Securities Law Prof Blog

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

Saturday, October 9, 2010

Geithner's 5 Myths about TARP

In an article to be published in Sunday's Washington Post, Treasury Secretary Tim Geithner debunks five myths about the Troubled Asset Relief Program (TARP), which expired on Sunday, October 3.

October 9, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Italian Trader Settles SEC Insider Trading Charges

The SEC announced a proposed settlement with Gianluca Di Nardo, an Italian citizen, and his investment vehicle Corralero Holdings, Inc., (“Corralero”) for alleged insider trading in the securities of two issuers, DRS Technologies, Inc. (“DRS”) and American Power Conversion Corp. (“APCC”). DiNardo agreed to settle the charges by paying approximately $3 million in disgorgement and penalties.

According to the SEC, Di Nardo made highly profitable and suspicious purchases of DRS and APCC call options ahead of public disclosures announcing the acquisitions of these companies. Between September 21 and 22, 2006, Di Nardo bought 2,400 APCC call options at a cost of approximately $299,800 while in possession of material, nonpublic information and liquidated all APCC call options and made a profit of approximately $1.4 million following the announcement by Schneider Electric SA on October 30, 2006, that it would acquire all of APCC’s outstanding shares for $31 a share. In addition, the Commission alleges that on April 29, 2008, Di Nardo bought 550 DRS call options that were out-of-the-money and set to expire in the near term and liquidated all DRS call options, reaping a profit of approximately $669,750 following a May 8, 2008, Wall Street Journal article reporting the advanced merger negotiations between Finmeccanica S.p.A. and DRS, and after confirmation by DRS that it was engaged in talks regarding a potential strategic transaction.

Under the terms of the proposed settlement, Di Nardo and Corralero will pay $2,110,600 in disgorgement, $191,345.77 in prejudgment interest, and a civil penalty of $700,000. The settlement remains subject to the approval of the U.S. District Court for the Southern District of New York.

The Commission’s Amended Complaint also identifies and alleges the following individuals and entities as purchasers of DRS call options in advance of the announcements: Oscar Ronzoni, an Italian citizen and manager of Luga Audit & Consulting SA in Lugano, Switzerland; Paolo Busardò, an Italian citizen who works for a subsidiary of Luga in Milan, Luga Audit & Consulting srl; Tatus Corp., a Panamanian corporation, an investment vehicle based in Switzerland for which Busardò is the ultimate beneficial owner and Ronzoni is the formal managing director; and A-Round Investment SA, a consulting firm based in Lugano controlled by Busardò.


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

SEC Charges Penny Stock Promoters with Illegal Kickback Schemes

The SECcharged more than a dozen penny stock promoters and their companies with securities fraud for their roles in various illicit kickback schemes to manipulate the volume and price of microcap stocks and illegally generate stock sales. One of the schemes was perpetrated by Larry Wilcox, an actor who starred as a police officer on the long-running television show CHiPs.

The SEC worked closely with the U.S. Attorney's Office for the Southern District of Florida and the Federal Bureau of Investigation as the separate schemes were uncovered through FBI undercover operations conducted in such a way that no investors suffered harm. The U.S. Attorney today announced criminal charges against some of the same individuals facing SEC civil charges.

According to the SEC's complaints filed in U.S. District Court for the Southern District of Florida, the schemes generally involved the payment of kickbacks to purportedly corrupt pension fund managers or stockbrokers, who would use their clients' accounts to purchase the publicly traded stock of microcap issuers controlled or promoted by the individuals and companies charged today. What the promoters and insiders did not know was that the people with whom they arranged these illegal transactions were actually undercover FBI agents or confidential sources participating in undercover operations.

The SEC is seeking permanent injunctions and financial penalties against all defendants; disgorgement plus prejudgment interest against defendants that received ill-gotten gains; officer-and-director bars against the individuals who served as officers or directors of the microcap companies involved; and penny stock bars against all individual defendants.

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

Thursday, October 7, 2010

SEC Issues Investor Alert About Internet Scheme Targeting Deaf Investors

The SEC issued an Investor Alert: Investor Warning Regarding Web-Based Scheme Defrauding Deaf Investors.  The agency charged an Internet-based investment company, Imperia Invest IBC (“Imperia”), with securities fraud for soliciting several million dollars from U.S. investors and promising guaranteed annual returns in excess of 1.2% per day while in reality siphoning the funds into foreign bank accounts and not paying any money back to investors. The SEC has obtained an emergency court order freezing the assets of Imperia which allegedly raised more than $7 million from approximately 14,000 investors worldwide. More than half of the funds were collected from U.S. investors who are Deaf. Imperia purported to invest in Traded Endowment Policies, the British term for viatical settlements, and claimed to pay returns of 1.2% per day.

