Securities Law Prof Blog

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

Tuesday, October 16, 2007

Weiss and Law Firm Enter Not-Guilty Pleas

Melvyn Weiss and Milberg Weiss appear to be the only remaining defendants in the criminal case alleging illegal kickbacks to named plaintiffs, as the other two defendants are likely to enter plea agreements.  The trial is set for August 2008; the lawyer for Mr. Weiss seeks to change the trial from Los Angeles to Manhattan.  NYTimes, After Not-Guilty Pleas, Lawyers May Part Ways; WSJ, More Milberg Weiss Pleas Are Likely.

October 16, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Citigroup Woes Continue

As criticism of Citigroup CEO Charles Prince mounted, the company admitted the obvious -- that its risk management models failed during the summer's credit crisis.  The company suffered a 57% drop in third quarter profit and wrote off $3.55 billion because of deteriorating security prices, leveraged loans and bad trading debt.  It also set aside an additional $2.24 billion reserve to cover future losses.  NYTimes, Citigroup Acknowledges Poor Risk Management; WSJ, Citigroup Model Is Left Shaken By Credit Crunch.

October 16, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, October 15, 2007

Chair Cox, Dirty Harry and Plain Language

Chair Cox on "plain language" (and an attempt at humor, presumably) from his speech at the Center for Plain Language Symposium:

Remember Clint Eastwood's classic role in Dirty Harry? ...One of the most famous scenes from the movie has the wounded bad guy trying to decide if he should draw his gun on Callahan, or if Callahan might have one shot left. Harry Callahan just squints at him, steely-eyed, and says:

"I know what you're thinking. Did he fire six shots or only five? Well, to tell you the truth, in all this excitement, I've kind of lost track myself. But being as this is a 44 Magnum, the most powerful handgun in the world, and would blow your head clear off, you've got to ask yourself one question: Do I feel lucky?"

Not much question that Dirty Harry got his point across. One of the reasons that all of us, as moviegoers, admire Harry's delivery is that we know it's actually difficult to speak that directly. In fact, if those same lines of dialogue were to appear in your average prospectus or proxy statement, they'd probably sound more like this:

"I imagine that you are harboring significant uncertainty concerning the precise number of times that the hammer of this particular multishot firearm was cocked, its cylinder was advanced, the hammer was then released at the rear of its travel, the round in the chamber was fired, and the cylinder was then advanced once again — and specifically whether the exact figure is six, or possibly only five. Indeed, given the ambient commotion, my preoccupation with the need to make multiple, simultaneous and consequential decisions with alacrity, the surrounding high-decibel acoustic percussion, and the substantial ramifications of the firearm having already been discharged multiple times, I myself am experiencing difficulty in quantifying the discharges with exactitude. But inasmuch as the instrument in question, having been manufactured by NASDAQ-listed Smith & Wesson (stock symbol SWHC) with a horizontal barrel dimension of 8 3/8" to propel a projectile with a diameter of nearly 1/2" at a velocity of over 1,000 feet per second and an energy of more than 1,400 joules, is arguably the most powerful firearm in the world (the uncertainty being a function of the particular metric that one might choose, such as overall terminal ballistics, external ballistics, or some combination of other factors), you should be advised that were the projectile from this instrument to strike you in the region between the apex of the cranium and the base of the lower mandible, it would completely sever this entire portion of your anatomy, and in addition transport it a considerable distance from its original location. As a result, it is appropriate that you pursue a specific and directed line of inquiry and self-examination: viz., in view of all the facts and circumstances, and giving due weight to the relevant risk factors, is it your considered judgment that you are more likely than not to be relatively fortunate?”

October 15, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Hedge Fund with Rule 105 Violations

The SEC today charged a New York hedge fund, its adviser, and its Managing Director with illegal trading in connection with at least eighteen public offerings. The Complaint alleges that Colonial Fund LLC, Colonial Investment Management LLC, and Cary G. Brody violated Rule 105 of Regulation M when they used shares purchased in at least eighteen registered public offerings to cover short sales that they made during a restricted period. The Defendants realized profits in excess of $1.48 million from the illegal trades.  The Complaint also alleges that the Defendants often engaged in sham market trades after covering Colonial Fund's restricted period short positions.

The Commission seeks an injunction prohibiting each Defendant from further violating Rule 105 of Regulation M. The Complaint also seeks full disgorgement and prejudgment interest from all Defendants, on a joint and several basis, and a civil penalty from Brody

October 15, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Nortel Networks Settles SEC Accounting Charges

The SEC today filed civil fraud charges against Nortel Networks alleging that it engaged in accounting fraud from 2000 through 2003 to close gaps between its true performance, its internal targets and Wall Street expectations. Nortel has agreed to settle the action by consenting to be permanently enjoined from violating the antifraud, reporting, books and records and internal control provisions of the federal securities laws and by paying a $35 million civil penalty, which the Commission will seek to place in a Fair Fund for distribution to affected shareholders. Nortel also has agreed to report periodically to the Commission's staff on its progress in implementing remedial measures and resolving an outstanding material weakness over its revenue recognition procedures.  The SEC, perhaps as part of its policy to make penalty amounts more transparent, characterized the fraud as "long-running, intentional and pervasive." 

