Securities Law Prof Blog

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

Saturday, August 13, 2011

SEC Looks into U.S. Credit Downgrade

The Wall St. Journal reports that the SEC will look into S&P's downgrading of the U.S. credit rating as part of an ongoing examination.  Treasury, you will recall, has accused the ratings firm of a $2 trillion math error.   WSJ, SEC Checks S&P's Downgrade Math

August 13, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, August 11, 2011

SEC Whistleblower Chief Says Program will Bolster Internal Compliance Systems

From Remarks at Georgetown University by Sean X. McKessy, Chief, Office of the Whistleblower, U.S. Securities and Exchange Commission (Aug. 11, 2011):

Issue Number 1:The Whistleblower program will bolster, not hamper, the internal compliance systems at companies across the country.

This seems rather apparent to me, yet no topic has been, and continues to be, more heavily debated than this one. The fact is that the SEC whistleblower program is the first and only such program in the country that makes available a monetary award from the government to an individual that reports possible wrongdoing internally. Put another way, the SEC’s WB program is the only one in the country that extends significant benefits to individuals that report internally that enhance the opportunity for a whistleblower award, and possibly an award at a higher end of the allowable range.


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

SEC Charges Former investment Fund Employee with Insider Trading in Marvel Stock

The SEC charged a California man with insider trading for a 3000 percent profit based on confidential information that he learned from his girlfriend prior to Walt Disney Company’s acquisition of Marvel Entertainment.  According to the SEC's complaint, Toby G. Scammell, who worked at an investment fund at the time, purchased Marvel call options beginning in mid-August 2009. He secretly used money in his brother’s accounts over which he had been given control when his brother was deployed to serve in Iraq a few years earlier. Scammell’s girlfriend worked on the Marvel acquisition as an extern in Disney’s corporate strategy department and possessed confidential details about the pricing and timing of the deal.  After Marvel’s stock price jumped more than 25 percent after the public announcement, Scammell sold all of his Marvel options.

The SEC seeks a permanent injunction, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.


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

Wednesday, August 10, 2011

SEC Charges That Stifel, Nicolaus Defrauded Wisconsin School Districts

The SEC charged Stifel, Nicolaus & Co., Inc., a St. Louis-based broker-dealer, and former Stifel Senior Vice President David W. Noack with defrauding five Wisconsin school districts by selling them unsuitably risky and complex investments funded largely with borrowed money.  According to the SEC’s complaint, the five school districts are the Kenosha Unified School District, Kimberly Area School District, School District of Waukesha, West Allis-West Milwaukee School District, and Whitefish Bay School District.

The SEC alleges that Stifel and Noack created a proprietary program to help the school districts fund retiree benefits by investing in notes linked to the performance of synthetic collateralized debt obligations (CDOs). The school districts established trusts that invested $200 million in three transactions from June to December 2006, paid for largely with borrowed funds. According to the SEC’s complaint, Stifel and Noack misrepresented the risk of the investments and failed to disclose material facts to the school districts. In the end, the investments were a complete failure, but generated significant fees for Stifel and Noack.

 The SEC seeks permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.

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

Tuesday, August 9, 2011

FINRA Fines Citigroup $500,000 for Failing to Supervise Thieving Broker

The FINRA fined Citigroup Global Markets, Inc. $500,000 for failing to supervise Tamara Moon, a former registered sales assistant at the firm's branch office in Palo Alto, California. Over an 8 year period, Moon misappropriated $749,978 from 22 customers, falsified account records and engaged in unauthorized trades in customer accounts. Moon took advantage of Citigroup's supervisory lapses at the branch and targeted elderly, ill or otherwise vulnerable customers whom she believed were unable to monitor their accounts. Moon's victims included elderly widows, a senior with Parkinson's disease and her own father. FINRA previously barred Moon for her actions and is continuing to investigate other individuals involved in the supervision of Moon.




August 9, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

NCUA Sues Goldman Sachs for Fraud on Behalf of Failed Credit Unions

The National Credit Union Administration filed suit today against New York firm Goldman Sachs & Co. alleging violations of federal and state securities laws, as well as misrepresentations in the sale of securities to now-failed U.S. Central and Western Corporate federal credit unions.  As liquidating agent for the failed corporate credit unions, NCUA can seek recoveries from responsible parties to minimize cost to its insurance funds and the credit union industry.

This law suit follows three similar legal proceedings, two filed in the Federal District Court of
Kansas June 20 against J.P. Morgan Securities, LLC, and RBS Securities, and one in the Federal
District Court in Central California also against RBS July 18. This action seeks damages in excess of $491 million from Goldman Sachs, bringing the total sought in the four lawsuits filed to date to nearly $2 billion. 

