January 23, 2009
Regulatory Reform Symposium at UCincinnati April 3
University of Cincinnati College of Law Corporate Law Center and Law Review's Twenty Second Annual Symposium:
New Models of Regulating the Financial Markets: The SEC's Future as It Turns 75
April 3, 2009 8:00 a.m. – 4:00 p.m.
The U.S. financial markets and financial institutions have long enjoyed a reputation for promoting capital formation, market stability, and investor protection. The financial meltdown and other market events, however, have renewed criticisms of the U.S. regulatory model as outmoded, anticompetitive, and ineffective. In addition, the collapse of major financial services companies and the Bernard Madoff scandal have seriously damaged the Securities and Exchange Commission’s reputation as regulator of the securities markets.
The 75th Anniversary of the Securities and Exchange Commission marks an appropriate occasion for an examination of these issues. The Symposium’s speakers will address proposals for regulatory reform from a variety of perspectives, both academic and practical.
James D. Cox, Brainerd Currie Professor, Duke University School of Law
Roberta S. Karmel, Centennial Professor, Brooklyn Law School
Jerry W. Markham, Professor of Law, Florida International University
Adam C. Pritchard, Professor of Law, University of Michigan School of Law
Janis Sarra, The University of British Columbia, Faculty of Law
William K. Sjostrom, Jr., Salmon P. Chase College of Law, Northern Kentucky University
Jonathan S. Sokobin, Director of the Office of Risk Assessment, Securities and Exchange Commission
Cynthia A. Williams, Osler Chair in Business Law, Osgoode Hall Law School, York University
CLE Credit Applied For and Is Expected.
The Event will be Webcast.
January 22, 2009
Former Cablevision Employees Settle "Prepay" Charges
The SEC filed a settled civil action against Catherine R. McEnroe, Noreen O'Loughlin and Martin von Ruden in United States District Court for the Eastern District of New York, alleging improper expense recognition at Cablevision Systems Corporation (Cablevision). The complaint alleges that from at least 1999 through mid-2003, contrary to GAAP, Cablevision recognized certain costs as current expenses when, in fact, the expenses should not have been recognized in those periods. These improper "prepays" occurred because employees prepared and submitted inaccurate invoices and other documents in order to accrue expenses earlier than when they should have been accrued. These improperly recognized expenses were reflected in Cablevision's books, records and accounts and caused Cablevision to overstate expenses in earlier fiscal periods and understate expenses in later periods. As a result, Cablevision's reports to the public and the Commission for the period 1999 through mid-2003 were inaccurate and caused Cablevision to restate its financial statements filed with the Commission for the period 2000 through the first nine months of 2003.
The Commission's complaint alleges that McEnroe, O'Loughlin and von Ruden, while serving as officers and managers of significant business units of Cablevision, directed or were aware of improper prepays and signed inaccurate payment authorization forms that caused improper prepays, and that they thereby violated Section 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 13b2-1 thereunder. Without admitting or denying the allegations in the Commission's complaint, McEnroe, O'Loughlin and von Ruden consented to final judgments ordering them to pay civil penalties of $30,000, $15,000, and $15,000, respectively.
In a related settled cease-and-desist proceeding against them, and also without admitting or denying the Commission's factual findings in its Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order, McEnroe, O'Loughlin and von Ruden each also consented to an administrative order to cease and desist from committing or causing any violations and any future violations of Exchange Act Section 13(b)(5) and Rule 13b2-1 thereunder.
Separately, the Commission today announced that it instituted settled cease-and-desist proceedings against Cablevision for improper expense recognition. For further information, see Release No. 34-59277 / Jan. 22, 2009.
GM Settles Pension Disclosure Charges
The SEC filed settled charges against General Motors Corporation (GM) relating to its disclosures concerning two pension accounting estimates and its projected cash contributions to its pension plans, as well as errors in its accounting for derivatives and various other transactions. According to the SEC's complaint, filed in federal court in the District of Columbia, GM violated the issuer reporting, books-and-records, and internal controls provisions of the federal securities laws.
With regard to GM's pension plans, the complaint alleges that GM made material misstatements or omissions in its 2002 Form 10-K concerning the disclosure of two critical pension accounting estimates - its pension discount rate for 2002 and its expected return on pension assets for 2003.
According to the complaint, GM had stated publicly in an August 2002 pension conference call with analysts that it used a duration matched approach to select its discount rate, but failed to disclose in its 2002 Form 10-K that its use of a 6.75% discount rate was developed from a non-duration matched approach, which was materially higher than the rate developed from a duration matched model. In addition, the complaint alleges that with respect to the discount rate, GM maintained inadequate internal controls to provide reasonable assurance that transactions would be recorded as necessary to permit preparation of financial statements in compliance with generally accepted accounting principles, including a process for reviewing and adopting discount rate recommendations to provide reasonable assurance that the recommendation was developed in a reasoned and unbiased manner.
