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Luisa Grillo-Chope and Fred Wong, Office of Regulations and Interpretations

Karen Lloyd, Office of Exemption Determinations

Christopher Cosby, Office of Policy and Research

Employee Benefits Security Administration

Attn: Conflict of Interest Rule

Room N–5655

U.S. Department of Labor

200 Constitution Avenue NW.

Washington, DC 20210

Via Email: e-ORI@dol.gov

Re: RIN 1210–AB32 

Ladies and Gentlemen:

We understand that “the Department (of Labor) is proposing new exemptions and amendments to 

existing exemptions from the prohibited transaction rules applicable to fiduciaries under ERISA and the 

Code that would allow certain broker-dealers, insurance agents and others that act as investment advice 

fiduciaries to continue to receive a variety of common forms of compensation that otherwise would be 

prohibited as conflicts of interest.”

I believe I have expertise borne of education and experience that may be helpful1. Further, we 

respectfully remind the Department that “All men are caught in an inescapable network of mutuality, 

tied in a single garment of destiny. Whatever affects one directly, affects all indirectly.” This is certainly 

true with respect to the subject matter at issue here.

Background

In order to place this matter in the proper context, we refer the Department to the following facts:

• April 28, 2003, every major US investment bank, including Merrill Lynch, Goldman Sachs, 

Morgan Stanley, Citigroup, Credit Suisse First Boston, Lehman Brothers Holdings, J.P. Morgan Chase, 

UBS Warburg, and U.S. Bancorp Piper Jaffray, were found to have aided and abetted efforts to defraud 

investors. 

 

1

I include all linked documents herein by reference in their entirety.
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• May, 2003, the Securities and Exchange Commission (“SEC”) disclosed that several “brokerage 

firms paid rivals that agreed to publish positive reports on companies whose shares..they issued to the 

public.” 

• September 3, 2003, the New York State Attorney General “obtained evidence of widespread 

illegal trading schemes, ‘late trading’ and ‘market timing,’ that potentially cost mutual fund shareholders 

billions of dollars annually.” 

• September 4, 2003, Goldman Sachs, admitted that it had misused material, nonpublic 

information that the US Treasury would suspend issuance of the 30-year bond. 

• December 18, 2003, the SEC “announced an enforcement action against Alliance Capital 

Management L.P. (Alliance Capital) for defrauding mutual fund investors.. the Commission found that 

Alliance Capital breached its fiduciary duty to (it’s) funds and misled those who invested in them.”

• October 8, 2004, the SEC “announced..enforcement actions against Invesco Funds Group, Inc. 

(IFG), AIM Advisors, Inc. (AIM Advisors), and AIM Distributors, Inc. (ADI) that required IFG to pay $215 

million in disgorgement and $110 million in civil penalties, and require AIM Advisors and ADI to pay, 

jointly and severally, $20 million in disgorgement and an aggregate $30 million in civil penalties.”

• November 4, 2004, the SEC “filed a settled civil action in the US District Court for the District of 

Columbia against Wachovia Corporation. Wachovia paid a $37 million penalty.”

• November 17, 2004, the SEC announced “charges concerning undisclosed market timing against 

Harold J. Baxter and Gary L. Pilgrim in the Commissions’ pending action in federal district court in 

Philadelphia.” Baxter and Pilgrim agreed to “pay $80 million – $60 million in disgorgement and $20 

million in civil penalties.”

• November 30, 2004, the SEC announced “American International Group, Inc. (AIG) agreed to pay 

a total of $126 million, consisting of a penalty of $80 million, and disgorgement and prejudgment 

interest of $46 million.”

• December 22, 2004, “the SEC, NASD and the New York Stock Exchange announced Edward D. 

Jones & Co., L.P., a registered broker-dealer in St. Louis, Missouri.. agreed to pay $75 million in 

disgorgement and civil penalties.”

• January 25, 2005, “the SEC announced separate settled civil injunctive actions against Morgan 

Stanley & Co. Incorporated (Morgan Stanley) and Goldman, Sachs & Co. (Goldman Sachs) relating to the 

firms' allocations of stock to institutional customers in initial public offerings (IPOs) underwritten by the 

firms during 1999 and 2000.”

• January 31, 2005, “the nation’s largest insurance brokerage company, Marsh & McLennan 

Companies Inc., (paid) $850 million to policyholders and issues a public apology calling its conduct 

"unlawful" and "shameful.." 

• February 9, 2005, the SEC “announced the settlement of an enforcement action against 

Columbia Management Advisors, Inc. (Columbia Advisors), Columbia Funds Distributor, Inc. (Columbia 

Distributor), and three former Columbia executives. Columbia paid $140 million.”

• March 23, 2005, the SEC “announced Putnam Investment Management, LLC (Putnam) will pay 

$40 million for failing to adequately disclose conflicts of interest.”
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• March 23, 2005, the SEC “announced that it settled an enforcement action against Citigroup 

Global Markets, Inc. (CGMI).”

• April 19, 2005, the SEC “announced that KPMG LLP settled charges against it in connection with 

the audits of Xerox Corp. from 1997 through 2000.” KPMG paid a fine totaling $22.475 million. 

• April 12, 2005, the SEC “settled an enforcement action against the New York Stock Exchange, 

Inc.” 

• April 28, 2005, the SEC announced “that it has instituted settled enforcement proceedings 

against Tyson Foods, Inc. and its former Chairman and CEO Donald "Don" Tyson. 

• May 31, 2005, the SEC “announced settled fraud charges against two subsidiaries of Citigroup, 

Inc. Citigroup paid $208 million in disgorgement and penalties.”

• June 2, 2005, the SEC “filed securities fraud charges against Amerindo Investment Advisors, Inc., 

et. al., for misappropriating at least $5 million from an Amerindo client.”

• June 9, 2005, the SEC announced that “Roys Poyiadjis, a former CEO of AremisSoft Corporation, 

consented to disgorge approximately $200 million of unlawful profit from his trading in AremisSoft 

stock.”

• July 20, 2005, the SEC “announced a settled administrative proceeding against Canadian 

Imperial Bank of Commerce's (CIBC) for..facilitating deceptive market timing and late trading of mutual 

funds by certain customers. The firm paid $125 million in disgorgement and penalties.”

