Securities Law Prof Blog

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

Friday, April 6, 2012

Merrill Seeks to Vacate $10 Million Arbitration Award in Deferred Comp Dispute, Citing Arbitrator Bias

A FINRA arbitration panel recently ordered Merrill Lynch to pay two former brokers about $5 million in deferred compensation and tacked on an additional $5 million in punitive damages.  The panel found that a committee set up to decide deferred compensation payouts when brokers left was a "sham."  Merrill promptly went to court to try to vacate the award, charging that the chair of the panel was biased and "demonstrated overt hostility" toward Merrill.  According to Merrill, the chair failed to disclose that her husband is a plaintiff's attorney who has previously sued Merrill.  InvNews, Merrill Lynch loses $10.2M broker-pay case

April 6, 2012 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

President Signs JOBS Act as Doubts Continue to Growth

President Obama signed the JOBS Act on Thursday.  In the signing ceremony, he stated:

Here’s what’s going to happen because of this bill.  For business owners who want to take their companies to the next level, this bill will make it easier for you to go public.  And that’s a big deal because going public is a major step towards expanding and hiring more workers.  It’s a big deal for investors as well, because public companies operate with greater oversight and greater transparency.

And for start-ups and small businesses, this bill is a potential game changer.  Right now, you can only turn to a limited group of investors -- including banks and wealthy individuals -- to get funding.  Laws that are nearly eight decades old make it impossible for others to invest.  But a lot has changed in 80 years, and it’s time our laws did as well.  Because of this bill, start-ups and small business will now have access to a big, new pool of potential investors -- namely, the American people.  For the first time, ordinary Americans will be able to go online and invest in entrepreneurs that they believe in.

Of course, to make sure Americans don’t get taken advantage of, the websites where folks will go to fund all these start-ups and small businesses will be subject to rigorous oversight.  The SEC is going to play an important role in implementing this bill.  And I’ve directed my administration to keep a close eye as this law goes into effect and to provide me with regular updates.

Meanwhile, doubts about the legislation continue to grow with careful scrutiny of its provisions.  The Wall St. Journal focused on the provisions that exempt "emerging growth companies" from the internal controls requirements and found "some support" for detractors of the bill.  It found that since 2004, 104 companies that have had issues with their accounting and audit procedures would have been exempt from the internal controls provision.  WSJ, Investors' Prying Eyes Blinded by New Law

Similarly, Peter Henning (Wayne State), in his New York Times blog, cautions investors to exercise vigilance in investing in start ups.  At Large and Small Companies, Internal Controls Matter

April 6, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 4, 2012

Bankers Life Settles Charges of Unlicensed Broker-Dealer and Investment Adviser Activities with States

NASAA announced that a settlement has been reached between Bankers Life and Casualty Company and state securities regulators concluding an investigation of unlicensed/unregistered brokerage activity by the insurance company.The Chicago-based company agreed that it, along with its BLC Financial Services, Inc. (BLCFS) subsidiary, will not engage in the hiring, training or supervision of any registered representatives or investment adviser representatives through March 31, 2015.  Bankers Life also agreed to withdraw the registration of its brokerage subsidiary with the Securities and Exchange Commission and will terminate its membership with FINRA.

The state investigation determined that in 2005, Bankers Life entered into an agreement with UVEST Financial Inc. under which Bankers Life insurance agents who became licensed as registered representatives and/or investment adviser representatives of UVEST would provide brokerage and investment advisory services out of the insurance firm’s branch offices. In 2010, Bankers Life entered into a similar arrangement with ProEquities, Inc., a broker-dealer based in Birmingham, Alabama.

State investigators determined that Bankers Life engaged in brokerage and investment adviser activity, despite not being registered, by affiliating with licensed brokers or other firms and directing the operations, hiring, training, production selection and sales techniques of those firms.          

State securities regulators determined that Bankers Life received approximately $21 million from the two brokerage firms for variable annuity and securities transactions and investment advice between 2005 and 2011.

