Securities Law Prof Blog

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

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Friday, February 1, 2008

SEC Staff Begins Small Business Cost-Benefit Study on SOX 404 Compliance

The SEC today announced that its professional staff has commenced a cost-benefit study of an upcoming auditor attestation requirement for smaller companies under Section 404(b) of the Sarbanes-Oxley Act of 2002.  The study will collect and analyze cost and benefit data from a broad array of companies currently complying with Section 404 under newly-issued guidance for companies and auditors. The new guidance for management and the new auditing standard were intended to reduce the compliance costs of Section 404 while strengthening its focus on material controls. In addition to assessing the Section 404 cost reductions resulting from the Commission's recent actions, the final report also will inform any decision to improve the efficiency and effectiveness of Section 404 implementation.

In connection with the study, the four-member Commission unanimously proposed on Jan. 31, 2008, the one-year extension of the Section 404(b) auditor attestation requirement for smaller companies that SEC Chairman Christopher Cox had previously announced in testimony before the House Small Business Committee in December 2007. The postponement would allow time for completion of the study. Under the proposed extension, the Section 404(b) requirements would apply to smaller public companies beginning with fiscal years ending on or after Dec. 15, 2009.

February 1, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (2)

SEC and European Commission Discuss Mutual Recognition

SEC Chairman Christopher Cox and the European Commissioner for the Internal Market and Services Charlie McCreevy met in Washington, D.C., on February 1. To quote from the press release:

They had a wide-ranging discussion on topics of mutual interest, including the current market volatility, accounting standards, sovereign wealth funds, credit rating agencies, XBRL developments and mutual recognition of securities regulation. With regard to the recent market movements, they discussed national and international efforts to analyze the circumstances resulting in the loss of market liquidity and mitigate its recurrence.

On mutual recognition, they agreed that the goals of a mutual recognition arrangement would be to increase transatlantic market efficiency and liquidity while enhancing investor protection. An EU-US mutual recognition arrangement for securities would have the potential to facilitate access of EU and U.S. investors to a broader and deeper transatlantic market, increase the availability of information about foreign investment opportunities, promote greater diversification of securities portfolios, significantly reduce transatlantic trading and transaction costs, and increase oversight coordination among regulators.

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

Massachusetts Sues Merrill Lynch over CDOs Sold to City

The Massachusetts Secretary of State is suing Merrill Lynch in connection with the firm's sale of CDOs to the city of Springfield, charging that it was an unsuitable investment.  Yesterday the firm bought back, at the original sale price of $13.9 million, the CDOs that it sold to Springfield last spring.

February 1, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (2)

Merrill Lynch Buys Back CDOs Sold to Springfield

Merrill Lynch repurchased CDOs that it sold to Springfield, Massachusetts last spring at the original sale price of $13.9 million.  The CDOs are currently worth about $1.2 million.  Merrill Lynch said its investigation showed that the city did not authorize the purchase.   The Massachusetts Attorney General said it was continuing its investigation.  WSJ, Merrill Pays Back Springfield, Mass., For CDO Purchase.

February 1, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Motorola Plans to Shed Handset Business

Motorola said it might spin off or sell its handset business in response to pressure from Carl Icahn.  An early leader in the industry, Motorola's market share has declined in recent years, and the industry faces continued challenges to innovate.  Icahn said he plans to run a proxy campaign this spring to replace four or five directors.  WSJ, Motorola to Spin Off Handset Unit, As Icahn Waits.

February 1, 2008 in News Stories | Permalink | Comments (0) | TrackBack (1)

McKee Nelson's Role in Securitization

A small law firm based in New York and D.C., McKee Nelson, made a name for itself by doing the legal work associated with bundling mortgage loans into securities.  Since 2000, the firm handled over 3,000 deals totalling $2.7 trillion.  Now questions grow about whether the risks were adequately disclosed, as federal and state regulators conduct investigations and unhappy investors look for deep pockets to sue.  Meanwhile, McKee Nelson is turning its attention to representing financial institutions in litigation.  NYTimes, Small Law Firm’s Big Role in Bundling Mortgages.