• August 15, 2005, the SEC “charged four brokers and a day trader with cheating investors 

through a fraudulent scheme that used squawk boxes to eavesdrop on the confidential order flow of 

major brokerages.”

• August 22, 2005, the SEC “filed civil fraud charges against two former officers of Bristol-Myers 

Squibb Company for orchestrating a fraudulent earnings management scheme.”

• August 23, 2005, the SEC “filed charges against two former top Kmart executives for misleading 

investors.”

• November 2, 2005, the SEC “filed enforcement actions against seven individuals alleging they 

aided and abetted a massive financial fraud at U.S. Foodservice, Inc. subsidiary of Royal Ahold 

(Koninklijke Ahold N.V.).”

• November 28, 2005, the SEC announced “that three affiliates of one of the country’s largest 

mutual fund managers..agreed to pay $72 million to settle charges they harmed long-term mutual fund 

shareholders.”

• December 1, 2005, the SEC “announced settled enforcement proceedings against American 

Express Financial Advisors Inc. AEFA paid $30 million in disgorgement and civil penalties.”

• December 1, 2005, the SEC “announced a settled administrative proceeding against Millennium 

Partners, L.P., et. al., The respondents paid $180 million in disgorgement and penalties.”

• December 19, 2005, the SEC “announced that it filed and settled insider trading charges both 

against an accountant and a former executive of Sirius Satellite Radio, Inc.”

• On December 21, 2005, the SEC “sued top executives of National Century Financial Enterprises, 

Inc. (NCFE), alleging that they participated in a scheme to defraud investors. NCFE suddenly collapsed in 
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October 2002, causing investor losses exceeding $2.6 billion and approximately 275 health-care 

providers were forced to file for bankruptcy protection.”

• January 3, 2006, the SEC announced “that it filed charges against six former officers of Putnam 

Fiduciary Trust Company (PFTC).”

• January 4, 2006, the SEC “filed securities fraud charges against McAfee, Inc. McAfee paid a $50 

million civil penalty.”

• January 9, 2006, the SEC “announced that Daniel Calugar and Security Brokerage, Inc. (SBI), 

agreed to settle the SEC’s charges. Calugar disgorged $103 million in ill-gotten gains and paid a civil 

penalty of $50 million.”

• February 2, 2006, the SEC “announced that it filed an enforcement action against five former 

senior executives of General Re Corporation (Gen Re) and American International Group, Inc. (AIG) for 

helping AIG mislead investors.” 

• February 9, 2006, the SEC announced “the settlement of charges that American International 

Group, Inc. (AIG) committed securities fraud. AIG paid in $1.6 billion to resolve claims related to 

improper accounting, bid rigging and practices involving workers’ compensation funds.”

• March 9, 2006, the SEC filed a lawsuit “against BMA Ventures, Inc. and its president, William 

Robert Kepler, 35, of Dallas, Texas, alleging that they illegally obtained approximately $1.9 million in a 

fraudulent scheme from January 2004 through March 2005. 

• On March 16, 2006, the SEC “announced a settled enforcement action against Bear, Stearns & 

Co., Inc. (BS&Co.) and Bear, Stearns Securities Corp. (BSSC). Bear Stearns paid $250 million in 

disgorgement penalties.”

• April 11, 2006, the SEC announced “charges against individuals involved in widespread and 

brazen international schemes of serial insider trading. The schemes were orchestrated by..a research 

analyst in the Fixed Income division of Goldman Sachs.” 

• April 17, 2006, the SEC brought “Settled Charges Against Tyco International Ltd. Alleging (a) 

Billion Dollar Accounting Fraud.”

• May 10, 2006, the SEC ordered “Former Chairman and CEO of Gemstar-TV Guide International, 

Inc. .. to Pay Over $22 Million For Role in Accounting Fraud.”

• May 10, 2006, the SEC sued “Morgan Stanley.”

• “May 23, 2006, the (SEC) filed a settled enforcement proceeding against the Federal National 

Mortgage Association (‘Fannie Mae’).”

• May 30, 2006, the SEC brought “Settled Charges Against Tribune Company for Reporting Inflated 

Circulation Figures and Misstating Circulation Revenues.”

• May 31, 2006, Bear, Stearns & Co. Inc.; Citigroup Global Markets, Inc.; Goldman, Sachs & Co.; 

J.P. Morgan Securities, Inc.; Lehman Brothers Inc.; Merrill Lynch, Pierce, Fenner & Smith Incorporated; 

Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc.; RBC Dain Rauscher Inc.; Banc of 

America Securities LLC; A.G. Edwards & Sons, Inc.; Morgan Keegan & Company, Inc.; Piper Jaffray & Co.; 

Suntrust Capital Markets inc.; and Wachovia Capital Markets, LLC, settled “SEC Charges Involving 

Violative Practices in the Auction Rate Securities Market.”
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• June 27, 2006, the SEC charged “Morgan Stanley With Failure To Maintain And Enforce Policies 

To Prevent Misuse of Inside Information.”

• June 28, 2006, the SEC settled with “Raytheon Company, it’s former CEO, and Subsidiary 

Controller for Improper Disclosure and Accounting Practices.”

• June 30, 2006, a jury found “Former PIMCO Equity Funds Chairman Defrauded Investors in 

Market Timing Case.”

• August 7, 2006, “Martha Stewart and Peter Bacanovic Settle(d) SEC's Insider Trading Charges.”

• August 28, 2006, Prudential Securities Inc. (APSI) was ordered “to Pay $600 Million in Global 

Settlement of Fraud Charges...”

• September 27, 2006, the SEC charged “Former CEO and Two Former Executives Affiliated with 

RenaissanceRe Holdings Ltd. with Securities Fraud.”

• October 30, 2006, the SEC charged “Delphi Corporation and Nine Individuals in wide-ranging 

financial fraud.”

• November 2, 2006, the SEC settled “Charges against Eight Former Officers and Directors of 

Spiegel, Inc.”

• November 14, 2006, the SEC sanctioned “the City Of San Diego for Fraudulent Municipal Bond 

Offerings and Order(ed) the City to Retain an Independent Consultant.”

• December 4, 2006, “Jefferies & Co., Inc. (Jefferies) Settle(d) SEC Charges.”

