Securities Law Prof Blog

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

Wednesday, June 20, 2007

Dow Jones Board Steps Up

The Dow Jones board of directors says it will take over negotiations over the future of the company.  Reportedly, it is frustrated by the slowness of the Bancroft family's discussions with Murdoch over the independence of the newspaper.  See WSJ, Dow Jones Board Takes Over Talks.

June 20, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Will Consider Proposal to Allow Non-US Companies to Use Int'l Accounting Rules

The SEC voted to put out for public comment a proposed rule that would allow non-US companies to report its financial information using international accounting rules instead of GAAP.  See WSJ, SEC Backs Plan to Accept International Accounting.

June 20, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Former Enron CFO Settles SEC Charges

The SEC charged former Enron Treasurer and Chief Financial Officer Jeffrey McMahon with violating the antifraud provisions of the federal securities laws and with aiding and abetting Enron's violations of the reporting and record keeping provisions. McMahon simultaneously settled with the Commission without admitting or denying the allegations in the Complaint. As part of the settlement agreement, which is subject to the approval of the U.S. District Court, McMahon has agreed to a permanent injunction and to be barred from acting as an officer or director of a public company for five years. In addition, McMahon will pay disgorgement and prejudgment interest in the amount of $150,000 and a civil penalty of $150,000.

Specifically, the Commission's Complaint alleges that McMahon participated in a fraudulent transaction involving the "sale" of an interest in Nigerian power generating barges to Merrill Lynch that allowed Enron to improperly report $12 million in earnings in the fourth quarter of 1999. The Complaint also alleges that while serving as Enron's Treasurer from April 1998 through March 2000, McMahon made false and misleading statements to the national credit rating agencies regarding Enron's financial position and cash flow. In addition, the Complaint alleges that McMahon made additional false and misleading statements to the rating agencies after he became Enron's Chief Financial Officer on October 24, 2001 through Enron's bankruptcy filing in December 2001.

June 20, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Schapiro Announces New Name for Consolidated Regulatory Arm

Mary Schapiro, CEO and Chair of NASD, announced that the name of the consolidated regulatory arm will be Securities Industry Regulatory Authority or SIRA.  She says her first choice was Vanguard, but that name was taken.  See Remarks, The Exchequer Club, Washington, DC, June 20, 2007.

June 20, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Expedia, Home Depot Announce Stock Buybacks

Two big stock buybacks were announced yesterday:  Expedia and Home Depot.  Expedia will buy back one-third of its outstanding shares; after the buyback, Chair Barry Diller will control 41% of the stock.  Home Depot increased its buyback program by $22.5 billion, financed by the sale (to a consortium of private equity firms) of a supply unit that was associated with its former CEO Nardelli, cash on hand, and sale of $12 billion in notes.  See NYTimes, Big Buyback of Shares Is Set by Expedia and  Home Depot Sells a Unit That Never Fit.

June 20, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Profile of Alleged Pakistani Insider Traders

Did Hafiz Muhammed Zubair Naseem, a Credit Suisse analyst living in suburban New York, tip his friend, Ajaz Rahim, a self-described "rupee billionaire" made rich by the post Sept. 11 Pakistani bull market, or is the government's case "plainly inferential," as Judge James C. Francis IV recently said?  According to the government, on nine occasions Naseem told Rahim about US companies that were soon to announce that they were takeover targets, including, in February, TXU.  The New York Times article gives us an insight into the business world in Pakistan.  See NYTimes Insider Trading Can Now Touch Many Corners of the World.

June 20, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 19, 2007

SIFMA Study in Support of Rule 12b-1 Fees

The Securities Industry and Financial Markets Association (SIFMA) has prepared a white paper on the history and purpose of Rule 12b-1 under the Investment Company Act of 1940.  Rule 12b-1 permits mutual funds to use fund assets to finance the distribution of their shares.  The white paper has been provided to the Securities Exchange Commission (SEC) as background material for panelists participating in a roundtable event on Rule 12b-1 being held today in Washington D.C. by the SEC.

“While we appreciate the SEC’s efforts to undertake a review of Rule 12b-1, we ultimately believe that the rule is important to both firms and investors,” points out Ira Hammerman, senior managing director and general counsel for SIFMA.  “For broker-dealers and other intermediaries, 12b-1 plans support important marketing, advertising, and administrative and shareholder servicing functions.”

