Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Wednesday, March 14, 2007

Wall St. Debates Current State of US Capital Markets

The talk today is all about what was said at Treasury Secretary Paulson's Capital Market Conference yesterday, and from the press reports it appears that there was more debate over the current state of Wall St. than might have been anticipated. Paulson urged consideration of a more principles-based regulatory system, while former SEC Chair Arthur Levitt said he was "really impatient" with calls to import the the British system of oversight.  Levitt also called the conclusions of recent studies that the US capital markets were losing their competitive edge "specious."  Warren Buffett noted that corporate profits were up and "That cannot be regarded as a broken capitalistic system."  Other panelists debated the costs and benefits of SOX's CEO and CFO certification requirement and section 404 internal controls.   Predictably, a panel of corporate executives blamed lawyers for bringing frivolous lawsuits, and Paulson asked "whether the legal system appropriately protected American investors or gave latitude to unscrupulous lawyers."  Ann Yerger from the Council of Institutional Investors, however, observed that the number of private lawsuits are down. 

All agreed that it would be difficult to accomplish legislative reform in the current political climate.  After the public sessions, the participants met privately to discuss three areas —regulation, corporate accounting and corporate governance and legal liability issues. See WPost, Wall Street, Washington Huddle on U.S. Markets; NYTimes, Paulson, at Talks on Regulation, Suggests Pendulum Has Swung Too Far ; WSJ,A Summit on U.S. Rules:'Too Gosh-Darn Complex.'

March 14, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Shareholders to Vote on CVS-Caremark Merger

Shareholders of Caremark and CVS vote later this week on the $23.4 billion merger.  Proxy advisors have divided on whether to recommend that Caremark shareholders approve the acquisition.  Institutional Shareholder Services recommends a yes vote, while Proxy Governance says no, citing concerns over the process.  See NYTimes, Adviser Urges Caremark to Accept CVS Bid.

March 14, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

The House Considers Hedge Funds

The House Financial Services Committee, chaired by Barney Frank, held a hearing yesterday on hedge funds, with Frank saying "we need to know more" about them.  Representatives from hedge funds and  hedge fund investors offered their views. See NYTimes, House Panel Ponders the Growth and Risk of Hedge Funds.

March 14, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Lehman Buys Stake in D.E. Shaw Hedge Fund

In another example of Wall St. going where the money is, Lehman Brothers purchased a 20% stake in the $29 billion hedge fund controlled by D.E. Shaw.  See WSJ, Lehman Buys Into D.E. Shaw, Seeking Private-Money Profits; NY Times, House Panel Ponders the Growth and Risk of Hedge Funds.

March 14, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 13, 2007

Court Finds Ponzi Schemer Liability, Targeted Haiitian American Community

The SEC announced that on  Feb.  28,  2007,  the  Honorable  K.    Michael Moore, U.S.  District  Judge  for  the  Southern  District  of Florida found  Aiby  Pierre-Louis  liable  for  disgorgement  of  $5.9  million, plus prejudgment interests in the amount of $817,309.43,  for his involvement in a Ponzi scheme that targeted more than 600 Haitian-Americans living in South Florida through  local  radio  programs  and presentations to Haitian-American church congregations.  Additionally, the Court ordered  Pierre-Louis  to  pay  a  civil  money  penalty  of $120,000. [SEC v. Focus Financial Associates, Inc., Civil  Action  No. 05-21527-CIV-Moore/Garber (S.D. FL)] (LR-20038)

March 13, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NYSE Suspends Trading in New Century Financial Corp.

NYSE Regulation, Inc. announced today that it determined that trading in the common stock of New Century Financial Corp. (the “Company”)and its Preferred Stock should be suspended immediately.  The Company expects its common stock to be quoted on the Pink Sheets following suspension.  The NYSE has determined that the Company's common stock and preferred securities are no longer suitable for continued listing on the NYSE. In this regard, NYSE noted the disclosures included in Form 8-K filings on March 12 and March 13, 2007 with the Securities and Exchange Commission (“SEC”) that all of the Company’s lenders under its short-term repurchase agreements and aggregation credit facilities had discontinued their financing with the company or had notified the Company of their intent to do so.  Certain of these lenders had also purported to terminate the Company’s servicing rights under the respective financing arrangement.

