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Bridging the Week by Gary DeWaal: August 22 to 26 and August 29, 2016 (Summarily Barred; False Performance Data; Inadequate Disclosure; The Grass Is Greener)

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Published Date: August 28, 2016

Last week, a nonmember was summarily barred from accessing all CME Group exchanges’ markets for 60 days for endeavoring to disguise that he was the controller of five trading accounts that were not in his name. In addition, 13 investment advisers agreed to settle charges brought by the Securities and Exchange Commission that they passed along to their own investors false performance data provided by an independent third party adviser. As a result, the following matters are covered in this week’s edition of Bridging the Week:

Nonmember Banned From Trading All CME Group Products for 60 Days Without a Hearing for Alleged Suspicious Trading Activities (includes Legal Weeds);
Multiple Investment Advisers Sanctioned for Passing Along False Performance Claims of Another Adviser;
Affiliated Private Equity Fund Advisers Agree to US $52.7 Million Settlement for Inadequate Disclosure Regarding Fees and Loans; and more.

Note: Because of the US Labor Day holiday, the next edition of Bridging the Week will be September 12, 2016.

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Briefly:

Nonmember Banned From Trading All CME Group Products for 60 Days Without a Hearing for Alleged Suspicious Trading Activities: Andrey Sakharov, a nonmember, was summarily barred from trading any CME Group product for 60 days based on a determination by CME Group’s chief regulatory officer or delegate that such action was necessary to “protect the best interests of the Exchanges and the marketplace.” According to CME Group, on multiple dates since July 1, 2016, Mr. Sakharov allegedly placed orders on Globex in an account not in his name and without an executed power of attorney. Using this account, he placed small quantity orders on one side of the market in August 2016 gold and natural gas futures contracts, and large quantity orders on the other side. He then cancelled both sides of his orders quickly afterwards. CME Group did not claim that any of these orders were placed to effectuate the execution of other orders; however, it claimed that Mr. Sakharov placed trades without any intent that they be executed. CME Group also said that an introducing firm advised it that the account on whose behalf Mr. Sakharov placed these orders had been referred to the Cyprus Securities and Exchange Commission for possible money laundering. In addition, alleged CME Group, Mr. Sakharov placed trades for a least four other accounts not in his name at an unidentified futures commission merchant after advising the same introducing firm that “he did not want to be officially associated with these accounts, since he was concerned that he may be banned from trading following this investigation.” Unrelatedly, three futures commission merchants were fined by the Chicago Mercantile Exchange for violations of rules related to financial requirements and/or requirements pertaining to the segregation of customer funds. The alleged violations appear to be of the nature of recordkeeping or procedural offenses, rather than deficiencies in any amounts required to be maintained. Each of the firms was fined US $50,000. Separately, LPS Futures LLC agreed to pay a fine of US $15,000 to resolve a disciplinary action brought by ICE Futures U.S. that charged it misreported the execution time of a block trade, and failed to report a block trade to the exchange within 15 minutes of execution, as required.

Legal Weeds: Designated contract markets are required by the Commodity Futures Trading Commission rule to have a disciplinary process that includes certain required elements that promote fairness, but may include an emergency process that permits a DCM to “impose a sanction, including suspension, or take other summary action against a person or entity subject to its jurisdiction upon a reasonable belief that such immediate action is necessary to protect the best interest of the marketplace.” (Click here to access the CFTC’s guidance regarding its Core Principle 13 for DCMs – Disciplinary Procedures.) Pursuant to this CFTC authority, DCMs, like CME Group exchanges, have adopted rules to permit summary denial of access to exchanges’ trading facilities “upon a good faith determination that there are substantial reasons to believe that such immediate action is necessary to protect the best interests of the Exchange.” (Click here to access CME Group Rule 413.A. See also ICE Futures U.S. Rule 21.02(f); click here to access.) Under these rules, there is typically a maximum period such summary ban may remain in effect. In the interim, a respondent may request a hearing before a hearing panel. In April 2015, CME Group summarily barred two traders – Nasim Salim and Heet Khara – from trading on any CME Group exchange for 60 days relying on its summary emergency suspension authority because of the respondents’ then current alleged spoofing activities. (Click here to access details in the article, “CME Group Summarily Suspends Trading Privileges of Two Traders Without Hearing for Alleged Spoofing and Non-Cooperation” in the May 3, 2015 edition of Bridging the Week.)

