Securities Law Prof Blog

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

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Thursday, August 6, 2009

Attorney Settles Charges in Pump and Dump Scheme

On July 31, 2009, the United States District Court for the Northern District of Georgia entered final judgments by consent against Albert J. Rasch, Jr., Kathleen R. Novinger, Sandra B. Masino and 144 Opinions, Inc. (144 Opinions) in a civil injunctive action charging them for their roles in issuing legal opinions in a pump-and-dump scheme. The final judgments enjoined all defendants from future antifraud and registration violations of the federal securities laws, imposed civil monetary penalties, and barred all defendants from participating in a penny stock offering for a period of five years.

The Commission filed its Complaint in this matter on May 5, 2009. The Complaint alleged that during 2007, the defendants collectively operated a legal "opinion mill" which issued fraudulent legal opinions used by promoters in a pump-and-dump scheme, and others, to sell securities in violation of the registration provisions of the federal securities laws. Masino and 144 Opinions drafted and Rasch or Novinger executed, at least 24 legal opinion letters concerning the removal of restrictive legends on certificates representing over 22 million shares of Mobile Ready Entertainment Corp. ("Mobile Ready"). The defendants cited to non-existent documents and misrepresented critical facts in executing the 24 legal opinions. The complaint alleges that the false and misleading statements drafted by Masino and 144 Opinions and thereafter executed by Rasch and Novinger fraudulently induced the transfer agent for Mobile Ready to remove the restrictive legends and permit the illegal sale of over 22 million shares of Mobile Ready in violation of the registration provision of the federal securities laws.

Without admitting or denying the allegations in the Commission's Complaint, Rasch, Novinger, Masino and 144 Opinions consented to judgments entered by the Court that permanently enjoin them from future violations of Sections 5 and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and bar them from participating in the offering of a penny stock for a period of five years. The judgments ordered Rasch and Masino each to pay a $20,000 civil monetary penalty, while Novinger was ordered to pay a $10,000 civil monetary penalty. Additionally, the final judgments ordered Rasch and Masino to disgorge all professional and service fees related to the Mobile Ready legal opinions.

August 6, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Federal Judge Calls for Hearing on SEC-BofA Settlement

Earlier this week the SEC announced a settlement with Bank of America over allegations that the bank misled its shareholders by not disclosing promised Merrill Lynch bonuses when it solicited their proxies for the merger, but a federal judge in S.D.N.Y. has called a hearing for August 10 before he will decide whether to approve the settlement.  Judge Rakoff cited the public importance of the case and said unless a hearing is held the public will remain uncertain about the truth of the allegations.  He specifically questioned the basis for the $33 million penalty and whether it will be paid with bailout money.   WSJ, Judge Calls Hearing in SEC Case Against BofA.   

August 6, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Fines Ameritas for Sales of Unsuitable VUL Policies

FINRA fined Ameritas Investment Corp.  $100,000 and suspended and fined one of its brokers for inducing customers to take on additional mortgage and/or home equity debt in order to purchase variable universal life insurance policies (VULs). Those policies were pitched to customers as mechanisms for funding college expenses and retirement.

 Ameritas was sanctioned for failing to adequately supervise broker Nancy Ziering, who was based in New Jersey, and for advertising violations related to her financial plans. FINRA found that the financial plans she created and were misleading and that her recommendations to customers to purchase VUL policies were unsuitable. Although the plans were marketed as a way to demonstrate how customers could save for college and retirement, in nearly every instance they recommended that the customer purchase a VUL policy issued by an affiliate of Ameritas, using money obtained from a mortgage refinancing or home equity loan.  Ziering was fined $60,000 and suspended for nine months. 




August 6, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Enforcement Statistics in 2009

Remarks to the New York City Bar Association, by Robert Khuzami, Director, Division of Enforcement, SEC, August 5, 2009:


Comparing the period from late January [2009] to the present to roughly the same period in 2008, the Division has opened 10% more investigations (approximately 525, compared to 475); have been granted 118% more formal orders (which grants us subpoena power) (275, compared to 126); have filed 147% more TROs (52, compared to 21); and have filed nearly 30% more actions (397, compared to 306).

Khuzami goes on to discuss organizational changes within Enforcement to improve its focus and efficiency as well as Enforcement's priorities.

