October 10, 2009
Chicago Hedge Fund Manager Pleads Guilty to Wire Fraud in Connection with Ponzi Scheme
The SEC announced that on October 7, 2009 the United States District Court for the District of Minnesota accepted a guilty plea by former Chicago-area hedge fund manager Gregory Bell to one count of wire fraud. Bell is one of the defendants in a pending civil injunctive action filed by the Commission on July 8, 2009 in which the SEC charges another defendant, Minnesota businessman Thomas Petters, with fraud for perpetrating a massive Ponzi scheme from 1995 to September 2008 through the sale of notes related to consumer electronics. In 2001 Bell formed an investment company Lancelot Investment Management, LLC, also a defendant in the Commission's lawsuit. From 2002 to 2008 Bell and his investment company raised over $2.62 billion from hundreds of investors through the sale of interests in hedge funds they managed. The Commission's Complaint alleges that Bell in turn invested almost all of these assets in notes sold by Petters, falsely assuring investors that he was taking steps to protect their money and to verify the underlying transactions. The Complaint alleges that when Petters's scheme began to unravel, Bell participated in a series of sham transactions to conceal that Petters owed more than $130 million in investor payments on the notes. Bell and Lancelot Management also withdrew more than $40 million in fees from the hedge funds during the final months before Petters's scheme collapsed. On July 24, 2009 the Court entered a Preliminary Injunction that, among other things, froze all assets of Lancelot Management, Bell and Bell's wife, who is a relief defendant, and required an accounting of their assets and liabilities including all funds and assets received from Petters's notes and/or the hedge funds.
Three Defendants in Wall St. Insider Trading Scheme Settle with SEC
The SEC announced that on September 29, 2009, the United States District Court for the Southern District of New York entered final judgments against defendants Erik R. Franklin, Q Capital Investment Partners, LP (“Q Capital”), and David M. Tavdy, in SEC v. Guttenberg, et al., an insider trading case the Commission filed on March 1, 2007. The Commission’s complaint alleged illegal insider trading in connection with two related schemes in which Wall Street professionals serially traded on material, nonpublic information tipped by insiders at UBS Securities LLC (“UBS”) and Morgan Stanley & Co., Inc. (“Morgan Stanley”), in exchange for cash kickbacks.
The Commission’s complaint alleged that from 2001 through 2006, Mitchel S. Guttenberg, an executive director in the equity research department of UBS, illegally tipped material, nonpublic information concerning upcoming UBS analyst upgrades and downgrades to two Wall Street traders, Franklin and Tavdy, in exchange for sharing in the illicit profits from their trading on that information. The complaint also alleged that Franklin was a downstream tippee in another scheme in which, in 2005 and 2006, Randi Collotta, an attorney who worked in the global compliance department of Morgan Stanley, illegally tipped material, nonpublic information concerning upcoming corporate acquisitions involving Morgan Stanley’s investment banking clients.
The complaint alleged that Franklin illegally traded on the inside information for two hedge funds he managed, Lyford Cay Capital, LP and Q Capital, and in his personal accounts. Tavdy illegally traded on the inside information (i) for Andover Brokerage, LLC and Assent LLC, registered broker-dealers where Tavdy was a proprietary trader, (ii) in his own personal account, (iii) in the accounts of a relative and friend, and (iv) in the accounts of Jasper Capital LLC, a day-trading firm with which Tavdy was associated. Franklin and Tavdy also had downstream tippees who traded on the inside information. Without admitting or denying the allegations in the complaint, Franklin, Q Capital, and Tavdy settled the Commission’s insider trading charges.
Franklin and Q Capital consented to the entry of a final judgment which (i) permanently enjoins them from violating Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933 (“Securities Act”); and (ii) orders, on a joint and several liability basis, disgorgement of $5,400,000, with all but $290,000 waived based on a demonstrated inability to pay. In a related administrative proceeding, Franklin consented to the entry of a Commission order barring him from future association with any broker, dealer, or investment adviser. In a parallel criminal case, Franklin previously pled guilty to charges of securities fraud and conspiracy to commit securities fraud and is awaiting sentencing. U.S. v. Erik Franklin, No. 1:07-CR-164 (S.D.N.Y.).
