Securities Law Prof Blog

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

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Wednesday, November 7, 2007

Former Freddie Mac Chair Settles Accounting Fraud Charges

The Office of Federal Housing Oversight (OFHEO) and former Freddie Mac chair Leland C. Brendsel settled accounting fraud charges midway through his regulatory trial.  Brendsel will pay $13 million and give up claims for additional compensation from Freddie Mac.  OFHEO had sought over $1 billion in damages and penalties.  The government said the money would be used to assist home owners at risk of losing their homes.

Freddie Mac had engaged in a practice of smoothing out profits over years to present a picture of stable earnings growth.  It previously agreed to settle for $590 million.

Warren Buffett testified at Brendsel's trial for the government that he liquidated his holdings in Freddie Mac because of his concerns over the company's earnings projections.  WPost, Brendsel, OFHEO Agree to Settle Freddie Ex-CEO to Pay $16.4 Million.

November 7, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 6, 2007

Investors' Lawyers Take on Hedge Funds

After the collapse of the tech stock boom, some retail investors looked for the "next big thing," and hedge funds, once the exclusive investment of the wealthy sophisticated investor, aimed to please them.  Now, although securities arbitration claims have been down this year, they may not be for long.  Investors' lawyers are filing arbitration claims on behalf of investors in failed hedge funds -- of which there are many, particularly the smaller funds.  Regulators are also looking into failed hedge funds,of which the collapse of two Bear Stearns funds over the summer is still the prime example.  InvNews, Hedge funds next target of plaintiff's bar?

November 6, 2007 | Permalink | Comments (0) | TrackBack (0)

Citigroup Sued by 401(K) Plan Participants

Another law suit filed against Citigroup, this one on behalf of participants in its 401(k) plans, alleging that the plan invested a significant amount of its funds into Citigroup stock -- about 32% of the plans' assets as of December 2006.  According to plaintiffs, this investment policy violated federal pension law and the prudent investor rule and exposed the plan participants to excessive risk.  CFO.com, Citigroup Slapped with 401(k) Suit.

November 6, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Nasdaq Expected to Purchase Philadelphia Exchange

Nasdaq is expected to purchase the Philadelphia Stock Exchange, the oldest U.S. exchange, for over $600 million in cash, a deal it has been negotiating off and on for several months.  The deal would allow Nasdaq to expand into the stock options business, of which the Philadelphia Exchange has about a 14% market share.  WSJ, Nasdaq Close to Buying Phil-Ex.

November 6, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Countrywide Extends Exercise Periods for Stock Options

Countrywide Financial Corp. extended the exercise dates of stock options held by employees for one to two years; otherwise, many of the options might have expired with the strike prices above the market price.  The company said it was necessary to retain valued employees.  The extensions do not apply to options held by the CEO and CFO.  In an October conference call, CEO Mozilo indicated that executives were considering personal purchases of the stock to show their confidence in the company, but there are no records showing any purchases to date.  WSJ, Countrywide Extends Employees' Stock Options.

November 6, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, November 5, 2007

Back Dating Class Action Against Openwave Allowed to Proceed

Judge Denise Cote of the Southern District of New York recently denied a motion to dismiss Rule 10b-5 claims against Openwave Systems and a number of its former executives involving an alleged seven-year stock option backdating scheme.  The court found that the plaintiffs adequately alleged scienter and loss causation.  In re Openwave Systems Sec. Litig., 2007 WL 3224584 (S.D.N.Y. Oct. 31, 2007).

November 5, 2007 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

SEC Gets Mixed Results in PIPES Short-Sales Charges

The SEC has brought a number of actions recently in which it alleges Securities Act section 5 violations for short-selling securities prior to purchasing the same securities in a PIPES offering.  Today it filed a settled action against New Jersey-based hedge fund TCMP3 Partners, L.P., its general partner TCMP3 Capital, LLC, its investment manager Titan Capital Management, LLC, and portfolio managers Walter M. Schenker and Steven E. Slawson in the U.S. District Court for the District of Columbia. The defendants agreed to settle the Commission's charge that they violated of Section 5 in connection with 26 unregistered "PIPEs" (Private Investment in Public Equity) offerings. The Commission alleges in its complaint that the defendants typically, after agreeing to invest in a PIPE offering, sold short the issuer's stock. The Commission's complaint further alleges that, once the Commission declared the resale registration statement for a PIPE effective, defendants used some or all of the PIPE shares to close out pre-effective date short positions by journaling PIPE shares to their short account.

