Securities Law Prof Blog

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

Tuesday, March 11, 2008

Court Enters Default Judgment in Phony Tender Offer Manipulation Case

The federal district court for the Southern District of New York entered a judgment permanently enjoining the partnership Hollingsworth, Rothwell & Roxford ("HRR") from future violations of the anti-manipulation and tender offer anti-fraud provisions of the federal securities laws. HRR was ordered to pay $900,000 in civil monetary penalties.  The court also entered a judgment permanently enjoining Theodore Roxford a/k/a Lawrence David Niren ("Roxford") from future violations and ordered him to pay $900,000 in civil monetary penalties. Both judgments were entered by default.

The SEC alleged that beginning in 2003, Roxford and HRR made false and materially misleading statements in connection with purported tender offer announcements for five publicly-traded companies - Sony Corporation, Zapata Corporation, Edgetech Services, Inc., Playboy Enterprises, Inc., and PeopleSupport, Inc. Roxford and HRR publicized the phony offers through press releases, internet message board postings, and in at least one filing with the Commission. They made these fake offers in order to manipulate the price of the target companies' stock by inducing investors to purchase the stock.

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

SEC Files Civil Charges Against Promoters of "Teach Me to Trade" Program

I have often wondered why there was not a crackdown on the infomercials shown on television and other"investor workshops." The SEC today filed civil fraud charges against Linda Woolf and David Gengler, two promoters who allegedly made millions selling a get-rich-quick stock trading system.  (If you go to its website, you can see videos of the sales pitch.)  The SEC alleges that they duped seniors and others who had attended free introductory seminars into believing they would make extraordinary stock market profits if they bought expensive "Teach Me to Trade" (TMTT) classes, mentoring, and computer software.  In order to con victims into paying as much as $40,000 for TMTT products and services, the Commission alleges that Woolf and Gengler lied about their success with the trading system, when in truth neither Woolf nor Gengler ever purchased TMTT's products or became successful traders.

In one infomercial Woolf told how she used to be an elementary school teacher and was able to replace her entire income after attending TMTT workshops. "I had no idea it was that easy to learn how to make money in the stock market," Woolf said. In another infomercial, Gengler claimed, "If you can simply follow steps and follow our principles, you'll make money. It's that simple."  Instead, the Commission alleges, Woolf and Gengler are unsuccessful traders, with Woolf having never declared a trading profit on her federal tax returns and Gengler typically declaring losses, or no profits. However, Woolf reaped approximately $4 million in commissions from selling TMTT packages, and Gengler made approximately $2.25 million, according to the Commission's complaint.

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

SEC and CFTC Announce New Cooperation Agreement

Turf wars between the SEC and the CFTC have existed since the latter agency's creation and have only intensified over the years with the proliferation of complex products.  Today the agencies announced what the press release describes as a "ground-breaking mutual cooperation agreement" to establish a closer working relationship between their agencies. The agreement establishes a permanent regulatory liaison between the agencies, provides for enhanced information sharing, and sets forth several key principles guiding their consideration of novel financial products that may reflect elements of both securities and commodity futures or options.

The agencies also announced their plans to consider two new derivative products under the agreement and issued notices requesting public comment on two new products. Both products would be based on the streetTracks ® Gold Trust Shares (Gold Shares). One product is an option that would be traded on options exchanges, and the other is a future that would trade on a single stock futures exchange. The requests for comment will be published in the Federal Register shortly.

In addition, the Options Clearing Corporation, which is subject to the joint jurisdiction of the agencies in certain areas, recently filed with both the SEC and the CFTC for approval to clear and settle both of the new products. Both agencies expect to act on these filings expeditiously and issue notices for public comment in the near future.

The two new products have raised questions about how they best should be regulated under federal law. Other recent products, such as credit default options, have raised similar questions. The Memorandum of Understanding addresses how the agencies will approach products that raise these issues in this burgeoning area of financial innovation. It also establishes a framework that will facilitate discussions and coordination regarding issues in other areas of common regulatory interest between the two agencies, such as portfolio margining, foreign security index products, and the oversight of firms registered with both agencies.

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

Private Equity on the Skids

The reversals of fortune for private equity firm continue to confound, as The Blackstone Group (which, you will remember went public just last year)announced an 89% earnings drop for the last quarter in 2007 and Carlyle Capital may be close to insolvency.  NYTimes, Buyout Industry Staggers Under Weight of Debt . However, Blackstone's Steven A. Schwarzman still has $100 million to give to the New York Public Library in exchange for naming rights.  NYTimes, A $100 Million Donation to the N.Y. Public Library.

March 11, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Activist Shareholder Considers Withhold Vote Campaign Against Morgan Stanley's Mack

At last year's annual meeting, Morgan Stanley CEO and Chair John J. Mack said: "Do we take a lot of risk? Yes, I think this firm has the capacity to take a lot more risk than it has in the past.”  What will he say this year?  Meanwhile, CtWInvestment Group, the activist shareholder, considers a campaign to withhold votes from Mr. Mack's re-election as director, in an effort to persuade the company to split the CEO and Chair positions.  NYTimes, Morgan Stanley Chief Grappling With New Risk.

