Securities Law Prof Blog

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

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Friday, July 11, 2008

El Paso Settles Charges of Inflating Oil & Gas Reserves

The SEC filed a civil action against El Paso Corporation (El Paso), its subsidiaries and several former employees alleging that they inflated the companies' proved natural gas and oil reserves in violation of the federal securities laws. The complaint names Rodney D. Erskine, the former president of El Paso's Exploration and Production Business Segment, Randy L. Bartley, the former senior vice president of El Paso's Exploration and Production Business Segment, and Steven L. Hochstein, John D. Perry, and Bryan T. Simmons, former vice presidents of El Paso's Exploration and Production Business Segment. According to the complaint, the defendants violated the antifraud and other provisions of the federal securities laws. All defendants have agreed to settle the charges against them, without admitting or denying the Commission's allegations.

In 2004, El Paso restated its financial statements for years 1999 through 2002, and for the first nine months of 2003, reducing its previously reported proved natural gas and oil reserves at December 31, 2002, 2001, and 2000 by 2.2 trillion cubic feet equivalent of natural gas (TCFe), 3.3 TCFe, and 3.3 TCFe, respectively, and materially reducing its previously reported standardized measures of future cash flows. The total cumulative impact of the restatements reduced El Paso's stockholders' equity as of September 30, 2003 by $1.7 billion. CGP and EPPH also restated their previously issued financial statements to correct their material overstatements of proved natural gas and oil reserves, standardized measures of future cash flows, and capitalized costs relating to their natural gas and oil producing activities. The Commission's complaint alleges that, between 1998 and the quarter ended September 30, 2003, El Paso and its subsidiaries, with the assistance of the individual defendants, inflated its proved natural gas and oil reserves, overstated its standardized measure of future cash flows, and overstated its capitalized costs relating to its natural gas and oil producing activities.

El Paso consented to a judgment that permanently enjoins it from future violations of these provisions.  The individual defendants agreed to civil penalties as well as injunctive relief.

July 11, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, July 10, 2008

SEC Settles Fraud Charges Against Former Transkaryotic Therapies CEO

The SEC announced that on July 9, 2008, a final judgment by consent was entered by the United States District Court Judge for the District of Massachusetts against Richard F. Selden, the former CEO of Transkaryotic Therapies ("TKT"), a biotechnology company that was headquartered in Cambridge, Massachusetts, and was publicly-traded until it was acquired in July 2005. The final judgment against Selden permanently enjoins him from violating the antifraud and other provisions of the federal securities laws, and orders Selden to pay a $125,000 civil penalty and $1,041,417 in disgorgement and prejudgment interest related to his sales of TKT stock during the period of the alleged fraud.

The SEC alleged that Selden made materially misleading statements between October 2000 and October 2002 concerning results of TKT's clinical trials and its U.S. Food and Drug Administration ("FDA") application for its flagship drug, Replagal. The complaint alleged that Selden knew, but failed to disclose, material negative information, including that Replagal's clinical trial failed to meet its primary objective and FDA had told TKT on several occasions that it was a failed study and had recommended additional clinical trials. The complaint further alleged that Selden benefited by selling 90,000 shares of TKT stock between May 2001 and February 2002, prior to TKT's disclosure of some negative information about Replagal on October 2, 2002, which caused TKT's stock price to fall.

July 10, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Fraud Charges Against Former Transkaryotic Therapies CEO

The SEC announced that on July 9, 2008, a final judgment by consent was entered by the United States District Court Judge for the District of Massachusetts against Richard F. Selden, the former CEO of Transkaryotic Therapies ("TKT"), a biotechnology company that was headquartered in Cambridge, Massachusetts, and was publicly-traded until it was acquired in July 2005. The final judgment against Selden permanently enjoins him from violating the antifraud and other provisions of the federal securities laws, and orders Selden to pay a $125,000 civil penalty and $1,041,417 in disgorgement and prejudgment interest related to his sales of TKT stock during the period of the alleged fraud.

