Securities Law Prof Blog

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

Friday, June 5, 2009

Geffen on Securities Act Claims Against Mutual Funds

A Shaky Future for Securities Act Claims Against Mutual Funds, by David M. Geffen, Dechert LLP, was recently posted on SSRN.  Here is the abstract:

The article considers the liability of mutual fund issuers under Sections 11(a) and 12(a)(2) of the Securities Act of 1933. In a Securities Act Section 11(a) or Section 12(a)(2) action, a plaintiff complains of a materially misleading statement in an issuer's registration statement. The article explains why a mutual fund issuer, by establishing a loss causation defense, should prevail in defending these actions. For a mutual fund, establishing a loss causation defense is straightforward, and a mutual fund can defeat Section 11(a) and Section 12(a)(2) claims at the pleading stage of a lawsuit. In effect, mutual funds and related defendants are largely and, perhaps, wholly insulated from Securities Act Section 11(a) and Section 12(a)(2) claims.

June 5, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Hill on SEC Discipline of Litigation Attorneys

Divide and Conquer:  SEC Discipline of Litigation Attorneys, by Julie Andersen Hill, University of Houston Law Center, was recently posted on SSRN.  Here is the abstract:

The Securities and Exchange Commission (“SEC”) can investigate and discipline attorneys for “unethical or improper professional conduct.” Although the SEC’s disciplinary authority extends to all attorneys, for more than 70 years it only investigated transactional attorneys. Recently, however, the SEC announced that it is now investigating litigation attorneys for professional misconduct.

This Article examines the problems that arise because the SEC staff that is investigating and prosecuting a client is also allowed to investigate the professional conduct of the litigator representing that client. The Article explains that the SEC’s rules governing litigator conduct are unclear and therefore susceptible to agency abuse. The SEC can use ethics investigations (or even threats of investigations) to remove attorneys from cases or to intimidate attorneys into less zealous advocacy. During ethics investigations, the SEC can further erode the attorney-client relationship by pressing litigators for confidential information ordinarily protected by the attorney-client privilege. By dividing the client from the attorney, the SEC can gain the upper hand in its investigation of the client. Because of these problems, the SEC should not investigate litigators for professional misconduct. Instead, litigators’ ethical lapses should be investigated by state attorney disciplinary agencies, or, if the allegations are very serious, by criminal authorities. The SEC can then impose reciprocal discipline.

June 5, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Three Broker Firms Settle FINRA Charges of Inadequate AML Compliance Programs

FINRA announced that it fined three broker-dealers — J.P. Turner & Co., of Atlanta, Park Financial Group, Inc., of Maitland, FL, and Legent Clearing, LLC, of Omaha — for failing to implement reasonable anti-money laundering (AML) compliance programs, including the failure to detect, investigate and report instances of potentially suspicious transactions in low-priced stocks.  J.P. Turner was fined $525,000, Park Financial was fined $400,000 and Legent Clearing was fined $350,000. In addition, two individuals — Park Financial's former CEO and AML compliance officer Gordon Charles Cantley and J.P. Turner equity trader John McFarland — were barred permanently from the securities industry. David Farber, a Park Financial equity trader, was fined $25,000 and suspended in all capacities for 30 days. S. Cheryl Bauman, J.P. Turner's former AML compliance officer, was fined $30,000 and suspended from acting as a principal in a securities firm for 18 months, while Robert Meyer, a former J.P. Turner branch manager, was fined $5,000 and suspended as a principal for one month.

 The Bank Secrecy Act and FINRA rules require all broker-dealers to design and implement programs to detect and report suspicious transactions at, by or through the firm. The program must be tailored to the risks of the firm's business. For such transactions to be reportable, the firm does not need actual knowledge that the customer is in fact committing a crime or that the funds are the proceeds of a crime.

 In each of the three cases announced today, the firms failed to establish and/or implement reasonable procedures to detect and report suspicious trading in low-priced securities. Certain trading in low-priced securities, or "penny stocks," creates a risk that these securities can be used by unscrupulous issuers of the stock, stock promoters and others affiliated with the issuers for money laundering or to commit securities fraud or market manipulation. These firms failed to detect and investigate potentially suspicious transactions. Many of the transactions in these cases presented sufficient red flags that the firms should have had reason to suspect that the customers may have been engaged in unregistered distributions, market manipulation or securities fraud.

