Securities Law Prof Blog

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

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Monday, November 26, 2007

SEC Alleges Large Scale Sale of Unregistered Securiites in Maximum Dynamics

The SECannounced that it filed charges against Eric R. Majors of South Africa and Joshua N. Wolcott of Denver, Colorado, stemming from the fraudulent offering and sale of more than eight million shares of unregistered stock in Maximum Dynamics, Inc. ("Maximum)", an alleged international projects management company that formerly operated out of Colorado Springs, Colorado, and Cape Town, South Africa.  The SEC alleges that from December 2002 through February 2005, chief executive officer Majors and former chief financial officer Wolcott engaged in the fraudulent, unregistered public distribution of the common stock of Maximum to illegally raise capital for the company and to compensate themselves. According to the complaint, Majors and Wolcott issued millions of Maximum shares in the names of alleged consultants in Mexico using false consulting contracts and false Form S-8 registration statements. The complaint alleges that, in reality, the individuals in Mexico sold their identities to Majors and did not know about the consulting contracts or the Maximum shares issued in their names. The complaint further alleges that Majors and Wolcott deposited the shares in brokerage accounts that they controlled and used the proceeds from the sale of the shares to secretly pay themselves, Maximum, and others. The complaint also alleges that Majors and Wolcott fraudulently certified Maximum's periodic reports with the Commission under the Sarbanes-Oxley Act of 2002.

November 26, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Files Fraud Charges Against Former GlobeTel Communications Officers

The SEC announced it filed securities fraud charges against Joseph J. Monterosso and Luis E. Vargas, former executives at GlobeTel Communications Corp. of Fort Lauderdale, Fla. The Commission's complaint, filed in the Southern District of Florida on November 21, 2007, alleges that Monterosso and Vargas created $119 million in fake invoices and caused GlobeTel to overstate its revenue for two years.  The complaint alleges that Monterosso and Vargas created hundreds of false invoices from technical data they obtained from their friends in the telecom industry. Those invoices - and the technical data that Monterosso and Vargas provided to the company's auditors - caused GlobeTel to report $119 million in false revenue. This so-called "off-net" revenue accounted for approximately 80 percent of the revenue GlobeTel reported between the third quarter of 2004 and the second quarter of 2006 - four out of every five dollars that the company reported.

GlobeTel has not filed a quarterly or annual statement for any period after the second quarter of 2006. On May 8 and June 29, 2007, GlobeTel filed Forms 8-K announcing that it will restate its financials for 2004 through 2006 to eliminate about $120 million in revenue. On November 2, 2007, the company filed a restated Form 10-KSB for 2004 in which the company reduced its annual revenue by $17.68 million.

November 26, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC's Proposal for Better Disclosure in Fund Prospectuses

The SEC recently released for public comment a proposed rule dealing with Enhanced Disclosure and New Prospectus Delivery Option for mutual funds.  The SEC forthrightly acknowledges that mutual fund prospectuses are universally criticized for being "long and complicated" and "often prove difficult for investors to use efficiently in comparing their many choices."  The SEC describes its proposal as having the "potential to revolutionize the provision of information to the millions of mutual fund investors who rely on mutual funds for their most basic financial needs."  The proposed rules require funds to provide investors with a summary section in the prospectus, containing key information for seven categories of information -- investment objectives; costs; principal investment strategies, risks and performance; top ten portfolio holdings; investment advisers and portfolio managers; brief purchase and sale and tax information; and financial intermediary compensation -- in plain English, in a standard format, so that investors can make comparisons among different mutual funds.  Funds have the option to give the summary information to investors and provide them with internet access to the entire prospectus, in what it refers to as a "layered approach to disclosure."  In addition, the investor could request a paper copy of the prospectus.

The concept of plain English summary disclosure is a good one, but there is bound to be controversy over how to make the disclosures meaningful to investors.  Let's hope that the SEC can move more speedily on this proposal than it has on the proposed rule for point of sale disclosures, originally proposed in January 2004, with the comment period reopened in February 2005. 

