September 29, 2007
Langevoort on Entity vs. Individual Liability
On Leaving Corporate Executives Naked, Homeless and Without Wheels: Corporate Fraud, Equitable Remedies, and the Debate Over Entity Versus Individual Liability, by DONALD C. LANGEVOORT, Georgetown University Law Center, was recently posted on SSRN. Here is the abstract:
There is a lively debate about the relative merits of entity versus individual liability in cases involving securities fraud. After reviewing this debate in the context of both private securities litigation and SEC enforcement, this paper considers whether the legal tools available against individual executives are adequate, and if not, what changes might be made. The main focus is on equitable remedies, especially rescission and restitution, under both state and federal law. As to the former, Vice Chancellor Strine's opinion in In re Healthsouth offers an interesting template, although there are limits on the usefulness of derivative suits to police aggressively in this area. Federal law probably offers the more powerful tools, which could be used more effectively than they are at present.
Tabak on Inflation and Damages Post-Dura
Inflation and Damages in a Post-Dura World, by DAVID TABAK, National Economic Research Associates, Inc. (NERA), was recently posted on SSRN. Here is the abstract:
There are three commonly used methodologies for modeling inflation in securities fraud cases: the “index method,” the “constant percentage method,” and the “constant dollar method.” I have previously argued that the index and constant percentage methods, if applied without adjustment as the measure of damages under the out-of-pocket rule, generally result in an overstatement of damages under certain interpretations of loss causation. The Supreme Court's ruling in Dura did in fact endorse an interpretation of loss causation that requires that an adjustment be made to the index and constant percentage methods in the process of going from inflation to damages. The need for an adjustment has been addressed in various ways by experts and the courts, most recently with a ruling finding that the index method (without adjustment) “collides directly with loss causation doctrine” and that the constant percentage method (with what we argue is an inadequate adjustment) creates damages with properties for which even the expert proffering the methodology could provide “no ‘economic or logical reason'” and also impermissibly provides investors with a “partial downside insurance policy.” Here we address the type of adjustment to certain inflation models necessary to comport with the loss causation doctrine in Dura in a consistent and logical fashion
Mitchell on The Speculation Economy
The Speculation Economy: How Finance Triumphed Over Industry, by LAWRENCE E. MITCHELL, George Washington University - Law School, was recently posted on SSRN. Here is the abstract:
The Speculation Economy identifies the moment in American history when finance triumphed over industry. It shows how the birth of the giant modern corporation spurred the rise of the stock market and how, by the dawn of the 1920s, the stock market left behind its business origins to become the very reason for the creation of business itself. The consequent widespread distribution of intrinsically speculative common stock embedded speculation into the capital structures of most large American corporations.
The stock market become the driving force of the American economy in the first decade of the 20th century as a result of the birth of the giant modern corporation. The Speculation Economy tells the story of the legal, financial, economic and social transformations that allowed financiers to collect companies and combine them together into huge new corporations for the main purpose of manufacturing stock and dumping it on the market. Businessmen started to make more money from legal and financial manipulation than from practical business improvements like innovations in technology, management, distribution, and marketing.
The Speculation Economy explains how and why, at the turn of the 20th century, the stock created by the giant modern corporation became dispersed throughout the market. It shows the shift in attitudes of ordinary Americans from cautious bond buyers into eager stock speculators. At the same time, it shows how a federal government wedded to an outdated economic model and struggling to expand its own power failed to regulate finance and thus missed the chance to control corporations. While politicians argued, finance came to dominate industry, and as stock ownership spread widely throughout society, the stock market came to dominate finance.
The Speculation Economy examines this history in detail from the perspectives of the economic history of the growth of the market, the social history of early stockholding, the intellectual history of financial analysis of the era, the federal regulatory attempts to control the giant combinations, and the roots of modern securities regulation that emerged from the antitrust debate of the first decade of the 20th century.
The downloadable paper includes the Table of Comments and Prologue of The Speculation Economy.
September 28, 2007
SEC Charges Spouse With Insider Trading
On September 28, the SEC announced the filing of a settled action against the spouse of a former officer of Triangle Pharmaceuticals, Inc. (Triangle) for illegal insider trading. The Commission's complaint, filed in the United States District Court of the Eastern District of North Carolina, alleges that, between October 2002 and November 2002, Daniel Joseph McKay (McKay)misappropriated from his spouse, who was then an executive vice president of Triangle, the material nonpublic information that Triangle had received an acquisition offer from another company. The Commission's complaint further alleges that, after misappropriating this information, McKay purchased Triangle stock and tipped two of his siblings, who also purchased Triangle stock. As a result of this illegal conduct, McKay and his siblings obtained a total of $11,416 in ill-gotten gains. With filing of the Commission's action, McKay has agreed, without admitting or denying the allegations in the Commission's complaint, to the entry of a final judgment permanently enjoining him from violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, thereunder, and ordering him to pay (i) disgorgement and prejudgment interest totaling $12,458.98 and (ii) a civil penalty of $11,416.