 In settling these matters, J.P. Turner, Park Financial, Legent Clearing, Gordon Charles Cantley, John McFarland, David Farber, S. Cheryl Bauman and Robert Meyer neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

June 5, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

FINRA Seeks SEC Approval to Make Pilot Cease & Desist Program Permanent

FINRA filed with the SEC a proposed rule change to adopt on a permanent basis the temporary and permanent cease and desist authority pilot program without any substantive changes to the terms of the existing program.  In May 2003, the Commission approved, on a two-year pilot basis, a rule change that gave FINRA authority to issue temporary cease and desist orders (“TCDOs”) and made explicit FINRA’s ability to impose permanent cease and desist orders as a remedy in disciplinary cases. The pilot program also gave FINRA authority to enforce cease and desist orders. In June 2005 and June 2007, the SEC approved two-year extensions of the pilot program.  The current two-year pilot expires on June 23, 2009.

FINRA is proposing to make the pilot program permanent without any substantive changes to the terms of the existing program. When it first sought cease and desist authority, FINRA stated that it would use the authority sparingly. That has been the case. Since the pilot program was first approved in 2003, FINRA has issued only one TCDO and one permanent cease and desist order (both in the same case). If adopted on a permanent basis, the cease and desist rules would continue to be used judiciously.

June 5, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Former Employee of Investor Relations Firm with Insider Trading

The SEC charged Zachary Bryant, a former account executive at the Los Angeles office of Lippert Heilshorn & Associates, Inc., an investor relations firm, for repeatedly misappropriating confidential information from firm clients and tipping his current employer and former colleague, who traded on that information and tipped others. As alleged in the Commission’s complaint, the defendants reaped more than $1.4 million in total profits through insider trading. The Commission alleges that  Bryant routinely learned material information about Lippert’s clients before the information was released to the public. The Commission further alleges that Bryant tipped Ahmad Haris Tajyar of Encino, California, in advance of five announcements made by Lippert’s clients. The Commission alleges that Bryant and Ahmad Tajyar met as co-workers in 1997, and Ahmad Tajyar later hired Bryant of North Hollywood, California, to work at Investor Relations International, a Los Angeles-based investor relations firm owned by Ahmad Tajyar.

The Commission’s complaint, filed in federal court in Los Angeles, alleges that on five separate occasions from at least April 2005 through December 2006 Bryant misappropriated nonpublic information from his firm’s clients by illegally tipping Ahmad Tajyar. The complaint further alleges that Ahmad Tajyar traded on the information in his own accounts and in the account of Dionysus Capital, LP, a hedge fund he managed. The complaint alleges that Ahmad Tajyar also tipped his cousin Omar Tajyar and that one of the Tajyars, in turn, tipped and/or traded in the account of a business associate, Vispi Shroff, a certified public accountant. The complaint alleges that the Tajyars, Shroff and Dionysus Capital reaped illegal profits totaling over $1.4 million.

The complaint alleges that the Tajyars, Bryant, and Shroff each violated the antifraud provisions of the federal securities laws, 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. The Commission is seeking permanent injunctive relief, disgorgement, and civil penalties against all the defendants. The Commission also seeks an officer and director bar against the Tajyars. Finally, the Commission seeks disgorgement from relief defendant, Dionysus Capital, L.P.


June 5, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Former Countrywide Financial CEO with Fraud

On June 4, 2009, the SEC announced the filing of securities fraud charges against former Countrywide Financial CEO Angelo Mozilo, former chief operating officer and president David Sambol, and former chief financial officer Eric Sieracki. They are charged with deliberately misleading investors about the significant credit risks being taken in efforts to build and maintain the company’s market share.  The Commission has additionally charged Mozilo with insider trading for selling his Countrywide stock based on non-public information for nearly $140 million in profits.

In its complaint filed in federal district court in Los Angeles, the SEC alleges that Mozilo, Sambol, and Sieracki misled the market by falsely assuring investors that Countrywide was primarily a prime quality mortgage lender that had avoided the excesses of its competitors. According to the SEC’s complaint, Countrywide’s credit risks were so alarming that Mozilo internally issued a series of increasingly dire assessments of various Countrywide loan products and the resulting risks to the company. In one internal e-mail, Mozilo referred to a profitable subprime product as “toxic.” In another internal e-mail regarding the performance of its heralded Pay-Option ARM loan, he acknowledged that the company was “flying blind.”

