Securities Law Prof Blog

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

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Saturday, June 26, 2010

FINRA Arbitration Panel Tells Goldman to Pay $20.6 Million to Bayou Group Creditors

A FINRA arbitration panel ordered Goldman Sachs Group to pay $20.6 million (the largest arbitration award against a securities firm) to unsecured creditors of Bayou Group LLC.  The claimants alleged  Goldman, who acted as clearing broker for Bayou, ignored signs of fraud.  The fund's CEO, Samual Israel III, is in prison for fraud.  It is extremely rare to impose liability on a clearing broker for the fraud committed by a broker or an issuer.  As is customary, the arbitration panel did not give reasons.  WSJ, Goldman Told to Pay Bayou Fund Creditors.

June 26, 2010 in Securities Arbitration | Permalink | Comments (1) | TrackBack (0)

SEC Loses Major Insider Trading Case Involving Swaps

After a three-week trial, a judge in S.D.N.Y. dismissed the SEC's insider trading case against Deutsche Bank salesman John-Paul Rorech and Renato Negrin, a manager of the Millenium hedge fund.  The SEC alleged that the defendants shared confidential information about a debt restructuring and then traded swaps, but the judge said the SEC offered no evidence to support its allegations.  This case was the SEC's first to allege insider-trading in connection with swaps.  The court found that the SEC did have jurisdiction over insider trading in swaps.  WSJ, Judge Dismisses Charges in Major 'Swaps' Case.

June 26, 2010 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

SEC Settles Mismanagement Charges Against Former Portfolio Manager of ICP Asset Management

On June 25, 2010, the SEC settled charges that Aamer Abdullah, formerly a portfolio manager at the New York-based investment advisory firm, ICP Asset Management, LLC, mismanaged several multi-billion-dollar collateralized debt obligations (CDOs), including knowingly causing CDOs under ICP's management to purchase securities at above-market prices.

Abdullah agreed to be barred from association with any broker, dealer, or investment adviser, without admitting or denying the allegations of the Commission's complaint. Under the terms of the partial judgment, which is subject to the approval of the Court, any monetary relief against Abdullah will be determined at a later date by the Court upon motion by the Commission.

June 26, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges that Florida Benefits Consulting Firm Defrauded Government Employees

The SEC obtained an asset freeze and other emergency relief against a Jacksonville, Fla., retirement benefits consulting firm that defrauded active and retired government employees and law enforcement agents nationwide through a Ponzi scheme that promised safe investments.  The SEC charged the estate of the recently deceased Kenneth Wayne McLeod, his benefits consulting firm, Federal Employee Benefits Group, Inc. (FEBG), and his registered investment adviser, F&S Asset Management Group, Inc. with fraudulently soliciting government employees to invest in a government bond fund that didn't exist.

The SEC alleges that McLeod lured many of his investors through retirement benefits seminars he gave at government agencies nationwide. According to the SEC's complaint, filed on June 24, 2010, in the U.S. District Court for the Southern District of Florida, McLeod traveled to various state and federal government agencies to conduct FEBG employee benefits counseling and planning seminars.He raised at least $34 million since 1988 from an estimated 260 investors around the country. The security of the government bonds was a key element of McLeod's deception but he never purchased any bonds. Instead, he used the investors' retirement savings to conduct a Ponzi scheme, to pay himself, and to pay for lavish entertainment, including annual trips to the Super Bowl for himself and 40 friends.

 The SEC alleges that the purported safety of the bond fund was an important factor in some investors' decision to retire from law enforcement or public service. Based on McLeod's misrepresentations, some investors rolled over their retirement and savings accounts into the bond fund or invested their inheritances and their children's tuition savings.

On June 24, 2010, the court entered an ex parte emergency order temporarily restraining FEBG and F&S Asset Management and freezing their assets and the assets of the Estate of McLeod. The order also provides for expedited discovery, a sworn accounting and the preservation of records.

