Securities Law Prof Blog

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

Saturday, March 24, 2007

Morgan Stanley Announces Spin-off of Discover

Morgan Stanley announced its plans to spin off its credit card operation, Discover, to its shareholders in a SEC filing.  The move has been long expected, as the credit card business was not seen as a key part of the investment firm's image.  See WSJ, Morgan Files to Spin Off Discover.

March 24, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Hedge Fund Manager Brings First Amendment Challenge in Massachusetts

A hedge fund manager, Bulldog Investors, has sued the Massachusetts securities regulator, asserting that the state's restrictions on information posted on Bulldog's website violate the First Amendment.   The state had previously charged that the website was an unregistered offering of securities.  See WSJ, Hedge-Fund Manager Sues Massachusetts Over Restrictions.

March 24, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Friday, March 23, 2007

Thomsen on Hedge Fund Fraud

Linda Chatman Thomsen, Director of Enforcement at the SEC, gave a speech before the Investment Adviser Association 9th Annual IA Compliance Best Practices Summit 200, in which she discussed recent enforcement actions involving conflicts of interest between mutual fund advisers and the funds, as well as the increasing number of enforcement actions against hedge funds, noting that "We are seeing more and more hedge fund managers engaged in trading violations. These violations include market manipulation, deceptive market timing and late trading, illegal short selling and, of course, insider trading."

March 23, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Criminal Market Timing Charges Brought Against Hedge Fund

The SEC announced today that Beacon Rock  Capital  LLC  (Beacon Rock), a hedge  fund  located  in  Portland,  Oregon,  and  Thomas  J. Gerbasio (Gerbasio), a  former  securities  registered  representative with a registered broker-dealer based in Philadelphia, were criminally charged in connection with a scheme to defraud mutual funds and  their shareholders of approximately $2.4 million. In an Information filed on March 20,  2007,  the  U.S.  Attorney  for  the  Eastern  District  of Pennsylvania (U.S. Attorney) charged that  Beacon  Rock  and  Gerbasio engaged in a scheme to evade and circumvent  controls  implemented  by mutual funds seeking to restrict  market  timing.  This is the first U.S.  criminal  case  against  a hedge fund for deceptive market timing.

March 23, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NASAA Pro-Investor Forum Today

North American Securities Administrators Association (NASAA) sponsored its own symposium to counter those recently held by pro-business groups such as the U.S. Chamber of Commerce.  NASAA President Borg said NASAA sponsored the symposium to 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. The symposium was moderated by University of Mississippi Law professor Mercer Bullard, and featured James D. Cox, Professor, Duke University School of Law; Tanya Solov, Illinois Director of Securities; Willis Riccio, Partner, Adler, Pollock & Sheehan; Nancy Smith, Vice President, Investment Services, AARP Financial; and former Enron employee Charles Prestwood.   Borg's presentation is available at the NASAA website.

March 23, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Merrill Lynch Limits Access to Research

MerillLymch is taking steps to limit access to the research reports it provides to its best customers, as it worries about its research "being Napsterized."  Merrill Lynch and other firms have sued a website that published a Merrill recommendation.  See WSJ, Merrill Lynch Takes Steps To Limit Access to Research.

March 23, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Blackstone Files Prospectus for IPO

The Blackstone Group, the largest private equity firm, filed its preliminary prospectus yesterday for its IPO offering investors 10% of the equity in the management company, which had $2.3 billion in profits last year.  Shareholders would have limited voting rights, would not elect management, and decisions would be made to favor the limited partners.  The private equity business has $31.1 billion in assets under management, and returns of 30.8%.  The prospectus reportedly did not offer much detail about the compensation of the principals   See NYTimes, Blackstone Says It Plans to Go Public ;  WSJ, Blackstone Aims To Keep Control As Public Entity.

March 23, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, March 22, 2007

SEC Settles Inadequate Surveilance Charges Against Amex

The Securities and Exchange Commission today issued a settled cease-and-desist order against American Stock Exchange LLC for failing to enforce compliance with securities laws and rules and failing to comply with its record-keeping obligations. In the order, the Commission found that from at least 1999 through June 2004, the Amex failed adequately to surveil for violations of order handling rules by Amex members and failed to keep and furnish surveillance and other records.

In addition, the Commission instituted contested administrative proceedings against Salvatore F. Sodano, the Amex's former chairman and chief executive officer, alleging that he failed to enforce compliance with federal securities laws and exchange rules by Amex members and persons associated with those members.