Multiple Investment Advisers Sanctioned for Passing Along False Performance Claims of Another Adviser: Thirteen investment advisers settled charges brought by the Securities and Exchange Commission for fines of between US $100,000 and US $500,000, for passing along to their advisory clients false performance data provided by another independent investment advisor. According to the SEC, each of the 13 advisers used performance data provided by F-Squared Investments, Inc., formerly registered with the SEC as an investment adviser from March 2009 through January 2013, to solicit investors for managed trading programs based on F-Squared’s AlphaSector index. However, said the SEC, the performance data provided by F-Squared was false in that, among other things, it claimed it was based on real client performance, when it was not, and the performance results were “substantially overstated.” The SEC charged that none of the 13 advisers took adequate steps to evaluate the legitimacy of F-Squared’s performance claims. The SEC charged each of the 13 advisers with failing to make and keep records necessary to demonstrate the calculation of performance or rate of return it provided to 10 or more persons, as well as distributing advertisements that were false and misleading. In January 2015, the SEC filed and settled charges against F-Squared, claiming it defrauded investors by falsely advertising a successful seven-year track record for its core investment strategy, reflecting actual investments for actual customers, when performance data was actually “materially inflated and hypothetical.” The firm agreed to pay US $35 million to resolves these charges. Separately, Howard Present, the firm’s cofounder and former chief executive officer, was also sued by the SEC for this matter; this matter is still pending. (Click here for details of these SEC enforcement actions in the article, “Investment Company and Former CEO Charged With Defrauding Investors Related to Sale of Index Products Using ETFs; Firm Settles by Payment of US $35 Million” in the January 4, 2015 edition of Bridging the Week.)
Affiliated Private Equity Fund Advisers Agree to US $52.7 Million Settlement for Inadequate Disclosure Regarding Fees and Loans: The Securities and Exchange Commission filed and settled charges against Apollo Commodities Management, L.P., a private equity fund adviser, and three other Apollo Management private equity fund advisers (Apollo Management V, VI, and VII, L.P.; collectively, all four entities, “Apollo”) for their inadequate disclosure to investors and a supervision lapse. The SEC charged that, from at least December 2011 through May 2015, Apollo accelerated the assessment of annual monitoring fees due from certain portfolio companies it advised upon the private sale or initial public offering of such companies. However, claimed the SEC, Apollo failed adequately to disclose in advance to the portfolio companies or their limited partners that the payment of such fees might be so accelerated. In addition, the SEC claimed that Apollo Management VI (AMVI) failed adequately to disclose on certain funds’ financial statements that, in connection with loans granted by the funds, an affiliated general partner of AMVI, not the funds, would receive interest payments. Finally, the SEC claimed that after a former Apollo senior partner was determined to have impermissibly charged personal items and services to Apollo-advised funds and the funds’ portfolio companies in 2010 and 2012, Apollo did nothing more than require the partner to reimburse the entities and reprimand the manager. Subsequently, Apollo engaged outside counsel who determined that the partner had charged additional personal expenses to Apollo-advised funds and the funds’ portfolio companies from January 2010 to June 2013. The partner reimbursed the entities for these expenses too and entered into a separation agreement with Apollo. The SEC claimed that Apollo failed “reasonably to supervise” the partner. To resolve the SEC’s allegations, Apollo agreed to disgorge US $40.2 million to compensate investors and to pay a fine of US $12.5 million. In October 2015, the SEC brought and settled similar charges against three affiliated Blackstone Group investment advisers for likewise not disclosing adequately to investors that they might accelerate certain management fees when they ceased advising certain investment companies. (Click here for details of this enforcement action in the article, “SEC Alleges Investment Advisers’ Failure to Disclose Pocketing of Legal Fees Discount Constitutes Conflict of Interest” in the October 11, 2015 edition of Bridging the Week.)

And more briefly:

