Securities Law Prof Blog

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

Thursday, September 24, 2009

House Oversight Hearing on Credit Rating Agencies Postponed

The Chairman of the House Oversight Committee postponed a scheduled hearing on the credit rating agencies, saying he wanted to give Moody's time to respond to charges by a former employee that the agency continues to inflate ratings.  The Wall St. Journal posted on its website Eric Kolchinsky's memo to the Moody's Chief Compliance Officer.  WSJ, House Panel Postpones Hearing On Credit-Rating Firms.

September 24, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Alleges Pump and Dump Scheme Involving ConnectAJet. com Stock

The SEC announced today that on September 18, 2009, it sued several individuals and entities, including, Inc., its president and chief executive officer, Martin Cantu, Cantu's father Martin M. Cantu, registered representative Stephen Fayette, and stock promoter Timothy Page. The SEC alleged that the defendants implemented a scheme to funnel, Inc. shares into the public market at great profit to themselves when no registration statement was filed or in effect.

According to the complaint,, Inc., of Austin, Texas, issued 30 million shares of stock in an illegal, unregistered offering to certain penny stock promoters, including Testre LP and Verona Funds LLC, companies owned and controlled by Page, a resident of Malibu, California. To pump up demand for the stock, Cantu and, Inc. launched a nationwide advertising campaign, issued false press releases and published misleading web content. The complaint further alleges that the press releases falsely stated that Inc. had created a real-time, online booking system for private jet travel. Testre LP, Verona Funds LLC, and an entity owned by Martin M. Cantu, Firenze Funds, LLC, then allegedly sold their stock into the public market at grossly inflated prices for millions of dollars in profits. Fayette, of Sarasota, Florida, allegedly facilitated the scheme by liquidating, Inc. shares on behalf of multiple clients.

The SEC alleges that by the above-mentioned conduct, the defendants violated the registration provisions of the Securities laws, Section 5 of the Securities Act of 1933. In addition, the SEC alleges that Cantu and, Inc. committed securities fraud, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The SEC is seeking permanent injunctions, civil penalties, disgorgement of ill-gotten gains and penny stock bars. Additionally, the complaint seeks an officer and director bar against Cantu, and the return of "ill-gotten gains" from four relief defendants.

September 24, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Former American Commercial Lines CFO Settles Reg FD Charges

The SEC settled charges against Christopher A. Black (Black), the former chief financial officer of American Commercial Lines, Inc. (ACL), a Delaware marine transportation and manufacturing company.  The SEC alleged that Black, while acting in his capacity as the company's designated investor relations contact and without informing anyone at ACL, selectively disclosed material, nonpublic information regarding ACL's second quarter 2007 earnings forecast to a limited number of analysts without simultaneously making that information available to the public. As a consequence, according to the SEC, Black aided and abetted ACL's violation of Regulation FD and Section 13(a) of the Securities Exchange Act of 1934 (Exchange Act).  Without admitting or denying the allegations in the complaint, Black consented to the entry of a final judgment requiring him to pay a $25,000 penalty.

More specifically, the complaint alleged that on Monday, June 11, 2007, ACL issued a press release projecting second quarter earnings in line with ACL's first quarter earnings of approximately $.20 per share. The complaint further alleges that on Saturday, June 16, 2007, Black sent an e-mail from his home to the eight sell-side analysts who covered the company. In addition, the complaint alleges that Black's e-mail stated that ACL's earnings per share for the second quarter "will likely be in the neighborhood of about a dime below that of the first quarter," effectively cutting in half ACL's second quarter earnings guidance. The complaint also alleged that Black's selective disclosure and resulting analysts' reports triggered a significant drop in ACL's stock price. Lastly, the complaint alleged that on Monday, June 18, the first trading day after Black's e-mail to analysts, ACL's stock price dropped 9.7% on unusually heavy volume.

Black also consented to the entry of an order in a follow-on administrative proceeding directing him to cease and desist from violating Regulation FD and Section 13(a) of the Securities Exchange Act of 1934.

In determining not to bring an enforcement action against ACL, the Commission considered several factors. Prior to the June 16, 2007 disclosure by Black, ACL cultivated an environment of compliance by providing training regarding the requirements of Regulation FD and by adopting policies that implemented controls to prevent violations. Further, Black alone was responsible for the violation and he acted outside the control systems established by ACL to prevent improper disclosures. Moreover, once the illegal disclosure was discovered by ACL, it promptly and publicly disclosed the information by filing a Form 8-K with the Commission the same day. In addition, ACL self-reported the conduct to the staff the day after it was discovered and the company provided extraordinary cooperation with the staff's investigation. Finally, the company took remedial measures to address the improper conduct, including the adoption of additional controls to prevent such conduct in the future.