• January 18, 2007, “Fred Alger Management and Fred Alger & Company (agreed) to Pay $40 

Million to Settle Market Timing and Late Trading Violations.”

• January 29, 2007, “MBIA Settle(d) Securities Fraud Charges for Misuse of Reinsurance 

Contracts.”

• March 1, 2007, “The SEC announced insider trading charges against fourteen defendants in 

connection with two..insider trading schemes.”

• March 12, 2007, the SEC charged “Four Former Senior Executives of Nortel Networks 

Corporation in Wide-Ranging Financial Fraud Scheme.”

• March 14, 2007, the SEC and the NYSE settled “Enforcement Actions Against (a) Goldman Sachs 

Unit for Role in Customers' Illegal Trading Scheme.”

• March 14, 2007, the SEC brought an enforcement action “Against Banc of America Securities for 

Failing to Safeguard Nonpublic Research Information and Publishing Fraudulent Research.” The firm 

agreed to pay $26 Million.

• March 15, 2007, the SEC settled “With Former Raytheon Officers For Improper Disclosure and 

Accounting Practices.”

• March 15, 2007, the SEC announced a “$28.7 Million Settlement of Fraud Charges against F. 

David Radler, Former COO of Hollinger International, Inc.”

• March 22, 2007, the SEC charged “American Stock Exchange and Former Chairman and CEO 

Salvatore Sodano with Failing to Exercise Regulatory Oversight Responsibilities.”

• March 29, 2007, Nicor paid “$10 Million to Settle Fraud Charges.”
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• April 2, 2007, the SEC charged “Tenet Healthcare Corporation and Four Former Senior 

Executives With Concealing Scheme to Meet Earnings Targets by Exploiting Medicare System.”

• April 24, 2007, the SEC charged the “Former Apple General Counsel for Illegal Stock Option 

Backdating.”

• April 26, 2007, the SEC charged “Baker Hughes With Foreign Bribery and With Violating 2001 

Commission Cease-and-Desist Order.”

• May 9, 2007, “Morgan Stanley (agreed) to Pay $7.9 Million to Settle Best Execution Case.”

• May 14, 2007, the SEC charged “Former Oracle Vice President with Illegal Insider Trading in 

Stocks of Oracle Acquisition Targets.”

• “May 23, 2007, the SEC filed a civil injunctive action in US District Court for the Southern District 

of New York charging the BISYS Group, Inc. with violating the financial reporting, books-and-records, and 

internal control provisions of the Securities Exchange Act of 1934. BISYS paid $25 million in 

disgorgement and interest.”

• May 31, 2007, “The SEC..filed civil fraud charges against Mercury Interactive, LLC and four 

former senior officers of Mercury. The SEC alleges that the former senior officers perpetrated a 

fraudulent and deceptive scheme from 1997 to 2005 to award themselves and other employees 

undisclosed, secret compensation by backdating stock option grants and failing to record hundreds of 

millions of dollars of compensation expense.”

• July 25, 2007, “The SEC..filed civil charges against ConAgra Foods, Inc. for fraudulent, accounting 

practices.”

• July 26, 2007, “The SEC..filed a civil action against Cardinal Health, Inc. Cardinal agreed to pay 

$35 million.”

• September 5, 2007, the SEC charged “26 Defendants in $428 Million Securities Fraud That 

Targeted Senior Citizens and Retirement Savings.”

• September 19, 2007, “Evergreen Investment Management Company and Affiliates (agreed) to 

Pay $32.5 Million to Settle Market Timing Violations.”

• September 19, 2007, “HSBC Bank Settle(d) SEC Charges and Agree(d) to Pay $10.5 Million.”

• “September 20, 2007, the SEC filed a civil injunctive action charging 28 defendants in a series of 

fraudulent schemes.”

• “September 27, 2007, the SEC filed a settled enforcement action charging the Federal Home 

Loan Mortgage Corporation (‘Freddie Mac’).”

• October 25, 2007, “the SEC.. announced the filing of securities fraud charges against David H. 

Brooks, the former Chief Executive Officer and Chairman of the Board at DHB Industries, Inc., charging 

that Brooks engaged in a pervasive accounting fraud at DHB between 2003 and 2005, violated insider 

trading laws in 2004, and used millions of dollars in corporate funds to pay personal expenses.”

• November 14, 2007, “the SEC.. filed Foreign Corrupt Practices Act books and records and 

internal controls charges against Chevron Corporation (‘Chevron’).” 

• February 5, 2008, “the SEC..announced settled insider trading charges against four Hong Kong 

residents for illegal tipping and trading in the securities of Dow Jones & Company, Inc. (‘Dow Jones’). 
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The alleged tip originated with David Li Kwok Po (‘David Li’), who served on the Dow Jones board of 

directors.”

• May 1, 2008, “The Securities and Exchange Commission..filed a civil injunctive action against 

McCann-Erickson Worldwide, Inc. (‘McCann’) and the Interpublic Group of Companies, Inc. (‘IPG’).”

• May 1, 2008, the SEC charged “Banc of America Investment Services With Failing to Disclose It 

Favored Affiliated Mutual Funds.”

• July 30, 2008, “The Securities and Exchange Commission..charged New Hampshire-based Pax 

World Management Corp. with violating investment restrictions.”

• August 11, 2008, “The Securities and Exchange Commission..filed charges against Wextrust 

Capital, LLC (Wextrust), its principals, and four affiliated Wextrust entities, alleging that defendants 

conducted a massive Ponzi-type scheme from 2005 or earlier that raised approximately $255 million 

from approximately 1,200 investors. The targets of the fraudulent offerings are primarily members of 

the Orthodox Jewish community.”

• September 3, 2008, the “Securities and Exchange Commission..charged two Wall Street brokers 

(at Credit Suisse Securities (USA) LLC) with defrauding their customers when making more than $1 

billion in unauthorized purchases of subprime-related auction rate securities.”

• September 3, 2008, The “SEC charged former Kellogg, Brown & Root, Inc. (KBR) executive Albert 

Jackson Stanley with violating the anti-bribery provisions of the Foreign Corrupt Practices Act (FCPA)..”

