Securities Law Prof Blog

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

A Member of the Law Professor Blogs Network

Saturday, January 16, 2010

Former Lazard Investment Banker Settles Insider Trading Charges

Adnan Zaman, a former Lazard investment banker settled SEC charges that he misappropriated confidential client information.  On Jan. 12, 2010, the nited States District Court for the Northern District of California entered a final judgment by consent against Zaman. The Commission's complaint alleged, inter alia, that Zaman, as a Lazard investment banker, was privy to highly confidential acquisition information involving Lazard clients which he misappropriated and illegally tipped to two friends who traded stock and options on the basis of the tipped information. The complaint further alleged that, in exchange for tipping the information, Zaman received kickbacks in the form of cash, free rent, and other items of value.

January 16, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Issues Policy Statement on Cooperation by Individuals

The SEC issued a policy statement announcing the analytical framework it uses to evaluate cooperation by individuals. According to the statement,

This framework serves two important purposes: it promotes the fair and effective exercise of discretion by the Commission, and it enhances confidence on the part of the public and cooperating individuals that decisions regarding cooperation in the Commission’s investigations and related enforcement actions will be made in an appropriate and consistent manner.

Policy Statement Concerning Cooperation by Individuals in its Investigations and Related Enforcement Actions

January 16, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NASAA Announces Distribution Plan for Brennan Customers

Only readers who have been around for a long time will remember Robert Brennan, a fraudster from the 1990s.  Yesterday NASAA announced that there is (a little) money available for distribution to some of his victims.The distribution plan provides $5.15 million to investors who were defrauded by Robert Brennan and results from a case the New Jersey Bureau of Securities began in 1995. In June 1999, the Bureau obtained a $45 million non-dischargeable judgment against Brennan and L.C. Wegard, which had offices in a number of states including New Jersey, Pennsylvania, New York, Rhode Island and Illinois.

An effort to find assets to satisfy the judgment began in 1999 after Brennan claimed he did not have assets. Ultimately, Bureau investigators tracked down and seized assets that Brennan had attempted to hide, including a pension fund that he had set up for himself.

L.C. Wegard customers during the period October 1, 1991 to September 1994 may be qualified to file a claim if they purchased certain identified securities during this time period.

January 16, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Thursday, January 14, 2010

President Obama Announces Fee on Financial Services Firms to Recoup Bailout Costs

"President Obama Proposes Financial Crisis Responsibility Fee to Recoup Every Last Penny for American Taxpayers" is the heading on the White House website.  “My commitment is to recover every single dime the American people are owed.  And my determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at the very firms who owe their continued existence to the American people – who have not been made whole, and who continue to face real hardship in this recession,”  said President Barack Obama. “That’s why I’m proposing a Financial Crisis Responsibility Fee to be imposed on major financial firms until the American people are fully compensated for the extraordinary assistance they provided to Wall Street.”

As proposed, the fee will be in place at least 10 years, but even longer if needed to pay back every penny of TARP. This will not be a cost borne by community banks or small firms; only the largest firms with more than $50 billion in assets will be affected. In fact, 60% of the revenue will come from the 10 largest financial firms.

The fee would:

