Securities Law Prof Blog

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

Friday, August 24, 2007

FINRA Releases Report Card on Securities Arbitration

Editor's Note to FINRA's Arbitration Policy Task Force Report—A Report Card:

In 1994, NASD, now the Financial Industry Regulatory Authority (FINRA), assembled a group of outside experts, led by former Securities and Exchange Commission Chairman David S. Ruder, to conduct a thorough examination of the nature of securities arbitration and recommend a roadmap for the future. It was the first comprehensive assessment of securities arbitration since the Supreme Court decisions in the late 1980s that held predispute arbitration agreements enforceable.

The task force report, Securities Arbitration Reform, recommended comprehensive proposals to revamp securities arbitration. The recommendations in the report formed the framework that currently guides FINRA's dispute resolution policy and rulemaking. FINRA has implemented nearly every key recommendation and has worked extensively to preserve and respect the basic elements of a fair and efficient dispute resolution system. FINRA's Arbitration Policy Task Force Report—A Report Card traces the actions taken in response to those recommendations.

August 24, 2007 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

NYSE Euronext Stock Troubles

NYSE Euronext, under CEO John Thain's leadership, appears to be doing everything right -- trading in record numbers on the NYSE, expansion into European markets through Euronext, plans to acquire a US derivatives market soon.  So why is the stock price down 23% this year?  Perhaps the short-term costs of the expansion efforts are making investors nervous and not sufficiently appreciative of long-term gains speculates the Wall St. Journal.  WSJ, Win-Lose for the NYSE.

August 24, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Insider Trading Cases Against Married Couples On The Rise

The New York Times reports on a phenomenon this Blog has pointed out previously -- the number of recent SEC enforcement actions against husband and wife couples involving inside trading.  The SEC says it has brought seven this year, compared with one last year.  Some of the cases involve the couple working together; others involve misappropriation of confidential information by one spouse.  Reasons probably include the increased number of opportunities during the buyout era, two-income couples, and the natural tendency of people to talk with their spouses.  NYTimes, Rise in Insider-Trading Cases Shows the Perils of Pillow Talk.

August 24, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, August 23, 2007

SEC Brings Enforcement Action Against Ponzi Scheme Targeting Senior Citizens

In a release written to promote its actions to protect senior citizens from fraud, the SEC announced that it asked a federal district court in Sacramento, Calif., to grant its request for an order temporarily prohibiting further sales of the products, freezing the assets, and appointing a receiver to take control of operations in order to manage and preserve remaining investor funds.  The SEC alleges that Donald Neuhaus of Redding, Calif., his daughter Kimberley Snowden, and their company Secure Investment Services, Inc., orchestrated the Ponzi scheme that falsely promised safe, secure and profitable interests in life insurance policies known as "viaticals" while failing to disclose the dire financial condition of the investment venture. Many of the investors were elderly and invested their retirement savings. The Commission also alleges the father-daughter fraudsters pocketed $700,000 for their personal use while the scam was on the verge of collapse.

The SEC's actions against frauds targeting retirees and other older investors will be a focus of the Commission's second annual Seniors Summit in Washington, D.C., on Sept. 10. The Summit also will include the release of findings from regulatory examinations of 110 firms offering "free lunch" investment seminars aimed at seniors.

According to the Commission's complaint, Neuhaus and Snowden sold shares of life insurance policies, calling them "bonded life settlements." They persuaded investors to buy the securities by representing that their money would be used to purchase and pay the necessary premiums on the life insurance policies. They promised returns up to 125 percent when the person insured by the policy died.   

August 23, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Textron Settles SEC Kickback Charges in UN Oil for Food Program

The SEC today filed Foreign Corrupt Practices Act books and records and internal controls charges against Textron Inc., alleging that from approximately 2001 through 2003, two of Textron's David Brown French subsidiaries authorized and made approximately $650,539 in kickback payments in connection with its sale of humanitarian goods to Iraq under the U.N. Oil for Food Program. The kickbacks were made in the form of "after-sales service fees" for which no bona fide services were actually rendered. The Program was intended to provide humanitarian relief for the Iraqi population, which faced severe hardship under international trade sanctions. Iraq was allowed to purchase humanitarian goods through a U.N. escrow account. However, according to the complaint, the kickbacks paid by Textron's subsidiaries bypassed the escrow account and were instead paid by third parties to Iraqi-controlled accounts. The contracts submitted to the U.N. did not disclose that the cost of the illicit payments were included in the inflated contract price. The Complaint also alleges that Textron's subsidiaries made illicit payments of $114,995 to secure thirty-six contracts in the United Arab Emirates, Bangladesh, Indonesia, Egypt, and India from 2001 to 2005.

