Securities Law Prof Blog

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

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Friday, May 21, 2010

FINRA Proposes Rule Change to Increase Number of Arbitrators on List

The SEC posted on its website FINRA's proposed rule change, to amend Rules 12403 and 12404 of the Code of Arbitration Procedure for Customer Disputes (“Customer Code”) and Rules 13403 and 13404 of the Code of Arbitration Procedure for Industry Disputes (“Industry Code”) to increase the number of arbitrators on each list generated by the Neutral List Selection System (“NLSS”).  A complaint of the FINRA arbitration selection process has been that after the parties exercise their right to strike names, there are no arbitrators left on the list, and FINRA must select arbitrators that were not on the parties' list.  FINRA explains that the amendment would expand the number of arbitrators on each list (public, non-public, and public chairperson) generated through NLSS from eight arbitrators to 10 arbitrators. Thus, in every two party case, at least two arbitrators would remain on each list after strikes. The additional number of arbitrators will increase the likelihood that the parties will get panelists they chose and ranked, even when FINRA must appoint a replacement arbitrator.

May 21, 2010 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Schapiro Testifies on May 6 Market Plunge

Examining the Causes and Lessons of the May 6th Market Plunge, Testimony of Chairman Mary L. Shapiro Before the Subcommittee on Securities, Insurance, and Investment of the United States Senate Committee on Banking, Housing, and Urban Affairs, on May 20, 2010

May 21, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Former HBOC CEO Settles Financial Fraud Charges

The SEC settled fraud charges against Charles McCall, former CEO and Chairman of HBOC and then Chairman of McKesson HBOC, stemming from allegations of financial reporting fraud at McKesson HBOC, Inc. (now, McKesson Corporation), a Fortune 100 company headquartered in San Francisco, California. McCall consented to the entry of judgment without admitting or denying the allegations of the Commission's complaint except as to jurisdiction.  McCall was previously convicted of securities fraud and related charges arising from the fraud at HBOC and McKesson HBOC. He was sentenced to ten years' incarceration and ordered to pay a $1 million criminal fine.

The complaint, filed June 4, 2003, alleged that McCall, together with other senior executives, participated in a long-running fraudulent scheme to inflate the revenue and net income of HBO & Company (HBOC), an Atlanta, Georgia-based vendor of health care technology that merged with McKesson in 1999. According to the SEC, McCall personally took part in negotiating at least two contracts with side letter agreements containing cancellation contingencies, one of which was also backdated. As a result of the scheme, according to the complaint, the companies were able to recognize revenue in earlier reporting periods. These practices failed to comply with Generally Accepted Accounting Principles.

The final judgment against McCall permanently enjoins him from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(b)(5) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13b2-1 and 13b2-2 thereunder. In addition, McCall was permanently barred him from acting as an officer or director of a public company and was ordered to pay a total of $1,878,128 in disgorgement and prejudgment interest. 
 

May 21, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SIFMA Says Senate Bill Could Have Negative Impact on Economy

Here is SIFMA's statement on the financial reform bill passed by the Senate last night:

“While we continue to support financial reform legislation that responsibly guards against systemic risk, protects investors and increases regulatory transparency and oversight of all markets, there are several provisions in the current legislation that would undermine the original goals for reform by creating unintended consequences that could have a negative impact on our economy.

“There have been important, positive steps forward including the creation of a systemic risk council and a resolution authority to ensure the orderly wind down of failing financial institutions. However, provisions like the so-called Volcker Rule would impose sweeping new restrictions on size and activities that were not a cause of the financial crisis.

“A number of the provisions in the derivatives section of the bill also remain problematic. Requiring banks to push out their derivatives businesses and limiting their ability to hedge their own risk exposures would not only deplete institutions of much needed capital, it will ultimately hurt consumers through higher mortgage and credit costs. We also believe that requiring financial institutions entering into swap contracts with state governments, pension funds or endowments to act as fiduciaries for their clients is legally unworkable and would limit these clients’ ability to access to vital risk management tools.

“As a result, while we support the bill’s original goal of enhancing systemic risk regulation and ending too big to fail through resolution authority, we must oppose the Senate’s legislation due to these provisions. We will continue to work with Members of Congress on these and other issues to ensure responsible reform that strengthens our financial system, but does not undermine America’s economic growth and job creation is enacted.”

