Friday, July 13, 2007
SIRA, or the Securities Industry Regulatory Authority, was going to be the new name for the consolidated regulatory arm of NASD and NYSE, it was annoounced about a month ago. However, the name has been changed to FINRA, or Financial Industry Regulatory Authority, because of concerns that SIRA sounded too much like the Arabic word Sirah, which refers to the biographies of the Prophet Mohammed. See WSJ, NASD Arm's Name Lands Regulator In Alphabet Soup.
Thursday, July 12, 2007
Now available on the SEC website:
Written Statement of the U.S. Securities and Exchange Commission, A Global View: Examining Cross-Border Exchange Mergers, Before the Subcommittee on Securities, Insurance, and Investment of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, July 12, 2007.
The SEC published final rule amendments to enable mutual funds to submit risk/return summary information from their prospectuses using interactive data under the Commission's voluntary program. The risk/return summary at the front of every mutual fund prospectus includes information about a fund's investment objectives and strategies, risks, costs, and historical performance. The Commission voted unanimously on June 20, 2007, to adopt the rule amendments. The submission of tagged risk/return summary information will be supplemental and will not replace the required official versions of the information. Any mutual fund submitting tagged risk/return summary information will be required to include this information as an amendment to a filing on Form N-1A, the registration form for mutual funds. Volunteers can begin submitting tagged risk/return summary information on Aug. 20, 2007
The SEC today filed a civil injunctive action against Michael F. Shanahan, Sr. (Shanahan), the former Chief Executive Officer and Chairman of the Board of Engineered Support Systems, Inc., and his son, Michael F. Shanahan, Jr. (Shanahan Jr.), a former member of Engineered Support's Compensation Committee of its Board of Directors, alleging that they participated in a fraudulent scheme in which they granted undisclosed, in-the-money stock options to themselves and to other Engineered Support officers, employees, and directors. According to the complaint, Engineered Support employees and directors received approximately $20 million in unauthorized and undisclosed compensation as a result of the backdating, $16 million of which was received by top executives and directors. Shanahan personally profited from the backdating scheme by more than $8.9 million.
The Wall St. Journal broke the story last night about the weird behavior of Whole Foods CEO John Mackay, and both the WSJ and the New York Times have long print articles about it today. For a period of about seven years Mackay posted, under a pseudonym, blogs that denigrated the performance of rival Wild Oats and praised Whole Foods' management, including his own hair cut. Whole Foods and Wild Oats are now seeking to merge, and the postings, and Mackay's identity, became public in filings with the FTC. (A few weeks ago, we learned about an internal e-mail by Mackay, saying the merger would destroy its competition, which is exhibit number one in the FTC's review of the merger.) Since Mackay apparently stopped the blogging last August, well before the merger discussions started, there does not appear to be any attempt to manipulate the price of Wild Oats stock. Whether anything he said about his own company or failing to reveal his identity could make him liable for securities fraud is more problematic, but courts may well treat these statements as "puffery" or mere opinion, that reasonable investors would not take seriously. Reasonable investors might well have lowered their opinion of Whole Foods if they knew the postings were from its CEO, because it demonstrates such poor judgment, but there is some indication that at least other bloggers guessed his identity. But it is another example of poor impulse control from senior management; at least it's different, and more entertaining, than the run-of-the-mill sexual indiscretion. See WSJ, Whole Foods Is Hot, Wild Oats a Dud --So Said 'Rahodeb' ; NYTimes, Whole Foods Executive Used Alias.
Margin debt at the NYSE increased by 11% in May to $353 billion (up from $318 billion in April), according to a NYSE report. Under a pilot program with eight brokerage firms begun in April, brokers can determine a customer's margin based on the overall portfolio instead of each specific investment, allowing customers to borrow more. According to a spokesperson for one firm participating in the program, this type of financing is just for sophisticated, options traders "at this point." See WSJ, 'Margin Debt' Hits Record $353 Billion on NYSE.
