Securities Law Prof Blog

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

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Thursday, August 7, 2008

Morgan Stanley Agrees to Buy Back ARSs from Massachusetts Municipalities

The Massachusetts Attorney General has entered into a settlement with Morgan Stanley & Company (Morgan) resolving allegations involving the investment bank’s sale of inappropriate auction rate security investments to Massachusetts municipalities.  In addition, Morgan will complete a full review of all investment clients and identify any and all Massachusetts towns and cities that have invested in auction rate securities through the investment bank.  Morgan will then repay the towns and cities all of their investment monies.  Morgan also agreed to cooperate with the Attorney General’s Office in its ongoing review of auction rate securities issues.  The Attorney General’s Office began a review of Morgan’s marketing tactics to municipalities in February 2008.  Morgan agreed to reimburse $1.5 million in investment monies to the city of New Bedford and the town of Hopkinton. 

              This is the third recovery by the Attorney General’s Office against an investment bank regarding auction rate securities.  In February, 2008, the Attorney General’s Office obtained a repayment by Merrill Lynch of $13.7 million for the city of Springfield, which allegedly had been misled into purchasing auction rate securities.  In May, 2008, the Attorney General’s Office obtained $37 million in recoveries for various towns and cities that had been allegedly misled into investing into risky auction rate securities by agents of investment banking giant UBS.  UBS also in July paid an additional $1,000,000 to the Commonwealth related to the sales of these instruments and reimbursed an additional $3.4 million to the remaining UBS municipal clients for their investments.

August 7, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Former Biopure Officer Settles Fraud Charges

The SEC announced that a final judgment by consent was entered by the United States District Court of the District of Massachusetts against Howard Richman, the former head of regulatory affairs of Biopure Corporation, in a previously-filed action alleging misleading public statements about the company's efforts to obtain FDA approval for its primary product, Hemopure, a synthetic blood product. The final judgment against Richmanpermanently enjoins him from violating the antifraud and other provisions of the federal securities laws, permanently bars him from serving as an officer or director of any public company and orders him to pay a $150,000 civil penalty.

The Commission's Complaint, filed September 14, 2005, alleges that, beginning in April 2003, Biopure received negative information from the FDA regarding its efforts to obtain FDA approval of its synthetic blood product Hemopure but failed to disclose the information, or falsely described it as positive developments. Specifically, the Complaint alleges that in April 2003, the FDA placed a clinical hold barring Biopure from conducting clinical trials of Hemopure in trauma settings such as emergency rooms, because of safety concerns about Hemopure. The Complaint further alleges that, during the next eight months, Richman and other Biopure employees concealed the imposition of the clinical hold while making public statements about Biopure's plans to obtain approval for trauma uses of Hemopure. In addition, according to the Complaint, in July 2003 the FDA informed Biopure that it had not approved Biopure's application for use of Hemopure in orthopedic surgery, and instead conveyed serious concerns about whether the materials Biopure had submitted in support of its application were reliable and questioning the safety of Hemopure. According to the Complaint, Biopure, however, issued public statements beginning on August 1, 2003 describing the FDA's communication as good news, causing its stock price to increase by over 20%. The Complaint alleges that Richman and other Biopure employees continued to make misleading statements until December 2003. During this period, Biopure raised over $35 million from investors. The Complaint further alleges that as the true status of Biopure's efforts to obtain FDA approval gradually became public, through a series of incomplete and misleading disclosures between late October and the end of December 2003, the company's stock price plummeted almost 66% from its August 1 price.

Biopure and three others previously settled SEC charges concerning the same conduct.

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

SEC Charges Microcap Companies with Raising Capital Through S-8 Offerings

The SEC charged six microcap companies, four company officers and several market professionals for their roles in a scheme to raise millions of dollars in capital through improperly registered stocks to fund the companies' struggling businesses.In four separate enforcement actions, the SEC alleged that these public offerings dumped billions of shares on the market through so-called employee stock option programs. These share offerings were improperly registered on Form S-8, which is a simplified registration statement used for compensating employees and consultants. In fact, the programs functioned as public offerings in which the companies used their employees as conduits to the market so that they could raise capital without complying with the securities laws. They then received at least 85% of the proceeds from the shares' sales as payment for the options' exercise price. The SEC further alleged that one of the companies, Global Materials & Services, Inc., and its former officer, Stephen J. Owens, committed securities fraud when they issued shares to sham consultants who then kicked back over 60% of the shares' sales proceeds to Owens and his other businesses.