Tavdy consented to the entry of a final judgment which (i) permanently enjoins him from violating Section 10(b) of the Exchange Act, Rule 10b-5 thereunder, and Section 17(a) of the Securities Act; and (ii) orders him to pay disgorgement of $10,300,000. In a related administrative proceeding, Tavdy consented to the entry of a Commission order barring him from future association with any broker or dealer. In a parallel criminal case, Tavdy previously pled guilty to charges of securities fraud and conspiracy to commit securities fraud, and was sentenced to 63 months in prison. U.S. v. Mitchel Guttenberg and David Tavdy, No. 1:07-CR-141 (S.D.N.Y.).
The Commission also announced that Samuel W. Childs, Jr., a former general securities principal at Assent LLC, consented to a Commission order barring him from future association with any broker or dealer, based on his criminal conviction for conspiracy to commit securities fraud, wire fraud and commercial bribery. U.S. v. Samuel W. Childs, Jr. and Laurence McKeever, No. 1:07-CR-142 (S.D.N.Y.). In that case, the criminal indictment alleged that Childs accepted bribes from traders at Assent LLC in exchange for not reporting their illegal trading to Assent management.
October 8, 2009
SEC Charges Two Attorneys with Corporate Hijackings
On September 29, 2009, the SEC filed a civil injunctive action against Irwin Boock, Stanton B. J. DeFreitas, and Jason C. Wong, all of Ontario, Canada, and two Houston-based attorneys, Roger L. Shoss and Nicolette D. Loisel, charging them with having violated the antifraud and registration provisions of the federal securities laws by effecting dozens of corporate hijackings and making unregistered offerings and sales of shares. The complaint also names as relief defendants Boock's wife, Birte Boock, and a company of which she allegedly was the sole officer and director during the relevant period, 1621566 Ontario, Inc.
The Commission's complaint alleges that the hijackings were effected by identifying inactive or defunct publicly-traded corporations which were no longer operating and either illicitly revivifying the corporations by falsely representing that the defendants were duly authorized officers, directors, or agents of the corporations or by incorporating new corporations using the names of the void corporation. Once an inactive corporation was revivified or a new corporation formed, the complaint alleges that the defendants immediately effected a name change in the corporation and requested from third parties responsible for assigning unique identifiers to each class of securities issued by a publicly-traded corporation a new identifying number known as a CUSIP number and ticker symbol. According to the complaint, these identifiers were obtained by falsely representing that the companies seeking new CUSIPs and ticker symbols were the same companies to which CUSIP numbers and ticker symbols had previously been issued and that the name changes triggering the need for new identifiers were duly authorized corporate actions.
The complaint alleges that Boock recruited Shoss and Loisel in late 2003 to handle the paperwork required to effect hijackings, including submitting false documentation to Secretaries of State, the Standard & Poor's CUSIP Service Bureau, transfer agents, and Nasdaq Corporate Data Operations which, during the relevant period, processed requests for ticker symbols. The complaint further alleges that from November 2003 through March 2006, Boock, Shoss, and Loisel effected at least 22 corporate hijackings. From November 2003 through June 2007, Boock, Wong, and DeFreitas allegedly effected at least another 21 corporate hijackings.
With respect to at least 19 of those corporations hijacked with Shoss and Loisel's involvement, the complaint alleges that Shoss and Loisel were tasked to provide 28 opinion letters falsely representing that offerings of approximately 223 million shares were exempt from the registration requirements of the federal securities laws. The complaint alleges that Boock dispensed with the need for obtaining legal opinion letters concerning the issuance of shares by the 21 hijacking corporations involving Wong and DeFreitas by incorporating his own transfer agency, Select American Transfer Company, which Wong and DeFreitas operated. With respect to these 21 companies, the complaint further alleges that the three men effected the unregistered offerings of up to seven billion shares.
