Regulatory and enforcement actions taken this week:
CFTC charges ICAP Europe with manipulation and attempted manipulation of yen Libor, ordered to pay $65 million
The U.S. Commodity Futures Trading Commission (CFTC) issued an order against ICAP Europe Ltd., an interdealer broker, bringing and settling charges of manipulation, attempted manipulation, false reporting, and aiding and abetting derivatives traders’ manipulation and attempted manipulation, relating to the London Interbank Offered Rate (LIBOR) for the Japanese yen. LIBOR is a critical benchmark interest rate used throughout the world as the basis for trillions of dollars of transactions. ICAP is a subsidiary of U.K.-based ICAP plc.
The CFTC found that for more than four years, from at least October 2006 through at least January 2011, ICAP brokers on its yen derivatives and cash desks knowingly disseminated false and misleading information concerning yen borrowing rates to market participants in attempts to manipulate, at times successfully, the official fixing of the daily yen LIBOR. ICAP brokers, including one known as “Lord LIBOR” or “Mr. LIBOR,” did so to aid and abet their highly valued client, who was a senior yen derivatives trader employed at UBS Securities Japan Co., Ltd. and later at another bank, in his relentless attempts to manipulate yen LIBOR to benefit his derivatives trading positions tied to this benchmark. On limited occasions, ICAP yen brokers engaged in this unlawful conduct to benefit other derivatives traders as well.
The order requires ICAP, among other things, to pay a $65 million civil monetary penalty, and cease and desist from further violations as charged. Pursuant to the order, ICAP and ICAP plc also agree to take specified steps to ensure the integrity and reliability of benchmark interest rate-related market information disseminated by ICAP and certain other ICAP plc companies.
“ICAP and other interdealer brokers are expected to be honest middlemen,” said David Meister, the CFTC’s Director of Enforcement. “Here, certain ICAP brokers were anything but honest. They repeatedly abused their trusted role when they infected the financial markets with false information to aid their top client’s manipulation of LIBOR. As should be clear from today’s action, any market participant who seeks to undermine the integrity of a global benchmark interest rate must be held accountable.”
Yen LIBOR is fixed daily based on rates contributed by panel banks for yen LIBOR that are supposed to reflect each bank’s assessment of costs of borrowing unsecured funds in the London interbank market. ICAP, as an interdealer broker, intermediates cash and LIBOR-based derivatives transactions between banks and other institutions. As a service to clients and to solicit and maintain business, ICAP also provides banks with market insight, including projections of likely LIBOR fixings, which are implicitly represented as ICAP’s unbiased assessment of borrowing costs and market pricing based on objective, observable data, some of which was uniquely in ICAP’s possession.
According to the CFTC, the UBS senior yen trader called on ICAP yen brokers more than 400 times for assistance in manipulating yen LIBOR. ICAP brokers often accommodated the requests by issuing, via a yen cash broker, group emails to panel banks and others containing “Suggested LIBORs” for yen LIBOR. But rather than providing an honest and objective assessment of how yen LIBOR would fix, the suggested LIBORs reflected the preferred rates that would benefit the senior yen trader.
The order finds that almost all of the yen LIBOR panel banks received the suggested LIBORs, and several relied on them in making their yen LIBOR submissions, particularly during the financial crisis of 2007-2009. Even panel banks that tried to make truthful yen LIBOR submissions may have passed on false or misleading submissions, because they used ICAP brokers’ purportedly unbiased suggested LIBORs to inform their LIBOR submissions.
According to the order, the ICAP brokers referred to the panel bank submitters as “sheep” when they copied the yen cash broker’s suggested LIBORS. In fact, the order finds that at least two banks’ submissions mirrored the suggested LIBORs up to 90% of the time.
The order further finds that the ICAP yen bokers provided these “LIBOR services” to keep the senior yen trader’s business, which accounted for as much as 20% of the yen derivatives desk’s revenue. “Mr. LIBOR,” the yen cash broker who disseminated the false suggested LIBORs, demanded compensation from the yen derivatives desk for his “LIBOR services” or “no more mr libor.” This grew from dinners and champagne, to additional commission-generating trades, to “kick backs” totaling $72,000.