According to two SEC complaints filed on August 6 in federal district court in Orange County, Calif., Global Materials and five other companies — Angel Acquisition Corp., Marshall Holdings International Inc., NW Tech Capital Inc., Winsted Holdings Inc., and Zann Corp. — improperly registered shares issued under their employee stock option programs on SEC Form S-8 registration statements. The Commission also charged Marshall Holdings’ officers Richard A. Bailey and Florian R. Ternes and Winsted Holdings’ former officer Mark T. Ellis with implementing and administering their companies’ employee stock option programs.

The SEC's complaints further alleged that the companies' programs had features that, taken together, virtually guaranteed that the options would be exercised and the underlying shares simultaneously sold to the public at or near the time the options were granted. First, the options' exercise price, which was typically set at 85 percent of the sale proceeds from the options' underlying shares, floated with the market value of a company's stock at the time of exercise. Second, the options vested immediately, meaning that no conditions needed to be met before the options could be exercised. Third, a cashless exercise method was used so that the exercise price was paid from the sale proceeds of the underlying shares rather than directly by the employees. Other than opening brokerage accounts and signing blank letters of authorization, the companies' employees made no decisions regarding the options' exercise or the sale of the underlying shares during the course of the programs.

The Commission today instituted cease-and-desist proceedings against Alexander & Wade, Inc. (AWI), a San Diego investment banking firm, and its agent James Lee for causing the registration violations. AWI and Lee allegedly introduced the programs to the companies and advised them on how to implement and administer the programs.

The Commission also instituted administrative and cease-and-desist proceedings against Finance 500, Inc., a brokerage firm located in Irvine, Calif. The Commission found that Finance 500 provided the brokerage services for the employee stock option programs despite red flags indicating that the employees were being used as conduits. Finance 500, without admitting or denying the SEC's findings, consented to the issuance of an order censuring it, ordering it to cease and desist from committing or causing future registration violations, and requiring payment of $271,484 in disgorgement and $74,015 in prejudgment interest.

Five companies charged — Angel Acquisition Corp., Global Materials, NW Tech, Winsted Holdings, and Zann Corp. — settled the SEC's charges without admitting or denying the allegations. They all consented to being permanently enjoined from future registration violations, and Global Materials also consented to being permanently enjoined from future fraud violations based on the SEC's allegations that it fraudulently used Form S-8 to enrich Owens through the use of sham consultants.

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

Citigroup Settles ARS Charges and Agrees to Buy Back Securities from Retail Customers

Citigroup Global Markets, Inc. (Citi) has agreed to a preliminary settlement in principle with the SEC and state regulators, including a plan that would give individual investors, small businesses, and charities all $7.5 billion of their money back from auction rate securities (ARS) they purchased from the firm. The agreement also would require Citi to use its best efforts to liquidate by the end of 2009 all of the approximately $12 billion worth of ARS the firm sold to retirement plans and other institutional investors.

The ARS market collapsed in mid-February 2008, leaving tens of thousands of Citi customers holding nearly $20 billion of these illiquid securities for an indefinite period of time. The conduct underlying the proposed charges stems from Citi's marketing of ARS to many of its customers as highly liquid investments, including as money market investments. The liquidity of these securities, however, was premised on Citi providing support bids for auctions it managed when there was not enough customer demand. When Citi stopped supporting auctions in February 2008, there were widespread auction failures. As a result, thousands of Citi customers were left holding illiquid securities.

The SEC Division of Enforcement set forth the terms of the agreement in principle in its press release.  They are subject to finalization, review and approval by the Commission:

Citi will be permanently enjoined from violating the provisions of Section 15(c) of the Exchange Act, and Rule 15c1-2 thereunder, which prohibit the use of manipulative or deceptive devices by broker-dealers.

