Friday, March 5, 2010
The SEC charged First Allied Securities, Inc., a San Diego-based broker-dealer, with failing to reasonably supervise one of its registered representatives who engaged in unauthorized fraudulent trading in the accounts of two Florida municipalities. First Allied Securities, Inc., has agreed to settle the SEC’s findings by paying $1.95 million. The SEC charged the firm’s former broker, Harold H. Jaschke, with fraud last year.
The SEC found that between May 2006 and March 2008, Jaschke executed numerous unauthorized transactions, made unsuitable recommendations, and churned the accounts of the City of Kissimmee, Fla., and the Tohopekaliga Water Authority. The SEC finds that First Allied failed reasonably to supervise Jaschke because it did not establish reasonable systems to direct follow-up action in response to red flags regarding churning and suitability.
According to the SEC’s order, First Allied waited nine months before contacting the municipalities through self-described “annual review” letters that, in actuality, did not relate to annual reviews. The letters failed to alert them about the suspicious trading activity occurring in their accounts. Additionally, the order finds that First Allied had no system in place to monitor compliance with its rule prohibiting its brokers from using personal e-mail accounts to conduct business. This enabled Jaschke to use his personal e-mail account to send and receive business-related e-mails that were neither reviewed nor retained by the firm. The SEC’s order finds that First Allied failed to retain certain business-related e-mails sent to and from its employees, as required under law.
In addition to requiring payment of $1.95 million in disgorgement, prejudgment interest and monetary penalties, the SEC’s order censures First Allied and requires the firm to cease and desist from committing or causing any future violations of certain books and records provisions. First Allied also agreed to certain undertakings, including the hiring of an independent consultant to review its policies and procedures as well as its system for implementing its policies and procedures. First Allied consented to the issuance of the order without admitting or denying the SEC’s findings.
Thursday, March 4, 2010
The U.S. Department of the Treasury announced today that it priced a secondary public offering of 150,375,940 warrants to purchase common stock of Bank of America Corporation (the "Company") at $8.35 per warrant and a secondary public offering of 121,792,790 warrants to purchase common stock of the Company at $2.55 per warrant. The aggregate net proceeds to Treasury from the offerings are expected to be approximately $1,542,717,552.79. These proceeds provide an additional return to the American taxpayer from Treasury's investment in the Company beyond the dividend payments it received on the related preferred stock.
The closings are expected to occur on or about March 9, 2010, subject to customary closing conditions. The offerings were priced through a modified Dutch auction. The warrants were offered pursuant to an effective shelf registration statement that was filed by the Company with the Securities and Exchange Commission (the "SEC").
On March 4, 2010, the SEC filed a complaint charging Sean David Morton, whom the SEC describes as a nationally-recognized psychic who bills himself as “America’s Prophet” with a multi-million dollar offering fraud. According to the SEC, beginning in the summer of 2006, Morton solicited individuals to invest in one of several companies he and his wife, Melissa Morton, controlled and claimed that he would use his psychic expertise to provide investment guidance to his investing team. However, according to the complaint, Morton lied to investors about his past successes, and about key aspects of the Delphi Investment Group, including the use of investor funds and the liquidity of the funds, and that the profits in the accounts were audited and certified. All together, Morton fraudulently raised more than $6 million from more than 100 investors for the Delphi Investment Group.
According to the Commission’s complaint, Morton used his monthly newsletter, his website, his appearances on a nationally syndicated radio show called Coast to Coast AM, and appearances at public events, to promote his psychic abilities. Morton made numerous materially false representations relating to his psychic abilities in order to solicit investors for the Delphi Investment Group. For example, Morton wrote to potential investors in his July 20, 2006 newsletter that: “I have called ALL the highs and lows of the market, giving EXACT DATES for rises and crashes over the last 14 years.” (emphasis in original.) The Commission alleges that this assertion, like others Morton made in soliciting investors, is false.