  • Require the Financial Sector to Pay Back For the Extraordinary Benefits Received: Many of the largest financial firms contributed to the financial crisis through the risks they took, and all of the largest firms benefitted enormously from the extraordinary actions taken to stabilize the financial system. It is our responsibility to ensure that the taxpayer dollars that supported these actions are reimbursed by the financial sector so that the deficit is not increased.
  • Responsibility Fee Would Remain in Place for 10 Years or Longer if Necessary to Fully Pay Back TARP: The fee – which would go into effect on June 30, 2010 – would last at least 10 years. If the costs have not been recouped after 10 years, the fee would remain in place until they are paid back in full. In addition, the Treasury Department would be asked to report after five years on the effectiveness of the fee as well as its progress in repaying projected TARP losses.
  • Raise Up to $117 Billion to Repay Projected Cost of TARP: As a result of prudent management and the stabilization of the financial system, the expected cost of the TARP program has dropped dramatically. While the Administration projected a cost of $341 billion as recently as August, it now estimates, under very conservative assumptions, that the cost will be $117 billion—reflecting the $224 billion reduction in the expected cost to the deficit. The proposed fee is expected to raise $117 billion over about 12 years, and $90 billion over the next 10 years.
  • President Obama is Fulfilling His Commitment to Provide a Plan for Taxpayer Repayment Three Years Earlier Than Required: The EESA statute that created the TARP requires that by 2013 the President put forward a plan “that recoups from the financial industry an amount equal to the shortfall in order to ensure that the Troubled Asset Relief Program does not add to the deficit or national debt.” The President has no intention of waiting that long. Instead, the President is fulfilling three years early his commitment to put forward a proposal that would – at a minimum – ensure that taxpayers are fully repaid for the support they provided.
  • Apply to the Largest and Most Highly Levered Firms: The fee the President is proposing would be levied on the debts of financial firms with more than $50 billion in consolidated assets, providing a deterrent against excessive leverage for the largest financial firms. By levying a fee on the liabilities of the largest firms – excluding FDIC-assessed deposits and insurance policy reserves, as appropriate – the Financial Crisis Responsibility Fee will place its heaviest burden on the largest firms that have taken on the most debt. Over sixty percent of revenues will most likely be paid by the 10 largest financial institutions.

See the Financial Responsibility Fact Sheet

January 14, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

In Case You Missed Any Part of the FCIC Hearings

The Financial Crisis Inquiry Commission has its own website, where you can access both the written statements and the video of the hearings -- although, to my mind, thus far they have been unilluminating.

January 14, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Schapiro Testifies Before Financial Crisis Inquiry Commission

SEC Chair Mary Schapiro testified today before the Financial Crisis Inquiry Commission.  Here is an excerpt of her testimony:

It is my view that the crisis resulted from many interconnected and mutually reinforcing causes, including:

The rise of mortgage securitization (a process originally viewed as a risk reduction mechanism) and its unintended facilitation of weaker underwriting standards by originators and excessive reliance on credit ratings by investors;
 
A wide-spread view that markets were almost always self-correcting and an inadequate appreciation of the risks of deregulation that, in some areas, resulted in weaker standards and regulatory gaps;
 
The proliferation of complex financial products, including derivatives, with illiquidity and other risk characteristics that were not fully transparent or understood;
 
Perverse incentives and asymmetric compensation arrangements that encouraged significant risk-taking;
 
Insufficient risk management and risk oversight by companies involved in marketing and purchasing complex financial products; and
 
A siloed financial regulatory framework that lacked the ability to monitor and reduce risks flowing across regulated entities and markets.

To assist the Commission in its efforts, my testimony will outline many of the lessons we have learned in our role as a securities and market regulator, how we are working to address them, and where additional efforts are needed. I look forward to working with the FCIC to identify the many causes of this crisis.


January 14, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

NASAA President Testifies Before Financial Crisis Inquiry Commission

Texas Securities Commissioner and NASAA President Denise Voigt Crawford today told the Financial Crisis Inquiry Commission that a series of actions by Congress and the courts to preempt the regulatory authority of state securities regulators contributed to the ongoing financial crisis that has caused widespread damage to both the U.S. economy and Main Street investors. Testimony of Denise Voigt Crawford, Commissioner, Texas Securities Board and President, North American Securities Administrators Association, Inc. Before the United States Financial Crisis Inquiry Commission

January 14, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 13, 2010

SEC Brings New Action Against BofA For Failure to Disclose Merrill Losses

You will recall that on Monday Judge Rakoff refused to allow the SEC to amend its complaint against Bank of America (relating to failures to disclose Merrill bonuses) to add new charges. That case is currently set for trial to begin on March 1, 2010.  Following the Judge's ruling, the agency brought a separate action and charged Bank of America with violating the federal proxy rules by failing to disclose extraordinary financial losses at Merrill Lynch prior to a shareholder vote to approve a merger between the two companies.