Wednesday, July 11, 2007
The examiner appointed to investigate the collapse of commodities firm Refco in 2005 has issued his report and says that the accounting firms of Grant Thornton and Ernst & Young, as well as the law firm of Mayer, Brown, should be sued for professional negligence. Refco's collapse allegedly resulted from the fraud of its CEO. See WSJ, Refco Bankruptcy Examiner Names Firms Likely to Face Lawsuits.
As a result of Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006), which invalidated a SEC rule requiring registration of hedge fund advisers because it viewed the investors (and not the fund) as the client, the SEC voted today to adopt a broad anti-fraud rule aimed at money managers who mislead or defraud investors in pooled-investment vehicles, including hedge funds. Chair Cox said the new rule would be "an important tool" to help police hedge funds. While voting in favor of the rule, Commissioner Atkins wished it could have been more narrowly tailored. See WSJ, SEC Adopts Fraud Rule Affecting Hedge Funds.
The SEC filed an emergency action on May 22, 2007, against two Californians and their company to halt an ongoing fraudulent scheme operated in Orange County, Calif., in which the defendants raised at least $3.7 million from approximately 33 investors. The court entered a temporary restraining order freezing the assets of TG Capital, LLC, a Nevada limited liability company, Thanh Viet Jeremy Cao, age 26, of Orange County, Calif. and Las Vegas, Nev., and Lodavina Grosnickle, age 51, of Chula Vista, Calif. The complaint alleges that from February 2007 to the present, Cao and Grosnickle lured investors to invest in TG Capital by falsely promising rates of return between 28% and 30% on their investment and assuring investors that TG Capital's investments were secured by guarantees from major banks or gold. The complaint also alleges that Cao forged at least one bank guarantee to support his false claims. The complaint further alleges that Cao and Grosnickle recently transferred $1.78 million of investor funds to a bank in Hong Kong, purportedly to make a personal loan from Cao to an individual. The Commission alleges that defendants falsely represented the overseas transfer was a legitimate TG Capital investment when in fact, Cao personally loaned the money, leaving TG Capital investors with no recourse if the individual borrower defaults.
The SEC announced that on June 20, 2007, a U.S. District Judge for the Middle District of Florida entered a default judgment against twenty-one year old Aleksey Kamardin. The complaint alleges that between July 13 and Aug. 25, 2006, Kamardin commandeered the online trading accounts of unwitting investors at various broker-dealers, liquidated existing equity positions and, using the resulting proceeds, purchased thinly traded stocks in order to create the appearance of trading activity and pump up the price of the stocks. The complaint further alleges that in seventeen instances, Kamardin, in his own account, bought shares in the thinly traded issuer just prior to or at the same time that compromised accounts were made to buy shares, creating the false appearance of market activity. Shortly after the intrusions, Kamardin sold all of his shares at the inflated prices. In all but three of these instances, Kamardin realized a profit from his trading, netting a total profit of $82,960.
In the first case of its kind, NASD announced today that it has fined Securities America, Inc. of Omaha, NE, $375,000 for improperly sharing directed brokerage commissions from a mutual fund company with Michael Bullock, a former Securities America broker in the Los Angeles, CA area. NASD also found that Securities America failed to adequately supervise Bullock's communications with his union-sponsored retirement plan clients to ensure that Bullock disclosed his additional compensation to those clients.
In a separate complaint, NASD charged Bullock with improperly receiving directed brokerage commissions and other compensation of more than $280,000. Bullock was also charged with misrepresenting and failing to disclose this compensation to his union retirement plan clients - at the same time he was advising those clients to maintain or include the fund company's mutual funds in the retirement plans they offered to working and retired union members.