The SEC alleged that Selden made materially misleading statements between October 2000 and October 2002 concerning results of TKT's clinical trials and its U.S. Food and Drug Administration ("FDA") application for its flagship drug, Replagal. The complaint alleged that Selden knew, but failed to disclose, material negative information, including that Replagal's clinical trial failed to meet its primary objective and FDA had told TKT on several occasions that it was a failed study and had recommended additional clinical trials. The complaint further alleged that Selden benefited by selling 90,000 shares of TKT stock between May 2001 and February 2002, prior to TKT's disclosure of some negative information about Replagal on October 2, 2002, which caused TKT's stock price to fall.

July 10, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Fraud Charges Against Former Transkaryotic Therapies CEO

The SEC announced that on July 9, 2008, a final judgment by consent was entered by the United States District Court Judge for the District of Massachusetts against Richard F. Selden, the former CEO of Transkaryotic Therapies ("TKT"), a biotechnology company that was headquartered in Cambridge, Massachusetts, and was publicly-traded until it was acquired in July 2005. The final judgment against Selden permanently enjoins him from violating the antifraud and other provisions of the federal securities laws, and orders Selden to pay a $125,000 civil penalty and $1,041,417 in disgorgement and prejudgment interest related to his sales of TKT stock during the period of the alleged fraud.

The SEC alleged that Selden made materially misleading statements between October 2000 and October 2002 concerning results of TKT's clinical trials and its U.S. Food and Drug Administration ("FDA") application for its flagship drug, Replagal. The complaint alleged that Selden knew, but failed to disclose, material negative information, including that Replagal's clinical trial failed to meet its primary objective and FDA had told TKT on several occasions that it was a failed study and had recommended additional clinical trials. The complaint further alleged that Selden benefited by selling 90,000 shares of TKT stock between May 2001 and February 2002, prior to TKT's disclosure of some negative information about Replagal on October 2, 2002, which caused TKT's stock price to fall.

July 10, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

ALJ Finds Broker Involved in Late Trading Scheme

An Administrative Law Judge has issued an Initial Decision in Pritchard Capital Partners, LLP, Administrative Proceeding No. 3-12753 and found that Respondent Joseph John VanCook (VanCook), while associated with the broker-dealer Pritchard Capital Partners, LLP (Pritchard Capital), engaged in a fraudulent mutual fund late trading scheme. VanCook enabled, and solicited, the mutual fund late trading business executed by his clients.  The Initial Decision concludes that VanCook willfully violated Rule 10b-5 and willfully aided and abetted and caused Banc of America Securities, LLC, to violate Section 22(c) of the Investment Company Act of 1940 and Rule 22c-1 thereunder. The Initial Decision orders VanCook to cease and desist from committing or causing future violations of the securities laws, bars him from associating with an investment adviser, broker, or dealer, and from working for an investment company, and orders him to disgorge $538,565.70 in ill-gotten gains (plus prejudgment interest) and to pay a civil penalty of $100,000.

July 10, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 9, 2008

PCAOB Proposes Rule Change Regarding Ethics & Independence Rule

The SEC has published for comment a proposed rule change (Release No. 34-58121; File No. PCAOB-2008-03) by the PCAOB Regarding Ethics and Independence Rule 3526, Communication with Audit Committees Concerning Independence, Amendment to Interim Independence Standards, and Amendment to Rule 3523, Tax Services for Persons in Financial Reporting Oversight Roles.

July 9, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC's Chief Economist Testifies on OTC Credit Derivatives Market

James A. Overdahl, the SEC's Chief Economist, testified on July 9, 2008, before the Subcommittee on Securities, Insurance, and Investment of the Senate Committee on Banking, Housing, and Urban Affairs, on Testimony Regarding Reducing Risks and Improving Oversight in the OTC Credit Derivatives Market.  In the course of his remarks, he also talked about clearance and settlement facilities for securities and made the following interesting statement:

Next, I'd like to share with you a quote from a report on clearance and settlement published by the International Securities Market Association in 1999:

These days, anybody can replicate the contracts an exchange can offer; anybody can set up the hardware to become an electronic exchange. Maybe the only way left to differentiate yourself is by really good clearing and settlement.

I wonder if NYSE and Nasdaq would agree with that?

