SEC Chairman Elise Walter and CFTC Chairman Gary Gensler
testified before a Senate Committee this week, focusing on the implementation
of Dodd-Frank. The SEC also approved the budget for the PCAOB.
Two former senior executive in the organization of jailed
Ponzi schemer Allen Stanford were sentenced to serve lengthy prison terms. A
former hedge fund operation caught up in the Galleon insider trading cases was
sentenced to a term of probation under a cooperation agreement.
Finally, FINRA issued another investor alert. This one
focuses on duration risk for bonds.
Testimony: Chairman Elisse
Walter testified before the Senate Committee on Banking, Housing and Urban
Affairs (Feb. 14, 2013). The Chairman's testimony covered a range of topics
including hedge fund reporting, the whistleblower program, derivatives and the
implementation of Dodd-Frank, staff studies on investment advisers and broker dealers,
credit rating agencies, the Volker Rule, new Commission offices and economic
PCAOB: The Commission
approved the Board's budget at a level which represents about an 8% increase (here).
Testimony: Chairman Gary Gensler
testified before the Senate Banking, Housing and Urban Affairs Committee (Feb.
14, 2013). In his testimony Chairman Gensler reviewed the implementation of
Dodd-Frank, noting that 80% of the swap market rules have been implemented. He
concluded with a review of the libor cases and a request for increased funding
Remarks: CFTC Commissioner
Bart Chilton addressed the Arkansas State University Agribusiness Conference
(Feb. 13, 2013) in remarks titled "Red." Commissioner's remarks focused on the
question: "Are these markets working for you?" (here).
SEC Enforcement: Filings and settlements
Weekly statistics: This
week the Commission filed 1 civil injunctive action and no administrative
proceedings (excluding tag-along-actions and 12(j) actions).
Cherry picking scheme: SEC v. Berger, Civil
Action No. CV-12 4728 (E.D.N.Y. Filed Sept. 21, 2012) is an action against
Howard Berger, the founder and manager of Professional Traders Management LLC
and Professional Offshore Traders Management LLC which managed and acted as the
investment adviser for two hedge funds. Between July 2008 and March 2010 Mr.
Berger engaged in a cherry picking scheme in which he took profitable trades
from one of the funds and allocated them to his wife's account. On January 15,
2013 the court entered a consent judgment against Mr. Berger, enjoining him
from future violations of Exchange Act Section 10(b) and Advisers Act Sections
206(1), (2) and (4) and Section 204(4)-8. In addition, Mr. Berger agreed to pay
disgorgement of $5,399,521.84, prejudgment interest and a $50,000 civil
penalty. In a separate administrative proceeding he will also be barred from
association with any broker, dealer, investment adviser, municipal securities
dealer or transfer agent. See also Lit. Rel. No. 22616 (Feb. 12, 2013).
Offering fraud: SEC v. A Chicago Convention
Center, LLC, Case No. 13cv982 (N.D. Ill. Filed Feb. 6,
2013) is an action against Anshoo Seithi and his controlled entities who are
alleged to have defrauded 250 investors of millions of dollars. Mr. Seithi used
the EB-5 Program, which promises foreign nationals an opportunity at a green
card in return for certain investments in the U.S. which create jobs for
citizens, to lure investors to purchase notes in A Chicago Convention Center.
He claimed it would build and operate what he called the World's First Zero
Carbon Emission Platinum LEED certified hotel and conference center in the
Chicago area. Investors were told that the work was progressing with major
hotel chains signed and all permits in place. Mr. Seithi was also supposed to
contribute real estate valued at $177 million. Investors were asked to wire a
minimum of $500,000 each for their investment and, in addition, $41,5000 as an
administrative fee. The claims were false and much of the money collected as
fees misappropriated. The Commission's complaint alleges violations of
Securities Act Sections 17(a)(1) & (2) and Exchange Act Section 10(b). The
case is in litigation. See also Lit. Rel. No. 22615 (Feb. 8, 2013).
Alert: The regulator issued
a new investor alert titled: "Duration-What Interest Rate Hike Could Do to Your
Bond Portfolio." The Alert focuses on the importance of duration risk.
Investment fund fraud: U.S. v. Lopez, 4:09-cr-0342
(S.D. Tx.) is the action against Gilbert Lopez, the former CEO of the Stanford
Financial Group Companies, and Mark Kuhrt, former global controller of Stanford
Financial Group Global Management. Each man was sentenced to serve 20 years in
prison. The two men were each convicted on one count of conspiracy and 10
counts of wire fraud by a jury following a five week trial. Each was found not
guilty on one count of wire fraud. At the hearing the court also found each
defendant guilty of obstruction of justice by committing perjury at trial. The
evidence at trial established that the two men were aware of and tracked Mr.
Stanford's misuse of Stanford Investment Bank's assets, concealed these facts
from others and helped cover them up.
Insider trading: U.S. v. Fortuna (S.D.N.Y.)
is the action in which the co-founder of hedge fund S2 Capital LLC, Steven
Fortuna, previously pleaded guilty to three counts of conspiracy to commit
securities fraud and securities fraud pursuant to a cooperation agreement. This
week Mr. Fortuna was sentenced to serve two years of probation. Mr. Fortuna had
been charged with gathering inside information from other hedge fund operators
and trading while in possession of it.
Market crisis: The
UK Financial Services Authority announced a settled market crisis action in
which UBS was fined £9.45 million for exposing sophisticated investors to
unacceptable investment risk. From December 2003 through September 2008 the
firm sold shares in the AIG Enhanced Variable Rate Fund to 1,998 investors. All
were high net worth individuals. The investments totaled £3.5 million. The
investments were in a money market fund seeking enhanced returns by putting a
significant amount of its assets in mortgaged backed securities and floating
As the market crisis unfolded, the value of some of the
assets in the fund dropped below book value. Following the collapse of Lehman
Brothers in September 2008 the share price dropped significantly. There was a
run on the fund. Redemptions were halted and many investors could not recover
their funds. UBS failed to ensure the suitability of its advise, the regulator
concluded, since the firm did not carry out adequate due diligence before
marketing the shares to investors or provide suffient training to its sales
force to ensure that the shares were only sold to suitable customers. UBS has
agreed to implement a remediation program. Since UBS agreed to settle at an
early stage it was given a 30% reduction in the fine which otherwise would have
been £13.5 million.
Investment fraud: The
Australian Securities and Investment Commission obtained a freeze order against
Gabriel Nakhi, a representative with the Sydney financial adviser, SydFA Pty
Ltd. Mr. Nakhi had induced investors to loan him money for investments.
Investors were promised a fixed return. The Commission obtained the ex parte
order because it was concerned that the funds may not have been used solely for
False application: The
Securities and Futures Commission banned Kuo Shou Min, a former licensed
representative, from the securities business for nine months. The regulator
concluded that Mr. Kuo failed to disclose on his license application that he
had been disciplined in 2005 by the Securities and Futures Bureau of Taiwan
where he had also been a licensed representative.
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
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