Securities Law Prof Blog

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

Thursday, April 2, 2009

G-20 London Summit Communique

Here is the full text of the G-20 Communique resulting from the London Summit.

April 2, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Charges New York Attorney with Participating in Illegal Penny Stock Scheme

On April 2, 2009, the SEC filed a civil complaint in United States District Court for the Southern District of Florida against south Florida residents Frank C. Calmes, Lynn D. Rowntree, and Manny J. Shulman, New York attorney James E. Pratt, and Younger America, Inc., formerly known as Infinity Acquisition Corp. and Infinity Music Corp., alleging that the defendants conducted an illegal penny stock distribution scheme that generated ill-gotten gains of approximately $3.9 million between 2004 and 2008.

The complaint alleges that Calmes, Rowntree, and Shulman devised a scheme to illegally sell large amounts of stock of small companies after they had arranged for the companies' shares to be publicly quoted. According to the complaint, these illegal stock distributions were often facilitated by baseless legal opinion letters written by Pratt and in some cases by fraudulent wash trades by Rowntree. The complaint further alleges that Calmes and Shulman took control of Younger America, one of the companies they had helped become publicly quoted, and disseminated false information to facilitate illegal sales of its stock by themselves and others. According to the complaint, many of Shulman's illegal sales were made through accounts held by his wife, Krystal A. Becnel, who is named in the Commission's complaint as a relief defendant.

The Commission seeks officer and director bars against Calmes and Shulman, penny stock bars against Calmes, Rowntree, Shulman, and Pratt, and disgorgement, plus prejudgment interest, and civil penalties against all of the defendants.

April 2, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

University of Cincinnati Presents Symposium on Regulatory Reform

The University of Cincinnati College of Law presents its annual Corporate Law Symposium tomorrow  April 3 on New Models of Regulating the Financial Markets: The SEC's Future as it Turns 75.  Here is a brief description:

April 3, 2009 — 8:00 a.m. - 4 p.m.
The U.S. financial markets and financial institutions have long enjoyed a reputation for promoting capital formation, market stability, and investor protection. The financial meltdown and other market events, however, have renewed criticisms of the U.S. regulatory model as outmoded, anticompetitive, and ineffective.  In addition, the collapse of major financial services companies and the Bernard Madoff scandal have seriously damaged the Securities and Exchange Commission’s reputation as regulator of the securities markets.

The 75th Anniversary of the Securities and Exchange Commission marks an appropriate occasion for an examination of these issues.  The Symposium’s speakers will address proposals for regulatory reform from a variety of perspectives, both academic and practical.

Speakers include James Cox (Duke), Adam Pritchard (Michigan), Roberta Karmel (Brooklyn), Jerry Markham (Florida International), Olufunmilayo Arewa (Northwestern), Janis Sarra (British Columbia) and Jonathan Sokobin (SEC Risk Assessment). 

The event is being webcast.  For further information, see the website.

April 2, 2009 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 1, 2009

Massachusetts Charges Fairfield Greenwich with Fraud

Secretary of the Commonwealth of Masssachusetts Galvin today filed fraud charges against Fairfield Greenwich, a Madoff feed fund.  All the documents are available on the website.

April 1, 2009 in State Securities Law | Permalink | Comments (0) | TrackBack (0)

NASAA Posts Information on ARS Claims Procedures

NASAA has posted on its website information on how to file ARS claims, specific to the firm and the investor's state.  NASAA explains:

Several brokerage firms have entered, or are expected to enter into, settlements with state securities regulators in cases arising from the sale by those firms of auction rate securities. Those settlements provide, among other things, that many customers of those firms are entitled to receive a refund of the purchase price of those securities from the firm. Despite receiving those refunds, some customers may believe they have incurred consequential damages as a result of their purchase and ownership of the auction rate securities. The settlements also provide for a “special arbitration procedure” which may be used by customers attempting to recover those consequential damages. This site describes those special procedures.

April 1, 2009 in State Securities Law | Permalink | Comments (0) | TrackBack (0)

FINRA Arbitration Filings Up 90% Over 2008

Summary Arbitration Statistics from FINRA's website:

New Case Filings through February 2009:
2007        535
2008        561
 2009        1,065
 2009  vs 2008    90%

April 1, 2009 in Securities Arbitration | Permalink | Comments (1) | TrackBack (0)

Take-Two Settles Backdating Charges with SEC

The SEC announced the filing of a civil action against video and computer game publisher and distributor Take-Two Interactive Software, Inc. ("Take-Two"), alleging that during a seven year period, Take-Two defrauded investors by granting backdated, undisclosed "in the money" stock options to officers, directors, and key employees while failing to record required non-cash charges for option-related compensation expenses.  The Complaint alleges that on over 100 occasions from 1997 through September 2003, Take-Two looked back and picked grant dates for the Company's incentive stock options, resulting in grants of "in-the-money" options.  

