Securities Law Prof Blog

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

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Friday, March 7, 2008

Executives Defend Pay Before House Committee

The Committee on Oversight and Government Reform held a hearing today on CEO Pay and the Mortgage Crisis.  The testimony of the speakers is at the Committee's website, including Countrywide's CEO Angelo Mozilo, former Citigroup CEO Charles Prince, and former Merrill Lynch CEO Stanley O'Neal.  The best exchange, as reported by the Wall St. Journal:

Republican Rep. Tom Davis of Virginia called the hearing a "sanctimonious search for scapegoats." "Punishing individual corporate executives with public floggings like this may be a politically satisfying ritual -- like an island tribe sacrificing a virgin to a grumbling volcano," Mr. Davis said.

Nell Minow, editor of the Corporate Library, responded: "They are not scapegoats and they are certainly not virgins."  WSJ, Top Bank Executives Defend Pay Packages on Capitol Hill.

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

SEC Charges Financial Fraud Involving Certified Services

The SEC filed a complaint against W. Anthony Huff, Danny L. Pixler, Anthony R. Russo, Otha Ray McCartha, and Charles J. Spinelli in the United States District Court for the Southern District of Florida charging them with a financial fraud arising from their involvement with Certified Services, Inc., ("Certified") a South Florida publicly traded company. Certified operated a professional employee leasing business providing, among other things, workers' compensation insurance services to small and medium size businesses. Since May 2006, Certified has been a Chapter 11 debtor under the control of a Chapter 11 trustee appointed by the bankruptcy court.

The SEC alleges that from approximately 2001 through 2004, the defendants siphoned approximately $30 million from Certified through an elaborate scheme. The Commission's complaint also alleges that during the same time period, the defendants participated in a scheme to inflate Certified's financial statements by reporting approximately $47 million in bogus letters of credit as assets while not recording liabilities which reached a high of about $65 million in the third quarter of 2004. In addition, the complaint alleges that Certified did not fully disclose related party relationships.

McCartha and Spinelli have consented to the entry of Final Judgments providing for full injunctive relief. In October 2007, the Honorable Adalberto Jordan, United States District Judge for the Southern District of Florida, sentenced Spinelli and McCartha to 21 and 24 months incarceration respectively, and ordered them to pay restitution.

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

SEC Obtains Emergency Order Against Unregistered Day-Trading Firm

The SEC obtained an emergency court order against Tuco Trading, LLC, an unregistered securities day-trading firm in La Jolla, Calif., that was not disclosing to traders that more than one-third of their money was being used to cover other traders' losses or pay firm expenses. The SEC's complaint alleged that approximately 35 percent of their equity was diverted, leaving an approximately $3.62 million shortfall in the traders' equity as of Dec. 31, 2007. In issuing the emergency orders, the court found that the SEC had shown that the day-trading firm was violating the broker-dealer registration and antifraud provisions of the federal securities laws, and ordered the appointment of a temporary receiver to safeguard customer assets.

According to the SEC's complaint, the defendants provide securities day-trading capability to more than 250 traders who had approximately $10.2 million invested in Tuco. They permitted traders to day-trade securities in Tuco's own brokerage accounts at registered broker-dealers through sub-accounts created at Tuco for each trader.  The defendants enticed traders with services unavailable at a registered broker-dealer. As alleged in the complaint, they allowed traders to day-trade without meeting the $25,000 minimum equity requirement under NASD regulations for such trading and allowed the traders at Tuco to have a 20:1 buying power. NASD and NYSE regulations, however, only allow a day-trader to have 4:1 buying power.

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

House Committee Holds Hearing on Executive Compensation

Three poster children for outsized executive compensation -- Countrywide Financial's Angelo Mozilo, former Merrill Lynch chair E. Stanley O'Neal, and former Citigroup CEO Charles O. Prince -- are scheduled to testify today before the House Oversight and Government Reform Committee.  Members of the companies' boards will also testify about their pay policies and practices.  NYTimes, Panel to Review Payouts Given by Troubled Firms; WSJ, House Report Says Countrywide's Mozilo Resisted Pay Cuts.

