Securities Law Prof Blog

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

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Saturday, August 16, 2008

Wachovia Agrees to Buy Back over $8.5 Billion in ARSs

The SEC and the New York Attorney General announced on August 15 that investors, small businesses, and charities who purchased auction rate securities (ARS) through and Wachovia Capital Markets, LLC (collectively Wachovia) could receive over $8.5 billion to fully restore their losses and liquidity through a preliminary settlement that has been reached with Wachovia.

Under the terms of the agreement in principle, which are subject to finalization, review and approval by the Commission:

Wachovia agrees to repurchase ARS from all investors who purchased ARS from Wachovia prior to the collapse of the ARS market in mid-February 2008. In the wake of the market collapse, Wachovia investors are currently unable to liquidate approximately $8.8 billion in ARS holdings. Under the proposed settlement, Wachovia will offer to purchase roughly $5.7 billion of ARS held by individual investors, small businesses, and charitable organizations. The buy back will begin no later than Nov. 10, 2008 and conclude by Nov. 28, 2008. Wachovia also will offer to purchase the roughly $3.1 billion of ARS held by all other Wachovia investors in a buy back that will begin no later than June 10, 2009 and conclude by June 30, 2009.
 
Wachovia Securities, LLC will be permanently enjoined from violating the provisions of Section 15(c) of the Securities Exchange Act of 1934, and Rule 15c1-2 thereunder, which prohibit the use of manipulative or deceptive devices by broker-dealers.
 
Until Wachovia actually provides for the liquidation of the ARS, Wachovia will provide customers no net loans that will remain outstanding until the ARS are repurchased.
 
To the extent customers have incurred consequential damages beyond the loss of liquidity in the customer's holdings of ARS, Wachovia will participate in a special arbitration process that the customer may elect and that will be overseen by the Financial Industry Regulatory Authority (FINRA), whereby Wachovia will not contest liability for its misrepresentations or omissions concerning ARS.
 
Wachovia will provide notice to all customers of the settlement terms.

Wachovia will also pay New York State and the North American Securities Administrators Association (“NASAA”) civil penalties in the amount of $50 million, which will be distributed pro rata by states’ investment dollar totals. Wachovia faces the prospect of a financial penalty to the SEC after it has completed its obligations under the settlement agreement. Determinations as to the amount of the penalty, if any, will take into account, among other things, an assessment of whether Wachovia has satisfactorily completed its obligations under the settlement, and the costs incurred by Wachovia in meeting those obligations, including other penalties incurred and the cost of remediation.

August 16, 2008 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, August 14, 2008

JP Morgan Chase and Morgan Stanley Agree to Buy Back ARSs in Settlement with New York AG

New York Attorney General Andrew M. Cuomo today announced another series of agreements to provide liquidity to consumers who purchased auction rate securities.  Under the agreements, JP Morgan Chase & Co. (“JP Morgan”) and Morgan Stanley will collectively return over $7 billion to investors across New York State and the nation. The agreements settle allegations that JP Morgan and Morgan Stanley made misrepresentations in their marketing and sales of auction rate securities, representing that they were safe, cash-equivalent products, when in fact they faced increasing liquidity risk.

JP Morgan and Morgan Stanley have agreed to buy back, no later than November 12, 2008, and December 11, 2008, respectively, all illiquid auction rate securities from all JP Morgan and Morgan Stanley retail customers, charities, and small to mid-sized businesses. Firms will also pay damages to investors who sold securities for a loss. JP Morgan and Morgan Stanley will also pay New York State and the North American Securities Administrators Association (“NASAA”) civil penalties in the amount of $25 million and $35 million, respectively, which will be distributed pro rata by states’ investment dollar totals. 

Today’s agreements with JP Morgan and Morgan Stanley come less than a week after Cuomo settled similar allegations against Citigroup and UBS.  The four settlements together provide relief to thousands of investors who were left holding $27 billion worth of securities they could not sell after the widespread failure of the auction rate securities market this past February. Citigroup, UBS, JP Morgan and Morgan Stanley are four of the larger participants in the auction rate securities market, and among them are responsible for more than half of all auction rate securities owned by investors. 

JP Morgan and Morgan Stanley will also:

• Fully reimburse all retail investors who sold their auction rate securities at a discount after the market failed;
• Consent to a special, public arbitration procedure to resolve claims of consequential damages suffered by retail investors as a result of not being able to access their funds;
• Undertake to expeditiously provide liquidity solutions to all other institutional investors;
• Reimburse all refinancing fees to any New York State municipal issuers who issued auction rate securities through JP Morgan and Morgan Stanley since August 1, 2007.

