Securities Law Prof Blog

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

Saturday, June 30, 2012

Guttentag on the JOBS Act's Periodic Disclosure Requirements

Michael Guttentag (Loyola Los Angeles) presented his paper, Patching a Hole in the Jobs Act: How and Why to Rewrite the Rules that Require Firms to Make Periodic Disclosures (Indiana Law Journal, forthcoming), at the National Business Law Scholars Conference, which University of Cincinnati College of Law hosted on June 27-28.  Here is the abstract:

This article considers if or when firms in the United States should be required to comply with federal periodic disclosure requirements. Such a consideration is timely. Provisions in the Jumpstart Our Business Startups Act of 2012 have made it much easier for firms to avoid federal periodic disclosure obligations, but these provisions were enacted based upon on a virtually non-existent legislative record and upended rules established only after careful consideration almost fifty years earlier.

Determining which firms should be required to comply with federal periodic disclosure requirements is best done in the context of a broader understanding of the history and economics of periodic disclosure regulation. This article provides such an understanding. The history of periodic disclosure regulation in the United States is traced back to its origins in the eighteenth century, and the economic analysis of periodic disclosure regulation is updated and refined to incorporate recent findings.

Building on this historical and economic understanding of periodic disclosure regulation, I consider anew if or when firms should be required to comply with federal periodic disclosure requirements. The analysis uncovers a flaw in the structure of the rules currently used to determine which firms must make periodic disclosures. To rectify this structural problem, I suggest that firms with a market capitalization of less than $35 million or fewer than 100 beneficial shareholders be granted an automatic exemption from periodic disclosure requirements. All other firms should be provided a choice between: 1) complying with federal periodic disclosure obligations, or 2) implementing measures that would mitigate the need for disclosure regulation, such as restricting share tradability or committing to an acceptable alternative disclosure regime.

June 30, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Peter Madoff Agrees to 10-Year Prison Term and Forfeiture of Assets

Peter Madoff pleaded guilty on Friday to a variety of charges, although he denied that he knew of Bernard's Ponzi scheme.  He admitted that he cheated on his taxes, put his wife on the payroll for a $100,000 no-show job, and submitted false filings to regulators.  He agreed to serve 10 years in prison and forfeit all of his assets.

Manwhile, the SEC brought civil charges, charging Peter with committing fraud, making false statements to regulators, and falsifying books and records in order to create the false appearance of a functioning compliance program over Madoff’s fraudulent investment advisory operations.

Also, according to the SEC’s complaint, Bernie Madoff realized in late 2008 that his decades-long scheme was on the verge of collapse. He told Peter Madoff that he could not pay billions of dollars of investor redemption requests and wanted to distribute remaining investor money to family, friends, and favored employees before the scheme collapsed. Peter Madoff then helped choose which family, friends and employees to pay, and rushed to withdraw $200,000 from BMIS’s bank account for himself before the fraud’s final downfall.

June 30, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, June 28, 2012

Schapiro Testifies on Implementing JOBS Act

SEC Chairman Chairman Mary L. Schapiro testified on the "JOBS Act in Action Part II: Overseeing Effective Implementation of the JOBS Act at the SEC" before the House Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs Oversight and Government Reform Committee, on June 28, 2012.

June 28, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Adopts Procedures for Review of Clearing Agency Actions

The SEC adopted rules that establish procedures for its review of certain clearing agency actions. The rules were required by Dodd-Frank, which called for a new regulatory framework for trading in over-the-counter derivatives, including swap agreements.

The rules detail how clearing agencies will provide information to the SEC about security-based swaps that the clearing agencies plan to accept for clearing. The information is intended to aid the SEC in determining whether such security-based swaps are required to be cleared.

The SEC also adopted rules requiring clearing agencies that are designated as "systemically important" to submit advance notice of changes to their rules, procedures, or operations if the changes could materially affect the nature or level of risk at those clearing agencies.

Most of the final rules will become effective 60 days after the date of publication in the Federal Register.

June 28, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Software Company with Bribing Morgan Chase Subsidiary to Get Business

The SEC charged that FalconStor Software, Inc., a Long Island, N.Y., data storage company, misled investors about bribes it paid to obtain business with a subsidiary of J.P. Morgan Chase & Co.  FalconStor admitted to the bribery scheme and agreed to pay a $2.9 million penalty and to institute enhanced compliance measures to settle the SEC’s civil lawsuit, filed in U.S. District Court for the Eastern District of New York. The settlement is subject to court approval. FalconStor will pay an additional $2.9 million as part of a deferred prosecution agreement with the U.S. Attorney’s Office for the EDNY, which filed a related criminal case against the Melville, N.Y., company.

