Securities Law Prof Blog

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

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Saturday, May 17, 2008

Court Enjoins Affinity Ponzi Scheme

On May 12, 2008, the federal district court for the Central District of California entered an order preliminary enjoining Safevest, LLC and its principals, Jon G. Ervin, Sr. and John V. Slye from future violations of the antifraud provisions of the federal securities laws. The SEC's complaint, filed in federal court in Santa Ana, California on May 1, 2008, alleges that since at least May 2007, the defendants have raised more than $25 million from more than 500 investors, including many from the Christian community, misrepresenting that investor funds would be pooled and invested in commodity futures 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.

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

SEC Obtains Freeze of Assets in Alleged Insider Trading Case

The SEC filed an emergency civil action in the United States District Court for the Southern District of New York against Cristian De Colli, a machinery engineer residing in Rome, Italy, alleging that he engaged in insider trading from which he reaped more than $2.1 million in illicit profits from highly suspicious trading in his U.S. brokerage account in the securities of DRS Technologies, Inc., prior to the public disclosure of advanced merger negotiations.  The SEC also filed an application for a temporary restraining order in order to freeze De Colli's assets in the United States, and the court issued a temporary restraining order freezing De Colli's assets in the U.S., including his brokerage account.

According to the Complaint, De Colli purchased 5,700 shares of DRS common stock from April 10 to April 29, 2008, and 3,116 call options for the common stock of DRS between April 15 and May 7, 2008. De Colli purchased more than 2,400 of the call options on May 6 and May 7, including certain options that were out-of-the-money by over $6 and which expired ten days after purchase. On April 28, 2008, De Colli liquidated securities that he had purchased in two other companies a week earlier in order to purchase additional DRS options. At that point, 100 percent of the holdings in De Colli's U.S.-based brokerage account consisted of DRS call options and DRS stock.

The SEC's complaint further alleges that immediately following a May 8th Wall Street Journal article reporting the advanced merger negotiations and after confirmation by DRS that it was engaged in talks regarding a potential strategic transaction, De Colli liquidated all of his call options and made his ill-gotten profit of more than $2.1 million on his initial investment of approximately $422,000. Finmeccanica later announced on May 12, 2008 that it would acquire DRS for $5.2 billion, or $81 a share.

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

Friday, May 16, 2008

Yahoo Responds to Icahn

The Yahoo board responded to Carl Icahn's proxy contest to replace Yahoo's ten directors in a letter stating that:

Unfortunately, your letter reflects a significant misunderstanding of the facts about the Microsoft proposal and the diligence with which our board evaluated and responded to that proposal. A fair-minded review of the factual record leads to one conclusion: that Yahoo!'s ten-member board, comprised of nine independent directors along with Yahoo! CEO Jerry Yang, remains the best and most qualified group to maximize value for all Yahoo! stockholders.

Conversely, we do not believe it is in the best interests of Yahoo! stockholders to allow you and your hand-picked nominees to take control of Yahoo! for the express purpose of trying to force a sale of Yahoo! to a formerly interested buyer who has publicly stated that they have moved on. ...

From the beginning of the process with Microsoft, Yahoo!'s independent directors focused on one central goal: how best to maximize stockholder value.

The letter goes on to detail the process of the Yahoo board's deliberations about the Microsoft bid and concludes:

In short, Yahoo!'s board was at every point in this process prepared to enter into a transaction with Microsoft that would maximize stockholder value--and included certainty of value and closing. What Yahoo!'s independent board refused to do was to allow control of this company to be acquired for less than its full value.

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

PurchasePro Founder Convicted of Stock Fraud

PurchasePro founder Charles E. Johnson Jr. was found guilty of stock fraud and obstruction of justice after a federal court found he misled investors by inflating revenues at the software company in 2001.  In his opinion the judge relied on the testimony of two convicted PurchasePro executives, which he found credible.  In addition to stock fraud charges, Johnson was found to have fabricated emails to support his defense.  WPost, Ex-PurchasePro Chief Found Guilty of Fraud, Obstruction.