SEC Files Insider Trading Charges Against Former Dell Accountants
On September 28, the SEC filed an insider trading action in the United States District Court for the Western District of Texas against Salvador Chavarria, Glenn D. Leftwich and John A. Nieto. At the time of the alleged misconduct, Chavarria, Leftwich and Nieto were employed as accountants in Dell Inc.'s (Dell) Americas Business Unit at its corporate headquarters in Round Rock, Texas. The Commission alleges that the three accountants engaged in unlawful insider trading in the securities of Dell in advance of a public announcement on Aug. 11,2005, that Dell's second quarter 2006 revenues had fallen short of the company's earlier guidance and analysts' expectations. In addition, the Commission alleges that Leftwich engaged in unlawful insider trading when he purchased Dell securities in advance of a Dell earnings release on Oct. 31, 2005, announcing Dell's failure to hit its earnings target for the third quarter 2006.
In its complaint, the Commission alleges that, in July and August 2005, Chavarria, Leftwich and Nieto purchased Dell put options while in possession of material, non-public information regarding Dell's financial performance for the second quarter of 2006. Specifically, the Defendants knew, in advance of the Aug. 11, 2005 release, that the company's second quarter revenues had fallen short of the company's earlier guidance and analysts' expectations. On the day after the announcement of the revenues miss, Dell's stock price dropped more than 7% on the news. By selling their Dell put options, the Defendants profited as follows: Chavarria, $153,240; Leftwich, $81,658; and Nieto, $16,677.
In addition, on Oct. 31, 2005, Leftwich bought Dell put options prior to a negative Dell earnings announcement. The negative news caused an 8.3% decline in Dell's stock price. Leftwich sold the puts on the following day and profited $24,769.
Without admitting or denying the allegations in the complaint, Chavarria and Nieto have agreed to settle the Commission's charges by consenting to the entry of a final judgment that would: (i)permanently enjoin them from further violations of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder; (ii)order them to pay $153,240 and $16,677, respectively, in disgorgement; (iii) order them to pay $16,673 and $2,059, respectively, in prejudgment interest; and (iv) order them to pay a civil penalty of $153,240 and $16,677, respectively. With regard to Leftwich, the Commission alleges in its complaint that Leftwich violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. In its complaint, the Commission seeks against Leftwich a permanent injunction, disgorgement plus prejudgment interest, and a civil money penalty.
SEC Obtains Summary Judgment Against E-Brain Solutions
The SEC announced today that the federal district court for the Northern District of Georgia granted the Commission's renewed motion for summary judgment and entered a final judgment against Peter Warren and Exo-Brain, Inc. ("Exo-Brain"), formerly known as E-Brain Solutions, LLC ("E-Brain LLC") on September 27, 2007. Warren and Exo-Brain were each ordered to pay disgorgement of $6,400,000, pre-judgment interest in the amount of $1,981,734.50 and civil penalties of $75,000. The defendants were ordered to pay these amounts within 30 days from the entry of the judgment. The Court made specific findings of fact and conclusions of law regarding Warren's conduct in the fraudulent offer and sale of unregistered Exo-Brain securities.
The court's order found that in 2000 and 2001, the defendants raised up to $12.4 million from investors in a series of fraudulent, unregistered offerings of securities. The court concluded that the defendants made misrepresentations and omissions of material facts to investors in connection with the offer and sale of securities including, among other things, misrepresenting the capabilities and developmental status of the technology, misrepresenting the company's financial condition, and that the defendants disregarded warnings of legal counsel recommending against further efforts to raise funds from investors. Additionally, the court found that in their May 2000 financial statement, the defendants failed to disclose to investors that E-Brain LLC lost money at a considerably faster pace than depicted in the limited financial statements provided to investors, and that the statement only reflected the results of operation for the first month of the company's existence. The court also found that E-Brain LLC, in order to fund its operation, had to seek investor funds six times in calendar year 2000. The court concluded that in the defendants' first offer to investors dated December 10, 1999, Warren falsely claimed that a prototype had been developed which could, among other things, send e-mails and faxes and browse the Internet, when, in fact, no prototype with these abilities had been developed.
