Securities Law Prof Blog

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

Thursday, August 12, 2010

FINRA Fines Morgan Stanley for Deficiencies in Research Conflicts Disclosure

FINRA censured and fined Morgan Stanley & Co., Inc. $800,000 for failing to make public disclosures required by FINRA's rules governing research analyst conflicts of interest. The firm also failed to comply with a key provision of the 2003 Research Analyst Settlement by failing to disclose the availability of independent research in customer account statements.  In addition to the censure and fine, Morgan Stanley must review a sample of its research reports and certify to FINRA that they comply with FINRA's research analyst conflict-of-interest rules. These reviews and certifications must take place every six months for two years.

FINRA found that from April 2006 to June 2010, Morgan Stanley issued equity research reports that failed to disclose accurate information about the relationships Morgan Stanley, or its analysts, had with companies covered in its research reports. Overall, these inaccuracies resulted in approximately 6,836 deficient disclosures in about 6,632 equity research reports and 84 public appearances by research analysts. Morgan Stanley also did not disclose in approximately 127,600 monthly account statements sent to customers from August 2007 to February 2008 that it had available independent, third-party research. The requirement to provide customers with this notification was part of the Securities and Exchange Commission's final agreement with Morgan Stanley as part of the 2003 Research Analyst Settlement and was incorporated into a separate agreement with FINRA.

In determining the appropriate sanctions in this matter, FINRA considered Morgan Stanley's self-review and self-reporting of some of its disclosure violations and remedial steps taken by the firm, as well as a prior FINRA settlement in 2005 that found the firm violated FINRA's research analyst disclosure rules.  In settling this matter, Morgan Stanley neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

August 12, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Monday, August 9, 2010

SEC Charges Seattle Skin Care Retailer with Accounting Fraud

The SEC charged International Commercial Televison Inc. (ICTV), a Seattle-area skin care retailer, and its former chief financial officer with fraudulently boosting earnings by reporting sales of anti-aging products promoted through Home Shopping Network infomercials while the products still sat unsold in the company's warehouse.  The SEC alleges that Karl Redekopp, the former CFO, turned millions of dollars of quarterly losses into profits by falsely accounting for ICTV's sales of the Derma Wand, a skin care appliance that purports to reduce wrinkles and improve skin appearance. Redekopp fraudulently recognized revenue before the Home Shopping Network had actually sold or delivered the product to viewers. He also improperly recognized revenue before a free trial period offered by the company had expired, and failed to reverse revenue from products that had been returned. Redekopp's misconduct caused the company to falsely report millions of dollars in excess revenue in 2007 and 2008.

The SEC's complaint against Redekopp, filed in federal district court in Tacoma, Wash., alleges that Redekopp recorded "sales" of products that had not been shipped or that the customer was not obligated to pay for. Redekopp's fraudulent accounting resulted in ICTV adjusting net sales by more than $3.7 million over a five-quarter period in 2007 and 2008, negating all originally reported net income for those periods to restated net losses. The SEC's complaint charges Redekopp with violating Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13a-14, and 13b2-1 thereunder, and aiding and abetting the violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. The SEC seeks a permanent injunction, a financial penalty, and an order barring him from serving as an officer or director of a public company.

In a separate complaint, the SEC charged ICTV for its misleading financial statements. Without admitting or denying the allegations, ICTV agreed to settle the charges by consenting to a final judgment permanently enjoining the company from future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, and 13a-13 thereunder.

The SEC also instituted administrative proceedings against ICTV's former outside auditors Steven H. Dohan, Nancy L. Brown and their Miami-area firm Dohan + Company CPAs as well as Erez Bahar, a Canadian Chartered Accountant who lives in Vancouver.  According to the SEC's order, Dohan, Brown, and Bahar were responsible for the issuance of an unqualified audit report stating that ICTV's financial statements were fairly reported in conformity with Generally Accepted Accounting Principles (GAAP) and that the audit had been conducted in accordance with Public Company Accounting Oversight Board (PCAOB) auditing standards. The SEC's Division of Enforcement alleges that the former auditors failed to identify the material accounting deficiencies and violations of GAAP that formed the basis of the SEC's enforcement action against Redekopp. The Division of Enforcement alleges that Dohan, Brown, Bahar, and Dohan + Company CPAs engaged in improper professional conduct under Rule 102(e) of the Commission's Rules of Practice. An administrative hearing will be scheduled to determine whether remedial sanctions are appropriate.

