Securities Law Prof Blog

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

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Saturday, November 13, 2010

SEC Charges Additional Defendants in Insider Trading Rings

The SEC announced that it had charged additional defendants in its ongoing investigations related to two enforcement actions, SEC v. Galleon Management, LP, et al., 09-CV-8811 (S.D.N.Y.) (JSR) and SEC v. Cutillo, et al., 09-CV-9208 (S.D.N.Y.) (RJS). The insider trading rings identified in these enforcement actions include several prominent hedge funds, high-profile hedge fund managers, Wall Street professionals such as attorneys, professional traders, and senior corporate executives.

In a complaint related to SEC v. Galleon, the SEC today charged Thomas Hardin, a former managing director at a New York-based hedge fund investment adviser, Lanexa Management LLC, for insider trading in connection with two corporate takeovers and a quarterly earnings announcement. The illicit profits at Lanexa resulting from Hardin's conduct alleged in this filing exceed $950,000. 

The SEC's complaint alleges that Khan tipped Hardin to inside information she received from a Moody's rating agency analyst, about an impending takeover of Hilton by The Blackstone Group. According to the allegations, Hardin traded on the information on behalf of Lanexa and also passed the information to others, who similarly traded on the information. Khan also shared with Hardin inside information she received from an employee at Market Street Partners, an investor relations consulting firm that did work for Google, about Google's Q2 2007 earnings. Hardin traded on the information on behalf of Lanexa and also tipped others. Finally, Khan tipped Hardin to inside information she received about the impending acquisition of Kronos by Hellman & Friedman. Hardin traded on the information on behalf of Lanexa and also tipped others, who traded on the information.

In separate complaints related to SEC v. Cutillo, et al., the SEC charged Mr. Hardin as well as two other defendants, Lanexa Management LLC, and former Schottenfeld Group LLC trader Franz Tudor, for insider trading in connection with corporate acquisitions. The illicit profits alleged in these filings total approximately $715,000. In its latest enforcement action in this matter, the SEC alleges that a Lanexa-managed hedge fund and Hardin reaped approximately $640,000 in illegal profits by insider trading based on confidential information about an impending acquisition involving 3Com Corp. The SEC also alleges that Tudor made approximately $75,000 in illicit profits by trading on material, nonpublic information concerning the proposed acquisition of Axcan Pharma Inc.

According to the SEC's complaint against Lanexa Management and Hardin, filed in federal court in Manhattan, the inside information about the 3Com acquisition that was obtained by Hardin was derived from Santarlas and Cutillo, who were privy to the confidential details through their work at the international law firm of Ropes & Gray LLP. Cutillo and Santarlas allegedly tipped this inside information through another attorney to Zvi Goffer, a former proprietary trader at Schottenfeld, in exchange for kickbacks. Goffer then tipped the inside information to fellow Schottenfeld trader Gautham Shankar, who then tipped Hardin. Goffer, Shankar and Schottenfeld were among those previously charged for their roles in the insider trading rings.

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

Friday, November 12, 2010

SEC Announces Speakers for Nov. 18 Small Business Forum

The SEC has posted on its website the agenda and list of speakers for its 2010 SEC Government-Business Forum on Small Business Capital Formation, to be held on November 18, 2010.

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

Thursday, November 11, 2010

SEC Bars Attorney for Unethical and Improper Professional Conduct

The SEC recently determined that an attorney who engaged in unethical and improper professional conduct while representing prospective witness in Commission administrative proceeding, in violation of state bar disciplinary rules, should be permanently barred from appearing or practicing before the Commission.  The ALJ imposed a nine-month suspension, but the SEC determined a permanent bar was warranted under Rule 102(e).  As explained by the SEC in its opinion,

Steven Altman, Esq., an attorney licensed to practice law in New York, appeals from an administrative law judge's decision. The law judge found that between January 28, 2004 and March 10, 2004 (the "relevant period"), Altman engaged in unethical and improper professional conduct while representing a prospective witness for the Division of Enforcement ("Division") in a Commission administrative proceeding. Specifically, the law judge found that Altman offered to have his client evade the Division's service of a subpoena and/or testify falsely in exchange for a financial package from two respondents in the proceeding. The law judge further found that Altman did so with scienter. As a result of his conduct, Altman violated Disciplinary Rules ("DR") 1-102(A)(4), 102(A)(5), and 102(A)(7) of the New York State Bar Association Lawyer's Code of Professional Responsibility. The law judge suspended Altman from appearing or practicing before the Commission for nine months pursuant to Rule 102(e)(1)(ii) of the Commission's Rules of Practice and Section 4C of the Securities Exchange Act of 1934.

