Securities Law Prof Blog

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

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Saturday, January 5, 2008

RAND Report Finds Investor Confusion, but Satisfaction with Services

Earlier this week the SEC posted on its website the pre-publication copy of the RAND Report on "Investor and Industry Perceptions on Investment Advisers and Broker-Dealers."  (The SEC states that there will be no substantive changes in the final report, expected to be released in March 2008).  Commissioned by the SEC after the D.C. Circuit invalidated the SEC rule that allowed broker-dealers to offer fee-based accounts without registering as investment advisers, the study (1) examines the practices of broker-dealers and investment advisers in marketing and providing financial services to individual investors; and (2)evaluates investors' understanding of the differences between broker-dealers and investment advisers' financial products and services, duties, and obligations. 

The Study's main purpose was to provide a factual description of the current state of the investment advisory and brokerage industries and not to make any policy recommendations. Its bottom line: The industry is composed of heterogeneous firms that provide a range of services and are engaged in a variety of relationships with one another.   Partly because of the diversity of the business models and services, investors typically fail to distinguish broker-dealers and investment advisers as defined in federal regulation.  Despite confusion about this, the investors surveyed expressed high levels of satisfaction with the services they receive from their own financial services providers.  They also reported relatively long-term relationships with their financial services providers.

The Report presents a wealth of information on investment advisers, broker-dealers, dual registrant firms and their compensation structures that can be the basis for informed policy-making.  The information is largely obtained through review of regulatory filings, documents supplied by some firms (many firms did not respond to the survey's repeated requests for documents), documents obtained online, and volunteer interviews.

The information from investors came from a national online household survey (654 households responded) and focus groups.  The survey asked participants about their beliefs about the differences between investment advisers and broker-dealers and their experiences with different types of financial services professionals.  It is important to note, as the Report makes clear, that because the participants in the household survey came from RAND's American Life Panel (an internet survey group), they tend to have more education and income than the broader U.S. population, and the survey likely overstates the levels of financial knowledge, experience and literacy of the U.S. population at large.

The Report also contains informative descriptions about firm disclosures involving the differences between investment advisers and broker-dealers, conflicts of interest, and compensation structure. 

January 5, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

The Numbers on Global Offerings for 2007

The New York Times has the numbers on the volume of securities underwritten by investment banks globally in 2007, compared with 2006.  The total volume of underwritten offerings fell 40% in the fourth quarter of 2007, to $1.3 trillion, from $2.2 trillion in the fourth quarter of 2006.  The decline was the worst in asset-backed securities (down 75%) and mortgage-backed securities (down 66%).  NYTimes, The Appetite for Securities Turns Less Hearty.

January 5, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Friday, January 4, 2008

FPA Calls on SEC for Roundtable on Rand Report

The Financial Planning Association (FPA), the plaintiff in the litigation that led to the D.C. Circuit's invalidation of the SEC Rule allowing broker-dealers to offer fee-based accounts under the statutory brokerage exemption, asked the SEC to host a roundtable to discuss the findings of the Rand Report, "Investor and Industry Perspectives on Investment Advisers and Broker-Dealers," that the SEC released yesterday.  InvNews, FPA calls for roundtable on RAND report.

January 4, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Former Goldman Sachs Employee Sentenced to 57 Months

Eugene Plotkin, a former Goldman Sachs employee, was sentenced to 57 months in prison for his involvement in an international insider-trading scheme that resulted in more than $6.7 million in profits.  Plotkin obtained his information from a variety of sources, including a friend at Merrill Lynch.  CFO.com, Pssst! Secrets in the Sauna End in Prison Term.

January 4, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Stanford Securities Class Action Clearinghouse Year-End Report

According to a recent report from Stanford's Securities Class Action Clearinghouse, nearly 20% of 2007 securities class action filings involved the collapse of the subprime markets.  In contrast, filings involving GAAP violations were down, 42% in 2007 compared to 66% in 2006.  Overall, 2007 filings were up 43% over last year, still a 14% decrease from the average recorded over the past ten years.  CFO.com, Subprime Mess Over Takes GAAP Gaffes.

