June 16, 2007
Accounting Firm Liable for Failing to Detect Fraud
A Florida jury has found accounting firm BDO Seidman liable for gross negligence in failing to detect a fraud at E.S. Bankest LLC, a Miami financial services firm. The accounting firm is potentially liable for investors' losses of $170 million and punitive damages. See WSJ, BDO Is Found Guilty Of Negligence in Fraud.
June 15, 2007
ALJ Dismisses Late-Trading Charges Against J.B. Oxford General Counsel
An Administrative Law Judge dismissed the SEC's charges against Scott G. Monson, the General Counsel of J.B. Oxford Holding and its brokerage subsidiary, relating to the firm's permitting favored clients to engage in late trading in violation of Rule 22c-1. Although the judge found that the evidence that the firm violated Rule 22c-1 was overwhelming, he held that the SEC did not prove that Monson should have known that his conduct would result in late trading violations. He had no actual knowledge of the Rule and he had no assigned duty or delegated responsibility to research legal implications of a trading deadline. Thus, he was not a cause of the firm's violations.
SEC Staff Issues Compliance Alerts
The staff of the Securities and Exchange Commission today released its first ComplianceAlert letter to help chief compliance officers of SEC-registered firms learn more about common deficiencies and weaknesses that SEC examiners are finding during compliance examinations. This broader sharing of recent examination findings can benefit compliance officers and help them to proactively fine-tune their compliance and supervisory controls.
The SEC's Office of Compliance Inspections and Examinations conducts compliance examinations of SEC-registered investment advisers, investment companies, broker-dealers, and transfer agents to determine whether firms are in compliance with federal securities laws and rules, and to help correct deficiencies and weaknesses in compliance and supervisory controls. The SEC staff's ComplianceAlert letter, available on the SEC Web site, summarizes select areas that SEC examiners have recently reviewed during examinations, describes issues that were found, and encourages firms to review compliance in these areas and implement improvements as appropriate. SEC staff plans to issue additional ComplianceAlert letters on the SEC Web site. See New "ComplianceAlerts" to Help SEC-Registered Firms Identify Deficiencies and Improve Compliance Programs, Press Release 2007-116.
NYSE Fines Morgan Stanley for Churning in Guardian Accounts
The NYSE fined Morgan Stanley $500,000 for failing to supervise brokers who engaged in excessivet trading in guardian accounts for the benefit of injured children and elderly clients. Seven accounts generated over $500,000 in commissions. See WSJ, Morgan Stanley to Pay Fine in Broker Case.
The Lure and Abuses of Variable Annuities
The Wall St. Journal has a front-page article on the aggressive marketing of variable annuities to the worldwide aging population. The article focuses primarily on the difficulties insurance companies (because of their insurance component, variable annuities are a hybrid of an insurance product and a security) have in predicting the longevity of their customers and how much in reserves to set aside for these payments. Midway through the article, however, the dirty little secret of variable annuities is examined. These are very expensive and very convoluted investments that are being oversold by brokers, frequently to persons for whom they are not a suitable investment. NASD has brought more than 350 disciplinary actions for improper sales practices in selling variable annuities. There is currently before the SEC a proposed rule to require advisors to receive training in variable annuities and for managers to review all variable annuity contracts. See WSJ, As Boomers Retire, Insurers Aim to Cash In.
June 14, 2007
Broker-Dealer Legal and Compliance Issues
Speech before the SIFMA Conference on Regulatory Focus on Broker-Dealer Legal and Compliance Issues, by Mary Ann Gadziala, Associate Director, Office of Compliance Inspections and Examinations, U.S. Securities and Exchange Commission, Chicago, Illinois, June 7, 2007. In her speech, Ms. Gadziala covered: enhancements to our examination program; examination priorities and challenges; and regulatory coordination.
SEC Sues Former SEC Attorney in Pump & Dump Scheme
The SEC today filed suit against the principals of a micro-cap technology company as well as two securities lawyers for their role in an illegal "pump and dump" scheme. The Commission alleges that Arizona attorney David B. Stocker and Texas attorney Phillip W. Offill, Jr. assisted Michigan-based AVL Global, Inc., in a scheme to dump millions of shares of AVL Global stock into the marketplace without any public disclosure of the company's failing operations. In the same action, the Commission also charged Peter W. Fisher and his son, N. Tyler Fisher, the principals behind AVL Global, for their roles in the scheme.
According to the Commission's complaint, Stocker and Offill, a former enforcement attorney in the Commission's Fort Worth office until 1999, devised a scheme to deliver millions of AVL Global shares to Peter Fisher - an Ontario resident with a criminal record who secretly controlled the company through his son - as well as various family members, business associates and stock promoters. The Commission alleges that, in late 2005, Peter Fisher and Tyler Fisher then caused AVL Global to issue a series of misleading press releases that touted the company's business prospects when, in reality, AVL Global had essentially abandoned its business and ceased operations. Peter Fisher, who controlled the vast majority of the company's stock, dumped his shares and netted approximately $160,000.
