Securities Law Prof Blog

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

Wednesday, December 21, 2011


I'm on holiday. Check back on December 28.

December 21, 2011 | Permalink | Comments (0) | TrackBack (0)

SEC: Judge Rakoff Committed Error in Requiring Adjudication or Admission of Facts

On December 15, the SEC filed papers seeking review of Judge Rakoff’s rejection of the $285 million settlement with Citigroup in the Second Circuit.  The agency subsequently filed in federal district court a Memorandum of Law in Support of its Motion for Stay Pending Appeal in which it develops the legal argument that is the basis for its appeal – namely, that the district court erred in requiring an adjudication or admission of facts as a condition for the entry of the proposed consent judgment.  In addition, the SEC argues, a stay of the proceedings (currently scheduled for a July trial date) is appropriate because otherwise the agency will be required to expend resources on litigating this matter while the appeal is pending instead of pursuing other enforcement activities.

Essentially the SEC’s argument is that Judge Rakoff’s rejection is an outlier.  In its brief the SEC states that “[it] is unaware of any court that has ever before required that ‘proven or acknowledged facts’ be established as a condition to the approval of a proposed consent judgment submitted by a federal government agency.”  In addition, the relief provided for in the proposed settlement is a reasonable approximation of the relief the agency would likely recover if it prevailed at trial.  Finally, the public was adequately informed about Citigroup’s misconduct because of the detailed allegations in its complaint.  Accordingly, “the Commission made the reasonable judgment that expending additional resources to attempt to obtain an adjudication of the facts is not justified in light of the adequacy of the relief obtained, the litigation risks associated with trial, and the need to devote those resources to other matters.”

On December 20, Citigroup filed a Memorandum in Support of the SEC’s Motion for a Stay Pending Appeal.

December 21, 2011 in Judicial Opinions, SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 20, 2011

UCLA Institute Accepting Applications for Law Teaching Fellowship

The Lowell Milken Institute for Business Law and Policy at UCLA School of Law is now accepting applications for the Lowell Milken Institute Law Teaching Fellowship.  This fellowship is a full-time, year-round, one or two academic-year position (approximately July 2012 through June 2013 or June 2014).  The position involves law teaching, legal and policy research and writing, preparing to go on the law teaching market, and assisting with organizing projects such as conferences and workshops, and teaching.  No degree will be offered as part of the Fellowship program.

For additional information, download this: Download Lowell Milken Institute Law Teaching Fellowship Advertisement 2011-12 final

December 20, 2011 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Aon Settles FCPA Charges with SEC and DOJ

The SEC settled allegations against Aon Corporation (Aon), an Illinois-based global provider of risk management services, insurance and reinsurance brokerage, involving violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (FCPA). Aon will pay a total of approximately $14.5 million in disgorgement and prejudgment interest to the SEC. In a related action, Aon will pay a $1.764 million criminal fine to the U.S. Department of Justice (DOJ).

The Commission’s complaint alleges that Aon’s subsidiaries made over $3.6 million in improper payments to various parties between 1983 and 2007 as a means of obtaining or retaining insurance business in those countries. The complaint alleges that some of the improper payments were made directly or indirectly to foreign government officials who could award business directly to Aon subsidiaries, who were in position to influence others who could award business to Aon subsidiaries, or who could otherwise provide favorable business treatment for the company’s interests. The complaint alleges that these payments were not accurately reflected in Aon’s books and records, and that Aon failed to maintain an adequate internal control system reasonably designed to detect and prevent the improper payments.

According to the Commission’s complaint, the improper payments made by Aon’s subsidiaries fall into two general categories: (i) training, travel, and entertainment provided to employees of foreign government-owned clients and third parties; and (ii) payments made to third-party facilitators. Aon subsidiaries made these payments in various countries around the world, including Costa Rica, Egypt, Vietnam, Indonesia, United Arab Emirates, Myanmar, and Bangladesh. The complaint alleges that Aon realized over $11.4 million in profits from these improper payments.

Without admitting or denying the allegations in the Commission’s complaint, Aon consented to the entry of a final judgment permanently enjoining it from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and ordering the company to pay disgorgement of $11,416,814 in profits, together with prejudgment interest thereon of $3,128,206, for a total of $14,545,020. Aon’s proposed settlement offer has been submitted to the court for its consideration. In a related criminal proceeding, DOJ announced today that Aon has entered into a non-prosecution agreement under which the company will pay a $1.764 million criminal fine for the misconduct. Aon cooperated with the Commission’s and DOJ’s investigations and implemented remedial measures during the course of the investigations.

December 20, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Former Football Player and Attorney in Pump-and-Dump Fraud

The SEC charged a purported heart monitoring device company and six individuals involved in a series of fraudulent schemes to artificially inflate the company’s stock. Among those charged are a former pro football player, a Hollywood talent agent, and an attorney who masterminded the scheme.  According to the SEC. Heart Tronics installed former pro football player Willie Gault as a figurehead co-CEO along with former Hollywood executive J. Rowland Perkins in order to generate publicity for the company and foster investor confidence. Meanwhile behind the scenes, California-based attorney Mitchell J. Stein was controlling most of the company’s business activities, hiring promoters to tout Heart Tronics stock on the Internet, and reaping nearly $8 million from secret trades that he orchestrated.

