Securities Law Prof Blog

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

Friday, June 6, 2008

SEC's White Speaks on IFRS

John W. White, Director, Division of Corporation Finance, SEC, spoke on IFRS and U.S. Companies: A Look Ahead at the Financial Executives International Global Financial Reporting Convergence Conference in New York, New York on June 5, 2008.

June 6, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Faro Settles FCPA Charges

The SEC instituted settled enforcement proceedings charging Faro Technologies, Inc. (Faro) with violations of the Foreign Corrupt Practices Act (FCPA) in connection with certain improper payments that Faro's Chinese subsidiary made to employees of Chinese state-owned companies in order to obtain or retain business. Faro develops, manufactures, markets, and supports software-based three-dimensional measurement devices.  The Commission issued an administrative order finding that Faro violated the anti-bribery, books-and-records, and internal controls provisions of the FCPA. In the administrative order, the Commission ordered Faro to cease and desist from such violations, and to disgorge $1,411,306 in illegal profits, together with $439,637.72 in prejudgment interest. The Commission also required Faro to retain an independent consultant for a two year term to review and make recommendations concerning the company's FCPA compliance policies and procedures.

In the administrative order, the Commission found that, from 2004 through early 2006, Faro's Chinese subsidiary made a total of $444,492 in improper payments to employees of Chinese state-owned companies in order to obtain or retain sales contracts, from which Faro realized net profits of $1,411,306. The Commission found that a high level Faro executive, Faro's Director of Asia-Pacific Sales (the Sales Director), authorized employees of Faro's Chinese subsidiary to make the improper payments, including payments made through third-party intermediaries in order to avoid detection. The Commission also found that the Sales Director directed employees of Faro's Chinese subsidiary to alter account entries to conceal the true nature of the payments. In connection with the improper payments, Faro failed to make and keep accurate books and records, and failed to devise and maintain effective internal accounting controls.

In addition, in a separate non-prosecution agreement with the United States Department of Justice also announced today, Faro will pay a $1.1 million criminal penalty and agree to the same terms concerning the independent consultant.

The Commission considered the fact that Faro self-reported and promptly undertook remedial actions, as well as the cooperation it afforded the Commission staff in its investigation. (Rel. 34-57933; AAE Rel. 2836; File No. 3-13059)

June 6, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC and DOJ Investigate AIG

The Wall St. Journal reports that both the SEC and the Department of Justice are investigating whether AIG overstated the value of credit default swaps, which are contracts that insure against default of securities, including those backed by subprime mortgages.  In February AIG announced that its auditor had found a "material weakness" in its accounting, and AIG has suffered two consecutive quarterly losses, the largest in its history, because of swaps-related writedowns.  WSJ, SEC, Justice Scrutinize
AIG on Swaps Accounting.

June 6, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Two Fed Reserve Presidents Warn About Lending Money to Investment Firms

The debate over the Federal Reserve's decision to bail out Bear Stearns and lend money to securities firms was renewed as two Federal Reserve Bank Presidents independently warned of adverse consequences from the decision.  Jeffrey Lacker, President of the Federal Reserve Bank in Richmond Virginia, said in a speech in London that it might induce greater risk-taking; Charles Plosser, President of the Federal Reserve Bank in Philadelphia, warned of the risk of "sowing the seeds of the next crisis."  NYTimes, Two Fed Bank Presidents Warn About Lending to Securities Firms; WSJ, Insider Joins Critics of the Fed, Faulting Credit-Crisis Programs.

June 6, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, June 5, 2008

Broadcom Co-Founder Indicted on Backdating and Drug Charges

Federal officials unsealed two indictments of Broadcom co-founder Henry T. Nicholas III.  One relates to securities fraud violations in connection with the company's backdating options scandal.  The other indictment charges Nicholas with conspiracy to distribute and acquire controlled substances, including ecstasy, cocaine and methamphetamine, which he allegedly used to spike the drinks of employees and customers.  Nicholas resigned as CEO in 2003.  WSJ, Broadcom Ex-Chief Nicholas Faces Fraud, Drug Charges.

