Securities Law Prof Blog

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

A Member of the Law Professor Blogs Network

Friday, September 11, 2009

SEC Announces Upcoming Roundtable on Securities Lending and Short Sales

The SEC will host a one and a half day roundtable, on Sept. 29-30, to solicit the views of
investors, issuers, financial services firms, self-regulatory organizations and the academic
community regarding securities lending and short sales. The roundtable will include a
comprehensive overview of securities lending and also analyze possible short sale pre-borrowing requirements and additional short sale disclosures.  The roundtable discussion will be available via webcast on the Commission's Web site.  The Commission will accept comments regarding issues addressed in the roundtable discussion until October 30, 2009.  Here is the agenda and the notice for comments.

September 11, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Two New Legislative Proposals Introduced to Address Senior Investment Fraud

Congressional members have recently introduced two bills aimed at senior investment fraud. 

Sen. Herbert Kohl (D-WI), chairman of the U.S. Senate Special Committee on Aging, and Senators Robert Casey (D-PA) and Kirsten Gillibrand (D-NY) introduced the “Senior Investment Protection Act” (S. 1661), which targets the misleading use of senior and retiree designations.  Representatives Paul Hodes (D-NH) and Gwen Moore (D-WI) introduced the companion bill (H.R. 3551) in the House of Representatives.  The Act would provide grants to states to fund additional resources, education materials and staff dedicated to cracking down on meaningless titles used by unscrupulous investment professionals to mislead investors about their expertise in senior financial issues. The bill, an enhanced version of an earlier proposal, now includes a provision to hold insurance professionals to a heightened suitability standard when recommending insurance products to seniors.

The lawmakers also introduced the “Senior Investor Protection Enhancement Act” (S. 1659/ H.R. 3550) to enhance penalties for violations of securities laws involving senior victims.  It would strengthen regulators’ and law enforcement’s authority to penalize those who take advantage of the financial circumstances of the elderly.

(Descriptions are taken from a NASAA press release lauding these efforts.)

Personally, I would not expect either of these measures to be passed anytime in the near future.  The energy for regulatory reform appears low in D.C., and lobbying efforts have greatly reduced the possibility that the proposal for a consumer protection agency for credit products will ever be enacted.

September 11, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, September 10, 2009

Senate Banking Committee Holds (Another) Hearing on Madoff

Testimony Concerning the SEC's Failure to Identify the Bernard L. Madoff Ponzi Scheme and How to Improve SEC Performance, by Robert Khuzami, SEC Director, Division of Enforcement, and John Walsh, Acting Director, SEC Office of Compliance Inspections and Examinations.

Testimony by H. David Kotz, SEC Inspector General.

Both before the United States Senate Committee on Banking, Housing, and Urban Affairs
September 10, 2009.

September 10, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Former Officers of Marshall Holdings Settle SEC Charges of Improper Form S-8 Registration

On September 4, 2009 the United States District Court for the Central District of California entered Final Judgments by consent against defendants Richard A. Bailey and Florian R. Ternes, residents of Las Vegas, Nevada and former officers and directors of Marshall Holdings International, Inc. (Marshall Holdings).  The SEC had previously alleged that Marshall Holdings, while under the control of Bailey and Ternes, improperly registered shares issued under employee stock option programs on Form S-8 registration statements from 2003 through 2005. Marshall Holdings then received at least 85% of the proceeds from the shares' sales as payment of the options' exercise price.

Without admitting or denying the complaint's allegations, Bailey and Ternes 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 $341,001 and $259,000, respectively, plus prejudgment interest and, based upon their financial conditions, waiving payment of all such amounts. With this settlement, the action is fully resolved as to all defendants.

September 10, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Schedules Meeting to Discuss NRSROs & Flash Orders

The SEC will hold an Open Meeting on September 17, 2009.  The subject matter of the September 17 Open Meeting will be:

1. Nationally Recognized Statistical Rating Organizations (NRSROs)

A. Final Rule Amendments and Proposed Rule Amendments under the Credit Rating Agency Reform Act of 2006

The Commission will consider whether to adopt rules and propose other rules that impose additional disclosure and conflict of interest requirements on NRSROs in order to address concerns about the integrity of the credit rating procedures and methodologies.

