Securities Law Prof Blog

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

Friday, November 23, 2007

New FINRA Rule on Representation of Parties

The SEC approved FINRA's rule change that clarifies the issue of representation of parties in FINRA dispute resolution proceedings.  The rule provides for pro se representation.  In addition, parties may be represented by attorneys in good standing and admitted to practice in any jurisdiction, unless state law prohibits it.  In addition, non-attorney representatives (NARs) may represent parties unless state law prohibits it, the person is suspended or barred from the securities industry, or the person is suspended or disbarred from the practice of law.

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

Should the SEC and CFTC Merge?

SIFMA, in a letter in response to Treasury Secretary Paulson's request for comments on the regulatory structure for financial institutions, revives the idea of consolidating the SEC and the CFTC into one "principles-based" regulator.  Certainly, the idea of consolidation has merit, as futures trading today is less involved in the traditional commodities and more focused on financial instruments.  As a result, there are counter-productive turf wars over the jurisdiction of each agency.  However, in an era of increasingly complicated financial products, I think there are good arguments for smaller specialized agencies.  Mutual fund regulation over the years, for example, may not have been effective because the SEC had neither the expertise nor the interest in the area.  Moreover, I suspect that a consolidated agency will not have the resources of two independent agencies, and the reduction will not result just from "efficiencies" of combining resources.  SIFMA, in its letter, also proposes other, comprehensive reforms for the financial services industry.

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

Freddie Mac Sued Over Risk-Management Practices

The bad news keeps coming for Freddie Mac.  On Tuesday, it announced a $2 billion third quarter loss.  The next day, shareholders filed a lawsuit charging the company with misleading investors about its risk-management practices.  Earlier this month, the New York Attorney General issued subpoenas to Fannie Mae and Freddie Mac and demanded they get independent appraisals on the loans they purchased from banks.  WPost, News Gets Worse for Freddie As Shareholders File Lawsuit.

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

2007 a Banner Year for IPOs

The Dow Jones dropped more than 1000 points this month, but the IPO market is having its best year since 2000.  Unlike the earlier boom, which was fueled by tech and dotcom stocks, companies in virtually all sectors of the economy are going public.  The theme this time around is international -- 6 of the 10 best-performing IPOs are foreign companies, three from China.  The best performing IPO is JA Solar, a Chinese company that sells solar-powered equipment.  Its shares are up about 260% since listing on Nasdaq in February.  WPost, IPOs Provide Firms With Ample Funds.

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

Wednesday, November 21, 2007

SEC's Proposed Rules on Mutual Fund Disclosure

The SEC has released for public comment its proposed rule on Enhanced Disclosure and New Prospectus Delivery Option for mutual funds.  In short, the proposal:

(1) requires key information to appear in plain English in a standardized order at the front of the mutual fund prospectus;

(2) allows the prospectus delivery requirement to be satisfied by sending the key information in a summary prospectus and providing the statutory prospectus via a website (with mailing to the investor, if he requests).

November 21, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Agenda for SEC Nov. 28 Meeting

As expected, the SEC will take up the issue of shareholders' access to the proxy statement to nominate directors at its November 28 meeting.  The agenda consists of:

The Commission will consider whether to adopt amendments to Rule 14a-8(i)(8) under the Securities Exchange Act of 1934, to clarify its longstanding interpretation of that rule.
The Commission will consider whether to adopt amendments to the proxy rules under the Securities Exchange Act of 1934 to facilitate the use of electronic shareholder forums.

November 21, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Law Firm Seeks $700 Million in Fees in Enron Case

Coughlin Stoia Geller Rudman & Rollins, the law firm founded by William Lerach, filed a fee application for nearly $700 million in the Enron case, or 9.5%  of the $7.2 billion settlement.  If approved, it will be the largest award of attorneys' fees in a securities class action.  WSJ, Law Firm Seeks Hefty Fee Payout For Enron Suit.

November 21, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 20, 2007

Wall St. Broker Settles Insider Trading Charges

The SEC announced that on Nov. 14, 2007, Andrew A. Srebnik, a former registered  representative  at  Bear,  Stearns  & Co., Inc., settled insider trading charges in SEC v. Guttenberg.  Srebnik  is  one of fourteen defendants in the Commission's complaint, which  alleged  illegal insider trading in connection with two related schemes   in  which  Wall  Street  professionals  serially  traded  on material, nonpublic  information  tipped,  in  exchange  for  cash kickbacks, by insiders at UBS Securities LLC and Morgan Stanley & Co., Inc.

