Washington, D.C., May 24, 2013 — The Securities and Exchange Commission today announced fraud charges and an asset freeze against a trader at a Dallas-based investment advisory firm who improperly profited by placing his own trades before executing large block trades for firm clients that had strong potential to increase the stock's price.

The SEC alleges that Daniel Bergin, a senior equity trader at Cushing MLP Asset Management, secretly executed hundreds of trades through his wife's accounts in a practice known as front running. Bergin illicitly profited by at least $520,000 by routinely purchasing securities in his wife's accounts earlier the same day he placed much larger orders for the same securities on behalf of firm clients. Bergin concealed his lucrative trading by failing to disclose his wife's accounts to the firm and avoiding pre-clearance of his trades in those accounts. Bergin also attempted to hide his wife's accounts from SEC examiners.

"Bergin betrayed the trust of his clients by secretly using information about their trades to gain an unfair trading advantage and reap massive profits for himself," said Marshall S. Sprung, Deputy Chief of the SEC Enforcement Division's Asset Management Unit.

According to the SEC's complaint filed yesterday in federal court in Dallas, many investment advisers to institutions employ traders to manage their exposure to market price risks and place these large client orders in advantageous market centers with sufficient trading quantities that minimize unfavorable price movements against client interests. Bergin is the trader primarily responsible for managing price exposures related to client orders for equity trades.

"Bergin's misconduct is particularly egregious because his firm depended on him to manage market exposure and risk for its investments. Instead, he pitted his clients' financial interests against his own," said David R. Woodcock, Director of the SEC's Fort Worth Regional Office.

According to the SEC's complaint, Bergin realized at least $1.7 million in profits in his wife's accounts from 2011 to 2012 as a result of his illegal same-day or front-running trades. More than $520,000 of the $1.7 million represents profits from approximately 132 occasions in which Bergin placed his initial trades in his wife's account ahead of clients' trades.

According to the SEC's complaint, more than $1.8 million was withdrawn since July 2012 from a trading account belonging to Bergin's wife that was undisclosed to his firm. Most of the withdrawals were large transfers to her bank account.

The SEC's complaint names Bergin's wife Jacqueline Zaun as a relief defendant for the purpose of recovering Bergin's illegal trading profits in her accounts.

In order to halt Bergin's ongoing scheme, the SEC requested and U.S. District Court Judge Barbara Lynn granted an emergency court order freezing the assets of Bergin and Zaun.

The SEC's complaint alleges that Bergin violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Section 17(j) of the Investment Company Act of 1940 and Rule 17j-1. The complaint seeks disgorgement, prejudgment interest, and a penalty as well as a permanent injunction against Bergin.

The SEC's investigation was conducted in the Fort Worth Regional Office by Frank Goodrich and Barbara Gunn of the Asset Management Unit. The litigation will be led by Jennifer Brandt and Mr. Goodrich. The examination that led to the investigation was conducted by Mary Walters, Anthony McNeal, Charles Amsler, Brandon Whitaker, Carol Hahn, Dennis Rogers, and Kim Shaw of the Fort Worth office.

The SEC appreciates the assistance of the U.S. Attorney's Office for the Northern District of Texas and the Federal Bureau of Investigation.

# # #

Washington, D.C., May 23, 2013 — The Securities and Exchange Commission today charged a Rockville, Md.-based proxy adviser for failing to safeguard the confidential proxy voting information of clients participating in a number of significant proxy contests.

An SEC investigation found that an employee at Institutional Shareholder Services (ISS) provided a proxy solicitor with material, nonpublic information revealing how more than 100 ISS institutional shareholder advisory clients were voting their proxy ballots. In exchange for voting information, the proxy solicitor provided the ISS employee with meals, expensive tickets to concerts and sporting events, and an airline ticket. The breach was made possible in part because ISS lacked sufficient controls over employee access to confidential client vote information, as this employee gathered the data by logging into the ISS voting website from home or work and using his personal e-mail account to communicate details to the proxy solicitor. The employee no longer works at ISS.

ISS, which is registered with the SEC as an investment adviser, agreed to settle the charges by paying $300,000 and retaining an independent compliance consultant.

"Proxy advisers must tailor their controls based on the risks of their particular business in order to protect the integrity of the proxy voting process," said Julie M. Riewe, Deputy Chief of the SEC Enforcement Division's Asset Management Unit. "The internal controls at ISS did not adequately address the potential misuse of confidential proxy voting information by firm employees."

According to the SEC's order instituting settled administrative proceedings, the breach occurred from approximately 2007 to 2012. ISS failed to establish or enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information by ISS employees. Specifically, ISS lacked sufficient controls over employee access to databases of confidential client vote information.

The SEC's order finds that ISS willfully violated Section 204A of the Investment Advisers Act of 1940. The order censures the firm and requires ISS to pay a $300,000 penalty and engage an independent compliance consultant to review its supervisory and compliance policies and procedures. The consultant will evaluate whether ISS's procedures are reasonably designed to ensure that its proxy voting services business complies with the Advisers Act in its treatment of confidential information, communications with proxy solicitors, and gifts and entertainment. Without admitting or denying the SEC's findings, ISS agreed to cease and desist from committing or causing any future violations of Section 204A.

The SEC's investigation was conducted in the Boston Regional Office by Robert Baker and Kevin Kelcourse of the Asset Management Unit along with Britt Collins and Rachel Hershfang. They were assisted by members of the Boston Regional Office's examination staff, including Daniel Wong, Paul Prata, and Dan Mazzaferro.

# # #

Washington, D.C., May 22, 2013 — The Securities and Exchange Commission today charged the City of South Miami, Fla., with defrauding bond investors about the tax-exempt financing eligibility of a mixed-use retail and parking structure being built in its downtown commercial district.

An SEC investigation found that the city of 11,000 residents located in Miami-Dade County borrowed approximately $12 million in two pooled, conduit bond offerings through the Florida Municipal Loan Council (FMLC). South Miami's participation in those offerings enabled it to borrow funds at advantageous tax-exempt rates. The city represented that the project was eligible for tax-exempt financing in various documents for the second offering that were relied upon by bond counsel in rendering its tax opinion. However, South Miami failed to disclose that it had actually jeopardized the tax-exempt status of both bond offerings by impermissibly loaning proceeds from the first offering to a private developer and restructuring a lease agreement prior to the second offering.

South Miami agreed to settle the charges and retain an independent third-party consultant to oversee its policies, procedures, and internal controls for municipal bond disclosures.

"South Miami's fraudulent conduct put bondholders in danger of incurring significant additional costs associated with their investments," said Elaine C. Greenberg, Chief of the SEC Enforcement Division's Municipal Securities and Public Pensions Unit. "The tax-exempt status of municipal bonds is vitally important to bond investors, and we will closely scrutinize any conduct by issuers or others that threatens that tax exemption."

Eric I. Bustillo, Director of the SEC's Miami Regional Office, added, "Municipalities in South Florida and elsewhere cannot rely on a lack of internal procedures or experience in debt offerings to excuse fraudulent disclosures made to investors."

According to the SEC's order instituting settled administrative proceedings, South Miami sought financing to develop a public parking garage. The project ultimately became a mixed-use retail and public parking structure to be developed by a for-profit developer. Under the initial lease agreement between the city and the developer, the city was responsible for all construction costs except the retail portion. The city retained full control over the operation and maintenance of the parking garage portion and all parking revenues. The developer's limited role was critical to the city receiving the benefits of tax-exempt financing. Under IRS regulations, the project could be financed on a tax-exempt basis only if its use by the for-profit developer was kept to a minimum.

According to the SEC's order, South Miami approved the financing for construction of the tax-exempt portion of the project and moved ahead with its participation in the initial FMLC 2002 bond pool offering. However, upon receiving a copy of the city's lease agreement with the developer, bond counsel identified a potential tax issue with the mixed public-retail nature of the project. During subsequent conference calls with the city's then-finance director, bond counsel communicated to city officials that no funds from the bond offering could be used to finance the retail portion of the structure.

However, the SEC found that subsequent city finance directors were unaware of the substance of these discussions or how the lease agreement affected the tax status of the bonds. Moreover, subsequent city finance directors had no previous experience, training, or guidance on disclosure requirement or tax issues in bond offerings. When the lease agreement was revised in 2005 to lease not only the retail space to the developer but the parking garage as well, the updated terms caused the project to be considered private business use, which jeopardized the tax-exempt status of the bonds. South Miami did not inform the FMLC, bond counsel, or any third parties about the project changes. Documents for the second 2006 FMLC bond pool offering contained material misrepresentations and omissions about the use of the offering's proceeds and the altered terms of the parking garage lease.

According to the SEC's order, annual certifications made by the city to the FMLC from 2003 to 2009 incorrectly stated that South Miami was in compliance with the terms of the loan agreements, which included representations that no event had occurred affecting the tax-exempt status of the bonds. South Miami eventually filed a material event notice with the Municipal Securities Rulemaking Board's Electronic Municipal Market Access (EMMA) system in July 2010 that publicly acknowledged a potential adverse impact on the bonds' tax exemption. Separately, the city settled with the IRS by paying $260,345 and defeasing a portion of the two prior bond offerings at a cost of $1.16 million. Because of the city's settlement and payments, bondholders were not financially harmed and they're not required to include any interest from the bonds in their gross incomes.

The SEC's order directs South Miami to cease and desist from committing or causing any violations of Sections 17(a)(2) and (3) of the Securities Act of 1933. The city must retain an independent third-party consultant, who for three years will conduct annual reviews of the city's policies, procedures, and practices related to its disclosures for municipal securities offerings. The city must abide by the independent consultant's determinations and implement all recommendations. South Miami neither admitted nor denied the SEC's findings. A full description of the undertakings can be found in the SEC's order.

This SEC's investigation was conducted in the Miami Regional Office by Senior Counsel Sean M. O'Neill under the supervision of Assistant Regional Director Jason R. Berkowitz, both members of the Municipal Securities and Public Pensions Unit.

# # #

Washington, D.C., May 16, 2013 — The Securities and Exchange Commission today charged a father and son and their Chicago-area investment advisory firm with defrauding clients through a cherry-picking scheme that garnered them nearly $2 million in illicit profits, which they spent on luxury homes, vehicles, and vacations.

The SEC alleges that Charles J. Dushek and his son Charles S. Dushek placed millions of dollars in securities trades without designating in advance whether they were trading personal funds or client funds. They delayed allocating the trades so they could cherry pick winning trades for their personal accounts and dump losing trades on the accounts of unwitting clients at Capital Management Associates (CMA). Lisle, Ill.-based CMA misrepresented the firm’s proprietary trading activities to clients, many of whom were senior citizens.

“The Dusheks and their firm had an obligation to treat clients fairly and honestly,” said Merri Jo Gillette, Director of the SEC’s Chicago Regional Office. “Instead, they exploited the trade allocation process to enrich themselves at the expense of their clients.”

According to the SEC’s complaint filed in federal court in Chicago, the scheme lasted from 2008 to 2012. During that period, the Dusheks made more than 13,500 purchases of securities totaling more than $350 million. The Dusheks typically waited to allocate the trades for at least one trading day – and often several days – by which time they knew whether the trades were profitable. The Dusheks ultimately kept most of the winning trades and assigned most of the losses to clients. At the time of the trading, they did not keep any written record of whether they were trading client funds or personal funds.

The Dusheks’ extraordinary trading success reflects the breadth of their scheme. For 17 consecutive quarters, the Dusheks reaped positive returns at the time of allocation while their clients suffered negative returns. One of Dushek Sr.’s personal accounts increased in value by almost 25,000 percent from 2008 to 2011 while many of his clients’ accounts decreased in value.

The illicit trading profits from his personal accounts were Dushek Sr.’s only source of regular income outside of Social Security, according to the SEC. It alleges that he drew no salary or other compensation as president of CMA and relied on profits from the scheme to make mortgage payments on his 6,500 square foot luxury home featuring separate equestrian facilities. He also spent the money on luxury vehicles including a Mercedes Benz SL550, membership in a luxury vacation resort, and vacations abroad. Dushek Jr. is alleged to have used trading profits to pay for a boat slip and vacations to ski resorts and Hawaii.

According to the SEC’s complaint, CMA misrepresented its proprietary trading activities to clients in a brochure that is part of the firm’s Form ADV. The brochure falsely claimed that Dushek Sr. maintained “reports” of his proprietary trading activities that he submitted to an associate for review, when he did not maintain such reports nor have any associate review his trading. The brochure further stated, “We do not merge or aggregate any client order with any employee order.” That claim also was false. When the Dusheks placed orders, there were no client orders or employee orders but instead merely block purchases in CMA’s brokerage accounts that were later allocated to client accounts or personal accounts.

The SEC’s complaint charges the Dusheks and CMA with fraud and seeks final judgments that would require them to return ill-gotten gains with interest and pay financial penalties.

The SEC’s investigation was conducted by Nicholas Eichenseer, Vanessa Horton, and Paul Montoya of the Chicago Regional Office. Steven Seeger will lead the SEC’s litigation.

# # #

Washington, D.C., May 15, 2013 — The Securities and Exchange Commission today named Keith F. Higgins as the new director of the agency’s Division of Corporation Finance.

Mr. Higgins comes to the SEC from the law firm of Ropes & Gray LLP where he is a partner in its Boston office with 30 years of experience advising public companies about securities offerings, mergers and acquisitions, compliance, and corporate governance. Mr. Higgins also has regularly advised underwriters in IPOs and other public equity offerings. He will begin his new position next month.

“Keith is a widely-respected expert on the securities laws with a wealth of knowledge and experience in the many issues confronting the Division,” said Mary Jo White, Chair of the SEC. “He understands and appreciates the importance of our disclosure laws in helping to ensure that investors get the information they need to make informed investment decisions.”

Mr. Higgins added, “During my 30 years of private practice, I have seen firsthand the talent and dedication of the staff of the SEC’s Division of Corporation Finance. It is an honor for me to have the opportunity to serve as its director. The Commission has an ambitious rulemaking agenda that will be my first priority, and I look forward to continuing to move that agenda forward.”

The Division of Corporation Finance seeks to ensure that investors are provided with material information in order to make informed investment decisions, both when a company initially offers its securities to the public and on an ongoing basis. The Division also reviews filings and provides interpretive assistance help companies meet their disclosure obligations, and makes recommendations to the Commission about new rules or updates to current rules.

Mr. Higgins, who began working at Ropes & Gray in 1983, has been a frequent writer and lecturer on securities law, executive compensation, and corporate governance. He is a past chair of the Federal Regulation of Securities Committee of the American Bar Association.

Mr. Higgins, 61, earned his B.A. at Florida State University (Phi Beta Kappa) and his M.A. at the University of Virginia. He earned his law degree (summa cum laude) from Boston University School of Law, and he clerked for the Honorable Herbert P. Wilkins in the Supreme Judicial Court of Massachusetts.

* * *

Lona Nallengara, who was serving as acting director of the Division of Corporation Finance since December 2012, has been named the SEC’s chief of staff.

# # #

Washington, D.C., May 15, 2013 — The Securities and Exchange Commission today announced that Lona Nallengara has been named the agency’s chief of staff.

Mr. Nallengara came to the SEC in March 2011 and served as deputy director for legal and regulatory policy in the Division of Corporation Finance until he was appointed in December 2012 as its acting director.

Mr. Nallengara has led a series of complex rulemakings by the Division of Corporation Finance stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Jumpstart Our Business Startups (JOBS) Act.

“Lona has been superb in leading the Division and has demonstrated tremendous judgment, intelligence and knowledge,” said Mary Jo White, SEC Chair. “In my short time here, I have come to appreciate his broad grasp of the agency’s overall agenda and his understanding of the Commission and its mission.”

Mr. Nallengara added, “My time in the Division of Corporation Finance has been incredibly rewarding. It has been an honor to work with the talented staff in the Division and across the agency and I look forward to continuing to work with them on behalf of the nation's investors in my new role.”

As a deputy director, Mr. Nallengara was responsible for overseeing the Division of Corporation Finance’s offices of chief counsel, enforcement liaison, international corporate finance, mergers and acquisitions, and small business policy.

Mr. Nallengara joined the SEC from Shearman & Sterling LLP in New York, where he was a partner in the Capital Markets practice group and advised public companies and financial institutions on a wide range of capital raising activities. Mr. Nallengara also served as the firm’s co-hiring partner, co-chair of its associate development committee and international associates and trainees committee, and as a member of the firm’s diversity committee.

Prior to joining Shearman & Sterling LLP in 1998, Mr. Nallengara practiced in the corporate group at the law firm of Osler, Hoskin & Harcourt LLP in Toronto.

Mr. Nallengara, 42, earned his law degree in 1996 from Osgoode Hall Law School in Toronto and his undergraduate degree in Political Science in 1993 from the University of Western Ontario in London, Canada.

* * *

The SEC also announced today that Keith Higgins has been named the new director of the SEC’s Division of Corporation Finance.

# # #

Washington, D.C., May 15, 2013 — The Securities and Exchange Commission today charged husband-and-wife executives at a China-based company with engaging in a scheme to overstate the company’s revenues and divert proceeds from a securities offering for their personal use.

The SEC alleges that RINO International Corporation’s chief executive officer Dejun “David” Zou and chairman of the board Jianping “Amy” Qiu diverted $3.5 million in company money to purchase a luxury home in Orange County, Calif., without disclosing it to investors. Conflicting information was provided to RINO’s outside auditor when questions were raised about the expenditure. Zou and Qiu also used offering proceeds to pay for automobiles as well as designer clothing and accessories without recording them as personal expenses or otherwise disclosing them in RINO’s public filings.

The SEC issued a trading suspension in 2011 against RINO, which is a holding company for subsidiaries that manufacture, install, and service equipment for the Chinese steel industry. The company became a China-based U.S. issuer through a reverse merger in 2007. The trading suspension was based on questions raised about RINO’s public filings — signed and certified by Zou and Qiu — overstating company revenues by including false sales contracts.

Zou and Qiu agreed to settle the SEC’s charges by paying penalties and consenting to decade-long bars from serving as officers or directors of any company publicly traded in the U.S.

“Executives grossly abuse their positions of trust when they divert corporate funds for their personal spending,” said Antonia Chion, Associate Director of the SEC’s Division of Enforcement. “When making their investment decisions, RINO’s investors did not have the benefit of knowing that Zou and Qiu were diverting money and the company’s revenues were greatly exaggerated.”

According to the SEC’s complaint filed in federal court in Washington D.C., RINO’s periodic filings contained false and misleading statements and omissions about the company’s revenue and operations from 2008 to 2010. RINO maintained two conflicting sets of financial records — one set of books for filings in China and another set of books for filings in the U.S. The Chinese books reflected sales of approximately $31 million from the first quarter of 2008 through the first three quarters of 2010. But the U.S. books that formed the basis for RINO’s SEC filings contained false contracts and portrayed sales revenues of approximately $491 million during that same time period — more than 15 times greater than the revenues recorded in the Chinese books.

The SEC alleges that when RINO’s outside auditor discovered the $3.5 million diversion of money by Zou and Qiu, the auditor was first told that RINO intended to use the funds as a down payment for a joint venture opportunity in the U.S. When the auditor raised further questions, Zou claimed that he had authorized the use of the funds to purchase a property to serve as an office and temporary housing for RINO’s employees visiting the U.S. The auditor then went to RINO’s audit committee to raise concerns about the transaction because of the different explanations and the nature of the home. Zou and Qiu then agreed to reclassify the $3.5 million as a loan, and signed a promissory note bearing interest at current market rates. Zou and Qiu purportedly repaid the loan on May 10, 2010, using funds wired from a Chinese bank account to RINO’s U.S. bank account. That money was later wired back to an account in China.

The SEC’s complaint charges RINO, Zou, and Qiu with violations of the anti-fraud, reporting, books and records, and internal control provisions of the federal securities laws. Without admitting or denying the allegations, RINO, Zou, and Qiu consented to the entry of a judgment permanently enjoining them from violations of the respective provisions of the securities laws. Zou and Qiu agreed to pay penalties of $150,000 and $100,000 respectively. They also paid the disgorgement amount of $3.5 million into a related class action settlement. Zou and Qiu consented to entry of an order prohibiting them from serving as officers and directors of a public company for 10 years. The settlement is subject to court approval.

The SEC’s investigation was conducted by Tom Swiers, Sarah Nilson, Kam Lee, and Melissa Hodgman of the SEC’s Cross Border Working Group, which focuses on U.S. companies with substantial foreign operations. Through the work of the Cross Border Working Group, the SEC has filed fraud cases involving more than 65 foreign issuers and executives, and deregistered the securities of more than 50 companies.

# # #

Washington, D.C., May 9, 2013 — The Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) today issued an investor alert entitled Pension or Settlement Income Streams – What You Need to Know Before Buying or Selling Them.

The investor alert informs investors about the risks involved when selling their rights to an income stream or investing in someone else’s income stream.  The alert urges investors considering an investment in pension or settlement income streams to proceed with caution.

Anyone receiving a monthly pension or regular distributions from a settlement following a personal injury lawsuit may be targeted by salespeople offering an immediate lump sum in exchange for the rights to some or all of the payments the person would otherwise receive in future.  Typically, recipients of a pension or structured settlement will sign over the rights to some or all of their monthly payments to a factoring company in return for a lump-sum amount, which will almost always be significantly lower than the present value of that future income stream.

“Investors should always learn as much as possible before making an investment decision, and this is certainly true with respect to investing in pension or structured settlement income stream products,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy.   “This alert will help investors understand the costs as well as the potentially significant risks of these transactions.”

Gerri Walsh, FINRA’s Senior Vice President for Investor Education, said, “Consumers should know that a series of potential pitfalls may greet anyone who is considering selling their rights to an income stream. And any investor who is tempted by the high yield offered by buying the rights to another person’s income stream should know that yield comes with high fees and considerable risks.”

The investor alert contains a checklist of questions before selling away an income stream:

• Is the transaction legal? Federal law may restrict or prohibit retirees from “assigning” their pension to someone else.
• Is the transaction worth the cost? Find the discount rate that the factoring company has applied to your income stream and compare this rate to alternatives such as a bank loan.
• What is the reputation of the company offering the lump sum? Check the factoring company’s record with the Better Business Bureau, and research the firm on the Internet and with a financial professional.
• Will the factoring company require life insurance? The factoring company may require you to purchase a life insurance policy, which will add to your transaction expenses and reduce your payout.
• What are the tax consequences? The lump-sum payment you collect may be taxable. 

The investor alert also warns investors who might be attracted to the yield offered by buying the rights to someone else’s pension or structured settlement to be aware that:

• Investors may encounter commissions of seven percent or higher. 
• Pension and structured settlement income-stream products may or may not be securities and likely are not registered with the SEC.
• These products could be difficult to sell if you need money and want to sell the product.
• Your “rights” to the income stream you purchased could face legal challenges.

# # #

Washington, D.C., May 9, 2013 — The Securities and Exchange Commission today announced that Bruce Karpati, chief of the Enforcement Division’s Asset Management Unit, will be leaving the agency for the private sector after more than a dozen years of federal service.

Mr. Karpati has served at the helm of the Asset Management Unit since its inception in January 2010, overseeing a staff of more than 75 attorneys, industry experts, and other professionals responsible for conducting investigations into investment advisers, investment companies, and private funds.

Mr. Karpati and several colleagues from the Asset Management Unit and other offices received the SEC Chairman’s Award for Excellence in 2012 for their work on the Aberrational Performance Inquiry, which proactively uses performance data to uncover various types of investment fraud by hedge fund managers.

“Beyond all the significant enforcement actions, Bruce has been a pioneer in the use of complex data analysis to detect securities fraud and a pivotal figure in the formation of specialty units within the Enforcement Division,” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement. “His vision and dedication have tremendously benefited the Asset Management Unit and enforcement staff around the country.”

Mr. Karpati said, “I have been privileged to work with such talented and dedicated staff in the Enforcement Division and across the SEC. I am particularly proud of the accomplishments of my colleagues in the Asset Management Unit, who have worked collaboratively on a nationwide basis to bring expertise to bear and proactively combat fraud in the asset management industry.”

During Mr. Karpati’s tenure as chief of the unit, he has overseen investigations of investment advisers for various forms of misconduct involving valuation, performance, conflicts of interest, insider trading, manipulation, derivatives, fund governance, the 15(c) process, disclosure, and compliance and controls.

Mr. Karpati has spearheaded several risk-based initiatives to ferret out misconduct by investment advisers, including the Aberrational Performance Inquiry, Fund Fee Initiative, Revenue Sharing Initiative, and Compliance Program Initiative that specifically focuses on registered investment advisers who repeatedly fail to adopt or implement effective compliance programs.

Among the unit’s enforcement actions brought under Mr. Karpati’s leadership:

• SEC charged a major quantitative investment adviser for misleading investors about the impact of a software error.
   
• SEC charged a former $1 billion hedge fund advisory firm and two executives with scheming to overvalue assets under management and exaggerate the reported returns of the hedge funds they managed.
   
• SEC charged a New York-based hedge fund manager and his firm with misappropriating client assets and secretly granting favorable redemption and liquidity rights to certain strategically important investors at the expense of other investors.
   
• SEC charged a hedge fund adviser and separately other hedge fund managers in cases where they misrepresented they had “skin in the game” when in fact they were not personally investing their money in the funds side-by-side with investors.
   
• SEC charged a Bay Area hedge fund manager with concealing investment proceeds in a side pocket to hide profits owed investors, and in a separate case charged Georgia-based hedge fund managers with overvaluing illiquid assets in a side pocket so they could extract excessive management fees based on those asset values.
   
• SEC charged multiple hedge fund managers with fraud in an inquiry targeting suspicious investment returns.
   
• SEC charged a Malaysia-based investment adviser and a Wall Street firm involved in an illegal mutual fund fee arrangement that repeatedly charged a fund and its investors for advisory services they weren’t actually receiving from a third party.
   
• SEC 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.
   
• SEC charged two New York-based private equity fund advisers with misleading investors about the valuation policies and performance of a private equity fund they managed.
   
• SEC charged the gatekeepers of two mutual fund trusts for inaccurate disclosures about decisions made on behalf of shareholders.

Mr. Karpati was instrumental in establishing the Asset Management Unit, formulating its strategic and operating plans, setting unit priorities, hiring industry experts, and building the unit’s infrastructure. A hallmark of Mr. Karpati’s tenure was very close coordination with other SEC divisions and offices such as the National Exam Program, the Division of Investment Management, and the Division of Risk, Strategy and Financial Innovation. These collaborations resulted in examination sweeps, rulemakings, and more effective detection of emerging risks.

Mr. Karpati, 43, joined the SEC’s New York Regional Office as an enforcement staff attorney in 2000. He was promoted to branch chief in 2002 and assistant regional director in 2005. In 2007, he founded the SEC’s Hedge Fund Working Group, a cross-office initiative to combat securities fraud in the hedge fund space. Prior to his arrival at the SEC, Mr. Karpati spent four years in private practice at a large national law firm.

Mr. Karpati graduated from Tufts University and the University at Buffalo Law School.

* * *

Following Mr. Karpati’s departure at the end of this week, deputy chiefs Julie Riewe and Marshall Sprung will lead the unit unit until new leadership is named.

# # #

Washington, D.C., May 6, 2013 — The Securities and Exchange Commission today charged four individuals with ties to a New York City brokerage firm in a scheme involving millions of dollars in illicit bribes paid to a high-ranking Venezuelan finance official to secure the bond trading business of a state-owned Venezuelan bank.

According to the SEC's complaint filed in federal court in Manhattan, the global markets group at broker-dealer Direct Access Partners (DAP) executed fixed income trades for customers in foreign sovereign debt. DAP Global generated more than $66 million in revenue for DAP from transaction fees - in the form of markups and markdowns - on riskless principal trade executions in Venezuelan sovereign or state-sponsored bonds for Banco de Desarrollo Económico y Social de Venezuela (BANDES). A portion of this revenue was illicitly paid to BANDES Vice President of Finance, María de los Ángeles González de Hernandez, who authorized the fraudulent trades.

"These traders triggered a fraud that was staggering in audacity and scope," said Andrew M. Calamari, Director of the SEC's New York Regional Office. "They thought they covered their tracks by using offshore accounts and a shadow accounting system to monitor their illicit profits and bribes, but they underestimated the SEC's tenacity in piecing the scheme together."

The SEC's complaint charges the following individuals for the roles in the kickback scheme:

• Tomas Alberto Clarke Bethancourt, who lives in Miami and is an executive vice president at DAP. Known as "Tomas Clarke," he was responsible for executing the fraudulent trades and maintaining spreadsheets tracking the illicit markups and markdowns on those trades.
• Iuri Rodolfo Bethancourt, who lives in Panama and received more than $20 million in fraudulent proceeds from DAP via his Panamanian shell company, which then paid Gonzalez a portion of this amount.
• Jose Alejandro Hurtado, who lives in Miami and served as the intermediary between DAP and Gonzalez. Hurtado was paid more than $6 million in kickbacks disguised as salary payments from DAP, and he remitted some of that money to Gonzalez.
• Haydee Leticia Pabon, who is Hurtado's wife and received approximately $8 million in markups or markdowns on BANDES trades that were funneled to her from DAP in the form of sham finders' fees.

In a parallel action, the U.S. Attorney's Office for the Southern District of New York announced criminal charges against Gonzalez as well as Clarke and Hurtado.

According to the SEC's complaint, the scheme began in October 2008 and continued until at least June 2010. BANDES was a new customer to DAP brought in by DAP Global executives through their connections to Hurtado. As a result of the kickbacks to Gonzalez, DAP obtained BANDES' lucrative trading business and provided Gonzalez with the incentive to enter into trades with DAP at considerable markups or markdowns without regard to the prices paid by BANDES. Gonzalez used her senior role at the Caracas-based bank to ensure that its bond trades would continue to be steered to DAP. As the scheme evolved over time, the traders deceived DAP's clearing brokers, executed internal wash trades, inter-positioned another broker-dealer in the trades to conceal their role in the transactions, and engaged in massive roundtrip trades to pad their revenue.

For example, the SEC alleges that in January 2010, the traders and Gonzalez arranged for two fraudulent roundtrip trades with BANDES as both buyer and seller. These trades - which lacked any legitimate business purpose - caused BANDES to pay DAP more than $10 million in fees, a portion of which was diverted to Gonzalez for authorizing the blatantly fraudulent trades.

The SEC further alleges that, giving rise to the adage of no honor among thieves, Clarke and Hurtado frequently falsified the size of DAP's fees in their reports to Gonzalez, which enabled the traders to retain a greater share of the fraudulent profits.

The SEC's complaint charges Clarke, Bethancourt, Hurtado, and Pabon with fraud and seeks final judgments that would require them to return ill-gotten gains with interest and pay financial penalties.

The SEC's investigation, which is continuing, was conducted by Wendy Tepperman, Amanda Straub, and Michael Osnato of the New York Regional Office. The SEC's litigation will be led by Howard Fischer. An SEC examination of DAP that that led to the investigation was conducted by members of the New York office's broker-dealer examination staff. The SEC appreciates the assistance of the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation.

# # #

Washington, D.C., May 7, 2013 — The Securities and Exchange Commission today announced the panelists for its Credit Ratings Roundtable, which will be held on May 14.

As previously announced, the roundtable will consist of three panels. The first panel will discuss the potential creation of a credit rating assignment system for asset-backed securities. The second panel will discuss the effectiveness of the SEC’s current system to encourage unsolicited ratings of asset-backed securities. The third panel will discuss other alternatives to the current issuer-pay business model in which the issuer selects and pays the firm it wants to provide credit ratings for its securities.

The event will be held in the auditorium at the SEC’s Washington, D.C., headquarters at 100 F Street, N.E., beginning at 9 a.m. and ending at approximately 4:30 p.m. The public is invited to attend, with seating available on a first-come, first-served basis. The event will be webcast live on the SEC’s website and archived for later viewing.

* * *

Agenda and Panelists

# # #

Washington, D.C., May 6, 2013 — The Securities and Exchange Commission today charged the City of Harrisburg, Pa., with securities fraud for its misleading public statements when its financial condition was deteriorating and financial information available to municipal bond investors was either incomplete or outdated.

An SEC investigation found that the misleading statements were made in the city’s budget report, annual and mid-year financial statements, and a State of the City address. This marks the first time that the SEC has charged a municipality for misleading statements made outside of its securities disclosure documents. Harrisburg has agreed to settle the charges.

The SEC found that Harrisburg failed to comply with requirements to provide certain ongoing financial information and audited financial statements for the benefit of investors holding hundreds of millions of dollars in bonds issued or guaranteed by the city. As a result of Harrisburg’s non-compliance from 2009 to 2011, investors had to seek out Harrisburg’s other public statements in order to obtain current information about the city’s finances. However, very little information about the city’s fiscal situation was publicly available elsewhere. Information that was accessible on the city’s website such as its 2009 budget, 2009 State of the City address, and 2009 mid-year fiscal report either misstated or failed to disclose critical information about Harrisburg’s financial condition and credit ratings.

The SEC separately issued a report today addressing the disclosure obligations of public officials and their potential liability under the federal securities laws for public statements made in the secondary market for municipal securities.

“In an information vacuum caused by Harrisburg’s failure to provide accurate information about its deteriorating financial condition, municipal investors had to rely on other public statements misrepresenting city finances,” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement. “Statements that are reasonably expected to reach the securities markets, even if not prepared for that purpose, cannot be materially misleading.”

Elaine C. Greenberg, Chief of the SEC’s Enforcement Division’s Municipal Securities and Public Pensions Unit, said, “A municipal issuer’s obligation to provide accurate and timely material information to investors is an ongoing one. Because of Harrisburg’s misrepresentations, secondary market investors made trading decisions based on inaccurate and stale information.”

According to the SEC’s order instituting settled administrative proceedings, Harrisburg is a near-bankrupt city under state receivership largely due to approximately $260 million in debt the city had guaranteed for upgrades and repairs to a municipal resource recovery facility owned by The Harrisburg Authority. As of March 15, 2013, Harrisburg has missed approximately $13.9 million in general obligation debt service payments.

According to the SEC’s order, Harrisburg had not submitted annual financial information or audited financial statements since submitting its 2007 Comprehensive Annual Financial Report (CAFR) to a Nationally Recognized Municipal Securities Information Repository (NRMSIR) in January 2009. Beginning in July 2009, Harrisburg was obligated to submit financial information and notices such as principal and interest payment delinquencies and changes in bond ratings to a central repository known as the Electronic Municipal Market Access (EMMA) system maintained by the Municipal Securities Rulemaking Board (MSRB). Harrisburg did not submit its 2008 CAFR to EMMA, instead erroneously submitting it to a former NRMSIR on March 2, 2010. Harrisburg did not submit its 2009 CAFR to EMMA until Aug. 6, 2012, and did not submit its 2010 CAFR to EMMA until Dec. 20, 2012. The city did not submit material event notices about its failure to submit annual financial information or its credit rating downgrades until March 29, 2011, after the SEC had commenced its investigation.

Therefore, the SEC’s order finds that at a time of increased interest in the Harrisburg’s financial health due to the deteriorating financial condition of The Harrisburg Authority, the city created a risk that investors could purchase or sell securities in the secondary market on the basis of incomplete and outdated information. For current information, investors had to review other public statements from the city about its fiscal situation. For example, Harrisburg’s 2009 budget and its accompanying transmittal letter were accessible on Harrisburg’s website. By the time the 2009 budget was passed, Harrisburg was aware of the Authority’s projected budget deficits and that Dauphin County was challenging a rate increase. As a result, the Authority was unlikely to have sufficient revenues to pay its 2009 debt service obligations. However, Harrisburg’s 2009 budget as adopted did not include funds for debt guarantee payments. The 2009 budget also misstated Harrisburg’s credit as being rated “Aaa” by Moody’s when in fact Moody’s had downgraded Harrisburg’s general obligation credit rating to Baa1 by December 2008.

According to the SEC’s order, another public statement available to investors on the city’s website was the annual State of the City address delivered on April 9, 2009. The address only discussed the municipal resource recovery facility as a situation that was an “additional challenge” and an “issue that can be resolved.” The address was misleading because it failed to mention that by this time, Harrisburg had already made $1.8 million in guarantee payments on the resource recovery facility bond debt. It also omitted the total amount of the debt that the city would likely have to repay from its general fund. By this time, Harrisburg knew that the Authority had failed to secure the requested rate increase, making it likely that Harrisburg would have to repay $260 million of the debt as guarantor.

According to the SEC’s order, Harrisburg’s 2009 mid-year fiscal report available on its website was designed to provide a snapshot of budget-to-actual figures at the middle of the year. However, the report did not reference any of the guarantee payments the city had made on the municipal resource recovery facility debt, which at this mid-year point totaled $2.3 million (7 percent of its general fund expenditures).

The SEC’s order requires Harrisburg to cease and desist from committing or causing violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The city neither admits nor denies the findings in the order. In the settlement, the SEC considered Harrisburg’s cooperation in the investigation and the various remedial measures implemented by the city to prevent further securities laws violations.

The SEC’s investigation was conducted by members of the Enforcement Division’s Municipal Securities and Public Pensions Unit including Senior Enforcement Counsel Yolanda Gonzalez and Assistant Director Ivonia K. Slade with assistance from Municipal Securities Specialist Jonathan D. Wilcox. The investigation was supervised by Unit Chief Elaine C. Greenberg and Deputy Chief Mark R. Zehner.

* * *

In its Report of Investigation to address the secondary market disclosure responsibilities of public officials when they make public statements about a municipal issuer, the SEC notes that public officials should be mindful that their written or oral public statements may affect the total mix of information available to investors. This could result in anti-fraud liability under the federal securities laws for the public officials making such statements if they are materially misleading or omit material information.

The report further states that public officials should consider taking steps to reduce the risk of misleading investors. At a minimum, they should consider adopting policies and procedures that are reasonably designed to result in accurate, timely, and complete public disclosures; identifying those persons involved in the disclosure process; evaluating other public disclosures including financial information made by the municipal issuer; and assuring that responsible individuals receive adequate training about their obligations under the federal securities laws.

# # #

Washington, D.C., May 2, 2013 — The Securities and Exchange Commission today announced that Andrew J. Bowden has been named Director of the agency’s Office of Compliance Inspections and Examinations (OCIE) and will lead its National Exam Program.

Mr. Bowden joined the SEC in November 2011 as the National Associate Director for OCIE’s Investment Adviser/Investment Company Examination Program, and he was appointed Deputy Director of OCIE in September 2012. He will succeed Carlo di Florio, whose departure was announced today.

“Drew has shown true leadership overseeing our investment adviser/investment company examination program and serving as deputy in the office,” said Mary Jo White, Chair of the SEC. “Drew also has been very engaged in strengthening employee engagement, training and development. During his time here, he has earned the trust and confidence of his colleagues, our regulatory partners, and the industry. His dedication, judgment, and leadership will serve him well as he takes on his new post leading an aggressive, effective examination program.”

Mr. Bowden said, “I am grateful for this opportunity to continue to work with the talented and dedicated team in OCIE, Chairman White and the Commissioners, our colleagues across the agency, and our fellow regulators. I also want to commend Carlo for all he has done for investors and the SEC over the last three years.”

The SEC’s National Exam Program conducts inspections and examinations of SEC-registered investment advisers, investment companies, broker-dealers, self-regulatory organizations, clearing agencies, and transfer agents. OCIE has adopted a risk-focused examination program, hired industry experts, leveraged technology to increase efficiency, and launched a training program focused on quality and consistency. These initiatives have enabled OCIE to more effectively fulfill its mission to promote compliance with U.S. securities laws, prevent fraud, monitor risk, and inform SEC policy.

Before joining the SEC, Mr. Bowden worked in private law practice, chiefly on legal, regulatory, and compliance issues involving broker-dealer activities. He spent 17 years at Legg Mason in a variety of legal, compliance, and senior business roles related to Legg Mason’s broker-dealer and investment management businesses and served on the Board of Governors and Executive Committee of the Investment Advisers Association.

Mr. Bowden, 51, received his law degree, cum laude, from the University of Pennsylvania Law School and his bachelor’s degree, summa cum laude, from Loyola University in Baltimore.

# # #

Washington, D.C., May 2, 2013 — The Securities and Exchange Commission today announced that Carlo V. di Florio will leave the agency after leading its National Exam Program for more than three years.

Mr. di Florio will depart later this month to lead a new division of risk and strategy at the Financial Industry Regulatory Authority (FINRA). 

“Carlo has been an outstanding leader of the National Exam Program and has made a lasting impact on the SEC by working with his team to comprehensively strengthen the agency’s examination program,” said Mary Jo White, Chair of the SEC.  “Under his leadership, the program recruited experts, implemented risk and quantitative analytics units, deployed new technology and strengthened industry risk governance practices.  Carlo also has shown tremendous leadership in strengthening partnership and coordination among regulators nationally and internationally.” 

Mr. di Florio said, “It has been a great honor and privilege to serve alongside such a talented and dedicated team of exam professionals, who work tirelessly to protect the investing public and our markets by monitoring risk, promoting compliance, preventing fraud, and informing policy as the eyes and ears of the SEC in the field.  I would like to express my appreciation to my colleagues across the agency for their outstanding teamwork and collaboration, and I appreciate the leadership and support of the various chairmen and commissioners under whom I have served.”

Mr. di Florio was appointed Director of the SEC’s Office of Compliance Inspections and Examinations (OCIE) in January 2010 and took the helm of the National Exam Program, which is comprised of a multidisciplinary team of more than 900 staff in 12 offices across the country.  The National Exam Program’s mission is to protect investors, ensure market integrity and promote capital formation by promoting compliance, preventing fraud, monitoring risk and informing policy.  SEC examiners conduct risk-targeted exams of regulated entities including broker-dealers, investment advisers, clearing agencies, transfer agents and self-regulatory organizations.  In addition to promoting compliance, monitoring risk, and informing policy, SEC exams also help prevent fraud and facilitate enforcement actions against insider trading, market manipulation, Ponzi schemes, abusive sales practices, conflicts of interest, and other violations of the federal securities laws.

Mr. di Florio led a comprehensive restructuring of the National Exam Program to strengthen the program’s strategy, structure, expertise, processes, and technology.  He has played a leadership role in strengthening coordination and collaboration among securities and banking regulators nationally and internationally.

Under Mr. di Florio’s stewardship, the collaborative restructuring of OCIE into a National Exam Program implemented a broad spectrum of improvements and best practices:

• Breaking down silos to establish a National Exam Program that facilitates information flow, teamwork, and collaboration across regions, programs and divisions, and utilizes central utilities to drive consistent risk analytics, operations, standards, processes, technology, training and communications.
• Driving specialization and expertise by recruiting a significant number of industry experts and establishing specialized working groups in key areas including derivatives, hedge funds, private equity, valuation, new and structured products, market structure and trading practices, fixed income and municipal securities, risk management, quantitative analytics and technology.
• Implementing a risk-focused exam strategy supported by a newly formed Risk Analysis and Surveillance Unit to aggregate, analyze and prioritize data from within and outside the SEC to help allocate resources to mission critical efforts.
• Fighting fraud by enhancing detection and prevention strategies, tools, and technologies, including asset verification, fraud risk analytics, and expertise.
• Strengthening firm governance, risk, and compliance by institutionalizing risk governance reviews of registrants that engage senior management, the boards of directors, business unit leadership, risk and control function leadership, and internal audit to evaluate the tone at the top, the culture, and the effectiveness of governance, risk management, and compliance enterprise-wide.
• Leveraging the power of technology to automate the exam process and facilitate risk assessment, exam planning, and execution, trade analytics, monitoring, testing, issues management, and record retention.
• Keeping pace with the rate of change, complexity, and firm innovation through the establishment of a Quantitative Analytics Unit comprised of quants to examine complex data sets and identify new and emerging risks in algorithmic/high-frequency trading and other investment and trading practices.
• Monitoring systemic and large firm risk through the establishment of a Large Firm Monitoring Unit that works with other SEC divisions and other regulators nationally and internationally to collaborate on risk assessment and monitoring without duplication of effort.
• Ensuring quality, consistency, and ongoing professional excellence through the establishing a Certified Examiner Training program to enhance skills, expertise and ongoing technical and leadership training for the SEC’s more than 900 examiners.
• Improving transparency and promoting compliance by sharing and publishing Risk Alerts and Exam Priorities to provide guidance to industry on key priorities, risk focus areas, and exam observations so firms can incorporate such guidance into their own risk assessments and program improvement efforts, thereby enhancing investor protection and market integrity.

In 2012, Mr. di Florio was recognized as one of the “100 Most Influential Corporate Governance Leaders” by The National Association of Corporate Directors. 

Prior to joining the SEC in 2010, Mr. di Florio was a partner in the Financial Services Risk & Regulatory Practice at PricewaterhouseCoopers (PwC) in New York, where he was a national leader in corporate governance, enterprise risk management, compliance, and ethics.  

Mr. di Florio, 46, received his LL.M with distinction from Georgetown University Law Center, his J.D. from Penn State University’s Dickinson School of Law, and his B.A. in Political Economy from Tulane University.

* * *

Following the departure of Mr. di Florio, Andrew Bowden will become the Director of the SEC’s National Exam Program.  Mr. Bowden came to the SEC in 2011, and was promoted to Deputy Director of OCIE in 2012. 

# # #

Washington, D.C., May 2, 2013 — The Securities and Exchange Commission today announced that David P. Bergers, Acting Deputy Director of the SEC’s Enforcement Division and Director of the Boston Regional Office, will be leaving the agency this spring after 13 years of federal service.

“David has been a tremendous asset to the agency, both as the head of the Boston Regional Office and as Acting Deputy Director,” said Mary Jo White, Chair of the SEC. “Not only does he have a deep understanding of the laws we enforce, but he also has a deep appreciation for the mission of the SEC. Additionally, David is highly regarded for his ability to cultivate strong collaborative relationships within the agency as well as with criminal law enforcement colleagues, state regulators, and self-regulatory organizations across the country.”

George S. Canellos, Co-Director of the SEC’s Division of Enforcement, said, “David is a uniquely talented attorney who combines intelligence and experience with a genuine passion for innovation and a true concern for supporting the efforts of SEC staff around the country. His willingness to roll up his sleeves and tackle any issue made him an ideal Acting Deputy Director and I’m honored to have served with him.”

Mr. Bergers said, “I have been incredibly fortunate to serve alongside the agency’s talented and dedicated staff working hard every day to protect investors.”

Appointed as Acting Deputy Director of Enforcement in January, Mr. Bergers has helped set enforcement priorities and supervise the civil law enforcement efforts of more than 1,200 SEC staff in 12 offices across the country. He helped oversee all investigative and litigation activities within the Enforcement Division, including the Office of Market Intelligence, Office of the Whistleblower, and five specialized units — Asset Management, Foreign Corrupt Practices Act, Market Abuse, Municipal Securities and Public Pension Funds, and Structured and New Products.

As Director of the Boston Regional Office, Mr. Bergers has been overseeing the SEC’s enforcement and examination programs in Massachusetts, Connecticut, New Hampshire, Maine, Vermont, and Rhode Island. The Boston office oversees more than 1,100 investment advisers, 60 mutual fund complexes, and 375 broker-dealers, including more than 200 investment advisers who recently registered with the SEC following the passage of the Dodd-Frank Act.

Mr. Bergers served at the SEC from 1998 to 2000 and returned in 2001, ascending through various enforcement positions until becoming head of SEC enforcement in Boston. He was appointed Regional Director of the Boston office in 2006. Mr. Bergers has led hundreds of SEC investigations into investment and financial fraud, insider trading, and other securities law violations. During the past four years, he played leadership roles in the reorganization of the Division of Enforcement and the Office of Compliance Inspections and Examinations (OCIE), and also helped write the rules for the SEC’s new national whistleblower program. Since 2010, Mr. Bergers has served on OCIE’s Executive Committee, which is responsible for setting policy and direction for the national examination program.

Mr. Bergers, 45, received the SEC’s Stanley Sporkin Award in 2010, the Law and Policy Award in 2011, and the SEC-NTEU Labor-Management Relations Award in 2011 and 2012. He received a Lawyer of the Year Award from Massachusetts Lawyers Weekly in 2006.

Mr. Bergers previously practiced at law firms in Philadelphia and Boston, and served as a vice president and assistant general counsel of a regional broker-dealer and primary counsel to an affiliated investment adviser. Mr. Bergers obtained his bachelor’s degree in 1989 from Eastern Nazarene College, and earned his law degree in 1992 at Yale Law School.

* * *

Following the departure of Mr. Bergers, John T. Dugan will become the Acting Director of the Boston Regional Office. Mr. Dugan has served at the SEC since 1999, and was appointed Associate Regional Director for Enforcement in Boston in 2006.

# # #

Washington, D.C., May 2, 2013 — The Securities and Exchange Commission today charged the gatekeepers of a pair of mutual fund trusts with causing untrue or misleading disclosures about the factors they considered when approving or renewing investment advisory contracts on behalf of shareholders.

Some trusts are created as turnkey mutual fund operations that launch numerous funds to be managed by different unaffiliated advisers and overseen by a single board of trustees. The federal securities laws require all mutual fund directors to evaluate and approve a fund's contract with its investment adviser, and the funds must report back to shareholders about the material factors considered by the directors in making these decisions. The SEC Enforcement Division's Asset Management Unit has been taking a widespread look into the investment advisory contract renewal process and fee arrangements in the fund industry.

An SEC investigation that arose from an examination of the Northern Lights Fund Trust and the Northern Lights Variable Trust found that some of the trusts' shareholder reports either misrepresented material information considered by the trustees or omitted material information about how they evaluated certain factors in reaching their decisions on behalf of the funds and their shareholders. The trustees and the trusts' chief compliance officer Northern Lights Compliance Services (NLCS) were responsible for causing violations of the SEC's compliance rule, and the trusts' fund administrator Gemini Fund Services (GFS) caused violations of the Investment Company Act recordkeeping and reporting provisions.

The firms and the trustees have agreed to settle the SEC's charges.

"Determining the terms of the investment advisory contract, especially compensation of the adviser, is one of the most critical duties of a mutual fund board," said George S. Canellos, Co-Director of the SEC's Division of Enforcement. "We will aggressively enforce investors' rights to accurate and complete information about the board's process and decision-making."

The five trustees named in the SEC enforcement action are: Michael Miola of Arizona, Lester M. Bryan of Utah, Anthony J. Hertl of Florida, Gary W. Lanzen of Nevada, and Mark H. Taylor of Ohio.

According to the SEC's order instituting settled administrative proceedings, the Northern Lights trusts included up to 71 mutual fund series from January 2009 to December 2010, most of which were managed by different advisers and sub-advisers. The trustees conducted 15 board meetings during that time period, and made decisions about 113 advisory and 32 sub-advisory contracts during what's known as the 15(c) process. Section 15(c) of the Investment Company Act requires fund directors to request and evaluate information that is reasonably necessary to evaluate the terms of any contract for an investment adviser of a registered investment company.

The SEC's order found that some boilerplate disclosures related to the 15(c) process that were included by GFS in some fund series shareholder reports contained untrue or misleading information. For example, one disclosure claimed that the trustees had considered peer group information about the advisory fee, however no such data had been provided to the trustees. Other disclosures misleadingly indicated that the fund's advisory fee was not materially higher than its peer group range, when in fact the fee was nearly double the peer group's mean fee or even higher. GFS failed to ensure that certain shareholder reports contained the required disclosures about the trustees' evaluation process and failed to ensure that certain series within the trusts maintained and preserved their 15(c) files.

The SEC's order also found that certain mutual fund series did not follow their policies and procedures for the trustees' approval of the investment advisers' compliance programs. Fund boards are required to approve the policies and procedures of service providers to a fund, including its adviser. The policies and procedures of each series within the Northern Lights trusts stated that the trustees could approve the compliance program of each series' investment adviser based on their review of an adviser's compliance manual or based on a summary provided by NLCS that familiarized them with the salient features of the compliance program and provided a good understanding of how the program addressed particularly significant compliance risks. Rather than following this process, the trustees' approval of the advisers' compliance programs was based primarily on their review of a brief written statement prepared by NLCS saying that the advisers' compliance manuals were "sufficient and in use" and a verbal representation by NLCS that such manuals were adequate.

"These violations make clear that turnkey mutual fund arrangements can pose significant governance concerns, and trustees must be vigilant in ensuring that the funds they oversee meet their disclosure, compliance, reporting, and recordkeeping obligations," said Marshall S. Sprung, Deputy Chief of the SEC Enforcement Division's Asset Management Unit.

The SEC's order finds that GFS caused violations of Sections 30(e) and 31(a) of the Investment Company Act and Rules 30e-1 and 31a-2(a)(6); NLCS and the trustees caused violations of Rule 38a-1(a)(1) under the Investment Company Act; and the trustees caused violations of Section 34(b) of the Investment Company Act. Without admitting or denying the SEC's findings, GFS and NLCS each agreed to pay $50,000 penalties, and the firms and trustees agreed to engage an independent compliance consultant to address the violations found in the SEC's order. They agreed to cease and desist from committing or causing any violations and any future violations of those provisions.

The SEC's investigation was conducted by Asset Management Unit members in the Denver and New York offices, including James Scoggins, Noel Franklin, John Mulhern, and Catherine Lifeso. The examination that led to the investigation was conducted by Bruce Ketter, Craig Ellis, and Phil Perrone of the Denver office.

# # #

Washington, D.C., May 1, 2013 — The Securities and Exchange Commission today voted unanimously to propose rules and interpretive guidance for parties to cross-border security-based swap transactions.

The proposal explains which regulatory requirements apply when a transaction occurs partially within and partially outside the U.S. The proposed rules also set forth when security-based swap dealers, major security-based swap participants, and other entities — such as clearing agencies, execution facilities, and data repositories — must register with the SEC.

The proposal outlines a “substituted compliance” framework in order to facilitate a well-functioning global security-based swap market. It is an approach that recognizes that market participants may be subject to conflicting or duplicative compliance obligations in the global derivatives market.

“We should take a robust and workable approach to this particularly complex and predominantly global market,” said Mary Jo White, SEC Chair. “The global nature of this market means that participants may be subject to requirements in multiple countries, and this type of overlapping regulatory oversight could lead to conflicting or costly duplicative regulatory requirements. Market participants need to know which rules to follow, and I believe that this proposal will serve as the road map.”

The comment period for the proposed rules and interpretive guidance for cross-border security-based swap activities will occur for 90 days after they are published in the Federal Register.

Separately, the Commission voted unanimously to reopen the public comment period for all rules not yet finalized, stemming from Title VII of the Dodd-Frank Act. The comment periods for these rules — and a policy statement describing the expected order for these new rules to take effect — will be reopened for 60 days after notice is published in the Federal Register.

# # #

FACT SHEET

Cross-Border Security-Based Swap Activities

SEC Open Meeting
May 1, 2013

Background

The Dodd-Frank Act — In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Title VII of this Act established a comprehensive framework for regulating the over-the-counter derivatives market.

Under Title VII, the SEC has regulatory authority over a type of derivative known as security-based swaps, as well as certain intermediaries and major players in that market, known as security-based swap dealers and major security-based swap participants. The agency also has authority over certain entities that perform infrastructure functions within the security-based swap market, such as clearing agencies, execution facilities, and data repositories.

Security-Based Swaps — In general, a derivative is a financial instrument or contract, such as a swap, whose value is “derived” from an underlying asset such as a commodity, bond, or equity security. Derivatives provide a way to transfer risk related to the underlying assets between two counterparties. They are flexible products that can be designed to achieve almost any financial purpose.

A security-based swap is a swap tied to a single security, loan, or issuer of securities, a narrow-based security index, or the occurrence of certain events relating to an issuer of securities or the issuers of securities in a narrow-based security index.

The Security-Based Swap Market — The market in security-based swaps involves counterparties located in different countries whose activities frequently span the globe. Indeed, according to data analyzed by SEC staff, the majority of single-name U.S. reference security-based swap transactions by market participants involve one or more counterparties located abroad. In addition, some swaps may be negotiated and executed by persons located in two different countries and then booked in yet other countries.

Implementing Title VII in a Global Market — Regulating this market is challenging because of the global nature and the interconnectedness of this market. These characteristics mean that a market participant located in a foreign country can create concerns within the U.S. of the type addressed by the Dodd-Frank Act. To address these concerns, the U.S. and many other countries are at various stages in the implementation of their own derivatives regulatory reform efforts.

Once the major derivatives jurisdictions adopt regulations, market participants could be subject to multiple and overlapping regulatory regimes, potentially resulting in regulatory conflicts and duplications. This, in turn, could adversely affect liquidity and efficiency in the global security-based swap market.

An SEC webpage — http://www.sec.gov/swaps-chart/swaps-chart.shtml — depicts the regulatory regime for security-based swaps and details what happens as a transaction occurs.

The Framework of the Proposal

In light of these market realities, the proposal includes rules and interpretive guidance that, among other things, would inform parties to a security-based swap transaction which regulatory requirements apply when their transaction occurs in part within and in part outside the U.S.

Security-Based Swap Transactions Involving Activity Within the U.S. Generally Would Be Subject to U.S. Regulation

The proposal generally would subject security-based swap transactions to the requirements of Title VII if they are entered into with a U.S. person or otherwise conducted within the U.S. However, under the proposal, a party may have the ability to instead comply with SEC requirements by complying with some or all of the requirements of a foreign regulatory regime, provided that those requirements have been determined by the Commission to achieve comparable regulatory outcomes.

In addition, the proposal would provide interpretive guidance regarding when a particular market infrastructure is required to register with the SEC.

The proposed rules and interpretive guidance reflect a territorial approach to application of Title VII requirements to security-based swap transactions.

Under this approach, Title VII requirements generally would apply:

• If the transaction is entered into with a U.S. person — The proposal would define the term “U.S. person” in a limited, territorial manner and would mean:
   
  
  • Any natural person resident in the U.S.
     
  • Any partnership, corporation, trust, or other legal person organized or incorporated under the laws of the U.S. or having its principal place of business in the U.S.
     
  • Any account (whether discretionary or non-discretionary) of a U.S. person.
    Certain multinational financial organizations would not be treated as U.S. persons for purposes of Title VII, regardless of where they are organized or where their primary place of business is located.
     
    Consistent with rules jointly adopted by the SEC and the CFTC regarding Title VII entity definitions, foreign branches of U.S. banks (and U.S. branches of foreign banks) would not be defined as separate legal persons for purposes of Title VII and therefore would have the same U.S.-person status of the bank’s home office. (As noted below, however, transactions conducted by U.S. banks through foreign branches would be treated, in many cases, similar to transactions conducted by non-U.S. persons.)

or…

• If the transaction is otherwise conducted within the United States — The proposal would define “transaction conducted within the United States” to mean any security-based swap transaction that is solicited, negotiated, executed, or booked within the U.S. by or on behalf of either counterparty to the transaction, regardless of the location, domicile, or residence status of either counterparty to the transaction.

Under the proposed approach, Title VII requirements generally would apply to transactions involving a person in the U.S. engaged in counterparty-facing activity, regardless of whether the transaction is booked in a U.S.-based or a foreign-based booking entity.

But a Party May Then Be Able to Substitute Foreign Regulatory Requirements for U.S. Requirements...

If Title VII requirements apply, market participants, under certain circumstances, may comply with foreign regulatory requirements in substitution for Title VII requirements. The proposal calls this approach “substituted compliance.”

• If foreign requirements are determined to be comparable to U.S. regulatory requirements …
   
  Under substituted compliance, a foreign market participant would be permitted to comply with the requirements imposed by its own home country, so long as those requirements achieve regulatory outcomes comparable with the regulatory outcomes of the relevant provisions of Title VII. If the home country does not have any requirements that achieve comparable regulatory outcomes, substituted compliance would not be permitted and the foreign entity would be required to comply with the applicable U.S. requirements.
   