B. References to Nationally Recognized Statistical Rating Organization Ratings in Commission Rules and Forms

The Commission will consider whether to eliminate references to credit ratings by NRSROs from certain rules and forms, and whether to re-open the comment period to solicit further comment on elimination of additional NRSRO references.

C. Credit Ratings and Rating Shopping Disclosure

The Commission will consider whether to propose amendments to Regulation S-K, and rules and forms under the Securities Act of 1933 (Securities Act), the Securities Exchange Act of 1934 (Exchange Act) and the Investment Company Act of 1940 (Investment Company Act) to require disclosure regarding credit ratings that a registrant uses in connection with a registered offering.

D. Rule 436(g)

The Commission will consider whether to issue a concept release and solicit comment on whether the Commission should propose to rescind Rule 436(g) under the Securities Act, in light of the disclosure regarding credit ratings being proposed in a companion release (see C above).

2. Flash Orders: Proposed amendment to Rule 602 of Regulation NMS

The Commission will consider a recommendation to propose an amendment to Rule 602 of Regulation NMS under the Exchange Act that would eliminate an exception for the use of flash orders, as well as other related issues. If adopted, the proposals would prohibit the practice of displaying marketable flash orders.

September 10, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Treasury Releases Report on 529 Savings Plans for College

The Treasury Dept. released today AN ANALYSIS OF SECTION 529 COLLEGE SAVINGS AND PREPAID TUITION PLANS, A REPORT PREPARED BY THE DEPARTMENT OF TREASURY FOR THE WHITE HOUSE TASK FORCE ON MIDDLE CLASS WORKING FAMILIES.  The Report discusses the benefits of 529s, the extent to which Section 529 plans serve various income groups, and how well the plans keep costs low so to maximize returns to savers. In addition, the report highlights exemplary practices and makes a set of recommendations on how to make Section 529 plans more effective and reliable.  Here are the principal recommendations:


Provision of Age-Based Index Funds. Age-based investment funds are very popular and are well suited to the circumstances of many middle class families that are saving for college. Yet five of the 48 states offering a direct sold savings plan do not offer an age-based fund. Moreover, only 23 of the 43 states that do offer an age-based fund offer it in the form of index funds. Historically, index funds have performed well relative to actively managed funds because they have low fees, and they are especially well suited for investors who do not wish to spend time acquiring information and evaluating the investment philosophy and track records of actively managed funds.
Eliminate Home-State Bias. If home-state bias in state tax and student aid policies were eliminated, the result would be more investment options for consumers, more intense competition between plans, and very likely lower fees. To the extent that there are economies of scale in plan administration, consumers will also benefit from additional scale and lower costs.
Per Beneficiary Contribution Limits. Currently there are effectively no limits on Section 529 account balances. Because 43 states offer plans open to residents in other states, a beneficiary can have accounts in as many as 44 states, each state with a limit exceeding $224,465. Putting an effective limit on Section 529 contributions requires making the limits per beneficiary rather than per beneficiary per state. Per beneficiary limits would reduce the tax benefits to high income families and, by lowering federal tax expenditures for the program, would potentially free up federal resources for education aid that could be targeted to low and middle income families. Per beneficiary limits would best be enforced at the time distributions are made.  Specifically, each distribution for a particular beneficiary’s qualified educational expenses would be divided into a principal portion counting against the contribution limit and an earnings portion. At such time as a beneficiary reaches the contribution limit, distributions would be nonqualified and subject to penalty.

September 10, 2009 in News Stories | Permalink | Comments (1) | TrackBack (0)

Wednesday, September 9, 2009

BofA Fights Back Against New York AG

The WSJ reports that Bank of America has responded by letter to the New York AG's charges that its proxy statement in connection with the Merrill Lynch merger was misleading and that it was hiding behind the attorney-client privilege.  On the contrary, according to BofB, the allegations are "spurious" and "the basic premise of the letter is simply wrong.  (The AG's letter is here.)  BofA also said that it has not asserted reliance on legal advice as a justification for its disclosures, because the attorneys wrote the disclosures without the participation of management.  Cuomo's office says it stands by its position.