The Company has received notices from certain of its lenders asserting that the Company and/or its subsidiaries have violated their respective obligations under certain of these financing arrangements and that such violations amount to events of default.  Certain of these lenders have further advised the Company that they are accelerating the Company’s obligation to repurchase all outstanding mortgage loans financed under the applicable agreements. The Company and its subsidiaries do not have sufficient liquidity to satisfy their outstanding repurchase obligations under the Company’s existing financing arrangements. In addition, the NYSE noted the overall uncertainty surrounding the Company’s previously announced restatement of its 2006 interim results and the delay in the completion of its current financial statement filing requirements with the SEC.

March 13, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Paulson Addresses Capital Markets Conference

Treasury Secretary Paulson addressed the Capital Markets Conference he convened today and said US policy makers should consider adopting a principles-based regulatory system "as we see working in other parts of the world."  This would include accounting and corporate governance standards.  See WSJ, Treasury's Paulson Suggests 'Principles-Based' Regulation.

March 13, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Paulson Conference on Capital Market Begins

As a prelude to today's Treasury Dept-sponsored conference on capital markets, Treasury Secretary Paulson gave an interview on Monday, identifying the areas of reform.  “What I hope to achieve tomorrow,” he said, “is to get a diverse group of participants from various parties, different viewpoints — investor protection, people with regulatory public backgrounds, people with a lot of experience in the capital markets — to focus on the three areas we identified early on: the regulatory structure, accounting, and legal and corporate governance issues.”   Both Paulson and SEC Chair Cox will speak at public sessions; there will also be private sessions between Wall St. executives and administration officials.  See NYTimes, Bush Aides and Business Meet on Shift in Regulation

March 13, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Profile on Executive Compensation Activists

The WSJ highlights some of the key players who have made executive-pay activism a "potent mainstream force," as shareholders have submitted 266 shareholder proposals related to executive compensation so far this proxy season.  It describes a network of state officials, politicians, labor leaders, mutual fund trustees and academics, including a profile of Lucien Bebchuk, who was described by one critic as the "Elvis Presley of executive compensation."  See WSJ, How Five New Players Aid Movement to Limit CEO Pay.

March 13, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

KKR Announces Buyout of Dollar General

The buyout firm KKR announced that it would take the discount stores chain, Dollar General, private in a $6.9 billion deal.  Shareholders will receive $22 per share.  There have been rumors for months that Dollar General would be taken private, as it has closed numerous stores to cut profits.  See NY Times, Buyout Firm Is Acquiring Dollar General Retail Chain .  The WSJ explains that Wall St. views retailers as cash cows, not growth businesses, and appeal more to private equity firms than to public investors.  See WSJ, KKR Spots Cash in Dollar General's Till.

March 13, 2007 in News Stories | Permalink | Comments (1) | TrackBack (0)

Boston Scientific Plans Spin-Off

Boston Scientific is considering an IPO of 18-25% of its businesses grouped under its Endosurgery division for about $1 billion, in order to raise needed cash.  See NYTimes, Boston Scientific Considers a Spinoff to Raise $1 Billion and WSJ, Boston Scientific Unit IPO?

March 13, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Citigroup Raises Bid for Nikko Cordial

Citigroup raised its all cash-all shares TO bid for Nikko Cordial to 1700 yen, or about $14.50, after the Tokyo Stock Exchange said it would not delist the brokerage firm's shares.  Previously, major shareholders called the original bid of 1350 yen too low.  See WSJ, Citigroup Raises Offer For Nikko Cordial.

