Securities Law Prof Blog

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

Friday, April 17, 2009

Fraud on the Smart Investor? One Columnist's Experience

Check this out -- a financial columnist for the New York Times worries that he has been the victim of fraud by his financial planner -- AFW Asset Management.  NYTimes, Even Vigilant Investors May Fall Victim to Fraud.

April 17, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

American Skandia Investment Services Settles Market-Timing Charges

On April 17, the SEC settled administrative charges against American Skandia Investment Services, Inc. (ASISI) that ASISI engaged in market-timing related misconduct as investment adviser to the American Skandia Trust (AST) portfolios underlying variable annuities issued by American Skandia Life Assurance Corporation (ASLAC). As a result of its misconduct, ASISI will pay disgorgement of $34 million and a civil penalty of $34 million for a total payment of $68 million to a Fair Fund.

The Order finds that from at least January 2000 through in or around September 2003, ASISI negligently failed to consider and adequately investigate credible complaints from sub-advisers of certain AST funds that market timing was having a detrimental effect on the performance of the funds. In doing so, ASISI negligently failed to inform the AST Board of Trustees of significant information concerning market timing and its potential effects. As a result, the AST Board of Trustees had insufficient information regarding the potential causes of the sub-advisers' investment results in certain of the AST sub-accounts, and ASISI's implementation of its own market-timing policies and procedures. In addition, the AST Board lacked adequate information to consider whether the sub-accounts had adequate policies and procedures in place with respect to market timing.

Based on the above Order, ASISI shall cease and desist from committing or causing any violations and any future violations of Section 206(2) of the Advisers Act. The Order censures ASISI pursuant to Section 203(e) of the Advisers Act. The Order also requires ASISI to pay disgorgement of ill-gotten gains in the amount of $34 million and civil monetary penalties of $34 million. ASISI has undertaken to undergo a compliance review by a third party by no later than 2009. In the Matter of AMERICAN SKANDIA INVESTMENT SERVICES, INC.

April 17, 2009 in SEC Action | Permalink | Comments (1) | TrackBack (0)

Rattner Allegedly Involved in NYS Pension Kickbacks

The Wall St. Journal reports that Steven Rattner, the leader of President Obama's auto task force, is implicated in the alleged kickback scheme involving the New York State pension fund that both the SEC and the New York AG are investigating.  WSJ, Rattner Involved in Inquiry on Fees.

April 17, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

FINRA Waters Down Supervisory Review of Deferred Variable Annuities

On May 21, 2008, FINRA filed with the SEC a proposed rule change to amend certain provisions of NASD Rule 2821 (Sales Practice Standards and Supervisory Requirements for Transactions in Deferred Variable Annuities).  The Rule, as originally adopted, required supervisory review of all deferred variable annuities, and a determination of suitability, whether or not the transaction was recommended by the broker.  After a comment period and revisions by FINRA, the SEC declared the proposed rule change effective.  A significant change is that a suitability determination would only be required for recommended transactions.  As explained in the adopting release:

Paragraph (c) of NASD Rule 2821 requires principals to treat all transactions as if they have been recommended for purposes of the rule. Following the Commission’s approval of the rule, however, several commenters asked that the Commission and FINRA reconsider this approach. As FINRA stated in the notice, some commenters asserted that applying the rule to non-recommended transactions would have unintended and harmful consequences. In particular, these commenters claimed that applying the rule to non-recommended transactions would effectively force out of the deferred variable annuities business some firms that offer low priced products, but that do not make recommendations or pay transaction-based compensation. In addition, commenters stated that, absent a recommendation, a customer should be free to invest in a deferred variable annuity without interference or second guessing from a broker-dealer.  In response, FINRA proposed to limit the rule’s application to recommended transactions. In the notice, FINRA explained that limiting the rule to recommended transactions would be consistent with the approach taken in its general suitability rule, Rule 2310. FINRA also stated that this change would not detract from the effectiveness of Rule 2821 because at firms that permit registered representatives to make recommendations concerning deferred variable annuities, the vast majority of purchases and exchanges of deferred variable annuities are recommended. FINRA offered further support for the rule change by stating that non-recommended transactions pose fewer concerns regarding conflicts of interest and less of a need for heightened sales-practice requirements. FINRA also indicated that this change would promote competition by allowing a wide variety of business models to exist, including those premised on keeping costs low by, in part, eliminating the need for a sales force and large numbers of principals. Finally, FINRA stated that attempts by registered representatives to mischaracterize transactions as non-recommended would be mitigated by the requirement that firms implement reasonable measures to detect and correct circumstances when brokers mischaracterize recommended transactions as non-recommended.

