July 11, 2009
Former Mayer Brown Lawyer Convicted for his Role in Refco Fraud
Joseph P. Collins, a former partner at Mayer Brown and longtime attorney for Refco, was convicted on Friday on conspiracy, securities and wire fraud charges in connection with Refco's scheme to hide its financial difficulties. The jury deadlocked on a number of other charges. Collins faces up to 20 years in prison. WSJ, Former Refco Lawyer Convicted of Fraud, Conspiracy.
Treasury Releases Proposed Investor Protection Legislation
The U.S. Treasury Dept. released a Fact Sheet: Administration’s Regulatory Reform Agenda Moves Forward Legislation for Strengthening Investor Protection Delivered to Capitol Hill. Here it is in full: (The proposed legislative language is here.)
Continuing its push to establish new rules of the road and make the financial system more fair for consumers and investors, the Administration today delivered proposed legislation to strengthen the SEC's authority to protect investors. The legislation outlines steps to establish consistent standards for all those who provide investment advice about securities, to improve the timing and the quality of disclosures, and to require accountability from securities professionals. The legislation would also establish a permanent Investor Advisory Committee to keep the voice of investors present at the SEC.
Establish Consistent Standards for Broker-Dealers and Investment Advisers: Under current law, different standards apply for broker-dealers and investment advisers – even though many investors rely on the investment advice of broker-dealers in the same manner as an investment adviser. The Administration's legislation would give the SEC authority to require a fiduciary duty for any broker, dealer, or investment adviser who gives investment advice about securities, aligning the standards based on activity, instead of based on legal distinctions that are no longer meaningful. In addition, the SEC would be empowered to examine and ban forms of compensation that encourage financial intermediaries to steer investors into products that are profitable to the intermediary, but are not in the investors' best interest.
Authority to Restrict or Limit Mandatory Arbitration: Although arbitration may be a reasonable option for many consumers to accept after a dispute arises, mandating a particular venue and up-front method of adjudicating disputes – and eliminating access to courts – may unjustifiably undermine investor interests. The Administration's legislation would give the SEC authority to prohibit mandatory arbitration clauses in broker-dealer, municipal securities dealer, and investment advisory agreements.
Authority to Require Disclosure Prior to Purchase of a Fund: Currently most fund disclosures and prospectuses are not required to be delivered to investors until after a transaction is complete. Our legislation would give the SEC authority to regulate the quality and timing of disclosures. For example, the SEC could require a concise summary prospectus and a simple disclosure showing the costs of a fund in a comparative context prior to the completion of a sale.
Consumer Testing of Disclosures and Rules: The Administration's legislation would clarify the SEC's authority to conduct consumer testing and encourage it to do so, in order to create more effective and clearer disclosures and to better assess its rules and programs.
Expand Protections for Whistleblowers: The SEC should gain the authority to establish a fund to pay whistleblowers for information that leads to enforcement actions resulting in significant financial awards. Currently, the SEC has the authority to compensate sources that provide evidence leading to a successful insider trading cases; that authority should be extended to other types of securities law violations. This authority will encourage insiders and others with strong evidence of securities law violations to bring that evidence to the SEC and improve its ability to enforce the securities laws. The Administration supports the creation of this fund using monies that the SEC collects from enforcement actions that are not otherwise distributed to investors.
Harmonize Liability Standards so that the SEC Can Pursue those who Aid and Abet Securities Fraud: The SEC currently has the ability to pursue actions against those who aid and abet securities fraud in cases brought under the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940, but not under the Securities Act of 1933 nor the Investment Company Act of 1940. The Administration's legislation closes this gap to create consistent remedies that the SEC can seek and eliminates significant limitations on the SEC's ability to pursue serious misconduct. The Administration's legislation also clarifies the legal standard for aiding and abetting and makes clear that the SEC can obtain penalties under any of its aiding and abetting provisions.
Require Accountability of Securities Professionals throughout the Financial Services Industry: Under current law, an individual barred from being an investment adviser because of serious misconduct could still apply to become a broker-dealer. The Administration's legislation would give the SEC authority to remove regulated persons from all aspects of the securities industry rather than just a specific segment.
