Securities Law Prof Blog

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

Friday, May 27, 2011

Former Nvidia Analyst Pleads Guilty in Expert-Networks Insider Trading Investigation

The feds have another notch on its belt in its ongoing investigation of insider-trading at expert-networks firms.   Sonny Nguyen, a former Nvidia financial analyst, pleaded guilty today to providing tips on the firm's earnings between 2007-08 to Winifred Jiau, a former consultant with Primary Global Resources, in exchange for other stock tips.  Ms. Jiau's trial is scheduled to begin soon, and he is expected to testify as a government witness.

In addition, another individual, Sam Barai, a former hedge fund manager, is expected to plead guilty this afternoon.

WSJ, Ex-Nvidia Analyst Pleads Guilty in Insider Trading Case

May 27, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, May 26, 2011

Former NASDAQ Managing Director Charged with Insider Trading

The SEC today charged Donald L. Johnson, a former managing director of The NASDAQ Stock Market, with multiple instances of insider trading.  According to the SEC’s complaint, Johnson held various positions at the NASD and NASDAQ for 20 years, until his retirement from NASDAQ in September 2009. From at least January 2000 to October 2006, Johnson worked in NASDAQ’s Corporate Client Group (CCG). He then transferred to the Market Intelligence Desk, a specialized department within the CCG that provides issuers with general market updates, overviews of their company’s sector, and commentary regarding the factors influencing day-to-day trading activity in their stocks.

The SEC alleges that, through his positions in the CCG and Market Intelligence Desk, Johnson had frequent and significant interactions with senior executives of NASDAQ-listed issuers, including CEOs, CFOs, and investor relations officers at his assigned companies. In those interactions, company executives routinely shared confidential information with Johnson regarding impending public announcements that could affect the price of their stocks.

According to the SEC’s complaint, Johnson unlawfully traded in advance of nine announcements of material nonpublic information involving NASDAQ-listed companies from August 2006 to July 2009. Johnson took advantage of both favorable and unfavorable information that was entrusted to him in confidence by NASDAQ and its listed companies, shorting stocks on several occasions and establishing long positions in other instances. The complaint also states that Johnson often placed the trades directly from his work computer through an online brokerage account in his wife’s name. The SEC alleges that Johnson reaped illicit profits in excess of $755,000 from his illegal trading.

Johnson also has been charged in a parallel criminal action announced by the U.S. Department of Justice today.

May 26, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Banks Sue Brokers Over Med Cap Fraud

Bank of New York Mellon Corp. and Wells Fargo Bank, who were trustees for Medical Capital Holdings, have sued a number of broker-dealers that marketed the Med Cap private placement offerings, claiming that the broker-dealers sold the securities to investors for whom it was an unsuitable investment and made misrepresentations about the investment's risks.  The banks are defendants in a 2009 class action that followed SEC charges that Med Cap was a fraud.  InvNews, Wells Fargo, BoNY Mellon sue Securities America, other B-Ds over MedCap

May 26, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

FINRA Fines Credit Suisse & Merrill Lynch for Misreps Involving Subprime Mortgage Securitizations

FINRA announced today that it fined Credit Suisse Securities (USA) LLC $4.5 million, and Merrill Lynch $3 million for misrepresenting delinquency data and inadequate supervision in connection with the issuance of residential subprime mortgage securitizations (RMBS).

Issuers of subprime RMBS are required to disclose historical performance information for past securitizations that contain mortgage loans similar to those in the RMBS being offered to investors. Historical delinquency rates are material to investors in assessing the value of RMBS and in determining whether future returns may be disrupted by mortgage holders' failures to make loan payments. As there are different standards for calculating delinquencies, issuers are required to disclose the specific method it used to calculate delinquencies. 

FINRA found that in 2006, Credit Suisse misrepresented the historical delinquency rates for 21 subprime RMBS it underwrote and sold. Although Credit Suisse knew of these inaccuracies, it did not sufficiently investigate the delinquency errors, inform clients who invested in these securitizations of the specific reporting discrepancies or correct the information on the website where the information was displayed. Credit Suisse also failed to name or define the methodology used to calculate mortgage delinquencies in five other subprime securitizations. Additionally, Credit Suisse failed to establish an adequate system to supervise the maintenance and updating of relevant disclosure on its website. 

For six of the 21 securitizations, the delinquency errors were significant enough to affect an investor's assessment of subsequent securitizations, as it was referenced in four subsequent RMBS investments. 

