Securities Law Prof Blog

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

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Saturday, April 14, 2007

Cox on Corporate Penalties; Muutal Fund Regulation

In a speech before the Mutual Fund Directors' Conference, SEC Chair Christopher Cox confirmed the SEC's new policy for settlements involving corporate penalties.  The SEC enforcement staff will be required to get approval from the Commission before beginning settlement talks.  In turn, where cases are settled within the range of guidance provided by the Commission, they will be eligible for summary approval.  Cox discounted the speculation that this would lead to lower corporate penalties.

Excerpts of his speech relating to current issues of mutual fund regulation:

Rule 12b-1 fees. The original premises of Rule 12b-1 seem highly suspect in today's world. If ever it was justified to indulge an irrebuttable presumption in favor of using fund assets to compensate brokers for sales of fund shares, that time surely has passed. Collecting an annual fee from mutual fund investors that is supposed to be used for marketing is no more consumer friendly than forcing cable TV subscribers to pay a special fee of $250 a year so the cable company can advertise HBO and Showtime to lure potential new customers.

401(k) Disclosures.  We are also in the midst of a broad initiative to examine the adequacy of investor disclosures by mutual funds and other investment vehicles in a typical 401(k) plan. With an emphasis on both the disclosures by the constituent investments in the 401(k), and the aggregate disclosures by the plan, we aim to make it far easier for busy Americans to understand the expenses they're being charged in connection with their investments, and the after-tax, after-inflation returns they're actually getting compared to an appropriate index. Even though this will require collaboration with the Department of Labor and other investment regulators, we're confident we can achieve a great deal in the coming months - and that the effort is supremely worthwhile, given what's at stake.

Soft Dollars.  The Commission is continuing to examine the potentially distortive effects that soft dollars can have on what should be the normal market incentive to seek best execution. And we're looking to ensure that when soft dollars are used to pay for research, it doesn't interfere with the full disclosure of actual management costs. In particular, the Commission will consider whether fund boards could better assess soft dollar arrangements if the Commission were to mandate better disclosure of the research and brokerage services that the adviser gets in return for a bundled commission. If directors are able to compare the broker's execution-only commission rate with its bundled rate, they could make more meaningful inquiries into the value of the additional services that the fund shareholders are getting.

See Speech by SEC Chairman:Address to the Mutual Fund Directors Forum Seventh Annual Policy Conference.

April 14, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Computer Associates SLC Report Blames Wang for Fraud

A report by a special litigation committee at Computer Associates, Inc., described a "culture of fear" under founder and chair Charles Wang, who the report says oversaw the decades-long accounting fraud that was the subject of a recently concluded federal investigation.  According to the report, Wang put inexperienced managers in charge and fired those who disagreed with him.  In addition the company lacked internal controls.  The report, which was in response to a shareholders' derivative suit, says that the corporation should take steps to recover at least $500 million from Wang and that the derivative action should be dismissed.  Wang took issue with the report and blamed the company's troubles on Sanjay Kumar, who this week agreed to pay $800 million and is going to prison to serve a 12-term sentence.  Wang himself was never charged.  See NYTimes, CA Says Its Founder Aided Fraud; WSJ, Directors' Probe Ties CA Founder To Massive Fraud.

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

Friday, April 13, 2007

Icahn Still Looks for Board Representation at Motorola

Carl Icahn, holder of 2.9% of Motorola, said in a letter to shareholders filed with the SEC that he still wants a seat on the board and doesn't understand why Motorola management doesn't want him  He took back his earlier call for more share buybacks, because of the operational difficulties of the company.  See WSJ, Icahn Presses His Case To Join Motorola Board.

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

Former Computer Associates CEO Agrees to $800 Million Restitution

Sanjay Kumar, former CEO of Computers Associates agreed to pay $800 million in restitution to investors to conclude the civil fraud action against him, based on the company's accounting fraud in 1999-2000.  It is unlikely that most of the money will be paid, however.  He will turn over about $52 million this year and is going to prison to serve a 12-year sentence on the criminal charges.   See NYTimes, Ex-Executive Agrees to Pay $800 Million in Restitution

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

Pre-IPO Dividends for Private Equity Firms

Pre-IPO dividends from borrowed funds are becoming a standard technique for the principals of private equity firms and hedge funds to profit from their holdings, with the debt being paid off from the IPO proceeds.  Fortress Investment, Apollo Management and the Blackstone Group are among the firms that have used or are considering this strategy.  See WSJ, Executives Hedge Their Own IPOs.

