Securities Law Prof Blog

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

Friday, January 7, 2011

SEC Reportedly Investigating Calpers

The New York Times reports  that the SEC is investigating whether Calpers, the California public pension fund that advocates for corporate governance reforms, violated federal securities laws by making false and misleading disclosures about the riskiness of its investment portfolio.  NYTimes, U.S. Inquiry Said to Focus on California Pension Fund

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

Educating Financial Literacy

Should high schools or colleges require students to take a financial literacy course?  There are numerous studies documenting the lack of financial savvy of U.S. citizens, but few programs that offer more than window-dressing to deal with an intractible problem.  A New York Times reporter sits in on Champlain College's required course on financial literacy and relates his observations.  NYTimes, Making Financial Literacy Part of the College Canon

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

SEC Charges North Carolina Adviser with Defrauding Hedge Fund Investors

The SEC charged SJK Investment Management LLC, a Greensboro, N.C.-based investment adviser firm, and its owner Staney Kowalewski with defrauding investors in two hedge funds by secretly diverting millions of dollars to themselves through various self-dealing transactions.  The SEC obtained an emergency court order late yesterday freezing the assets of SJK Investment Management LLC and  Kowalewski, alleging that they raised more than $65 million since summer 2009 through marketing two hedge funds to various investors including pension funds, school endowments, hospitals and non-profit foundations. However, unbeknownst to these investors, Kowalewski placed $16.5 million of their money in an undisclosed, wholly-controlled, new fund that he created, and then misused it in a number of ways. For example, he purchased a vacation home for approximately $3.9 million. He also sold his personal home to the fund for nearly $1 million more than the price he paid for it, and then continued to live in the house essentially rent-free.

According to the SEC's complaint filed yesterday in federal court in Atlanta, SJK and Kowalewski began diverting investor money in August 2009 — almost immediately after receiving the first investor proceeds — to pay their personal and business overhead expenses under the pretense that they were "start-up" expenses for the funds.


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

SEC Charges Two Former Portfolio Managers with Defrauding Muncipal Bond Fund

The SEC today charged two former portfolio managers with defrauding a mutual fund that invests primarily in municipal bonds issued by the State of Utah and its county and local authorities.  According to the SEC, Kimball L. Young of Salt Lake City and Thomas S. Albright of Louisville — former co-portfolio managers of the Tax Free Fund for Utah (TFFU) while working at Aquila Investment Management LLC — improperly charged municipal bond issuers more than a half-million dollars in undisclosed "credit monitoring fees" that they pocketed for themselves.  Young and Albright settled the SEC's charges by agreeing to sanctions including bars from the industry and payback of all credit monitoring fees they received along with additional financial penalties.

According to the SEC's orders instituting administrating proceedings, Young and Albright began charging municipal bond issuers "credit monitoring fees" in 2003 on certain private placement and non-rated bond offerings without informing Aquila management or the TFFU's board of trustees. The fees, which ranged between 0.5 and 1 percent of each bond's par value, were a one-time fee purportedly to compensate Young and Albright for performing additional ongoing credit monitoring that they contend was required because the bonds were not rated.  The SEC found that, in fact, any credit monitoring work that Young and Albright performed was already part of their regular job responsibilities. Although deal documents indicated that the fees were required by and would be paid to the TFFU, the fees were instead wired to a company controlled by Young, who shared them equally with Albright. The fees totaled $520,626 from 2003 to April 2009, including $256,071 for the year 2008 alone.

According to the SEC's orders, Aquila management learned in April 2009 that Young and Albright had been charging credit monitoring fees, at which point Aquila promptly suspended Young and Albright and reported their conduct to the SEC.

Young and Albright settled the charges without admitting or denying the SEC's findings. Young agreed to pay $294,789 in disgorgement and prejudgment interest and a $75,000 penalty, and to be barred for five years from association with any investment adviser, broker, dealer, or certain other entities and industry organizations. Albright agreed to pay $294,789 in disgorgement and prejudgment interest and a $50,000 penalty, and to be barred for one year from association with any investment adviser, broker, dealer, or certain other entities and industry organizations.

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

Bernanke Testifies on Economic Outlook Before Senate Budget Committee

Federal Reserve Board Chairman Ben S. Bernanke testified on The Economic Outlook and Monetary and Fiscal Policy before the Committee on the Budget, U.S. Senate, on January 7, 2011.

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

Thursday, January 6, 2011

Broker Settles Charges He Cheated Nuns

The SEC and Paul George Chironis, a Long Island, N.Y.-based broker, agreed to settle charges against him for defrauding a congregation of mostly elderly nuns in the Bronx.  The SEC found that he churned two accounts owned by the Sisters of Charity — one account with money for care of nuns in assisted-living facilities and a second account to support the nuns' charitable endeavors. Chironis was formerly affiliated with Capital Growth Financial, Inc., a broker-dealer firm that was based in Boca Raton, Fla., and is no longer in business.

Chironis agreed to pay $350,000 to the Sisters of Charity in the SEC settlement.

The SEC's order specifically found that during a 13-month period, the Sisters of Charity's accounts paid approximately 10.8 percent of their value to Chironis in transaction fees. The nuns' accounts were charged an average markup of 3.68 percent on 46 bond purchases including mortgage-backed securities, and 3.03 percent on 33 closed-end bond fund purchases. The congregation's accounts also were being charged an average markdown of 1.92 percent on 67 bond sales and 1.86 percent on 15 closed-end bond fund sales.