Imperia is not registered with the SEC.  Imperia is not registered as an investment advisor or broker-dealer in any state.  The staff of the SEC has also received credible information suggesting that Imperia, which has made claims to be licensed and located in both the Bahamas and Vanuatu, is not licensed to do business or located at either of those locations. 

October 7, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Radio Show Host with Misappropriating Investors' Funds

The SEC charged Barbra Alexander, a talk radio show host, and two other executives of APS Funding, a Monterey, Calif.-based firm, with misappropriating $2.5 million of approximately $7 million they raised through the fraudulent sale of interests in two real estate investment funds.  According to the SEC's complaint, Alexander used her status as host of an internationally-syndicated radio show for entrepreneurs called MoneyDots to lure investors who thought their money would be used to fund short-term loans secured by real estate. Alexander along with the firm's secretary/chief financial officer Beth Piña, and vice president Michael E. Swanson, instead stole investor money to pay themselves $1.2 million and finance MoneyDots and other unrelated businesses.

In a related criminal proceeding announced today, the U.S. Attorney's Office for the Northern District of California filed criminal actions against Alexander, Piña, and Swanson based on the same alleged misconduct.

October 7, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Former NY Comptroller Hevesi Pleads Guilty for Involvement in Pay-to-Play Kickback Scheme

Former Comptroller of the State of New York Alan Hevesi pleaded guity to a felony charge for his involvement in a pay-to-play kickback scheme at the Office of the New York State Comptroller.  Hevesi acknowledged receiving nearly $1 million in gifts in exchange for improperly favoring and approving a $250 million investment in Markstone Capital Partners, L.P. from the New York State Common Retirement Fund.  The gifts consisted of $75,000 in travel expenses for Hevesi and his family, $380,000 in sham consulting fees for a lobbyist friend, and over $500,000 in campaign contributions as directed by Hevesi.  Hevesi also acknowledged that while he served as Comptroller he was aware that Henry “Hank” Morris – his paid political adviser and campaign manager – was using the pension fund for a pay-to-play scheme in which Morris personally received fees from pension deals and steered investments to friends and political associates.

Hevesi pleaded guilty to a felony charge of receiving reward for official misconduct and faces up to four years in prison.  He has also agreed to fully cooperate with Cuomo’s investigation.

Today’s announcement is the latest development in Cuomo’s three-year, ongoing investigation into corruption involving the Office of the New York State Comptroller and the pension fund.  The charges to date allege a complex criminal scheme involving numerous individuals operating at the highest political and governmental levels under former Comptroller Alan Hevesi.  Through this scheme, Hevesi, his chief political aide, and many of their political allies and friends reaped tens of millions of dollars in kickbacks, bribes, and sham consulting and finder fees connected to pension fund investments.

Court documents are available at:the AG's website.

October 7, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 6, 2010

SEC Charges Former Dell Employee with Insider Trading Involving Perot Tender Offer

On October 5, 2010, the SEC charged former Dell Inc. employee Marleen Jantzen and her husband, John Jantzen, a licensed broker, with insider trading around the public announcement of Dell's tender offer for Perot Systems in September 2009.

According to the SEC's complaint, Marleen Jantzen learned about the deal during the course of her duties for Dell and was under explicit, written instructions not to trade. Nevertheless, on the last trading day before the deal announcement, Marleen Jantzen made a highly unusual cash transfer to a brokerage account held jointly by both Jantzens. According to the Complaint, within minutes of the cash transfer, John Jantzen started buying Perot Systems call options and common stock in the joint account-in total, purchasing 500 shares of Perot Systems common stock and 24 Perot Systems call option contracts.

According to the Complaint, the public announcement of the deal on September 21, 2009 resulted in a substantial increase in the price of Perot System shares. Immediately following the announcement, the Jantzens liquidated their entire position in Perot Systems stock and call options. The complaint alleges that, as a result of their illegal trading in Perot Systems securities, Defendants realized net trading profits totaling $26,813.58.

