Securities Law Prof Blog

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

Saturday, July 18, 2009

Gevurtz on Stoneridge

Law Upside Down: A Critical Essay on Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., by Franklin A. Gevurtz, University of the Pacific (UOP) - McGeorge School of Law, was recently posted on SSRN.  Here is the abstract:

This essay uses the Supreme Court’s recent decision in the highly controversial Stoneridge Investment Partners, LLC v. Scientific Atlanta, Inc. case to explore the question of who ought to pay when corporations issue false financial statements - an issue of critical importance with the seemingly endless stream of corporate fraud coming to light. The Supreme’s Courts’ answer is to focus on the corporation as the target for liability. The thrust of the essay is to show how this paints a bulls-eye on the wrong target, while allowing those who profited from knowing misrepresentation to escape liability.

July 18, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Webber on Pay-to-Play in Securities Class Actions

Is 'Pay-to-Play' Driving Public Pension Fund Activism in Securities Class Actions? An Empirical Study, by David H. Webber, Center for Law & Business at New York University School of Law and Stern School of Business, was recently posted on SSRN.  Here is the abstract:

The emergence of public pension funds as frequent lead plaintiffs in securities class actions has prompted speculation that the funds’ litigation activism is driven by “pay-to-play”. “Pay-to-play” posits that plaintiffs’ lawyers make campaign contributions to politicians who control public pension funds; in return, the funds seek lead-plaintiff appointments and select the contributing lawyers as their lead counsel. This paper provides a comprehensive analysis of the securities litigation activity of 111 such funds from 2003 to 2006. The paper’s primary finding is that the percentage of politicians on a fund’s board correlates negatively with lead-plaintiff appointments obtained by the fund, whereas the percentage of fund beneficiaries on a board correlates positively with such appointments. These results suggest that the influence of “pay-to-play” on public pension fund securities litigation activism has been overstated. The substantial role played by beneficiary board members in driving the funds’ litigation activism is analyzed by the author in the context of prior literature comparing such board members to corporate managers with an equity stake in the corporation, and the possible influence of unions on such members. In light of these findings, the author criticizes legislation pending in Congress designed to curb “pay-to-play” in the securities class action context.

July 18, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Black on Protecting the Retail Investor

Protecting the Retail Investor in an Age of Financial Uncertainty, by Barbara Black, University of Cincinnati - College of Law,  was recently posted on SSRN.  Here is the abstract:

This essay, originating in a presentation made at the University of Dayton School of Law's Fallout from the Bailout Symposium on March 20, 2009, first sets forth some comparisons between other recent financial crises and the 2008 financial meltdown. It then provides an assessment of the SEC's role during the financial crisis and concludes with a review of the key provisions of the Obama Administration's proposed financial regulatory reform that affect the SEC and investor protection. The Obama proposal offers no redesign of the SEC, relying instead on SEC Chairman Mary Schapiro's commitment to re-energize and re-commit the agency to investor protection. It remains very much to be seen whether these efforts will be sufficient to protect the retail investor from future fraud and to restore her confidence in the markets.

July 18, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Friday, July 17, 2009

Sec Publishes Proposed Disclosure Amendments on Municipal Securities

The SEC published for comment proposed amendments to Rule 15c2-12 under the Securities Exchange Act of 1934 (“Exchange Act”) relating to municipal securities disclosure. The proposal would amend certain requirements regarding the information that a broker, dealer, or municipal securities dealer acting as an underwriter in a primary offering of municipal securities must reasonably determine that an issuer of municipal securities or an obligated person has undertaken, in a written agreement or contract for the benefit of holders of the issuer’s municipal securities, to provide to the Municipal Securities Rulemaking Board (“MSRB”). Specifically, the proposed amendments would require a broker, dealer, or municipal securities dealer to reasonably determine that the issuer or obligated person has agreed to provide notice of specified events in a timely manner not in excess of ten business days after the event’s occurrence, would amend the list of events for which a notice is to be provided, and would modify the events that are subject to a materiality determination before triggering a notice to the MSRB. In addition, the amendments would revise an exemption from the rule for certain offerings of municipal securities with put features. The Commission also is providing interpretive guidance intended to
assist municipal securities issuers, brokers, dealers and municipal securities dealers in meeting
their obligations under the antifraud provisions.

Comments are due 45 days after publication in the Federal Register.

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

Court Dismisses SEC's insider Trading Case Against Cuban

A Federal District Court in Dallas has dismissed the SEC's insider trading case against Mark Cuban; the agency has 30 days to replead its case.  According to the SEC, Cuban sold shares of while in possession of inside information.  The defense argued that Cuban was not a corporate insider and owed no duty not to trade on the information.  WSJ, Judge Dismisses SEC Insider-Trading Case Against Mark Cuban.