August 9, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

University of Tennessee Conference on Behavior & Business Law

University of Tennessee College of Law Presents
A Multidisciplinary Event:
Behavior and Business Law Conference
October 2, 2010
Business Law in the New Economy
The recent financial crisis has prompted policymakers in the U.S. and abroad to reexamine some basic assumptions of a market economy. In reexamining these assumptions, policymakers are studying the findings of one of the hottest topics within academia: behavioral studies.

This emerging field of research uses facts and methods from the social sciences, such as psychology and sociology, to better understand how people behave across social and business settings in terms of decision-making, willpower, and motivation.

This conference will consider the implications of behavioral studies in four key areas:

First, we will look at how behavioral economics can be applied to corporate and securities law. Business associations have cultures and exhibit behaviors as participants in society. How can laws and informal norms affect the behavior of business associations and their constituents?

Next we will consider how behavioral research can aid in resolving disputes, where emotions can often play an important role.

After lunch with law professor and Instapundit blogger Glenn Reynolds, we will consider the role of behavioral economics in consumer protection. Do people act contrary to their longterm interests, and, if so, should the law protect them or is that too paternalistic?

Finally, we will consider an issue that has vexed philosophers and theologians for centuries: What makes us happy in business and law?

Each workshop features an academic paper with commentary by other panelists and the audience participants. The scholars participating in the conference come from a variety of institutions and fields of interest.  All workshops, the CLE, and the evening reception and dinner are open to all conference registrants, who may attend as many of the sessions as they like. For further information, see the UT website.

August 9, 2010 in Professional Announcements | Permalink | Comments (1) | TrackBack (0)

Call for Papers --Fiduciary Standards of Conduct


Summary: Call for Short Papers.  The editors of the Boston University Review of Banking & Financial Law, in cooperation with The Committee for the Fiduciary Standard, invites papers from scholars, researchers, practitioners, and professionals for 1,250- to 4,000-word paper contributions to an issue slated for publication during the Fall of 2010.  This issue focuses on the application of fiduciary duties to the delivery of investment advice as potentially impacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Completed manuscripts are due not later than August 31, 2010.

Research Topics:  Three- to seven-page research papers covering the topics of the SEC’s study, which is referenced below, are welcome.  An emphasis on the purpose, function and parameters of the fiduciary standard of conduct under the Investment Advisers Act of 1940, contrasts with state common law, as well as their application to investment advisers, and its potential application to the investment advisory activities of broker-dealers, is desired.  Economic analysis of the issues, including the application of behavioral research, is also requested.  Appropriate citation to legal authority and/or discussion of economic theory, and/or the use of appropriate consumer survey or other data sets, is strongly encouraged.  Additionally:

(1) Section 913 of the Dodd-frank legislation calls for a six-month study by the U.S. Securities and Exchange Commission (SEC), which includes an examination of the “standards of care” for brokers-dealers (and their registered representatives) and investment advisers (and their representatives).

(2) The SEC is directed to issue a Report to Congress regarding the study, and in connection therewith the SEC is expected to receive the public views of knowledgeable persons. To that end, the Boston University Review of Banking & Financial Law, with assistance from The Committee for the Fiduciary Standard, is putting out this Call for Papers, of length from three to seven pages, which papers should address one or more of the questions posed in the SEC’s study.  Please consult the full text of Section 913(b) of the legislation (see link below).

(3) Given the short time available to the SEC for the completion of its study, papers should be submitted to the email address shown below not later than August 31, 2010.

(4) Papers will be reviewed by a panel formed by The Committee for the Fiduciary Standard. (See below). 

