Securities Law Prof Blog

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

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Friday, May 23, 2008

Attorney Settles SEC Charges of Authoring Fraudulent Legal Opinion

The SEC charged Global Development & Environmental Resources, Inc., and individual defendants with securities fraud for their participation in a fraudulent scheme to evade registration requirements and a "pump and dump" stock manipulation scheme. The SEC also settled fraud charges against California-based securities attorney, Carmine J. Bua, who authored a fraudulent legal opinion, which authorized the issuance of purportedly unrestricted Global shares. The SEC alleges that from June through August 2005, defendants engaged in a complex scheme to evade the registration requirements by obtaining a fraudulently backdated convertible promissory note, using a forged assignment to assign the note to three foreign entities and then converting the note into unrestricted Global shares. The complaint alleges that defendant Bua drafted the assignment and legal opinion letter authorizing the issuance of unrestricted shares, despite possessing information which undermined the validity of the note and its subsequent assignment.  The complaint further alleges that the defendants then engaged in a "pump-and-dump" scheme by arranging for Global to issue numerous press releases that contained false and misleading information relating to Global's purported clients, pending contracts and revenue projections.

Upon the filing of the Commission's complaint, and without admitting or denying the allegations in the complaint, Bua consented to the entry of a final judgment permanently enjoining him from violating Section 5 of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and to a penny stock bar. Bua has agreed to pay disgorgement and civil penalties in an amount to be determined at a later date.

May 23, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Former Gemstar-TV Guide CEO Indicted on Obstruction of Justice Charge

The SEC announced that on May 13, 2008, Henry C. Yuen, the former chairman and chief executive officer of Gemstar-TV Guide International, Inc., was indicted on a felony charge of obstructing a Commission investigation.  The indictment alleges that during an investigation regarding accounting irregularities at Gemstar-TV Guide, the Commission issued a subpoena to Yuen requiring him to produce documents. After receiving the subpoena, Yuen allegedly began deleting from his computer various documents that were called for by the subpoena. In addition, the day before Yuen was scheduled to appear for testimony in the Commission investigation, Yuen allegedly ran a program on his computer that made it impossible to recover the documents he had previously deleted.

The SEC's complaint, filed in June 2003, alleged that from June 1999 through September 2002, Yuen participated in Gemstar's fraudulent overstatement of revenues by at least $248 million. After a three week trial in December 2005, the court found in favor of the Commission and against Yuen on all claims and ordered Yuen to pay over $22 million in disgorgement and penalties. On April 1, 2008, the Ninth Circuit affirmed the district court's ruling.

May 23, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Rating Firms Switch Analysts at Issuers' Request

Additional evidence that raises doubts about the independence of the bond rating agencies -- all three rating companies, Moody's, Fitch, and S&P, acknowledge that on some occasions they have changed the analysts assigned to rate an issuer's bonds after the issuer or its bank requested it.  Various reasons where given, such as that the analyst did not respond to telephone calls or asked too many questions.  WSJ, At Request of Bond Issuers or Bankers, Credit-Rating Firms Switch Analysts.

May 23, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Yahoo Postpones Annual Meeting

Yahoo filed its preliminary proxy materials with the SEC on May 22, with nine of the current 10 directors up for re-election (one, Michael Kozel, has resigned), and postponed the date of the annual meeting from July 3 to the end of July, pending SECreview and clearance of the proxy materials.  Talks continue between Microsoft and Yahoo over Microsoft's offer to acquire parts of Yahoo's business, which some see as an excuse to resume merger discussions.  The Wall St. Journal explores the connections among the key players at both companies -- former employees of Donaldson Lufkin & Jenrette, friends of Carl Icahn, and directors of Berkshire Hathaway.  WSJ, Yahoo, Microsoft and the Ties That Bind.

