Securities Law Prof Blog

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

Friday, October 15, 2010

SEC, CFTC Announce Roundtable on Clearing of Credit Default Swaps

The SEC and the CFTC staffs will hold a public roundtable on October 22 to discuss issues related to the clearing of credit default swaps.  There will be two sessions:

Session on Products and Processing

  • Characteristics of credit derivatives, including corporate index and single name CDS and other credit derivatives.
    Standardization, eligibility for clearing, and pricing issues.
    Operational issues, including credit event processing.
    Reporting to trade repositories.  

Session on Clearing Initiatives

  • Current products offered for clearing.
    Prospective products offered for clearing.
    Risk management practices, including access to price information, clearing member default management, and management of jump-to-default risk.
    Effect of clearing mandates. 

October 15, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Countrywide's Mozilo Will Pay $67.5 Million to Settle SEC Charges

The SEC today announced that former Countrywide Financial CEO Angelo Mozilo will pay a record $22.5 million penalty to settle SEC charges that he and two other former Countrywide executives misled investors as the subprime mortgage crisis emerged. The settlement also permanently bars Mozilo from ever again serving as an officer or director of a publicly traded company.

Mozilo’s financial penalty is the largest ever paid by a public company's senior executive in an SEC settlement. Mozilo also agreed to $45 million in disgorgement of ill-gotten gains to settle the SEC’s disclosure violation and insider trading charges against him, for a total financial settlement of $67.5 million that will be returned to harmed investors.

Former Countrywide chief operating officer David Sambol agreed to a settlement in which he is liable for $5 million in disgorgement and a $520,000 penalty, and a three-year officer and director bar. Former chief financial officer Eric Sieracki agreed to pay a $130,000 penalty and a one-year bar from practicing before the Commission. In settling the SEC’s charges, the former executives neither admit nor deny the allegations against them.

The penalties and disgorgement paid by Sambol and Sieracki will also be returned to harmed investors.

The settlement was approved by the Honorable John F. Walter, United States District Judge for the Central District of California in a court hearing held today.

The SEC filed charges against Mozilo, Sambol, and Sieracki on June 4, 2009, alleging that they failed to disclose to investors the significant credit risk that Countrywide was taking on as a result of its efforts to build and maintain market share. The SEC’s complaint further alleged that Mozilo engaged in insider trading in the securities of Countrywide by establishing four 10b5-1 sales plans in October, November, and December 2006 while he was aware of material, non-public information concerning Countrywide’s increasing credit risk and the risk regarding the poor expected performance of Countrywide-originated loans.

October 15, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, October 14, 2010

SEC Publishes Text of Proposed Reg MC

In accordance with Section 765 of the Dodd-Frank Act, the SEC is proposing Regulation MC for clearing agencies that clear security-based swaps (“security-based swap clearing agencies”) and for security-based swap execution facilities (“SB SEFs”) and national securities exchanges that post or make available for trading security-based swaps (“SBS exchanges”). Regulation MC is designed to mitigate potential conflicts of interest that could exist at these entities. Specifically, the Commission seeks to mitigate the potential conflicts of interest through conditions and structures relating to ownership, voting, and governance of security-based swap clearing agencies, SB SEFs, and SBS exchanges.

Comments are due 30 days after publication in the Federal Register.

October 14, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Two Florida Hedge Fund Managers with $1 Billion Ponzi Scheme

The SEC charged two Florida-based hedge fund managers and their firms with fraudulently funneling more than a billion dollars of investor money into a Ponzi scheme operated by Minnesota businessman Thomas Petters.  According to the SEC, Bruce F. Prévost and David W. Harrold falsely assured their investors and potential investors that the flow of their money would be safeguarded by collateral accounts and described a phony process for protecting their assets. When Petters was unable to make payments on investments held by the funds they managed, Prévost, Harrold, and their firms concealed it from investors by concocting sham note exchange transactions with Petters, who the SEC charged last year along with an Illinois-based hedge fund manager who also facilitated the scheme.

The SEC's complaint filed in U.S. District Court for the District of Minnesota alleges that Prévost, Harrold, and their firms Palm Beach Capital Management LP and Palm Beach Capital Management LLC invested more than $1 billion in hedge fund assets with Petters while pocketing more than $58 million in fees. Petters promised investors that their money would be used to finance the purchase of vast amounts of consumer electronics by vendors who then re-sold the merchandise to such "Big Box" retailers as Wal-Mart and Costco. In reality, Petters's "purchase order inventory financing" business was merely a Ponzi scheme. There were no inventory transactions. Petters sold promissory notes to feeder funds like those controlled by Prévost, Harrold, and their firms, and Petters used some of the note proceeds to pay returns to earlier investors, diverting the rest of the cash to his own purposes.

