Securities Law Prof Blog

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

Friday, May 18, 2012

SEC Charges Former NAPFA Officer with Defrauding Advisory Clients

On May 17 the SEC charged Mark Spangler, a Seattle-based investment adviser and a former chairman of the National Association of Personal Financial Advisors, with defrauding clients by secretly investing their money in two risky start-up companies he co-founded.

According to the SEC, Spangler funneled approximately $47.7 million of client money into these private ventures despite representing that he would invest primarily in publicly-traded securities. Spangler served as chairman and CEO of one of the companies, which is now bankrupt.

The U.S. Attorney’s Office for the Western District  of Washington announced parallel criminal charges against Spangler.

According to the SEC’s complaint filed in federal court in Seattle, Spangler raised more than $56 million from his clients since 1998 for several private investment funds he managed. Beginning around 2003, without notifying investors in the funds, Spangler and his advisory firm The Spangler Group (TSG) began diverting the majority of client money into two private technology companies he created. One of the companies received nearly $42 million from the funds before shutting down operations.

The SEC alleges that Spangler and his firm secretly reaped $830,000 from the companies in addition to any management fees that TSG received from clients.

According to the SEC’s complaint, Spangler concealed his diversion of client funds for years. He disclosed it only after he placed TSG and the funds he managed into state court receivership in 2011.

May 18, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Call For Papers: St. John's Law Review Symposium on Regulation of Financial Advice

Call For Papers
"Revolution in the Regulation of Financial Advice: the US, the UK and Australia"
Opening Speaker: Brian Shea, Chief Executive Officer of Pershing LLC, a BNY Mellon company

Recently, Australia and the UK have been carrying out radical reforms in compensation practices for investment advice to retail customers.   These reforms contrast sharply with the normal US practices of transparency and increased disclosure requirements.  On Friday, October 12, 2012, the St. John’s Law Review, in conjunction with the St. John’s Center for International and Comparative Law, will host a symposium featuring panelists from the United States, Australia, and the UK exploring recent developments in the regulatory regimes of those countries.  Specifically, the symposium will discuss the future of investment adviser regulation after Dodd-Frank in the US, the Future of Financial Advice in Australia, the Retail Distribution Review in the UK and other international developments in the regulation of financial advice. It will examine the benefits of different regulatory plans affecting broker-dealers and investment advisers ranging from mandatory disclosure to more substantive regulation preventing conflicts of interest.

The sponsors invite practitioners and scholars to submit papers advancing a novel perspective or proposal regarding the regulation of investment advisers in the United States, Australia, or the UK.  In order to include a broad range of papers, we ask that submissions be limited to a maximum of 8,000 words exclusive of footnotes.  All papers should be cited according to traditional journal conventions and submitted, along with the author’s curriculum vitae, to the following email address: RevRegConference.SJULaw@Gmail.Com. We ask that you submit your papers by August 20, 2012.

May 18, 2012 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Thursday, May 17, 2012

Khuzami Testifies on Settlement Practices

Robert Khuzami, Director, Division of Enforcement, U.S. Securities and Exchange Commission, testified today before the Committee on Financial Services, U.S. House of Representatives, on "Examining the Settlement Practices of U.S. Financial Regulators."

May 17, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 16, 2012

FINRA Announces Improvements to BrokerCheck

FINRA announced new features to BrokerCheck to help users more easily access broker-dealer and investment adviser registration information. With the latest improvements, users now have:

  • centralized access to licensing and registration information on current and former brokers and brokerage firms, and investment adviser representatives and investment adviser firms;
  • the ability to search for and locate a financial services professional based on main office and branch locations, and the ability to conduct ZIP code radius searches (in increments of 5, 15 or 25 miles); and
  • access to expanded educational content available on BrokerCheck, including new help icons that clarify commonly referenced terms throughout the system and within BrokerCheck reports.

In February 2012, FINRA issued Regulatory Notice 12-10, soliciting comments on ways to facilitate and increase investor use of BrokerCheck. The comment period ended on April 27 and FINRA is currently reviewing the 71 comments received.

May 16, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 15, 2012

Two Commissioners Fault MSRB and SEC for Faulty Cost Benefit Analysis

SEC Commissioners Gallagher and Paredes have issued a statement regarding the SEC's May 4, 2012 order approving a proposed rule change by the Municipal Securities Rulemaking Board consisting of an interpretive notice concerning the application of MSRB Rule G-17 to underwriters of municipal securities. 

