Securities Law Prof Blog

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

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Tuesday, September 30, 2008

Former BISYS Group Officer Settles SEC Accounting Charges

The SEC filed a civil injunctive action in United States District Court for the Southern District of New York charging Steven Wevodau, former vice president of finance for the Insurance and Education Services group of the BISYS Group, Inc., with violating the antifraud and internal controls provisions of the Securities Exchange Act of 1934 ("Exchange Act'), and with aiding and abetting BISYS's violations of the Exchange Act's financial reporting, books-and-records and internal controls provisions. Wevodau has agreed to settle the case, without admitting or denying the Commission's allegations.  The SEC's complaint alleged that from at least July 2000 until at least March 2002, Wevodau was the senior financial official in the business unit that included BISYS's Insurance Services division, which was largely responsible for the company's reported growth during the period. Wevodau allegedly responded to senior management's focus on meeting aggressive, short-term earnings projections by encouraging and directing personnel in Insurance Services' finance department to meet earnings targets by applying a variety of fraudulent or otherwise improper accounting practices. These accounting practices allegedly substantially inflated BISYS's operating results for the quarters ended September 30, 2000 and December 31, 2000, and for the fiscal years ended June 30, 2001 and 2002 (fiscal years 2001 and 2002) and contributed substantially to the company's eventual restatement of over $100 million of Insurance Services' reported income for fiscal years 2001 through 2003.

BISYS previously consented, without admitting or denying the Commission's allegations against it, to the entry of a judgment enjoining the company from violating the financial reporting, books-and-records, and internal controls provisions of the federal securities laws and ordering that it pay $25 million in disgorgement and prejudgment interest.

September 30, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Insider Trading Charges in ACR Group Stock

The SEC settled insider trading charges against Randolph Leone and Randall Clark Wall, both of whom, the SEC alleged, independently engaged in unlawful insider trading in the securities of ACR Group, Inc. in advance of a public announcement on July 5, 2007 that ACR Group had executed a definitive agreement with Watsco, Inc., a New York Stock Exchange issuer, pursuant to which Watsco would acquire ACR Group's outstanding common stock in a tender offer.  The Commission alleged that Leone learned of the pending ACR Group/Watsco transaction when he overheard a telephone conversation between his wife and the wife of ACR Group's in-house general counsel telephoned (they are sisters). According to the SEC, Wall, a former employee of a supplier to both ACR Group and Watsco, learned of the pending ACR Group/Watsco transaction from his supervisor, who was informed of the deal, in confidence, by Watsco's senior vice president.

September 30, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Insider Trading Charges Against Former Genesis Microchip CEO and Friend

The SEC settled insider trading charges against Elias Antoun, the former President and CEO of Genesis Microchip, Inc. It alleged that Antoun bought Genesis stock while in confidential merger negotiations with STMicroelectronics, one of the world's largest semiconductor companies.  The SEC also charged Antoun's childhood friend, Samir Abed, who purchased Genesis stock and options after learning of the merger negotiations from Antoun. Both Antoun and Abed, who netted profits of approximately $33,975 and $51,206, respectively, when the merger was announced, agreed to settle the SEC's charges without admitting or denying the Commission's allegations.

September 30, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Clarifications on Fair Value Accounting

The SEC posted "SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Value Accounting" on its website.  It states in full:

The current environment has made questions surrounding the determination of fair value particularly challenging for preparers, auditors, and users of financial information. The SEC's Office of the Chief Accountant and the staff of the FASB have been engaged in extensive consultations with participants in the capital markets, including investors, preparers, and auditors, on the application of fair value measurements in the current market environment.

There are a number of practice issues where there is a need for immediate additional guidance. The SEC's Office of the Chief Accountant recognizes and supports the productive efforts of the FASB and the IASB on these issues, including the IASB Expert Advisory Panel's Sept. 16, 2008 draft document, the work of the FASB's Valuation Resource Group, and the IASB's upcoming meeting on the credit crisis. To provide additional guidance on these and other issues surrounding fair value measurements, the FASB is preparing to propose additional interpretative guidance on fair value measurement under U.S. GAAP later this week.