However, a federal district court recently dismissed similar charges in SEC v. Mangan (W.D.N.C. Oct. 24, 2007), holding that no sale of unregistered securities occurred as a matter of law.  The SEC has a number of similar cases pending in other jurisdictions.

November 5, 2007 | Permalink | Comments (0) | TrackBack (0)

SEC Staff Bulletin on Accounting for Written Loan Commitments Recorded at Fair Value

The SEC's Office of the Chief Accountant and Division of Corporation Finance today announced the release of Staff Accounting Bulletin (SAB) No. 109, "Written Loan Commitments Recorded at Fair Value Through Earnings." The SAB provides the staff's views on the accounting for written loan commitments recorded at fair value under generally accepted accounting principles (GAAP).

To make the staff's views consistent with current authoritative accounting guidance, the SAB revises and rescinds portions of SAB No. 105, "Application of Accounting Principles to Loan Commitments."

Specifically, the SAB revises the SEC staff's views on incorporating expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. The SAB retains the staff's views on incorporating expected net future cash flows related to internally-developed intangible assets in the fair value measurement of a written loan commitment.

November 5, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Expells Firm for AML Violations

FINRA announced today that it has expelled Franklin Ross, Inc. (FRI) of Princeton, NJ from FINRA membership for repeatedly violating anti-money laundering (AML) rules. FINRA also imposed fines and suspensions against two of the firm's principals - its former president, Mark G. Ross, Jr., and its current president, Kevin K. Herridge. By federal statute, a firm must be a FINRA member in order to conduct a public securities business.

FINRA found that FRI repeatedly violated anti-money laundering (AML) rules by failing to investigate and report numerous suspicious transactions; failing to obtain adequate background information on new customer accounts; failing to conduct an independent test of its AML program; and failing to provide AML training. FRI and Ross also violated supervisory, recordkeeping and registration provisions.

FINRA found that, at various times from February 2004 through September 2006, FRI's clientele included notorious stock promoters and others who had been barred by FINRA or disciplined by the Securities and Exchange Commission (SEC) or had criminal histories - including one customer who had been convicted for money laundering. FINRA further found that in at least a dozen instances, FRI customers sold large blocks of penny stocks that were linked to allegedly fraudulent schemes.

In addition to expelling the firm, FINRA suspended Ross for two years in a principal capacity and 90 days in all capacities and fined him $35,000. FINRA suspended Herridge for six months in a principal capacity and 30 days in all capacities and fined him $25,000. FINRA also ordered both individuals to obtain substantial additional AML training over the next two years.  In concluding this settlement, FRI, Ross and Herridge neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

November 5, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Job Searches at Merrill and Citigroup Raise Questions of Succession Planning

As both Merrill Lynch and Citigroup are looking for new leaders, the question is why there appears to be such a shortage of talent at the top?  Isn't it the responsibility of the board to do some succession planning in advance of the crisis?  A frequently expressed view is that the push to maximize profits at the big banks, and the speedy exit of anyone who fails to perform, weeds out some executives who might be deserving of a second chance.  Another is the combination of skills necessary to do the job -- the charm and sophistication necessary for the public face of a major international firm, combined with the ruthlessness and nerdiness of the finance pro.  Meanwhile, Charles Prince will walk away with $105.2 million in cash and stock, in addition to the $53.1 million he collected in pay in the last four years.  WSJ, Perform-or-Die Culture Leaves Thin Talent Pool For Top Wall Street Jobs.

November 5, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, November 4, 2007

Citigroup Expected to Announce Additional Write-Downs

Citigroup CEO Charles Prince's job has been on the line for weeks, so the (expected) news of his resignation is not a surprise.  But billions of dollars in additional write-downs on mortgage-related securities?  When the tech stock bubble burst, judges and academics were ruthless in their criticism of retail investors' failure to understand the principle of "high return, high risk."  Now it seems that Citigroup management was equally clueless.  It remains to be seen what, if anything, will be the consequences of their failure to understand this fundamental principle of investing.  Is this protected as "business judgment?"  WSJ, Charles Prince Resigns As Citi CEO, Chairman.