June 26, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Friday, June 25, 2010

Conference Committee Approves Final Version of Financial Reform

The Conference Committee met its deadline, but only by pulling an all-nighter.  Senator Lincoln's restrictions on derivatives trading by banks was watered down, as was the Volcker Rule.  I'll provide some analysis over the weekend, but here is a sampling of press coverage:

WSJ, Major Provisions in the Financial Overhaul Bill

NYTimes, Congress Reaches Deal on Financial Bill

WPost, House, Senate leaders finalize details of sweeping financial overhaul

WSJ, U.S. Lawmakers Reach Accord on New Finance Rules  

June 25, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, June 24, 2010

SEC Plans to Take up "Pay to Play" Practices of Investment Advisers at Next Meeting

The SEC has announced an Open Meeting for June 30, 2010.  The subject matter of the meeting will be:

The Commission will consider whether to adopt a new rule and related rule amendments under the Investment Advisers Act of 1940 to address "pay to play" practices by investment advisers. The new rule is designed to prohibit advisers from seeking to influence the award of advisory contracts by public entities by making or soliciting political contributions to or for those officials who are in a position to influence the awards.


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

Supreme Court Says Honest-Services Doctrine Means Bribery & Kickback Schemes

Today the Supreme Court decided Jeffrey Skilling's appeal.  In the first part of the opinion, the majority opinion (written by Ginsberg) rejected Skilling's agument that pretrial publicity and community prejudice prevented him from obtaining a fair trial.  Sotomayor (joined by Stevens and Breyer) dissented to this part of the opinion.  I will leave analysis of the Sixth Amendment claim to others and turn to the Section 1346 "unconstitutionally vague" question.  Despite its length, the opinion's take-away is straightforward.  The statute means only bribery and kickbacks and is therefore constitutional.

Ginsberg emphasizes that the current caselaw requires the Court, if it can, to construe, and not condemn, Congressional enactments.  She determines (although not without some difficulty) that it can and begins the process by reviewing the development of the "the intangible right of honest services" caselaw.  She finds that, prior to the Supreme Court's 1987 opinion in McNally v. U.S.,  a consensus had developed in the lower courts that section 1346 could be used to prosecute offenders who, in violation of a fiduciary duty, participated in bribery or kickback schemes.  McNally, however, stopped the development of the intangible-rights doctrine in its tracks by limiting its scope to the protection of property rights.  Congress then reacted and enacted a statute specifically to cover "the intangible right of honest services."  Since Congress's action was in reaction to McNally, the majority reasons, Congress intended to make criminal the "core" conduct recognized by the courts prior to McNally, which involved fraudulent schemes to deprive another of honest services through bribery or kickbacks supplied by a third party that was not deceived.  Ergo -- one statute saved from unconstitutional vagueness.  (The analysis includes an inordinate emphasis on the meaning of "the" -- see text at footnote 40, if you appreciate these kinds of arguments.)

The majority declines the government's urging to go further to include "undisclosed self-dealing by a public official or private employee."  "If Congress desires to go further," repeating its words from McNally, "it must speak more clearly than it has."  In footnote 45, it makes clear how hard a drafting exercise this would be.

Finally, the opinion remands to the FifthCircuit to figure out how the reversal on the honest-services wire fraud count affects his conspiracy conviction (since it included securities fraud and money-or property wire fraud) and how the potential reversal on the conspiracy count affects his convictions on the other counts. 

Justice Scalia (joined by Thomas and Kennedy) finds that the statute is unconstitutionally vague and the majority's paring down of the statute amounted to an impermissible defining of a new federal crime.

June 24, 2010 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Massachusetts and Morgan Stanley Settle Charges over Subprime Lending Practices

The Massachusetts Attorney General and Morgan Stanley reached settlement over the firm's subprime lending policies that requires the firm to pay the state $102 million, of which $58 million will go to the state's affected homeowners.  According to the Attorney General, the firm continued to fund and securitize subprime loans after the 2007 financial meltdown.  WSJ, Morgan Stanley, Mass. Settle Subprime Case for $102 Million

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

FINRA Fines Brokers $4.3 Million for Improper Communications about Customers' Interdealer Brokerage Negotiations

FINRA announced today that it has imposed fines totaling $4.3 million against Phoenix Derivatives Group, LLC of New York and eight brokers – three employed at Phoenix and five at four other interdealer brokerage firms – for improper communications about customers' proposed brokerage rate reductions in the wholesale credit default swap (CDS) market.  Phoenix and its three CDS desk co-heads were sanctioned for attempting to improperly influence other interdealer brokerage firms and their employees regarding brokerage fees and rate reductions.  