• In any of four categories ...
   
  In making the comparability determination, the SEC would separately assess four distinct categories of Title VII requirements. If, for example, a foreign regulatory system achieves comparable regulatory outcomes in three out of the four categories, then the SEC would permit substituted compliance with respect to those three categories, but not for the one, non-comparable category. In other words, the Commission is not proposing an “all-or-nothing” approach.
   
  The four categories are:
   
  
  • Requirements applicable to registered non-U.S. security-based swap dealers.
     
  • Requirements relating to regulatory reporting and public dissemination of security-based swap data.
     
  • Requirements relating to mandatory clearing for security-based swaps.
     
  • Requirements relating to mandatory trade execution for security-based swaps.

Under this proposal, a market participant or group of market participants could request a substituted compliance determination with respect to a particular category or categories of foreign regulatory requirements. Any determination to grant substituted compliance generally would be available to all market participants in the particular foreign jurisdiction.
 

• Based on regulatory outcomes, not rule-by-rule comparisons…
   
  In addition, under the proposal, in making the comparability determination, the Commission would take a holistic approach; that is, it would ultimately focus on whether the foreign regime achieves regulatory outcomes that are comparable to the regulatory outcomes of Title VII rather than basing the ultimate determination on a rule-by-rule comparison.
   
  If the foreign regulatory regime does achieve comparable regulatory outcomes, the proposed approach provides that the Commission could make a substituted compliance determination, notwithstanding differences in granular requirements of particular regulatory categories.
   
  Under the proposal, the Commission, on its own initiative, could modify the terms of, or withdraw, a substituted compliance determination, after appropriate notice and opportunity for comment. The Commission also would have the ability to periodically review the substituted compliance determinations it has granted and decide whether the substituted compliance determination should continue to apply.

Highlights of the Proposal

The proposal and interpretive guidance would address, among other things:

When is a non-U.S. person required to register with the Commission as a Security-Based Swap Dealer?

Conducting the De Minimis Calculation — In 2012, the SEC and the CFTC jointly adopted rules indicating that a security-based swap dealer would be required to register with the Commission if its notional amount of dealing transactions conducted in the past 12 months exceeded a de minimis level.

This proposal would require foreign dealers, in determining whether they have exceeded this de minimis amount, generally to count only dealing activity:

• Conducted with U.S. persons.
   
• Conducted within the U.S.

However, a non-U.S. person would not be required to include in this calculation its security-based swap dealing transactions with foreign branches of U.S. banks. By contrast, the proposal would require U.S. persons to count all of their security-based swap transactions toward the de minimis threshold.

Guaranteed Non-U.S. Dealer Affiliates — Under the proposal, a non-U.S. person that receives a guarantee from a U.S. person on its performance on security-based swaps would not be required to count its dealing transactions with non-U.S. persons outside the United States toward its de minimis threshold.

Aggregating Transactions Involving Dealing Activity of Affiliates — In 2012, the SEC and the CFTC jointly adopted a rule providing that persons engaged in dealing activity would be required to aggregate certain security-based swap dealing transactions of their commonly controlled affiliates. This proposal would clarify that a person may exclude the dealing transactions of any commonly controlled affiliate that is registered with the Commission as a security-based swap dealer from its de minimis calculation, so long as the person’s security-based swap activities are operationally independent from those of its registered security-based swap dealer affiliate.

What regulatory requirements apply to a Security-Based Swap Dealer?

The proposal separates the requirements of a security-based swap dealer into two categories:

• Entity-level requirements, which apply to the security-based swap dealer as a whole (e.g., capital, margin, and risk management requirements).
   
• Transaction-level requirements, which apply to the security-based swap dealer’s individual security-based swap transactions (e.g., external business conduct requirements).

Under the proposal, registered foreign security-based swap dealers would be required to comply with:

• Entity-level requirements (although they may be able to substitute compliance with comparable requirements in a foreign jurisdiction).
   
• External business conduct requirements with respect to their U.S. business but not with respect to their foreign business (although they may be able to substitute compliance with comparable requirements in a foreign jurisdiction).
   
• Segregation requirements generally only with respect to transactions with counterparties who are U.S. persons.

Security-based swap dealers that are U.S. persons would be required to comply with all Title VII requirements, but U.S. banks that conduct security-based swap activity out of a foreign branch would not be required to comply with external business conduct requirements with respect to their foreign business. (The application of non-dealer-specific requirements to activity out of a foreign branch is addressed below.)

The proposal would define U.S. business:

• For non-U.S. persons, as any transaction entered into or offered to be entered into by or on behalf of the foreign security-based swap dealer, with a U.S. person (other than with a foreign branch of a U.S. bank), or any transaction conducted within the U.S.
   
• For U.S. persons, as any transaction by or on behalf of the U.S.-person security-based swap dealer, wherever it occurs, except for transactions conducted through a foreign branch of a U.S. bank with a non-U.S. person or another foreign branch of a U.S. bank.

The proposal would define foreign business for any security-based swap dealer to be any transactions that are not defined as U.S. business for that dealer.

When is a non-U.S. person required to register with the Commission as a Major Security-Based Swap Participant?

Conducting the Threshold Calculations — In 2012, the SEC and the CFTC jointly adopted rules indicating that a major security-based swap participant would be required to register with the SEC if its security-based swap positions exceed a defined substantial position or substantial counterparty exposure threshold.

The proposal would require that, when determining whether a person falls within the major security-based swap participant definition, a U.S. person consider all security-based swap transactions that it has entered into. A non-U.S. person, on the other hand, would consider only transactions that it has entered into with U.S. persons, including foreign branches of U.S. banks.

Attribution of Guaranteed Positions — A guarantee on a security-based swap allows a counterparty to demand that the person providing the guarantee perform the obligations of the guaranteed entity under the security-based swap. In 2012, the SEC and the CFTC jointly adopted interpretive guidance generally requiring persons to include in their calculations of the major security-based swap threshold any positions resulting from transactions that they guarantee.

The proposal provides interpretive guidance that certain security-based swaps guaranteed by U.S. persons and non-U.S. persons would be attributed for purposes of the major security-based swap participant threshold to the person providing that guarantee.

Under the proposed approach, guaranteed positions would be attributed as follows:

• A non-U.S. person that guarantees performance of the security-based swap obligations of a U.S. person would attribute to itself all of the U.S. person’s security-based swap positions that it guarantees.
   
• A non-U.S. person that guarantees performance on the security-based swap transactions of another non-U.S. person would attribute to itself only the guaranteed security-based swap positions arising from transactions with U.S. person counterparties.
   
• A U.S. person that guarantees performance of the security-based swap obligations of a non-U.S. person would attribute to itself all of that non-U.S. person’s security-based swap positions that it guarantees, regardless of whether the non-U.S. person’s positions arise from transactions with a U.S. person counterparty or a non-U.S. person counterparty.

Under the proposed approach, however, a guarantor would not be required to attribute to itself any guaranteed positions entered into by a non-U.S. person that is subject to Basel capital standards.

What regulatory requirements apply to a foreign Major Security-Based Swap Participant?

As with security-based swap dealers, Title VII subjects registered major security-based swap participants to both entity-level and transaction-level requirements. Under the proposed approach, foreign major security-based swap participants would be required to comply with the entity-level requirements.

The proposed approach would not require foreign major security-based swap participants to comply with the transaction-level requirements that are specific to major security-based swap requirements in their transactions with counterparties that are non-U.S. persons.

When does a transaction have to be reported, disseminated, cleared, or executed on a swap execution facility?

The proposal generally would require security-based swap transactions to be reported to a data repository if any of the following are counterparties to the transaction:

• A U.S. person.
   
• A non-U.S. person that receives a guarantee from a U.S. person.
   
• A registered security-based swap dealer. Security-based swap transactions that are conducted within the U.S. would also be required to be reported.

In addition, the proposal also generally would require compliance with public dissemination, clearing, and trade execution requirements for security-based swap transactions when:

• A counterparty is a U.S. person (including foreign branches of U.S. banks).
   
• A counterparty is a non-U.S. person that receives a guarantee from a U.S. person on its performance on security-based swaps.
   
• A transaction is conducted within the U.S. (subject to certain exceptions with respect to clearing and trade execution requirements).

However, under the proposed approach, these transaction-level requirements generally would not apply to transactions conducted outside the U.S. between:

• A foreign branch of a U.S. bank and an unregistered non-U.S. person that does not receive a guarantee from a U.S. person on its performance of its security-based swap obligations.
   
• A non-U.S. person that receives a guarantee from a U.S. person on its performance of its security-based swap obligations and an unregistered non-U.S. person that does not receive such a guarantee from a U.S. person.
   
• A non-U.S. person that is a registered security-based swap dealer and a non-U.S. person that does not receive a guarantee from a U.S. person on its performance of its security-based swap obligations.
   
• Two non-U.S. persons that are not registered security-based swap dealers and do not receive a guarantee from a U.S. person.

When do security-based swap infrastructures need to register?

Under Title VII, the new regulatory regime would include a number of market infrastructures, such as security-based swap clearing agencies, execution facilities, and data repositories.

The proposal would provide a rule and interpretive guidance regarding when entities that perform these infrastructure functions would be required to register with the Commission. The proposed guidance generally would take a territorial approach to registration, requiring each entity to determine whether it performs the relevant infrastructure function within the U.S.

The focus of this analysis for each type of entity would include, among other things, the following:

• Clearing agencies — Whether they have one or more U.S. persons as members.
   
• Swap execution facilities — Whether they provide U.S. persons, or non-U.S. persons located in the U.S., with the direct ability to trade or execute security-based swaps on the foreign security-based swap market.
   
• Swap data repositories — Whether they receive security-based swap data from U.S. persons, and whether they operate within the U.S.

The proposal also provides interpretive guidance regarding availability of exemptions for non-resident infrastructure entities when, among other things, they are subject to comparable regulation in their home countries.

When would a data repository be able to turn over data without requiring an indemnification agreement from the requesting regulator?

Under Title VII, any government agency — foreign or domestic — that seeks information from a security-based swap data repository must first provide the data repository with an indemnification agreement. The agreement would ensure that, if sued, the data repository could be reimbursed by the requesting government agency for any expenses arising from litigation relating to the information.

The proposal would enable the data repository to waive the indemnification requirement if:

• The requesting authority seeks security-based swap information from the security-based swap data repository to fulfill its regulatory mandate or legal responsibility.
   
• The authority’s request pertains to a person or financial product subject to its jurisdiction, supervision, or oversight.
   
• The requesting authority has entered into a supervisory and enforcement memorandum of understanding or other arrangement with the SEC that addresses the confidentiality of the security-based swap information provided and any other matters as determined by the Commission.

What’s Next

The comment period for the proposed rules and interpretive guidance will last for 90 days after their publication in the Federal Register.

# # #

Washington, D.C., April 29, 2013 — The Securities and Exchange Commission today announced that Greenwich, Conn.-based hedge fund advisory firm Level Global Investors LP has agreed to pay more than $21.5 million to settle charges that its co-founder, who also served as a portfolio manager, and its analyst engaged in repeated insider trading in the securities of Dell Inc. and Nvidia Corp.

In January 2012, the SEC filed insider trading charges against Level Global, the firm's co-founder Anthony Chiasson, a former analyst Spyridon "Sam" Adondakis, and six other defendants, including five investment professionals and the hedge fund advisory firm Diamondback Capital Management.

The SEC's complaint, filed in federal court in Manhattan, alleged that Adondakis was a member of a group of closely associated hedge fund analysts who illegally obtained highly sensitive information regarding the financial performance of Dell and Nvidia before this information was made public. The illegally obtained information involved Dell and Nvidia's revenues and profit margins and sometimes indicated that the tech companies' quarterly results would differ significantly from the consensus expectations of Wall Street analysts.

According to the SEC, during 2008 and 2009, Adondakis passed the information on to Chiasson, who used it to execute trades on behalf of hedge funds managed by Level Global and reap millions of dollars in illegal profits. In 2011, following news reports of the government's investigation, Level Global, which had once managed as much as $4 billion, announced that it would close its business and begin returning money to its investors. It is presently in the process of winding down its business.

"The insider trading at Level Global was hardly an isolated event - it occurred repeatedly, and involved multiple companies and multiple quarterly announcements," said Sanjay Wadhwa, Senior Associate Director of the SEC's New York Regional Office. "This settlement serves as another reminder that the SEC will hold hedge fund managers accountable when their employees violate the securities laws."

The settlement with Level Global, which is subject to court approval, requires the firm to disgorge $10,082,725 in fees that it reaped from the alleged insider-trading scheme, to pay prejudgment interest of $1,348,824, and to pay a penalty of $10,082,725. Level Global has also agreed to the entry of an order permanently enjoining the firm from future violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5, and Section 17(a) of the Securities Act of 1933.

Level Global neither admits nor denies the SEC's allegations. Adondakis previously pleaded guilty to parallel criminal charges and agreed to a settlement with the SEC in which he admitted liability for insider trading. The SEC is continuing to pursue its insider trading claims against the firm's co-founder Chiasson, who was convicted in December 2012 of securities fraud in a parallel criminal proceeding.

The SEC's investigation, which is continuing, has been conducted by Daniel Marcus, Stephen Larson, and Joseph Sansone - members of the SEC's Market Abuse Unit in New York - and Matthew Watkins, Justin Smith, Neil Hendelman, Diego Brucculeri and James D'Avino of the New York Regional Office. It has been supervised by Sanjay Wadhwa. 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 the matter.

# # #

Washington, D.C., April 29, 2013 — The Securities and Exchange Commission today charged that the City of Victorville, Calif., a city official, the Southern California Logistics Airport Authority, and Kinsell, Newcomb & DeDios (KND), the underwriter of the Airport Authority’s bonds, defrauded investors by inflating valuations of property securing an April 2008 municipal bond offering.

Victorville Assistant City Manager and former Director of Economic Development Keith C. Metzler, KND owner J. Jeffrey Kinsell, and KND Vice President Janees L. Williams were responsible for false and misleading statements made in the Airport Authority’s 2008 bond offering, the SEC alleged. It also charged that KND, working through a related party, misused more than $2.7 million of bond proceeds to keep itself afloat.

“Financing redevelopment projects by selling municipal bonds based on inflated valuations violates the public trust as well as the antifraud provisions of the federal securities laws,” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement. “Public officials have the same obligation as corporate officials to tell the truth to their investors.”

Elaine C. Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, said, “Investors are entitled to full disclosure of material financial arrangements entered into by related parties. Underwriters who secretly line their own pockets by taking unauthorized fees will be held accountable.”

The SEC alleges the Airport Authority, which is controlled by the City of Victorville, undertook a variety of redevelopment projects, including the construction of four airplane hangars on a former Air Force base. It financed the projects by issuing tax increment bonds, which are solely secured by and repaid from property-tax increases attributable to increases in the assessed value of property in the redevelopment project area.

According to the SEC’s complaint filed in U.S. District Court for the Central District of California, by April 2008, the Airport Authority was forced to refinance part of the debt incurred to construct the hangars, and other projects, by issuing additional bonds. The principal amount of the new bond issue was partly based on Metzler, Williams, and Kinsell using a $65 million valuation for the airplane hangars even though they knew the county assessor valued the hangars at less than half that amount. The inflated figure allowed the Airport Authority to issue substantially more bonds and raise more money than it otherwise would have. It also meant that investors were given false information about the value of the security available to repay them.

In addition, the SEC’s investigation found that Kinsell, KND, and another of his companies misappropriated more than $2.7 million in bond proceeds that were supposed to be used to build airplane hangars for the Airport Authority. According to the SEC’s complaint, the scheme began when Kinsell learned of allegations that the contractor building the hangars had likely diverted bond proceeds for his own personal use. When the contractor was removed, Kinsell stepped in to oversee the hangar project through another company he owned, KND Affiliates, LLC, even though Kinsell had no construction experience.

The SEC alleges that the Airport Authority loaned KND Affiliates more than $60 million in bond proceeds for the hangar project and agreed that as compensation for the project, KND Affiliates would receive a construction management fee of two percent of the remaining cost of construction. However, Kinsell and KND Affiliates took an additional $450,000 in unauthorized fees to oversee the construction and took $2.3 million in fees that the Airport Authority was unaware of and never agreed to, purportedly as compensation to “manage” the hangars. The SEC alleges that Kinsell and KND Affiliates hid these fees from the Airport Authority representatives and from the auditors who reviewed KND Affiliates’ books and records.

The SEC’s complaint alleges that the Airport Authority, Kinsell, KND, and KND Affiliates violated the antifraud provisions of U.S. securities laws and that KND violated 15B(c)(1) of the Exchange Act and Municipal Securities Rulemaking Board Rules G-17, G-27 and G-32(a)(iii)(A)(2). The complaint also alleges that Victorville, Metzler, KND, Kinsell, and Williams aided and abetted various violations. The SEC is seeking the return of ill-gotten gains with prejudgment interest, financial penalties, and permanent injunctions against all of the defendants, as well as the return of ill-gotten gains from relief defendant KND Holdings, the parent company of KND.

The SEC’s investigation was conducted by Robert H. Conrrad and Theresa M. Melson in the Municipal Securities and Public Pensions Unit, and Lorraine B. Echavarria, Todd S. Brilliant, and Dora M. Zaldivar of the Los Angeles Regional Office. Sam S. Puathasnanon will lead the SEC’s litigation.

# # #

Washington, D.C., April 25, 2013 — The Securities and Exchange Commission today announced that starting on May 25, 2013, the fee rates applicable to most securities transactions will decrease from $22.40 per million dollars to $17.40 per million dollars. The assessment on security futures transactions will remain unchanged at $0.0042 for each round turn transaction.

The Commission determined these new rates in accordance with Section 31 of the Securities Exchange Act of 1934 and consulted with both the Congressional Budget Office and the Office of Management and Budget regarding the annual adjustments. These adjustments do not directly affect the amount of funding available to the SEC.

The Office of Interpretation and Guidance in the Commission’s Division of Trading and Markets is available for questions on Section 31 at (202) 551-5777, or by e-mail at tradingandmarkets@sec.gov.

The Commission will issue further notices as appropriate to keep the public informed of developments relating to fees under Section 31. These notices will be posted at the SEC's website.

# # #

Washington, D.C., April 25, 2013 — The Securities and Exchange Commission today announced fraud charges against a Spokane Valley, Wash., company and its owner for misleading investors with claims to raise billions of investment capital under the Jumpstart Our Business Startups (JOBS) Act and invest it exclusively in American businesses.

The SEC alleges that Daniel F. Peterson and his company USA Real Estate Fund 1 promised investors that they could reap spectacular returns from an upcoming offering in a “secured” product backed by prominent financial firms. Peterson repeatedly told investors that the 2012 JOBS Act would enable him to raise billions of dollars by advertising the offering to the general public, and produce big profits for early investors. He preyed upon investors’ sense of patriotism by promising to invest the proceeds of the offering in exclusively American businesses, and help assist in Washington State’s economic recovery. The SEC alleges that Peterson used investors’ money for personal expenses, and is continuing to solicit investors and may be preparing to tout the offering through investor seminars and public advertising.

“We’ve brought this court action to stop Peterson’s fraud in its tracks before it picks up more steam,” said Michael S. Dicke, Associate Director in the SEC’s San Francisco Regional Office. “The JOBS Act is intended to help small businesses raise capital, not to legalize fraud or give unscrupulous entrepreneurs a right to make false claims to fleece investors.”

According to the SEC’s complaint filed in federal court in Spokane, Peterson sold common stock in USA Real Estate Fund from November 2010 to June 2012 to more than 20 investors in Washington and at least five other states. In e-mails and in periodic e-newsletters that he used to solicit USA Real Estate Fund investors, Peterson said that he was preparing to raise billions of dollars in a second offering of additional “preferred” securities, which he claimed would be “secured” and have 10-year returns of up to 1,300 percent. Peterson claimed that two prominent Wall Street financial firms had partnered with him to bring his offering to market, and that the firms had conducted due diligence on USA Real Estate Fund and were structuring sales agreements and pricing. Peterson promised the early investors they would profit massively once the purported future offering was underway.

Peterson’s claims were false. He has no guaranteed investment product to offer, the projected returns were either fictitious or based on implausible and unsupported analyses, and he has no affiliation with any financial firm to underwrite his purported future offering, the SEC alleges.

The SEC alleges that Peterson used investor money to pay for his rent, food, entertainment, vacations, and a rented Mercedes Benz SUV. He also used investor funds on clothing for friends, luggage for his wife, and expenses at a Las Vegas casino.

The SEC’s complaint charges USA Real Estate Fund and Peterson with violating the anti-fraud provisions of the federal securities laws. The SEC is seeking a court order requiring USA Real Estate Fund and Peterson to return their allegedly ill-gotten gains, with interest, and pay financial penalties. It also is seeking a preliminary injunction restraining USA Real Estate Fund and Peterson from engaging in conduct that would allow them to continue their scheme and restraining them from further violations of the securities laws.

David Berman and Tracy Davis of the SEC’s San Francisco Regional Office investigated the case. The SEC appreciates the assistance of the Washington State Department of Financial Institutions.

# # #

Washington, D.C., April 24, 2013 — The Securities and Exchange Commission today charged Capital One Financial Corporation and two senior executives for understating millions of dollars in auto loan losses incurred during the months leading into the financial crisis.

An SEC investigation found that in financial reporting for the second and third quarters of 2007, Capital One failed to properly account for losses in its auto finance business when they became higher than originally forecasted. The profitability of its auto loan business was primarily derived from extending credit to subprime consumers. As credit markets began to deteriorate, Capital One’s internal loss forecasting tool found that the declining credit environment had a significant impact on its loan loss expense. However, Capital One failed to properly incorporate these internal assessments into its financial reporting, and thus understated its loan loss expense by approximately 18 percent in the second quarter and 9 percent in the third quarter.

Capital One agreed to pay $3.5 million to settle the SEC’s charges. The two executives – former Chief Risk Officer Peter A. Schnall and former Divisional Credit Officer David A. LaGassa – also agreed to settle the charges against them.

“Accurate financial reporting is a fundamental obligation for any public company, particularly a bank’s accounting for its provision for loan losses during a time of severe financial distress,” said George Canellos, Co-Director of the Division of Enforcement.  “Capital One failed in this responsibility by underreporting expenses relating to its loan losses even as its own internal forecasting tool had signaled an increase in incurred losses due to the impending financial crisis.”

According to the SEC’s order instituting settled administrative proceedings, beginning in October 2006 and continuing through the third quarter of 2007, Capital One Auto Finance (COAF) experienced significantly higher charge-offs and delinquencies for its auto loans than it had originally forecasted. The elevated losses occurred within every type of loan in each of COAF’s lines of business. Its internal loss forecasting tool assessed that its escalating loss variances were attributable to an increase in a forecasting factor it called the “exogenous” – which measured the impact on credit losses from conditions external to the business such as macroeconomic conditions. A change in this exogenous factor generally had a significant impact on COAF’s loan loss expense, and it was closely monitored by the company through its loss forecasting tool. Capital One determined that incorporating the full exogenous levels into its loss forecast would have resulted in a second quarter allowance build of $72 million by year-end. Since no such expense was incorporated for the second quarter, it would have resulted in a third quarter allowance build of $85 million by year-end.

However, according to the SEC’s order, instead of incorporating the results of its loss forecasting tool, Capital One failed to include any of COAF’s exogenous-driven losses in its second quarter provision for loan losses and included only one-third of such losses in the third quarter. The exogenous losses were an integral component of Capital One’s methodology for calculating its provision for loan losses. As a result, Capital One’s second and third quarter loan loss expense for COAF did not appropriately estimate probable incurred losses in accordance with accounting requirements.

The SEC’s order also finds that Schnall and LaGassa caused Capital One’s understatements of its loan loss expense by deviating from established policies and procedures and failing to implement proper internal controls for determining its loan loss expense. Schnall, who oversaw Capital One’s credit management function, took inadequate steps to communicate COAF’s exogenous treatment to the senior management committee in charge of ensuring that the company’s allowance was compliant with accounting requirements. Despite warnings, he also failed to ensure that the exogenous treatment was properly documented. LaGassa, who managed the COAF loss forecasting process, failed to ensure that the proper exogenous levels were incorporated into the COAF loss forecast. He also failed to ensure that the exogenous treatment was documented consistent with policies and procedures.

“Financial institutions, especially those engaged in subprime lending practices, must have rigorous controls surrounding their process for estimating loan losses to prevent material misstatements of those expenses,” said Gerald W. Hodgkins, Associate Director of the Division of Enforcement. “The SEC will not tolerate deficient controls surrounding an issuer’s financial reporting obligations, including quarterly reporting obligations.”

Capital One’s material understatements of its loan loss expense and internal controls failures violated the reporting, books and records, and internal controls provisions of the federal securities laws, namely Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20 and 13a-13. Schnall and LaGassa caused Capital One’s violations of Section 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rule 13a-13 thereunder and violated Exchange Act Rule 13b2-1 by indirectly causing Capital One’s books and records violations.

Schnall agreed to pay an $85,000 penalty and LaGassa agreed to pay a $50,000 penalty to settle the SEC’s charges. Capital One and the two executives neither admitted nor denied the findings in consenting to the SEC’s order requiring them to cease and desist from committing or causing any violations of these federal securities laws.

The SEC’s investigation was conducted by Senior Counsel Anita Bandy and Assistant Chief Accountant Amanda deRoo and supervised by Assistant Director Conway Dodge.

# # #

Washington, D.C., April 23, 2013 — The Securities and Exchange Commission today announced the agenda for its Credit Ratings Roundtable, which will be held at the SEC’s headquarters in Washington, D.C., on May 14.

The roundtable, which was previously announced, will consist of three panels, with panelists to be named later. The first panel will discuss the potential creation of a credit rating assignment system for asset-backed securities. The second panel will discuss the effectiveness of the SEC’s current system to encourage unsolicited ratings of asset-backed securities. The third panel will discuss other alternatives to the current issuer-pay business model in which the issuer selects and pays the firm it wants to provide credit ratings for its securities.

The event will begin at 9 a.m. and is open to the public with seating on a first-come, first-served basis. The event also will be webcast live on the SEC’s website and will be archived for later viewing.

Members of the public may submit comments electronically or on paper.  Please submit comments using one method only.  Information that is submitted will become part of the public record of the roundtable.

Electronic submissions:

Use the SEC’s Internet submission form or send an e-mail to rule-comments@sec.gov.

Paper submissions:

Send paper submissions in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549-1090.

All submissions should refer to File Number 4-661, and the file number should be included on the subject line if e-mail is used. 

# # #

Agenda

Opening Remarks

Panel 1 — Credit Rating Assignment System

This panel will discuss the potential creation of a credit rating assignment system. The questions that the panel could consider include:

• Could a credit rating assignment system serve to mitigate the conflict of interest associated with the issuer-pay model, for instance by eliminating the opportunity for coordinated activities between credit rating agencies and market participants such as issuers and arrangers? If so, to what degree might this occur?
   
• What potential disadvantages, including potential unintended consequences, could arise from creating such a system?
   
• Would the creation of such a system raise any constitutional issues?
   
• What would it cost to implement such a system and how could it be funded?
   
• What effects would the establishment of such a system have on the markets and market participants?
   
• Would there be any impact to investors from not creating such a system?
   
• What metrics could a credit rating assignment system use to measure past performance of a Nationally Recognized Statistical Rating Organization (NRSRO) in order to determine future rating assignments?
   
• Would using such metrics to evaluate rating performance constitute interference with the substance or methodology of credit ratings? If so, how could this be mitigated?
   
• Could using such metrics to determine future rating assignments have an adverse effect on the rating process? If so, how could this be mitigated?
   
• What potential conflicts of interest would a credit rating assignment board have and how could they be mitigated?
   
• Should participation in a credit rating assignment system be mandatory or voluntary? What would be the effect of eligible NRSROs choosing not to participate in a voluntary credit rating assignment system?

Break

Panel 2 — Rule 17g-5 Program (Unsolicited Ratings)

This panel will discuss the effectiveness of the SEC’s current Rule 17g-5 system to encourage unsolicited ratings of asset-backed securities. The questions that the panel could consider include:

• How are NRSROs currently using the SEC’s Rule 17g-5 system to develop and issue unsolicited ratings?
   
• What improvements could be made to the Rule 17g-5 system to further encourage unsolicited ratings?
   
• To what degree could such improvements mitigate conflicts of interest with the issuer-pay model?
   
• What would be the effect of removing the requirement that NRSROs accessing Rule 17g-5 information issue unsolicited ratings for at least 10 percent of the issuances they access?
   
• Are issuers imposing any impediments to NRSROs accessing their information through the Rule 17g-5 system?
   
• Do concerns about liability affect the NRSROs’ willingness to issue unsolicited ratings?
   
• What other obstacles discourage NRSROs from issuing unsolicited ratings?
   
• Should the information on the 17g-5 websites be made available to investors? What are the implications of doing so?

Panel 3 — Alternative Compensation Models

This panel will discuss other potential alternatives to the current issuer-pay business model. The questions that the panel could consider include:

• What are other potential alternatives to the current issuer-pay business model?
   
• What potential advantages and disadvantages would come from establishing a licensing and certification requirement for NRSRO analysts?
   
• Would a system of NRSRO rotation be workable?
   
• What would be the effects of requiring NRSROs to use compensation systems other than the issuer-pay model?
   
• Should the SEC require issuers to hire at least one smaller NRSRO to rate each structured finance issuance? Would opinions of these smaller NRSROs help to mitigate any conflicts of interest in the issuer-pay model of the larger NRSROs? How should “smaller NRSRO” be defined? Would such a requirement cause a race to the bottom among the smaller NRSROs? Would it increase costs to issuers?
   
• Should issuers be required to provide credit enhancement that is no lower than the second lowest quote it receives from NRSROs? Should the issuer be permitted to hire any NRSRO it chooses, as long as it provides enhancement no lower than an amount equal to the second lowest quote? Would this method help to satisfy investor guidelines and mitigate ratings “shopping”?
   
• Should issuers be required to disclose which rating firms they have solicited for feedback, regardless of which firm or firms, if any, they engage to issue a rating?
   
• Are investors’ voices being heard in the rating selection process and in the terms of structured finance transactions? If not, how could investors have more input?
   
• Would a compensation scheme that required NRSROs to charge a flat fee reduce the potential for inflated ratings?
   
• Are there any other potential alternatives that the Commission has not yet considered?

Closing remarks

Roundtable concludes

# # #

Washington, D.C., April 23, 2013 — The Securities and Exchange Commission today announced that investors in a fraudulent investment scheme that offered foreign investors a path to citizenship will get their money back promptly thanks to the SEC’s recent court action. A federal district court judge has ordered the return of all investors’ principal investment in the fraudulent securities offering.

Just two months ago, the SEC charged Anshoo R. Sethi and two companies he created in Chicago to sell more than $147 million in securities to purportedly finance the construction of a hotel and conference center near O’Hare Airport. The SEC alleged that Sethi and his companies misled Chinese investors about both the purported investment opportunity and the prospect of gaining legal U.S. residency through the EB-5 Immigrant Investor Pilot Program.

The SEC filed its complaint in federal court in Chicago and obtained an emergency court order to freeze investor assets that were at risk of being misappropriated. Sethi and his companies then terminated the offering and consented to the SEC’s motion to return all of the funds held in escrow to investors.

U.S. District Court Judge Amy St. Eve modified the asset freeze order on April 19 and directed the return of more than $147 million in escrowed funds to investors. The litigation continues as the SEC seeks further monetary relief and permanent injunctions against Sethi and his companies.

“Obtaining the speedy return of investor funds in cases like this is at the core of the SEC’s mission,” said Stephen L. Cohen, Associate Director of the SEC’s Division of Enforcement. “We will continue to work closely with U.S. Citizenship and Immigration Services when questions arise about investments involving the EB-5 Program.”

# # #

Washington, D.C., April 23, 2013 — The Securities and Exchange Commission today announced that Anne K. Small has been named General Counsel of the agency.

Ms. Small comes to the SEC from the White House Counsel’s Office where she has been serving as Special Assistant to the President and Associate Counsel to the President since October 2011.  She has advised on legal policy questions with a focus on economic issues.

Ms. Small previously worked at the SEC as Deputy General Counsel for Litigation and Adjudication, helping to oversee enforcement matters, appellate cases, and adjudications.  She becomes the first woman to be named General Counsel of the SEC.

“I’m delighted that Annie will be returning the agency at a time when our rule writing is in full swing and our enforcement program continues to pursue cases involving some of the most complex transactions,” said Mary Jo White, the SEC Chair.  “The Commission will benefit from her experience, judgment, and tremendous talent.”

Before entering government, Ms. Small worked at WilmerHale LLP, where she was a partner in the firm’s litigation department.  She was involved in commercial and securities litigation, a broad range of civil and criminal matters, and trial and appellate work.

Ms. Small said, “It is an honor to return to the Commission.  I am looking forward to working with the talented staff in the General Counsel’s Office and serving Chairman White and the other Commissioners in the agency’s efforts to protect investors.”

Ms. Small is expected to arrive at the agency soon and will succeed Geoffrey Aronow, who will become a senior counsel to the Chairman.  

“Even in his short stint as General Counsel, Geoff has proved himself to be a wise and insightful counselor to the Commission.  I am very pleased that he has agreed to stay on as a senior counsel in my office.  In that role, he will assist in navigating some of the more complex and difficult policy issues we must address,” said Chairman White.

Ms. Small began her law career as a law clerk for Judge Guido Calabresi on the U.S. Court of Appeals for the Second Circuit and for Justice Stephen G. Breyer on the U.S. Supreme Court.  She received her J.D. in 2001 from Harvard Law School, where she was awarded the Sears Prize and served as President of the Harvard Law Review.  She earned her B.A. from Yale University in 1996.

# # #

Washington, D.C., April 22, 2013 — The Securities and Exchange Commission today announced the agenda for a meeting of its Advisory Committee on Small and Emerging Companies on Wednesday, May 1.

The Advisory Committee will hear presentations from Robert Greifeld, Chief Executive Officer of NASDAQ OMX Group, William R. Hambrecht, Chairman and Chief Executive Officer of WR Hambrecht + Co., and Duncan L. Niederauer, Chief Executive Officer of NYSE Euronext. The presentations and the discussions are expected to cover a wide array of issues regarding small and emerging companies, such as capital formation, securities trading, and research and offering communications.

The Advisory Committee meeting, announced earlier this month, will begin at 9:30 a.m. in the multi-purpose room at the SEC’s Washington, D.C., headquarters. The public is welcome to attend with seating available on a first-come, first-served basis. The event also will be webcast live on the SEC website and will be archived for later viewing.

Members of the public who wish to provide their views on the matters to be considered by the Advisory Committee may submit comments electronically or on paper. Please submit comments using one method only. Information that is submitted will become part of the public record of the meeting.

Electronic submissions:

Use the SEC’s Internet submission form or send an e-mail to rule-comments@sec.gov.

Paper submissions:

Send paper submissions in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549-1090.

All submissions should refer to File Number 265-27, and the file number should be included on the subject line if e-mail is used.

# # #

Agenda

# # #

Washington, D.C., April 22, 2013 — The Securities and Exchange Commission today announced that Acting Director George Canellos and former federal prosecutor Andrew Ceresney have been named Co-Directors of the Division of Enforcement.

Mr. Canellos, 48, has been serving as Acting Director since January, and previously had been the division’s Deputy Director since June 2012. He played a key role in developing the division’s Cooperation Program and in generating numerous programmatic, policy, and legislative initiatives and critical decisions on national priority enforcement actions.

From July 2009 to June 2012, Mr. Canellos served as Director of the SEC’s New York Regional Office, overseeing 400 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.

Previously, Mr. Ceresney, 41, served as a Deputy Chief Appellate Attorney in the United States Attorney's Office for the Southern District of New York, where he was a member of the Securities and Commodities Fraud Task Force and the Major Crimes Unit. As a prosecutor, Mr. Ceresney handled numerous white collar criminal investigations, trials and appeals, including matters relating to securities fraud, mail and wire fraud, and money laundering.

Most recently, Mr. Ceresney served as a partner in the law firm of Debevoise & Plimpton LLP, where he focused on representing entities and individuals in white collar criminal and SEC investigations, complex civil litigation and internal corporate investigations.

“George and Andrew are two of the best lawyers and finest people I know. They are a perfect combination to lead the talented Enforcement Division professionals who protect investors and keep our markets safe and vibrant,” said Mary Jo White, SEC Chair.

“As head of the New York Regional Office and the Deputy Director and Acting Director of Enforcement, George has distinguished himself at the SEC as a highly respected leader with a keen intellect and extensive knowledge of the securities laws,” Chairman White added. “I have had the pleasure of working with Andrew both at the U.S. Attorney’s Office and in the private sector. He has proven himself to be an extraordinarily talented and versatile lawyer with tremendous judgment and creativity. George and Andrew will be a formidable team and I am grateful to both of them for taking on this extremely important responsibility.”

Mr. Canellos said, “I am delighted and honored to have this opportunity to serve again under Mary Jo White in partnership with my longtime friend and gifted former colleague. I look forward to continuing to work with the Commission and with my colleagues in the Enforcement Division and throughout the agency as we confront new challenges.”

Mr. Ceresney said, “I am truly humbled to be joining the SEC’s Enforcement Division with its rich history and deeply committed and talented people. I am excited to be charged with implementing Chairman White’s mandate of bold and unrelenting enforcement and thrilled to be teaming again with George, an immensely talented lawyer and close friend.”

The Enforcement Division is the agency's largest unit, with more than 1,200 investigators, accountants, trial attorneys and other professionals. In recent years the division has achieved remarkable success prosecuting financial crisis cases, insider trading and other violations, while returning billions to harmed investors.

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. After leaving the U.S. Attorney’s Office and before joining the SEC, Mr. Canellos spent 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. Ceresney served as a law clerk to the Honorable Dennis Jacobs, Chief Judge of the U.S. Court of Appeals for the Second Circuit from 1997 to 1998. He served as law clerk to the Honorable Michael Mukasey, formerly Chief Judge of the U.S. District Court for the Southern District of New York, from 1996 to 1997. Mr. Ceresney is a graduate of Columbia College and Yale Law School.

# # #

Washington, D.C., April 22, 2013 — The Securities and Exchange Commission today charged a former corporate executive living in South Florida with insider trading based on confidential information that he learned as part of a professional organization.

The SEC alleges that Mark D. Begelman purchased stock in Bluegreen Corporation in advance of a public announcement by BFC Financial Corporation that it was acquiring the company. Begelman was a member of the World Presidents’ Organization (WPO), which is a global professional group of business leaders who are current or former executives at major companies. The WPO has a specific written policy that discussions of a confidential nature are to be kept confidential. Nonetheless, Begelman took advantage of confidential information he learned from another WPO member and illegally traded ahead of the merger announcement for nearly $15,000 in illicit profits.

Begelman has agreed to pay more than $30,000 to settle the SEC’s charges.

“As a longstanding member of a group of executive professionals, Begelman disregarded his obligation of trust and confidence by abusing and illegally profiting from his extraordinary access to material, nonpublic information,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, Begelman joined the WPO in 1991 while he was president and chief operating officer at Office Depot. He later served as an officer at BankAtlantic Bancorp and as vice chairman of the board at Canyon Creek Food Company. Begelman was part of a small, tightly-knit group of WPO members called Forum 91. Begelman gleaned the nonpublic information about the merger from a fellow Forum 91 member who was a high-ranking executive at both Bluegreen and BFC.

According to the SEC’s complaint, Begelman and his fellow Forum 91 members gathered for their annual retreat in the Florida Keys from Nov. 1 to Nov. 3, 2011. During the retreat, Begelman learned from the executive that Bluegreen and BFC were in merger negotiations and planned to enter into a business combination. Begelman e-mailed his stockbroker on November 2 instructing him to buy 25,000 shares of Bluegreen. The next day, Begelman and his stockbroker spoke by phone, and minutes later the stockbroker entered an order to purchase 25,000 Bluegreen shares at $2.25 per share. The purchase order was filled by Nov. 9, 2011.

The SEC alleges that Begelman purchased the shares despite the duty of trust and confidence he owed to the WPO member from whom he learned the material, nonpublic information. After BFC issued a press release on November 14 announcing the acquisition, Bluegreen’s share price rose nearly 46 percent and Begelman sold all 25,000 of his Bluegreen shares at higher prices for $14,949.34 in illegal trading profits.

The SEC’s complaint charges Begelman, who lives in Delray Beach, Fla., with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Without admitting or denying the charges, Begelman agreed to disgorge his ill-gotten gains of $14,949.34 and pay prejudgment interest of $377.22 and a penalty of $14,949.34. He also agreed to be prohibited from serving as an officer and director of a public company for a period of at least five years. The settlement is subject to court approval.

The SEC’s investigation was conducted in the Miami Regional Office by Senior Investigations Counsel Gary M. Miller under the supervision of Assistant Regional Director Elisha L. Frank. Regional Trial Counsel Robert K. Levenson will lead the district court action. The SEC appreciated the assistance of FINRA’s Office of Fraud Detection and Market Intelligence.

# # #

Washington, D.C., April 22, 2013 — The Securities and Exchange Commission today announced a non-prosecution agreement (NPA) with Ralph Lauren Corporation in which the company will disgorge more than $700,000 in illicit profits and interest obtained in connection with bribes paid by a subsidiary to government officials in Argentina from 2005 to 2009. The misconduct was uncovered in an internal review undertaken by the company and promptly reported to the SEC.

The SEC has determined not to charge Ralph Lauren Corporation with violations of the Foreign Corrupt Practices Act (FCPA) due to the company's prompt reporting of the violations on its own initiative, the completeness of the information it provided, and its extensive, thorough, and real-time cooperation with the SEC's investigation. Ralph Lauren Corporation's cooperation saved the agency substantial time and resources ordinarily consumed in investigations of comparable conduct.

The NPA is the first that the SEC has entered involving FCPA misconduct. NPAs are part of the SEC Enforcement Division's Cooperation Initiative, which rewards cooperation in SEC investigations. In parallel criminal proceedings, the Justice Department entered into an NPA with Ralph Lauren Corporation in which the company will pay an $882,000 penalty.

"When they found a problem, Ralph Lauren Corporation did the right thing by immediately reporting it to the SEC and providing exceptional assistance in our investigation," said George S. Canellos, Acting Director of the SEC's Division of Enforcement. "The NPA in this matter makes clear that we will confer substantial and tangible benefits on companies that respond appropriately to violations and cooperate fully with the SEC."

Kara Brockmeyer, the SEC's FCPA Unit Chief, added, "This NPA shows the benefit of implementing an effective compliance program. Ralph Lauren Corporation discovered this problem after it put in place an enhanced compliance program and began training its employees. That level of self-policing along with its self-reporting and cooperation led to this resolution."

According to the NPA, Ralph Lauren Corporation's cooperation included:

• Reporting preliminary findings of its internal investigation to the staff within two weeks of discovering the illegal payments and gifts.
• Voluntarily and expeditiously producing documents.
• Providing English language translations of documents to the staff.
• Summarizing witness interviews that the company's investigators conducted overseas.
• Making overseas witnesses available for staff interviews and bringing witnesses to the U.S.

According to the NPA, the bribes occurred during a period when Ralph Lauren Corporation lacked meaningful anti-corruption compliance and control mechanisms over its Argentine subsidiary. The misconduct came to light as a result of the company adopting measures to improve its worldwide internal controls and compliance efforts, including implementation of an FCPA compliance training program in Argentina.

As outlined in the NPA, Ralph Lauren Corporation's Argentine subsidiary paid bribes to government and customs officials to improperly secure the importation of Ralph Lauren Corporation's products in Argentina. The purpose of the bribes, paid through its customs broker, was to obtain entry of Ralph Lauren Corporation's products into the country without necessary paperwork, avoid inspection of prohibited products, and avoid inspection by customs officials. The bribe payments and gifts to Argentine officials totaled $593,000 during a four-year period.

Under the NPA, Ralph Lauren Corporation agreed to pay $593,000 in disgorgement and $141,845.79 in prejudgment interest.

The SEC took into account the significant remedial measures undertaken by Ralph Lauren Corporation, including a comprehensive new compliance program throughout its operations. Among Ralph Lauren Corporation's remedial measures have been new compliance training, termination of employment and business arrangements with all individuals involved in the wrongdoing, and strengthening its internal controls and its procedures for third party due diligence. Ralph Lauren Corporation also conducted a risk assessment of its major operations worldwide to identify any other compliance problems. Ralph Lauren Corporation has ceased operations in Argentina.

The SEC's investigation was conducted by Kristin A. Snyder and FCPA Unit Assistant Director Tracy L. Davis in the San Francisco Regional Office. The SEC appreciates the assistance of the U.S. Department of Justice's Fraud Section, the U.S. Attorney's Office for the Eastern District of New York, and the Federal Bureau of Investigation in this matter.

# # #

Washington, D.C., April 18, 2013 — The Securities and Exchange Commission today charged the CEO of Chicago-based investment advisory firm Simran Capital Management with lying to the California Public Employers' Retirement System (CalPERS) and other current and potential clients about the amount of money managed by the firm.

Institutional investors such as CalPERS often use assets under management (AUM) as a metric to screen prospective investment advisers soliciting their business. An SEC investigation revealed that while pitching Simran's services, Mesh Tandon falsely certified to CalPERS that his firm satisfied its minimum AUM requirements. After fraudulently obtaining the business from CalPERS, Tandon also falsely inflated Simran's AUM in communications with other potential clients with whom he touted his firm's relationship with CalPERS. Tandon also fraudulently reported an inflated AUM in filings with the SEC, and he later attempted to mislead SEC examiners during a routine examination of Simran.

Tandon, who previously lived in Chicago and now resides in Texas, has agreed to settle the SEC's fraud charges.

"Tandon deliberately undermined the CalPERS screening process by grossly misrepresenting his firm's purported assets under management," said Merri Jo Gillette, Director of the SEC's Chicago Regional Office. "To make matters worse, he then used his association with CalPERS to lure other public institutional investors under false pretenses."

According to the SEC's order instituting settled administrative proceedings against Tandon, he represented to CalPERS in May 2008 that Simran met explicit AUM requirements and managed at least $200 million as of Dec. 31, 2007. In fact, Simran managed approximately $80 million at that time. Evidence indicates that Tandon was aware that Simran did not meet the CalPERS requirements for AUM.

According to the SEC's order, Tandon touted Simran's relationship with CalPERS to other prospective clients from 2008 to 2011, and he instructed other Simran employees to do the same. On more than a dozen occasions, Tandon and Simran employees falsely inflated the firm's AUM in communications with employee retirement systems and other prospective clients. Tandon and Simran also overstated the AUM in at least four of the firm's Form ADVs filed with the SEC. In February 2012, Simran withdrew its SEC registration as an investment adviser and has since ceased operations.

According to the SEC's order, Tandon violated Sections 206(1), 206(2), and 207 of the Investment Advisers Act of 1940. Tandon neither admitted nor denied the findings, and agreed to be barred from the securities industry and pay disgorgement of $20,018, prejudgment interest of $1,680, and a penalty of $100,000.

The SEC's investigation was conducted by Peter K.M. Chan along with Jonathan I. Katz and Andrew O'Brien in the Chicago Regional Office. They were assisted by members of the Chicago Regional Office's examination staff including Susan M. Weis, Jeson G. Patel, and Max J. Gillman.

# # #

Washington, D.C., April 16, 2013 — The Securities and Exchange Commission today charged two former brokers in Arizona with stealing investments in a project to develop tankless water heaters.

The SEC alleges that Jeffrey Stebbins of Mesa, Ariz., and Corbin Jones of Gilbert, Ariz., diverted at least $1.8 million of investor money for their personal use and fraudulently obtained more than $6 million in stock for themselves to the detriment of investors. Typically used in residences, tankless water heaters are generally designed to instantly heat water as it passes through pipes rather than in large containers like traditional water heaters. Stebbins and Jones personally told investors that all of the money they raised would be used to develop the tankless water heater venture. Instead, they diverted nearly 30 percent of the funds they raised to pay unrelated business expenses and support their lavish lifestyles, including the lease of luxury automobiles.

“Stebbins and Jones secretly misappropriated investor funds for their personal use and defrauded investors at every turn,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office.

According to the SEC’s complaint filed in U.S. District Court for the District of Arizona, Stebbins and Jones solicited investors for the tankless water heater project during a three-year period by offering securities through a variety of companies. Besides misappropriating $1.8 million for themselves, they fraudulently duped certain shareholders in one of the companies, Noble Systems, to swap their private shares for publicly-traded shares in another company, Noble Innovations. This turned out to be nothing more than a fraudulently orchestrated stock swap enabling Stebbins and Jones to reap more than $6 million worth of Noble Innovations stock at the expense of these shareholders who were left with almost nothing. Stebbins and Jones also deprived early investors in the water heater venture of more than $1 million of Noble Innovations stock that rightfully belonged to them. Throughout much of this time, Stebbins and Jones traded Noble Innovations stock by using 28 accounts in 18 different names with 14 separate brokers to ultimately profit by more than $557,000. Stebbins and Jones never reported their significant holdings in Noble Innovations as they were required to do under the securities laws.

The SEC’s complaint charges Stebbins and Jones with violating the antifraud, broker-dealer registration, and beneficial ownership reporting provisions of the federal securities laws. The SEC is seeking disgorgement of ill-gotten gains and prejudgment interest, financial penalties, injunctions, and penny stock bars.

The SEC separately issued an order to revoke the registration of Noble Innovations securities due to the company’s failure to make required periodic filings.

The SEC’s investigation was conducted by Junling Ma, Marshall Sprung, and C. Dabney O’Riordan of the Los Angeles Regional Office. The SEC’s litigation will be conducted by Sam Puathasnanon, David Van Havermaat, and Ms. Ma.

# # #

Washington, D.C., April 16, 2013 — The Securities and Exchange Commission today charged an investment banker in Toronto with insider trading by using information that he obtained through his job of pitching investment ideas to the Canada Pension Plan Investment Board (CPPIB).

The SEC alleges that Richard Bruce Moore, who worked at the Canadian Imperial Bank of Commerce (CIBC), was attempting to obtain a role in a pending acquisition when he learned facts that allowed him to conclude that U.K.-based engineering and manufacturing company Tomkins plc was the CPPIB’s target. Moore misappropriated the information by purchasing Tomkins American Depositary Receipts (ADRs), which trade on the New York Stock Exchange, during the weeks leading up to the acquisition. After the acquisition offer was announced, the closing price of Tomkins ADRs rose 27 percent, and Moore made more than $163,000 in illicit profits.

Moore has agreed to settle the SEC’s charges by paying more than $340,000. The Ontario Securities Commission today announced a related action against Moore for insider trading in Tomkins common stock.

“Moore spent approximately one-third of his total net worth on purchases of Tomkins securities based on information he learned in the course of his employment,” said Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement. “In today’s interconnected markets, the cooperative relationships among securities regulators mean that those who choose to engage in international insider trading should expect to face consequences across the globe.”

According to the SEC’s complaint filed in federal court in Manhattan, the CPPIB was one of Moore’s top clients at CIBC in 2010. His primary contact was a CPPIB managing director who was responsible for taking public companies private. Through Moore’s interactions with the CPPIB, he learned that the Board was working on a large transaction in the United Kingdom. He pieced together nonpublic information to conclude that the Board was going to make an offer to acquire Tomkins.

The SEC alleges that Moore used an account in the Channel Islands to purchase 51,350 Tomkins ADRs on the New York Stock Exchange on June 28, 2010. He also purchased a large number of Tomkins common shares on the London Stock Exchange. The CPPIB and a Canadian private equity firm announced the acquisition offer for Tomkins on July 19, 2010.

The SEC’s complaint charges Moore with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In the settlement, which is subject to court approval, Moore agreed to pay $163,293 in disgorgement, $14,905 in prejudgment interest, and a $163,293 penalty. Moore also agreed to an SEC order that will bar him from the securities industry or participating in a penny stock offering.

The SEC’s investigation was conducted by David Frohlich and Matthew L. Skidmore. The SEC appreciates the cooperation and assistance of the Ontario Securities Commission, Jersey Financial Services Commission, and Financial Industry Regulatory Authority.

# # #

Washington, D.C., April 15, 2013 — The Securities and Exchange Commission today charged a prominent Denver-based businessman with insider trading based on confidential information he obtained from the CEO of an oil and gas company that was about to secure a huge investment.

An investigation by the SEC’s Enforcement Division found that Scott Reiman obtained inside information about Delta Petroleum ahead of the company’s announcement that it had secured a $684 million investment from private investment firm Tracinda. After the major investment was publicly announced, Delta Petroleum’s stock price jumped almost 20 percent and Reiman reaped substantial illicit profits. The SEC previously charged Reiman’s source, then-CEO Roger Parker, as well as another trader, Michael Van Gilder, in this insider trading investigation.

To settle the SEC’s charges, Reiman agreed to pay nearly $900,000 and be barred from the securities industry and from serving as an officer or director of a public company for at least five years.

“Reiman took advantage of highly confidential information that he obtained through his friendship with Parker and traded on it for significant and entirely illegal profits,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit.

Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “These enforcement actions against Reiman, Parker, and Van Gilder show that the SEC will unravel the story behind suspicious trades and root out corporate insiders who give away confidential information as well as those who can’t resist the temptation to trade on it.”

According to the SEC’s order instituting proceedings, Reiman is the founder and president of the Denver-based investment firm Hexagon Inc. He received repeated tips from Parker about Tracinda’s potential investment in Delta Petroleum. On three occasions in late November and early December 2007, Reiman bought Delta Petroleum stock or highly speculative option contracts shortly after speaking to Parker, including once within minutes after getting off the phone with him. When Delta publicly announced the Tracinda investment on Dec. 31, 2007, the value of Reiman’s fraudulently obtained Delta Petroleum securities soared nearly 20 percent.

The SEC’s order charged Reiman with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Reiman neither admitted nor denied the charges. Reiman agreed to pay disgorgement of $398,000 plus prejudgment interest of $93,567 and a penalty of $398,000. The order bars Reiman from acting as an officer or director of any public company for a period of five years, bars him from the securities industry with the right to reapply for reentry after five years, and requires him to cease-and-desist from future violations.

The SEC’s investigation has been conducted by members of the Enforcement Division’s Market Abuse Unit — Michael Holland, Jeffrey Oraker, Joseph Sansone, and Jay Scoggins — with substantial assistance from Neil Hendelman in the New York Regional Office and Thomas Krysa in the Denver Regional Office. The case has been supervised by Daniel M. Hawke and Sanjay Wadhwa.

The SEC appreciates the assistance of the U.S. Attorney offices in the Southern District of New York and the District of Colorado as well as the Federal Bureau of Investigation.

# # #

Washington, D.C., April 15, 2013 — The Securities and Exchange Commission today charged a former employee at a Connecticut-based brokerage firm with scheming to personally profit from placing unauthorized orders to buy Apple stock. When the scheme backfired, it ultimately caused the firm to cease operations.

David Miller, an institutional sales trader who lives in Rockville Centre, N.Y., has agreed to a partial settlement of the SEC's charges. He also pleaded guilty today in a parallel criminal case.

The SEC alleges that Miller misrepresented to Rochdale Securities LLC that a customer had authorized the Apple orders and assumed the risk of loss on any resulting trades. The customer order was to purchase just 1,625 shares of Apple stock, but Miller instead entered a series of orders totaling 1.625 million shares at a cost of almost $1 billion. Miller planned to share in the customer's profit if Apple's stock profited, and if the stock decreased he would claim that he erred on the size of the order. The stock wound up decreasing after an earnings announcement later that day, and Rochdale was forced to cease operations in the wake of covering the losses suffered from the rogue trades.

"Miller's scheme was deliberate, brazen, and ultimately ill-conceived," said Daniel M. Hawke, Chief of the SEC Enforcement Division's Market Abuse Unit. "This is a wake-up call to the brokerage industry that the unchecked conduct of even a single individual in a position of trust can pose grave risks to a firm and potentially to the markets and investors."

According to the SEC's complaint filed in federal court in Connecticut, Miller entered purchase orders for 1.625 million shares of Apple stock on Oct. 25, 2012, with the company's earnings announcement expected later that day. His plan was to share in the customer's profit from selling the shares if Apple's stock price increased. Alternatively, if Apple's stock price decreased, Miller planned to claim that he inadvertently misinterpreted the size of the customer's order, and Rochdale would then take responsibility for the unauthorized purchase and suffer the losses.

According to the SEC's complaint, Apple's stock price decreased after Apple's earnings release was issued on October 25. The customer denied buying all but 1,625 Apple shares, and Rochdale was forced to take responsibility for the unauthorized purchase. Rochdale then sold the Apple stock at an approximately $5.3 million loss, causing the value of the firm's available liquid assets to fall below regulatory limits required of broker-dealers. Rochdale had to cease operations shortly thereafter.

The SEC's complaint charges Miller with violations of Section 17(a)(1) and (3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. To settle the SEC's charges, Miller will be barred in separate SEC administrative proceedings from working in the securities industry or participating in any offering of penny stock. In the partial settlement in court, Miller agreed to be enjoined from future violations of the antifraud provisions of the federal securities laws. A financial penalty will be determined at a later date by the court upon the SEC's motion.

In the criminal proceeding, Miller pleaded guilty to charges of wire fraud and conspiracy to commit securities and wire fraud. He will be sentenced on July 8.

The SEC's investigation, which is continuing, has been conducted by Eric A. Forni, David H. London, and Michele T. Perillo of the Market Abuse Unit in the Boston Regional Office. The SEC acknowledges the assistance of the U.S. Attorney's Office for the District of Connecticut, Federal Bureau of Investigation, and Financial Industry Regulatory Authority (FINRA).

# # #

Washington, D.C., April 11, 2013 — The Securities and Exchange Commission today announced that Jennifer Marietta-Westberg has been named Deputy Director of its Division of Risk, Strategy, and Financial Innovation (RSFI).

The SEC created the Division of Risk, Strategy, and Financial Innovation in September 2009 to help inform the agency’s policymaking, rulemaking, enforcement, and examinations. The division provides economic analysis, quantitative research, and risk assessment, and its staff has expertise in a variety of academic disciplines and deep knowledge of the financial industry and markets.

Dr. Marietta-Westberg will oversee the division’s policy and rulemaking support functions, particularly its economic analysis in support of SEC policy and rulemaking. In addition, she will assist with the overall management of the division, working closely with RSFI Director and Chief Economist Craig Lewis and the division’s other Deputy Director, Kathleen Weiss Hanley.

Dr. Lewis said, “Dr. Marietta-Westberg is already a valued member of the division with a wealth of experience in performing complex economic analysis to support the SEC’s policy initiatives. I am delighted that she will be able to bring her experience and leadership to this new and vital role.”

“I am honored to take on this new role and to continue to work with the talented staff in the division to provide robust economic analysis that helps inform the Commission’s policy choices,” Dr. Marietta-Westberg said.

Dr. Marietta-Westberg joined the SEC in 2006 as a Visiting Scholar in what was then the Office of Economic Analysis. In 2010, she was named Assistant Director of what is now the Office of Investments and Intermediaries within RSFI, where she oversaw economic analyses in support of policy and rulemaking recommendations by the SEC’s Division of Investment Management and its Division of Trading and Markets. Before coming to the SEC, Dr. Marietta-Westberg was an Assistant Professor at Michigan State University. She graduated from the University of Iowa in 2000 with a Ph.D. in Finance.

# # #

Washington, D.C., April 11, 2013 — The Securities and Exchange Commission today charged the former partner in charge of KPMG's Pacific Southwest audit practice and his friend with insider trading on nonpublic information about firm clients.