August 6, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

AIG's Former Executives Settle Accounting Fraud Charges with SEC

The SEC  settled charges that former American International Group Chairman and CEO Maurice "Hank" Greenberg and former Vice Chairman and CFO Howard Smith were involved in numerous improper accounting transactions that inflated AIG's reported financial results between 2000 and 2005. The SEC alleged that Greenberg and Smith are liable as control persons for AIG's violations of the antifraud and other provisions of the securities laws. Smith also is charged with direct violations of the antifraud and other provisions of the securities laws.


The SEC alleged that Greenberg and Smith were responsible for material misstatements that enabled AIG to create the false impression that the company consistently met or exceeded key earnings and growth targets. According to the SEC's complaint, Greenberg publicly described AIG as the leader in the insurance and financial services industry with a history of delivering consistent double-digit growth. However, AIG faced numerous financial challenges under Greenberg's leadership that were disguised through improper accounting.  The SEC previously charged AIG in 2006 with securities fraud and improper accounting, and the company settled the charges by paying disgorgement of $700 million and a penalty of $100 million, among other remedies.

Greenberg and Smith agreed to settle the SEC's charges and pay disgorgement and penalties totaling $15 million and $1.5 million, respectively.

August 6, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 5, 2009

Former Royal Ahold Executive Settles SEC Accounting Charges

The SEC settled charges against Johannes Gerhardus Andreae, a former Executive Vice President and former member of the executive board of Royal Ahold (Koninklijke Ahold N.V.).  The SEC alleged that Andreae and others at Royal Ahold participated in a scheme to consolidate joint ventures improperly, which caused Royal Ahold fraudulently to publish materially false and misleading financial and other statements for at least fiscal years 2000 and 2001 and for the first three quarters of 2002. Royal Ahold is a publicly held company organized in The Netherlands. At the time of the alleged misconduct, the company had registered securities with the Commission pursuant to Section 12(b) of the Exchange Act.

The proposed Final Judgment would: (i) permanently enjoin Andreae from violating Section 17(a) of the Securities Act of 1933; violating, or aiding and abetting violations of, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 13b2-1, and 13b2-2 thereunder; and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 13a-1 and 13a-16 thereunder; and (ii) bar Andreae from serving as an officer or director of a public company. The proposed Final Judgment is subject to the approval of the U.S. District Court for the District of Columbia.

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

SEC Settles Two Cases Alleging Naked Short Selling

The SEC announced that it has taken its first enforcement actions for violations of the Commission's rules to prevent abusive "naked" short selling, charging two options traders and their broker-dealers with violating the locate and close-out requirements of Regulation SHO. The Commission also charged a supervisor at one of the firms.

Regulation SHO requires broker-dealers to locate a source of borrowable shares prior to selling short, and to deliver securities sold short by a specified date. The SEC alleges that the traders and their firms improperly claimed that they were entitled to an exception to the locate requirement, and engaged in transactions that created the appearance that they were complying with the close-out requirement. In fact, they were not entitled to the exception and were not complying with the close-out requirement.

The SEC charged New York City-based Hazan Capital Management LLC (HCM) and its principal trader and majority owner, Steven M. Hazan, with Regulation SHO violations, and separately charged Chicago-based TJM Proprietary Trading LLC and one of its traders, Michael R. Benson, with Regulation SHO violations while also charging TJM's chief operating officer John T. Burke for failing to supervise Benson. The firms and individuals agreed to settle the SEC's charges without admitting or denying the findings.


In the HCM proceeding, the Commission found that HCM engaged in misconduct from January 2005 to October 2007 and received ill-gotten gains of at least $3 million. The Commission ordered HCM to cease and desist from committing or causing, and Hazan to cease and desist from causing, any violations and future violations of Rules 203(b)(1) and 203(b)(3), censured HCM, and barred Hazan from association with any broker-dealer, with the right to reapply for association after five years. The Commission also ordered HCM and Hazan to pay disgorgement in the amount of $3 million, but provided that the payment obligation shall be deemed satisfied by orders of NYSE Amex, LLC and NYSE Arca, Inc. in their related actions directing Hazan and HCM to pay disgorgement in that amount. The Commission acknowledged HCM's and Hazan's undertakings to pay fines totaling $1 million in the related SRO actions.