The Office of the General Counsel ("OGC") appeals the nine-month suspension imposed on Altman. It seeks an order permanently denying him the privilege of appearing or practicing before the Commission. We base our findings on an independent review of the record, except with respect to those findings not challenged on appeal. We conclude that Altman's conduct is fundamentally inconsistent with the effective administration of justice and warrants a permanent denial of the privilege of appearing or practicing before the Commission.

November 11, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, November 10, 2010

Rabbi Convicted of Trying to Extort Hedge Fund

The dean of a Hebrew day school in Brooklyn, Rabbi Milton Balkany, was convicted of trying to extort $4 million for his school from SAC Capital Advisers, a hedge fund, and its founder Stephen A. Cohen.  The jury found that Balkany claimed to be a spiritual adviser to an inmate who had information about insider trading activities of the hedge fund and demanded the money to keep quiet.  SAC cooperated in the investigation.  WSJ, Rabbi Tried to Scam Hedge Fund Titan

November 10, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Charles Schwab Terminates Settlement Over YieldPlus Fund

On November 8 Charles Schwab announced that it was invoking the termination clauses in settlement agreements in a consolidated class action lawsuit relating to the Schwab YieldPlus Fund®.   Schwab also filed with the court a notice of withdrawal from the original motions filed jointly by plaintiffs and defendants for final approval of the settlements.   According to the release:

In the spring of 2010 after a lengthy and cooperative negotiation with Plaintiffs' lawyers, Schwab agreed to a substantial settlement of $235 million to settle all claims in the Yield Plus class action proceedings, regardless of their merit. Schwab was fully prepared to contest the allegations at trial but wanted to provide significant and speedy financial benefit to valued clients who purchased or held the fund during the period covered by the lawsuit and to put the matter behind us. Plaintiffs' lawyers had praised the settlement as one in which clients would receive "real money" and "a high percentage of recovery."

Plaintiffs' recent assertions, that they continue to have the right to sue on behalf of non-California class members, means that none of the parties will receive the benefit of the agreement originally negotiated. As a result, Schwab has determined its only option is to withdraw from the settlement and litigate the case rather than subject the company and its shareholders to yet more litigation over the same issues. Schwab worked hard to settle this case for the benefit of its clients and shareholders and thought it had accomplished that goal. Schwab agreed to a generous settlement, but only in return for an end to all litigation over the facts and claims alleged in the consolidated complaints. Now that Plaintiffs have asserted that Schwab is not entitled to the primary benefit Schwab was to receive under the settlement, Schwab has no choice but to withdraw from the joint motions for final approval.

We look forward to a fair and complete hearing of the facts of this matter in court where it will be clear that the decline of the YieldPlus fund was caused by the credit crisis and unprecedented housing market collapse of 2007-2008, not by any Schwab wrongdoing.

November 10, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 9, 2010

SEC Issues Cease and Desist Order Against Former President of NRSRO

The SEC issued an administrative Cease-And-Desist Order against Damyon Mouzon, the former President of registered Nationally Recognized Statistical Rating Agency (NRSRO) LACE Financial Corporation (LACE). The Order finds that Mouzon was a cause of LACE's misrepresentations in its application to become registered as an NRSRO and its accompanying request for an exemption from a conflict-of-interest provision. Exchange Act Rule 17g-5(c)(1) (the Ten Percent Rule) prohibits an NRSRO from issuing or maintaining a credit rating solicited by a person that, in the most recently ended fiscal year, provided the NRSRO with net revenue equaling or exceeding ten percent of the NRSRO's total net revenue for the fiscal year. In its NRSRO application and request for an exemption from the Ten Percent Rule, LACE materially misstated the amount of revenue it received from its largest customer during 2007. The Order finds that, as LACE's President, Mouzon was responsible for ensuring the accuracy of the information provided to the Commission in connection with LACE's NRSRO application and its request for an exemption from the Ten Percent Rule, and that he knew or should have known that LACE's representations regarding the amount of revenue received from its largest client during 2007 were inaccurate.

The Order also finds that Mouzon caused LACE to violate certain other provisions governing NRSROs by (a) failing to disclose in its NRSRO application that it performed an extra layer of review when determining credit ratings for certain issuers whose securities made up the pools of asset-backed securities managed by LACE's largest customer, (b) failing to maintain written policies and procedures governing this extra layer of review, and (c) failing to maintain all e-mails concerning its credit ratings. The Order finds that Mouzon knew or should have known that LACE was required to disclose the extra layer of review performed for certain issuers in its NRSRO application and maintain written policies and procedures governing this extra layer of review, but failed to ensure that LACE did so. The Order also finds that Mouzon knew or should have known that, as a registered NRSRO, LACE was required to retain all e-mails relating to its credit ratings, but failed to ensure that LACE did so.

