Securities Law Prof Blog

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

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Saturday, January 1, 2011

Burch on Optimal Lead Plaintiffs

Optimal Lead Plaintiffs, by Elizabeth Chamblee Burch, Florida State University - College of Law, was recently posted on SSRN.  Here is the abstract:

Adequate representation in securities class actions is, at best, an afterthought and, at worst, usurped and subsumed by the Private Securities Litigation Reform Act’s lead-plaintiff appointment process. Once appointed, the lead plaintiff bears a crushing burden: Congress expects her to monitor the attorney, thwart strike suits, and deter fraud, while judges expect her appointment as the “most adequate plaintiff” to resolve intra-class conflicts and adequate-representation problems. But even if she could be all things to all people, the lead plaintiff has little authority to do much aside from appointing lead counsel. Plus, class members in securities-fraud cases have diverse preferences – their litigation stakes, risk preferences, relationships with class counsel, financial sophistication, and desired remedies all vary. Yet, the presumption is that because class members are absent, a lead plaintiff with claims and motivations similar to theirs will advance their interests and ensure due process. But a single institution or investor pursuing its or her own interests is hard pressed to represent a diverse class, much less to fulfill Congressional and judicial expectations.

In practice if not in print, courts define “interests” in terms of a widely shared desire to recover one’s losses. This broad definition allows judges to certify securities class actions and thus promote private enforcement’s public function by holding the government and corporations accountable. But it also means that attorneys can pursue an institutional lead plaintiff’s interests at the other class members’ expense. The “other class members” are principally individual investors, those who need the class-action vehicle the most. The logical solution is to appoint a lead-plaintiff group. But so far, groups have underperformed largely because courts prefer members with preexisting relationships and group cohesion – the same qualities that lead to group polarization and confirmation bias. Consequently, this Article suggests an alternative remedy: appoint a cognitively diverse lead-plaintiff group with individuals and institutions and link diversity to class members’ heterogeneous interests. Once a richly representative group exists, it should have more decision-making autonomy; lead counsel should consult and defer to the group’s decisions on matters that implicate plaintiffs’ values and litigation objectives or affect the case’s merits just as attorneys do in individual litigation.

January 1, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Birdthistle on Money Market Funds

Breaking Bucks in Money Market Funds, by William A. Birdthistle, Chicago-Kent College of Law, was recently posted on SSRN.  Here is the abstract:

This Article argues that the Securities and Exchange Commission’s first and most significant response to the economic crisis increases rather than decreases the likelihood of future failures in money market funds and the broader capital markets. In newly promulgated regulations addressing the "breaking of the buck" in the $3 trillion money market - a debacle at the fulcrum of the 2008 financial meltdown - the SEC endorses practices that obfuscate rather than illuminate the capital markets, including fixed pricing for money market funds, potentially riskier portfolio requirements, and the continued use of discredited ratings agencies. These policies, premised implicitly upon doubt in the ability of markets to process information effectively, obscure the true perils of money market funds. Rather than swaddling investment risks in misleading regulatory padding, the SEC should illuminate the possible menace of these funds. This Article offers transparent solutions to alleviate moral hazard and systemic risk in the broader market and to end the regulatory subsidy of these specific investments.

January 1, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Cornell on Market Efficiency in Securities Litigation

Market Efficiency and Securities Litigation: Implications of the Appellate Decision in Thane, by Bradford Cornell, California Institute of Technology, was recently posted on SSRN.  Here is the abstract:

The recent Ninth Circuit decision in Miller v. Thane International, Inc. is a significant innovation that brings legal precedent regarding market efficiency more in line with current thinking in financial economics. Prior to Thane there was a tendency for courts to view financial markets as being either efficient or not. This is contrary to academic thinking in finance where scholars have come to accept that financial markets can never be fully efficient or completely inefficient. Instead financial markets, like physical systems, are better thought of as evidencing relative degrees of efficiency. By reaching the conclusion that the hurdle for assessing efficiency depends on the particular legal issue at hand, the Ninth Circuit appropriately adopts the concept of relative efficiency.

January 1, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Thursday, December 30, 2010

Rattner Settles New York AG Charges for $10 Million and 5 Year Ban

New York AG Cuomo today announced an agreement with Steven Rattner, former founding principal of private equity firm Quadrangle Group, LLC (“Quadrangle”) in the Attorney General’s public pension fund investigation.  Mr. Rattner will pay $10,000,000 in restitution to the State of New York and be banned from appearing in any capacity before any public pension fund within the State of New York for five years. The agreement today will end the two lawsuits previously filed against Mr. Rattner by the Attorney General’s Office in New York State Supreme Court relating to the circumstances surrounding $150 million in investments in Quadrangle from the New York State Common Retirement Fund (“CRF”).

