Securities Law Prof Blog

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

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Friday, May 1, 2009

SEC Announces Short-Selling Roundtable Speakers

The SEC announced the agenda and panelists for its May 5 roundtable to discuss short sale price tests and short sale circuit breakers:

Panel One: Market Changes and Investor Confidence; Are short sale price tests or short sale circuit breakers necessary or effective?

Kevin Cronin, Invesco
Brian Conroy, Fidelity Investments
Richard Ketchum, FINRA
John Kozak, Park National Bank Corporation
Dan Mathisson, Credit Suisse
Michael McAlevey, General Electric Corporation
Justin Schack, Rosenblatt Securities


Panel Two: Bid versus Tick versus Circuit Breakers; Discussion of short sale price tests and short sale circuit breakers.

Jeff Brown, Charles Schwab Corporation
Larry Leibowitz, The New York Stock Exchange
John Nagel, The Citadel Group
Bill O'Brien, Direct Edge
Jerry O'Connell, Susquehanna International Group
Brett Redfearn, JP Morgan Chase

Panel Three: Lessons and Insights from Empirical Data; Short sale price tests and short sale circuit breakers by the numbers.

Professor James Angel, Georgetown University
Dr. Frank Hatheway, Nasdaq OMX Group
Professor Charles Jones, Columbia University
Dr. Robert Shapiro, Sonecon, LLC
Professor Ingrid Werner, The Ohio State University

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

Cuomo and Other States Form Task Force on Pension Fund Abuse

New York Attorney General Andrew Cuomo announced the creation of a multi-state task force to explore pension fund abuse so that states can share information to prosecute wrongdoing and facilitate nationwide reform. 

His office also announced that it has issued subpoenas to over 100 investment firms and their agents in its expanding investigation into corruption and kickback schemes involving the New York State and City pension funds. Today’s announcement stems from the Attorney General’s broadening investigation into individuals and companies who make or receive improper payments in connection with lucrative business opportunities with state and city pension funds. Under state and federal law, securities brokers are generally required to be licensed and registered with a broker-dealer in order to protect the investing public from unscrupulous and unqualified brokers. In occasional cases, a registered broker is not required. But, after Cuomo’s investigation found that 40 to 50 percent of agents obtaining investments from New York pension funds were unregistered, his Office issued subpoenas. 

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

Thursday, April 30, 2009

SEC Charges Aldus Equity Partners in New York Pension Plan Fraud

The SEC announced charges against Dallas-based Aldus Equity Partners, L.P. and one of its founding principals, Saul Meyer, in connection with a multi-million dollar kickback scheme involving New York's largest pension fund.  According to the SEC, Meyer and Aldus participated in a fraudulent kickback scheme in order to win investment business from the New York State Common Retirement Fund. The SEC previously charged Henry "Hank" Morris and David Loglisci for orchestrating a fraudulent scheme to enrich Morris and other political allies and associates including Raymond Harding and Barrett Wissman, who have also been charged in the case.

The SEC alleges that Meyer caused Aldus to pay a shell company owned by Morris approximately $320,000 in sham finder fees, in exchange for which Loglisci caused the pension fund to invest a total of $375 million with Aldus from 2004 to 2006.

The SEC's amended complaint further alleges that Loglisci ensured that Aldus and certain other investment managers who were willing to make the requisite payments to Morris and others were rewarded with lucrative investment management contracts, while investment managers who declined to make such payments were denied Common Fund business. The scheme corrupted the integrity of the Common Fund's investment processes and resulted in the retirement fund's assets being invested with the undisclosed purpose of enriching Morris and certain others.

The SEC alleges that Loglisci chose Aldus as the Common Fund's emerging fund portfolio manager on the sole basis of Meyer's willingness to pay Morris. Prior to selecting Aldus, the Comptroller's office had been in discussions with another investment manager about creating and managing an emerging fund portfolio for the Common Fund. When that investment manager refused to pay kickbacks to Morris, Loglisci rejected that firm and recruited Aldus to manage the Common Fund's emerging fund portfolio.

