Securities Law Prof Blog

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

Friday, June 3, 2011

SEC's Inspector General Reports on Investigations into Agency's Failings

The SEC's Inspector General recently released its Semiannual Report to Congress on the activities and accomplishments of the SEC's Office of Inspector General (OIG) for the period of October 1, 2010 through March 31, 2011.  According to the Inspector General's cover letter:

...[W]e completed approximately 20 investigations on a myriad of complex and significant issues, including the failure to uncover a $554 million Ponzi scheme, improprieties in the SEC’s Office of Information Technology’s (OIT) acquisition of approximately $1 million of computer equipment, the alleged violation of post-employment restrictions, the role of political appointees in the Freedom of Information Act (FOIA) process, abusive and intimidating conduct in the workplace, dissemination of false and misleading information regarding an active SEC enforcement investigation, unauthorized disclosures of nonpublic information, theft of funds, misuse of computer resources, and abuse of compensatory time for travel. We are also actively working on and finalizing several additional investigations, including an investigation of the facts and circumstances surrounding the SEC former General Counsel’s involvement in activities relating to the Bernard L. Madoff Ponzi scheme in light of a lawsuit brought against him and his brothers by the trustee appointed in the Madoff liquidation under SIPA for the return of approximately $1.5 million in fictitious profits received from the Ponzi scheme, and an investigation into allegations that the agency’s leasing activities and related procurements at the Constitution Center and Station Place III sites in Washington, D.C., have resulted in significant waste of government funds and/or violated federal regulations

June 3, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FRB's Tarullo Addresses Enhanced Capital Requirements for SIFIs

Federal Reserve Board Governor Daniel K. Tarullo spoke today at the Peter G. Peterson Institute for International Economics, Washington, D.C., on Regulating Systemically Important Financial Firms, in which he suggested five desirable characteristics of an Enhanced Capital Requirement required for SIFIs under Dodd-Frank.

June 3, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

2d Circuit: Arbitrator's "Predisposition" not a Basis for Vacatur

The Second Circuit recently issued an opinion discussing the tests for judicial review of arbitration awards under FAA 10 as well as the manifest disregard of the law (assuming it still exists after Hall St. Associates).  STMicroelectronics, N.V. v. Credit Suisse LLC (2d Cir. June 2, 2011).   The underlying facts of the controversy involve Credit Suisse's purchases for its customer STM of auction rate securities.  Under the plan approved by STM, CS was to purchase only ARS that were backed by federally guaranteed student loans.  After only a few days, however, CS began buying much riskier types of ADR for STM's accounts and covered this up by sending STM phony confirmations.  The arbitration panel unanimously found for STM and essentially ordered rescission of the transactions, ordering STM to return the portfolio to CS in exchange for $400 million, plus other costs and fees.

CS's argument for vacating the award under FAA 10(a) was that one of the arbitrators had a predisposition of the case, because of his extensive work as an expert on behalf of claimants in financial disputes.  Midway through the arbitration hearing, it sought to remove the arbitrator, alleging that he painted a more balanced picture of his experience on his disclosure report when he stated that he represented both sides.  In fact, CS argued, the arbitrator's consulting work was done principally for claimants.

Before the district court, which confirmed the award, CS had relied on FAA 10(a)(2) -- "evident partialilty" -- but on appeal it shifted its legal theory and argued that the arbitrator's misleading disclosure was cause to vacate under FAA 10(a)(3) -- "other misbehavior by which the rights of any party have been prejudiced."  The Second Circuit said that the reason for the shift was clear -- 10(a)(2) addresses only nondisclosure of facts bearing on a relationship with a party, lawyer or other attorney.  In this case CS was making the novel argument that improper disclosure could be "other misbehavior" when it misrepresented facts that go to an arbitrator's predisposition on how he would decide certain kinds of cases.  The Second Circuit said, however, that it did not have to "div[e] very deeply into these difficult legal matters," because CS did not carry its burden of establishing facts that supported its legal theory:

Given the “very high” showing necessary to vacate an award ...we would expect Credit Suisse to present more evidence to support its contentions about Duval’s background. It appears, however, that Credit Suisse never asked Duval for an accounting of his experience, either before or during the arbitration or during the district court proceedings. Although we have limited the availability of discovery regarding the completeness of an arbitrator’s disclosures, we have not forbidden it altogether. ...

The lack of evidence means we cannot know exactly how much work Duval did or for whom. But that was Credit Suisse’s burden to show, and it has failed to carry it. At the very least, even if we assume that Duval has worked for many more claimants than respondents, his work for “numerous” respondents and his ability to cite two respondents employing him at the time of the 2008 arbitration belie Credit Suisse’s contention that he “served . . . almost exclusively as a professional claimant-side expert witness.”

