FOR IMMEDIATE RELEASE
2013-90

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.

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FOR IMMEDIATE RELEASE
2013-89

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.

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FOR IMMEDIATE RELEASE
2013-88

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.

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FOR IMMEDIATE RELEASE
2013-87

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.

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FOR IMMEDIATE RELEASE
2013-86

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.

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FOR IMMEDIATE RELEASE
2013-85

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.

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FOR IMMEDIATE RELEASE
2013-84

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.

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FOR IMMEDIATE RELEASE
2013-83

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

9:00 a.m.	Opening Remarks
10:00 a.m.	Panel 1: Credit Rating Assignment System Arthur Bolden - Analyst Stephen Hall - Securities Specialist at Better Markets Inc. Sanjeev Handa - Managing Director at TIAA-CREF Martin Hughes - CEO at Redwood Trust Inc. Reginald Imamura – Chairman at Structured Finance Industry Group Jules Kroll - Chairman and CEO at Kroll Bond Rating Agency Inc. Douglas Peterson – President at Standard and Poor’s Ratings Services David Raboy - Chief Economic Consultant at Patton Boggs LLP Kermit Roosevelt - Professor of Law at University of Pennsylvania Law School
12:00 p.m.	Break
1:30 p.m.	Panel 2: Rule 17g-5 Program (Unsolicited Ratings) Tom Deutsch - Executive Director at American Securitization Forum Kevin Duignan - Managing Director at Fitch Ratings Stephen Ehrenberg - Partner at Sullivan & Cromwell LLP Joseph Petro - Managing Director at Morningstar Credit Ratings LLC John Schiavetta - Senior Vice President, Director of Risk Management-Fixed Income at AllianceBernstein Julie Schlueter - Manager, Capital Markets at CNH Global N.V. Martin Schuh - Vice President for Legislative and Regulatory Policy at Commercial Real Estate Finance Council Lawrence White - Professor of Economics at New York University, Leonard N. Stern School of Business
2:30 p.m.	Break
2:45 p.m.	Panel 3: Alternative Compensation Models Neil Baron - Consultant Félix Flinterman - Head of Credit Rating Agency Unit at European Securities and Markets Authority (ESMA) James Gellert - Chairman and CEO at Rapid Ratings International Inc. Annette Heuser - Executive Director at Bertelsmann Foundation Marc Joffe – Founder at Public Sector Credit Solutions Christopher Killian - Managing Director at Securities Industry and Financial Markets Association (SIFMA) Alberto Ramos - Chairman and CEO at HR Ratings de México Mitchell Resnick - Vice President of Pricing, Costing and Capital Deployment at Freddie Mac Farisa Zarin – Managing Director, Global Regulatory Affairs at Moody’s Investors Service Inc.
4:15 p.m.	Closing Remarks
4:30 p.m.	Roundtable concludes

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FOR IMMEDIATE RELEASE
2013-82

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.

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FOR IMMEDIATE RELEASE
2013-81

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.

# # #

FOR IMMEDIATE RELEASE
2013-80

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. 

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FOR IMMEDIATE RELEASE
2013-79

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.

# # #

FOR IMMEDIATE RELEASE
2013-78

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.

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FOR IMMEDIATE RELEASE
2013-77

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.

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FOR IMMEDIATE RELEASE
2013-76

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.

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FOR IMMEDIATE RELEASE
2013-75

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.

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FOR IMMEDIATE RELEASE
2013-74

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.

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FOR IMMEDIATE RELEASE
2013-73

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.

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FOR IMMEDIATE RELEASE
2013-72

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.

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FOR IMMEDIATE RELEASE
2013-71

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. 

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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

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