Securities Law Prof Blog

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

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Friday, May 2, 2008

SEC Obtains Freeze of Assets of Alleged Ponzi Scheme

The SEC obtained a court order halting a $25 million fraudulent scheme allegedly perpetrated by Laguna Hills, Calif.-based Safevest, LLC and its principals, Jon G. Ervinand John V. Slye.  The U.S. District Court for the Central District of California issued an order freezing assets and appointing a temporary receiver over Safevest and its affiliates. 

The SEC's complaint alleges that since at least May 2007, the defendants have raised at least $25 million from more than 500 investors, including many from the Christian community, misrepresenting that investor funds would be pooled and invested in futures commodities trading, that the investment would generate daily profits ranging from 1.5% to 1.9%, and that investors could receive their money back within 72 hours of requesting it. In reality, according to the complaint, no investor money was invested in futures trading, and requests by investors for withdrawal of their funds have either not been honored or have only been partially honored. The complaint further alleges that, undisclosed to investors, the defendants paid more than $18 million to investors in Ponzi-like fashion. The defendants also allegedly misappropriated investor funds for the personal use of Ervin, Slye, and their family members.

The Commission also seeks preliminary and permanent injunctions, disgorgement, and civil penalties against all defendants.

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

"Dolan Discount"?

Another example that it's tough being minority shareholders in a family-controlled public corporation.  Last fall the public Cablevision shareholders rejected the Dolan family's bid to buy them out at $36.26.  This year Cablevision's stock has declined, while the stock of its two competitors -- Comcast and Time Warner -- has risen.  Investors worry about CEO James Dolan's acquisition plans, including a bid for Newsday, the Long Island newspaper.  Some think he is punishing the company for rejecting the offer; according to Dolan, the shareholders gave him a mandate to grow the company.  WSJ, 'Dolan Discount' Affliction.

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

Herbalife President Resigns

Herbalife's President Gregory Probert resigned, after admitting he faked a MBA claimed in the company's SEC filings.  "Vanity" made him do it.  WSJ, Herbalife President Resigns.

May 2, 2008 in News Stories | Permalink | Comments (1) | TrackBack (0)

Thursday, May 1, 2008

Banc of America Investment Services Settles SEC Charges of Favoring Proprietary Funds

The SEC filed a settled enforcement action against Banc of America Investment Services, Inc. (BAISI) for failing to disclose to clients that in selecting investments for discretionary mutual fund wrap fee accounts, it favored two mutual funds affiliated with BAISI.  The SEC also charged Columbia Management Advisors, LLC (Columbia), as successor to Banc of America Capital Management, LLC (BACAP), with aiding and abetting, and causing certain of BAISI's violations. As part of the settlement, BAISI and Columbia agreed to pay a total of nearly $10 million in disgorgement and penalties. The Commission ordered BAISI to distribute the settlement amount to affected clients.

According to the SEC, from July 2002 through December 2004, BAISI made material misrepresentations and omissions to clients who had given BAISI discretion to select mutual funds for them. The clients participated in an asset-based or "wrap" fee program in which they paid BAISI a fee based upon the amount of their assets in exchange for BAISI providing advisory and other account services. BAISI purchased at least two proprietary "Nations Funds" for clients with discretionary wrap fee accounts using a methodology that was contrary to BAISI's disclosures to those clients. The Order also finds that BAISI omitted to disclose the scope of its and BACAP's conflict of interests, and their bias in the recommendation and selection process. BACAP earned additional fees as a result of these violations because it was paid management and other fees based on the total assets of Nations Funds.

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

McCann-Erickson Settles Accounting Fraud Charges

The SEC filed a civil injunctive action against McCann-Erickson Worldwide, Inc. (“McCann”) and the Interpublic Group of Companies, Inc. (“IPG”) alleging that McCann committed securities fraud when it misstated its financial results by failing to expense properly intercompany charges and IPG negligently failed to address the intercompany problems at its largest subsidiary, McCann. IPG also violated the reporting, internal controls and books and records provisions of the securities laws in connection with a variety of issues that were reflected in various restatements IPG issued from August 2002 through September 2005 totaling more than $600 million. IPG and McCann agreed to settle the Commission’s charges, and McCann agreed to pay a $12 million civil penalty.

