September 22, 2007
SEC Roundtable on Private Securities Fraud Litigation
The Wall St. Journal reports that six law professors have petitioned the SEC to take a leadership role on the issue of private securities fraud litigation, and, in response, the SEC will hold a roundtable on the subject in spring 2008. My own quick search of the SEC website couldl not find this petition, so I ask readers to provide me with a copy of the petition. WSJ, SEC Turning Attention To Shareholder Suits.
KKR and Goldman Sachs Walk out of Harman LBO
Will KKR and Goldman Sach's walking away from the $8 billion LBO of Harman International Industries start a trend? Citing financial conditions within Harman, the buyers invoked the Material Adverse Change Clause (MAC) to back out of the deal. The contract language does not give the buyers much leeway: according to the Wall St. Journal, it states, in part, that the buyers can't walk for issues "generally affecting the consumer or professional audio, automotive audio, information, entertainment or infotainment industries, or the economy or financial, credit or securities markets in the United States or any other country." WSJ, KKR, Goldman Cancel $8 Billion Harman Deal.
September 21, 2007
Securities Class Action Filings Up
A sign of troubled times? See CFO.com, Signs of Life: Securities Suits Rise:
Despite scrutiny and a crackdown on fraud, securities class-action litigation filings are rebounding.
Cox Announces Public Availability for Interactive Financial Report Viewer Source Code
SEC Chairman Christopher Cox announced today that the source code for the Interactive Financial Report Viewer that enables investors to analyze companies’ interactive data filings is now available via its Web site for free use by the market. Chairman Cox also said the SEC will participate in a news conference with XBRL US and others on Tuesday, Sept. 25 in New York to announce a major breakthrough in the introduction of interactive financial reporting.
Interactive data is powered by XBRL, a computer software language that labels companies’ financial and other data with codes from standard lists so that investors and analysts can more easily locate and analyze desired information.
The SEC’s XBRL Voluntary Financial Reporting Program is an initiative to make filings more accessible and understandable to the common investor by allowing public companies to submit documents in eXtensible Business Reporting Language (XBRL) format as exhibits to periodic reports and investment company act filings. The Interactive Financial Report Viewer, first released in December 2006, allows investors to view and analyze the XBRL-based filings submitted to the SEC.
FINRA Changes to Short Sales Delivery Requirements
Executive Summary of Notice to Members 07-45, Short Sale Delivery Requirements:
FINRA is issuing this Notice to advise firms and other interested parties of changes to NASD Rule 3210 (Short Sale Delivery Requirements) to conform with amendments to the SEC's Regulation SHO delivery requirements.
Beginning on October 15, 2007, firms are required to close out within 35 consecutive settlement days any previously "grandfathered" fail-to-deliver positions in a non-reporting threshold security1 that is on the Rule 3210 threshold list on that date. Any new fails in a non-reporting threshold security after October 15, 2007 will be subject to Rule 3210's 13 consecutive settlement day close-out requirements. There is, however, one exception; as of October 15, 2007, firms will have 35, rather than 13, consecutive settlement days to close out fails to deliver resulting from sales of non-reporting threshold securities pursuant to SEC Rule 144.
Roberts Will Participate in Scheme Liability Case
Chief Justice Roberts has un-recused himself in Stoneridge Investment Partners v. Scientific-Atlanta, meaning eight Justices will decide the issue of scheme liability. Justice Breyer remains recused. WSJ, Roberts Will Rule In Securities Appeal.
Weiss Is Indicted
As expected, Melvyn Weiss was indicted, charged with conspiracy, racketeering, obstruction of justice and making false statements to a grand jury. The indictment also broadened the charges against the Milberg Weiss firm, alleging that the firm received $250 million in legal fees over the last 25 years from class actions in which it paid kickbacks to named plaintiffs. Another former Milberg Weiss partner, Steven Schulman, agreed to plead guilty to a conspiracy charge and cooperate with prosecutors. The government's indictment apparently was strengthened through information obtain from another former partner, David Bershad, who previously pleaded guilty. NYTimes, Top Class-Action Lawyer Faces Federal Charges; WSJ, In Role Reversal, Melvyn Weiss Is Indicted.
