Securities Law Prof Blog

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

Tuesday, September 11, 2007

Corporate Law Center Database on Commercial Courts/Dockets

In 2007 Chief Justice Thomas J. Moyer of the Ohio Supreme Court announced that he had appointed a Task Force on Commercial Dockets to develop a pilot project to assess the best method of establishing commercial civil litigation dockets in Ohio’s common pleas courts.  The UC Corporate Law Center volunteered its assistance to Task Force and, to that end, has compiled information on other states’ efforts to create specialized business or commercial courts.  The information is posted on the CLC website in two forms: (1) a spreadsheet and (2) summaries detailing information on each state’s use of specialized business/commercial courts.

The Corporate Law Center hopes that this information will be a useful resource for everyone who is interested in the development of business/commercial courts throughout the nation, including policy makers, academics, attorneys and users of the judicial system.  We plan to update it regularly and welcome the submission of additional information.  Please send questions, comments, corrections and other information directly to me at

September 11, 2007 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Big Money in Chinese Surveillance

The New York Times profiles China Security and Surveillance, a current favorite on Wall St., which installs and operates surveillance systems for Chinese police and other customers.  The company has raised large sums of money from US private equity funds and soon will be listed on the NYSE.  Much of the company's profits comes from installing 24/7 surveillance at internet cafes, street corners and other gathering sites for student protesters. NYTimes, An Opportunity for Wall St. in China’s Surveillance Boom.

September 11, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Investment Adviser in KPMG Tax Shelter Case Pleads Guilty

The government's criminal case against promoters of bogus tax shelters got a boost yesterday when David Amir Makov, an investment adviser, pleaded guilty to one count of tax evasion and provided information that is expected to help the government's prosecution of three former employees of KPMG and an attorney.  (Over the summer the judge dismissed charges against many other defendants.)  In addition, the information may prove helpful in the government's investigation of Deutsche Bank's involvement.  Most pertinently, Makov provided an explanation on how Blips worked.  The judge had previously criticized the government for not explaining their workings.  NYTimes, Guilty Plea Seen Aiding Tax Shelter Prosecution.

September 11, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Former Head of MX Factors Arrested

Richard M. Harkless, former head of MX Factors Ltd., was arrested and charged with operating a Ponzi scheme that took more than $39 million from investors.  The government alleges that MX pretended to make short-term secured loans to government contractors and promised returns as high as 12% in 60 days.  California regulators shut down MX in 2003.  WSJ, Former Head of MX Factors Is Charged With Fraud.

September 11, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Where is the Money Coming From?

Everyhone's wondering where KKR will get the money for its mega-deals.   Yesterday the financial press reported that KKR had to make concessions about performance criteria in order to borrow the money for the First Data buyout. (WSJ provides more details on this today: KKR Buyout Terms May Set the Standard.)  Today the Washington Post quotes James Angel, associate professor of finance at Georgetown, asking:  Could [the TXU acquisition] be the bridge too far for KKR?  The private equity firm and the challenges it faces are profiled in this story as KKR looks to raise the financing for its two big deals, First Data and TXU, the Texas utililty.  Meanwhile, KKR is moving forward with its own IPO and faces other difficulties -- a DOJ probe into possible anti-competitive behavior among private equity firms and possible legislation to increase taxes paid by private equity firms.  WPost, KKR Buyouts to Test the Stretched Credit Market.

September 11, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Memoirs of a Boiler Room Salesman

Jordan Belfort, who served 22 months in prison for defrauding investors when he controlled the boiler room known as Stratton Oakmont, is now an author.  In his memoir, The Wolf of Wall St., he recalls his days as a "Master of the Universe," high on drugs as he talked gullible folks out of their life savings.  Now he says he's remorseful.  Do we care?  NYTimes, In the Ashes of His Life as a Broker, Inspiration.

September 11, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, September 10, 2007

SEC Approves FINRA Rule On Deferred Variable Annuities' Sales Practices

On September 7, the SEC approved a new FINRA rule that is intended to enhance broker-dealer sales practices with respect to purchases and exchanges of deferred variable annuities.  The rule has four primary components. First, it imposes a suitability obligation tailored to the characteristics of deferred variable annuities. Second, it contains standards for principal review and requires principals to review transactions before the customer's application is forwarded to the issuing insurance company for processing. Third, the rule requires members to establish and maintain specific written supervisory procedures reasonably designed to achieve compliance with the standards set forth in the proposed rule. Fourth, it requires members to develop and document specific training policies or programs designed to ensure compliance with the requirements of the rule and salespersons' understanding of the material features of deferred variable annuities.

The Commission also issued an exemptive order allowing FINRA members to hold customer funds for no more than seven business days while completing the required principal review under the new rule without becoming fully subject to Exchange Act Rule 15c3-3 and being required to maintain higher levels of net capital in accordance with Rule 15c3-1.

While the new rule applies to sales to all investors and not just to seniors, because deferred variable annuities are often marketed to investors looking toward retirement, it has been a particular focus in the context of protecting senior investors against financial fraud.

September 10, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Announces Two Regulatory Sweeps Relating to Senior Fraud

At the SEC's Seniors Summit, FINRA announced the initiation of two new major regulatory sweeps intended to ensure that securities firms are using appropriate sales practices in their dealings with seniors and individuals nearing retirement. Since January 2005, FINRA has completed approximately 100 formal disciplinary actions involving or related to seniors. Currently, FINRA has about 70 open investigations that involve seniors or senior-related issues.

