Securities Law Prof Blog

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

Friday, February 8, 2008

Chair Cox Outlines 2008 Agenda

In a speech at the PLI "SEC Speaks" Conference today, Chair Cox outlined an ambitious 2008 agenda for the SEC that includes major enforcement initiatives (e.g., improved Fair Fund distributions, insider trading and market manipulation by hedge funds, fraud involving the subprime collapse, microcap fraud, municipal securities market) and rulemaking efforts (e.g., mutual funds, municipal securities, credit rating agencies).  Let's hope the SEC can accomplish at least some of these goals given its depleted person power both at the staff and Commissioner levels.

February 8, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (2)

SEC Charges Pump and Dump, Market Manipulation Scheme

The SEC filed a Complaint in the United States District Court for the Western District of Washington against Strategic Management & Opportunity Corporation ("SMPP"), Robert J. Pratt ("Pratt"), and Jeffrey A. Brommer ("Brommer") on February 6, 2008. The Complaint alleges that from February to August 2004, SMPP issued a series of materially false and misleading press releases concerning the market readiness of SMPP's kiosk systems and its capital raising efforts. According to the Complaint, those misrepresentations included touting a series of bogus funding agreements claiming SMPP would distribute 50 million restricted shares to four entities in exchange for $41.8 million. The Complaint alleges that SMPP did not have a market-ready product and had received a mere $1.25 million of the $41.8 million capital touted in the press releases. According to the Complaint, these misrepresentations drove up SMPP's stock price from $.10 per share on February 2 to a high of $4.50 on June 10. The Complaint also alleges that the distribution of those restricted shares significantly increased the total number of outstanding shares, enabling Pratt to sell much more stock than he otherwise would have been permitted under the securities regulations. The Complaint alleges that Pratt sold over 320,000 shares into the artificially-inflated market for a total profit of $628,947. The Complaint also alleges that Brommer, who was hired to provide investor relations services for SMPP, made misleading statements vouching for SMPP and Pratt. The Complaint alleges that Brommer had no independent basis in vouching for SMPP, but rather had a significant, undisclosed financial motive for his support of SMPP - his own receipt of 50,000 shares as compensation. The Complaint alleges that Brommer profited nearly $25,000 by selling SMPP shares during this time.

Brommer, without admitting or denying the allegations in the Commission's Complaint, consented to the entry of a Final Judgment that would order Brommer to pay $24,916 in disgorgement and $1,084 in prejudgment interest, together with a civil money penalty in the amount of $40,000. The proposed Final Judgment also will enjoin him permanently from violating Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, and bar him from participating in an offering of penny stock. The settlement is subject to the Court's approval.

February 8, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Professor Hillary Sale of University of Iowa Law School is to be commended for her efforts to increase the number of women who serve as directors on public corporations.  Here is an excerpt from Iowa's press release about DirectWomen:

Among the thousands of board members serving America's public corporations, only about 14 percent are women.

Hillary Sale is working to change that.

Sale is a UI law professor and a member of the organization DirectWomen -- started last year by the American Bar Association and Catalyst, a group assisting women in business -- that aims to recruit, train and place more women lawyers on the boards of America's publicly traded companies.

DirectWomen hosts an institute each year as its primary training seminar. Sale is chairing this year's after participating last year as a faculty member. The institute will be held Feb. 20-22 in New York.

There, 20 women lawyers will gather to hear from speakers to learn about how corporate boards operate and what they can expect while serving on boards. The topics they will cover include the roles and responsibilities of the director and the board, leadership and strategy, the use of financial statements in strategic planning, assessment of company performance, today's legal and regulatory environments, directors' and officers' liability and other current issues.

Among the women who have participated in the first two institutes are corporate general counsels, law firm partners, congresswomen and a college president. Sale said that one alumna of the program has already been appointed to the board of a financial services corporation.

