Securities Law Prof Blog

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

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Saturday, July 21, 2007

SEC Takes Down Website Link on Business with Terrorist States

Just a month ago, the SEC posted on its website a list of companies that do business with countries that are considered state sponsors of terror, with links to the descriptions in the corporate documents.  The S.E.C. list named 29 companies whose 2006 annual reports had mentioned doing business in Cuba, 57 in Iran, 8 in North Korea, 35 in Sudan and 24 in Syria.   “No investor should ever have to wonder whether his or her investments or retirement savings are indirectly subsidizing a terrorist haven or genocidal state,” the S.E.C. chairman, Christopher Cox, said at the time. 

Last night, however, the SEC took down the tool, after a storm of criticism about its accuracy.  Companies complained  that they were listed even if they disclosed minimal contacts that had been discontinued.  Both the Chair and ranking Republican member of the House Financial Services Committee wrote to the SEC and criticized the list as unfair and ill-conceived. While the SEC said it was temporarily suspending the site, it added that it might conclude that it was not necessary after all.  NYTimes, S.E.C. Rethinks Lists Linking Companies and Terrorist States; WSJ, SEC Halts Watch List Tool.

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

Friday, July 20, 2007

SIFMA Urges Continuance of Rule 12b-1 Fees

SIFMA filed a comment letter with the SEC, following up on the agency's June 19 Roundtable Discussion on Rule 12b-1 fees, where Chair Cox questioned whether there was a continuing justification for allowing use of fund assets to promote sales activities.  SIFMA stated that it would be a major mistake to discontinue the fees because they play an important role in opening up the financial markets to investors.

July 20, 2007 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Updates on Options Backdating Crimes

The former general counsel and former chief accounting officer at Take-Two Interactive Software pleaded guilty yesterday to falsifying business records in connection with the backdating of stock  options in 2001-02.  Its former CEO pleaded guilty to similar charges in February.  NYTimes, 2 Ex-Officials of Take-Two Plead Guilty.  At the trial of former Brocade Communications Systems CEO Gregory Reyes on backdating, the judge said might not rule on whether to dismiss the charges until after the jury returns a verdict.  Previously, the judge asked the prosecutors about their evidence that would establish that Reyes understood the accounting rules.  NYTimes, Judge Still Weighing Brocade Charges.  In addition, the former CEO of Engineered Support Systems and his son were indicted on backdating charges, a week after the SEC filed civil charges against them.  WSJ, Suit Claims Monster's Ex-Chief Had Backdating Role.

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

Senate Committee Investigates "Certified Senior Advisers"

A Senate committee is investigating the practices of some insurance companies of holding out their sales agents as having special expertise in advising senior citizens about their financial needs.  The committee asked insurance companies and training companies to provide their materials.  A few weeks ago the New York Times ran a feature story on how an agent could become a "certified senior adviser" with minimal instruction.  Massachusetts regulators have cracked down on this practice, and the NASD has posted warnings on its website.  NYTimes, Senate Panel Investigates How Insurers Sell to Elderly.

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

Thursday, July 19, 2007

Agenda for SEC July 25 Open Meeting

Agenda for SEC Open Meeting -- Wednesday,  July 25:

     1. The Commission will consider whether  to  approve  the  Public Company Accounting Oversight Board's 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 3525, and Conforming Amendments.

     2. The Commission will consider whether to adopt rule  amendments to Exchange Act Rule 12b-2 and Rule 1-02  of  Regulation  S-X  to define the term "significant deficiency."

     3. The Commission will consider  whether  to  publish  a  Concept Release to  solicit  public  comment  on  allowing  U.S  issuers, including investment companies subject to the Investment  Company Act of 1940, to prepare financial statements in  accordance  with International  Financial  Reporting  Standards  as  published  in English by  the  International  Accounting  Standards  Board  for purposes  of  complying   with   the   Commission's   rules   and regulations.

     4. The Commission will consider whether to propose amendments  to the proxy rules under the Securities Exchange  Act  of  1934  for operating  and   investment   companies   regarding   shareholder proposals, disclosure about shareholder  proponents,  shareholder communications, and related matters.

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

Chair Cox on Integrity in the Municipal Market

Integrity in the Municipal Market, by Chairman Christopher Cox, U.S. Securities and Exchange Commission, Los Angeles, California, July 18, 2007:

In this speech, Chair Cox points to the size of the municipal bond market today; nearly $2.5 trillion of municipal securities are outstanding.  In addition, 36% of all municipal securities are owned directly by households.  He goes on to say:

One would think, given the size and importance of this market, and the prevalence of individual investors and older Americans in municipal trading and investing, that investors in municipal bonds can rest assured that their interests are fully protected by the same high standards that operate everywhere else in the U.S. capital markets. Not exactly. And not even close

Our recent SEC enforcement actions in the municipal area, together with the expert observations of Commission staff, indicate an urgent need to improve the quality and the availability of disclosure documents and financial information for municipal securities. We need to take immediate steps to improve governmental accounting, and to insure that issuers make financial information available more quickly. And we need to increase the understanding and involvement of issuer officials in the disclosure process, so that process becomes subject to appropriate disclosure controls and procedures.