The SEC also brought settled charges against Salvatore LaGreca and Brian Watson for their role in failing to reconcile intercompany accounts that resulted in the 2002 restatement. LaGreca served as McCann’s Vice-Chairman, Finance and Operations and CFO from January 1996 to October 2002. Watson joined McCann’s European-Middle-East-Asia region (“EMEA”) as Director of Operations in 1996, from 2000 served as Chief Operating Officer and in approximately May 2002 became Deputy Regional Director of EMEA and, from approximately the middle of 1998 until January 2000, and from early 2001 to May 2002, when EMEA did not have a Finance Director, Watson handled many aspects of the Finance Director’s responsibilities.

IPG, McCann, LaGreca and Watson settled the Commission’s charges without admitting or denying the allegations in the Commission's complaints.

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

Time Warner Will Spin Off Cable Subsidiary

The dismantling of the failed Time Warner-AOL merger continues.  Time Warner announced that it would spin off Time Warner Cable, its 84% owned subsidiary and the second largest provider of cable television, high-speed Internet, and telephone service.  The cable company needs to invest in capital improvements, but much of its excess cash has gone back to Time Warner. 

Next Time Warner is expected to focus on the future of AOL.  Previously Time Warner had discussions with Yahoo about combining AOL's advertising platform and Yahoo's portal, in an effort to thwart Microsoft's bid for Yahoo, but there does not appear to be any progress on those talks.  WPost, Time Warner To Spin Off Cable; NYTimes, Time Warner Refocusing With Move to Spin Off Cable.   

Meanwhile, Microsoft's board reportedly met yesterday to discuss the Yahoo bid, but no public announcement of its plans yet.  NYTimes, Microsoft’s Board Meets on Yahoo Bid; WSJ, Microsoft Fails to Reach Yahoo Decision.

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

Cabelvision Joins Bidding for Newsday

Cablevision entered the auction for the Long Island newspaper Newday with a $650 million bid, competing against Rupert Murdoch and Mortimer Zuckerman, each of whom has bid $580 million.  The latter two have also agreed to structure the deal so that the Tribune, parent of Newsday, can avoid taxes on the deal.  NYTimes, Cablevision Set to Raise the Stakes in Newsday Bidding

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

Survey of Auditors' Fees

A survey of financial executives at 185 companies found that larger firms spent an average of $3.6 million on total audit costs in 2007, up 2% from 2006, but a 5.4% decline in the cost for auditors' review of management's internal controls.  Larger firms paid an average of $210 per hour for auditors, up 5% from 2006.  WSJ, Sarbanes-Oxley Costs For Compliance Decline.

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

Wednesday, April 30, 2008

SEC Settles Earnings Management Charges Against Former Nortel VPs

The SEC announced that Craig A. Johnson, James B. Kinney and Kenneth R.W. Taylor — who were the vice presidents of finance for the Wireline, Wireless, and Enterprise business units of Nortel Networks Corporation (“Nortel”), respectively — agreed to settle the Commission’s charges against them arising from their alleged involvement in Nortel’s earnings management fraud during 2002 and 2003. Each has consented, without admitting or denying the Commission’s allegations against them, to the entry of a final judgment in the Commission’s pending litigation.  The final judgments order each individual to pay a $75,000 civil penalty and to pay disgorgement in the amount of $66,845 (Johnson) and $52,000 (each for Kinney and Taylor), along with prejudgment interest in the amount of $21,186 (Johnson) and $16,481 (each for Kinney and Taylor). The final judgments also bar each individual from acting as an officer or director of any public company for five years and permanently enjoin each individual from federal securities law violations.

April 30, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Issues Notice on Partial Redemptions of Auction Rate Securities

FINRA issued a Notice to Members regarding partial redemptions of auction rate securities.  In response to current market conditions, some issuers are offering partial redemptions of auction rate securities. This Notice reminds firms that when allocating partial redemptions of auction rate securities among their customers, they must adopt procedures that are reasonably designed to treat customers fairly and impartially, and must put their customers’ interests ahead of their own.

