Securities Law Prof Blog

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

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Friday, February 20, 2009

Arbitration Filings Up 54% in 2008

New cases filed in FINRA arbitration increased in 2008 by 54% over 2007 -- 4962 cases compared with 3238 in the previous year.  This is the highest number of new filings since 2005.

February 20, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (3)

SEC Obtains Emergency Relief Against Hedge Fund, Paramount Partners

On February 18, 2009, the SEC filed an emergency civil action in the U.S. District Court of Minnesota charging Paramount Partners, LP ("Paramount"), a hedge fund, Crossroad Capital Management, LLC ("Crossroad"), Paramount's investment adviser, and John W. Lawton ("Lawton"), who runs Crossroad, with ongoing fraudulent conduct.  According to the complaint: Paramount is a hedge fund in which approximately 50 to 60 investors, many of whom live in Minnesota, have invested as much as $9 million. Lawton and Crossroad have engaged in a fraud in which they misrepresented Paramount's assets and returns to investors. The complaint alleges that the defendants misrepresented to investors that Paramount has produced annual returns of 65% to 19% since 2001 and that it had investments totaling about $17 million as of December 31, 2008, while in fact, Paramount only had $5.3 million of assets in its accounts at that time. The complaint alleges that as of February 13, Paramount's assets amounted to less than $2 million, and that defendants withdrew $900,000 in January. The complaint further alleges that when the Commission requested documents from the defendants to verify defendants' claims about Paramount's assets, the defendants provided account statements showing a false $12 million account balance in a brokerage account that had long been closed.

In an order dated February 19, 2009, the Honorable Judge Ann Montgomery entered a temporary restraining order enjoining Paramount, Crossroad, and Lawton from violating the antifraud provisions of the Securities Act of 1933 [Section 17(a)] and the Securities Exchange Act of 1934 [Section 10(b) and Rule 10b-5 thereunder], and against Crossroad and Lawton with respect to violations of the Investment Advisers Act of 1940 [Sections 206(1), 206(2), and 206(4) and Rule 206(4)-8 thereunder] and aiding and abetting of Crossroad's violations of those provisions by Lawton. The Order, among other things, also freezes assets of Paramount, Crossroad, and Lawton until further order of the court.

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

SEC Suspends Former UnitedHealth Group GC From Practicing Before SEC

On February 19, the SEC, pursuant to Rule 102(e) of its Rules of Practice, issued an order (the Rule 102(e) Order) suspending former UnitedHealth Group, Inc. General Counsel David J. Lubben from appearing or practicing before the Commission as an attorney for three years. On Jan. 23, 2009, Lubben was permanently enjoined by the United States District Court for the District of Minnesota from violating various federal securities laws, including several antifraud provisions, and was suspended by the Commission on that basis. Lubben consented to the suspension without admitting or denying the Rule 102(e) Order's findings, except he admitted to the U.S. District Court's entry of the injunction.

In its civil action filed in U.S. District Court, the Commission charged Lubben with participating in a stock option backdating scheme at UnitedHealth. According to the Commission's complaint, Lubben or others acting at his direction created false or misleading company records indicating that stock option grants by UnitedHealth had occurred on dates when the company's stock price had been at a low. Lubben personally received numerous backdated grants of options, representing as many as 3.8 million shares of UnitedHealth stock on a split adjusted basis. He exercised approximately 1.8 million of those options for approximately $1.1 million in gains attributable to improper backdating.

Without admitting or denying the allegations, Lubben consented to the entry of an order, which, among other things, permanently enjoins him from violating the antifraud provisions of the federal securities laws and bars him from serving as an officer or director of a public company for a period of five years. The U.S. District Court also ordered Lubben to pay a $575,000 civil penalty. See Litigation Release No. 20836 (Dec. 22, 2008). The Court's Order further provides that Lubben's disgorgement and prejudgment interest would be deemed satisfied by his voluntary repricing of his UnitedHealth stock options, which reduced the value of those options by approximately $2.7 million, and his payment of approximately $630,000 in pending settlements to resolve derivative and shareholder lawsuits related to options backdating filed against Lubben in state and federal courts in Minnesota.

February 20, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (1)

SEC's Statement on Robert Allen Stanford

The SEC today made the following statement regarding its enforcement action against Robert Allen Stanford:

"At the request of the SEC, Special Agents of the Federal Bureau of Investigation's Richmond Division today located and identified Stanford Financial Group chairman Allen Stanford in the Fredericksburg, Va., area. The agents served Mr. Stanford with court orders and documents related to the SEC's civil filing against him and three of his companies. The SEC very much appreciates the outstanding assistance of the FBI in this matter."

