U.S. SEC settles fraud case against former Vitesse executives

NEW YORK, Sept 27 | Fri Sep 27, 2013 6:15pm EDT

NEW YORK, Sept 27 (Reuters) - The U.S. Securities and Exchange Commission said on Friday it reached a settlement with two former Vitesse Semiconductor Corp executives accused of inflating company earnings and backdating stock option grants.

The settlements with former Chief Executive Louis Tomasetta and former Executive Vice President Eugene Hovanec followed two mistrials in a related criminal case on similar claims. The two men pleaded guilty to a lesser charge in August.

Under the SEC settlements announced on Friday, Tomasetta will pay $100,000 and Hovanec will pay $50,000 in civil penalties. Both men agreed to be barred from serving as an officer or director of any public company for 10 years.

They have also agreed to orders requiring them to disgorge nearly $2.91 million, although those sums are being deemed by the SEC as satisfied by amounts they previously paid to resolve a separate class action.

Tomasetta and Hovanec neither admitted nor denied the allegations in settling with the SEC. The settlements are subject to the approval of U.S. District Judge Jed Rakoff in Manhattan.

The accord would resolve one of the last remaining cases with roots in a scandal beginning in 2005 over allegations that companies and their executives manipulated stock option dates. A number of civil and criminal cases were launched in the United States as a result.

The SEC in 2010 accused Tomasetta and Hovanec and two other former Vitesse employees of scheming from 2001 to 2006 to inflate Vitesse's revenues.

The SEC also accused Tomasetta and Hovanec of backdating stock option grants from 1995 to 2006 and later attempting a cover-up by fabricating the meeting minutes of a Vitesse board committee.

Illegal backdating occurs when companies tie stock options to an earlier date when share prices are low, but do not properly account for it.

Dan Marmalefsky, a lawyer for Tomasetta, declined to comment, as did Gary Lincenberg, a lawyer for Hovanec.

The SEC case had been on hold while prosecutors in New York sought since 2010 to obtain the conviction of the two men on a broad set of criminal charges including securities fraud and making false statements to auditors.

But after jurors failed to reach a verdict in April 2012, a judge dismissed much of the case. Prosecutors took Tomasetta and Hovanec to trial again on a single count each of conspiracy to commit securities fraud, but jurors again deadlocked in February.

Plea negotiations followed and Tomasetta and Hovanec pleaded guilty in August to an entirely different charge, admitting to altering company records to impede a contemplated investigation by the SEC.

In 2010, Vitesse agreed to pay $3 million to settle with the SEC.

The SEC said on Friday it decided not to impose civil penalties on two other former Vitesse executives, Yatin Mody, a former chief financial officer, and Nicole Kaplan, a former director of accounting.

The SEC cited their cooperation in the investigation. Both pleaded guilty to securities fraud and other charges in 2010.

The case is Securities and Exchange Commission v. Vitesse Semiconductor Corporation, et al, U.S. District Court, Southern District of New York, 10-9239.

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US CFTC warns against some derivatives documents, after investors balk

By Karen Brettell

NEW YORK, Sept 27 | Fri Sep 27, 2013 4:33pm EDT

NEW YORK, Sept 27 (Reuters) - The U.S. Commodity Futures Trading Commission has warned against the use of controversial documents that have been at the center of disputes in the $300 trillion derivatives market in recent weeks, after some fund managers accused big banks of trying to use the proposed agreements to maintain their market control.

The derivatives market is nearing a deadline next week that will kick-start a trading regime in which the majority of the market is expected to gradually shift to new electronic trading platforms which are meant to help promote price transparency and draw in new market entrants.

The CFTC, the main U.S. derivatives regulator, has been rushing through approvals for companies planning to offer trading platforms, called swap execution facilities (SEFs), that will go live Wednesday, as part of an overhaul of Wall Street after the financial crisis.

But the process has been marred by disputes over some terms regarding trading.

Some of the trading platforms have asked investors to sign documents that specify what happens to trades in the event they are not accepted into clearinghouses, known as "breakage agreements," said four people familiar with the situation. Other platforms have been pressured by banks to require the documents, but have refused, the people said.

Fund managers balked at signing the agreements, saying they were unnecessary and were meant to benefit the largest banks that already dominate trading. The fund managers said they would struggle to finalize paperwork with trading partners beyond the largest banks that already offer the most liquidity.

"If there (are) 1,000 participants that come into this market, you need 1,000 participants to have arrangements with 1,000 participants, which would mean a million agreements," which would benefit the incumbent banks, CFTC Chairman Gary Gensler told reporters at a conference in Washington on Friday.

Some banks have also tried to require that the documents be enforced on order-book platforms, where trades are meant to be anonymous, said one person familiar with the requests.

The CFTC, in a letter sent on Thursday to trading platforms, clearing organizations, and banks that act as clearing agents for the trades, said that the use of the documents would go against rules that require SEFs to allow investors impartial access to trading.

A rejection of a trade by a clearinghouse is also rare because banks and trading platforms use credit checks before trades to ensure that they will be accepted to clearing, and because trades are accepted by clearinghouses within seconds, the CFTC said in the letter.

Clearinghouses stand between trading partners and guarantee trades. By removing the credit risks associated with trade counterparties, central clearing is the first step to opening the market to new competition. Open trading platforms that hook into clearing will now enable any investor to trade with any other, and to bypass the banks as intermediaries.

The dispute was the latest in a series of arguments between market participants as the CFTC implements rules mandated by the 2010 Dodd-Frank legislation to reduce the risks of the markets. Though rare, it's not the first time that the CFTC has intervened on a documentation issue.

The regulator last year banned the use of triparty documentation for clearing that was being pushed by banks through the International Swaps and Derivatives Association and futures trade group the Futures Industry Association, after critics alleged that the documents would have a coercive effect of restricting investors to trading only with the largest banks.

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