August 10, 2007
SEC Efforts Against Ponzi Schemes
The SEC reports today on three enforcement actions against Ponzi or other fraudulent schemes targeted at elderly and retired investors -- a reminder that an important and perhaps under-publicized part of SEC enforcement goes toward attempts to stamp out these blatant frauds that continue to appeal to unsophisticated and naive members of the investing public. They are:
(1) A fraudulent foreign currency option scheme that collected more than $11 million from over 100 investors. The creator of this Ponzi scheme was described by the SEC as a twice-convicted felon, with four decades of securities fraud, who embarked on this venture shortly after release from prison.
(2) A fraudulent offer and sale of Secured Debt Obligations (SDOs) that raised more than $55 million from investors.
(3) Fraudulent sales of mining claims that guaranteed 7-9% annual revenues from mining operations, but in reality was a Ponzi scheme that raised over $20 million from over 100 investors.
Campos's Departure May Doom Shareholder Access Proposal
The speculation this morning is what impact SEC Campos's announced resignation will have on the SEC's proposal to give shareholders greater access to the management proxy to elect directors. Last month the SEC released for public comment two completely different versions of a rule, both with a 3-2 vote. Commissioner Campos, along with fellow Democratic Commissioner Nazareth, supported a rule that would allow 5% shareholders to propose bylaw changes that would allow shareholders' nomination of directors, while Republican Commissioners Atkins and Casey supported a rule that would not allow shareholders to propose election-related matters. Commissioner Cox voted in favor of both proposals and subsequently said he favors alllowing shareholder access. With the departure of Commmissioner Campos, the proposal allowing access would not seem to have the necessary votes. WSJ, SEC's Democrats to Step Down; WPost, SEC's Senior Democrat to Leave As Vote on Investor Rights Nears.
SEC Looks at Securities Firms' Subprime Assets
The SEC is examining the books of the major securities firms and banks to make sure that they are not hiding losses in subprime-mortgages, according to the Wall St. Journal. The concern is that they may not be using consistent methods in marking down the value of subprime assets and may not be marking down their own portfolios as aggressively as the portfolios held by customers such as hedge funds. WSJ, Seeking Hidden Losses,Regulators Comb Books Of Wall Street Titans.
August 9, 2007
General American Life Insurance Co. Settles Late Trading Charges
The SEC announced a settled enforcement action against General American Life Insurance Company and a former senior vice president, William C. Thater, for their roles in a late trading scheme. General American is a St. Louis-based insurance company and subsidiary of MetLife, Inc. General American will pay a civil penalty of $3.3 million and Thater will pay disgorgement, prejudgment interest and civil penalties totaling $163,137 to settle charges that Thater permitted and General American failed to prevent late trading of mutual funds underlying one of General American's variable insurance products. The payments will be distributed to the affected funds. The Commission's order finds that Thater, 52, of Danbury, Conn., entered into a written agreement that gave a New York family exclusive late trading privileges in mutual funds underlying the private placement life insurance policies the family purchased from General American for approximately $20 million.
SEC Commissioner Campos Announces Resignation
SEC Commissioner Roel C. Campos announced that he intends to leave the Commission in a month's time and plans to return to the private sector. Currently serving his second term, Mr. Campos was first appointed by President George W. Bush and confirmed by the U.S. Senate as a Commissioner in August 2002. Mr. Campos established a reputation as a strong advocate for investors and was the first Hispanic Commissioner.
SEC Files Financial Fraud Charges Against Former Nicor Officers
The SEC announced the filing of a civil injunctive action against former senior officials of Nicor, Inc., a major Chicago-area natural gas distributor, alleging financial fraud lasting from 1999 to 2002. The SEC's complaint alleges that former Chairman, CEO and President Thomas Fisher, former CFO and Executive Vice-President Kathleen Halloran, and former Treasurer and Vice-President George Behrens engaged in or approved improper transactions, and misrepresented Nicor's gas inventory in order to meet earnings targets and increase the company's revenues under a performance-based utility rate plan. As a result of the manipulative scheme, Nicor materially overstated its reported income for the years ending 2000 and 2001, and for each of the quarters within those years and the financial statements filed with those reports. The Commission's action seeks injunctive relief, disgorgement, civil penalties, and officer and director bars against Fisher, Halloran and Behrens.