In a filing with the federal district court judge that is reviewing the proposed BofA settlement with the SEC, the bank said it was prepared to litigate if the judge did not approve the settlement.  WSJ, BofA Says It's Not Hiding Behind Lawyers.

September 9, 2009 | Permalink | Comments (0) | TrackBack (0)

SEC Charges Former CEO of Globe Tel with Accounting Fraud

The SEC filed a civil action against Timothy J. Huff ("Huff"), the former chief executive officer ("CEO") of GlobeTel Communications Corp. ("GlobeTel" or the "company"), a publicly-traded company headquartered in Fort Lauderdale, Florida, now known as Sanswire Corp. According to the complaint, Huff participated in a scheme to fraudulently inflate GlobeTel's revenue from approximately May 2002 through October 2004. The complaint alleges that Huff's scheme involved the creation of millions of dollars in fake invoices and call detail records that appeared to reflect transactions between GlobeTel and telecommunications companies in Mexico, Brazil and the Philippines. The complaint further alleges that, as a result of Huff's scheme, GlobeTel issued materially false and misleading periodic reports, registration statements and press releases. Huff allegedly received compensation from the company of about $4.9 million and exercised stock options with a value of more than $1.5 million. The SEC charges Huff with violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and (B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13a-14 and 13b2-2 thereunder and seeks as relief permanent injunctions, civil penalties, disgorgement with prejudgment interest and an officer and director bar.

The SEC previously charged GlobeTel and a number of other former officers in connection with these and other securities law violations. The SEC also charged Huff for violations of Section 5(a) and 5(c) of the Securities Act of 1933. Without admitting or denying the allegations, Huff settled those charges by consenting to an injunction and $30,000 civil penalty.

September 9, 2009 in SEC Action | Permalink | Comments (3) | TrackBack (0)

Married Couple Settle SEC Insider Trading Charges

The SEC filed a settled insider trading action in the United States District Court in Dallas, Texas against Jeff L. Soisson and Karen Kaye Walker. The Commission alleges that Soisson and Walker, who are married, engaged in unlawful insider trading in the securities of i2 Technologies, Inc. 

According to the complaint: on August 11, 2008, JDA Software Group, Inc. announced a merger agreement with i2 Technologies. On November 4, 2008, Walker, who was JDA's communications director, learned through her employment that JDA was not going to proceed with the merger. This information was not public at the time. Walker immediately alerted Soisson of the news and, shortly afterwards, he sold approximately 40,000 shares of i2 Technologies stock — the couple's entire stake — that they had purchased several months earlier. After JDA announced on November 5, 2008 that it was effectively not proceeding with the merger, i2 Technologies' share price declined sharply, closing that day at $10.42 compared the previous day's closing price of $14.60. By selling his i2 Technologies shares in advance of the announcement, Soisson avoided losses of $163,224.

Without admitting or denying the complaint's allegations, Soisson and Walker have agreed to settle the Commission's charges by consenting to the entry of a final judgment that: (i) permanently enjoins them from further violations of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder; (ii) orders them to jointly and severally pay $163,224 in disgorgement and $3,973.89 in prejudgment interest; and (iii) orders them to jointly and severally pay a civil penalty of $163,224.

September 9, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 8, 2009

Madoff Feeder Fund Settles with Massachusetts Secretary of State

Fairfield Greenwich, Madoff Feeder Fund, Fined and Ordered to Make Restitution In Massachusetts Securities Case Settlement (On September 8, 2009).  Here is the final order.

September 8, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Ohio AG Announces $475 Million Settlement with Merrill Lynch Is Final

Ohio Attorney General Richard Cordray has announced that the $475 million settlement between the State Teachers Retirement System (STRS Ohio) and Merrill Lynch, first reported in January 2009, has been finalized. The settlement, in connection with a class action lawsuit, became final on August 4, 2009. The final court approval paves the way for the disbursement of funds in the largest settlement of its kind in a case brought by an Ohio entity.