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

More on Dow Chemical Firings

More details have emerged on the firing of two longtime senior officers at Dow Chemical, J. Pedro Reinhard (director and senior adviser) and Romeo Kreinberg (executive VP).  Allegedly for the past four months they held a series of secret meetings with JP Morgan Chase and investors about a possible LBO of the company, without informing the CEO or Board of Directors.  The Dow Chemical CEO found out about the talks from the investment banker.  Kreinberg said there is "no substance" to the rumors.  Reinhard remains on the board of directors until the next shareholders meeting unless he resigns.  See NYTimes, Dow Fires 2, Citing Talks on a Buyout; WSJ, Officials Fired At Dow Chemical For Secret Talks.

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

New SEC Policy on Settlement Discussions

According to the Washington Post, the SEC has instituted a pilot program requiring that enforcement staff get approval from the Commission before beginning settlement discussions that would result in corporate penalties.  Since the SEC's January 2006 policy statement on corporate penalties, the agency has been slow in wrapping up a number of high-profile backdating cases, suggesting difficulties in implementing the policy.  See WPost, SEC Shift May Lead To Lower Penalties.

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

Thursday, April 12, 2007

SEC Deputy Chief Accountant on Principles-Based Accounting

Speech by SEC Staff:Remarks before the 2007 Conference on Principles-Based Accounting and the Challenges of Implementation by James L. Kroeker, Deputy Chief Accountant, Office of the Chief Accountant, New York, N.Y., April 4, 2007.  The bottom line:

I want to focus on the potential for objective-oriented standards to enhance consistency and comparability in financial reporting for the benefit of investors. I will also discuss some challenges facing the profession in endeavoring to refocus on objectives in the development and application of accounting standards.

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

SEC Investment Management Developments

Speech by SEC Staff: Keynote Address at the Practicing Law Institute Investment Management Institute 2007 by Andrew J. Donohue,Director, Division of Investment Management, New York, N.Y.,April 12, 2007.  The bottom line:

While the industry experienced an upheaval in 2003 as the late trading and market timing scandals came to light, the Commission also experienced the urgency of the situation as it adjusted its regulatory agenda to respond to this event. In the years since, while the industry has been determining how to best implement the variety of new regulations that were adopted, we have been responding to your questions, assisting with implementation of new regulations and assessing the effectiveness of the new regulatory landscape. Now, I would contend that, like you, we have also returned to a certain extent to a state of normalcy.

Areas he identified as current projects at the SEC:  Disclosure reform and Interactive Data; 401(k) Investors; Rule 12b-1; Books and Records; New Products.

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

NASAA Public Policy Program May 8

The North American Securities Administrators Association (NASAA) will hold its 2007 Public Policy Conference on May 8 in Washington, D.C. to focus attention on investor protection issues of key concern to both state securities regulators and the securities industry, NASAA President and Alabama Securities Commission Director Joseph P. Borg said today.

April 12, 2007 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Senator Kennedy Asks SEC to Investigate Stock Sales in Student Loan Scandal

The student loan scandal may have securities implications.  Senator Kennedy has asked the SEC to investigate the circumstances surrounding sales of Student Loan Xpress stock to several university financial aid officers and a DOE official by Fabrizio Balestri, the President of Student Loan Xpress, who acquired the shares in a private placement before he became President.  Senator Kennedy reports both Balestri and the subsequent purchasers bought the stock at the same deeply discounted price, but Balestri later asserted that he transferred the shares as a gift.