SEC Subpoenas Jobs
The SEC reportedly has subpoenaed Steve Jobs to answer questions in connection with the backdating case it has brought against former Apple GC, Nancy Heinen. The SEC has charged that Heinen falsified records and backdated one of her own, as well as one of Jobs', stock option grants. Jobs has not been charged; Apple has previously stated that he did not understand the accounting implications of backdating. WSJ, Apple's Jobs Is Subpoenaed By SEC in Backdating Case.
Prosecutors Say Hsu Ran Ponzi Scheme
Federal prosecutors charge that Norman Hsu, the Democratic fund raiser, engaged in a classic Ponzi scheme, raising over $60 million from investors over four years. He allegedly told investors the money was being used to obtain letters of credit for imaginary manufacturers and importers of high-end fashion from China. The complaint also alleges that he pressured some of his investors to make political contributions. NYTimes, Complaint Says Hsu Admitted Fraud; WSJ, Hsu Is Accused of Ponzi Scheme.
Borse Dubai/Nasdaq Deal Requires National Security Review
Several influential lawmakers have indicated that Borse Dubai's acquisition of a 20% stake in Nasdaq did not raise national security concerns. The deal requires approval under a recent law adopted in response to Dubai's efforts to buy an operator of US ports. Under the deal, Borse Dubai will elect two of Nasdaq's 16 directors and will have no more than 5% voting rights. As part of the deal, Borse Dubai is also buying Nasdaq's 28% stake in the London Stock Exchange, and, in exchange, Nasdaq gets the Nordic operator, OMX AB. NYTimes, Mild Reaction in Capitol to a Dubai Nasdaq Stake.
The Wall St. Journal reviews other deals by Dubai or Qatar, who are competing for dominance in many markets, including the London Stock Exchange, in which Qatar purchased a 20% stake. WSJ, As Oil Hits High, Mideast Buyers Go on a Spree.
September 20, 2007
SEC Adopts Bank Broker Rules
The SEC voted to adopt, jointly with the Board of Governors of the Federal Reserve System (Board), new rules that will finally implement the bank broker provisions of the Gramm-Leach-Bliley Act of 1999. The Board will consider these final rules at its Sept. 24, 2007 meeting. The Commission and the Board consulted with and sought the concurrence of the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Office of Thrift Supervision.
In addition, the Commission also voted to issue a second release concerning certain bank dealer activities and other related matters.
"A customer should be able to walk into a financial institution and get any financial product he or she needs — securities, insurance, banking or trust services," said SEC Chairman Christopher Cox. "But Congress recognized those benefits couldn't be achieved without new ways to safeguard investors that would be consistent with continued innovation. Today's historic action, coming eight years after the passage of the law, is long overdue but welcome news for investors who will now begin to see the benefits of broader services and lower costs that the law intended."
An important provision of the Gramm-Leach-Bliley Act amended the definition of "broker" in the Securities Exchange Act of 1934 so that banks would no longer be completely excluded from the broker-dealer registration requirements. At the same time, the new law created specific exceptions from those requirements. Proposed Regulation R would give effect to these bank broker exceptions, in a way that accommodates the traditional business practices of banks, and at the same time furthers our goal of better protecting investors.
The Gramm-Leach-Bliley Act was signed into law by President Bill Clinton on Nov. 12, 1999. The Act provided an 18-month deadline for the adoption of implementing rules, but from 1999 until 2005, the rule-writing effort stalled repeatedly. On Oct. 13, 2006, President Bush signed into law the Regulatory Relief Act, which added the requirement that the Commission and the Board issue the proposed rules jointly, and seek the concurrence of the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation.