The first new sweep announced today is examining whether brokers are using so-called "professional" designations to mislead and defraud investors. FINRA is concerned about the proliferation of professional designations, particularly those that require no meaningful training or specialized knowledge but suggest an expertise in retirement planning or financial services for seniors. The sweep also will help inform possible rulemaking on the use of designations. A recent survey conducted for the FINRA Investor Education Foundation found that a quarter of senior investors surveyed were told that their investment professional was specially accredited to advise them on senior financial issues. Of those investors, half said they were more likely to listen to the professional's advice because they held a special designation.

In the second of the new sweeps, FINRA is looking at early retirement seminars conducted by securities firms designed to entice older workers to liquidate their retirement funds and invest them with a specific firm or representative. In the past year, FINRA has fined two firms a total of $5.5 million and ordered the firms to pay $26 million in restitution related to early retirement investment schemes aimed at Exxon and Bell South employees.  To address the risks to near-retirees, FINRA also is launching a new campaign aimed at informing human resource professionals and unions about the risks of flawed or even fraudulent early retirement seminars. FINRA will offer a Seminar Scan program that will review the information related to a financial seminar sent to a human resource department, since HR departments often influence employee attendance and receptivity to these seminars and strategies.

FINRA currently has two other regulatory sweeps ongoing in the area of protecting seniors - one examining the sale of collateralized mortgage obligations targeted at seniors; and a second focused on the sale of life settlements. FINRA recently completed another regulatory sweep, conducted jointly with the SEC and state regulators, into the sales tactics used at "free lunch" seminars.  FINRA Announces Major Regulatory Sweeps at Seniors Summit.

In addition, FINRA issued Regulatory Notice 07-43, FINRA Reminds Firms of Their Obligations Relating to Senior Investors and Highlights Industry Practices to Serve these Customers.

September 10, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Regulators Issue Report on Free-Lunch Sales Seminars at Seniors Summit

The SEC held its second Seniors Summit today, and securities regulators released a joint report summarizing the results of their examinations of "free lunch" investment seminars.  The year-long examination was conducted by the SEC, FINRA and NASAA.  The regulators scrutinized 110 securities firms and branch offices that sponsor sales seminars and offer a free lunch to entice attendees.

The report's key findings (which should come as no surprise) include:

100% of the "seminars" were instead sales presentations.
While many sales seminars were advertised as "educational," "workshops," and "nothing will be sold," they were intended to result in the attendees' opening new accounts and, ultimately, in the sales of investment products, if not at the seminar itself, then in follow-up contacts with the attendees.

59% reflected weak supervisory practices by firms.
While some exams found effective supervisory practices, many examinations found indications that firms had poorly supervised these sales seminars, including failure to review seminar presentations or materials as required.

50% featured exaggerated or misleading advertising claims.
Examples included "Immediately add $100,000 to your net worth," "How to receive a 13.3% return," and "How $100K can pay 1 Million Dollars to Your Heirs."

23% involved possibly unsuitable recommendations.
In 25 of the 110 examinations, examiners found indications that unsuitable recommendations were made, for example, a risky investment recommended to an investor with a "conservative" investment objective, or an illiquid investment recommended to an investor with a short-term need for cash.

13% appeared to be fraudulent and have been referred to the most appropriate regulator for possible enforcement or disciplinary action.
Examiners found indications of possible fraudulent practices in 14 examinations that involved apparent serious misrepresentations of risk and return, possible liquidation of accounts without the customer's knowledge or consent, and possible sales of fictitious investments.

September 10, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

KKR Debt for First Data Acquisition Goes on Sale This Week

In order to finance the debt necessary for its $26.4 billion acquisition of First Data, KKR agreed to a covenant that place performance criteria on the debt.  The sale of the debt is expected to begin this week.  Banks expect to take a loss on the debt due to concerns over the credit markets.  WSJ, KKR Allows First Data Covenant.

September 10, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, September 9, 2007

Heminway on Rule 10b-5 Criminal Actions

Hell Hath No Fury Like an Investor Scorned: Retribution, Deterrence, Restoration, and the Criminalization of Securities Fraud Under Rule 10b-5, by JOAN MACLEOD HEMINWAY, University of Tennessee, Knoxville - College of Law, was recently posted on SSRN.  Here is the abstract:

  This brief article focuses attention on the ineffectual nature of prosecutions of corporations and their insiders - generally, officers and directors—for securities fraud under Rule 10b-5. Specifically, the article begins by briefly summarizing the nature of enforcement actions and related penalties under Rule 10b-5. Next, the article argues that, as currently conceived and executed, criminal enforcement actions under Rule 10b-5 are ineffective as a means of achieving retribution, as deterrents of undesirable behavior, and as enforcement vehicles that vindicate the policies underlying Rule 10b-5. As a means of addressing these criticisms, the article suggests possible enhancements to Rule 10b-5 prosecutions, including more victim involvement in the proceedings. These enhancements, rooted in victims' rights initiatives and restorative justice principles, may better serve societal and regulatory aims.

September 9, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Cunningham on Auditors' Caps

Securitizing Audit Failure Risk: An Alternative to Caps on Damages , by LAWRENCE A. CUNNINGHAM,
George Washington University Law School, was recently posted on SSRN.  Here is the abstract:

  For several decades, policy analysts have debated whether to establish ex ante caps on damages that audit firms face for violating state or federal law in their audits of public companies. A common argument supporting caps is a claimed inability of audit firms to obtain requisite external liability insurance and need to resort to self-insurance programs. This Article evaluates this claim by assessing existing insurance resources and inquiring into potential additional insurance devices. The assessment suggests that, for auditors, self-insurance is better than external insurance so that the claim does not necessarily support damages caps. Even if the claim were valid, the inquiry concerning additional insurance suggests superior alternatives by using previously-discussed financial statement insurance, to tailor coverage to risks of ordinary audit failure, and the novel innovation of insurance securitization to pool and distribute risks of catastrophic audit failure through capital markets.

September 9, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)