Establish a Permanent Investor Advisory Committee: The SEC has recently established an Investor Advisory Committee, made up of a diverse group of well-respected investors, to advise on the SEC's regulatory priorities, including issues concerning new products, trading strategies, fee structures, and the effectiveness of disclosure. The Investor Advisory Committee would be made permanent by this legislation.
SEC Publishes Proposed Amendments to Compensation and Corporate Governance Disclosures
The SEC published on its website proposed amendments to the rules to enhance the compensation and corporate governance disclosures registrants are required to make about their overall compensation policies and their impact on risk taking; stock and option awards of executives and directors; director and nominee qualifications and legal proceedings; company leadership structure; the board's role in the risk management process; and potential conflicts of interest of compensation consultants that advise companies. The proposed amendments to disclosure rules would be applicable to proxy and information statements, annual reports and registration statements under the Securities Exchange Act of 1934, and registration statements under the Securities Act of 1933 as well as the Investment Company Act of 1940. The SEC is also proposing amendments to transfer from Forms 10-Q and 10-K to Form 8-K the requirement to disclose shareholder voting results and amendments to the proxy rules to clarify the manner in which they operate and address issues that have arisen in the proxy solicitation process.
Comments are due 60 days after publication in the Federal Register.
Hedge Fund Found Liable for Short Selling Violations of Reg M
On July 7, 2009, the United States District Judge for the Southern District of New York found after a bench trial that Cary G. Brody and two entities he controlled, New York hedge fund Colonial Fund LLC and its adviser, Colonial Investment Management LLC, were liable for illegal trading relating to eighteen registered public offerings. The court permanently enjoined the defendants from violating Rule 105 of Regulation M under the Securities Exchange Act of 1934. Judge Castel also ordered defendants to pay disgorgement totaling more than $1.4 million in ill-gotten gains, plus prejudgment interest, and required Brody to pay a civil penalty of $450,000.
In general, Rule 105 seeks to prevent manipulative trading by short sellers prior to registered public offerings and to promote offering prices that are based upon open market prices, determined by supply and demand, rather than by artificial forces. At the time of the violations, Rule 105 generally prohibited short sellers, regardless of intent, from using securities purchased in registered public offerings to cover short sales that occurred during the five business days before the pricing of the offerings (the restricted period).
The Commission's complaint, filed in federal court in Manhattan on October 15, 2007, alleged that the defendants violated Rule 105 when they used shares purchased in at least eighteen registered public offerings to cover short sales that they made during the rule's restricted period. The defendants allegedly realized profits in excess of $1.4 million from the illegal trades because Colonial Fund typically sold shares short during the restricted period at prices that were higher than the offering prices and then covered the restricted period short positions with shares purchased at lower prices in the offerings. The complaint also alleged the defendants often structured post-offering trades in an effort to conceal their Rule 105 violations.
In his ruling, Judge Castel found, among other things, that the defendants' Rule 105 violations were complete when Colonial purchased offering stock, that the defendants' post-offering trading could not undo the violations, and that those trades were an effort by the defendants to create the false appearance to third parties and regulators that they had not used shares purchased in public offerings to illegally cover the short positions. Judge Castel further found that defendants acted recklessly with respect to five of the offerings, and knowingly, intentionally, and willfully with respect to the other thirteen offerings. The court imposed a $450,000 civil penalty on Brody, finding that Brody's unlawful actions involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement.
SEC Alleges Illinois Hedge Fund Manager Invested $2 Billion in Ponzi Scheme
The SEC announced fraud charges and an asset freeze against a hedge fund manager and his firm for facilitating a multi-billion dollar Ponzi scheme operated by Minnesota businessman Thomas Petters. The SEC's complaint, filed in U.S. District Court for the District of Minnesota, alleges that Gregory Bell and Lancelot Management LLC invested more than $2 billion in hedge funds assets with Petters and pocketed millions of dollars in fraudulent fees at the expense of investors in the funds. The SEC's complaint also charges Petters with fraud for perpetrating the massive Ponzi scheme through the sale of notes related to consumer electronics. When Petters's scheme began to unravel, Bell participated in a series of sham transactions to conceal that Petters owed more than $130 million in investor payments on the notes.