While the FASB is preparing to provide additional interpretative guidance, SEC staff and FASB staff are seeking to assist preparers and auditors by providing immediate clarifications. The clarifications SEC staff and FASB staff are jointly providing today, based on the fair value measurement guidance in FASB Statement No. 157, Fair Value Measurements (Statement 157), are intended to help preparers, auditors, and investors address fair value measurement questions that have been cited as most urgent in the current environment.

September 30, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

The Penn Traffic Company Settles SEC Accounting Fraud Charges

The SEC charged the supermarket operator and wholesale food distributor The Penn Traffic Company with fraud for orchestrating multi-million dollar accounting schemes that inflated its operating income and overstated its after tax net income.  The SEC's complaint, filed in the U.S. District Court for the Northern District of New York, alleges that Syracuse, N.Y.-based Penn Traffic carried out the accounting fraud over multiple reporting periods, and failed to file certain required financial reports with the SEC or filed reports that did not fully comply with SEC regulations.  Penn Traffic agreed to settle the SEC's charges without admitting or denying the allegations in the Complaint and consented to the entry of a Court order enjoining it from violating the antifraud, books and records, internal controls, and periodic reporting provisions of the federal securities laws. Penn Traffic also agreed to certain undertakings that require it to employ an independent examiner, among other things. The settlement is subject to the Court's approval.

The SEC previously charged two former senior Penn Traffic executives and one Penny Curtiss executive for their roles in the fraudulent schemes alleged in the complaint. The Commission's case is pending against Leslie H. Knox, Penn Traffic's former Senior Vice President and Chief Marketing Officer, and Linda J. Jones, Penn Traffic's former Vice President of Non-Perishable Merchandising. In 2005, the Commission obtained a consent judgment against Michael J. Lawler, the former Director of Manufacturing at Penny Curtiss, permanently enjoining him from violating the antifraud and books and records of the securities laws.

September 30, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, September 29, 2008

SEC Schedules Roundtable on Disclosure System

The SEC will hold a Roundtable on Modernizing the Securities and Exchange Commission's Disclosure System on Wednesday, Oct. 8, 2008, beginning at 9:00 a.m.  (I know, you're thinking that the financial markets are going to hell in a handbasket, but ....)  The roundtable will consist of an open discussion on the Commission's financial disclosure system, including the information needs of investors, public companies, and others and the capabilities of modern information technology to improve transparency and ease of use. The roundtable will be organized as two panels, each consisting of investors, issuers, academics, and other parties with experience with the Commission's financial disclosure system.

September 29, 2008 in SEC Action | Permalink | Comments (1) | TrackBack (0)

Court Finds Hedge fund Adviser Overstated Funds' Valuations

The United States District Court for the Southern District of Florida recently granted the SEC's motion for summary judgment, in part, against Michael Lauer, the architect of a $1.1 billion hedge fund fraud scheme. The Court found that Lauer's fraud as head of Lancer Management Group and Lancer Management Group II that acted as hedge fund advisers was "egregious, pervasive, premeditated and resulted in the loss of hundreds of millions of dollars in investors' funds."  Te Court found Lauer materially overstated the hedge funds' valuations for the years 1999-2002, manipulated the prices of seven securities that were a material portion of the funds' portfolios from November 1999 through at least April 2003, failed to provide any basis for the exorbitant valuations of the shell corporations that saturated the funds' portfolios, lied to investors about the hedge funds actual holdings by providing them with fake portfolios; and falsely represented the hedge funds' holdings in newsletters.

The Court's order reserved ruling on the amount of disgorgement Lauer should pay until the Court conducts an evidentiary hearing, and gave the SEC sixty days to propose a civil money penalty amount that Lauer should pay.

September 29, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Former SafeNet Officer Consents to Backdating Judgment

The United States District Court for the District of Columbia entered a Final Judgment of permanent injunction and other relief, including a ten year officer and director bar, against Carole Argo ("Argo"), the former president, Chief Financial Officer and Chief Operating Officer of SafeNet, Inc. ("SafeNet"). Without admitting or denying the Commission's allegations, Argo consented to the entry of the Final Judgment. The judgment settles the Commission's claims against Argo in a civil action filed on August 1, 2007, in which the Commission alleged that Argo engaged in a fraudulent scheme to backdate option grants while she was an officer of SafeNet.  The Commission's complaint alleged that Argo was aware that SafeNet routinely granted in-the-money options, and she knowingly or recklessly failed to cause SafeNet to record a compensation expense as required by Generally Accepted Accounting Principles. Consequently, SafeNet reported materially misstated financial results for periods beginning in late-2000 through early-2006. The complaint further alleges that Argo regularly prepared, reviewed, and/or signed proxy statements, periodic reports, and registration statements that she knew, or was reckless in not knowing, contained materially false and misleading statements and omissions concerning SafeNet's financial condition and options granting practices.