In a separate case, FINRA found that Merrill Lynch negligently misrepresented the historical delinquency rates for 61 subprime RMBS it underwrote and sold. However, in June 2007, after learning of the delinquency errors, Merrill Lynch promptly recalculated the information and posted the corrected historical delinquency rates on its website. Merrill Lynch also failed to establish a reasonable system to supervise and review its reporting of historical delinquency information. On January 1, 2009, Merrill Lynch was acquired by Bank of America, but the firm continues to do brokerage business under its own individual broker-dealer registration. 

In eight instances, the delinquencies were significant enough to affect an investor's assessment of subsequent securitizations, as it was referenced in five subsequent RMBS investments.

May 26, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 25, 2011

SEC Proposes Rule Disqualifying "Bad Actors" from Reg D Offerings

The SEC today proposed a rule to deny certain securities offerings from qualifying for exemption from registration if they involve certain “felons and other bad actors.”  The proposed rule would implement a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Regulation D provides three exemptions that a company can use to avoid registration under the securities laws, the most widely used of which is Rule 506. If an offering qualifies for the Rule 506 exemption, an issuer can raise unlimited capital from an unlimited number of accredited investors and up to 35 non-accredited investors.  Under the proposed rule, an offering would be unable to rely on the Rule 506 exemption if the issuer or any other person covered by the rule had a “disqualifying event” such as a criminal conviction, court injunction and restraining order.

May 25, 2011 in SEC Action | Permalink | Comments (1) | TrackBack (0)

SEC Adopts Final Whistleblower Rules

The SEC today adopted rules to create a whistleblower program that rewards individuals who provide the agency with high-quality tips that lead to successful enforcement actions.  The new SEC whistleblower program, implemented under Section 922 of the Dodd-Frank Act, is primarily intended to reward individuals who act early to expose violations and who provide significant evidence that helps the SEC bring successful cases.  To be considered for an award, the SEC’s rules require that a whistleblower must voluntarily provide the SEC with original information that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million.

The SEC’s rules will be effective 60 days after they are submitted to Congress or published in the Federal Register.

May 25, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Signs Lease for Unnecessary Space, Backdates Documentation

Once again the SEC is caught in an embarrassing incident involving its leasing of space.  In addition, the SEC Inspector General's Report on its investigation of this episode found that SEC personnel backdated forms to cover up unauthorized actions.  According to the executive summary:

The OIG investigation found that the circumstances surrounding the SEC's entering into a lease contract with David Nassif Associates ("DNA") for 900,000 square feet of space at the Constitution Center facility in July 2010 represents another in a long history ofmissteps and misguided leasing decisions made by the SEC since it was granted independent leasing authority by Congress in 1990....

The OIG investigation further found that based upon estimates ofincreased funding primarily to meet the requirements ofthe Dodd-Frank: Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), between June and July of2010, the SEC Office ofAdministrative Services ("OAS") conducted a deeply flawed and unsound analysis to justify the need for the SEC to lease 900,000 square feet of space at the Constitution Center facility. We found that OAS grossly overestimated the amount of space needed at SEC Headquarters for the SEC's projected expansion by more than 300 percent and used these groundless and unsupportable figures to justify the SEC committing to an expenditure of $556,811 ,589 over 10 years.

The OIG investigation also found that OAS prepared a faulty Justification and Approval to support entering into the lease contract for the Constitution Center facility without competition. This Justification and Approval was prepared after the SEC had already signed the contract to lease the Constitution Center facility. Further, OAS backdated the Justification and Approval, thereby creating the false impression that it had been prepared only a few days after they entered into the lease contract. In actuality, the Justification and Approval was not finalized until a month later.


May 25, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 24, 2011

ProPublica's Cheat Sheet on Bank Investigations

ProPublica's Marian Wang has posted a Cheat Sheet on Bank Investigations and the Probes That Have Petered Out.  It's well worth checking out.

May 24, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

Chrysler Repays Outstanding TARP loans

Today, the U.S. Department of the Treasury announced that Chrysler Group LLC has repaid its outstanding Troubled Asset Relief Program (TARP) loans. Chrysler Group LLC repaid $5.1 billion in TARP loans and terminated its ability to draw a remaining $2.1 billion TARP loan commitment. Treasury committed a total of $12.5 billion to Chrysler under TARP’s Automotive Industry Financing Program (AIFP). With today’s transaction, Chrysler has returned more than $10.6 billion of that amount through principal repayments, interest, and cancelled commitments.  Treasury continues to hold a 6.6 percent common equity stake in Chrysler. Treasury is unlikely to fully recover its remaining outstanding investment of $1.9 billion in Chrysler.