February 8, 2008 | Permalink | Comments (0) | TrackBack (0)

Regulators Looking for Firms' "Best Practices" in Dealing with Senior Investors

In a joint press release, the SEC, NASAA and FINRA announced a new initiative on behalf of senior investors. The goal of the initiative is to identify effective practices used by financial services firms in dealing with senior investors, and to provide information about these practices publicly.  According to the press release:

As regulators have increasingly focused on protecting older investors, many investment advisers and broker-dealer firms are evaluating their current practices in serving seniors.   SEC staff, NASAA, and FINRA will solicit input from all interested parties in order to identify strong supervisory, compliance and other practices used by financial services firms serving seniors in the following areas: marketing and advertising to seniors; account opening; product and account review; ongoing review of the relationship and appropriateness of products; discerning and meeting the changing needs of customers as they age; surveillance and compliance reviews; and training for firm employees. The findings will be published so all firms can improve their service to older investors.

It is not expected that there will be a “one-size-fits all” approach to effective practices in these areas, and there may be many different practices that are effective.  The goal of the initiative is not to impose new regulatory requirements, but to help firms better meet their current obligations to, as well as more generally to serve, their senior customers.

February 8, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Criminal Investigations into Investment Firms' Mortgage Bond Practices Continue

The Department of Justice has notified the SEC that it wants to review the information the SEC has gathered in its inquiry into Merrill Lynch's practices in valuing mortgage bonds and whether it inflated those values.  The SEC, meanwhile, upgraded its inquiry into a formal investigation.  The DOJ and state attorneys general are looking into mortgage bond practices at other investment firms.  WSJ, Prosecutors Widen Probes Into Subprime.

February 8, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

New York Attorney General Not Satisfied with Rating Firm's Proposals for Reform

New York Attorney General Andrew Cuomo is not satisfied that Standard &  Poor's and Moody's have proposed meaningful reforms to their ratings procedures.  In a statement he said that S&P and Moody's "are attempting to make piece-meal change that seem more like public relations window dressing than systemic reform." While he has not filed charges against any of the ratings agencies, his investigation into how they assigned triple A ratings to bonds backed by risky subprime loans continues.  The SEC is conducting a similar investigation.  NYTimes, Bond Raters in Effort to Repair Credibility, WSJ, Rating the Rating Overhaul.

February 8, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Securitization Forum Held in Vegas

The Fifth Annual Conference of the American Securitization Forum was held this week in Las Vegas, and the New York Times headline may say it all: Creators of Credit Crisis Revel in Las Vegas.  Countrywide Financial, poster child for the collapse of the mortgage industry, hosted a Super Bowl party, there was a gala dinner hosted by a bond trader, and a golf outing.  Meanwhile, there were panel discussions on topics like "Transparency, Valuation and Rebuilding Investor Confidence."  Good luck with that.

February 8, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, February 7, 2008

Thomsen Testifies on Sovereign Wealth Funds

Linda Chatman Thomsen, Director, Division of Enforcement, SEC, testified before the U.S.-China Economic and Security Review Commission on February 7, 2008 on Sovereign Wealth Funds and Public Disclosure.

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

SEC Settles Fraud Charges Against Attorney for Role in Pump and Dump Scheme

The SEC continues its crackdown on attorneys who facilitate microcap fraud.  Today it announced a settled enforcement action against California attorney Kenneth M. Christison for facilitating a multi-million dollar pump-and-dump scheme by issuing a series of bogus legal opinion letters. 

The SEC previously brought and settled charges against Michael Paloma and Lawrence Kaplan in an elaborate market manipulation scheme that involved unlawfully taking public seven microcap companies, inflating their share prices, and dumping millions of shares into the public market. They touted the companies' shares and netted nearly $3 million in ill-gotten gains by disseminating millions of false or misleading blast faxes and spam e-mails.  The SEC alleged that on four occasions between May 1 and Nov. 30, 2004, Paloma hired Christison to issue opinion of counsel letters warranting that certain offerings of securities were exempt from the registration provisions of the federal securities laws and that there were no restrictions on resale of the securities sold in those offerings. According to the Commission, in each instance, Christison knew or should have known that his opinion letter would contribute to Paloma's unregistered public distribution of securities through non-exempt transactions. The Commission further alleged that Christison, in fact, possessed documents and other information signaling Paloma's intent to conduct unlawful distributions by ultimately selling these securities into the public marketplace.  Without admitting or denying the accusations, Christison consented to the entry of an order directing him to cease and desist from committing or causing violations of Sections 5(a) and 5(c), the registration provisions, of the Securities Act of 1933.