• September 14, 2008, the SEC “announced..that, together with the Treasury and the Federal 

Reserve, it is working with Lehman Brothers to address the issues that it faces.”

• September 15, 2008, the SEC “charged the former chairman and CEO of ..KB Home, Inc., for his 

participation in a multi-year scheme to backdate stock options to himself and other company officers 

and employees, depriving investors of accurate information about executive compensation at the 

company.”

• October 7, 2008, the “SEC..charged a former vice president at..Restoration Hardware with 

insider trading.”

• November 18, 2008, the SEC “charged four individuals for engaging in a fraudulent scheme to 

overvalue the commodity derivatives trading portfolio at Bank of Montreal (BMO).”

• December 11, 2008, the SEC “finalized settlements with Citigroup Global Markets, Inc. (Citi) and 

UBS Securities LLC and UBS Financial Services, Inc. (UBS) that will provide nearly $30 billion to tens of 

thousands of customers.”

• December 11, 2008, the SEC “charged Bernard L. Madoff and his investment firm, Bernard L. 

Madoff Investment Securities LLC, with securities fraud.”

• December 18, 2008, the SEC “charged seven individuals and two companies involved in an 

insider trading ring, alleging that Matthew Devlin, at Lehman Brothers, Inc. in NY,, traded on confidential 

information.”

• December 22, 2008, the SEC “filed a civil injunctive action against UnitedHealth Group Inc., 

alleging that it engaged in a scheme to backdate stock $1 billion in options.”
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• February 5, 2009, the SEC “charged seven individuals involved in an insider trading ring that 

generated more than $11.6 million in illegal profits and avoided losses.

• The SEC allege(d) that two mergers and acquisitions professionals, at UBS Investment Bank and 

at Blackstone Advisory Services, L.P., tipped five individuals with material nonpublic information about 

three impending corporate acquisitions.”

• February 5, 2009, the SEC “filed an enforcement action against UBS AG, charging the firm with 

acting as an unregistered broker-dealer and investment adviser.” 

• February 17, 2009, the SEC “charged Robert Allen Stanford with orchestrating a fraudulent, 

multi-billion dollar investment scheme.”

• March 2, 2009, the SEC “charged Sunwest Management Inc. with securities fraud.”

• February 25, 2009, the SEC “obtained an asset freeze against two New York residents and their 

three affiliated entities, who orchestrated a brazen investment fraud involving the misappropriation of 

as much as $554 million in investor assets.”

• March 4, 2009, the SEC “brought enforcement actions against 14 specialist firms for unlawful 

proprietary trading on several regional and options exchanges.” • March 11, 2009, the SEC 

“charged Merrill Lynch, Pierce, Fenner & Smith Inc. with securities laws violations.”

• May 12, 2009, the SEC “charged Julio Ramirez, Jr., in connection with a multi-million dollar 

kickback scheme involving New York's largest pension fund.”

• June 24, 2009, the SEC “charged a money manager.. in Wayland, Mass., for conducting a multimillion dollar Ponzi scheme.”

• July 22, 2009, the SEC “asked a court to order the former chief executive officer of CSK Auto 

Corporation to reimburse the company and its shareholders more than $4 million that he received in 

bonuses and stock sale profits while CSK was committing accounting fraud.”

• July 28, 2009, the SEC “obtained a court order to halt an alleged offering fraud and Ponzi 

scheme being conducted in the Detroit area by two individuals and two companies they control.”

• August 3, 2009, the SEC “charged Bank of America Corporation for misleading investors about 

billions of dollars in bonuses that were being paid to Merrill Lynch & Co. executives at the time of its 

acquisition of the firm.”

• September 28, 2009, the SEC “charged (a) Detroit-area stock broker..with fraud, alleging that he 

lured elderly investors into a $250 million Ponzi scheme.”

• October 16, 2009 — the SEC “charged billionaire Raj Rajaratnam and his New York-based hedge 

fund advisory firm Galleon Management LP with engaging in a massive insider trading scheme.”

• November 4, 2009, the SEC “charged J.P. Morgan Securities Inc. and two of its former managing 

directors for their roles in an unlawful payment scheme.”

• November 4, 2009, the SEC “charged Milwaukee-based Merge Healthcare Incorporated and two 

former senior executives for their roles in an accounting fraud.”

• November 4, 2009, the SEC “charged New York City-based investment adviser Value Line Inc., its 

CEO, its former Chief Compliance Officer and its affiliated broker-dealer with defrauding the Value Line 

family of mutual funds.”
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• November 5, 2009, the SEC “charged a pair of lawyers for tipping inside information in exchange 

for kickbacks.”

• November 16, 2009, the SEC “charged four individuals and two companies involved in

perpetrating a $30 million Ponzi scheme.”

• December 7, 2009, the SEC “charged three former top officers of New Century Financial 

Corporation with securities fraud for misleading investors as New Century's subprime mortgage business 

was collapsing in 2006.”

• January 5, 2010, the SEC “announced that a former Perot family companies employee it charged 

with insider trading in September has agreed to return all of his illicit profits — a total of more than $8.6 

million.”

• January 20, 2010, the SEC “charged General Re Corporation for its involvement in separate 

schemes by American International Group (AIG) and Prudential Financial, Inc. to manipulate and falsify 

their reported financial results.”

• On February 4, 2010, the SEC “charged Boston-based State Street Bank and Trust Company with 

misleading its investors about their exposure to subprime investments while selectively disclosing more 

complete information to specific investors.”

• On March 4, 2010, the SEC “charged a self-proclaimed psychic who fraudulently raised $6 

million after telling investors he could predict stock market highs and lows.”

• On March 5, 2010, the SEC “charged a San Diego-based broker-dealer with failing to reasonably 

supervise one of its registered representatives who engaged in unauthorized fraudulent trading in the 

accounts of two Florida municipalities.”

• Om March 24, 2010, the SEC “filed fraud charges against a prominent New Mexico realtor and 

obtained an emergency court order to halt his $80 million Ponzi scheme.”

• On March 29, 2010, the SEC “charged an Ohio-based investment adviser with fraud for lying 

about his investment strategy, fabricating account statements to hide losses, and using investor money 

to buy property and pay unrelated business expenses.”

