Securities Law Prof Blog

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

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Friday, February 13, 2009

SEC Fines SG Americas Securities for Failure to Supervise Former Managing Director

In the Matter of SG Americas Securities, LLC and Francois O. Barthelemy:

On February 13, the SEC issued an Order Imposing Remedial Sanctions (Order) against SG Americas Securities, LLC (SGAS) and Francois O. Barthelemy (Barthelemy). The Order finds that SGAS and Barthelemy failed reasonably to supervise Guillaume Pollet (Pollet), a former managing director who violated the antifraud provisions of the federal securities laws by selling short the publicly traded securities of PIPE issuers prior to the close of the PIPE transaction in which he was contemplating investing the capital of SGAS's parent, Société Générale. In certain instances, Pollet's short-selling was contrary to specific representations in Securities Purchase Agreements (SPAs), and also constituted unlawful insider trading. In 2007, Pollet settled with the Commission by consenting to a final judgment, pursuant to which Pollet was permanently enjoined from violating the antifraud provisions and ordered to pay a civil penalty in the amount of $150,000.

SGAS failed to have a reasonable system to implement its compliance and supervisory policies to prevent and detect Pollet's unlawful trading, and its Control Room staff failed to adequately investigate suspicious trading by Pollet. Also, SGAS did not have a reasonable system to implement its policies or procedures concerning the proper retention of outside counsel, or the vetting of legal advice received from outside counsel. Barthelemy was Pollet's direct supervisor, and failed reasonably to supervise Pollet because he failed to follow up on the red flags indicating that Pollet's trading was questionable. Barthelemy was aware that Pollet's trading could present legal and regulatory concerns and he directed Pollet to obtain legal advice from counsel, but Barthelemy did not take steps to find out what the advice was or whether it was being appropriately followed. In addition, while Pollet was on vacation, Barthelemy signed two SPAs that contained false representations and failed to follow up with Pollet regarding the accuracy of those representations.

Based on the above, the Order censures SGAS pursuant to Section 15(b)(4)(E) of the Exchange Act and orders SGAS to pay disgorgement of $5,756,086.03 and prejudgment interest of $2,628,846.40. The Order suspends Barthelemy from acting in a supervisory capacity for any broker or dealer for a period of three months and orders him to pay a civil money penalty in the amount of $50,000. SGAS and Barthelemy consented to the issuance of the Order without admitting or denying any of the findings in the Order. (Rel. 34-59401; File No. 3-13372)

February 13, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Brokerage Pay Under Government Scrutiny

The House Committee on Oversight and Government Reform is looking into pay practices, such as retention bonuses and recruitment packages, at the retail brokerage units of financial institutions that have received federal bailout money.  InvNews, House committee explores payouts at brokerage firms.

February 13, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, February 12, 2009

Ruth Madoff Withdrew $15.5 Million before Husband's Arrest

Ruth Madoff, Bernard's wife, reportedly withdrew $15.5 million from a brokerage account in the weeks before her husband's arrest, $10 million of it the day before.  NYTimes, Wife Withdrew Millions Before Madoff’s Arrest.

February 12, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

FINRA Fines Wachovia For Mutual Fund and UIT Suitability Violations

FINRA announced today that it has fined two Wachovia units more than $4.5 million for violations related to the sales of mutual funds and Unit Investment Trusts (UIT). Wachovia Securities was fined $4.41 million for its failure to provide investors with sales charge discounts in eligible UIT transactions, its failure to ensure that investors received the benefit of Net Asset Value (NAV) transfer programs in applicable mutual fund purchases and for suitability violations related to the sale of Class B and C mutual fund shares. Wachovia Securities Financial Network was fined $150,500 for suitability violations related to improper Class B share sales. The fines reflect the $4 million-plus in additional commissions the firms received by selling Class B and C shares rather than Class A shares.

Wachovia has already returned over $2.4 million to Class A purchasers in connection with 4,200 NAV transfer transactions and approximately $3 million to customers in connection with over 20,000 UIT transactions. As part of the settlement, the firms will also provide remediation to 5,850 households that purchased Class B and C shares in over 14,500 transactions and to additional eligible NAV customers who did not receive the benefit of NAV transfer programs.

