Securities Law Prof Blog

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

Saturday, November 6, 2010

SEC Extends Compliance Date for Short-Sales Regulations

The SEC extended for a limited period of time the compliance date for the amendments to Rule 201 and Rule 200(g) of Regulation SHO . Rule 201 adopts a short sale-related circuit breaker that, if triggered, will impose a restriction on the prices at which securities may be sold short (“short sale price test restriction”). The amendments to Rule 200(g) provide that a broker-dealer may mark certain qualifying short sale orders “short exempt.”

The Commission is extending the compliance date to give certain exchanges additional time to modify their current procedures for conducting single-priced opening, reopening, and closing transactions for covered securities that have triggered Rule 201’s circuit breaker in a manner that is consistent with the goals and requirements of Rule 201. The extended compliance period will give industry participants additional time for programming and testing for compliance with the requirements of the Rule.

DATES: The effective date for Rule 201 (17 CFR 242.201) and Rule 200(g) (17 CFR 242.200(g)) remains March 10, 2010. The compliance date for both Rules has been extended from November 10, 2010 to February 28, 2011.

November 6, 2010 in SEC Action | Permalink | Comments (1) | TrackBack (0)

SEC Posts FINRA Proposed Rule for All-Public Arbitrator Panels

The SEC posted on its website FINRA's proposed rule change to give investors the option of selecting an all-public arbitrator panel in all customers' disputes with their securities firms and associated persons.  Comments are due 21 days after publication in the Federal Register.

Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to Amendments to the Panel Composition Rule, and Related Rules, of the Code of Arbitration Procedure for Customer Disputes

November 6, 2010 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

Active Traders on Capital Hill

86 legislators and congressional aides on both sides of the aisle reported frequent trades of securities last year, according to a Wall Street Journal's analysis of disclosure forms covering trading activity on Capitol Hill in 2009.  WSJ, Congress Has Active Investors.

November 6, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Friday, November 5, 2010

Supreme Court will hold Oral Argument in Market-Timing Disclosure Case Next Month

The Supreme Court will hear oral argument on December 7, 2010 on Janus Capital Group v. First Derivative Traders, 566 F.3d 111 (4th Cir. 2009) involving alleged misstatements about market-timing in a mutual fund prospectus.  As set forth in the Fourth Circuit's opinion (which reversed the district court's dismissal of the complaint):

Plaintiff First Derivative Traders (First Derivative) appeals the Rule 12(b)(6) dismissal of its putative class action complaint, which alleges violations of § 10(b) and § 20(a) of the Securities Exchange Act of 1934(Act) and Securities and Exchange Commission (SEC) Rule 10b-5. First Derivative, individually and on behalf of certain shareholders of Janus Capital Group Inc. (JCG), filed the operative complaint against JCG and its wholly-owned subsidiary Janus Capital Management LLC (JCM). JCM is the investment advisor to the Janus mutual funds. The complaint alleges that JCG and JCM were responsible for certain misleading statements appearing in prospectuses for a number of *115 the individual Janus funds during the class period. These statements represented that the funds' managers did not permit, and took active measures to prevent, “market timing” of the funds. First Derivative contends that class members (plaintiffs) bought JCG shares at inflated prices and thereafter lost money when market timing practices authorized by JCG and JCM became known to the public.

The district court concluded that plaintiffs had failed to sufficiently plead certain elements of a § 10(b) securities fraud action against either JCG or JCM. Additionally, the district court determined that plaintiffs' claim of control person liability against JCG under § 20(a) failed because plaintiffs had not pled a viable § 10(b) securities fraud claim against JCM. After reviewing the allegations on our own, we reach a different conclusion. We hold that plaintiffs' § 10(b) primary liability claim against JCM and plaintiffs' § 20(a) control person liability claim against JCG are sufficiently pled to overcome defendants' motion to dismiss. Accordingly, we reverse the district court's order granting defendants' motion to dismiss and remand the case for further proceedings.