The SEC on February 17 charged Robert Allen Stanford and three of his companies, alleging a fraudulent, multi-billion dollar investment scheme. Stanford's companies include Antiguan-based Stanford International Bank (SIB), Houston-based broker-dealer and investment adviser Stanford Group Company (SGC), and investment adviser Stanford Capital Management. The SEC also charged SIB chief financial officer James Davis and Stanford Financial Group chief investment officer Laura Pendergest-Holt in the enforcement action.

The orders and documents that the FBI served on Stanford were the SEC's complaint, the memorandum of law filed with the complaint, the court order freezing assets, and the court order appointing a receiver.  These documents are posted on the SEC website.

The Honorable Reed O'Connor, U.S. District Court Judge for the Northern District of Texas, granted the SEC's request for emergency relief for investors, and issued the orders freezing assets and appointing a receiver over R. Allen Stanford and other defendants.

February 20, 2009 in SEC Action | Permalink | Comments (1) | TrackBack (1)

Thursday, February 19, 2009

Robert Khuzami Named SEC Director of Enforcement

As expected, Chair Schapiro announced today that former federal prosecutor Robert Khuzami has been named Director of the Division of Enforcement.  As the SEC release emphasizes, Mr. Khuzami previously served as a federal prosecutor for 11 years with the United States Attorney's Office for the Southern District of New York. As Chief of that Office's Securities and Commodities Fraud Task Force for three years, Mr. Khuzami prosecuted numerous complex securities and white-collar criminal matters, including those involving insider trading, Ponzi schemes, accounting and financial statement fraud, organized crime infiltration of the securities markets, and IPO and investment adviser fraud. Mr. Khuzami most recently served as General Counsel for the Americas at Deutsche Bank AG.

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

SEC Takes Action Against Ponzi Scheme Targeting Deaf Community

On February 18, 2009, the SEC obtained a court order halting an alleged $4 million Ponzi scheme perpetrated by Hawaii-based Billion Coupons, Inc. ("BCI") and its CEO Marvin R. Cooper. The Complaint alleges that BCI and Cooper raised $4.4 million from 125 investors since at least September 2007 and specifically targeted members of the Deaf community in the United States and Japan.

The Complaint, filed in federal court in Honolulu, Hawaii, alleges that BCI and Cooper represented to the investors that their funds would be invested in the foreign exchange ("Forex") markets, that investors would receive returns of up to 25% compounded monthly from such trading, and that their investments were safe. According to the Complaint, BCI and Cooper actually used only a net $800,000 (cash deposits minus cash withdrawals) of investor funds for Forex trading, and they lost more than $750,000 from their Forex trading. The Complaint further alleges that BCI and Cooper failed to generate sufficient funds from their Forex trading to pay the promised returns and operated as a Ponzi scheme by paying returns to existing investors from funds contributed by new investors. The Complaint also alleges that Cooper misappropriated at least $1.4 million in investor funds to pay for a new home and other personal expenses.

The Complaint alleges that the defendants have violated the registration and antifraud provisions of the federal securities laws, Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. In its lawsuit, the Commission obtained an order temporarily enjoining BCI and Cooper from future violations of these provisions. The Commission also obtained an order: (1) freezing the assets of BCI and Cooper; (2) appointing a temporary receiver over BCI; (3) preventing the destruction of documents; (4) granting expedited discovery; and (5) requiring BCI and Cooper to provide accountings. The Commission also seeks preliminary and permanent injunctions, disgorgement, and civil penalties against both defendants. A hearing on whether a preliminary injunction should be issued against the defendants and whether a permanent receiver should be appointed is scheduled for March 2, 2009, at 9:00 a.m. HST.

The Commodity Futures Trading Commission ("CFTC") also filed an emergency action against BCI and Cooper, alleging violations of the antifraud provisions of the Commodity Exchange Act, and the State of Hawaii's Department of Commerce and Consumer Affairs ("DCCA"), Office of the Commissioner of Securities, issued a preliminary order to cease and desist against BCI and Cooper.

February 19, 2009 in SEC Action | Permalink | Comments (2) | TrackBack (4)

The SEC and the Stanford Group Fraud

The fallout over the SEC's failure to uncover earlier the Stanford fraud begins.  The New York Times reports that both the SEC and FINRA previously found violations at the Stanford Group, but let it off the hook with small fines.  In 2007, for example, the SEC found that the firm did not meet the net capital requirements for broker-dealer firms and fined it $20,000.  Over the years FINRA imposed small fines against it for various violations.  SEC staff said it was looking into whether there were "red flags" that should have alerted the agency to more serious problems.  NYTimes, S.E.C. Fines Didn’t Avert Stanford Group Case.