The complaint seeks a final judgment permanently restraining and enjoining the Defendants from future violations of the above provisions of the federal securities laws. The complaint further seeks a final judgment ordering the Defendants, jointly and severally, to disgorge their ill-gotten gains plus prejudgment interest, ordering the Relief Defendants to disgorge their ill-gotten gains plus prejudgment interest, and ordering the Defendants to pay civil penalties. The complaint also seeks a final judgment ordering the Defendants and Relief Defendants to provide a verified accounting.
The National Adjudicatory Council (NAC) of the Financial Industry Regulatory Authority (FINRA) issued a ruling today dismissing charges that Kenneth Pasternak, former CEO of Knight Securities, L.P., and John Leighton, former head of the firm's Institutional Sales Desk, were responsible for supervisory failures in connection with alleged fraudulent sales to institutional customers. The ruling by the NAC — FINRA's appellate body — reverses an earlier FINRA Hearing Panel decision that found that Pasternak and Leighton had violated FINRA's supervision rule in their roles as supervisors of Knight Securities' leading institutional sales trader. The Hearing Panel's decision fined each respondent $100,000, barred John Leighton in all supervisory capacities and suspended Pasternak in all supervisory capacities for two years. Those sanctions are vacated by the NAC's ruling.
The NAC concluded that FINRA failed to satisfy its burden of proof concerning allegations set forth in a March 4, 2005, complaint, which alleged that Pasternak and Leighton did not take reasonable steps to ensure that Knight Securities' leading institutional sales trader adhered to "industry standards" when executing orders for institutional customers. The NAC found that FINRA staff did not establish that the sales trader contravened any market or regulatory standards when providing execution services to institutional customers. The NAC further found that the preponderance of the evidence did not support the allegation that Pasternak and Leighton failed to supervise reasonably the sales trader's practices. Finally, the NAC decided that the evidence did not support allegations that Pasternak failed to respond appropriately to certain "red flags" that were raised concerning the manner in which the leading institutional sales trader executed institutional customer orders.
The University of Cincinnati Symposium on The Globalization of Securities Regulation:Competition or Coordination? will take place tomorrow March 5. We have a very distinguished group of speakers on this very timely topic. The program will be webcast from the UC website:
In addition, if you have questions for the panelists, you can email them during the webcast: email@example.com.
The webcast will also be archived so you could watch it at a later date.
Here is the program:
8:45-8:50 Welcome, Barbara Black, University of Cincinnati College of Law
8:50 – 10:30 Politics and Regulatory Agenda
Heedless Globalism: The SEC's Roadmap to Accounting Convergence. William Wilson Bratton, Peter P. Weidenbruch, Jr. Professor of Business Law, Georgetown University Law Center.
The Rhetoric and Political Economy of International Securities Regulation. Steven M. Davidoff, Associate Professor of Law, University of Connecticut School of Law
Perspectives from the SEC. Robert J. Peterson, Assistant Director, U.S. Securities and Exchange Commission Office of International Affairs
10:45-12:15 Activities of International Firms in Global Markets
The 'Global Enterprise' in Cross-Border Securities Litigation. Hannah Buxbaum, Professor of Law and Executive Associate Dean for Academic Affairs, Maurer School of Law, Indiana University-Bloomington
“Breaking Up is Hard to Do": Should Financial Conglomerates be Dismantled? James A. Fanto, Professor and Associate Director, Center of the Study of International Business Law, Brooklyn Law School
Bankers Across Borders: Compensation, Cartels, and Competition. Frederick Tung, Robert T. Thompson Professor of Law and Business, Emory University School of Law
1:30-3:30 Regulatory Evolution: Other Models, Other Times
Between Competition and Coordination in International Financial Regulation: Lessons from Networks. Robert B. Ahdieh, Professor of Law, Emory University School of Law.