The Final Judgment orders Argo to pay a civil penalty of $50,000 (which will be offset by any payment Argo makes toward the $1,000,000 fine that was imposed upon her in a parallel criminal prosecution).

As part of the settlement, the Commission today issued an administrative order, pursuant to Rule 102(e)(3) of the Commission's Rules of Practice, suspending Argo from appearing or practicing before the Commission as an accountant. Argo consented to the issuance of the order, without admitting or denying the Commission's findings

September 29, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Participants in "Free Lunch" Fraud Sentenced

A California judge sentenced the last of three men to prison after they were convicted of 522 felony charges in a fraudulent scheme that was the subject of a prior enforcement action brought by the SEC.  The fraud raised more than $187 million from over 1,800 victims, mostly senior citizens and the elderly.  Daniel Heath was sentenced on September 26, 2008 to 127 years and four months in state prison; Denis O'Brien on April 4, to 40 years and four months; and John Heath (now deceased) on February 22, to 28 years and four months. Each defendant received the maximum sentence for their convictions and was ordered to pay a total of $117 million in restitution to the defrauded investors.

In 2004, the Riverside County District Attorney's Office arrested and charged the defendants with committing securities fraud, elder abuse, grand theft, money laundering, tax fraud, and conspiracy, all under California law. In January 2008, a Riverside County jury found Daniel Heath found guilty on 400 felony counts, O'Brien on 70 felony counts, and John Heath on 52 felony counts.  In addition, in 2004, the SEC filed a complaint against Daniel Heath and O'Brien alleging they fraudulently induced elderly investors through "free lunch" seminars to invest in "secured" notes that paid a "guaranteed" return. Final judgments of permanent injunction and other relief were entered against them.

September 29, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

What's Next?

Statement by Assistant Secretary Michele Davis on Emergency Economic Stabilization Act Vote:

"The Secretary will be consulting with the President, the Chairman of the Federal Reserve, and Congressional leaders on next steps. In the meantime, we stand ready to work with fellow regulators and use all the tools at our disposal, as we have over the last several months, to protect our financial markets and our economy."

September 29, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Citigroup Will Acquire Wachovia's Banking Operations with FDIC Assistance

Citigroup and Wachovia reached an agreement-in-principle for Citi to acquire Wachovia's banking operations in An FDIC-assisted transaction.  The acquisition will result in a retail bank with 9.8% U.S. market deposit share and total deposits globally of $1.3 trillion.  The FDIC is providing loss protection to Citi in support of transaction.  In addition, Citi plans to raise $10 billion in common equity and reduce its quarterly dividend to 16 cents per share.   

Wachovia will remain a public company and retain its asset management, retail brokerage, and certain select parts of its wealth management businesses, including the Evergreen and Wachovia Securities franchises. Under the terms of the agreement-in-principle, Citi will pay Wachovia approximately $2.16 billion in stock and assume Wachovia senior and subordinated debt, totaling approximately $53 billion.

September 29, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Congress Considers Emergency Economic Stabilization Act

Here is the text of the Emergency Economic Stabilization Act of 2008 as posted today on Nancy Pelosi's website.  The bill is described on the website, as follows:

PROTECTION FOR TAXPAYERS, REQUIRING A PLAN TO BE REPAID IN FULL

Requiring Congressional review after the first $350 billion is disbursed
Gives taxpayers a share of the profits of participating companies, or puts taxpayers first in line to recover assets if a company fails
Requires a President five years from now to submit a plan to ensure taxpayers are repaid in full, with Wall Street making up any difference
Allows the government to also purchase troubled assets from pension plans, local governments, and small banks that serve low- and middle-income families
LIMITS ON EXCESSIVE COMPENSATION FOR CEOs AND EXECUTIVES