August 14, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Backdating Charges Against Former Apple GC

The SEC announced that it settled options backdating charges against Nancy R. Heinen, the former General Counsel of Apple, Inc. As part of the settlement Heinen agreed (without admitting or denying the allegations) to pay $2.2 million in disgorgement, interest and penalties, be barred from serving as an officer or director of any public company for five years, and be suspended from appearing or practicing as an attorney before the Commission for three years.

The SEC charged that Heinen caused Apple to fraudulently backdate two large options grants to senior executives of Apple — a February 2001 grant of 4.8 million options to Apple's Executive Team and a December 2001 grant of 7.5 million options to Apple Chief Executive Officer Steve Jobs — and altered company records to conceal the fraud. The complaint alleges that as a result of the backdating Apple underreported its expenses by nearly $40 million.

In the first instance, Apple granted 4.8 million options to six members of its Executive Team (including Heinen) in February 2001. Because the options were in-the-money when granted, Apple was required to report a compensation charge in its publicly-filed financial statements. The Commission alleges that, in order to avoid reporting this expense, Heinen caused Apple to backdate options to January 17, 2001, when Apple's share price was substantially lower. Heinen is also alleged to have directed her staff to prepare documents falsely indicating that Apple's Board had approved the Executive Team grant on January 17. As a result, Apple failed to record approximately $18.9 million in compensation expenses associated with the option grant.

The Commission's complaint also alleged improprieties in connection with a December 2001 grant of 7.5 million options to CEO Steve Jobs. Although the options were in-the-money at that time, Heinen — as with the Executive Team grant — caused Apple to backdate the grant to October 19, 2001, when Apple's share price was lower. As a result, the Commission alleges that Heinen caused Apple to improperly fail to record $20.3 million in compensation expense associated with the in-the-money options grant. The Commission further alleges that Heinen then signed fictitious Board minutes stating that Apple's Board had approved the grant to Jobs on October 19 at a "Special Meeting of the Board of Directors" — a meeting that, in fact, never occurred.

August 14, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 13, 2008

SEC's Division of Corporation Finance in 2008

John White, the Director of the Division of Corporation Finance, in a recent speech before the ABA's Section of Business Law, Committee on Federal Regulation of Securities, reported on the Division's activities to date in 2008 and what it expects to do in the remainder of the year.

August 13, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC and SROs Enter Insider Trading Surveillance Agreement

The SEC published for public comment an agreement among the securities self-regulatory organizations (SROs) that is designed to improve detection of insider trading across the equities markets by centralizing surveillance, investigation, and enforcement under NYSE Regulation, Inc. (NYSE Regulation) and the Financial Industry Regulatory Authority, Inc. (FINRA). Currently, each equity exchange is responsible for surveillance of trading on its market and any investigations and enforcement actions involving its members.  This proposed new approach by the SROs to detect and enforce prohibitions against insider trading arose from yearlong discussions among the SEC, NYSE Regulation, FINRA and the exchanges to improve market integrity and better protect investors and is intended to focus expertise and eliminate gaps and duplication in surveillance for insider trading among the equities markets.

To complement the regulatory allocation agreement published for comment today, the securities exchanges and FINRA also entered into regulatory services agreements. Together, these agreements would provide NYSE Regulation with responsibility for surveillance, investigation, and enforcement of insider trading in securities listed on the New York Stock Exchange and NYSE Arca; FINRA would have such responsibility with respect to NASDAQ-listed and Amex-listed securities, and securities listed solely on the Chicago Stock Exchange.

FINRA and the following equity exchanges are parties to these agreements:

American Stock Exchange LLC
Boston Stock Exchange, Inc.
CBOE Stock Exchange, LLC
Chicago Stock Exchange, Inc.
International Securities Exchange, LLC
NASDAQ Stock Market, LLC
National Stock Exchange, Inc.
New York Stock Exchange, LLC
NYSE Arca Inc.
Philadelphia Stock Exchange, Inc.
NYSE Regulation, Inc. (acting under authority delegated to it by NYSE)

The insider trading initiative for the equities markets follows a similar consolidation of responsibility for surveillance for insider trading involving securities options, which the SEC approved in June 2006.

Public comments should be received by the Commission no later than 21 days after publication of the proposed plan in the Federal Register.