August 9, 2011 in News Stories, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Sunday, August 7, 2011

Martin on Hedge Fund Regulation

Is Systemic Risk Prevention the New Paradigm? A Proposal to Expand Investor Protection Principles to the Hedge Fund Industry, by Cary Martin, University of Wisconsin Law School, was recently posted on SSRN.  Here is the abstract:

The Dodd-Frank Act finally achieved the inevitable. It subjects hedge funds to significant regulatory oversight even though they were previously exempt from regulation. In 2006, the SEC notoriously failed at this task when the D.C. Court of Appeals held that the agency acted outside of its rulemaking authority in attempting to regulate hedge fund advisers. Through the passage of the Dodd-Frank Act, Congress finally finished what the SEC started by using the current political climate to close this regulatory loophole. The Dodd-Frank Act is a step in the right direction, but it leaves an important question largely unanswered: Should hedge fund investors actually be protected under our federal securities laws?

While the Dodd-Frank Act will require many hedge fund advisers to register under the Advisers Act, the extent to which this will actually protect investors is unclear. Overall, the Dodd-Frank Act seems to be limited to systemic risk prevention. Many researchers in this area agree with this approach and believe that investor protection is inapplicable in this case, since such investors are typically institutions or wealthy individuals who can presumably fend for themselves. This view is consistent with traditional notions of investor protection, which reject the argument that investor protection principles should be expanded to hedge fund investors. In contrast, this article focuses on the need for greater protection of these investors since the hedge fund industry has morphed into its own distinct marketplace that has grown increasingly complex. As such, this article specifically argues that the Dodd-Frank Act does not provide hedge fund investors with enough information to adequately protect themselves from the unique informational challenges associated with hedge fund investments. These unique issues encompass an overall lack of standardization within the industry, particularly with respect to its disclosure practices, risk assessments, and valuation procedures. Furthermore, the losses of these sophisticated investors can adversely impact unsuspecting retail investors as well the entire economy, which makes the expansion of investor protection concepts a pressing issue. This article concludes by proposing an alternative regulatory framework that creates uniform and mandatory measures of risk and valuation, which would provide reliable and consistent disclosures to investors, and create more transparency within the hedge fund marketplace.

August 7, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Barnett on Assessing Risk on Subprime Securities

Assessing Risk on Subprime Mortgage Backed Securities: Did Credit Rating Agencies Misrepresent Risk to Investors?, by Harold C. Barnett, Roosevelt University - Walter E. Heller College of Business - Marshall Bennet Institute of Real Estate, was recently posted on SSRN.  Here is the abstract:

The Securities and Exchange Commission (SEC) has asked whether credit rating agencies (CRA) committed fraud by misleading investors with respect to the default risk on mortgage backed securities (MBS). This paper argues that, to the detriment of investors, the CRA did not incorporate information available to securitizers in their ratings of subprime mortgage backed securities. A test of this proposition utilizes data on CRA ratings of 32 Goldman Sachs MBS issued in 2005-2007 and Moody’s Investor Services projections of loss for these mortgage pools. The percent of principal balances rated triple-A is relatively constant over this period. In contrast, projected losses increase substantially for 2006-2007 MBS issues. A Goldman Sachs presentation to its Board highlights factors that enhanced the risk of default in 2006-2007. Review of a select sample of 2006-2007 MBS prospectuses contain disclosures of market, originator and mortgage characteristics that the securitizer associates with an increased risk of default. These disclosures suggest that the risk of default increased step wise beginning in 2006. While the same information was available to the CRA, their credit risk ratings did not incorporate this information and remained flat. Should the SEC obtain data on the near term performance of these MBS they would be able to establish if this divergence in risk assessment was substantial and if the CRA chose to support their clients to the detriment of MBS investors.

August 7, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Black on Arbitration of Investors' Claims Against Issuers

Arbitration of Investors' Claims Against Issuers: An Idea Whose Time Has Come?, by Barbara Black,
University of Cincinnati - College of Law, was recently posted on SSRN.  Here is the abstract:

Ever since the U.S. Supreme Court held that arbitration provisions contained in brokerage customers’ agreements were enforceable with respect to federal securities claims, proposals have been floated to include in an issuer’s governance documents a provision that would require arbitration of investors’ claims against the issuer. To date, however, publicly traded domestic issuers and their counsel have not seriously pursued these proposals, probably because of several legal obstacles to implementation. In addition to these legal obstacles, publicly traded issuers may not have perceived significant advantages to arbitration. Recent legal developments, however, make inclusion of an arbitration provision in a publicly traded issuer’s governance documents a proposal worthy of serious consideration. In particular, because of the Supreme Court’s recent opinion in AT&T Mobility LLC v. Concepcion, issuers may be able to achieve an advantage through adoption of an arbitration provision in their governance documents that they were not able to achieve through PSLRA and the Securities Litigation Uniform Standards Act. They could finally achieve the demise of securities class claims.