Chair Cox goes on to suggest a number of legislative solutions to provide better investor protection.

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

Former SmartForce Officers and Former Outside Auditior Settle SEC Accounting Charges

The SEC today brought settled enforcement actions against four former executives at SmartForce PLC, the company's former outside auditor, and its former audit engagement partner in connection with the software company's overstatement of revenue by $113.6 million and net income by $127 million during a 3½-year period ending in mid-2002.  According to the complaint, the financial statements of SmartForce, which has since merged into SkillSoft PLC., failed to comply with generally accepted accounting principles (GAAP) by, among other things, recognizing revenue improperly from various types of transactions in which the company engaged, including multiple-element arrangements, reciprocal transactions, and reseller agreements.

The Commission instituted both administrative and civil actions against former SmartForce Chief Financial Officer David C. Drummond and two former vice presidents of finance, Patrick E. Murphy and John P. Hayes. The Commission filed an injunctive action against Patrick T. Chew, former controller of SmartForce's subsidiary in the United States ("SmartForce US"). The four former SmartForce executives will pay a total of $2.3 million in disgorgement, interest, and penalties.

The Commission also instituted proceedings against Ernst & Young Chartered Accountants and the lead partner on the SmartForce engagement, Denis O'Hogan, for engaging in improper professional conduct in connection with multiple audits and periodic reviews of SmartForce's financial statements. Ernst & Young Chartered Accountants were censured and agreed to pay $725,000, an amount equal to its audit fees.

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

Wednesday, July 18, 2007

SEC Settles Accounting Fraud Charges at Quovadx

On July 17, 2007, the SEC filed a civil action in federal court in Colorado charging Lorine Sweeney, the former President and Chief Executive Officer of Quovadx, Inc., and Gary Scherping, Quovadx's former Chief Financial Officer, with participating in a fraudulent scheme to overstate Quovadx's software licensing revenue in 2003. The Commission also instituted settled enforcement proceedings against Quovadx, a Colorado software company, two of its former officers and a high-ranking salesperson, and the principals of three of its customers.

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

SEC Obtains Consent Judgment Against Alleged Spammer

On July 16, 2007, a consent and final judgment was entered against Samuel Aaron Meltzer, whom the SEC identifies as a professional internet spammer. Meltzer consented to the entry of the final judgment, without admitting or denying the allegations of the Commission's complaint.  According to the complaint, Meltzer, in return for compensation from stock promoters and issuers, sent millions of unsolicited emails and created numerous websites to promote various penny stocks. In order to conceal his identity — and to avoid the detection of web hosts seeking to stop Internet spam — Meltzer operated under at least thirty different assumed Internet identities.

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

SEC Files Accounting Fraud Charges Against Former OM Group Officers

On July 18, 2007, the SEC filed civil fraud charges against James Materna, the former chief financial officer of OM Group, John Holtzhauser, the former controller of OM Group, and Paul Venesky, the former controller of OMG Americas, a subsidiary, for accounting fraud.   According to the Complaint,  the improper accounting practices were done with the intent to manage earnings and resulted in the filing of materially false and misleading financial statements. In March 2005, after conducting an internal investigation, OM Group issued a restatement reducing its retained earnings for the relevant period by $64 million as a result of the fraud.  On July 18, 2007, the Commission issued a settled cease-and-desist order that finds that OM Group violated the antifraud, reporting, books and records, and internal controls provisions.

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

SEC May Charge Dow Jones Director in Inside Trading Case

This is the week for news about Dow Jones.  First, the board announced its approval of the deal to sell the company to News Corp, after months of intermittent negotiations.  Now, following up on an earlier story about inside trading in Dow Jones stock, the SEC notified David Li, a Dow Jones director, that it plans to bring civil charges against him.  The SEC previously charged a Hong Kong couple who made profitable trades in Dow Jones stock before the public announcement of Murdoch's interest; Mr. Li has business and social ties to the father of the wife.  WSJ, SEC to File Civil Charges Against Dow Jones Director.

July 18, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

DOJ Corporate Fraud Convictions Top A Thousand

The DOJ announced that its corporate fraud task force, in five years, has obtained 1,236 fraud convictions, including 214 CEOs and 53 CFOs, and has collected over $1 billion in fraud-related forfeitures.  WSJ, Prosecutors Feel Pressure To Curb Aggressive Tactics .