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

Royal Dutch Shell Settles European Investors' Claims, Pays US Attorneys

In what may be the first pan-European settlement of a securities fraud case, Royal Dutch Shell agreed to pay $352.6 million to settle all claims brought by European investors, as well as $47 million in attorneys fees to three American law firms.  A separate case involving U.S. investors is proceeding in federal district court.  The charges in both cases relate to alleged overstating of hydrocarbon reserves from 1999-2004.  See Shell Settles European Case -- U.S. Style.

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

Shareholder Puts Pressure on Sprint Nextel to Improve Performance

Relational Investors, the firm owned by Ralph Whitworth, has acquired a 1% interest in Sprint Nextel and is pressing management for changes to improve the the company's poor performance.  Relational Investors led the charge at Home Depot that resulted in the ouster of CEO Nardelli and the appointment to the board of one of Whitworth's associates.  See WSJ, Whitworth Quietly Gains Sprint Stake.

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

Wednesday, April 11, 2007

SEC Obtains TRO Against Novus Technologies

The Commission has obtained an order temporarily restraining Novus Technologies, LLC, Ralph W. Thompson, Jr., Duane C. Johnson, RCH2, LLC, and Robert Casey Hall, from making unregistered fraudulent offers, sales and purchases of securities and freezing the assets of Novus, RCH2, Hall, Thompson, Johnson, U.S. Ventures, LC (US Ventures), U.S. Ventures International, LLC, (USVI), Robert L. Holloway, Online Strategies Group, Inc., and David Story The Order was entered April 11, 2007, by the Honorable Paul G. Cassell, United States District Judge for the District of Utah.

The complaint alleges the defendants have obtained investments of at least $4.8 million from the fraudulent unregistered sale of short-term promissory notes and joint venture agreements from at least 50 investors. It is alleged that Novus and RCH2 have made offers and sales through: the Internet, referrals from current investors and sales presentations at a Salt Lake City shopping mall. Both Novus and RCH2 allegedly have sold six month promissory notes providing for returns to investors of between 3% and 5% per month.

The complaint further alleges that Novus and RCH2 have been telling investors this opportunity is "too good NOT to be true." Novus and RCH2 also allegedly represent to investors that 80% of investor funds are placed in low risk investments such as real estate with only 20% of the funds invested in high risk investments such as currency futures. Investors are also allegedly told the funds are 100% safe because they are pooled in a large interest-bearing account. It is further alleged that Novus and RCH2 have told investors their funds are backed by liquid assets or real estate and sufficient funds are maintained to cover six months worth of interest and principal.The complaint alleges that these representations are false and that, in fact, almost all investor money has been invested in high risk currency futures or S&P 500 futures through US Ventures resulting in trading losses of at least $9 million. It is also alleged in the complaint that funds obtained from later investors in the scheme were used to pay promised returns to earlier investors in a classic Ponzi scheme.  See Litigation Release No. 20075 / April 11, 2007.

April 11, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Alleges Aiding and Abetting a Pump and Dump Scheme

The Securities and Exchange Commission today announced the institution of administrative and cease-and-desist proceedings against Winter Park, Fla.-based Park Financial Group, Inc. and its principal, Gordon Cantley. In the Order Instituting Proceedings, the Division of Enforcement alleges that Park and Cantley aided and abetted and caused a pump-and-dump scheme involving the securities of Spear & Jackson, Inc. and failed to file Suspicious Activity Reports (SARs) reporting suspicious transactions, in violation of the firm's record-keeping obligations.
The Order alleges that between February 2002 and July 2003, Park, a registered broker-dealer with a disciplinary history, and Cantley executed numerous trades in Spear & Jackson stock, despite obvious red flags, for three companies located in the British Virgin Islands (BVI Companies), which Crowley secretly controlled. Specifically, on several occasions, Crowley gave Park and Cantley sell orders for the BVI Companies' accounts. Park and Cantley filled these orders even though each of these foreign-based accounts, which were rare for Park, required the written approval of at least two authorized individuals before any transaction could occur, and Crowley was not an authorized signatory. Moreover, Park and Cantley executed Crowley's trades knowing that he was the chief executive officer of Spear & Jackson and that the BVI Companies' accounts traded exclusively in Spear & Jackson stock, often buying and selling shares on a daily basis. Park and Cantley also knew that the BVI Companies were transferring large amounts of Spear & Jackson stock to a stock promoter, which was actively promoting Spear & Jackson, and Spear & Jackson's stock price was sharply increasing. During the relevant time period, Park and Cantley executed more than 200 trades in Spear & Jackson stock for the BVI Companies' accounts, which generated approximately $2.5 million in proceeds.  See SEC Institutes Enforcement Action Alleging Broker-Dealer and Its Principal Aided and Abetted Pump-and-Dump Scheme and Failed to File Suspicious Activity Reports Required by Bank Secrecy Act.

