Securities Law Prof Blog

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

Thursday, May 12, 2011

SEC Schedules May 18 Open Meeting on Credit Rating Agencies

The SEC's next Open Meeting is scheduled for May 18, 2011.  The subject matter of the Open Meeting will be:

The Commission will consider whether to propose new rules and amendments to existing rules to implement provisions of Subtitle C of Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act that would apply to credit rating agencies registered with the Commission as nationally recognized statistical rating organizations, providers of third-party due diligence services for asset-backed securities, and issuers and underwriters of asset-backed securities.


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

Senate Committee Holds Another Hearing on Dodd-Frank Implementation

Today the Senate Banking Committee held its fourth hearing with regulators on implementation of Dodd-Frank financial reform.  In particular, lawmakers expressed concern that regulators are not providing the public with enough information or an opportunity to comment on what firms will be deemed to pose a systemic risk.  WSJ, Regulators Defend Financial Revamp Efforts; WPost, Bernanke, fellow regulators update Congress on efforts to overhaul US financial rulebook

May 12, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC's Schapiro Testifies On Monitoring Systemic Risk

SEC Chairman Mary L. Schapiro testified on Monitoring Systemic Risk and Promoting Financial Stability before the United States Senate Committee on Banking, Housing and Urban Affairs on May 12, 2011.

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

SEC Roundtable: What To Do About Money Market Funds

The SEC held a roundtable discussion yesterday on what to do with money market funds, and, as expected, the regulators and the industry had different views about whether to maintain the stable $1 NAV.  Investment News provides a good summary.  FDIC Chair Sheila Blair and former Fed Chair Paul Volcker called for a floating NAV, while industry representatives testified that forcing MM funds to abandon the stable $1 NAV would destroy the funds' appeal to investors.  InvNews, Money fund 'fiction' a real threat to investors: FDIC's Bair

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

2d Circuit: Rating Agencies are not "Underwriters" or "Control Persons"

The Second Circuit, in In re Lehman Brothers Mortage-Backed Securities Litigation (May 11, 2011)(Download 2dCir.LehmanMortBackAssets) affirmed the district court's dismissal of three class action complaints brought by purchasers of mortgage pass-through certificates registered with the SEC that entitled them to distributions from the underlying pools of mortgages.  Most of the certificates received AAA ratings from one of the three major credit rating agencies named as defendants -- S&P, Moody's, and Fitch.  According to plaintiffs, the rating agencies exceeded their traditional roles by actively aiding in the structuring and securitization process and helped to determine the composition of the loan pools, the certificates' structures and the amount and kind of credit enhancement for particular tranches.  Plaintiffs argued that the rating agencies' activities made them "underwriters" for purposes of Securities Act section 11 liability or "control persons" under section 15.  The Second Circuit, however, was not persuaded. 

As to underwriter status, the Second Circuit held that:

To qualify as an “underwriter” under 15 U.S.C. § 77b(a)(11), a person must
have participated, directly or indirectly, in the purchase of securities with a view toward
distribution, or in the sale or offer of securities in connection with a distribution. Because
the Rating Agencies’ alleged structuring or creation of securities was insufficient to
demonstrate their involvement in the requisite distributional activities, plaintiffs’ § 11 claims
against these defendants were properly dismissed.

The court based its holding on statutory interpretation, legislative history and policy.

As to "control person" liability:

Because the Rating Agencies’ provision of advice and guidance regarding
transaction structures was insufficient to permit an inference that they had the power to direct
the management or policies of alleged primary violators of § 11, plaintiffs’ “control person”
claims against these defendants pursuant to 15 U.S.C. § 77o(a) were properly dismissed.

The court also found that the district court did not abuse its discretion in implicitly denying plaintiffs' cursory requests to amend their complaints.

May 12, 2011 | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 11, 2011

What's Next in the Galleon Case

Peter Henning, over at the NYTimes Dealbook, has an excellent description of the next steps in Galleon founder Raj Rajaratnam's trial -- the sentencing and the expected appeal.  On appeal the critical issue is the trial judge's decision to admit those wiretaps.  It will be a year before the Second Circuit is likely to hear any appeal.  Stay tuned.