In the TJM proceeding, the Commission found that TJM engaged in misconduct from January 2007 to July 2007 and ordered TJM to cease and desist from committing or causing, and Benson to cease and desist from causing, any violations and any future violations of Rules 203(b)(1) and 203(b)(3). The Commission also censured TJM, suspended Benson from associating with any broker or dealer for a period of three months, and suspended Burke from acting in a supervisory capacity with a broker or dealer for a period of nine months. The Commission ordered TJM to pay disgorgement in the amount of $541,000, but provided that the payment obligation shall be deemed satisfied by an order of the Chicago Board Options Exchange Inc.'s (CBOE) Business Conduct Committee (BCC) in a related action directing TJM to pay disgorgement in that amount. The Commission acknowledged TJM's, Benson's, and Burke's undertaking to pay, jointly and severally, a $250,000 fine to the CBOE's BCC in its related action.

In its continuing effort to address short selling abuses, the SEC last week announced several regulatory actions to further protect investors and the markets from the negative effects of abusive "naked" short sales. The Commission made permanent a temporary rule implemented in 2008 to address concerns about "fails to deliver," and the SEC's Office of Economic Analysis has since determined that the number of fails to deliver has declined significantly under the rule. Fails to deliver in all equity securities has decreased by approximately 57 percent since the fall of 2008, and the average daily number of threshold list securities has declined from a high of approximately 582 securities in July 2008 to 63 in March 2009.

August 5, 2009 in SEC Action | Permalink | Comments (1) | TrackBack (0)

Specter Introduces Bill to Create Private Aiding and Abetting Remedy for Rule 10b-5 Fraud

Senator Specter introduced a Bill that would amend section 20 of the Securities Exchange Act to allow private Rule 10b-5  actions against persons that knowingly or recklessly provide substantial assistance to primary violators, thus overturning Central Bank and Stoneridge.  In his accompanying remarks, Senator Specter referred to Judge Lynch's recent call, in the Refco opinion dismissing the charges against outside counsel, to re-examine the issue in light of the fact that secondary actors sometimes are "deeply and indispensably implicated in the wrongful conduct."

In response, the U.S. Chamber issued a press release, warning that expansion of private securities litigation "will only slow our economic recovery, drag down investors' portfolios and retirement accounts, and delay the creation of much needed jobs." 

While the Administraton's proposed legislation would expand the scope of the SEC's power to impose aiding and abetting liability, it does not address a private remedy.

August 5, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 4, 2009

SEC is Looking at Flash Trading

Senator Charles Schumer said that SEC Chairman Schapiro had promised him that the agency would ban flash trading, and Ms. Schapiro made a statement that the SEC may curb the practice to eliminate inequities.  She also said that the agency was looking at flash trading (routing trades through private liquidity pools before sending them to exchanges) as part of a broader examination of dark pools and high-frequency trading.  WSJ, SEC to Explore Changes in Flash Trading.

August 4, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC and GE Settle Accounting Fraud Charges

The SEC announced that it settled charges against General Electric Company (GE) alleging that GE misled investors by reporting materially false and misleading results in its financial statements. The SEC alleges that GE used improper accounting methods to increase its reported earnings or revenues and avoid reporting negative financial results. GE has agreed to pay a $50 million penalty to settle the SEC's charges.

According to the Commission's complaint, GE met or exceeded final consensus analyst earnings per share (EPS) expectations every quarter from 1995 through filing of its 2004 annual report. However, on four separate occasions in 2002 and 2003, high-level GE accounting executives or other finance personnel approved accounting that was not in compliance with Generally Accepted Accounting Principles ("GAAP"). In one instance, the improper accounting allowed GE to avoid missing analysts' final consensus EPS expectations. The four accounting violations were (1) beginning in January 2003, an improper application of the accounting standards to GE's commercial paper funding program to avoid unfavorable disclosures and an estimated approximately $200 million pre-tax charge to earnings; (2) a 2003 failure to correct a misapplication of financial accounting standards to certain GE interest-rate swaps; (3) in 2002 and 2003, reported end-of-year sales of locomotives that had not yet occurred in order to accelerate more than $370 million in revenue; and (4) in 2002, an improper change to GE's accounting for sales of commercial aircraft engines' spare parts that increased GE's 2002 net earnings by $585 million.

Without admitting or denying the SEC's allegations, GE agreed to the financial penalty and consented to the entry of an order permanently enjoining it from violating Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The charges announced today conclude the SEC's investigation with respect to the company.