Bell, Lancelot Management, and the hedge funds they manage have never been registered with the SEC or any other regulatory agency.
The United States District Court, District of Minnesota, issued a court order freezing all assets of Bell and Lancelot Management as well as relief defendants, including Bell's wife Inna Goldman. Among other things, the court order requires that they repatriate all overseas assets to the United States. Petters was previously charged by the U.S. Attorney for the District of Minnesota in early October 2008, and his assets were frozen at that time. He is in custody awaiting trial.
According to the SEC's complaint, Petters carried out his Ponzi scheme from as early as 1995 through September 2008, promising investors that proceeds from the notes they were sold would be used to finance the purchase of vast amounts of consumer electronics by vendors who then re-sold the merchandise to "Big Box" retailers including such well-known chains as Wal-Mart and Costco. Instead, the "purchase order inventory financing" business was a complete sham, and the vendors secretly returned most investor money back to Petters, who diverted billions of dollars for his own purposes.
The SEC alleges that Petters sold the notes to several feeder funds that in turn raised their investment capital from hundreds of private investors in the U.S. and abroad. Beginning in 2002, Bell and Lancelot Management raised approximately $2.62 billion from hundreds of investors through the sale of interests in three hedge funds they managed (Lancelot Investors Fund, L.P., Lancelot Investors Fund II, L.P., and Lancelot Investors Fund, Ltd.). The investors included individuals, retirement plans, individual retirement accounts, trusts, corporations, partnerships, and other hedge funds. Bell and Lancelot Investment used almost all of the fund assets to purchase notes offered by Petters and his companies.
The SEC seeks entry of a court order of permanent injunction against Bell, Lancelot Management and Petters, as well as an order of disgorgement, including prejudgment interest and financial penalties. The SEC also seeks an order requiring the relief defendants to disgorge all ill-gotten gains and pay prejudgment interest.
Ameriprise Settles SEC Charges for Failing to Disclose REIT Revenue Sharing Payments
The SEC announced that broker-dealer Ameriprise Financial Services, Inc., settled charges alleging that it received millions of dollars in undisclosed compensation as a condition for offering and selling certain real estate investment trusts (REITs) to its brokerage customers. Ameriprise agreed to pay $17.3 million to settle the SEC's charges.
The SEC's order finds that Ameriprise demanded and received so-called "revenue sharing" payments related to its sales of REITs and failed to disclose the payments as required. Ameriprise also sold more than $100 million of unregistered shares of one particular REIT in violation of the registration provisions of the federal securities laws. The SEC's order finds that neither Ameriprise nor the REITs disclosed to investors that additional payments were being made in connection with the sale of REIT shares, or the conflicts of interest these additional payments created. The SEC's order also finds that Ameriprise issued a variety of mislabeled invoices to the REITs as a means of collecting the undisclosed revenue sharing payments that appeared to be legitimate reimbursements for services provided by Ameriprise.
The SEC censured Ameriprise and ordered it to cease and desist from committing or causing violations of Sections 5(a), 17(a)(2), and 17(a)(3) of the Securities Act of 1933 and Securities Exchange Act of 1934 Rule 10b-10. The SEC also ordered Ameriprise to pay $17.3 million in disgorgement and financial penalties. Ameriprise has consented to the issuance of the SEC's order without admitting or denying the findings.
IPOS on U.S. Exchanges in 2009 Total Almost $2.5 Billion
According to a NYSE Euronext press release, through first-half 2009, 11 IPOs on the NYSE raised a total of $2.2 billion in proceeds. Three IPOs listed on Nasdaq OMX during that time period raised $268 million. The press release says that the NYSE amount is the most among major exchanges in Europe and the U.S.