 The issues in the case, as phrased in the United States/SEC amicus brief are:

1. Whether an investment adviser to mutual funds “ma[d]e” misleading statements for purposes of liability under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b), and SEC Rule 10b-5, 17 C.F.R. 240.10b-5, by participating in the drafting and dissemination of misleading prospectuses of mutual funds it managed.

2. Whether misleading statements in a mutual fund’s prospectuses must be explicitly attributed to the mutual fund’s investment adviser in order to establish the reliance element of a private Section 10(b) action against the adviser.

Besides the government, a number of other amicus briefs have been filed.

November 5, 2010 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Thursday, November 4, 2010

SEC & DOJ Settle FCPA Charges Against 7 Companies in Oil Services Industry

The SEC announced settlements with global freight forwarding company Panalpina, Inc. and six other companies in the oil services industry that violated the Foreign Corrupt Practices Act (FCPA) by paying millions of dollars in bribes to foreign officials to receive preferential treatment and improper benefits during the customs process.  The SEC alleged that the companies bribed customs officials in more than 10 countries in exchange for such perks as avoiding applicable customs duties on imported goods, expediting the importation of goods and equipment, extending drilling contracts, and lowering tax assessments. The companies also paid bribes to obtain false documentation related to temporary import permits for oil drilling rigs, and enable the release of drilling rigs and other equipment from customs officials.

The SEC's cases were coordinated with the U.S. Department of Justice's Fraud Section, and the sanctions to be paid by the companies under the settlements total $236.5 million. This is the first sweep of a particular industrial sector in order to crack down on public companies and third parties who are paying bribes abroad.

Without admitting or denying the allegations, the companies agreed to settle the SEC's charges against them by paying approximately $80 million in disgorgement, interest, and penalties. The companies agreed to pay fines of $156.5 million to settle the criminal proceedings with DOJ.

November 4, 2010 in SEC Action | Permalink | Comments (1) | TrackBack (0)

Wednesday, November 3, 2010

SEC Requires Broker-Dealers to Have Risk Controls for "Sponsored Access"

The SEC today voted unanimously to adopt a new rule to require brokers and dealers to have risk controls in place before providing their customers with access to the market.  The new rule focuses on a practice in which broker-dealers hand their customer a special pass to access the markets called a market participant identifier. The customer then gains direct access to the applicable exchange or alternative trading system (ATS), also known as “sponsored access.”

The rule approved today prohibits broker-dealers from providing customers with “unfiltered” or “naked” access to an exchange or ATS. It also requires brokers with market access — including those who sponsor customers’ access to an exchange or ATS — to put in place risk management controls and supervisory procedures to help prevent erroneous orders, ensure compliance with regulatory requirements, and enforce pre-set credit or capital thresholds.

Through sponsored access — especially “unfiltered” or “naked” sponsored access arrangements — there is the potential that financial, regulatory and other risks associated with the placement of orders are not being appropriately managed. Of particular concern is the quality of broker-dealer risk controls in “unfiltered” access arrangements. In some cases, the broker may be relying on assurances from its customer that the customer has appropriate risk controls in place.

The new rule will be effective 60 days from the date of its publication in the Federal Register. Once effective, broker-dealers subject to the rule will have six months to comply with the requirements.

November 3, 2010 in SEC Action | Permalink | Comments (1) | TrackBack (0)

SEC Seeks Public Comment on Money Market Fund Reforms

The SEC published a request for public comment on the options discussed in the President's Working Group on Financial Markets report on possible money market fund reforms.  As contemplated by the President's Working Group report, the SEC is requesting public comment on the options described in the report, including the effectiveness of the options in mitigating any systemic risk or susceptibility to runs associated with money market funds, as well as their potential impact on money market fund investors, fund managers, issuers of short-term debt, and other stakeholders. Comment received will assist the SEC and the Financial Stability Oversight Council in their further analysis.

The public comment period will remain open for 60 days following publication of the comment request in the Federal Register.