July 17, 2009 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Treasury Proposes Say on Pay Legislation

On July 16 Treasury announced that it delivered draft "say-on-pay" legislation to Congress that would require all publicly traded companies to give shareholders a non-binding vote on executive compensation packages. This legislation would require a non-binding annual shareholder vote on compensation for all public companies.  All public companies will be required to include a non-binding shareholder vote on executive compensation as disclosed in the proxy for any annual meeting held after December 15, 2009.
Compensation subject to the vote includes pay packages for senior executive officers. The disclosures that would be subject to the say-on-pay vote include tables summarizing salary, bonuses, stock and option awards and total compensation for senior executive officers, as well as summaries of golden parachute and pension compensation and a narrative explanation of the board's compensation decisions.  The Treasury proposal is heavily influenced by the U.K. experience. 

July 17, 2009 in News Stories | Permalink | Comments (1) | TrackBack (0)

A Dream Come True? Fiduciary Standards for Broker-Dealers

Is it even remotely possible that an aftermath of the financial meltdown could be a heightened standard of conduct for broker-dealers?  Yesterday SIFMA came out in favor of a uniform "fiduciary standard" for broker-dealers and investment advisers that provide individualized investment advice that is part of the Obama administraton's financial reform package.  Currently there is not even a federal remedy for negligent brokerage advice; the only federal remedy requires proof of fraud. 

Of course, the devil is in the details.  The phrase "fiduciary standard" is an aspirational concept, but in fact there is not a great deal of caselaw that defines the concept as it applies to brokers or investment advisers.  (The fiduciary standard applicable to traditional trustees, with its prudent person standard, is inapplicable in investment settings where customers can have a range of risk tolerance and investment objectives.)  Will there really be a prohibition on self-dealing as classic fiduciary principles require? And assuming that heightened standards are adopted by statute or (more likely) SEC or FINRA rulemaking, will there be a private cause of action?  Stay tuned for future developments.

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

Thursday, July 16, 2009

SEC Proposes to Improve Disclosure about Municipal Securities

The SEC voted unanimously on July 15 to propose rule amendments to improve the quality and timeliness of municipal securities disclosure.  The proposed amendments to SEC Rule 15c2-12 would help investors make more knowledgeable investment decisions, effectively manage and monitor their investments, and avoid fraud. The proposed amendments also would assist broker-dealers in carrying out their responsibilities under the securities laws.

Because municipal securities are exempt from the disclosure requirements of the federal securities laws, the SEC adopted Rule 15c2-12 in 1989, which was designed to foster greater transparency in the municipal securities market.   Rule 15c2-12 prohibits brokers, dealers, and municipal securities dealers from purchasing or selling municipal securities unless they reasonably believe that the state or local government issuing the securities has agreed to disclose such things as annual financial statements and notices of certain events, such as payment defaults, rating changes and prepayments.

Public comments on today’s proposed rule amendments must be received by the Commission within 45 days after their publication in the Federal Register.  The full text of the proposed rule amendments will be posted to the SEC Web site as soon as possible.

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

Congressional Commission Appointed to Study Causes of Financial Crisis

Congress has appointed a commission to examine the causes of the financial meltdown.  Phil Angelides, a former California Treasurer, will lead the 10-person commission, and Bill Thomas, former Republican representative from California, will serve as vice-chair.  The commission is supposed to issue a final report by the end of next year.  NYTimes, A Panel Is Named to Examine Causes of the Economic Crisis.

July 16, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 15, 2009

ICI and ETF Firms Call on FINRA to Withdraw ETF Notice

According to Investment News, the Investment Company Institute and ETF firms call on FINRA to withdraw its June 29 Regulatory Notice 9-31 that warned brokers that inverse and leverage exchange traded funds "typically are unsuitable for retail investors" who hold them for more than one day.  They complain that the notice interferes with brokers' discretion to determine suitable products and services for their customers.  InvNews, Finra's ETF notice angers ICI, firms.

