Securities Law Prof Blog

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

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Friday, October 26, 2007

SIFMA's White Paper on Securities Arbitration

SIFMA's Oct. 25 testimony before House Subcommittee on Commercial and Administrative Law on the "Arbitration Fairness Act" is posted on its website, a more concise version of its White Paper on Securities Arbitration, subtitled "the success story of an investor protection focused institution that has delivered timely, cost-effective, and fair results for over 30 years."

The Arbitration Fairness Act is the most recent Congressional expression of concern about the securities arbitration process that dates back to the McMahon decision itself.  My objections to the White Paper are not so much with its position; I have previously written that, with all its flaws, the securities arbitration process is reasonably fair and that most investors are probably better off in arbitration than in court.  I just wish that SIFMA had invested its resources into contributing new research or new insights to this perennial debate.  Instead, the White Paper is principally a rehash of the old arguments and relies heavily on old studies – e.g., a 1988 study comparing arbitration and litigation, the 1992 GAO study, the 1999 Tidwell study based on NASD party evaluations. The most argumentative portion of the White Paper is devoted to a critique of the recently released Solin Report.  While I have previously pointed out difficulties with the analysis in the Solin Report, its authors base their arguments on an empirical examination of a substantial number of arbitration awards.

The White Paper, for example, faults the Solin Report for its failure to account for what the White Paper characterizes as the “particularly aggressive claimants’ bar” in the early 2000s which filed, in its view, a large number of meritless claims, specifically, the tainted research claims.  I think, however, that the poor rate of success of the tainted research cases in arbitration is a topic worthy of more dispassionate study.  Given the public exposure of statements by analysts that they were lying about their expectations for the stocks, why were the arbitrators apparently so willing to blame the investors instead of the firms?  Contrary to the White Paper, I personally do find it surprising that arbitrators awarded damages in fewer than one-third of the analyst cases.  Unlike the White Paper, I have doubts that the explanation lies with the aggressive claimants’ bar. 

October 26, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

FINRA Censures UBS for Late CRD Disclosures

FINRA announced today that it has censured and fined UBS Financial Services, Inc. (UBS) $370,000, for making hundreds of late disclosures to FINRA's Central Registration Depository (CRD) of information about its brokers, including customer complaints, regulatory actions and criminal disclosures. Those reporting violations occurred over a three-year period, from January 2002 through December 2004.  FINRA's findings included:

From January 2002 through December 2004, UBS failed to report on time 559 required disclosures on Forms U4 and U5 relating to reportable customer complaints, regulatory actions and criminal disclosures, representing a non-compliance rate of over 18 percent. During the same time period, the firm failed to have supervisory systems and procedures in place reasonably designed to achieve compliance with reporting obligations for timely disclosures.

From January 2002 through December 2004, UBS failed to disclose on Forms U4 and U5 at least 24 reportable written customer complaints that the firm had received.

As part of the settlement, UBS agreed to conduct an internal audit to evaluate the effectiveness of its system for timely compliance with certain Forms U4 and U5 reporting obligations. In addition, the firm agreed that an officer of the firm will certify that such audit has occurred and that recommendations from the audit have been or will be implemented.  In settling this matter, UBS neither admitted nor denied the allegations, but consented to the entry of FINRA's findings.

October 26, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Former CEO of DHB Industries Arrested for Insider Trading

David Brooks, the former CEO of body armor-maker DHB Industries (n/k/a Point Blank Solutions) was arrested on conspiracy, insider trading, and other charges involving an alleged scheme to inflate the company's performance from 2000-2006.  The indictment also alleges that Brooks used company funds (about $ 5 million) for a whole array of personal and family expenses, including expenses related to his children's Bat/Bar Mitzvahs and his wife's cosmetic surgery.  WSJ, Former DHB Industries Chief Is Charged With Insider Trading.

The SEC also brought civil charges against Mr. Brooks.  At the time of the alleged conduct, Brooks was subject to an SEC injunction entered by a federal court in December 1992 against future violations of the antifraud provisions.

October 26, 2007 in News Stories | Permalink | Comments (1) | TrackBack (0)

Tyco Executives Appeal Convictions

Former Tyco executives Dennis Kozlowski and Mark Swartz have appealed their convictions that they looted the company, arguing that they were entitled to the money under the company's executive compensation plan.  Each man has already served two years of his sentence.  WSJ, Tyco Ex-Officers Seek to Reverse Convictions.

October 26, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, October 25, 2007

SIFMA Releases White Paper on Securities Arbitration

SIFMA has released a White Paper on Arbitration in the Securities Industry, which it subtitles "the success story of an investor protection-focused institution that has delivered timely, cost-effective and fair results for over 30 years."  I'll report more on this later when I have a chance to read its 70 pages.

October 25, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Is Merrill's CEO Long for the Job?