The report is available at the SIFMA website.

June 19, 2007 in Professional Announcements | Permalink | Comments (1) | TrackBack (0)

SEC Settles Insider Trading Case Against Former Sadia Director

The SEC filed a settled civil injunctive action in the United States District Court for the District of Columbia against Romano Ancelmo Fontana Filho, a former Director at Sadia S.A. ("Sadia"), a Brazilian food products company. The Commission charged Fontana with engaging in illegal insider trading both by purchasing securities of Perdigão S.A. ("Perdigão") prior to Sadia's tender offer for Perdigão and by selling the same securities of Perdigão prior to Sadia's subsequent revocation of the tender offer. Without admitting or denying the allegations in the Commission's complaint, Fontana has consented to the entry of a final judgment imposing injunctive and monetary relief and barring him from acting as an officer or director of a publicly traded company for a period of five years.  The Commission's complaint alleges that Fontana learned of the contemplated tender offer on April 26, 2006, through a conversation with the chairman of Sadia's board of directors. According to the complaint, Fontana subsequently purchased 18,000 American Depositary Shares ("ADSs") of Perdigão at an average cost of $19.12 per ADS through three transactions executed between July 5 and 12, 2006, on the basis of material, nonpublic information concerning the proposed acquisition, and in breach of a duty of trust and confidence he owed to Sadia. On Sunday, July 16, 2006, Sadia announced the tender offer for Perdigão. The following day, the price of Perdigão ADSs increased to $24.50, up $4.25 (21%) from the previous closing price. On the morning of July 21, 2006, Fontana participated by conference call in a meeting at which Sadia's board of directors decided to revoke the tender offer. As the complaint alleges, after this meeting — but before Sadia announced the revocation later that day — Fontana sold all 18,000 ADSs of Perdigão at an average selling price of $26.85 per ADS. By selling in advance of the public announcement of the revocation, the complaint alleges, Fontana again engaged in illegal insider trading, in breach of a duty of trust and confidence he owed to Sadia. The complaint alleges that Fontana realized ill-gotten profits of $139,114.50 from his unlawful trading.

June 19, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Wife with Trading In Information Obtained from Husband

We've seen a number of insider trading cases involving married couples, and here's another one:

On June 18, the SEC filed a settled  civil  action  in  federal district court against Terese Dearmin (Dearmin) and her father Richard Harris (Harris), alleging violations of  federal  securities  laws  in   separate instances of insider trading in the securities of U.S. Home & Garden, Inc. (USHG) ahead of the public  announcement  of  its  merger with Ionatron, Inc. (Ionatron).  The Commission's complaint  alleges  that  Dearmin  learned  from  her husband, the former CEO of a privately-held company  called  Ionatron, that it would merge with USHG approximately one  month  prior  to  the Feb. 25, 2004, public  announcement  of  the  merger.  Dearmin  tipped Harris, her  mother,  and  her  business  partner,  according  to  the complaint, and all three purchased USGH stock in advance of the merger    announcement.  Without admitting or denying the allegations in the complaint, Dearmin and Harris consented to entry of a final  judgment  that  imposes  an  injunction, disgorgement of profits, and penalties.

June 19, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Things Not To Say Out Loud

The Federal Trade Commission, in its suit to block the Whole Foods-Wild Oats merger, says that the Whole Foods CEO told his board the merger was necessary to "avoid nasty price wars" among natural foods grocers.  See WSJ, Whole Foods CEO Says Merger With Wild Oats Avoids Price War.

June 19, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Big Deals Provides Lots of Opportunities for Insider Trading

Are there widespread systematic abuses of trading on inside information involving private equity deals?  The Wall St. Journal profiles KKR's $25.6 billion buyout of First Data Corp. as it explores this question.  Senate Arlen Specter and Federal Reserve Board Chairman Ben Bernanke call for crack-downs on misuse of inside information.  See WSJ, Secrets to Keep:Insider Trading Hits Golden Age.

June 19, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Corporate Executives on Trial

The first criminal case involving backdating stock options began in San Francisco against Gregory L. Reyes, former CEO of Brocade Communications.  It is expected to be a test of what the government must prove to establish that backdating is a securities fraud crime.  See NYTimes, Trial Starts for Former Chief in Options-Backdating Case; WSJ, Trial Opens in Brocade Backdating Case.

