Securities Law Prof Blog

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

Tuesday, April 17, 2007

Ponzi Schemer Sentenced

On March 30, 2007, U.S. District Judge Janet Bond Arterton of the U.S. District Court for the District of Connecticut  sentenced  Connecticut resident Blake A. Prater to one hundred twenty months of  imprisonment followed by three years of supervised release. On Oct. 3, 2006, Prater pleaded guilty to one count of  securities  fraud  and  one  count  of conspiracy  to  engage  in  certain  monetary  transactions  involving proceeds of securities fraud. On Aug. 16, 2004,  in  a  related  civil action,  the  Court  had  approved  a  settlement  concerning  similar allegations by the  Commission  against  Prater  and  his  now-defunct company, Wellspring Capital Group, Inc. The amounts collected from the defendants under the settlement have been distributed  to  victims  of Prater's fraud. The Commission's complaint, filed  on  Sept.  5,  2003,  alleged  that Prater,  through  Wellspring   Capital  Group,   Inc.,   operated   a sophisticated Internet Ponzi scheme that raised  millions  of  dollars from thousands of investors. Prater  was  indicted  for  substantially similar conduct by a federal grand jury in Hartford on Jan.  4,  2006.

April 17, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sallie Mae LBO News

Lots of disucssion about the proposed sale of Sallie Mae to two banks and two private equity firms for $25 billion.   There are three themes in the commentary.  First, the focus on the debt (about $16.2 billion of the purchase price) and its effect on the lending industry.  Second, for an industry already in hot water with Congress, this may provide more ammmunition for reforms, as Congress can point to the purchasers' expectation of big profits as evidence of profiteering at the expense of students.  Finally, press reports focus on how Sallie Mae senior management will profit personally from lucrative compensation packages and stock options.  See NYTimes, Deal to Make Sallie Mae a Big Debtor;  WPost, Private Investors to Buy Sallie Mae for $25 Billion and The Dissident Who Remade Sallie Mae and WSJ, Downgrades for Sallie Mae?. (The Washington Post has good coverage because Sallie Mae is a local company.)

April 17, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, April 16, 2007

SEC's Thomsen on Mutual Fund Directors

Chairman Cox and Commissioner Nazareth have already spoken at the 7th Annual Mutual Fund Directors Meeting, and now it's SEC Enforcement Director Linda Chatman Thomsen's turn.  Here is an excerpt:

I, of course, look at good corporate citizenship from a cooperation perspective. A good starting point is the Commission's Report of Investigation issued in October 2001, commonly referred to as the "Seaboard Report," although the word Seaboard nowhere appears in that report. In it, the Commission outlined the factors it would consider in exercising its discretion on the issues of whether or not, and to what extent, to charge and sanction entities. The four fundamental factors are: self-policing, including the environment in which the misconduct occurred; self-reporting; remediation; and cooperation with law enforcement. ...Most importantly, independent directors, who are chosen particularly for their independence, experience and judgment, have the ability to set the tone and ethical standards by which their funds operate. ... Your single-minded focus on acting in the best interests of fund shareholders, and seeking to make sure fund management does the same, inevitably will serve your funds well in the event you are faced with a potential enforcement action.

April 16, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Chief Economist on Indexing

Excerpt from Public Plan Investment and the Role of Indexing, by Chester S. Spatt, Chief Economist and Director, Office of Economic Analysis, SEC:

In my remarks I have highlighted the incentives of financial advisers and how that can influence the advice they provide with respect to selecting mutual funds. The difficulty in detecting statistically superior out-performance due to the cross-sectional variability in returns has been emphasized along with the importance and persistence of fund expenses for mutual fund selection. My overall judgment is that low-cost indexation and passive investing is an excellent choice for most investors as relatively large rents may be earned from unsophisticated customers purchasing active mutual funds.

April 16, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC's AML Compliance Tool for Broker-Dealers

The SEC staff  announced  the availability of a new compliance tool to assist anti-money  laundering  (AML) compliance efforts by broker-dealers.  See Anti-Money Laundering (AML) Source Tool.