FINRA found that Wachovia Securities failed to provide rollover discounts in connection with over 15,000 customer purchases of UITs. The firm also failed to provide breakpoint discounts in connection with approximately 5,000 customer UIT purchases. As a result, customers paid approximately $2.71 million in excessive sales charges.  FINRA also found that Wachovia Securities made unsuitable sales of Class B and C shares and Wachovia Securities Financial Network made unsuitable sales of Class B shares. Wachovia Securities recommended the purchase of Class B and C shares, and Wachovia Securities Financial Network recommended the purchase of B shares, without considering, on a consistent basis, that an equal investment in Class A shares would have generally been more advantageous for certain customers.  FINRA also found that Wachovia Securities had inadequate supervisory procedures relating to UIT, NAV transfer program and Class B and C sales and Wachovia Securities Financial Network had inadequate supervisory procedures relating to Class B share sales.

Each firm settled these matters without admitting or denying the allegations, but consented to the entry of FINRA's findings.

February 12, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Enjoins Meridian Holdings from Fraud, Books & Records Violations

The SEC announced today that the United States District Court for the Central District of California entered final judgments, by consent, permanently enjoining Meridian Holdings, Inc. ("Meridian"), Anthony C. Dike ("Dike") and Michelle V. Nguyen ("Nguyen") from future violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20 and 13a-13 thereunder. In addition, both Meridian and Dike were permanently enjoined from future violations of Section 302(b) of Regulation S-T, and Dike was further permanently enjoined from future violations of Exchange Rule 13a-14. Dike was also ordered to pay a civil penalty in the amount of $25,000, and is prohibited for five years from the date of the judgment from acting as an officer or director of a public company. Nguyen was ordered to pay a civil penalty in the amount of $15,000 and, in a separate administrative proceeding, was suspended from appearing or practicing before the Commission as an accountant, with the right to request reinstatement after three years.

Meridian, which was located in Culver City, California, owned interests in companies that engage in e-commerce in the medical industry, and provided management services to those companies. The Commission's complaint, filed on September 28, 2007, alleged that the financial statements filed with Meridian's 2004 second and third quarter reports caused Meridian to materially overstate it assets and represent it had significant gains, when, in fact, it should have reported losses. Meridian also backdated officer certifications required by the Sarbanes-Oxley Act, the Commission alleged.  On October 30, 2009, Meridian filed with the Commission a certification and notice of termination of its registration under Section 12(g) of the Exchange Act.

February 12, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Issues Final Rule on Interactive Data for Mutual Fund Risk/Return

The SEC issued its final rule on INTERACTIVE DATA FOR MUTUAL FUND RISK/RETURN   Here is the summary:

We are adopting rule amendments requiring mutual funds to provide risk/return summary information in a form that is intended to improve its usefulness to investors. Under the rules, risk/return summary information could be downloaded directly into spreadsheets, analyzed in a variety of ways using commercial off-the-shelf software, and used within investment models in other software formats. Mutual funds will provide the risk/return summary section of their prospectuses to the Commission and on their Web sites in interactive data format using the eXtensible Business Reporting Language (“XBRL”). The interactive data will be provided as exhibits to registration statements and as exhibits to prospectuses with risk/return summary information that varies from the registration statement. The rules are intended not only to make risk/return summary information easier for investors to analyze but also to assist in automating regulatory filings and business information processing. Interactive data has the potential to increase the speed, accuracy, and usability of mutual fund disclosure, and eventually reduce costs. We also are adopting rules to permit investment companies to submit portfolio holdings information in our interactive data voluntary program without being required to submit other financial information.

DATES: Effective Date: July 15, 2009. Compliance Date: January 1, 2011.

February 12, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Canadian with Manipulating Stocks of Four Companies

The SEC announced that today it charged George Georgiou, of Toronto, Ontario, with manipulating the market in four separate microcap stocks — Avicena Group, Inc., Neutron Enterprises, Inc., Hydrogen Hybrid Technologies, Inc., and Northern Ethanol, Inc.  The Commission's action, filed in federal district court in Philadelphia, alleges that, from 2004 through September 2008, Georgiou, who controlled the publicly-traded stock of each company, manipulated the market in each stock through the use of many nominee accounts that he either directly or indirectly controlled at offshore broker-dealers and banks and the use of manipulative techniques, including matched orders and wash sales. Ultimately, Georgiou realized at least $20.9 million in ill-gotten gains from his manipulation schemes.

