Securities Law Prof Blog

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

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Tuesday, May 13, 2008

SEC Settles Manipulation Charges in OTC BB Stock

The United States District Court for the District of Columbia entered a Final Judgment of permanent injunction and other relief, including a bar against participating in offerings of penny stocks, against Jeffrey A. Hayden on May 7, 2008. Without admitting or denying the Commission's allegations, Hayden consented to the entry of the Final Judgment. The judgment settles the Commission's claims against Hayden in a civil action filed on August 16, 2007, in which the Commission alleged that Hayden had participated in a fraudulent scheme to manipulate the stock price of Nationwide Capital Corporation, a now-defunct company whose shares traded on the Over-the-Counter Bulletin Board.  The SEC alleged that, in August and September 2002, Hayden and others carried out a scheme to manipulate the price of Nationwide's stock that artificially inflated Nationwide's stock price from pennies to $9.35 per share. The scheme collapsed on October 1, 2002, when the SEC suspended trading in Nationwide securities.

Hayden was liable for disgorgement of $290,798, together with prejudgment interest of $116,330, but payment of these amounts was waived based upon Hayden's sworn Statement of Financial Condition. A civil penalty was not imposed for the same reason.

May 13, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Insider Trading Charges Involving U.S. Foodservice

The SEC settled insider trading charges against John Turchetta of Naples, Florida. The complaint alleges that Turchetta purchased securities of U.S. Foodservice (USF) after he acquired material, nonpublic information concerning a proposed tender offer by Royal Ahold (Koninklijke Ahold N.V.) for the outstanding shares of USF common stock. Turchetta received the inside information from a USF vendor, who had been tipped by a senior officer of the company.

Turchetta has agreed to settle the Commission's action, without admitting or denying the allegations in the complaint. The final judgment orders Turchetta to pay disgorgement of $553,000 plus prejudgment interest thereon in the amount of $162,069, as well as a civil penalty of $553,000, for a total of $1,268,069. The settlement is subject to approval by the Court.

May 13, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Fraud Charges Against Former U.S. Foodservice VP

The SEC settled charges against Brian Spears, a former Vice President of Purchasing at U.S. Foodservice (USF). The SEC alleged that Spears and others at USF, then a subsidiary of Royal Ahold (Koninklijke Ahold N.V.) (Ahold), engaged in a large-scale fraud that, for fiscal years 2001 and 2002, materially overstated operating income by an aggregate amount of approximately $700 million.

The Commission's complaint further alleged that Spears and others at USF induced third parties to confirm false information to USF's outside auditors. Spears and others at USF did this to make it falsely appear that amounts recorded on USF's books and records as accounts receivable were earned. As alleged in the complaint, Spears called vendors at USF's 2001 fiscal year-end and 2002 fiscal year-end and worked with others at USF to convince the vendors to sign the confirmation letters and return them to USF's auditors.

Spears has agreed to settle the Commission's action, without admitting or denying the allegations in the complaint. The final judgment orders disgorgement of $45,000 and prejudgment interest thereon in the amount of $15,547, but waives payment of all disgorgement and prejudgment interest and does not impose a civil penalty, based on the sworn representations in Spears' Statement of Financial Condition and other documents and information submitted to the Commission. The final judgment also bars Spears from serving as an officer or director of a public company for five years. The settlement is subject to approval by the Court.

May 13, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Investigates Wachovia's ARS Practices

Wachovia disclosed that the SEC and other regulators are seeking information about the underwriting, sale, and auctions of municipal auction-rate securities and auction-rate preferred securities.  In addition, a lawsuit was filed in March in New York by customers who purchased ARS alleging misrepresentations about the quality and risk of the securities.  Wachovia's CEO said the company hired a consultant to review its financial controls and risk management practices.  NYTimes, Wachovia Faces S.E.C. Inquiry Over Auction-Rate Securities.

