Securities Law Prof Blog

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

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Saturday, December 22, 2007

Fifth Circuit Holds that Customer of Non-NASD Brokerage Firm Did Not Have to Arbitrate Claim

The Fifth Circuit, in Galey v. World Marketing Alliance, 2007 WL 4323610 (Dec. 12, 2007), agreed with a securities customer that he did not have to arbitrate his dispute before NASD pursuant to an arbitration clause in his customer agreement, since the brokerage firm had allowed its membership in NASD to lapse.  NASD Rule 10301 provides that a claim involving a member whose membership has been terminated is ineligible for arbitration.  The Fifth Circuit found that the Rule meant what it says and it was incorporated by reference into the customer's arbitration agreement.  Moreover, since the Rule was to protect the customer, it was not severable from the rest of the agreement.  As a result, the customer was free to bring his claim in court.

December 22, 2007 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Friday, December 21, 2007

SEC Final Rule on Form S-3 Eligibility Published

Former Prudential Broker Indicted on Market-Timing Charges

The United States Attorney's Office in Boston, Massachusetts obtained an indictment against Justin F. Ficken of Boston, Massachusetts, related to Ficken's alleged deceptive market timing activity while working at Prudential Securities, Inc. Ficken was charged with one count of conspiracy to commit wire fraud and securities fraud, four counts of wire fraud, four counts of securities fraud, and one count of obstruction related to testimony he gave during the SEC's related investigation.  The SEC previously filed a civil enforcement action against Ficken and others, alleging that Ficken was part of a three-person group of registered representatives, known as the "Druffner Group," that defrauded mutual fund companies and the funds' shareholders by placing thousands of market timing trades worth more than $1 billion for five hedge fund customers from at least January 2001 through September 2003. According to the amended complaint, Ficken knew that the mutual fund companies monitored and attempted to restrict excessive trading in their mutual funds. The amended complaint alleged that, to evade those restrictions when placing market timing trades, Druffner Group members disguised their own identities by establishing multiple broker identification numbers and disguised their customers' identities by opening numerous customer accounts for what were, in reality, only a handful of customers.

On September 13, 2007, the U.S. District Court for the District of Massachusetts entered a final judgment against Ficken. Ficken has appealed that judgment, and that appeal is pending.

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

Lucent Settles FCPA Allegations

The SEC filed another action involving FCPA violations, this time a settled complaint against Lucent Technologies Inc. ("Lucent"). Lucent agreed, without admitting or denying the allegations in the complaint, to the entry of a permanent injunction and to pay $1.5 million in civil penalties.  The SEC alleges that, from at least 2000 to 2003, Lucent spent over $10,000,000 for approximately 1,000 Chinese foreign officials, who were employees of Chinese state-owned or state-controlled telecommunications enterprises, to travel to the United States and elsewhere. The Commission alleges that while the trips were ostensibly designed to allow the Chinese foreign officials to inspect Lucent's factories and to train the officials in using Lucent equipment, in fact, the officials spent little or no time visiting Lucent's facilities. Instead, they visited tourist destinations such as Hawaii, Las Vegas, the Grand Canyon, Niagara Falls, Disney World, Universal Studios, and New York City. As set forth in the complaint, the Chinese government enterprises for whom the officials worked were either entities to which Lucent was seeking to sell its equipment and services or existing Lucent customers.

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

SEC Extends Simplified Method for Valuing Stock Options

The SEC's Office of the Chief Accountant and Division of Corporation Finance today released a new Staff Accounting Bulletin (SAB) that is intended to assist public companies in valuing stock option grants to their employees for income statement purposes.  As a result of new SAB 110, eligible public companies may continue to use a simplified method set forth in SAB 107 for estimating the expense of stock options if their own historical experience isn't sufficient to provide a reasonable basis.  Without this action, otherwise eligible public companies would have lost the option to use the simplified method as of Dec. 31, 2007. The limited extension in SAB 110 will be of particular benefit to those public companies that lack historical exercise data, many of which are smaller companies.

Specifically, SAB 107 provided a simple rule for estimating the expected term of what it called a "plain vanilla" option : it would be just the average of the time to vesting and the full term of the option. Companies could use this simplified method until Dec. 31, 2007.  As the Dec. 31, 2007 deadline in SAB 107 quickly approaches, however, the detailed information about exercise behavior that the staff contemplated is still not readily available. As a result, the staff will continue to accept use of the simplified method on an interim basis, provided a company concludes that its own historical share option exercise experience doesn't provide a reasonable basis for estimating expected term. Once relevant detailed external information about exercise behavior becomes widely available for companies to make more refined estimates of expected term, the staff will no longer accept use of the simplified method.