Buca Settles SEC Fraud Charges
The SEC today announced the filing of a settled civil injunctive action against Buca, Inc. (Buca), the Minneapolis-based corporate parent of the Buca di Beppo restaurant chain. The Commission's complaint, filed yesterday in federal court in Minneapolis, alleges that from 2000 to 2004, Buca materially understated the compensation of its top two officers, omitted significant related party transactions involving the company's former CEO and former CFO, and reported inflated income due to an earnings management scheme.
Specifically, the Commission's complaint alleges that Buca failed to disclose in its proxy statements and Forms 10-K for 2000 to 2003 that its former CEO improperly obtained reimbursement from Buca for personal expenses totaling nearly $850,000, including ATM cash withdrawals, duplicate airline tickets, family wedding expenses, dog kenneling, and home remodeling costs and that its former CFO improperly obtained reimbursement of more than $111,000 for vacations and visits to strip clubs and other personal expenses. The complaint further alleges that Buca reported inflated pre-tax income from 2000 to 2004 in amounts ranging from 18.8% to 36.9% due to a scheme orchestrated by its former CFO and former controller to meet earnings targets through improperly capitalizing approximately $11.9 million in expenses. Finally, the Commission's complaint alleges that Buca failed to disclose in its Forms 10-K for 2000 and 2001 its former CEO's and former CFO's participation in various related party transactions, including the former CEO's purchase of an Italian villa with Buca's funds and the former CFO's ownership interest in a vendor with which Buca transacted more than $1 million of business.
SEC Settles Charges Relating to Municipal Bond Offerings
The SEC continues its crackdown on the municipal bond industry as it today announced settled enforcement actions against two California companies for their failure to disclose a fee agreement that created a risk to investors that interest on $650 million of municipal bonds might lose its tax-exempt status. The charges against CDR Financial Products, Inc. (formerly known as Chambers, Dunhill, Rubin & Co.) and Anchor National Life Insurance Company, (now doing business under the name of AIG SunAmerica Life Assurance Company) relate to three separate municipal bond offerings in Florida in 1999 and 2000. The Commission's Orders find that Anchor served as the credit enhancement provider, and that CDR served various roles, in the three offerings. The Commission's Orders further find that the existence of the fee agreement between CDR and Anchor was material for several reasons. Among other things, the bond proceeds were to be used for originating loans, and therefore CDR's receipt of payment on unloaned bond proceeds created a potential conflict with the offerings' purpose.
In addition, tax regulations require bond issuers to have a reasonable expectation that most of the bond proceeds would be loaned out within three years. Without knowledge of the fee agreement, the issuers made calculations, disclosures and certifications relating to their reasonable expectation regarding loan origination within the required time without having all information that was material to that issue. Moreover, the fee agreement also created a risk that the Internal Revenue Service would declare the bonds to be arbitrage bonds, with accompanying potential negative tax consequences.
The Commission's Orders also find that in one bond offering, CDR executed a certificate that was misleading in light of the undisclosed fee agreement.
A Big Oops! for Martha Stewart
Martha Stewart Living Omnimedia earlier reported a 125% sales growth for its "soft home" products at KMart stores for the one-week period following the line's relaunch, as compared to the same week last year. Yesterday the company announced that was an error -- the actual number is 28%. CFO.com, Martha Stewart's 97-Point Mistake.
New Securities Regulation Goes into Effect in Japan
Japan's Financial Instruments & Exchange Law (FIEL) marks the biggest change in the country's financial regulation in 20 years, covering everything from corporate disclosure to securities trading practices. The regulations will bring Japan's regulation closer to international standards. The Japanese public, well-known as savers, is expected to start shifting savings into investments. WSJ, Japan Securities Law Targets Local Savers.
KPMG Judge Speaks Out on Government's Investigative Powers in Corporate Criminal Cases
Judge Lewis Kaplan, the federal district court judge presiding over the government's prosecution of bogus tax shelters marketed by KPMG said it may be time to curb the government's investigative powers in cases alleging corporate criminal liability. "I question whether placing virtually unchecked power in the hands of any branch of government" is the right thing, Judge Kaplan said, WSJ, KPMG Judge Questions Laws, Tactics Used in Corporate Cases.
