Recently in Securities Exchange Commission Category

The Wall Street Journal reported that the Securities Exchange Commission ("SEC") wants to even the field in the bond market between small investors and Wall Street's biggest banks. The SEC unveiled plans to make real time pricing information for the corporate and municipal bond markets less difficult for investors to obtain. This proposal would require public dissemination of the best buy and sell orders generated on private electronic networks for bonds that are currently accessed primarily by market insiders. Average investors typically see prices only after a trade is executed.

The SEC's effort to broaden access to pricing information comes amid a broader push to erode some of the trading advantages used by computer driven trading. Bond trading is dominated by, and highly profitable for big Wall Street banks, while regular investors have been shut out of the inner workings of the bond markets.

Unlike the stock market, where exchanges publish buy and sell orders in real time, there is little way for investors to check demand for bonds. Customers thus can't tell if they are being overcharged on bonds until after the trade is completed. The SEC's proposal resembles the changes the SEC made in the late 1990s which made trading information about stocks far more widely available to individual investors.

The biggest beneficiaries of bond market pricing information might be fund managers because they would have a better idea about how much supply and demand existed in the bond markets. Bank industry representatives played down the significance of disclosure information in the bond markets since the markets for municipal bonds are so thinly traded due to weak demand.

The Financial Industry Regulatory Authority ("FINRA"), which oversees the industry, has been probing trading of banks and other middlemen in certain bond transactions, looking for unusually large profits.

The SEC is planning to work with FINRA and the Municipal Securities Rulemaking Board to implement rules outlining best execution standards for municipal bonds and to develop new rules regarding the disclosure of markups, the added charges that brokers tack onto certain municipal and corporate bond trades.

Posted in: Securities Exchange Commission

As part of the $920 million agreement with regulators in the U.S. and U.K.,, including the U.S. Securities and Exchange Commission ("SEC"), New York-based JP Morgan Chase & Co. ("JP Morgan") admitted that it violated federal securities laws when it failed to catch traders hiding losses in 2012 relating to the "Whale". In settling claims with JP Morgan, the SEC began fulfilling its pledge to force wrongdoers to admit guilt.

Under SEC Chairman Mary Jo White, 65, the enforcement division has shifted its long-standing policy of allowing defendants to settle matters without admitting or denying any wrongdoing. The practice had been thrown into question when U.S. District Judge Jed Rakoff rejected a settlement with Citigroup Inc. in part because the bank didn't admit to any misconduct.

Bloomberg reported that not all SEC commissioners supported the settlement, which was approved by a 2-1 vote, according to two people with knowledge of the matter. Michael Piwowar, 45, a Republican commissioner who joined the agency last month, voted against it, while Democrats Luis Aguilar, 59, and Kara Stein, 49, supported the agreement, said the people, who asked not to be identified because the matter isn't public.

White and Republican commissioner Daniel Gallagher were recused. White had previously represented the bank, according to public disclosures, and Gallagher's former law firm -- Wilmer Cutler Pickering Hale and Dorr LLP -- was lead counsel for JP Morgan in the case.

Jaret Seiberg, an analyst at Guggenheim Partners, said in a note that JP Morgan's admission of wrongdoing will help the bank restore its public image. "Bank executives can rightly say they have taken responsibility for what went wrong," Seiberg said.

As a result of failing to oversee the Whale trades, senior managers and traders at JP Morgan were fired. The trades losses had no public costs but cost JP Morgan shareholders over $6 billion in losses.


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Posted in: Securities Exchange Commission

The Securities and Exchange Commission charged the Chicago Board Options Exchange (CBOE) and an affiliate for various systemic breakdowns in their regulatory and compliance functions as a self-regulatory organization, including a failure to enforce or even fully comprehend rules to prevent abusive short selling.

CBOE agreed to pay a $6 million penalty and implement major remedial measures to settle the SEC's charges. The financial penalty is the first assessed against an exchange for violations related to its regulatory oversight. Previous financial penalties against exchanges involved misconduct on the business side of their operations.