August 4, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, August 3, 2009

Former Take-Two GC and CFO Settle Backdating Charges

The SEC announced that Kenneth Selterman and Patti Tay, the former General Counsel and former Controller/ Chief Accounting Officer, respectively, of video game maker Take-Two Interactive Software, Inc. (Take-Two), settled charges of stock option backdating. The SEC alleged that Tay and Selterman enriched themselves and others by knowingly or recklessly allowing Take-Two's former Chairman/CEO Ryan Brant to backdate Take-Two's stock option grants. The scheme involved granting backdated, undisclosed "in the money" stock options that coincided with dates of historically low annual and quarterly closing prices for Take-Two's common stock. The complaint alleges that Take-Two granted backdated stock options to senior officers, directors, and key employees without complying with its own stock option plans, and generally, without the Board or a committee thereof approving the grant dates and exercise prices. Take-Two also did not record or disclose the compensation expenses it incurred as a result of the "in-the-money" portions of the option grants. Tay's misconduct, according to the complaint, occurred from at least as early as 1998, while Selterman's misconduct occurred from at least as early as 2002.

The SEC alleged that Tay and Selterman:

  • knew, or were reckless in not knowing, that exercise prices for stock options had been picked with hindsight;

  • created company records that falsely indicated that stock option grants had occurred on earlier dates when Take-Two's stock price had been at a low;

  • knew the accounting consequences of granting stock options at exercise prices less than fair market value on the date of the grant; and

  • knew or were reckless in not knowing that Take-Two's filings with the SEC were false and misleading because they materially understated Take-Two's compensation expenses and materially overstated its earnings (or understated its losses), and contained materially false and misleading statements pertaining to the true grant dates and exercise prices of options, creating the false and misleading impression that Take-Two granted options in accordance with the terms of its stock option plans.

Tay and Selterman consented to orders permanently enjoining them from violating the antifraud provisions of Section 10(b) of the Exchange Act and Rule 10b-5, the internal controls and books and records provisions of Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1; the misrepresentations to auditors provision of Exchange Act Rule 13b2-2; and the reporting provisions of Section 16(a) of the Exchange Act and Rule 16a-3; and from aiding and abetting Take-Two's violations of the Exchange Act's reporting, books and records, internal controls, and proxy solicitation provisions. Tay and Selterman agreed to permanent bars from serving as officers or directors of any issuer that has a class of securities registered with the SEC or that is required to file reports with the SEC. Tay and Selterman will each pay a civil penalty of $125,000. Selterman will also pay disgorgement of $363,185 plus prejudgment interest of $111,115, for a total of $474,300, representing the "in-the-money" benefit he obtained from exercising his backdated options.

In addition, as part of the settlements, and following the entry of the proposed final judgments, Tay and Selterman, without admitting or denying the Commission's findings, consented to the entry of administrative orders pursuant to Rule 102(e)(3) of the Commission's Rules of Practice permanently suspending them from appearing or practicing before the SEC as an accountant and an attorney, respectively.

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

SEC Publishes Proposed "Pay to Play" Rules for Investment Advisers

The SEC published on its website for public comment proposed new rules that address “pay to play” practices by investment advisers. The new rules would prohibit an investment adviser from providing advisory services for compensation to a government client for two years after the adviser or certain of its executives or employees make a contribution to certain elected officials or candidates. They would also prohibit an adviser from providing or agreeing to provide, directly or indirectly, payment to any third party for a solicitation of advisory business from any government entity on behalf of such adviser. Additionally, the new rules would prevent an adviser from soliciting from others, or coordinating, contributions to certain elected officials or candidates or payments to political parties where the adviser is providing or seeking government business. The Commission also is proposing rule amendments that would require a registered adviser to maintain certain records of the political contributions made by the adviser or certain of its executives or employees.

Public comments are due 60 days after publication in the Federal Register.

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

SEC and BofA Settle Charges Involving Merrill Bonuses

The SEC and Bank of America settled charges that Bank of America misled investors about billions of dollars in bonuses that were being paid to Merrill Lynch & Co. executives at the time of its $50 billion acquisition of the firm. Bank of America agreed to settle the SEC's charges and pay a penalty of $33 million.