January 4, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

State Street Sets Up Reserve for Possible Mortgage-Related Securities Liability

State Street Corp. will set aside $618 million to cover possible liability resulting from lawsuits filed by five clients who were invested in State Street funds that experienced substantial losses because of investments in mortgage-related securities.  Four of the clients are pension funds that allege they were told their money would be invested in risk-free debt like Treasuries.  The suits allege breach of fiduciary duties under pension law.  In addition, the CEO of State Street's investment management unit resigned.  NYTimes, State Street Corp. Is Sued Over Pension Fund Losses.

January 4, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Failed Buyouts and Contract Language

Will the recent wave of failed LBOs lead to revisions in the contract language about remedies for non-performance?  Some experts suggest that, in addition to negotiations over price, parties will bargain harder over the terms, with sellers seeking stronger financing guaranties and larger break-up fees.  This renewed attention comes about after a recent Delaware Chancery opinion that found that the contract language in the Cerberus-United Rentals deal was "hopelessly conflicted" on the issue of specific performance.  NYTimes, As Buyouts Falter, New Tactics Aim to Lock in Deals.

January 4, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, January 3, 2008

Feb. 8 Symposium on Forex Regulation

FOREX Symposium, Regulations in Currency Exchange and Its Impact on International Business, sponsored by Hofstra University's Journal of International Business and Law (Download forex_symposium.doc), will be held on February 8, 2008. This symposium is centered on addressing current and key issues in the market through panel discussions consisting of prominent panelists including academics, business professionals, lawyers and regulators.  It will address current as well as upcoming issues, such as: the ramifications of Commodity Futures Trading Com'n v. Zelener, 373 F.3d 861 (7th Cir. 2004) on the FOREX market, the impact of recent OTC retail FOREX regulations, the World's economy and the declining collar, and the effect and legal implications of the declining dollar in pricing and hedging strategies.

January 3, 2008 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Judgment Entered Against Former Waste Management CFO in Securities Fraud Action

The SEC announced that the U.S. District Court for the Northern District of Illinois entered final judgment against James E. Koenig, the former CFO of Waste Management, Inc., after a jury found that he committed 60 securities laws violations in a five-year period.

The final judgment, entered on Dec. 21, 2007, followed a two-day bench trial on remedies. The SEC alleged that, from 1992 -- 1997, Koenig engaged in a systematic scheme to falsify and misrepresent Waste Management's financial results with profits being overstated by $1.7 billion.  The final judgment permanently bars Koenig from acting as an officer or director of a public company, enjoins him from future violations of the antifraud and other provisions of the federal securities laws, and requires him to pay more than $4 million in disgorgement, prejudgment interest, and civil penalties.

January 3, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Rand Report on Investment Advisers and Broker-Dealers Available at SEC Website

The SEC posted on its Web site the text of the RAND Corporation's final report on practices in the investment adviser and broker-dealer industries.  RAND produced the report under contract with the SEC.  Following a March 2007 D.C. Court of Appeals decision that overturned a 2005 SEC rule permitting non-adviser broker-dealers to charge fees to investors based on account size, the SEC and RAND agreed that RAND would deliver its final report in pre-publication format on Dec. 31, 2007, three months earlier than the contract had originally required. The text of the posted report is final and has been peer-reviewed. Neither the data nor the analysis on which it is based will change. The fully formatted, publication version of RAND's final report is due by March 25, 2008.  (In a subsequent post, I will address the substance of the Rand Report.)  Press Release 2008-1.

January 3, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Carlyle Group Wants to Invest in Infrastructure

First, public schools, now our infrastructure goes private ... The private equity firm, The Carlyle Group, has raised $1.15 billion for an infrastructure fund that it will use to partner with cash-strapped federal, state and local governments in public works projects like highways, bridges and airports.  Carlyle says it can run these operations better than government and make a profit for its investors.  Critics worry about public safety and security issues.  WPost, Soon, Roads Could Start Tolling for Carlyle.