The Ohio Attorney General’s Office represents STRS Ohio as lead plaintiff in the case. STRS Ohio and other investors in Merrill Lynch stock and certain preferred shares suffered substantial losses after the company wrote down billions of dollars in assets backed by subprime mortgages beginning in 2007.  In a complaint filed in May 2008, STRS Ohio alleged that practices of and statements by Merrill Lynch concerning collateralized debt obligations and related assets backed by sub-prime mortgages artificially inflated the market price for Merrill Lynch stock and certain preferred shares, injuring individuals and groups who were Merrill Lynch investors. Those who stand to recover damages as part of the class include investors who purchased Merrill Lynch common stock or certain preferred shares between October 17, 2006 and December 31, 2008.

This settlement is the largest settlement of a securities class-action suit in which an Ohio-based entity served as lead plaintiff since current federal procedures for such suits were established in 1995. It ranks in the top 15 of all such settlements in United States history.

The Attorney General's office also continues to press forward as lead plaintiff for the Ohio retirement systems and others in another separate case against Bank of America for alleged violations stemming from the handling of its merger with Merrill Lynch.

September 8, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Start-up Biotech Company with Securities Fraud

The SEC charged CellCyte Genetics Corporation, a biotechnology company based in Bothell, Wash., and its former CEO and Chief Scientific Officer, for falsely telling investors that the company's cutting-edge stem cell technology had been proven successful and was headed for human trials. In reality, the SEC alleges, the company merely had a license for a very early stage technology and no reasonable basis for its claims. According to the SEC, stock promoters hired by the company then spread the false information to investors, briefly driving the stock price to $7.50 before it plummeted back down to under a dime.

The SEC's action against CellCyte and Berninger alleges that CellCyte violated Sections 5(a) and 5(c) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 ("Exchange Act"), and Exchange Act Rules 10b-5, 12b-20, 13a-11 and 13a-13. The SEC alleges that Berninger violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and that Berninger aided and abetted CellCyte's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-11 and 13a-13 thereunder. CellCyte and Berninger agreed to a settlement, without admitting or denying the SEC's allegations, in which they each consented to a permanent injunction; Berninger also agreed to pay a $50,000 civil penalty and be barred from serving as an officer or director of a public company for five years.

In a separate litigated action, the SEC charges Reys with violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and with aiding and abetting CellCyte's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-11 and 13a-13 thereunder. The SEC's action against Reys further alleges that he made false statements about his past employment and that he concealed CellCyte's role in the spam campaign. The SEC seeks injunctive relief, a monetary penalty, and an order barring Reys from serving as an officer or director of a public company.

September 8, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges North Carolina Couple of Bilking Senior Citizens

The SEC announced fraud charges and an asset freeze against the perpetrators of a Charlotte, N.C.-based investment scheme that bilked $32.5 million from approximately 500 investors by falsely promising extraordinarily high returns.  The SEC alleges that Sidney S. Hanson and his wife Charlotte M. Hanson solicited investors at church gatherings and in other face-to-face meetings, persuading them to cash out their retirement funds and invest in so-called private loan agreements that the Charlotte couple offered through a dozen companies they controlled (collectively, Queen Shoals Entities). Through their Web site and a widespread sales force of at least 45 "consultants," the Hansons falsely promised investors that the investment contracts they were offering would generate them yearly returns ranging from 8 to 30 percent, and that their funds would be safe in a diversified portfolio of treasury bills, precious metals, and foreign currency.  According to the SEC's complaint, filed in U.S. District Court for the Western District of North Carolina, the Hansons and their network of consultants offered and sold approximately $32.5 million in private loan agreements to investors from August 2006 to June 2009.

Chief United States District Judge Robert J. Conrad, Jr. granted the SEC's request for an asset freeze and other emergency relief for investors on Sept. 3, 2009.

September 8, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Brooklyn Money Manager Settles SEC Charges of Running a Ponzi Scheme

Yet another Ponzi scheme!  The SEC charged a Brooklyn money manager with running a $40 million Ponzi scheme in which he promised approximately 800 investors guaranteed high returns from safe, liquid investments, but instead spent their money on real estate, his pornography mail order business, and other interests.