The complaint also alleges that DeFreitas effected unregistered sales in the securities of at least 30 of the hijacked or hijacking entities, generating at least $2.2 million in illicit proceeds. Boock allegedly effected unregistered sales of securities in at least five of the hijacked or hijacking entities, generating at least $267,625 in illicit proceeds. Wong allegedly effected unregistered sales of securities in at least 11 of the hijacked or hijacking entities.
The complaint alleges that each of the defendant received illicit proceeds in the form of remuneration for services, proceeds from the sale of the shell companies to buyers, and/or from the sale of shares in purported private placements or into the secondary market.
Based on the foregoing, the Commission's complaint alleges that the five defendants violated Sections 5(a) and (c) 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. The complaint further alleges that Boock violated a penny stock bar instituted against him in 2002 in a settled administrative proceeding (see In the Matter of Birte Boock and Irwin Boock, Admin. Proc. File No. 3-10960 (Ex. Act Rel. No. 46952)), thereby violating Exchange Act Section 15(b)(6)(B)(i). With respect to each of the five defendants, the Commission is seeking a permanent injunction, a judicial penny stock bar, disgorgement with prejudgment interest, and civil penalties. The Commission is also seeking officer and director bars against Boock and Wong.
California Court Sentences Ponzi Schemer to 100 Years
The SEC announced today that on September 28, 2009 the United States District Court for the Central District of California sentenced Richard M. Harkless, 65, of Riverside, California to 100 years in federal prison. Harkless was convicted in July of three counts of mail fraud, three counts of wire fraud, and one count of money laundering. According to the United States Attorney's Office, Harkless's sentence is believed to be the longest ever imposed in a white collar crime in the Central District of California.
Harkless was charged by the United States Attorney's Office for the Central District of California with orchestrating a multi-million dollar Ponzi scheme between 2000 and late 2003. Harkless and his sales agents fraudulently induced investors nationwide to invest in Mx Factors' notes, which purportedly paid a "guaranteed" return of up to 14% every two to three months. Mx Factors claimed that it would use the investor funds to provide its clients - construction contractors, wholesalers, and manufacturers - with accounts receivable financing. Instead, Harkless operated a Ponzi scheme and skimmed investor funds to finance a Mexican crab fishing business, pay personal expenses, and fund overseas bank accounts. In February 2004, the Commission obtained a restraining order against Harkless, Mx Factors, and the sales agents, and federal criminal authorities executed search warrants. Harkless fled to Mexico shortly thereafter. Harkless was arrested by special agents with IRS-Criminal Investigation two years ago when he traveled to Phoenix.
In a related proceeding, the Commission obtained a final judgment against Harkless on February 6, 2006. That judgment permanently enjoins Harkless from future securities law violations and orders him to pay over $42 million in disgorgement, prejudgment interest, and civil penalties. The Commission also obtained a judgment by default against Mx Factors and its sales agents BBH Resources and JTL Financial. Mx Factors, BBH Resources, and JTL Financial have been under the control of a court-appointed receiver since the Commission's action was filed on February 26, 2004 in federal district court in Riverside, California. And, on June 2, 2006, the Commission obtained a final judgment against Harkless's three sales agents, Daniel Berardi, Jr., Thomas Hawkesworth, and Randall W. Harding ordering disgorgement, prejudgment interest, and civil penalties. The judgment orders Berardi and Hawkesworth, managing members of BBH Resources, LLC, to pay over $11 million in disgorgement, prejudgment interest, and civil penalties. The judgment orders Harding, managing member of JTL Financial Group, LLC, to pay over $17 million in disgorgement, prejudgment interest, and civil penalties. Berardi, Hawkesworth, and Harding received sentences of up to six years as part of the criminal proceeding.