August 13, 2008 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 12, 2008

Morgan Stanley Announces BuyBack Program for ARS

On August 11 Morgan Stanley announced that it will repurchase at par auction rate securities (ARS) that are held by its retail accounts and were purchased through the Firm prior to February 13, 2008:

Commencing no later than September 30, 2008, Morgan Stanley will offer to repurchase at par ARS held by all individuals, all charities and those small to medium sized businesses with accounts of $10 million or less (collectively, “retail clients”) that were purchased through the Firm prior to February 13, 2008, with the exception of those ARS where auctions are clearing or there is a scheduled redemption.  The Firm will keep this offer open until November 30, 2008.  The Firm anticipates that this buy-back program will result in repurchases from retail clients of approximately $4.5 billion.
Morgan Stanley will make whole any losses sustained by retail clients who purchased ARS through Morgan Stanley before Feb. 12, 2008, and sold such securities at a loss between that date and the date of this announcement.
Consistent with applicable regulatory rules, until Morgan Stanley actually provides for the liquidation of the securities on the schedule set forth above, on request, Morgan Stanley will provide no-cost loans to retail clients that will remain outstanding until the ARS are repurchased, and will reimburse retail clients for any interest costs incurred under any prior loan programs the Firm provided to its ARS customers.
To the extent that a retail client has incurred consequential damages beyond the loss of liquidity in the retail client's holdings of ARS, Morgan Stanley will participate in a special arbitration process that the retail client may elect, and that will be overseen by FINRA, whereby Morgan Stanley will not contest liability for any alleged misrepresentations and omissions concerning the ARS, but may challenge the existence or amount of any consequential damages; the arbitration claim will be heard by a single, non-industry arbitrator.
Morgan Stanley will use its best efforts to provide liquidity solutions for its institutional investor base, including continuing to work with issuers and other interested parties on capital markets solutions, financing options and market liquidity, with the goal of resolving institutional investor clients’ liquidity concerns no later than the end of 2009.  Institutional clients who purchased ARS after February 13, 2008, as well as institutional clients who hold ARS where the auctions are clearing will be excluded from the program.

August 12, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Obtains Relief in Universal Leases Litigation

The SEC announced that on August 6, 2008, the federal district Court for the Northern District of Illinois entered an order permanently enjoining Warren Todd Chambers (Chambers) and Century Estate Planning, Inc. (Century Estate Planning), Chambers' business, from violating the antifraud and registration provisions of the federal securities laws. The SEC's complaint in this matter charges that Michael E. Kelly and 25 other defendants, including Chambers and Century Estate Planning, participated in a massive fraud on U.S. investors that involved the offer and sale of securities in the form of Universal Lease investments. Universal Leases were structured as timeshares in several hotels in Cancun, Mexico, coupled with a pre-arranged rental agreement that promised investors a high, fixed rate of return. The SEC's complaint alleges that from 1999 until 2005, Kelly and others, including Chambers and Century Estate Planning, raised at least $428 million through the Universal Lease scheme from investors throughout the United States, with more than $136 million of the funds invested coming from IRA accounts. The SEC further alleges that a nationwide network of unregistered salespeople who sold the Universal Leases, including Chambers and Century Estate Planning, collected undisclosed commissions totaling more than $72 million. The SEC also alleges that Kelly and others ran the scheme from Cancun, Mexico, through a number of foreign entities in Mexico and Panama. According to the SEC's complaint, Kelly and others told investors that Universal Leases would generate guaranteed income through the leasing of investor timeshares by a large, independent leasing agent. In fact, the complaint alleges the leasing agent was a small Panamanian travel agency controlled by Kelly and for most of the scheme its payments to investors came from accounts funded by money raised from new investors. Further, the complaint alleges that Kelly and others, including Chambers and Century Estate Planning, failed to disclose key facts about the Universal Lease investments, including the risks of the investments and that more than $72 million in investor funds were used to pay commissions as high as 27% to the selling brokers. The SEC continues to pursue its claims against Chambers and Century Estate Planning for disgorgement and civil penalties. The SEC's action against the remaining defendants is also pending.

August 12, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Phoenix Attorney with Corporate Identity Theft

The SEC filed a civil complaint against David B. Stocker, a Phoenix, Arizona attorney, and his wholly-owned corporation, Carrera Capital, Inc. The Commission's complaint alleges that, beginning in early 2006, Stocker allegedly found several companies whose stock had once traded in the public markets, but that had become defunct corporations and were no longer operating. When he found such a company, he allegedly incorporated a new company under the same name in the same State and, using his authority to act for the new company, purported to act on behalf of the old company. Specifically, Stocker allegedly caused stock in the old companies to be exchanged for stock in the new companies under the false pretense that the old company was undergoing a reverse stock split. Stocker then allegedly caused the new companies to issue large blocks of stock to Carrera Capital, Inc., or to other persons, such that he or the other persons typically held 99% of the stock in the new companies. Through this scheme, Stocker was allegedly able to gain control of public shells without having to pay for them or otherwise deal with their former control persons. The Commission alleges that Stocker profited from the scheme by selling the shells for cash payments.