• On April 1, 2010, the SEC “announced a settlement with Daimler AG for violations of the Foreign 

Corrupt Practices Act (FCPA), alleging that the..automobile manufacturer engaged in a repeated and 

systematic practice of paying bribes to foreign government officials to secure business in Asia, Africa, 

Eastern Europe and the Middle East.”

• On April 7, 2010, the SEC charged “Morgan Keegan and Two Employees With Fraud Related to 

Subprime Mortgages.”

• On April 15, 2010, the SEC “charged a private investment firm and one of its affiliated entities 

for participating in a widespread kickback scheme to obtain investments from New York's largest 

pension fund.”

• On April 16, 2010, the SEC “charged Goldman, Sachs & Co. and one of its vice presidents for 

defrauding investors by misstating and omitting key facts about a financial product tied to subprime 

mortgages as the U.S. housing market was beginning to falter.”
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• On April 22, 2010, the SEC “charged a private equity firm, a money manager and his friend with 

participating in a fraudulent scheme through which they stole more than $3 million invested by three 

Detroit-area public pension funds.”

• On May 7, 2010, the California's attorney general announced a lawsuit targeting “two former 

officials from Calpers, the nation's largest public pension fund, alleging that they took kickbacks in 

exchange for a piece of the fund's lucrative investment portfolio.” 

• On June 16, 2010, the SEC “charged the former chairman and majority owner of what was once 

the nation's largest non-depository mortgage lender with orchestrating a large-scale securities fraud 

scheme and attempting to scam the U.S. Treasury's Troubled Asset Relief Program (TARP).”

• On June 21, 2010, the SEC “charged a New York-based investment adviser and three of his 

affiliated firms with fraudulently managing investment products tied to the mortgage markets as they 

came under pressure in 2007.”

• On July 15, 2010, the SEC “announced that Goldman, Sachs & Co. will pay $550 million and 

reform its business practices to settle SEC charges that Goldman misled investors in a subprime 

mortgage product just as the U.S. housing market was starting to collapse.”

• On July 22, 2010, the SEC “charged Dell Inc. with failing to disclose material information to 

investors and using fraudulent accounting to make it falsely appear that the company was consistently 

meeting Wall Street earnings targets and reducing its operating expenses. Dell Inc. agreed to pay a $100 

million penalty to settle the SEC’s charges.”

• On July 29, 2010, the SEC “charged Citigroup Inc. with misleading investors about the company's 

exposure to subprime mortgage-related assets.”

• On August 4, 2010, the SEC “charged a former Deloitte and Touche LLP partner and his son with 

insider trading in the securities of several of the firm's audit clients.”

• On August 6, 2010, the SEC “charged two global tobacco companies with violations of the 

Foreign Corrupt Practices Act (FCPA) for paying more than $5 million in bribes to government officials in 

Thailand and other countries to illicitly obtain tobacco sales contracts.”

• On August 18, 2010, the SEC “charged the State of New Jersey with securities fraud for 

misrepresenting and failing to disclose to investors in billions of dollars worth of municipal bond 

offerings that it was underfunding the state's two largest pension plans.”

• On September 29, 2010, the SEC “charged ABB Ltd with violations of the Foreign Corrupt 

Practices Act (FCPA) for using subsidiaries to pay bribes to Mexican officials to obtain business with 

government-owned power companies, and to pay kickbacks to Iraq to obtain contracts under the U.N. 

Oil for Food Program.”

• On October 15, 2010, the SEC “announced that former Countrywide Financial CEO Angelo 

Mozilo will pay a record $22.5 million penalty to settle SEC charges that he and two other former 

Countrywide executives misled investors as the subprime mortgage crisis emerged.”

• On November 4, 2010, the SEC “announced sweeping settlements with global freight forwarding 

company Panalpina, Inc., Pride International, Inc., Tidewater Inc., Transocean, Inc., GlobalSantaFe Corp., 

and Noble Corporation, all companies in the oil services industry who, according to the SEC, violated the 
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Foreign Corrupt Practices Act (FCPA) by paying millions of dollars in bribes to foreign officials to receive 

preferential treatment and improper benefits during the customs process.”

• On December 27, 2010, the SEC “charged Paris-based telecommunications company AlcatelLucent, S.A. with violating the Foreign Corrupt Practices Act (FCPA) by paying bribes to foreign 

government officials to illicitly win business in Latin America and Asia.”

• On January 25, 2011, the SEC “charged Merrill Lynch, Pierce, Fenner & Smith Incorporated with 

securities fraud for misusing customer order information to place proprietary trades for the firm and for 

charging customers undisclosed trading fees. To settle the SEC's charges, Merrill..agreed to pay a $10 

million penalty and consent to a cease-and-desist order.”

• On February 3, 2011, the SEC “charged three AXA Rosenberg entities with securities fraud for 

concealing a significant error in the computer code of the quantitative investment model that they use 

to manage client assets. The error caused $217 million in investor losses.”

• On March 1, 2011, the SEC “announced insider trading charges against a business consultant 

who has served on the boards of directors at Goldman Sachs and Procter & Gamble for illegally tipping 

Galleon Management founder and hedge fund manager Raj Rajaratnam with inside information about 

the quarterly earnings at both firms as well as an impending $5 billion investment by Berkshire 

Hathaway in Goldman.”

• On April 6, 2011, the SEC “charged a corporate attorney and a Wall Street trader with insider 

trading in advance of at least 11 merger and acquisition announcements involving clients of the law firm 

where the attorney worked.”

• On June 21, 2011, the SEC “announced that J.P. Morgan Securities LLC will pay $153.6 million to 

settle SEC charges that it misled investors in a complex mortgage securities transaction just as the 

housing market was starting to plummet.”

• On June 22, 2011, the Securities and Exchange Commission, state regulators, and the Financial 

Industry Regulatory Authority (FINRA) announced..that Morgan Keegan & Company and Morgan Asset 

Management have agreed to pay $200 million to settle fraud charges related to subprime mortgagebacked securities.”

In no section of the proposed regulation does the Department acknowledge these facts. This is akin to 

designing rules governing the construction of residential and office building firewalls without 

acknowledging that the goal of the rules are to limit damage done by fire.