June 5, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

New York Attorney General Enters Agreement with Credit Rating Agencies to Increase Independence

New York State Attorney General Andrew M. Cuomo today announced agreement with the nation’s three principal credit rating agencies in the residential mortgage-backed securities market -- Standard & Poor’s (“S&P”) Moody’s Investors Service, Inc. (“Moody’s”), and Fitch, Inc. (“Fitch”) -- designed to increase the independence of the ratings agencies, ensure that crucial loan data is provided to the agencies before they rate loan pools, and increase transparency in the RMBS market.

Under the agreements, the credit rating agencies will fundamentally alter how they are compensated by investment banks for providing ratings on loan pools. In addition, the ratings firms will all now require for the first time that investment banks provide due diligence data on loan pools for review prior to the issuance of ratings. This will ensure that significant data, which was not previously disclosed to the rating agencies, will be received and reviewed by them before any bonds are rated.

Under current practice, credit rating agencies were typically only compensated by investment banks if they were selected by the investment banks to provide an ultimate rating on a loan pool. They were paid no fees during their initial reviews of the loan pools or during their discussions and negotiations with the investment banks about the structuring of the loan pools. Investment banks were thus able to get free previews of RMBS assessments from multiple credit rating agencies, enabling the investment banks to hire the agency that provided the best rating. In addition, the Attorney General’s investigation found that credit rating agencies were not privy to pertinent due diligence information that investment banks had about the mortgages comprising the loan pools.

All three rating agencies have agreed to implement the following reforms:

• Fee Reforms. Credit rating agencies will now establish a fee-for-service structure, where they will be compensated regardless of whether the investment bank ultimately selects them to rate a RMBS.

• Disclosure Reforms. Credit rating agencies will disclose information about all securitizations submitted for their initial review. This will enable investors to determine whether issuers sought, but subsequently decided not to use, ratings from a credit rating agency.

• Loan Originator Review. Credit rating agencies will establish criteria for reviewing individual mortgage lenders (known as originators), as well as the lender’s origination processes. The credit rating agencies will review and evaluate these loan originators and disclose their originator evaluations on their websites.

• Due Diligence Reforms. Credit rating agencies will develop criteria for the due diligence information that is collected by investment banks on the mortgages comprising an RMBS. The credit rating agencies will receive loan level results of due diligence and review those results prior to issuing ratings. The credit rating agencies will also disclose their due diligence criteria on their websites.

• Credit Agency Independence. Credit rating agencies will perform an annual review of their RMBS businesses to identify practices that could compromise their independent ratings. The credit ratings agencies will remediate any practices that they find could compromise independence.

• Representations and Warranties. Credit rating agencies will require a series of representations and warranties from investment banks and other financially responsible parties about the loans underlying the RMBS.

June 5, 2008 in Other Regulatory Action | Permalink | Comments (3) | TrackBack (0)

Yahoo Responds to Icahn's Letter

Roy Bostock, chairman of Yahoo, responded to Carl Icahn's letter and took issue with Icahn's characterization of the employee severance plan as a poison pill.  Rather, the plan "is intended to help us preserve and enhance    shareholder value by allowing Yahoo! to continue to attract and retain the industry's best talent, and to allow employees to stay focused on implementing Yahoo!'s business strategy."  In responding to Icahn's assertion that the board "sabotaged" the Microsoft offer, Bostock stated that the Yahoo board engaged in discussions focused on maximizing shareholder value until Microsoft walked away.  He also criticized Icahn for relying on unsubstantiated assertions contained in documents filed in a shareholders' derivative suit that was recently unsealed.

June 5, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 4, 2008

Attorney Settles Insider Trading Charges Involving NSD Bancorp

The SEC filed a complaint in the United States District Court for the Southern District of New York against Jeffrey P. Myers, an attorney, alleging that he engaged in unlawful insider trading. Myers unlawfully purchased 1,000 shares of the common stock of NSD Bancorp, Inc. (NSD Bancorp) in advance of an October 15, 2004, public announcement of a merger between NSD Bancorp and F.N.B. Corporation (FNB) and after being tipped about the merger by a member of NSD Bancorp's Board of Directors (the Insider). Myers sold all 1,000 shares of his stock after the merger announcement for a profit of $10,939.