The settlement calls for Bankers Life to pay $9.9 million to be disbursed among the states where its dual agents were located between 2005 and 2011. The firm also agreed to pay $375,000 to reimburse the states for the cost of the investigation, $260,000 in past licensing and registration fees, and $106,000 to cover the cost of state audits to ensure compliance with the consent order.

Similar settlements were reached with UVEST and ProEquities. UVEST agreed to pay $750,000 and ProEquities agreed to a payment of $435,000 for their role in the relationship with Bankers Life.


April 4, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

FINRA Fines David Lerner for Excessive Markups

A FINRA hearing panel ruled that Long Island-based David Lerner Associates, Inc. (DLA) charged excessive markups on municipal bond and collateralized mortgage obligation (CMO) transactions over a two-year period, causing the firm's retail customers to pay unfairly high prices and receive lower yields than they otherwise would have received. The panel fined DLA $2.3 million for the markup and related supervisory violations, and ordered the firm to pay restitution of more than $1.4 million, plus interest, to affected customers. The panel also fined its head trader William Mason $200,000 and suspended him for six months from the securities industry. The ruling resolves charges brought by FINRA's Department of Enforcement in May 2010.

The panel found that from January 2005 through January 2007, DLA and Mason charged retail customers excessive markups in more than 1,500 municipal bond transactions and charged excessive markups in more than 1,700 CMO transactions from January 2005 through August 2007. The hearing panel decision notes that DLA's municipal bond and CMO trades reflected a pattern of intentional excessive markups. The municipal bonds and CMOs in the transactions were all rated investment grade or above, and were readily available in the market at significantly lower prices than DLA charged.

The panel noted that DLA charged markups on the municipal bonds ranging from 3.01 percent to 5.78 percent and charged markups on the CMOs ranging from 4.02 percent to 12.39 percent. Regardless of whether a DLA customer bought as much as $225,000 or as little as $8,000 of a CMO, the price was marked up "without consideration for the amount of money involved in the transaction." The hearing panel concluded that as a result of the unfair markups, the customers received lower yields than they would have received if the markups had been fair and reasonable.

In determining the sanctions, the panel took into consideration DLA's relevant disciplinary history. Despite having received a Letter of Caution raising FINRA's concerns about DLA's markup practices after a 2004 exam, and after having received a Wells Notices concerning the matter in July 2009, DLA continued its unfair pricing practice. The panel's decision notes that "in keeping with their unwillingness to accept responsibility, DLA has not taken any corrective measures to improve their fixed income markups policies and practices."


April 4, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 3, 2012

SEC Seeks Additional Comments on Target Date Retirement Fund Proposed Rule

The SEC has reopened the comment period for its proposed rule on target date retirement funds, to consider comments on the results of investor testing regarding target date retirement funds. The proposed rule is intended to enhance the information provided to individuals investing in such funds.(Download 33-9309[1])

That proposed rule would generally require target date retirement funds to more prominently disclose the fund's asset allocation at the target date. Under the proposal, the disclosure would have to be placed adjacent to the fund's name the first time the name appears in marketing materials. The proposal also would require marketing materials for target date retirement funds to include a table, chart, or graph depicting the fund's asset allocation over time.

In the SEC-sponsored survey (Download S71210-58[1]), investors were asked questions after reviewing documents containing information about a hypothetical target date retirement fund. The documents included versions revised to reflect the changes proposed by the Commission.

April 3, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FSOC Issues Final Rule on Nonbank Financial Companies

The Financial Stability Oversight Council issued a final rule on Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies.( Download Nonbank Designations - Final Rule and Guidance[1])  Section 113 of the Dodd-Frank Act authorizes the Financial Stability Oversight Council to determine that a nonbank financial company shall be supervised by the Board of Governors of the Federal Reserve System and shall be subject to prudential standards, in accordance with Title I of the Dodd-Frank Act, if the Council determines that material financial distress at the nonbank financial company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the nonbank financial company, could pose a threat to the financial stability of the United States. This final rule and the interpretive guidance attached as an appendix describe the manner in which the Council intends to apply the statutory standards and considerations, and the processes and procedures that the Council intends to follow, in making determinations under section 113 of the Dodd-Frank Act.