This is the second case filed by the SEC charging insider trading ahead of the Dell-Perot Systems deal announcement. The Commission previously filed an emergency action against former Perot Systems employee Reza Saleh for his insider trading ahead of the transaction, and successfully recovered $8.6 million in illicit profits.

October 6, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC's Will Consider Reporting of Security-Based Swaps at Oct. 13 Meeting

SEC Open Meeting - October 13, 2010

The subject matter of the Open Meeting will be:

The Commission will consider whether to adopt an interim final temporary rule under Section 766 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, to provide for the reporting of certain security-based swap transactions and including an interpretive note regarding retention and recordkeeping requirements for certain security-based swap transactions.

The Commission will consider whether to propose Regulation MC pursuant to Section 765 of the Dodd-Frank Act to mitigate conflicts of interest at security-based swap clearing agencies, security-based swap execution facilities, and national security exchanges that post or make available for trading security-based swaps.

The Commission will consider whether to propose rules that would implement Section 945 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires an issuer of asset-backed securities (ABS) to perform a review of the assets underlying the ABS and disclose information relating to the review. The Commission will also consider whether to propose rules that would implement Section 15E(s)(4)(A) of the Exchange Act as added by Section 932 of the Act, which requires an ABS issuer or underwriter to make publicly available the findings and conclusions of any third party due diligence report.

October 6, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Announces Annual Small Business Capital Formation Forum

The SEC announced that it will hold its annual forum on small business capital formation on November 18 at its Washington, D.C., headquarters.  The forum enables the SEC and its staff to interact with the small business community and exchange ideas on issues that impact the ability of small companies to raise capital. One session will include a panel of representatives from small business organizations making recommendations to improve small business capital formation.

The names of panel participants and the full agenda for the forum will be announced at a later date and posted on the small business page of the SEC website. The SEC is looking for suggestions on specific topics to be discussed at the forum and for recommendations to be considered by the forum breakout groups.

October 6, 2010 in SEC Action | Permalink | Comments (2) | TrackBack (0)

SEC Proposes Rules on Disclosure of ABSs

The SEC seeks public comment on proposed regulations to require issuers of asset-backed securities (ABS) — and credit rating agencies that rate ABS — to provide investors with new disclosures about representations, warranties, and enforcement mechanisms.  Section 943 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the Commission to prescribe regulations on the use of representations and warranties in the ABS market by Jan. 14, 2011, so that investors receive information about the representations and warranties and repurchase history so they may identify originators with clear underwriting deficiencies.

The SEC’s proposed rules would:

  • Require Disclosure of Repurchase History
  • Require Disclosure of Repurchase History in Prospectuses and Ongoing Reports
  • Require NRSROs to Provide Disclosure in Any Report Accompanying a Credit Rating

The public comment period ends on Nov. 15, 2010.

October 6, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 5, 2010

Treasury Releases Two-Year Retrospective Report on TARP

Today the U.S. Department of the Treasury released its "Two-year Retrospective" report on TARP.  According toTreasury's release:

The report provides a comprehensive overview of the steps that Treasury took under TARP to contain a growing financial panic that gripped our country in late 2008 and early 2009. The program played a critical role in recapitalizing the financial sector and restarting the credit markets, which made it possible for businesses, municipalities, and families to borrow again, so that our economy could recover.

According to the report, in light of the recently announced AIG restructuring and when valued at current market prices, Treasury now estimates that the total cost of TARP will be about $50 billion. In addition, using the same assumptions, Treasury estimates that the combined cost of TARP programs and other Treasury interests in AIG will be about $30 billion.

October 5, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Charges New Jersey Adviser with Misappropriating Pension Accounts

The SEC filed an emergency enforcement action in the federal district court in New Jesey to halt a fraudulent scheme by investment adviser Carlo G. Chiaese and his company, C.G.C. Advisors, LLC. The Commission also charged Chiaese's wife, Micol Chiaese, as a relief defendant for her unjust enrichment from the scheme.  According to the SEC's complaint, between 2008 and the present, Chiaese and CGC misappropriated at least approximately $2.5 million from at least six of their advisory clients, including a union pension trust fund for the benefit of approximately 880 members. He used much of his clients' funds to support his lavish lifestyle. 

