This week's regulatory actions:
Federal court orders Michael Peskin to pay more than $480,000 to settle charges that Peskin violated a permanent trading ban
The U.S. Commodity Futures Trading Commission (CFTC) announced that Judge John F. Grady of the U.S. District Court for the Northern District of Illinois entered a consent order permanently enjoining Michael Peskin from trading in violation of a CFTC trading ban. The order, entered on July 24, 2013, arises out of an enforcement action filed against Peskin in CFTC v. Michael Peskin, a case stemming from charges that Peskin had violated a permanent trading ban. The Court also ordered Peskin to pay disgorgement of $239,339.78 and a civil monetary penalty of $250,000.
The Commission imposed a trading ban against Peskin in 1993 as a sanction after finding that Peskin had fraudulently allocated trades to benefit himself at the expense of his customers in an administrative proceeding entitled In the Matter of Peskin,
The CFTC complaint alleges that Peskin violated a permanent trading ban entered against him in 1993 by trading for himself through the individual trading accounts of others from at least February 2006 through December 2012. The complaint also alleged that Peskin profited by $239,339.78 by trading in violation of the ban.
The order finds that, beginning in at least February 2006, Peskin arranged with other persons to assume the identity of these other persons in order to trade for himself, both telephonically and electronically, through the accounts of those other persons.
CFTC orders Panther Energy Trading and its principal Michael J. Coscia to pay $2.8 million for spoofing in numerous commodity futures contracts
First case under Dodd-Frank’s prohibition of the disruptive practice of spoofing by bidding or offering with intent to cancel before execution
The CFTC issued an order filing and simultaneously settling charges against Panther Energy Trading LLC of Red Bank, N.J,. and Michael J. Coscia of Rumson, N.J. for engaging in the disruptive practice of “spoofing” by utilizing a computer algorithm that was designed to illegally place and quickly cancel bids and offers in futures contracts. The order finds that this unlawful activity took place across a broad spectrum of commodities from Aug. 8, 2011 through Oct. 18, 2011 on CME Group’s Globex trading platform. The CFTC order requires Panther and Coscia to pay a $1.4 million civil monetary penalty, disgorge $1.4 million in trading profits, and bans Panther and Coscia from trading on any CFTC-registered entity for one year.
According to the order, Coscia and Panther made money by employing a computer algorithm that was designed to unlawfully place and quickly cancel orders in exchange-traded futures contracts. For example, Coscia and Panther would place a relatively small order to sell futures that they did want to execute, which they quickly followed with several large buy orders at successively higher prices that they intended to cancel. By placing the large buy orders, Coscia and Panther sought to give the market the impression that there was significant buying interest, which suggested that prices would soon rise, raising the likelihood that other market participants would buy from the small order Coscia and Panther were then offering to sell. Although Coscia and Panther wanted to give the impression of buy-side interest, they entered the large buy orders with the intent that they be canceled before these orders were actually executed. Once the small sell order was filled according to the plan, the buy orders would be cancelled, and the sequence would quickly repeat but in reverse – a small buy order followed by several large sell orders. With this back and forth, Coscia and Panther profited on the executions of the small orders many times over the period in question.
David Meister, the CFTC’s enforcement director, said, “While forms of algorithmic trading are of course lawful, using a computer program that is written to spoof the market is illegal and will not be tolerated. We will use the Dodd Frank anti-disruptive practices provision against schemes like this one to protect market participants and promote market integrity, particularly in the growing world of electronic trading platforms.”
The order finds that Panther and Coscia engaged in this unlawful activity in 18 futures contracts traded on four exchanges owned by CME Group. The activity involved a broad spectrum of commodities including energies, metals, interest rates, agricultures, stock indices, and foreign currencies. The futures contracts included the widely-traded light sweet crude oil contract as well as natural gas, corn, soybean, soybean oil, soybean meal, and wheat contracts.
In a related matter, the United Kingdom’s Financial Conduct Authority issued a Final Notice regarding its enforcement action against Coscia relating to his market abuse activities on the ICE Futures Europe exchange, and has imposed a penalty of approximately $900,000 against him. Furthermore, the CME Group, by virtue of disciplinary actions taken by four of its exchanges, has imposed a fine of $800,000 and ordered disgorgement of approximately $1.3 million against Coscia and Panther and has issued a six-month trading ban on its exchanges against Coscia.
