Securities Law Prof Blog

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

Thursday, December 3, 2009

House Capital Markets Subcommittee Schedules Hearing on SIPC Issues Related to Madoff

Congressman Paul E. Kanjorski (D-PA), the Chairman of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, today announced that he will convene yet another proceeding looking into the Madoff Ponzi scheme.  The hearing will focus on a variety of policy issues involving the Securities Investor Protection Corporation (SIPC). The hearing will also occur during the week of the first anniversary of Mr. Madoff’s arrest.

December 3, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

House Financial Services Committee Passes Financial Reform Package

Yesterday the House Financial Services Committee completed its work on a comprehensive set of reforms intended to modernize America’s financial regulations. The Wall Street Reform and Consumer Protection Act (H.R. 4173), which will be considered on the House floor next week, includes the following provisions:

Consumer Protections: Creates the Consumer Financial Protection Agency (CFPA), a new, independent federal agency solely devoted to protecting Americans from unfair and abusive financial products and services. 

Financial Stability Council: Creates an inter-agency oversight council that will identify and regulate financial firms that are so large, interconnected, or risky that their collapse would put the entire financial system at risk. These systemically risky firms will be subject to heightened oversight, standards, and regulation. 

Dissolution Authority and Ending “Too Big to Fail”: Establishes an orderly process for dismantling large, failing financial institutions like AIG or Lehman Brothers in a way that ends bailouts, protects taxpayers, and prevents contagion to the rest of the financial system.

Executive Compensation: Gives shareholders a “say on pay” – an advisory vote on pay practices including executive compensation and golden parachutes. It also enables regulators to ban inappropriate or imprudently risky compensation practices, and it requires financial firms to disclose any compensation structures that include incentive-based elements.

Investor Protections: Strengthens the SEC’s powers so that it can better protect investors and regulate the nation’s securities markets.  It responds to the failures to detect the Madoff and Stanford Financial frauds by ordering a study of the entire securities industry that will identify needed reforms and force the SEC and other entities to further improve investor protection. 

Regulation of Derivatives:  Regulates, for the first time ever, the over-the-counter (OTC) derivatives marketplace. Under the bill, all standardized swap transactions between dealers and “major swap participants” would have to be cleared and traded on an exchange or electronic platform. The bill defines a major swap participant as anyone that maintains a substantial net position in swaps, exclusive of hedging for commercial risk, or whose positions create such significant exposure to others that it requires monitoring. 

Mortgage Reform and Anti-Predatory Lending: Would incorporate the tough mortgage reform and anti-predatory lending bill the House passed earlier this year. The legislation outlaws many of the egregious industry practices that marked the subprime lending boom, and it would ensure that mortgage lenders make loans that benefit the consumer.  It would establish a simple standard for all home loans: institutions must ensure that borrowers can repay the loans they are sold. 

Reform of Credit Rating Agencies: Addresses the role that credit rating agencies played in the economic crisis, and takes strong steps to reduce conflicts of interest, reduce market reliance on credit rating agencies, and impose a liability standard on the agencies.  

Hedge Fund, Private Equity and Private Pools of Capital Registration: Fills a regulatory hole that allows hedge funds and their advisors to escape any and all regulation.  This bill requires almost all advisers to private pools of capital to register with the SEC, and they will be subject to systemic risk regulation by the Financial Stability regulator.

Office of Insurance: Creates a Federal Insurance Office that will monitor all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to a systemic crisis and undermine the entire financial system.

December 3, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC's Schapiro Addresses Consumer Federation of America Conference

SEC Chairman Mary Schapiro spoke on "The Consumer in the Financial Services Revolution" at the Consumer Federation of America 21st Annual Financial Services Conference today in Washington D.C. Questions she addressed in her remarks:

Does the investor make a distinction between brokers and investment advisers, the way the law does?

Does the investor get the relevant, simple and comparable information at the point of sale or recommendation, or only after the sale has occurred, if at all?

Does the investor know about all the fees they are being charged and whether they are getting the services they are being charged for?

And, does the investor appreciate the nuances of retirement investments and products?

Of course we know the answers to those questions.  What we want to know is what the SEC is going to do to improve the investment decision-making process for retail investors.  Ms. Schapiro goes on to address SEC initiatives. 

