Securities Law Prof Blog

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

Saturday, February 5, 2011

Former TPG Capital Associate Found Liable for Tipping Information about Acquisitions

The SEC announced that on February 3, 2011, a federal jury in the Northern District of California found former TPG Capital, L.P. ("TPG") private equity associate Vinayak S. Gowrish liable for illegally tipping material, nonpublic information that TPG was in negotiations to acquire three separate publicly traded companies: Sabre Holdings Corp. ("Sabre"), TXU Corp. ("TXU"), and Alliance Data Systems Corp. ("ADS").

The jury found that Gowrish, a former associate at multi-billion dollar private equity firm TPG, misappropriated material nonpublic information from his employer in connection with TPG's negotiations to acquire Sabre, TXU, and ADS. Gowrish tipped the confidential acquisition information to his long-time friend, Adnan Zaman, a former investment banker at Lazard Frères & Co. LLC. Zaman, in turn, tipped the information to their two friends, Pascal S. Vaghar and Sameer N. Khoury. On the basis of the information provided by Gowrish through Zaman, Vaghar and Khoury then traded Sabre, TXU, and ADS securities, realizing approximately $375,000 in illicit profits. The Commission's complaint alleged that, in exchange for the confidential information, Vaghar provided cash kickbacks to both Gowrish and Zaman.

Zaman, Vaghar, and Khoury previously consented to the entry of final judgments permanently enjoining them from violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Zaman is currently serving a 26-month federal prison sentence for his role in the scheme.

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

SEC Obtains Consent Order as to Defendant in Galleon Insider Trading Case

The SEC announced that a Consent Order and Final Judgment as to Ali Hariri was entered in federal district court on February 4, 2011, in the SEC's insider trading case, SEC v. Galleon Management, LP, et al., 09-CV-8811 (SDNY) (JSR). The SEC filed its action on October 16, 2009, against Raj Rajaratnam, Galleon Management, LP, and others, alleging a widespread and repeated insider trading scheme involving hedge funds, industry professionals, and corporate insiders. When the SEC's action was filed, Hariri was Vice President of Broadband Carrier Networking at Atheros Communications, Inc.

The SEC alleged that Hariri tipped co-defendant Ali Far in advance of certain of Atheros's earnings announcements, and that Far and co-defendant CB Lee traded profitably based on that information. In exchange, Far tipped Hariri with inside information on another company. Through trading based on inside information he received from Far, Hariri personally profited by $2,548.91.

In a parallel criminal action against him in which Hariri pleaded guilty, United States v. Hariri, 10 CR 00173 (SDNY), Hariri was sentenced to a term of imprisonment of eighteen months, two years supervised release, and ordered to pay a criminal fine of $50,000.

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

Friday, February 4, 2011

Tenth Circuit Interprets Broker-Dealer Exclusion in Advisers Act

A recent opinion from the Tenth Circuit addresses the broker-dealer exclusion in the Investment Advisers Act, an important and controversial statutory provision that courts have rarely interpreted.  In Thomas v. Metropolitan Life Insurance Co (10th Cir. Feb. 2, 2011)(Download Thomasv.MetLife), plaintiffs, purchasers of a variable universal life insurance policy from the Met representative, complained that defendants failed to disclose that the Met representative had strong financial incentives to sell Met's proprietary products as opposed to giving unbiased advice.  The court affirmed the district court's interpretation and held that a "financial services representative" employed by Met was not an "investment adviser" for purposes of the IAA, because he was exempt as a broker-dealer who gives advice "solely incidental to" his conduct as a broker-dealer and receives " no special compensation" for his advice. 

The district court held, first, that the applicability of the exemption depends not on the quantum or importance of the broker-dealer's advice, but on whether the broker-dealer gives advice in connection with the sale of a product.  In affirming this interpretation, the Appeals Court looked to the "plain meaning" of the statute and examined various dictionary definitions of the word "incidental."  It found that, while the definitions varied, all dictionary definitions had two components: to be considered incidental, two actions or objects must be related in a particular way -- the incidental action or object must occur only as a result of or in connection with the primary.  In addition, the incidental action or object must be secondary in size or importance to the primary.  The Court rejected the plaintiffs' emphasis on the second component of the definition as inconsistent with the dictionary definitions.  It also found support for its interpretation in SEC pronouncements and the legislative history.

