Securities Law Prof Blog

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

Saturday, April 12, 2008

J.P. Morgan Files Registration Statement for Bear Stearns Merger

J.P. Morgan Chase filed yesterday the Registration Statement on Form S-4 for the shares to be issued in the Bear Stearns merger.

April 12, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Bear Stearns Reports on Liquidity Crisis

Bear Stearns filed an 8-K Report yesterday,

to provide disclosure regarding the liquidity crisis that the Company experienced during the end of the week of March 10, 2008 and related events in: (i) the historical consolidated statements of financial condition of the Company as of November 30, 2007 and 2006, and the related consolidated statements of income, comprehensive income, cash flows and changes in stockholders' equity for each of the three years in the period ended November 30, 2007 and the related management's discussion and analysis of financial condition and results of operations; and (ii) the historical condensed statement of financial condition of The Bear Stearns Companies Inc. (Parent Company Only) as of November 30, 2007 and 2006, and the related condensed statements of income and cash flows for each of the three years in the period ended November 30, 2007 prior to the incorporation of such financial statements and management's discussion and analysis of financial condition and results of operations into the Registration Statement.

April 12, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Friday, April 11, 2008

ISS Recommends Against 4 Citigroup Directors

ISS recommends that Citigroup shareholders not vote for the reelection of four directors.  Three of the directors -- Alain J.P. Balda (Chair, Alcoa), Kenneth Derr (former Chair, Chevron), and Richard Parsons (Chair, Time Warner) are on the Compensation Committee, which approved a $9.5 million pay package to CFO Gary Crittenden and the exit package for departing CEO Charles Prince.  The fourth director, Anne Mulcahy serves on three corporate boards as well as her day job as Chair of Xerox., ISS: Throw Them Citi Bums Out.

The U.S. Chamber of Commerce, meanwhile, has expressed concern that ISS policy-setting process furthers the agenda of "a minority of special-interest activist shareholders," according to BNA's Securities Law Daily, and calls on RiskMetrics for greater transparency.

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

Bear Stearns Notifies SEC It Cannot Timely File 10-Q

Bear Stearns notified the SEC today that it could not timely file its 10-Q Report because, as it explains:

The Company experienced a significant liquidity crisis during the end of the
week of March 10, 2008 that seriously jeopardized its financial viability. On
March 16, 2008, the Company and JPMorgan Chase & Co. ("JPMorgan Chase") entered
into an agreement and plan of merger, and on March 24, 2008, the Company and
JPMorgan Chase entered into an amendment to the agreement and plan of merger (as
amended, the "Merger Agreement"). The liquidity crisis, execution of the Merger
Agreement and the events and circumstances surrounding and following them have
precipitated some disruption and delay in the normal process of preparation and
completion of the Form 10-Q and the certification process attendant thereto.

The reasons causing the inability to file timely could not be eliminated by the
Company without unreasonable expense or effort. The Company intends to file the
Form 10-Q as promptly as practicable, and expects that such filing will be made
by the April 14, 2008 extended deadline.

April 11, 2008 in News Stories | Permalink | Comments (0) | TrackBack (1)

SEC Charges Another U.K. Fund with Late Trading

For the second time in  a week, the SEC charged a U.K. fund group with late trading and market timing in U.S. mutual funds.  The SEC alleges that Headstart Advisers, its chief investment adviser, and Headstart Fund earned nearly $200 million in illicit profits from 1998 to 2003.  WSJ, SEC Files Late-Trading Claim Against Another U.K. Fund.

April 11, 2008 in News Stories | Permalink | Comments (0) | TrackBack (5)

Lehman Borrows from Fed Creatively

Wall St. is taking advantage of its new ability to borrow from the Fed.  Lehman Brothers, for example, moved $8.2 billion in loans that it had trouble selling into a new investment vehicle "Freedom," so called because it gave the firm the freedom to tap into as much cash as it needed.  Freedom then issued debt securities backed by the loans, most of which received investment grade credit ratings.  Lehman then used the securities as collateral for a low interest short term loan from the Fed.  Was this strategy "shocking" or "brilliant?"  In any event, expect more of the same.  WSJ, How Lehman Opened the Fed's Spigot.

April 11, 2008 in News Stories | Permalink | Comments (1) | TrackBack (0)

Thursday, April 10, 2008

Bernanke Outlines Regulatory Reform

In a speech today, Addressing Weaknesses in the Global Financial Markets: The Report of the President's Working Group on Financial Markets, Ben S. Bernanke offered some preliminary conclusions about the causes of the current turmoil and identified some measures to strengthen the global financial system.  Although noting that many factors contributed to the current problems, he identified as a primary cause the implementation of the "originate-to-distribute" approach to credit extension.  This ultimately led to a variety of undesirable consequences, including the compromise of underwriting standards at the point of origination, the general erosion of market discipline, underpricing of risk, and insufficient attention by investors to the quality or riskiness of the investments they purchased (including overreliance on credit rating agencies).