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

Thursday, May 15, 2008

Former NBTY Director Settles Insider Trading Charges

A final judgment was entered on May 8, 2008, by the United States District Court for the Southern District of New York against Nathan Rosenblatt, a former director of NBTY, Inc., and member of its three-person audit committee. Rosenblatt consented to the entry of final judgment, without admitting or denying the allegations of the SEC's complaint.  The complaint alleged that Rosenblatt tipped his close friend Morris Gad with material, nonpublic information concerning the company's significant revenue and earnings shortfall for the third quarter of 2004, prior the company's public release of its financial results. With this information in hand, Gad sold his entire position of NBTY stock, sold the stock short, purchased put contracts, and sold call contracts through the custodial accounts of his three children prior to NBTY's release of its 2004 third quarter financial results. In so doing, Gad made $399,187.40 in trading profits and losses avoided.  Gad previously settled with the Commission.

The final judgment against Rosenblatt orders him to pay a civil penalty of $399,187.40, and permanently bars him from acting as an officer or director of any public company.

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

SEC Amends Rule 2a-46 of Investment Co. Act

The SEC broadened small business financing opportunities by amending Rule 2a-46 under the Investment Company Act to increase the availability of capital to certain smaller companies that may not have ready access to the public capital markets or other forms of conventional financing.

Congress in 1980 established business development companies (BDCs) to help make capital more readily available to small, developing, and financially troubled businesses. To accomplish this purpose, the Investment Company Act generally prohibits a BDC from making any investment unless, at the time of the investment, at least 70 percent of its total assets are invested in securities of certain specific types of companies, including "eligible portfolio companies."

The Commission has amended Rule 2a-46 to expand the definition of eligible portfolio company to include any domestic operating company with securities listed on a national securities exchange, if the company has a market capitalization of less than $250 million.

The Investment Company Act defines eligible portfolio company to include a domestic operating company that, among other things, does not have any class of securities that are marginable under rules issued by the Federal Reserve Board. In 1998, for reasons unrelated to small business capital formation, the Federal Reserve Board amended its margin rules to include all publicly traded equity securities and most debt securities. These 1998 amendments had the unintended consequence of substantially reducing the number of companies that met the definition of eligible portfolio company.

In 2006, the Commission adopted new rules under the Investment Company Act to address the effect of the Federal Reserve Board's 1998 amendments on the definition of eligible portfolio company. The Commission adopted Rule 2a 46 to include in the definition of eligible portfolio company all private companies and public companies whose securities are not listed on a national securities exchange. This is the rule that the Commission has amended today. The Commission in 2006 also adopted Rule 55a-1 to conditionally permit a BDC to include in its 70 percent basket any follow on investments in a company that met the new definition of eligible portfolio company at the time of the BDC's initial investment in it.

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

FINRA Fines 3 Firms for OATS violations

FINRA fined TradeStation Securities, Inc., E*Trade Securities, LLC and CIBC World Markets Corp. a total of $1.6 million for multi-year violations relating to FINRA's Order Audit Trail System (OATS) rules and related supervisory failures.  Under the OATS rules, firms must report information related to the handling and execution of customer orders, as well as for certain proprietary orders for Nasdaq and OTC Equity securities. This information allows FINRA to recreate the life cycle of an order and is critical to effective regulation.

TradeStation Securities, Inc. was fined $750,000 for failing to report approximately 23.5 million Reportable Order Events relating to orders received. E*Trade Securities was fined $500,000 for failing to report "New Order Reports" and "Route Reports." CIBC was fined $350,000 for failing to report to OATS over 28 million orders which were generated by an affiliate.

FINRA further found that the three firms did not have adequate systems of supervision in place to monitor their OATS reporting compliance.  The fine for CIBC was reduced in recognition of the firm's actions in reporting the problem to FINRA and taking prompt remedial actions to correct the problem. In settling these matters, the firms neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

May 15, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Icahn Seeks to Replace Yahoo Directors

As expected, Carl Icahn launched a proxy contest to replace all ten directors on the Yahoo board at its upcoming shareholders' meeting, saying that the current board has "acted irrationally and lost the faith of shareholders."  Among the nominees is Harvard Law Professor Lucian Bebchuk.  WSJ, Icahn Moves to Oust Yahoo Board.