Phoenix was fined $3 million, of which $900,000 is a joint and several fine apportioned among the three CDS desk co-heads – former Managing Partner Jon Lines and Managing Partners Wesley Wang and Marcos Brodsky. FINRA suspended all three from working in the securities industry – Lines for three months, Wang for two months and Brodsky for one month.  In addition to Phoenix and its desk co-heads, five brokers at other interdealer firms in the CDS market were fined a total of $1.3 million and issued suspensions as part of FINRA's ongoing review:

FINRA found that the eight brokers engaged in communications with personnel at other interdealer brokerage firms that improperly attempted to influence those firms and individuals. These communications generally occurred after individual customer firms sought to renegotiate their CDS brokerage fees, sending schedules of proposed rate reductions separately to a number of individual interdealer brokers. The communications that the eight brokers engaged in with personnel at other interdealer brokers included reactions to customers' proposed rate reductions and statements concerning actual or contemplated interdealer broker responses or counter-positions to the customers' proposed rate reductions. Certain brokers' communications with other interdealer brokers also included discussions about creating identical, or similar, individual counter-proposals to rate reduction requests.  FINRA also found that while many of the brokers' communications typically involved one-to-one discussions with personnel from other CDS interdealer brokerage firms, certain of those discussions also referred to similar communications about the proposed fee-reduction schedules with additional interdealer brokerage firms.

 Phoenix and the eight individuals settled these matters without admitting or denying the allegations, but consented to the entry of FINRA's findings.

June 24, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Scalia: Presumption Against Extraterritoriality Rules

Justice Scalia had no difficulty, in Morrison v. National Australia Bank LLC, in deciding that Section 10(b) of the Exchange Act did not provide a cause of action to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges.  To sum up his 24-page opinion, we need only recite the first sentence of the section that begins the substantive analysis (Part III.A):  It is a "longstanding principle of American law 'that legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.'"  "When a statute gives no clear indication of an extraterritorial application, it has none."

Much of the opinion is devoted to explaining, without any tact, how many ways the Second Circuit was wrong in its approach to the issue (although it reached the right result).  First, as a threshold error, the lower courts analyzed the issue of extraterritoriality, consistent with Second Circuit precedent established by Judge Friendly, as a question of subject-matter jurisdiction dismissable under Rule 12(b)(1). To the contrary, Judge Scalia says, it is a merits question dismissable under Rule 12(b)(6).  However, since nothing in the analysis of the courts below turns on this distinction, it was unnecessary to remand.

Next, the fun really begins for Justice Scalia, who after announcing the presumption against extraterritoriality, describes the history of the Second Circuit in disregarding the presumption and producing a body of caselaw that purported to divine Congressional intent, a collection of tests ... complex in formulation and unpredictable in application." The flaw of the Second Circuit's effects and conduct tests, besides lack of textual support, was the difficulty in applying them because of their "vague formulations" and opportunities for "judicial-speculation-made-law" in divining what Congress would have wanted if it had thought of the situation before the court.  Now the presumption against extraterritoriality is operative analytical tool, and Justice Scalia quickly reviews the Exchange Act sections and finds no "affirmative indication" that section 10(b) applies extraterritorially.

Justice Scalia moves to the next step of the analysis, which is to determine the relevant activity for determining the location of the violation.  According to Scalia, "the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case."  Accordingly, the focus of the Exchang Act, he pronounces, is not upon the place where the deception originated, but upon purchases and sales of securities in the United States.  End of discussion.

Notwithstanding Scalia's assertions that he is picking up the statute and reading it (nothing more), he does assert two policy reasons for the holding.  First, there is the probability of incompatibility with applicable laws of foreign countries, for which he cites the many amicus briefs filed by foreign governments and business groups complaining about interference with foreign securities regulation.  Second, (and of course Scalia couldn't resist an opportunity to trash securities fraud class actions and the plaintiffs' bar), one should also be "repulsed" by the adverse consequences of a broader test:

"While there is no reason to believe that the United States has become the Barbary Coast for those perpetrating frauds on foreign securities markets, some fear that it has become the Shangri-La of class action litigation for lawyers representing those allegedly cheated in foreign securities markets."