Without admitting or denying the allegations, Take-Two consented to the entry of a permanent injunction and agreed to pay a $3 million civil penalty. The settlement is subject to the approval of the United States District Court for the Southern District of New York.

The Complaint alleges that because of the undisclosed backdating scheme, Take Two filed with the Commission and disseminated to investors current, quarterly and annual reports, proxy statements and registration statements that contained materially false and misleading statements concerning the true grant dates and proper exercise prices of stock options. In doing so, Take-Two created the false and misleading impression that stock options were granted in accordance with the terms of the applicable stock option plans. According to the Complaint, Take-Two materially understated its compensation expenses and materially overstated its quarterly and annual pre-tax earnings and earnings per share in its financial statements. On February 28, 2007, Take-Two restated historical financial results for multiple years to record additional non-cash charges for option-related compensation expenses totaling $42.1 million net of tax.

The Commission previously settled with former Chief Executive Officer and Chairman Ryan Brant for his alleged role as the architect of the fraudulent options backdating scheme. 

April 1, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges New York Adviser with Running Ponzi Scheme

The SEC charged Edward T. Stein with securities fraud and froze his assets to halt an ongoing alleged Ponzi scheme. The Court also froze the assets of seven entities, which Stein controlled, and the Commission charged as relief defendants, including investment funds Gemini Fund I, L.P. (Gemini) and DISP LLC (DISP), as well as, Prima Capital Management Corp. (Prima), Edward T. Stein Associates, Ltd., Vibrant Capital Corp. (Vibrant), Vibrant Capital Funding I LLC, and G&C Partnership Joint Venture.

In its action, filed in federal court in Manhattan, the Commission alleges that Stein is operating a Ponzi scheme and has moved more than $55 million in investor funds through the accounts of his investment funds, Gemini and DISP. The complaint alleges that Stein made material misrepresentations and omissions to induce individuals to invest in Gemini and DISP and then deceived investors by producing false statements reflecting healthy returns over the life of their investments. The Commission further alleges that in the past several months, Stein has turned to stealing client funds to keep his scheme going. Beginning in May 2008 and continuing into March 2009, Stein converted millions of dollars from a single client to pay off investors and pay personal expenses, including the purchase of a million dollar Manhattan condominium.

Judge Lynch of the U.S. District Court for the Southern District of New York granted the Commission's request for an order temporarily restraining Stein, freezing his assets and those of the relief defendants, and ordering accountings of Stein and the relief defendants. The SEC's complaint also seeks a final judgment permanently enjoining Stein from future violations of the federal securities laws, ordering him to pay financial penalties and to disgorge ill-gotten gains with prejudgment interest.

April 1, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

In re Refco, Inc. Securities Litigation

The federal district court for the Southern District of New York recently dismissed charges against the Meyer Brown law firm in In re Refco, Inc. Securities Litigation, 2009 WL 724378 (S.D.N.Y. Mar. 17, 2009).  As you may recall, one of Meyer Brown's partners, Joseph P. Collins, was indicted for his role in the fraud to cover up the true financial condition of the international brokerage firm.  Plaintiffs argued that the law firm's alleged substantial involvement in the fraud made them liable in damages under Rule 10b-5.  While the court's analysis is a straightforward application of Central Bank and Stoneridge (the judge rejecting the plaintiff's attempt to distinguish Stoneridge because that case involved "remote" participants in the fraud), what is interesting is the judge's footnote 15:

It is perhaps dismaying that participants in a fraudulent scheme who may even have committed criminal acts are not answerable in damages to the victims of the fraud. However, as the Court noted in Stoneridge, the fact that the plaintiff-investors have no claim is the result of a policy choice by Congress. 128 S.Ct. at 769. In 1995, in reaction to the Supreme Court's decision in Central Bank, Congress authorized the SEC-but not private parties-to bring enforcement actions against those who “knowingly provide [ ] substantial assistance to another person” in violation of the federal securities laws. See PSLRA, Pub.L. No. 104-67, § 104, 109 Stat. 737, 757, codified in 15 U.S.C. § 78t(f). This choice may be ripe for legislative re examination. While the impulse to protect professionals and other marginal actors who may too easily be drawn into securities litigation may well be sound, a bright line between principals and accomplices may not be appropriate. There are accomplices and there are accomplices: after all, in the criminal context when the Godfather orders a hit, he is only an accomplice to murder-one who “counsels, commands, induces or procures” but he is nonetheless liable as a principal for the commission of the crime. 18 U.S.C. § 2(a). Likewise, some civil accomplices are deeply and indispensably implicated in wrongful conduct. Perhaps a provision authorizing the SEC not only to bring actions in its own right but also to permit private plaintiffs to proceed against accomplices after some form of agency review would provide the necessary flexibility without involving the courts in standardless and difficult-to-administer line-drawing exercises.

