December 22, 2009
Atlas Mining and Former CEO Settle SEC Fraud Charges
The SEC filed settled charges against Atlas Mining Company, an Idaho mining company, and its former CEO for improperly financing their struggling operations through the illegal distribution of millions of shares of stock to investors. According to the SEC, William Jacobson caused Atlas Mining to sell millions of shares of stock to the public while evading the disclosure and registration requirements of the federal securities laws. Among other things, the SEC alleges that Jacobson issued stock to family members and companies he controlled, who then resold the stock to the public and funneled the money back to the company. Similarly, the SEC alleges that when a 2003 public offering failed to raise sufficient funds before expiring, Jacobson unlawfully "parked" nearly 10 million shares with various friends, family members and affiliates so they could be sold at a later date. According to the SEC, these improprieties allowed Atlas Mining to raise financing without providing complete and timely information to investors as required by law.
The SEC's complaint charges Jacobson with violations of the antifraud and registration provisions of the federal securities laws, as well as reporting, internal control and certification provisions. Without admitting or denying the Commission's allegations, Jacobson consented to settle the charges and agreed to a permanent injunction against future violations of the federal securities laws, a $50,000 penalty, an order barring him from serving as an officer or director of any issuer for a period of five years, and an order barring him from participating in any offering of penny stock for a period of five years.
In a separate administrative proceeding, Atlas Mining, now known as Applied Minerals, Inc., consented to the entry of a cease-and-desist order barring violations of certain registration and reporting provisions of the federal securities laws.
SEC Settles Fraud Charges Against Texas Investment Adviser Who Used Football Players to Promote Offerings
The SEC filed securities fraud charges against Kurt B. Barton, an Austin, Texas investment adviser, and two businesses he controls for operating a multi-million dollar scam that used former professional football players to promote its offerings. According to the SEC, Barton and Triton Financial LLC raised more than $8.4 million from approximately 90 investors by selling "investor units" in an affiliate, Triton Insurance, and telling investors that their funds would be used to purchase an insurance company. The SEC alleges that these representations were false and investor proceeds were instead misused to pay day-to-day expenses at Triton and its affiliate.
According to the SEC's complaint, filed in federal court in Austin, Barton and Triton used former football players as well as stockbrokers and other salesmen to promote Triton securities to potential investors. Barton and Triton have consented to court orders freezing their assets. Triton has been registered with the Texas State Securities Board (TSSB) as an investment adviser since June 2006.
Triton was the subject of a March 2009 Sports Illustrated article that prompted the TSSB to examine Triton's business. The article described Triton's use of former Heisman Trophy winners and NFL players to promote its investments to potential investors, including other football players. The article noted one particular mass e-mail, sent by a former NFL quarterback to numerous NFL alumni, that discussed Triton's activities and touted Triton's returns on its investments. According to the SEC's complaint, the defendants provided the TSSB with altered and fabricated documents during the examination that followed the article's publication.
Without admitting or denying the SEC's allegations, the defendants have consented to permanent injunctions against future securities fraud violations. They have also consented to appointment of a receiver and to orders freezing their assets, prohibiting destruction of documents, and requiring that they provide an accounting.
SEC Proposes Amendments to Rule 163The SEC proposes amendments to Rule 163(c) under the Securities Act of 1933 that would allow a well-known seasoned issuer to authorize an underwriter or dealer to act as its agent or representative in communicating about offerings of the issuer’s securities prior to the filing of a registration statement. The agency believe that the proposed amendments would further facilitate capital formation by well-known seasoned issuers by removing certain impediments to issuer communications with broader groups of potential investors regarding offerings of securities.
Oversight Group Charges SEC Delay in Implementing OIG Recommendations
The Project On Government Oversight (POGO), an independent nonprofit that investigates and exposes government corruption and other misconduct, charged in a Dec. 16, 2009 letter to SEC Chair Schapiro that the agency has been dragging its feet on 224 recommendations (over 60%) made by the Office of Inspector General (OIG) since December 2007.
Documents obtained by POGO through a Freedom Of Information Act request show that hundreds of OIG recommendations have gone unimplemented over the last two years. Specifically, one document shows that the SEC has taken "no action” on 27 of 52 recommendations made by the OIG in its reports of investigation since December 2007, and a second document shows that 197 of the 312 recommendations made in the OIG’s audits since December 2007 are still listed as “pending,” including recommendations from the OIG’s audits on the Madoff case.