In our view, neither the MSRB’s nor the Commission’s analysis in this rulemaking is rigorous enough to pass muster.

Any rulemaking — whether by a self-regulatory organization, such as the MSRB, or by the Commission itself — should be the product of a careful and balanced assessment of the potential consequences that could arise. Such an assessment should entail a thorough analysis of both the intended benefits and the possible costs of a proposed rulemaking in order to ensure that any regulatory decision to proceed with the initiative reflects a well-reasoned conclusion that the benefits will come at an acceptable cost. This requires identifying the scope and nature of the problem to be addressed, determining the likelihood that the proposed rulemaking will mitigate or remedy the problem, evaluating how the rule change could impact affected parties for better and for worse, and justifying the recommended course of action as compared to the primary alternatives.

The decision-making process that led to the Commission’s approval of the MRSB’s proposed rule change falls far short of meeting this benchmark. Accordingly, we do not support the Commission order approving the MSRB’s proposed rule change regarding Rule G-17.



May 15, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Former CEO of PresstekSettles Reg FD Charges

The SEC announced that Edward J. Marino, the former chief executive officer of Connecticut-based Presstek, Inc., has agreed to settle previously-filed charges that he aided and abetted Presstek’s violations of Section 13(a) of the Securities and Exchange Act of 1934 (“Exchange Act”) and Regulation FD. On March 9, 2010, the Commission filed a civil injunctive action against Marino and Presstek, a manufacturer and distributor of high-technology digital imaging equipment. The Commission's complaint alleged that on September 28, 2006, while acting on behalf of Presstek, Marino selectively disclosed material non-public information regarding Presstek's financial performance during the third quarter of 2006 to a partner of a registered investment adviser. According to the complaint, within minutes of receiving the information from Marino, the partner decided to sell all of the shares of Presstek stock managed by the investment adviser. The complaint alleged that Presstek violated of Section 13(a) of the Exchange Act and Regulation FD when it did not simultaneously disclose to the public the information provided by Marino to the partner, and that Marino aided and abetted those violations.

Without admitting or denying the Commission’s allegations, Marino has consented to the entry of a civil judgment requiring him to pay a $50,000 civil penalty. At the time the case was originally filed in March 2010, Presstek agreed to settle the Commission's charges by consenting to a judgment that enjoins Presstek from further violations of Section 13(a) of the Exchange Act and Regulation FD and ordered it to pay a $400,000 civil penalty.

May 15, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, May 14, 2012

New York's Highest Court Rejects Compliance Officer's Wrongful Discharge Claim

The New York Court of Appeals recently held that a hedge fund's compliance officer, who was an at will employee, had no claim for wrongful discharge because he was allegedly discharged for confronting the CEO about his front-running transactions.  Sullivan v. Harnisch (Download Sullivan.050812[1]).  According to New York's highest court,  exceptions to the state's at-will doctrine are narrow; it specifically declined to extend Wieder v. Skala, 80 NY2d 628, which recognized a wrongful discharge claim in the context of an attorney who claimed he was dismissed because of his insistence that the law firm report professional misconduct committed by another attorney at the firm. 

A majority of the judges rejected the plaintiff's assertion that "compliance with securities laws was central to his relationship with [the hedge fund] in the same way that ethical behavior as a lawyer was central in Wieder to the plaintiff's employment at a law firm."  Noting that the plaintiff did not associate with other compliance officers in a firm where all were subject to self-regulation as members of a common profession and that plaintiff was not even a "full-time compliance officer," the court said that "it is simply not true that regulatory compliance ... 'was at the very core and, indeed, the only purpose' of [plaintiff's] employment."

Moreover, according to the court, "the existence of federal regulation furnishes no reason to make state common law more intrusive."  If Congress wants to create protection for compliance officers, it is free to do so.

May 14, 2012 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

SEC Charges China Gas Company and Executive with Fraud

The SEC charged China Natural Gas Inc., a China-based natural gas company, and Qinan Ji, its former CEO, for defrauding investors by secretly loaning company funds to benefit the executive's son and nephew while failing to disclose the true nature of the loans.

The SEC alleges Ji, who remains chairman of China Natural Gas Inc., coordinated two short-term loans totaling more than $14 million in January 2010. One loan went to a real estate firm co-owned by Ji’s son and nephew through a sham borrower. The other loan went to a business partner of the real estate firm. Ji signed the company’s SEC filings that falsely stated the loans were made to third parties. Ji then lied about the true borrower to China Natural Gas’s board, investors, and auditors as well as during the company’s internal investigation.