In its order against the Amex, the Commission found that, from at least 1999, the Amex was on notice that its surveillance, investigatory, and enforcement programs were inadequate. The Amex previously had consented to the issuance of a Sept. 11, 2000, order that, in part, directed the Amex to enhance and improve its regulatory programs for surveillance, investigation, and enforcement of the options order handling rules. The Commission found that, notwithstanding the September 2000 order, the Amex's surveillance programs for options order handling remained inadequate to detect violations of firm quote, customer priority, limit order display, and trade reporting, and other rules. When the Amex's surveillance programs detected rule violations, the Amex failed to investigate violations properly, improperly excused violations, and failed to pursue adequately disciplinary actions for rule violations. The Commission also found that as late as June 2004, the Amex had similar deficiencies in its surveillance for equity order handling and floor broker violations. In addition to the deficiencies in the Amex's surveillance, investigatory, and enforcement programs, the Commission found that the Amex failed to keep and furnish certain records relating to its surveillance, investigatory, and enforcement activities and further furnished the Commission with inaccurate documents.

In the separate, related proceeding against Sodano, the former chairman and CEO of the Amex, the Division of Enforcement alleged that the Amex's regulatory failures resulted in large part from Sodano's failures to make regulation an Amex priority, to pay adequate attention to regulation, to put in place an oversight structure to monitor compliance, to ensure that regulatory staff was properly trained, and to dedicate sufficient resources to regulation. These failures were particularly significant with respect to the Amex's options market because Sodano knew the Amex had been previously sanctioned by the Commission for its inadequate options regulation in the September 2000 order and that the Commission had ordered the Amex to enhance and improve its regulatory programs for surveillance, investigation, and enforcement of the options order handling rules. The proceedings instituted today against Sodano, pursuant to Section 19(h) of the Exchange Act, will determine whether Sodano failed, without reasonable justification or excuse, to enforce compliance with the federal securities laws, rules, and regulations, and Amex rules, by members of the Amex and persons associated with those members.

March 22, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Lawsuit Challenging PCAOB Dismissed

A D.C. Federal District Court dismissed a constitutional challenge to the PCAOB.  The suit asserted that the Board's members must be appointed by the President and not the SEC, as Sarbanes Oxley requires.  An appeal is expected.  See WSJ, Court Ruling Upholds New Auditing Board.

March 22, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Studies Empty Voting

The practice of "empty voting" -- where big investors vote shares they have borrowed but do not own -- is under scrutiny at the SEC.  Chairman Cox has asked the staff to study and provide recommendations by the end of the year.  See WSJ, Hedge Funds Vote (Often).

March 22, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Stockman Faces Criminal Charges for Accounting Fraud

David A. Stockman, President Reagan's Budget Director, reportedly will be charged with accounting fraud in connection with his tenure as Chair of Collins & Aikman, an auto parts manufacturer., shortly before it declared bankruptcy in 2005.  The charges relate to inflating revenues from rebate programs and other accounting irregularities.  His attorneys called the possibility of indictment a "miscarriage of justice" and blamed Sarbanes-Oxley.  See NYTimes, Ex-Chief of Collins & Aikman Is Said to Be Facing Indictment ; WSJ, Stockman May Take Another Hit.

March 22, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 21, 2007

Nazareth on Competitiveness

Excerpts from Remarks Before the Council of Institutional Investors by Commissioner Annette L. Nazareth:

Any serious examination of competitiveness issues and unnecessary regulatory cost also will have to focus on our U.S. regulatory structure. This "elephant in the room" has been largely ignored in the recent debate as there has been greater focus on "quick fixes." But our regulatory structure has been virtually unchanged since the 1930s. When one considers the enormous changes that have occurred in the nature of our markets, the market intermediaries, and in the products that they sell, is it any wonder that we have inefficiency, uncertainty and duplication in our regulatory oversight? Indeed, we are witnessing increasing instances of proposed products and services that fall on the jurisdictional seams of the various regulatory agencies. If these activities simply raised questions of "who is in charge," I could understand a lack of broad public interest in the debate. But when the question is "what law applies and what protections do U.S. investors have," then we should all have an interest.

The Chamber report, to its credit, broached the subject of SEC-CFTC consolidation. This topic has traditionally been viewed as virtually unachievable, due largely to the interests of the separate committees in Congress that oversee the two agencies. As you undoubtedly know, we may well be the only jurisdiction in the world that oversees securities and futures activities in two separate agencies. Through financial innovation we now have financial futures and securities options that bear striking resemblances to each other from an economic standpoint. Yet these products are regulated under very different regimes. Among the more important distinctions, securities options and other securities are subject to insider trading prohibitions. Futures subject to exclusive CFTC jurisdiction, on the other hand, are not subject to insider trading prohibitions, even though some of the new products designed to duplicate the OTC credit default swaps market could be used as vehicles for insider trading. These types of issues are arising with increasing frequency as the futures and options exchanges seek to create new exchange-traded products. It is particularly troubling when jurisdictional murkiness provides opportunities to create products that avoid the protections of the securities laws. At some point Congress will need to address these fundamental jurisdictional and policy issues. And dare I note that the issues of potential SEC-CFTC consolidation pale in comparison to the challenges, but also the potential cost savings and efficiencies, that could result from consolidation of even a few of the many federal banking regulators?

