Securities Law Prof Blog

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

Friday, October 23, 2009

SEC Announces Nov. 19 Small Business Forum

The SEC plans to host its 2009 Government-Business Forum on Small Business Capital Formation on Thursday, November 19, 2009, from 9:00 a.m. to 5:30 p.m., at its headquarters at 100 F Street, N.E., Washington, D.C. 20549. For the first time, those who are pre-registered will be able to participate in the Forum fully without traveling to Washington.

The SEC hosts an annual forum that focuses on the capital formation concerns of small business. A major purpose of the Forum is to provide a platform for small business to highlight perceived unnecessary impediments to the capital-raising process. Previous Forums have developed numerous recommendations seeking legislative and regulatory changes in the areas of securities and financial services regulation, taxation and state and federal assistance. Participants in the Forum typically have included small business executives, venture capitalists, government officials, trade association representatives, lawyers, accountants, academics and small business advocates. In recent years, the format of the Forum typically has emphasized small interactive breakout groups developing recommendations for governmental action.

October 23, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, October 22, 2009

SEC Charges Broker with Using Fake Press Releases to Manipulate Stock Prices

The SEC charged a New York securities broker with securities fraud for repeatedly creating and then distributing fake press releases to manipulate the stock prices of multiple publicly traded companies. The SEC alleges that Lambros Ballas, a registered representative of New York stock brokerage firm Global Arena Capital Corporation, purported to announce good news regarding the companies, including that Google was buying one of them at a substantial premium. Ballas then posed as an investor on Internet message boards, touting the announcements he had fabricated. In one instance, his scheme caused the stock price to increase by nearly 80 percent within a few hours of the issuance of his phony press release. The SEC is seeking an emergency court order to enjoin the broker from further fraudulent activity. 

According to the SEC’s complaint, filed in federal court in San Jose, Calif., and other court documents filed in the case:

Ballas issued a phony press release the evening of Sept. 29, 2009, announcing that Pennsylvania biotech company Discovery Laboratories had obtained approval from the U.S. Food and Drug Administration for a drug under development. Ballas then posted a message on a stock message board with a link to what he described as the company’s “official press release.” In his post, Ballas claimed to have called his “personal broker” who “says it’s been confirmed.” The next morning, Discovery Laboratories shares opened significantly higher.
The next day, Ballas issued another press release falsely claiming that IMAX Corporation had been acquired by Disney. Once again, he followed up by posting links to the phony release on a stock message board, telling other potential investors that he had bought 10,000 IMAX shares and that his broker “just called me to tell me at the crack of dawn.
Ballas continued his scheme on October 1, issuing a phony press release stating that California search engine company was being acquired by Microsoft. Ballas again followed up by posting messages and links to the release on stock message boards. In one posting he stated: “Local just bought out by Microsoft, at $12.50 per share including patent ownership.” In after-market trading,’s stock price rose nearly 80 percent.
Later that night, issued a corrective release saying that the Microsoft release had been false — there was no Microsoft acquisition. Undeterred, the next day Ballas issued another phony release, this time stating that it was Google, and not Microsoft, that was acquiring the company.
The SEC further alleges that shortly before he sent the hoax press release about Discovery Laboratories, Ballas’s brokerage clients purchased shares of the company and thus stood to profit by any price rise Ballas’s fake release created. Similarly, the complaint alleges that Ballas bought shares of stock just before he sent out the fake release so that he could capitalize on the fraudulent share price inflation he intended to trigger.

The SEC’s complaint charges Ballas with violations of the antifraud provisions of the federal securities laws. The SEC seeks injunctive relief, disgorgement of ill-gotten gains, and monetary penalties against Ballas.

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

SEC Charges Promoters of Real Estate Investment Scheme Targeted at Seniors with Fraud

The SEC charged a N.Y.-based real estate funds promoter and the former president of a broker-dealer firm with orchestrating a multi-million dollar real estate investment scheme. The SEC also charged two brokers at the firm with selling unregistered securities by means of "free lunch" seminars they used to coax elderly investors into making the risky investments.

SEC Chairman Mary L. Schapiro announced the enforcement action during remarks she made today at a forum in Washington D.C. sponsored by AARP and the National Consumers League. When discussing senior fraud, Chairman Schapiro noted that the SEC has brought nearly 70 enforcement actions during the past three years against fraudsters targeting elderly investors.

