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Securities Enforcement and Market Oversight Training

May 2-6, 2011

AGENDA SO PAULO, BRAZIL

Securities Enforcement and Market Oversight Training


MAY 2nd, 2011 DAY 1
9:00 a.m. 10:00 a.m.

Registration and Welcome Coffee Opening Remarks/Program Overview Speakers: Mr. Edemir Pinto Chairperson, BM&FBOVESPA Ms. Maria Helena Santana Chairperson, CVM Mr. Alberto Arevalo Assistant Director, US SEC Overview of SECs Market Oversight and Enforcement Program Speaker: Mr. Z. Scott Birdwell Branch Chief and Counsel for International Enforcement, US SEC Coffee Break Overview of CVMs Market Oversight and Enforcement Program Speakers: Mr. Roberto Tadeu Antunes Fernandes Chief Executive Officer, CVM Mr. Raul Fernando Salgado Zenha Acting Head, Superintendent Process Penalty, CVM Mr. Alexandre Pinheiro dos Santos Attorney General, CVM Lunch Overview of BSMs Market Oversight and Enforcement Program Speaker: Mr. Luiz Felipe Calabr Head of Legal Department, BSM International Enforcement Cooperation Speakers: Mr. Alberto Arevalo, US SEC Ms. Izabela Reis Senior Counsel, US SEC Coffee Break Investigating and Enforcement Cooperation in Brazil (Case Studies) Speakers: Mr. Alexandre Pinheiro dos Santos Attorney General, CVM Mr. Marcelo Moscogliato Federal Prosecutor, MPF Mr. Edson Fbio Moreira Garutt Federal Police Delegate, PF

10:00 a.m. 10:30 a.m.

10:30 a.m. 11:00 a.m.

11:00 a.m. 11:30 a.m.

11:30 a.m. 1:00 p.m.

1:00 p.m. 2:30 p.m

2:30 p.m. 3:00 p.m.

3:00 p.m. 4:00 p.m.

4:00 p.m. 4:30 p.m.

4:30 p.m. 6:00 p.m.

AGENDA SO PAULO, BRAZIL

Securities Enforcement and Market Oversight Training


MAY 3rd, 2011 DAY 2

9:00 a.m. 10:00 a.m.

Investigating Market Manipulation Speakers: Mr. Alberto Arevalo and Ms. Izabela Reis, US SEC Investigating and Prosecuting Market Manipulation (Cases) Speakers: Mr. Waldir de Jesus Nobre Head, Market Relations and Intermediates, and Mr. Eduardo Jos Busato Analyst, CVM Mr. Luiz Eduardo Costa e Silva Head of Market Surveillance Department, BSM Coffee Break Case Study on the Investigation and Prosecution of an International Boiler Room Speaker: Mr. Robert K. Tripp, Federal Agent, FBI Mr. Otvio Margonari Russo Federal Police Delegate, PF Lunch

10:00 a.m. 11:15 a.m.

11:15 a.m. 11:45 a.m.

11:45 a.m. 12:45 p.m.

12:45 p.m. 2:15 p.m.

2:15 p.m. 3:00 p.m.

Remedies for Securities Law Violations a discussion of appropriate sanctions to deter violations and protect investors. Settlements will also be discussed. Speakers: Mr. Z. Scott Birdwell, US SEC Mr. Cameron Funkhouser Executive Vice President Office of Fraud Detection and Market Intelligence, FINRA Coffee Break Money Laundering Speakers: Mr. Marcus Vinicius de Carvalho, Inspector, CVM Mr. Jos Eduardo Guimares Barros Federal Attorney, CVM Mr. Antonio Gustavo Rodrigues Chairperson, COAF Ms. Carla Verssimo de Carli Federal Prosecutor, MPF Mr. Robert K. Tripp Federal Agent, FBI Mr. Bruno Titz Rezende Federal Police Delegate, PF

3:00 p.m. 3:30 p.m.

3:30 p.m. 5:30 p.m.

AGENDA SO PAULO, BRAZIL

Securities Enforcement and Market Oversight Training


MAY 4th, 2011 DAY 3

9:00 a.m. 10:00 a.m.

Investigating International Insider Trading Speaker: Mr. Z. Scott Birdwell, US SEC Case study presented by: Mr. Alberto Arevalo and Ms. Izabela Reis, US SEC

10:00 am 11:00 am

Insider Trading Surveillance A Case Study Speakers: Mr. Cameron Funkhouser, FINRA Coffee Break

11:00 a.m. 11:30 a.m.

11:30 a.m. 1:30 p.m.

Investigating and Prosecuting Insider Trading (Cases) Speakers: Mr. Waldir de Jesus Nobre and Mr. Eduardo Jos Busato, CVM Mr. Alexandre Pinheiro dos Santos Attorney General, CVM Mr. Luiz Eduardo Costa e Silva, BSM Mr. Rodrigo de Grandis Federal Prosecutor, MPF Lunch

1:30 p.m. 3:00 p.m.

3:00 p.m. 4:30 p.m.

Earnings Management and Fraud in Financial Statements by Stock Issuing Companies Speakers: Mr. Alexsandro Broedel Lopes Commissioner, CVM Mr. Jonathan Streeter Securities and Commodities Fraud Task Force, US Attorneys Office, Southern District of New York DOJ Mr. Z. Scott Birdwell, US SEC Coffee Break

4:30 p.m. 5:00 p.m.

5:00 p.m. 6:00 p.m.

Fraud Detection a SRO Perspective Speaker: Mr. Cameron Funkhouser, FINRA

AGENDA SO PAULO, BRAZIL

Securities Enforcement and Market Oversight Training


MAY 5th, 2011 DAY 4

9:00 a.m. 10:00 a.m.

Criminal Prosecution of Insider Trading Speaker: Mr. Jonathan Streeter, US Attorneys Office, Southern District of New York

10:00 a.m. 11:00 a.m.

Broker Dealer Violations and Customer Abuse (including case studies of churning, front running, and failure to supervise) Speaker: Mr. Z. Scott Birdwell, US SEC Coffee Break

11:00 a.m. 11:30 a.m.

11:30 a.m. 12:30 p.m.

Broker Dealer Compliance & Examinations and Their Relation to Enforcement Speaker: Mr. Rodrigo Soares Lopes Head of Audit Department, BSM Lunch

12:30 p.m. 2:00 p.m.

2:00 p.m. 3:30 p.m.

Broker Dealer Enforcement Cases Speakers: Mr. Marcos Galileu Lorena Dutra Analyst, CVM Mr. Luiz Felipe Calabr, BSM Coffee Break

3:30 p.m. 4:00 p.m.

4:00 p.m. 5:30 p.m.

Criminal Enforcement of the Securities Laws and Parallel Proceedings Speakers: Mr. Jonathan Streeter Securities and Commodities Fraud Task Force, US Attorneys Office, Southern District of New York

Commentary from Mr. Alberto Arevalo and Mr. Z. Scott Birdwell, US SEC

AGENDA SO PAULO, BRAZIL

Securities Enforcement and Market Oversight Training


MAY 6th, 2011 DAY 5

9:00 a.m. 10:15 a.m.

Market Intelligence and Surveillance Systems and Techniques Speakers: Mr. Marcos Galileu Lorena Dutra, Analyst, CVM Mr. Luiz Eduardo Costa e Silva, BSM Coffee Break

10:15 a.m. 10:45 a.m.

10:45 a.m. 11:45 a.m.

Restraining Proceeds of Fraud Speakers: Mr. Alberto Arevalo, US SEC Ms. Izabela Reis, US SEC Mr. Jonathan Streeter, DOJ

11:45 a.m. 12:45 p.m.

International Cooperation in the Investigation and Prosecution of Unfair Practices (Cases) Speaker: Mr. Eduardo Manhes Head, International Affairs CVM Lunch

12:45 p.m. 2:15 p.m.

2:15 p.m. 3:15 p.m.

Investigating and Prosecuting Irregular Asset Management Speaker: Mr. Francisco Jos Bastos Santos Head, Institutional Investors Regulation, CVM Coffee Break

3:15 p.m. 3:45 p.m.

3:45 p.m. 4:15 p.m.

Closing Remarks Speakers: Mr. Z. Scott Birdwell, US SEC Mr. Alexandre Pinheiro dos Santos - Attorney General, CVM Mr. Marcelo Deschamps Head of Strategy and Analysis Department, BSM

Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

Overview of U.S. SECs Enforcement Program

By Z. Scott Birdwell
The Securities and Exchange Commission, As a Matter of Policy, Disclaims Responsibility for Any Private Publication or Statement by Any of Its Employees. The Views Expressed Herein Do Not Necessarily Reflect the Views of the Commission or of Other Members of the Staff of the Commission

Introduction to US SEC

Established pursuant to the Securities Exchange Act of 1934 (Exchange Act) Act). The SEC is an independent federal agency. SEC consists of five presidentially-appointed presidentiallyCommissioners, with staggered five-year fiveterms. Core Mission: protect investors, maintain orderly and efficient markets and facilitate capital formation.

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

SEC Responsibilities
SEC Regulates 35,000 entities

11,800 Investment Advisors (that manage $38 trillion in assets) 9500 Public companies 4200 Mutual Funds 5400 Broker Dealers with 175,000 branches 12 Exchanges FINRA, PCAOB, Municipal Securities Rulemaking Board Transfer agents, clearing agencies, statistical rating organizations

SEC Staff
Total Staff about 3800 Enforcement about 1200

Mostly attorneys and accountants

Examinations about 800 Corporation Finance (oversees corporate disclosures) about 500 di l ) b t Trading and Markets (supervise market participants) about 200

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

SEC Budget and Resources


FY 2010 = $1.11 billion SEC h 12 E has Examiners per t illi dollars in i trillion d ll i investment advisor assets under management! SEC collects transaction fees of 2 cents per $1000 (SEC funding is deficit neutral) t l) SEC returned $2.2 billion to harmed investors (twice our budget)

Dodd-Frank Act Dodd

Requires SEC to promulgate 100 new rules Create 5 new offices Conduct over 20 studies and reports Oversee the over-the-counter derivatives over-themarket

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

Annual Enforcement Caseload

Approximately 600 or more cases per year in i recent years t


632 579 659 674 665

enforcement enforcement enforcement enforcement enforcement

cases cases cases cases cases

in in in in in

FY2005 FY2006 FY2007 FY2008 FY2009

SEC Enforcement: FY 2008


671 total cases v. 1635 defendants Largest categories:

Issuer Reporting and Disclosure (23%) (23%)

Investment adviser/Investment company Violations (12%) (12%) BrokerBroker-dealer Violations (9%) (9%) Securities Offering Frauds (Pyramid Schemes and Boiler rooms) (18%) Insider Trading (9%) Market manipulation (8%)

Includes Foreign Corrupt Practices Act Cases

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

Statutory Authority

The SEC has broad authority to investigate actual or potential violations of the federal securities laws. h f d l ii l The SEC has broad authority to determine the scope of its investigations and the persons or entities subject to investigation. The federal statutes authorize the SEC to investigate past, ongoing, or prospective violations of the federal securities laws and SEC rules and regulations.

Section 10(b) Exchange Act and Rule 10b-5 10b

Rule 10b-5 states: 10bIt shall be unlawful for any person, directly or person indirectly, to:

Employ any device, scheme or artifice to defraud Make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or Engage in any act, practice, or course of business which operates or would operate as a fraud of deceit Upon any person, in connection with the purchase or sale of any security

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

General Enforcement Concepts

A strong enforcement program is the muscle that makes the rules work All SEC investigations are non-public nonWe can investigate and bring enforcement actions against anyone, not just those registered with the SEC or exchanges The key concept behind our enforcement regulation is Full Disclosure

Distinction between Examinations and Enforcement

Examinations

NonNon-adversarial dialogue with the firm Primary result: deficiency letters

Enforcement

Ad e sa ial Adversarial Compulsory Primary Result: public enforcement actions

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

Goals of an Enforcement Program


Protect investors Stop St ongoing f d i frauds Deter illegal conduct Send a message! Disgorge illegal profits Bar professionals from the industry if they have p y y committed fraud Maintain confidence that your market is fair and honest

The Investors Advocate


The investor is our client. Always evaluating our actions to do what is best for investors. SOX provides that SEC may seek, and any Federal court may grant, any equitable relief that may be appropriate or necessary for the benefit of investors.

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

Sources of Investigations

Potential cases obtained from many sources:


Investor complaints News articles Referrals


Exam groups Broker-Dealer, Investment Company, BrokerInvestment Adviser examination staff Other regulators/SROs

Commission filings g Market surveillance Disgruntled employees or whistleblowers Anonymous tips Auditing firms or Attorneys

Compulsory Subpoena Powers


Subpoenas for documents Subpoenas for testimony SEC may may seek court order for subpoena enforcement SEC entitled to all information relevant to its investigation Criminal penalties for non-compliance non-

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

Information from Regulated and NonNon-Regulated Persons


Brokerage Records Bank Records Corporate Records Telephone Records (cell, landline, etc) ISP Records Emails, Text messages Beneficial Ownership Accounting Records Offering Documents Testimony with consequences for lying

Taking Testimony

Ask the witness questions Under oath

criminal sanctions for failing to tell the truth makes an accurate transcript of the proceedings

With court reporter present

Witness represented by Counsel Two Primary Purposes:

Gather information from those with knowledge of the facts Pin down witnesses story- particularly from those who storyyou believe may have committed a violations

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

International Cooperation
IOSCO Multilateral MOU

Currently 67 signatories Contemporaneous trading records Bank records relating to securities transactions Beneficial ownership of transactions Beneficial ownership of non-natural persons non-

1. Information sharing:

2. Confidentiality of information received 3. Permissible uses

Independent Investigatory and Litigating Authority


Cases are often filed against high profile, powerful persons and entities. SEC has authority and staff to file its own cases in Federal Court SEC v. Dresser Industries, 628 F. 2d 1368, 1379. (D.C. Industries, Cir. 1980) (en banc), cert. denied, 101 S. Ct. 529 (finding that the SEC retain[s] full powers of investigation and civil enforcement action, even after Justice has begun a criminal investigation into the same alleged violations.) violations ). In re Sealed Case, 676, F.2d 793, 823 n. 127 (citing Donaldson v. United States, 400 U.S. 517, 536 (1971) States, (noting that [t]he SEC may not pursue an investigation solely to gather evidence for a criminal prosecution.).

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

Confidentiality of Investigations

NonNon-public nature of investigations protects the people being investigated and the integrity of the investigative process. We neither confirm nor deny. Investigations are not an indication of any violation of law not until the Commission has th i d h authorized an action. ti Communications among regulators are privileged.

Coordination with Criminal Authorities

Securities laws carry both civil and criminal penalties i i l lti Ability to refer most egregious cases Ability to share files Securities fraud may be tied up with other crimes like money laundering, conspiracy, laundering conspiracy wire fraud, mail fraud, and obstruction of justice.

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

Things SEC Enforcement Cannot Do


Wire tapping Search and seizure of records Undercover operations Physical arrests Criminal agencies have authority for these type of actions f

Partnership with the Industry


Industry is your Eyes and Ears Industry has incentive to keep its house in order Industry has the resources Empower Compliance officers Good compliance is good business d l db Cultivate cooperation

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

Securities Market Oversight in the United States


Criminal Cases U.S. Department of Justice Approx. 50 cases Civil Enforcement Cases U.S. Securities and Exchange Commission Approx. 650 cases in administrative or federal court Insider Trading Market Manipulation Broker Dealer and Investment Advisor Violations Financial Accounting Fraud Offering Frauds Self Regulatory Organization Disciplinary Actions Against Members 1177 FINRA actions in 2007 Firms: 16 Expelled, 5 Suspended Individuals: 338 Barred, 288 Suspended FINRA, NYSE, AMEX, etc. Securities and Exchange Commission Examinations Office of Compliance Inspections and Examinations 2500 3000 examinations Routine / Risk Based / For Cause Self Regulatory Organization Examinations approx. 2659 FINRA examinations FINRA, NYSE, AMEX, etc. Routine / Risk Based / For Cause Compliance All Securities Firms 4984 Broker Dealer Firms / 677,594 Registered Representatives Chief Compliance Officers Required at Every Institution Compliance Programs, Anti-Money Laundering, etc.

Formal Investigation Rights

Individual or entity has certain rights:

Obtaining or reviewing a copy of the Formal o e ie ing cop Fo mal Order Witnesses right to counsel Right to assert certain privileges
AttorneyAttorney-client privilege 5th Amendment privilege against self incrimination

Witness can obtain copy of transcript of testimony

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

Completion of Investigation

The staff concludes with no action, or The staff makes a recommendation to the Commission to:

authorize an administrative proceeding for remedial sanctions authorize a court action seeking injunctive and other relief

Comprehensive Civil Remedies


1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Censure Stop Order T Temporary suspension of l i f lawyer or accountant t t Accounting Equitable relief as appropriate or necessary for benefit of investors Trading suspension Disgorgement of illegal profits Freeze of stock options and bonuses of D&Os pending investigation Officer and Director b ff d bars Civil monetary penalties Court ordered injunctions to stop present and future violations Appointment of a corporate monitor or receiver Emergency Asset freezes

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

Show me the Money!


Securities Fraud is motivated by money Money trail may lead you to the M t il l d t th perpetrators Money Trail may expose motivations Asset restraints mean leverage, eliminate profit from fraud, and facilitate recovery for defrauded investors. Must have access to bank records and financial intelligence

Disgorgement

Goal is to disgorge all illegal profits from securities law violators. Take all profit out of violations. p An order requiring Defendant or Respondent to pay illillgotten gains or unjust enrichment

Give up fruits of the fraud so that fraud does not pay

An equitable remedy found in the case law for injunctions and statutes for Admin Actions Need only be a reasonable approximation of profits connected to th violation t d t the i l ti Different concept than Restitution

Make injured parties whole

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

Examples of Disgorgement

Financial Fraud

Officers bonus, stock options, or even salary where company , p , y p y financial results have been misrepresented Trading profits Money misappropriated from the funds raised Commissions earned on fraudulent transactions Profits made or losses avoided from insider trading Profits from manipulative trading and sales

Offering Fraud

Broker Dealer Fraud

Insider Trading

Manipulation

Penalties
Optimal Deterrence?

If $1 million in profit from wrongdoing And 1/3 chance of being caught Penalty should be $3 million Otherwise, in expectation, wrongdoing pays

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

Elements of Real Time Enforcement


action to stop fraud and other investor harm expeditiously. expeditiously Take action to educate the public expeditiously. Temporary Restraining Orders Court order to stop the conduct, expedite discovery, restrain assets, order repatriation. Reward meaningful cooperation, self-policing and R d i f l ti self- li i lf d selfself-reporting.
Take

Where SEC Cases are Filed


Basically two types of actions brought by the Commission Both are civil actions

Civil Injunctive action filed in U.S. Federal District Court Administrative Proceeding conducted by an Administrative Law Judge In both proceedings we must prove the violations alleged by a preponderance of the evidence before preponderance evidence a finder of fact to obtain remedies and sanctions Unlike investigations, Enforcement Actions are public

Announce in Litigation Releases and Press Releases

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

Federal Civil Court Action


Before U.S. District Court Judge: Permanent Injunctive Relief Disgorgement of ill-gotten gains ill

Plus prejudgment interest

Civil penalties Officer and Director Bars Other related relief


TROs & Asset Freezes Appointment of a receiver Repatriation of assets

Administrative Action

Administrative Law Judge: Disgorgement & Fines Cease and Desist Orders Censure Suspension or revocation of license

Restriction on practice before the Commission

Stock Brokers & Investment Advisors Most actions against broker-dealers & investment brokeradvisers brought as administrative proceedings Attorneys & Accountants

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Z. Scott Birdwell, SEC

Overview of U.S. SECs Enforcement Program

Settlements

SEC settles about 90 percent of its cases Usually gets relief it would have obtained in litigated action Neither confirm nor deny wrongdoing. Note: settlements are not meaningful if they do not fulfill the goals of an enforcement program!

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Atividade Reguladora e Fiscalizadora da CVM


Rio de Janeiro, 02 de maio de 2011

Competncia Legal

A Lei n 6.385/76 define de maneira ampla os mandatos legais da CVM:


Desenvolvimento do Mercado (art 4. Incisos I e II); Eficincia e Funcionamento do Mercado
incisos III, VII e VIII); (art. 4,

Proteo dos Investidores (art 4, incisos IV e V); Acesso Informao Adequada


art. 8, incisos I e II); (art 4, inciso VI, e 4,

Fiscalizao e Punio
11);

(art. 8, incisos III e V, e art.

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Competncia Legal

Previso Legal: Atividade de Fiscalizao


Lei n 6.385, de 07/12/76 / /
Compete Comisso de Valores Mobilirios: III Fiscalizar permanentemente as atividades e os servios do mercado de valores mobilirios, bem como a veiculao de informaes relativas ao mercado, s pessoas que dele participem, e aos valores neles negociados. (Art. 8, inciso III)

Valores Mobilirios - Enumerao

So Valores Mobilirios sujeitos ao regime da Lei n 6.385/76:


Aes, debntures e bnus de subscrio; Cupons, direitos, recibos de subscrio e certificados de desdobramento relativos aos valores mobilirios acima; Certificados de depsito de valores mobilirios; Cdulas de debntures; C t d f d d i Cotas de fundos de investimento em valores mobilirios ou ti t l bili i de clubes de investimento em quaisquer ativos;
(Art. 2, incisos I a V)

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Valores Mobilirios - Enumerao

So Valores Mobilirios sujeitos ao regime da Lei n 6.385/76:


Notas comerciais; Contratos futuros, de opes e outros derivativos, cujos ativos subjacentes sejam valores mobilirios; Outros contratos derivativos, independentes dos ativos subjacentes; Quando ofertados publicamente, quaisquer outros ttulos Q p , q q ou contratos de investimentos coletivos, que gerem direito de participao, de parceria ou de remunerao, inclusive resultante de prestao de servios, cujos rendimentos advm do esforo do empreendedor ou de terceiros
(Art. 2, incisos VI a IX)

Valores Mobilirios - Observaes

I.

A relao apresentada no art. 2 da Lei n 6385/76 de natureza exemplificativa, e no exaustiva.

II.

So excludos do conceito de Valores Mobilirios: II. I. os ttulos da dvida pblica; II.II. II II os ttulos cambiais de responsabilidade de instituies financeiras, exceto as debntures; (Art. 2, 1)

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Poder Regulador da CVM

A ao fiscalizadora e os poderes da CVM:


Ao lado de atribuies diversas, a Lei n 6.385/76 ofereceu CVM os meios materiais e institucionais necessrios ao cumprimento de sua funo. Destaca-se aqui o poder normativo, atravs do qual a CVM regula a atuao dos diversos agentes de mercado mercado.

Poder Regulador da CVM

Fundamentao Legal:
Lei n 6.385, de 07/12/76
Compete Comisso de Valores Mobilirios: I regulamentar, com observncia da poltica definida pelo Conselho Monetrio Nacional, as matrias expressamente nesta Lei e na lei das sociedades por aes. (Art. 8, inciso I)

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Poder Regulador da CVM

Principais Ordenamentos Jurdicos sujeitos regulamentao pela CVM:


Lei n 6.385/76 Lei da CVM Lei n 6.404/76 Lei das S/A Lei n 9.613/98 Lavagem de dinheiro g Lei n 12.249/10 Letras Financeiras

Poder Regulador da CVM

Atos Decorrentes das Atribuies Normativas:


Instruo atos atravs dos quais a CVM regulamenta q g
matrias expressamente previstas nas Leis n 6.385/76 e 6.404/76 (art. 8, inciso I);

Deliberao consubstancia todos os atos de competncia


do Colegiado, nos termos do Regimento Interno;

Nota Explicativa atos atravs dos quais a CVM torna


pblicos os motivos que a levaram a baixar norma ou a apresentar proposio ao Conselho Monetrio Nacional, alm de fornecer explicaes sobre a utilizao da norma;

Ato Declaratrio documento atravs do qual a CVM


credencia ou autoriza o exerccio de atividades no mercado de valores mobilirios;

(Deliberao CVM n 01/78)

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Poder Regulador da CVM

A Superintendncia de Desenvolvimento de Mercado (SDM):


Atua, em conjunto com outras reas, na reviso e

ajustes dos atos normativos da CVM, adequando-os s necessidades do mercado; Elabora estudos, projetos e normas orientados para o desenvolvimento do mercado de valores mobilirios;

Poder Regulador da CVM

Comit de Regulao
Criao:
Portaria CVM/PTE/N 042, de 06/05/2005

Finalidade:
Comit destinado ao debate e ao exame de propostas de regulao

Composio:
Superintendncia-Geral (SGE) Superintendncia de Desenvolvimento de Mercado (SDM) Superintendncia de Relaes com Empresas (SEP) Superintendncia de Relaes com Investidores Institucionais (SIN) Superintendncia de Registros (SRE) Superintendncia de Normas Contbeis e de Auditoria (SNC) Superintendncia de Proteo e Orientao e aos Investidores (SOI) Participa ainda o titular da Procuradoria Federal Especializada na CVM (PFE CVM)

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Poder Regulador da CVM

Audincia Pblica
Orientadas por um princpio de amplo dilogo, as minutas de projetos de normas da CVM so colocadas disposio dos interessados para que eles se manifestem sobre o documento. Obtido o melhor nvel de compreenso e adeso do mercado, bem como avaliadas suas crticas e sugestes entende a sugestes, CVM que a nova norma a ser baixada refletir mais fielmente s necessidades e aspiraes de seus usurios.

Estrutura do Mercado de Valores Mobilirios

Ncleo Bsico do Mercado de Valores Mobilirios:

Emissores

Intermedirios

Investidores

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Estrutura do Mercado de Valores Mobilirios O Mercado de Valores Mobilirios estruturado basicamente por emissores (companhias abertas e fundos), intermedirios ( (corretoras e distribuidoras) e os mercados organizados e ) g investidores. Alm destes, outros participantes compem o sistema de distribuio de ttulos e valores mobilirios: Analistas e consultores de valores mobilirios Administradores de carteira Agentes autnomos de investimento Auditores independentes Agentes fiducirios Custodiantes

Estrutura de Fiscalizao - Emissores

Superintendncia de Relaes com Empresas (SEP)


Principais Atribuies: Fiscalizar a observncia de normas sobre atividades relacionadas ao registro e a divulgao de informaes pelas companhias abertas e outros emissores; Coordenar, supervisionar e fiscalizar os registros de companhias abertas e de outros emissores, bem como suas atualizaes;

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Estrutura de Fiscalizao - Emissores

Superintendncia de Relaes com Empresas (SEP)


Exemplos de instrues normativas relativas s atividades fiscalizadoras da SEP: Instruo CVM n 358/2002 dispe sobre Fatos Relevantes relativos a companhias abertas, disciplina divulgao de informaes na negociao de valores mobilirios e na aquisio de lote significativo de aes; Instruo CVM n 480/2009 dispe sobre o registro de emissores de valores mobilirios admitidos negociao em mercados regulamentados;

Estrutura de Fiscalizao - Emissores Superintendncia de Relaes com Investidores Institucionais (SIN) Principais Atribuies: Fiscalizar os registros para constituio de fundos, sociedades de investimentos, carteira de investidores estrangeiros e clubes de investimento; Supervisionar e fiscalizar o acompanhamento das p p atividades dos investidores institucionais registrados na CVM; Propor e fiscalizar a observncia de normas relacionadas aos registros e divulgao de informaes desses investidores institucionais;

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Estrutura de Fiscalizao - Emissores Superintendncia de Relaes com Investidores Institucionais (SIN)


Exemplos de instrues normativas relativas s atividades fiscalizadoras da SIN: Instruo CVM n 409/2004 dispe sobre Fundos de Investimento, considerados os fundos de varejo; I t Instruo CVM n 306/1999 di sobre a administrao d dispe b d i i t de carteira de valores mobilirios; Instruo CVM n 325/2000 dispe sobre registro, na CVM, de investidor no residente no Pas;

Estrutura de Fiscalizao - Emissores

Superintendncia de Registro (SRE)


Principais Atribuies: Fiscalizar os registros de ofertas pblicas de distribuio de valores mobilirios (IPO), bem como os registros de ofertas pblicas de aquisio de aes (OPA); Fiscalizar a observncia de normas sobre atividades relacionadas aos registros de ofertas pblicas de distribuio de valores mobilirios e de OPA; Fiscalizar as atividades dos agentes fiducirios;

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Estrutura de Fiscalizao - Emissores

Superintendncia de Registro (SRE)


Exemplos de instrues normativas relativas s atividades fiscalizadoras da SRE: Instruo CVM n 400/2003 dispe sobre as ofertas pblicas de distribuio de valores mobilirios, nos mercados primrio ou secundrio; Instruo CVM n 361/2002 dispe sobre o procedimento aplicvel s ofertas pblicas de aquisio de aes de companhias abertas; Instruo CVM n 28/1983 dispe sobre o exerccio da funo de agente fiducirio dos debenturistas;

Estrutura de Fiscalizao Auditores Independentes

Superintendncia de Normas Contbeis e de Auditoria (SNC)


Na estrutura da SNC encontramos a Gerncia de Normas de Auditoria (GNA), que possui entre suas atribuies: o credenciamento e a fiscalizao das atividades dos auditores independentes, pessoas fsicas e jurdicas; a proposio de normas e procedimentos de auditoria a serem observados no mbito do mercado de valores mobilirios;

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Estrutura de Fiscalizao Auditores Independentes A importncia que a CVM concede s atividades dos auditores independentes norteada por quatro pressupostos:

1. a existncia de um sistema de auditoria independente como


suporte indispensvel ao rgo regulador; 2. a figura do auditor independente como elemento imprescindvel para a credibilidade do mercado e como instrumento de inestimvel valor na proteo dos investidores, na medida que a sua funo zelar pela fidedignidade e confiabilidade das demonstraes contbeis da entidade auditada;

(Nota Explicativa Instruo CVM n 308, de 14.05.99)

Estrutura de Fiscalizao Auditores Independentes A importncia que a CVM concede s atividades dos auditores independentes norteada por quatro pressupostos:
3. a exatido e a clareza das demonstraes contbeis, inclusive a divulgao em notas explicativas indispensveis visualizao patrimonial e financeira e dos resultados da entidade auditada, dependem de um sistema de um sistema de auditoria eficaz e, fundamentalmente, da tomada de conscincia do auditor quanto a seu verdadeiro papel dentro desse contexto; 4. 4 a necessidade d que o mercado di id d de d disponha d auditores h de dit independentes altamente capacitados e que, ao mesmo tempo, desfrutem de um elevado grau de independncia no exerccio de suas atividades;

(Nota Explicativa Instruo CVM n 308, de 14.05.99)

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Estrutura de Fiscalizao Intermedirios

Superintendncia de Relaes com o Mercado e Intermedirios (SMI)


Principais Atribuies: Coordenar, supervisionar e fiscalizar as entidades integrantes do sistema de distribuio de valores mobilirios, assegurando o funcionamento eficiente e regular dos mercados de bolsa, de balco, de balco organizado e de mercados derivativos; Coordenar, supervisionar e fiscalizar os credenciamentos dos integrantes do sistema de distribuio de valores mobilirios e das entidades que atuam nesse mercado; Fiscalizar a observncia de normas relacionadas ao funcionamento do sistema de distribuio de valores mobilirios e ao funcionamento do mercado de derivativos;

Estrutura de Fiscalizao Intermedirios

Superintendncia de Relaes com o Mercado e Intermedirios (SMI)


Exemplos de instrues fiscalizadoras da SMI: normativas relativas s atividades

Instruo CVM n 461/2007 disciplina os mercados regulamentados de valores mobilirios; Instruo CVM n 387/2003 estabelece normas e procedimentos a serem observados nas operaes realizadas com valores mobilirios; Instruo CVM n 434/2006 dispe sobre a atividade de agente autnomo de investimento; Instruo CVM n 402/2004 estabelece normas e procedimentos para organizao e funcionamento das corretoras de mercadorias;

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Estrutura de Fiscalizao Investidores

Superintendncia de Investidores (SOI)


Principais Atribuies:

Proteo

Orientao

aos

Atuar em conjunto com outros setores da CVM, ou com outras entidades, na realizao de projetos educacionais no mbito do mercado de valores mobilirios; Analisar reclamaes formais apresentadas pelo pblico em geral sobre o funcionamento administrativo da CVM e sobre a atuao de participantes do mercado; Administrar servio de atendimento ao pblico para fornecimento de informaes prestadas CVM, por integrantes do mercado de valores mobilirios;

Estrutura de Fiscalizao Investidores

Portal do Investidor (http://www.portaldoinvestidor.gov.br/Investidor/tabid/54/Default.aspx)

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Estrutura de Fiscalizao Inspeo e Fiscalizao Externa

Superintendncia de Fiscalizao Externa (SFI)


Criada com a finalidade principal de fiscalizar, supervisionar e orientar diretamente os participantes do mercado de valores mobilirios.

Mercado de Valores Mobilirios - Dimenso

Quantitativo relativo s Companhias Emissoras listadas no cadastro da CVM:


Nmero de Emissores (1) Companhias Abertas Companhias Estrangeiras Total 657 9 666 Patrimnio Lquido (2) R$ 1.624.123.643.844 R$ 66.387.751.146 R$ 1.690.511.394.990 1 690 511 394 990 Nmero de Acionistas (2) 35.504.145 31.640 35.535.785 35 535 785

(1) (2)

Valores relativos a 31/03/2011 Valores relativos a 30/09/2010

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Mercado de Valores Mobilirios - Dimenso

Quantitativo relativo aos Fundos de Investimento sob superviso da CVM:


Nmero de Fundos FI Fundos de Investimento FI Fundos de Cotas FE Fundos Estruturados FE Fundos de Cotas Outros Fundos Total
Valores relativos a 15/03/2011

Patrimnio Lquido R$ 1.607.466.713.804 R$ 815.317.354.408 R$ 147.930.757.832 R$ 4.780.280.430 R$ 15.074.122.101 R$ 1.770.471.593.737

Nmero de Cotistas 2.785.224 6.997.806 928.391 10.771.421

5.158 4.574 973 46 112 10.863

Mercado de Valores Mobilirios - Dimenso

Quantitativo relativo ao segmento Bovespa:


Nmero de Negcios Realizados Fev/2011 10.897.755 Mdia Diria
(Negcios Realizados)

Volume Financeiro Negociado

Mdia Diria
(Vol. Fin.)

544.888 R$ 145,67 bilhes

R$ 7,28 bilhes

Mar/2011

10.321.974

491.523 R$ 135,68 bilhes

R$ 6,46 bilhes

O valor de mercado (capitalizao burstil) das 375 empresas com aes negociadas na BM&FBOVESPA, ao final de maro, foi de R$ 2,57 trilhes. Em fevereiro, esse valor era de R$ 2,55 trilhes, referentes a 375 companhias.

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Mercado de Valores Mobilirios - Dimenso

Quantitativo relativo ao segmento BM&F:


Nmero d N de Contratos Negociados Fev/2011 56.375.869 Mdia Di i Mdi Diria Volume V l Financeiro Mensal
(Valor Nocional)

2.818.793

R$ 3,39 trilhes

Mar/2011

65.197.860

3.104.660

R$ 4,27 trilhes

Ao final do ltimo prego de maro, o nmero dos contratos em aberto, no total do mercado, foi de 41.645.980 posies, ante 38.251.129 em fevereiro.

Mercado de Valores Mobilirios - Dimenso

Outros dados relativos ao segmento Bovespa:


Clubes de Investimento:
Em maro, passaram a totalizar 3.015 registros. At o final de fevereiro, o Patrimnio Lquido era R$ 10,97 bilhes e o nmero de cotistas estava em 131.824.

Investidores Individuais:
O nmero de contas de investidores pessoas fsicas no mercado de aes foi de 597.014 em maro. Ao final de fevereiro, o nmero era de 600.341.

Home Broker:
O volume financeiro totalizou R$ 41,39 bilhes em maro, ante R$ 45,03 bilhes em fevereiro.

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Autorregulao no Mercado de Valores Mobilirios Fundamenta-se nos seguintes pressupostos:


A ao eficaz do rgo regulador sobre os participantes do mercado de valores mobilirios implica custos excessivamente altos quando se busca aumentar a eficincia e abrangncia dessa ao; Uma entidade autorreguladora, por sua proximidade das atividades de mercado, dispe de grande sensibilidade para avali-las e normatiz-las, podendo agir com presteza e a custos moderados; A elaborao e o estabelecimento, por participantes do mercado, de normas que disciplinam suas atividades fazem com que a aceitao dessas normas aumente, diminuindo-se a necessidade de interveno do rgo regulador;

Autorregulao no Mercado de Valores Mobilirios

Entidades Autorreguladoras e suas estruturas:


BM&FBOVESPA: realizada pela BM&FBOVESPA Superviso de Mercados (BSM) criada em 2007; (BSM), CETIP: sociedade administradora de mercados de balco organizados, realiza sua funo autorreguladora por meio de uma Diretoria de Autorregulao; ANBIMA: representante das instituies que atuam nos mercados financeiro e de capitais, criou e supervisiona o cumprimento das regras de seus Cdigos de Regulao e Melhores Prticas. Registre-se assinatura de convnio com a CVM para realizao de anlises prvias relativas a pedidos de registros de ofertas pblicas de distribuio de alguns valores mobilirios, por meio de procedimento simplificado (Instruo CVM n 471/2008); APIMEC: a Associao dos Analistas e Profissionais de Investimento do Mercado de Capitais criou em dezembro de 2010 o seu Conselho de Superviso do Analista (CSA);

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45

Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Sistema de Superviso Baseada em Risco

Conceito:
Mtodo de priorizao das atividades de superviso, adotado por entidades reguladoras de diversos pases, que busca promover uma relao eficiente entre: Dispndio dos recursos humanos e materiais disponveis ao regulador E Consecuo dos objetivos que lhes so impostos por leis e regulamentos

Sistema de Superviso Baseada em Risco

Previso Legal
Lei n 6.385, de 07/12/76
Na apurao de infraes da legislao do mercado de valores mobilirios, a Comisso dever dar prioridade s infraes de natureza grave, cuja apenao proporcione maior efeito educativo e preventivo para os participantes do mercado.
(Art. 9, 4 - includo pelo Decreto n 3.995, de 31/10/2001)

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Sistema de Superviso Baseada em Risco

Conselho Monetrio Nacional


Resoluo CMN n 3.427, de 22/12/06
Estabelece, como poltica a ser observada no mercado de valores mobilirios, e como g orientao geral das atividades finalsticas da CVM, a adoo de um modelo de regulao e superviso baseado em risco.

Sistema de Superviso Baseada em Risco

Regulamentao pela CVM


Deliberao CVM n 521, de 27/06/07
Disciplina a Superviso Baseada em Risco SBR no mbito da CVM; Estabelece o Comit de Gesto de Riscos CGR; CGR Cria instrumentos de planejamento e controle.

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Sistema de Superviso Baseada em Risco

Instrumentos de planejamento e controle


Plano Bienal de Superviso; Questionrio Trimestral; Relatrio Semestral de Monitoramento de Riscos; Formulrio de Classificao de Risco;

Sistema de Superviso Baseada em Risco

Plano Bienal 2011-2012


Esforos concentrados em trs frentes:
Aperfeioamento e consolidao das rotinas de planejamento de atividades e de utilizao de recursos humanos e materiais; Ampliao no escopo das atividades de superviso submetidas ao Plano; Aprimoramento, pelas reas tcnicas, dos parmetros de risco usados para a eleio dos eventos de risco.

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Sistema de Superviso Baseada em Risco

Abrangncia do Plano Bienal 2011-2012:


I. Empresas

II. Auditores Independentes III. Fundos de Investimento IV. Intermedirios e Autorreguladores

SBR Plano Bienal 2011-2012 - Empresas 2011-

Aes Gerais e Resultados Esperados:


a) Acompanhamento das informaes peridicas e eventuais divulgadas ao mercado pelas companhias, verificando sua disponibilizao oportuna e sua qualidade, de modo a possibilitar a tomada de deciso pelo investidor de forma consciente. Acompanhamento da atuao dos administradores e acionistas controladores das companhias, verificando a observncia do respeito ao interesse social e aos direitos dos acionistas, de modo a fortalecer a confiana dos investidores no mercado.

b)

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

SBR Plano Bienal 2011-2012 - Empresas 2011-

Eventos de Risco:
O resultado esperado para a primeira ao geral est sujeito aos seguintes eventos de risco: 1. 2. No prestao ou atraso na entrega das informaes peridicas por parte das companhias; No divulgao, pelas companhias, seus administradores ou acionistas, de informaes teis, com qualidade adequada e suficientes t fi i t tomada d d i pelos i d de deciso l investidores, ou sua tid divulgao de forma assimtrica, intempestiva ou incompleta. Elaborao e divulgao, pelas companhias, das informaes econmico-financeiras em desacordo com a regulamentao vigente (sobretudo considerando as disposies da Lei n 11.638/07) e com as disposies estatutrias das sociedades.

3.

SBR Plano Bienal 2011-2012 - Empresas 2011-

Eventos de Risco:
O resultado esperado para a segunda ao geral est sujeito ao seguinte evento de risco:

4.

Existncia de irregularidades nas propostas e decises da administrao, nas deliberaes em assembleias gerais e na conduo dos negcios por parte dos controladores e rgos de d i i t d administrao.

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Roberto Tadeu Antunes Fernandes, CVM

Atividade Reguladora e Fiscalizadora da CVM

Encerramento

Informaes adicionais I f adicionais: di i i http://www.cvm.gov.br/ link Superviso Baseada em Risco

Encerramento

Obrigado
www.cvm.gov.br www.portaldoinvestidor.gov.br sge@cvm.gov.br

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Alexandre Pinheiro dos Santos, CVM

Atuao Sancionadora da CVM

Securities Enforcement and Market Oversight Training 2011 (CVM/BSM/SEC) (CVM/BSM/SEC)

Atuao Sancionadora da CVM


Alexandre Pinheiro dos Santos
Procurador-Chefe da CVM Procurador-

Esta apresentao da inteira responsabilidade do seu Autor e no vincula a Comisso de Valores Mobilirios ou a Advocacia-Geral da Unio

02/05/2011

52

Alexandre Pinheiro dos Santos, CVM

Atuao Sancionadora da CVM

Atuao sancionadora

Medidas adotadas pela CVM: Contratao, por meio de projeto financiado pelo Banco Mundial, de consultoria para o aperfeioamento das atividades de enforcement: Criao da Superintendncia de Processos Sancionadores - SPS (Decreto n 6.382/08): Segregao de atividades de inspeo (SFI); e rea exclusivamente voltada atuao sancionadora (SPS e PFE/GJU-4). Procuradores exclusivamente dedicados atuao sancionadora (PFE/CVM)

Medidas adotadas pela CVM (continuao): Fortalecimento do poder disciplinar das entidades autorreguladoras (Instruo CVM n 461/07) Critrios objetivos, transparentes, articulados e comprometidos com resultados concretos Art. 49, 5 e 6, da Instruo CVM n 461/07 A CVM poder reduzir, das penalidades que venha a aplicar, aquelas impostas no mbito da autorregulao. Em processos administrativos que tenham por objeto os mesmos fatos j apurados no mbito da autorregulao a autorregulao, pena mxima deve ser calculada somando-se a pena imposta pela autorregulao e aquela aplicada pela CVM. Convnio com a ANBIMA Termos de Compromisso e penalidades aplicadas

02/05/2011

53

Alexandre Pinheiro dos Santos, CVM

Atuao Sancionadora da CVM

Medidas adotadas pela CVM (continuao): Colaborao contnua e recproca com o Ministrio Pblico Federal (MPF) e com a Polcia Federal: Acordos de Cooperao Tcnica (Maio/2008 e Maro/2010) Grupo de Trabalho do Mercado de Capitais Estmulo celebrao de termos de compromisso (art. 11, 5, da Lei n 6.385/76 e Deliberao CVM n 390/01): A CVM poder, a seu exclusivo critrio, se o interesse pblico permitir suspender procedimento para a apurao permitir, de infraes da legislao do mercado, se o investigado ou acusado assinar termo de compromisso, obrigando-se a: cessar a prtica de atividades ou atos considerados ilcitos pela CVM; e corrigir as irregularidades e indenizar prejuzos. * PFE/CVM e Comit opinam sobre o proposto.

Medidas adotadas pela CVM (continuao):


Adoo

de procedimentos orientadores:

preventivos

Deliberao CVM n 542, de 09 de julho de 2008


As Superintendncias podero, uma vez constatada a ocorrncia de irregularidade praticada no mbito do mercado, alertar a pessoa fsica ou jurdica fiscalizada para o desvio observado, assinalando-lhe, se for o caso, prazo razovel para a devida correo correo. Corrigida a irregularidade apontada, a Superintendncia afeta ao mrito do processo poder, diante das circunstncias do caso, promover o arquivamento do feito, por falta de justa causa.

02/05/2011

54

Alexandre Pinheiro dos Santos, CVM

Atuao Sancionadora da CVM

Conceitos Bsicos: Rito Ordinrio: I Inqurito Ad i i t ti it Administrativo (IA) a etapa i (IA): t investigativa que ti ti precede o processo administrativo sancionador. Processo Administrativo Sancionador (PAS): fase contraditria do procedimento administrativo, instaurada a partir da data de recebimento da intimao pelo acusado para apresentar defesa. Termo de Acusao (TA): havendo suficientes elementos de autoria e materialidade da infrao o Superintendente da rea responsvel deve oferecer termo de acusao. Rito Sumrio Infraes de natureza objetiva a que se comine penalidade de multa pecuniria at o mximo de cem mil reais Instruo CVM n 251/96 e outras

Inqurito Administrativo
Art.

20 do Decreto n 6.382/08 Superintendncia de Processos Sancionadores (SPS) compete conduzir, na forma da regulamentao da CVM (Deliberao CVM n 538/08), os processos sancionadores.
O IA conduzido pela SPS em conjunto com a Procuradoria Federal Especializada (PFE-CVM). Prazo para concluso do IA 90 dias (art. 4 da Deliberao CVM n 538/08).

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Alexandre Pinheiro dos Santos, CVM

Atuao Sancionadora da CVM

Inqurito Administrativo Concluda a Etapa Investigativa deve ser elaborado Relatrio (pea acusatria), do qual devem constar (art. 6 da Deliberao): nome e qualificao dos acusados; narrativa dos fatos investigados que demonstre a materialidade das infraes apuradas; anlise de autoria das infraes, contendo a individualizao da conduta, fazendo-se remisso expressa s provas que demonstrem participao nas infraes apuradas; os dispositivos legais ou regulamentares infringidos; e proposta de comunicao a rgos pblicos, se for o caso.

A SPS e a PFE proporo ao SGE o arquivamento do IA se no obtiverem provas suficientes para formular a acusao ou se convencerem da inexistncia de infrao ou de prescrio.

Termo de acusao dever ser adotado sempre que estiverem presentes elementos suficientes quanto autoria e materialidade da infrao.

Competncia Superintendncias da CVM. Elementos essenciais os mesmos exigidos para elaborao do Relatrio de IA, conforme 2 do art. 8 da Deliberao CVM n 538/08. Antes da intimao dos acusados para apresentao de defesa, a p , p PFE emitir parecer sobre o termo de acusao, no prazo de 30 dias, analisando objetivamente a observncia dos requisitos do art. 6 e o cumprimento do art. 11 da Deliberao CVM n 538/08. A Superintendncia que tiver oferecido o termo de acusao poder, considerando o parecer da PFE, arquivar o processo.

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Alexandre Pinheiro dos Santos, CVM

Atuao Sancionadora da CVM

Manifestao Prvia do Investigado

Para formular a acusao, as Superintendncias e a PFE, que participa, com voz, de todos os julgamentos, devero ter diligenciado no sentido de obter do investigado esclarecimentos sobre os fatos descritos no relatrio ou no termo de acusao, conforme o caso. atendida a exigncia de manifestao prvia sempre que o acusado: tenha prestado depoimento pessoal ou se manifestado voluntariamente acerca dos atos a ele imputados; ou tenha sido intimado para prestar esclarecimentos sobre os atos a ele imputados, ainda que no o faa. Esse di E dispositivo no iti confere um di it subjetivo aos i di i d nem se f direito bj ti indiciados consubstancia em uma defesa prvia, sendo medida nica e exclusiva de eficincia administrativa, com o objetivo de evitar acusaes descabidas e melhorar o nvel probatrio dos processos administrativos, buscando, ao final, a instaurao apenas de processos sancionadores justificados e que sejam instrudos com qualidade (PAS CVM RJ n 2006/4665).