CFTC and FIA Object to CFPB Proposal to Ban Certain Arbitration Agreements to the Extent They Pertain to Commission-Regulated Activities: The Commodity Futures Trading Commission and the Futures Industry Association filed comment letters with the US Bureau of Consumer Financial Protection (CFPB) objecting, in part, to a proposed rule by the CFPB that would prohibit arbitration agreements that barred consumers from filing or participating in class action litigations regarding covered consumer financial products or services. Language in the preamble to the proposed rule would subject the rule’s requirements to “any product or service that is subject to both the Bureau’s and [CFTC’s arbitration rules].” Both the CFTC and FIA pointed out that the CFTC has exclusive jurisdiction over the regulated activities of CFTC registrants, and any CFPB rule may not also regulate such activities.
Security-Based Swaps May Be Aggregated in Initial Margin Calculations for Uncleared Swaps Says CFTC Staff: Staff of two divisions of the Commodity Futures Trading Commission issued an interpretation to the International Swaps and Derivatives Association permitting covered swap entities that collect and post margin on a portfolio basis to include both security-based swaps and swaps in their calculations, subject to certain enumerated conditions. Among other things, both the swaps and security-based swaps must be subject to the same eligible master netting agreement and applicable netting portfolio. The two divisions are the Division of Swap Dealer and Intermediary Oversight and the Division of Clearing and Risk.
SEC Adopts Rules to Enhance Investment Advisers’ Disclosure, Including Derivatives Exposure, on Form ADV: The Securities and Exchange Commission amended various of its rules under the Investment Advisers Act to require advisers to disclose on their Form ADVs filed with it additional information regarding their separately managed accounts. (Form ADV is used by investment advisers to register with the SEC and state securities authorities; click here for background.) In addition, the amended rules enable private funder adviser entities that operate a single advisory business to register using a single Form ADV. The new amendments will be effective 60 days after they are published in the Federal Register.
CFTC Grants SEF Registration to Seed SEF LLC: The Commodity Futures Trading Commission approved Seed SEF LLC as a swap execution facility. Seed’s website indicates that it will offer swap products in “emerging agricultural markets with idiosyncratic production risks.” Apparently, its first swap products will be derivatives based on hemp, a type of cannabis plant.

Totally Irrelevant (But Is It?): I guess buyers and sellers in this marketplace will conclusively get to determine whether the grass is truly greener on the other side. I presume they each hope that is not the case.

For more information, see:

Affiliated Private Equity Fund Advisers Agree to US $52.7 Million Settlement for Inadequate Disclosure Regarding Fees and Loans:
https://www.sec.gov/news/pressrelease/2016-165.html

CFTC and FIA Object to CFPB Proposal to Ban Certain Arbitration Agreements to the Extent They Pertain to Commission-Regulated Activities:
https://www.regulations.gov/document?D=CFPB-2016-0020-3688
https://fia.org/sites/default/files/content_attachments/2016-08-22_CFPB_Arbitration_Provisions.pdf
https://www.regulations.gov/document?D=CFPB-2016-0020-1486

CFTC Grants SEF Registration to Seed SEF LLC:
http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/orgsefseedorderofreg160823.pdf

See also Seed SEF LLC website:
http://seedcx.com

Multiple Investment Advisers Sanctioned for Passing Along False Performance Claims of Another Adviser:

Representative Cases:
https://www.sec.gov/litigation/admin/2016/ia-4506.pdf
https://www.sec.gov/litigation/admin/2016/ia-4501.pdf
https://www.sec.gov/litigation/admin/2016/ia-4496.pdf

Nonmember Banned From Trading All CME Group Products for 60 Days Without a Hearing for Alleged Suspicious Trading Activities:
Cunningham Commodities:
http://www.cmegroup.com/notices/clearing/2016/08/16-ch-1601.html#pageNumber=1
FC Stone:
http://www.cmegroup.com/notices/clearing/2016/08/notice-of-disciplinary-action/16-ch-1604.html#pageNumber=1
LPS:
/ckfinder/userfiles/files/Gmail%20-%20Settlement%20of%20Charges%20Against%20LPS%20Futures%20LLC.pdf
Andrey Sakharov:
http://www.cmegroup.com/notices/disciplinary/2016/08/COMEX-16-0486-ANDREY-SAKHAROV.html#pageNumber=1
SG Americas Securities:
http://www.cmegroup.com/notices/clearing/2016/08/16-ch-1602.html#pageNumber=1

SEC Adopts Rules to Enhance Investment Advisers’ Disclosure, Including Derivatives Exposure, on Form ADV:
https://www.sec.gov/rules/final/2016/ia-4509.pdf

Security-Based Swaps May Be Aggregated in Initial Margin Calculations for Uncleared Swaps Says CFTC Staff:
/ckfinder/userfiles/files/August%2023%202016%20-%20CFTC-%20Request%20to%20Include%20Security-Based%20Swaps%20in%20Produc___-2(1).pdf

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of August 27, 2016. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP may represent one or more entities mentioned in this article. Quotations attributable to speeches are from published remarks and may not reflect statements actually made.

Commentaries

Bridging the Week by Gary DeWaal: August 22 to 26 and August 29, 2016 (Summarily Barred; False Performance Data; Inadequate Disclosure; The Grass Is Greener)

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