April 30, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

AFD $5 Million Fine for Directed Brokerage Upheld on Appeal

A $5 million fine imposed against American Fund Distributors (AFD) for directed brokerage in 2006 will stand, according to a ruling issued today by the National Adjudicatory Council (NAC), the appeals body of the Financial Industry Regulatory Authority (FINRA).  The NAC upheld a FINRA Hearing Panel decision finding that AFD violated FINRA's Anti-Reciprocal Rule when it directed more than $98 million in brokerage commissions between 2001 and 2003 to the 46 retail securities firms that were the top sellers of its mutual funds.

AFD is the principal underwriter and distributor of American Funds, a family of 29 mutual funds. In ruling on AFD's appeal of the Hearing Panel decision, the NAC concluded that AFD arranged for the direction of a specific amount or percentage of brokerage commissions to other securities firms conditioned upon those firms' sales of American Funds shares, an "outright" violation of FINRA's Anti-Reciprocal Rule.  The NAC also concluded that AFD's requests and arrangements for the direction of brokerage, conditioned upon sales, was directly at odds with the goal of the Anti-Reciprocal Rule, which is "to curb conflicts of interest that might cause retail firms to recommend investment company shares based upon the receipt of commissions from that investment company."

In the decision released today, the NAC emphasized that AFD tracked, monitored, and facilitated the directed brokerage payments by identifying the top-selling retail firms of American Funds, providing its investment adviser with the amount of commissions to be sent, and monitoring its investment adviser's trading with, and the payment of commissions to, the selected retail firms throughout the year. The NAC also highlighted the fact that AFD directed commissions to "step-out firms" - retail firms that had no capability to execute portfolio trades for American Funds, but nevertheless obtained commissions indirectly from clearing firms that did execute the trades.  The NAC also found that AFD's conduct was intentional.  The NAC concluded that AFD's violations, while "not egregious, were quite serious" and that a "substantial" fine of $5 million was appropriate based on the facts and circumstances of the case.

April 30, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Birmingham Mayor with Municipal Bond Fraud

The SEC filed a civil action today against Birmingham Mayor Larry Langford, William Blount, and Albert LaPierre, alleging that while Langford served as president of the County Commission of Jefferson County, Alabama (County Commission), he accepted more than $156,000 in undisclosed cash and benefits over the course of two years from Blount, the chairman of Blount Parrish & Co, Inc. Blount Parrish is a broker-dealer based in Montgomery, Alabama.  According to the SEC's complaint, Langford selected Blount Parrish to participate in every Jefferson County municipal bond offering and security-based swap agreement transaction during 2003 and 2004, earning Blount Parrish over $6.7 million in fees. Moreover, the SEC alleges, Langford and Blount concealed the payment scheme by using their long-time friend, LaPierre, an Alabama registered political lobbyist, as a conduit. The case is the SEC's first enforcement action involving security-based swap agreements.

April 30, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Two Former Monster Worldwide Officers with Backdating

The SEC today charged two former senior executives at Monster Worldwide, Inc., for their alleged participation in a multi-year scheme to secretly backdate stock options granted to thousands of Monster officers, directors and employees.  The SEC alleges that Monster's former president and chief operating officer James J. Treacy and former controller Anthony Bonica participated in a scheme that began in 1997 to fraudulently backdate stock options to coincide with the dates of low closing prices for the New York-based company's common stock.  As a result of their conduct, Monster misrepresented that all stock options were granted at the fair market value of the stock on the date of the award and also filed materially misstated financial statements in its Forms 10-K and 10-Q that did not recognize compensation expense for the company's stock option grants.  As a result, Monster overstated its aggregate pre-tax operating income by approximately $339.5 million for fiscal years 1997 through 2005.

The SEC's complaint further alleges that Treacy and Bonica personally benefited from the fraudulent scheme by receiving and exercising backdated grants of in-the-money options.  The Commission is seeking permanent injunctive relief, disgorgement of ill-gotten gains and financial penalties from each defendant, as well as an officer and director bar against Treacy.

April 30, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Report Calls for Eliminating Price Discrepancies

The Security Traders Association will release a report calling on the NYSE and Nasdaq to work on "an appropriate and coordinated opening process" to eliminate growing price discrepancies in stocks at the opening of trading.  "Divergent prices confuse investors," explained John Giesea, president of the group.  WSJ, NYSE, Nasdaq Urged To Cut Price Divergence.

