Securities Law Prof Blog

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

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Thursday, March 25, 2010

SEC Charges UBS Investment Banker and Friends with Insider Trading Ring

The SEC today charged a Wall Street investment banker, another securities professional, and one of their friends in a clandestine insider trading ring that netted approximately $1 million in illicit profits by trading ahead of at least 11 mergers, acquisitions, and other corporate deals.  The SEC alleges that Igor Poteroba, a high-ranking investment banker in UBS Securities LLC’s Global Healthcare Group in New York City, tipped his friend Aleksey Koval with highly confidential inside information about impending transactions involving pharmaceutical companies. Koval, who held positions at securities industry firms at the time, then traded in stocks and options of the companies targeted for acquisition. Koval also tipped their friend Alexander Vorobiev, who traded ahead of four of the deals. Among the means of communication used to illegally tip and trade on the inside information were coded e-mail messages that referred to securities and money as “frequent flyer miles” and “potatoes.” They coded one e-mail exchange about insider trading as a discussion about a Macy’s wedding registry.

The SEC alleges that the scheme began as early as July 2005 when Poteroba illegally tipped Koval in advance of the acquisition of Guilford Pharmaceuticals Inc. by MGI Pharma.  On July 21, 2005, Guilford publicly announced that it would be acquired by MGI Pharma, and Guilford’s stock closed 41 percent higher than the increase over the prior day’s closing price. That same day, Koval and Vorobiev sold most or all of the Guilford stock in their accounts as well as Guilford shares in a brokerage account in the name of Vorobiev’s wife.

With respect to subsequent insider trading transactions, the SEC’s complaint alleges that Poteroba continued to supply confidential information to Koval about various impending mergers. They continued to use coded e-mail messages to maintain communications during the insider trading scheme.

The Commission seeks permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and the imposition of financial penalties against the defendants, and disgorgement of illicit profits with prejudgment interest from the relief defendants.

March 25, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Staff Reviews Use of Derivatives by Mutual Funds and ETFs

The SEC staff is conducting a review to evaluate the use of derivatives by mutual funds, exchange-traded funds (ETFs) and other investment companies. The review will examine whether and what additional protections are necessary for those funds under the Investment Company Act of 1940.  Pending the review's completion, the staff has determined to defer consideration of exemptive requests under the Investment Company Act to permit ETFs that would make significant investments in derivatives. The staff's decision will affect new and pending exemptive requests from certain actively-managed and leveraged ETFs that particularly rely on swaps and other derivative instruments to achieve their investment objectives. The deferral does not affect any existing ETFs or other types of fund applications.

The staff generally intends to explore issues related to the use of derivatives by funds, including, among other things, whether:

  • current market practices involving derivatives are consistent with the leverage, concentration and diversification provisions of the Investment Company Act
  • funds that rely substantially upon derivatives, particularly those that seek to provide leveraged returns, maintain and implement adequate risk management and other procedures in light of the nature and volume of the fund's derivatives transactions
  • fund boards of directors are providing appropriate oversight of the use of derivatives by funds
  • existing rules sufficiently address matters such as the proper procedure for a fund's pricing and liquidity determinations regarding its derivatives holdings
  • existing prospectus disclosures adequately address the particular risks created by derivatives
  • funds' derivative activities should be subject to special reporting requirements

The staff also will seek to determine what, if any, changes in Commission rules or guidance may be warranted.

March 25, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 24, 2010

SEC's Inspector General Criticizes Investigation into Allied Capital

More poor marks for the SEC from its Inspector General.  A report (available at the Washington Post's website) finds that the agency did not seriously pursue allegations against Allied Capital, a D.C.-based private equity firm, but did go after the hedge fund manager who challenged the value of Allied's investments after heavy lobbying at the SEC by Allied.  According to the Inspector General, the incident once again raises serious concerns about how decisions are made at the agency about bringing and conducting investigations.  WPost, SEC inspector general raises red flags in new report

March 24, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Treasury's Wolin Addresses Chamber of Commerce on Financial Reform

Deputy Secretary of the Treasury Neal Wolin came out swinging today in a speech before the U.S. Chamber of Commerce on the Urgency of Financial Reform:

So while we can have legitimate disagreements on the details of financial reform, there can be no disagreement that reform is necessary.  And there should be no disagreement that reform is long, long overdue. 