December 3, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NY AG Announces Another Guilty Plea in Pay-to-Play Kickback Scheme

New York Attorney General Cuomo today announced a felony guilty plea by Elliott Broidy, a founder and Chairman of Markstone Capital Group LLC, for his involvement in a pay-to-play kickback scheme at the Office of the New York State Comptroller (“OSC”).  Broidy acknowledged paying nearly one million dollars in gifts for the benefit of OSC officials to obtain a $250 million investment from the New York State Common Retirement Fund (“CRF”) in Markstone Capital Partners, L.P. (the “Markstone Fund”). Broidy pleaded guilty to a felony charge of rewarding official misconduct and will cooperate in the Attorney General’s ongoing investigation. Broidy will also forfeit $18 million in connection with his plea.

Today's announcement arises from a two-year, ongoing investigation into corruption involving the OSC and the CRF. The charges to date allege a complex criminal scheme involving numerous individuals operating at the highest political and governmental levels under former Comptroller Alan Hevesi.

Markstone is a private equity firm headquartered in Los Angeles, California with an office in Israel. The Markstone Fund focuses on corporate buyout investments in privately held companies in Israel. Broidy resigned from his management role in Markstone on December 1, 2009. Broidy was also a trustee of the Los Angeles Fire and Police Pension fund from 2002 until he resigned in May 2009.

In his allocution to the Court, Broidy acknowledged making a series of payments to help induce and then increase the CRF’s investment in the Markstone Fund. The CRF ultimately committed $250 million to the Markstone Fund and paid over $18 million in management fees to Markstone. Broidy acknowledged that he had an agreement or understanding with certain high-ranking OSC officials: in exchange for certain benefits from Broidy, the OSC officials would exercise their judgment or discretion to benefit Markstone.

December 3, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 2, 2009

House Financial Services Committee Passes Financial Stability Improvement Act

Today, the House Financial Services Committee approved legislation that, according to its press release,  will put an end to “too big to fail” financial firms, help prevent the failure of large institutions from becoming a systemwide crisis, and ensure that taxpayers are never again left on the hook for Wall Street’s reckless actions. The Financial Stability Improvement Act (H.R. 3996) passed by a vote of 31-27.

H.R. 3996 specifically targets the issue of systemic risk within the financial system and the potential harm that regulatory gaps and large, interconnected companies like AIG can pose to the economy. The legislation will:

  • Identify and subject systemically risky firms to increased scrutiny and regulation: H.R. 3996 will create an inter-agency oversight council that will identify and monitor financial firms and activities that could potentially undermine the nation’s financial stability. Once identified, these firms and activities will be subject to stricter oversight, standards, and regulation.
  • Ensure that the collapse of a large, interconnected financial institution does not lead to another taxpayer bailout or jeopardize the economy: Currently, there is no system in place to responsibly shut down a failing financial company like AIG or Lehman Brothers. This bill establishes an orderly process for the dismantling any large failing financial institution in a way that protects taxpayers and minimizes the impact to the financial system.
  • Hold Wall Street accountable for its actions: If a large institution fails, the bill holds the financial industry and shareholders responsible for the cost of the company’s orderly wind down, not taxpayers. Under H.R. 3996, any costs for dismantling a failed financial company will be repaid first from the assets of the failed firm at the expense of shareholders and creditors. Any shortfall would then be covered by a “dissolution fund” pre-funded by large financial companies with assets of more than $50 billion and hedge funds with assets of more than $10 billion.

December 2, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC and Compass Capital Group Settle Charges Relating to Offering of Unregistered Securities

The U.S. District Court for the District of Nevada entered a final judgment against Mark A. Lefkowitz and Compass Capital Group, Inc., two defendants in the SEC's pending civil action concerning an unlawful offering of unregistered stock by 21st Century Technologies, Inc. Without admitting or denying the allegations of the Commission's complaint, Lefkowitz and Compass Capital consented to the entry of permanent injunctions and penny stock bars, and to pay disgorgement of $750,000 of illicit trading profits and a civil penalty of $50,000.