Lavagem de Dinheiro Lei n 9.613/98 e Decreto n 2.799/98 Instruo CVM n 301/99 Pode ser adotado o rito ordinrio ou sumrio, dependendo da natureza da infrao. (Instrues CVM 251/96, art. 1, incisos XXXV e XXXVI, e 301/99) Recurso para o Ministro da Fazenda, no prazo de 15 dias di Impossibilidade de celebrao de Termo de Compromisso ( 1 do art. 1 da Deliberao CVM n 390/01)

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Alexandre Pinheiro dos Santos, CVM

Atuao Sancionadora da CVM

A CVM pode impor aos infratores das normas das Leis p p 6.385/76, 6.404/76, das suas instrues, bem como de outras normas legais cujo cumprimento lhe incumba fiscalizar, as seguintes penalidades (art. 11/Lei n 6.385): advertncia; multa; A multa no exceder o maior destes valores: R$ 500.000,00 (quinhentos mil reais); 50% do valor da emisso ou operao irregular; ou trs vezes o montante da vantagem econmica ou da perda evitada em decorrncia do ilcito.

suspenso do exerccio do cargo de administrador ou de conselheiro fiscal de companhia aberta, de entidade do sistema de distribuio ou de outras entidades que dependam de autorizao ou registro na Comisso de Valores Mobilirios; inabilitao temporria, at o mximo de vinte anos, para o exerccio dos cargos acima referidos; suspenso da autorizao ou registro para o exerccio d atividades d que t t a L i n 6 385 i das ti id d de trata Lei 6.385; cassao de autorizao ou registro, para o exerccio das atividades de que trata a Lei n 6.385;

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Alexandre Pinheiro dos Santos, CVM

Atuao Sancionadora da CVM

proibio p

temporria, at o mximo de vinte p , anos, de praticar determinadas atividades ou operaes, para os integrantes do sistema de distribuio ou de outras entidades que dependam de autorizao ou registro na Comisso de Valores Mobilirios; ou temporria, at o mximo de dez anos, de atuar, direta ou indiretamente, em uma ou mais modalidades de operao no mercado de valores mobilirios.

proibio

Em regra, as penalidades previstas nos incisos III a VIII do caput do art 11 da Lei n art. 6.385/76 somente sero aplicadas nos casos de infrao grave, assim definidas em normas da Comisso de Valores Mobilirios. Nos casos de reincidncia sero aplicadas aplicadas, alternativamente, multa at o triplo dos valores acima, ou penalidades previstas nos incisos III a VIII do caput do art. 11 da Lei n 6.385/76.

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Alexandre Pinheiro dos Santos, CVM

Atuao Sancionadora da CVM

Recurso Voluntrio Cabe ao CRSFN julgar em segunda e ltima julgar, instncia, os recursos apresentados pelas partes contra as decises proferidas pelo Colegiado da CVM em processos administrativos sancionadores ( 4 do art. 11 da Lei n 6.385/76 e art. 2, I, c, do Decreto n 1.935/96). Prazo: 30 dias (art. 37 da Deliberao CVM n 538/08). ) Efeitos: Devolutivo e suspensivo (art. 38 da Deliberao CVM n 538/08). Petio ao Presidente do CRSFN apresentada perante o rgo que houver aplicado a penalidade.

Recurso de Ofcio
Art Art.

3 do Decreto n 1 935/96 q ando a 1.935/96 quando CVM concluir pela no aplicao de penalidades, dever ser interposto o denominado recurso de ofcio.
Institucionalizao da obrigatoriedade de duplo grau de jurisdio. A precluso administrativa somente ocorre aps a l d i i t ti t reviso pelo rgo colegiado de segundo grau.

BACEN decises monocrticas CVM decises colegiadas

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Alexandre Pinheiro dos Santos, CVM

Atuao Sancionadora da CVM

Lei n 9 873 de 29 de janeiro de 1999: n 9.873, Prescreve em cinco anos a ao punitiva da Administrao Pblica Federal, direta e indireta, no exerccio do poder de polcia, objetivando apurar infrao legislao em vigor, contados da data da prtica do ato ou, no caso de infrao permanente ou continuada, do dia em que tiver cessado.

CONTATOS

alexandre@cvm.gov.br

02/05/2011

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61

Luiz Felipe Amaral Calabr, BSM

Overview of BSMs Market Oversight and Enforcement Program

Securities Enforcement and Market Oversight Training So Paulo, Brasil


Luiz Felipe Amaral Calabr Gerente Jurdico

Overview of BSMs Market Oversight and Enforcement Program

Introduo Regulao e Autorregulao BSM: estrutura BSM: principais atividades Pessoas sujeitas autorregulao exercida pela BSM Programa de superviso de mercados, fiscalizao e enforcement Penalidades aplicveis pela BSM Processos Administrativos MRP Troca de informaes e cooperao

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Luiz Felipe Amaral Calabr, BSM

Overview of BSMs Market Oversight and Enforcement Program

Introduo conceitos gerais


Conceito amplo de autorregulao
Autonomia privada

Autorregulao legitimada pelo ordenamento jurdico e pelo mercado Panorama histrico da autorregulao regulados (bolsa e balco organizado) dos mercados

Natureza jurdica da atual estrutura de autorregulao dos mercados regulados


Paraestatal sujeita a regime jurdico privado Instituio de mercado com funo social

Introduo ordenamento jurdico SFN


Constituio Federal Arts. 170, 192... Sistema Financeiro Nacional Leis 4.595/64 4.728/65

Lei 10.214/01

Lei 6.385/76

CMN

ICVM 461/07

Banco Central

CVM

Clearings

Bolsas

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Luiz Felipe Amaral Calabr, BSM

Overview of BSMs Market Oversight and Enforcement Program

Regulao e Autorregulao
REGULAO

AUTORREGULAO

DESENVOLVIMENTO E SEGURANA DO MERCADO


CMN CVM BACEN

BSM BM&FBOVESPA Investidores Emissores Intermedirios

Vantagens da Autorregulao
Agilidade: conjuntura normativa facilitada para acompanhar a dinmica do mercado (possibilidade de criao/alterao rpida de regras) Eficcia: participao do mercado na elaborao das normas Eficincia: ampliao da capacidade de superviso do rgo regulador mantendo-se a mesma equipe tcnica Economia: custos menores para os rgos reguladores O funcionamento da BSM regulado e supervisionado pela CVM

Regulao e Autorregulao
Lei 6.385/76
Dispe sobre o mercado de valores mobilirios e cria a Comisso de Valores Mobilirios
Estabelece que as Bolsas so instituies auxiliares da CVM, responsveis pela superviso e fiscalizao de seus membros e operaes

Instruo CVM 461/07


Disciplina os mercados regulamentados de valores mobilirios e dispe sobre a constituio, organizao, funcionamento e extino das bolsas de valores, bolsas de mercadorias e futuros e mercados de balco organizado Determina a criao de um Departamento de Autorregulao
(Autorregulao mandatria)

Estabelece a estrutura da autorregulao: departamento ou entidade de autorregulao, conselho de autorregulao e diretor de autorregulao Assegura autonomia e independncia estrutura de autorregulao Prev que a determinao de penalidade pelo conselho de autorregulao deciso irrecorrvel CVM Garante amplo acesso s informaes necessrias atuao do departamento de autorregulao

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Luiz Felipe Amaral Calabr, BSM

Overview of BSMs Market Oversight and Enforcement Program

BSM: estrutura

MISSO
ZELAR PELA INTEGRIDADE DOS MERCADOS ADMINISTRADOS PELA BM&FBOVESPA

Personalidade jurdica e patrimnio prprios Autoridade administrativa independente Ausncia de subordinao hierrquica Mandato fixo e estabilidade do diretor e dos conselheiros Autonomia administrativa, financeira e oramentria Corpo tcnico especializado

BSM: estrutura

Conselho de Superviso

Diretor de Autorregulao

Auditoria de Participantes
(30)

Superviso de Mercado
(14)

Anlise e Estratgia
(4)

Jurdico
(14)

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Luiz Felipe Amaral Calabr, BSM

Overview of BSMs Market Oversight and Enforcement Program

BSM: principais atividades


SUPERVISO
Acompanhamento de mercado Auto-listagem da BM&FBOVESPA Pessoas autorizadas a operar nos mercados supervisionados pela BSM s reas operacionais da BM&FBOVESPA

REGULAO
Manifestar-se sobre a adequao e eficcia das normas regulamentares editadas pela BM&FBOVESPA, relativas s respectivas atividades operacionais. Estabelecer as normas e os regulamentos necessrios ao desempenho de suas funes.

FISCALIZAO
Auditar as pessoas autorizadas a operar nos mercados administrados pela BM&FBOVESPA e seus prepostos

BSM: principais atividades


ENFORCEMENT (aplicao de penalidades)

Aplicar penalidades em caso de infraes s suas prprias p p p p normas e s normas legais e regulamentares cujo cumprimento lhe incumbe supervisionar, fiscalizar ou auditar e julgar os recursos contra as penalidades aplicadas.
ADMINISTRAO DO MECANISMO DE RESSARCIMENTO DE PREJUZOS REPRESENTAO INSTITUCIONAL ATIVIDADES EDUCACIONAIS

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Luiz Felipe Amaral Calabr, BSM

Overview of BSMs Market Oversight and Enforcement Program

Pessoas sujeitas autorregulao exercida pela BSM

Corretoras de Valores

Corretoras de Mercadorias Participantes dos mercados BM&FBovespa

Distribuidoras

Corretoras de Cmbio

Agentes de Custdia

Participantes do Sistema de Liquidao

Agentes Autnomos de Investimentos

e respectivos administradores, funcionrios e prepostos

Programa de superviso de mercados, fiscalizao e enforcement

Forte interao com a regulao


programa de trabalho anual aprovado pela CVM reportes peridicos para a CVM

Critrios materiais para superviso e fiscalizao


princpios gerais nacionais e internacionais legislao normativos CVM, CMN e BACEN regras da BM&FBOVESPA superviso por risco

02/05/2011

6 67

Luiz Felipe Amaral Calabr, BSM

Overview of BSMs Market Oversight and Enforcement Program

Programa de superviso de mercados, fiscalizao e enforcement

Critrios materiais para enforcement


atuao preventiva e repressiva boa f boa-f objetiva proteo x moral hazard informao lealdade e confiana

jurisprudncia (judicial e administrativa) regime jurdico sui generis

Programa de superviso de mercados, fiscalizao e enforcement

02/05/2011

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Luiz Felipe Amaral Calabr, BSM

Overview of BSMs Market Oversight and Enforcement Program

Penalidades aplicveis pela BSM

Tipologia das penalidades aplicadas pela BSM


Advertncia Multa

No poder exceder o maior dos seguintes valores:


R$ 500.000,00 50% do valor da operao irregular 3 vezes o montante da vantagem econmica obtida ou a perda evitada em decorrncia do ilcito

Suspenso

Pelo prazo mximo de 90 dias

Inabilitao temporria

Pelo prazo mximo de 10 anos para o exerccio de cargos de administradores, empregados, operadores, prepostos e representantes da prpria BSM, Associados e Participantes

Penalidades aplicveis pela BSM

Regras gerais

OC Conselho de S lh d Superviso j l i julga em primeira i t i por meio i i instncia i de Turma (composta por 3 conselheiros) e eventual recurso julgado pelo Pleno.

DAR julga processos que envolverem infraes de natureza objetiva praticadas p j p por Participantes, respectivos p , p administradores, funcionrios e prepostos, bem como por funcionrios da BSM. Nesses casos, o Pleno do CS rgo recursal.

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Luiz Felipe Amaral Calabr, BSM

Overview of BSMs Market Oversight and Enforcement Program

Processos Administrativos
TABELA 3 Resultado dos Processos Administrativos
Julgamentos
Termos de T d Compromisso

Penalidades
Absolvio Advertncia

Ano Condenao 2008 2009 2010 2011


A B

Multa 1 1B 4D

Inabilitao

Valor total t t lA (R$ mil) 510 2.170 730 2.760

3 1 2 1

1 1

11 28 5 4

2 1 1C

1 -

O valor total corresponde soma das multas e dos termos de compromisso. Pena alternativa de multa no valor de R$98.694,49 ou, em substituio, adoo de medidas para evitar novas irregularidades. C Pendente de recurso D Duas das quais, pendentes de recurso

Dados de 26/4/2011

MRP

Mecanismos de Ressarcimento de Prejuzos (MRP)


Mecanismo estabelecido para ressarcir investidores de prejuzos causados pela ao imprpria de um participante do mercado ICVM 461

A entidade administradora de mercado de bolsa deve manter um mecanismo de ressarcimento de prejuzos, com a finalidade de assegurar aos investidores o ressarcimento de prejuzos decorrentes da ao ou omisso de pessoa autorizada a operar (ou de seus administradores, empregados ou prepostos), em relao intermediao de negociaes realizadas na bolsa ou aos servios de custdia A entidade administradora de mercado de bolsa deve baixar regulamento especfico disciplinando o funcionamento do mecanismo de ressarcimento de prejuzos O regulamento, bem como suas alteraes posteriores, devem ser previamente aprovados pela CVM

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Luiz Felipe Amaral Calabr, BSM

Overview of BSMs Market Oversight and Enforcement Program

MRP

Regras gerais

Prazo de 18 meses, a contar da data de ocorrncia que tenha dado origem ao pedido, para pleitear o ressarcimento junto ao MRP

valor mximo de ressarcimento = R$ 60.000,00 (por investidor reclamante em cada ocorrncia)

Da deciso do Conselho de Superviso cabe recurso CVM

BSM: troca de informaes e cooperao

Forte relacionamento com a CVM (artigo 44 da ICVM 461)

Envio para a CVM de todos os dados e informaes obtidos por meio de suas atividades de inspeo e auditoria.

Imediata informao CVM acerca de prticas de ilcitos e existncia de indcios de irregularidades.

Informao CVM sobre as medidas adotadas adotadas.

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Luiz Felipe Amaral Calabr, BSM

Overview of BSMs Market Oversight and Enforcement Program

BSM: troca de informaes e cooperao

Lei Complementar 105/01 e artigo 37 da ICVM 461/07


sigilo das informaes prestao de informaes: Poder Judicirio CVM BACEN Comisses Parlamentares de Inqurito

Publicidade das decises do Conselho de Superviso e do Diretor de Autorregulao Recebimento de denncias via:
rgos reguladores (CVM e BACEN) BM&FBOVESPA Investidores outras entidades autorreguladoras

www.bsm-autorregulacao.com.br www bsm autorregulacao com br

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INTERNATIONAL ENFORCEMENT COOPERATION


Presented by:
Alberto Arevalo, Assistant Director Izabela Reis, Senior Counsel Reis
U.S. Securities and Exchange Commission Office of International Affairs
The U.S. Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein do not necessarily reflect the views of the Commission or of other members of the staff of the Commission.

TOPICS

Why is the SEC involved in international enforcement? How does the SEC work to get what it needs overseas? How can you get what you need from the SEC? International Trends
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Why is the SEC involved in international enforcement?

New World

Globalization of fraud

Stanford and Madoff Worldwide victims Learn from the SECs mistakes Electronic Communications

Emails Cell phones

Why is the SEC involved in international enforcement?

Fraudsters do not respect bordersbut they are smart crooks:


Off Off Off Off

shore shore sho e shore shore

trading nominee companies banks co-conspirators


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How does the SEC work internationally? How does SEC staff get what it needs?

MOUs IOSCO MMOU MLATs Letters Rogatory Other International Treaties and Conventions

Hague Service Convention Hague Evidence Convention OAS/UN Conventions

Informal channels

Can you (CVM) get what you need from the SEC? Menu Options: When you get your choice depends on what you order

Your target on the SEC radar screen SEC investigative files Brokerage records Bank account information Beneficial ownership records Company records, including chronologies Telephone records Hotel and airline records Records from Internet Service Providers Testimony

75

When will I get my dish?


That depends! If you ordered bank records, telephone records, ISP records, or testimony:
o o o o o

Memo Systems Approval Subpoena writing Subpoena issuance

What if I do not work at the CVM? Can I still get cooperation from the SEC?

Yes! Section 21(a)(2)

76

What if I do not work at the SEC? Can I still get cooperation from the SEC?

SEC s SECs authority to assist a foreign securities authority: Section 21(a)(2) of Securities Exchange Act of 1934 On request from a foreign securities authority, [t]he Commission may, in its discretion, conduct such investigation as the Commission deems necessary to collect information and evidence pertinent to the request for assistance. Such

assistance may be provided without regard to whether the facts stated in the request would also constitute a violation of the laws of the United States.

SEC will consider confidentiality, public interest, and reciprocity.

What if I do not work at the SEC? Can I still get cooperation from the SEC?

SEC s SECs statute permits assistance to any foreign securities authority investigating securities violations

Whether or not foreign regulator is a SEC counterpart Whether or not there is a US/SEC interest Whether or not there is dual illegality or criminality

Our little secret if you are a Brazilian prosecutor


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77

What are the international trends?


Real joint investigations Global FCPA investigations International freezes through private action Litigation

11

What are the international trends?

Real joint investigations


o o

Not parallel but together aQuantive Siemens

Global FCPA cases


o

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78

What are the international trends?

International freezes through private action


o o o

Aimsi Manterfield Stanford Badian MMOU is faster


13

Litigation
o o

Contacts:

Informal Channel: Call the SEC s Office of SECs International Affairs (OIA) at (202) 551-6690.
Ask to speak with Mr. Alberto Arevalo (Assistant Director, International Enforcement) (Tel. 202-551-6697) (Email: arevaloa@sec.gov) or Mr. Kurt Gresenz (Senior Advisor and Branch Chief, International Enforcement) (Tel. 202-551-4733) (Email: gresenzk@sec.gov). You may also contact Ms. Izabela Reis (Senior Counsel, International Enforcement) (Tel. 202-551-6670) (Email: reisi@sec.gov).

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INTERNATIONAL ENFORCEMENT COOPERATION: THANK YOU!!!

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Alexandre Pinheiro dos Santos, CVM

Regime de cooperao entre CVM, MPF e PF

Securities Enforcement and Market Oversight Training 2011 (CVM/BSM/SEC) (CVM/BSM/SEC)

Regime de cooperao entre CVM, MPF e PF


Alexandre Pinheiro dos Santos
Procurador-Chefe da CVM Procurador-

Esta apresentao da inteira responsabilidade do seu Autor e no vincula a Comisso de Valores Mobilirios ou a Advocacia-Geral da Unio

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Alexandre Pinheiro dos Santos, CVM

Regime de cooperao entre CVM, MPF e PF

INTRODUO A Procuradoria Federal Especializada junto CVM (PFE/CVM) um rgo jurdico da AGU/PGF inserido na estrutura da CVM, ao qual compete, basicamente: representar a CVM judicial e extrajudicialmente; prestar consultoria e assessoramento jurdico CVM; e apurar a liquidez e a certeza dos crditos da CVM, inscrevendo-os em dvida ativa, para fins de cobrana amigvel ou judicial (Lei Complementar n 73/93 e legislao especfica).

Entre as suas muitas atribuies, a PFE/CVM responsvel pelo permanente relacionamento institucional da CVM com os Ministrios Pblicos e as Polcias em todo o pas. O Ministrio Pblico Federal (MPF) o legitimado ativo central para o ajuizamento de aes civis pblicas para preveno e ressarcimento de danos causados a titulares de valores mobilirios e investidores como um todo (Lei n 7.913/89), assim como o p p titular das aes penais pblicas referentes aos crimes contra o sistema financeiro nacional e, mais especificamente, o seu segmento do mercado de capitais (Lei n 7.492/86 e Lei n 6.385/76), os quais, por vezes, so apurados por meio de inquritos conduzidos pela Polcia Federal (PF).

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Alexandre Pinheiro dos Santos, CVM

Regime de cooperao entre CVM, MPF e PF

Em 2006, o ento recentemente criado Grupo de Trabalho sobre o mercado de capitais do MPF, estruturado no mbito da sua 3 3 Cmara de Coordenao e Reviso, teve um encontro com a CVM, ento representada pela respectiva Presidncia e pela PFE/CVM, para se apresentar e discutir assuntos gerais relativos ao mercado de capitais, o que marcou o incio de uma nova e relevante fase de coordenao entre as instituies. A partir da reunio acima, a PFE/CVM passou a se reunir p , p periodicamente com o Grupo de Trabalho do MPF. O amplo trabalho conjunto que ento se desenvolvia foi crucial para o xito de marcantes atuaes extraordinrias das duas instituies ocorridas no ano de 2007.

ATUAO CONJUNTA EM AES CIVIS PBLICAS Lei n 7.913/89 Art. 1 Sem prejuzo da ao de indenizao do prejudicado, o Ministrio Pblico, de ofcio ou por solicitao da Comisso de Valores Mobilirios - CVM, adotar as medidas judiciais necessrias para evitar prejuzos ou obter ressarcimento d d it j bt i t de danos causados d aos titulares de valores mobilirios e aos investidores do mercado (...)

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Alexandre Pinheiro dos Santos, CVM

Regime de cooperao entre CVM, MPF e PF

Em maro/07 foi divulgada a aquisio do Grupo Ipiranga por Petrobras, g q p p g p , Ultra e Braskem e, em agosto/07, a aquisio da Suzano Petroqumica S.A. pela Petrobras. Pela Lei das S/A (art. 254-A), os adquirentes do controle de companhia aberta devem fazer oferta pblica de aquisio, estendendo aos demais acionistas votantes parte do preo pago (tag along). No caso Ipiranga, o tag along era de 80% do preo do controle, a ser pago aos detentores de ONs (tag along previsto na lei); no caso Suzano, que integrava o Nvel 2 da Bovespa, o tag along era de 100% para ONs e 80% para PNs.

A valorizao das aes das companhias cujo controle foi adquirido aps a divulgao das operaes seria natural, em razo da prpria extenso aos acionistas minoritrios de preo igual ou prximo ao pago pelas aes de controle. Entretanto, a CVM verificou oscilao atpica antes da divulgao, em cada caso, do Fato Relevante (FR), nos preos e volumes negociados, e, mais do que isso, detectou indcios de insider trading. Caso Ipiranga Um investidor vendeu aes PN (sem direito a tag along) e comprou aes ON pouco antes do FR, vendendo-as logo em seguida ao FR e lucrando cerca de R$ 120 mil (era um interno do Grupo adquirente);

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Alexandre Pinheiro dos Santos, CVM

Regime de cooperao entre CVM, MPF e PF

outro i t investidor repentinamente se t tid ti t tornou cliente d corretora e, no di li t de t dia seguinte e prximo da divulgao do FR, comprou aes ON, vendendoas um dia aps a publicao do FR e lucrando cerca de R$ 250 mil; um terceiro investidor lucrou cerca de R$ 400 mil comprando aes poucos dias antes do FR e vendendo-as em seguida publicao do FR, mediante atuao claramente atpica; e por fim, um investidor estrangeiro, em atuao tambm atpica, comprou cerca de R$ 3,3 milhes em aes pouco antes do FR, auferindo lucro de cerca de 40%.

Caso Suzano Dois investidores (um estrangeiro) que no compraram aes de emisso da companhia durante todo o ano de 2007 adquiriram aes pouco antes da divulgao do FR e as venderam logo aps, lucrando cerca de R$ 300 e R$ 550 mil, respectivamente; um dos investidores ainda assumiu posio a termo antes do FR, que lhe daria lucro de R$ 520 mil. Em relao aos investidores acima, que no tinham qualquer motivo legtimo aparente para agir como agiram e cuja atuao oferecia srios riscos para a efetividade de futuras medidas administrativas e judiciais, a CVM e o MPF ajuizaram aes cautelares.

02/05/2011

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Alexandre Pinheiro dos Santos, CVM

Regime de cooperao entre CVM, MPF e PF

Buscou-se a obteno de medidas liminares de bloqueio dos recursos resultantes d li id l da liquidao d das operaes realizadas e a CVM i i i li d iniciou procedimentos administrativos para apurao aprofundada dos fatos. Em ambos os casos as liminares foram concedidas. As medidas cautelares eram preparatrias de ao civil pblica. Efetivamente, foram oportunamente ajuizadas, sob segredo de justia, as aes principais, para a reparao civil do dano em tese causado aos investidores d mercado e aos i t i tid do d interesses dif difusos d sociedade como um da i d d todo. Uma das aes j foi encerrada em razo da celebrao conjunta (CVM e MPF) do primeiro Termo de Compromisso e de Ajustamento de Conduta com um participante do mercado de capitais.

Aps a exitosa experincia de atuao conjunta da CVM com o MPF, entendeu-se conveniente a consolidao d relacionamento i tit i t d i t lid do l i t institucional, l por meio da celebrao de um acordo de cooperao. Em 08/05/08 a CVM e o MPF firmaram um Termo de Cooperao Tcnica visando ao intercmbio de informaes e cooperao tcnica e operacional. A coordenao do acordo compete ao Procurador-Chefe da PFE/CVM e ao Coordenador da 3 Cmara de Coordenao e Reviso do MPF MPF. Na oportunidade da assinatura do Termo de Cooperao foi considerado e expressamente mencionado o seguinte:

02/05/2011

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Alexandre Pinheiro dos Santos, CVM

Regime de cooperao entre CVM, MPF e PF

- a competncia da CVM para regular e fiscalizar o mercado de capitais, conforme previsto na L i n 6 385/76 f i t Lei 6.385/76; - a necessidade e o permanente interesse da CVM no aperfeioamento das suas aes institucionais de regulao e fiscalizao; - o atual estgio de desenvolvimento do mercado de valores mobilirios e p p a necessidade de fortalecimento dos meios de preveno, apurao e represso de prticas lesivas a tal mercado e aos seus respectivos participantes; - o potencial carter transnacional dos ilcitos no mercado de capitais;

- diversas prticas lesivas ao mercado de capitais tambm constituem crimes previstos nos artigos 2 C a 2 F todos d L i n 6 38 / 6 b i i i 27-C 27-F, d da Lei 6.385/76, bem como infraes contra a coletividade e os investidores difusos, cabendo ao MPF a atribuio para ajuizar aes penais e aes civis pblicas; - a atuao articulada entre a CVM e o MPF proporciona maior efetividade preveno, apurao e represso s prticas lesivas ao mercado de capitais; e - interessa ao pblico o estmulo da produo de conhecimentos tcnicojurdicos a respeito de regras, prticas e operaes no mercado de valores mobilirios.

02/05/2011

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Alexandre Pinheiro dos Santos, CVM

Regime de cooperao entre CVM, MPF e PF

Mais recentemente, somou-se ao acordo de cooperao com o MPF p q ( ) um importante acordo que a CVM celebrou com a PF (maro de 2010). As trs instituies esto atuando em regime de estreita coordenao e colaborao, contando, ainda, com a especial cooperao da BSM. E, alm do que j foi mencionado, vale destacar, em relao atuao institucional em regime de coordenao de esforos para a preveno e o combate a ilcitos no mercado de capitais, o seguinte: 1 - atuao da CVM, inclusive como assistente da acusao, nos dois primeiros processos penais envolvendo o ilcito de insider trading do Brasil (notrios casos Sadia e Randon, valendo lembrar que o primeiro caso ensejou a primeira condenao por insider do pas).

2 - Termo de Compromisso e de Ajustamento de Conduta no PAS CVM RJ N 2007/12231 e na ACP n 2007.51.01.022852-8 (6 VF/RJ): ( ) A CVM e o MPF assinaram, em 17/03/08, o j citado primeiro Termo de Compromisso e de Ajustamento de Conduta com um participante do mercado de capitais, para encerramento concomitante de procedimentos administrativo e judicial. Trata-se de acordo com uma sociedade estrangeira que adquiriu aes preferenciais de emisso da Suzano em 27/07/07, tendo vendido toda a posio no dia 3 de agosto seguinte, logo aps a publicao do FR antes mencionado, obtendo lucro de mais de R$ 500 mil. O Termo foi homologado pelo MM. Juzo da 6 (Sexta) Vara Federal do Rio e a Compromitente desembolsou a quantia de R$ 2.200.000,00, destinada aos investidores que operaram com ela e ao FDDD.

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Alexandre Pinheiro dos Santos, CVM

Regime de cooperao entre CVM, MPF e PF

3 - Termo de Compromisso e de Ajustamento de Conduta celebrado no PAS CVM RJ N 2009/428: Em 26/02/09, foi noticiada a aprovao, pela CVM e pelo MPF, de proposta de celebrao de Termo de Compromisso e de Ajustamento de Conduta apresentada por integrante do bloco de controle da Construtora Tenda S.A. e membro da sua administrao em novo caso de possvel insider trading. A fim de extinguir o processo acima antes mesmo de formulada acusao bem como de evitar a adoo de acusao, medidas de natureza civil pela CVM e pelo MPF, o proponente comprometeu-se a pagar R$ 200.000,00 ao Fundo de Defesa de Direitos Difusos e ainda a no ocupar cargo de administrao ou no conselho fiscal, por trs anos, em entidade regulada pela CVM.

4 - Termo de Compromisso e de Ajustamento de Conduta no PAS CVM RJ N 10/08 e na ACP n 2007.51.01.01.4273-7 (15 VF/RJ): ( ) Em setembro de 2010, CVM e MPF noticiaram Termo de Compromisso e de Ajustamento de Conduta celebrado com ex-gerente da BR Distribuidora que realizou operaes com aes de emisso de sociedades do Grupo Ipiranga antes e logo aps o anncio da antes referida aquisio de empresas do Grupo por Braskem, Ultra e Petrobras, no ano de 2007. O Compromitente respondia a processos administrativo e judicial sob acusao de insider trading e se obrigou ao pagamento do total do ganho com a sua atuao no mercado reputada irregular (R$ 120.067,75 mais atualizao), acrescido de R$ 240.135,50, bem como a no operar no mercado por trs anos.

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Alexandre Pinheiro dos Santos, CVM

Regime de cooperao entre CVM, MPF e PF

CONTATOS

alexandre@cvm.gov.br

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Marcelo Moscogliato, MPF

Investigating and Enforcement Cooperation in Brazil (Case Studies)

Securities Enforcement and Market Oversight Training MAY 2nd, 2011 DAY 1 Investigating and Enforcement Cooperation in Brazil (Case Studies).

Marcelo Moscogliato Procurador Regional da Repblica (Federal Prosecutor) Tel. (55) 11 2192 8678 / Cel. (55) 11 9128 8800 e-mail: marcelo@moscogliato.com.br

Cooperar. Por que?


There may be nothing more important than human cooperation. ti Cooperation is the stuff of which meaningful human lives and viable societies are made. Open a newspaper, today or any day for the rest of your life and you will witness failures of human life, cooperation, - Sam Harris The Moral Landscape NY: Free Press, 2010.

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Marcelo Moscogliato, MPF

Investigating and Enforcement Cooperation in Brazil (Case Studies)

Se cooperar lgico; por que no cooperamos?


H zilhes de respostas. O direito, a psicologia, a economia, a cincia poltica, a biologia, por exemplo, exploram idias a respeito da cooperao h sculos sculos.

Cooperao. Algumas idias:


- uma concesso no implica necessariamente em uma perda; - simpatia e confiana, gratido e lealdade, so construdos por pessoas, dentro de instituies; no o contrrio; - os registros verbais e escritos so muito importantes para a construo de uma boa reputao institucional e/ou pessoal; - Quem nos paga? Por que? Quais os restultados que entregamos?

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Marcelo Moscogliato, MPF

Investigating and Enforcement Cooperation in Brazil (Case Studies)

Steven Pinker. The Blank Slate. NY: Penguin Books, 2003. Sympathy and trust prompt people to extend the first favor. Gratitude and loyalty prompt them to repay favors. Guilt and shame deter them from hurting or failing to repay others. Anger and contempt prompt them to avoid or punish cheaters. And among humans, any tendency of an individual to reciprocate or cheat does not have to be witnessed firsthand but can be recounted by language. This leads to an interest in the reputation of others, transmitted by gossip and public approval or condemnation, and a concern with condemnation ones own reputation. Partnerships, friendships, alliances, and communities can emerge, cemented by these emotions and concerns.

Procuradores da Repblica.

Interesse pelo mercado de capitais.

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Marcelo Moscogliato, MPF

Investigating and Enforcement Cooperation in Brazil (Case Studies)

Ministrio Pblico Federal Procuradores da Repblica = 1 grau Procuradores Regionais da Repblica = 2 grau Subprocuradores-Gerais da Repblica = 3 grau e 4 graus As A respostas esto na LC 75/1993 e na organizao interna i i do MPF, onde podem ser encontrados os instrumentos de atuao www.pgr.mpf.gov.br

Base Legal:
-

Art. 129, Constituio Federal.

Lei Complementar n. 75/1993 n - art. 5, inciso II, c; - art. 6, incisos V, VII, letras a, b, d, XII, XIII, XIV, b - arts. 7 e 8 - instrumentos para a atuao
-

Lei n 7.913, de 07.12.1989 -... o Ministrio Pblico, de ofcio ou por solicitao da Comisso de Valores Mobilirios ...
-

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Marcelo Moscogliato, MPF

Investigating and Enforcement Cooperation in Brazil (Case Studies)

H problemas na lei. O que fazer?


... even the clearest law and the most brilliantly drawn and articulated set of policies will lead people to disagree. (James C. Miller, III; ex-chairman of the FTC - 13 Geo. Mason L. Rev. 269) Vague language in a statute is, in effect, a delegation by Congress to lower agencies, or to the executive and the courts; it passes the problem along to these others. Such a law often buys time; it postpones resolution of a problem; it acts as a compromise between those who want sharp, specific action and those who want to stand pat. (Lawrence M. Friedman - A History of American Law; Simon & Schuster, NY, 1985) The disputes that judges confront are characterized instead by ambiguities and multiple shades of gray, and the doctrines must be sufficiently nuanced to accommodate these subtleties. What we should lose, however, is the incoherence and confusion that results when these subtleties calcify into a rigid web of inconsistent legal rules and convenient escape devices. (Laura E. Little, Professor of Law, Temple Universitys Beasley School of Law, 37 U.C. DAVIS L. REV. 971.)

O que fizemos: - conversamos e p (Caso Coteminas, Caso , cooperamos ( Ipiranga/Petrobrs, Caso Sadia/Perdigo, Caso Suzano, Caso Agrenco. Chefias firmaram termo de cooperao, etc.). ) O que faremos?

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Marcelo Moscogliato, MPF

Investigating and Enforcement Cooperation in Brazil (Case Studies)

Concluso:
Fizemos e continuamos fazendo - aproximao e cooperao entre a Polcia Federal, a CVM e o MPF (construo de conceitos, destruio de preconceitos); - aproximao com a BMF&BOVESPA; - atuao conjunta, discutida, debatida, negociada dentro conjunta discutida debatida do esprito pblico e da eficincia, porque ao contribuinte que devemos prestar contas; - formao de massa crtica e histria institucional.

Obrigado. Thank you everyone. h k

marcelo@moscogliato.com.br a ce o@ oscog ato.co .b moscogliato@prr3.mpf.gov.br Tel. (55) 11.2192.8678 Cel. (55) 11.9128.8800

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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

Investigating Market Manipulation


Presented By: Alberto Arevalo, Assistant Director Izabela Reis, Senior Counsel (With thanks to Tim Warren, Division of Enforcement) U.S. Securities and Exchange Commission Office of International Affairs
The U S Securities and Exchange Commission as a matter U.S. Commission, of policy, disclaims responsibility for any private publication or statement by any of its staff. The views express herein are those of the author and do not necessarily reflect the views of the Commission or its staff.

What is market manipulation?

Defined:

Intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities; or Intentional i t f I t ti l interference with the f ith th free forces of supply and demand

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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

Negative consequences

Harmful because it affects the integrity of the market place Price should be set by the unimpeded collective judgment of buyers and sellers Undermines fair, honest, and orderly markets Investors will stay out of your market if th I t ill t t f k t they perceive that it is not fair and is subject to manipulation
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Two Broad Categories of Manipulation

Pump and dump or Hype and Dump Pump dump Hype Dump cases Traditional or Classical trading manipulations

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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

Pump and Dump or Hype and Dump

Insiders and promoters hype or promote the stock or issuer through a variety of fraudulent means to generate interest in the stock and cause the price to rise

Once stock hits a certain price level, insiders or promoters dump their stock on unsuspecting public and walk away with profits
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False press releases Paid promoters E-mail spam campaigns Fax blasts Message board postings Internet chat rooms

Classical or Traditional Manipulations

Market is manipulated through the efforts of traders, brokers, and others engaged in various trading devices and/or the handling of quotations

Wash sales Matched Orders Marking the Close Dominated and Controlled Markets Arbitrary Quotations
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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

Blended Manipulations

May in fact see both types of manipulative activities at work in a particular manipulation For example, a combination of false p press along with wash trades and g matched orders

Commencement of a Manipulation

Manipulations typically involve thinly traded shares of little known or start up companies With small volume of trading easier to cause changes to the price of the stock Little known companies easier to make fraudulent or outlandish claims about the issuers business, financial condition, or business prospects
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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

Freely tradable shares

Typically start with some mechanism to get freely tradable shares in the hands of insiders, promoters, and nominees Examples:

Shell games g Bogus exemptions from registration


Rule 504 S-8 Offerings


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Shell Games

Insiders purchase dormant corporation with previously registered freely tradable stock Merge that dormant corporation into privately held company with some genuine or purported line of business Locate a broker-dealer who is willing to make a market in the newly merged company Trading commences in the shares of the newly created entity
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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

Bogus Exempted Securities

Some mechanism for issuing securities with a claim of exemption from registration requirements In reality, these exemptions are being abused and do not apply Examples:

Rule 504 offerings allow sales of limited dollar amount that purportedly comply with state requirements S-8 offerings stock issued to advisers and consultants as purported compensation

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Hype and Dump Manipulation

Insiders or promoters obtain via own accounts or nominee accounts ownership or control of a significant block of stock of selected issuer Commence hyping that stock to the yp g public to generate artificial interest in stock and cause price to rise
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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

False Press Releases

Company or promoter puts out press release announcing some form of market moving news that is not true or without a legitimate basis

Claim of a significant transaction, contract, or business deal Claim to an invention, patent, new product, or invention patent product license for certain technology False or baseless financial claims, i.e., record earnings, revenues, or sales
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Paid promoters

Purportedly independent Adviser or Analyst publishes recommendation or analysis regarding company recommending stock as a bargain, must buy, or hot buy In reality, this recommendation or analysis has been paid for by insiders or promoter but this payment is not disclosed

Aside: 17(b) violation

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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

Spam, Message Boards, & Chat Rooms


Manipulators have found the internet to be a great tool for manipulating stocks Use e-mail spam campaigns, message board postings, and chat rooms to create a buzz or public interest in a particular stock May send out literally thousands of e-mails purporting to come from multiple independent sources May be orchestrated conversations in chat rooms or on message boards that follow particular stocks or the markets In reality it can all be traced back to the manipulators
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Spam, Message Boards, or Chat Rooms

The spam e mails, message board postings, e-mails, or chat room conversations may repeat claims made in false press releases or analysis or recommendations made by paid promoters May make entirely new claims, such as access to purported inside information or news about th company b f b t the before it b becomes public bli All designed to create appearance of public interest in stock and demand for the stock To get the unsuspecting public to jump in and purchase the stock for their own account
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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

Fax Blasts

Thousands of faxes sent out to unsuspecting recipients Repeating claims similar to those found in spam campaigns Again, all designed to generate interest in the stock

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The Dump

Once the manipulators have been successful in driving up the price of the companies stock through these various means they will dump or sell their own shares to the unsuspecting public and walk away with the profits Investors are left holding largely worthless stock
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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

How to investigate?

Need to come at these investigations from two different directions at once First, who was behind the market trading?

Where did the shares come from, who was trading, and most importantly who PROFITED g y from the trading at the end of the day

Second, who was behind the hype and is there any truth to the claims made?

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Trading information

Need to reconstruct the trading activity in the stock in question for the time period you are examining Need to obtain all relevant trading records

Order tickets Confirmations Monthly account statements Purchase and Sale Blotters Stock position and inventory records
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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

Reconstruct Relevant Trading

Need to analyze those records to reconstruct the market Where did stock come from, who was trading it, where did it end up? If multiple brokers making a market in the t k th stock, may require multiple requests i lti l t to reconstruct the trading in question and capture the entire market
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Where is the Money?

Probably the most important thing to determine from your trading analysis is who made money from all of this activity? Manipulation and fraud is all about making money In all likelihood, if you can determine who likelihood profited at the end of the day that is the prime suspect for your manipulation
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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

Second Prong Examine the Hype

What was the source of the information about the company, its financial health, and its stock that caused the price jump? Was that information legitimate or false g and misleading?

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False Press Releases


Subpoena the issuer for any and all information backing up the claims in the release If it is an agreement, contract, or sale subpoena or talk to the party on the other side of the deal is there really such an agreement, contract, or sale? Claim of an invention, patent, or new product subpoena any evidence that the product really exists or functions as claimed or any evidence that the patent or li t t license was granted t d

Product testing data Prototypes Manufacturing information

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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

Examine the Issuer

Conduct a fundamental analysis of the issuers financial statements


What assets support the companys stock? Are they real or bogus? How do earnings look both past and g p current? Do the financial statements support the price at which the stock was trading?
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Analysts and Advisers


Purportedly independent advice or Purportedly independent recommendation show it is not Subpoena records to see if have any ties to the issuer, insiders, or promoter Most important, subpoena any and all financial records of analyst or adviser to see if obtained any kind of compensation or y p promise of future compensation from issuer, insider, or promoter Will also want to subpoena any such records from issuer, insider, or promoter
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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

Spam, Message Boards, and Chat Rooms

Said earlier manipulators have found the internet to be a great tool to facilitate market manipulations However it can be a great tool for regulators as well because now all these manipulative acts are effectively carried out right out in the open for all to see Plus, there is often a traceable electronic record of these activities
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Internet Information

When using the internet manipulators generally try to hide their identities Operate behind various screen names Manipulators may be the source of hundreds of e-mails and postings all appearing to come from many different sources Need to try to trace the spam e-mails, message board postings, and chat room conversations back to their true source
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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

Tracing E-mails

For e mails you can subpoena the e-mails internet service provider that carries the e-mail account for account information relating to the e-mail account

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Bring the Prongs Together

After all of this investigative work you want to bring the two prongs of your investigation back together Tie the false press releases, paid hype, false internet spam, or postings back to p , p g the insider or promoter who profited from the manipulation and walked away with the trading profits
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111

Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

Classical or Traditional Manipulation Mechanisms

Discuss some examples of trading tactics all conducted for the purpose of creating the appearance of active trading in a security or an active market in the security for the purpose of raising the bid price for the security

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Inception of Manipulation

Start the same as the hype and dump hype dump manipulation Insider or promoter gets control of significant block of freely trading shares of small, little known issuer Instead f i h I t d of using hype, or i conjunction in j ti with hype, uses trading tactics to increase price
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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

Be on the look out for


Arbitrary Quotes Wash Sales Matched Orders Marking the Close Domination d C t l f M k t D i ti and Control of Market

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Arbitrary Quotes and Trading

Commencing the market with arbitrary quotes that bear no logical relation to the issuers business history, earnings, assets, and products Bizarre Trading is there any sense g y to the trading scheme used?

Do trading patterns follow those expected from free forces of supply and demand?
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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

Wash Sales and Matched Orders

Wash Sales: A person places simultaneous orders to buy and sell quantities of the same security in transactions involving no change of beneficial ownership of the stock Matched Orders: A person or persons places buy or sell orders for a security with the knowledge that sell or buy orders of substantially the same size and price will be placed simultaneously Why? E Wh ? Engaged in for the purpose of creating a f l d i f th f ti false appearance of active trading in the market for a security May be done at successively higher and higher prices to move market price of security upwards
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Marking the Close

Repeatedly upping the bid at or near the close of the market, or Purchasing the stock at or near the close of the market at an uptick Done to send a positive signal to the market Closing Cl i market price is viewed by market k t i i i db k t professionals and investors as a guide to the trend of the market
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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

Domination and Control of Market

Market Maker comes to dominate and control market for a particular security Once control is established, market maker is free to arbitrarily move bid and p price of security upwards without y p reference to forces of supply and demand
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Indications of Dominated Market

Reduce Supply of the Float

Refusal to execute sell orders from customer accounts

Most of the float tied up in broker-dealers inventory account or in customer accounts at broker-dealer Makes stock price highly sensitive to demand

Crossing stock among customer accounts, instead of selling into market

Would i W ld increase shares available trade and h il bl d d decrease control

Again to keep control of float

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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

Boiler Room Sales


Manipulation activities often linked with boiler room sales A small army of dishonest salesmen who make cold calls to as many investors as possible Use high pressure sales tactics to convince customers to buy stocks that have been y manipulated May make outrageous promises of guaranteed, quick profits coupled with misrepresentations about the issuer
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Who made the money?

Again all of these cases are about making money at the expense of the public investor and the markets Determine who stood to profit by all of this activity and in all likelihood y will y you find your manipulator!

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Alberto Arevalo & Izabela Reis, SEC

Investigating Market Manipulation

Tokyo Joe

41

THANK YOU FOR YOUR ATTENTION!!!

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117

Waldir de Jesus Nobre & Eduardo Jos Busato, CVM

Investigating and Prosecuting Market Manipulation

Investigating and Prosecuting Market Manipulation


Securities Enforcement and Market Oversight Training O i ht T i i May 3rd 2011

Market manipulation: The case of Santander


Waldir Nobre / Eduardo Busato Market O M k Oversight Division i h Di i i Comisso de Valores Mobilirios (CVM)

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Waldir de Jesus Nobre & Eduardo Jos Busato, CVM

Investigating and Prosecuting Market Manipulation

Background
Ibovespa: Main indicator of Brazilian Stock Market
Portfolio:
Includes the stocks traded in the Brazilian Market with high liquidity; Rebalanced every four months (3x a year);
January to April, May to August and September to December;

Usually 40-70 stocks;

2000:
Ibovespa cash market (spot): stocks traded at So Paulo Stock Exchange (Bovespa); Ibovespa futures: contracts traded at Brazilian Futures Exchange (BM&F)

Background
Ibovespa Compostion (January to April 2000):
44 shares RCTB31: 8.74% of the value of the index; RCTB41: 34.68% of the value of the index.
RCTB31 +RCTB41: 43.42%

All other (42 shares): 56,58%

RCTB31 and RCTB41: depositary receipts that represented 12 different shares (each)
RCTB31: 12 common shares RCTB41: 12 preferred shares

RCTB31 and RCTB41 would leave the index portfolio starting May 2000:
Replaced by other shares, according to their liquidity; Rebalancing criteria are known:
Changes estimated by market participants before implementation.

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Waldir de Jesus Nobre & Eduardo Jos Busato, CVM

Investigating and Prosecuting Market Manipulation

Background
Closing price at Bovespa:
Five minute auction at the end of the trading session; One single price according to bids/asks during the auction.

Settlement price at BM&F:


Average of contract prices in the last thirty minutes. Influence of closing price at Bovespa was limited.

Facts on April 28th 2000


Last trading session of the old portfolio of IBovespa.

Comportamento do Ibovespa Prego de 28/04/2000


16,000

15,900

15,800

Valor Iboves spa

15,700 15 700

15,600

15,500

15,400

15,300

Horrio

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Waldir de Jesus Nobre & Eduardo Jos Busato, CVM

Investigating and Prosecuting Market Manipulation

Facts on April 28th 2000


Before closing auction:
Ibovespa: +2.08% RCTB31: R$ 163.00; RCBT41: R$ 216.50.