The actions announced today differ from previous disciplinary actions involving directed brokerage in several important respects. Previous actions involved firms receiving directed brokerage in exchange for providing "shelf space" for specific mutual funds - that is, promoting those funds to the investing public and among their own brokers in exchange for directed brokerage from those funds. In this case, the fund company directed brokerage specifically for the benefit of an individual broker - a first. NASD rules prohibit registered firms from granting a participation in directed brokerage to sales personnel.
In settling these matters, Securities America neither admitted nor denied the charges, but consented to the entry of NASD's findings.
Steven G. Cooperman pled guilty in California to taking $6.1 million in kickbacks from Milberg Weiss to serve as lead plaintiff in a number of class action law suits brought by the firm. David Bershad, a former name partner in the firm, pled guilty last week in New York. The trial of the firm and another former partner, Steven Schulman, is scheduled to begin in January. See NYTimes, Milberg Client Pleads Guilty to Taking Pay to File Suits.
The jury in Conrad Black's criminal trial advised the judge, during its ninth day of deliberations, that it was unable to reach an unanimous verdict in the former Hollinger International CEO's looting trial. The judge reread the instructions to the jury and asked them to continue deliberations. See WPost, Black's Jury Deadlocks, Seeks Help From Judge.
The SEC is circulating a draft proposal that would allow 5% shareholders to nominate candidates for the board of directors and may present the plan at its open meeting scheduled for July 28. Chair Cox has previously promised to propose a proxy access rule this year. A 5% threshold will certainly be viewed as too high by shareholder advocates. See WSJ, SEC Proxy-Access Proposal Draws Fire From Investors.
Tuesday, July 10, 2007
SEC, Open Meeting Agenda, Wednesday, July 11, 2007
Item 1: Prohibition of fraud by advisers to certain pooled investment vehicles
Office: Division of Investment Management
Staff: Robert Plaze, David Blass, Daniel Kahl, and Vivien Liu
The Commission will consider whether to adopt a new antifraud rule under the Investment Advisers Act of 1940. The new rule would prohibit advisers to certain pooled investment vehicles from making false or misleading statements to, or otherwise defrauding, investors or prospective investors in those pooled vehicles.
In the closely watched Brocade Communications stock options backdating criminal case in San Francisco, the judge is considering whether to dismiss the charges against former CEO Gregory Reyes, because, as the defendant asserts, the government failed to introduce sufficient evidence to show that the executive understood the options accounting rules. See WSJ, Judge Mulls Brocade Dismissal.
The Wall St. Journal puts the spotlight on a recent NASD arbitration brought by trusts established by Subway co-founder Frederick DeLuca against brokerage firm UBS. The arbitration panel rejected in its entirety the trusts' claim that UBS was responsible for $190 million losses from investments in tech and telecom stocks in 1998-2001. According to the reporter, it demonstrates that wealthy people have difficulty winning the sympathy of arbitration panels. However, the outcome may not reflect any supposed biases on the part of the arbitrators, but the application of legal principles that require all investors to show "reasonable reliance" on their brokers' recommendations and that the recommendations caused the investors' loss (and not the market crash). In addition, as the article mentions, the panel may have determined that the trusts waited too long in bringing the claim. In any event, because arbitration hearings are private and the awards provide no reasons for their outcomes, it's mere conjecture why the panel decided as they did. See WSJ, Why a Billionaire Lost on Wall Street.
Gemstar, best known as the publisher of TV Guide, put itself up for sale. The company, which is 41% owned by Rupert Murdoch's News Corp., was previously the subject of a SEC accounting fraud investigation, which led to its former CEO Henry Yuen being found civilly liable for his role in inflating the company's revenues. See WSJ, Gemstar-TV Guide Puts Itself Up for Sale.
NYSE is investigating trading in the ADRs of ABN Amro Holding NV prior to the Dutch bank's March 19 announcement that it was in negotiations to sell itself to Barclays Bank. A consortium of three European banks is competing with Barclays for ABN. See WSJ. NYSE Investigates Trading in ABN
As Bank Held Talks With Barclays.