Securities Law Prof Blog

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

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Thursday, September 2, 2010

Remaining Defendant in Lucent Accounting Action Settles with SEC

On August 17, 2010, the United States District Court for the District of New Jersey entered final judgment against Nina Aversano, former President of North America Service Provider Networks and former corporate officer of Lucent Technologies Inc. (Lucent), arising out her role in an accounting fraud action that the SEC previously filed against Lucent and ten individuals. Aversano was the remaining defendant in this action. The Commission alleged that Aversano entered into side agreements with certain of Lucent's distributors that granted the distributors rights and privileges beyond those contained in their respective distribution agreements. Those side agreements made it improper for Lucent to recognize revenue, and caused Lucent to materially overstate its pre-tax income for fiscal year 2000.

Without admitting or denying the allegations in the Commission's Amended Complaint, Aversano consented to the entry of the order, which permanently enjoins her from aiding and abetting violations of the anti-fraud provisions of the federal securities laws, and from violating, or aiding and abetting the violation of, the books and records, internal controls, and reporting provisions of the federal securities laws.  In addition, Aversano was ordered to pay a civil penalty in the amount of $100,000 and to: (1) not seek or become an officer or director of any public company for one year following the date of entry of the Final Judgment; (2) resign immediately from the audit committee of New Jersey Resources Corporation; and (3) discontinue her relationship with the Board of Directors of New Jersey Resources at the earlier of [a] termination by the company, or [b] the expiration of her current term in January 2011.

September 2, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Municipal Advisers Must Register with SEC by Oct. 1

The SEC today announced that it has adopted a temporary rule requiring municipal advisors to register with the SEC by October 1, a deadline established by the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Municipal advisors can now access and complete the new registration form (Form MA-T) on the SEC's website.

September 2, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

New Jersey Investment Adviser Settles SEC Fraud Charges

The SEC charged Sandra Venetis, a Branchburg, N.J.-based investment adviser, and three of her firms, Systematic Financial Services, Inc., Systematic Financial Associates, Inc., and Systematic Financial Services, LLC, with operating a multi-million dollar offering fraud involving the sale of phony promissory notes to investors, many of whom are retired or unsophisticated in investments.  According to the SEC, Venetis obtained at least $11 million from investors since approximately 1997. Systematic Financial Associates Inc. is an investment adviser, Systematic Financial Services LLC is an accounting and tax preparation firm, and Systematic Financial Services Inc. is an entity Venetis created to conduct the fraudulent offerings.

Venetis and the entities agreed to settle the SEC's charges and consented to all of the relief that the SEC seeks in its complaint, including the entry of a court order enjoining them from future violations of the above provisions of the securities laws, ordering the payment of disgorgement of ill-gotten gains with prejudgment interest, financial penalties, an asset freeze, accountings, and the appointment of an independent monitor. The settlement will defer the determination of the amount of the monetary relief to a later date.

The Commission's complaint alleges that Venetis told some investors that the promissory notes were guaranteed by the Federal Deposit Insurance Corporation and would earn interest of approximately 6 to 11 percent per year that would be tax-free due to a loophole in the tax code. She also told investors that she would use their money to fund loans to doctors that would be backed by Medicare reimbursement payments to those doctors. Instead of making investments, Venetis looted investor funds to pay business debts and personal expenses accrued from international travel, gambling, and home mortgages and property taxes. She also funneled cash to her relatives.

September 2, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Bernanke, Bair Testify Before Financial Crisis Inquiry Commission

Federal Reserve Board Chairman Ben S. Bernan testified on Causes of the Recent Financial and Economic Crisis before the Financial Crisis Inquiry Commission  today. FDIC Chair Sheila Bair also testified, on SYSTEMICALLY IMPORTANT INSTITUTIONS AND THE ISSUE OF “TOO BIG TO FAIL

September 2, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Can Brokerage Customers Get Two Bites of Apple?