The SEC's complaint seeks permanent injunctions, orders to provide an accounting, disgorgement plus prejudgment interest, third tier civil penalties, and penny stock bars against each defendant.

August 12, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Files Suit Charging Ponzi Scheme

The SEC filed a civil injunctive action against Kay Services, LLC, and its sole owner and officer, Marcia Sladich, alleging that they orchestrated a Ponzi scheme raising more than $10 million from at least 1,000 victims, many of whom were members of the Family Federation for World Peace, formerly known as the Unification Church.  The complaint alleges that Sladich repeatedly told investors that their money would be invested in domestic and international real estate and promised investors 50–100% guaranteed return on their investment in one year. She also promised investors additional payments for every investor they referred.  Throughout the scheme, Kay Services had no revenue-generating business or assets. The complaint charges the defendants with violating federal securities laws, seeks an order permanently enjoining the defendants from committing future violations and a final judgment ordering the individual defendants to disgorge their ill-gotten gains and to pay civil penalties.

August 12, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, August 11, 2008

Doidge et alia on Deregistrations under Rule 12h-6

Why Do Foreign Firms Leave U.S. Equity Markets? An Analysis of Deregistrations Under SEC Exchange Act Rule 12h-6 , by Craig Doidge, University of Toronto - Joseph L. Rotman School of Management; George Andrew Karolyi, Ohio State University - Department of Finance; and René M. Stulz, Ohio State University - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

On March 21, 2007, the Securities and Exchange Commission (SEC) adopted Exchange Act Rule 12h-6 which makes it easier for foreign private issuers to deregister and terminate the reporting obligations associated with a listing on a major U.S. exchange. We examine the characteristics of 59 firms that immediately announced they would deregister under the new rules, their potential motivations for doing so, as well as the economic consequences of their decisions. We find that these firms experienced significantly slower growth and lower stock returns than other U.S. exchange-listed foreign firms in the years preceding the decision. There is weak evidence that firms experience negative stock returns when they announce deregistration and stronger evidence that the stock-price reaction is worse for firms with higher growth. When we examine stock-price reactions around events associated with the passage of the Sarbanes-Oxley Act (SOX), we find negative average stock-price reactions with some specifications but not others. Further, there is no evidence that deregistering firms were affected more negatively by SOX than foreign-listed firms that did not deregister. Our evidence supports the hypothesis that foreign firms list shares in the U.S. in order to raise capital at the lowest possible cost to finance growth opportunities and that, when those opportunities disappear, a listing becomes less valuable to corporate insiders so that firms are more likely to deregister and go home.

August 11, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

SEC Files Charges Alleging Ponzi Scheme

The SEC filed charges against Wextrust Capital, LLC (Wextrust), its principals, and four affiliated Wextrust entities, alleging that defendants conducted a massive Ponzi-type scheme from 2005 or earlier that raised approximately $255 million from approximately 1,200 investors. The targets of the fraudulent offerings are primarily members of the Orthodox Jewish community. Simultaneously with the filing of the action, the Commission is seeking emergency relief from the Court to freeze the defendants' assets and place the Wextrust entities under the control of a receiver to safeguard assets. The Commission is also seeking a temporary restraining order to stop the ongoing offerings and other immediate relief.

The Commission's complaint, filed in federal court in Manhattan, charges that Wextrust, its principals Steven Byers and Joseph Shereshevsky, and its affiliated entities Wextrust Equity Partners, LLC (WEP), Wextrust Development Group, LLC (WDG), Wextrust Securities, LLC (Wextrust Securities) and Axela Hospitality, LLC (Axela) conducted at least 60 securities offerings through private placements and created approximately 150 entities in the form of limited liability companies or similar vehicles to act as issuers or facilitators of the offerings, purportedly to fund the acquisition of specified assets, the majority of which were commercial real estate ventures. Contrary to representations in the offering memoranda that proceeds would be used for specific projects, the defendants allegedly diverted funds to pay returns to investors in prior offerings, or to fund expenses of the defendants.

Overall, the complaint alleges, defendants diverted at least $100 million dollars to unauthorized purposes. The complaint alleges that the defendants are conducting at least four ongoing offering frauds intended to raise money to pay back investors from prior offerings.  In addition to the emergency relief sought today, the Commission's complaint seeks disgorgement of the defendants' ill-gotten gains, civil penalties, and permanent injunctions barring future violations of the antifraud and other provisions of the federal securities laws.