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

University of Cincinnati Corporate Law Symposium on Dysfunctional Boards

Corporate Law Center and University of Cincinnati Law Review
2008 Corporate Law Symposium

The Dysfunctional Board: Causes and Cures

March 14, 2008 9:00 a.m. -- 4 p.m.

Hewlett-Packard presents a cautionary tale of the damage caused by distrust and dissension within the boardroom.  In fall 2006, Hewlett-Packard became embroiled in a headline-grabbing scandal and disgrace when the media reported that the board had authorized the use of possibly illegal tactics to determine the source of boardroom leaks.  In the resulting publicity, the underlying problem – the breach of the directors’ obligation to maintain the confidentiality of corporate information – was often overlooked. More recently, Dow Chemical announced that it had fired two senior executives, one of whom a director, for allegedly engaging in unauthorized talks to sell the company.  In another well-publicized “civil war,” in 2005 Morgan Stanley replaced its CEO and substantially reshaped its board of directors.

What confluence of events can cause governance at highly-regarded corporations to go awry?   This symposium will explore the causes of dysfunctional boards and attempt to formulate some possible cures.

Confirmed Speakers:

Miriam H. Baer, Acting Assistant Professor, NYU School of Law

Jayne W. Barnard, James Goold Cutler Professor, College of William and Mary, Marshall-Wythe School of Law

Lissa Lamkin Broome, Professor, University of North Carolina School of Law

Lawrence A. Cunningham, Professor, George Washington University Law School 

Tamar Frankel, Professor and Michaels Faculty Research Scholar, Boston University School of Law 

Franklin A. Gevurtz, Distinguished Professor and Scholar, University of the Pacific, McGeorge School of Law

Peter J. Henning, Professor, Wayne State University Law School

Kimberly D. Krawiec, Professor, University of North Carolina School of Law

The Corporate Law Symposium is generously sponsored by the law firm of Dinsmore & Shohl LLP.

For further information, contact Toni McGuire at

February 7, 2008 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Ratings Firm Revamp Their Procedures

Ratings firms are announcing changes in their ratings procedures to counter criticisms that their ratings are not always the product of objective, unbiased research.  S&P, for example, says it will rotate lead rating analysts after five years to prevent the relationship between the analyst and the company from getting too cozy.  Moody's and Fitch are planning similar reforms.  WSJ, S&P Plans Series of Moves
To Counter Conflict Claims.

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

Bond Insurers Seek to Maintain Ratings

Fitch Ratings estimates that bond insurers collectively are exposed to about $100 billion in CDOs backed by deteriorating subprime mortgage collateral.  Efforts to prevent drastic downgrades in the triple-A rating essential to a bond insurer's business are underway.  MBIA says it will sell $750 million of common shares to raise capital.  Consortia of banks are working on rescue plans for FGIC and Ambac.  WSJ, Rescue Plans Won't Prevent Downgrades.

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

Wednesday, February 6, 2008

SEC Agenda for Feb. 13 Open Meeting

The SEC will hold an Open Meeting on Wednesday, February 13, 2008 - 10:00 a.m.  The subject matter will be:

The Commission will consider whether to propose amendments to its rules regarding the circumstances under which a foreign private issuer is required to register a class of equity securities under Section 12(g) of the Exchange Act.
The Commission will consider whether to propose a package of amendments to various Commission rules and forms to improve reporting by foreign private issuers. The amendments, if adopted, would allow foreign private issuer status to be tested once a year; change the deadline for annual reports filed by foreign private issuers; revise the annual report and registration statement forms used by foreign private issuers to improve disclosure; and amend the rule regarding going private transactions to reflect recent regulatory changes.
The Commission will consider whether to propose amendments to Part 2 of Form ADV under the Investment Advisers Act of 1940 and related rules. The proposed amendments, if adopted, would require investment advisers to provide clients with narrative brochures containing plain English descriptions of the advisers' businesses, services, and conflicts of interest. The proposal also would require advisers to electronically file their brochures with the Commission, and the brochures would be available to the public through the Commission's Web site.
The Commission will, as required by Section 109 of the Sarbanes-Oxley Act of 2002, review the annual accounting support fee of the Financial Accounting Standards Board.