SEC Settles Insider Trading Charges Involving Document Sciences Acquisition
The SEC today filed a settled civil injunctive action in the United States District Court for the Southern District of California, alleging that Feng “Frank” Xie, a former employee at Document Sciences Corp. (DOCX), engaged in insider trading in DOCX common stock, prior to the announcement on December 27, 2007 that EMC Corp. (“EMC”) would acquire DOCX in an all-cash transaction valued at $85 million, or $14.75 per share.
The Commission’s Complaint alleges the following:
DOCX executives asked Xie in late November 2007 to participate in a meeting with EMC representatives concerning a plan to further extend the pre-existing partnership between EMC and DOCX. DOCX executives asked Xie to compile information about DOCX’s source code and other documents in anticipation of the meeting with EMC. Xie also worked on the project with a due diligence firm hired by EMC.
On December 7, 2007 at a meeting between EMC and DOCX employees in Oakland, Xie made a presentation and answered related questions. After the meeting, Xie asked his DOCX supervisor what would happen if someone were to buy DOCX shares in a time period when they thought something was going to happen to that company. Xie’s supervisor told Xie that would be a bad thing to do, that it could be traced, and that it was prohibited and illegal. As late as December 19, 2007, Xie continued to work with EMC and EMC’s due diligence firm.
Xie began acquiring shares of DOCX common stock prior to the December 7th meeting, while preparing due diligence materials for EMC. These initial purchases of 6,892 shares were made at prices ranging from $8.39 to $8.68. Despite the warning from his supervisor on December 7th, Xie continued to acquire DOCX common stock up to the day before the merger announcement, purchasing an additional 3,607 shares. In total, between December 3, 2007 and December 26, 2007, Xie purchased 10,499 DOCX common shares for prices ranging from $8.10 to $8.81.
Under terms of the proposed settlement, Xie has consented, without admitting or denying the allegations of the Commission’s Complaint, to the entry of a final judgment permanently enjoining him from violating the antifraud provisions of the Securities Exchange Act of 1934, specifically Section 10(b) and Rule 10b-5 thereunder. As part of the proposed settlement, Xie also has agreed to pay disgorgement of $62,050.25, prejudgment interest of $5,297.25, and a civil penalty of $62,050.25. The settlement remains subject to the approval of the U.S. District Court for the Southern District of California.
SEC Solicits Comment on Draft Strategic PlanThe SEC seeks comment on its draft Strategic Plan. The document includes drafts of the SEC’s mission, vision, values, strategic goals, major initiatives, and performance metrics for fiscal years 2010 through 2015. Comments can be sent to email@example.com no later than November 16, 2009.
October 7, 2009
Former Biopure Executive Sent to Jail for Lying
The SEC announced that on October 5, 2009 Howard Richman, the former head of regulatory affairs of Biopure Corporation was sentenced to three years incarceration, three years of supervised release, a $50,000 fine, and a $100 mandatory special assessment. Richman, who was a defendant in a previously-filed Commission enforcement action, was indicted on September 24, 2008 by a grand jury convened by the United States Attorney for the District of Massachusetts. He pleaded guilty on March 11, 2009 to lying and obstructing justice in an SEC action against him.
According to the Indictment, from October 26, 2006 through July 17, 2007, Richman represented to a federal judge that he was terminally ill with colon cancer and could not participate in an ongoing civil case that was brought against him by the Commission. The Indictment alleged that in reality, Richman did not have cancer. Rather, according to the Indictment, he falsely claimed to be terminally ill in order to avoid discovery and a scheduled trial in the SEC's case against him and to obtain a favorable settlement. The Indictment alleged that, to perpetuate his lie, Richman provided the Court with false affidavits and fabricated letters from a physician.
Previously, in September 2005, the Commission filed an enforcement action against Biopure, Richman and three other executives alleging that beginning in April 2003, Biopure received negative information from the FDA regarding its efforts to obtain FDA approval of its synthetic blood product Hemopure but failed to disclose the information, or falsely described it as positive developments in its filings with the Commission.