May 23, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, May 22, 2008

Eight individuals Indicted in Stock Lending Kickbacks Investigation

Federal prosecutors indicted eight more individuals in connection with a scheme involving illegal kickbacks paid by brokerage firms in connection with stock lending.  Those indicted include former stock-lending supervisors at Morgan Stanley and Janney Montgomery Scott.  Eighteen people previously pleaded guilty.  WSJ, Eight More Are Charged In Stock-Lending Probe.

May 22, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Canadian Court Blocks BCE Buyout

A Canadian appellate court sided with the bondholders of Canadian telecommunications company BCE Inc. and held that the company's LBO is unfair to them.  According to the court,

"The Board should have considered the interests (including reasonable expectations) of the [bondholders]. In Canada, the directors of a corporation have a more extensive duty...giving consideration to the interests of all stakeholders, which, in this case, includes the [bondholders]."

Is this an accurate expressesion of Canadian law, or will the decision be overturned on appeal?  Any experts in Canadian corporate law out there?  WSJ, BCE Buyout Blocked in Canada Court.

May 22, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Shareholder Votes On Say on Pay Down at Big Banks

Shareholder support for "say-on-pay" proposals at the four big banks -- Merrill Lynch, Citigroup, J.P. Morgan Chase, and Morgan Stanley -- averaged 37% of shareholder votes.  While that's a healthy percentage, it's down from last year's average of 43% for the same companies -- a surprising result given the drop of stockholder value and the generous compensation packages at those firms.  In contrast, shareholder support for the proposal at all U.S. corporations is roughly the same as last year.  WSJ, Say-on-Pay Doesn't Play on Wall Street.

May 22, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 21, 2008

Former Investor Relations Director of Provide Commerce Settles Insider Trading Charges

The SEC filed an insider trading action against Gordon C. Bigler, the former director of corporate finance and investor relations for Provide Commerce, alleging that Bigler traded in Provide Commerce stock immediately after learning confidential information about its pending acquisition by Liberty Media.  The SEC's complaint, filed in federal district court in San Diego, California, alleges that Bigler learned of Liberty's proposed acquisition price for Provide Commerce of $33 per share prior to the merger in an email from Provide Commerce's chief financial officer on November 15, 2005. Bigler traded within an hour of receiving the inside information, buying 4,500 Provide Commerce shares. On the first trading day after Provide Commerce publicly announced the acquisition, Provide Commerce's stock price increased more than 10.5 percent, and its trading volume increased 1,045 percent. Shortly after the announcement, Bigler sold his Provide Commerce shares for a profit of $41,622.78.

To settle the SEC's charges, Gordon C. Bigler has consented, without admitting or denying the allegations in the complaint, to a final judgment permanently enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, to pay $41,622.78, representing the disgorgement of his illegal trading profits and prejudgment interest, and to pay a civil penalty of $41,622.78. The settlement is subject to approval by the court.

May 21, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

First Quarter Securities Issuance Reached $1.43 Trillion

According to the latest Research Quarterly released by the Securities Industry and Financial Markets Association (SIFMA), securities issuance in the first quarter of 2008 reached $1.43 trillion, an increase from the $1.36 trillion issued in the fourth quarter of 2007 but substantially lower than the $1.81 trillion issued in the first quarter of 2007. The year-over-year issuance decline was the result of the uncertain capital market conditions over the past year. The sharpest declines occurred in the most credit risk sensitive sectors, including nonagency or private-label mortgage-related securities and high-yield bonds. Investment-grade corporate bonds experienced a more modest volume decline, and agency debt and mortgage-backed pass-through securities volumes rose on a year-over-year basis.

May 21, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Law & Society Annual Meeting Sessions from Corporate and Securities Law Women Scholars

For those attending the Law and Society Annual Meeting next week (May 29-June 1) in Montreal, I hope you will mark the following six programs on your calendar.  All are organized by the Corporate and Securities Law Women Scholars under the capable leadership of Faith Stevelman (NYLS).