As to the "special compensation" prong of the exclusion, the Tenth Circuit found the statutory language more straightforward: broker-dealers who give incidental advice are exempted from the IAA so long as they receive "no special compensation" for the advice.  The Court determined that in the overall context of the broker-dealer exemption compensation received by a broker-dealer is "special" only when (1) the compensation is received specifically in exchange for giving advice, as opposed to some other service, and (2) the compensation takes a form other than a commission or analogous transaction-based compensation received for the sale of the product. 

The facts of this case provide a good illustration of the need for harmonizing the standards of conduct for broker-dealers and investment advisers, which has been the subject of a recent SEC staff study mandated by Dodd-Frank.  Unfortunately, however, it is unlikely that the SEC will take on the issue of troublesome problem of broker-dealers that sell only proprietary products to their customers without disclosing the availability of less expensible comparable products. 

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

Thursday, February 3, 2011

SEC Censures TD Ameritrade for Sales of Reserve Yield Plus Fund Shares

The SEC charged TD Ameritrade Inc. for failing to reasonably supervise its registered representatives, some of whom misled customers when selling shares of the Reserve Yield Plus Fund, a mutual fund that "broke the buck" in September 2008.  According to the SEC's order, TD Ameritrade's representatives offered and sold the fund through the firm's various sales channels prior to Sept. 16, 2008. The order finds that a number of the representatives violated the securities laws when they mischaracterized the fund as a money market fund, as safe as cash, or as an investment with guaranteed liquidity. They also failed to disclose the nature or risks of the fund when offering the investment to customers. TD Ameritrade failed to prevent the misconduct by its representatives because it did not establish adequate supervisory policies and procedures or a system to implement them with respect to the offers and sales of the fund.

To settle the SEC's charges, TD Ameritrade has agreed to distribute approximately $10 million to eligible customers who continue to hold shares of the fund.

The SEC's administrative order finds that the Reserve Yield Plus Fund sought to provide higher returns than a money market fund while seeking to maintain a net asset value (NAV) of $1.00. The fund's NAV fell to 97 cents on Sept. 16, 2008, after the Reserve wrote down the fund's investments in commercial paper issued by Lehman Brothers Holdings Inc.  The SEC's order finds that thousands of TD Ameritrade's customers continue to hold a majority of the fund's shares. They have received approximately 95 percent of their original principal investments in the fund following distribution of most of the fund's liquidated assets to all of its shareholders.

Without admitting or denying the SEC's allegations, TD Ameritrade consented to the SEC's order, which censures the firm. As part of the order, TD Ameritrade also agrees to:

Distribute $0.012 per share of the fund to eligible customers who hold such shares within 30 days of the order's issuance.
Provide notice of the terms of the SEC's order to all eligible customers and display information concerning the terms of the order on the firm's website.

February 3, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges AXA Rosenberg Entities for Concealing Error in Quantitative Investment Model

The SEC charged three AXA Rosenberg entities with securities fraud for concealing a significant error in the computer code of the quantitative investment model that they use to manage client assets. The error caused $217 million in investor losses.  AXA Rosenberg Group LLC (ARG), AXA Rosenberg Investment Management LLC (ARIM), and Barr Rosenberg Research Center LLC (BRRC) have agreed to settle the SEC's charges by paying $217 million to harmed clients plus a $25 million penalty, and hiring an independent consultant with expertise in quantitative investment techniques who will review disclosures and enhance the role of compliance personnel.

The SEC's order instituting administrative proceedings against the firms found that senior management at BRRC and ARG learned in June 2009 of a material error in the model's code that disabled one of the key components for managing risk. Instead of disclosing and fixing the error immediately, a senior ARG and BRRC official directed others to keep quiet about the error and declined to fix the error at that time.  The SEC additionally charged BRRC with failing to adopt and implement compliance policies and procedures to ensure that the model would work as intended.  According to the SEC's order, ARG is the holding company of BRRC and ARIM, which are Orinda, Calif.-based investment advisers registered with the SEC. BRRC developed and maintains the computer code for the quantitative investment model and ARIM uses the model to manage client portfolios.

The SEC found that the error, which was introduced into the model in April 2007, was eventually fixed for all portfolios. However, knowledge of the error was kept from ARG's Global CEO until November 2009. ARG then conducted an internal investigation and disclosed the error to SEC examination staff in late March 2010 after being informed of an impending SEC examination of ARIM and BRRC. ARG disclosed the error to clients on April 15.