November 4, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

FINRA Files Dispositive Motion Rule with SEC

Observers of the securities arbitration process are well aware that dispositive motions have increased significantly in recent years and threaten to deprive the customer of his right to a hearing.  Since NASD(n/k/a FINRA) first proposed its Customer Code of Arbitration, it has struggled to win consensus for a rule dealing with dispositive motions.  The original version of the rule that was contained in the proposed Customer Code was taken out of the Customer Code when it appeared that controversy over it would delay adoption of the rest of the Code.  NASD then filed a proposed dispositive motion rule separately, which the majority of commenters opposed, believing that it actually would encourage dispositive motions rather than, as intended, discourage them.  FINRA now has officially withdrawn the 2006 proposal and, as it announced a few weeks ago, it has filed with the SEC a new proposal.  In this proposal it makes clear that motions to dismiss before the conclusion of the party's case in chief are discouraged.  There are only three grounds for granting a motion to dismiss before a party has concluded its case in chief:  prior written release of the claim; the party was not associated with the account, security or conduct at issue; stale claims under the Eligibility Rule.  In addition, the rule sets forth a procedure for deciding the motion -- they must be decided by the full panel, after an in-person or telephonic conference; decisions to grant the motion must be unanimous, and the arbitrators must give a written explanation.  It is expected that the SEC will put the rule out for public comment soon.  Some representatives of the securities industry have already expressed opposition to the proposal, asserting that it will encourage customers to file meritless claims in the hopes of extracting a settlement.

November 4, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Langevoort on Fraud on the Market

Basic at Twenty: Rethinking Fraud-on-The-Market, by DONALD C. LANGEVOORT, Georgetown University Law Center, was recently posted on SSRN.  Here is the abstract:

Twenty years after being decided, Basic Inc. v. Levinson is being interpreted and applied in interesting, sometimes jarring, ways. This paper looks at Basic's presumption of reliance in fraud-on-the-market cases and the ways in which contemporary courts are addressing such issues as (1) the level of efficiency that is necessary for the presumption to apply; (2) the role of market price distortion and loss causation in the class certification decision; and (3) the connections between materiality and reliance (Basic's two separate issues) in both class certification and on the merits. Basic set in motion much of the resulting confusion by making more of reliance – and market efficiency – than was needed, and then paying too little attention to the joint risks of indeterminacy and disproportionality in the liability threat created by fraud-on-the-market lawsuits. Had it taken a different route, or better explained the route it was taking, we might have seen early on that class recovery is better suited as a deterrence mechanism than a compensatory device. That makes a stringent approach to reliance, causation or class certification unnecessary – but also calls into question the idea that each investor has a “right” to recovery by trading at a distorted price. Instead, the law headed in precisely the opposite direction.

November 4, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Farifax on Social Responsibility Rhetoric

Easier Said than Done? A Corporate Law Theory for Actualizing Social Responsibility Rhetoric , by LISA FAIRFAX, University of Maryland - School of Law, was recently posted on SSRN.  Here is the abstract:

Post Enron has witnessed renewed concern regarding corporations' failure to behave responsibly, both in terms of their ethical responsibility and in terms of their responsibilities to advance issues beyond financial matters, such as those that impact employees, customers, and the broader community. Many scholars, legislators, and members of the business community have struggled to find strategies for restoring corporate responsibility. This Article argues that a corporation's own words or rhetoric may be useful in solving its behavioral defects. In fact, the vast majority of corporations issue statements or otherwise engage in rhetoric that suggest a commitment to issues and concerns beyond financial matters. Most people dismiss this rhetoric as meaningless speech, and as a result there has been very little attempt to analyze its relevance to corporate conduct. This Article insists that such dismissals are shortsighted. First, by critically examining the available empirical evidence, this Article demonstrates that corporate rhetoric has a greater connection to corporate behavior than most would presume. Second, this Article draws on social psychology literature to illuminate how corporate rhetoric on responsibility can be used strategically to increase the likelihood that corporations will engage in behavior consistent with that rhetoric. By highlighting the behavioral significance of corporate rhetoric, this Article offers a unique and novel solution to the problem of corporate irresponsibility.

November 4, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)