The SEC alleges that Scott London tipped Bryan Shaw with confidential details about five KPMG audit clients and enabled Shaw to make more than $1.2 million in illicit profits trading ahead of earnings or merger announcements. The two men had met at a country club several years earlier and became close friends and golfing partners. London has said that he provided the inside information about his clients to help Shaw overcome financial struggles after his family-run jewelry business began faltering in the economic downturn. In exchange for the illegal trading tips, Shaw paid London at least $50,000 in cash that was usually delivered in bags outside of his Encino, Calif. jewelry store. Shaw also gave London an expensive Rolex watch as well as other jewelry, meals, and tickets to entertainment events.

London, who lives in Agoura Hills, Calif., and worked at KPMG for nearly 30 years, recently informed the firm that he was under investigation by the SEC and criminal authorities for insider trading in the securities of several KPMG clients. The firm immediately terminated him.

"London was honored with the highest trust of public companies, and he crassly betrayed that trust for bags of cash and a Rolex," said George S. Canellos, Acting Director of the Division of Enforcement.

Michele Wein Layne, Director of the SEC's Los Angeles Regional Office, added, "As a leader at a major accounting firm, London's conduct was an egregious violation of his ethical and professional duties."

In a parallel action, the U.S. Attorney's Office for the Central District of California today announced criminal charges against London.

According to the SEC's complaint filed in federal court in Los Angeles, London began providing Shaw with nonpublic information in October 2010 and the misconduct continued for the next 18 months. Shaw and London communicated almost exclusively using their cell phones, although on at least one occasion London disclosed nonpublic information in the presence of others during a golf outing.

According to the SEC's complaint, London was the lead partner on several KPMG audits including Herbalife and Skechers USA, and he was the firm's account executive for Deckers Outdoor Corp. Therefore, London was able to obtain material, nonpublic information about these companies prior to their earnings announcements or release of financial results. Shaw, who lives in Lake Sherwood, Calif., routinely traded at least a dozen times on the inside information he received from London. He grossed profits of more than $714,000 from trading based on confidential financial data about Herbalife, Skechers, and Deckers.

The SEC alleges that London also gained access to inside information about impending mergers involving two former KPMG clients - RSC Holdings and Pacific Capital. London tipped Shaw with the confidential details. Shaw made nearly $192,000 by purchasing RSC Holdings stock the day before its Dec. 15, 2011, merger announcement. He made more than $365,000 in illicit profits from his well-timed purchase of Pacific Capital securities prior to a merger announcement on March 9, 2012.

According to the SEC's complaint, in addition to the bags of cash and the Rolex watch valued at $12,000, Shaw gave London several pieces of expensive jewelry for his wife and routinely covered the costs of dinners and concerts the two men shared along with their families.

The SEC's complaint charges London and Shaw with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a final judgment permanently ordering them to disgorge ill-gotten gains plus pay prejudgment interest and financial penalties, and enjoining them from future violations of these provisions of the federal securities laws.

The SEC's investigation, which began in mid-2012 and is continuing, has been conducted by William Fiske and Marc Blau of the Los Angeles Regional Office. The SEC's litigation will be led by Lynn Dean. The SEC appreciates the assistance of the U.S. Attorney's Office for the Central District of California and the Federal Bureau of Investigation. The SEC also appreciates assistance from the Financial Industry Regulatory Authority (FINRA), Options Regulatory Surveillance Authority (ORSA), and Chicago Board Options Exchange (CBOE).

# # #

Washington, D.C., April 10, 2013 — The Securities and Exchange Commission today voted unanimously to adopt rules requiring broker-dealers, mutual funds, investment advisers, and certain other entities regulated by the agency to adopt programs to detect red flags and prevent identity theft.

The SEC adopted the rules jointly with the Commodity Futures Trading Commission (CFTC) in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

“Under these rules, certain businesses regulated by the SEC and CFTC would be required to adopt and implement programs to detect and respond to indicators of possible identity theft,” said SEC Chairman Mary Jo White. “These rules are a common-sense response to the growing threat of identity theft to all Americans who invest, save, or borrow money.”

The final rules will become effective 30 days after publication in the Federal Register, and the compliance date will be six months after the effective date.

# # #

FACT SHEET

Preventing and Detecting Identity Theft

SEC Open Meeting
April 10, 2013

Background

The development and expansion of information technology and electronic communication during the past decade have led to increasing threats to the integrity and privacy of personal information. The federal government has taken steps to help protect individuals and help individuals protect themselves from the risks of theft, loss, and abuse of their personal information.

Congress amended Fair Credit Reporting Act (FCRA) in 2003 to require several federal agencies including the Federal Trade Commission (FTC) and banking regulators to issue joint rules and guidelines on detecting, preventing, and mitigating identity theft. At that time, the FCRA did not include the SEC or CFTC among the agencies required to adopt identity theft rules, but instead gave the FTC authority to adopt and enforce identity theft rules related to entities regulated by the SEC and CFTC.

Under the Dodd-Frank Act, Congress amended the FCRA to transfer identity theft rulemaking responsibility and enforcement authority from the FTC to the SEC and CFTC for entities they regulate.

The SEC and CFTC jointly proposed rules in February 2012 requiring certain entities they regulate to adopt and administer identity theft red flags programs. The proposed rules were largely identical to the rules that the FTC and other federal agencies adopted under FCRA, and included examples and guidance to help entities comply with the rules.

Final Rules

The final rules require certain entities regulated by the SEC such as broker-dealers, mutual funds, and investment advisers to adopt an identity theft program.

The program should include policies and procedures designed to:

• Identify relevant types of identity theft red flags.
   
• Detect the occurrence of those red flags.
   
• Respond appropriately to the detected red flags.
   
• Periodically update the identity theft program.

The SEC’s rules apply only to SEC-regulated entities that meet the definition of “financial institution” or “creditor” under the FCRA.

The rules require entities to provide such things as staff training and oversight of service providers. The rules include guidelines and examples of red flags to help firms administer their programs.

The rules require entities that issue debit cards or credit cards to take certain precautionary actions when they receive a request for a new card soon after they receive a notification of a change of address for a consumer’s account.

What’s Next

The final rules will become effective 30 days after publication in the Federal Register. The compliance date for the final rules will be six months after their effective date.

Washington, D.C., April 10, 2013 — The Securities and Exchange Commission today announced that Mary Jo White was sworn in this morning as the 31st Chair of the SEC.

Chairman White comes to the SEC with decades of experience as a federal prosecutor and securities lawyer. She was nominated to be SEC Chair by President Barack Obama on Feb. 7, 2013, and confirmed by the U.S. Senate on April 8.

"It is an honor to lead the talented and dedicated SEC staff on behalf of America's investors and markets," said Chairman White. "Our markets are the envy of the world precisely because of the SEC's work effectively regulating the markets, requiring comprehensive disclosure, and vigorously enforcing the securities laws."

Chairman White specialized in prosecuting complex securities and financial institution frauds and international terrorism cases when she served as the U.S. Attorney for the Southern District of New York from 1993 to 2002. Under her leadership, the office earned convictions against the terrorists responsible for the 1993 bombing of the World Trade Center and the bombings of American embassies in Africa. She is the only woman to hold the top position in the 200-year-plus history of that office.

Prior to becoming the U.S. Attorney for the Southern District of New York, Chairman White served as the First Assistant U.S. Attorney and later Acting U.S. Attorney for the Eastern District of New York from 1990 to 1993. She previously served as an Assistant U.S. Attorney for the Southern District of New York from 1978 to 1981 and became Chief Appellate Attorney of the Criminal Division.

After leaving her U.S. Attorney post, Chairman White became chair of the litigation department at Debevoise & Plimpton in New York, where she led a team of more than 200 lawyers.  Chairman White previously was a litigation partner at the firm from 1983 to 1990 and worked as an associate from 1976 to 1978.

Chairman White earned her undergraduate degree, Phi Beta Kappa, from William & Mary in 1970, and her master's degree in psychology from The New School for Social Research in 1971. She earned her law degree in 1974 at Columbia Law School, where she was an officer of the Law Review. She served as a law clerk to the Honorable Marvin E. Frankel of the U.S. District Court for the Southern District of New York.

Chairman White has won numerous awards in recognition of her outstanding work both as a prosecutor and a securities lawyer.  The 2012 Chambers USA Women in Law Awards named her Regulatory Lawyer of the Year.  Among other honors she has received are the Margaret Brent Women Lawyers of Achievement Award, the George W. Bush Award for Excellence in Counterterrorism, the Sandra Day O’Connor Award for Distinction in Public Service, and the “Women of Power and Influence Award” given by the National Organization for Women.

Chairman White is a fellow in the American College of Trial Lawyers and the International College of Trial Lawyers.  She also has served as a director of The NASDAQ Stock Exchange and on its executive, audit and policy committees.  Chairman White is a member of the Council on Foreign Relations.

# # #

Washington, D.C., April 9, 2013 — The Securities and Exchange Commission today announced the panelists who will participate in its April 16 roundtable on ways to improve the transparency and efficiency of the fixed income markets.

As previously announced, the roundtable will consist of four panels. The participants in the first panel will discuss the characteristics of the municipal securities market. The second panel will focus on the characteristics of the corporate bond and asset-backed securities markets and how they compare to the municipal securities market. The third panel will discuss potential steps to improve the transparency, liquidity, efficiency, or other structural aspects of the municipal securities market. The fourth panel will discuss potential steps to improve the transparency, liquidity, efficiency, or other structural aspects of the corporate bond and asset-backed securities markets.

The roundtable discussion will be held in the multi-purpose room of the SEC’s headquarters at 100 F Street, N.E., in Washington, D.C., beginning at 8:30 a.m. and ending at approximately 4:15 p.m. The public is invited to attend, with seating available on a first-come, first-served basis. The event will be webcast live on the Commission’s website at www.sec.gov and archived for later viewing.

* * *

Agenda and Panelists

8:30 a.m.	Introduction
9:00 a.m.	Panel 1: Current Market Structure for Municipal Securities Robert F. Auwaerter, Principal and Head of the Fixed Income Group at The Vanguard Group Inc. John Bonow, CEO at The PFM Group Larry Bowden, Executive Vice President and Director of Fixed Income Sales and Trading at Stephens Inc. Ric Edelman, Chairman and CEO at Edelman Financial Services Joseph A. Hemphill III, CEO at Regional Brokers Inc. Burton Hollifield, Professor of Financial Economics at Carnegie Mellon University Craig A. Noble, Managing Director and Head of Retail Fixed Income at Wells Fargo Advisors Benjamin S. Thompson, CEO and Managing Principal at Samson Capital Advisors LLC Thomas S. Vales, Chairman and CEO at TMC Bonds LLC
10:45 a.m.	Break
11:00 a.m.	Panel 2: Current Market Structure for Corporate Bonds and Asset-Backed Securities Steven C. Genyk, Managing Director and Head of Fixed Income Capital Markets at Janney Montgomery Scott LLC Michael A. Goldstein, Professor of Finance, Donald P. Babson Chair in Applied Investments, and Chair of the Finance Department at Babson College Nancy Mueller Handal, Managing Director and Head of Structured Finance at MetLife Colin Heffron, CEO at GFI Group Inc. Jonathan Horne, Executive Vice President and Portfolio Manager at Pacific Investment Management Company Richard M. McVey, Chairman and CEO at MarketAxess Kevin Molloy, Managing Director of Fixed Income at NYSE Bonds Eric J. Pitt, Managing Director at J.P. Morgan Securities Neil M. Schloss, Treasurer and Vice President at Ford Motor Company Robert G. Smith, President, Chief Investment Officer and Principal at Sage Advisory Services Ltd. Inc.
12:45 p.m.	Lunch
1:45 p.m.	Panel 3: Potential Improvements to the Market Structure for Municipal Securities Robert F. Auwaerter, Principal and Head of the Fixed Income Group at The Vanguard Group Inc. Burton Hollifield, Professor of Financial Economics at Carnegie Mellon University Lynnette Kelly, Executive Director at the Municipal Securities Rulemaking Board Jason Lehman, Co-CEO and Managing Member at Headlands Technologies LLC Marshall Nicholson, President at Knight BondPoint Craig A. Noble, Managing Director and Head of Retail Fixed Income at Wells Fargo Advisors Paige W. Pierce, President and CEO at RW Smith Benjamin S. Thompson, CEO and Managing Principal at Samson Capital Advisors LLC J. Ben Watkins, Director of Bond Finance, State of Florida, and Chairman of the Government Finance Officers Association Debt Committee Brad Winges, Managing Director and Head of Fixed Income, Sales, Trading and Underwriting at Piper Jaffray Investment Management
3:00 p.m.	Panel 4: Potential Improvements to the Market Structure for Corporate Bonds and Asset-Backed Securities Steven C. Genyk, Managing Director and Head of Fixed Income Capital Markets at Janney Montgomery Scott LLC Nancy Mueller Handal, Managing Director and Head of Structured Finance at MetLife Colin Heffron, CEO at GFI Group Inc. Richard G. Ketchum, Chairman and CEO at FINRA Richard M. McVey, Chairman and CEO at MarketAxess Kevin Molloy, Managing Director of Fixed Income at NYSE Bonds Neil M. Schloss, Treasurer and Vice President at Ford Motor Company Dexter Senft, Managing Director at Morgan Stanley Robert G. Smith, President, Chief Investment Officer and Principal at Sage Advisory Services Ltd. Inc. Kumar Venkataraman, Chairman of the Finance Department and Fabacher Endowed Professor of Alternative Asset Management at Southern Methodist University Cox School of Business Christopher J. Vogel, Managing Director and Global Head of Fixed Income and Currency Trading at Blackrock Inc.
4:15 p.m.	Roundtable concludes

# # #

Washington, D.C., April 8, 2013 — The Securities and Exchange Commission today charged a former employee at a California-based medical device manufacturer with illegally tipping confidential financial data to her brother, who illegally traded in the company's stock and enabled his hedge fund clients to do the same.

The SEC alleges that ThanhHa Bao, who worked in the finance department at Abaxis Inc., regularly provided material nonpublic information to Tai Nguyen, whose insider trading in advance of the company's quarterly earnings announcements generated $144,910 in illicit profits. Nguyen, who was charged by the SEC last year, also passed confidential information to clients of his equity research firm Insight Research, including hedge fund managers.

To settle the SEC's charges, Bao has agreed to pay $144,910 and be barred from serving as an officer or director of a public company for five years.

"When corporate insiders leak confidential information to a select few, the integrity of our markets is undermined," said Sanjay Wadhwa, Senior Associate Director of the SEC's New York Regional Office. "Abaxis entrusted ThanhHa Bao with market-moving information, and she violated that trust to financially benefit her family."

The SEC's charges stem from its ongoing investigations into expert networks that have uncovered widespread insider trading at several hedge funds and other investment advisory firms. The investigations have so far resulted in enforcement actions against 40 entities or individuals who have reaped more than $430 million in alleged insider trading gains.

According to the SEC's amended complaint filed in federal court in Manhattan, Bao regularly passed Abaxis quarterly earnings data to Nguyen from 2006 to 2009. Besides illegally trading in his own account, Nguyen passed the inside information to hedge fund managers Barai Capital Management and Sonar Capital Management, which were paying Insight Research tens of thousands of dollars per month as clients. These hedge fund managers traded Abaxis securities based on the inside information provided by Nguyen for more than $7.2 million in illicit gains for the hedge funds. Those who caused the trading at these hedge funds were later charged by the SEC with insider trading.

In a parallel criminal proceeding, Nguyen pleaded guilty and has been sentenced to a year and a day in prison. He also agreed to a criminal forfeiture of $400,000.

The SEC's amended complaint charges Bao with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The settlement, which is subject to court approval, requires Bao to pay $144,910 in penalties and be barred from serving as an officer or director of a public company for a period of five years. She also would be permanently enjoined from future violations of the federal securities laws.

The SEC's investigation, which is continuing, has been conducted by Daniel Marcus and Joseph Sansone - members of the SEC's Market Abuse Unit in New York - and Matthew Watkins, Neil Hendelman, Diego Brucculeri, and James D'Avino in the New York Regional Office. The investigation has been supervised by Sanjay Wadhwa. The SEC acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation.

# # #

Washington, D.C., April 3, 2013 — The Securities and Exchange Commission today announced that Marc Fagel, the director of the San Francisco Regional Office, will be leaving the agency later this month for the private sector. He has worked at the SEC for more than 15 years.

Mr. Fagel has served at the helm of the San Francisco office since 2008, overseeing a staff of more than 100 attorneys, accountants, and other professionals responsible for conducting investigations, litigation, and examinations in a region covering Northern California, Washington, Oregon, Montana, Idaho, and Alaska.

“Marc’s quick wit and passion for investor protection have earned him deep respect and admiration throughout the Commission,” said SEC Chairman Elisse B. Walter. “He has been a loyal and effective leader at this agency and has unequivocally served investors with steady determination throughout his long tenure.”

Mr. Fagel said, “I consider myself lucky to have had an opportunity to serve alongside so many smart and talented professionals here in San Francisco and throughout the Commission. Investors throughout the Bay Area and Pacific Northwest region are fortunate to have such a dedicated team serving as their advocates.”

Mr. Fagel, 46, joined the SEC’s San Francisco staff as an enforcement staff attorney in 1997. He was promoted to branch chief for the office’s Internet enforcement branch and later appointed associate regional director in charge of the office’s entire enforcement program. Prior to his arrival at the SEC, he spent six years in private practice with a large national law firm. Mr. Fagel graduated from Princeton University and the University of Chicago Law School.

During Mr. Fagel’s tenure, he has overseen several of the largest financial fraud cases ever filed in the Pacific Northwest as well as numerous investigations of hedge funds and other private investment funds, including cases alleging undisclosed conflicts of interest, end-of-quarter “portfolio pumping,” improper use of “side pockets,” and misuse of client assets. Mr. Fagel also spearheaded cases against hedge fund managers and online trading platforms involved in the emerging secondary market for pre-IPO stock of hot Silicon Valley companies.

Among the noteworthy matters investigated under Mr. Fagel’s leadership:

• Dozens of investigations into improper backdating of stock options by public companies, including actions against senior executives of multiple Silicon Valley tech companies.
   
• Investigations of multi-million-dollar insider trading rings, including charges against a Wall Street investment banker alleged to have repeatedly tipped friends and family members about confidential transactions, and the spouse of a Big 4 accounting firm partner alleged to have tipped information about her husband’s M&A transactions to a derivatives trader in the UK.
   
• Fraud charges against the senior executive team in one of the largest bank failures of the financial crisis.

Mr. Fagel also played an instrumental role in the historic restructuring of the SEC’s Enforcement Division during the past few years, particularly in the Commission’s grant of delegated formal order authority to the Enforcement Division as well as reforms related to other aspects of the investigative process.

“Marc’s energy, creativity, and vision along with his steady leadership have been critical to the success of the San Francisco office’s enforcement program, said George S. Canellos, Acting Director of the SEC’s Division of Enforcement. “He brought those same qualifies to the Enforcement Division’s national leadership and helped develop and implement reforms that greatly enhanced the effectiveness of our investigations.”

As a member of the National Exam Program’s Executive Committee, Mr. Fagel also helped bring about successful changes in the structure and processes of the exam program. He particularly assisted initiatives to instill a more risk-focused approached to examinations and adapt the program to the large influx of newly-registered hedge fund managers and private equity funds under the Dodd-Frank Act.

“Marc has been an exemplary regional director, and under his leadership the San Francisco office’s exam program has done an excellent job protecting investors and supporting the National Exam Program by preventing fraud, promoting compliance, monitoring risk and informing policy,” said Carlo di Florio, Director of the SEC’s Office of Compliance Inspections and Examinations.

Mr. Fagel is a past recipient of the SEC’s Ellen B. Ross Award, an honor in recognition of exemplary commitment, enthusiasm, and performance in working to fulfill the Commission’s responsibilities for the fair and effective enforcement of the federal securities laws. He served as a management representative on the SEC’s Labor Management Forum, working closely with agency managers and the National Treasury Employees Union to improve agency operations and strengthen employee engagement.

Following Mr. Fagel’s departure later this month, Kristin Snyder and Michael Dicke, who are associate regional directors for examinations and enforcement, respectively, will serve as co-acting regional directors in the San Francisco office.

# # #

Washington, D.C., April 3, 2013 — The Securities and Exchange Commission today announced a final rule that streamlines the process for rulemaking by clearing agencies that are registered with both the SEC and the Commodity Futures Trading Commission (CFTC).

The final rule amends an interim rule adopted in 2011 that allowed rule changes filed with the SEC by clearing agencies to become effective as soon as they were filed when they were not related primarily to securities futures and did not significantly affect the clearing agencies’ securities clearing operations.

The final rule expands upon the interim rule to permit effectiveness upon filing for rule changes that concern other products that are not securities — including swaps that are neither mixed swaps nor security-based swaps, and forwards that are not security forwards — provided those rule changes do not significantly affect the clearing agencies’ securities clearing operations.

The final rule also includes a new provision that under certain conditions permits temporary immediate effectiveness for rules that significantly affect the clearing agency’s securities-clearing operations when the products themselves are not securities.

The final rule is intended to ensure that clearing agencies registered with both the SEC and the CFTC can avoid unnecessary delays in implementing rule changes that relate primarily to products that are not securities. At the same time, the final rule ensures that such rule changes continue to be filed with the SEC, so that the Commission can carry out its statutory duty to supervise all registered clearing agencies.

The amendments will become effective 60 days after the date of publication of the release in the Federal Register.

# # #

Washington, D.C., April 2, 2013 — The Securities and Exchange Commission today issued a report that makes clear that companies can use social media outlets like Facebook and Twitter to announce key information in compliance with Regulation Fair Disclosure (Regulation FD) so long as investors have been alerted about which social media will be used to disseminate such information.

The SEC’s report of investigation confirms that Regulation FD applies to social media and other emerging means of communication used by public companies the same way it applies to company websites. The SEC issued guidance in 2008 clarifying that websites can serve as an effective means for disseminating information to investors if they’ve been made aware that’s where to look for it. Today’s report clarifies that company communications made through social media channels could constitute selective disclosures and, therefore, require careful Regulation FD analysis.

“One set of shareholders should not be able to get a jump on other shareholders just because the company is selectively disclosing important information,” said George Canellos, Acting Director of the SEC’s Division of Enforcement. “Most social media are perfectly suitable methods for communicating with investors, but not if the access is restricted or if investors don’t know that’s where they need to turn to get the latest news.”

Regulation FD requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively. It is intended to ensure that all investors have the ability to gain access to material information at the same time.

Lona Nallengara, Acting Director of the SEC’s Division of Corporation Finance, added, “Companies should review the Commission’s existing guidance — it is flexible enough to address questions that arise for companies that choose to communicate through social media, and the guidance does so in a straightforward manner.”

The SEC’s report of investigation stems from an inquiry the Division of Enforcement launched into a post by Netflix CEO Reed Hastings on his personal Facebook page stating that Netflix’s monthly online viewing had exceeded one billion hours for the first time. Netflix did not report this information to investors through a press release or Form 8-K filing, and a subsequent company press release later that day did not include this information. Neither Hastings nor Netflix had previously used his Facebook page to announce company metrics, and they had never before taken steps to alert investors that Hastings’ personal Facebook page might be used as a medium for communicating information about Netflix. Netflix’s stock price had begun rising before the posting, and increased from $70.45 at the time of the Facebook post to $81.72 at the close of the following trading day.

The SEC did not initiate an enforcement action or allege wrongdoing by Hastings or Netflix. Recognizing that there has been market uncertainty about the application of Regulation FD to social media, the SEC issued the report of investigation pursuant to Section 21(a) of the Securities Exchange Act of 1934.

The report of investigation explains that although every case must be evaluated on its own facts, disclosure of material, nonpublic information on the personal social media site of an individual corporate officer — without advance notice to investors that the site may be used for this purpose — is unlikely to qualify as an acceptable method of disclosure under the securities laws. Personal social media sites of individuals employed by a public company would not ordinarily be assumed to be channels through which the company would disclose material corporate information.

The SEC’s inquiry was conducted by Cameron P. Hoffman, Michael E. Liftik, and Assistant Regional Director Cary S. Robnett in the San Francisco Regional Office.

# # #

Washington, D.C., March 29, 2013 — The Securities and Exchange Commission today announced that a Chinese businessman and his wife whose trading accounts were frozen last year as part of a major insider trading case have agreed to settle charges that they loaded up on the securities of Nexen Inc. while in possession of nonpublic information about an impending announcement that the company was being acquired by China-based CNOOC Ltd.

The SEC obtained an emergency court order in July 2012 to freeze multiple Hong Kong and Singapore-based trading accounts just days after the Nexen acquisition was announced and suspicious trading in Nexen stock was detected. The SEC’s complaint alleged that in the days leading up to the announcement, Hong Kong-based firm Well Advantage Limited and other unknown traders purchased Nexen stock based on confidential details about the acquisition.

The SEC’s investigation has identified Ren Feng and his wife Zeng Huiyu as previously unknown traders charged in the complaint as well as Ren’s private investment company CT Prime Assets Limited and four of Zeng’s brokerage customers on whose behalf she traded. They made a combined $2.3 million in illegal profits from Nexen stock trades made by Ren and Zeng.

The settlement, which is subject to court approval, requires the traders to pay more than $3.3 million combined.

“This settlement requires full disgorgement of the insider trading profits of this group of foreign traders, and Ren and Zeng must additionally pay sizeable penalties,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office. “This should send a stern warning to anyone contemplating insider trading in U.S. markets from abroad that the SEC uncovers such misconduct and the end result is a severe financial setback rather than a windfall.”

In October 2012, the SEC announced a settlement with Well Advantage, which agreed to pay more than $14.2 million to settle the insider trading charges. U.S. District Court Judge Richard J. Sullivan of the Southern District of New York approved that settlement.

This proposed settlement with Ren, Zeng, and the others also must be approved by Judge Sullivan.

Ren and CT Prime agreed to the entry of a final judgment requiring them to jointly pay disgorgement of their ill-gotten gains of $839,714.57 plus a penalty of $839,714.57, and permanently enjoining them from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

Zeng agreed to the entry of a final judgment requiring her to pay disgorgement of her ill-gotten gains of $202,030.22 plus a penalty of $202,030.22, and permanently enjoining her from future violations of Section 10(b) of the Exchange Act and Rule 10b-5.

Zeng also traded on behalf of four of her brokerage customers, who have agreed to disgorgement of the ill-gotten gains. Wong Chi Yu and her company Giant East Investments Limited agreed to jointly pay disgorgement of $641,057.94. Wang Wei agreed to pay disgorgement of $137,369.56. Wang Zhi Hua agreed to pay disgorgement of $466,169.15.

The defendants neither admit nor deny the SEC’s allegations.

The SEC’s investigation, which is continuing, has been conducted by Simona Suh, Charles D. Riely, Michael P. Holland, and Joseph G. Sansone of the Market Abuse Unit as well as Elzbieta Wraga and Aaron Arnzen of the New York Regional Office. The case has been supervised by Daniel M. Hawke and Sanjay Wadhwa. The SEC appreciates the assistance of the Hong Kong Securities and Futures Commission and the Financial Industry Regulatory Authority (FINRA).

# # #

Washington, D.C., March 29, 2013 —The Securities and Exchange Commission today charged Michael Steinberg, a portfolio manager at New York-based hedge fund advisory firm Sigma Capital Management, with trading on inside information ahead of quarterly earnings announcements by Dell and Nvidia Corporation.

The SEC alleges that Steinberg's illegal conduct enabled hedge funds managed by Sigma Capital and its affiliate S.A.C. Capital Advisors to generate more than $6 million in profits and avoided losses. Steinberg received illegal tips from Jon Horvath, an analyst who reported to him at Sigma Capital. Horvath was charged last year among several hedge fund managers and analysts as part of the SEC's broader investigation into expert networks and the trading activities of hedge funds. Earlier this month, Sigma Capital and two affiliated hedge funds agreed to a $14 million settlement with the SEC for insider trading charges.

"Steinberg essentially got an advance copy of Dell and Nvidia's quarterly earnings announcements, allowing him to trade on tomorrow's news today," said George S. Canellos, Acting Director of the SEC's Division of Enforcement.

Sanjay Wadhwa, Senior Associate Director of the SEC's New York Regional Office, added, "The SEC's aggressive pursuit of hedge fund insider trading, including this enforcement action against Steinberg, underscores its steadfast commitment to leveling the playing field for all investors by rooting out illicit conduct by well-capitalized traders."

In a separate action, the U.S. Attorney's Office for the Southern District of New York today announced criminal charges against Steinberg.

According to the SEC's complaint filed in federal court in Manhattan, Steinberg traded Dell and Nvidia securities based on nonpublic information in advance of at least four quarterly earnings announcements in 2008 and 2009. Horvath provided Steinberg with nonpublic details that he had obtained through a group of hedge fund analysts with whom he regularly communicated. Steinberg used the inside information to obtain more than $3 million in profits and losses avoided for a Sigma Capital hedge fund.

The SEC's complaint further alleges that Steinberg also illegally tipped inside information about Dell's quarterly earnings to another portfolio manager at Sigma Capital. Horvath sent an e-mail to the other portfolio manager and copied Steinberg on the message. The e-mail stated:

"I have a 2nd hand read from someone at the company - this is 3rd quarter I have gotten this read from them and it has been very good in the last quarters. They are seeing GMs miss by 50-80 [basis points] due to poor mix, [operating expenses] in-line and a little revenue upside netting out to an [earnings per share] miss. . . . Please keep to yourself as obviously not well known."

The SEC alleges that two minutes later, Steinberg chimed in, "Yes, normally we would never divulge data like this, so please be discreet." Only 24 minutes after Horvath's e-mail, the other portfolio manager began to sell shares of Dell stock on behalf of the Sigma Capital hedge fund and reduced the hedge fund's Dell holdings by 600,000 shares ahead of Dell's quarterly earnings announcement. In the days following the negative announcement, Steinberg closed out a short position in Dell stock and multiple options positions for a $1 million illicit profit to the Sigma Capital hedge fund. The other portfolio manager's sales of Dell stock enabled the Sigma Capital hedge fund and a hedge fund managed by S.A.C. Capital Advisors to avoid more than $3 million in losses.

The SEC's complaint charges Steinberg with violating Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a final judgment ordering Steinberg to pay disgorgement of his ill-gotten gains plus prejudgment interest and financial penalties, and permanently enjoining him from future violations of these provisions of the federal securities laws.

The SEC's investigation, which is continuing, has been conducted by Joseph Sansone, Daniel Marcus, and Stephen Larson of the Market Abuse Unit in New York as well as Matthew Watkins, Justin Smith, Neil Hendelman, Diego Brucculeri, and James D'Avino of the New York Regional Office. The case has been supervised by Sanjay Wadhwa. The SEC appreciates the assistance of the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation.

# # #

Washington, D.C., March 28, 2013 — The Securities and Exchange Commission today announced the agenda for its upcoming roundtable to discuss potential ways to improve the transparency and efficiency of fixed income markets.

The roundtable, announced last month, will take place on April 16 in Washington D.C. Panelists will be announced at a later date.

The roundtable will be divided into four panels.

The first panel will address current market structure for municipal securities, and the second panel will discuss current market structure for corporate bonds and asset-backed securities.

The third panel will focus on whether potential steps can be taken to improve the transparency, liquidity, or efficiency of the market structure for municipal securities. The fourth panel will focus on whether potential steps can be taken to improve the transparency, liquidity, or efficiency of the market structure for corporate bonds and asset-backed securities.

# # #

Washington, D.C., March 26, 2013 — The Securities and Exchange Commission today charged a California-based hedge fund analyst with insider trading in advance of a merger of two technology companies based on nonpublic information he received from his friend who was an executive at one of the companies.

The SEC also charged the executive and another trader in the $29 million insider trading scheme.

The SEC alleges that Matthew Teeple of San Clemente, Calif., was tipped in advance of a July 2008 announcement that Foundry Networks Inc. had agreed to be acquired by Brocade Communication Systems Inc. for approximately $3 billion. Teeple’s source was Foundry’s chief information officer David Riley, a friend who he had previously given investment advice. Teeple then caused the San Francisco-based hedge fund advisory firm where he works to buy Foundry shares in large quantities in the days leading up to the public announcement, and the hedge funds managed by the firm reaped millions of dollars in profits when Foundry’s stock value increased upon the news. Teeple also tipped a Denver-based investment professional John Johnson who he befriended through a previous working relationship, and Johnson made illegal trades based on the nonpublic information. Riley also tipped Teeple in advance of at least two other major announcements by Foundry, and Teeple’s firm traded on the nonpublic information to make profits or avoid losses.

“David Riley was entrusted with Foundry’s most valuable secrets, but betrayed his company and set off an explosive chain reaction of illegal tips from friend to friend for illicit profits,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement.

Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “Company insiders who reveal confidential information and the traders who trade on it can expect robust scrutiny from the SEC. The charges against Riley and Teeple are a cautionary tale for those considering insider trading that should make them think twice.”

In a separate action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Teeple, Riley, and Johnson.

According to the SEC’s complaint filed in federal court in Manhattan, Riley tipped Teeple on the morning of July 16 about Brocade’s impending acquisition of Foundry. Teeple immediately shared this information with colleagues at his firm as well as Johnson and several others who purchased Foundry stock, often within minutes of communicating with Teeple. Foundry stock climbed approximately 32 percent after the public announcement of the merger on July 21.

The SEC alleges that Riley, who lives in San Jose, Calif., continued to provide material nonpublic information to Teeple about key events throughout the process of Foundry’s acquisition by Brocade, which was not fully completed until Dec. 18, 2008. Teeple’s firm continued to profitably trade Foundry securities based on this inside information. For example, Riley tipped Teeple in advance of an October 24 announcement that Foundry’s shareholder vote to approve the acquisition would be delayed “given recent developments related to the transaction.” Earlier in 2008, Riley tipped Teeple in advance of Foundry’s April 11 earnings forecast so Teeple’s firm could profitably trade in advance of the announcement.

The SEC’s complaint charges Teeple, Riley, and Johnson with violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a final judgment ordering them to disgorge their ill-gotten gains plus prejudgment interest, ordering them to pay financial penalties, and permanently enjoining them from future violations of these provisions of the federal securities laws. The complaint also seeks to permanently prohibit Riley from serving as an officer or director of a public company.

The SEC’s investigation, which is continuing, has been conducted by Michael Holland, William Edwards, and Joseph Sansone of the Market Abuse Unit in New York as well as Christopher Ferrante and Melissa Coppola in the New York Regional Office. The case has been supervised by Sanjay Wadhwa. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York, Federal Bureau of Investigation, and Financial Industry Regulatory Authority (FINRA).

Since October 2009, the SEC has charged more than 430 individuals and entities with insider trading. The defendants in these cases are alleged to have made approximately $940 million in illicit profits and losses avoided.

# # #

Washington, D.C., March 22, 2013 — The Securities and Exchange Commission today announced charges against a Houston-based hedge fund manager and his firm accused of defrauding investors in two hedge funds and steering bloated fees to a brokerage firm CEO who also is charged in the SEC’s case.

An investigation by the SEC’s Enforcement Division found that George R. Jarkesy Jr., worked closely with Thomas Belesis to launch two hedge funds that raised $30 million from investors. Jarkesy and his firm John Thomas Capital Management (since renamed Patriot28 LLC) inflated valuations of the funds’ assets, causing the value of investors’ shares to be overstated and his management and incentive fees to be increased. Jarkesy, a frequent media commentator and radio talk show host, also lied to investors about the identity of the funds’ auditor and prime broker. Meanwhile, although they shared the same “John Thomas” brand name, Jarkesy’s firm and Belesis’ firm John Thomas Financial were portrayed as wholly independent. Jarkesy led investors to believe that as manager of the funds, he was solely responsible for all investment decisions. However, Belesis sometimes supplanted Jarkesy as the decision maker and directed some investments from the hedge funds into a company in which his firm was heavily invested. Belesis also bullied Jarkesy into showering excessive fees on John Thomas Financial even in instances where the firm had done virtually nothing to earn them.

“Jarkesy disregarded the basic standards to which all fund managers are held,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “Not only did he falsify valuations and deceive investors about the value of their holdings, but he bent over backwards to enrich Belesis at the funds’ expense. Belesis in turn exploited the supposed independence of the funds to surreptitiously pull the strings on key decisions.”

According to the SEC’s order instituting administrative proceedings against Jarkesy, Belesis, and their firms, Jarkesy launched the two hedge funds in 2007 and 2009, and they were called John Thomas Bridge and Opportunity Fund LP I and John Thomas Bridge and Opportunity Fund LP II. The funds invested in three asset classes: bridge loans to start-up companies, equity investments principally in microcap companies, and life settlement policies. Jarkesy mispriced certain holdings to increase the net asset values of the funds, which were the basis for calculating the management and incentive fees that Jarkesy deducted from the funds for himself. Jarkesy also falsely claimed that prominent service providers such as KPMG and Deutsche Bank worked with the funds.

According to the SEC’s order, Jarkesy used fund assets to hire multiple stock promoters in 2010 and 2011 to create an artificial and unsustainable spike in the price of two microcap stocks in which the funds were heavily invested. As a result of these efforts, the funds recorded temporary gains in the value of the microcap stocks that Jarkesy used to mask the write-down of other more illiquid holdings of the funds.

According to the SEC’s order, Jarkesy violated his fiduciary duties to the funds in multiple instances by providing excessive compensation to Belesis and John Thomas Financial. This only incited further demands by Belesis. For example, in February 2009, Belesis angrily complained via e-mail that Jarkesy was not steering enough money to John Thomas Financial, and Jarkesy responded that “we will always try to get you as much as possible, Everytime [sic] without exception!” On another occasion, Jarkesy reassured Belesis that “[n]obody gets access to Tommy until they make us money!!!!!”

The SEC’s order charges that Jarkesy and John Thomas Capital Management violated and aided and abetted violations of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act and Rule 10b-5, and violated Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act and Rule 206(4)-8. The SEC’s order further charges that Belesis and John Thomas Financial aided and abetted and caused Jarkesy’s and John Thomas Capital Management’s violations of Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-8. The administrative proceedings will determine what, if any, remedial action is appropriate in the public interest against Jarkesy, John Thomas Capital Management, Belesis, and John Thomas Financial including disgorgement and financial penalties.

The SEC’s investigation was conducted by Igor Rozenblit, Kathy Murdocco, and Michael Osnato in the New York Regional Office. The SEC’s litigation will be led by Todd Brody. The SEC appreciates the assistance of the Financial Industry Regulatory Authority (FINRA).

# # #

Washington, D.C., March 21, 2013 — The Securities and Exchange Commission today charged Rajarengan “Rengan” Rajaratnam for his role in the massive insider trading scheme spearheaded by his older brother Raj Rajaratnam and hedge fund advisory firm Galleon Management.

The SEC alleges that from 2006 to 2008, Rengan Rajaratnam repeatedly received inside information from his brother and reaped more than $3 million in illicit gains for himself and hedge funds that he managed at Galleon and Sedna Capital Management, a hedge fund advisory firm that he co-founded. In addition to illegally trading on inside tips, Rengan Rajaratnam was an active participant in his brother’s scheme to cultivate highly placed sources and extract confidential information for an unfair advantage over other traders.

“Our complaint against Rengan Rajaratnam tells a sad tale of a man who followed his brother down an illegal path of greed to its inevitable conclusion,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement.

Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “Rengan Rajaratnam profited handsomely from his brother’s insider trading activities, and he may have believed he wouldn’t have to pay a price for his involvement. But now he is learning the true cost of his participation in the most expansive insider trading scheme ever perpetrated.”

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

According to the SEC’s complaint filed in federal court in Manhattan, Rengan Rajaratnam repeatedly received valuable insider tips from his brother that he used for illegal trading in the securities of Polycom, Hilton Hotels, Clearwire Corporation, Akamai Technologies, and AMD. For example, in July 2007, he made substantial profits trading Hilton stock in his personal account based on a timely insider trading tip from Raj Rajaratnam that Hilton was about to be taken private. Rengan Rajaratnam quickly loaded up on Hilton stock, and the price of Hilton shares jumped more than 25 percent after the news became public. Rengan Rajaratnam cashed in his recently acquired position for an illicit profit of more than $675,000.

According to the SEC’s complaint, after Raj Rajaratnam tipped him about an upcoming transaction involving Clearwire Corporation in March 2008, Rengan Rajaratnam complained to his brother that certain nonpublic information they had used to begin accumulating a position in Clearwire stock was about to be reported by the media before they could establish a larger position. Rengan Rajaratnam nevertheless profited by more than $100,000 in his personal brokerage account and more than $230,000 for Galleon hedge funds based on trades in Clearwire securities.

The SEC’s complaint charges Rengan Rajaratnam with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a final judgment permanently enjoining Rajaratnam from future violations of these provisions of the federal securities laws, ordering him to disgorge his ill-gotten gains plus prejudgment interest, and ordering him to pay financial penalties.

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

The SEC has now charged 33 defendants in its Galleon-related enforcement actions, which have exposed widespread and repeated insider trading at numerous hedge funds and by other traders, investment professionals, and corporate insiders located throughout the country. The insider trading occurred in the securities of more than 15 companies for illicit gains totaling more than $96 million.

# # #

Washington, D.C., March 19, 2013 — The Securities and Exchange Commission today announced charges against a financier masquerading as a sophisticated fund manager who defrauded investors seeking to acquire highly coveted pre-IPO shares of Facebook and other social media companies.

An investigation by the SEC’s Enforcement Division found that Craig Berkman, a former Oregon gubernatorial candidate who now lives in Florida, touted to investors that he had special access to scarce sources of pre-IPO stock in Facebook, LinkedIn, Groupon, and Zynga. Instead of purchasing shares on investors’ behalf as promised, Berkman misused their investments to make Ponzi-like payments to earlier investors, fund personal expenses, and pay off claims against him in a bankruptcy case.

The SEC’s Enforcement Division also charged John B. Kern of Charleston, S.C., for his participation in the fraud as legal counsel to some of Berkman’s companies. When investors in Berkman’s phony Facebook fund began questioning what happened to their money after Facebook’s IPO occurred, Kern falsely assured them that their money was used to purchase pre-IPO Facebook stock being held for them by unnamed counterparties.

“Berkman blatantly capitalized on the market fervor preceding highly anticipated IPOs of Facebook and other social media companies to fleece investors whose cash flow he treated like an ATM to fund his own living expenses and pay court-ordered claims to victims of his past misdeeds,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “Lawyers and others who help shady operators commit fraud in the securities markets will be held accountable for their supporting roles. Kern was duty-bound to look out for investors’ best interests, but instead he was actively colluding with Berkman to prevent investors from discovering the fraud.”

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

According to the SEC’s order instituting administrative proceedings, Berkman raised at least $13.2 million from 120 investors by selling membership interests in limited liability companies that he controlled. Berkman defrauded investors in three different sets of offerings. He falsely told the first set of investors he would use their money to acquire pre-IPO shares of several social media companies. He misled the second set of investors into believing that their money would be used to purchase pre-IPO shares of Facebook or acquire a company that held pre-IPO Facebook shares. In the third offering, Berkman falsely told investors that he would use their money to fund various new large-scale technology ventures.

The SEC’s Enforcement Division alleges that Berkman misappropriated virtually all investor funds that he raised. He did use $600,000 to purchase a small interest in an unrelated fund that had acquired pre-IPO Facebook stock, however that purchase did not provide any company affiliated with Berkman with ownership of Facebook shares. One of Berkman’s companies nevertheless used a forged letter about that investment to falsely represent to investors that it owned nearly a half-million shares of Facebook stock. Upon discovering the forgery, the fund informed Berkman that it was immediately terminating and liquidating his company’s interest, leaving it without even an indirect interest in Facebook shares.

The SEC’s order details a recidivist history for Berkman. The Oregon Division of Finance and Securities issued a cease-and-desist order and $50,000 fine against Berkman in 2001 for offering and selling convertible promissory notes without a brokerage license to Oregon residents. In June 2008, an Oregon jury found Berkman liable in a private action for breach of fiduciary duty, conversion of investor funds, and misrepresentation to investors arising from Berkman’s involvement with a series of purported venture capital funds known as Synectic Ventures. The court entered a $28 million judgment against Berkman. In March 2009, Synectic filed an involuntary Chapter 7 bankruptcy petition against Berkman in Florida for his unpaid debts arising from the 2008 court judgment. The parties to the bankruptcy proceeding reached a settlement with Berkman.

According to the SEC’s order, instead of using his own money to satisfy these past claims, Berkman spent more than $5.4 million in funds from investors in his pre-IPO offerings to make the payments in the bankruptcy settlement. Berkman also made $4.8 million in Ponzi-like payments to earlier investors in the pre-IPO scheme, falsely telling some of them that they had made money on their investment when in reality he never purchased shares for them. Berkman used approximately $1.6 million of investor money to make large cash withdrawals and pay his own dining and travel expenses.

According to the SEC’s order, three months after Facebook’s IPO transpired, Kern wrote and signed a memorandum addressed to concerned investors in Berkman’s purported Facebook fund. Kern’s memorandum stated that a counterparty has “repeatedly affirmed that it has the requisite [Facebook] shares and reconfirmed to us that we have the securities interests to which we subscribed.” Kern knew this statement was false because the “counterparty” had told Kern that it was terminating Berkman’s company’s interest in the fund because of the forged letter. Kern received nearly $300,000 out of the offering proceeds.

The SEC’s order alleges that Berkman and his affiliated entities committed and caused violations of the antifraud provisions of the federal securities laws, and that Kern caused and aided and abetted the violations. The administrative proceedings will determine whether a cease-and-desist order should be issued and what, if any, remedial action or financial sanctions are appropriate and in the public interest.

The SEC’s investigation, which is continuing, has been conducted by Christopher M. Castano, Neil Hendelman, Layla Mayer, Vipul Soni, and George N. Stepaniuk of the New York Regional Office. The SEC’s litigation will be led by Preethi Krishnamurthy. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the U.S. Postal Inspection Service.

# # #

Washington, D.C., March 18, 2013 — The Securities and Exchange Commission today announced an asset freeze against a Massachusetts-based investment adviser charged with stealing money from clients who were given the false impression they were investing in a hedge fund.

In a complaint unsealed today in federal court in Boston, the SEC alleges that Gregg D. Caplitz and Insight Onsite Strategic Management in Wilmington, Mass., raised at least $1.1 million from clients that was used for purposes other than investing in the hedge fund they purported to manage. Investor money was merely transferred to the firm’s chief investment officer and other members of her family who spent it on personal expenses. The firm reported in SEC filings that it has $100 million in assets under management, however the purported hedge fund actually has no assets.

U.S. District Judge Mark L. Wolf granted the SEC’s request for an emergency court order to freeze the assets of Caplitz and his firm as well as others who received investor money and have been named as relief defendants for the purposes of recovering investor funds in their possession.

“Caplitz and his firm conjured up a hedge fund to lure longtime clients into investing substantial amounts of money that became nothing more than a slush fund to pay bills for others,” said Julie M. Riewe, Deputy Chief of the SEC Enforcement Division’s Asset Management Unit.

According to the SEC’s complaint, Caplitz’s scheme began around 2009. While soliciting funds, Caplitz convinced one client and his wife to invest $275,000 in the hedge fund that Caplitz claimed would generate them about $1,000 per month in returns. Caplitz also solicited a 20-year client who after considering his sales pitch decided not to invest in the hedge fund because she considered it too risky of an investment for someone her age. But Caplitz apparently took action to obtain funds from the client’s IRA account and wire thousands of dollars to an Insight Onsite Strategic Management bank account. The client was not aware of the transfers and did not authorize them.

The SEC alleges that instead of using investor funds to purchase shares in a hedge fund or to manage or develop a hedge fund, Caplitz transferred control of client money to Rosalind Herman, his friend who works at the firm. Investor funds also were transferred to her sons Brad and Brian Herman, daughter-in-law Charlene Herman, and a company called The Knew Finance Experts. The Hermans, who all live in Las Vegas, own that company. The Hermans used investor money to pay legal bills and other personal expenses at gas stations, drugstores, and restaurants.

The SEC alleges that as part of his scheme, Caplitz obtained funds from a real estate investment trust (REIT) by falsely representing that a hedge fund he operated was interested in making an investment in that trust. The public, non-traded REIT gave $135,000 to Caplitz so he could conduct due diligence on the REIT as a precursor to making a $5 million investment that never materialized.

The SEC alleges that Caplitz and Insight Onsite Strategic Management violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, Section 17(a) of the Securities Act of 1933, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The complaint seeks a permanent injunction plus disgorgement, prejudgment interest, and a penalty against Caplitz and his firm. The complaint also names the four Hermans and The Knew Finance Experts as relief defendants and seeks disgorgement plus prejudgment interest.

The SEC’s investigation was conducted in the Boston Regional Office by Mayeti Gametchu and Kevin Kelcourse of the Asset Management Unit and Susan Cooke Anderson. The litigation will be led by Kathy Shields and Ms. Gametchu.

# # #

Washington, D.C., March 15, 2013 — The Securities and Exchange Commission today announced that New York-based hedge fund advisory firm Sigma Capital Management has agreed to pay nearly $14 million to settle charges that the firm engaged in insider trading based on nonpublic information obtained through one of its analysts about the quarterly earnings of Dell and Nvidia Corporation.

The SEC’s case, borne out of its ongoing investigation into expert networks and the trading activities of hedge funds, began last year with charges against several hedge fund managers and analysts including Jon Horvath, a former analyst at Sigma Capital. Horvath agreed to a settlement earlier this month in which he admitted liability.

In a complaint filed today along with the proposed settlement in federal court in Manhattan, the SEC additionally charged Sigma Capital in the insider trading scheme and named two affiliated hedge funds – Sigma Capital Associates and S.A.C. Select Fund – as relief defendants that unjustly benefited from Sigma Capital’s violations. S.A.C. Select Fund is an affiliate of S.A.C. Capital.

The SEC’s complaint alleges that Horvath provided Sigma Capital portfolio managers with nonpublic details about quarterly earnings at Dell and Nvidia after he learned them through a group of hedge fund analysts with whom he regularly communicated. Based on the confidential information, Sigma Capital traded Dell and Nvidia securities in advance of earnings announcements in 2008 and 2009 for $6.425 million in gains for its hedge fund affiliates.

Sigma Capital agreed to pay disgorgement of $6.425 million plus prejudgment interest of $1,094,161.92 and a penalty of $6.425 million.

“Quarterly revenues and profit margins are fundamental drivers of stock prices. By illegally obtaining these vital financial measures in advance of their public announcement, Sigma Capital secured a crystal ball revealing where the stock would likely be trading in the near future,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement. “However, the crystal ball failed to predict a costly settlement with the SEC.”

Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “Sigma Capital’s violations of the securities laws were blatant and recurring. The firm obtained key quarterly earnings information before it was public and exploited an unfair edge over the rest of the market to reap millions of dollars in unlawful gains.”

According to the SEC’s complaint, the key inside information that Horvath obtained about upcoming earnings announcements by Dell and Nvidia often differed significantly from the predictions of market analysts, who only had access to publicly available information. Based on this inside information, Sigma Capital traded Dell and Nvidia securities in advance of four quarterly earnings announcements and reaped more than $5.2 million for its hedge fund Sigma Capital Associates. Horvath’s inside information also enabled S.A.C. Select Fund to execute trades and avoid losses of more than $1 million.

The SEC’s complaint charges Sigma Capital with violating Section 17(a) of the Securities Act, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Sigma Capital is neither admitting nor denying the charges. The settlement, subject to court approval, also would permanently enjoin Sigma Capital from future violations of the antifraud provisions of the federal securities laws.

The SEC’s investigation, which is continuing, has been conducted by Joseph Sansone, Daniel Marcus, and Stephen Larson – members of the SEC’s Market Abuse Unit in New York – and Matthew Watkins, Justin Smith, Neil Hendelman, Diego Brucculeri, and James D’Avino of the New York Regional Office. It has been supervised by Sanjay Wadhwa. The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

# # #

Washington, D.C., March 15, 2013 — The Securities and Exchange Commission today announced that Stamford, Conn.-based hedge fund advisory firm CR Intrinsic Investors has agreed to pay more than $600 million to settle SEC charges that it participated in an insider trading scheme involving a clinical trial for an Alzheimer’s drug being jointly developed by two pharmaceutical companies.

The SEC charged CR Intrinsic with insider trading in November 2012, alleging that one of the firm’s portfolio managers Mathew Martoma illegally obtained confidential details about the clinical trial from Dr. Sidney Gilman, who was selected by the pharmaceutical companies — Elan Corporation and Wyeth — to present the final drug trial results to the public.

The settlement filed today in federal court in Manhattan is the largest ever in an insider trading case, requiring CR Intrinsic — an affiliate of S.A.C. Capital Advisors — to pay $274,972,541 in disgorgement, $51,802,381.22 in prejudgment interest, and a $274,972,541 penalty.

“The historic monetary sanctions against CR Intrinsic and its affiliates are sharp warning that the SEC will hold hedge fund advisory firms and their funds accountable when employees break the law to benefit the firm,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement.

Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “A robust culture of compliance and zero tolerance toward employee misconduct can help other firms avoid the severe financial consequences that CR Intrinsic is facing for its misconduct.”

The SEC’s complaint against CR Intrinsic, Martoma, and Dr. Gilman alleged that during phone calls arranged by a New York-based expert network firm for which Dr. Gilman moonlighted as a medical consultant, he tipped Martoma with safety data and eventually details about negative results in the trial about two weeks before they were made public in July 2008. Martoma and CR Intrinsic then caused several hedge funds to sell more than $960 million in Elan and Wyeth securities in a little more than a week.

In an amended complaint filed today, the SEC added S.A.C. Capital Advisors and four hedge funds managed by CR Intrinsic and S.A.C. Capital as relief defendants because they each received ill-gotten gains from the insider trading scheme. These ill-gotten gains are comprised of profits and avoided losses resulting from trades placed in the hedge fund portfolios that CR Intrinsic and S.A.C. Capital managed, and include fees that S.A.C. Capital received as a result of these ill-gotten gains.

The settlement is subject to the approval of Judge Victor Marrero of the U.S. District Court for the Southern District of New York. The settlement would resolve the SEC’s charges against CR Intrinsic and the relief defendants relating to the trades in the securities of Elan and Wyeth between July 21 and July 30, 2008. The settling parties neither admit nor deny the charges. The settlement does not resolve the charges against Martoma, whose case continues in litigation. The court previously entered a consent judgment against Dr. Gilman requiring him to pay disgorgement and prejudgment interest, and permanently enjoining him from further violations of the anti-fraud provisions of the federal securities laws.

The SEC’s investigation, which is continuing, has been conducted by Charles D. Riely and Amelia A. Cottrell of the SEC’s Market Abuse Unit in New York, and Matthew J. Watkins and Neil Hendelman of the New York Regional Office. The case has been supervised by Sanjay Wadhwa. The SEC appreciates 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 (FINRA).

# # #

Washington, D.C., March 15, 2013 — The Securities and Exchange Commission today published a guidance update from its staff to clarify the obligations of mutual funds and other investment companies to seek review of materials posted on their social media sites.

The guidance from the Division of Investment Management is the first in its “IM Guidance Update” series, which will offer the staff’s views on emerging legal issues. The goal of the guidance is to increase transparency and enhance compliance with federal securities laws and regulations.

Mutual funds and other investment companies are required to file certain advertisements for review by Financial Industry Regulatory Authority (FINRA). The SEC staff has learned that out of an abundance of caution, many mutual funds and other investment companies may file materials on their social media sites with FINRA unnecessarily.

The IM Guidance Update provides examples of the kinds of communications that the staff believes would be subject to a requirement to file with FINRA and examples of communications that would not trigger a filing requirement.

“Today’s inaugural IM Guidance Update on social media is intended to help firms strengthen their compliance efforts by providing meaningful real life examples in a format that is accessible to all on the SEC’s website,” said Norm Champ, Director of the Division of Investment Management. “We expect future guidance updates will highlight other relevant issues for funds, advisers, and the public.”

Douglas Scheidt, Sara Crovitz, Brian Murphy, and Catherine Courtney from the Division of Investment Management contributed substantially to preparing the IM Guidance Update, as did Paula Jenson, Lourdes Gonzalez, and Alicia Goldin from the Division of Trading and Markets.

The Division of Investment Management works to:

• protect investors
   
• promote informed investment decisions and
   
• facilitate appropriate innovation in investment products and services

through regulating the asset management industry.

# # #

Washington, D.C., March 15, 2013 — The Securities and Exchange Commission today charged a group of Canadian stock promoters, two San Diego attorneys, a Bahamas-based broker-dealer, and other participants in an international “pump-and-dump” scheme involving two publicly traded U.S. companies, Pacific Blue Energy Corporation and Tradeshow Marketing Company Ltd.

According to the SEC’s complaint, Canadian stock promoters John Kirk, Benjamin Kirk, Dylan Boyle, James Hinton, and their associates, used false and misleading promotions to pump up trading in the stock of the two microcap companies and made millions when they secretly dumped their own shares. Microcap companies typically have limited assets and low-priced stock that trades in low volumes. The SEC alleges that the promoters sent investors false and misleading emails about the companies through two websites they controlled, Skymark Research and Emerging Stock Report, and used “boiler room” sales calls to tout the stocks, falsely claiming that the recommendations were based on independent research by Skymark and Emerging Stock Report.

The SEC alleges that San Diego-based attorneys Luis Carrillo and Wade Huettel were central participants in the scheme who helped the promoters conceal their ownership interests in the companies, drafted misleading public filings, and provided misleading legal opinions. As part of the scheme, their law firm, Carrillo Huettel LLP, secretly received proceeds of stock sales in the form of a sham “loan.”

The SEC’s complaint, filed in federal court in Manhattan, alleges that Gibraltar Global Securities, a Bahamian broker-dealer, provided false affidavits and misleading statements that allowed Benjamin Kirk to secretly sell shares of the companies he was promoting. The SEC also charged Gibraltar’s president, Warren Davis, who signed misleading representations on behalf of Gibraltar.

“Microcap fraud is a scourge on our markets and we will continue to aggressively pursue individuals who engage in it, whether they are unscrupulous stock promoters who prey on investors or unethical attorneys who enable these pernicious schemes. Moreover, as this action demonstrates, the SEC is working closely with foreign authorities to root out this conduct in the international arena,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

According to the SEC, Tradeshow president Luniel de Beer, who served as chairman of Pacific Blue, received more than $330,000 in secret kickbacks for his part in the scheme. In addition, the SEC alleged that de Beer and Pacific Blue president Joel Franklin made misleading representations and facilitated the promoters’ stock sales. Without admitting or denying the SEC’s allegations, Franklin agreed to settle the SEC’s charges and consented to certain injunctive relief.

The SEC’s complaint charges Carrillo Huettel LLP, Carrillo, Huettel, Gibraltar Global Securities, John Kirk, Benjamin Kirk, Boyle, Hinton, de Beer, Franklin, Pacific Blue, and Tradeshow with violations of U.S. anti-fraud laws and rules, and charges these defendants, along with Warren Davis and Carrillo’s father, Dr. Luis Carrillo, with distributing unregistered shares, in violation of U.S. securities laws.

The SEC is seeking to have the defendants return their allegedly ill-gotten gains, with interest, and to bar Carrillo, Huettel, de Beer, John Kirk, Benjamin Kirk, Boyle, and Hinton from participating in penny stock offerings and from serving as public company officers or directors. The SEC is seeking civil monetary penalties from the attorneys, their law firm, and from de Beer.

Joshua Newville, Katherine Bromberg, Michael Paley, and Michael Osnato of the New York Regional Office conducted the SEC’s investigation. Mr. Newville, Ms. Bromberg and Todd Brody will lead the SEC’s litigation effort.