All papers which in the judgment of The Committee for the Fiduciary Standard are likely to provide substantial assistance to the SEC (regardless of the point of view expressed) will be assembled by The Committee for the Fiduciary Standard and submitted as a group to the SEC in early September 2010. The Editors of Boston University Review of Banking & Financial Law will then select a smaller number of papers for publication in the Review of Banking & Financial Law in the Fall of 2010.
(5) Writers are encouraged to address the purpose of fiduciary standards and the manner of application to RIA and/or BD activities, as well as address the other issues posed by Congress in connection with the study.  Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which calls for the study, may be found at

Questions?  If you have any questions, please submit them to

Associated Public Policy Conference.  The Committee for the Fiduciary Standard and other professional and industry organizations may host a special Public Policy Conference early this Fall.  The date and location of this Conference will be announced not later than August 20, 2010.  Select authors will be invited to present their papers and/or participate in panel discussions.  This Conference will address current issues in the regulation of investment advice, with an emphasis on understanding fiduciary standards of conduct, for the purpose of providing valued input to policy makers.
Submission Procedure.   Please submit papers of no less than three, nor more than seven pages to the e-mail address shown below, not later than August 31, 2010. Earlier submissions are encouraged.  All papers submitted should be in the format of Word, with end notes (not footnotes), 8.5 x 11, 12-pt. font size, Times New Roman font, single-space, and of 1,250 to 4,000 words, inclusive of footnotes.

Please e-mail all papers to:

Within three business days following receipt of a paper, an acknowledgement of receipt and Publication Agreement (for purposes of distribution to SEC staff, for papers which are subsequently approved) will be furnished by e-mail to each author. 


August 9, 2010 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

D.C. Circuit Faults SEC Rulemaking Process Once Again

The D.C. Circuit continues its practice of carefully reviewing the SEC rulemaking process and remanding rules when it finds the process deficient, particularly when the SEC has not, in its view, adequately considered the Rules's effect on competition.  Recently, the D.C. Circuit vacated the SEC's rule on fixed indexed annuities, Rule 151A, for its failure to consider the rule's effect on efficiency, competition and capital formation.  The vacatur came one year after the Court had remanded the Rule to the SEC for reconsideration of these issues.  American Equity Investment Life Insurance Co. v. SEC.(Download American EquityInvestment_2010).  On August 6, 2010, the D.C. Circuit remanded to the SEC its order approving the NYSE Arca ArcaBook fees rule, because the agency did not adequately explain the basis of its approval and did not support its conclusion with substantial evidence.  NetCoalition v. SEC (Download NYSEArcaMarketOrderOpinion)

First, the D.C. Circuit found that the SEC's "market-based" approach to evaluating the fairness and reasonableness of the ArcaBook fees did not contravene the Exchange Act and that the SEC did not arbitrarily reject its prior cost-based approach.  However, a cost analysis is not irrelevant under a market-based approach.  The SEC based its determination that consideration of cost was unnecessary because NYSE Arca is subject to two types of competitive forces: its need to attract order flow and the availability of alternatives to ArcaBook.  However, the SEC failed to provide sufficient evidence that NYSE Arca is indeed subject to significant competitive forces in pricing ArcaBook.  Accordingly, the Court remanded the Rule to the agency for further proceedings.

August 9, 2010 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Sunday, August 8, 2010

Black on the U.S. Government as Reluctant Shareholder

The U.S. as 'Reluctant Shareholder': Government, Business and the Law, by Barbara Black, niversity of Cincinnati - College of Law, was recently posted on SSRN.  Here is the abstract:

Through the TARP program, the government became a substantial equity holder in five major U.S. companies: American International Group, Inc.(AIG), Citigroup Inc. (Citigroup), General Motors Company (GM), Chrysler Group LLC (Chrysler), and GMAC Inc.(GMAC), now known as Ally Financial Inc. (Ally). How the government behaves when it is a significant shareholder in private business is a subject worthy of examination. That is the primary purpose of the paper.

I closely examine the government's actions as an equity holder, beginning with the closest parallel to the current situation, the Federal Deposit Insurance Corporation’s 1984 acquisition of an 80% ownership interest in the public holding company of Continental Illinois National Bank and Trust Co. I then look at the 2008-09 bailouts of AIG, Citigroup, GM, Chrysler and Ally and trace the development of a policy for how the government acts as a shareholder and show that, notwithstanding the government's assertions of a "reluctant shareholder" policy, the government has been deeply involved in these companies as a creditor, regulator, and legislator.