July 9, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sycamore Networks and Three Former Executives Settle Backdating Charges

The SEC filed a settled civil enforcement action against Sycamore Networks, Inc., an optical networking company, and its former Chief Financial Officer Frances M. Jewels, former Director of Financial Operations Cheryl E. Kalinen, and former Director of Human Resources Robin A. Friedman in connection with the backdating of stock options to employees over several years and the failure to disclose options-related expenses to the company's auditors and investors.

The SEC alleged that Sycamore's unreported options-related expenses during its fiscal years 2000 through 2005 totaled nearly $250 million. The complaint further alleges that Jewels and Kalinen repeatedly backdated options grants between October 1999 and July 2002 to prices at or near monthly or quarterly low points for the company's stock, providing employees with options with prices at which they could purchase shares that were lower than the market price at the time the options actually were granted. The complaint describes an internal memorandum that outlines a plan to grant options at below-market prices to five company employees and keep the company's outside auditors from discovering these grants. The memo, drafted by Kalinen and provided to Jewels and Friedman, analyzed the risk that the company's outside auditors would uncover the conduct. Friedman participated in the plan by altering or creating, or causing others to alter or create, company personnel and payroll records so that they would reflect inaccurate start dates for the employees, according to the Commission's complaint.

All defendants have agreed to settle this matter, without admitting or denying the allegations in the Commission's complaint.  Jewels will disgorge ill-gotten gains of $30,000 (plus prejudgment interest on that amount of $4,980.04), reimburse Sycamore (pursuant to Section 304 of the Sarbanes-Oxley Act of 2002) for $190,000 in cash bonuses she received during the period of the fraud, and pay a civil monetary penalty of $230,000. Jewels also will be barred from serving as an officer or director of any public company for a period of five years, and, in a related administrative proceeding, will be prohibited from appearing or practicing before the Commission as an attorney or accountant for a period of five years.  Kalinen will disgorge ill-gotten gains of $28,000 (plus prejudgment interest on that amount of $7,060.71) and pay a penalty of $150,000.  Friedman will pay a penalty of $40,000.  Sycamore consented to the entry of a permanent injunction against future violations.  The SEC's release states that the settlement with Sycamore takes into account the company's cooperation during the Commission's investigation.

July 9, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Staff Provides Interpretation of Notice Regarding Partial Redemptions of ARS

FINRA issued a staff interpretive memo regarding NASD Rule 2110 and NYSE Rule 402.30—Partial Redemption Allocations and Disclosure Practices in Auction Rate Securities, to clarify questions about its recently issued Regulatory Notice 08-21 (the Notice), in which FINRA provided guidance to its members on partial redemptions of auction rate securities.  In response to current market conditions, some issuers are offering partial redemptions of auction rate securities, raising questions about the precise allocation methodologies that might be acceptable under NASD Rule 2110 and NYSE Rule 402.30.

FINRA set out in the Notice the requirements of the respective governing rules. Where a member firm is considering the adoption of an allocation process that diverges from the express provisions of NYSE Rule 402.30, but such methodology is believed to comport with the principles set forth in the Notice—including that no customers are disadvantaged—given the exigencies of the partial redemptions in these particular securities, the member firm should contact its FINRA Coordinator for a determination that such methodology will be acceptable.

In addition, FINRA notes that, when dealing with investors who hold securities that have become illiquid (such as auction rate securities that are experiencing failed auctions), NASD Rule 2110 requires that firms must provide fair and balanced communications pertaining to material matters related to such securities, including allocation methodologies in the case of redemptions and calls. FINRA provides some examples of possible methods of such communications.

July 9, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 8, 2008

SEC Releases Staff Report on Credit Rating Agencies

The SEC released a Summary Report of Issues Identified in the Commission Staff's Examinations of Select Credit Rating Agencies prepared by the staff of the Office of Compliance Inspections and Examinations, Division of Trading and Markets and Office of Economic Analysis.  In August 2007, the Securities and Exchange Commission’s Staff initiated examinations of three credit rating agencies -- Fitch Ratings, Ltd. (“Fitch”), Moody’s Investor Services, Inc. (“Moody’s”) and Standard & Poor’s Ratings Services (“S&P”) -- to review their role in the recent turmoil in the subprime mortgage-related securities markets. The focus of the examinations was the rating agencies’ activities in rating subprime residential mortgage-backed securities (“RMBS”) and collateralized debt obligations (“CDOs”) linked to subprime residential mortgage-backed securities, in order to develop an understanding of the practices of the rating agencies surrounding the rating of RMBS and CDOs.

