Securities Law Prof Blog

Market-Timing Agreement Enforced

In Prusky v. Reliastar Life Ins. Co., 2007 WL 43641 (E.D. Pa. 01/05/07), the court ordered specific performance of a contract that gave plaintiff the right to engage in market-timing in the mutual fund sub-accounts within the variable life insurance policies and rejected the defendant's defense of impracticability.

Frankel & Cunningham on Market Timing

Tamar Frankel and Lawrence Cunningham's paper, The Mysterious Ways of Mutual Funds: Market Timing, is now available on SSRN and is well worth reading for those of us who have read the newspaper accounts but looked for more scholarly analysis of the issues.  Here is the abstract:

Abstract:      
The term market timing was little known outside the arcane world of mutual funds until state attorneys general from across the country popularized it. The term's innocuous-sounding ring assumed a more pernicious note when the mysterious ways of mutual funds became more transparent. In its pernicious sense, market timing denominates mutual fund insiders using the inscrutable structures of mutual funds to provide benefits selectively to favored participants at the expense of less favored participants.

Mutual fund shares are not like common stocks; investments made using these vehicles are unlike those made through traditional securities markets. While the peculiar features of mutual funds were manifested in the contemporary environment, these peculiarities are inherent in the very structure of mutual funds. Regulatory efforts dating to the 1940s recognize these realities and regulatory reforms of the early 2000s struggle to respond in much the way earlier reforms did.

The wide range of reforms that have been adopted and proposed may overlook this reality, however. By correcting this oversight, and unveiling the historical and contemporary landscape, this Article provides more realistic appraisals for increasing the integrity of the mutual fund investment vehicle. Chief among these is a deeper point: critical to sustaining the mutual fund as an important institution in the financial system is a renewed appreciation of concepts of trust and professionalism. [emphasis added: amen to that]

EOP Postpones Shareholder Vote in LBO Battle

In  what is expected to be the largest LBO to date, Equity Office Properties Trust announced it is postponing next week's shareholder vote on the Blackstone deal for two days, giving Vornado a chance to increase its $46 billion offer.  Vornado's is valued higher than Blackstone's, but contains a stock component, while Blackstone's is all-cash.  See NYTimes, Vornado Under Pressure to Sweeten Its Bid for Office Landlord.  for the Washington Post's take on the situation, see Equity Endorses Blackstone Bid.

Profiles of Carl Icahn and Motorola

The NY Times profiles Carl Icahn, in the news this week because of his purchase of a shareholder stake in Motorola.  See From Raider to Activist, but Still Icahn .  Another story discusses the problems at Motorola, stemming from the cell phone as fasion accessory phenomenon.  See Cellphone Envy Lays Motorola Low.

Gordon Macklin Remembered

The WSJ has a remembrance of Gordon Macklin, who died this week, and his pivotal role in the transformation of NASDAQ into an electronic trading market.  See WSJ, Ushering in Age of the Electronic Stock Market

News About Rich Old Men and their Children

The WSJ has two stories about how powerful men and their children get along in business.  See WSJ, Sumner Redstone Settles Suit With Son Over Family's Fortune and WSJ, All of Murdoch's Children Receive Big News Corp. Stakes.

Herbalife -- The Revolving Door

Herbalife was public, then private, then public, and now announces a bid to go private again by the same equity fund that did the previous deals and remains the largest shareholder.  The premium is about 14.8%.  See WSJ, Herbalife Receives $2.7 Billion Offer.

2d Cir. Affirms Dismissal of Deloitte

In Lattanzio v. Deloitte Touche, 2007 WL 259877 (2d. Cir. 1/31/07), the Court upheld the dismissal of a securities fraud class action against the accounting firm arising from alleged misstatements in Warnaco's financial statements.  The court held that the requirement that the auditing firm review the unaudited statements did not make the maker of the unaudited statements for purposes of Central Bank and did not give rise to a duty to correct any misstatements.  In addition, plaintiffs failed to allege loss causation -- a connection between the misstatements and the losess suffered as a result of Warnaco's bankruptcy.  In particular, Deloitte's "going concern" warning would give investors adequate warning of the risk of bankruptcy, even if the underyling financial information was inaccurate.

Highest NY Court to Consider Form U-5 Privilege Issue

An important and unresolved question is whether securities firms can be sued for libel if the information they are required to disclose on Form U-5 about an employee's employment termination is incorrect.  The New York Court of Appeals will hear arguments in a case this month that should resolve the split among New York courts between an absolute and a qualified privilege.  WSJ gives background on the issue in  Some Brokers Can't Flee Past.