July 15, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Court Finds Butko Liable for Online Intrusion Scheme

The SEC announced that on July 6, 2009, the United States District Court of Connecticut entered a Default Judgment against Dmitriy Butko ordering him to pay disgorgement in the amount of $60,362 together with prejudgment interest of $10,494.92 and imposing a civil penalty of $520,000.  The Commission began this action by filing a complaint against Butko on August 7, 2008. The complaint alleged that Butko engaged in a modern, high-tech version of the traditional pump-and-dump market manipulation scheme. Specifically, the Defendant was trading in the common stock of issuers on the National Association of Securities Dealers Quotation System (Nasdaq) whose shares were being manipulated through unauthorized intrusions and trading in online brokerage accounts of unsuspecting at U.S. broker-dealers in violation of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

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

Marshall Holdings Int'l Liable for Public Offerings on Form S-8

The SEC announced that on July 6, 2009 the United States District Court for the Central District of California entered Final Judgments by consent against defendants Marshall Holdings International, Inc. (Marshall Holdings) and Mark T. Ellis, a resident of Irvine, California.  In the complaint filed on August 6, 2008, the Commission alleged that Marshall Holdings and Ellis, an officer of Winsted Holdings, Inc. (Winsted Holdings), improperly registered shares issued under employee stock option programs on Form S-8 registration statements from 2003 through 2005. Marshall Holdings and Winsted Holdings then received at least 85% of the proceeds from the shares' sales as payment of the options' exercise price.  According to the complaint, the option programs functioned as public offerings through which Marshall Holdings and Winsted Holdings used their employees as conduits to the market so that they could raise capital without complying with the registration provisions.

Without admitting or denying the complaint's allegations, Marshall Holdings and Ellis have consented to the entry of Final Judgments enjoining them from violating Section 5 of the Securities Act of 1933, ordering them to pay disgorgement of $8,974,033 and $1,042,000, respectively, plus prejudgment interest and, based upon their financial conditions, waiving payment of all such amounts. The litigation continues as to two remaining defendants.

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

SEC Brings Allegations of Insider Trading Involving Two Separate Mergers

The SEC today charged 11 individuals who were involved in separate insider trading schemes that were detected through surveillance of unusual trades preceding two different company merger announcements.

The SEC alleges that five individuals, including a former investment banker at Goldman Sachs & Co., illegally tipped or traded on confidential information ahead of an announcement last year that Liberty Mutual Insurance Company would acquire Safeco Corporation, a Seattle-based insurance company.

The SEC additionally alleges that six other individuals illicitly traded on non-public information in advance of an announcement in 2005 that private equity firm Odyssey Investment Partners LLC would acquire Neff Corporation, a Miami-based rental equipment company.

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

Tuesday, July 14, 2009

Tyco Officers Settle with SEC

Remember Tyco?  The SEC announced settlements with three former officers:

On July 14, 2009, the Securities and Exchange Commission (the Commission) filed settled Final Judgments against L. Dennis Kozlowski, the former Chairman and Chief Executive Officer of Tyco International Ltd. (Tyco), and Mark H. Swartz, the former Chief Financial Officer of Tyco, in the Commission's action arising from their violations of the federal securities laws while officers of that company. The Final Judgments permanently enjoin Kozlowski and Swartz from violating, or aiding and abetting violations of, the antifraud, proxy statement, periodic reporting, books and records, and lying to auditors provisions of the federal securities laws and permanently bar each of them from serving as an officer or director of a public company. FORMER TYCO EXECUTIVES L. DENNIS KOZLOWSKI AND MARK H. SWARTZ SETTLE SEC FRAUD ACTION

On July 14, 2009, the Securities and Exchange Commission (the Commission) filed a settled Final Judgment against Richard D. Power, a former Tyco International Ltd. (Tyco) Vice President, in the Commission's action against Power arising from his involvement in fraudulent accounting practices at Tyco. The Final Judgment permanently enjoins Power from violating, or aiding and abetting violations of, the antifraud, periodic reporting, and books and records provisions of the federal securities laws, orders him to pay disgorgement of $425,000, and imposes a $100,000 civil penalty. FORMER TYCO VICE PRESIDENT SETTLES SEC ACTION FOR ROLE IN ACCOUNTING FRAUD

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

Schapiro Testifies on SEC's Priorities

SEC Chairman Mary L. Schapiro testified today Concerning SEC Oversight: Current State and Agenda before the United States House of Representatives Committee on Financial Services, Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises.  Here is an excerpt:

We are:

  • working to fill regulatory gaps exposed by the economic crisis;
  • seeking to strengthen standards governing broker-dealers and investment advisers;
  • enhancing disclosure provided to investors;
  • streamlining enforcement procedures and focusing on cases that will have the greatest impact;
  • revamping the system for handling the approximately one million tips and complaints we receive annually;
  • improving our risk assessment capabilities;
  • bolstering our internal training; and
  • bringing on new leadership and new skill sets throughout the agency.

While we can never stop every scam artist scheming to defraud investors, I believe these and other changes will greatly improve our odds of catching them. Indeed, in the wake of the Madoff fraud, I believe we owe it to investors to show them that we can and will adapt our ways and learn from our past errors so that we do not repeat them.


