Securities Law Prof Blog

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

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Friday, January 11, 2008

Davidoff on Sec Reg in the New Millennium

Paradigm Shift: Federal Securities Regulation in the New Millennium, by STEVEN M. DAVIDOFF, Wayne State University Law School, was recently posted on SSRN.  Here is the abstract:

In May 2007, Oaktree Capital Management LLC, a U.S.-based hedge fund adviser with over forty billion dollars in assets under management, sold approximately fourteen percent of its equity for more than $800 million in a widespread offering made to a number of prospective purchasers. This equity offering was not made on the New York Stock Exchange or Nasdaq. Instead, Oaktree's initial offering was made on the U.S. private market. The company thereafter listed its equity securities on Goldman Sachs & Co.'s non-public market, the GS Tradable Unregistered Equity OTC Market. This offering is emblematic of a paradigm shift occurring in the capital markets: the market for capital is increasingly competitive and global, viable public and private markets are proliferating world-wide, domestic investing patterns are changing as intermediary investing and deretailization occur, and financial innovation is quickening. The result is an on-going, perhaps revolutionary, transformation in the scope and structure of the global and domestic capital markets. This essay is about this paradigm shift, its implications for the SEC regulatory process and the future of federal securities regulation. It was prepared for and presented at the 2008 meeting of the AALS securities regulation section.

And congratulations to Steve, who is becoming a blogger on Deals for the New York Times!

January 11, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (1)

SEC Alleges Ponzi Scheme in Nebraska

The SEC obtained an order temporarily restraining Bryan S. Behrens and a private entity controlled by him, National Investments, Inc., from continuing to engage in the fraudulent offer and sale of securities. The federal district court for the District of Nebraska also froze the defendants' assets. The SEC alleges that Behrens and National Investments fraudulently raised approximately $6.5 million from approximately 20 investors, including senior citizens, offering promissory notes to investors and falsely claiming that the interest payable on the notes, approximately 9% interest per annum, would be generated from lending investors' money to others at a higher rate of interest. The SEC alleges that defendants operated a Ponzi-like scheme by using proceeds obtained from new investors to make payments to early investors. Behrens is further alleged to have misappropriated approximately $3.5 million for personal use, including financing renovations to his two homes, purchasing luxury vehicles, and transferring money to another company that Behrens owns.

January 11, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (1)

SEC Bars Father and Son from Industry for Insider Trading

The SEC barred Elliot Joel Smith (E. Smith), of New  York  City, and his son, Gregg Ashley Smith (G. Smith), from associating with any broker-dealer because of alleged insider-trading.  E. Smith was employed  as  the  Managing  Director of Broadband Capital Management,LLC, a registered broker-dealer, and G. Smith was employed as an investment  banker at Banc of America Securities,LLC.  The sanction was based on a permanent injunction entered in an SEC enforcement action.  The  complaint  in that matter alleged  that  from  December  2001  to  December  2002,  E. Smith received material, nonpublic information  about  three  public companies from his son, G. Smith, and traded on that information.

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

Another Huge Write-Down Expected from Merrill

Merrill Lynch is expected to announce another huge write-down from mortgage investments next week -- $15 billion -- almost double its original estimate.  It is looking to raise about $4 billion in capital from investors and may also sell some noncore assets.  On Thursday New York's Senator Schumer expressed concern over the amount of money American financial institutions are raising from sovereign wealth funds.  To date, none of the foreign investors has asked for board representation in exchange for their investment.  NYTimes, Giant Write-Down Is Seen for Merrill

January 11, 2008 in News Stories | Permalink | Comments (0) | TrackBack (2)

Smart Money in Troubled Times

Lots of investors that are supposed to be the "smart money" are losing big by looking for opportunities in these troubled markets.  Bank of America's $2 billion investment to shore up mortgage lender Countrywide Financial has turned out so badly that the only way for Bank of America to salvage it is to buy the whole company (See NYTimes, Bank May Buy Troubled Giant in Home Loans; WSJ, Countrywide Seeks Rescue Deal)  Other investors that have been burned include:  billionaire investor Joseph C. Lewis (invested in Bear Stearns), China Investment Corp. (took stake in Blackstone Group); Citadel Investment Group (invested in E*Trade).  Of course, if they stick it out for the long term, some of these investments may yet pay off.  NYTimes, Burned by Investing in Troubled Times.