After Richman's lie was revealed, the Commission reached a settlement of its case with him, and the Court entered a final judgment by consent against Richman on August 6, 2008 permanently enjoining Richman from violating the antifraud and other provisions of the federal securities laws, permanently barring Richman from serving as an officer or director of any public company and ordering him to pay a $150,000 civil penalty. As a condition of his supervised release, Richman must enter into a payment plan with the Commission to pay the remainder of his $150,000 civil penalty. Biopure and three others previously settled SEC charges.
SEC Appeals Dismissal of Cuban Insider Trading ChargesThe SEC will appeal a Texas federal district court's dismissal of insider trading charges against Mark Cuban to the Fifth Circuit, according to Investment News, Dallas Mavericks' owner Mark Cuban is back in SEC's sights on insider trading charges
SEC Proposes New Rules on Credit Rating DisclosureThe SEC has proposed new rules regarding credit rating disclosure. If adopted, they would require disclosure of information regarding credit ratings used by registrants, including closed-end management investment companies, in connection with a registered offering of securities so that investors will better understand the credit rating and its limitations. The amendments also would require additional disclosure that would inform investors about potential conflicts of interest that could affect the credit rating. In addition, the agency is proposing amendments to require disclosure of preliminary credit ratings in certain circumstances so that investors have enhanced information about the credit ratings process that may bear on the quality or reliability of the rating. The proposed amendments would be applicable to registration statements filed under the Securities Act of 1933, the Securities Exchange Act of 1934 and the Investment Company Act of 1940, and Forms 8-K and 20-F.
October 6, 2009
SIFMA Testifies on Investor Protection Issues
JOHN TAFT testified today on behalf of SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION before U.S. HOUSE OF REPRESENTATIVES COMMITTEE ON FINANCIAL SERVICES HEARING ON: CAPITAL MARKETS REGULATORY REFORM: STRENGTHENING INVESTOR PROTECTION, ENHANCING OVERSIGHT OF PRIVATE POOLS OF CAPITAL, AND CREATING A NATIONAL INSURANCE OFFICE.
SIFMA supports a harmonized federal fiduciary standard for broker-dealers and investment advisers that provide personalized investment advice. It also advocates that the federal standard should preempt state common law standards. As to mandatory securities arbitration, SIFMA advocates "continuous study of the fairness and efficiency" of the process and says the SEC should be required to do yet another study on the fairness of the securities arbitration process.
Two More Guilty Pleas in New York's Pay-to-Play Kickback InvestigationNew York Attorney General Andrew M. Cuomo today announced two guilty pleas in the ongoing investigation relating to the New York State Common Retirement Fund (“CRF”). Raymond Harding, the former chair of the Liberal Party, and Saul Meyer, a founding partner of a Dallas-based firm that advises public pension systems across the nation, both pled guilty to felony securities fraud charges for their involvement in pay-to-play kickback schemes at the New York State Office of the Comptroller and the CRF.
NASAA President Testifies on Investor Protection
In testimony before the U.S. House Financial Services Committee, NASAA President and Texas Securities Commissioner Denise Voigt Crawford outlined the key elements of meaningful financial services regulatory reform. Crawford’s testimony focused on three proposals in the Investor Protection Act that she identified as important to individual investors: the establishment of a fiduciary duty for broker-dealers who provide investment advice, restricting mandatory pre-dispute arbitration and removing some of the hurdles facing private plaintiffs who seek damages for securities fraud.
NASAA Issues Statement on FINRA's Expansion of Arbitration Pilot Program
The following is a statement by North American Securities Administrators Association (NASAA) President and Texas Securities Commissioner Denise Voigt Crawford regarding the expansion of the Financial Industry Regulatory Authority (FINRA) pilot program to allow certain investors making arbitration claims to choose a panel made up of three public arbitrators instead of the current system, which requires the inclusion of a mandatory industry representative on arbitration panels:
“Regardless of the scope of FINRA’s pilot program on the composition of arbitration panels, a greater issue remains – the mandatory ‘take-it-or-leave it’ clause in brokerage contracts, which forces all investors to agree to mandatory, industry-run arbitration administered by FINRA, the securities industry self-regulatory organization.
