Securities Law Prof Blog

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

Thursday, January 12, 2012

Is Greenspan "Pretty Terrific" Today?

The Fed released transcripts of eight Federal Open Market Committee Meetings for 2006 (there is a five-year lag in releasing them), and the Wall St. Journal has some excerpts.  Here is a funny one:

JAN. 31: Alan Greenspan is chief for the last time during the meeting of the Fed’s decision-making body. Fed officials spend much of their time praising him. “I’d like the record to show that I think you’re pretty terrific, too,” says Timothy Geithner. “And thinking in terms of probabilities, I think the risk that we decide in the future that you’re even better than we think is higher than the alternative.”

WSJ, Fed 2006 Transcript Highlights: Riding Housing Roller Coaster With Eyes Shut.

January 12, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Former BDO Auditor Pleads Guilty to Lying to SEC

A former audit partner at accounting and consulting firm BDO USA LLP, Bryan N. Polozola, pled guilty to criminal charges for lying to SEC enforcement staff during investigative testimony.  According to the criminal information filed in U.S. District Court for the District of Columbia, the SEC issued subpoenas last year to BDO and Polozola, who was responsible for auditing several hedge funds managed by an investment adviser that the SEC is investigating. The criminal information alleges that during questioning in September 2011, Polozola falsely testified to SEC staff that he was not aware of a $49,350 payment made on his behalf to his former employer. In fact, Polozola was aware that his attorney had repaid the $49,350 to the former employer as reimbursement of the funds he had allegedly taken for his personal use. The payment was made at Polozola’s direction and with Polozola’s funds.

Polozola pled guilty to a one-count information charging him with making a false statement to government officials in violation of 18 U.S.C. § 1001.

January 12, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

GAO Recommends Additional Actions to Address Analysts' Conflicts

The GAO issued a report today on Additional Actions Could Improve Regulatory Oversight of Analyst Conflicts of Interest (GAO-12-209, Jan 12, 2012)( Download GAO-12-209).  Here is an excerpt from the highlights:

What GAO Found
Existing research and stakeholder views suggest that the Global Settlement and other regulatory actions have helped to address conflicts faced by equity research analysts. The results of the empirical studies that GAO reviewed generally suggest that the Global Settlement and equity research rules adopted by the SROs were associated with improvements in analysts’ stock recommendations. FINRA officials and SEC staff told GAO that the regulatory reforms have been effective, citing minor deficiencies in their examinations and the limited number of enforcement actions involving conflicts between research and investment banking as evidence of the reforms’ effectiveness. Independent monitors, which were required as part of the Global Settlement, also found that the 12 firms generally were complying with the Global Settlement. Finally, broker-dealers, institutional investors, and others told GAO that the regulatory actions have helped insulate equity research from investment banking influence, although some noted that not all conflicts can be eliminated and certain restrictions can be circumvented.

Although SEC and FINRA have been taking regulatory action to further address conflicts faced by research analysts, additional action is warranted. FINRA has been working to finalize a rule proposal designed to broaden the obligations of firms to identify and manage equity analyst conflicts and better balance the goals of helping ensure objective and reliable research with minimizing regulatory costs and burdens. FINRA also has been working to finalize another rule proposal that would address conflicts faced by debt research analysts. The current SRO research rules do not cover debt research analysts, although these analysts face conflicts of interests similar to those faced by their equity analyst counterparts. In the absence of an SRO debt research rule, the SROs have relied on antifraud statutes and SRO rules requiring ethical conduct. They also have encouraged firms—with limited success—to comply voluntarily with industry-developed principles designed to address debt analyst conflicts. FINRA plans to package its two rule proposals together and submit them to SEC in the first half of 2012. In contrast, SEC and FINRA have not proposed codifying the Global Settlement’s remaining terms. At the request of the broker-dealers, a court modified the Global Settlement in 2010 and eliminated settlement terms where, for the most part, comparable SRO rules existed. Nonetheless, some of the Global Settlement’s terms that serve to protect investors have not been codified. As a result, the Global Settlement firms continue to be subject to the requirements of the Global Settlement and the SRO research analyst rules, while other firms that provide the same services are subject only to the SRO research analyst rules. As a result, investors may not be provided the same level of protection. GAO has previously reported that a regulatory framework should ensure that market participants receive consistent and useful information as well as consistent protections for similar financial products and services. SEC staff told GAO that they periodically have discussed and analyzed the Global Settlement terms but have not formally assessed and documented whether any of the Global Settlement’s remaining terms should be codified. By not formally assessing whether codifying any of the Global Settlement’s remaining terms provides an effective way of furthering investor protection, SEC may be missing an opportunity to provide the same level of protection for all investors.