July 18, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Whole Foods CEO Says He's Sorry

Whole Foods CEO John Mackey said he's sorry for his error in judgment in annonymously posting email messages for seven years, and the company confirmed that the SEC is conducting an investigation.  It also said that the company is conducting its own investigation in the matter.  NYTimes, Whole Foods Chief Apologizes for Posts. WSJ, Whole Foods Sets Probe as CEO Apologizes.

July 18, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Cox Wants Strengthening of Government Accounting Standards Board

SEC Chair Cox is expected, in a speech today, to call on Congress to strengthen the Government Accounting Standards Board, which sets accounting standards for state and local governments, in light of the size, importance and complexity of the municipal bond market.  San Diego recently settled charges with the SEC that it failed to disclose completely information about its health-care and pension obligations.  Among the Board's weaknesses:  compliance with its standards is voluntary, and it has no independent funding source.  In addition, public access to governmental financial information is limited.  Chair Cox is also expected to announce that the SEC will review brokerage firms for its compliance with rules banning "pay to play," or the practice of making political donations to get municipal bond business.  NYTimes, S.E.C. Chief Seeks New Clout for Board Overseeing States; WSJ, SEC Chief Wants to Boost Oversight of Muni Market.

July 18, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Dow Jones Board Approves Sale

The Dow Jones board approved the sale of the company to News Corp yesterday.  None of the sixteen directors dissented from the vote, although two members of the Bancroft family did not vote at all -- one left early, another abstained from voting, as did another director.  News Corp. announced its board would authorize the agreement if enough Bancroft family members promptly signed voting agreements to assure shareholder approval.  The Bancroft family will meet Monday to consider the deal.  NYTimes, Dow Jones Board Reaches Deal With Murdoch; WSJ, Dow Jones Board Approves Sale.

July 18, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 17, 2007

Former SEC Commissioners Support Plaintiffs in Scheme Liability Case

Three former SEC Commissioners have filed a brief with the Supreme Court, asking permission to file a brief on behalf of plaintiffs in the Charter Communications case involving "scheme liability" under rule 10b-5.  Last month the U.S. Solicitor General did not file a brief on behalf of the plaintiff-investors, as the SEC requested.  Treasury Secretary Paulson opposed the SEC's position, and President Bush agreed with the Treasury Secretary.  It remains to be seen whether the Solicitor General will file a brief in support of the defendant's position.  The former SEC Commissioners are represented by NYU Professor Arthur Miller.  See WPost, Former SEC Officials Enter Securities Case

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

Dow Jones and News Corp. Reach Tentative Agreement

After months of on-and-off negotiations, the Wall St. Journal announced a tentative agreement for the sale of Dow Jones to News Corp. at the $5 billion price Rupert Murdoch offered last April.  The full board will consider the agreement Tuesday.  Whether enough members of the Bancroft family, which as a group control the company, will vote in favor of the sale remains "too close to call," according to insiders.  WSJ, Dow Jones, News Corp. Set Deal.

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

Law Suit Charges Teachers Professional Association Breached Duty to Members in Recommending Annuities

Gretchen Morgenson reports that the National Education Association, the teachers' professional association, is being sued in Washington State Court, charged with breaching its duty to its members by recommending high-cost annuities in exchange for millions of dollars from two financial firms, National Life Insurance Co. and Security Benefit Group.  Annuities are sold to retirees on the basis of their guaranteed income, and the investors frequently do not understand that their high expenses diminish their return.  The plaintiffs charge that because of their recommendations the NEA became a retirement plan sponsor under ERISA and thus owed their members a fiduciary duty.  See NYTimes, Lawsuit Says Teachers Are Overcharged on Annuities.

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

Citigroup Settles New Jersey Investigation

Citigroup agreed to pay $978,000 to settle a New Jersey investigation that two of its brokers, located in Short Hills, placed their customers, including many elderly investors, in unsuitably risky investment strategies, including short selling.  See NYTimes, Citigroup Agrees to Settlement in New Jersey.

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

Monday, July 16, 2007

The Costs of Defending Securities Crime

Judge Kaplan, in his opinion dismissing the federal charges against 13 defendants in the KPMG tax shelter case, gives us some staggering numbers about what a high-powered defense in a securities criminal case costs: "These have included costs of $14.9 million (Kumar -- Computer Associates), $17.7 million and $8 million for each of two trials (Kozlowski -- Tyco), $24 million (Shelton -- Cendant), $25 million (Rigases -- Adelphia), $32 million (Scrushy -- HealthSouth), and $25 and $70 million (Lay and Skilling, respectively -- Enron)."  All of these, the judge noted, "involved far fewer documents and far shorter trials than this case will require."

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