In addition to the enforcement action, the Commission today entered an order suspending trading in the securities of the four manipulated stocks for a ten day period commencing 9:30 a.m. February 12, 2009. The U. S. Attorney for the Eastern District of Pennsylvania today separately announced criminal charges against Georgiou involving the same conduct.

The Commission's complaint alleges that Avicena Group is headquartered in Palo Alto, California, and that the other three companies are headquartered in Canada. 

The complaint seeks a permanent injunction, disgorgement of ill-gotten gains, together with prejudgment interest, civil penalties, and a penny stock bar against Georgiou.

February 12, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 11, 2009

Cuomo Says Nearly 700 Merrill Lynch Employees Received at least $1 Million Bonus Payments

In a letter to Barney Frank, Chairman of the House Committee on Financial Services, New York State Attorney General Andrew Cuomo states that, "in a surprising fit of corporate irresponsibility," Merrill Lynch decided secretly to move up the planned date to allocate 2008 bonuses and awarded approximately $3.6 billion in bonuses. He goes on to say:

One disturbing question that must be answered is whether Merrill Lynch and Bank of America timed the bonuses in such a way as to force taxpayers to pay for them through the deal funding. We plan to require top officials at both Merrill Lynch and Bank of America to answer this question and to provide justifications for the massive bonuses they paid ahead of their massive losses. As you know, my Office recently issued subpoenas seeking the testimony of former Merrill Lynch CEO John Thain, as well as the testimony of Bank of America Chief Administrative Officer J. Steele Alphin. I expect we will also be seeking the testimony of other top executives at these firms.
What my Office has learned thus far concerning the allocation of the nearly $4 billion in Merrill Lynch bonuses is nothing short of staggering. Some analysts have wrongly claimed that individual bonuses were actually quite modest and thus legitimate because dividing the $3.6 billion over thousands upon thousands of employees results in relatively small amounts estimated at approximately $91,000 per employee. In fact, Merrill chose to do the opposite. While more than 39 thousand Merrill employees received bonuses from the pool, the vast majority of these funds were disproportionately distributed to a small number of individuals. Indeed, Merrill chose to make millionaires out of a select group of 700 employees. Furthermore, as the statistics below make clear, Merrill Lynch awarded an even smaller group of top executives what can only be described as gigantic bonuses.

The top four bonus recipients received a combined $121 million; the next four bonus recipients received a combined $62 million, and the next six bonus recipients received a combined $66 million.  In all, 696 individuals received bonuses of $1 million or more.

Cuomo goes on to state:

My investigation into whether these bonus payments violated New York's fraudulent conveyance statute and whether the lack of disclosures concerning these payments and other matters violated the Martin Act will continue. We will also continue to examine the circumstances surrounding any supposed guaranteed bonuses, their justifications, and Merrill's obligations pursuant to them, once Bank of America produces more information concerning such bonuses.

February 11, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

ITT Settles FCPA Charges Involving Chinese Contracts

The SEC filed a settled civil injunctive action in the U.S. District Court for the District of Columbia against ITT Corporation ("ITT"), a New York-based global multi-industry company, alleging violations of Section 13(b)(2)(A) and (B) of the Securities Exchange Act of 1934 ("Exchange Act"). Those provisions are part of the Foreign Corrupt Practices Act books and records and internal controls provisions. The Commission's complaint alleges that ITT's violations of the provisions resulted from payments to Chinese government officials by ITT's wholly-owned Chinese subsidiary, Nanjing Goulds Pumps Ltd. ("NGP"). From 2001 through 2005, NGP's illicit payments to employees of numerous Chinese state-owned entities ("SOEs") totaled approximately $200,000. The customers associated with those illicit payments generated over $4 million in sales to NGP, from which ITT realized improper profits of more than $1 million.