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

Exxon Urges Investors to Reject Corporate Governance Proposal

Exxon Mobile asked its institutional investors to reject a shareholder's proposal, introduced by activist shareholder Robert A.G. Monks, to separate the positions of CEO and Chair at the May 28 shareholders' meeting.  The resolution received 40% of the vote at last year's meeting and is supported by some influential shareholders, including members of the Rockefeller family.  In emails, Exxon said that there is no "one size fits all" model of corporate governance.  WSJ, Exxon Email Opposes Shareholder Measure.

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

Monday, May 12, 2008

Broker Sentenced in First Criminal Case Against Hedge Fund for Market-Timing

Beacon Rock Capital LLC ("Beacon Rock"), a hedge fund located in Portland, Oregon, and Thomas J. Gerbasio ("Gerbasio"), a former registered representative with a registered broker-dealer based in Philadelphia, have been sentenced in connection with the first U.S. criminal case brought against a hedge fund for deceptive market timing. On May 7, 2008, the United States District Court for the Eastern District of Pennsylvania sentenced Gerbasio to one year and one day in prison, two years of supervised release, and ordered him to pay a fine of $7,500. The Judge further sentenced Beacon Rock to three years of probation, and ordered the hedge fund to forfeit $475,905 and to pay a fine of $600,000.

The criminal action began with an Information filed on March 20, 2007, by the U.S. Attorney for the Eastern District of Pennsylvania, charging Beacon Rock and Gerbasio with securities fraud. According to the Information, from December 1999 through November 2003, Gerbasio, while associated with two brokers registered with the Commission, provided brokerage services to Beacon Rock. The Information charged that the primary purpose of this relationship was to permit Beacon Rock, whose primary trading strategies involved market timing, to evade and circumvent controls implemented by mutual funds seeking to restrict market timing or other excessive trading. Gerbasio and others at his direction, engaged in a number of deceptive and fraudulent practices designed to conceal the identity of Beacon Rock and the nature of its trading activity, resulting in more than 26,000 Beacon Rock market timing trades. The U.S. Attorney charged Beacon Rock and Gerbasio with, and the defendants pled guilty to, securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §78j(b)] and Rule 10b-5 thereunder [17 C.F.R. 240.10b-5].

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

Greenberg Calls for Postponement of AIG Annual Meeting

Maurice Greenberg, who was forced out as AIG's CEO after an accounting scandal and who remains CEO of AIG's largest shareholder, C.V. Starr & Co., filed a 13D with the SEC, stating that AIG is "in crisis" and calling for a postponement of the annual meeting scheduled for this week.  Last week AIG announced a first quarter net loss of $7.81 billion, the largest loss in the company's history. 

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

Banks Agree to Fund Clear Channel Buyout at Reduced Price

A settlement is imminent between Wall St. banks and Thomas H. Lee Partners and Bain Capital, the two private equity firms that agreed to buy out Clear Channel Communications.  The buyers sued the banks to force them to fund the deal.  Under the settlement, the banks would fund the deal at $36 per share, down from the previously agreed $39.20.  WSJ, Settlement in Clear Channel Case Imminent.

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

Principles for Distribution of Structured Products to Individual Investors Released

Five leading trade associations, co-sponsors of the Joint Associations Committee (JAC), today released an exposure draft of “Structured Products: Principles for Managing the Distributor-Individual Investor Relationship.” The global, non-binding, Principles address a wide range of issues affecting distribution of structured products to individual investors and reflect "collective industry expectations of integrity, professionalism, and ethical conduct in the retail structured products market,” according to Timothy Hailes, managing director and associate general counsel at JPMorgan Chase in London who is Chairman of the joint-associations working group that developed the Principles.

The Principles are the product of a coalition of trade associations that form the JAC, which comprises:  European Securitisation Forum (ESF), International Capital Market Association (ICMA), London Investment Banking Association (LIBA), the International Swaps and Derivatives Association (ISDA®) and SIFMA.  The principles were based on extensive work and collaboration with the associations’ member firms, and on consultation with distributor associations.  The JAC invites public comments on the Principles until June 16, 2008. 