January 3, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

OMX Board Approves Sale

As part of the tripartite deal between Nasdaq, the Nordic stock exchange operator OMX AB,, and the Borse Dubai, OMX approved the sale of all its shares to the Borse Dubai, after which Nasdaq will buy them for a combination of cash and Nasdaq shares.  Last year Borse Dubai acquired a 19.9% stake in Nasdaq.  WSJ, OMX Board Approves Deal.

January 3, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 2, 2008

Syms Shareholders Object to Delisting Plan

Syms shareholders are urging the Syms board to reconsider its decision to deregister its common shares and to delist from the NYSE and instead to have the shares trade in the Pink Sheets.  Syms says that most of its shares are registered in street name and thus there are less than the 300 shareholders that trigger registration under the Securities Exchange Act.  The company says it is taking these actions to minimize its costs associated with Sarbanes Oxley compliance, which it says amount to $750,000 annually.  CFO.com, Syms Shareholders Decry Delisting Plan.

January 2, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Obtains Judgment Against NBTY Inhouse Counsel On Insider Trading

On December 26, 2007, a Manhattan federal court entered final judgments against defendants Mitchell S. Drucker and Ronald Drucker, and relief defendant William Minerva. The judgments follow the jury verdict on December 3, 2007 in favor of the SEC finding the defendants liable for insider trading in the stock of NBTY, Inc. Mitchell Drucker is the former associate general counsel of NBTY, Inc., a nutritional supplements manufacturer and retailer, and his father, Ronald Drucker, is a former New York City police detective. The Commission had charged that, while Mitchell Drucker was a lawyer at NBTY, and had learned that NBTY was about to announce lower than expected quarterly earnings, he and his father sold their holdings of NBTY stock just before the negative announcement. Collectively, the defendants avoided $197,243 in losses by selling in advance of the announcement.

In making findings for the judgments, Judge Colleen McMahon issued on December 20, 2007, her Decision On Relief, in which she found that Mitchell Drucker "perjured himself during the trial." That same decision stated, among other things, that the Court is "convinced, by the brazenness of his misconduct and by his cocky refusal to own up to it, that this attorney [Mitchell Drucker] — who was supposed to be NBTY's 'policeman,' and who demonstrated utter indifference to both the law and to his client — is not fit to participate in the governance of any public company

January 2, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

PHH Corp. Announces LBO is Terminated

PHH Corp., a mortgage originator and provider of automobile fleet management services, announced that its $1.7 billion LBO was off, because the Blackstone Group could not raise the financing for the deal.  It also said that Blackstone owed it a $50 million termination fee.  Blackstone had promoted its reputation for not walking away from a deal; its inability to raise the funds for a relatively small deal does not bode well for the future.  WSJ, Very Early in '08, A Failed Deal Harks Back to '07; NYTimes, Deal to Buy Mortgage Company Collapses.

January 2, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

What Happened in 2007 -- Retrospectives

The New Year retrospectives on 2007 have a common theme -- the rise of private equity in the first six months of the past year and the fall of private equity in the final six months of 2007, felled by the subprime mortgage crisis and its aftermath.  Here are some good analyses: WPost, '07: Buyouts and Bailouts (Alan Sloan's column); WPost, Private Equity's Loss of Leverage; NYTimes, Customers, Not Brokers, Profited in an Odd 2007.

Meanwhile, the Wall St. Journal looks ahead and analyzes the threat of recession, WSJ, Stocks Leap Obstacles for Gains.

January 2, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, December 31, 2007

SEC Charges Former Terex CFO With Assisting United Rentals Fraud

The SEC filed a complaint against Joseph F. Apuzzo, former Chief Financial Officer ("CFO") of Terex Corporation, for aiding and abetting securities law violations of United Rentals, Inc. ("URI") and Michael J. Nolan ("Nolan"), a former CFO of URI. Apuzzo is the second CFO charged in connection with the alleged violations. On December 12, 2007, the Commission filed settled financial fraud charges against Nolan.