You may remember that when the charges were announced in November, Mr. Rattner (President Obama's former Car Czar) proclaimed that he would not be bullied by the AG.  In contrast, today Mr. Rattner stated: “I am pleased to have reached a settlement with the New York Attorney General’s Office, which allows me to put this matter behind me. I apologize if during the course of this process there is anything I did that may have made reaching this agreement more difficult. I respect the work of the Attorney General and his staff to ensure that the New York State Common Retirement Fund operates properly and in the best interests of New Yorkers.”

With today’s agreement, Cuomo’s investigation has secured agreements with nineteen firms and five individuals, garnering over $170 million for New York and the pension fund. The investigation has led to eight guilty pleas, including pleas by former Comptroller Alan Hevesi, his chief political consultant, and his Chief Investment Officer.

December 30, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Keeps Secrets on FOIA Procedures

Investment News reports that the SEC has denied a Freedom of Information Act request that sought information on the agency's procedures for handling FOIA requests!  Citizens for Responsibility and Ethics in Washington filed the request in September.  INVNews, SEC won't reveal info on how it decides what info to reveal

As someone who is still waiting for records to be produced under a FOIA request I submitted over a year ago, I cheer all efforts to make the SEC more responsive and transparent.  The documents I have been seeking are hardly obscure or confidential; I requested comment letters submitted in response to a 1995 call for comments on a proposed SEC rule.  The SEC maintains that it cannot locate any documents responsive to my request. -- hard to imagine.

So you go, Citizens for Responsibility!

December 30, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 29, 2010

FINRA Expels Texas Firm for Excessive Mark-ups

FINRA expelled APS Financial Corporation, located in Austin, Texas, barred the firm's former President, George Conwill, and barred Peter Aman, a former broker at the firm, in a scheme which overcharged an elderly investor by $1.2 million.  FINRA found that Aman charged mark-ups ranging from 4.15 percent to fraudulently excessive mark-ups as high as 67 percent when executing 45 transactions for customers of APS Financial. Forty-three of these excessive or fraudulent mark-ups were related to transactions for the accounts of a single elderly investor. Aman overcharged this elderly investor by more than $1.2 million through undisclosed mark-ups, including $767,000 in fraudulently excessive mark-ups.  In total, APS Financial Corporation overcharged customers on 59 transactions. Conwill approved all 53 mark-ups above 5 percent, including 42 of the 43 excessive or fraudulent mark-ups for the elderly investor's accounts.

FINRA also barred Conwill and expelled APS Financial for rule violations relating to trading in corporate high yield bonds, collateralized mortgage obligations and collateralized debt obligations. Both APS Financial and Conwill were cited for charging excessive mark-ups and supervision violations.

APS Financial Corporation, Aman and Conwill settled these matters without admitting or denying the allegations, but consented to the entry of FINRA's findings.

December 29, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Government Arrests California Woman in Insider Trading Probe

Winifred Jiau becomes the seventh person charged in the government's investigation of insider trading through expert networks.  Ms. Jiau worked for Nvidia as a contractor until about a year ago.  According to the government, she was paid more than $200,000 for providing information, including inside information about Nvidia and Marvell Technology, to hedge fund portfolio managers through an expert-network firm.  WSJ. California Woman Is Latest Charged in Insider Probe

December 29, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 28, 2010

SEC Extends Temporary Rule on Dual Registrants' Principal Trades

The SEC amended rule 206(3)-3T under the Investment Advisers Act of 1940, a temporary rule that establishes an alternative means for investment advisers who are registered with the Commission as broker-dealers to meet the requirements of section 206(3) of the Investment Advisers Act when they act in a principal capacity in transactions with certain of their advisory clients. The amendment extends the date on which rule 206(3)-3T will sunset from December 31, 2010 to December 31, 2012.  From the SEC's release:

We are amending rule 206(3)-3T only to extend the rule’s expiration date by two years. Absent further action by the Commission, the rule will expire on December 31, 2012. We are adopting this extension because, as we discussed in the Proposing Release, we believe that firms’ compliance with the substantive provisions of rule 206(3)-3T provides sufficient protection to advisory clients to warrant the rule’s continued operation for the additional two years while we conduct the study mandated by section 913 of the Dodd-Frank Act and consider more broadly the regulatory requirements applicable to broker-dealers and investment advisers. As part of our broader consideration of the regulatory requirements applicable to broker-dealers and investment advisers, we intend to carefully consider principal trading by advisers, including whether rule 206(3)-3T should be substantively modified, supplanted, or permitted to expire.

