Henry T.C. Hu, Inaugural Director of Division of Risk, Strategy and Financial Innovation, to Return to University of Texas
The Securities and Exchange Commission announced today that Henry T. C. Hu, the Director of the Division of Risk, Strategy, and Financial Innovation since its creation in September 2009, plans to leave his position at the agency and return to the University of Texas in January.
The SEC's first new Division in 37 years, Risk Fin was created to provide sophisticated, interdisciplinary analysis across the entire spectrum of SEC activities, including policymaking, rulemaking, enforcement, and examinations. In addition to this role as an agency "think tank," Risk Fin was created to help break down silos that compartmentalized the SEC's institutional expertise.
Under Mr. Hu's leadership, the Division has hired individuals who have financial, quantitative, and transactional experience in corporate governance, derivatives, risk management, and trading at major hedge funds, investment banks, and law firms, as well as individuals with advanced academic training, including Ph.Ds in economics, finance, and mathematics. With these new skill-sets, Risk Fin has helped in the agency's efforts to identify, analyze, and respond to complex risks and trends, including those associated with certain new financial products and strategies.
"When I asked Henry to join us at the SEC, he interrupted his life and academic career to help us launch Risk Fin and set the SEC on a new path. Interdisciplinary thinking is no longer a novelty at the SEC, thanks to Henry," said SEC Chairman Mary L. Schapiro. "I am deeply grateful to Henry for the great start that he has given the Division, and for his valued judgment on a wide range of important substantive issues."
Mr. Hu said, "The opportunity that Chairman Schapiro provided was exceptional: a chance to serve as a catalyst for change amidst the most striking capital market and regulatory developments since the 1930s. The SEC has outstanding, dedicated people. I deeply appreciate the support and friendship of the SEC's leadership, my wonderful Risk Fin colleagues, and others throughout the agency. Risk Fin is, and hopefully will always be, a work in progress, one as dynamic as today's capital markets."
In addition to his lead role in creating Risk Fin, Mr. Hu has provided advice on key substantive matters to the Commission and other staff at the SEC. He testified before Congress on landmark derivatives legislation, and is now involved in the implementation of the pertinent provisions in the Dodd-Frank Act.
Mr. Hu holds the Allan Shivers Chair in the Law of Banking and Finance at the University of Texas School of Law and has written on the law and economics of asset allocation, bank, derivatives, hedge fund, and mutual fund regulation, board fiduciary duties, corporate governance, global competitiveness of U.S. derivatives markets, model risk, risk management, and swaps and other financial innovations.
Mr. Hu's publications include seminal articles on the systemic and other risks posed by derivatives, including Misunderstood Derivatives, a 1993 Yale Law Journal article. More recently, he was the lead author on a series of pioneering articles on the "decoupling" of debt and equity, its impact on corporate and debt governance and world systemic risk, and possible disclosure and substantive responses. Mr. Hu holds a BS in Molecular Biophysics & Biochemistry, an MA in Economics, and a JD, all from Yale University. (Press Rel. 2010-226)
Closed Meeting - Tuesday, November 23, 2010 - 2:00 p.m.
The subject matter of the Closed Meeting scheduled for Tuesday, Nov. 23, 2010 will be: institution and settlement of injunctive actions; institution and settlement of administrative proceedings; and other matters relating to enforcement proceedings.
At times, changes in Commission priorities require alterations in the scheduling of meeting items. For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact: The Office of the Secretary at (202) 551-5400.
Commission Declares Initial Decision as to VoiceIQ, Inc. (n/k/a Yoho Resources, Inc.) Final
The Commission has declared final an initial decision of an administrative law judge dismissing the proceedings against VoiceIQ, Inc. (n/k/a Yoho Resources, Inc.). The law judge found that VoiceIQ and Yoho violated Section 13(a) of the Securities Exchange Act of 1934 and Exchange Act Rule 13a 1 by failure to file any periodic reports for any period after July 13, 2001. The law judge also found that these administrative proceedings included situations where the issuers withdrew from registration before an OIP was issued under Section 12(j), where issuers did not file Form 15 until after an OIP was issued under Section 12(j), and where the withdrawal from registration became effective before an Administrative Law Judge issued an Initial Decision. On these bases, the law judge concluded that there was no registration left in place to revoke or suspend, and consistent with prior Commission actions, dismissed the proceeding. (Rel. 34-63330; File No. 3-13918)
SEC Charges Steven Rattner in Pay-To-Play Scheme Involving New York State Pension Fund
The Securities and Exchange Commission today charged former Quadrangle Group principal Steven Rattner with participating in a widespread kickback scheme to obtain investments from New York's largest pension fund.