January 12, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 10, 2012

MFA Petitions for Amending 502(c) of Reg D

Managed Funds Association submitted to the SEC a petition for rulemaking (Download MFApetn4-643[1]), requesting that the Commission amend Rule 502(c) of Regulation D to eliminate the prohibition on offers or sales of securities by general solicitation or general advertising with respect to private funds.

January 10, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Scheduled to Consider PCAOB Budget and Fees

Wednesday, January 11, 2012
The Commission will consider whether to approve the 2012 budget of the Public Company Accounting Oversight Board and will consider the related annual accounting support fee for the Board under Section 109 of the Sarbanes-Oxley Act of 2002.

January 10, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges 3 Former Wellcare Execs with Fraud and Insider Trading

The SEC charged three former executives of WellCare Health Plans, Inc. (“WellCare”), a managed care services company that administers federal government-sponsored health care programs with fraud. According to the Commission’s complaint, from 2003 to 2007, Todd Farha, former Chief Executive Officer, Paul Behrens, former Chief Financial Officer, and Thaddeus Bereday, former General Counsel, (collectively, “the Defendants”), devised and carried out a fraudulent scheme that deceived the Florida Agency for Health Care Administration (“AHCA”) and the Florida Healthy Kids Corporation (“Healthy Kids”) by improperly retaining over $40 million in health care premiums the company was statutorily and contractually obligated to spend on certain health care services or reimburse to the state agencies. As a result of the scheme, WellCare recorded the retained amount as revenue, which materially inflated its net income and diluted earnings per share (“EPS”) in its public financial statements.

In total, through their fraudulent conduct, the complaint alleges that WellCare reduced the refunds it paid to AHCA by approximately $35 million and to Healthy Kids by approximately $6 million.

The excess premiums retained by the Defendants went straight to WellCare’s bottom line. WellCare materially misstated its net income and EPS in filings with the Commission and in quarterly and annual earnings releases from 2004-2006 and the first two quarters of 2007. On January 26, 2009, WellCare filed its Form 10-K for 2007 and restated its financial results for those time periods. The Restatement reduced WellCare’s reported net income and EPS by approximately 14% for fiscal year (“FY”) 2004, 9% for FY 2005, 13% for FY 2006, and 9% for the first quarter of FY 2007.

The Commission’s complaint also alleges that, after setting their fraudulent scheme in motion, the Defendants sold approximately 1.6 million WellCare shares into the public market for gross proceeds of approximately $91 million. According to the complaint, the Defendants sold the shares pursuant to 10b5-1 trading plans that were created and amended in bad faith, and through three public stock offerings conducted while the scheme was ongoing.

As to each Defendant, the Commission is seeking a judgment permanently enjoining them from violating provisions of the securities laws, civil penalties, disgorgement of ill-gotten gains with prejudgment interest, and officer and director bars. As to Farha and Behrens, the Commission seeks reimbursement of incentive-based and equity-based compensation pursuant to Section 304(a) of Sarbanes-Oxley.

January 10, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, January 9, 2012

Refco Attorney Gets New Trial Because of Judge's Mistake

Former Mayer Brown partner Joseph Collins gets a new trial because the federal district court had a private conversation with a juror.  Collins was convicted in July 2009 for his role in assisting owners and executives of Refco, the defunct commodities firm, in covering up the firm's financial difficulties.  However, the appellate court said that the presiding judge made mistakes in handling a juror during heated jury deliberations.  The judge had a private conversation with a juror who refused to deliberate over the objections of Collins' attorneys.  A court reporter kept a record of the conversation and later shared it with the parties.

WSJ, Refco Lawyer Gets New Trial .

