October 19, 2007
Criminal Charges in PIPEs Deals
Criminal charges were filed in federal court against six individuals, including a securities lawyer, alleging securities fraud in connection with PIPEs tranactions by Xybernaut Corp. and Ramp Corp. WSJ, Ex-Xybernaut Executives, Lawyer Indicted in PIPEs Case.
SEC Distributes Fair Funds to Fannie Mae Investors
The SEC today announced that $356 million is being paid to investors harmed by the financial fraud at Fannie Mae (Federal National Mortgage Association) between 1998 and 2004. With today's payments, the SEC has distributed more than $3 billion overall since the agency was given authority to send financial penalties from SEC enforcement actions to the victims of financial fraud.
Today's $356,128,500 going to individual investors, pension plans and other victims represents the entirety of the money Fannie Mae paid to settle the SEC's fraud charges last year, plus interest. The Fair Fund for Fannie Mae victims resulted from an enforcement action in May 2006 in which Fannie Mae paid $350 million to settle SEC charges that it issued materially false and misleading financial statements in SEC filings and in various reports disseminated to investors. Final judgment was entered in August 2006, and the U.S. District Court of the District of Columbia approved the establishment of the Fair Fund in April 2007.
NASAA Roundtable at PIABA Meeting
A panel of state securities regulators representing the North American Securities Administrators Association (NASAA) reported on developments at the PIABA Annual Meeting. A few themes were emphasized. First, fraud among senior investors is increasing and is expected to continue to increase with the aging population. Second, a significant number of their complaints relate to annuities, which they also expect will increase. Indeed, one regulator called equity-indexed annuities a "scourge" and urged the SEC to resolve whether they are securities. Third, as to arbitration, they recommend making it non-mandatory and eliminating the industry arbitrator. Rex Staples, the GC of NASAA, referred to the industry arbitrator as the "Achilles' heel" of securities arbitration and unnecessary, given the prevalence of expert testimony on industry practices.
FINRA's Proposal on Dispositive Motions a Hot Topic
One of the hot topics at this year's Public Investors Arbitration Bar Association (PIABA) Annual Meeting is FINRA's proposed rule that is intended to reduce the number of pre-hearing motions to dismiss. Although FINRA has not yet filed the text of the rule with the SEC, it took the unusual step of issuing a Notice to Parties describing the proposed rule, as well as sending an e-mail blast to its arbitrators immediately after the FINRA Board approved the proposal. George Friedman, Executive Vice President, made it clear that this proposed rule was in response to complaints from claimants' attorneys that too many pre-hearing dispositive motions were being filed in arbitration. The proposed rule will restrict pre-hearing motions to dismiss to three ground -- prior written settlement, "factual impossibility," and the 6-year eligibility rule and require a panel that grants a dispositive motion to give an explanation. Of course, as with the expungement procedure, much will depend upon the competence and commitment of the arbitrators to understand and follow the procedures.
Customer Sues Merrill Lynch Over CDO Investments
MetroPCS Communications filed suit in Texas state court charging that its broker, Merrill Lynch, acted improperly in investing about $134 million in risky CDO securities, in violation of its objective to maintain low-risk, liquid investments for its spare cash. Apparently the customer did not sign a predispute arbitration agreement. WSJ, MetroPCS Sues Merrill Over Risky Investment.
Massachusetts Regulator Investigates Principal Trading at Bear Stearns Funds
Is Bear Stearns in trouble again? The Massachusetts securities regulator is investigating whether the firm engaged in undisclosed principal trading with two inhouse hedge funds that collapsed this summer. The federal prosecutors and the SEC are already investigating the circumstances surrounding the collapse. WSJ, Bear Stearns Draws Probe On Fund Trades.
October 18, 2007
Latest Development in KPMG Trial
The convoluted and troubled criminal trial against three former KPMG executives and a former Sidley Austin attorney was delayed, after Judge Kaplan disqualified Steven Bauer, lead counsel for ex-KPMG senior tax manager John Larson for potential conflicts of interest. Last month the government asked the judge to explore possible conflicts. WSJ, Judge Delays KPMG Trial After Barring Defense Lawyer.
NYSE FAQs About Portfolio Margin Requirements
NYSE Regulation released FAQs about Portfolio Margin Requirements.
FINRA and NASAA Discuss Expungement at PIABA Meeting
I have the honor of being a speaker at the Public Investors Arbitration Bar Association (PIABA) Annual Meeting currently underway on Amelia Island, Florida. This morning George Friedman, Executive Vice President, FINRA Dispute Resolution, reported on recent developments and answered a number of questions put to him by PIABA attorneys. Of particular interest is the track record on motions to expunge from the CRD records of arbitration claims filed by customers against registered representatives. A recent PIABA study examined all settled customer awards issued by FINRA panels in 2006 that were subject to the restrictions on expungement under NASD Rule 2130. It found that in over 71% of the stipulated awards arbitration panels recommended expungement of customer complaints without any evidence that an evidentiary hearing had been conducted, and that expungements were granted in more than 98% of the stipulated or settled awards where the expungement relief had been requested.
Mr. Friedman began his remarks by stating that clearly something needs to be done to address the problem and that he expects (without giving specifics) that something will be done soon. He did note that expungements have gone down since the new rule took effect, from 907 in 2005 to 516 in 2006 and, for the first half of 2007, 166. Since the rule has taken effect, NASD/FINRA has been named a defendant in 69 post-award judicial expungement proceedings and has opposed expungement in 56 of those instances. The SRO has received 440 requests for waiver of the rule's requirement that the SRO be named as a defendant, and it has granted 386 waivers. Mr. Friedman also noted that the rule does not require that the arbitrators conduct an evidentiary hearing on the grounds for expungement, although FINRA does encourage hearings. He also noted that all arbitrators were required to receive training on the operation of the new rule. He acknowledged that there have been disagreements between FINRA and NASAA about the expungement process-- a topic that a later NASAA panel addressed in greater detail. Finally, Mr. Friedman said that failure was not an option for this rule.