The SEC alleges that Rattner secured investments for Quadrangle from the New York State Common Retirement Fund after he arranged for a firm affiliate to distribute the DVD of a low-budget film produced by the Retirement Fund's chief investment officer and his brothers. Rattner then caused Quadrangle to retain Henry Morris - the top political advisor and chief fundraiser for former New York State Comptroller Alan Hevesi - as a "placement agent" and pay him more than $1 million in sham fees even though Rattner was already dealing directly with then-New York State Deputy Comptroller David Loglisci and did not need an introduction to the Retirement Fund.
The SEC alleges that after receiving pressure from Morris, Rattner also arranged a $50,000 contribution to Hevesi's re-election campaign. Just a month later, Loglisci increased the Retirement Fund's investment with Quadrangle from $100 million to $150 million. As a result of the $150 million investment with Quadrangle, the Retirement Fund paid management fees to a Quadrangle subsidiary. By virtue of his partnership interest in Quadrangle and its affiliates, Rattner's personal share of these fees totals approximately $3 million.
Rattner agreed to settle the SEC's charges by paying $6.2 million and consenting to a two-year bar from associating with any investment adviser or broker-dealer.
The SEC previously charged Morris and Loglisci for orchestrating the fraudulent scheme that extracted kickbacks from investment management firms seeking to manage the assets of the Retirement Fund. The SEC charged Quadrangle earlier this year.
According to the SEC's complaint against Rattner filed in U.S. District Court for the Southern District of New York, Morris informed Rattner in the fall of 2003 that Loglisci's brother was involved in producing a film called "Chooch." Morris suggested that Rattner help Loglisci's brother with the theatrical distribution of the film. Rattner met with Loglisci's brother and agreed to assist him, but Rattner's efforts did not lead to a distribution deal. Approximately one year later, Loglisci's brother contacted Rattner about DVD distribution of "Chooch." Within days of speaking to Loglisci's brother, Rattner contacted Loglisci about investing in a new Quadrangle private equity fund being marketed by the firm. Rattner told Loglisci that he had arranged a meeting between Loglisci's brother and a Quadrangle affiliate - GT Brands - to discuss a possible DVD distribution deal.
The SEC alleges that after Loglisci's brother met with GT Brands and telephoned Rattner to complain about the treatment he had received from GT Brands, Rattner warned a GT Brands executive to treat Loglisci's brother "carefully" because Quadrangle was trying to obtain an investment through Loglisci. After GT Brands made clear to Rattner that it was not interested in distributing the film, Rattner instructed the GT Brands executive to "dance along" with Loglisci's brother. According to an e-mail, Rattner telephoned Morris to inquire whether "GT needs to distribute [the Chooch] video" in order to secure an investment from the Retirement Fund. Morris offered to "nose around" to determine how important the DVD distribution deal was to Loglisci. GT Brands ultimately reversed course and offered to manufacture and distribute the DVD at a discount from its standard fee. Rattner approved the proposed terms of the distribution deal.
The SEC's complaint alleges that in late October 2004, after Rattner and others from Quadrangle had already met with Loglisci and the Retirement Fund's private equity consultant and received encouraging feedback from both of them, Morris met with Rattner and offered his placement agent services to Quadrangle. Morris warned Rattner that Quadrangle's negotiations with the Retirement Fund could always fall apart. Although Quadrangle was already working with a placement agent, Quadrangle agreed to pay Morris as well.
According to the SEC's complaint, soon after Quadrangle retained Morris as a placement agent and Rattner had advised Morris that GT Brands was moving forward with the deal to distribute the Chooch DVD, Loglisci personally informed Rattner that the Retirement Fund would be making a $100 million investment in the Quadrangle fund.
The SEC alleges that Morris later contacted Rattner and pressed him for a financial contribution to Hevesi's re-election campaign. Although Rattner purportedly had a personal policy that he would not make political contributions to politicians who have influence over public pension funds, Rattner agreed to find someone else to make the contribution. After speaking with Morris, Rattner asked a friend and the friend's wife to each contribute $25,000 to Hevesi's campaign. The day after these contributions were communicated to Hevesi's campaign staff, Hevesi telephoned Rattner and left him a message thanking him for the contribution. In late May 2006, Rattner's friend transmitted the promised campaign contributions to Rattner, who forwarded the two checks to Hevesi's campaign. Approximately one month later, Loglisci committed the Retirement Fund to an additional $50 million investment in the Quadrangle fund.
In settling the SEC's charges without admitting or denying the allegations, Rattner consented to the entry of a judgment that permanently enjoins him from violating Section 17(a)(2) of the Securities Act of 1933 and orders him to pay approximately $3.2 million in disgorgement and a $3 million penalty. The settlement is subject to court approval. Rattner also consented to the entry of a Commission order that will bar him for two years from associating with any investment adviser or broker-dealer.