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

Cadwalader Cuts 35 Attorneys

Cadwalader Wickersham & Taft said it will lay off 35 lawyers because of a decline in business in its finance and capital markets practice.  The firm has a large structured finance practice that has been hit hard by the downtown in the credit markets.  WSJ, Law Firm Cadwalader To Lay Off 35 Attorneys.

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

SEC Ends Investigation into Usana

The SEC closed its investigation into Usana Health Services without taking any action.  Usana sells vitamins, nutrition bars and skin-care products through a network of distributors who receive commissions on purchases for recruiting additional people to become distributors.  Former distributors have brought suit in California state court, accusing the company of fraud and operating a pyramid scheme.  Since the SEC started its investigation last March, Usana's shares have dropped 40% and are among the most bet-against by short-sellers.  The company's auditing firm also resigned this year.  WSJ, SEC Ends Investigation of Usana Without Acting, but Lawsuits Loom.

January 11, 2008 in News Stories | Permalink | Comments (0) | TrackBack (2)

Thursday, January 10, 2008

Deloitte Settles with Parmalat Bondholders

Deloitte & Touche has reached a settlement with a committee representing about 32,000 bondholders of Parmalat, the Italian version of Enron that collapsed four years ago amidst scandal.  The accounting firm has agreed to pay up to 6% of the nominal value of their investments before Nov. 11, 2003.  CFO.com, Parmalat Investors to Get $.06 on the Dollar from Deloitte.

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

Former CEO of Chancellor Corp. Found Liable for Securities Fraud

On January 3, 2008, the federal district court for the District of Massachusetts entered a Final Judgment against Brian M. Adley, the former Chairman, Chief Executive Officer and controlling shareholder of Chancellor Corporation, a now defunct Boston, MA transportation equipment-leasing company, for his role in a multi-faceted financial fraud. The Court ordered that Adley be enjoined from future violations of the federal securities laws and that he pay $930,000 in disgorgement.  In addition, Adley is barred from acting as an officer or director of a public company for twenty-years.

The SEC had alleged that Adley caused Chancellor to file false financial statements in 1999 and 2000 by directing the wholesale fabrication of corporate documents, by instructing that the fabricated documents be given to the company's auditors, and by coordinating the filing of false financial statements with the Commission. The Final Judgment followed a jury verdict in the SEC's favor on all securities fraud charges against Adley.

January 10, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sallie Mae, MBIA Seek Funds

More companies looking for money -- Sallie Mae wants to issue $30 billion in new debt to replace a loan made last year by Bank of America and J.P. Morgan Chase.  While the company's reputation is low right now, it dominance in the student loan market may make it "too big to fail."  WSJ, SLM Asks: Brother, Can You Spare $30 Billion, Cheaply?  The troubled bond insurer, MBIA, seeks to raise $1 billion in surplus notes.  The notes were marketed yesterday with a 12% yield, but there weren't enough buyers at that price.  WSJ, Wall Street's Scary Word: MBIA.

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

Citi, Merrill Will Get Billions More from SWFs

Both Citigroup and Merrill Lynch are seeking additional capital from investors, principally sovereign wealth funds (SWFs).  Merrill is expected to raise $3-4 billion, mostly from a middle eastern SWF, and Citigroup is expected to get $10 billion from SWFs.  Foreign governments have already invested about $27 billion in major investment banks.  Will the size of these additional capital infusions result in political or shareholder backlash?  The goal, says a lobbyist who has shepherded foreign investments through Congressional scrutiny, is to get a B6 story in the Wall St. Journal and have no one mention it.  WSJ, Citigroup, Merrill Seek More Foreign Capital.

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

Wednesday, January 9, 2008

NYSE, Amex in Merger Talks

The NYSE is talking with the privately held American Stock Exchange about acquiring the smaller exchange, possibly for as much as $350 million.  Amex has been consistently losing market share in stocks, options and ETFs and has been looking for a merger partner for some time.  WSJ, NYSE Is in Talks to Buy American Stock Exchange.