NYTimes, The Galleon Case Is Nowhere Near Over

May 11, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

Consultant Pleads Guilty in Expert-Network Investigation

This was a successful day for federal prosecutors in Manhattan today.  Besides Raj Rajaratnam's conviction on 14 counts of securities fraud and conspiracy, in another courtroom Manosha Karunatilaka, who was an account manager at Taiwan Semiconductor Manufacturing, pleaded guilty to sharing confidential information about his employer with clients of Primary Global Research LLC, an expert-networking firm.  He acknowledged that, without his employer's knowledge, he received $200 per conversation with Primary Global's clients.  He faces about four years in prison.

WSJ, Former Consultant Pleads Guilty in Expert-Network Probe

May 11, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Charges Two Businessmen With Securities Fraud in New York-Based Beverage and Food Carrier Company

The SEC today charged the co-founders of a New York-based beverage and food carrier company with orchestrating an $8 million securities fraud and spending at least half of investor money for their personal use.  According to the SEC's complaint, Angelo Cuomo and George Garcy fraudulently obtained investments in E-Z Media Inc. while falsely telling investors that their company owned several patents for beverage and food carriers and had contracts to sell its carriers to such major companies as Heineken, Anheuser Busch, and Aramark Corporation. They also misrepresented their plans to conduct an initial public offering (IPO), their use of offering proceeds, and the projected share price. E-Z Media never actually had any contracts or other agreements to sell its carriers to any major company, including the brand-name companies that Cuomo and Garcy touted to investors. E-Z Media never took even the basic steps to prepare for a purported IPO.

The SEC alleges that Cuomo and Garcy (also known as Jorge Garcia) conducted their scheme from at least 2003 to 2009, making false statements and omissions about their company’s business prospects, assets, and liabilities. According to the SEC’s complaint, Garcy and Cuomo misappropriated and diverted at least $4 million of funds obtained from investors to make payments on personal loans, private school tuition, and rent and mortgages as well as other personal uses.

The SEC’s complaint seeks a final judgment permanently enjoining Garcy and Cuomo from future violations of the federal securities laws, barring Garcy and Cuomo from acting as officers and directors of any public company, requiring Garcy and Cuomo to pay financial penalties, and requiring the defendants and relief defendants to disgorge all ill-gotten gains plus prejudgment interest, among other relief.

May 11, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Jury Convicts Galleon Founder Rajaratnam on All Counts

After eleven days of deliberation, the jury found Galleon founder Raj Rajaratnam guilty of all fourteen counts of fraud and conspiracy.  RR could face up to 20 years in prison; an appeal is certainly expected. Meanwhile, it's a huge victory for the Manhattan office of the U.S. District Attorney and its crackdown on insider-trading on Wall St.  In the end, the government's wire taps paid off; the jury heard portions of 45 taped telephone calls that were hard for the defense to explain away.  Its defense, that the stock trades were based on due diligence and careful research, did not convince the jury.  

For early coverage, see:

NYTimes, Galleon’s Rajaratnam Found Guilty

WSJ, Jury Convicts Galleon Founder Rajaratnam

May 11, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 10, 2011

SEC Solicits Comment to Assist in Study on Assigned Credit Ratings

The SEC published on its website a request for public comment on the feasibility of a system in which a public or private utility or a self-regulatory organization would assign a nationally recognized statistical rating organization (NRSRO) to determine credit ratings for structured finance products. The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that the SEC study assigned ratings as part of a broader examination of credit ratings.

Section 939F of the Dodd-Frank Act directs the SEC to study the credit rating process for structured finance products and the conflicts associated with the “issuer-pay” and the “subscriber-pay” models. The Act also requires the SEC to study the feasibility of establishing a system in which a public or private utility or a self-regulatory organization assigns NRSROs to determine the credit ratings for structured finance products. In addition, the study must address the range of metrics that could be used to determine the accuracy of credit ratings for structured finance products, and alternative means for compensating NRSROs that would create incentives for accurate credit ratings for structured finance products. By July 21, 2012, the SEC is required to submit the findings of the study to Congress along with any recommendations for regulatory or statutory changes that the Commission determines should be made.