October 14, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Court Approves $100 Million Settlement between SEC and Dell

The federal district court for D.C. approved the proposed settlement between the SEC, Dell Computer and five current or former executive officers (including Michael Dell), in which Dell agrees to pay $100 million and implement remedial measures.  In its complaint, filed july 22, 2010, the SEC alleged that the company had engaged in improper accounting and disclosure practices from 2001-2006 to make it appear the company met its earnings targets.  Legal Times, Judge Approves $100M Settlement Between Dell, SEC.

October 14, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Releases Survey of Military Families' Finances

The FINRA Investor Education Foundation released a survey that measures the overall financial capabilities of U.S. military personnel.  The Military Survey – one of three linked surveys analyzing the financial capability of American adults – was developed in consultation with the U.S. Department of the Treasury and the President's Advisory Council on Financial Literacy.  Some of the findings are predictable; others more surprising.  Thus, unfortunately, the  study reveals that men and women in uniform face considerable obstacles in maintaining their financial readiness:

  • Military families are heavily in debt to credit card issuers, with over one in four respondents reporting more than $10,000 in credit card debt.
  • One in four servicemembers with checking accounts reported overdrawing their accounts, which typically incurs significant fees.
  • More than one in five (21 percent) servicemembers used high-cost, non-bank borrowing such as payday or auto title loans in the last five years.
  • Over half of enlisted personnel and junior non-commissioned officers reported that in some months, they made only the minimum payment on their credit cards.
  • Only 50 percent of military respondents have a "rainy day" fund for unanticipated financial emergencies.

However, more surprising perhaps, military families are outpacing their civilian counterparts in:

  • keeping up with monthly expenses;
  • calculating how much they need to save for retirement;
  • shopping around to compare financial products;
  • checking their credit score and credit report; and
  • demonstrating higher levels of financial literacy.


October 14, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC's Inspector General Did Not Find Timing of Goldman Suit Influenced by Reform Legislation

The SEC's Office of Inspector General released its report on its investigation into the timing of the SEC's enforcement action against Goldman Sachs.  As the executive summary relates:

On April 23, 2010, the SEC OIG, in response to a written request from United States Representative Darrell Issa and other members of the House ofRepresentatives, opened an investigation into allegations that SEC employees communicated or coordinated with the White House, Members of Congress, or Democratic political committees concerning the bringing, or the timing of bringing, an action against Goldman, in order to affect debate of the financial regulatory reform legislation pending before the United States Senate. Congressman Issa and other members of Congress also alleged that SEC employees may have had communications with the New York Times concerning its complaint against Goldman prior to the filing ofthe complaint.

On July 22,2010, Congressman Issa requested that the OIG broaden its investigation to examine whether the timing of the Commission's proposed settlement with Goldman related to either the financial regulatory reform legislation passed by the United States Senate the same day, or was an effort to avoid further criticism in the press concerning the proposed settlement. The OIG expanded its investigation to examine these issues as well.

The OIG did not found evidence indicating that the SEC's investigation of, or its action against, Goldman was intended to influence, or was influenced by, financial regulatory reform legislation.  Rather,

The OIG found that the investigation's procedural path and timing was governed primarily by decisions relating to the case itself, as well as concerns about: (1) facts surrounding the investigation's subj ect matter being publicized prior to the SEC filing its action; (2) maintaining a relationship with the New York State Attorney General ("NY AG"); and (3) maximizing and shaping positive press coverage.

The OIG did find that the SEC staff did not fully comply with an SEC administrative regulation that states that staff should make "every effort" to notify Goldman ofthe SEC's action prior to filing the action.   The report also notes that staff attorneys in Enforcement had differing views on whether notice should be given to a defendant in advance of an SEC enforcement action.  

Allegations of Improper Coordination Between the SEC and Other Governmental Entities Concerning the SEC's Enforcement Action Against Goldman Sachs & Co.

October 14, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 13, 2010

SEC Adopts Interim Rule on Security-Based Swaps

The SEC today adopted an interim rule that requires certain swaps dealers and other parties to report any security-based swaps entered into prior to the July 21 passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This rule applies only to such swaps whose terms had not expired as of July 21.  The interim rule requires parties to report security-based swap information to the SEC or to a registered security-based swap data repository. Parties also are required to preserve data pertaining to the terms of pre-enactment security-based swaps in support of the reporting requirements.


October 13, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Proposes Rules to Mitigate Conflicts Involving Security-Based Swaps

The SEC today proposed rules intended to mitigate conflicts of interest for security-based swap clearing agencies, security-based swap execution facilities, and national securities exchanges that post security-based swaps or make them available for trading.  The SEC's proposed rules — known as Proposed Regulation MC — require security-based swap clearing agencies, security-based SEFs and security-based swap exchanges to adopt ownership and voting limitations as well as certain governance requirements.