The SEC thanks the Financial Industry Regulatory Authority, the Alberta Securities Commission, the British Columbia Securities Commission, the Bahamas Securities Commission, the National Banking and Securities Commission of Mexico, and the Turks and Caicos Islands Financial Services Commission for their assistance in this matter.

# # #

Washington, D.C., March 11, 2013 — The Securities and Exchange Commission today charged two investment advisers at Oppenheimer & Co. with misleading investors about the valuation policies and performance of a private equity fund they manage.

An SEC investigation found that Oppenheimer Asset Management and Oppenheimer Alternative Investment Management disseminated misleading quarterly reports and marketing materials stating that the fund’s holdings of other private equity funds were valued “based on the underlying managers’ estimated values.” However, the portfolio manager of the Oppenheimer fund actually valued the fund’s largest investment at a significant markup to the underlying manager’s estimated value, a change that made the fund’s performance appear significantly better as measured by its internal rate of return.

Oppenheimer agreed to pay more than $2.8 million to settle the SEC’s charges. The Massachusetts Attorney General’s office today announced a related action and additional financial penalty against Oppenheimer.

“Honest disclosure about how investments are valued and how performance is measured is vital to private equity investors,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement. “This action against Oppenheimer for misleadingly writing up the value of illiquid investments is clear warning that the SEC will not tolerate lax disclosure practices in the marketing of private equity funds.”

According to the SEC’s order instituting settled administrative proceedings, the Oppenheimer advisers marketed Oppenheimer Global Resource Private Equity Fund I L.P. (OGR) to investors from around October 2009 to June 2010. OGR is a fund that invests in other private equity funds, and it was marketed primarily to pensions, foundations, and endowments as well as high net worth individuals and families.

According to the SEC’s order, OGR’s largest investment — Cartesian Investors-A LLC — was not valued based on the underlying managers’ estimated values. OGR’s portfolio manager himself valued Cartesian at a significant markup to the underlying manager’s estimated value. OAM’s change in valuation methodology resulted in a material increase in OGR’s performance as measured by its internal rate of return, which is a metric commonly used to compare the profitability of various investments. For the quarter ended June 30, 2009, the portfolio manager’s markup of OGR’s Cartesian investment increased the internal rate of return from approximately 3.8 to 38.3 percent.

“Particularly in the current difficult fundraising environment that can incentivize private equity managers to artificially inflate portfolio valuations, firms must implement policies and procedures to ensure that investors receive performance data derived from the disclosed valuation methodology,” said Julie M. Riewe, Deputy Chief of the SEC Enforcement Division’s Asset Management Unit. “Oppenheimer failed to implement such procedures and provided investors with misleading information about its valuation policies and performance numbers.”

The SEC’s order found that former OAM employees made the following misrepresentations to potential investors:

• The increase in Cartesian’s value was due to an increase in Cartesian’s performance when, in fact, the increase was attributable to the portfolio manager’s new valuation method.
   
• A third-party valuation firm used by Cartesian’s underlying manager wrote up the value of Cartesian, which was untrue.
   
• OGR’s underlying funds were audited by independent third-party auditors when, in fact, Cartesian was unaudited.

The SEC’s order also found that Oppenheimer Asset Management’s written policies and procedures were not reasonably designed to ensure that valuations provided to prospective and existing investors were presented in a manner consistent with written representations to investors and prospective investors.

Oppenheimer Asset Management’s conduct violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and Section 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-7 and 206(4)-8. Without admitting or denying the findings, Oppenheimer agreed to pay a $617,579 penalty and return $2,269,098 to those who invested in OGR during the time period when the misrepresentations were made. Oppenheimer consented to a censure and agreed to cease and desist from committing or causing any future violations of the securities laws. The firm is required to retain an independent consultant to conduct a review of its valuation policies and procedures.

Oppenheimer will pay an additional penalty of $132,421 to the Commonwealth of Massachusetts in the related action taken by the Massachusetts Attorney General.

The SEC’s investigation, which is continuing, was conducted by Panayiota K. Bougiamas and Igor Rozenblit of the Asset Management Unit and Lisa Knoop. It was supervised by Valerie A. Szczepanik. The SEC acknowledges the assistance of the Massachusetts Attorney General’s office.

# # #

Washington, D.C., March 11, 2013 — The Securities and Exchange Commission today charged the State of Illinois with securities fraud for misleading municipal bond investors about the state’s approach to funding its pension obligations.

An SEC investigation revealed that Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition. The state also misled investors about the effect of changes to its statutory plan.

Illinois, which implemented a number of remedial actions and issued corrective disclosures beginning in 2009, agreed to settle the SEC’s charges.

“Municipal investors are no less entitled to truthful risk disclosures than other investors,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement. “Time after time, Illinois failed to inform its bond investors about the risk to its financial condition posed by the structural underfunding of its pension system.”

Elaine Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, added, “Regardless of the funding methodology they choose, municipal issuers must provide accurate and complete pension disclosures including the effects of material changes to their pension plans. Public pension disclosure by municipal issuers continues to be a top priority of the unit.”

According to the SEC’s order instituting settled administrative proceedings against Illinois, the state established a 50-year pension contribution schedule in the Illinois Pension Funding Act that was enacted in 1994. The schedule proved insufficient to cover both the cost of benefits accrued in a current year and a payment to amortize the plans’ unfunded actuarial liability. The statutory plan structurally underfunded the state’s pension obligations and backloaded the majority of pension contributions far into the future. This structure imposed significant stress on the pension systems and the state’s ability to meet its competing obligations – a condition that worsened over time.

The SEC’s order finds that Illinois misled investors about the effect of changes to its funding plan, particularly pension holidays enacted in 2005. Although the state disclosed the pension holidays and other legislative amendments to the plan, Illinois did not disclose the effect of those changes on the contribution schedule and its ability to meet its pension obligations. The state’s misleading disclosures resulted from various institutional failures. As a result, Illinois lacked proper mechanisms to identify and evaluate relevant information about its pension systems into its disclosures. For example, Illinois had not adopted or implemented sufficient controls, policies, or procedures to ensure that material information about the state’s pension plan was assembled and communicated to individuals responsible for bond disclosures. The state also did not adequately train personnel involved in the disclosure process or retain disclosure counsel.

According to the SEC’s order, Illinois took multiple steps beginning in 2009 to correct process deficiencies and enhance its pension disclosures. The state issued significantly improved disclosures in the pension section of its bond offering documents, retained disclosure counsel, and instituted written policies and procedures as well as implemented disclosure controls and training programs. The state designated a disclosure committee to assemble and evaluate pension disclosures. In reaching a settlement, the Commission considered these and other remedial acts by Illinois and its cooperation with SEC staff during the investigation. Without admitting or denying the findings, Illinois consented to the SEC’s order to cease and desist from committing or causing any violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.

The SEC’s investigation was conducted by Peter K. M. Chan along with Paul M. G. Helms in the Chicago Regional Office and Eric A. Celauro and Sally J. Hewitt in the Municipal Securities and Public Pensions Unit. They were assisted by other specialists in the unit including Joseph O. Chimienti, Creighton Papier, and Jonathan Wilcox.

This enforcement action marks the second time that the SEC has charged a state with violating federal securities laws in their public pension disclosures. The SEC charged New Jersey in 2010 with misleading municipal bond investors about its underfunding of the state’s two largest pension plans. Additional information about the SEC’s initiatives in the area of municipal securities can be found in its Report on the Municipal Securities Market released last year.

# # #

Washington, D.C., March 11, 2013 — The Securities and Exchange Commission today announced charges against New York-based private equity firm Ranieri Partners, a former senior executive, and an unregistered broker who violated securities laws when soliciting more than $500 million in capital commitments for private funds managed by the firm.

The federal securities laws require that an individual who solicits investments in return for transaction-based compensation be registered as a broker. An SEC investigation found that William M. Stephens of Hinsdale, Ill., solicited investors as a hired consultant for Ranieri Partners and was paid fees by the firm, but never registered as a broker. Stephens’ longtime friend Donald W. Phillips, a senior managing director who headed up capital raising efforts for Ranieri Partners, was responsible for overseeing Stephens’ activities as a purported “finder” who would merely make initial introductions to potential investors. But Stephens’ role went far beyond that of a finder. He consistently communicated with prospective investors and their advisors and provided them with key investment documentation that he received from Ranieri Partners.

Ranieri Partners, Phillips, and Stephens agreed to settle the SEC’s charges.

“Registered brokers are subject to SEC oversight and examinations in order to monitor their conduct and protect the interests of investors,” said Merri Jo Gillette, Director of the SEC’s Chicago Regional Office. “Investors in Ranieri Partners’ funds were denied these protections because Stephens acted outside the boundaries of the law, and Phillips and the firm ignored the essence of his activities.”

According to the SEC’s orders instituting settled administrative and cease-and-desist proceedings, Stephens engaged in the business of effecting transactions in securities in several ways despite not being registered as a broker or affiliated with a registered broker-dealer. Stephens sent private placement memoranda, subscription documents, and due diligence materials to potential investors, and urged at least one investor to consider adjusting portfolio allocations to accommodate an investment with Ranieri Partners. Stephens provided potential investors with his analysis of the strategy and performance track record for Ranieri Partners’ funds, and also provided confidential information identifying other investors and their capital commitments. The SEC charged Stephens with violating Section 15(a) of the Securities Exchange Act, which requires people acting as brokers to be registered with the SEC.

The SEC’s order against Phillips and Ranieri Partners found that Phillips, who lives in Barrington, Ill., aided and abetted Stephens’ violations by providing Stephens with key fund documents and information while ignoring red flags indicating that Stephens had gone well beyond the limited role of a finder and was actively soliciting investments. The order found that Ranieri Partners caused Stephens’ violations.

In settling the SEC’s charges, Ranieri Partners agreed to pay a penalty of $375,000, Phillips agreed to pay a penalty of $75,000, and Stephens agreed to be barred from the securities industry. The SEC’s orders require each of them to cease-and-desist from further violations of Section 15(a). The SEC also suspended Phillips from acting in a supervisory capacity at an investment adviser or broker-dealer for nine months. Ranieri Partners, Phillips and Stephens consented to the entry of the SEC’s orders without admitting or denying the findings.

The SEC’s investigation was conducted by Jason Howard, Steven L. Klawans and John J. Sikora, Jr., in the Chicago Regional Office with assistance from examiners John T. Brodersen and Eric P. Donofrio.

# # #

Washington, D.C., March 7, 2013 — The Securities and Exchange Commission today unanimously proposed new rules to require certain key market participants to have comprehensive policies and procedures in place surrounding their technological systems.

The SEC’s proposal called Regulation SCI would replace the current voluntary compliance program with enforceable rules designed to better insulate the markets from vulnerabilities posed by systems technology issues.

Self-regulatory organizations, certain alternative trading systems, plan processors, and certain exempt clearing agencies would be required to carefully design, develop, test, maintain, and surveil systems that are integral to their operations. The proposed rules would require them to ensure their core technology meets certain standards, conduct business continuity testing, and provide certain notifications in the event of systems disruptions and other events.

“While it’s not possible to prevent every technological error that market participants may commit, we must ensure that our regulations are designed to minimize their impact on our markets and ultimately investors,” said SEC Chairman Elisse B. Walter. “Reg SCI would provide more explicit technology and control standards to help ensure that our markets remain resilient against technological vulnerabilities.”

The SEC will seek public comment on Reg SCI for 60 days following its publication in the Federal Register.

# # #

FACT SHEET

Improving Systems Compliance and Integrity

SEC Open Meeting
March 7, 2013

Background

Today’s securities markets rely extensively on technology more than ever before. As with any industry, the consequences can be significant when technology goes awry.

The high-speed automated trading that occurs both on national securities exchanges and alternative trading systems has heightened the potential for a technological problem to broadly impact the market.

Following the Flash Crash in May 2010, the SEC approved a series of measures to help limit the impact of such technological errors. For instance, the SEC approved rules to halt trading when a stock price falls too far, too fast as well as rules to provide certainty in advance of when an erroneous trade would be broken and rules to eliminate stub quotes.

Additionally, the SEC approved a rule known as the market access rule, which requires brokers and dealers with market access to put in place risk management controls and supervisory procedures designed to manage the financial, regulatory, and other risks posed to the markets by a malfunctioning of their technological systems.

Automation Review Policy

There are no mandatory rules governing the automated systems of self-regulatory organizations, such as national securities exchanges, clearing agencies, FINRA, and the MSRB. Instead, for the past two decades, they have followed a voluntary set of principles articulated in the SEC’s Automation Review Policy and participated in what is known as the ARP Inspection Program.

Recent technological issues in the securities markets including those that arose during the initial public offerings of Facebook and BATS Global Markets as well as the Knight Capital trading incident have shown that investors can be put at risk when technology fails, and confidence in the markets can falter.

The SEC convened a roundtable in October 2012 to discuss how market participants could prevent or at least mitigate systems issues, and how the response to such issues could be improved. The market closures following Superstorm Sandy also highlight the importance of having a robust market technology infrastructure. These events and discussions have helped shape the development of the rulemaking being proposed today.

Proposed Rule — Regulation SCI

The set of rules proposed by the Commission — called Regulation Systems Compliance and Integrity (Regulation SCI) — would formalize and make mandatory many of the provisions of the SEC’s Automation Review Policy that have developed during the last two decades. The proposed rule applies the policy and proposes additional measures to entities at the heart of U.S. securities market infrastructure in order to protect that infrastructure.

Regulation SCI would seek to ensure:

• Core technology of national securities exchanges, significant alternative trading systems, clearing agencies, and plan processors meet certain standards.
   
• These entities conduct business continuity testing with their members or participants.
   
• These entities provide certain notifications regarding systems disruptions and other types of systems issues.

Regulation SCI is intended to reduce the chance of technology problems occurring in the first place and ensure that key entities are well-positioned to take appropriate corrective action if problems do occur.

Proposed Scope

The proposed rule would apply to “SCI entities,” a term that would include:

• Self-regulatory organizations (the registered national securities exchanges, registered clearing agencies, FINRA, and MSRB).
   
• Alternative trading systems that exceed specified volume thresholds (SCI ATSs).
   
• Disseminators of market data under certain National Market Systems plans (“plan processors”).
   
• Certain clearing agencies exempt from SEC registration.

It would apply primarily to the systems of SCI entities that are core to the functioning of the securities markets, such as those that directly support trading, clearance and settlement, order routing, market data, regulation, or surveillance.

Proposed Provisions

Under the proposed rule, each SCI entity would be required among other things to:

• Establish policies and procedures relating to the capacity, integrity, resiliency and security of its technology systems.
   
• Establish policies and procedures to ensure its systems operate in the manner intended, including in compliance with relevant federal securities laws and rules.
   
• Take timely corrective action in response to systems disruptions, systems compliance issues and systems intrusions.
   
• Notify and provide the SEC with detailed information when such systems issues occur as well as when there are material changes in its systems. Written notices would be filed electronically on new Form SCI.
   
• Inform its members or participants about certain systems problems and provide information about the systems and market participants affected by the problem and the progress of corrective action.
   
• Conduct an annual review of its compliance with Regulation SCI, and submit a report of the annual review to its senior management and the SEC.
   
• Designate certain individuals or firms to participate in the testing of its business continuity and disaster recovery plans at least once annually, and coordinate such testing with other entities on an industry- or sector-wide basis.
   
• Provide SEC staff with access to its systems to assess compliance with Regulation SCI.

What’s Next

A 60-day public comment period will follow Reg SCI’s publication in the Federal Register.

Washington, D.C., Mar. 7, 2013 — The Securities and Exchange Commission today charged a California-based lawyer who has been fraudulently churning out baseless legal opinion letters for penny stocks through his website without researching and evaluating the individual stock offerings. 

Legal opinion letters are issued to transfer agents on behalf of holders of restricted stock seeking to sell the stock freely in the public markets.  Transfer agents typically require a lawyer’s opinion explaining the legal basis for lifting the restriction on the stock and allowing it to be freely traded. 

The SEC alleges that Brian Reiss of Huntington Beach, Calif., set up 144letters.com to promote his legal opinion letter business and advertise “volume discount” rates while noting “penny stocks not a problem.”  Reiss steered potential customers to his website by making bids on search terms through Google’s AdWords, and then relied on a computer-generated template to draft his opinion letters within minutes absent any true analysis of the facts behind each stock offering.  The letters from Reiss ultimately made false and misleading statements and facilitated the sale of securities in violation of the registration provisions of the federal securities laws.

“Reiss flouted his responsibilities as a gatekeeper in the issuance of stock, and churned out opinion letters to make a quick buck,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Attorneys who act as gatekeepers in our markets have a solemn responsibility to ensure that they provide accurate information to the marketplace.”

Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “Reiss falsely claimed he had conducted investigations into various stocks and determined them to be exempt from registration under the securities laws.  He misrepresented critical facts, and our enforcement action seeks to bring Reiss’s opinion mill to an end.” 

According to the SEC’s complaint filed in federal court in Manhattan, Reiss began issuing the fraudulent legal opinion letters in 2008.  He advertised a $285 rate for each letter and a “volume discount” rate of $195 per letter.  Reiss routinely made inaccurate statements bearing on whether the restriction should be lifted, and failed to conduct even a token inquiry into the underlying facts.  He knew or recklessly disregarded the fact that shareholders seeking his opinion letters intended to sell their stock in the public markets, and that transfer agents would rely on his opinion letters to issue stock certificates without restrictive legends. 

According to the SEC’s complaint, the false and misleading statements that Reiss made in opinion letters induced transfer agents for several public companies to remove the restrictive legends from the stock certificates and permit the sale of free-trading shares to the public.  Reiss provided the opinion letters to transfer agents who required assurances in the form of a legal opinion that the transactions qualified for an exemption from the registration requirements under the federal securities laws.  With Reiss’s baseless assurances, the transfer agents issued stock certificates without restrictive legends and enabled the stock to be traded freely. 

The SEC’s complaint charges Reiss 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.  The SEC seeks disgorgement of ill-gotten gains with prejudgment interest and financial penalties.  The SEC seeks to bar Reiss from participating in the offering of any penny stock pursuant to Section 20(g) of the Securities Act.  The SEC also seeks permanent injunctions – including an injunction prohibiting Reiss from providing legal services in connection with an unregistered offer or sale of securities.

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

The SEC also 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 (FINRA).

# # #

Washington, D.C., March 4, 2013 — The Securities and Exchange Commission today issued a Risk Alert on compliance with its custody rule for investment advisers and it also issued an Investor Bulletin about the rule, which is designed to protect advisory clients from theft or misuse of their funds and securities.

The alert by the SEC’s Office of Compliance Inspections and Examinations (OCIE) comes after a review of recent examinations where significant deficiencies were identified showed custody-related issues in about one-third of the firms examined. The advisers’ deficiencies included:

• Failure to recognize that they have custody, such as situations where the adviser serves as trustee, is authorized to write or sign checks for clients, or is authorized to make withdrawals from a client’s account as part of bill-paying services
   
• Failure to meet the custody rule’s surprise examination requirements
   
• Failure to satisfy the custody rule’s qualified custodian requirements, for instance, by commingling client, proprietary, and employee assets in a single account, or by lacking a reasonable basis to believe that a qualified custodian is sending quarterly account statements to the client.

In addition, for advisers to audited pooled investment vehicles, the examinations found some failed to meet requirements to engage an independent accountant and demonstrate that financial statements were distributed to all fund investors.

“Because the safeguarding of assets is central to investor protection, it is critical that investment advisers follow our rules when they maintain custody of their clients’ funds,” said SEC Chairman Elisse B. Walter.

“We take deficiencies in this area very seriously and want to put advisers on alert about the importance of complying with the custody rule,” said OCIE Director Carlo V. di Florio. “It is a key component of our investment adviser examination program.” 

The alert notes that the recent findings of custody deficiencies have resulted in a range of actions. These included remedial measures by advisers, such as drafting, amending or enhancing their written compliance procedures, policies or processes, changing their business practices, or devoting more resources or attention to custody issues. OCIE’s National Exam Program also has made referrals to the SEC’s Division of Enforcement where appropriate.

The bulletin by the SEC’s Office of Investor Education and Advocacy (OIEA) describes the requirements of the custody rule, including the requirement for custodians to send account statements to investment advisory clients at least every quarter. The bulletin notes that even though the custody rule provides enhanced protections to investors, it is not a substitute for investors’ own oversight and monitoring of their investments.

“Investors should always ask questions — including questions about the custody issues discussed in this Investor Bulletin — when considering an investment,” said OIEA Director Lori Schock. “Asking questions and monitoring investments are key ways to protect yourself from investment fraud.”

* * *

To be notified about new Risk Alerts or Investor Bulletins via email or SMA/text message, subscribe here.

When selecting subscription preferences, click the box by “OCIE Staff Letters and Risk Alerts” under the heading “Industry Guidance and Information.”

For Investor Bulletins, click “Investor Bulletins” under the heading “Information for Investors.”

# # #

Washington, D.C., March 1, 2013 — The Securities and Exchange Commission today published a request for data and other information to assist the agency in considering whether to make new rules about the standards of conduct and regulatory obligations for broker-dealers and investment advisers when they provide personalized investment advice about securities to retail customers.

“Studies have shown that few investors realize that the standard of care they receive depends on the type of investment professional they use. And often investors do not know which type of financial professional they are relying on,” said SEC Chairman Elisse B. Walter. “This request for information will help us in our ongoing consideration of alternative standards of conduct for certain broker-dealers and investment advisers, as well as potential harmonization of other aspects of regulation in this area.”

Specifically, the SEC is requesting data and other information from the public and interested parties about the benefits and costs of the current standards of conduct for broker-dealers and investment advisers when providing advice to retail customers, as well as alternative approaches to the standards of conduct.

While the SEC is particularly interested in receiving empirical and quantitative data and other information, all interested parties are encouraged to submit comments, including qualitative and descriptive analysis of the benefits and costs of potential approaches and guidance.

The SEC recognizes that retail investors are unlikely to have significant empirical and quantitative information, and welcomes any information they would like to provide. Commenters should only submit information that they wish to make publicly available. The public comment period will remain open for 120 days following publication of the request for data and other information in the Federal Register.

# # #

Washington, D.C., March 1, 2013 — The Securities and Exchange Commission today announced that Public Company Accounting Oversight Board members Steven B. Harris and Jay D. Hanson have been reappointed for five-year terms.

The PCAOB, established by the Sarbanes-Oxley Act of 2002, oversees the audits of the financial statements of public companies and broker-dealers through registration, standard setting, inspection, and disciplinary programs. The Commission selects members and the chair of the PCAOB after consultation with the Treasury Department and the Federal Reserve Board.

“I’m pleased to join my fellow commissioners in reappointing Steve and Jay to serve as PCAOB board members, and I look forward to their continued service in a second term,” said SEC Chairman Elisse B. Walter. “Steve has provided important institutional continuity as the longest-serving Board member who played a key role in helping to shape the law that created the PCAOB. Jay’s depth of expertise in auditing issues from his more than 30 years of prior private practice already has been an invaluable contribution to the Board’s efforts.”

SEC Chief Accountant Paul Beswick added, “The Board has a number of important initiatives underway as it embarks on its second decade of overseeing auditors of companies subject to the securities laws. We are very pleased to be able to continue to work with Steve, Jay, and the rest of the Board on these initiatives.”

Mr. Harris was appointed to the PCAOB in 2008. He was previously Senior Vice President and Special Counsel for APCO Worldwide, where he advised clients on matters relating to financial transactions, corporate governance, crisis management, investigations, foreign investment, trade promotion, and government affairs. For more than 15 years, Mr. Harris served as a Staff Director and Chief Counsel of the U.S. Senate Committee on Banking, Housing, and Urban Affairs. He also served as a Staff Director and Chief Counsel to the Securities Subcommittee. He worked on all of the legislation, investigations, and oversight conducted by the committee from 1981 to 2007. Mr. Harris was a counsel to Senator Donald W. Riegle, Jr. from 1979 to 1981, and served as a counsel to Congresswoman Barbara Jordan and as a representative to the National Commission for the Review of Antitrust Laws and Procedures from 1978 to 1979. He graduated with honors from Dartmouth College and earned an LL.B. from George Washington University.

Mr. Hanson was appointed to the PCAOB in 2011. He previously spent nearly 32 years at McGladrey & Pullen LLP, where he worked with a variety of clients ranging from small nonprofit organizations to large multi-national public companies. Mr. Hanson served as the National Director of Accounting, overseeing the firm’s accounting guidance and training practices, as well as leader of the firm’s Accounting Standards Group. He served as a member of the Emerging Issues Task Force of the Financial Accounting Standards Board (FASB) from 2006 to 2011. He also was a member of the Financial Reporting Executive Committee of the American Institute of Certified Public Accountants (AICPA) from 2005 to 2011, serving as chairman for the final three years of his tenure. Mr. Hanson is a certified public accountant licensed to practice in his home state of Minnesota. He graduated from Concordia College in Moorhead, Minn., with a B.A. in Business Administration, Accounting and Mathematics.

Mr. Harris is reappointed to a second term ending Oct. 24, 2017, and Mr. Hanson is reappointed to a second term ending Oct. 24, 2018.

# # #

Washington, D.C., Feb. 28, 2013 — The Securities and Exchange Commission today charged a China-based petrochemical company and its former chief financial officer with accounting and disclosure violations, and they agreed to pay more than $1 million combined to settle the charges.

The SEC alleges that Keyuan Petrochemicals, which was formed through a reverse merger in April 2010, systematically failed to disclose to investors numerous related party transactions involving its CEO, controlling shareholders, and entities controlled by management or their family members. Keyuan also operated a secret off-balance sheet cash account to pay for cash bonuses to senior officers, travel and entertainment expenses and an apartment rental for the CEO, and cash and non-cash gifts to Chinese government officials.

The SEC further alleges that Keyuan’s then-CFO Aichun Li, who lives in North Carolina, played a role in the company’s failure to disclose the related party transactions. Li was hired to ensure the company’s compliance with U.S. accounting and financial reporting regulations, and she received information and encountered red flags that should have indicated that the company was not properly identifying or disclosing related party transactions. Despite such knowledge, Li signed Keyuan’s registration statements and quarterly reports that failed to disclose material related party transactions.

“By omitting related party transactions from its financial statements, Keyuan deprived investors of a true representation of the company’s business dealings,” said Stephen L. Cohen, an Associate Director in the SEC’s Division of Enforcement. “As CFO, Li failed to right these wrongs.”

According to the SEC’s complaint filed in federal court in Washington D.C., the related party transactions that Keyuan failed to disclose between May 2010 and January 2011 in accordance with U.S. Generally Accepted Accounting Principles (GAAP) included sales of products, purchases of raw materials, loan guarantees, and short-term financing. As a consequence of using an off-balance sheet cash account, the company’s reported balances in its financial statements for cash, receivables, construction-in-progress, interest income, other income, and general and administrative expenses were misstated. In October 2011, Keyuan filed restatements of the financial statements contained in its Form 10-Qs for the second and third quarters of 2010 that disclosed the related party transactions and off-balance sheet accounting for the first time.

The SEC’s complaint charges Keyuan with violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 12b-20 and 13a-13 under the Exchange Act. The SEC’s complaint charges Li with violations of Section 13(b)(5) of the Exchange Act and aiding and abetting Keyuan’s violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13.

Keyuan agreed to pay a $1 million penalty and Li agreed to pay a $25,000 penalty to settle the SEC’s charges. They consented to the entry of a judgment permanently enjoining them from violations of the respective provisions of the Securities Act and Exchange Act. Li also agreed to be suspended from appearing or practicing as an accountant before the Commission with the right to apply for reinstatement after two years. The proposed settlement, in which Keyuan and Li neither admit nor deny the charges, is subject to court approval.

The SEC’s investigation, which is continuing, has been conducted by Fuad Rana, Avron Elbaum, and Melissa A. Robertson with assistance from the SEC’s Cross Border Working Group, which has representatives from each of the SEC’s major divisions and offices and focuses on U.S. companies with substantial foreign operations. Through the work of the Cross Border Working Group, the SEC has filed fraud cases involving more than 40 foreign issuers and executives, and deregistered the securities of more than 50 companies. The SEC’s Enforcement Division also has taken a series of actions against China-based audit firms that have refused to produce documents for SEC investigations into clients whose securities trade in U.S. markets.

# # #

Washington, D.C., Feb. 27, 2013 — The Securities and Exchange Commission today announced that it will hold a roundtable on April 16 to discuss potential ways to improve the transparency and efficiency of fixed income markets. The roundtable will focus on the corporate bond market and the municipal securities market, which was the subject of a July 2012 Commission report.

The roundtable will be held at the SEC’s Washington, D.C., headquarters, and will be open to the public and webcast live on the SEC’s website. Information on the agenda and participants will be issued shortly.

“As regulators, we must continually work to enhance the quality of the fixed income markets, which are critical to the U.S. economy,” said SEC Chairman Elisse Walter. “We’ve already taken a step in that direction by issuing a report last summer on the municipal securities market and this roundtable will be another step forward.”

The U.S. fixed income markets help finance the nation’s public infrastructure and private businesses. Fixed income securities also are important components of the investment portfolios of the American public, with retail investors directly or indirectly holding more than 75 percent of the outstanding principal amount of municipal securities and 28 percent of the outstanding principal amount of corporate bonds.

The Commission’s 2012 Report on the Municipal Securities Market made a variety of recommendations to improve pre-trade and post-trade price transparency and to strengthen brokers’ existing obligations to provide investors with best execution and fair pricing. The roundtable will provide a forum for in-depth discussion of these and other ideas to enhance the municipal securities market as well as the extent to which those recommendations could be applied to the corporate bond market.

“I look forward to hearing the views of a wide range of knowledgeable market participants, investors, and others on how best to improve the transparency, efficiency and fairness of the fixed income markets and practical ways in which these ideas might be implemented,” said Chairman Walter.

# # #

Washington, D.C., Feb. 26, 2013 — The Securities and Exchange Commission today charged a pair of hedge fund managers and their Connecticut-based advisory firm New Stream Capital with lying to investors about their fund’s structure and financial condition before it failed during the financial crisis.

The SEC alleges that the firm’s co-owners David Bryson and Bart Gutekunst secretly revised the fund’s capital structure before it collapsed in order to placate its largest investor, Gottex Fund Management. Bryson and Gutekunst then directed New Stream’s marketing department to continue marketing the hedge fund as though all investors were on the same footing when in fact Gottex had priority over other fund investors in the event of the fund’s liquidation.

The SEC additionally charged New Stream’s former chief financial officer Richard Pereira and former head of investor relations Tara Bryson, who is David Bryson’s sister. She agreed to settle the SEC’s charges. New Stream’s Cayman Islands affiliate also was charged in the scheme, which allowed the hedge fund managers to raise nearly $50 million and receive lucrative fees while leaving investors with nearly worthless holdings when the fund went bankrupt.

“Hedge fund managers who put greed ahead of full disclosure to investors violate a fundamental trust,” said George S. Canellos, Acting Director of the SEC’s Division of Enforcement. “Bryson and Gutekunst told investors they were all investing on equal terms when in fact some were investing in a fund that had been secretly restructured to their detriment.”

In a parallel action, the U.S. Attorney for the District of Connecticut today announced criminal charges against Bryson, Gutekunst, and Pereira.

According to the SEC’s complaint filed in federal court in Connecticut, New Stream managed a $750 million hedge fund focused on illiquid investments in asset-based lending. In March 2008, Bryson and Gutekunst revised the fund’s capital structure after Gottex, a fund manager with nearly $300 million invested in New Stream, had threatened to redeem its investment. A restructuring of the New Stream hedge fund a few months earlier had created two new feeder funds and eliminated the preferential liquidation rights previously enjoyed by the feeder fund through which Gottex had invested. Bryson told others at New Stream that if Gottex withdrew, the firm’s hedge fund business would “tank.”

The SEC alleges that revealing to all investors that New Stream restructured to favor Gottex would have made it much harder for the firm to attract and retain investors. Public disclosure also would have jeopardized cash flow from a lucrative fee arrangement that the fund’s managers put in place in late 2007. So the fund instead used misleading marketing documents that omitted the change, and Pereira as CFO falsified the fund’s financial statements to conceal the restructuring. Investors who asked about redemption levels were not told about the Gottex redemption request and others that followed. For example, Gutekunst falsely told one investor in June 2008 that there was nothing remarkable about the level of redemptions that New Stream had received and that there were no liquidity concerns.

According to the SEC’s complaint, as the financial crisis worsened in September 2008, New Stream was facing $545 million in redemption requests and was forced to suspend further redemptions and cease raising new funds. After several failed attempts at restructuring, New Stream and its affiliated entities filed for bankruptcy in March 2011.

The SEC’s complaint charges Bryson, Gutekunst, and Pereira with violating 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. Bryson and Gutekunst are charged with violating Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder, and Pereira is charged with aiding and abetting their violations of Section 206(4). The SEC is seeking a variety of sanctions and relief against them including injunctions, disgorgement of ill-gotten gains with prejudgment interest, and penalties.

In the settlement with Tara Bryson, which is subject to court approval, she agreed to be permanently enjoined from further violations of the provisions of the securities laws at issue in this case. She also agreed to be permanently barred from the securities industry.

The SEC’s investigation, which is continuing, was conducted by Sheldon Pollock, Lisa Knoop, Alan Maza, Kevin McGrath, Alistaire Bambach, Scott York, and George Stepaniuk of the New York Regional Office. The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of Connecticut, the Federal Bureau of Investigation, and the U.S. Department of Labor’s Office of Labor Racketeering and Fraud Investigations.

# # #

Washington, D.C., Feb. 26, 2013 — The Securities and Exchange Commission today announced that it will hold a Credit Ratings Roundtable on May 14 in response to a recent staff report on credit ratings and related matters.

The event will be held at the SEC’s headquarters in Washington, D.C., and will be open to the public and webcast live on the SEC’s website. Information on the agenda and participants will be issued at a later date.

A recent report by the SEC staff, required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, recommended that the Commission convene a roundtable to discuss the staff’s report. The roundtable will provide a forum for discussion of the staff’s Report on Assigned Credit Ratings.

# # #

Washington, D.C., Feb. 21, 2013 — The Securities Exchange Commission today published its examination priorities for 2013, which cover a wide range of issues at financial institutions, including broker-dealers, clearing agencies, exchanges and self-regulatory organizations, investment companies, hedge funds and private equity funds, and transfer agents.

“We are publishing these priorities to promote compliance and communicate with investors and our registrants about areas that we perceive to have heightened risk,” said Carlo V. di Florio, Director of the SEC’s Office of Compliance Inspections and Examinations, which is responsible for the national examination program. “Our examination program constantly seeks new ways to share our perspectives on key risks and regulatory issues so that registrants’ senior management, compliance and risk managers, among others, can take effective action. This document, as well as our Risk Alerts and other public statements, are windows through which we can increase transparency, strengthen compliance, and inform the public and the financial services industry about key risks that we are monitoring and examining.”

The examination priorities address issues that span the entire market as well as issues that relate specifically to particular business models and organizations. The market-wide priorities include fraud detection and prevention, corporate governance and enterprise risk management, conflicts of interest, and technology controls. Priorities in each program area include:

• For investment advisers and investment companies –presence exams for newly registered private fund advisers, and payments by advisers and funds to entities that distribute mutual funds
   
• For broker-dealers – sales practices and fraud, and compliance with the new market access rule
   
• For market oversight – risk-based examinations of securities exchanges and FINRA, and order-type assessment
   
• For clearing and settlement – For transfer agent exams, timely turnaround of items and transfers, accurate recordkeeping, and safeguarding of assets. For clearing agencies designated as systemically important, conduct annual examinations as required by the Dodd-Frank Act.

The priority list is not exhaustive and priorities may be adjusted throughout the year in light of ongoing risk assessment activities.

Senior exam staff, management from the SEC’s 12 regional offices, and other SEC divisions and offices selected the examination priorities for 2013 in consultation with each of the Commissioners, based upon a variety of information and risk analytics, including:

• Tips, complaints and referrals, including from whistleblowers, customers and investors
   
• Information reported by registrants in required filings with the Commission
   
• Information gathered through examinations conducted by the SEC and other regulators
   
• Communications with other U.S. and international regulators and agencies
   
• Industry and media publications
   
• Data maintained in third party databases
   
• Interactions with registrants, industry groups, and service providers (outside of examinations).

# # #

Washington, D.C., Feb. 21, 2013 — The Securities and Exchange Commission today charged an investment adviser located in the U.S. Virgin Islands with defrauding clients from whom he withheld the fact that he was receiving kickbacks for investing their money in thinly-traded companies. When he faced pressure to pay clients their returns on those investments, he allegedly used money from other clients in a Ponzi-like fashion to make payments.

The SEC’s Enforcement Division alleges that James S. Tagliaferri, through his St. Thomas-based firm TAG Virgin Islands, routinely used his discretionary authority over the accounts of his clients to purchase promissory notes issued by particular private companies. In exchange for financing those companies, TAG received millions of dollars in cash and other compensation — a conflict of interest that was never disclosed to investors. The Enforcement Division further alleges that when the promissory notes neared or passed maturity and his clients demanded payment, Tagliaferri misused assets of other clients to meet those demands.

“Tagliaferri was anything but forthcoming with his clients and he repeatedly failed to act in their best interests,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “He didn’t tell them about the compensation he received from the companies they were financing, and then compounded his fraud by using client assets to pay other clients when the conflicted investments came due.”

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

According to the SEC’s order instituting administrative proceedings, Tagliaferri invested TAG clients primarily in conservative and liquid investments such as municipal bonds and blue-chip stocks until around 2007, when he began investing clients in highly illiquid securities. These investments included promissory notes issued by various closely-held private companies that were nothing more than holding companies through which an individual and his family effected personal and business transactions. He also invested at least $40 million of clients’ money in notes of a private horse-racing company, International Equine Acquisitions Holdings, Inc.

According to the SEC’s order, TAG received more than $3.35 million and approximately 500,000 shares of stock of a microcap company in return for placing various investments with these companies. The compensation that TAG received from the companies for the investments that Tagliaferri made on behalf of his clients created a conflict of interest that he was required to disclose to investors.

The SEC’s Enforcement Division alleges that Tagliaferri then further defrauded clients by investing their funds in microcap and other thinly-traded public companies in order to raise at least $80 million to pay the interest or principal due to other clients on certain of the promissory notes. Tagliaferri explained in e-mails he sent in April 2010 to the individual behind the companies that the real motivation for investing TAG clients in one of his microcap companies was to use the proceeds to pay off other clients invested in the initial series of promissory notes. “Where is the $125MM. As you are aware, this money was earmarked to clear all of the notes and other issues facing us both,” Tagliaferri wrote. He later added, the “shares you transferred are being sold to clients. With those proceeds, you’re buying back your own notes.” TAG clients were unaware, however, that Tagliaferri’s true motivation for having them buy these stocks was to repay other TAG clients on other conflicted investments he had made for them.

According to the SEC’s order, Tagliaferri willfully violated Sections 17(a)(1) and (3) of the Securities Act of 1933, Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 and Rules 10b-5 thereunder, and Sections 206(1), 206(2) and 206(3) of the Investment Advisers Act of 1940.

The SEC’s investigation, which is continuing, was conducted by Leslie Kazon, Saima S. Ahmed, and Christopher Ferrante of the New York Regional Office. The litigation will be led by Ms. Ahmed and Nancy Brown. The SEC thanks the U.S. Attorney’s Office for the Southern District of New York, the U.S. Postal Inspection Service, and the Financial Industry Regulatory Authority (FINRA) for their assistance in this matter.

# # #

Washington, D.C., Feb. 15, 2013 — The Securities and Exchange Commission today obtained an emergency court order to freeze assets in a Zurich, Switzerland-based trading account that was used to reap more than $1.7 million from trading in advance of yesterday’s public announcement about the acquisition of H.J. Heinz Company.

The SEC’s immediate action ensures that potentially illegal profits cannot be siphoned out of this account while the agency’s investigation of the suspicious trading continues.

In a complaint filed in federal court in Manhattan, the SEC alleges that prior to any public awareness that Berkshire Hathaway and 3G Capital had agreed to acquire H.J. Heinz Company in a deal valued at $28 billion, unknown traders took risky bets that Heinz’s stock price would increase. The traders purchased call options the very day before the public announcement. After the announcement, Heinz’s stock rose nearly 20 percent and trading volume increased more than 1,700 percent from the prior day, placing these traders in a position to profit substantially.

“Irregular and highly suspicious options trading immediately in front of a merger or acquisition announcement is a serious red flag that traders may be improperly acting on confidential nonpublic information,” said Daniel M. Hawke, Chief of the Division of Enforcement’s Market Abuse Unit.

Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, added, “Despite the obvious logistical challenges of investigating trades involving offshore accounts, we moved swiftly to locate and freeze the assets of these suspicious traders, who now have to make an appearance in court to explain their trading if they want their assets unfrozen.”

The SEC alleges that the unknown traders were in possession of material nonpublic information about the impending acquisition when they purchased out-of-the-money Heinz call options the day before the announcement. The timing and size of the trades were highly suspicious because the account through which the traders purchased the options had no history of trading Heinz securities in the last six months. Overall trading activity in Heinz call options several days before the announcement had been minimal.

The emergency court order obtained by the SEC freezes the traders’ assets and prohibits them from destroying any evidence. The SEC’s complaint charges the unknown traders with violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In addition to the emergency relief, the SEC is seeking a final judgment ordering the traders to disgorge their ill-gotten gains with interest, pay financial penalties, and be permanently barred from future violations.

The SEC’s expedited investigation is being conducted by Market Abuse Unit members Megan Bergstrom, David S. Brown, and Diana Tani in the Los Angeles Regional Office with substantial assistance from Charles Riely, Market Abuse Unit member in the New York Regional Office who will handle the SEC’s litigation. The SEC appreciates the assistance of the Options Regulatory Surveillance Authority (ORSA).

# # #

Washington, D.C., Feb. 15, 2013 — The Securities and Exchange Commission today announced fraud charges against a New York-based brokerage firm and two brokers who allegedly used misleading sales tactics to steer investors toward risky investments in a purported clean energy company so the firm could earn lucrative commissions.

The SEC’s Division of Enforcement alleges that Gregg Lorenzo, the founder of Charles Vista LLC, teamed with an investment banker named Frank Lorenzo and made a litany of false, misleading, and unfounded statements to create the impression that speculative debt securities issued by Waste2Energy Holdings Inc., which were convertible into stock, were risk-free and likely to result in enormous investment returns. The Lorenzos are not related. While Gregg Lorenzo was touting the profitability of investing in Waste2Energy, which purported to possess technology for converting waste into clean energy, the company was struggling in reality. Waste2Energy eventually filed for bankruptcy.

“Charles Vista customers were told a false tale of a safe and conservative investment with an explosive upside, but the risky downside was downplayed in the story,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “Brokerage customers deserve unbiased and fair recommendations about the risks of potential investments, not misleading boiler room sales tactics.”

According to the SEC’s order instituting administrative proceedings against Charles Vista and the Lorenzos, investors were solicited to purchase the Waste2Energy convertible debentures in 2009 and 2010. An e-mail that Charles Vista sent customers made various false claims, such as Waste2Energy possessing “over $10 million in confirmed assets” to provide investors with protection against losses. In reality, the company had written its assets down to less than $1 million.

The SEC’s Division of Enforcement alleges that Gregg Lorenzo, who lives in Staten Island, made verbal sales pitches to investors that misrepresented Waste2Energy’s financial condition and business prospects. He made the debentures’ stock conversion feature appear valuable by making baseless predictions about the future of the company’s stock. Lorenzo told at least one investor that he believed Waste2Energy “will be a NASDAQ trading stock within 12 months. I believe they will meet the listing requirements.” Frank Lorenzo was the head of investment banking at Charles Vista until he left the firm in 2010. He sent e-mails to Charles Vista customers that contained false or misleading claims about Waste2Energy’s assets and alleged contracts.

According to the SEC’s order, Charles Vista was the exclusive placement agent for the issuance of these Waste2Energy securities, and the firm’s financial interest in the offering was considerable. Documents attached to some of Waste2Energy’s SEC filings indicate that Charles Vista had arranged to receive a 10 percent “commission” on the gross proceeds of all debentures sales, a consulting fee of $10,000 per month for 12 months, and various other commissions and fees.

The SEC’s Division of Enforcement alleges that Charles Vista and the Lorenzos willfully violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5. Charles Vista also allegedly violated Exchange Act Section 15(c) and Rule 10b-3. The administrative proceedings will determine what, if any, remedial action or financial penalties are appropriate in the public interest against Charles Vista and the Lorenzos.

The SEC’s investigation was conducted by Peter Pizzani, Melissa Coppola, Michael Osnato, and Jack Kaufman in the New York Regional Office. The SEC’s litigation will be led by Mr. Kaufman and Joseph Boryshansky.

# # #

Washington, D.C., Feb. 15, 2013 — The Securities and Exchange Commission today announced that Ethiopis Tafara, Director of the SEC's Office of International Affairs, will leave the agency at the end of next month after 13 years of public service.

The SEC's Office of International Affairs (OIA) advises the Commission on cross-border enforcement and regulatory matters, and engages in regulatory dialogues with authorities outside the U.S. Mr. Tafara joined the SEC staff in 2000 and has served as Director of OIA for the past 10 years. He successfully restructured the office to cover matters beyond the traditional areas of enforcement cooperation and development of international principles. For example, OIA now engages in comparative regulation and supervisory cooperation, and has expanded the size and scope of its technical assistance program to provide greater training to foreign authorities around the world than ever before.

"Ethiopis has gained a well-deserved reputation around the globe as a dedicated ambassador of investor protection," said SEC Chairman Elisse B. Walter. "His effective leadership was characterized by his dedicated efforts to achieve a better understanding globally of common regulatory concerns and approaches as a means of reaching solutions with compatibility across borders. Ethiopis's vision together with his diplomacy and drive has been a significant component in raising standards of international cooperation and regulation to levels that would have been unthought of before his SEC tenure."

Mr. Tafara said, "Cross-border cooperation has become essential to the SEC's work in protecting investors and facilitating capital-raising in the U.S. and across the globe. I have been privileged to spend the last 13 years promoting international cooperation along with OIA's deeply talented and committed staff. Their creativity, diplomacy, and enthusiasm are matched only by the depth of my gratitude to them. I wish to express my appreciation for the leadership and support of the Chairmen and Commissioners under whom I served. I also thank all of my SEC colleagues for their collaboration and camaraderie, as well as my colleagues around the world for their teamwork and friendship."

Mr. Tafara is one of the architects of the IFRS Monitoring Board that oversees the IFRS Foundation, which in turn is charged with safeguarding the due process of the International Accounting Standards Board. He served as staff chair of the IOSCO Task Force that crafted IOSCO Credit Rating Agency Principles and Code of Conduct in 2003 and 2004 (later established as the international standard for CRA oversight by the G-20) and chaired the reconstituted Task Force when it revised the standards in 2008. He chaired the IOSCO Task Force that developed Principles for Supervisory Cooperation and the related model MOU. He was staff chair of the IOSCO Task Force that developed IOSCO's Report on Strengthening Capital Markets Against Financial Fraud following the Enron and Parmalat financial frauds, and the Task Force that developed IOSCO's Report on Audit Services focusing on auditor transparency, governance, and communications. Mr. Tafara also was the principal author of the IOSCO Joint and Parallel Investigations Guide.

Under Mr. Tafara's leadership, OIA saw a significant expansion of international enforcement assistance fueled by its effort to extend the SEC's network of enforcement partners through participation in the International Organization of Securities Commissions' Screening Group for accession to the IOSCO Multilateral Memorandum of Understanding of the International Organization of Securities Commissions. OIA now handles more than 1,000 requests to or from foreign authorities each year. Mr. Tafara's pursuit of partnerships with non-securities regulatory counterparts including criminal authorities and financial intelligence units also contributed to this growth. OIA has extended the frontier of cooperation to facilitate cross-border asset freezes and the repatriation of ill-gotten gains, such as the return to the U.S. of $230 million held in an offshore account by a hedge fund involved in an enforcement matter, and the repatriation of $15 million from overseas in another enforcement case.

As an outgrowth of the increasingly global nature of the U.S. capital markets, Mr. Tafara also formed a special section within OIA that specifically monitors legal and regulatory developments abroad. OIA advises the Commission on the effects these developments may have in the U.S., and also analyzes the potential impact U.S. regulatory changes might have on foreign markets. This focus on comparative regulation during Mr. Tafara's tenure led to a pilot mutual recognition arrangement with the Australian Securities and Investments Commission based on the concept of substituted compliance developed in a law review article he co-wrote. Mr. Tafara also has taken a leadership role for the SEC in the OTC Derivatives Regulators Group that is working to resolve the cross-border issues in the regulation of the OTC derivatives market by drawing on the concept of substituted compliance.

Mr. Tafara expanded and refined the SEC's technical assistance program to transform it into a premier training and support program for capacity building with foreign regulatory and law enforcement counterparts. The number of foreign officials attending these training programs has increased dramatically along with the number, scope, and specialization of the programs. The technical assistance program expanded geographically with increased efforts in Africa and the Americas. The bridges formed with regulatory counterparts abroad has facilitated and complemented the SEC's cross-border enforcement and supervisory efforts while contributing to the efficiency of capital formation in emerging markets.

Mr. Tafara received the SEC's esteemed Chairman's Award for Excellence in 2008. He currently serves as Vice Chair of the IOSCO Board and Chairman of the PIOB Monitoring Group. He received his J.D. from Georgetown University Law Center, a Certificate of Attendance from The Hague Academy of International Law, and his A.B. from Princeton University.

* * *

The SEC also announced today that Dr. Robert Fisher, a Deputy Director in OIA, will become Acting Director upon Mr. Tafara's departure.

Dr. Fisher joined the SEC staff in 2002 as a financial economist in the Office of Economic Analysis. He later became an Assistant Director in the Office of International Affairs and was primarily responsible for the SEC's international technical assistance program for emerging and recently-emerged markets. Dr. Fisher was elevated to a Deputy Director position in January 2012.

Dr. Fisher holds a Ph. D and A.B. in Economics from Duke University and a J.D. from Harvard Law School.

# # #

Washington, D.C., Feb. 13, 2013 — The Securities and Exchange Commission today unanimously approved the 2013 budget of the Public Company Accounting Oversight Board (PCAOB) and the related annual accounting support fee as required by the Sarbanes-Oxley Act of 2002.

The PCAOB budget totals $245.6 million and will be funded primarily by the collection of an accounting support fee totaling $234 million.

“It is critical that the PCAOB has the resources it needs to get the job done,” said SEC Chairman Elisse B. Walter. “This budget review and approval process allows the SEC to determine appropriate funding levels and ensure that funds collected from issuers and broker-dealers are used efficiently and effectively.”

# # #

FACT SHEET

Background

The PCAOB oversees the audits and auditors of the financial statements that are filed by issuers and registered broker-dealers. The Sarbanes-Oxley Act of 2002, which established the PCAOB, provides the Commission with oversight responsibility over the PCAOB. This includes approving the PCAOB’s budget and accounting support fee annually.

Under Section 109 of the Sarbanes-Oxley Act, the PCAOB is required to establish, with the approval of the Commission, a reasonable accounting support fee to fund its operations. The fee is assessed annually on issuers and SEC-registered broker-dealers. Consideration of the budget for approval is one on the many ways in which the Commission exercises its oversight responsibilities of the PCAOB.

Highlights of the PCAOB’s Proposed 2013 Budget and Accounting Support Fee

The PCAOB approved its 2013 budget and accounting support fee in November 2012 during an open meeting of the Board. That budget, now also approved by the SEC, includes:

• A proposed 2013 budget of $245.6 million
• A proposed 2013 accounting support fee totaling $234 million allocated as follows:
  • $207.5 million to be assessed on issuers
  • $26.5 million to be assessed on broker-dealers

The PCAOB’s 2013 budget represents an increase of approximately 8 percent over its 2012 budget of $227.7 million. The increase is primarily attributable to an increase in the PCAOB’s audit inspections program, including additional staff to:

• Perform inspections of audits of SEC-registered broker-dealers (a class of audits overseen by the PCAOB as a result of the Dodd-Frank Act).
• Perform international inspections.
• Implement planned improvements to the PCAOB’s inspections program, including the reporting and processes for assessing quality control remediation efforts.

The 2013 budget will be funded mostly by the 2013 accounting support fee of $234 million, which is approximately 9 percent higher than the 2012 accounting support fee of $215 million.

Washington, D.C., Feb. 8, 2013 — The Securities and Exchange Commission today announced charges and an asset freeze against an individual living in Illinois and two companies behind an investment scheme defrauding foreign investors seeking profitable returns and a legal path to U.S. residency through a federal visa program.

The SEC alleges that Anshoo R. Sethi created A Chicago Convention Center (ACCC) and Intercontinental Regional Center Trust of Chicago (IRCTC) and fraudulently sold more than $145 million in securities and collected $11 million in administrative fees from more than 250 investors primarily from China. Sethi and his companies duped investors into believing that by purchasing interests in ACCC, they would be financing construction of the “World’s First Zero Carbon Emission Platinum LEED certified” hotel and conference center near Chicago’s O’Hare Airport. Investors were misled to believe their investments were simultaneously enhancing their prospects for U.S. citizenship through the EB-5 Immigrant Investor Pilot Program, which provides foreign investors an avenue to U.S. residency by investing in domestic projects that will create or preserve a minimum number of jobs for U.S. workers.

The SEC alleges that Sethi and his companies falsely boasted to investors that they had acquired all the necessary building permits and that several major hotel chains had signed onto the project. They also provided falsified documents to U.S. Citizenship and Immigration Services (USCIS) — the federal agency that administers the EB-5 program — in an attempt to secure the agency’s preliminary approval of the project and investors’ provisional visas. Meanwhile, Sethi and his companies have spent more than 90 percent of the administrative fees collected from investors despite their promise to return this money to investors if their visa applications are denied. More than $2.5 million of these funds were directed to Sethi’s personal bank account in Hong Kong.

Swift coordination between the SEC and USCIS has brought the scheme to a halt in its application stage at USCIS. The SEC filed its complaint under seal earlier this week and obtained an emergency court order to protect the remaining $145 million in investor assets that were at risk of being similarly misappropriated by Sethi and his companies. The case was unsealed this morning.

“Sethi orchestrated an elaborate scheme and exploited these investors’ dream of earning legal U.S. residence along with a positive return on their investment in a project that was not nearly the done deal that he portrayed,” said Stephen L. Cohen, Associate Director in the SEC’s Division of Enforcement. “The good news is that working closely with USCIS, we intervened early and stopped him from getting very far, and the asset freeze preserves nearly all of the money invested.”

According to the SEC’s complaint filed in U.S. District Court for the Northern District of Illinois, the EB-5 program enables foreign investors to possibly qualify for a green card if they invest $1 million (or $500,000 in a “Targeted Employment Area” with a high unemployment rate) in a project that creates or preserves at least 10 jobs for U.S. workers, excluding the investor and his or her immediate family. Sethi and his companies used the lure of a pathway to U.S. citizenship to convince investors to wire a minimum of $500,000 apiece plus a $41,500 “administrative fee” to U.S. bank accounts. These administrative fees are separate from the investment capital that the EB-5 program requires to be deployed into a job-creating enterprise. More than $11 million in administrative fees were collected with the claim that they were fully refundable to investors if their visa applications are rejected. Sethi and his companies have instead been spending those funds.

The SEC alleges that Sethi submitted false claims about the project to USCIS. Among the phony documentation that he provided to the agency in seeking preliminary approval for the project under the EB-5 program were a comfort letter from Hyatt Hotels and a backup financing letter from the Qatar Investment Authority.

The SEC’s complaint alleges that Sethi and his companies made a number of misrepresentations about the project to dupe investors. Offering materials stated that investors’ funds would help build “a convention center and hotel complex, including convention and meeting space, five upscale hotels, and amenities including restaurants, lounges, bars, and entertainment facilities.” Sethi and his companies prominently featured in their marketing materials the purported participation of three major hotel chains in the project: Hyatt, Intercontinental Hotel Group, and Starwood Hotels. However, none of these hotel chains have executed franchise agreements to include a brand hotel in this project as represented to investors in the offering materials. Two of the chains actually terminated prior deals with other Sethi-related entities more than two years before these offering materials were circulated to investors.

The SEC further alleges that the offering materials falsely stated that construction would begin in summer 2012 and occupancy of the first tower would occur in early spring 2014. A search of the Chicago Building Permits database for the project address shows that the only recent permits are for a tent for a purported groundbreaking ceremony held in November 2012, a demolition permit, construction of a fence, and a minor electrical wiring permit.

According to the SEC’s complaint, the 29-year-old Sethi misrepresented to investors in offering materials that he has “over fifteen years of experience in real estate development and management, specifically in the lodging area.” Offering materials also misleadingly state that the project’s developer Upgrowth LLC has “more than 35 years of experience.” Illinois corporate records show that Upgrowth was just recently organized in 2010.

The SEC’s complaint alleges that Sethi, ACCC, and IRCTC violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. In addition to the temporary restraining order and asset freeze granted by the court, the SEC’s complaint seeks permanent injunctions and other monetary relief.

The SEC’s investigation, which is continuing, has been conducted by Mika M. Donlon and Adam J. Eisner under the supervision of C. Joshua Felker. Patrick M. Bryan will lead the litigation. The SEC acknowledges the substantial assistance of the USCIS.

# # #

Washington, D.C., Feb. 4, 2013 — The Securities and Exchange Commission today charged a husband and wife who raised millions of dollars selling investments for a purported charitable organization in Tallahassee, Fla., while defrauding senior citizens and significantly exaggerating the amount of contributions actually made to charity.

The SEC alleges that after Richard K. Olive and Susan L. Olive were hired at We The People Inc., the organization obtained $75 million from more than 400 investors in Florida, Colorado, and Texas among more than 30 states across the country by selling an investment product they described as a charitable gift annuity (CGA). However, the CGAs issued by We The People differed in several ways from CGAs issued legitimately, namely that they were issued primarily to benefit the Olives and other third-party promoters and consultants. Only a small amount of the money raised was actually directed to charitable services. Meanwhile the Olives received more than $1.1 million in salary and commissions, and they also siphoned away investor funds for their personal use.

The SEC further alleges that the Olives lured elderly investors with limited investing experience into the scheme by making a number of false representations about the purported value and financial benefits of We The People’s CGAs. The Olives also lied about the safety and security of the investments.

“The Olives raised millions from senior citizens by claiming that We The People’s so-called CGAs provided attractive financial benefits and were re-insured and backed by assets held in trust,” said Julie Lutz, Associate Director of the SEC’s Denver Regional Office. “Investors were not given the full story about the true value and security of their investments.”

According to the SEC’s complaint against the Olives filed in U.S. District Court for the Southern District of Florida, investors were coaxed to transfer assets including stocks, annuities, real estate, and cash to We The People in exchange for a CGA. We The People claimed to operate as a non-profit organization while it was offering the CGAs from June 2008 to April 2012. However, We The People was not operating as a charity but instead for the primary purpose of issuing CGAs and using the proceeds to pay substantial sums to the Olives, third-party promoters, and consultants. On rare occasions when We The People did actually direct money raised toward charitable services, it was insignificant. For instance, the organization made public statements that it donated $21.8 million in relief aid to AIDS orphans in Zambia, but in fact the supplies were donated by others and We The People merely made a small payment to the third party that was shipping the supplies.

