Securities Law Prof Blog

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

Friday, March 21, 2008

Hedge Fund Manager Criminally Charged with Market Manipulation

The SEC announced that the United States Attorney's Office for the Southern District of Florida unsealed an Indictment charging Michael Lauer and four other individuals with one count of conspiracy to commit mail, wire and securities fraud and six counts of wire fraud. If convicted, Lauer faces a maximum sentence of 20 years and a $250,000 fine for each count of wire fraud and five years and a $250,000 fine for the conspiracy count. The Indictment also seeks forfeiture of properties obtained, directly or indirectly as a result of the alleged criminal violations.  The Indictment alleges that from at least October 1999 through July 2003, Lauer, as founder and primary manager, formed and directed several hedge funds, collectively known as the Lancer Group hedge funds, to manipulate the month-end closing prices of shares of thinly-traded shell companies' securities, to falsely overstate the value of the Lancer Group's holdings. According to the Indictment, Lauer purchased large quantities of restricted stock at pennies per share in private transactions and then purchased small amounts of the same securities for the Lancer Group to drive up the price by the end of the trading day. Lauer then falsely valued the securities held by the Lancer Group, including the restricted shares, at the much higher closing price, to pump-up the performance fees paid to the management companies, attract new investors to buy into the hedge funds, and induce current investors in the hedge funds.

March 21, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Cox Supports Basel Committee's Guidance on Liquidity Management

SEC Chair Christopher Cox sent a letter to the chairman of the Basel Committee on Banking Supervision expressing strong support for its planned updated guidance on liquidity management for banking organizations in light of the recent market turmoil.  Chairman Cox Letter to Basel Committee in Support of New Guidance on Liquidity Management

March 21, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Levitt on Financial Reform

Arthur Levitt, former SEC Chair, calls for regulatory reforms in a Wall St. Journal op-ed piece, including:

Beyond these immediate fixes, what's needed to restore public confidence is a more wholesale reconsideration of how we can inject greater transparency into the markets and bring about a change in attitude on the part of business leaders and policy makers that puts the interests of investors first. This may require a more fundamental restructuring of how we regulate the markets -- for instance, merging the SEC and the Commodities Futures Trading Commission to create a single securities regulator -- and giving that regulator the resources and the authority to do its job, something the SEC currently lacks.

WSJ, Regulatory Underkill.

March 21, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Compensation Rules Result in Math But Not Comprehension

What has been the effect of the SEC's new rules on the disclosure of executive compensation in the 2008 proxy materials?  Complex mathematical formulas and not much comprehension of the numbers is what the Wall St. Journal found in a page one story.  It appears that some companies, frustrated with the SEC's demand for more disclosure, included math that even math wizards may not understand.  But working your way through the calculations may not be especially informative; key information, like performance goals for the CEO, are not disclosed for fear of tipping off competitors.  WSJ, New Math) x (SEC Rules) + Proxy=Confusion.

March 21, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

SWFs Adopt Investment Principles

Treasury Secretary Paulson announced that the Abu Dhabi and Singapore SWFs adopted investment principles committing them to avoid "geopolitical goals," promote disclosure of investment activity and adopt strong internal controls.  In addition, the IMF plans to develop "best practices" for SWFs.  NYTimes, Sovereign Funds Agree to Shun ‘Geopolitical’ Investing; WSJ, Code Is Set for State-Run Funds.

March 21, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Frank Calls For Unified Financial Regulation

Will the cost to the financial industry of the Fed's bailout be more pervasive regulation over the entire industry?  Rep. Barney Frank calls for a single regulator with the power to regulate banks, securities firms, hedge funds and other financial players.  NYTimes, Lawmaker Urges New Financial Oversight.

March 21, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, March 20, 2008

FINRA Proposes Two Changes to Arbitration Codes

The SEC published for public comment two minor revisions to the FINRA Codes of Arbitration Procedure for Customer and Industry Disputes:  to Amend the Chairperson Eligibility Requirements  and to Permit Submissions to Arbitrators After a Case Has Closed Under Limited Circumstances.

March 20, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Richards on SEC Exams of Investment Advisers

Speech by SEC Staff: Focus Areas in SEC Examinations of Investment Advisers: the Top 10, by Lori A. Richards, Director, Office of Compliance Inspections and Examinations, U.S. Securities and Exchange Commission, at the IA Compliance Best Practices Summit 2008, IA Week and the Investment Adviser Association, Washington, D.C. March 20, 2008.

