Securities Law Prof Blog

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

Thursday, June 16, 2011

SEC Proposes Ways to Strengthen Audits and Reporting of Broker-Dealers to Protect Customer Assets

The SEC proposed amendments to the broker-dealer financial reporting rule in order to strengthen the audits of broker-dealers as well as the SEC’s oversight of the way broker-dealers handle their customers’ securities and cash.  The SEC’s proposal builds upon rules adopted in December 2009 that strengthened the protections provided to investors who turn their assets over to investment advisers.

The SEC’s proposal is intended to strengthen the annual audits of broker-dealers by requiring an increased focus on the custody activities of broker-dealers. While current rules require broker-dealers to protect and account for customer assets, the proposed rule amendments would mandate an audit of the controls that the broker-dealer has put in place.

Additionally, the proposal would strengthen oversight of broker-dealer custody practices by requiring broker-dealers that maintain custody of customer assets or self-clear transactions to allow SEC staff and the relevant designated examining authority to review work papers of the public accounting firm that audits the broker-dealer and discuss any findings with the accounting firm. The proposed amendments also would require all broker-dealers to quarterly file a proposed new form that would elicit information about the custody practices of the broker-dealer to be used as a starting point for examinations by regulators.

Public comments on the SEC’s proposal should be received within 60 days of its publication in the Federal Register.


June 16, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Concludes that Some Stanford Investors are Entitled to SIPA Protections

The SEC concluded that certain individuals who invested money through the Stanford Group Company are entitled to the protections of the Securities Investor Protection Act of 1970 (SIPA) and asked the Securities Investor Protection Corporation (SIPC) to initiate a court proceeding under SIPA to liquidate the broker-dealer.

According to its 2009 complaint, the SEC alleged that Allen Stanford operated a Ponzi scheme in which certain investors were sold certificates of deposit (CDs) issued by Stanford International Bank Ltd. (SIBL) through the Stanford Group Company (SGC). SGC is a SIPC Member.  In an analysis provided to SIPC, the SEC explains that, on the specific facts of this case, investors with brokerage accounts at SGC who purchased the CDs through the broker-dealer qualify for protected “customer” status under SIPA.  In reaching its determination, the SEC cited the conclusions in the report of the court appointed-receiver for SGC, who noted that the many companies controlled and directly or indirectly owned by Stanford “were operated in a highly interconnected fashion, with a core objective of selling” the CDs.

The Commission further determined that, in light of all of the facts and circumstances in this case, the customers’ claims should be based on their net investment in the fraudulent CDs used to carry out the Ponzi scheme.

A SIPA liquidation proceeding would allow investors with accounts at SGC to file claims with a trustee selected by SIPC. The trustee would decide whether the investors have “customer” claims that are protected by the statute. An investor who disagreed with the trustee’s determination could seek court review.

June 16, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Provides Temporary Relief Regarding Security-Based Swap Provisions of Dodd-Frank Act

The SEC provided guidance as to which of the Title VII requirements of the Dodd-Frank Act will apply to security-based swap transactions as of July 16, the effective date of Title VII. It also granted temporary relief to market participants from compliance with certain of these requirements.  The guidance makes clear that substantially all of Title VII’s requirements applicable to security-based swaps will not go into effect on July 16. The Commission’s action also grants temporary relief from compliance with most of the new Exchange Act requirements that would otherwise apply on July 16.  In addition, the Commission’s action provides temporary relief from Section 29(b), which generally provides that contracts made in violation of any provision of the Exchange Act shall be void as to the rights of any person who is in violation of the provision.

June 16, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 14, 2011

SEC Brings Stop-Order Proceedings Against Two Chinese Issuers

The SEC announced that it instituted proceedings to determine whether stop orders should be issued suspending the effectiveness of registration statements filed by two companies – China Intelligent Lighting and Electronics Inc. (CIL) and China Century Dragon Media Inc. (CDM).

The SEC instituted the stop order proceedings against each company after the companies’ independent auditor resigned and withdrew its audit opinions on the financial statements included in the companies’ registration statements.