The Nebraska Supreme Court recently held that investors who purchased unregistered securities through registered representatives of a brokerage firm, and who had previously received an arbitration award against the RRs and firm, could also sue the firm's holding company (apparently not a BD firm) and the individuals who were principals of both companies under the Nebraska Securities Act's "control person" provision.  While the claim against the principals sounds like impermissible claim-splitting to me, in fact, the Supreme Court does not directly address this issue, perhaps because the defendants did not raise it.  The Court's only reference to this issue was In response to the defendants'' argument that the damage award should have been reduced by the amounts the RRs paid to plaintiffs in the arbitration; the Court stated it did not address the issue because the record was "insufficient" to resolve it.  Hooper v. Freedom Group, Inc., 784 N.W.2d 437 (Neb. 2010).

September 2, 2010 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 1, 2010

SEC Settles Insider Trading Charges Based on AstraZeneca-MEDI Merger

The SEC settled charges against James W. Self, Jr. (Self), an Executive Director of Business Development at a pharmaceutical company located in New Jersey (the Company), and Stephen R. Goldfield (Goldfield), a former hedge fund manager, for engaging in unlawful insider trading in advance of the April 23, 2007 announcement that AstraZeneca would acquire MedImmune, Inc. (MEDI). The SEC alleged that Self tipped Goldfield, a friend and former business school classmate, with material nonpublic information regarding the MEDI acquisition and that Goldfield unlawfully purchased 17,000 MEDI call options and 255,000 shares of MEDI stock while in possession of the material nonpublic information provided to him by Self. Goldfield realized actual profits of approximately $14 million from his unlawful trading.

According to the SEC, Self had been assigned to the Company's team that was tasked with evaluating a potential acquisition of MEDI, and learned nonpublic information about the potential MEDI acquisition. During a meeting with Goldfield on or about March 12 or 13, 2007, Self, in violation of his duty to the Company, told Goldfield that he had been assigned to work on the potential MEDI acquisition and showed Goldfield a confidential deal sheet, which described MEDI and the procedure and planned timing for the subsequent confidential auction process. The Complaint further alleges that, following this meeting, Self continued to provide nonpublic information to Goldfield on the status of the potential acquisition. From March 15, 2007 continuing through April 20, 2007, Goldfield traded while in possession of the material nonpublic information that Self provided to him. Goldfield closed out his MEDI position entirely within the four business days immediately following the April 23, 2007 announcement about the acquisition, and realized $13,978,752 in profits from his unlawful trading. By May 31, 2007, Goldfield lost all of the profits he had earned trading MEDI through aggressively trading index options.

September 1, 2010 in SEC Action | Permalink | Comments (2) | TrackBack (0)

Former Group VP of Finance & Tax Counsel of Centerpulse Settles SEC Charges

The SEC announced that Richard Jon May, the former Group Vice President of Finance, Tax Counsel and Treasurer of Centerpulse USA, Inc., a subsidiary of Centerpulse Ltd., settled the Commission's charges against him arising from his alleged involvement in the improper overstatement of Centerpulse's income in the third and fourth quarters of 2002. Without admitting or denying the Commission's allegations, May consented to the entry of a final judgment in the Commission's litigation pending in the U.S. District Court for the District of Columbia. The final judgment, which was entered on August 30, 2010, orders May to pay $20,000 in disgorgement and $10,519 in prejudgment interest. The final judgment also permanently enjoins May from violating the falsification of books and records provision of the federal securities laws and from aiding and abetting violations of the reporting, books and records and internal controls provisions of the federal securities laws.

The Commission's complaint alleged that May, along with two other former Centerpulse executives, (1) overstated Centerpulse's third quarter 2002 income by improperly deferring recognition of a $25 million expense, and (2) improperly overstated Centerpulse's fourth quarter and fiscal 2002 income by not increasing a reserve to cover at least $18 million in liabilities, and improperly using anticipated refund credits to offset another $5 million in expenses.

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

Did the Government Let Lehman Fail?

Much has been written about the problems of the Financial Crisis Inquiry Commission, principally the departure of staff members and internal rifts among Commissioners, that may make it difficult to meet the December deadline for its report.  Some of those tensions may have been on display at today's hearing, as Chairman Phil Angelides, a Democrat, cited emails from government officials that he said showed that government officials "made a conscious decision not to rescue" Lehman.  Republican Commissioners disputed that interpretation, noting there were other factors that caused Lehman to fail, such as the absence of a buyer.  WSJ, Clashing Testimony Over Lehman Bankruptcy.

