Securities Law Prof Blog

Big Bonuses at Goldman Sachs

Goldman Sachs led investment banks in 2006 in profits and bonuses.  With $9.6 billion in profits, it could afford to pay a $53.4 million bonus to its CEO, bonuses of $52.3 million to each of its two Co-Presidents, and a $31.5 million bonus to its Vice Chair.  See NYTimes, Even for Rungs Below the Top, Goldman Bonuses Were Hefty and WSJ, At Goldman, Two More Officials Revealed as $50 Million Men.

SEC Comments on Accounting for IPO/Merger with Entities under Common Control

The SEC website has just posted  a December 2006 Speech by Leslie A. Overton, Associate Chief Accountant, Division of Corporation Finance, before the 2006 AICPA National Conference on Current SEC and PCAOB Developments, on Accounting and Reporting Issues for an IPO in Connection with a Merger of Entities under Common Control.

Former Biopure CEO Settles Fraud Charges

The SEC announced that a final judgment  by  consent  was entered by the U.S. District Court of the  District  of  Massachusetts against Thomas Moore, the former chief executive  officer  of  Biopure Corporation, in a previously-filed action alleging  misleading  public statements about the company's efforts to obtain FDA approval for  its primary product,  Hemopure,  a  synthetic  blood  product.  The  final judgment permanently enjoins Moore from violating antifraud provisions of the federal securities laws and orders him to  pay  a  $120,000  civil penalty.

For further information, see Litigation Release No. 19825  (Sept.  12, 2006) (SEC Settles Civil Injunctive Action Against Biopure Corporation and Its General Counsel), Litigation  Release  No.  19651  (April  11, 2006) (SEC Settles  with  Former  Biopure  Executive)  and  Litigation Release No. 19376 (Sept. 14, 2005) (Biopure and others charged by  the Commission). [SEC v. Biopure Corporation, et al., Civil Action No. 05-11853-PBS (D. Mass.)] (LR-20010)

former Bennett Environmental CFO Settles Charges

The SEC settled fraud charges against Richard L. Stern, the former CFO of Bennett Environmental, Inc.  (BEI),  and  two others for their roles in the  repeated  dissemination  of  false  and misleading  information  concerning  a  Superfund   soil   remediation contract awarded to the company in 2003.  The Commission alleged that between June 2003 and  April  2004,  Stern and others caused BEI to issue press releases and make public  filings misrepresenting and exaggerating a contract that it extolled  as  "the largest in the Company's  history"  with  a  value  of  "$200 million  [Canadian]." In reality, the contract had a guaranteed value  of  less than $250,000, later was cancelled by the  Army  Corps  of  Engineers, reinstated on a limited basis, and then re-solicited under  materially different terms. The complaint alleges that during the  relevant  time period, Stern and the other defendants failed  to  inform  the  public about material changes to the contract, failed to correct prior  false statements, and continued to misrepresent the  contract  by  asserting that it was in full force and effect and  worth  C$200  million.  Only after a new CEO took over at BEI did the true  facts  come  to  light, which were disclosed in a July 2004 press release.

Without admitting or denying the Commission's allegations , Stern consented to the entry of a final judgment permanently  enjoining  him from violating Section 10(b) of the Securities Exchange  Act  of  1934 (Exchange Act) and Rules 10b-5 and 13a-14 thereunder, and  aiding  and abetting violations of Section 13(a) of the  Exchange  Act  and  Rules 12b-20, 13a-1, and 13a-16 thereunder.  Stern  also  agreed  to  pay  a $75,000 civil penalty and to be barred from acting as  an  officer  or director  of  a  public  company  for  five  years.  [SEC  v.  Bennett Environmental, Inc., John  A.  Bennett,  Robert  P.G.  Griffiths,  and Richard L. Stern, Case No. 06-Civ-14294] (LR-20009)

Veritas settles earnings management charges

The SEC filed a complaint in the U.S. District  Court  for  the    District of Columbia yesterday charging Veritas  Software  Corporation with securities fraud for engaging in an  earnings  management  scheme and filing false and misleading financial statements from 2000 through 2003. Veritas was also charged with fraud in connection with  improper round-trip  transactions,  including  a  round-trip  transaction  with  America Online, Inc. (AOL), as well as aiding  and  abetting  AOL's fraud. Veritas was acquired by Symantec Corporation on July 2, 2005.