What is interesting about this case is that the SEC alleged that Mitchel  S.  Guttenberg, an executive director  in  the  equity research department of UBS, illegally tipped information  concerning  upcoming  UBS  analyst upgrades  and  downgrades to two Wall Street traders, including Franklin, but not to Srebnik.  Instead, the complaint alleged, Srebnik  worked  on a trading desk at Bear Stearns where  he  had access to Franklin's trading information and, based on Franklin's trading patterns, Srebnik figured out that he was using material,nonpublic    information  to  trade  ahead  of  upcoming  UBS  analyst recommendations.  Srebnik monitored Franklin's trading at Bear  Stearns and used the UBS tips to purchase and sell securities in his  personal  account.

November 20, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Files Charges in Phony Casino Scam

The SEC filed charges stemming from a $250 million offering fraud that it describes as a "brazen scam" and involved phony Las Vegas casino and resort telecommunications deals, which victimized as many as 1,200 investors, many of whom were senior citizens.  The SEC's action charges Detroit-area resident Edward May and E-M Management Co. LLC with selling investors shares of limited liability companies that they claimed had received revenues from telecommunications equipment and services contracts with hotels, casinos, resorts and similar establishments, many of which were purportedly located in Las Vegas. In fact, no such contracts ever existed. To perpetrate their fraudulent scheme, May and E-M relied on a network of individuals, some of whom organized "investment seminars" to entice investors to invest with E-M.

The Commission's civil injunctive complaint, filed in the U.S. District Court, Eastern District of Michigan, alleges that May, through E-M, raised as much as $250 million between 1998 and July 2007.  Both orally and in writing, May and E-M allegedly promised returns in the form of monthly payments to investors for a period as long as 12 to 14 years, and "guaranteed" that investors, at a minimum, would receive the promised payments for approximately the first 20 to 24 months after they invested.

November 20, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Profile of Treasury Secretary Paulson

The Washington Post has a laudatory article on Treasury Secretary Henry Paulson's behind the scenes efforts to deal with the mortgage industry.  Is it too much or too little regulation?  Will it work?  The article lets you decide.  At least, the article implies, we've got a Treasury Secretary that is working on these issues.  WPost, On the Money at Treasury.

November 20, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sovereign Funds Invest in U.S. Firms

A provocative title on a Wall St. Journal article -- The Deal Story of 2008:Will the U.S. Get LBOed? -- expresses the growing unease over foreign investment in U.S. companies.  Twenty years ago we feared the Japanese -- they were going to take over Wall St. and Rockefeller Center too.  Now the sovereign funds of China, the Gulf States, Singapore and Russia, are taking stakes in big-name U.S. companies, including Nasdaq, Blackstone Group and Bear Stearns.  With $2-3 trillion to invest, we can expect more.  In 2007 foreign buyers accounted for 20% of M&A in U.S.   Is the U.S. becoming a "share-cropper economy" as one expert put it?

November 20, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, November 19, 2007

United Rentals Sues Cerberus To Go Through with LBO

Another busted buyout, another lawsuit.  United Rentals said it filed a lawsuit in Delaware Chancery Court against Cerberus Capital Management to force it to complete the $7 billion LBO.  Last week Cerberus said it was not prepared to go forward with the transaction, which valued the company at $34.50.  WSJ, United Rentals Sues Cerberus Over Failed Buyout Deal.

November 19, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

2007 SEC Performance & Accountability Report Released

The SEC has released its 2007 Performance and Accountability Report, as well as its 2007 Selected SEC and Market Data.  Both documents provide a wealth of information about the SEC's activities during the past fiscal year and its assessment of its performance.  Among many other things, it reports a total of 656 enforcement actions in FY '07, involving a total of 1449 respondents or defendants and that it has obtained orders requiring securities violators to disgorge illegal profits of about $1.1 billion and another approximately $507 million in penalties.  It also reports a total of approximately $13.8 billion in disgorgements and penalties in SEC enforcement actions from FY '03 through FY '07, more than 75% of which have been collected.  It reports a lower volume of high penalty financial fraud cases in fiscal 07. In SEC-related criminal cases, prosecutors filed indictments, informations or contempts in 144 cases.

November 19, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Private Backdating Options Suits Wind Down

As the SEC appears to be winding down its backdating investigations, private suits appear to be settling or are being dismissed.  The Wall St. Journal reports that about 160 derivative suits were filed, and some are being settled on modest terms -- typically, the executives pay back some money, stock options are repriced, the corporations agree to corporate governance changes, and the plaintiffs' attorneys get their fees paid.  Far fewer securities fraud class actions have been filed, because the corrective disclosures did not cause drops in the stock price; many of them have been dismissed.  WSJ, Firms Settle Backdating Suits.

