Securities Law Prof Blog

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

Friday, November 21, 2008

SEC Bars Adviser's Former Managing Director for Conversion, Fraud

The SEC imposed sanctions on Brendan E. Murray, formerly a managing director of registered investment advisor Cornerstone Equity Advisers, Inc. (Cornerstone) and secretary to Cornerstone's advisory clients the Cornerstone Funds, Inc. (Funds), for willfully aiding and abetting, and being a cause of, Cornerstone's violations of antifraud provisions of the Investment Advisers Act of 1940. Cornerstone, a fiduciary to the Funds, misappropriated client funds by knowingly inflating and falsifying vendor invoices, directing the payments of the inflated amounts to an intermediary, and instructing the intermediary to pay the vendors lesser amounts (or nothing) while keeping the overage. The Commission found that Murray participated in the scheme by creating, submitting, and authorizing payment of the inflated invoices. The Commission also found that Murray, who as secretary owed a fiduciary duty to the Funds, converted corporate funds by knowingly submitting inflated invoices for reimbursement. The Commission concluded that it is in the public interest to bar Murray from associating with any investment adviser or investment company, to impose a cease-and-desist order, to impose a civil money penalty in the amount of $60,000, and to order disgorgement in the amount of $21,157 plus prejudgment interest.

November 21, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, November 20, 2008

SEC Director Sirri Testifies on Credit Default Swaps

Erik Sirri, Director, Division of Trading and Markets, SEC, testified on Credit Default Swaps before the House Committee on Agriculture on November 20, 2008.

November 20, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Convenes Meeting of International Regulators

SEC Chairman Christopher Cox announced that he will convene a meeting of the International Organization of Securities Commissions (IOSCO) Technical Committee on Monday, November 24 by teleconference to discuss urgent regulatory issues in the ongoing credit crisis.  The Technical Committee meeting will consider:

Short Selling — Consider the effectiveness of recent regulatory responses in reducing manipulative short selling without stifling legitimate short selling activity, and explore possible coordination on rules relating to naked short sales, in particular with regard to position reporting and delivery and pre-borrowing requirements
Under-Regulated or Unregulated Products — Develop disclosure principles to promote transparency in OTC markets for derivatives and other financial instruments which will contribute to enhanced investor protection and mitigating systemic risk.

The meeting also will focus on:

Credit Rating Agencies — Assess members' progress in adopting rules based on IOSCO's revised Code of Conduct, and accelerate work on developing a common examination module.
International Accounting Standards — Ensure that the process of developing international accounting standards continues to take account of the interests of investors.

November 20, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, November 19, 2008

SEC Charges Day-Traders with Manipulative Short-Selling Scheme

The SEC filed charges against two day-traders, Robert Todd Beardsley and George Lindenberg, who allegedly perpetrated a manipulative short selling scheme through brokerage accounts at a now defunct broker-dealer, Redwood Trading LLC ("Redwood"). As alleged in the complaint, Beardsley and Lindenberg engaged in their manipulative short selling scheme by repeatedly selling short securities in violation of the then-existing short sale rule, commonly referred to as the "uptick rule," with the intent to artificially depress the price of shares that they had sold short in order to enable them to cover their short positions at favorable prices. In a related civil injunctive action, the SEC alleges that Dennis McNell, the former Chief Executive Officer and Chief Operations Officer of Redwood, aided and abetted the illegal short selling scheme. The complaint also alleges that McNell engaged in an unrelated fraudulent scheme to hide substantial trading losses that he had incurred in a Redwood proprietary account.  The SEC has settled the charges against Lindenberg and McNell, pending court approval.

November 19, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Announces Panelists for Mark-to-Market Accounting Roundtable

The SEC announced the expected panelists for its November 21 roundtable concerning mark-to-market accounting.  The roundtable will have one panel discussion focused on the usefulness of mark-to-market accounting to investors:

The sufficiency of information and the ability to improve the reliability regarding the valuation of assets recognized at fair value that do not currently trade in an active market
Challenges encountered and best practice used by preparers of financial statements related to estimating fair value during the current market conditions
Whether there are aspects of the current fair value measurement accounting standards that are not sufficiently clear, and if so, what are the areas that could be improved and how
Whether there needs to be more education related to fair value measurements
Challenges that auditors have faced and best practice employed in providing assurance regarding fair value accounting
Ways to increase transparency and consistency in the application of impairment models for investments not held for trading purposes