Citi will liquidate at par all ARS from its retail customers, which include all natural persons, charities, and small businesses, no later than three months from today.

Citi will make whole any losses sustained by customers who purchased ARS before Feb. 12, 2008, and sold such securities after that date at a loss.

Citi will use its best efforts to liquidate ARS from its institutional customers by the end of 2009.

Until Citi actually provides for the liquidation of the securities on the schedule set forth above, Citi will provide no-cost loans to customers that will remain outstanding until the ARS are repurchased, and will reimburse customers for any interest costs incurred under any prior loan programs the firm provided to its ARS customers.

Citi will not liquidate its own inventory of a particular ARS before it liquidates its customers' holding in that security.

To the extent that a customer has incurred consequential damages beyond the loss of liquidity in the customer's holdings of ARS (which should be restored pursuant to the settlement terms above), Citi will participate in a special arbitration process that the customer may elect, and that will be overseen by FINRA, whereby Citi will not contest liability for its misrepresentations and omissions concerning the ARS, but may challenge the existence or amount of any consequential damages; the arbitration claim will be heard by a single, non-industry arbitrator.

This arbitration process will be voluntary on the part of the customer and if a customer elects not to take advantage of these special procedures, a customer may pursue all other arbitration or legal or equitable remedies available through any other administrative or judicial process available to the customer.

Citi will provide notice to all customers of the settlement terms.

Citi will establish a telephone assistance line, with appropriate staffing, to respond to questions from customers concerning the terms of the settlement.

Citi faces the prospect of a financial penalty to the SEC after it has completed its obligations under the settlement agreement. Determinations as to the amount of the penalty, if any, will take into account, among other things, an assessment of whether Citi has satisfactorily completed its obligations under the settlement, and the costs incurred by Citi in meeting those obligations, including penalties incurred and the cost of remediation.

In addition, in its press release announcing the settlement, the New York Attorney General stated that Citi will pay to the State of New York a civil penalty in the amount of $50 million.  The penalty embraces both Citigroup’s substantive conduct and its failure to properly comply with its obligations under the Attorney General’s Martin Act subpoena.  Citi will also pay a separate civil penalty of $50 million to the North American Securities Administrators Association (“NASAA”), whose ARS Task Force has been conducting its own series of investigations into the marketing and sale of auction rate securities by broker-dealer firms.  The ARS Task Force’s investigation of Citigroup was led by the Texas State Securities Board.  (Here is NASAA's press release about the settlement.)

In addition, FINRA announced today that it has established a special process for resolving ARS-based claims in its arbitration forum. Qualifying investors will have the option of having their claims heard by a three-person panel of arbitrators, none of whom would be affiliated with a firm that recently sold auction rate securities. The new process comes as a result of the one developed by FINRA for the Securities and Exchange Commission's settlement with Citigroup.

The arbitration panels will continue to consist of two public arbitrators and one non-public arbitrator.

To date, more than 170 cases involving auction rate securities have been filed in FINRA's Dispute Resolution forum. Individuals who since Jan. 1, 2005, have either worked for a firm that sold auction rate securities or themselves sold or supervised someone who sold them will not appear on non-public arbitrator lists given to parties in these and future auction rate securities arbitration cases.

August 7, 2008 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

Citigroup Nearing Settlement on ARS Charges

The Wall St. Journal reports that Citigroup is reaching agreement with the New York Attorney General, other state regulators and the SEC over its marketing of auction rate securities.  The settlement would require Citigroup to buy back $5-$8 billion of ARSs from its retail customers and pay hefty penalties to the state regulators.  UBS has previously settled charges over its ARS sales with the Massachusetts regulator and is also in negotiations with other state regulators and the SEC.  WSJ, Citigroup May Pressure Other Firms With Deal on Auction-Rate Securities.