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

Advisory Committee on Financial Reporting Will Hold Open Meeting

The Advisory Committee on Improvements to Financial Reporting, chaired by Robert Pozen, will hold an open meeting on Jan. 11 at 9:30 a.m. to continue its discussion of the draft decision memo.

January 9, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (2)

FINRA Fines Brokerage Firm for Improper Soft Dollar Payments

FINRA has fined SMH Capital Inc. (f/k/a Sanders Morris Harris, Inc.) of Houston, TX, $450,000 for failing to adopt adequate supervisory procedures and systems designed to address its prime brokerage and soft dollar services to hedge funds. As a result, SMH made improper payments of $325,000 in soft dollars to a hedge fund manager.  The firm's failures also included drafting and distributing hedge fund sales materials that did not adequately disclose material investment risks to potential hedge fund investors. In addition, SMH entered into an improper compensation arrangement with two SMH brokers who also managed hedge funds, allowing them to share in commissions earned from fund trading contrary to representations made in the offering documents and a separate agreement.  In addition to the fine, SMH was ordered to retain an Independent Consultant to conduct a comprehensive review of the adequacy of the firm's policies, systems, procedures and training with regard to its hedge fund operation.

FINRA found that SMH commenced its hedge fund services business in July 2000 and eventually established relationships with more than 15 different hedge funds, making the hedge fund business an important part of the firm's overall operations. SMH provided a platform of services to hedge fund managers including office space (complete with desks, computers, telephones and internet access), marketing assistance and capital introduction, with the fund managers paying for such services through commissions earned on trades directed to SMH.

The firm also operated soft dollar accounts for hedge funds that opted not to join SMH's prime brokerage services platform. These accounts collected a portion of the commissions earned when SMH executed trades for each fund. Fund managers could then submit, or cause to be submitted from third party service providers, invoices for products and services. SMH then paid the providers from the balances accumulated in the soft dollar accounts.

FINRA found that, by failing to have policies and procedures to police its soft dollar payments, SMH sent two improper soft dollar payments totaling $325,000 to a hedge fund manager, despite red flags that the payments were improper. In settling this matter, SMH neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

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

Citigroup Seeks to Dismiss Enron's Claims Against It

Over six years since Enron's collapse, litigation and finger-pointing goes on.  Citigroup filed a motion in bankruptcy court seeking to dismiss Enron's claims that the bank assisted company executives in the firm's wrongdoing.  Citigroup, the only financial institution named as a defendant that has not settled, says that Enron has only itself to blame.  The trial is set for this spring.  WSJ, Citigroup Fights Enron Suit.

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

A Bad Time to be an Arbitrageur

Pity the arbitrageur -- 2007 was probably their worst year because of failed deals.  A case in point -- the price offered for Clear Channel Communications shares in an LBO scheduled to close in March is $39.20; the stock closed yesterday at $34.01, for a spread of 15%.  WSJ, Arbs Are Wary On Takeovers.

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

Tuesday, January 8, 2008

Wachovia Broker Found Liable for Insider Trading in Blue Rhino

On Nov. 26, 2007, the federal district court for the Northern District of Illinois entered  a  permanent injunction and other relief against Mark Michel, a registered representative with Wachovia  Securities, finding that he repeatedly traded  on  material,  non-public  information  in  the securities  of Blue Rhino Corp. (Blue Rhino) in the week leading up to Blue  Rhino's  Feb.  9,  2004,  merger announcement  with  Ferrellgas Partners, LP.  The Court found that a long-time friend of Michel's  (who  was  a  co-defendant  in  the  case who had previously settled)  tipped  Michel  about  Blue Rhino's merger negotiations in a telephone call. The Court found that the following  morning,   Michel began a six-day buying spree for himself, his relatives  and  his  customers in which he bought $1.4 million of Blue Rhino stock. The opinion also found that several other individuals had received the same  information  as  Michel  on  the  night of January 29 or shortly thereafter,  all  of  whom  were  friends  or  relatives of a business partner of one of Blue Rhino's directors, and all made unusually large and unexplained purchases of Blue Rhino in the week before the merger.  The  judge  found  that  based  on  the  close relationships among the individuals  involved,  a series of unusual telephone calls on January 29  and  30, the unusually large purchases of Blue Rhino that followed almost   immediately,   and   numerous   "shifting,  contradictory and implausible  or  inadequate explanations" of the purchases, Michel and the other individuals had engaged in insider trading.