The order further finds that this unlawful, manipulative conduct continued for more than four years, in part because ICAP’s supervision, internal controls, policies and procedures were inadequate. For example, ICAP never audited the yen derivatives desk and left compliance oversight to the yen derivatives desk head, who was complicit in the misconduct.
With this Order, the CFTC has now imposed penalties of just under $1.3 billion on entities for manipulative conduct with respect to LIBOR submissions and other benchmark interest rates. See In the Matter of The Royal Bank of Scotland plc and RBS Securities Japan Limited, Order Instituting Proceedings Pursuant To Sections 6(c) And 6(d) Of The Commodity Exchange Act, Making Findings And Imposing Remedial Sanctions (February 6, 2013) ($325 Million penalty) (see CFTC Press Release 6510-13); In the Matter of UBS AG and UBS Securities Japan Co., Ltd., Order Instituting Proceedings Pursuant To Sections 6(c) And 6(d) Of The Commodity Exchange Act, Making Findings And Imposing Remedial Sanctions (December 19, 2012) ($700 Million penalty) (see CFTC Press Release 6472-12); and In the Matter of Barclays PLC, Barclays Bank PLC, and Barclays Capital Inc., Order Instituting Proceedings Pursuant To Sections 6(c) And 6(d) Of The Commodity Exchange Act, As Amended, Making Findings And Imposing Remedial Sanctions (June 27, 2012) ($200 million penalty) (see CFTC Press Release 6289-13). In the actions against the panel banks, the CFTC Orders also require the banks to comply with undertakings specifying the factors upon which benchmark interest rate submissions should be made, and requiring implementation of internal controls and policies needed to ensure the integrity and reliability of such communications.
CFTC orders Vision Financial Markets to Pay a $525,000 for violations of customer fund segregation requirements
The CFTC filed and simultaneously settled charges against Vision Financial Markets LLC, for failing to segregate commodity and options customer funds, failing to notify the CFTC and Vision’s designated self-regulatory organization (DSRO) of its under-segregation, and making misstatements to the CFTC about the location and manner in which the customer funds were being held. Vision is registered with the CFTC as a futures commission merchant (FCM) and with the SEC as a broker-dealer.
The CFTC requires Vision to pay a $525,000 civil monetary penalty and cease and desist from violating the CEA and Regulations, as charged.
The CFTC found that Vision, after using commodity futures and options customer funds to purchase securities, failed to account for and hold those securities separately for its customers. Instead, between approximately August 2008 and June 2009, Vision commingled the securities with its own funds and the funds of its securities customers in Vision’s participant account held in its own name at the Depository Trust Company (DTC). Vision represented to the CFTC that the securities were “deposited in segregated funds bank accounts,” when, in fact, certain Vision personnel involved with preparing and submitting the monthly segregation statements knew that the assets were not held at a bank but actually were held in Vision’s account at DTC and were commingled with funds of Vision and others.
The CFTC also found that after Vision’s segregation violations and misstatements were uncovered in June 2009, Vision restated its monthly segregation statements, deducting the value of the customer funds held in the DTC account from its calculation of total segregated funds. From December 2008 through May 2009, when Vision had invested larger amounts of customer funds in securities, excluding their value from Vision’s calculation of total funds in segregation put Vision in a position of under-segregation for a six month period. However, during that period, Vision did not notify the CFTC or its DSRO that it was under-segregated, the CFTC found.
Separately, the CFTC filed and and simultaneously settled charges against Vision Financial Markets for failing to diligently supervise by failing to aggregate a customer’s multiple accounts, failing to use the proper delta, and utilizing a faulty software program in calculating the customer’s net position. The CFTC requires Vision to pay a civil monetary penalty of $140,000 and to cease and desist from violating the CFTC’s Regulation 166.3.