SEC Adopts Temporary Rule for Principal Trades
The SEC yesterday voted to adopt, on an interim-final basis, a temporary rule that will establish an alternative means for investment advisers who are registered as broker-dealers to meet the requirements of Section 206(3) of the Advisers Act when they act in a principal capacity in transactions with certain of their advisory clients. The temporary rule is being adopted on an interim final basis in response to the decision by the U.S. Court of Appeals for the District of Columbia Circuit in Financial Planning Association v. SEC. As a result of the Court's decision, which takes effect as early as October 1, fee-based brokerage customers must decide whether they will convert their accounts to fee-based accounts that are subject to the Advisers Act or to commission-based brokerage accounts. The temporary rule is designed to enable investors to continue to have access to many of the securities held by the firms providing advisory accounts. Compliance with the temporary rule will not relieve an investment adviser from its fiduciary obligations imposed by the Advisers Act or by other applicable provisions of federal law. These obligations include fulfilling the duty to seek best execution of client transactions, as well as the duty to disclose material facts necessary to alert clients to the adviser's potential conflicts of interest.
Temporary Rule 206(3)-3T permits an adviser, with respect to a non-discretionary advisory account, to comply with Section 206(3) of the Advisers Act by, among other things, (i) providing written prospective disclosure regarding the conflicts arising from principal trades; (ii) obtaining written, revocable consent from the client prospectively authorizing the adviser to enter into principal transactions; (iii) making certain disclosures either orally or in writing and obtaining the client's consent before each principal transaction; (iv) sending to the client confirmation statements disclosing the capacity in which the adviser has acted and disclosing that the adviser informed the client that it may act in a principal capacity and that the client authorized the transaction; and (v) delivering to the client an annual report itemizing the principal transactions. The rule also requires that the investment adviser be registered as a broker-dealer under Section 15 of the Exchange Act and that each account for which the adviser relies on this rule be a brokerage account subject to the Exchange Act, and the rules thereunder, and the rules of the self-regulatory organization(s) of which it is a member.
The temporary rule will expire and no longer be effective on Dec. 31, 2009.
The Commission invites comments on all aspects of the temporary rule. The Commission should receive comments by Nov. 30, 2007.
The Commission also voted to propose rule amendments that would reinstate three interpretive provisions of a rule that was vacated by the Court of Appeals for the District of Columbia Circuit in Financial Planning Association v. SEC. Those interpretations relate to the application of the Advisers Act to certain activities of broker-dealers.
The proposed rule amendments would re-codify guidance as to when advice is "solely incidental" to the conduct of business as a broker-dealer within the meaning of Section 202(a)(11)(C) of the Advisers Act.
Separate Fee or Contract. When a broker-dealer charges a separate fee or separately contracts for advisory services, its advice would not be considered "solely incidental" to the business of brokerage.
Discretionary Asset Management. When a broker-dealer exercises investment discretion it would not be considered to be providing advice that is "solely incidental" to the business of brokerage.
The proposed rule amendments would also re-codify guidance as to when a broker-dealer receives "special compensation" for providing investment advice within the meaning of Section 202(a)(11)(C) of the Advisers Act.
Discount Brokerage. Under the proposal, a broker-dealer does not receive "special compensation" solely because it charges a commission for discount brokerage that is less than it charges for full-service brokerage.
Finally, the proposed rule amendments would re-codify an interpretation that dually-registered broker-dealers and investment advisers are considered investment advisers solely with respect to those accounts for which they provide services that subject them to the Advisers Act.
Comments on these proposed amendments should be received by the Commission by Nov. 2, 2007.
SEC Charges "Stock Loan" Traders
The SEC charged 38 defendants in a series of fraudulent schemes involving phony finder fees and illegal kickbacks in the "stock loan" industry. The defendants include 17 current and former "stock loan" traders employed at several major Wall Street brokerage firms, including Morgan Stanley, Van der Moolen (VDM), Janney Montgomery, A.G. Edwards, Oppenheimer, and Nomura Securities. These traders conspired in various schemes with 21 purported stock loan "finders" to skim profits on stock loan transactions. The defendants pocketed more than $12 million from their unlawful schemes over a period of nearly a decade.
