Securities Law Prof Blog

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

Thursday, August 28, 2008

SEC Settles Fraud Charges Alleging Real Estate Investment Fraud

The federal district court for the Central District of California recently entered an order permanently enjoining Robert Thomas Fletcher III (Fletcher) from violating the antifraud and registration provisions of the federal securities laws. The SEC's complaint alleged that Fletcher was the chief executive officer, chairman and president of ProVision, a company that purportedly provided continuing education and support to investors through seminars and workshops focusing on real estate investing, stock investing and other wealth-building strategies.  The order against Fletcher also requires him to disgorge $5,000,000, plus prejudgment interest, and pay a civil money penalty of $130,000.  According to the SEC's complaint, ProVision and Fletcher fraudulently raised millions of dollars from investors, which Fletcher used to support his lavish lifestyle.   According to the complaint, ProVision and Fletcher falsely claimed to own or control, or have the ability to acquire, yachts, real property, and millions of tons of a mineral substance called “humate,” which they fraudulently claimed was worth $137,000,000.

August 28, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Charges Against Former CEO of REIT

The SEC settled charges against Jeffrey Fishman, the former president and chief executive officer of One Liberty Properties, Inc. (OLP), a publicly traded New York based real estate investment trust, alleging two fraudulent schemes in which he received approximately $1.6 million in illicit profits. According to the SEC's complaint, filed in the U.S. District Court for the Eastern District of New York, between 2001 and 2005, Fishman raised approximately $940,000 from seventeen individuals to invest in Medemil and misappropriated at least $609,000 of this amount to pay personal expenses and to gamble. By 2005, all of the Medemil investors’ funds had been dissipated as a result of Fishman’s misconduct and through trading losses.  The complaint further alleges that in 2002 and 2003, Fishman received almost $1 million in undisclosed kickbacks from two of OLP’s commercial partners in exchange for more favorable terms in connection with business transactions involving OLP.

Without admitting or denying the allegations in the complaint, Fishman consented to the entry of a final judgment that enjoins him from violating or aiding and abetting future violations of the securities laws, permanently bars him from serving as an officer or director of a public company, and orders him to pay $821,843.65 in disgorgement and prejudgment interest, and a $75,000 civil penalty.

August 28, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

ALJ Orders Cease and Desist of Illegal Stock Option Programs

An administrative law judge ordered James Y. Lee to cease and desist from violations of the registration provisions of the securities laws and to disgorge $2,866,375 of ill-gotten gains. From 2002 to 2005, Lee advised and guided several microcap issuers in raising millions of dollars by selling their common stock to the public in violation of the registration requirements.  Lee introduced at least fourteen clients (the Issuers) to so-called employee stock option programs, under which the Issuers sold billions of shares of common stock in unregistered offerings. Under the programs, the Issuers improperly registered the shares underlying the stock options on Form S-8 registration statements and then received the bulk of the sales proceeds as payment for the options’ exercise price. Lee introduced the programs to the Issuers, helped implement the programs, and provided advice on how to administer the programs, even though he knew, or should have known, that his conduct was contributing to the Issuers’ registration violations.

August 28, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Charges Involving Fractional Interests in Oil & Gas

The SEC filed a civil action in the United States District Court for the District of Colorado against Donald H. Allen and his two wholly-owned companies, H&M Petroleum Corporation (“H&M”) and American Energy Resources Corporation (“AER”), for violations of the antifraud and registration provisions of the federal securities laws.  In its Complaint, the SEC alleges that, between March 2002 and December 2006, Allen, H&M, and AER raised approximately $9.9 million from at least 355 investors nationwide through a series of unregistered offerings of fractional interests in oil and gas projects. These projects were marketed to the public through cold call telephone solicitations and “seminars” advertised in local newspapers. According to the Complaint, Allen, H&M, and AER diverted over $2.3 million to Allen’s personal use. The defendants also misrepresented or omitted material information about their track record, projected return on the investments, and their own investment in the offerings. Allen, AER, and H&M agreed to settle the SEC’s charges without admitting or denying the allegations in the Complaint. Relief includes payment of $510,000 in disgorgement to harmed investors.