January 8, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (5)

SEC and Securities And Exchange Board of India Announce Dialogue

The SEC and the Securities and Exchange Board of India (SEBI) today announced terms for increased cooperation and collaboration.  SEC Chairman Christopher Cox and SEBI Chairman M. Damodaran elaborated the terms establishing the structure of, and agenda for, an SEC-SEBI dialogue. This new dialogue has three main objectives:

Identify and discuss regulatory issues of common concern
Continue and expand upon the existing program of capacity-building and technical cooperation between the SEC and the SEBI
Improve cooperation and the exchange of information in cross-border securities enforcement matters

The dialogue will be composed of regular meetings and ad hoc information exchange at the staff level and between high-level representatives of the SEC and SEBI.

January 8, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (2)

FINRA Fines 19 Broker-Dealers for Overstating Advertised Trade Volume

FINRA fined 19 broker-dealers a total of $2.8 million for substantially overstating their advertised trade volume to three private service providers.  FINRA compared the firms' advertised trade volume in selected securities with the firms' executed trade volume for the same securities in August 2006 and found substantial overstatements for each firm in one or more of the securities reviewed. FINRA also found that, prior to September 2006, all of the firms lacked an adequate supervisory system and procedures for communicating trade volume to such services.  The firms' overstated trade volumes were made available to market participants by the service providers. The service providers also used the firms' inaccurate advertised trade volumes to compile rankings and reports, including reports that rank the most active broker-dealers by security.

In the actions announced today, eight firms were fined $200,000 each (Broadpoint Capital, Inc., CIBC World Markets Corp., Lehman Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., Needham & Company, LLC, Robert W. Baird & Co., Inc., Thomas Weisel Partners, LLC and UBS Securities, LLC). Six firms were fined $150,000 each (Bear, Stearns & Co., Inc., BMO Capital Markets Corp., Cowen and Company, LLC, Deutsche Bank Securities, Inc., Leerink Swann & Company, Inc. and RBC Capital Markets Corp.). Four firms were fined $50,000 each (Friedman, Billings, Ramsey & Co., Inc., Jefferies & Company, Inc., JMP Securities, LLC and Pacific Crest Securities, Inc.).

The fine for one firm, Piper Jaffray & Co., was reduced to $100,000 because the firm conducted its own extensive internal investigation and then voluntarily provided the results to FINRA.

In concluding these settlements, the 19 firms neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

January 8, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Leadership Changes at Bear Stearns, Sallie Mae and Starbucks

Three troubled companies are starting the new year with leadership changes -- Bear Stearns, Sallie Mae, and Starbucks.

At Bear Stearns, James E. Cayne will step down as CEO, but remain Chairman.  The new CEO will be Alan Schwartz, currently the President.  Bear Stearns, you will recall, has suffered mightily from the mortgage crisis.  Its trouble began last summer with the collapse of two hedge funds and have only continued.  It posted its first quarterly loss ever in fourth quarter 2007.  Besides all this, Cayne's work ethic was questioned as he took time off during crises to play golf and bridge.  NYTimes, Bear’s Cayne to Quit as Chief Executive.

At Sallie Mae, Anthony P. Terracciano, a long time bank executive with a reputation for turning around troubled companies, becomes Chairman, succeeding Alfred L. Lord, who will stay on as CEO.  Sallie Mae's troubles include a busted LBO with J.C. Flowers, rising default rates on student loans, and tighter credit markets.  Lord did not help matters with a recent disastrous conference call that ended with an expletive.  NYTimes, A Chairman Is Appointed to Rebuild Sallie Mae.

Finally, at Starbucks, Howard D. Schultz, currently Chairman, becomes CEO, and current CEO James L. Donald will leave the company.  Schultz, who has been with the company since 1982, promises rededicated focus on the Starbucks brand, as it faces increasing competition from McDonalds and Dunkin' Donuts.  NYTimes, Starbucks Replaces Chief With Chairman.

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