Securities Law Prof Blog

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

Saturday, October 8, 2011

SEC Plans to Take Up Volcker Rule

The SEC will hold an Open Meeting on October 12, 2011.  The subject matter of the Open Meeting will be:

Item 1: The Commission will consider whether to propose a new rule under Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, that would generally prohibit any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund subject to certain exemptions.

Item 2: The Commission will consider whether to propose new rules under Section 764(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act to provide for the registration of security-based swap dealers and major security-based swap participants.


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

Friday, October 7, 2011

SEC Advisory Committee on Small Companies Schedules Public Meeting

The SEC Advisory Committee on Small and Emerging Companies is providing notice that it will hold a public meeting on October 31, 2011.  The public portions of the meeting will be webcast on the Commission’s website. The public is invited to submit written statements to the Committee.The agenda for the meeting includes discussion of capital formation issues relevant to small and emerging companies.

October 7, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Schedules Public Roundtable on Conflict Minerals

The SEC will hold a public roundtable on October 18, 2011 on various issues related to the Commission’s required rulemaking under Section 1502 of the Dodd-Frank Act , which relates to reporting requirements regarding conflict minerals originating in the Democratic Republic of the Congo and adjoining countries. Roundtable panelists are expected to reflect the views of different constituencies, including investors, affected issuers, human rights organizations, and other stakeholders.

October 7, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Schedules Roundtable on Microcap Securities

The SEC will hold a public roundtable meeting on October 17, 2011 on issues related to the Execution, Clearance and Settlement of Microcap Securities.   Panelists will consider a range of microcap securities topics, such as the current issues facing small cap issuers in the clearance and settlement process, potential regulatory changes impacting the Over-The-Counter markets, and Anti-Money Laundering concerns specific to microcap issuers.

October 7, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, October 6, 2011

SEC Files Emergency Action to Halt Green-Product Themed Ponzi Scheme

The SEC announced that it obtained an emergency court order to halt a Ponzi scheme that promised investors rich returns on water-filtering natural stone pavers, but bilked them of approximately $26 million over a four-year period.  The SEC’s complaint alleges that convicted felon Eric Aronson and others defrauded investors in PermaPave Companies, a group of firms based on Long Island, N.Y., and controlled by Aronson.

About 140 individuals, many working in the construction or landscaping business, invested in the scheme between 2006 and 2010, the SEC alleged. Investors were told that PermaPave Companies had a tremendous backlog of orders for pavers imported from Australia, which could be sold in the U.S. at a substantial mark-up, yielding monthly returns to investors of 7.8% to 33%. In reality, the complaint states that there was little demand for the product, and the cost of the pavers far exceeded the revenue from sales. 

According to the SEC’s complaint, when investors began demanding money owed to them, Aronson accused them of committing a felony by lending the PermaPave Companies money at the interest rates he promised them, which he suddenly claimed were usurious. Aronson and his attorney, Fredric Aaron, then allegedly made false statements to persuade investors to convert their securities into ones that deferred payments owed them for several years.

The U.S. Attorney’s Office for the Eastern District of New York, which conducted a parallel investigation of the matter, today filed criminal charges against Aronson, Buonauro, and Kondratick, who were arrested earlier today.

U.S. District Court Judge Jed S. Rakoff granted the SEC’s request to freeze assets of the defendants and eight relief defendants. The SEC is seeking preliminary and permanent injunctions against the defendants, and to have them return their allegedly illicit profits with prejudgment interest, and pay civil monetary penalties. In addition, the SEC seeks to bar Aronson, Kondratick, and Aaron from participating in penny-stock offerings and from serving as officers or directors of public companies.

October 6, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges StratoComm, Execs and Attorney with Securities Fraud

The SEC recently filed two actions involving allegedly illegal unregistered stock offerings by StratoComm Corporation.  It charged the company, its CEO Roger D. Shearer, and its former Director of Investor Relations, Craig Danzig, in one action and its outside counsel, Stewart A. Merkin, in the other.The SEC alleges that StratoComm, acting at Shearer’s direction and with Danzig’s assistance, issued and distributed public statements falsely portraying the company as actively engaged in the manufacture and sale of telecommunications systems for use in underdeveloped countries, particularly Africa. In reality, the company had no product and no revenue. The SEC’s complaint also alleges that StratoComm, Shearer and Danzig sold investors approximately $3 million worth of StratoComm stock in unregistered transactions. Shearer used much of that money for his own purposes, including paying a substantial part of the restitution he owed in connection with his guilty plea in a prior criminal proceeding.