Public comments on the proposed rules should be received by the Commission no later than 30 days after they are published in the Federal Register.

October 13, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Proposes Additional ABS Disclosures

The SEC issued a proposal to enhance disclosure to investors in the asset-backed securities market.  It would require issuers of asset-backed securities (ABS) to perform a review of the assets underlying the securities and publicly disclose information relating to the review. The proposal also requires an issuer or underwriter of ABS to make publicly available the findings and conclusions of any third-party due diligence report.

The SEC’s proposal seeks to enhance ABS disclosure in three ways:

  • Issuers of ABS that are registered with the SEC would be required to perform a review of the bundled assets that underlie the ABS.
  • Proposed amendments to Regulation AB would require an ABS issuer to disclose the nature, findings and conclusions of this review of assets.
  • The issuer or underwriter for both registered and unregistered ABS offerings would be required to disclose the findings and conclusions of any review performed by a third party that was hired to conduct such a review.

The proposal includes detailed requests for comment on whether the Commission should set a minimum review standard, including possible standards that could be included in a final rule.

Public comments on the proposed rules should be received by the Commission by November 15.

October 13, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 12, 2010

SEC Proposes "Family Offices" Exclusion from Investment Advisers Act

The SEC proposed a new rule, based on requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act, that would help those managing their own family's financial portfolios determine whether their "family offices" can continue to be excluded from the Investment Advisers Act of 1940.  Family offices are entities established by wealthy families to manage their money and provide tax and estate planning and similar services.

Historically, family offices have not been required to register with the SEC under the Advisers Act because of an exemption provided to investment advisers with fewer than 15 clients. The Dodd-Frank Act removes that exemption to enable the SEC to regulate hedge fund and other private fund advisers, but includes a new provision requiring the SEC to define family offices in order to exempt them from regulation under the Advisers Act.

The Commission is proposing to define a family office as any firm that:

  • Provides investment advice only to family members, as defined by the rule; certain key employees; charities and trusts established by family members; and entities wholly owned and controlled by family members.
  • Is wholly owned and controlled by family members.
  • Does not hold itself out to the public as an investment adviser.

Public comments on the proposed rule should be received by the Commission by Nov. 18, 2010.

October 12, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

New York AG and Law Firm Settle Charges Involving State Pension Fund Investigation

New York AG Andrew M. Cuomo today announced an agreement with national law firm Manatt Phelps & Phillips, LLP (“Manatt”) in the Attorney General’s ongoing state pension fund investigation. The agreement arises from Manatt’s conduct on behalf of financial firms seeking investments from public pension funds without a securities license.  Manatt has agreed to a five-year ban from appearing before any public pension fund in New York. Manatt will pay $550,000 to the State of New York and will cooperate with the Attorney General’s investigation. Manatt will also comply with the Attorney General’s Public Pension Fund Reform Code of Conduct, which, among other things, bans the use of placement agents to solicit investments from public pension funds and prohibits investments within two years of any campaign contribution from the investment firm to the Comptroller or other elected trustee.

The investigation showed that Manatt made introductions and secured meetings on behalf of firms seeking investments from public pension funds in New York, California, and elsewhere. Neither Manatt, nor any of the Manatt partners who made the introductions, were licensed placement agents or securities brokers under state and federal law. In New York, Manatt made and attempted to make introductions to the New York State Common Retirement Fund (“state pension fund”), the New York City pension funds, and the New York State Teachers Retirement System. The state pension fund is the biggest pool of money in the state and the third largest pension fund in the country, most recently valued at approximately $124.8 billion. Manatt received fees for successfully placing one investment with the California Public Employees’ Retirement System (“CalPERS”). Its other efforts failed.

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

NASAA Identifies Most Common Deficiencies in Broker-Dealer Compliance

NASAA posted on its website its 2010 Broker-Dealer Coordinated Examination Report, which identifies the top compliance deficiencies and offers a series of recommended best practices for broker-dealers to consider in order to improve their compliance practices and procedures.  David Massey, NASAA President and North Carolina Deputy Securities Administrator. said the best practices were developed after a nationwide series of examinations of broker-dealers by state securities examiners from 30 NASAA jurisdictions in the United States revealed a significant number of problem areas.

A total of 290 examinations conducted between January 1, 2010 and June 30, 2010 found 567 deficiencies in five compliance areas. The greatest number of deficiencies (33 percent or 185 deficiencies) involved books and records, followed by sales practices (29 percent or 164 deficiencies), supervision (20 percent or 115 deficiencies), registration and licensing (10 percent or 56 deficiencies), and operations (8 percent or 47 deficiencies).