Thursday 8:15 - 10:00 a.m.  Securities Markets, Risk and Corporate Fraud: Looking Beyond Private Civil Litigation. Principal presenters include: Jayne Barnard (William & Mary), Donna Nagy (Indiana-Bloomington), Rebecca Roiphe (NYLS).

Friday 12:30 -- 2:15 p.m.  Firms, Markets, and Social Welfare: The Role of Business Law.  Principal presenters include: Claire Moore Dickerson (Tulane), Renee Jones (Boston College), Christiana Ochoa (Indiana-Bloomington), Janis Sarra (British Columbia).

Saturday 8:15 -- 10:00 a.m. Law, Value, and Wealth: Markets and Securities Law.  Principal presenters include: Christine Hurt (Illinois), Lisa Fairfax (Maryland), Elizabeth Nowicki (Tulane).

Saturday 4:30 -- 6:15 p.m.  Corporate Governance and Employees: Caught in the Crossfire.  Principal presenters include: Kelli Alces (Florida State), Katrice Bridges (Penn State), Julie Goldscheid (CUNY).

Sunday 8:15 -- 10:00 a.m.  Changing Perspectives on the Corporate Board, its Role and Functions.  Principal presenters include: Lynne Dallas (San Diego), Kimberly Krawiec (UNC), Erica Beecher-Monas (Wayne State).

Sunday 10:15 -- noon.  Trends in Securities Litigation and Settlements.  Principal presenters include: Margaret V. Sachs (Georgia), Verity Winship (Fordham), Faith Stevelman (NYLS).

I hope to see you there!

May 21, 2008 in Professional Announcements | Permalink | Comments (0) | TrackBack (3)

FINRA Warns About Misleading Investors About Expertise

FINRA issued a regulatory notice to remind firms of their obligation to supervise representatives' communications with the public used to establish their expertise. FINRA is concerned that some representatives are misrepresenting their investment acumen by using ghostwritten communications that mislead investors.

May 21, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Former U.S. Foodservice CFO Consents to Injunction

The SEC announced that the federal district court for the District of Maryland entered a final judgment against defendant Michael Resnick, former CFO of U.S. Foodservice (USF). The judgment permanently enjoins Resnick from violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5 and 13b2-1 thereunder and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. Resnick was permanently barred from serving as an officer or director of a public company. The judgment also orders Resnick to pay approximately $353,750 in disgorgement and prejudgment interest thereon in the amount of $141,529, but waives payment of all disgorgement and prejudgment interest and does not impose a civil penalty, based on the sworn representations in Resnick's Statement of Financial Condition and other documents and information submitted to the Commission.

The SEC alleged that Resnick and others at USF, then a subsidiary of Royal Ahold (Koninklijke Ahold N.V.), participated in a scheme to overstate Royal Ahold's income by $700 million or more in Commission filings and other public announcements for at least fiscal years 2001 and 2002.  Resnick consented to the judgment without admitting or denying the allegations.

May 21, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Proposes to Require Interactive Data from Mutual Funds

The SEC voted unanimously to propose that mutual fund investors get access to key information about fees, performance, and strategies through interactive data, which would permit investors to make comparisons among thousands of funds.  The SEC's proposal would require funds to label data in their public filings using computer tags similar to the bar codes that identify products at stores or packages in the mail. Mutual funds already have been submitting information to the SEC in interactive data format on a voluntary basis. The SEC's rule proposal would require all mutual funds to provide data-tagged information beginning with registration statement filings that become effective after Dec. 31, 2009. A mutual fund also would be required to post the interactive data on its Web site, if it maintains one.
Last week, the SEC proposed a similar rule to help investors by requiring public companies to provide financial information using interactive data beginning next year for the largest companies and within three years for all public companies.  Mutual Fund Investors Could Get Access to "Comparison Shopping" Information.