The CFTC found that in May 2012, Vision failed to diligently supervise its employees in the handling of a customer’s commodity interest accounts. Specifically, the CFTC found that Vision failed to aggregate a customer’s multiple trading accounts held at Vision when calculating that customer’s feeder cattle futures speculative positions traded on the CME and that Vision failed to use the proper delta in calculating this customer’s aggregate futures equivalent net positions. The order further finds that Vision relied on a faulty back-office software program, which incorrectly calculated aggregate futures equivalent net positions and which was used to identify potential speculative limit violations for all of its customer accounts. The software program was not corrected until six months after Vision discovered the software program’s calculation error, according to the CFTC.
CFTC charges The Yorkshire Group and Scott Platto with engaging in illegal, off-exchange precious metals transactions
The CFTC filed a civil injunctive enforcement action in the U.S. District Court for the Eastern District of New York against defendants The Yorkshire Group Inc. of Staten Island, N.Y, and its sole owner, Scott Platto, also of Staten Island.The CFTC complaint, filed on Sept. 25, 2013, charges the defendants with engaging in illegal, off-exchange financed transactions in precious metals with retail customers. The complaint further alleges that Platto, as the owner, operator, and controlling person of Yorkshire, is liable for Yorkshire’s violations of the Commodity Exchange Act (CEA).
According to the complaint, between September 2011 and August 2012, the defendants solicited retail customers by telephone to buy physical precious metals such as silver and palladium in off-exchange leverage transactions. Retail customers engaging in financed transaction with Yorkshire were allegedly told that they were borrowing money to purchase precious metals. Customers paid Yorkshire a portion of the purchase price for the metals, and Yorkshire financed the remainder of the purchase price, while charging the customers interest on the amount they purportedly loaned to customers. The Complaint further alleges that Yorkshire’s customers never took delivery of the precious metals they purportedly purchased and that the defendants neither bought, sold, loaned, stored, or transferred any physical metals for these transactions.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which expanded the CFTC’s jurisdiction over retail commodity transactions like these, prohibits fraud in connection with such transactions, and requires that these transactions be executed on or subject to the rules of a board of trade, exchange, or contract market. Thus, since Yorkshire’s and Platto’s transactions were executed off exchange, they were illegal, according to the Complaint.
When Yorkshire and Platto allegedly engaged in these illegal transactions, they were acting as a dealer for metals merchant Hunter Wise Commodities, LLC, which the CFTC charged with fraud and other violations in federal court in Florida on Dec. 5, 2012. On Feb. 25, 2013, the court granted a preliminary injunction against Hunter Wise, froze the firm’s assets, and appointed a corporate monitor to assume control over those assets.
In its continuing litigation against Yorkshire and Platto, the CFTC seeks restitution to defrauded customers, a return of ill-gotten gains, civil monetary penalties, trading and registration bans, and permanent injunctions against further violations of the CEA, as charged.
CFTC files enforcement action charging Daniel K. Steele with violations of forex regs
The CFTC filed a civil Complaint against defendants Daniel K. Steele of Rolla, Mo., and his firm Champion Management International, LLC. The CFTC’s charges Steele with, among other things, engaging in an act or practice which operated as a fraud or deceit under Section 4o(1)(B) of the CEA for failing to disclose material information, including that defendants were acting as unregistered commodity pool operators (CPO) for at least two commodity pools engaging in off-exchange retail foreign currency transactions. The CFTC also charges Steele with failing to disclose that the counterparty to the retail forex transactions that were offered or entered into with the respective pools was not registered as a Retail Foreign Exchange Dealer (RFED). The CFTC charges Champion Management with acting as an unregistered CPO in connection with a third forex pool. Further, the CFTC alleges that neither defendant has ever been registered with the CFTC in any capacity.