March 13, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, March 12, 2007

SEC Charges in Viatical Case

On Nov. 17, 2006,  the  SEC filed  a  complaint  against  ABC Viaticals, Inc. (ABC), and its former President, Keith LaMonda and his brother,  Jesse  LaMonda,  for  their  roles  in  the  fraudulent and unregistered offer  and  sale  of  life settlements. With the consent of the parties,  Judge  Solis  entered  an  order  granting   a   preliminary injunction, an asset freeze, the appointment of a receiver, and  other relief.  In its complaint, the SEC alleges that from at least June 2001 through November 2006, ABC raised  at  least  $100  million  from  over  4,000 investors worldwide from the sale of life settlements with  guaranteed returns from 27%  to  150%.  ABC  claimed  that  investor  funds  were controlled by an independent escrow agent, that  funds  sufficient  to pay premiums for the life expectancy of the insured were segregated in a  separate  escrow  account,  and  that  financial  guarantee   bonds purchased by ABC would "fix" the date and  amount  of  the  investor's return. The complaint, however, alleges that the LaMondas exercised de facto control over all funds held by its escrow  agents,  never  fully funded the escrow accounts to pay premiums on the  policies,  siphoned millions of dollars of  investor  funds  into  their  own  pockets  or entities they controlled, and used a bonding company  that  they  knew would not perform when bonds came due. The complaint  further  alleges that the LaMondas never disclosed to investors that in July 2005  they were indicted for their role in the fraudulent sale  of  viatical  and life  settlement  investments  through  Accelerated   Benefits   Corp. (Accelerated Benefits), or the fact that they and Accelerated Benefits were the subject of at least seven state regulatory actions  based  on their sales of viatical and life settlement investments.

On March 7, 2007, the jury in the LaMondas' criminal  trial  convicted Keith and Jesse LaMonda on all counts charged, including mail and wire fraud, for their role in selling viatical and life settlements through Accelerated Benefits. The LaMondas face up to 30 years in  prison  and over $100 million in criminal restitution.   

March 12, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Former Nortel Executives with Accounting Fraud

The SEC filed civil fraud charges against four former senior executives of Nortel Networks Corporation for repeatedly engaging in accounting fraud to bridge gaps between Nortel's true performance, its internal targets and Wall Street expectations. Nortel is a Canadian manufacturer of telecommunications equipment.

Named in the Commission's complaint are Frank A. Dunn, Douglas C. Beatty, Michael J. Gollogly and MaryAnne E. Pahapill. The complaint alleges that these individuals engaged in this misconduct while serving as top corporate executives of Nortel between September 2000 and January 2004. During that time, Dunn served as Chief Financial Officer and Chief Executive Officer; Beatty as Controller and Chief Financial Officer; Gollogly as Controller; and Pahapill as Assistant Controller and Vice President of Corporate Reporting.

According to the Commission's complaint, from late 2000 through January 2001, Dunn, Beatty and Pahapill altered Nortel's revenue recognition policies to accelerate revenue as needed to meet forecasts and, from at least July 2002 through June 2003, Dunn, Beatty and Gollogly improperly established, maintained and released reserves to meet earnings targets, fabricate profits and pay performance-related bonuses.

March 12, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC and DOJ Bring Computer Hacking Case

The SEC announced the filing of civil charges against three Indian nationals who participated in a fraudulent scheme to manipulate the prices of at least fourteen securities through the unauthorized use of other people’s online brokerage accounts. One victim had $180,000 cash and equity in his online brokerage account before a five-day fishing trip only to find a negative $200,000 balance when he returned.  In a related action, the U.S. Department of Justice announced that a federal court in Nebraska today unsealed a twenty-three count indictment against the individuals charged in the Commission’s complaint.

The SEC has brought four account intrusion cases since December, involving defendants in Estonia, Latvia and now, Hong Kong and Malaysia.

According to the Commission’s complaint, between July and November 2006, the Defendants repeatedly hijacked the online brokerage accounts of unwitting investors using stolen usernames and passwords. Prior to intruding into these accounts, the Defendants acquired positions in the securities of at least fourteen securities, including Sun Microsystems, Inc., and “out of the money” put options on shares of Google, Inc. Then, without the accountholders’ knowledge, and using the victims’ own accounts and funds, the Defendants placed scores of unauthorized buy orders at above-market prices. After these unauthorized buy orders were placed, the Defendants sold the positions held in their own accounts at the artificially inflated prices, realizing profits of over $121,500.

March 12, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NYSE Halts Trading in New Century Financial Corp.