September 27, 2007
SEC Cracks Down on Municipal Bond Market Fraud
The SEC instituted settled enforcement actions against two broker-dealers and their CEOs for fraudulent auction practices in the municipal bond market. The Commission issued Orders against Philadelphia-based Regional Brokers, Inc., and its CEO Patrick Lubin; and against Cherry Hill, N.J.-based D.M. Keck & Company, Inc. (doing business as Discount Munibrokers), CEO Donald Michael Keck, and a supervisor, Patricia Ann Sealaus. The firms served as "broker's brokers" in auctions by providing brokerage services exclusively for municipal securities dealers.
The Orders make the following findings:
Regional was placing bids on municipal bonds in auctions where Regional was acting as the broker's broker, without the intent of ever purchasing the bonds. Often, these bids were placed as the second highest bid, known as the "cover bid," after the high bid had already been made, and right before the close of the auction. Regional deceived its customers by fraudulently giving the appearance that Regional was conducting municipal bond auctions with tighter spreads and by creating the illusion of additional interest in the bonds.
Regional consistently accepted late bids in "Sharp Time" auctions with knowledge that the bidding broker-dealer's late bid was the highest — and therefore the winning — bid in the auction. This conduct favored the late bidder and disadvantaged other auction participants who had submitted their bids within the required Sharp Time and who had less time to prepare their bids in accordance with the explicit terms of the auction.
Similar to the conduct at Regional, Discount Munibrokers disseminated fake bids in auctions it conducted in an effort to convince the high bidders that the auctions were more competitive than they really were or to meet minimum bid requirements imposed by certain broker-dealers attempting to sell securities through the auction process.
Discount Munibrokers also engaged in an "adjusted trading" scheme with a municipal securities trader at another broker-dealer. Specifically, on certain municipal bond sales brokered by Discount Munibrokers the firm paid the other broker-dealer proceeds from sales that were substantially greater than the actual prices paid by the purchasers in those transactions. To make up Discount Munibrokers' losses on those transactions, on other sales, the same selling broker-dealer received proceeds that were substantially less than what was paid by the purchasers. Discount Munibrokers reported the fictitious prices used in the adjusted trading scheme to the market as the actual prices paid on the transactions.
Freddie Mac Settles Fraud Charges
The SEC today charged the Federal Home Loan Mortgage Corporation (Freddie Mac) with securities fraud in connection with improper earnings management beginning as early as 1998 and lasting into 2002. To settle the SEC’s charges, Freddie Mac agreed to pay a $50 million penalty, which is expected to be distributed to injured investors through a Fair Fund. The SEC’s complaint alleges that Freddie Mac engaged in a fraudulent scheme that deceived investors about its true performance, profitability, and growth trends. According to the complaint, Freddie Mac misreported its net income in 2000, 2001 and 2002 by 30.5 percent, 23.9 percent and 42.9 percent, respectively. Furthermore, Freddie Mac’s senior management exerted consistent pressure to have the company report smooth and dependable earnings growth in order to present investors with the image of a company that would continue to generate predictable and growing earnings.
The charged former Freddie Mac executives are David W. Glenn (president, chief operating officer, and vice chairman of the board); Vaughn A. Clarke (chief financial officer); and former senior vice presidents Robert C. Dean and Nazir G. Dossani.
According to the Commission’s complaint, Freddie Mac’s violations were the direct result of a corporate culture that placed great emphasis on steady earnings, and a senior management that fostered a corporate image that was touted as “Steady Freddie” to the marketplace. Among the violations alleged in the complaint is the use of certain transactions to nullify the transitional effects of the company’s implementation of accounting standard SFAS 133 (which relates to accounting for derivative instruments and hedging activities); the improper change in valuing the company’s “swaptions” portfolio at year-end 2000; the improper use of derivatives to shift earnings between periods; the improper use of a reserve in connection with the company’s application of SFAS 91 (which relates to accounting for loan origination costs); the use of certain transactions to nullify the effects of an accounting pronouncement known as Emerging Issues Task Force Issue 99-20; and the maintenance and reporting of a reserves for losses on loans materially in excess of probable losses.
The four former executives, who were charged with negligent conduct, agreed to settle the case without admitting or denying the allegations. Glenn agreed to pay a $250,000 civil penalty and $150,000 in disgorgement. Clarke agreed to pay a $125,000 civil penalty and $29,227 in disgorgement. Dossani agreed to pay a $75,000 civil penalty and $61,663 in disgorgement. Dean agreed to pay a $65,000 civil penalty and $34,658 in disgorgement.