May 24, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

FINRA's Ketchum Addresses Compliance, Fiduciary Standard and other Challenges at Conference

Richard G. Ketchum, Chairman and Chief Executive Officer, FINRA, spoke today at the FINRA Annual Conference in Washington, DC.  In his prepared remarks, Mr. Ketchum "shared ... some of what we're focused on right now at FINRA, including changes to our exam program. I'd also like to offer some observations about what we're seeing from the industry, both in terms of improved compliance and challenges facing firms, as well as areas that I think we both should be thinking about as the industry looks toward a fiduciary standard."

May 24, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Monday, May 23, 2011

Carpenters Union Petitions SEC for Rulemaking to Eliminate "Withhold Authority" Vote

The United Brotherhood of Carpenters and Joiners of America filed a petition with the SEC to initiate a rulemaking to amend Rule 14a-4(b)(2)3 (Requirements as to proxy) to eliminate the "withhold authority" vote on proxy forms used for the election of corporate directors.  According to the petition,

the "withhold authority" vote," or so-called "withhold" vote, established decades ago to "provide greater opportunities for shareholders to exercise their right of suffrage ... ," has outlived its intended purpose. The widespread adoption of a majority vote standard in director elections provides shareholders a valid opposition vote ("against") that has a "legal effect" in determining whether a nominee is elected. The symbolic "withhold" vote, a vestige of a plurality vote standard era, is not a valid vote option under any vote standard and its continued use contributes to confusing and misleading proxy communications that threaten the integrity of director elections.

May 23, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Massachusetts & Securities America Settle Medical Capital Notes Private Placement Allegations

The Massachusetts Securities Division announced today that Securities America Agrees to Make Investors Whole In Settlement of Medical Capital Notes Private Placement Securities Case (May 23, 2011).

May 23, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

FINRA & Nuveen Settle ARS Disclosure Allegations for $3 Million

FINRA announced today that it fined Nuveen Investments, LLC, of Chicago, $3 million for creating misleading marketing materials used in sales of auction rate preferred securities (ARPS).  In contrast to other types of auction rate securities, the Nuveen ARPS were preferred shares issued by closed end mutual funds to raise money for the funds to use to invest.

By early 2008, over $15 billion of Nuveen Funds' ARPS had been sold to retail customers by third-party broker-dealers. Nuveen did not sell the ARPS to customers, but in its role as distributor for Nuveen Funds, it created marketing brochures that were used by the broker-dealers who sold the ARPS to retail customers. The brochures were the primary sales and marketing material Nuveen created for the auction rate preferred securities. FINRA found that the brochures, also available on Nuveen's website, failed to adequately disclose liquidity risks for ARPS. Nuveen neglected to include the risks that auctions for the ARPS could fail, investments could become illiquid and that customers might be unable to obtain access to funds invested in the ARPS for a period of time should the auctions fail. Instead, the brochures contained misleading statements which described the ARPS as safe and liquid investments. Also, FINRA found that Nuveen failed to maintain adequate supervisory procedures to ensure that the materials it used to market the auction rate preferred securities accurately described the features and risks of the securities.

Nuveen failed to revise disclosures in their brochures after a lead auction manager responsible for approximately $2.5 billion of the ARPS notified Nuveen in early January 2008 that it intended to stop managing Nuveen auctions. On January 22, 2008, the lead manager did not submit support bids in an auction for a series of Nuveen auction rate preferred stock and that auction failed. FINRA found that the auction failure and Nuveen's inability to find a replacement for the lead manager raised serious questions for Nuveen about whether investors in Nuveen's ARPS would be able to obtain liquidity for the securities in future auctions. Despite this, Nuveen failed to revise its marketing brochures to reflect these risks and, thus, the brochures were misleading. In February 2008, widespread auction failures occurred throughout the auction rate securities market, including auctions for Nuveen funds ARPS.

To date, the Nuveen funds have redeemed approximately $14.2 billion of the $15.4 billion of the ARPS that were outstanding on February 12, 2008. As part of the settlement, Nuveen agreed to use its best efforts to effect redemptions of any remaining outstanding Nuveen funds ARPS.


May 23, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Sunday, May 22, 2011

Fried on Executive Pay

Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay, by Jesse M. Fried, Harvard Law School, was recently posted on SSRN.  Here is the abstract:

This Article identifies a cost to public investors of tying executive pay to the future value of a firm’s stock - even its long-term value. In particular, such an arrangement can incentivize executives to engage in share repurchases (when the current stock price is low) and equity issuances (when the current stock price is high) that reduce “aggregate shareholder value,” the amount of value flowing to all the firm’s shareholders over time. The Article also puts forward a mechanism that ties executive pay to aggregate shareholder value and thereby eliminates the identified distortions.

May 22, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)