August 28, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Second Circuit Affirms Dismissal of Indictment Against Former KPMG Partners and Employees Because of 6th Amendment Violation

In a major victory for the white collar defense bar, the Second Circuit affirmed the district court's dismissal of the indictment against former KPMG partners and employees because the government deprived the defendants of their Sixth Amendment right to counsel by causing KPMG to place conditions on the advancement of legal fees and to cap the fees and ultimately end them.  U.S. v. Stein (2d Cir. August 28, 2008).

August 28, 2008 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

DOJ Revises Corporate Charging Guidelines

Deputy Attorney General Mark R. Filip announced today that the Department of Justice is revising its corporate charging guidelines for federal prosecutors.  The revised guidelines state that credit for cooperation will not depend on the corporation’s waiver of attorney-client privilege or work product protection, but rather on the disclosure of relevant facts.  Corporations that disclose relevant facts may receive due credit for cooperation, regardless of whether they waive attorney-client privilege or work product protection in the process.  While prior guidance had allowed federal prosecutors to request the disclosure of non-factual attorney-client privileged communications and work product -- which the old guidelines designated “Category II” information -- the new guidance forbids it, with two exceptions.

The new Principles also instruct prosecutors not to consider a corporation’s advancement of attorneys’ fees to employees when evaluating cooperativeness.  They also make clear that the mere participation in a joint defense agreement will not render a corporation ineligible for cooperation credit.  In addition, the new guidance provides that prosecutors may not consider whether a corporation has sanctioned or retained culpable employees in evaluating whether to assign cooperation credit to the corporation.

Many speculate that the changes were made at this time to forestall Congressional action that might impose further limitations on federal prosecutors.  It remains to be seen if these changes will be seen as a sufficient response to widespread criticism of past government practice.

August 28, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 27, 2008

SEC Charges Illegal Forex Trading Scheme

The SEC recently filed an action in Dallas federal court to halt an alleged unregistered and fraudulent offering of securities by Patrick H. Haxton and his company Royal Forex Management, LLC ("Royal"). that involve the trading of foreign currencies on the Forex market. The judge entered a temporary restraining order suspending the offering and orders freezing the defendants' assets, requiring sworn accountings, prohibiting any alteration or destruction of documents and expediting discovery. The Commission's Complaint alleges that from at least June 2007 to the present defendants raised at least $305,000 from 8 investors in three states. Haxton offers the Forex investments through the Royal web site, advertising on his work truck and personal contacts. Royal's promotional materials and Haxton's oral statements included claims of 400% to 500% annual returns.

The defendants are charged with securities fraud under Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and with conducting an unregistered offering under Section 5 of the Securities Act. The Complaint also seeks permanent injunctions, civil penalties and disgorgement of ill-gotten gains, among other relief, against each defendant.

August 27, 2008 in SEC Action | Permalink | Comments (1) | TrackBack (0)

Con-way Settles FCPA Charges

The SEC settled charges that Con-way Inc. (Con-way), an international freight transportation company, violated the books and records and internal controls provisions of the Foreign Corrupt Practices Act. According to the complaint, a Philippines-based firm controlled by Con-way made approximately $417,000 in improper payments to numerous foreign government officials between 2000 and 2003. Without admitting or denying the allegations in the Commission's complaint, Con-way agreed to pay a $300,000 civil penalty.

In a related action, the Commission also issued a settled cease-and-desist order against Con-way finding that Con-way violated the books and records and internal controls provisions of the Exchange Act in connection with the improper payments made by Emery Transnational. Without admitting or denying the Commission's findings, Con-way consented to the issuance of an order that requires Con-way to cease and desist from committing or causing any violations and any future violations of Sections 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act.