Another approach to executive compensation -- Aflac becomes the first public U.S. company to give shareholders an advisory vote on executive compensation at its May annual meeting.  The Wall St. Journal interviews Aflac CEO Daniel Amos about its decision to follow a shareholders' proposal on an advisory vote.  WSJ, Say on the Boss's Pay.

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

Thursday, March 6, 2008

Supervisory Agencies Issue Joint Report on Risk Management Practices

Senior financial supervisors from five countries today issued a report that assesses a range of risk management practices among a sample of major global financial services organizations.  The report's key observations and proposed supervisory responses are summarized in a transmittal letter to the chairman of the Financial Stability Forum. The seven supervisory agencies participating in this project are the French Banking Commission, the German Federal Financial Supervisory Authority, the Swiss Federal Banking Commission, the U.K. Financial Services Authority, and, in the United States, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and the Federal Reserve.

Supervisors undertook this effort to evaluate the effectiveness of current risk management practices during this period of stress. These observations could then be used in supervising individual firms and in assessing potential future changes in supervisory requirements, guidance and expectations.  This work was also undertaken in response to a request from the Financial Stability Forum, whose mission is to promote international financial stability, improve the functioning of markets, and reduce systemic risk. The Financial Stability Forum has established a Working Group on Market and Institutional Resilience that is preparing a separate report to the Finance Ministers and Central Bank Governors of the G-7 countries on the underlying causes of recent financial market turmoil and will make appropriate recommendations.

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

SEC Warns Public Pension Plans about Compliance

The SEC issued a press release reminding public pension funds of their responsibilities under the federal securities laws and the importance of adequate compliance policies and procedures to prevent wrongdoing in their money management functions.  The SEC's Report of Investigation stems from an insider trading inquiry into stock purchases by The Retirement Systems of Alabama (RSA), a state pension fund. RSA purchased shares of The Liberty Corporation while in possession of material, non-public information about the prospective acquisition of Liberty which it learned about because it was to provide financing for the acquisition. RSA did not have any program, policy, practice, or training to ensure that its investment staff understood and complied with the federal securities laws in general, or insider trading laws in particular. When the information became public, the value of RSA's Liberty shares increased by more than $700,000.

The SEC resolved the dispute with a report instead of other sanctions, at least in part because of RSA's remedial actions and cooperation in the investigation.

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

Wednesday, March 5, 2008

Yahoo Extends Deadline for Nominating Directors

Yahoo amended its bylaws to extend the deadline for nominating directors from March 14 to 10 days following the public announcement of the date for the 2008 Annual Meeting (which has not yet been announced).  This will give Microsoft more time to nominate directors, if it decides to pursue this option.  Yahoo stated that it remained committed to pursuing alternatives to maximize shareholder value.

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

SEC Settles Charges Against Former Broadcom VP

The SEC filed a settled enforcement action against Nancy M. Tullos, the former vice president of human resources at Broadcom Corporation, for her participation in a five-year scheme to backdate stock options granted to Broadcom employees and officers.  As a result of this scheme, Broadcom restated its financial results in January 2007 and reported an additional $2.22 billion in compensation expenses — the largest restatement to date arising from stock option backdating.

The SEC charged Tullos with participating in a scheme at Broadcom from 1998 to 2003 to backdate stock option grants.  The SEC's complaint alleges that Tullos communicated false grant dates within the company and provided spreadsheets of stock option allocations for the backdated grants to Broadcom's finance and shareholder services departments, knowing that they would use such information to prepare Broadcom's books and records and periodic filings with the SEC. As a result, the complaint alleges that Tullos contributed to Broadcom's misrepresentations in these filings that no compensation expense was required for the stock option grants. Tullos personally benefited from the backdating scheme because she received and exercised backdated stock options that were in-the-money by more than $1.2 million.

Under the settlement, Tullos agreed to pay more than $1.3 million in disgorgement and prejudgment interest, which will be offset by the value of her exercisable stock options that Broadcom cancelled. She agreed to pay a civil penalty of $100,000. Tullos also will be permanently enjoined from federal securities violations.  Tullos agreed to the settlement without admitting or denying the allegations in the complaint.