Scheduled panelists include:

James Gilleran, former Director, Office of Thrift Supervision
Jay Hanson, McGladrey & Pullen, LLP
Richard Jones, Dechert LLP
Wayne Landsman, University of North Carolina
David Larsen, Duff and Phelps LLC
Dane Mott, JP Morgan Chase
Donald Nicolaisen, former Chief Accountant of the SEC
Samuel Ranzilla, KPMG LLP
David Runkle, Trilogy Global Advisors
Kevin Spataro, The Allstate Corporation
Mark Thresher, Nationwide Financial
Bob Traficanti, Citigroup

In addition, the following individuals are scheduled to participate in the panel discussion as observers:

Daniel Goelzer, Public Company Accounting Oversight Board
Charles Holm, Federal Reserve Board
Kristen Jaconi, U.S. Department of the Treasury
Thomas Jones, International Accounting Standards Board
Thomas Linsmeier, Financial Accounting Standards Board

November 19, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NASAA Announces Regulatory Reform Roundtable Next Month

The NASAA released five core principles to help guide the ongoing policy debate over the changes necessary to strengthen the nation’s financial services regulatory structure.  NASAA also announced that it will host a Regulatory Reform Roundtable next month in Washington, D.C. to discuss the Core Principles and present specific recommendations for future reforms.

The five core principles of regulatory reform are:

Preserve the system of state/federal collaboration while streamlining where possible.
Close regulatory gaps by subjecting all financial products and markets to regulation.
Strengthen standards of conduct, and use “principles” to complement rules, not replace them. 
Improve oversight through better risk assessment and interagency communication.
Toughen enforcement and shore up private remedies.

November 19, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Adopts Rules to Improve Mutual Fund Disclosure

The SEC voted unanimously to improve mutual fund disclosure by requiring that funds provide investors with a concise summary — in plain English — of the key information they need to make informed investment decisions. The new summary prospectus will appear at the front of a fund’s prospectus.  The Commission also approved amendments to encourage funds to make greater use of the Internet so investors can receive more detailed information in a way that best suits their needs.

Mutual funds are supposed to be the best investment vehicle for retail investors to obtain diversification, yet past SEC efforts to improve the quality of mutual fund disclosure have been unsuccessful.  As Andrew J. Donohue, Director of the SEC’s Division of Investment Management, acknowledged: “Many investors often find current fund prospectuses to be lengthy, legalistic and confusing.

Specifically, the SEC adopted the following improvements to mutual fund disclosure:

Summary Information at the Front of the Prospectus
Every mutual fund must include key information at the front of its statutory prospectus about the fund’s investment objectives and strategies, risks, and costs. The summary will also include brief information regarding investment advisers and portfolio managers, purchase and sale procedures, tax consequences, and financial intermediary compensation. Funds will be required to provide the summary information in plain English and in a standardized order.

New Prospectus Delivery Option for Mutual Fund Securities
The Commission adopted a new rule that permits sending a summary prospectus to satisfy prospectus delivery requirements provided that the mutual fund’s summary prospectus, statutory prospectus, and other specified information are available online. The summary prospectus must have the same information in the same order as the summary at the front of the statutory prospectus.

In addition:

The online materials must be in a user-friendly format that permits investors and other users to move back and forth between the summary prospectus and the statutory prospectus. This will allow investors and others to efficiently access particular information that is of interest to them.
Investors have to be able to download and retain an electronic version of the information.
The statutory prospectus and other information must be provided in paper or by e-mail upon request so investors can choose the format in which they receive more detailed information.

The full text of the Commission’s new disclosure requirements will be posted to the SEC Web site as soon as possible.

November 19, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 18, 2008

SEC Charges Fraud in Commodity Derivatives Trading at Bank of Montreal

The SEC filed charges in the United States District Court for the Southern District of New York alleging that four individuals engaged in a fraudulent scheme to overvalue the commodity derivatives trading portfolio at Bank of Montreal ("BMO") and thereby inflate BMO's publicly reported financial results. The defendants include a former senior derivatives trader at BMO and the top two senior executive officers of Optionable, Inc. ("Optionable"), a publicly traded commodities brokerage firm.