September 24, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Perot Systems Employee with Inside Trading Involving Dell's Tender Offer

The SEC today charged Perot Systems employee Reza Saleh with insider trading around the public announcement of Dell Inc.'s tender offer for Perot Systems earlier this week.  The SEC alleges that Saleh made increasingly large purchases of Perot Systems call options contracts based on material, non-public information that he learned in the course of his employment and, immediately following the tender offer announcement on Monday, September 21, Saleh sold all of the call option contracts in the accounts and reaped approximately $8.6 million in illicit profits.

Later that same morning, SEC staff with assistance from the Options Regulatory Surveillance Authority identified Saleh as a suspicious trader.

The SEC's complaint charges that Saleh violated the anti-fraud provisions of the Securities Exchange Act of 1934, including specific provisions that prohibit trading while in possession of material nonpublic information about tender offers. In addition to seeking an emergency asset freeze, the SEC has sought a preliminary injunction and a final judgment permanently enjoining Saleh from future violations of the relevant provisions of the federal securities laws and ordering him to pay financial penalties and disgorgement of ill-gotten gains with prejudgment interest.  The SEC's complaint also names Amir Saleh of Richardson, Texas, as a relief defendant, in order to recover trading profits he received as a co-account holder on one of Reza Saleh's brokerage accounts.

September 24, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 23, 2009

SEC Staff Advice on Dealing with SEC Comment Letters

An SEC official gave some advice on how to respond to a comment letter from the agency on the financial statements.  First thing to do is to pick up the phone and call the agency -- he says they welcome dialogue., How to Answer an SEC Comment Letter.

September 23, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Geithner on Financial Regulatory Reform

Treasury Secretary Timothy F. Geithner, Written Testimony before the House Financial Services Committee, on Financial Regulatory Reform (Sept. 23, 2009):

At a minimum, reform must achieve these critical objectives:

It must provide substantial new protections for consumers and investors.
It must create a more stable, safer financial system, one less prone to crisis.
And it must safeguard American taxpayers from having to bear the costs of battling future crises.
* * *
The need for a dedicated, consolidated consumer protection agency is clear. The current consumer protection system failed to protect consumers, responsible providers, or market efficiency and innovation. 

* * *
[W]e cannot allow firms to reap the benefits of explicit or implicit government subsidies without very strong government oversight. We must substantially reduce the moral hazard created by the perception that these subsidies exist; address their corrosive effects on market discipline; and minimize their encouragement of risk-taking. So, for example, we cannot permit weak regulation of government-sponsored enterprises like Fannie Mae and Freddie Mac that accumulate trillions of dollars of exposure that is implicitly backed by the taxpayer.  We cannot again permit our largest investment banks or other firms to operate without real consolidated supervision, yet obtain government assistance when they collapse.

September 23, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 22, 2009

Schapiro's Testimony on OTC Derivatives

Testimony Concerning the Over-the-Counter Derivatives Markets Act of 2009, by SEC Chairman Mary L. Schapiro, Before the House Committee on Agriculture, September 22, 2009

September 22, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC May Expand Charges Against BofA

The SEC says that it will expand its investigation into alleged wrongdoing at Bank of America and may seek to bring additional charges. WPost, SEC Gets Tougher With Bank of America.

September 22, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Continues Temporary Rule Requiring MM Funds to Report Information to SEC

The SEC, on September 18, adopted temporary Rule 30b1-6T under the Investment Company Act of 1940 to require money market funds to report portfolio holdings and valuation information to the Commission under certain circumstances. The new rule continues substantially similar reporting requirements of the Temporary Guarantee Program for Money Market Funds established by the Department of the Treasury, which expires today. The rule was effective on September 18, 2009, and will expire on September 17, 2010. The Commission also requested comment on the temporary rule, and the comment period will end on Oct. 26, 2009.

September 22, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Fines Underwriters for Miscommunications to Customers in Vonage IPO

FINRA fined Citigroup Global Markets, UBS Securities and Deutsche Bank Securities a total of $425,000 — and ordered the firms to make payments to customers that could total $420,000 — in connection with the firms' failure to adequately supervise communications with their customers in the initial public offering (IPO) of Vonage, LLC in May 2006.

 FINRA found that each of the firms failed to establish adequate systems and procedures to supervise the outsourcing of communications with customers about the sale of securities in the Vonage IPO. Each of the firms was a lead underwriter for the Vonage IPO, which included a directed share program (DSP) under which the firms sold approximately 4.2 million shares to Vonage customers through accounts the customers had opened at the firms.  FINRA found that because of the firms' supervisory failures, when a problem occurred at the outside company that caused numerous customers to receive incorrect communications, the firms were unable to respond satisfactorily.