In settling the matter, the SEC also acknowledged Nortel's substantial remedial efforts and cooperation. After Nortel announced its first restatement, the Audit Committee of Nortel's Board of Directors launched an independent investigation which later uncovered the improper accounting. Nortel's Board took extensive remedial action that included promptly terminating employees responsible for the wrongdoing, restating its financial statements four times over four years, replacing its senior management, and instituting a comprehensive remediation program designed to ensure proper accounting and reporting practices. Nortel also shared the results of its independent investigation with the Commission.

The SEC previously announced the filing of civil fraud charges against a number of former Nortell officers, including its former CEO Frank Dunn, former CFO Douglas Beatty, and former Controller Michael Gollogly.

October 15, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NASAA Releases Best Practices for Investment Advisers

The North American Securities Administrators Association (NASAA) today released an updated series of recommended best practices that investment advisers should consider in order to improve their compliance practices and procedures. The best practices were developed after a nationwide series of coordinated examinations of investment advisers by 43 state and provincial securities examiners revealed a significant number of problem areas. 418 examinations of investment advisers were conducted between January 1, 2007 and May 31, 2007. These exams revealed 2,135 deficiencies in 13 compliance areas.

The top five categories with the greatest number of deficiencies identified in the examinations involved registration, unethical business practices, books and records, supervisory/compliance, and privacy.

October 15, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

H-P Settles BackDating Class Action at Mercury

Hewlett-Packard agreed to a $117.5 million settlement of a class action involving alleged stock option backdating at Mercury Corp., which it acquired in 2006.  H-P previously paid a $25 million penalty to the SEC over the same charges.  The allegations stem from conduct prior to H-P's acquisition of the company.  Part of the controversey over the stock option backdating has been whether the shareholders can show injury from the practice; here, the parties agreed there was substantial injury.  WSJ, H-P to Pay $117.5 Million to Settle Mercury Interactive Options Case.

October 15, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Drexel Presents "No Seat at the Table"

Drexel University's College of Law Program in Business & Entrepreneurship Law is hosting a conference on November 29, 2007 entitled "No Seat at the Table" A Discussion of Women & Corporate Boards. 
Attendance at the conference is open to the public and, unless you are seeking CLE credits, free of charge.  The conference is three (3) hours of substantive CLE credits in PA for $25, payable the day of the conference.  All attendees must register in advance.  See the website for further information.

October 15, 2007 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Sallie Mae Seeks Expedited Trial

Sallie Mae has asked Delaware Chancellor Leo Strine to expedite its breach of contract trial against the buyer group led by J.C. Flowers.  Sallie Mae seeks completion of the LBO or payment of the $900 million breakup fee. It says that it is being held hostage by the buying group, because the agreement requires Sallie Mae to obtain permission for any major decisions prior to completing the deal.  The buying group, in turn, is expected to file a counterclaim or its own lawsuit seeking a declatory judgment that the federal legislation cutting subsidies to the student lending industry is a material adverse event under the contract.  NYTimes, Sallie Mae Seeks to Expedite Trial on Buyout; WSJ, Sallie Mae Seeks Expedited Trial In Buyout Suit.

October 15, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Opposition to Cablevision LBO Grows

Both proxy adviser ISS Governance Services and Mario Gabelli's Gamco Investors (owners of 8% of the shares) announced their opposition to the Dolan family's plan to take Cablevision private, saying the $36.26 price is too low.  The Dolans have been attempting to take the company private since 2005.  The shareholders meeting is scheduled for Oct. 24.  WSJ, Cablevision Offer Meets New Opposition.

October 15, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, October 14, 2007

Is There A Higher Suitability Standard for Seniors?

The vulnerability of senior investors to investment scams has certainly been the recent focus of the SEC, the SROs, and the state securities regulators.  The SEC's Seniors Summit, in particular, drew attention to the "Free Lunch" Investment Seminars and other high-pressure sales tactics.  FINRA followed up with a Notice to Members reminding brokers and dealers of their suitability obligations in advising senior or disabled citizens.  This has led some to assert that brokers will be held to a higher suitability standard in their recommendations and seniors have "special status."  However, no one should be surprised by the regulators' statements.  Both the courts and the regulators have long recognized that the broker's duty when he makes a recommendation includes making an investigation  into the customer's circumstances to make certain the investment or the investment strategy is suitable for the investor. In addition, even if the broker does not himself make a recommendation to his customer, he may have a duty to warn the investor about investments that the investor is considering that are unduly risky for the investor.  These well-recognized duties include an obligation to make certain that the investor understands the risks associated with any investment.  There is no doubt that many brokers have viewed the ever-increasing number of senior investors who are dependent on their investment income  as a source of revenue; the regulators and the industry should also make certain that these investors are not taken advantage of and can live their retirement years with dignity.