According to the SEC's amended complaint, Aldus was serving as the Common Fund's outside consultant at the time, making Aldus a fiduciary of the Common Fund. In the midst of Aldus's negotiations to manage the Common Fund's emerging fund portfolio, a close associate of Morris approached Meyer and assured Meyer that Aldus would win the contract if Aldus agreed to pay Morris a portion of the management fees that Aldus received from the Common Fund. After Morris's friend made clear to Meyer that Aldus would not be hired if Aldus did not retain Morris, Meyer arranged for Aldus to kickback 35 percent of its management fees to a shell entity run by Morris. As a result of the quid pro quo arrangement, Aldus secured the Common Fund's emerging fund portfolio business.

The SEC's amended complaint alleges that Meyer and Aldus violated and/or aided and abetted violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The complaint seeks permanent injunctions against future violations of the federal securities laws, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.

In a parallel criminal action, the Office of the Attorney General of the State of New York today announced the filing of a criminal complaint against Meyer. The SEC acknowledges the assistance of the Office of the Attorney General of the State of New York.

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

SEC Announces an Industry & Markets Fellows Program

The SEC today announced a new effort to identify and assess risks in the financial markets by attracting seasoned industry professionals to the agency's Office of Risk Assessment.  The new Industry and Markets Fellows Program will help the agency expand its ability to oversee complex industry practices and products in today's markets.  The individual fellows who come to the agency through the program will also help familiarize SEC staff with current industry practices and products.

The SEC will immediately begin recruiting candidates with extensive experience in the financial markets, including but not limited to any of the following: trading in equity and fixed income securities, structured products, complex derivatives, financial analysis and valuation, fund management, investment banking and financial services operations. A statement detailing the fellows' qualifications and duties is available on the SEC Web site. The SEC encourages qualified individuals to apply by June 1, 2009.

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

SEC Charges Former Citigroup Investment Banker with Insider Trading Scheme

On April 30, 2009, the SEC filed a civil action in the United States District Court for the Northern District of California against Maher Kara, his brother Michael Kara, and others. The Commission alleges that Maher Kara, a former Citigroup investment banker, repeatedly tipped his brother about upcoming merger deals in an insider trading scheme that involved friends and family throughout Northern California and the Midwest.  The SEC alleges that Maher Kara, a former director in Citigroup Global Markets' investment banking division in New York, repeatedly told his brother Michael Kara of Walnut Creek, Calif., about upcoming deals involving Citigroup's health care industry clients. According to the SEC's complaint, Michael Kara is a self-employed environmental clean-up consultant who traded in at least 20 companies that were involved in confidential transactions pending in the Citigroup health care investment banking group where Maher Kara worked.  The SEC further alleges that Michael Kara also leaked the information to a network of friends and family who also traded in advance of the deals. The SEC has charged the Kara brothers and six others in the case.

The participants in the scheme made their biggest profits trading in the stock and options of San Diego, Calif.-based medical testing company Biosite, Inc., less than three days before a March 25, 2007, announcement that it would be acquired. According to the SEC's complaint, Maher Kara tipped his brother on March 22 about the confidential merger negotiations, and less than 15 minutes later Michael Kara began acquiring a large volume of Biosite stock and short-term call options. That same day, Michael Kara began calling friends and family members to pass along the tip, and they too began buying Biosite securities. After the acquisition of Biosite was publicly disclosed days later, the stock price jumped over 50 percent. Michael Kara made illegal profits of more than $1.2 million, while his six tippees together made nearly $4 million.

In addition to the Kara brothers, the SEC complaint also names the following defendants: Emile Jilwan of Pleasanton, Calif. (Michael Kara's friend), who made $2.3 million on Biosite trades; Zahi Haddad of Stockton, Calif. (Michael and Maher Kara's uncle), who made $82,000; Bassam Salman of Orland Park, Ill. (brother of Maher Kara's wife), who passed the information to his brother-in-law; and Karim Bayyouk of Livonia, Mich. (Salman's brother-in-law), who made $950,000 (some of which he returned to Salman).

The SEC's complaint alleges that Maher Kara, who is now residing in San Carlos, Calif., also tipped his brother about a planned March 2006 acquisition of Andrx Corporation, a Florida drug manufacturer. Michael Kara allegedly made nearly $400,000 in illegal profits trading on the tip, and passed the information to Jilwan, Haddad, Azar, and Salman (who then tipped Bayyouk). Together, they made an additional $750,000 when the Andrx acquisition was announced.

The SEC's complaint charges the defendants with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The complaint seeks disgorgement of illegal profits, civil penalties, and a permanent injunction against future violations of Sections 10(b) and 14(e).