February 1, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, January 31, 2008

MBIA Reports $2.3 Billion Net Loss for Fourth Quarter

MBIA, the largest bond insurer, reported a $2.3 billion fourth quarter net loss and a $3.5 billion write-down of its credits derivatives portfolio.  Warburg Pincus purchased $500 million worth of stock to provide much-needed capital.  MBIA's triple-A credit rating, which is necessary to insure municipal bonds, may be at risk; Moody's is said to be reviewing it.  WSJ, Derivatives Write-Downs Hit MBIA

January 31, 2008 in News Stories | Permalink | Comments (0) | TrackBack (2)

Cuomo's Investigation into Subprime Mortgage Pools Intensifies

New York State Attorney General Andrew Cuomo is using the state's Martin Act (made famous by his predecessor Eliot Spitzer's investigations into analysts' conflicts) in the investigation into whether Wall St. firms failed to disclose adequately that loans it was packaging for sale included "exception" loans, or loans that did not meet minimum lending standards.  Under the Martin Act, which has both civil and criminal remedies, securities fraud is easier to prove.  Clayton Holdings, a company that provides due diligence on mortgage pools for Wall St., is cooperating in the investigation.  WSJ, State Subprime Probe Takes a New Tack.

Meanwhile, again like his predecessor, Mr. Cuomo is engaged with a turf war with federal regulators, in this case, the Office of Federal Housing Enterprise Oversight, which oversees Freddie Mac and Fannie Mae.  Both are investigating allegations of mortgage fraud and fraudulent appraisals.  WSJ, Tensions Rise in Lending Probes.

January 31, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 30, 2008

Atkins on Attorney-Client Privilege

SEC Commissioner Paul S. Atkins, in Remarks at the Federalist Society Lawyers' Chapter of Dallas, Texas, on January 18, 2008, said the attorney-client privilege was under siege due to the aggressive actions of the DOJ and SEC.

January 30, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (1)

NASAA's Legislative Agenda

The North American Securities Administrators Association (NASAA) identified its initiatives and legislative agenda for the second session of the 110th Congress.  The initiatives fall into five broad categories: 1.  Preserving the authority of state regulators to protect investors; 2. strengthening the mechanisms currently in place that provide redress to investors for wrongdoing by industry participants; 3. maintaining federal laws designed to insure corporate accountability and shareholder confidence; 4. promoting sound and effective regulatory initiatives, and 5. improving the scope and breadth of investor education efforts.  NASAA, 2008 Pro-Investor Legislative Agenda.

January 30, 2008 in State Securities Law | Permalink | Comments (0) | TrackBack (0)

UBS Announces $4 Billion Net Loss for 2007

UBS announced it would write-off a higher than expected $14 billion because of the U.S. mortgage markets and would post a $4 billion net loss for the year.  Its fourth quarter net loss was $11.4 billion.  NYTimes, UBS Takes a $14 Billion Hit; WSJ, UBS to Post Record Full-Year Loss On Further Mortgage Write-Downs.

January 30, 2008 in News Stories | Permalink | Comments (0) | TrackBack (1)

Comverse Internal Probe Finds Additional Wrongdoing

A Comverse Technology investigation found that, in addition to backdating stock options, Kobi Alexander, its former CEO now living in Namibia, manipulated the company's earnings and falsified dates when he exercised some stock options.  WSJ, Probe Finds Comverse Executives Falsified Results.

January 30, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 29, 2008

FBI Investigates Suprime Mortgage Fraud

The FBI is investigating 14 unidentified companies for fraud in the subprime mortgage markets, including accounting fraud and insider trading.  Since the 1990s, th eFBI has investigated mortgage fraud in the primary real estate market.  WSJ, U.S. Probes 14 Companies In Subprime Investigation.

January 29, 2008 in News Stories | Permalink | Comments (0) | TrackBack (1)

Former Bayou CFO Sentenced to 20 Years

Daniel Marino, former CFO of Bayou Management, was sentenced to 20 years for his role in defrauding investors out of more than $400 million.  Marino, who pleaded guilty in 2005, said he was "truly sorry."  WSJ, Former CFO of Bayou Management Gets 20 Years for Investor Fraud.

January 29, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Settles Fraud Charges Involving Unregistered Offerings

On January 25, 2008, the federal district court for the Northern District of Georgia entered an order permanently enjoining Coadum Advisors, Inc. ("Coadum"), et alia, ("collectively "defendants") from violations of the federal securities laws and continued a freeze of defendants' assets.The SEC alleged that the defendants engaged in fraud in conjunction with a series of four securities offerings which began in early 2006 and raised approximately $30 million from at least 150 investors. The Complaint alleged that the defendants falsely represented to investors that they would receive a return of from 3 to 6% per month; misrepresented that their principal was protected; and failed to disclose that the defendants have made loans to themselves from the investor proceeds. Furthermore, the Complaint alleged that the defendants falsely represented in monthly account statements to investors that they have earned approximately 4% per month, and that all or most of their principal was in escrow. Finally, the Complaint alleged that, without disclosure to investors, Coadum and Mansell have also "borrowed" in excess of $3 million of, or against, the investors' funds and have disbursed approximately $5 million to related parties.