According to the report's summary, the Staff’s examinations revealed that:

there was a substantial increase in the number and in the complexity of RMBS and CDO deals since 2002, and some of the rating agencies appear to have struggled with the growth;

significant aspects of the ratings process were not always disclosed;

policies and procedures for rating RMBS and CDOs can be better documented;

the rating agencies are implementing new practices with respect to the
information provided to them;

the rating agencies did not always document significant steps in the ratings process -- including the rationale for deviations from their models and for rating committee actions and decisions -- and they did not always document significant participants in the ratings process;

the surveillance processes used by the rating agencies appear to have been less robust than the processes used for initial ratings;

issues were identified in the management of conflicts of interest and
improvements can be made; and

the rating agencies’ internal audit processes varied significantly.

In addition, the Report summarizes conflicts of interest that are unique to these products and provides a factual summary of the models and methodologies used by the rating agencies.

July 8, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Bernanke on Financial Stability

Federal Reserve Board Chairman Ben S. Bernanke  spoke on Financial Regulation and Financial Stability at the Federal Deposit Insurance Corporation's Forum on Mortgage Lending for Low and Moderate Income Households, Arlington, Virginia, on July 8, 2008.  On yesterday's Memorandum of Understanding between the SEC and Federal Reserve, he stated:

Fed-SEC cooperation is taking place within the existing statutory framework with the objective of addressing the near-term situation. In the longer term, legislation may be needed to provide a more robust framework for the prudential supervision of investment banks and other large securities dealers. In particular, under current arrangements, the SEC's oversight of the holding companies of the major investment banks is based on a voluntary agreement between the SEC and those firms. Strong holding company oversight is essential and thus, in my view, the Congress should consider requiring consolidated supervision of those firms, providing the regulator the authority to set standards for capital, liquidity holdings, and risk management.More generally, in the longer term, the Congress should consider whether our current regulatory structure needs to be modernized to address the changes that have occurred in the structure of the financial system, including the enormous growth of nonbank financial institutions and the development of new financial products.

July 8, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, July 7, 2008

New Hampshire Enacts NASAA's Model Rule on Senior Certifications

New Hampshire becomes the first state to legislatively adopt NASAA’s Model Rule on the Use of Senior Certifications and Professional Designations.  Last month Washington and Virginia became the first jurisdictions to adopt rules based on NASAA’s model. NASAA’s model rule prohibits the misleading use of senior and retiree designations and also provides a means by which a securities administrator may recognize the use of certain designations conferred by an accredited organization.  The model rule addresses the growing use of financial designations or certifications that ostensibly convey expertise in advising seniors and retirees.

July 7, 2008 in State Securities Law | Permalink | Comments (1) | TrackBack (0)

SEC's Advisory Committee on Improvements to Financial Report Scheduled to Meet

There is scheduled an Open Meeting of the SEC Advisory Committee on Improvements to Financial Reporting for July 11, 2008.  Its draft Report will be the subject of the meeting.

July 7, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC and Federal Reserve Enter into Memorandum of Understanding

The SEC and the Federal Reserve System signed a memorandum of understanding (MOU) between the two agencies that, according to the press release, should deepen their information sharing and cooperation.  Last week some members of Congress expressed concern that the MOU would be entered into without Congressional imput.

Under the MOU between the two agencies, the SEC and the Board would share information and cooperate across a number of important areas of common interest including anti-money laundering, bank brokerage activities under the Gramm-Leach-Bliley Act, clearance and settlement in the banking and securities industries, and the regulation of transfer agents. The Fed has regulatory responsibilities over banking companies and bank holding companies, while the SEC has regulatory authority over securities companies.

The SEC recently entered into a similar MOU with the Commodity Futures Trading Commission. An agreement between the SEC and the Department of Labor is anticipated later this summer.

July 7, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)