The SEC alleges that Philip G. Barry and his firms Leverage Group, Leverage Option Management Co., Inc, and North American Financial Services defrauded investors, including senior citizens and retirees, by selling securities in Leverage investment funds. According to the Commission's complaint, Barry provided fake account statements to investors that recorded growing account balances and concealed that Barry had not been trading securities at all for several years. Neither Barry nor any of his related firms is registered with the SEC in any capacity.

The SEC's complaint charges Barry, Leverage Group, Leverage Option Management Co., Inc, and North American Financial Services with numerous securities violations.  Barry, Leverage Group, Leverage Option Management Co., Inc, and North American Financial Services, without admitting or denying the allegations, consented to the entry of a judgment that will grant the SEC the full relief that it seeks, but will defer the determination of the financial amounts of the settlement until a later date. The agreement to resolve the SEC's action is subject to approval by the court. Barry also has consented to the issuance of a Commission order barring him from association with an investment adviser.

September 8, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

New York AG Wants BofA to Disclose Attorneys' Advice

The New York AG's office is not buying Bank of America's defense of reliance on counsel without disclosure of the attorneys' advice.  In a letter posted on its website today to BofA's outside counsel, the office stated:

We are at the stage in our investigation in which we are making charging decisions with respect to Bank of America and its executives. However, Bank of America's indiscriminate invocation of the attorney-client privilege is hindering this Office's ability to make fair and fully informed decisions as to what charges, if any, to bring and whether individual Bank of America officers should be charged. We cannot simply accept Bank of America's officers' naked assertions that they sought and relied on advice of counsel in good faith, and that, therefore, they should not be charged. Accordingly, we request that Bank of America reconsider its decision to prevent this Office from adequately probing these crucial Issues.

The letter goes on to state that there are at least four instances in the fourth quarter of 2008 where the bank and its senior officers failed to disclose material non-public information to its shareholders.  It goes on to describe "how Bank of America is improperly using the attorneyclient privilege as both a sword and a shield in defending each of its failures to disclose material information to its shareholders."

Finally, it concludes:

The law is clear that Bank of America and its officers cannot assert an advice of counsel defense for their decisions, and at the same time persist in refusing to disclose the substance of the conversations with counsel. Accordingly, we request that Bank of America reconsider its decision to prevent this Office from adequately probing these crucial issues. We provide you with this final opportunity to reconsider. Otherwise, we will proceed with our charging decisions without giving credit to the advice ofcounsel defenses that Bank ofAmerica has not permitted us to test.


September 8, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Sunday, September 6, 2009

Administration Announces Steps to Boost Participation in Retirement Savings Plans

The Administration announced new (modest) steps to complement the president’s legislative proposals to boost participation in IRAs and match retirement savings. The Department of the Treasury will:
  • Expand opportunities for automatic enrollment in 401(k) and other retirement savings plans,

    Make it easier for more than 100 million families to save a portion or all of their tax refunds,

    Enable workers to convert their unused vacation or other similar leave into additional retirement savings, and

    Help workers and their employers better understand the available options for tax-favored retirement saving through clear, easy-to-understand language.

September 6, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Geithner at the G-20 Meeting

Statement by Secretary Geithner at the G-20 Meeting of Finance Ministers and Central Bank Governors (Sept. 5, 2009):

Our strategy is to put in place stronger constraints on risk taking across the financial system, to bring comprehensive oversight to key institutions and to critical markets, such as derivatives, to reform the securities markets, and to provide the tools necessary to wind down firms that fail.

The fundamental test of reform is to make the system resilient enough to withstand future storms. 

Toward this effort, we outlined here the critical elements of a stronger international capital standard for banks.  Our objective is to reach agreement by the end of next year on a new standard that will raise capital and liquidity requirements and dampen rather than amplify future credit and asset price bubbles.  Financial activities which present the most risk should have higher capital requirements.  And the major globally active financial institutions, those firms that present the greatest risk of systemic crisis, should be held to more demanding standards.

