Securities Law Prof Blog

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

Friday, December 17, 2010

$7.2 Billion Settlement with Picower's Estate Adds to Fund for Madoff Victims

Federal prosecutors and the trustee charged with recovering assets in the Bernard L. Madoff bankruptcy announced settlements with the estate of Jeffry M. Picower, a Palm Beach philanthropist who died in October 2009, that would add $7.2 billion to the cash available to compensate Madoff's victims.  NYTimes, $7.2 Billion Settlement Reached With Madoff Investor

December 17, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Bipartisanship Reigns at FCIC

Four Republican members of the Financial Crisis Inquiry Commission released a 9-page "primer" on December 15, the date Congress set for the final report, which a majority of the Commissioners deferred for one month.  According to its introduction:

This primer contains preliminary findings and conclusions released by Vice Chairman Bill Thomas, Commissioner Keith Hennessey, Commissioner Douglas Holtz-Eakin, and Commissioner Peter J. Wallison, and represents a portion of the findings and conclusions resulting from our work on the FCIC. As the transmission of the report of the FCIC to the President and Congress requires a majority vote of the Commission, these findings and conclusions do not constitute the Commission’s report. Rather, this document is an effort to reflect the clear intention of our enabling legislation.
* * *
Our framework reflects a central premise that the financial crisis was distinct from other recent important economic events, including the housing bubble and the prolonged economic recession. We believe that the financial crisis was, at its core, a financial panic that was precipitated by highly correlated mortgage-related losses concentrated at large financial firms in the United States and Europe. While the housing bubble, the financial crisis, and the recession are surely interrelated events, we do not believe that the housing bubble was a sufficient condition for the financial crisis. The unprecedented number of subprime and other weak mortgages in this bubble set it and its effect apart from others in the past.

The FCIC website posted this response:

Today some members of the Commission made public their personal views on the financial
crisis. The Commission had not previously seen or had an opportunity to review what was
released today. But, as it does with the views of any of its members, the Commission will review
and take them into consideration.


December 17, 2010 in News Stories | Permalink | Comments (1) | TrackBack (0)

FINRA Gives its 2010 Performance High Marks

FINRA released its FINRA 2010 Year in Review and gave itself many pats on the back for its performance.  Acording to the report's introduction:

The Financial Industry Regulatory Authority (FINRA) significantly expanded and enhanced its investor protection and market regulation capabilities in 2010 in each of the areas central to its investor protection mission, including: market and firm regulation, transparency, registration and disclosure, dispute resolution and investor education. FINRA's work progressed amid continuing changes sweeping financial markets, ongoing economic challenges and the implementation of a new industry regulatory framework.

December 17, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Forensics Accounting Master Ranks Blogs in its Field

Forensics Accounting Masters has posted a "Top 50" list of blogs related to forensic accounting, securities fraud, corporate governance and other topics.  It's a good compilation of well-regarded blogs; I'm proud to say Securities Law Prof is ranked at #47.

December 17, 2010 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Thursday, December 16, 2010

SEC Charges Former Wachovia Employees with Defrauding Customers

The SEC filed a civil injunctive action in Charlotte, North Carolina on December 15, 2010, alleging that William K. Harrison (“Harrison”) and Eddie W. Sawyers (“Sawyers”), former employees of Wachovia, defrauded at least forty-two Wachovia brokerage customers of at least $8 million in customer funds between approximately December 2007 and October 2008.  According to the complaint, Harrison and Sawyers, acting under the d/b/a “Harrison/Sawyers Financial Services,” began offering their Wachovia customers an investment opportunity that they misrepresented was guaranteed to make a 35% return, with no risk of loss of principal.  By October 2008, they had depleted the vast majority of the money they had raised from investors.  On October 13, 2008, Harrison submitted to Wachovia a resignation letter in which he confessed to “misdirecting” $6.6 million from seventeen of his Wachovia customers in order to trade online.  He also admitted that he had conducted this online trading without first securing the authorization of these 17 individuals.

December 16, 2010 in SEC Action | Permalink | Comments (1) | TrackBack (0)

SEC Charges Attorney in Adviser Kenneth Starr's Fraud

The SEC today charged Jonathan Star Bristol, attorney for former financial advisor Kenneth Ira Starr, with aiding and abetting Starr's multi-million dollar fraud by allowing Starr to use Bristol's attorney trust accounts to mask the misappropriation scheme. Beginning in November 2008 through Starr's arrest in May 2010, more than $25 million of Starr's clients' funds flowed through Bristol's attorney trust accounts. Throughout that time, Bristol was a partner with a prominent international law firm.