In the other action, the SEC alleges that Merkin wrote four attorney representation letters for posting on the website of Pink Sheets LLC and its successor, Pink OTC Markets, Inc. In those letters Merkin disclaimed knowledge of any investigation into possible violations of the securities laws by StratoComm or any of its officers or directors. However, the SEC’s complaint alleges, Merkin was representing StratoComm and several individuals in connection with the SEC’s investigation at the time. Nevertheless, in order that StratoComm’s shares would continue to be quoted, the SEC’s complaint alleges that Merkin falsely stated that to his knowledge StatoComm was not under investigation.

October 6, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

2d Circuit: FINRA Can't Sue to Collect Fines

On Oct. 5, 2011 the Second Circuit held that FINRA does not have the authority to bring judicial actions to collect disciplinary fines.  Fiero v. FINRA (09-1556-cv (L))(Download Fireo v FINRA).  Because I currently sit on the National Appellate Council of FINRA, I am not commenting on the opinion.

October 6, 2011 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 5, 2011

Another Galleon Defendant Settles Insider Trading Charges

The SEC has settled yet another case against a defendant related to Galleon Management.  On September 30, 2011, the Honorable Jed S. Rakoff, United States District Judge, United States District Court for the Southern District of New York, entered a Final Judgment on Consent as to Steven Fortuna in the SEC's insider trading case, SEC v. Galleon Management, LP, et al., 09-CV-8811 (SDNY) (JSR). On the same day, the Court entered the SEC's Notice of Dismissal as to S2 Capital Management, LP. The SEC filed its action on October 16, 2009, which alleged that Raj Rajaratnam, Galleon Management, LP, Fortuna, S2 Capital, and others engaged in a widespread insider trading scheme involving hedge funds, industry professionals, and corporate insiders.

Fortuna was a co-founder and principal of S2 Capital, which was an unregistered hedge fund investment adviser based in New York, New York. S2 Capital served as the investment adviser to the hedge fund S2 Capital Fund, LP. During the relevant time period, S2 Capital had over $125 million in assets under management.

The Commission alleged that Fortuna and S2 Capital violated the federal securities laws by trading on the basis of material nonpublic information concerning quarterly earnings of Akamai Technologies, Inc. and concerning Advanced Micro Devices Inc.'s pending transactions with two Abu Dhabi sovereign entities. Fortuna and S2 Capital learned the inside information from Danielle Chiesi, a consultant and portfolio manager at New Castle Funds LLC, then a registered investment adviser based in White Plains, New York.

The Final Judgment orders Fortuna liable for disgorgement of $193,536, prejudgment interest thereon in the amount of $11,040, and a civil penalty in the amount of $96,768. Fortuna separately pleaded guilty in a parallel criminal case before the United States District Court of the Southern District of New York, and has been cooperating in connection with this action and related investigations. The SEC dismissed its case against S2 Capital, an entity which has ceased operations and is essentially defunct.

October 5, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Withdraws Proposal on Supervision

According to the SEC website, FINRA has withdrawn a proposed rule to Adopt Rules Regarding Supervision in the Consolidated FINRA Rulebook.  FINRA proposed the rule in June 26, 2011 and received about a dozen comments on it.  No explanation was given for the withdrawal.

October 5, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Capital University: Conference on Foreclosure Crisis

Capital University Law School, my neighbor to the north in Columbus, Ohio, has announced what looks to be a terrific conference: The Foreclosure Crisis: New Strategies for Addressing the National and Local Calamity on October 28, 2011.  Steven L. Schwarcz (Duke) will speak on Structuring Responsibility in Securitization Transactions, and Richard Cordray, nominee for Director of the Consumer Financial Protection Bureau, will speak on the CFPB's work.  Check out the website for further information.