In two separate complaints filed in federal court in Brooklyn, N.Y., the SEC alleges that from 1998 until June 2006, the stock loan traders named as defendants routinely defrauded the brokerage firms that employed them and others by engaging in collusive loan transactions and causing the firms to pay sham finder fees to companies controlled by the traders themselves or by their friends and relatives. Acting as fronts for the traders, these companies received hefty finder fees on several thousand stock loan transactions even though they did not provide any legitimate finding services and, in many cases, were simply shell companies that were not even involved in the stock loan business. These phony finders included a mailman, a perfume salesman, a pharmacist and a dental receptionist. The defendants shared in the sham finder fees through secret kickback arrangements. In some cases, defendants met monthly at New York City bars and restaurants to exchange thousands of dollars in cash, often wrapped in newspapers or stuffed into envelopes.
Sallie Mae Buyout in Trouble, Again
Will the Sallie Mae buyout be another casualty of the tight credit markets? The buyers have previously said the $25 billion deal was in jeopardy after Congress passed legislation reducing subsidies to student lenders. They are expected to press Sallie Mae for a price reduction and, failing that, may walk away. NYTimes, Deal to Buy Sallie Mae in Jeopardy.
SEC Expected to Charge Brokerage Employees in Stock-Lending Fraud
The SEC is expected to file charges against current and former employees at several brokerage firms (including Janney Montgomery Scott, Morgan Stanley, and Van der Moolen) alleging abusive stock-lending practices. In addition, criminal charges may be filed. The investigation focused on whether the employees took kickbacks for arranging stock-lending agreements (in connection with short-selling). Janney Montgomery Scott settled charges with the NYSE over the summer. WSJ, Civil Charges Are Expected In Probe of Stock Lending.
Borse Dubai Agrees to Buy Stake in Nasdaq
Nasdaq and Borse Dubai have agreed that Borse Dubai will buy a 20% stake in Nasdaq -- thus becoming its largest shareholder -- and Nasdaq's 30% stake in the London Stock Exchange. In return, Borse Dubai will complete its acquisition of Nordic stock operator OMX AB (Nasdaq was a rival bidder) and turn it over to Nasdaq.
All this may depend on whether Congress is comfortable with Dubai owning a big stake of a major U.S. exchange. Senator Charles Schumer, who helped lead the opposition to Dubai’s investment in the American ports, said that the deal would “raise serious questions that have to be answered.” NYTimes, Dubai to Buy Large Stake in Nasdaq; WSJ, Nasdaq, Borse Dubai Reach Takeover Deal for OMX.
September 19, 2007
Weiss's Indictment is Expected
Melvyn Weiss is expected to be indicted Thursday. The firm released a statement that he has decided to discontinue his participation in firm management to focus on his defense, but will remain available to counsel clients.
SEC Staff Recommends Adoption of Reg R
Excerpt from Opening Remarks at SEC Open Meeting: Adoption of Regulation R — The Bank Broker Provisions of the Securities Exchange Act of 1934, by Erik R. Sirri, Director, Division of Market Regulation, September 19, 2007:
The Agencies received approximately 60 comments on proposed Regulation R. Staff from the Commission and the banking agencies have worked closely together to consider the comments and draft the final rules that we recommend today. This collaborative process has resulted in a set of rules that — while largely similar to those proposed — have been modified and clarified to address commenters' concerns. The revised rules are consistent with the language of the bank broker exceptions established by the GLBA and the underlying policies of functional regulation and investor protection. They also take into account banking industry implementation and compliance concerns.
The rules define terms used in the exceptions relating to networking, trust and fiduciary activities, safekeeping and custody, and sweep accounts. They also provide conditional exemptions from certain of the statutory requirements of these exceptions. In addition, they provide banks with the targeted exemptions for particular securities activities that were proposed as well as one new exemption pertaining to employee stock plans. Finally, these rules provide banks with additional time to come into compliance with the GLBA, and grant limited relief for banks from possible third-party rescission rights.