April 16, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NASD Investor Alert on Market Risk

NASD issued an Investor Alert today to remind investors that marketplace risks are just as important to consider when evaluating particular investments as are specific business risks.  NASD's Investor Alert, Market Risk: What You Don't Know Can Hurt You, outlines the various types of market risks investments may be exposed to and describes the steps investors can take to minimize those risks. The Alert explains that common market risks are dependent on the nature of the investment and may involve international, as well as domestic, factors. The Alert is being published for investors around the world through the efforts of the International Organization of Securities Commissions.  The Alert explains that while investors cannot completely avoid market risks, investors can help mitigate certain risks by diversifying their investments - not just at the product or sector level, but also in terms of region (domestic and foreign) and length of holdings (short- and long-term). The Alert also explains that by selecting investments that are less likely to fluctuate with changes in the market, investors can help minimize risks to a certain extent. 

April 16, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (1)

Call for Papers-- UCincinnati 2008 Corporate Law Symposium


Corporate Law Center and Law Review 2008 Corporate Law Symposium

The Dysfunctional Board: Causes and Cures

March 14, 2008

Hewlett-Packard presents a cautionary tale of the damage caused by distrust and dissension within the boardroom.  In fall 2006, Hewlett-Packard became embroiled in a headline-grabbing scandal and disgrace when the media reported that the board had authorized the use of possibly illegal tactics to determine the source of boardroom leaks.  In the resulting publicity, the underlying problem – the breach of the directors’ obligation to maintain the confidentiality of corporate information – was often overlooked.  More recently, Dow Chemical announced that it had fired two senior executives, one of whom is a director, for allegedly engaging in unauthorized talks to sell the company.  In another well-publicized “civil war,” in 2005 Morgan Stanley replaced its CEO and substantially reshaped its board of directors.

  What confluence of events can cause governance at highly-regarded corporations to go awry?   This symposium will explore the causes of dysfunctional boards and attempt to formulate some possible cures.

This is a call for papers.  If you are interested in presenting a paper on any aspect of this topic, please submit a proposal to Barbara Black, Charles Hartsock Professor of Law and Director, Corporate Law Center, University of Cincinnati College of Law.  Submissions should be no more than 5 single-spaced pages and should be sent by e-mail by May 31 to:

Presenters will be reimbursed for reasonable travel expenses to attend the conference, and papers will be published in the symposium issue of the University of Cincinnati Law Review.

Confirmed Speakers:

Lissa Lamkin Broome, Professor of Law, University of North Carolina School of Law

Lawrence A. Cunningham, Academic Dean, Libby Scholar and Professor of Law &  Business, Boston College Law School 

Tamar Frankel, Professor and Michaels Faculty Research Scholar, Boston University School of Law 

Kimberly D. Krawiec, Professor, University of North Carolina School of Law

April 16, 2007 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

SEC Ponders Arbitration of Shareholders' Disputes

SEC staff is considering an option to require shareholders to arbitrate their disputes with corporations instead of bringing litigation, one of the recommendations pushed in the recent studies urging deregulation of the capital markets.  According to the Wall St. Journal, this would "realign" the balance of power between shareholders and managememt "at a time when that balance has tipped increasingly toward shareholders." (Huh -- when did that happen?)  Such a proposal may be part of a package that would give shareholders the right, under some circumstances, to nominate candidates to the board of directors.  See WSJ, SEC Explores Opening Door To Arbitration

April 16, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Bidders Say They Will Raise Price for Clear Channel

The private equity firms looking to buy Clear Channel Communications have said that they will raise their $26 billion bid and may offer shareholders a small piece of the deal.  With the shareholder vote scheduled for April 19, some institutional shareholders have said the price was too low, and Glass Lewis recommends rejection of the offer.  See NYTimes, Suitors Raise Bid for Clear Channel; WSJ, Clear Channel Suitors Make Late Push.

April 16, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Banks and Private Equity Firms Will Buy Sallie Mae

Sallie Mae, the largest education lender, will be sold to a consortium consisting of 2 banks and 2 private equity firms for $25 billion.  The banks will commit to up to $200 billion of financing so that the company can continue to make low-cost student loans if access to federal and other funds dries up.  Newspapers note that deal highlights a new trend of private equity firms going into regulated industries.  See NYTimes, Negotiators Say Sallie Mae to Be Sold for $25 Billion; WSJ, Sallie Mae Will Be Sold to Banks, Investment Funds for $25 Billion.