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

Key Provisions of Proposed Investor Protection Legislation--Part II

Yesterday I examined the provisions of the proposed Investor Protection Act of 2009 (Download InvestorProtectionAct2009) that deal with the Investor Advisory Committee  (sec. 911), the Establishment of a Fiduciary Duty for Brokers, Dealers and Investment Advisers and the Harmonization of the Regulation of Brokers, Dealers and Investment Advisers (sec. 913), and the Authority to Restrict Mandatory Pre-Dispute Arbitration[sic] (sec. 921).  This posting will discuss the provisions dealing with Securities Whistleblower Incentives and Protection (sec. 922).

This provision gives the SEC the authority to pay to whistleblowers awards not exceeding 30% of the monetary sanctions imposed in SEC enforcement actions (either judicial or administrative) in excess of $1 million.  The determination of the amount of the award is in the sole discretion of the SEC and is not reviewable by the courts.  The whistleblower is someone (not an employee of the SEC, DOJ, an SRO or other "appropriate regulatory agency") who voluntarily provided original information to the SEC that led to the successful enforcement of the action.  Someone who was convicted of a criminal violation related to the SEC action is not eligible for an award.  While claims for awards can be made anonymously, prior to the payment, the whistleblower must disclose his identity.

The proposed statute also provides for the establishment of an Investor Protection Fund (IPF) that the SEC can use for paying awards to whistleblowers and for funding investor education initiatives.  Since enactment in SOX of the Fair Funds provision, the SEC has prided itself in paying out penalties it has collected to investors harmed by the fraud.  This proposed IPF, if adopted, thus creates a tension among competing interests for the fraud, including the cash-strapped federal government that otherwise would be the recipient of the penalties.  Moreover, the SEC's previous foray into funding investor education initiatives (as contemplated in the Conflicted Analysts Settlement) ended with embarrassment as the SEC folded its program into FINRA's, the latter being recently admonished by a federal district judge for its dilatory approach toward funding projects.

The statute provides that the IPF will consist of (1) penalties that are not added to the Fair Fund, (2) penalties added to a Fair Fund that are not distributed to the victims, and (3) accumulated interest on the investments in U.S. obligations.  The IPF is not to exceed $100 million.

The information provided by the whistleblower is deemed confidential and privileged and not subject to civil discovery and exempt from disclosure under the FOIA.

Once a year the SEC is to account to Congress on the whistleblower program, including the number of awards made and the investor education initiatives that were funded. 

The statute also provides for protection of whistleblowers from retaliation, including reinstatement and damages.

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

Monday, July 13, 2009

SEC Releases Statement on Preventing Unfair Trading by Employees

The Securities and Exchange Commission released a Statement for the Record Before the House of Representatives Committee on Financial Services, Subcommittee on Oversight and Investigations, on July 13 in connection with the Subcommittee’s hearing entitled, “Preventing Unfair Trading by Government Officials.”  The SEC addressed efforts it has taken in response to an Inspector General Report finding deficiencies in the SEC's system for monitoring employees' stock trading.

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

Some Key Provisions of Proposed Investor Protection Legislation

I posted over the weekend the text of the proposed Investor Protection Act of 2009(Download InvestorProtectionAct2009) released by Treasury.  In this blog, I discuss some of its key provisions:

Investment Advisory Committee.  The role of this Committee (already organized by Mary Schapiro) is to advise and consult with the SEC on regulatory priorities, initiatives to protect "investor interest," and initiatives to promote investor confidence; the SEC is not required to follow any of its recommendations.  Its members are supposed to represent the interests of both individual and institutional investors and "use a wide range of investment and approaches."  The members are supposed to meet a minimum of two times a year. (sec. 911)

Establishment of a Fiduciary Duty for Brokers, Dealers, and Investment Advisers, and Harmonization of the Regulation of Brokers, Dealers and Investment Advisers.  As drafted, this proposal offers the promise of a complete rethinking of the duties of broker-dealers.  The key provision, however, is drafted as permissive language, so it may be illusory.  Specifically, the proposal states:

 The Commission may promulgate rules to provide, in substance, that the standards of conduct for all brokers, dealers, and investment advisers, in providing investment advice about securities to retail investors or clients (and such other customers or clients as the Commission may be rule provide), shall be to act solely in the interest of the customer or client without regard to the financial or other interest of the broker, dealer or investment adviser providing the advice. (section 912(a))

If this legislation were enacted as a mandate to the SEC to adopt such standards of conduct, it would make a long overdue transformation of the broker-dealers' responsibilities.  Keep in mind that under federal securities law broker-dealers are only liable for fraudulent advice; there is no federal remedy for brokers who negligently provide customers with advice.  Moreover, under the prevailing interpretation of the FINRA/NASD suitability obligation, brokers owe customers duties only when they make recommendations to customers; the obligation does not extend to advice to hold securities.  Moreover, state law generally does not require brokers to provide updated advice to customers even when they initially recommended the securities. 