December 21, 2009
FINRA Fines Pacific Cornerstone Capital for Private Placement Violations
FINRA announced today that it fined Pacific Cornerstone Capital, Inc. and its former chief executive officer, Terry Roussel, a total of $750,000 for failing to include full and complete information in private placement offering documents and marketing material. FINRA also charged Pacific Cornerstone and Roussel with advertising violations and supervisory failures. Pacific Cornerstone was fined $700,000 and agreed to make corrective disclosures to investors and to submit advertising and sales literature to FINRA for pre-use review for one year. Roussel was fined $50,000 and suspended in all capacities for 20 business days and in a principal capacity for an additional three months.
From January 2004 to May 2009, Pacific Cornerstone sold private placements in two affiliated companies using offering documents and accompanying sales literature that contained targets as to when investors would receive the return of their principal investment and the yield on their investment. The offering documents included statements that the affiliated entities targeted returns of principal in two to four years and targeted a yield on a $100,000 investment in excess of 18 percent. FINRA found no reasonable basis for those statements. Further, Pacific Cornerstone and Roussel continued to use a similar targeted time period for return of capital and rate of return in successive offering documents, although those targets were not supported by prior performance. FINRA also found that the offering documents failed to disclose the complete financial condition of one or both of the companies.
Pacific Cornerstone also offered private placement units of the two affiliated entities, Cornerstone Industrial Properties, LLC and CIP Leveraged Fund Advisors, LLC, to other broker-dealers and investment advisors, which in turn sold the units to the investing public. A total of approximately $50 million worth of units were sold to approximately 950 accredited investors over a period of almost six years. Pacific Cornerstone continued to use the same targeted two-to-four year return of principal and 18 percent rate of return in successive offering documents, despite not having met those targets.
During the same period, Roussel periodically sent letters to the private placement investors to update them on the progress of their investment that painted a positive — but unrealistic — future, without providing required risk disclosures. Roussel's letters also failed to disclose the complete financial picture of the two companies.
In concluding this settlement, the firm and Roussel neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
SEC Approves Amendments to FINRA Arbitration Rules
On December 18, the SEC approved amendments to the FINRA arbitration rules. While mostly of a housekeeping nature, the one amendment that could affect investors is a provision that states that customers may be responsible for hearing fees if they file a claim against the broker in response to the broker's claim against them. As the FINRA notice (09-74) states:
Under the old Code, arbitrators could allocate hearing session fees against any party.
Rule 10332(c)10 of the old Code protected customers from potentially higher forum fees
(now hearing session fees) triggered by amounts sought in industry claims by
prohibiting the arbitrators from assessing forum fees against customers if the industry
claim was dismissed.Moreover, the rule protected customers from higher forum fees by
requiring that the amount of the forum fees be based on the amount awarded to an
industry party and not on the amount of damages requested by the industry claim.
However, Rule 10332(c) also provided that customers could be subject to potential
forum fees based on their own claims for relief in connection with the industry claim.
During the drafting of the Code Revision, FINRA inadvertently omitted from the
corresponding rule in the Customer Code the provision (in old Rule 10332(c)) that
permitted the forumto assess fees against the customer based on the customer’s claim
in an industry dispute. Thus, FINRA has amended Rule 12902(a)(4) to incorporate the
omitted language, which makes it clear to customers that if they file a claim in
connection with a claim filed by a firm, they may be subject to filing fees and hearing
session fees based on their own claim for relief.
December 20, 2009
Pan on Financial Regulatory Reform
Four Challenges to Financial Regulatory Reform, by Eric J. Pan, Yeshiva University - Benjamin N. Cardozo School of Law, was recently posted on SSRN. Here is the abstract:
The recent global financial crisis represented a failure of regulation to the extent that regulatory responses and strategies existed, but were not deployed, to prevent or mitigate the factors that contributed to the crisis. Recognizing the failure of regulation in preventing the recent financial crisis and the need to pursue more effective regulatory strategies, policymakers in the United Kingdom, United States and European Union set forth concurrent proposals for substantial reform of their respective regulatory systems. The reforms emphasized the reorganization of regulatory agencies and expansion of powers of surviving agencies. The proposals, however, differed significantly from each other.
Successful financial regulatory reform must address four challenges. First, how should regulatory systems be structured? Second, should there be a separation of prudential supervision and consumer protection regulation? Third, which entity should be responsible for monitoring and managing systemic risk and what should be its powers? Fourth, how should cross-border financial services and transactions be supervised and regulated?