His recommendations include: 

  • Weaknesses in the origination stage must be corrected
  • Better consumer protections and disclosures
  • Greater supervisory scrutiny of the originators' processes and their incentives
  • Improved methods and greater transparency from credit rating agencies
  • Strengthening risk management practices

In addition, investors must take responsibility for developing independent views of the risks of these investments.

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

Reports about Possible Yahoo and Microsoft Deals

The news today is full of behind-the-scenes dealmaking involving Microsoft and Yahoo.  First, it is reported that News Corp. (Rupert Murdoch) and Microsoft are in talks about a joint bid for Yahoo that, if successful, would combine Yahoo, MSN, and MySpace.  Second, Yahoo reportedly is having talks with TimeWarner about combining AOL with Yahoo's internet operations.  The deal would include Yahoo buying back some of its shares at a price higher than Microsoft's bid.  (Previously, it was reported that Yahoo had talks with News Corp too.)  In addition, Yahoo announced it would test outsourcing some of its search advertising to Google, to see if it resulted in more revenues.  Microsoft blasted the partnership as anticompetitive.  NYTimes, News Corp. May Join Yahoo Bid With Microsoft; WSJ, News Corp., AOL Pursue Yahoo Deals.

April 10, 2008 in News Stories | Permalink | Comments (0) | TrackBack (1)

Wednesday, April 9, 2008

SEC Advisory Committee on Improvements to Financial Reporting Notices Meeting

The SEC Advisory Committee on Improvements to Financial Reporting will hold a public meeting on Friday, May 2, 2008, in Rosemont, Illinois.  The agenda for the meeting includes hearing oral testimony from panel participants regarding the Advisory Committee’s developed proposals and conceptual approaches, as presented in the Advisory Committee’s progress report dated February 14, 2008, related to substantive complexity and the standards-setting process; consideration of comment letters received by the Advisory Committee; consideration of updates from subcommittees of the Advisory Committee; and discussion of next steps and planning for the next meeting.

April 9, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Cox Addresses NASAA

Chairman Christopher Cox Addressed the North American Securities Administrators Association 2008 Public Policy Conference on April 1, 2008 and focused on SEC-NASAA initiatives against senior fraud and other enforcement actions against fraud.

April 9, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (7)

Court Upholds Forfeiture of Gemstar-TV Guide Severance Payment

The SEC announced a court ruling that successfully concludes its effort to stop a $29.5 million severance package from being paid to the former CEO of Gemstar-TV Guide International, Henry C. Yuen, who committed securities fraud before leaving his position at the Pasadena, Calif.-based company. The funds were previously set aside in an escrow account that will now be dissolved so that the money remains with the company and its shareholders.  The SEC was able to stop the large payment to Yuen through a provision in the Sarbanes-Oxley Act - Section 1103 - that allows the Commission to seek a temporary order from a federal district court requiring the company to hold "extraordinary payments" likely to be made to any officer, director, or affiliate of the company who is charged with a violation of the securities laws. The SEC charged Yuen with various violations of the federal securities laws in 2003, and he was later found guilty on all claims and forced to pay more than $22 million in financial penalties. This forfeiture of his severance payment will bring the total financial cost to more than $51 million for Yuen in the wake of his securities fraud violations.

"The U.S. District Court for the Central District of California ordered on March 27, 2008, that the $29.5 million be returned to the company. The district court had granted the SEC's application for an order pursuant to Section 1103 of the Sarbanes-Oxley Act on May 13, 2003, requiring Gemstar-TV Guide to escrow the pending payment to Yuen.

After obtaining the temporary order, the SEC sued Yuen for various violations of the federal securities laws. Following a three-week trial in December 2005, the court ruled in favor of the SEC against Yuen on all claims. Yuen committed securities fraud by making misrepresentations and omissions of material fact about certain Gemstar revenues, aiding and abetting Gemstar's primary violations of the periodic reporting and record keeping control requirements, and lying to the auditors. On May 8, 2006, the court ordered Yuen to disgorge more than $10.5 million in ill-gotten gains, pay prejudgment interest of more than $1.1 million, and pay a civil penalty of more than $10.5 million. On April 1, 2008, the Ninth Circuit Court of Appeals affirmed the district court ruling that Yuen committed securities fraud, and found that the financial penalties against Yuen were appropriate.

April 9, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Issues Guidance on Unauthorized Proprietary Trading

In the wake of several recent cases involving allegations of unauthorized or "rogue" trading resulting in substantial losses by firms both in the United States and abroad, many FINRA firms are undertaking comprehensive reviews of their internal controls and risk management systems designed to prevent such trading activity. FINRA is issuing a Notice to Members to highlight sound practices for firms to consider as they undergo that process and to remind firms that even profitable unauthorized trading can result in regulatory exposure if it involves falsification of the firm's books and records, failures in supervisory control systems, market manipulation or fraud. Therefore, internal control systems should be designed to address regulatory as well as business and reputational risk. Regulatory Notice 08-18, Sound Practices for Preventing and Detecting Unauthorized Proprietary Trading Executive Summary.


