Friday, August 5, 2011
On August 5, 2011, the SEC charged H. Clayton Peterson, a former member of Mariner Energy Inc.’s board of directors, and his son, a securities industry professional, with illegally tipping and trading on the basis of inside information about the impending acquisition of Mariner Energy. According to the SEC. Peterson, who served on Mariner Energy, Inc.’s board of directors from 2006 through 2010, provided his son, Drew Clayton Peterson, with confidential information about Apache Corporation’s upcoming acquisition of Mariner Energy. Drew Peterson, a managing director at a Denver-based investment adviser, then traded on the illegally obtained inside information and purchased Mariner Energy stock for himself, his relatives, his clients, and for a close friend. Drew Peterson also tipped other close friends as to the impending acquisition of Mariner Energy who also traded on the illegally obtained information. The insider trading by the Petersons and others generated more than $5.2 million in illicit profits.
The SEC’s complaint charges Clayton Peterson and Drew Peterson with violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
The SEC and Rajat Gupta agreed that the agency would drop its administrative proceeding against him and that it could bring the insider trading charges in federal district court. As you recall, the SEC chose to exercise its new powers under Dodd-Frank to bring an administrative proceeding against Gupta, while it pursued insider trading allegations against all other Galleon defendants in federal district court. Judge Rakoff, in S.D.N.Y., found that the agency's unexplained disparate treatment was unfair. WSJ, SEC, Rajat Gupta Drop Their Cases, for Now
The New York AG has challenged a proposed $8.5 billion settlement between the Bank of New York Mellon and the Bank of America over troubled loan pools issued by Countrywide (acquired by BofA). In court papers, the AG alleges that Bank of New York, as trustee overseeing the pools, misled investors into believing that the lender had delivered to the trustee complete files for every loan, when in fact it had not. The AG also alleges that the Trustee had a conflict of interest because it would gain financially from the settlement. Twenty two investors, including the New York Fed, support the settlement, but many others believe it is unfair. A court hearing on the proposed settlement is scheduled for today. NYTimes, Mortgage Settlement Challenged
Thursday, August 4, 2011
Yesterday it was the ex-son-in-law of Hugh Hefner. Today it's former baseball player Doug DeCinces, who is settling SEC insider trading charges. According to the SEC's complaint, DeCinces and associates made more than $1.7 million in illegal profits when Abbott Laboratories Inc. announced its plan to purchase Advanced Medical Optics Inc. through a tender offer. The SEC alleges that DeCinces received confidential information about the acquisition from a source at Advanced Medical Optics. DeCinces immediately began to purchase shares of Advanced Medical Optics in several brokerage accounts, buying more throughout the course of the impending transaction as he received updated information from his source. During this time, DeCinces also illegally tipped three associates who traded on the confidential information – physical therapist Joseph J. Donohue, real estate lawyer Fred Scott Jackson, and businessman Roger A. Wittenbach.
DeCinces agreed to pay $2.5 million to settle the SEC’s charges, and the three others also agreed to settlements.
Wednesday, August 3, 2011
The SEC settled charges that William A. Marovitz, the spouse of former Playboy CEO Christie Hefner, engaged in illegal insider trading in Playboy stock in advance of public news announcements. According to the SEC's complaint, on five occasions between 2004 and 2009, Marovitz traded based on confidential information that he misappropriated from Hefner, who was the CEO of Playboy during most of the trades at issue. Marovitz bought and sold Playboy stock in his own brokerage accounts ahead of public news announcements despite instructions from his wife that he should not trade in shares of Playboy and a warning from the general counsel of Playboy about his buying or selling Playboy stock. In total, Marovitz gained profits and avoided losses of $100,952.
Marovitz has consented to pay $168,352 in disgorgement, prejudgment interest and civil penalties. The settlement is subject to approval by the court.
What's wrong with the SEC, and what's the solution? Does the agency need restructuring or more money? Rep. Bachus, Chairman of the House Financial Services Committee, is drafting legislation to restructure the agency. Financial Services Committee Chairman Bachus Proposing “SEC Modernization Act” According to Rep. Bachus,
“The SEC is structurally flawed and suffers from operational inefficiencies and organizational incoherence. This legislation will be a comprehensive restructuring of the SEC. It will make the SEC more efficient, consolidate duplicative offices, enable the agency to use better technology, and strengthen ethical safeguards to avoid conflicts of interest.”
Others (i.e. Democrats) assert that what the agency needs is additional funding to accomplish its responsibilities, including those added by the Dodd-Frank Act. (Note: the SEC is funded by industry fees, not from taxpayer revenues, so the industry benefits directly if Congress does not increase its budget.)
The Washington Post reviews the Bachus reforms; Two takes on SEC restructuring: Modernization or evisceration. Among them, the Office of Investors' Advocate authorized by Dodd-Frank (but not yet in place) would have a diminished presence, while an Ombudsmans' Office would be created to address complaints from businesses.