For companies publicly auctioning over $300 million:

No multi-million dollar golden parachutes for top 5 executives after auction
No tax deduction for executive compensation over $500,000
Penalizes golden parachutes for CEOs who are fired or have run the company into the ground
For companies from which the government makes direct purchases:
No multi-million dollar golden parachutes
Limits CEO compensation that encourages unnecessary risk-taking
Recovers bonuses paid to executives who promise gains that later turn out to be false or inaccurate
STRONG INDEPENDENT OVERSIGHT AND TRANSPARENCY
Four separate independent oversight entities or processes to protect the taxpayer
A strong oversight board appointed by bipartisan leaders of Congress
GAO oversight and audits at Treasury to ensure strong controls; to prevent waste, fraud, and abuse
An independent Inspector General to monitor the Treasury Secretary’s decisions
Transparency—requiring posting of transactions online
Meaningful judicial review of the Treasury Secretary’s actions
HELP TO PREVENT HOME FORECLOSURES CRIPPLING THE AMERICAN ECONOMY
The government can work with loan servicers to change the terms of mortgages (reduce principal or interest rate, lengthen time to pay back the mortgage) to reduce the 2 million projected foreclosures in the next year
Extends provision (enacted earlier in this Congress) to stop tax liability on mortgage foreclosures
Helps save small businesses that need credit by aiding small community banks hurt by the mortgage crisis—allowing these banks to deduct losses from investments in Fannie Mae and Freddie Mac stocks

September 29, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, September 28, 2008

Pritchard & Thompson on New Deal Justices

Securities Law and the New Deal Justices, by Adam C. Pritchard, University of Michigan Law School, and Robert B. Thompson, Vanderbilt University - School of Law; Vanderbilt University - Owen Graduate School of Management, was recently posted on SSRN.  Here is the abstract:

Taming the power of Wall Street was a principal campaign theme for Franklin Delano Roosevelt in the 1932 election. Roosevelt's election bore fruit in the Securities Act of 1933, which regulated the public offering of securities, the Securities Exchange Act of 1934, which regulated stock markets and the securities traded in those markets, and the Public Utility Holding Company Act of 1935 (PUHCA), which legislated a wholesale reorganization of the utility industry. The reform effort was spearheaded by the newly created Securities and Exchange Commission, part of the new wave of experts brought to Washington to rein in business. PUHCA also marked the federal government's first significant incursion into corporate governance, with a corresponding reduction in the traditional role of investment bankers. The SEC's ascendance over the investment bankers was reinforced during FDR's second term by the Chandler Act of 1938, which provided the agency with a broad role in the bankruptcy reorganization of troubled companies.

Enacting those statutes was only the beginning, as the scope and effectiveness of the SEC's regulatory efforts depended critically on navigating these new statutes past an initially hostile Supreme Court. After substantial delay in the lower courts, the securities statutes eventually got a friendly hearing in the Supreme Court, where a number of Justices came to the Court after serving as the "Founding Fathers" of the federal securities laws. Roosevelt's Supreme Court nominees were involved in drafting the new legislation, securing its passage in Congress and implementing a litigation strategy that successfully stalled final determination of the constitutionality of the securities laws until New Deal appointed justices were in place. Felix Frankfurter played an important role in shaping the Securities Act and PUHCA, and was a key advisor on litigation strategy to the Roosevelt administration. Hugo Black led the legislative battle to enact PUHCA against the utility companies. Stanley Reed and Robert Jackson were key courtroom advocates arguing PUHCA's constitutionality. William O. Douglas headed the study of Protective Committees that led to the Chandler Act and was Chairman of the SEC.

In this article, we explore the role of the New Deal justices in enacting the securities laws, litigating the challenges brought against them and then interpreting these laws in securities cases before the Supreme Court. We show the important role that these New Deal justices played in ensuring a broad scope for the federal securities laws through generous interpretation. Once constitutional questions had faded, securities cases proved to be a critical testing ground for newly emerging theories of administrative law. We demonstrate the split over the importance of judicial review versus deference to the rule of experts that emerged among these Roosevelt appointees. Finally, we explore the relative lack of influence of Douglas and Frankfurter in these cases, despite their familiarity and experience with the securities laws.