The Commission further alleges that Stocker and Offill arranged a series of sham transactions that helped the company avoid registering the stock sales with the Commission and disclosing to the public AVL Global's true financial position. According to the complaint, the defendants caused AVL Global to issue approximately 15 million shares of stock to bogus investment companies controlled by Offill or Stocker. Stocker falsely claimed that these companies had purchased the stock for "investment purposes" and thus the sales were exempt from registration; however, within days of the supposed investments, the Stocker and Offill entities transferred all the stock to Peter Fisher and his associates, who could then commence dumping the stock into the market.
The Commission's complaint, filed in the United States District Court for the Eastern District of Michigan, alleges that the defendants violated the registration provisions of the federal securities laws, and that Peter and Tyler Fisher violated the antifraud provisions as well. The Commission seeks injunctive relief, disgorgement of ill-gotten gains, civil monetary penalties, and other relief.
Without admitting or denying the allegations, AVL Global president Tyler Fisher, of Ontario, Canada, agreed to settle the charges against him. Tyler Fisher agreed to pay a $25,000 civil penalty and consented to an order barring him from serving as an officer or director of a publicly-traded company or participating in penny stock offerings for five years.
NASD-NYSE Proposed Guidance on E-Mail
As mentioned earlier, the NYSE and NASD have released for public comment a Proposed Joint Guidance Regarding the Review and Supervision of Electronic Communications, which sets forth principles for member organizations to consider when developing supervisory systems and procedures for electronic communications that are reasonably designed to achieve compliance with securities laws and SRO rules. Comments are due by July 13, 2007.
SROs will Issue Guidance on E-Mail
A joint NYSE-NASD committee will issue proposed guidelines on how securities firms should monitor written electronic communications both inside and outside the firm, as well as regulate employees' personal use of cellphones, text-messaging etc. A concern that the guidelines, while expressed as best practices, will lead to SRO enforcement actions for violations. See NYTimes, Wall Street to Get Guidelines on E-Mail.
AIG Sues Greenberg, Smith
In response to a shareholders' demand, and after a special investigation, AIG is taking over a litigation filed as a shareholders' derivative suit against its former CEO Maurice "Hank" Greenberg and former-CFO Howard Smith for more than $1 billion in damages resulting from AIG's accounting scandal that was exposed by then- New York Attorney General Spitzer. Greenberg's lawyer, David Boies, says it's "old news." See WSJ, AIG Sues Greenberg, Smith For Over $1 Billion in Damages.
Four Big Banks Indicted in Parmalat Scandal
Citigroup, Deutsche Bank, Morgan Stanley, and UBS will go on trial in Italy on charges of market manipulation in connection with the December 2003 collapse of Parmalat, the largest bankruptcy in Europe. The trial will begin in January. According to the indictment, the firms secured financing through the sale of bonds knowing that the financials had been falsified and was in financial difficulty. The firms can be convicted if the prosecutors can prove the firms did not have policies in place to prevent their employees from committing the crimes. According to the New York Times, the statute of limitations is seven and a half years, which the Times says means that "in most cases, the trial will have to be concluded by the end of 2010 or the charges will be dropped. With the trial not scheduled until January, and with a long appeals process likely if there are convictions, several legal experts said that the statute of limitations might come into play." In Europe isn't the relevant period for limitations the filing of the charges? See NYTimes, Trial Ordered in Italy for 4 Big Banks in Parmalat’s Failure, WSJ, Four International BanksTo Face Trial in Milan.
CME Will Increase Its Bid for CBOT
Chicago Mercantile Exchange will increase the value of its $10 billion bid for Chicago Board of Trade by offering a special dividend for CBOT shareholders, in response to the competitive bid by IntercontinentalExchange. While ICE's offer is valued higher than CME's, the CBOT board has not wavered in its support for CME, and their merger received antitrust clearance this week. See WSJ, Chicago Mercantile Exchange To Sweeten Bid for CBOT.
Frank on Bush on Scheme Liability
Frankly, I think the flap about the Solicitor General's not following the SEC's request to file an amicus brief on the side of plaintiffs in Stoneridge is the poverbial tempest in a tea pot(does anyone really think this Supreme Court will recognize scheme liability?), but President Bush gave his views and now Barney Frank, Chair of the House Financial Services Committee, finds it "troubling" that the President expressed an "economic argument." See WPost, Frank Critical Of Bush On Suits.
Richard Breeden, Hedge Fund Owner
A year ago, Richard C. Breeden, former SEC chair and former court-appointed monitor for Worldcom, started his own hedge fund. How's he doing? Pretty well, according to the Washington Post. See Still Keeping An Eye on Trouble in Boardroom.
June 13, 2007
What a Surprise...
