Securities Law Prof Blog

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

Thursday, March 15, 2012

Second Circuit Grants Stay in SEC v. Citigroup

The Second Circuit issued a per curiam opinion today in SEC v. Citigroup Global Markets.  Technically the court granted the SEC's and Citigroup's request for a stay of the district court proceedings, refused to expedite the appeal and directed appointment of counsel to represent the "other side" of this appeal (since both parties want to reverse the district court's order).  Untechnically, the SEC and Citigroup won, and Judge Rakoff lost.

The court's views on the merits are made clear in its discussion of why the parties have a strong likelihood of success on the merits.  The court noted a number of problems with Judge Rakoff's determination that a consent judgment without Citigroup's admission of liability is bad policy, including:

The district court prejudges that Citigroup had misled investors and assumes the SEC would prevail at trial;

In addition, (and most important) the district court did not appear to give deference to the SEC's judgment on wholly discretionary matters of policy.  The scope of the district court's authority to second-guess an agency's discretionary and policy-based decision to settle is "at best minimal."

The Second Circuit did take care to emphasize that its discussion of the merits was solely for the purpose of establishing that the parties have a "strong likelihood" of success on the merits and that the "other side" was not represented. 

We recognize that, because both parties to the litigation are united in seeking the stay and opposing the district court’s order, this panel has not had the benefit of adversarial briefing. In order to ensure that the panel which determines the merits receives briefing on both sides, counsel will be appointed to argue in support of the district court’s position.
The merits panel is, of course, free to resolve all issues without preclusive effect from this ruling. In addition to the fact that our ruling is made without benefit of briefing in support of the district court’s position, our ruling, to the extent it addresses the merits, finds only that the movant has shown a likelihood of success and does not address the ultimate question to be resolved by the merits panel – whether the district court’s order should in fact be overturned.

Neverthless, unless this panel is an outlier, the opinion is a good prediction of the merits determination.

SEC v. Citigroup Global Markets (2d Cir. Mar. 15, 2012)(Download SECvCitigroup.2dCir)


March 15, 2012 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

This is Financial Reform?

ProPublica's Jesse Eisinger's take on the JOBS Act that recently passed in the House appears in today's New York Times.  The title says it all:  A Jobs Bill That Will Provide Help, but for All the Wrong People

March 15, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 14, 2012

Schapiro Warns JOBS Act could Weaken Investor Protection

The JOBS Act, which passed the House by a wide margin, has been on a bipartisan bandwagon of support, with calls that it will lead to "job creation."  SEC Chair Mary Schapiro today took a more somber view of the proposed legislation and warned that its provisions could seriously weaken investor protection.  WPost, JOBS Act could remove investor protections, SEC chair Mary Schapiro warns

Let's hope there are enough thoughtful voices to slow this train down!

March 14, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Treasury Announces Plans to Sell Off TARP Investments

Today Treasury announced that as part of its ongoing efforts to explore options for the management and ultimate recovery of its remaining Capital Purchase Program (CPP) investments under the Troubled Asset Relief Program (TARP), it intented to sell several preferred stock CPP investments.  Treasury intends to conduct public auctions to sell its preferred stock positions in the following six banks:
•Banner Corporation, Walla Walla, WA (“Banner”)
•First Financial Holdings Inc., Charleston, SC (“First Financial”)
•MainSource Financial Group, Inc., Greensburg, IN (“MainSource”)
•Seacoast Banking Corporation of Florida, Stuart, FL (“Seacoast”)
•Wilshire Bancorp, Inc., Los Angeles, CA (“Wilshire”)
•WSFS Financial Corporation, Wilmington, DE (“WSFS”)

Treasury expects to conduct the auctions, which will be registered public offerings, on or about March 26, 2012.

In addition, on March 8, Treasury announced that it agreed to sell 206,896,552 shares of its American International Group (AIG) common stock at $29.00 per share.  The aggregate proceeds to Treasury from the common stock offering are expected to be approximately $6.0 billion.  As part of Treasury’s common stock offering, AIG agreed to purchase 103,448,276 shares at the offering price of $29.00 per share – representing $3.0 billion of Treasury’s expected proceeds from the sale.