August 7, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 6, 2008

SEC Issues Guidance on Use of Company Web Sites

The SEC posted on its website its interpretive release to provide guidance regarding the use of company web sites under the Exchange Act and the antifraud provisions of the federal securities laws. It is soliciting comment on issues relating to company use of technology generally in providing information to investors.  The release notes that:

Given the development and proliferation of company web sites since 2000, and our expectation that continued technological advances will further enhance the quality, not just the quantity, of information delivered and available to investors on such web sites, as well as the speed at which such information reaches the market, we are issuing this interpretive release to provide additional guidance on the use of company web sites with respect to the antifraud provisions and certain relevant Exchange Act provisions of the federal securities laws.

The guidance focuses principally on:

When information posted on a company web site is “public” for purposes of the applicability of Regulation FD;

Company liability for information on company web sites – including previously posted information, hyperlinks to third-party information, summary information and the content of interactive web sites;

The types of controls and procedures advisable with respect to such information; and

The format of information presented on a company web site, with the focus on readability, not printability.

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

NYSE Reviewing Large Market Orders Near Close

The Risk Group of NYSE Regulation is reviewing the general practices among member firms relating to the control environment for the handling of sizable market orders or other facilitation orders at or near the close that could have an adverse, manipulative impact on the closing price of the security.  A series of one-on-one meetings with selected firms will follow and may result in guidance to the industry.

August 6, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Prudential Financial Settles Financial Reporting Charges

On August 6, 2008, the SEC and Prudential Financial, Inc., a leading provider of financial services, settled charges that Prudential violated the financial reporting, books-and-records, and internal control provisions of the Securities Exchange Act of 1934. The SEC alleged that from December 1997 through December 2002, Prudential's former property and casualty subsidiaries known as the Prupac companies ("Prupac"), entered into a series of so-called finite reinsurance contracts with General Reinsurance Corporation ("Gen Re") that had no economic substance and no purpose other than to build up and then draw down on an off-balance sheet asset, or "bank," that Gen Re held for Prupac. According to the complaint, the contracts were shams, written to look as though they met the requirements to qualify for reinsurance accounting, while in fact, they were subject to an oral side agreement that effectively eliminated any risk to either party and made such accounting improper. Prupac built up the bank in 1997, 1998 and 1999 and then, in 2000, 2001 and 2002, drew down on the bank and improperly recorded the repayments as income. In 2001, Prudential became a public company and the inaccurate financial statements became a part of its annual, quarterly and current filings thereafter.

The complaint alleges that the improper accounting practices within Prudential's Property and Casualty Insurance division resulted in an overstatement of Prudential's consolidated pre-tax income for 2000, 2001 and 2002 by $57 million or 9%, $75 million or 25%, and by $38 million or 146%, respectively. Without admitting or denying the Commission's allegations, Prudential has agreed to settle the charges by consenting to a permanent injunction.

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

Tuesday, August 5, 2008

Pritchard on Stoneridge

Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc.: The Political Economy of Securities Class Action Reform, by Adam C. Pritchard, University of Michigan Law School, was recently posted on SSRN.  Here is the abstract:

Stoneridge is the latest in a series of recent Supreme Court decisions restricting securities class actions. It is also the latest in a series of Court decisions (Affiliated Ute, Basic, and Central Bank) using the reliance element of the Rule 10b-5 cause of action to expand or restrict the reach of securities fraud class actions. In this essay I argue that the Court took a wrong turn in Basic when it failed to come to terms with the relation between reliance and damages in securities fraud. Central Bank held that the express causes of action in the securities laws should serve as a guide to the elements of implied cause of action in Rule 10b-5. A close reading of the express causes of action in the securities law suggests that damages should be limited to the defendant's benefit if the plaintiff cannot plead actual reliance on the fraudulent misstatement. Compensation should only be available in cases alleging actual reliance. Changing the damages measure to disgorgement in Rule 10b-5 actions based on Basic's fraud on the market presumption would substantially diminish the pocket shifting aspect of securities fraud class actions while maintaining their deterrent value. I analyze the institutions that might effect this needed change in the damages measure - the Court, Congress, the SEC, or shareholders. The available evidence suggests that the three governmental actors in this list are largely paralyzed from overhauling securities class actions in a meaningful way. I argue that shareholders, the parties who bear the costs of the current regime, must take matters into their own hands by amending the corporation's articles. The amendment proposed here would effect a limited waiver of compensatory damages in lawsuits relying on the fraud on the market presumption.