Two commenters representing retail investors -- PIABA and the Cornell Securities Arbitration Clinic -- disagreed with the proposed change and argued that registered representatives could falsely assert that an unsuitable transaction was not recommended.  While FINRA acknowledged the concern, it responded that it would be mitigated by the requirement that broker-dealers implement reasonable measures to detect and correct circumstances in which transactions can be mischaracterized.  

April 17, 2009 in Other Regulatory Action | Permalink | Comments (1) | TrackBack (0)

Federal Court Refuses Government Request to Stay FINRA Arbitration

U.S. v. FINRA, a recently issued opinion from the federal district court (E.D.N.Y. Apr. 9, 2009), presents an interesting issue stemming from the collapse of Bear Stearns hedge funds.  The U.S. sought to enjoin FINRA from conducting arbitration proceedings brought by a customer pending completion of a related criminal case against the hedge fund managers.  Although the defendants in the criminal case were not parties to the arbitration, both proceedings involved the same subject matter --whether the criminal defendants' conduct was securities fraud.  The court denied the government's petition.  It concluded that the only "prejudice" to the government in allowing the arbitration to proceed was that the criminal defendants would have more information than they would otherwise be entitled to under the Federal Rules of Criminal Procedure and that "this loss of the government's usual tactical advantage is insufficient to justify enjoining the arbitration."  (Thanks to Jill Gross for calling this to my attention.) 

April 17, 2009 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Thursday, April 16, 2009

Defendant in SEC Universal Leases Action Settles

The United States District Court for the Northern District of Illinois entered an order permanently enjoining Michael E. Kelly (Kelly), a former resident of North Liberty, Indiana and Cancun, Mexico, in connection with a civil injunctive action filed in September, 2007 against Kelly and 25 other defendants. The order, entered with Kelly's consent, permanently enjoins him from violating Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.  The SEC's complaint in this matter charges that Kelly and 25 other defendants participated in a massive fraud on U.S. investors that involved the offer and sale of securities in the form of Universal Lease investments. Universal Leases were structured as timeshares in several hotels in Cancun, Mexico, coupled with a pre-arranged rental agreement that promised investors a high, fixed rate of return. The SEC's complaint alleges that from 1999 until 2005, Kelly and others raised at least $428 million through the Universal Lease scheme from investors throughout the United States, with more than $136 million of the funds invested coming from IRA accounts. The SEC further alleges that Kelly used a nationwide network of unregistered salespeople who sold the Universal Leases and collected undisclosed commissions totaling more than $72 million. The SEC also alleges that Kelly and others ran the scheme from Cancun, Mexico through a number of foreign entities in Mexico and Panama. According to the SEC's complaint, Kelly and others told investors that Universal Leases would generate guaranteed income through the leasing of investor timeshares by a large, independent leasing agent. In fact, the complaint alleges the leasing agent was a small Panamanian travel agency controlled by Kelly and for most of the scheme its payments to investors came from accounts funded by money raised from new investors. Further, the complaint alleges that Kelly and others failed to disclose key facts about the Universal Lease investments, including the risks of the investments and that more than $72 million in investor funds were used to pay commissions as high as 27% to the selling brokers. The SEC continues to pursue its claims against Kelly for disgorgement and civil penalties. The SEC's action against the remaining defendants is also pending.

April 16, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Former Fidelity National Director Settles Insider Trading Charges in Lending Tree

The SEC announced today that on April 10, 2009, the District Court for the Central District of California entered a final judgment against J. Thomas Talbot ("Talbot"), a former Director of Fidelity National Financial Inc. ("Fidelity"), in an insider trading case.  Without admitting or denying the allegations in the complaint, Talbot consented to the entry of the final judgment which (1) permanently enjoins him from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, (ii) orders him to pay disgorgement of $67,881 and prejudgment interest of $26,916, and (iii) orders him to pay a civil penalty of $135,762.