March 14, 2012 in News Stories, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Brings Charges from Investigation of Secondary Market Trading of Private Company Shares

The SEC charged two managers of private investment funds established solely to acquire the shares of Facebook and other Silicon Valley firms with misleading investors and pocketing undisclosed fees and commissions. The SEC alleges that the fund managers collectively raised more than $70 million from investors.

Separately, the SEC charged SharesPost, an online service that matches buyers and sellers of pre-IPO stock, with engaging in securities transactions without registering as a broker-dealer.

The charges stem from the SEC’s yearlong investigation of the fast-growing business of trading pre-IPO shares on the secondary market.

SEC v. Frank Mazzola, Felix Investments LLC, and Facie Libre Management Associates LLC

The SEC alleges that Mazzola and his firms created two funds to buy securities of Facebook and other high profile technology companies. However, Mazzola and his firms engaged in improper self-dealing — earning secret commissions above the 5 percent disclosed in offering materials on the funds’ acquisition of Facebook stock and on re-sales of fund interests to new investors. The hidden charges essentially raised the prices paid by their investors for Facebook stock because it created a disincentive for Mazzola and his firms to negotiate a lower price for fund investors. They also sold Facie Libre fund interests despite knowing the funds lacked ownership of certain Facebook shares.

According to the SEC’s complaint filed in federal court in San Francisco, Mazzola and his firms also made false statements to investors in other funds they created to invest in various pre-IPO companies. For instance, they misled one investor into believing a Felix fund had successfully acquired stock of Zynga. They also made false representations about Twitter’s revenue to attract investors to their Twitter fund.

The SEC’s lawsuit against Mazzola, Felix Investments, and Facie Libre seeks court orders prohibiting them from engaging in securities fraud and requiring them to disgorge their ill-gotten gains and pay financial penalties.

In the Matter of EB Financial Group LLC and Laurence Albukerk

According to the SEC’s administrative proceeding against Laurence Albukerk, he and his firm hid from investors significant compensation earned in connection with two Facebook funds they managed. In written offering materials for the funds, Albukerk told investors he charged only a 5 percent fee for an initial investment and a 5 percent fee when the shares were distributed to fund investors upon a Facebook IPO. However, Albukerk obtained additional compensation by using an entity controlled by his wife to purchase the Facebook stock and then buying interests in that entity for the EB Funds while charging investors a mark-up. Albukerk also earned a brokerage fee on the acquisition of Facebook shares from the original stockholders. As a result of the fee and mark-up, investors in Albukerk’s two Facebook funds ultimately paid significantly more than the fees disclosed in the offering materials.

Without admitting or denying the SEC’s findings, Albukerk and EB Financial consented to entry of a SEC order finding that they violated Section 17(a)(2) of the Securities Act of 1933 and Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder. Albukerk and EB Financial also agreed to pay disgorgement and prejudgment interest of $210,499 and a penalty of $100,000.

In the Matter of SharesPost Inc. and Greg Brogger

According to the SEC’s administrative proceeding against SharesPost and its CEO Greg Brogger, the online platform facilitated securities transactions without registering with the SEC as a broker-dealer. SharesPost engaged in a series of activities that constituted the business of effecting securities transactions and thus were required to register as a broker-dealer. SharesPost held itself out to the public as an online service to help match buyers and sellers of pre-IPO stock and allowed registered representatives of other broker-dealers to hold themselves out as SharesPost employees and earn commissions on transactions they facilitated through the SharesPost platform. SharesPost and affiliated broker-dealers also created a commission pool that was distributed by an executive to employees who were representatives of these broker-dealers. The company also collected and published on its website third-party information concerning issuers’ financial metrics, SharesPost-funded research reports, and a SharesPost-created valuation index. Additionally, the SharesPost platform was used to create an auction process for interests in funds managed by a SharesPost affiliate and designed to buy stock in pre-IPO companies.

SharesPost and Brogger consented to an SEC order finding that SharesPost committed and Brogger caused a violation of Section 15(a) of the Exchange Act of 1934. They agreed to pay penalties of $80,000 and $20,000 respectively. Subsequent to the SEC’s investigation, SharesPost acquired a broker-dealer and its membership agreement was approved by the Financial Industry Regulatory Authority (FINRA).