Improper Accounting Allegations Against Dell

A class action suit was filed in Texas against Dell and its auditors, PriceWaterhouseCoopers, alleging that the computer company engaged in improper accounting practices in its partnership with Intel, to inflate revenues.  William Lerach filed the complaint.  See WSJ, Dell's Woes Mount as Investors File Improper-Accounting Suit.

BackDated Options Little Longterm Effect on Stock Prices

WSJ studies the stock prices of companies that reported backdated stock options and finds that many of them have bounced back shortly after the news broke.  While many corporations have had to restate their financial statements, the effect on the bottom line remains substantially the same, and to some investors the drop in price from the bad publicity created buying opportunities.  See Buy a 'Backdating' Stock?

Blips Illegal, Says Texas Court

A federal district court in Texas ruled that the aggressive tax shelters marketed by KPMG known as Blips were ilegal.  The first ruling on the legitimacy of this tax shelter, it is expected to give a boost to the New York prosecutors' case against the accounting firm.  See NY Times, Court Rejects Tax Shelter Once Sold by KPMG .

SEC Approves Auction to Value Options

New York Times reports on the SEC's tentative approval of an auction approach to valuing stock options that was approved by the SEC staff in a letter to Zion Bancorp, which plans to market the auction of new securities, called "Esoar," to establish the value of companies' stock options.  The SEC says that auditors still need to review the results before using the value in the financials.  See S.E.C. Approves New Method for Companies to Value Stock Options

Senate Report Criticizes SEC Investigation

Senators Specter and Grassley released an interim report critical of the SEC's investigation of hedge fund Pequot Capital Management.  “At best, the picture shows extraordinarily lax enforcement by the S.E.C.,” Senate investigators concluded. “At worse, the picture is colored with overtones of a possible cover-up.”   The report also suggests that former SEC attorney Gary Aguirre was fired because of his persistence.  The Senate inquiry is also looking into whether SEC officials made false statements to the Senate. See NY Times, Senate Report Says S.E.C. Botched Hedge Fund Inquiry.

Battle for EOP Continues

Vornado announced it has increased its bid for Equity Office Properties Trust to $56 per share in cash and stock.  EOP is the target of competing bids from Vornado and Blackstone, in what would be the largest LBO in the US.

Houston Attorney Settles SEC Charges of Registration Violations

On February 1, the Commission  filed  to  amend  its  complaint  in  a lawsuit against Allixon International Corp.,  a  Delaware  corporation based in South Korea, to name Houston attorney Hank A. Vanderkam as  a defendant. Vanderkam is the former securities counsel to Allixon.  The SEC filed the original lawsuit in November 2005  against  Allixon  and other defendants to halt an ongoing unregistered distribution  of  1.3 million shares of Allixon's common stock.

   The amended complaint  alleges  that  Vanderkam  participated  in  the illegal  distribution  of  the  1.3  million  Allixon  shares,   which represented 94% of the company's float. The 1.3  million  shares  were issued to two offshore entities without a restrictive legend based  on  Vanderkam's opinion letter that the Allixon  stock  offering  complied with "Section (sic) 504 of Regulation D and the laws of the  State  of Texas." In fact, the offering failed to comply with  the  requirements of Rule 504 under Regulation D of the Securities Act of 1933, and  the offering was never registered in, and had no connection to, the  State of  Texas.  The  two  offshore  entities,   defendants   Silver   Lake  Investments, Inc. and Crescendo Investments Inc., were control persons of Allixon who allegedly sold over 900,000 of the  Allixon  shares  in the Pink Sheets for approximately $4.3 million.

Vanderkam consented to the entry of an agreed final judgment,  permanently  enjoining  him from future violations of the  securities-registration  provisions and other relief.  In addition, the consent  order  bars  Vanderkam  from  issuing  opinion letters under Rule 504 of Regulation D. [SEC v. Allixon  International  Corp., et al., Civil Action No. 3:05-CV-2260-P, United States District Court for the Northern District of Texas, Dallas Division] (LR-19987)

SEC Settles Fraud Charges Agst Enterasys Asst. Controller

On Jan. 30, 2007, the Commission filed a settled civil fraud action in the United States District Court for the  District  of  New  Hampshire against  Anthony  L.  Hurley,  the  former  assistant  controller  for Enterasys Networks, Inc. and  its  former  parent  company,  Cabletron Systems, Inc.