That is why it is so puzzling that, despite the urgent and undeniable need for reform, the Chamber of Commerce has launched a $3 million advertising campaign against it.  That campaign is not designed to improve the House and Senate bills.  It is designed to defeat them.  It is designed to delay reform until the memory of the crisis fades and the political will for change dies out.

The Chamber's campaign comes on top of the $1.4 million per day already being spent on lobbying and campaign contributions by big banks and Wall Street financial firms.  There are four financial lobbyists for every member of Congress. 

All told, it is one of the most expensive special interest campaigns in history

March 24, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Is It Financial Reform's Time Finally?

Senators Gregg and Corker, two Republicans on the Senate Banking Committee (which voted Senator Dodd's version out of committee, on a partisan vote, without debate), say yes:

WPost, GOP's Gregg, Corker predict financial regulation bill will pass in 2010

March 24, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Charges New Mexico Realtor with $80 Million Ponzi Scheme

The SEC yesterday filed fraud charges against Douglas F. Vaughan, a prominent New Mexico realtor, and obtained an emergency court order to halt an alleged $80 million Ponzi scheme.  According to the complaint, Vaughan through his company — The Vaughan Company Realtors — issued promissory notes that he claimed would generate high fixed returns for investors. Vaughan also used another entity — Vaughan Capital LLC — to solicit investors for different types of real estate-related investments, such as buying residential properties at distressed prices. Vaughan relied entirely on new money raised from investors through both companies to fund Vaughan Company's ever-increasing obligations to note holders.

The U.S. District Court for the District of New Mexico granted the SEC's request for a temporary restraining order and asset freeze against Vaughan and his companies.

March 24, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 23, 2010

Daimler Agrees to Settle FCPA Charges

Daimler AG has agreed to pay $185 million to settle charges brought by the DOJ and SEC that the company paid bribes to secure overseas business.  In addition to paying the fines, the company will plead guilty to violating the FCPA.  WSJ, Daimler Agrees to Pay $185 Million to Settle U.S. Bribery Investigation

March 23, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

UK Arrests Six in Insider Trading Crackdown

The U.K. regulator, the Financial Service Authority, announced a major crackdown on insider trading, including the arrest of six individuals.  Although the FSA release did not name names, the Wall St. Journal does -- including an employee of the U.S. hedge fund Moore Capital Management.  WSJ, U.K. Arrests Deutsche Bank, Moore Capital Employees in Insider-Trading Probe

March 23, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Freezes Assets in Alleged Life Settlement Fraud

The SEC recently obtained a judicial order temporarily freezing assets and appointing a receiver to take control of the assets and operations of American Settlement Associates, LLC ("ASA") in an alleged $3.5 million life settlement fraud.  According to its complaint, Charles C. Jordan, Kelly T. Gipson, and ASA LLC, sold fractional ownership interests in a particular life settlement policy to a specific group of investors ("the Policy"), and then failed, without warning or disclosure, to use investors' money to cover the future premium payments on the Policy. Instead of reserving investor funds to pay future Policy premiums, Defendants commingled the funds and used them to pay Defendants' business and personal expenses and to support lavish lifestyles, including payments for jewelry, casinos and other travel and entertainment. The complaint alleges that Defendants enriched themselves with approximately $2.3 million of investor funds. As a result, the Policy lapsed on March 9, 2010. The Commission further alleges that Jordan and Gipson misled investors by falsely claiming that the investments were protected by a bonding company, but failed to disclose to investors significant risks associated with the purported bonding company, including the fact that it is located offshore and is not licensed to provide insurance in the U.S.

The complaint seeks preliminary and permanent injunctions, disgorgement together with prejudgment interest, and civil penalties. The Commission's complaint also seeks an asset freeze against the Defendants, and the appointment of a receiver to recover and conserve assets for the benefit of defrauded investors.