March 14, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 13, 2012

SEC Charges Two Ameriprise Advisors with Insider Trading

The SEC charged two Ameriprise financial advisors with insider trading for more than $1.8 million in illicit profits based on confidential information about a Philadelphia-based insurance holding company’s merger negotiations with a Japanese firm.  According to the SEC, Timothy J. McGee and Michael W. Zirinsky, who are registered representatives at Ameriprise Financial Services, illegally traded in the stock of Philadelphia Consolidated Holding Corp. (PHLY) based on nonpublic information about the company’s impending merger with Tokio Marine Holdings. McGee obtained the inside information from a PHLY senior executive who was confiding in him through their relationship at Alcoholics Anonymous (AA) about pressures he was confronting at work. McGee then purchased PHLY stock in advance of the merger announcement on July 23, 2008, and made a $292,128 profit when the stock price jumped 64 percent that day.

In addition, according to the SEC’s complaint, McGee tipped Zirinsky, who purchased PHLY stock in his own trading account as well as those of his wife, sister, mother, and grandmother. Zirinsky tipped his father Robert Zirinsky and his friend Paulo Lam, a Hong Kong resident who in turn tipped another friend whose wife Marianna sze wan Ho also traded on the nonpublic information. The Zirinsky family collectively obtained illegal profits of $562,673 through their insider trading. Lam made an illicit profit of $837,975 and Ho, also a Hong Kong resident, profited by $110,580.

Lam and Ho each agreed to settle the SEC’s charges and pay approximately $1.2 million and $140,000 respectively.

March 13, 2012 in SEC Action | Permalink | Comments (1) | TrackBack (0)

SEC Charges Execs at Former Mortgage Company with Concealing Financial Collapse

The SEC charged Thornburg Mortgage Inc. chief executive officer Larry Goldstone, chief financial officer Clarence Simmons, and chief accounting officer Jane Starrett (whom the agency describes as the senior-most executives at formerly one of the nation’s largest mortgage companies) with hiding the company’s deteriorating financial condition at the onset of the financial crisis. According to the SEC, they schemed to fraudulently overstate the company’s income by more than $400 million and falsely record a profit rather than an actual loss for the fourth quarter in its 2007 annual report. Behind the scenes, Thornburg was facing a severe liquidity crisis and was unable to make on-time payments for substantial margin calls it received from its lenders in the weeks leading up to the filing of its annual report on Feb. 28, 2008.

According to the SEC’s complaint filed in federal court in New Mexico, even though Thornburg was violating lending agreements by failing to make on-time payments, the executives were unwilling to disclose the severity of their liquidity crisis to investors and Thornburg’s auditor. For example, in a February 25 e-mail from Starrett to Goldstone and Simmons, she said, “We have purposefully not told [our auditor] about the margins calls.” Goldstone, Simmons, and Starrett scrambled to satisfy all outstanding margin calls and then timed the filing of the annual report to occur just hours later in order to precede additional margin calls and avoid full disclosure. As Goldstone had earlier stated to Simmons and Starrett in an e-mail, “We don’t want to disclose our current circumstance until it is resolved.” The intention was “to keep the current situation quiet while we deal with it.”

The SEC alleges that the executives’ plan to never disclose the delayed margin call payments fell through when they were unable to raise cash quickly enough to meet more margin calls received soon after filing the annual report. When Thornburg began to default on this new round of margin calls, it was forced to disclose its problems in 8-K filings with the SEC. By the time the company filed an amended annual report on March 11, its stock price had collapsed by more than 90 percent. Thornburg never fully recovered and filed for bankruptcy on May 1, 2009.

The SEC’s complaint charges Goldstone, Simmons, and Starrett with violations of the antifraud, deceit of auditors, reporting, record keeping, and internal controls provisions of the federal securities laws. The complaint seeks officer and director bars, disgorgement, and financial penalties.