During its panel session, NASAA, for its part, noted that NASAA and FINRA were interpreting the three findings of the rule differently. NASAA reviews all requests for expungement and transmits the information to all states where the registered representative is registered. Some states are fighting expungement proceedings aggressively; the New York AG, for example, is opposing expungement in every case. NASAA's website has further information on the cases.
I will report in later posts on other "hot" topics addressed at the meeting, including FINRA's proposed rule limiting motions to dismiss.
Hedge Funds Want Changes at Brink's
Millbrook Capital, an activist hedge fund, wants Brnk's to split its armored-truck and security provider units into two separate companies. To that end, it plans a proxy contest for four seats on the board of directors. Another hedge fund, Pirate Capital, is also pressing for corporate governance changes; it wants to eliminate the staggered board and to separate the offices of chair and CEO. NYTimes, Millbrook Plans Proxy Contest for Seats on Brink’s Board
State Street Sued Again Over Losses in Fixed-Income Funds
Unisystems Inc. filed a putative class action against State Street Corp. over losses in fixed-income funds held in workplace retirement plans. The complaint alleges that the funds were misrepresented as conservative investments and did not disclose their investments in high-risk and mortgage-backed securities. Prudential previously filed suit against State St. with similar allegations, and several State Attorneys General are investigating State Street in connection with losses in state retirement plans. WSJ, State Street Is Sued Over Fund Losses.
JPMorganChase Reports Modest Profit
The big banks' reporting of third quarter results continues to reflect this summer's difficulties. JPMorganChase was able to report a 2.3% increase in earnings, even as it took nearly $2 billion in write-downs and increases to consumer loss reserves that reflect the difficulties in its retail and investment banking units. JPMorgan Chase's performance is in sharp contrast to Citigroup's dismal 57% drop in earnings for the third quarter. NYTimes, JPMorgan Chase Posts a Profit, but Takes $2 Billion Write-Down ; WSJ, J.P. Morgan's Time to Grin.
Morgan Stanley Sells New York Times Stock
The New York Times Co. is one of the best examples of a dual-class share structure that allows a public company to vest perpetual control in a shareholder group, in this case, the Ochs-Sulzberger family. For two years, Morgan Stanley, a 7% shareholder, waged a campaign to change the structure, but no more. It has sold its block of New York Times stock. The stock price closed yesterday at its lowest since January 1997. NYTimes, Big Holder Sells Stake in Times Co.; WSJ, Sign of Times:Don't Fight The Family?
October 17, 2007
SEC Investigating Countrywide Financial CEO's Stock Sales
Somehow we knew this was coming -- the SEC is conducting an informal investigation into the stock sales by Countrywide Financial Corp. CEO Angelo Mozilo, who reportedly sold $130.6 million worth of shares in the first half of the year under a Rule 10b5-1 plan. WSJ, SEC Investigating Mozilo Stock Sales.
Fired Dow Officer Sues Bank That Implicated Him
You will recall that Dow Chemical fired two officers when JPMorganChase told the company that they had participated in secret talks to buy the company. The firing resulted in litigation between the company and the officers. Now Romeo Kreinberg, one of the officers, is suing JPMorganChase, calling it a "Judas" that implicated him in the negotiations to get back into Dow's good graces. The complaint also asserts that the bank should be held accountable for its share of the harm to Dow. (huh?) NYTimes, Fired Dow Chemical Officer Sues JPMorgan
Cablevision's Largest Shareholder Threatens No Vote
Even as Cablevision's largest shareholder, ClearBridge Advisors (with 13.6%) threatens to vote against the Dolan family's purchase of the company, the Dolans maintained they would not raise the price of their $10.6 billion offer. Other large shareholders and ISS have already opposed the deal; the vote is scheduled for Oct. 24 and requires a majority of the public shareholders. The Dolans have tried several times to take the company private in recent years. NYTimes, Cablevision Buyout Deal Is Imperiled; WSJ, Cablevision Deal Meets More Opposition.
Internet Start-ups are Back!
Is Facebook worth $15 billion -- about half the value of Yahoo? Wall St. is in love with Internet start-ups again. Is this deja vu all over again, or have they become better at valuing business opportunities? NYTimes, Silicon Valley Start-Ups Awash in Dollars, Again.
October 16, 2007
Employers' Obligations under 401(k) Plans under Examination
What are employers' responsibilities under 401(k) plans to assure that the fees charged to employees are reasonable? Class action lawsuits against a number of big companies, alleging that the companies violated their fiduciary duties by not adequately informing employees about the fees and not taking measures to assure fair fees, are exploring that issue. Courts generally are not granting defendants' motions to dismiss. CFO.com, Fees Under Fire.
Atkins on Globalization
SEC Commissioner Paul S. Atkins spoke on The SEC's Role in Globalization of the Capital Markets at the American Chamber of Commerce in Japan on October 16, 2007.
Sallie Mae Buyers File Legal Response
The group that contracted to buy Sallie Mae filed a response in Delaware Chancery Court to the company's breach of contract case yesterday, saying it was not obligated to go through with the LBO. It also proposed a mutual termination of the agreement that would still allow the sides to argue over whether the buying group had to pay the $900 million termination fee. In that way, it said, it would eliminate Sallie Mae's concerns about whether it was still subject to the agreement's terms. WPost, Investors Punch Back at Sallie Mae; NYTimes, Sallie Mae Deal More Shaky; WSJ, Jilted SLM Is Asked
To Forget About Offer.