May 21, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Senate Passes Regulatory Reform Legislation

Last night the Senate, by a 59-39 vote, passed its version of financial reform.  Here is some media coverage:

WPost, Senate passes financial regulation bill

NYTimes, Senate Passes Broader Rules for Overseeing Wall Street

WSJ, Senate Passes Finance Bill

Here are some additional links that summarize the legislation or compare it with the House version:

WPost, Reinventing financial regulation

NYTimes, Major Parts of the Financial Regulation Overhaul

WSJ, Major Provisions in Senate Financial Overhaul Bill 

May 21, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 19, 2010

SEC & CFTC Staff Release Preliminary Findings on May 6 Flash Crash

The staffs of the SEC and CFTC released yesterday Preliminary Findings Regarding the Market Events of May 6, 2010.  Bottom line: they don't know what happened.

May 19, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Will Consider Proposed Rule on Consolidated Audit Trail Next Week

The SEC will hold its next open meeting May 26, 2010.  The subject matter of the Open Meeting will be:

Item 1: The Commission will consider whether to propose new Rule 613 of Regulation NMS that would require national securities exchanges and national securities associations to act jointly in developing a national market system plan to create, implement, and maintain a consolidated audit trail that would capture customer and order event information, mostly in real time, for all orders in NMS securities, across all markets, from the time of order inception through routing, cancellation, modification, or execution.

Item 2: The Commission will consider a recommendation to adopt amendments to Rule 15c2-12 under the Securities Exchange Act of 1934, a rule pertaining to municipal securities disclosure. The Commission will also consider related interpretive guidance to assist brokers, dealers and municipal securities dealers in meeting their obligations under the antifraud provisions of the federal securities laws.

May 19, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 18, 2010

Defendant in Galleon Insider Trading Case Settles SEC Charges

The SEC announced that, on May 17, 2010, the U.S. District Court for the Southern District of New York entered a Consent Order and Judgment as to Defendant Anil Kumar ("Kumar") in the SEC's insider trading case, SEC v. Galleon Management, LP, filed against Raj Rajaratnam ("Rajaratnam"), Galleon Management, LP ("Galleon"), Kumar, and others. Rajaratnam is the founder and a Managing General Partner of Galleon, a New York hedge fund, which at the time of the alleged insider trading had billions of dollars under management. When the SEC's complaint was filed, Kumar, a friend of Rajaratnam's and a Galleon investor, was a director at the global consulting firm McKinsey & Co. ("McKinsey"). The SEC alleged that Rajaratnam unlawfully traded based on inside information involving numerous companies. It further alleged that Kumar acquired material non-public information while working as a McKinsey consultant and passed that information to Rajaratnam, who traded on it.

The Consent Order and Judgment entered against Kumar permanently enjoins him from violating the antifraud provisions of the federal securities laws, Section 10(b) of the Exchange Act, Exchange Act Rule 10b-5, and Section 17(a) of the Securities Act. It also orders him to pay disgorgement in the amount of $2.6 million, plus prejudgment interest in the amount of $190,621, for a total of $2,790,621. The order provides that the Court will determine at a later date whether any civil penalty is appropriate. Kumar has agreed to cooperate with the SEC in connection with this action and related investigations.

May 18, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Exchanges and FINRA Propose Stock Circuit-Breaker Rules

The SEC announced that in response to the market disruption of May 6, the national securities exchanges and FINRA are filing proposed rules today under which they would pause trading in certain individual stocks if the price moves 10 percent or more in a five-minute period. The SEC is seeking comment on the proposed rules.

The markets are proposing these rules in consultation with FINRA and staff of the SEC to provide for uniform market-wide standards for individual securities in the S&P 500® Index that experience a rapid price movement. These rules reflect a consensus that was achieved among the exchanges and FINRA after SEC Chairman Mary Schapiro convened a meeting of exchange leaders and FINRA at the SEC early last week.