   The complaint alleges that from  March  2000  through  December  2001,Hurley participated in a company-wide scheme to  fraudulently  inflate revenues at Enterasys and its former parent  company,  Cabletron,  and thereby convince the market that Enterasys was a  viable  independent company with consistently strong revenue growth.

      Hurley, without admitting or denying the allegations of the complaint, consented to an injunction against future violations.  Additionally, Hurley consented to paying disgorgement in the amount of $24,498, plus prejudgment interest in the amount of $7,526, reflecting the full amount of his ill gotten gains. In a related  criminal  case, Hurley pled guilty to one count of wire fraud and cooperated with  the U.S. Attorney's Office for  the  District  of  New  Hampshire  in  the prosecution of U.S. v. Barber et al., Criminal  No.  04-126  (D.N.H.). [SEC v. Anthony L. Hurley, Civil  Action  No.  07cv022,  D.N.H.]  (LR-19986)

SEC Proposes to Expand its Interactive Data Voluntary Programs

At its Jan. 31 meeting, the Securities and Exchange Commission voted to publish for comment rule amendments that would expand the agency's interactive data voluntary program to enable mutual funds to submit data tagged risk/return summary information. The Commission also voted to propose rules required under the Credit Rating Agency Reform Act of 2006. 

SEC Corp Fin Guidance on Exec Comp Disclosure

On Jan. 24, 2007 Corporate Finance issued guidance on Item 402 of Reg. S-X -- Executive Compensation.  Eighteen pages in length, there are questions and answers of general applicability, as well as interpretive responses regarding particular situations.

Roger J. Dennis Dean at Drexel

Roger J. Dennis, Professor and Provost at Rutgers-Camden, has been named the Dean at Drexel University's new law school.  Roger's scholarship, including MATERIALITY AND THE EFFICIENT CAPITAL MARKET MODEL: A RECIPE FOR THE TOTAL MIX, is well-known to all of us. Congratulations, Roger!

NASDAQ-LSE News

If NASDAQ's bid to acquire the London Stock Exchange fails, it will likely to continue to hold on to its 29% stake in LSE, says NASDAQ CEO Greifeld.  NASDAQ will likely pursue tie-ins with other exchanges.  See WSJ, Nasdaq to Keep LSE Stake, Seek Other Deals.

TSE in the News Again

The Tokyo Stock Exchange is in talks about forming an alliance with Chicago Mercantile Exchange, a day after the announcement of its alliance with NYSE, reports the WSJ.  Tokyo Stock Exchange Discusses Possible Alliance with Chicago Merc.

Vornado-Blackstone Battle over EOP

Vornado is expected to increase its bid for Equity Office Properties in the competition with Blackstone, in what promises to be the largest LBO in the US.  See Vornado to Raise EOP Bid
In Latest Shot at Blackstone.

Secret Payment Disclosed in Milberg Weiss Firm

A plea agreement filed in federal district court in California says that a Milberg Weiss partner made a secret payment of $175,000 to former opthamalogist Steven Cooperman to serve as lead plaintiff in a class action.  The filing does not directly link the payment to Mel Weiss or William Lerach.  The firm's spokesperson said the allegation were not credible and old news.  See NY Times, New Blow to a Law Firm Under Inquiry.

Bush on Exec Compensation, SOX

President Bush told a Wall. St. audience that corporations should link executive pay packages more closely with performance because otherwise investor's trust in the markets could be impacted.  He said he disapproved of federal mandating corporate governance practices, but approved of the SEC's new disclosure rules on executive compensation:  "I appreciate the fact that the S.E.C. has issued new rules to ensure that there is transparency when it comes to executive pay packages.  The print ought to be big and understandable.”  The New York Times reports that the ortherwise friendly audience was silent during these remarks.  See Bush Tells Wall St. to Rethink Pay Practices.  For the WSJ's take on the President's speech, which focuses on his criticsm of SOX 404, see Bush Gives Hope to Foes Of Sarbanes-Oxley Law. 