The actual loss reported by Merrill Lynch yesterday was $8.4 billion, up from the expected $5 billion figure of two weeks ago and up from the $7 billion figure that was floated early yesterday morning.  Merrill Lynch gets the dubious distinction of the largest loss ever on Wall St., surpassing the $6 billion loss by hedge fund Amaranth in 2006.  In a telephone call with analysts, CEO Stanley O'Neal concedes that "some mistakes were made."  Everyone else is wondering how the firm's exposure to risky mortgages got so out of hand and whether O'Neal will hold onto the CEO spot.  WSJ, Merrill Takes $8.4 Billion Credit Hit.

October 25, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sovereign Wealth Funds in the Spotlight

The growing size and influence of sovereign wealth funds has become a topic of concern.  Currently these funds are operated by more than twenty countries, including China and Saudi Arabia, and are buying stakes in U.S. companies.  Both the Group of Seven and the IMF recently asked whether there should be standards addressing risk management, transparency and accountability for the funds.  Chair Cox last night in a speech said that the rise of the funds "challenges us to ask whether these many benefits of markets and private ownership will be threatened if government ownership in the economy...becomes more significant -- or whether, alternatively, the world will be better off."   WSJ, Cox Cites Concern Over Sovereign Funds.

October 25, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 24, 2007

Cablevision Shareholders Vote Down Dolans' Going Private Offer

Will James Dolan give up on plans to take Cablevision private, now that, as expected, the public shareholders voted down the $10.6 billion offer ($36.26 per share)?  Several large shareholders announced that they would vote against the plan.  Stay tuned .... WSJ, Cablevision Shareholders Reject Dolans' Bid to Take Firm Private.

October 24, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Merrill Expected to Announce $7 Billion Losses

The word is that Merrill Lynch will soon announce that its third quarter losses are even greater than the previously announced $5 billion and will, in fact, exceed $7 billion.  Merrill CEO Stanley O'Neal joins Citigroup CEO Charles Prince on the hot seat, as doubts continue about Merrill's ability to manage its risk.  WSJ, Merrill Loss May Be Wider Than Projected;NYTimes, Merrill Lynch to Report $2.5 Billion in Added Loss.

October 24, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Where's the Rescue Plan?

Since Citigroup, Bank of America and JPMorgan Chase announced, with great fanfare, its "rescue plan" for SIVs (structured investment vehicles), they have not released much information about how the plan would work or where the rescue funds would come from.  Indeed, some have said the plan is just window-dressing.  Meanwhile, the SIVs need to find investors for about $100 billion in debt coming due soon.  SIVs sell short-term debt and use the proceeds to buy longer-term, higher-yielding securities.  They are a popular investment vehicle for money market funds and municipalities that viewed SIVs as loss-risk investments.  In the wake of the credit crunch, however, SIVs have had difficulty selling the debt, and much of their approximately $350 billion in assets is backed by U.S. mortgages.  WSJ, SIV Situation:Will RescuersArrive in Time?

October 24, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 23, 2007

Atkins Calls for Review of SEC Enforcement Program

In a recent speech, SEC Commmissioner Paul Atkins, reviews the history of the Wells Committee and says:

I welcome the idea of new advisory committees to review the functions of our divisions and offices. In light of the many issues raised in the three recent capital market competitiveness reports, the 2006 Chamber of Commerce report on the SEC enforcement program, and the Congressional and GAO reports, I think it is clear that this would be a good time for a new "Wells-like" advisory committee to review the policies and procedures of our enforcement program. The Commission and the staff should welcome, not fear, such a review.

Remarks at the Eighth Annual A. A. Sommer, Jr. Corporate, Securities and Financial Law Lecture, Fordham University Law School, New York, New York, October 9, 2007.

October 23, 2007 in SEC Action | Permalink | Comments (1) | TrackBack (0)

SEC Gets TRO in Ponzi Scheme

The SEC announced that on October 19, 2007, the United Stated District Court for the Northern District of Illinois, Eastern Division issued a Temporary Restraining Order and Asset Freeze against Robert A. Loffredi (Loffredi) and Raymond Financial Group, Inc. (Raymond Financial) temporarily enjoining Loffredi and Raymond Financial from securities law violations and freezing their assets. The SEC alleges that from at least August 2003 to the present, Loffredi, a registered representative and the President of Raymond Financial, raised at least $2.8 million from at least fourteen customers by falsely representing that he would invest their funds in securities, primarily in the form of purported certificates of deposit (CDs). Instead, Loffredi used the customers' funds to pay his personal and business expenses and to make payments to other customers who had invested in fictitious securities.

October 23, 2007 in SEC Action | Permalink | Comments (1) | TrackBack (0)

FINRA Warns Investors About Energy Stock Frauds

FINRA issued an Investor Alert today warning investors to be wary of energy-related stock "pump-and-dump" scams that entice investors to purchase stocks that promise exponential price growth.