In its settlement with the Commission, the company agreed, without admitting or denying the allegations, to the entry of a final judgment that permanently enjoins the company from violations of the anti-fraud provisions of the federal securities laws. Without admitting or denying the allegations in the Commission’s complaint, Glenn, Clarke, and Dossani agreed to the entry of a final judgment that permanently enjoins them from violating Sections 17(a)(2) and (3) of the Securities Act. In a separate proceeding, Dean consented to the entry of a Commission Order requiring him to cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and (3) of the Securities Act.
Morgan Stanley Pays $12.5 Million to Settle Charges of Failure to Produce Emails
FINRA today announced a settlement with Morgan Stanley & Co. to resolve charges that the firm's former affiliate, Morgan Stanley DW, Inc. (MSDW), failed on numerous occasions to provide emails to claimants in arbitration proceedings as well as to regulators - while representing that the destruction of the firm's email servers in the Sept. 11, 2001 terrorist attacks on New York's World Trade Center resulted in the loss of all pre-9/11 email. In fact, the firm had millions of pre-9/11 emails that had been restored to the firm's active email system using back-up tapes that had been stored in another location.
The settlement also resolves additional charges relating to the firm's failure to provide required supervisory materials to numerous arbitration claimants. The settlement announced today is the first of its kind - in that it provides for distribution of $9.5 million to two groups of customers who had arbitration claims against the firm. FINRA estimates that several thousand customers may be eligible to receive payments. FINRA also imposed a $3 million fine on the firm for its failure to provide pre-9/11 emails and updates to a supervisory manual.
Under the terms of the settlement, Morgan Stanley will deposit $9.5 million into a fund to pay arbitration claimants for the discovery failures. All fund expenses, as well as the cost of hiring and compensating a fund administrator acceptable to FINRA, will be borne by the firm. The fund administrator will identify and notify potentially eligible arbitration claimants. Eligible claimants in the email aspect of the case can elect to receive a standard payment estimated to be between $3,000 and $5,000, or may choose to require Morgan Stanley to produce relevant emails still in its possession. A claimant who demands email production can decide to accept the standard payment - or waive that payment and have the fund administrator determine the amount, if any, that the claimant should receive depending on the particular facts and circumstances of that individual case. Maximum payment in cases decided by the fund administrator cannot exceed $20,000.
Eligible claimants who were denied the required supervisory materials will receive payments expected to be between $1,500 and $2,500. Some claimants may be eligible for payments as to both the pre-9/11 email and the failure to receive supervisory materials.
Detailed information about which arbitration claimants are eligible for fund payments, and about the claims process itself, can be found on the Arbitration Discovery Fund page of FINRA's Web site.
FINRA found that MSDW failed to provide pre-9/11 emails to claimants in numerous arbitration proceedings and in response to three regulatory inquiries during the period from October 2001 through March 2005. FINRA found that MSDW made statements in numerous arbitration proceedings and to the former NASD, New York Stock Exchange Regulation and the Massachusetts Securities Division that those emails had been destroyed. Those statements were not true. In fact, MSDW possessed millions of pre-9/11 emails that had been restored to the firm's system shortly after Sept.11, 2001 using backup tapes. Many other emails were maintained on individual users' computers and had not been affected by the events of 9/11. Among the matters where MSDW failed to produce e-mail was an NASD investigation that resulted in an August 2005 settlement with the firm.
FINRA also found that MSDW later destroyed many of the pre-9/11 emails it did possess. The firm did so in two ways - by overwriting backup tapes that had been used to restore the emails from 11 of its 12 servers to the firm's system, and by allowing users of the firm's email system to permanently delete the emails over an extended period of time. As a result, between September 2001 and March 2005, MSDW deleted millions of pre-9/11 emails from the firm's systems.
In addition, FINRA found that MSDW failed to provide updates to the firm's supervisory manual for branch office managers to claimants in numerous arbitration proceedings over a period of years. The Branch Manager's Manual was issued in 1994 and was subsequently supplemented with numerous updates. FINRA found, however, that MSDW repeatedly failed to provide updates to the manual in discovery in numerous arbitration proceedings from late 1999 through the end of 2005.
In settling this matter, Morgan Stanley neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Buffett May Invest in Bear Stearns?
Bear Stearns stock rose yesterday on reports that a group of investors led by Warren Buffett might buy a stake in the investment firm. The investment bank reportedly is talking to other possible buyers as well. Bear Stearns has been hit hard by the credit market collapse and had to shut down two hedge funds because of it. Buffett rescused another investment bank, Salomon Brothers, in 1991 when John Gutfreund resigned because of a bond trading scandal. WPost, Buffett May Buy Stake in Bear Stearns; NYTimes, Buffett Said to Consider Bear Stake.