The complaint, filed on Sept. 25, 2013, in the U.S. District Court for the Eastern District of Missouri Eastern Division, alleges that from at least Feb. 28, 2011 through the present (relevant period), Steele individually and acting as an agent of Champion Management, solicited at least $1.7 million from at least 24 pool participants to participate in three forex pools. The complaint further alleges that Steele, during the relevant period, failed to disclose material information to pool participants, which operated as a fraud in that neither he nor Champion Management were properly registered with the CFTC and that he misappropriated a portion of pool participants’ funds.
On Sept. 25, 2013, Judge Rodney W. Sippel, of the U.S. District Court for the for the Eastern District of Missouri, entered under seal an emergency order freezing the defendants’ assets and prohibiting the destruction or alteration of books and records.
CFTC obtains permanent injunction against iFinix Futures, Inc. and Benhope Marlon Munroe
Judge Leonard D. Wexler of the U.S. District Court for the Eastern District of New York entered an order of default judgment and permanent injunction against CFTC-registered independent introducing broker (IB) iFinix Futures, Inc. of Plainview, N.Y., and its senior executive officer, Benhope Marlon Munroe of New Milford, Conn. iFinix also has done business under the name Pro-Active Futures.
The court’s order requires iFinix and Munroe to pay a $1,260,000 civil monetary penalty, imposes permanent trading and registration bans against them, and prohibits them from violating the CEA and CFTC regulations, as charged.
The order, entered Sept. 16, 2013, stems from a CFTC complaint filed on Sept. 27, 2012, charging the defendants with making false statements to the National Futures Association (NFA), the futures industry self-regulatory organization, and with failing to meet minimum financial requirements for an independent IB.
The order finds that, in and around July 2011, Munroe and iFinix willfully provided no fewer than five falsified bank account documents to the NFA during its audit of iFinix, to conceal iFinix’s failure to maintain adequate capital. In addition, the order finds that, during at least the months of July and August 2011, iFinix, with Munroe as its controlling person, failed to maintain adequate capital, failed to maintain current books and records, and failed to cease operations and provide notice of its inadequate capital.
CFTC closes investigation on silver markets
The CFTC Division of Enforcement has closed the investigation that was publicly confirmed in September 2008 concerning silver markets. The Division of Enforcement is not recommending charges to the Commission in that investigation. For law enforcement and confidentiality reasons, the CFTC only rarely comments publicly on whether it has opened or closed any particular investigation. Nonetheless, given that this particular investigation was confirmed in September 2008, the CFTC deemed it appropriate to inform the public that the investigation is no longer ongoing. Based upon the law and evidence as they exist at this time, there is not a viable basis to bring an enforcement action with respect to any firm or its employees related to our investigation of silver markets.
In September 2008 the CFTC confirmed that its Division of Enforcement was investigating complaints of misconduct in the silver market. At that time the CFTC had received complaints regarding silver prices. These complaints were focused on whether the silver futures contracts traded on the Commodity Exchange, Inc. (COMEX) were being manipulated. For example, the complaints pointed to differences between prices in the silver futures contracts and prices in other silver products, including retail silver products. The complainants generally asserted that because the prices for retail silver products, such as coins and bullion, had increased, the price of silver futures contracts should have also experienced an increase. By reference to publicly available information concerning large traders with short open positions in the silver futures contracts, the complaints also alleged that the large shorts in the silver market were responsible for lower futures prices. The Division of Enforcement conducted an exhaustive investigation of these and other complaints and focused on identifying and evaluating whether there was any trading activity in violation of the CEA and Commission regulations including the anti-manipulation provisions.
The Division of Enforcement’s investigation utilized more than seven thousand enforcement staff hours. The staff reviewed and analyzed position and transaction data, including physical, swaps, options, and futures trading data, and other documents and information, and interviewed witnesses. The Division’s investigation included an evaluation of silver market fundamentals and trading within and between cash, futures and over the counter markets. The investigation was also undertaken with assistance by the Commission’s Division of Market Oversight, the Commission’s Office of Chief Economist, and outside experts.
