by T. GormanPosted on Posted in SECActions

The SEC brought three actions focused on the protection of investor securities and funds held by investment advisers. In the Matter of Further Lane Assets Management, LLC, Adm. Proc. File No. 3-15590 (Oct. 28, 2013); In the Matter of GW& Wade, LLC, Adm. Proc. File No. 3-15589 (Oct. 28, 2013); In the Matter of Knelman Asset Management Group, LLC, Adm. Proc. File No. 3-15588 (Oct. 28, 2013). Each settled proceeding is based on alleged violations of the custody rule, as well as other violations of the federal securities laws.

Rule 206(4)-2 under the Advisers Act is the Custody Rule. It requires registered investment advisers with custody of client funds or securities to implement certain controls to protect those assets. Prior to its amendment, effective in March 2010, the Rule required advisers with custody to have a reasonable basis for believing that a qualified custodian or the adviser sent quarterly account statements to each client for which custody was maintained and obtain an annual surprise exam by an independent public accountant to very all client assets. After March 12, 2012 an amendment to the Rule added certain exceptions for an adviser of a pooled investment vehicle from the basic provisions if certain requirements were met. Those requirements include an annual audit of the pool by a PCAOB registered and inspected independent public accountant. The audited financial statements must also be delivered to investors within certain time limits.

Further Lane Asset Management, named as Respondents the registered investment adviser, Osprey Group, Inc. and Jose Araiz. Mr. Araiz owns and is the President, CEO and CCO of the adviser. Osprey is an unregistered investment adviser controlled by Mr. Araiz.

Further Lane, unlike many advisers, maintained custody of assets of hedge funds that it managed. Nevertheless, the firm failed to arrange for an annual surprise examination to verify the assets held for investors or for investors to receive account statements at least quarterly as required by the Rule. The adviser also failed to disclose that it engaged in a related party in-kind redemption from another fund advised by Mr. Araiz thereby changing its investment approach. The adviser also did not adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and to maintain the required records.

To resolve the proceeding the adviser agreed to implement certain undertakings and consented to the entry of a cease and desist order based on Sections 204, 206(2), 206(3), 206(4) and 207 of the Advisers Act and a censure. Mr. Araiz consented to the entry of a cease and desist order based on the same Sections. Osprey consented to the entry of a cease and desist order based on Section 206(3) and to the entry of a censure. The three Respondents will pay, on a joint and several basis, disgorgement of $338,017 and prejudgment interest. Mr. Araiz will also pay a civil money penalty of $150,000.

Knelman Asset Management is a proceeding which names as Respondents the registered investment adviser and its managing director, CEO and COO, Irving P. Knelman. Knelman Asset Management is the manager of Rancho Partners I, LLC, a fund of private equity funds. The Order alleges that the custody rule was violated by failing to arrange the annual surprise examination or taking the alternate of ensuring that investors were furnished with audited financial statements. The adviser held customer securities in a safe deposit box to which it had access, an arrangement set up after a 2005 inspection in which the staff pointed out a violation of the custody rule. At the time of the 2010 inspection the firm still had access and thus custody.

The Order alleges four other violations of the federal securities laws: 1) Using a distribution method for members that was contrary to the firm documents and, in some instances, improper discretionary cash distributions to certain members; 2) failing to conduct an annual review of the adequacy and effectiveness of the adviser’s compliance policies and procedures and adopting controls to protect customer assets; 3) failing to accurately maintain the required books and records; and 4) filing a form ADV which incorrectly stated that the firm did not have custody.

To resolve the proceeding the adviser agreed to implement certain undertakings. Each Respondent consented to the entry of a cease and desist order based on Sections 204, 206, 206(2), 206(4) and 207 of the Advisers Act. The adviser was also censured and will pay a civil money penalty of $60,000 while Mr. Knelman will pay $75,000.

GW & Wade is a proceeding which names as a Respondent the registered investment adviser. The adviser, which manages funds for typically high net worth individuals, generally invests in mutual funds. Although the adviser has custody of client assets it failed to obtain an examination of those assets by an independent public accountant and to identify those assets in its public disclosures. The firm also failed to adopt or implement policies and procedures reasonably designed to prevent violations of the securities laws and to implement policies and procedures for calculating its advisory fees in discretionary accounts. To resolve the proceeding Respondent consented to the entry of a cease and desist order based on Sections 204, 206(4) and 207 of the Advisers Act and a censure. The firm will also pay a civil money penalty of $250,000.