Senate Banking Committee Holds Hearing on Rating Firms
At a Senate Banking Committee hearing on the role of the rating firms in the subprime mortgage market collapse, SEC Chair Cox said that the SEC had opened an investigation into whether the credit-rating firms inflated their ratings of mortgage-backed bonds because they were also advising the investment banks on packaging the securities. Representatives from S&P and Moody's denied that conflicts of interest played any role in inflating ratings. The hearings continue for a second day. NYTimes, S.E.C. Inquiry Looks for Conflicts in Credit Rating.
Buyers Call Off Buyout of Sallie Mae
Buyers (headed by J.C. Flowers) backed out of the $25.3 billion buyout of Sallie Mae deal at the current price, invoking the MAC clause and citing cuts in federal subsidies and the credit markets. They suggested the possibility of renegotiating the price. In the last sentence of its statement, the consortium said, “We have told representatives of the Sallie Mae board that we are open to discussing a revision of the transaction that reflects this new environment.” Sallie Mae, however, vows to fight. Other private equity deals that have collapsed recently include KKR's buyout of Harman International and the Fine Line-Genesco merger. WPost, Investors End Deal To Buy Sallie Mae; NYTimes, Deal at Risk, Buyers Warn Sallie Mae; WSJ, Buyout Group Balks at Sallie Mae.
September 26, 2007
Cox Testifies on Credit Rating Ratings' Role in Subprime Markets
Testimony:The Role and Impact of Credit Rating Agencies on the Subprime Credit Markets, by Chairman Christopher Cox, U.S. Securities & Exchange Commission, Before the U.S. Senate Committee on Banking, Housing and Urban Affairs, September 26, 2007.
SEC Settles FCPA Charges Against Bristow Group
The SEC today announced the institution of a settled enforcement action against Bristow Group Inc., a Houston-based and New York Stock Exchange-listed helicopter transportation services and oil and gas production facilities operation company, for violations of the Foreign Corrupt Practices Act (FCPA). Among other things, the FCPA prohibits bribery of foreign government officials.
The Commission's Order finds that a Nigerian affiliate of Bristow Group made improper payments to Nigerian state government officials in return for the officials' reduction of the affiliate's employment taxes owed to the Nigerian state governments. The Order also finds that the same affiliate and another Nigerian affiliate of Bristow Group also underreported their expatriate payroll expenses in Nigeria.
Without admitting or denying the Commission's allegations, Bristow Group consented to entry of an Administrative Order that requires Bristow Group to cease and desist from committing violations of the antibribery, internal controls and books and records provisions of the Securities and Exchange Act of 1934 (Exchange Act).
SEC Announces Initiative on Alerting Investors About Fraud
The SEC announced a new Internet-based initiative to alert investors worldwide about problems with certain unregistered entities engaged in solicitations of securities transactions. By more immediately sharing information received in complaints about particular unregistered soliciting entities, the SEC is aiming to give retail investors, before they invest, a new tool to help them avoid questionable investment solicitations, including solicitations from online boiler room and advance fee scheme operations.
Through its "Public Alert: Unregistered Soliciting Entities" (PAUSE) program, the Commission will publish on its Web site certain factual information about unregistered soliciting entities that have been the subject of complaints forwarded by investors and others around the globe, including foreign securities regulators. The Commission is seeking public comments on the PAUSE program before it begins.
To implement the PAUSE initiative, the Commission will post on its public Web site specific information about unregistered soliciting entities that have been the subject of complaints. For each of these entities, the Commission's staff will have determined either (1) that there is no U.S. registered securities firm with that name, or (2) that there is a U.S. registered securities firm with the same or similar name, but that solicitations appear to have been made by people not affiliated with the U.S. registered securities firm. A second PAUSE list will name fictitious government agencies and international organizations referred to by entities that are subjects of complaints.
Generally, entities that solicit purchases or sales of securities for the accounts of other people in the United States are required to register with the SEC. It is important for prospective investors to consider whether a soliciting entity is, in fact, registered with the SEC. A large number of investor complaints received by the Commission concern solicitations of investors by unregistered entities that appear to be involved in boiler room and secondary advance fee schemes, which, in most instances, claim a nexus to the United States, but, in truth, are located outside of the United States and target non-U.S. investors.
The comment period extends for 30 days after the Release is published in the Federal Register.