The SEC further alleges that Myers knew the Insider was a member of NSD Bancorp's Board of Directors. Because of his position as a Director, by September 15, 2004, the Insider knew that at least four companies had submitted indications of interest in acquiring NSD Bancorp and that FNB had specifically offered $40 per share. The complaint further alleges that on September 16, 2004, Myers and the Insider, who were engaged in several joint business ventures unrelated to NSD Bancorp, met to discuss their business. During this meeting, the Insider provided Myers with material, nonpublic information concerning NSD Bancorp's merger negotiations. Simultaneously with the filing of the complaint, and without admitting or denying the Commission's allegations, Myers consented to the entry of a final judgment, subject to the Court's approval: permanently enjoining him from future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and ordering Myers to pay disgorgement of his trading profits, plus prejudgment interest thereon, totaling $13,705, and a one-time civil penalty of $10,939.

June 4, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Two With Insider Trading in Connection with Johnson & Johnson Merger

The SEC filed a civil action in the United States District Court for the Southern District of New York against Burr B. McKeehan and Joseph A. Fontanetta for engaging in unlawful insider trading in the securities of Animas Corporation ("Animas") before a December 16, 2005 merger announcement with Johnson & Johnson. Animas designed, manufactured and sold products and services for patients with insulin-requiring diabetes. Its common stock was traded on the NASDAQ National Market System until February 2006, when the merger with Johnson & Johnson became effective.

The complaint alleges that Fontanetta, the Chief Executive Officer a privately-held medical instrumentation company, tipped material nonpublic information about Animas' merger to McKeehan, a retired podiatrist, two days prior to the merger announcement. The complaint also alleges that Fontanetta either misappropriated or unlawfully received the material nonpublic information from a fellow board member at his company who was the husband of an Animas executive and privy to the merger negotiations.  After receiving the information, the complaint alleges that McKeehan began purchasing Animas stock and purchased a total of 30,000 shares of Animas stock, and, as a result of his unlawful trading, McKeehan realized potential profits of $183,018.

Without admitting or denying the allegations of the complaint, McKeehan has consented to the entry of a final judgment, subject to the Court's approval, permanently enjoining him from violating the charged provisions, and ordering him to pay disgorgement of $183,018, plus prejudgment interest of $18,059, and a civil penalty of $183,018.

June 4, 2008 in SEC Action | Permalink | Comments (1) | TrackBack (0)

SEC Announces Panelists for International Conference on Interactive Data

The SEC announced the list of panelists scheduled to participate in the International Roundtable on Interactive Data for Public Financial Reporting scheduled for June 10, 2008, from 9:30 a.m. to 12:00 p.m. The Roundtable follows the issuance on May 30, 2008, of a proposed rule on Interactive Data to Improve Financial Reporting.  A number of countries already require public companies to provide their financial reports in interactive data.

Proposed topics to be discussed at the Roundtable include the experience in countries that have already adopted interactive data; the views of countries currently considering adopting interactive data; and the perspectives from analysts and users of financial information about how best to take advantage of the capabilities of interactive data.

Confirmed panelists and participants at this date include:

José Manuel Alonso, Head, Information Technology, Comisión Nacional del Mercado de Valores (CNMV) , Spain
Stefano Natella, Head, Global Equity Research, Credit Suisse
Lalit Ranpuria, General Manager (Information Technology), Bombay Stock Exchange, India
SHI Xiaocheng Deputy Director, Information Center Shanghai Stock Exchange, China
LI Wei, Deputy Director-General, Information Center, China Securities Regulatory Commission, China
Olivier Servais, XBRL Team Leader, International Accounting Standards Committee Foundation, IASC Foundation
Harm-Jan van Burg, Senior Policy Maker, Ministry of Finance, the Netherlands
Natan Hershkovitz, Chief Information Officer, Israel Securities Authority, Israel
Toshinori Kobayashi, Director of Enforcement for Corporate Disclosure, Financial Services Agency, Japan
James E. A. Turner, Vice-Chair, Ontario Securities Commission of Canada

June 4, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Nominees Appear Before Senate Banking Committee

The Senate Banking Committee questioned the three nominees to the SEC yesterday -- Democrats Luis Aguiler and Elisse Walter and Republican Troy Paredes -- so perhaps they will be confirmed shortly so that the SEC can be at full membership to deal with regulatory issues.  All three stated they favored reopening the debate on shareholders' access to the management's proxy statement.  WSJ, SEC Nominees Weigh In On Proxy Access.