August 11, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

New York Expands ARS Investigation

New York Attorney General Andrew M. Cuomo today announced his office is expanding its investigation into the auction rate securities scandal. Cuomo today sent letters to JP Morgan Chase, Morgan Stanley and Wachovia announcing that his office will look into the firms’ behavior pertaining to misrepresenting auction rate securities to investors as safe, cash-equivalent products, when in fact they faced increasing liquidity risk.

Last week the SEC, the New York Attorney General and NASAA entered into agreements with UBS and Citigroup that will return over $20 billion to investors.   

August 11, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Stock Manipulation Through Theft of Online Accounts

The SEC filed a complaint on August 8 in the United States District Court for the District of Connecticut charging Dmitriy Butko, a Russian resident, with fraudulently manipulating the prices of numerous stocks by using the Internet to intrude into the online brokerage accounts of unsuspecting customers at U.S. broker-dealers.  The complaint alleges that between October 19, 2006 through November 30, 2006, Butko, or others acting in concert, commandeered the online trading accounts of unwitting investors at various broker-dealers, liquidated existing equity positions and, using the resulting proceeds, purchased thinly traded stocks in order to create the appearance of trading activity and pump up the price of the stocks. The complaint further alleges that in five instances, Butko, in his own account, bought shares in the thinly traded issuers just prior to or at the same time that compromised accounts were made to buy shares, creating the false appearance of market activity. Shortly after the intrusions, Butko sold all of his shares at the inflated prices. In all but one of these instances, Butko realized a profit from his trading, netting a total profit of $60,362.

August 11, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

UBS Settles Charges and Agrees to Buy Back ARSs

On August 8 the SEC's Division of Enforcement announced a preliminary settlement in principle with UBS Securities LLC and UBS Financial Services, Inc. (collectively, UBS) including proposed charges and a plan that would restore approximately $22 billion in liquidity to its customers who invested in auction rate securities (ARS). This plan includes approximately $8.2 billion for individual investors, small businesses, and charitable organizations, $3.3 billion for holders of tax-exempt Auction Preferred Shares (subject to regulatory review), and $10.3 billion for institutional investors.

The terms of the agreement in principle, which are subject to finalization, review and approval by the SEC, provide:

UBS will be permanently enjoined from violating the provisions of Section 15(c) of the Securities Exchange Act of 1934, and Rule 15c1-2 thereunder, which prohibit the use of manipulative or deceptive devices by broker-dealers.
 
No later than Oct. 31, 2008, UBS will offer to liquidate at par all ARS from individual investors and charitable organizations who have less than $1,000,000 in funds on deposit at UBS.
 
No later than Oct. 31, 2008, subject to regulatory approval, UBS will proceed with its plan for the repurchase of tax-exempt Auction Preferred Shares held by all UBS investors.
 
No later than Jan. 2, 2009, UBS will offer to liquidate at par all ARS from all other UBS individual investors and charitable organizations as well as from small business investors with account and household values up to $10,000,000.
 
UBS will use its best efforts to offer to liquidate at par ARS from its institutional customers by the end of 2009. However, by no later than June 30, 2010, UBS will offer to liquidate at par all ARS held by institutional customers.
 
UBS will make whole by Sept. 15, 2008, any losses sustained by the customers described above who sold ARS after Feb. 13, 2008.
 
Until UBS actually provides for the liquidation of the securities on the schedule set forth above, UBS will provide customers no-cost loans that will remain outstanding until the ARS are repurchased.
 
To the extent that the customers described above have incurred consequential damages beyond the loss of liquidity in the customer’s holdings of ARS (which should be restored pursuant to the settlement terms above), UBS will participate in a special arbitration process that the customer may elect, and that will be overseen by the Financial Industry Regulatory Authority (FINRA), whereby UBS will not contest liability for its misrepresentations and omissions concerning the ARS, but may challenge the existence or amount of any consequential damages. The arbitration claim will be heard by a single, non-industry arbitrator.
 
This arbitration process will be voluntary on the part of the customer and if a customer elects not to take advantage of these special procedures, a customer may pursue all other arbitration or legal or equitable remedies available through any other administrative or judicial process available to the customer.
 
UBS will not liquidate its own inventory of a particular ARS before it liquidates its customers’ holding in that security.
 
UBS will provide notice to all customers of the settlement terms.
 
UBS will establish a telephone assistance line, with appropriate staffing, to respond to questions from customers concerning the terms of the settlement.
 