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

Former KPMG Consulting Managing Director Settles Peregrine Fraud Charges

The SEC settled an enforcement action against a former principal and managing director of KPMG Consulting LLC for his role in deceiving investors in a major corporate accounting fraud.  Larry A. Rodda was charged by the SEC in 2004 with aiding and abetting a massive financial fraud orchestrated by senior officers at Peregrine Systems, Inc., a San Diego software company that has since been acquired by Hewlett-Packard Company. According to the SEC's complaint, Rodda knowingly signed four sham software license agreements that allowed Peregrine to improperly record approximately $22 million in revenue. Rodda has agreed to pay an $80,000 financial penalty to settle the SEC's charges.

According to the SEC's complaint, Rodda and eight other defendants fraudulently inflated the product revenues Peregrine reported in SEC filings and elsewhere from its fiscal year 2000 through the third quarter of its fiscal year 2002. In February 2003, Peregrine restated its financial results for 11 quarters, reducing previously reported revenue of $1.34 billion by more than $507 million.

Rodda pleaded guilty in November 2004 to criminal charges brought by the U.S. Attorney's Office for the Southern District of California. Without admitting or denying the SEC's allegations, Rodda agreed to be enjoined from violating the antifraud provisions of the Securities Exchange Act of 1934 in addition to paying the financial penalty.

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

Empirical Study on Perceptions of Fairness in SRO Customer Arbitrations Is Released

The Securities Industry Conference on Arbitration (SICA) commissioned Professor Jill Gross of Pace Law School and myself to conduct an empirical study of participants' perceptions of the fairness of the SRO securities arbitration process relating to customer-broker disputes.  Our survey was released today and is available at the Pace website.  Here is the Executive Summary:

Survey participants have divided views about the fairness of securities arbitration, based on their most recent experience with the process.  In general, when asked to focus on their most recent dispute filed for arbitration, participants overwhelmingly agreed that the arbitration panel listened to the parties, their representatives and the witnesses and gave the parties enough time to present their evidence and argue the merits of their cases.  Participants also perceived that the arbitrators appeared competent to handle the dispute, to resolve pre-hearing issues, and to understand the issues and legal arguments in the case.   They also believed that the discovery process allowed them to obtain the necessary information for a hearing.
In contrast, participants’ perceptions as to other aspects of the panel’s performance in their most recent dispute were more mixed; in particular, whether the panel was open-minded and impartial and whether the panel applied the law.   Views were also divided on whether the hearings took too long and whether the arbitration process was too expensive.  Survey participants were divided about whether they would recommend that others use arbitration to resolve their securities disputes; whether they had a favorable view of securities arbitration; and whether the outcome was very different from their initial expectations.
Furthermore, overall, participants were not satisfied with the outcome of their most recent dispute and would be more satisfied if they had an explanation of the award.  Many survey participants with recent comparable experience in a civil court case perceived arbitration as unfair by comparison.
Finally, when asked about their overall perception of securities arbitration (as opposed to their perceptions derived from their most recent experience), survey participants were more negative.  Although participants agreed that arbitration is conducted in a simple way, they were split as to whether the process is economical, and they disagreed with the statements that it is conducted without bias and conducted in a way that is fair to all parties. 
For almost every question in the survey, statistical analysis reveals that customers have a more negative perception of the process than non-customers, as we detail throughout the report.