As a consequence of the firms' failures, when an error by an employee of the outside company resulted in certain customers receiving communications stating that they had not received IPO allocations when in fact they had, the firms were unable to take prompt and effective action to respond to the problem. By the time some customers learned several days later that they had been allocated shares, the price of Vonage stock had declined significantly from the initial IPO price. Nevertheless, those customers were required to pay the higher IPO price for their shares and incurred losses when they later sold those shares.

 The restitution payments that FINRA ordered will compensate the customers for the difference between the $17 per share IPO price they paid and the lower price of Vonage stock at the time they learned that they had been allocated shares. Pursuant to the terms of the settlement, the firms will notify eligible customers.

September 22, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Professor Gordon Suggests Retail and Institutional Investors Should be Treated Differently in MMFunds

Professor Jeffrey Gordon (Columbia) has filed a Comment Letter (Download Gordon SEC MMF Corr Comment Letter 091509) with the SEC in response to its proposal to reform money market funds.  The SEC sought comment on proposed reforms that, among other things, would force money-market funds to have part of their portfolios made up of highly liquid investments, be restricted to owning only the highest-quality securities and reduce their exposure to long-term debt.  Professor Gordon labels the proposals “quite modest.” Instead, he advocates a division between MMFs sold to retail investors and institutional MMFs sold to corporations, governments, and pension funds. The former would be covered by deposit insurance to ensure a fixed NAV. The latter, he said, should “give up the promise” of a fixed NAV and reduce the risk of a run on withdrawals since there would be no “buck” to be broken. 

September 22, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, September 21, 2009

BofA Pays $425 Million to End Government Guarantee

Bank of America Corporation announced that it has reached an agreement with the U.S. Government to terminate its term sheet with respect to the guarantee of up to $118 billion in assets by the U.S. Government. The term sheet was executed in connection with Bank of America's acquisition of Merrill Lynch in January 2009.  Under terms of the agreement, Bank of America will pay $425 million to the Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation.  Bank of America also announced that it had received FDIC approval to exit the debt guarantee program under the FDIC's Temporary Liquidity Guarantee Program (TLGP).

According to the announcement, "The decisions to terminate the asset guarantee term sheet and exit the debt guarantee program are the latest in a series of steps taken by Bank of America to reduce its reliance on government support and return to normal market funding."


September 21, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC & Regions Bank Settle Offering Fraud Allegations

The SEC charged Alabama-based Regions Bank for its role in an offering fraud that victimized thousands of investors predominantly in Latin America.  The SEC alleges that Regions Bank and its predecessor were a key selling point in the investment scheme because the relationship with a U.S. bank gave Latin American investors the impression that their funds would be secure.  Regions Bank agreed to settle the SEC's charges by consenting to the entry of a cease-and-desist order and payment of a $1 million penalty that will be placed into a Fair Fund to compensate harmed investors in the USPT offering fraud.

The SEC previously charged unregistered broker-dealers U.S. Pension Trust Corp. and U.S. College Trust Corp. (USPT) for deceptively charging investors exorbitant, undisclosed commissions and fees in the sale of mutual funds through a series of investment plans. Regions Bank served as trustee of the investment plans.

According to the SEC's complaint, filed in the Southern District of Florida, Regions Bank and its predecessor Union Planters Bank served as trustee of investment plans since October 2001. The investment plans gave investors a choice of making either annual contributions or a single, lump-sum contribution. Until March 2006, USPT did not disclose to investors that it subtracted substantial amounts of their contributions for payment of sales commissions and other fees. USPT deducted up to 85 percent of initial contributions in the annual plans and as much as 18 percent in the single contribution plans. The SEC alleges that USPT has illicitly raised at least $255 million from more than 14,000 investors.

The SEC alleges that Regions Bank allowed USPT to use its name in marketing materials, prepared a promotional video that was posted on USPT's Web site, and sent representatives to Latin America to meet with sales agents and prospective investors to explain Regions Bank's role as trustee. Regions entered into individual trust relationships with all investors, processed their contributions, and purchased the selected mutual funds for them.

Regions Bank stopped accepting new USPT investor trust relationships in January 2008, and stopped accepting additional contributions under existing plans in August 2009.