The SEC alleges that Apuzzo aided and abetted a fraudulent accounting scheme involving two sale-leaseback transactions, carried out between 2000 and 2002 by URI, Nolan and others. The transactions were structured to improve URI's 2000 and 2001 financial results by allowing URI to recognize revenue prematurely and to inflate the profit generated from the sales. The complaint alleges that Apuzzo signed agreements with URI that he knew, or was reckless in not knowing, were designed to hide URI's continuing risks and financial obligations relating to the sale-leaseback transactions and approved the issuance of inflated invoices that he knew, or was reckless in not knowing, URI, through Nolan and others, would use to inflate URI's gain on the transactions.  As a result, URI materially overstated its financial results in its Forms 10-K for fiscal years 2000 and 2001, as well as in other filings and public releases.

December 31, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sunday, December 30, 2007

Grundfest Replies to Prentice

Is There an Express Section 10(b) Private Right of Action? A Response to Professor Prentice, by JOSEPH GRUNDFEST, Stanford University Law School, was recently posted on SSRN.  Here is the abstract:

In Scheme Liability: A Reply to Grundfest, Professor Robert A. Prentice asserts that the United States Supreme Court was simply and abysmally wrong in Central Bank v. First Interstate Bank. He also claims that the majority of lower courts have been dead wrong in interpreting Central Bank. He further states that the Section 10(b) private right of action is express and not implied, that Congress in 1934 intended to create that private right of action, and that the Securities and Exchange Commission also intended to create a private right when it adopted Rule 10b-5 in 1942. From these premises, Professor Prentice urges that Section 10(b) and Rule 10b-5 be interpreted to sustain a private right of action for scheme liability.

Professor Prentice's analysis rests on revisionist history. The record is clear that the private right of action under Section 10(b) is implied: it is not and has never been express. Congress in 1934 did not intend to create a private right of action under Section 10(b), much less one that would encompass scheme liability. Nor did the Commission intend to create a private right of action in 1942 when it adopted Rule 10b-5. Professor Prentice's conclusions based on these false premises fail of their own weight.

Professor Prentice's analysis is also strategically selective. He ignores 1934-era common law rejecting scheme liability. He nowhere discusses the Court's admonitions that implied rights be narrowly construed. He also fails to appreciate the implications of his historically revisionist analysis. If Professor Prentice is correct that the Section 10(b) private right is express, and intended by Congress and the Commission, then the entire corpus of federal securities law must be rewritten. Central Bank is then far from the only decision in which the Supreme Court is simply and abysmally wrong.

December 30, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Davidoff on Black Market Capital

Black Market Capital, by STEVEN M. DAVIDOFF, Wayne State University Law School, was recently posted on SSRN.  Here is the abstract:

Hedge funds and private equity offer unique investing opportunities, including the possibility for diversified and excess returns. Yet, current federal securities regulation effectively prohibits the public offer and purchase in the United States of these hedge fund and private equity investments. Public investors, foreclosed from purchasing hedge funds and private equity, instead seek to replicate their benefits. This demand drives public investors to substitute less-suitable, publicly available investments which attempt to mimic the characteristics of hedge funds or private equity. This effect, which this Article terms black market capital, is an economic spur for a number of recent capital markets phenomena, including fund adviser IPOs, special purpose acquisition companies, business development companies and specialized exchange traded funds all of which largely attempt to replicate private equity or hedge fund returns and have been marketed to public investors on this basis. Black market capital has not only altered the structure of the U.S. capital market but has shifted capital flows to foreign markets and engendered the creation of U.S. private markets. This Article identifies and examines the ramifications of black market capital. It finds this effect to be an irrational by-product of current hedge fund and private equity regulation, one likely harmful to U.S. capital markets. These are external costs inherent in the current regulatory scheme which the SEC has not recognized. The SEC should consequently undertake a thorough cost-benefit analysis of its hedge fund and private equity regulation. Based on the available evidence, such an analysis is likely to conclude that the benefits of a regulatory scheme permitting the public offer of hedge funds and private equity funds not only exceed its costs but is superior to current regulation. Black market capital is also an example of the unintended effects of regulating under the precautionary principle and difficulty of regulating in an era of market proliferation.

December 30, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)