Securities Law Prof Blog

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

Friday, June 22, 2012

Judge Approves "Chump Change" Settlement with Two Former Bear Fund Managers

Judge Frederic Block, Senior Judge on the federal district court in E.D.N.Y., recently approved, with reluctance, an SEC consent judgment with former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin for "chump change," because the SEC persuaded him that its power to recover losses for investors was limited.  SEC v. Cioffi (E.D.N.Y. 6/18/12)(Download Cioffi.061812[1])

Cioffi and Tannin were managers of two Bear Stearns hedge funds that collapsed in 2007.  The government brought criminal securities fraud changes against the men; a jury acquitted them in 2009.  The SEC persisted in its civil action and earlier this year presented a proposed consent decree for judicial approval.  It would require Cioffi to pay $800,000 and Tannin $250,000 as well as impose industry bars for three and two years, respectively. 

Noting that investors' losses amounted to approximately $1.6 billion, the judge initially questioned the adequacy of the settlement.  The SEC persuaded the court, however, that the agency had limited power to recoup investors' losses, since it was limited to seeking disgorgement of profits.  The judge also expressed concern over the obstacles Congress had placed on private litigation in the PSLRA.  The judge reluctantly approved the settlement and invited Congress to consider whether the government should do more to aid victims of securities fraud. 

June 22, 2012 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Thursday, June 21, 2012

Schapiro on JP Morgan Chase

SEC Chairman Mary L. Schapiro testified on “Examining Bank Supervision and Risk Management in Light of JPMorgan Chase’s Trading Loss” before the House Committee on Financial Services on June 19, 2012.

June 21, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Schapiro Testifies on Money Market Fund Reforms

SEC Chairman Mary L. Schapiro testified on “Perspectives on Money Market Mutual Fund Reforms” before the Senate Committee on Banking, Housing, and Urban Affairs on June 21, 2012.  Her testimony discussed the history of money market funds, the remaining systemic risk they pose to the financial system even after the 2010 reforms, and the need for further reforms to protect investors, taxpayers and the broader financial system.

June 21, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Stock Lending Charges Against New Jersey Businessman

The SEC charged a New Jersey businessman with running a stock-lending scheme that defrauded public company officials and brought restricted stock to the market.  The case is the second the SEC has brought this year involving stock lending. In March, the SEC charged two executives and their California-based firm with defrauding corporate officials in an $8 million stock-lending scheme.

Ayuda Equity Funding, LLC and AmeriFund Capital Holdings and owner Manuel M. Bello agreed to settle the SEC’s complaint without admitting or denying the allegations. Bello and the firms jointly agreed to return $3.2 million of allegedly ill-gotten gains, plus interest. Bello also agreed to pay a $500,000 penalty and be permanently barred from the securities industry.

According to the SEC’s complaint, Ayuda and AmeriFund reaped more than $3.2 million of illegal gains on loans to public company officers and directors who put up stock as collateral. Although some borrowers received written and oral assurances that the stock would not be sold as long as they did not default on their loan payments, Ayuda and AmeriFund sold the shares before or soon after making the loans, the SEC alleged.

The SEC also alleged that in at least 35 loan transactions, Ayuda and AmeriFund sold the borrowers’ restricted shares into the market without registering the transactions and the firms and Bello themselves failed to register with the SEC as brokers or dealers.

In a separate administrative proceeding, the SEC charged Howard L. Blum, alleging that he brokered numerous transactions for Ayuda without being registered as a broker or dealer. Blum, without admitting or denying the SEC’s findings, agreed to return more than $1 million of allegedly ill-gotten gains, plus interest, pay a $50,000 penalty, and be suspended from the securities industry for twelve months.

June 21, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Fines Merrill $2.8 Million for Overcharging Customers

FINRA announced that it fined Merrill Lynch, Pierce, Fenner & Smith, Inc. $2.8 million for supervisory failures that resulted in overcharging customers $32 million in unwarranted fees, and for failing to provide certain required trade notices. Merrill Lynch has provided $32 million in remediation, plus interest, to the affected customers.

 FINRA found that from April 2003 to December 2011, Merrill Lynch failed to have an adequate supervisory system to ensure that customers in certain investment advisory programs were billed in accordance with contract and disclosure documents. As a result, the firm overcharged nearly 95,000 customer accounts fees of more than $32 million. Merrill Lynch has since returned the unwarranted fees, with interest, to the affected customers.

Merrill Lynch also failed to provide timely trade confirmations to customers in certain advisory programs due to computer programming errors. As a result, from July 2006 to November 2010, Merrill Lynch failed to send customers trade confirmations for more than 10.6 million trades in over 230,000 customer accounts. In addition, Merrill Lynch failed to properly identify whether it acted as an agent or principal on trade confirmations and account statements relating to at least 7.5 million mutual fund purchase transactions. At various times, Merrill Lynch also failed to deliver certain proxy and voting materials, margin risk disclosure statements and business continuity plans.