Open Markets in Jeopardy? Andrea M. Corcoran, Principal, Align International, LLC (formerly, Director, Office of International Affairs, Commodity Futures Trading Commission)
Territorial Regulation after the Financial Crisis. Christopher Brummer, Professor of Law, Georgetown University Law Center
Contemplating the Endgame: An Evolutionary Model for the Harmonization and Centralization of International Securities Regulation. Eric C. Chaffee, Associate Professor and Chair, Project for Law & Business Ethics, University of Dayton School of Law
Wednesday, March 3, 2010
The SEC filed a civil action against Verint Systems Inc. ("Verint") alleging a fraudulent scheme involving improper accounting practices. The Complaint alleges the misconduct began as early as 1998, when Verint was a wholly-owned subsidiary of Comverse Technology, Inc. ("Comverse"), and continued after Verint became a publicly traded company, while still majority-owned by Comverse, in 2002. In addition, the Commission today instituted administrative proceedings against Verint to determine whether the registration of each class of its securities should be revoked or suspended for a period not exceeding twelve months for its failure to file required periodic reports for over four years.
The Complaint alleges that as a result of this misconduct, Verint's books and records falsely and inaccurately reflected, among other things, the Company's liabilities, expenses, net income, and general financial condition through at least the fiscal year ended January 31, 2005. The Complaint also alleges that Verint failed to maintain a system of internal accounting controls sufficient to provide assurances that its reserve activity was recorded as necessary to permit the proper preparation of financial statements in conformity with GAAP.
Without admitting or denying the allegations of the Commission's Complaint, Verint has consented to the entry of a final judgment permanently enjoining it from violating the antifraud, reporting, record-keeping, and internal controls provisions of the federal securities laws. Specifically, the proposed final judgment against Verint would permanently enjoin it from violating Section 17(a) of the Securities Act of 1933, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act"), and Exchange Act Rules 13a-1 and 13a-13. In accepting the settlement offer, the Commission considered, among other things, Verint's remediation and cooperation in the Commission's investigation. The settlement is subject to the approval of the United States District Court for the Eastern District of New York.
Separately, the Commission today issued an Order Instituting Administrative Proceedings and Notice of Hearing Pursuant to Section 12(j) of the Securities Exchange Act of 1934 against Verint, to determine whether the registration of each class of its securities should be revoked or suspended for a period not exceeding twelve months based on its failure to file required periodic reports. The Division of Enforcement alleges that Verint has failed to comply with Exchange Act Section 13(a) and Rules 13a-1 and 13a-13 thereunder by failing to file an annual report on either Form 10-K or Form 10-KSB since April 25, 2005, or quarterly reports on either Form 10-Q or Form 10-QSB since December 12, 2005. A hearing will be scheduled before an Administrative Law Judge to determine whether the allegations of the Division contained in the Order are true, and to provide Verint an opportunity to respond to these allegations.
The SEC today charged a prominent Miami-based business leader and his wife with fraud for conducting a $135 million Ponzi scheme with real estate investments from hundreds of elderly Cuban-American investors living in South Florida. It alleges that Gaston E. Cantens and Teresita Cantens, the founders and co-owners of real estate development company Royal West Properties Inc., sold promissory notes to investors after acquiring various properties and later financing their sale. According to the complaint, the Cantens lured investors by promising the investments in their real estate business were safe and secure with annual returns between 9 and 16 percent. However, when property owners defaulted on their mortgages, Royal West's financial condition deteriorated and the Cantens used new investor money to repay earlier investors and afford the firm's operating costs. The Cantens also misappropriated more than $20 million from investors to fund unrelated personal business ventures, pay themselves high salaries, and divert money to their children and grandchildren.
According to the SEC's complaint, filed in U.S. District Court for the Southern District of Florida, the Cantens gained the trust of prospective investors in typical affinity fraud fashion by cultivating an impression within their community that it was a privilege to invest with them. The Cantens emphasized that Jesuit priests and other well-known leaders in the Cuban-American community had invested with Royal West. They targeted investors at charitable and religious gatherings and at social functions in their home. They also recruited investors through their contacts with alumni and others associated with a local private boys' school where Gaston Cantens served on the Board of Advisors. Besides word of mouth, the Cantens also attracted potential investors who learned of Royal West properties through television commercials broadcast on Spanish-language channels nationwide.