In separate civil actions filed April 30, 2009, the SEC also charged two of Michael Kara's tippees, Nasser Mardini of Stockton, Calif. and Joseph Azar of Pleasanton, Calif., with violating Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. Azar and Mardini have agreed to settle the SEC's charges without admitting or denying the allegations. Mardini has agreed to repay illegal profits and the entry of a permanent injunction against future violations of Section 10(b) and 14(e), and Azar has agreed to repay illegal profits, pay a penalty, and the entry of a permanent injunction against future violations of Section 10(b) and 14(e).

The SEC acknowledges the assistance of the Chicago Board Options Exchange, the Federal Bureau of Investigation, and the U.S. Attorney's Office for the Northern District of California in this matter. The SEC also acknowledges the assistance provided by Citigroup during the investigation.

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

Call for Papers -- Law, Entrepreneurship & Economic Recovery

CALL FOR PAPERS

UMKC LAW REVIEW

Fall 2009 Symposium Issue

LAW, ENTREPRENEURSHIP & ECONOMIC RECOVERY

The UMKC Law Review, published by the University of Missouri-Kansas City School of Law, is calling for papers by legal scholars addressing the potential for law and legal education to promote entrepreneurship and innovation and facilitate economic recovery and growth.  Articles and essays accepted for publication will appear in the Fall 2009 Law, Entrepreneurship & Economic Recovery issue of the Law Review.

Suitable topics for this symposium issue would include critical analysis of the role of laws generally, or of particular laws, in either supporting or inhibiting the opportunity identification, creativity and business models that fuel successful entrepreneurial ventures; proposals for legal reforms to foster the generation of new ideas and inventions and to provide viable paths and regulatory climates for the commercialization of innovations; and ways in which law schools can improve the education of law students to better position them to become lawyers who are effective and valuable contributors to the success of entrepreneurial endeavors.

Submissions should be made by August 1, 2009.  We welcome both articles (under 25,000 words) and essays (10,000-15,000 words). I am the coordinator of the Symposium, and you may contact me at the address below if you are interested in writing a topical article or essay.

   Professor Anthony Luppino
    UMKC School of Law
    500 E. 52nd St.
    Kansas City, Missouri  64110
    e-mail: luppinoa@umkc.edu
    phone: 816-235-6165

April 30, 2009 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 29, 2009

Court Enjoins Georgia Broker Charged with Defrauding Elderly Customer

The SEC announced today that the federal district court for the Northern District of Georgia entered default judgment as to defendants Frederick J. Barton ("Barton"), Barton Asset Management, LLC ("Barton Asset Management"), and TwinSpan Capital Management, LLC ("TwinSpan") on April 27, 2009. The judgment restrained and enjoined all of the defendants from future violations of the antifraud provisions.  The judgment also granted injunctive relief against all of the defendants from future violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940.

The court ordered disgorgement against Barton in the amount of $3,170,000, of which $1,021,900 is owed jointly and severally with TwinSpan, and $685,000 is owed jointly and severally with Barton Asset Management. The court further ordered prejudgment interest against Barton in the amount of $945,110.92, of which $265,936.86 is owed jointly and severally with TwinSpan, and $106,589.43 is owed jointly and severally with Barton Asset Management. Further, the court ordered Barton, Barton Asset Management and TwinSpan to pay civil penalties in the amounts of $120,000, $60,000 and $60,000, respectively. The defendants were ordered to pay the above amounts within 10 business days after the entry of the default judgment.

The court's judgment specifically found that between approximately May 1999 and December 2003, Barton, acting individually or through Barton Asset Management, misappropriated approximately $970,000 from a single, elderly brokerage customer of his who suffered from diminished mental capacity arising from Alzheimer's disease, and that Barton tricked her into selling the securities in her brokerage account and providing him and Barton Asset Management with the proceeds of those sales. The court also found that between October 2004 and October 2005, Barton and TwinSpan engaged in a $1.515 million offering fraud involving ten investors. Barton and TwinSpan told investors that the funds raised would only be used upon reaching a minimum offering amount and then, would only be used for TwinSpan's general corporate purposes. The court concluded that despite these representations, Barton and TwinSpan diverted at least $493,100 of the offering proceeds for Barton's personal use and used a substantial portion of the offering proceeds in advance of reaching the minimum offering amount. Finally, the court specifically found that, between October 2006 and January 2007, Barton misappropriated $685,000 from an advisory client of TwinSpan. Specifically, Barton, acting through TwinSpan, forged the customer's signature on four wire-transfer authorizations that transferred $185,000 of the client's assets at TwinSpan to a bank account in the name of Barton Asset Management. Shortly thereafter, Barton borrowed an additional $500,000 from this client, without disclosing his earlier theft of her funds.