Santander (during closing auction):


Ask prices:
RCTB31: R$ 155.00 (-4.90%)
Best bid price (other participants): R$ 161.00

RCTB41: R$ 200.00 (-7.62%)


Best bid price (other participants): R$ 216.00

Facts on April 28th 2000


Closing prices:
RCTB31: -3.69% RCTB41: -1.84%

Closing auction led by Santander; Ibovespa:


Before closing auction: +2.08% After closing auction: +0.63%

Price difference (RCTB41 x underlying shares):


Historical: max. 0.5% April 28th 2000: -4%

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Waldir de Jesus Nobre & Eduardo Jos Busato, CVM

Investigating and Prosecuting Market Manipulation

Effects on the market


Lower value of the index with the new portfolio on May 2nd 2000:
Before closing auction: 15,749 points Actual: 15,537 points (-1.35%)

RCTB31 and RCTB41 prices went up on May 2nd:


Ibovespa cash was not affected; Ibovespa future was adjusted to the closing price of April 28th. 28th

Spot x Future Index Prices not aligned


Ibovespa (cash Bovespa) Ibovespa (future BM&F) April 28th +0.63% +1.32% May 2nd -0.09% -1.49%

Effects on the market


Substantial benefits to those with short positions on Ibovespa Futures:
Total settlement value on May 2nd: R$ 17 million

Total open interest positions:


25,756 contracts Santander:1,670 contracts (short)
2nd biggest short position at BM&F.

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Waldir de Jesus Nobre & Eduardo Jos Busato, CVM

Investigating and Prosecuting Market Manipulation

The explanation
Santander:
Cash position (Ibovespa) + short position (Ibovespa future); Cash position should be adjusted:
Selling RCTB31 and RCTB41; Buying other shares (according to Ibovespa new portfolio).

No other way of doing it:


Santander should sell the porfolio in the end of the trading session.

The decision
Explanation different from actually happened:
Santander should sell 130,000,000 RCTB41 and 45,000,000 RCTB31, but...
Bought 149,000,000 RCTB41 and sold 81,000,000 RCTB41 before the closing auction of April 28th 2000; Bought 35,000,000 RCTB31 and sold 11,000,000 RCTB31 before the closing auction of April 28th 2000; g p ;

To believe that all remaining RCTB31 and RCTB41 would be sold during the closing auction (5 minutes) is unreasonable.

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Waldir de Jesus Nobre & Eduardo Jos Busato, CVM

Investigating and Prosecuting Market Manipulation

The decision
Selling RCTB31 and RCTB41 at low prices represented a loss of R$ 100,000.00; Settlement in Ibovespa Futures: more than R$ 1,000,000.00; The effect in the derivatives market was foreseeable; The manipulation of RCTB31 and RCTB41 affected all market participantes with open positions. k t ti i t ith iti

The decision
On July 5th 2004 CVM considered that Banco Santander 2004, has manipulated RCTB31 and RCTB41 prices on April 28th 2000, violating CVM Instruction number 8/78, II, letter b
Fine of R$ 500.000,00 (max.)

CVM also included the broker of the group, Santander Noroeste DTVM, as participant in the manipulation violation schema, imposing a fine of R$100.000,00. CVM case TA/2001/236.

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Waldir de Jesus Nobre & Eduardo Jos Busato, CVM

Investigating and Prosecuting Market Manipulation

Market manipulation: The case of Santander


Waldir Nobre / Eduardo Busato Market Oversight Division g Comisso de Valores Mobilirios (CVM) May 2011

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125

Luiz Eduardo Costa e Silva, BSM

Investigating and Prosecuting Market Manipulation

Securities Enforcement and Market Oversight Training


Day 2 - Investigating and Prosecuting Market Manipulation

2 a 6 de maio de 2011 Luiz Eduardo Costa e Silva Gerncia de Acompanhamento de Mercado

Estrutura organizacional - BSM

Conselho de Superviso

Diretor de Autorregulao

Auditoria de Participantes

Superviso de Mercado

Anlise e Estratgia

Jurdico

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Luiz Eduardo Costa e Silva, BSM

Investigating and Prosecuting Market Manipulation

Estrutura organizacional Superviso de Mercado

Gerncia de Acompanhamento de Mercado d M d

Coordenao de Acompanhamento de Mercado Segmento BM&F

Coordenao de Mtodos Quantitativos Segmento BM&F

Coordenao de Acompanhamento de Mercado Segmento Bovespa

Coordenao de Mtodos Quantitativos Segmento Bovespa

BSM - BM&FBOVESPA Superviso de Mercados


Funes Acompanhamento de Mercado

Identificar violaes legislao e regulamentao vigentes, condies anormais de negociao ou comportamentos que possam colocar em risco a regularidade de funcionamento, a transparncia e a credibilidade do mercado superviso das operaes cursadas nos mercados administrados pela BM&FBOVESPA detectar desvios que possam estar relacionados realizao de operaes irregulares utilizao intensiva de recursos computacionais e estatsticos identificar operaes, investidores, participantes do mercado e profissionais de mercado que tenham infringido o disposto na regulamentao em vigor e nas normas e procedimentos da BM&FBOVESPA foco especialmente em relao a condies artificiais de demanda, oferta ou preo; manipulao de preos; operaes fraudulentas; prticas no equitativas, uso de informaes privilegiadas e exerccio irregular de atividade no mercado de valores mobilirios a superviso de mercado abrange ainda a anlise das operaes com valores mobilirios de emisso da prpria BM&FBOVESPA (autolistagem).

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Luiz Eduardo Costa e Silva, BSM

Investigating and Prosecuting Market Manipulation

BSM - BM&FBOVESPA Superviso de Mercados


Funes Acompanhamento de Mercado
ACOMPANHAMENTO DE MERCADO

AUDITORIA

JURDICO

Os relatrios de Acompanhamento de Mercado e de Auditoria relacionados a prticas ilegais so enviados ao Diretor de Autorregulao da BSM O Diretor de Autorregulao da BSM decide pela instaurao ou no de processo administrativo (em caso de no instaurao, o Conselho de Superviso notificado) Os participantes do mercado e os diretores envolvidos so notificados Defesa e possibilidade de termo de compromisso No cabe recurso Comisso de Valores Mobilirios contra as decises do Conselho de Superviso Os fundos recolhidos com a aplicao de multas e com termos de compromisso so revertidos para as atividades de autorregulao

BSM - BM&FBOVESPA Superviso de Mercados


Funes Acompanhamento de Mercado
Operadores e clientes (DMA)

Amplo acesso a cadastro de clientes e outros documentos dos participantes do mercado Acessso direto aos bancos de dados de negcios, g , liquidao e custdia Informao operaes
-

Negociao

centralizada

do

cliente

final

das

Ordens de compra e venda devem ser inseridas no sistema de negociao com a identificao da conta do cliente A identificao do cliente final deve ser enviada para o sistema da clearing em D+0 para derivativos e D+1 para o mercado a vista atividades operacionais da

Ps-negociao

Superviso das BM&FBOVESPA

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Luiz Eduardo Costa e Silva, BSM

Investigating and Prosecuting Market Manipulation

BSM - BM&FBOVESPA Superviso de Mercados


Funes Acompanhamento de Mercado

Sistema de cadastro de clientes

Manipulao de Mercado
MANIPULAO DE MERCADO NO BRASIL
considerado um crime contra o mercado de capitais Lei n 6.385 de 7 de Dezembro de 1976 Manipulao do Mercado Artigo 27-C. Realizar operaes simuladas ou executar outras manobras fraudulentas, com a finalidade de alterar artificialmente o regular funcionamento dos mercados de valores mobilirios em bolsa de valores, de mercadorias e de futuros, no mercado de balco ou no mercado de balco organizado, com o fim de obter vantagem indevida ou lucro, para si ou para outrem, ou causar dano a Terceiros. Pena Recluso, de 1 (um) ano a 8 (oito) anos, e multa de at 3 (trs) vezes o montante da vantagem ilcita obtida em decorrncia do crime.

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129

Luiz Eduardo Costa e Silva, BSM

Investigating and Prosecuting Market Manipulation

Manipulao de Mercado
MANIPULAO DE MERCADO NO BRASIL
Instruo CVM n 8, de 8 de Outubro de 1979 vedada aos administradores e acionistas de companhias abertas, aos intermedirios e aos demais particpantes do mercado de valores mobilirios, a criao de condies artificiais de demanda, oferta ou preo de valores mobilirios, a manipulao de preo, a realizao de operaes fraudulentas e o uso de prticas no equitativas. Para efeitos da instruo, conceitua-se como manipulao de preos no mercado de valores mobilirios, a utilizao de qualquer processo ou artifcio destinado, direta ou indiretamente, a elevar, manter ou baixar a cotao de um valor mobilirio, induzindo, terceiros sua compra e venda. venda

Manipulao de Mercado
Procedimentos de Investigao
Anlise dos dados semanais X dados histricos. V l tilid d d preos Volatilidade de Negociabilidade (n de operaes, quantidade de aes e volume financeiro) Demanda externa. rea de Operaes da BM&FBOVESPA Participantes do mercado Investidores

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Luiz Eduardo Costa e Silva, BSM

Investigating and Prosecuting Market Manipulation

Manipulao de Mercado
Procedimentos de Investigao
Comportamento dos ativos do mesmo setor Notcias e fatos relevantes Negcios realizados com o ativo Leiles Identificao dos principais clientes Administradores/Controladores Ranking dos acionistas Participantes e profissionais de mercado Empresa negociando com ativo de sua prpria emisso Negociao de clientes relacionados entre si

Manipulao de Mercado
Procedimentos de Investigao
Seleo de clientes e seus dados:

Cadastro (profisso, endereo, data de nascimento/constituio etc) Posio de custdia (evoluo) Internet Perfil de negociao (por data, instrumento, contrapartes etc) Day trade participantes, operadores, mercado,

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Luiz Eduardo Costa e Silva, BSM

Investigating and Prosecuting Market Manipulation

Manipulao de Mercado
Procedimentos de Investigao
Identificao da Anlise :

Negociao com incidncia de oscilao de preo Atuao de uma nica corretora na contraparte, representando 80,4% das operaes realizadas pelo cliente Negociao incompatvel com a profisso do cliente O cliente no possua posio em custdia Realizao de day trade com lucro para o cliente e prejuzo para o cliente contraparte p p p As operaes do cliente contraparte foram realizadas por intermdio de conexo automatizada (repassador de ordem) Vnculo entre o cliente e o repassador de ordem responsvel pelas operaes do cliente contraparte, conforme esclarecimentos prestados por uma das corretoras

Obrigado
Contato: lsilva@bsm-bvmf.com.br

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132

Robert K. Tripp, FBI

International Boiler Room

SENSITIVE BUT UNCLASSIFIED

DORON MUKAMAL ET AL; HIGH YIELD SECURITIES FRAUD

Federal Bureau of Investigation Washington Field Office Northern Virginia Resident Agency

SENSITIVE BUT UNCLASSIFIED

Doron Mukamal Organization

In business since at least 2003 1000s of victims Received $50,000,000$50,000,000$70,000,000 in payments from victims #1 Source of consumer complaints received by US Securities and Exchange Commission

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133

Robert K. Tripp, FBI

International Boiler Room

SENSITIVE BUT UNCLASSIFIED

Monthly Accounting, 2003-4 2003-

19 months $10 million income $1.2 illi $1 2 million in i commissions

SENSITIVE BUT UNCLASSIFIED

Modus Operandi

Solicitation by bogus M & A firm to buy RegulationRegulation-S shares at vastly inflated prices Verification by bogus regulator Victim pays advanced fees to US account Problem(s) requiring additional payment(s)

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Robert K. Tripp, FBI

International Boiler Room

SENSITIVE BUT UNCLASSIFIED

Realistic Sites, Documents, Office Environment

SENSITIVE BUT UNCLASSIFIED

Stamps and Signatures

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135

Robert K. Tripp, FBI

International Boiler Room

SENSITIVE BUT UNCLASSIFIED

Trained Sales Staff

SENSITIVE BUT UNCLASSIFIED

Trained Sales Staff

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136

Robert K. Tripp, FBI

International Boiler Room

SENSITIVE BUT UNCLASSIFIED

Trained Sales Staff

SENSITIVE BUT UNCLASSIFIED

Professional Business Model

Management M t Sales Department Administration Department IT Department Investment Department Support Staff

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Robert K. Tripp, FBI

International Boiler Room

SENSITIVE BUT UNCLASSIFIED

Investigative Obstacles

Dozens of Front Companies Dozens of Front Regulators VOIP and EFax False Identification at US Banks Use of non-US accounts nonJurisdictional Nightmare
Copy of domains2.xla

Microsoft Excel Add-In

SENSITIVE BUT UNCLASSIFIED

US Investigation: Money Laundering

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138

Z. Scott Birdwell, SEC

Remedies and Sanctions for Securities Law Violations

Remedies and Sanctions for Securities Law Violations


By Matthew T. Martens
The Securities and Exchange Commission, As a Matter of Policy, Disclaims Responsibility for Any Private Publication or Statement by Di l i R ibilit f A P i t P bli ti St t tb Any of Its Employees. The Views Expressed Herein Are Those of the Author and Do Not Necessarily Reflect the Views of the Commission or of Other Members of the Staff of the Commission

Youve proved a violation. Now what are you going to do about it?

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Z. Scott Birdwell, SEC

Remedies and Sanctions for Securities Law Violations

Two Issues
1. 2.

What does the law allow? la allo ? What should you do as a matter of prosecutorial discretion?

Remedies/Sanctions
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.

Censure Suspension or bar of securities professionals Stop order Suspension or bar of l S i b f lawyer or accountant t t Accounting Equitable relief as appropriate or necessary for the benefit of investors Trading suspension for 10 days Asset freeze Freeze of stock options/bonuses of D&Os pending investigation Injunctive (cease and desist) orders to stop illegal conduct Appointment of a corporate monitor or receiver Disgorgement of illegal gains (or losses avoided) Civil monetary penalties ClawClaw-back Officer and director bars Penny stock bar Criminal referrals

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Z. Scott Birdwell, SEC

Remedies and Sanctions for Securities Law Violations

Forum
1. 2.

Administrative P oceeding Administ ati e Proceeding Federal District Court

Administrative Proceedings

Brought before an Administrative Law Judge (ALJ) J d ALJs are employed by SEC, but independent (cannot be removed or fired) Issue recommended decisions Decisions are appealable to Commission and then directly to Federal Appellate Court

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Z. Scott Birdwell, SEC

Remedies and Sanctions for Securities Law Violations

Why Use Administrative Proceedings?


Used in approximately 50 percent of SEC cases ALJs hear only securities law cases Efficient and expeditious Typically ALJs address violations by professional market intermediaries (broker-dealer, transfer (brokeragent, investment adviser, investment company) agent in estment ad ise in estment compan ) and associated or affiliated persons Certain remedies only available here

Remedies Available Only in Administrative Proceedings


Cease & Desist (C&D) orders Trading T di suspensions i Censure, suspension, bar or revocation of suspension, registration

Stock brokers and investment advisers Supervisory bars

Stop order d Restriction on practice before the Commission

Attorneys and accountants

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Z. Scott Birdwell, SEC

Remedies and Sanctions for Securities Law Violations

Trading Suspensions

The SEC may order a 10-day suspension in trading of 10any publicly traded security. Trading suspensions are based on concerns about the accuracy or adequacy of publicly disseminated information. As a result, a trading suspension alerts existing and prospective investors that there may be undisclosed problems or inadequate disclosure regarding the company issuing the securities or with the trading market for those securities. securities.

Frequently used to halt trading when a stock appears to be the subject of a pump and dump manipulation.

In FY 2009, the Commission halted trading in securities of 192 companies about which there was inadequate public disclosure in the market.

Industry Bars

Only available in administrative proceedings Suspensions or bars from association with Broker-Dealer, BrokerInvestment Adviser, Investment Company, Municipal Securities Dealer or Transfer Agent Affects individuals right to continue to work in the securities business

Can be for a period of months (suspension), or A period of years (e.g., bar with right to reapply in 3 years), or Permanent bar from industry Can be a bar from acting in a supervisory capacity

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Z. Scott Birdwell, SEC

Remedies and Sanctions for Securities Law Violations

Registration Revocation

Can revoke the registration of a broker-dealer, brokerInvestment Adviser, Investment Company, , p y, Municipal Securities Dealer or Transfer Agent Often used for leverage to get registered entity to adopt remedial measures or new policies and procedures designed to prevent future violations Also used as leverage to get entity to consent to review by Independent Compliance Consultant and adopt Consultants changes

Sanctions Available from Federal District Court

Temporary Restraining Orders


An accounting accounting Asset Freeze Orders Repatriation of Assets Appointment of Receiver

Injunction court order to stop violating the law Disgorgement return profits of the fraud g g p ClawClaw-back Civil Monetary Penalties Officer/Director Bars

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Z. Scott Birdwell, SEC

Remedies and Sanctions for Securities Law Violations

Temporary Restraining Orders


Unilateral, expedited, without notice Stops ill St illegal conduct immediately l d ti di t l Freezes Assets prevents dissipation and protects investor funds Seize and preserve books and records Appoint a receiver to run company and replace management Appoint a corporate monitor or independent consultant

SEC v. Unknown Purchasers of InVision Call Options


March 5-12, 2004: unknown traders purchase InVision 5call options at UBS Securities through European p g p affiliates. Sunday, March 15: announcement by GE that it will acquire InVision for $50 share. Monday, March 16: Options stand to gain one day profit of $2.7 million. Exchange refers suspicious trading to SEC. SEC commences investigation. Tuesday, M h 17 SEC obtains emergency restraint of T d March 17: bt i t i t f $2.7 million in proceeds from options trading by unknown purchasers. Sept. 2005 SEC gets default judgment for $3.1 million.

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Z. Scott Birdwell, SEC

Remedies and Sanctions for Securities Law Violations

Injunctive Actions

Brought in federal court before federal judge j d or jury against any person or j i t company Often involve financial and accounting fraud by issuers of securities, insider trading, fraudulent or unregistered offering of securities.

Disgorgement

Goal is to disgorge all illegal gains from securities law violators. Take all profit out of violations. p An order requiring Defendant or Respondent to pay illillgotten gains or unjust enrichment

Give up fruits of the fraud so that fraud does not pay

An equitable remedy found in the case law for injunctions and statutes for administrative actions Need only be a reasonable approximation of profits connected to th violation t d t the i l ti Different concept than Restitution

Make injured parties whole

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Z. Scott Birdwell, SEC

Remedies and Sanctions for Securities Law Violations

Examples of Disgorgement

Financial Fraud

Officers bonus, stock options, or even salary where company , p , y p y financial results have been misrepresented Trading profits Money misappropriated from the funds raised Commissions earned on fraudulent transactions Profits made or losses avoided from insider trading Profits from manipulative trading and sales

Offering Fraud

BrokerBroker-Dealer Fraud

Insider Trading

Manipulation

Claw-back Claw

SarbanesSarbanes-Oxley Section 304

(a) If an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall reimburse the issuer for

any bonus or other incentive-based or equity-based compensation incentiveequityreceived by that person from the issuer during the 12-month period 12following the first public issuance or filing with the Commission (whichever first occurs) of the financial document embodying such financial reporting requirement; and any profits realized from the sale of securities of the issuer during that 12-month period. 12-

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Z. Scott Birdwell, SEC

Remedies and Sanctions for Securities Law Violations

Civil Monetary Penalties

Goal is deterrence Can be imposed on any person (individual or corporate) corporate) Fair Funds Penalties now can go to benefit victims.

Prior to this, penalties went to U.S. Treasury.

Civil Monetary Penalties


Based on statutory authority Statutes lay out three graduated tiers of penalties (Tier 1, Tier 2, and Tier 3) Authorize a specific penalty amount per violation Penalty assessed by District Court Judge (or an ALJ)

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Z. Scott Birdwell, SEC

Remedies and Sanctions for Securities Law Violations

Tier One Penalty

Violations of the federal securities laws (non-fraud) (non-f d) ( For each violation, shall not exceed the greater of:

$7,500 for a person or $75,000 for an entity, or The gross amount of pecuniary gain to the defendant as a result of the violation

Tier Two Penalty

If violation involved fraud, deceit, manipulation, manipulation or deliberate or reckless disregard of a regulatory requirement For each violation, shall not exceed the greater of:

$75,000 for person or $375,000 for an entity, $375,000 or The gross amount of pecuniary gain to the defendant as a result of the violation

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Z. Scott Birdwell, SEC

Remedies and Sanctions for Securities Law Violations

Tier Three Penalty

If violation involved fraud, deceit, manipulation, or deliberate or reckless disregard of a g regulatory requirement; and Such violation directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons For each violation, shall not exceed the greater of:

This is the tier that we use the most!

$150,000 for a person or $725,000 for an entity, or The gross amount of pecuniary gain to the defendant as a result of the violation

Flexible Criteria for Penalties

Up to the greater of:

Fixed dollar amo nt pe iolation Fi ed dolla amount per violation

What is a violation?

Per sale, trade, or misstatement Per statute violated

Gross amount of pecuniary gain

Have used to obtain penalties from a few thousand dollars up to $150 million!

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Z. Scott Birdwell, SEC

Remedies and Sanctions for Securities Law Violations

Deterrence

In any instance in which he or she is caught, wrongdoer must b required t ht d t be i d to pay sufficient amount that:

crime will not pay on average (i.e., in expectation) expectation) If caught less than 100% of time, than penalty must be some multiple of profits from wrongdoing

Formula for optimal deterrence given uncertainty of being caught

Total profit from wrongdoing divided by probability of being caught and p proven culpable p

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CarlaVerssimodeCarli,MPF

OPapeldoMinistrioPblicoFederalno SistemaNacionalAntilavagemdeDinheiro

O Papel do Ministrio Pblico Federal no Sistema Nacional Antilavagem de Dinheiro


Securities Enforcement and Market Oversight Training CVM/SEC/BM&F Bovespa So Paulo, 3.5.2011

Sistema Nacional Antilavagem de Dinheiro


Conveno da ONU contra o Trfico Ilcito de Entorpecentes e Substncias Psicotrpicas: lei nacional Lei 9.613/98 COAF (UIF) Medidas preventivas nas instituies financeiras Polcia, Ministrio Pblico e Judicirio Enccla

03/05/2011

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CarlaVerssimodeCarli,MPF

OPapeldoMinistrioPblicoFederalno SistemaNacionalAntilavagemdeDinheiro

2 eixos principais:
Preveno da lavagem de dinheiro Controle penal da lavagem de dinheiro

Preveno: sistema financeiro


Atores: - Sujeitos obrigados (art. 9) - Reguladores (BACEN, CVM, COAF) SUSEP, SPC,

Lgica do sistema: identificao dos clientes clientes, manuteno de registros, controle, comunicao de operaes suspeitas (CDD) Articulao adicional: ENCCLA

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CarlaVerssimodeCarli,MPF

OPapeldoMinistrioPblicoFederalno SistemaNacionalAntilavagemdeDinheiro

ENCCLA
Forum de articulao e atuao conjunta em lavagem de dinheiro Desde 2003 70 rgos e instituies 1 grande encontro anual e diversos encontros ao longo do ano Estratgia de metas/aes, trabalho em grupos Realizaes: PNLD, CCS, regulao das PEPs, SNBA, difuso do SIMBA, etc.

Tipologias de LD no mercado de capitais


Ou: por que a atividade de manter registro e fazer o CDD importante, no mbito do mercado de capitais?

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CarlaVerssimodeCarli,MPF

OPapeldoMinistrioPblicoFederalno SistemaNacionalAntilavagemdeDinheiro

Exemplos...
Falsa especulao com valorizao de aes de bagatela de empresas cmplices Aquisio de empresa que abrir o capital Negociao entre criminosos de aes em regime de quase monoplio ou de aes ilquidas Operao esquenta-esfria ou especulao financeira cruzada Falsa especulao com aes com participao de intermedirio Transferncia de valores atravs do mercado de aes

Controle Penal: law enforcement/sistema de justia criminal


Polcia Judiciria Ministrio Pblico Justia Criminal

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CarlaVerssimodeCarli,MPF

OPapeldoMinistrioPblicoFederalno SistemaNacionalAntilavagemdeDinheiro

Cadeia de comunicaes
Corretora de Valores CVM COAF
Polcia Federal/Ministrio Pblico Federal/Ministrio Pblico Estadual

MPF
Titular da ao penal Atribuio para atuar em crimes contra o sistema financeiro nacional, crimes contra o mercado de capitais e crimes de lavagem de dinheiro, entre outros Recebe comunicao do BACEN da CVM e de BACEN, outros rgos quando estes, no exerccio de suas atribuies, verificarem a ocorrncia de crime (art. 9 LC 105/20010 Presente em todo o pas, nos 3 graus de jurisdio

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156

CarlaVerssimodeCarli,MPF

OPapeldoMinistrioPblicoFederalno SistemaNacionalAntilavagemdeDinheiro

Competncia para investigar e julgar a lavagem de dinheiro


estadual (antecedente estadual) federal: - praticado contra o sistema financeiro nacional, ordem econmico-financeira, ou em detrimento de bens, servios ou interesses da Unio, entidades autrquicas ou fundacionais; - crime antecedente federal; - lavagem de dinheiro transnacional (CF, 109, IV)

Varas federais especializadas


Em todas as capitais do pas Algumas cidades do interior Especializadas em crimes financeiros e lavagem de dinheiro, em sua maioria Vantagens: grande conhecimento da matria, que normalmente complexa Aumento da efetividade na resposta do Estado ao crime de lavagem de dinheiro

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CarlaVerssimodeCarli,MPF

OPapeldoMinistrioPblicoFederalno SistemaNacionalAntilavagemdeDinheiro

Objetivos do controle penal


Investigao Ao penal Medidas assecuratrias Condenao Confisco de bens e valores

GAFI: standards e peer review/peer pressure


40+9 Recomendaes Avaliaces mtuas Soft law: presses e recomendaes

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CarlaVerssimodeCarli,MPF

OPapeldoMinistrioPblicoFederalno SistemaNacionalAntilavagemdeDinheiro

Efetividade do Sistema: avaliao internacional (peer review)


Brasil foi avaliado pela 4. vez, o relatrio se encontra publicado no site do GAFI. Follow-up: dois anos para sanar deficincias Retorna em junho de 2012 quele foro internacional

Principais deficincias apontadas no sistema de justia criminal


Ausncia d criminalizao d f de l do financiamento ao terrorismo e problemas da derivados; Falta de responsabilizao criminal de pessoas jurdicas por lavagem de dinheiro; Poucas condenaes finais por lavagem de dinheiro, considerando o risco de LD e o tamanho do sistema financeiro; Baixo nmero de apreenses e confiscos de bens e valores; Foco na persecuo dos crimes antecedentes; Estatsticas inconsistentes sobre investigaes, aes penais e condenaes por lavagem de dinheiro;

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CarlaVerssimodeCarli,MPF

OPapeldoMinistrioPblicoFederalno SistemaNacionalAntilavagemdeDinheiro

Efetividade do sistema de justia


2006 investigaes aes penais absolvies prescrio condenaes 1. 1 instncia condenaes finais 2.228 462 7 1 14 2 2007 1.311 187 13 10 30 1 2008 1.221 131 47 40 47 3 TOTAL 4.760 780 67 51 91 11

Desafios
Construir um sistema integrado de estatsticas de investigaes e processos criminais (ao n. 1 ENCCLA 2011) Tornar mais clere a resposta penal: tempo mais curto para investigar e julgar delitos de lavagem de dinheiro sentenas teis

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CarlaVerssimodeCarli,MPF

OPapeldoMinistrioPblicoFederalno SistemaNacionalAntilavagemdeDinheiro

Procuradora Regional da Repblica na 4. Regio Ministrio Pblico Federal Porto Alegre/RS - Brazil (+55.51.3216.2084) ccarli@prr4.mpf.gov.br ccarli@prr4 mpf gov br

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161

RobertK.Tripp,FBI

MoneyLaundering

MoneyLaundering

UnitedStatesOverview
SecuritiesEnforcementandMarketOversight TrainingProgram May3,2011

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RobertK.Tripp,FBI

MoneyLaundering

NegativeImpactofMoney Laundering
Competesunfairlywithlegitimatebusinesses Competes unfairly with legitimate businesses Disruptseconomicdevelopment Affectstradeflowandinternationalcommerce Reducestaxrevenuesthroughunderground economies(i.e.,blackmarket) Damages or destroys financial institutions Damagesordestroysfinancialinstitutions Encouragescorruptionbothprivateandpublic Erodespublictrustingovernmentandprivate institutions

TwoKeyStatutes
18USC 1956=usingthedirtymoneyto promotetheoffenseorconcealingthedirty t th ff li th di t money 18USC 1957=puttingthedirtymoney,over $10,000,inabankorotherfinancial institution

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RobertK.Tripp,FBI

MoneyLaundering

DistinguishingtheStatutes
1956
20yearfelony Financial Transaction FinancialTransaction Virtuallyallcommercial transactionscovered Knowledgethatfundsare fromsomeformof unlawfulactivity IncludesStingprovision g p SpecificIntentrequired Nominimumdollar threshold

1957
10yearfelony M Monetarytransaction t t ti Limitedtotransactionsby orthroughafinancial institution Knowledgethatfundsare criminallyderived p ope ty property NoStingprovision GeneralIntent $10,000.00ormore

Title18U.S.C. 1957
Engages or attempts to engage in a monetary Engagesorattemptstoengageinamonetary transaction Intheamountof$10,000.00ormore AndknowsproceedsderivedfromanSUA

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RobertK.Tripp,FBI

MoneyLaundering

Title18U.S.C. 1956 Title18U.S.C.


BasicStatutoryElements
Financial Transaction Whoever conducts or FinancialTransaction Whoever,conductsor attemptstoconductafinancialtransaction Proceeds Whichinfactinvolvestheproceedsof SpecifiedUnlawfulActivity(SUA) Knowledge Knowingthatthepropertyinvolved inthefinancialtransactionrepresentsthe proceedsofastate,federal,orforeignfelony proceeds of a state, federal, or foreign felony SpecificIntent Withtheintenttopromote, evade,concealordisguise,ortoavoidreporting requirements

WhatareSUAs?
Manyspecificviolations,includingmailfraudand wirefraud; wire fraud; Fraud,oranyschemeorattempttodefraud,by oragainstaforeignbank; AnoffensewithrespecttowhichtheUnited Stateswouldbeobligatedbymultilateraltreaty, eithertoextraditetheallegedoffenderorto either to extradite the alleged offender or to submitthecaseforprosecution,iftheoffender werefoundwithintheterritoryoftheUnited States

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RobertK.Tripp,FBI

MoneyLaundering

ExtraterritorialJurisdiction
ConductisbyaUnitedStatescitizenor,inthe caseofanonUnitedStatescitizen,the f U it d St t iti th conductoccursinpartintheUnitedStates; and Thetransactionorseriesofrelated transactionsinvolvesfundsormonetary y instrumentsofavalueexceeding$10,000

Scienter:General,notSpecific
TheGovernmentmustprovethatthedefendant knewthatthemoneyinvolvedinthefinancial transactionrepresentstheproceedsofsomeform ofunlawfulactivitythatconstitutesafelony understate,federal,orforeignlaw. TheGovernmentdoesnothavetoprovethe defendantknewitwasfromanSUA;onlyafelony. Willful blindness is not a defense Willfulblindnessisnotadefense.

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166

RobertK.Tripp,FBI

MoneyLaundering

ThegovernmentdoesNOThavetoprovethatthe moneylaundererknewexactlywhatspecified unlawfulactivitythemoneycamefrom,onlythat unlawful activity the money came from only that theyknewitcamefromcriminalactivitythatwasa felony.Theydonthavetoknowexactlywhatcrime wascommitted. Thisknowledgecanbeentirelyprovenbasedon circumstantialevidence,suchasproofthatour subjectsdeviousconductshowsthattheymusthave knownthattheyweredealingwithdirtymoney.

MONEYLAUNDERINGELEMENTS
Therearefourquestionsthatwehaveto answertobesurethatwehaveallofthe t b th t h ll f th elementsofamoneylaunderingtransaction.

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RobertK.Tripp,FBI

MoneyLaundering

MONEYLAUNDERINGELEMENTS
1. Whatisthetransaction? Wemusthavemoneygoingbetweenpeople, bankaccounts,etc.

MONEYLAUNDERINGELEMENTS
2. Wheredoesthemoneycomefrom? Wemusthaveproofthatthemoneycomes fromsomespecifiedunlawfulactivity.

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RobertK.Tripp,FBI

MoneyLaundering

MONEYLAUNDERINGELEMENTS
3. Howdoweprovethatoursubjectknew thatthemoneywasdirty? th t th di t ? Thiscanbeprovenbythesubjectssuspicious conduct,suchasopeningbankaccountsinthe namesofshellcompanies,structuring names of shell companies structuring deposits/withdrawals,etc.

MONEYLAUNDERINGELEMENTS
4. Whatwasthesubjecttryingtodowiththe money? Ourtheorywillbethatthemoneywasbeingusedto either:(a)concealthedirtymoney;or(b)promote thespecifiedunlawfulactivity.Again,thiscanbe proventhroughcircumstantialevidencebythe suspiciousconductofthesubject,whichwill i i d f h bj hi h ill demonstratehis/herguiltystateofmind.

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RobertK.Tripp,FBI

MoneyLaundering

ThreeStepMoneyLaundering Process
Placement Layering Integration

Placement
Firststepinthelaunderingprocess:
Pl i th illi it f d Placingtheillicitfunds,withoutdiscovery: ith t di intothefinancialsystem intothedomesticeconomy intoaninternationalhaven(e.g.Offshore banks) Illicitfundsareatthegreatestriskofdetection duringthisprocess

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RobertK.Tripp,FBI

MoneyLaundering

Layering
Secondstepinthelaunderingprocess:
Involvesseparatingtheillegallyobtained moneyfromitscriminalsourcebylayeringit thoughaseriesoffinancialtransactions,which makesitdifficulttotracethemoneybacktoits originalsource

MethodsofLayering
ShellandFrontCompanies
Sh ll C ShellCompanies:Existonlyonpapertoensure i E i l anonymity,multijurisdictionalandeasytoestablish. FrontCompanies:Legitimatecompanieswithco mingledillicitassets.

OnlineBanking Internetgambling SmartCards, Etc.

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RobertK.Tripp,FBI

MoneyLaundering

Integration
Thirdstepintheprocess:
Involvesmovingtheproceedsintoaseemingly legitimateform. Purchaseofautomobiles,businesses,real estate,etc. Salaryorconsultingpaymentsfromthird Salary or consulting payments from third parties

CommonIndicators
UnsubstantiatedWealth Large amounts of cash Largeamountsofcash Irregularwork/travel patterns Suspiciousbanking Noapparentsourceof incomewithhigh income with high standardofliving Nonincomegenerating business Owning/investingin cashbusiness cash business Useofnomineesto purchaseassets Handwrittenbooksand recordsincode

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172

RobertK.Tripp,FBI

MoneyLaundering

INTERNATIONALWIRETRANSFERS
Q. Onceweseeapatternofwiretransfers goingtoaforeignbank,whatisthefastest i t f i b k h t i th f t t waytoidentifyaccountsandbeneficiariesat thatbank? A. Legalprocess(subpoena)tocorrespondent bank.Foreignbanktransactionstouching g g theUnitedStatesgenerallyinvolve correspondentbanks.

18U.S.C. 981(k)
FOREIGNBANK
AGENT WITHSEIZURE WITH SEIZURE WARRANT

U.S.CORRESPONDENT U.S. CORRESPONDENT ACCOUNT


VICTIM $$$

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RobertK.Tripp,FBI

MoneyLaundering

Relationship
Marketmanipulation:nomineetrading accountsleadingtoconcealment/promotion t l di t l t/ ti Insidertrading:possiblenomineetrading accountsleadingtoconcealment InternationalHighYield(i.e.,boilerroom): correspondentaccountsleadingto correspondent accounts leading to concealmentandpromotion

Whyitmatters
Question:whatdoyougetwhenyouthreaten toseizeafraudsterscars,cashandassets? t i f dt h d t?

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RobertK.Tripp,FBI

MoneyLaundering

Whyitmatters
Answer:acooperatingwitness
SARobertTripp FederalBureauofInvestigation 7036866214 2022782000 robert.tripp@ic.fbi.gov

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175

Investigating and Prosecuting Insider Trading Z. Scott Birdwell


U.S. Securities and Exchange Commission
The Securities and Exchange Commission, As a Matter of Policy, Disclaims Responsibility for Any Private Publication or Statement by Any of Its Employees. The Views Expressed Herein Do Not Necessarily Reflect the Views of the Commission or of Other Members of the Staff of the Commission.

SEC Enforcement: FY 2008


671 total cases v. 1635 defendants Second highest number of actions in SECs history Largest categories:

Issuer Reporting and Disclosure (23%) Investment adviser/Investment company Violations (12%) ( (12%) ) BrokerBroker-dealer Violations (9%) (9%) Securities Offerings (18%) Insider Trading (9%) Market manipulation (8%)

176

SEC v. Blue Bottle Limited


The Future of Insider Trading?

Blue Bottle Ltd. opens brokerage account in U.S. and makes over $2.7 million by impeccably timed $2 7 trading in stock, call and put options in advance of significant press releases by 12 different companies on U.S. market. Blue Bottle is a Hong Kong chartered company

With address in London Who resides in Dubai, UAE

CEO of Blue Bottle is citizen of Guernsey (S k) C O f l l fG (Sark)

Proceeds of the trading transferred to Cyprus What is going on here?

What is insider trading?

Insider trading is the trading of a corporations securities by individuals with access to material non-public noninformation about the company.

177

Alberto Arevalo & Izabela Reis, SEC

Investigating International Insider Trading: A Case Study

Investigating International Insider Trading: A Case Study

Presented By: Alberto Arevalo, Assistant Director Izabela Reis, Senior Counsel U.S. Securities and Exchange Commission Office of International Affairs The U.S. Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or presentation of its employees. The views expressed in this presentation do not necessarily reflect the views of the Commission, individual commissioners, or the staff of f f C ff f the Commission.

INVESTIGATING INTERNATIONAL INSIDER TRADING: A CASE STUDY Topic Outline: The Case: The Context, The Referral, The Response, The Motive Case Challenges Lessons Learned: The Good, the Bad, and the Ugly U l

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Alberto Arevalo & Izabela Reis, SEC

Investigating International Insider Trading: A Case Study

CASE OVERVIEW: THE CONTEXT


TXU Energy Company in Texas Feb. 23, 2007: Purchase of 6700 TXU Call Options , p p Feb. 23, 2007: Media reports that KKR would purchase TXU Feb. 26, 2007: TXU publicly confirmed that KKR is acquiring TXU Acquisition is leveraged buyout Value of US$45 Billion Largest LBO to date TXU li t d on NYSE listed Merger gives 20% premium over closing price on Feb. 22, 2007 After announcement stock rises 13% to US$69.93/share
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CASE: THE REFERRAL

Chicago Board of Options Exchange Referral Purchase of Call Option Contracts Purchases Through Overseas Accounts Purchases Made in Advance of Merger Announcement Suspected Profits: Approximately US$5.4 Million

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Alberto Arevalo & Izabela Reis, SEC

Investigating International Insider Trading: A Case Study

CASE: THE REFERRAL & SEC STAFF RESPONSE Red flags (warnings) for SEC Enforcement Team in Texas:
Suspicious trading pattern: Large Volume Strike Price Options Timing Purchase through foreign accounts Cleared through US affiliates SEC Response Go to U.S. Court Get a Temporary Restraining Order Freeze Assets
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SEC STAFF: RESPONSE

March 2, 2007: SEC files complaint in United States District Court 3 days after public announcement of TXU acquisition SEC requests freeze and repatriation , March 2, 2007: U.S. Court issues freeze and repatriation orders Problem: Unknown Purchasers???

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180

Alberto Arevalo & Izabela Reis, SEC

Investigating International Insider Trading: A Case Study

Case Challenge No. 1: Who is the Purchaser?

SEC staff needs to know the identity of the trader to link to the tipper

Case Challenge No. 1: Who is the Purchaser? The Largest Trade U.S. clearing firm (UBS) to omnibus London brokerage account to Swiss brokerage account to Guernsey brokerage account Options held at UBS Securities USA UBS Securities USA is an account for UBS AG in London UBS London Account was an omnibus account Contains transactions of many account holders UBS London acting for UBS affiliate in Switzerland
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181

Alberto Arevalo & Izabela Reis, SEC

Investigating International Insider Trading: A Case Study

Case Challenge No. 1: Who is the Purchaser? SEC staff telephones United Kingdoms Financial Services Authority
UBS Compliance Officer L d C li Offi London UBS Compliance Officer London to UBS Compliance Officer Switzerland UBS Compliance Officer Switzerland to SEC staff p g SEC staff telephones Swiss Federal Banking Commission Trades made by Swiss broker acting on behalf of client in Guernsey Trades made through Julius Baer Bank in Guernsey
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Case Challenge No. 1: Who is the Purchaser? March 4 5: Staff of SECs Office of International Affairs (OIA) and SECs Fort Worth Regional Office (FWRO) telephones and writes to Guernsey Financial Services Commission (GFSC) C i i
By March 13: GFSC identifies Ajiz Rahim as the purchaser GFSC informs SEC staff that Rahim made profit of over $ $5 million for TXU options p GFSC informs SEC staff that Rahim has at least $6.8 million in Julius Baer-Guernsey

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182

Alberto Arevalo & Izabela Reis, SEC

Investigating International Insider Trading: A Case Study

Case Challenge No. 2: How Does SEC Staff Freeze the Funds at Julius Baer in Guernsey ? U.S. Court Issues Freeze and Repatriation Orders
U.S. Repatriation Order binds defendant U S Order does not necessarily bind Guernsey Bank U.S. SEC staff Contacts Financial Intelligence Service Guernsey (FIU) Informs FIU of SEC case p FIU imposes no consent at Julius Baer SEC staff also sends bank warning letter to Julius Baer Constructive Trustee AML obligations
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Case Challenge No. 2: How Does SEC Staff Freeze the Funds at Julius Baer in Guernsey FIU informs SEC staff that US$10 million is in Rahims Julius Baer Guernsey bank account SEC staff in constant contact with FIU: Keep temporary no consent in place SEC staff requests a formal freeze
Submits formal freeze request to Guernsey Attorney General U.S. Department of Justice (U.S. DOJ) gets involved

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183

Alberto Arevalo & Izabela Reis, SEC

Investigating International Insider Trading: A Case Study

Relationship Between SEC and U.S. DOJ

SEC Civil charges (Complaint) Civil penalties and sanctions Referral of cases to U.S. DOJ for criminal prosecution U.S. DOJ Criminal charges (Indictment) Criminal penalties includes prison time Can use information which SEC gives it Able to use Proceeds of Crime Act in Guernsey

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Case Challenge No. 3: Linking Rahim (Trader) to Naseem (Tipper) NYSE/CBOE With Rahims name, SEC staff checks other trading activity SEC staff gets name of other brokerage firms that Rahim used

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184

Alberto Arevalo & Izabela Reis, SEC

Investigating International Insider Trading: A Case Study

Case Challenge No. 3: Linking Rahim (Trader) to Naseem (Tipper)


SEC staff contacts Rahims brokerage firms SEC staff gets trading records SEC staff sees a pattern of Rahims trading in other t ff tt f R hi t di i th securities before announcements of other mergers/acquisitions SEC staff contacts the companies other than TXU SEC staff gets a list of persons with access to non-public information SEC staff compares lists from the different companies BINGO! Common Denominator All the companies used Credit Suisse as an investment banker
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Case Challenge No. 3: Linking Rahim (Trader) to Naseem (Tipper)


SEC staff contacts Credit Suisse USA

g y SEC staff gives Credit Suisse key data including data about Rahim BINGO! Initial link between Rahim and Hafiz Naseem - both had worked at American Express Bank In Karachi, Pakistan Naseem Credit Suisse Employee 2006-2007

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185

Alberto Arevalo & Izabela Reis, SEC

Investigating International Insider Trading: A Case Study

Case Challenge No. 3: Linking Rahim (Trader) to Naseem (Tipper)

INSIDERS

TRADERS

ISSUERS INVEST. BANKERS ACCOUNTING FIRMS REGULATORS PR FIRMS DEAL People LOBBYISTS OTHERS

INDIVIDUALS EXPERIENCE NOVICES FRIENDS AND FAMILY PROFESSIONALS HEDGE FUNDS MUTUAL FUNDS

A TYPICAL CASE CAN HAVE HUNDREDS OF INDIVIDUAL INSIDERS WHO POSSESSED THE NON PUBLIC INFORMATION LEGITIMATELY

A TYPICAL CASE CAN HAVE THOSANDS OF TRADERS WHO TRADED DURING THE RELEVANT PERIOD

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Case Challenge No. 4: How Does SEC Staff Prove that Naseem Gave Rahim Access to Non-Public Information? Non-

Naseem at Credit Suisse

Not assigned to work on acquisitions Searched Credit Suisses computer for information Observed rummaging through desks Log-ins and swipe cards

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186

Alberto Arevalo & Izabela Reis, SEC

Investigating International Insider Trading: A Case Study

Timeline of Calls and Trades


Naseem calls Rahim before the acquisition from

Credit Suisse business phone to Rahims cell phone and home phone Rahim purchases before public announcements Purchases (Rahims trading) happen soon after the calls Rahim sells after price goes up

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Timeline of Calls and Trades

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187

Alberto Arevalo & Izabela Reis, SEC

Investigating International Insider Trading: A Case Study

Timeline: Less than 15 months from Referral to Sentence


Begins Credit Suisse business 2/26/2007 (Mon.) Public announcement of TXU phone to buyout home phones (Wed.) CBOE referral 2/28/2007 (Fri.) TROs and asset freezes entered Rahim purchases before public 3/2/2007 against unknown traders SEC identifies largest trader (Rahim) 3/8/2007 SECthe calls tipper (Naseem) 4/17/2007 identifies the FBI arrests Naseem Rahim sells after price Grand jury (SDNY) indicts Naseem and Rahim Naseem convicted of insider trading Naseem sentenced to 10 years in prison; ordered to forfeit $9 million
5/3/2007

Suspicious calls Rahim before the NaseemTXU Options Trading 2/21/2007 acquisition from

Rahims cell and announcements

Purchases (Rahims trading) happen soon after goes up


7/3/2007 2/4/2008 5/30/2008

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FBI Arrests Tipper


The New York Times: Times: Wall St Banker Jailed in Trading on 9 St. Deals Deals

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188

Alberto Arevalo & Izabela Reis, SEC

Investigating International Insider Trading: A Case Study

Lessons Learned: The Good, the Bad, and the Ugly

The Good FWRO and OIA: A Team Helpful Foreign Regulators, Prosecutors, and FIUs SEC Can Help Put Insider Traders in Jail The Bad No Luxury for Delay or Part-time Work PartThe Ugly Disappearing Defendant Not the Only Insider Trading Case U.S. Attorney in New York: Rampant Insider Trading Now
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INVESTIGATING INTERNATIONAL INSIDER TRADING: A CASE STUDY

THANK YOU FOR YOUR ATTENTION!!!

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189

Waldir de Jesus Nobre & Eduardo Jos Busato, CVM

Investigating and Prosecuting Insider Trading

Investigating and Prosecuting Insider Trading


Securities Enforcement and Market Oversight Training O i ht T i i May 4rd 2011

Insider trading: The case of Embraer


Waldir Nobre / Eduardo Busato Market Oversight Di i i M k O i h Division Comisso de Valores Mobilirios (CVM)

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190

Waldir de Jesus Nobre & Eduardo Jos Busato, CVM

Investigating and Prosecuting Insider Trading

Background
EMBRAER - Empresa Brasileira de Aeronutica S.A.: one of the worlds main aircraft manufacturers. f h ld i i f f
Founded in 1969 as a state-owned company; In 1994 EMBAER was privatized within the National Privatization Program; As the company was a strategic company, the Golden Share was created within the privatization process. The Golden Share, while held by the Federal Government, granted veto rights in the approval of certain matters, as well as the prerogative of appointing a member and an alternate to the Board of Directors; Controlling shareholders Bozano, Previ and Sistel entered into a Shareholders Agreement in 1997; Until January 2006 EMBRAERs Capital Ownership was composed of common and preferred shares;

Facts on January 13th 2006


EMBRAER:
O J On January 13th EMBRAER published a Material F t bli h d M t i l Fact announcing a proposal of the Companys restructuring which would entail its listing in the Novo Mercado upon a corporate structure with dispersed ownership among its shareholders (the NM Project); The proposal aimed at promoting the dispersion of New EMBRAERs control amongst its shareholders, as well as its listing on the BOVESPA s Novo Mercado segment and its ADS BOVESPAs listed on NYSE; The capital structure resultant in the New EMBRAER would have only common shares; The rights of the Golden Share to be held by the Federal Government were fully maintained in New EMBRAERs bylaws;

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191

Waldir de Jesus Nobre & Eduardo Jos Busato, CVM

Investigating and Prosecuting Insider Trading

Facts on January 13th 2006


EMBRAER main shareholders as of December 30th 2005:

Facts on January 13th 2006


EMBRAERs capital structure before restructuring:

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192

Waldir de Jesus Nobre & Eduardo Jos Busato, CVM

Investigating and Prosecuting Insider Trading

Facts on January 13th 2006


EMBRAERs capital structure after restructuring:

Facts on January 13th 2006


Before the Material Fact was published on January 13th, the CVM Market Oversight Division had already observed some atypical activities on EMBRAERs common shares at the market;

Grfico I Comportamento do papel EMBR3 entre 01/out/05 e 01/fev/06


Fonte: Bloomberg

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193

Waldir de Jesus Nobre & Eduardo Jos Busato, CVM

Investigating and Prosecuting Insider Trading

Facts on January 13th 2006


Historically there was a high positive correlation between EMBRAER ordinary and preferred share prices This prices. correlation changed some days before the Material Fact of January 13th 2006

Grfico IV Comparao EMBR3 x EMBR4 entre 01/out/05 a 01/fev/06


Fonte: Bloomberg

The participation of Credit Suisse


CVM have questioned EMBRAER about the studies that resulted in the proposed restructuring; EMBRAER informed that the project was presented to the Board on October 2005. One of the main shareholders, Sistel, manifested the intention to obtain a second opinion on the proposal, and hired Banco de Investimentos Credit Suisse (Brasil) S.A. (Credit Suisse); ( Credit Suisse ); Sistel and Credit Suisse signed, on December 13th, a NonDisclosure Agreement, meaning parties were restricted in the use of the materials provided.