The SEC alleges that We The People’s marketing and promotional materials for the CGA offering contained misrepresentations and omissions including:

• False statements that the CGAs were worth the “full” accumulated value of the assets transferred by investors to We The People. Investors were not told in advance of transferring their assets that the value of the CGA as calculated by We The People was always substantially less than the “full” accumulated value of those assets because We The People took a significant percentage of the asset’s value and kept it as a purported “charitable gift.”
   
• False statements about the safety and security of the CGA program including that We The People held in trust a reserve equal to 110 percent of its liabilities and that it “reinsured” its products through “highly rated” commercial insurance companies. We The People did not in fact have any restricted-access trust accounts let alone maintain a reserve in them, and it did not purchase reinsurance from any insurance company to cover its potential liabilities under the CGAs.
   
• Omissions of the previous indictments and regulatory sanctions against Richard and Susan Olive when they previously sold similar products.
   
• Omissions of the sizable commissions that We The People paid to third-party promoters and the Olives on the sale of the CGAs, hiding from investors that these commissions totaled several million dollars.

The SEC’s complaint charges the Olives with violations, or aiding and abetting violations, of the antifraud provisions of the federal securities laws as well as violations of the securities and broker-dealer registration provisions of the federal securities laws. The SEC is seeking disgorgement of ill-gotten gains plus pre- and post-judgment interest and financial penalties against the Olives.

The SEC also filed separate complaints today against We The People as well as the company’s in-house counsel William G. Reeves. They both agreed to settle the charges without admitting or denying the allegations. The settlements are subject to court approval.

We The People consented to a final judgment that will enable the appointment of a receiver to protect more than $60 million of investor assets still held by the company. The final judgment also provides for disgorgement of ill-gotten gains and provides injunctive relief under the antifraud and registration provisions of the federal securities laws.

Reeves entered into a cooperation agreement with the SEC, and the terms of his settlement reflect his assistance in the SEC’s investigation and anticipated cooperation in its pending action against the Olives. Reeves agreed to be suspended from appearing or practicing before the SEC for at least five years, and consented to a final judgment providing injunctive relief under the provisions of the federal securities laws that he violated. The court will determine at a later date whether a financial penalty should be imposed against Reeves.

The SEC’s investigation was conducted by Michael Cates and Ian Karpel in the Denver Regional Office. The SEC’s litigation against the Olives will be led by Nicholas Heinke and Dugan Bliss.

# # #

Washington, D.C., Jan. 31, 2013 — The Securities and Exchange Commission today announced that David P. Bergers, Director of the SEC’s Boston Regional Office, has been named Acting Deputy Director of the Enforcement Division, effective February 8, when Deputy Director George Canellos becomes the division’s Acting Director.

“David is an extremely talented attorney who has a successful track record leading the Boston Regional Office,” said SEC Chairman Elisse B. Walter.  “Having worked at the SEC for 13 years, he has a deep understanding of the division, agency, and laws we enforce.  And, he has a true appreciation for the significant impact that the work of the SEC has on investors.”

“David is a tremendous asset to the division,” said Robert S. Khuzami, Director of the Division of Enforcement, who is leaving the SEC on February 8.  “His deep enforcement experience and willingness to roll up his sleeves and tackle any issue make him the ideal choice to serve as Acting Deputy Director.” 

Mr. Bergers said, “I am honored to serve in this role and will work to support the incredible efforts of the enforcement staff across the country as they seek to accomplish our mission of investor protection.” 

Mr. Bergers, 45, has headed the SEC’s Boston Regional Office since 2006.  The office oversees more than 1100 investment advisers, 60 mutual fund complexes, and 375 broker-dealers in Massachusetts, Connecticut, New Hampshire, Maine, Vermont, and Rhode Island.  He served at the SEC from 1998 to 2000 and returned in 2001, and has served in various enforcement positions, including head of SEC enforcement in Boston.  He has headed hundreds of SEC investigations into investment and financial fraud, insider trading, and other securities law violations.   

Mr. Bergers received the SEC’s Stanley Sporkin Award in 2010 for his leadership in reorganizing the SEC’s Enforcement Division to streamline management structure and create five specialized units.  He received the SEC and NTEU Labor-Management Relations Award in 2011 and 2012 for his work on a union-management team that helped restructure the SEC’s national examination program.  He also was one of several SEC enforcement staffers who received the SEC’s Law and Policy Award for developing the SEC’s whistleblower rules that became effective in 2011.

In addition to his work at the SEC, Mr. Bergers has practiced with law firms in the Philadelphia and Boston areas and served as a vice president and assistant general counsel of a regional broker-dealer and affiliated investment adviser in Boston.  He received his bachelor’s degree from Eastern Nazarene College and his law degree from Yale Law School.

# # #

Washington, D.C., Jan. 31, 2013 — The Securities and Exchange Commission today announced that George S. Canellos, currently Deputy Director of the Division of Enforcement, has been named Acting Director.  The appointment is effective February 8.

“George’s proven intellectual abilities and creative approach to problem-solving have made him an extremely effective advocate for investors and make him ideally suited to serve as Acting Director,” said SEC Chairman Elisse B. Walter.  “As Deputy Director, he helped to oversee a division that brought record numbers of enforcement actions and some of the most complex cases in the agency’s history.”

“George is highly respected for his intellect, prosecutorial instincts, and commitment to tough and fair enforcement of the federal securities laws,” said Robert S. Khuzami, Director of the Division of Enforcement, who is leaving the SEC on February 8.  “His service will benefit both the SEC’s talented and hard-working staff and the investing public.”

“It is an honor and inspiration to serve with such talented and dedicated colleagues throughout the SEC,” said Mr. Canellos.  “I look forward to continuing to work with them as we emerge from a historic restructuring and confront new challenges.”

Mr. Canellos, 48, has been the division’s Deputy Director since June 2012 and has been instrumental in developing the division’s Cooperation Program, in generating numerous programmatic, policy, and legislative initiatives, and in critical decisions on national priority enforcement actions. 

He served as Director of the SEC’s New York Regional Office from July 2009 to June 2012, overseeing 400 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.  After leaving the U.S. Attorney’s Office and before joining the SEC, Mr. Canellos spent 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.

# # #

Washington, D.C., Jan. 31, 2013 — The Securities and Exchange Commission today announced the panelists who will participate in its roundtable next week on decimalization.

The February 5 roundtable, which will evaluate the impact of tick sizes on the securities markets, will consist of three panels.

Participants on the first panel will address the impact of tick sizes on small and mid-sized companies, the economic consequences (including costs and benefits) of increasing or decreasing minimum tick sizes, and whether other policy alternatives might better address concerns related to Section 106(b) of the JOBS Act.

Participants on the second panel will address the impact of tick sizes on the securities market in general, including what benefits may have been achieved and what, if any, negative effects have resulted.

Participants on the third panel will address potential methods for analysis of the issues, including whether and how to conduct a pilot for alternative minimum tick sizes. SEC staff is particularly interested in hearing what types of data that market participants should provide for use in assessing the effects of an increase or variation in minimum tick sizes for companies of different capitalizations.

The roundtable will begin at 9:30 a.m. in the auditorium at the SEC’s Washington D.C. headquarters located at 100 F Street N.E. The public is invited to attend and observe the discussion with seating available on a first-come, first-served basis. The event will be webcast live on the SEC website and archived for later viewing.

* * *

Agenda and Panelists

# # #

Washington, D.C., Jan. 30, 2013 — The Securities and Exchange Commission today charged five former real estate executives who defrauded investors into believing they were funding the development of five-star destination resorts in Florida and Las Vegas when they were actually buying into a Ponzi scheme.

The SEC alleges that Cay Clubs Resorts and Marinas raised more than $300 million from nearly 1,400 investors nationwide through a network of hundreds of sales agents, marketing seminars, and podcasts that touted the profitability of purchasing units at Cay Clubs resort locations.  Investors were promised immediate income from a guaranteed 15 percent return and a future income stream through a rental program that Cay Clubs managed.  But instead of using investor funds to develop resort properties and units, the Cay Clubs executives used new investor deposits to pay leaseback returns to earlier investors.  Meanwhile they paid themselves exorbitant salaries and commissions totaling more than $30 million, and investor funds also were misused to buy airplanes and boats.  While still advertising itself as a profitable venture, Cay Clubs eventually abandoned its operations. Many investors’ properties went into foreclosure.

“These Cay Clubs executives lined their pockets with millions of dollars that they told investors would be used to develop five-star resort properties,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.  “They continued to defraud investors as Cay Clubs collapsed.” 

The SEC’s complaint filed in U.S. District Court for the Southern District of Florida charges the following former Cay Clubs executives:

• Fred Davis Clark, Jr. – president and CEO
• David W. Schwarz – chief accounting officer
• Cristal R. Coleman – manager and sales agent
• Barry J. Graham – sales director
• Ricky Lynn Stokes – sales director

According to the SEC’s complaint, the scheme began in 2004.  Clark, Coleman, Graham, and Stokes solicited investors with promises of guaranteed income, instant equity in undervalued properties, historic appreciation, and at least $30,000 in upgrades to the units they purchased at Cay Clubs resort locations in Florida and Las Vegas.  The representations about investors’ profitability and instant equity were false because the purported triple-digit returns resulted from undisclosed insider transactions with Cay Clubs by Coleman, Graham, and Stokes.  Their actions made it appear that Cay Clubs units had enormous rates of appreciation over a short period of time when in fact the transactions were merely part of an insider flipping scheme.  Further, Stokes wrote letters directly to potential investors claiming that the leaseback payments and profits were “guaranteed” and that Cay Clubs was a “very stable financially healthy company worth BILLIONS.”

The SEC alleges that Cay Clubs continued to solicit new investors despite the fact that the company’s financial condition had deteriorated so significantly that it did not have sufficient funds to make the “guaranteed” leaseback or rental payments to investors.  Clark, Coleman, and Schwarz misappropriated millions of dollars in investor funds using the multitude of bank accounts they controlled.  Besides purchasing airplanes and boats, they misused investor money for unrelated business ventures including investments in precious metals and a liquor distillery that produced Pirate’s Choice Rum.  After Cay Clubs abandoned its operations in 2008, Clark and Coleman (who are now husband and wife) moved to the Cayman Islands and continued to dissipate assets and funnel at least $2 million to offshore accounts.

The SEC’s complaint seeks financial penalties from Clark, Coleman, and Stokes and the disgorgement of ill-gotten gains plus prejudgment interest by all five executives.  The complaint also seeks injunctive relief to enjoin them from future violations of the federal securities laws as well as an accounting and an order to repatriate investor assets.

The SEC’s investigation was conducted in the Miami Regional Office by Senior Counsel Linda S. Schmidt and Senior Regional Accountant Fernando Torres under the supervision of Assistant Regional Director Jason R. Berkowitz.  Senior Trial Counsel Amie R. Berlin will lead the SEC’s litigation.

# # #

Washington, D.C., Jan. 29, 2013 — The Securities and Exchange Commission today announced that it has named Carl W. Hoecker as its Inspector General.

Mr. Hoecker currently serves as Inspector General for the U.S. Capitol Police and will replace David Kotz, who left the SEC last year. Jon T. Rymer, the Inspector General for the Federal Deposit Insurance Corporation, has served as the SEC’s interim Inspector General since May 2012.

The SEC’s Inspector General issues reports and conducts independent and objective audits, investigations, and inspections to detect waste, fraud, and abuse and to promote economy, effectiveness, and efficiency.

“Carl has demonstrated ability in conducting complex investigations,” said SEC Chairman Elisse Walter. “He has more than 30 years of federal law enforcement experience and is well qualified to serve as the SEC’s Inspector General.”

“I am deeply honored to have been selected for this position,” said Mr. Hoecker. “The SEC has an extremely important mission and I look forward to working with the Commissioners, the SEC staff, and the SEC stakeholders as I carry out my responsibilities under the Inspectors General Act.”

Mr. Hoecker has served since 2006 as the first Inspector General of the U.S. Capitol Police. He spent 10 years at the U.S. Department of the Treasury, starting as a special agent in 1996 and serving as Deputy Assistant Inspector General from October 2003 to July 2006. Mr. Hoecker joined the Inspector General community in 1992 as a criminal investigator at the U.S. Information Agency, now part of the Department of State. He began his career with the U.S. Army in 1976 as a military policeman, later becoming a special agent for the Army Criminal Investigations Command.

In addition to being a Certified Public Accountant, Mr. Hoecker is a Certified Fraud Examiner and Certified Government Financial Manager, and he is certified in Financial Forensics. He also chairs the Investigations Committee of the Council of Inspectors General on Integrity and Efficiency. He received his B.A. in Business Administration from Governors State University and completed his M.A. in Systems Management from the University of Southern California while on active military duty.

Under the Inspector General Act of 1978, Inspectors General have a dual and independent reporting relationship to the Commission and to Congress. Appointments are based on integrity and ability in such areas as accounting, auditing, financial analysis, public administration and law, without regard to political affiliation.

# # #

Chart: Hamdan's Brokerage Statements
–
Fact and Fiction

Full-size (PDF)

Washington, D.C., Jan 29, 2013 — The Securities and Exchange Commission today charged a day trader in Sugar Land, Texas, with defrauding investors in his supposed high-frequency trading program and providing them falsified brokerage records that drastically overstated assets and hid his massive trading losses.

The SEC alleges that Firas Hamdan particularly targeted fellow members of the Houston-area Lebanese and Druze communities, raising more than $6 million during a five-year period from at least 33 investors. Hamdan told prospective investors that he would pool their investments with his own money and conduct high-frequency trading using a supposed proprietary trading algorithm. Hamdan promised annual returns of 30 percent and assured investors that his program was safe and proven when in reality it was a dismal failure, generating $1.5 million in losses. As he failed to deliver the promised profits, Hamdan told investors that his funds were tied up in the Greek debt crisis and the MF Global bankruptcy among other phony excuses.

The SEC is seeking an emergency court order to halt the scheme and freeze Hamdan’s assets and those of his firm, FAH Capital Partners.

“Hamdan’s affinity scam preyed upon people’s tendency to trust those who share common backgrounds and beliefs,” said David R. Woodcock, Director of the SEC’s Fort Worth Regional Office. “Hamdan raised money by creating the aura of a successful day trader among friends and family in his community, and he continued to mislead them and hide the truth while trading losses mounted.”

According to the SEC’s complaint filed in federal court in Houston, Hamdan is well-known in the Lebanese and Druze communities in the Houston area and is a former treasurer of the Houston branch of the American Druze Society. Hamdan found investors for his trading program by talking with his friends and family in these communities. As word spread about his purported trading success, he asked existing investors to solicit their friends for investments.

The SEC alleges that Hamdan misrepresented to investors that he generated positive returns in 59 of 60 months between 2007 and 2012. He showed them phony documentation to support his false claims. For instance, a purported brokerage statement he provided investors for the first quarter of 2010 showed an opening balance of more than $2.3 million with quarterly trading gains of $2.7 million for a closing balance above $5.1 million. An actual brokerage statement obtained by SEC investigators for Hamdan’s account during that same period shows the opening balance at just $27,970.76 and the closing balance at $148,210.02, with quarterly trading losses of $7,452.80.

According to the SEC’s complaint, Hamdan made several other false claims to potential investors. For instance, he lied about the existence of a cash reserve account that secured their investments. Hamdan falsely stated that investments were further secured by a $5 million “key-man” insurance policy. He also falsely claimed that a well-known hedge fund manager in the Dallas area made a million-dollar investment with him and promised to invest more based on Hamdan’s continuing success.

The SEC’s complaint alleges that Hamdan violated the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The complaint seeks various relief including a temporary restraining order, preliminary and permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.

The SEC’s investigation was conducted by Jonathan Scott, Timothy Evans, and Mark Pittman of the Fort Worth Regional Office. Bret Helmer will lead the SEC’s litigation. Investors affected by this scheme who have questions can contact the Fort Worth office investigative staff at dfw@sec.gov.

* * *

The SEC has published an Affinity Fraud Investor Alert that provides tips about how to avoid being a victimized by an affinity fraud. This and other investor alerts can be found on the SEC’s website for investor education at www.investor.gov.

# # #

Washington, D.C., Jan. 28, 2013 — The Securities and Exchange Commission today charged a former executive at New York-based broker-dealer Jefferies & Co. with defrauding investors while selling mortgage-backed securities (MBS) in the wake of the financial crisis so he could generate additional revenue for his firm.

According to the SEC’s complaint filed in federal court in Connecticut, Jesse Litvak arranged trades for customers as part of his job as a managing director on the MBS desk at Jefferies.  Litvak would buy a MBS from one customer and sell it to another customer, but on many occasions he lied about the price at which his firm had bought the MBS so he could re-sell it to the other customer at a higher price and keep more money for the firm.  On other occasions, Litvak misled purchasers by creating a fictional seller to purport that he was arranging a MBS trade between customers when in reality he was just selling MBS out of his firm’s inventory at a higher price.  Because MBS are generally illiquid and difficult to price, it is particularly important for brokers to provide honest and accurate information. 

The SEC alleges that Litvak generated more than $2.7 million in additional revenue for Jefferies through his deceit.  His misconduct helped him improve his own standing at the firm, as his bonuses were determined in part by the amount of revenue he generated for the firm.

“Brokers must always tell their customers the truth, particularly in complex securities transactions in which it is difficult for investors to determine market prices on their own,” said George Canellos, Deputy Director of the SEC’s Division of Enforcement.  “Litvak repeatedly lied to his customers and invented facts to bring additional profits into his firm and ultimately his own pocket at their expense.”

The U.S. Attorney’s Office for the District of Connecticut today announced criminal charges against Litvak.

According to the SEC’s complaint, Litvak worked in the Stamford, Conn., office at Jefferies, and his misconduct lasted from 2009 to 2011.  Litvak’s customers included some funds created by the U.S. government under a program designed to help strengthen the markets for MBS during the financial crisis.  Had these customers been aware that they could have paid less for the MBS they purchased, they likely would have done so.

The SEC’s complaint charges Litvak with violating the antifraud provisions of the federal securities laws, particularly Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5, and Section 17(a) of the Securities Act of 1933.

The SEC’s investigation, which is continuing, has been conducted by Kerry Dakin, James Goldman, Rachel Hershfang, and Kevin Kelcourse in the Boston Regional Office.  Mr. Goldman is a member of the Enforcement Division’s Structured and New Products Unit headed by Kenneth Lench.  The SEC’s litigation will be led by Ms. Hershfang. 

# # #

Washington, D.C., Jan. 28, 2013 — The Securities and Exchange Commission today announced the agenda for a meeting of its Advisory Committee on Small and Emerging Companies being held this Friday, February 1.

The Committee will consider recommendations about trading spreads for smaller exchange-listed companies, creation of a separate U.S. equity market limited to sophisticated investors for small and emerging companies, and disclosure rules for smaller reporting companies.

The meeting will begin at 9:30 a.m. in the multi-purpose room at the SEC’s Washington D.C. headquarters. Public seating will be on a first-come, first-served basis. The event will be webcast live on the SEC website and will be archived for later viewing.

Members of the public who wish to provide their views on the matters to be considered by the Advisory Committee may submit comments using the comment form on the SEC’s website or by sending an e-mail to rule-comments@sec.gov. Include File Number 265-27 on the subject line. The SEC also accepts paper comments. Please send paper submissions in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549-1090, and refer to File Number 265-27. Any comments submitted will be made available to the public.

# # #

Agenda

Washington, D.C., Jan. 25, 2013 — The Securities and Exchange Commission today charged a financial adviser in Boca Raton, Fla., with illegally tipping inside information he learned about the upcoming sale of a pharmaceutical company in exchange for $35,000 and a jet ski dock.

The SEC alleges that Kevin L. Dowd got details about the impeding acquisition of Princeton, N.J.-based Pharmasset Inc. by California-based Gilead Sciences from one of his supervisors at the brokerage firm where he worked. The supervisor learned about the deal from a customer who sat on Pharmasset’s board of directors. Dowd, who knew the customer, breached his duty to keep the information confidential by tipping a friend in the penny stock promotion business who bought Pharmasset stock on the last trading day before the public announcement of the deal. The trader also tipped another individual who bought Pharmasset call options, and collectively they made $708,327 in illicit insider trading profits in just two trading days. The SEC’s investigation is continuing.

The SEC alleges that Dowd profited from the scheme in a roundabout way, receiving the jet ski dock from his tippee and a cashier’s check for $35,000, which he used for expensive upgrades to a pool at his home.

“As an industry professional, Dowd surely knew what he was doing was wrong, but he incorrectly thought that his scheme was clever enough to avoid detection by investigators,” said Daniel M. Hawke, Chief of the SEC Enforcement Division’s Market Abuse Unit. “Professionals in the securities industry or any sector should know that you’ll be held accountable for violating insider trading laws, even if you don’t trade the securities yourself.”

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

According to the SEC’s complaint filed in federal court in New Jersey, the Pharmasset director told Dowd’s supervisor in confidence as his financial adviser that Pharmasset was going to be sold and the price would be in the high $130s per share. Dowd’s supervisor provided Dowd with the information along with an instruction that he was restricted from trading or recommending Pharmasset securities. Despite the warning, Dowd tipped his penny stock promoter friend, who wired $196,000 into a brokerage account with a zero balance and bought 2,700 shares of Pharmasset stock on Friday, Nov. 18, 2011. Dowd’s friend tipped another individual who bought 100 out-of-the-money call options, which are securities that derive their value from the underlying common stock of the issuer and give the purchaser the right to buy the underlying stock at a specific price within a specified time period. Investors typically purchase call options when they believe the value of the underlying securities is going up.

According to the SEC’s complaint, Gilead and Pharmasset announced the acquisition on Monday, November 21. Dowd’s tippees immediately sold all of their Pharmasset securities to obtain their illegal profits.

The SEC alleges that Dowd violated Sections 10(b) and (14)(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest, a financial penalty, and a permanent injunction against Dowd.

The SEC’s investigation is being conducted by Market Abuse Unit staff Mary P. Hansen, Paul T. Chryssikos, and John S. Rymas in the Philadelphia Regional Office. The litigation will be handled by G. Jeffrey Boujoukos and Christopher R. Kelly. The SEC has coordinated its action with the U.S. Attorney’s Office for the District of New Jersey, and appreciates the assistance of the Federal Bureau of Investigation and the Options Regulatory Surveillance Authority.

# # #

Washington, D.C., Jan. 23, 2013 — The Securities and Exchange Commission today announced the opening of registration for its National Compliance Outreach Program for Broker-Dealers that will take place in Washington D.C. on April 9.

The event is sponsored by the SEC's Office of Compliance Inspections and Examinations in coordination with the SEC's Division of Trading and Markets and the Financial Industry Regulatory Authority (FINRA). It provides a forum for open discussions about effective compliance practices for broker-dealers and will focus on topics of interest to compliance, risk, and audit officers of large broker-dealers with multiple and complex business lines.

"To be effective, compliance and ethics programs cannot exist in silos. They need to be ingrained in the DNA of the organization and the decision-making framework of the organization. They need to be part of the way business is done," said Carlo di Florio, Director of the SEC's National Examination Program. "Compliance and risk management programs add tremendous business value. They protect the business. They enhance the brand. They ensure that reputation is protected. Our National Compliance Outreach Program is one of the ways that we try to support and enhance the compliance and risk management functions of firms."

FINRA Member Regulation EVP Susan Axelrod added, "FINRA is pleased to continue the partnership with the SEC to provide this opportunity for broker-dealer compliance professionals and regulators to foster two-way communication and work together to protect investors. Given the pace of change in the industry, face-to-face meetings of this kind are more valuable than ever."

There is no cost to attend the event, which will be held at the SEC's headquarters at 100 F Street NE in Washington. Registration for in-person attendance is limited to 500 people on a first-come, first-serve basis. There will be a maximum of 10 attendees per firm. The event also will be webcast on the SEC website.

To register for the 2013 National Compliance Outreach Program for Broker Dealers, visit the SEC website at www.sec.gov/info/complianceoutreach-bd.htm.

# # #

Washington, D.C., Jan. 22, 2013 — The Securities and Exchange Commission today announced that Vincente L. Martinez has been named Chief of the Enforcement Division’s Office of Market Intelligence, which collects and evaluates thousands of tips, complaints, and referrals that come into the SEC each year.

Mr. Martinez was one of the first assistant directors in the SEC’s Office of Market Intelligence, which was created in 2010 as part of a major restructuring of the Enforcement Division. He left the SEC in 2011 to become the first director of the whistleblower office at the Commodity Futures Trading Commission (CFTC). He will return to the SEC next month to begin his new role.

“Our Office of Market Intelligence employs next-generation technology and data analysis to inform and drive our enforcement effort and priorities in the years to come,” said Robert Khuzami, Director of the SEC’s Enforcement Division. “Vince has the vision and dedication to lead that effort given his talent, commitment, and prior service to the SEC.”

Adam Storch, Managing Executive of the SEC’s Enforcement Division, added, “Vince understands the task at hand and is ready to further leverage the valuable intelligence we get from the public, cultivate our relationships with our regulatory partners, and tackle the increasing sophistication of the schemes victimizing investors.”

Mr. Martinez said, “I am honored and pleased to rejoin the SEC staff and have this opportunity to advance the Office of Market Intelligence’s meaningful contributions to the protection of investors by further developing our ability to proactively identify risks and ferret out misconduct.”

At the CFTC, Mr. Martinez has interacted with whistleblowers and their representatives, developed the CFTC’s policies and procedures for handling whistleblower matters, and worked to raise awareness of the CFTC’s whistleblower program – which was created under the Dodd-Frank Act.

Mr. Martinez previously worked for eight years in the SEC’s Enforcement Division, beginning in 2003 as a staff attorney and later becoming a senior counsel. He served on a task force devoted to pursuing accounting frauds. When he shifted to the Office of Market Intelligence, he played a key role in developing Enforcement Division and SEC-wide policies and procedures for handling tips, complaints, and referrals. He helped cultivate cooperative relationships with other government agencies and self-regulatory organizations. Mr. Martinez received two SEC awards in 2011 (Chairman’s Award for Excellence and Business Operations Award) and an Enforcement Division Director’s Award in 2007.

Prior to joining the SEC staff, Mr. Martinez was a litigator and corporate lawyer in private practice for six years. He is a graduate of Georgetown University and the Boalt Hall School of Law at the University of California at Berkeley.

The Enforcement Division and Mr. Martinez extend their recognition and gratitude for the outstanding contributions of Lori Walsh, who is currently serving as the Acting Chief of the Office of Market Intelligence. Ms. Walsh will continue her leadership role as Deputy Chief of the office, and she will provide an instrumental contribution as the architect of its risk assessment tools and capabilities.

# # #

Washington, D.C., Jan. 22, 2013 — The Securities and Exchange Commission today announced that Egan-Jones Ratings Company (EJR) and its president Sean Egan have agreed to settle charges that they made willful and material misstatements and omissions when registering with the SEC to become a Nationally Recognized Statistical Rating Organization (NRSRO) for asset-backed securities and government securities.

EJR and Egan consented to an SEC order that found EJR falsely stated in its registration application that the firm had been rating issuers of asset-backed and government securities since 1995 — when in truth the firm had not issued such ratings prior to filing its application. The SEC’s order also found that EJR violated conflict-of-interest provisions, and that Egan caused EJR's violations.

EJR and Egan made a settlement offer that the Commission determined to accept. Under the settlement, EJR and Egan agreed to be barred for at least 18 months from rating asset-backed and government securities issuers as an NRSRO. EJR and Egan also agreed to correct the deficiencies found by SEC examiners in 2012, and submit a report – signed by Egan under penalty of perjury — detailing steps the firm has taken.

“Accuracy and transparency in the registration process are essential to the Commission’s oversight of credit rating agencies,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “EJR and Egan’s misrepresentation of the firm’s actual experience rating issuers of asset-backed and government securities is a serious violation that undercuts the integrity of the SEC’s NRSRO registration process.”

Antonia Chion, Associate Director of the SEC’s Division of Enforcement, added, “Provisions requiring NRSROs to retain certain records and address conflicts of interest are central to the SEC’s oversight of credit rating agencies. EJR’s violations of these provisions were significant and recurring.”

Egan and his firm were charged last year for falsely stating on EJR’s July 2008 application to the SEC that it had 150 outstanding asset-backed securities (ABS) issuer ratings and 50 outstanding government issuer ratings, and had been issuing credit ratings in these categories on a continuous basis since 1995. Egan signed and certified the application as accurate. According to the SEC’s order, EJR had not issued any ABS or government issuer ratings that were made available through the Internet or any other readily accessible means. Therefore, EJR did not meet the requirements for registration as a NRSRO in these classes. The Commission found that EJR continued to make material misrepresentations about its experience in subsequent annual certifications. EJR also made other misstatements in submissions to the SEC, and violated recordkeeping and conflict-of-interest provisions governing NRSROs — which are intended to safeguard the integrity of credit ratings.

EJR and Egan agreed to certain undertakings in the SEC’s order, including that they must conduct a comprehensive self-review and implement policies, procedures, practices, and internal controls that correct issues identified in the SEC’s order and in the 2012 examination of EJR conducted by the SEC’s Office of Credit Ratings. EJR and Egan consented to the entry of the order without admitting or denying the findings. The order requires them to cease and desist from committing or causing future violations.

The SEC’s investigation was conducted by Stacy Bogert, Pamela Nolan, Alec Koch, and Yuri Zelinsky. The SEC’s litigation was led by James Kidney with assistance from Alfred Day and Ms. Nolan. The related examinations of EJR were conducted by staff from the SEC’s Office of Credit Ratings, Office of Compliance Inspections and Examinations, and Division of Trading and Markets. Examiners included Michele Wilham, Jon Hertzke, Mark Donohue, Kristin Costello, Scott Davey, Alan Dunetz, Nicole Billick, David Nicolardi, Natasha Kaden, and Abe Losice.

# # #

Washington, D.C., Jan. 15, 2013 — The Securities and Exchange Commission today announced that Gregg E. Berman has been named Associate Director of the Office of Analytics and Research in the SEC’s Division of Trading and Markets.

Mr. Berman has been a senior advisor to the Director of the Division of Trading and Markets since June 2010, and joined the SEC staff in October 2009 as a senior advisor in the Division of Risk, Strategy, and Financial Innovation. In his new role, Mr. Berman will oversee the office established in 2012 to conduct research and analysis that will help inform the Commission’s policies on markets and market structure.

“Gregg’s analytical expertise and market background make him a tremendous asset for our new Office of Analytics and Research,” said John Ramsay, Acting Director of the Division of Trading and Markets. “In his time at the SEC, Gregg has worked on many complex issues, including an analysis of the causes of the May 6, 2011, ‘flash crash,’ on rulemaking to create a Consolidated Audit Trail, and on the many new rules for derivatives trading required by the Dodd-Frank Act.”

“I am excited to take on these new responsibilities and honored to have the opportunity to continue working with such a talented and dedicated set of colleagues, both within the division and across the entire SEC,” said Mr. Berman. “Though the markets may be complex, they are not impenetrable, and I am confident in our abilities to continue developing data-driven analyses to inform policy.”

The new office will provide expertise in quantitative data analysis, trading, portfolio management, and risk management, and will examine a wide variety of topics, ranging from market structure to new products and rule filings by exchanges. The use of data analysis to help inform the Commission’s policy decisions is central to the office’s mission and will be aided by the SEC’s recent acquisition of an advanced market data system, which will for the first time allow the staff to analyze trading using the same tools and technologies used by some of today’s most sophisticated market participants.

Before coming to the SEC, Mr. Berman was a co-founding partner of New York-based RiskMetrics Group, which focuses on risk management, corporate governance, and financial research and analysis. Mr. Berman served in various roles during his 11 years at the firm, most recently as the head of its global risk business. Mr. Berman holds a bachelor’s degree in physics from the Massachusetts Institute of Technology and doctorate in physics from Princeton University.

# # #

Washington, D.C., Jan. 15, 2013 — The Securities and Exchange Commission today announced that David Grim has been appointed Deputy Director of its Division of Investment Management. Mr. Grim has worked in the division for 17 years, most recently as Assistant Chief Counsel in its Office of Chief Counsel, and has received several awards for his legal and managerial work.

"We are pleased to welcome Dave to his new role as Deputy Director of the Division of Investment Management. He brings intellectual curiosity and extensive management experience, and is committed to our program of making the division an organization that grows through continuous improvement," said Norm Champ, Director of the Division of Investment Management.

Mr. Grim joined the SEC in September 1995 as a Staff Attorney in the division's Office of Investment Company Regulation. In January 1998, he moved to the division's Office of Chief Counsel, where he has served in a variety of positions, including since September 2007 as Assistant Chief Counsel. Mr. Grim received the SEC's Capital Markets Award in 2005, the SEC's Supervisory Excellence Award in 2007, and the SEC's Law and Policy Award in 2011.

"I am honored to have the opportunity to work with Norm and my dedicated colleagues in the division to carry out our vitally important mission on behalf of investors," Mr. Grim said.

Mr. Grim graduated cum laude with a degree in Political Science from Duke University and received his law degree from George Washington University, where he was Managing Editor of the George Washington Journal of International Law and Economics.

The SEC's Division of Investment Management works to protect investors, promote informed investment decisions, and facilitate innovation in investment products and services through regulation of the asset management industry.

# # #

Washington, D.C., Jan. 9, 2013 — The Securities and Exchange Commission today charged three former executives at Norfolk, Va.-based Bank of the Commonwealth for understating millions of dollars in losses and masking the true health of the bank’s loan portfolio at the height of the financial crisis.

The SEC alleges that Edward J. Woodard, who was CEO, president, and chairman of the board, was responsible along with CFO Cynthia A. Sabol and executive vice president Stephen G. Fields for misrepresentations to investors by the bank’s parent company Commonwealth Bankshares. The consistent message in Commonwealth’s public statements and SEC filings was that its portfolio of loans — which comprised approximately 94 percent of the company’s total assets in 2008 — was conservatively managed according to strict underwriting standards aimed at keeping the bank’s reserved losses low during a time of unprecedented economic turmoil.

In reality, the SEC alleges that internal practice deviated significantly from what the public was being told. Woodard knew the true state of Commonwealth’s rapidly-deteriorating loan portfolio, yet he worked to hide the problems and engineer the misleading public statements, particularly those made in earnings releases. Sabol knew of the activity to mask the problems with the company’s loan portfolio and the corresponding effect these masking practices had on the bank’s financial statements and disclosures, yet she signed the disclosures and certified to the investing public that they were accurate. Fields oversaw the bank’s largest portfolio of construction and development loans and was involved in the masking practices.

“During times of financial stress, it’s more important than ever for executives to make full and honest disclosure to the investing public,” said Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement. “Commonwealth’s executives did the opposite and hid the company’s worsening performance from shareholders through masking practices that understated the losses on its most troubled loans.”

According to the SEC’s complaint filed in U.S. District Court for the Eastern District of Virginia, Commonwealth understated its allowance for loan and lease losses (known as ALLL) by approximately 17 to 25 percent from November 2008 to August 2010. This caused the bank to understate its reported loss before income taxes by approximately 64 percent for fiscal year 2008. Commonwealth also understated its losses on real estate repossessed by the bank (known as OREO) in two fiscal quarters, which caused the bank to understate its reported loss before income. For eight consecutive fiscal quarters, Commonwealth underreported its total non-performing loans.

The SEC’s complaint alleges that Commonwealth obtained an appraisal for its largest collateral-dependent loan that falsely inflated the value of the collateral. The bank executed hundreds of “change-in-terms agreements” at the end of the quarter to remove tens of millions of dollars of loans from its reported non-performing loans. Woodard, Sabol, and Fields helped enable the bank to artificially bring otherwise-delinquent loans current by permitting checking accounts associated with the guarantors of the delinquent loans to be overdrawn. The bank also disbursed loan proceeds without inspecting the property to confirm that the work requiring the disbursement had actually been performed.

The SEC’s complaint charges Woodard, Sabol, and Fields with violations of the antifraud, reporting, recordkeeping, internal controls, deceit of auditors, and Sarbanes-Oxley certification provisions of the federal securities laws.

The SEC’s investigation, which is continuing, has been conducted by Laura B. Josephs, Thomas D. Silverstein, David S. Karp, Lucas R. Moskowitz, and David Estabrook. The SEC’s litigation will be led by Richard Hong. The SEC appreciates the cooperation of the Federal Bureau of Investigation, the U.S. Attorney’s Office for the Eastern District of Virginia, the Office of the Special Inspector General for the Troubled Asset Relief Program, the Board of Governors of the Federal Reserve Board, the Federal Reserve Bank of Richmond, the Federal Deposit Insurance Corporation, and the Bureau of Financial Institutions of the Virginia State Corporation Commission.

# # #

Washington, D.C., Jan. 9, 2013 — The Securities and Exchange Commission today announced that Enforcement Director Robert Khuzami will leave the agency after nearly four years of leadership. During Mr. Khuzami’s tenure, the Enforcement Division filed scores of significant actions connected to the financial crisis and brought record numbers of cases involving insider trading and misconduct by investment advisers and investment companies.

Among other accomplishments under Mr. Khuzami’s leadership, the Enforcement Division filed its most-ever cases in fiscal years 2011 and 2012 following the most significant restructuring in agency history that streamlined procedures and expedited investigations.

“Rob’s leadership and bold ideas transformed and reinvigorated the enforcement program,” said Chairman Elisse B. Walter. “Under his direction, the Division not only produced record results, but embraced changes that in the years to come will enable the talented staff to better protect investors through increased efficiency, expertise, and strategic focus.”

Mr. Khuzami said, “I have spent half my career in public service, and nowhere is there the level of professionalism, skill, and talent on such a large and coordinated scale as there is in the SEC’s Division of Enforcement. They have inspired me, educated me, and motivated me to do my very best, and for that I am eternally grateful.”

After being named Enforcement Director in February 2009 by former SEC Chairman Mary Schapiro, Mr. Khuzami prioritized the Enforcement Division’s effort to pursue financial crisis misconduct. The Division has since charged more than 150 individuals and entities with wrongdoing, including 65 CEOs, CFOs, and other senior corporate officers. These financial crisis-related cases have resulted in $2.68 billion in financial relief for harmed investors, and 36 individuals have been barred from serving as officers and directors at public companies or from working in the securities industry. High-profile defendants in SEC cases alleging wrongdoing during the financial crisis include Goldman Sachs, J.P. Morgan, Credit Suisse, Citigroup, State Street, Wachovia, Charles Schwab, and former top executives at Fannie Mae, Freddie Mac, and Countrywide.

Mr. Khuzami has led the Division’s most productive period of insider trading enforcement as investigators cracked large-scale coordinated schemes involving Wall Street professionals. The Galleon Management/Raj Rajaratnam investigation has resulted in charges against 29 defendants including former McKinsey & Co. global head Rajat Gupta. The SEC also has pursued insider trading cases related to expert networks, charging hedge funds, portfolio managers, and analysts for illegally trading on confidential information obtained from technology company employees moonlighting as expert network consultants. The SEC also charged hedge fund advisory firm CR Intrinsic Investors LLC and its former portfolio manager Matthew Martoma in a $276 million insider trading scheme that is the largest ever charged by the SEC. Since the beginning of fiscal year 2010, the SEC has filed 180 enforcement actions alleging insider trading by approximately 430 individuals and entities for illicit profits totaling $900 million.

In addition to the all-time record number of 735 SEC enforcement actions in FY 2011 and another 734 actions in FY 2012, Mr. Khuzami led the Division to record results in a number of specific enforcement areas. The SEC filed 293 enforcement actions involving investment advisers in fiscal years 2011 and 2012, the most ever in a two-year period. There was a 60 percent increase in cases filed against broker-dealers in fiscal year 2011, and the number of filed actions increased another 19 percent in fiscal year 2012. The SEC also filed 17 actions related to municipal securities in fiscal year 2012, the most in a single year since 2004.

The agency’s record results came after Mr. Khuzami initiated the Enforcement Division’s most significant restructuring in the agency’s history. Specialized prosecution units were created nationwide to concentrate on the high-priority areas of investment advisers and private funds; large-scale trading and market abuse; mortgage and other structured products; bribery of foreign officials under the Foreign Corrupt Practices Act; and municipal securities and public pensions. The Division hired private sector and other experts, adopted targeted and risk-based investigative approaches, and increased its overall expertise in the products, transactions, and practices that occur in the securities markets it polices. An Office of Market Intelligence was created to revamp the way the Division handles the more than 30,000 tips, complaints and referrals received each year, enabling the Division to collect, analyze, and triage these complaints and thus enhancing its capacity to prioritize its investigations, stop fraud quicker, and minimize the losses to investors. The Enforcement Division also has become more efficient in maximizing scarce resources, and the agency has increased deterrence efforts by moving quickly to address newly-emerging or well-disguised threats before they take hold across entire industries.

Under Mr. Khuzami’s watch, the SEC created a valuable cooperation program authorizing the use of non-prosecution agreements, deferred prosecutions agreements, and cooperation agreements to establish incentives for individuals and companies to fully and truthfully cooperate and assist with SEC investigations and enforcement actions, often early on in the investigative phase. The agency also established the Office of the Whistleblower to implement the whistleblower program authorized by the Dodd-Frank Act to enable the Division to benefit from timely and high-quality evidence offered by whistleblowers and provide monetary awards to eligible individuals who come forward with high-quality original information that leads to an SEC enforcement action.

Mr. Khuzami has encouraged strong and effective collaboration with the agency’s law enforcement partners, including the criminal authorities as well as other federal and state authorities. He has served as co-chair of both the Securities and Commodities Fraud Working Group and the Residential Mortgage-Backed Securities Working Group of the inter-agency Financial Fraud Enforcement Task Force.

Prior to joining the SEC, Mr. Khuzami served as a federal prosecutor for 11 years with the U.S. Attorney’s Office for the Southern District of New York, including three years as chief of its Securities and Commodities Fraud Task Force. Mr. Khuzami was a member of the prosecution team in what was then the largest terrorism trial in U.S. history — the successful prosecution of the “Blind Sheik” Omar Ahmed Ali Abdel Rahman arising out of the 1993 bombing of the World Trade Center and the 1994 plot to blow up New York City’s bridges, tunnels and other landmarks.

Mr. Khuzami served as a law clerk for the Honorable John R. Gibson of the U.S. Court of Appeals for the Eighth Circuit in Kansas City, Mo. He received his J.D. from the Boston University School of Law, and graduated magna cum laude from the University of Rochester, where he was elected to Phi Beta Kappa.

# # #

Washington, D.C., Jan. 9, 2013 — The Securities and Exchange Commission today charged two auditors at KPMG for their roles in a failed audit of a Nebraska-based bank that hid millions of dollars in loan losses from investors during the financial crisis and eventually was forced to file for bankruptcy.

The SEC previously charged three former TierOne Bank executives responsible for the scheme. Two executives agreed to settle the SEC’s charges, and the case continues against the other.

The new charges in the SEC’s case are against KPMG partner John J. Aesoph and senior manager Darren M. Bennett. The SEC’s investigation found that they failed to appropriately scrutinize management’s estimates of TierOne’s allowance for loan and lease losses (known as ALLL). Due to the financial crisis and problems in the real estate market, this was one of the highest risk areas of the audit, yet Aesoph and Bennett failed to obtain sufficient evidence supporting management’s estimates of fair value of the collateral underlying the bank’s troubled loans. Instead, they relied on stale information and management’s representations, and they failed to heed numerous red flags when issuing unqualified opinions on TierOne’s 2008 financial statements and the bank’s internal controls over its financial reporting.

“Aesoph and Bennett merely rubber-stamped TierOne’s collateral value estimates and ignored the red flags surrounding the bank’s troubled real estate loans,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Auditors must adhere to professional auditing standards and exercise due diligence rather than merely relying on management’s representations.”

According to the SEC’s order instituting administrative proceedings against Aesoph, who lives in Omaha, and Bennett, who lives in Elkhorn, Neb., the auditors failed to comply with professional auditing standards in their substantive audit procedures over the bank’s valuation of loan losses resulting from impaired loans. They relied principally on stale appraisals and management’s uncorroborated representations of current value despite evidence that management’s estimates were biased and inconsistent with independent market data. Aesoph and Bennett failed to exercise the appropriate professional skepticism and obtain sufficient evidence that management’s collateral value and loan loss estimates were reasonable.

According to the SEC’s order, the internal controls identified and tested by the auditing engagement team did not effectively test management’s use of stale and inadequate appraisals to value the collateral underlying the bank’s troubled loan portfolio. For example, the auditors identified TierOne’s Asset Classification Committee as a key ALLL control. But there was no reference in the audit work papers to whether or how the committee assessed the value of the collateral underlying individual loans evaluated for impairment, and the committee did not generate or review written documentation to support management’s assumptions. Given the complete lack of documentation, Aesoph and Bennett had insufficient evidence from which to conclude that the bank’s internal controls for valuation of collateral were effective.

The SEC’s order alleges that Aesoph and Bennett engaged in improper professional conduct as defined in Section 4C of the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the order are true and what, if any, remedial sanctions are appropriate pursuant to Rule 102(e). The administrative law judge will issue an initial decision no later than 300 days from the date of service of the order.

The SEC’s investigation of the auditors was led by Mary Brady and Michael D’Angelo of the Denver Regional Office. Barbara Wells and Nicholas Heinke will lead the Enforcement Division’s litigation in the administrative proceeding.

# # #

Washington, D.C., Jan. 7, 2013 — The Securities and Exchange Commission today announced that Chairman Elisse B. Walter has appointed Geoffrey F. Aronow as the agency’s General Counsel. He will begin his new role later this month.

Mr. Aronow comes to the SEC from the law firm of Bingham McCutchen LLP, where he is a partner in the Washington D.C. office. Mr. Aronow has prior federal government leadership experience as the Director of the Division of Enforcement at the Commodity Futures Trading Commission (CFTC) for nearly four years.

As the SEC’s chief legal officer, Mr. Aronow will lead the Office of the General Counsel in advising the Commission on issues ranging from enforcement actions, rulemakings, and legal proceedings in federal courts throughout the country. Mr. Aronow replaces Mark Cahn, who left the agency last week.

“Geoff brings the ideal combination of practical knowledge, expertise, and common sense that is so critical to addressing the often nuanced and difficult issues that come before the Commission,” said Chairman Walter. “Geoff is a faithful steward of the securities laws with a comprehensive understanding of law enforcement who shares our commitment to excellence and passion for investor protection.”

Mr. Aronow said, “I’m truly honored to re-enter public service as the General Counsel at an agency with such a storied history and critical mission of investor protection and effective market oversight. It is humbling to lead a dedicated staff of so many talented and distinguished lawyers in the Office of the General Counsel, and I look forward to working with them closely as we provide the wisest advice possible to Chairman Walter, the other Commissioners, and agency staff.”

Mr. Aronow, 57, has worked at Bingham McCutchen since August 2008 and has advised clients on matters before the SEC, CFTC, and other federal agencies as well as in litigation in federal courts and on legislative initiatives before Congress. His other legal experience includes two stints as a partner at Arnold & Porter LLP (1988-1995 and 1999-2004). He worked at Heller Ehrman LLP from 2004 to 2008.

As the head of enforcement at the CFTC from September 1995 to June 1999, Mr. Aronow oversaw investigations, recommendations of action to the Commission, and litigation in federal court or administrative proceedings. He coordinated with a wide breadth of other international, federal, state and local law enforcement and regulatory authorities.

Mr. Aronow is a former member of the National Adjudicatory Council, NASD Regulation. He also served on the board of directors for the National Capital Area Chapter of the American Civil Liberties Union.

Since 2010, Mr. Aronow has served as an adjunct professor at George Washington University Law School, where he co-teaches a seminar on futures and derivatives law. He previously served as an adjunct professor for two years at Catholic University’s Columbus School of Law. Mr. Aronow earned his J.D. from Yale Law School and earned his B.A. (summa cum laude and Phi Beta Kappa) from Yale College.

# # #

Washington, D.C., Dec. 26, 2012 — The Securities and Exchange Commission today announced additional charges in an insider trading case against two brokers who traded on nonpublic information ahead of IBM Corporation’s acquisition of SPSS Inc.

In an amended complaint filed in federal court in Manhattan, the SEC is now charging research analyst Trent Martin, who was the brokers’ source of confidential information in an insider trading scheme that yielded more than $1 million in illicit profits. Martin worked at a brokerage firm in Connecticut and specialized in Australian equity investments, and he learned nonpublic information about the impending IBM-SPSS transaction from an attorney friend who was working on the deal. Rather than maintaining the confidence of the information, Martin used the information for his own benefit, purchasing SPSS securities and subsequently tipping his roommate Thomas C. Conradt, who traded and tipped his friend and fellow retail broker David J. Weishaus. Martin was specifically named as their source in instant messages between Conradt and Weishaus about their illegal trading.

The SEC charged Conradt and Weishaus with insider trading on November 29. Martin, who fled the U.S. to Australia soon after learning about the SEC’s investigation, currently lives in Hong Kong.

“Martin is a licensed professional who knowingly disregarded insider trading laws to enrich himself, and then fled the United States when he learned of our investigation,” said Daniel M. Hawke, Director of the SEC’s Philadelphia Regional Office. “Martin could run but he could not hide, as the long arm of the SEC will extend to those who flee the United States hoping to avoid the consequences of their unlawful conduct.”

The SEC alleges that Martin’s attorney friend expected him to maintain information in confidence and refrain from illegal trading or disclosing it to others. The attorney sought moral support, reassurance, and advice when he privately told Martin about his new assignment working on the IBM-SPSS acquisition. The lawyer disclosed to Martin such details as the anticipated transaction price and the identities of the acquiring and target companies while he was describing the magnitude of the assignment.

According to the SEC’s complaint, Martin attempted to purchase SPSS common stock on the very first business day after learning the nonpublic information from his friend. His first three orders were cancelled because he did not have sufficient funds in the account to make the purchases, but he later wired $50,000 from his checking account into his brokerage account to purchase SPSS shares.

The SEC’s complaint alleges that Martin, Conradt and Weishaus violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest and financial penalties, and a permanent injunction against the brokers.

The SEC’s investigation, which is continuing, is being conducted by Mary P. Hansen, A. Kristina Littman, and John S. Rymas in the SEC’s Philadelphia Regional Office. G. Jeffrey Boujoukos and Catherine E. Pappas in the Philadelphia office are handling the litigation.

The SEC acknowledges the assistance of the Options Regulatory Surveillance Authority (ORSA), the New Zealand Securities Commission, and the Australia Securities and Investments Commission. The SEC also acknowledges the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

# # #

Washington, D.C., Dec. 26, 2012 — The Securities and Exchange Commission today issued an Investor Bulletin to help purchasers of municipal bonds better assess the bonds’ credit risks.

The bulletin provides several factors for investors to consider including the type of the bond, the purpose and nature of the financing, the overall financial condition of the issuer, and the sources of funds to pay both principal and interest.

The bulletin also urges investors to undertake their own independent review of municipal bonds’ credit risk and not rely solely on a credit rating or a short-hand label such as “general obligation” or “revenue” bond when deciding whether to purchase a municipal bond.

“Investors should gather as much relevant information as they can before spending their hard-earned dollars on any investment,” said SEC Chairman Elisse Walter. “While I will continue to push for enhanced and more timely disclosure by those who issue municipal securities, investors should continue to learn all they can before purchasing them.”

The bulletin also provides a list of additional resources where investors can find more information on municipal bonds. The bulletin was prepared by an intra-agency group including the Office of Investor Education and Advocacy, Division of Enforcement, Office of Credit Ratings, Office of Municipal Securities, Division of Trading and Markets, and the Division of Corporation Finance.

The bulletin is the 23rd issued this year by the agency. They are available on www.investor.gov — an SEC website designed for individual investors.

# # #

Washington, D.C., Dec. 21, 2012 — The Securities and Exchange Commission today charged four securities industry professionals with conducting a fraudulent penny stock scheme in which they illegally acquired more than one billion unregistered shares in microcap companies at deep discounts and then dumped them on the market for approximately $17 million in illicit profits while claiming bogus exemptions from the federal securities laws.

The SEC alleges that Danny Garber, Michael Manis, Kenneth Yellin, and Jordan Feinstein acquired shares at about 30 to 60 percent off the market price by misrepresenting to the penny stock companies that they intended to hold the shares for investment purposes rather than immediately re-selling them. Instead, they immediately sold the shares without registering them by purporting to rely on an exemption for transactions that are in compliance with certain types of state law exemptions. However, no such state law exemptions were applicable to their transactions. To create the appearance that the claimed exemption was valid, they created virtual corporate presences in Minnesota, Texas, and Delaware. The SEC also charged 12 entities that they operated in connection with the scheme.

According to the SEC’s complaint filed in federal court in Manhattan, Garber, Manis, Yellin, and Feinstein all live in the New York/New Jersey area and operated the scheme from 2007 to 2010. They each have previously worked in the securities industry either as registered representatives or providers of investment management or financial advisory services.

“These penny stock purchasers had enough securities industry experience to know that their penny stock trading was not exempt from the securities laws as they claimed,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “They repeatedly violated the registration provisions and in the process also committed securities fraud. We will continue to fight microcap stock abuses that result in the unregistered distribution of shares without vital information about those companies being known to investors.”

The SEC’s complaint alleges that Garber, Manis, Yellin, Feinstein and the named entities violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933; Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC’s complaint seeks a final judgment, among other things, ordering all of the defendants to pay disgorgement, prejudgment interest and financial penalties; permanently enjoining all the defendants from future violations of the securities laws; and permanently enjoining all the defendants from participating in penny stock offerings.

The SEC’s investigation, which is continuing, has been conducted by Michael Paley, Laura Yeu, Elzbieta Wraga, Haimavathi Marlier, Yitzchok Klug and Paul Gizzi of the New York Regional Office. Mr. Gizzi and Ms. Marlier will lead the SEC’s litigation.

# # #

Washington, D.C., Dec. 21, 2012 — The Securities and Exchange Commission today unanimously approved new rules requiring broker-dealers to conduct searches for holders of securities with whom they have lost contact. 

A similar rule already applied to recordkeeping transfer agents, who are the intermediaries between the clearing house and the broker-dealer.  The Dodd-Frank Wall Street Reform and Consumer Protection Act tasked the SEC with extending the application of this rule to broker dealers so that broker-dealers have the same obligation.

The new rules also require broker-dealers and other securities market participants to provide notifications to persons who have not processed checks that they have received in connection with their securities holdings. 

“For the first time, broker-dealers will have a duty to reach out and find those they have lost touch with.   It’s a straightforward rule with a common-sense objective,” said SEC Chairman Elisse Walter.  “Among other things, it will make it more likely that investors will get the money that they may not have realized is owed to them.”

Specifically, the new rules:

• Require broker-dealers to conduct certain searches for lost holders of securities that transfer agents currently are required to conduct.
• Require “paying agents” – including certain issuers, broker-dealers, transfer agents, and other entities – to notify certain persons – termed “missing securityholders” in the statute and “unresponsive payees” in the adopted rules – in writing that the paying agent has sent the person a check that has not yet been negotiated.
• Excludes paying agents from their notification requirement when the value of the not yet negotiated check is less than $25.
• Add a provision clarifying that the notification requirement for paying agents shall have no effect on a state’s ability to collect funds that it deems abandoned under so-called state escheatment laws.
• Add a conforming technical rule to help ensure that broker-dealers have notice of their new obligations regarding lost holders of securities and unresponsive payees.

The original rule – Rule 17Ad-17 – required only recordkeeping transfer agents to exercise reasonable care to ascertain the correct addresses of “lost securityholders” and conduct certain database searches for them.  This loss of contact can be harmful to holders of securities because they no longer receive corporate communications or the interest and dividend payments to which they may be entitled.  In addition, the securities and any related interest and dividend payments to which the holders of securities may be entitled are often placed at risk of being deemed abandoned under operation of state escheatment laws. 

The amendments will become effective 60 days after the date of publication of the release in the Federal Register.  The compliance date will be one year after the date of publication of the release in the Federal Register.

*  *  *

The new rules are available in draft form while pending review at the Office of Management and Budget (OMB) of the major rule analysis under the Small Business Regulatory Enforcement Fairness Act.  After the OMB review is complete, the Commission will issue the rule release in final form and send it to the Federal Register for publication.

# # #

Washington, D.C., Dec. 21, 2012 — The Securities and Exchange Commission today barred an Arizona-based mutual fund manager from the securities industry for failing to follow the investment objectives of a stock mutual fund managed by his firm, leading to the fund’s collapse.

An SEC investigation found that the prospectus of Z Seven Fund (ZSF) stated that it sought long-term capital appreciation and restricted the use of options. Nonetheless, beginning in September 2009, Barry C. Ziskin and his firm Top Fund Management (TFM) invested ZSF in put options for speculative purposes contrary to the fund’s stated investment policy. The losses from options trading and the ensuing investor redemptions ultimately resulted in ZSF’s liquidation in December 2010.

“ZSF investors expected the fund to pursue capital appreciation by buying stocks, but TFM and Ziskin took the fund down a very different and disastrous path,” said Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit. “Mutual fund advisers who deviate from their fund’s investment strategy and keep investors in the dark will be held accountable for their fraudulent actions.”

According to the SEC’s order instituting settled administrative proceedings against TFM and Ziskin, disclosures in ZSF’s prospectuses and statements of additional information provided that the fund could trade options only to hedge its portfolio. However, because TFM and Ziskin traded put options in such large amounts relative to the size of ZSF’s equity portfolio, their strategy amounted to speculation. For example, ZSF’s equity portfolio had a market value of $1,835,607 on July 6, 2010, but ZSF held enough option contracts to protect a portfolio worth $32,858,000 (17.9 times the value of the equity portfolio). ZSF’s options trading also caused the fund’s performance to plummet. As of October 2009, ZSF had net assets of $5.3 million, but over the next 15 months the fund suffered $3.7 million in losses from options. TFM and Ziskin misled ZSF investors by misrepresenting in a shareholder report that options trading was for hedging purposes.

The SEC’s order finds that TFM and Ziskin willfully violated the antifraud provisions of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940. The order also finds that TFM and Ziskin violated Section 34(b) of the Investment Company Act of 1940 and caused ZSF to violate Section 13(a)(3) of that act. Without admitting or denying the SEC’s findings, TFM and Ziskin agreed to cease and desist from committing or causing any violations and any future violations of these provisions. They also consented to the entry of an SEC order that censures TFM and bars Ziskin from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and prohibits him from serving as an officer, director or employee of a mutual fund.

The SEC’s investigation was conducted by Payam Danialypour and C. Dabney O’Riordan, who are members of the Asset Management Unit in the SEC’s Los Angeles Regional Office. The examination of TFM was conducted by Arlana D. Williams and John K. Kreimeyer of the Los Angeles office’s investment adviser/investment company examination program.

# # #

FOR IMMEDIATE RELEASE
2012-275

Washington, D.C., Dec. 21, 2012 — Securities and Exchange Commission Chairman Elisse Walter today announced the appointment of Paul A. Beswick as the agency's Chief Accountant. Mr. Beswick has been serving as Acting Chief Accountant for the past several months.

"Paul has served the Commission with great distinction and provided wise counsel on difficult accounting questions," said SEC Chairman Elisse Walter. "Investors and the accounting profession will benefit with Paul as the Chief Accountant."

The SEC's Office of the Chief Accountant is responsible for establishing and enforcing accounting and auditing policy to enhance the transparency and relevancy of financial reporting, and for improving the professional performance of public company auditors in order to ensure that financial statements used for investment decisions are presented fairly and have credibility.

Mr. Beswick joined the SEC staff in September 2007 has held several positions in the Office of the Chief Accountant. Prior to assuming the role of Acting Chief Accountant, Mr. Beswick served as Deputy Chief Accountant and was responsible for the day-to-day operations of the office's accounting group, including resolution of accounting practice issues, rulemaking, and oversight of private sector standard-setting efforts.