Further, we note that the Department seeks, via the proposed regulation, to “enable advisers and their 

firms to give advice that is in the best interest of their customers, without disrupting common 

compensation arrangements under conditions designed to ensure the adviser is acting in the best 

interest of the advice recipient.”
William Michael Cunningham

Economist and Social Investing Advisor

May 24, 2015

Copyright, WMC, 2015. info@creativeinvest.com

www.creativeinvest.com

12

The Department fails to recognize that it is these common compensation arrangements that give rise to 

the behavior, outlined above, that is contrary to the best interest of both investors and the general 

public. 

In light of the track record above, this regulatory goal is simply inappropriate and inconsistent. This

places the Department in the position of wanting “crops without ploughing the ground; they want rain 

without thunder and lightning; they want the ocean without the roar of its many waters.”2 We remind 

the Department that the current set of dominant financial institutions will “concede nothing without a 

demand” and the proposed regulation appears to be without a request or demand in the public interest. 

The economic crisis of 2006 to 2013 resulted in the loss of millions of jobs, cost thousands of lives3 and 

imposed trillions of dollars in actual and potential losses. The downturn was entirely predictable.

4

The public remains at risk

The following are the simple facts. Repeatedly over the past thirty years, signal market participants, 

operating in the most materially advantaged country ever to exist, abandoned ethical principles in the 

pursuit of material wellbeing. By 2013, marketplace ethics, as evidenced above, reached a new low. 

Senior management at major firms unfairly transferred value from outsider to insider shareholders 

and/or engaged in fraudulent and unethical business behavior. 

This is no trivial matter. This is a multi-decade set of unethical business practices spanning every major 

firm in the country. There are hundreds of other cases.5 Envy, hatred, and greed6 have flourished in 

capital market institutions, propelling ethical standards of behavior downward. Thus, unethical behavior 

 

2 Douglass, Frederick. [1857] (1985). "The Significance of Emancipation in the West Indies." Speech, Canandaigua, 

New York, August 3, 1857; collected in pamphlet by author. In The Frederick Douglass Papers. Series One: 

Speeches, Debates, and Interviews. Volume 3: 1855-63. Edited by John W. Blassingame. New Haven: Yale 

University Press, p. 204.

3

“Just as the commandment ‘Thou shalt not kill’ sets a clear limit in order to safeguard the value of human life, 

today we also have to say ‘thou shalt not’ to an economy of exclusion and inequality. Such an economy kills.” Pope 

Francis. EVANGELII GAUDIUM. Page 45. November 24, 2013. 

4 Supreme Court of the United States. No. 97–5066. William Michael Cunningham, Petitioner v. Board of 

Governors of the Federal Reserve System. Petition for writ of certiorari to the United States Court of Appeals for the 

District of Columbia Circuit.

5 For each successfully prosecuted incident, we estimate nine others either go undetected or do not make it to the 

prosecution and settlement phase.

6 See: Transaction Cost Theory of the Crisis http://www.prlog.org/10746429-firm-releases-transaction-cost-theoryof-the-financial-crisis.html..

6

“Bank accused of predatory practices. Lawsuit alleges black neighborhood, churches targeted.” Gazette.net. Online 

at: http://www.gazette.net/stories/06182009/collnew182411_32521.shtml

6 The relationship between investment banks and the economy. http://twisri.blogspot.com/2009/04/commercial-andinvestment-banks-used.html and http://twisri.blogspot.com/2009/03/why-market-failed.html
William Michael Cunningham

Economist and Social Investing Advisor

May 24, 2015

Copyright, WMC, 2015. info@creativeinvest.com

www.creativeinvest.com

13

has become standard in the financial services marketplace, 7to the benefit of a narrow set of nonminority individuals. Markets cannot survive continuously elevated levels of fraud, since fraudulent 

practices mask an entity's true value and misallocates capital by moving investment dollars from 

deserving entities and companies to unworthy ones. Without meaningful reform, there remains a 

significant and growing risk that our economic system will simply cease functioning.8 Given this, the 

future of American democratic capitalism is at stake.

Background

William Michael Cunningham manages an investment advisory and research firm, Creative Investment 

Research, Inc. The firm researches and creates socially responsible investments and provides socially 

responsible investment advisory services.

Creative Investment Research, Incorporated is an independent investment research and management 

firm, founded in 1989. For clients, our services save millions, if not billions: on December 22, 2003 and 

February 6, 2006, we warned the S.E.C. and other regulators that statistical models using the proprietary 

Fully Adjusted Return® Methodology signaled the probability of system-wide economic and market 

failure (see below). Clients who heeded our warning adjusted their investment portfolios in a manner 

that allowed them to escape much of the damage caused by the crisis. The firm was formerly in the pool 

of Corporate Governance Advisors and Diversity Investing Advisors to CalPERS.

Mr. Cunningham is a Global Member of the Internet Society (ISOC), a Public Member of the World Wide 

Web Consortium (W3C), and an Invited Expert Member in the eGovernment Group of the W3C. On 

November 16, 1995, he launched one of the first investment advisor websites at www.ari.net/cirm (now 

www.creativeinvest.com).

Track Record

On July 3, 1993, Mr. Cunningham wrote to US Securities and Exchange Commissioner (SEC) Mary 

Schapiro to notify the Commission about a specific investing scam, the "Nigerian letter scam." A timely 

warning was not issued to the investing public, members of the public were damaged, and the SEC 

launched retaliatory regulatory actions against Mr. Cunningham.

 

7 These “ideologies which defend the absolute autonomy of the marketplace and financial speculation..reject the 

right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus 

born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules.” FRANCIS, 

Apostolic Exhortation Evangelii Gaudium (26 November 2013)

8 Proportional hazard models created by WMC and reflecting the probability of system wide market failure first 

spiked in September, 1998. The models spiked again in January and August, 2001. On December 22, 2005, we met 

with Ms. Elaine M. Hartmann and others from the Division of Market Regulation, U.S. Securities and Exchange 

Commission and specifically detailed our model findings. 
William Michael Cunningham

Economist and Social Investing Advisor

May 24, 2015

Copyright, WMC, 2015. info@creativeinvest.com

www.creativeinvest.com

14

He designed the first mortgage security backed by home mortgage loans to low and moderate income 

persons and originated by minority-owned institutions. (See: Security Backed Exclusively by Minority 

Loans, The American Banker Newspaper. Friday, December 2, 1994.)