A crucial part of financial reform is to change compensation practices.  On February 4 of this year, the President of the United States first outlined a set of proposals to reform compensation practices, both for institutions that receive exceptional financial assistance and for all banks.  These proposals were designed to constrain excess risk taking by making sure that compensation is tied to risk and long-term performance.  We have proposed, and the House has already passed, legislation to require firms to submit compensation practices to an approval by shareholders.  And the Federal Reserve and other bank supervisors will enforce these standards through the supervisory process. 

We welcome the support we found here in Europe and among the G-20 for compensation reform as part of comprehensive reform of the financial system.  Stronger capital standards are not a substitute for compensation reform.  Compensation reform is a necessary part of building a more stable system.

In addition to capital and compensation, more work needs to be done on over-the-counter derivatives and cross-border resolution frameworks.

Another critical part of the reform agenda is building stronger international financial institutions.  We must provide the resources and tools necessary to support development and provide insurance against future crises.  But this is not just about resources.  We need these institutions to play a greater role in preventing future crises, with stronger surveillance by the IMF.  We need the multilateral development banks to focus their efforts on the key priorities of fighting poverty, supporting higher productivity in agriculture, building the institutions necessary for private investment and growth, and facilitating the transition to a green economy. And we must reform the institutions' governance structures to better reflect the important role of emerging market and developing economies.

September 6, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Bondi on Arbitration of Mortgage-Backed Securities Suitability Claims

Securities Arbitrations Involving Mortgage-Backed Securities and Collateralized Mortgage Obligations: Suitable for Unsuitability Claims, by Bradley J Bondi, Counsel to SEC Commissioner; Adjunct Professor of Law, was recently posted on SSRN.  Here is an abbreviated version of the abstract:

Over the past two years, the world has witnessed the unfolding of the 'subprime mortgage crisis.' A steep rise in home foreclosures beginning in late 2006 caused a ripple effect throughout the economy, resulting in a dearth of liquidity across the lending sector. The largest rise in defaults occurred on so-called 'subprime' and other adjustable rate mortgages (ARMs). These types of mortgages were offered initially during a time of rising housing prices, often to unqualified borrowers, who thought that they would later have the opportunity to refinance at more favorable terms. As housing prices declined, however, refinancing became more difficult; defaults increased sharply as interest rates reset at higher rates on many of the mortgages. These events contributed to approximately 1.3 million foreclosures in 2007, an increase of approximately 75% from 2006. Foreclosures increased to 2.3 million in 2008, an increase of approximately 80% from 2007. Some experts have estimated that subprime defaults ultimately will reach between $200 billion and $300 billion before the crisis ends.

* * *
This short Article explores the unsuitability claim from its inception to its modern application. It then discusses unsuitability claims in the context of MBSs and CMOs and in the forum of arbitration. Finally, this Article briefly highlights some of the basic considerations of whether a safe harbor for recommendations of brokers to certain institutional customers would be appropriate to consider.

September 6, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Atkins & Bondi on SEC's Enforcement Program

Evaluating the Mission: A Critical Review of the History and Evolution of the SEC Enforcement Program, by Paul S. Atkins, Securities and Exchange Commission (SEC), and Bradley J Bondi, Counsel to SEC Commissioner; Adjunct Professor of Law, was recently posted on SSRN.  Here is the abstract:

The United States Securities and Exchange Commission (the 'SEC' or 'Commission') is nearing its seventy-fifth anniversary, a milestone that will be marked by reflection on the past and contemplation of the future. During this time of introspection, the Commission should take the opportunity to examine the manner in which it has reacted to the growth and changes in its regulatory authority and in the capital markets. One constant throughout its history has been the SEC’s need to balance competing interests. The SEC’s stated mission reflects this tension. Today, that mission is composed of three objectives: 'to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.'