July 9, 2009
SEC Staff Issues Warning on Cal. IOUs
The SECstaff today issued the following statement:
The staff of the Securities and Exchange Commission has expressed its belief that California’s recently-issued IOUs are “securities” under federal securities law. As such, holders of these IOUs and those who may purchase them are protected by the provisions of the federal securities laws that prohibit fraud in the purchase or sale of securities.
California began issuing the IOUs (called “registered warrants” by California) on July 2 to certain individuals and entities, including citizens who were entitled to a tax refund or vendors who were entitled to payments. The IOUs are obligations of the State of California, are negotiable, and bear interest. The staff’s view that the IOUs are securities does not affect California’s right to issue or repay the IOUs.
In addition to the antifraud provisions of the federal securities laws, other parts of the federal securities laws also apply to the purchase and sale of the IOUs. Persons acting as intermediaries between buyers and sellers of the warrants may need to register as brokers, dealers or municipal securities dealers, or as alternative trading systems or national securities exchanges.
Broker-dealers, as well as any potential secondary markets, should be aware that the requirements of the securities laws and the rules of the Municipal Securities Rulemaking Board apply to the IOUs.
Finally, although the IOUs are labeled “registered warrants,” they are not registered with the SEC. There is no registration requirement that applies because the IOUs are municipal securities.
SEC Charges Russian Firm with Manipulating Stocks Through Innocent Victims' Accounts
The SEC filed a complaint in the United States District Court for the Southern District of New York charging Russian entity Pointer Worldwide Ltd and its officer, Tatiana Badmaeva, with participating in a fraudulent scheme to manipulate the prices of four New York Stock Exchange and Nasdaq traded securities through the unauthorized use of innocent victims' online brokerage accounts between June 18, 2008 and June 20, 2008. In just three days of trading involving a combination of buys, sales and short sales, Pointer Worldwide and Badmaeva generated a net profit of $33,113.75 trading in the four securities.
The Commission's action charges Pointer Worldwide and Badmaeva with violations of the antifraud and seeks permanent injunctive relief, disgorgement and civil money penalties.
July 8, 2009
Pace Investor Rights Clinic Investor's Guide to Securities Industry Disputes
The Pace Law School Investor Rights Clinic has published an Investors' Guide to Securities Industry Disputes( Securities Dispute Guide). This extremely useful guide first provides basic information on how to avoid disputes with brokers and sets forth investors' rights and responsibilities. It then provides information on the dispute resolution process, including both arbitration and mediation. The Guide contains practical information in a very readable format. Kudos to its editors Jill Gross and Alice Oshins.
SEC's Investor Advisory Committee Announces Public Meeting
The SEC's newly-formed Investor Advisory Committee will hold a public meeting on July 27, 2009, at the SEC's main offices at 10 a.m. It will be open to the public and webcast. The public is invited to submit written statements to the Committee. The agenda for the meeting includes opening remarks, introduction of Committee members, discussion of Committee agenda and organization, and discussion of investor views of possible refinements to the disclosure regime.
Former CFO of UCI Medical Affiliates Settles Fraud, Embezzlement Charges with SEC
The SEC filed a Complaint in the United States District Court for the District of South Carolina against Jerry F. Wells, Jr. ("Wells"), a former Executive Vice President and Chief Financial Officer of UCI Medical Affiliates, Inc. ("UCI" or the "Company"), a provider of nonmedical management and administrative services based in South Carolina. The Complaint alleges that between 2003 and 2008, Wells embezzled approximately $2.97 million from UCI through a variety of measures, including submitting unsupported check requests for non-business expenses, including construction work on Wells' personal residences and personal credit card accounts. The Complaint further alleges that Wells capitalized the expenses as fixed assets on the Company's balance sheet, causing UCI to overstate its net earnings in the affected periods. According to the Complaint, to justify capitalizing these expenses, Wells altered invoices from contractors performing work on his personal residences to suggest that the work was for one of UCI's facilities, and provided fraudulent work descriptions on the related check requests. The Complaint also alleges that Wells signed each of the Company's Forms 10-Q and 10-K and accompanying Sarbanes-Oxley certifications, thereby misrepresenting that they did not contain any untrue statements of material fact. The Complaint further alleges that, in connection with the audit of the Company's annual financial statements, Wells also signed multiple management representation letters to UCI's auditors, thereby misrepresenting that the Company's financial statements were prepared in conformity with GAAP.