Mr. Beswick also served as staff director of a multi-year effort to help the Commission evaluate the implications of incorporating International Financial Reporting Standards (IFRS) into the financial reporting system for U.S. companies. The effort began in February 2010 and a final staff report was published earlier this year.

Mr. Beswick replaces James L. Kroeker, who left the SEC in July 2012 to return to the private sector.

Prior to joining the SEC staff, Mr. Beswick was a Partner with Ernst & Young LLP, where he worked in the firm's Professional Practice and Risk Management Group. He also served as a Practice Fellow at the Financial Accounting Standards Board, where he assisted in the development of accounting guidance related to evolving accounting issues.

Mr. Beswick is a graduate of Miami University in Oxford, Ohio.

# # #

Washington, D.C., Dec. 21, 2012 — The Securities and Exchange Commission today announced the agenda for its upcoming staff roundtable that will evaluate the impact of tick sizes on the securities markets.

The roundtable, announced earlier this month, will take place on February 5 in Washington D.C. Panelists will be finalized and announced at a later date.

The roundtable will be divided into three panels.

Participants on the first panel will address the impact of tick sizes on small and mid-sized companies, the economic consequences (including costs and benefits) of increasing or decreasing minimum tick sizes, and whether other policy alternatives might better address concerns related to Section 106(b) of the JOBS Act.

Participants on the second panel will address the impact of tick sizes on the securities market in general, including what benefits may have been achieved and what, if any, negative effects have resulted.

Participants on the third panel will address potential methods for analysis of the issues, including whether and how to conduct a pilot for alternative minimum tick sizes. SEC staff is particularly interested in hearing what types of data that market participants should provide for use in assessing the effects of an increase or variation in minimum tick sizes for companies of different capitalizations.

The SEC staff welcomes feedback regarding any of the topics to be addressed at the roundtable. Information that is submitted will become part of the public record of the roundtable.

Information may be submitted to the Commission using the following methods:

Electronic submissions:

• Use the SEC’s Internet submission form or send an e-mail to rule-comments@sec.gov.

Paper submissions:

• Send paper submissions in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number 4-657. This file number should be included on the subject line if e-mail is used. To help process and review submissions more efficiently, please use only one method. The SEC will post all submissions at www.sec.gov.

Please note that all submissions received will be posted without change. The SEC does not edit personal identifying information from submissions. Only information desired to be shared publicly should be submitted.

# # #

Agenda

Panel 1 — Evaluating Concerns Relating to Tick Size for Small and Middle Capitalization Companies

• Given the current market structure, does a one-cent minimum tick size inhibit IPOs or otherwise have any negative effects on small and middle capitalization companies?
   
• Are there other economic or regulatory developments during the timeframe that decimalization has been in place that may have had a more significant impact on U.S. IPOs?
   
• What are possible regulatory initiatives that might encourage small and middle capitalization companies to conduct IPOs?
   
• Will the provisions of Title I of the JOBS Act that provide additional flexibility to small and middle capitalization companies with respect to disclosure obligations, internal controls, auditing standards, research reports and other matters encourage these companies to conduct IPOs? If so, how much?
   
• Would increasing minimum tick sizes for trading the securities of small and middle capitalization companies materially impact the incentives for IPOs? If so, what should the minimum tick size be?
   
• Can issuers effectively address the tick size issue through reverse stock splits or stock price range selection at the time of the IPO?
   
• Should minimum tick sizes remain at a specific level only for a certain period after the IPO of small and middle capitalization companies? If so, what period would be necessary?
   
• What particular problems do small and middle capitalization companies face in the current market structure?
   
• Is the level of liquidity provided for securities of small and middle capitalization companies inadequate today? If so, to what extent has this problem been exacerbated by smaller tick sizes?
   
• Are there other factors that significantly impact the liquidity and trading of small and middle capitalization companies? If so, what are possible regulatory solutions to improve the market structure for them?
   
• Would increasing minimum tick sizes for trading the securities of small and middle capitalization companies improve their market structure by enhancing economic incentives for market making?
   
• Would increasing tick size improve the availability of research on small and middle capitalization companies?
   
• From the perspective of investors, would the potential benefits of increased liquidity outweigh the potential reduction in price competition?
   
• Is the impact different for institutional and retail investors?

Panel 2 — Evaluating Concerns Relating to Tick Size for the Securities Market Generally

• What impact has decimalization had on the securities market in general?
   
• What problems has decimalization caused? What benefits have been realized? Do the benefits of decimalization outweigh any such problems?
   
• Is it advisable to broadly re-evaluate minimum tick sizes in the U.S. securities market?
   
• Should consideration be given to reducing minimum tick sizes for other types of securities such as those of very liquid large capitalization companies?
   
• What should be the factors in determining optimal minimum tick sizes?
   
• Should the minimum tick size vary with the price of a security, its liquidity, the size of the issuer, or other characteristics?
   
• Are there international models that might provide a good example of tiered minimum tick sizes?
   
• Should the minimum tick size be mandated for all securities, or should issuers or primary listing markets be allowed to choose?

Panel 3 — Studying the Effects of Alternative Tick Sizes

• What is the best way to study the effects of decimalization on small and middle capitalization companies?
   
• Is it feasible to isolate the impact of decimalization on IPOs? If so, how?
   
• What data would be needed to support changing the minimum tick size for all or a subset of stocks?
   
• How can the Commission or exchanges generate additional studies of the impact of minimum tick sizes on the liquidity and trading of securities of small and middle capitalization companies? Is this best done through a pilot program in which the minimum tick size is actually changed for a control group of securities? If so, how should such a pilot program be designed?
   
• Should the Commission assess the impact of minimum tick sizes on the full range of equity securities, including those of large capitalization companies?
   
• Should OTC executions in increments less than the minimum tick size (i.e., subpenny price improvement) be prohibited during a pilot period?
   
• What criteria should be used to select securities for participation in a pilot?
   
• What minimum tick sizes should be used for a pilot program, and to which types of securities should they apply?
   
• To what extent should issuers have input into the participation of their securities in the pilot? How long should a pilot program last? What are the most useful research questions that could be examined from such a pilot program?
   
• Is public data sufficient for addressing these questions in the context of a pilot? If not, what questions cannot be addressed with public data and what additional data would be needed to address these questions?
   
• Who is likely to study and to provide analysis of a tick size pilot (e.g. academics, exchanges, industry groups, others)?
   
• Are there particular risks associated with conducting a pilot program? If so, what is the best way to mitigate these risks?
   
• What are the costs associated with a pilot and how does the design of a pilot affect those costs?
   
• Are there better ways to gather reliable data on the impact of minimum tick sizes on the securities of small and middle capitalization issuers?

Washington, D.C., Dec. 20, 2012 — The Securities and Exchange Commission today charged Eli Lilly and Company with violations of the Foreign Corrupt Practices Act (FCPA) for improper payments its subsidiaries made to foreign government officials to win millions of dollars of business in Russia, Brazil, China, and Poland.

The SEC alleges that the Indianapolis-based pharmaceutical company’s subsidiary in Russia used offshore “marketing agreements” to pay millions of dollars to third parties chosen by government customers or distributors, despite knowing little or nothing about the third parties beyond their offshore address and bank account information. These offshore entities rarely provided any services and in some instances were used to funnel money to government officials in order to obtain business for the subsidiary. Transactions with offshore or government-affiliated entities did not receive specialized or closer review for possible FCPA violations. Paperwork was accepted at face value and little was done to assess whether the terms or circumstances surrounding a transaction suggested the possibility of foreign bribery.

The SEC alleges that when the company did become aware of possible FCPA violations in Russia, Lilly did not curtail the subsidiary’s use of the marketing agreements for more than five years. Lilly subsidiaries in Brazil, China, and Poland also made improper payments to government officials or third-party entities associated with government officials. Lilly agreed to pay more than $29 million to settle the SEC’s charges.

“When a parent company learns tell-tale signs of a bribery scheme involving a subsidiary, it must take immediate action to assure that the FCPA is not being violated,” said Antonia Chion, Associate Director in the SEC Enforcement Division. “We strongly caution company officials from averting their eyes from what they do not wish to see.”

Kara Novaco Brockmeyer, Chief of the SEC Enforcement Division’s Foreign Corrupt Practices Unit, added, “Eli Lilly and its subsidiaries possessed a ‘check the box’ mentality when it came to third-party due diligence. Companies can’t simply rely on paper-thin assurances by employees, distributors, or customers. They need to look at the surrounding circumstances of any payment to adequately assess whether it could wind up in a government official’s pocket.”

As alleged in the SEC’s complaint filed in federal court in Washington D.C.:

• Lilly’s subsidiary in Russia paid millions of dollars to offshore entities for alleged “marketing services” in order to induce pharmaceutical distributors and government entities to purchase Lilly’s drugs, including approximately $2 million to an offshore entity owned by a government official and approximately $5.2 million to offshore entities owned by a person closely associated with an important member of Russia’s parliament. Despite the company’s recognition that the marketing agreements were being used to “create sales potential” with government customers and that it did not appear that any actual services were being rendered under the agreements, Eli Lilly allowed its subsidiary to continue using the agreements for years.
   
• Employees at Lilly’s subsidiary in China falsified expense reports in order to provide spa treatments, jewelry, and other improper gifts and cash payments to government-employed physicians.
   
• Lilly’s subsidiary in Brazil allowed one of its pharmaceutical distributors to pay bribes to government health officials to facilitate $1.2 million in sales of a Lilly drug product to state government institutions.
   
• Lilly’s subsidiary in Poland made eight improper payments totaling $39,000 to a small charitable foundation that was founded and administered by the head of one of the regional government health authorities in exchange for the official’s support for placing Lilly drugs on the government reimbursement list.

Lilly agreed to pay disgorgement of $13,955,196, prejudgment interest of $6,743,538, and a penalty of $8.7 million for a total payment of $29,398,734. Without admitting or denying the allegations, Lilly consented to the entry of a final judgment permanently enjoining the company from violating the anti-bribery, books and records, and internal controls provisions of the FCPA. Lilly also agreed to comply with certain undertakings including the retention of an independent consultant to review and make recommendations about its foreign corruption policies and procedures. The settlement is subject to court approval.

The SEC’s investigation was conducted by Steven A. Susswein. The SEC acknowledges the assistance of the U.S. Department of Justice’s Fraud Section and the Federal Bureau of Investigation.

# # #

Washington, D.C., Dec. 19, 2012 — The Securities and Exchange Commission today charged two investment advisory firms and two portfolio managers responsible for managing a Midwest-based closed-end mutual fund for their roles in the failure to adequately inform investors about the fund’s risky derivative strategies that contributed to its collapse during the financial crisis.

An SEC investigation found that the Fiduciary/Claymore Dynamic Equity Fund (HCE) attempted two strategies to enhance returns — writing out-of-the money put options and shorting variance swaps. This exposed HCE to additional undisclosed risks and caused the fund to lose more than $45 million in September and October 2008, which was approximately 45 percent of its net assets. The fund liquidated in 2009.

Fund adviser and administrator Claymore Advisors LLC, which is located in Lisle, Ill., and the sub-adviser responsible for managing HCE’s portfolio, St. Louis-based Fiduciary Asset Management LLC (FAMCO), agreed to settle the SEC’s charges. Claymore has established a plan to distribute up to $45 million to fully compensate investors for losses related to the problematic trading. FAMCO agreed to pay an additional $2 million in disgorgement and penalties. The SEC’s case continues against former FAMCO employees Mohammed K. Riad of Clayton, Mo., and Kevin Timothy Swanson of St. Louis, the co-portfolio managers who allegedly made misleading statements in HCE’s periodic reports about the two strategies’ contribution to HCE’s performance and about HCE’s exposure to downside risk.

“When discussing fund performance and risks, fund advisers must candidly and accurately portray how the fund is being managed. The disclosures in this case fell short of the mark,” said Robert J. Burson, Senior Associate Regional Director of the SEC’s Chicago office.

The SEC’s investigation was conducted by the Chicago office and the Enforcement Division’s Structured and New Products Unit that focuses on derivatives and other complex financial products.

“Derivatives have the potential to vastly increase the amount of leverage and exposure for a fund. HCE was exposed to substantial undisclosed risks as a result of its use of these complex financial instruments, and investors weren’t sufficiently told,” said Kenneth Lench, Chief of the SEC Enforcement Division’s Structured and New Products Unit.

According to the SEC’s orders instituting the settled and unsettled administrative proceedings, FAMCO managed HCE in a manner that was inconsistent with the fund’s registration statement. Through the portfolio managers, FAMCO made misleading statements about HCE’s performance, omitting discussion of contributions from the put-writing and variance swap strategies. FAMCO also made misleading statements about HCE’s exposure to downside risk. Investors in HCE lost $45,396,878 as a result of this riskier trading, and the fund lost $70 million total (72.4 percent of its net asset value) during this period of general market decline.

The SEC’s order found that Claymore failed reasonably to supervise FAMCO as required by the firms’ investment advisory agreements, and found that Claymore caused HCE’s failure to provide adequate disclosure in HCE’s annual report or an amended registration statement about the fund’s use of written put options and variance swaps and their associated risks. Claymore consented to the order without admitting or denying the charges, and has established a distribution plan to fully reimburse shareholders for up to $45,396,878 in losses from these derivative transactions.

FAMCO agreed to pay disgorgement of $644,951, prejudgment interest of $134,978, and a penalty of $1.3 million. Without admitting or denying the charges, FAMCO agreed to be censured and to cease and desist from committing or causing any violations of Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8, and Section 34(b) of the Investment Company Act of 1940.

The case continues against Riad and Swanson, who the SEC Division of Enforcement alleges violated, aided and abetted, and/or caused violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, Section 206(4) of the Investment Advisers Act and Rule 206(4)-8, and Section 34(b) of the Investment Company Act. The Division also alleges that Riad caused violations of Investment Company Act Rule 8b-16.

The SEC’s investigation was conducted by Jeffrey A. Shank and Anne C. McKinley with assistance from Emmanouil Tsimouris and Susan M. Weis in the Office of Compliance Inspections and Examinations. Robert M. Moye will lead the SEC’s litigation. Related examinations of HCE, Claymore, and FAMCO were conducted by Mr. Tsimouris, Ms. Weis, Edward J. Wicherek, Michael R. Collins, Vanessa L. Horton, Walter H. Melcher, and Anthony J. Santoro under the supervision of Belinda A. Hoskins, Andrew D. Schuster, Maureen S. Dempsey, and David J. Mueller in the Chicago office.

* * *

More Information About Claymore’s Plan For Reimbursing Investors:

Claymore has engaged The Garden City Group, Inc. as the Plan Administrator responsible for managing the distribution of up to $45,396,878 to reimburse former HCE shareholders for losses from the derivative transactions described in the SEC’s enforcement action. In implementing Claymore’s distribution plan, The Garden City Group will send a notice with additional information about the distribution and a claim form to all identified potentially eligible HCE shareholders who held shares of HCE between Aug. 19, 2008 and Oct. 20, 2008. Claymore will provide additional information about the distribution plan through a release and on its website. The Garden City Group also will provide information through a website. Any investor who would like more information about Claymore’s distribution plan should contact The Garden City Group at 855-590-8694 or www.HCEDistributionPlan.com.

# # #

Washington, D.C., Dec. 18, 2012 — The Securities and Exchange Commission today charged a Toronto-based brokerage firm and its top two executives for failing to supervise overseas day traders who used the firm’s order management system to engage repeatedly in a manipulative trading practice known as layering.

In layering, a trader places orders with no intention of having them executed but rather to trick others into buying or selling a stock at an artificial price driven by the orders, which the trader later cancels. The SEC’s investigation found that Biremis – whose worldwide day trading business enabled up to 5,000 traders on as many 200 trading floors in 30 countries to gain access to U.S. markets – failed to address repeated instances of layering by many of the overseas day traders using its system. The firm’s co-founders Peter Beck and Charles Kim ignored repeated red flags indicating that overseas traders were engaging in layering manipulations. Biremis served as the broker-dealer for an affiliated Canadian day trading firm, Swift Trade Inc.

Biremis and the two executives agreed to a settlement in which the firm’s registration as a U.S. broker-dealer is revoked and permanent industry bars are imposed on Beck and Kim, who also will pay a combined half-million dollars to settle the SEC’s charges.

“Engaged and forceful supervisors are the first line of defense against individual misconduct in financial services companies,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Beck and Kim were neither, as they saw obvious red flags of market manipulation by their firm’s traders but failed to respond or take any steps to prevent the manipulation. They have learned the painful lesson that supervisors who fail to heed repeated red flags of misconduct will no longer have any place in the securities industry.”

According to the SEC’s order instituting settled administrative proceedings, Biremis, Beck, and Kim exercised substantial control over the overseas day traders. They backed the traders’ trading with capital from Biremis, determined the amount of Biremis capital available to each individual trader to purchase stocks, and set and enforced daily loss limits on each trader. They also wielded authority to reprimand, restrict, suspend, or terminate traders.

The SEC’s order found that many of the Biremis-affiliated overseas day traders engaged in repeated instances of layering from January 2007 to mid-2010. Beck and Kim learned from numerous sources – including three U.S. broker-dealers and a Biremis employee – that layering was occurring, yet they failed to take any steps to prevent it. For example, in spring 2008, representatives of one U.S. broker-dealer warned Beck and Kim that certain overseas traders were “gaming” U.S. stocks by altering those stocks’ bid and offer prices in order to buy or sell the stock at the altered price. Beck and Kim failed to act on this information.

According to the SEC’s order, Biremis also failed to retain virtually all of its instant messages related to its broker-dealer business, and failed to file any suspicious activity reports (SARs) related to the manipulative trading.

“Broker-dealers must recognize that their supervisory responsibilities over their associated persons don’t end at the U.S. border,” said Antonia Chion, Associate Director of the SEC’s Division of Enforcement. “Broker-dealers face severe consequences if they fail to supervise their traders who engage in manipulative trading, whether those traders are located in the U.S. or abroad.”

The SEC’s order finds that Biremis, Beck, and Kim failed reasonably to supervise the firm’s associated persons (the overseas day traders) with a view to preventing and detecting their layering manipulations. The order also finds that Biremis willfully violated Exchange Act Section 17(a) and Rule 17a-8 by failing to file SARs and Section 17(a) and Rule 17a-4(b)(4) by failing to retain instant messages.

The SEC’s order revokes Biremis’ registration as a broker-dealer and requires the firm to cease and desist from committing or causing violations of Exchange Act Section 17(a) and Rules 17a-4(b)(4) and 17a-8. The SEC imposed permanent industry bars on Beck and Kim, who each agreed to pay penalties of $250,000. Biremis, Beck, and Kim neither admitted nor denied the findings contained in the SEC’s order.

The SEC’s investigation was conducted by senior counsel Paul J. Bohr and supervised by assistant director Ricky Sachar. The SEC acknowledges the assistance of the Ontario Securities Commission, the U.K. Financial Services Authority, and the Financial Industry Regulatory Authority (FINRA).

# # #

Washington, D.C., Dec. 18, 2012 — The Securities and Exchange Commission today charged a digital financial media company and three executives for their roles in an accounting fraud that artificially inflated company revenues and misstated operating income to investors.

The SEC alleges that TheStreet Inc., which operates the website TheStreet.com, filed false financial reports throughout 2008 by reporting revenue from fraudulent transactions at a subsidiary it had acquired the previous year.  The co-presidents of the subsidiary – Gregg Alwine and David Barnett – entered into sham transactions with friendly counterparties that had little or no economic substance.  They also fabricated and backdated contracts and other documents to facilitate the fraudulent accounting.  Barnett is additionally charged with misleading TheStreet’s auditor to believe that the subsidiary had performed services to earn revenue on a specific transaction when in fact it did not perform the services.  The SEC also alleges that TheStreet’s former chief financial officer Eric Ashman caused the company to report revenue before it had been earned.  

The three executives agreed to pay financial penalties and accept officer-and-director bars to settle the SEC’s charges.

“Alwine and Barnett used crooked tactics, Ashman ignored basic accounting rules, and TheStreet failed to put controls in place to spot the wrongdoing,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “The SEC will continue to root out accounting fraud and punish the executives responsible.”

According to the SEC’s complaints filed in federal court in Manhattan, the subsidiary acquired by TheStreet specializes in online promotions such as sweepstakes.  After the acquisition, TheStreet failed to implement a system of internal controls at the subsidiary, which enabled the accounting fraud. 

The SEC alleges that through the actions of Ashman, Alwine, and Barnett, TheStreet:

• Improperly recognized revenue based on sham transactions.
• Used the percentage-of-completion method of revenue recognition without meeting fundamental prerequisites to do so, including reliably estimating and documenting progress toward the completion of relevant contracts.
• Prematurely recognized revenue when the subsidiary had not performed actual work and therefore had not really earned the revenue. 

According to the SEC’s complaint, when the subsidiary’s financial results were consolidated with TheStreet’s financial results for financial reporting purposes, the improper revenue on the subsidiary’s books resulted in material misstatements in the company’s quarterly and annual reports for fiscal year 2008.  On Feb. 8, 2010, TheStreet restated its 2008 Form 10-K and disclosed a number of improprieties related to revenue recognition at its subsidiary, including transactions that lacked economic substance, internal control deficiencies, and improper accounting for certain contracts. 

Ashman agreed to pay a $125,000 penalty and reimburse TheStreet $34,240.40 under the clawback provision (Section 304) of the Sarbanes-Oxley Act, and he will be barred from acting as a director or officer of a public company for three years.  Barnett and Alwine agreed to pay penalties of $130,000 and $120,000 respectively, and to be barred from serving as officers or directors of a public company for 10 years.  Without admitting or denying the allegations, the three executives and TheStreet agreed to be permanently enjoined from future violations of the federal securities laws. 

The SEC’s investigation was conducted by Senior Counsel Maureen P. King and Staff Accountant Nandy Celamy of the New York Regional Office.  Aaron Arnzen served as Senior Trial Counsel in the matter. 

# # #

Washington, D.C., Dec. 17, 2012 — Securities and Exchange Commission Chairman Elisse B. Walter today named Lona Nallengara as Acting Director of the Division of Corporation Finance. He will replace Meredith B. Cross when she leaves the SEC to return to the private sector at the end of the year.

Mr. Nallengara has served as Deputy Director for Legal and Regulatory Policy of the Division since March 2011 and has been responsible for overseeing the Division’s offices of Chief Counsel, Enforcement Liaison, International Corporate Finance, Mergers and Acquisitions and Small Business Policy.

Mr. Nallengara has led a series of complex rulemakings required by the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Division’s implementation of the Jumpstart Our Business Startups (JOBS) Act.

“Lona understands that our financial system is premised on investors getting the information they need to make smart decisions and on businesses having access to new capital,” said Chairman Walter. “Lona has extensive experience working within the agency and with companies seeking to raise capital. He appreciates the impact that our rules have not only on the lives of everyday investors, but also on the financial system as a whole.”

Mr. Nallengara said, “I am honored to have the opportunity to continue working with Chairman Walter and the other Commissioners as well as the exceptional staff of the Division of Corporation Finance to carry out the SEC’s important mission.”

The Division of Corporation Finance oversees the disclosures made to investors by more than 9,000 public issuers including registration statements for newly-offered securities, materials distributed in connection with business combination transactions, annual and quarterly filings and proxy materials sent to shareholders for annual meetings. The Division provides interpretive assistance to companies and investors with respect to their obligations under the federal securities laws and develops rulemaking recommendations for the Commission.

Mr. Nallengara joined the SEC from Shearman & Sterling LLP in New York, where he was a partner in the Capital Markets practice group and advised public companies and financial institutions in a wide range of capital raising activities and on corporate governance, public reporting and mergers and acquisitions matters. Mr. Nallengara earned his law degree from Osgoode Hall Law School in Toronto and his undergraduate degree in Political Science from the University of Western Ontario in London, Canada.

# # #

Washington, D.C., Dec. 17, 2012 — Securities and Exchange Commission Chairman Elisse B. Walter today named John Ramsay as Acting Director of the Division of Trading and Markets. He will replace Robert Cook, who announced that he plans to step down after a short transition period.

Since September 2010, Mr. Ramsay has served as a Deputy Director for the Division and is responsible for broker-dealer financial responsibility, risk oversight, and clearance and settlement functions. He has played a key role in the advancement of rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“John has a wealth of experience to draw upon and a firm grasp of the intricacies of issues,” said Chairman Walter. “He is well-positioned to oversee the Division as we continue to further bolster the markets and ensure they operate fairly and efficiently.”

Mr. Ramsay said, “I’m pleased to have the chance in this role to support Chairman Walter and the other Commissioners and to carry forward the vital work of the Division that Robert and my colleagues here have done so much to advance. This is an extraordinary time for the Division and our markets, and I work with an extraordinary group of people.”

The Division of Trading and Markets establishes and maintains standards for fair, orderly, and efficient markets. The Division regulates the major securities market participants, including broker-dealers, transfer agents, and self-regulatory organizations such as securities exchanges, the Financial Industry Regulatory Authority, and clearing agencies. The Division also has responsibility for oversight of security-based swap markets and participants in such markets.

Mr. Ramsay previously worked at the SEC from 1989 to 1994 in various posts including as counsel to then-Commissioner Mary L. Schapiro. He also has held other key regulatory policy positions at the Commodity Futures Trading Commission and the National Association of Securities Dealers (now the Financial Industry Regulatory Authority). In the private sector, Mr. Ramsay worked as a partner at the law firm of Morgan Lewis and Bockius, senior vice president of the Bond Market Association (now the Securities Industry and Financial Markets Association), and managing director and deputy general counsel at Citigroup Global Markets.

Mr. Ramsay received his J.D. from the University of Michigan in 1984 and graduated summa cum laude from the University of Texas at Austin in 1981, where he was elected to Phi Beta Kappa.

# # #

Washington, D.C., Dec. 17, 2012 — The Securities and Exchange Commission today charged a Connecticut-based investment adviser with falsely stating to clients that it was co-investing alongside them in two collateralized debt obligations (CDO).

The SEC’s investigation found that Aladdin Capital Management’s co-investment representation was a key feature and selling point for its Multiple Asset Securitized Tranche (MAST) advisory program involving CDOs and collateralized loan obligations (CLOs). For example, Aladdin Capital Management asked in one marketing piece, “Why is an investor better off just investing in Aladdin sponsored CLOs and CDOs?” It then emphasized that the “most powerful response I can give to your question is that Aladdin co-invests alongside MAST investors in every program. Putting meaningful ‘skin in the game’ as we do means our financial interests are aligned with those of our MAST investors.” Aladdin Capital Management in fact made no such investments in either CDO, and its affiliated broker-dealer Aladdin Capital collected placement fees from the CDO underwriters.

Aladdin Capital Management and Aladdin Capital agreed to pay more than $1.6 million combined to settle the SEC’s charges. One of the firms’ former executives Joseph Schlim agreed to pay a $50,000 penalty to settle charges against him for his role in the misrepresentations.

“If you sell an investment with the pitch that you are co-investing and have ‘skin in the game,’ then you better actually have ‘skin in the game,’” said Robert Khuzami, Director of the SEC’s Enforcement Division. “Such a representation by an investment adviser or broker-dealer is an important consideration to investors in complex products.”

Kenneth Lench, Chief of the SEC Enforcement Division’s Structured and New Products Unit, added, “Aladdin marketed these CDOs via the co-investment representation, but then did not take steps to ensure that the representation was accurate. This action demonstrates our continuing commitment to holding market participants, including individuals, responsible for their misconduct leading up to the financial crisis.”

According to the SEC’s orders instituting settled administrative proceedings, Aladdin Capital Management’s clients committed to investing in upcoming CDO deals that would be managed by the firm. Aladdin Capital Management inaccurately informed a municipal retirement plan, a pension plan, and an individual entrepreneur that it would co-invest alongside them. After those three clients invested in the two CDOs, Aladdin Management erroneously continued to inform clients from 2007 to 2010 that the firm had skin in the game.

According to the SEC’s order against Schlim, he was significantly involved in the MAST program on a day-to-day basis. He made sales calls to potential clients and negotiated with CDO and CLO underwriters about the amount of equity in those securities that Aladdin Capital could place with customers or purchase for itself. Schlim also negotiated the placement fees to be received by Aladdin Capital for securing MAST investments in equity tranches of each CDO or CLO.

The SEC found that Schlim knew that Aladdin used the co-investment representation as a significant marketing feature in its pitches to clients, but he failed to take any action to ensure that such representations were accurate when they were made. As the CFO of Aladdin, Schlim was responsible for reserving funds for Aladdin to co-invest alongside its MAST clients, yet he failed to ensure that funds were reserved or allocated for any co-investments alongside clients in either CDO.

Aladdin Capital Management and Schlim agreed to cease-and-desist orders without admitting or denying the SEC’s allegations. The Aladdin entities agreed to jointly pay $900,000 in disgorgement, $268,831 in prejudgment interest, and a $450,000 penalty. Schlim agreed to pay a $50,000 penalty.

The SEC’s investigation was conducted by James Goldman, Neil Smith, Kathleen Shields, and Kenneth Leung in the SEC’s Boston Regional Office. Mr. Goldman is a member of the Structured and New Products Unit. Mr. Leung participated in a related SEC examination of Aladdin Capital Management.

# # #

Washington, D.C., Dec. 17, 2012 — The Securities and Exchange Commission today charged Germany-based insurance and asset management company Allianz SE with violating the books and records and internal controls provisions of the Foreign Corrupt Practices Act (FCPA) for improper payments to government officials in Indonesia during a seven-year period.

The SEC’s investigation uncovered 295 insurance contracts on large government projects that were obtained or retained by improper payments of $650,626 by Allianz’s subsidiary in Indonesia to employees of state-owned entities. Allianz made more than $5.3 million in profits as a result of the improper payments.

Allianz, which is headquartered in Munich, agreed to pay more than $12.3 million to settle the SEC’s charges.

“Allianz’s subsidiary created an 'off-the-books' account that served as a slush fund for bribe payments to foreign officials to win insurance contracts worth several million dollars,” said Kara Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit.

According to the SEC’s order instituting settled administrative proceedings against Allianz, the misconduct occurred from 2001 to 2008 while the company’s shares and bonds were registered with the SEC and traded on the New York Stock Exchange. Two complaints brought the misconduct to Allianz’s attention. The first complaint submitted in 2005 reported unsupported payments to agents, and a subsequent audit of accounting records at Allianz’s subsidiary in Indonesia uncovered that managers were using “special purpose accounts” to make illegal payments to government officials in order to secure business in Indonesia. The misconduct continued in spite of that audit.

According to the SEC’s order, the second complaint was made to Allianz’s external auditor in 2009. Allianz failed to properly account for certain payments in their books and records. The improper payments were disguised in invoices as an “overriding commission” for an agent that was not associated with the government insurance contract. In other instances, the improper payments were structured as an overpayment by the government insurance contract holder, who was later “reimbursed” for the overpayment. Excess funds were then paid to foreign officials who were responsible for procuring the government insurance contracts. Allianz lacked sufficient internal controls to detect and prevent the wrongful payments and improper accounting.

The SEC’s order found that Allianz violated the books and records and internal controls provisions of the FCPA, specifically Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. Without admitting or denying the findings, Allianz agreed to cease and desist from further violations and pay disgorgement of $5,315,649, prejudgment interest of $1,765,125, and a penalty of $5,315,649 for a total of $12,396,423.

The SEC’s investigation was conducted by Irene Gutierrez, Jennifer Baskin and Tracy L. Price of the FCPA Unit.

# # #

Washington, D.C., Dec. 13, 2012 — The Securities and Exchange Commission today announced that Danforth Townley has been appointed an Attorney Fellow in its Division of Investment Management, which protects investors and promotes capital formation through oversight and regulation of the nation’s multi-trillion dollar investment management industry.

Mr. Townley will provide counsel on rulemaking issues and other policy initiatives beginning in January 2013.

“We are pleased to announce that Dan is joining the Division of Investment Management. He has longtime experience in private practice in advising hedge funds, private equity funds, and investment companies that will be helpful to the Division,” said Norm Champ, Director of the SEC’s Division of Investment Management.

Mr. Townley said, “I’m extremely excited to have this opportunity to serve at the SEC during this busy period of regulatory change for the financial industry. I look forward to working with Norm Champ and the staff of the Division of Investment Management on important rulemaking activities and other regulatory initiatives.”

Mr. Townley comes to the SEC from law firm Davis Polk & Wardwell, where he is a partner in the firm’s Corporate Department and practices in its Investment Management Group in New York. He has advised clients on investment funds and related corporate finance transactions including the structuring and offering of hedge funds, private equity funds, and other investment vehicles. Mr. Townley has advised financial institutions, fund sponsors, corporations, employees’ securities companies, and other entities about regulatory compliance and exemptions pertaining to the Investment Company Act of 1940 and the Investment Advisers Act of 1940. He has served as Chair of the Practising Law Institute’s Annual Conference on Hedge Funds and as a regular panelist on investment fund topics. From 1985 to 1986, Mr. Townley clerked for the Honorable Robert W. Sweet, U.S. District Court for the Southern District of New York.

Mr. Townley has a B.A. from Yale College, magna cum laude, and a J.D. from Yale Law School, where he served as editor of The Yale Law Journal.

# # #

Washington, D.C., Dec. 12, 2012 — The Securities and Exchange Commission today charged the manager of two New York-based hedge funds with conducting a pair of trading schemes involving Chinese bank stocks and making $16.7 million in illicit profits. He and his firms have agreed to pay $44 million to settle the SEC’s charges.

The SEC alleges that Sung Kook “Bill” Hwang, the founder and portfolio manager of Tiger Asia Management and Tiger Asia Partners, committed insider trading by short selling three Chinese bank stocks based on confidential information they received in private placement offerings. Hwang and his advisory firms then covered the short positions with private placement shares purchased at a significant discount to the stocks’ market price. They separately attempted to manipulate the prices of publicly traded Chinese bank stocks in which Hwang’s hedge funds had substantial short positions by placing losing trades in an attempt to lower the price of the stocks and increase the value of the short positions. This enabled Hwang and Tiger Asia Management to illicitly collect higher management fees from investors.

In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Tiger Asia Management.

“Hwang today learned the painful lesson that illegal offshore trading is not off-limits from U.S. law enforcement, and tomorrow’s would-be securities law violators would be well-advised to heed this warning,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

Sanjay Wadhwa, Associate Director of the SEC’s New York Regional Office and Deputy Chief of the Enforcement Division’s Market Abuse Unit, added, “Hwang betrayed his duty of confidentiality by trading ahead of the private placements, and betrayed his fiduciary obligations when he defrauded his investors by collecting fees earned from his attempted manipulation scheme.”

The SEC also charged Raymond Y.H. Park for his roles in both schemes as the head trader of the two hedge funds involved – Tiger Asia Fund and Tiger Asia Overseas Fund. Park, who lives in Riverdale, N.Y., also agreed to settle the SEC’s charges. Hwang lives in Tenafly, N.J.

According to the SEC’s complaint filed in federal court in Newark, N.J., from December 2008 to January 2009, Hwang and his advisory firms participated in two private placements for Bank of China stock and one private placement for China Construction Bank stock. Before disclosing material nonpublic information about the offerings, the placement agents required wall-crossing agreements from Park and the firms to keep the information confidential and refrain from trading until the transaction took place. Despite agreeing to those terms, Hwang ordered Park to make short sales in each stock in the days prior to the private placement. Hwang and his firms illegally profited by $16.2 million by using the discounted private placement shares they received to cover the short sales they had entered into based on inside information about the placements.

The SEC further alleges that on at least four occasions from November 2008 to February 2009, Hwang and his firms, with Park’s assistance, attempted to manipulate the month-end closing prices of Chinese bank stocks publicly listed on the Hong Kong Stock Exchange. These stocks were among the largest short position holdings in the hedge funds’ portfolios. The more assets the hedge funds had under management, the greater the management fee that Tiger Asia Management was entitled to collect. So Hwang directed Park to place losing trades in order to depress the stock prices, which would inflate the calculation of the management fees. Hwang and Tiger Asia Management made approximately $496,000 in fraudulent management fees through this scheme.

The SEC’s complaint charges Hwang, his firms, and Park with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as Section 17(a) of the Securities Act of 1933. Hwang and his firms also are charged with violating Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8, and Park is charged with aiding and abetting those violations.

The settlements, which are subject to court approval, require Hwang, Tiger Asia Management, and Tiger Asia Partners to collectively pay $19,048,787 in disgorgement and prejudgment interest. Each of them has agreed to pay a penalty of $8,294,348 for a total of 24,883,044. Park agreed to pay $39,819 in disgorgement and prejudgment interest, and a penalty of $34,897. With the exception of Tiger Asia Management, the defendants neither admit nor deny the charges.

The SEC’s investigation was conducted by Thomas P. Smith, Jr., Sandeep Satwalekar, and Amelia A. Cottrell of the SEC’s Market Abuse Unit in New York, and Frank Milewski of the New York Regional Office. The SEC appreciates the assistance of the U.S. Attorney’s Office for the District of New Jersey, the Federal Bureau of Investigation, the Japanese Securities and Exchange Surveillance Commission, and the Hong Kong Securities and Futures Commission.

* * *

The SEC has filed more than 175 insider trading actions since October 2009 charging more than 400 individuals and entities. The defendants in these actions are alleged to have made more than $905 million in illicit gains comprised of profits and avoidance of losses.

# # #

Washington, D.C., Dec. 12, 2012 — The Securities and Exchange Commission today announced that SEC Chief of Staff Didem A. Nisanci will leave the agency at the end of this week.

SEC Chairman Mary Schapiro named Ms. Nisanci as Chief of Staff in March 2009. In that position, Ms. Nisanci has been a senior advisor to the Chairman on policy, management, and regulatory issues. She played an integral role in the SEC’s efforts in the passage of the Dodd-Frank Act. She also has served as an SEC deputy to the Financial Services Oversight Council.

“Didem has been a trusted adviser who has always offered solid judgment and wise counsel on critical policy matters,” said SEC Chairman Schapiro. “Didem’s leadership has helped us to reform and improve so much of the way the agency operates. Investors everywhere are better off today because of her public service and commitment to enhancing the integrity of the nation’s securities markets.”

Ms. Nisanci said, "It’s been a great honor to serve at the SEC during such a pivotal and consequential period. I have been fortunate to work with so many talented and dedicated professionals both at the SEC and across the financial regulatory community to advance the Commission’s mission and work on fundamental issues relating to enhancing the integrity, resiliency, and transparency of our financial markets.”

Before coming to the SEC, Ms. Nisanci served as Staff Director for the U.S. Senate Banking Subcommittee on Securities, Insurance, and Investment, chaired by Sen. Jack Reed. During her tenure, the subcommittee held hearings examining the financial crisis, over-the-counter derivatives, credit rating agencies, risk management, consolidated supervised entities, and accounting. Ms. Nisanci also served as a lead staff negotiator for key provisions of the Emergency Economic Stabilization Act of 2008 and the Housing and Economic Recovery Act of 2008.

Ms. Nisanci earned a B.A. in Economics and Government from Smith College in 1995.

# # #

Washington, D.C., Dec. 10, 2012 — The Securities and Exchange Commission today charged a New Jersey-based consultant with violating securities laws and defrauding some investors while helping Chinese companies gain access to the U.S. capital markets.

The SEC alleges that Huakang “David” Zhou and his consulting firm Warner Technology and Investment Corporation located more than 20 private companies in China to bring public in the U.S. through reverse mergers, and then committed various securities laws violations in the course of advising those companies and later assuming operational roles at some of them.  After earning millions of dollars in consulting fees, Zhou and his firm have left several failed Chinese companies in their wake in the U.S. markets including China Yingxia International, whose registration was revoked after the company collapsed amid fraud allegations.  The SEC has previously charged several individuals and firms with misconduct related to China Yingxia, including Zhou’s son.

The SEC alleges that the elder Zhou engaged in varied misconduct ranging from non-disclosure of certain holdings and transactions to outright fraud.  For instance, Zhou failed to disclose to investors in one company that he engaged in questionable wire transfers of their money to evade Chinese currency regulations, and he orchestrated an elaborate scheme to meet the requirements necessary to list a purported Chinese real estate developer on a national securities exchange.  Zhou also stole $271,500 in investment proceeds from a capital raise to make mortgage payments on a million-dollar condo where his son lives in New York City. 

“Zhou and his firm sought to take advantage of our financial markets by propping up some Chinese issuers with the sole purpose of enriching themselves at the expense of U.S. investors,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Warner Technology and Investment Corporation advertises itself on its website as the first U.S. consulting firm that successfully brought a Chinese private company public in the U.S. through a reverse merger with an OTCBB trading company.  Zhou’s misconduct occurred from at least 2007 to 2010.  After completing the reverse mergers, Zhou strongly influenced or even directed many of his clients’ newfound U.S. presence and obligations as public companies.  He opened and controlled U.S. bank accounts for many of his clients to pay for services rendered and receive any proceeds from fundraising done in the U.S.  This enabled Zhou to control how and when offering proceeds were wired to China, and gave him the ability to direct money to himself purportedly to collect fees or repay loans made to the companies.

The SEC alleges that while Zhou raised $2 million for client American Nano Silicon Technologies, he concealed from investors that their money would be put at risk due to the circuitous manner in which he purportedly sent investment proceeds to China.  Unknown to the investors, Zhou controlled a U.S. bank account for the issuer and sent hundreds of thousands of dollars by wire transfer to multiple individuals in China who had no apparent affiliation with American Nano.  The process called for the individuals to then wire the money to the company’s CEO, who would transfer the money to the company’s Chinese bank account.  Zhou failed to disclose to investors that he engaged in these questionable wire transfers to evade Chinese currency regulations.  Although investment proceeds were in part used for seemingly legitimate company expenses in the U.S. such as to pay accountants, the transfer agent, and an investment bank, Zhou used some of the money as his own.  In addition to the $271,500 of investor money that he siphoned away for mortgage payments, Zhou paid his wife a “refund” of $40,000 for undisclosed reasons and wrote a check for $5,824 to “cash.” 

The SEC alleges that Zhou engaged in manipulative trading as part of his scheme to list China HGS Real Estate on a national exchange, including matched orders to meet the $4 minimum bid required for listing.  Through gifts of stock and a purportedly private sale to a broker-dealer, Zhou schemed to artificially create a sufficient number of shareholders to meet a listing requirement to have more than 400 “round lot shareholders” with 100 shares or more.  The scheme succeeded, and Zhou’s client was approved for listing on the exchange.

According to the SEC’s complaint, Zhou engaged in unregistered sales of securities for several clients, including a $5 million offering to roughly 85 Chinese-Americans living in several U.S. states.  Zhou and his firm also improperly assisted with securities offerings for two clients while not registered as broker-dealers, and they aided and abetted violations by other unregistered brokers.

The SEC’s complaint against Zhou and Warner Technology and Investment Corporation alleges violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Sections 10(b), 13(d), 15(a), and 16(a) of the Securities Exchange Act of 1934, and Rules 10b-5, 13d-1, 13d-2, and 16a-3.  The SEC’s complaint further charges Zhou for control person liability and aiding and abetting violations of Section 10(b) and 15(a) of the Exchange Act, and Rule 10b-5(b). 

The SEC’s investigation was conducted by Celeste A. Chase, Eduardo A. Santiago-Acevedo, and Osman E. Nawaz in the New York Regional Office with assistance from Frank Milewski.  The SEC’s litigation will be led by Paul Gizzi and Mr. Nawaz.  The SEC appreciates the assistance of the Financial Industry Regulatory Authority (FINRA) in this matter.

# # #

Washington, D.C., Dec. 11, 2012 — The Securities and Exchange Commission today charged a New York-based fund manager with conducting a pair of illegal trading schemes to financially benefit his investment fund Octagon Capital Partners LP.

The SEC alleges that Steven B. Hart made $831,071 during a four-year period through illicit trading while he also worked as a portfolio manager and employee at a New Jersey-based firm that served as an adviser for several affiliated investment funds.  In one scheme, Hart illegally matched 31 pre-market trades to benefit his own fund at the expense of one of his employer’s funds.  In the other scheme, Hart conducted insider trading in the securities of 19 issuers based on nonpublic information he learned in advance of their offering announcements.  Furthermore, Hart signed two securities purchase agreements in which he falsely represented that he had not traded the issuer's securities prior to the public announcement of the offerings in which he had been confidentially solicited to invest.

Hart agreed to pay more than $1.3 million to settle the SEC’s charges.

“By engaging in more than 50 instances of illegal activity in his securities trading, Hart showed a complete disregard for the securities laws and our markets,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  “Hart also misused his position of authority as a portfolio manager of his employer’s fund in order to make handsome profits for his own fund.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Hart conducted his schemes from 2007 to 2011.  He caused Octagon to purchase stock in small, thinly traded issuers at the going market price so that he could sell the same stock the following day to his employer’s fund at a price substantially above the prevailing market price.  Each of the sales from Octagon to the employer’s fund occurred in pre-market trading, thus Hart was able to ensure that the trades matched.  Later that same day or within a few days of the matched trades, Hart directed the employer’s fund to sell the recently-acquired stock on the open market at a loss.  Hart generated ill-gotten gains of $586,338 for Octagon in this scheme.

According to the SEC’s complaint, Hart was confidentially solicited by 19 issuers to invest in securities offerings where he expressly agreed to go “over-the-wall” and keep confidential the information he received and not trade on it.  Nevertheless, Hart traded for Octagon on the basis of material nonpublic information about the offerings in breach of his duty of trust or confidence.  Hart’s illegal trades involved PIPE offerings, registered direct offerings, and confidentially marketed public offerings.  Octagon derived ill-gotten gains of $244,733 as a result of Hart’s misconduct.

The SEC alleges that in order to induce two issuers to sell securities to his fund, Hart signed securities purchase agreements falsely representing that Octagon had not traded the issuers’ securities after he had been solicited.  Despite going “over-the-wall” during the solicitations conducted by the two issuers, Hart directed short sales of these issuers’ securities and obtained insider trading profits.  He subsequently signed the securities purchase agreements misrepresenting that he hadn’t traded in their securities in the days leading up to the public announcements about the offerings. 

The SEC’s complaint against Hart alleges violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.  Hart agreed to pay $831,071 in disgorgement, $103,424 in prejudgment interest, and a $394,733 penalty to settle the SEC’s charges without admitting or denying the allegations.  Hart also consented to the entry of a judgment enjoining him from future violations of the respective provisions of the Securities Act, Exchange Act, and Advisers Act.  The settlement is subject to court approval.

The SEC’s investigation was conducted in the New York Regional Office by Celeste A. Chase, Eduardo A. Santiago-Acevedo, and Osman E. Nawaz with assistance from Frank J. Milewski.  The SEC acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA) in this matter.

# # #

Washington, D.C., Dec. 11, 2012 — The Securities and Exchange Commission today announced that Jennifer B. McHugh has been named Senior Advisor to the Director in its Division of Investment Management.

Ms. McHugh will advise the Director of Investment Management on issues related to mutual funds and investment advisers. She starts her new position on December 17.

“We are excited to have Jennifer join the Division of Investment Management as she brings extensive experience on investment management issues,” said Norm Champ, Director of the SEC’s Division of Investment Management. “Jennifer has a wealth of experience from her last four years in the Chairman’s Office that will be extremely helpful to the Division.”

Ms. McHugh said, “I look forward to working with Norm Champ and the dedicated and talented staff of the Division of Investment Management. The Division’s work developing regulatory policy for mutual funds and investment advisers is particularly meaningful and rewarding because it has a direct impact on everyday investors.”

Ms. McHugh served as Acting Director of the Division of Investment Management from the end of 2010 to early 2011, and has been a Senior Advisor to SEC Chairman Mary L. Schapiro since 2009. She is a 13-year SEC veteran who joined the agency in 1999 as an attorney in the Division of Investment Management, where she focused on mutual fund rulemaking. In 2000, she was named Special Counsel in the Division’s Office of Investment Adviser Regulation. From 2001 to 2009, Ms. McHugh served as Senior Advisor to the Director in the Division of Investment Management, advising two Directors and two Acting Directors on management and policy issues. Ms. McHugh received the SEC’s Distinguished Service Award in 2012, and is a three-time recipient of the Chairman’s Award for Excellence.

Ms. McHugh received her J.D., magna cum laude, from Catholic University where she was the Lead Articles Editor of the Catholic University Law Review. She received her B.A., cum laude, from the University of Notre Dame. Prior to joining the SEC staff, Ms. McHugh was an associate in the Investment Management Practice Group of Dechert LLP.

The SEC’s Division of Investment Management protects investors and promotes capital formation through oversight and regulation of the nation’s multi-trillion dollar investment management industry.

# # #

Washington, D.C., Dec. 10, 2012 — The Securities and Exchange Commission today announced charges against eight former members of the boards of directors overseeing five Memphis, Tenn.-based mutual funds for violating their asset pricing responsibilities under the federal securities laws.

The funds, which were invested in some securities backed by subprime mortgages, fraudulently overstated the value of their securities as the housing market was on the brink of financial crisis in 2007. The SEC and other regulators previously charged the funds’ managers with fraud, and the firms later agreed to pay $200 million to settle the charges.

Under the securities laws, fund directors are responsible for determining the fair value of fund securities for which market quotations are not readily available. According to the SEC’s order instituting administrative proceedings against the eight directors, they delegated their fair valuation responsibility to a valuation committee without providing meaningful substantive guidance on how fair valuation determinations should be made. The fund directors then made no meaningful effort to learn how fair values were being determined. They received only limited information about the factors involved with the funds’ fair value determinations, and obtained almost no information explaining why particular fair values were assigned to portfolio securities.

“Investors rely on board members to establish an accurate process for valuing their mutual fund investments. Otherwise, they are left in the dark about the value of their investments and handicapped in their ability to make informed decisions,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Had the board not abdicated its responsibilities, investors may have stood a better chance of preserving their hard-earned nest assets.”

The SEC Enforcement Division’s Asset Management Unit continues to prioritize asset valuation investigations, with recent enforcement actions including charges against three top executives at New York-based KCAP Financial and two executives at former $1 billion hedge fund advisory firm Yorkville Advisors LLC.

The eight fund directors named in today’s SEC enforcement action are:

• J. Kenneth Alderman of Birmingham, Ala.
• Jack R. Blair of Germantown, Tenn.
• Albert C. Johnson of Hoover, Ala.
• James Stillman R. McFadden of Germantown
• Allen B. Morgan Jr. of Memphis
• W. Randall Pittman of Birmingham
• Mary S. Stone of Birmingham
• Archie W. Willis III of Memphis

According to the SEC’s order, the eight directors’ failure to fulfill their fair value-related obligations was particularly inexcusable given that fair-valued securities made up the majority of the funds’ net asset values – in most cases more than 60 percent. The mutual funds involved were the RMK High Income Fund, RMK Multi-Sector High Income Fund, RMK Strategic Income Fund, RMK Advantage Income Fund, and Morgan Keegan Select Fund.

The SEC Enforcement Division alleges that the directors caused the funds to violate the federal securities laws by failing to adopt and implement meaningful fair valuation methodologies and procedures and failing to maintain internal control over financial reporting. For example, the funds’ valuation procedures did not include any mechanism for identifying and reviewing fair-valued securities whose prices remained unchanged for weeks, months, and even entire quarters.

“While it is understood that fund directors typically assign others the daily task of calculating the fair value of each security in a fund’s portfolio, at a minimum they must determine the method, understand the process, and continuously evaluate the appropriateness of the method used,” said William Hicks, Associate Regional Director of the SEC’s Atlanta Regional Office.

According to the SEC’s order, the funds’ valuation procedures required that the directors be given explanatory notes for the fair values assigned to securities. However, no such notes were ever provided to the directors, and they never followed up to request such notes or any other specific information about the basis for the assigned fair values. In fact, Morgan Keegan’s Fund Accounting unit, which assigned values to the securities, did not utilize reasonable procedures and often allowed the portfolio manager to arbitrarily set values. As a result, the net asset values of the funds were materially misstated in 2007 from at least March 31 to August 9. Consequently, the prices at which one open-end fund sold, redeemed, and repurchased its shares were inaccurate. Furthermore, other reports and at least one registration statement filed by the funds with the SEC contained net asset values that were materially misstated.

The SEC’s order alleges that the fund directors caused the funds’ violations of Rules 22c-1, 30a-3(a) and 38a-1 under the Investment Company Act of 1940.

The SEC’s investigation was conducted by members of the SEC’s Atlanta Regional Office and the Asset Management Unit.

# # #

Washington, D.C., Dec. 7, 2012 — The Securities and Exchange Commission today charged a prominent Miami-based entrepreneur with defrauding investors by grossly exaggerating the financial success of his company that purportedly produced housing materials to withstand fires and hurricanes. Claudio Osorio stole nearly half of the money raised from investors to pay the mortgage on his multi-million dollar mansion and other lavish highlife expenses.

The SEC alleges that Osorio, who is a former Ernst & Young Entrepreneur of the Year award winner, raised at least $16.8 million from investors by portraying InnoVida Holdings LLC as having millions of dollars more in cash and equity than it actually did. Osorio sometimes solicited investors one-on-one at political fundraising events. To add an air of legitimacy to his company, Osorio assembled a high-profile board of directors that included a former governor of Florida, a lobbyist, and a major real estate developer. Osorio falsely told a potential investor he had invested tens of millions of dollars of his own money as InnoVida's largest stakeholder, and he hyped a Middle Eastern sovereign wealth fund investment as a ruse to solicit additional funds from investors.

The SEC also charged InnoVida's chief financial officer Craig Toll, a certified public accountant living in Pembroke Pines, Fla., who helped Osorio create the false financial picture of InnoVida.

The SEC alleges that besides his Miami Beach mansion, Osorio illegally used investor money to pay for his Maserati, a Colorado mountain retreat home, and country club dues. He stole at least $8.1 million in investor funds.

"From his lap of luxury, Osorio concocted a compelling story about InnoVida by recruiting an impressive board of directors and boasting a bogus financial condition to lure investors into funding his scheme of lies," said Eric I. Bustillo, Director of the SEC's Miami Regional Office.

In a parallel action, the U.S. Attorney's Office for the Southern District of Florida today announced criminal charges against Osorio and Toll.

According to the SEC's complaint filed in U.S. District Court for the Southern District of Florida, the scheme began in 2007 and lasted until 2010. InnoVida was purportedly in the business of manufacturing building panels used to construct houses and other structures resistant to fires and hurricanes. The company entered bankruptcy in 2011.

To induce funds from investors, Osorio and Toll allegedly produced false pro forma financial statements. A pro forma financial statement for March 31, 2009, stated that InnoVida had more than $35 million in cash and cash equivalents and more than $100 million of equity. A pro forma financial statement for Dec. 31, 2009, listed more than $39 million in cash and cash equivalents and $122 million of equity. In reality, the company's bank accounts held less than $185,000 on March 31, 2009, and less than $2 million on Dec. 31, 2009. Toll failed to review all of InnoVida's bank account statements when he drafted financial statements. Instead, he accepted Osorio's misrepresentations that InnoVida had these assets in an account to which Toll did not have access.

The SEC alleges that Osorio offered bogus share prices to prospective investors based on false valuations. He told one investor that InnoVida was valued at $250 million, and then a week later told a different investor that the company was worth $50 million. The latter investor purchased $100,000 of Osorio's stake in the company for five cents per share.

The SEC further alleges that Osorio lied to an investor when he said that he had personally invested tens of millions of dollars into InnoVida. He had in fact made no such investment. Osorio also enticed an investor to increase an investment in InnoVida by touting a supposed $500 million deal he was negotiating with a Middle Eastern sovereign wealth fund that would significantly benefit InnoVida investors. Osorio went so far as to create a document showing the investor how much he would make once the sovereign wealth deal closed and was funded. Based on Osorio's misrepresentations, the investor was able to raise approximately $700,000 and later borrowed $3 million from a close friend. However, no sovereign wealth buyout deal ever materialized, and InnoVida investors never benefited as promised.

The SEC's complaint seeks disgorgement of ill-gotten gains, financial penalties, and injunctive relief against InnoVida, Osorio, and Toll to enjoin them from future violations of the federal securities laws. The complaint also seeks an order barring Osorio and Toll from serving as an officer or director of a public company.

The SEC's investigation was conducted in the Miami Regional Office by Senior Investigations Counsel Gary M. Miller and Accountant Karaz S. Zaki under the supervision of Assistant Regional Director Elisha L. Frank. Amie Riggle Berlin will lead the SEC's litigation. The SEC acknowledges the assistance and cooperation of the U.S. Attorney's Office for the Southern District of Florida, and the Federal Bureau of Investigation's Miami Division.

# # #

Washington, D.C., Dec. 7, 2012 — The Securities and Exchange Commission today announced charges against a Florida-based securities lawyer for issuing fraudulent attorney opinion letters that resulted in more than 70 million shares of microcap stock becoming available for unrestricted trading by investors.

An attorney opinion letter is required from a licensed and duly authorized securities lawyer in order to facilitate the transfer of restricted microcap shares on the over-the-counter markets. In April 2010, the Pink Sheets (now OTC Markets Group) banned Guy M. Jean-Pierre of Pompano Beach, Fla., from issuing attorney opinion letters due to “repeated missing information and inconsistencies” about the issuers and his lack of due diligence in his past letters.

The SEC alleges that Jean-Pierre has since engaged in a scheme to continue writing and issuing attorney opinion letters in the name of his niece by applying her signature without her consent. Jean-Pierre (also known as Marcelo Dominguez de Guerra) sought to evade the ban by forming a new company called Complete Legal Solutions and misrepresenting that his niece was conducting the legal work that was allegedly performed.

“Securities lawyers are trusted gatekeepers in the issuance of stock, and it is particularly offensive when attorneys like Jean-Pierre blatantly break the rules and commit fraud,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “The SEC is committed to punishing offenders like Jean-Pierre as we continue to root out the enablers of microcap fraud in our markets.”

According to the SEC’s complaint filed late yesterday in U.S. District Court for the Southern District of New York, Jean-Pierre hatched a plan within two weeks of his ban to continue issuing attorney opinion letters through Complete Legal and his niece’s identity. Jean-Pierre’s niece, a licensed attorney herself, was looking for work at the time. Jean-Pierre told his niece about his work issuing attorney opinion letters and offered to pay her to assist him. He suggested they form Complete Legal and asked her to send him three copies of her signature and a copy of her driver’s license. Jean-Pierre’s niece complied with his requests with the understanding this information was needed to incorporate Complete Legal. Afterwards, Jean-Pierre never requested that his niece do any legal work at Complete Legal and she was not compensated for any such work.

Instead, the SEC alleges that Jean-Pierre used the new company and his niece’s identity to continue his prior practice of issuing attorney opinion letters. Each of these letters contained fraudulent statements and falsely represented his niece as the signatory. Jean-Pierre’s niece did not write any of the letters and did not make the representations concerning the issuers. Jean-Pierre fabricated attorney opinion letters on Complete Legal letterhead for at least 11 companies that traded publicly on the Pink Sheets. Certain letters resulted in Pink Sheet issuers being granted the improved status of having adequate current information in the public domain under Rule 144(c)(2) of the Securities Act of 1933. This status kept the issuers from being tagged on the Pink Sheets’ website with a red “STOP” sign near its ticker symbol with the moniker of “OTC Pink No Information” and a large warning that the company “may not be making material information publicly available.”

According to the SEC’s complaint, adequate current public information about an issuer must be available for certain selling security holders to comply with the Rule 144 safe harbor allowing companies to issue unregistered securities pursuant to Section 4(1) of the Securities Act. Jean-Pierre falsely issued letters bearing his niece’s signature to transfer agents opining that restrictive legends could be legally removed from either pre-existing stock certificates or newly issued stock certificates pursuant to Rules 144 or 504 of the Securities Act.