March 13, 2012 in Film, SEC Action | Permalink | Comments (0) | TrackBack (0)

Sutherland Asbill Reports Increase in FINRA Disciplinary Actions

Sutherland Asbill & Brennan LLP has posted its annual FINRA Sanctions Survey, a review of the disciplinary actions reported by the Financial Industry Regulatory Authority (FINRA), on its website. The Survey reports that in 2011 FINRA reported a significant increase in the number of disciplinary actions filed and the total fines imposed.  These increases followed a substantial increase in the number of cases reported in 2010.  Sutherland also identified the top enforcement issues for FINRA in 2011, as well as emerging trends.

March 13, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Brown Introduces Crowfunding Legislation (Again) in Senate

I have blogged several times about proposed crowdfunding legislation and expressed my deep concern that it will facilitate the defrauding of small investors.  Today I got a press release from Senator Scott Brown, touting the Crowdfund Act "which will boost job growth in Massachusetts by empowering new small businesses and aspiring entrepreneurs to raise capital from a wide range of small dollar investors."  The Act will:

"Allow entrepreneurs to raise up to $1 million per year through an SEC-registered crowdfunding portal.

"Free people to invest a percentage of their income. For investors with an income of less than $100,000, investments will be capped at the greater of $2,000 or 5% of income. For investors within an income of more than $100,000, investments will be capped at 10% up to $100,000. (emphasis added)"

Does it make it okay to take unsophisticated investors money so long as the amount is capped?

March 13, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, March 11, 2012

Morriss & Henson on Regulatory Effectiveness and OffShore Financial Centers

Regulatory Effectiveness in Onshore & Offshore Financial Centers, by Andrew P. Morriss, University of Alabama School of Law; PERC - Property and Environment Research Center; George Mason University - Mercatus Center, and Clifford Chad Henson, University of Illinois College of Law; University of Illinois, College of Business, Department of Finance, was recently posted on SSRN.  Here is the abstract:

Onshore jurisdictions, such as the United States, United Kingdom, France and Germany, are critical of offshore financial centers (OFCs), such as Bermuda, the Cayman Islands, and the Channel Islands. Arguments against OFCs include claims that their regulatory oversight is lax, allowing fraud and criminal activity. In this article, we present cross-jurisdictional data, showing that OFCs are not lax. We also provide qualitative analyses of regulatory effectiveness, demonstrating that input-based measures of regulation are inappropriate metrics for comparing jurisdictions. Based on both quantitative input measures and a qualitative assessment, we reject the onshore critique of OFCs as bastions of laxity.

March 11, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Cox & Baucom on Business Roundtable v. SEC

The Emperor Has No Clothes: Confronting the DC Circuit’s Usurpation of SEC Rulemaking Authority, by James D. Cox, Duke University School of Law, and Banjamin J. C. Baucom, was recently posted on SSRN.  Here is the abstract:

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 introduced the most sweeping reforms of financial markets since the Great Depression. Nestled among its numerous provisions was the amendment to section 14(a) of the Securities Exchange Act expressly authorizing the Securities and Exchange Commission (SEC) to adopt rules for shareholders to nominate directors to the boards of reporting companies. Earlier, financial institutions had long lobbied the SEC for a rule providing shareholders access to the nominating process of publicly held corporations. Their cause gained momentum with a 2003 SEC staff report recommending that large, long-term holders, under very limited circumstances, should have the right to nominate a minority of the directors to be elected. After that report, a battle royal ensued, a pro-access chairman was terminated, and under the new SEC chairman the SEC side-tracked shareholder access and even curbed the institutions’ access to the proxy machinery as a means to authorize shareholder nominations to the board. Then, with the imprimatur of Dodd-Frank, the SEC acted, albeit timidly, to provide, in Rule 14a-11, a process for limited shareholder board nominations. In broad overview, Rule 14a-11 permitted a shareholder or group of shareholders that has held at least three percent of the voting power for over three years to nominate a maximum of 25 percent of the board. Institutions rejoiced, but only briefly. Rule 14a-11 never became operative. The rule was immediately challenged so that the SEC suspended its effect until the legal challenge to the rule was resolved. Ultimately the D.C. Circuit held that Rule 14a-11 was invalid due to the SEC’s failure to “consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.” when adopting rules approved.

March 11, 2012 in Law Review Articles | Permalink | Comments (1) | TrackBack (0)