The Commission's complaint alleged that in April 2003, Talbot engaged in insider trading by purchasing stock of LendingTree, Inc. ("LendingTree"), after learning at a meeting of the Fidelity Board of Directors that LendingTree would be acquired by another company.  According to the SEC's Complaint, Talbot wrote "LendingTree" on the top of his meeting agenda, the only notes that Talbot made during the four-hour Board meeting. The Complaint alleged that after this information was conveyed to the Board of Directors, a Fidelity Board member cautioned the directors not to trade in LendingTree securities because they had been provided with confidential information; however, two days after the Board meeting, Talbot purchased 5,000 shares of LendingTree stock and also subsequently purchased an additional 5,000 shares of LendingTree.  The Complaint further alleged that on May 5, 2003, the day that USA Interactive announced that it would acquire LendingTree, Talbot sold his 10,000 shares of LendingTree stock, realizing illicit profits of $67,881.

April 16, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NASAA Sponsors Program on Regulatory Reform

NASAA will host its annual Public Policy Conference on April 28 in Washington, D.C. to discuss the challenges facing the current financial services regulatory structure and outline policy proposals to strengthen regulatory safeguards for Main Street investors.  The conference will open with a keynote speech by U.S. Rep. Paul Kanjorski (D-PA), who serves on the House Financial Services Committee and is chairman of its Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises. The conference also features two panel discussions.

Panel One: Answering an Angry Public: Restructuring Our Regulatory System and Restoring Investor Confidence

Moderator: James Cox, Duke University School of Law
Panelists: Mark Cooper, Director of Research, Consumer Federation of America 
                Matt Kitzi, Missouri Commissioner of Securities 
                Donald Langevoort, Georgetown University School of Law

Panel Two: Risky Business: Rebuilding Market Integrity through Systemic Risk Regulation

Moderator: Joseph Borg, Alabama Securities Commission Director
Panelists:  Monica Lindeen, Montana State Auditor 
                 Sarah Bloom Raskin, Maryland Commissioner of Financial Regulation 
                 Dean Shahinian, Senior Counsel, U.S. Senate Banking Committee

More information is available at the NASAA website.

April 16, 2009 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 15, 2009

SEC Holdsd Roundtable on Credit Rating Agencies

Here is the agenda and list of participants at the SEC's Roundtable Discussion on Credit Rating Agencies, which is being held today, and is webcast from the SEC website.  Academic participants include Professor Frank Partnoy of San Diego, Lawrence White of NYU, and Joseph Grundfest of Stanford.

April 15, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC and New York State File Charges Against Former New York State Political Leader and Hedge Fund Manager in Pension Fund Fraud

The SEC today charged Raymond Harding, who is a former leader of the New York Liberal Party, and Barrett Wissman, a former hedge fund manager, in connection with a multi-million dollar kickback scheme involving New York's largest pension fund.  According to the SEC's complaint, Harding and Wissman participated in a scheme that extracted kickbacks from investment management firms seeking to manage the assets of the New York State Common Retirement Fund. (The SEC previously charged Henry "Hank" Morris and David Loglisci with orchestrating the fraudulent scheme to enrich Morris and others with close ties to them.) Specifically, the SEC alleges that Wissman arranged some of the payments made to Morris, and Wissman was rewarded with at least $12 million in sham "finder" or "placement agent" fees. Harding received approximately $800,000 in sham fees that were arranged by Morris and Loglisci.

In addition, Attorney General Andrew M. Cuomo today announced charges against Harding and a guilty plea from Wissman for their alleged involvement in the kickback scheme at the Office of the New York State Comptroller.  The felony complaint alleges that Harding obtained over $800,000 in illegal fees on State pension fund investments as a reward for opening up a State Assembly seat for then Comptroller Alan Hevesis son and for over 30 years of prior political endorsements.  The felony complaint filed today in New York County Criminal Court charges that Harding committed multiple felonies in violation of the Martin Act, the New York securities fraud statute.