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194

Waldir de Jesus Nobre & Eduardo Jos Busato, CVM

Investigating and Prosecuting Insider Trading

The participation of Credit Suisse


CVM has identified that a non resident investor named investor, Credit Suisse International (CSI), traded in EMBRAER common shares and was the most relevant buyer in the period of Oct 1st 2005 to Jan 12th 2006; CSI bought 16% of EMBRAER ordinary shares traded during that period (around R$90 mm); CVM has also observed that the movement started on 12th December 2005, but the main acquisitions took place between January 02nd and 12th 2006;

The participation of Credit Suisse


CSI alleged that the ordinary shares acquisitions where based on two main aspects:
EMBRAER research reports provided by Merrill Lynch and UBS on the beginning of December 2005, which reviewed their analysis due to the increase of the small business aircraft market, and Common shares experienced a larger liquidity improvement on December 2005;

CSI also observed that their legal local representative in Brazil was Credit Suisse DTVM, not Banco de Investimentos Credit Suisse (Brasil) S.A.; CSI argued that EMBRAER ordinary shares bought in December represented only 5.79% of its portfolio. On April 2006 the participation of EMBRAER ordinary shares reached 27.17% of CSI portfolio in Brazil.

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195

Waldir de Jesus Nobre & Eduardo Jos Busato, CVM

Investigating and Prosecuting Insider Trading

The decision
The Enforcement Division , through the CVM case IA/2006/22, requested that the Defendant enter a judgment finding that it has violated 4th, article 155 of the Brazilian Securities Law (Law number 6.385/76), and 1st, article 13 of CVM Instruction number 358/02.

The decision
On October 20th 2009 without admitting or denying the 2009, allegations in the complaint, CSI have agreed to settle the Commissions charges by consenting to the entry of final judgments that would permanently enjoin it from further violations of the Securities Law, and proposed to pay an amount of R$19.2 MM.

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196

Waldir de Jesus Nobre & Eduardo Jos Busato, CVM

Investigating and Prosecuting Insider Trading

Insider trading: The case of Embraer


Waldir Nobre / Eduardo Busato Market Oversight Di i i M k O i h Division Comisso de Valores Mobilirios (CVM)

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197

Alexandre Pinheiro dos Santos, CVM

Insider Trading

Securities Enforcement and Market Oversight Training 2011 (CVM/BSM/SEC) (CVM/BSM/SEC)

Insider Trading
Alexandre Pinheiro dos Santos
Procurador-Chefe da CVM Procurador-

Esta apresentao da inteira responsabilidade do seu Autor e no vincula a Comisso de Valores Mobilirios ou a Advocacia-Geral da Unio

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198

Alexandre Pinheiro dos Santos, CVM

Insider Trading

I - Introduo O princpio central da regulao e da fiscalizao dos emissores de valores mobilirios pela CVM o princpio do full and fair disclosure, que norteia a lei que dispe sobre o mercado mobilirio (Lei n 6.385/76) e a lei corporativa brasileira (Lei n 6.404/76). O nosso modelo de regulao e de fiscalizao fortemente inspirado na experincia estadunidense no nvel federal. Ele tambm coloca o Estado na posio de responsvel pela exigncia de um mnimo de informaes a serem prestadas por qualquer empreendedor que pretenda captar a poupana popular. Os registros de emissor e de distribuies pblicas de valores mobilirios junto CVM esto inseridos no contexto acima.

Essencialmente, os emissores registrados na CVM devem prestar informaes completas e precisas sobre os empreendimentos em comum por eles desenvolvidos e os valores mobilirios que emitam publicamente para publicamente, viabilizarem conscientes tomadas de deciso por parte de qualquer investidor. A CVM no atesta a qualidade de empreendimentos, como reconheceu o MM. Juzo da 24 Vara Federal do Rio (Proc. n 2003.51.01.028307-8). II - Fato relevante Considera-se relevante qualquer deciso de controlador, deliberao da assemblia ou dos rgos de administrao, ou qualquer outro ato ou fato de carter poltico-administrativo, tcnico, negocial ou econmico-financeiro ocorrido ou relacionado aos negcios que possa influir de modo pondervel na

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199

Alexandre Pinheiro dos Santos, CVM

Insider Trading

cotao dos valores mobilirios de emisso da companhia aberta ou a eles referenciados; na deciso dos investidores de comprar, vender ou manter aqueles valores mobilirios; ou na deciso dos investidores de exercer quaisquer direitos inerentes condio de titular de valores mobilirios emitidos pela companhia ou a eles referenciados.*

* Art. 2 da Instruo CVM n 358/02 (regulamento atinente ao uso de informaes relevantes referentes a companhias abertas).

A assinatura de acordo de transferncia do controle acionrio de companhia aberta, a deciso de se promover o cancelamento do seu registro, a celebrao de acordo de acionistas que tenha sido averbado no livro prprio e a incorporao envolvendo a companhia so exemplos de fatos relevantes.

III - Insider trading Em termos gerais, pode-se dizer que, no Brasil, o uso indevido de informao privilegiada ou insider trading ocorre quando algum utiliza informao relevante de que tenha conhecimento e que ainda no tenha sido divulgada ao mercado, para obter, para si ou para outrem, algum tipo de vantagem na negociao com valores mobilirios. Nos dias atuais a conduta do insider repercute nas searas administrativa, civil e criminal. Na rea penal o conceito de uso indevido de informao privilegiada mais restrito. O ilcito, que est tipificado no art. 27-D da Lei n 6.385/76, somente se caracteriza se quem utiliza a informao tem o dever de mant-la sob sigilo. No mbito civil, alm de aes judiciais individuais, possvel o ajuizamento de ao civil pblica pela CVM e pelo MPF.

04/05/2011

200

Alexandre Pinheiro dos Santos, CVM

Insider Trading

Em relao aos mbitos civil e administrativo, assim dispe o art. 155 da Lei n 6.404/76, cujo descumprimento enseja ampla responsabilizao no campo civil e, por fora do disposto no art. 11 da Lei n 6.385/76, a aplicao de penalidades administrativas pela CVM: (...) 1 Cumpre, ademais, ao administrador de companhia aberta, guardar sigilo sobre qualquer informao que ainda no tenha sido divulgada para conhecimento do mercado, obtida em razo do cargo e capaz de influir de modo pondervel na cotao de valores mobilirios, sendo-lhe vedado valerse da informao para obter, para si ou para outrem, vantagem mediante compra ou venda de valores mobilirios. 2 O administrador deve zelar para que a violao do disposto no 1 no possa ocorrer atravs de subordinados ou terceiros de sua confiana.

3 A pessoa prejudicada em compra e venda de valores mobilirios, contratada com infrao do disposto nos 1 e 2, tem direito de haver do infrator indenizao por perdas e danos, a menos que ao contratar j conhecesse a informao. 4o vedada a utilizao de informao relevante ainda no divulgada, por qualquer pessoa que a ela tenha tido acesso, com a finalidade de auferir vantagem, para si ou para outrem, no mercado de valores mobilirios. O insider trading pode ser provado com prova indiciria ou indireta mas nem indireta, tudo o que se relaciona com o tema se resolve com indcios ou presunes. * Insider primrio x insider de mercado ** Inexigibilidade de prova de vnculo ou contato com insider primrio

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201

Alexandre Pinheiro dos Santos, CVM

Insider Trading

Vale destacar, em relao atuao da CVM na preveno e no combate ao ilcito de insider trading, que, tal como j foi dito no segundo dia deste evento, atualmente a Autarquia mantm acordos de cooperao com o MPF e a PF, atuando em estrita consonncia, inclusive, com o princpio do non bis in idem, e, mais especificamente, o seguinte: 1 - as decises judiciais de bloqueio de ativos nas j mencionadas aes movidas pela CVM e pelo MPF no mbito dos notrios casos Ipiranga e Suzano e aes civis pblicas decorrentes. 2 - atuao da CVM, inclusive como assistente da acusao, nos tambm j mencionados dois primeiros processos penais envolvendo o ilcito de insider trading do Brasil (notrios casos Sadia e Randon, valendo lembrar que o primeiro caso ensejou, recentemente, a primeira condenao penal por insider do pas).

3 - Termo de Compromisso e de Ajustamento de Conduta no mbito do PAS CVM RJ N 2007/12231 e da ACP n 2007.51.01.022852-8 (6 VF/RJ): A CVM e o Ministrio Pblico Federal (MPF) assinaram, em 17/03/08, o primeiro Termo de Compromisso e de Ajustamento de Conduta firmado com um participante do mercado de capitais, para o encerramento concomitante de procedimentos administrativo e judicial. Trata-se de acordo com uma sociedade estrangeira que adquiriu aes preferenciais de emisso da Suzano Petroqumica S.A. em 27/07/07, tendo vendido toda a posio no dia 3 de agosto seguinte, logo aps publicao de fato relevante relativo aquisio do controle da companhia, obtendo lucro de mais de R$ 500.000,00. O Termo foi homologado pelo MM. Juzo da 6 (Sexta) Vara Federal do Rio de Janeiro e a Compromitente desembolsou a quantia de R$ 2.200.000,00, destinada aos investidores que operaram com ela e ao Fundo de Defesa de Direitos Difusos.

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Alexandre Pinheiro dos Santos, CVM

Insider Trading

4 - Termo de Compromisso no mbito do PAS CVM RJ N 2007/11305: Para extinguir processo administrativo sancionador envolvendo indevida divulgao de informaes acerca de companhia aberta, ex-governador de Estado apresentou proposta CVM de enviar declarao a ento governadores reconhecendo a importncia de as informaes sensveis e relevantes, capazes de influenciar a cotao dos valores mobilirios de emisso de companhias abertas sob controle estatal, serem informadas por meio dos canais institucionais da prpria companhia e de acordo com a legislao, legislao especialmente a regulamentao da CVM O proponente se CVM. comprometeu ainda a atender os veculos de imprensa que o procurassem para tratar do assunto. O Colegiado da CVM aprovou a proposta em 05/06/08, pois entendeu ser conveniente e oportuna e que, embora no contemplasse prestao pecuniria, justificava-se por seu carter educativo.

5 - Termo de Compromisso e de Ajustamento de Conduta celebrado no p j mbito do PAS CVM RJ N 2009/428: Em 26/02/09, foi noticiada a aprovao, pela CVM e pelo MPF, de proposta de celebrao de Termo de Compromisso e de Ajustamento de Conduta apresentada por integrante do bloco de controle da Construtora Tenda S.A. e membro da sua administrao em novo caso de possvel insider trading. A fim de extinguir o Processo CVM N RJ 2009/428 antes mesmo de formulada qualquer acusao, b l bem como d evitar a adoo d medidas d natureza civil de it d de did de t i il pela CVM e pelo MPF, o proponente comprometeu-se a pagar R$ 200.000,00 ao Fundo de Defesa de Direitos Difusos e ainda a no ocupar cargo de administrao ou no conselho fiscal, por trs anos, em entidade regulada pela CVM.

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203

Alexandre Pinheiro dos Santos, CVM

Insider Trading

6 - Termo de Compromisso e de Ajustamento de Conduta no mbito do PAS CVM RJ N 10/08 e da ACP n 2007.51.01.01.4273-7 (15 VF/RJ): Em setembro de 2010, CVM e MPF noticiaram Termo de Compromisso e de Ajustamento de Conduta celebrado com ex-gerente da BR Distribuidora que realizou operaes com aes de emisso de sociedades do Grupo Ipiranga antes e logo aps o anncio da aquisio de empresas do Grupo por Braskem, Ultra e Petrobras, no ano de 2007. O Compromitente respondia a processos administrativo e judicial sob acusao de insider trading e se obrigou ao pagamento do total do ganho com a sua atuao no mercado reputada irregular (R$ 120.067,75 mais atualizao), acrescido de R$ 240.135,50, bem como a no operar no mercado por trs anos.

7 - Termo de Compromisso no mbito do PAS n SP 2007/119: Em 2008, para encerrar o PAS n SP 2007/119, o Colegiado da CVM aprovou proposta de pagamento, Autarquia, de R$ 238.000,00. Tratou-se de acusao de utilizao de informao relevante ainda no divulgada com a finalidade de obter vantagem, mediante aquisio de ADRs da Perdigo no mercado estadunidense em 20/06/2006 (infrao ao disposto no art. 155, 4, da Lei n 6.404/1976). O acusado era, ento, superintendente de instituio financeira que prestou assessoria Sadia na montagem de oferta que tal q p g q companhia realizou para comprar o controle da Perdigo. Ele tambm foi ru no processo penal decorrente (Caso Sadia), o qual foi suspenso em razo da aceitao de condies propostas por MPF e CVM.

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Alexandre Pinheiro dos Santos, CVM

Insider Trading

8 - Termo de Compromisso no mbito do PAS n 22/2006: Em 2009 foi aprovada pela CVM, outrossim, proposta de celebrao de Termo de Compromisso apresentada por instituio integrante de um conglomerado financeiro internacional, a qual foi acusada no mbito do PAS N 22/2006 de ter se utilizado de informao relevante ainda no divulgada ao mercado ( 4 do art. 155 da Lei n 6404/1976 e 1 do art. 13 da Instruo CVM n 358/2002). 358/2002) A proponente pagou Autarquia o valor de R$ 19 200 000 00 19.200.000,00.

9 - Termo de Compromisso no mbito do PAS CVM n RJ2009/6713: n No primeiro semestre de 2010, para extinguir o PAS CVM n RJ2009/6713, Diretor de Relaes com Investidores de sociedade de economia mista apresentou proposta de pagamento CVM no valor de R$ 1.000.000,00. Ele foi acusado de descumprimento do disposto no 4 do art. 157 da Lei n 6.404/1976, combinado com o disposto no 3 do art. 3 da Instruo CVM n 358/2002 (no divulgao de Fato Relevante no momento em que determinada informao sensvel foi levada ao conhecimento de uma agncia reguladora).

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Alexandre Pinheiro dos Santos, CVM

Insider Trading

CONTATOS

alexandre@cvm.gov.br

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Luiz Eduardo Costa e Silva, BSM

Investigating and Prosecuting Insider Trading

Securities Enforcement and Market Oversight Training


Day 3 - Investigating and Prosecuting Insider Trading (Cases)

2 a 6 de maio de 2011 Luiz Eduardo Costa e Silva Gerncia de Acompanhamento de Mercado

Insider Trading
INSIDER TRADING NO BRASIL
considerado crime contra o mercado de capitais Lei n 6.385 de 7 de dezembro de 1976 Uso Indevido de Informao Privilegiada (Includo pela Lei n 10.303, de 31.10.2001) Art. 27-D. Utilizar informao relevante ainda no divulgada ao mercado, de que tenha conhecimento e da qual deva manter sigilo, capaz de propiciar, para si ou para outrem, vantagem indevida, mediante negociao, em nome prprio ou de terceiro, com valores mobilirios: (Artigo includo pela Lei n 10.303, de 31.10.2001) Pena recluso, de 1 (um) a 5 (cinco) anos, e multa de at 3 (trs) vezes o montante da vantagem ilcita obtida em decorrncia do crime. (Includo pela Lei n 10.303, de 31.10.2001)

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Luiz Eduardo Costa e Silva, BSM

Investigating and Prosecuting Insider Trading

Insider Trading
INSIDER TRADING NO BRASIL
Diretor de Relaes com Investidores deve publicar e informar Comisso de Valores Mobilirios e Bolsa sobre qualquer evento relevante relacionado ao seu negcio Considera-se relevante qualquer deciso de acionista controlador, deliberao da assemblia geral ou dos rgos de administrao da companhia aberta, ou qualquer outro ato ou fato de carter poltico-administrativo, tcnico, negocial ou econmico-financeiro ocorrido ou relacionado aos seus negcios que possa influir de modo pondervel: I na cotao dos valores mobilirios de emisso da companhia aberta ou a eles referenciados II na deciso dos investidores de comprar, vender ou manter aqueles valores mobilirios III na deciso dos investidores de exercer quaisquer direitos inerentes condio de titular de valores mobilirios emitidos pela companhia ou a eles referenciados (Instruo CVM n 358 de 3 de janeiro de 2002)

Insider Trading
Procedimentos de Investigao Anlise de alertas dirios X dados histricos - movimentos de preos atpicos - volatilidade significativa - volumes atpicos - notcias e informaes das companhias (Sistema de Informaes Eventuais e Peridicas)

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Luiz Eduardo Costa e Silva, BSM

Investigating and Prosecuting Insider Trading

Insider Trading

Procedimentos de Investigao
Comportamento de Preo do Ativo Investigado
2.000.000 1.800.000 1.600.000 1.400.000 1.200.000 1.000.000 800.000 600.000 400.000 200.000 0 Dia 1 Dia 2 Dia 3 Dia 4 Dia 5 Dia 6 Quantidade Negociada Dia 7 Dia 8 Dia 9 Dia 10 Dia 11 Preo de Fechamento 10,50 10,00 9,50 9,00 8,50 8,00 7,50 7,00 6,50 6,00 5,50 5,00

No dia 10 foi publicada informao relevante relativa aquisio de controle da empresa por outra companhia!

Insider Trading
Procedimentos de Investigao
A CVM notificada anlise iniciada
Seleo de instrumentos ativos e derivativos Seleo do perodo Comparao dos negcios no perodo (flexvel) Perodo do movimento de preo atpico X Negcios nos ltimos 6 meses Inclui nome e caractersticas dos clientes envolvidos (fundos, no-residentes, pessoas fsicas, etc) Anlise dos negcios do cliente Insider trading (acionistas controladores, diretores, membros do conselho de diretores, etc) g Operaes atpicas Jurisdio da BSM: os participantes ou seus profissionais negociaram?

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Luiz Eduardo Costa e Silva, BSM

Investigating and Prosecuting Insider Trading

Insider Trading
Procedimentos de Investigao

Resultados Insiders Participantes do Mercado ou seus profissionais nenhum registro de negcios Insiders, Operao atpica seleo de um cliente e seus dados Contas Profisso, endereo, data de nascimento/constituio etc Posio em custdia (evoluo) Perfil de negociao (por data, ativo, corretora, operador, mercado, contrapartes etc) Day-trades Ordens de compra e venda enviadas para o sistema Documentos mantidos na corretora (incluindo cadastro, gravaes telefnicas, situao financeira e patrimonial do cliente etc)

Insider Trading
Procedimentos de Investigao
Resultados

A anlise identificou: Negcios incompatveis com a profisso do cliente A conta foi aberta originalmente no modelo DMA Antes do primeiro negcio a conta foi transferida para a mesa de operaes da corretora, com um operador especfico As gravaes telefnicas indicaram que a conta do cliente era administrada por um parente, sem o cumprimento das regras aplicveis (ausncia de procurao) A deciso dos negcios foi tomada diretamente pelo parente do cliente em contato com o operador sem envolvimento do cliente

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Luiz Eduardo Costa e Silva, BSM

Investigating and Prosecuting Insider Trading

Obrigado
Contato: lsilva@bsm-bvmf.com.br

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211

Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

Investigating Financial Fraud By Stock Issuing Companies


By Z. Scott Birdwell Office of International Affairs U.S. Securities and Exchange Commission The following views are my own and not necessarily shared by the SEC, its Commissioners, or its staff

SEC Enforcement: FY 2008


671 total cases v. 1635 defendants Second highest number of actions in
SECs history Largest categories:
Issuer Reporting and Disclosure (23%) Investment adviser/Investment company Violations (12%) ( (12%) ) Broker-dealer Violations (9%) Broker(9%) Securities Offerings (18%) Insider Trading (9%) Market manipulation (8%)

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

Two Types of Financial Fraud Cases


1. Financial fraud is often present in many SEC
enforcement actions against unregistered offerings. The fraud involved in such cases tends to be blatant and often involves completely fictitious claims; such as pump and dump schemes

2. 2 Financial fraud by reporting companies tends


to involve more sophisticated attempts by more established companies to manage their earnings, influence their stock price, and/or meet performance targets

Some of the Biggest Names In U.S. and International Business



Enron World Com Xerox Bristol Myers Squibb Apple Computer General Electric

Livedoor Japan Royal Ahold Netherlands VivendiVivendi- France Parmalat Italy Royal Dutch Shell UK Satyam -- India

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

Common Financial Fraud Schemes


Backdating of contracts g Fictitious invoices Shipment of unfinished Hidden side letters
giving customers rights to return product Excess reserves to smooth earnings Intentional misstatement of financial results in press releases. Undisclosed Related Party Transactions Channel Stuffing
8

product Revenue after the fiscal period Fail e to record/disclose Failure eco d/disclose liabilities Revenue recognized on products not shipped or not yet manufactured

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

Why is Financial Fraud Bad?


Capital markets depend on
transparency and integrity Scandals shake investor confidence and public trust
Can intrude into national debate Provoke outrage, scrutiny, discussion outrage scrutiny Focus becomes who was harmed, who is
responsible, how future scandals can be prevented

Increase compensation, bonuses or value of stock options Facilitate a public offering; sell company stock at inflated I Increase company value for merger or acquisition l f i iti Increase market value of equity to increase borrowing Manage or smooth the companys earnings to meet
capacity or prevent default on loans analysts or company projections Hide bad news (e.g., loss of a major customer) Inflate perceived value of a subsidiary or division to sell it p y at higher prices Cover up Foreign Corrupt Practices Act (FCPA violations (e.g., bribes to foreign officials to obtain business or management perquisites) Cover up looting or asset stripping by company insiders
10

Why Corporate Executives Cook the Books

prices

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

The Progression
Starts with making the numbers making numbers Then managing the numbers
because problem is never fixed by next reporting period

Ends with making up the numbers


Which usually happens anyway

because alternative is devastating collapse

April 2009 (For Distribution)

11

Reporting Companies
Must file periodic reports with the SEC p p Quarterly reports on Form 10Q Annual reports on Form 10K
Accounting Principles (GAAP)

Include quarterly financial statements Include annual financial statements Financial statements must comport with Generally Accepted Audited by Independent Public Accountant Audit must be performed in compliance with Generally
Accepted Auditing Standards (GAAS)

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

Financial Reporting Law


Case Law: requirement to file reports necessarily
embodies the requirement that such reports b t b di th i t th t h t be true and correct Fraud Statutes: Section 10(b) of the Exchange Act, Rule 10b-5 10bRequirement to implement an adequate system of internal accounting controls Requirement to maintain accurate books and records Prohibition against false and misleading statements to the companys independent auditors

Section 10(b) Exchange Act and Rule 10b-5 10bIt shall be unlawful for any p y person, directly or y indirectly, to:
Employ any device, scheme or artifice to defraud Make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or Engage in any act, practice, or course of business g g y ,p , which operates or would operate as a fraud or deceit Upon any person, in connection with the purchase or sale of any security

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

Why do we open financial fraud investigations?


Issuer restatement Negative public announcements Auditor withdrawal Unanticipated change in senior management Significant stock sales by insiders Confidential informant or whistleblower News story in financial press Review of periodic filings 10Q & 10K Referrals from stock exchanges
April 2009 (For Distribution) 15

Questions to ask in an Investigation

What Generally Accepted Accounting

Principle (GAAP) applies Were there any GAAP violations? How should the company have accounted for the transaction in question? q If improper accounting, who is responsible

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

Evidence of Fraud in Accounting Cases


Accounting records were intentionally falsified or g y
altered Accounting principles were intentionally misapplied Material information was intentionally misrepresented or omitted from financial statements Misrepresentations were made to the companys internal accountants or independent auditors

Public Documents to Obtain and Review


SEC Filings including Annual Reports (Form
10K), Quarterly Reports (Form 10Q), Forms 8K, Registration Statements and Proxy Statements Press Releases Information about the Company on its Web site Analyst Reports What did they consider important about the company

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

Documents from Issuer


Transaction documents Accounting Journals Accounting Ledgers
Sales or purchase invoices Sales or purchase journals Accounts payable or receivable

Trial Balances Supplementary Schedules or Spreadsheets Budgets or projections Board of Director Minutes Emails

Documents from Auditors


Auditor working p p g papers
Audit planning memos Proposed adjusting journal entries Actual adjusting journal entries Correspondence
Management representation Letters Post audit review notes Quarterly and annual Include audit programs

Audit staff files

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

Interview Decisions
Who to take testimony from
Who Who Who Who was involved in the transaction had access to the relevant information prepared, reviewed, or signed the filings had the ability to falsify records

What order to interview individuals


Top Down or Bottom Up?

Sanctions
Injunctions against future violations j g Disgorgement
Bonuses, stock/option profits, salaries

Fines Cease and desist orders against future violations Officer and Director bars Accountant or Attorney bar Jail time (criminal authorities)
SOX substantially increased length of jail terms

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

U.S. Enron
October 2001
7th largest company in U.S. Collapsed over a six week period in 2001 $60 billion loss of market capitalization billi l f k t it li ti $60 billion is more than GDP of 125 countries Over 30,000 employees lost their jobs Bankruptcy liquidation Creditors received little

CNN.com

What happened at Enron?


Public consensus FRAUD
Reliance on complex transactions Misuse of accounting standards Auditor conflicts of interest Sham related party transactions Gate Keeper failures Third party banks complicit False and misleading disclosure Corporate culture; arrogance and greed Poor governance and internal controls
24

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

Opening of Enron Investigation

www.ctv.ca

SEC begins inquiry in August 2001 following newspaper As part of inquiry, SEC staff sends voluntary document
request to Enron in October 2001 compel testimony and production of documents

reports of related party transactions and CEO resignation

Thereafter obtains formal order, i.e., power to subpoena


25 April 2009 (For Distribution)

Shredding the Documents


Arthur Anderson shredding
documents in anticipation of official investigation Preservation of documents

Contact with criminal authorities


FBI on premises in January 2002
26

Subpoena Preservation Letter

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13

Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

Related Party Transactions What to Look for:


Is the deal adequately disclosed? Closeness of relationship of related party Secret, oral or side deals not in deal documents Who has the risk of loss? Economic substance is there any? Would a true third party do the deal on same terms? terms? Compensation paid to related party Overly generous?
27

The Prepays:

round trip or circular transactions

Special Purpose Entity


(off balance sheet entity fo med b bank) formed by

Oil and gas contract Cash now Enron


(recognizes cash in as cash flow from operations)

Cash now

Oil and gas contract

Cash later Oil and gas contract

Bank

Practical effect: Enron borrowed money but reported borrowings on its financial reports as operating cash flow
April 2009 (For Distribution) 28

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

Complex Transactions: Deal Diagram


[Capital and ownership structure kept JEDI off balance sheet]

April 2009 (For Distribution)

29

The Nigerian Barges


Barges Interest Enron $28 million $ Barge Interest LJM (Fastow Enrons CEO) $28 million plus profit Merrill Lynch

Secret agreement

On December 29, 1999, Merrill Lynch bought an interest in certain power-producing barges off the coast of Nigeria, with an express understanding that Enron would arrange for someone to buy its interest within 6 months at a specified rate of return. This was an asset parking arrangement. The risks and rewards of ownership of the interest in the barges did not pass to Merrill Lynch. LJM purchased interest from Merrill Lynch in satisfaction of promise.
30

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

Evidence

April 2009 (For Distribution)

31

Third Party Complicity Look For:


Third partys incentive to participate P Prepays b k are i b i banks in business of providing loans f idi l Barges not real reason for Merrill to participate Is transaction typical for third party? Why is Citibank or Chase buying oil and gas contracts? Why is Merrill buying power producing barges? Suspicious timing or size of transaction Barges transaction done within days of end of year How do we get to bottom of what transaction is about? Get third parties documents Deal approval process Internal communications

April 2009 (For Distribution)

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16

Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

Disclosure
After you understand the
transactions, can you find them in companys financial reports? Is disclosure consistent with substance? How does the company break out results? By business segment, type of transaction Who is responsible for disclosure? Can you find early drafts of disclosures? di l ? How about communications about early drafts?

April 2009 (For Distribution)

33

Corporate Culture; Greed and Arrogance


Follow the money
Insider Trading Loans from the company

Public statements who said what?


Earnings calls, analyst conferences

Email and other written communications Profiting at companys expense Brag Sheets
Compensation and bonus process
34

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

Governance and Internal Controls


What was the role of inside counsel? at as t e o e o s de cou se Written policies or procedures for deals Ethics policies
Were they followed? Did executives adhere to them?

Internal audit function Board committees How was compensation structured?


35

Gate Keeper Failures


Accountants and Auditors
Transactions GAAP compliant? Regardless, were financial reports accurate? Audit / Consulting conflict? Attorney-client privilege Attorney Emails and advice

Lawyers

Board of Directors

Stock transactions? Board minutes, attendance, presentations, briefings Committees

36

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

Accountants and Auditors Every case raises the question:

37

Misuse of Accounting Standards


What accounting standards are
relevant? Get accountants involved early Get auditors work papers and files
Do financial results recognized from an g accounting perspective really exist?

38

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

39

40

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

Progress to Date
More than a dozen civil enforcement actions filed More than two dozen individuals sued Four financial institutions sued Enrons executive officers sued $400+ million recovered DOJ / FBI: Criminal convictions
Accountants, Officers and Directors barred Inside and outside company Corresponding criminal indictments

41

Weaknesses Exposed by Enron


Substantive Law Do existing laws cover of misconduct
in question?
Conduct may push boundaries: Legal framework Professional standards industry practices

42

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

Weaknesses Exposed by Enron


Process Do regulators have appropriate tools
to investigate and prosecute violations?
Who has jurisdiction? Civil or criminal authorities What is the burden of proof? What powers do regulators have? Ability to compel information?
43

New Accounting/Auditor Tools Under Sarbanes-Oxley Sarbanes PCAOB created Independence requirements (201-206) (201 Audit committee responsibilities of
listed companies (301) p ( ) Foreign audit papers (Sarbanes-Oxley (SarbanesSection 106(b))

44

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

New Enforcement Tools Under SarbanesSarbanes-Oxley


FAIR funds - use penalties for investor p
compensation (308(a))

New provisions focused on misconduct


(307:attorneys; 303:audits) Forfeiture of bonuses (304) Responsibility and certification (302, 404) Securities liabilities non-dischargeable in nonbankruptcy
45

Equitable powers of courts (305(b))

New Director and Officer Tools Under Sarbanes-Oxley Sarbanes Officer & Director bar standard lowered
from substantially unfit to unfit. (305(a)) (1105)

O&D bar in administrative proceeding

Escrow extraordinary payments


(1103)
46

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Z. Scott Birdwell, SEC

Investigating Financial Fraud by Stock Issuing Companies

New Criminal Tools Under SarbanesSarbanes-Oxley

Longer jail time New crimes include:


False certifications Interference with whistleblowers Destruction of documents
47

Case Studies in Financial Fraud


Cases show:
What are common disclosure violations How it was done Why it misleads How to remedy the violation

48

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24

Criminal Prosecution of Insider Trading


Jonathan Streeter
United States Attorneys Office Southern District of New York Securities and Commodities Fraud Task Force

United States of America -v.Raj Rajaratnam


2

236

Kumar Conspiracy

AMD Strategic Plans AMD Earnings

Spansion Term Sheet

Mubadala

McKinsey

Inside Information

Raj Rajaratnam

Anil Kumar
3

237

238

GX 559-T, p.1

Theyve shaken hands


GX 553-T-K

239

GX 594-T-R, p.2

GX 616-T, p.7

10

240

Theyve shaken hands


GX 553-T-K

Deal pushed out


GX 617-T

11

GX 625-T-R, p.2

12

241

Deal Announced Theyve shaken hands


GX 553-T-K

Deal pushed out


GX 617-T

13

14

242

2/5/06 Email to Kumar: CEO feels that he could get to a deal by end of March.
GX 815

2/5/06 Email to Kumar: CEO feels that he could get to a deal by end of March.
GX 815

2/6/06 Kumar-Raj Call 6 minutes


GX 206

243

GX 815

4/10/06 Email to Kumar: [ATI] seems definitely interested and it appears to now be a matter or price
GX 822

GX 815

4/10/06 Email to Kumar: [ATI] seems definitely interested and it appears to now be a matter or price
GX 822

4/17/06 Kumar-Raj Call 24 minutes


GX 206

244

GX 815

GX 822

5/4/06 Email to Kumar: AMD- Initial offer of ~$20 could make senseThis represents a ~20% premiumThe ultimate price could be higher.
GX 826

GX 815

GX 822

5/4/06 Email to Kumar: AMD- Initial offer of ~$20 could make senseThis represents a ~20% premiumThe ultimate price could be higher.
GX 826

5/10/06 Kumar-Raj Call 13 minutes


GX 206

245

GX 815

GX 822

GX 826

5/16/06 Email to Kumar: AMD executive thinks $24 is likely compromiseexpects this to be done reasonably soon.
GX 828

GX 815

GX 822

GX 826

5/16/06 Email to Kumar: AMD executive thinks $24 is likely compromiseexpects this to be done reasonably soon.
GX 828

5/31/06 Kumar-Raj Call 10 minutes


GX 206

246

7/5/06 Email from Kumar: So july 24 is action week!


GX 815 GX 822 GX 826 GX 828 GX 836

7/5/06 Email from Kumar: So july 24 is action week!


GX 815 GX 822 GX 826 GX 828 GX 836

7/7/06 Kumar-Raj Call 3 minutes


GX 206

247

Kumar: He saidyoure a hero


Tr. 387 GX 815 GX 822 GX 826 GX 828 GX 836

5/31/06: First rumor of merger in analyst report/news

Kumar: He saidyoure a hero


Tr. 387 GX 815 GX 822 GX 826 GX 828 GX 836

7/25/06 Kumar-Raj Call 19 minutes


GX 206

5/31/06: First rumor of merger in analyst report/news

248

27

28

249

29

GX 534-T-R, p.2
30

250

GX 534-T-R, p.4

31

32

251

9:57 am Gupta calls Rajaratnam


33

9:57 am Gupta calls Rajaratnam

9:45 am Galleon calls Gupta


34

252

9:57 am Gupta calls Rajaratnam

9:45 am Galleon calls Gupta

3:55 pm Gupta calls Rajaratnam


35

Goldman Sachs: Warren Buffet September 23, 2008


Rajat Gupta on GS Board Call
3:13 pm 3:54 pm

36

253

Goldman Sachs: Warren Buffet September 23, 2008


Rajat Gupta on GS Board Call
3:13 pm 3:54 pm

16 seconds later
Gupta Calls Rajaratnam
3:55 pm

37

Goldman Sachs: Warren Buffet September 23, 2008


Rajat Gupta on GS Board Call
3:13 pm 3:54 pm

16 seconds later
Gupta Calls Rajaratnam
3:55 pm

2 minutes later
Rajaratnam Buys GS Stock
3:58 pm

38

254

Goldman Sachs: Warren Buffet September 23, 2008

I got a call at 3:58 saying something good might happen to Goldman.


-Raj Rajaratnam

39 GX 627-T-R, Page 1

Goldman Sachs: Earnings October 23-24, 2008


Rajat Gupta on GS Board Call
4:17 4:50 pm

40

255

Goldman Sachs: Earnings October 23-24, 2008


Rajat Gupta on GS Board Call
4:17 4:50 pm

23 seconds later
Gupta Calls Rajaratnam
4:50 5:03 pm

41

Goldman Sachs: Earnings October 23-24, 2008


Rajat Gupta on GS Board Call
4:17 4:50 pm

23 seconds later
Gupta Calls Rajaratnam
4:50 5:03 pm

Next Day
Rajaratnam Sells All GS Stock
9:31 am
42

256

Goldman Sachs: Earnings October 23-24, 2008


I heard yesterday from somebody whos on the Board of Goldman Sachs, that they are gonna lose $2 per share. The Street has them making $2.50 They have zero revenuesI dont think thats built into Goldman Sachs stock price.
-Raj Rajaratnam
43 GX 678-T, Page 2

Chiesi Conspiracy
Kieran Taylor

Inside Information

Raj Rajaratnam
Inside Information

Danielle Chiesi
44

257

45

46

258

GX 532-T, p.1

47

GX 532-T, p.2

48

259

GX 532-T, p.3

49

50

260

Chiesi calls Rajaratnam: AkamaiTheyre gonna guide down


GX 532-T

51

Akamai Guides Down Chiesi calls Rajaratnam: AkamaiTheyre gonna guide down
GX 532-T

52

261

Akamai Guides Down Chiesi calls Rajaratnam: AkamaiTheyre gonna guide down
GX 532-T

Hi Dani, Raj. I just wanted to say, thank you.


GX 543-T

53

54

262

55

56

263

57

GX 698-T, p.4

58

264

59

GX 703-T, p.3
60

265

GX 703-T, p.4

61

62

266

United States of America -v.Raj Rajaratnam


63

267

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Broker Dealer Broker-Dealer Enforcement Cases


By: Tim Warren, SEC

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any publication or statement by any of its staff. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or its staff.

Agenda

Discussion of types of cases brought against Broker-Dealers and associated persons Types of Violations Investigative Steps SEC Case Study

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268

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Boiler Rooms

Trademark sign of an unscrupulous or unethical Broker-Dealer A small army of salesmen making hundreds of long distance cold calls a day to potential investors from a list of names Pushing stock of the day or house stocks for the firms Characterized by high pressure sales tactics coupled with material misrepresentations Tend to prey on unsophisticated investors

Boiler Room Salesmen

Salesmen s Salesmens performance is judged by how many sales he can make in least amount of time with least expense Hence high pressure to close the transaction and move on Sales are made to customers without regard to customers best interests Sales commissions, mark-ups and firm profits are the driving force behind transactions Salesmen make money, customer loses money

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269

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Boiler Room Stocks

Usually securities sold are somewhat obscure, very thinly traded Boiler room prefers to have a security about which there is little or no publicly available information No N one can check on what they say h k h t th about a given stock or at least not until it is TOO LATE

Violations

Be on the look out for these types of violations:

Misrepresentations and Omissions

Lies and half truths

Unauthorized trading Churning Excessive Mark-ups Failure to Supervise

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270

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Fraudulent Statements

First thing to look for in this type of case are classic misrepresentations and omissions in the sale of the stock Salesmen are selling stock of the day or house stock and may in fact know little or nothing about the company and the stock they are selling Salesmen are repeating a limited amount of information they have been given by the heads of the firm fi Often working from a set sales pitch or script for the particular stock provided by the firm Sales pitch may have little to do with realities of Co.

Specific Misstatements

Some examples of specific misstatements include:


Lies about issuers line of business, business transactions, products or financial condition Claims of having inside information about a company Promises about the market for a particular stock

Guarantees that you will make money, but only if you ACT NOW

This is a sure thing sure thing The price is sure to double in a month Our firm is behind this stock 100% it can only go up

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271

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Investigative Steps

Obtain all relevant broker-dealer broker dealer records Obtain any and all records of statements made Interview the investor Take testimony from the salesman Examine the Issuer

Broker Dealer Records

Get all records relating to the transaction


Order tickets Confirmations Monthly account statements y Payment information Sales Commission or Mark-up calculations

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272

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Evidence of Sales Pitch

Look for and obtain any evidence of what salesman told investor to convince them to buy the stock

Sales scripts Training manuals Sales presentations Salesman notes Tapes of conversations

Conduct Interviews of the Investors

Interview the investor in detail

What were they told by the salesman to convince them to invest What promises or representations were made Do they have any notes of the conversation any tape recordings Get all investor records: account information, correspondence, canceled checks, etc.

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273

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Take Testimony from Salesman

Put the salesman on the record to get his story


What did he tell the investor What is the basis for the statements made

May tell you the truth and incriminate himself More likely he will lie to you

However, since he is under oath he has now committed to a story and you can now punch holes in the story he has given you

Investigate the Issuer

If the sales force has made specific statements about the issuer, conduct an investigation about the issuer to determine if any of the statements made are false

What is its business, how long in existence, financial condition, products, sales, contracts p

Subpoena information from the issuer about its business, transactions, contracts, financial condition, etc.

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274

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Misrepresentation = Fraud

If you establish that a broker knowingly or recklessly lied to a customer about a material fact regarding the company or the market for its securities to convince the customer to purchase the security That is

Fraud

Unauthorized Transactions

Broker commits fraud by executing a trade in a customer account without the customers authority Clear form of violation that you often see in boiler room type situations yp Pressure on salesmen to make sales at any cost

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275

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Unauthorized Transaction

Customer has or opens an account with the broker, or Broker obtains enough information from customer to enable him to open an account

Name, address, tax ID #

Broker puts through trade for customer without customer consent and without customer knowledge

How to detect?

Look for customer complaint letters

Customers complaining to firm that trade was unauthorized Can be a sign of firm that is making g g unauthorized trades When customer complains long and hard enough firm cancels the trade

Lots of cancellations of trades by broker

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276

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Execution and Ratification


If customer has funds on deposit at firm those funds will be used to pay for trade If not, firm and salesman may hound and threaten customer until payment is received

May make further false promises after the fact to get customer to keep the trade

Pay us or your credit will be ruined!

Lies about issuer or the market Promises or guarantees you will make money If you take this trade I will make it up to you on the next stock

How to Investigate

Obtain all relevant brokerage records

Order tickets, confirmations, account statements Complaint letters in particular Do D you b li believe this customer? thi t ? Is there a pattern with this broker?

Obtain all of the customers written records

Interview the customer critical

Examine and interview the broker

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277

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Churning

A broker who knowingly engages in churning is committing fraud Churning occurs when a broker enters into transactions and manages a customers account in disregard of that customers interests and investment objectives Instead is trading for the purpose of generating commissions for the broker and lining his own pockets

Elements of Churning

Generally must prove: That the broker controlled the customer account

Directly through a discretionary account arrangement Indirectly through acquiescence, trust or reliance by the customer

That the broker traded excessively in the customers account in light of the customers investment objectives

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278

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Control

Direct control through a discretionary account relationship

Formal relationship where customer has granted broker actual discretionary trading authority

Indirect no formal relationship but broker has de facto control


Customer unsophisticated C t hi ti t d Relied on brokers recommendations Unable to independently evaluate or manage accounts

De Facto Control

Some facts we have relied on to establish de facto control:


Customer not given information by the broker concerning brokers total compensation Customer not aware of risks associated with multiple transactions in account Not able to obtain information about thinly traded house stocks broker is recommending Were not informed transactions were being made on margin Were not even told of transactions

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279

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Excessive Trading

Characterized by frequent in and out in out trading over short periods of time Two tests utilized to determine excessive trading: Turnover ratio Break even ratio If ratios reach certain levels = excessive trading

Turnover Ratio

Turnover ratio compares total cost of purchases in an account to the equity in an account on an annualized (yearly) basis Example:

$20,000 $20 000 in account $100,000 in purchases in one year Equals 5 to 1 turnover ratio

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280

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Turnover Ratio Standards


Under U S Law U.S. Turnover ratio of greater than 4 creates a presumption of churning Turnover ration of greater than 6, the presumption becomes conclusive Have seen turnover ratios as high as 32!

Break Even Ratio

Calculates the percentage of return needed in an account on an annual (yearly) basis for the customer to pay the expenses of the account without losing money Example:

$20,000 in account $5,000 in commissions and account fees in one year Equals 25% break even ratio Must earn 25% return just to break even

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14
281

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Break Even Ratio Standards

20% break even ratio has been held to be excessive by U.S. Courts For conservative investor, standards may be even tighter:

8% gives rise to presumption of churning g p p g 12% presumption becomes conclusive

Investigative Steps

Need to determine control


Need to determine investors investment objective and risk tolerance


Grant of discretionary authority Factors to establish de facto control

Need account trading records to be able to calculate ratios and expenses

Conservative investor Speculative, risk taking investor

Order tickets, account statements, confirmations, commission runs

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15
282

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Excessive Mark-ups

Broker acting as agent Commissions are disclosed on confirmation

Disclosed and so less subject to abuse

Broker acting as principal or dealer selling from its own inventory or account may be no disclosure of the mark-up on the trade Rules and principles adopted by SEC and NASD to ensure that those mark-ups are fair and reasonable

Elements of Excessive Markup Violation

A dealer commits fraud when it charges retail customers prices that are not reasonably related to the prevailing market price Mark-ups of more than 10% over the prevailing market price have consistently been held to be excessive and, therefore, fraudulent

Example: security costs firm $10, firm charges customer $13 = 30% mark up

Mark up of 5% or lower may be excessive depending on type of security at issue

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16
283

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Prevailing Market Price

Must determine prevailing market price with prevailing price different tests for different situations Is there an active, independent market for the security Is the dealer acting as a market maker in the security Is it a market dominated and controlled by the dealer in question

Active, Independent Market

If an active, independent market

Dealer in question is making a market in the stock Look to price at which dealers trade with one another, current inter-dealer market, as the prevailing market price However, if dealer is not a market maker, prevailing market price is dealers contemporaneous cost

Multiple dealers making a market in the stock

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284

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Dominated and Controlled Market

If on the other hand the market for the stock hand, is dominated and controlled by the dealer in question Inter dealer trading is not good evidence of the prevailing market price

Dominated market the dealer controls the price

Mark-ups calculated from dealers contemporaneous cost, what it actually cost this dealer to acquire the stock in question

Investigative Steps

Can be challenging cases, like manipulation cases cases may need to reconstruct entire market in security for particular time period If a sale by a non market maker, calculation simple as you would use dealers contemporaneous cost to calculate mark-up However, if dealing with a market maker, will need to reconstruct market at the time to determine if an active, independent market or a dominated and controlled market

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285

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Records

Order tickets time stamps Confirmations Securities position records inventory/trade runs for stock in question Purchase and sale blotters Any evidence of mark-up calculations by firm notes of inter dealer quotes

Failure to Supervise

Under the Federal Securities Laws brokerbroker dealer firm and its supervisory staff can be sanctioned for failing to reasonably supervise a salesmen who commits violations of the federal securities laws A good tool to go after the firm and its bosses who may not actually not deal directly with customers and therefore may try to hind behind the salesman

It wasnt me! It was that bad salesman!

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286

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Standards

Not an absolute liability No person/firm will be deemed to have failed to reasonably supervise if:

1) there were established procedures which would reasonably be expected to prevent and detect, insofar as practicable, violations by another person; and 2) the supervisor reasonably discharged the duties and obligations under the procedures and had no reason to believe the procedures were not being complied with

Two Questions

Are there adequate procedures?


Look to the firm and its senior officers Those who were responsible for establishing effective procedures Look to those whose job it was to carry out the procedures

Were they carried out? y

First line supervisor, branch manager

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20
287

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

W.J. Nolan & Co.

A Broker-Dealer case Study Broker Dealer

W.J. Nolan & Co.