The SEC also alleges that in the fourth quarter of 2008, China Natural Gas paid $19.6 million to acquire a natural gas company but did not timely and properly report the transaction in its SEC filings. As with the loans, Ji approved the acquisition without obtaining prior authorization from the board.

The SEC’s complaint seeks a final judgment that imposes financial penalties, bars Ji from acting as an officer or director of a public company, and permanently enjoins Ji and China Natural Gas from future violations of these provisions.

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

SEC Suspends Trading in 379 Dormant Shell Companies

The SEC suspended trading in the securities of 379 dormant companies because of concern that they could be hijacked by fraudsters and used to harm investors through reverse mergers or pump-and-dump schemes. The SEC website sets forth the names of all 379 companies.  The trading suspension marks the most companies ever suspended in a single day by the agency.  An initiative tabbed Operation Shell-Expel by the SEC's Microcap Fraud Working Group utilized various agency resources including the enhanced intelligence technology of the Enforcement Division's Office of Market Intelligence to scrutinize microcap stocks in the markets nationwide and identify clearly dormant shell companies in 32 states and six foreign countries that were ripe for potential fraud.

The federal securities laws allow the SEC to suspend trading in any stock for up to 10 business days. Subject to certain exceptions and exemptions, once a company is suspended from trading, it cannot be quoted again until it provides updated information including accurate financial statements.

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

Court Dismisses Schwab's Challenge to FINRA Rule For Failure to Exhaust Administrative Remedies

Regular readers of this blog will recall that Charles Schwab and FINRA are involved in a dispute over the SRO's rules that prohibit broker-dealers from requiring customers to give up their rights to bring class actions in court.  Last fall Schwab amended its customers' agreements to include such a prohibition in reliance on AT&T Mobility v. Concepcion.  FINRA promptly brought a disciplinary proceeding against the firm, and Schwab, in turn, brought an action in federal district court seeking a declaratory judgment that FINRA could not enforce its rules, first, because the FINRA rules do not really prohibit class action waivers and, second, even if it does, the rules violate the FAA.

On May 11, the federal district court granted FINRA's motion to dismiss the complaint because the court lacks jurisdiction to hear the case.  The court held that Schwab failed to exhaust its administrative remedies and that the failure to exhaust administrative remedies is jurisdictional.  In addition, even if failure to exhaust is only an element of a claim, Schwab failed to show that it meets the requirements for an exception to the requirement of administrative exhaustion.

The 21-page opinion emphasizes that the issues involved in this case are squarely within the expertise of FINRA and the SEC and do not involve any constitutional claims (unlike the issues in SEC v. Gupta dealing with retroactive application of Dodd-Frank).

Charles Schwab & Co., Inc. v. FINRA (N.D. Cal. May 11, 2012) (Download Order Granting Def's MTD)

May 14, 2012 in Judicial Opinions, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Sunday, May 13, 2012

Heminway on Extraterritorial Application of U.S. Securities Fraud Prohibitions

The Extraterritorial Application of U.S. Securities Fraud Prohibitions in an Increasingly Global Transactional World, by Joan MacLeod Heminway, University of Tennessee College of Law, was recently posted on SSRN.  Here is the abstract:

This draft working paper, prepared for a French academic forum entitled “American Law Today: A Transatlantic Glance,” is a brief essay on the current and potential future extraterritorial reach of Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 adopted by the U.S. Securities and Exchange Commission under Section 10(b). The essay does three principal things. First, it summarizes the key antifraud rules in context. Next, it describes (in brief) the history and current state of the academic and political debate on the extraterritoriality of Section 10(b) and Rule 10b-5 (including commentary on the U.S. Supreme Court’s opinion in Morrison v. Nat’l Austl. Bank Ltd. and reactions to the recently released report of the Securities and Exchange Commission in compliance with Congress’s mandate under the Dodd-Frank Wall Street Reform and Consumer Protection Act). Finally, before briefly concluding, the essay suggests a way forward for Congress in light of the current state of the extraterritoriality debate.