The SEC alleges that in proxy materials soliciting the votes of shareholders on the proposed acquisition of Merrill, Bank of America stated that Merrill had agreed that it would not pay year-end performance bonuses or other discretionary compensation to its executives prior to the closing of the merger without Bank of America's consent. In fact, Bank of America had already contractually authorized Merrill to pay up to $5.8 billion in discretionary bonuses to Merrill executives for 2008. According to the SEC's complaint, the disclosures in the proxy statement were rendered materially false and misleading by the existence of the prior undisclosed agreement allowing Merrill to pay billions of dollars in bonuses for 2008. Bank of America had agreed that Merrill could pay up to $5.8 billion, or nearly 12 percent of the $50 billion merger consideration, in discretionary bonuses to its executives. The merger agreement was included as an appendix and summarized in the joint proxy statement that was distributed to all 283,000 shareholders of both companies. But Bank of America's agreement to allow Merrill to pay these discretionary bonuses was in a separate document that was omitted from the proxy statement and whose contents were never disclosed before the shareholders' vote on the merger.

Meanwhile, the New York Attorney General announced that its investigation was continuing.

In settling the SEC's charges without admitting or denying the allegations, Bank of America consented to the entry of a judgment that permanently enjoins Bank of America from violating the proxy solicitation rules — Section 14(a) of the Exchange Act of 1934 and Rule 14a-9 — and orders Bank of America to pay the financial penalty. The settlement is subject to court approval.

August 3, 2009 in SEC Action | Permalink | Comments (1) | TrackBack (0)

Sunday, August 2, 2009

Heminway on Officer's Candor

Martha’s (and Steve’s) Good Faith: An Officer’s Duty of Loyalty at the Intersection of Good Faith and Candor, by Joan MacLeod Heminway, University of Tennessee College of Law, was recently posted on SSRN.  Here is the abstract:

This short paper begins to explore whether a corporate officer’s duty of good faith extends to public disclosures of personal facts. Specifically, the paper preliminarily attacks the following question: in the post Stone v. Ritter, post-Gantler v. Stephens era in which we now live, is the absence or inadequacy of an executive officer’s disclosure of personal facts a breach of the duty of good faith and, as a result, the fiduciary duty of loyalty under Delaware law? The answer to this question is tied up in recent jurisprudence of the Delaware Supreme Court at the intersection of the duty of good faith, the duty of disclosure (or candor), and the applicability of fiduciary duties to corporate officers. Accordingly, in a preliminary analysis, this paper first describes that jurisprudence and then applies it to executive disclosures of personal facts. The paper closes with a brief conclusion that includes a cautionary note about the use of its findings in a litigation setting.

August 2, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Brummer on International Securities Regulation

Post-American Securities Regulation, by Chris Brummer, Georgetown University Law Center, was recently posted on SSRN.  Here is the abstract:

International securities regulation has arrived at the forefront of the country's debate on financial market reform. The global economic crisis has exposed the enormous systemic risk that can arise where securities are sold across borders. Meanwhile, the Bernie Madoff and Allen Stanford frauds have illustrated the international reach of swindlers and conmen. Consequently, policymakers have vociferously called for not only domestic securities law reform, but also a more effective international regulatory architecture.

Yet international securities regulation is poorly understood. Securities scholars traditionally view the SEC as a global regulatory monopolist due to the size of US stock exchanges. But they overlook the rise of foreign capital markets and the diminished influence of the SEC. Meanwhile, international law scholars view international securities regulation as involving what game theoreticians would call an "assurance" game where information sharing through informal networks of regulators facilitates swift agreement on standards. But they ignore the asymmetric costs of adopting international standards and thus underestimate the obstacles to convergence.

This Article overcomes these limitations and offers a fuller theoretical account of international securities regulation. It argues that due to increased global competition for securities transactions, coordination among securities regulators often comprises a "battle of the sexes" game where regulators are not necessarily incentivized to adopt the other's regime. Instead, only where securities regulation touches upon what can be considered "systemic risks" - defined as financial risks whose costs are internalized broadly and deeply across borders - will networks be potentially capable of realizing significant regulatory coordination. And even here, coordination is most likely to be undertaken by cross-functional networks operating with the credibility and support of political elites. The Article then shows how the SEC, cognizant of this development, is forming club-like alliances that offer foreign regulators special rewards, like eased market access for foreign market participants, for adopting some of its policy preferences. The Article then assesses the effectiveness of this approach and concludes that clubs have better prospects of success in enforcement cooperation than in substantive areas of securities law.

August 2, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)