The SEC's complaint charges the Cantens with violating the securities registration and antifraud provisions of the federal securities laws. The complaint seeks permanent injunctions, sworn accountings, disgorgement of ill-gotten gains and financial penalties against the Cantens.
The SEC settled proxy disclosure charges against American Equity Investment Life Holding Company, an Iowa insurance company, and two executives, alleging that they inadequately disclosed details about the acquisition of another company and the resulting financial boon to the then-CEO. The SEC alleges that American Equity Investment Life Holding Company's former CEO and current chairman David Noble and current CEO Wendy Waugaman (who was then CFO) helped cause the West Des Moines-based company to make misleading disclosures to investors in its 2006 proxy statement.
According to the SEC's complaint, filed in federal court in Des Moines, the company did disclose that immediately prior to its acquisition of a financing company wholly-owned by Noble, he received a $2.5 million distribution from the acquired company. However, the SEC alleges that American Equity did not disclose that the acquired company had a large deficit at the time of the distribution, and that this acquisition of Noble's company effectively relieved him of substantial potential personal liability for the acquired company's debts.
American Equity, Noble, and Waugaman agreed to settle the charges against them without admitting or denying the allegations of the SEC's complaint. Under the settlement, Noble, Waugaman, and American Equity agreed to be permanently enjoined from committing future violations of the provisions of the federal securities laws that prohibit materially false or misleading statements or omissions in proxy statements. Additionally, Noble will pay a $900,000 penalty and Waugaman will pay a $130,000 penalty. American Equity also has agreed to certain undertakings in connection with the settlement.
Tuesday, March 2, 2010
The transcript of yesterday's oral hearing in Jeff Skilling's appeal to the U.S. Supreme Court proves to be an interesting read. You will recall Skilling made two arguments: first, that the trial should have been moved from Houston because the degree of passion and prejudice in the community meant that the process of voir dire could not be relied upon to weed out biassed jurors; second, the federal "honest-services" statute is unconstitutionally vague.
As to the first, some of the Justices seem troubled that the district court spent only about 5 hours questioning potential jurors -- an average of 4-1/2 minutes per juror. In contrast, in the Martha Stewart case, there were six days of voir dire. However, some judges are equally troubled about undue interference with the discretion of the trial judge in managing the case.
On the second, this is not the first time this term the Justices have expressed their concern over the vagueness of the statute criminalizing defendant's breach of fiduciary duty to provide honest services. Just last month it heard Lord Conrad Black's appeal on this same issue. Skilling's attorney argued forcefully that the government's theory could convert almost any workplace lie into a federal felony. The government attorney argued that this would depend on whether the employee owed a fiduciary duty to his employer and that involved principles of agency law -- a line of argument that did not appear to win over any Justices. The Justices also did not appear to be persuaded by the government's argument that the scienter requirement saved the statute from an overly broad scope.
We'll await the Court's decision.
The SEC yesterday charged Newport Beach-based former registered investment adviser Envision Direct L.L.C., and its owner, Gary R. Headding, for defrauding clients, including a young college student who invested her mother's life insurance policy proceeds with Headding. Envision Direct, a firm that managed almost $40 million in funds in 2007, de-registered in 2009 immediately after the Commission's investment advisory examination staff alerted Headding about a regulatory examination of the firm.
The Commission's complaint, filed in the federal court for the Central District of California, alleges that between April 2007 and May 2008, Headding stole at least $274,000 from two clients and used the monies for his personal purposes, including funding his own individual retirement account. The SEC alleges that although clients gave Headding discretionary authority to trade in their accounts, they did not authorize him to squander their money for his benefit. Headding used tactics such as obtaining clients' on-line passwords to effectuate his fraud. The Commission's complaint further alleges that Envision Direct and Headding withdrew inflated advisory fees of nearly $50,000 from three clients. Despite its agreement to charge advisory fees of no more than 2.0% of the asset value, Envision Direct extracted as much as 12.9% in unauthorized fees from some clients.
The Commission seeks permanent injunctions, disgorgement with prejudgment interest, and civil penalties.