The defendants named in the Commission's complaint are:

David Lee ("Lee") was a natural gas options trader employed by BMO Capital Markets Corp., a wholly-owned subsidiary of BMO and a registered broker-dealer, until he resigned on May 15, 2007. From 2001 through 2004, Lee was a Vice President of BMO's Commodity Derivatives Group, the unit through which BMO traded commodity derivatives. In 2005, he was promoted to Managing Director of that group.

Kevin P. Cassidy ("Cassidy") was one of Optionable's founders and served as Vice Chairman of Optionable's board of directors until he resigned on May 12, 2007. Except for the period from March 2004 to October 2005, he was also Optionable's CEO throughout the relevant period.

Edward O'Connor ("O'Connor") was one of Optionable's founders and since 2001, he has served as President and a director of Optionable. From March 2004 through October 2005, he was also Optionable's CEO and Treasurer.

Scott Connor ("Connor") was employed by Optionable as a commodities broker until May 2007.

The Commission's complaint specifically alleges as follows:

Lee fraudulently overvalued BMO's portfolio of natural gas options by deliberately "mismarking" trading positions for which market prices were unavailable. Lee recorded inflated values that were then purportedly validated by Optionable, which held itself out to BMO and the public as a legitimate provider of independent derivatives valuation services. In fact, Cassidy, O'Connor and Connor schemed with Lee to have Optionable simply rubber-stamp whatever inflated values Lee recorded. After the scheme was discovered, BMO restated its financial results by reducing net income for the first quarter of its 2007 fiscal year by approximately $237 million Canadian dollars ($204 million USD), which reflects a 68% overstatement of BMO's net income for that quarter.

BMO was Optionable's largest customer, and BMO trades accounted for as much as 60% of Optionable's commodity brokerage business. Lee's trading accounted for virtually all of BMO's business with Optionable. As a result, Optionable's management, led by Cassidy, was willing to do whatever it took to keep Lee satisfied. When market prices were unavailable, BMO's risk management personnel sought to verify the accuracy of BMO's commodity derivatives traders' valuations of their positions, or their "marks," by obtaining supposedly independent valuations, or "quotes," for those positions from one or more third parties. During the relevant period, Optionable was the primary source of the third-party quotes that BMO used to validate Lee's marks. Lee provided his marks directly to Cassidy, O'Connor or Connor, who then simply forwarded Lee's marks, virtually unchanged, to BMO's risk management department as if they were Optionable's independent quotes. At first, Lee used this "u-turn" scheme to boost his trading profits and incentive compensation, but in 2006, the market turned against Lee and he used the scheme to hide substantial trading losses. In May 2007, BMO concluded that due to the Optionable scheme and other positions that Lee had also mismarked, Lee's trading book was overvalued by an aggregate total of $680 million (CAD) since the beginning of BMO's fiscal year ended October 31, 2006.

Cassidy and O'Connor also defrauded Optionable's public shareholders by concealing Optionable's role in the scheme. Optionable's periodic reports touted the synergistic benefits of the derivatives valuation services that Optionable purportedly provided to multiple brokerage clients, but those reports, which Cassidy and O'Connor signed, never disclosed that BMO was the principal client for whom those "services" were performed and that the "valuation services" provided to BMO were a sham designed to defraud BMO. In addition, Cassidy and O'Connor defrauded the New York Mercantile Exchange ("NYMEX") by selling over $10 million of their own Optionable stock to NYMEX in April 2007. Both Cassidy and O'Connor represented to NYMEX that Optionable's periodic reports were materially accurate, but they never disclosed anything about their scheme with Lee to defraud the shareholders of BMO, Optionable's largest customer. On May 9, 2007, one day after BMO announced that it had placed Lee on leave and suspended its business relationship with Optionable, Optionable issued an announcement stating that the suspension would have an adverse effect on Optionable's business. Optionable's stock price fell almost 40% that day, from $4.64 to $2.81 per share, and dropped to below 50 cents per share one week later after Cassidy's prior criminal record was disclosed in press reports.

The United States Attorney's Office for the Southern District of New York ("USAO"), the New York County District Attorney's Office ("NYCDA"), and the United States Commodity Futures Trading Commission ("CFTC") also filed parallel criminal and regulatory charges today arising from the same conduct that is alleged in the Commission's complaint. Lee pled guilty to parallel criminal charges filed by the USAO and the NYCDA. In connection with his guilty plea, Lee agreed to pay a total of $4.41 million in forfeiture.

