Securities Law Prof Blog

NYSE Firms Post Big Third Quarter Losses

NYSE member firms that conduct business with the public reported third quarter 2007 after-tax loss of $2.49 billion and revenues of $78.79 billion, compared with $2.64 billion after-tax profit and revenues of $81.76 billion in third quarter 2006.  NYSE, NYSE Member Firms Report Third-Quarter 2007 Results.

Meanwhile, Morgan Stanley is getting a $5 billion investment from China's sovereign wealth fund, after posting a $9.4 billion write-down due to bad bets on mortgages.  The China fund will acquire preferred shares that will convert into just under 10% of the common stock.  Morgan Stanley joins Citigroup, Bear Stearns, and UBS in receiving bailouts from Asia and the Middle East.  WSJ, Morgan Gets Infusion From China After Swinging to a Quarterly Loss.

SEC Charges Two Former Morgan Stanley Advisors with Market Timing

The SEC recently filed a civil fraud action against  two former Morgan Stanley DW, Inc. (MSDW) financial advisors, Darryl  A. Goldstein and Christopher O'Donnell, for allegedly engaging in  a  fraudulent  market timing scheme. The  SEC alleged that  Goldstein  and  O'Donnell engaged  in  a  number  of  deceptive practices to defraud at least 50 mutual  fund  companies  and  their  shareholders by circumventing the funds'  restrictions  on  market-timing.  The conduct alleged occurred from January  2002  until  August  2003  and generated approximately  $1  million  in net commissions or asset-based fees for the  defendants. 

In    a  related  administrative  proceeding,  Morgan  Stanley  &  Co. Incorporated (MS&Co.), as successor to MSDW, consented to the issuance of  a  Commission  order  which  found  that MSDW failed reasonably to supervise  four  financial  advisors  who engaged in  the fraudulent market timing scheme and also allowed multiple mutual fund  trades  to  be placed or amended after the 4:00 p.m. ET close of trading  but  priced  at  the net asset value determined at the market close. Without  admitting or denying the findings, MS&Co. consented to a censure and an order to pay disgorgement,  including  prejudgment  interest,  of  $5,120,000 and a penalty of $11,880,000, for a total of $17 million.

In  another  related  administrative  proceeding,  Marc  H. Plotkin, a former  MSDW financial advisor who worked with Goldstein, consented to the  issuance of a Commission order which found that Plotkin willfully aided  and  abetted  and  caused  securities fraud violations  Without admitting or denying the findings, Plotkin  consented to an order to pay a civil  penalty  of  $90,000 and to be barred from association with any broker,  dealer,  or  investment adviser with the right to reapply for association  after  one year.

SEC and DOJ Charge Refco's Outside Attorney

The SEC today filed a civil injunctive action against Joseph P. Collins, a partner at the law firm of Mayer Brown LLP and the longtime, primary outside attorney for Refco Group Ltd. The Commission's complaint alleges that Collins substantially assisted Refco Group Ltd. and its corporate successor Refco Inc. in their failure to disclose hundreds of millions of dollars in related party indebtedness and related party transactions. The complaint alleges that Collins aided and abetted Refco's violations of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 10b 5. In addition, the U.S. Attorney's Office for the Southern District of New York today announced the filing of criminal charges against Collins for his role in the Refco fraud.

The SEC alleges that Collins, in the course of representing Refco, learned that Refco Group Holdings, Inc. (RGHI), a non-Refco entity controlled by Phillip R. Bennett, Refco's chief executive officer, owed Refco hundreds of millions of dollars. In addition, the complaint alleges that Collins worked on, and oversaw other attorneys' work on, short-term transactions that occurred regularly at the end of Refco fiscal periods from February 2000 through May 2005. In these transactions, a Refco subsidiary, at the end of a fiscal period, loaned hundreds of millions of dollars to a third party that, in turn, was obligated to loan an equal amount simultaneously to RGHI. The transactions were reversed shortly after the fiscal periods ended. In these transactions, Refco assumed hundreds of millions of dollars in potential liabilities, in the form of guaranties and indemnification that it extended to the third parties to protect them from a default by RGHI or claims that might arise out of the loans.

In 2004, Refco placed $600 million in senior subordinated notes with certain financial institutions pursuant to an offering circular. In 2005, Refco commenced its initial public offering of common stock. The SEC alleges that the offering circular failed to disclose RGHI's indebtedness, the period end transactions, and the related potential liabilities and that the registration statement failed to disclose the indebtedness and the potential liabilities. The complaint further alleges that Collins, while aware of the indebtedness and the transactions, reviewed and revised sections of the offering circular and the registration statement, without inserting requisite disclosures regarding the indebtedness, the period-end transactions, and the potential liabilities.

The Wall St. Journal has the text of the indictment.

Sallie Mae Chair's Stock Sales in the News Again

Sallie Mae Chairman Alfred L. Lord's stock sales made news this year.  Last Friday the company announced that Lord sold 90% of his stock apparently to meet a margin call.  Last February he sold about $18.3 million of his shares just before the administration announced a proposal to cut student loan subsidies.  Lord said he didn't know anything about the proposal.  The Chair still has plenty of stock options.  WPost, A Reversal of Fortune For Sallie Mae Chairman.