UBS faces the prospect of a financial penalty to the SEC after it has completed its obligations under the settlement agreement. Determinations as to the amount of the penalty, if any, will take into account, among other things, an assessment of whether UBS has satisfactorily completed its obligations under the settlement, and the costs incurred by UBS in meeting those obligations, including penalties incurred and the cost of remediation.

In addition, the New York State Attorney General announced that as part of the settlement of charges brought by it, UBS will pay to the State of New York a civil penalty in the amount of $75 million. UBS will also pay a separate civil penalty of $75 million to the North American Securities Administrators Association (“NASAA”), whose ARS Task Force has been conducting its own series of investigations into the marketing and sale of auction rate securities by broker-dealer firms.

August 11, 2008 in Other Regulatory Action, SEC Action | Permalink | Comments (1) | TrackBack (0)

Thursday, August 7, 2008

Morgan Stanley Agrees to Buy Back ARSs from Massachusetts Municipalities

The Massachusetts Attorney General has entered into a settlement with Morgan Stanley & Company (Morgan) resolving allegations involving the investment bank’s sale of inappropriate auction rate security investments to Massachusetts municipalities.  In addition, Morgan will complete a full review of all investment clients and identify any and all Massachusetts towns and cities that have invested in auction rate securities through the investment bank.  Morgan will then repay the towns and cities all of their investment monies.  Morgan also agreed to cooperate with the Attorney General’s Office in its ongoing review of auction rate securities issues.  The Attorney General’s Office began a review of Morgan’s marketing tactics to municipalities in February 2008.  Morgan agreed to reimburse $1.5 million in investment monies to the city of New Bedford and the town of Hopkinton. 

              This is the third recovery by the Attorney General’s Office against an investment bank regarding auction rate securities.  In February, 2008, the Attorney General’s Office obtained a repayment by Merrill Lynch of $13.7 million for the city of Springfield, which allegedly had been misled into purchasing auction rate securities.  In May, 2008, the Attorney General’s Office obtained $37 million in recoveries for various towns and cities that had been allegedly misled into investing into risky auction rate securities by agents of investment banking giant UBS.  UBS also in July paid an additional $1,000,000 to the Commonwealth related to the sales of these instruments and reimbursed an additional $3.4 million to the remaining UBS municipal clients for their investments.

August 7, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Former Biopure Officer Settles Fraud Charges

The SEC announced that a final judgment by consent was entered by the United States District Court of the District of Massachusetts against Howard Richman, the former head of regulatory affairs 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 against Richmanpermanently enjoins him from violating the antifraud and other provisions of the federal securities laws, permanently bars him from serving as an officer or director of any public company and orders him to pay a $150,000 civil penalty.

The Commission's Complaint, filed September 14, 2005, alleges that, beginning in April 2003, Biopure received negative information from the FDA regarding its efforts to obtain FDA approval of its synthetic blood product Hemopure but failed to disclose the information, or falsely described it as positive developments. Specifically, the Complaint alleges that in April 2003, the FDA placed a clinical hold barring Biopure from conducting clinical trials of Hemopure in trauma settings such as emergency rooms, because of safety concerns about Hemopure. The Complaint further alleges that, during the next eight months, Richman and other Biopure employees concealed the imposition of the clinical hold while making public statements about Biopure's plans to obtain approval for trauma uses of Hemopure. In addition, according to the Complaint, in July 2003 the FDA informed Biopure that it had not approved Biopure's application for use of Hemopure in orthopedic surgery, and instead conveyed serious concerns about whether the materials Biopure had submitted in support of its application were reliable and questioning the safety of Hemopure. According to the Complaint, Biopure, however, issued public statements beginning on August 1, 2003 describing the FDA's communication as good news, causing its stock price to increase by over 20%. The Complaint alleges that Richman and other Biopure employees continued to make misleading statements until December 2003. During this period, Biopure raised over $35 million from investors. The Complaint further alleges that as the true status of Biopure's efforts to obtain FDA approval gradually became public, through a series of incomplete and misleading disclosures between late October and the end of December 2003, the company's stock price plummeted almost 66% from its August 1 price.

Biopure and three others previously settled SEC charges concerning the same conduct.

