SEC News Digest

COMMISSION ANNOUNCEMENTS

Michael Conley Named SEC Deputy Solicitor

The Securities and Exchange Commission announced today that Michael A. Conley has been named Deputy Solicitor in the Appellate Group of the SEC's Office of the General Counsel. In that role, Mr. Conley will help oversee the Commission's appellate and amicus curiae litigation.

"Michael is a superb legal craftsman and appellate litigator," said Jacob Stillman, the SEC's Solicitor. "He has demonstrated great skill and judgment, and I am delighted that Michael has agreed to become Deputy Solicitor."

Mr. Conley previously held the position of Senior Special Counsel in the Appellate Group. He joined the SEC staff in 2000, and has since been responsible for some of the Commission's most important appellate litigation.

Prior to joining the SEC staff, Mr. Conley was the managing partner of the Washington office of Pillsbury Madison & Sutro, where he specialized in appellate litigation.

Mr. Conley is a graduate of Boston University School of Law, where he was Editor-in-Chief of the Boston University Law Review. Following law school, he was a law clerk for Judge Abner J. Mikva of the U.S. Court of Appeals for the District of Columbia Circuit and for Justice Harry A. Blackmun of the U.S. Supreme Court. (Press Rel. 2009-33)

ENFORCEMENT PROCEEDINGS

In the Matter of Leumi Investment Services Inc.

On February 24, the Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 (Order) against Leumi Investment Services Inc. (LISI), a registered broker-dealer. LISI consented to the issuance of the Order without admitting or denying any of the findings in the Order, except jurisdiction and the subject matter of these proceedings, which it admitted. The Order finds that from May 2003 to August 2004, LISI failed reasonably to supervise Victor P. Machado (Machado), a former fixed income trader at LISI, with a view to preventing and detecting Machado's violations of the federal securities laws. The Order finds that during this period, Machado and Frank Lu, a former salesperson at Oppenheimer & Co. Inc. (OPCO), a registered broker-dealer and investment adviser, engaged in a fraudulent scheme that resulted in a substantial increase of order flow from LISI to OPCO. The Order finds that as a fixed income trader, Machado was responsible for executing LISI's customer orders. The Order further finds that pursuant to their scheme, Lu provided Machado with secret gratuities and entertainment and Machado, in violation of his duties to LISI and its customers, directed a substantial flow of orders to OPCO for execution at prices that were favorable to OPCO and detrimental to LISI's customers. The Order also finds that as a result of this arrangement, on certain trades, Machado and Lu also positioned OPCO between LISI and other broker-dealers offering better prices that Machado could have obtained for LISI. The Order finds that Machado's and Lu's scheme harmed LISI, and a related entity, and their customers by approximately $1.1 million.

The Order finds that during this period LISI did not implement reasonable procedures to prevent and detect unauthorized changes to trade tickets by its personnel. The Order further finds that Machado frequently improperly changed and falsified trade tickets in an effort to conceal the fraudulent scheme. The Order finds that had LISI implemented reasonable procedures concerning changes to trade tickets, Machado's supervisor could have detected Machado's falsification of the trade tickets and uncovered Machado's fraudulent scheme. As a result of the conduct described above, the Order finds that LISI failed reasonably to supervise Machado, within the meaning of Section 15(b)(4) of the Exchange Act, with a view to preventing and detecting Machado's violations of the federal securities laws. The Order further finds that LISI also violated Exchange Act Section 17(a) and Rule 17a-3 thereunder because false information was entered into LISI's books and records by Machado.

Based on the above, the Order censures LISI and orders it to cease and desist from committing or causing any violations or any future violations of Section 17(a) of the Exchange Act and Rule 17a-3 thereunder, and requires LISI to comply with certain undertakings. In determining to accept LISI's offer of settlement, the Commission considered remedial acts promptly undertaken by LISI (including reimbursement by LISI and a related entity to their customers by approximately $1.2 million) and its cooperation with the Commission's investigation. (Rel. 34-59437; File No. 3-13377)

In the Matter of Oppenheimer & Co. Inc.