The SEC's amended complaint, filed in federal court in Manhattan, alleges that Bristol repeatedly allowed Starr to use Bristol's attorney trust accounts as conduits when Starr stole money from his advisory clients. Starr would transfer, without authorization, clients' funds into the attorney trust accounts, and then Bristol, who was the sole owner of the trust accounts, would transfer the stolen funds to, among others, Starr and two Starr-controlled entities — Starr Investment Advisors LLC and Starr & Company LLC. The account documentation for the attorney trust accounts was sent directly to Bristol's home address. Bristol received monthly statements for the attorney trust accounts, which clearly listed the names of Starr's clients as the source of the incoming transfers. Bristol never disclosed the existence of the accounts to his law firm. Bristol did, however, tout his relationship with Starr to his colleagues and others, even claiming that Starr managed $70 billion in assets, when in fact Starr managed a fraction of that amount.

The SEC further alleges that, when confronted by one of Starr's victims about an unauthorized $1 million transfer from the victim's account, Bristol lied to the victim that the funds were being bundled with other clients' funds for an investment with UBS Financial Services. In fact, Bristol had already used the misappropriated funds to pay a multi-million dollar legal settlement with one of Starr's former clients. Bristol subsequently sought to represent that same victim in connection with the SEC's investigation.

The SEC previously charged Starr, Starr Investment Advisors and Starr & Company (together, the "Starr Parties") with using misappropriated client funds to, among other things, buy a multimillion dollar luxury condominium on Manhattan's Upper East Side.  The SEC is seeking permanent injunctions, disgorgement of ill-gotten gains with pre-judgment interest and financial penalties.


December 16, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

DOJ Arrests Consultants in Probe of insider Trading Involving Expert-Networking

We have been waiting for a shoe to drop in the three-year investigation into insider trading, and here it is: the government arrested four consultants and one employee of Primary Global Research LLC, an "expert-network" firm.  The government alleges illegal tipping of confidential material information from corporations to investors via expert networks.  Those arrested:

James Fleishman, sales executive at Primary Global;

Walter Shimoon, VP/Businesss Development at Flextronics International Ltd.;

Mark Anthony Longoria, an employee at Advanced MicroDevices;

Manosha Karunatilaka, business development manager at Taiwan Semiconductor North America.

Another consultant, David Devore, global supply manager at Dell, pleaded guilty to wire fraud and is reportedly cooperating with authorities.  WSJ, U.S. Charges Five in Alleged Insider-Trading Ring

December 16, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Judge Rakoff Orders Arbitration of Brokers' FLSA Collective Action

There is no arrogance quite like that of a federal district judge, and  Judge Jed Rakoff' provides an excellent example in Gomez v. Brill Securities, Inc., 10 Civ. 3503 (JSR) (S.D.N.Y. Nov. 2, 2010).  Plaintiffs, brokers formerly employed at defendant securities firm, brought a FLSA collective action seeking unpaid overtime compensation.  Defendants made a motion to compel arbitration; plaintiffs resisted, citing FINRA's Rule 13204, which closes the FINRA forum to class actions, thus permitting class actions to be brought in court.  FINRA staff have previously issued opinion letters that the Rule applied to FLSA collective actions.  Judge Rakoff, however, found the Rule inapplicable and granted defendant's motion.

Judge Rakoff found that the staff opinion letters were not entitled to judicial deference, in part because they did not contain the sort of detailed analysis that he might find persuasive.  Declining to provide that sort of analysis himself, he simply notes that there are "significant differences" between an "opt-out class action" and an "opt-in FLSA collective action."  Accordingly, plaintiffs' action must be arbitrated before the FINRA forum.   He also directs the parties to report to him, every three months, on the status of the arbitration.