Lee has agreed to settle the SEC charges by consenting, without admitting or denying the SEC's allegations, to the entry of a permanent injunction against future violations of various provisions of the federal securities laws. The Commission's claims for disgorgement and civil penalties against Lee, and all of its claims against the other three defendants, remain pending.

November 18, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, November 17, 2008

SEC Proposes Roadmap for Adoption of IFRS Standards

The SEC issued for public comment a  proposed Roadmap for the potential use of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board by U.S. issuers for purposes of their filings with the Commission. This Roadmap sets forth several milestones that, if achieved, could lead to the required use of IFRS by U.S. issuers in 2014 if the Commission believes it to be in the public interest and for the protection of investors. This Roadmap also includes discussion of various areas of consideration for market participants related to the eventual use of IFRS in the United States. As part of the Roadmap, the Commission is proposing amendments to various regulations, rules and forms that would permit early use of IFRS by a limited number of U.S. issuers where this would enhance the comparability of financial information to investors. Only an issuer whose industry uses IFRS as the basis of financial reporting more than any other set of standards would be eligible to elect to use IFRS, beginning with filings in 2010.  ROADMAP FOR THE POTENTIAL USE OF FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS BY U.S. ISSUERS [RELEASE NOS. 33-8982; 34-58960; File No. S7-27-08]. 

November 17, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Goldman, UBS Announce No Bonuses for Top Executives

Both Goldman Sachs and UBS AG have announced that their top executives will not receive bonuses for 2008.  Goldman's seven top executives decided it would not be politic to receive bonuses this year.  InvNews, Goldman execs just say no to bonuses. In addition, UBS announced that its top executives and senior managers will receive no bonuses in 2008.  InvNew, Bonus spigot runs dry at UBS.

New York Attorney General Andrew Cuomo commended Goldman and UBS for foregoing bonuses and "encouraged" Citicorp and AIG to do the same:

"Citigroup's announcement today that it will cut an additional 50,000 jobs is a sad and disturbing development for the company. As Citigroup suffers, so too do investors, employees, and taxpayers. At the very least, Citigroup should follow Goldman Sachs' lead and announce quickly that top executives will not be receiving bonuses this year. Citigroup's stated intention to wait until the new year to make its bonus decisions is a mistake. After four consecutive quarterly losses, it seems only fair that top executives should shoulder their fair share of these difficult economic times. It would send exactly the wrong message for Citigroup's top brass to collect bonuses while investors, taxpayers, and now Citigroup's own employees suffer."

"Citigroup is, of course, not the only company in this situation. Other companies like AIG, who have received billions in rescue financing from taxpayers, also need to take a hard look in the mirror when determining the right thing to do on executive bonuses during these very difficult economic times."

November 17, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Taxpayers' Funds to Buy Back ADRs?

Talk about chutzpah -- according to the Investment News, FINRA has asked Treasury to advance funds from the $700 billion TARP to help broker-dealers re-purchase illiquid auction rate securities from clients. (Tip of the hat to Jill Gross, for calling this to my attention).  InvNews, Small firms caught in ARS buyback vise.

November 17, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC's 2008 PAR Available

The SEC has posted to its website its 2008 Performance and Accountability Report.

November 17, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Cuban with Insider Trading

The SEC filed insider trading charges today against Dallas entrepreneur Mark Cuban in the U.S. District Court for the Northern District of Texas. The Commission's complaint alleges that Cuban engaged in illegal insider trading in the securities of Inc. (""), a publicly traded Internet search engine company (now known as Copernic Inc.) According to the complaint, in June 2004, Cuban sold his entire 600,000 share position in on the basis of material, non-public information concerning an impending PIPE (private investment in public equity) offering by the company. The complaint alleges that Cuban avoided losses in excess of $750,000 by selling his stock prior to the public announcement of the PIPE offering.

According to the complaint, Cuban was's largest known shareholder during the relevant time period. On June 28, 2004, the complaint alleges,'s then-chief executive officer — after securing Cuban's agreement to keep the information confidential — invited Cuban to invest in the PIPE offering. The complaint further alleges that Cuban knew that the offering would be conducted at a discount to the prevailing market price and that it would be dilutive to existing shareholders. According to the complaint, later that day, Cuban called his broker and instructed him to sell out his entire position in the company. That afternoon (June 28), and over the next day (June 29), the broker liquidated Cuban's entire 600,000 share position. After the markets closed on June 29, 2004, publicly announced the PIPE offering. The next day,'s stock price opened at $11.89, down $1.215 or 9.3%, from the prior day's closing price of $13.105. The Commission's complaint seeks to permanently enjoin Cuban from future violations of the applicable provisions of the federal securities laws, disgorgement (with prejudgment interest thereon), and a civil penalty.

