Securities Law Prof Blog

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

Wednesday, October 19, 2011

FINRA Proposes a Rule on Private Placements

FINRA filed with the SEC proposed FINRA Rule 5123, which would require that members and associated persons that offer or sell private placements (as described in the Rule), or participate in the preparation of private placement memoranda (“PPM”), term sheets or other disclosure documents in connection with such private placements, provide relevant disclosures to each investor prior to sale describing the anticipated use of offering proceeds, and the amount and type of offering expenses and offering compensation. FINRA Rule 5123 also would require that the PPM, term sheet or other disclosure document, and any exhibits thereto, be filed with FINRA no later than 15 calendar days after the date of the first sale, and any material amendments to such document, or any amendments to the disclosures mandated by the Rule, be filed no later than 15 calendar days after the date such document is provided to any investor or prospective investor.

October 19, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Director, Investment Management, Testifies on ETFs

Eileen Rominger, SEC Director, Division of Investment Management, testified before the Subcommittee on Securities, Insurance, and Investment, Senate Committee on Banking, Housing and Urban Affairs, on
October 19, 2011, on Testimony on Market Micro-Structure: An Examination of ETFs.

October 19, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC & Former Inhouse Counsel Settle Backdating Charges

If you remember the backdating stock options scandal of a few years back, you may recall that the SEC brought a number of enforcement actions against inhouse counsel.  Today the SEC announced the conclusion of one of these matters and the settlement of its claims against Lisa C. Berry, the former General Counsel of KLA-Tencor Corp. and Juniper Networks, Inc. The Commission alleged that from 1997 through 2003 Berry caused KLA-Tencor and Juniper to report false financial information to the investing public through her preparation of corporate records that concealed that employee stock option grants were priced with the benefit of hindsight at both companies.  Without admitting or denying the Commission's allegations, Berry consented to pay a $350,000 civil penalty, and also to pay disgorgement totaling $77,120, including interest. The United States District Court for the Northern District of California approved the settlement on October 7, 2011.

In a separate administrative proceeding, Berry also agreed to be suspended from appearing or practicing as an attorney before the Commission. Under the terms of the agreement, Berry may apply for reinstatement in five years. Berry agreed to the suspension without admitting or denying the Commission's allegations.

October 19, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC & Citigroup Settle Charges It Misled Investors About CDO Tied to Housing Market

The SEC and Citigroup settled charges that Citigroup’s principal U.S. broker-dealer subsidiary misled investors about a $1 billion collateralized debt obligation (CDO) tied to the U.S. housing market in which Citigroup bet against investors as the housing market showed signs of distress. The CDO defaulted within months, leaving investors with losses while Citigroup made $160 million in fees and trading profits.  According to the SEC, Citigroup Global Markets structured and marketed a CDO called Class V Funding III and exercised significant influence over the selection of $500 million of the assets included in the CDO portfolio. Citigroup then took a proprietary short position against those mortgage-related assets from which it would profit if the assets declined in value. Citigroup did not disclose to investors its role in the asset selection process or that it took a short position against the assets it helped select.

Citigroup has agreed to settle the SEC’s charges by paying a total of $285 million, which will be returned to investors.  The settlement is subject to court approval.

The SEC also charged Brian Stoker, the Citigroup employee primarily responsible for structuring the CDO transaction. The agency brought separate settled charges against Credit Suisse’s asset management unit, which served as the collateral manager for the CDO transaction, as well as the Credit Suisse portfolio manager primarily responsible for the transaction, Samir H. Bhatt.


October 19, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NASAA Reports 51% Increase in Enforcement Actions in 2010

NASAA reported a 51 percent increase in the number of enforcement actions by state securities regulators in 2010, which led to a nearly 200 percent increase in the amount of money ordered returned to investors.  According to the NASAA report, state securities regulators conducted 7,063 investigations in 2010, which led to 3,475 enforcement actions, up from 2,294 enforcement actions in the previous year. Enforcement actions include criminal, administrative and civil actions. Nearly 1,000 of these actions involved financial abuse of seniors.

October 19, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

PCAOB Criticizes Deloitte Audits for Insufficient Quality Controls

Earlier this week the PCAOB released a previously non-public report on Deloitte criticizing inadequate quality controls for its audits.  According to the report, the auditing firm placed too much reliance on the management of the companies that they audited.  The report was written in 2008 and covered audits conducted in 2007.  According to its website, 

PCAOB prepares a report on each inspection it conducts of a registered public accounting firm, and a portion of each report is made publicly available when issued. Many reports contain nonpublic content, which may include, among other things, discussion of potential defects in a firm's system of quality control. Any such quality control criticisms remain nonpublic if the firm addresses them to the Board's satisfaction within 12 months after the report date. If a firm fails to satisfactorily address any of the quality control criticisms within 12 months, the portion of the report discussing the particular criticism(s) is made publicly available.

Specifically with respect to the Deloitte report, PCAOB stated:

The Public Company Accounting Oversight Board, in anticipation of questions about the publication of previously nonpublic portions of its May 19, 2008 inspection report on Deloitte & Touche LLP, issued the following statement today:

"The quality control remediation process is central to the Board's efforts to cause firms to improve the quality of their audits and thereby better protect investors. The Board therefore takes very seriously the importance of firms making sufficient progress on quality control issues identified in an inspection report in the 12 months following the report. Particularly with the largest firms, which are inspected annually, the Board devotes considerable time and resources to critically evaluating whether the firm did in fact make sufficient progress in that period. The Board can and does make the relevant criticisms public when a firm has failed to do so."


October 19, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Monday, October 17, 2011

SEC & Florida Penny-Stock Promoters Settle Fraud Charges

On October 13, 2011 the U.S. District Court for the Southern District of Florida entered judgments against a group of penny-stock promoters arising out of their repackaging of “news” issued by a series of sham energy companies. The judgments, which the defendants consented to as part of a settlement with the Commission, require them to pay penalties and to disgorge profits from their illicit activities. The judgments also permanently ban the defendants from touting and other dealings involving penny stocks.  SEC v. Wall Street Capital Funding LLC, Philip Cardwell, Roy Campbell, and Aaron Hume, Civil Action No. 11-cv-20413-DLG (S.D. Fla.)


October 17, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Announces Panelists for Oct. 18 Conflict Minerals Roundtable

The Panelists for the SEC's Oct. 18 Roundtable on Conflict Minerals are posted on the agency's website.

October 17, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Fed Issues Rule to Implement Resolution Plan Requirement

The Federal Reserve Board announced the approval of a final rule to implement the resolution plan requirement in the Dodd-Frank Act. 

The final rule requires bank holding companies with assets of $50 billion or more and nonbank financial firms designated by the Financial Stability Oversight Council for supervision by the Board to annually submit resolution plans to the Board and the Federal Deposit Insurance Corporation.  Each plan will describe the company's strategy for rapid and orderly resolution in bankruptcy during times of financial distress.

Under the final rule, companies will submit their initial resolution plans on a staggered basis. The first group of companies, generally those with $250 billion or more in non-bank assets, must submit their initial plans on or before July 1, 2012; the second group, generally those with $100 billion or more, but less than $250 billion, in total non-bank assets, must submit their initial plans on or before July 1, 2013; and the remaining companies, generally those subject to the rule with less than $100 billion in total non-bank assets, must submit their initial plans on or before December 31, 2013.

October 17, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)