A Broker-Dealer registered with the Broker Dealer Commission Owned by one Bill Nolan A long standing bond firm in New York city with a long history of being a conservative firm

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21
288

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Late 90s Stock Market

In the late 90 s the equity markets in 90s the U.S. were very hot, huge market increases Bill decides he wants to get a piece of that business for his firm Decides to open an equity business

Bills big mistake

Unfortunately Bill hooks up with two individuals: Eric Perryman Igor Flash Fleshmaker Unknown to Bill, these were two bad Bill guys with a history of shady dealings

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22
289

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

The Branch Offices

Perryman and Fleshmaker open two branch offices of W.J. Nolan


One in New York suburb One in Chicago

These offices end up being run as boiler rooms Teams of salesmen pushing 5 house stocks little known, thinly traded, companies of marginal worth

Equity Trading Desk

Perryman & Fleshmaker also convince Bill Nolan to hire two equity traders to make-a-market for the firm in these house stocks Hire two brothers in-law Mazzeo & Palazolo They commence making a market for the firm in the penny stocks

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290

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Our Investigation Commences

These two branch offices are up and running for only about six months when we get some indication of what is going on in Chicago We get a tip from a Broker Assistant g p hired at the Chicago branch office

Brokers Assistant

This young man came into our office to tell us what he was seeing at the firm While had been hired to be a brokers assistant, they had him cold calling customers and selling them stocks He was actually serious about being a stockbroker so he had independently signed p y g up for training at the NASD (Now FINRA) Learned in his class that he was doing things at Nolan that he should not be doing, so he contacted us

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291

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Examination Staff Goes to Work

We send in teams of examiners immediately to both the Chicago branch office and the New York branch office Examiners find all kinds of problems Approach Bill Nolan, the owner and President f the firm, who d P id t of th fi h does th the right thing and shuts down the two branch offices

Enforcement Investigation

Our Enforcement Investigation follows We find every violation I just went through and then some more!

Misrepresentations regarding the issuers and the stocks prospects Unauthorized trading Unauthorized use of margin U th i d f i Churning (The 32 times turn over ratio) Excessive Mark-ups Unregistered individuals making sales

05/05/2011

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292

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Action Against the Salesmen

We sued 9 salesmen alleging: salesmen,


Misrepresentations Unauthorized Trading Unauthorized use of margin Churning

Obtained i d t b Obt i d industry bars, Disgorgement Di t of all Commissions, and Civil Penalties of generally $110,000 each

Action against the Equity Traders

We sued the two equity traders Mazzeo traders, & Palazolo for the excessive mark-ups Ordered to Disgorge their cut of the excessive mark-ups, pay civil penalties and barred from the industry y

05/05/2011

26
293

Z. Scott Birdwell, SEC

Broker-Dealer Enforcement Cases

Failure to Supervise

We also sued Bill Nolan & the Firm for failure to supervise Even though Bill was not directly involved in the fraud, he had not taken any steps to supervise these branch offices as required by the law Had to disgorge any profits from the activities of the two branch offices Both the firm and Bill Nolan had to pay a civil penalty Bill got a six month supervisory bar could not be a supervisor at a firm for six months Firm eventually went out of business

Perryman & Fleshmaker?

They remained so behind the scenes that we had a tough time coming up with enough evidence to bring an action against them However, we got a break, they got criminally convicted by the State of New York criminal authorities for conduct at a broker dealer that broker-dealer preceded their conduct at W.J. Nolan Barred them from the securities industry on the basis of this criminal conviction

05/05/2011

27
294

Rodrigo Soares Lopes, BSM

Broker Dealer Compliance & Examinations and their relation to enforcement

Broker Dealer Compliance & Examinations and their relation to enforcement

Maio/2011

Estrutura Organizacional Auditorias Realizadas Auditoria Operacional de Participantes Auditoria Baseada em Riscos Auditoria de Custdia Mecanismo de Ressarcimento de Prejuzos Auditoria de Conexes Eletrnicas

05/05/2011

1
295

Rodrigo Soares Lopes, BSM

Broker Dealer Compliance & Examinations and their relation to enforcement

Estrutura organizacional

Conselho de Superviso

Diretor de Autorregulao

Auditoria de Participantes

Superviso de Mercado

Anlise e Estratgia

Jurdico

Estrutura organizacional

Gerncia de Auditoria de Participantes g p Rodrigo Lopes

Coordenao de Auditoria Operacional Paula Lima

Coordenao de Auditoria Operacional Carlos Gentil

Coordenao de MRP Ana Lucia

Especialistas Agostinho Avedova Roberto Serec

Equipe de Auditoria Operacional 20 auditores

Equipe de MRP 1 snior 1 jnior

05/05/2011

2
296

Marcos Galileu Lorena Dutra, CVM

Broker Dealer Enforcement Cases

Securities Enforcement and Market Oversight Training


So Paulo, 5 de maio de 2011

05/05/2011

297

Marcos Galileu Lorena Dutra, CVM

Broker Dealer Enforcement Cases

Broker Dealer Enforcement Cases


Marcos Galileu Lorena Dutra Gerente de Anlise de Negcios (GMN) Superintendncia de Relaes com o Mercado e Intermedirios (SMI)

Tendncias recentes na indstria de intermediao

Aumento da competio:

Tendncia concentrao; Reduo nos custos de execuo; Uso mais agressivo de campanhas de marketing;

Uso mais intensivo de tecnologia da informao: i f

Popularizao do home broker;

Uso de AAIs como canal de distribuio.

05/05/2011

298

Marcos Galileu Lorena Dutra, CVM

Broker Dealer Enforcement Cases

Fatores a considerar

Novos investidores com pequeno conhecimento do mercado; Competio gera presso por reduo nos custos:

Deteriorao de controles internos;

Volatilidade dos mercados; Instrumentos financeiros mais sofisticados.


5

As fontes de informao mais utilizadas pela SMI


Reclamaes/denncias de investidores; Notcias divulgadas nos meios de comunicao; Comunicaes/solicitaes de outros rgos da administrao pblica; Intercmbio de informaes com autorreguladores:

BSM, BM&FBOVESPA e CETIP;

Atuao da CVM como amicus curiae; Superviso Baseada em Risco (SBR).


6

05/05/2011

299

Marcos Galileu Lorena Dutra, CVM

Broker Dealer Enforcement Cases

A superviso dos intermedirios pela CVM

Superintendncia Geral (SGE)

Superintendncia de Relaes com o Mercado e Intermedirios (SMI)

Superintendncia de Fiscalizao (SFI)

Superintendncia de Processos Sancionadores (SPS)

Superintendncia de Proteo e Orientao aos Investidores (SOI)

Problemas mais frequentes


Falta de identificao cadastral adequada; Ausncia de controles acerca de ordens recebidas e negcios realizados; Financiamento de clientes sem obedincia s normas em vigor; Atuao de pessoas no autorizadas na atividade de mediao; Prepostos que realizam a atividade de administrao de carteira sem autorizao; Falta de controle sobre as atividades dos agentes autnomos de investimento.

05/05/2011

300

Marcos Galileu Lorena Dutra, CVM

Broker Dealer Enforcement Cases

Falta de identificao cadastral adequada


Instrues CVM n.s 301/99 e 387/03; Caracterstica:

problemas na observncia das regras de identificao dos clientes e manuteno de documentao cadastral; Falta de procedimentos internos adequados para ok know your client; li t Problemas agravados pela ao de AAIs e falta de contato pessoal com os clientes; SP2008/0038 (Unibanco Investshop CVMC S.A.)

Causas:

Exemplos:

Ausncia de controles sobre ordens e negcios


Instruo CVM n. 387/03 Caracterstica:

Ordens transmitidas no so registradas tempestivamente ou sem os detalhes necessrios;

Causas

Falta de procedimentos internos de controle; Conduta dolosa de operadores de mesa; SP2010/001 (Umuarama S.A. CTVM), IA 12/06 (Dimarco Participaes e Emprendimentos Ltda.).

Exemplos:

10

05/05/2011

301

Marcos Galileu Lorena Dutra, CVM

Broker Dealer Enforcement Cases

Financiamento de clientes

Instruo CVM n. 51/86, Resoluo CMN n. 1.655/89. Caracterstica:

Clientes so financiados sem obedincia s regras de conta margem;

Causas

Falta de procedimentos internos de controle; Financiamento dos clientes vendido como produto; SP2007/0167 (Umuarama S.A. CTVM), IA 01/06 (Master CM Ltda.).
11

Exemplos:

Atuao de pessoas no autorizadas

Instrues CVM n.s 387/03 e 434/06.


Caracterstica:

Pessoas no autorizadas atuam na atividade de mediao;

Causas:

Uso de meios alternativos de captao de clientes; Grande pulverizao da propriedade de aes de algumas companhias companhias. SP2001/204 (Orbival CCVM Ltda.), SP2005/128 (So Paulo CV Ltda.), SP2008/040 (Pax CVC Ltda).

Exemplos:

12

05/05/2011

302

Marcos Galileu Lorena Dutra, CVM

Broker Dealer Enforcement Cases

Administrao de carteira

Instruo CVM n. 306/99


Caracterstica:

Operadores ou agentes autnomos passam a gerir a carteira do cliente;

Causas

Falta de procedimentos internos de controle; Pouca familiaridade do cliente com as caractersticas do mercado; RJ2010/1281 (Levy Makoto Tanaka), RJ2005/5038 (SLW CVC Ltda.)
13

Exemplos:

Falta de controle sobre as atividades dos AAIs

Instruo CVM n. 434/06;


Caracterstica:

Agentes autnomos atuam sem observar os limites impostos pela regulamentao em vigor;

Causas

Falta de superviso do AAI; AAI no reconhecido como preposto do intermedirio; Inexperincia do cliente; RJ2009/10246 (Antonio Carlos Batista dos Santos)

Exemplos:

14

05/05/2011

303

Marcos Galileu Lorena Dutra, CVM

Broker Dealer Enforcement Cases

Alteraes na regulamentao

Atualizao da Instruo CVM n 387/03;


Exigncias cadastrais; Controle de ordens; Controles internos dos intermedirios.

Mudanas na regulamentao aplicvel aos agentes autnomos de investimento; Edio de norma sobre procedimentos de suitability.

15

Broker Dealer Enforcement Cases


Marcos Galileu Lorena Dutra Gerente de Anlise de Negcios (GMN) Superintendncia de Relaes com o Mercado e Intermedirios (SMI)

05/05/2011

304

Marcos Galileu Lorena Dutra, CVM

Broker Dealer Enforcement Cases

17

05/05/2011

305

Luiz Felipe Amaral Calabr, BSM

Enforcement Cases

Securities Enforcement and Market Oversight Training So Paulo Brasil Paulo,


Luiz Felipe Amaral Calabr Gerente Jurdico

Caso 1 Operaes Fraudulentas e Prticas No Equitativas Caso 2 Condies Artificiais e Prticas No Equitativas Caso 3 Administrao Irregular de Carteira e Churning

05/05/2011

1 306

Luiz Felipe Amaral Calabr, BSM

Enforcement Cases

Caso 1 Operaes Fraudulentas e Prticas No Equitativas


Origem: Relatrio da rea de acompanhamento de mercado No perodo de 17/12/07 a 30/06/08, dois investidores realizaram por intermdio da Corretora cerca de 4081 operaes nos mercados a vista, a termo, fracionrio e de opes, com um volume de R$ 21,9 milhes. Mais de 90% dessas operaes foram realizadas no mercado de opes e registradas pelo mesmo operador. No referido perodo, os dois investidores realizaram 359 day trades, obtendo um lucro bruto de R$ 791,6 mil. Em algumas operaes day trade realizadas em nome dos investidores, responsveis por um lucro bruto de R$ 468,2 mil, foi constatado o registro de ofertas com cdigos de outros clientes.

Caso 1 - Operaes Fraudulentas e Prticas No Equitativas


Foi constatado que os negcios realizados por intermdio do operador, entre 2/01/07 e 30/06/08, movimentaram R$ 280,4 milhes. Deste total, R$ 19,3 milhes resultaram de ofertas cujos clientes identificados originalmente f i i l t foram alterados. lt d Infraes cometidas pela Corretora: Deixou de atuar no melhor interesse de seus clientes, usou de prticas no equitativas, condies artificiais de demanda oferta ou preo e realizou operaes fraudulentas (infrao ICVM 08 e ao Regulamento de Operaes da BVSP) BVSP). Permitiu a emisso de ordens e ofertas com cdigos de outros clientes da Corretora, sendo os negcios, posteriormente execuo, alocados para os cdigos dos investidores (infrao s Regras e Parmetros de Atuao da Corretora e ao Ofcio Circular n 074/06-SG, da BVSP).

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2 307

Luiz Felipe Amaral Calabr, BSM

Enforcement Cases

Caso 1 - Operaes Fraudulentas e Prticas No Equitativas


Infraes cometidas pela Corretora: Contribuir para a ocorrncia de prticas no equitativas e realizao de operaes fraudulentas, pois foi responsvel pelo registro no Sistema Mega Bolsa de ofertas em nome dos investidores, visando beneficiar os referidos investidores em detrimento de outros clientes da Corretora (infrao ICVM 8/79 c/c o Regulamento de Operaes da BM&FBOVESPA). Termo de Compromisso Corretora celebrou Termo de Compromisso no valor de R$ 400.000,00 e se comprometeu a melhorar seus controles internos com o objetivo de que referidas infraes no se repitam (plano de ao auditado). Penalidade Operador foi julgado e condenado a 1 ano de inabilitao temporria.

Caso 2 Condies Artificiais e Prticas No Equitativas


Origem: mercado Relatrio da rea de acompanhamento de

Nos preges dos dias 4 6 e 8/8/2008 foram realizadas 4, 8/8/2008, operaes day trade envolvendo volumes atpicos de contratos futuros de dlar comercial, entre um Banco e um Fundo de Investimento, por intermdio de uma Corretora. Todas as ordens recebidas pela Corretora registradas como sendo do tipo monitorada, foram realizadas em horrio posterior sua execuo, gerando negcios diretos entre o Banco, o Fundo e a carteira prpria da Corretora, sendo que: , p p , q (i) no prego do dia 4/8/2008, apresentaram resultado financeiro nulo e (ii) nos preges dos dias 6 e 8/8/2008, resultaram em lucro de R$ 125 mil para a Corretora e de R$ 626 mil para o Banco em detrimento do Fundo.

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3 308

Luiz Felipe Amaral Calabr, BSM

Enforcement Cases

Caso 2 Condies Artificiais e Prticas No Equitativas


Instada a se manifestar a Corretora informou que simplesmente uma casa de intermediao...no questiona seus clientes no que tange ao fundamento econmico para a realizao de operaes nos mercados em que atua como intermedirio. Para justificar as operaes com a sua carteira prpria, a Corretora mencionou que se tratavam de erros operacionais cometidos pelos operadores de mesa, devido alta volatilidade das operaes. O Banco informou que as operaes realizadas nos dias 4, 6 e 8/8/2008, referiram-se a operaes de teste, denominadas dry-run nos Estados Unidos, necessrias para uma operao y , p p estruturada envolvendo montante total entre R$ 7 e R$ 8 bilhes, cujo hedge seria feito no Brasil.

Caso 2 Condies Artificiais e Prticas No Equitativas


Normas Infringidas Corretora no ter recusado as ordens de operaes irregulares (art 6 da (art. ICVM n 387/03 c/c os itens 6 e 7 das Regras e Parmetros de Atuao da Corretora ter permitido a criao de condies artificiais de demanda, oferta ou preo (itens I e II, alnea a, da ICVM n 8/79 c/c o item 4.2, subitem 2, inciso IX, do Regulamento de Operaes do Segmento BM&F ter incorrido em prticas no equitativas, pois obteve os melhores p q , p preos nas operaes em detrimento do Fundo (itens I e II, alnea d, da ICVM n 8/79 c/c item 4.2, subitem 2, inciso IX, do Regulamento de Operaes do Segmento BM&F)

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Luiz Felipe Amaral Calabr, BSM

Enforcement Cases

Caso 2 Condies Artificiais e Prticas No Equitativas


Normas Infringidas Diretor do Mercado de Aes falha no dever de diligncia (culpa in vigillando) na qualidade de responsvel pelo cumprimento e fiscalizao dos procedimentos referentes s operaes realizadas com valores mobilirios, principalmente no tocante ao registro das ordens Operador permitir a criao de condies artificiais de demanda, oferta ou p preo de valores mobilirios e prticas no equitativas p q

Caso 2 Condies Artificiais e Prticas No Equitativas


Normas Infringidas Banco criou condies artificiais de demanda, oferta ou preo de valores mobilirios, ao realizar negcios artificiais, os quais (i) geraram resultado financeiro nulo ou (ii) prejuzos para uma das partes, propositalmente (itens I e II, alnea a, da ICVM n 8/79, combinado com o item 4.2, subitem 2, inciso IX, do Regulamento de Operaes do Segmento BM&F)

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Luiz Felipe Amaral Calabr, BSM

Enforcement Cases

Caso 2 Condies Artificiais e Prticas No Equitativas


Termo de Compromisso: Corretora: valor de R$ 250.000,00 e aperfeioamentos em seus controles internos Banco: valor de R$ 400.000,00 e aperfeioamentos em seus controles internos Diretor: R$ 40.000,00 Operador: R$ 20.000,00

Caso 3 Administrao Irregular de Carteira e Churning


Origem: 22 processos de MRP Entre janeiro de 2007 e fevereiro de 2008 foram instaurados 22 processos de MRP, em face de uma Corretora, em razo de suposta infiel execuo de ordens Os pedidos de ressarcimento dos investidores fundamentaram-se, principalmente, na atuao irregular de um profissional que se apresentou aos investidores como agente autnomo vinculado Corretora O agente autnomo recebia recursos diretamente dos investidores e prometeu rendimentos fixos (entre 3% e 5%), realizando operaes, supostamente, sem a autorizao dos investidores O agente autnomo ainda prometeu assumir 100% de eventual prejuzo. O agente autnomo apresentou aos investidores necessrios para cadastro junto Corretora os documentos

O agente autnomo no tinha contrato assinado com a Corretora.

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Luiz Felipe Amaral Calabr, BSM

Enforcement Cases

Caso 3 Administrao Irregular de Carteira e Churning


O agente autnomo estava indicado como procurador nas fichas cadastrais de 10 investidores As estratgias das operaes eram semelhantes nos 22 casos de MRP Alm disso, verificou-se, em um dos processos de MRP, um giro excessivo da carteira do investidor, que gerou ganhos atpicos de corretagem para a Corretora (churning) Irregularidades cometidas pela Corretora Permitiu a atuao do agente autnomo: - como administrador de carteira irregular - como procurador de diversos investidores - e sem contrato com a Corretora Praticou churning.

Caso 3 Administrao Irregular de Carteira e Churning


Irregularidades cometidas pelo Diretor falha no dever de diligncia (culpa in vigillando) na qualidade de responsvel pelo cumprimento e fiscalizao dos procedimentos referentes s operaes realizadas com valores mobilirios mobilirios, principalmente no tocante ao registro das ordens. Defesa da Corretora A corretora alegou que o agente autnomo era mero cliente e que nunca teria atuado como agente autnomo, razo pela qual no existia contrato entre ambos No h provas de administrao irregular de carteiras. A prtica de churning no est regulamentada no ordenamento jurdico brasileiro.

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Luiz Felipe Amaral Calabr, BSM

Enforcement Cases

Caso 3 Administrao Irregular de Carteira e Churning


Proposta de Termo de Compromisso A Corretora e o Diretor apresentaram proposta de celebrao de Termo de Compromisso, no valor de R$40.000,00 e R$10.000,00, respectivamente. respectivamente O Conselho de Superviso rejeitou por unanimidade a proposta de celebrao de termo de compromisso. Ofcio CVM A CVM encaminhou BSM ofcio elencando uma srie de inquritos administrativos instaurados pela CVM em face da Corretora, em razo p , de irregularidades similares s identificadas nos processos de MRP. A pedido do Conselho de Superviso, foram solicitados levantamentos adicionais, para que se apurasse indcios de irregularidades mencionadas no ofcio da CVM Verificou-se que a Corretora reincidiu nas infraes apuradas nos processos de MRP.

Caso 3 Administrao Irregular de Carteira e Churning


Julgamento do Processo A Corretora foi penalizada em R$1.026.221,88 O di t f i penalizado em R$100 000 00 diretor foi li d R$100.000,00 Recurso Os acusados recorreram ao Pleno do Conselho de Superviso, que manteve a deciso da Turma.

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8 313

Luiz Felipe Amaral Calabr, BSM

Enforcement Cases

www.bsm-autorregulacao.com.br www bsm autorregulacao com br

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9 314

Z. Scott Birdwell, SEC

Criminal Enforcemente and Parallel Proceedings

CRIMINAL ENFORCEMENT
AND

PARALLEL PROCEEDINGS

U.S. U S Securities and Exchange Commission International Enforcement Institute April 2011

Overview
Differences between criminal and civil enforcement Potential problems of parallel proceedings Solutions Coordination

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315

Z. Scott Birdwell, SEC

Criminal Enforcemente and Parallel Proceedings

Why have parallel investigations and proceedings?


Dont know outcome of investigation Don t Each agency contributes resources and techniques SEC may seek additional or emergency remedies SEC may charge more defendants

Differences: Criminal & Civil


Remedies Investigative techniques Process of prosecution and litigation

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316

Z. Scott Birdwell, SEC

Criminal Enforcemente and Parallel Proceedings

Remedies: Criminal
Term of Imprisonment
Length driven by $$$ losses to victims

Restitution
Mandatory in fraud crimes No discharge in bankruptcy Vi i issues: Identity and Losses Victim i Id i dL

Fines Forfeiture Power

Remedies: Civil
Disgorgement Monetary penalties Permanent injunction Undertakings in settlements

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317

Z. Scott Birdwell, SEC

Criminal Enforcemente and Parallel Proceedings

Remedies: Civil
Bars
Association with Broker-Dealer, Investment Adviser or Investment Company Officer or Director of Public Company Penny Stock Bar Practice before the SEC Accountants and Attorneys

Remedies: Civil
Emergency Remedies
Temporary Restraining Order and Preliminary Injunction Asset Freeze Temporary freeze of extraordinary payments Receiver appointment Trading suspension Accounting of investor funds Repatriation of assets abroad

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318

Z. Scott Birdwell, SEC

Criminal Enforcemente and Parallel Proceedings

Investigative Techniques: Criminal


Grand Jury Court Authorized Seizures Undercover Operations Voluntary C V l t Cooperation ti

Criminal Investigative Techniques: Grand Jury Overview


Approves Criminal Charges
Probable Cause Standard 23 Jurors, Majority Vote No Judge, No Defense Counsel

Proceedings Are Secret


Rule 6(e) Can not share with SEC Charges can be dismissed or, if extreme: Prosecutors can go to jail for willful violations

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319

Z. Scott Birdwell, SEC

Criminal Enforcemente and Parallel Proceedings

Criminal Investigative Techniques: Grand Jury Subpoenas


Broad Subpoena Power
Subpoenas for documents Subpoenas for tangible objects Subpoenas for testimony Nationwide and Worldwide Service

Legal Test To Issue


Do I have one in my drawer?

Criminal Investigative Techniques: Limitations on Grand Jury Subpoenas


Fifth Amendment Protection
Only for Individuals

Legal Privileges
Attorney Client Privilege Attorney Work Product Spousal Privilege S l P i il Reporters / First Amendment Psychiatrist / Patient

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320

Z. Scott Birdwell, SEC

Criminal Enforcemente and Parallel Proceedings

Criminal Investigative Techniques: Court Authorization Required


Search Warrants
Probable Cause Standard Ex Parte and No Prior Notice

Wiretaps and Bugs


Probable Cause Standard No viable alternative means Labor Intensive

Criminal Investigative Techniques: The Really Good Stuff


Undercover Agents Informants Cooperators Consensual Recordings Sting O Sti Operations ti
Canadian Fleece SEC can provide assistance

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321

Z. Scott Birdwell, SEC

Criminal Enforcemente and Parallel Proceedings

Criminal Investigative Techniques: Voluntary Cooperation


Voluntary Interviews Proffers of Subjects and Targets
Limited Immunity

Voluntary Production of Documents Corporations Sometimes Elect to Waive Attorney-Client Privilege

Civil Investigative Techniques


Some information is available Registered Entities
Mandatory production of required records Examination power

Stock trading data ( Blue sheets ) (Blue sheets)

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322

Z. Scott Birdwell, SEC

Criminal Enforcemente and Parallel Proceedings

Civil Investigative Techniques: Informal Investigations


Voluntary Request documents and information Testimonies Interviews

Civil Investigative Techniques: Formal Investigations


Formal order of investigation issued by Commission or Enforcement Division under delegated authority Subpoenas for documents Subpoenas for testimony Interviews Subpoenas for bank and telephone records

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323

Z. Scott Birdwell, SEC

Criminal Enforcemente and Parallel Proceedings

Criminal Process: Overview Part One


Formal Charge
C Complaint sworn by a f d l agent l i t b federal t Grand Jury Indictment

Arraignment / Bail
Risk of Flight or Danger

Discovery
Only Documentary Evidence No Witness Depositions by Defendant

Limited Pre-Trial Motions

Criminal Process: Overview Part Two


Plea Negotiations
At any stage of Proceedings

Trial
Disclose Witness Statements Jury of 12 Unanimous Criminal I C i i l Intent to Defraud D f d Beyond a Reasonable Doubt

Sentencing

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324

Z. Scott Birdwell, SEC

Criminal Enforcemente and Parallel Proceedings

Civil Process: Federal Court Actions


File complaint Discovery is broad Trial before judge or jury Appeal to Federal Appeals Court pp pp

Civil Process Administrative Proceeding


Commission issues Order Instituting Proceeding Hearing before Administrative Law Judge Appeal to Commission and then to Federal Appeals Court

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325

Z. Scott Birdwell, SEC

Criminal Enforcemente and Parallel Proceedings

Potential Problems and Solutions:


During investigation After commencement of litigation

Potential Problems and Solutions: Grand Jury Secrecy


Gathering Documentary Evidence
SEC subpoenas documents
USAO Access Requests Grand Jury subpoenas only to prevent obstruction

USAO uses Search Warrants

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326

Z. Scott Birdwell, SEC

Criminal Enforcemente and Parallel Proceedings

Potential Problems and Solutions: Grand Jury Secrecy


Gathering Witness Testimony
Voluntary Interviews and Proffers
Conducted Jointly Proffer Agreements

SEC Testimonies

Witness Statements and 3500 Material


Limit Amount Created During Investigation Limit Amount Leaked Through Civil Action

Potential problems and solutions: Discovery


Civil Discovery Much Broader than Criminal Criminal Prosecutor Seeks to Stay Discovery in Civil Cases
Discretionary SEC Does Not Object WorldCom & Impath Experience

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327

Z. Scott Birdwell, SEC

Criminal Enforcemente and Parallel Proceedings

Parallel Proceedings
Courts have approved parallel proceedings
U.S. Supreme Court Federal Circuit Courts of Appeals

Guiding Principle: Each agency must pursue its own mission for its own reasons Concerns
Unfair to gather evidence via civil process for use in criminal proceeding Potential to trick defendant into waiving 5th Amendment right

Risks Of Parallel Proceedings


Risks:
Suppression in criminal case of testimony taken by SEC Suppression of other evidence gathered by the SEC Dismissal of indictment A ruling that the SEC is the Govt for purposes of Brady and Giglio.

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328

Z. Scott Birdwell, SEC

Criminal Enforcemente and Parallel Proceedings

Solution: Communication
Strategic Planning and Timing Tactical Use of Different Investigative Techniques Sharing What we Learn in Real Time

Charging Corporations #1
Broad Corporate Criminal Liability
Any Crime Committed by Employee Within Scope of Employment

Corporate Sanctions
Fines Restitution Remedial Measures

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329

Z. Scott Birdwell, SEC

Criminal Enforcemente and Parallel Proceedings

Charging Corporations #2
Collateral Consequences Often Severe
Loss of Licenses Loss of Government Contracts Loss of Lender Confidence Loss of Investor Confidence Loss of Client Confidence

Often A Death Sentence

Charging Corporations #3
Limited Only By Prosecutor s Discretion Prosecutors Balancing Collateral Harm
Creditors Employees Clients

Against Need to Punish and Deter Non-Filip Memo

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330

Z. Scott Birdwell, SEC

Criminal Enforcemente and Parallel Proceedings

Charging Corporations #4
The Filip Memo factors include: Filip Memo
Seriousness of Offense Pervasiveness of Misconduct Prior Misconduct at Firm Remediation and Restitution Alternative Civil Remedies Cooperation with Regulators Investigation Collateral Consequences

Charging public companies: SEC Perspective


Collateral consequences arise from particular remedies
Monetary penalties Penalties guidelines

SEC 21(a) Report sets forth factors


Self-policing and self-reporting Seriousness of fraud Cooperation with government investigation Remediation

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331

Marcos Galileu Lorena Dutra, CVM

Market Intelligence and Surveillance Systems and Techniques

Securities Enforcement and Market Oversight Training


So Paulo, 6 de maio de 2011

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332

Marcos Galileu Lorena Dutra, CVM

Market Intelligence and Surveillance Systems and Techniques

Market Intelligence and Surveillance Systems and Techniques


Marcos Galileu Lorena Dutra Gerente de Anlise de Negcios (GMN) Superintendncia de Relaes com o Mercado e Intermedirios (SMI)

Contexto do mercado

Maior participao de pessoas naturais; Crescimento no nmero de operaes e nos volumes negociados; Disseminao do DMA; Multiplicao do nmero de instrumentos financeiros disposio; p ; Integrao de plataformas e estratgias de negociao.
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333

Marcos Galileu Lorena Dutra, CVM

Market Intelligence and Surveillance Systems and Techniques

Projeto SSMCB

Projeto estratgico para a Comisso de Valores Mobilirios (CVM):

Sistema d S Si t de Superviso d M i do Mercado d C it i B il i d de Capitais Brasileiro (SSMCB)

Parte do Programa de Modernizaco e Fortalecimento Institucional da CVM:

Financiamento do Banco Interamericano de Desenvolvimento (BID), com apoio do Programa das p ( ); Naces Unidas para o Desenvolvimento (PNUD);

Empresas contratadas: SIASSB (Itlia), com apoio da subsidiria local da TCS (ndia):

SIA-EAGLE.

Objetivos do Sistema

Monitoramento dos mercados organizados de valores mobilirios:

Acompanhamento integrado:

BM&FBovespa e CETIP; Mercado de bolsa e balco (OTC); Mercados de derivativos e seus ativos j subjacentes; Posies em aberto e operaes realizadas ao longo de um ou diversos preges;

Ganho de eficincia com uso intensivo da automao;

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334

Marcos Galileu Lorena Dutra, CVM

Market Intelligence and Surveillance Systems and Techniques

Alcance do SSMCB

os negcios com valores mobilirios ocorridos nos mercados organizados (BM&FBovespa e CETIP); p posies em aberto nos mercados de derivativos; ; pessoas autorizadas a operar nesses mercados; outras pessoas envolvidas nessas operaes:

Operadores, clientes, agentes autnomos de investimento, insiders, administradores de carteira, acionistas relevantes das companhias e emissores;

dados divulgados ao mercado por meio dos sistemas de Informaes Peridicas e Eventuais (IPE), de Demonstraes Financeiras Padronizadas (DFP), dos Formulrios Cadastrais (FC) e de Referncia(FR), bem como informaes encaminhadas CVM sobre os fundos de investimento.
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Caractersticas

Aderncia aos princpios da IOSCO; Flexibilidade; Processos automatizados de monitoramento dirio das operaes para detectar potenciais prticas de abuso de mercado.

anlise de comportamento das operaes a partir de dados estatsticos;

Integrao de informaes oriundas de trs fontes diferentes em um nico banco de dados:


BM&FBOVESPA: mercados de bolsa e balco organizado; CETIP: mercado de balco organizado; CVM: dados sobre notcias, emissores e fundos de investimento
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335

Marcos Galileu Lorena Dutra, CVM

Market Intelligence and Surveillance Systems and Techniques

Processos do Sistema SIA EAGLE


Passo 1. Dados Captao de dados relevantes de: negcios e posies; investidores e intermedirios; dados de mercado; Informaes qualitativas (ex: comunicados do emissor); Os dados coletados so verificados e normalizados para permitir um diagnstico consistente e efetivo. Passo 2. Diagnstico O motor de diagnstico automaticamente detecta prticas suspeitas para manipulao e abusos de mercado. Passo 3. Anlise O processo de investigao inclui: gerenciamento de alertas; consultas; gerenciamento de casos com potenciais irregularidades; irreg laridades gerenciamento de fluxo de trabalho; relatrios.

O motor baseado em templates de algoritmos que fazem um levantamento dirio dos negcios e dados do mercado, e cado, selecionando um subconjunto de operaes, valores mobilirios, investidores, etc. para ser analisado.

Funcionalidades

O banco de dados estar disponvel para uso por meio de uma ferramenta da business intelligence;

a CVM poder criar suas prprias ferramentas de anlise, ainda que no originalmente previstas no SIA-EAGLE; realizao de um maior nmero de verificaes, com maior rapidez e segurana.
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336

Marcos Galileu Lorena Dutra, CVM

Market Intelligence and Surveillance Systems and Techniques

Caractersticas do SSMCB

No um sistema de monitoramento em real time:

Integrao com a atividade de surveillance desenvolvida pela BM&FBOVESPA BSM e CETIP; BM&FBOVESPA,

Recebimento de informaes pela CVM aps a identificao do comitente final; Uso de CNPJs e CPFs para a identificao de investidores que atuam de forma simultnea em mais de um mercado; Identificao de pessoas que no atuam de forma direta no mercado:

Cotistas de fundos de investimento; Acionistas/cotistas de pessoas jurdicas identificadas nos formulrios de referncia (FRs).
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Caractersticas do SSMCB

Identificao de pessoas que podem atuar de forma coordenada:


fundos de investimento sob gesto comum; administradores de uma mesma companhia; Investidores atendidos por um mesmo intermedirio, operador ou repassador de ordens;

Comparaes entre estratgias de negociao e posies em aberto nos i i b t mercados de derivativos.

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337

Marcos Galileu Lorena Dutra, CVM

Market Intelligence and Surveillance Systems and Techniques

Exemplos de dados capturados BM&FBOVESPA


Operaes realizadas; Daily market data (BDI); Composio e comportamento de ndices; Operaes canceladas; Posies em aberto nos mercados de derivativos (opes, futuro, termo); Operaes de emprstimo; Transferncias de custdia; Dados cadastrais bsicos dos investidores, intermedirios e seus prepostos; Dados bsicos dos valores mobilirios.
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Exemplos de dados capturados CETIP


Operaes realizadas; Daily market data; Posies em aberto nos mercados de derivativos de balco (opes, futuro, termo); Dados cadastrais bsicos dos investidores e intermedirios; Dados bsicos dos valores mobilirios.
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338

Marcos Galileu Lorena Dutra, CVM

Market Intelligence and Surveillance Systems and Techniques

Exemplos de dados capturados CVM

Sobre fundos de investimento:

Identificao dos administradores, gestores e principais cotistas; Informaes sobre o perfil dos fundos; Identificao de potenciais insiders: membros de conselhos e comits, diretores, auditores independentes, independentes acionistas diretos e indiretos com participao relevante, sociedades ligadas (controladas e coligadas) e partes relacionadas.

Sobre as companhias abertas:

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Market Intelligence and Surveillance Systems and Techniques


Marcos Galileu Lorena Dutra Gerente de Anlise de Negcios (GMN) Superintendncia de Relaes com o Mercado e Intermedirios (SMI)

06/05/2011

339

Marcos Galileu Lorena Dutra, CVM

Market Intelligence and Surveillance Systems and Techniques

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06/05/2011

340

Luiz Eduardo Costa e Silva, BSM

Market Intelligence and Surveillance Systems and Techniques

Securities Enforcement and Market Oversight Training


Day 5 - Market Intelligence and Surveillance Systems and Techniques T h i

2 a 6 de maio de 2011 Luiz Eduardo Costa e Silva Gerncia de Acompanhamento de Mercado

BSM - BM&FBOVESPA Superviso de Mercados

Minerao de Dados Superviso de Mercado baseada b d em modelos d l estatsticos, que geram indicadores relacionados prticas ilegais Uso de tecnologia especfica e acesso s bases de dados de g q negcios e liquidaes
Alertas Relatrios Anlise de Dados

Programas Estatsticos

Bases de Dados do Mercado

Atuao em: Negociao: alertas

Anlise de Acompanhamento de Mercado

Ps-negociao: SAS (estatsticas)

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341

Luiz Eduardo Costa e Silva, BSM

Market Intelligence and Surveillance Systems and Techniques

BSM - BM&FBOVESPA Superviso de Mercados


4Ativos, Futuros e Opes
Perfil do Cliente Registros de Negcios Liquidao Custdia Outros
(at 25 anos)

Ativos

Futuros e Opes

Outros

SAS
4BSM
Anlise estatstica Relatrios sumariados Relatrios de negcios

Estudo de Casos

4Clube de Investimento x Representante


Concentrao de contraparte Negcios diretos realizados entre o Clube de Investimento e seu representante Incidncia de resultados negativos para o Clube

4ndice de acerto
Incidncia de resultados positivos para a pessoa fsica Pessoa fsica negociando no mercado de opes do segmento BM&F Concentrao de investidores institucionais geridos por uma mesma instituio atuando na contraparte

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342

Luiz Eduardo Costa e Silva, BSM

Market Intelligence and Surveillance Systems and Techniques

Estudo de Casos

4Concentrao de Contraparte
Contraparte responsvel por 97,6% do volume movimentado pela cliente Exclusivamente day-trades envolvendo operaes de maior complexidade e risco Indcios de administrao de carteira

4Reespecificao
Cliente com alto ndice de reespecificao e de resultados positivos Pesquisa pelo cdigo de oferta identificou mais 4 clientes Distribuio dos melhores preos

Estudo de Casos 4Incompatibilidade


Cadastro recente e 100% das operaes via home broker Day-trades envolvendo operaes de maior complexidade e risco Posio em c stdia de R$ 320 8 mil e lucro b to de R$ 284 6 mil custdia 320,8 l c o bruto 284,6

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Market Intelligence and Surveillance Systems and Techniques

ESTUDO DE CASO AUTORREGULAO NO BRASIL Prticas no equitativas

Prticas no equitativas

Instruo da Comisso de Valores Mobilirios n 8 , de 8 de outubro de 1979

vedada aos administradores e acionistas de companhias abertas, aos intermedirios e aos demais participantes do mercado de valores mobilirios, a criao de condies artificiais de demanda, oferta ou preo de valores mobilirios, a manipulao de preo, a realizao de operaes fraudulentas e o uso de prticas no equitativas. Para os efeitos da instruo, conceitua-se como prtica no equitativa no mercado de valores mobilirios, aquela de que resulte, direta ou indiretamente, efetiva ou potencialidade, um tratamento para qualquer das partes, em negociaes com valores mobilirios, que a coloque em uma indevida posio de desequilbrio ou desigualdade em face dos demais participantes da operao.

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Market Intelligence and Surveillance Systems and Techniques

Prticas no equitativas

A corretora deve indicar um diretor, que ser responsvel pelo cumprimento das regras relativas aos procedimentos a serem seguidos em negociao com valores mobilirios, bem como a identificao, o registro de operaes, comunicao, limites e a responsabilidade administrativa abordada pela lei referente ao crimes de lavagem de dinheiro (Instrues CVM ns. 301 e 16 de abril de 1999 e 387 de 28 de abril de 2003)

Prticas no equitativas
Procedimentos de Investigao Anlise de alertas dirios X dados histricos - Lucros/prejuzos atpicos em day-trades

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Market Intelligence and Surveillance Systems and Techniques

Prticas no equitativas
Procedimentos de Investigao
Anlise das operaes de um cliente Resultados Operaes atpicas seleo de dois clientes e seus dados Contas Profisso, endereo, data de nascimento/constituio, etc Posio em custdia (evoluo) Perfil de negociao (por data, ativo, corretora, operador, mercado, contrapartes etc) Day-trades Ofertas de compra e venda enviadas para o sistema Documentos mantidos na corretora (incluindo cadastro, gravaes telefnicas, situao financeira e patrimonial do cliente etc)

Prticas no equitativas
Procedimentos de Investigao
Resultados

Anlise identificou: Suspeita do uso de contas por terceiros Operaes incompatveis com a ocupao profissional, os rendimentos e a situao financeira dos clientes Operaes cujo grau de complexidade e risco se mostraram incompatveis com a qualificao tcnica dos clientes Ordens de compra e venda foram enviadas para o sistema com a identificao das contas de d outros clientes e os negcios f t li t i foram alocados para os clientes selecionados pelo sistema l d li t l i d l i t de superviso Um operador especfico foi responsvel por 84% das operaes atpicas Distribuio de preos

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Market Intelligence and Surveillance Systems and Techniques

Obrigado
Contato: lsilva@bsm-bvmf.com.br

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RESTRAINING PROCEEDS OF FRAUD


Presented by: Alberto Arevalo, Assistant Director Izabela Reis, Senior Counsel U.S. Securities and Exchange Commission Office of International Affairs
The U.S. Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein do not necessarily reflect the views of the Commission or of other members of the staff of the Commission.

There are seven ways the SEC obtains cross-border asset crossfreezes:
1. 2. 3. 4. 5. 6. 7.
Bank warning letters Regulatory freezes FIU freezes SEC actions Receiver Actions Direct Criminal Authority Freezes MLATS
2

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1. Bank Warning Letters


What are they?
Notice and not a freeze request Why not? Constructive trustee What can it do? Kick in AML/SAR Voluntary or FIU freeze B time Buy i Advantages and Disadvantages Advantage: Quick Disadvantage: Temporary/Luck
3

Bank warning letter: What does it say and what does it do?
Provides notice to bank
This letter is to advise you that an account at [the bank] may contain the proceeds of securities fraud that may be the subject of an enforcement proceeding brought by the [SEC]. Includes summary of facts related to SECs US court proceeding Attaches copy of/refers to SECs US court freeze order Advises of potential liability for withdrawal, transfer, or dissipation of assets during pendency of SECs case Copies to: Securities regulator; Financial Intelligence Unit

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2. Regulatory Freezes
Who? Canada OSC How? Simple request with US court
freeze order Advantage: Quick Disadvantages:

Lasts only a few days Need to hire foreign counsel for follow up
5

3. FIU freezes
How triggered?
Bank warning letter Direct contact

No consent Stanford example/Latvia example p / p Advantage: Quick/buys time Disadvantage: Temporary


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4. SEC actions: Freezing Injunctions


SEC as plaintiff 2 part action:
Freeze Enforce judgment

Disadvantage: Expensive foreign counsel;


Commission authority needed; Undertakings; Loser Pays; default judgments

SEC v. Glenn Manterfield, Claim No. HQ08X00798 Manterfield, (High Court of Justice, Queens Bench Division, Royal Courts of Justice, Feb. 29, 2008; appeal denied June 25, 2009)

SEC filed case against Manterfield for

Hedge Fund fraud and froze his assets UK Court upheld an SEC Freezing Injunction over assets in the UK Waived a cross undertaking g Recognized the enforceable nature of the US order for disgorgement (finding that it is not penal)
8

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5. Receiver actions
Receiver is the plaintiff Receiver hires foreign counsel Disadvantages: Costs of foreign counsel,

receiver and his US counsel (triple costs); not a public agency; not a liquidating p g y; q g receiver

6. Direct Criminal Authority Freezes


Somewhat rare
Danish MOJ example

10

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7. MLAT: Basics & what do you need for a freeze?


Basics:
What is an MLAT request?

What do you need for a freeze?


The format Probably an AUSA US Department of Justice (DOJ) OIA PC link to proceeds TRO or criminal seizure warrant
11

MLAT: Good idea?


Advantage: Your time is cheap,
documents and testimony too

Disadvantage: Can be slow, through US


Central Authority (US DOJ)

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The SECs Recent Experience:


FY 2010: Froze more than US$32,000,000 US$32 000 000
of securities fraud proceeds located abroad. FY 2009: Froze more than US$325,951,645 of securities fraud proceeds located abroad. FY 2008: Froze more than US$18,000,000 of securities fraud proceeds located abroad. 13

We are fastbut sometimes not fast enough!


Real time enforcement is essential to stop p
ongoing frauds and to try and freeze proceeds of fraud. Reality: But the wrongdoers are usually steps ahead of us! (Its very easy to wire money!) Still, Still we need to follow the money (as quickly follow money as possible!): It is essential to take the profit out of securities fraud and protect investors and the markets.
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THANK YOU FOR YOUR ATTENTION!!!

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Francisco Santos, CVM

Regulation of CIS in Brazil

Regulation of CIS in Brazil


Francisco Santos
CIS Department - Securities Commission of Brazil Securities Enforcement and Market Oversight Training So Paulo, May 2011
1

Disclaimer

The opinions and conclusions here presented are of my own responsibility and do not necessarily represent those of the CVM.
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Overview of CIS Industry


As of 28 February 2011: 9,628 funds = 5 , 11 0 F u n d s + 4 , 5 1 8 F u n d s o f F u n d s To t a l N AV ( e x c l . F o F s ) > 1 . 6 t r i l l i o n B R $ More than 10 million accounts
*Does not include structured funds (PE, VC, ABS, Real Estate)
3

Overview of CIS Industry


1 2 3 4 5 6 7 8 9 10 Country United States Luxembourg L b France Australia Ireland Brazil Japan Canada Germany Korea,Repof TotalNetAssets 11.266.658 2.437.986 2 437 986 1.669.231 1.312.786 966.923 922.663 749.058 587.485 323.372 269.406
4

Source: ICI data for Q3 2010 Values in US$

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Overview of CIS Industry


Distribution by type of fund, based on NAV:
Foreign exchange 0%

Referenced 16%

Stocks 9%

Short term 5%

Multi market Multi-market 27% Fixed Income 43%


Foreign debt 0%

Regulatory Foundations
Main rules -CVM Instruction 409 -Rules pertaining to the fund -http://www.cvm.gov.br/ingl/regu/cvm_409.ASP -CVM Instruction 306 -Rules regarding the administrator/manager -http://www.cvm.gov.br/ingl/regu/CVMINST_306_rev .asp
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Regulatory Foundations Six Pillars


Six pillars of an effective regulation 1. Disclosure 2. Registration 3. Gatekeepers 4. No exclusions 5. Supervision 6. Enforcement
7

Pillar 1 - Disclosure
Benefits - Information for investor decision-making - Market transparency - Peer surveilance - Difusion of best practices Disclosure to investors include s s cu ed -Risks incurred - Fees charged -Redemption conditions -Investment Strategy -Audited financial statements -Potential conflicts of interest

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Pillar 1 - Disclosure
Disclosure to market includes -N AV -N u m b e r o f i n v e s t o r s -R e d e m p t i o n s a n d S u b s c r i p t i o n s -P r o s p e c t u s e s a n d B y - l a w s -F i n a n c i a l s t a t e m e n t s -M a t e r i a l e v e n t s -D e t a i l e d p o r t f o l i o Daily information can be found on the CVM website for all 9,600 funds. Portfolio composition disclosed monthly and strategic positions can be held up for up to 90 days 9 upon justified request.