Without admitting or denying the allegations in the complaint, Wells consented to the entry of an order (1) enjoining him from violating these statutes and rules and (2) barring him from serving as an officer and director of a public company.
SEC Charges New York Broker-Dealer with $61 Million Boiler Room Fraud
On July 8, 2009, the SEC filed a civil injunctive action in the United States District Court for the Southern District of New York alleging that a New York based broker-dealer, Sky Capital LLC a/k/a Granta Capital LLC (Sky Capital) used fraudulent boiler room tactics between September 2002 and November 2006 to raise more than $61 million from investors in two related companies — Sky Capital Holdings Ltd. and Sky Capital Enterprises, Inc. (the Sky Entities). The Commission also charged Sky Capital's founder, former President and CEO, Ross Mandell, the firm's former COO, Stephen Shea, and four registered representatives, Adam Harrington Ruckdeschel, Arn Wilson, Michael Passaro, and Robert Grabowski, for orchestrating and participating in the fraudulent scheme designed to fraudulently induce numerous individuals to invest in the Sky Entities.
According to the Commission's complaint, Mandell orchestrated the fraudulent scheme with the assistance of Shea and the other defendants. According to the complaint, Mandell directed Sky Capital brokers to make material misrepresentations, and fail to disclose material information, to induce their Sky Capital customers to purchase stock in the Sky Entities. Mandell also personally made material misrepresentations to his customers. Additionally, the defendants implemented and enforced a "no-net sales" policy, which had the effect of preventing investors from selling their Sky Entities' stocks that were otherwise publicly traded on the Alternative Investment Market of the London Stock Exchange. The no-net sales policy had the effect of artificially inflating the price of the Sky Entities' stocks. Moreover, as a result of the "no-net sales" policy, which the defendants did not disclose to their customers, numerous Sky Capital investors were unable to sell their shares in the Sky Entities before trading in those stocks was suspended thereby rendering the investments worthless.
The SEC's complaint charges each of the defendants with violations of the antifraud provisions and 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 penalties. The complaint also seeks to permanently prohibit Mandell from acting as an officer or director of any registered public company.
July 7, 2009
SEC Obtains Asset Freeze in Alleged $485 Million Ponzi Scheme
On July 2, 2009, the SEC obtained a temporary restraining order and emergency asset freeze in yet another alleged Ponzi scheme, this one a $485 million offering fraud run by three individuals (Paul R. Melbye, Brendan W. Coughlin and Henry D. Harrison) through a company they owned and controlled, Provident Royalties LLC. In addition to the asset freeze, the court has appointed a receiver to preserve and marshal assets for the benefit of investors.
The Commission alleges that from at least June 2006 through January 2009, Provident made a series of fraudulent offerings of preferred stock and limited partnership interests for the purpose of generating promised returns through investments in oil and gas assets. The complaint alleges the sales were made through 21 affiliated entities to more than 7,700 investors throughout the United States. It is also alleged that Provident Asset Management, LLC, an affiliated broker-dealer, made some direct retail sales of securities, but primarily solicited unaffiliated retail broker-dealers to enter into placement agreements for each offering, and those retail broker-dealers sold the stock to retail investors nationwide.
According to the Commission's complaint filed in U.S. District Court for the Northern District of Texas, Provident falsely promised yearly returns of up to 18 percent and misrepresented to investors that 85 percent of the funds raised through the offerings would be used to purchase interests in oil and gas real estate, leases, mineral rights, and interests, exploration and development. The Commission alleges that, in fact, less than 50 percent of investor funds were used for their stated purpose, and the proceeds from later offerings were used to pay expenses related to earlier offerings and returns to investors in those offerings.