April 29, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Obtains Emergency Relief against Beverly Hills Hedge Fund Operator

On April 29, 2009, the SEC obtained a court order halting a hedge fund fraud based in Beverly Hills, California. The SEC's complaint alleges that Bradley L. Ruderman ("Ruderman") raised at least $38 million from about twenty investors since at least 2002 through his two hedge funds, Ruderman Capital Partners and Ruderman Capital Partners A. The SEC alleges that Ruderman defrauded his hedge fund investors by misrepresenting to them the hedge funds' investment returns and the assets under management.

Specifically, the SEC's complaint alleges that Ruderman falsely told investors that the hedge funds had earned positive returns from 15% to 60% per year and had over $800 million in assets. In reality, the hedge funds lost money and had less than $650,000 in assets. The complaint further alleges that in 2009, Ruderman made at least one Ponzi-like payment, using new investor money to pay returns to an earlier investor, and that Ruderman falsely told prospective investors that Lowell Milken (chairman of the Milken Family Foundation and Michael Milken's younger brother) and Larry Ellison (the CEO of Oracle Corporation) were investors in his hedge funds.

The federal district court for the Central District of California granted the SEC's request for emergency relief, including an order temporarily enjoining Ruderman, his company Ruderman Capital Management ("RCM"), and the hedge funds from future violations of the antifraud provisions, freezing their assets, and prohibiting the destruction of documents. The Commission also seeks preliminary and permanent injunctions, disgorgement, and civil penalties against all defendants. A hearing on whether a preliminary injunction should be issued against the defendants and whether a permanent receiver should be appointed is scheduled for May 7, 2009, at 1:30 p.m. PDT.

April 29, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NASAA President Testifies on Life Settlement Fraud

State securities regulators continue to see problems of fraud and abuse in the growing life settlement industry and outlined for Congress the need for strong regulation of these financial products by appropriate regulatory authorities, NASAA President and Colorado Securities Commissioner Fred Joseph told the U.S. Senate Special Committee on Aging in a hearing exploring the life settlement industry and its impact on seniors.  “Thousands of investors, many of them senior citizens, have been victimized through fraud and abuse in the sale of viaticals and life settlements,” Joseph testified. “Notwithstanding substantial successes by securities regulators in their enforcement actions, and higher standards among some industry participants, abuses continue and diligent oversight of these products remains necessary.”
 

Joseph told the panel that effective regulation of life settlements requires a joint effort by securities and insurance regulators. “Life settlements are complex financial arrangements, involving both securities and insurance transactions,” he said. “Consequently, regulating them effectively requires a joint effort by securities and insurance regulators, each applying their laws and expertise to different aspects of the product.”
   

April 29, 2009 in State Securities Law | Permalink | Comments (1) | TrackBack (0)

Ernst on Obama's Team of Bankers

Dan Ernst has a great posting on the Legal History Blog on the legislative origins of the federal securities legislation and the brain power assembled by Felix Frankfurter to accomplish the task.  He concludes:

Analogizing across a historical divide like the one separating us from 1934 is perilous and possibly foolhardy. Still, it’s hard not to find in the legislative history of the SEC reason to second Speaker Pelosi’s call for a new Pecora hearing. News reports of the deliberations before the release of the Torture Memos show President Obama acting on his pledge of open-minded consideration of multiple viewpoints, captured in his emulation of Lincoln’s appointment of a “Team of Rivals” to his cabinet. Right now, however, he seems to be leaving financial regulation to a “Team of Bankers."

Beyond the First Hundred Days: Securities Regulation

April 29, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 28, 2009

Call for Papers -- AALS Section on Securities Regulation

Call for Papers

AALS Section on Securities Regulation

"Responding to the Financial Crisis: Change is in the Air"
2010 AALS Annual Meeting
New Orleans, Louisiana

The Executive Committee of the AALS Section on Securities Regulation invites you to submit a proposal on the topic "Responding to the Financial Crisis: Change is in the Air" for the 2010 AALS Annual Meeting in New Orleans, Louisiana.
 