On February 24, the Commission issued an Order Instituting Administrative Proceedings, Making Findings, and Imposing Remedial Sanctions Pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Order) against Oppenheimer & Co. Inc. (OPCO), a registered broker-dealer and investment adviser. OPCO consented to the issuance of the Order without admitting or denying any of the findings in the Order, except jurisdiction and the subject matter of these proceedings, which it admitted. The Order finds that from May 2003 to August 2004, OPCO failed reasonably to supervise Frank Lu (Lu), a former salesperson at OPCO, with a view to preventing and detecting Lu's violations of the federal securities laws. The Order finds that during this period, Lu and Victor P. Machado (Machado), a former trader at two related entities, Leumi Investment Services Inc., a registered broker-dealer, and Bank Leumi USA (collectively referred to as Leumi), engaged in a fraudulent scheme that resulted in a substantial increase of order flow from Leumi to OPCO. The Order further finds that pursuant to their scheme, Lu provided Machado with secret gratuities and entertainment and Machado, in violation of his duties to Leumi and its customers, directed a substantial flow of orders to OPCO for execution at prices that were favorable to OPCO and detrimental to Leumi's customers. The Order also finds that as a result of this arrangement, on certain trades, Lu and Machado also positioned OPCO between Leumi and other broker-dealers offering better prices that Machado could have obtained for Leumi. The Order finds that Lu's and Machado's scheme harmed Leumi and its customers by approximately $1.1 million.

The Order finds that during the period, Lu and Machado conducted their trading and most of their communications by e-mail on the Bloomberg Mail messaging system used by OPCO. The Order further finds that several e-mail exchanges between Lu and Machado presented red flags indicating that Machado was directing order flow to Lu, and in turn, Lu was providing secret gratuities to Machado. The Order finds that because of a deficiency in OPCO's e-mail review procedures, none of Lu's Bloomberg e-mails was reviewed by OPCO staff, as required by OPCO's electronic communications policy. As a result of this deficiency, the Order finds that for over four years, OPCO's computer system did not retrieve from Bloomberg, or load into OPCO's database for supervisory review, the Bloomberg e-mail messages for approximately 370 OPCO employees, including Lu. The Order further finds that if OPCO had monitored Lu's Bloomberg e-mail communications, OPCO supervisors could have prevented Lu's misconduct or detected it at an earlier time. As a result of the conduct described above, the Order finds that OPCO failed reasonably to supervise Lu, within the meaning of Section 15(b)(4) of the Exchange Act.

Based on the above, the Order (i) censures OPCO; (ii) orders OPCO to pay a civil penalty of $850,000; and (iii) requires OPCO to comply with certain undertakings. (Rel. 34-59438; File No. 3-13378)

In the Matter of RBC Capital Markets Corporation

On February 24, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Sections 15(b)(4), 15B(c)(2), and 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order (Order) against RBC Capital Markets Corporation (RBC). The Order finds that RBC violated the fair dealing, gifts and gratuities, and supervisory rules of the Municipal Securities Rulemaking Board (MSRB) for monetary advances made on behalf of, and reimbursements from, one of its municipal clients (City) for expenses incurred on trips to New York to meet with rating agencies as part of the City's municipal bond issuance process. The Order finds that on rating trips taken in 2004 and 2005, City officials were accompanied to New York by family members, where they all dined at upscale restaurants, attended Broadway shows and sporting events, and had access to a private car service. Both rating trips lasted six days, even though meetings with the rating agencies took place on only one or two days. The Order finds that RBC advanced the payment for a substantial portion of the expenses incurred by the City officials and their family members, and then obtained reimbursement for all expenses incurred on the rating trips as a cost of issuance directly from bond proceeds at closing.