Justice Breyer filed a one-paragraph concurring opinion.  Justice Stevens (with Ginsberg joining) has a longer concurring opinion that essentially adheres to the effects and conduct tests applied by the Second Circuit. Stevens notes that the majority's approach transforms the presumption against extraterritoriality from a "flexible rule of thumb" into "something more like a clear statement rule."  Second, Stevens challenges the suggestion that the presumption against extraterritoriality is fatal to the Second Circuit's test; the real question is how much, and what kinds of, domestic contacts are sufficient to trigger application of section 10(b).  Answering this question is more complicated and nuanced than the majority's heavy-handed approach.  While Stevens finds that this case has "Australia written all over it" and thus agrees with the result, he respectfully dissents, once again, "from the Court's continuing campaign to render the private cause of action under section 10(b) toothless."

Finally, it should be noted that, since this is purely a question of statutory meaning, Congress can overrule this opinion at any time.  Indeed, a provision in the financial reform legislation would give the SEC (but not private plaintiffs) some extraterritorial power.

June 24, 2010 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Supreme Court Hands Down Morrison, Skilling Opinions

In Morrison v. National Australia Bank Ltd (.Download Morrison), the majority opinion (written by Scalia, joined by Roberts, Kennedy, Thomas and Alito) affirmed the lower courts and held that Section 10(b) of the 34 Act does not provide a cause of action to foreign plaintiffs suing foreign and American defendants for misconduct in connection with securities traded on foreign exchanges.  (Breyer filed an opinion concurring in part and concurring in the judgment.  Stevens filed an opinion concurring in the judgment, in which Ginsburg joined.  Sotomayor took no part.)

In Skilling v. U.S.(Download Skilling), the majority opinion (written by Ginsburg, joined by Roberts, Stevens, Scalia, Kennedy, Thomas and Alito) affirmed in part, vacated in part, and remanded the 5th Circuit opinion.  It held:

1. Pretrial publicity and community prejudice did not prevent Skilling from obtaining a fair trial.

2. Section 1346, which proscribes fraudulent deprivations of "the intangible right of honest services," is properly confined to cover only bribery and kickback schemes.  Skilling's misconduct did not fall within the Court's confinement of section 1346's proscription.

(There were various separate opinions concurring in part, and Sotomayor filed an opinion dissenting in part, which Stevens and Breyer joined.)

The Supreme Court also issued opinions in the Conrad Black(Download Black) and Bruce Weyhrauch (Download Weyrauch)appeals consistent with Skilling.

I will write more on both these opinions later; they are long.

June 24, 2010 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Financial Reform Debate Update

The conferees are at an impasse on Senator Blanche Lincoln's provision to restrict derivatives trading by banks and may not make their deadline of finalizing the bill this week before the G-20 meets this weekend.  NYTimes, Lawmakers at Impasse on Trading; WSJ, Negotiators Ease Finance Rules.

The House Offer on Derivatives is here.

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

Tuesday, June 22, 2010

FINRA Tells Jesup & Lamont to Shut Down Brokerage Firm

FINRA said that retail securities firm Jesup & Lamont Securities Corp. is out of compliance with net capital rules and ordered it to cease business.  J&L disputes the finding.  InvNews, 300 reps in limbo as Jesup & Lamont Securities slips below net-cap requirements. 

Investment News also has a timeline of broker-dealer firms that have shut down recently and reports that in 2005 there were 5111 broker-dealers registered with FINRA, compared with 4693 today, an 8.2% decline.

June 22, 2010 in Other Regulatory Action | Permalink | Comments (1) | TrackBack (0)

SEC Publishes Proposed Rules on Target Date Fund Advertising

As previously reported, the SEC proposes amendments to rule 482 under the Securities Act of 1933 and rule 34b-1 under the Investment Company Act of 1940 that, if adopted, would require a target date retirement fund that includes the target date in its name to disclose the fund’s asset allocation at the target date immediately adjacent to the first use of the fund’s name in marketing materials. The Commission is also proposing amendments to rule 482 and rule 34b-1 that, if adopted, would require marketing materials for target date retirement funds to include a table, chart, or graph depicting the fund’s asset allocation over time, together with a statement that would highlight the fund’s final asset allocation. In addition, the Commission is proposing to amend rule 482 and rule 34b-1 to require a statement in marketing materials to the effect that a target date retirement fund should not be selected based solely on age or retirement date, is not a guaranteed investment, and the stated asset allocations may be subject to change. Finally, the Commission is proposing amendments to rule 156 under the Securities Act that, if adopted, would provide additional guidance regarding statements in marketing materials for target date retirement funds and other investment companies that could be misleading. The amendments are intended to provide enhanced information to investors concerning target date retirement funds and reduce the potential for investors to be confused or misled regarding these and other investment companies.