According to the SEC's complaint in this case, filed in federal court in Brooklyn, N.Y., the investment scheme collected nearly $12 million from approximately 90 investors while the promoter made numerous misrepresentations, including that the return was more than 50 percent on the sale of some properties in which they were investing. The SEC also alleges that the real estate funds promoter, Charles C. Slowey, Jr., misappropriated more than $1 million of investor funds in such ways as charging excessive management fees and taking out an interest-free personal loan to purchase his own home.

The SEC charged four entities involved in the scheme. Endeavor Partners LLC and Endeavor Capital Management Group LLC, both of which are controlled by Slowey, acted as the managing members of all four real estate investment funds involved. The broker-dealer firm Advanced Planning Securities, Inc. (APS) sold the Endeavor Funds through its agents. Oldham Harris, Inc. (OHI) is a Kenosha, Wisc.-based retirement advisory business through which two of the brokers provided their brokerage services to APS.

The three brokers at APS charged by the SEC are Edward D. Puttick, Sr., Gregory L. Oldham and Glenn R. Harris. Puttick was the firm's former owner and president.

According to the SEC's complaint, Oldham, Harris, and OHI solicited investors by means of invitations to free lunch or dinner "seminars" at restaurants. On several occasions, Slowey joined Oldham and Harris at the gatherings to help them make sales of Endeavor Securities to potential investors at the seminars or in meetings at the OHI office scheduled shortly afterwards. Many of the investors to whom Oldham, Harris, and OHI sold these investments were elderly and of limited means, and few had previously invested in private placement securities or securities based on distressed or subprime mortgages.

The SEC's complaint charges each of the defendants with violations of Sections 5(a) and 5(c) of the Securities Act of 1933. Further, the SEC's complaint charges Slowey, Endeavor Partners and Endeavor Capital, Puttick and APS with violations of Section 17(a) of the Securities Act, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC's complaint seeks a final judgment permanently enjoining the defendants (except APS) from future violations of the above provisions of the federal securities laws, ordering them to disgorge their ill-gotten gains plus prejudgment interest on a joint and several basis, and ordering them to pay financial penalties.

October 22, 2009 in SEC Action | Permalink | Comments (2) | TrackBack (0)

House Financial Services Votes for Consumer Financial Protection Agency

The House Financial Services Committee voted (39-29) to create a Consumer Financial Protection Agency, a new, independent federal agency solely devoted to protecting Americans from unfair and abusive financial products and services. This is a central part of the Obama Administration's Financial Regulatory Reform and has met with fierce resistance by both business interests and banking regulators.

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

Fed Issues Proposal to Review Incentive Compensation Practices at Big Banks

This morning I read in the New York Times that Morgan Stanley had returned to profitability and had plans to pay its employees healthy bonuses, because, its CFO said, "we have to pay people competitively." He also said the company planned to hire 400 new employees, mostly outside the U.S., to rebuild its trading business.  NYTimes, Morgan Stanley Returns to a Profit.  Maybe someone in government took notice too, because later today the Federal Reserve announced proposals on executive compensation o discourage excessive risk-taking at the big banks.  Here is part of the press release:

The Federal Reserve Board on Thursday issued a proposal designed to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of their organizations.

The proposal includes two supervisory initiatives. One, applicable to 28 large, complex banking organizations, will review each firm's policies and practices to determine their consistency with the principles for risk-appropriate incentive compensation set forth in the proposal. These firm-specific policies will be assessed by supervisors in a special "horizontal review," a coordinated examination of practices at the 28 firms. The policies and implementing practices adopted by these firms in response to the final supervisory principles will become a part of the supervisory expectations for each firm and will be monitored for compliance.

Second, supervisors will review compensation practices at regional, community, and other banking organizations not classified as large and complex as part of the regular, risk-focused examination process. These reviews will be tailored to take account of the size, complexity, and other characteristics of the banking organization.


