CFTC Skips Votes, Bitcoin Ponzi, SAC E-Mail: Compliance
Enforcement lawyers at the U.S. Commodity Futures Trading Commission have circumvented formal agency votes to begin investigations unilaterally, according to Scott O’Malia, a Republican member of the commission.
The lawyers at the top U.S. derivatives regulator are using a summary process that doesn’t require a vote by the agency’s members who are confirmed by the Senate, O’Malia said in testimony at a House Agriculture Committee hearing yesterday.
The agency’s enforcement process “is a clear abrogation of the commission’s powers and a violation of commission rules relating to investigations,” O’Malia said in prepared remarks.
The CFTC’s enforcement division has begun using new Dodd-Frank Act authorities to oversee swaps and futures markets, while bringing a series of recent enforcement cases to ensure customer funds are adequately protected.
At the Securities and Exchange Commission, attorneys previously required approval to open formal investigations and issue subpoenas. When Mary Schapiro took over the agency’s helm in 2009, she delegated subpoena authority to the enforcement division, saying the approval process unnecessarily slowed investigations.
Bart Chilton, one of three Democratic members of the CFTC, said the enforcement division’s policy is long-standing. Representative Frank D. Lucas, the Oklahoma Republican who leads the agriculture panel, said he was concerned by the CFTC’s enforcement process. “The requirement to vote on key actions should not be disregarded,” Lucas said at the hearing.
Congress Must Rein in Banks’ Commodity Business, Rosner Says
The U.S. Congress should rein in banks’ ability to own and trade raw materials or risk another financial collapse, Joshua Rosner of Graham Fisher & Co. said at a Senate subcommittee hearing yesterday.
The Federal Reserve said last week that it’s reviewing a decade-old ruling that lets banks deal in physical assets like metal and oil, potentially putting commodity units of JPMorgan Chase & Co. (JPM), Morgan Stanley and Goldman Sachs Group Inc. (GS) in jeopardy. A Senate Banking Committee subcommittee yesterday considered whether laws and regulations that have allowed banks to own, store and transport raw materials are hurting competition and endangering the financial system.
The panel is led by U.S. Senator Sherrod Brown, an Ohio Democrat, who is among lawmakers and regulators who say banks can drive up prices when they control both the physical products and the financing. Senator Jeff Merkley, an Oregon Democrat, said the arrangement may allow banks to “put a thumb on the scale” to influence supply and demand, and bet accordingly.
Banks and regulators probably will be called to testify at a second hearing on their role in the commodities industry and the Federal Reserve will need to be “more forthcoming,” said Brown. A new hearing might occur in September, and he wants banks, the Fed and the Commodity Futures Trading Commission to testify, Brown said.
Banks may get an unfair advantage because they can fund themselves from the Fed and insured deposits, according to some of yesterday’s witnesses, and Brown said he’s concerned that lenders may be put at risk when volatile commodity markets move against them or disaster strikes one of their operations.
For more, click here, and see Interviews, below.
SAC Says Cohen Has No Recollection of Dell E-Mail Cited by SEC
Steve Cohen doesn’t recall reading an e-mail on Dell Inc. that was cited by the Securities and Exchange Commission as evidence that that the founder of SAC Capital Advisors LP failed to supervise his employees, according to a report given to the firm’s employees July 22.
While Cohen sold his stake in Dell after being forwarded the e-mail, evidence suggests he did so because a portfolio manager started selling the stock, SAC said in a 45-page paper that refutes many of the facts outlined in the SEC’s administrative order filed last week against the 57-year-old billionaire. There’s no evidence Cohen ever read the communication, according to the paper.
The refutation, posted on SAC’s internal website, illustrates Cohen’s efforts to keep his employees calm while fighting the SEC’s allegations -- the government’s first against him personally -- and its efforts to close down his $15 billion hedge fund. Cohen was accused of ignoring red flags in trades conducted by two portfolio managers, Mathew Martoma and Michael Steinberg, who have both been charged with securities fraud. The report stated that at that time, Cohen only opened about 11 percent of his messages. SAC argues that even if Cohen had read the e-mail, the SAC report also says there were no “red flags.”
Martoma, 39, was arrested in November for alleged insider trading in Elan Corp. and Wyeth. Steinberg was arrested in March for trading in Dell and Nvidia Corp. Martoma and Steinberg, 41, have pleaded not guilty.
The SEC said in last week’s order that Cohen received a tip about Dell that was forwarded to him by Steinberg, and that he traded immediately afterward.
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Bitcoin Ponzi Scheme Alleged by SEC in Lawsuit Against Texas Man
The U.S. Securities and Exchange Commission sued a Texas man over claims he operated a Ponzi scheme involving Bitcoin, the virtual currency that has recently attracted investors including Tyler and Cameron Winklevoss.