The Commission is seeking, among other emergency relief, a temporary restraining order, which freezes the assets of Chiaese, Micol Chiaese and CGC. In its enforcement action, the Commission is seeking additional relief, including orders enjoining Chiaese and CGC, preliminarily and permanently, from committing future violations of the foregoing federal securities laws, and a final judgment ordering Chiaese, Micol Chiaese and CGC to disgorge their ill-gotten gains plus prejudgment interest, and assessing civil penalties against Chiaese and CGC.

October 5, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Stays Effectiveness of Proxy Access Rule Pending Judicial Review

The SEC announced that it would stay the effectiveness of Rule 14a-11 (the Proxy Access Rule) and related amendments to the proxy rules, pending the D.C. Circuit's review of the petition filed by the U.S. Chamber of Commerce and Business Roundtable to vacate the rule.  Petitioners and the SEC will seek expedited review of the rule.

October 5, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, October 4, 2010

What Really Caused the "Flash Crash"?

Were the events of May 6 really caused largely by one big trade that used the wrong algorithm, as the joint report of the SEC and CFTC suggests?  Others believe that things are not that simple and the regulators have downplayed other factors, including the lack of liquidity resulting from market participants' flight from the markets.  For a review of the controversy, see WSJ Debate Swirls Around Causes of 'Flash Crash' .

October 4, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Proposes Disclosure Rule for ABSs


Pursuant to Section 943 of the Dodd-Frank Wall Street Reform and Consumer Protection Act we are proposing rules related to representations and warranties in asset-backed securities offerings. Our proposals would require securitizers of asset-backed securities to disclose fulfilled and unfulfilled repurchase requests across all transactions. Our proposals would also require nationally recognized statistical rating organizations to include information regarding the representations, warranties and enforcement mechanisms available to investors in an asset-backed securities offering in any report accompanying a credit rating issued in connection with such offerings, including a preliminary credit rating.

 Comments should be received on or before November 15, 2010.

October 4, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Boston University Honors Professor Frankel with Fiduciary Duty Conference

Boston University School of Law is holding a conference on The Role of Fiduciary Law and Trust in the 21st Century: A Conference Inspired by the Work of Tamar Frankel, on October 29, 2010, at the Law School.  The school is honoring Professor Tamar Frankel with a conference featuring outstanding scholars and legal practitioners giving papers and commentaries on the role of fiduciary law and trust in the 21st century. Boston University Law Review will publish the papers and proceedings.

This Conference highlights the nature and scope of fiduciary law, and its relationship to other legal doctrines and categories.  It considers how fiduciary law can be illuminated by viewing it through the lens of such disciplines as economics, psychology, history, political science, and philosophy.  It also investigates current debates about recognizing fiduciary duties in the determination of executive compensation, in the prohibition of insider trading under the federal securities laws, in the largely unregulated world of securities and mortgage broker-dealers, and in modern capital structure and governance.  It further explores the relevance of fiduciary law principles to the abuse of power by public officials and to other issues of democratic legitimacy, as well as the relevance of constraints on political power to the duties of private actors.

For further information, including the schedule and list of participants, see the BULaw website.


October 4, 2010 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Sunday, October 3, 2010

Treasury Announces Sales of Citigroup Securities

Treasury recently announced that it priced a secondary offering of all Citigroup trust preferred securities (TruPS®) received pursuant to the Asset Guarantee Program (AGP).  The aggregate gross proceeds from the offering, all of which represent a net gain or profit to the taxpayer under the AGP, will be $2.246 billion.  The closing of the TruPS® sale is expected to occur on Tuesday, October 5, 2010. 

Treasury also announced the sale of 1.5 billion shares of Citigroup common stock pursuant to the completion of its third trading plan with Morgan Stanley as sales agent.  To date, Treasury has sold approximately 4.1 billion shares of Citigroup common stock for gross proceeds of approximately $16.4 billion.  Treasury currently owns approximately 3.6 billion shares of Citigroup common stock, representing 12.4% ownership of the outstanding common stock.  Treasury expects to continue selling its shares in the market in an orderly fashion, after the blackout period set by Citigroup related to its third quarter earnings release ends.