The SEC’s complaint alleges that Countrywide’s annual reports for 2005, 2006, and 2007 misled investors in claiming that Countrywide “manage[d] credit risk through credit policy, underwriting, quality control and surveillance activities.” Its annual reports for 2005 and 2006 falsely stated that the company ensured its “access to the secondary mortgage market by consistently producing quality mortgages.” The annual report for 2006 also falsely claimed that Countrywide had “prudently underwritten” its Pay-Option ARM loans.

The SEC alleges that Mozilo, Sambol, and Sieracki actually knew, and acknowledged internally, that Countrywide was writing increasingly risky loans and that defaults and delinquencies would rise as a result, both in loans that Countrywide serviced and loans that the company packaged and sold as mortgage-backed securities.

According to the SEC’s complaint, Countrywide developed what was internally referred to as a “supermarket” strategy that widened underwriting guidelines to match any product offered by its competitors. By the end of 2006, Countrywide’s underwriting guidelines were as wide as they had ever been, and Countrywide made an increasing number of loans based on exceptions to those already wide guidelines, even though exception loans had a higher rate of default.

The SEC’s complaint alleges that Mozilo believed that the risk was so high that he repeatedly urged that Countrywide sell its entire portfolio of Pay-Option loans. Despite these severe concerns about the increasing risks that Countrywide was undertaking, Mozilo, Sambol, and Sieracki hid these risks from the investing public.

The SEC further alleges that Mozilo engaged in insider trading of Countrywide stock that he owned. Mozilo established four executive stock sale plans for himself in October, November, and December 2006 while he was aware of material, non-public information concerning Countrywide’s increasing credit risk and the expected poor performance of Countrywide-originated loans. From November 2006 through August 2007, Mozilo exercised more than 5.1 million stock options and sold the underlying shares for total proceeds of nearly $140 million, pursuant to written trading plans adopted in late 2006 and early 2007.

The SEC’s complaint alleges that each of the defendants 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, and aided and abetted violations of Sections 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. The complaint further alleges that Mozilo and Sieracki violated Rule 13a-14 under the Exchange Act. The SEC’s complaint seeks permanent injunctive relief, officer and director bars, and financial penalties against all of the defendants and the disgorgement of ill-gotten gains with prejudgment interest against Mozilo and Sambol.

For press coverage, see:

NYTimes, S.E.C. Accuses Countrywide’s Ex-Chief of Fraud

WSJ, Countrywide Chiefs Charged With Fraud

WPost, Mortgage Pioneer Accused Of Fraud  

June 5, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, June 4, 2009

Focus on Mary Schapiro

Jeffrey Goldfarb of the Washington Post continues his examination of the SEC and focuses on the actions  of SEC Chairman Mary Schapiro to date.  WPost, SEC Chief Strives To Rebuild Regulator.

June 4, 2009 in News Stories | Permalink | Comments (1) | TrackBack (0)

Wednesday, June 3, 2009

GAO Releases Report on Regulation SHO

The GAO today released a report on naked short selling: REGULATION SHO Recent Actions Appear to Have Initially Reduced Failures to Deliver, but More Industry Guidance Is Needed.

The GAO explains why it did this study:

The Securities and Exchange Commission (SEC) adopted Regulation SHO to, among other things, curb the potential for manipulative naked short selling in equity securities. Selling a security short without borrowing the securities needed to settle the trade within the standard 3-day period, can result in failures to deliver (FTD), and can be used to manipulate (drive down) the price of a security. To further address this concern, SEC recently issued an order amending Regulation SHO. This report (1) provides an overview of Regulation SHO and related SEC actions, (2) discusses regulators’ and market participants’ views on the effectiveness of the rule, and (3) analyzes regulators’ efforts to enforce the rule.
To address these objectives, GAO reviewed SEC rules and draft industry guidance, analyzed FTD data, reviewed SEC and self-regulatory organization (SRO) examinations, and interviewed SEC and SRO officials and market participants.

The GAO recommends the following:

GAO recommends that the SEC Chairman expedite the review and approval of the draft guidance and develop a process to respond to implementation issues that arise from temporary rules. SEC stated that it would consider addressing the intent of the draft guidance in the temporary rule and evaluate how it can further address implementation concerns raised by the industry.