Monday, August 1, 2011
As we have reported in previous postings, purchasers of auction rate securities (ARS) have fared poorly in their Rule 10b-5 litigation against the investment banks that recommended the securities to them. Ashland Inc. recently had the dismissals of their complaints against two different investment firms affirmed by two Circuits (2d and 6th). The opinions provide good examples of the legal grounds successfully used by defendants to defeat these claims: lack of reasonable reliance on the part of the investor and failure to plead scienter with the requisite particularity required by PSLRA.
The Second Circuit, in particular, has frequently invoked the duty of sophisticated investors to conduct due diligence to bar Rule 10b-5 fraud claims, and Ashland Inc. v. Morgan Stanley & Co., Inc. (10-1549-cv, July 28, 2011) gives the court another opportunity to apply that doctrine. Ashland contended that Morgan Stanley, in both oral and email communications, repeatedly misrepresented the the liquidity of certain ARS, thus inducing them to purchase and hold these securities at a time when Morgan Stanley knew the market for ARS was collapsing. The Second Circuit, however, affirmed the district court's dismissal of the complaint because Ashland, concededly a sophisticated investor, could not plead reasonable reliance on the alleged misrepresentations because Morgan Stanley had,pursuant to an SEC order, previously posted on its website statements that explicitly disclosed the liquidity risks. The Second Circuit also affirmed the district court's dismissal of the claims under New York common law, also because of plaintiffs' lack of reasonable reliance, thus ducking the Martin Act preemption issue that has been the subject of conflicting rulings by the state and federal courts and is currently before the New York Court of Appeals.
The Sixth Circuit based its affirmance of Ashland's dismissal on that other common ground for dismissal -- failure to plead scienter with the requisite particularity. In Ashland Inc. v. Oppenheimer & Co., Inc. (No. 10-5305, July 28, 2011), the court, following the "entirely collective assessment" of Tellabs and Matrixx, concluded that Ashland's factual allegations, when considered together, did not give rise to a strong inference that Oppenheimer acted with scienter. "Simply put, apart from conclusory allegations, Ashland fails to provide any facts explaining why or how Oppenheimer possessed advance, non-public knowledge that underwriters would jointly exit the ARS market and cause its collapse..." The court also affirmed dismissal of the state law claims for failure to plead scienter or (in the case of the non-fraud claims) lack of justifiable reliance.
Solicitation, Extortion, and the FCPA, by Joseph W. Yockey, University of Iowa College of Law, was recently posted on SSRN. Here is the abstract:
The U.S. Foreign Corrupt Practices Act (FCPA) prohibits firms from paying bribes to foreign officials to obtain or retain business. It is one of the most significant and feared statutes for companies operating abroad. FCPA enforcement has never been higher and nine-figure monetary penalties are not uncommon. This makes the implementation of robust FCPA compliance programs of paramount importance. Unfortunately, regardless of whether they have compliance measures in place, many firms report that they face bribe requests and extortionate threats from foreign public officials on a daily basis. The implications of these demand-side pressures have gone largely unexplored in the FCPA context. This Article helps fill that gap. First, I describe the nature and frequency of bribe solicitation and extortion to illustrate the scope of the problem and the costs it imposes on firms and other market participants. I then argue that current FCPA enforcement policy in cases of solicitation and extortion raises several unique corporate governance and compliance challenges, and ultimately poses a risk of overdeterrence. Though these concerns can be partially addressed through enhanced statutory guidance, I conclude by urging regulators to shift some of their focus from bribe-paying firms in order to directly target bribe-seeking public officials. Confronting the market for bribe demands in this way will help reduce corruption in general while also allowing employees and agents to spend less time worrying about how to respond to bribe requests and more time on legitimate, value-enhancing transactions.
SEC v. Capital Gains Research Bureau and the Investment Advisers Act of 1940, by Arthur B. Laby, Rutgers University School of Law - Camden, was recently posted on SSRN. Here is the abstract:
This paper was prepared for a conference entitled The Role of Fiduciary Law and Trust in the Twenty-First Century: A Conference Inspired by the Work of Tamar Frankel, held at Boston University School of Law in October 2010. SEC v. Capital Gains Research Bureau was the Supreme Court’s first interpretation of the Investment Advisers Act of 1940 and it still stands as a leading case under the Act. The opinion is often cited for the proposition that the Advisers Act imposed a federal fiduciary duty on investment advisers. Yet a careful reading of the case and the underlying statute reveals that neither was intended to create a federal fiduciary standard. Rather, the doctrine developed through statements in subsequent Supreme Court decisions, which misread or disregarded Justice Goldberg’s disquisition in Capital Gains. This article reviews the history of the Capital Gains case and then explains when and how it was misinterpreted to state that Congress established a federal fiduciary duty in the Advisers Act. The last part of the paper discusses implications of this development, including the confusion provoked as Congress and the SEC grapple with whether to impose a fiduciary duty on broker-dealers commensurate with the duty imposed on advisers.