Bear Stearns Fund Manager under Investigation

Federal prosecutors reportedly are investigating the actions of a Bear Stearns fund manager who took about $2 million of his own money out of one of the Bear Stearns internal funds that subsequently collapsed.  According to reports, at the time Ralph Cioffi moved his money into a different fund, he was still making optimistic forecasts about the fund.  WSJ, Bear Manager's Actions Are Subject of Inquiry.

FASB Board Set for an Overhaul

The Financial Accounting Foundation, the parent group for both the Financial Accounting Standards Board and the Government Accounting Standards Board, will propose an overhaul of the FASB board to reduce its size from seven to five members and to give the chairman the power to decide agenda items.  Under the proposal, one member of the board will have to come from each of four backgrounds: investing, auditing, preparing financial statements and academic accounting.  The Foundation also said it expected to take a more active role in oversight.  In addition to its traditional role of setting accounting rules for US public companies, FASB is working on convergence with the rules of the International Auditing Standards Board.  NYTimes, Overhaul Proposed in Accounting Standards Board.

Accounting Software Provider Goes Public

The total number of IPOs is up 25% from last year, and many of them are technology companies.  NetSuite, an on-demand accounting software provider, plans a Dutch auction IPO later this week.  What is interesting is that NetSuite's largest financial backer, and largest shareholder, is Oracle's Larry Ellison, and the IPO proceeds will be used to pay down the company's line of credit owed to one of his affiliates.  Ellison says that he will place his shares in a "lock box" LLC to avoid conflicts of interest.  NYTimes, Going Public Caps Dream for a Maker of Software.

GAO Issues Report on SEC Oversight of SROs

The GAO released a report today on the SEC's oversight of the SROs, entitled "Opportunities Exist to Improve Oversight of Self-Regulatory Organizations."  The report was requested by Senator Charles E. Grassley, the Ranking Member of the Senate Committee on Finance.  GAO's recommendations for improving SRO oversight include (1) establishing a written framework for conducting SRO investigations and broaden current guidance to SRO inspection staff to have them consider to what extent they will use SRO internal audit reports when planning SRO inspections, (2) ensure that Market Regulation makes certain that SROs include in their periodic risk assessment of their IT systems a review of the security of their enforcement-related databases, and that Market Regulation reviews the comprehensiveness and completeness of the related SRO-sponsored audits of SRO enforcement-related databases; and (3) ensure that any software developed for tracking SRO inspections includes the ability to track SRO inspection recommendations, and consider IT improvements that would increase staff's ability to search for, monitor, and analyze information on SRO advisories and referrals.

SEC Charges msystems Director with Insider Trading

The SEC filed a complaint charging Hans Wagner, a resident of Sweden and a director of msystems, a publicly traded Israeli corporation, with insider trading in advance of a merger announcement.  The complaint also states that Wagner voluntarily contacted the SEC staff and offered to disgorge the profits.  There is no explanation why the SEC filed this complaint seeking disgorgement of the profits.

SEC Seeks Testimony Regarding Municipal Bond Offerings in Alabama

The  SEC announced today that it filed an action in federal court  seeking  an  order  requiring testimony in an SEC investigation from  Larry  P. Langford, the current Mayor of Birmingham, Alabama and former  Jefferson  County Commission President, and William B. Blount, the  chairman  of  Blount  Parrish  &  Co, an SEC-registered municipal securities dealer and broker-dealer.  Both Langford and Blount previously declined  to  testify  or articulate  a  recognized  legal privilege that would excuse them from answering the staff's questions. The SEC is investigating whether there were violations of the antifraud provisions of the federal securities laws in connection with the  offer,  purchase  or sale of Jefferson County (Alabama) municipal bonds  or  security-based  swap  agreements. 

Investors in CDOs Battle Over What's Left

Who gets what when CDOs (collateralized debt obligations) liquidate is expected to become a big issue in 2008; already three CDOs are in liquidation.  A recently-filed New York State court filing may provide some answers, as Sagittarius CDO trustee Deutsche Bank seeks guidance on handling the disputed claims of two investors, MBIA and UBS.  WSJ, CDO Battles: Royal Pain Over Who Gets What.

United Rentals and Cerberus Postpone Trial

United Rentals and Cerberus agreed to delay by one day the start of the trial in the Delaware Chancery Court to pursue a settlement.  United is suing Cerberus over its refusal to go through with its acquisition of United in November.  WSJ, United Rentals, Cerberus Delay Start of Trial.

Debt Investors Lobby for More Protection

A recently formed group of debt investors called the Credit Roundtable will release a white paper today calling for stronger protections in bond contracts.  The proposals include a "change in control put" that would allow the bondholder to sell the bonds back to the company in the event the company is taken over and "step-up coupon provisions" that would compel issuers to pay higher interest if ratings are downgraded.  In 2007 about 30 companies had their credit ratings cut from investment grade to junk, many as a result of leveraged buyouts or restructurings.  WSJ, Investor Group Seeks Bond Protections.