The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, alleges that Bank of America learned prior to the Dec. 5, 2008, shareholder vote that Merrill Lynch had incurred a net loss of $4.5 billion in October 2008 and estimated billions of dollars of additional losses in November. Bank of America erroneously and unreasonably concluded that no disclosure concerning these extraordinary losses was required as shareholders were called upon to vote on the proposed merger with Merrill Lynch. The lack of any disclosure about the losses deprived shareholders of up-to-date information that was essential to their ability fairly to evaluate whether to approve the merger on the terms presented to them. Bank of America’s failure to disclose this information violated its undertaking to update shareholders concerning fundamental changes to previously disclosed information, and rendered its prior disclosures materially false and misleading.

According to the SEC’s complaint filed today, the actual and estimated losses at Merrill Lynch for the fourth quarter of 2008 together represented approximately one-third of the value of the merger at the time of the shareholder vote and more than 60 percent of the aggregate losses that the firm sustained in the preceding three quarters combined. The SEC’s complaint further alleges that Merrill’s deteriorating performance represented a fundamental change to the financial information that Bank of America provided shareholders in the proxy statement used to solicit votes for approval of the merger. In connection with the merger, Bank of America also publicly filed a registration statement in which it represented that it would update shareholders about any fundamental changes in the information previously disclosed.

The SEC’s complaint charges Bank of America with violating Section 14(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9 by failing to make any disclosure to its shareholders of the losses that Merrill Lynch incurred in the two-month period leading to the Dec. 5, 2008 shareholder vote.


 

January 13, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC's Enforcement Division Reorganization Emphasizes Market Intelligence

The SEC's Enforcement Division announced the appointment of the newest members of its national leadership team in what the Division describes as "its most significant reorganization since its establishment in 1972."  The Division established five priority areas dedicated to particular highly specialized and complex areas of securities law.

In addition, the Division created a new Office of Market Intelligence that is responsible for the collection, analysis, and monitoring of the hundreds of thousands of tips, complaints, and referrals that the SEC receives each year.

The agency also announced a series of measures to further strengthen its enforcement program by encouraging greater cooperation from individuals and companies in the agency's investigations and enforcement actions. 

January 13, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Issues Concept Release on Structure of Equity Markets

The SEC is undertaking a review of the structure of equity markets and voted to issue a concept release seeking public comment on such issues as high frequency trading, co-locating trading terminals, and markets that do not publicly display price quotations.  The SEC's announcement explains that:

The U.S. equity markets have undergone significant change in recent years from a market structure that relies on people shouting on the exchange floors to one that relies on advanced computer technology. The speed of trading has accelerated from seconds to milliseconds to microseconds. Trading volume has expanded, and new trading centers have entered the markets and captured a significant share of volume. Liquidity is now dispersed among many different venues, and these venues offer a complex array of order types and other trading services.

In conducting this review, the Commission seeks to ensure that the current market structure serves the interests of long-term investors willing to accept the risk of equity ownership over time and are essential for capital formation. These investors include individuals who invest directly in equities, as well as retirement plans and other institutional investors that invest on behalf of many individuals.

The release requests comment on all matters related to market structure. In addition, it asks many specific questions about the current market structure.

The Commission intends to use the public's comments on the concept release to help determine whether additional regulatory measures are needed to improve the current equity market structure. Public comments on the concept release must be received by the Commission within 90 days after its publication in the Federal Register.


 

January 13, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Proposes Rule Prohibiting Customers' Naked Access to Exchange

The SEC today proposed a new rule that would effectively prohibit broker-dealers from providing customers with "unfiltered" or "naked" access to an exchange or alternative trading system (ATS).  The SEC's proposed rule would require brokers with market access, including those who sponsor customers' access to an exchange, to put in place risk management controls and supervisory procedures. Among other things, the procedures would help prevent erroneous orders, ensure compliance with regulatory requirements, and enforce pre-set credit or capital thresholds.

Broker-dealers use a 'special pass' known as their market participant identifier (MPID) to electronically access an exchange or ATS and place an order for a customer. Under an arrangement known as "direct market access" or "sponsored access," the customer can sometimes place an order that flows directly into the markets without first passing through the broker-dealer's systems and without being pre-screened by the broker-dealer in any manner. This type of direct market access arrangement is known as "unfiltered" access and "naked" access. A recent report estimated that naked access accounts for 38 percent of the daily volume for equities traded in the U.S. markets.