November 19, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, November 18, 2007

SEC Considers Enhanced Access to Information about SST Activities -- Again

In June the SEC posted on its website  a Web Tool that was supposed to allow investors to determine whether public corporations were doing business in or with countries that the State Dept. has designated State Sponsors of Terrorism.  The site was something of a fiasco for the SEC, and it took it down rather quickly, promising to rethink the concept.  It has now released a Concept Release seeking public comment on enhanced access to disclosure of this information.  While it asks a number of questions on the concept, they basically boil down to two:  Should the SEC provide enhanced access to disclosure to this information, since it does not do so for any other category of information?  Should the SEC staff have a different standard of materiality in reviewing these kinds of disclosures?  The agency also asks for comment on implementation alternatives, including improvement to the Web Tool and data tagging by the companies themselves.

November 18, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Prentice Replies to Grundfest re Scheme Liability

Scheme Liability: A Reply to Grundfest , by ROBERT A. PRENTICE, University of Texas at Austin - McCombs School of Business, was recently posted on SSRN.  Here is the abstract:

This paper responds to Professor Joseph Grundfest's recent paper opposing recognition of scheme liability under §10(b)/Rule 10b-5 - Scheme Liability: A Question for Congress, Not for the Courts. In responding to Professor Grundfest's cogent arguments, this article tries to simplify the issue. Section 10(b) is indisputably valid, and it broadly authorizes the SEC to issue rules to protect the investing public from fraud. The Commission issued Rule 10b-5, using Congress's own words from the antifraud provisions of the 1933 Act, including the scheme to defraud language. No one suggests that Rule 10b-5 is invalid, so that should largely end the debate. A valid agency rule that Congress authorized expressly outlaws schemes to defraud in the sale of securities. Q.E.D.

It may be telling that Professor Grundfest's paper neither quotes §10(b) (or Rule 10b-5) nor sets forth the facts of the case. As other opponents of scheme liability, Professor Grundfest tries to divert attention from the wording of the statute and rule to the holding in Central Bank. However, Central Bank did not address scheme liability or the proper scope of primary liability under §10(b). It held only that there is no express cause of action for aiding and abetting liability, with the Court stressing the absence of aiding and abetting language in §10(b)/Rule 10b-5. However, the necessary language for scheme liability is present in §10(b)/Rule 10b-5.

The Supreme Court has properly noted that divining what Congress would have intended in 1934 often requires historical reconstruction. Such a reconstruction clearly demonstrates that Congress in 1934 would have expected joint tort liability to be visited upon those who knowingly participated in a fraudulent scheme to sell securities.

The scheme liability language of Rule 10b-5 was borrowed from Congress's own words in §17(a) of the '33 Act which, in turn, were derived from the federal mail fraud statute. Case law under both that statute and the common law of fraud (to which the Supreme Court has also looked for guidance in interpreting §10(b)) indicate that in 1934: (a) all who knowingly participated in fraudulent schemes were held liable (with no distinction being made between primary and secondary liability), and (b) liability was consistently imposed in cases that are nearly identical factually (A knowingly participates in B's fraudulent scheme by entering into a fake transaction that enables B to defraud C) to recent scheme liability cases, including the Stoneridge case currently before the Supreme Court.

Much of Professor Grundfest's article is, in stark contradiction to his title, composed of policy arguments that should be largely irrelevant to the Supreme Court's determination of Stoneridge. These policy arguments apply equally to the misrepresentation and manipulation provisions of §10(b)/Rule 10b-5, which are indisputably valid.


November 18, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Bebchuk & Neeman on Investor Protection and Politics

Investor Protection and Interest Group Politics, by LUCIAN ARYE BEBCHUK, Harvard Law School; National Bureau of Economic Research (NBER), and ZVIKA NEEMAN, Boston University - Department of Economics; Hebrew University of Jerusalem - Department of Economics, was recently posted on SSRN.  Here is the abstract:

We model how lobbying by interest groups affects the level of investor protection. In our model, insiders in existing public companies, institutional investors (financial intermediaries), and entrepreneurs who plan to take companies public in the future, compete for influence over the politicians setting the level of investor protection. We identify conditions under which this lobbying game has an inefficiently low equilibrium level of investor protection. Factors that operate to reduce investor protection below its efficient level include the ability of corporate insiders to use the corporate assets they control to influence politicians, as well as the inability of institutional investors to capture the full value that efficient investor protection would produce for outside investors. The interest that entrepreneurs (and existing public firms) have in raising equity capital in the future reduces but does not eliminate the distortions arising from insiders' interest in extracting rents from the capital public firms already have. Our analysis generates testable predictions, and can explain existing empirical evidence, regarding the way in which investor protection varies over time and around the world.

November 18, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)