March 11, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, March 10, 2008

University of Cincinnati Symposium on Dysfunctional Boards

The University of Cincinnati College of Law and Law Review Present

The Dysfunctional Board: Causes and Cures

March 14, 2008, 8:00 a.m. - 3:30 p.m.

This Program will be Webcast at the Corporate Law Center website.  In addition, you will be able to participate in the question and answer sessions by emailing questions to the panels.  The email address will be announced during the conference and posted on the website.


Panel 1: The Underlying Causes of Dysfunctionality

9:00 -- 10:30 a.m.

MODERATOR: John S. Stith, Esq., Porter Wright & Morris LLP, Cincinnati


Franklin A. Gevurtz, Distinguished Professor and Scholar, University of the

Pacific, McGeorge School of Law

The Function of Dysfunctional Boards

An examination of the historical and political origins of the corporate

board of directors and what it tells us about Hewlett-Packard.

Jayne W. Barnard, James Goold Cutler Professor, College of William and

Mary, Marshall-Wythe School of Law

Narcissism, Over-Optimism, Fear, Anger and Depression: The Interior Life of

Corporate Leaders

An exploration of the cognitive biases and personal demons that may

drive leaders to foolish acts and several structural responses to the most

common CEO pathologies.

Panel 2: Competing Expectations for Board Performance

10:45 a.m. -- 12:30 p.m.

MODERATOR: Gary P. Kreider, Esq., Keating Muething & Klekamp, LLP, Cincinnati


Lissa Lamkin Broome, Professor, University of North Carolina School of Law

Kimberly D. Krawiec, Professor, University of North Carolina School of Law

The Road to Board Diversity: A Case Study from North Carolina

Empirical research on the hurdles and successes of board diversity and its

impact on board decision-making.

Lawrence A. Cunningham, Professor, George Washington University Law School

Rediscovering Board Expertise: Legal Implications of the Empirical Literature

An examination of the relative importance of independence versus

expertise on the board of directors, especially as it relates to the audit


Tamar Frankel, Professor and Michaels Faculty Research Scholar, Boston

University School of Law

Corporate Boards of Directors: Advisors or Supervisors?

An analysis of the role of boards as advisors vs. supervisors, and the issues of

mediation among the two conflicting power positions as well as cause and cure.

Panel 3: The Board as Compliance Officer

1:45 - 3:15 p.m.

MODERATOR: Clifford A. Roe, Jr., Esq., Dinsmore & Shohl, LLP, Cincinnati


Peter J. Henning, Professor, Wayne State University Law School

Board Dysfunction: Dealing with the Threat of Corporate Criminal Liability

An analysis of how boards respond to corporate malfeasance and, in some

instances, enable companies and their CEOs to commit corporate malfeasance.

Miriam H. Baer, Acting Assistant Professor, New York University School of Law

Corporate Policing and Corporate Governance: What Can We Learn from

Hewlett-Packard’s Pretexting Scandal?

An examination of the tension between law enforcement norms and

corporate governance norms, the deception gap between private and

public law enforcement, and the implications of these tensions for public

companies and their Boards.

The Corporate Law Symposium is generously sponsored by the law firm of Dinsmore & Shohl LLP.

March 10, 2008 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Governor Spitzer, Linked to Prostitution Ring, Apologizes

This afternoon both the New York Times and the Wall St. Journal reported that Governor Eliot Spitzer had been involved in a prostitution ring, apparently caught in a federal wiretap arranging for the services of a prostitute in Washington D.C. last month.  This afternoon Governor Spitzer appeared to confirm these reports as he made a brief public statement in which he apologized to his family and to the public, but also stated that: "I do not believe that politics in the long run is about individuals. It is about ideas, the public good and doing what is best for the State of New York."

Unfortunately, politics is about individuals.  The kickback scandals of Milberg Weiss and William Lerach gave corporate defendants a powerful weapon to use against securities fraud class actions, and they have used it with great effectiveness, to argue that the greed of the private securities bar, and not vindication of investors' rights, was the force behind private litigation. Now Governor Spitzer has given corporate America yet another reason to attack the bona fides of those who seek to hold them accountable.  While the Governor may assert that his transgressions are moral and personal and have nothing to do with his record of public service, for Wall St. he is the face of the government prosecutor against greed and corruption in the mutual funds and tainted analysis scandals.  For years, they have argued that his headline-grabbing investigations were done to further his political career, and to this one could reasonably say so what?  However, a crusader's credibility is based, to a great extent, on his personal probity, and his critics are certain to make the most out of this.  And who can blame them?  Wall St. may be corrupt, but the Governor is immoral.

It's a sad day for investors' advocates.

March 10, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, March 9, 2008

Bainbridge on Say on Pay

Remarks on Say on Pay: An Unjustified Incursion on Director Authority, by STEPHEN M. BAINBRIDGE, University of California, Los Angeles - School of Law, was recently posted on SSRN.  Here is the abstract:

These remarks were presented to the Penn Law and Economic Institute's Chancery Court Program on Say on Pay: A Positive Contribution To Corporate Effectiveness and Accountability Or An Unprincipled and Costly Incursion Into Director Authority?