SEC Hedge Fund Investigation Still under Investigation

Senators Arlen Specter and Charles Grassley continue to express their displeasure over the SEC's investigation into hedge fund, Pequot Capital Management  and say that an interim report reporting their findings will be released today.  The SEC inquiry was triggered by fired SEC lawyer Gary Aguirre's charge that he was called off his investigation because of the hedge fund's connections with Wall St. executive John Mack.  See NY Times, 2 Senators Renew Attacks on S.E.C. Hedge Fund Investigation

Enron Officer's Conviction Vacated

The Texas federal district court threw out the jury verdict against Kevin Howard, former Broadbrand financial officer at Enron, based on the Fifth Circuit's ruling in another Enron case that an empoyee's services in furtherance of corporate malfeasance could not be the basis of a theft of honest services conviction.  See NY Times, Judge Throws Out a Conviction in Enron Case .

Investment Adviser Consents to Prime Bank Fraud

The SEC announced today that, on January 29, 2007, the U.S. District Court for the Northern District of Illinois entered a Final Judgment in the Commission's civil action against Directors Financial Group, Ltd. ("DFG"), an Illinois investment adviser formerly registered with the Commission, and Sharon E. Vaughn, DFG's owner and operator. In addition to relief previously ordered, the Court's Final Judgment requires Vaughn to pay a $200,000 civil penalty. Vaughn consented to the Final Judgment without admitting or denying the allegations of the Complaint.

The Commission filed its Complaint on March 2, 2006, alleging that Vaughn and DFG defrauded their private hedge fund clients in Directors Performance Fund, L.L.C. (the "Fund"). According to the Complaint, Vaughn and DFG, among other things (1) invested the Fund's assets in a fraudulent Prime Bank trading scheme (the "Trading Program") contrary to the Fund's disclosed trading strategy, (2) failed to investigate the Trading Program or its promoters, (3) entered into an undisclosed profit sharing agreement that ceded 25% of the Fund's purported profits to one of the Trading Program's promoters, (4) gave control of the Fund's assets to the Trading Program's promoters in violation of the terms of the Fund's prospectus, and (5) tried to cover up their fraud by withholding documents from — and providing fake documents to — the Commission's exam staff.  See SEC v. Sharon E. Vaughn and Directors Financial Group, Ltd., Case No. 06-C-1135 (N.D. Ill.)
   

Market-Timing Allegations Against CIBC Reps

IN THE MATTER OF MICHAEL SASSANO, DOGAN  BARUH,  ROBERT  OKIN  and  R.
SCOTT ABRY

   On  January  31,  the   Commission   issued   an   Order   Instituting Administrative Proceedings  against Michael Sassano, Dogan Baruh, Robert Okin and R.  Scott  Abry, alleging that Sassano  and Baruh, former registered representatives with CIBC World Markets Corp. and Fahnestock & Co., Inc.,  collaborated  with  numerous  hedge  fund customers to deceptively market time mutual funds through a variety of deceptive practices. Mutual funds, for  example,  repeatedly  detected Sassano's, Baruh's, and their customers' fraudulent  conduct  from  at least 1999 until September 2003, and sent World Markets and Fahnestock numerous letters and emails  complaining  about  this  abusive  market timing. In response to the mutual funds' efforts to  stop  the  market timing, Sassano and Baruh used numerous strategies to help their hedge fund customers deceive the mutual funds. Okin, the  Head  of CIBC's Private Client Services, and Abry, Sassano's and Baruh's branch manager, supervised Sassano and  Baruh  and  knew  of,  and  assisted, Sassano and Baruh's deceptive market timing practices.

   The Division of Enforcement seeks  cease-and-desist orders, disgorgement, civil penalties, prejudgment interest,  and  all    other remedial sanctions  that  are  appropriate  and  in  the  public    interest. (Rels. 33-8778; 34-55208; IA-2587;  IC-27692;  File  No.  3-12554).

      

Former General Counsel of Comverse Consents to Sanctions in Rule 102(e) Proceeding

William Sorin, former General Counsel of Comverse Technologies, consented to sanctions under Rule 102(e) in connection with the backdating stock options scandal involving that company and Kobi Alexander.  This follows the entry of a consent injunction in federal district court enjoining Sorin from future violations of federal securities laws.  The Commission's  complaint  alleges,  among
other things, that  beginning  no  later  than  1991,  and  continuing    through 2001, Sorin engaged in a  fraudulent  scheme  with  Comverse's   former Chairman and Chief Executive Officer, and from  at  least  1998   with Comverse's former Chief Financial Officer, to grant  undisclosed, in-the-money options to themselves and  others,  by  backdating  stock  option grants to coincide with historically low annual  and  quarterly   closing  prices  for  Comverse's  stock.  Among  other   things,   the   Commission's Complaint alleges that Sorin created company records that falsely indicated that Comverse's compensation committee had  approved   a grant of stock options on a date when, in reality, no such corporate   action took place. The complaint also alleges that Sorin created false   company records  that  facilitated  a  similar  backdating  scheme  at Ulticom,  Inc.,  another  public  company  that  is  a  majority-owned   subsidiary of Comverse.