The complaint further alleges that since at least the mid-1980s, GM's expected return assumption had never been higher than its most recent 10 year average return. In its 2001 Form 10-K and during the August 2002 pension call, GM referred to its rolling 10 year historical average return of 10% or better as support for the reasonableness of its 10% expected return assumption. In its 2002 Form 10-K, GM did not state that its most recent 10 year average return was below its new assumption set at year-end. According to the complaint, if GM had used an expected return consistent with its 10 year historical average, it would have reduced its 2003 pre-tax earnings by $680 million.
The complaint also alleges that in that same 2002 Form 10-K and in three 10-Q filings, GM failed to disclose material information about the timing and amount of its projected cash contributions to its pension plans to avoid variable rate premiums to the Pension Benefit Guaranty Corporation (PBGC) and the impact such contributions might have on its liquidity and capital resources.
With regard to GM's other transactions, the SEC's complaint alleges that GM made material misstatements that included improperly accounting for a $97 million transaction involving the sale and repurchase of precious metals inventory in its 2000 Form 10-K; prematurely recognizing in its 2001 Form 10-K and Q3 2001 Form 10-Q a $100 million signing bonus it received for entering into a railroad shipping contract; and improperly accounting for two types of derivatives contracts - a Canadian dollar mirror hedge strategy and "normal purchase normal sale" arrangements of commodities - in its 2004 Form10-K. The complaint also alleges that GM maintained inadequate internal controls in these areas and maintained inaccurate books and records in connection with these transactions.
GM simultaneously settled the charges, without admitting or denying the allegations, by consenting to the entry of a final judgment permanently enjoining it from violating Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-13 thereunder. The settlement is subject to court approval.
January 21, 2009
SEC Gets Emergency Action Against Another Alleged Ponzi Scheme
Yet another alleged ponzi scheme -- On January 20, 2009, the U.S. District Court for the Northern District of Texas, Lubbock Division, appointed a receiver and froze the assets of a former bail bondsman who is purportedly managing a hedge fund worth at least $45 million on behalf of 31 individual investors. Defendant Rod Cameron Stringer claims that his stock trading strategy has generated annual returns as high as 61%, and total returns in excess of 600%. However, according to the SEC, Stringer has been operating a fraudulent scheme since at least 2001, during which he has misappropriated millions of dollars of investor funds to support an extremely lavish lifestyle and to make Ponzi payments to earlier investors with new investor funds. Many of Stringer's investors are elderly.
Specifically, the complaint alleges that defendant Stringer used less than 20% of the investors' funds to engage in securities transactions, and those transactions have resulted in substantial losses, not gains, as reported to investors. While Stringer's alleged fraudulent scheme began as early as 2001, an expedited investigation by the Federal Bureau of Investigation (FBI) and the Commission focused on Stringer's activities since January 2007. Since that time, the complaint alleges that Stringer raised at least $8.5 million from approximately 12 -15 investors. Contrary to Stringer's representations, only approximately $1.5 million of this amount made its way into three securities brokerage accounts, each of which is maintained in Stringer's personal name. The exact disposition of the remaining funds is presently unknown, but it is clear that Stringer used substantial amounts of investor funds to, among other things, finance a horse racing partnership, purchase a luxury boat, build a swimming pool at his office, purchase several pieces of jewelry, pay off mortgages on at least two houses, and purchase several expensive cars and trucks. Further, since January 2007, the complaint alleges that Stringer has used at least $2.4 million of the $8.5 million invested by his hedge fund clients to pay distributions and purported profits to other investors
The Court has frozen Stringer's assets and appointed a receiver to recover and conserve assets for the benefit of defrauded investors.
SEC Issues Opinion in Revoking Registration for Failure to File Reports
The SEC issued an opinion that upheld the ALJ's decision ordering that the registration of NATURE’S SUNSHINE PRODUCTS, INC. common stock be revoked under section 12(j) for failure to file any required 10-K and 10-Q reports since it filed its 10-k report for December 31, 2004. In its opinion the Commission reviewed the factors it takes into account in determining whether revocation is appropriate and rejected the company's argument that revocation amounted to a "draconian" sanction that operated as a "corporate death penalty."
SEC Seeks Emergency Relief Against Missing Hedge Fund Manager
It's hard keeping track of all the ponzi schemes that wealthy investors fell for, but you may recall that Sarasota Florida's Arthur Nadel, a hedge fund manager, vanished recently and so apparently did his clients' $350 million. NYDailyNews, Another Bernard Madoff? Hedge-fund manager Arthur Nadel vanishes with $350 million of clients' cash. Today the SEC went to court again to close the door after the horse was gone. According to its release, the SEC filed a civil injunctive action in the United States District Court for the Middle District of Florida charging Arthur Nadel with fraud in connection with six hedge funds (the "Funds") for which he acted as the principal investment advisor. According to the Commission's complaint, Nadel provided false and misleading information for dissemination to investors about the Funds' historical returns and falsely overstated the value of investments in the Funds by approximately $300 million. In contrast, the Funds appear to have total assets of less than $1 million. Nadel has been missing since January 14, 2009.