Flaws in incentive compensation practices were one of many factors contributing to the financial crisis. Inappropriate bonus or other compensation practices can incent senior executives or lower level employees, such as traders or mortgage officers, to take imprudent risks that significantly and adversely affect the firm. With that in mind, the Federal Reserve's guidance and supervisory reviews cover all employees who have the ability to materially affect the risk profile of an organization, either individually, or as part of a group.

The findings from these reviews will be incorporated into the banking organization's supervisory ratings. In appropriate circumstances, the Federal Reserve may require an organization to develop a corrective action plan to rectify deficiencies in its incentive compensation programs and processes.

To monitor and encourage improvements, Federal Reserve staff will prepare a report after the conclusion of 2010 on trends and developments in compensation practices at banking organizations.

  In addition, Kenneth Feinberg provided additional information on the negotiations with the seven companies bailed out by the government and how he made his decisions to slash top officers' compensation; The Special Master for TARP Executive Compensation Issues First Rulings.   NYTimes, Fed Plans to Vet Banker Pay to Discourage Risky Practices.

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

Wednesday, October 21, 2009

Pay Czar Will Order Pay Cuts at Seven Recipients of Bailout Funds

The federal "pay czar," Kenneth Feinberg, will order the seven companies receiving the most federal bailout money to reduce the cash compensation to their 25 highest-paid employees by about 90%.  Many employees will instead receive restricted stock.  Total compensation to those employees will be reduced by about 50%.  Feinberg will also require a number of corporate governance changes, such as splitting the CEO and Board Chairman positions and eliminating staggered boards.  NYTimes, U.S. to Order Steep Pay Cuts at Firms That Got Most Aid; WSJ, Pay Czar to Slash Compensation at Seven Firms.

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

SEC Settles Insider Trading Charges in Georgia Pacific Stock

The SEC announced that the United States District Court for the Northern District of Illinois entered Final Judgment as to defendant Dr. Gautam Gupta ("Gupta") in connection with insider trading charges in Georgia Pacific Corporation. The Court ordered disgorgement and prejudgment interest against Gupta in the respective amounts of $689,401 and $188,096.17. The Court also imposed a civil penalty against Gupta in the amount of $689,401, the full amount of his insider trading profits. The Court ordered Gupta to satisfy payment of these amounts in accordance with a monthly payment schedule over a period of one year. Gupta consented to the entry of the judgment without admitting or denying the allegations of the Commission's Complaint.

The Commission's complaint alleged fraud in connection with insider trading in the securities of Georgia-Pacific Corporation by three individuals who received tips directly or indirectly from defendant James D. Zeglis ("Zeglis"), now deceased. The Complaint alleged that Zeglis misappropriated material nonpublic information from his brother, a member of Georgia-Pacific's board of directors, and further alleged that on November 10, 2005, three days before a public announcement that Georgia-Pacific had agreed to be acquired by Koch Industries, Inc., Zeglis tipped Gupta and Jim W. Dixon ("Dixon"), both of whom purchased Georgia-Pacific securities. Gupta, in turn, tipped Lance D. McKee ("McKee"), who also purchased Georgia-Pacific securities.

Further, the Complaint alleged that after Zeglis tipped Dixon, Dixon purchased Georgia-Pacific options on Zeglis's recommendation, and paid Zeglis a kickback from his ill-gotten gains. Within moments after meeting with Zeglis, Gupta transferred $400,000 from a commodities brokerage account to his bank account and placed a 40 second phone call to McKee. After the phone call from Gupta, McKee almost immediately purchased 500 shares of Georgia-Pacific stock, a stock he had never previously purchased. Within a few hours, Gupta had opened a brokerage account, transferred the $400,000 into his new brokerage account, and made his first stock purchase in ten years by purchasing 20,000 shares of Georgia-Pacific. The following day, Gupta purchased an additional 10,000 shares and then purchased 241short term call options in Georgia-Pacific, increasing his investment in Georgia-Pacific securities to more than $1 million. Further, the Complaint alleged that on Sunday, November 13, 2005, Koch Industries, Inc. ("Koch") publicly announced a definitive agreement for a Koch subsidiary to make a cash tender offer for all shares of Georgia-Pacific. The following day, Georgia-Pacific's stock price increased 36% in response to the announcement. Gupta then sold his Georgia-Pacific securities, realizing profits of $689,401.

Final judgments have previously been entered against all other defendants.

