Securities Law Prof Blog

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

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Saturday, December 6, 2008

Pan & Jackson on Regulatory Competition

Regulatory Competition in International Securities Markets: Evidence from Europe - Part II, by Eric J. Pan, Yeshiva University - Benjamin N. Cardozo School of Law, and Howell E. Jackson, Harvard Law School, was recently posted on SSRN.  Here is the abstract:

This article presents the second installment of an empirical investigation into regulatory competition in international securities markets. It contributes to the current debate about competitiveness of U.S. capital markets by offering an account of transatlantic capital raising practices at the height of technology boom of the 1990s and before the passage of the Sarbanes-Oxley Act of 2002 and the corporate scandals that precipitated the Act. This article provides evidence that European issuers in the late 1990s were already turning away from U.S. public capital markets. While regulatory considerations appear to have played a role in that trend, even more important were the growing importance of private means of access of U.S. capital, the increased off-shore presence of U.S. institutional investors, and the relatively unsatisfactory trading performance of many foreign issuers that had gone to the trouble of obtaining U.S. public listings early in the 1990s. The picture of transatlantic capital raising presented in our survey suggests that the recent decline in competitiveness of U.S. capital markets may well be more a product of long-standing trends in global financial markets than a response to the Sarbanes-Oxley Act or other requirements of federal securities laws. We have supplemented our original analysis with a post-script from the vantage point of 2008 to draw connections between our findings and those of recent academic literature.

December 6, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Coffee & Sale on Redesigning the SEC

Redesigning the SEC: Does the Treasury Have a Better Idea?, John C. Coffee Jr., Columbia Law School, and Hillary A. Sale, University of Iowa - College of Law, was recently posted on SSRN.  Here is the abstract:

The 2008 financial crisis has necessarily raised the question of regulatory redesign. Were regulatory failures responsible to any significant degree for the insolvency of the major investment banks? Even prior to the crisis's cresting, the Treasury Department issued a "Blueprint" in early 2008 concluding that the regulation of financial institutions in the U.S. was overly fragmented. This paper analyses both the Treasury Department's proposals and the role of the SEC in the rapid increase of leverage at major investment banks in the 2005 to 2008 era that led to their insolvency. Finding the SEC to be more competent at consumer protection and antifraud enforcement than at prudential financial regulation, this paper supports a "twin peaks" model for financial regulation in preference to either a universal regulator or the U.S.'s current system of "functional regulation." It disagrees, however, with the Treasury's recommendation of greater reliance on self-regulation and "principles" over "rules," finding that deference to self-regulation was at the heart of the SEC's recent failure in the Consolidated Supervised Entity Program and provides a paradigm of when self-regulation will fail. An alternative (and more modest) proposal is also made to Treasury's proposed preemption of state securities regulation. This article will appear in the 75th Anniversary SEC Symposium in the Virginia Law Review.

December 6, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

First Circuit Allows SEC to Proceed with Market-Timing Claims

On December 3, 2008, the United States Court of Appeals for the First Circuit issued a ruling that allows the SEC to proceed with its fraud action against James Tambone and Robert Hussey, former executives of Columbia Funds Distributor, Inc. ("Columbia Distributor"), the principal underwriter and distributor for a group of approximately 140 mutual funds in the Columbia mutual fund complex ("Columbia Funds"). The SEC alleged that from 1998 through 2003, Tambone and Hussey participated in a fraudulent scheme with Columbia Distributor and Columbia Management Advisors, Inc. ("Columbia Advisors"), the investment adviser to the funds, by secretly entering into or approving arrangements with at least eight preferred customers allowing them to engage in frequent short-term trading in certain Columbia Funds in contravention of the prospectuses that represented that the funds did not permit or were otherwise hostile to market timing or other short-term or excessive trading.

The First Circuit ruling reversed a decision by the District of Massachusetts that had dismissed the case in December 2006 on the ground that Tambone and Hussey could not be held primarily liable for false statements in the prospectuses because they did not make those statements. The First Circuit held that Tambone and Hussey could be held liable. In its decision, the First Circuit emphasized the unique role that underwriters play in the sale and distribution of mutual funds to the investing public and the reliance that the investing public places on them as a result. The First Circuit explained that Tambone and Hussey, as executives of Columbia Distributor, had a legal duty to confirm the accuracy and completeness of the prospectuses and other fund material that they distributed. By distributing the misleading prospectuses, the First Circuit reasoned, Tambone and Hussey made implied statements to potential investors that they had a reasonable basis for believing that the key statements in the prospectuses regarding market timing were accurate and complete.