June 14, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Janus Capital Group Majority: Adviser Did Not "Make" Statements in Fund Prospectuses

In a predictable outcome, a divided Supreme Court (5-4) held, in Janus Capital Group v. First Derivatives Traders, that a mutual fund adviser cannot be held liable in a private Rule 10b-5 action for false statements included in the prospectuses of mutual funds even though the funds and the adviser are affiliated entities within a fund family (in this case, Janus).  In finding that the adviser did not make the statements, Justice Thomas relied on the dictionary definition of "make," its previous precedent, Central Bank and Stoneridge,  and its policy of construing the scope of the implied remedy narrowly.  Moreover,

Although First Derivative and its amici persuasively argue that investment advisers exercise significant influence over their client funds, ... it is undisputed that the corporate formalities were observed here. JCM and Janus Investment Fund remain legally separate entities, and Janus Investment Fund’s board of trustees was more independent than the statute requires....  Any reapportionment of liability in the securities industry in light of the close relationship between investment advisers and mutual funds is properly the responsibility of Congress and not the courts.

Justice Breyer dissented, along with Justices Sotomayor, Ginsburg, and Kagan.

June 14, 2011 in Judicial Opinions | Permalink | Comments (2) | TrackBack (0)

Sunday, June 12, 2011

Heminway on SEC's Reform Efforts

Sustaining Reform Efforts at the SEC: A Progress Report, by Joan MacLeod Heminway, University of Tennessee College of Law, was recently posted on SSRN.  Here is the abstract:

Many recent articles written by U.S. legal practitioners and law scholars in the wake of the financial crisis address regulatory reforms included in or omitted from the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and related agency initiatives. In contrast, this article focuses on institutional reforms - specifically those instituted at the U.S. Securities and Exchange Commission (SEC) since President Barack Obama took office in January 2009.

In an article published in the Villanova Law Review last year, I assessed the early reform efforts at the SEC in the Obama era from the vantage point of change leadership literature (a branch of business management scholarship). This article updates the preliminary findings reported in the Villanova Law Review article in light of the enactment and initial phases of implementation of the Dodd-Frank Act (which was in the final stages of congressional action when work on the Villanova Law Review article was completed in the spring of 2010) and the subsequent change in the composition of Congress as a result of the mid-term elections in November 2010. The article begins by identifying and assessing ongoing evidence of effective change leadership at the SEC in accordance with the framework used in my earlier article and continues by briefly addressing the potential effects of shortfalls in SEC funding. The article then concludes by making tentative predictions about the future of institutional reform at the SEC in this new political environment.

June 12, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Davis on Berle & Means

The Twilight of the Berle and Means Corporation, by Gerald F. Davis, Stephen M. Ross School of Business at the University of Michigan, was recently posted on SSRN.  Here is the abstract:

This article describes the major features of the public corporation described by Berle and Means in The Modern Corporation and Private Property and how these have been challenged since the early 1980s. A decade into the twenty-first century, the public corporation may have reached its twilight in the United States. The “shareholder value” movement of the past generation has succeeded in turning managers into faithful servants of share price maximization, even when this comes at the expense of other considerations. But the shareholder value movement also brought with it a series of changes that have undone many core features of the Berle and Means corporation. Corporate ownership is no longer dispersed; the concentration of assets and employment have been in decline for three decades; and today’s largest corporations bear little resemblance to the companies analyzed by Berle and Means. Moreover, there are far fewer of them than there used to be: the United States had half as many publicly traded domestic corporations in 2010 as it did in 1997. In another generation, the Berle and Means corporation may be largely a memory, overtaken by new forms of organization and financing.

June 12, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

SEC & CFTC Announce Roundtable on Swaps Definitions

The staffs of the SEC and CFTC announced a joint public roundtable discussion to be held on June 16 to discuss proposed definitions required under Title VII of Dodd-Frank.  The Act provides that the CFTC and the SEC, in consultation with the Federal Reserve, must work jointly to further define the meaning of certain key terms including “swap dealer,” “security-based swap dealer,” “major swap participant,” and “major security-based swap participant.” Title VII also provides for the registration of dealers and major participants, and will subject them to a number of statutory requirements including capital, margin and business conduct requirements.

The roundtable will focus on such issues as:

General parameters of dealer activity.
Application of the dealer definitions among different types of asset classes.
Application of the de minimis exception from the dealer definitions.
Adequacy of the proposed major participant tests.

June 12, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC's Plans as Security-Based Swaps Effective Date Approaches

The SEC announced that it will take a series of actions in the coming weeks to clarify the requirements that will apply to security-based swap transactions as of July 16 – the effective date of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act – and to provide appropriate temporary relief.