Mr. Cunningham opposed the application, approved by the Federal Reserve Board on September 23, 

1998, by Travelers Group Inc., New York, New York, to become a bank holding company 

(http://www.creativeinvest.com/FRBtrav.pdf). In October 1998, in a petition to the United States Court 

of Appeals (Case Number 98-1459) concerning the Travelers Group Inc./Citicorp merger 

(http://www.creativeinvest.com/USAppealsCourt.pdf), Mr. Cunningham cited evidence that growing 

financial market malfeasance greatly exacerbated risks in financial markets, reducing the safety and 

soundness of large financial institutions. 

From October 1999 to March 2002, Mr. Cunningham was responsible for proxy voting activity for the 

Board of Pensions of the Evangelical Lutheran Church in America. In 2001, he voted on 1,395 issues 

impacting 401 companies. In 2000, he voted on 1,903 issues impacting 422 companies. He managed 

fund efforts and corporate governance matters related to Talisman Energy and its’ operations in the 

Sudan. He researched the issue, contacting various groups involved in the process. Our efforts also 

included researching fund policies and procedures. His collaborative, risk controlled strategy helped lead 

the firm out of the Sudan. On February 1, 2000, Mr. Cunningham wrote to the office of U.S. Senator 

Samuel Brownback (http://www.creativeinvest.com/SudanSenateLtr.pdf) urging him to encourage 

pension funds to divest from the Sudan. 

On June 15, 2000, Mr. Cunningham testified before the Financial Services Subcommittee on Capital 

Markets, Insurance and Government Sponsored Enterprises (GSE) of the U.S. House of Representatives 

and suggested that GSE Fannie Mae and Freddie Mac be subject to a Social Audit. A social audit is an 

examination of the performance of an enterprise relative to certain social return objectives. It includes a 

review of ethical practices. Had the GSE been subject to this audit, certain flaws in their operation, 

including ethical shortcomings, would have been revealed earlier, prior to the GSEs entering 

bankruptcy. (See: http://www.creativeinvest.com/fnma/fnmapr16.html)

In 2001, Mr. Cunningham participated in the first wide scale home mortgage loan modification project. 

The Minneapolis-based effort helped 50 families victimized by predatory lending practices. See:

Property Flipping Remediation Yields Investment-grade Security.

(http://www.socialfunds.com/news/article.cgi/article682.html)

On December 22, 2003, we warned US regulators that statistical models created by the firm using the 

proprietary Fully Adjusted Return® Methodology signaled the probability of system-wide economic and 

market failure See Page 6. (http://www.sec.gov/rules/proposed/s71903/wmccir122203.pdf)

In 2005, Mr. Cunningham served as an expert witness in a case that sought to hold Credit Suisse First 

Boston, Fairbanks/SPS, Moody’s and Standard and Poor’s, US National Bank Association, and other 
William Michael Cunningham

Economist and Social Investing Advisor

May 24, 2015

Copyright, WMC, 2015. info@creativeinvest.com

www.creativeinvest.com

15

parties legally responsible for supporting and facilitating fraudulent subprime lending market activities. 

Had this single case been successful, we believe the credit crisis would have been less severe.

On December 22, 2005, he issued a strongly worded warning that system-wide economic and market 

failure was a growing possibility in a meeting at the SEC with Ms. Elaine M. Hartmann of the Division of 

Market Regulation.

On February 6, 2006, we again warned regulators that statistical models we created using the 

proprietary Fully Adjusted Return® Methodology confirmed that system-wide economic and market 

failure was a growing possibility. We stated that: Without meaningful reform there is a small, but 

significant and growing, risk that our (market) system will simply cease functioning. This is, of course, 

exactly what happened. See pages 2 and 8.

http://www.sec.gov/rules/proposed/s71005/wcunningham5867.pdf

We created the first consistent methodology for measuring the social impact of banking activities, which 

we discussed on August 3, 2006 at a seminar sponsored by Fannie Mae and the Federal Reserve: 

http://www.knowledgeplex.org/showdoc.html?id=188307

On June 18, 2009, he testified before the House Ways and Means Select Revenue Measures 

Subcommittee at a joint hearing with the Subcommittee on Domestic Monetary Policy and Technology 

of the Financial Services Committee: Testimony on the New Markets Tax Credit Program. He suggested 

ways to improve the program. See: 

http://www.novoco.com/new_markets/resource_files/advocacy/cunningham_testimony_061809.pdf

On Wednesday, January 13, 2010 and Monday, June 14, 2010, Mr. Cunningham wrote to Mr. Phil 

Angelides, Chairman, Financial Crisis Inquiry Commission, to submit testimony and comments to the 

Commission. In addition, he noted that he was “disappointed that FCIC has not sought out or recognized 

a broader set of opinions and viewpoints and are further disappointed by FCIC’s lack of ethnic diversity 

at both the Board and Staff level.”

On July 19, 2010, Mr. Cunningham testified on behalf of the public at the Joint Interagency Public CRA 

hearings: “The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance 

Corporation and the Office of the Comptroller of the Currency jointly held public hearings on 

modernizing the regulations that implement the Community Reinvestment Act (CRA).” See: 

http://www.fdic.gov/CRAhearings/Individual_Presentations.pdf

On August 13, 2012, Mr. Cunningham filed a "Friend of the Court" brief in United States Securities & 

Exchange Commission vs. Citigroup Global Markets Inc. (Second Circuit Court of Appeals Case Number 

11-5227). The case concerned the rejection, by a Federal Judge, of a settlement agreed to by the United 

States Securities & Exchange Commission (SEC) and Citigroup Global Markets Inc. (Citigroup), the latter 

accused of securities fraud. http://www.prlog.org/11948760-william-michael-cunningham-files-revisedbrief-in-sec-vs-citigroup-2nd-cir-ct-of-ap.html
William Michael Cunningham

Economist and Social Investing Advisor

May 24, 2015

Copyright, WMC, 2015. info@creativeinvest.com

www.creativeinvest.com

16

On December 9, 2013, Mr. Cunningham filed a "Friend of the Court" brief in the United States District 