“The only chance of recovery for most investors who fall victim to Wall Street wrongdoing is through a single securities arbitration forum controlled by the securities industry. NASAA believes that the securities arbitration system should be truly voluntary and that Congress should end mandatory securities arbitration.”
October 5, 2009
SEC Adopts Rules Removing References to Credit Ratings; Proposes Additional RulesThe SEC (“Commission”) adopted amendments to certain of its rules and forms to remove references to securities credit ratings. The Commission is eliminating certain references to credit ratings issued by nationally recognized statistical rating organizations (“NRSROs”) in rules and forms under the Securities Exchange Act of 1934 related to the regulation of self-regulatory organizations and alternative trading systems, and in rules under the Investment Company Act of 1940 that affect an investment company’s ability to purchase refunded securities and securities in underwritings in which an affiliate is participating. The Commission believes that the references to credit ratings in these rules and forms are no longer warranted as serving their intended purposes. The amendments are designed to address concerns that references to NRSRO ratings in Commission rules may have contributed to an undue reliance on those ratings by market participants. In a companion release, the Commission is re-opening the comment period for certain other proposed rule and form amendments that would eliminate additional references to NRSRO ratings.
SEC Releases Annual Report on Credit Rating Agencies
The Annual Report on Nationally Recognized Statistical Rating Organizations, as Required by Section 6 of the Credit Rating Agency Reform Act of 2006, is posted on the SEC website. This report provides an overview of the rules proposed and adopted by the Commission during the year to which this report relates, a summary of the staff findings from the examinations of certain NRSROs, published on July 8, 2008, and addresses each of the items specified in Section 6 of the Rating Agency Act.
Vendor of Newpark Resources Settles Accounting Fraud Charges with SEC
On October 2, 2009, the Eastern District of Louisiana entered a final judgment of permanent injunction and other relief against defendant Joe E. Penland, a Texas resident and the owner of a third-party vendor of Newpark Resources, Inc. ("Newpark"), an oil and gas company based in Houston, Texas. Penland was the principal of Quality Mat Company, a Newpark vendor, and was charged in the complaint along with Newpark principals for violations of the federal securities laws. The final judgment permanently enjoined Penland from future violations of the antifraud provision of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and from future violations of Exchange Act Rule 13b2-2, which prohibits lying to auditors. The final judgment also permanently enjoined Penland from aiding and abetting accounting violations of others as set forth in Sections13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. The final judgment ordered that Penland pay a civil penalty in the amount of $70,000. Penland consented to the entry of the order without admitting or denying the allegations of the Commission's complaint.
According to the Commission's Complaint, Matthew W. Hardey, a former Chief Financial Officer for Newpark, and L. Cyrus DeBlanc, a former Chief Financial Officer for Newpark subsidiary Soloco LLC, conspired with Quality Mat president Joe E. Penland to engage in a fraudulent accounting scheme that allowed Newpark in fiscal year 2003 to avoid writing off approximately $4.2 million in aging debt. As a result, Newpark reported approximately $500,000 of net income instead of a significant loss for that fiscal year. The Commission's Complaint alleged that, in 2002 and 2003, Newpark recognized $4.2 million in revenue based on sales of its primary product — industrial mats used to lay temporary roads at drilling sites — to Quality Mat and another vendor, Easy Frac. The Complaint alleged that neither vendor had made any payment on the sales through the end of 2003, and that Hardey, DeBlanc and Penland devised and executed a scheme to funnel money to Quality Mat and Easy Frac through sham transactions that would then allow the vendors to pay their debts to Newpark.