August 7, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Microcap Companies with Raising Capital Through S-8 Offerings

The SEC charged six microcap companies, four company officers and several market professionals for their roles in a scheme to raise millions of dollars in capital through improperly registered stocks to fund the companies' struggling businesses.In four separate enforcement actions, the SEC alleged that these public offerings dumped billions of shares on the market through so-called employee stock option programs. These share offerings were improperly registered on Form S-8, which is a simplified registration statement used for compensating employees and consultants. In fact, the programs functioned as public offerings in which the companies used their employees as conduits to the market so that they could raise capital without complying with the securities laws. They then received at least 85% of the proceeds from the shares' sales as payment for the options' exercise price. The SEC further alleged that one of the companies, Global Materials & Services, Inc., and its former officer, Stephen J. Owens, committed securities fraud when they issued shares to sham consultants who then kicked back over 60% of the shares' sales proceeds to Owens and his other businesses.

According to two SEC complaints filed on August 6 in federal district court in Orange County, Calif., Global Materials and five other companies — Angel Acquisition Corp., Marshall Holdings International Inc., NW Tech Capital Inc., Winsted Holdings Inc., and Zann Corp. — improperly registered shares issued under their employee stock option programs on SEC Form S-8 registration statements. The Commission also charged Marshall Holdings’ officers Richard A. Bailey and Florian R. Ternes and Winsted Holdings’ former officer Mark T. Ellis with implementing and administering their companies’ employee stock option programs.

The SEC's complaints further alleged that the companies' programs had features that, taken together, virtually guaranteed that the options would be exercised and the underlying shares simultaneously sold to the public at or near the time the options were granted. First, the options' exercise price, which was typically set at 85 percent of the sale proceeds from the options' underlying shares, floated with the market value of a company's stock at the time of exercise. Second, the options vested immediately, meaning that no conditions needed to be met before the options could be exercised. Third, a cashless exercise method was used so that the exercise price was paid from the sale proceeds of the underlying shares rather than directly by the employees. Other than opening brokerage accounts and signing blank letters of authorization, the companies' employees made no decisions regarding the options' exercise or the sale of the underlying shares during the course of the programs.

The Commission today instituted cease-and-desist proceedings against Alexander & Wade, Inc. (AWI), a San Diego investment banking firm, and its agent James Lee for causing the registration violations. AWI and Lee allegedly introduced the programs to the companies and advised them on how to implement and administer the programs.

The Commission also instituted administrative and cease-and-desist proceedings against Finance 500, Inc., a brokerage firm located in Irvine, Calif. The Commission found that Finance 500 provided the brokerage services for the employee stock option programs despite red flags indicating that the employees were being used as conduits. Finance 500, without admitting or denying the SEC's findings, consented to the issuance of an order censuring it, ordering it to cease and desist from committing or causing future registration violations, and requiring payment of $271,484 in disgorgement and $74,015 in prejudgment interest.

Five companies charged — Angel Acquisition Corp., Global Materials, NW Tech, Winsted Holdings, and Zann Corp. — settled the SEC's charges without admitting or denying the allegations. They all consented to being permanently enjoined from future registration violations, and Global Materials also consented to being permanently enjoined from future fraud violations based on the SEC's allegations that it fraudulently used Form S-8 to enrich Owens through the use of sham consultants.

August 7, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Citigroup Settles ARS Charges and Agrees to Buy Back Securities from Retail Customers

Citigroup Global Markets, Inc. (Citi) has agreed to a preliminary settlement in principle with the SEC and state regulators, including a plan that would give individual investors, small businesses, and charities all $7.5 billion of their money back from auction rate securities (ARS) they purchased from the firm. The agreement also would require Citi to use its best efforts to liquidate by the end of 2009 all of the approximately $12 billion worth of ARS the firm sold to retirement plans and other institutional investors.

The ARS market collapsed in mid-February 2008, leaving tens of thousands of Citi customers holding nearly $20 billion of these illiquid securities for an indefinite period of time. The conduct underlying the proposed charges stems from Citi's marketing of ARS to many of its customers as highly liquid investments, including as money market investments. The liquidity of these securities, however, was premised on Citi providing support bids for auctions it managed when there was not enough customer demand. When Citi stopped supporting auctions in February 2008, there were widespread auction failures. As a result, thousands of Citi customers were left holding illiquid securities.

The SEC Division of Enforcement set forth the terms of the agreement in principle in its press release.  They are subject to finalization, review and approval by the Commission:

Citi will be permanently enjoined from violating the provisions of Section 15(c) of the Exchange Act, and Rule 15c1-2 thereunder, which prohibit the use of manipulative or deceptive devices by broker-dealers.

Citi will liquidate at par all ARS from its retail customers, which include all natural persons, charities, and small businesses, no later than three months from today.

Citi will make whole any losses sustained by customers who purchased ARS before Feb. 12, 2008, and sold such securities after that date at a loss.