August 27, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Proposes Roadmap to IFRS by 2014

The SEC voted to publish for public comment a proposed Roadmap that could lead to the use of International Financial Reporting Standards (IFRS) by U.S. issuers beginning in 2014. The Commission would make a decision in 2011 on whether adoption of IFRS is in the public interest and would benefit investors. The proposed multi-year plan sets out several milestones that, if achieved, could lead to the use of IFRS by U.S. issuers in their filings with the Commission.

In his opening remarks at the SEC's meeting, Chairman Cox noted that since March 2007, the Commission and staff have held three roundtables to examine IFRS, including one earlier this month regarding the performance of IFRS and U.S. GAAP during the subprime crisis. Almost one year ago, the Commission issued a concept release on allowing U.S. issuers to prepare financial statements using IFRS.

Today, more than 100 countries around the world, including all of Europe, currently require or permit IFRS reporting. Approximately 85 of those countries require IFRS reporting for all domestic, listed companies.

August 27, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Adopts Changes to Reporting Requirements for Foreign Issuers

The SEC voted today to update and modernize the disclosure requirements for foreign companies offering securities in U.S. markets.  The rule amendments eliminate requirements for foreign companies without SEC-registered securities to submit paper disclosures and instead give investors instant electronic access to foreign company disclosure documents, in English, on the Internet. After a period of transition, foreign reporting companies also will be required to file their annual reports with the SEC two months earlier, making those submissions more timely and therefore more useful to investors. The rule amendments also facilitate the ability of U.S. investors to participate in cross-border tender offers and other business combinations.  According to the SEC's press release, the changes "reflect advances in technology and other recent global changes, and bring the SEC's foreign company disclosure requirements into the 21st Century."

Specifically, the Commission adopted three sets of rule amendments.

One set of amendments, called Foreign Issuer Reporting Enhancements, will update Securities Exchange Act filing requirements and enhance disclosure required by foreign private issuers in response to changes in foreign filing requirements, market practices, and other areas of SEC regulation. The rule amendments shorten the deadline for annual reports filed by foreign private issuers from six months to four months. The rule amendments also enable foreign issuers to test their eligibility to use the special forms and rules available to foreign private issuers once a year, rather than continuously; enhance the disclosures a foreign private issuer provides to investors regarding any changes in and disagreements with its certifying accountant in its annual reports and registration statements; and revise the annual report and registration statement forms used by foreign private issuers to improve certain disclosures provided in these forms.

A second set of amendments concerns Exchange Act Rule 12g3-2(b), which exempts a foreign private issuer from registering a class of equity securities based on submission to the SEC of certain information published outside the U.S. The exemption allows a foreign private issuer to have its equity securities traded in the U.S. over-the-counter (OTC) market without registration under Section 12(g). The adopted rule amendments will eliminate the current written application and paper submission requirements under Rule 12g3-2(b) by automatically exempting a foreign private issuer from Section 12(g) provided they meet specified conditions. As is currently the case, issuers must continue registering their securities under the Exchange Act to have them listed on a national securities exchange or traded on the OTC Bulletin Board.

The Commission also voted to adopt changes to its cross-border exemptions. These amendments are intended to expand and enhance the utility of the exemptions for business combination transactions, tender offers, and rights offerings and to encourage offerors and issuers to permit U.S. security holders to participate in these transactions on the same terms as other security holders. Among the amendments are codifications of existing interpretive positions and exemptive orders in the cross-border area, as well as amendments to allow specified foreign institutions to report beneficial ownership on Schedule 13G to the same extent as their U.S. institutional counterparts. The Commission also voted to provide interpretive guidance on several topics that come up frequently for practitioners in the cross-border area.