April 30, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Countrywide Announces Another Big Loss

Countrywide Financial announced a $893 million loss in the first quarter ($1.60 per share) because of rising loan defaults.  The Wall St. Journal reports that a federal investigation has uncovered evidence that Countrywide sales executives falsified income figures for many borrowers, particularly in the Fast and Easy mortgage program, where borrowers did not have to provide documentation of their income.  NYTimes, Countrywide Says It Lost $893 Million in Quarter; WSJ, Countrywide Loss Focuses Attention on Underwriting.

April 30, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Citigroup Issues $3 Billion in New Stock

Citigroup will sell $3 billion in common shares this week to increase its capital and help protect its dividend.  This will make $39 billion Citigroup has raised since November.  NYTimes, Citigroup to Sell $3 Billion in Stock.

April 30, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Freddie Mac's Compensation Committee Cites Accomplishments in Awarding CEO Compensation

Freddie Mac lost $3.1 billion in 2007, its first annual loss, and its regulator Ofheo reported to Congress that the company remains "a significant regulatory concern."  Yet the company's compensation committee cited management's "notable accomplishments" in the annual report and disclosed total compensation to the chairman and CEO Richard Syron of over $13 million.  His $2.2 million performance-based cash bonus, though, was only 66% of his target amount since, a spokesperson explained, Freddie Mac's financial performance was "not good."  WPost, Freddie Mac Differs With Regulator on 2007 Results.

April 30, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 29, 2008

FINRA Proposes Amendments to Options Communications Rule

The SEC has released for public comment FINRA's proposed amendment of NASD Rule 2220 (Options Communications with the Public), which FINRA says is being revised to better address current needs for regulating options communications practices and promote consistency across the options communications rules of other self-regulatory organizations ("SROs").  FINRA explains that it, along with other SROs, have sought to modernize their rules concerning options communications with the public. One of the goals of this rule modernization is to make the rules on options communications consistent with the general rules on communications with the public. To this end, FINRA proposes to: (1) use, to the extent appropriate, the same terminology and definitions as in its general communications rules; (2) make the requirements for principal review of correspondence concerning options the same as for correspondence generally; and (3) update the standards on the content of communications that precede the delivery of the options disclosure document ("ODD").

April 29, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Insider Trading Charges Against Bank Director and Son

The SEC settled an insider trading action against Charles R. Norton, a former director of Community Bancorp, and his son, Chad R. Norton, who traded in Valley Bancorp stock shortly before the June 28, 2006 announcement of Valley Bancorp's acquisition by Community Bancorp.  The SEC alleged that Charles and Chad Norton traded on the basis of confidential information about Community Bancorp's imminent acquisition of Valley Bancorp. Charles Norton sat on the board of directors of Community Bancorp and had access to sensitive information about the acquisition through his attendance at Community Bancorp board meetings. The complaint alleges that Charles Norton tipped Chad Norton, who traded ahead of the announcement. Charles and Chad Norton realized illegal profits of $35,064.71 from the trades.

To settle the SEC's charges, Charles and Chad Norton have consented, without admitting or denying the allegations in the complaint, to a final judgment permanently enjoining them from future violations, to pay $38,433.72, representing the disgorgement of their illegal trading profits and prejudgment interest, and each to pay a civil penalty of $35,064.71. In addition, Charles Norton will be barred from serving as an officer or director of a public company for five years. The settlement is subject to approval by the court.

April 29, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC's Corporation Finance Recommends Changes to Cross-Border Tender Offer Rules

The SEC's Division of Corporation Finance said today that it has completed its review of the Commission's cross-border tender, exchange offer and business combination rules, and has prepared recommendations for consideration by the Commission.  The cross-border tender offer rules apply to offers for the securities of foreign companies that have U.S. security holders.

Director of Corporation Finance John White said that the goal of the review was to determine whether changes could be made that would facilitate the ability of U.S. investors to exercise their rights in connection with cross-border mergers and acquisitions. This review included looking at areas of conflict and inconsistency with foreign regulations and practice that are frequently encountered in cross-border business combinations and that result in U.S. investors being excluded from these transactions.

April 29, 2008 in SEC Action | Permalink | Comments (1) | TrackBack (1)