Court, Central District of California in a case concerning an action that the U.S. Department of Justice, 

acting on behalf of the United States of America (Plaintiff), brought against McGraw-Hill Companies, 

Inc., and Standard & Poor’s Financial Services LLC, et. al., (Defendants) under 12 U.S.C. § 1833a; 18 

U.S.C. §§ 1341, 1343 & 1344. Our comments led to a significant change in enforcement strategy, 

including the first ever, albeit temporary, rating firm suspension. See: http://www.prlog.org/12256590-

william-michael-cunningham-files-amicus-brief-in-us-vs-sp-us-district-court-central-district-ca.html

On February 3, 2015, we commented on an effort by Apple Computer, one of the largest holdings in the 

fund, to utilize women and minority-owned brokerage firms: 

http://www.usatoday.com/story/tech/2015/02/03/apple-debt-offering-minority-firms-jesse-jackson-diversitysilicon-valley/22805673/

General comments on the proposal

We agree with others who “see the need for better balance between short- and long-term investing.“ 

Unfortunately, little in the Department’s regulatory proposal serves to enhance that balance.

This is particularly important. As the market value of environmental, social and governance factors 

continues to grow, companies and investment managers will engage in fraudulent practices related to 

these factors. These practices will range from simple falsification of environmental, social and 

governance records to more sophisticated, but no less fraudulent methods related to environmental, 

social and governance ratings. We have provided evidence that unethical practices have flourished in 

capital market institutions and incorporate the following comments by reference: 

Comments on Proposed Rule: 

Executive Compensation and Related Party Disclosure 

[Release Nos. 33-8655; 34-53185; IC-27218; File No. S7-03-06]

http://www.sec.gov/rules/proposed/s70306/wcunningham6601.pdf

Comments on Proposed Rule: 

Internet Availability of Proxy Materials 

[Release Nos. 34-52926; IC-27182; File No. S7-10-05]

http://www.sec.gov/rules/proposed/s71005/wcunningham5867.pdf

Comments on Proposed Rule: 

Security Holder Director Nominations 

[Release Nos. 34-48626; IC-26206; File No. S7-19-03]

http://www.sec.gov/rules/proposed/s71903/wmccir122203.pdf

Comments on Proposed Rule: 
William Michael Cunningham

Economist and Social Investing Advisor

May 24, 2015

Copyright, WMC, 2015. info@creativeinvest.com

www.creativeinvest.com

17

Definition of Nationally Recognized Statistical Rating Organization

[Release Nos. 33-8570; 34-51572; IC-26834; File No. S7-04-05]

http://www.sec.gov/rules/proposed/s70405/wcunningham9442.pdf
William Michael Cunningham

Economist and Social Investing Advisor

May 24, 2015

Copyright, WMC, 2015. info@creativeinvest.com

www.creativeinvest.com

18

Comments on Proposed Rule:

Securities Offering Reform

[RELEASE NOS. 33-8501; 34-50624; IC-26649 International Series Release No. 1282 File No. S7-38-04]

http://www.sec.gov/rules/proposed/s73804/cunningham013105.pdf

Effective Investing 

Our research supports the contention that there is no contradiction between financial goals and an 

objective of influencing environmental, social and governance factors.

We coined the term "Effective Investing" to reflect a style of investing that minimizes costs while 

maximizing financial AND social return. There are only two ways to accomplish this, stock investing and 

bond investing. Pension scheme funds should go toward participants’ future, not, to an unreasonable 

degree, to a broker or investment management/mutual fund company fees. 

Pension scheme money should be safe and effective investing means being able to sleep at night. This 

means managing and minimizing risk. There are a limited number of ways to accomplish this, too. Risk is 

a feature of investing: it is how you get to return. Still, pension schemes can rationally minimize risk by 

taking a few constructive steps. 

In the bond or fixed income world, investing in Government securities is the only way to accomplish this. 

In the stock market, the strategy is the polar opposite and can be summarized as "don't put all of your 

eggs in one basket." This means investing in an Index Fund. But, as we have seen with the LIBOR scandal, 

even this style of stock investing is not free from ethical risk imposed by brokers and other financial 

institutions. 

Finally, effective investing means being at peace. This means not investing in companies that are, or that 

may do “bad” things. This means looking for and investing in responsible companies.

In summary, Effective Investing:

Minimizes fees.

Minimizes risk.

Maximizes potential financial AND social return.

See: http://twisri.blogspot.com/2015/04/effective-investing-how-to-minimize.html
William Michael Cunningham

Economist and Social Investing Advisor

May 24, 2015

Copyright, WMC, 2015. info@creativeinvest.com

www.creativeinvest.com

19

Environmental Issues and Stock Returns

Using data from both old and new sources, Creative Investment Research, Inc. explored and quantified 

the impact environmental factors have on stock prices using several statistical techniques. 

Our research is structured into two parts. In the first, we specify three standard market models and test 

the hypothesis that environmental factors do, in fact, impact equity prices. In the second part, we 

examine the impact of a major environmental incident on stock prices, using new data sources and with 

the assistance of the equity market models specified in phase one.

We created three portfolios based on a ranking of environmental impact forecasts and preparations, as 

outlined below. The first portfolio returned -21.974% from March 10, 2011 to August 10, 2011. This 

portfolio consisted of firms with an environmental impact forecast who were well prepared for an 

environmental incident. The second portfolio consisted of firms with an environmental impact forecast 

who were marginally prepared for an environmental incident. Returns were +30.686% from March 10, 

2011 to August 10, 2011. The final portfolio consisted of firms without an environmental impact forecast 

who were not prepared for an environmental incident. Returns were -24.036% from March 10, 2011 to 

August 10, 2011.

Our analysis strongly suggests that investors and publicly traded companies must recognize the impact 

environmental incidents and issues have on a given firm's ability to use company assets and therefore 

generate revenue and profits. 

We look forward to reviewing your continuing efforts to carry out your mission. We appreciate the time 

and effort devoted to this task. Thank you for your leadership. Please contact me with any questions or 

comments.

Sincerely,

/William Michael Cunningham/

William Michael Cunningham

Social Investing Adviser for William Michael Cunningham and Creative Investment Research, Inc.