DATES: Comments should be received on or before August 23, 2010.

June 22, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Florida Investment Adviser with Running a Ponzi Scheme

The SEC today charged Trade-LLC, an investment adviser in Palm Beach Gardens, Florida, and two of its managing members with fraud for running a Ponzi scheme and stealing client funds.  According to the SEC, Trade-LLC, and its managing members, Philip W. Milton and William Center, convinced three private investment clubs, with more than 800 members nationwide, to entrust Trade-LLC with money so that it can trade securities on the clubs' behalf using its purported proprietary software trading program. Trade-LLC raised almost $28 million from the clubs and throughout the course of the scheme, claimed that it was profitably trading securities for them. In fact, Trade-LLC was incurring significant trading losses and Milton and Center were allegedly using the funds Trade-LLC received from the clubs to pay fictitious trading profits to them. Milton and Center also misappropriated the clubs' monies to pay their salaries and other personal and business expenses.

According to the SEC's complaint, filed in the U.S. District Court for the Southern District of Florida, between 2007 and 2009, the three private investment clubs invested nearly $28 million of their members' funds with Trade-LLC based on promises that the firm can generate significant returns for them and their members. On a monthly basis, the clubs received reports from Trade-LLC purportedly showing that they were making returns of up to 8% a month, or approximately 100% on an annualized basis. In truth, Trade-LCC was consistently losing money from the trading it conducted on behalf of the clubs, which was directed by Milton, and in total sustained trading losses of more than $2 million.

The complaint further alleges that Trade-LLC, Milton, and Center were operating a Ponzi scheme by using the funds Trade-LLC received from the clubs to pay back to them more than $1 million in fictitious profits. Moreover, the SEC's complaint alleges that Milton and Center misappropriated millions of dollars belonging to the clubs. Specifically, Milton and Center used the clubs' funds to pay themselves salaries of more than $2 million and $1 million, respectively, and to cover more than $1.3 million in business and other unrelated expenses. Milton and Center also transferred, without any legitimate basis, over $4.8 million of the clubs' funds to three Florida companies they controlled.

Trade-LLC, the relief defendants and Milton have agreed to settle the charges against them. Trade-LLC and the relief defendants have consented to asset freezes and being placed in receivership, and to disgorge all of the funds that the court determines they received from the fraudulent scheme.

June 22, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Conference Committee Continues Deliberations on Financial Reform

The Wall Street Reform Bill: Conference Update

 The following is a summary of the many provisions agreed to during the House-Senate conference last week.  A list of House and Senate offers and counter offers can be found by clicking here, but please note that there are still open items in each title, and nothing will be final until the conference report is signed by the conferees at the end of this week.  The House-Senate conference will continue its negotiations on the Wall Street Reform and Consumer Protection Act at noon in room SD-106, Dirksen Senate Office Building.

Title III

AGREED TO - THRIFT PROVISIONS

· Preserves the Thrift Charter

· Abolishes the Office of Thrift Supervision

· Transfers the Authority of the OTS mainly to the OCC

· Establishes a Deputy Comptroller for Thrifts at the OCC

· Clarifies Branching Authority of thrifts that convert to banks

· House Employee Protections as provided for in the House passed bill.

 AGREED TO – New Offices of Minority and Women

 AGREED TO – Deposit Insurance Reforms: Permanent increase in deposit insurance for banks, thrifts and credit unions to $250,000, retroactive to January 1, 2008.

 Title IV: - RAISING STANDARDS AND REGULATING HEDGE FUNDS AGREED TO

·     Fills Regulatory Gaps: Ends the “shadow” financial system in which hedge funds and private equity funds operate by requiring those that manage over $150 million in assets provide regulators with critical information.