The three most commonly found problem areas involved failure to follow written supervisory policies and procedures, advertising and sales literature, and variable product suitability. Half of the examinations involved one-person branch offices, 19 percent were home offices, 18 percent were branch offices with two to five agents, 10 percent were branch offices with more than five agents and 3 percent were non-branch offices.

Based on the examination results, NASAA recommended a series of 10 “Best Practices” to help broker-dealers develop compliance practices and procedures.

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

Sunday, October 10, 2010

Griffin et al. on Insider Trading & Debt Covenant Violation Disclosure

Insightful Insiders? Insider Trading and Stock Return Around Debt Covenant Violation Disclosures, by aul A. Griffin, University of California, Davis - Graduate School of Management; David H. Lont , University of Otago - Department of Accountancy, and Kate McClune, was recently posted on SSRN.  Here is the abstract:

This paper documents significant trading by insiders around a first-time debt covenant violation disclosure in an SEC filing, and is interesting from a research and regulatory standpoint because of three considerations - delay and relative infrequency of new covenant violation disclosures, lack of attention to disclosure issues by regulators, and dearth of research. Importantly, we find a lead relation between net insider selling in the 12 months before a debt covenant violation disclosure and investors’ negative returns and net insider buying up to 12 months after disclosure and investors’ positive returns. This relation is robust to the presence of other information. These results support our contention that insiders’ trades around a covenant violation disclosure may benefit from an information advantage unavailable to other market participants. The aggregate return to insiders - the sum of the losses avoided from selling and the gains from buying - approaches almost two billion dollars over an eight-year study period.

October 10, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Levitin & Wachter on the U.S. Mortgage Crisis

Information Failure and the U.S. Mortgage Crisis, by Adam J. Levitin, Georgetown University Law Center, and Susan M. Wachter, University of Pennsylvania - The Wharton School - Real Estate Department, was posted on SSRN.  Here is the abstract:

This paper argues that during the housing bubble, housing finance markets failed to price risk correctly because of information failure caused by the complexity and heterogeneity of private-label mortgage-backed securities and structured finance products. Addressing the informational problems with mortgage securitization is critical not just for avoiding future housing bubbles but for rebuilding American housing finance. The continued availability of the long-term fixed-rate mortgage, which has been the bedrock of American homeownership since the Depression, depends on the continued viability of securitization. The paper proposes that mortgage securitization and origination be standardized as a way of reducing complexity and heterogeneity in order to rebuild a sustainable, stable housing finance market based around the long-term fixed-rate mortgage.

October 10, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Ibrahim on Exit in Venture Capital

The New Exit in Venture Capital, by Darian M. Ibrahim, University of Wisconsin Law School, was recently posted on SSRN.  Here is the abstract:
This Article is the first to explore a third exit option in venture capital to supplement IPOs and trade sales: secondary markets for the sale of individual ownership interests in start-ups and venture capital funds. The Article begins by explaining how high levels of investor lock-in and illiquidity are embedded in the VC model and have been made worse by negative and perhaps lasting changes in IPO markets. While most private companies have no market for their shares and therefore must rely on legal solutions to the problems caused by investor lock-in, this Article reveals the unique development of a market solution for investors in private start-ups and VC funds. These secondary markets that are emerging in venture capital can increase liquidity for investors, reduce agency costs in start-up and VC fund governance, and mitigate VC-entrepreneur conflicts over traditional exit decisions. These secondary markets also have limitations, however, including that they can mute high-powered incentives for performance, present high levels of information asymmetry and transaction costs, and face legal impediments to growth. The emergence of electronic marketplaces will help to facilitate transactions and overcome some of these limitations, but certain securities and tax laws may need to be revisited as secondary markets continue to develop.

October 10, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Heminway on The SEC & Change Leadership

Reframing and Reforming the Securities and Exchange Commission: Lessons from Literature on Change Leadership, by Joan MacLeod Heminway, University of Tennessee College of Law, was recently posted on SSRN.  Here is the abstract:

 As a reaction to perceived and actual regulatory failures at the Securities and Exchange Commission (the "SEC"), from mistakes that contributed to the financial crisis to the Bernard Madoff affair, the SEC has been engaged in an operational transformation process. The growing literature on management and leadership in times of change--change leadership literature--offers a number of potentially valuable lenses through which we may assess reform at the SEC.

With the thought that securities regulators and others may learn valuable lessons about the SEC’s restructuring and reorganization from experts in change leadership, this Article explores a selected group of principles from change leadership literature. These principles are then mapped to recent and current changes at the SEC. The resulting analysis offers certain positive observations but also allows for certain critiques of, questions about, and advice concerning the processes by which change leaders are selected and institutional reform is undertaken at a federal agency. As a result, the Article highlights certain strengths of and exposes possible weaknesses in SEC reform efforts.

October 10, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)