Through sponsored access, especially "unfiltered" or "naked" sponsored access arrangements, there is the potential that financial, regulatory and other risks associated with the placement of orders are not being appropriately managed. In particular, there is an increased likelihood that customers will enter erroneous orders as a result of computer malfunction or human error, fail to comply with various regulatory requirements, or breach a credit or capital limit.

The SEC's proposed rule would require broker-dealers to establish, document and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory and other risks related to its market access, including access on behalf of sponsored customers.

Broker-dealers would be required to:

  • Create financial risk management controls reasonably designed to prevent the entry of orders that exceed appropriate pre-set credit or capital thresholds, or that appear to be erroneous.
  • Create regulatory risk management controls reasonably designed to ensure compliance with all regulatory requirements applicable in connection with market access.
  • Have financial and regulatory risk management controls applied automatically on a pre-trade basis before orders route to an exchange or ATS.
  • Maintain risk management controls and supervisory procedures under the direct and exclusive control of the broker-dealer with market access.
  • Establish, document and maintain a system for regularly reviewing the effectiveness of its risk management controls and for promptly addressing any issues.


The SEC today also approved a new Nasdaq rule that requires broker-dealers offering sponsored access to Nasdaq to establish certain controls over the financial and regulatory risks of that activity. The proposed Commission rule would extend beyond the new Nasdaq rule in several respects. For example, the Commission's proposal would require the broker-dealer to automatically apply its controls on a pre-trade basis, and to retain exclusive control over those controls without delegation of this critical function to the customer or another third party. The Commission's proposal also would require broker-dealers to establish a supervisory system, including an annual CEO certification, to assure the ongoing effectiveness of its controls In addition, the Commission's proposed risk management controls would apply market-wide, whenever a broker-dealer directly accesses any exchange or ATS.

The full text of the proposed rule will be posted to the SEC Web site as soon as possible.

January 13, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 12, 2010

House Committee Seeks Documents on AIG from Fed Reserve

The House Committee on Oversight and Government Reform issued a subpoena to the Federal Reserve Bank of New York, seeking documents related to the federal government's bailout of AIG and the controversial decision to make whole the counterparties on the bad bets on mortgage-related securities. Emails released last week by Representative Issa showed that attorneys for the Fed told AIG not to disclose the names in SEC filings.  WSJ, House Panel Subpoenas N.Y. Fed's AIG Documents.

January 12, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Adopts Amendment to Proxy Rule on Shareholder Approval of Executive Compensation of TARP Recipients

The SEC published as a final rule amendments to the proxy rules to set forth certain requirements for U.S. registrants subject to Section 111(e) of the Emergency Economic Stabilization Act of 2008. Section 111(e) of the Emergency Economic Stabilization Act of 2008 requires companies that have received financial assistance under the Troubled Asset Relief Program (“TARP”) to permit a separate shareholder advisory vote to approve the compensation of executives, as disclosed pursuant to the compensation disclosure rules of the Commission, during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding. The amendments are intended to help implement this requirement by specifying and clarifying it in the context of the federal proxy rules.
SHAREHOLDER APPROVAL OF EXECUTIVE COMPENSATION OF TARP
RECIPIENTS

January 12, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Open Meeting Agenda Jan. 13, 2010

SEC Open Meeting Agenda, Wednesday, January 13, 2010

Item 1: Risk Management Controls for Brokers or Dealers with Market Access
Office:  Division of Trading and Markets
Staff:  James A. Brigagliano, David S. Shillman, John C. Roeser, Marc F. McKayle, Theodore S. Venuti, Daniel T. Gien

The Commission will consider whether to propose a new rule regarding risk management controls and supervisory procedures to manage financial, regulatory and other risks for brokers or dealers that provide market access.


Item 2: Concept Release on Equity Market Structure
Office:  Division of Trading and Markets
Staff:  James A. Brigagliano, David S. Shillman, Daniel M. Gray, Arisa Tinaves, Gary M. Rubin

The Commission will consider whether to publish a concept release on equity market structure. The concept release would invite public comment on a wide range of issues, including the performance of equity market structure in recent years, high frequency trading, and undisplayed, or "dark," liquidity.