Based on the above conduct, the Order censures RBC, orders RBC to cease and desist from committing or causing any violations or any future violations of Section 15B(c)(1) of the Exchange Act and MSRB Rules G-17, G-20 and G-27, and orders RBC to pay a $125,000 civil penalty. RBC consented to the issuance of the Order without admitting or denying any of the findings contained therein except for the Commission's jurisdiction over RBC and the administrative proceedings. (Rel. 34-59439; File No. 3-13379)

SEC Charges Former Trader Victor Machado and Former Salesperson Frank Lu for Participating in Fraudulent Trading Scheme

Leumi Investment Services Inc. and Oppenheimer & Co. Inc. Each Settle Administrative Proceedings Based on Failures to Supervise Machado and Lu, Respectively

The Commission today filed a civil injunctive action against two former registered representatives, Victor P. Machado, a former fixed income trader at two related entities, Leumi Investment Services Inc. (LISI), a registered broker-dealer, and Bank Leumi USA (BLUSA) (collectively Leumi), and Frank Lu, a former salesperson at Oppenheimer & Co. Inc. (OPCO), a registered broker-dealer and investment adviser, for engaging in a fraudulent trading scheme. Without admitting or denying the allegations in the Complaint, except as to jurisdiction, both Machado and Lu have agreed to settle the action on the terms described below.

As alleged in the Complaint, from May 2003 through mid-August 2004, Machado and Lu engaged in a scheme to direct Leumi's securities order flow to OPCO in exchange for secret gratuities and entertainment that Lu provided to Machado. The Complaint also alleges that as part of the scheme, and in violation of Machado's duties to Leumi's customers, Machado routinely directed a substantial flow of orders to OPCO for execution at prices that were favorable to OPCO and detrimental to Leumi's own customers. The Complaint further alleges that as a result of Machado's and Lu's conduct, Leumi and its customers were harmed by approximately $1.1 million.

According to the allegations in the Complaint, in mid-2003, Machado and Lu agreed that Machado would direct orders to Lu for execution at prices favorable to OPCO, and Lu, in exchange, would provide Machado with frequent and costly gratuities and entertainment. As part of their fraudulent arrangement, the Complaint alleges that Machado and Lu also harmed Leumi's customers by unnecessarily using OPCO as a "middleman" to execute trades with other firms, when Machado could have executed those trades directly with the same firms at prices that were more favorable to Leumi's customers. By engaging in this conduct, the Complaint alleges that Machado and Lu ensured that OPCO realized a quick profit on Leumi's trading with little or no risk.

The SEC's Complaint, filed in the United States District Court for the Southern District of New York, charges Machado and Lu with having violated the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 (Securities Act), and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 10b-5. Further, Lu is charged with aiding and abetting Machado's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Machado is charged with aiding and abetting LISI's violations of Section 17(a)(1) of the Exchange Act and Rule 17a-3 thereunder (broker-dealer books and records provisions).

Without admitting or denying the allegations in the Complaint, Machado has consented to the entry of a final judgment that (i) permanently enjoins him from committing, or aiding and abetting, future violations of the above-referenced provisions, and (ii) based on Machado's financial condition, waives the payment of disgorgement and prejudgment interest and does not impose a civil penalty. As part of his settlement, Machado has also agreed to the issuance of an administrative order that bars him from association with any broker or dealer.

Lu has consented to the entry of a final judgment that (i) permanently enjoins him from committing future violations of the antifraud provisions of the federal securities laws referenced above, and (ii) based on Lu's financial condition, orders him to pay partial disgorgement of $100,000, and does not impose a civil penalty. As part of his settlement, Lu has also agreed to the issuance of an administrative order that bars him from association with any broker, dealer, or investment adviser.

The proposed relief in the settled actions with Machado and Lu is subject to court approval.