I also believe more effort should be made to develop prudential regulatory approaches. There has been much discussion recently about the benefits of principles versus rules-based regulation. Many commentators believe that our rules-based regulation in the U.S. adds unnecessary cost and stifles innovation. I believe that this is a false dichotomy. All regulation should be derived from over-arching principles, but rules can provide guidance and specificity that the marketplace desires. Indeed, Callum McCarthy, the Chairman of the UK's Financial Services Authority ("FSA") has noted that even the FSA, that pillar of principles-based regulation, has hundreds of pages of rules. So in my view the focus should not be on rules versus principles, but rather on a move toward more prudential approaches to regulation. The bank regulators have implemented a prudential regulatory model with success for many years. Although not well known by many in the industry, for two years the SEC also has implemented a highly successful program of consolidated financial supervision. Known as the Consolidated Supervised Entity, the program enables us to work in very close collaboration with our five largest U.S. investment bank holding companies to monitor their risk management capabilities. The program is notable for at least two reasons that distinguish it from the traditional SEC supervision. First, the program emphasizes a prudential approach to supervision. The staff involved in this program meet with the five firms on a regular and periodic basis to review risk management controls and liquidity. Second, the supervision is at the holding company level, and includes not only the regulated but also the unregulated entities. Thus for such firms, the SEC has a wholistic view of the risk management and the business of these firms. Thus enabled, we can effectively carry out our charge of insuring adequate risk controls and liquidity throughout the organization.

March 21, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Atkins on Final Deregistration Rule

Excerpts from Comments on Final Deregistration Rules at the SEC March 21 Open Meeting by Commissioner Paul S. Atkins:

The finalization of this rulemaking is another significant, tangible step in the SEC's evolving perception of its role in a globalizing marketplace. By adopting these rule amendments today, we are remedying a problem that has been festering for decades. Our former deregistration rules, which required a nose-count of U.S. investors to determine if registration was required, was so beloved by our foreign brethren that it gave rise to such kindly monikers as "hotel California," or the "roach motel" or - one of my own creations -- the "Venus flytrap." Surely none of us at the SEC want to perpetuate such ill-famed requirements. And so it is with great relief that we are adopting much more flexible, realistic, and forward-looking rules with the new Exchange Act Rule 12h-6. Rule 12h-6 will measure trading volume instead of the number of U.S. investors. Although I continue to believe that measuring the percentage of a foreign private issuer's equity held by U.S. investors would be workable -- or even preferable -- if we excluded Qualified Institutional Buyers, the 12h-6 volume test is an excellent alternative.

Measuring U.S. trading volume to determine if registration is required simply makes sense - we should be weighing the domestic U.S. investor interest in an issuer, and should not be apply our laws to purely foreign transactions. This is consistent with the Commission's long-held "territorial approach" to regulation. Over the last 20 years, through Rule 144A, Reg. S, Rule 15a-6, and other rulemakings, the Commission has steadfastly proclaimed that we should not apply our regulations to transactions occurring outside the United States.

March 21, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Campos on Foreign Private Issuer Deregistration

Excerpts from Remarks at the March 21 Open Meeting: Foreign Private Issuer Deregistration
by Commissioner Roel C. Campos:

In practical terms, I understand that nearly 60% of European issuers listed in the U.S will be eligible to deregister under the new rules. Now, I don't believe that there will be a rush to the exits. I am sure that foreign issuers realize that there are many benefits to being in the U.S. Our markets have the lowest cost of capital in the world. Cross-listings in the U.S. produce a premium averaging 30 percentage points over the price of stock in the home country. Further, the U.S. is, to use a military term, "target rich." In other words, nowhere else in the world are there more potential merger partners. Almost all U.S. companies are available for sale — at the right price. Of course, having securities already registered in the U.S. provides great flexibility in making acquisitions.