April 11, 2007 | Permalink | Comments (0) | TrackBack (0)

NASD Files former Knight Securities Officers for Failure to Supervise

An NASD Hearing Panel today issued $100,000 fines against Kenneth Pasternak, former CEO of Knight Securities, L.P. (now known as Knight Equity Markets, L.P.), and John Leighton, former head of the firm's Institutional Sales Desk, for supervisory violations in connection with fraudulent sales to institutional customers in 1999 and 2000.  In addition, Pasternak was suspended in all supervisory capacities for two years, while Leighton was barred in all supervisory capacities.

In March 2005, NASD's Department of Market Regulation charged Pasternak and Leighton with failure to supervise the firm's leading institutional sales trader, Joseph Leighton, who is John Leighton's brother. The NASD complaint also charged Pasternak with failing to establish and enforce a supervisory system designed to ensure compliance with federal securities laws and NASD rules.

In a 2-1 ruling, the panel found that Pasternak and John Leighton failed to supervise Joseph Leighton's trading activities. "For all intents and purposes, Joseph Leighton ran the Institutional Sales Department as he saw fit," the majority ruling says. "Pasternak, John Leighton, and Joseph Leighton each concluded that as long as the customers did not learn of the extraordinary profits Knight earned on their orders, there was no limit to the amount the firm could make on an institutional order."  The majority also found that Pasternak's response to numerous red flags was "woefully inadequate." See NASD Hearing Panel Sanctions Former Knight Securities Executives for Supervisory Failures in Connection with Fraudulent Sales.

April 11, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Shareholders Vote on "Say on Pay"

"Say on pay" proposals (shareholders' advisory vote on executive compensation) received 37% of the shareholder vote at Morgan Stanley and 47% of the shareholder vote at Bank of New York.  Shareholders at other companies will be voting on "say on pay" in the next few weeks.  See WPost, Morgan Stanley, Bank of N.Y. Investors Reject 'Say on Pay';

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

Internal Controls at Fannie and Freddie Not Fixed Yet

Fannie Mae and Freddie Mac "remain a significant supervisory concern" because of their difficulties in fix their weak financial controls systems, the Office of Federal Housing Enterprise Oversight reported to Congress.  Both companies have been working on restating their financial statements, and neither has yet been able to file current 10 Q reports.  See WPost, Freddie, Fannie a 'Concern' To OFHEO.

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

Oppenheimer's Role in Ouster of Management at Take-Two.

The new activism at mutual funds is illustrated by the Oppenheimer Fund's teaming up with several hedge funds to replace the board of directors and top management at the video game manufacturer, Take-Two Interactive Software.  This is the first time that the Oppenheimer Fund has actively campaigned to change management.  See WSJ, Oppenheimer Revolt Shows Mutual Funds' New Mood.  The New York Times profiles the new CEO, Strauss Zelnick today; see Take-Two’s Mr. Fix-It Inherits a Handful.

April 11, 2007 | Permalink | Comments (0) | TrackBack (0)

Armstrong Sentenced in Ponzi Scheme

Martin A. Armstrong was sentenced to five years in prison and ordered to pay $80 million in restitution for running a $3 billion Ponzi scheme from 1992-1999.  He has already been in jail for seven years for contempt of court, for refusing to turn out gold, antiquities and documents in a related civil case brougoht by the government.  The five year sentence will not begin until the conclusion of the contempt sentence.  See NYTimes, Jailed Adviser Is Sentenced and Fined in Fraud Case ; WSJ, 'Princeton Notes' Financier Is Sentenced.

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