September 30, 2010
SEC Approves FINRA Rule Change on Abuses in IPO Allocation PracticesThe SEC granted "accelerated approval" of a proposed rule change filed by NASD on Sept. 15, 2003. New FINRA Rule 5131 (originally proposed as NASD Rule 2712) prohibits certain abuses in the allocation and distribution of shares in initial publiofferings (“IPOs”), including prohibitions on quid pro quo allocations, spinning, flipping. It also regulates IPO pricing and trading practices.
SEC Chair Testifies on Dodd-Frank Implementation
SEC Chairman Mary L. Schapiro presented Testimony on Implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act by the U.S. Securities and Exchange Commission, before the United States Senate Committee on Banking, Housing, and Urban Affairs on September 30, 2010.
Former State Street Employees Settle Charges They Misled Investors about Subprime Exposure
The SEC today charged a pair of former employees at Boston-based State Street Bank and Trust Company with misleading investors about their exposure to subprime investments. The SEC's Division of Enforcement alleges that John P. Flannery and James D. Hopkins marketed State Street's Limited Duration Bond Fund as an "enhanced cash" investment strategy that was an alternative to a money market fund for certain types of investors. By 2007, however, the fund was almost entirely invested in subprime residential mortgage-backed securities and derivatives. Yet despite this exposure to subprime securities, the fund continued to be described as less risky than a typical money market fund and the extent of its concentration in subprime investments was not disclosed to investors.
According to the SEC, Hopkins and Flannery played an instrumental role in drafting a series of misleading communications to investors beginning in July 2007. Flannery was a chief investment officer. Hopkins was a product engineer at the time, and later State Street's head of product engineering for North America.
In the settlement with the firm announced jointly by the SEC and the offices of Massachusetts Secretary of State William F. Galvin and Massachusetts Attorney General Martha Coakley, State Street agreed to pay more than $300 million to investors who lost money during the subprime market meltdown in 2007. State Street distributed those funds to investors in February and March. State Street additionally paid nearly $350 million to investors to settle private lawsuits.
The SEC charged State Street in a related case earlier this year. The firm agreed to settle the charges by repaying fund investors more than $300 million.
Second Circuit Finds Judge Rakoff Exceeded Discretion in Galleon Insider Trading Case
In a setback for the SEC, the Second Circuit, in SEC v. Rajaratnam (Download Secvgalleon2Cir ), reversed Judge Rakoff's discovery order that compelled defendants to disclose to the SEC wiretapped conversations provided to defendants by the federal prosecutor in a related criminal action for use in the civil enforcement action. The Second Circuit held that, while federal law did not absolutely prohibit the disclosure of the wiretap conversations, the trial court must balance the right of access to the materials against the privacy interests at stake. The court determined that the district court clearly exceeded its discretion in ordering disclosure of thousands of conversations involving hundreds of parties, prior to any ruling on the legality of the wiretaps and without limiting the disclosure to relevant conversations.
Both the criminal action and the SEC enforcement action (which are before different judges in the S.D.N.Y.) revolve around the same allegations: that defendants engaged in widespread and repeated insider trading at several hedge funds. The criminal investigation included court-ordered wiretapping of conversations which were turned over to the defendants as part of criminal discovery. The federal prosecutor did not share the information with the SEC; the agency instead sought access through discovery in the SEC enforcement action.
The appellate court made clear that where the civil defendant has properly received the materials from the government, the SEC has a presumptive right to discovery of the materials based on the civil discovery principle of equal information. It went on, however, to state that the right of access does not outweigh any and all privacy interests at issue. A balancing is required for a district court reasonably to exercise its discretion. The court found that the SEC's right of access is significant, but the privacy interests in this case were real, since the disclosure order implicated thousands of conversations with hundreds of individuals. Accordingly, the district court exceeded its discretion because (1) disclosure was ordered prior to any ruling on the legality of the wiretaps, and (2) disclosure was not limited to relevant conversations.
In particular, the appellate court noted that "the more prudent course in the instant case may have been to adjourn the civil trial until after the criminal trial." In that case, the most relevant wiretapped conversations might have been publicly disclosed at trial, and the SEC would be able to use the materials in the civil proceeding without implicating any privacy concerns. "Apparently, all the parties agreed to such a request, yet the district court declined to grant it."
Judge Rakoff is known as a take-charge kind of judge -- remember his disapproval of the first proposed settlement in SEC v. Bank of America. Here the Second Circuit clearly felt he had gone too far and did not take into account the complexities presented by concurrent civil and criminal proceedings.