May 21, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Pickens Supports Icahn's Proxy Fight to Replace Yahoo Board

T. Boone Pickens said he bought 10 million shares of Yahoo and supports Carl Icahn's effort to replace the Yahoo board.  While some other big shareholders have indicated their support for Icahn, his success may depend on whether Microsoft renews its offer to take over the company.  The Yahoo shareholders meeting is set for July 3.  WSJ, Icahn Gains New Support in Yahoo Push.

For more information about Icahn's blue-chip slate of nominees for the Yahoo board, see WSJ, Icahn's Gate Crashers Could Be Asked to Stay.

May 21, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Time Warner Will Announce Cable Spin-Off Details

Time Warner will announce details of its plan to spin off its 84% owned subsidiary, Time Warner Cable, by year end.  The plan includes payment of a special $10 per share dividend by the cable company prior to the spin-off, which will bring Time Warner $9.25 billion.  WSJ, Time Warner to Detail Plan for Cable Arm.

May 21, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Sends Greenberg a Wells Notice

The SEC sent Maurice Greenberg, former AIG CEO, a Wells notice, informing him that he may face civil charges for his alleged role in the transactions with General Re creating sham loss reserves.  A Wells notice gives the subject of an investigation an opportunity to persuade the SEC not to bring charges.  Greenber's lawyer stated they remained confident of their position on the merits.  WSJ, Greenberg May Face SEC Civil Charges.

May 21, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 20, 2008

D.C. District Court Finds Courts Cannot Impose Penalties for Aiding & Abetting Advisers Act Violations

In what the court describes as a "case of first impression," the federal district court for the District of Columbia held that the SEC does not have the authority to seek, and the court lacks jurisdiction to impose, monetary penalties for aiding and abetting violations of the Investment Advisers Act of 1940.  The court relied on the plain meaning of Section 209(e) of the Advisers Act, which provides that civil penalties can be imposed on "the person who committed" a violation of the Act.  The court deemed the statute's failure to authorize explicitly monetary penalties for aiding and abetting violations of the Advisers Act dispositive.  It rejected the SEC's argument that this interpretation made no sense because it would mean that the SEC could only obtain monetary penalties against aiders and abettors under the Advisers Act in administrative proceedings and would require the agency to bring both an administrative and judicial proceeding where it sought both a monetary penalty and injunctive relief.  It also rejected the SEC's proffer of judicial decisions where the district courts imposed civil penalties for aiding and abetting Advisers Act violations, finding that none of them had actually analyzed the issue of the availability of the remedy.  SEC v. Bolla, 2008 WL 1959502 (D.D.C. May 6, 2008).

May 20, 2008 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

SEC Remands NYSE Disciplinary Action for Reconsideration of Sanctions

The SEC sustained the NYSE's findings that James Gerard O'Callaghan, an NYSE member and independent floor broker, violated Section 11(a) and Rule 11a-1 of the Securities Exchange Act of 1934 and NYSE Rules 90, 95, and 476 by executing trades in an account over which he exercised investment discretion. The SEC, however, remanded the proceeding for the NYSE to reconsider the sanctions imposed, particularly the three-month suspension. On remand, the SEC stated that the NYSE should address the protective interests to be served by removing O'Callaghan from the exchange floor, the mitigating factors presented in the record, and any other factors related to whether a suspension is appropriately remedial and not punitive.

May 20, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Obtains Relief Against $72 Million Ponzi Scheme

On May 16, 2008, the SEC obtained Orders of Preliminary Injunction and Other Relief (Orders) from the United States District Court for the Eastern District of Michigan against Gregory N. McKnight (McKnight) and Legisi Holdings, LLC (Legisi), pursuant to their consent. The Orders preliminarily enjoin the Defendants from violating the anti-fraud and registration provisions of the federal securities laws in connection with a $72 million Ponzi scheme. The Orders also continue the asset freezes and certain other ancillary relief previously ordered by the Court.