October 5, 2011 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

New York Charges BNY Mellon with Defrauding Clients in Forex Transactions

The New York Attorney General and the City of New York filed a lawsuit against the Bank of New York Mellon (BNY Mellon) for defrauding clients in foreign currency exchange transactions. The victims include both public and private pension funds, including those of the New York City Employee Retirement System (NYCERS) and the State University of New York.

According to the AG's press release, over a 10-year period, BNY Mellon consistently misrepresented to customers the rates it would give foreign currency transactions. Instead of providing the best interbank rates– as it promised – BNY Mellon gave the worst or nearly the worst rates of the trading day.  The Bank made nearly $2 billion from these trades, accounting for over 65 percent of its foreign exchange revenues.

New York City pension funds were among the most impacted of BNY Mellon’s clients and lost tens of millions of dollars as a result of its fraudulent rates. In addition to NYCERS, those funds include the Teachers Retirement System of the City of New York, the New York City Police Pension Fund, Subchapter 2, and the New York City Fire Department Pension Fund, Subchapter 2.

The case began when a whistleblower, FX Analytics, filed a complaint with the Attorney General’s officein 2009.  The whistleblower’s complaint was filed under seal while the Attorney General had the opportunity to investigate the matter. The Attorney General seeks to force BNY Mellon to return its profits, restitution, damages, and with respect to the False Claims Act violations, triple damages and penalties of $12,000 per violation.

October 5, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Insider Trading Charges Against Former Investment Bank Exec

The SEC settled insider trading charges against Richard A. Hansen, the former Chairman of Keystone Equities Group, a registered broker-dealer and regional investment bank. According to the SEC, Hansen received illegal tips concerning pending acquisitions from his then-employee and close personal friend Donna Murdoch.  Murdoch, in turn, had learned of the acquisitions through her close personal relationship with James Gansman, then an Ernst & Young (“E&Y”) partner who worked on the transactions for E&Y clients.  Hansen also passed on one of the tips to his longtime friend Stuart Kobrovsky, a retired stockbroker, who likewise traded.

Without admitting or denying the allegations—except to the extent they are embraced by his guilty plea and conviction in the parallel criminal case —Hansen has agreed to settle the Commission’s allegations against him.  The final judgment to which Hansen consented would further order that he is liable for a combined total in disgorgement and prejudgment interest of $63,038, of which $32,222 would be deemed satisfied by the order of criminal forfeiture entered against Hansen in the parallel criminal case, leaving a balance due of $30,816. Finally, the Final Judgment would bar Hansen permanently from serving as an officer or director of any public company. Additionally, Hansen consented, in related administrative proceedings, to the entry of a Commission order that would bar him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, or from participating in any offering of a penny stock.

October 5, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 4, 2011

House Financial Services Commitee Considers Bill to Establish Certain Thresholds for Shareholder Registration

The House Capital Markets and Government Sponsored Enterprises Subcommittee will meet October 5 on:

Markup of H.R. 1965, To amend the securities laws to establish certain thresholds for shareholder registration, and for other purposes (Rep. Himes); H.R. 2167, Private Company Flexibility and Growth Act (Rep. Schweikert); H.R. 2930, Entrepreneur Access to Capital Act (Rep. McHenry); H.R. 2940, Access to Capital for Job Creators Act (Rep. McCarthy); H.R. ____, Small Company Job Growth and Regulatory Relief Act of 2011 (Rep. Fincher)

October 4, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

FINRA Fines Merrill For RR's Ponzi Scheme

FINRA has fined Merrill Lynch, Pierce, Fenner & Smith Inc., $1 million for supervisory failures that allowed a registered representative at Merrill Lynch's branch office in San Antonio, Texas, to use a Merrill Lynch account to operate a Ponzi scheme.  Bruce Hammonds, the registered representative, convinced 11 individuals to invest more than $1 million in a Ponzi scheme he created and ran as B&J Partnership for over 10 months. Merrill Lynch supervisors approved Hammonds' request to open a business account for B&J and failed to supervise funds that customers deposited and Hammonds withdrew. FINRA permanently barred Hammonds from the securities industry in December 2009. Merrill Lynch reimbursed all investors who were harmed by Hammond's misconduct.