According to the SEC, FalconStor’s now deceased co-founder, chairman, and former chief executive ordered the bribes, which were paid to three executives of the subsidiary, JPMorgan Chase Bank, National Association, and their relatives, starting in October 2007. Lavish entertainment at casinos, and payments in cash, traveler’s checks, gift cards, and grants of FalconStor options and restricted stock, helped FalconStor secure a multi-million dollar contract with the J.P. Morgan Chase subsidiary, the SEC said.

The J.P. Morgan Chase subsidiary became one of FalconStor’s largest customers and FalconStor touted the relationship in earnings calls and releases as proof of the strength of its products and its strides in moving to direct sales rather than relying on third-party distributors. The SEC said FalconStor never told investors about the bribes and inaccurately recorded the payments as “compensation,” “sales promotion,” or “entertainment” expenses.

FalconStor’s CEO resigned in September 2010, after admitting that he had been involved in improper payments to a customer, and FalconStor’s stock fell by more than 22 percent on the news.

June 28, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Fund Adviser Falcone with Fraud

The SEC filed fraud charges against New York-based hedge fund adviser Philip A. Falcone and his advisory firm, Harbinger Capital Partners LLC for illicit conduct that included misappropriation of client assets, market manipulation, and betraying clients. The SEC also charged Peter A. Jenson, Harbinger’s former Chief Operating Officer, for aiding and abetting the misappropriation scheme. Additionally, the SEC reached a settlement with Harbinger for unlawful trading.

In a separate, settled action, the SEC charged Harbert Management Corporation, whose affiliates served as the managing members of two Harbinger-related entities, as a controlling person in the market manipulation.

The SEC alleges that Falcone used fund assets to pay his taxes, conducted an illegal “short squeeze” to manipulate bond prices, secretly favored certain customers at the expense of others, and that Harbinger unlawfully bought equity securities in a public offering, after having sold short the same security during a restricted period.

The SEC filed actions in U.S. District Court for the Southern District of New York against Falcone, Jenson, and Harbinger, and, in connection with the illegal trading scheme, separately instituted and settled administrative and cease-and-desist proceedings against Harbinger.

In particular, the SEC alleges that:

Falcone fraudulently obtained $113.2 million from a hedge fund that he advised and misappropriated the proceeds to pay his personal taxes;
Falcone and two Harbinger investment managers through which Falcone operated manipulated the price and availability of a series of distressed high-yield bonds by engaging in an illegal “short squeeze;”
Falcone and Harbinger secretly offered and granted favorable redemption and liquidity rights to certain strategically-important investors in exchange for those investors’ consent to restrict redemption rights of other fund investors, and concealed the arrangement from the fund’s directors and investors; and
Harbinger engaged in illegal trades in connection with the purchase of common stock in three public offerings after having sold the same securities short during a restricted period.

June 28, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Simplified Arbitration's Dollar Limit Raised to $50,000

FINRA Rules 12800 and 13800 (Simplified Arbitration) of the Customer and Industry Codes of Arbitration Procedure (Codes) provide streamlined arbitration procedures for claimants seeking damages of $25,000 or less. The SEC approved amendments to the Codes to raise the dollar limit for simplified arbitration from $25,000 to $50,000. The amendments are effective on July 23, 2012, for all cases filed on or after
the effective date.

June 28, 2012 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Peter Madoff Expected to Plead Guilty Today

Peter Madoff, brother of Bernard, will plead guilty to criminal charges and accept a prison term of 10 years today.  He has agreed to forfeit $143 billion.  The plea does not involve any admission that Peter knew about the illegal Ponzi scheme, but confirms allegations that he was a sham compiance officer who exercised no effective oversight over the firm's operations.