The SEC alleged that McKnight and Legisi Holdings conducted a fraudulent, unregistered offering of securities in which they raised approximately $72 million from more than 3,000 investors in all 50 states and several foreign countries through the Legisi website.  The SEC alleged that McKnight represented that he would invest the offering proceeds in foreign currencies, commodity futures, stocks and real estate and promised to pay interest of as much as 15 percent per month from the profits from his investments.  The complaint charges that, contrary to these representations, McKnight invested only approximately $33 million of the offering proceeds and that, rather than earning profits, these investments resulted in millions of dollars in losses. The Commission's complaint further charges that Defendants used approximately $27.5 million of the offering proceeds to make payments of purported profits to prior investors and were, thus, operating a Ponzi scheme, and that McKnight used $2.2 million of investor funds to pay for his personal expenses and to make payments to his relatives, Jennifer McKnight, Danielle Burton, and Theresa Burton.

The Orders preliminarily restrain and enjoin McKnight and Legisi from violating Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The Orders also, among other things, continue the freeze of McKnight's and Legisi's assets and the freeze of Legisi investor funds wherever located.

May 20, 2008 in SEC Action | Permalink | Comments (1) | TrackBack (0)

Senator Cornyn Introduces Bill to Address Kickback Arrangements in Private Securities Litigation

Senator John Cornyn (R-Tex.) recently introduced the Securities Litigation Attorney Accountability and Transparency Act in response to the recent scandals involving kickback arrangements by plaintiffs' counsel.  According to the Senator's Floor Statement,

Today, William Lerach, once a name partner at the law firm of Milberg, Weiss, Bershad, Hynes & Lerach LLP, reports to the United States Penitentiary in Lompoc, California, after pleading guilty to entering into this type of illegal kickback arrangement with lead plaintiffs. Next month, his former law partner Melvyn Weiss will be sentenced for the same crime. But there is reason to believe that this criminal activity is not limited to a few bad actors. Indeed, Mr. Lerach, unrepentant about having defrauded thousands of investors out of millions of dollars, has tried to defend himself on the basis that “everybody does it.” “Believe me,” Mr. Lerach told the Wall Street Journal, “it was industry practice.”

The Bill proposes reforms to address the the potential for private arrangements between lead plaintiffs and class counsel and the risk that lead plaintiffs will enter fee agreements that pay the lawyers more than the market rate.  Again according to the Floor Statement,

The Bill would require sworn certifications from lead plaintiffs and their attorneys disclosing: (a) any payments or promises of payment made by the attorney to the plaintiff in connection with the action; (b) any other legal representations of the plaintiff by the attorney; (c) any campaign contributions the attorney has made to any elected official with authority to retain counsel for the plaintiff; and (d) any other conflicts of interest. This disclosure would put an end to secret agreements where plaintiffs’ lawyers pay kickbacks to the lead plaintiffs who retain them. These secret arrangements divorced the interests of both the lawyers and the lead plaintiffs from the interests of the class as a whole. Full disclosure will prevent this situation from recurring.

The Bill would also require courts to employ a competitive bidding process as one of the criteria in the approval of the lead class counsel. In current practice, courts usually defer to the lead plaintiff’s choice of class counsel after reviewing the prospective lead counsel’s prior work on the case, experience, knowledge, and resources. The Bill would require that courts also consider the prospective lead counsel’s fees, and have courts solicit competitive bids so that those fees are based on market rates. The class members deserve to be represented at a reasonable market rate. Money that goes to the lawyers is money that never makes it to the ordinary shareholders who are the victims of securities fraud. Currently, courts review attorneys’ fees for reasonableness before the fees are paid at the conclusion of the case. This provision would allow courts to negotiate a reasonable fee at the threshold of the litigation.

Finally, the Bill would commission a study of the last 5 years of fee awards in securities class actions to determine the average hourly rate for lead counsel. Courts may be able to use this information to better rein-in excessive attorneys’ fees.

May 20, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)