June 21, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 20, 2012

SEC Adopts New Rule on Listing Standards for Compensation Committees & Compensation Advisers

The SEC approved a rule that directs national securities exchanges to adopt listing standards for public company boards of directors and compensation advisers. (Download 33-9330[1]) The new rule, required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, requires exchange listing standards to address:

  • The independence of the members on a compensation committee
  • The committee’s authority to retain compensation advisers
  • The committee’s consideration of the independence of any compensation advisers and
  • The committee’s responsibility for the appointment, compensation, and oversight of the work of any compensation adviser.

Once an exchange’s new listing standards are in effect, a listed company must meet the standards in order for its shares to continue trading on that exchange.

The SEC also amended its proxy disclosure rules to require new disclosures from companies about their use of compensation consultants and conflicts of interest.

The new rule and rule amendments will take effect 30 days after publication in the Federal Register. No later than 90 days after effectiveness, each exchange that lists equity securities must propose listing standards that comply with the new rule. The new listing standards must be approved by the Commission within one year of the new rule becoming effective.

June 20, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

AALS Section on Transactional Law and Skills -- Call for Papers

I am pleased to post this Call for Papers on behalf of the AALS Section on Transactional Law and Skills:

AALS Section on Transactional Law and Skills
Call for Papers
January 2013 Annual Meeting

             The AALS Section on Transactional Law and Skills will meet during the AALS Annual Meeting in New Orleans, Louisiana, from 1:30 pm – 3:15 pm on Saturday, January 5, 2013.  Please note this program in your calendar.  We hope to see you there.

             We are soliciting papers for presentation at the Annual Meeting.  The topic for this year’s session is: Researching and Teaching Transactional Law and Skills in an Increasingly Global World.

Two presenters will be chosen on the basis of paper summaries submitted in response to this Call for Papers. The topic encompasses the scholarship and teaching of international and comparative transactional law and cross-border transactions. The Executive Committee encourages submissions on a broad range of transactional law and skills issues related to this year’s topic. Paper proposals focused on the teaching of international and comparative transactional law and skills are welcomed, but the Executive Committee is especially interested in papers that explore international and cross-border transactions from an empirical, doctrinal, or theoretical perspective.  The Executive Committee specifically encourages submissions from junior scholars.

            If you are interested in presenting a paper, please submit a summary of no more than three double-spaced pages, by e-mail, on or before Monday, July 30, 2012. You also may submit a complete draft of your paper. Send your submission to Joan Heminway at The University of Tennessee College of Law ( Papers will be reviewed and selected for presentation at the program by members of the Executive Committee of the Section on Transactional Law and Skills:

Afra Afsharipour, Treasurer (U.C. Davis)

Eric Gouvin, Chair-Elect (Western New England)

Joan Heminway, Chair (Tennessee)

Lyman Johnson (Washington and Lee/St. Thomas)

Therese Maynard (Loyola Los Angeles)

Gordon Smith, Secretary (BYU)

Tina Stark, Past Chair (Boston University)          

             Authors of accepted papers will be notified by August 31, 2012.  Please pass this Call for Papers along to any colleagues who may be interested.

June 20, 2012 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 19, 2012

Chamber of Commerce Issues Report on Dangers of MM Fund Reform

The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC) released a white paper titled, “Money Market Mutual Fund Reform: The Dangers of Acting Now”, which examines the impacts of possible reforms to money market mutual funds (MMMFs) on businesses, municipalities, individual investors and the overall economy.  The paper, authored by Georgetown University Professor James J. Angel, finds that contemplated reforms intended to reduce the chance of runs on MMMFs could, in fact, have the opposite effect and increase systemic risk.  Reforms could have far reaching consequences well beyond the fund industry. ( Download Angel-Costs-and-Costs-of-MMMF-Reforms-draft-6.18.2012-FINAL[1])

June 19, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, June 18, 2012

Former AT&T Employee Pleads Guilty to Selling Info to Expert-Network Firm

A former AT&T employee, Alnoor Ebrahim, pleaded guilty to providing confidential information about his company to clients of Primary Global Research LLC, an expert-network firm, including information about AT&T's sales of Apple's IPhones and RIM's Blackberries.  Ebrahim said he received about $180,000 from Primary Global Research.