March 23, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Issues Statement on Modifications to 2003 Analysts Settlement

You will recall that I reported last week that the securities firms subject to the 2003 Analysts Settlement sought modifications to certain provisions of the settlement, which request the SEC did not oppose.  The Judge approved most of them, but rejected a modification that would have  permitted analysts and investment bankers to speak outside of the presence of a compliance person.  Here is the official SEC release on the modifications:

The Securities and Exchange Commission today announced that the Honorable William H. Pauley III issued an Order on March 15, 2010 approving modifications to the final judgments entered against the twelve firms covered by the Global Research Analyst Settlement.

The final judgments first entered in October 2003 contained an extensive Addendum with provisions mandating structural and other reforms that addressed potential conflicts of interest between equity research analysts and investment banking.

The Global Settlement provided that with respect to any provision that had not been expressly superseded by subsequent rulemaking within five years, it was the expectation of the parties that, "the SEC would agree to an amendment or modification of such term, subject to Court approval, unless the SEC believes such amendment or modification would not be in the public interest."

As set forth in an Aug. 3, 2009 letter to the Court made public in connection with the Court's decision, the Settling Firms "strongly believe[d]" that all existing operative provisions of the Addendum should be eliminated, but the Commission believed that it was in the public interest to retain a number of provisions in their current form or with certain modifications. The Settling Firms consequently did not seek elimination of all of the Addendum's operative provisions, but instead requested specific modifications. The SEC did not oppose the resulting request by the Settling Firms.

In particular, there was no request for modification of the following provisions and firewalls, all of which remain in place under the modified Addendum approved by Judge Pauley:

Investment banking input into the research budget is prohibited;
The physical separation of research analysts and investment banking is required;
Investment banking is prohibited from having input into company-specific coverage decisions;
Research oversight committees are required to ensure the integrity and independence of equity research;
Communications between investment banking personnel and research analysts regarding the merits of a proposed transaction or a potential candidate for a transaction are prohibited unless a chaperone from the firm's legal and compliance department is present;
Research analysts and investment bankers are prohibited from having any communications for the purpose of having research personnel identify specific potential investment banking transactions; and
Research analysts must be able to express their views to a commitment committee about a proposed transaction outside the presence of investment bankers working on the deal.
The SEC supported the continued retention of these provisions in the Addendum.

The Court approved removing a number of provisions from the Addendum because rules issued by the National Association of Securities Dealers Inc. and New York Stock Exchange addressed the same concerns and provided comparable protections. As a result, the Addendum no longer includes prohibitions against investment banking input into research analyst compensation and the bar against research analysts participating in efforts to solicit investment banking business, among other things.

As noted above, the modified Addendum as ordered by Judge Pauley and supported by the SEC maintained the requirement that a chaperone from legal or compliance be present when investment banking seeks the views of research analysts concerning a proposed transaction or a potential candidate for a transaction. One proposed modification would have allowed investment banking to seek the views of research analysts regarding market or industry trends, conditions, or developments without the requirement of a chaperone, subject to certain limitations including the implementation of controls and training as described in the November 30, 2009 letter to the Court from the Settling Firms. In his March 15, 2010 Order, Judge Pauley did not approve this proposed modification.

As a result of the Court's Order, the Settling Firms remain subject to a number of important restrictions that apply only to Global Settlement firms. Together with the rest of the industry, they also remain subject to all of the provisions of NASD Rule 2711, NYSE Rule 472, and the SEC's Regulation AC that address research analyst conflicts of interest.

March 23, 2010 in SEC Action | Permalink | Comments (1) | TrackBack (0)

TARP Special Master Issues Rulings on 2010 Executive Pay for 5 "Exceptional Assistance" Firms

The Special Master for TARP Executive Compensation, Kenneth R. Feinberg, issued his rulings on 2010 executive pay packages for the `Top 25' executives at the five remaining firms that received exceptional assistance from taxpayers: AIG, Chrysler, Chrysler Financial, GM, and GMAC.  Because Bank of America and Citigroup repaid their exceptional assistance, they are not subject to the Special Master's 2010 rulings.  The Special Master also released a letter requesting information on compensation paid to the `Top 25' executives at each firm that received TARP assistance before February 17, 2009 to obtain information needed for the `look back' review required by the Recovery Act.