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

Hedge Fund Manager Settles Insider Trading Charges

The SEC announced that on May 8, 2008, the Massachusetts federal district court entered final judgments by consent against the remaining defendants in an insider trading case arising out of Rhode Island-based Citizens Bank's May 4, 2004 announcement that it was acquiring Charter One Financial, Inc., a Cleveland-based bank. The settling parties are former hedge fund manager, Michael K.C. Tom of Waltham, Massachusetts, former Burlington, Massachusetts-based investment adviser, Global Time Capital Management, LLC, and former Burlington, Massachusetts-based hedge fund, GTC Growth Fund, L.P..  The SEC alleged that a then-Citizens employee conveyed certain material, non-public information relating to Citizens' planned acquisition to Global Time Capital Management portfolio manager Michael Tom, a former Citizens employee who ran the GTC Growth Fund. The complaint further alleged that between April 29, 2004 and May 4, 2004, Michael Tom purchased numerous Charter One call options, for his personal account and for the GTC Growth Fund. In addition, Michael Tom traded Charter One securities prior to Citizens' announcement in a joint account he held with his wife and in accounts he managed for his wife and in-laws. Michael Tom also tipped his brother about Citizen's acquisition plan. According to the complaint, Michael Tom's illegal insider trading in Charter One securities resulted in total profits of approximately $743,505.

Michael Tom and Global Time Capital Management, without admitting or denying the allegations contained in the Commission's complaint, each consented to the entry of final judgments against them and permanent injunctions against future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Michael Tom also agreed to pay disgorgement of $543,875.07 plus prejudgment interest of $107,381.63, and a civil money penalty of $150,000. Global Time Capital Management has agreed to pay a civil money penalty of $39,056.93. Relief defendant GTC Growth Fund has agreed to pay disgorgement of $189,868.39 plus prejudgment interest of $23,145.67.

May 12, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Three Florida Doctors with Insider Trading

The SEC filed a civil action in the United States District Court for the Southern District of Florida charging three doctors, Dr. Zachariah P. Zachariah (Zachariah), Dr. Mammen P. Zachariah (M. Zachariah), and Dr. Sheldon Nassberg, with illegal insider trading from which they reaped a total of more than a half-million dollars in profits. All three defendants reside and practice medicine in the Ft. Lauderdale, Florida area.

The SEC alleges illegal trading in the shares of two unrelated companies. In the first, the complaint alleges that Zachariah, shortly after being appointed to serve as a company director, learned that IVAX's then-chairman and CEO had agreed with the then-CEO of Teva Pharmaceuticals Ltd. on preliminary terms for Teva to acquire IVAX and placed the first of four separate IVAX stock purchase orders that he made in his online brokerage account that day. Zachariah purchased 35,000 shares of IVAX stock at a cost of approximately $730,000.  The SEC further alleges that Zachariah later tipped his brother, M. Zachariah, who purchased 2,000 shares of IVAX stock at a total cost of approximately $46,000 on the last trading day before IVAX announced on July 25, 2005 that Teva would acquire it.

In addition, according to the SEC's complaint, Zachariah also misappropriated material, non-public information about Sarasota, Fla.-based Correctional Services Corporation, which operated correctional and detention facilities.  The SEC's complaint alleges that from May through July 2005, Zachariah bought over $200,000 worth of Correctional shares and his brother and close friend, Nassberg, each made multiple purchases of Correctional stock in the week leading up to a public announcement on July 14, 2005, by The GEO Group, Inc., that it would acquire Correctional. Zachariah was a GEO consultant. The complaint seeks a judgment against all defendants providing for injunctions, disgorgement of their ill-gotten gains with prejudgment interest, and civil money penalties. The complaint also seeks an order prohibiting Zachariah from serving as an officer or director of a public company.