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

SEC Announces Executive Compensation Disclosure

The SEC has launched "Executive Compensation Disclosure" that, it says, will enable investors to compare what 500 of the largest American companies are paying their top executives. The SEC is implementing its vision of XBRL interactive data to make disclosures more accessible to investors.  According to the SEC press release, "investors can quickly glimpse the total annual pay as well as dollar amounts for salary, bonus, stock, options and company perks. They can instantly compare those executive compensation figures with other companies by sorting according to industry or size."  It includes direct links to companies' proxy statements, including footnotes and the companies' explanation of their compensation decisions.

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

Chair Cox on SWFs

Today, the world's sovereign wealth funds (SWFs) are larger than all of the world's hedge funds combined.  SEC Chair Cox has recently spoken publicly about SWFs, and, in light of the fact that SWFs are taking significant positions in major Wall St. institutions, I thought it would be useful to review what he has said about them.  In a Dec. 5, 2007 lecture at the AEI Legal Center for the Public Interest, entitled "The Rise of Sovereign Business," Chair Cox noted that SWFs are "challenging conventional approaches to the respective roles of government and the private sector."  Dissolving borders, he notes, requires us to face the reality that many of the world's governments do not attach the importance we do to private economic ordering  as the operating premise of the capital markets.  So he identifies the issue as:if the distinction between government and private activity in our capital markets is increasingly blurred, is there a point at which the "free market" as defined by Adam Smith stops being that and morphs into something else? 

Chair Cox also noted several specific issues that SWFs present for the SEC.  One is enforcement -- what happens when the SEC investigates an entity that is controlled by the government?  Is it likely that the SEC would get the assistance of its overseas regulatory counterparts?  In addition, questions of conflicts of interest and opportunities for political corruption increase.  Will SWFs always direct their affairs in furtherance of investment returns, or will they use those resources in pursuit of other government interests?  Another important issue is transparency, as to which Chair Cox noted that "the track record to date of most SWFs does not inspire confidence."  This could result in serious disparities of information, with a resulting loss in investor confidence.  The answer, however, is not to restrict SWFs' access to capital markets, but to work to ensure the transparency of sovereign investment.

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

SEC Investigates Mortgage Valuations on Wall St.

The SEC is conducting more than three dozen investigations into mortgage-securities pricing, including at many of the big Wall St. firms like Bear Stearns, Merrill Lynch, Morgan Stanley and UBS.  Issues include whether they should have disclosed earlier the declining values of their mortgage securities portfolios and how they priced the securities, including whether they valued the same securities held in their own trading accounts higher than those held in the asset management group or trading accounts of customers.  WSJ, Pricing Probes On Wall Street Gather Steam.

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

SEC Investigates Inflated Appraisals at Washington Mutual

The SEC is investigating Washington Mutual, the nation's largest S&L and one of the largest home-mortgage lenders, on issues related to inflated appraisals on home mortgages.  Last month the New York State Attorney General filed a lawsuit that, while not naming WaMu as a defendant, alleges that it put pressure on an appraisal company to inflate property valuations.  WaMu said that it is cooperating with the SEC inquiry and that an internal investigation shows there was no systematic effort to inflate appraisals.  WSJ, SEC Probes WaMu on Appraisals.

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

2007 Class Action Filings Up

Class action filings in 2007 are up 58% over 2006, according to a NERA study.  A total of 198 were filed through Dec. 15, 38 related to subprime mortgages.  Even excluding subprime mortgages and backdating stock options, class action filings are up almost 40%.  Average settlements for 2007 are $33.2 million, compared with $22.7 million in 2006.  NYTimes, Class-Action Cases Rise, Fueled by Subprime Troubles. 

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

Thursday, December 20, 2007

Akzo Nobel Settles FCPA Charges with SEC

The SEC has settled another FCPA case involving kickbacks made under the U.N. Oil for Food Program.  The SEC filed books and records and internal controls charges against Akzo Nobel N.V., a Netherlands-based pharmaceutical company, alleging that from 2000 to 2003, two of Akzo Nobel's subsidiaries authorized and made $279,491 in kickback payments in connection with their sales of humanitarian goods to Iraq under the U.N. Oil for Food Program (the "Program"). The kickbacks were characterized as "after-sales service fees" ("ASSFs"), but no bona fide services were performed. The kickbacks paid in connection with Akzo Nobel's subsidiaries' sales to Iraq bypassed the escrow account and were paid by third parties to Iraqi-controlled accounts in Lebanon and Jordan.

Akzo Nobel consented to the entry of a final judgment permanently enjoining it from future violations and agreed to disgorge $1,647,363 in profits, plus $584,150 in pre-judgment interest, and to pay a civil penalty of $750,000. The SEC stated that it took the company's prompt remedial acts into account.