·     Register with the SEC: Requires hedge funds and private equity advisors to register with the SEC as investment advisers and provide information about their trades and portfolios necessary to assess systemic risk.  This data will be shared with the systemic risk regulator and the SEC will report to Congress annually on how it uses this data to protect investors and market integrity. 

·     Greater State Supervision: Raises the assets threshold for federal regulation of many investment advisers from $25 million to $100 million, a move expected to significantly increase the number of advisors under state supervision.  States have proven to be strong regulators in this area and subjecting more entities to state supervision will allow the SEC to focus its resources on newly registered hedge funds.

 Title V: INSURANCE

AGREED TO

·     Federal Insurance Office:  Creates a new office within the Treasury Department to monitor the insurance industry and requires a study on ways to modernize insurance regulation and provide Congress with recommendations. 

·     Streamlines regulation of surplus lines insurance and reinsurance through state-based reforms.

·     Regulatory Considerations by the Federal Insurance Office expanded to include access to affordable insurance products by minorities, low- and moderate-income persons and underserved communities.

 Title IX

AGREED TO - NEW REQUIREMENTS AND OVERSIGHT OF CREDIT RATING AGENCIES

·     Ends Shopping for Ratings: The SEC shall create a new mechanism to prevent issuers of asset backed-securities from picking the agency they think will give the highest rating, after conducting a study and after submission of the report to Congress.

·     New Office, New Focus at SEC: Creates an Office of Credit Ratings at the SEC with its own compliance staff and the authority to fine agencies.  The SEC is required to examine Nationally Recognized Statistical Ratings Organizations at least once a year and make key findings public. 

·     Disclosure: Requires Nationally Recognized Statistical Ratings Organizations to disclose their methodologies, their use of third parties for due diligence efforts, and their ratings track record.

·     Independent Information: Requires agencies to consider information in their ratings that comes to their attention from a source other than the organizations being rated if they find it credible.

·     Conflicts of Interest: Prohibits compliance officers from working on ratings, methodologies, or sales.

·     Liability: Investors could bring private rights of action against ratings agencies for a knowing or reckless failure to conduct a reasonable investigation of the facts or to obtain analysis from an independent source.  

·     Right to Deregister: Gives the SEC the authority to deregister an agency for providing bad ratings over time. 

·     Education: Requires ratings analysts to pass qualifying exams and have continuing education.

·     Eliminates Many Statutory and Regulatory Requirements to Use NRSRO Ratings: Reduces over-reliance on ratings and encourages investors to conduct their own analysis.

·     Independent Boards: Requires at least half the members of NRSRO boards to be independent, with no financial stake in credit ratings.

 AGREED TO - EXECUTIVE COMPENSATION AND CORPORATE GOVERNANCE

·     Independent Compensation Committees: Standards for listing on an exchange will require that compensation committees include only independent directors and have authority to hire compensation consultants in order to strengthen their independence from the executives they are rewarding or punishing.

·     No Compensation for Lies: Requires that public companies set policies to take back executive compensation if it was based on inaccurate financial statements that don’t comply with accounting standards.

·     SEC Review: Directs the SEC to clarify disclosures relating to compensation, including requiring companies to provide charts that compare their executive compensation with stock performance over a five-year period.

AGREED TO - SEC AND IMPROVING INVESTOR PROTECTIONS

·     Encouraging Whistleblowers: Creates a program within the SEC to encourage people to report securities violations, creating rewards of up to 30% of funds recovered for information provided.

·     SEC Management Reform: Mandates a comprehensive outside consultant study of the SEC, an annual assessment of the SEC’s internal supervisory controls and GAO review of SEC management.

·     New Advocates for Investors:  Creates the Investment Advisory Committee, a committee of investors to advise the SEC on its regulatory priorities and practices; the Office of Investor Advocate in the SEC, to identify areas where investors have significant problems dealing with the SEC and provide them assistance; and an ombudsman to handle investor complaints.

AGREED TO - BETTER OVERSIGHT OF MUNICIPAL SECURITY ISSUER ADVISORS

·     Registers Municipal Advisors: Requires registration for municipal financial advisers, swap advisers, and investment brokers – unregulated intermediaries who play key roles in the municipal bond market.  Subjects financial advisors, swap advisors, and investment brokers to rules enforced by the SEC or a designee.