The SEC's investigation was conducted by Joseph Sansone and Maureen Lewis of the New York Regional Office. The investigation is continuing. [SEC v. Steven L. Rattner, 10 cv 8699 (S.D.N.Y.)] (LR-21748)
Promoter of Phony Investment Pool Scheme Sentenced to 41 Months in Federal Prison
The Securities and Exchange Commission announced that a federal judge in San Diego sentenced Mohit A. Khanna, age 33, for his role in perpetrating a phony investment pool scheme through his former company, MAK 1 Enterprises Group LLC, both formerly of San Diego.
Judge Larry Alan Burns of the U.S. District Court for the Southern District of California sentenced Khanna on Nov. 15, 2010 to serve 41 months in federal prison, three years supervised release thereafter, and to pay restitution of $15,901,724.44. The sentencing arises from Khanna's guilty plea to felony counts of conspiracy to commit mail and wire fraud (in connection with his role in MAK 1) and filing a false tax return. United States of America v. Mohit A. Khanna, U.S. District Court for the Southern District of California, case no. 10CR2271LAB (filed June 17, 2010).
MAK 1 was a Ponzi scheme that was halted by an emergency action filed by the Commission in federal court in San Diego in August 2009. In that action, the Commission charged MAK 1, Mohit Khanna, and Sharanjit Khanna with violations of the federal securities laws. All defendants in the action consented to entry of judgments of permanent injunction and orders of disgorgement of their ill-gotten gains.
Separately, the Commission charged Gustav G. Bujkovsky, a lawyer who represented MAK 1 and the Khannas, with violations of the federal securities laws. Securities and Exchange Commission v. Gustav George Bujkovsky, et al., United States District Court for the Southern District of California, Case No. 10-CV1965BEN (filed Sept. 21, 2010). Bujkovsky pleaded guilty to felony counts of obstruction of justice (for making false statements to Commission staff in connection with the Commission's investigation of MAK 1 and Mohit Khanna) and income tax evasion. United States of America v. Gustav G. Bujkovsky, U.S. District Court for the Southern District of California, case no. 10CR3467LAB (filed Aug. 31, 2010). He is scheduled to be sentenced on Dec. 12, 2010. [SEC v. Mohit A. Khanna, MAK 1 Enterprises Group, LLC, et al., United States District Court for the Southern District of California, Case No. 09cv1784 BEN (POR)] (LR-21749)
SEC Charges Two Longtime Madoff Employees With Fraud
The Securities and Exchange Commission today charged a pair of longtime employees at Bernard L. Madoff Investment Securities LLC (BMIS) with playing key roles in the Madoff Ponzi scheme. One employee produced phony account statements for investors and feathered her own accounts for personal gain, while the other conspired to cash out Madoff's friends and family as the fraud collapsed in addition to creating phony account statements and tracking the Ponzi scheme bank account.
The SEC alleges that Annette Bongiorno, who began working for BMIS in an administrative capacity in 1968, regularly created false books and records and helped mislead investors in telephone conversations and through account statements and trade confirmations that reported securities transactions that never happened and positions that never existed. Bongiorno also created false trades in her own BMIS accounts that enabled her to cash out millions of dollars more than she deposited.
The SEC further alleges that JoAnn Crupi, who was responsible for supervising the primary bank account used in BMIS's investment advisory operations, helped facilitate the fraud and mislead investors, auditors, and regulators into believing that BMIS was a legitimate enterprise. When the fraud was on the verge of collapse, Crupi helped decide which accounts should be cashed out and prepared checks for those selected investors, many of them who were friends or family of Madoff.
According to the SEC's complaint against Bongiorno filed in U.S. District Court for the Southern District of New York, Bongiorno created trades that were chosen with the benefit of hindsight to generate large "gains" in BMIS accounts. The trades and positions reported in investor accounts, however, were fictional. Bongiorno also fabricated trades in her own BMIS accounts, depositing approximately $920,000 into these accounts but withdrawing approximately $14.5 million. The high balances and withdrawals were made possible only through the sham, backdated, highly profitable "trades" that Bongiorno fabricated.
According to the SEC's complaint against Crupi, also filed in U.S. District Court for the Southern District of New York, she was hired in 1983 as a keypunch operator in BMIS's investment advisory operations and reported to Bongiorno. She eventually supervised some lower-level BMIS employees and worked closely with Frank DiPascali, another high-level BMIS lieutenant charged by the SEC last year. Crupi had exclusive control over two important aspects of the BMIS fraud: she handled the primary bank account used in the Ponzi scheme, and she created false trading portfolios and account statements related to a purported hedging strategy using baskets of stock for a group of limited partnership funds managed by a longtime BMIS investor.