The CFTC’s $1.4 million disgorgement will be offset by amounts paid by Panther and Coscia to satisfy any disgorgement order in CME Group’s disciplinary action related to the spoofing charged by the CFTC. As CME Group has represented to the Commission, disgorgement paid in the CME Group’s action will be used first to offset the cost of customer protection programs, and thereafter, if the disgorged funds collected exceed the cost of those programs, the excess will be contributed to the CME Trust to be used to provide assistance to customers threatened with loss of their money or securities. The CME Trust is prohibited from utilizing any of its funds for the purpose of satisfying any legal obligation of the CME.
SEC charges Texas man with running Bitcoin-denominated Ponzi scheme
The Securities and Exchange Commission (SEC) charged a Texas man and his company with defrauding investors in a Ponzi scheme involving Bitcoin, a virtual currency traded on online exchanges for conventional currencies like the U.S. dollar or used to purchase goods or services online.
The SEC alleges that Trendon T. Shavers, who is the founder and operator of Bitcoin Savings and Trust (BTCST), offered and sold Bitcoin-denominated investments through the Internet using the monikers “Pirate” and “pirateat40.” Shavers raised at least 700,000 Bitcoin in BTCST investments, which 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 alleges that Shavers promised investors up to 7% weekly interest based on BTCST’s Bitcoin market arbitrage activity, which supposedly included selling to individuals who wished to buy Bitcoin “off the radar” in quick fashion or large quantities. In reality, BTCST was a sham and a Ponzi scheme in which Shavers used Bitcoin from new investors to make purported interest payments and cover investor withdrawals on outstanding BTCST investments. Shavers also diverted investors’ Bitcoin for day trading in his account on a Bitcoin currency exchange, and exchanged investors’ Bitcoin for U.S. dollars to pay his personal expenses.
The SEC issued an investor alert today warning investors about the dangers of potential investment scams involving virtual currencies promoted through the Internet.
“Fraudsters are not beyond the reach of the SEC just because they use Bitcoin or another virtual currency to mislead investors and violate the federal securities laws,” said Andrew M. Calamari, director of the SEC’s New York regional office. “Shavers preyed on investors in an online forum by claiming his investments carried no risk and huge profits for them while his true intentions were rooted in nothing more than personal greed.”
According to the SEC’s complaint filed in U.S. District Court for the Eastern District of Texas, Shavers sold BTCST investments over the Internet to investors in such states as Connecticut, Hawaii, Illinois, Louisiana, Massachusetts, North Carolina, and Pennsylvania. Shavers posted general solicitations on a website dedicated to Bitcoin discussions, and he misled investors with such false assurances about his investment opportunity as “It’s growing, it’s growing!” and “I have yet to come close to taking a loss on any deal,” and “risk is almost 0.” Contrary to the representations made to investors, BTCST was not in the business of buying and selling Bitcoin at all.
The SEC alleges that Shavers, who lives in McKinney, Texas, paid 507,148 Bitcoin in investor withdrawals and purported interest payments. He transferred at least 150,649 Bitcoin to his personal account at an online Bitcoin currency exchange. Shavers suffered a net loss from his day trading, but realized net proceeds of $164,758 from his sales of 86,202 Bitcoin. Shavers transferred $147,102 from his personal account at the online Bitcoin currency exchange to accounts he controlled at an online payment processor as well as his personal checking account. He used this money to pay his rent, utilities, and car-related expenses as well as for food and retail purchases and gambling.
The SEC’s complaint charges Shavers and BTCST with offering and selling investments in violation of the anti-fraud and registration provisions of the securities laws. The SEC is seeking a court order to freeze the assets of Shavers and BTCST in addition to other relief, including permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.
SEC charges Steven A. Cohen with failing to supervise portfolio managers and prevent insider trading
The SEC announced charges against hedge fund adviser Steven A. Cohen for failing to supervise two senior employees and prevent them from insider trading under his watch.
The SEC’s division of enforcement alleges that Cohen received highly suspicious information that should have caused any reasonable hedge fund manager to investigate the basis for trades made by two portfolio managers who reported to him – Mathew Martoma and Michael Steinberg. Cohen ignored the red flags and allowed Martoma and Steinberg to execute the trades. Instead of scrutinizing their conduct, Cohen praised Steinberg for his role in the suspicious trading and rewarded Martoma with a $9 million bonus for his work. Cohen’s hedge funds earned profits and avoided losses of more than $275 million as a result of the illegal trades.