The SEC’s complaint alleges that Jean-Pierre violated Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest and financial penalties, a permanent injunction, and a bar from participating in the offering of any penny stock pursuant to Section 20(g) of the Securities Act.

The SEC’s investigation, which is continuing, has been conducted by Megan Genet and Steven G. Rawlings in the New York Regional Office. Todd Brody, Barry Kamar, and Ms. Genet are handling the SEC’s litigation.

# # #

Washington, D.C., Dec. 6, 2012 — The Securities and Exchange Commission announced the completion of its 18th Annual International Enforcement Institute, held from Nov. 5 to Nov. 9 at SEC headquarters in Washington, D.C., with participants from 60 different countries. In all, 161 officials from foreign stock exchanges and other regulatory and law enforcement agencies attended the weeklong training program.

SEC Chairman Mary L. Schapiro said, "The commitment of securities regulators around the globe to protecting their investors and markets from those that would cause them harm has never been stronger. Through this program, the SEC staff teaches and learns enforcement best practices. We stand alongside our foreign law enforcement partners, ready to protect our capital markets from fraudsters, manipulators, and schemers, wherever they may lurk."

SEC Enforcement Division Director Rob Khuzami and former Enforcement Directors Linda Chatman Thompson, William McLucas, and Gary G. Lynch, kicked off the event with a discussion of the experiences and challenges of their tenure. The Institute also featured presentations by dozens of SEC officials, two U.S. Attorney's Offices, and the Financial Industry Regulatory Authority, on topics such as insider trading and other market abuses, market intelligence and surveillance, investigative techniques, anti-money laundering initiatives, and optimal remedies for violations.

"In a world of global financial markets, where securities fraud crosses borders as easily as capital, cross-border cooperation in investigations and enforcement is essential," said Ethiopis Tafara, Director of the SEC's Office of International Affairs. "The professional and personal relationships formed at these Institutes provide a strong foundation for us to address shared challenges and continue to learn from and assist our counterparts in what is truly a common mission."

The Institute is part of the SEC's Technical Assistance Program, whose annual International Institute for Securities Market Development took place in April. For more information on the Technical Assistance Program, contact Z. Scott Birdwell or Erin McCartney in the SEC's Office of International Affairs at 202-551-6690, or by email at OIA@SEC.gov.

# # #

Washington, D.C., Dec. 5, 2012 — The Securities and Exchange Commission today charged an investment banker who was primarily based in Charlotte, N.C., and nine others involved in an insider trading ring that garnered more than $11 million in illicit profits trading on confidential information about impending mergers.

The SEC alleges that John W. Femenia misused his position at Wells Fargo Securities to obtain material, nonpublic information about four separate merger transactions involving firm clients. Upon learning inside information about an impending deal, Femenia’s first call to set the insider trading ring in motion was typically to his longtime friend Shawn C. Hegedus, who worked as a registered broker. Femenia and Hegedus illegally tipped other friends who in turn tipped more friends or family members in a ring that spread across five states.

The SEC has obtained a court order freezing the assets of the illegal traders.

“Here you have an investment banker who clearly knew better that inside information can’t form the basis of trading decisions,” said William P. Hicks, Associate Director for Enforcement in the SEC’s Atlanta Regional Office. “Instead he basically started a phone tree of nonpublic information to enrich friends and others.”

According to the SEC’s complaint filed in U.S. District Court for the Western District of North Carolina, Femenia was based in Wells Fargo’s Charlotte office when most of the misconduct occurred, but later moved and worked in New York where he currently resides. Femenia’s tippees included his friends Aaron M. Wens, who lives in Encinatas, Calif., and Matthew Musante, who lives in Miami. Musante tipped his father Anthony Musante, who lives in Melbourne, Fla. Hegedus tipped his girlfriend Danielle Laurenti and his business colleague Roger A. Williams, who lives in Georgetown, S.C. Williams tipped three of his friends: Frank M. Burgess, Jr. of Charlotte, James A. Hayes IV of Charlotte, and Kenneth M. Raby of Greer, S.C.

The SEC charged two companies with ties to Hegedus or Laurenti that were involved in the illegal trading: Coram Real Estate Holdings Inc. and GoldStar P.S. The SEC also charged two others as relief defendants for the purposes of recovering illicit profits that are now in their possession: Femenia’s girlfriend Kristine Lack and Anthony Musante’s wife Christine Musante.

According to the SEC’s complaint, the illegal trading occurred from July 2010 to July 2012 and involved the following transactions:

• The acquisition of ATC Technology Corporation by GENCO Distribution Systems (publicly announced July 19, 2010)
   
• The acquisition of Smurfit-Stone Container Corp. by Rock-Tenn Company (publicly announced Jan. 23, 2011)
   
• The acquisition of K-Sea Transportation Partners by Kirby Corporation (publicly announced March 13, 2011)
   
• The acquisition of The Shaw Group by Chicago Bridge & Iron Co. (publicly announced July 30, 2012)

According to the SEC’s complaint, Femenia’s tips enabled profitable trades in the stock and options of the companies being acquired in the deals, and at least one trader provided a portion of his profits to Femenia in exchange for the information. Some downstream tippees also kicked back a portion of their profits.

The SEC’s complaint alleges that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. At the SEC’s request, The Honorable Graham C. Mullen entered a temporary restraining order freezing the assets of the defendants and relief defendants. The court order also provides for expedited discovery and prohibits the defendants and relief defendants from destroying evidence.

The investigation was conducted in the SEC’s Atlanta Regional Office by Staff Attorney Monifa F. Wright under the supervision of Assistant Regional Director Matthew F. McNamara. Paul T. Kim and Pat Huddleston will lead the litigation.

The SEC appreciates the assistance of the U.S. Attorney’s Office for the Western District of North Carolina, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority (FINRA).

# # #

Washington, D.C., Dec. 5, 2012 — The Securities and Exchange Commission today announced that General Counsel Mark D. Cahn will leave the agency at the end of the year to return to the private sector.

Mr. Cahn has served as the SEC’s General Counsel since February 2011 and counseled the Commission on issues ranging from enforcement actions, rulemakings, other administrative proceedings, and appeals throughout the country and in the Supreme Court. Prior to becoming General Counsel, Mr. Cahn served as the SEC’s Deputy General Counsel for two years.

“Mark has always provided the Commission clear and thoughtful legal advice as we set out to better protect investors,” said SEC Chairman Mary L. Schapiro. “The Commission has benefited greatly from his careful guidance and his good judgment.”

“It has been a unique privilege to have worked at the Commission during such an extraordinary period of change in the financial and regulatory arena,” said Mr. Cahn. “I am particularly honored to have worked alongside Chairman Schapiro and the other Commissioners on so many important issues that affect investors every day, and I thank them for that opportunity.”

Mr. Cahn served as the SEC’s chief legal officer during a period of unprecedented enforcement and regulatory activity. He was deeply involved in developing the Commission’s rules to establish a Whistleblower Program. The General Counsel’s office also provided advice on every rulemaking release that came before the Commission, including rules proposed and adopted pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Mr. Cahn’s tenure as General Counsel and Deputy General Counsel coincided with a period of significant appellate activity. This included the successful defense of SEC enforcement actions in the Courts of Appeals and involvement as amicus in Supreme Court cases addressing a variety of issues, including mutual fund advisory fees (Jones v. Harris Associates), the statute of limitations in securities litigation (Merck & Co., Inc. v. Reynolds), and pleading and proof requirements in securities fraud actions (Matrixx Initiatives v. Siracusano and Erica P. John Fund v. Halliburton).

“The rewards of public service are many, but none as great as the opportunity to work with so many dedicated professionals,” Mr. Cahn added. “I want particularly to express my profound appreciation to the exceptional lawyers who served with me in the Office of the General Counsel. Every day I was the beneficiary of their extraordinary talents.”

Prior to joining the SEC in 2009, Mr. Cahn was a partner at the law firm of Wilmer Cutler Pickering Hale and Dorr LLP. Mr. Cahn began his legal career as law clerk to Judge Herbert J. Stern of the U.S. District Court for the District of New Jersey and to Judge John J. Gibbons, Chief Judge of the U.S. Court of Appeals for the Third Circuit. He graduated from Tufts University in 1983 and from Yale Law School in 1986.

# # #

Washington, D.C., Dec. 5, 2012 — The Securities and Exchange Commission today announced that Robert W. Cook, Director of the SEC’s Division of Trading and Markets, plans to leave the agency.

Since joining the SEC in January 2010, Mr. Cook has led the Division’s broad regulatory policy program that includes oversight of securities exchanges and markets, broker-dealers, clearing agencies, and the Financial Industry Regulatory Authority (FINRA). Mr. Cook has overseen the implementation of significant rulemaking and other responsibilities assigned to the Division under the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Jumpstart Our Business Startups Act.

“Robert provided extraordinary counsel and worked tirelessly as we put in place measures that have helped to bolster our markets,” said SEC Chairman Mary L. Schapiro. “With his deep experience across a range of issues, he has helped us lay the groundwork for an entirely new and comprehensive regulatory regime for derivatives.”

Mr. Cook said, “I am honored to have worked with my colleagues in the Division of Trading and Markets and others throughout the agency on so many different initiatives to improve our markets and protect investors. It has been a period of unprecedented productivity for the Division, and I am proud of the staff’s hard work and many accomplishments. I would like to thank Chairman Schapiro and the other Commissioners for the opportunity to serve them and the agency. It is an experience for which I will always be grateful.”

Mr. Cook, 47, oversaw several significant market structure initiatives including the adoption of enhanced risk controls for traders with access to the securities markets, large trader registration and reporting rules, and consolidated audit trail rules. He also directed the staff’s ongoing review of equity market structure and its analysis of the “Flash Crash” of May 6, 2010, as well as its work on various regulatory responses such as single-stock circuit breakers, more transparent clearly erroneous trade break rules, updated market-wide circuit breakers, and the limit-up/limit-down volatility moderation mechanism.

Mr. Cook also supervised more than 30 other major rulemaking initiatives and studies authorized or mandated by Dodd-Frank or the JOBS Act, including the implementation of a new regulatory regime for security-based swaps under Title VII of the Dodd-Frank Act. In addition, Mr. Cook oversaw various projects related to the Chairman’s work on the Financial Stability Oversight Council.

In order to support the increasing amount and complexity of the Division’s responsibilities, Mr. Cook also helped to improve the Division’s organization and operations. As part of this effort, he oversaw a significant increase in the Division’s staff to approximately 250 attorneys, financial economists and analysts, accountants, and others. The Division also implemented enhanced procedures for the review of the more than 2,000 proposed rule changes and other filings received annually from self-regulatory organizations.

Mr. Cook will remain with the Commission for a transitional period in order to help ensure continuity in the Division’s functions.

Prior to arriving at the SEC, Mr. Cook was a partner at the law firm of Cleary Gottlieb Steen & Hamilton LLP. He earned a J.D. from Harvard Law School, an M.Sc. from the London School of Economics, and an A.B. from Harvard College.

# # #

Washington, D.C., Dec. 4, 2012 — The Securities and Exchange Commission today announced that Meredith B. Cross, Director of the Division of Corporation Finance, will leave the SEC at the end of the year to return to the private sector.

Ms. Cross has served as the Division’s Director since June 2009. She joined Chairman Mary Schapiro’s senior leadership team in the wake of the financial crisis and played a key role in the Chairman’s initiatives to rebuild the agency’s credibility, improve overall operations at the SEC, and build a more resilient, integrated program designed to foresee and reduce the likelihood of future crises in the securities markets.

As Director, Ms. Cross led a broad array of initiatives designed to enhance investor protection and restore investor confidence in the securities markets, address gaps in the regulatory landscape highlighted by the financial crisis, enhance the impact of the Division’s review of prospectuses, annual reports and other company filings, foster capital formation for smaller business, and develop additional expertise to better position the Division for the future. Among many major projects, Ms. Cross led the Division’s ongoing efforts to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Jumpstart Our Business Startups Act.

“Meredith has been an exceptional division director and a trusted adviser during this critical time at the Commission,” said Chairman Schapiro. “Because of the efforts of Meredith and her staff, investors today get better, more meaningful information about the companies they invest in. She understands that the SEC’s work matters for millions of Americans and she helped to improve the way the agency does its job.”

Ms. Cross said, “It has been an honor and a privilege to work with Chairman Schapiro, Chairman-designate Walter and the other members of the Commission, and the remarkably talented and committed staff in the Division of Corporation Finance and throughout the agency during this time of historic changes in our markets and the regulatory landscape. I am so proud of all we have accomplished together. With Chairman Schapiro’s support, we have been able to demonstrate time and time again that the Division’s disclosure review program makes a real difference in improving the quality of information that is available to investors. The Division’s rule-writing staff has worked tirelessly to produce top quality recommendations to implement the many legislative mandates and other rules that are critical to protecting investors and improving access to capital for issuers. And the many other members of the Division staff have skillfully provided the interpretations, training, administrative, technology, and other support that has been critical for the Division to accomplish so much. ”

During Ms. Cross’s tenure, the Division’s staff reviewed some of the most high-profile IPOs in history, significantly improving investors’ access to the information they need while allowing companies timely access to the capital markets. The Division established a program to perform continuous reviews of the largest financial services companies and recalibrated the review program to enhance effectiveness and efficiency of reviews of smaller companies.

Under Ms. Cross, the Division established new offices specifically focusing on large financial institutions, asset-backed securities and other structured products, and capital markets trends, which enable the Division to better identify and address issues that could significantly impact investors, issuers and markets in the future. Most recently, the Division created a new Office of Disclosure Standards to assess the outcomes of filing reviews and assist the Division in enhancing the review program in the future.

Ms. Cross and the Division staff also have worked closely with the SEC’s Advisory Committee on Small and Emerging Companies as it has provided advice to the Commission on matters relating to small company capital raising and regulatory requirements.

Ms. Cross testified before Congress on numerous occasions on a range of issues, including corporate governance, capital formation, risk retention in asset-backed securities offerings, executive compensation oversight, and agency management and budget.

Under Ms. Cross’s leadership, the Division recommended close to 60 rulemaking releases to the Commission for action, including:

• Adopting rules addressing say-on-pay votes, compensation committees and compensation advisers, proxy disclosure enhancements, and rules related to the process for shareholder nominations to corporate boards of directors and shareholder proposals related to that process. In addition, a broad review of the proxy process at U.S. public companies initiated through the publication of a concept release is ongoing.
   
• Adopting rules to address problems highlighted in the financial crisis related to asset-backed securities, including rules required by the Dodd-Frank Act regarding representations and warranties, due diligence and ongoing reporting by ABS issuers. Pending proposals build on the significant reforms adopted as Regulation AB in 2004 and include major changes to the offering process for asset-backed securities, required risk retention, and enhanced disclosures in offerings and on an ongoing basis, to better protect investors in the securitization market.
   
• Adopting a series of other rules required by the Dodd-Frank Act, such as specialized disclosure requirements with regard to conflict minerals, mine safety, and resource extraction, among others.
   
• Implementing rules and interpretations to address Securities Act and Exchange Act issues raised by the new regulatory regime for derivatives mandated by Title VII of the Dodd-Frank Act.

Following enactment of the JOBS Act in April 2012, Ms. Cross guided the Division’s efforts to quickly provide pragmatic guidance to issuers and their advisers about the Act. The Division immediately implemented procedures to allow for the confidential submission of registration statements by “emerging growth companies,” as contemplated by the JOBS Act, and promptly posted a series of “frequently asked questions” on matters related to the law’s IPO “on-ramp” provisions and changes to the requirements for Exchange Act registration and deregistration. The Division continues to work on rulemakings required by the JOBS Act.

The Division of Corporation Finance oversees the disclosures made to investors by more than 9,000 public issuers including registration statements for newly-offered securities, materials distributed in connection with business combination transactions, annual and quarterly filings, and proxy materials sent to shareholders for annual meetings. The Division provides interpretive assistance to companies and investors with respect to their obligations under the federal securities laws and develops rulemaking recommendations for the Commission.

Ms. Cross previously was a partner at Wilmer Cutler Pickering Hale and Dorr LLP in Washington D.C. from 1998 to 2009, advising clients on corporate and securities matters. She was involved with the full range of issues faced by public and private companies in capital raising and financial reporting. Ms. Cross worked in the SEC’s Division of Corporation Finance from 1990 to 1998, serving in a variety of capacities including Deputy Chief Counsel, Chief Counsel, Associate Director, and Deputy Director. Among other prior positions, Ms. Cross worked in the securities department of King & Spalding in Atlanta and served as a law clerk to Judge Albert Henderson of the U.S. Court of Appeals for the Eleventh Circuit in 1982 and 1983. She earned her undergraduate degree, cum laude, from Duke University in 1979, and her law degree in 1982 from Vanderbilt University Law School, where she was a member of the Vanderbilt Law Review and Order of the Coif.

# # #

Washington, D.C., Dec. 3, 2012 — The Securities and Exchange Commission's Office of International Affairs today released the following joint statement of leaders of regulatory authorities on the regulation of OTC derivatives markets:

Leaders of authorities with responsibility for the regulation of the over-the-counter (OTC) derivatives markets in Australia, Brazil, the European Union, Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland and the United States,¹ met on November 28, 2012 to discuss reform of the OTC derivatives market as agreed by the leaders at the G-20 Pittsburgh Summit in September 2009.

We recognize that the OTC derivatives market is a global market and firmly support the adoption and enforcement of robust and consistent standards in and across jurisdictions. This will help further the G-20 regulatory reform agenda for OTC derivatives markets to mitigate risk, improve transparency and protect against market abuse, and to prevent regulatory gaps, reduce the potential for arbitrage opportunities, and foster a level playing field for market participants, intermediaries and infrastructures. We further recognize the need to reduce regulatory uncertainty and provide market participants, intermediaries and infrastructures with sufficient clarity on laws and regulations by avoiding, to the extent possible, the application of conflicting rules to the same entities and transactions. We also acknowledge the need to take into account, among other factors, minimizing the application of inconsistent and duplicative rules.

It is clear that coordination among jurisdictions regarding the regulation of cross-border activities should facilitate the implementation of the objectives of the G-20 regulatory reform agenda for the OTC derivatives market. However, complete harmonization - perfect alignment of rules across jurisdictions - is difficult as it would need to overcome jurisdictions' differences in law, policy, markets and implementation timing, as well as to take into account the unique nature of jurisdictions' legislative and regulatory processes.

We recognize that national authorities have ultimate responsibility and authority to protect against all sources of risk to their markets, and that statutory and regulatory requirements of each jurisdiction are core components of each respective market. Legal systems and market conditions differ among jurisdictions and due account should be taken of such differences in determining the cross-border application of laws and regulations.

We also recognize that conflicting or inconsistent cross-border application of rules to market participants, intermediaries, infrastructures and products may inhibit the execution or clearing of certain cross-border transactions or impose additional compliance burdens. We further recognize that regulatory gaps may present risks to financial markets and provide the potential for regulatory arbitrage.

During our series of discussions, we have identified various potential conflicts, inconsistencies, and duplicative requirements within our respective contemplated rules and we will continue to discuss measures to ameliorate the challenges they raise. In this connection, it is therefore important to (i) develop concrete and practical solutions with respect to any conflicting application of rules, (ii) identify inconsistent or duplicative requirements and attempt to reduce the regulatory burdens associated with such requirements, and (iii) identify gaps and reduce the potential for regulatory arbitrage.

In light of the above, we have reached the following understandings and identified the following areas for further exploration.

1. Understanding on Clearing Determinations

In a manner consistent with our respective legal regimes and the achievement of our policy objectives, we agree to consult with each other prior to making any final determinations regarding which derivatives products will be subject to a mandatory clearing requirement. We also commit that once one of the authorities decides that a certain product or class of products should be subject to a clearing requirement, then each of us will consider whether the same product should be subject to the same requirement in our jurisdictions, having regard to the characteristics of our domestic markets and in accordance with the applicable determination processes in our respective legal regimes.

We agree to continue to work together to define the process pursuant to which our respective authorities will consult in making mandatory clearing determinations.

2. Understanding on Sharing of Information and Supervisory and Enforcement Cooperation

We recognize that entering into, and abiding by, supervisory and enforcement cooperation arrangements should facilitate effective coordination in implementing recognition, substituted compliance, and registration categories and exemptions approaches.

We agree to attempt to ensure that the relevant supervisory authorities:

1. enter into supervisory cooperation arrangements with the relevant supervisory authorities (using the model supervisory cooperation arrangement adopted by the International Organization of Securities Commissions (IOSCO) as a guide) to enable effective supervision and oversight of cross-border market participants, intermediaries and infrastructures and to ensure compliance by cross-border market participants, intermediaries and infrastructures with our respective statutory and regulatory requirements; and
    
2. enter into bilateral enforcement cooperation arrangements based on the IOSCO Multilateral Memorandum of Understanding (MMOU) or enter into the IOSCO MMOU.

We will make every effort to provide to each other the assistance necessary to satisfy our counterpart's statutory and regulatory requirements under the terms and conditions of these supervisory and enforcement cooperation arrangements.

We also recognize such arrangements should not preclude market participants, intermediaries and infrastructures from meeting their obligation to provide relevant information under that authority's recognition or registration (including substituted compliance, registration categories or exemptions) framework.

We agree that authorities should have appropriate and effective access to such data as required to perform properly their mandates. Consistent with our domestic law and the relevant international regulatory recommendations, standards and principles, we will work to ensure that other authorities have appropriate and effective access to data held in trade repositories consistent with their mandates.

3. Understanding on Timing

Keeping in mind the G-20 commitments to implement key OTC reforms in our respective jurisdictions with respect to clearing, reporting, trading and capital by end-2012, we recognize that differences in implementation dates may create gaps in regulations and uncertainty in the application of certain cross-border regulatory requirements, and may lead to risks to financial markets that are unaddressed, to regulatory arbitrage, and to an uneven playing field for market participants, intermediaries and infrastructures. Accordingly, we renew our efforts to implement quickly OTC derivatives reforms and in a manner consistent with an orderly implementation process in our respective jurisdictions.

Wherever possible consistent with applicable laws and regulations, the scope of market participants to whom cross border regulatory requirements apply should be clear. The absence of rules and regulations in certain jurisdictions may limit the assessments of such jurisdictions for purposes of giving effect to regimes based on recognition and substituted compliance. We will consider providing appropriate transitional implementation periods for entities in jurisdictions that are implementing comparable regulations, supervision, and comprehensive oversight.

In order to facilitate an orderly transition with respect to new OTC derivatives regulatory requirements when promulgating regulations with cross-border applicability, we agree to a reasonable, limited transition period to facilitate the implementation of such cross-border regulatory requirements in appropriate circumstances and in consultation with other jurisdictions. Consistent with the G-20 commitments, we commit to work with our legislative bodies to finalize expeditiously relevant legislation and to promulgate promptly requirements in a form flexible enough to respond to cross-border consistency and other issues that may arise, consistent with our respective legal requirements and our core policy objectives.

4. Areas of Exploration - Scope of Regulation and Recognition or Substituted Compliance for Cross Border Compliance

We discussed different possible approaches to regulating persons, transactions and infrastructures with respect to cross-border activity when more than one set of rules applies. We discussed the differences in scope of our rules and the application of requirements to foreign participants, intermediaries and infrastructures. We also noted the need to prevent the application of conflicting rules and the desire to minimize, where appropriate, the application of inconsistent and duplicative rules. We agree that one or more of the following or different approaches should be considered, consistent with our respective statutory and other legal requirements:

1. Recognition - An authority could decide that market participants, intermediaries and infrastructures have substantially met some or all of its regulatory requirements if it determines that such entities are already subject to the regulation and oversight of another authority, which the first authority has recognized to be comparable or equivalent.
    
2. Registration and Substituted Compliance - An authority requiring all relevant market participants, intermediaries and infrastructures to register with it, could as part of the registration process, allow in certain circumstances for compliance with foreign regulations to substitute for compliance with otherwise applicable requirements. In permitting the use of substituted compliance, the authority must first determine that the entities are already subject to comparable regulation, supervision and comprehensive oversight of compliance, by virtue of the fact that: (i) the foreign regulation and oversight meet the same regulatory objectives; and (ii) the foreign regulator has the authority and means to support and enforce compliance by relevant foreign participants, intermediaries and infrastructures. It should be noted that in some jurisdictions' regulatory systems, this registration process is characterized as "recognition."
    
3. Transactions and Substituted Compliance - An authority could allow in certain circumstances for compliance with foreign regulations to substitute for compliance with otherwise applicable transaction-level requirements (i.e., requirements that apply regardless of registration status). In permitting the use of substituted compliance, the authority must first determine that transactions are already subject to comparable regulation, by virtue of the fact that: (i) the foreign regulation meets the same regulatory objectives; and (ii) the foreign regulator has the authority and means to support and enforce compliance by relevant foreign participants, intermediaries and infrastructures.
    
4. Registration Categories and Exemptions - An authority could require market participants, intermediaries and infrastructures to register with it. Such authority may define different registration categories to provide such market participants, intermediaries and infrastructures the opportunity to comply with different sets of regulatory requirements, or the same regulatory requirements in different ways, based upon their characteristics and activities. This provides flexibility in oversight in instances where entities are already subject to comparable regulation and oversight by another authority. The authority also may elect to exempt certain market participants, intermediaries and infrastructures, from registration or other requirements, after taking into consideration such entities' existing obligations to other regulators.

We agree that these different approaches will not be undertaken on a firm by firm basis but rather will focus on the applicable regime in a jurisdiction and will entail a review of laws, rules, supervision and enforcement.

Authorities will consider these different approaches, taking into account, among other factors, the application of conflicting, inconsistent and duplicative rules to the same entities and transactions.

Permitting compliance with another jurisdiction's rules and regulations through either recognition or substituted compliance to satisfy our rules and regulations or exempting a person from our rules and regulations does not restrict, or represent a forfeit of, our power to take appropriate regulatory, supervisory or enforcement measures over a person or transactions subject to our law. However, in this case, close consultation with relevant authorities of another jurisdiction will be needed in connection with taking such measures.

We will continue to work together to further refine the concepts of recognition, substituted compliance, registration categories and exemptions, including continued consultation in a timely manner about our respective processes for determining when we will use recognition, substituted compliance, registration categories or exemptions and the conditions that we will require to be met for such treatment.

Next Steps

In support of these understandings and areas of exploration, we commit to regularly meet and consult with one another. We agree to next meet in Brussels in early 2013. Future meetings will address the following items:

1. Options to address identified conflicts, inconsistencies and duplicative rules;
    
2. With respect to the basis for determinations of comparability of regulatory regimes:
    
   1. Discuss expected regulatory outcomes with regard to the regulation of market participants, intermediaries, and infrastructures;
   2. Identify possible standards, including relevant international standards, that will help to inform an assessment of whether a given regulatory regime achieves particular outcomes; and
   3. Identify the types of arrangements, including supervisory and enforcement memoranda of understanding, that need to be entered into by each relevant supervisory authority.
   
    
3. In relation to timing and sequencing, the authorities will meet in January 2013 to inform each other of the planned timing of the finalization and implementation of our rules and advise of possible transition periods and update each other on progress on the concrete steps being taken in our own jurisdictions to improve global regulatory oversight in these markets.
    
4. In relation to clearing determinations, we have reached an understanding and will:
    
   1. Develop a process and a means for consulting with each other prior to making any final determinations regarding which derivatives products will be subject to a mandatory clearing requirement; and
   2. Reach an understanding of the objective of such consultation process.

5. International Engagement

We support the continued development and setting of international standards by IOSCO and other standard setting bodies and intend to remain active in the various workstreams related to OTC derivatives. We support the efforts of the Financial Stability Board (FSB) in ensuring coordination among international standard-setting bodies. We further support the efforts of the FSB to promote the implementation of the G-20 regulatory reform agenda in the area of OTC derivatives regulation.

# # #

Washington, D.C., Dec. 3, 2012 — The Securities and Exchange Commission today announced that its staff will host a roundtable early next year to discuss the impact of decimal-based stock trading on small and mid-sized companies, market professionals, investors, and U.S. securities markets.

The roundtable will be held on Feb. 5 at the SEC’s Washington, D.C., headquarters, and will be open to the public and webcast live on the SEC’s website. Information on the agenda and participants will be issued shortly.

U.S. stock markets adopted decimal pricing increments in place of fractions in 2001, in part to address concerns that the U.S. was at a competitive disadvantage to markets outside the U.S. using decimal pricing. Proponents of decimal pricing also pointed to evidence of artificially wide spreads — the difference between the price to buy and sell a stock — with fractional pricing, which might benefit market makers at the expense of investors. Since the advent of decimalization, however, various parties have raised concerns that its adoption may be detrimental to small and mid-sized companies.

The Jumpstart Our Business Startups Act, or JOBS Act, enacted in April, directed the Commission to conduct a study of the effects of decimalization on initial public offerings (IPOs) and on small and middle-capitalization companies. In its Report to Congress on Decimalization, the SEC staff recommended that the Commission solicit the views of investors, companies, market professionals, academics, and other interested parties on decimalization generally, its effects on IPOs and on trading and liquidity for small and mid-cap companies, and what, if any, changes should be considered. The roundtable will provide a forum to discuss these issues and explore specific recommendations on structuring pilot programs to gather additional data and analysis on these issues.

# # #

Washington, D.C., Dec. 3, 2012 — The Securities and Exchange Commission today began administrative proceedings against the China affiliates of each of the Big Four accounting firms and another large U.S. accounting firm for refusing to produce audit work papers and other documents related to China-based companies under investigation by the SEC for potential accounting fraud against U.S. investors.

The SEC charged the following firms with violating the Securities Exchange Act and the Sarbanes-Oxley Act, which requires foreign public accounting firms to provide the SEC upon request with audit work papers involving any company trading on U.S. markets:

• BDO China Dahua Co. Ltd
• Deloitte Touche Tohmatsu Certified Public Accountants Ltd
• Ernst & Young Hua Ming LLP
• KPMG Huazhen (Special General Partnership)
• PricewaterhouseCoopers Zhong Tian CPAs Limited

According to the SEC’s order instituting the proceedings, SEC investigators have been making efforts for the past several months to obtain documents from these firms. The audit materials are being sought as part of SEC investigations into potential wrongdoing by nine China-based companies whose securities are publicly traded in the U.S. The audit firms have refused to cooperate in the investigations.

“Only with access to work papers of foreign public accounting firms can the SEC test the quality of the underlying audits and protect investors from the dangers of accounting fraud,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Firms that conduct audits knowing they cannot comply with laws requiring access to these work papers face serious sanctions.”

An administrative law judge will schedule a hearing and determine the appropriate remedial sanction against the firms. The order requires the administrative law judge to issue an initial decision no later than 300 days from the date of service of the order.

The SEC has launched an initiative to address concerns arising from reverse mergers and foreign issuers. Through the work of a Cross Border Working Group, the agency has deregistered the securities of nearly 50 companies and filed fraud cases against more than 40 foreign issuers and executives. The SEC’s Enforcement Division has taken a series of actions against China-based audit firms. Earlier this year, the SEC announced an enforcement action against Shanghai-based Deloitte Touche Tomatsu for refusing to produce documents for an SEC investigation into one of its China-based clients. That proceeding is ongoing. The SEC previously filed a subpoena enforcement action in federal court against the firm for failing to produce documents in response to a subpoena pertaining to its longtime client Longtop Financial Technologies Limited. In the separate administrative proceeding against Longtop, an administrative law judge found that Longtop was delinquent in its reporting obligations and ordered Longtop’s securities registration to be revoked.

“U.S. investors should be able to rely on the quality of audited financial statements,” said Kara Brockmeyer, co-head of the SEC’s Cross Border Working Group. “Our Working Group’s actions demonstrate how the SEC is proactively identifying emerging risks to protect U.S. investors from accounting fraud.”

This enforcement action was coordinated by the Cross Border Working Group and involved investigative teams in SEC offices in Washington D.C., Boston, New York, Fort Worth, and Los Angeles.

# # #

Washington, D.C., Nov. 30, 2012 — The Securities and Exchange Commission today announced insider trading charges against a Brazilian ex-banker for his role in a scheme to illegally trade Burger King securities. The SEC previously charged a Brazilian citizen working in the Miami office of Wells Fargo with tipping him the inside information.

The SEC alleges that Igor Cornelsen and his firm through which he made trades - Bainbridge Group - reaped illicit profits of more than $1.68 million by trading Burger King options based on confidential information ahead of the company's September 2010 announcement that it was being acquired by a New York private equity firm. Cornelsen is now a resident of the Bahamas with a home in South Florida after holding high-ranking positions at several banks in Brazil before his retirement. He sought inside information from his broker Waldyr Da Silva Prado Neto by sending him e-mails with such masked references as, "Is the sandwich deal going to happen?" Prado was stealing the inside information from another Wells Fargo brokerage customer involved in the Burger King deal.

Cornelsen and Bainbridge Group agreed to pay more than $5.1 million to settle the SEC's charges. The settlement is subject to court approval. The litigation continues against Prado, whose assets have been frozen by the court.

"Cornelsen shamelessly prodded Prado for details on 'the sandwich deal' and Prado happily obliged to satisfy his customer's appetite for inside information," said Daniel M. Hawke, Chief of the SEC Enforcement Division's Market Abuse Unit and Director of the Philadelphia Regional Office.

Sanjay Wadhwa, Deputy Chief of the Market Abuse Unit and Associate Director of the New York Regional Office, added, "Foreign investors who access the U.S. capital markets must play by the rules and not rig the market in their favor, otherwise they face getting caught by the SEC and paying a hefty price as Cornelsen is here."

According to the SEC's complaint filed today in federal court in Manhattan, Cornelsen became Prado's customer in 2008. On May 17, 2010, Prado sent Cornelsen an e-mail written in Portuguese that translates to, "Igor, if you are around call me at the hotel … I have some info … You have to hear this." Cornelsen called Prado at his hotel and they had a 10-minute conversation. Earlier that same day, Prado told a friend that he had knowledge of the impending Burger King deal. After talking with Prado, Cornelsen began trading out-of-the-money Burger King call options the very next day. Cornelsen had never previously traded Burger King securities.

The SEC alleges that Cornelsen continued trading Burger King options over that summer despite losing money in some instances. In August, Cornelsen sent Prado e-mails seeking assurances that 'the sandwich deal' was going to happen, and Prado responded with such statements as "Yes it's going to happen" and "Everything is 100% under control." Cornelsen then purchased additional Burger King call options. Cornelsen took steps to minimize his connection to Prado by purchasing the Burger King call options in accounts held at brokerage firms other than where Prado worked.

The SEC alleges that after the public announcement of the Burger King deal, Cornelsen e-mailed Prado to inquire about the acquisition price. Upon learning the new per share price that would yield him substantial illegal profits, Cornelsen e-mailed back, "Wow! What a day!"

The SEC's complaint charges Cornelsen and Bainbridge Group with violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3. The proposed final judgment orders them to jointly and severally pay $1,681,090 in disgorgement and $136,620.96 in prejudgment interest. Cornelsen is ordered to pay a $3,362,180 penalty. They neither admit nor deny the SEC charges. The proposed final judgment also enjoins them from future violations of these provisions of the federal securities laws.

The SEC's investigation, which is continuing, has been conducted by Market Abuse Unit members Megan Bergstrom, David Brown, and Diana Tani in the Los Angeles office with assistance from Charles D. Riely in the New York office. The SEC appreciates the assistance of the Comissão de Valores Mobliliários (Securities and Exchange Commission of Brazil), the Options Regulatory Surveillance Authority (ORSA), and the Financial Industry Regulatory Authority (FINRA).

# # #

Washington, D.C., Nov. 30, 2012 — The Securities and Exchange Commission today charged a Connecticut-based business executive with insider trading ahead of the sale of Patriot Capital Funding Group based on nonpublic information he learned at the helm of a firm involved in the bidding process.

The SEC alleges that I. Joseph Massoud, who founded investment advisory firm Compass Group Management, gained access to nonpublic information contained in an online “dataroom” where bidding companies could learn more about Patriot Capital’s financial condition. For access to the data, Compass Group had to enter into a confidentiality agreement that prohibited its employees from buying Patriot Capital stock. Nonetheless, Massoud purchased shares soon after Compass Group gained access to the confidential information, and he bought even more stock after he learned that Compass Group’s bid was what he described as “waaaaay off” compared to bids from other companies. Patriot Capital’s share price more than doubled after a merger was publicly announced, and Massoud realized more than $676,000 in illegal profits.

Massoud, who lives in Westport, Conn., agreed to settle the SEC’s charges by paying more than $1.4 million. He also will be barred from working in the securities industry or serving as an officer or director of a public company. The settlement is subject to court approval.

“With full knowledge of a confidentiality agreement that prohibited him from buying Patriot Capital stock, Massoud abused his access to nonpublic data for what turned out to be a short-term personal gain,” said John T. Dugan, Associate Director of the SEC’s Boston Regional Office. “As a result of the SEC’s action, Massoud must pay back double what he made in the scheme and he can never work in the securities industry again.”

According to the SEC’s complaint filed in federal court in Connecticut, Patriot Capital initiated a nonpublic bidding process in 2009 to entertain proposals for strategic investments and the possible sale of the company. In May 2009, Massoud directed Compass Group to execute a confidentiality agreement with Patriot Capital so it could participate in that process. After Compass Group was provided access to the online dataroom as part of the bidding process, a Compass Group analyst accessed the dataroom and provided various reports containing material, nonpublic information to Massoud.

The SEC alleges that Massoud also learned nonpublic information about the value of bids received by Patriot Capital from other parties involved in the bidding process. On July 7, 2009, Massoud e-mailed others working on the Patriot Capital transaction at Compass Group and indicated that he had just talked with Patriot Capital’s CEO. He wrote that Compass Group was “waaaaay off” on its bid to acquire Patriot Capital, which according to the CEO had received several acquisition bids that were much higher than Compass Group’s offer. Massoud also learned from the CEO that Compass Group would have to increase its bid to match those higher proposals if it wanted to be considered.

According to the SEC’s complaint, Massoud bought 322,216 shares of Patriot Capital stock in transactions spread across 15 different trading days from May to July. Massoud purchased more than half of those shares after July 7 when Patriot Capital’s CEO confidentially told him about other higher bids to acquire Patriot Capital. On Aug. 3, 2009, Patriot Capital publicly announced a merger with Prospect Capital Corporation. On August 25, after Patriot Capital had been acquired and its stock price had increased significantly, Massoud sold all of his Patriot Capital stock.

The SEC alleges that Massoud violated Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 and that his profits constitute ill-gotten gains. Massoud agreed to pay disgorgement of $676,013, prejudgment interest of $80,785, and a penalty of $676,013. He agreed to be enjoined from violating Section 10(b) and Rule 10b-5 in the future, and he will be barred from serving as a public company officer or director and from being associated with any broker, dealer, investment adviser, municipal securities dealer, municipal adviser, transfer agent, or national recognized statistical rating organization. He also will be barred from participating in any penny stock offering.

The SEC’s investigation was conducted by James Fay, Deena Bernstein, and Kevin Kelcourse in the Boston Regional Office. The SEC acknowledges the assistance of the Financial Industry Regulatory Authority (FINRA).

# # #

Washington, D.C., Nov. 29, 2012 — The Securities and Exchange Commission today announced that it has named Todd K. Scharf, Sr. as Chief Information Security Officer and Associate Director in the agency’s Office of Information Technology.

“Todd Scharf has an extensive technical and operational background in information security,” said Thomas A. Bayer, the SEC’s Chief Information Officer. “Todd’s knowledge of market operations, along with his leadership efforts to improve the SEC’s information security operations already have had a significant effect on the agency, and we’re pleased to welcome him to this new position.”

In recent years, the SEC has taken steps to enhance its technological capabilities, modernize its computer systems, and transform the way it performs its mission. It has deployed a centralized database for the tips and complaints it receives, installed an automated work-flow system to track and triage enforcement actions, created an automated e-discovery system to help investigators rapidly review evidence, established a national standardized collection and storage system for SEC inspections and examinations, procured a system to analyze market data, and refurbished its financial management system.

Mr. Scharf joined the SEC in 2009 as the Assistant Director for Corporate Information Security, where he helped develop, maintain, and oversee agency-wide information technology security programs. During his tenure, Mr. Scharf implemented industry-leading security measures and programs that led to significant improvements in the SEC’s information technology and financial reporting processes. In two years, the SEC succeeded in reducing the information technology and financial reporting deficiencies identified by the agency, its Inspector General, and the Government Accountability Office to a level that, in November 2011, the GAO concluded that there were no longer “material weaknesses” in the SEC’s internal controls.

Mr. Scharf began his civilian career in 1996 as a Data Security Analyst at GE Information Services, and spent 11 years at the Financial Industry Regulatory Authority (FINRA), where he worked in various capacities, starting as an Operations Manager for Information Security. He was named Director of Network Operations and Information Security at the self-regulatory organization in 2001, and became FINRA’s Associate Vice President for Corporate Information Security in 2003, overseeing information security and strategy.

Mr. Scharf received his undergraduate degree in Criminal Justice from Penn State University and completed his master’s level courses in Business Management at Troy State University. He was honorably discharged from the U.S. Navy in 1996 as a Lieutenant after serving nine-and-a-half years in various capacities, from propulsion engineer to data center manager.

Mr. Scharf will continue to lead the SEC’s Office of Information Security, which is responsible for identifying and mitigating potential information-technology security risks and information breaches. Mr. Scharf has been actively involved in directing SEC efforts to identify and resolve security risks and exposures and will continue those efforts in his new role.

# # #

Washington, D.C., Nov. 29, 2012 — The Securities and Exchange Commission today charged two retail brokers who formerly worked at a Connecticut-based broker-dealer with insider trading on nonpublic information ahead of IBM Corporation’s acquisition of SPSS Inc.

The SEC alleges that Thomas C. Conradt learned confidential details about the merger from his roommate, a research analyst who got the information from an attorney working on the transaction who discussed it in confidence. Conradt purchased SPSS securities and subsequently tipped his friend and fellow broker David J. Weishaus, who also traded. The insider trading yielded more than $1 million in illicit profits. The SEC’s investigation uncovered instant messages between Conradt and Weishaus where they openly discussed their illegal activity. The SEC’s investigation is continuing.

“When licensed professionals who are privileged to work in the securities industry violate legal duties and enrich themselves at investors’ expense, it undermines public confidence in the integrity of the markets,” said Daniel M. Hawke, Director of the SEC’s Philadelphia Regional Office. “As industry professionals, Conradt and Weishaus clearly understood that what they were doing was wrong, but did so anyway while knowing the consequences they would face if caught.”

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Conradt and Weishaus, who live in Denver and Baltimore respectively.

According to the SEC’s complaint filed in federal court in Manhattan, the scheme occurred in 2009. Conradt revealed in instant messages that he received the information from the research analyst and warned Weishaus that they needed to “keep this in the family.” Weishaus agreed, typing “i don't want to go to jail.” They went on to discuss other people who have been prosecuted for insider trading. In another series of instant messages, Conradt bragged that he was “makin everyone rich” by sharing the nonpublic information. Weishaus later noted, “this is gonna be sweet.”

The SEC alleges that the research analyst’s attorney friend sought moral support, reassurance, and advice when he privately told the research analyst about his new assignment at work on the SPSS acquisition by IBM. In describing the magnitude of the assignment, the lawyer disclosed material, nonpublic information about the proposed transaction, including the anticipated transaction price and the identities of the acquiring and target companies. The associate expected the research analyst to maintain this information in confidence and refrain from trading on this information or disclosing it to others.

The SEC alleges that Conradt, Weishaus, and other downstream tippees purchased common stock and call options in SPSS. A call option is a security that derives its value from the underlying common stock of the issuer and gives the purchaser the right to buy the underlying stock at a specific price within a specified period of time. Typically, investors will purchase call options when they believe the stock of the underlying securities is going up. Conradt, Weishaus, and other downstream tippees invested so heavily in SPSS securities that the investments accounted for 76 percent to 100 percent of their various brokerage accounts. Conradt and Weishaus both hold law degrees. Conradt is admitted to practice law in Maryland, and he passed the Colorado bar examination administered in February 2012.

The SEC alleges that Conradt and Weishaus violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest and financial penalties, and a permanent injunction against the brokers.

The SEC’s investigation is being conducted by Mary P. Hansen, A. Kristina Littman and John S. Rymas, in the SEC’s Philadelphia Regional Office. G. Jeffrey Boujoukos and Catherine E. Pappas in the Philadelphia office are handling the litigation. The SEC acknowledges the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.

# # #

Washington, D.C., Nov. 29, 2012 — The Securities and Exchange Commission today charged a Chicago-based investment adviser and his firm with defrauding clients and others who were promised returns that would “beat the market” for investing in a private equity fund they managed. What investors didn’t know was the fund was failing and they were being used to raise money to repay promissory notes to earlier investors.

The SEC alleges that Joseph J. Hennessy and Resources Planning Group (RPG) raised more than $1.3 million by misrepresenting the Midwest Opportunity Fund (MOF) as a viable private equity fund that could offer high returns. Hennessy failed to tell investors about the fund’s poor financial condition or that their money was being used to repay MOF promissory notes that he had personally guaranteed. He therefore misappropriated client funds to make payments on the notes and prop up the fund. Hennessy used at least $641,408 to make partial payments to certain note holders, substantially reducing his personal liability on the notes.

“Private equity fund investors expect their money to be invested in viable assets that will generate positive returns,” said Marshall S. Sprung, Deputy Chief of the SEC Enforcement Division’s Asset Management Unit. “Hennessy made these promises, but betrayed his clients and others by using their money to save himself from financial ruin.”

According to the SEC’s complaint filed against Hennessy and RPG in federal court in Chicago, Hennessy financed MOF’s acquisition of its largest portfolio company in 2007 in part by having the fund issue $1.65 million in promissory notes, all of which he personally guaranteed. When MOF’s portfolio companies were unable to pay management fees later that year, MOF lacked sufficient funds to repay the notes. From September 2007 to March 2010, Hennessy raised $1.36 million from RPG clients and other investors to make payments on the notes. Hennessy falsely told investors that MOF was viable and offered high returns.

The SEC further alleges that Hennessy misappropriated money from RPG clients. In November 2007, he raised $750,000 from three RPG clients purportedly to invest in MOF. But then Hennessy used that money to redeem another client’s investment in the fund. Twice in mid-2009, Hennessy forged letters of authorization from a widowed RPG client to transfer $100,000 from her account to MOF in exchange for promissory notes that have yet to be repaid.

The SEC’s complaint charges Hennessy 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. Hennessy is also charged with violating Sections 206(1), (2) and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8. RPG is charged with violating Sections 206(1), (2) and (4) of the Advisers Act and Rule 206(4)-7.

The SEC’s investigation was conducted by Amy S. Cotter, Luz M. Aguilar, and John J. Sikora, Jr. in the SEC’s Chicago Regional Office. Ms. Cotter and Mr. Sikora are members of the Asset Management Unit. The examination of RPG was conducted by Susan M. Weis, Matthew D. Harris, and Maureen S. Dempsey of the Investment Company/Investment Adviser examination group in the Chicago office. The SEC’s litigation will be led by Ms. Cotter and John E. Birkenheier.

# # #

Washington, D.C., Nov. 28, 2012 — The Securities and Exchange Commission today announced charges against the former CEO of a Denver-based oil-and-gas company at the center of an insider trading scheme that the SEC began prosecuting last month.

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

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

“Parker was entrusted with highly confidential information, and he betrayed that trust to help line the pockets of his close friends,” said Sanjay Wadhwa, Deputy Chief of the SEC Enforcement Division’s Market Abuse Unit and Associate Director of the New York Regional Office. “Company officials who exploit their insider status must realize that they do so at the risk of inviting SEC scrutiny.”

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

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

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

The SEC’s investigation, which is continuing, has been conducted by members of the SEC’s Market Abuse Unit – Michael Holland and Joseph Sansone in New York and Jeffrey Oraker and Jay Scoggins in Denver – with substantial assistance from Neil Hendelman of the New York Regional Office. The SEC’s litigation is being handled by Thomas Krysa, who is Regional Trial Counsel in the Denver office, as well as Mr. Oraker and Mr. Holland.

The SEC thanks the U.S. Attorney offices in the Southern District of New York and the District of Colorado as well as the Federal Bureau of Investigation for their assistance in this matter.

# # #

Washington, D.C., Nov. 28, 2012 — The Securities and Exchange Commission today charged three top executives at a New York-based publicly-traded fund being regulated as a business development company (BDC) with overstating the fund’s assets during the financial crisis. The fund’s asset portfolio consisted primarily of corporate debt securities and investments in collateralized loan obligations (CLOs).

An SEC investigation found that KCAP Financial Inc. did not account for certain market-based activity in determining the fair value of its debt securities and certain CLOs. KCAP also failed to disclose that the fund had valued its two largest CLO investments at cost. KCAP’s chief executive officer Dayl W. Pearson and chief investment officer R. Jonathan Corless had primary responsibility for calculating the fair value of KCAP’s debt securities, while KCAP’s former chief financial officer Michael I. Wirth had primary responsibility for calculating the fair value of KCAP’s CLOs. Wirth, a certified public accountant, prepared the disclosures about KCAP’s methodologies to fair value its CLOs, and Pearson reviewed those disclosures.

The three executives agreed to pay financial penalties to settle the SEC’s charges.

“When market conditions change, funds and other entities must properly take into account those changed conditions in fair valuing their assets, said Antonia Chion, Associate Director in the SEC’s Division of Enforcement. “This is particularly important for BDCs like KCAP, whose entire business consists of the assets that it holds for investment.”

This is the SEC’s first enforcement action against a public company that failed to properly fair value its assets according to the applicable financial accounting standard — FAS 157 — which became effective for KCAP in the first quarter of 2008.

According to the SEC’s order instituting administrative proceedings against the fund and the three executives, KCAP did not record and report the fair value of its assets in accordance with Generally Accepted Accounting Principles (GAAP) and in particular FAS 157, which requires assets to be fair valued based on an “exit price” that reflects the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.

The SEC’s order found that Pearson and Corless concluded that any trades of debt securities held by KCAP in the fourth quarter of 2008 reflected distressed transactions, and therefore KCAP determined the fair value of its debt securities based solely on an enterprise value methodology. However, this methodology did not calculate or inform KCAP investors of the FAS 157 “exit price” for that security. Wirth calculated the fair value of KCAP’s two largest CLO investments to be their cost, and did not take into account the market conditions during that period.

According to the SEC’s order, in May 2010, KCAP restated the fair values for certain debt securities and CLOs whose net asset values had been overstated by approximately 27 percent as of Dec. 31, 2008. Moreover, KCAP’s internal controls over financial reporting did not adequately take into account certain market inputs and other data.

“KCAP should have accounted for market conditions in the fourth quarter of 2008 in determining the fair values of its assets,” said Julie M. Riewe, Deputy Chief of the SEC Enforcement Division’s Asset Management Unit. “FAS 157 is critically important in fair valuing illiquid securities, and funds must consider market information in making FAS 157 fair value determinations and comply with their disclosed valuation methodologies.”

KCAP’s overvaluation and internal controls failures violated the reporting, books and records, and internal controls provisions of the federal securities laws, namely Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. Pearson, Corless, and Wirth caused KCAP’s violations and directly violated Exchange Act Rule 13b2-1 by causing KCAP’s books and records to be falsified. Pearson and Wirth also directly violated Exchange Act Rule 13a-14 by falsely certifying the adequacy of KCAP’s internal controls.

Pearson and Wirth each agreed to pay $50,000 penalties and Corless agreed to pay a $25,000 penalty to settle the SEC’s charges. KCAP and the three executives, without admitting or denying the findings, consented to the SEC’s order requiring them to cease and desist from committing or causing any violations or any future violations of these federal securities laws.

The SEC’s investigation was conducted by Adam Aderton of the Asset Management Unit, Noel Gittens, and Richard Haynes, and was supervised by Assistant Director Ricky Sachar.

# # #

Washington, D.C., Nov. 27, 2012 — The Securities and Exchange Commission today charged four financial services firms based in India for providing brokerage services to institutional investors in the United States without being registered with the SEC as required under the federal securities laws.

The four firms – Ambit Capital Private Limited, Edelweiss Financial Services Limited, JM Financial Institutional Securities Private Limited, and Motilal Oswal Securities Limited – agreed to pay more than $1.8 million combined to settle the SEC’s charges.

“The broker-dealer registration provisions are critical safeguards for the integrity of our securities markets,” said Scott W. Friestad, Associate Director of the SEC’s Division of Enforcement. “These four firms and all other foreign broker-dealers must educate themselves on the U.S. laws and regulations when they provide services to U.S. investors.”

According to the SEC’s orders against the firms, they engaged with U.S. investors in some of the following ways despite being unregistered broker-dealers:

• Sponsored conferences in the U.S.
• Had employees travel regularly to the U.S. to meet with investors.
• Traded securities of India-based issuers on behalf of U.S. investors
• Participated in securities offerings from India-based issuers to U.S. investors.

In their respective settlements, the firms agreed to be censured while neither admitting nor denying the SEC’s charges. Ambit agreed to pay disgorgement and prejudgment interest totaling $30,910. Edelweiss agreed to pay $568,347. JM Financial agreed to pay $443,545. Motilal agreed to pay $821,594.

“The firms’ cooperation with the Commission staff and their prompt remedial measures, including entering into Rule 15a-6 chaperoning agreements with U.S. registered broker-dealers and/or initiating registration with the Commission as a broker-dealer, were important factors in accepting the firms’ settlement offers, particularly the Commission’s decision not to impose a cease-and-desist order or a penalty,” said Mr. Friestad.

The SEC’s investigation, which is continuing to look for potential violations at other firms, has been conducted by Amy Friedman and supervised by Laura Josephs.

# # #

Washington, D.C., Nov. 26, 2012 — After nearly four years in office, SEC Chairman Mary L. Schapiro today announced that she will step down on Dec. 14, 2012.

Chairman Schapiro, who became chairman in the wake of the financial crisis in January 2009, strengthened, reformed, and revitalized the agency. She oversaw a more rigorous enforcement and examination program, and shaped new rules by which Wall Street must play.

“It has been an incredibly rewarding experience to work with so many dedicated SEC staff who strive every day to protect investors and ensure our markets operate with integrity,” said Chairman Schapiro. “Over the past four years we have brought a record number of enforcement actions, engaged in one of the busiest rulemaking periods, and gained greater authority from Congress to better fulfill our mission.”

Chairman Schapiro is one of the longest-serving SEC chairmen, having served longer than 24 of the previous 28. She was appointed by President Barack Obama on Jan. 20, 2009, and unanimously confirmed by the Senate.

During her tenure, Chairman Schapiro worked to bolster the SEC’s enforcement and examination programs, among others. As a result of a series of reforms, the agency is more adept at pursing tips and complaints provided by outsiders, better able to identify wrongdoers through vastly upgraded market intelligence capabilities, and more strategic, innovative and risk-focused in the way it inspects financial firms.

In each of the past two years, the agency has brought more enforcement actions than ever before, including 735 enforcement actions in fiscal year 2011 and 734 actions in FY 2012.

In addition, the SEC engaged in one of the busiest rulemaking periods in decades. Due to new rules now in place, investors can get clear information about the advisers they invest with, vote on the executive compensation packages at companies they invest in, benefit from additional safeguards that protect their assets held by investment advisers, and get access to more meaningful information about company boards and municipal securities.

“I’ve been so amazed by how hard the men and women of the agency work each and every day and by the sacrifices they make to get the job done,” added Chairman Schapiro. “So often they stay late or come in on weekends to polish a legal brief, review a corporate filing, write new rules, or reconstruct trading events. And despite the complexity and the intense scrutiny, they always excel at what they do.”

As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the agency has implemented a new whistleblower program, strengthened regulation of asset-backed securities, laid the foundation for an entirely new regulatory regime for the previously-unregulated derivatives market, and required advisers to hedge funds and other private funds to register and be subject to SEC rules.

During Chairman Schapiro’s tenure, the agency worked to improve the structure of the market by approving a series of measures that have helped to strengthen equity market structure and reduce the chance of another Flash Crash. Among other things, the Commission for the first time has required the exchanges to create a consolidated audit trail that will enable the agency to reconstruct trading across various trading venues.

Chairman Schapiro previously served as a commissioner at the SEC from 1988 to 1994. She was appointed by President Ronald Reagan, reappointed by President George H.W. Bush in 1989, and named Acting Chairman by President Bill Clinton in 1993. She left the SEC when President Clinton appointed her as chairman of the Commodity Futures Trading Commission, where she served until 1996. She is the only person to have ever served as chairman of both the SEC and CFTC.

As SEC chairman, Schapiro also serves on the Financial Stability Oversight Council, the FHFA Oversight Board, the Financial Stability Oversight Board, and the IFRS Foundation Monitoring Board.

# # #

Washington, D.C., Nov. 20, 2012 — The Securities and Exchange Commission today announced that Lorraine B. Echavarria has been promoted to lead the Los Angeles Regional Office’s enforcement program as an Associate Regional Director.

Ms. Echavarria, who joined the SEC staff in 2000, has served as an Assistant Regional Director for more than five years and has served in the Enforcement Division’s national Municipal Securities and Public Pension Specialized Unit for more than two years. Ms. Echavarria has worked on significant cases throughout her career at the SEC, including the SEC’s first-ever Sarbanes-Oxley Act “clawback” case against an individual required to return bonuses and stock profits while not personally charged for the company’s misconduct.

“Lori has great enthusiasm and passion for the work of protecting investors and the financial markets, which has been instrumental in leading her teams to bring challenging cases,” said Michele Wein Layne, Director of the SEC’s Los Angeles Regional Office. “Her demonstrated securities experience combined with her strong leadership skills make her ideally suited to accomplish our shared goal of having a premier enforcement program in our region.”

Ms. Echavarria said, “I am deeply honored by this appointment. For 12 years, I have had the privilege to work with the dedicated and talented Los Angeles staff, and I look forward to leading the enforcement program to continued success in protecting the investing public.”

Ms. Echavarria fills the Associate Regional Director position vacated by Ms. Layne when she became the Director of the Los Angeles office.

Prior to joining the SEC staff, Ms. Echavarria practiced at O’Melveny & Myers LLP in Los Angeles and Greenberg Glusker in Los Angeles. She earned her law degree cum laude from NYU Law School, and her undergraduate degree with highest honors from the University of California at Santa Barbara.

# # #

Washington, D.C., Nov. 20, 2012 — The Securities and Exchange Commission today sanctioned two investment advisory firms for impeding examinations conducted by SEC staff.

An SEC investigation found that Evens Barthelemy and his New York-based firm Barthelemy Group LLC misled SEC examiners by inflating the firm’s claimed assets under management (AUM) ten-fold in an apparent attempt to show that the firm was eligible for SEC registration. Another SEC investigation found that Seth Richard Freeman and his San Francisco-area firm EM Capital delayed nearly 18 months in producing books and records related to the firm’s mutual fund advisory business.

Both firms agreed to settle the SEC’s charges against them.

“Barthelemy was not truthful and Freeman was not responsive during their respective interactions with SEC examiners,” said Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit. “We will continue to pursue enforcement actions against firms that obstruct or delay the SEC’s critical work in overseeing investment advisers.”

Carlo di Florio, Director of the SEC’s Office of Compliance Inspections and Examinations, added, “Examinations of SEC-registered firms play a vital role in protecting markets and investors, and we expect their candor and prompt cooperation as SEC staff works to promote compliance, monitor risk, and prevent fraud.”