On March 2, 2010, the SEC settled administrative charges against Sharath Sury (Sury), the former Chief Executive Officer of S4 Capital, LLC, and against S4 Capital, LLC (S4 Capital), an investment adviser registered with the Commission.
The SEC alleged that from December 2005 to February 2006, Sury caused an unregistered hedge fund managed by S4 Capital to engage in undisclosed, unhedged, high-risk trading, primarily in Google stock options, which resulted in substantial losses to the fund. In addition, Sury failed to disclose to investors in the hedge fund with whom S4 Capital had investment advisory agreements, that Sury was engaging in risky, unhedged trading that was contrary to the investment strategy described in the hedge fund's private placement memorandum and their personal investment objectives and that the fund was suffering mounting losses. According to the SEC, Sury's undisclosed high-risk trading caused the hedged fund to lose all of its assets, totaling approximately $12 million, in about two months time.
The SEC Orders find that as a result of this conduct, S4 Capital and Sury willfully violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. The Orders further finds that S4 Capital willfully violated Sections 206(1) and 206(2) of the Investment Advisers Act of 1940, and that Sury willfully aided and abetted and caused S4 Capital's violations of Sections 206(1) and 206(2) of the Advisers Act.
Based on the above, the Order against Sury: (1) orders Sury to cease and desist from committing or causing any violations and any future violations Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act; (2) bars Sury from association with any broker, dealer, or investment adviser and is prohibited from serving or acting as an employee, officer, director, member of an advisory board, investment adviser, or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter, with the right to reapply for association after two years to the appropriate self-regulatory organization, or if there is none, to the Commission; and (3) orders Sury to pay a civil penalty in the amount of $130,000 to the United States Treasury. The Order against S4 Capital: (1) orders S4 Capital to cease and desist from committing or causing any violations and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Sections 206(1) and 206(2) of the Advisers Act.; (2) censures S4 Capital; and (3) orders S4 Capital to undertake to wind down its operations and to file a Form ADV-W within six months from the date of the entry of the Order Against S4 Capital and to ensure that Sury will have no association with S4 Capital or any entities controlled by it during the period that Sury is barred; and (4) does not impose a civil penalty based on S4 Capital's sworn representations in its statement of financial condition. Sury and S4 Capital consented to the issuance of the orders against them without admitting or denying any of the findings in the Orders, except as to the Commission's jurisdiction over them and the subject matter of the proceedings, which they admitted.
The SEC and the IRS today announced that the two agencies agreed to work more closely to monitor and regulate the municipal bond market and industry. SEC Chairman Mary Schapiro and IRS Commissioner Doug Shulman today signed a Memorandum of Understanding (MOU) designed to improve compliance with SEC and IRS rules and regulations related to municipal securities. The muni bond market currently totals about $2.8 trillion in outstanding securities and continues to grow in complexity and size.
The SEC and IRS will work cooperatively to identify issues and trends related to tax-exempt bonds in the municipal securities industry and to develop strategies to enhance performance of their respective regulatory responsibilities. To support this effort, the two agencies will work through a standing Tax Exempt Bond/Municipal Securities Committee to discuss policy, procedures and compliance issues. The SEC and IRS will also share information as appropriate regarding market risks, practices and events related to municipal securities, among other things. In addition, the two agencies will collaborate on educational and other types of outreach efforts.
Former SEC Chair Christopher Cox frequently expressed the need for reform in the municipal bond offering requirements. It's not clear to me whether this is part of the current Chair's focus.
Monday, March 1, 2010
March 1 marks a major expansion of the FINRA Trade Reporting and Compliance Engine (TRACE) – to include debt issued by federal government agencies, government corporations and government-sponsored enterprises (GSEs), as well as primary market transactions in new corporate debt issues. With this expansion of TRACE, broker-dealers will report all primary and secondary transactions in non-mortgage related debt instruments issued by federal government agencies such as Fannie Mae, Freddie Mac, Federal Home Loan Banks and Federal Farm Credit, among others.