January 12, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Obtains Fraud Judgments Against Former CEO of National Century Financial Enterprises

The SEC announced that the federal district court in southern Ohio entered final judgments against Lance Poulsen, the former Chairman and Chief Executive Officer of National Century Financial Enterprises, Inc. (NCFE); Donald Ayers, NCFE's former Chief Operating Officer and a former member of its board of directors; Randolph Speer, NCFE's former Chief Financial Officer; and Rebecca Parrett, NCFE's former Director of Accounts Receivable and also a member of the board of directors, resolving the Commission's charges that they orchestrated a fraud on institutional investors in securities issued by subsidiaries of NCFE.

The complaint, initially filed in 2005, alleged that Poulsen, Ayers, Parrett and Speer participated in a scheme to defraud investors in securities issued by subsidiaries of NCFE. The complaint alleges NCFE subsidiaries, known as "programs," purchased medical accounts receivable from healthcare providers and issued notes that securitized those receivables. From at least February 1999 through October 2002, the programs raised at least $3.25 billion from the offer and sale of notes through private placements that were exempt from registration. Under the pertinent agreements, the programs were required to maintain specified reserve account balances and certain balances of medical accounts receivable as collateral to secure the notes. NCFE directors and officers depleted the programs' reserve accounts and collateral base by advancing at least $1.2 billion from the programs' funds to healthcare providers without receiving eligible receivables in return. These advances were essentially unsecured loans by the programs to distressed or defunct healthcare providers-many of which were wholly or partly owned by NCFE or its principals. The complaint further alleges NCFE officials misrepresented the status of the programs' reserve accounts and collateral base to investors and concealed the reserve account and collateral shortfalls by creating or allowing the creation of false offering documents, monthly investor reports, and accounting records. When investors discovered the reserve account transfers and collateral shortfalls in late 2002, NCFE and the programs stopped providing funding to healthcare providers and filed for Chapter 11 bankruptcy protection. As a result, approximately 275 healthcare providers were also forced to file for bankruptcy protection. NCFE and its programs have subsequently been liquidated.

January 12, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Former Advisers Sue Utah for Malicious Prosecution

Investment News reports that two former independent financial advisers are suing the State of Utah and its Division of Securities, alleging violations of due process and civil rights.  In essence, they charge that the regulators drummed them out of the business for malicious reasons.  Among their charges -- the Division posted false press releases calling the advisers "poster boys" for securities fraud and paid Google a fee so that the releases would appear at the top of Google searches.

Plaintiffs seek over $350 million in damages.  InvNews, Regulators ‘gone wild’? Advisers sue state of Utah.

January 12, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

NATCO Group Settles FCPA Charges

The SEC has settled another FCPA case, this one involving NATCO Group, an oil field services provider.  According to the SEC's complaint, TEST Automation & Controls, Inc. (TEST), a wholly owned subsidiary of NATCO Group Inc., created and accepted false documents while paying extorted immigration fines and obtaining immigration visas in the Republic of Kazakhstan. NATCO's system of internal accounting controls failed to ensure that TEST recorded the true purpose of the payments, and NATCO's consolidated books and records did not accurately reflect these payments. Without admitting or denying the allegations in the Commission's complaint, NATCO agreed to pay a $65,000 civil penalty.

In a related administrative proceeding, the Commission today issued a settled cease-and-desist order against NATCO finding that NATCO violated the books and records and internal controls provisions of the Exchange Act in connection with the improper payments made by TEST. Without admitting or denying the Commission's findings, NATCO consented to the issuance of an order that requires NATCO to cease and desist from committing or causing any violations and any future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.

January 12, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Obtains Emergency Relief Against Fraud Targeted at Iranian-American Community in LA

On January 8, 2010, the SEC filed a complaint in the United States District Court for the Central District of California against Beverly Hills, Calif.-based NewPoint Financial Services, Inc. ("NewPoint"), John Farahi and Gissou Rastegar Farahi (the "Farahis"), and Elaheh Amouei (collectively, "the defendants") to halt the fraudulent, unregistered offering and sale of securities by defendants and to prevent the dissipation of investor funds. The court entered an order halting the alleged fraud and freezing the defendants' assets and those of relief defendant, Triple "J" Plus, LLC ("Triple 'J'"), an entity controlled by the Farahis.