November 3, 2010 in SEC Action | Permalink | Comments (1) | TrackBack (0)

SEC Proposes Anti-Fraud Rule in connection with Security-Based Swaps

The SEC today voted unanimously to propose a new rule to help prevent fraud, manipulation, and deception in connection with security-based swaps, pursuant to its authority under Dodd-Frank to regulate security-based swaps. The proposal would ensure that market conduct in connection with the offer, purchase or sale of any security-based swap is subject to the same general anti-fraud provisions that apply to all securities. The rule would also explicitly reach misconduct in connection with ongoing payments and deliveries under a security-based swap.

The SEC’s rule proposal recognizes that security-based swaps are unlike other securities because they are typically characterized by ongoing payments or deliveries between the parties throughout the life of the swap. Therefore, it’s possible that one party may engage in misconduct to trigger, avoid, or affect the value of such ongoing payments. Such fraud may occur separately from the sale, purchase, or offering.

The proposed antifraud rule would apply not only to offers, purchases and sales of security-based swaps, but also explicitly to the cash flows, payments, deliveries, and other ongoing obligations and rights that are specific to security-based swaps. The rule would make explicit the liability of persons that engage in misconduct to trigger, avoid, or affect the value of such ongoing payments or deliveries.

The text of the proposed rule is posted on the SEC website.  SEC is seeking public comment on the proposed rule for a period of 45 days following its publication in the Federal Register.

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

SEC Proposes A Whistleblower Program for High-Quality Tips

At its meeting today, the SEC took a number of actions that I will address in a series of blog postings.

The agency voted unanimously to propose a whistleblower program to reward individuals who provide the agency with high-quality tips that lead to successful enforcement actions.  The SEC’s proposed rule under Dodd-Frank maps out a procedure for would-be whistleblowers to provide critical information to the agency. To be considered for an award, a whistleblower must voluntarily provide the SEC with original information about a violation of the federal securities laws that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million.

The text of the proposal is posted on the SEC website.  The SEC is seeking public comment on the proposal through December 17.

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

Tuesday, November 2, 2010

SEC and Certain Madoff Feeder Firms Agree to Partial Settlement

The SEC announced that on November 1, 2010, it submitted to the court for its approval partial settlements in its Madoff-related action, SEC v. Cohmad Securities Corp., et al.  If approved, the settlements will permanently enjoin defendants Robert M. Jaffe, Maurice J. Cohn, Marcia B. Cohn and Cohmad Securities Corp. (“Cohmad”), from future violations of the federal securities laws.

The amended complaint filed with the settlements alleges the defendants made material misrepresentations and omissions by referring hundreds of investors to Bernard L. Madoff and his firm, Bernard L. Madoff Investment Securities Corporation LLC (“BMIS”), while the defendants were aware of and failed to disclose facts that should have raised serious questions about the propriety of the Madoff investment.  The investors referred to BMIS by the Defendants provided BMIS with more than one billion dollars.  In consenting to partial judgments, each defendant neither admitted nor denied the allegations of the amended complaint, except that solely for purposes of the Court’s later determination of monetary relief, the allegations of the amended complaint are accepted as and deemed true by the Court.  

Each partial judgment provides that the issue of disgorgement, prejudgment interest and civil penalty relief against the defendants will be decided at a later time.

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

FINRA Issues Guidance on Funding and Liquidity Risk Management Practices

FINRA recently released Regulatory Notice 10-57, dealing with Funding and Liquidity Risk Management Practices.  According to the executive summary:

In adverse circumstances, whether the result of firm-specific events or systemic credit events, the cost of funding a broker-dealer’s operations could become prohibitively expensive; in extreme cases funding could become unavailable. FINRA expects broker-dealers to develop and maintain robust funding and liquidity risk management practices to prepare for adverse circumstances. Further, FINRA expects broker-dealers affiliated with holding companies to undertake these efforts at the broker-dealer level, in addition to their planning at the holding-company level. We are publishing this Notice to provide guidance in this effort.

Many of the practices outlined in this Notice were identified through FINRA examinations and a survey of 15 mid-sized and large broker-dealers that hold inventory positions and carry customer accounts. This Notice does not provide a comprehensive description of all appropriate funding and liquidity risk management practices. Each broker-dealer should determine which practices are best suited to its particular business, whether or not they are mentioned in this Notice. While much of the content in this Notice is directed to broker-dealers that carry inventory positions, other brokerdealers may also find it to be a valuable resource.