Prior to this change, TRACE encompassed real-time pricing and trade volume information only on corporate bonds trading in the secondary market. The additional transaction information will significantly enhance the transparency in the debt markets. Collecting agency and primary market transaction data will also enhance FINRA's ability to detect fraud, manipulation, unfair pricing and other misconduct that violate the federal securities laws and FINRA rules. FINRA will also publish end-of-day aggregate information, including total volume and number of securities traded.
There is approximately $3 trillion outstanding in U.S. agency debt securities that will be eligible for trade reporting on March 1, compared to over $6 trillion for the corporate debt market. The trading volume in agency debt is estimated to be three to four times higher than the corporate universe, measured by par value traded.
U.S. Bankruptcy Judge Burton Lifland ruled today in favor of the SIPC Trustee in the liquidation of Bernard Madoff's securities firm, affirming that customers' claims are properly based on the amount of cash deposited by the customer less any amounts withdrawn by the customer (the "net investment method"). Some customers argued that the amounts of their claims should be based on the amounts set forth in their last financial statements received from Madoff (the 'last statement method"). Recognizing that choosing between these two competing calculations of "net equity" was not "plainly ascertainable in law," the court endorsed the trustee's net investment method after a thorough analysis of the plain meaning and legislative history of the relevant statute, controlling Second Circuit precedent, and considerations of equity and practicality. The New York Times has posted the opinion on its website.
An appeal of the decision is expected.
Sunday, February 28, 2010
Toward a New Law and Economics: The Case of the Stock Market, by Lawrence E. Mitchell, George Washington University - Law School, was recently posted on SSRN. Here is the abstract:
Do the public equity markets play the macroeconomic role we believe them to play? What is the relationship between the U.S. public equity markets and American economic growth? What do these conclusions teach us about the approaches we take and should take in evaluating and designing the laws of corporate governance and securities regulation?
The law and economics paradigm of the last forty years may be mistaken in assuming that economic efficiency on an individual (or institutional) level is sufficient to ensure economic welfare on a macroeconomic level. While legal scholars have carefully and usefully examined the effects of a wide range of regulations on individual and institutional behavior, they have largely done so without considering the broader economic roles individuals and institutions play in building a growing and sustainable economy that creates wealth and jobs. Asking these broader questions may lead to reexamination of the ways in which we encourage the creation of economic institutions and incentives for economic behavior.
This paper exemplifies this new approach through an examination of the role of the U.S. public equity markets, concluding that their contribution to economic growth is highly limited. Public equity markets do not generally finance the formation of productive capital except in the limited, but important, role they play in providing exit opportunities for entrepreneurs and venture capitalists. But I do not accept this conclusion uncritically, noting that even claims for the importance of public equity markets for business creation may well be overstated, and that there is considerable research yet to be done. Moreover, even if the conclusion holds, an overall appraisal of this contribution in the broader context of the public equity markets raise important questions for corporate governance, financial regulation, and the structure of market institutions.
Gartenberg, Jones, and the Meaning of Fiduciary: A Legislative Investigation of Section 36(b), by Amy Yeung, ZeniMax Media Inc., and Kristen J. Freeman, was recently posted on SSRN. Here is the abstract:
Section 36(b) of the Investment Company Act of 1940 creates a “fiduciary duty” on the part of an investment adviser with respect to the receipts of compensation for services or of payments of a material nature. The term “fiduciary,” however, conveys a range of obligations, the breadth of which comes before the Supreme Court in Jones v. Harris, as two circuits diverge on the meaning of fiduciary duty under Section 36(b), and by doing so, call into question whether a fund’s investment adviser breached its fiduciary duty by charging an excessive fee.
Notably absent from the language of Section 36(b) is any description of substantive or procedural application of the term “fiduciary.” Justice Kennedy pressed for such analysis in the Jones oral arguments: “Is Harris a fiduciary in the same sense as a corporate officer and a corporate director? Or does his fiduciary duty differ?” This article provides a comprehensive review of the legislative history creating the “fiduciary” obligation under Section 36(b) of the Investment Company Act. It identifies key Congressional and industry themes, and draws conclusions on the legislative intent of Section 36(b), in an attempt to clarify the use of “fiduciary.”