June 3, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Creates Investor Advisory Committee

SEC Chairman Mary Schapiro today announced the formation of an Investor Advisory Committee to give investors a greater voice in the Commission's work. SEC Commissioner Luis A. Aguilar will serve as the Commission's primary sponsor of the Committee.  The Investor Advisory Committee's charter provides for a broad scope of interest, including:

Advising the Commission on matters of concern to investors in the securities markets;
Providing the Commission with investors' perspectives on current, non-enforcement, regulatory issues; and
Serving as a source of information and recommendations to the Commission regarding the Commission's regulatory programs from the point of view of investors.

The Advisory Committee will be co-chaired by Richard (Mac) Hisey, President of AARP Financial Incorporated and AARP Funds, and Hye-Won Choi, Senior Vice President and Head of Corporate Governance for TIAA-CREF. Fred Joseph, President of the North American Securities Administrators Association and Securities Administrator for the State of Colorado, will be an ex officio participant.

The Advisory Committee's other members will include:

Mark Anson, President and Executive Director of Investment Services, Nuveen Investments
Mercer Bullard, Founder and President of Fund Democracy, Inc. and Associate Professor of Law, University of Mississippi Law School
Jeff Brown, Senior Vice President, Legislative and Regulatory Affairs, Charles Schwab & Co., Inc.
Stephen Davis, Senior Fellow and Project Director, Yale University School for Management's Millstein Center for Corporate Governance, and nonexecutive chair of Hermes Equity Ownership Service
Abe Friedman, Global Head of Corporate Governance and Proxy Voting and Managing Director, Barclays Global Investors
Mellody Hobson, President of Ariel Capital Management
Dennis A. Johnson, Managing Director, Shamrock Capital Advisors, Inc.
Adam Kanzer, Managing Director and General Counsel, Domini Social Investments LLC
Mark Latham, Director of Proxy Democracy, a nonprofit organization helping individual investors
Barbara Roper, Director of Investor Protection, Consumer Federation of America
Dallas Salisbury, President and CEO, Employee Benefit Research Institute
Kurt Schacht, Managing Director, CFA Institute
Damon Silvers, Associate General Counsel, AFL-CIO
Kurt Stocker, Chairman of the Individual Investors Advisory Board of the NYSE
Ann Yerger, Executive Director, Council of Institutional Investors

The Advisory Committee will begin its work in the next few weeks, after the SEC staff files the Committee's charter with Congress.

June 3, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

BofA, RBC & Deutsche Bank Finalize ARS Settlements with SEC & New York

The SEC today announced finalized settlements with Bank of America, RBC Capital Markets, and Deutsche Bank to resolve SEC charges that the firms misled investors regarding the liquidity risks associated with auction rate securities (ARS) that they underwrote, marketed, or sold.  These settlements provide nearly $6.7 billion to approximately 9,600 customers who invested in ARS before the market for those securities froze in February 2008. 

Previous ARS settlements include Wachovia, Citigroup and UBS and a settlement in principle with Merrill Lynch.

In addition, New York Attorney General Andrew M. Cuomo today announced Assurances of Discontinuance with Banc of America Securities LLC and Banc of America Investment Services, Inc., Deutsche Bank Securities Inc., Goldman, Sachs & Co., JPMorgan Chase & Co., Morgan Stanley & Co. Inc. and RBC Capital Markets Corporation relating to the auction rate securities settlements reached last summer. The Assurances detail how the firms have and will continue to provide liquidity to investors who purchased auction rate securities.

The settlements, which are subject to court approval, will restore approximately $4.5 billion in liquidity to Bank of America customers, $800 million in liquidity to RBC customers, and $1.3 billion in liquidity to Deutsche Bank customers.

Without admitting or denying the SEC's allegations, Bank of America, RBC and Deutsche Bank agreed to be permanently enjoined from violations of the broker-dealer fraud provisions and to comply with a number of undertakings, some of which are set forth below.

  • Each firm will offer to purchase ARS at par from individuals, charities, and small or medium businesses that purchased those ARS from the firm, even if those customers moved their accounts.
  • Each firm will use its best efforts to provide liquidity solutions for institutional and other customers and will not take advantage of liquidity solutions for its own inventory before making those solutions available to these customers.
  • Each firm will pay eligible customers who sold their ARS below par the difference between par and the sale price of the ARS.
The Commission wishes to alert investors that, in most instances, they have received or will receive correspondence from Bank of America, RBC, and Deutsche Bank, and that they must advise the respective firm that they elect to participate in these settlements, or they could lose their rights to sell their ARS. If eligible customers incurred consequential damages because of the illiquidity of their ARS, they may participate in special FINRA arbitrations.