According to the SEC’s order against Barthelemy and his firm, when examiners asked for a list of client assets, Barthelemy misrepresented his firm’s AUM as $26.28 million instead of the actual $2.628 million. He downloaded client account balances from the firm’s online custodial platform onto a spreadsheet, and then manually moved the decimal points for each client one place to the right before providing it to the SEC staff. From July 2009 to early 2011, Barthelemy improperly registered Barthelemy Group with the SEC on the basis of the aspirational AUM that was 10 times higher than reality. Barthelemy Group, through Barthelemy’s actions as chief compliance officer, also failed to adopt reasonable compliance policies and procedures or to maintain required books and records concerning codes of ethics and providing the firm’s disclosure brochure to clients.

Barthelemy agreed to be barred from the securities industry and from associating with an investment company, with the right to reapply after two years. Without admitting or denying the allegations, Barthelemy and his firm consented to cease-and-desist orders, and the firm was censured. Barthelemy and his firm also will provide a copy of the proceeding to their clients and appropriate state securities regulators, will post a copy on the firm’s website, and will disclose the proceeding in an amended SEC Form ADV filing.

According to the SEC’s order issued today against Freeman and his firm, they failed to immediately furnish the required books and records upon request by SEC staff in December 2010. EM Capital and Freeman repeatedly promised to provide the records including financial statements, e-mails, and documents related to their management of a mutual fund. However, they did not fully comply until September 2012, months after learning that SEC staff was considering enforcement action against them.

Freeman and EM Capital agreed to pay a combined $20,000 penalty. Without admitting or denying the SEC’s findings, Freeman and EM Capital also agreed to censures and cease-and-desist orders.

The SEC’s investigation of Barthelemy Group was conducted by David Neuman and Scott Weisman of the SEC’s Asset Management Unit. The examination of Barthelemy Group was conducted by Dawn Blankenship, Kristine Geissler, Arjuman Sultana, Margaret Pottanat, and Anthony Fiduccia of the New York Regional Office’s investment adviser/investment company examination program. The SEC’s investigation of EM Capital was conducted by Sahil W. Desai and Erin E. Schneider of the San Francisco Regional Office, who are members of the SEC’s Asset Management Unit. The examination of EM Capital was conducted by Tom Dutton, Ada Chee, and Ed Haddad of the San Francisco Regional Office’s investment adviser/investment company examination program.

# # #

Washington, D.C., Nov. 20, 2012 — The Securities and Exchange Commission today charged Stamford, Conn.-based hedge fund advisory firm CR Intrinsic Investors LLC and its former portfolio manager along with a medical consultant for an expert network firm for their roles in a $276 million insider trading scheme involving a clinical trial for an Alzheimer’s drug being jointly developed by two pharmaceutical companies. The illicit gains generated in this scheme make it the largest insider trading case ever charged by the SEC.

The SEC alleges that Mathew Martoma illegally obtained confidential details about the clinical trial from Dr. Sidney Gilman, who served as chairman of the safety monitoring committee overseeing the trial. Dr. Gilman was selected by Elan Corporation and Wyeth to present the final drug trial results to the public. In phone calls that were arranged by a New York-based expert network firm for which he moonlighted as a medical consultant, Dr. Gilman tipped Martoma with safety data and eventually details about negative results in the trial about two weeks before they were made public in July 2008. Martoma then caused several hedge funds to sell more than $960 million in Elan and Wyeth securities in just over a week.

Dr. Gilman, who lives in Ann Arbor, Mich., where he works as a medical school professor, has agreed to settle the SEC’s charges and cooperate in this action and related SEC investigations. In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Martoma and a non-prosecution agreement with Dr. Gilman. Martoma lives in Boca Raton, Fla.

“Today’s record-setting insider trading case reinforces the cold, hard lesson of so many other recent cases that when you trade on inside information, you’re not just betting your money but also your career, your reputation, your financial security, and your liberty,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Now, yet another corrupt hedge fund manager has learned the high cost of ignoring that lesson.”

Sanjay Wadhwa, Associate Director of the SEC’s New York Regional Office and Deputy Chief of the Enforcement Division’s Market Abuse Unit, added, “Today’s action against CR Intrinsic underscores our commitment to hold hedge fund advisory firms accountable when their employees break the law for the firms’ benefit. The clear message is that firms should adopt appropriate procedural safeguards and a culture of zero tolerance toward employee misconduct that could subject the firm to such serious consequences.”

According to the SEC’s complaint filed in federal court in Manhattan, Martoma first met Dr. Gilman through paid consultations arranged by the expert network firm. Dr. Gilman provided Martoma with material nonpublic information concerning the Phase II trial of the potential Alzheimer’s drug called bapineuzumab (bapi). They coordinated their expert network consultations around scheduled safety monitoring committee meetings, and during their phone calls they discussed PowerPoint presentations made during the meetings and Dr. Gilman provided Martoma with his perspective on the results. Dr. Gilman developed a personal relationship with Martoma, eventually coming to view Martoma as a friend and pupil.

The SEC alleges that Martoma caused hedge funds managed by CR Intrinsic as well as hedge funds managed by an affiliated investment adviser to trade on the negative inside information he received from Dr. Gilman. Although Elan and Wyeth’s shares rose on June 17, 2008, on the public release of top-line results of the Phase II trial, market participants were disappointed by the detailed final results issued on July 29, 2008. Double-digit declines in Elan and Wyeth shares ensued. After Martoma was tipped, the hedge funds not only liquidated their combined long position in Elan and Wyeth of more than $700 million, but went on to hold substantial short positions in both securities. This massive repositioning allowed CR Intrinsic and the affiliated advisory firm to reap approximately $82 million in profits and $194 million in avoided losses for a total of more than $276 million in illicit gains.

According to the SEC’s complaint, Martoma received a $9.3 million bonus at the end of 2008 – a significant portion of which was attributable to the illegal profits that the hedge funds managed by CR Intrinsic and the other investment advisory firm had generated in this scheme. Dr. Gilman, who was generally paid $1,000 per hour as a consultant for the expert network firm, received more than $100,000 for his consultations with Martoma and others at the hedge fund advisory firms. Dr. Gilman also received approximately $79,000 from Elan for his consultations concerning bapi in 2007 and 2008.

The SEC’s complaint charges each of the defendants with violating Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and seeks a final judgment ordering them to disgorge their ill-gotten gains plus prejudgment interest, ordering them to pay financial penalties, and permanently enjoining them from future violations of these provisions of the federal securities laws.

Dr. Gilman has agreed to pay more than $234,000 in disgorgement and prejudgment interest. He also agreed to a permanent injunction against further violations of the federal securities laws. The proposed settlement is subject to approval by the court, which also will determine at a later date whether any additional financial penalty is appropriate.

The SEC’s investigation, which is continuing, has been conducted by Charles D. Riely and Amelia A. Cottrell of the SEC’s Market Abuse Unit in New York and Matthew J. Watkins and Neil Hendelman of the SEC’s New York Regional Office. It has been supervised by Sanjay Wadhwa. The SEC thanks the U.S. Attorney’s Office for the Southern District of New York, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority (FINRA) for their assistance in this matter.

Since October 2009, the SEC has filed more than 170 insider trading actions charging more than 410 individuals and entities. The defendants in these actions are alleged to have made more than $875 million in illicit gains comprised of profits and the avoidance of losses.

# # #

Washington, D.C., Nov. 19, 2012 — The Securities and Exchange Commission today charged the operators of a long-running prime bank scheme with defrauding investors who were promised sky-high returns on loans to a secret European trust. It also is seeking an emergency court order to freeze the operators’ assets for the benefit of investors.

The SEC alleges that Billy W. McClintock, who lives in Florida, and Dianne Alexander, a former Georgia resident who now lives in California and also is known as Linda Dianne Alexander, raised $15 million from at least 220 investors in more than 20 states, primarily Georgia. McClintock portrayed himself as the “U.S. Director” of a secret European trust that had the power to create money and claimed to have appointed Alexander as a “U.S. Regional Director” for the trust. McClintock and Alexander led investors to believe that they could receive 38 percent annual interest on loans to the trust, provided they abide by the trust’s strict rules requiring secrecy. However, investor money was instead used to merely pay other investors, the hallmark of a Ponzi scheme.

“McClintock and Alexander pitched an investment opportunity that simply did not exist. They merely reshuffled funds between investors in a modern take on a classic prime bank scheme,” said William P. Hicks, Associate Director of Enforcement in the SEC’s Atlanta Regional Office.

According to the SEC’s complaint filed in U.S. District Court for the Northern District of Georgia, McClintock and Alexander began conducting the scheme by at least 2004 and misrepresented or omitted facts about investment risks, expected returns, and how investor funds would be used. The complaint charges McClintock and Alexander with violating the securities registration, broker-dealer registration, and antifraud provisions of the U.S. securities laws and a related SEC anti-fraud rule.

The SEC’s complaint also names as relief defendants two entities that McClintock controls — MSC Holdings USA LLC, and MSC Holdings Inc. — and another entity controlled by Alexander — MSC GA Holdings LLC. The SEC believes the three firms may have received ill-gotten assets from the fraud that should be returned to investors.

Information on how to avoid prime bank frauds is available at: http://www.sec.gov/divisions/enforce/primebank.shtml and

http://investor.gov/investing-basics/avoiding-fraud/types-fraud/prime-bank-investments

The SEC’s investigation, which is continuing, has been conducted by Natalie M. Brunson and Lucy T. Graetz of the SEC's Atlanta Regional Office under the supervision of Aaron W. Lipson. Senior Trial Counsel Pat Huddleston II will lead the litigation. The SEC acknowledges the assistance of the U. S. Attorney's Office for the Northern District of Georgia and the Federal Bureau of Investigation’s Atlanta Division in this matter.

# # #

Washington, D.C., Nov. 19, 2012 — The Securities and Exchange Commission today charged a purported investment adviser in New York with defrauding investors who he convinced to invest in his start-up businesses while in reality he was spending their money on illegal drugs and gambling.

The SEC alleges that Stephen A. Colangelo, Jr. repeatedly misled investors while raising $3 million in investments for four start-up companies that he created. He also persuaded three other investors to let him act as their investment adviser and they gave him more than $1 million to invest in the markets on their behalf. Colangelo boasted a phony professional and educational background and hid his past criminal activities from potential investors, and he falsely claimed to have historically achieved extremely high returns buying and selling securities. Meanwhile, Colangelo siphoned off at least $1 million in investor funds to pay such unauthorized personal expenses as his federal income taxes, illegal narcotics, gambling, cigars, and travel for him and his family.

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

“Colangelo used blatantly false claims of investment success to lure investors to pour a substantial portion of their life savings into his numerous business and investment schemes,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “In reality they were footing the bill for his illegal activities, luxury vacations, and even his income taxes.”

According to the SEC’s complaint filed in the U.S. District Court for the Southern District of New York, Colangelo’s fraudulent scheme began in 2009 when he induced investors to invest more than $750,000 in the Brickell Fund LLC, a pooled investment vehicle that he created, advised, and controlled. In March 2009 when the Brickell Fund did not have any investors and Colangelo was not buying and selling securities on behalf of the fund, he sent numerous e-mails to potential investors boasting phony information. For instance, one e-mail claimed, “BEST TRADING DAY OF MY LIFE!!!!!!!. . . . Up over 400% and documented. Mind boggling to say the least.” In reality, Colangelo did not make any trades that day.

The SEC alleges that after spending or losing all of the money invested in the Brickell Fund, Colangelo continued to fraudulently raise funds from investors for three other startup businesses he created – Hedge Community LLC, Start a Hedge Fund LLC, and Under the Radar SEO LLC. Some individuals provided Colangelo with funds directly to invest on their behalf. Colangelo continued to use investor funds for a variety of purposes that weren’t disclosed to investors, namely personal expenses and unrelated business expenses.

According to the SEC’s complaint, Colangelo created a profile on the LinkedIn website used for professional networking and misrepresented that he had studied finance at Nyack College from 1986 to 1989. Colangelo provided a link to his profile to potential and existing investors in one of his start-up companies. His representations to investors were false because he never attended Nyack College and has not graduated from high school.

The SEC’s complaint charges Colangelo with violations of the anti-fraud provisions of the federal securities laws, and seeks permanent injunctions, financial penalties, and disgorgement of ill-gotten gains plus prejudgment interest.

The SEC’s investigation was conducted in the New York Regional Office by Senior Attorney Christina McGill and Assistant Regional Director Wendy B. Tepperman. The SEC’s litigation will be led by Senior Trial Counsel Kevin McGrath. 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.

# # #

Washington, D.C., Nov. 19, 2012 — The Securities and Exchange Commission today charged three health care company employees and four others in a New Jersey-based insider trading ring of various high school friends generating $1.7 million in illegal profits and kickbacks by trading in advance of 11 public announcements involving mergers, a drug approval application, and quarterly earnings of pharmaceutical companies and medical technology firms.

The SEC alleges that Celgene Corporation's director of financial reporting John Lazorchak, Sanofi S.A.'s director of accounting and reporting Mark S. Cupo, and Stryker Corporation's marketing employee Mark D. Foldy each illegally tipped confidential information about their companies for the purpose of insider trading. Typically the nonpublic information involved upcoming mergers or acquisitions, but Lazorchak also tipped confidential details about Celgene's quarterly earnings and the status of a Celgene application to expand the use of its drug Revlimid. The trading was carefully orchestrated so there was usually someone acting solely as a non-trading middleman who received the nonpublic information from the insider and tipped others. They hoped to avoid detection with no direct connection between the insiders and the traders, and the insiders were later compensated for the inside information with cash payments made in installments to avoid any scrutiny of large cash withdrawals.

The SEC alleges that Cupo's friend Michael Castelli along with Lawrence Grum, who attended high school with Castelli, were the primary traders in the scheme. Among the ways that Castelli and Grum tried to hide their illegal conduct was by compiling binders of research to serve as a false basis for their trading. They actively traded in Celgene securities to create a pattern of long-standing positions in the stock. Grum reassured Cupo that discovery of the scheme and consequent legal action was unlikely due to limited government resources to police insider trading activity. Grum said, "At the end of the day, the SEC's got to pick their battle because they have a limited number of people and a huge number of investors to go after."

Daniel M. Hawke, Chief of the SEC Enforcement Division's Market Abuse Unit and Director of the Philadelphia Regional Office, said, "This is yet another case where wrongdoers believed they could outsmart investigators by creating an elaborate smokescreen to hide their insider trading. Such tactics as using middlemen to pass inside information and compiling research to falsely justify illegal trades will not prevent lawbreakers from getting caught."

The other two traders charged are Lazorchak's high school friends Michael T. Pendolino and James N. Deprado, who now live in New Hampshire and Virginia respectively. The others live in New Jersey. In a parallel criminal action, the U.S. Attorney's Office for the District of New Jersey today announced criminal charges against Lazorchak, Cupo, Foldy, Castelli, Grum, and Pendolino.

According to the SEC's complaint filed in U.S. District Court for the District of New Jersey, the scheme began in late 2007 when Lazorchak and Cupo, who were friends and colleagues at Sanofi, discussed Lazorchak's new position at Celgene where he'd have access to nonpublic information about mergers and acquisitions. Lazorchak told Cupo that he was initially working on Celgene's possible acquisition of another pharmaceutical company, Pharmion. Cupo discussed Lazorchak's position with Castelli, a friend with whom he attends winemaking club meetings. Castelli brought in Grum, who he considered a sophisticated trader with knowledge of the securities industry. Castelli and Grum devised the scheme in which Lazorchak tipped Cupo with nonpublic Celgene-related information. Cupo, as the middleman, tipped Castelli and Grum so they could illegally trade. Castelli and Grum paid Cupo for his tips, and gave Cupo money to pass along to Lazorchak for the initial tips. Lazorchak never knew the identities of Castelli or Grum, but was aware that Cupo was passing confidential Celgene information to other traders.

The SEC alleges that Lazorchak's high school friend Foldy entered the scheme in 2007, when Lazorchak tipped him with confidential details about the impending merger between Celgene and Pharmion, and Foldy illegally traded on the information prior to the public announcement of the deal. Lazorchak and Foldy devised and used code phrases while conversing to identify instances when Lazorchak was passing inside information or Foldy was seeking more details. After the illegal trading occurred and Foldy obtained illicit profits of $14,500, Lazorchak repeatedly demanded that Foldy compensate him for the inside information. Foldy ultimately paid Lazorchak at least $500 and later returned the favor with illegal tips of confidential information about a tender offer involving his employer, Stryker Corp. Lazorchak acted as a middleman and did not trade, instead tipping Pendolino so he could trade on the nonpublic information. Pendolino in turn tipped Deprado, who also traded. Lazorchak additionally tipped Cupo, who did not trade but acted as a middleman and tipped Castelli and Grum, who both traded.

The SEC alleges that Cupo began tipping inside information about his employer in late 2009, when he learned that Sanofi was planning to announce a tender offer to acquire another pharmaceutical company, Chattem Inc. Cupo learned of the imminent tender offer a few days prior to the public announcement, he tipped Castelli and Grum with the confidential details, and they both traded on the nonpublic information.

The SEC alleges that each of the defendants violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder and that Castelli and Grum violated Section 17(a) of the Securities Act of 1933. The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and officer and director bars for Lazorchak, Cupo, and Foldy.

The SEC's investigation, which is continuing, has been conducted by Colleen K. Lynch, David W. Snyder and John S. Rymas, who are members of the Market Abuse Unit in the SEC's Philadelphia office. G. Jeffrey Boujoukos and Catherine E. Pappas are 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, the Financial Industry Regulatory Authority, and the Options Regulatory Surveillance Authority.

# # #

Washington, D.C., Nov. 16, 2012 — In coordination with the federal-state Residential Mortgage-Backed Securities Working Group, the Securities and Exchange Commission today charged J.P. Morgan Securities LLC and Credit Suisse Securities (USA) with misleading investors in offerings of residential mortgage-backed securities (RMBS). The firms agreed to settlements in which they will pay more than $400 million combined, and the SEC plans to distribute the money to harmed investors.

The SEC alleges that J.P. Morgan misstated information about the delinquency status of mortgage loans that provided collateral for an RMBS offering in which it was the underwriter. J.P. Morgan received fees of more than $2.7 million, and investors sustained losses of at least $37 million on undisclosed delinquent loans. J.P. Morgan also is charged for Bear Stearns' failure to disclose its practice of obtaining and keeping cash settlements from mortgage loan originators on problem loans that Bear Stearns had sold into RMBS trusts. The proceeds from this bulk settlement practice were at least $137.8 million.

J.P. Morgan has agreed to pay $296.9 million to settle the SEC's charges.

According to the SEC's order against Credit Suisse, the firm similarly failed to accurately disclose its practice of retaining cash for itself from the settlement of claims against mortgage loan originators for problems with loans that Credit Suisse had sold into RMBS trusts and no longer owned. Credit Suisse also made misstatements in SEC filings about when it would repurchase mortgage loans from trusts if borrowers missed the first payment due. The firm made $55.7 million in profits and losses avoided from its bulk settlement practice, and its investors lost more than $10 million due to Credit Suisse's practices concerning first payment defaults.

Credit Suisse has agreed to pay $120 million to settle the SEC's charges.

"In many ways, mortgage products such as RMBS were ground zero in the financial crisis," said Robert Khuzami, Director of the SEC's Division of Enforcement. "Misrepresentations in connection with the creation and sale of mortgage securities contributed greatly to the tremendous losses suffered by investors once the U.S. housing market collapsed. Today's actions involving RMBS securities are a continuation of the SEC's strong efforts to pursue wrongdoing committed in connection with the financial crisis."

Mr. Khuzami is a co-chair of the RMBS Working Group, which brings together federal and state agencies to investigate those responsible for misconduct that contributed to the financial crisis through the pooling and sale of RMBS.

RMBS Working Group Co-Chair and U.S. Attorney for the District of Colorado John Walsh said, "Today's filings represent significant steps towards the accomplishment of the Working Group's mission - to investigate and confront the abuses in the residential mortgage-backed securities market that significantly contributed to the Financial Crisis. The Working Group model allows the Department of Justice to lend a hand to other enforcement partners around the country who, in turn, have their own unique resources, talents, and legal tools to contribute to the effort. And the Justice Department's efforts in this area have benefited from SEC's work on its own cases."

RMBS Working Group Co-Chair and New York State Attorney General Eric Schneiderman said, "Today's actions are another step forward in the process of bringing accountability for the misconduct that led to the collapse of the housing market. We will continue to work together on behalf of consumers and investors to ensure that it never happens again."

According to the SEC's complaint against J.P. Morgan filed in federal court in Washington D.C., federal regulations under the securities laws require the disclosure of delinquency information related to assets that provide collateral for an asset-backed securities offering. Information about the delinquency status of mortgage loans in an RMBS transaction is important to investors because those loans are the primary source of funds by which investors can earn interest and obtain repayment of their principal.

The SEC alleges that in the prospectus supplement for the $1.8 billion RMBS offering that occurred in December 2006, J.P. Morgan made materially false and misleading statements about the loans that provided collateral for the transaction. The firm represented that only four loans (.04 percent of the total loans collateralizing the transaction) were delinquent by 30 to 59 days, and that those four were the only loans that had had an instance of delinquency of 30 or more days in the 12 months prior to the "cut-off date" for the transaction. However, at the time J.P. Morgan made these representations, the firm actually had information showing that more than 620 loans (above 7 percent of the total loans collateralizing the transaction) were, and had been, 30 to 59 days delinquent, and the four loans represented as being 30 to 59 days delinquent were in fact 60 to 89 days delinquent.

The SEC's complaint also alleges that Bear Stearns' bulk settlements covered loans collateralizing 156 different RMBS transactions issued from 2005 to 2007. Loan originators were usually required by contract to buy back loans that suffered early payment defaults or had other defects. However, Bear Stearns frequently negotiated discounted cash settlements with these loan originators in lieu of a buy-back on loans that were owned by the RMBS trusts. The firm - both before and after the merger with J.P. Morgan - then kept most of the bulk settlement proceeds. The firm failed to disclose the practice to investors who owned the loans. Bear Stearns repurchased only about 13 percent of these defective bulk settlement loans from the trusts, compared to a nearly 100 percent repurchase rate when loan originators agreed to buy back the defective loans. For most loans covered by bulk settlements, the firm collected money from originators without paying anything to the trusts.

J.P. Morgan settled the SEC's charges by consenting to pay $50.5 million in disgorgement and prejudgment interest and a $24 million penalty for the delinquency misstatements, which the SEC will seek to distribute to harmed investors in the transaction through a Fair Fund. J.P. Morgan agreed to pay $162,065,536 in disgorgement and prejudgment interest and a $60.35 million penalty for the bulk settlement practice misconduct, and the SEC will seek to distribute these funds to harmed investors through a separate Fair Fund. J.P. Morgan consented, without admitting or denying the allegations, to the entry of a final judgment permanently enjoining them from violating Section 17(a)(2) and (3) of the Securities Act of 1933. The settlement is subject to court approval.

According to the SEC's order instituting a settled administrative proceeding against Credit Suisse, the firm and its affiliated entities misled investors in 75 different RMBS transactions through the bulk settlement practice. From 2005 to 2010, Credit Suisse frequently negotiated bulk settlements with loan originators in lieu of a buy-back of loans that were owned by the RMBS trusts. Credit Suisse kept the bulk settlement proceeds for itself and failed to disclose the practice to investors who owned the loans. In nine of the 75 RMBS trusts, Credit Suisse failed to comply with offering document provisions that required it to repurchase certain early defaulting loans. Credit Suisse also applied different quality review procedures for loans that it sought to put back to originators, instituted a practice of not repurchasing such loans from trusts unless the originators had agreed to repurchase them, and failed to disclose the bulk settlement practice when answering investor questions about early payment defaults.

The SEC's order also found that Credit Suisse made misleading statements about a key investor protection known as the First Payment Default (FPD) provision in two RMBS offerings. The FPD provision required the mortgage loan originator to repurchase or substitute loans that missed payments shortly before or after they were securitized. Credit Suisse misled investors by falsely claiming that "all First Payment Default Risk" was removed from its RMBS, and at the same time limiting the number of FPD loans that were put back to the originator.

Credit Suisse settled the SEC's charges by consenting to pay $68,747,769 in disgorgement and prejudgment interest and a $33 million penalty, which the SEC will seek to distribute through a Fair Fund to harmed investors in the 75 RMBS transactions affected by the bulk settlement practice. Credit Suisse agreed to pay $12,256,651 in disgorgement and prejudgment interest and a $6 million penalty, which the SEC will seek to distribute through a separate Fair Fund to harmed investors in the two transactions affected by the FPD misstatements. Credit Suisse agreed to an order, without admitting or denying the allegations, requiring them to cease and desist from violations of Section 17(a)(2) and (3) of the Securities Act and Section 15(d) of the Securities Exchange Act of 1934.

These investigations were conducted by members of the SEC Enforcement Division's Structured and New Products Unit in both the Denver and Washington, D.C. offices, including Zachary Carlyle, Mark Cave, Sarra Cho, Allison Herren Lee, Laura Metcalfe, Colin Rand, Thomas Silverstein, John Smith, Andrew Sporkin, Amy Sumner, and Jeffrey Weiss. The trial unit members assigned to this matter were Dugan Bliss, Kyle DeYoung, Jan Folena, and Christian Schultz. The Enforcement Division was assisted by Eugene Canjels and Vance Anthony in the Division of Risk, Strategy and Financial Innovation. The SEC thanks the other agencies who are members of the RMBS Working Group for their assistance and cooperation regarding these enforcement actions.

"These actions demonstrate that we intend to hold accountable those who misled investors through poor disclosures in the sale of RMBS and other financial products commonly marketed and sold during the financial crisis. Our efforts in that regard continue," said Kenneth Lench, Chief of the SEC Enforcement Division's Structured and New Products Unit.

* * *

Today's announcement is part of the ongoing efforts of President Obama's Financial Fraud Enforcement Task Force's Residential Mortgage-Backed Securities (RMBS) Working Group, a federal and state law enforcement effort focused on investigating fraud and abuse in the RMBS market that helped lead the 2008 financial crisis. The RMBS Working Group brings together more than 200 attorneys, investigators, analysts and staff from dozens of state and federal agencies including the Department of Justice together with 10 U.S. Attorneys' Offices and the FBI, the Securities and Exchange Commission, the Department of Housing and Urban Development (HUD), HUD's Office of Inspector General, the Federal Housing Finance Agency's Office of Inspector General, the Office of the Special Inspector General for the Troubled Asset Relief Program, the Federal Reserve Board's Office of Inspector General, the Recovery Accountability and Transparency Board, the Financial Crimes Enforcement Network, and more than 10 state attorneys general offices around the country.

The Working Group is led by five co-chairs: Director of Enforcement for the SEC Robert Khuzami, New York State Attorney General Eric Schneiderman, Assistant Attorney General for the Justice Department's Criminal Division Lanny Breuer, Principal Deputy Assistant Attorney General for the Justice Department's Civil Division Stuart Delery and U.S. Attorney for the District of Colorado John Walsh. The RMBS Working Group Coordinator is Matthew Stegman. For more information about the RMBS working group and the Financial Fraud Enforcement Task Force, which is chaired by Attorney General Eric Holder, visit: www.stopfraud.gov

# # #

Washington, D.C., November 14, 2012 — The Securities and Exchange Commission is operating under a continuing resolution through March 27, 2013. Accordingly, the fees paid under Section 31 of the Securities Exchange Act will remain at their current rate until 60 days after the enactment of a regular appropriation for the Commission.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Commission will be required to publish a revised fee rate 30 days after the Commission’s regular appropriation for FY 2012 is enacted, and this new fee rate will become effective 60 days after the appropriation is enacted. Until this time, the Section 31 fee rate will remain at the current rate of $22.40 per million. The Section 31 assessment on round turn transactions in security futures also will remain at $0.0042 per transaction.

The Office of Interpretation and Guidance in the Commission’s Division of Trading and Markets is available for questions on Section 31 at (202) 551-5777 or by e-mail at tradingandmarkets@sec.gov.

The Commission will issue further notices as appropriate to keep the public informed of developments relating to the effective dates of the fee rates under Section 31. These notices will be posted at the SEC’s website.

# # #

Washington, D.C., Nov. 15, 2012 — The Securities and Exchange Commission today charged BP p.l.c. with misleading investors while its Deepwater Horizon oil rig was gushing into the Gulf of Mexico by significantly understating the flow rate in multiple reports filed with the SEC.

The SEC alleges that the global oil and gas company headquartered in London made fraudulent public statements indicating a flow rate estimate of 5,000 barrels of oil per day. BP reported this figure despite its own internal data indicating that potential flow rates could be as high as 146,000 barrels of oil per day. BP executives also made numerous public statements after the filings were made in which they stood behind the flow rate estimate of 5,000 barrels of oil per day even though they had internal data indicating otherwise. In fact, they criticized other much higher estimates by third parties as scaremongering. Months later, a government task force determined the flow rate estimate was actually more than 10 times higher at 52,700 to 62,200 barrels of oil per day, yet BP never corrected or updated the misrepresentations and omissions it made in SEC filings for investors.

BP agreed to settle the SEC's charges by paying the third-largest penalty in agency history at $525 million. The SEC plans to establish a Fair Fund with the BP penalty to provide harmed investors with compensation for losses they sustained in the fraud. The SEC announced the case today along with the Attorney General and other senior officials at the Justice Department, which brought a criminal action against BP.

"The oil spill was catastrophic for the environment, but by hiding its severity BP also harmed another constituency – its own shareholders and the investing public who are entitled to transparency, accuracy, and completeness of company information, particularly in times of crisis," said Robert Khuzami, Director of the SEC's Division of Enforcement. "Good corporate citizenship and responsible crisis management means that a company can't hide critical information simply because it fears the backlash."

Daniel M. Hawke, Director of the SEC's Philadelphia Regional Office and Chief of the Enforcement Division's Market Abuse Unit, said, "Without accurate critical flow rate data known only to BP, the company denied its shareholders and investors the opportunity to fairly assess BP's potential liabilities and true financial condition."

According to the SEC's complaint filed in the U.S. District Court for the Eastern District of Louisiana, BP stated that the flow rate was estimated to be 5,000 barrels of oil per day (bopd) in three separate Forms 6-K filed with the SEC following the Deepwater Horizon oil rig explosion on April 20, 2010. In a 6-K filed on April 29, BP stated in part, "[e]fforts continue to stem the flow of oil from the well, currently estimated at up to 5,000 bopd[.]" BP filed another report the next day similarly referencing "[e]fforts to stem the flow from the well, currently estimated at up to 5,000 barrels a day are continuing[.]"

The SEC alleges that when the company made those statements, BP possessed at least five different flow rate calculations, estimates, or data indicating a much higher flow rate. BP did not possess or generate any piece of data suggesting that 5,000 bopd represented a ceiling for the rate of oil flowing into the Gulf of Mexico or was the best estimate. The failure to disclose the existence of these higher estimates rendered BP's statements in its Reports on Form 6-K materially false and misleading.

According to the SEC's complaint, BP issued another 6-K on May 4 that stated, "Accurate estimation of the rate of flow is difficult, but current estimates by the U.S. National Oceanic and Atmospheric Administration (NOAA) suggest that some 5,000 barrels (210,000 US gallons) of oil per day are escaping from the well."

The SEC alleges that BP omitted from its disclosure the material fact that, by this date, it possessed at least six estimates, calculations and data indicating that the oil flow rate far exceeded 5,000 bopd. Therefore, it was no longer accurate to suggest that 5,000 bopd was the best estimate or that the NOAA estimate was the current estimate.

The SEC's complaint further alleges that BP executives made numerous public statements in May 2010 supporting the 5,000 bopd flow rate estimate and criticizing other estimates despite internal evidence showing that flow rates were likely well in excess of 5,000 bopd. Eventually on August 2, the Flow Rate Technical Group consisting of government and academic experts tasked with reaching a final official flow rate estimate announced that the flow rate estimate was 52,700 to 62,200 bopd. BP never corrected or updated its material misrepresentations and omissions about the flow rate.

BP has consented to the entry of a final judgment ordering it to pay the $525 million penalty and permanently restraining and enjoining the company from violating Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20 and 13a-16. The proposed final judgment is subject to court approval.

The SEC's investigation, which is continuing, has been conducted by Brian P. Thomas, Matthew S. Raalf, Kelly L. Gibson, Michael F. McGraw, John S. Rymas, Colleen K. Lynch, Jeffrey Boujoukos, Michael J. Rinaldi, and Elaine C. Greenberg in the Philadelphia Regional Office. The SEC appreciates the assistance of the Department of Justice's Deepwater Horizon Task Force and the United Kingdom Financial Services Authority.

# # #

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

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

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

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

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

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

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

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

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

# # #

Washington, D.C., Nov. 15, 2012 — Over the past year, the Securities and Exchange Commission received more than 3,000 whistleblower tips from all 50 states and from 49 countries, according to the agency's 2012 Annual Report on the Dodd-Frank Whistleblower Program released today.

The report, which is required by the Dodd Frank Wall Street Reform and Consumer Protection Act, summarizes the activities of the SEC's Office of the Whistleblower.

"In just its first year, the whistleblower program already has proven to be a valuable tool in helping us ferret out financial fraud," said SEC Chairman Mary L. Schapiro. "When insiders provide us with high-quality road maps of fraudulent wrongdoing, it reduces the length of time we spend investigating and saves the agency substantial resources."

Among other things, the report notes:

• The SEC made its first award under the new program to a whistleblower who helped the SEC stop an ongoing multi-million dollar fraud. The whistleblower received an award of 30 percent of the amount collected in the SEC's enforcement action, which is the maximum percentage payout allowed by law.
• The SEC received 3,001 tips, complaints, and referrals from whistleblowers from individuals in all 50 states, the District of Columbia, and the U.S. territory of Puerto Rico as well as 49 countries outside of the United States.
• The most common complaints related to corporate disclosures and financials (18.2 percent), offering fraud (15.5 percent), and manipulation (15.2 percent).
• There were 143 enforcement judgments and orders issued during fiscal year 2012 that potentially qualify as eligible for a whistleblower award. The Office of the Whistleblower provided the public with notice of these actions because they involved sanctions exceeding the statutory threshold of more than $1 million.

Under the Dodd-Frank Act, the SEC can pay financial awards to whistleblowers who provide high-quality, original information about a possible securities law violation that leads to a successful SEC enforcement action with more than $1 million in monetary sanctions. The SEC is authorized to pay the whistleblower 10 to 30 percent of the sanctions collected. Awards are paid from the Investor Protection Fund established by Congress to fund payments.

Information on eligibility requirements, directions on how to submit a tip or complaint, instructions on how to apply for an award, and answers to frequently asked questions are available at: www.sec.gov/whistleblower.

# # #

Washington, D.C., Nov. 15, 2012 — The Securities and Exchange Commission today issued its second annual staff report on the findings of examinations of credit rating agencies registered with the SEC as Nationally Recognized Statistical Rating Organizations (NRSROs). The staff determined that with one exception, all NRSROs appropriately addressed the staff's recommendations in the first annual report in 2011. In addition, the staff announced a new initiative to highlight compliance issues at credit rating agencies between examinations.

"The SEC's enhanced oversight of NRSROs is having a positive effect," said Thomas J. Butler, Director of the SEC's Office of Credit Ratings. "The firms have been generally responsive to the staff's recommendations, which are intended to strengthen NRSROs' policies, procedures, and operations and to make their internal governance and controls more robust. We will continue to review their responses to our recommendations and use our examinations to promote compliance with statutory and Commission requirements."

Congress mandated the creation of the Office of Credit Ratings as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which imposed new reporting, disclosure, and examination requirements to enhance the regulation of NRSROs. The Dodd-Frank Act requires the Commission staff to examine each NRSRO at least annually and issue a report summarizing the essential findings of the examinations. In the reports, firms are referred to as "large NRSROs" or "small NRSROs" to promote the public's understanding without compromising due process requirements.

The 2012 report discusses the staff's findings and recommendations in eight areas, including whether the NRSRO conducts business in accordance with its policies, procedures, and methodologies, how it manages conflicts of interest, and whether it maintains effective internal controls. The staff identified findings and made recommendations to all NRSROs. Findings identified at one or more NRSROs include the following:

• The methodology applied to rating certain securities appears to have been changed, but the change was not publicly disclosed for several months
   
• Certain securities were not timely downgraded in accordance with policies and procedures related to rating watch status
   
• Methodologies were published and disclosed inconsistently and in a less-than-transparent manner
   
• Directors were not actively exercising their required oversight duties

In addition to the recommendations to NRSROs based on the 2012 exams, the SEC's Office of Credit Ratings will promote compliance between exams by sending letters to the Designated Compliance Officers at all of the firms as issues arise. The first industry-wide "Dear DCO" letter, sent today, urges NRSROs to review SEC rules on preventing the misuse of material nonpublic information and avoiding unfair, coercive, or abusive practices with respect to credit ratings. The letter is available on the SEC's website at www.sec.gov/about/offices/ocr.shtml.

The following staff made significant contributions to the examinations referenced in the second annual staff report: Abe Losice, Kenneth Godwin, Michele Wilham, Jon Hertzke, Natalia Kaden, Nicole Billick, Shawn Davis, Michael Gerity, Warren Greth, Julia Kiel, Russell Long, Carlos Maymi, David Nicolardi, Harriet Orol, Jacob Prudhomme, Abraham Putney, Said Rafat, Mary Ryan, Warren Tong, Evelyn Tuntono, and Kenneth Weinstein.

# # #

Washington, D.C., Nov. 14, 2012 — Building on last year’s record results, the Securities and Exchange Commission today announced that it filed 734 enforcement actions in the fiscal year that ended Sept. 30, 2012, one shy of last year’s record of 735. Most significantly, that number included an increasing number of cases involving highly complex products, transactions, and practices, including those related to the financial crisis, trading platforms and market structure, and insider trading by market professionals. Twenty percent of the actions were filed in investigations designated as National Priority Cases, representing the Division’s most important and complex matters.

The SEC also announced that it obtained orders in fiscal year 2012 requiring the payment of more than $3 billion in penalties and disgorgement for the benefit of harmed investors. It represents an 11 percent increase over the amount ordered last year. In the past two years, the SEC has obtained orders for $5.9 billion in penalties and disgorgement.

“The record of performance is a testament to the professionalism and perseverance of the staff and the innovative reforms put in place over the past few years,” said SEC Chairman Mary L. Schapiro. “We’ve now brought more enforcement actions in each of the last two years than ever before including some of the most complex cases we’ve ever seen.”

Robert Khuzami, Director of the SEC’s Division of Enforcement, added, “It’s not simply numbers, but the increasing complexity and diversity of the cases we file that shows how successful we’ve been. The intelligence, dedication, and deep experience of our enforcement staff are, more than any other factors, responsible for the Division’s success.”

The sustained high-level performance comes two years after the Division underwent its most significant reorganization since it was established in the early 1970s. The results in 2012 were aided by many of the reforms and innovations put in place in the past two years, such as increased expertise in complex and emerging financial markets, products, and transactions, including through enhanced training, the hiring of industry experts, and the creation of specialized enforcement units focused on high-priority misconduct; a flatter management structure; streamlined and centralized processes and the improved utilization of information technology; and a vastly enhanced ability to collect, process, and analyze tips and complaints.

Financial Crisis-Related Cases

Among the cases filed by the SEC in FY 2012 were 29 separate actions naming 38 individuals, including 24 CEOs, CFOs and other senior corporate officers, regarding wrongdoing related to the financial crisis.

These cases included enforcement actions involving:

• The former senior officers of Fannie Mae and Freddie Mac for misleading statements regarding the extent of each company’s holdings of higher-risk mortgage loans.
   
• Former investment bankers at Credit Suisse for fraudulently overstating the prices of $3 billion in subprime bonds.
   
• Several bank and mortgage executives including those at United Commercial Bank, TierOne Bank, Franklin Bank, and Thornburg Mortgage for misleading investors about mounting loan losses and the deteriorating financial condition of their institutions.
   
• The U.S. investment banking subsidiary of Japan-based Mizuho Financial Group for misleading investors in a CDO by using “dummy assets” to inflate the deal’s credit ratings.

During the last 2½ years, the agency has filed actions related to the financial crisis against 117 defendants – nearly half of whom were CEOs, CFOs and other senior corporate executives, resulting in approximately $ 2.2 billion in disgorgement, penalties, and other monetary relief obtained or agreed to. The SEC brought enforcement actions against Goldman Sachs, J.P Morgan Securities, and Morgan Keegan as well as senior executives from Countrywide, New Century, and American Home Mortgage.

Insider Trading Cases

Insider trading cases also are on the upswing with 58 actions filed in FY 2012 by the SEC, an increase over last year’s total of 57 actions. The 168 total insider trading actions filed since October 2009 have been the most in SEC history for any three-year period.

In these actions, the SEC has charged approximately 400 individuals and entities for illegal trading totaling approximately $600 million in illicit profits. Among those charged in SEC insider trading cases in 2012 were:

• Former McKinsey & Co. global head Rajat Gupta for illegally tipping convicted hedge fund manager Raj Rajaratnam.
   
• Hedge funds Diamondback Capital and Level Global Investors and affiliated traders and analysts.
   
• Hedge fund manager Douglas Whitman.
   
• John Kinnucan and his expert network consulting firm Broadband Research Corporation.
   
• A second round of charges in an insider trading case involving former professional baseball players and the former top executive at Advanced Medical Optics.

Other Enforcement Matters

In order to ensure fair trading and equal access to information in the securities markets, the SEC brought several actions involving compliance failures and rules violations relating to stock exchanges, alternative trading platforms, and other market structure participants.

These cases included:

• First-of-its-kind charges against the New York Stock Exchange for compliance failures that gave certain customers an improper head start on trading information.
   
• The first-ever action against a “dark pool” trading platform (Pipeline Trading Systems) for failing to disclose to its customers that the vast amount of orders were filled by an affiliated trading operation.
   
• An action against Direct Edge Holdings LLC for violations at two of its electronic stock exchanges and a broker-dealer arising out of weak controls that resulted in millions of dollars in trading losses and a systems outage.

In the NYSE matter, the exchange and its parent company NYSE Euronext agreed to pay a $5 million penalty, marking the first-ever SEC financial penalty against an exchange.

Investment Advisers: The SEC filed numerous actions resulting from several risk-based, proactive measures that identify threats at an early stage so that early action to halt the misconduct can be initiated and investor harm minimized. In 2012, several actions resulted from the Division’s investment adviser compliance initiative, which looks for registered investment advisers who lack effective compliance programs designed to prevent securities laws violations.

The SEC also filed actions charging three advisory firms and six individuals as part of the Aberrational Performance Inquiry into abnormal performance returns by hedge funds.  Other actions against investment advisers included cases against UBS Financial Services of Puerto Rico and two executives for misleading disclosures relating to certain proprietary closed-end mutual funds, Morgan Stanley Investment Management for an improper fee arrangement, and OppenheimerFunds for misleading investors in two funds suffering significant losses during the financial crisis.  UBS paid more than $26 million to settle the SEC’s charges while OppenheimerFunds paid more than $35 million for its violations.

The SEC filed 147 enforcement actions in 2012 against investment advisers and investment companies, one more than the previous year’s record number.

Issuer Disclosures: The SEC brought 79 actions in FY 2012 for financial fraud and issuer disclosure violations.  Those cases included actions against Life Partners Holdings and senior executives for fraudulent disclosures related to life settlements; two executives at China-based Puda Coal for defrauding investors about the nature of the company’s assets; and an enforcement action against Shanghai-based Deloitte Touche Tohmatsu for its refusal to provide the SEC with audit work papers related to a China-based company under investigation for potential accounting fraud against U.S. investors.

Broker-Dealers: The agency filed 134 enforcement actions related to broker-dealers, a 19 percent increase over the previous year.  Broker-dealer actions included charges against a Latvian trader and electronic trading firms for their roles in an online account intrusion scheme that manipulated the prices of more than 100 NYSE and Nasdaq securities as well as charges against New York-based brokerage firm Hold Brothers On-Line Investment Services and three of its executives for their roles in allowing overseas traders to access the markets and conduct manipulative trading through accounts the firm controlled.  The defendants in the Hold Brothers action paid a total of $4 million to settle the SEC’s charges.

FCPA: The SEC filed 15 actions in FY 2012 for violations of the Foreign Corrupt Practices Act. FCPA actions were filed against former Siemens executives, Magyar Telekom, Biomet, Smith & Nephew, Pfizer, Tyco International, and a former executive at Morgan Stanley’s real estate investment and fund advisory business.

Municipal Securities: The SEC filed 17 enforcement actions related to municipal securities, more than double the number filed in 2011. Among those charged in SEC municipal securities actions were the former mayor and city treasurer of Detroit in a pay-to-play scheme involving investments of the city’s pension funds, and Goldman Sachs for violations of various municipal securities rules resulting from undisclosed “in-kind” non-cash contributions that one of its investment bankers made to a Massachusetts gubernatorial candidate.

* * *

The Division also achieved impressive results in its litigated enforcement actions. During fiscal year 2012, the Division prevailed at trial against 95 percent (21-1) of defendants.

Additional data on the SEC’s FY 2012 enforcement results will be available as part of the SEC’s upcoming Agency Financial Report.

# # #

Washington, D.C., Nov. 14, 2012 — The Securities and Exchange Commission today issued an order providing regulatory relief to publicly traded companies, investment companies, accountants, transfer agents, and others affected by Hurricane Sandy.

The loss of property, power, transportation, and mail delivery due to the hurricane poses challenges for some public companies and others that are required to provide information to the SEC and shareholders. To address compliance issues caused by Hurricane Sandy and its aftermath, the order conditionally exempts affected persons from the requirements of the federal securities laws with regard to the following:

• Exchange Act filing requirements for the period from Oct. 29, 2012 to Nov. 20, 2012, provided that the filer disclose the reasons why, in good faith, it cannot file on a timely basis
   
• Proxy and information statement delivery requirements for companies or others attempting to deliver materials to affected areas
   
• Investment Company Act requirements for the transmittal to shareholders in affected areas of the annual and semi-annual reports of registered investment companies for the period from Oct. 29, 2012 to Nov. 20, 2012
   
• Transfer agent compliance with Exchange Act Sections 17A and 17(f) and Exchange Act Rules 17Ad-1 through 17Ad-20, and Exchange Act Rules 17f-1 and 17f-2 for the period from Oct. 29, 2012 to Dec. 1, 2012
   
• Auditor independence requirements as they relate to reconstruction of previously existing accounting records for audit clients

In addition, the Commission has directed the staff to take the following positions under the Exchange Act, the Securities Act, and the Investment Advisers Act, regarding issues that may arise commonly for companies and others attempting to comply with their obligations under the federal securities laws:

• For purposes of eligibility to use Form S-3 (as well as well-known seasoned issuer status, which is based in part on Form S-3 eligibility) for a company relying on the exemptive order, any of that company’s Exchange Act reports that would have been required to be filed during the period from Oct. 29, 2012 to Nov. 20, 2012 will be due by Nov. 21, 2012. Such a company will, therefore, be considered:
   
  
  • Current in its Exchange Act reports prior to Nov. 21, 2012 if it was current in its Exchange Act reports as of Oct. 28, 2012
     
  • Current in its Exchange Act reports as of Nov. 21, 2012 if it was current in its Exchange Act reports as of Oct. 28, 2012 and it has made any filings required during the period from Oct. 29, 2012 to Nov. 20, 2012
     
  • Timely in its Exchange Act reports prior to Nov. 21, 2012 if it was timely in its Exchange Act reports as of Oct. 28, 2012
     
  • Timely in its Exchange Act reports as of Nov. 21, 2012 if it was timely in its Exchange Act reports as of Oct. 28, 2012 and it has made any filings required during the period from Oct. 29, 2012 to Nov. 20, 2012 on or before Nov. 21, 2012
     
• For purposes of the Form S-8 eligibility requirements and the current public information eligibility requirements of Rule 144(c), a company relying on the exemptive order will be considered:
   
  
  • Current in its Exchange Act reports prior to Nov. 21, 2012 if it was current in its Exchange Act reports as of Oct. 28, 2012
     
  • Current in its Exchange Act reports as of Nov. 21, 2012 if it was current in its Exchange Act reports as of Oct. 28, 2012 and it has made any filings required during the period from Oct. 29, 2012 to Nov. 20, 2012
     
• Companies that receive an extension on filing Exchange Act annual reports or quarterly reports pursuant to the order will be considered to have a due date of Nov. 21, 2012 for those reports for purposes of Exchange Act Rule 12b-25. As such, those companies will be permitted to rely on Rule 12b-25 where they are unable to file the required reports on or before Nov. 21, 2012.
   
• For the period from Oct. 29, 2012 to Nov. 20, 2012, a registered open-end investment company and a registered unit investment trust will be considered to have satisfied the requirements of Section 5(b)(2) of the Securities Act to deliver a summary or a statutory prospectus, as applicable, to an investor, provided that: (1) the sale of shares to the investor was not an initial purchase by the investor of shares of the company or unit investment trust; (2) the investor’s mailing address for delivery, as listed in the records of the company or unit investment trust, has a ZIP code for which the U.S. Postal Service has suspended mail service, as a result of Hurricane Sandy, of the type or class customarily used by the company or unit investment trust, to deliver summary or statutory prospectuses; and (3) the company, or unit investment trust, or other person promptly delivers the summary or statutory prospectus, as applicable (a) if requested by the investor, or (b) by the earlier of Nov. 21, 2012 or the resumption of the applicable mail service.
   
• A registered investment adviser will be considered to have satisfied Form ADV filing requirements under Section 204(a) of the Advisers Act and Rule 204-1 thereunder, if: (1) the registrant’s Form ADV filing deadline falls within the period from Oct. 29, 2012 to Nov. 20, 2012; (2) the registrant was or is not able to meet its filing deadline due to Hurricane Sandy and its aftermath; and (3) the registrant makes the required Form ADV filing by Nov. 21, 2012.
   
• For the period from Oct. 29, 2012 to Nov. 20, 2012, a registered investment adviser will be considered to have satisfied the requirements of Section 204 of the Advisers Act and Rule 204-3(b) thereunder to deliver the written disclosure statements required thereunder to its advisory client, provided that: (1) the client’s mailing address for delivery, as listed in the records of the investment adviser, has a ZIP code for which the U.S. Postal Service has suspended mail service, as a result of Hurricane Sandy, of the type or class customarily used by the adviser to deliver written disclosure statements; and (2) the investment adviser or other person promptly delivers the written disclosure statement (a) if requested by the client, or (b) at the earlier of Nov. 21, 2012 or the resumption of the applicable mail service.

The relief is structured for a broad class of companies and others affected by Hurricane Sandy. Some companies and other affected persons may require additional or different assistance in their efforts to comply with the requirements of the federal securities laws. The Commission staff will address these and any disclosure-related issues on a case-by-case basis in light of their fact-specific nature.

Any companies, transfer agents, brokerage firms, investment companies, investment advisers, security holders or other persons requiring additional assistance are encouraged to contact Commission staff for individual relief or interpretive guidance.

# # #

Washington D.C., Nov. 14, 2012 — The Securities and Exchange Commission and the Department of Justice today released A Resource Guide to the U.S. Foreign Corrupt Practices Act. The 120-page guide provides a detailed analysis of the U.S. Foreign Corrupt Practices Act (FCPA) and closely examines the SEC and DOJ approach to FCPA enforcement.

The guide provides helpful information to enterprises of all sizes from small businesses doing their first transactions abroad to multi-national corporations with subsidiaries around the world. The guide addresses a wide variety of topics including who and what is covered by the FCPA's anti-bribery and accounting provisions; the definition of a "foreign official"; what constitute proper and improper gifts, travel, and entertainment expenses; facilitating payments; how successor liability applies in the mergers and acquisitions context; the hallmarks of an effective corporate compliance program; and the different types of civil and criminal resolutions available in the FCPA context. On these and other topics, the guide takes a multi-faceted approach toward setting forth the statute's requirements and providing insights into SEC and DOJ enforcement practices. It uses hypotheticals, examples of enforcement actions and matters that the SEC and DOJ have declined to pursue, and summaries of applicable case law and DOJ opinion releases.

"Investors must have faith that the economic performance of public companies reflects lawful considerations of markets, price, and product rather than a mirage resulting from bribery and corruption," said Robert Khuzami, Director of the SEC's Division of Enforcement. "This guide will protect investors by assisting businesses in preventing such unlawful behavior, thus avoiding FCPA violations in the first place, which is in the interest of law enforcement and business alike."

Assistant Attorney General Lanny A. Breuer of the Justice Department's Criminal Division said, "The fight against corruption is a law enforcement priority of the United States. Our FCPA enforcement is critical to protecting the integrity of markets for American companies doing business abroad, and we will continue to make clear that bribing foreign officials is not an acceptable shortcut. The guide is an important illustration of our transparency and a useful reference for companies and individuals who wish to act responsibly and in compliance with the law."

The guide is available online at: www.sec.gov/spotlight/fcpa.shtml or www.justice.gov/criminal/fraud/fcpa

# # #

Washington D.C., Nov. 9, 2012 — The Securities and Exchange Commission today charged a Miami-based investment adviser for defrauding his clients by concealing trading losses and diverting investor funds for personal use.

The SEC alleges that Anand Sekaran and his firm Wasson Capital Advisors Ltd. fabricated documents showing illusory profits after his trading strategy became unprofitable in 2008 and produced substantial losses for clients. Sekaran also misused client funds to pay various personal and business expenses, and he collected fees in excess of what he was due under the arrangements he had with clients.

Sekaran and Wasson agreed to resolve the SEC’s charges as well as a parallel criminal action announced today by the U.S. Attorney’s Office for the Southern District of New York.

“An investment adviser’s fiduciary duty applies equally in good times and bad,” said Bruce Karpati, Chief of the SEC Enforcement Division’s Asset Management Unit. “Sekaran breached that duty when he concealed trading losses and misled clients rather than simply admitting that his investment strategy was unsuccessful.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Sekaran provided investors with a spreadsheet inaccurately showing that Wasson was profitable. He inflated account balances on some clients’ account statements, using the letterhead of a defunct British Virgin Islands trust company for one client and the letterhead of a New Zealand firm for another client. He misappropriated investor money for personal mortgage and maintenance payments, restaurant and travel expenses, entertainment and event tickets, employee salaries and health insurance, and rent and office expenses.

In settling the SEC’s charges, Sekaran and Wasson consented to a final judgment imposing permanent injunctions from future violations of the anti-fraud provisions of the federal securities laws. Sekaran separately consented to an SEC order barring him from the securities industry and penny stock industry. Sekaran is required to pay $2.3 million to satisfy restitution and forfeiture orders in the criminal matter.

The SEC’s investigation was conducted by Salvatore Massa and Anthony Kelly of the Asset Management Unit and Tonya Tullis of the Miami Regional Office. Omar Santos conducted a related SEC examination. The SEC thanks the U.S. Attorney’s Office for the Southern District of New York and the U.S. Postal Inspection Service for their assistance in this matter.

# # #

Washington, D.C., Nov. 8, 2012 — The Securities and Exchange Commission today charged three executives with repeatedly lying to investors about the operations and financial condition of an Irvine, Calif.-based company that purported to sell credit card-size electronic games. The SEC also charged the company’s independent auditor with facilitating the scheme.

The SEC alleges that chief executive officer Lee Cole and chief financial officer Linden Boyne orchestrated a scheme in which Electronic Game Card Inc. (EGMI) enticed investors by claiming to have millions of dollars in annual revenue, hold millions of dollars in investments, and own an off-shore bank account worth more than $10 million. In reality, many of the company’s purported contracts were phony, the purported investments were merely in entities affiliated with Cole or Boyne, and the bank account did not exist. As a result of EGMI’s false claims, the company’s outstanding common stock was once valued as high as $150 million. EGMI is now bankrupt and its stock is worthless.

The SEC charged the company’s outside auditor — certified public accountant Timothy Quintanilla — with repeatedly issuing clean audit opinions about EGMI based on reckless and deficient audit work. Also charged is Kevin Donovan, who later replaced Cole as CEO and ignored many red flags about the accuracy of the company’s public statements and the integrity of Cole and Boyne. He provided false information during conference calls with analysts and investors.

“Cole and Boyne played a game of make-believe with a publicly-traded microcap company,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office. “We will continue to fight microcap fraud and bring charges against not only the company executives but also the auditors or other gatekeepers who legitimize a fraud and allow investors to be victimized.”

According to the SEC’s complaint filed in federal court in Manhattan, EGMI’s material misrepresentations and omissions in SEC filings and public statements occurred from 2007 to 2009. The company repeatedly reported non-existent revenues and assets, misrepresented its business operations, and failed to disclose related-party transactions. Those misrepresentations and others like them were just part of a scheme that Cole and Boyne orchestrated through EGMI to reap approximately $12 million in unlawful gains. While they were making material misrepresentations to inflate EGMI’s stock price, Cole and Boyne also secretly funneled millions of shares of EGMI stock to entities based in Gibraltar that they secretly controlled. They directed the Gibraltar entities to sell the shares, and proceeds of those sales were transferred to people or entities associated with Cole and Boyne or to EGMI itself. Cole and Boyne bolstered their lies by providing falsified documents to the company’s outside auditors.

The SEC alleges that as EGMI’s engagement partner, Quintanilla and the public accounting firm Mendoza Berger & Co. LLP issued clean audit opinions for EGMI’s year-end financial statements for 2006, 2007, and 2008, even though those statements were riddled with material misstatements and omissions. Mendoza Berger and Quintanilla knowingly or recklessly misrepresented that the firm had conducted audits of EGMI’s financial statements “in accordance with the standards of the Public Company Accounting Oversight Board (United States).” Mendoza Berger’s opinion stated that EGMI’s financial statements “present[ed] fairly, in all material respects, the financial position” of EGMI. In fact, Mendoza Berger had not audited critical aspects of EGMI’s financial statements, and its work did not conform to the standards of the Public Company Accounting Oversight Board (PCAOB). Quintanilla had no meaningful basis to have Mendoza Berger issue an opinion on EGMI’s financial statements.

The SEC further alleges that shortly after Donovan became CEO, he was notified of many red flags related to the company’s public statements about its operations, finances, and share count. Donovan violated the antifraud provisions of the securities laws when he led several public conference calls with securities analysts and investors in 2009, and knowingly or recklessly relayed false financial information about the company that had been provided to him by Cole and Boyne.

The SEC’s complaint alleges that Cole and Boyne violated Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933; Sections 10(b), 13(b)(5), 13(d), and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 13a-14, 13b2-1, 13b2-2, 13d-1, 13d-2, 16a-2, and 16a-3; and Section 304 of the Sarbanes-Oxley Act of 2002. The SEC also alleges that Cole and Boyne are liable as control persons and for aiding and abetting violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13. The SEC charges that Donovan violated Sections 17(a)(1) and 17(a)(3) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. The SEC alleges that Quintanilla violated Section 17(a) of the Securities Act and Sections 10(b), 10A(a)(1), and 10A(b)(1) of the Exchange Act and Rule 10b-5. Quintanilla also is charged with aiding and abetting violations of Sections 10(b), 10A(a)(1), and 10A(b)(1) of the Exchange Act and Rule 10b-5 thereunder.

The SEC’s complaint seeks, among other things, a final judgment ordering Cole, Boyne, Donovan, and Quintanilla to pay financial penalties and permanently enjoining them from future violations of the securities laws; enjoining Cole, Boyne, and Donovan from serving as officers and directors of public companies and from participating in penny stock offerings; and ordering Cole, Boyne, and Quintanilla to disgorge their ill-gotten gains with prejudgment interest.

The SEC’s investigation, which is continuing, has been conducted by Michael Paley, Stephen Larson, James Addison, Gwen Licardo, and Aaron Arnzen of the New York Regional Office. Mr. Arnzen will lead the SEC’s litigation. The SEC thanks the PCAOB for its assistance in this matter.

# # #

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

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

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

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

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

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

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

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

# # #