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

Chair Cox Speaks on Cross-Border Securities Markets Mergers

Chair Cox gave the keynote address at a conference at Columbia University on Cross-Border Securities Markets Mergers on Dec. 19.

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

Bear Stearns Announces 4th Quarter Loss

Another day, another financial institution announces a loss because of mortgage writedowns.  Bear Stearns reports a net loss of $854 million for the fourth quarter and a revenue loss of $379 million.  Its top executives will forego their annual bonuses.  WSJ, Mortgage Bets Bite Bear Stearns.

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

SWFs' Power Raise Concerns over Political Control

Sovereign wealth funds (SWFs) are increasingly in the headlines as they provide the cash for troubled US financial institutions, Morgan Stanley being the most recent example.  Should we be worried about foreign political involvement in these businesses?  The IMF is working on a code of best practices for SWFs, and the Organization for Economic Cooperation & Development is preparing a code for the recipients of the investments.  Both are expected to be released in preliminary form next spring.  WSJ, Wanted: SWFs' Money Sans Politics.

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

S&P Cuts a Bond Insurer's Rating

The ratings agencies have been subject to some criticism for not reacting quicker to the mortgage market crisis.  In a sign that the market's troubles are not over, yesterday Standard & Poors cut the bond rating of one bond insurer, ACA Financial Guaranty, from A to CCC and, while not cutting their ratings, assigned a "negative outlook" to four other companies that guarantee debt linked to home mortgages.  ACA announced it had negotiated a postponement of its contractual commitment to post $1.7 billion in collateral if its rating fell, but it needs to find a more permanent solution.  NYTimes,
Bond Insurer Cut to Junk; Negative Outlook for 4 More.

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

Government Savings Plan Confronts Frequent Traders

The Thrift Savings Plan is a 401(k)-type plan established by Congress for government employees to save for their retirement.  Last month its board voted to limit participants to two trades a month, because some investors trying to beat the market were driving up transaction costs for the Plan.  The problem is especially acute in its international stock fund.  Predictably some participants are organizing an opposition campaign, saying they have a right to trade whenever they want.  The SEC requires mutual fund boards to consider taking steps to prevent market-timing in their funds.  WPost, Too-Frequent Traders?

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

Wednesday, December 19, 2007

SEC Advisory Committee on Financial Reporting Sets Agenda for Jan. 11 Meeting

The SEC Advisory Committee on Improvements to Financial Reporting will hold a public meeting on Jan. 11, to discuss its progress report on the Committee's work to date in the areas of substantive complexity, standard setting, audit process, and compliance and delivery of financial information.

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

SEC Publishes Final Rules on Smaller Reporting Companies

The SEC has published its final rules on Smaller Reporting Company Regulatory Relief and Simplification, which expands the number of companies that qualify for its scaled disclosure requirements for smaller reporting companies.

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

SEC Settles Charges Against Former Refco Executive

The SEC filed a settled civil injunctive action against Santo C. Maggio, a former senior executive of Refco Inc. and its corporate predecessor, Refco Group Ltd. (together, Refco). Maggio was an executive vice president at Refco and headed Refco's registered broker-dealer subsidiary. The Commission's complaint alleges that Maggio played a significant role in concealing hundreds of millions of dollars of related party receivables and also alleges that Maggio participated in certain practices that inflated Refco's financial results.  Yesterday both the SEC and DOJ filed charges against Refco's principal outside attorney Joseph P. Collins in connection with the Refco fraud. 

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

SEC Obtains Order in Alleged $250 Million Offering Fraud

The SEC obtained a partial final judgment and order for permanent injunction and other relief against Edward P. May ("May") and E-M Management Company LLC ("E-M"), in connection with an alleged $250 million offering fraud that allegedly involved phony Las Vegas casino and resort telecommunication deals and may have involved as many as 1,200 investors, many of whom are senior citizens. May and E-M consented to the Order without admitting or denying the allegations of the SEC's complaint. The Order indicates that the Court will determine the specific amounts, if any, of disgorgement and civil penalties against May and E-M at a separate hearing upon notice and motion by the SEC.

The SECalleged that May, through E-M, raised as much as $250 million between 1998 and July 2007 from investors living in Michigan, California, Florida, Illinois, New York, Ohio and New Jersey. According to the allegations of the complaint, May and E-M sold securities in the form of interests in limited liability companies ("LLCs"), and told investors that these LLCs had been contracted to install and provide telecommunications equipment and services to major Las Vegas hotel chains and casinos.The complaint goes on to allege that May and E-M, both orally and in writing, 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.  The SEC's complaint further alleged that, in reality, the LLCs did not have any telecommunication contracts with the establishments identified in offering materials provided by May and E-M.

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