October 3, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Financial Stability Oversight Council Sets Its Agenda for Action

The Financial Stability Oversight Council held its first meeting October 1, 2010.  Among the actions taken:

ANPR Regarding Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies

The Dodd-Frank Act gives the Council a mandate to designate systemically important nonbank financial firms for heightened supervision, in order to ensure that these institutions cannot escape tough oversight or threaten the stability of the broader financial sector. The ANPR is an initial step in the process by which the Council intends to develop a robust and disciplined framework for the designation of nonbank financial companies for heightened supervision.  The ANPR consists of fifteen questions to solicit public comment regarding the implementation of these provisions and will have a 30-day public comment period. The ANPR will inform development of a specific regulatory proposal expected to be published for comment near year-end, with Final Council action on the designation criteria and process is expected by March 31, 2011. 

Notice and Request for Information Regarding the Council's "Volcker Rule" Study and Recommendations

The Dodd-Frank Act requires the Council to conduct a study and make recommendations by January 22, 2011, to inform coordinated agency rulemaking on the "Volcker Rule."  The Volcker Rule will help improve the safety of our nation's banking system by prohibiting proprietary trading activities and certain private fund investments. The Notice and Request for Information (RFI) provides an effective mechanism for soliciting public and industry input during the development of the Council's formal study and recommendations.  The RFI will have a 30-day public comment period.

Integrated Implementation Roadmap

The "Integrated Implementation Roadmap" outlines a coordinated timeline of goals, both of the Council and its independent member agencies, to fully implement the Dodd-Frank Act. This roadmap is the product of a mutual effort to provide transparency as financial regulatory agencies move forward with financial reform.  This roadmap includes statutory deadlines as well as non-statutory targets for agency work that may be updated over time.  

October 3, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC & CFTC Release Staff Report on May 6 Market Events

The staffs of the SEC CFTC released its long-awaited joint report presenting their findings regarding the market events of May 6, 2010. The report will be presented to the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues. Here are excerpts on principal lessons:

One key lesson is that under stressed market conditions, the automated execution of a large sell order can trigger extreme price movements, especially if the automated execution algorithm does not take prices into account. Moreover, the interaction between automated execution programs and algorithmic trading strategies can quickly erode liquidity and result in disorderly markets. As the events of May 6 demonstrate, especially in times of significant volatility, high trading volume is not necessarily a reliable indicator of market liquidity.

May 6 was also an important reminder of the inter-connectedness of our derivatives and securities markets, particularly with respect to index products. .... [T]he staffs of the CFTC and SEC are working together with the markets to consider recalibrating the existing market-wide circuit breakers – none of which were triggered on May 6 – that apply across all equity trading venues and the futures markets.

Another key lesson from May 6 is that many market participants employ their own versions of a trading pause – either generally or in particular products – based on different combinations of market signals. While the withdrawal of a single participant may not significantly impact the entire market, a liquidity crisis can develop if many market participants withdraw at the same time. This, in turn, can lead to the breakdown of a fair and orderly price-discovery process, and in the extreme case trades can be executed at stub-quotes used by market makers to fulfill their continuous two-sided quoting obligations. ...

A further observation from May 6 is that market participants’ uncertainty about when trades will be broken can affect their trading strategies and willingness to provide liquidity. ...

Going forward, SEC staff will evaluate the operation of the circuit breaker program and the new procedures for breaking erroneous trades during the pilot period. As part of its review, SEC staff intends to assess whether the current circuit breaker approach could be improved by adopting or incorporating other mechanisms, such as a limit up/limit down procedure that would directly prevent trades outside of specified parameters, while allowing trading to continue within those parameters. ...

Of final note, the events of May 6 clearly demonstrate the importance of data in today’s world of fully-automated trading strategies and systems. This is further complicated by the many sources of data that must be aggregated in order to form a complete picture of the markets upon which decisions to trade can be based. ...

Whether trading decisions are based on human judgment or a computer algorithm, and whether trades occur once a minute or thousands of times each second, fair and orderly markets require that the standard for robust, accessible, and timely market data be set quite high. Although we do not believe significant market data delays were the primary factor in causing the events of May 6, our analyses of that day reveal the extent to which the actions of market participants can be influenced by uncertainty about, or delays in, market data.

Accordingly, another area of focus going forward should be on the integrity and reliability of market centers’ data processes, especially those that involve the publication of trades and quotes to the consolidated market data feeds. In addition, we will be working with the market centers in exploring their members’ trading practices to identify any unintentional or potentially abusive or manipulative conduct that may cause system delays that inhibit the ability of market participants to engage in a fair and orderly process of price discovery.

October 3, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)