Securities Law Prof Blog

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

Sunday, October 4, 2009

Loan Broker Settles Fraud Charges Involving Stock-Based Loan Scheme

The SEC settled charges against HedgeLender LLC, a stock-based loan broker located in Philadelphia, and its two principals, Daniel W. Stafford and Fred R. Wahler, Jr., for their conduct in connection with a fraudulent stock-based loan scheme orchestrated by Michael and Melissa Spillan through One Equity Corporation and other companies. Upon filing of the complaint, the defendants consented to the entry of orders, without admitting or denying the allegations of the complaint, that will permanently enjoin them from violating Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934. The orders also provide that the Court shall order disgorgement of ill-gotten gains, prejudgment interest and civil penalties in amounts to be determined upon later motion of the Commission.

The Commission’s complaint alleges that in February 2006, HedgeLender entered into an agreement with One Equity through which HedgeLender referred borrowers to One Equity in exchange for commissions on successful stock-based loan transactions. One Equity was not, however, a legitimate lender. The Spillans, through One Equity, induced borrowers to transfer ownership of publicly traded stock to them as collateral for purported non-recourse loans. They represented that all shares would be returned to borrowers upon repayment of the loans. Instead, the Spillans generally liquidated the shares to fund the loans and failed to maintain adequate cash reserves necessary to repurchase and return the shares to borrowers.

According to the complaint, HedgeLender promoted One Equity’s stock-based loan program as Hedgelender’s Star HedgeLoan®. On its website, HedgeLender represented to potential clients that it had certified its stock-based loan programs, vetted the professional reputations of those that administered the programs, and took steps to ensure the security of borrowers’ shares. In reality, Stafford, a resident of Gaithersburg, Maryland, and Wahler, a resident of Philadelphia, conducted minimal due diligence and failed to investigate “red flags” that cast doubt on One Equity’s ability to administer and fund its stock-based loans. Adequate due diligence would have revealed that One Equity had no funding source and that the Spillans had never run a legitimate stock-based lending enterprise. The complaint further alleges that from February 2006 through at least November 2007, HedgeLender referred approximately 54 borrowers to One Equity and received approximately $1.7 million in commission payments.

October 4, 2009 in SEC Action | Permalink | Comments (8) | TrackBack (0)

SEC Revokes Registration of Broker-Dealer For Assisting Day-Trading Firm

The SEC settled administrative proceedings against GLB Trading, Inc. (GLB Trading), a broker-dealer registered with the Commission, and Robert A. Lechman (Lechman), GLB Trading's owner and former president, CEO, and chief compliance officer (collectively, Respondents).  Without admitting or denying the Commission's findings, Respondents have consented to the entry of the Order, which finds that from 2006 to March 2008, Respondents knowingly and substantially assisted Tuco Trading, LLC, a firm that provided day-trading capability to its customers and that was run by a registered representative of GLB Trading. The Order further finds that through Tuco's accounts at GLB Trading, Tuco effected its customers' securities transactions and received commissions on such trading but that it was not registered with the Commission as a broker-dealer. The Order also finds that Respondents knew of Tuco's activities and provided it with substantial assistance by allowing Tuco to operate through GLB Trading; helping Tuco solicit new customers; structuring Tuco's operations; and loaning funds so that Tuco could meet day-trading calls. As a result of the conduct described above, the Order finds that Respondents willfully aided and abetted and caused Tuco's violations of Section 15(a) of the Securities Exchange Act of 1934 (Exchange Act).

GLB Trading has been censured, and its registration with the Commission as a broker-dealer has been revoked. Respondents have also been ordered to pay disgorgement of $216,507.00, and prejudgment interest of $4,163.00 for a total of $220,670.00, which obligation is jointly and severally held by GLB Trading and Lechman. Lechman has also been barred from association with any broker or dealer, with a right to reapply for association after three (3) years from the date of the Order, and has been ordered to pay a $75,000.00 civil penalty. 