The Commission's complaint also alleges that defendant Nadel recently transferred at least $1.25 million from two of the funds to secret bank accounts that he controlled.
The complaint seeks a temporary restraining order, an asset freeze, and preliminary injunction against Nadel and preliminary injunctions and asset freezes against Scoop Capital and Scoop Management. In addition, the complaint seeks permanent injunctions, disgorgement plus prejudgment interest, and civil money penalties against all the defendants. Without admitting or denying the allegations of the complaint, defendants Scoop Capital and Scoop Management consented to the entry of, among other things, preliminary injunctions, asset freezes, and the appointment of a Receiver.
The complaint also names as relief defendants two investment management companies, Valhalla Management, Inc. and Viking Management, LLC, and the six Funds, Scoop Real Estate, L.P., Valhalla Investment Partners, L.P., Victory IRA Fund, Ltd., Victory Fund, Ltd, Viking IRA Fund, LLC, and Viking Fund, LLC. The complaint seeks disgorgement plus prejudgment interest against each of the relief defendants. Without admitting or denying the allegations of the complaint, the relief defendants consented to asset freezes and the appointment of a Receiver.
Also on January 21, United States District Judge Richard A. Lazzara granted all of the emergency relief requested by the SEC and appointed a Receiver.
January 18, 2009
Harris on Contested Corporate Elections
The Quiet Revolutionary: The Absence of Retail Investors in Contested Corporate Elections, by Lee A. Harris, University of Memphis - Cecil C. Humphreys School of Law, was recently posted on SSRN. Here is the abstract:
Shareholder-led campaigns to install new leadership at U.S. firms occur too rarely and, when they do occur, are led by the same boring, cast of characters too often. This Article presents empirical evidence that the system of contested corporate elections is broken. When it comes to the interests of retail investors-i.e., individuals usually with small stakes in a particular firm-the evidence suggests that contested corporate elections are virtually off-limits. Retail investors almost never launch a campaign and their interests are not represented well by those who do. This Article presents empirical evidence that the lop-sided nature of the current structure reduces the number of contested corporate elections overall, particularly those that, but for the rules, would originate from retail investors.
Henderson on Two Visions of Corporate Law
Two Visions of Corporate Law, by M. Todd Henderson, University of Chicago - Law School, was recently posted on SSRN. Here is the abstract:
In a recent paper, Professor Robert Ahdieh argues that the debate about whether corporate law federalism leads to a race to the top or the bottom is pointless because state corporate law has little to do with the quality of corporate governance. Ahdieh thinks that markets, like those for corporate control and labor, are what make corporate governance what it is, not state competition for corporate charters.
This essay, which will appear in the George Washington Law Review as part of a colloquy on Ahdieh's thought-provoking paper, argues that the race debate matters because while the market for corporate control disciplines managers, it is competition among states that disciplines states from distorting the market for corporate control.
After showing that the race debate matters, the essay then tries to explain the persistence and ideological valence of the debate. Why is it that the debate continues despite innumerable empirical and theoretical studies on both sides, and why is it that defenders of the federalism model are mostly conservatives and critics are mostly liberals? The answer to both questions is that the race debate is really a conflict between two visions of corporate law held by these groups. Using the framework developed by Thomas Sowell, the essay shows how the split in the academic community about the optimality of the corporate law model can be explained by one's faith in experts (what Sowell calls the "unconstrained" vision) or by one's faith in processes, like markets (what Sowell calls the "constrained" vision). The essay then offers some preliminary thoughts on the implications of this description for corporate law scholarship and some ideas on how to move the debate forward.
Choi & Silberman on Transnational Litigation
Transnational Litigation and Global Securities Class Actions, by Stephen J. Choi, New York University - School of Law, and Linda Silberman, New York University School of Law, was recently posted on SSRN. Here is the abstract:
Courts apply a number of doctrines, including the conduct and effects test, in determining how far to extend jurisdiction in securities class actions involving transnational securities fraud. Courts often focus on whether foreign jurisdictions will recognize a U.S. class action judgment and the presence of alternative remedies abroad in determining both jurisdiction and the propriety of a class action. We focus our analysis on the present extraterritorial regime as applied to securities class actions involving foreign issuers and, at least in part, foreign investors transacting abroad (often referred to as "f-cubed" litigation). We argue that the conduct and effects test, as well as court inquiries into whether foreign jurisdictions will recognize U.S. judgments and the presence of alternative remedies abroad, are uncertain in their application and as a result unpredictable. We propose instead that courts adopt a uniform, bright-line exchange-based presumptive rule in determining the applicable class in a Rule 10b-5 class action. Courts should presume jurisdiction over all investors trading in a company's securities within the United States and presume no jurisdiction for Rule 10b-5 suits for foreign investors trading outside the United States. Focusing on U.S. investors in a class action results in an equivalent level of incentive for private plaintiffs' attorneys to file a class action under Rule 10b-5 compared with domestic issuers with a similar level of U.S. investor ownership and trading volume and thus an equal level of private deterrence against the negative effects to the U.S. markets of fraud.