February 3, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Expert Network Consultants with Insider Trading

The SEC today charged six expert network consultants and employees with insider trading for illegally tipping hedge funds and other investors to generate nearly $6 million in illicit gains. The charges stem from the SEC's ongoing investigation into the activities of expert networks that purport to provide professional investment research to their clients.

The SEC alleges that four technology company employees, while moonlighting as consultants or "experts" to Primary Global Research LLC (PGR) without the knowledge of their employers, abused their access to inside information about such technology companies as AMD, Apple, Dell, Flextronics, and Marvell. The consultants received hundreds of thousands of dollars in purported consulting fees from PGR for sharing the inside information with PGR employees and clients. The SEC charges two PGR employees for facilitating the transfer of inside information from PGR consultants to PGR clients.

The SEC's complaint alleges that PGR consultants Mark Anthony Longoria, Daniel L. DeVore, Winifred Jiau and Walter Shimoon obtained material, non-public confidential information about quarterly earnings and performance data and shared that information with hedge funds and other clients of PGR who traded on the inside information. PGR employees Bob Nguyen and James Fleishman acted as conduits by receiving inside information from PGR consultants and passing that information directly to PGR clients.

The SEC alleges that:

  • Longoria, a manager in AMD's desktop global operations group, had access to sales figures for AMD's various operational units. He also obtained from a colleague AMD's financial results, including "top line" quarterly revenue and profit margin information prior to their public announcement. Longoria shared this inside information with multiple PGR clients who, in turn, traded in AMD securities. From January 2008 to March 2010, Longoria received more than $130,000 for talking to PGR and its clients.
  • DeVore, a Global Supply Manager at Dell, was privy to confidential information about Dell's internal sales forecasts as well as information about the pricing and volume of Dell's purchases from its suppliers. DeVore regularly provided PGR and PGR clients with this inside information so it could be used to trade securities. From 2008 to 2010, DeVore received approximately $145,000 for talking to PGR and its clients.
  • Shimoon, a Vice President of Business Development for Components in the Americas at Flextronics, was privy to confidential information concerning Flextronics and its customers including Apple, Omnivision, and Research in Motion. Shimoon provided this inside information to PGR and PGR clients so it could be used to trade securities. From September 2008 to June 2010, Shimoon received approximately $13,600 for talking to PGR and its clients.
  • Jiau was a "private" PGR expert, meaning that PGR made her available only to a small number of PGR clients. Jiau, who had contacts at Marvell and other technology companies, regularly provided certain PGR clients with inside information regarding Marvell and other technology companies. Jiau provided company-specific financial results that companies had not yet announced publicly. From September 2006 to December 2008, Jiau received more than $200,000 for her consultations with select PGR clients.

February 3, 2011 in SEC Action | Permalink | Comments (2) | TrackBack (0)

Wednesday, February 2, 2011

Chimay Pleads Guilty to Defrauding Investors

Guy Albert de Chimay, a former money manager who claimed to manage $200 million for royal relatives in Europe pleaded guilty today in New York state court for fraud and larceny.  The SEC also has charged hin with using investor funds to support an extravagent lifestyle.  WSJ, Chimay Pleads Guilty in Fraud Scheme

February 2, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

Treasury Announces the Bank TARP Program Nearing Profitability

Treasury announced that Fifth Third Bancorp of Cincinnati, Ohio has fully repaid its $3.4 billion in outstanding Troubled Asset Relief Program (TARP) funds. With this transaction, total repayments and other income from programs within TARP to provide direct financial support to banks (approximately $243 billion) have nearly surpassed total disbursements under those programs (approximately $245 billion). Treasury currently estimates that bank programs within TARP will ultimately provide a lifetime profit of nearly $20 billion to taxpayers.
Overall, across all TARP programs, – including financial support for banks, the domestic auto industry, and AIG; targeted initiatives to help restart the credit markets; and foreclosure prevention programs – Treasury has disbursed a total of approximately $410 billion. With today’s transactions, total program repayments (approximately $238 billion) and other income (approximately $36 billion) have reached more than $274 billion.  

February 2, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC's Feb. 9 Open Meeting Will Consider Credit Ratings References

At its next Open Meeting, on February 9, 2011, the SEC will consider:

whether to propose amendments to rules and forms under the Securities Act of 1933 and Schedule 14A under the Securities Exchange Act of 1934, to replace references to credit ratings with alternative criteria. These amendments are in accordance with Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act.