November 2, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC's Director or Investment Management Reviews Initiatives and Developments

Andrew J. Donohue, the retiring Director, Division of Investment Management at the SEC, recently reviewed recent developments at the Commission, as well as some of the initiatives that the Division staff is currently considering at the 2010 ALI-ABA Conference on Life Insurance Company Products.

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

Agenda for Nov. 3 SEC Open Meeting

SEC's Open Meeting Agenda, November 3, 2010

Item 1: Risk Management Controls for Brokers or Dealers with Market Access
Office:  Division of Trading and Markets

Item 2: Prohibition Against Fraud, Manipulation, and Deception in Connection with Security-Based Swaps
Office:  Division of Trading and Markets

Item 3: Proposed Rules for Implementing the Whistleblower Provisions of Secton 21F of the Securities Exchange Act of 1934
Office:  Division of Enforcement, Office of the General Counsel

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

SEC Alleges Pump & Dump Scheme in California Apparel Company Stock

The SEC charged a Southern California businessman, Javeed Matin, with engaging in a scheme to pump up the stock of his former apparel company, Veltex Corp.  The Commission's complaint alleges that, beginning in at least 2006 through August 2008, Matin perpetuated a "pump and dump" scheme in which he arranged for a company to acquire newly issued shares of Veltex, made false representations about Veltex's business prospects, and then caused the company to sell its shares into the resulting market. According to the complaint, while Matin was Veltex's CEO, he funneled about 10.5 million Veltex shares in an unregistered offering to a company he controlled, Wilshire Equity, Inc. The complaint further alleges that Matin enlisted a figurehead over Wilshire, Mazhar Ul Haque, who immediately resold Veltex shares to the public at Matin's direction. The complaint also alleges that Matin contemporaneously touted Veltex by issuing a series of false and misleading press releases grossly inflating Veltex's revenues, embellishing its overseas operations, and assuring investors that Veltex's financial statements were being audited. The complaint alleges during this time Veltex's stock price fluctuated between $0.33 and $3.30 and that Matin generated approximately $6.5 million from the sale of Veltex shares through Wilshire.

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


The SEC charged a trader with orchestrating and conducting an illegal scheme that defrauded two broker-dealers out of more than $600,000, and netted the trader, alone or with others, over $223,000 in illicit profits.  According to the SEC, Noor Mohammed, acting alone or in conjunction with others, conducted a fraudulent "free-riding" scheme by: (1) using false information to establish margin accounts at the broker-dealers; (ii) funding those accounts with checks that Mohammed knew were not backed by sufficient funds; (iii) executing over 100 trades in the accounts; and (iv) either profiting from the winning trades or abandoning the accounts without paying for the losing trades.

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

SEC Charges French Doctor with Tipping Results of Clinical Trials to Hedge Fund Manager

The SEC charged that Yves M. Benhamou, M.D., a French medical doctor and researcher, tipped a hedge fund manager with confidential information about a clinical trial that he was involved in.  According to the SEC, Benhamou breached his duty of confidentiality to Human Genome Science, Inc. (HGSI) when he illegally tipped non-public negative details about a clinical trial for the drug Albumin Interferon Alfa 2-a (Albuferon) ahead of a public announcement by the company.

A Wall St. Journal article identifies FrontPoint Partners, a $7 billion hedge-fund firm owned by Morgan Stanley, as the firm for which the hedge fund manager worked.   WSJ, FrontPoint Figures in Insider-Trading Case.

The SEC's complaint alleges that Benhamou was a member of the Steering Committee overseeing HGSI's clinical trial of Albuferon, a potential drug to treat Hepatitis C. Benhamou learned about two serious adverse events, including one death, occurring during the third phase of the trial. HGSI consequently decided to reduce the dosage for the patients in that arm of the trial and publicly announce the changes.  While serving on the Steering Committee, Benhamou provided consulting services to the portfolio manager with whom he had developed a friendship over the years. The portfolio manager, based on the confidential information provided by Benhamou, ordered the sale of the entire position of HGSI stock held by six health care-related hedge funds that he co-managed (approximately 6 million shares). These sales occurred during the six-week period prior to HGSI's public announcement on Jan. 23, 2008, that it was reducing the dosage in one arm of the trial. Two million shares were sold in a block trade just before the markets closed on January 22. HGSI's share price dropped 44 percent by the end of the day on January 23. As a result of the sales, the hedge funds avoided losses of at least $30 million.