NYTimes, Madoff’s Brother Sets Plea Deal in Ponzi Case

June 28, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 26, 2012

Lawmakers Tweak Their Portfolios After Talking with Administration Officials

In case you missed it, this is well worth reading: 

On Sunday the Washington Post reports on 34 members of Congress who reworked their financial portfolios during the financial crisis after phone calls or meetings with Treasury Secretary Henry Paulson, Timothy Geithner or Fed Chairman Bernanke, according to the newspaper's examination of appointment calendars and congressional disclosure forms.  The lawmakers changed portions of their portfolios 166 times within two business days of speaking or meeting with administration officials.  The paper did not turn up evidence of insider trading.  According to Professor Richard Painter (Minnesota), "Members of Congress are still loosey-goosey about what they require of themselves."  WPost, Lawmakers reworked financial portfolios after talks with Fed, Treasury officials

June 26, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Charges Adviser with Charging Fees For Nonexistent Services

The SEC sued AMMB Consultant Sendirian Berhad (AMC), a Malaysian investment adviser, alleging that for more than a decade, AMC charged a U.S. registered fund for advisory services that AMC did not provide. Kuala Lumpur-based AMC served as a sub-adviser to the Malaysia Fund, Inc., a closed-end fund that invests in Malaysian companies, whose principal investment adviser is Morgan Stanley Investment Management, Inc. (MSIM). The SEC alleges that AMC misrepresented its services during the fund’s annual advisory agreement review process for each year for more than 10 years, and AMC collected fees for advisory services that it did not provide.

AMC, a unit of AMMB Holdings Berhad, one of Malaysia’s largest banking groups, agreed to pay $1.6 million to settle the SEC’s charges, without admitting or denying the allegations. The case follows the SEC’s recent related action against the Malaysia Fund’s primary adviser, MSIM, and is part of an inquiry into the investment advisory contract renewal process by the SEC Enforcement Division’s Asset Management Unit.

According to the SEC, AMC submitted a report to the Malaysia Fund’s board of directors each year that falsely claimed that AMC was providing specific advice, research, and assistance to MSIM for the benefit of the fund. In reality, the SEC’s complaint said AMC’s services were limited to providing two monthly reports based on publicly available information that MSIM did not request or use. AMC’s advisory agreement with the fund was terminated in early 2008 after the SEC’s examination staff inquired about the services AMC was purportedly providing to the fund.


June 26, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Facebook Finds Qualified Woman to Sit on its Board of Directors

I thought Facebook was curiously tone-deaf when it did not take the occasion of its IPO to address the lack of diversity on its board of directors, specifically the fact there were no women on the board.  This was especially curious since its COO, Sheryl Sandberg, is one of the foremost advocates on behalf of women advancing in the workforce. Yesterday, Facebook appointed Ms. Sandberg as a director -- she joins seven guys.  One small step .... Facebook Names Sheryl Sandberg to Its Board of Directors

June 26, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, June 25, 2012

NY Attorney General Announces $410 Million Settlement with Ezra Merkin

The New York Attorney General announced a $410 million settlement with J. Ezra Merkin, who controlled four funds that invested over $2 billion with Bernard M. Madoff on behalf of hundreds of investors.  Investors in the funds, Ariel Fund Ltd., Gabriel Capital L.P., Ascot Fund Ltd. and Ascot Partners L.P., lost in excess of $1.2 billion, while Merkin received hundreds of millions of dollars in management fees.

Under the agreement, Merkin will pay $405 million to compensate investors over a three-year period, and $5 million to the State of New York to cover fees and costs. This is the first settlement resulting from a government action against Merkin.

In April 2009, the Office of Attorney General charged Merkin with violations of the Martin Act, General Business Law § 352; and Executive Law § 63(12) for concealing Madoff’s control of the Merkin Funds and for breaches of his fiduciary duty to manage the funds prudently. The lawsuit sought damages, disgorgement of all fees by Merkin, and injunctive relief.

Depending on the size of their losses, eligible investors will be entitled to receive over 40 percent of their cash losses. Pursuant to a claims process, investors who were not aware of Merkin’s delegation to Madoff will receive a defined percentage of their losses, while those who were aware of Madoff’s role will be eligible to receive a smaller recovery. In addition, all investors are likely to receive additional payments at a future date when the Madoff Estate is able to distribute moneys recovered by Irving Picard, the Securities Investor Protection Corporation Trustee for the liquidation of Madoff’s Estate, who is not involved in Attorney General Schneiderman’s settlement.

For nearly two decades, Merkin presented himself as a skilled money manager and used his social and charitable connections to raise over $4 billion from hundreds of individuals, charities, and other investors. Merkin turned over to Madoff all of the money in the Ascot Funds, and a substantial portion of the Ariel and Gabriel Funds.

June 25, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)