April 9, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (1)

WaMu Turned Down JPM Before Taking Deal with TPG

JP Morgan Chase appears to have its finger in all the Wall St. pies.  Washington Mutual, which just got a $7 billion capital infusion from TPG, previously had been negotiating with JPM  about a stock tender offer that would have valued the WaMu stock at around $8, before turning it down.  Some WaMu shareholders think the JPM deal would have been better.  WSJ, WaMu's Hedge: CEO Called In Dimon & Co.

April 9, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Apollo Management Files IPO

Private equity firm Apollo Management has filed an IPO with the SEC, according to the Wall St. Journal (although I couldn't find the filing on EDGAR this morning).  The offering is valued at about $418 million.   If the deal is successful, the main owners, including Leon Black, will make a lot of money and also maintain control, since they plan to seek a "controlled corporation" exception from the NYSE listing requirement of a majority of independent directors.  Mr. Black made his reputation selling junk bonds at Drexel Burnham.  WSJ, IPO for Apollo Management.

April 9, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Bankruptcy Trustee Goes After Subprime Lender's Underwriters

Subprime lender American Business Financial Services (ABFS) went bankrupt three years ago, and purchasers of its high-yield notes, unsophisticated investors who purchased the notes through direct mailings and newspaper ads, lost millions.  Now the bankruptcy trustee is looking into the role the investment banks played in the company's overstatement of its assets on its books, and the FBI and SEC are investigating as well.  All the investment banks have denied wrongdoing.  After the banks stopped securitizing ABFS loans in 2003 (after an annonymous letter accusing the company of running a pyramid scheme), the company kept marketing its notes directly to the public, warning investors in the prospectus that they could lose their entire investment.  WSJ, Subprime Lender's Failure Sparks Lawsuit Against Wall Street Banks.

April 9, 2008 in News Stories | Permalink | Comments (0) | TrackBack (3)

Tuesday, April 8, 2008

SEC Charges 5 Former San Diego Officials with Fraud

The SEC charged 5 former San Diego officials with fraud in connection with the City’s false and misleading financial statements in five 2002 and 2003 bond offerings.  According to the SEC’s complaint, these five former officials knew that the city had been intentionally under-funding its pension obligations so that it could increase pension benefits but defer the costs. They were aware that the city would face severe difficulty funding its future pension and retiree health care obligations unless new revenues were obtained, pension and health care benefits were reduced, or city services were cut. They specifically knew that the city’s unfunded liability to its pension plan was projected to dramatically increase, growing from $284 million at the beginning of fiscal year 2002 to an estimated $2 billion by 2009, and that the city’s liability for retiree health care was another estimated $1.1 billion. The complaint seeks a final judgment permanently enjoining the officials from further violations of the securities laws and ordering them to pay civil penalties. To settle the action, the city previously agreed to cease and desist from future securities fraud violations and to retain an independent consultant for three years to foster compliance with its disclosure obligations under the federal securities laws. The Commission also previously filed a settled civil injunctive action against the outside auditors for the City of San Diego and its pension system.

April 8, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NYSE Firms Lost Over $7 Billion in 2007

New York Stock Exchange member firms that conduct business with the public reported a fourth-quarter 2007 after-tax loss of $10.64 billion and revenues of $88.18 billion, compared with $4.92 billion in after-tax profits on revenues of $93.38 billion in fourth quarter 2006. For 2007, the firms reported an after-tax loss of $7.35 billion on record revenues of $352.05 billion, compared with an after-tax profit of $13.58 billion on revenues of $331.34 billion in 2006. Comparative financial results are in the attached table.

April 8, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Former Nymex Director Pleads Guity to Front-Running

Steven Karvellas, a former Director of the New York Mercantile Exchange, pleaded guilty to two felony counts of illegal trading in natural-gas markets.  The charges result from an investigation by the Exchange, the CFTC, and the Manhattan District Attorney into "front-running," or the practice of waiting to execute a customer's order until the broker determines how the market is moving.  WSJ, Ex-Nymex Official Pleads Guilty To 2 Counts in Gas-Trading Probe.

April 8, 2008 in News Stories | Permalink | Comments (0) | TrackBack (2)

Greenspan Defends his Legacy

Alan Greenspan wants to set the record straight: the current financial mess is not his fault.  The Wall St. Journal contains excerpts from several interviews with him about his record, criticisms of his performance, and his recommendations for the future.  WSJ, 'The Impact Was Larger Than I Expected'.

April 8, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, April 7, 2008

Shareholders' Resolutions Reflect Shareholder Anger

Shareholders are upset about the credit collapse, and the shareholders' resolutions this proxy season reflect their anger. has a good article summarizing shareholder activists' efforts; For Shareholders, It's Subprime Time.

April 7, 2008 in News Stories | Permalink | Comments (0) | TrackBack (4)