In related administrative proceedings, LISI and OPCO consented to the issuance of Commission Orders, without admitting or denying the findings in the Orders, except as to jurisdiction. In the LISI Order, the Commission found that from May 2003 to August 2004, LISI failed reasonably to supervise Machado with a view to preventing and detecting Machado's violations of the federal securities laws. The Commission further found that Machado frequently improperly changed and falsified trade tickets in an effort to conceal the fraudulent scheme and that, during this period, LISI did not implement reasonable procedures to prevent and detect unauthorized changes to trade tickets by its personnel. The Commission also found that if LISI had implemented reasonable procedures concerning changes to trade tickets, Machado's supervisor could have detected Machado's falsification of the trade tickets and uncovered Machado's fraudulent scheme. Accordingly, the Commission found that LISI had violated Exchange Act Section 17(a) and Rule 17a-3 thereunder because false information was entered into LISI's books and records by Machado. Accordingly, in the Order, the Commission (i) censures LISI, (ii) orders LISI to cease and desist from committing or causing violations of Section 17(a) of the Exchange Act and Rule 17a-3 thereunder; and (iii) requires LISI to comply with certain undertakings. In determining to accept LISI's offer of settlement, the Commission considered remedial acts promptly undertaken by LISI, including full reimbursement by LISI and BLUSA of their customers' losses, totalling approximately $1.2 million, and its cooperation with the Commission's investigation.

In the OPCO Order, the Commission found that from May 2003 to August 2004, OPCO failed reasonably to supervise Lu with a view to preventing and detecting Lu's violations of the federal securities laws. The Commission found that, during this period, Lu and Machado had conducted their trading and most of their communications by e-mail on the Bloomberg Mail messaging system that was used by OPCO and that several Bloomberg e-mail exchanges between Lu and Machado presented red flags indicating that Machado was directing order flow to Lu, and in turn, Lu was providing secret gratuities to Machado. The Commission also found that because of a deficiency in OPCO's e-mail review procedures, none of Lu's Bloomberg e-mails was reviewed by OPCO staff, as required by OPCO's electronic communications policy. The Commission found that, as a result of this deficiency, for over four years, OPCO's computer system did not retrieve from Bloomberg, or load into OPCO's database for supervisory review, the Bloomberg e-mail messages for approximately 370 OPCO employees, including Lu. The Commission further found that if OPCO had monitored Lu's Bloomberg e-mail communications, OPCO supervisors could have prevented Lu's misconduct or detected it at an earlier time. Accordingly, in the Order, the Commission (i) censures OPCO; (ii) orders OPCO to pay a civil penalty of $850,000; and (iii) requires OPCO to comply with certain undertakings. [SEC v. Victor P. Machado and Frank Lu, Civil Action No. 09-CV-01711 (RMB), USDC, SDNY] (LR-20909)

SELF-REGULATORY ORGANIZATIONS

Proposed Rule Change

The Chicago Board Options Exchange filed a proposed rule change (SR-CBOE-2009-009) under Rule 19b-4 of the Securities Exchange Act of 1934 to amend its rules prohibiting members from functioning as market-makers. Publication is expected in the Federal Register during the week of February 23. (Rel. 34-59425)

Immediate Effectiveness of Proposed Rule Changes

A proposed rule change (SR-CBOE-2009-008) filed by the Chicago Board Options Exchange relating to the Options Regulatory Fee has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of February 23. (Rel. 34-59427)

A proposed rule change filed by NYSE Alternext US establishing a fee for its new Risk Management Gateway Service (SR-NYSEALTR-2009-12) has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of February 23. (Rel. 34-59429)

A proposed rule change filed by New York Stock Exchange establishing a fee for its new Risk Management Gateway Service (SR-NYSE-2009-15) has become effective under Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of February 23. (Rel. 34-59430)

Approval of Proposed Rule Change

The Commission approved a proposed rule change (SR-BSE-2008-56) filed by the Boston Stock Exchange relating to BOX rules governing a BOX member's doing business with the public. Publication is expected in the Federal Register during the week of February 23. (Rel. 34-59434)

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