December 16, 2010 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

NASAA Proposes Model Rule on Registration and Reporting Requirements for Advisers to Private Funds

Dodd-Frank made significant changes to the provisions governing the regulation of investment advisers under the Investment Advisers Act of 1940 (“IAA”).  In addition to expanding the states’ oversight of investment advisers by increasing the assets under management threshold for registration with the Securities and Exchange Commission (“SEC”), the Act made substantial changes to the regulation of investment advisers to hedge funds and other private funds.  The implementation of these provisions and others is the subject of two releases recently issued by the SEC for comment. In Release No. IA-3110 and Release No. IA-3111 the SEC explains how the agency intends to implement the new registration and reporting requirements for investment advisers as well as other changes required under the Dodd-Frank Act.

NASAA is considering adopting a model rule governing the registration and reporting requirements for advisers to private funds. NASAA’s proposal is designed to follow certain provisions in the Dodd-Frank Act as implemented by the SEC, and, therefore, is contingent in many respects on how the SEC moves forward on implementation in this area. Consequently, if the SEC makes significant alterations to its proposals NASAA may be required to reevaluate the provisions in any proposed model rule or rules
NASAA is seeking comments on the proposed rule in general and is particularly interested in comments as to the scope of the rule.  The deadline for submission of comments is January 24, 2011. 

Proposed NASAA Model Rule on Private Fund Adviser Registration and Exemption

December 16, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 15, 2010

SEC Charges Nevada Lawyer with Multi-Million $ Fraud Scheme

On December 14, 2010, the SEC filed a civil action in the U.S. District Court of Nevada charging Marcus Luna, Nathan Montgomery, Adam Daskivich, David Murtha, St. Paul Venture Fund LLC ("St. Paul VF"), Minnesota Venture Capital, Inc. ("Minnesota VC"), Real Estate of Minnesota, Inc. ("Real Estate MN") and Matrix Venture Capital, Inc. ("Matrix VC") for their roles in a multi-million dollar scheme and for selling shares of Axis Technologies Group, Inc. stock in a public distribution without registration with the Commission.

The Commission's complaint alleges that:

Luna drafted and issued a legal opinion letter to a transfer agent that falsely stated the shares of Axis were unrestricted because they were issued pursuant to a valid exemption from registration under Rule 504 of Regulation D.

Luna further misrepresented that St. Paul VF, Minnesota VC, Real Estate MN and Matrix VC were accredited investors in Minnesota, and claimed that Minnesota state law permitted an exemption allowing accredited investors to purchase unrestricted shares from Axis.

These entities were not accredited investors, and moreover were simply conduits for distribution of the stock to the public. Soon after these alleged accredited investors received their shares, they transferred shares to promoters and sold the remaining shares to the public.

Luna, Montgomery, Daskivich and Murtha received profits totaling $6.88 million from St. Paul VF, Minnesota VC, Real Estate MN and Matrix VC sales of their shares of Axis stock.

The Commission's complaint alleges that Luna violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Luna, Montgomery, Daskivich, Murtha and their entities violated the registration provisions of Sections 5(a) and 5(c) of the Securities Act. The Commission's complaint seeks from Montgomery, Daskivich, Murtha, St. Paul VF, Minnesota VC, Real Estate MN and Matrix VC: (1) a permanent injunction; (2) disgorgement of profits, including prejudgment interest; (3) a civil penalty; and (4) a penny stock bar. In addition, as to Luna, it seeks an order prohibiting Luna from providing professional legal services to any person in connection with the offer or sale of securities pursuant to, or claiming, an exemption under Regulation D, including, without limitation, participating in the preparation or issuance of any opinion letter related to such offerings.

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

SEC Proposes Specialized Disclosures Mandated by Dodd-Frank

The SEC today voted unanimously to propose measures, as mandated by the Dodd-Frank Act, which would require new disclosures by reporting issuers concerning conflict minerals that originated in the Democratic Republic of the Congo or an adjoining country.  Specifically, companies would be required to disclose annually whether they use “conflict minerals” that are “necessary to the functionality or production” of a product that they either manufacture or contract to be manufactured that originate from the Democratic Republic of the Congo or adjoining countries. The conflict minerals are cassiterite, columbite-tantalite, gold, wolframite or their derivatives. These minerals are essential to many products — from jewelry to cell phones to jet engines.  CONFLICT MINERALS

In addition:

SEC Proposes Specialized Disclosure of Mine Safety Information Under Dodd-Frank Act, MINE SAFETY DISCLOSURE and

SEC Proposes Rules for Resource Extraction Issuers Under Dodd-Frank Act, DISCLOSURE OF PAYMENTS BY RESOURCE EXTRACTION ISSUERS.