The new Investor Alert, "Save Your Energy and Money—Don't Fall for Energy Stock Scams," explains these energy stock scams typically involve small unknown companies, using a combination of baseless price predictions, misrepresentations and hyperbole. The goal of these scams is to inflate the price of the stock through false and misleading statements that create unwarranted demand for the company's shares. The con artists behind the scam can then sell off their shares, leaving investors with worthless stock.

The Alert warns investors about fax, email and even cell phone text message scams that promise high returns in exchange for little risk. In a spam message, one outfit trumpets that a certain Texas energy firm has "teamed up with China's $23 billion oil monopoly," and promises that huge returns are in store for those with the wisdom and foresight to invest 'RIGHT NOW!'

October 23, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Applebee's Director Plans to Seek Appraisal of Shares If IHOP Deal is Approved

Appraisal proceedings are rare -- the procedure is too cumbersome, and the cost/benefit analysis rarely points to filing the proceeding.  Even rarer is a director of the acquired corporation filing an appraisal proceeding, but that is what Burton "Skip" Sack, a director and the largest individual shareholder of Applebee's International, says he plans to do if the other shareholders approve IHOP's acquisition at $25.50 per share.  The Applebee's board split 9-5 over whether to approve the deal, and the proxy advisory firms are also split.  WSJ, Applebee's Director Says IHOP Is Paying Too Little for Chain.

October 23, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Government Disputes Nacchio's Claim that Government Retaliated Against Qwest

You will recall that former Qwest CEO Joseph Nacchio has filed an appeal in his criminal insider-trading conviction.  Among the grounds cited, he points to the exclusion of certain evidence by the district court that, he says, shows that the government retaliated against the company by leaving its name off a list of subcontractors for a lucrative government project, after Qwest questioned the legality of an earlier government plan.  While it's not clear to me what this has to do with the insider-trading charges, the allegations received a great deal of press.  Prosecutors yesterday filed papers that, it says, show that Qwest in fact was part of a group that secured the government contract.  WPost, Papers Contradict Nacchio's Defense.

October 23, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Dispute Over Sallie Mae Likely to Go to Trial

The attorneys for the buying group led by J.C. Flowers and Sallie Mae held a conference call with Vice Chancellor Victor Strine over Sallie Mae's request for an expedited hearing, because it says that the restrictive covenants in the merger agreement interfere with its business operations and prevent it from shopping the company.  The Chancellor repeatedly asked why the parties did not agree to terminate the agreement.  Finally, the buyers agreed to waive the restrictive covenants so as to avoid the expedited hearing. A trial is likely for early next year, unless the parties arrive at a settlement. NYTimes, Provision Is Waived in Sallie Mae Merger Case, but Underlying Dispute Remains ; WSJ, Flowers Drops Sallie Proviso.

October 23, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, October 22, 2007

Sales of B Shares Continue to Decline

In a few years Class B shares in mutual funds may be extinct, thanks to regulatory pressure to thwart brokers' sales of B shares in lieu of more suitable A shares, as well as (perhaps) better investor education as to the differences.  In recent years, investors have pulled out more money from B shares than they have invested; last year, net outflows were more than $57 billion, according to an industry source.  Brokers frequently pushed more expensive B shares as an alternative for "no-load" funds because the sales charge was at the back end.  In addition, B shares were frequently sold to customers whose dollar amounts made A shares a better deal.  InvNews, Sales of B shares continue to wane.

October 22, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Joe Torre and Performance-Based Pay

Was Joe Torre right to feel insulted by the Yankees' offer of a one-year contract that cut his base salary (from $7.5 million to $5 million) and replaced it with performance-based bonuses -- $1 million for each level of postseason play reached in 2008?  Not according to many CFOs, who view performance-based incentives as completely appropriate for senior management.  CFO.com, Torre's Pay Offer Is a Hit with CFOs.

October 22, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

A $6 Million Verdict Against Merrill Lynch in Customer Dispute

A Florida jury found that a Merrill Lynch broker took advantage of the late philanthropist George Rothman (who died in 2004 at the age of 86) and his wife and awarded $6 million in damages.  The jury will decide whether to award punitive damages.  The allegations are representative of the kind of "senior investor" case we can expect to see more of: the broker took advantage of the deteriorating mental condition of the couple and placed them in high-commission variable annuities, while assuring them they were in low-load funds.  There is no explanation why this case was in court instead of in arbitration.  A Merrill Lynch spokesperson called the verdict "astonishing," because the couple were wealthy sophisticated investors who lost no money on the investment.  NYTimes, Jury Finds Merrill Lynch Bilked Couple.

October 22, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Coke Resists Class Action Certification Citing Lerach

Will Bill Lerach's guilty plea be grounds to terminate pending class actions brought by his former law firm, Coughlin Stoia?  Coca-Cola seeks to deny class-action certification in an action alleging accounting fraud that was instituted in 2000 on that ground.  A federal judge in another securities fraud class action has already rejected the argument, because Lerach had retired from the firm and the law firm itself is not under indictment -- as is the case with Milberg Weiss.  WSJ, Coke Tries New Defense.

October 22, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)