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

SEC Proposes Rules on Dark Pools

The SEC voted to propose measures intended to increase transparency of dark pools so investors get a clearer view of stock prices and liquidity.  Dark pools are essentially private trading systems in which participants can transact their trades without displaying quotations to the public. The largest dark pools are sponsored by securities firms primarily to execute the orders of their customers and proprietary orders of the firms.  The number of active dark pools transacting in stocks that trade on major U.S. stock markets has tripled since 2002. Given this growth of dark pools, a lack of transparency could create a two-tiered market that deprives the public of information about stock prices and liquidity.

To make trading through dark pools more transparent, the SEC's proposals generally would require that information about an investor's interest in buying or selling a stock be made available to the public instead of just a select group operating with a dark pool. The proposals also would require that dark pools publicly identify that it was their pool that executed the trade.

The SEC's proposals address three specific concerns related to dark pools:

The first proposal would require actionable Indications of Interest (IOIs) — which are similar to a typical buy or sell quote — to be treated like other quotes and subject to the same disclosure rules.

The second proposal would lower the trading volume threshold applicable to alternative trading systems (ATS) for displaying best-priced orders. Currently, if an ATS displays orders to more than one person, it must display its best-priced orders to the public when its trading volume for a stock is 5 percent or more. Today's proposal would lower that percentage to 0.25 percent for ATSs, including dark pools that use actionable IOIs.

The third proposal that would create the same level of post-trade transparency for dark pools - and other ATSs - as for registered exchanges. Specifically the proposal would amend existing rules to require real-time disclosure of the identity of the dark pool that executed the trade.

In its proposals, the Commission is seeking public comment and data on certain issues relating to dark pools. Dark pools of liquidity are one of several issues that the Commission is currently considering as part of its broad review of equity market structure.

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

Senior Financial Supervisors Say Risk Management Practices Continue to Need Improvement

The Senior Supervisors Group (SSG) that comprises senior financial supervisors from seven countries (United States, Canada, France, Germany, Japan, Switzerland, United Kingdom) today issued a report that evaluates how weaknesses in risk management and internal controls contributed to industry distress during the financial crisis.  The report — Risk Management Lessons from the Global Banking Crisis of 2008 — reviews in detail the funding and liquidity issues central to the recent crisis and explores critical areas of risk management practice in need of improvement across the financial services industry.  The report concludes that despite firms' recent progress in improving risk management practices, underlying weaknesses in governance, incentive structures, information technology infrastructure and internal controls require substantial work to address.

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

Tuesday, October 20, 2009

Perceptive Advisors Settles SEC Charges of Reg M Violations

The SEC and Perceptive Advisors LLC settled charges that from January 2005 through December 2005, Perceptive Advisors violated Rule 105 of Regulation M with respect to five repeat securities offerings. In each case, Perceptive Advisors sold securities short within five business days before the pricing of the offering, and then covered the short position, in whole or in part, with shares purchased in the offering. As a result, Perceptive obtained unlawful profits of $245,902.34.  Based on the above, the Order censures Perceptive Advisors; requires Perceptive Advisors to cease and desist from committing or causing any violations and any future violations of Rule 105 of Regulation M; and orders Perceptive Advisors to pay disgorgement of $245,902.34 plus prejudgment interest of $68,852.92, and a civil money penalty in the amount of $125,000. Perceptive has consented to the issuance of the Order without admitting or denying any of the findings in the Order

October 20, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

First New York Securities Settles Reg M Charges

The SEC and First New York Securities LLC settled charges that First New York violated Rule 105 of Regulation M with respect to two repeat securities offerings. On both occasions, in connection with the offering, First New York sold securities short within five business days before the pricing of the offering, and then covered the short position, in whole or in part, with shares purchased in the offering. As a result, First New York obtained unlawful profits of $39,544.35.  Based on the above, the Order censures First New York; requires First New York to cease and desist from committing or causing any violations and any future violations of Rule 105 of Regulation M; and orders First New York to pay disgorgement of $39,544.35 and prejudgment interest of $9,464.37, and a civil money penalty in the amount of $20,000. First New York consented to the issuance of the Order without admitting or denying any of the findings in the Order.