June 4, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Lehman's Continuing Troubles

Lots of news about Lehman Brothers' troubles in the past few days.  Its stock price continues to decline, and it is down 53% since the start of the year.  The company is expected to post one of its largest quarterly losses in its history, and it is reported that it is looking to raise an additional $4 billion in capital from overseas investors.  In addition, a hedge fund manager who is shorting the stock is very publicly questioning its asset valuations.  To combat the price drop, Lehman reportedly went into the market to buy back its shares.  WSJ, Lehman Is Seeking Overseas Capital; NYTimes, Lehman Battles an Insurgent Investor.

June 4, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 3, 2008

Icahn Says He'd Remove Yang

Carl Icahn said he will seek to remove Yahoo co-founder and CEO Jerry Yang if he is successful in his proxy campaign to replace the directors.  Icahn accused the CEO of taking extreme measures to ward off Microsoft's bid in order to entrench management.  Yesterday the Delaware court unsealed documents in a shareholders' suit against Yahoo directors that revealed new information about the expensive employee-severance plan that the Yahoo board adopted while Microsoft's offer was pending.  WSJ, Icahn Steps Up Yahoo Attack, Seeks Yang's Ouster as CEO.

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

Credit Ratings Firms Expected to Announce New Fees System

The three major credit ratings firms -- Moody's, Standard & Poor, and Fitch -- are expected to announce that they will revise their fees structure to settle an investigation by the New York State Attorney General.  Under current practice, only a firm selected to issue a rating by the investment bank gets paid, even though other firms may have reviewed the deal.  Under the settlement, ratings firms would charge two separate fees, one for the preliminary work and one for the rating.  The expectation is that this would reduce the conflict of interest between the rating firm and the investment bank.  The SEC is expected soon to issue proposed rules to help restore investor confidence in ratings.  WSJ, Ratings Firms to Shift Fee Practices.

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

SEC Charges Broker with Defrauding Elderly Customer

The SEC announced the filing of a civil action against Frederick J. Barton (Barton), a formerly registered representative of a national, registered broker-dealer and two entities he controlled: TwinSpan Capital Management, LLC (TwinSpan), an investment adviser formerly registered with the Commission, and Barton Asset Management, LLC (Barton Asset Management). The Commission alleges that, between 1999 and 2007, Barton, acting individually or through TwinSpan or Barton Asset Management, engaged in three separate securities frauds-including one involving a senior citizen suffering from Alzheimer's disease-and through his misconduct obtained over $3 million in ill-gotten gains. The Commission further alleges that he then spent his ill-gotten gains, among other things, to send his children to an exclusive private school, fund his own investment portfolio, and service his credit card debts.

The complaint, filed in federal District Court in Atlanta alleges that between approximately May 1999 and December 2003, Barton misappropriated approximately $970,000 from a single, elderly brokerage customer who suffered from diminished mental capacity and Alzheimer's disease. The complaint alleges that Barton induced her to sell securities in her brokerage account, held by the firm that employed Barton, and give him the proceeds of those sales based on representations that he would somehow either transfer those proceeds into instruments offered by a local bank or, in a few instances, place the proceeds in an advisory account at Barton Asset Management. As a result of this conduct, the value of this customer's brokerage account declined from over $1.3 million (practically her entire life's savings) to only a few dollars by December 2003.

The SEC seeks permanent injunctive relief, an accounting, disgorgement of ill-gotten gains plus prejudgment interest and civil penalties. The litigation remains pending as to all parties.