ITT, without admitting or denying the allegations in the Commission's complaint, consented to the entry of a final judgment permanently enjoining it from future violations of Section 13(b)(2)(A) and (B) of the Exchange Act; ordering the company to pay disgorgement of $1,041,112, together with prejudgment interest thereon of $387,538.11; and imposing a $250,000 civil penalty, pursuant to Section 21(d)(3) of the Exchange Act. The Commission considered that ITT self-reported, cooperated with the Commission's investigation, and instituted subsequent remedial measures.

February 11, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles with Four Individuals Charged with Insider Trading in Dick's Sporting Goods Stock

The SEC announced that on February 6, the U.S. District Court Judge for the Western District of Pennsylvania entered Final Judgments against four individuals charged with insider trading in advance of Dick's Sporting Goods Inc.'s June 21, 2004, announcement that it intended to acquire Galyan's Trading Company, Inc. via a tender offer. The complaints, which the SEC filed on September 30, 2008, alleged:

Joseph J. Queri, Jr., who was Dicks' Senior Vice President of Real Estate, tipped his close friend, Gary Gosson, and his father, Joseph Queri, Sr., about the acquisition.

Gosson tipped several friends, including defendants Joseph A. Federico, Philip J. Simao and Mark J. Costello, who all bought shares of Galyans stock.

Queri Sr. also tipped several friends, including Gino M. Ferraro. Ferraro tipped his son-in-law, defendant Franko J. Marretti III, who traded and tipped a business colleague.

The day after the public announcement, Galyan's stock closed at $16.68, a 50.3% increase from the previous day's closing price of $11.10.

Without admitting or denying the allegations in the complaint, Federico, Simao, Costello and Marretti consented to the entry of a Final Judgment in which they are permanently enjoined from future violations of the antifraud provisions of the securities laws, Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. Federico also agreed to pay disgorgement of $23,326.00, plus prejudgment interest of $7,540.22, and a one-time civil penalty for trading in the amount of $23,326.00. Simao agreed to pay disgorgement of $13,390.00, plus prejudgment interest of $4,328.37, and a one-time civil penalty for his trading in the amount of $13,390.00. Costello agreed to pay disgorgement of $9,540.00, plus prejudgment interest of $3,083.85, and a one-time civil penalty for his trading in the amount of $9,540.00. Finally, Marretti agreed to pay disgorgement of $9,552.00, plus prejudgment interest of $3,150.92, and a civil penalty for trading and tipping a colleague in the amount of $54,817.00. The Commission has now obtained settlements from nine of the sixteen defendants.

February 11, 2009 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

KBR and Halliburton Settle FCPA Charges Involving Nigerian Contracts

The SEC announced settlements with KBR, Inc. and Halliburton Co. to resolve SEC charges that KBR subsidiary Kellogg Brown & Root LLC bribed Nigerian government officials over a 10-year period, in violation of the Foreign Corrupt Practices Act (FCPA), in order to obtain construction contracts. The SEC also charged that KBR and Halliburton, KBR's former parent company, engaged in books and records violations and internal controls violations related to the bribery.

KBR and Halliburton have agreed to pay $177 million in disgorgement to settle the SEC's charges. Kellogg Brown & Root LLC has agreed to pay a $402 million fine to settle parallel criminal charges brought today by the U.S. Department of Justice. The sanctions represent the largest combined settlement ever paid by U.S. companies since the FCPA's inception.

Kellogg Brown & Root LLC's predecessor entities (Kellogg, Brown & Root, Inc. and The M.W. Kellogg Company) were members of a four-company joint venture that won the construction contracts worth more than $6 billion. In September 1998, Halliburton acquired Dresser Industries, Inc., the parent company of The M.W. Kellogg Company.

The SEC alleges that beginning as early as 1994, members of the joint venture determined that it was necessary to pay bribes to officials within the Nigerian government in order to obtain the construction contracts. The former CEO of the predecessor entities, Albert "Jack" Stanley, and others involved in the joint venture met with high-ranking Nigerian government officials and their representatives on at least four occasions to arrange the bribe payments. To conceal the illicit payments, the joint venture entered into sham contracts with two agents, one based in the United Kingdom and one based in Japan, to funnel money to Nigerian officials.