The SEC has posted at its website information for investors about the court-appointed receiver.

February 19, 2009 | Permalink | Comments (1) | TrackBack (1)

Wednesday, February 18, 2009

Insurance and Index Annuity Groups File Brief Challenging SEC Authority to Regulate Index Annuities

In a brief filed with the D.C. Court of Appeals, the National Association of Insurance Commissioners and the National Conference of Insurance Legislators joined a group of equity index annuity companies and argued that the SEC exceeded its authority when it enacted, last December, its rule subjecting most index annuities to federal regulation as securities.  The SEC's response is due April 6.  The D.C. Circuit, which frequently overturns SEC rules, agreed to hear the case on an accelerated basis.  InvNews, States fight for right to regulate equity index annuities.

February 18, 2009 in News Stories | Permalink | Comments (0) | TrackBack (7)

Study Reports Companies Did Not Write Down ARS

Nearly 30% of public companies holding auction rate securities are reporting them at full par value, according to a study conducted by researchers at Pluris Valuation Advisers and Villanova University, and many companies that did write them down did not do so to the full extent of their impairment.  CFO.com, Study: Many Companies Fail to Write Down ARS Losses.

February 18, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

FINRA Fines Robert W. Baird & Co. for Fee-Based Accounts Violations

FINRA announced that it has fined Robert W. Baird & Co. $500,000 for supervisory violations relating to its fee-based brokerage business. FINRA also ordered Baird to return $434,510 in fees, plus interest, to 154 customers. Those customers either paid fees in fee-based accounts without generating activity or paid fees higher than those indicated on the Baird fee schedule.  Baird terminated its fee-based brokerage account program — called 360/One accounts - on Sept. 30, 2007.

FINRA found that Baird's failure to adequately review its 360/One accounts during a period in which the 360/One program grew from approximately 7,000 accounts to over 11,000 accounts allowed numerous 360/One customers to remain in the program despite conducting no trades for at least eight consecutive quarters. These accounts paid over $269,000 in fees during the inactive quarters (that is, excluding the first four consecutive quarters with no trades).

Baird also failed to have a supervisory system in place to automatically credit certain 360/One customers with breakpoint discounts that were specified in new account agreements. As a result, 53 customers paid fees higher than those indicated on the Baird fee schedule, resulting in total overpayments of approximately $165,000.

In addition, from May 1999 through January 2005, Baird failed to adequately disclose to its fee-based customers that assets held on margin — for which the customer might already be paying interest — and short sales were included as eligible assets for purposes of fee calculation.

In settling this matter, the firm neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

February 18, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (5)

SEC Commissioner Walter Speaks on Corporate Governance Issues

SEC Commissioner Elisse B. Walter spoke today in New York on "Restoring Investor Trust through Corporate Governance."  Topics included proxy access, enhanced disclosure on director nominees, e-proxies, broker votes and say-on-pay.

February 18, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (5)

SEC Charges Former Colorado Broker with Running a Ponzi Scheme

The SEC filed securities fraud charges against former registered representative, William L. Walters for operating a Ponzi scheme promising annual returns ranging from 20% to 40%.  According to the Complaint, from 2003 through 2006, Walters raised approximately $16.8 million from more than 80 investors under the false pretense that he would invest their funds in day trading in the securities markets. In reality, the Commission alleges, Walters deposited only a small fraction of investor funds into brokerage accounts, conducted very little trading in these accounts, and sustained heavy losses on the trading he did conduct. The Commission further alleges that Walters used approximately $11.4 million of investor funds to pay off prior investors in a classic Ponzi scheme pattern, using the rest largely to support his lavish lifestyle, with expensive cars and homes in Colorado and Hawaii.

February 18, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (5)

UBS Settles SEC Charges It Facilitated Clients' Tax Avoidance

The SEC filed an enforcement action against UBS AG, charging the firm with acting as an unregistered broker-dealer and investment adviser.  According to its complaint, UBS's conduct facilitated the ability of certain U.S. clients to maintain undisclosed accounts in Switzerland and other foreign countries, which enabled those clients to avoid paying taxes related to the assets in those accounts. UBS agreed to settle the SEC's charges by consenting to the issuance of a final judgment that permanently enjoins UBS and orders it to disgorge $200 million.