The SEC's amended complaint additionally charges three entities through which Wissman perpetrated the fraud - Flandana Holdings Ltd., Tuscany Enterprises LLC, and W Investment Strategies LLC - as well as two investment management firms with which he was affiliated at the time, HFV Management L.P. and HFV Asset Management L.P. According to the SEC's amended complaint, Wissman was a longtime family friend of Loglisci and a key participant in the kickback scheme. Wissman worked with Loglisci and Morris to extract sham finder fee payments for Morris and for himself from investment managers. Wissman received millions of dollars in sham fees and other illicit payments, and arranged millions of dollars in additional payments for Morris. In addition, Wissman caused HFV Management L.P. and HFV Asset Management L.P. to pay sham finder fees to Morris in one New York State Common Retirement Fund transaction.

According to the SEC's amended complaint, Harding was a political ally who was allegedly inserted by Morris and Loglisci into at least two fund transactions for the sole purpose of compensating Harding, and Harding received a total of approximately $800,000 in sham "finder" fees. In one of those transactions, the investment management firm already had a finder and Morris arranged for that finder to secretly split his fee with Harding. In another transaction, Morris and Loglisci simply inserted Harding as a finder on an investment solely for the purpose of directing money to Harding.

In a partial settlement of the SEC's charges, Wissman and Flandana Holdings Ltd. have consented, without admitting or denying the SEC's allegations, to the entry of a partial final judgment that permanently enjoins them from violating Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("Advisers Act") and defers the determination of disgorgement and financial penalties until a later date.

In addition, HFV Management and HFV Asset Management have consented, without admitting or denying the SEC's allegations, to the entry of a final judgment that permanently enjoins them from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act and Section 206(2) of the Advisers Act, and that orders them to pay a penalty in the aggregate amount of $150,000.

The SEC's charges against Harding remain pending. The amended complaint alleges that Harding aided and abetted violations of Section 10(b) of the Exchange Act and Rule 10b-5 committed by Morris and Loglisci. The SEC is seeking a permanent antifraud injunction, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties

April 15, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 14, 2009

SEC Charges Church Leaders in Queens N.Y. with Affinity Fraud

On April 14, 2009, the SEC filed civil injunctive actions in the United States District Court for the Eastern District of New York charging seven leading members of a church in Queens, N.Y. for orchestrating a fraudulent investment scheme that targeted mostly elderly parishioners. According to the complaint, the seven individuals defrauded scores of investors of more than $12 million by making numerous misrepresentations, including promises of returns as high as 75 percent, to encourage them to invest in two hedge funds - the Logos Fund and the Donum Fund. Instead of investing the money as promised, the defendants misappropriated millions of dollars to furnish their own lavish lifestyles with purchases of luxury cars, jewelry, clothing, meals, and expensive foreign travel.

According to the Commission's complaint, the fraudulent scheme was orchestrated by seven individuals who were active members and leaders of the church: Isaac I. Ovid; Aaron Riddle; J. Jonathan Coleman; Stephen Cina; Cory A. Martin; Timothy Smith; and Robert J. Riddle. The Complaint alleges that these individuals used two entities to carry out the fraudulent scheme: Jadis Capital, Inc. - the hedge fund manager of the Logos Fund and the Donum Fund - and Jadis Capital's subsidiary, Jadis Investments, LLC, a registered investment adviser and the investment manager of the funds.  The SEC's complaint alleges that between January and November 2005, the defendants raised more than $12 million from more than 80 investors in the two funds by making material misrepresentations including promises of incredible returns.

The SEC's complaint charges each of the defendants with multiple violations of the federal securities laws.. The SEC's complaint seeks a final judgment permanently enjoining the defendants from future violations of the above provisions of the federal securities laws, ordering them to disgorge their ill-gotten gains plus prejudgment interest, and ordering them to pay civil monetary penalties.

April 14, 2009 in SEC Action | Permalink | Comments (1) | TrackBack (0)

FINRA Fines Fifth Third Securities for Unsuitable Variable Annuity Transactions

FINRA announced today that it fined Fifth Third Securities, Inc., (FTS) of Cincinnati, OH, $1.75 million for a series of violations related to variable annuity sales and exchanges. FINRA found that FTS made 250 unsuitable sales and exchanges to 197 customers through 42 individual brokers. FINRA also found that FTS's supervisory systems and procedures were inadequate for policing the firm's variable annuity sales and exchanges.  In settling this matter, FTS neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

 In addition to the fine, FINRA ordered FTS to pay more than $260,000 in restitution to 74 customers to compensate them for surrender charges incurred in the unsuitable transactions. The firm must also offer all 197 customers the opportunity to rescind their unsuitable transactions and receive the initial value of their purchase plus interest and any surrender charges required, adjusted for any withdrawals made.