August 27, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sunday, August 24, 2008

Choi et alia on Director Elections and Proxy Advisors

Director Elections and the Role of Proxy Advisors, by Stephen J. Choi, New York University - School of Law; Jill E. Fisch, University of Pennsylvania Law School, and Marcel Kahan, New York University - School of Law, was recently posted on SSRN.  Here is the abstract:

Using a dataset of proxy recommendations and voting results for uncontested director elections from 2005 and 2006 at S&P 1500 companies, we examine how advisors make their recommendations. Of the four firms we study, Institutional Shareholder Services (ISS), Proxy Governance (PGI), Glass Lewis (GL), and Egan Jones (EJ), ISS has the largest market share and is widely regarded as the most influential. We find that the four proxy advisory firms differ substantially from each other both in their willingness to issue a withhold recommendation and in the factors that affect their recommendation.

It is not clear that these differences, or the bases for the recommendations, are transparent to the institutions that purchase proxy advisory services. If the differences are not apparent, investors may not accurately perceive the information content associated with a withhold recommendation, and investors may rely on those recommendations based on an erroneous understanding of the basis for that recommendation. To the extent that proxy advisors aggregate information for the purpose of facilitating an informed shareholder vote, these limitations may impair the effectiveness of the shareholder franchise. If the differences are apparent, our results show that investors, though selecting a proxy advisor, can indirectly choose the bases for their vote on directors. To that extent, it is likely that proxy advisory firms will retain more investor clients if their recommendations are based on factors that their clients consider relevant.

August 24, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Fisch on Causation in Federal Securities Fraud

Cause for Concern: Causation and Federal Securities Fraud, by Jill E. Fisch, University of Pennsylvania Law School, was recently posted on SSRN.  Here is the abstract:

The Supreme Court's decision in Dura Pharmaceuticals dramatically changed federal securities fraud litigation. The Dura decision itself said little, but counseled lower courts to fashion new requirements of causation and harm modeled upon common law tort principles. These instructions have led lower courts to craft a series of confusing and inconsistent decisions that incorporate little of the reasoning upon which the common law principles are based.

This Article accepts the Dura challenge and examines both common law causation principles and their applicability to federal securities fraud. In so doing, the Article identifies the failure of the federal courts properly to confront the complex causation challenges presented by securities fraud and the extent to which common law approaches to multiple and indeterminate causation offer guidance. Common law causation analysis further highlights the critical issue of harm specification. The Article demonstrates how, from Basic to Dura, the Supreme Court has refused to address the issue of what constitutes an appropriate economic loss, despite the fact that this determination is a necessary predicate to formulating a causation requirement. The Article goes on to show how, in Basic, the Court shifted the nature of actionable harm and, in so doing, exacerbated the complexity of causation analysis.

Defining the appropriate harm involved in securities fraud is challenging. Drawing upon tort law principles, the Article considers several alternatives, ranging from artificial price inflation and ex post stock drop, to increased investment risk. The choice among these alternatives reflects policy judgments about the appropriate goals of private securities fraud litigation. In its final section, the Article considers current critiques of securities fraud litigation and demonstrates how these concerns should influence the scope of the private right of action.

August 24, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Thomas et alia on CEO Employment Contracts and Arbitration

When Do CEOs Bargain for Arbitration?: A Theoretical and Empirical Analysis, by Randall S. Thomas,
Vanderbilt University - School of Law; Vanderbilt University - Owen Graduate School of Management; Erin A. O'Hara, Vanderbilt University School of Law, and Kenneth J. Martin, New Mexico State University - Department of Finance & Business Law, was recently posted on SSRN.  Here is the abstract:

In this paper, we ask whether CEOs bargain to include binding arbitration provisions in their employment contracts. After exploring the theoretical arguments for and against including such provisions in these agreements, we use a large sample of CEO employment contracts to test the several different hypotheses for including such provisions. We find that only about one half of CEO employment contracts in our sample include such provisions. We further find that CEOs that receive a higher percentage of long term incentive pay as a fraction of their total pay, that work in industry sectors that are undergoing greater amounts of change, and that have lower long term profitability are statistically significantly more likely to have arbitration provisions in their employment contracts.

August 24, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)