The Commission's complaint alleged that Lefkowitz and Compass Capital, an entity that he controls, aided and abetted a scheme to defraud investors of 21st Century, by engaging in a public offering of millions of shares of 21st Century's common stock while posing as a Wall Street financing source for the company. Investors were not told that 21st Century, a now-defunct business development company, had sold to Lefkowitz and Compass Capital, and entities introduced by them, millions of shares of its stock in unregistered transactions, at a discount to market prices, and that the defendants and the other entities immediately resold the shares to public market investors for almost-guaranteed profits. By acting as statutory underwriters of 21st Century's unregistered offering, Lefkowitz and Compass Capital also violated the securities registration provisions of the federal securities laws, and acted as unregistered broker dealers by inducing others to purchase the shares. The complaint also alleged that Lefkowitz and Compass Capital failed to report their ownership of more than five percent of the outstanding shares of 21st Century in 2003 and 2004.

Lefkowitz and Compass Capital were ordered to disgorge $750,000 of trading profits, are barred from participating in any offering of penny stock for a period of five years. Additionally, Lefkowitz was ordered to pay a civil money penalty in the amount of $50,000.

The Commission's litigation against the one remaining defendant, John Hopf, is ongoing.

December 2, 2009 in SEC Action | Permalink | Comments (1) | TrackBack (0)

SEC Charges Transfer Agent with Improper Distribution of Restricted Securities

On November 30, 2009, the SEC filed a civil injunctive action in the U.S. District Court for the District of Utah against Standard Transfer & Trust, a registered transfer agent, and its president Whitney D. Lund, Sr. In its Complaint, the SEC charges Lund with improperly distributing restricted stock certificates of Mosaic Nutraceuticals Corp. after fraudulently issuing the certificates without the proper restrictive legends. He allgedly did this as part of a scheme to profit from the sale of Mosaic shares he owned and controlled, and, as a result of his actions, market participants were misled into treating these restricted securities as free trading. To cover his scheme and reap more than $700,000 in illicit profits, according to the Complaint, Lund falsified transfer agent records and obtained a materially false and misleading attorney opinion letter that was backdated at Lund’s direction in an effort to make his distribution of Mosaic stock appear legitimate. In addition, according to the Complaint, Lund testified falsely during the SEC’s investigation, claiming that he relied on this opinion letter when he made the distribution. The Complaint further charges Standard Transfer & Trust from violating multiple regulations governing the conduct of transfer agents and Lund with aiding and abetting those violations.

The Complaint requests that the court permanently enjoin the defendants from future violations of the federal securities laws, order the defendants to pay financial penalties, and order Lund to disgorge ill-gotten gains, plus prejudgment interest. The complaint also asks the court to bar Lund from participating in an offering of penny stock.

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

SEC Charges Canopy Financial with Offering Fraud

The SEC announced that it has filed fraud charges against Canopy Financial Inc., a Chicago-based health care financial services company, and has frozen the assets of its co-founder who allegedly provided investors with forged financial statements to lure them into a $75 million investment scheme.  The SEC alleges that Canopy and its former president and chief operating officer Jeremy J. Blackburn solicited investors for a private placement offering for preferred shares of Canopy. They provided investors with a falsified audit report purportedly from accounting firm KPMG as well as bank and financial statements with false and misleading information exaggerating Canopy's financial condition. Blackburn misappropriated at least $1.7 million from the offering into his personal bank accounts.

The U.S. District Court for the Northern District of Illinois granted the SEC's request for a temporary restraining order and asset freeze against Blackburn. The SEC's case was unsealed today by the court.

The SEC's complaint alleges that Canopy and Blackburn solicited investors from at least October 2008 through August 2009, providing them with documents devised to show that Canopy had a much healthier cash balance and larger client base than it actually did. Blackburn also falsified at least one bank statement to show an account balance of approximately $8.9 million, when in fact it was a custodial account of a Canopy client that held approximately $86,952. The SEC further alleges that Canopy raised approximately $75 million from investors and paid approximately $40 million in redemptions to existing investors, including Blackburn who redeemed 250,000 shares in exchange for approximately $1.625 million.

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

SEC Reportedly Investigating Insider Trading in Health Care Mergers

The Wall St. Journal reports today that the SEC has sent out "at least three dozen" subpoenas to hedge funds and brokerage firms looking into insider trading.  The focus appears to be on health care mergers in recent years and the role of Goldman Sachs.  WSJ, SEC Steps Up Insider-Trading Probes.