Separately, the Division of Market Oversight continued surveillance of the silver market contemporaneously to the Division of Enforcement’s investigation. The Division of Market Oversight’s market surveillance function encompasses a robust monitoring of traders’ positions and transactions at the ownership and account levels to identify potential violations of the CEA and Commission regulations including, but not limited to, price manipulation, disruptive trading and trade practice violations. For example, after an episode of sharp price moves in any commodity, staff utilizes numerous visualization and analytical tools on data submitted daily to the Commission to discover indications of potential manipulation and other violations. Where questions remain, Division of Market Oversight staff regularly utilize the Commission authority such as the Special Call under Regulation § 18.05 to obtain additional detailed information from traders.
The Division of Enforcement takes complaints it receives seriously. The Division will not hesitate to use its authority, including new manipulation authority in the Dodd-Frank Act, to bring market manipulation charges as supported by the evidence.
 The CME Group now includes the New York Mercantile Exchange (NYMEX) as well as the Commodity Exchange, Inc. (COMEX). Market participants generally still refer to the silver futures contracts offered by the CME Group as “COMEX silver futures.”
CFTC orders Newbridge Metals to pay over $1.5 Million illegal, off-exchange precious metals transactions
The CFTC filed and simultaneously settled charges against Newbridge Metals, LLC, based in Boca Raton, Fla., for engaging in illegal off-exchange precious metals transactions.
The CFTC requires Newbridge to pay restitution of $1,517,930.66 to its customers. In addition, the CFTC order imposes permanent registration and trading bans against Newbridge and requires the firm to cease and desist from violating Section 4(a) of the CEA, as charged.
As explained, financed transactions in commodities with retail customers, like those engaged in by Newbridge, must be executed on, or subject to, the rules of an exchange approved by the CFTC. The CFTC found that, from February 2012 through February 2013, Newbridge solicited retail customers to buy and sell precious metals on a financed basis.
Newbridge telemarketers typically represented that a customer could purchase a desired quantity of precious metals with a 25% deposit, and that the customer could borrow the remaining 75%. The customer would then pay Newbridge a finance charge on the loan, a service charge, and a maximum commission of 15%.
If a customer agreed to the transaction, the customer sent the deposit, finance charge, and commission to Newbridge. Newbridge confirmed the transaction and ultimately transferred the funds to Hunter Wise Commodities, LLC (Hunter Wise), the Order finds. Hunter Wise subsequently remitted to Newbridge a portion of the customer commissions and fees, with Newbridge ultimately receiving $1,517,930.66 in commissions and fees for the retail financed precious metals transactions executed through Hunter Wise, the order states.
However, according to the order, neither Newbridge nor Hunter Wise bought, sold, loaned, stored, or transferred any physical metals for these transactions, and neither company actually delivered any precious metals to any customer. Because Newbridge’s transactions were executed off exchange, they were illegal.
The CFTC sued Newbridge’s clearing firm, Hunter Wise, in federal court in Florida on Dec. 5, 2012. The CFTC charged Hunter Wise with engaging in illegal, off-exchange precious metals transactions, as well as fraud and other violations. On Feb. 25, 2013, the court granted a preliminary injunction against Hunter Wise, froze the firm’s assets, and appointed a corporate monitor to assume control over those assets.
SEC charges China-based executives with fraud and insider trading
The Securities and Exchange Commission (SEC) charged the former CEO of an education services provider based in China with stealing tens of millions of dollars from investors in a U.S. public offering, and charged another executive with illegally dumping his stock in the company after he helped steal valuable company assets.
The SEC alleges that ChinaCast Education Corporation’s former CEO and chairman of the board Chan Tze Ngon illicitly transferred $41 million out of the $43.8 million raised from investors to a purported subsidiary in which he secretly held a controlling 50% ownership stake. From there, Chan transferred investor funds to another entity outside ChinaCast’s control. Chan also secretly pledged $30.4 million of ChinaCast’s cash deposits to secure the debts of entities unrelated to ChinaCast. None of the transactions were disclosed in the periodic and other reports signed by Chan and filed with the SEC.