January 29, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

BOSC Settles Unsuitable DVA Sales Charges

FINRA continues to crack down on sales of deferred variable annuities to senior citizens.  It fined Banc One Securities Corporation (BOSC) of Chicago $225,000 for making unsuitable sales of deferred variable annuities to 23 customers and for having inadequate systems and procedures governing annuity exchanges. Twenty-one of the 23 customers were over 70 years old.  FINRA is also requiring the firm to allow each of the 23 customers to sell their variable annuities without penalty. Ordinarily, these variable annuities would have been subject to a six-year "surrender period" during which time the customers would have been required to pay surrender charges as high as 7 percent of the amount invested if they were sold in the first two years. The firm will also pay restitution of about $6,500 to two customers who incurred surrender charges when exchanging annuities.

In 2006, BOSC merged with J.P. Morgan Securities, Inc.

FINRA found that in each of the 23 transactions between January 1, 2004, and June 30, 2005, BOSC representatives recommended that the customers exchange their fixed annuities then paying a minimum of 3 percent, for variable annuities. Following the exchange, the customers placed 100 percent of their assets into the fixed rate feature of the variable annuity, which paid a maximum of 3 percent - as recommended by BOSC representatives. All but one of the fixed annuities were beyond the surrender period - that is, the customers were not subject to any financial penalties if they withdrew any of their funds from the fixed annuity. Each of the newly purchased variable annuities was subject to a six-year surrender period requiring the customers to pay a penalty if they withdrew more than the sum of their earnings and 10 percent of their principal. FINRA found that each of these 23 recommendations was unsuitable, given the customer's age, investment objective, financial situation and income needs.

The settlement cites one example of an 80-year old customer who exchanged a fixed annuity earning 3 percent for a variable annuity, in which he invested the entire $80,000 balance in the fixed income feature, which also paid 3 percent interest. This new variable annuity was subject to a six-year surrender period. Within the first year of owning the variable annuity, the customer withdrew $9,000. Sixteen months after buying the variable annuity, the customer liquidated it and incurred a $4,628 surrender fee.

In concluding this settlement, BOSC neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

January 29, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

CME, Nymex in Merger Talks

The Chicago Mercantile Exchange, the world's largest market for derivatives trading, and the New York Mercantile Exchange, a leader in energy and metals trading, are in talks about a $11 billion merger.  CME would acquire Nymex for a combination of cash and stock for an estimated price of $119 per share.  NYTimes, Commodities Markets in New York and Chicago Discuss Merger ; WSJ, CME-Nymex: Good Deal?

January 29, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Criticizes Disclosure on Executive Pay Policies

As the SEC has increased its scrutiny of how corporations describe their executive compensation policies, it has expressed dissatisfaction at how many companies describe the role of individual performance in pay decisions.  In the past year the SEC sent out two rounds of letters to corporations about their descriptions of their pay policies.  Letters from 26 completed cases are posted on the SEC website.  The Wall St. Journal suggests this could lead corporations to focus less on individual performance as a measure of success and instead focus on corporate financial targets like earnings and stock prices.  WSJ, SEC Unhappy With Answers on Executive Pay.

January 29, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Lazar Sentenced for Perjury

Seymour M. Lazar, a former Milberg Weiss client who received secret payments for serving as leading plaintiff in securities class actions, was sentenced to six months' home detention and a $600,000 fine for perjury.  He previously forfeited $1.5 million in a plea agreement.  NYTimes, Ex-Client Sentenced in Law Firm Case.

January 29, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Former SafeNet CFO Sentenced in Backdating Case

Carole D. Argo, former CFO of SafeNet, was sentenced to six months in prison and fined $1 million for her role in backdating millions of dollars' worth of employee stock options.  The judge said he imposed a lenient sentence because of her charitable work; the sentencing guidelines called for 9-10 years.  NYTimes, Backdating Case Brings a Prison Term.

January 29, 2008 in News Stories | Permalink | Comments (0) | TrackBack (2)