The SEC's complaint alleges that the internal controls of Halliburton, the parent company of the KBR predecessor entities from 1998 to 2006, failed to detect or prevent the bribery, and that Halliburton records were falsified as a result of the bribery scheme. In September 2008, Stanley pleaded guilty to bribery and related charges and entered into a settlement with the SEC.

In the related criminal proceeding announced today, the U.S. Department of Justice filed a criminal action against Kellogg Brown & Root LLC, charging one count of conspiring to violate the FCPA and four counts of violating the anti-bribery provisions of the FCPA. Kellogg Brown & Root LLC has pled guilty to each of these counts. Under its plea agreement, Kellogg Brown & Root LLC is required to pay a criminal fine of $402 million and to retain a monitor to review and evaluate KBR's policies and procedures as they relate to compliance with the FCPA.

February 11, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 10, 2009

SEC Settles Financial Fraud Charges Against Former MetLife Officer

The SEC announced that on February 9, 2009, the United States District Court for the District of Massachusetts entered a final judgment by consent against Thom A. Faria, the last defendant in a financial fraud case filed in April 2006. Faria is a former officer of MetLife, Inc. and its insurance company subsidiary New England Financial (NEF). The Commission's action charged that Faria and two other defendants engaged in a scheme to improperly hide NEF expenses that led directly to the publication of materially false financial statements by MetLife and NEF. Faria, who was the former president of the NEF distribution channel and a senior vice president of MetLife, settled the matter without admitting or denying the Commission's allegations. He consented to the entry of a final judgment enjoining him from future violations of the federal securities laws, ordering him to pay a total of over $97,000 in disgorgement, prejudgment interest and civil penalties, and barring him from serving as an officer or director of a public company for five years.

Faria's two co-defendants, former NEF employees Stephen McLaughlin and William Stickney, previously agreed to settle the Commission's charges. Judgments by consented were entered against Stickney in July 2007 and McLaughlin in October 2007.

February 10, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Three with Pump and Dump Scheme

The SEC filed a civil enforcement action against Tulsa attorney George David Gordon; Dallas, Texas resident Joshua Lankford; and Canadian Dean Sheptycki for their roles in a scheme to defraud the public by manipulating the share prices of three penny stocks (National Storm Management Group, Inc. ("NLST"), Deep Rock Oil and Gas, Inc. ("DPRK"), and Global Beverages Solutions, Inc. ("GBVS) collectively referred to as "Target Stocks"). The Commission charged Gordon and Lankford with violating the antifraud and stock registration provisions of the United States securities laws and charged Sheptycki with aiding and abetting Gordon and Lankford's violations of the antifraud provisions.  According to the complaint, Defendants' scheme to defraud was perpetrated from the spring of 2005 through December 2006 and derived illegal trading profits totaling in excess of $20 million.

The complaint charges Gordon and Lankford with violating Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder and Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act"), and seeks a permanent injunction, disgorgement, prejudgment interest, a civil penalty, and a penny stock bar. The complaint charges Sheptycki with aiding and abetting Mark B. Lindberg, Gordon, and Lankford's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 17(a) of the Securities Act, and seeks a permanent injunction, disgorgement, prejudgment interest, a civil penalty, and a penny stock bar.

February 10, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Hedge Fund Managers with Fraud

The SEC filed a civil injunctive action in the United States District Court for the Southern District of New York charging Grant Ivan Grieve, Finvest Asset Management, LLC ("FAM") and Finvest Fund Management, LLC ("FFM") with fraud in connection with two hedge funds that they managed and advised, Finvest Primer, L.P. ("Primer Fund") and Finvest Yankee, L.P ("Yankee Fund"). The Commission's complaint alleges that, in an effort to attract and retain investors in Primer Fund and Yankee Fund, the defendants took elaborate steps to create the impression of profitable performance that they had not actually achieved.  Specifically, the Commission's complaint alleges that, beginning at least as early as mid-2006, defendants Grieve and FAM fabricated and disseminated financial information for the Primer Fund that was "certified" by two sham professional firms that Grieve himself created: a supposedly independent back-office administrator called Global Hedge Fund Services ("GHFS"); and a purportedly independent accounting firm called Kass Roland, LLC ("Kass Roland"). The complaint further alleges that Grieve and FAM sent certain investors a fabricated confirmation by GHFS of Primer Fund's trading operations for fiscal years 2001 through 2005, and sent at least one prospective investor financial statements containing a fake Kass Roland audit opinion. According to the complaint, Grieve had secretly formed GHFS and Kass Roland — each with fictitious employees, phone numbers, websites, email addresses, automated voice messaging systems, and physical office addresses — as part of an overall effort to deceive current and prospective investors about his investing capabilities and track record.