April 3, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

UK Hedge Fund Adviser Owes SEC $98 Million for Late Trading

On March 28, 2012, the federal district court for the Southern District of New York entered a final judgment in favor of the SEC ordering total monetary relief of $98.6 million and enjoining Pentagon Capital Management (“PCM”), a United Kingdom based hedge fund adviser, and its chief executive officer, Lewis Chester, from violating the antifraud provisions of the securities laws.

Previously, on February 15, 2012, the Court issued an Opinion finding that Defendants “intentionally, and egregiously,” violated the antifraud provisions of the securities laws by engaging in a late trading scheme to defraud United States mutual funds. The Court also issued an Opinion explaining its decision to impose a penalty equal to the disgorgement ordered because, inter alia, “Defendants understood that late trading was illegal and acted with marked scienter, going to great lengths to seek out, structure, and maintain the ability to deceive the funds into accepting their late trades and attempting to cover up their late trading after the fact.”

PCM is an investment adviser and investment manager based in London, England, and is registered with the United Kingdom Financial Services Authority.

April 3, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, April 2, 2012

SEC Issues Final Rule on Exemptions for Security-Based Swaps Issued by Clearing Agencies

The SEC issued a final rule on EXEMPTIONS FOR SECURITY-BASED SWAPS ISSUED BY CERTAIN CLEARING AGENCIES (Download 33-9308[1]). The final rules exempt transactions by clearing agencies in these security-based swaps from all provisions of the Securities Act, other than the Section 17(a) anti-fraud provisions, as well as exempt these security-based swaps from Exchange Act registration requirements and from the provisions of the Trust Indenture Act, provided certain conditions are met.  They are effective April 16, 2012.

April 2, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Seeks Clawback from Two Former ArthroCare Execs under SOX 304

The SEC sued two former executives at an Austin, Texas-based surgical products manufacturer to recover bonus compensation and stock sale profits they received during an accounting fraud at the company.  The SEC previously brought a settled enforcement action against ArthroCare later charged two former ArthroCare executives with perpetrating a fraudulent scheme to overstate ArthroCare’s revenues and earnings.

In today's action, filed in federal court in Austin, former ArthroCare Corporation CEO Michael A. Baker and former CFO Michael Gluk are not charged with personal misconduct, but they are still required under Section 304 of the Sarbanes-Oxley Act to reimburse ArthroCare for bonuses and stock profits that they received after the company filed fraudulent financial statements during 2006, 2007, and the first quarter of 2008.


April 2, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sunday, April 1, 2012

Files et alia on Monetary Benefit of Cooperating with SEC

The Monetary Benefit of Cooperation in Regulatory Enforcement Actions for Financial Misrepresentation, by Rebecca Files, University of Texas at Dallas; Gerald S. Martin, American University - Kogod School of Business; and Stephanie J. Rasmussen, University of Texas at Arlington, was recently posted on SSRN.  Here is the abstract:

We examine the monetary benefits of cooperation for 1,059 enforcement actions initiated by the Securities and Exchange Commission (SEC) and Department of Justice (DOJ) for financial misrepresentation from 1978-2011. We estimate that firm cooperation results in a 12% increase in the probability of regulators bringing charges against firms. However, using a Heckman full maximum likelihood estimator, we find that being credited for cooperation by regulators reduces the monetary penalties firms pay by 35% (conversely, non-cooperation increases monetary penalties by 53%). Assuming an average penalty, this translates to a $6 million benefit from cooperation. When cooperation credit is coupled with conducting an independent investigation and making the results available to regulators, monetary penalties are reduced by 47%, or $8.2 million on average. These estimates are robust to controlling for factors considered by the SEC and DOJ when determining whether or not to bring charges and determining penalties. Alternative estimators provide similar estimates of the monetary benefits of cooperation.