August 5, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Myers on Special Litigation Committees

The Decisions of Corporate Special Litigation Committees: An Empirical Investigation, by Minor Myers, Brooklyn Law School, was recently posted on SSRN.  Here is the abstract:

This Article examines the decisions of corporate special litigation committees using an original data set gathered from company filings with the SEC. It demonstrates that the prevailing view in corporate law-that special litigation committees uniformly decide to dismiss derivative litigation against manager colleagues-is not accurate. This Article shows that approximately forty percent of the time special litigation committees decide to settle claims or pursue them against one or more defendants. Furthermore, approximately seventy percent of the time cases subject to control by a special litigation end in settlement; only approximately twenty percent of the time is the end result dismissal. What has long been viewed as an engine for having derivative litigation dismissed actually leads to settlements most of the time. The view that special litigation committees behave too predictably has underwritten doubts about the ability of independent and disinterested directors to police conflict of interest transactions generally. The findings presented here show that the prevailing view about special litigation committee behavior is an unsound basis for generalizing about how independent and disinterested directors behave.

August 5, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Thompson on Delaware's Disclosure

Delaware's Disclosure: Moving the Line of Federal-State Corporate Regulation, by Robert B. Thompson, Vanderbilt University - School of Law; Vanderbilt University - Owen Graduate School of Management, was recently posted on SSRN.  Here is the abstract:

Delaware's century-long success in attracting corporations to use its law has provoked a recurring series of inquiries seeking to explain how one of our smallest and least populous states dominates such an important part of our national economy. The larger potential challenge to Delaware's hegemony is the continued shrinking of the space for any state corporate law as the federal government elects to encompass more and more of all fields of American law. This article develops how judicial requirements as to disclosure have become a way for Delaware to push into the part of corporate governance that has been most visibly the federal government's domain. By case law particularly visible since 2007, Delaware courts have expanded the reach of Delaware law in corporate governance via disclosure even in an age of growing federal regulation. This development shows that disclosure to protect the exercise of shareholder governance rights cannot be effectively separated from legal protection that substantively protects shareholder's ability to act within that space, protection usually provided by fiduciary duty provided by Unocal, Revlon and other such well known Delaware cases. Absent a broader federalization of corporate law, only Delaware can provide protection of both disclosure and the shareholders' substantive rights, giving Delaware a continuing advantage as a lawgiver in resolving corporate governance disputes. Additionally, this article addresses challenges made to Delaware law as indeterminate, providing a structural overview that suggests judicial review of director action can best be seen within a space running between judicial deference on one side and intrusive judicial review on the other. The article provides a schematic presentation of how various Delaware cases seen as indeterminate easily fit within such a structure.

August 5, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Monday, August 4, 2008

FINRA Proposes Changes in Variable Life Insurance and Variable Annuities Rules

FINRA has put out for public comment proposed changes to guidelines on illustrations of tax-deferred versus taxable compounding in advertising and sales literature (NASD Interpretive Material 2210-1) and communications with the public about variable life insurance and variable annuities (NASD Interpretive Material 2210-2). The proposal would:

shorten and simplify existing provisions regarding product identification, liquidity and guarantee claims;
consolidate previous FINRA staff guidance concerning variable insurance product communications;
address changes in variable insurance products and the manner in which they are advertised, particularly with regard to riders, hypothetical illustrations and investment analysis tools; and
codify FINRA staff guidance concerning comparative illustrations of the mathematical principle of tax-deferred versus taxable compounding.