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

Merrill Reforms its Stock Rating System

Merrill announced a new system for rating stocks that requires its analysts to assign "underperform" ratings to 20% of the stock they cover and "buy" ratings to no more than 70%.  Even after the Global Analysts' Settlement that mandated industry reforms to improve research, analysts remain reluctant to advise investors to sell.  According to Bloomberg, only about 5% of all stock recommendations today are "sell."  NYTimes, Merrill Tries to Temper the Pollyannas in Its Ranks.

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

Moody's Will Restrict Bond Analysts' Talks with Issuers

Moody's Investors Service said it would revise its code of conduct to limit bond-rating analysts' discussions with issuers to "credit issues."  The independence of debt-rating agencies has been doubted, and there are calls for regulatory reform.  The SEC is expected to propose new rules for rating agencies shortly.  WSJ, Moody's Aims to Buff Image By Revising Policies.

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

Freddie Reports Quarterly Loss

As evidence that the housing market crisis is not over, Freddie Mac reported a loss for the first quarter of 2008 of $151 million (66 cents per share), compared with a loss of $133 million (35 cents per share) for the first quarter of 2007.  Freddie reported $1.45 billion of credit-related expenses in the quarter.  Its estimated asset value was negative $5.2 billion on March 31, compared with a positive $12.6 billion on December 31.  The March estimated loss would have been about $4.6 billion more, except for changes in valuation methods.  Freddie said it planned to raise an additional $5.5 billion in capital through sales of common and preferred shares, a commitment it made to its regulator.  WPost, Freddie's Quarterly Loss Widens.

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

Wednesday, May 14, 2008

Indiana Businessman Charged with Criminal Securities Fraud

The SEC announced that on May 9, 2008, the United States Attorney's Office for the Northern District of Illinois filed a 14-count criminal information against Michael E. Kelly ("Kelly"), a former South Bend, Indiana businessman that the SEC previously charged with securities fraud in a civil action filed in September 2007. The information alleges that Kelly engaged in a fraudulent investment scheme by offering and selling through fraudulent means approximately $34 million in promissory notes and more than $450 million in investments called Universal Leases. The criminal information charges Kelly with 10 counts of mail fraud, two counts of wire fraud and two counts of securities fraud and also seeks the forfeiture of approximately $500 million. Kelly was initially charged in a criminal complaint when he was arrested in December 2006.

May 14, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Court Enjoins Pump & Dump Scheme Involving Nutraceutical

On April 25, 2008, the U.S. District Court for the Middle District of Florida granted the SEC's motion for summary judgment and entered an order and final judgment against Kerry P. Kennedy, a stock promoter who orchestrated the fraudulent promotion of the securities of Nutraceutical Clinical Laboratories International, Inc. ("Nutraceutical" or the "Company").  The Court's judgment (1) enjoins Kennedy from violating the anti-fraud provisions of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), Exchange Act Rule 10b-5, and the registration provisions of Section 5(a) and (c) of the Securities Act of 1933 ("Securities Act"); (2) orders Kennedy to disgorge $1,685,413.71 in ill-gotten gains (including prejudgment interest) from his participation in the pump-and-dump scheme; (3) imposes a $400,000 civil money penalty; and (4) bars Kennedy from participating in any offering of penny stock.

The SEC's complaint, filed on November 15, 2004, alleged that in 2000 and 2001 Kennedy, along with fellow stock promoter Stanley Siciliano, attorney John Zankowski and Nutraceutical CEO Paul Simmons and CFO Rodney Gilbert, engaged in a multi-faceted pump-and-dump scheme involving the securities of Nutraceutical, which now, under different management, operates as Preservation Sciences, Inc. and EFUEL Network, Inc. As part of a reverse merger transaction Kennedy helped to arrange, CEO Simmons, CFO Gilbert, promoter Kennedy and attorney Zankowski secretly purchased nearly all of Nutraceutical's purportedly free trading stock through their offshore nominee accounts. They did so in order to make a public market for the illegal, unregistered distribution of their stock.