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

Kaal & Painter on Forum Competition after Morrison

Forum Competition and Choice of Law Competition in Securities Law after Morrison v. National Australia Bank, by Wulf A. Kaal, University of St. Thomas - School of Law (Minnesota), and Richard W. Painter, University of Minnesota Law School, was recently posted on SSRN.  Here is the abstract:

In Morrison v. National Australia Bank, the U.S. Supreme Court in 2010 held that U.S. securities laws apply only to securities transactions within the United States.

The transactional test in Morrison could be relatively short lived because it is rooted in geography. For cases involving private securities transactions in which geographic determinants of a transaction and thus applicable law are unclear, this article suggests redirecting the inquiry away from the geographic location of securities transactions towards the parties’ choice of law. In the long run, allowing parties to choose the law pertaining to private transactions could be more effective than relying on geography that is both indeterminate and easy to manipulate. Jurisdictions could then compete to induce transacting parties to bring private transactions within their jurisdictional reach by designing substantive law and procedures that parties choose ex-ante ("Choice of Law Competition”).

Recent cases expanding the jurisdictional reach of Dutch courts suggest that the Netherlands or another EU member state could engage in a different type of jurisdictional competition. Jurisdictions performing this role adjust their procedural rules to set up a forum within their borders for litigation that appeals to plaintiffs and their lawyers ("Forum Competition"). The U.S. engaged in some Forum Competition for extraterritorial securities litigation prior to Morrison, and the Dodd-Frank Act of 2010 empowers the SEC to continue to bring suits in the United States over securities transactions outside the United States. For many issuers and investors who do not choose the forum ex-ante, Forum Competition can be suboptimal. Depending on future developments, the acceptable outer bounds of Forum Competition between the United States and Europe may need to be defined by treaty or multilateral agreement

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

Baer on Punishment vs. Regulation

Choosing Punishment, by Miriam H. Baer, Brooklyn Law School, was recently posted on SSRN.  Here is the abstract:

This Article sets forth two propositions. First, at a policy-making level, it is easier to punish than it is to regulate. That is, it is easier to attract public and political support for state-sponsored punishment than it is to attract similar support for regulation. “Punishment,” as defined in this Article, includes any retributively motivated government action or response.

Second, this preference for punishment may not be particularly healthy. No doubt, there are many good reasons for supporting the government when it imposes just deserts or communicates the public’s moral condemnation. Moreover, it is likely impossible to eradicate retributive motivations that are hard-wired into our collective DNA. But the resources we spend on punishment are resources that might be spent elsewhere. Even worse, by overemphasizing punishment, we may undermine and crowd out the non-punitive, regulatory alternatives that are more adept at averting disastrous outcomes in the first place. Accordingly, we should worry about punishment’s effect on all government institutions, and not just on the criminal justice system.

This Article begins that task by focusing on corporate governance regulation and policy. The Article opens by explaining why public actors choose retributive responses and theorizes how those responses are likely to affect the legal institutions that dominate corporate governance law. The Article then tackles the normative point. Although punishment offers a number of benefits, it may leave society worse off over the long term. The Article concludes with suggestions for further inquiry.

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

Klausner & Hegland on D&O Insurance Payments

How Protective is D&O Insurance in Securities Class Actions?, by Michael Klausner, Stanford Law School, and Jason Hegland was recently posted on SSRN.  Here is the abstract:

This article provides basic descriptive statistics on actual payments by D&O insurers for amounts paid in settling securities class actions. Insurers cover 100% of settlements in over 50% of cases and something less than 100% in another 35% of cases. Officers and (rarely) directors pay in 6% of cases.

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