 Mouzon consented to the issuance of the Order without admitting or denying the findings.

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

FINRA Fines Goldman Sachs For Failing to Disclose Tourre's Wells Notice

FINRA has fined Goldman, Sachs & Co. $650,000 for failing to disclose that two of its registered representatives, including Fabrice Tourre, had received formal notices from the SEC that they were the subjects of investigations. Tourre's "Wells Notice" was issued in connection with the SEC's investigation of an offering of a synthetic collateralized debt obligation (CDO) called ABACUS 2007-ACI (Abacus).

 Firms are required to update a representative's regulatory record by filing a Form U4 reporting the receipt of a Wells Notice within 30 days of learning of the Notice. In Tourre's case, his Form U4 was not amended until May 3, 2010, more than seven months after Goldman learned of his Wells Notice, and only after the SEC filed a complaint against Goldman and Tourre on April 16, 2010.

 FINRA found that Goldman did not have adequate supervisory procedures and systems in place to ensure that required disclosures were made when registered employees received notice that they were the subject of a regulatory investigation. FINRA also found that Goldman's written supervisory procedures, manuals and policies were inadequate. Nowhere did the procedures and policies mention "Wells Notices" specifically and the need to make disclosure when one was issued. 

Individuals at Goldman were promptly informed of the receipt of the Wells Notices by the outside counsel for both employees, but they subsequently failed to notify the Goldman compliance unit charged with updating Forms U4. The second registered individual subsequently was not named in an SEC complaint. 

As part of the settlement, Goldman also agreed to review its supervisory procedures and systems in the reporting area and to implement and document any necessary remedial measures.

 

In concluding this settlement, Goldman neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

November 9, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Monday, November 8, 2010

SEC Settles with Two Defendants in Rajaratnam Insider Trading Case

On October 27, 2010 and November 5, 2010, respectively, the United States District Court for the Southern District of New York entered Consent Orders and Judgments as to Defendants Roomy Khan ("Khan") and Rajiv Goel ("Goel") in the SEC's insider trading case, SEC v. Galleon Management, LP, et al.  The SEC filed its action on October 16, 2009, against Raj Rajaratnam ("Rajaratnam"), Galleon Management, LP ("Galleon"), Goel, and others. On November 5, 2009, the Commission amended its complaint to add allegations against additional entities and individuals, including Khan.

Rajaratnam is the founder and a Managing General Partner of Galleon, a New York hedge fund, which at the time of the alleged insider trading had billions of dollars under management. When the SEC's complaint was filed, Goel, a friend of Rajaratnam's, was a managing director within the treasury group of Intel Corp. ("Intel"), as well as the Director of Strategic Investments at Intel Capital, an Intel subsidiary that makes proprietary equity investments in technology companies. Khan was an individual investor who had been employed at Intel in the late 1990s and had been subsequently employed at Galleon.

The SEC alleged that Rajaratnam unlawfully traded based on inside information involving numerous companies. It further alleged that Goel acquired material non-public information while working at Intel and passed that information to Rajaratnam, who traded on it. The SEC also alleged that Khan acquired material non-public information from several sources, including a senior executive at Polycom, Inc., a Moody's rating agency analyst, and an employee at an investor relations consulting firm, and traded on that information. Khan also passed such information on to others, including Rajaratnam, who traded on it. The SEC charged Rajaratnam, Goel, and Khan with violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933 ("Securities Act").

The Consent Order and Judgment entered against Khan permanently enjoins her from violating the antifraud provisions of the federal securities laws and also orders her to pay disgorgement in the amount of $1,552,566.94, plus prejudgment interest in the amount of $304,398.77, for a total of $1,856,965.71. The order provides that the Court will determine at a later date whether any civil penalty is appropriate. Khan has agreed to cooperate with the SEC in connection with this action and related investigations.

The Consent Order and Judgment entered against Goel permanently enjoins him from violating the antifraud provisions of the federal securities laws and also orders him to pay disgorgement in the amount of $230,570.52, plus prejudgment interest in the amount of $23,447.21, for a total of $254,017.73. The order provides that the Court will determine at a later date whether any civil penalty is appropriate. The order also bars Goel from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act. Goel has agreed to cooperate with the SEC in connection with this action and related investigations.

November 8, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Approves Rules to Prohibit "Stub Quotes"

The SEC approved new rules proposed by the exchanges and FINRA to strengthen the minimum quoting standards for market makers and effectively prohibit "stub quotes" in the U.S. equity markets.