December 2, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 1, 2009

SEC's Inspector General Releases Semi-Annual Report to Congress

The SEC's Office of Inspector General released its Semi-Annual Report to Congress reporting on its investigations of the agency's programs, procedures and policies.  The OIG's report on the SEC's failures in connection with the Madoff fraud received a great deal of publicity, but, as the Report makes clear, it has conducted a number of other important investigations into the operations of the agency.

December 1, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, November 30, 2009

SEC Announces $2 Billion in Fair Fund Distributions in 2009

The SEC issued a press release last week announcing that, for the first time, more than $2 billion has been distributed in a calendar year to injured investors as a result of SEC enforcement actions and proceedings.

In 2009, distributions to injured investors have been made in 31 cases brought by the Commission, involving illegal conduct ranging from accounting fraud to pump-and-dump schemes to mutual fund market timing. Among the distributions this year were more than $840 million to approximately 257,000 injured AIG investors, more than $320 million to approximately two million injured investors in Alliance Capital mutual funds, and more than $240 million to approximately 700,000 injured Bear Stearns investors.

November 30, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges New Orleans Hurricane Restoration Company with Securities Fraud

The SEC charged a Dallas and New Orleans-based hurricane restoration company and several executives for lying about non-existent business deals in the wake of Hurricane Katrina, and fraudulently inflating the company's stock price before the company's CEO sold millions of dollars in company shares.  The SEC alleges that Home Solutions of America, Inc. recorded millions of dollars in bogus revenue and issued a series of materially false press releases boasting robust financial results following Katrina and other weather-related disasters, thus inflating the company's stock price. The stock price later plummeted after large insider stock sales, the filing of private securities lawsuits alleging fraud, and the company's public announcement that it would restate its financial statements. Home Solutions then-CEO Frank Fradella, who is among seven individuals charged by the SEC in the scheme, dumped approximately $6.8 million worth of stock into the inflated market.

The SEC's complaint charges Home Solutions, Fradella, Marshall and Mattich with violations of the antifraud, reporting, books and records and internal control provisions of the federal securities laws and seeks permanent injunctive relief, financial penalties, and as to the individuals, full disgorgement with interest and officer and director bars.

Four others charged today by the SEC simultaneously agreed to settle on the following terms, without admitting or denying the allegations in the complaint:

November 30, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Supreme Court Grants Cert in Foreign Cubed Action

The U.S. Supreme Court accepted certiorari today in Morrison v. National Australia Bank Ltd., 547 F.3d 167 (2d Cir. 2008), an important case dealing with the extraterritorial effect of federal securities law.  The Second Circuit affirmed the district court's holding that it should not exercise jursidiction over a class action where (1) foreign plaintiffs are suing (2) a foreign issuer in an American court for violations of American securities laws based on securities transactions in (3) foreign countries (so-called foreign cubed action).  The U.S. Solicitor General had filed a petition advising the Court not to grant certiorari.

According to the petitioners, the issues presented are:

I. Whether the antifraud provisions of the United States securities laws extend to transnational frauds where: (a) the foreign-based parent company conducted substantial business in the United States, its American Depository Receipts were traded on the New York Stock Exchange and its financial statements were filed with the Securities Exchange Commission (“SEC”); and (b)the claims arose from a massive accounting fraud perpetrated by American citizens at the parent company's Florida-based subsidiary and were merely reported from overseas in the parent company's financial statements.

II. Whether this Court, which has never addressed the issue of whether subject matter jurisdiction may extend to claims involving transnational securities fraud, should set forth a policy to resolve the three-way conflict among the circuits ( i.e., District of Columbia Circuit versus the Second, Fifth and Seventh Circuits versus the Third, Eighth and Ninth Circuits).

III. Whether the Second Circuit should have adopted the SEC's proposed standard for determining the proper exercise of subject matter jurisdiction in transnational securities fraud cases, as set forth in the SEC's amicus brief submitted at the request of the Second Circuit, and whether the Second Circuit should have adopted the SEC's finding that subject matter jurisdiction exists here due to the “material and substantial conduct in furtherance of” the securities fraud that occurred in the United States.

November 30, 2009 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)