To better inform the study, the request asks interested parties to provide comments, proposals, data and analysis in response to questions presented in the request. The public comment period will remain open for 120 days following publication of the request in the Federal Register.

May 10, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Proposes Changes to Dollar Thresholds for Investment Adviser Performance Compensation

The SEC provided public notice of its plan to raise certain dollar thresholds that would need to be met before investment advisers can charge their clients performance fees. The SEC seeks public comment on the plan, which would satisfy a requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Currently, Rule 205-3 under the Investment Advisers Act allows an adviser to charge its clients performance fees in certain circumstances. Two of the circumstances are:

  • The client has at least $750,000 under management with the adviser.
  • The adviser reasonably believes the client has a net worth of more than $1.5 million.

Section 418 of the Dodd-Frank Act requires the SEC to issue an order to adjust for inflation these dollar amount thresholds by July 21, 2011, and every five years thereafter. As a result, the SEC issued today’s notice that it intends to issue an order to revise the dollar amount tests to $1 million for assets under management and $2 million for net worth.

The Commission also proposed related amendments to Rule 205-3 that would:

  • Provide the method for calculating future inflation adjustments of the dollar amount tests.
  • Exclude the value of a person’s primary residence from the determination of whether a person meets the net worth standard.
  • Modify the transition provisions of the rule to take into account performance fee arrangements that were permissible at the time the adviser and client entered into their advisory contract.

The SEC also is seeking public comment on these proposed related rule amendments.

Hearing requests on the SEC’s notice for an order should be received by June 20, 2011, and comments on the SEC’s proposed rule amendments should be received by July 11, 2011.

May 10, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, May 9, 2011

NASDAQ/ICE Press Case to NYSE Shareholders

NASDAQ/ICE continue to press their case for merger directly to the NYSE Euronext shareholders, issuing a letter today asking:

What's the Rush?

-- Why are NYSE Euronext stockholders being asked to approve a high-risk, low-value transaction without all of the facts?

-- Why is your board rushing you into a vote?

NYSE Euronext shareholders as of today's date will be eligible to vote on the merger with Deutsche Boerse at a special shareholders meeting scheduled for July 7.

-- And why are they refusing to even meet with NASDAQ OMX and ICE to explore a clearly financially superior alternative?

May 9, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

Republicans Urge Agencies to Consider Cost in Dodd-Frank Regulations

Republican Senators on the Senate Banking Committee urge the watchdogs for regulators to make sure the agencies take cost into account in promulgating Dodd-Frank rules, and SEC Chair Mary Schapiro says agency will focus on cost-benefit analysis when it considers a uniform fiduciary standard for investment advisers and broker-dealers later this year.  InvNews, Will new pressures on Dodd-Frank influence the fiduciary standard?

May 9, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

New FINRA Arbitration Motion Practice Rule Effective June 6

FINRA Dispute Resolution announced that effective June 6, 2011, a moving party (the party that makes the original motion in an arbitration) will have a five-day period to reply to a response to a motion. This five-day period gives parties an opportunity to brief fully the issues in dispute, and ensure that arbitrators deciding a motion have all the motion papers before issuing a final decision.

May 9, 2011 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Sunday, May 8, 2011

Kaufman & Wunderlich on Barriers to Remedies for Securities Fraud

The Judicial Access Barriers to Remedies for Securities Fraud, by Michael J. Kaufman, Loyola University Chicago School of Law, and John M. Wunderlich , was recently posted on SSRN.  Here is the abstract:

Congress has created a mechanism through which victims of securities fraud may pursue remedies for their losses against the perpetrators. That mechanism includes the substantive prohibitions of the federal securities laws, as well as the procedural pathways established by the Private Securities Litigation Reform Act of 1995 and the Federal Rules of Civil Procedure and Evidence. In this Article, we delineate those access barriers and question both their constitutionality and wisdom.