The Commission will:

  • Provide guidance regarding which provisions of Subtitle B of Title VII will become operable as of July 16, and, where appropriate, provide temporary relief from several of these provisions.
  • Provide guidance regarding – and where appropriate, temporary relief from – the various pre-Dodd-Frank provisions of the Exchange Act that would otherwise apply to security-based swaps on July 16. Under Dodd-Frank, security-based swaps would be included in the definition of “security” under the Exchange Act. While such swaps will be subject to provisions addressing fraud and manipulation, the Commission intends to provide temporary relief from certain other provisions of the Exchange Act so that the industry will have time to seek, and the Commission can consider, what if any further guidance or action is required.
  • Take other actions such as extending existing temporary rules under the Securities Act, the Exchange Act, and the Trust Indenture Act, and extending existing temporary relief from exchange registration under the Exchange Act. This will help to continue facilitating the clearing of certain credit default swaps by clearing agencies functioning as central counterparties.

The SEC also announced proposed rules that would exempt transactions by clearing agencies in security-based swaps that they issue from all provisions of the Securities Act, other than the Section 17(a) anti-fraud provisions, as well as exempt these security-based swaps from Exchange Act registration requirements and from the provisions of the Trust Indenture Act, provided certain conditions are met.

June 12, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

This Week: Midwest Corporate Scholars Conference

The Second Annual Midwest Corporate Scholars Conference will be held this Wednesday June 15 at The Ohio State University Michael E. Moritz College of Law in Columbus, Ohio.  The full-day program features corporate scholars from across the country presenting papers on a variety of topics.  For more information, visit the Ohio State website.

June 12, 2011 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Thursday, June 9, 2011

Goldman Pays $10 Million and Halts "Huddles"

Massachusetts Securities Division and Goldman Sachs entered a consent order in which Goldman will pay $10 million and stop its practice of "huddles" between research analysts and traders.

June 9, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Nasdaq Files Proposed Rule Changes on Reverse Merger Companies

NASDAQ filed with the SEC a proposed rule change requiring additional disclosure about companies that become public through reverse mergers.   NASDAQ explained that because of the extraordinary level of public attention in listed companies that went public via a Reverse Merger, where an unlisted operating company becomes a public company by merging with a public shell, Nasdaq staff has adopted heightened review procedures for Reverse Merger applicants. However, Nasdaq also believes that additional requirements for listing Reverse Merger companies are appropriate to discourage inappropriate behavior on the part of companies, promoters and others. Accordingly, Nasdaq proposes to adopt certain “seasoning” requirements for Reverse Mergers.

June 9, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Copper King Mining Posted Misleading Info on Website

The SEC filed a complaint in federal district court against Copper King Mining Corp. (Copper King), Alexander Lindale, LLC (Alexander Lindale), Mark D. Dotson (Dotson), Wilford R. Blum (Blum) and Stephen G. Bennett (Bennett). The complaint alleges that Copper King and its prior President and CEO, Dotson, authored and distributed false and misleading information on Copper King’s Internet website regarding the company’s ability to produce revenue, its ability to extract significant amounts of copper and other metals, its receipt of an irrevocable purchase order for its copper, and its receipt of a firm funding commitment for $100 million to pay for operations and build an ore processing mill.

June 9, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Announces Open Meetings on Various Topics

The SEC announced several forthcoming Open Meetings:

Wednesday, June 15, 2011 The Commission will consider whether to propose amendments to Rule 17a-5 – the broker-dealer reporting rule – under the Securities Exchange Act of 1934.

Wednesday, June 22, 2011.  The subject matters of the Open Meeting will be:

Item 1: The Commission will consider whether to adopt new rules and rule amendments under the Investment Advisers Act of 1940 to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rules and rule amendments are designed to give effect to provisions of Title IV of the Dodd-Frank Act that, among other things, increase the statutory threshold for registration of investment advisers with the Commission, require advisers to hedge funds and other private funds to register with the Commission, and address reporting by certain investment advisers that are exempt from registration.

Item 2: The Commission will consider whether to adopt rules that would implement new exemptions from the registration requirements of the Investment Advisers Act of 1940 for advisers to venture capital funds and advisers with less than $150 million in private fund assets under management in the United States. These exemptions were enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new rules also would clarify the meaning of certain terms included in a new exemption for foreign private advisers.

Item 3: The Commission will consider whether to adopt a rule defining “family offices” that will be excluded from the definition of an investment adviser under the Investment Advisers Act of 1940.