In addition, in the course of the opinion, the Second Circuit made some interesting observations discrediting CS's argument based on "predisposition:"

More fundamentally, the major premise of Credit Suisse’s attack on Duval’s nondisclosure of his prior testimony fails. There is no contention here that Duval had any prior knowledge of, or misconception about, the facts of this case. Credit Suisse’s argument, rather, is that his testimony suggests he had pre-existing views about potentially relevant propositions of law. However, “[a] judge’s lack of predisposition regarding the relevant legal issues in a case has never been thought a necessary
component of equal justice, and with good reason. For one thing, it is virtually impossible to find a judge who does not have preconceptions about the law.”...  This is all the more true for arbitrators, “[t]he most sought-after” of whom “are those who are prominent and experienced members of the specific business community in which the dispute to be arbitrated arose.” ...Arbitrator Duval played that very role on this panel, as the “non-public arbitrator” specifically chosen for his industry connection....It would be strange if such an arbitrator were forced to search the record of all prior testimony for any statement that might – however tangentially – relate to any of the many legal issues that might arise in any given case. A party might like to know that information when shopping for arbitrators, but its absence cannot form a ground for vacating an arbitration award.

The opinion also has a thorough analysis of the manifest disregard of the law standard in dismissing CS's arguments based on the non-statutory standard.

June 3, 2011 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 1, 2011

Call for Papers -- AALS Securities Regulation Section

Call for Papers Announcement: AALS Section on Securities Regulation

2012 AALS Annual Meeting
Friday, January 6, 2012
10:30 a.m. to 12:15 p.m.

The AALS Section on Securities Regulation will hold a program during the AALS 2012 Annual Meeting in Washington D.C. The topic is “Exploring the Regulatory Response to the Financial Crisis.”  The program will include presentations by SEC Commissioner Troy Paredes, Professor Lynn Stout (UCLA), Professor Robert Thompson (Georgetown), and two additional speakers chosen via this Call for Papers.

Faculty members of AALS member schools are eligible to submit papers.  Faculty members of fee-paid law schools, Foreign, visiting and adjunct faculty members, graduate students, and fellows are not eligible to submit.

Eligible faculty members interested in presenting a paper should send a draft or proposal to William Sjostrom at by August 15, 2011.  Decisions will be announced by September 15, 2011.

Registration Fee and Expenses:
Call for Paper participants will be responsible for paying their annual meeting registration fee and travel expenses.

How will papers be reviewed?
Papers will be selected after review by members of the Executive Committee of the Section.

Contact for submission and inquiries:
William Sjostrom
Chair, AALS Section on Securities Regulation
University of Arizona
James E. Rogers College of Law
1201 E. Speedway Boulevard
P.O. Box 210176
Tucson, AZ 85721

June 1, 2011 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Call for Papers -- Michigan Journal of Private Equity and Venture Capital Law

The University of Michigan Law School is proud to announce its newest publication, the Michigan Journal of Private Equity and Venture Capital Law.

The Journal is published semi-annually by the students of the University of Michigan Law School in conjunction with the ABA Committee on Private Equity and Venture Capital.  The Journal addresses the regulatory, securities, corporate, tax, intellectual property, and any other legal issues involved with
private equity and venture capital, including with respect to both investments by funds and the formation of funds.

The Journal is currently accepting scholarly papers and paper proposals for publication in our first issue. We anticipate publishing the issue in late fall 2011. Articles for this issue are generally between 25 and 40 pages long.

Please send drafts, proposals, or inquiries to Jeffrey Koh, Executive Article Editor, at, or via ExpressO.


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

Tuesday, May 31, 2011

FINRA Charges David Lerner with Suitability Obligations in Marketing REITs

FINRA announced today that it filed a complaint against David Lerner & Associates, Inc. (DLA), of Syosset, NY, charging the firm with soliciting investors to purchase shares in Apple REIT Ten, a non-traded $2 billion Real Estate Investment Trust (REIT), without conducting a reasonable investigation to determine whether it was suitable for investors, and with providing misleading information on its website regarding Apple REIT Ten distributions. DLA has sold and continues to sell Apple REIT Ten targeting unsophisticated and elderly customers with unsuitable sales of the illiquid security.