 FINRA found that between January 2004 and December 2006, FTS effected 250 unsuitable VA exchanges or transactions through 42 brokers, who, in many cases, worked in Fifth Third Bank branches. They used lists provided by the bank of customers with maturing CDs and referrals from bank employees to identify new customers — some of them elderly and/or unsophisticated and with conservative investment objectives — to purchase VAs.

 One broker had 74 customers enter into 118 unsuitable exchanges shortly after he joined FTS in early 2005. To avoid leaving substantial customer assets at his prior firm, he switched his customers into VAs issued by the same insurance company with the same riders. In recommending these cookie cutter transactions, the broker ignored substantial differences in his customers' ages, incomes, investment objectives and investment sophistication. The customers paid, in aggregate, at least $260,000 in charges to surrender their old annuities and were locked into essentially identical VAs that were more expensive and had new surrender periods.  The commissions earned on these transactions enabled the broker to win a firm sales contest and he and his supervisor were each awarded a 42" flat screen TV. FINRA found that FTS knew the broker was engaging in a mass switch and approved each of the broker's transactions, failing to adequately respond to red flags indicating that the exchanges were unsuitable.

 FINRA also found that 41 other FTS brokers recommended and effected 132 unsuitable VA purchases for 123 customers. These customers used cash from CDs or bank accounts to purchase the same VA and they put their entire investments into the fixed rate sub-account of the VA. Many of these customers were elderly and/or possessed limited financial sophistication, and had conservative investment objectives. FINRA found these identical transactions, in which customers traded liquid assets for a VA with a seven-year surrender period and annual fees, to be unsuitable given the customers' financial situations, needs, and investment objectives.

As part of the settlement, FINRA is requiring the firm to retain an independent consultant to review the adequacy of and recommend modifications to the firm's supervisory system and procedures and training relating to VA transactions.The firm also violated FINRA registration rules by allowing improperly registered representatives to buy and sell equities and bonds and by allowing at least one Fifth Third Bank employee to maintain his securities license with FTS even though he did no work for FTS and FTS did not pay him. FINRA also found that the firm failed to maintain accurate books and records related to its VA business

April 14, 2009 in Other Regulatory Action | Permalink | Comments (1) | TrackBack (0)

Oregon Sues Oppenheimer over 529 Plan

Orgeon sued Oppenheimer Funds charging that the money manager understated risks in its 529 College Savings bond fund that lost $36 million.  According to the state, Oppenheimer did not disclose that the fund invested in credit default swaps and other high-risk derivative instruments.  WSJ, Oregon Sues Over Risks Taken In Its '529' Fund.

April 14, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, April 13, 2009

SEC Releases Information on April 15 Roundtable on CRAs

In February 2009, the SEC issued a proposing release that included several proposals to further the Credit Rating Agency Reform Act’s purpose of promoting accountability, transparency, and competition in the credit rating industry. (The proposing release is available on the Commission’s Web site.)  In addition, on April 15, the SEC will host a roundtable discussion regarding the oversight of credit rating agencies, as it relates to both the Commission’s pending proposals and more broadly.  The roundtable will be webcast live at the SEC's website. The roundtable will consist of four panels. Roundtable participants were not identified in the release, but will include leaders from investor organizations, financial services associations, credit rating agencies, and academia.

The panel discussions will focus on:
• The perspective of current NRSROs: What went wrong and what corrective steps is the industry taking?
• Competition Issues: What are current barriers to entering the credit rating agency
• The perspective of users of credit ratings.
• Approaches to improve credit rating agency oversight.

April 13, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thomas & Cox on Empirical Studies of Securities Law Enforcement

Mapping the American Shareholder Litigation Experience: A Survey of Empirical Studies of the Enforcement of the U.S. Securities Law, by Randall S. Thomas, Vanderbilt University - School of Law, and James D. Cox, Duke University School of Law, was recently posted on SSRN.  Here is the abstract:

In this paper, we provide an overview of the most significant empirical research that has been conducted in recent years on the public and private enforcement of the federal securities laws. The existing studies of the U.S. enforcement system provide a rich tapestry for assessing the value of enforcement, both private and public, as well as market penalties for fraudulent financial reporting practices. The relevance of the U.S. experience is made broader by the introduction through the PSLRA in late 1995 of new procedures for the conduct of private suits and the numerous efforts to evaluate the effects of those provisions.

