Securities Law Prof Blog

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

Thursday, June 7, 2012

Former Bear Execs Settle Shareholder Suit for $275 Million

Former Bear Stearns executives have agreed to settle For $275 million a shareholder suit brought by the State of Michigan Retirement Systems.  Plaintiff charged the exectives with misleading investors about the firm's financial condition prior to its2008 collapse.  Defendants include two former CEOs -- James E. Cayne and Alan D. Schwartz.

WSJ, Bear Stearns Ex-Executives Agree to Settle Shareholder Suit for $275 Million

June 7, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 6, 2012

SEC & Oppenheimer Settle Charges for Misleading Statements During Financial Crisis

The SEC and investment management company OppenheimerFunds Inc. settled charges that its sales and distribution arm made misleading statements about two of its mutual funds struggling in the midst of the credit crisis in late 2008.  Oppenheimer agreed to pay more than $35 million to settle the SEC’s administrative charges.

According to the SEC, Oppenheimer used derivative instruments known as total return swaps (TRS contracts) to add substantial commercial mortgage-backed securities (CMBS) exposure in a high-yield bond fund called the Oppenheimer Champion Income Fund and an intermediate-term, investment-grade fund called the Oppenheimer Core Bond Fund. The 2008 prospectus for the Champion fund didn’t adequately disclose the fund’s practice of assuming substantial leverage in using derivative instruments. When declines in the CMBS market triggered large cash liabilities on the TRS contracts in both funds and forced Oppenheimer to reduce CMBS exposure, Oppenheimer disseminated misleading statements about the funds’ losses and their recovery prospects.

The TRS contracts allowed the two funds to gain substantial exposure to commercial mortgages without purchasing actual bonds. But they also created large amounts of leverage in the funds. Beginning in mid-September 2008, steep CMBS market declines drove down the net asset values (NAVs) of both funds. These losses forced Oppenheimer to raise cash for month-end TRS contract payments by selling securities into an increasingly illiquid market.  According to the SEC’s order, the funds’ portfolio managers under instruction from senior management began executing a plan in mid-November to reduce CMBS exposure. Just as they began to do so, however, the CMBS market collapse accelerated, creating staggering cash liabilities for the funds and driving their NAVs even lower.

Without admitting or denying the SEC’s findings, OppenheimerFunds agreed to pay a penalty of $24 million, disgorgement of $9,879,706, and prejudgment interest of $1,487,190. This money will be deposited into a fund for the benefit of investors. OppenheimerFunds and OppenheimerFunds Distributor also agreed to provisions in the order censuring them and directing them to cease and desist from committing or causing any violations or future violations of these statutes and rules.

June 6, 2012 in SEC Action | Permalink | Comments (1) | TrackBack (0)

Tuesday, June 5, 2012

Ketchum on SRO for Investment Advisers

Richard G. Ketchum, Chairman and Chief Executive Officer, FINRA, testified today before the House Committee on Financial Services on  H.R. 4624, the Investment Adviser Oversight Act of 2012.

Bottom line:

H.R. 4624 represents a direct, bipartisan response to the SEC's study and recommendations, and is an important and thoughtful effort to help fill the gap in the protection of investment advisory clients. Specifically, the legislation addresses the current lack of Commission resources and allows self-regulatory organizations registered with and subject to strict SEC oversight to assist government regulators in providing closer and more regular oversight of investment advisers who serve predominantly retail investors. The legislation also would free up resources for the SEC to examine investment advisers who primarily serve institutional clients.

 Testimony of other witnesses is available at the Committee's website.

June 5, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Nabors Shareholders Vote for Proxy Access Proposal

A majority of Nabors Industries shareholders approved a nonbinding proxy access proposal that, if adopted by the board of directors, would allow large shareholders (holding 3% for at least 3 years) to include competing nominees for the board (no more than one-quarter of the board) on the management proxy statement.  The proposal was introduced by New York City Employees’ Retirement System, New York City Fire Department Pension Fund, the New York City Teachers’ Retirement System, and the New York City Police Pension Fund and co-sponsored by a number of other plans.

Nabors angered many shareholders when last year it announced that Eugene Isenberg would receive $100 million for relinquishing his position as CEO.  Later the company announced that Isenberg would waive the payment.

WSJ, Nabors Owners Back Proxy Access Resolution

June 5, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Advisory Committee on Small & Emerging Companies Schedules June 8 Meeting

The SEC's Advisory Committee on Small and Emerging Companies will meet on June 8.  The discussion is expected to include the recently enacted JOBS Act, market structure issues, and scaling of disclosure and corporate governance rules for smaller public companies.  The agenda is posted on the SEC website.

The meeting will be webcast live on the SEC's website.

The Advisory Committee was formed last year to provide a formal mechanism for the SEC to receive advice and recommendations on privately held small businesses and publicly traded companies with a market capitalization less than $250 million.

June 5, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Penny Stock Companies and Promoters in Florida

The SEC charged several penny stock companies and their officers as well as three penny stock promoters involved in various stock schemes in which bribes and kickbacks were paid to hype microcap stocks and illegally generate stock sales.  These charges are the latest in a series of cases in which the SEC has worked closely with the U.S. Attorney's Office for the Southern District of Florida and the Federal Bureau of Investigation to uncover penny stock schemes.

According to the SEC's complaints, some of these latest schemes involved the payment of undisclosed kickbacks to a pension fund manager in exchange for the fund's purchase of restricted shares of stock in the various microcap companies. Other schemes involved an undisclosed bribe that was to be paid to a stockbroker who agreed to purchase a microcap company's stock in the open market for his customers' discretionary accounts.

The U.S. Attorney's Office today announced criminal charges against the same individuals facing SEC civil charges.