NYSE Regulation, Inc. announced today that it is reviewing the continued listing status of the common and preferred shares of the troubled REIT, New Century Financial Corp. The NYSE halted trading on Monday, March 12, 2007 , due to the review of recent disclosures involving the Company’s ongoing liquidity and financing efforts.  It stated that although the Company is currently in compliance with the applicable listing requirements, "the NYSE is not limited to these quantitative standards. Rather, it may make an appraisal of, and determine on an individual basis, the suitability for continued listing of an issue in light of all pertinent facts whenever it deems such action appropriate, even though a security meets or fails to meet any enumerated criteria."

The NYSE noted that it may, at any time, suspend a security if it believes that continued dealings in the security on the NYSE are not advisable.

March 12, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

NASAA Announces Conference on Investor Protection

In a week where two pro-business groups hold conferences on the competitive challenges facing the US capital markets (the Paulson Group's Capital Markets Conference Tuesday and the Chamber of Commerce on Wednesday), another country is heard from.  The North American Securities Administrators Association (NASAA) announced that it will hold a conference on March 22 to examine how strong investor protections and shareholder rights enable U.S. capital markets to maintain their competitive advantages in an era of increasing international market competitiveness.

“Investor confidence is the cornerstone of the success of our capital markets. A key component of investor confidence is a regulatory framework that provides strong investor protection,” said NASAA President and Alabama Securities Commission Director Joseph P. Borg.  “Some on Wall Street and in Washington are calling for weakening this framework in an attempt to do away with laws and regulations that require accountability and punish wrongdoing. With record profits on Wall Street and the echoes of Enron still reverberating, rolling back a system of regulation that has vigorously protected U.S. investors for decades could have profound and costly consequences if it went too far.”

The Symposium will feature a panel of legal, regulatory, academic, and industry experts who will respond to recent suggestions that U.S. capital markets are losing their competitive edge because of burdensome regulations and regulators who are aggressively protecting investors – those same investors who are at the core of our market strength.  See NASAA to Host Symposium Focusing on Investor Protection in an Era of Increasing Capital Market Competition.

March 12, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Another Developments in Citigroup-Nikko Cordial Deal

Citigroup's $10.8 billion bid to acquire the troubled Japanese brokerage firm, Nikko Cordial, is facing shareholder pressure to increase the price, as a fourth major shareholder says it's too low.  See NYTimes, 4th Shareholder of Nikko in Japan Rejects a Citigroup Offer as Low

In a surprising development, the Tokyo Stock Exchange announced that it would not delist shares of Nikko Cordial, because it did not find evidence of systemic accounting problems or intentional fraud.  See WSJ, Tokyo Stock Exchange Will Keep Nikko Cordial Shares Listed.

March 12, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Anti-Regulatory Reform Efforts This Week

Business begins its week of advocating changes in the regulation of capital markets, with the U.S. Chamber of Commerce's release of its report, followed on Tuesday with the Treasury Dept's roundtable discussion and Wednesday's Chamber of Commerce conference at which SEC Chair Cox will speak.  The Chamber of Commerce Report is the third report calling for changes to make the US markets more competitive; earlier reports were released by the Paulson Capital Markets Group and a Schumer-Bloomberg group.  The Chamber of Commerce Report has six specific recommendations, including changing the SEC's structure and approach to regulation and giving the agency more authority to exempt companies from some provisions of SOX.  It also wants limits on private securities actions and calls on corporations to stop making quarterly earnings estimates.  See WSJ, Panel Urges Steps To Boost Allure Of U.S. Markets and WPost, Businesses Prepare to Mount a Concerted Attack on Regulation.  The Chamber of Commerce Report is available on its website.

March 12, 2007 in News Stories | Permalink | Comments (0) | TrackBack (1)

Sunday, March 11, 2007

Perspectives on The Past Week's News

Two themes this past week, Globalization and High-Tech Fraud, both of which have been recurrent ones:

1.  Globalization -- The SEC held its Roundtable on International Financial Reporting Standards, and Citigroup announced its bid for the troubled Japanese brokerage firm, Nikko Cordial (which is not so troubled that its two largest shareholders could not complain about the low price).

2.  High-Tech Fraud -- the SEC announced two big market manipulation scams, one involving computer hacking and the other, dubbed "Operation Spamalot," involving spam email.

March 11, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)