While this rule is important, in and of itself, I think it is also very significant in the larger context of today's global economy. And it shows that the U.S. is willing to make accommodations to reflect this new reality. On the one hand, the rule will make it easier for foreign private issuers to delist and deregister if they believe that the U.S. market does not present an attractive opportunity. On the other hand, we have also adopted rules and committed ourselves to making the U.S. regulatory environment more compelling for foreign companies. For example, we are in the midst of right-sizing and reducing the burdens of Section 404 of the Sarbanes-Oxley Act. And, as we emphasized just a few weeks ago, we're also committed to the roadmap designed to end the GAAP-IFRS reconciliation requirement.

March 21, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Ponzi Schemer Pleads Guilty

On March 5, Gary L. McNaughton pled guilty to  10  counts  of  securities  fraud,  unlawful  sale  of    unregistered  securities,  mail  fraud  and  attempted  tax   evasion.  McNaughton is scheduled to be sentenced on these charges  on  May  22, 2007. The charges stemmed from McNaughton's role in a Ponzi scheme  in which he fraudulently raised at least $17 million  from  approximately 200 investors and which was the subject of a prior Commission action.

In the criminal case, filed in a Cleveland federal court by  the  U.S. Attorney's Office for the Northern District of  Ohio,  the  indictment charged that McNaughton raised at least $17 million from approximately 200 investors through the sale of unregistered securities in the  form of notes under the name of The Haven Equity  Company.  The  indictment further charged that  McNaughton  fraudulently  guaranteed  an  annual return of 10% to 35% on the investment and told  investors  that  they would receive their returns in the form of monthly interest  payments.  According to the indictment, McNaughton also told  investors  that  he would send their money to a trader and friend in Ontario, Canada,  who  would use a trading  strategy  to  generate  the  guaranteed  returns.  However, rather than investing the  funds,  McNaughton  used  investor funds to, among other things, pay purported interest and principal  to existing investors and pay his personal expenses.

March 21, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Fair Funds Distribution to Mutual Funds Harmed by Veras Market-Timing

The Securities and Exchange Commission today announced the distribution of approximately $38 million in Fair Funds to approximately 810 mutual funds that were victims of fraudulent market timing and late trading by the Veras hedge funds. The funds distributed reflect the entirety of the disgorgement and civil penalties paid by the Veras hedge funds and their principals to settle charges of unlawful market timing and late trading brought by the SEC.
On Dec. 22, 2005, the SEC brought settled administrative proceedings against the Veras Capital Master Fund, VEY Partners Master Fund, Veras Investment Partners, LLC, Kevin D. Larson, and James R. McBride for their participation in a fraudulent market timing and late trading scheme. Respondents consented to entry of the settlement order without admitting or denying the SEC's findings. The settlement order found that from January 2002 through September 2003, respondents used deceptive techniques to continue market timing in mutual funds that previously had detected and restricted, or that otherwise would not have permitted, the Veras hedge funds' trading. The settlement order also found that respondents traded mutual fund shares after 4:00 pm Eastern Time and received the same day's price, and that, by virtue of their conduct, respondents caused violations of and willfully violated and aided and abetted violations of the antifraud and mutual fund pricing provisions of the federal securities laws.

March 21, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Perelman's $1.57 Billion Verdict against Morgan Stanley is Tossed

A Florida state appellate court threw out Ron Perelman's $1.57 billion verdict against Morgan Stanley.  You will recall that Perelman sued the securities firm alleging it had misled him when he purchased Sunbeam and the trial court instructed the jury to find against Morgan Stanley on the question of liability, to punish it for its discovery violations.   The appellate court has found that Perelman did not establish its damages, so the entire verdict is thrown out.  We will await an appeal.  See WSJ, Court Overturns Verdict Requiring Morgan Stanley to Pay Perelman.

March 21, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Hedge Fund Charged with Market-Timing

Hedge Fund Beacon Rock Capital was charged with defrauding mutual fund shareholders of $2.4 million ithrough market-timing in Philadelphia, the first criminal case involving market-timing.  See NYTimes, Hedge Fund Is Charged Over Trades.

March 21, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

TXU Buyout May Not Happen

The $45 billion buyout of Texs utility TXU -- described as the biggest private equity deal ever -- may not happen, as the two equity funds, KKR and Texas Pacific, threaten to walk away if the Texas legislature goes through with plans to require regulatory approval of the deal.  See NY Times, Texas Lawmakers and Bidders Are at Odds Over TXU Deal

March 21, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Icahn Offer for Lear Moving Forward

Lear Corp. recommended that its shareholders accept a merger offer from an affiliate of Carl Icahn, saying that an investment banking firm has opined that the $36 per share price fair.  Three shareholders holding about 19% of the stock oppose the deal; Icahn holds about 16%.  See WSJ, Lear Board Recommends Shareholders Approve Icahn Deal.

March 21, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)