The SEC's complaint alleges that the defendants engaged in an unregistered offering fraud targeting the Los Angeles Iranian-American community. According to the complaint, most investors learned of NewPoint, a corporation controlled by the Farahis, through a daily finance radio program that John Farahi hosts on a Farsi language radio station in the Los Angeles area. The SEC alleges that investors were typically solicited to invest in the debentures by the Farahis and/or Elaheh Amouei, NewPoint's controller, after making an appointment to discuss investment opportunities offered by NewPoint. The SEC's complaint alleges that since at least 2003, NewPoint has offered and sold more than $20 million worth of debentures to more than one hundred investors.

The complaint alleges that the defendants misled investors by falsely telling investors that the NewPoint debentures were low-risk. According to the complaint, many investors were also falsely told that they were investing in FDIC insured certificates of deposit, government bonds, and/or corporate bonds issued by companies backed by funds from the Troubled Asset Relief Program, also known as "TARP." The SEC alleges that in reality the vast majority of the money raised was actually transferred to accounts controlled by the Farahis, including an account at relief defendant Triple "J" to, among other things, fund the construction of the Farahis' multi-million dollar personal residence in Beverly Hills, California and to engage in risky options futures trading in the stock market in which the Farahis lost more than $18 million in 2008 and the beginning of 2009.

Finally, the SEC alleges that since approximately June 2009, John Farahi and Amouei have made further misrepresentations to investors in an effort to lull them into keeping their money with NewPoint. Investors have allegedly been told that their money is safe and that they are guaranteed to get the entirety of their investment back — despite the fact that NewPoint lacks sufficient funds to make all investors whole. The SEC alleges that John Farahi has also paid back some investors on a selective basis while failing to return money to other investors who have asked for a return of their investment. The SEC also alleges that Amouei has falsely told some of the investors who have not received a return of their investment that NewPoint was unable to return their money because the Commission has frozen NewPoint's financial accounts.

In its lawsuit, the SEC obtained an order (1) freezing the assets of NewPoint, the Farahis, and Triple "J"; (2) appointing a temporary receiver over NewPoint and Triple "J"; (3) preventing the destruction of documents; (4) requiring accountings from NewPoint, the Farahis, and Triple "J"; and (5) temporarily enjoining NewPoint, the Farahis, and Amouei from future violations of 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. The SEC also seeks preliminary and permanent injunctions and civil penalties against the defendants and disgorgement with prejudgment interest against NewPoint, the Farahis, and Triple "J." A hearing on whether a preliminary injunction should be issued against the defendants and whether a permanent receiver should be appointed is scheduled for January 15, 2010 at 10:00 a.m.

January 12, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Fraud Charges Against Two Florida Investment Advisers

The SEC charged Neil V. Moody and his son, Christopher D. Moody, two Sarasota, Fla.-based investment advisers, with securities fraud for misleading investors about the financial condition of three hedge funds they managed and misrepresenting that they controlled the funds' investment and trading activities when in fact they were being handled by Arthur G. Nadel.  The SEC charged Nadel with fraud last year and obtained an emergency court order to freeze his assets.

The SEC alleges that the Moodys distributed offering materials, account statements, and newsletters to investors that misrepresented the hedge funds' historical investment returns and overstated their asset values by as much as $160 million. The Moodys based their materials on grossly overstated performance numbers that Nadel created and provided to them. The Moodys failed to independently verify the accuracy of the figures despite multiple red flags, and relied exclusively on Nadel’s inaccurate information when communicating with investors.

According to the SEC's complaint, filed in federal court in Tampa, Fla., Neil and Christopher Moody disseminated misleading materials to investors about their hedge funds Valhalla Investment Partners L.P., Viking IRA Fund LLC, and Viking Fund LLC from at least 2003 through December 2008.  The SEC's complaint further alleges that the Moodys misled investors regarding their role in managing the assets of the three hedge funds by claiming that they controlled all of the investment and trading decisions. In truth, under an arrangement that the Moodys had with Nadel, he controlled nearly all of the funds’ investment and trading activities with no meaningful supervision or oversight by the Moodys.

