Sunday, October 23, 2011
Keynote Address: A Regulatory Framework for Managing Systemic Risk, by Steven L. Schwarcz, Duke University - School of Law, was recently posted on SSRN. Here is the abstract:
This accessible analysis of systemic risk regulation was delivered as the keynote speech at an October 20, 2011 European Central Bank conference on regulation of financial services. Many regulatory responses, like the Dodd-Frank Act in the United States, consist largely of politically motivated reactions to the financial crisis, looking for villains (whether or not they exist). To be most effective, however, the regulation must be situated within a more analytical framework. In this speech, I attempt to build that framework, showing that preventive regulation is insufficient and that regulation also must be designed to limit the transmission of systemic risk and reduce systemic consequences.
The Supreme Court’s Janus Capital Case, by Norman S. Poser, Brooklyn Law School, was recently posted on SSRN. Here is the abstract:
In Janus Capital Group, Inc. v. First Derivative Traders, a divided Supreme Court created the unprecedented doctrine that the investment adviser to a mutual fund that drafted and distributed a false prospectus for the fund did not “make” a false statement under Rule 10b-5 because the fund, and not the adviser, had “ultimate authority” over the prospectus. The author argues that the decision was out of touch with reality because it failed to give proper consideration to the unique structure of the mutual fund industry. Furthermore, the decision is an illustration of judicial activism, and is likely to protect fund advisers and other corporate officials from liability for their own fraudulent actions
NASAA recently announced that a settlement in principle has been reached between E*TRADE Securities LLC and state securities regulators to return approximately $100 million to the firm’s clients who have had their funds frozen in the auction rate securities (ARS) market since 2008. The firm also will pay a $5 million fine. The settlement with E*TRADE is the result of a multi-state investigation led by the Colorado Division of Securities into allegations that the firm misled clients by falsely assuring them that auction rate securities were a safe, liquid alternative to cash, certificates of deposit and money market funds. The ARS markets froze in February 2008, triggering complaints from investors who could not withdraw money from their accounts.
Under the terms of the settlement, E*TRADE agreed to buy back at par value all outstanding auction rate securities purchased through the firm by individual investors before February 2008.
Other terms of the multi-state settlement require E*TRADE to:
- Fully reimburse all individual investors who sold their auction rate securities at a discount after the auction market failed;
- Consent to a special, public arbitration process to resolve claims of consequential damages suffered by individual investors who were unable to access their funds;
- Maintain a dedicated toll-free telephone assistance line, website and email address to provide information about the terms of the final order and to answer questions from investors;
- Reimburse certain investors for the cost of loans after the investor took out a loan from E*TRADE because the investor’s auction rate securities were frozen; and
- Pay to the states monetary penalties of $5 million and reimburse certain costs of the investigation.
The SEC announced that the inaugural roundtable in the Financial Reporting Series will be held on November 8. The purpose of the Financial Reporting Series is to proactively help identify risks and potential improvements in the financial information provided to investors. The inaugural roundtable will examine the extent to which financial reporting should include measurement uncertainties, and the information investors find important to understanding and assessing those uncertainties. The SEC released a briefing paper on the issue.
The SEC announced additional charges in its insider trading case against Denver-based traders who traded on confidential information in the securities of Mariner Energy Inc. ahead of the oil and gas company’s $3.9 billion takeover by Apache Corporation in April 2010. In its initial complaint filed on Aug. 5, 2011, the SEC alleged that Mariner Energy board member H. Clayton Peterson tipped his son with confidential details about Mariner Energy’s upcoming acquisition. Drew Clayton Peterson, who was a managing director at a Denver-based investment adviser, then used the inside information to purchase Mariner Energy stock for himself and others.
An amended complaint filed today adds two more defendants to the case – money manager Drew K. Brownstein who is a longtime friend of Drew Peterson, and the hedge fund advisory firm he controls, Big 5 Asset Management LLC. The SEC alleges that Brownstein traded Mariner Energy securities on the basis of inside information he received from Drew Peterson and reaped illicit profits of more than $5 million combined in his own account, the accounts of his relatives, and the accounts of two hedge funds managed by Big 5.
According to the SEC, “This case is further evidence of the pervasive nature of insider trading by hedge funds, and a sobering reminder that such conduct is not limited to the immediate vicinity of Wall Street but is taking place in cities around the country.”
The Senate confirmed the SEC nominations of Luis Aguilar (Democrat) and Daniel Gallagher, Jr. (Republican) so that the Commission is again at full strength. Mr. Gallagher most recently was a partner at the D.C. office of Wilmer Hale and before that Deputy Director of Division of Trading and Markets.