According to the Complaint, one of the sham transactions took place in 2004 and involved Dura-Base Nevada, LLC and Dura-Base de Mexico, two Newpark subsidiaries created to begin mat rentals in Mexico. The Complaint asserted that Newpark purchased the entire initial inventory of mats for the Dura-Base business from Quality Mat, and that the decision to purchase the approximately 6,175 mats from Quality Mat was a pretext meant to give the appearance of a legitimate business transaction to Newpark's repurchase, at the original sales price, of 1,500 mats sold to Quality Mat in 2002 and 600 mats sold to Easy Frac in 2003. The Complaint claimed that, in an attempt to perpetuate the pretext, Hardey also misled Newpark's auditors about the basis for buying the Dura-Base inventory from Quality Mat by falsely claiming that Quality Mat had contractual rights in Mexico that Newpark would have to buy in order for the Dura-Base venture to go forward. According to the Complaint, this ruse was necessary to allow Newpark to buy back the mats at the original sales price without suffering any adverse accounting consequences. Under this scheme, Newpark could account for the repurchases as if they had taken place at Newpark's manufacturing cost, but still pay Quality Mat the original purchase price for the mats by assigning the difference in value to the intangible asset allegedly created by the repurchase of Quality Mat's contract rights.
SEC Approves Consistent Exchange Rules on Breaking "Clearly Erroneous" Trades
The SEC announced that it has approved new exchange rules for breaking stock trades that deviate so substantially from current market prices that they are considered “clearly erroneous.” The rules would for the first time provide a consistent standard across stock exchanges and reduce uncertainty about what happens to a trade depending on where it is executed. Clearly erroneous trades can result from a variety of causes, including human error or computer malfunction. Because the markets today are so fast, automated and interconnected, an erroneous trade on one market can very rapidly trigger a wave of similarly erroneous trades on other markets.
Historically, the clearly erroneous execution rules varied from exchange to exchange, with some breaking trades only if the price exceeded an objective threshold based on the preceding market price, and others relying more heavily on the subjective judgment of exchange officials. In addition, there were variations in the time periods within which exchanges required the clearly erroneous review process to be triggered and completed. The problems with inconsistent exchange rules became particularly evident last fall when the extraordinary market volatility led to a substantial increase in the number of erroneous trades.
To better assure consistent results across the equities markets, the exchanges — led by NYSE Arca — worked together with Commission staff to develop “model” rules with more objective standards for breaking trades. These new rules, filed by BATS Exchange, Chicago Board Options Exchange, Chicago Stock Exchange, International Securities Exchange, NASDAQ Stock Market, NASDAQ OMX BX, National Stock Exchange, New York Stock Exchange, NYSE Amex, and NYSE Arca, become effective today.
In general, the new rules allow an exchange to consider breaking a trade only if the price exceeds the consolidated last sale price by more than a specified percentage amount: 10% for stocks priced under $25; 5% for stocks priced between $25 and $50; and 3% for stocks priced over $50. In addition, the erroneous trade review process generally must commence within 30 minutes of the trade, and be resolved within 30 minutes thereafter.
FINRA Expands Pilot Arbitration Program Giving Investors Choice of No Industry Arbitrator
FINRA announced the expansion of its two-year pilot program that gives investors who are filing eligible claims the opportunity to select an arbitration panel composed of three public arbitrators instead of two public and one non-public. In its second year, the pilot will expand from 11 to 14 broker-dealers, and the number of eligible cases will increase from 276 to 411, a rise of nearly 50 percent. Only the investor filing the claim can elect to participate in the program and the firms cannot choose which cases are eligible.
Each participating firm has agreed to commit a specific number of cases to the pilot. Cases enter the pilot on a first-come, first-served basis at the sole discretion of the claimant, who is typically a retail brokerage customer. The program began on October 6, 2008, and will conclude on October 5, 2010. The three new firms contributing cases to the pilot program are: Chase Investment Services, with 10 cases; Oppenheimer & Co, with 15 cases; and Raymond James Financial Services/Raymond James & Associates, with 10 cases. Of the 11 firms already participating, five are increasing the number of pilot cases from 40 to 60: Citigroup Global Markets, Merrill Lynch, Morgan Stanley Smith Barney, UBS Financial Services and Wells Fargo Advisors.