Without admitting or denying the allegations in the complaint, Veritas consented to the entry of a judgment that  enjoins  the  company  from violating the antifraud, reporting, books and  records,  and  internal control provisions of the federal securities laws, and from aiding and abetting securities fraud violations by  other  parties.  Veritas  was also ordered to pay a $30 million civil penalty, which the  Commission will seek to distribute to harmed investors pursuant to the Fair Funds provision of the Sarbanes-Oxley Act of 2002. [SEC v. Veritas  Software
   Corp., Civil Action No. 07-364 (D.D.C.)] (LR-20008; AAE Rel. 2562)

NASDD TRACE Fact Book Available

The 2006 NASD TRACE Fact Book is now available on its website.  It is intended to give retail investors, market professionals, media and educational institutions a historical perspective of the over-the-counter (OTC) U.S. corporate bond market. The Fact Book is released annually and is based on aggregated data as entered into the Trade Reporting and Compliance Engine (TRACE).

Raymond James Fined $2.75 million for Inadequate Supervision

NASD fined Raymond James Financial Services, Inc. (RJFS) of St. Petersburg, FL, $2.75 million for failing to maintain an adequate supervisory system to oversee the sales activities of over 1,000 producing branch managers working in offices throughout the United States.

"RJFS's supervisory system was inadequate because it allowed producing branch managers to supervise themselves, said James S. Shorris, NASD's Executive Vice President and Head of Enforcement. "This flawed supervisory system created a situation where the unsuitable sales of variable annuities and risky mutual funds to elderly and risk-averse customers went undetected."

From early 2000 through September 2004, RJFS employed over 1,100 producing registered principals, or branch managers, most of whom worked in small, geographically dispersed offices. These branch managers were allowed to act as the primary supervisors of their own business activities. They approved their own transactions, opened and accepted new accounts, and reviewed their own correspondence. The firm relied on an electronic transaction surveillance system maintained by RJFS's Compliance Department, and a series of exception reports, to flag transactions that required further review. It also assigned supervisory responsibility for these 1,100 branch managers to three sales managers. The activities commonly associated with daily supervision, however, were conducted by the branch managers, who in many cases, in effect, supervised themselves. By permitting these principals to engage in self-supervision, RJFS's supervisory system was not reasonably designed to achieve compliance with securities rules and regulations.

One such producing manager was Donna Vogt, whose sales practice violations went undetected for approximately four years. Vogt was the branch manager and the only registered person working in her office in Wisconsin. She maintained hundreds of customer accounts and sold mainly mutual funds and variable annuities. Many of her customers were of retirement age or older. NASD found that, in determining which products to recommend, Vogt treated her customers as a homogeneous group, regardless of age, financial status, investment experience and objectives. Of her approximately 700 accounts, more than 90 percent listed their primary investment objective as "growth" and risk tolerance as "medium." RJFS never questioned the fact that Vogt listed these objectives and strategies for almost all of her customers. In fact, the person who reviewed and accepted the customer account documents was Vogt herself.

Judge Throws Out Conviction of Specialist

A federal district court judge in New York threw out the conviction of Dennis Finnerty, a trader at the  NYSE specialist firm, Fleet Specialists, for improper trading for his firm's accounts.  The prosecution was one of a number against specialist firms for allegedly interpositioning themselves between customers' orders to make a profit.  The judge said that the government did not meet its burden of showing fraud or deceptive conduct or establishing that the customers were misled or defrauded.  See WSJ, Judge Throws Out Conviction Of Ex-Specialist Finnerty.

Fannie Mae Cancels Bonuses

Fannie Mae, whose profits were overstated by $6.3 billion, announced it would not pay bonuses totalling $44.4 million to 46 current and former employees for the period 2001-04.  See WPost, Fannie Cancels Executive Bonuses and WSJ, Fannie Won't Pay $44.4 Million in Bonuses.