February 6, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Time Warner Considers Spin-offs

New Time Warner CEO Jeffrey L. Bewkes is expected to tell investors today of plans to shake up the company, whose stock price has fallen 7% in the past year.  Plans include a spin-off or sale of Time Warner Cable (Time Warner owns a controlling block) and a break-up of AOL, with Time Warner keeping the online advertising business and selling off the Internet service provider business. WPost, Time Warner Considers Spinoffs.

February 6, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Expert Predicts Increase in High-Yield Bond Default Rate

NYU finance professor Edward Altman predicts that high-yield bonds will default at a rate of 4.64% this year, up from 0.51% in 2007.  This would be the highest rate since 2003.  WSJ, A Year of Reckoning.

February 6, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 5, 2008

SEC Settles Late Trading Charges with Ritchie Capital

The SEC settled an enforcement action against a hedge fund, its investment adviser, its founder and CEO, and two employees for their roles in an illegal late trading scheme.  The SEC charged hedge fund Ritchie Multi-Strategy Global Trading Ltd. and its Chicago-based adviser — Ritchie Capital Management LLC — as well as Ritchie Capital’s founder and CEO A.R. Thane Ritchie and employees Warren DeMaio and Michael Mauriello. They will pay a combined total of approximately $40 million to settle the SEC’s charges. These payments will be distributed to the affected mutual funds.

The SEC's Order finds that from January 2001 through September 2003, Ritchie Capital engaged in an illegal late trading scheme, placing thousands of late trades in mutual fund shares.  Thane Ritchie approved the use of late trading by Ritchie Capital’s mutual fund group and oversaw its performance. DeMaio supervised mutual fund trading at Ritchie Capital and was involved in the development of the late trading strategy. Mauriello was responsible for placing mutual fund late trades with brokers on behalf of Ritchie Capital. Ritchie Capital’s post-4 p.m. trading resulted in a profit of approximately $30 million to the Ritchie Multi-Strategy fund.

The Commission’s Order requires Ritchie Multi-Strategy Global Trading Ltd. and Ritchie Capital Management LLC to pay disgorgement, jointly and severally, of $30 million, and prejudgment interest thereon of approximately $7.4 million. Ritchie Capital and Ritchie will pay civil penalties, jointly and severally, totaling $2.5 million. DeMaio will pay $250,000 in civil penalties. These payments will be distributed to the affected mutual funds.

February 5, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles $24 Million Settlement Involving Inside Trading in Dow Jones Stock

The SEC today announced a $24 million settlement with a former Dow Jones & Company board member and three other Hong Kong residents accused of illegal tipping and insider trading ahead of news that News Corp. made an unsolicited buyout offer for Dow Jones stock.  The SEC alleged that David Li Kwok Po, a Dow Jones board member at the time who also is Chairman and CEO of the Bank of East Asia and a member of Hong Kong's Legislative Counsel and Executive Committee, learned of the then-secret News Corp. offer and illegally tipped his close friend Michael Leung Kai Hung.  The SEC also alleged that Leung, with the help of his daughter Charlotte Ka On Wong Leung and son-in-law Kan King Wong purchased approximately $15 million worth of Dow Jones securities in their account at Merrill Lynch. They stood to make approximately $8 million in illicit profits had the SEC not won an emergency court order within days of the News Corp. offer, freezing the account. 

Without admitting or denying the Commission's allegations, David Li, Michael Leung, K.K. Wong and Charlotte Wong consented to the entry of court orders enjoining them from federal securities violations.  David Li is ordered to pay an $8.1 million civil penalty. Michael Leung is ordered to pay $8.1 million in disgorgement plus prejudgment interest and an $8.1 million penalty. K.K. Wong is ordered to pay $40,000 in disgorgement plus prejudgment interest and a $40,000 civil penalty.  The SEC's complaint is available at its website.

February 5, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Former Credit Suisse Banker Convicted of Insider Trading

Hafiz Muhammad Zubair Naseem, a former Credit Suisse banker in New York, was convicted for his role in a $7.5 billion insider trading scheme that included tipping inside information about the TXU buyout to Ajaz Rahim, the former head of investment banking at a leading bank in Pakistan.  NYTimes, Former Banker Convicted of Insider Trading.

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