April 1, 2009 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 31, 2009

ARS Purchasers' Suit Against UBS Dismissed Because of SEC Settlement

The federal district court in the Southern District of New York dismissed an investors' action against UBS that charged the investment bank misled them about the safety and liquidity of ARS.  The judge said the investors could not continue their suit because UBS previously entered a $19.4 billion settlement with the SEC and state regulators and agreed to buy back the securities.  NYTimes, Investors’ Suit Against UBS Is Dismissed.

March 31, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wachovia and Citigroup Agree to Buy Back ARS from California Residents

Wachovia Securities and Citigroup Global Markets entered settlements with California to buy back $4.7 billion in ARS from California residents and companies.  California regulators say these are "the first two" investment banks to settle with the state and "it won't be the last" settlement.  Bizjournals, Citigroup, Wachovia reach 'significant' settlement with California.

March 31, 2009 in State Securities Law | Permalink | Comments (0) | TrackBack (0)

Treasury Extends Money Market Fund Guarantees Until Sept. 18, 2009

The U.S. Treasury Department today announced an extension of its temporary Money Market Funds Guarantee Program through September 18, 2009, in order to support ongoing stability in financial markets.  The Program was scheduled to end on April 30, 2009. As a result of this extension, the temporary guarantee program will continue to provide coverage to shareholders up to the amount held in participating money market funds as of the close of business on September 19, 2008.  All money market funds that currently participate in the Program and meet the extension requirements under the Guarantee Agreements are eligible to continue to participate in the Program.  Funds that are not currently participating in the Program are not eligible to participate.

March 31, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Obtains Consent Judgment in Action Involving Sales of Restricted Securities

On March 30, 2009, the United States District Court for the Southern District of New York entered a partial consent judgment against defendant Pinchus Gold, of Brooklyn, New York, in an action filed in February by the SEC.  Without admitting or denying the allegations of the Commission's complaint, Gold consented to the entry of judgment that permanently enjoins him from further violation of the anti-fraud and registration provisions of the federal securities laws. The judgment further provides that Gold will disgorge his ill-gotten gains and prejudgment interest in an amount to be determined by the Court, and that Gold will be subject to a civil penalty in an amount to be determined by the Court.

The Commission's complaint alleges that Gold and others made material misrepresentations to the transfer agent for Forest Resources Management Corp. in order to obtain millions of restricted shares without the required restricted legend. A registration statement was never in effect for the shares issued to Gold and his nominees. Gold and his nominees then sold these unlegended shares on the open market, falsely holding them out to the investing public as free-trading shares, when in fact they were restricted stock. Gold received nearly $600,000 from the improper sale of these shares.

The litigation is continuing against the remaining defendants.

March 31, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Tacoma Wash. Man with Affinity Fraud

The SEC charged John H. Min of Tacoma, Wash., and his company Dime Financial Group LLC with raising more than $6 million in a fraudulent investment scheme that targeted churches, church members and senior citizens. The SEC alleges that Min misled some investors into believing their money would support Third World charitable causes while in fact spending the funds on his own lavish lifestyle and on failed high-risk investments.  According to the SEC's complaint, Min associated himself with a tight-knit religious and philanthropic community in the Pacific Northwest, creating a not-for-profit entity to attract charitable investors who believed that their investments would support certain Third Word aid groups, such as a charity supporting Bolivian widows and orphans. Min lured other investors by telling them that his trading expertise allowed him to make annual returns as high as 800 percent, and by touting Dime as a safe, low-risk investment for retirees' savings. The SEC alleges that Min and Dime deceived more than 60 investors since 2005 into buying interests in Dime's purportedly prosperous investment program.

The SEC seeks permanent injunctions, civil monetary penalties, and disgorgement against both Min and Dime.

Separately, today the United States Attorney's Office for the Western District of Washington (USAO) unsealed an indictment charging Min with criminal violations based on the same misconduct.

March 31, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

GAO Update on TARP Program

The GAO issued an update on the TARP program, Troubled Asset Relief Program: March 2009 Status of Efforts to Address Transparency and Accountability Issues. GAO-09-504.  It contains a useful timeline of programs and selected actions under TARP from Jan 30, 2009 through March 23, 2009.