Since January 2011, as sole underwriter for Apple REIT Ten, DLA has sold over $300 million of an open $2 billion offering of the REIT's shares. Apple REIT Ten invests in the same extended stay hotel properties as a series of other Apple REITs closed to investors. Apple REIT Ten and the closed Apple REITs were founded by the same individual, and are all under common management. DLA has been the sole underwriter for Apple REITs since 1992, selling nearly $6.8 billion of the securities into approximately 122,600 DLA customer accounts. DLA earns 10 percent of all offerings of Apple REIT securities as well as other fees. Apple REIT sales have generated $600 million for DLA, accounting for 60 to 70 percent of DLA's business annually since 1996.

The complaint against DLA alleges that since at least 2004, the closed Apple REITs have unreasonably valued their shares at a constant price of $11 notwithstanding market fluctuations, performance declines and increased leverage, while maintaining outsized distributions of 7 to 8 percent by leveraging the REITs through borrowings and returning capital to investors. As sole distributor, DLA did not question the Apple REITs' unchanging valuations despite the economic downturn for commercial real estate.

FINRA alleges that DLA failed to sufficiently investigate the valuation and distribution irregularities of the closed Apple REITs prior to selling Apple REIT Ten. As the sole underwriter of all of the Apple REITs, DLA was aware of the Apple REITs' valuation and distribution practices. Rather than conduct due diligence into those valuations and distribution irregularities to determine that they were reasonable and that the Apple REITs were suitable, DLA accepted the valuations and continued to record them on customer account statements.

In its solicitation of customers to purchase Apple REIT Ten, DLA's website provided distribution rates for all of the previous Apple REITs. These distribution figures were misleading and omitted material information because they did not disclose recent distribution rate reductions or that distributions far exceeded income from operations and were funded by debt that further leveraged the REITs.

The issuance of a disciplinary complaint represents the initiation of a formal proceeding by FINRA in which findings as to the allegations in the complaint have not been made, and does not represent a decision as to any of the allegations contained in the complaint.

May 31, 2011 in Other Regulatory Action | Permalink | Comments (1) | TrackBack (0)

Sunday, May 29, 2011

Schwarcz on Securitization Markets

Testimony on the State of the Securitization Markets, by Steven L. Schwarcz, Duke University - School of Law, was recently posted on SSRN.  Here is the abtract:

In this May 18, 2011 testimony before the Subcommittee on Securities, Insurance, and Investment of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, I suggest certain regulatory responses to improve securitization. Certain of securitization’s problems are typical of problems we must face in any innovative financial market: that increasing complexity, coupled with human complacency (among other factors), will make failures virtually inevitable. Regulation must respond to this reality by putting into place, before these failures occur, responses that supplement regulatory restrictions intended to prevent failures.

May 29, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Molony on Security-Based Swaps

Still Floating: Security-Based Swap Agreements after Dodd-Frank, by Thomas Molony, Elon University School of Law, was recently posted on SSRN.  Here is the abstract:

The Commodity Futures Modernization Act of 2000 (the "CFMA") established that most swaps were not securities for purposes of the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act"). At the same time, however, the CFMA subjected certain swaps - security-based swap agreements - to the antifraud prohibitions under Securities Act § 17(a) and Exchange Act § 10(b) and Rule 10b-5. Since the CFMA was enacted, few courts have interpreted the term "security-based swap agreement" and only one has given it significant substantive attention.

Congress’s enactment of The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") in 2010 changed the playing field for swaps dramatically, subjecting them to extensive regulation by the Securities Exchange Commission (the "SEC") and the Commodity Futures Trading Commission. The regulations with respect to security-based swap agreements survived the reform, but their continuing utility in the new regulatory regime is an open question.

This Article examines the historical interpretation of the term "security-based swap agreement," its application in pending SEC enforcement actions involving interest rate swaps and the continuing viability post-Dodd-Frank of the provisions of the Securities Act and the Exchange Act applicable to security-based swap agreements. The Article begins with a discussion of how the securities laws applied to swaps prior to Dodd-Frank. After reviewing and critiquing the handful of opinions that have considered the scope of the term "security-based swap agreement," it considers whether the interest rate swaps at issue in the pending SEC enforcement actions are security-based swap agreements. The Article next describes generally the jurisdictional division between the SEC and the CFTC under Dodd-Frank and how security-based swap agreements fit within the new regime. It then explores reasons to do away with the security-based swap agreement in the federal securities laws, while considering whether term represents a necessary evil. The Article ultimately concludes that Congress should eliminate the provisions of the Securities Act and the Exchange Act related to security-based swap agreements because (i) the provisions largely have gone unused, (ii) the term "security-based swap agreement" has been poorly interpreted, (iii) the term is overbroad, (iv) Dodd-Frank makes the provisions unnecessary and (v) the term creates unnecessary confusion in the new regulatory scheme.

May 29, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)