August 7, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Skeel on The New Financial Deal

Making Sense of the New Financial Deal, by David A. Skeel Jr., University of Pennsylvania Law School; European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

In this Essay, I assess the enactment and implications of the Dodd-Frank Act, Congress’s response to the 2008 financial crisis. To set the stage, I begin by very briefly reviewing the causes of the crisis. I then argue that the legislation has two very clear objectives. The first is to limit the risk of the shadow banking system by more carefully regulating the key instruments and institutions of contemporary finance. The second objective is to limit the damage in the event one of these giant institutions fails. While the new regulation of the instruments of contemporary finance - including clearing and exchange trading requirements for derivatives - is promising, its treatment of systemically important financial institutions is likely to create a troublesome partnership between these institutions and the government. I also argue that our financial world is just as prone to bailouts after Dodd-Frank as it was before, and that it would have made a lot more sense to focus on bankruptcy as the solution of choice for troubled financial institutions.

After this initial assessment, I discuss the CEO compensation issues that have gotten so much attention in the press. I conclude by considering the legislation from a distinctively Christian perspective.

August 7, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Christensen on Allocating Loss in Ponzi Schemes

Allocating Loss in Securities Fraud: Time to Adopt a Uniform Rule for the Special Case of Ponzi Schemes, by Grant Christensen, University of Oregon College of Law; University of Toledo - College of Law, was recently posted on SSRN.  Here is the abstract:

The Global Financial Crisis precipitated a condensing of capital and a fall in global equities markets that resulted not solely in the necessity of government bailouts of the financial industry but also exposed a number of Ponzi schemes that collectively will cost investors tens of billions of dollars. With a new wave of litigation by innocent investors against Ponzi scheme operators just beginning, and likely to take years, it becomes important to clearly identify the methodologies used to value the loss and allocate existing assets among remaining creditors. To that end I offer this article to argue that courts ought to use a comparatively new approach – the loss to the losing victim methodology originally pioneered in criminal law – to determine how equally innocent victims share the losses these schemes precipitated. By standardizing the calculation of loss to investors in both criminal and civil law, the courts will not only make the determination of loss considerably easier, but also more equitable.

August 7, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Schipani et al. on Efficiency of the Corporate Bond Market

Fraud on the Market: Analysis of the Efficiency of the Corporate Bond Market, by Cindy A. Schipani, University of Michigan - Stephen M. Ross School of Business; Michael L. Hartzmark, Navigant Consulting, Inc.; and Hasan Nejat Seyhun, University of Michigan at Ann Arbor - Stephen M. Ross School of Business, was recently posted on SSRN.  Here is the abstract:

The efficiency of the corporate bond market is not well understood. Although many of the factors used to analyze stock market efficiency translate with some adjustments to corporate bond markets, the cause-effect factor is not intuitive and can be a source of significant confusion.

In this manuscript we analyze bond market efficiency in the context of a recent court decision. In recent litigation concerning allegations of securities fraud perpetrated by the American International Group (AIG), the federal district court for the Southern District of New York declined to certify a class of bondholders, citing lack of common questions of law or fact. The decision turned on an empirical analysis of whether certain AIG bonds traded in an open, developed and efficient market. If the market for these bonds had been found efficient, there would have been grounds to certify the bondholders as a class.

Ironically, the court found insufficient empirical evidence to hold that the $1.71 billion in AIG bonds, issued by the world’s largest insurance company, traded in efficient markets. Unfortunately, the AIG court missed salient differences between the stock and bond markets in reaching its conclusion. Our manuscript describes the analysis missed by the court and supports a contrary result.

Part I provides an overview of the law as it has developed regarding certification of class actions and the elements of a claim of fraud on the market as relevant to the lead plaintiffs’ claims of violations of the securities laws. Part II introduces the required empirical analysis and benchmarks to evaluate a claim of fraud on the market. Part III continues with a theoretical discussion of the distinctions missing in the AIG analysis between bonds and stocks relevant to determining whether the bond market should be afforded the fraud on the market presumption. Part IV builds on this with a discussion of our alternate empirical analyses. Concluding remarks follow.

The AIG decision has serious implications not only for the corporate bond market but also for public policy. Private securities fraud class actions are an important mechanism for deterring fraud and promoting confidence in the securities markets. When market efficiency is important for determining certification of a class of security holders, it is critical that courts carefully consider how different markets operate.

August 7, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Omarova on the Global Financial Crisis

The New Crisis for the New Century: Some Observations on the 'Big - Picture' Lessons of the Global Financial Crisis of 2008, by Saule T. Omarova, University of North Carolina at Chapel Hill School of Law, was recently posted on SSRN.  Here is the abstract:

Two key factors made the financial crisis of 2008-09 qualitatively different from all prior crises and panics. First, it was the world's first truly global financial crisis. Second, it was a crisis rooted fundamentally in the successes of financial innovation and an unprecedented complexity of financial products, which resulted from such innovation. Each of these unique characteristics of the current crisis has major implications from the perspective of regulatory reform in the financial services sector, both domestically and on the international level. This essay sketches in broad strokes some of these high-level implications.

August 7, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)