·     Puts Investors First on the MSRB Board: Gives investor and public representatives a majority on the MSRB to better protect investors in the municipal securities market where there has been less transparency than in corporate debt markets.

·     Imposes a fiduciary duty on advisors to municipal securities issuers.

 Title XI: AGREED TO - STRENGTHENING THE FEDERAL RESERVE

·     Federal Reserve Emergency Lending: Limits the Federal Reserve’s 13(3) emergency lending authority by prohibiting emergency lending to an individual entity.  Secretary of the Treasury must approve any lending program, programs must be broad based, and loans cannot be made to insolvent firms.  Collateral must be sufficient to protect taxpayers from losses.

·     Transparency – GAO Audit: GAO will conduct a one-time audit of all Federal Reserve 13(3) emergency lending that took place during the financial crisis.  Details on all lending will be published on the Federal Reserve website by December 1, 2010.  In the future GAO will have authority to audit 13(3) and discount window lending, and open market transactions.

·     Transparency - Disclosure: Requires the Federal Reserve to disclose counterparties and information about amounts, terms and conditions of 13(3) and discount window lending, and open market transactions, with specified time delays.

·     Oversight Accountability: Creates a Vice Chairman for Supervision, a member of the Board of Governors of the Federal Reserve designated by the President, who will develop policy recommendations regarding supervision and regulation for the Board, and will report to Congress semi-annually on Board supervision and regulation efforts.

·     Federal Reserve Bank Governance: GAO will conduct a study of the current system for appointing Federal Reserve Bank directors, to examine whether the current system effectively represents the public, and whether there are actual or potential conflicts of interest.  It will also examine the establishment and operation of emergency lending facilities during the crisis and the Federal Reserve banks involved therein.  The GAO will identify measures that would improve reserve bank governance.

·     Election of Federal Reserve Bank Presidents: Presidents of the Federal Reserve Banks will be elected by class B directors - elected by district member banks to represent the public - and class C directors - appointed by the Board of Governors to represent the public.  Class A directors - elected by member banks to represent member banks – will no longer vote for presidents of the Federal Reserve Banks.

·     Limits on Debt Guarantees: To prevent bank runs, the FDIC can guarantee debt of solvent insured banks, but only after meeting serious requirements: 2/3 majority of the Board and the FDIC board determine there is a threat to financial stability; the Treasury Secretary approves terms and conditions and sets a cap on overall guarantee amounts; the President activates an expedited process for Congressional approval.




 

June 22, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, June 21, 2010

Massachusetts Securities Division Charges Banc of America Investment Services with Misrepresenting Risks of Fannie/Freddie Bonds

The Massachusetts Securities Division recently filed an administrative complaint against Banc of America Investment Services, charging it with misrepresentations in  the sale of Fannie Mae/Freddie Mac Bonds.  According to the complaint, the investor at the center of the allegations was originally a customer of the Bank of America and had CDs coming up for renewal.  In a desperate attempt to save the money from leaving the BofA family, a dual employee of the bank and BAI pitched the federal agency step-up bonds that had more attractive interest rates than CDs, but also came with more risks.  In recommending the product, which the dual employee was not authorized to sell, both the dual employee and a registered representative of BAI made gross mischaracterizations as to the safety of the product.  The  complaint further alleges that through a series of misrepresentations and failures to comply with BAI's supervisory procedures, the employee and registered representative prevented $2 million from leaving the BofA family.  The complaint goes on to allege that neither individual was disciplined for this action, but instead were praised for keeping the money in the firm,.

June 21, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Joint SEC-CFTC Committee Meets Tomorrow on May 6 Market Events

The Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues today announced the agenda for its public meeting to be held on June 22, 2010.

The Committee is conducting a review of the unusual market events that occurred on May 6, 2010. The Committee will hear from representatives of exchanges and significant market participants about their views and observations relating to market events of that day. At the Committee's next meeting, anticipated to occur in late July, the Committee expects to hear from other market participants, including brokerage houses, issuers, institutional traders and retail investors about the effects of the events of May 6.