A stub quote is an offer to buy or sell a stock at a price so far away from the prevailing market that it is not intended to be executed, such as an order to buy at a penny or an offer to sell at $100,000. A market maker may enter stub quotes to nominally comply with its obligation to maintain a two-sided quotation at those times when it does not wish to actively provide liquidity. Executions against stub quotes represented a significant proportion of the trades that were executed at extreme prices on May 6, and subsequently broken.

The new rules address the problem of stub quotes by requiring market makers in exchange-listed equities to maintain continuous two-sided quotations during regular market hours that are within a certain percentage band of the national best bid and offer (NBBO). The band would vary based on different criteria:

  • For securities subject to the circuit breaker pilot program approved this past summer, market makers must enter quotes that are not more than 8% away from the NBBO.
  • For the periods near the opening and closing where the circuit breakers are not applicable, that is before 9:45 a.m. and after 3:35 p.m., market makers in these securities must enter quotes no further than 20% away from the NBBO.
  • For exchange-listed equities that are not included in the circuit breaker pilot program, market makers must enter quotes that are no more than 30% away from the NBBO.
  • In each of these cases, a market maker's quote will be allowed to "drift" an additional 1.5% away from the NBBO before a new quote within the applicable band must be entered.

The new market maker quoting requirements will become effective on Dec. 6, 2010.

 

November 8, 2010 in SEC Action | Permalink | Comments (1) | TrackBack (0)

Sunday, November 7, 2010

Thompson on Good Faith and Delaware Courts

The Short But Interesting Life of Good Faith as an Independent Liability Rule, by Robert B. Thompson,  
Georgetown University Law Center, was recently posted on SSRN.  Here is the abstract:

 Shareholder challenges to director actions usually assert a breach of the fiduciary duties of loyalty or care. For much of the last two decades, Delaware case law referred to a trilogy of duties holding out the possibility that good faith was an independent basis for liability. Recent opinions tell us this is no so. This article examines why good faith flowered for a while as a possible independent basis for liability — as the latest incarnation of fail/safe doctrines permitting courts to rein in questionable behavior that didn’t quite fit within existing categories; as an effort to avoid the exculpation provisions of Delaware’s statute; and as part of a sermonizing function sometimes undertaken by Delaware courts. Now that good faith is firmly ensconced within the duty of loyalty, the article examines whether the path to this point reflects a Delaware judiciary less willing to engage in substantive review of director action in a takeover context.

November 7, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Awrey on Principles-Based Regulation

Regulating Financial Innovation: A More Principles-Based Alternative?, by Dan Awrey, University of Oxford - Faculty of Law, was recently posted on SSRN.  Here is the abstract:

The global financial crisis has exposed the complexity of modern financial markets. One of the primary drivers of this complexity has been financial innovation. From sub-prime mortgages, securitization and credit default swaps to sophisticated quantitative models for measuring and managing risk, the footprints of financial innovation can be found at almost every step along the road to the Great Recession. More broadly, complexity and innovation have combined to generate significant asymmetries of information and expertise between public regulators and private actors, thereby exacerbating the agency problems which pervade financial markets. At the same time, the pace of innovation has left regulators and regulation chronically behind the curve. This paper examines the desirability of ‘more principles-based’ regulation (MPBR) as a response to the challenges stemming from the complexity and innovativeness of modern financial markets. This paper advances the scholarly and public policy debates surrounding the optimal approach toward financial regulation in three ways. First, it re-conceptualizes the theoretical core of MPBR and demonstrates how this core transcends the now stale ‘rules versus principles’ debate within which the debate over MPBR has been historically mired. Second, using over-the-counter derivatives markets as a case study, it illuminates the pervasiveness and significance of asymmetries of information and expertise and agency problems within complex, innovative financial markets and how MPBR manifests the potential to address many of the attendant regulatory challenges. Finally, it moves the debate beyond the structure, perimeter and even substance of regulation and toward the examination of the optimal philosophy of regulation given the complexity and innovation exhibited within modern financial markets.

November 7, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Alvarez on Corporations under International Law

Are Corporations 'Subjects' of International Law?, by Jose E. Alvarez, New York University - School of Law, was recently posted on SSRN.  Here is the abstract:

Courts and scholars often attempt to draw legal conclusions from the status of entities, whether states, international organizations or corporations. Debates concerning whether corporations are “subjects” of international law and the legal conclusions that supposedly follow from this are particularly vociferous within Alien Tort Claims litigation in U.S. courts. Using the Supreme Court’s recent decision in Citizens United as a cautionary tale, the author argues that drawing legal conclusions from the fact of “subject-hood” is fraught with peril, particularly in the case of corporations. He argues that such top-down approaches are likely to lead to unintended consequences and that corporations, like international organizations, should more properly be seen as “participants” than “subjects.”

November 7, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)