According to the SEC’s complaint filed in federal court in Los Angeles, Gault and Perkins rarely questioned Stein’s fraudulent agenda and abdicated their fiduciary responsibilities under the Sarbanes-Oxley Act. Stein and Gault together defrauded one investor into making a substantial investment in Heart Tronics based on false representations that his money would fund the company’s operations. Instead, Stein and Gault diverted the investor’s proceeds for personal use, including the purchase of Heart Tronics stock in Gault’s personal brokerage account “Catch 83” to create the false appearance of volume and investor demand for the stock.

In a parallel criminal investigation, the U.S. Department of Justice today announced the arrest of Stein.

The SEC’s complaint charges the defendants with various violations of the federal securities laws and seeks disgorgement of ill-gotten gains with prejudgment interest financial penalties and permanent injunctive relief.

December 20, 2011 | Permalink | Comments (0) | TrackBack (0)

New York's Highest Court Holds that Investors Can Bring Common Law Claims for Breach of Fiduciary Duty and Gross Neglience

In a short and sweet opinion, the New York Court of Appeals significantly improved investor protection in New York state law today by holding that the state's Martin Act does not preempt an investor's common law claims for breach of fiduciary duty and gross negligence.  Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Management Inc., 2011 NY Slip Opinion 09162 (Dec. 20, 2011).  The lower state courts had split on this question, and the federal district court in S.D.N.Y., in particular, had asserted preemption.

Plaintiff, Morgan Investment Management, alleged that J.P. Morgan had mismanaged the investment portfolio of an entity (Orkney Re II) whose obligations MOM guaranteed.  As an express third-party beneficiary of an investment management agreement between J.P. Morgan and Orkney, MOM alleged that J.P. Morgan invested Orkney's assets heavily in high-risk securities and failed to diversify the portfolio or advise Orkney of the risks.  In addition, it alleged that J.P. Morgan improperly made investment decisions in favor of another Orkney investor that was a J.P. Morgan client.

The Supreme Court granted J.P. Morgan's motion to dismiss the complaint in its entirety on grounds of preemption.  The Appellate Division, however, modified by reinstating the breach of fiduciary duty and gross negligence claims, thus setting up the appeal to the Court of Appeals.

The Court of Appeals rejected J.P. Morgan's argument that the common law breach of fiduciary duty and gross negligence claims must be dismissed because they are preempted by the Martin Act in short order.  The Court stated that "[legislative intent is integral to the question of whether the Martin Act was intended to supplant nonfraud common-law claims."  Moreover, it was "well settled that 'when the common law gives a remedy, and another remedy is provided by statute, the latter is cumulative, unless made exclusive by the statute'....We have emphasized that 'a clear and specific legislative intent is required to override the common law' and that such a prerogative must be 'unambiguous'...."  The Court found no evidence in the plain text of the Martin Act that the legislature contemplated the elimination of common-law claims.

True, we have held that the Martin Act did not "create" a private right of action to enforce its provisions ....But the fact that "no new per se action was contemplated by the Legislature does not ... require us to conclude that the traditional...forms of action are no longer available to redress injury...."

Accordingly, an investor may bring a common-law claim that is not entirely dependent on the Martin Act for its viability, and "[m]ere overlap between the common law and the Martin Act is not enough to extinguish common-law remedies."

Finally, the Court recognized that policy concerns supported its conclusion because private actions further the goal of combating fraud and deception in securities transactions.  Quoting Judge Marrero from the S.D.N.Y. (whose scholarly opinion in Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 354, was instrumental in rethinking the analysis in the lower courts' preemption decisions), the Court concluded that to hold otherwise would leave the marketplace "less protected than it was before the Martin Act's passage, which can hardly have been the goal of its drafters...'"



December 20, 2011 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

SEC & DOJ Settle Charges Against Madoff Employee

The SEC and the DOJ announced that they have settled charges against a long-time Madoff employee,Enrica Cotellessa-Pitz, involving falsification of books and records in order to hide Madoff’s fraudulent investment advisory operations from regulators.

The SEC alleges that Cotellessa-Pitz, who worked at Bernard L. Madoff Investment Securities LLC (BMIS) for more than 30 years, assisted in falsifying BMIS’s internal accounting records in order to misclassify hundreds of millions of dollars of income purportedly generated by BMIS’s investment advisory operations. Cotellessa-Pitz also falsified financial statements filed with the SEC and other regulators as well as materials that were prepared to deceive SEC staff examiners, federal and state tax auditors, and other external reviewers.

The U.S. Attorney’s Office for the Southern District of New York announced parallel criminal charges against Cotellessa-Pitz, who has pled guilty and also consented to the entry of a partial judgment in the SEC’s civil case against her. Subject to court approval, the proposed partial judgment will impose a permanent injunction against Cotellessa-Pitz and require her to disgorge ill-gotten gains and pay a fine in amounts to be determined by the court at a later date.