February 2, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Proposes Rules on Security-Based Swap Execution Facilities

The SEC today voted unanimously to propose rules defining security-based swap execution facilities (SEFs) and establishing their registration requirements, as well as their duties and core principles.

Dodd-Frank authorized the SEC to implement a regulatory framework for security-based swaps, which currently trade exclusively in the over-the-counter markets with little transparency or oversight.  The Dodd-Frank Act sought to move the trading of security-based swaps onto regulated trading markets, and therefore created security-based SEFs as a new category of market intended to provide more transparency and reduce systemic risk.

The Commission's proposed rules:

Interpret the definition of "security-based SEFs" as set forth in Dodd-Frank.
Set out the registration requirements for security-based SEFs.
Implement the 14 core principles for security-based SEFs that the legislation outlined.
Establish the process for security-based SEFs to file rule changes and new products with the SEC.
Exempt security-based SEFs from the definition of "exchange" and from most regulation as a broker.

Public comments on the rule proposal should be received by the Commission by April 4, 2011.

Text of Proposed Rules

February 2, 2011 | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 1, 2011

SEC Charges Operators of $33 Million International Microcap Stock Scheme with Fraud

The SEC brought fraud charges against the operators of a $33 million international microcap stock scheme involving the stocks of eight small U.S. companies headquartered in the People's Republic of China, Canada, and Israel.  The SEC charged three companies and eight individuals with engaging in unlawful spam e-mail campaigns to pump and dump securities of microcap companies. The SEC alleges that each scheme was primarily organized and devised by one or all of the following:

Francis A. Tribble, who is a U.S. citizen and former stock promoter
How Wai Hui (a.k.a. John Hui), who is a dual citizen of Hong Kong and Canada and the former CEO of China World Trade Corp.
Kwong-Chung Chan (a.k.a. Bernard Chan), who is a citizen and resident of Hong Kong and the former CFO of China World Trade Corp.
Gregg M.S. Berger, who is a stockbroker from Yonkers, N.Y.

In a parallel criminal proceeding, the Department of Justice today unsealed an indictment against Berger, charging him with one count of conspiracy to commit securities fraud and wire fraud. Previously, in related criminal actions, Hui and Tribble pleaded guilty to conspiracy to commit wire fraud, mail fraud and to violate the CAN-SPAM Act, as well as to committing wire fraud and engaging in money laundering for their roles in the scheme to artificially inflate the prices of the securities of several companies, including China World Trade. Hui and Tribble were each sentenced to 51 months in prison for their actions.

February 1, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Ketchum Says Fiduciary Standard for Dealers no earlier than mid-2012

FINRA CEO Richard Ketchum predicted that registered representatives would operate under a fiducary standard no earlier than the second half of 2012, because of the need for an implementation process at the SEC.  In addition, if FINRA is designated as the SRO for investment advisers, it would create a discrete board to take responsibility for investment adviser issues and build a new staff knowledgeable in that area to oversee investment advisers.  He made his remarks at the annual meeting of the Financial Services Institute.  InvNews, Fiduciary standard not happening until mid-2012: Ketchum

February 1, 2011 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

SEC Approves FINRA Rule Allowing Customers the Option of All-Public Panel

The SEC approved FINRA's proposed rule change to provide customers in all FINRA arbitrations the option of having an all public panel. Historically, in cases with three arbitrators, the panels have been comprised of two public arbitrators and one arbitrator with a nexus to the securities industry. The amended rules will apply to all customer cases in which a list of potential arbitrators has not yet been sent to the parties. 

FINRA sought the SEC's approval for the rule change in October after results of a 27-month pilot program showed that investors presented with this option chose the new method of arbitrator selection nearly 60 percent of the time. Participation in FINRA's Public Arbitrator Pilot Program was voluntary and ultimately included the participation of 14 firms.

Here is NASAA's statement on the approval:

“State securities regulators have long advocated providing investors with greater choice in FINRA arbitrations. Providing investors with the option to have an all-public panel of arbitrators is a positive development toward increasing the fairness of the securities arbitration process. Another step in enhancing investor confidence would be to allow investors to choose between arbitration and litigation in an independent judicial forum.”