To drum up interest in the Company and to facilitate their anonymous distribution, Simmons disseminated false and misleading publicity about Nutraceutical, while, at the same time, stock promoters Kennedy and Siciliano falsely touted the stock on an Internet message board and manipulated the market for the Company's stock through fraudulent stock trading via matched and washed buy and sell orders. According to the Court's order, "Kennedy's actions showed that he was aware of the true value of Nutraceutical's stock, while simultaneously deceiving potential investors to increase the profit of his stock sale." During the course of the pump, Kennedy unlawfully dumped Nutraceutical stock through nominee accounts, reaping $1,144,583.95 in profits.

May 14, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Icahn Will Run Slate for Yahoo Board

Carl Icahn plans to launch a proxy contest to replace all ten of Yahoo's directors, with the goal of pressuring the company to resume merger negotiations with Microsoft.  The Yahoo deadline for board nominations is Thursday.  WSJ, Icahn Will Launch Proxy Contest To Unseat Yahoo's Entire Board.

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

SEC Charges Ponzi Scheme Targetted to African-American Community in Los Angeles

The SEC filed securities fraud charges against the promoters of an $18 million real estate investment scheme targeting the African-American community in the Los Angeles area and other locations in Nevada and Georgia.  The SEC's complaint, filed in U.S. District Court in Los Angeles, charges Jeanetta M. Standefor and Accelerated Funding Group (AFG) with operating a fraudulent "foreclosure reinstatement" scheme that attracted more than 600 investors between 2005 and 2007. The scheme purported to use investors' funds to cure defaults on distressed properties owned by others. The SEC alleges that while soliciting investor money and promising returns of up to 50 percent within 30 to 45 days, Standefor and AFG were instead operating a Ponzi-like scheme that used money from new investors to pay previous investors. Standefor also used more than $1.9 million of investor funds for personal expenses such as her lavish wedding and honeymoon, cars, jewelry, tickets to entertainment events, and home renovations. Standefor and AFG also misused investor funds to pay $121,000 in "consulting fees" to Standefor's husband, Darrell R. Dansby.

May 14, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Broadcom Officers with Backdating

The SEC charged two current and two former top officers of Broadcom Corporation for their alleged participation in a five-year scheme to secretly backdate stock options granted to virtually all Broadcom officers and employees.  The SEC's complaint, filed in federal district court for the Central District of California, alleges that Broadcom's former chief executive officer Henry T. Nicholas, chairman and chief technology officer Henry Samueli, former chief financial officer William J. Ruehle, and general counsel David Dull perpetrated a scheme from 1998 to 2003 to fraudulently backdate stock option grants, failing to record billions of dollars of compensation expenses and falsifying documents to further the fraud. As a result of the scheme, Broadcom restated its financial results in January 2007 and reported more than $2 billion in additional compensation expenses.

According to the SEC's complaint, Nicholas and Samueli served on the two-member option committee that had authority to approve options to employees and all but the most senior officers. The SEC alleges that the option committee approved as many as 88 grants during the relevant period, but for many of the grants the committee neither held meetings nor made decisions on the dates the grants were supposedly approved. Instead, Ruehle allegedly selected most of the grant dates retroactively based on a comparison of Broadcom's historical stock prices, and Nicholas and Samueli allegedly concealed the backdating by signing false committee written consents stating that the grant had been approved "as of" the retroactive date.

In addition, the SEC alleges that Nicholas, Samueli, and Ruehle - not the compensation committee - decided on option grants to Broadcom's senior officers and used hindsight to select the dates for them. Dull allegedly knew about and participated in the backdating scheme and was involved in the preparation, review, and approval of false board and compensation committee meeting documents to conceal two backdated grants in 2001, one of which awarded him options to purchase 300,000 shares. The SEC is alleging that Ruehle and Dull each personally benefited from the backdating scheme by receiving and exercising backdated grants that were in-the-money by more than $100,000 for Ruehle and $1.8 million for Dull.