October 20, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, October 19, 2009

SEC Brings Failure to Supervise Charges Against Ferris Baker Watts GC

The SEC Enforcement Division instituted an administrative proceeding against Theodore W. Urban, who allegedly was the General Counsel and a member of the Board of Directors and Credit Committee of Ferris Baker Watts, Inc. (Ferris), a registered broker-dealer and investment adviser. According to the complaint, from at least August 2002 through November 2005, Ferris registered representative Stephen J. Glantz (Glantz), David A. Dadante (Dadante), who was one of Glantz's customers, and a registered representative at another brokerage firm all participated in a scheme to manipulate the market for the stock of Innotrac Corp. (Innotrac). The Division of Enforcement further alleges that all three pled guilty to violations of Section 10(b) of the Securities Exchange Act of 1934 and in their plea agreements, they all admitted that they artificially inflated and maintained the price for Innotrac stock.

The Division of Enforcement alleges that Urban had the requisite degree of responsibility, ability or authority at Ferris to affect the conduct of Glantz and, thus, was a supervisor of Glantz. The Division of Enforcement alleges that Urban failed to respond reasonably to red flags regarding Glantz's misconduct and lack of supervision, including, among others, those raised in a May 23, 2003 Ferris Compliance Department memorandum and in numerous communications from Compliance Department and other Ferris personnel. As a result of this conduct, the Division of Enforcement alleges that Urban failed reasonably to supervise Glantz with a view to detecting and preventing Glantz's violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the Order are true, to provide Urban an opportunity to establish any defense to these allegations, and to determine what, if any, remedial action is appropriate in the public interest against Urban.

October 19, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Proposes Revisions to Notice and Access Provisions of Proxy Rules

On October 14 the SEC published proposed changes to the proxy rules to improve the notice and access model for furnishing proxy materials to shareholders. Specifically, it proposes revisions to provide additional flexibility regarding the format of the Notice of Internet Availability of Proxy Materials that is sent to shareholders. The proposal also provides guidance about the current requirement for the Notice to identify the matters intended to be acted on at the shareholders’ meeting. In addition, the SEC proposes a new rule that will permit issuers and soliciting shareholders to include explanatory materials regarding the process of receiving and reviewing proxy materials and voting, as well as revisions to the timeframe for delivering a Notice to shareholders when a soliciting person other than the issuer relies on the notice-only option.

Comments should be received on or before November 20, 2009.

October 19, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sunday, October 18, 2009

Canova on Financial Market Failure

Financial Market Failure as a Crisis in the Rule of Law: From Market Fundamentalism to a New Keynesian Regulatory Model, by Timothy A. Canova, Chapman University - School of Law, was recently posted on SSRN.  Here is the abstract:

This article considers the financial panic of 2008 in historical context by analyzing the institutional and regulatory factors that contributed to the financial and economic crisis. The move away from a Keynesian regulatory model was a function of larger institutional flaws. The Keynesian regime of command-and-control regulation focused on macroeconomic policy objectives designed to achieve full employment, more equitable distributions of wealth and income, greater transparency in the regulatory process, and reduction in monopoly exploitation of consumers. Central to this regime was a model of central banking that required greater accountability to elected branches of government and the use of selective credit controls to complement general monetary policy measures. As the Federal Reserve (the Fed) became increasingly subject to agency capture by its private financial constituencies, it also became a leading force behind the deregulation of interest rates and lending standards, and the adoption of risk-based capital requirements. These trends, in turn, undermined the transparency of financial institutions and markets, and encouraged the development of an unsustainable, bubble economy. The privatized Federal Reserve System represents a profound rule-of-law failure that is reflected in today’s bailout model which socializes losses and privatizes gains for “too big to fail” financial institutions. This captured Fed represents a significant impediment to effective financial regulation and a proper balance of constitutional authority on monetary and fiscal policymaking between elected and appointed branches and private actors. This article recommends reviving the model of institutional law and Keynesian economics by suggesting a more complete and integrated approach to financial regulation that would keep competition within prescribed limits while allocating credit and capital away from private, speculative activity and into longer-term public investment in physical and social infrastructure. A necessary precondition is reform of the Fed’s institutional structure to safeguard monetary policy and financial regulation from a self-serving financial industry.

October 18, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)