June 3, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Files Charges Against Oil & Gas Joint Ventures

The SEC filed civil securities fraud charges against a number of defendants in federal district court in Kansas.  The charges stem from an alleged massive securities offering fraud that has victimized over 1,300 investors from across the United States, as well as Canada and Puerto Rico. The complaint alleges that, between March 2004 and December 2007, the defendants raised approximately $156 million through the use of 22 purported oil-and-gas related equipment "joint ventures" structured to evade the securities laws. The defendants, according to the complaint, lured potential investors with, among other things, the false promise of annual returns of up to 40% from leasing and operating oil and gas equipment, and that the "joint ventures" would be rolled up into a single entity that would be the subject of an even more lucrative initial public offering (IPO) resulting in returns as high as 3-8 times their investment. However, the complaint alleges, the promised IPO and high annual returns have never come to fruition. On the contrary, the defendants have only returned approximately $7 million to investors over the four-year period of their fraudulent scheme, $1 million of which was diverted from other investors as Ponzi payments. Moreover, nearly half of the funds fraudulently raised were used to pay sales commissions and other "organizational" costs.

Without admitting or denying the allegations set forth in the complaint, all of the defendants except one have consented to the entry of an order permanently enjoining them from engaging in the violations set forth above.

June 3, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Allixon Settles Charges of Improper Reg D Offering

The SEC settled charges against Allixon International Corporation relating to the issuance of unregistered securities.  The Order finds that in July 2005 Allixon's board of directors authorized the issuance of 1.3 million shares to two Turks and Caicos entities pursuant to Rule 504 of Regulation D. Contemporaneously with the issuance of the shares, Allixon's corporate secretary negotiated an escrow agreement that specified that the Allixon shares transferred to the Turks and Caicos entities were to be sold and proceeds from the sale of the shares were to be used for the purpose of paying transaction costs of the reverse merger. Allixon did not receive, directly or indirectly, any of the remaining stock sale proceeds. No registration statement was filed with the Commission or was in effect as to the transactions in Allixon shares described above and the transactions were not otherwise exempt from registration. Therefore, the securities transactions described above violated Sections 5(a) and 5(c) of the Securities Act.  Based on the above, the Order directs Allixon International Corporation to cease and desist from committing or causing any violations and any future violations of Sections 5(a) and 5(c) of the Securities Act. Allixon International Corporation consented to the issuance of the Order without admitting or denying any of the findings contained in the Order

June 3, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Chairs Roundtable Discussion Announced

SEC Chair Cox announced that six former SEC chairmen will join him for a roundtable discussion on Wednesday, June 4, 2008, at the agency's headquarters in Washington D.C.  No agenda was stated.

In addition to Chairman Cox, roundtable participants will include:

Richard Breeden (1989-93)
Bradford Cook (1973)
William Donaldson (2003-05)
Roderick Hills (1975-77)
Harvey Pitt (2001-03)
David Ruder (1987-89)
The public roundtable is scheduled for 3 p.m. to 4:30 p.m. ET. The event also will be webcast live at the SEC's website.

June 3, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC & CFTC Approve Novel Derivative Products

The SEC and the CFTC announced that each has approved the trading and clearing of two novel derivative products — futures and option contracts based on shares of the SPDR® Gold Trust (Gold Trust), an exchange traded fund (ETF). The SEC approved trading in options on the Gold Trust shares and the CFTC approved trading in futures on them.

Option contracts on the Gold Trust's shares will be listed on the American Stock Exchange, Chicago Board Options Exchange, International Securities Exchange, Philadelphia Stock Exchange, and the NYSE Arca Exchange. Futures contracts will trade on OneChicago, a security futures exchange. The Options Clearing Corporation will clear both types of contracts.

In order to address growing areas of mutual interest, the SEC and CFTC entered into a Memorandum of Understanding (MOU) on March 11, 2008, that established a permanent regulatory liaison between the agencies. The MOU provides for enhanced information sharing and articulates several key principles intended to guide the agencies' review of novel derivative products containing elements of both securities and commodity futures or options. In accordance with these principles, the agencies have recognized their mutual regulatory interests and have agreed to encourage innovation, competition, market neutrality, and legal certainty. Today's approvals for the trading of futures and option contracts on shares of the Gold Trust represent the first product approvals under the MOU.

June 3, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, June 2, 2008

Brocade Agrees to $160 Million Settlement of Backdating Charges

Brocade Communications Systems agreed to settle a securities fraud class action involving backdating stock options for $160 million, the largest settlement to date on this issue.  Two of its former executives, including former CEO Gregory Reyes, were previously convicted on related charges.  Last month the judge hearing the case ruled that the corporation would be liable for damages resulting from Reyes' misconduct.

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