Speech by NASD Vice Chair

In a speech before the Securities Traders Association, Doug Shulman, Vice Chair of NASD, addressed a number of issues, including the following:  the merger of the NYSE and NASD regulatory arms, the effect of technology and product convergence on the markets, and Regulation NMS.

NYSE-TSE Alliance Announced

The NYSE and Tokyo Stock Exchange agreed to an alliance that could ultimately lead to cross-listings of securities, in NYSE's latest move toward globalization.  See WSJ, Tokyo Exchange, NYSE Agree to Form an Alliance.  For more details, see the NYSE press release.

Altria Announces Spinoff of Kraft

As expected, Altria announced that it would split up Altria and Kraft Foods.  The transaction will take place by the end of March, and Altria shareholders will get .7 share of Kraft for every Altria share they own.  WSJ, Altria Board Approves Spinoff Of Company's Kraft Foods Unit.

Banks' Buybacks of Shares on the Increase

Banks turn to share buybacks as regulation makes it increasingly difficult to lend money.  See WSJ, Capital Idea:Banks Turn To Buybacks.

In Defense of Private Equity

Is there a backlash against private equity funds?  Yes, says a WSJ columnist, citing Clear Channel Communications, and it is not deserved.  The question is why can't public company managers produce the same profits for their shareholders that the private firms do?  See WSJ, Private Equity's Successes Stir Up A Backlash That May Be Misdirected.

Investing Club in Trouble with Investors

BetterInvesting, a NFP umbrella group of investment clubs, once riding high, is facing dissension from many of its mostly senior volunteers, who question its high expenses and governance practices.  Meanwhile, it is trying to recruit new investors, particularly teenagers, and has received a grant to teach investing to high schoolers. See WSJ, Peeved Members Of Investing Clubs Turn on Leaders.

Icahn's Interested in Motorola

Carl Icahn is at it again.  He announced yesterday that he is seeking a seat on the board of directors of Motorola.  He has only a 1.4% interest in the company, whose stock prices has been in a decline for some months.  Last year, Icahn threatened Time-Warner  with a proxy contest before backing down.  See NY Times, Icahn Seeks Board Seat at Motorola. The story also makes page one of the WSCJ, Icahn Bid Adds To Woes Dogging Motorola's CEO.

Investors Love Tobacco

The New York Times features Altria's proposed spinoff of Kraft Foods, in an article discussing investors' positive reactions about the spinoff and the tobacco industry.  Altria's a cash cow -- although regulation of smoking increases, people still smoke and apparently will pay any price for cigarettes.  See Tobacco’s Stigma Aside, Wall Street Finds a Lot to Like .

PIPE Offering Fraud Action Settled

FORMER SG COWEN MANAGING DIRECTOR AGREES TO A PERMANENT INJUNCTION AND PAYS $150,000 IN CIVIL PENALTIES TO SETTLE CHARGES OF INSIDER  TRADING AND FRAUD IN CONNECTION WITH "PIPE" OFFERINGS.

The Commission's complaint alleged that, during 2001, Pollet traded in the
   securities of ten public companies after receiving  confidential  non-
   public information that these entities were either engaged in, or were
   contemplating engaging in, "PIPE" financings. A "PIPE"  is  a  private
   investment in public equity. Specifically, the complaint alleged  that
   Pollet routinely sold short the publicly traded securities of the PIPE
   issuers prior to the close of the PIPE transaction in order to lock in
   gains for SG Cowen's proprietary account.

NYSE, TSE Alliance Expected

The Tokyo Stock Exchange is "very close" to an agreement on an alliance with the NYSE, according to TSE's chief executive.  John Thain, head of NYSE, predicts that this should eventually led to uniform regulation of cross-border transactions.  WSJ, NYSE, Tokyo Stock Exchange Are 'Very Close' to an Alliance.

BackDated Stock Options an Issue in Battle for Caremark

Did a promise of protection against charges of backdating stock options cause Caremark's board to favor CVS's bid for the company over Express Scripts?  So alleges Express Scripts in a lawsuit charging the Caremark board with breaching its obligations to obtain the best price for the shareholders.  See WSJ, Caremark Options Probes Ruffle Deal.