Under the proposed rules, which are subject to Commission approval following the completion of the comment period, trading in a stock would pause across U.S. equity markets for a five-minute period in the event that the stock experiences a 10 percent change in price over the preceding five minutes. The pause would give the markets the opportunity to attract new trading interest in an affected stock, establish a reasonable market price, and resume trading in a fair and orderly fashion. Initially, these new rules would be in effect on a pilot basis through Dec. 10, 2010. The markets will use the pilot period to make appropriate adjustments to the parameters or operation of the circuit breaker as warranted based on their experience, and to expand the scope to securities beyond the S&P 500 (including ETFs) as soon as practicable.

The proposed rules will be available on the SEC's website as well as the websites of each of the exchanges and FINRA. The Commission intends to promptly publish the proposed rules for a 10-day public comment period, and determine whether to approve them shortly thereafter.

During the pilot period, Chairman Schapiro has asked the SEC staff to consider ways to address the risks of market orders and their potential to contribute to sudden price moves, as well as to consider steps to deter or prohibit the use by market makers of "stub" quotes, which are not intended to indicate actual trading interest. The staff will study the impact of other trading protocols at the exchanges, including the use of trading pauses and self-help rules. The SEC staff also will continue to work with the exchanges and FINRA to improve the process for breaking erroneous trades, by assuring speed and consistency across markets.

The SEC staff is working with the markets to consider recalibrating market-wide circuit breakers currently on the books — none of which were triggered on May 6. These circuit breakers apply across all equity trading venues and the futures markets.

May 18, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

First Meeting of SEC-CFTC Committee on Emerging Regulatory Issues Set for May 24

The SEC and the CFTC announced that the first meeting of the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues will be held on Monday, May 24.  The Joint Committee will discuss the preliminary findings of the staffs of the CFTC and SEC related to the unusual market events of May 6.


The CFTC and SEC also announced today that Nobel Laureate and Columbia Business School Professor Joseph Stiglitz will be a member of the Joint Committee.

May 18, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, May 17, 2010

SEC Small Business Capital Formation Report Available

The 2009 Annual SEC Government-Business Forum on Small Business Capital Formation FINAL REPORT is posted on the SEC website.

May 17, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Is Mandatory Securities Arbitration Likely to be Abolished?

Today I appeared as part of a panel of experts on securities arbitration before the SEC Investor Advisory Committee.  The Committee appears to be considering seriously a recommendation to eliminate mandatory securities arbitration.  As an investor advocate (particularly for small retail investors), I believe that securities arbitration is a better, fairer process for most investors than litigation.  Accepting that, it presents the question:  if arbitration is better for most investors, and the industry wants arbitration, then won't parties agree to it post-dispute anyway?  The answer is not necessarily.

Scholars who have studied consumer and employment arbitration note that the incentives to support arbitration change when the system becomes voluntary.  Similarly, brokerage firms have cost advantages attributable to mandatory arbitration that may be lost in a voluntary system.  Once a dispute has arisen, each side will have a view about its claim will fare better in court or in arbitration.  As a result, they are unlikely to agree, post-dispute, on a choice of forum.

Suppose, for example, a $25,000 claim for breach of the suitability rule.  The investor is likely to want arbitration, while the firm has strategic advantages to insist on court -- it won't be cost-efficient to litigate this claim, and there is no private cause of action for breach of an SRO rule.  Conversely, if a disabled investor has a $5 million claim for fraudulent misrepresentations, the investor's attorney will want to take the case to a jury, with all the attendant publicity, while the firm would prefer arbitration.

As a result, the number of claims going to arbitration will decrease.  There is some empirical evidence in other types of arbitration (employment and consumer) that post-dispute arbitration agreements are rare.  The incentives on the part of the firm to support arbitration decrease.  In addition, the resources devoted to maintain a fair and efficient arbitration forum -- which, on the part of FINRA, are considerable, would likely decrease.

The complication in the securities arbitration area is that FINRA Rule 12200 provides that a customer can always require the firm to arbitrate its claim.  FINRA takes the position that it is essential for investor protection that FINRA maintain Rule 12200 if Congress and the SEC decide to limit or prohibit mandatory arbitration.  However, in that event, we can expect that the securities industry would campaign to eliminate Rule 12200 as one-sided and unfair to the industry. 

May 17, 2010 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)