Securities Law Prof Blog

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

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Friday, April 18, 2008

Finra Seeks Delay on Parts of Suitability Rule for Deferred Variable Annuities

Finra filed a proposed rule change with the SEC to delay the effectiveness of the principal review and supervisory/compliance procedures sections of Rule 2821 (dealing with suitability requirements for sales of deferred variable annuities).  Finra said it plans to file an unspecified substantive change to the rule in the near future.  Proposed Rule Change to Delay the Effective Date of Certain FINRA Rule Changes Approved in SR-NASD-2004-183.

April 18, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (1)

Raines Settles Charges with Ofheo

Remaining defiant to the end ("I did not break any laws or rules"), former Fannie Mae CEO Franklin Raines settled Ofheo charges that he manipulated the company's earnings.  The settlement, which also included two other former officers, provides that Fannie's insurer will make cash payments of about $3 million; the three officers will surrender stock options that are now worthless.  In addition, Ofheo said that Raines will donate proceeds from the sale of $1.8 million of Fannie Mae stock.  Ofheo had originally sought return of substantial amounts of cash compensation from the officers.  WSJ, Former Top Fannie Officials Won't Pay Any Cash in Settlement.

April 18, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

NYS Attorney General Investigates Auction Rate Securities Market

New York State Attorney General Andrew Cuomo is investigating the auction-rate securities market and has sent subpoenas to eighteen institutions seeking information.  The market for the securities collapsed in February when Wall St. firms stopped their support for the securities, and investors have been unable to sell their holdings that were marketed as liquid investments.  WSJ, Auction-Rate Debt Market Faces Probe.

April 18, 2008 in News Stories | Permalink | Comments (0) | TrackBack (5)

Thursday, April 17, 2008

AARP Survey Finds Investors Confused by Jargon

A survey of investors conducted by AARP Financial found that use of "technical and confusing" language by financial services firms caused investing mistakes.  More than one-half also said they did not read the financial literature because they found it "too hard to understand."  InvNews, Survey: Financial lingo baffles investors.

April 17, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Settles Allegations that Trader Misappropriated Information From Brother-in-Law

The SEC settled a civil action in the U.S. District Court for the Southern District of New York against Michael A. Stummer alleging illegal trading in the common stock of Ryan's Restaurant Group (Ryan's).  The complaint charges Stummer with fraudulently obtaining material, non-public information about the impending acquisition of Ryan and then using that information to trade Ryan's securities. The Commission complaint alleges that on July 21, 2006, Stummer and his family arrived at the New York home of his brother-in-law for an annual weekend gathering. At this time his brother-in-law served as director of the private equity firm advising the acquiring company on the impending Ryan's transaction. During the weekend visit, Stummer snuck into the brother-in-law's bedroom office, where, secretly and without permission, he accessed his brother-in-law's bedroom office computer. By correctly guessing his brother-in-law's password, Stummer deceptively gained unauthorized access to the private equity firm's computer network and read several confidential and nonpublic emails relating to the Ryan transaction.

Without admitting or denying the Commission's allegations, Stummer consented to the entry of a final judgment permanently enjoining him from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. The final judgment also requires Stummer to pay $46,386.66, representing the disgorgement of his illegal trading profits, prejudgment interest, and a civil penalty in an amount equal to the profits.

April 17, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Files Complaint Against Former Fidelity Trader for Misappropriating Confidential Information

The SEC filed a civil action in the U.S. District Court in Boston against David K. Donovan, Jr. ("Donovan"), a former equity trader at Fidelity Investments, and David R. Hinkle ("Hinkle"), a former broker at Capital Institutional Services, Inc. ("Capital Institutional Services"), for defrauding Fidelity and its advisory clients. The complaint alleges that, between July and September 2003, the defendants defrauded Fidelity and its advisory clients by gaining access to confidential trading information stored on Fidelity's internal order database, by learning that Fidelity's advisory clients, including the Fidelity mutual funds, were purchasing and intended to continue purchasing a substantial amount of the common stock of Covad Communications Group, Inc. ("Covad"), by using that confidential information concerning Fidelity's pending securities orders to trade on and ahead of Fidelity's securities orders for the stock of Covad, by failing to disclose to Fidelity and its clients that they were trading on and ahead of those orders, and by profiting thereby.

The SEC alleges that Donovan and Hinkle violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission's complaint seeks permanent injunctive relief, disgorgement with prejudgment interest, and civil penalties

April 17, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NASAA Coordinates Auction Rate Securities Investigations

NASAA announced that several of its members have been conducting investigations involving auction-rate securities (ARS) and are coordinating their efforts to help investors who cannot access funds that their brokers placed in these complex investment products.  Karen Tyler, NASAA President and North Dakota Securities Commissioner, said that state securities regulators have been responding to auction-rate securities-related complaints and have had investigations underway since late February, 2008. The state investigations center on sales practices and supervisory issues related to auction-rate securities. The investigations are being conducted by individual jurisdictions through an ARS Task Force chaired by Bryan Lantagne, Director of the Massachusetts Securities Division. Task force members include state securities regulators from Florida, Georgia, Illinois, Massachusetts, Missouri, New Hampshire, New Jersey, Texas and Washington.