Pillar 2 - Registration

Funds -Simple online process for open-ended funds -Closed-ended funds targeted at retail investors are subject to previous analysis by CVM Administrators Portfolio Managers

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Pillar 2 - Registration
Custodians Independent Auditors Assets -Tr a d e d i n a n e x c h a n g e -R e g i s t e r e d i n a n a u t h o r i z e d r e p o s i t o r y institution or depository system -K e p t i n a s p e c i f i c a c c o u n t u n d e r t h e n a m e of the fund
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Pillar 3 - Gatekeepers
Administrator - Formal responsible for the fund - Can delegate duties, but remains co-responsible duties Portfolio manager -Co-responsible for many duties Custodians - Ensure that funds assets exist and are guarded in compliance to regulation Independent auditors - Check funds financial statements

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Pillar 4 - No exclusions
Any Collective Investment Scheme offered to the public j g is subject to CVMs regulation. - Discounts only apply for funds targeting qualified/accredited investors To t a l i n c l u s i o n o f H e d g e F u n d s i n o u r regulation Side letters are not allowed
13

Pillar 5 - Supervision
Electronic filters Use of database to identify non-compliances and to foresee problems before they actually occur. Risk-based approach - Potential impact x Probability et odo ogy ade ow website - Methodology made known in webs te - Includes analysis of by-laws, prospectuses, marketing material, observation of concentration limits and pricing of assets. Relevant role of ANBIMA
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Pillar 6 - Enforcement
Alerts -H a r m h a s b e e n c e a s e d / r e v e r t e d -L o w r e l e v a n c y ( l o w r i s k t o t h e i n v e s t o r s L or to the regulatory objectives) Adjustment of conduct Sanctions -R e i n c i d e n c e s -S e r i o u s i n f r a c t i o n s -E x a m p l e s e t t i n g -E ff o r t t o c o n t i n u e t o r e d u c e l e a d t i m e between infraction and sanction

15

Other Characteristics
Prudential regulation Loan prohibition -Leverage can be done only through derivatives (margin calls limitations) (limits on OTC counterparts concentration) Portfolio concentration limits both in terms of issuer and type of asset, checked on a monthly basis

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CVM Organizational Structure

Commissioner

Commissioner

Chairperson

Commissioner

Commissioner

SGE

CIS DIVISION

SIN

GIA
Enforcement Investigations Enforcement Actions

GIR
Registration Registrations Authorizations

GIF
Surveillance Continuous Supervision

GIE
Structured Funds Registrations, authorizations and surveillance of structured funds
17

CIS Enforcement Structure

GIA
Area created in 2008

Gerncia de Apurao de Irregularidades Detection of Irregularities Area

Dedicated fully to investigating non-compliances and of starting administrative proceedings seeking to punish deviant behaviour. behaviour Aimed at building up expertise on enforcement relative to CIS rules. Such expertise and its related gains of scale and scope imply in a reduction in the lead-time between detection of a non-compliance and its punishment

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Enforcement Cases Origin


Funds investment in listed corporations Broker/dealers INTERNAL SOURCES Onsite inspections EXTERNAL SOURCES Financial institutions statements

SFI

SEP

SMI
Investor complaints

BACEN

SOI GIR
Registration of market participants

GIA

SPC
Pension funds data

SUSEP GIE
Structured funds Insurance companies portfolios
19

GIF
Supervision of funds data INTRA-DIVISION SOURCES

A Typical Enforcement Action


GIF

GIF GIA GIA SIN

Electronic surveillance of data received from fund managers In particular, attention is paid to: p p g prescriptions p -compliance of portfolio with legislation p -Abrupt variations in quota value -Inconsistency between fund type and fund portfolio Detailed analysis if inconsistencies are found Investigative actions Requests for information and subpoenas Recommendation for sanctioning Obs. In less serious cases, warnings are issued and a record is kept to ensure non reincidence Chair and Commissioners deliberate on sanctions Advises Criminal prosecutors of suspicions of crime
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CVM SGE

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Review

Conselho de Recursos do Sistema Financeiro Nacional (CRSFN) National Financial S N i l Fi i l System A Appeals C l Council il Sanctioning actions performed by the CVM can be reviewed by the CRSFN The Council members come from various entities such as the Ministry of Finance, the financial system self-regulator, the stock exchange, the Central Bank, and the CVM.

Recent Cases
Case 1 GIF routine electronic analysis show inconsistency in a given fund GIF portfolio data Further analysis show that fund is overinvested in a certain type of asset GIA investigation shows that not only fund is non compliant with legislation prescriptions for portfolio composition, but also that bonds in which fund is overinvested were issued by a party related to the manager (conflict of interest not disclosed to investors) SIN recommends to CVM that sanctions be applied to manager company and responsible director Chairperson and Commisioners deliberate on sanctions: Both management company and director are suspended for two years and 22 fined R$100,000.00

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Recent Cases
Case 2 An investor calls CVM enquiring about the regularity of an investment offered to him GIR i contacted and verifies that neither i ff d hi is d d ifi h ih the fund nor its managers are registered GIA investigates and finds website advertising and offering investment in a fund The fund of the champions Promised returns are up to 11% a month SIN recommends to CVM the issuance of stop-order alerting the public of the irregularities pertaining the investment Stop order is issued and sanctioning process is started Criminal prosecutors also act Manager of the scam is arrested Press announces scam as the Brazilian Madoff SIN recommends to CVM that sanctions be applied Case will be judged soon by the Board 23

Recent Cases
Case 3 FINRA contacts CVM and shares information about issues it had found in an examination conducted in one of their members. They y had found some suspicious activities involving two funds based in Brazil. Almost all of the revenue of the broker/dealer was being generated in transactions involving these two members. They found evidence of possible conflicts of interest, possible interpositioning using nominee accounts and possible excessive markup charges to the funds. GIA analyses documentation sent by FINRA and finds evidence of non-compliance to Brazilian rules SIN subpoenas fund manager to explain findings SFI performed on site examination and collected additional evidences 24 Case is still ongoing

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Francisco Santos, CVM

Regulation of CIS in Brazil

Effects of the Recent Crisis


NAV had shrunk 8% between July and December 2008 Seven relatively small open-ended funds suspended redemptions - legal procedures were observed - liquidity problems were overcome with participation and agreement of investors

25

Historical Performance
Long Term Evolution of NAV in billions of Reais
1.800

CAGR 03/10: 17,2%

1.600 1 600

1.400

1.200

1.000

800

600

400

200

0 2000 2001 2002 2003* 2004 2005 2006 2007 2008 2009 2010**

*2003 regulation of all funds transferred to the CVM **2010 until end of October NAV of R$1.5 trillion

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Francisco Santos, CVM

Regulation of CIS in Brazil

THANK YOU!
Francisco Santos Head of the CIS Department Tel: +55(21)3554-8371 sin@cvm.gov.br
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Appendix Regulatory Improvement Details on Liquidity Management and Systemic Risk Monitoring Proposals
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Regulatory Improvement
Regulatory improvements under consideration -Annual disclosure for investors of a detailed report of expenses -Adoption of simplified prospectuses -Detailing of the minimum requirements of liquidity management systems, including periodical stress tests - Additional information to be sent to the commission on a daily or monthly basis to help the assessment of any liquidity or systemic risk.
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Liquidity Management
Liquidity management Revision of rules under consideration Objective: Ensure an adequate balance between assets and liabilities maturities and its continuous reassessment Current rule: Generic duty of granting redemptions when requested Adequate, but improvable Rule under study: Obligation of implementing a liquidity management system
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Liquidity Management
Liquidity management (Rules under consideration continued) Based on a relative concept of liquidity, i.e. liquidity to be liquidity i e assessed vis--vis the obligations of the fund System must take into consideration, at least: -Funds obligations (including margin calls, for sta ce) instance) -Redemption requests expected under normal circumstances -Daily volume of trades in the market, for each asset -Number of days it would take to sell out funds assets 31 -Analysis of dispersion of ownership of fund

Liquidity Management
Liquidity management (Rules under consideration continued) Furthermore, the rules would require periodic stress tests and the disclosure of liquidity management system used in CIS by-laws and offering documents Information on the amount of net liquid assets and on the stock of redemptions requested would be reported to the commission on a daily basis.
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Regulatory Improvement
Commitment to improve regulation and supervision of HFs up to the best international standards IOSCO Task Force on Unregulated Entities (TFUE) Created in 2008 as part of an effort by IOSCO to increase the sharing of sensitive information and guard against systemic risk in financial markets

33

Regulatory Improvement

30 September 2010: 1st edition of a global survey to collect data regarding HFs CVM has requested information from 9 fund administrators with regard to 113 funds. As a result of participating in the survey, CVM is proposing an update of the information required monthly of all funds to increase capability of identifying possible systemic issues involving HFs
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Regulatory Improvement Systemic Risk

Some of the new information to be requested monthly ( (forthcoming rules, still in draft format) include: g , ) -DV01 measures sensitivity to variations in interest rates -CS01 measures sensitivity to variations in the exchange rate to the Us$. -Equity - measures sensitivity to variations in equity E i ii i i i i i prices -Expected impact on fund of the worst scenario among the ones published by BM&FBovespas clearing house and of the stress scenario used by the manager 35

Regulatory Improvement Systemic Risk

Some of the new information to be requested monthly ( (forthcoming rules, still in draft format) include: g , ) - Derivatives exposure both in the CCP and in the OTC markets - Transactions with related parties - Performance fees charged - 1 day Value at Ri k calculated based on the last 21 d Vl Risk l l d b d h l working days and with 95% confidence - The CVM already has detailed monthly information on the funds portfolio and financial statements, including on counterparty and type of asset exposure concentration 36

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Home | Previous Page

SECURITIES AND EXCHANGE COMMISSION


SECURITIES EXCHANGE ACT OF 1934 Release No. 44969 / October 23, 2001 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 1470 / October 23, 2001 Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions Today, we commence and settle a cease-and-desist proceeding against Gisela de Leon-Meredith, former controller of a public company's subsidiary.1 Our order finds that Meredith caused the parent company's books and records to be inaccurate and its periodic reports misstated, and then covered up those facts. We are not taking action against the parent company, given the nature of the conduct and the company's responses. Within a week of learning about the apparent misconduct, the company's internal auditors had conducted a preliminary review and had advised company management who, in turn, advised the Board's audit committee, that Meredith had caused the company's books and records to be inaccurate and its financial reports to be misstated. The full Board was advised and authorized the company to hire an outside law firm to conduct a thorough inquiry. Four days later, Meredith was dismissed, as were two other employees who, in the company's view, had inadequately supervised Meredith; a day later, the company disclosed publicly and to us that its financial statements would be restated. The price of the company's shares did not decline after the announcement or after the restatement was published. The company pledged and gave complete cooperation to our staff. It provided the staff with all information relevant to the underlying violations. Among other things, the company produced the details of its internal investigation, including notes and transcripts of interviews of Meredith and others; and it did not invoke the attorney-client privilege, work product protection or other privileges or protections with respect to any facts uncovered in the investigation. The company also strengthened its financial reporting processes to address Meredith's conduct -- developing a detailed closing process for the

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subsidiary's accounting personnel, consolidating subsidiary accounting functions under a parent company CPA, hiring three new CPAs for the accounting department responsible for preparing the subsidiary's financial statements, redesigning the subsidiary's minimum annual audit requirements, and requiring the parent company's controller to interview and approve all senior accounting personnel in its subsidiaries' reporting processes. Our willingness to credit such behavior in deciding whether and how to take enforcement action benefits investors as well as our enforcement program. When businesses seek out, self-report and rectify illegal conduct, and otherwise cooperate with Commission staff, large expenditures of government and shareholder resources can be avoided and investors can benefit more promptly.2 In setting forth the criteria listed below, we think a few caveats are in order: First, the paramount issue in every enforcement judgment is, and must be, what best protects investors. There is no single, or constant, answer to that question. Self-policing, self-reporting, remediation and cooperation with law enforcement authorities, among other things, are unquestionably important in promoting investors' best interests. But, so too are vigorous enforcement and the imposition of appropriate sanctions where the law has been violated. Indeed, there may be circumstances where conduct is so egregious, and harm so great, that no amount of cooperation or other mitigating conduct can justify a decision not to bring any enforcement action at all. In the end, no set of criteria can, or should, be strictly applied in every situation to which they may be applicable. Second, we are not adopting any rule or making any commitment or promise about any specific case; nor are we in any way limiting our broad discretion to evaluate every case individually, on its own particular facts and circumstances. Conversely, we are not conferring any "rights" on any person or entity. We seek only to convey an understanding of the factors that may influence our decisions. Third, we do not limit ourselves to the criteria we discuss below. By definition, enforcement judgments are just that -- judgments. Our failure to mention a specific criterion in one context does not preclude us from relying on that criterion in another. Further, the fact that a company has satisfied all the criteria we list below will not foreclose us from bringing enforcement proceedings that we believe are necessary or appropriate, for the benefit of investors. In brief form, we set forth below some of the criteria we will consider in determining whether, and how much, to credit self-policing, self-reporting, remediation and cooperation -- from the extraordinary step of taking no enforcement action to bringing reduced charges, seeking lighter sanctions, or including mitigating language in documents we use to announce and resolve enforcement actions. 1. What is the nature of the misconduct involved? Did it result from inadvertence, honest mistake, simple negligence, reckless or deliberate

375

indifference to indicia of wrongful conduct, willful misconduct or unadorned venality? Were the company's auditors misled? 2. How did the misconduct arise? Is it the result of pressure placed on employees to achieve specific results, or a tone of lawlessness set by those in control of the company? What compliance procedures were in place to prevent the misconduct now uncovered? Why did those procedures fail to stop or inhibit the wrongful conduct? 3. Where in the organization did the misconduct occur? How high up in the chain of command was knowledge of, or participation in, the misconduct? Did senior personnel participate in, or turn a blind eye toward, obvious indicia of misconduct? How systemic was the behavior? Is it symptomatic of the way the entity does business, or was it isolated? 4. How long did the misconduct last? Was it a one-quarter, or one-time, event, or did it last several years? In the case of a public company, did the misconduct occur before the company went public? Did it facilitate the company's ability to go public? 5. How much harm has the misconduct inflicted upon investors and other corporate constituencies? Did the share price of the company's stock drop significantly upon its discovery and disclosure? 6. How was the misconduct detected and who uncovered it? 7. How long after discovery of the misconduct did it take to implement an effective response? 8. What steps did the company take upon learning of the misconduct? Did the company immediately stop the misconduct? Are persons responsible for any misconduct still with the company? If so, are they still in the same positions? Did the company promptly, completely and effectively disclose the existence of the misconduct to the public, to regulators and to selfregulators? Did the company cooperate completely with appropriate regulatory and law enforcement bodies? Did the company identify what additional related misconduct is likely to have occurred? Did the company take steps to identify the extent of damage to investors and other corporate constituencies? Did the company appropriately recompense those adversely affected by the conduct? 9. What processes did the company follow to resolve many of these issues and ferret out necessary information? Were the Audit Committee and the Board of Directors fully informed? If so, when? 10. Did the company commit to learn the truth, fully and expeditiously? Did it do a thorough review of the nature, extent, origins and consequences of the conduct and related behavior? Did management, the Board or committees consisting solely of outside directors oversee the review? Did company employees or outside persons perform the review? If outside persons, had they done other work for the company? Where the review was

376

conducted by outside counsel, had management previously engaged such counsel? Were scope limitations placed on the review? If so, what were they? 11. Did the company promptly make available to our staff the results of its review and provide sufficient documentation reflecting its response to the situation? Did the company identify possible violative conduct and evidence with sufficient precision to facilitate prompt enforcement actions against those who violated the law? Did the company produce a thorough and probing written report detailing the findings of its review? Did the company voluntarily disclose information our staff did not directly request and otherwise might not have uncovered? Did the company ask its employees to cooperate with our staff and make all reasonable efforts to secure such cooperation?3 12. What assurances are there that the conduct is unlikely to recur? Did the company adopt and ensure enforcement of new and more effective internal controls and procedures designed to prevent a recurrence of the misconduct? Did the company provide our staff with sufficient information for it to evaluate the company's measures to correct the situation and ensure that the conduct does not recur? 13. Is the company the same company in which the misconduct occurred, or has it changed through a merger or bankruptcy reorganization? We hope that this Report of Investigation and Commission Statement will further encourage self-policing efforts and will promote more self-reporting, remediation and cooperation with the Commission staff. We welcome the constructive input of all interested persons. We urge those who have contributions to make to direct them to our Division of Enforcement. The public can be confident that all such communications will be fairly evaluated not only by our staff, but also by us. We continue to reassess our enforcement approaches with the aim of maximizing the benefits of our program to investors and the marketplace. By the Commission (Chairman Pitt, Commissioner Hunt, Commissioner Unger). Footnotes
1

In the Matter of Gisela de Leon-Meredith, Exchange Act Release No. 44970 (October 23, 2001).
2

We note that the federal securities laws and other legal requirements and guidance also promote and even require a certain measure of self-policing, self-reporting and remediation. See, e.g., Section 10A of the Securities Exchange Act of 1934, 15 U.S.C. 78j-1 (requiring issuers and auditors to report certain illegal conduct to the Commission); In the Matter of W.R. Grace & Co., Exchange Act Release No. 39157 (Sept. 30, 1997) (emphasizing the affirmative responsibilities of corporate officers and directors to ensure that shareholders receive accurate and complete disclosure of information required by the proxy solicitation and periodic

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reporting provisions of the federal securities laws); In the Matter of Cooper Companies, Inc., Exchange Act Release No. 35082 (Dec. 12, 1994) (emphasizing responsibility of corporate directors in safeguarding the integrity of a company's public statements and the interests of investors when evidence of fraudulent conduct by corporate management comes to their attention); In the Matter of John Gutfreund, Exchange Act Release No. 31554 (Dec. 3, 1992) (sanctions imposed against supervisors at brokerdealer for failing promptly to bring misconduct to attention of the government). See also Federal Sentencing Guidelines 8C2.5(f) & (g) (organization's "culpability score" decreases if organization has an effective program to prevent and detect violations of law or if organization reports offense to governmental authorities prior to imminent threat of disclosure or government investigation and within reasonably prompt time after becoming aware of the offense); New York Stock Exchange Rules 342.21 & 351(e) (members and member organizations required to review certain trades for compliance with rules against insider trading and manipulation, to conduct prompt internal investigations of any potentially violative trades, and to report the status and/or results of such internal investigations).
3

In some cases, the desire to provide information to the Commission staff may cause companies to consider choosing not to assert the attorney-client privilege, the work product protection and other privileges, protections and exemptions with respect to the Commission. The Commission recognizes that these privileges, protections and exemptions serve important social interests. In this regard, the Commission does not view a company's waiver of a privilege as an end in itself, but only as a means (where necessary) to provide relevant and sometimes critical information to the Commission staff. Thus, the Commission recently filed an amicus brief arguing that the provision of privileged information to the Commission staff pursuant to a confidentiality agreement did not necessarily waive the privilege as to third parties. Brief of SEC as Amicus Curiae, McKesson HBOC, Inc., No. 99-C7980-3 (Ga. Ct. App. Filed May 13, 2001). Moreover, in certain circumstances, the Commission staff has agreed that a witness' production of privileged information would not constitute a subject matter waiver that would entitle the staff to receive further privileged information. http://www.sec.gov/litigation/investreport/34-44969.htm

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Modified: 10/23/2001

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Statement of the Securities and Exchange Commission Concerning Financial Penalties


FOR IMMEDIATE RELEASE 2006-4 Washington, D.C., Jan. 4, 2006 The U.S. Securities and Exchange Commission today issued the following statement concerning financial penalties: Today the Commission announced the filing of two settled actions against corporate issuers, SEC v. McAfee, Inc. and In the Matter of Applix, Inc. In one, the company will pay a civil money penalty; in the other, a penalty is not part of the settlement. The question of whether, and if so to what extent, to impose civil penalties against a corporation raises significant questions for our mission of investor protection. The authority to impose such penalties is relatively recent in the Commissions history, and the use of very large corporate penalties is more recent still. Recent cases have not produced a clear public view of when and how the Commission will use corporate penalties, and within the Commission itself a variety of views have heretofore been expressed, but not reconciled. The Commission believes it important to provide the maximum possible degree of clarity, consistency, and predictability in explaining the way that its corporate penalty authority will be exercised. To this end, we are issuing this statement describing with particularity the framework for our penalty determinations in these two cases. We have issued these decisions, and this statement of principles, unanimously. In determining whether or not to impose penalties against the corporations in these cases, we carefully considered our statutory authority, and the legislative history surrounding that statutory authority. In 1990, Congress passed the Securities Enforcement Remedies and Penny Stock Reform Act (the Remedies Act), which gave the Commission authority generally to seek civil money penalties in enforcement cases. 1 The penalty provisions added by the Remedies Act expressly authorize the Commission to obtain money penalties from entities, including corporate issuers. These provisions also enhanced the Commissions authority to fine

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individuals. Today, we limit our discussion to penalties against corporations, although we view penalties against individual offenders as a critical component in punishing and deterring violative conduct. The Remedies Act legislative history contains express references to penalty assessments against corporate issuers of securities. In its Report on the legislation, the Senate Committee on Banking, Housing, and Urban Affairs expressly noted both that the civil money penalty provisions would be applicable to corporate issuers, and that shareholders ultimately may bear the cost of penalties imposed on corporate issuers. According to the Report, such penalties should be assessed when the securities law violation that is the basis of the penalty has resulted in an improper benefit to the shareholders. It also cautioned that the Commission and courts should, in considering corporate issuer penalties, take into account whether the penalty would be paid by shareholders who had been the principal victims of the violation: The Committee believes that the civil money penalty provisions should be applicable to corporate issuers, and the legislation permits penalties against issuers. However, because the costs of such penalties may be passed on to shareholders, the Committee intends that a penalty be sought when the violation results in an improper benefit to shareholders. In cases in which shareholders are the principal victims of the violations, the Committee expects that the SEC, when appropriate, will seek penalties from the individual offenders acting for a corporate issuer. Moreover, in deciding whether and to what extent to assess a penalty against the issuer, the court may properly take into account whether civil penalties assessed against corporate issuers will ultimately be paid by shareholders who were themselves victimized by the violations. The court also may consider the extent to which the passage of time has resulted in shareholder turnover. 2 As this discussion indicates, a key question for the Commission is whether the issuers violation has provided an improper benefit to the shareholders, or conversely whether the violation has resulted in harm to the shareholders. Where shareholders have been victimized by the violative conduct, or by the resulting negative effect on the entity following its discovery, the Commission is expected to seek penalties from culpable individual offenders acting for a corporation. This same point was made in the SECs memorandum in support of the Remedies Act, which the then Chairman of the SEC, David Ruder, transmitted to the Senate in a January 18, 1989 letter.3 In addition to the benefit or harm to shareholders, the statute and its legislative history suggest several other factors that may be pertinent to the analysis of corporate issuer penalties. For example, the need for effective deterrence is discussed throughout the legislative history of the Remedies Act.4 The Senate Report also notes the importance of good compliance programs and observes that the availability of penalties may encourage development of such programs.5 The Senate Report also observes that penalties may serve to decrease the temptation to violate the law in areas where the perceived risk of detection of wrongdoing is small. 6 Other factors discussed in the legislative history include whether there was

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fraudulent intent, harm to innocent third parties, and the possibility of unjust enrichment to the wrongdoer.7 The Sarbanes-Oxley Act of 2002 changed the ultimate disposition of penalties. Section 308 of Sarbanes-Oxley (the Fair Funds provision) allows the Commission to take penalties paid by individuals and entities in enforcement actions and add them to disgorgement funds for the benefit of victims. Penalty moneys no longer always go to the Treasury. Under Fair Funds, penalty moneys instead can be used to compensate the victims for the losses they experienced from the wrongdoing. If the victims are shareholders of the corporation being penalized, they will still bear the cost of issuer penalty payments (which is the case with any penalty against a corporate entity). When penalty moneys are ultimately returned to all or some of the investors who were victims of the violation, the amounts returned are less the administrative costs of the distribution. While the legislative history of the Fair Funds provision is scant, there are two general points that can be discerned. First, the purpose of the provision is to provide an additional source of compensation to victims of securities law violations. Second, the provision applies to all penalties and makes no distinction between penalties against individuals or entities.8 We have considered the legislative histories of both the Remedies Act and the Fair Funds provisions of the Sarbanes-Oxley Act in reaching the decisions we announce today. We proceed from the fundamental principle that corporate penalties are an essential part of an aggressive and comprehensive program to enforce the federal securities laws, and that the availability of a corporate penalty, as one of a range of remedies, contributes to the Commissions ability to achieve an appropriate level of deterrence through its decision in a particular case. With this principle in mind, our view of the appropriateness of a penalty on the corporation in a particular case, as distinct from the individuals who commit a securities law violation, turns principally on two considerations: The presence or absence of a direct benefit to the corporation as a result of the violation. The fact that a corporation itself has received a direct and material benefit from the offense, for example through reduced expenses or increased revenues, weighs in support of the imposition of a corporate penalty. If the corporation is in any other way unjustly enriched, this similarly weighs in support of the imposition of a corporate penalty. Within this parameter, the strongest case for the imposition of a corporate penalty is one in which the shareholders of the corporation have received an improper benefit as a result of the violation; the weakest case is one in which the current shareholders of the corporation are the principal victims of the securities law violation. The degree to which the penalty will recompense or further harm the injured shareholders. Because the protection of innocent investors is a principal objective of the securities laws, the imposition of a penalty on the corporation itself carries with it the risk that shareholders who are innocent

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of the violation will nonetheless bear the burden of the penalty. In some cases, however, the penalty itself may be used as a source of funds to recompense the injury suffered by victims of the securities law violations. The presence of an opportunity to use the penalty as a meaningful source of compensation to injured shareholders is a factor in support of its imposition. The likelihood a corporate penalty will unfairly injure investors, the corporation, or third parties weighs against its use as a sanction. In addition to these two principal considerations, there are several additional factors that are properly considered in determining whether to impose a penalty on the corporation. These are: The need to deter the particular type of offense. The likelihood that a corporate penalty will serve as a strong deterrent to others similarly situated weighs in favor of the imposition of a corporate penalty. Conversely, the prevalence of unique circumstances that render the particular offense unlikely to be repeated in other contexts is a factor weighing against the need for a penalty on the corporation rather than on the responsible individuals. The extent of the injury to innocent parties. The egregiousness of the harm done, the number of investors injured, and the extent of societal harm if the corporations infliction of such injury on innocent parties goes unpunished, are significant determinants of the propriety of a corporate penalty. Whether complicity in the violation is widespread throughout the corporation. The more pervasive the participation in the offense by responsible persons within the corporation, the more appropriate is the use of a corporate penalty. Conversely, within this parameter, isolated conduct by only a few individuals would tend not to support the imposition of a corporate penalty. Whether the corporation has replaced those persons responsible for the violation will also be considered in weighing this factor. The level of intent on the part of the perpetrators. Within this parameter, the imposition of a corporate penalty is most appropriate in egregious circumstances, where the culpability and fraudulent intent of the perpetrators are manifest. A corporate penalty is less likely to be imposed if the violation is not the result of deliberate, intentionally fraudulent conduct. The degree of difficulty in detecting the particular type of offense. Because offenses that are particularly difficult to detect call for an especially high level of deterrence, this factor weighs in support of the imposition of a corporate penalty. Presence or lack of remedial steps by the corporation. Because the aim of the securities laws is to protect investors, the prevention of future harm, as well as the punishment of past offenses, is a high priority. The Commissions decisions in particular cases are intended to encourage the management of corporations accused of securities law violations to do everything within their power to take remedial steps, from the first moment that the violation is brought to their attention. Exemplary conduct by

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management in this respect weighs against the use of a corporate penalty; failure of management to take remedial steps is a factor supporting the imposition of a corporate penalty. Extent of cooperation with Commission and other law enforcement. Effective compliance with the securities laws depends upon vigilant supervision, monitoring, and reporting of violations. When securities law violations are discovered, it is incumbent upon management to report them to the Commission and to other appropriate law enforcement authorities. The degree to which a corporation has self reported an offense, or otherwise cooperated with the investigation and remediation of the offense, is a factor that the Commission will consider in determining the propriety of a corporate penalty. This framework for the consideration of the propriety of corporate penalties is grounded in the Commissions statutory authority and supported by the legislative history underlying that authority. It is the Commissions intent that the elucidation of these principles will provide a high degree of transparency to our decisions in these and future cases, and will be of assistance to the Commissions professional staff, to corporate issuers and their counsel, and to the public. ###
1

Before the enactment of the Remedies Act, the Commissions penalty authority was essentially limited to the ability to seek penalties in district court for insider trading violations.
2

S. Rep. No. 337, 101st Cong., 2d Sess. at 17 (1990) (1990 Senate Report).
3

Securities Law Enforcement: Hearings on H.R. 975 Before the Subcomm. on Telecommunications and Finance of the House Comm. on Energy and Commerce, 101st Cong., 1st Sess. 47-48 (1989) (statement of David S. Ruder, Chairman, SEC, attaching Memorandum of the SEC in Support of the Securities Law Enforcement Remedies Act of 1989).
4

See, e.g., 1990 Senate Report at 6-11; see also Section 21B(c)(5) of the Exchange Act.
5

1990 Senate Report at 10-11. 1990 Senate Report at 15.

1990 Senate Report at 14. See, e.g., Section 21B(c)(1)-(3) of the Exchange Act.
8

See House Committee on Financial Services Release, Baker Proposes FAIR Account to Return Funds to Defrauded Investors (July 17, 2002)(including statements of Chairman Oxley and Chairman Baker),

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available at http://financialservices.house.gov/news.asp. Additional materials: Litigation Release 19520 Administrative Proceeding Release No. 33-8651<>

http://www.sec.gov/news/press/2006-4.htm

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Modified: 01/04/2006

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Sample Bank Warning letter

November 5, 2007

BY FAX (

) AND AIRMAIL

Mr. Compliance Officer ABC Bank 55 King Street West Country Re: Securities and Exchange Commission v. Defendants, Civil Action No. 05-80128-CIV-ZLOCH ( )

Dear Mr. Compliance Officer: This letter is to notify you that United States Securities and Exchange Commission filed an emergency civil enforcement action on November 5, 2007 in the United States District Court for the Southern District of New York. The Commission alleged that the defendant has engaged in unlawful insider trading in the stock of XYZ Corp. and made illegal profits of $14 million. The proceeds of this securities fraud appear to be held in account number 123456789 at ABC Bank. As a result of that action, the District Court temporarily ordered the above-named defendants to restrain from violating the antifraud provisions of the U.S. federal securities laws. The District Court also ordered a freeze of defendants assets, an accounting of and identification of his accounts, and a repatriation of all funds obtained from the alleged fraudulent scheme. Specifically, the Court has restrained defendant from directly or indirectly, transferring, changing, setting off, assigning, liquidating or otherwise disposing of, or withdrawing any assets or property owned or controlled by him, including cash. The District Courts asset freeze applies to bank accounts in the names of third parties on which defendant is a signatory. A copy of the Courts order is attached. On the basis of the above, we request that ABC Bank honor the District Courts Order and preserve the funds in the above-noted accounts. We note that ABC Bank may now be acting as a constructive trustee on behalf of allegedly defrauded investors with respect to the funds held on behalf of the defendant. We request that ABC Bank not permit funds in any of these accounts to be withdrawn, transferred or dissipated in any way during the pendency of the action. We also

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request that you notify us, or your supervisory authority, in the event that there is any attempt by any person to withdraw the funds. If you have any questions regarding this request, please contact _______________ Very truly yours, Deputy Director Enclosure Copy to: Foreign Securities Authority Foreign Financial Intelligence Unit

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June 1, 2008
VIA FACSIMILE (555-121-2121) AND FEDERAL EXPRESS

General Counsel General Motors Corporation 5555 North Boulevard Re: In the Matter of Trading in Aston Martin Stock., File No. 2008-0001

Dear Mr. Lawyer: This correspondence confirms our telephone conversation of earlier today in which Deputy Assistant Director Smith and I informed you that the Division of Enforcement is currently conducting the nonpublic informal inquiry captioned above. In connection with this inquiry, the staff requests that General Motors voluntarily provide it on an expedited basis with certain information and documents described below. This request is divided into two parts. The information requested in Part I concerns the results of your circulation of the attached list of names and accompanying questions. We request a response to Part I no later than 12:00 noon EDT on Thursday, June 5, 2008. We ask that your response to the items requested in Part II be completed by July 4, 2008. Part I. Please circulate the attached list of names of individuals and entities to all General Motors officers, directors, and other present or former General Motors personnel who had knowledge of or were privy to information concerning Aston Martins potential acquisition of General Motors before the October 15, 2007 public announcement of Aston Martins agreement to acquire General Motors, to determine whether any of the names on the list is known to anyone to whom the list is circulated. If so, please provide a detailed description of the relationship between the former and the latter, which includes the following information: a. The name of the person(s) at General Motors and the corresponding name(s) of the persons or entities on the list; b. The nature and history of the relationship between or among them; c. The frequency of their contact or dealings with one another; d. A synopsis of any contact between or among them that occurred during the period October 1, 2007 through October 15, 2007; e. A statement as to the circumstances under which any knowledge of Aston Martins acquisition talks with General Motors may have been gained by the individuals/entities on the list; and f. Any other information that may be useful to the staff in its review.

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As noted above, the staff requests General Motorss response to this section by 12:00 noon (EDT) on Thursday, November 15, 2007. Part II. Please provide the following information and documents no later than close of business on Tuesday, July 4, 2008: 1. A written, detailed chronology that describes the events leading up to and relating to the October 15, 2007 public announcement that Aston Martin agreed to acquire General Motors. The chronology should include the dates, times-of-day, precise locations, durations, and subject matter of any meetings, contacts or discussions regarding the potential acquisition of General Motors. The chronology should also identify all persons who were present or who participated in such meetings, contacts or discussions. For each such person, please identify his or her affiliation, position title, home and business addresses, and home, cellular and business telephone and facsimile numbers. A list of all persons and entities involved in or aware, prior to the October 15, 2007 public announcement that Aston Martin had agreed to acquire General Motors, of the General Motors acquisition talks or of the preparation of a public announcement relating to the same, including, but not limited to, directors, officers, employees, and personnel of law firms, investment banking firms and public relations firms. For each such person, please specify his or her affiliation, position title, the date he or she became aware of the nonpublic information, and his or her home and business addresses, fax numbers, and home, cellular and business telephone numbers. All documents that analyze, summarize, record or otherwise relate to the events identified in the requested chronology, including but not limited to correspondence, notes, agendas, minutes, memoranda and press releases. For each document produced, identify the author(s), recipient(s) and the dates on which the document was prepared and distributed. The date, time and text of the public announcement of Aston Martins agreement to acquire General Motors, as well as all prior drafts thereof. For the period January 1, 2003, through October 15, 2007, all research reports or other analyses published or prepared concerning General Motors or its securities.

2.

3.

4.

5.

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6.

A copy of General Motorss employee directory or directories in use during the period of January through December 2007, listing names, addresses, and phone numbers of its employees. Copies of General Motorss policies and procedures in effect since January 1, 2006, governing insider trading; and a list of all providers of telephone services to General Motors from January 1, 2006 through the present, including all providers of call detail services. This list should identify the name(s) of the vendor(s), business address(es), telephone number(s), services provided to General Motors, and dates during which such services were provided.

7.

8.

As noted above, we would appreciate a response to Part II of this request no later than July 4, 2008. If you are unable to provide the requested materials by this date, please contact me. Please direct your correspondence to the undersigned at: United States Securities and Exchange Commission Division of Enforcement Mail Stop 8-6 450 Fifth Street, N.W. Washington, DC 20549-0806 Please note that the existence of this investigation should not be construed as an indication by the Commission or its staff that any violations of law have occurred, nor should it be taken as a reflection upon any person, entity, or security. I am enclosing a notice containing important supplemental information and a statement of Routine Uses relating to the staffs request for information. Should you have any questions, please do not hesitate to call me at the above number at (202) 5555555. Sincerely, Staff Attorney Enclosures: List of Names Form 1662

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REPORT TO THE PRESIDENT CORPORATE FRAUD TASK FORCE

2008

390

REPORT TO THE PRESIDENT CORPORATE FRAUD TASK FORCE 2008

391

Report To The President Corporate Fraud Task Force 2008

Members of the Corporate Fraud Task Force


Mark Filip, Chairman Deputy Attorney General United States Department of Justice Alice Fisher Assistant Attorney General of the Criminal Division Nathan J. Hochman Assistant Attorney General of the Tax Division Robert S. Mueller, III Director Federal Bureau of Investigation Michael J. Garcia United States Attorney for the Southern District of New York Patrick J. Fitzgerald United States Attorney for the Northern District of Illinois Donald J. DeGabrielle, Jr. United States Attorney for the Southern District of Texas Patrick L. Meehan United States Attorney for the Eastern District of Pennsylvania Joseph P. Russoniello United States Attorney for the Northern District of California Benton J. Campbell United States Attorney for the Eastern District of New York Thomas P. OBrien United States Attorney for the Central District of California Henry M. Paulson, Jr. Secretary United States Department of the Treasury Elaine L. Chao Secretary United States Department of Labor Christopher Cox Chairman Securities and Exchange Commission Walter L. Lukken Chairman Commodity Futures Trading Commission Joseph T. Kelliher Chairman Federal Energy Regulatory Commission Kevin J. Martin Chairman Federal Communications Commission James B. Lockhart, III Director Federal Housing Enterprise Oversight Office Alexander Lazaroff Chief Postal Inspector United States Postal Inspection Service

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Table of Contents
Table of Contents ............................................................................................................i
Letter from the Chairman of the Corporate Fraud Task Force..............................iii
Corporate Fraud Task Force Member Contributions ........................................1.1

a. Criminal Enforcement ........................................................................................1.3


Cases Prosecuted By DOJs Criminal Division ................................................1.3
Cases Prosecuted By DOJs Tax Division..........................................................1.4
Cases Prosecuted By Task Force United States Attorneys Offices ..................1.5
Other Significant Federal Criminal Cases ......................................................1.14
Federal Bureau of Investigation ......................................................................1.19
Department of Treasury ..................................................................................1.20
United States Postal Inspection Service ..........................................................1.22
b. Civil Enforcement..............................................................................................1.23
Department of the Labor ................................................................................1.23
Office of Federal Housing Enterprise Oversight............................................1.23
Securities and Exchange Commission ............................................................1.25
Commodity Futures Trading Commission ....................................................1.29
Federal Communications Commission ..........................................................1.34
Federal Energy Regulatory Commission ........................................................1.36

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Message from the Chairman

April 2, 2008

MESSAGE FROM THE CHAIRMAN On July 9, 2002, President George W. Bush created the Corporate Fraud Task Force to strengthen the efforts of the Department of Justice and Federal, State, and local agencies to investigate and prosecute significant financial crimes, recover the proceeds of such crimes, and ensure just and effective punishment of those who perpetrate financial crimes. The Task Force was formed in response to a number of high-profile acts of fraud and dishonesty that occurred in corporate executive suites and boardrooms across the country. The brunt of these schemes was borne by innocent corporate employees, pensioners, and investorswhose futures and fortunes were harmed, and at times, even shattered, by corporate leaders they trusted with their savings. Since 2002, the Presidents Corporate Fraud Task Force has worked hard to hold wrongdoers responsible and to restore an atmosphere of accountability and integrity within corporations across the country. Relying both on traditional investigative techniques and on new tools made available by the Congress at the request of the President, the Task Force has punished corporate malfeasance and encouraged corporate transparency and self-regulation. The Task Force combines the talents and experience of thousands of investigators, attorneys, accountants, and regulatory experts. Ten federal departments, commissions, and agencies are involved with the Task Force, in addition to seven U.S. Attorneys Offices and two Divisions within the Justice Department. This commitment of resources and expertise reflects the Governments resolve to combat corporate fraud and to foster an environment in which ethical and honest corporate conduct is encouraged and promoted. Since July 2002, the Department of Justice has obtained nearly 1,300 corporate fraud convictions. These figures include convictions of more than 200 chief executive officers and corporate presidents, more than 120 corporate vice presidents, and more than 50 chief financial officers. These convictions are the product of the hard work and cooperation of prosecutors, federal agents, accountants, and support staff from dozens of agencies and offices within the Justice Department and other Task Force components. Some of the contributions of the Task Force are documented in greater detail in this Report.

iii

394

Report To The President Corporate Fraud Task Force 2008

As you will see, criminal enforcement is only one aspect of the Task Forces effort to combat corporate fraud. Task Force members also filed administrative enforcement suits, civil injunctive actions, and amicus briefs in civil corporate fraud cases; provided regulatory oversight for government-sponsored enterprises; established mandatory debarment procedures to prevent those with a history of fraudulent activity from participating in certain federal programs; implemented new anti-manipulation regulations; and issued show cause orders addressing market manipulation. Many of these activities involved the cooperation and coordination of multiple Task Force member agencies. The Task Force remains committed to using all appropriate means to continue combating corporate fraud and to promoting the integrity of the American financial marketplace. The Task Force is proud of its efforts to bring hundreds of unethical corporate officers to justice and to recoup hundreds of millions of dollars in fines, forfeitures, and civil judgments. That said, it is important to appreciate that criminal and unethical corporate leaders are the exception in our nation. Corporations play a vital role in our countryproviding jobs for our people and vitality and innovation to our national economyand the men and women who lead American corporations are overwhelmingly people of talent, dedication, and integrity. By holding unscrupulous corporate officers and entities to account, the Task Force hopes to minimize unfair competition and investor distrust that can curtail the success of law-abiding businesses. The cooperation of numerous upstanding businesses and individuals with federal investigators has been vital to the success of the Task Forces efforts. Since 2002, the Task Force has prosecuted numerous unlawful actors who have operated in the American marketplace. The Task Force remains committed to fulfilling its mission of combating corporate fraud, and helping to protect all Americans by promoting integrity in our national marketplace. Task Force members proudly serve in this capacity, and look forward to doing so in the future.

Mark Filip Chairman Presidents Corporate Fraud Task Force

iv

395

Corporate Fraud Task Force Member Contributions

396

Corporate Fraud Task Force Member Contributions

Criminal Enforcement

Cases Prosecuted By DOJs Criminal Division


Enron Task Force The Department established the Enron Task Force within its Criminal Division in 2002 in response to the discovery of accounting fraud at Enron Corporation. The Task Force, which con sisted of experienced federal prosecutors and agents from around the country, worked for four years to investigate and prosecute cases arising from the fraud at Enron. The Task Force charged a total of 34 defendants. Of those 34 defendants, 26 were former Enron executives. A former CEO of Enron was sentenced to 292 months in prison after being found guilty at trial. The guilty verdicts against the former chairman were dismissed following his death prior to sen tencing. Enrons former CFO pled guilty and was sentenced to six years in prison and its chief accounting officer received a sentence of five and one-half years following his guilty plea. The Department has also seized more than $100 mil lion and has worked with the SEC to obtain orders directing the recovery of more than $450 million for the victims of the Enron fraud. Enterasys Eight former officers of Enterasys Network Systems, Inc., including the chairman and the CFO, have pled guilty or been found guilty at trial in December 2006 on charges stemming from a scheme to artificially inflate revenue to increase, or maintain, the price of Enterasys stock. The fraud caused Enterasys to overstate its revenue by over $11 million in the quarter ending Sept. 1, 2001. The fraud and its public disclosure resulted in a loss to shareholders of about $1.3 billion. As a result, in July 2007, Enterasys CFO Robert J. Gagalis was sentenced

to 11 years in prison. Bruce D. Kay, formerly Enterasyss senior vice president of finance, was sentenced to nine and one half years in prison. Robert G. Barber, a former Enterasys business development executive, was sentenced to eight years in prison and fined $25,000. Hor Chong (David) Boey, former finance executive in Enterasyss Asia Pacific division, was sentenced to three years in prison. Qwest Joseph E. Nacchio, the former CEO of Qwest Communications International, Inc., was found guilty on 19 counts of insider trading on April 19, 2007, on charges stemming from his sale of more than $100 million in Qwest stock while in possession of material, non-public information regarding Qwests financial health. Nacchio was sentenced to six years imprison ment and received the maximum $19 million fine on July 29, 2007. A former CFO pled guilty to insider trading. British Petroleum BP America, Inc., entered into a deferred prosecution agreement in October 25, 2007, in which it admitted that its traders illegally cor nered the market for February 2004 TET propane, which is propane transported via pipeline from Texas to the Northeast and Midwest. BP North America agreed to pay a $100 million penalty, make a $25 million pay ment to the U.S. Postal Inspection Services Consumer Fraud Fund, pay restitution of more than $53 million, and pay a $125 million civil penalty to the CFTC. BP America also agreed to cooperate with an independent monitor, who will be appointed for a three-year period. In addition, four BP traders have been indict ed on charges of conspiracy, commodities mar ket manipulation, and wire fraud in the Northern District of Illinois. In June 2006, Dennis Abbott, a BP energy trader, pled guilty
1.3

397

Report To The President Corporate Fraud Task Force 2008

to one count of conspiracy to commit com modities fraud and agreed to cooperate in the Governments ongoing investigation. AEP AEP Energy Services, Inc. (AEPES), is a wholly owned subsidiary of American Electric Power, Inc. (AEP), one of the nations largest electric utilities. AEPES entered into a deferred prosecution agreement on January 25, 2005, in which it admitted that its traders manipulated the natural gas market by knowingly submitting false trading reports to market indices. AEPES agreed to pay a $30 million criminal penalty. Three energy traders also pled guilty. In sepa rate actions, the CFTC filed a civil injunction against AEP and AEPES. The companies also agreed to pay $21 million to the Federal Energy Regulatory Commission. PNC PNC ICLC Corporation, a subsidiary of the PNC Financial Services Group, Inc., the sev enth largest bank holding company in the nation, was charged with conspiracy to violate securities laws by fraudulently transferring $762 million in mostly troubled loans and venture capital investments from PNC ICLC to offbalance sheet entities. PNC entered into a deferred prosecution agreement on June 2, 2003, and PNC ICLC agreed to pay a total of $115 million in restitution and penalties.

to defraud the United States. As part of the conspiracy, they falsely characterized the presi dents personal use of corporate funds as busi ness expenses. The expenditures included the costs of enhancing and operating his 65-foot yacht, the salaries of the yacht captain and first mate, the cost of landscaping at his residence, and credit card payments for his boat captain and maid. From 1998 through 2001, the com pany president used more than $2 million in corporate funds for personal expenditures, but he failed to report it as income on his tax returns. Also, he directed the CFO not to pay the companys payroll tax liability. The president also provided false financial documents to National City Bank to support an increase in the companys line of credit with the bank. The president was sentenced to 34 months in prison and ordered to pay $4.8 million in restitution for the tax fraud scheme. The CFO was sen tenced to 15 months in prison and ordered to pay more than $1.62 million in restitution to the IRS. Thyssen, Inc. In August 2004, a federal jury in Detroit, Michigan, found two former executives of Thyssen, Inc., guilty of tax fraud, conspiracy, and money laundering charges in a $6.5 million kickback scheme. Kenneth Graham and Kyle Dresbach are the former CEO and executive vice president, respectively, of Thyssen, a Detroit steel-processing company. Their attor ney, Jerome Jay Allen (both an attorney and CPA), pled guilty to conspiracy in August 2003, and cooperated with the prosecution. Graham and Dresbach had conspired with Allen to pay inflated prices for cranes and steel slitting machines. The vendors of the cranes and slitting machines paid the inflated prices as commis sions to a consultant, Hurricane Machine. Hurricane Machine then paid kickbacks to more than a dozen entities controlled by Allen. He laundered the funds and used his client trust

Cases Prosecuted By DOJs Tax Division


Superior Electric In November 2006, the 50% owner and president of Superior Electric Company, a com mercial electrical contracting company based in Columbus, Ohio, pled guilty to bank fraud and to conspiracy to defraud the United States. The companys CFO also pled guilty to conspiracy
1.4

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Corporate Fraud Task Force Member Contributions

fund accounts to pay kickbacks to Graham and Dresbach. As part of this conspiracy, Graham and Dresbach also conspired with Allen to file false individual income tax returns that did not report the kickback payments. Graham was sen tenced to 75 months in prison and was ordered to pay restitution of $8.8 million. Dresbach was sentenced to 58 months in prison and was ordered to pay restitution of $8.4 million. Allen was sentenced to 34 months in prison and was ordered to pay restitution of $8 million. UNI Engineering, Inc. In October 2006, a federal grand jury in Camden, New Jersey, returned an indictment charging the controller of UNI Engineering, Inc., a privately-held company, with obstruct ing the internal revenue laws, filing a false pay roll tax return, and failing to pay more than $400,000 in payroll taxes to the IRS. The indictment alleges that the controller con cealed from the owners of UNI Engineering and the IRS that UNI Engineering did not accurately report and pay its employment taxes from 1998 through 2001, and that he misap propriated funds that UNI Engineering was required to pay to the IRS for employment taxes. The controller pled guilty to five felony tax charges and admitted that he misappropri ated unpaid payroll taxes of the company and filed false payroll and individual income tax returns with the IRS. He was sentenced to 24 months in jail and ordered to pay a $7,800 fine. Neways, Inc. In September 2006, a federal judge in Salt Lake City sentenced Utah executives Thomas E. Mower and Leslie D. Mower and their cor porate counsel, James L. Thompson, for their respective roles in a scheme to defraud the United States. Thomas Mower, founder and CEO of Neways, Inc., an international multi level marketing company, was sentenced to 33

months in prison and ordered to pay a $75,000 fine. Leslie Mower, Newayss CFO, was sen tenced to 27 months in prison and ordered to pay a $60,000 fine. Thompson, Newayss cor porate counsel from 1995 through 1997, was sentenced to 12 months and one day in prison. They had concealed from the IRS more than $1 million of Newayss gross receipts and $3 million of the Mowers commission income. The Mowers used nominee bank accounts, nominee entities, and nominee social security numbers for various bank accounts. Thompson had created and presented a false loan docu ment to the investigating agent.