August 4, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

FINRA Will Launch Pilot Program of All-Public Arbitrators in Customer Disputes

FINRA will launch a two-year pilot program later this fall that will allow some investors making arbitration claims to choose a panel made up of three public arbitrators instead of two public arbitrators and one non-public arbitrator, which is currently required.  Six firms — Merrill Lynch, Citigroup Global Markets, UBS, Wachovia Securities, Morgan Stanley and Charles Schwab — have volunteered to participate in the pilot program. The first five firms will contribute 40 arbitration cases each per year to the program and Schwab, with fewer cases in the forum, will refer 10 cases - meaning that over the course of the pilot, over 400 arbitration cases involving those firms can be heard by all-public arbitration panels. Only the investor making the arbitration claim can elect to participate in the pilot program; the firms will not decide which cases become part of the pilot. The pilot will be available to eligible claims filed on or after October 6, 2008.

FINRA is also reaching out to a wide range of other firms to join the pilot so that a variety of firm sizes and business models will be represented.

Investors who choose to have their claims heard under the pilot program - and the firm they are making their claim against - will receive the same three lists of potential arbitrators that parties to standard arbitration disputes receive: a list of eight chair-qualified public arbitrators, a list of eight public arbitrators and a list of eight non-public arbitrators. Parties may strike up to four of the arbitrators from the chair-qualified and public arbitrator lists for any reason, then rank the remaining arbitrators on those lists according to preference. Parties participating in the pilot program may strike all eight names on the non-public arbitrator list and the next highest-ranked public arbitrator will be selected to complete the panel.

The pilot program will be evaluated according to a number of criteria, including the percentage of investors who opt into the pilot and the percentage of investors who choose an all-public panel after opting in. FINRA will compare the results of pilot and non-pilot investor cases, including the percentage of cases that settle before award (and how quickly they settle). FINRA will also study the length of hearings and the use of expert witnesses in pilot and non-pilot cases.

August 4, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Advisory Committee Releases Report on Financial Reporting

The SEC Advisory Committee on Improvements to Financial Reporting presented to the SEC its final report containing 25 recommendations to make financial information more useful and understandable to investors.  Last year Chairman Cox created the Advisory Committee to make recommendations on reducing unnecessary complexity in the U.S. financial reporting system and making financial reports clearer and more understandable to investors.

The SEC already has acted on two earlier recommendations made by the Advisory Committee. On May 14, the Commission formally proposed requiring all U.S. companies to provide financial information using interactive data beginning as early as next year. On July 30, the SEC approved new guidance to public companies to address their concerns about how to comply with the securities laws while developing their Web sites to serve as an effective means for disseminating important information to investors.

The Committee's report provides practical proposals to improve financial reporting in five main areas:

Increasing the usefulness of information in SEC filings
Enhancing the accounting standards-setting process
Improving the substantive design of new standards
Delineating authoritative interpretive guidance
Clarifying guidance on financial restatements and accounting judgments

Among other things, the Committee noted in the first area that many individual investors find company filings with the SEC to be overly complex and detailed. Thus the Committee recommended the inclusion of a short executive summary at the beginning of a company's annual report that would describe concisely the main aspects of its business and its key performance metrics.

In the second area, the Committee called for more investor participation in accounting standard setting by increasing investor representation on the FASB and Financial Accounting Foundation (FAF).

In the third area, the Committee noted that the underlying objectives of certain accounting standards are sometimes obscured by dense language, detailed rules, and numerous exemptions. The Committee recommended a different approach to the substantive design of standards. For example, the Committee called for improved rules on off-balance sheet accounting and fewer situations where alternative accounting standards exist for the same transaction. The Committee recommended that companies provide better disclosure to investors about what portion of their earnings constitutes cash or accrued income based on historic cost accounting and what portion represents unrealized gains or losses based on fair value estimates.

To reduce the proliferation of U.S. GAAP, the Committee said it strongly supports FASB's efforts to complete the codification of all authoritative accounting literature into one document. The Committee said that others such as audit firms may still publish their views on accounting issues, but they should be labeled as non-authoritative. In this fourth area, the Committee also called for a clearer delineation of functions on interpreting accounting standards — with the FASB taking the lead on broad issues and the SEC on registrant-specific issues.

