Securities Law Prof Blog

Philly Broker Indicted for Defrauding School Districts

The SEC announced today that on December 11, 2007, Robert Bradbury (Bradbury), the chairman, and a principal shareholder of, Dolphin & Bradbury, Incorporated (D&B), a Philadelphia broker-dealer, was indicted by a grand jury convened by the United States Attorney for the Eastern District of Pennsylvania.  The nine count criminal indictment charges Bradbury with defrauding four Pennsylvania school districts by selling them high-risk securities that were unlawful and inappropriate investments for the districts. According to the indictment, Bradbury concealed from the school districts the true nature of and risks associated with the high-risk bond anticipation notes, issued to finance a speculative golf course project known as Whitetail. According to the indictment, the notes eventually defaulted in September 2004, and the four school districts collectively lost approximately $10.5 million as a result of the fraud. If convicted, Bradbury faces a maximum of 160 years imprisonment and a $2 million fine.

FINRA Proposes New Rule on Expungement Procedures

FINRA announced today that its Board of Governors approved a rule proposal that would impose expungement procedures requiring arbitrators to take specific steps, including issuing a written explanation, before recommending expungement of information related to arbitration cases from a registered person's Central Registration Depository (CRD) record. This proposal is designed to assure that expungement occurs only when one of the narrow grounds specified in the FINRA rules—factual impossibility, no involvement by the registered person or falsity—is determined and documented by the arbitrators.

The proposed rule would require arbitrators considering an expungement request to hold a recorded hearing session by telephone or in person and provide a brief written explanation of the reasons for ordering expungement. In cases involving a settlement, arbitrators would be required to review the settlement documents to evaluate culpability by examining the amounts paid to any party and any other terms and conditions of the settlement before awarding expungement.

Expungement has been an ongoing controversy.  Investors' advocates say it rewrites history and that customers are entitled to know if their brokers have been in disputes with their customers, while industry representatives say that brokers need protection against frivolous complaints or simple misunderstandings.  The Nw York Times had an article today, reviewing the respective positions.  NYTimes, Site That Tracks Brokers Questioned on Erased Cases.

Goldman Profits on Mortgage Mess

When all other investment banks are reporting big losses because of subprime mortgages, Goldman Sachs is expected to report record net annual income of more than $11 billion.  A good share of those profits comes because its proprietary traders bet that the subprime mortgage market would collapse.  This presents the question -- why did Goldman continue to sell CDOs to its customers, when its own traders were betting they would fall?  WSJ, How Goldman Won Big On Mortgage Meltdown.

Citigroup Bails Out its SIVs

Citigroup, shifting course under its new management, announced a rescue of seven affiliated structured investment vehicles (SIVs).  It will provide emergency support if they can't find buyers for their short- and medium-term debt.  This means Citigroup will bring about $49 billion of SIV assets on its balance sheet, putting further strain on its tight capital situation.  Citigroup's move is widely seen as the deathknell for the Treasury Dept.-sponsored bailout by major banks, which has not gotten off the ground.  NYTimes, Big Rescue of Funds by Citigroup; WSJ, Citigroup Alters Course, Bails Out Affiliated Funds.

Lufthansa Purchases 19% Stake in Jet Blue

Jet Blue Airways becomes the latest struggling U.S. company to get a cash influsion from overseas, as Lufthansa announced it would take a 19% stake in the discount airline for $300 million.  Lufthansa is purchasing 42 million common shares at $7.27, a premium over yesterday's close of $6.25.  It will also have the right to nominate one director.  The deal is subject to regulatory approval.  WSJ, Lufthansa to Buy 19% Stake in JetBlue.