The SEC alleges that Crupi knew the true financial condition of Madoff's Ponzi scheme and its dwindling assets. On Dec. 3, 2008, DiPascali told Crupi that the scheme was on the verge of collapse, and they met shortly thereafter to discuss the implications of the collapse in more detail. Crupi continued to process client deposits during this time period, depositing approximately $59 million of client checks into the Ponzi scheme bank account from December 4 to December 12. In the final days of the fraud, when the money available to meet investor redemptions had dwindled to a few hundred million dollars, DiPascali convinced Madoff to use the remaining funds to liquidate the accounts of family and friends of the firm, including employees, and not to honor redemption requests by the larger institutional investors. Crupi helped DiPascali review BMIS investor lists and identify which accounts should be cashed out. Madoff approved these actions and Crupi prepared checks for the selected investors totaling more than $350 million. Madoff was arrested and the checks were seized before they could be distributed.
The SEC's complaints against Bongiorno and Crupi specifically allege that by their actions, they violated Section 17(a) of the Securities Act; violated and aided and abetted violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and aided and abetted violations of Sections 204, 206(1) and 206(2) of the Advisers Act and Rule 204-2 thereunder and Sections 15(c) and 17(a) of the Exchange Act and Rules 10b-3 and 17a-3 thereunder. Among other things, the SEC's complaints seek permanent injunctions, financial penalties and court orders requiring Bongiorno and Crupi to disgorge their ill-gotten gains.
The Commission acknowledges the assistance of the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation, with which the Commission has coordinated its investigation. The SEC's investigation is continuing. [SEC v. Joanne Crupi (S.D.N.Y. Civ. 10 CV 8702); SEC v. Annette Bongiorno (S.D.N.Y. Civ. 10 CV 8701)] (LR-21750)
INVESTMENT COMPANY ACT RELEASES
Citigroup Global Markets Inc. et al.
The Commission has issued a permanent order to Citigroup Global Markets Inc. et al., under Section 9(c) of the Investment Company Act with respect to an injunction issued against Citigroup Inc. (Citigroup) by the U.S. District Court for the District of Columbia on Oct. 19, 2010. The permanent order exempts Citigroup Global Markets Inc., CEFOF GP I Corp., CELFOF GP Corp., Citibank, N.A., Citigroup Alternative Investments LLC, Consulting Group Advisory Services LLC, Citigroup Capital Partners I GP I Corp., and Citigroup Capital Partners I GP II Corp., as well as companies of which Citigroup is or becomes an affiliated person, from the provisions of Section 9(a) of the Act. (Rel. IC-29498 - November 15)
Proposed Rule Changes
The Financial Industry Regulatory Authority filed a proposed rule change (SR-FINRA-2010-056) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 to adopt FINRA Rule 1113 (restrictions pertaining to new member applications) and to amend FINRA Rule 9520 Series (eligibility proceedings). Publication is expected in the Federal Register during the week of November 22. (Rel. 34-63316)
NYSE Arca filed a proposed rule change (SR-NYSEArca-2010-101) under Section 19(b)(1) of the Securities Exchange Act of 1934 relating to the listing and trading of the ProShares VIX Short-Term Futures ETF and the ProShares VIX Mid-Term Futures ETF. Publication is expected in the Federal Register during the week of November 22. (Rel. 34-63317)
The NASDAQ OMX PHLX filed a proposed rule change (SR-Phlx-2010-148) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 relating to certain membership rules. Publication is expected in the Federal Register during the week of November 22. (Rel. 34-63318)
The Depository Trust Company filed a proposed rule change (SR-DTC-2010-15) pursuant to Section 19(b)(1) of the Act that would amend DTC's rules relating to its Fast Automated Securities program to eliminate the requirement for certain transfer agents to custody a balance certificate. Publication is expected in the Federal Register during the week of November 22. (Rel. 34-63320)
Immediate Effectiveness of Proposed Rule Changes
A proposed rule change filed by the Financial Industry Regulatory Authority (SR-FINRA-2010-060) to update certain cross-references and make non-substantive technical changes to certain FINRA rules has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of November 22. (Rel. 34-63319)
A proposed rule change filed by NASDAQ OMX BX to establish a Pilot Program to list series with additional expiration months for each class of options opened for trading on BOX (SR-BX-2010-077) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of November 22. (Rel. 34-63321)
A proposed rule change filed by BATS Exchange to Establish a $0.50 Strike Program (SR-BATS-2010-032) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of November 22. (Rel. 34-63322)
A proposed rule change filed by the International Securities Exchange (SR-ISE-2010-103) relating to market data fees has become immediately effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of November 22. (Rel. 34-63324)
Accelerated Approval of Proposed Rule Change
The Commission approved, on an accelerated basis, a proposed rule change filed by the Financial Industry Regulatory Authority (SR-FINRA-2010-039) pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 to adopt FINRA Rules 2090 (Know Your Customer) and 2111 (Suitability) in the Consolidated FINRA rulebook. Publication is expected in the Federal Register during the week of November 22. (Rel. 34-63325)
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