U.S. v. Collins (Download Collins.010912[1])

January 9, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Advisory Committee Recommends Relaxing General Solicitation Prohibition in Certain Private Offerings

The SEC Advisory Committee on Small and Emerging Companies recently filed with the SEC a recommendation to relax the general solicitation prohibition in certain private offerings:

Recommendation Regarding Relaxing or Modifying
Restrictions on General Solicitation in Certain Private Offerings of Securities
January 6, 2012
1. The Advisory Committee is of the view that private offerings of securities pursuant to Section 4(2) under the Securities Act of 1933 (the “Securities Act”) are a successful instrument for facilitating capital formation by emerging privately held small businesses and smaller public companies;
2. In offerings of securities conducted pursuant to Rule 506 of Regulation D (“Rule 506”), which is a safe harbor for private offerings of securities under Section 4(2) of the Securities Act and the most widely used Regulation D exemption, neither the issuer nor any person acting on the issuer’s behalf may offer or sell securities by any form of general solicitation or general advertising and securities sold pursuant to Rule 506 must be sold to “accredited investors” or persons who, either alone or with a representative, have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of a prospective investment;
3. The Advisory Committee is of the view that the restrictions on general solicitation and general advertising prevent many privately held small businesses and smaller public companies from gaining sufficient access to sources of capital and thereby materially limit their ability to raise capital through private offerings of securities; and
4. The Advisory Committee is of the view that the investor protections afforded by the existing restrictions on general solicitation and general advertising are not necessary in private offerings of securities whereby the securities are sold solely to accredited investors.
THEREFORE, the Advisory Committee recommends that the Commission take immediate action to relax or modify the restrictions on general solicitation and general advertising to permit general solicitation and general advertising in private offerings of securities under Rule 506 where securities are sold only to accredited investors.
(Download Acsec-recommendation-010612[1])


January 9, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Proposes to Preclude Collective Action Claims from Arbitration

FINRA recently filed with the SEC a rule change that would amend Rule 13204 of the Industry Arbitration Code to preclude collective action claims from being arbitrated under the Industry Code. (Download SR-FINRA-2011-75) The amendment is a consequence of a federal district court opinion that held, contrary to the view of FINRA Dispute Resolution, that collective action claims under the Fair Labor Standards Act were not "class actions" for the purpose of Rule 13204 and thus compelled arbitration of the claims before FINRA.  (Apparently the federal district court thinks it can interpret FINRA rules better than the organization itself.)  The amendment explicitly provides that collective action claims under the Fair Labor Standards Act, the Age Discrimination in Employment Act or the Equal Pay Act of 1963 may not be arbitrated under the Code.

January 9, 2012 in Other Regulatory Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Sunday, January 8, 2012

Cheffins & Armour on Shareholder Activism by Hedge Funds

The Rise and Fall (?) of Shareholder Activism by Hedge Funds, by Brian R. Cheffins, University of Cambridge - Faculty of Law; European Corporate Governance Institute (ECGI), and John Armour, University of Oxford - Faculty of Law; Oxford-Man Institute of Quantitative Finance; European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

Shareholder activism by hedge funds became a major corporate governance phenomenon in the United States in the 2000s. This paper puts the trend into context by introducing a heuristic device referred to as 'the market for corporate influence' to distinguish the ex ante-oriented 'offensive' brand of activism hedge funds engage in from the ex post-oriented 'defensive' activism carried out by mutual funds and pension funds. The paper traces the rise of hedge fund activism and anticipates future developments, arguing in so doing that, despite the blow the 2008 financial crisis dealt to hedge funds, their interventions will remain an important element of U.S. corporate governance going forward.

This article is an updated synthesis for a non-legal audience of

January 8, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

SEC Modifies "Neither Admit Nor Deny" Policy

The SEC's Enforcement Division announced on Friday that it would no longer allow defendants to deny liability in SEC settlements when they have admitted to or been convicted of criminal wrongdoing at the same time.  This is a sensible, and minor, modification of its "neither admit nor deny" policy and would not have changed the terms of the Citigroup settlement at issue in Judge Rakoff's denial of approval.

NYTimes, S.E.C. Changes Policy on Firms’ Admission of Guilt 

WSJ, SEC Modifies 'Confirm Nor Deny' .

January 8, 2012 in News Stories, SEC Action | Permalink | Comments (0) | TrackBack (0)