HSBC Bank Settles SEC Charges Involving Pension Fund's Offering Fraud
The SECannounced settled enforcement proceedings against HSBC Bank USA, N.A., which will pay a $10 million civil penalty and approximately $500,000 in disgorgement for allowing its name and logo to be used in connection with a Florida-based offering fraud by Pension Fund of America, L.C. (Pension Fund), that was directed primarily at Central and South American investors. The Commission issued a settled cease-and-desist Order finding that from August 2003 to March 2005, HSBC served as trustee for the investment component of Pension Fund and its affiliated entities' trust plans. Since at least 1999, Pension Fund sold retirement and college "trust plans" that purportedly provided term life insurance and the opportunity to invest in one or more pre-selected mutual funds. However, Pension Fund failed to disclose, among other things, that it was taking up to 95 percent of the investors' funds to pay commissions and fees. Pension Fund raised at least $127 million from more than 3,400 investors, primarily from Central and South America.
On March 28, 2005, the SEC filed an emergency action in the U.S. District Court for the Southern District of Florida against Pension Fund and its principals to halt the offering fraud. The Court appointed a receiver over Pension Fund, who shut down its operations, marshaled its assets, and developed a claims process to distribute recovered funds to its investor victims.
The SEC Order filed today finds that HSBC allowed the use of its name and logo in Pension Fund's offering materials. HSBC also allowed Pension Fund to use marketing materials that falsely suggested that the trust plans were co-developed by HSBC and Pension Fund, and that investors' funds would be "totally safe" because the money would be deposited in a trust account at HSBC. In reality, Pension Fund deposited investors' funds in an ordinary checking account in its name at HSBC, and used up to 95 percent of such funds to pay its own undisclosed sales commissions, expenses and fees. Pension Funds' marketing brochures provided a list of mutual funds offered as part of the trust plans, but did not disclose any information about the sales commissions, administrative expenses, or the front-load mutual fund fees charged to investors. The SEC Order finds, among other things, that HSBC failed to follow its own internal procedures in reviewing and approving certain Pension Fund offering materials.
Additionally, HSBC actively participated in the selection of offshore, high front-load mutual funds to be offered to prospective investors under a negotiated fee arrangement between HSBC and Pension Fund. However, neither the amount of the funds' sales loads, nor HSBC's role in the funds' selection, were disclosed to investors. In October 2003, shortly after HSBC became trustee for Pension Fund's plans, HSBC drafted a letter on its own letterhead announcing the new relationship and inviting certain of Pension Fund's existing investors to transfer their funds to HSBC. Pension Fund sent the letter to approximately half of its existing investors, and enclosed a form bearing HSBC's logo that listed new mutual fund selections available upon transfer to HSBC. Neither the letter nor the enclosure disclosed that investors would incur new front-load fees in connection with such transfers, or the amounts of those prospective costs.
Evergreen Settles Market-Timing Charges
The SEC announced settled enforcement actions against registered investment adviser Evergreen Investment Management Company (Evergreen), three of its affiliates, and a former officer, alleging that, contrary to prospectus disclosures, they allowed certain shareholders to market time and engage in excessive exchange activity in the Evergreen mutual fund complex. Evergreen and three affiliates, Evergreen Investment Services, Inc., and Evergreen Service Company, all based in Boston, Mass., and Wachovia Securities, based in Richmond, Va. (the affiliates), will pay $28.5 million in disgorgement and a total of $4 million in civil penalties. William M. Ennis, a former officer of Evergreen who resides in Charleston, S.C., will pay $1 in disgorgement plus a civil penalty of $150,000. The payments will be distributed according to a plan to be developed by an independent distribution consultant under the Fair Fund provisions of the Sarbanes-Oxley Act.
The Commission's Orders find that Evergreen, the affiliates and Ennis entered into an agreement to allow a registered representative of a broker-dealer to market time at Evergreen funds in excess of trading limits set forth in the funds' prospectuses. The Commission's Order as to Evergreen and the affiliates further finds that they generally failed to enforce these limits as to other traders, which resulted in substantial trading activity that imposed costs on the funds and impaired their performance.