March 20, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

AB Volvo Settles FCPA charges

The SEC settled Foreign Corrupt Practices Act books and records and internal controls charges against AB Volvo in the U.S. District Court for the District of Columbia. AB Volvo is a Swedish company that provides commercial transport solutions, including trucks, buses and construction equipment.  (Volvo is not the company that currently makes the "Volvo" brand car.) The Commission's complaint alleges that from 1999 through 2003, two of AB Volvo's subsidiaries and their agents and distributors made approximately $6,206,331 in kickback payments, and authorized additional payments of $2,388,419 in connection with their sales of humanitarian goods to Iraq under the United Nations Oil for Food Program (the "Program"). The kickbacks were characterized as "after-sales service fees" ("ASSFs"), but no bona fide services were performed. One of Volvo's subsidiaries also made other types of illicit payments to Iraq. The SEC alleged that AB Volvo either knew or was reckless in not knowing that illicit payments were either offered or paid in connection with these transactions and failed to maintain an adequate system of internal controls to detect and prevent the payments, and its accounting for these transactions failed properly to record the nature of the payments. AB Volvo consented to the entry of a final judgment permanently enjoining it from future violations, ordering it to disgorge $7,299,208, in profits plus $1,303,441 in pre-judgment interest, and to pay a civil penalty of $4,000,000. AB Volvo will also pay a $7,000,000 penalty pursuant to a deferred prosecution agreement with the U.S. Department of Justice, Fraud Section.

March 20, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Melvyn Weiss Pleads Guilty, Will Serve 18-33 months

Melvyn Weiss agreed to plead guilty to a federal racketeering charge and acknowledge that he and others concealed secret payment arrangements that Milberg Weiss had with named plaintiffs in class action lawsuits.  The plea agreement calls for a sentence of between 18 and 33 months.  Weiss also agrees to forfeit $9.75 million in ill-gotten gains and to pay a criminal fine of $250,000.  Previously, former Milberg Weiss partners William Lerach, David Bershad and Steven Schulman pleaded guilty to their involvement in the secret kickbacks scheme.  There are two remaining defendants in the case -- the law firm itself and Paul Selzer -- scheduled to go on trial in August.

Milberg Weiss issued a press release stating its deep disappointment that it learned that Weiss had engaged in misconduct and that it had previously believed former leaders' assurances of their innocence.

March 20, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Investigating Bear Stearns Put Trades

The Wall St. Journal reports that the SEC is investigating an unusual increase last week in trading in put options of Bear Stearns Stock.  Put options give the purchaser the right to sell the stock at a fixed price in the future; the buyer's profit is made if the price of the stock declines during the option period.  Heavy trading in puts began on March 7 and became more aggressive in later days.  WSJ, SEC's Bear Stearns Probe Zeroes In on 'Put' Trades.

March 20, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Weiss Agrees to Plea Bargain

Melvyn Weiss agreed to plead guilty to kickbacks in securities class actions.  The terms of the deal were not announced.  WSJ, Weiss Makes Plea Deal In Kickback Case.

March 20, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 19, 2008

Bear Stearns Amends Indemnification Bylaw

Bear Stearns has posted at its website Shareholder FAQs about the Morgan-Bear merger.  One question, and answer:

How could this have happened to an 85 year old firm?
Extraordinary conditions have existed in the credit markets for at least nine months,
generally restricting the credit available to financial institutions, including Bear Stearns.
During the last week, rumors about our liquidity caused customers to withdraw funds and
terminate positions, further straining our liquidity position. Even with the Fed’s
intervention on Friday, the Bear Stearns Board of Directors agreed to an acquisition by
JPMorgan Chase based on its judgment that the transaction is in the best interest of our
stakeholders, the best strategic alternative for the Firm, and allows us to continue
business operations. We believe that the acquisition represents the best outcome for all
of our constituencies based upon the current circumstances.

Bear Stearns also disclosed, in an 8-K filing, that on March 16, 2008, the Board approved an amendment to the By-laws adding a new Article 14, effective immediately (the "Amendment"). The purpose of the Amendment is to provide that in connection with any indemnification as set forth in Article VIII of the Company's Certification of Incorporation, expenses, including attorneys' fees, incurred by the person entitled to indemnification in defending any such action, suit or proceeding shall be paid or reimbursed by the Company promptly upon demand by such person.

March 19, 2008 | Permalink | Comments (0) | TrackBack (0)

SEC Issues No-Action Letter re. Form BD Amendments in Morgan-Bear Merger

The SEC Division of Trading and Markets issued a no-action letter to J.P. Morgan Chase, stating that

In view of the circumstances of the purchase of Bear Stearns by JP Morgan Chase,
the Division of Trading and Markets will not recommend enforcement action if JP
Morgan Chase files, within a reasonable period from after the close of the
purchase of Bear Stearns by JP Morgan Chase, the Form BD amendments required as
a result of the change of control contemplated under the purchase agreement and
related agreements.

March 19, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Shuts Down Ponzi Scheme

The SEC announced the filing of a settled civil injunctive action in the United States District Court for the Eastern District of Virginia against Ralph Gregory Gibbs, who operated an offering fraud and "Ponzi" scheme. The Complaint alleges that since at least April 2005 through February 2007, Gibbs, doing business as Golden Summit Group, raised approximately $21 million from at least 150 investors in at least 25 states, many of whom were elderly, retired or otherwise living on limited incomes, through the offer and sale of securities. The Commission's Complaint further alleges that in exchange for their investments in Golden Summit Group, Gibbs promised to pay investors interest of 3-5% monthly (up to 60% annually) and guaranteed that investors would not lose their principal.