FINRA found that Merrill Lynch failed to have an adequate supervisory system in place to monitor employee accounts for potential misconduct. Merrill Lynch's supervisory system automatically captured accounts an employee opened using a social security number as the primary tax identification number. However, if the employee's social security number was not the primary number associated with the account, the system failed to capture the account in its database. Instead, Merrill Lynch solely relied on its employees to manually input these accounts into its supervisory system. FINRA also found that from January 2006 to June 2010, Merrill Lynch failed to monitor an additional 40,000 employee/employee-interested accounts, which were not reported for certain periods of time and therefore not available on the supervisory system

October 4, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

S.D.N.Y. Judge Blasts SEC for Lack of Oversight over Distribution of Funds to Investors

The SEC just can't catch a break in the courts.  To cite just two recent examples: Judge Rakoff's begrudging approval of the agency's settlement with Bank of America over the Merrill Lynch merger, calling it "half-baked justice;" the D.C. Circuit's vacating of the proxy access rule because of inadequate analysis of its competitive impact.  And now Judge Pauley, in the S.D.N.Y., refuses to sign off on a bill submitted by a claims administrator in an SEC settlement, because the administrator failed to justify its requested fees and the SEC appeared to conduct no meaningful oversight.  SEC v. Zurich Financial Services (S.D.N.Y. Sept. 30, 2011).

As Judge Pauley explains, the SEC nominated Garden City Group (GCG) as claims administrator to distribute a $25 million in an SEC action against Zurich Financial Services, because GCG was the claims administrator in a $84.6 million private securities class action settlement against the same defendant involving the same misconduct.  GCF charged a total of approximately $360,000 to administer the private class action fund; it submitted a bill of approximately $1.1 million to settle the SEC action.  The only support for the charges was an invoice that provided no description of the services rendered or the rates charged.  Worse, the invoice totalled only $870,000; the balance was not supported by any documentation.  The judge had, in a previous litigation, warned the SEC about its responsibility to review and audit fees submitted by its nominees, and he is clearly very displeased about the agency's continued laissez-faire attitude.  In particular, the judge questions the expenditure of about $529,000 in publication costs without any assessment of whether such an expensive notice program was necessary or effective.

Clearly, what bothers the court, at least in part, is the agency's cavalier disregard for the court throughout the process:  the court had to prod the SEC to propose a distribution fund, and the agency did not keep the court informed throughout the distribution process. The fee application was the final straw: "In ostrich-like fashion, the SEC does not even bother to submit a single piece of paper on GCG's cumulative motions for payment of fees and expenses totalling $1,083,911.88."

So I wonder:  has the agency's performance become so bad, or have judges become more demanding or less forgiving about the agency's performance?  Has the SEC become the punching bag for the judiciary as well as for Congress (which seems to hold oversight hearings on a continuous basis).

October 4, 2011 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Monday, October 3, 2011

Coordinated State Exams Identify Top Investment Adviser Deficiencies

NASAA released an updated series of recommended best practices that investment advisers should consider to minimize the risk of regulatory violations.  The best practices were developed after a series of coordinated examinations of investment advisers by 45 state and provincial securities examiners revealed a number of significant problem areas. Examinations of 825 investment advisers conducted between January 1, 2011 and June 30, 2011 uncovered 3,543 deficiencies in 13 compliance areas, compared to 1,887 deficiencies in 13 compliance areas identified in a similar 2009 coordinated examination of 458 investment advisers.

The 2011 examinations were conducted under the guidance of NASAA’s Investment Adviser Operations Project Group. The top five categories with the greatest number of deficiencies involved registration, books and records, unethical business practices, supervision, and advertising.

The examinations revealed that:

  • The top registration deficiencies were inconsistencies between parts I and II of form ADV and failing to amend form ADV in a timely manner.
  • In the area of preparing and maintaining current and accurate books and records, the top deficiencies included not maintaining client suitability information, not properly safeguarding client records and data, and not backing up data.
  • The leading unethical business practice deficiencies involved missing or no contracts and other contract-related issues, altered documentation and signing blank documents. 
  • The most common supervision deficiencies were inadequate or no supervisory/compliance procedures, supervision over personal trades, and remote location supervision.
  • Common advertising deficiencies included issues involving websites, correspondence, business cards and the misuse of “RIA,” (Registered Investment Adviser).

Other areas in which investment advisers faced compliance challenges included privacy, fees, custody, investment activities, and solicitors.