January 6, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

President's Chief of Staff Has Strong Ties to U.S. Chamber of Commerce

ProPublica reports that President Obama's new Chief of Staff, Bill Daley, is a JP MorganChase executive with strong ties to the U.S. Chamber of Commerce.  From 2005-07 he co-chaired the Chamber's Commission on the Regulation of Capital Markets in the 21st Century that advocated, of course, for the deregulation of the markets.  He also publicly opposed the concept of an independent consumer financial protection agency.  ProPublica, Obama’s New Chief of Staff a Top Banker With Strong Chamber Ties

January 6, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 5, 2011

SEC Looks Into Goldman-Facebook Investment

The Wall St. Journal  reports that the SEC has begun an investigation because of Goldman Sach's plan to create an investment vehicle that will allow perhaps hundreds of investors to invest in Facebook without requiring the company to register with the SEC.  Under section 12(g) of the Securities Exchange Act, companies that have fewer than 500 record holders are not subject to the periodic reporting requirements, and Facebook has been careful not to go over this number.  While creating an investment vehicle seems an obvious attempt to evade the registration requirements, the statute explicitly refers to record holders and thus calls into question the authority of the SEC to close this loophole without statutory amendment.  WSJ, Facebook Deal Spurs Inquiry

January 5, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 4, 2011

U.S. Claws Back Compensation from Wilmington Trust CEO

Wall St. Journal reports that Wilmington Trust Corp., which received more than $330 million in TARP funds, recently rescinded more than $1.8 million in compensation from CEO Donald Foley.  This may be the first time an executive had to give back compensation under the TARP rules.  WSJ, U.S. Claws Back Pay From Wilmington Trust CEO

January 4, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

New Jersey Federal District Court Rejects Madoff Investor's Claim Against Goldman

In a recent opinion marked not for publication, the federal district court in New Jersey dismissed without prejudice a retired investor's claims against Goldman Sachs for failing to warn him to decrease or divest investments in Bernie Madoff's ponzi scheme.  Goodman v. Goldman Sachs & Co., Civ. No. 10-1247 (FLW) (Dec. 14, 2010).  According to the complaint, the plaintiff had invested the bulk of his retirement funds with The Ayco Company, a company he retained as his financial advisor.  Acting upon Ayco's advice, plaintiff ultimately invested $15 million, or 87% of his assets, with Madoff.  Meanwhile Goldman Sachs purchased Ayco and advised plaintiff that Goldman would work "in tandem" with Ayco to provide financial advisory services.  (The court states in a note that Ayco was not named as a defendant presumably because of an arbitration clause in their agreement that called for application of New York law.)  The gist of plaintiff's complaint is that he would have divested himself from the Madoff fund if Goldman had warned him of the dangers of over-concentration in a single investment.  Applying New Jersey law, however, the court finds that plaintiff failed to state a claim, in large part because he does not allege sufficient facts to support allegations of a fiduciary relationship between the plaintiff and Goldman.  The court noted that plaintiff specifically alleges only one meeting with Goldman representatives at which Goldman presented an investment strategy that plaintiff did not follow and that plaintiff never signed a retainer agreement with Goldman.  "In light of Plaintiff's failure to allege that Goldman Sachs maintained discretion over his investments, his breach of fiduciary duty claim fails to state a claim under New Jersey law."

January 4, 2011 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Committee on Capital Markets Regulation Warns of Hasty Rulemaking under Dodd-Frank

The Committee on Capital Markets Regulation (which prior to the financial crisis produced a white paper on financial reform) recently wrote(Download 2010.12.15_Rulemaking_Timeline_Letter) to Congressional leaders on the Senate Banking Committee and House Financial Services Committee to express concern over the pace of rulemaking under Dodd-Frank.  It believes "there is an urgent need for [the] Committees to hold oversight hearings on the implementation through rulemaking of the Dodd-Frank legislation," because the current process is "sacrificing quality and fairness for apparent speed...."

The letter goes on to note that the SEC, which prior to the financial crisis averaged fewer than ten new rules a year, is required to issue approximately 100 new rules, of which about 60 must be written by July 2011; the CFTC, which issued a total of 12 new rules in the two years prior to the financial crisis, must issue nearly 40 by that date.

It concludes by warning that speed in rulemaking "may kill our economy by producing bad rules that interfere with the proper functioning of the financial system for years to come.  The letter is signed by co-Chairs R. Glenn Hubbard and John L. Thornton and Director Hal S. Scott.

January 4, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

Federal and State Regulators Plan to Coordinate Regulation of Consumer Financial Products and Services

The Consumer Financial Protection Bureau (CFPB) implementation team currently housed within the US Department of the Treasury and the Conference of State Bank Supervisors (CSBS) today signed a memorandum of understanding (MOU) to establish a foundation of state and federal coordination and cooperation for supervision of providers of consumer financial products and services.  According to the announcement,

Specifically, state regulators and the CFPB will endeavor to promote consistent examination procedures and effective enforcement of state and federal consumer laws and to minimize regulatory burden and efficiently deploy supervisory resources.  Further, the MOU provides that state regulators and the CFPB will consult each other regarding the standards, procedures, and practices used by state regulators and the CFPB to conduct compliance examinations of providers of consumer financial products and services, including non-depository mortgage lenders, mortgage servicers, private student lenders, and payday lenders.

....  This MOU is an important step in implementing this balance and provides a starting point for additional state agreements as the states and the CFPB work to fulfill their mandates.   Whether shopping for a mortgage for their first home or exploring possibilities to finance their child’s education, consumers will benefit from this partnership as the CFPB and CSBS coordinate efforts to enforce applicable federal and state law and to protect consumers.  For the first time, a federal agency with the sole job of looking out for consumers as they interact with the financial system will work with state regulators to review businesses’ practices and ensure that firms that provide consumer financial products, such as mortgages, are following the law.

January 4, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)