May 13, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Perino on Financial Reform in the New Deal

Crisis, Scandal and Financial Reform During the New Deal, by Michael A. Perino, St. John's University School of Law, was recently posted on SSRN.  Here is the abstract:

This chapter in the forthcoming Oxford Handbook of the New Deal provides a brief overview of the major financial reform legislation passed during the first term of the Roosevelt administration. After describing the structural flaws in the pre-New Deal regulatory landscape, the chapter illustrates how the stock market crash of 1929, the onset Great Depression, and the banking crisis of 1933 helped create the climate in which financial reform could pass. In particular, it highlights the crucial role that the Senate investigation of Wall Street — commonly known as the Pecora investigation, after its chief counsel, Ferdinand Pecora — played in building the clamor for financial reform. The chapter then catalogs the major banking and securities legislation adopted during the Roosevelt administration’s first term and demonstrates the transient nature of the political moments that crises and scandals create. In the immediate aftermath of the crisis, reform proposals passed with little effective opposition. As the crisis receded, however, organized lobbying efforts grew more powerful and were often successful in diminishing reform proposals.

May 13, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Bainbridge on Regulating Insider Trading in Post-Fiduciary Duty Era

Regulating Insider Trading in the Post-Fiduciary Duty Era: Equal Access or Property Rights?, by Stephen M. Bainbridge, University of California, Los Angeles (UCLA) - School of Law, was recently posted on SSRN.  Here is the abstract:

This essay was prepared for a forthcoming book on the law and economics of insider trading.

In Chiarella and Dirks, the Supreme Court based insider trading liability on a breach of a disclosure obligations arising out of a fiduciary relationship. The resulting narrowing of the scope of insider trading liability met substantial resistance from the Securities and Exchange Commission (SEC) and the lower courts. Through both regulatory actions and judicial opinions, the SEC and the courts gradually chipped away at the fiduciary duty rationale. In recent years, the trend has accelerated, with several developments having substantially eviscerated the fiduciary duty requirement.

The current unsettled state of insider trading jurisprudence necessitates rethinking the foundational premises of that jurisprudence from first principles. This essay argues that the correct rationale for regulation insider trading is protecting property rights in information. Although that rationale obviously has little to do with the traditional concerns of securities regulation, this article further argues that the SEC has a sufficiently substantial advantage in detecting and prosecuting insider trading that it should retain jurisdiction over the offense.

May 13, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Jones & Welsh on Public Enforcement for Directors' Oversight Duty

Toward a Public Enforcement Model for Directors' Duty of Oversight, by Renee M. Jones, Boston College - Law School, and Michelle Welsh, Monash University - Faculty of Business and Economics, was recently posted on SSRN.  Here is the abstract:

This Article proposes a public enforcement model for the fiduciary duties of corporate directors. Under the dominant model of corporate governance, the principal function of the board of directors is to oversee the conduct of senior corporate officials. When directors fail to provide proper oversight, the consequences can be severe for shareholders, creditors, employees, and society at large.

Despite general agreement on the importance of director oversight, courts have yet to develop a coherent doctrine governing director liability for the breach of oversight duties. In Delaware, the dominant state for U.S. corporate law, the courts tout the importance of board oversight in dicta, yet emphasize in holdings that directors cannot be personally liable for oversight failures, absent evidence that they intentionally violated their duties.

We argue that some form of external enforcement mechanism is necessary to ensure optimal conduct from corporate leaders. Unfortunately, the disciplinary force of shareholder litigation has been vitiated by procedural rules and doctrines that make it exceedingly difficult for plaintiffs to prevail in derivative litigation. Because private shareholder litigation no longer fulfills its traditional role, the need exists for alternative mechanisms for director accountability.

We look to Australian corporate law for solutions to the problem of enforcing the duty of oversight. Australian corporate law encompasses a range of enforcement mechanisms for directors’ duties. The Australian Securities and Investments Commission (ASIC) has power to sue to enforce directors’ statutory duties. ASIC can seek a range of penalties for breach of duty, including pecuniary penalties and officer and director bars. ASIC has prevailed in a number of high-profile actions against directors of public companies in recent years. Despite the relative rigor of enforcement in Australia, capable directors continue to serve and its economy has thrived.

The Article explores several possibilities for incorporating public enforcement into the U.S. corporate governance system. We consider SEC enforcement of fiduciary duties and enforcement by states’ attorneys general. We also consider empowering state judges to impose bars on future service, as an alternative to tort-based damages awards. Regardless of the exact model of public enforcement, the reforms advanced here would help provide for greater director accountability and thus better motivate directors to perform their duties responsibly.

May 13, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)