The complaint seeks a temporary restraining order and preliminary and permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest and financial penalties. Officer and director bars are sought against Melbye, Harrison and Coughlin. Five affiliated entities that did not sell securities are named as relief defendants for purposes of disgorgement.
New York AG Announces Two More Assurances of Discontinuance in ARS Settlements
The New York Attorney General announced Assurances of Discontinuance with Credit Suisse Securities LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated 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. Last year the New York AG and other regulators settled allegations with eleven securities firms that theymade misrepresentations in their marketing and sale of auction rate securities. The New York AG's website has posted the eleven Assurances. The settling firms are Banc of America Securities LLC and Banc of America Investment Services, Inc., Citigroup Global Markets, Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Goldman, Sachs & Co., JPMorgan Chase & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Inc., RBC Capital Markets Corporation, UBS Securities LLC and UBS Financial Services LLC, and Wachovia Securities LLC and Wachovia Capital Markets LLC.
July 6, 2009
Former HealthSouth CFO Speaks on Ethics
CFO.com runs an interview with Aaron Beam, a former HealthSouth CFO who admitted to cooking the books during 1996-97 and who served three months in a minimum security prison. He is currently mowing lawns and speaking to business students on ethics. The bottom line -- "I Should Have Said No."
July 5, 2009
Schwartz on Mutual Fund Conflicts
Mutual Fund Conflicts of Interest in the Wake of the Short-Term Trading Scandals: Encouraging Structural Change Through Shareholder Choice, by Jeff Schwartz, California Western School of Law, was recently posted on SSRN. Here is the abstract:
This piece contends that the way mutual funds are typically organized incentivizes fund managers to put their own interests ahead of fund shareholders. It goes on to argue that the legal regime in place to protect investors from such abuse is flawed, and that the late trading and market timing scandals that came to light several years ago, among other harms that shareholders have endured, illustrate the need for substantive reform.
Investors would be best served, I argue, if mutual funds were organized in an alternate fashion - one which alleviates the conflicts of interest motivating management overreaching. The article concludes that a restructuring is possible through informed shareholder choice, but for this to occur the SEC must take steps to create a more knowledgeable investor base.
Vega on SOX Whistleblowers
The Sarbanes-Oxley Act & the Culture of Bribery: Expanding the Scope of Private Whistleblower Suits to Overseas Employees, by Matt A Vega, Faulkner University, Thomas Goode Jones School of Law, was recently posted on SSRN. Here is the abstract:
This Article makes a case for using a private right of action to protect overseas employees from retaliation by their employers for reporting or opposing the bribery of foreign officials. After surveying public enforcement efforts, voluntary corporate initiatives, and existing private causes of action that may be predicated on FCPA violations, the Article finds that they all have their shortcomings and recommends several legal and legislative solutions. First, a private cause of action for retaliation should be implied under the FCPA. Second, section 806 of the Sarbanes- Oxley Act of 2002 should be read to protect whistleblowers who disclose FCPA violations by publicly held U.S. companies. Third, the territorial scope of section 806 should be expanded to cover employees working overseas. The Article takes issue with the First Circuit’s decision in Carnero v. Boston Scientific Corp., which declined to extend section 806 whistleblower protection to a foreign employee of a foreign subsidiary of a publicly held U.S. company. The Article then explores two alternative approaches to extraterritoriality suggested in the Southern District of New York court’s recent decision in O’Mahony v. Accenture Ltd. to support prescriptive jurisdiction in such cases: the 'conduct' and 'effects' tests. Alternatively, it argues section 806 and the administrative complaint procedures from AIR21 it incorporates by reference should be amended to provide specific procedures for employees overseas to bring whistleblower complaints. Finally, the Article endorses the Foreign Business Bribery Prohibition Act of 2008, H.R. 6188, which is expected to be reintroduced by Congressman Ed Perlmutter in the 111th Congress, to authorize private suits for treble damages against foreign concerns whose bribery costs American businesses and their employees.