Tullos' settlement is subject to approval by the court.

March 5, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Proposes Rules to Ease Requirements for ETFs

As I reported earlier, the SEC voted to propose two new rules under the Investment Company Act to permit exchange-traded funds (ETFs) to operate without the need to obtain individual exemptive orders from the Commission.  Here is more detail about the proposed rules:

Proposed Rule 6c-11. Proposed Rule 6c-11 under the Act would provide several exemptions from the Act to permit ETFs to form and operate without the need to obtain individual exemptive relief from the Commission. The rule would codify most of the exemptions previously granted by the Commission to index-based ETFs and, pursuant to several recently-issued exemptive orders, to fully transparent actively managed ETFs.
 
Proposed Rule 12d1-4. Proposed Rule 12d1-4 under the Act would allow investment companies to make larger investments in ETFs than currently permitted under the Act, which limits one investment company to acquiring no more than 3 percent of another investment company’s shares. The exemptions in the proposed rule would be subject to several conditions designed to address the historical abuses associated with “pyramiding” schemes that often occurred with fund investment in other funds (so-called “fund of funds” arrangements).
 
Amendments to Form N-1A.  The proposed amendments to Form N-1A, which open-end funds use to register under the Act and offer their securities under the Securities Act of 1933, would accommodate the use of the form by ETFs. The proposed amendments are designed to provide key information to investors who purchase ETF shares in secondary market transactions, where most ETF investors (including retail investors) purchase their shares.

The comment period for the proposal will end 60 days from the date of publication of the proposed rule in the Federal Register.

March 5, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Fidelity and Lynch with Accepting Improper Gifts

The SEC filed charges against Fidelity Investments and 13 current or former employees including Peter Lynch, for improperly accepting more than $1.6 million in travel, entertainment, and other gifts paid for by outside brokers courting the massive trading business Fidelity generates on behalf of the mutual funds it manages.  In a settled Order against Fidelity, the SEC charged that the firm failed to seek "best execution" for its clients' mutual funds securities transactions. The Order found that Fidelity allowed the selection of brokers to execute those transactions to be influenced by lavish gifts as well as family and romantic relationships with brokers.  Fidelity agreed to pay an $8 million penalty, which takes into account Fidelity's separate agreements with its mutual fund trustees and institutional and other clients to make additional payments. The SEC also censured Fidelity and required Fidelity to hire an independent compliance consultant to conduct a comprehensive review of Fidelity's current policies and procedures concerning equity trading operations, conflicts and gifts. Fidelity consented to the Order without admitting or denying the findings.

According to the SEC Order, those charged received a host of travel, entertainment and other gifts paid for by outside brokers, including private jet trips to such places as Bermuda, Mexico, and Las Vegas and premium sports tickets to events including Wimbledon, the Super Bowl, and the Ryder Cup golf tournament.

The individuals charged by the SEC include Scott E. DeSano, Fidelity's former senior vice president and head of global equity trading, Bart A. Grenier, a senior vice president who held supervisory responsibility for Fidelity's equity trading desk and other business groups, and Peter Lynch, Fidelity's trustee, vice chairman and former portfolio manager of Fidelity's flagship Magellan Fund. Grenier and Lynch settled the SEC's charges without admitting or denying the allegations.

The SEC's Order against Lynch found that he obtained numerous free tickets to concerts, theater and sporting events paid for by outside brokers through his requests to two traders on Fidelity's equity trading desk, causing those traders to violate an Investment Company Act provision that bars accepting compensation from outside sources when transacting on behalf of a mutual fund. The Order requires Lynch to cease committing or causing any further violations and to pay $15,948 in disgorgement — equaling his ill-gotten gains — and prejudgment interest of $4,183.