The Commission's complaint also alleges that Grieve, FAM, and FFM provided current and prospective investors in both Primer Fund and Yankee Fund with monthly account statements, newsletters, and "fact sheets" that materially overstated the funds' performance and assets. The complaint further alleges that, beginning in late 2008, Grieve has been engaging in similar misconduct overseas, including luring new investors and/or placating existing European investors with newly-fabricated documents.

The complaint seeks permanent injunctions, disgorgement and prejudgment interest thereon, and civil money penalties against all of the defendants.

February 10, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, February 9, 2009

SEC Charges Spokane Washington Man with Ponzi Scheme

The SEC filed securities fraud and other charges against Quest Holdings, Inc. and its principal, Craig T. Jolly, of Spokane, Washington, for operating an internet-based Ponzi scheme promising monthly returns of up to 19.5 percent. According to the complaint, defendants Quest and Jolly raised approximately $4 million from more than 200 investors, located throughout the country and abroad, through the issuance of short-term securities promising monthly interest rates as high as 19.5 percent. Jolly raised funds by offering and selling Quest securities through Quest's website, EarnByLoaning.com. As set forth in the complaint, Jolly claimed to be active in the investment community and financial markets and falsely assured investors that Quest had a reserve fund to ensure that they would be repaid.

In reality, the Commission alleges, Jolly invested only about one-third of the investor funds he received, on which he suffered hundreds of thousands of dollars in trading losses. The complaint also alleges that defendants operated a Ponzi scheme and repaid purported profits to investors from funds provided by later investors, not from earnings on Quest's investment activities. In addition, the Commission alleges that Jolly misappropriated at least $628,000 of investor funds, which he used for his own stock trading and to pay for his vehicles, medical bills and other personal expenses.

The Commission's complaint, filed in federal district court for the Eastern District of Washington, charges Quest and Jolly with violating the antifraud and registration provisions of the federal securities laws, and seeks entry of an order for an asset freeze, injunctions, an accounting, disgorgement, and civil penalties.

February 9, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Approves FINRA Arbitration Rule on Explained Decisions

The SEC approved a proposed rule change (SR-FINRA-2008-051) filed by FINRA relating to amendments to the Codes of Arbitration Procedure to require arbitrators to provide an explained decision upon the joint request of the parties. Publication is expected in the Federal Register during the week of February 9.

February 9, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Madoff Consents to Permanent Injunction in SEC Action

The SEC announced that on February 9, 2009, it submitted to the federal court in the Southern District of New York the consent of Bernard L. Madoff to a proposed partial judgment imposing a permanent injunction and continuing relief previously imposed in the preliminary injunction order, entered on December 18, 2008. Madoff consented to the partial judgment without admitting or denying the allegations of the SEC's complaint, filed on December 11, 2008. If the partial judgment is entered by the Court, the permanent injunction will continue to restrain Madoff from violating certain antifraud provisions of the federal securities laws. The proposed partial judgment would also continue against Madoff the relief imposed in the December 18, 2008 Order, including the order freezing assets. The proposed partial judgment would leave the issues of the amount of disgorgement, prejudgment interest and civil penalty to be imposed against Madoff to be decided at a later time. For purposes of determining Madoff's obligation to pay disgorgement, prejudgment interest and/or a civil penalty, the proposed partial judgment deems the facts of the complaint are established and cannot be contested by Madoff.

The SEC's complaint, filed on December 11, 2008, in federal court in Manhattan, alleges that Madoff and Defendant Bernard L. Madoff Investment Securities LLC have committed a $50 billion fraud and violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act of 1940. The complaint alleges that Madoff, just prior to the filing of the complaint on December 11, 2008, informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme." The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.