December 20, 2011 | Permalink | Comments (0) | TrackBack (0)

Monday, December 19, 2011

Chamber of Commerce Recommends Transformational Reform at SEC

The U.S. Chamber of Commerce's Center for Capital Markets Competitiveness recently released a report on the SEC, entitled A Roadmap for Transformational Reform ( Download Chambersec20111214[1]).  Here is an excerpt from the Executive Summary:

In response to the stock market crash of 1929 and the Great Depression, Congress created the U.S. Securities and Exchange Commission (SEC). Throughout much of its history, the SEC has been the preeminent financial regulator, successfully overseeing the world’s leading capital markets. However, for more than a decade, the SEC regulatory and enforcement structures have failed to keep pace with rapidly changing markets. This is attributable to a variety of factors including, but not limited to, structural and managerial inefficiencies at the SEC, rapidly evolving markets, and the rise of intense global competition. The purpose of this report and its recommendations is to restore the SEC as the world’s premier financial services regulator.

Businesses and investors alike need a modern, efficient, fair, and tough regulator.  America’s ability to maintain the world’s deepest and most liquid markets hinges in part on having a strong, effective, and even-handed regulator. While outdated and broken regulations and ineffective application of regulatory authority were not the primary cause of the 2008 financial crisis, they should not be overlooked as contributory causes. The financial crisis has laid bare many of the shortcomings of an agency that is grounded in an outdated view of the world’s financial markets and is in profound need of transformational reform.

This need for transformational change supplants earlier proposals for reform. In 2009, the U.S. Chamber of Commerce released its first SEC reform report: Examining the Efficiency and Effectiveness of the U.S. Securities and Exchange Commission (2009 Report). While the 2009 Report made 23 recommendations for reform, they were proposals for incremental change. We fully recognize that over the past few years, the current leadership of the SEC has begun to address some of the key weaknesses of the agency and positive progress has been made in some areas. However incremental change will no longer do.

The Report contains 28 new recommendations, including two new Commissioners and the appointment of a Deputy Chairman to take charge of implementing changes.


December 19, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, December 18, 2011

Couture on Mixed Statements and the Safe Harbor

Mixed Statements: The Safe Harbor's Rocky Shore, by Wendy Gerwick Couture, University of Idaho College of Law, was recently posted on SSRN.  Here is the abstract:

In this essay, the author analyzes how to apply the Private Securities Litigation Reform Act’s safe harbor for forward-looking statements to “mixed statements” – in which statements about the past or present are intertwined with statements about the future. The author identifies three categories of mixed statement that are the subject of frequent litigation, demonstrates the courts’ disagreement about their treatment, and – drawing from the statutory text and policy rationales – recommends how the safe harbor should apply to each category of statement.

In particular, the author argues that (1) statements of historical or current fact that underlie predictions should not be protected by the safe harbor; (2) statements about the present that necessarily incorporate predictions should be protected by the safe harbor; and (3) statements that contain both present and future components should be bifurcated, with the safe harbor protecting only those portions that predict.

December 18, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Testy on Securities Regulation in a Global Marketplace

Comity and Cooperation: Securities Regulation in a Global Marketplace, by Kellye Y. Testy, University of Washington - School of Law, was recently posted on SSRN.  Here is the abstract:

When the securities laws were enacted, and even later when Rule 10b-5 was promulgated, transactions in securities were primarily domestic in nature. A dramatic globalization trend, however, is presently transforming the nature of securities markets and the nature of transactions conducted in those markets. Courts will soon be faced with more frequent and more difficult decisions as to the scope of the antifraud protections of the U.S. securities laws.

This article suggests that the time is ripe for the SEC or Congress to consider taking action to limit the extraterritorial application of the United States securities laws in antifraud cases. Furthermore, the SEC should look to its work in Regulation S and be guided by policies that further integrate world markets and prevent U.S. markets from being placed at a competitive disadvantage due to the stringency and over-zealous application of U.S. laws.

December 18, 2011 in Law Review Articles | Permalink | Comments (1) | TrackBack (0)

Davis & Johnson on Say on Pay Lawsuits

Say on Pay Lawsuits - Is this Time Different?, by Kenneth B. Davis Jr.,
University of Wisconsin Law School, and Keith L. Johnson, International Corporate Governance Initiative; Reinhart Institutional Investor Services, was recently posted on SSRN.  Here is the abstract:

The first season of advisory shareholder "say on pay" votes under the Dodd-Frank Act has led to a number of derivative lawsuits challenging the compensation of senior executives at companies where shareholders voted against pay practices. The authors argue that boards might not always be automatically protected by the "business judgment rule" in these suits. First, unique policy considerations presented by say on pay votes can distinguish the cases from a typical corporate derivative lawsuit. That could invite closer scrutiny of executive pay decisions under a stricter judicial standard of review and increase chances that shareholders will be excused from the procedural requirement to file a demand with the board and defer to its decision on whether to allow the action. Second, institutional investors have an incentive to use say on pay litigation as one of the few viable means through which they can address ineffective and recalcitrant boards. The authors conclude by suggesting that boards improve disclosure, engage with key shareholders and resolve the causes of failed executive say on pay votes in order to reduce exposure to risks of loss in say on pay lawsuits.

December 18, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)