WSJ, Ex-Expert Network Consultant Pleads Guilty in Insider Case

June 18, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, June 17, 2012

Lambert on Decision Theory and Insider Trading

Decision Theory and the Case for a Disclosure-Based Insider Trading Regime, by Thomas A. Lambert, University of Missouri - School of Law, was recently posted on SSRN.  Here is the abstract:

Stock trading on the basis of material, nonpublic information (insider trading) is a “mixed bag” in that it can create both social harms and social benefits. Attempts to regulate such mixed bag business practices may err in two directions: They may wrongly permit or encourage socially undesirable instances of the practice at issue, or they may wrongly condemn or deter socially desirable instances. In either case, social welfare suffers (i.e., “error costs” result). Attempts to avoid error in one direction or another by heightening the liability inquiry will tend to increase the administrative costs (“decision costs”) of the regulatory regime. Decision theory therefore calls for regulating mixed bag practices under a regime that “minimizes the sum of error and decision costs.”

Adjudged under the decision-theoretic criterion, the current regime for regulating insider trading in the United States fails; it is difficult to administer, and it deters many instances of socially desirable informed trading. The approach apparently favored by the enforcement agencies fares even worse. The laissez-faire, “contractarian” approach favored by many law and economics scholars would represent an improvement over both the legal status quo and the approach favored by the enforcement agencies, but that approach, too, may be suboptimal.

This paper advocates an optional, disclosure-based regulatory regime. Under the regime, authorized informed trading would be permitted as long as the trader first disclosed to a centralized, searchable database her insider status, the fact that she was trading on the basis of material, nonpublic in-formation, and the nature of her trade. Such an approach would (1) enhance the market efficiency benefits of insider trading by facilitating “trade decoding,” while (2) reducing potential costs stemming from deliberate mismanagement, disclosure delays, and infringement of informational property rights. By “accentuating the positive” and “eliminating the negative” consequences of informed trading, the proposed approach would perform better than the legal status quo and the leading proposed regulatory alternatives at minimizing the sum of error and decision costs resulting from insider trading restrictions.

June 17, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Hu on the SEC's Disclosure Paradigm

Too Complex to Depict? Innovation, 'Pure Information,' and the SEC Disclosure Paradigm, by Henry T.C. Hu, University of Texas at Austin - School of Law, was recently posted on SSRN.  Here is the abstract:

Since the Depression, the SEC’s totemic philosophy has been to promote a robust informational foundation, furthering efficiency and governance. As a corollary, the SEC’s approach has been incremental, generally not venturing beyond information to substantive decision making.

The Article’s starts by showing that this disclosure philosophy has always been largely implemented through what can be conceptualized as an “intermediary depiction” model. An intermediary — e.g., a corporation issuing shares — stands between the investor and an objective reality. The intermediary observes that reality, crafts a depiction of the reality’s pertinent aspects, and transmits the depiction to investors.

The Article proceeds to show that the intermediary depiction model is increasingly undermined by modern financial innovation. Financial innovation is creating objective realities far more complex than in the past, often beyond the capacity of the English language, accounting, visual, risk measurement, and other tools on which depictions rely. With complex realities and rudimentary tools, the depictions may offer shadowy outlines of objective reality. The Article illustrates, such as with asset-backed securities (ABS).

Financial innovation sometimes poses a second roadblock to depictions: even a well-intentioned intermediary either may not truly understand or may not function as if he understands the reality he is charged with depicting. This second roadblock can flow both from complexities of financial innovation and organizational complexities associated with the intermediary itself.

Depictions of major banks involved in financial innovation activities can suffer from both roadblocks. An afterword (Section IV(C)(3)) on the now-unfolding JPMorgan Chase Chief Investment Office derivatives hedging situation illustrates.

Technological innovation can help. With advances in computer and Internet technologies, it is no longer essential to rely exclusively on intermediary depictions. Figuratively, the inntermediary can step out of the way. Such “disintermediation” and “pure information” have advantages — and disadvantages.

A disclosure paradigm relying on both the intermediary depiction model and the pure information model — and the full spectrum of strategies between these extremes — is necessary. The Article outlines possible strategies that, e.g., would generate “moderately pure” bank information and possible strategies for the “simplification of reality” itself. Substantive questions, including “too big to fail,” are implicated. If a bank is “too complex to depict” and pure information-type models are insufficient, might it also be “too complex to exist”?

The Article also suggests that challenges to the SEC disclosure paradigm extend to the paradigm’s philosophy, in particular, the philosophy’s incrementalist component. Departures such as the 2008 SEC short-selling ban raise SEC independence issues and the need to consider the proper relationship between the paradigm’s traditional efficiency goals and the truly rare situations in which, e.g., short-term financial stability ought also be considered. Other departures, such as responses to the 2010 “flash crash,” raise questions as to how high frequency trading and other innovations might conflict with the paradigm’s traditional goals.

A fundamental rethinking of the SEC disclosure paradigm is now essential.

June 17, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)