The SEC first bought action against Tambone and Hussey on February 9, 2005. The District Court dismissed that action without prejudice on January 27, 2006. Thereafter, on May 19, 2006, the SEC filed a new complaint concerning the same conduct. The SEC's complaint alleges that the defendants violated Section 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, and aided and abetted Columbia Distributor's violations of Section 15(c)(1) of the Exchange Act, Columbia Advisors' violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, and the Columbia entities' violations of Section 10(b) and Rule 10b-5 of the Exchange Act. The SEC is seeking an order permanently enjoining Tambone and Hussey from violating the antifraud and other provisions of the federal securities laws, requiring them to disgorge funds received through their violations of the securities laws, and imposing civil monetary penalties. Although the District Court dismissed this complaint on December 29, 2006, the First Circuit, in its decision, remanded the case to the District Court for further proceedings.

In related proceedings, the SEC filed a civil injunctive action against Columbia Management Advisors, Inc. and Columbia Funds Distributor, Inc., in federal court in Massachusetts on February 24, 2004. That action was later dismissed when the two Columbia entities agreed to settle charges through administrative proceedings that resulted in an Order issued by the SEC on February 9, 2005 requiring, among other things, $140 million in disgorgement and penalties to be distributed to investors harmed by market timing activity at Columbia. The SEC is in the process of distributing those funds to investors.

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

Friday, December 5, 2008

Merrill Lynch Shareholders Approve Bank of America Merger

Merrill Lynch & Co., Inc. announced that Bank of America’s acquisition of Merrill Lynch was approved today at its special stockholders meeting along with two other related proposals.  Under the terms of the transaction, which was announced on September 15, 2008, Merrill Lynch stockholders will receive 0.8595 of a share of Bank of America common stock for each share of Merrill Lynch common stock held immediately prior to the merger and Merrill Lynch & Co., Inc. will become a wholly-owned subsidiary of Bank of America Corporation.  The acquisition is expected to close by the end of the year, pending the receipt of regulatory approvals and the satisfaction of other customary closing conditions.

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

Thursday, December 4, 2008

Ebbers Seeks Pardon from Bush

Should Bernie Ebbers (former WorldCom CEO), Conrad Black (former Hollister Int'l CEO) and Michael Milken (junk bonds ) get Presidential pardons?  According to published reports, all are seeking them.  InvNews, WorldCom ex-chief begs pardon from Bush.

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

Silicon Valley Venture Capitalist Settles SEC Fraud Charges

The SEC filed a civil injunctive action against Silicon Valley venture capitalist, William J. "Boots" Del Biaggio III, in federal district court in the Northern District of California alleging that he engaged in two distinct securities fraud schemes, defrauding investors, banks and private lenders out of $65 million. The complaint alleges that Del Biaggio used the funds to maintain a lavish lifestyle, which included buying an interest in a professional hockey team, satisfying substantial gambling debts, and paying expenses on his family's luxury home. Without admitting or denying the complaint's allegations, Del Biaggio has agreed to a permanent injunction from further violations of the antifraud provisions of the federal securities laws. Del Biaggio also has agreed that, at a later date, the court in this matter shall determine the amount of ill-gotten gains (disgorgement) and civil monetary penalties that Del Biaggio shall be required to pay.

According to the Commission's complaint, Del Biaggio engaged in two distinct securities fraud schemes. First, Del Biaggio fraudulently pledged securities owned by innocent customers of a San Francisco-based broker dealer as collateral for more than $45 million in personal loans. Beginning in August 2007, Del Biaggio obtained brokerage account statements of unknowing customers with the help of a friend who was a managing director at a San Francisco brokerage firm, and then falsified the account statements to make it appear that Del Biaggio owned the assets in the accounts. To obtain more than $45 million in loan proceeds, Del Biaggio supplied the forged account statements to multiple banks and private lenders and signed agreements pledging the securities in the innocent customers' accounts. As alleged in the complaint, Del Biaggio used $25 million of the loan proceeds to purchase an interest in the Nashville Predators professional hockey team, and used the rest for other personal expenses.