About the Topic:  In keeping with the theme of this year's Annual Meeting, the Executive Committee invites papers that explore the transformative power of the law in addressing the ongoing economic crisis.  The panel seeks to address the fundamental question of how to respond to the current crisis by asking:  Where have we been?  Where are we now?  And, finally, where are we going?  Without a doubt, financial products and financial markets have played a pivotal role in contributing to the recent downturn in economic activity and thus raise a host of important and pressing questions regarding securities regulation.  These questions include:
To what extent did gaps in the financial regulatory system generally, and securities regulation in particular, contribute to the recent financial turmoil?
How can organizational reform help improve the efficacy and independence of securities regulation?
What should be the primary focus of future securities regulation efforts:  Consumer protection?  Investor protection? Financial market efficiency?  Systemic risk containment?  All of the above?
In what ways should the regulation of derivatives markets, futures markets, money market funds, private equity funds, or hedge funds be modified in light of recent developments?
Given recent events, should the definition of a sophisticated investor be revised? If so, to what degree?
What are the similarities and differences between the current financial crisis and previous financial crises?  What is the relevance of these parallels to securities regulation?
How does the current crisis impact efforts to coordinate securities regulation on a global basis?
Should financial accounting standards and the process by which these standards are established be modified?
How can a regulatory agency charged with reducing systemic risk best achieve this objective?  Is there a role for securities regulation in achieving the objective of reducing systemic risk?
The Executive Committee encourages submissions related to these topics, or other issues involving securities regulation and recent developments in the financial markets.

How to Apply: If you are interested in presenting a paper, please submit a draft manuscript (an abstract or three-page summary is acceptable, if a draft is not available) to Professor Therese Maynard, Chair of the Section on Securities Regulation by August 15, 2009.  E-mail submissions are preferred and should be sent to: therese.maynard@lls.edu  
 
You may also submit your proposal by mail to:

Professor Therese H. Maynard
Loyola Law School - Los Angeles,
919 Albany Street, Los Angeles, CA 90015.

Submissions will be reviewed by the Executive Committee of the Section on Securities Regulation, and decisions will be communicated no later than October 1, 2009.  The AALS Annual Meeting will be held January 6 - January 10, 2010, and our section meeting is currently scheduled for Saturday, January 9, from 10:30 am - 12:15 pm.

Selected speakers may submit their paper to AALS prior to the Annual Meeting for posting to the AALS website.  Papers which are already accepted for publication may be submitted, so long as the paper is not anticipated to be published before the Annual Meeting.  All participants will be responsible for their own travel and conference registration expenses.
 
Please feel free to forward this Call for Papers to colleagues who may be interested.
 
 
 

April 28, 2009 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

SEC Charges Former Officers of American Home Mortgage Investment with Accounting Fraud

On April 28, 2009, the SEC filed a civil action in the United States District Court for the Southern District of New York against former officers at American Home Mortgage Investment Corp., Michael Strauss, Stephen Hozie and Robert Bernstein, charging them with engaging in accounting fraud and making false and misleading disclosures that were designed to conceal from investors that American Home Mortgage's financial condition and prospects had significantly worsened in the first four months of 2007.

.The complaint alleges that Strauss and Hozie violated the antifraud provisions of the federal securities laws.  The complaint further charges (i) Strauss and Hozie with aiding and abetting American Home Mortgage's violations of Section 10(b) and Rules 10b-5 and 13a-11 of the Exchange Act; (ii) Strauss, Hozie and Bernstein with aiding and abetting American Home Mortgage's violations of the reporting, books and records, and internal control provisions under Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder; and (iii) Strauss, Hozie and Bernstein with direct violations of Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 thereunder. Finally, the complaint charges Strauss and Hozie with violations of the officer certification provisions under Rule 13a-14 of the Exchange Act. The Commission's complaint seeks permanent injunctions against future violations, disgorgement of ill-gotten gains plus prejudgment interest and the imposition of civil penalties. The complaint also seeks officer and director bars against Strauss and Hozie.

Strauss has agreed to settle the SEC's charges without admitting or denying the allegations. He will be permanently enjoined from violating the antifraud, reporting, record-keeping, and internal controls provisions of the federal securities laws and will pay approximately $2.2 million in disgorgement and prejudgment interest and a $250,000 penalty. Strauss will also be barred from serving as an officer or director of a public company for five years. The litigation is ongoing with respect to the other defendants.