October 14, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Eleventh Circuit's Application of Blue Chip and Reves Tests

In a recent opinion, the Eleventh Circuit offers some observations on both the Blue Chip standing test and the definition of a security under the Reves test.  In Financial Security Assurance , Inc. v. Stephens, Inc., (11th Cir. Sept. 18, 2007), 2007 WL 2700280,  an insurer of municipal bonds that became the owner upon default by the issuer brought Rule 10b-5 claims against the underwriter of the bonds and a civil engineering firm.  The district court had dismissed the claims, but the appeals court initially affirmed in part and reversed in part and remanded the case.  On rehearing, however, in a per curiam opinion, the appeals court affirmed the district court completely and dismissed the case.  It found that the insurer had no standing to bring the Rule 10b-5 claims.  It rejected the plaintiff's arguments that, as guarantor of the bonds, it was the real party in interest and interpreted the Blue Chip standing test as rejecting any functional test.  In addition, the court rejected the plaintiff's argument that after default it had purchased the bonds under the terms of the insurance policy because, it said, that under the Reves test, the bonds were not securities because when the plaintiff purchased them they did not have the potential to generate any profit.  So apparently the bonds could be securities when owned by the initial purchasers, but became non-securities when held by the insurer.

October 14, 2007 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Heminway on Disclosure of Personal Facts

Personal Facts About Executive Officers: A Proposal for Tailored Disclosures to Encourage Reasonable Investor Behavior, by JOAN MACLEOD HEMINWAY, University of Tennessee, Knoxville - College of Law, was recently posted on SSRN.  Here is the abstract:

Required disclosures under U.S. securities laws, whether mandated by line-item disclosure rules, gap-filling regulations, or antifraud provisions, tend to focus principally, although not exclusively, on corporate facts - information about an issuer of securities or a transaction involving an issuer of securities. Although there are line-item disclosure rules that require the public revelation of personal facts about executive officers (both by the issuer and by the executive himself or herself), these rules are limited in scope.

However, public disclosure of executives' personal facts not covered by these line-item rules still may be required under applicable gap-filling regulations or antifraud provisions. The analysis of whether and, if so, when to disclose personal facts about an executive officer under these regulations and provisions may be difficult. The lynchpin in that analysis is a decision as to whether the personal facts are material under applicable formulations of the judge-made materiality standard. These materiality determinations may be complex and emotionally laden.

This paper argues for an enhancement of federal disclosure rules as they relate to personal facts about executive officers of public companies. The paper first summarizes significant existing requirements for disclosure about executive officers. Then, the paper argues that the existing federal securities law regime applicable to public company executive disclosures of personal facts is deficient in three respects. Specifically, existing disclosure requirements place too much discretion in the hands of executives, cause pressure on important individual rights, and tend to cause investors and markets to overreact. As a response, the paper proposes limited federal securities rule changes designed to more effectively and efficiently manage the public release of personal facts about public company executives.


October 14, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Shadab on Hedge Fund Markets

Fending for Themselves: Regulatory Reform to Create a U.S. Hedge Fund Market for Retail Investors, by HOUMAN B. SHADAB, George Mason University - Mercatus Center, was recently posted on SSRN.  Here is the abstract:

This Article shows that financially sophisticated retail investors in the United States likely suffer from undue economic losses because they are not permitted to invest in hedge funds. “Hedge fund” is a term of art for a diverse group of investment funds whose superior risk-adjusted performance owes much to their distinguishing characteristics and operations. Modern portfolio economics teaches that diversification helps to prevent investment losses, and the absolute return strategies employed by hedge funds can help to diversify an investment portfolio. However, U.S. federal securities law requires individual investors to be wealthy to qualify to invest in hedge funds. Although intended to protect investors, wealth-based qualifications prohibit sophisticated retail investors from benefiting from hedge funds and do not prevent unsophisticated investors from bearing hedge fund-like risks. The Securities and Exchange Commission has expressed a desire to increase access to hedge funds while maintaining investor protection, and the reforms proposed in this Article explain how to accomplish that goal. The proposed reforms seek to create a retail fund of hedge funds that privately raises capital through an underwriter who in turns lists the securities of the fund on an electronic trading platform accessible only by sophisticated investors.

October 14, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)