May 12, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Cablevision Set to Acquire Newsday

The Dolan family, who failed in its effort to take Cablevision private last year, seems to have prevailed with its $650 million bid for the Long Island newspaper, Newsday, after Rupert Murdoch pulled the News Co's $580 million bid and said it would not raise its price.  Cablevision consists of the cable company and a mix of sports and entertainment businesses, including Madison Square Garden, the Knicks and the Rangers.  Sam Zell, who controls the Newsday's parent company Tribune after taking its private last year, needs to sell assets to pay down the debt from the LBO.  Analysts view Cablevision's acquisition of the newspaper with skepticism, saying shareholders would be better off if the company repurchased its shares.  NYTimes, Cablevision Offer Baffles Wall Street (Again); WSJ, Cablevision Closes In On Deal for Newsday.

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

Sunday, May 11, 2008

Mitchell on Morals of the Marketplace

The Morals of the Marketplace, by LAWRENCE E. MITCHELL, George Washington University - Law School, was recently posted on SSRN.  Here is the abstract:

This brief essay explores the economic and social legitimacy of modern financial markets, with particular attention to the relationship between risk and responsibility. Using the markets for corporate common stock and mortgaged-backed securities as illustrations, and modern portfolio theory as its theoretical base, it raises questions about the links between capital markets and the real economy, and their effects upon each other. It concludes that capital markets largely have become disconnected from the real economy and have created a context in which finance finances finance rather than production.

This theoretical essay introduces a larger empirical project in progress in which I am attempting to understand in detail and nuance the relationships between capital markets and the formation of productive capital.

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

Heminway on SOX and Ethics

Does Sarbanes-Oxley Foster the Existence of Ethical Executive Role Models in the Corporation?, by JOAN MACLEOD HEMINWAY, University of Tennessee College of Law, was recently posted on SSRN.  Here is the abstract:

If compliance with, or the efficacy of, Sarbanes-Oxley and other corporate governance initiatives requires that executives (or other firm leaders) be good ethical role models, then it is important to ask whether Sarbanes-Oxley - or any other attribute of existing corporate governance regulation - in fact promotes or permits the production or preservation of ethical role models in the executive ranks of public companies. An absence of support for ethical role models in public companies may signal the failure of broad-based federal corporate governance initiatives like Sarbanes-Oxley.

This Article assumes that ethical roles models may be important to the maintenance of good corporate governance (in general) and the success of Sarbanes-Oxley as a corporate governance initiative (in specific). With that in mind, the Article preliminarily analyzes, using legal and social sciences literature, whether Sarbanes-Oxley may encourage or discourage the existence of ethical role models in the corporation.

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

Bartlett on Going Private

Going Private But Staying Public: Reexamining the Effect of Sarbanes-Oxley on Firms' Going-Private Decisions, by ROBERT P. BARTLETT III, University of Georgia Law School, was recently posted on SSRN.  Here is the abstract:

This article examines whether the cost of complying with the Sarbanes-Oxley Act of 2002 (SOX) contributed to the rise in going-private transactions after its enactment. Prior studies of this issue generally suffer from a mistaken assumption that by going private, a publicly-traded firm necessarily immunizes itself from SOX. In actuality, the need to finance a going-private transaction often requires firms to issue high-yield debt securities that subject the surviving firm to SEC-reporting obligations and, as a consequence, most of the substantive provisions of SOX. This paper thus explores a previously unexamined natural experiment: To the extent SOX contributed to the rise in going-private transactions, one should observe after 2002 a transition away from high-yield debt in the financing of going-private transactions towards other forms of SOX-free finance.

Using a unique dataset of going-private transactions, this paper examines the financing decisions of 468 going-private transactions occurring in the eight year period surrounding the enactment of SOX. Although SOX-free forms of subordinated debt-financing were widely available during this period, I find no significant change in the overall rate at which firms used high-yield debt in structuring going-private transactions after SOX was enacted. Cross-sectional analysis, however, reveals that the use of high-yield financing marginally declined after 2002 for small- and medium-sized transactions, while significantly increasing for large-sized transactions. These findings are consistent with the hypothesis that the costs of SOX have disproportionately burdened small firms. They also strongly suggest that non-SOX factors were the primary impetus for the name brand buyouts commonly evoked as evidence that SOX has harmed the competitiveness of U.S. capital markets.