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

SEC Proposes Review Process for Mandatory Clearing of Security-Based Swaps

The SEC today voted unanimously to propose rules required under the Dodd-Frank Act that would set out the way in which clearing agencies provide information to the SEC about security-based swaps that the clearing agencies plan to accept for clearing. This information is designed to aid the SEC in determining whether such security-based swaps are, in fact, required to be cleared.

The SEC also proposed rules that would set out the way in which those clearing agencies that are designated as “systemically important” must submit advance notices for changes to their rules, procedures, or operations that could materially affect the nature or level of risk presented at such clearing agencies.

Public comments on the proposed rules should be received by the Commission within 45 days after their publication in the Federal Register.  Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies; Technical Amendments to Rule 19b-4 and Form 19b-4 Applicable to All Self-Regulatory Organizations

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

SEC Proposes End-User Requirements for Security-Based Swaps

The SEC today voted unanimously to propose requirements of end-users when they engage in a security-based swap transaction that is not subject to mandatory clearing.  The proposed rule, required under the Dodd-Frank Act, specifies the steps that end-users must follow to notify the SEC of how they generally meet their financial obligations when engaging in a security-based swap transaction exempt from the mandatory clearing requirement.  The SEC also sought comment on whether to provide an additional exemption for certain financial institutions that would permit those institutions to use the exception to mandatory clearing that is available to end-users.

Public comments on the proposed rules should be received by the Commission within 45 days after their publication in the Federal Register.  End-User Exception to Mandatory Clearing of Security-Based Swaps

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

Budget Issues Slow Down SEC Enforcement Efforts

The Wall St. Journal reports that the SEC is slowing down some investigations and inspections because of the budget impasse in Congress.  Regulator Is Slowed By Budget Impasse 

Pro Publica is running a similar story which also addresses the extensive lobbying efforts by business and their impact on the SEC's reguatory agenda under Dodd-Frank, see Budget Cuts, Lobbying Challenge SEC’s Oversight

December 15, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 14, 2010

Current SEC & PCAOB Developments

CURRENT DEVELOPMENTS IN THE DIVISION OF CORPORATION FINANCE, Presentation at the National Conference on Current SEC & PCAOB Developments,  December 7, 2010

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

SEC Open Meeting Agenda for December 15 Meeting

SEC's Open Meeting Agenda for December 15, 2010

Item 1: Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies
Office:  Division of Trading and Markets

Item 2: End-User Exception to Mandatory Clearing of Security-Based Swaps
Office:  Division of Trading and Markets

Item 3: Conflict Minerals
Office:  Division of Corporation Finance

Item 4: Mine Safety Disclosure
Office:  Division of Corporation Finance

Item 5: Disclosure of Payments by Resource Extraction Issuers
Office:  Division of Corporation Finance

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

PCAOB Proposes Interim Inspection Program and Rules on Funding

The Public Company Accounting Oversight Board today proposed for public comment rules to begin implementation of provisions of Dodd-Frank that expand the Board's oversight authority to encompass audits of securities brokers and dealers.  Specifically, the Board proposed for public comment a temporary rule to establish an interim inspection program for registered public accounting firms' audits of brokers and dealers, as well as rules related to assessing and collecting a portion of its Accounting Support Fee from brokers and dealers to fund PCAOB oversight of audits of brokers and dealers, consistent with the Act. Certain amendments to existing funding rules for issuers were also proposed for public comment.

Dodd-Frank authorized the Board to establish a program of inspection of auditors of brokers and dealers. The temporary rule proposed by the Board today would, if adopted, put in place an interim inspection program while the Board considers the scope and other elements of a permanent inspection program. Under the temporary rule, the Board would begin to inspect auditors of brokers and dealers and identify and address with the registered firms any significant issues in those audits. The Board also expects that insights gained through the interim program will inform the eventual determination of the scope and elements of a permanent program, and the Board expects to propose rules for a permanent program after no more than two years of an interim program. During the interim program, the Board would at least annually provide public reports on the progress of the interim program and significant issues identified, but the Board would not expect to issue firm-specific inspection reports before the scope of a permanent program is set.