Former United Rentals CFO Settles Fraud Charges

The  SEC  announced  that  it  filed  settled  securities fraud charges  against Michael J. Nolan, a former Chief Financial Officer of United Rentals, Inc. (URI). The SEC alleged that, from 2000 through 2002, Nolan engaged  in a series of fraudulent transactions undertaken in order to meet  URI's earnings forecasts and analyst expectations. The complaint alleges  that  Nolan and others carried out the fraud through a series of  interlocking  three-party transactions, structured as "minor sale-leasebacks,"  to  allow  URI  to  recognize revenue prematurely and to inflate  profits  generated  from the sales. As a result of the fraud, URI  materially overstated its financial results in its Forms 10-K for fiscal  years  2000 and 2001, and its Forms 10-Q for the periods ended June  30,  2001,  and  March  31,  2002,  as  well  as in other public releases.

The  complaint  further  alleges that shortly after URI announced 2001 and 2002 year-end results, Nolan sold approximately $11 million of URI stock  that  he  owned, knowing that the company's announced financial results were materially overstated.

Former Schnitzer Steel CEO Settles FCPA Charges

The SEC charged the former Chairman and CEO of Schnitzer Steel Industries, Inc., with violating anti-bribery provisions of the Foreign Corrupt Practices Act (FCPA) by approving cash payments and other gifts to officials at Chinese government-owned steel mills to entice their business.  Without admitting or denying the allegations, Robert W. Philip of Portland, Ore., agreed to pay more than $250,000 to settle the SEC’s charges.  The SEC alleges that from at least 1999 through 2004, Philip authorized payment of more than $200,000 in cash bribes and other gifts to managers at government-owned steel mills in China to induce them to purchase scrap metal from Portland-based Schnitzer. The Commission alleges that Schnitzer generated more than $96 million in revenue and more than $6.2 million in profits from sales to customers who had received the improper payments. The complaint further alleges that Philip authorized more than $1.7 million in payments to managers of privately owned steel mills in both China and South Korea, generating more than $500 million in additional revenue for the company.

FINRA Fines J.P. Morgan For Failures to Disclose to MSRB

FINRA today announced that it fined J.P. Morgan Securities, Inc. $500,000 for failing to disclose to the Municipal Securities Rulemaking Board (MSRB) that it had used consultants to obtain numerous municipal securities offerings and had made payments to consultants connected to particular offerings. FINRA is responsible for enforcing MSRB rules.  J.P. Morgan inaccurately stated in its filings with the MSRB that no municipal securities business had been obtained by its consultants and that it had made no payments to consultants connected with particular transactions. In fact, FINRA found, during the period from January 2002 through June 2004, J.P. Morgan used 16 different consultants to obtain at least 70 separate underwritings and paid at least $750,000 to six consultants connected to particular transactions.

During the time period at issue in this case, MSRB Rule G-38 required firms to disclose in quarterly filings with the MSRB any municipal securities business obtained or retained by a consultant. The rule also required firms to disclose payments made to consultants connected to particular municipal securities offerings. The rule is intended to address potential abuses in connection with the awarding of municipal securities business. It was revised in August 2005 to prohibit payments to any person not affiliated with a firm to solicit municipal securities business on behalf of the firm.

In settling this matter, J.P. Morgan neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

NASAA President Testifies on Holiday Scams

In testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, NASAA President Karen Tyler said investment fraud, a year-round problem, hits home during the holidays when consumers may face a financial crunch with increased expenses from holiday gifts and travel, or may be considering end-of-year investment or tax-savings opportunities.  State securities regulators are concerned that this predatory conduct, combined with a convergence of financial challenges - higher gasoline prices, a volatile stock market, lower housing values, and general economic unrest - may lead individuals to make hasty, ill-informed decisions in the pursuit of higher returns on their investments.  NASAA urges investors to be especially vigilant in protecting their assets from Internet, telephone and in-person promotions for alternative investment opportunities.

Morgan Keegan Sued over Mutual Fund Losses

Mutual fund investors  filed a federal class action in Tennessee against Morgan Keegan Asset Management, charging that it misrepresented the securities in the portfolios of two funds, an intermediate bond fund and a high income fund.  Both funds have lost about one-half their value this year.  WSJ, Morgan Keegan Sued Over Mutual-Fund Woes.