April 28, 2009 in SEC Action | Permalink | Comments (1) | TrackBack (0)

Tulsa Attorney Settles Insider Trading Charges with SEC

The SECfiled a civil action in the United States District Court for the Northern District of Oklahoma on April 28, 2009, alleging that Matthew J. Browne, a Tulsa, Oklahoma attorney, engaged in insider trading in securities of then Nasdaq-listed SemGroup Energy Partners, LP ("SGLP").  According to the Commission's complaint, in the course of providing legal services to a clienton July 14, 2008, Browne learned that SGLP's privately-held parent company and largest customer, SemGroup, LP, was experiencing liquidity issues. The complaint further alleges that, immediately after learning this information, Browne sold his entire position in SGLP (5,200 units), at an average price of $24.06 per share. On July 17, after the close of trading, SGLP announced that SemGroup, LP was "experiencing liquidity issues" and was considering bankruptcy. On July 18, SGLP's unit price closed at $8.30 per share, 65.5% lower than Browne's July 14 average sale price. According to the complaint, by liquidating his SGLP holdings on July 14, Browne avoided losses of $81,773.

Without admitting or denying the allegations in the complaint, Browne has consented to a permanent injunction against future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and to pay disgorgement of the $81,773 loss he avoided by his illegal trading, plus prejudgment interest of $1,505.98, and a civil penalty of $81,773. In a separate administrative action, Browne has also consented to a five-year suspension from appearing or practicing before the Commission, under Rule 102(e) of the Commission's Rules of Practice.

The staff's investigation is ongoing.

April 28, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NASAA President to Testify on Life Settlements

NASAA President and Colorado Securities Commissioner Fred Joseph is scheduled to testify on April 29 before the U.S. Senate Special Committee on Aging in a hearing exploring the growing life settlement industry and its impact on seniors.  The hearing, “Betting on Death in the Life Settlement Market - What's at Stake for Seniors?” will be held at 2 p.m. in Room 106 of the Dirksen Senate Office Building.

NASAA members have been very active in response to problems associated with viaticals and life settlements, terms which have become interchangeable. Viatical settlements emerged in the early 1990s in response to the AIDS crisis to create opportunities for terminally ill patients to receive money by selling their life insurance death benefits for much more than the cash surrender value available from insurance companies.  The offer and sale of investments in viatical or life settlements has been marked by a wide range of fraudulent practices over the past 20 years.

April 28, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

FINRA Fines Member for Failure to Protect Customer Information

FINRA announced today that it has fined Centaurus Financial, Inc. (CFI), of Orange County, CA, $175,000 for its failure to protect certain confidential customer information. Centaurus was also ordered to provide notifications to affected customers and their brokers and to offer these customers one year of credit monitoring at no cost.  FINRA found that from April 2006 to July 2007, CFI failed to ensure that it safeguarded confidential customer information. Its improperly configured computer firewall - along with an ineffective username and password on its computer facsimile server - permitted unauthorized persons to access stored images of faxes that included confidential customer information, such as social security numbers, account numbers, dates of birth and other sensitive, personal and confidential data. The firm's failures also permitted an unknown individual to conduct a "phishing" scam. When CFI became aware of the phishing scam, the firm conducted an inadequate investigation and sent a misleading notification letter to approximately 1,400 affected customers and their brokers.  CFI's conduct violated federal Regulation S-P and FINRA rules.

Under the terms of the settlement, Centaurus has agreed to provide corrected notifications of the unauthorized accesses to all previously notified customers and brokers and to offer these customers one year of free credit monitoring. In addition, CFI will certify to FINRA that its procedures and systems are in compliance with privacy requirements.  In settling this matter, the firm neither admitted nor denied the charges, but consented to the entry of FINRA's findings

April 28, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Cunningham on The New Federal Corporation Law

The New Federal Corporation Law?, by Lawrence A. Cunningham, George Washington University Law School, was recently posted on SSRN.  Here is the abstract:

Could a preemptive federal incorporation law today assume the enabling character of traditional state corporation law, instead of the mandatory flavor typical of much federal securities regulation? Does global competition mean that the US should both preempt state corporation law and adopt a flexible, principles-oriented approach to business regulation? This essay, commenting on Robert Ahdieh’s Trapped in a Metaphor: The Limited Implications of Federalism for Corporate Governance, shows how this surprising approach is plausible and may be desirable but also that it is not politically likely in the current environment.