The prepared testimony for today's witnesses, including Richard Fuld, is at the FCIC website.

The Hearing continues tomorrow, with Ben Bernanke and Sheila Blair scheduled to testify.

September 1, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Fuld Testifies that Lehman Could Have Been Saved

Richard Fuld, former CEO of the former Lehman Brothers, testified today before the Financial Crisis Inquiry Commission.  The New York Times article describes him as "defiant" as he asserted that the company could have been saved if the Federal Reserve had given it the support it gave Lehman's competitors and other firms.  NY Times, Fuld Says Lehman Was Denied the Help Its Rivals Received

September 1, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Charges Two Former Accountants at Koss Corp. with Embezzlement

The SEC today charged two former senior accounting professionals at Koss Corporation, a Milwaukee-based headphone manufacturer, with accounting fraud, books-and-records violations, and related misconduct arising from the embezzlement of more than $30 million from the company.  According to the SEC's complaint, Sujata Sachdeva, who was the vice president of finance and principal accounting officer at Koss Corporation, stole money from company accounts to make millions of dollars in payments on her personal credit card and for other extravagant personal purchases from luxury retailers. With the assistance of Koss senior accountant Julie Mulvaney, Sachdeva concealed the theft on Koss’s balance sheet and income statement by overstating assets, expenses, and cost of sales, and by understating liabilities and sales. Based on the fraudulent records prepared by Sachdeva and Mulvaney, Koss prepared materially false financial statements and filed materially false current, quarterly, and annual reports with the SEC.  The alleged scheme began in 2004 and lasted through December 2009. After discovering the embezzlement, Koss amended and restated its financial statements for fiscal years 2008 and 2009 and the first three quarters of fiscal year 2010. Both Sachdeva and Mulvaney have been terminated by the company.

The SEC’s complaint charges Sachdeva with violations of the antifraud provisions of the federal securities laws and charges both Sachdeva and Mulvaney with violations of the reporting, books and records and internal control provisions of the federal securities laws. The SEC seeks a permanent injunction, disgorgement of ill-gotten gains and financial penalties against Sachdeva and Mulvaney, and an order barring Sachdeva from serving as an officer or director of a public company.

Sachdeva entered into a plea agreement with the U.S. Attorney’s Office for the Eastern District of Wisconsin on July 27, 2010, in a parallel criminal proceeding and pled guilty to six counts of wire fraud. Sachdeva is scheduled to be sentenced on Nov. 18, 2010.

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

SEC Charges Pinnacle Capital Markets with Non-Compliance with AML Rule

The SEC charged Pinnacle Capital Markets LLC with failing to comply with an anti-money laundering (AML) rule that requires broker-dealers to identify and verify the identities of its customers and document its procedures for doing so. The SEC also charged Pinnacle's managing director Michael A. Paciorek with causing Pinnacle's violations.  In a parallel action also announced today, the Financial Crimes Enforcement Network (FinCEN) assessed a penalty against Pinnacle for violating the Bank Secrecy Act (BSA).

Pinnacle is a broker-dealer based in Raleigh, N.C., with more than 99 percent of its customers residing outside the United States. Pinnacle's business primarily involves order processing with direct market access (DMA) software for foreign institutions comprised mostly of banks and brokerage firms and foreign individuals.

The SEC found that Pinnacle established, documented and maintained a customer identification program (CIP) that specified it would identify and verify the identities of all of its customers. However, during a six-year period, Pinnacle failed to follow the identification and verification procedures set forth in its CIP.