December 28, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Obtains TRO Alleging Insider Trading in Martek Acquisition

On December 22, 2010, the U.S. District Court for the Southern District of New York entered a Temporary Restraining Order freezing assets and trading proceeds of certain unknown purchasers of the securities of Martek Biosciences Corporation (the “Unknown Purchasers”).  The Commission filed a complaint alleging that the Unknown Purchasers engaged in illegal insider trading in the days preceding the December 21, 2010 announcement that Royal DSM N.V., a Dutch company, and Martek, a Columbia, Maryland company, had entered into an agreement under which DSM would acquire all of the outstanding common stock of Martek at a 35% premium over the previous day’s closing price.  According to the SEC, between December 10, 2010 and December 15, 2010, the Unknown Purchasers bought 2,615 Martek call option contracts through a UBS account.  The Unknown Purchasers’ buys comprised over 90% of the volume for these contracts on those days.  The complaint further alleges that, after the acquisition announcement, the price of Martek common stock increase 36% from the previous day’s closing price.  The value of the call options held by the Unknown Purchasers rose dramatically during the day.  In one instance, the options increased 2,500% in value.  The complaint alleges that, as a result, the Unknown Purchasers are in a position to realize total profits of approximately $1.2 million from the sale of the call options.

In addition to freezing the assets relating to the trading, the Temporary Restraining Order requires the Unknown Purchasers to identify themselves, imposes an expedited discovery schedule, and prohibits the defendants from destroying documents.

December 28, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

More Work Needs to be Done on Risk Appetite Frameworks, Senior Supervisors Report

Senior financial supervisors from 10 countries — collectively, the Senior Supervisors Group (SSG) — issued a report on December 23 that evaluates how financial institutions have progressed in developing formal risk appetite frameworks and in building out highly developed IT infrastructures and firm wide data aggregation capabilities.

The report — Observations on Developments in Risk Appetite Frameworks and IT Infrastructures — concludes that while firms have made progress in developing risk appetite frameworks and have begun multi-year projects to improve IT infrastructure, considerably more work must be done to strengthen these practices. In particular, the aggregation of risk data remains a challenge, despite its criticality to strategic planning, decision making, and risk management.

The observations and conclusions in the report reflect the findings of initiatives undertaken by two SSG working groups. The risk appetite working group conducted a series of interviews with boards of directors and senior management of global financial institutions to gauge progress in risk appetite frameworks, while the working group that focused on IT infrastructure based its views on observations from a number of existing supervisory efforts.

This report represents a joint effort on the part of twelve supervisory agencies: the Canadian Office of the Superintendent of Financial Institutions, the French Prudential Control Authority, the German Federal Financial Supervisory Authority, the Bank of Italy, the Japanese Financial Services Agency, the Netherlands Bank, the Bank of Spain, the Swiss Financial Market Supervisory Authority, the U.K. Financial Services Authority, and, in the United States, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and the Federal Reserve.

December 28, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Alcatel Settles FCPA Charges for $137 Million

The SEC and Alcatel-Lucent, S.A. (Alcatel) settled charges that  Alcatel violated the anti-bribery, books and records, and internal controls provisions of the Foreign Corrupt Practices Act (FCPA) by paying bribes to foreign government officials to obtain or retain business in Latin America and Asia.

Alcatel, the provider of telecommunications equipment and services, has offered to pay a total of $137.372 million in disgorgement and fines, including $45.372 million in disgorgement to the SEC.  In a related action, Alcatel will pay a $92 million criminal fine to the U.S. Department of Justice.

The SEC’s complaint, filed in the Southern District of Florida, alleges that Alcatel’s bribes went to government officials in Costa Rica, Honduras, Malaysia, and Taiwan between December 2001 and June 2006.  An Alcatel subsidiary provided at least $14.5 million to consulting firms through sham consulting agreements for use in the bribery scheme in Costa Rica.  Various high-level government officials in Costa Rica received at least $7 million of the $14.5 million to ensure Alcatel obtained or retained three contracts to provide telephone services in Costa Rica.

The SEC alleges that the same Alcatel subsidiary bribed officials in the government of Honduras to obtain or retain five telecommunications contracts.  Another Alcatel subsidiary made bribery payments to Malaysian government officials in order to procure a telecommunications contract.  An Alcatel subsidiary also made illegal payments to various officials in the government of Taiwan to win a contract to supply railway axle counters to the Taiwan Railway Administration.

According to the SEC’s complaint, all of the bribery payments were undocumented or improperly recorded as consulting fees in the books of Alcatel’s subsidiaries and then consolidated into Alcatel’s financial statements.  The leaders of several Alcatel subsidiaries and geographical regions, including some who reported directly to Alcatel’s executive committee, either knew or were severely reckless in not knowing about the misconduct.

Without admitting or denying the SEC’s allegations, Alcatel has consented to a court order permanently enjoining it from future violations of these statutory provisions; ordering the company to pay $45.372 million in disgorgement of wrongfully obtained profits, and ordering it to comply with certain undertakings, including an independent monitor for a three year term. 

December 28, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)