Trendon T. Shavers raised at least 700,000 Bitcoin starting no later than September 2011 through his firm Bitcoin Savings & Trust and improperly used currency from new investors to cover investor withdrawals, the SEC said in a complaint filed yesterday in federal court in Texas.
Shavers falsely promised investors as much as 7 percent interest weekly on purported trades, including selling the online currency to individuals who wished to buy it “off the radar,” quickly or in large quantities, the SEC said. Shavers also misappropriated investors’ funds for his personal use, according to the complaint.
The SEC said the 700,000 Bitcoin that Shavers raised amounted to more than $4.5 million, based on the average price of Bitcoin in 2011 and 2012 when the investments were offered and sold. Today, the value of 700,000 Bitcoin exceeds $60 million, the SEC said.
Bitcoin is a virtual currency created four years ago that can be used to buy and sell a broad array of items, both legal and illegal. The Winkelvoss brothers offered 1 million shares in a trust that would track the price of Bitcoins, according to a filing with the SEC.
No attorney was listed by the SEC. A phone call to a number listed to Shavers wasn’t immediately returned.
Former ArthroCare Official Pleads Guilty to Securities Fraud
John Raffle, 45, a former ArthroCare Corp. (ARTC) senior executive, pleaded guilty for his role in a $400 million scheme to defraud investors in the maker of surgical products.
Raffle, who was a senior vice president of Strategic Business Units at Austin, Texas-based ArthroCare, pleaded guilty in June to one count of conspiracy to commit securities, mail and wire fraud and two counts of making false statements. His plea was unsealed yesterday, the U.S. Justice Department said.
He “admitted that he and other co-conspirators falsely inflated ArthroCare’s sales and revenue through end-of-quarter transactions involving ArthroCare’s distributors,” the department said in a statement. Raffle faces a maximum of five years in prison for each count, the government said.
Three other company officers were indicted last week on charges they falsely inflated revenue. A fourth former executive, David Applegate, pleaded guilty in May to two counts of fraud.
The case is U.S. v. Raffle, 12-cr-00314, U.S. District Court, Western District of Texas (Austin).
Guynn Says Banking, Commodities Connection Not New
Randall Guynn, head of the financial institutions group at law firm Davis Polk & Wardwell LLP, says the connection between banking and commodities is “not a new development” and has “very ancient roots.”
Guynn testified before a Senate Banking subcommittee in Washington yesterday.
For the video, click here and for more, see Compliance Policy, above.
Robertson Sees ‘Tougher’ Competition Among Hedge Funds
Julian Robertson, founder and chief executive officer of Tiger Management LLC, and Nehal Chopra, founder of Tiger Ratan Capital, talked about the hedge-fund industry and investment strategy.
They spoke with Tom Keene and Scarlet Fu on Bloomberg Television’s “Surveillance.”
For the video, click here.
Douglas Burns, Bloomberg’s Burton Discuss SAC’s Cohen
Douglas Burns, an attorney and former federal prosecutor, and Bloomberg News reporter Katherine Burton discussed the Security and Exchange Commission’s administrative action against Steven Cohen, the owner of SAC Capital Advisors LP. Burns and Burton talked with Bloomberg’s Pimm Fox and Carol Massar on Bloomberg Radio’s “Taking Stock” on July 22nd.
For the audio, click here.
Comings and Goings
Ex-SEC Enforcement Chief Khuzami Joins Kirkland & Ellis Law Firm
Robert Khuzami, the former head of enforcement at the U.S. Securities and Exchange Commission, is joining Kirkland & Ellis LLP.
Mark Filip, a partner in charge of Kirkland’s government enforcement defense and internal investigations, said Khuzami will help immediately in securities enforcement defense, advising boards and companies and counseling financial institutions on securities regulations. He will complement the firm’s general white-collar, internal investigations, and private class-action securities practices, Filip said July 22 in an interview.
Khuzami, 56, will be joined by Kenneth Lench, who served as one of his lieutenants at the SEC and headed a unit that scrutinizes financial instruments such as mortgage-backed securities and collateralized-debt obligations, Filip said.
Khuzami, a former federal prosecutor and top lawyer at Deutsche Bank AG, took over the SEC’s enforcement division in 2009 under Mary Schapiro. He carried out the biggest shakeup in the enforcement unit’s history, eliminating management layers, expanding investigators’ powers and creating five specialized units to police Wall Street.
He held the position for about four years before stepping down and was replaced in February by his deputy, George Canellos.
Under Khuzami, the SEC filed more than 150 cases related to the financial meltdown, including 65 actions against senior corporate officers, the agency said in January.
For more, click here.
To contact the editor responsible for this story: Michael Hytha at email@example.com