February 9, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Changes in Leadership at SEC

A change in leadership in the SEC's Enforcement Division was probably inevitable after the Madoff scandal, the Congressional anger at the SEC staff expressed during recent hearings, and SEC Chair Schapiro's promise to get tough.  Today the SEC announced that Linda Chatman Thomsen was returning to the private sector, and the press reported that the new Director of Enforcement would likely be a former federal prosecutor, Robert Khuzami. WSJ, SEC Expected to Name Khuzami Enforcement Director

In another change at the top, the SEC announced last Friday that David Becker, who was General Counsel at the SEC from 2000-02 under Arthur Levitt, will return to that position and, in addition, will be Senior Policy Director.

February 9, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, February 8, 2009

Kaufman & Wunderlich on Confidential Informants in Securities Litigation

Congress, the Supreme Court, and the Proper Role of Confidential Informants in Securities Fraud Litigation, by Michael J. Kaufman, Loyola University of Chicago - School of Law, and John M. Wunderlich, was recently posted on SSRN.  Here is the abstract:

Confidential sources are critical to preventing financial harm and prosecuting corporate misconduct. In order to overcome the Private Securities Fraud Litigation Act's heightened pleading requirements, victims of securities fraud often have to rely on confidential sources for particularized facts regarding fraud. In its most recent decision regarding those pleading requirements, the United States Supreme Court held that plaintiffs must allege a strong inference of scienter; meaning the inference of culpability must be at least as likely as nonculpable competing inferences. The question left unanswered by the Court in Tellabs, however, is whether securities fraud victims can satisfy this pleading standard through the use of confidential sources.

This article will show that Tellabs cannot fairly be construed to preclude plaintiffs from relying on confidential sources to satisfy the PSLRA's securities fraud pleading requirements. Section II of this article will examine the federal courts' pre-Tellabs treatment of confidential sources for securities fraud cases based on the particularity provision of the PSLRA. This section also will discuss the Tellabs decision and its emergent rule. Section III of this article will analyze the circuits' post-Tellabs treatment of confidential sources. The lower federal courts thus far are split on the place of confidential sources in securities fraud pleading. A recent Seventh Circuit decision invoking Tellabs requires courts to discount allegations from confidential witnesses. This Section will show that the Tellabs rule does not justify such a discounting of confidential sources. Finally, this article will conclude that, while the federal courts previously assessed confidential informants from a particularity viewpoint, some federal courts after Tellabs are beginning to treat confidential sources under an erroneous strong inference standard. The continuation of that trend will disserve the Supreme Court's precedents, the will of Congress and the victims of securities fraud.

February 8, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Franklin on Chamber of Commerce's Success at Roberts Court

What Kind of Business-Friendly Court? Explaining the Chamber of Commerce's Success at the Roberts Court, by David L. Franklin, DePaul University - College of Law, was recently posted on SSRN.  Here is the abstract:

Since the Roberts Court was formed in January 2006, the Court has decided 38 cases in which the Chamber of Commerce of the United States filed a brief either as a party or amicus. In these 38 cases, the party supported by the Chamber ended up prevailing in 28, for a winning percentage of almost 74 percent. Nor did the parties supported by the Chamber typically squeak by with narrow victories-twelve of the Chamber's 28 wins were by unanimous votes, and in eight more the Chamber or the party it supported got seven or eight votes.

As the Chamber's success rate illustrates, there is little doubt that the Roberts Court is, broadly speaking, a business-friendly Court. The questions that remain have to do with what kind of a business-friendly Court it is. In what contexts is the Court especially receptive to the arguments and interests of business, and for what reasons? In what areas has the Court remained relatively unreceptive, and why? Are the Court's pro-business leanings best explained in terms of legal doctrines or ideological preferences?

Part I of this article describes the Chamber's litigation efforts generally and its participation as amicus in the Supreme Court in particular, and canvasses the existing literature on amicus brief efficacy in order to put the Chamber's efforts and outcomes in perspective. Part II is the main part of the article; it examines the Court's decisions and the Chamber's briefs in five key areas-preemption, punitive damages, arbitration, pleading standards, and employment discrimination-and finds in these areas a consistent theme of skepticism about litigation as a mode of regulatory control. The article concludes with a brief comment about the implications of this preliminary finding for future research.

February 8, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)