We believe that the evidence reviewed here shows that the PSLRA's provisions have largely achieved their intended purposes. For example, many more private suits are headed by an institutional lead plaintiff, such plaintiffs appear to fulfill the desired role of monitoring the suit's prosecution and their presence is associated with suits yielding better settlements and lower attorneys' fees awards. SEC enforcement efforts, while significant, have tended to focus on weaker targets, suggesting that the big fish get away. Equally importantly, markets impose their own discipline on companies whose managers release false financial reports and, in turn, firms discipline the managers who are responsible for false misleading reporting, perhaps because of the presence of, or potential for, private enforcement actions.

April 13, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Black on Eliminating Securities Fraud Class Actions

Eliminating Securities Fraud Class Actions Under the Radar, by Barbara Black, University of Cincinnati - College of Law, was recently posted on SSRN.  Here is the abstract:

At least since Basic, Inc. v. Levinson, the business community and many influential scholars have challenged the existence of the securities fraud class action on a variety of grounds. Recently, two proposals have been advanced to "fix" the problem of "abusive" securities fraud class actions. One proposal requires arbitration of all securities fraud class actions; the other eliminates the corporate defendant in most actions. Proponents assert that shareholders should have the right to adopt these proposals through amendment of the company's certificate of incorporation. In reality, adoption of either proposal would substantially curtail, if not eliminate, the securities fraud class action.

Part I of this paper first reviews the rationales - compensation and deterrence - for the federal securities class action, sets forth the critics' principal arguments as to why these goals are not achieved, and argues that the post-PSLRA securities fraud class action is reasonably effective in achieving both compensatory and deterrence goals. Part II then describes the two proposals. Part III explains why these proposals are impermissible under the anti-waiver clause, Section 29(a) of the Securities Exchange Act. Part IV explains why these proposals are also, under state law, illegal, unfair to current shareholders that do not vote in favor of them, and unenforceable as to future stock purchasers. Part V concludes by calling for a national debate on the future of the securities fraud class action. The arguments for and against the securities fraud class action involve complexities and uncertainties that make "quick and dirty" solutions like these two proposals inappropriate

April 13, 2009 in Law Review Articles | Permalink | Comments (1) | TrackBack (0)

Fishman on Nonprofit Corporate Law Reform

The Development of Nonprofit Corporation Law and an Agenda for Reform, by James Fishman, Pace University - School of Law, was recently posted on SSRN.  Here is the abstract:

This article examines the development of the law of "charitable corporations" and attempts to explain why the charitable corporation rather than the charitable trust became the predominant organizational form for charitable and benevolent activities in the United States. It then discusses some of the inconsistencies of non-profit corporation law and provides an agenda for future reform.

April 13, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Cunningham on GAAP-IFRS Debate

Treatment Differences and Political Realities in the GAAP-IFRS Debate, by Lawrence A. Cunningham, George Washington University Law School, was recently posted on SSRN.  Here is the abstract:

The Securities Exchange Commission has introduced a "Roadmap" that describes a process leading to mandatory use of IFRS by domestic issuers by 2014. The SEC justifies this initiative on the grounds that global standardization yields cost savings and an ultimate gain in comparability, facilitating the search for global opportunities by U.S. investors and making U.S. capital markets more attractive to foreign issuers.

This paper enters an objection, noting that the stakes include more than the choice of the framework for standard setting. The accounting treatments themselves are at issue, treatments that for the most part concern domestic reporting firms and domestic users of financial statements.

We present a treatment by treatment comparison of GAAP and IFRS and go on to discuss the differences' implications. FASB maintained its independence during its 35 year history in the teeth of opposition from corporate management, which experienced a steady diminution of its zone of financial reporting discretion.

A switch to IFRS would allow management to reclaim some of the lost territory. Meanwhile, the interest group alignment that protected FASB, comprised of auditing firms, actors in the financial markets, and the SEC, has disintegrated as U.S. capital market power has waned in the face of international competition. Management is the shift's incidental beneficiary, with possible negative effects for reporting quality in domestic markets.

April 13, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)