Citi will use its best efforts to liquidate ARS from its institutional customers by the end of 2009.

Until Citi actually provides for the liquidation of the securities on the schedule set forth above, Citi will provide no-cost loans to customers that will remain outstanding until the ARS are repurchased, and will reimburse customers for any interest costs incurred under any prior loan programs the firm provided to its ARS customers.

Citi will not liquidate its own inventory of a particular ARS before it liquidates its customers' holding in that security.

To the extent that a customer has incurred consequential damages beyond the loss of liquidity in the customer's holdings of ARS (which should be restored pursuant to the settlement terms above), Citi will participate in a special arbitration process that the customer may elect, and that will be overseen by FINRA, whereby Citi will not contest liability for its misrepresentations and omissions concerning the ARS, but may challenge the existence or amount of any consequential damages; the arbitration claim will be heard by a single, non-industry arbitrator.

This arbitration process will be voluntary on the part of the customer and if a customer elects not to take advantage of these special procedures, a customer may pursue all other arbitration or legal or equitable remedies available through any other administrative or judicial process available to the customer.

Citi will provide notice to all customers of the settlement terms.

Citi will establish a telephone assistance line, with appropriate staffing, to respond to questions from customers concerning the terms of the settlement.

Citi faces the prospect of a financial penalty to the SEC after it has completed its obligations under the settlement agreement. Determinations as to the amount of the penalty, if any, will take into account, among other things, an assessment of whether Citi has satisfactorily completed its obligations under the settlement, and the costs incurred by Citi in meeting those obligations, including penalties incurred and the cost of remediation.

In addition, in its press release announcing the settlement, the New York Attorney General stated that Citi will pay to the State of New York a civil penalty in the amount of $50 million.  The penalty embraces both Citigroup’s substantive conduct and its failure to properly comply with its obligations under the Attorney General’s Martin Act subpoena.  Citi will also pay a separate civil penalty of $50 million to the North American Securities Administrators Association (“NASAA”), whose ARS Task Force has been conducting its own series of investigations into the marketing and sale of auction rate securities by broker-dealer firms.  The ARS Task Force’s investigation of Citigroup was led by the Texas State Securities Board.  (Here is NASAA's press release about the settlement.)

In addition, FINRA announced today that it has established a special process for resolving ARS-based claims in its arbitration forum. Qualifying investors will have the option of having their claims heard by a three-person panel of arbitrators, none of whom would be affiliated with a firm that recently sold auction rate securities. The new process comes as a result of the one developed by FINRA for the Securities and Exchange Commission's settlement with Citigroup.

The arbitration panels will continue to consist of two public arbitrators and one non-public arbitrator.

To date, more than 170 cases involving auction rate securities have been filed in FINRA's Dispute Resolution forum. Individuals who since Jan. 1, 2005, have either worked for a firm that sold auction rate securities or themselves sold or supervised someone who sold them will not appear on non-public arbitrator lists given to parties in these and future auction rate securities arbitration cases.

August 7, 2008 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

Citigroup Nearing Settlement on ARS Charges

The Wall St. Journal reports that Citigroup is reaching agreement with the New York Attorney General, other state regulators and the SEC over its marketing of auction rate securities.  The settlement would require Citigroup to buy back $5-$8 billion of ARSs from its retail customers and pay hefty penalties to the state regulators.  UBS has previously settled charges over its ARS sales with the Massachusetts regulator and is also in negotiations with other state regulators and the SEC.  WSJ, Citigroup May Pressure Other Firms With Deal on Auction-Rate Securities.

August 7, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 6, 2008

SEC Issues Guidance on Use of Company Web Sites

The SEC posted on its website its interpretive release to provide guidance regarding the use of company web sites under the Exchange Act and the antifraud provisions of the federal securities laws. It is soliciting comment on issues relating to company use of technology generally in providing information to investors.  The release notes that:

Given the development and proliferation of company web sites since 2000, and our expectation that continued technological advances will further enhance the quality, not just the quantity, of information delivered and available to investors on such web sites, as well as the speed at which such information reaches the market, we are issuing this interpretive release to provide additional guidance on the use of company web sites with respect to the antifraud provisions and certain relevant Exchange Act provisions of the federal securities laws.

The guidance focuses principally on:

When information posted on a company web site is “public” for purposes of the applicability of Regulation FD;

Company liability for information on company web sites – including previously posted information, hyperlinks to third-party information, summary information and the content of interactive web sites;

The types of controls and procedures advisable with respect to such information; and

The format of information presented on a company web site, with the focus on readability, not printability.

August 6, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)