Auction rate securities are often promoted as being similar to cash deposits or money market accounts. However, because of tight credit markets stemming from the sub-prime mortgage crisis, many auctions where auction rate securities are traded have failed. As a result, many investors are finding that they are unable to access their money.  Complaints received by state securities regulators have the same common theme. “Investors are telling state securities regulators that they did not know that their money was being held in auction-rate securities, and were not advised about the liquidity risks,” Lantagne said.

April 17, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (1)

Wednesday, April 16, 2008

SEC Scehdules Open Meeting on Requiring Interactive Data Filing

The SEC will hold an open meeting on April 21 to consider "whether to propose amendments to provide for corporate financial statement information to be filed with the Commission in interactive data format, and a near- and long-term schedule therefor."

April 16, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (1)

Cox Testifies Before House Appropriations Committee

Chair Cox, in his testimony before the Subcommittee on Financial Services and General Government, House Committee on Appropriations, both reviewed the SEC's activities in fiscal year 2007 and discussed fiscal year 2008 to date.  He concluded his review of the prior fiscal year's activities by stating that the agency "had one of the most productive years in its history, aggressively pursuing wrongdoing and tackling fundamental reforms in the securities markets."  What's the backup for that statement?  With respect to the first assessment, he states that the enforcement division filed the second highest number of cases in its history.  With respect to "fundamental reforms," he identified the following reforms: implementing section 404 internal controls, reforms to aid smaller companies in raising capital, the comprehensive disclosure rules for executive compensation, final rules to implement GLB's bank-broker provisions, major reforms to improve the effectiveness of SEC operations and (of course) steps to foster the use of interactive data.  Does all this add up to one of its most productive years ever?

As to what the agency's been doing so far in fiscal 2008:  not surprisingly, he frequently referred to the current difficulties in the financial markets.  Thus, the SEC will exercise its new authority over credit rating agencies and propose rules to improve the quality of ratings, and the enforcement division's subprime working group is aggressively investigating fraud.  The SEC is also doubling the size of its Office of Risk Assessment "to identify potentially dangerous practices" before they impact investors and the economy. He also discusses the agency's international regulatory issues.

April 16, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (2)

Washington Mutual Announces Changes at Shareholders Meeting

Washington Mutual announced at its shareholder meeting the resignation of Mary Pugh, the director who was head of the board's finance committee.  In addition, the company will revise its incentive-pay plan that did not take mortgage losses into account in calculating cash bonuses.  51% of shares voted in favor of a shareholders' request to separate the positions of chairman and CEO.  WSJ, WaMu Revises Pay Plan And a Director Resigns As Holders Press Change.

April 16, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Merrill's Troubles Not Over

According to the Wall St. Journal, Merrill Lynch will report $6-8 billion in new writedowns tomorrow, bringing the total to $30 billion since October.  It will also report its third straight quarterly loss.  Meanwhile, the SEC continues to look into whether investors should have been warned earlier about the extent of Merrill's risk in mortgage securities.   A Page One story examines how risk controls at the firm were relaxed under former CEO Stanley O'Neal.  WSJ, Merrill Upped Ante as Boom In Mortgage Bonds Fizzled.

April 16, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 15, 2008

President's Working Group Releases Two Reports on Hedge Fund Practices

Two blue-ribbon private-sector committees established by the President's Working Group released separate yet complementary sets of best practices for hedge fund investors and asset managers today. The PWG tasked the committees with collaborating on industry issues and developing a set of best practices for their respective groups of stakeholders. The PWG includes the heads of the U.S. Treasury Department, the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

The best practices for the asset managers call on hedge funds to adopt comprehensive best practices in all aspects of their business, including the critical areas of disclosure, valuation of assets, risk management, business operations, compliance and conflicts of interest. Eric Mindich, CEO of Eton Park Capital Management, chairs the Asset Managers' Committee.

The best practices for investors include a Fiduciary's Guide and an Investor's Guide. The Fiduciary's Guide provides recommendations to individuals charged with evaluating the appropriateness of hedge funds as a component of an investment portfolio. The Investor's Guide provides recommendations to those charged with executing and administering a hedge fund program once a hedge fund has been added to the investment portfolio. Russell Read, Chief Investment Officer of the California Public Employees' Retirement System, leads the Investors' Committee.