As alleged in the SEC's complaint, from at least 1999 through 2008, UBS acted as an unregistered broker-dealer and investment adviser to thousands of U.S. persons and offshore entities with United States citizens as beneficial owners. UBS had at least 11,000 to 14,000 of such clients and held billions of dollars of assets for them. The U.S. cross-border business provided UBS with revenues of $120 to $140 million per year.

In connection with a related criminal investigation, UBS has entered into a deferred prosecution agreement with the Department of Justice pursuant to which UBS will pay an additional $180 million in disgorgement, as well as $400 million in tax-related payments.

February 18, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (1)

Tuesday, February 17, 2009

Research in Motion Limited Settles Backdating Charges with SEC

The SEC charged Ontario, Canada, BlackBerry maker Research in Motion Limited (RIM) and four of its senior executives with stock option backdating.  The SEC's complaint alleges that RIM, its former Chief Financial Officer Dennis Kavelman, former Vice President of Finance Angelo Loberto, and Co-Chief Executive Officers James Balsillie and Mike Lazaridis illegally granted undisclosed, in-the-money options to RIM executives and employees by backdating millions of stock options over an eight-year period from 1998 through 2006. The complaint alleges that the defendants made false and misleading disclosures about how RIM priced and accounted for options, and that the illicit backdating provided the executives and other employees with millions of dollars in undisclosed compensation. In addition, according to the complaint, the backdating violated the terms of RIM's stock option plan and a listing requirement of the Toronto Stock Exchange. RIM's stock is listed on both the NASDAQ Stock Market and the Toronto Stock Exchange.

As alleged in the complaint, Kavelman, Loberto, Balsillie and Lazaridis backdated option agreements and offer letters, which concealed the fact that the options were granted in-the-money. The complaint also alleges that Kavelman and Loberto took steps to hide the backdating from regulators, RIM's independent auditor and outside lawyer. The complaint further alleges that after all four executives were aware of backdating issues that had come to light at other companies, they attended RIM's July 2006 annual shareholder meeting where Kavelman misled investors by denying that RIM was backdating options.

All defendants have agreed to settle this matter, without admitting or denying the allegations in the SEC's complaint.  The individual defendants will pay civil penalties in the following amounts: $500,000 for Kavelman; $425,000 for Loberto; $350,000 for Balsillie; and $150,000 for Lazaridis. The individual defendants also agreed to disgorge the in-the-money value of backdated options they had exercised ($132,914.60 for Kavelman, $47,950.56 for Loberto, $334,250 for Balsillie and $328,300 for Lazaridis) plus interest. Their disgorgement will be deemed satisfied by their previous payment of these amounts to RIM.

The settlements in the civil injunctive action are subject to the approval of the U.S. District Court for the District of Columbia.

February 17, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (4)

SEC Charges Stanford Int'l Bank with $8 Billion Fraud

On February 16, 2009, the federal district court in the Northern District of Texas, at the request of the SEC, entered a TRO against Robert Allen Stanford and three of his companies, the Antiguan-based Stanford International Bank (SIB), Houston based broker-dealer and investment adviser, Stanford Group Company (SGC) and investment adviser, Stanford Capital Management. The SEC's complaint alleges that the defendants, acting through a network of SGC financial advisers, sold approximately $8 billion of so-called “certificates of deposit” to investors by promising improbable and unsubstantiated high interest rates, supposedly earned through its unique investment strategy, which has purportedly allowed the bank to achieve double-digit returns on its investments over the past 15 years. The court’s order also extends to SIB chief financial officer James Davis, and Laura Pendergest-Holt, chief investment officer of Stanford Financial Group. The court froze all assets of the defendants until further notice, ordered that assets outside the U.S. be returned to the court’s jurisdiction, appointed a receiver to marshal the defendants’ assets and granted other relief.

According to the Complaint, the defendants have misrepresented to CD purchasers that their deposits are safe, falsely claiming that the bank re-invests client funds primarily in “liquid” financial instruments (the “portfolio”); monitors the portfolio through a team of 20-plus analysts; and is subject to yearly audits by Antiguan regulators. Recently, as the market absorbed the news of Bernard Madoff’s massive Ponzi scheme, SIB attempted to calm its own investors by falsely claiming the bank has no “direct or indirect” exposure to the Madoff scheme.

The Commission continues to seek, among other things, a permanent injunction, disgorgement of ill-gotten gains plus pre-judgment interest, and civil money penalties.