In the second scheme, according to the Commission's complaint, Del Biaggio misappropriated more than $19 million from individual investors he advised. The Commission alleges that between 2003 and 2008, Del Biaggio used his reputation as a prominent venture capitalist and role as the founder and CEO of established venture firm Sand Hill Capital L.P. to entice dozens of his advisory clients to invest in three investment funds he formed. The complaint alleges that Del Biaggio then misappropriated the money or used it to buy stocks which he then pledged as collateral for personal loans. The Commission alleges that Del Biaggio used the proceeds of his fraud to pay for other business and personal expenses.

Separately today, the U.S. Attorney's Office for the Northern District of California (USAO) also filed criminal charges arising from some of the same conduct that is alleged in the Commission's complaint.

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

Wednesday, December 3, 2008

SEC Approves New Rules on Credit Rating Agencies

The SEC approved a series of measures to increase transparency and accountability at credit rating agencies.  The new measures impose additional requirements on credit rating agencies, whose ratings of residential mortgage-backed securities backed by subprime mortgage loans and of collateralized debt obligations linked to subprime loans contributed to the recent turmoil in the credit markets. The SEC also proposed additional measures related to transparency and competition concerning credit rating agencies. This is the second set of credit rating agency reforms since the SEC received its new regulatory authority from Congress to register and oversee credit rating agencies. The initial rules were implemented by the Commission under the Credit Rating Agency Reform Act in June 2007. The regulatory program established through the Credit Rating Agency Reform Act allows the SEC to promulgate rules regarding public disclosure, recordkeeping and financial reporting, and substantive requirements to ensure that credit rating agencies conduct their activities with integrity and impartiality.

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

Tuesday, December 2, 2008

GAO Issues Report on TARP

GAO issued its first report on TROUBLED ASSET RELIEF PROGRAM: Additional Actions Needed to Better Ensure Integrity, Accountability, and Transparency.  Here is an excerpt from its summary:

Treasury has taken a number of steps to stabilize U.S. financial markets and the banking system, including injecting billions of dollars in financial institutions. Through the capital purchase program (CPP)—a preferred stock and warrant purchase program—Treasury provided more than $150 billion in capital to 52 institutions as of November 25, 2008. GAO recognizes that TARP has existed for less than 60 days and that a new program of such magnitude faces many challenges, especially in this current uncertain economic climate. However, Treasury has yet to address a number of critical issues, including determining how it will ensure that CPP is achieving its intended goals and monitoring compliance with limitations on executive compensation and dividend payments. Moreover, further actions are needed to formalize transition planning efforts and establish an effective management structure and an essential system of internal control.

The Report goes on to set forth a number of more specific recommendations.

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

Alaska Air Shareholder Proposes Waiver of FOM Presumption

Prof. Adam Pritchard (University of Michigan) reports that a shareholder in Alaska Air has submitted a proposal to the company under Rule 14a-8 to amend Alaska Air’s certificate of incorporation to provide for “a partial waiver of the ‘fraud on the market’ presumption of reliance created by the Supreme Court in Basic v. Levinson," an argument Adam sets forth in his recent article on Stoneridge.

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

Monday, December 1, 2008

NASAA Settles with Peer-to-Peer Lending Service

NASAA announced that state securities regulators have reached a settlement in principle with Prosper Marketplace, Inc., an online “peer-to peer” lending service, to resolve matters relating to the sale and offer of unregistered securities and the omission of material facts in connection with the offer, sale or purchase of a security.  Under terms of the settlement, San Francisco-based Prosper agreed not to offer or sell any securities in any jurisdiction until it is in compliance with that jurisdiction’s securities registration laws. Prosper also agreed to pay a fine totaling $1 million to the states. In consideration of the settlement, the states will terminate their investigation of Prosper’s activities related to the sale of securities before November 24, 2008.

Prosper provides a private online lending “marketplace” that allows prospective borrowers and lenders to find one another. Through its website, Prosper conducts an electronic auction to fund unsecured promissory notes. The website features a list of potential loans and investors bid against each other to finance the loans. Funds from the lowest bidders are pooled together to fund the loans. Prosper issues notes to those lenders funding the loans and services that note.