Nicor previously consented to the entry of a court order enjoining it from violating the antifraud and reporting provisions of the federal securities laws and ordering that it pay a $10 million civil penalty.
Take-Two's Former GC Sentenced in Backdating Scandal
Kenneth Selterman, former general counsel at Take-Two Interactive Software, was sentenced to three years probation for his role in the backdating stock options scandal at that company. He previously admitted that he provided false information to Nasdaq about employee stock options. NYTimes, Former Take-Two Official Is Sentenced in Backdating Case
Refco Trustee Sues Private Equity Firm for Ignoring Signs of Fraud
The bankruptcy trustee for Refco, the failed commodities firm, is suing Thomas H. Lee, the private equity firm that took Refco public shortly before its collapse in 2005. The complaint charges that Lee ignored red flags and concealed its extensive knowledge of serious problems at the firm in its haste to take the company public. Investors lost more than $1 billion; prosecutors charge Philip Bennett, Refco's former CEO, with engineering the fraud the led to Refco's collapse. The complaint alleges that after an informant told Lee that previous losses had been covered up, it declined KPMG's suggestion of an audit that would have exposed the fraud and instead accepted Bennett's assurances that there were no problems. Lee denies the allegation and says that it was a victim of the fraud. A few weeks ago, Lee filed suit against Mayer Brown, the law firm that represented Refco in the LBO. NYTimes, Bankruptcy Trustee Sues Big Investor in Refco; WSJ, Refco Litigation Trust Sues Private-Equity Firm.
Istithmar Prevails in Bidding War Over Barneys
Barney New York, the fashion icon owned by Jones Apparel Group, is a much desired company. Istithmar, a private equity firm that is an arm of the Dubai government, raised its bid to $942 million ($117 million more than its original offer) in response to the competing offer from Fast Retailing, a Japanese clothing conglomerate. Although Fast Retailing had until 5 p.m. today to raise its offer, it announced that the price was too high for it. NYTimes, Original Suitor Sweetens Its Barneys Offer to $942 Million; WSJ, Fast Retailing Pulls Out Of Bidding War for Barneys.
August 8, 2007
SEC Adopts Amendments to Reg SHO, Re-Proposes Others
The SEC has adopted amendments to Rules 200 and 203 of Regulation SHO, intended to further reduce fails to deliver in certain equity securities by eliminating the grandfather provision of Regulation SHO. The amendments also modify the close-out requirement for fails to deliver resulting from sales of threshold securities pursuant to Rule 144 and update the market decline limitation referenced in Regulation SHO.
The SEC also issued a release re-proposing amendments to Rule 203 of Regulation SHO, intended to further reduce fails to deliver in certain equity securities by proposing to eliminate the options market maker exception to the close-out requirement of Regulation SHO. In addition, the release proposes amendments to Rule 200 that would modify the long sale marking requirements of Regulation SHO to require that broker-dealers marking a sale as "long" document the present location of the securities being sold.
SAC Award Surveys Available
The Securities Arbitration Commentator is well known among securities arbitration practitioners for its statistical information on arbitration awards. It has now posted 50 Award Surveys on its website that are available, for free, to the general public.
Japan Supreme Court Upholds Poison Pill
Japan's highest court confirmed that Japanese companies can install poison pill defenses, a blow to New York-based Steel Partners Japan Strategic Fund's tender offer for Bull-Dog Sauce Co. The court said it did not violate the principle of equal treatment of shareholders. WSJ, In Japan, Activists May Find Poison.