The SEC's Order against Grenier found that he violated the Investment Company Act in connection with his acceptance of $38,500 worth of tickets from brokers to 21 concerts and sporting events. The Order further finds that Grenier caused violations of the Investment Company Act by DeSano, through whom Grenier requested the tickets from brokers. The Order requires Grenier to pay disgorgement and prejudgment interest in the amount of $26,316.89, and a $25,000 penalty. Grenier also was censured and ordered to cease further violations.

DeSano still faces SEC charges.  The SEC alleges that DeSano knew that certain Fidelity traders directed transactions to brokers who provided them with travel, entertainment and gifts, and also to brokers with whom certain Fidelity traders had a family or romantic relationship.

On Dec. 1, 2006, the SEC brought a settled enforcement action against Jefferies & Co, Inc., its Director of Equities Scott Jones, and former Senior Vice President and equity sales trader Kevin Quinn in connection with Jefferies' provision of extravagant travel and entertainment, and other lavish gifts to Fidelity equity traders and DeSano in order to win securities brokerage business from the Fidelity mutual funds.

March 5, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Approves Two New Rule Proposals

In its meeting yesterday, the SEC approved two significant rule proposals.  One is an anti-fraud rule to crack down on abuses involving naked short sales.  WSJ, SEC Proposes Teeth for Short-Selling Rules.  The other would allow for quicker marketing of new ETFs.  WSJ, SEC Proposes Faster .ETF Path to Market.  The text of the rules has not yet been published.

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

SEC Trial Against Specialists May Turn on Accuracy of Data

The accuracy of NYSE trading data is a key issue in the SEC administrative proceeding against 14 NYSE traders charged with illegally profiting from trading ahead of customers and interpositioning between customer trades.  The defense introduced a 12-minute tape that tracks trading in one stock and, according to the defense, shows that the NYSE erroneously reported data for 20 of the 73 trades on the tape.  WSJ, NYSE Data at Issue in Traders Case.

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

Master Disqualifies Law Firm in Coca-Cola Suit

The special master in a securities fraud class action against Coca-Cola recommended that Coughlin Stoia Geller Rudman & Robbins not be appointed lead counsel because the law firm purchased Coca-Cola documents from a disgruntled former executive.  WSJ, How 'Smoking Gun' Rule Holds Up Securities Suits.

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

Yahoo Looks For Alternatives to Microsoft

Negotiations between Yahoo and Time Warner about a combination of Yahoo and AOL continue as Yahoo looks for alternatives to a Microsoft deal.  Yahoo also is engaged in talks with News Corp., in which News Corp. would buy a stake in Yahoo in exchange for MySpace.  Meanwhile, Microsoft faces a March 14 deadline to file a slate of Yahoo directors if it plans a proxy contest, although Yahoo could extend that deadline or delay its not-yet-scheduled annual meeting.  NYTimes, Yahoo Looks at New Way to Survive; WSJ, Yahoo Steps Up Talks With Time Warner.

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

Tuesday, March 4, 2008

Ninth Circuit Upholds Earlier Statute of Limitations Decision

In the latest opinion in Betz v. Trainer, Wortham & Co. (Feb. 26, 2008), the Ninth Circuit confirmed its earlier interpretation of an "inquiry notice plus reasonable diligence" standard to determine when the statute of limitations for Rule 10b-5 actions begins to run and refused the defendant's petition for rehearing.  The appeals court had previously reinstated plaintiff's claim and held there were material issues of fact preventing a summary dismissal.  Judge Kozinski (joined by two other judges) was very unhappy about this outcome and complained, in a sharply worded dissent, that the Ninth Circuit's "unique interpretation" of the statute of limitations puts it "at odds" with ten other Circuits.  Plaintiff, a retired art dealer, invested over $2 million with defendant based on an oral promise to achieve high returns with no risk.  Judge Kozinksi already has trouble with this, since the oral promise was contradicted by the written contract.  He goes on to describe how plaintiff received a statement showing a loss in February 2000 and continued to receive 29 more statements, and waited three and a half years, before filing suit.  Judge Kozinski's dissent goes on for some length, but this lament sums it up:

If a securities defendant in a simple case like this cannot use the statute of limitations as a shield against the costs and hazards of trial, then no defendant can, and the statute of limitations Congress passed for 10b-5 cases is pretty much a dead letter in this circuit.