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

Former Gen Re and AIG Executives Settle SEC Charges Regarding Fraudulent Reinsurance Transactions

The SEC announced that the United States District Court for the Southern District of New York entered final judgments against five former senior executives of General Re Corporation (Gen Re) and American International Group, Inc. (AIG) for their roles in helping AIG mislead investors through the use of fraudulent reinsurance transactions.  Four of the former executives, Ronald Ferguson, Elizabeth Monrad, CPA, Robert Graham, Esq., and Christopher Garand, worked for Gen Re, while the fifth, Christian Milton, worked for AIG.

On February 2, 2006, the Commission filed its civil action against the defendants, alleging that they aided and abetted AIG’s violations of the antifraud and other provisions of the securities laws. The complaint alleged that Ferguson, Monrad, Graham, Garand, and others at Gen Re worked with Milton and others at AIG to fashion two sham reinsurance contracts between Cologne Re Dublin, a Gen Re subsidiary in Dublin, Ireland, and an AIG subsidiary. The sham reinsurance transactions made it appear that AIG had legitimately increased its general loss reserves.  Without admitting or denying the allegations in the complaint, the defendants each consented to the entry of a final judgment, permanently enjoining them from violating or aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) of the Exchange Act of 1934 (Exchange Act) and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1. Defendants also consented to officer and director bars. In separate administrative proceedings, Monrad and Graham were suspended from appearing and practicing before the Commission.

On February 25, 2008, in a criminal action filed by the U.S. Attorney’s Office for the Eastern District of Virginia, and tried in the U.S. District Court for the District of Connecticut, United States v. Ronald E. Ferguson, et al., D. Conn. No. 3:06-CR-137 (CFD), a jury returned a guilty verdict on all sixteen felony counts against all five defendants in connection with the AIG sham reinsurance transactions. All five defendants subsequently were sentenced to serve terms of imprisonment and to pay monetary penalties. In determining to accept defendants’ settlement offers in which they consented to final judgments, the Commission considered the sanctions the court ordered against them in the criminal proceedings.

The SEC previously charged AIG in 2006 with securities fraud and improper accounting, and the company settled the charges by paying disgorgement of $700 million and a penalty of $100 million, among other remedies.

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

Bratton & Wachter on Shareholder Empowerment

The Case Against Shareholder Empowerment, by William W. Bratton, Georgetown University Law Center; European Corporate Governance Institute (ECGI), and Michael L. Wachter, University of Pennsylvania Law School, was recently posted on SSRN.  Here is the abstract:

Many look toward enactment of the law reform agenda held out by proponents of shareholder empowerment as a part of the regulatory response to the financial crisis. This Article argues that the financial crisis exposes major weaknesses in the shareholder case. Our claim is that shareholder empowerment delivers management a simple and emphatic marching order: manage to maximize the market price of the stock. And that is exactly what the managers of a critical set of financial firms did in recent years. They managed to a market that focused on increasing observable earnings and, as it turned out, failed to factor in concomitant increases in risk that went largely unobserved. The fact that management bears primary responsibility for the disastrous results does not suffice to effect a policy connection between increased shareholder power and sound regulatory reform. A policy connection instead turns on a counterfactual question: Whether increased shareholder power would have imported more effective risk management in advance of the crisis. We conclude that no plausible grounds exist for making such a case. In the years preceding the financial crisis, shareholders validated the strategies of the very financial firms that pursued high leverage, high return, and high risk strategies and penalized those that did not. It is hard to see how shareholders, having played a role in fomenting the crisis, have a positive role to play in its resolution.

The prevailing legal model of the corporation strikes a better balance between the powers of directors and shareholders than does the shareholder-centered alternative. Shareholder proponents see management agency costs as a constant in history and shareholder empowerment as the only tool available to reduce them. This Article counters this picture, making reference to agency theory and recent history to describe a dynamic process of agency cost reduction. It goes on to show that shareholder empowerment would occasion significant agency costs on its own by forcing management to a market price set in most cases under asymmetric information and set in some cases in speculative markets in which heterogeneous expectations obscure the price’s informational content.

October 4, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)