S.E.C. Member’s Role in Failed Mutual Fund Reform

The following is an excerpt from an article in 

The New York Times
Monday, August 27, 2012

S.E.C. Member’s Role in Failed Mutual Fund Reform

By NATHANIEL POPPER

Luis A. Aguilar, one of five members of the Securities and Exchange Commission, is generally known as one of its strongest advocates for tougher oversight of the securities industry. In public statements this year, he has pushed his S.E.C. colleagues to be more aggressive, contending that the commission was not protecting investors assiduously enough.

But last week, Mr. Aguilar derailed one of the most significant current efforts to tighten regulations on the financial industry. His opposition to a proposal put forward by the S.E.C. chairwoman, Mary L. Schapiro, which was intended to improve the safety and soundness of a popular investment, money market mutual funds, put Mr. Aguilar in lock step with the powerful and aggressive mutual fund industry in which he worked as a lawyer from 1994 to 2002. Mr. Aguilar’s decision to oppose Ms. Schapiro’s plan last week became the third and deciding S.E.C. vote against the proposal.

His public criticisms of the approach taken by Ms. Schapiro closely echo those made by the industry in its fierce lobbying effort to scuttle a regulatory plan that had won support from nearly every top financial regulator, including the Federal Reserve chairman, Ben S. Bernanke, and Treasury Secretary Timothy F. Geithner.

It is not uncommon, of course, for regulators to side with the industries they oversee. But Mr. Aguilar has been adamant that he is not against prudent reform. He has said instead that he wants to be sure regulators have enough information before they move forward with new rules.

Behind the scenes, though, Mr. Aguilar had not requested that additional information, according to people briefed on his actions in recent months.

In his statement outlining his opposition to Ms. Schapiro’s plan, for instance, he said “there are larger macro questions and concerns about the cash management industry as a whole” that needed to be studied before the S.E.C. could move forward with efforts to improve money market funds. Mr. Aguilar did not mention the need for further study to Ms. Schapiro until two days before he went public with his opposition last week, commission officials said.

Possible changes to money market funds have been discussed within the agency for over a year, and Ms. Schapiro distributed the 414-page proposal in June to the four other members of the commission, including Mr. Aguilar. During that time, S.E.C. staff members made numerous overtures to Mr. Aguilar to address any concerns he might have had about the proposal, but most were rebuffed, the people said. On the other hand, Mr. Aguilar met with mutual fund companies 11 times this year as the proposal was being developed, according to S.E.C. records.

For more, visit www.nytimes.com.

News Release from the FBI, Atlanta Division

Former Corporate Officers Sentenced to Lengthy Imprisonment for Stock Fraud Scam 

U.S. Attorney’s OfficeFebruary 23, 2012

Northern District of Georgia(404) 581-6000

ATLANTA—RUFUS PAUL HARRIS, 43, of Oklahoma City, Oklahoma, BENJAMIN STANLEY, 48, of Kennesaw, Georgia, and DARRYL HORTON, 50, of Okemos, Michigan, were sentenced today by United States District Judge Timothy C. Batten to significant terms of imprisonment on fraud charges stemming from a stock pump-and-dump scam involving their former company, Kennesaw, Georgia-based Conversion Solutions Holdings Corporation (“CSHC”).

In commenting on the case, United States Attorney Sally Quillian Yates said, “These significant sentences reflect the seriousness of the massive fraud these defendants committed against numerous victims who invested in the defendants’ company. By issuing false information about the company’s assets, the defendants lured victims into purchasing stock at artificially high prices. While the defendants got rich, victims lost millions. But the defendants won’t be enjoying any of the ill-gotten gains—they will be spending many years in prison. The President’s Financial Fraud Task Force will continue its work to root out fraud and restore investor confidence in our financial markets.”

“Today is a great accomplishment in the fight against fraud. Investment fraud not only victimizes individual investors, but the American public. Postal Inspectors will continue to work with its law enforcement partners to aggressively investigate and bring to justice those individuals who commit such crimes,” said Keith Morris, Postal Inspector in Charge of the Atlanta Division.

HARRIS was sentenced to 23 years in prison to be followed by five years of supervised release. STANLEY was sentenced to 16 years in prison to be followed by five years of supervised release. HORTON was sentenced to 4½ years in prison to be followed by three years of supervised release. Each defendant will be jointly and severally liable to repay $44,025,620.06 in restitution to over 5,000 investor victims.

HARRIS and STANLEY were convicted by the jury’s verdict on May 26, 2011, after a two-week jury trial. HORTON pleaded guilty to committing the offense of mail fraud while the jury was deliberating and so no jury verdict was reached as to him.

According to United States Attorney Yates, the charges, and other information presented in court: HARRIS was the founder and chief executive officer of CSHC; STANLEY was the co-founder and chief operating officer; and HORTON was the chief financial officer. The three defendants conspired to issue false press releases and financial statements about the company for the purpose of inflating the stock price, while at the same time they secretly transferred shares to family members who sold them at the inflated prices.

The defendants began issuing a series of press releases beginning in approximately July 2006, that publicly claimed CSHC’s ownership or control of entire issuances of foreign sovereign bonds issued by the Republics of Venezuela and Finland. These bonds were, on their face, worth billions of dollars and paid tens of millions in annual interest. In at least one of the press releases, HARRIS was quoted as stating that, based on CSHC’s acquisition of such large quantities of sovereign debt, “we are looking at a new justifiable reorganization release price of $25.63 [per share].” At the time, CSHC shares generally traded at less than approximately $1 per share. In October 2006, CSHC issued an annual report claiming as much as $800 million in assets, $500 million of which was in the form of foreign sovereign bonds as stated in at least some of the press releases. Also according to this report and its attachments, CSHC’s anticipated income included $19,869,792 in interest revenue from those bonds.

The evidence at trial showed that the three defendants knew these public statements were untrue, and knew that CSHC had little if any assets of any value and did not own or control the foreign sovereign bonds and other assets that it claimed to have. CSHC also had little if any in the way of revenue or profits from any business activity.

During the weeks that the defendants disseminated these misrepresentations via press releases and SEC filings, CSHC’s stock price on the open market more than tripled. The stock, which was a “penny-stock” trading for less than $1 per share in August 2006, sold for between $3-$4 per share in October 2006. During this time, HARRIS, STANLEY and HORTON transferred substantial quantities of CSHC stock to family members and others, who sold the stock in the open market at artificially inflated prices.

On May 24, 2011, before the trial concluded, HARRIS jumped his bail and fled Atlanta. The trial continued as to the other two Defendants and as to HARRIS in absentia. HARRIS was arrested by a U.S. Marshals Service task force in Utah on May 28, 2011, and he has been held in detention pending this sentence.

This case was investigated by special agents of the Federal Bureau Investigation and Postal Inspectors with the U.S. Postal Inspection Service, based on a referral from the United States Securities and Exchange Commission (“SEC”). The SEC has brought civil fraud charges against CSHD.

Assistant United States Attorney Justin S. Anand prosecuted the case.

This law enforcement action is part of President Barack Obama’s Financial Fraud Enforcement Task Force.

President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

For further information, please contact Sally Q. Yates, United States Attorney, or Charysse L. Alexander, Executive Assistant United States Attorney, through the U.S. Attorney’s Public Affairs Office, at USAGAN.Presse-mails@usdoj.gov or (404) 581-6016. The Internet address for the HomePage for the U.S. Attorney’s Office for the Northern District of Georgia iswww.justice.gov/usao/gan.