Perelman's Suit Against Morgan Stanley Over

The well-publicized litigation between Ron Perelman and Morgan Stanley is now over, as the Florida Supreme Court refused to hear Perelman's appeal.  In 2005 a jury awarded Perelman $1.58 billion in his claim that Morgan Stanley defrauded him in a deal in which he purchased Sunbeam Corp. stock, that ultimately became worthless.  Earlier this year the appeals court threw out the verdict, saying that Perelman had not proved his damages.  NYTimes, Florida Court Rejects Claim, a Boon for Morgan Stanley.

SEC Publishes Amendments to Rules 144 and 145

The SEC published the final rules amending Rule 144 and Rule 145.  The primary changes to Rule 144 include shortening the holding period to six months for restricted securities that are subject to the reporting requirements and substantially easing the restrictions on resales by non-affiliates.  The Rule 145 amendment eliminates the presumptive underwriter provision.

SEC Obtains Emergency Freeze in Options Trading Scheme

The SEC announced that it obtained an emergency order temporarily freezing the assets of Terry E. Provence (Provence) and DT Capital LLC (DT Capital), in connection with their alleged roles in a fraudulent options trading scheme. The SEC alleges that no later than March 2007 and continuing until at least August 2007, Provence pitched a sham index option trading program to primarily inexperienced investors with false promises that their principal would be safe and created DT Capital as a vehicle to marshal investor funds and promote the options program. The Complaint further alleges that Provence and DT Capital falsely represented that a major brokerage firm guaranteed the safety of investor principal, that the actual options trader, Fredrick J. Kunen (Kunen), was a licensed securities trader and director at the brokerage firm, that the options program had a successful ten-year track record, and that investors could expect extraordinary returns. The Complaint alleges that Provence and DT Capital raised at least $3.5 million from approximately forty investors and that Provence and DT Capital profited by at least $130,000.

Cox Testifies on 404 for Smaller Public Companies

SEC Chair Cox testified before the House Committee on Small Business on 404 Compliance for smaller public companies.  As expected, he announced that he would propose to the full Commission a further one-year postponement on final implementation of 404.  He also announced that the agency would conduct a cost benefit analysis of 404 compliance under the new auditing standard and mangement guidance, including a web-based survey and in-depth interviews.

SEC Announces Two Roundtables on IFRS

The SEC announced today that it will host two roundtable discussions in December on issues surrounding the growing prevalence of International Financial Reporting Standards (IFRS).  The first roundtable, on Dec. 13, 2007, will address the issues arising from the current co-existence of two accounting standards in the U.S. markets — a development that has been accelerated by Europe's decision to mandate IFRS for all public companies beginning in 2005. The second roundtable, on Dec. 17, 2007, will focus on the practical issues surrounding the possible future use of IFRS by U.S. companies.

The agenda and list of participants for each roundtable is at the SEC's website.

NASAA Testifies in Support of Arbitration Fairness Act

Tanya Solov, Director of the Illinois Securities Department, testified on behalf of NASAA in support of the Arbitration Fairness Act of 2007 introduced by Sen. Russ Feingold, saying that it is “a positive step in the right direction” toward improving the fairness of the system of securities arbitration.

“NASAA believes that securities arbitration system should be truly voluntary, that more meaningful and accurate statistics concerning arbitration outcomes should be compiled and disseminated, and the balance in the composition of arbitration panels should be restored,” Solov testified.

Solov said FINRA should require its member firms to offer their customers a meaningful choice between binding arbitration and civil litigation. “If arbitration really is fair, inexpensive, and quick, as its adherents claim, then these benefits will prompt investors to choose arbitration,” Solov testified. “If, on the other hand, arbitration does not offer these advantages, then this mode of dispute resolution should not be forced upon the investing public.”

NASAA also suggested changes to the current securities arbitration system: 

Removing mandatory industry arbitrators from the arbitration process, and for public arbitrators to have no ties to the industry.

Improving the statistics that FINRA collects and disseminates on arbitration, particularly with respect to outcomes. Currently, FINRA statistics treat any award of damages to a customer as a "win," even if the amount is a small percentage of what was asked for.