Roundtable Open Meeting on Thursday, June 16, 2011.  The SEC and the CFTC will hold public roundtable discussions concerning the definitions of “swap dealer,” “security-based swap dealer,” “major swap participant,” and “major security-based swap participant” in the context of certain authority that Section 712(d)(1) of the Dodd-Frank Wall Street Reform and Consumer Protect Act granted the Agencies.

June 9, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 8, 2011

SE Readopts Without Change Beneficial Ownership Rules

The SEC readopted, without change, the relevant portions of existing rules that govern beneficial ownership determinations under Sections 13 and 16 of the Securities Exchange Act of 1934. The Commission took this action to preserve the application of the existing beneficial ownership rules to persons who purchase or sell security-based swaps after the effective date of new Section 13(o) under the Exchange Act, which was added by Section 766 of the Dodd-Frank Act. Readoption of the relevant portions of Exchange Act Rules 13d-3 and 16a-1 confirms that following the July 16, 2011 statutory effective date of Section 13(o), persons who purchase or sell security-based swaps will remain within the scope of these rules to the same extent as they are now.

June 8, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Two Ad Execs Settle Charges of Soliciting Pledges to Purchase Beer Company

The SEC announced a settlement with two advertising executives who launched a campaign to buy a beer company through a solicitation of investors on Facebook and Twitter without first registering with securities regulators and making the necessary disclosures.  Michael Migliozzi II and Brian William Flatow consented to a cease and desist order to settle charges that they directed investors to their website,, and solicited pledges for a hoped-for $300 million purchase of the Pabst Brewing Company.

The SEC's order found that Migliozzi and Flatow intended to solicit funds in two stages. In the first stage, the two sought pledges and required that pledgors only supply an e-mail address, first name, last name, and pledge amount. If they received $300 million in pledges, the second stage would consist of collecting the pledges and undertaking to purchase Pabst.  In addition, Migliozzi and Flatow created a Facebook page and Twitter account in order to advertise their offering. Would-be investors visiting the website were told that each investor would receive a certificate of ownership as well as beer of a value equal to the amount invested.  In the end, the two never received the $300 million in pledges, and never collected any money.

The SEC's order finds that Migliozzi and Flatow violated Section 5(c) of the Securities Act of 1933.

June 8, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Second Circuit: Broker's Fiduciary Duty Based on Relationship of Trust & Confidence

The Second Circuit recently set forth its view of the nature of a broker's fiduciary duty in affirming the conviction of a broker for his involvement in a pump-and-dump scheme, U.S. v. Wolfson (2d Cir. June 7, 2011).  According to the court,

The evidence at trial showed that Wolfson artificially inflated the prices of certain thinly-traded securities in which he had amassed a substantial interest, and then unloaded those holdings on unsuspecting investors. Of particular relevance to Wolfson’s conviction, the scheme relied on corrupt stock brokers who sold the securities for prices far above their actual value. In exchange, Wolfson rewarded the brokers with exorbitant commissions. Some of the brokers failed to disclose the fact of the commissions to their customers. Others made affirmative misrepresentations about the size of these commissions.

On appeal, Wolfson argued that the brokers had no duty to disclose their commissions; accordingly, since his fraud convictions relied on the breach of that duty to establish a scheme to defraud, it must be overturned. In addition, Wolfson argued that, even if a duty to disclose might arise in some contexts, the district court gave an improper fiduciary duty instruction.  The court rejected both arguments.

On the fiduciary duty question, the court stated:

Although we have long held that there “is no general fiduciary duty inherent in an
ordinary broker/customer relationship,” we have also recognized that “a relationship of trust and
confidence does exist between a broker and a customer with respect to those matters that have
been entrusted to the broker.” ...[A] discretionary account is not the sole means by which a fiduciary duty may be created in the context of a broker-customer relationship; we have “recognized that particular factual circumstances may serve to create a fiduciary duty between a broker and his customer even in the absence of a discretionary account.”...Put otherwise, it is well settled in this Circuit that the presence of a discretionary account automatically implies a general fiduciary duty between a broker and customer, but the absence of a discretionary account does not mean that no fiduciary duty exists.

The appellate court also upheld the jury instructions, set forth below, as virtually identical to those in a previous dump and dump case:

Whether a fiduciary relationship exists is a matter of fact for you, the jury, to determine. At the heart of the fiduciary relationship lies reliance and de facto control and dominance. The relationship exists when confidence is reposed on one side and there is resulting superiority and influence on the other. One acts in a fiduciary capacity when the business which he or she transacts or the money or property which he or she handles is not his own or for his or her own benefit but for the benefit of another person, as to whom he or she stands in a relation implying and necessitating great confidence and trust on the one part and a high degree of good faith on the other part.