Panelists Include:

 Craig S. Donohue, Chief Executive Officer, the Chicago Mercantile Exchange
Edward J. Joyce, President & Chief Operating Officer, Chicago Board Options Exchange, Inc.
Joseph Mecane, Executive Vice President & Co-Head of U.S. Listing and Cash Execution, NYSE Euronext
Eric Noll, Executive Vice President-Transaction Services, NASDAQ OMX Group
William O'Brien, Chief Executive Officer, Direct Edge
Joseph Ratterman, President & Chief Executive Officer, BATS Exchange, Inc.
Chuck Vice, President & Chief Operating Officer, the Intercontinental Exchange, Inc. 
 
Leonard Amoruso, Senior Managing Director & General Counsel, Knight Capital Group
David Cummings, Owner & Chairman of the Board, Tradebot Systems
Jeff Engelberg, Principal & Senior Trader, Southeastern Asset Management, Inc.
Thomas Peterffy, Chairman & CEO, Interactive Brokers LLC
Anoop Prasad, Managing Director, D.E. Shaw & Co.
Matt Schrecengost, Chief Operating Officer, Jump Trading LLC
David Weild IV, Capital Markets Advisor, Grant Thornton

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

SEC Charges Investment Adviser With Fraudulent Management of CDOs Tied to Mortgage-Backed Securities

The SEC today charged a New York-based investment adviser, Thomas Priore, and three of his affiliated firms with fraudulently managing investment products tied to the mortgage markets as they came under pressure in 2007.  The SEC alleges that Priore and ICP Asset Management LLC defrauded four multi-billion-dollar collateralized debt obligations (CDOs) by engaging in fraudulent practices and misrepresentations that caused the CDOs to lose tens of millions of dollars. Priore and his companies also improperly obtained tens of millions of dollars in advisory fees and undisclosed profits at the expense of their clients and investors.

According to the SEC's complaint, filed in the U.S. District Court for the Southern District of New York, ICP began serving in 2006 as the collateral manager for what were known as the Triaxx CDOs, which invested primarily in mortgage-backed securities. The SEC alleges that ICP and Priore directed more than a billion dollars of trades for the Triaxx CDOs at what they knew were inflated prices. ICP and Priore repeatedly caused the Triaxx CDOs to overpay for securities in order to make money for ICP and protect other ICP clients from realizing losses. The prices for such trades often exceeded market prices by substantial margins. In some trades, ICP caused the CDOs to pay a price that was substantially higher than the price another ICP client paid for the security earlier the same day.

According to the SEC's complaint, ICP and Priore caused the CDOs to make numerous prohibited investments without obtaining necessary approvals, and they later misrepresented those investments to the trustee of the CDOs and to investors. The prices of many of these investments were intentionally inflated to allow ICP to collect millions of dollars in advisory fees from the CDOs. The SEC further alleges that ICP and Priore executed undisclosed cash transfers from a hedge fund they managed in order to allow another ICP client to meet the margin calls of one of its creditors. Priore subsequently misrepresented the transfers to the hedge fund's investors.ICP's affiliated broker-dealer ICP Securities LLC and its parent company Institutional Credit Partners LLC also are charged in the SEC's complaint.

The SEC's complaint charges the defendants with violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 15(c)(1)(a) of the Securities Exchange Act of 1934 and Rules 10b-3 and 10b-5 thereunder, and Sections 204, 206(1), 206(2), 206(3), and 206(4) of the Investment Advisers Act of 1940 and Rules 204-2, 206(4)-7, and 206(4)-8 thereunder. The SEC's complaint seeks permanent injunctions barring future violations of the federal securities laws, disgorgement of the defendants' ill-gotten gains with pre-judgment interest, and monetary penalties.

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

Financial Reform Conferees Adopts Levin's Gustafson Fix

Last week, during the conference committee negotiations on the financial reform legislation, Senator Carl Levin introduced an amendment that he describes as a "Gustafson fix."  It would, in his words

address the effects of a 1995 Supreme Court ruling, in the Gustafson case, that has left investors in private securities offerings without protection from material misstatements or omissions in the security’s prospectus. The Gustafson ruling interpreted the securities laws as depriving purchasers in private offerings of the same protections against material misstatements or omissions that apply to public offerings. Our amendment would restore Congressional intent and close that loophole
 

Jim Hamilton's blog reports that, in fact, the conferees accepted the Levin amendment.

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