Cases Prosecuted By Task Force United States Attorneys Offices


U.S. Attorneys Office for the Central District of California Milberg Weiss This national class action law firm, several partners, and other individuals were indicted for making illegal, undisclosed payments to class plaintiffs. The attorneys subsequently made false statements in court filings regarding these payments. The indictment charges defendants with conspiracy, fraud, and money laundering counts. Several of the attorneys involved including former law firm name partners William Lerach and David Bershad pled guilty in 2007 and are cooperating with the government. Trial against the remaining parties is currently scheduled for 2008. Homestore.com, Inc. Eleven executives and employees of this California-based Internet company were con victed for their roles in a complicated revenue inflation scheme. Homestore fraudulently paid itself millions of dollars in bogus roundtrip deals to meet quarterly revenue expectations.
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Report To The President Corporate Fraud Task Force 2008

The companys senior management, finance department, and sales staff were convicted of conspiracy, insider trading, wire fraud, and other securities law violations for their roles in the transactions. After a lengthy jury trial in 2006, Homestores former CEO was found guilty of numerous criminal counts, including filing false quarterly statements with the SEC and lying to auditors. He was sentenced to 15 years in prison and ordered to pay $13 million in fines and restitution. U.S. Attorneys Office for the Northern District of California M&A West Zahra Gilak, corporate secretary at M&A West, was convicted of one count of securities fraud and five counts of money laundering. The jury found that Gilak participated in a stock manipulation scheme in connection with the purchase and sale of shares of three publicly trad ed companies on the Over-the-Counter Bulletin Board in 1999-2000. Gilak devised a scheme to gain a controlling interest over three companies and concealed her interest by holding stock through multiple shell companies that she con trolled. After manipulating demand for the stock, Gilak sold the securities, reaping approxi mately $14 million in net proceeds. Gilak was sentenced in April 2007 to 51 months imprison ment and 36 months supervised release. She was ordered to pay a $600 special assessment and $2.5 million in restitution. She also forfeited $881,000. Gilak has appealed. F. Thomas Eck, III, attorney, and Scott Kelly, former CEO of M&A West, both pled guilty on related charges. Eck was sentenced in June 2004 to 70 months custody and three years supervised release, and was ordered to pay a $100 special assessment. Kelly was sentenced on August 28, 2007, to 14 months custody and three years supervised release. Kelly was ordered to pay a $200 special assessment, $200,000 forfeiture, and $6.5 million in restitution.

U.S. Wireless Oliver Hilsenrath, CEO, and David Klarman, general counsel, were charged with defrauding U.S. Wireless shareholders by improperly trans ferring company stock and cash to offshore entities they controlled and also causing U.S. Wireless to file false and misleading financial statements with the SEC. When the fraud was discovered, U.S. Wireless restated its financial results, increasing its fiscal year 2000 loss by more than 55%. Hilsenrath pled guilty and was sen tenced on July 9, 2007, to five years probation. He was ordered to pay $2 million in restitution, a $2,000 fine, and a $200 special assessment. D. Klarman pled guilty and was sentenced on July 10, 2007, to three years probation and received a $100 special assessment. U.S. Attorneys Office for the Northern District of Illinois Mercury Finance Company Mercury Finance Company was a NYSElisted subprime lending company. As a result of an extensive accounting fraud scheme designed to inflate the companys revenues and to under state its delinquencies and charge offs over sever al years, the market capitalization of the compa ny decreased by nearly $2 billion in one trading day after the existence of the fraud was publicly announced. Commercial paper purchasers also eventually lost about $40 million and longer term lenders lost another $40 million. The former CFO admitted his role in the fraudulent scheme and cooperated with the investigation, but he died unexpectedly before charges were brought. John Brincat Sr., the former CEO and chairman of the board of directors of the company, pled guilty to wire fraud and conspiracy in connection with the scheme. On May 23, 2007, Brincat was sentenced to 10 years in prison. Previously, Bradley Vallem, the former treasurer of the com pany, pled guilty to engaging in the accounting fraud scheme, agreed to cooperate and received a

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400

Corporate Fraud Task Force Member Contributions

20-month sentence. Lawrence Borowiak, the former accounting manager, pled guilty to trad ing Mercury Finance Company stock on inside information, agreed to cooperate, and received a sentence of 12 months in prison. Anicom, Inc. Anicom, Inc., was a publicly held national distributor of wire and cable products such as fiber optic cable. The former chairman of the board of directors and six others at the compa ny were charged with engaging in an account ing fraud scheme. The scheme involved creat ing fictitious sales of more than $24 million, understating expenses, and overstating earn ings and net income by millions of dollars. The scheme led to a market capitalization loss of more than $80 million. All of the defendants except the former chairman have pled guilty and are cooperating. These include a former CEO, a former COO, a former CEO, a former controller, a former vice president of sales and a shipping manager. U.S. Attorneys Office for the Eastern District of New York Comverse Between 1998 and 2002, the CEO, CFO, and general counsel of Comverse Technology, Inc., defrauded Comverse shareholders by secretly backdating Comverse's option grants to executives and employees. The defendants backdated Comverse stock options to mask that the options were in fact granted "in the money" (with an exercise price below the fair market value of Comverse shares on the date of the grant) and to avoid properly accounting for the in-the-money grants in SEC filings (which would have had the effect of increasing com pensation expense and decreasing the compa nys reported earnings). Among other things, the three executives lied to their outside audi

tors and to institutional investors to conceal their fraudulent options practices. In addition, the CEO and CFO created a secret slush fund of options (code-named "Phantom" and "Fargo") which they made through the surreptitious grant of hundreds of thousands of options to fictional employees. Options from the Phantom/Fargo slush fund were transferred to favored employees at Alexander's discretion, with neither the knowledge nor the oversight of the board of directors of Comverse, nor with any disclosure or accounting for these options in Comverse's pub lic filings. The loss to Comverse and its share holders resulting from the stock option fraud schemes at the company is currently estimated at $51 million. The option fraud schemes concluded in April 2002 and came to light in March 2006. The CEO immediately attempted to buy off the CFO, offering him $2 million, then $5 million, then asking him to "name your price," to take sole responsibility for the options schemes and to absolve him. On October 24, 2006, the CFO pled guilty to charges of securities fraud and con spiracy to commit securities fraud pursuant to a cooperation agreement. The SEC simultaneously announced a settlement with the CFO providing, among other things, for him to disgorge approx imately $2.4 million. On November 2, 2006, the general counsel pled guilty to conspiracy to com mit securities fraud. The general counsel was sen tenced to 12 months and one day of incarcera tion. The former CEO is a fugitive. In June 2006, he fled to a vacation home in Israel. During the month of July 2006 alone, he laundered at least $57 million by transferring assets from the United States to Israel and elsewhere. He was arrested in Namibia on September 27, 2006. The pending indictment against the CEO charges him with 35 counts, including securities fraud, mail fraud, wire fraud, conspiracy, false statements to the SEC, obstruction of justice, and money laundering. It also contains two forfeiture allega tions. The Government is seeking extradition.
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Report To The President Corporate Fraud Task Force 2008

Computer Associates From approximately 1998 through 2000, senior executives at Computer Associates, including Sanjay Kumar (president and COO, and then CEO), Stephen Richards (head of worldwide sales) and others, caused the compa ny to backdate billions of dollars' worth of license agreements in order to prematurely rec ognize revenue to avoid missing Wall Streets projected earnings per share estimates for the given quarter. Later, when the Government began investigating this conduct, the defendants implemented a massive scheme to obstruct jus tice. In the end, eight defendants pled guilty. On November 2, 2006, Kumar was sentenced to 12 years' imprisonment. On November 14, 2006, Richards was sentenced to seven years' impris onment. Five additional cooperating witnesses have been sentenced since January 1, 2007. Friedmans Jewelers From approximately 2000 through 2003, Friedmans Inc. was a fine-jewelry retailer with publicly traded stock. Friedmans offered an installment credit program, which the company described as an integral part of its business strat egy, to help its customers finance jewelry purchas es. The majority of Friedmans sales were made on credit, and Friedmans public filings represented that it strictly followed company guidelines as to when and how much credit to issue to Friedmans customers. In reality, Friedmans employees, with managements encouragement, routinely violated these guidelines in issuing credit. As a result, Friedmans had a rising level of uncollectible accounts receivable. Instead of disclosing its col lection problems, senior management manipulat ed Friedman's accounting to hide the collection problems from the investing public. These manip ulations created the appearance that the company had met Wall Streets expectations in multiple quarters, when it in fact had not. Friedmans for mer CFO, Victor Suglia, and Friedmans former
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controller, John Mauro, have been cooperating with the investigation and recently pled guilty to conspiracy to commit securities fraud, wire fraud and mail fraud. On February 13, 2007, a grand jury indicted Friedmans and Crescents former CEO, Bradley Stinn, on multiple charges stem ming from this conspiracy. In November 2005, Friedmans entered into a non-prosecution agree ment with the Government. Under the terms of the agreement, Friedmans acknowledged that it violated federal criminal law through the conduct of certain former Friedmans executives, officers and employees and admitted that former Friedmans executives conspired to commit and engaged in securities fraud. As part of the agree ment, Friedmans agreed to implement numerous corporate reforms, continue its cooperation with the Governments investigation and pay $2,000,000 to the U.S. Postal Inspection Service Consumer Fraud Fund. The Government also entered into a non-prosecution agreement with Crescent Jewelers, an affiliate of Friedmans. Under the terms of the agreement, Crescent acknowledged that it violated federal criminal law through the conduct of certain former Crescent executives and admitted that former Crescent executives conspired to defraud Friedmans share holders through the scheme outlined above. Crescent also agreed to implement numerous cor porate reforms, continue its cooperation with the Governments investigation and pay $1,000,000. Allou Healthcare, Inc. The case centered on a Long Island based public company called Allou Healthcare, Inc. (Allou). The principals of Allou and its affili ated companies, all members of the Jacobowitz family, engaged in a massive, decade-long con spiracy involving bank fraud and securities fraud. The scheme caused losses to creditors and investors of nearly $200 million, and involved an array of shell companies, phony transactions, and wire transfers of funds to foreign countries. In an attempt to cover up the massive fraud at

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Corporate Fraud Task Force Member Contributions

Allou, the Jacobowitzes planned a fire at Allous Brooklyn warehouse in September 2002 to recover $100 million in insurance proceeds. This plan ultimately went awry when Allous insurers refused to pay the $100 million claim because of the fire departments conclusion that the fire was arson. To bolster Allous insurance claim and to obstruct the criminal investigations into the origin of the fire, the Jacobowitzes and their associates then offered to pay a fire marshal $100,000 in cash to change the fire depart ments conclusion regarding the origin of the fire. Eight defendants, including the company president, pled guilty to various charges of fraud and bribery. American Tissue, Inc. American Tissue, Inc. (ATI) was the fourth largest tissue manufacturer in the United States, with offices in Happaugue, Long Island, and approximately a dozen manufacturing facilities throughout the United States and Mexico. ATI issued $165 million worth of bonds that were publicly traded, and it operated under a revolv ing loan facility which included several banks but was administered by LaSalle Business Credit (LaSalle). During 2000 and 2001, ATI began to experience severe financial difficulties, due largely to reckless over-expansion and a downturn in the market. As a consequence, cor porate executives, including the CEO Mehdi Gabayzadeh and VP of Finance John Lorenz, engaged in various schemes designed to defraud LaSalle into loaning operating funds to ATI. These schemes also included a conspiracy to fal sify SEC filings and press releases regarding ATI's financial condition, in hopes of propping up the value of ATI's existing bonds and suc cessfully offering an additional $200 million worth of bonds to raise capital. The fraud was uncovered in early September 2001 and ATI declared bankruptcy. Several months later, Gabayzadeh was forced out of ATI and he formed a second corporation, American Paper

Corporation. As CEO of American Paper Corporation, Gabayzadeh engaged in addition al schemes to defraud the bankrupt ATI out of assets that were owned by creditors. In September 2006, Gabayzadeh was con victed after trial and sentenced to 15 years imprisonment, five years supervised release, and restitution in the amount of $64,933,931. In January 2007, Lorenz was sentenced to 18 months imprisonment and three years of super vised release, and was ordered to pay restitution in the amount of $64,682,588. Two additional executives also pled guilty. DHB Industries DHB Industries manufactures body armor and has been the primary supplier of body armor to the military since approximately 2002. Until recently, it was headquartered in Westbury, Long Island, with manufacturing facilities in Pompano Beach, Florida and Jacksonville, Tennessee. The former CFO and the former COO were indicted for conspiracy to commit securities fraud and securities fraud, including insider trading charges. From 2003 until 2005, they inflated DHB's inventory val uations in order to boost reported profits, and they improperly reclassified expenses to increase DHB's reported gross margin per centage. In addition, during the first quarter of 2005, they falsified DHB's records to reflect the existence of $7 million worth of non-exis tent inventory. When auditors first uncovered this fraud, the CFO insisted the inventory existed and provided bogus documents to back up her claim. After the auditors discredited the claim, they admitted to the auditors that the inventory entry was false. In November and December of 2004, while DHB was reporting the profit and gross margin numbers fraudu lently inflated by the CFO and the COO, the CFO sold approximately $3 million worth of DHB and the COO sold approximately $5
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Report To The President Corporate Fraud Task Force 2008

million worth of DHB stock, both doing so through the execution of cashless warrant options. U.S. Attorneys Office for the Southern District of New York Accounting / Financial Fraud Adelphia. Following a four-month trial, the former CEO and CFO of Adelphia Commun ications Corp. were convicted of fraud charges arising from their participation in a complex financial statement fraud and embezzlement scheme that defrauded Adelphias shareholders and creditors out of billions of dollars. John and Timothy Rigas were sentenced to 15 and 20 years imprisonment, respectively. The Govern ment also obtained the forfeiture of more than $715 million from the Rigas family and Adelphia for distribution to victims. Refco. The former CEO of Refco, a com modities brokerage firm based in New York, the CFO, and a half owner were indicted for their roles in a scheme to hide from Refco's investors massive losses sustained by the company in the late 1990s; public investor losses exceed $2 bil lion. Trial is currently scheduled for March 2008. The Government entered into a non-prosecution agreement in which BAWAG Bank admitted facilitating the Refco fraud, agreed to cooperate, and to forfeit more than $400 million. Impath. The former president and COO of Impath, Inc., a New York-based biotechnology company, was convicted after a three-week trial for his role in a massive accounting fraud that caused a decline in the companys market capital ization in excess of $260 million. He was sen tenced to 42 months' imprisonment and was ordered to pay $50 million in restitution and $1.2 million in forfeiture.

Options Backdating Safenet. In October 2007, the former presi dent, COO, and CFO of SafeNet, Inc., a Maryland-based software encryption company, pled guilty to one count of securities fraud, with a plea agreement stipulating a sentencing guide lines range of 97-121 months. He schemed with others to backdate millions of dollars of stock options at SafeNet from 2000 through 2006 without recording or reporting the option grants as compensation expenses. The indictment alleges eight different sets of backdated option grants. In each case, the options were backdated to dates on which SafeNet's stock was trading at historical low points. MonsterWorldwide. In February 2007, Myron Olesnyckyj, former general counsel of recruit ment services giant MonsterWorldwide, Inc., pled guilty in connection with the backdating of millions of dollars worth of employee stock option grants at Monster. Olesnyckyj and other senior executives at Monster backdated options by papering them as if they had been granted on dates in the past on which Monsters stock price had been at a periodic low point. Insider Trading Reebok. In 2006, the Government charged an associate at Goldman Sachs, an investment banking analyst at Merrill Lynch, and several other defendants with participation in a massive insider trading scheme that resulted in more than $6.7 million in illicit gains. The defendants traded on inside information from: (1) Merrill Lynch; (2) advance copies of Business Weeks "Inside Wall Street" column; and (3) a grand juror hearing evidence of accounting fraud at Bristol-Myers Squibb. Five defendants have pled guilty.

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Corporate Fraud Task Force Member Contributions

UBS. In March 2007, the Government charged an executive director at UBS, a former in-house attorney at Morgan Stanley, and 11 other defendants with participating in two mas sive insider trading schemes and in two separate bribery schemes that, in total, provided the defendants with more than $8 million in illegal profits. Eight of the 13 defendants have pled guilty. Imclone. Martha Stewart, former CEO of Martha Stewart Living Omnimedia, was con victed of conspiracy, obstruction of justice, and false statement charges and was sentenced to five months in prison and five months in home confinement. The charges arose from Stewarts efforts to obstruct federal investigations into her trading in the securities of ImClone Systems, Inc., on the eve of that companys announce ment of extremely negative news. Peter Bacanovic, Stewarts Merrill Lynch broker, was also convicted and sentenced to five months in prison. The former CEO of Imclone, Samuel Waksal, pled guilty to insider trading charges and is serving a seven-year sentence. Hedge Funds

shelter transactions. Together the entities have paid a total of over $485 million in monetary penalties and restitution to the Government. KPMG. Nineteen defendants, including three successive heads of tax for KPMG, a former KPMG associate general counsel, and a former partner at Brown & Wood, were charged with participating in a multi-billion dollar fraud on the United States relating to fraudulent tax shelters. Two of these individuals pled guilty, and the Government is currently appealing an adverse ruling in connection with the remain ing 13 individuals. Ernst & Young. Four current and former partners of Ernst & Young were charged with conspiracy to defraud the IRS, as well as mak ing false statements to the IRS and additional tax offenses. In addition, Belle Six, who worked with E&Y and later went on to work with two of E&Y s tax shelter co-promoters, pled guilty to participating in the same con spiracy and forfeited approximately $13 mil lion in fees she collected from the sale of fraud ulent tax shelters. Oil for Food Cases

Bayou. Principals of the Connecticut-based Bayou Hedge Funds, Samuel Israel III, Daniel E. Marino, and James G. Marquez, pled guilty to fraud and conspiracy charges based on their substantial and prolonged misrepresentation of the value of the assets of the funds, to which investors had entrusted more than $450 million. The Government obtained $106 million for dis tribution to victims. Tax Shelter Prosecutions KPMG and HVB. KPMG and HVB (a Ger man bank) each entered into deferred prosecu tion agreements in which they admitted partic ipating in a multi-billion dollar fraud on the United States in connection with fraudulent tax

Bayoil (USA). This case was brought as a result of a wide-ranging criminal investigation into the United Nations Oil-for-Food Program (OFFP). In mid-2000, the former Government of Iraq, under Saddam Hussein, began conditioning the right to purchase Iraqi oil under the OFFP a program intended to provide humanitarian aid to the Iraqi people on the purchasers willingness to return a por tion of the profits secretly to Husseins govern ment, then the subject of international sanc tions. The Government investigated and prose cuted several of the U.S.-based individuals and entities who agreed to pay the secret illegal sur charges to the Hussein regime in order to insure continued access to the lucrative oil contracts
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Report To The President Corporate Fraud Task Force 2008

from the Hussein regime: David B. Chalmers, Jr., the CEO and sole owner of Bayoil (USA) and Bayoil Supply & Trade, and executive Lubmil Dionissiev, as well as the Bayoil entities; Oscar S. Wyatt, Jr.; and several foreign individuals and entities. In August 2007, Chalmers, Bayoil (USA), and Bayoil Supply & Trade pled guilty and agreed to forfeit more than $9 million. Dionissiev pled guilty on the same day. Wyatt pled guilty on October 1, 2007, nearly four weeks into his criminal trial, and agreed to forfeit more than $11 million. El Paso Corporation. On February 7, 2007, the Government reached an agreement with the El Paso Corporation and its subsidiaries, in which El Paso admitted to obtaining Iraqi oil under the Oil-for-Food Program from third par ties that paid secret, illegal surcharges to the for mer Government of Iraq. El Paso agreed to for feit approximately $5.5 million as part of the agreement. U.S. Attorneys Office for the Eastern District of Pennsylvania Beacon Rock In the first criminal prosecution of market timing fraud in the United States, guilty pleas were entered by Beacon Rock Capital, a Portland, Oregon based hedge fund, and Thomas Gerbasio, Beacon Rocks broker. Mutual funds attempting to prevent market timing were deceived by an elaborate scheme utilizing more than 60 different account names and numbers, 26,000 trades structured to avoid detection, and false assurances that no market timing was being conducted. The trades result ed in profits of $2.4 million. Though market timing is not per se illegal, the defendants deceptions prevented the funds from protecting the value of shares from dilution for fund par ticipants.
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DVI, Inc. A CFO was charged in one of the nations first indictments for violation of the reporting requirements of Sarbanes-Oxley in a $50 million fraud scheme. Steven Garfinkel, CFO of DVI, Inc., a publicly traded healthcare finance compa ny, was sentenced to 30 months imprisonment for fraud. Garfinkel altered corporate records to double count $50 million in assets, which result ed in false quarterly reports filed under the requirements of Sarbanes-Oxley, and losses of almost $50 million to financial institutions upon the collapse and bankruptcy of the company. Philadelphia Seaport Museum The corporate head of a major Philadelphia museum received a 15-year sentence for stealing from the non-profit institution. On November 2, 2007, John Carter, president of the Philadelphia Seaport Museum, was sentenced to 15 years imprisonment for fraud and tax eva sion. Over a 10-year period, Carter falsified records of the museum and created fictitious invoices to divert $2 million to his own use in order to maintain a lavish lifestyle, including making additions to his Cape Cod home and purchasing art work, vacations, and three yachts. He also forged documents in an attempt to divert $1 million from the cash value of an insurance policy maintained by the museum after he learned of the federal investigation. Amkor Technologies A corporate general counsel of Amkor Technologies, one the worlds largest packagers of semiconductors, abused his position to enrich himself through insider trading. In October 2007, Kevin Heron was convicted of insider trading and conspiracy for his own trading in Amkor stock over several periods in 2005, and for trading information about Amkor and

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Corporate Fraud Task Force Member Contributions

Neoware Corporation with Neoware employee Stephen Sands, who pled guilty to conspiracy charges. Heron, who enforced Amkors insider trading policy, advised members of the board of directors they could not trade while he him self was conducting trades. Heron realized profits and avoided losses totaling $300,000 through the use of options, puts, calls, and direct purchases and sales of stock. Cyberkey A brazen securities pump and dump was uncovered at Cyberkey, a Utah electronics firm. In July 2007, charges were filed against the CEO, who schemed to inflate the value of Cyberkey stock through false public announcements that Cyberkey had a $24 million contract with the Department of Homeland Security, and through the use of a telemarketing firm to push the sale of the stock. The over-the-counter stock rose sharply with the false news and plummeted after the fraud was discovered, with investors defraud ed of $3.5 million. The CEO attempted to cover up the fraud, and was also charged with obstruc tion of justice for lying and providing false docu ments to the SEC. Fountainhead Fund Abuse of investors by hedge fund managers resulted in prosecution of two founders and directors of a hedge fund, Fountainhead Fund LP. The defendants misrepresented the risks of the fund, falsely assuring investors that the fund dealt in insured, conservative investments. The fund soon began to lose money, but defendants solicited new investors and kept early investors from closing their accounts by creating fictitious account statements and K1 tax reports that reflected profits. When the fraud was uncovered and the fund frozen, investors had lost over $2 million of the $5.2 million invested. One defen dant was sentenced to five years imprisonment, the other to one year.

Computer Video Store A wide-ranging infomercial fraud on con sumers and financial institutions was perpetuat ed by George Capell, president and CEO, and Patrick Buttery, CFO, through Computer Video Store, which grossed $100 million annu ally selling computers through television infomercials to thousands of consumers. As the company failed, they continued to take con sumer orders, order form suppliers, and increase funding from financial institutions. They falsi fied corporate records and sales records, and diverted funds to their own use, defrauding con sumers of over $3 million, suppliers of $13.5 million, and financial institutions of $22.5 mil lion. Capell was sentenced to over seven years imprisonment, ordered to pay $31.9 million in restitution, and required to forfeit $475,000, two properties, and three vehicles. Buttery was sen tenced to one years imprisonment. E-Star Strong sanctions were imposed on a foreign corporation cheating on federal taxes by not reporting $99 million worth of stock bonuses to its American employees. In April 2007, E-Star, a subsidiary of a Taiwanese corporation, was sentenced for failure to pay taxes on $99 million worth of stock bonuses to employees. The com pany devised a manual, off-the-books system to track stock bonuses, and transacted stock sales and payments in Taiwan and through overseas accounts to mask the tax liability. The company was ordered to pay over $45 million in taxes, penalties, interest, and fines. U.S. Attorneys Office for the Southern District of Texas Dynergy Gene Foster, Dynegys former vice president of tax, and Helen Sharkey, formerly a member
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Report To The President Corporate Fraud Task Force 2008

of Dynegys Risk Control Group and Deal Structure Groups, pled guilty to conspiracy to commit securities fraud related to Project Alpha. This was an accounting scheme designed to borrow $300 million from various lending institutions while publicly misrepresenting the proceeds of those loans as revenue from opera tions rather than debt. It was also part of the con spiracy to prevent disclosure to the SEC, the shareholders and the investing public. On January 5, 2006, Foster was sentenced to 15 months confinement and three years supervised release. He was ordered to pay a $1,000 fine and $100 special assessment. Sharkey was sentenced to 30 days in jail and three years of supervised release (with the first six months on home con finement). She was ordered to pay a $10,000 fine and $100 special assessment. Jamie Olis, former vice president of finance, was convicted by a jury on November 13, 2003, of conspiracy, securities fraud, mail fraud and wire fraud. Olis received a sentence of 72 months imprisonment and three years supervised release, and ordered to pay a $25,000 fine and $600 special assessment. Seitel Paul Frame, ex-CEO of Seitel, was indicted for defrauding his former corporation of approximately $750,000, laundering the pro ceeds of the fraud, and lying to the SEC about the fraud. He was convicted on April 7, 2005, and sentenced on October 27, 2005, to 63 months in prison and three years supervised release. He was ordered to pay restitution of $750,000. Enron Enrons director of benefits for its Human Resources Department fraudulently billed Enron for approximately $3 million. He was convicted and sentenced to three years in prison on April 19, 2007.
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Other Significant Federal Criminal Cases


Hamilton Bank The Hamilton Bank case involved the crim inal undertakings of Eduardo Masferrer, the chairman and CEO of both Miami-based Hamilton Bank and its holding company, Hamilton Bancorp, in concert with Carlos Bernace, Hamilton Banks president, and John Jacobs, Hamilton Bancorps CFO. These three defendants removed certain distressed Russian loans from Hamilton Banks books by recording that these assets had been successfully sold for no loss, despite consequent multi-million dollar losses realized from the sales, which was accom plished through fraudulent accounting entries. The undisclosed quid pro quo for these sales consisted of the banks concurrently conducted purchase of various Latin American securities from the same foreign banks also at fraudulent ly inflated prices. In order to conceal this accounting fraud, the fortuitous Russian loan sales were recorded without revealing the related and necessary purchase transactions. Masferrer was convicted in the Southern District of Florida in May 2006 of all 16 counts alleging securities fraud, bank fraud, wire fraud, false statements, obstruction of regulatory proceed ings, and conspiracy. Bernace and Jacobs each had pled guilty to securities fraud charges and testified against Masferrer. Masferrer was sen tenced to 30 years imprisonment (what is believed to be one of the lengthiest sentences for a corporate accounting fraud scheme in American history) and ordered to pay $17.2 million in restitution to the FDIC as receiver for Hamilton Bank, as well as $14.5 million to investors who had purchased Hamilton Bancorp stock. Bernace and Jacobs were each sentenced to 28 months imprisonment and were also ordered to pay $14.5 million to the investor victims.

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Corporate Fraud Task Force Member Contributions

Chiquita Brands International, Inc. In March 2007, Chiquita Brands International, Inc. ("Chiquita" or "Company") pled guilty in the District of Columbia to the felony charge of engaging in transactions with a specially designated global terrorist. On September 17, 2007, the Company was sen tenced to a criminal fine of $25 million and five years of probation. From 1997 through early 2004, Chiquita paid money to the Colombian terrorist organization Autodefen sas Unidas de Colombia (the AUC), a spe cially designated global terrorist organization. Chiquita paid the AUC in total over $1.7 mil lion in over 100 installments. The investigation into the Company's conduct revealed that Chiquita had violated the books and records provision of the Foreign Corrupt Practices Act. In connection with the guilty plea, the Company admitted that its corporate books and records never reflected that the ultimate and intended recipient of these funds was the AUC. Suprema Specialties Inc Suprema Specialties, Inc., was a public company that manufactured, processed, and distributed a variety of purportedly all natural cheese products. Between the mid-1990's and early 2002, various individuals at Suprema, with the assistance of some of their customers, engaged in a massive fraud by fraudulently inflating Supremas sales, inflating the value of Supremas inventory, and misrepresenting the nature of some of Supremas products. They then used these misrepresentations to obtain money from Supremas banks under a line of credit and from the investing public through a secondary offering of stock in November 2001. This fraud resulted in losses to banks and the investing public of more than $100 million. (Suprema entered Chapter 7 liquidation in

2002 and is no longer operational.). Mark Cocchiola, a Suprema founder and former CEO and chairman of the board of directors, and Steven Venechanos, its former CFO and a director, were found guilty on 38 counts of conspiracy, bank fraud, securities fraud, mail fraud and wire fraud. Six individuals pled guilty in U.S. District Court for the District of New Jersey in connection with this fraud and agreed to cooperate with the Government. CUC/Cendant Corp. From the late 1980s through April 15, 1998, executives Walter A. Forbes and E. Kirk Shelton, together with their coconspirators, artificially inflated the earnings at CUC International and its corporate successor, Cendant Corporation, to create the appearance that CUC/Cendant was meeting the growth targets set by Wall Street stock analysts. The defendants and their coconspirators engaged in four separate accounting frauds to inflate CUCs earnings: (1) improperly reversing merger reserves; (2) understating the membership can cellation reserve; (3) delaying recognition of rejects-in-transit; and (4) engaging in early rev enue recognition. Between 1995 and 1997 alone, those four separate accounting frauds overstated CUCs income by more than $252 million. When Cendant publicly announced its initial findings regarding the fraud in the former CUC businesses, Cendants stock price declined by 47% in a single day, and Cendants share holders lost more than $14 billion in market value. Cendant remains one of the largest accounting frauds of the 1990s. In 2005, a jury found Shelton, who was Cendants vice chair man, guilty on 12 counts, and he received a sen tence of 120 months of imprisonment and was ordered to pay $3.275 billion in restitution. A jury found Forbes, who was Cendants chair man, guilty on three counts: one count of con spiring to file false statements with the SEC
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Report To The President Corporate Fraud Task Force 2008

and to commit securities fraud; and two counts of filing false statements with the SEC. In January 2007, the U.S. District Court for the District of New Jersey imposed a sentence of 151 months imprisonment and $3.275 billion in restitution. Terry Manufacturing Company Roy and Rudolph Terry were brothers who owned and managed Terry Manufacturing Company (TMC), a manufacturer of uniforms in Roanoke, Alabama. TMC began to decline financially in the late 1990s. In order to keep TMC afloat, Roy Terry began a four-year-long campaign to fraudulently obtain financing for TMC. Through the use of false financial state ments, Roy Terry fraudulently obtained over $20 million for TMC from banks and individual investors. Roy Terry also embezzled funds from the TMC pension plan. Rudolph Terry partici pated in the defrauding of individual investors to the extent of $5.5 million. In a case handled in the Middle District of Alabama, on June 17, 2005, Roy Terry pled guilty to an information charging mail, wire, and bank fraud; misuse of pension funds; and interstate transportation of fraudulently obtained proceeds. On April 3, 2006, Rudolph Terry pled guilty to an informa tion charging conspiracy. Rudolph Terry was sen tenced to 41 months imprisonment. Roy Terry was sentenced to 78 months imprisonment. World Auto Parts This case concerns fraud by an owner and top management of a privately held company, World Auto Parts, against Chase Bank. The defendants engaged in fraud against the bank, in particular, falsifying asset information pro vided to the bank, for the purpose of keeping the bank's revolving line of credit going. Had the bank been aware of the true financial status of the company, it would likely have called the
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loan. The company comptroller has pled guilty and was a key witness during the trial. His sen tencing was adjourned until after the trial, which concluded with a verdict convicting the owner of six counts of the indictment against him. Three of those counts carry statutory max imum penalties of 30 years imprisonment, while the other three counts have 20-year max imums. The total loss to the bank as a result of his conduct was approximately $11 million. Sentencing is pending in the Western District of New York. National Air Cargo, Inc. National Air Cargo, Inc., a national air freight forwarder based in Orchard Park, New York, and owned by Christopher Alf, entered into a corpo rate plea in the U.S. District Court for the Western District of New York to a felony charge of making a material false statement to the Government. National Air Cargo, which con tracts with the Department of Defense to trans port freight, admitted falsifying a document to show an "on time" delivery date to the Government, when in fact, that delivery had been made later than the date reported. This plea resolved an ongoing multi-agency investigation into defendants domestic billing and shipping practices. Pursuant to Rule 11(c)(1)(C) of the Federal Rules of Criminal Procedure, defendant agreed, upon the acceptance of the plea and at the time of sentencing, to make payments totaling $28 million. Such payments would represent the largest criminal monetary resolution in the his tory of the Western District of New York. Of that amount, defendant, in addition to agreeing to pay the maximum fine of $8.8 million, has also agreed to pay restitution to the United States in the amount of $4.4 million, and to set tle a related civil forfeiture claim with a payment of $7.429 million, as well as an additional $7.129 million in settlement of a related civil qui tam action.

410

Corporate Fraud Task Force Member Contributions

International Heritage In November, 2006, Stanley H. Van Etten was sentenced in the Eastern District of North Carolina following his conviction for charges related to his activities as founder and CEO of the former International Heritage, Inc. (IHI), a Raleigh-based multilevel marketing company and for fraud related to Mayflower Venture Capital Fund III (Mayflower) and its purport ed investment in BuildNet, a Durham-based software company. Van Etten was given 10 years imprisonment and ordered to make resti tution in the amount of $14,484,620 to the victims of the now defunct Mayflower Venture Capital Fund III. The case involved two schemes: first was IHI, determined by federal regulators to be one of the biggest pyramid schemes they had ever seen, involving over 150,000 individuals and gross receipts of over $150 million at its peak; and second, Mayflower Fund III, a Raleigh-based capital venture fund which was supposed to invest in the BuildNet IPO. It was discovered that 120 investors were defrauded of over $15 million when the Mayflower funds were used for other purposes without the investors knowledge. Five former Van Etten IHI associates pled guilty to IHI-related charges including co founders Claude Savage and Larry G. Smith. Also VP John Brothers was found guilty. Convictions were further obtained against the IHI principal accountant and an attorney. Pinnacle Development Partners, LLC Gene A. O'Neal served as CEO and presi dent of Pinnacle Development Partners, LLC ("Pinnacle"), a real estate investment fund headquartered in Atlanta. Between October 2005 and October 2006, O'Neal raised more than $60 million in investment from more than 2,000 nationwide investors. The scope and rate of investment in Pinnacle flowed from

O'Neal's promise of a 25% rate of return in 60 days, which O'Neal falsely represented was generated by Pinnacle's real estate develop ment activities. The returns were in fact paid solely by later investors' capital contributions, resulting in a huge, and undisclosed, debt bur den. By the time the SEC and FBI interceded in October 2006, O'Neal's investors had lost over $20 million. He was indicted by the Northern District of Georgia U.S. Attorneys Office in March 2007, pled guilty, and was sentenced to 144 months in prison in September 2007. Key Bank David Verhotz was a senior vice president and the head of international banking for Key Bank in Cleveland. During a nine-year period from October 1997 to November 2006, Verhotz fraudulently obtained 106 loans totaling $40.6 million. When this activity was discovered in November 2006, there were 29 unpaid loans totaling $18.6 million. In a case prosecuted by the U.S. Attorneys Office for the Northern District of Ohio, Verhotz pled guilty to bank fraud on January 25, 2007. He was sentenced to 97 months imprisonment, five years supervised release, and ordered to pay $18.6 million restitu tion. Verhotz agreed to forfeit substantial real and personal property, including a $5.6 million home in Sagaponack, New York; $2.7 million in escrow for the purchase of a condominium on Park Avenue in New York; and more than $2 million in jewelry. Fruit of the Loom, Inc. Kalen Watkins, the former director of envi ronmental services for Fruit of the Loom, Inc., located in Bowling Green, Kentucky, was charged by the U.S. Attorneys Office for the Western District of Kentucky with seven counts arising from a conspiracy to defraud
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Report To The President Corporate Fraud Task Force 2008

Fruit of the Loom of approximately $1 million. In this case, which involves self-dealing by a corporate insider, Watkins enlisted co-conspira tors to submit false invoices to Fruit of the Loom for services never rendered, or to submit inflated invoices. When the invoices were paid, Watkins co-conspirators paid kickbacks to Watkins in return for Fruit of the Loom busi ness. On April 25, 2007, Watkins pled guilty to three counts of the indictment: conspiracy to commit mail fraud, and two counts of money laundering. Watkins was pending trial on the remaining four counts of the indictment. On August 24, 2007, three days before two of Watkins co-conspirators went to trial, Watkins pled guilty to additional counts of money laun dering and obstruction of justice for creating fraudulent correspondence that was produced in response to a grand jury subpoena. National Century Financial Enterprises, Inc. (NCFE) NCFE was the largest healthcare finance company in the United States prior to its col lapse in November 2002. Through two of its subsidiaries, NCFE sold billions of dollars of asset-backed securities to large institutional investors from around the world by representing that investor funds would be used to purchase health care accounts receivable. From about 1994 through October 2002, NCFEs owners and executives diverted billions of investor dol lars for other purposes, including the unjust enrichment of NCFEs owners. The loss to investors in NCFE asset-backed securities was in excess of $2.88 billion at the time the com pany collapsed. Four of NCFEs executives, including its CFO and another executive vice president, pled guilty to conspiracy, money laundering, and/or securities fraud offenses. Seven other owners and executives of NCFE are awaiting trial on an indictment that charges them with conspiracy, money laundering, mail fraud, wire fraud, and securities fraud offenses,
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and that includes a $1.9 billion forfeiture count. The charges against these individuals were the result of one of the largest fraud investigations involving a privately held corporation ever con ducted by the FBI. The U.S. Attorneys Office for the Southern District of Ohio and the Criminal Division prosecuted this case. MCA Financial Corp. MCA Financial Corp., based in Southfield, Michigan, was a privately held mortgage company that made conventional and subprime loans to individual homebuyers in Michigan and several other states. MCA was also a mortgage and land contract broker and servicer. MCA defrauded both its investors, who purchased MCAs bonds and mortgage-backed securities, and institutional lenders by misrepresenting its true financial condi tion in financial statements that were regularly filed with the SEC. As the result of paper transac tions involving low-income housing in the City of Detroit between MCA and numerous off-book partnerships controlled by MCAs top two execu tives, tens of millions of dollars in sham assets and revenues were booked. Seven former MCA exec utives, including its chairman and CEO, president and COO, CFO, and controller, were convicted in the Eastern District of Michigan of conspiracy, wire fraud, mail fraud, bank fraud, and filing false statements with the SEC. Their sentences, the last of which were imposed in 2006, ranged from 10 years imprisonment, for the former chairman, to 12 months of alternative confinement, for a senior vice president who cooperated. The defendants were also ordered to pay restitution, jointly and severally, to investors and lenders in the amount of $256 million. Electro Scientific Industries On June 25, 2007, James T. Dooley, the for mer CEO of Electro Scientific Industries, a high tech manufacturer headquartered in Portland, pled guilty to one count of making

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Corporate Fraud Task Force Member Contributions

false statements to a publicly traded company. During the process of closing the books for the first quarter of FY 2003, he unilaterally elimi nated the retirement benefits for all employees in Asia. He falsely represented to the compa nys auditor that legal counsel had approved the decision, when in fact no such legal advice had been procured. During the second quar terly review process of 2003, a second employ ee, James Lorenz, failed to disclose that he had made a significant change in the way a certain category of inventory was treated, changing the item from an expense to a company asset. Lorenz pled guilty to making false statements to the auditor. Sentencing is scheduled for February 2008 in the District of Oregon.

FBI Corporate & Securities Fraud Statistics Fiscal Years 2003-2007


2000
1562 1655

Cases
1746

1500 1000 500 0 600 500 400


463 431 513 413 1215 1319
Percent change from FY01- FY07

43.70%

2003

2004

2005

2006

2007

Convictions
473

Federal Bureau of Investigation


Securities Fraud Market Manipulation Initiative The FBI has undertaken several proactive Securities Fraud Market Manipulation initiatives that aggressively pursue corrupt participants in the financial markets.These initiatives use under cover techniques not only to target traditional market manipulation schemes, but also to curb the rising threat posed by market manipulations carried out via computer intrusion. Corporate Fraud Response Team The Corporate Fraud Response Team (CFRT) is designed to provide a rapid start to complex corporate fraud matters through a team deployment of Special Agents, Financial Analysts, and Asset Forfeiture investigators. CFRT members have the experience and finan cial expertise necessary to provide expert advice and assistance to case agents investigating largescale corporate frauds. CFRT members assist case agents in the planning and execution of searches, the immediate identification of perti nent documents, efficient document manage-

300 200 100 0 600 500 400 300 200 100 0 2003 2004 2005
Percent change from FY01- FY07 Percent change from FY01- FY07

2.16%

2003

2004

2005 2006 2007 Informations & Indictments


496 505 567

585 508

11.61%

2006

2007

Fiscal Years
Over the five year period from FY 2003 to FY 2007, the FBI has opened a consistent average of 505 new Corporate and Securities Fraud cases each year. Informations/indictments and convictions have also remained relately stable at an average of 531 and 458 each year, respectively.

ment, interviews, and by providing "best practice" guidance for large-scale corporate fraud investi gations. CFRT deployments produce wellorganized corporate fraud investigations that will ultimately lead to more efficient prosecutions. The CFRT is available for temporary deploy ment to any field office nationwide.
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Report To The President Corporate Fraud Task Force 2008

FBI Corporate Fraud Statistics Fiscal Years 2003-2007


600 500 400 300
287
Percent change from FY01- FY07

FBI Securities/Commodities Fraud Statistics Fiscal Years 2003-2007


Cases
529

1400 1200 1000


928 987 1139 1165

Cases
1217

490 423 332

800 600 400 200


84.32%

200 100 0 200 160 120 80 40 0 200


192 143 126 150

Percent change from FY01- FY07

31.14%

2003

2004

2005

2006

2007

0 400 350 300

2003

2004

2005
363

2006

2007

Convictions
173

Convictions
320 305 279 300

134

250 200 150

Percent change from FY01- FY07

Percent change from FY01- FY07

20.98%

100 50 0 450 400 350 300 250 200 150 100 50 0


393

(6.25%)

2003

2004

2005 2006 2007 Informations & Indictments


178 176 183

2003

2004

2005 2006 2007 Informations & Indictments


384

160 120 80 40 0

150

358

327

320

Percent change from FY01- FY07

Percent change from FY01- FY07

22.00%

7.26%

2003

2004

2005

2006

2007

2003

2004

2005

2006

2007

Fiscal Years
Over the past five years, the FBI has opened a consistent average of 161 new Corporate Fraud investigations each year. Informations/indictments and convictions have also remained relatievely stable at an average of 175 and 145 each year, respectively.

Fiscal Years
Over the past five years, the FBI has opened a consistent average of 344 new Securities/Commodities Fraud investigations each year. Informations/indict ments and convictions have also remained relatively satble at an average of 356 and 313 each year, respectively.

Department of the Treasury


Within the Treasury Department, the Criminal Investigation Division (CI) of the Internal Revenue Service (IRS) is responsible for taking steps to combat corporate fraud. Combating corporate fraud continues to be a priority for the IRS and CI. Most recently, in
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CIs FY 2007 Annual Business Plan, targeting corporate fraud is identified as a compliance strategy supporting the IRS strategic goals:

Corporate corruption, designated as a high priority for the Department of Justice, con tinues to be a priority in CI as well. Criminal Investigation will continue to work with the

414

Corporate Fraud Task Force Member Contributions

Small Business/Self-Employed (SB/SE) and Large & Mid-Size Business (LMSB) Divisions to identify and investigate alleged violations by corporate officers and executives. To identify and investigate high-impact cor porate fraud cases, CI will also work with the United States Attorneys Offices (USAO), the Federal Bureau of Investigation (FBI), the Securities and Exchange Commission (SEC), and other federal and state agencies. Field office corporate fraud coordinators will con tinue to serve as liaisons with our civil part ners, helping to facilitate fraud referrals. CIs involvement in most of the regional corporate fraud task forces has resulted in the following: Activity

CI established a specific program area ded icated to Corporate Fraud Recent Significant Cases

CI maintains Corporate Fraud Coordin ators in each field office CI conducts Corporate Fraud Training for Special Agents and Coordinators CI works closely with IRSs Large and Mid-Size Business (LMSB) Operating Division promoter teams investigating abu sive tax shelters CI works closely with LMSB Issue Management Teams (IMT) focused on executive compensation abuses (e.g., back dating stock options)

Beaulieu Group Pays $32 Million; Two Executives of Beaulieu Step Down from Corporate Positions. On July 11, 2007, in Rome, GA, Beaulieu Group, LLC (Beaulieu), of Dalton, Georgia, paid $32 million in back taxes, penalties and other costs as a result of filing false tax returns. As part of the plea agreement, Carl M. Bouckaert, chairman and CEO of Beaulieu, and Mieke D. Hanssens, executive vice president, agreed to step down as corporate officers of Beaulieu. In addition, the company was placed on five years probation. Additionally, both the company and the offi cers stepping down were ordered not to commit any other federal state or local tax violations. The company was also re-quired to submit quarterly reports to update the court on its business ethics policies. The court reserved the right to inspect re cords of the company to ensure compliance. Former Chief Financial Officer of Superior Electric Company Sentenced to 15 Months In Prison for Tax Conspiracy. On March 28, 2007, in Columbus, OH, John P. McShane was sen tenced to 15 months in prison and ordered to pay $1.6 million in restitution to the IRS for his role in a tax fraud scheme. McShane was the CFO of Superior Electric Company, a Columbus commercial electrical contracting company that is now FY 2006 FY 2007 defunct. McShane and his company president, 40 124 Jerry P. Gemeinhardt, 76 77 each pled guilty in 78 53 November 2006 to con spiracy to impede and 36 51 impair the IRS. 86.1% 68.6%

Investigations Initiated Prosecution Recommendations Indictments/Informations Sentenced Incarceration Rate Avg. Months to Serve

FY 2005 102 115 69 51 80.4% 23

49

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The decline in the FY 2007 incarceration rate is the result of a larger number of sentenced cases identified as a corporate entity in the FY 2007 data, when compared to FY 2006.Corporate entities do not result in months to serve, and therefore reduce the incar ceration rate.

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Report To The President Corporate Fraud Task Force 2008

Former Cable Television Executive Sentenced to 108 Months on Tax and Fraud Charges. On March 5, 2007, in Miami, FL, Charles C. Hermanowski, aka John Stobierski, was sentenced to 108 months in prison, followed by three years of supervised release, and ordered to pay a $4 million fine. On December 15, 2006, Hermanowski pled guilty to 39 tax and fraud charges arising out of Hermanowskis operation of a series of Miamibased cable television companies. Jury Convicts Former Chief Executive Officer of Digital Consulting, Inc. of Conspiracy and Tax Evasion. On January 25, 2007, in Boston, MA, George Schussel was convicted by jury of tax fraud conspiracy and tax evasion for spearhead ing a scheme in which he diverted millions in unreported income generated by his company, Digital Consulting, Inc. (DCI), to an off-shore account in Bermuda to avoid paying taxes. On July 12, 2007, in Boston, MA, George Schussel

was sentenced to 60 months in prison, followed by two years of supervised release, and fined $125,000 for tax fraud conspiracy and tax eva sion. Schussel was also ordered to meet with the IRS to resolve his outstanding tax liability on millions of dollars that he evaded. Former Vice President of Taxation at Tyco Sentenced to Prison for Filing a False Corporate Tax Return. On November 29, 2006, in Miami, FL, Raymond Scott Stevenson, former vice president of taxation at Tyco, was sentenced to 36 months in prison, one year of supervised release, and ordered to pay a $100,000 fine for filing a false corporate tax return. In September 2006, Stevenson entered a plea of guilty to intentionally failing to report more than $170 million in income on Tyco International Ltd.s 1999 corporate tax return, which would have resulted in an additional tax liability of approximately $50 to $60 million.