If you find that the government has shown beyond a reasonable doubt that a fiduciary relationship existed, such as between any one of the brokers and the customers you next consider whether there was a breach of the duties incumbent upon the fiduciary in the fiduciary relationship and specifically whether the defendant caused the broker or brokers to breach their fiduciary duties to customers. I instruct you that a fiduciary owes a duty of honest services to his customer, including a duty to disclose all material facts concerning the transaction entrusted to him or her. The concealment by a fiduciary of material information which he or she is under a duty to disclose to another, under circumstances where the nondisclosure can or does result in harm to the other is a [b]reach of the fiduciary duty and can be a violation of the federal securities laws, if the government has proven beyond a reasonable doubt the other elements of this offense, as I explained them to you.


June 8, 2011 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 7, 2011

Deutsche Boerse & NYSE Euronext Plan a Special Dividend after Closing

Deutsche Boerse AG and NYSE Euronext announced that they have recommended to the Board of Directors of the holding company of the merged group, Alpha Beta Netherlands Holding N.V. (“Holdco”), to pay a one-time special dividend of €2.00 per Holdco share from Holdco’s capital reserves shortly after closing of the combination of Deutsche Boerse and NYSE Euronext.   The dividend would be paid shortly after the closing of the merger. 

Based on the share exchange ratios agreed under the business combination agreement, the intended distribution translates into a special dividend of €2.00 for every Deutsche Boerse share which is tendered in the current exchange offer (exchange ratio 1:1) and into a special dividend of €0.94 / US $1.37 per NYSE Euronext share (exchange ratio 0.47:1 and assuming an exchange rate of $1.46 per euro). The total dividend amount paid out by Holdco is expected to amount to approximately €620 million / US $905 million, assuming 100 percent acceptance by Deutsche Boerse shareholders in the current exchange offer.


June 7, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

Time Period to Comment on Credit Risk Retention Requirements is Extended

The comment period on the proposed rules to implement the credit risk retention requirements of  Dodd-Frank is extended to August 1, 2011, to allow interested persons more time to analyze the issues and prepare their comments. Originally, comments were due by June 10, 2011.  The proposed rule generally would require sponsors of asset-backed securities to retain at least 5 percent of the credit risk of the assets underlying the securities and would not permit sponsors to transfer or hedge that credit risk. The proposal was issued by the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation, the U.S. Securities and Exchange Commission, the Federal Housing Finance Agency, and the Department of Housing and Urban Development.

June 7, 2011 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Suspends Trading in 17 Penny Stocks

The SEC today suspended trading in 17 microcap stocks because of questions about the adequacy and accuracy of publicly available information about the companies, which trade in the over-the-counter (OTC) market.  The trading suspensions spring from a joint effort by SEC regional offices in Los Angeles, Miami, New York, and Philadelphia; its Office of Market Intelligence; and its new Microcap Fraud Working Group.

The 17 companies and their ticker symbols are:

American Pacific Rim Commerce Group (APRM), based in Citra, Fla.
Anywhere MD, Inc. (ANWM), based in Altascadero, Calif.
Calypso Wireless Inc. (CLYW), based in Houston.
Cascadia Investments, Inc. (CDIV), based in Tacoma, Wash.
CytoGenix Inc. (CYGX), based in Houston.
Emerging Healthcare Solutions Inc. (EHSI), based in Houston.
Evolution Solar Corp. (EVSO), based in The Woodlands, Texas.
Global Resource Corp. (GBRC), based in Morrisville, N.C.
Go Solar USA Inc. (GSLO), based in New Orleans.
Kore Nutrition Inc. (KORE), based in Henderson, Nev.
Laidlaw Energy Group Inc. (LLEG), based in New York City.
Mind Technologies Inc. (METK), based in Cardiff, Calif.
Montvale Technologies Inc. (IVVI), based in Montvale, N.J.
MSGI Security Solutions Inc. (MSGI), based in New York City.
Prime Star Group Inc. (PSGI), based in Las Vegas, Nev.
Solar Park Initiatives Inc. (SOPV), based in Ponte Verde Beach, Fla.
United States Oil & Gas Corp. (USOG), based in Austin, Texas.

June 7, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)