Textron, without admitting or denying the allegations in the Commission's complaint, consented to the entry of a final judgment permanently enjoining it from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, ordering it to disgorge $2,284,579 in profits, plus $450,461.68 in pre-judgment interest, and to pay a civil penalty of $800,000. Textron is also ordered to comply with certain undertakings regarding its Foreign Corrupt Practices Act compliance program. Textron will also pay a $1,150,000 fine pursuant to a non-prosecution agreement with the U.S. Department of Justice, Fraud Section.

August 23, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Bank of America Invests in Countrywide

Bank of America invested $2 billion in troubled mortgage company Countrywide Financial in the form of convertible preferred shares which, if converted, would give Bank of America a 16-17% stake in Countrywide.  Countrywide is the largest mortgage company, originating or funding about one out of six mortgages. Countrywide disclosed it has commitments to repurchase some of the mortgages it sold to investors if their terms were modified to help homeowners.  NYTimes, Assurances on Buybacks Cost a Lender; WSJ, Bank of America Invests $2 Billion In Countrywide.

August 23, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Rumors of a Sale of Bear Stearns

Is Bear Stearns on the auction block?  Hit hard by the collapse of the subprime mortgage industry, the drop in its stock price could make it a bargain.  Possible suitors include HSBC Holding, Deutsche Bank, Barclays, Bank of America, Wachovia or an arm of the Chinese government, which earlier this summer bought a 10% stake in The Blackstone Group.  WSJ, Bear Stearns Buzz Swirls.

August 23, 2007 in News Stories | Permalink | Comments (2) | TrackBack (0)

Brokers Earn Fewer Commissions

U.S. brokers' commissions fell for the first time in three years -- $10.3 billion for the twelve months ended first quarter 2007, as compared with $10.8 billion for the comparable twelve month periods in 2005 and 2006.  WSJ, Brokers' Commissions Fall.

August 23, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 22, 2007

Hedge Fund Principal Settles Late Trading Charges

The SEC settled late trading charges against Michael Carl Hoffman, a principal of a  hedge fund known as Ilytat (formerly  based  in  San  Francisco).  The SEC alleged that Ilytat engaged in late trading of
mutual fund shares through Bear Stearns from about 2000 through  2002 and that Ilytat's clearing broker, Bear Stearns,  provided Ilytat with direct access to its mutual fund order entry system, which
allowed Ilytat to late trade, or  place  orders  to  buy,  redeem,  or exchange mutual fund shares after the 4:00 p.m.  Eastern  time  market close while still receiving  the  current  day's  mutual  fund  price.
The Order requires Hoffman to pay a civil monetary penalty of  $100,000. 

August 22, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Posts Transcript of Rule 12b-1 Roundtable

The SEC has posted on its website the transcript for the Division of Investment Management's Rule 12b-1 Roundtable discussion held on June 19, 2007.  The program consisted of 4 panels:  Historical Perspective, Current Uses of 12b-1 Plans, the Costs and Benefits of 12b-1 Plans, and Looking Ahead.

August 22, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Underwriter Backs Out of Start-Up IPO

The $80.5 million IPO for Accoona is on hold, after the underwriter withdrew from the deal after completing its due diligence.  Although Accoona has been associated with some prominent figures, most notably former President Clinton, it has a checkered business record and was started by a promoter with a shady past.  Marc Armand Rousso pleaded guilty to stock fraud in this country and was convicted of stock fraud in France.  The company describes its business as an Internet search engine powered by artificial intelligence technology, but its revenues come principally from online electronic stores.  NYTimes, Misgivings Spoil Plans of Start-Up.

August 22, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Is Any Lawyer Worth $1,000 Per Hour?

$1,000 per hour is the billing rate for some of the elite lawyers, as law firms are breaking the previous barrier, convinced that clients will not balk at a four-digit billable hour rate.  In London, where things are always more expensive, billable rates (when converted) can exceed $1,500.WSJ, Lawyers Gear Up Grand New Fees.