Finally, I argue that government intervention in business has become sufficiently regular that the government should develop policies for the future so that its actions are more forthright and transparent. To that end, I set forth a modest proposal consisting of three suggestions. First, when Treasury is a substantial shareholder, it should work with corporate management to provide the general public regularly with clear specific statements about government intervention and its effect on the corporation. The second and third proposals contemplate that the government will exercise the customary power of a substantial shareholder and select directors who will represent the taxpayers’ interests in the boardroom. Treasury’s active participation in the corporate boardroom could promote greater understanding of the respective positions of government and business and alleviate some of tensions and conflicts resulting from the uneasy alliance of government and business.

August 8, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Black on Behavioral Economics & Securities Arbitration

Can Behavioral Economics Inform Our Understanding of Securities Arbitration?, by Barbara Black, University of Cincinnati - College of Law, was recently posted on SSRN.  Here is the abstract:

The classical economic approach assumes that parties take rational account of the effects of ADR on the likely disposition of their disputes and adopt predispute arbitration agreements (PDAAs) when they mutually benefit the parties. Accordingly, there should be a presumption in favor of enforcing PDAAs so long as the parties have entered into them knowingly and voluntarily, but there is generally no reason for the state to favor PDAAs. In contrast, critics of mandatory consumer arbitration believe that, as a practical reality, consumers cannot bargain over PDAAs and have little choice but to accept the deal offered by the business. In addition, relying on the behavioral economics literature, they assert that consumers typically are not as rational as classic economic theory supposes.

The opposing positions in this debate over consumer arbitration have been well fleshed out in the academic literature. This paper will focus specifically on securities arbitration in the FINRA forum, where there are unique differences in the FINRA process that add complexity to this issue. I look at three examples of puzzling behavior in FINRA securities arbitration to explore whether behavioral economic theory provides an explanation.

This paper is a working paper that will be finalized during a workshop on Oct. 2, 2010 that is part of The University of Tennessee College of Law’s Behavior and Business Law Conference, sponsored by the Clayton Center for Entrepreneurial Law on the occasion of its 15th anniversary. Information on the conference can be found on the UT College of Law website.

August 8, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Armour & Cheffins on Shareholder Activism by Hedge Funds

The Rise and Fall (?) of Shareholder Activism by Hedge Funds, by John Armour, University of Oxford - Faculty of Law; Oxford-Man Institute of Quantitative Finance; European Corporate Governance Institute (ECGI), and Brian R. Cheffins, University of Cambridge - Faculty of Law; European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

Shareholder activism by hedge funds has over the past few years become a major corporate governance phenomenon. This paper puts the trend into context. The paper begins by distinguishing the “offensive” form of activism hedge funds engage in from “defensive” interventions “mainstream” institutional investors (e.g. pension funds or mutual funds) undertake. Variables influencing the prevalence of offensive shareholder activism are then identified using a heuristic device we call “the market for corporate influence”. The rise of hedge funds as practitioners of offensive shareholder activism is traced by reference to the “supply” and “demand” sides of this market, with the basic chronology being that, while there were direct antecedents of hedge fund activists as far back as the 1980s, hedge funds did not move to the activism forefront until the 2000s. The paper brings matters up-to-date by discussing the impact of the recent financial crisis on hedge fund-driven shareholder activism and draws upon the market for corporate influence heuristic to predict future trends.

August 8, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Cain & Davidoff on Management Buy-Outs

Form Over Substance? The Value of Corporate Process and Management Buy-Outs, by Matthew D. Cain,
University of Notre Dame - Department of Finance, and Steven M. Davidoff, University of Connecticut School of Law, was recently posted on SSRN.  Here is the abstract:

We examine management buy-out (MBO) transactions announced from 2003-2009 in order to study the wealth effects of MBOs and the role of process. We find that there is “value” in corporate process. MBO offer premiums are positively associated with competitive contracts and the existence of special committees. Among transactions with low initial offer premiums, bid failures are more likely when target shareholders benefit from competitive contracts. Our results allow for a cautious approach and more rigorous application of current Delaware law to provide that courts more vigorously scrutinize MBO transactions. They also inform the proper standard for review of other forms of takeovers with explicit agency/principal conflicts, including freeze-outs.

August 8, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)