The SEC is seeking permanent injunctions, civil monetary penalties, and officer-and-director bars against each of the individuals, disgorgement with prejudgment interest against Ruehle and Dull, and reimbursement of bonuses and profits from stock sales from Nicholas and Ruehle pursuant to Section 304 of the Sarbanes-Oxley Act of 2002.

May 14, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles FCPA Charges Against Willbros Group

The SEC filed a settled civil action against Willbros Group, Inc. and several former employees alleging that they violated the anti-bribery provisions of the Foreign Corrupt Practices Act (FCPA) and the antifraud provisions of the federal securities laws. According to the complaint, the company also violated the reporting, books and records and internal controls provisions of the Securities Exchange Act. Willbros Group agreed to settle the charges, without admitting or denying the Commission's allegations.

According to the SEC's complaint, the Willbros Group engaged in multiple schemes to bribe foreign officials in Nigeria and Ecuador and also implemented a fraudulent tax avoidance scheme in Bolivia. Willbros Group agreed to consent to the entry of a judgment that permanently enjoins it from future violations of these provisions and that orders it to pay disgorgement of $8.9 million, plus prejudgment interest of $1.4 million.

May 14, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Proposes Requirement of Interactive Data Format

The SEC voted to propose a rule that would require all U.S. companies to provide financial information using interactive data beginning next year for the largest companies, and within three years for all public companies.  The interactive data tags uniquely identify individual items in a company's financial statement so they can be easily searched on the Internet, downloaded into spreadsheets, reorganized in databases, and put to other comparative and analytical uses by investors, analysts, and journalists.  Since 2005, many companies have voluntarily submitted to the SEC financial information in interactive data format.

"This is all about bringing investors better, faster, more meaningful information about the companies they own," said SEC Chairman Christopher Cox. "It would transform financial disclosure from a 1930s form-based system to a truly 21st century model that taps the power of technology for the benefit of investors."

The SEC's proposed schedule would require companies using U.S. Generally Accepted Accounting Principles with a worldwide public float over $5 billion (approximately the 500 largest companies) to make financial disclosures using interactive data formatted in eXtensible Business Reporting Language (XBRL) for fiscal periods ending in late 2008. If adopted, the first interactive data provided under the new rules would be made public in early 2009. The remaining companies using U.S. GAAP would provide this disclosure over the following two years. Companies using International Financial Reporting Standards as issued by the International Accounting Standards Board would provide this disclosure for fiscal periods ending in late 2010. The disclosure would be provided as additional exhibits to annual and quarterly reports and registration statements. Companies also would be required to post this information on their websites.

The required tagged disclosures would include companies' primary financial statements, notes, and financial statement schedules. Initially, companies would tag notes and schedules as blocks of text, and a year later, they would provide tags for the details within the notes and schedules.

Public comment on the proposed rule should be received by the SEC no later than 60 days after its publication in the Federal Register.

May 14, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

IAC and Liberty Settle Dispute over Spin-offs

Liberty Media (controlled by John Malone), which has majority voting power in IAC/Interactive Corp. (controlled by Barry Diller), went to court in Delaware to block IAC's planned restructuring that would have diluted its voting power.  After a lower court decision largely favoring IAC, the two now have settled their differences, and Liberty's spin-off of four businesses, including Ticketmaster, LendingTree and home-shopping network HSN, will go forward.  The businesses will have a single-tier voting structure, as IAC wanted, and Liberty will have the right to appoint 20% of the directors.  IAC will keep its Internet businesses, including Ask.com and Match.com.  WSJ, Liberty Media Ends Its Opposition to IAC Spinoffs.

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

Tuesday, May 13, 2008

Icahn Purchases Yahoo Stock and Considers Proxy Contest

Carl Icahn reportedly has purchased about 50 million shares of Yahoo stock since Microsoft withdrew its bid and is trying to decide whether to launch a proxy campaign to replace some or all of the directors at the upcoming July 3 shareholders' meeting.  Yahoo's deadline for board nominations is Thursday.  WSJ, Icahn Enters Microsoft-Yahoo Fray.

May 13, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)