September 28, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Poser on Securities Fraud

Securities Fraud and the Common Law, by Norman S. Poser, Brooklyn Law School, was recently posted on SSRN.  Here is the abstract:

In early cases, the federal courts held that securities fraud was not limited to common law fraud when a broader reading was deemed necessary to protect investors. But now the courts are holding that securities fraud is narrower than common law fraud, and that it is not the role of the courts to imply private rights of action. The author gives an overview of the cases, beginning in the 1940's, and concludes that, with a few exceptions, on balance the investor has been the loser.

September 28, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (5)

Ball on Accounting Scandals

Market and Political/Regulatory Perspectives on the Recent Accounting Scandals, by Ray Ball, University of Chicago, was recently posted on SSRN.  Here is the abstract:

Not surprisingly, the recent accounting scandals look different when viewed from the perspectives of the political/regulatory process and of the market for corporate governance and financial reporting. We do not have the opportunity to observe a world in which either market or political/regulatory processes operate independently, and the events are recent and not well-researched, so untangling their separate effects is somewhat conjectural. This paper offers conjectures on issues such as: What caused the scandalous behavior? Why was there such a rash of accounting scandals at one time? Who killed Arthur Andersen - the SEC, or the market? Did fraudulent accounting kill Enron, or just keep it alive for too long? What is the social cost of financial reporting fraud? Does the US in fact operate a "principles-based" or a "rules-based" accounting system? Was there market failure? Or was there regulatory failure? Or both? Was the Sarbanes-Oxley Act a political and regulatory over-reaction?

September 28, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Cox on Survival Strategies for the SEC

Coping in a Global Marketplace: Survival Strategies for a 75-Year-Old SEC, by James D. Cox, Duke University School of Law, was recently posted on SSRN.  Here is the abstract:

Notwithstanding cynicism to the contrary, data bears witness to the fact that government agencies come and go. There are multiple causes that give rise to their disappearance but among the most powerful is that conditions that first gave rise to the particular agency's creation no longer exist so that the regulatory needs that once prevailed are no longer present or that there is a better governmental response than Congress' earlier embraced when it initially created an independent regulatory agency to address the problems needing to be addressed. Certainly the more rigid the regulatory authority conferred on an agency has much to do with its ability to survive changes in the social, economic, commercial and scientific forces that shape its environment. One of the great illustrations of the vibrancy of the regulatory agency model, and particularly the notion of equipping such an agency with "quasi-legislative" authority through broad enabling statutes, is the Securities and Exchange Commission. But can an agency created and operating through most of its years in the internationally insulated environment of U.S. capital markets survive in a world that is light years away from the environment that existed a few years ago, not to mention 75 years ago when the SEC was created?

September 28, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Gerding on the Subprime Crisis

The Subprime Crisis and the Outsourcing of Financial Regulation to Financial Institution Risk Models: Code, Crash, and Open Source, by Erik F. Gerding, University of New Mexico - School of Law, was recently posted on SSRN.  Here is the abstract:

The lens of cyberlaw scholarship provides perspective on how the crash of computer-based "codes," particularly risk models, triggered the subprime mortgage crisis and on ways to mitigate risks posed by these codes. This lens reveals a critical flaw in financial regulation; regulators outsourced vast regulatory authority to the proprietary codes of financial institutions, without examining defects in those codes.

Financial codes now drive:

* the types of mortgages and other financial products that financial institutions market to consumers;
* the manner in which financial institutions securitize those products;
* how institutions that purchase asset-backed securities hedge risks; and
* overall risk management by financial institutions.

At each of these nodes in the financial network, regulators relinquished significant oversight responsibility to the "new financial code." This continues despite the subprime crisis.

The Article unpacks the dangers of this deference by examining the failures of code in the subprime crisis, using insights from computer science, finance, behavioral economics, and complexity science. These insights have policy and scholarly implications, including:

* Regulators should promote open source in code used to market consumer financial products, price securitizations and manage financial institution risk.
* Consumer financial protection must be reconceived as protection from systemic risk. This connection became apparent when errors cascaded from codes that lenders used to market consumer mortgages to the models financial utions used for portfolio management.
* Bank regulators should delay implementing Basel II, which allows certain banks to set capital requirements according to internal risk models.