September 21, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

GAO: AIG's Ability to Repay the Government Unclear at this Time

The GAO released a report TROUBLED ASSET RELIEF PROGRAM Status of Government Assistance Provided to AIG.  From the summary:

While federal assistance has helped stabilize AIG’s financial condition, GAO-developed indicators suggest that AIG’s ability to restructure its business and repay the government is unclear at this time. Indicators of AIG’s financial risk suggest that since AIG reported significant losses in late 2008, AIG’s operations, with federal assistance, have begun to show signs of stabilizing in mid 2009. Similarly, after a declining trend through 2008 and early 2009, indicators of AIG insurance companies’ financial risk suggest improved financial conditions that were largely results of federal assistance. Indicators of AIG’s repayment of federal assistance show some progress in AIG’s ability to repay the federal assistance; however, improvement in the stability of AIG’s business depends on the long-term health of the company, market conditions, and continued government support. Therefore, the ultimate success of AIG’s restructuring and repayment efforts remains uncertain. GAO plans to continue to review the Federal Reserve’s and Treasury’s monitoring efforts and report on these indicators to determine the likelihood of AIG repaying the government’s assistance in full and the government recouping its investment.

September 21, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Seton Hall Symposium on The Global Economic Crisis

The Seton Hall Law Review is sponsoring a Symposium entitled "Securities Regulation and the Global Economic Crisis: What Does the Future Hold?", which will take place on Friday, October 30, 2009, at Seton Hall University School of Law in Newark, NJ.  The event is free and open to all and offers six (6) New York CLE credits for full-day attendance.

Further information about the Symposium, a list of presenters, and a link to register can be found at  

September 21, 2009 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Sunday, September 20, 2009

Heyman on Investigating Corporate Malfeasance

Bottom-Up: An Alternative Approach for Investigating Corporate Malfeasance, by Susan Schwab Heyman, Benjamin N. Cardozo School of Law/Yeshiva University, was recently posted on SSRN.  Here is the abstract:

At least since the Enron scandal, the government has focused intensive efforts on developing a strategy to investigate and prosecute corporate malfeasance. The prevailing method has been a “top-down” approach: government agents provide companies with incentives to conduct internal investigations, coerce employee cooperation, and disclose privileged information. Although many have expressed concern about violations of constitutional rights and erosions of privilege, the current system faces another critical problem: the top-down strategy will become less effective at unraveling corporate fraud as employees learn that it is not in their interest to cooperate. Further, the approach aims deterrence at the wrong people – it does not focus on high corporate officials who often orchestrate and tolerate the wrongdoing, but instead focuses on employees who participate in the unlawful acts. A “bottom-up” approach, long used by government agencies in rooting out criminal behavior in other areas, particularly drug enforcement, would encourage employee cooperation and focus enforcement on the appropriate actors. There is every reason to believe that a bottom-up strategy would be an effective supplement to the top-down approach that currently predominates in the corporate world. Indeed, the first and to date only internal investigation completed using an amnesty program which protected cooperating employees from adverse employment actions has proven successful in encouraging employee cooperation and unraveling the web of corporate fraud.

September 20, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Baer on Corporate Compliance

Governing Corporate Compliance, by Miriam H. Baer, Brooklyn Law School, was recently posted on SSRN.  Here is the abstract:

In light of the financial meltdown of 2008, it is reasonable to question whether the prior decade’s emphasis on corporate compliance - the internal programs that corporations adopt in order to educate employees, improve ethical norms, and detect and prevent violations of law - has been fruitful. This Article contends that the key problem with compliance is that we regulate it through an adversarial system that pits federal prosecutors against corporate defense counsel, fueling distrust between corporate entities and the government, and between the corporate employees and the internal monitors tasked with ensuring compliance. Despite this adversarial atmosphere, a number of scholars have suggested that corporate compliance is an example of a more collaborative regulatory approach known as “New Governance.” This Article challenges that notion, arguing that the government’s adversarial stance all but eliminates the experimental and collaborative approach championed by the New Governance movement. The Article further concludes that a New Governance model of compliance regulation is unlikely to take hold. Nevertheless, policymakers should consider New Governance’s administrative stance in lieu of the more punitive, “war-driven” approach that adjudication usually encourages.

September 20, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Hazen on Regulating OTC Derivatives

Filling a Regulatory Gap: It is Time to Regulate Over-the-Counter Derivatives, by Thomas Lee Hazen, University of North Carolina at Chapel Hill - School of Law, was recently posted on SSRN.  Here is the abstract:

The recent credit crisis has highlighted the lack of regulation for credit default swaps that has both magnified and contributed to market failure that began in the latter half of 2008. Securities regulation covers most types of investment contracts, but currently does not include non-securities based derivative contracts such as credit default swaps. The unique aspect of credit default swaps is that unlike other risk shifting contracts such as insurance, they are not regulated. The regulatory framework lacks a consistent approach in dealing with risk shifting and hedging devices. The degree of regulation is based on the form of the instrument rather than on the substance of the risk shifting transactions. This essay is an abridged and updated version of a 2005 article that questioned the wisdom of deregulation in the derivatives markets that has taken place since the early 1990s.

September 20, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)