No Longer Plain Vanilla Index Funds

Index funds with high fees?  That's the new product in the funds industry, as companies create higher-risk index funds with a specific focus -- as a fund that index dividend-paying stocks or stocks of companies that are buying back their own stock.   See WSJ, Investors Bombarded By Index-Fund Choices.

London's AIM Attracts U.S. Small Caps

Clara Furse, the CEO of the London Stock Exchange, writes a WSJ commentary on the Alternative Investment Market (AIM) of the LSE and how it is attracting U.S. small caps to its market.  In the last 12 months, 23 U.S. companies have joined, raising a total of over $1 billion in capital.  See Taking AIM at Small Caps.

Congress Tackles Executive Pay

Congress has attached to the bill raising the minimum wage a provision that caps at $1 million per year the amount of deferred compensation.  Other attempts to limit executive compensation may follow.  See WSJ, Strike One for Executive Pay.

SEC Approves Use of Market Forces to Value Employee Stock Options

The SEC, for the first time, has approved a market-based method for valuing employee stock options in a letter to Zions Bancorp.  The move could lead to reduced reported values for the options.  See SEC Clears Market-Based WayTo Value Staff Stock Options.

Chinese Stock Market Overheated?

The WSJ reports that, the Chinese stock market boom is drawing more investors to the capital and, with it, risky practices familiar to the U.S. dot.com era -- including using funds borrowed from credit card companies and mortgage on the house to invest in the market.  See Stock Frenzy In China Stokes Official Concern.

SEC Commissioner Atkins on Hedge Fund Regulation

SEC Commissioner Paul Atkins spoke on hedge fund regulation at the Ninth Alternative Investment Roundup on Jan. 29.  He reviewed the history of attempted regulation of hedge funds, including the SEC's controversial rule -- invalidated last summer by the D.C. Circuit -- that would have required registration of hedge fund advisers.  He also discussed the narrower proposed rule put out for comment in December which will clarify the SEC's authority to bring enforcement actions against investment advisors for fraud against investors and will narrow the pool of investors eligible to invest in hedge and private equity funds.  On the latter, the Commissioner expressed concern about the rule as a barrier to entry for newly established hedge fund advisors.

Proposed SRO Rules re. Short Interest Reporting

The National Association of Securities Dealers,  the  New  York  Stock
   Exchange, and the American Stock Exchange filed proposed rule  changes
   (SR-NASD-2006-131; SR-NYSE-2006-111; SR-Amex-2007-05) to increase  the
   frequency of the short interest reporting requirements. Publication is
   expected in the Federal Register during the week of January 29.  (Rel.
   34-55170)

SEC Reports on Administrative Proceedings

Reports on Administrative Proceedings for the Periods April  1,  2005,
   through Sept. 30, 2005; Oct. 1, 2005,  through  March  31,  2006;  and
   April 1, 2006 through Sept. 30, 2006, have been issued, giving summary
   statistical information on the Commission's administrative proceedings
   caseload. The reports are published in the SEC Docket  and  appear  on
   the Commission's website. (Rels. 34-55166, 34-55167 and 34-55168)

Investment Bank and Securities Dealing Receipts Up 25 Percent

Census Bureau Reports Revenue in the investment banking and securities dealing industry reached $158.9 billion in 2005, a 25 percent increase from $127.3 billion in 2004, according to a report released today by the U.S. Census Bureau. This industry is rebounding from two years of declining revenues [...]

MBIA Settles Securities Fraud Charges for Misuse of Reinsurance Contracts

The Securities and Exchange Commission announced settled securities fraud charges against MBIA Inc., one of the nation’s largest insurers of municipal bonds, arising out of a sham reinsurance transaction that was restated in 2005, which the company had previously entered into to avoid having to recognize a $170 million loss. MBIA suffered the loss when, in 1998, the Allegheny Health, Education and Research Foundation (AHERF) defaulted on bonds guaranteed by MBIA and MBIA was forced to make good on its guarantee. MBIA addressed analyst concerns about its expected losses on the AHERF bonds by representing that it had obtained reinsurance to cover them. In fact, MBIA had agreed through concessions on other reinsurance agreements to compensate the reinsurers for the losses they were certain to incur on the AHERF contracts. The improper use of the reinsurance contracts enabled MBIA to convert what would otherwise have been the company’s first-ever quarterly loss into a profit and reverse the decline in MBIA’s stock price.