In contrast to the permissive language about the standards of conduct, the proposed statute provides that the SEC shall (1) take steps to facilitate the provision of simple and clear disclosures to investors regarding the terms of their relationships with investment professionals, and (2) examine and, where appropriate, promulgate rules prohibiting sales practices, conflicts of interests, and compensation for financial intermediaries that it deems contrary to the public interest and the interests of investors. (sec. 912(b))

Currently, the problem of conflicts of interest are generally "managed" by disclosure of the possibility of a conflict in confusing, boilerplate language; thus, securities laws generally treats broker-dealers as sales persons who can recommend proprietary products or services that provide a substantial financial benefit to the broker or his firm, even though there are better alternative products and services available, notwithstanding the fact that brokers customarily advertise themselves as financial "advisers" or "consultants" who look out for their customers' best interests.  If adopted, this legislation would require clearer and more informative disclosure, at a minimum, and, in addition, (hopefully) prohibition of the more egregious conflicts of interest. 

If the SEC enacted standards of conflict as proposed in the legislation, the federal law would finally move closer to recognizing that broker-dealers owe fiduciary duties to their customers.  Could this happen?  Let's wait and see.

The proposed legislation also states that the SEC has the authority to prohibit or impose conditions on the use of pre-dispute arbitration agreements in customers' agreements if it finds that such prohibition or limitation is in the public interest and for the protection of investors. (sec. 921)  Since the SEC already has this authority implicitly under its authority to approve or disapprove of SRO rules, I do not see what this provision adds to the current law. 

The proposed legislation also has some interesting provisions on whistleblower incentives and protections and the establishment of an Investor Protection Fund, which I will discuss in a later post.

July 13, 2009 in News Stories | Permalink | Comments (1) | TrackBack (0)

SEC's July 15 Meeting will Consider Municipal Securities Underwritings

The SEC's next Open Meeting is July 15.  The subject matter is:

The Commission will consider a recommendation regarding amendments to Rule 15c2-12 ("Rule") under the Securities Exchange Act of 1934 ("Act"), concerning the responsibilities of a broker, dealer, or municipal securities dealer acting as an underwriter in a primary offering of municipal securities and interpretive guidance intended to assist municipal securities issuers, brokers, dealers and municipal securities dealers in meeting their obligations under the antifraud provisions of the Act.

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

SEC Charges Seattle Attorney with Pump & Dump Scheme for MitoPharm Stock

The SEC charged Seattle-based securities lawyer David Otto and several others with conducting a fraudulent “pump-and-dump” scheme in which they secretly unloaded more than $1 million in penny stock of a company touting non-existent anti-aging products.  The SEC alleges that a series of misleading press releases and Web profiles were used to tout purported beverages and nutritional supplements of Seattle-based MitoPharm Corporation and drove the stock up during the aggressive stock promotion campaign. However, the SEC alleges that MitoPharm’s products were not “available” as advertised and were still in the developmental stage.

The SEC’s complaint, filed in federal court in Seattle, charges Otto, his associate Todd Van Siclen of Seattle, and Houston-based stock promoter Charles Bingham and his company Wall Street PR, Inc. MitoPharm and its CEO Pak Peter Cheung of Vancouver were also charged.

According to the SEC’s complaint, the scheme began in late 2006 when Otto arranged to purchase a publicly traded shell company as a merger partner for MitoPharm. Otto and Van Siclen drafted false opinion letters to MitoPharm’s transfer agent to secure supposedly “freely tradable” stock certificates for individuals and entities secretly controlled by Otto.  The SEC’s complaint further alleges that the defendants embarked on an aggressive public relations campaign that centered on the misleading promotion of two key products — “Restorade” and “Stamina Solutions” — that did not exist. As the promotional campaign caused the stock price to rise above $2.30, Otto sold his shares for more than $1 million and Bingham netted an additional $300,000. The massive selling of the stock caused the price to fall to a nickel per share by November 2007.

The SEC’s complaint alleges that the defendants violated the antifraud and other provisions of the federal securities laws. The SEC seeks injunctive relief, disgorgement and financial penalties from the defendants as well as penny stock bars for Otto, Van Siclen, and Cheung, and an officer-and-director bar against Cheung.

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