March 31, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, March 30, 2009

SEC Defers Consideration of Rule 12b-1 Reform

Andrew J. Donohue, the SEC's Director, Division of Investment Management, gave the Keynote Address at the Investment Company Institute, 2009 Mutual Funds and Investment Management Conference on March 23, 2009.  Among the topics covered was Rule 12b-1 reform, which the SEC has put on hold:

Just as you are adjusting to the new market realities, we also need to adjust and reconsider our regulatory priorities to ensure that limited resources are employed where they can provide the greatest impact and benefit to fund investors. While I know our Chairman is supportive of investor-oriented rule 12b-1 reform, I believe that it would be wise in the current market environment, for us to defer consideration of rule 12b-1 reform for this year. We should address a few fundamental matters that directly impact investor protection concerns. For example, we urgently need to reconcile the diverse regulatory regimes governing investment advisers and broker-dealers, and alleviate the uncertainty in the industry emanating from this unresolved matter.

March 30, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Panel Awards Customer Over $30 Million in Damages from Merrill

On March 16, A FINRA arbitration panel awarded claimants $30.6 million in compensatory damages (the full amount of claimant's claim), plus 9% interest, against Advest, Inc. and Merrill Lynch, one of the largest awards in a customer dispute.  The claimant, the Trustees of the Masonic Hall and Asylum Fund, charged Advest and Merrill with negligence, breach of contract, misrepresentation and breach of fiduciary duty in connection with the purchase of interests in Sphinx Managed Futures Index Fund.  The award also ordered the claimant to assign to Merrill its interest of its claims in New York State courts against Price Waterhouse Coopers and in the liquidation proceeding of the Sphinx Fund to the extent of the monetary award recovered in the arbitration.

The arbitration was conducted in Albany, NY.

March 30, 2009 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

SEC Obtains Judgment in Ponzi Scheme Targeting Cambodian Immigrants

The SEC announced that on March 26, 2009, the United States District Court for the District of Massachusetts entered final judgments against five defendants in a civil action filed in November 2005 involving a fraudulent investment scheme targeting Cambodian immigrants. The Commission's action charged that defendants WMDS, Inc. ("WMDS"), OneUniverseOnLine, Inc. ("1UOL"), James Bunchan, Seng Tan and Christian Rochon falsely promised members of the Cambodian immigrant community guaranteed monthly returns on investments that purportedly would pass on to future generations. The complaint alleged that the defendants emphasized their shared Cambodian heritage with their victims, and that certain written solicitation documents drew a parallel between investing in WMDS and fulfilling the American dream. In fact, according to the complaint, the defendants were operating a fraudulent pyramid scheme that ceased making the promised monthly payments in mid-2005.

The final judgments entered by the Court against Bunchan, Tan, Rochon, WMDS and 1UOL came in response to a Commission motion for default judgments and (1) permanently enjoin the defendants from future violations of Sections 17(a) and 5(a) and 5(c) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and (2) require the defendants, jointly and severally, to disgorge $26,261,133.16 in ill-gotten gains, such amount to be reduced by any amount forfeited or paid as part of a related criminal proceeding.

On November 28, 2007, Bunchan and Tan each were sentenced by the United States District Court for the District of Massachusetts in a related criminal action after being convicted of mail fraud, conspiracy and money laundering in connection with the fraudulent investment scheme. Bunchan was sentenced to 35 years in prison and Tan was sentenced to 20 years in prison. On August 7, 2008, Rochon was sentenced by the same court based on his June 4, 2007 guilty plea to mail fraud, conspiracy and money laundering in connection with the fraudulent investment scheme. Rochon was sentenced to 5 years probation, with the first year to be served in home confinement.

March 30, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sunday, March 29, 2009

McCoy et alia on Securitization

Systemic Risk through Securitization: The Result of Deregulation and Regulatory Failure, Patricia A. McCoy, University of Connecticut - School of Law, Andrey D. Pavlov, University of Pennsylvania - Real Estate Department; Simon Fraser University - Finance Area, and Susan M. Wachter, University of Pennsylvania - Finance Department, was recently posted on SSRN.  Here is the abstract:

Without regulation, securitization allowed mortgage industry actors to gain fees and to put off risks. During the housing boom, the ability to pass off risk allowed lenders and securitizers to compete for market share by lowering their lending standards, which activated more borrowing. Lenders who did not join in the easing of lending standards were crowded out of the market. Artificially low risk premia caused the asset price of houses to go up, leading to an asset bubble and breeding fraud. The consequences of lax lending were thereby covered up.

The market might have corrected this problem if investors had been able to express their negative views by short selling mortgage-backed securities, thereby allowing fundamental market value to be achieved. However, the one instrument that could have been used to short sell mortgage-backed securities - the credit default swap -was also infected with underpricing due to lack of minimum capital requirements and regulation to facilitate transparent pricing. As a result, there was no opportunity for short selling in the private-label securitization market. The authors propose countercyclical regulation to prevent a race to the bottom at the height of the business cycle.

March 29, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)