We begin by describing how some federal courts have rewritten the PSLRA and the Federal Rules of Civil Procedure and Evidence to erect merits barriers at three key pre-trial litigation stages that force plaintiffs to prove their case without the benefit of discovery to a judge before reaching a jury. In particular, some federal courts have redesigned the pleading standard under the PSLRA and the federal rules so as to steeply discount allegations of scienter based on circumstantial evidence. Other courts have doctored Rule 23 to require plaintiffs to prove the elements of reliance and loss causation by a preponderance of the evidence to pursue a class action. And some other courts have adjusted Rule 56 and the expert-witness regime to require plaintiffs to establish the weight and credibility of their expert witnesses to avoid summary judgment. At each of these pre-trial stages, the federal courts have effectively required plaintiffs to meet a burden of proof which is actually greater than or equal to the burden of proof which should be encountered only later at trial.

The next part explains that these access barriers pose both constitutional and practical concerns. First by rewriting rules of procedure, rather than deferring to traditional rulemaking bodies like Congress and the Advisory Committee on Civil Rules of the Judicial Conference, the judiciary has usurped the rulemaking function of the legislature. Second, the pre-trial barriers erected require plaintiffs to meet, or at times even exceed, their burden of proof at trial and leave district courts with considerable fact-finding power, encroaching on the province of the jury.

The constitutional implications of these merits-based access barriers alone should be sufficient to prevent federal courts from continuing to redesign the private securities litigation process. If it is not, this next part offers another reason cautions against mainstream acceptance of these judicial access barriers: they are unwise. The judicial access barriers rest on three premises that are incomplete, unsupported, or not true, including the incomplete and unsupported contention that defendants settle claims in terrorem, the myth that Congress is incapable of fashioning rules responsive to litigation concerns and that the jury is incapable of merited fact-finding, and the flawed assumption that merits-based screening precludes only “frivolous” litigation. We discover no legitimate support for any of these assumptions.

May 8, 2011 in Law Review Articles | Permalink | Comments (1) | TrackBack (0)

Fox on Class Actions Against Foreign Issuers

Fraud-On-The Market Class Actions Against Foreign Issuers, by Merritt B. Fox, Columbia University - Law School, was recently posted on SSRN.  Here is the abstract:

This Article goes back to first principles to look at the basic policy concerns that are implicated by the extra territorial reach of fraud-on-the-market class actions. The resulting analysis suggests a simple, clear rule that can be shown likely to both maximize U.S. economic welfare and, by also promoting global economic welfare, foster good U.S. foreign relations as well. The U.S. law based class action fraud-on-the-market liability regime, I conclude, should not as a general matter be imposed upon any genuinely foreign issuer, even where the purchaser making the claim is a U.S. investor purchasing the share in a U.S. market or where significant conduct contributing to the misstatement occurs in the United States. An issuer is genuinely foreign if it has its economic center of gravity as an operating firm outside the United States. The only exception would be a foreign issuer that has agreed, as a form of bonding, to be subject to the U.S. liability regime, in which case all such claims against the issuer should be allowed, regardless of the nationality and residence of the purchasing plaintiff, the place where she executes the transaction, and the place or places where conduct contributing to the misstatement occurs.

May 8, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Sale on the New Public Corporation

The New 'Public' Corporation, by Hillary A. Sale, Washington University in St. Louis - School of Law, was recently posted on SSRN.  Here is the abstract:

The United States has experienced a financial crisis, a market crash, and a shift in the perception of America’s place in the global economy. New financial reform legislation will increase the role of the government in the socalled private-law world of corporations and will press further on our conception of what the rights and responsibilities of “public corporations” actually are and will push us to reconceive the definitions of public corporations and corporate governance.

This article explores that issue - the definition of public corporation and its impact on corporate governance. Rather than accepting the definition of public corporations as those that are traded in markets, this article argues that, when viewed in light of the ways in which society’s views of corporations have changed, that definition is impoverished. Public corporations are not just creatures of Wall Street. They are creatures of Main Street, the media, bloggers, Congress, and the government. Indeed, the article argues, it is the failure of the fiduciaries of public corporations to understand their “publicness” that accounts for many of the recent scandals.

May 8, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

SEC Announces Speakers for Money Market Funds Roundtable

The SEC announced the speakers for its roundtable discussion on money market funds and systemic risk, which will be held on May 10, 2011.  It will provide a forum for various stakeholders in money market funds to exchange views on the potential effectiveness of certain options in mitigating systemic risks associated with money market funds. These will include, but are not limited to, options raised in the President’s Working Group report on possible money market fund reforms that was issued in October 2010

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