March 4, 2008 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

SEC Reproposes Amendments to Form ADV

The SEC is reproposing amendments to Part 2 of Form ADV, and related rules under the Investment Advisers Act, to require registered investment advisers to deliver to clients and prospective clients a brochure written in plain English. These amendments are designed to require advisers to provide clients and prospective clients with clear, current, and more meaningful disclosure of the business practices, conflicts of interest (including those related to soft dollar practices), and background of investment advisers and their advisory personnel. Advisers would file their brochures with the SEC electronically, and it would make them available to the public through the SEC Web site. The Commission also is proposing to withdraw, as duplicative, the Advisers Act rule requiring advisers to disclose certain disciplinary and financial information.

March 4, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Files Insider Trading Charges Involving Synergetics-Valley Forge Merger

The SEC settled an insider trading action against Stanley Manne, for engaging in unlawful insider trading in the securities of Valley Forge Scientific, Inc. ("Valley Forge"), which was located in Oaks, Pennsylvania. The complaint alleges that the defendant, a retired business owner, purchased securities of Valley Forge on the basis of material nonpublic information concerning a merger between Valley Forge and Synergetics, Inc. Without admitting or denying the allegations of the complaint, Manne has consented to the entry of a final judgment permanently enjoining him from engaging in the alleged violations and ordering him to pay disgorgement of $85,601, plus prejudgment interest of $13,315, and a civil penalty of $85,601.

March 4, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Affirms Disciplinary Action Against Former Jesup & Lamont CCO

The SEC sustained NASD disciplinary action against Robert E. Strong, former chief compliance officer of Jesup & Lamont Securities Corp. (J&L), an NASD member. The Commission also sustained NASD's imposition of a total of $10,000 in fines for Strong's misconduct.  The Commission upheld NASD findings that Strong failed to supervise a J&L research analyst, failed to ensure that research reports issued by J&L contained the disclosures required by NASD rules, and failed to file a report required by NASD within the time required. In approving NASD's sanctions, the Commission observed that Strong's "supervisory failures reflect a troubling inattention to the responsibilities given to him" by J&L's management. According to the Commission, "the sanctions imposed by NASD serve the public interest by encouraging future compliance with the rules at issue here, by Strong and by others in the industry who have been given similar responsibilities."

March 4, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Files Fraud Charges Against Thompson Consulting

The SEC filed an enforcement action against a Salt Lake City investment adviser and three of its principals for making undisclosed high-risk investments that resulted in the near total loss of the assets in two hedge funds managed by the adviser.  The SEC charged Thompson Consulting, Inc., Kyle Thompson, David Condie and Sherman Warner with violations of the antifraud provisions of the securities laws by engaging in much riskier trading strategies than those described to investors, several of whom were seniors.  The SEC alleges that Thompson, Condie and Warner managed the hedge funds and also made sales presentations to potential investors in which they emphasized the safety of Thompson Consulting's investment strategy for the funds. 

The SEC's complaint, filed in the U.S. District Court for the District of Utah, also alleges that Thompson Consulting's deviations from its stated investment policy resulted in substantial losses to both the hedge funds and an individual client.  Among those departures from its stated strategy were failed investments in options on the stock of a subprime lender. The SEC's complaint further alleges that the defendants improperly transferred money from the hedge funds to the account they managed for the individual client to make up for the individual's losses.  The SEC alleges that from March through August 2007, Thompson Consulting, in attempting to attain promised returns of 3 percent per month (or more than 36 percent per year), embarked on progressively riskier trading strategies without disclosing the change in strategy to the hedge funds' investors.

March 4, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Buffett Says Recession

Warren Buffett says the U.S. economy is in a recession, based on the bottom line at Bershire Hathaway, whose 76 operating units sell a variety of goods and services, where he sees "a significant slowdown."  Buffett also said his previous offer to reinsure municipal bonds is no longer on the table.  NYTimes, Buffett Says U.S. Is in Recession.

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