Section 109 of the Sarbanes-Oxley Act, as originally enacted, provided that funds to cover the PCAOB annual budget, less registration and annual fees paid by registered public accounting firms, would be collected from issuers based on each issuer's relative average monthly equity market capitalization. The amount due from issuers is referred to as the Accounting Support Fee. As amended by Dodd-Frank, Section 109 now requires that the Board allocate respective portions of the total Accounting Support Fee among issuers, brokers and dealers and allow for differentiation among classes of brokers, and dealers.

The rules proposed today for comment would establish classes of broker-dealers for funding purposes, describe the method for allocating the appropriate portion of the Broker-Dealer Accounting Support Fee to each broker and dealer within each class, and address the collection of assessed shares from brokers and dealers. The Board anticipates that the rules, subject to SEC approval, would be in effect for its 2011 funding cycle for broker and dealers.

The Board also proposed certain amendments to its funding rules for issuers, based on its experience with the issuer accounting support fee process over the last eight years. The rules proposed today for comment would, among other things, increase the market capitalization threshold for equity and investment company issuers and would revise the basis for calculating an issuer's market capitalization to include the market capitalization of all classes of an issuers' voting and non-voting common equity rather than just its common stock. The Board anticipates that the rules related to the Issuer Accounting Support fee, subject to SEC approval, would become effective for its 2012 funding cycle for issuers.

Comments are due to the PCAOB no later than Feb.15, 2011.

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

FINRA Releases Updated Information on Pilot Program Results

FINRA recently posted at its website an update on the results of its Pilot Program that allows eligible customers that have instituted arbitration proceedings against 14 firms to opt for an all-public arbitrator panel.  On Oct. 26, FINRA filed a rule proposal with the SEC that would allow all investors the option of an all-public panel.  The proposed rule would apply to all investor disputes against any firm and any individual broker.  FINRA reports that:

As of December 1, 2010, fifty-six percent of investors eligible to participate have opted in, resulting in 583 out of 1,035 cases that were eligible for the Pilot Program. Investors have chosen to rank one or more non-public arbitrators on the list in 50 percent of the cases (255 of the 506 cases) in which parties have completed the ranking process.

From the above, FINRA concludes that in 74 percent of cases eligible for the Pilot Program, investors have opted for a non-public arbitrator either by choosing not to participate in the Pilot Program or by participating in the pilot but ranking one or more non-public arbitrators.

FINRA also reports that:

Parties involved in Pilot Program cases have resolved cases via settlement more often than non-Pilot Program cases involving three arbitrators. Fewer Pilot Program cases result in awards than non-Pilot Program cases with three arbitrators.

Preliminary award outcomes show that all-public panels in Pilot Program cases award damages to investors more often compared to awards issued by majority public panels in Pilot Program and non-Pilot Program cases; however, there is not yet sufficient award data to draw meaningful conclusions.

December 14, 2010 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Sunday, December 12, 2010

Schwarcz on Marginalizing Risk

Marginalizing Risk, by Steven L. Schwarcz, Duke University - School of Law, was recently posted on SSRN.  Here is the abstract:

A major focus of finance is reducing risk on investments, in order to reduce a borrower’s costs of funds. From any given investor’s standpoint, risk dispersion appears as an important way to reduce investment risk; but sometimes risk dispersion can cause investors and other market participants to underestimate and under-protect against risk. Risk can even be so widely dispersed that rational market participants individually lack the incentive to monitor it. This article examines the market failures resulting from risk dispersion that can cause market participants to under-protect against risk. The article also analyzes the extent to which government regulation may be necessary or appropriate to limit these market failures. Finally, the article examines how such regulation should be designed, including the extent to which it should limit risk dispersion in the first instance.

December 12, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Gulinello on Retail Investor Vote

The Retail Investor Vote: Mobilizing Rationally Apathetic Shareholders to Preserve or Challenge the Board's Presumption of Authority, by Christopher John Gulinello, Northern Kentucky University - Salmon P. Chase College of Law, was recently posted on SSRN.  Here is the abstract:

 The article proposes the implementation of the RIVI (“Retail Investor Voting Instructions”) to mobilize retail investors to vote in corporate elections. The author argues that current retail-investor voting has an adverse effect on our capital markets because it is uninformed. In this article, the author proposes the creation of the RIVI to promote more robust and informed retail-investor voting, which will, in turn, contribute to a more efficient balance between board accountability and authority in public companies.

December 12, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)