Under the settlement, MBIA consents to a cease-and-desist order, to pay a $50 million penalty, and to retain an independent consultant to examine a number of other specified transactions to which MBIA was a party.

ICC Criticizes SEC's Changes to Exec Compensation Rules

The Council on Institutional Investors criticize the SEC's changes to the executive compensation rules made last December without public comment.  The SEC said at the time that the changes were just revisions to conform to its original intent.  The changes will allow some corporations to report lower values for some stock option grants.  In its letter ICC wrote that it is "questionable" whether the new requirements will make information easier for investors to understand and noted that  support for the changes did not "appear to include a single investor or investor-based organization."  See Investors Say SEC Rushed Rule

EOPT LBO Gets the Nod from ISS

Equity Office Properties Trust announced that ISS favored Blackstone's $54 per share bid for the company that tops the bid of rival bidder Vornado.  The shareholders' meeting is scheduled for Feb. 5.  It would be the largest LBO to date.  See Blackstone Offer Favored.

Newspapers Restore Stock Tables

Some newspapers' cost-cutting measures have hit a snag as readers complain bitterly about the elimination of the stock tables.  Both the WSJ and Washington Post announced that they will restore some of the tables, despite the fact, as the Washington Post put it, that most readers get their stock tables for free online.  See Vocal Minority Wants the Stock Tables Back.

SEC Quiet Period Reform Not Making Much Impact

The liberalization of SEC regulations in June 2005 to allow more public communications in the pre-IPO period has not yet resulted in more information during the quiet period, according to the WSJ.  However, well-established public corporations have taken advantage of the expanded use of the shelf-regulation offerings.  See  In the 'Quiet Period,' Mum's Still the Word.

SEC Investigation into Mutual Funds" Stock Lending Practices

An SEC investigation uncovers widespread violations of procedures in stock-lending practices of mutual funds and directors' failures to provide oversight, the WSJ reports.  See SEC Discovers Breaches In Lending of Securities.

Hedge Fund Sues under Federal False Claims Act

In a new strategy, a hedge fund holding a short position in Allied Capital Corp. sues under the Federal False Claims Act, alleging that an ACC subsidiary defrauded the government out of millions of dollars.  See Greenlight Heads to a Courtroom .

Vinson & Elkins Dismissed from Enron Class Action

On Jan., 24, 2007 the district court granted plaintiff's motion to dismiss the law firm of Vinson & Elkins from the Enron class action.  In re Enron Securities Litig. (S.D.Tex. 1/24/07).  The court recognized that "many class members and the public at large may be angered by the dismissal of Vinson & Elkins...without a trial to determine whether they are liable for defrauding shareholders, especially in the wake of the numerous allegations made against them by Lead Plaintiff for years," but upheld the plaintiff's right to control its suit and to pursue the "deepest pockets."

Recent Scholarship

The Once and Future New York Stock Exchange: The Regulation of Global Exchanges 

ROBERTA S. KARMEL
Brooklyn Law School 

Abstract:      
The NYSE Group, Inc., the parent of the New York Stock Exchange, Inc. (“NYSE”), and Euronext NV (“Euronext”), are planning to merge, creating the first trans-Atlantic linkup of stock and derivatives markets. At least three reasons for a merger between the NYSE and Euronext have been put forward. First, is the idea that investors will be able to buy stocks in the U.S. and Europe, thus making it more attractive and cheaper for them to buy foreign shares. The NYSE and other U.S. exchanges have been losing listings, and especially IPOs to European exchanges and merging with a European exchange may be a way to recapture the fees and trading profits from these listings. A second justification for the NYSE-Euronext merger is that it will give the NYSE a derivatives platform. When two exchanges combine, they can cut staff and share technology. A third reason that has been asserted for the creation of a global exchange by the NYSE is that the NYSE and Euronext will be able to operate from a common trading platform.

Despite the several sound reasons for a trans-national merger between exchanges, stock exchanges cannot compete as ordinary business enterprises because of the manner in which they are regulated and because they function as self-regulatory organizations. Unless such regulation is significantly changed, the effort by exchanges to become global companies will be impeded. This paper will discuss the impediments to the creation of a global exchange posed by the U.S. federal securities laws and how these laws could be changed to permit the possible synergies of a combination between the NYSE and a foreign exchange to be better achieved.