August 7, 2007
Former CEO of Brocade Communications Convicted on Backdating Charges
A jury found Gregory Reyes, former CEO of Brocade Communications, guilty on 10 felony counts relating to the backdating of stock options from 2000 to 2004. The trial was closely watched because it is the first criminal case involving backdating, and the defendant's defense was principally that as a non-accountant and non-lawyer Reyes did not understand that backdating was illegal. WSC, Former Brocade CEO Is Found Guilty On All Counts in Backdating Case.
SEC Adopts Amended Rule 105 of Regulation M
The SEC adopted a final rule that amends Rule 105 of Regulation M, the anti-manipulation rules concerning the offering of securities. Rule 105 governs short sales effected prior to pricing the offering. The amendment is tailored to end the progression of strategies designed to conceal the covering of restricted period short sales with offered securities. The amendment eliminates the covering element of the former rule.
SEC Announces Senior Summit
SEC Chair Cox announced that the agency will hold its second annual Seniors Summit on Sept. 10, 2007, at the SEC’s Washington, D.C., headquarters. The event will further examine how regulators, community organizations, and others can increasingly coordinate efforts to protect older Americans from abusive sales practices and investment fraud. AARP, the Financial Industry Regulatory Authority (FINRA), and the North American Securities Administrators Association (NASAA) will be other leading participants at the Seniors Summit.
“Americans are living far longer than ever before. As the Baby Boomers reach retirement age, more than 10,000 Americans are turning 60 every day – and the net worth of older Americans is growing to historic proportions. That has made seniors the prime targets for scam artists and securities swindlers. So the SEC is attacking the problem of senior fraud from all angles, with aggressive enforcement efforts, targeted rules and examinations, and investor education focused not only on seniors but their caregivers and pre-retirement workers as well,” Chairman Cox said.
First Bancorp Settles Financial Fraud Charges Involving Subprime Mortgages
First Bancorp, a NYSE-listed, Puerto Rico-based bank holding company, settled SEC charges that its former senior management concealed the true nature of more than $4 billion worth of transactions involving "non-conforming" residential mortgages. Non-conforming mortgages have income verification and credit history standards that are generally more flexible than those required for sale or exchange under Fannie Mae and Freddie Mac programs and can constitute subprime mortgages. First BanCorp consented to being permanently enjoined from violating the antifraud, reporting, books and records and internal control provisions of the federal securities laws and paying an $8.5 million civil penalty.
The Commission's complaint charged First BanCorp with aiding and abetting violations of the federal securities laws by Doral Financial Corporation, another NYSE-listed, Puerto Rico-based bank holding company. Doral Financial previously consented to the entry of a court order enjoining it from violating the antifraud, reporting, books and records and internal control provisions of the federal securities laws and ordering that it pay a $25 million civil penalty. According to the complaint, First BanCorp, which purportedly purchased the non-conforming mortgages from Doral Financial, profited from the transactions by earning more than $100 million in net interest income. Doral Financial, which purportedly sold the mortgages to First BanCorp, improperly recognized income on the transactions. According to the Commission, the mortgage-related transactions were not true sales under generally accepted accounting principles because senior management of Doral Financial agreed orally and in emails to extend the recourse provision from the 24-month period included in the written agreements to full recourse for the duration of the mortgages.
Morgan Stanley Fined for Excessive Mark-ups in Bond Sales
FINRA fined Morgan Stanley DW Inc. (now known as Morgan Stanley & Co. Incorporated) $1.5 million and ordered the firm to pay more than $4.6 million in restitution for rule violations relating to the sale of corporate bonds to retail customers at excessive prices. The firm was cited for charging excessive mark-ups in more than 2,800 transactions and for having an inadequate supervisory system for monitoring the pricing of corporate fixed income securities sold to customers. The firm's corporate bond trader, who was responsible for setting the excessive prices, Kenneth S. Carberry III, was fined $40,000 jointly and severally with the firm and suspended in all capacities for 15 business days.
FINRA -- Get Used to It!
The new website is up, and NASD Regulation is now FINRA -- the Financial Industry Regulatory Authority. Check out its website.