“Hedge fund managers are responsible for exercising appropriate supervision over their employees to ensure that their firms comply with the securities laws,” said Andrew J. Ceresney, co-director of the SEC’s division of enforcement. “After learning about red flags indicating potential insider trading by his employees, Steven Cohen allegedly failed to follow up to prevent violations of the law. In addition to the more than $615 million his firm has already agreed to pay for the alleged insider trading, the Enforcement Division is seeking to bar Cohen from overseeing investor funds.”
According to the SEC’s order instituting administrative proceedings against Cohen, portfolio managers Martoma and Steinberg obtained material non-public information about publicly traded companies in 2008, and they traded on the basis of that information. The SEC charged Martoma and his tipper with insider trading in an enforcement action last year, and charged Steinberg with insider trading in a complaint filed earlier this year. In connection with those cases, CR Intrinsic, an affiliate of Cohen’s firm S.A.C. Capital Advisors, agreed to pay more than $600 million in the largest-ever insider trading settlement. Another Cohen affiliate, Sigma Capital, agreed to pay nearly $14 million to settle insider trading charges.
The SEC’s investigation found that in his supervisory role, Cohen oversaw trading by Martoma and Steinberg and required them to update him on their stock trading and convey the reasons for their trades. On at least two separate occasions in 2008, they provided information to Cohen indicating their potential access to inside information to support their trading. However, Cohen stood by on both occasions instead of ascertaining whether insider trading was taking place.
According to the SEC’s order, Cohen watched Martoma build a massive long position in the stock of two pharmaceutical companies – Elan and Wyeth – based on their joint clinical trial of a drug with the potential to treat Alzheimer’s disease. Cohen allowed this despite repeated e-mails and instant messages to Cohen from other analysts at CR Intrinsic advocating against it. The analysts questioned whether Martoma possessed undisclosed data on the results of the trial. Cohen responded by saying it was “tough” to know whether Martoma knew something, but that he would follow Martoma’s advice because he was “closer to it than you.” In later exchanges of instant messages, Cohen further remarked that it “seems like mat [Martoma] has a lot of good relationships in this arena.” Cohen also was told about a doctor who had provided his portfolio managers with potentially non-public information about the clinical trial, but failed to express any concern about the use of that information. During his e-mail exchanges, Cohen displayed no concern that Martoma might possess non-public information or about his use of such information to inform investment decisions at his firm. Instead, Cohen encouraged Martoma to talk further with a doctor familiar with the clinical trial.
The SEC’s enforcement division alleges that after months of building up the massive position and being bullish on both Elan and Wyeth, Martoma had a 20-minute phone conversation with Cohen on July 20, 2008. According to Cohen, Martoma said that he was no longer comfortable with the Elan investments that CR Intrinsic and SAC held. Despite Martoma’s abrupt change in view and red flags that he likely received confidential information about the clinical trials from a tipper, Cohen failed to take prompt action to determine whether an employee under his supervision was violating insider trading laws. Starting the next morning, Cohen oversaw the liquidation of his and Martoma’s positions in Elan and Wyeth and the accumulation of a short position instead.
According to the SEC’s order, Cohen also supervised Steinberg while he was involved in insider trading of Dell securities in August 2008. After being looped into a highly suspicious e-mail between Steinberg and other firm employees reflecting the clear possibility that they possessed material non-public information about an upcoming earnings announcement at Dell, Cohen again failed to take prompt action to determine whether Steinberg was engaged in unlawful insider trading. Instead, Cohen liquidated his Dell shares based on the recommendation of Steinberg, who continued short selling Dell shares in his Sigma Capital portfolio based on the confidential information. Dell’s stock price dropped sharply after its August 28 earnings announcement, and funds managed by Cohen’s firms profited or avoided losses totaling at least $1.7 million. Three hours after the earnings announcement, Cohen e-mailed Steinberg: “Nice job on Dell.”
The SEC’s division of enforcement alleges that by engaging in the conduct described in the SEC’s order, Cohen failed reasonably to supervise Martoma and Steinberg with a view to preventing SEC.The administrative proceedings will determine what relief is in the public interest against Cohen, including financial penalties, a supervisory and financial services industry bar, and other relief.
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