February 17, 2009 in SEC Action | Permalink | Comments (0) | TrackBack (2)

Chamber of Commerce Releases Report to Improve SEC

The U.S. Chamber of Commerce's Center for Capital Markets Competitiveness recently released a report, Examining the Efficiency and Effectiveness of the U.S. Securities and Exchange Commission.  While recent criticisms of the agency have focused on agency's failures to prevent the collapse of Bear Stearns and Lehman Brothers and to detect Bernard Madoff's ponzi scheme, this Report, written by Jonathan Katz, former Secretary of the SEC for 20 years, focuses on improving the effectiveness and efficiency of certain core regulatory functions that are less visible but highly important, including staff no-action letters, investment company exemptive orders, and SRO rule orders.  A theme throughout the Report is to improve coordination among the agency's divisions both to shorten delays in the approval process and to prevent matters from falling between the cracks.  Thus, a key recommendation, which it acknowledges will be controversial, is the creation of a Chief Operating Officer to oversee daily operaitons. 

Another recommendation that is worthy of serious consideration is the realignment of the Division of Trading and Markets and the Division of Investment Management into a Division of Investor Protection and Retail Financial Services Regulation and a Division of Market Oversight and Operations, with the Examination Programs of OCIE assigned to these new divisions.  The Division of Investor Protection and Retail Financial Services Regulation would have responsibility for regulation of all retail investment products and services, whether stocks or mutual funds, and all professionals, whether broker-dealer or investment adviser, while the Market Oversight Division would be responsible for oversight of secondary market operations and oversight of the back-office and capital adequacy of regulated entities.  In addition, returning the examination functions into the new divisions is an important recommendation.  As many have recently observed, the 1994 creation of the separate OCIE Division may have diminished the effectiveness of the operating divisons by depriving them of real-time information from the field.

In short, there is much in this Study that contributes to the ongoing discussion of ways to improve the effectiveness of the SEC. 

February 17, 2009 in News Stories | Permalink | Comments (0) | TrackBack (2)

Monday, February 16, 2009

Morgan Stanley and Citigroup Will Pay Big Bucks to Brokers

Morgan Stanley and Citigroup will pay $3 billion in retention payments to top-producing brokers to keep them from being lured away from the firm, reports the Wall St. Journal.  Morgan Stanley, Citigroup to Give Brokers Big Retention Fees

February 16, 2009 in News Stories | Permalink | Comments (0) | TrackBack (2)

Niemeier for SEC Chief Accountant?

The CFO Blog reports the rumor that current PCAOB member Charles Niemeier will be appointed the SEC's Chief Accountant.  This is important because Niemeier opposed past Chair Cox's accelerated timetable for adoption of IFRS.  Mary Schapiro has already distanced herself from the rush to IFRS.

February 16, 2009 in News Stories | Permalink | Comments (0) | TrackBack (3)

Should the SEC be more like the CIA?

Professor Donald Langevoort, Georgetown University Law School, recommends that the SEC "has a lot to learn" from the CIA's methods of gathering information.  His comments were part of a program on the future of financial regulation presented last week at Columbia Law School.  CRO.com, SEC Should Adopt CIA Methods, Lawyers Say.

February 16, 2009 in News Stories | Permalink | Comments (0) | TrackBack (0)

First Circuit Affirms Dismissal of Fraud Charges Against Three Former Employees of Putnam Fiduciary Trust

The SEC recently announced that on February 6, 2009, the United States Court of Appeals for the First Circuit affirmed a federal district court decision dismissing a civil fraud action against three former executives of Putnam Fiduciary Trust Company (PFTC), a Boston-based registered transfer agent. The action, filed in December 2005, alleges that six former PFTC executives engaged in a scheme beginning in January 2001 by which the defendants defrauded a defined contribution plan client and group of Putnam mutual funds of approximately $4 million. On March 6, 2007, the district court issued a ruling dismissing the Commission's case against three of the six defendants: Virginia Papa, a former managing director and director of defined contribution servicing; Sandra Childs, a former managing director who had overall responsibility for PFTC's compliance department; and Kevin Crain, a managing director who had responsibility for PFTC's plan administration unit. Judgments by consent were entered in October 2008 against two of the three remaining defendants. The case against the remaining defendant, Donald McCracken, of Melrose, Massachusetts, a former managing director and head of global operations services for PFTC, is pending.

The Commission's Complaint alleges that through their conduct, all defendants violated Section 17(a) of the Securities Act of 1933 and violated and/or aided and abetted violations of Section 10(b) of the Securities Exchange Act of 1934 and one defendant violated Sections 34(b) and 37 of the Investment Company Act of 1940. The Commission is seeking injunctive relief and civil monetary penalties against the remaining defendant.

February 16, 2009 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)