SEC Sustains NASD's Findings in Research Reports Case

The SEC sustained  NASD's  findings  of  violation  against Donner Corporation International, a former NASD member  firm,  Jeffrey L. Baclet, its former president and sole owner, and Vincent M.  Uberti and Paul A. Runyon, former registered representatives of Donner.  NASD found that Donner, Baclet, Uberti, and Runyon violated  Section  10(b)and Rule  10b-5,  and NASD Rules  2120,  2210,  and  2110  by  preparing  and  disseminating research reports which contained material misstatements and omissions.  NASD found further that Donner, Baclet, and Uberti violated NASD  Rule 2110 by failing to disclose in certain  Donner  research  reports  the compensation Donner  received  for  writing  the  reports.  NASD  also determined that Donner and Baclet violated NASD Rules 3010, 2210,  and 2110 by failing to establish and maintain adequate written supervisory procedures and by failing  to  ensure  written  approval  of  Donner's  research reports by a firm principal.

Further Due Process Restrictions on Punitive Damages

The Supreme Court, in a 5-4 decision, imposed further restrictions on punitive damages awards, holding that the award cannot penalize the defendant for harm done to non-parties.  While punitive damages are not allowed in federal securities claims, they may be awarded in some state securities claims and in arbitration cases against brokerage firms.  Recently, there have been some judicial opinions holding that due process limits on punitive damages awards are applicable in arbitration, even though there is no state action.  For discussion of the Phillips Morris v. Williams decision, see WSJ, High Court Throws Out Verdict Against Philip Morris.

Academic Study on Hedge Fund Performance

The New York Times highlights the study of "Hedge Fund Activism, Corporate Governance and Firm Performance" by law professors Frank Partney (San Diego) and Randall Thomas (Vanderbilt) and two finance professors. The study contradicts the generally held view that hedge funds are not "real" shareholders and only in it for short term gains.  In fact, they find that most hedge funds take long-term positions in the companies they invest in and improve the bottom line for all shareholders.  (Frank and Randall presented the paper at the January AALS meeting.)  See NY Times, A Good Word for Hedge Fund Activism (It appeared in the Sunday paper, but you may have missed it because of the holiday.)

Study on Foreign IPOs since SOX

It has practically become common wisdom -- that since the enactment of Sarbanes Oxley, foreign companies have avoided the U.S. markets.  But a new study by Thomson Financial examines IPOs for the past 20 years and finds little evidence that it's true.  See WSJ,  Do Tough Rules Deter Foreign IPOL istings in U.S.?

New Brokerage Ad Campaigns

Morgan Stanley is unveiling its new ad campaign since changing CEOs in 2005.  It has dumped the "your stockbroker is your family friend" theme and is going for a "chillier, less emotional image" with the tagline "World Wise."  Courting retail investors is a big business for the large brokerage firms.  See WSJ, Morgan Stanley Alters Its Pitch.

Hedge Funds Get Attention from Fed Reserve of NY

Timothy Geithner's ( President of the Federal Reserve Bank of New York) mission:  prevent financial system meltdown.  He is focusing his attention on the risks presented by hedge funds, as he works with other regulators to minimize systemic risk.  See WSJ, Geithner's Balancing Act.

Mercury Court Documents Reveal Backdating

More details about those incriminating emails released in court documents (previously sealed) in the Mercury backdating options lawsuit -- The WSJ provides excerpts that demonstrate the blatant nature of the backdating, with talk of using the "magic backdating ink."  See WSJ, Emails Reveal Backdating Scheme.

Daimler Reportedly Getting Ready to Sell Chrysler

Reports that DaimlerChrysler will shed Chrysler gain traction.  Investment bankers are reportedly working to put a value on Chrysler, and an auction or spin-off may take place in the coming months.  See WSJ, Future of Chrysler Rests With Zetsche.

Lateral Moves in Academia

Gordon Smith is moving from Wisconsin to BYU.

Susan Stabile is moving from St. John's to St. Thomas (Minneapolis).

Congrats to both Gordon and Susan!

Citigroup Considering TSE Listing

Citigroup is considering listing its shares on the Tokyo Stock Exchange, to facilitate its expansion efforts in Japan.  See WSJ, Citigroup Studies Possibility Of Tokyo Share Listing.

Daimler May Shed Chrysler

Today's rumor is that DaimlerChrysler will sell or spin off Chrysler.  This follows last week's rumor of a Chrysler-GM merger.  SeeWSJ, Kicking Chrysler's Tires