March 23, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Massachusetts Issues Subpoenas to Broker-Dealers Over Private Placements

Massachusetts securities regulator William Galvin yesterday issued subpoenas to six brokerage firms concerning sales of participations in private placements marketed by Medical Capital Holdings Inc. and Provident Royalties LLC, seeking information on due diligence efforts, suitability data and promotional materials.  The firms are QA3 Financial Corp., National Securities Corp., CapWest Securities, Independent Financial Group, Investors Capital Corp., and Centaurus Financial.  InvNews, Six broker-dealers subpoenaed over private placements.

March 23, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Dodd Calls for DOJ Investigation of Lehman Brothers Accounting

Today Senate Banking Committee Chairman Chris Dodd (D-CT) sent a letter to Attorney General Eric Holder asking that he commission a task force to investigate activities at Lehman Brothers and other companies that may have engaged in similar accounting manipulation with a view to prosecution of those who broke of the law.

On a related topic:  The Guardian has a recent article on Erin Callan, the former Lehman Brothers CFO, the title of which says it all:  Lehman Brothers' golden girl, Erin Callan: through the glass ceiling – and off the glass cliff

March 23, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Senate Banking Committee Votes Financial Reform Bill to Senate

Yesterday the Senate Banking Committee voted, on strict party lines, to send the committee's version of the financial reform package to the Senate for debate and vote.  The House approved its version last December.  NYTimes, Bank Panel Clears Bill on Overhaul.


Here is the Senate's version after yesterday's mark-up session.

March 23, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, March 22, 2010

Afsharipour on Reverse Termination Fees

Transforming the Allocation of Deal Risk Through Reverse Termination Fees, by Afra Afsharipour, University of California, Davis - School of Law, was recently posted on SSRN.  Here is the abstract:

Buyers and sellers in strategic acquisition transactions are fundamentally shifting the way they allocate deal risk through their use of reverse termination fees (RTFs). Once relatively obscure in strategic transactions, RTFs have emerged as one of the most significant provisions in agreements that govern multi-million and multi-billion dollar deals. Despite their recent surge in acquisition agreements, RTFs have yet to be examined in any systematic way. This Article presents the first empirical study of RTFs in strategic transactions, demonstrating that these provisions are on the rise. More significantly, this study reveals the changing and increasingly complex nature of RTF provisions and how parties are using them to transform the allocation of deal risk. By exploring the evolution of the use of RTF provisions, this study explicates differing models for structuring deal risk and yields greater insights into how parties use complex contractual provisions not only to shift the allocation of risk, but also to engage in contractual innovation.

March 22, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Thomas & Wells on Executive Compensation

Executive Compensation in the Courts: Board Capture, Optimal Contracting and Officer Fiduciary Duties, by Randall S. Thomas, Vanderbilt University - School of Law, and Harwell Wells, Temple University Beasley School of Law, was recently posted on SSRN. Here is the abstract:

This Article proposes a new approach to monitoring executive compensation. While the public seems convinced that executives at public corporations are paid too much, scholars are sharply divided. Advocates of “Board Capture” theory believe officers so dominate their boards that they can negotiate their own employment agreements and set their own pay. “Optimal contracting” theorists doubt this, contending that, given legal and economic constraints, executive compensation agreements are likely to be pretty good and benefit shareholders. Disputes about which theory is correct have hampered efforts to reform executive compensation practices.

Recent developments in corporate law point to a way out of this theoretical impasse. Last year, in Gantler v. Stephens, Delaware’s Supreme Court resolved a major unanswered issue in corporation law when it held that a corporation’s officers owe the same fiduciary duty to the corporation and its shareholders as do its directors. Gantler opens the door for courts to scrutinize rigorously officers’ actions in negotiating their own compensation agreements. The Delaware Chancery Court has taken up this invitation by holding that corporate officers are bound by their duty of loyalty to negotiate employment contracts in an arm’s-length, adversarial manner. If the officers do not do so, but instead try to take advantage of the Board, they will open themselves up to shareholder lawsuits and give courts the opportunity to examine the compensation agreements and their negotiations. This will provide a new level of judicial scrutiny of executive compensation arrangements, and should go far to answer criticisms leveled by Board Capture theorists, who believe the present negotiating system is corrupt, while Optimal Contracting theorists will welcome judicial intervention that improves the present negotiating environment.

March 22, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)