The paper considers the four challenges to financial regulatory reform and evaluates whether the UK, US and EU reform proposals succeeded in addressing the challenges. Given their weaknesses, the paper concludes that the reform proposals do not go far enough to prevent future regulatory failures.
Barnard on SEC Enforcement
Evolutionary Enforcement at the Securities and Exchange Commission, by Jayne W. Barnard, William & Mary Law School, was recently posted on SSRN. Here is the abstract:
Since the worldwide financial meltdown in the autumn of 2008 and the discovery of Bernard Madoff’s crimes in December, 2008, hundreds of critics and political leaders have heaped abuse upon the SEC Enforcement Division. This article explores the SEC’s response to these critics, primarily through the appointment of new top-level managers and the initiation of an aggressive reorganization of the processes and workflow of the Division. It then sketches out six recommendations for further improving the Enforcement Division: a bounty program to compensate informants who come forward with useful information; creation of a victim services unit; a proposal to develop behavioral, as well as legal and financial, expertise within the Division; a surveillance and monitoring program for defendants demonstrating a recidivist profile; a sanction policy for individuals that is proportionate, progressive, remedial, and real; and regular publication of meaningful data regarding losses from fraud in the securities markets.
Yermack on Shareholder Voting
Shareholder Voting and Corporate Governance, by David Yermack, New York University - Stern School of Business, was recently posted on SSRN. Here is the abstract:
This article reviews recent research into corporate voting and elections. Regulatory reforms have given shareholders more voting power in the election of directors and in executive compensation issues. Shareholders use voting as a channel of communication with boards of directors, and protest voting can lead to significant changes in corporate governance and strategy. Some investors have embraced innovative “empty voting” strategies for decoupling voting rights from cash flow rights, enabling them to mount aggressive programs of shareholder activism. Market-based methods have been used by researchers to establish the value of voting rights and show how this value can vary in different settings.
Cohen et alia on Regulation of Structured Products
Have Us Regulators Been Soft on Banks Over Structured Products? Yes, by George M. Cohen, University of Virginia School of Law; David A. Dana, Northwestern University - School of Law; Susan P. Koniak, Boston University School of Law; and Thomas Ross, was recently posted on SSRN. Here is the abstract:
This article was originally written as a comment on the proposed Interagency Statement on Sound Practices Concerning Elevated Risk Complex Structured Finance Activities, 71 Fed. Reg. 28329 (May 16, 2006). The statement is Interagency Statement is a joint effort of all the federal agencies having a role in the regulation of financial institutions, including the SEC, FDIC, Federal Reserve, OTS, and the Comptroller of the Currency. The comment argues that the proposed Interagency Statement is a mistake and should be withdrawn because in its current form, it can be (and we think will be) read to encourage and condone illegal conduct. The proposed Interagency Statement gives financial institutions too much discretion to determine which “complex structured finance transactions” (CSFT) pose the problem of “elevated risk.” More troubling, the Statement provides a list of transaction characteristics that “may . . . warrant additional scrutiny” without recognizing or emphasizing that all of the characteristics are strongly indicative of potential fraud which in our view invites reckless participation in illegal conduct, either as a primary wrongdoer or as an aider and abetter.
Qian et alia on the Economic Benefits of SOX
The Economic Benefits of the Sarbanes-Oxley Act? Evidence from a Natural Experiment, by Jun Qian, Boston College - Finance Department; University of Pennsylvania - Wharton Financial Institutions Center; China Academy of Financial Research (CAFR); Philip E. Strahan, Boston College - Department of Finance; National Bureau of Economic Research (NBER); and Julie Zhu, Boston University, was recently posted on SSRN. Here is the abstract:
Section 404 of the Sarbanes-Oxley Act (SOX) requires firms with a public float over $75 million during 2002-2004 to file management reports beginning in 2004, but firms with a smaller float in each of the three years do not need to comply until the end of 2007. Relative to firms that could delay compliance, mandatory filers cut CEO compensation and financial slack, increase ownership by insiders, raise payouts to shareholders, and slow investment growth. These firms experience no change in borrowing costs but enjoy access to longer-term public debt. In contrast, we find no changes in the terms of bank debt. Unlike most prior studies, our results indicate potential benefits of SOX: reduced agency problems of complying firms and improved access to public debt.