Meanwhile, in Chicago, the three-month trial of Lord Conrad Black, accusing of looting Hollinger International, is wrapping up.  The prosecutor presented closing arguments, and the case is expected to go to the jury soon.  See NYTimes, Closing Arguments Begin in Black Trial.

June 19, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, June 18, 2007

SEC Solicits Additional Comments on Auditing Standard 5

The SEC  published  a  notice  of  additional  solicitation  of comments on proposed rules (PCAOB-2007-02)  submitted  by  the  Public Company Accounting Oversight Board which were previously published  on June 12, 2007. These rules establish requirements that apply  when  an auditor is engaged  to  perform an  audit  of  the  effectiveness  of internal control over financial reporting that is integrated  with  an audit of the financial statements (Auditing Standard No. 5,  An  Audit of Internal Control Over Financial Reporting That Is  Integrated  with An Audit of Financial Statements), a related independence  rule  (Rule 3525, Audit Committee Pre-Approval of Non-Audit  Services  Related  to Internal Control Over Financial Reporting), and conforming  amendments to its auditing standards. Publication of  the  notice  of  additional solicitation of comment is expected in the Federal Register during the week of June 18. The comment period will close on July 12, 2007.

June 18, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Supreme Court Holds Securities Laws Prevent Antitrust Claims Against Underwriters

The Supreme Court (7-1 vote) held, in Credit Suisse First Boston v. Billing, that the federal securities laws prevent private antitrust claims against several underwriters of IPOs in connection with tie-in arrangements that required firms to purchase additional securities in the aftermarket.  The decision reversed the Second Circuit.   Justice Thomas dissented.

June 18, 2007 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Sunday, June 17, 2007

Study on SRO Arbitration of Customers' Disputes

Edward S. O'Neal, Securities Litigation and Consulting Group, and Daniel R. Solin, a securities arbitration attorney representing investors, released their report, Mandatory Arbitration of Securities Disputes: A Statistical Analysis of How Claimants Fare, this week.  The report is available at or  Here are the report's major  findings:

The raw win rate for investors in arbitration has dropped from a high of 59 percent in 1999 to 44 percent in 2004. This overall figure includes a lower win rate (39 percent) at the three largest brokerage firms that do business with the largest numbers of investors.

Award percentages reached a high in 1998 of 68 percent and have steadily declined to stabilize at approximately 50 percent in the 2002-2004 time period.

Investors in arbitration were awarded 22 cents on the dollar in 2004 (as a percentage the amount claimed) versus 38 cents on the dollar in 1998.

The larger the award and the brokerage firm involved, the smaller the recovery. Claimants in arbitrations against top 20 brokerage firms face an expected recovery percentage that is approximately 28 percent in claims under $10,000. The expected recovery percentage plunges to approximately 12 percent in claims over $250,000.

Award requests increased significantly over the entire period while average awards remained nearly constant. In 1998, the average award was $56,000 while in 2004 it was $59,000. This 6 percent increase in real awards is dwarfed by the difference in award requests, which rose over 300 percent from $168,000 in 1998 to $540,000 in 2004.

This is a significant research effort that is an important contribution to the literature on the fairness of securities arbitration of customers' disputes.  The authors collected information on NASD and NYSE arbitrations that occurred between January 1995 and December 2004.  Their database consisted of 13,810 arbitration awards, 90% from NASD and the remaining 10% from the NYSE.  Their conclusions about the drop in investors' win rates and the decrease in the percentage recovery are not new information; SRO statistics reveal the same trend.  No previous study, to my knowledge, has focused on correlations between the size of the requested damages and the size of the brokerage firms and the percentage recovery. 

I remain unconvinced, however, that these statistics demonstrate the existence of a serious "repeat player" problem that advantages major brokerage firms.  The problem with any study of awards is that it excludes the great numbers of cases that are settled and do not result in an award.  Thus, we are left with what may ultimately be an unrepresentative sampling.  In addition, any assessment of the fairness of a system without any examination of the merits of the claim and the assessment of damages (an impossible undertaking given the absence of meaningful information in the awards) must necessarily be incomplete.  The authors argue that brokerage firms have an advantage here because they have greater familiarity with the merits of settled claims than do claimants, but most claimants, at least those claimants seeking recovery of large amounts of damages, are represented by experienced claimants' attorneys who are equally knowledgeable about the system.