February 1, 2011 in Other Regulatory Action, SEC Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Monday, January 31, 2011

SEC Investigates Harrisburg PA Muni-Bond Disclosures

The SEC is investigating whether Harrisburg PA officials provided investors with enough information about the financial condition of the city.  According to a spokesperson for the city, the inquiry began last November.  The SEC has recently stepped up its role in the municipal bond market.  It settled a case against New Jersey and is also investigating Illinois.  WSJ, SEC Probes Harrisburg's Muni Disclosures

January 31, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Hedge Funds Seek Guidance on Expert Networks

Managed Funds Association, a Washington lobbying group, said it has requested guidelines from the SEC on the use of "expert networks."  Some of its members have expressed concern about the lack of clarity surrounding their use.  WSJ, Hedge Funds Seek Clarity on 'Expert Networks'

January 31, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Charges Three New York Investment Firms with Misusing Clients' Funds

On January 20, 2011, the SEC charged three affiliated New York-based investment firms and four former senior officers with fraud, misuse of client assets, and other securities laws violations involving their $66 million advisory business.  According to the SEC, the operation's investment adviser William Landberg and president Kevin Kramer - through the firms West End Financial Advisors LLC (WEFA), West End Capital Management LLC (WECM), and Sentinel Investment Management Corporation - misled investors into believing that their money was in stable, safe investments designed to provide steady streams of income. However, in reality West End faced deepening financial problems stemming from Landberg's failed investment strategies. When starved for cash to meet obligations of the West End funds or for his personal needs, Landberg misused investor assets, fraudulently obtained more than $8.5 million from a bank, and used millions of dollars from an interest reserve account for unauthorized purposes.  The SEC also charged West End's chief financial officer Steven Gould and controller Janis Barsuk for their roles in the scheme.

According to the SEC's complaint filed in U.S. District Court for the Southern District of New York, the misconduct occurred from at least January 2008 to May 2009. The Commission seeks permanent injunctive relief against each defendant and disgorgement of ill-gotten gains with prejudgment interest against defendants and relief defendants.

January 31, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC and Maxwell Technologies Settle FCPA Charges

The SEC and energy-related products manufacturer Maxwell Technologies Inc. settled charges that Maxwell violated the Foreign Corrupt Practices Act (FCPA) by repeatedly paying bribes to government officials in China to obtain business from several Chinese state-owned entities.  The SEC alleged that a Maxwell subsidiary paid more than $2.5 million in bribes to Chinese officials through a third-party sales agent from 2002 to May 2009. As a result, the subsidiary was awarded contracts that generated more than $15 million in revenues and $5.6 million in profits for Maxwell. These sales and profits helped Maxwell offset losses that it incurred to develop new products now expected to become Maxwell's future source of revenue growth.

Maxwell — a Delaware corporation headquartered in San Diego — has agreed to pay more than $6.3 million to settle the SEC's charges. In a related criminal proceeding, Maxwell has reached a settlement with the U.S. Department of Justice and agreed to pay an $8 million penalty.

The SEC's complaint alleges that the illicit payments were made with the knowledge and tacit approval of certain former Maxwell officials. For example, former management at Maxwell knew of the bribery scheme in late 2002 when an employee indicated in an e-mail that a payment made in connection with a sale in China appeared to be "a kick-back, pay-off, bribe, whatever you want to call it, . . . . in violation of US trade laws." A U.S.-based Maxwell executive replied that "this is a well know[n] issue" and he warned "[n]o more e-mails please."

The SEC alleges that Maxwell failed to devise and maintain an effective system of internal controls and improperly recorded the bribes on its books. The illicit sales and profits from the bribery scheme helped Maxwell offset losses that it incurred to develop its new products. Maxwell made corrections in its Form 10-Q filing for the quarter ended March 31, 2009.

January 31, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Releases Money Market Fund Portfolio and "Shadow NAV" Information to the Public

The SEC announced that investors can now access detailed information that money market funds file with the Commission — including information about a fund's investments and the market-based price of its portfolio known as its "shadow NAV" (net asset value) or mark-to-market valuation.  The information is available on the SEC's website and will be updated monthly.

As part of its overhaul of money market fund regulation, the Commission last year adopted a rule requiring money market funds to file information about their holdings and portfolio valuations.  Funds began filing the information on the SEC's new Form N-MFP in December. Under the rule, the SEC will release the information with a 60-day delay. The rule also requires money market funds to post more current but less detailed portfolio information on their own websites within five business days after the end of the month.

See also Staff Responses to Questions about Information Filed on Form N-MFP

January 31, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)