August 22, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Discount Brokerages Talking About Merger

TD Ameritrade and E*Trade are reportedly having merger discussions.  If the deal took place, the combined company would pass Charles Schwab in the number of customers' accounts -- TD Ameritrade has about 6.3 million, E*Trade has about 4.7 million, and Charles Schwab has about 6.9 million.  WSJ, TD Ameritrade In Merger Talks With E*Trade.

August 22, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 21, 2007

Advisory Committee Discussion Paper Out for Public Comment

The SEC Advisory Committee on Improvements to Financial Reporting is seeking public comments on a discussion paper prepared by the Committee Chair, Robert Pozen.  The Committee was formed this July to examine the U.S. financial reporting system, with a view toward providing specific recommendations as to how unnecessary complexity in the system can be reduced and how the system could be made more useful to investors.

August 21, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

More Information on SEC Action Against Sentinel

The SEC has posted to its website the litigation documents in connection with its emergency action against Sentinel Management Group, in which the SEC alleges improper commingling, misappropriating, and leveraging clients' securities without their consent.  The Wall St. Journal reported this morning that the judge denied the SEC's application for an asset freeze preventing the distribution of the proceeds of a sale of assets.  The SEC reports here that the Court entered an order requiring Sentinel to provide a full accounting of client assets and Sentinel’s assets and liabilities within five days. In addition, the Court ordered Sentinel to immediately produce certain brokerage and bank documents in order to begin the process of determining client portfolio holdings and ownership of securities.

August 21, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Cox Applauds Mutual Funds' Use of Interactive Data

Chair Cox, as we all know, is an enthusiastic advocate for interactive data (XBRL).  Today he announced that several mutual funds have voluntarily submitted risk/return summary information from their prospectuses using interactive data, which the SEC authorized in June.  According to Chair Cox, "When most mutual funds provide their risk/return summary information using dynamic data that's searchable and comparable on the Web, investors will be able to comparison shop among thousands of funds at the click of a mouse. This is a potentially rich new source of investing information for retail investors who need it most."  "We commend the mutual funds that have demonstrated their commitment to investors by leading the way to interactive data," Chairman Cox added.

August 21, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Sentinel with Fraud

More on the SEC charges of fraud against Sentinel Management Group, a money manager with many futures clearing firms as clients, that broke last evening.  Last week Sentinel announced that it had to halt redemptions because of the liquidity crisis in the credit markets.  Instead, the SEC alleges, the firm has been suffering losses for several months because of "undisclosed use of leverage, commingling and misappropriation of clients' funds."  The SEC alleges that Sentinel commingled at least $460 million of clients' securities with its own accounts and used some of the clients' securities to secure a $321 million loan, on which Sentinel is now in default.  Yesterday the SEC and CFTC took opposing sides on Sentinel's request for judicial approval to distribute the proceeds of the sale of assets to Citadel Investment to Sentinel's clients.  The SEC said that there should be a freeze until the court determined whether some clients would receive more than their fair share of the assets.  The CFTC said the futures clearing firms needed the funds.  The court allowed Sentinel to distribute most of the assets.  WSJ, Sentinel May Have Used Liquidity Crunch as Cover.

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

Looking For Warren Buffett

Will Warren Buffett come to the rescue of beleagered Wall St.?  "I can spend money faster than Imelda Marcos when things are right," the Wall St. Journal quotes him as saying, and he has $50 billion in cash to back up those words.  Although Buffett won't talk about possible acquisitions, speculation is that he will find bargains aplenty to his liking, including assets of the mortgage Countrywide Financial Corp.  WSJ, After the Tumult, Is It Buffett Time?

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

Monday, August 20, 2007

SEC Brings Fraud Charges Against Sentinel

The SEC brought fraud charges against Sentinel Management Group, a money manager, and sought to prevent distribution of the proceeds of investment assets sold to Citadel Investment Group for $312 million.  Last Friday Sentinel filed for bankruptcy protection, after clients sued Sentinel for selling the assets too cheaply.  WSJ, Sentinel Faces SEC Fraud Charges.

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

Nasdaq Wants to Sell LSE Stake

Nasdaq announced its plans to sell its 30% stake in the London Stock Exchange, putting an end to its unsuccessful efforts to acquire it.  WSJ, Nasdaq Seeks to Sell Its 30% Stake in LSE.

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