Other participating firms are Ameriprise Financial Services, with 18 cases; Charles Schwab, with 10 cases; Edward Jones, with 18 cases; Fidelity Brokerage Services, with 10 cases; LPL Financial, with 10 cases; and TD Ameritrade with 10 cases.
The pilot program will be evaluated by a number of criteria, including the percentage of investors who opt in and, of those, the percentage who actually select an all-public panel. Currently, about half of the investors in the pilot choose to have a non-public arbitrator on their hearing panel. FINRA also will compare the results of pilot and non-pilot cases, including the percentage of cases that settle before award and how quickly they settle, the length of hearings and the use of expert witnesses. FINRA also is conducting participant surveys.
So far, investors have filed 474 eligible cases. With the initial year of the pilot nearly concluded, 51 percent of the eligible investors have opted into the pilot, resulting in 244 cases. Investors who choose to have their claim heard under the pilot program — and the firm named in the claim — receive the same three lists of potential arbitrators that parties in non-pilot disputes receive: lists of eight chair-qualified public arbitrators, eight public arbitrators and eight non-public arbitrators. Investors participating in the pilot may choose either an all-public three-member panel or a majority public panel with one non-public arbitrator.
To date, in the 225 pilot cases where ranking lists have been returned, investors have ranked one or more non-public arbitrators half the time and struck all eight non-public arbitrators in the other half. Thus, investors are choosing to have a non-public arbitrator in 50 percent of the pilot cases.
FINRA Warns of ARS Phishing Scam
FINRA today issued an Investor Alert called Beware of Auction Rate Securities Settlement "Phishing" Scam, which warns the public about a scam using fake FINRA emails that promise compensation from auction rate securities (ARS) settlements in exchange for personal information. The fake emails are made to appear as if they originated from FINRA and use language from a recent FINRA press release announcing ARS settlements. They state that the email recipient is due $1.5 million regardless of the amount of their ARS investment or loss. The email then "phishes" for personal information by asking for the investor's occupation, address and phone number.
While FINRA, along with the Securities and Exchange Commission and state securities regulators, has announced final settlements with numerous brokerage firms relating to the sale of ARS, FINRA does not contact investors directly to advise them of the settlements. Instead, brokerage firms contact eligible investors, generally via letter, with an offer to repurchase ARS that the firm sold to them
Ketchum on Retail Sales Practices
Excerpt from Rick Ketchum, Chairman & CEO, FINRA, Fordham University Ethics and Regulatory Conference, October 2, 2009:
Retail Sales Responses
I'd like to turn now to the retail side of our markets, where there's more direct interaction with individual investors.
For entirely too long, this segment of U.S. markets has been marked by a struggle with regulators, as retail firms have pushed the proverbial envelope with regulators to see what products they can sell, what incentives they can offer, and what information needs to be disclosed. While they are seeking to comply with the letter of the laws, it seems that some are looking to evade the spirit of the laws.
There is a clear need for a shift in culture at these retail firms—focused on serving customers' long-term interests, providing greater transparency about the risks and rewards of financial products, and living up to a higher standard of professional responsibility.
There is also a clear need for a shift in regulation, and let me offer a specific example. Individual investors interface with both investment advisers and broker-dealers. These are distinct entities, but the everyday reality is, as the Rand Institute said in a study last year, that "trends in the financial service market since the early 1990s have blurred the boundaries between them."
Indeed, most investors cannot distinguish between the investment advisory service they receive and their brokerage service. But broker-dealers are regulated one way—they operate under a standard of selling their clients "suitable" products. Investment advisers are regulated another way—they must meet a fiduciary standard that puts their clients' interests before their own.
This distinction is far from an ideal regulatory arrangement, and we agree with the Obama Administration's view that a fiduciary standard should be established for broker-dealers when they are offering investment advice. Simply put, broker-dealers should always ask whether certain products or services are in the customer's best interest.