Several states had been investigating Prosper’s activity and were considering or preparing enforcement actions. Earlier this year, a working group involving state securities regulators from approximately 20 jurisdictions was formed to seek a collaborative approach to these issues. In mid-October, Prosper stopped issuing new loans and accepting new investors. The firm is currently seeking registration with the U.S. Securities and Exchange Commission.

From February 2006 to present, Prosper has offered and sold promissory notes with fixed annual interest rates ranging from 7 percent to 36 percent, amortized over a three-year term with equal monthly payments. As of September 29, 2008, Prosper’s website reported that it had 810,000 members and $175 million in loans funded.

December 1, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Sunday, November 30, 2008

Steinbach on Trading on Stolen Information

Mere Thieves, by Robert Steinbuch, University of Arkansas at Little Rock, was recently posted on SSRN.  Here is the abstract:

Today, criminals are capable of covertly stealing financial secrets from multinational corporations. Securities jurisprudence, however, has focused largely on the activities of insiders who secretly trade on information that they legally garner through their positions of trust, and has not addressed the culpability of "mere thieves" who trade on confidential financial information gained through illegal means. As such, a void in securities law exists regarding how to address the theft and use of confidential financial information by strangers under the Securities and Exchange Commission's (SEC) Rule 10b-5. This article sets forth a jurisprudential analysis under which mere thieves who trade on stolen confidential information are liable for insider trading.

November 30, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Davidoff & Zaring on Government's Response to Financial Crisis

Big Deal: The Government's Response to the Financial Crisis, by Steven M. Davidoff, University of Connecticut School of Law; Ohio State University - Michael E. Moritz College of Law, and David T. Zaring, University of Pennsylvania - Legal Studies Department, was recently posted on SSRN.   Here is the abstract:

How should we understand the federal government's response to the financial crisis? The government's team, largely staffed by investment bankers, pushed the limits of its statutory authority to authorize an ad hoc series of deals designed to mitigate that crisis. It then decided to seek comprehensive legislation that, as it turned out, paved the way for more deals. The result has not been particularly coherent, but it has married transactional practice to administrative law. In fact, we think that regulation by deal provides an organizing principle, albeit a loose one, to the government's response to the financial crisis. Dealmakers use contract to avoid some legal constraints, and often prefer to focus on arms-length negotiation, rather than regulatory authorization, as the source of legitimacy for their actions, though the law does provide a structure to their deals. They also do not always take the long view or place value on consistency, instead preferring to complete the latest deal at hand and move to the next transaction. In this paper, we offer a first look at the history of the financial crisis from the fall of Bear Stearns up to, and including, the initial implementation of the Economic Emergency Stability Act of 2008. We analyze in depth each deal the government concluded, and how it justified those deals within the constraints of the law, using its authority to sometimes stretch but never truly break that law. We consider what the government's response so far means for transactional and administrative law scholarship, as well as some of the broader implications of crisis governance by deal.

November 30, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Michaels on Securities Litigation after Worldcom

An Empirical Study of Securities Litigation after WorldCom, by David I. Michaels, Delaware Court of Chancery; UCLA School of Law, was recently posted on SSRN.  Here is the abstract:

In this article I present the first empirical study analyzing whether and to what extent In re WorldCom, Inc. Securities Litigation impacted class action litigation brought under Section 11 of the Securities Act of 1933, one of the securities laws' principal liability provisions. The study tests the hypothesis of an article I previously published in which I argued that WorldCom would encourage plaintiffs to increasingly utilize Section 11 as a means to obtain settlement awards in securities class action cases. WorldCom, I argued, made it virtually impossible for outside directors to successfully assert Section 11's "due diligence" defense-an affirmative defense for parties involved in securities offerings who have completed the requisite investigation of the information disseminated to investors in connection with public offerings of securities-even though historically outside directors were held to a low standard. At the same time, outside directors' liability under Rule 10b-5, the securities laws' most broadly sweeping liability provision, has historically been negligible. Therefore, I concluded that plaintiffs would likely assert more Section 11 class actions relative to Rule 10b-5 actions. I described why this result is sub-optimal and proposed an effective solution. In this article, I test that hypothesis by utilizing empirical methodology, and conclude that there has been a statistically significant rise in post-WorldCom Section 11 class action flings relative to Rule 10b-5 class action filings. This supports the conclusion that the SEC should reexamine the Section 11 standard for outside directors.

November 30, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)