According to the SEC's order against Pinnacle, many of the firm's foreign entity customers hold omnibus accounts at Pinnacle through which the entities carry sub-accounts for their own corporate or retail customers. Pinnacle treats the sub-account holders of the foreign entity omnibus accounts in the same manner as it does its regular account holders. The vast majority of Pinnacle's regular account holders, as well as the omnibus sub-account holders, use DMA software to enter securities trades directly and instantly through their own computers. As a result, these account holders have direct, unfiltered control over how securities transactions are effected in the accounts. The foreign entity holding the omnibus account does not intermediate these trades. The DMA software allows the omnibus sub-account holders to route their securities transactions directly to the relevant market centers without intermediation.

The SEC's order finds that Pinnacle willfully violated Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder, which require a broker-dealer to comply with the reporting, recordkeeping and record retention requirements in regulations implemented under the BSA, including the requirements in the CIP rule applicable to broker-dealers. The CIP rule generally requires a broker-dealer to establish, document, and maintain procedures for identifying customers and verifying their identities.  Pinnacle and Paciorek agreed to settle the SEC's enforcement action without admitting or denying the allegations, and Pinnacle will pay $25,000 in financial penalties. As part of an action taken by the Financial Industry Regulatory Authority (FINRA) in February 2010, Pinnacle also has agreed to certain undertakings, including extensive AML training for its employees, as well as the hiring of an independent consultant to review its AML compliance program.

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

Tuesday, August 31, 2010

Treasury Releases Data on U.S. Holdings of Foreign Securities

Treasury released preliminary data from an annual survey of U.S. portfolio holdings of foreign securities at year-end 2009.  Final survey results, which will include additional detail as well as revisions to the data, will be reported on October 29, 2010.  The survey was undertaken jointly by the U.S. Department of the Treasury, the Federal Reserve Bank of New York and the Board of Governors of the Federal Reserve System. 

A complementary survey measuring foreign holdings of U.S. securities also is conducted annually.  Data from the most recent such survey, which reports on securities held on June 30, 2010, are currently being processed. Preliminary results are expected to be reported on February 28, 2011.

The survey measured U.S. holdings at year-end 2009 of approximately $6.0 trillion, with $4.0 trillion held in foreign equities, $1.6 trillion in foreign long-term debt securities (original term-to-maturity in excess of one year), and $0.4 trillion held in foreign short-term debt securities.  The previous such survey, conducted as of year-end 2008, measured U.S. holdings of $4.3 trillion, with $2.7 trillion held in foreign equities, $1.3 trillion in foreign long-term debt securities and $0.3 trillion held in foreign short-term debt securities.

August 31, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Cautions Rating Agencies about Deceptive Ratings Conduct and Internal Controls

The SEC today issued a report cautioning credit rating agencies about deceptive ratings conduct and the importance of sufficient internal controls over the policies, procedures, and methodologies the firms use to determine credit ratings.  The SEC's Report of Investigation stems from an Enforcement Division inquiry into whether Moody's Investors Service, Inc. (MIS) — the credit rating business segment of Moody's Corporation — violated the registration provisions or the antifraud provisions of the federal securities laws.

The Report says that because of uncertainty regarding a jurisdictional nexus between the United States and the relevant ratings conduct, the Commission declined to pursue a fraud enforcement action in this matter. The Report notes that the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act provided expressly that federal district courts have jurisdiction over SEC enforcement actions alleging violations of the antifraud provisions of the securities laws when conduct includes significant steps, or a foreseeable substantial effect, within the United States. The Report also notes that the Dodd-Frank Act amended the securities laws to require nationally recognized statistical rating organizations (NRSROs) to "establish, maintain, enforce, and document an effective internal control structure governing the implementation of and adherence to policies, procedures, and methodologies for determining credit ratings."

According to the Report, an MIS analyst discovered in early 2007 that a computer coding error had upwardly impacted by 1.5 to 3.5 notches the model output used to determine MIS credit ratings for certain constant proportion debt obligation notes. Nevertheless, shortly thereafter during a meeting in Europe, an MIS rating committee voted against taking responsive rating action, in part because of concerns that doing so would negatively impact MIS's business reputation.

MIS applied in June 2007 to be registered with the Commission as an NRSRO. The Report notes that the European rating committee's self-serving consideration of non-credit related factors in support of the decision to maintain the credit ratings constituted conduct that was contrary to the MIS procedures used to determine credit ratings as described in the MIS application to the SEC.