Flowers Turns Down Invite to Renegotiate Sallie Mae LBO

SLM Corp. (Sallie Mae), which is suing private equity firm J.C. Flowers for backing out of a deal to buy SLM, said that the firm turned down its invitation to renegotiate the terms.  The $25.3 billion LBO was one of the biggest to blow up in the face of the credit markets collapse.  WSJ, Flowers Won't Make New SLM Bid.

Dow Jones Shareholders Approve Sale to Murdoch

The Wall St. Journal reports that Dow Jones shareholders have approved the company's sale to Rupert Murdoch's News Corp. at $60 per share.  The shareholders' meeting will be held tomorrow.  WSJ, Count of Proxy Votes Shows Dow Jones Holders Approving Sale.

Small Public Companies Will Get Another Delay on 404 Compliance

SEC Chair Cox is expected to tell the House Small Business Committee today that the SEC will delay for another year the requirement that smaller public companies comply with section 404 of Sarbanes-Oxley.  The ultimate decision on whether to require compliance will depend in part on an SEC study of costs.  NYTimes, S.E.C. Planning to Delay Accounting Rules for Small Companies.

SEC Liberalizes Use of Shelf Registration

The SEC today adopted amendments to Form S-3 and Form F-3 that will permit smaller public companies (below a $75 million public float) to use shelf registrations, so long as they do not offer securities worth more than one-third of their public float (up from the 20% in the original proposal).   Shell companies, chronic late filers, and companies not listed on an exchange are not eligible.  It is expected that about 1400 companies will be able to take advantage of the amendment.  CFO.com, The SEC Wraps a Small-Biz Gift. 

SEC Obtains Asset Freeze in Pyramid Scheme Aimed at Hispanic Community

The SEC obtained an asset freeze and other emergency relief to halt a massive pyramid scheme with as many as 70,000 victims in 64 countries. The scheme involving the purported sale of English and Spanish language tutorials particularly preyed on Hispanic communities in Orlando, Fla., and Puerto Rico.  The SEC charged Robert Lane, Wealth Pools International, Inc., and Recruit For Wealth, Inc. with the fraudulent offer and sale of unregistered securities in the form of "Associate" memberships in an enterprise called Wealth Pools. The fraudulent offering began in 2005 and the defendants claim to have raised more than $132 million in 2007 alone, according to the SEC's complaint.

While Wealth Pools purports to be a multi-level marketing company primarily selling an English and Spanish language tutorial DVD called Talk-N-Tutor through a network of sales Associates around the world, the SEC alleges in its complaint that the DVD is, in reality, a front for Wealth Pools's true product - an investment in one or more "pools" that offer investors an opportunity to receive passive income through the efforts of others to recruit new investors.

SEC Settles Fraud Charges Against San Diego's Independent Auditor

The SEC filed a settled civil fraud action yesterday against San Diego's independent auditor, Thomas J. Saiz and his firm, Calderon, Jaham & Osborn (CJO), in connection with the city's false and misleading financial statements in five 2002 and 2003 bond offerings.  According to the complaint, the independent auditor issued unqualified audit reports on the bond offerings that raised $260 million from investors but contained materially false and misleading information about San Diego's pension and retiree health care obligations.  It also charges that they failed to comply with generally accepted accounting standards, were not knowledgeable about San Diego, and failed to obtain sufficient competent evidential matter.

PCAOB Censures D&T

The Public Company Accounting Oversight Board fined Deloitte & Touche $1 million and censured the firm for shoddy work in auditing the books of Ligand Pharmaceuticals.  It is the board's first enforcement action against a Big Four Accounting firm.  D&T agreed to settle charges that it failed to perform appropriate and adequate procedures in a 2004 audit.  The company later had to restate its financial results for the period because of non-compliance with GAAP.  WSJ, Deloitte Receives $1 Million Fine.

More Fallout from Subprime Crisis

More fallout from the subprime mess:

Washington Mutual, one of the largest lenders, is leaving the subprime lending business, raising $2.5 billion through an issuance of convertible preferred shares, cutting its dividends and eliminating over 3000 jobs.  NYTimes, Washington Mutual Cutting Dividend and Jobs; WSJ, WaMu Is Retrenching After Taking Hard Hit From Mortgage Crisis .