Finally, the authors' endorsement of the view that SRO arbitration is "a damage containment and control program masquerading as a juridical proceeding" is not supported by their findings and seems overblown.

June 17, 2007 in Securities Arbitration | Permalink | Comments (4) | TrackBack (0)

Corporate Women Scholar's Conference

The Corporate Women Scholar's Conference was held Saturday June 16 at the Seattle University School of Law.  Presenters included Jill Fisch (Fordham), Loss Causation in Securities Fraud; Donna Nagy(Indiana), The Demise of the Fiduciary Principle in Insider-Trading Law; Hillary Sale(Iowa), The Gatekeeping Role of Judges in Approving Settlements; Janis Serra (British Columbia), Legal and Governance Principles in Cross-Border Corporate Group Insolvencies; Cheryl Wade (St. John's), SOX Five Years Later: Calls for Repeal or Rollback, anad What the Public Does Not Know; Lynne Dallas (San Diego), Implications of the Post-SOX Changes in the Composition and Culture of Boards; and Barbara Black (Cincinnati), Should the SEC be a Collection Agency for Defrauded Investors?  Other participants include Renee Jones (Boston College), Elizabeth Nowicki (Tulane), Claire Moore Dickinson (Rutgers/Tulane), Cristine Hurt (Illinois), Faith Kahn (New York Law School).  Many thanks go to Dean Kellye Testy for hosting this wonderful conference at her beautiful law school!

June 17, 2007 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Perspectives on the Past Week's News

The Department of Justice did not file an amicus brief on the side of investors in the "scheme liability" case that the Supreme Court will hear next term, reflecting the division of opinion between the SEC (in favor of plaintiffs) and the Treasury Dept. (in favor of defendants) that President Bush decided, saying the SEC's position was bad policy.  It remains to be seen whether the government will file on behalf of the defendants or sit this one out.  Still waiting for the Tellabs decision ....

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

Sjostrom on PIPEs

PIPEs, by WILLIAM K. SJOSTROM Jr., Northern Kentucky University - Salmon P. Chase College of Law, was recently posted on SSRN.  Here is the abstract:

The Article examines Private Investments in Public Equity (PIPEs), an important source of financing for small public companies. The Article describes common characteristics of PIPE deals, including the types of securities issued and the basic trading strategy employed by hedge funds, the most common investors in small company PIPEs. The Article argues that by investing in a PIPE and promptly selling short the issuer's common stock, a hedge fund is essentially underwriting a follow-on public offering while legally avoiding many of the regulations applicable to underwriters. This “regulatory arbitrage” makes it possible for hedge funds to secure the advantageous terms responsible for the market-beating returns they have garnered from PIPE investments. Additionally, the article details securities law compliance issues with respect to PIPE transactions and explores recent SEC PIPE-related enforcement actions and regulatory maneuvers. The Article concludes that a more measured and transparent SEC approach to PIPE regulation is in order.

June 17, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Barnard on Securities Fraud Professionals

Securities Fraud Professionals, by JAYNE W. BARNARD, College of William and Mary - Marshall-Wythe School of Law, was recently posted on SSRN.  Here is the abstract:

This article examines the phenomenon of securities fraud professionals – the con artists who sell bogus stock on the Internet, orchestrate elaborate pump-and-dump schemes, and create a never-ending array of purportedly “risk free” investment opportunities. Collectively, and in a cruel mockery of capitalism, these offenders extract hundreds of millions dollars from investors every year.

The article explores some of the common characteristics of these offenders, with a particular focus on those who orchestrate fraudulent schemes three, four, or more times in their careers. I theorize that this group – much like sex offenders – are “hard wired” to engage in fraudulent behavior.

I then propose several changes to the Securities and Exchange Commission's approach to these offenders. The escalating use of civil sanctions, and the imposition of multiple “obey-the-law” injunctions, simply are not enough to deal with this population. I also propose a research agenda that would teach us much more about these harmful predators.

June 17, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)