Proponents of H.R.1257 or similar federal legislation entitling shareholders to vote on executive compensation must carry their burden of proving three distinct claims: First, that there is an executive compensation problem justifying legislative intervention. Second, say on pay is an effective solution to the problem. Third, that any such legislative intervention should be imposed at the federal level.

If any of these claims fail, the case for a federal say on pay law collapses. In these remarks, I hope to demonstrate that none of the three holds up to close examination.

March 9, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Baker & Griffith on D&O Insurance and Settlements

How the Merits Matter: D&O Insurance and Securities Settlements, by TOM BAKER, University of Connecticut School of Law, and SEAN J. GRIFFITH, Fordham Law School, was recently posted on SSRN.  Here is the abstract:

This Article seeks what may be the holy grail of securities law scholarship - the role of the merits in securities class actions - by investigating the relationship between settlements and D&O insurance. Drawing upon in-depth interviews with plaintiffs' and defense lawyers, D&O claims managers, monitoring counsel, brokers, mediators, and testifying experts, we elucidate the key factors influencing settlement and examine the relationship between these factors and notions of merit in civil litigation. We find that, although securities settlements are influenced by some factors that are arguably merit-related, such as the sex appeal of a claims liability elements, they are also influenced by many that are not, including, most obviously, the amount and structure of D&O insurance. The virtual absence of adjudication results in payment to the plaintiffs' class for every claim surviving the motions stage and, as importantly, a lack of authoritative guidance about merit at settlement. Without adjudication, the weight of various factual patterns is untested, and the validity of competing damages models remains unknown. Parties structure their settlement by reference to other settlements, but these are opaque and subject to the same set of distortions. In this murky environment, plaintiffs and defendants collude to pressure the D&O insurer to settle on terms that may not reflect the ultimate merits of the claim. More adjudication, we argue, would be the best solution to the problem, but barring that, disclosure of D&O insurance and settlement terms would offer some improvement.

March 9, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Rose on SWFs

Sovereigns as Shareholders, by PAUL ROSE, Ohio State University - Michael E. Moritz College of Law, was recently posted on SSRN.  Here is the abstract:

This paper considers the increasing impact of sovereign wealth funds as equity investors. Sovereign investment has been viewed with suspicion because sovereign wealth funds, as tools of sovereign entities, could be used for political rather than investment purposes. While this risk is considerable, much of the discussion surrounding sovereign investment ignores or minimizes the mitigating effect of a number of regulatory, economic and political factors. This paper argues that continued care, but not additional regulation, is necessary to ensure that U.S. interests are not jeopardized by sovereign investment in U.S. enterprises. However, while the U.S. is able to protect its interests within its markets, other countries may not have the regulatory structure or political power to adequately defend their interests. Additionally, U.S. interests could be harmed by politically-motivated sovereign investment in other countries. As a result, this paper argues in support of efforts to establish a code of conduct for sovereign investment.

March 9, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Chiappinelli on Definition of Security

Reinventing a Security: Arguments for a Public Interest Definition, by ERIC A. CHIAPPINELLI, was recently posted on SSRN.  Here is the abstract:

The traditional test for evaluating whether a particular investment vehicle is covered under the securities law is in dire need of reform. Under the traditional test, coverage turns entirely on the private needs of private investors rather than on the public needs of the national securities markets. Considerations of the American capital formation and secondary trading markets or those markets' ability to compete in foreign markets remain untouched. The introduction of more sophisticated investment vehicles provides an opportunity to amend the traditional analysis to better address the broader public interest. Considerations of the national markets can be integrated harmoniously into the traditional analysis for the purposes of making securities coverage determinations. Adding a public interest component to the test would provide a useful supplement to the traditional approach. This article analyzes the current approach; moving through a discussion of how the Supreme Court determines what is and what is not a security before delving into the deficiencies of the current approach. An expanded calculus that includes a public interest test is needed so that capital formation, secondary trading markets, and issues of market regulation are explicitly considered. A public interest test is entirely consonant with the traditional touchstones of congressional intention and prior case law. On multiple occasions Congress has acted by amendment to bring a portion of the financial markets under greater regulation in order to protect the public interest. This article illustrates that in the absence of the public interest calculus the traditional test is insufficient. It is therefore important that the courts consider the larger, national implications of securities coverage through the application of a public interest test.

March 9, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Schwarcz on Subprime Mortgage Crisis

Markets, Systemic Risk, and the Subprime Mortgage Crisis, by STEVEN L. SCHWARCZ, Duke University School of Law, was recently posted on SSRN.  Here is the abstract:

The subprime mortgage crisis is undermining financial market stability and has the potential to cause a true systemic breakdown. This short and accessible essay, which is based on the author's 2008 Roy R. Ray Lecture at SMU Law School, uses this crisis to demonstrate that existing protections against systemic risk, which focus on banks and largely ignore financial markets, are misguided. Because companies increasingly access financial markets without going through banks, an effective framework for containing systemic risk must focus on markets.

March 9, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)