The intellectual basis for a preemptive, enabling, and flexible federal corporation law appears in the Treasury Department’s March 2008 blueprint for financial regulation reform. The blueprint would consolidate regulatory power in Washington over securities, futures, banking and insurance, then delegate that power to self-regulatory organizations. The logic extends readily to traditional corporation law. That means federal preemption plus delegation to stock exchanges, who take over the role that US law traditionally gives to states. US stock exchanges then compete with stock exchanges elsewhere, wielding a broad range of tools, including jurisdiction to resolve disputes, usually handled by states. The result would promote US competiveness in global capital markets.

Intellectually, the domestic corporate law competition debate gets replayed as an international securities law debate which, of course, already is underway, highlighted by issuer choice proposals. Market forces dominate the form and content of resulting corporate law and governance. Political realities likely put these developments out into the future however. Instead, there is a good chance that federal preemption of state corporation law may soon come, covering corporations of systemic significance and imposing on them strict, mandatory corporation law rules, ranging from board composition, executive compensation, shareholder voting procedures, and interests of other constituencies.

April 28, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

McTier & Wald on Causes of Securities Class Actions

The Causes and Consequences of Securities Class Action Litigation, by Brian Carson McTier, University of Texas at San Antonio, and John K. Wald, University of Texas at San Antonio, was recently posted on SSRN.  Here is the abstract:

We test explanations for securities class action lawsuits consistent with both rent-seeking and managerial agency problems. We find some evidence that proxies for both explanations help explain which firms are sued. Contrary to past studies, we find little evidence that CEO characteristics contribute to the probability of suit. We also find significant evidence that post-suit firms improve governance mechanisms and reduce agency problems. Specifically, post-suit, firms’ leverage and cash retained increase, while diversification and investments decrease. We also find evidence that CEO turnover and idiosyncratic risk increase following a class action suit whereas proxies for management entrenchment decrease. Overall the results suggest that class action lawsuits drive firms to reduce over investment and increase focus.

April 28, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

The Causes and Consequences of Securities Class Action Litigation, by Brian Carson McTier, University of Texas at San Antonio, and John K. Wald, University of Texas at San Antonio, was recently posted on SSRN.  Here is the abstract:

We test explanations for securities class action lawsuits consistent with both rent-seeking and managerial agency problems. We find some evidence that proxies for both explanations help explain which firms are sued. Contrary to past studies, we find little evidence that CEO characteristics contribute to the probability of suit. We also find significant evidence that post-suit firms improve governance mechanisms and reduce agency problems. Specifically, post-suit, firms’ leverage and cash retained increase, while diversification and investments decrease. We also find evidence that CEO turnover and idiosyncratic risk increase following a class action suit whereas proxies for management entrenchment decrease. Overall the results suggest that class action lawsuits drive firms to reduce over investment and increase focus.

April 28, 2009 | Permalink | Comments (0) | TrackBack (0)

Monday, April 27, 2009

SEC Obtains Emergency Relief Against Connecticut Hedge Fund

On April 27, 2009, the SEC filed an emergency action in the United States District Court for the Western District of Texas to halt an on-going multi-million dollar fraud involving investments in a Stamford, Connecticut-based hedge fund and its affiliates — Ponta Negra Fund I, LLC, Ponta Negra Offshore Fund I, Ltd., and Ponta Negra Group, LLC (the “Hedge Fund”). The Commission’s complaint alleges, among other things, that Defendant Francesco Rusciano, 27, of Stamford, Connecticut, in selling interests in the Hedge Fund, (i) forged documents, (ii) promised false returns, and (iii) misrepresented assets managed by the Hedge Fund. U.S. District Judge Sam Sparks granted a temporary restraining order, asset freeze, and other emergency relief against the Defendants.

