May 27, 2008
SEC Expands Inquiry into Credit Ratings Agencies
The SEC expanded its investigation into credit ratings agencies to look at how the agencies detect and handle errors in their ratings. Last week it was reported that Moody's failed promptly to correct triple-A ratings that resulted from errors in computer coding. WSJ, SEC Widens Ratings-Agencies Probe.
Former VP of Drug Company Settles Insider Trading Charges
The federal district court for the Southern District of New York entered a Final Judgment against defendant Alexander Yaroshinsky in SEC v. Yaroshinsky, restraining and enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The SEC alleged that Yaroshinsky, a former Vice President of Clinical Operations and Biostatistics for Connetics Corporation, learned material non-public information concerning the FDA staff's preliminary analysis of the carcinogenicity tests of Velac Gel, an acne drug then being developed by Connetics, and tipped his co-defendant Victor Zak to this information and then traded on it himself. Yaroshinsky consented to the entry of the judgment without admitting or denying any of the allegations of the Commission's complaint. Yaroshinsky is liable for disgorgement in the amount of $354,927, plus prejudgment interest thereon in the amount of $84,275, and a civil penalty of $283,798. Zak settled charges related to this case last yeardisgorgement of $138,569 for his own trades, plus an equal civil penalty of $138,569 and prejudgment interest of $32,902. He is also paying the $216,358 in disgorgement that Zak was unable to pay, plus prejudgment interest thereon of $51,373 and a civil penalty of $145,229.
Broker-Dealer Settles Charges It Intervened in ARS Auctions
The SEC settled administrative proceedings against broker-dealer First Southwest Co., which, as part of its broker-dealer business, underwrote and managed a limited number of auctions for auction rate securities. The SEC alleged that the firm had, without adequate disclosure, intervened in auctions by bidding for its proprietary account to prevent failed auctions and all-hold auctions, and, in some instances, the intervention affected the clearing rate. In assessing a civil penalty of $150,000, the SEC noted that it considered the firm's cooperation in the investigation and its relatively small share of the auction rate securities markets. It also considered, however, that the firm did not self-report the practices to the SEC.
The Last Days of Bear Stearns
Over two months later, what do we know about the collapse of Bear Stearns? Bear's CEO Alan Schwartz blames an unforeseen "market tsunami." The Wall St. Journal, in the first of a three-part series, looks at the role internal dissension played in bringing about its downfall. It reports that at early as August 2007 individuals within and outside the firm were calling for it to raise additional capital and reduce its inventory of mortgage-related securities, but to no avail, in large part, according to the WSJ, to the firm's reluctance to replace CEO James Cayne, much blamed by the newspaper in an earlier article for his disengaged attitude toward the firm's troubles. WSJ, Lost Opportunities Haunt Final Days of Bear Stearns.
SEC Reverses Position on Shareholders' Proposals on Universal Health Care
The SEC, in a reversal of its position, told several companies, including United Health and Boeing, that they cannot exclude from the management proxy statement shareholders' resolutions urging universal health insurance coverage under Rule 14a-8's exclusion for ordinary business decisions, but instead must treat it as an issue of social policy. Religious groups and labor unions have submitted the same health care proposal to three dozen corporations. At some companies, the proposing shareholders agreed to withdraw the proposal in exchange for a dialogue with the corporation on the issue. NYTimes, S.E.C. Backs Health Care Balloting .
Fed and SEC Work Out Oversight Relationship over Big Banks
What will be the future of financial regulation? Treasury Secretary Paulson's Blueprint would make the Treasury Dept. the uber-financial regulator (with a diminished role for the SEC), while SEC Chairman Cox, in recent weeks, has advocated for that agency's increased supervisory role over the major investment banks that it currently oversees through its Consolidated Supervised Entities (CSE) system. The Washington Post explores how the Federal Reserve and the SEC are working out their joint involvement in the aftermath of the Fed's rescue of Bear Stearns. A special unit, created in the New York Fed that reports directly to its President Timothy Geithner, is composed of staff members from both the bank supervision and markets groups and has been accompanying the SEC on its visits to the big investment banks. Meanwhile the SEC is preparing a Memorandum of Understanding to formalize their information-sharing and cooperative efforts. WPost, Fed Keeps Watch on Wall St. -- From the Inside.
May 25, 2008
Winship on Fair Funds
Fair Funds and the Compensation Conundrum, by VERITY WINSHIP, Fordham University School of Law, was recently posted on SSRN. Here is the abstract:
The Fair Fund provision of Sarbanes-Oxley allows the Securities and Exchange Commission ("SEC") to direct money penalty amounts to injured investors. Because of the provision, large penalties mean potentially large SEC-obtained investor compensation, heralding a new compensatory role for the agency. The SEC has announced that it will direct money to injured investors whenever possible, but has not articulated clear priorities. This Article fills the gap by introducing terms of debate and proposing a framework for the SEC's exercise of its discretion under Fair Funds.
The Article introduces the concept of "public class counsel," a public actor that has the dual function of deterrence and victim compensation. The concept describes - and suggest limits to - the SEC's role in a system in which public and private remedies for securities law violations increasingly converge. The Article then draws on the analogy between the "public class counsel" and the "private attorney general" to propose an answer to the following question: When should the SEC exercise its discretion to create a Fair Fund? It suggests that the SEC focus on distributing penalties gathered from aiders and abettors of securities fraud because such an approach would minimize two significant concerns with investor compensation: first, that compensation of injured investors often amounts to a transfer of money among equally innocent investors and, second, that giving the SEC and private actors a role in compensation risks duplication of costs.
Jordan & Hughes on Self-Regulation
Which Way for Market Institutions? The Fundamental Question of Self-Regulation, by CALLY E. JORDAN, University of Melbourne - Law School, and PAMELA S. HUGHES, Blake, Cassels & Graydon LLP, was recentlly posted on SSRN. Here is the abstract:
It is a fundamental question. How should financial market institutions be regulated? Is self-regulation alive and well, at least in some parts of the world, for some market functions? Or, despite a last gasp here and there, is self-regulation shuffling towards extinction? In particular, the wave of demutualizations and consolidations of exchanges has prompted questions as to traditional roles, governance models and the nature of regulation of exchanges. Demutualization of exchanges has been a catalyst for these debates, but the debates are not new. Although numerous studies have discussed the advantages and disadvantages of a self-regulatory structure for exchanges and other market institutions, few have considered the interaction of factors that have determined the traditional allocations of regulatory powers: market history, business culture, legal system, the concept of public interest, the corporate form, the political system, forces of internationalization. How have these factors affected the allocation of regulatory power? Will the self-regulatory model of market institution, where it has been dominant, be pushed to the margins by the interplay of these various factor, as in the UK? Do unitary regulators oust self-regulatory principles? Is self-regulation in the US merely a façade? Are small and emerging markets adopting outdated self-regulatory models at the behest of the international financial institutions? Do self-regulatory organizations have a new role to play as liaison between national and supranational regulators? It may be too soon to definitively answer the questions posed by this paper, but for the moment, self regulation is here to stay; it just might not be staying where it used to.