Self-regulatory organizations (SROs) must enforce the federal securities laws as well as their own rules to regulate trading on their exchanges by their member firms. In doing so, they must sufficiently manage an inherent conflict that exists between self-regulatory obligations and the business interests of an SRO and its members. During the investigation, the SEC found that employees of the CBOE didn't know enough about the short-sale law to enforce it, according to the SEC statement. Not only did they fail to detect violations, they "took misguided and unprecedented steps" to assist the firm that later became the subject of an SEC enforcement action. CBOE put the interests of the firm ahead of its regulatory obligations by failing to properly investigate the firm's compliance with Regulation SHO and then interfering with the SEC investigation of the firm.

According to the SEC's order instituting settled administrative proceedings, CBOE demonstrated an overall inability to enforce regulations with an ineffective surveillance program that failed to detect wrongdoing despite numerous red flags that its members were engaged in abusive short selling. CBOE also fell short in its regulatory and compliance responsibilities in several other areas during a four-year period.

Exchange executives, long shielded from legal scrutiny in the U.S., have been put on notice that may be changing after the $6 million fine for unprecedented lapses in supervision. The settlement with the biggest American options venue, marks the third time in nine months the Securities and Exchange Commission has announced financial sanctions against a market operator. Before collecting $5 million from NYSE Euronet (NYX) in September for data dissemination violations, the commission had never imposed a monetary penalty on an exchange.

More than a decade of evolution in the way stocks, options, futures and derivatives trade in the U.S. has raised scrutiny of exchanges, which compete against each other for profits while supervising members as self-regulatory organizations. The role, dating from a period when markets were owned by the firms that used them, has been questioned following lapses in technology and oversight. Clearly the SEC is sending a message that SROs will be more closely scrutinized and have a an increased level of accountability for their oversight responsibilities.

Posted in: Securities Exchange Commission

The Securities and Exchange Commission ("SEC") has accepted the Offer of Settlement from Advanced Equities, Inc. ("AEI"), Dwight Badger ("Badger") and Keith Daubenspeck ("Daubenspeck"), which consented to an Order Instituting Administrative and Cease-and-Desist Proceedings pursuant to Section 8A of the Securities Act of 1933, Section 15(b) of ;the Securities Exchange Act of 1934 and Sections 203(e) and 203(f) of the Investment Advisors Act of 1940. The SEC found that in 2006, after AEI completed a private equity offering for Company A, they were allowed by Company A to attend its board of directors meetings, whereby they were privy to hear and view confidential information

At Company A's December 2008 Board Meeting, Badger and Daubenspeck made a presentation to the board to allow them to raise $150 Million in a Series F offering. They told Company A that they hoped to complete the Series F Offering during the month of January 2009 by targeting a small number of high-net-worth individuals. They intended to raise the funds by offering shares of stock at $18.52.

Badger and Daubenspeck began their efforts to raise capital for Company A in December of 2008. By mid-January of 2009, they realized that they would not be able to meet their stated goals and began targeting smaller investors. Since Company A did not accept direct investments of less than $2 Million, AEI formed two limited liability companies, Greentech III and Greentech IV, on January 23, 2009. These companies would allow accredited investors (Greentech III) and qualified purchasers (Greentech IV) to invest as little as $25,000 in Company A. These investors would deal with AEI, rather than with Company A.

Company A placed strict restrictions on information that AEI could provide to potential investors. Badger took personal control of contacts with potential investors in the Greentech companies. He alleged that he made over 200 personal calls to investors. Daubenspeck, along with several AEI brokers and investment bankers traveled to Company A's headquarters. Between early January and late March of 2009, AEI raised approximately $122 Million from 609 investors.

Badger made misrepresentations about Company A to AEI brokers in an email when he stated that Company A had an order for the sale of 2,000 units to the CIA. This order would have generated approximately $2 Billion in revenue for Company A. In reality, Company A did not have any orders with the CIA. Badger and Daubenspeck also misrepresented Company A's projected revenue to AEI brokers during an internal sales call on February 2, 2009. They stated that Company A had projected revenue from contracts and backorders of $2 Billion when in fact Company A had between $10 Million and $42 Million under contract as order backlog.

Badger continued to make fraudulent misrepresentations to AEI brokers in February and March of 2009. During one internal sales call, he stated that Company A had a $1 Billion contract with a well- known national grocery chain when the actual contract number was $2 Million. He also stated that Company A was getting funded by the Department of Energy with $300 Million of revenue when Company A had only applied for a loan of $96.8 Million but had not even received notice if its application would be granted. Daubenspeck remained silent during the call.


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Posted in: Securities Exchange Commission