March 19, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Abu Dhabi's SWF Speaks on its Plans

Yousef Al Otaiba, the Director of International Affairs for the Government of Abu Dhabi, has an opinion piece in today's Wall St. Journal on Our Sovereign Wealth Plans, in which he states:

Abu Dhabi's investment organizations also meticulously follow all of the laws, regulations and rules of the countries and exchanges where they make investments, and meet all disclosure requirements of relevant government and regulatory bodies. There is acceptance of the need for increased scrutiny from governments of in-bound investments that have potential national security implications, so long as the process is clear, fair and timely. For example, Abu Dhabi's investment organizations to date have been comfortable with the new review process in the United States, and remain committed to abiding by both the letter and the spirit of the new law.

It is important to be absolutely clear that the Abu Dhabi government has never and will never use its investment organizations or individual investments as a foreign-policy tool.

March 19, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Visa Goes Public

Visa went public yesterday in the largest U.S. IPO ever -- $18 billion.  The shares were priced at $44, above the expected range of $37-$42.  About 77% of the IPOs in the pipeline have been withdrawn or postponed.  WSJ, Visa's IPO Price: $44 a Share; NYTimes, Big Payday for Wall St. in Visa’s Public Offering.

March 19, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Will Bear Shareholders Kill the Deal?

Trading in Bear Stearns stock was heavy yesterday, and the stock closed at $5.91 per share, almost three times the price offered by JP Morgan Chase in the merger.  Both bondholders, who want the deal to go through, and stockholders, who hope a better deal is out there, were buying the shares.  Shareholders, many of whom are Bear Stearns employees (an estimated 30% of the shares are owned by employees), threaten to vote down the merger, but it appears unlikely that another bidder would risk the Fed's wrath and offer competition to the merger it brokered.  JP Morgan Chase has two valuable lock-up options, an option to buy the Bear Manhattan headquarters and an option to buy 19.9% of Bear stock at $2.  If the shareholders vote down the merger (the vote is expected by the end of May), Morgan could purchase the shares and may have enough stock to prevail at a second shareholders vote (which the merger agreement provides for).  NYTimes, It’s Bondholders vs. Shareholders in a Race to Buy Bear Stearns Stock; WSJ, Bear's Run-Up Sets the Stage
For Epic Clash

March 19, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 18, 2008

Unregistered Day-Trading Firm Enjoined

On March 17, 2008, a federal court permanently enjoined Tuco Trading, LLC, an unregistered securities day-trading firm in La Jolla, California, and its principal, Douglas G. Frederick, from future violations of the broker-dealer registration and antifraud provisions of the federal securities laws. Tuco and Frederick consented to the entry of the permanent injunctions without admitting or denying the allegations of the SEC's complaint, which alleged that the defendants provided securities day-trading capability to Tuco's over 250 traders who had approximately $10.2 million in reported equity balances at Tuco. The complaint alleged that Tuco provided traders with services not permitted at a registered broker-dealer. As alleged in the complaint, the defendants allowed traders to day-trade without meeting the $25,000 minimum equity requirement under NASD regulations for such trading. The complaint also alleges that for each $1 in the trader's sub-account, Tuco and Frederick allowed the traders at Tuco to use up to $20 of Tuco's equity, which had been invested by other traders, to purchase securities (20:1 buying power). NASD and NYSE regulations, however, only allow a day-trader to have 4:1 buying power

March 18, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

W>P. Carey Settles Charges of Undisclosed Brokers' Payments

The SEC filed settled securities fraud charges against W.P. Carey & Co., a manager of real estate investment trusts (REITs), and two of W.P. Carey's senior executives for paying undisclosed compensation to a brokerage firm that sold the REITs to investors. W.P. Carey did not disclose the payments to the broker-dealer, as it was required to do in the REITs' offering documents, and misrepresented the payments in the REITs' periodic filings.  The SEC complaint names as defendants W.P. Carey & Co.; John J. Park, formerly the chief financial officer of W.P. Carey, until yesterday a managing director of strategic planning at W.P. Carey and currently an employee in charge of strategic planning; Claude Fernandez, formerly the chief accounting officer and currently a managing director of W.P. Carey; and Carey Financial, LLC, a broker-dealer subsidiary of W.P. Carey.

To settle the SEC's charges, W.P. Carey agreed to pay approximately $30 million — approximately $20 million in disgorgement and interest and $10 million in penalties. Park's settlement includes a five-year bar from serving as an officer or director of a public company, and a $240,000 penalty. Fernandez's settlement includes a two-year suspension from appearing before the Commission as an accountant and a $75,000 penalty.

March 18, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)