U.S. Postal Inspection Service Corporate Fraud Investigations Statistics Fiscal Years 2004-2007
Fiscal Year 2004 Fiscal Year 2005 Fiscal Year 2006 Fiscal Year 2007

Open Cases Jacketed Cases Work Hours Information/Indictments Arrests Convictions Court Ordered Restitution Criminal Fines Voluntary Restitution
Voluntary Restitution.

123 87 63,554 52 57 33 $75,016,835 $275,000 $138,100,000*

146 44 57,378 61 72 28 $63,645,399 $1,280,600 $0

135 23 45,996 58 58 54

112 21 36,192 52 51 46

$25,067,997 $496,770,514 $599,138 $650,000 $19,185,000 $0

* Symbol Technologies Settlement Agreement with Government/SEC. Entered in Case Management System as
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416

Corporate Fraud Task Force Member Contributions

Ralphs Grocery Company Pays $70 Million in Criminal Fines; Placed on Three Years Corporate Probation. On November 14, 2006, in Los Angeles, CA, Ralphs Grocery Company was placed on corporate probation for three years, during which time it will be required to estab lish court-supervised training and compliance programs. Ralphs and its parent company, Kroger, have agreed to cooperate fully with the Government in its continuing investigation. Recently, Ralphs has paid $70 million dollars in criminal fines as well as compensation, health benefits, and pension funds for Ralphs workers and their unions, after pleading guilty to several criminal charges for illegally rehiring hundreds of locked-out union members during the 2003-2004 labor dispute.

the plan fiduciary for the Rite Aid 401(k) plan. EBSA also obtained permanent injunctions against Aaron Beam, Jr., Anthony Tanner and Michael D. Martin, who were the fiduciaries of the HealthSouth Rehabilitation Corporation and Subsidiaries Employee Stock Ownership Plan; and Gary Winnick, Dan Cohrs, Joseph Perrone, and John Comparin, the fiduciaries of the Global Crossing Employees Retirement Savings Plan. EBSA also worked with the Department of Justice and the Federal Bureau of Investigation in bringing criminal actions that resulted in convictions or guilty pleas by several defendants involved with the U.S. Foodservice and Ahold USA 401(k) plans. The Department filed amicus briefs in 13 corporate fraud cases: In re Schering-Plough ERISA Litigation on October 20, 2004; Lang becker v. EDS on April 26, 2005; Vaughn v. Bay Environmental on June 6, 2006; Holzscher v. Dynegy on June 28, 2006; Dickerson v. Feldman on July 18, 2006; Kirschbaum v. Reliant Energy on August 16, 2006; Graden v. Conexant on September 1, 2006; Bridges v. Am. Elec. Power on October 19, 2006; Howell v. Motorolla on November 1, 2006; Phelps v. Calpine on November 15, 2006; Rogers v. Baxter on December 8, 2006; Harsewski v. Guidant on January 2, 2007; Wangberger v. Janus Capital on January 10, 2007; and Lively v. Dynegy on October 10, 2007.

Civil Enforcement
The Department of Labor
The Department of Labors Employee Benefits Security Administration (EBSA) con tinues to aggressively protect employee benefit plans from the effects of corporate fraud. Since the creation of the Corporate Fraud Task Force, EBSA completed over 40 civil and criminal investigations opened due to potential corporate fraud issues affecting employee benefit plans. In connection with its corporate fraud investiga tions, EBSA has obtained more than $790 mil lion for the benefit of employees, cooperating with other federal enforcement agencies includ ing the Department of Justice, the Federal Bureau of Investigation, and the Securities and Exchange Commission. EBSA filed successful civil lawsuits against numerous fiduciaries of Enron Corporations retirement plans, including Kenneth Lay and Jeffrey Skilling; against Scott Sullivan, who was the plan fiduciary for the MCI Worldcom, Inc., 401(k) plan; and against Franklyn Bergonzi,

Office of Federal Housing Enterprise Oversight (OFHEO)


The Office of Federal Housing Enterprise Oversight (OFHEO) serves as the safety and soundness regulator for the government-spon sored enterprises Fannie Mae and Freddie Mac (the Enterprises). OFHEO provides on-site supervision through its examination force, including oversight of Enterprise efforts to resist and detect fraudulent activities from
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Report To The President Corporate Fraud Task Force 2008

internal or external threats. When OFHEO discovers criminal activities, it refers its findings to the appropriate federal or state authorities. Over the last few years, OFHEOs efforts regarding corporate fraud have centered on remedial steps at the Enterprises to strengthen their internal controls, including internal audit; on adding stronger rules for corporate gover nance and responsibility; and on Enterprise programs to resist fraudulent activities in the mortgage markets. The Corporate Fraud Task Force has been important to OFHEOs supervisory program, with members providing valuable contributions such as briefings on white collar crime and for eign asset control rules for OFHEO front-line examiners, and enhancing OFHEOs work on mortgage fraud. Mortgage Fraud Following litigation brought by the U.S. Attorney for the Western District of North Carolina involving mortgage fraud against Fannie Mae, OFHEO examiners analyzed the controls and operating systems for any short comings that permitted such a fraud to be attempted against the Enterprise. Enterprise remediation began immediately. With the cooperation and assistance of members of the Corporate Fraud Task Force, OFHEO published a regulation for mortgage fraud reporting that brought information pro vided by the Enterprises to OFHEO into the reporting regime administered by the Treasury Departments Financial Crimes Enforcement Network (FinCEN). The regulation required ongoing employee training, internal reporting improvements, and enhanced mortgage fraud detection regimes. Following OFHEO testimony in 2005, lan guage regarding mortgage fraud was added to

bills now pending before Congress to revamp supervision of the Enterprises. Since the creation of the regulation and a clarifying guidance, OFHEO has worked close ly with law enforcement around the country on matters involving cases of suspected mortgage fraud reported by the Enterprises. OFHEO participates regularly with the Justice Departments Mortgage Fraud Working Group to share information and experience regarding mortgage fraud with law enforcement and financial regulators. In 2006 and 2007, OFHEO was consulted by law enforcement as a result of its filing of Suspicious Activity Reports to FinCEN based on a MOU regarding information sharing. The FBI, Department of Justice, IRS and other agencies in various localities have sought addi tional information on specific cases based on OFHEO reports. Further, OFHEO continues to provide public outreach through publications and public appearances and has raised concerns that the subprime lending problems of 2007 may prove to be rife with fraudulent activities. Examination of Enterprise Accounting and Controls From 2004 to the present, OFHEO contin ued overseeing the remediation of Enterprise accounting and control structures. These efforts have included putting in place new corporate risk, audit and compliance structures at the Enterprises and deploying increased resources to prevent opportunities for falsification of records or other fraud and to increase overall manage ment control. Other structural and cultural changes were also part of the OFHEO agree ments with the Enterprises. OFHEO during the past five years has responded to the challenges of overseeing Enterprise activities by enhancing both the size and diversity of its staff and by creating two new

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418

Corporate Fraud Task Force Member Contributions

examination groupsthe Office of Accounting and the Office of Compliance. In addition, OFHEO has published guidances relating to accounting, executive compensation and corpo rate governance that seek to clarify the policies of the agency regarding the responsibilities of the Enterprises in these areas. Corporate Governance Regulation In 2005, OFHEO amended its corporate governance regulation. In large measure, the revisions to the corporate governance rule were aimed at increasing management responsibility at the Enterprises and enhanced oversight by the Board of Directors. The amended rule elaborated upon the cor porate governance responsibilities of officers and directors at the Enterprises, including (1) mandatory, annual officer and director training on legal responsibilities, (2) enhanced rules providing for director independence, (3) exec utive compensation standards tied not only to revenue production but also to law and regula tory compliance and operational stability, (4) mandatory review and updating of conflict of interest standards, and (5) mandating audit partner rotation. An OFHEO guidance in 2006 went further, requiring not only rotation of audit partners, but also rotation of audit firms. That guidance also enhanced board independence by requiring a separation of the board chair and Enterprise CEO. Finally, the amended rule called for the creation of compli ance offices to oversee compliance with law and regulations related to OFHEO and corpo rate and financial disclosure. Enforcement Actions As part of its enforcement activities, OFHEO entered into a consent agreement with Freddie Mac that included a $125 million penalty (subsequently an additional $50 mil lion penalty was imposed by the SEC) and a

consent agreement with Fannie Mae that included a $400 million penalty. OFHEO also entered into consent agreements in 2007 with former Freddie Mac chairman and CEO Leland Brendsel that included penalties, dis gorgement, and waiver of claims totaling $16.4 million, and with former Freddie Mac CFO Vaughn Clarke that imposed a civil money penalty of $125,000. Also, a consent agreement was entered into with former Freddie Mac President & COO David Glenn, with an attendant civil money penalty of $125,000. Outstanding enforcement actions remain against former Fannie Mae CEO Franklin Raines, CFO Timothy Howard and Controller Leanne Spencer.

Securities and Exchange Commission


American International Group, Inc. On February 9, 2006, the Commission filed settled charges against American International Group, Inc. (AIG) for securities fraud, alleging that AIG misled investors about its financial results by entering into sham reinsurance transactions. The settlement required AIG to pay a penalty of $100 million and disgorge illgotten gains of $700 million. Time Warner Inc. On March 21, 2005, the Commission charged Time Warner Inc. with materially overstating online advertising revenue and the number of its Internet subscribers and with aiding and abetting three other securities frauds. The Commission also charged that the company violated a prior Commission cease and-desist order. In a separate administrative proceeding, the Commission charged the CFO, the controller, and a deputy controller with causing violations of the reporting provi sions of the federal securities laws. Time Warner consented to the entry of a judgment that, among other things, ordered it to pay

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$300 million in penalties. The executives con sented to the entry of a Commission cease-and desist order. Federal Home Loan Mortgage Corporation (Freddie Mac) On September 27, 2007, the Commission filed a settled enforcement action charging Freddie Mac with securities fraud in connection with improper earnings management. The Commissions action also charged former Freddie Mac executives David W. Glenn, its former pres ident, COO, and vice-chairman of the board; Vaughn A. Clarke, its former CFO; Robert C. Dean, a former senior vice president; and Nazir G. Dossani, a former senior vice president. The Commission alleged that Freddie Mac engaged in a scheme that deceived investors about its per formance, profitability, and growth trends and that the company misreported its net income in 2000, 2001, and 2002. In its settlement with the Commission, Freddie Mac agreed to pay a $50 million penalty. Glenn, Clarke, Dossani, and Dean agreed to pay penalties of $250,000, $125,000, $75,000, and $65,000, respectively, in addition to disgorgement. MBIA Inc. On January 29, 2007, the Commission filed a settled civil action against MBIA Inc. alleging securities fraud. The Commission alleged that, to avoid a loss of $170 million from the default on bonds it had guaranteed, MBIA entered into improper, retroactive reinsurance contacts and falsely represented that it had obtained reinsur ance coverage for the bonds. In connection with the settlement, MBIA agreed to pay a $50 mil lion penalty. Tyco International Ltd. On April 17, 2006, the Commission filed a settled civil injunctive action against Tyco
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International Ltd. The Commission alleged that, from 1996 through 2002, Tyco violated the feder al securities laws through various improper accounting practices and that it overstated its reported financial results by at least one billion dollars. Tyco agreed to pay a $50 million penalty. McAfee, Inc. On January 4, 2006, the Commission filed securities fraud charges against McAfee, Inc., formerly known as Network Associates, Inc. The Commissions complaint alleged that, from the second quarter of 1998 through 2000, McAfee overstated its revenue and earnings by hundreds of millions of dollars. McAfee agreed to pay a $50 million penalty. ConAgra Foods, Inc. On July 24, 2007, the Commission filed civil charges against ConAgra Foods, Inc., alleging that it engaged in improper, and in certain instances fraudulent, accounting practices dur ing its fiscal years 1999 through 2001. The fraudulent practices alleged involved the misuse of corporate reserves to manipulate reported earnings and a scheme at a former subsidiary that involved improper and premature revenue recognition. Additionally, the complaint alleged that ConAgra's tax department made numerous tax errors, causing the company to misstate its reported income tax expense by $105 million. To settle the charges, ConAgra agreed to pay a $45 million penalty. Cardinal Health, Inc. On July 26, 2007, the Commission an nounced that Cardinal Health, Inc., a pharma ceutical distribution company, agreed to pay a $35 million penalty and settle charges that it engaged in a fraudulent revenue and earnings management scheme, as well as other improper accounting and disclosure practices, from

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September 2000 through March 2004. Cardinal materially overstated its operating revenue, earnings, and growth trends in certain earnings releases and filings with the Commission. Adelphia Communications Corp. On April 25, 2005, Adelphia Communi cations Corporation, its founder John J. Rigas, and his three sons settled civil and criminal charges in one of the most extensive financial frauds ever to take place at a public company. Under the settlement agreement, the Rigas family members forfeited in excess of $1.5 bil lion in assets that they derived from the fraud. Qwest Communications International Inc. On March 15, 2005, the Commission charged Joseph P. Nacchio, former co-chairman and CEO of Qwest Communications International Inc., and eight other former Qwest officers and employees with fraud and other violations of the securities laws. According to the SEC's complaints, Nacchio and others made numerous false and misleading statements about Qwest's financial condition in annual, quarterly, and current reports; in registration statements that incorporated Qwest's financial statements; and in other public statements, including earnings releases and investor calls. AremisSoft Corp. On June 9, 2006, Roys Poyiadjis, a former CEO at AremisSoft Corporation, settled the Commission's securities fraud charges against him brought in October 2001. Poyiadjis agreed to disgorge approximately $200 million and to accept an officer-and-director bar. The Commission's complaint charged that Poyiadjis made fraudulent statements in public filings and press releases.

National Century Financial Enterprises, Inc. On December 21, 2005, the Commission filed a civil injunctive action alleging that four NCFE executives participated in a scheme to defraud investors. In October 2002, NCFE suddenly collapsed, causing investor losses exceeding $2.6 billion. Mercury Interactive, LLC On May 31, 2007, the Commission filed civil fraud charges against Mercury Interactive, LLC and four former senior officers: former Chairman and CEO Amnon Landan, former CFOs Sharlene Abrams and Douglas Smith, and former General Counsel Susan Skaer. The Commission alleged that from 1997 to 2002, Mercury, acting through Landan, Abrams, Smith, and Skaer, fraudulently awarded undis closed compensation to executives and employees by backdating every stock option granted and failed to record over $258 million in compensation expenses. Mercury settled, paying a $28 million penalty and agreeing to be permanently enjoined. The case against the other defendants is ongoing. Brocade Communications Systems, Inc. On May 31, 2007, the Commission filed a settled civil action against Brocade Communi cations Systems, Inc. for falsifying its reported income from 1999 through 2004. The Com mission alleged that Brocade's former CEO, president, and chairman, Gregory L. Reyes, routinely granted in-the-money stock options for which a financial statement expense was required, but not recorded. Brocade agreed to pay a penalty of $7 million to settle the charges. On August 17, 2007, the Commission filed fraud charges against Michael J. Byrd, Brocades former CFO and COO, alleging

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that Byrd, who himself received backdated options, received information suggesting that certain of the companys grants were backdated, but failed to ensure that the grants were proper ly accounted for or disclosed to investors. Juniper Networks, Inc. On August 28, 2007, the Commission filed fraud charges against Lisa C. Berry for backdating option grants from 1997 to 2003, first as general counsel of KLA-Tencor Corporation and then as general counsel of Juniper Networks, Inc. The Commission also filed a settled enforcement action against Juniper. The Commission alleges that Berry routinely used hindsight to identify dates with historically low stock prices, facilitating the backdating of option grants by KLA's stock option committee. According to the Commission, Berry then moved to Juniper, establishing a simi lar backdating process there. The Commission's complaint alleges that the backdated grants result ed in KLA overstating its net income in fiscal years 1998 through 1999 by as much as 47% and Juniper overstating its 2003 net income by nearly 22%. Juniper agreed to settle the matter by con senting to an injunction. KLA-Tencor Corp. On July 25, 2007, the Commission filed charges against Silicon Valley semiconductor company KLA-Tencor Corporation (KLA) and its former CEO, Kenneth L. Schroeder, alleging that they engaged in an illicit scheme to backdate stock option grants. The Commission alleged that KLA concealed more than $200 million in stock option compensation by providing employees and execu tives with in-the-money options while secretly backdating the grants to avoid recording the expenses. In a separate complaint filed against Schroeder, the Commission charged that he repeat edly engaged in backdating after becoming CEO in 1999. KLA-Tencor agreed to settle the matter and accept an injunction for certain non-fraud charges.
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Integrated Silicon Solution, Inc. On August 1, 2007, the Commission filed charges against Integrated Silicon Solution, Inc. (ISSI) and its former CFO alleging that they engaged in a long-running scheme to backdate stock option grants and conceal millions of dol lars of stock option compensation expenses. The former CFO agreed to settle the matter by con senting to a permanent injunction, paying $414,830 in disgorgement and interest and a $125,000 penalty, and consenting to an order barring him for five years from acting as an offi cer or director of a public company. ISSI agreed to settle the matter by consenting to a permanent injunction. Apple, Inc. On April 24, 2007, the Commission filed a civil action against two former senior executives of Apple, Inc. in connection with stock options back dating. Apples former CFO agreed to accept an injunction for non-fraud violations and to pay approximately $3.5 million in disgorgement, interest, and penalties. The Commission alleges that Apples former general counsel engaged in fraudulent options backdating, and litigation against her is ongoing. The Commission also announced that it would not bring an enforcement action against Apple in light of the companys swift, extensive, and extraordinary cooperation in the Commissions investigation. Engineered Support Systems, Inc. On July 12, 2007, the Commission filed a civil injunctive action against Michael F. Shanahan, Sr., the former CEO of Engineered Support Systems, Inc., and his son Michael F. Shanahan, Jr., a for mer member of Engineered Support's Compen sation Committee of its Board of Directors, alleg ing that they participated in a fraudulent scheme to grant undisclosed, in-the-money stock options to themselves and other engineered support offi

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cers, employees, and directors. The complaint alleged that the employees and directors received approximately $20 million in unauthorized and undisclosed compensation. Collins & Aikman Corp. On March 26, 2007, the Commission filed civil fraud charges against auto parts manufac turer Collins & Aikman Corporation (C&A); David A. Stockman, C&A's former CEO and chairman of the board of directors; and eight other former C&A directors and officers. The Commission alleged that between 2001 and 2005, Stockman personally directed fraudulent schemes to inflate C&A's reported income by improperly accounting for supplier payments and that the other former officers, including the CFO, controller, treasurer, and a former member of C&A's board of directors, partici pated in the accounting schemes. C&A settled the charges, agreeing to permanent injunc tions. The case against the other defendants is ongoing. DHB Industries, Inc. On October 25, 2007, the Commission filed fraud charges against David H. Brooks, the for mer CEO and chairman of DHB, a major sup plier of body armor to the U.S. military and to law enforcement agencies. The Commission alleges that Brooks manipulated the company's gross profit margin and net income, that he fun neled millions of dollars out of DHB through fraudulent transactions with a related entity he controlled, and that he used company funds to pay millions of dollars in personal expenses. The complaint also alleges that, while in possession of material, non-public information, Brooks sold his personal DHB stock for proceeds of about $186 million in late 2004 at the height of DHB's stock price.

First BanCorp. On August 7, 2007, the Commission filed financial fraud charges against First BanCorp, alleging that former senior management hid the true nature of more than $4 billion worth of transactions involving non-conforming residential mortgages. The complaint alleged that First BanCorp, which purportedly pur chased non-conforming mortgages in transac tions that were not true sales, earned more than $100 million in interest income at little or no risk.

Commodity Futures Trading Commission (CFTC)


The CFTC regulates the commodity futures and option markets in the United States. The CFTC's mission is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets. During the time that the CFTC has been a Task Force member, the CFTC has been responsible for the filing of more than 295 civil enforcement actions. As a result of these actions, the CFTC obtained fines and restitution orders totaling about $1.8 billion. Since the creation of the Task Force, the CFTC has devoted considerable efforts to address manipulation of the energy markets and commodity pool/hedge fund fraud. The CFTC has actively investigated instances of manipulation and attempted manipulation in the energy markets by numerous energy compa nies. During this time, the CFTC filed 39 enforcement actions, charging 64 companies and individuals with attempted manipulation, manipulation and/or false reporting. These actions have resulted in civil monetary penalties

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totaling approximately $435 million. The CFTC also filed more than 60 civil enforcement actions against individuals and firms that fraudulently operated multi-million dollar commodity pools and hedge funds. These actions have resulted in fines and restitution totaling almost $235 million. CFTC v. Enron Corp., et al. On March 12, 2003, the CFTC filed a civil injunctive action against Enron Corp. (Enron), and Hunter S. Shively, who was the supervisor of the Central Desk of Enrons natural gas trading operation. The complaint alleged that the defen dants engaged in manipulation or attempted manipulation, and further alleged that Enron operated an illegal futures exchange, and traded an illegal, off-exchange agricultural futures contract. Until its bankruptcy in December 2001, Enron was one of the largest energy companies in the United States. Its natural gas trading unit was based in Houston and managed several nat ural gas over-the-counter (OTC) products. Enrons natural gas trading unit was divided into geographical regions and included a natural gas futures desk. Shively was the supervisor and trading manager of Enrons Central Desk from May 1999 through December 2001. From Nov ember 1999 through at least December 2001, Enron Online (EOL) was Enrons web-based electronic trading platform for wholesale energy, swaps, and other commodities, including the Henry Hub (HH) natural gas next-day spot contract that was delivered at the HH natural gas facility in Louisiana. The HH is the delivery point for the natural gas futures contract traded on the New York Mercantile Exchange (NYMEX), and prices in the HH Spot Market are correlated with the NYMEX natural gas futures contract. During its existence, EOL became a leading platform for natural gas spot and swaps trading. The complaint alleged that on July 19, 2001, Shively, through EOL, caused Enron to pur chase an extraordinarily large amount of HH
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Spot Market natural gas within a short period of time, causing artificial prices in the HH Spot Market and impacting the correlated NYMEX natural gas futures price. The complaint also alleged that in September 2001, Enron modi fied EOL to effectively allow outside users to post bids and offers. Enron listed at least three swaps on EOL that were commodity futures contracts. The complaint alleged that with this modification, Enron was required to register or designate EOL with the CFTC or notify the CFTC that EOL was exempt from registration. Enron failed to do either of these things, and the complaint charged that, because of this failure, EOL operated as an illegal futures exchange. Finally, the complaint alleged that Enron with offering an illegal agricultural futures contract on EOL. According to the complaint, between at least December 2000 and December 2001, Enron offered a product on EOL it called the US Financial Lumber Swap. The complaint alleged that the EOL lumber swap was an agricultural futures contract that was not traded on a designat ed exchange or otherwise exempt, and therefore was an illegal agricultural futures contract. CFTC v. Enron Corp., et al., No. H-03-909 (S.D. Tex. filed March 12, 2003). On May 28, 2004 and July 16, 2004, the court entered separate consent orders of perma nent injunction against Enron and Shively, respectively. The sanctions imposed included: permanent injunctions from further violations, as charged; 18-month prohibition against Shively from applying for registration with the CFTC or acting in a capacity requiring such registration; and civil monetary penalties (Enron $35 million and Shively $300,000). CFTC v. American Electric Power Company, Inc., et al. On September 30, 2003, the CFTC filed a civil injunctive complaint against American Electric Power Company, Inc. (AEP), and its

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wholly-owned subsidiary, AEP Energy Services, Inc. (AEPES). The complaint alleged that the defendants, from at least November 2000 through October 2002, knowingly reported false natural gas trading information, including price and volume information, to certain reporting firms that used such information in publishing surveys or indexes (indexes) of nat ural gas prices with the intent to skew the indexes to benefit their trading positions. Specifically, the complaint alleged that the defendants knowingly delivered to one report ing firm, Platts, over 3,600 purported natural gas trades, 78% of which were false, misleading or knowingly inaccurate. The complaint fur ther alleged that defendants conduct consti tutes an attempted manipulation, which, if suc cessful, could have affected prices of NYMEX natural gas futures contracts. On January 26, 2005, the CFTC settled this enforcement action. The Final Judgment and Consent Order requires the defendants to pay a $30 million civil monetary penalty in settlement of charges that defendants falsely reported natural gas trades and attempted to manipulate natural gas prices. In addition, in related actions, AEPES agreed to pay an additional $30 million to the DOJ, and $21 million to the Federal Energy Regulatory Commission. CFTC v. American Electric Power Company, Inc., et al., No. C2 03 891 (S.D. Ohio filed Sept. 30, 2003, settled Jan. 26, 2005). Operation Wooden Nickel On November 18, 2003, the CFTC filed six civil enforcement actions against 31 persons and entities alleging forex fraud and other violative conduct within the CFTCs jurisdiction. These enforcement actions, and related criminal actions, were the culmination of the 18-month Operation Wooden Nickel undercover inves tigation into forex and bank fraud conducted by the U.S. Attorney and FBI in the Southern District of New York. On November 19, 2003,

as part of a broader operation, the U.S. Attorney filed criminal charges against 47 defendants and arrested many of them. As part of the undercov er operation, federal criminal agents infiltrated a forex boiler room in the World Financial Center and captured hundreds of hours of video and audio recordings of defendants allegedly schem ing to deceive unsuspecting customers and steal millions of dollars. Operation Wooden Nickel is the largest undercover operation in which the CFTC has participated. As a result of these efforts, the CFTC was successful in obtaining fines and restitution totaling more than $100 million, and 56 individuals were convicted. CFTC Operation Wooden Nickel Enforce ment Actions: CFTC v. First Lexington Group, LLC, et al., No. 03 CV 9124 (S.D.N.Y. Nov. 18, 2003); CFTC v. Bursztyn, et al., No. 03 CV 9125 (S.D.N.Y. Nov. 18, 2003); CFTC v. Walter, Scott, Lev & Associates, LLC, et al., No. 03 CV 9126 (S.D.N.Y. Nov. 18, 2003); CFTC v. ISB Clearing Corp., et al., No. 03 CV 9127 (S.D.N.Y. Nov. 18, 2003); CFTC v. Madison Deane & Associates, Inc., et al., No. 03 CV 9128 (S.D.N.Y. Nov. 18, 2003); CFTC v. Itradecurrency USA LLC, et al., No. 03 CV 9129 (S.D.N.Y. Nov. 18, 2003). In re Reliant Energy Services, Inc. On November 25, 2003, the CFTC simulta neously filed and settled an administrative action against Reliant Energy Services (RES), in which the CFTC found that from at least February 1999 through May 2002, respondents Houston offices of RES delivered false reports to certain reporting firms and attempted to manipulate natural gas prices. Moreover, the Order found that on seven occasions between April and November 2000, respondent executed non-com petitive, prearranged wash sales during offexchange trading of electricity contracts. The CFTC Order required respondent to pay a civil monetary penalty of $18 million. In March 2007, RES agreed to a deferred prosecution
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agreement with the U.S. Attorney for the Northern District of California. As part of the agreement, RES agreed to pay a penalty of $22.2 million (in addition to a $13.8 million credit for January 2003 settlement with the FERC pertain ing to the same incident). In re Reliant Energy Services, Inc., CFTC Docket No. 04-06 (CFTC filed Nov. 25, 2003). CFTC v. BP Products North America, Inc. On June 28, 2006 the CFTC filed a civil enforcement action against BP Products North America, Inc., a wholly owned subsidiary of BP plc, alleging that BP manipulated the price of February 2004 TET physical propane by, among other things, cornering the market for February 2004 TET physical propane. The CFTC also charges BP Products North America, Inc., with attempting to manipulate the price of April 2003 TET physical propane by attempting to corner the April 2003 TET physical propane market. The term TET propane refers to propane that is deliverable at the TEPPCO storage facility in Mont Belvieu, Texas, or anywhere within the TEPPCO system. TEPPCO is an acronym for Texas Eastern Products Pipeline Co, LLC. According to the lawsuit, TET propane is the primary propane used for residential and com mercial heating in the Northeast United States, particularly in rural areas which are not served by natural gas pipelines; and, the price of TET propane at Mont Belvieu affects the price of propane paid by consumers. Furthermore, prices of TET propane affect the price of the NYMEX futures contract for propane, in part, because the NYMEX propane contract provides for delivery of propane at TEPPCO, according to the com plaint. The CFTC received assistance from the Presidents Corporate Fraud Task Force and in this matter. CFTC v. BP Products North America, Inc., No. 06C 3503 (N.D. Ill. filed June 28, 2006). On the same date that the CFTC filed its complaint, the Criminal Fraud Section of the DOJ filed an information against Dennis Abbott based upon the same underlying facts of the

CFTCs complaint that charges him with con spiracy. Abbott entered a plea of guilty to the conspiracy charge. On October 25, 2007, BP agreed to a settle ment order requiring it to pay a $125 million fine, establish a compliance and ethics program, and install a monitor to oversee BPs trading activities in the commodities markets. The order also recognized the payment of approxi mately $53 million by BP into a restitution set tlement fund. In a separate criminal action by the DOJ, BP agreed to pay a $100 million fine, pay $25 million into a consumer fraud fund, and comply with restitution payments and installa tion of the monitor. In addition, four BP traders were indicted on charges of conspiracy, com modities market manipulation, and wire fraud in the Northern District of Illinois. CFTC v. MF Global In December 2007, futures and options bro ker MF Global Ltd. agreed to pay more than $77 million to settle CFTC charges that it failed to watch over a hedge fund charged with fraud. The CFTC asserted the company did not adequately supervise accounts used by Philadelphia Alternative Asset Management Co., a hedge fund that the CFTC charged with fraud in summer 2005. The CFTC, which pursued the case with the receiver in charge of the hedge fund's assets, settled the charges with both MF Global and a former account executive, Thomas Gilmartin, who also had an ownership stake in the hedge fund and failed to tell his employer. The hedge fund lost about $133 million in MF Global accounts, but hid large losses by restrict ing Internet access to accounts and backdating execution dates of some trades executed through MF Global. In a related criminal proceeding, the U.S. Attorney for the Eastern District of Pennsylvania indicted the hedge fund's presi dent and founder on two criminal counts of commodities fraud.

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CFTC v. Amaranth Advisors, L.L.C., et al. On July 25, 2007, the Commission filed a civil enforcement action charging Amaranth Advisors, L.L.C., Amaranth Advisors (Calgary) ULC (collectively Amaranth), and Brian Hunter with attempted manipulation. Specifically, the complaint alleges that the defendants intentionally and unlawfully attempted to manipulate the price of natural gas futures contracts on the NYMEX on February 24 and April 26, 2006. February 24, 2006 was the last day of trading (expiry day) for the March 2006 NYMEX natural gas futures con tract, and April 26, 2006, was the expiry day of the May 2006 NYMEX natural gas futures con tract. The settlement price of each NYMEX natural gas futures contract is determined by the volume-weighted average of trades executed from 2:00-2:30 p.m. (the closing range) on the expiry day of such contracts. The Complaint alleges that, for each of the expiry days at issue, the defendants acquired more than 3,000 NYMEX natural gas futures contracts in advance of the closing range, which they planned to, and for the most part did, sell dur ing the closing range. The Complaint also alleges that defendants held large short natural gas financially-settled swaps positions, primari ly held on the Intercontinental Exchange (ICE). The settlement price of the ICE swaps is based on the NYMEX natural gas futures set tlement price determined by trading done dur ing the closing range on expiry day. The Complaint alleges that defendants intended to lower the prices of the NYMEX natural gas futures contracts to benefit defendants larger swaps positions on ICE and elsewhere. The Complaint also alleges that, in response to an inquiry from NYMEX about the April 26, 2006 trading, Amaranth Advisors L.L.C. made false statements to NYMEX to cover up defendants attempted manipulation. The Commission received cooperation from the FERC, SEC and NYMEX in connection with this matter. CFTC

v. Amaranth Advisors, L.L.C., et al., No. 07 CIV 6682 (S.D.N.Y. filed July 25, 2007). CFTC v. Energy Transfer Partners, L.P. On July 26, 2007, the Commission filed a civil enforcement action charging Energy Transfer Partners, L.P. (ETP), and three ETP subsidiaries Energy Transfer Company (a/k/a La Grange Acquisition, L.P.) (ETC), Houston Pipeline Company (HPLC), and ETC Marketing, Ltd. (ETC Marketing) with attempted manipulation. Specifically, the complaint alleges that the defendants attempt ed to manipulate the price of physical natural gas at the Houston Ship Channel (HSC) delivery hub during September and November 2005. The Complaint further alleges that the defendants attempted to manipulate the October 2005 and December 2005 HSC monthly index prices of natural gas published by Platts (a division of The McGraw-Hill Companies, Inc.) in its Inside FERCs Gas Market Report (Inside FERC). The Com plaint alleges that the defendants used Hurricane Rita as a pretext for their scheme. Specifically, the Complaint states that Hurricane Rita made landfall in the Texas and Louisiana Gulf region on September 24, 2005, and demand for natural gas in Houston dropped as residents fled the hurricane. Anticipating this occurrence, the defendants allegedly devised a four-step plan to take advantage of and financially benefit from Hurricane Ritas impact. As alleged, the first step in the defendants plan was to build their short position in the October 2005 HSC financial basis swap. A basis swap is a swap whose cash settlement price is calculated based on the basis between a futures contract and the spot price of the underlying commodity or a closely related commodity on a specified date. In this instance, the two legs of the swap are the monthly HSC index price pub
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lished by Inside FERC and the final settlement price of the Henry Hub futures contract traded on the NYMEX. As a short, the defendants were obligated to pay the HSC index price; thus they benefited from a lower HSC index price. Second, in the days just before and after Hurricane Rita, the defendants allegedly built up a huge invento ry of physical gas with the intent to deliver that gas to HSC, despite the lack of demand in the Houston area. Third, on September 28, 2005, the defendants sold a vast quantity of natural gas for delivery during October 2005 at HSC with the intent to push down, or cap, the price of physical natural gas at HSC. They purportedly made most of these sales on the ICE. In fact, the defendants represented 96 percent by volume of all the trades that took place that day on ICE in the HSC contract. The fourth and final step in the defendants plan allegedly occurred when they reported the September 28, 2005, sales to Platts with the intent and belief that Platts would use these transactions in calculating the October Inside FERC monthly price index at HSC, pre sumably at lower or stabilized prices to the bene fit of the defendants short swaps positions. The Complaint further alleges that the defendants attempted to manipulate the price for November 2005 physical natural gas at HSC and attempted to manipulate the December Inside FERC monthly index price. Defendants purportedly repeated the same course of action in the November/December 2005 time period as they did during September/October 2005. The Com mission received cooperation from the FERC in connection with this matter. CFTC v. Energy Transfer Partners, L.P., No. 3-07CV1301-K (N.D. Tex. filed July 26, 2007). In re Marathon Petroleum Company On August 1, 2007, the Commission filed and simultaneously settled an administrative enforcement action against Marathon Petroleum Company (MPC), a subsidiary of Marathon Oil Corporation, finding that MPC attempted to
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manipulate a price of spot cash West Texas Intermediate (WTI) crude oil delivered at Cushing, Oklahoma on November 26, 2003, by attempting to influence downward the Platts market assessment for spot cash WTI for that day. The Platts market assessment for WTI is derived from trading activity during a particular 30-minute period of the physical trading day. The Platts market assessment for WTI is used as the price of crude oil in certain domestic and for eign transactions. At the time in question, MPC priced approximately 7.3 million barrels of phys ical crude oil per month off the Platts market assessment for WTI. As a net purchaser of for eign crude oil priced off of the Platts spot cash WTI assessment, if its conduct was successful, MPC would have benefited from a lower Platts spot cash WTI assessment. The order finds that, on November 26, 2003, MPC purchased NYMEX WTI contracts with the intention of selling physical WTI during the Platts window at prices intended to influence the Platts WTI spot cash assessment downward. Further, during the Platts window, MPC knowingly offered WTI through the prevailing bid at a price level calculated to influence downward the Platts WTI assessment. The Commission assessed sanctions including a cease and desist order and a civil mon etary penalty ($1,000,000). In re Marathon Petroleum Company, CFTC Docket No. 07-09 (CFTC filed Aug. 1, 2007).

Federal Communications Commission


Over the last five years, the Federal Com munications Commission (FCC or Commis sion) has made preventing, detecting, and deter ring waste, fraud, and abuse by its regulatees an agency-wide priority. As described below, the FCCs fraud-related actions advance the Presidents goals of promoting corporate respon sibility and ensuring just and effective punish ment of those who perpetrate financial crimes. In addition, the Commission has been an active participant in the Presidents Corp-orate Fraud

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Task Force. Through this participation, the Com mission has learned a great deal from the efforts of other agencies, and has used this knowledge in its own efforts to prevent, detect, and deter waste, fraud, and abuse. Universal Service Fund Fraud.

for ineligible services, false and fraudulent invoices, kickbacks and bribes. These joint efforts have yielded nearly $50 million in civil recoveries, over $20 million in criminal penalties and restitution, and numerous indict ments, prison terms, and plea agreements. Mandatory Debarments. The Commission views debarment as a critical tool in deterring waste, fraud, and abuse, and it has established mandatory debarment procedures triggered by civil or criminal judgments to prevent corporations and individuals who have defrauded the Government from participating in the USF program for schools and libraries. Over the last several years, eight individuals and four companies (NEC-Business Network Solutions, InterTel Technologies, Inc., Premio Inc., and NextiraOne LLC) convicted of fraud-related offenses in connection with the USF have been debarred for periods ranging from six months to three years. Other Significant Fraud Enforcement Actions.

Much of the agencys fraud-related activity involves its oversight of the Universal Service Fund (USF), a multi-billion dollar federal program that helps communities across America obtain affordable telecommunications services. In addition to its collaboration with law enforcement on False Claims Act and antitrust cases related to universal service funds, the Commission has also debarred wrongdoers, launched an unprecedented audit program of the USF, and used its rulemaking authority to establish a regulatory framework inhospitable to fraudulent activity.

$70 Million from Fraud Investigations and Prosecutions. In investigating and supporting the prosecution of fraud and other financial crimes, the Commission ultimately seeks to ensure that the USF is made whole for all direct and collateral damages and that amounts disbursed through fraud are available to other program participants. This effort involves multiple bureaus and offices within the Commission, including the Office of General Counsel, Office of Inspector General, Wireline Competition Bureau, and Enforcement Bureau. In addition, building on the 2003 Memorandum of Understand ing with the DOJ on corporate fraud coor dination, the Commission has continued to nurture interagency relationships. The Com mission has actively supported DOJ and the FBI in 90 investigations over the last five years, 60 of which have closed. Working closely with these agencies, the Commission has moved aggressively to investigate allega tions of bid-rigging, over-billing and billing

$130 Million to Settle Spectrum Auction Fraud Case. In July 2006, DOJ and the FCC reached a $130 million settlement with Wall Street money manager Mario Gabelli and affiliated entities and individuals to resolve civil allegations of fraud in connection with wireless spectrum license auctions conducted by the FCC. In these auctions, the FCC had established rules that, depending on the auc tion, permitted only small businesses to par ticipate or to qualify for bidding credits and favorable financing. The Government alleged that various friends and relatives of Gabelli were recruited to serve as officers of sham small businesses, solely to certify that these businesses met the FCCs eligibility rules for participation in certain auctions, bidding credits, and favorable Government financing. In reality, however, these businesses were con
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trolled by Gabelli. This settlement helped to ensure the integrity of the FCCs auction program.

$9.3 Million for Slamming Violations. Another significant area of corporate fraud enforcement activity is slamming, the unau thorized change of a consumer's preferred telecommunications carrier. Over the last five years, the Commission has investigated thou sands of slamming complaints and recouped over $1 million directly for consumers; the Commission has also issued forfeitures and entered consent decrees for an additional $8.3 million. Beyond these payments, the Com mission has often required companies to adopt compliance programs, including employee training, periodic audits, and records retention requirements. We also enforce our slamming rules in partnership with the States and maintain consumer education efforts on slamming, cramming, and various scams such as modem redialing, voice mail fraud, and cell phone cloning. $8 Million to Settle Fraud Case Involving the TRS Fund. In 2005, the FCC entered into a consent decree with the Publix Companies to resolve allegations that the company unlawful ly and fraudulently collected or attempted to collect over $10 million from the national Telecommunications Relay Services (TRS) Fund, which supports critical telecommuni cations services to persons with disabilities. Publix also agreed to relinquish its authori zation to operate as a common carrier, reim burse the TRS Fund $7.9 million, and forego another $2.3 million in TRS payments. $12.5 Million Consent Decree Regarding Payola Schemes. In April 2007, the Com mission entered consent decrees with CBS Radio, Citadel Broadcasting Corporation, Clear Channel Communications, Inc., and Entercom Communications Corp. to address alleged payola violations the practice of

accepting cash or other valuable considera tion from record labels in exchange for airplay of artists from those labels, without disclosing the pay-for-play arrangement. In addition to $12.5 million in voluntary contributions to the U.S. Treasury, the broadcasters agreed to implement certain business reforms and com pliance measures.

$7 Million in Forfeitures Related to Junk Faxes. Finally, the Commission continues to take aggressive enforcement action against companies that send unsolicited faxes, proposing or issuing forfeitures totaling over $7.8 million since 2000. The agency has also issued over 600 citations concerning junk fax violations. A significant portion of junk fax complaints involve stock touting and socalled pump and dump schemes. The Commissions staff shares information concerning these complaints with the SEC.

Federal Energy Regulatory Commission


In August 2005, the Energy Policy Act of 2005 (EPAct 2005) went into effect, enhancing the regulatory authority of the Federal Energy Regulatory Commission (FERC). EPAct 2005 gave the FERC increased civil penalty authori ty of up to $1 million per day per violation for violations of the Federal Power Act and Natural Gas Act, and any rules, regulations, restrictions, conditions, or orders made or imposed by FERC thereunder. EPAct 2005 also gave the FERC express jurisdiction to prohibit energy market manipulation. Pursuant to the EPAct 2005, FERC imple mented new anti-manipulation regulations mak ing it unlawful for any entity, directly or indirectly, in connection with the purchase or sale of natu ral gas or the purchase or sale of transportation services subject to the jurisdiction of the FERC, or in connection with the purchase or sale of elec tric energy or the purchase or sale of transmission services subject to the jurisdiction of the FERC,

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(1) to use or employ any device, scheme, or arti fice to defraud, (2) to make any untrue state ment of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circum stances under which they were made, not mis leading, or (3) to engage in any act, practice, or course of business that operates or would oper ate as a fraud or deceit upon any entity. Prohibition of Energy Market Manipulation, Order No. 670, FERC Statutes & Regulations 31,202 (2006), rehg denied, 114 FERC 61,300 (2006). Prior to the promulgation of FERC's antimanipulation rule, FERC issued its Policy Statement on Enforcement (113 FERC 61,068) to provide the public with guidance and regulatory certainty regarding FERC's enforcement of the statutes, orders, rules and regulations it administers. Among other things, the Policy Statement on Enforcement details the FERC's penalty assessment process. Shortly after the issuance of the Policy Statement on Enforcement, FERC instituted a No-Action Letter Process (113 FERC 61,174) whereby regulated entities can seek informal staff advice regarding whether a transaction would be viewed by staff as consti tuting a violation of certain orders or regula tions. In both Orders, FERC drew on the best practices of other economic regulators includ ing the DOJ, SEC and Commodity Futures Trading Commission (CFTC). EPAct 2005 also directed FERC and the CF TC to enter into a Memorandum of Understanding. The MOU provides both agencies with enhanced ability to efficiently and effectively detect manipulation in both gas and electric markets by allowing the agencies to share information and thereby reduce duplicative efforts. FERC and CFTC are actively conducting joint investigations.

Since January 1, 2006, FERC has employed its new civil penalty authority in 12 cases resulting in a total of $39.8 million in civil penalties and tailored compliance plans. These are set forth below. Recent enforcement actions under the FERCs anti-manipulation rules set forth in 18 C.F.R. Part 1c demonstrate that FERC is dedicated to ensuring the markets subject to its jurisdiction are well-functioning and free from corporate fraud. Significant Cases Amaranth and Energy Transfer Partners Show Cause Orders FERC used its enforcement authority in two market manipulation cases when it issued show cause orders that made preliminary find ings of market manipulation and proposed civil penalties totaling $458 million in two investi gations involving traders unlawful actions in natural gas markets. Amaranth. This case was brought under the FERCs new anti-manipulation rule, and involves the Greenwich, Connecticut-based hedge fund Amaranth LLC and traders Brian Hunter and Matthew Donohoe. FERCs staff observed, in real-time, anomalies in the price on the NYMEX of NG Futures Contracts and informed the CFTC of our observations. For more than a year, FERC and the CFTC coor dinated their respective investigations into whether the Amaranth Entities and their traders manipulated the settlement price of the NG Futures Contracts. That settlement price is explicitly used to determine the price for a substantial volume of FERC-jurisdictional physical natural gas transactions. After a unan imous vote on July 26, 2007, FERC issued an order requiring Amaranth and the traders to show why they should not be assessed civil penalties and disgorge profits totaling $291 million for manipulating the price of FERCjurisdictional transactions by trading in the
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NYMEX Natural Gas Futures Contract in February, March, and April 2006. FERCs Order was issued within one day of the CFTCs civil action against certain Amaranth entities and Hunter. In separate federal court actions filed in the U.S. District Court for the District of Columbia and the Southern District of New York seeking to enjoin FERCs Order to Show Cause pro ceedings, the Amaranth Entities and Hunter challenged FERCs subject matter jurisdiction to assess civil penalties and require disgorgement of unjust profits for Amaranths trading in Natural Gas Futures Contracts, which had a direct and substantial effect on the price of FERC-jurisdictional transactions. Both the U.S. District Court for the Southern District of New York and the U.S. District Court for the District of Columbia denied the motions for a preliminary injunction. Energy Transfer Partners, LP. This case, which came to the FERCs attention through its Enforcement Hotline, involved alleged manipu lation by Energy Transfer Partners, LP (ETP), a Texas-based owner of pipeline assets, and a natural gas trading affiliate ETP of wholesale natural gas markets at Houston Ship Channel and Waha, Texas, trading hubs on various dates from December 2003 through December 2005. On July 26, 2007, the FERC voted unanimously to order ETP to show that it did not violate the FERCs former market behavior rule by manipulating the wholesale natural gas market at Houston Ship Channel on certain dates in 2003, 2004, and 2005. The FERC is proposing more than $167 million in total penalties and disgorgement of unjust profits. Following the FERCs initiation of the investigation of ETP, the CFTC joined the investigation and then brought its own action against ETP in the Southern District of Texas. In both the Amaranth and ETP cases, FERCs actions are preliminary; there has been no final agency action.

Other Significant Cases

Two electric energy companies, PacifiCorp, 118 FERC 61,026 ( Jan. 18, 2007) and SCANA, 118 FERC 61,028 ( Jan. 18, 2007), agreed to pay $10 million and $9 million in civil penalties, respectively, to resolve claims arising from their violation of FERCs transmission open access rules. BP Energy Company (BP), 121 FERC 61,088 (Oct. 25, 2007), paid a $7 million civil penalty to resolve multiple self-report ed violations of competitive bidding regulations, the shipper-must-have-title requirement, and the prohibition on buy/sell arrangements. Calpine Energy Services, 119 FERC 61,125 (May 9, 2007), a subsidiary of Calpine Corporation, an integrated power company, and Bangor Gas Company, 118 FERC 61,186 (Mar. 7, 2007), a subsidiary of Sempra Energy, an energy-services holding company, agreed to pay $4.5 million and $1 million in civil penalties, respectively, for failing to hold good title to the gas shipped on their capacity on interstate pipelines. To resolve claims arising out of the Califor nia energy crisis of 2000-2001, including the proceedings alleging market manipula tion by Enron, FERC Office of Enforcement staff has helped facilitate, and FERC has approved, 16 settlements representing $6.5 billion in refunds to California parties. American Electric Power Corp., 110 FERC 61,061 ( Jan. 26, 2005), one of the largest electric utilities in the United States, agreed to pay a $21 million civil penalty under the Natural Gas Policy Act of 1978 for allowing an affiliate, AEP Energy Services, to improperly receive confidential information about non-affiliated customers.

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