SIFMA opposes extending Rule 10b-5 liability through the "scheme liability" theory. Here is its press release:
The Securities Industry and Financial Markets Association (SIFMA) today issued the following statement in response to the pending Supreme Court case, Stoneridge Investment Partners v. Scientific-Atlanta and Motorola. The Court’s ruling in the case could determine whether shareholders can collect damages from investment banks, attorneys, accountants, and other third-parties who did business with a company that engaged in fraud. Such an outcome would unnecessarily generate significant additional litigation, costing billions of dollars to American businesses, and putting US companies at a competitive disadvantage to their foreign counterparts.
“Expanding the scope of class action lawsuits to include third-parties would send large ripple effects throughout the US economy,” said Marc Lackritz, SIFMA president and CEO. “The inclusion of third-parties would cause litigation costs to skyrocket at the expense of the American economy and its workers, by raising the costs for companies in the US and deterring foreign investment in our economy.”
“President Bush got it right yesterday in reiterating the administration’s policy of not expanding the scope of private shareholder litigation against third-parties,” added Lackritz. “As the President said, this is not a case concerning investor protection; it’s about overzealous litigation. The SEC already has all the necessary regulatory tools to recoup lost money for investors.”
Attorney Settles Insider Trading Charges Involving Client's Stock
The SEC today filed a settled civil injunctive action against David A. Schwinger, an attorney and former managing partner of Katten Muchin Rosenman LLP's (KMR) Washington, D.C. office. Schwinger was charged with engaging in illegal insider trading by purchasing shares of Vastera, Inc. (Vastera). The complaint alleges that Schwinger purchased Vastera common stock on Nov. 5, 2004, on the basis of material, nonpublic information that an acquisition of Vastera was imminent. The complaint further alleges that Schwinger learned of the impending merger while interviewing Vastera's Chief Counsel, who was then seeking to be hired by KMR as a partner. In responding to Schwinger's inquiries during the interview process about the Chief Counsel's reasons for leaving Vastera, the Chief Counsel allegedly disclosed to Schwinger no later than Oct. 27, 2004, that Vastera's acquisition was imminent. On the basis of that material, nonpublic information, the complaint alleges that Schwinger purchased 10,000 shares of Vastera common stock on Nov. 5, 2004, at an average price of $1.70 per share. The complaint further alleges that Schwinger knew that Vastera was a KMR client at the time of the purchase. According to the complaint, Vastera announced on Jan. 7, 2005, that it was being acquired by JP Morgan Chase Bank N.A. The complaint alleges that Schwinger knew, or was reckless in not knowing, that he purchased Vastera shares based on material, nonpublic information obtained during the interview process and in breach of a fiduciary duty owed to his firm, KMR. Schwinger is alleged to have imputed profits of $13,027. Without admitting or denying the allegations in the complaint, Schwinger has consented to the entry of a final judgment that: (i)permanently enjoins him from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; (ii) requires him to disgorge $13,027 in illicit gains and $1,940 in prejudgment interest thereon; and (iii)orders him to pay a civil penalty of $26,054.
SEC Votes Amendments to Reg SHO
The Securities and Exchange Commission today voted to take additional steps to better safeguard investors and protect the integrity of the markets during short selling transactions by closing loopholes in Regulation SHO and further reducing persistent failures to deliver stock by the end of the standard three-day settlement period for trades. The full text of the detailed releases concerning these items will be posted to the SEC Web site as soon as possible. For a summary, see SEC Votes on Regulation SHO Amendments and Proposals; Also Votes to Eliminate "Tick" Test.
Proposed NYSE Rule Would Bar Broker Votes in Uncontested Elections
A proposed NYSE rule change currently before the SEC for approval would define even uncontested directors' elections as "non routine" and bar the current practice of brokers' voting shares when their customers do not give them instructions. Currently, brokers usually vote the shares in favor of management, and in close contests this could make the difference. The Wall St. Journal discusses the ramifications of the proposed rule change; see 'Broker Votes':Opponents May Win One.
Director/Lawyer Controversy at Topps
A disagreement over a proposed buyout of Topps has revived an old debate -- should a company's outside lawyers sit on the board? Jack Nusbaum, director and partner at Willkie, Farr & Gallagher, supports the buyout; another director, Arnaud Ajdler, managing director of an investment firm that is a large shareholder, opposes it and criticizes Nusbaum's dual role, saying that Willkie Farr would receive $2 million in legal fees if the deal goes through. See WSJ, Dual Role of Topps Director Revives Old Conflict Debate.
ICE Continues Fight for CBOT
The Chicago Board of Trade's acquisition by Chicago Mercantile Exchange is moving forward after antitrust clearance, but IntercontintentalExchange has not given up. It revised its bid, already about $1.1 billion more than CME's, to give CBOT shareholders an oppotunity to receive cash instead of stock and said it would file proxy materials opposing CME's acquisition. See NYTimes, Suitor Revises Bid for Chicago Board; WSJ, IntercontinentalExchange Upgrades Its Bid for CBOT.