The SEC is seeking financial penalties, disgorgement of ill-gotten gains plus prejudgment interest, and permanent injunctions against all the defendants.

June 5, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Massachusetts Report: State Registered Advisers Oppose SRO

State securities regulators have expressed concern about the establishment of an SRO that would include state-registered investment advisers. The Massachusetts Securities Division recently posted on its website a REPORT ON THE POTENTIAL IMPACT OF THE INVESTMENT ADVISER OVERSIGHT ACT OF 2012 ON SMALL ADVISERS reporting on a survey mailed to 649 advisers registered in Massachusetts (Download Mass.Report_on_IA_Impact[1]).

According to the report:

Small investment advisers are consistently and overwhelmingly opposed to the establishment of an SRO because of the financial impacts such a bill would have on their small business. 98% of survey respondents indicated that passage of a bill that required them to become an SRO member and pay membership fees would have a
financial impact on their ability to run their firm. 241 (69%) advisers characterized the financial impact to be “Severe” and the highest on the survey’s 1-9 scale. Advisers also indicated that they would be less likely to hire more personnel (81%) and may be forced to conduct layoffs (55%) given the additional costs the adviser would incur as a result of an SRO membership. Most significantly, approximately 146 of 353 (41%) advisers volunteered additional information in the optional comment section suggesting that they would be forced out of business if the Bill passes in its current form.

June 5, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

House Schedules Hearing on Investment Adviser Oversight Act

The House Financial Services Committee has scheduled a hearing on “H.R. 4624, the Investment Adviser Oversight Act of 2012”
for June 6, 2012 . The witness list includes:

•Mr. Dale Brown, President and Chief Executive Officer, Financial Services Institute
•Mr. Thomas D. Currey, Past President, National Association of Insurance and Financial Advisors
•Mr. Chet Helck, Chief Operating Officer, Raymond James Financial Inc., on behalf of the Securities Industry and Financial Markets Association
•Mr. Richard Ketchum, Chairman and Chief Executive Officer, Financial Industry Regulatory Authority
•Mr. John Morgan, Securities Commissioner of Texas, on behalf of the North American Securities Administrators Association
•Mr. David Tittsworth, Executive Director and Executive Vice President, Investment Adviser Association

June 5, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, June 4, 2012

FINRA Panel Fines Brookstone Securities $1 Million for Fraudulent Sales of CMOs

A FINRA hearing panel ruled that Brookstone Securities and the firm's Owner/CEO Antony Turbeville and one of the firm's brokers, Christopher Kline, made fraudulent sales of collateralized mortgage obligations (CMOs) to unsophisticated, elderly and retired investors. The panel fined Brookstone $1 million and ordered it to pay restitution of more than $1.6 million to customers, with $440,600 of that amount imposed jointly and severally with Turbeville, and the remaining $1,179,500 imposed jointly and severally with Kline.

The panel also barred Turbeville and Kline from the securities industry, and barred Brookstone's former Chief Compliance Officer David Locy from acting in any supervisory or principal capacity, suspended him in all capacities for two years and fined him $25,000. Unless the hearing panel's decision is appealed to FINRA's National Adjudicatory Council (NAC) or is called for review by the NAC, the hearing panel's decision becomes final after 45 days.

The panel found that from July 2005 through July 2007, Turbeville and Kline intentionally made fraudulent misrepresentations and omissions to elderly and unsophisticated customers regarding the risks associated with investing in CMOs. All of the affected customers were retired investors looking for safer alternatives to equity investments. According to the decision, Turbeville and Kline "preyed on their elderly customers' greatest fears," such as losing their assets to nursing homes and becoming destitute during their retirement and old age, in order to induce them to purchase unsuitable CMOs. By 2005, interest rates were increasing, and the negative effect on CMOs was evident to Turbeville and Kline, yet they did not explain the changing conditions to their customers. Instead, they led customers to believe that the CMOs were "government-guaranteed bonds" that preserved capital and generated 10 percent to 15 percent returns. During the two-year period, Brookstone made $492,500 in commissions on CMO bond transactions from seven customers named in the December 2009 complaint, while those same customers lost $1,620,100.



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

Sunday, June 3, 2012

Heminway on Interrelationship between Gender and Insider Trading

A Portrait of the Insider Trader as a Woman, by Joan MacLeod Heminway, University of Tennessee College of Law, was recently posted on SSRN.  Here is the abstract:

This draft book chapter describes the interrelationship between gender and U.S insider trading law and explores (anecdotally and through extensions of existing gender studies outside the insider trading realm) the potential roles and significance of gender in that context. Although women have become more visible as participants in the securities markets and as alleged and actual transgressors of insider trading rules, the role of women in insider trading is still ill understood, except anecdotally. In sum, the portrait of the insider trader as a woman is a work in process.

June 3, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Morley on Allowing Mutual Funds to Issue Debt

Let Mutual Funds Issue Debt, by John Morley, University of Virginia School of Law, was recently posted on SSRN.  Here is the abstract:

At present, the only type of security open-end mutual funds can issue is common stock. This paper contemplates a broader set of possibilities: maybe mutual funds should be allowed to issue debt securities, such as redeemable bonds, in addition to common stock. Debt securities might hold many advantages. Most obviously, they might offer superior alternatives to money market fund shares. Unlike money market fund shares, debt securities could offer fixed interest rates as well as fixed redemption values and would be insulated from risk by loss-bearing equity. There is no obvious mechanical obstacle that prevents open-end mutual funds from issuing debt: these funds already borrow from banks and derivative counterparties, and they used to issue redeemable bonds and preferred stock in the past. This draft is preliminary and suggestions are welcome.

June 3, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)