In a parallel criminal proceeding, the U.S. Attorney's Office for the Southern District of New York today announced a criminal action against Benhamou.

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

Monday, November 1, 2010

Fraudster that Conned Elway Pleads Guilty

Sean Mueller, the hedge-fund manager facing charges related to a Ponzi scheme that conned some of Denver's wealthiest people, including former Broncos quarterback John Elway, pleaded guilty Monday to securities fraud and other charges.  Under the plea agreement, he could serve up to 40 years in prison.  WSJ, Guilty Plea Comes in Ponzi Scheme That Conned Elway


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

Is SEC Investigating JPMorganChase's Dealings with Hedge Fund?

Pro Publica reports that the SEC is investigating whether JPMorgan Chase improperly allowed a hedge fund to select assets for a $1.1 billion deal backed by subprime mortgages.  SEC Investigating Deal Between JPMorgan and Hedge Fund Magnetar


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

Treasury Provides Update on AIG Restructuring, U.S. to Own 92% of AIG

The U.S. Department of the Treasury provided an update on the previously announced restructuring of the United States Government's (USG) loans to and investments in American International Group, Inc. (AIG), following the completion of an initial public offering for AIA Group Limited (AIA) and the sale of American Life Insurance Company (ALICO) to MetLife, Inc.:

The AIA IPO raised $20.5 billion of cash proceeds. The ALICO sale raised approximately $16.2 billion of total proceeds, approximately $7.2 billion of which is cash. This approximately $36.7 billion in aggregate proceeds will be used to repay the loan extended to AIG by the Federal Reserve Bank of New York (FRBNY) and a substantial amount of the FRBNY's preferred interests in certain AIG subsidiaries.

As part of the restructuring, AIG will draw up to $22 billion in remaining Troubled Asset Relief Program (TARP) funds from Treasury to purchase the FRBNY's preferred interests in the special purpose vehicles holding AIA and ALICO, and Treasury will receive those interests.  The assets held by these special purpose vehicles, which include, among others, AIG's remaining shares in AIA and the non-cash proceeds received from MetLife for ALICO, significantly exceed the amount of the preferred interests and, as such, no losses are expected on those preferred interests.

After the restructuring, Treasury will own 92.1 percent of AIG, which equates to approximately 1.66 billion shares of common stock in the company. Based on the market closing price of AIG on October 29, 2010, these shares are worth approximately $69.5 billion.  This amount significantly exceeds Treasury's current $47.5 billion cash investment in AIG.   (This is in addition to the Treasury investment in the preferred interests described above.)  AIG has announced that it expects to complete the restructuring by the end of the first quarter of 2011.

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

SIFMA Releases Impact Assessment Survey of Uniform Standard of Care for BDs and IAs

According to a study commissioned by SIFMA, retail investors would see reduced product and service availability and higher costs under a uniform standard of care for investment advisers and broker dealers that does not recognize distinctions among business models. 

In an impact assessment conducted by consulting firm Oliver Wyman, retail investors were likely to see a negative impact on choice of advisory model, product access, and affordability of investment and advisory services should the SEC adopt the Investment Advisers Act of 1940 standard for all brokerage activity.   To conduct its impact analysis, Oliver Wyman collected data from a broad cross section of retail brokerage firms that serve 38.2 million households and manage $6.8 trillion in client assets.  The survey covered approximately 33 percent of households and 25 percent of retail financial assets in the US, based on estimates from the Federal Reserve Survey of Consumer Finances. 

The study analyzed the potential impact of rulemaking on retail investors by focusing on three core areas: client choice, product access, and affordability of advisory services. 

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