In the Report of Investigation, the Commission makes clear that credit rating agencies registered with the SEC must implement and follow appropriate internal controls and procedures governing their determination of credit ratings, and must also take reasonable steps to ensure the accuracy of statements in applications or reports submitted to the SEC.

The Report cautions NRSROs that, when appropriate, the Commission will pursue antifraud enforcement actions against deceptive ratings conduct, including actions pursuant to the Dodd-Frank Act provisions regarding conduct that physically occurs outside the United States but involves significant steps or foreseeable effects within the U.S.

Under Section 21(a) of the Securities Exchange Act of 1934, the Commission may investigate violations of the federal securities laws and at its discretion "publish information concerning any such violations."

August 31, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, August 30, 2010

SEC Approves Rule Change on RR's Outside Business Activities

The SEC granted approval to FINRA Rule 3270 (Outside Business Activities of Registered Persons).  As part of the process of developing a new consolidated rulebook, FINRA proposed to adopt NASD Rule 3030 (Outside Business Activities of an Associated Person) as FINRA Rule 3270 (Outside Business Activities of Registered Persons) in the Consolidated FINRA Rulebook with moderate changes.  Proposed FINRA Rule 3270 would prohibit any registered person from being an employee, independent contractor, sole proprietor, officer, director or partner of another person, or being compensated, or having the reasonable expectation of compensation, from another person as a result of any business activity outside the scope of the relationship with his or her member firm, unless he or she has provided prior written notice to the member. The proposed rule change would expand the obligations imposed under NASD Rule 3030, which prohibits any registered person from being employed by or accepting any compensation from any person as a result of any outside business activity, other than passive investment, unless he has provided prompt written notice to his member firm.  The rule change implements additional protections such as the need for registered persons to provide prior written notice to its member firms of proposed outside business activities and for firms to implement a system to assess the risk that these outside business activities may cause. 

August 30, 2010 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

Former Dell Chief Accounting Officer Settles Accounting Fraud Charges

The SEC today charged former Dell Inc. ("Dell") Chief Accounting Officer Robert W. Davis for his role in the company's accounting fraud. Last month, the SEC charged Dell with fraud for materially misstating its operating results from fiscal year 2002 to fiscal year 2005. The SEC's complaint against Davis alleges that he materially misrepresented Dell's financial results by using various "cookie jar" reserves to cover shortfalls in operating results and engaged in other reserve manipulations from FY2002 to FY2005. Davis agreed to pay a $175,000 penalty and to pay disgorgement and pre-judgment interest to settle the SEC's charges.

The SEC separately charged today former Dell Assistant Controller Randall D. Imhoff with aiding and abetting Dell's improper accounting. Imhoff agreed to pay a $25,000 penalty and to pay disgorgement and pre-judgment interest to settle the SEC's charges.

The SEC's complaint against Davis, filed in federal district court in Washington, D.C., alleges that he directed the use of "cookie jar" reserves to cover shortfalls in operating results over three years. This fraudulent accounting made it appear that Dell was consistently meeting Wall Street earnings targets through the company's management and operations. The SEC's complaint further alleges that the reserve manipulations allowed Dell to materially misstate its operating expenses as a percentage of revenue - an important financial metric that Dell highlighted to investors. The manipulations also enabled Dell to materially misstate the operating income of its Europe, Middle East and Africa ("EMEA") segment.

In a separate complaint also filed in federal district court in Washington, D.C., the SEC alleges that Imhoff aided and abetted Dell's improper use of "cookie jar" reserves and other reserve manipulations to cover shortfalls in Dell's operating results from FY2002 to FY2004. The SEC's complaint alleges that Imhoff, acting under his supervisors' general direction, planned and issued instructions regarding Dell's build-up and use of cookie jar reserves. In an example of his involvement in Dell's other improper reserve manipulations, the SEC's complaint alleges that Imhoff failed to ensure that Dell increased its reserves, as required by GAAP, after learning that an accrual to cover the costs of closing a Dell facility in Texas was inadequate.

August 30, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)