April 16, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, April 15, 2007

Sherwin on Mutual Fund Reform

The Cost-Benefit Analysis of Financial Regulation: Lessons from the SEC's Stalled Mutual Fund Reform Effort, by EDWARD SHERWIN, United States District Court, Eastern District of New York, was recently posted on SSRN.  Here is the abstract:

This paper explores the reasons for and the implications of the failure of the Securities and Exchange Commission to engage in meaningful cost-benefit analysis of its proposed rulemakings. While most government agencies are required by statute or executive order to demonstrate that their major policy decisions increase societal welfare, the SEC is relatively free of such constraints. As a result, the Commission has, in many instances, promulgated regulations whose benefits do not clearly exceed their costs. Focusing on three rules issued in response to recent mutual fund scandals, including the controversial fund-governance rules struck down by the D.C. Circuit, this paper explores how the failure to utilize the methods of cost-benefit analysis harmed the rulemaking process. While this paper is ultimately agnostic on the merits of the regulations discussed, it concludes that the SEC's failure to explain its actions in economic terms undermines the credibility of those regulations in the eyes of Congress, the courts, and the public.

April 15, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Perspective on The Past Week's Stories

SEC's Chairman Cox announced a significant policy change this week -- in enforcement actions that potentially involve corporate penalties, the SEC staff must get preapproval from the full Commission before initiating settlement discussions.  In turn, Cox promised that proposed settlements would get a fast-track approval from the Commission.  He discounted any suggestion that the pre-approval process would lead to lower penalties.  The SEC has in recent months apparently been bogged down and has not yet signed off on some important settlements involving backdating stock options.

Two stories we expect to hear more about in coming weeks -- the sudden firings of two longtime senior executives (one a director) of Dow Chemical for engaging in unauthorized LBO talks and DaimlerChrysler's talks with potential buyers of Chrysler, which apparently exclude Kirk Kerkorian, who publicly announced his interest.

Finally, the much-publicized insider trading trial of former Qwest Communications CEO Joseph Nacchio wrapped up this week and goes to the jury.

April 15, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Merck Securities Fraud Action Dismissed as Time-Barred

The Federal District Court in New Jersey this week dismissed a securities fraud class action brought by purchasers of Merck stock charging that the company had lied about the safety of its drug VIOXX, finding that the claims were time-barred.  Because the first complaint was filed Nov. 6, 2003, the applicable date was Oct. 9, 2001 (Because the action was brought after SOX became law, the court applied the 2 year limitations period.)  Applying the Third Circuit's "inquiry notice" standard, the court found an "overwhelming" amount of information ("storm warnings") by that date that Merck may have been deceiving the public about the drug's safety, including a New York Times article where Merck admitted the drug may increase the risk of heart attacks, an FDA Warning Letter and product liability lawsuits.  In the face of this information, the burden shifted to the plaintiffs to show that they conducted an investigation.  The court rejected plaintiffs' arguments that they could rely on management's reassurances.  Following 3d Circuit precedent, the district court noted that the duty to investigate is greater where the plaintiffs are direct investors in the company, as opposed to mutual fund investors.  See In re Merck & Co. Sec. Litig., 2007 WL 1100820 (D.N.J. 4/12/07).

April 15, 2007 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Annus on 10b-5 Scheme Liability

Scheme Liability Under 10(B) of the Securities Exchange Act of 1934, by TAAVI ANNUS, University of Missouri at Columbia - School of Law, was recently posted on SSRN.  Here is the abstract:

In private securities litigation, plaintiffs often turn against entities who participated in various ways in the securities fraud of the issuer. However the Supreme Court held in 1994 that there is no private right of action against parties aiding and abetting securities law violations under § 10(b) of the Securities Exchange Act of 1934. In the last few years, plaintiffs have tried to avoid this limitation by using a theory called “scheme liability.” This paper provides an overview of the recent cases from lower courts where plaintiffs have tried to utilize the theory. The paper shows that scheme liability is applied in cases involving very different fraudulent practices and against actors with very different functions. Due to this wide range of circumstances, it is probably inappropriate to formulate a single test or rule for deciding scheme liability cases. Instead, courts should approach each case separately, based on the type of defendant and the type of claim.

April 15, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (1)