Business Groups Challenge SEC Proxy Access Rule
As expected, the U.S. Chamber of Commerce and the Business Roundtable yesterday filed a complaint (Download ChamberProxyAccessComplaint) in the D.C. Circuit, challenging the SEC's recent adoption of the Proxy Access Rule. Petitioners ask the Court to hold the rule unlawful under the Investment Company Act, the Securities Exchange Act, and the Administrative Procedure Act. The petitioners state they have asked the SEC to stay the rule, scheduled to go into effect on November 15, 2010, and if the SEC does not grant the stay, then it will file a motion for stay with the Court.
Petitioners' principal argument is that the SEC failed to adequately assess the rule's impact on "efficiency, competition, and capital formation," an argument that has found a receptive ear at the D.C. Circuit in recent years. The Court has previously struck down several SEC rules for these same inadequacies. In particular, the petitioners argue that the SEC did not give sufficient weight to the costs on corporations of election contests and to the motives and intensity of shareholders pursuing special interests, such as unions. The petitioners also assert the rule violates the First Amendment and is a taking of corporate property because it forces companies to fund and carry election-related speech that is opposed by the board of directors.
September 29, 2010
ABB Ltd. Settles FCPA Charges Involving Mexico and Iraq Business
The SEC announced today that it filed a settled civil action against ABB Ltd ("ABB") in the United States District Court for the District of Columbia, charging the company with violations of the Foreign Corrupt Practices Act. ABB is a Swiss corporation that provides power and automation products and services worldwide. The SEC alleges that ABB, through its subsidiaries, paid bribes to government officials in Mexico to obtain business with government owned power companies, and paid kickbacks to the former regime in Iraq to obtain contracts under the United Nations Oil for Food Program. As alleged in the complaint, ABB's subsidiaries made at least $2.7 million in illicit payments in these schemes to obtain contracts that generated more than $100 million in revenues for ABB.
ABB agreed to settle the SEC's action without admitting or denying the allegations. It will pay $22,804,262 in disgorgement and prejudgment interest and a $16,510,000 civil penalty. In related criminal proceedings, ABB has reached a settlement with the United States Department of Justice in which ABB has agreed to pay a criminal fine of $30,420,000.
September 28, 2010
NASAA Announces Assistance for Investment Advisers Switching from Federal to State Regulation
NASAA today launched an online resource to help investment adviser firms prepare to switch from federal to state regulation. The new NASAA IA Switch Resource Center provides a series of resources to keep firms informed of the upcoming registration switch, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the new law, investment advisers with assets under management of less than $100 million will be required to register with and be examined by state securities regulators. The previous threshold had been $25 million. The new law takes effect on July 21, 2011.
The IA Switch Resource Center includes background information, answers to frequently asked questions and a directory of state contacts. Users of the site also are able to send their questions to NASAA. These questions, in turn, will be used to update the site’s FAQ.
FINRA Plans to Allow All Investors to Select Arbitration Panels with All Public Arbitrators
FINRA announced today that it will file a rule proposal next month that would allow all investors filing arbitration claims the option of having an all-public panel. The rule proposal, which will be filed for approval with the Securities and Exchange Commission (SEC), would expand to all investor claims a two-year-old FINRA pilot program that gives investors filing an arbitration claim against certain firms the option of choosing an all-public panel. According to Richard Ketchum, FINRA CEO, "Giving each individual investor the option of an all-public panel will enhance confidence in and increase the perception of fairness in the FINRA arbitration process."
If approved by the SEC, the rule would give investors the option of choosing an arbitration panel that has two public arbitrators and one non-public arbitrator, as is now the case, or choosing to have their case heard by an all-public panel. The proposed rule would apply to all investor disputes against any firm and any individual broker. It would not apply to arbitration disputes involving only industry parties.
The current pilot program involves 14 firms that agreed voluntarily to a set number of investor cases that did not involve individual brokers. Since the pilot program began in October 2008, slightly more than 60 percent of investors eligible to participate have opted in, resulting in almost 560 cases to date. Investors opting into the pilot, given the power to eliminate all non-public arbitrators, still chose to have one non-public arbitrator on their panel about 50 percent of the time. The pilot program was originally set to conclude after two years. However, the participating firms agreed recently to extend the pilot program for an additional year while the rule making process goes forward.
This rule proposal is not unexpected, although many thought that FINRA would wait until completion and further evaluation of the cases in the pilot program.