Historically, the SEC’s mission has focused on investor protection. As the SEC and its regulatory powers have grown in response to the ever more complex and international financial services markets, the seemingly straightforward mission of investor protection has become more intricate and multidimensional, prompting questions such as, 'Who are the investors that should be protected‘ and 'How should they be protected?‘ After all, investors range in sophistication, size, activity, goals, needs, and other attributes. They include traditional individual and institutional investors in the securities markets, traders, and foreign entities seeking to invest in the United States. Choices that the SEC makes in its rulemaking and other activities can favor or disfavor one group of investors over another. A rule beneficial for one investor may be detrimental to another, depending on an investor’s investment strategy or changing circumstances. Indeed, because investors ultimately pay for inefficiencies arising from regulatory mandates through direct or indirect costs, diminished returns, and reduced choice, the rules must be made with careful analysis and deliberation. Congress acknowledged this potential harm in 1996 when it revised the SEC’s statutory mandate to expressly require the SEC 'to consider or determine whether an action is necessary or appropriate in the public interest' and to 'consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.'

This multidimensional aspect of investor protection applies not only to rulemaking, but also to enforcement matters. Each enforcement matter involves in some degree a balancing of competing interests, some at a pragmatic, case-specific level and others at a higher policy level. For example, in distributing money recovered in an enforcement action against a bankrupt company, the SEC conceivably could decline a distribution to all investors and instead choose a distribution that favors one class of investor over another, such as common stockholders over senior debtholders, which by virtue of their preferred position may have had greater recovery per dollar invested than did common stockholders, but still fell short of their desired recovery. In its overall enforcement program, the SEC’s decisions about resource allocation, charges to be brought, and relief to be sought may enhance the protection of one group of investors at the potential cost of another. Advancing a novel legal theory may protect the group of investors in a particular case, but have unintended detrimental consequences to investors as a whole.

The enforcement decisions of the SEC must be guided by the multidimensional nature of the SEC’s mission of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation. The difficult choices of balancing conflicting interests must be guided by the transcendent principles of predictability, fairness, and transparency, culminating in the rule of law. These principles are the defining characteristics of the U.S. markets.

In order to assess the SEC’s application of these principles to its enforcement decisions, this Article investigates the shifting focus of the SEC’s enforcement program from its inception to the present day. The Article explores the development and usage of the SEC’s statutory enforcement powers in the context of due process and fairness. Finally, the Article calls for the Commission to appoint an independent advisory committee to conduct a detailed review and evaluation of the policies and procedures of the enforcement program in light of the changes in the SEC’s statutory authority over the course of the last three decades.

September 6, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Verret on the Bailout

Treasury Inc.: How the Bailout Reshapes Corporate Theory and Practice, by J.W. Verret, George Mason University - School of Law, was recently posted on SSRN.  Here is the abstract:

Corporate law theory and practice considers shareholder relations with companies and the implications of ownership separated from control. Yet through the TARP bailout and the government's resultant shareholding, ownership and control at many companies has merged, leaving corporate theory and practice for the financial and automotive sectors in chaos. The government's $700 billion bailout is a unique historical event; not merely because of its size, but because of a resulting ripple through corporate scholarship and practice. This article builds on the author's four testimonies before Congress during the financial crisis and implementation of the TARP bailout and his consultation for the Inspector General for TARP. It updates the six central theories of corporate law to reveal that none function adequately when considered with a controlling government shareholder that enjoys sovereign immunity from corporate and securities law. From agency theory and nexus-of-contracts thought to the shareholder/director primacy debate, even to notions of progressive corporate law and the team production model, existing theory breaks down when a government shareholder is present. The article also develops an economic model of incentives facing political decision-makers in exercise of their shareholder power. After considering corporate theory, the article offers predictions for how Treasury's stock ownership reshapes the practice of corporate law. In short, TARP will result in a tectonic shift for current understanding about insider trading, securities class actions, share voting, and state corporate law fiduciary duties. The article closes with three recommendations. First, that Treasury take frozen options, an invention explained in the text, rather than equity. Second, that Congress pass legislation establishing a fiduciary duty for Treasury to maximize the value of its investment, a suggestion that has contributed to Sens. Warner and Corker's introduction of implementing legislation. Third, that Treasury adopt a sales plan for closing out its TARP holdings.

September 6, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)