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

Karmel on SROs as Government Agencies

Should Securities Industry Self-Regulatory Organizations be Considered Government Agencies?, by ROBERTA S. KARMEL, Brooklyn Law School, was recently posted on SSRN.  Here is the abstract:

Securities industry self-regulatory organizations (SROs) began as private sector membership organizations of securities industry professionals. This article addresses the questions of whether, and to what extent, securities industry SROs have become government agencies, and whether, and to what extent, they should be subject to constitutional and statutory controls on government agencies. It focuses principally on the Financial Industry Regulatory Agency (FINRA), a new entity which combined the National Association of Securities Dealers, Inc. (NASD) and the member regulation functions of NYSE Group, Inc. (NYSE).

The cases addressing these critical issues are contradictory, and generally not based on any overriding constitutional law principles. In some areas, the courts have just stated that an SRO is exercising delegated governmental power. In other areas, the courts have just stated that an SRO is a private membership organization. Sometimes, courts have distinguished between the commercial and regulatory functions of SROs, in order to draw lines separating the laws applicable to government agencies from private sector organizations.

The article will conclude that as long as the securities industry, rather than the SEC, controls the governance of FINRA and the selection of its Board of Governors, FINRA should not be held to be a government entity. This conclusion may be surprising to scholars and lawyers who have not considered the implications of changed SRO governance. Nevertheless, when FINRA is exercising investigative and disciplinary functions it should be treated like a government agency. Furthermore, to the extent practicable FINRA should operate according to transparency standards applicable to government bodies. Striking the right balance between private sector flexibility and constitutional and administrative law protections is critical to the future operation of FINRA and other securities industry SROs.

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

Krawiec on Risk Management

Operational Risk Management: An Emergent Industry, by KIMBERLY D. KRAWIEC, University of North Carolina at Chapel Hill - School of Law, was recently posted on SSRN.  Here is the abstract:

Financial institutions have always been exposed to operational risk - the risk of loss from faulty internal controls, human error or misconduct, external events, or legal liability. Only in the past decade, however, has operational risk risen to claim a central role in risk management within financial institutions, taking its place alongside market and credit risk as a hazard that financial institutions, regulators, and academics seriously study, model, and attempt to control and quantify. This newfound prominence is reflected in the Basel II capital accord, in numerous books and articles on operational risk, and in the emergence of a rapidly expanding operational risk management profession that is expected to grow at a compound annual rate of 5.5%, from US$992 million in 2006 to US$1.16 billion in 2009.

This increased emphasis on operational risk management corresponds to a much wider trend of responsive or enforced self- regulation, both in the United States and internationally, that attaches significant importance to the internal control and compliance mechanisms of business and financial institutions. Driven by legal changes and well-organized compliance industries that include lawyers, accountants, consultants, in-house compliance and human resources personnel, risk management experts, and workplace diversity trainers (hereafter, legal intermediaries), internal compliance expenditures have increased substantially throughout the past decade, assuming an ever-greater role in legal liability determinations and organizational decision-making, and consuming an ever-greater portion of corporate and financial institution budgets.

This chapter situates operational risk management - particularly those components of operational risk related to legal risk and the risk of loss from employee misconduct - within the broader literature on enforced self-regulation, internal controls, and compliance, arguing that the increased focus on operational risk management portends both positive and negative effects. On the one hand, business and financial institutions that are law abiding and avoid unforeseen and unaccounted for disasters are an obvious positive. At the same time, however, all operational risk management is not created equally. Some operational risk expenditures may prove more effective at enhancing the profits or positions of particular firm constituencies and legal intermediaries, or luring regulators and firm stakeholders into a false confidence regarding operational risk management, than at significantly reducing operational risk losses. Indeed, recent rogue trading losses such as those at Société Générale and MF Global Ltd. demonstrate that operational risk measures such as those embraced in Basel II are no substitute for sound firm management and regulatory oversight.

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