April 15, 2008 in News Stories | Permalink | Comments (0) | TrackBack (1)

Parmalat Suit Against Citigroup Set for Trial in New Jersey

The trial in New Jersey state court brought by Parmalat against Citigroup for allegedly assisting former Parmalat management in committing financial fraud will begin next month.  Citigroup sought to dismiss the case on a number of grounds, including that New Jersey was not an appropriate forum and on the basis of Stoneridge Investors.  CFO.com, Judge Orders Citi to Trial in Parmalat Case.

April 15, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Cox Issued Statement on Financial Stability Forum's Report

SEC Chair Cox today issued the following statement on the Financial Stability Forum's (FSF) "Report on Enhancing Market and Institutional Resilience," which was undertaken at the request of the G-7 Finance Ministers and Central Bank Governors and delivered for their recent meeting in Washington, D.C.:

"The report by the Financial Stability Forum represents an important contribution to ongoing international discussions of these topics. It provides a backdrop for actions considered by the SEC and others to deal with the issues underlying the recent market turmoil. As the Commission prepares to write new rules for credit rating agencies under the recent authority granted us by Congress, this report will be of great value."

The SEC's press release also states that the FSF report draws heavily on the relevant work of the President's Working Group on Financial Markets, the International Organization of Securities Commissions (IOSCO), and the Senior Supervisor's Group (SSG). Chairman Cox is a principal of the President's Working Group on Financial Markets and is currently the Co-Chair of the IOSCO Task Force on the Subprime Crisis, as well as the Vice Chairman of the IOSCO Technical Committee.  It also explains that the SEC, along with the Department of the Treasury and the Board of Governors of the Federal Reserve System, is a member of the Financial Stability Forum, created in 1999 to promote international financial stability through information exchange and international cooperation in financial supervision and surveillance.

April 15, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (3)

SEC Charges Defendants with Defrauding JP Morgan Chase Through Sham Finder Fees

On April 15, 2008, the SEC filed a civil injunctive action in the United States District Court for the Eastern District of New York charging 6 defendants with engaging in a scheme to defraud JP Morgan Chase Bank (Chase)through the payment of sham "finder" fees in connection with a series of "stock loan" transactions. The defendants include a former stock loan trader employed at Chase, three so-called "finders" with whom he schemed and the two entities through which they perpetrated the fraud. The SEC alleges that the defendants conspired to misappropriate Chase's lending profits on a series of April 2003 stock loans made by Chase to Dresdner Kleinwort Wasserstein Securities LLC ("DKW"), and in doing so pocketed $1.2 million from their unlawful scheme.

April 15, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (1)

SEC Announces List of Unregistered Soliciting Firms

The SEC announced a Public Alert: Unregistered Soliciting Entities (PAUSE) website where it lists unregistered soliciting entities that have been the subject of investors' complaints.  For each of the entities named on the website, SEC staff determined either (1) that there is no US registered securities firm with this name, or (2) that there is a US registered securities firm with the same (or a similar) name but that solicitations appear to have been made by persons who are not affiliated with the US registered securities firm.

April 15, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

No One Likes Blockbuster's Bid for Circuit City

Circuit City doubts that Blockbust can find the financing for its $1 billion cash hostile bid, and Wall St. thinks Blockbuster has enough financial problems already.  James W. Keyes, Blockbuster CEO, says Carl Icahn's support for the deal is key.  NYTimes, Hostile Blockbuster Bid Scorned by Circuit City ; WSJ, A Blockbuster Raid on Circuit City.

April 15, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Bear Stearns Files 10-Q Report

Bear Stearns filed its 10-Q Report for the first quarter of 2008, and both the notes to the financial statements and the MDA discuss the subsequent liquidity crisis, the merger with JPMorgan Chase and related litigation.  It also discloses that the Antitrust Division of the U.S. Department of Justice ("DOJ") and the SEC are investigating possible anti-competitive bidding practices in the municipal derivatives industry and that  Bear Stearns received a "Wells Notice" in connection with the bidding for various
financial instruments associated with municipal securities.

April 15, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Treasury Plans to Release Reports on Hedge Funds

Two reports on hedge funds are expected to be out today from the office of Robert K. Steel, under secretary of the Treasury for domestic finance.  One, prepared by Eric Mindich, operator of the hedge fund Eton Park, proposes nonbinding best practices for hedge fund such as publishing audited financial statements.  The other report, prepared by Russell Read, the chief investment officer for Calpers, address the applicability of funds to different classes of investors.  NYTimes, Wall Streeter Converts to a Fan of Regulation.

April 15, 2008 in News Stories | Permalink | Comments (0) | TrackBack (1)

Monday, April 14, 2008

Bayou's Israel Sentenced to 20 Years

Former Bayou hedge fund executive Samuel Israel III was sentenced to 20 years in prison for defrauding investors out of over $450 million.  He was also ordered to pay $300 million in restitution.  Israel pleaded guilty to conspiracy and investment adviser fraud; the judge called him the "mastermind" of the fraud.  WSJ, Bayou Hedge Fund Chief Israel Sentenced to 20 Years in Prison.

April 14, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)