September 28, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Velasco on Shareholder Ownership

Shareholder Ownership and Primacy, by Julian Velasco, Notre Dame Law School, was recently posted on SSRN.  Here is the abstract:

According to the traditional view, the shareholders own the corporation. Until recently, this view enjoyed general acceptance. Today, however, there seems to be substantial agreement among legal scholars and others in the academy that shareholders do not own corporations. In fact, the claim that shareholders do own corporations is often dismissed as merely a theory or even a naked assertion. And yet, outside of the academy, views on the corporation remain quite traditional. Most people - not just the public and the media, but also politicians, and even bureaucrats and the courts - seem to believe that the shareholders do, in fact, own the corporation.

Why this disconnect? I believe it is because contemporary scholarship has done a better job of critiquing shareholder ownership than of disproving it. In this article, I will provide a defense of the traditional view by evaluating many of the arguments commonly raised against shareholder ownership and showing how they fall short. I will then explain why the issue matters. As a theoretical matter, the issue of ownership is necessary to a proper understanding of the nature of the corporation and corporate law. As a practical matter, it is an important consideration in the allocation of rights in the corporation: if shareholders are owners, the balance of rights is likely to tip more heavily in their favor, and against others, than if they are not. Ownership may not settle any specific question of corporate governance, but it will make a significant difference in the analysis. Thus, the issue is important regardless of the normative desirability of shareholder rights. Advocates on both sides should be concerned, albeit for very different reasons.

September 28, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Bebchuk on Plan for Addressing Financial Crisis

A Plan for Addressing the Financial Crisis, by Lucian Arye Bebchuk, Harvard Law School; National Bureau of Economic Research (NBER), was recently posted on SSRN.  Here is the abstract:

This paper critiques the proposed emergency legislation for spending $700 billion on purchasing financial firms' troubled assets to address the 2008 financial crisis. It also puts forward a superior alternative for advancing the two goals of the proposed legislation - restoring stability to the financial markets and protecting taxpayers.

I show that the proposed legislation can be redesigned to limit greatly the cost to taxpayers while doing much better in terms of restoring stability to the financial markets. The proposed redesign is based on four interrelated elements:

* No overpaying for troubled assets: The Treasury's authority to purchase troubled assets should be limited to doing so at fair market value.

* Addressing undercapitalization problems directly: Because the purchase of troubled assets at fair market value may leave financial firms severely under-capitalized, the Treasury's authority should be expanded to allow purchasing, again at fair market value, new securities issued by financial institutions in need of additional capital.

* Market-based discipline: to ensure that purchases are made at fair market value, the Treasury should conduct them through multi-buyer competitive processes with appropriate incentives.

* Inducing infusion of private capital: to further expand the capital available to the financial sector, and to reduce the use of public funds for this purpose, financial firms should be required or induced to raise capital through right offerings to their existing shareholders.

Compared with the Treasury's proposed legislation, the alternative proposal put forward in this paper would provide a far better way to use taxpayers' funds to address the financial crisis.

September 28, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

FINRA Proposes Increase in Amount for One-Arbitrator Cases

FINRA announced it has filed a proposed rule change with the SEC to have investor cases with claims of up to $100,000 in dispute heard by a single public arbitrator, an increase from $50,000.  One arbitrator would be assigned to cases involving $25,000 to $100,000, under the proposal, unless all parties in arbitration agree to a three-person panel. Claims of $25,000 or less would continue to be heard by a single arbitrator, while three would continue to be assigned to cases involving more than $100,000 in dispute.

If approved, the new rule is estimated to double the percentage of cases heard by a single arbitrator - from approximately 17 percent to 34 percent - and would restore this figure to what it was when the three-arbitrator threshold was last increased in 1998.

The proposed threshold change comes during a rise in the number of arbitration claims filed with FINRA Dispute Resolution. Through mid-September 2008, FINRA has received 3,203 arbitration case filings, compared to 2,226 cases for the same period in 2007, a 44 percent increase. Claims initiated by customers have increased by 67 percent during this period.   

September 28, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)