Investors should review the full text of the consents executed by Bank of America, RBC and Deutsche Bank. Customers with questions about these settlements may contact Bank of America, RBC, or Deutsche Bank through the firms' Web sites or at the following toll-free telephone numbers:

  • Bank of America: 1-866-638-4183
  • RBC: 1-866-876-5469 or Web site
  • Deutsche Bank: 1-866-926-1437

Bank of America, RBC and Deutsche Bank also will be permanently enjoined from violating the provisions of Section 15(c) of the Exchange Act of 1934, which prohibit the use of manipulative or deceptive devices by broker-dealers. The Commission reserves the right to seek a financial penalty

June 3, 2009 in SEC Action, State Securities Law | Permalink | Comments (1) | TrackBack (0)

Tuesday, June 2, 2009

Schapiro Testifies Before Senate

SEC Chairman Schapiro testified today before the Senate Subcommittee on Financial Services and General Government on the Commission's role in helping to address the financial crisis and reforms to improve investor protection and restore confidence in our markets.  A quick read of her prepared remarks does not reveal any new information or insights about the agency; the usual topics are addressed: the need to reinvigorate enforcement, strengthen examinations and oversight, improve transparency and investor protection, combat abusive short-selling, fill regulatory gaps, strengthen shareholder rights, improve money market and mutual fund regulation.  She also emphasized again how thinly stretched the agency's resources are, with the growth in the size and complexity of the securities markets.  She attached to her testimony an appendix SEC Staff Levels Have Not Kept Pace with Industry Growth.

Here are some excerpts from the concluding paragraphs of her testimony:

I came to the SEC to shape public policy in the interest of investors and to strengthen our enforcement program. The things I have described in this testimony are important to those efforts. But what I have also discovered in the past four months is that much attention needs to be focused on the internal operations of the agency, the processes that guide our work, the agency's infrastructure and how we are organized. I have been disappointed to find that in some areas of our internal operations, we fall short of what the taxpayer has a right to expect of us, and what our employees have a right to expect of a world class organization. I am committed to a complete review of areas large and small, including FOIA operations, call centers operations, records management, and others, to ensure that we meet the highest standards and that we are fully supporting the important work of our employees in these operations. Doing this will take time and energy and focus. To ensure that we do it well and thoroughly, I intend to bring in a Chief Operating Officer to manage the process. Federal agencies do not manage themselves; we must be actively engaged in that process everyday.

In one area, we have already made progress: we are moving to build an internal compliance program that is second to none. ...

I want to thank you for your continued strong support for the SEC and its critical mission. I believe the steps I have outlined here — strengthening our enforcement program, enhancing risk-based oversight of the markets and leveraging technology — are essential for restoring investors' confidence in both the SEC and in our nation's securities markets.


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

SEC's Inspector General Releases Semi-Annual Report on SEC Performance

The SEC's Office of Inspector General released its semi-annual report to Congress, covering the period from Oct. 1, 2008 --  Mar. 31, 2009.  In it the OIG describes both its past and pending audits and investigations that look into a variety of allegations involving SEC employees' peformance.  The report describes its investigation into why the SEC never uncovered the Madoff ponzi scheme and states that it expects to complete the investigation by this fall.  It also describes an ongoing investigation stemming from complaints of investigative misconduct by enforcement attorneys.  A Wall St. Journal article today says that this investigation was triggered by Mark Cuban's complaints about the conduct of the SEC attorneys investigating the allegations of insider trading against him, WSJ, SEC Examines Actions by Staffers.

June 2, 2009 in SEC Action | Permalink | Comments (1) | TrackBack (0)

Monday, June 1, 2009

Cox Undermined Enforcement's Efforts, According to Washington Post

The Washington Post has an in-depth story charging that former SEC Chairman Cox undermined the enforcement division's efforts to investigate corporate wrongdoing and punish those involved.  It is based on 19 interviews with current and former SEC officials and focuses on the SEC's settlement of accounting fraud charges against Biovail, where the Commission cut the proposed corporate penalties without consultation with the enforcement attorneys handling the case.  WPost, In Cox Years at the SEC, Policies Undercut Action.

June 1, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)