November 17, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sunday, November 16, 2008

Bainbridge on Corporate Opportunity

Rethinking Delaware's Corporate Opportunity Doctrine, by Stephen M. Bainbridge, University of California, Los Angeles - School of Law, was recently posted on SSRN.  Here is the abstract:

Although the prohibition on taking of organizational opportunities is well established, the standards applied to this problem in corporate law disputes are vague and imprecise. Corporate directors and officers lack clear guidance as to when a particular business venture may be taken for themselves or must first be offered to the corporation. In this article, I review the relevant Delaware case law, focusing on the ambiguities inherent therein. I then offer a proposed alternative regime, providing greater certainty and predictability.

November 16, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Jackson on Consolidation of Financial Regulation

A Pragmatic Approach to the Phased Consolidation of Financial Regulation in the United States, by Howell E. Jackson, Harvard Law School, was recently posted on SSRN.  Here is the abstract:

This essay proposes a phased transformation of financial regulation in the United States to focus the Federal Reserve Board on oversight of market stability, including systemically important institutions throughout the financial services industry, and to assign all other regulatory functions, including routine supervision and consumer protection, to an independent consolidated agency.

I. The authority of the Federal Reserve Board to oversee financial market stability should be expanded to cover all sources of systemic risk in the financial services industry, should be structured to coordinate effectively with other supervisory agencies, and should be designed to allow for consistent, appropriate forms of intervention in response to systemic risks.

II. Even after the authority of the Federal Reserve Board has been expanded, the consolidation of other federal financial regulatory functions should proceed; the experience of other leading jurisdictions indicates that consolidated supervision offer numerous benefits in terms of the quality and completeness of financial regulation and that the principal objections to consolidated supervision can be met through statutory safeguards and institutional design.III: Experience in other leading jurisdictions also demonstrates that many of the benefits of consolidated oversight can be achieved without the statutory consolidation of front-line supervisory units and the world's premiere consolidated agency, the British FSA, was established in a multi-stage process whereby the enactment and implementation of new substantive statutes did not occur until the FSA has been in operations for several years.

IV. Drawing on these experiences, U.S. regulatory consolidation should follow a four-stage process: 1) immediate enhancement of the President's Working Group on Financial Markets; 2) prompt enactment of legislation creating an independent United States Financial Services Authority ("USFSA" or "Authority") to provide industry-wide oversight, coordinate existing regulatory structures, and lay the groundwork for combination of existing supervisory agencies; 3) a second round of legislation authorizing the merger into the USFSA all other federal supervisory agencies; and 4) resolution of the organizational structure of the Authority should be postponed until regulatory consolidation is complete.

V. This four-phase approach to regulatory consolidation improves the likelihood of successful transition by delaying controversial decisions, avoiding unnecessary steps, and providing an organizational structure that can lead reform while safeguarding continuity of supervision.

VI. The creation of a United States Financial Services Authority is also consistent with expansion of the Federal Reserve Board's role in overseeing market stability and would actually improve the capacity of the Board to perform that function effectively.

November 16, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Fried on "Dark" Firms

Firms Gone Dark, by Jesse M. Fried, University of California, Berkeley - School of Law, was recently posted on SSRN.  Here is the abstract:

A loophole in the securities laws permits certain firms to exit the mandatory disclosure system even though their shares are held by hundreds (or even thousands) of investors and continue to be publicly traded. Such exiting firms are said to "go dark" because they subsequently provide little information to public investors. This paper addresses the going-dark phenomenon and its implications for the debate over mandatory disclosure. Mandatory disclosure's critics contend that insiders of publicly traded firms will always voluntarily provide adequate information to investors. The disclosure choices of gone-dark firms raise doubts about this claim. The paper also puts forward a new approach to regulating going-dark firms: giving public shareholders a veto right over exits from mandatory disclosure. Such an approach, it shows, will prevent undesirable exits from mandatory disclosure while preserving firms' ability to engage in value-increasing exits.

November 16, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)