October 3, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

The SEC and Cost-Benefit Analysis

A good read -- Sarah Johnson, Is the SEC Being “Set Up to Fail”?, CFO. com (describing SEC Chair Schapiro's pushback from a bill that would require more empirical data before the agency sets rules)


October 3, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Sunday, October 2, 2011

Monestier on Canada & Global Securities Class Actions

Is Canada the New 'Shangri-La' of Global Securities Class Actions?, by Tanya J. Monestier, Roger Williams University School of Law,  was recently posted on SSRN.  Here is the abstract:

There has been significant academic buzz about Silver v. Imax, an Ontario case certifying a global class of shareholders alleging statutory and common law misrepresentation in connection with a secondary market distribution of shares. Although global class actions on a more limited scale have been certified in Canada prior to Imax, it can now be said that global classes have “officially” arrived in Canada. Many predict that the Imax decision means that Ontario will become the new center for the resolution of global securities disputes. This is particularly so after the United States largely relinquished this role last year in Morrison v. National Australia Bank.

Whether Imax proves to be a meaningful precedent or simply an aberration will largely depend on whether the court dealt appropriately with the conflict of laws issues at the heart of the case. No author has yet addressed the conflict of laws complications posed by the certification of global class actions in Canada; this Article seeks to fill that void. In particular, I use the Imax case as a lens through which to canvass the conflict of laws issues raised by the certification of global classes. I look at the difficult questions of jurisdiction simpliciter, recognition of judgments, choice of law, parallel proceedings, and notice/procedural rights that need to be addressed now that global classes have come to Canada.

October 2, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Cheffins & Armour on Hedge Fund Activism

The Past, Present and Future of Shareholder Activism by Hedge Funds, by Brian R. Cheffins, University of Cambridge - Faculty of Law; European Corporate Governance Institute (ECGI), and John Armour, University of Oxford - Faculty of Law; Oxford-Man Institute of Quantitative Finance; European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

The forthright brand of shareholder activism hedge funds deploy emerged by the mid-2000s as a major corporate governance phenomenon. This paper explains the rise of hedge fund activism and offers predictions about future developments. The paper begins by distinguishing the “offensive” form of activism hedge funds engage in from “defensive” interventions “mainstream” institutional investors (e.g. pension funds or mutual funds) undertake. Variables influencing the prevalence of offensive shareholder activism are then identified using a heuristic device, “the market for corporate influence”. The rise of hedge funds as practitioners of offensive shareholder activism is traced by reference to the “supply” and “demand” sides of this market, with the basic chronology being that, while there were direct antecedents of hedge fund activists as far back as the 1980s, hedge funds did not move to the activism forefront until the 2000s. The paper brings matters up-to-date by discussing the impact of the recent financial crisis on hedge fund activism and draws upon the market for corporate influence heuristic to predict that activism by hedge funds is likely to remain an important element of corporate governance going forward.

October 2, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Campbell on Regulation of Capital Formation Activities

Federalism Gone Amuck: The Case for Reallocating Governmental Authority Over the Capital Formation Activities of Businesses, by Rutheford B. Campbell Jr., University of Kentucky - College of Law, was recently posted on SSRN.  Here is the abstract:

This essay, published in connection with the 100th anniversary of the Kansas Blue Sky Law, offers arguments in favor of a significant reallocation of governmental authority over the capital formation activities of businesses.

The essay argues that the present system of dual, federal-state control over capital formation is not in the best interests of the citizens that state and federal rulemakers and regulators are obligated to serve. The system is out of balance for a market economy such as ours, due principally to a misallocation of state resources in support of state rules requiring the registration of securities.

The solution for this problem is the elimination all of state authority over the registration of securities and the reallocation of state resources to the enforcement of state antifraud provisions.

This solution requires both state and federal regulators to alter their past conduct. State regulators must abandon the vigorous and pernicious fight they have waged in their effort to maintain their authority over the registration of securities and, instead, work to achieve a reallocation of scarce state resources to their most efficient use, which is the support of states’ enforcement of their antifraud provisions. The Securities and Exchange Commission must abandon its hands-off approach with regard to state authority over registration and use its best efforts to achieve a single, national system regarding the registration of securities.

October 2, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)