In the fifth area, the Committee recommended increased correction of accounting errors and more disclosures about those corrections to investors. However, the Committee warned that the correction of every accounting error should not automatically result in a lengthy process of restating financial statements for several prior years. The Committee said that in the "dark period" during restatements when companies generally cease filing current financial reports, companies usually do not provide investors with much information. Thus, the Committee said it believes that restatements of prior years should be undertaken for the correction of accounting errors that are material to current investors.

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

Former Refco CEO Settles Fraud Charges

On July 29, 2008, a final judgment by consent was entered by the United States District Court for the Southern District of New York against Phillip R. Bennett, the former Chairman and Chief Executive Officer of Refco Inc., in a civil injunctive action brought by the SEC alleging that Bennett orchestrated a fraud that periodically concealed hundreds of millions of dollars owed to Refco Inc. and its corporate predecessor, Refco Group Ltd. (together, Refco), by a private entity that Bennett controlled. The complaint also alleged that Bennett directed practices that artificially inflated Refco Inc.'s reported financial results. The final judgment, to which Bennett consented without admitting or denying the Commission's allegations, permanently enjoins Bennett from violating antifraud, record keeping, periodic reporting, internal controls, and certification provisions of the federal securities laws and bars him from serving as an officer or director of a public company.

On July 30, the Commission also issued an Order Instituting Administrative Proceedings against Bennett that bars Bennett from association with any broker, dealer, or investment adviser. Bennett consented to the issuance of the Order, without admitting or denying the Commission's findings except as to entry of the injunction.

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

SEC Votes to Issue Guidance to Mutual Fund Boards on Oversight Responsibilities

On July 30 the SEC voted to issue proposed guidance to mutual fund boards to assist them in fulfilling their oversight responsibilities with respect to trading of fund portfolio securities by investment advisers. The proposed guidance follows the interpretive guidance issued by the Commission in 2006, which clarified the scope of the safe harbor provided to investment advisers that use soft dollars to purchase brokerage and research services under Section 28(e) of the Securities Exchange Act of 1934.

The proposed guidance focuses on the board's oversight of investment advisers' obligation to seek best execution when it trades a fund's securities and addresses the board's oversight of the conflicts of interest that arise with respect to an adviser's trading practices, including those associated with an adviser's use of soft dollars.  It does not impose any new requirements on fund directors or investment advisers, but instead proposes a flexible framework for directors to work within when conducting their oversight of an adviser's trading activities. Specifically, the guidance suggests the information that a fund board should request from an investment adviser to enable the directors to determine that the adviser is managing any conflicts and using fund assets in the best interests of the fund.

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

SEC Proposes Rule to Provide Retail Investors with Information on Municipal Bonds

On July 30 the SEC voted to propose measures that would for the first time enable investors to easily access complete financial information about municipal bonds for free on the Internet.  Currently, retail investors in municipal securities usually cannot get ongoing disclosure information about their securities without paying significant fees and waiting for the documents to come in paper form by mail or fax. The rule amendments proposed by the SEC would designate the Municipal Securities Rulemaking Board (MSRB) as the central repository for ongoing disclosures by municipal issuers. Under a separate MSRB-proposed rule change, its Electronic Municipal Market Access (EMMA) system would make these disclosures available to investors for free on the Internet in the same way the SEC's EDGAR system does for corporate disclosures.

Public comment on the SEC's proposed amendments to Rule 15c2-12 under the Securities Exchange Act of 1934, as well as public comment on the MSRB's proposed rule change should be received by the Commission no later than 45 days after their respective publication in the Federal Register.

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

SEC Issues New Guidance on Web Sites

On July 30 the SEC voted to provide new guidance to public companies about how to comply with the securities laws while developing their Web sites to serve as an effective means for disseminating important information to investors.  Issued in the form of an interpretive release, the SEC's guidance provides helpful information for companies considering providing investors with interactive content on their Web sites, as well as summary information and links to third-party information. The SEC's guidance addresses a recommendation made by the SEC's Advisory Committee on Improvements to Financial Reporting in its February 2008 Progress Report for the Commission to provide clarity on issues and questions that arise in connection with SEC rules against selective disclosure of material nonpublic information.  The Internet has changed significantly since 2000, when the SEC last issued extensive guidance on the use of Web sites and electronic media.