One oddity -- in the middle of the 137 page release, the SEC contains a section entitled "Special Request for Comments from Investors," requesting them to comment on the proposal and more generally their views on mutual fund prospectuses.  How many investors does the SEC think read SEC releases on proposed rules?

November 26, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

CDOs and Off-Balance Sheet Accounting Treatment

Off-balance sheet accounting treatment is receiving increased attention in the face of Citigroup's $41 billion invested in CDOs.  Accountants debate whether action taken by Citigroup over the summer to shore up their holdings constitutes a "reconsideration event" that would require placing these securities on the balance sheet.  More generally, it raises the Enron question of whether investors are adequately informed of the risks when there is off-balance sheet treatement of complex instruments.  WSJ, Citi's $41 Billion Issue: Should It Put CDOs On the Balance Sheet?

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

Growth Industry in Life Markets

The Wall St. Journal focuses on the "life settlement" business, where companies pay a lump sum to the insureds in exchange for the death benefits under life insurance policies.   This is a growth industry that is an expansion of the viatical settlements that were offered to AIDs patients and that the D.C. Circuit held, in 1996, were not securities in SEC v. Life Partners Inc. Major investment firms like Goldman Sachs, Credit Suisse and Bear Stearns are in the business as the market looks for returns that are unrelated to the capital markets.  The firms have formed a trade association, Institutional Life Markets Association, to lobby against efforts to restrict the business.  WSJ, An Insurance Man Builds A Lively Business in Death.

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

Sunday, November 25, 2007

Davis on Derivative Suits

The Forgotten Derivative Suit, by KENNETH B. DAVIS Jr.. University of Wisconsin Law School, was recently posted on SSRN.  Here is the abstract:

Policing fiduciary misconduct by corporate officers and directors has traditionally been the province of the courts, by means of the shareholders derivative suit. Beginning in the late 1970s, courts ceded much of this authority to the corporation's independent directors, substantially restricting the shareholders ability to bring suit. After tracing the history and reasons for this restrictive approach, this article examines its consequences, twenty-five years later. To do so, it employs a variety of perspectives, including the production of precedent, the disclosure the related-party transactions, and most significantly, a review of the 294 reported derivative suits decided in the federal and Delaware courts from 2000 through the first quarter of 2007. The results reveal that the role played by derivative litigation today varies widely with the kind of corporation and misconduct involved. For the types of misconduct typical of large cap, widely held corporations, other institutions now perform much of the deterrent function historically associated with derivative suits. As a result, the fact that few of these suits survive a motion to dismiss is often consistent with the shareholders' best interests, given the cost of litigation. For smaller firms with controlling shareholders, on the other hand, derivative suits continue to perform a unique function. Courts have therefore needed to be creative in providing minority shareholders the means to relief, notwithstanding the dictates of the restrictive approach.

November 25, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Powell on Enron Trial

The Enron Trial Drama: A New Case for Stakeholder Theory , by RUSSELL POWELL, Seattle University School of Law, was recently posted on SSRN.  Here is the abstract:

This article analyzes the trial of Jeffrey Skilling and Kenneth Lay, including an empirical analysis of jury comments made after the trial. The study indicates that the jury was influenced by the scope of the Enron collapse and its impact on employees, in particular. I argue that if juries (or judges) are influenced by the magnitude of harm caused by fraudulent, disloyal behavior, especially when it impacts large numbers of working and middle-class employees, it is likely that the same factors will impact the outcome of derivative suits claiming breaches in fiduciary duties brought against officers and perhaps even directors. If concern for employees and communities plays a role in deliberation of federal fraud charges, it may play a role in civil fiduciary duty suits even when the only factual question concerns duties owed to shareholders. Officers and directors who want to avoid personal liability for alleged duty violations may choose to consider impact on corporate stakeholders, especially employees. This appears consistent with stakeholder and related models for corporate governance advocating that corporate fiduciaries should be able to consider the interests of stakeholders other than shareholders in making business decisions.

November 25, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)