The SEC further alleges that Jiang Xiangyuan, ChinaCast’s former president for operations in China, avoided more than $200,000 in losses by illegally selling approximately 50,000 ChinaCast shares after participating in the ownership transfer of one of company’s revenue-generating colleges before it was publicly disclosed by a new management team. ChinaCast had a market capitalization of more than $200 million before these alleged frauds came to light. After Chan and Jiang were terminated and their misconduct was publicly disclosed by new management, ChinaCast’s market capitalization dropped to less than $5 million.
“The massive fraud perpetrated by Chan destroyed hundreds of millions of dollars in market value, and Jiang’s brazen insider trading allowed him to profit by dumping his own shares on the market before the fraud was exposed,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.
According to the SEC’s complaint filed in federal court in Manhattan, ChinaCast entered the U.S. capital markets through a reverse merger in December 2006, and its common stock was listed on the NASDAQ from Oct. 29, 2007 to June 25, 2012. ChinaCast conducted multiple public stock offerings in the United States, with the second one occurring in December 2009 when ChinaCast represented that the proceeds would be used for “working capital, future acquisitions, and general corporate purposes.” Chan instead directed and engaged in the transactions that moved investor funds outside ChinaCast’s corporate structure for his personal benefit. He did so without seeking or obtaining the approval of ChinaCast’s board of directors, and the transactions were not publicly disclosed until ChinaCast’s new management prompted the company to file a Form 8-K on Dec. 21, 2012, disclosing Chan’s misconduct.
The SEC alleges that ChinaCast falsely stated in multiple SEC filings signed by Chan that the company indirectly owned 98.5 percent of ChinaCast Technology (HK) Limited – the purported subsidiary to which Chan first transferred investor funds. However, ChinaCast actually held only an indirect 49.2% interest while Chan personally owned 50 percent. Chan also signed a number of periodic reports falsely stating that offering proceeds were under ChinaCast’s control and falsely including those funds in amounts that ChinaCast reported as cash and cash equivalents. Chan also defrauded shareholders and prospective investors by secretly pledging ChinaCast’s existing term cash deposits as collateral to secure debts incurred by various third parties that had nothing to do with ChinaCast’s business. Chan signed periodic reports falsely stating that ChinaCast’s cash and cash equivalents were completely unencumbered.
“Chan orchestrated the systematic looting of ChinaCast and hid his misconduct by repeatedly lying to investors about the company’s assets until he lost control of the board and was terminated,” said Sanjay Wadhwa, senior associate director for enforcement in the SEC’s New York office. “Officers and directors who misuse their access to the U.S. capital markets will be held accountable for their insidious behavior.”
According to the SEC’s complaint, Jiang was a member of the senior management group headed by Chan. Jiang engaged in illegal trading based on inside information by selling his shares on March 28, 2012, at $4.59 per share. After Chan’s management group lost control of the board, they transferred ownership of ChinaCast’s three profitable brick-and-mortar colleges away from ChinaCast to Jiang and the dean of one of the colleges. They were later sold to others. At least one of the colleges was transferred to Jiang and the dean three weeks before Jiang’s March 28stock sale. Jiang was terminated on March 29, and NASDAQ suspended trading in ChinaCast onApril 2 due to its failure to file an annual report for 2011. ChinaCast was later delisted. When over-the-counter trading resumed on June 25 after multiple disclosures made by new management about former management’s misconduct, the stock opened at 55 cents per share and closed at 82 cents. ChinaCast’s stock is currently trading at 10 cents per share.
Chan is charged with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 as well as violations of various corporate reporting, recordkeeping, and internal controls provisions. Jiang is charged with illegal insider trading in violations of the same antifraud provisions. The SEC seeks disgorgement of ill-gotten gains plus prejudgment interest, financial penalties, permanent injunctions, and officer-and-director bars.
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