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by T. GormanPosted on Posted in SECActions

The CFTC stepped up its enforcement activity in fiscal 2013, brining a number of significant actions, according to a recent report by the agency. Last year the trading Commission filed 82 enforcement actions while opening 290 new investigations. Over the past three years the agency brought 282 enforcement actions, almost double the number initiated in the prior three years. Those actions resulted in Orders imposing about $1.5 billion in penalties and requiring the payment of approximately $200 million in restitution and disgorgement. The Commission also reported that about 93% of its major fraud cases had a parallel criminal investigation, reflecting the continued criminalization of regulatory enforcement.

Significant cases brought by the CFTC last year included:

Interest rate benchmarks:

In re UBS AG, CFTC Docket No. 13-09 (Filed Dec. 19, 2012) is a settled action against the financial institution charging manipulation, attempted manipulation and false reporting of LIBOR and other benchmark interest rates for at least six years. The papers document more than 2,000 instances of unlawful conduct. UBS resolved the action by paying a $700 million civil money penalty.

In re The Royal Bank of Scotland plc, CFTC Docket No. 13-14 (Filed Feb. 6, 2012) is an action charging the financial institution with manipulation, attempted manipulation and false reporting relating to LIBOR for Yen and Swiss Franc over about four years. RBS resolved the proceeding, paying a $325 million civil money penalty.

In re ICAP Europe Ltd., CFTC Docket No. 13-38 (Filed Sept. 25, 2013) is an action charging that for over four years ICAP engaged in manipulation, attempted manipulation, false reporting and aiding and abetting derivatives traders’ manipulation and attempted manipulation relating to the LIBOR for Yen. The exchange resolved the matter by paying a $65 million monetary penalty.

Customer protection rules

CFTC v. MF Global Inc., Civil Action No. 13 Civ 4463 (S.D.N.Y. Filed June 27, 2013) is an action against the firm, its former CEO, Jon Corzine, and former assistant treasurer, Edith O’Brien, centered on allegations relating to the unlawful use of customer funds. The firm agreed to settle and reimburse customers 100% of the about $1 billion in funds lost its customers. The individuals are litigating the case.

CFTC v. Peregrine Financial Group, Inc., Civil Action No. 1:12-cv-06383 (N.D. Ill. Filed Feb. 13, 2013) is an action against the firm and its owner, Russell Wasendorf, Sr. alleging the misappropriation of about $200 million in customer funds. The Court entered injunctions prohibiting future violations based on a default and reserved the question of monetary relief. There are two related actions, one against the auditors and a second against the financial institution which held customer segregated funds. In re Veraja-Snelling, CFTC Docket No. 13-29 (Filed Aug. 26, 2013)( action against the audit firm of Peregrine for failing to conduct the audits in accord with GAAS; the case is being litigated); CFTC v. U.S. Bank, N.A., No. 13-Civ-2041 (N.D. Iowa Filed June 5, 2013)(action against the financial institution that held the customer segregated funds alleging misuse; the case is being litigated).

Manipulation/spoofing

CFTC v. Moncada, Civil Action No. 12-cv-8791 (S.D.N.Y. Filed Dec. 4, 2012) is an action against Eric Moncada, BES Capital LC and Serdika LLC alleging attempted manipulation of wheat futures prices. The complaint claims in part that Moncada entered and immediately canceled numerous large-lot orders for wheat futures that were not intended to be filled, creating a misleading impression of increasing marketplace liquidity which the firm used to its advantage. The case is in litigation. See also In re Gelber Group, LLC, CFTC Docket No. 13-15 (Filed Feb 8, 2013)(alleging similar conduct pre-open; settled with the payment of a $750,000 monetary penalty); In re Lorenzen, CFTC Docket No. 13-16 (Filed Feb. 8, 2013)(alleging similar conduct pre-open; settled with the payment of a $250000 civil monetary penalty).

In re Panther Energy Trading LLC, No. 13-26 (Filed July 22, 2013) is the first proceeding brought under the new Dodd-Frank anti-spoofing provision. Here the Respondents utilized a computer algorithm designed to illegally place and quickly cancel large bids and offers in futures contracts on CME Group’s Globex trading platform. The orders created a false impression of trading interest which was exploited. The matter was resolved with the firm paying $1.4 million in disgorgement and a $1.4 million monetary penalty.

Markets

CFTC v. Byrnes, Civil Action No. 13 CIV 1174 (S.D.N.Y. Filed Feb. 21, 2013) is an action against the new York Mercantile Exchange, Inc which is owned and operated by the CME Group, and two former CME NYMEX employees, William Byrnes and Christopher Curtin. The complaint alleges the unlawful disclosure of material nonpublic customer information over two and one half years to an outside commodity broker. The case is in litigation.

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