The Commission’s complaint alleges that from at least as early as September 1, 2007 to the present, the Hedge Fund, acting through Rusciano, raised at least $31 million from at least 15 investors. According to the Commission’s complaint, on at least two occasions, Rusciano forged brokerage account statements for the Hedge Fund to make it appear that the Hedge Fund had millions of dollars more in assets than it actually had. Specifically, the Commission alleges that Rusciano provided a selling agent for the Hedge Fund a January 11, 2008 brokerage statement, reflecting an account balance for Ponta Negra Fund I of $42,967,338.90. According to the Commission’s complaint, the correct balance for that account as of January 11, 2008 was $2,967,338.90 — $40 million less than the amount represented by Rusciano. Similarly, the Commission alleges that, on August 5, 2008, Rusciano produced to another selling agent a brokerage account statement reflecting an “equity” balance for Ponta Negra Fund, LLC of more $64 million. According to the Commission’s complaint, Rusciano altered the August 1, 2008 account statement by, among other things, redacting the word “excess” in the “excess equity” field on the account statement to make it appear as though the Hedge Fund had in excess of $64 million in that account. In reality, the account had less than $7 million.

According to the Commission’s complaint, Rusciano also misrepresented the Hedge Fund’s monthly and yearly performance results. With regard to monthly returns, the Commission alleges that Rusciano falsely represented that the Hedge Fund had consistently achieved positive results for every month throughout 2007 and 2008. In fact, in the account that held most of its assets, the Hedge Fund lost money in 10 of the 24 months from March 2007 through March 2009. With regard to yearly results, the Commission alleges that Rusciano misrepresented that the Hedge Fund earned total annual returns of 42.99% for 2007, 24.85% for 2008, and 6.14% for the first two months of 2009. In reality, the account that held most of the Hedge Funds’ assets suffered substantial trading losses in 2007, had modest profits in 2008, and again sustained losses in 2009. Finally, the Commission alleges that, on April 21, 2009, Rusciano sent an email to a selling agent for the Hedge Fund, detailing the Hedge Fund’s assets under management. According to the e-mail, the Hedge Fund had $59 million in assets under management as of February 2009. According to the Commission’s complaint, the Hedge Fund had less than $10 million.

The complaint alleges that Defendants Ponta Negra Fund I, LLC, Ponta Negra Offshore Fund I, Ltd., Ponta Negra Group, LLC, and Francesco Rusciano violated the anti-fraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In addition to the emergency relief granted by the Court, the Commission seeks permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and civil money penalties against the Defendants.

April 27, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Obtains Freeze on Assets of Danny Pang

The SEC obtained an emergency court order freezing the assets of Newport Beach, Calif.-based financier Danny Pang and his two companies for allegedly defrauding investors of hundreds of millions of dollars by misrepresenting investments in the life insurance policies of senior citizens and in timeshare real estate. The SEC obtained additional relief against Pang including an order requiring him to repatriate assets sent overseas and turn over to the court all of his passports. The SEC’s complaint alleges that Pang and his Irvine, Calif.-based firms Private Equity Management Group, Inc. and Private Equity Management Group LLC (the PEM Group) violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

The SEC alleges that Pang and the PEM Group misled investors by falsely claiming that their returns would come from proceeds made on the timeshare or insurance policies investments. Instead, some of the purported returns were paid out of funds raised from newer investors. Furthermore, in at least one instance, the PEM Group presented investors with a forged $108 million insurance policy to support a false claim that a particular investment was entirely covered by insurance.

The SEC also alleges that Pang and the PEM Group attracted investors by falsely representing Pang as a former senior vice president and high-tech merger adviser from Morgan Stanley & Co. with an MBA from the University of California at Irvine. Pang never worked at Morgan Stanley nor did he attend or obtain any degrees from UC Irvine. Neither Pang nor his entities have ever been registered with the SEC.

According to the SEC’s complaint, Pang and the PEM Group have been engaged in the fraudulent offering of securities since at least 2003 and raised several hundreds of millions of dollars from investors, primarily located in Taiwan. Pang and the PEM Group told investors that they would generate enough profit to pay returns on their investments through purchasing life insurance policies at a discount before maturity and then collecting the proceeds of the policy upon the death of the insured. In fact, the life insurance policies did not generate sufficient profit to cover the cost of the premiums to maintain the policies and pay the purported returns to investors. Pang instead directed PEM Group to use funds raised from subsequent investors, who were supposed to be investing in timeshares, to pay the purported returns of earlier investors in the ill-fated life insurance investment.

The SEC alleges that Pang and the PEM Group claimed that both principal and interest were insured and “guaranteed” by the purported $108 million of insurance when in fact the relevant insurance policy was for approximately $31 million. In response to investor requests to see the policy, Pang had the policy altered to increase the face amount of the policy and the PEM Group provided investors with the bogus insurance policy when soliciting their investments.

April 27, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)