The SEC's guidance is divided into four parts:

The guidance clarifies how information posted on a company Web site can be considered "public" and provides guidance to help companies comply with public disclosure requirements under Regulation FD.

The guidance clarifies the liability framework for certain types of electronic disclosure, including how companies can provide access to historical or archived data without it being considered reissued or republished every time it is accessed. It provides guidance on how companies can link to third party information or Web sites without having to "adopt" that content for liability purposes. It provides guidance on the appropriate use of summary information in the context of the securities laws' antifraud provisions. It also clarifies that the antifraud provisions apply to statements made by the company (or by a person acting on behalf of the company) in blogs and electronic shareholder forums, and companies cannot require investors to waive protections under the federal securities laws as a condition to enter or participate in a blog or electronic shareholder forum.

The guidance clarifies that information posted on company Web sites would not generally be subject to rules under the Sarbanes-Oxley Act relating to a company's "disclosure controls and procedures."

The guidance clarifies that information need not satisfy a "printer-friendly" standard, unless other rules explicitly require it, that could restrict creative Web enhancements that incorporate interactive and dynamic design features.

The SEC's interpretive release will be effective upon its publication in the Federal Register.

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

Former Enron Energy Services CEO Settles Insider Trading Charges

On July 29 the SEC filed a civil action against Lou L. Pai, the former Chairman and Chief Executive Officer of Enron Energy Services ("EES"), a division of Enron Corp. ("Enron"), alleging that Pai sold Enron stock in May and June 2001 on the basis of material, nonpublic information concerning Enron. Pai simultaneously settled the action without admitting or denying the allegations in the Commission's complaint.

According to the Commission's complaint, shortly before his departure from Enron, between May 18, 2001 and June 7, 2001, Pai sold 338,897 shares of Enron stock and exercised stock options that resulted in the sale of 572,818 shares to the open market. Before making these sales, Pai learned from EES successor management that it had identified certain financial and operational problems and substantial contract-related losses at EES. Had Enron reported EES's contract-related losses in its Retail Energy Services segment, that segment would have shown a quarterly loss of at least $60 million, rather than a profit of $40 million as falsely reported in Enron's Form 10-Q for the first quarter of 2001. The Commission's complaint further alleges that Pai avoided substantial losses from these sales when the price of Enron stock collapsed in the fall of 2001. Enron's stock price averaged approximately $53.78 per share during the time of Pai's sales, but closed at $0.40 on December 3, 2001 - the day after Enron filed for Chapter 11 bankruptcy protection.

Pai consented to the entry of a final judgment that permanently enjoins him from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and bars him from acting as an officer or director of a public company for five years. Pai also agreed to pay $30 million in disgorgement and prejudgment interest (subject to a $6 million offset based on his prior waiver of insurance coverage for the benefit of Enron investors), plus a $1.5 million civil money penalty.

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

SEC and Labor Sign MOU on Investments in Employee Benefit Plans

On July 29 the SEC and and the U.S. Department of Labor entered a Memorandum of Understanding to share information on retirement and investments to protect the $5.8 trillion in retirement assets of American workers, retirees and their families held in employee benefit plans.  The increasing intersection of regulatory responsibilities in today's financial world presents new challenges in protecting the retirement assets of investors nationwide.

The MOU establishes a process for the department's Employee Benefits Security Administration and SEC staffs to share information and meet regularly to discuss matters of mutual interest. These include examination findings and trends, enforcement cases and regulatory requirements that impact the missions of both agencies. The department has oversight over 401(k) and other retirement plans as well as plan participants, while the SEC oversees, among other areas, brokerages, investment advisers and mutual funds.

Both agencies will designate points of contact in their regional offices to facilitate communications among staff on enforcement and examination matters. The agreement also will expedite the sharing of non-public information regarding investment advisers and other subjects of mutual interest between the two agencies. Additionally, the Labor Department and SEC will cross-train staff under the agreement with the goal of enhancing each agency's understanding of the other's mission and investigative jurisdiction.

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