Bank of America has closed its Columbia Strategic Cash Portfolio, the largest of its kind, after wealthy investors withdrew billions of assets.  Only last month the fund had $40 billion in assets.  Investors will lose 1/2 cent on the dollar.  NYtimes, Mortgage Crisis Forces the Closing of a Fund; WSJ, A $34 Billion Cash Fund to Close Up.

MBIA, the largest bond insurer, is receiving a $1 billion investment from private equity firm Pincus Warburg after Moody's warned last wekk that MBIA was at "greater risk" of a capital shortfall than previously thought.  NYTimes, Equity Firm Makes $1 Billion Investment in MBIA; WSJ, MBIA Gets a Capital Pain-Reliever.

Former PurchasePro CEO's Crimina l Trial Wraps Up

Lawyers made closing arguments in the second criminal corporate fraud case against former PurchasePro CEO Charles E. Johnson Jr.  Johnson is charged with both accounting fraud to meet earnings projections (stemming from conduct in March 2001) and obstruction of justice, based on four emails that Johnson fabricated and gave to his former lawyers in April 2006, who testified against him in this trial.  Johnson said that the phony emails were to test the attention span of his lawyers.  WPost, Both Sides Rest in Trial Of Ex-PurchasePro Chief.

Black Sentenced to 6-1/2 Years

Conrad Black, the former CEO of Hollinger International accused of stealing millions of dollars from the corporation, was sentenced to 6-1/2 years in prison.  Some observers expected that he might be sentenced to 19-25 years.  Last summer a jury convicted him of three counts of mail fraud and one count of obstruction of justice; he was acquitted of nine other counts.  The judge reprimanded Black for not accepting his guilt.  CFO.com, Conrad Black Sentenced in Fraud Case.

Cox on Sovereign Business

We have all become aware of the financial clout of sovereign capital in the markets today, as sovereign funds in the Middle East and Asia are stepping in to bail out the cash-strapped megabanks hit by the subprime crisis.  SEC Chair Cox, in a recent speech, "The Rise of Sovereign Business," before the American Enterprise Institute Legal Center for the Public Interest, addressed how (1) state-owned or controlled corporations in the public markets and (2) government-owned commercial investment funds are challenging the conventional approaches to the roles of government and the private sector, respectively, in an era when the world's capital markets are converging.  He asks:  is there a point at which the entire financial activity we call a "free market" stops being that and morphs into something else?  He addresses specific SEC concerns, including enforcement, conflicts of interest, market efficiency, and transparency.

SEC and New York Conducted 2005 Investigations into Bear Stearns Mortgage Pricing

Both the SEC and the New York Attorney General conducted investigations in 2005 into how Bear Stearns priced mortgage securities it sold to institutional investors, but each ultimately decided not to bring enforcement actions.  Bear Stearns' disclosure this summer of mispriced mortgage securities in two hedge funds marked the beginning of the subprime mess.  The article raises the intriguing question of whether an earlier enforcement action would have sent a message to Wall St. to clean up their houses.  Did the SEC's emphasis on bringing enforcement actions on behalf of small investors cause them to miss this opportunity?  The investors in the 2005 matter were institutional investors.  WSJ, Did Authorities Miss a Chance To Ease Crunch?

UBS Announces $10 Billion Writedown

In what is becoming a familiar pattern, megabank UBS announced a $10 billion writedown due to subprime mortgages and an emergency cash injection, totalling approximately $11.5 billion, from the Singapore government and an unnamed Middle East investor believed to be the government of Oman or Abu Dhabi.  UBS also announced it expected a overall loss this year and cancelled its cash dividend and instead will issue a stock dividend.  The investment takes the form of a convertible preferred stock bearing a 9% dividend.  Singapore will take a 9% stake in UBS.  NYTimes, UBS Declares a $10 Billion Writedown; WSJ, UBS Gains Two New Investors, Writes Down $10 Billion.