In its complaint against the Moodys, the SEC seeks permanent injunctions, financial penalties, and disgorgement of illegal gains. Without admitting or denying the SEC's allegations, the Moodys have consented to permanent injunctions against future securities fraud violations. The Moodys also consented to the entry of a Commission order that will bar them for five years from associating with any investment adviser

January 12, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, January 11, 2010

Update on SEC's Enforcement Action Against Bank of America

The SEC announced today that it seeks to charge Bank of America with failing to disclose extraordinary financial losses at Merrill Lynch prior to a shareholder vote to approve a merger between the two companies.  By 8 p.m., the Wall St. Journal and New York Times reported that Judge Rakoff denied the SEC's attempt to add new charges, but said that the agency could file a new complaint. 

The SEC also said it would not file charges against BofA executives because it has found no evidence that they deliberately concealed the information.  You will recall the Judge Rakoff, in refusing to approve the proposed settlement between the SEC and BofA, was sharply critical of the imposition of a fine on the corporation in conjunction with the failure to seek relief from individuals who made the relevant disclosure decisions.

It is not clear to me why the SEC has apparently charged the corporation with negligent violation of Rule 14a-9, but asserts that scienter is required to hold the individuals liable.  It remains an open question (until the Supreme Court decides it) whether scienter is required to establish a section 14(a) violation, but I am not aware of any precedent that holds there is a different culpability standard for corporate and individual defendants.

In its original complaint, the agency charged the bank with misleading investors about billions of dollars in bonuses that were being paid to Merrill executives. That complaint was amended in October to add a charge for Bank of America's failure to comply with certain affirmative disclosure obligations under the federal proxy rules.  The proposed second amended complaint alleges that Bank of America learned prior to the Dec. 5, 2008, shareholder meeting vote that Merrill Lynch experienced a net loss of $4.5 billion in October and estimated that it had experienced billions of dollars of additional losses in November. The actual and estimated losses together represented approximately one-third of the value of the merger at the time of the shareholder meeting and more than 60 percent of the aggregate losses Merrill Lynch sustained in the preceding three quarters combined.  It alleges that Merrill's slumping performance represented a fundamental change to the financial information that Bank of America provided shareholders in a Nov. 3, 2008 proxy statement to solicit their votes for approval of the Merrill Lynch merger on terms that had principally been negotiated in September 2008. In connection with the merger, Bank of America also publicly filed a registration statement in which it represented that it would update shareholders about any fundamental changes in the information previously disclosed.

The SEC's proposed complaint would allege that Bank of America erroneously and negligently concluded that no disclosure concerning these extraordinary losses was required as shareholders were called upon to vote on the proposed merger with Merrill Lynch. The Commission also would allege that the lack of any disclosure about the losses deprived shareholders of up-to-date information that was essential to their ability fairly to evaluate whether to approve the merger on the terms presented to them. According to the proposed complaint, Bank of America's failure to disclose this information violated its undertaking to update shareholders concerning fundamental changes to previously disclosed information, and rendered its prior disclosures materially false and misleading.

In the course of discovery in the pending case against Bank of America and earlier investigation, the Commission's staff reviewed tens of thousands of pages of records, including e-mail and other electronic communications relating to the merger. SEC staff took testimony or conducted investigative interviews of dozens of witnesses, including senior executives, internal counsel, and external counsel of both Bank of America and Merrill Lynch. Pursuant to a stipulation and order entered by the court in October 2009, Bank of America waived all claims of privilege relating to the proxy disclosures made in connection with the merger and several other subjects in order to permit the SEC to conduct a thorough investigation of these subjects, including the actions, advice and communications of counsel.

According to the SEC's proposed complaint, Bank of America executives at various times discussed the firm's disclosure obligations with internal and external counsel. These executives are not alleged to have deliberately concealed information from counsel or otherwise acted with scienter or intent to mislead. Nor is any counsel alleged to have acted with scienter or intent to mislead. For these reasons, the SEC's proposed complaint does not seek charges against any individual officers, directors or attorneys. SEC staff has advised the Commission that, after a careful assessment of the evidence and all of the relevant circumstances, it has determined that charges against individuals for their roles in connection with proxy disclosure are not appropriate.

January 11, 2010 in SEC Action | Permalink | Comments (1) | TrackBack (0)