Securities Law Prof Blog

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

Thursday, July 19, 2012

SEC Charges CEO with Insider Trading in Secondary Offering of Company Stock

The SEC charged Manouchehr Moshayedi, the chairman and CEO of STEC Inc., a Santa Ana, Calif.-based computer storage device company, with insider trading in a secondary offering of his stock with knowledge of confidential information that a major customer’s demand for one of its most profitable products was turning out to be less than expected. 

According to the SEC, Moshayedi sought to take advantage of a dramatically upward trend in the stock price of STEC Inc. by selling a significant portion of his stock holdings as well as shares owned by his brother, a company co-founder. The secondary offering was set to coincide with the release of the company’s financial results for the second quarter of 2009 and its revenue guidance for the third quarter. However, in the days leading up to the secondary offering, Moshayedi learned critical nonpublic information that was likely to have a detrimental impact on the stock price. Moshayedi did not call off the offering and abstain from selling his shares once he possessed the negative information unbeknownst to the investing public. Instead, he engaged in a fraudulent scheme to hide the truth through a secret side deal, and proceeded with the sale of 9 million shares from which he and his brother reaped gross proceeds of approximately $134 million each.

The SEC’s complaint charges Moshayedi with violating the anti-fraud provisions of U.S. securities laws and seeks a final judgment ordering him to disgorge his own ill-gotten gains and the trading profits of his brother Mehrdad Mark Moshayedi, pay prejudgment interest and financial penalties, and be permanently barred from future violations and from serving as an officer and director of any registered public company.

July 19, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

GAO Reports on Conflict Minerals Disclosure Rule and Stakeholder Initiatives

The GAO recently released a report on the Conflict Minerals Disclosure Rule:  SEC's Actions and Stakeholder-Developed Initiatives.(Download GAO.ConflictMinerals.592458[1])  Here is what the Report found:

The Securities and Exchange Commission (SEC) has taken some steps toward developing a conflict minerals disclosure rule, but it has not issued a final rule. For example, SEC published a proposed rule in December 2010 and has gathered and reviewed extensive input from external stakeholders through comment letters and meetings. SEC has also announced, on several occasions, new target dates for the publication of a final rule. In July 2012, SEC announced that the Commission will hold an open meeting in August 2012 to consider whether to adopt a final rule. According to SEC officials, various factors have caused delays in finalizing the rule beyond the April 2011 deadline stipulated in the act, including the intensity of input from stakeholders and the public; the amount of time required to review this input; and the need to conduct a thorough economic analysis for rule making.

Various stakeholders have developed initiatives that may help covered companies comply with the anticipated rule, but some initiatives have been hindered by SEC’s delay in issuing a final rule. Industry associations, multilateral organizations, and other stakeholders have developed global and in-region sourcing initiatives, which include the development of guidance documents, audit protocols, and in-region sourcing systems. These initiatives may support companies’ efforts to conduct due diligence and to identify and responsibly source conflict minerals. In the absence of SEC’s final rule, however, stakeholders note that uncertainty regarding SEC’s reporting and due diligence requirements has complicated their efforts to expand and harmonize their initiatives. For example, in the absence of a final rule, one initiative is facing difficulty engaging additional participants, while stakeholders’ efforts to harmonize two initiatives have been hindered.

Little additional information on the rate of sexual violence in eastern Democratic Republic of the Congo (DRC) and neighboring countries has become available since GAO’s 2011 report on that subject. For example, only one population-based survey has been published on sexual violence in Rwanda, and it reports that 22 percent of women ages 15-49 have experienced sexual violence there in their lifetimes. No additional surveys have been conducted in eastern DRC; however, one organization is currently conducting a survey and another is planning to conduct a survey there in 2012.

July 19, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

New York's High Court Will Hear Greenberg Appeal on Martin Act Preemption Claim

The New York Court of Appeals will hear an appeal by former AIG executives Hank Greenberg and Howard Smith asserting that the state attorney general's action against them for violating the state's Martin Act is preempted by federal legislation --PSLRA, NSMIA and SLUSA -- that establishes a uniform federal standard for securities litigation.  In State of New York v. Greenberg, the state charged the executives with violating the statute because of their role in fraudulent transactions designed to portray an unduly positive picture of AIG's loss reserves and underwriting performance.  The trial court denied defendants' motion for summary judgment, and the Appellate Division affirmed, 95 A.3d 474 (Ist Dept. 2012(one justice dissenting).  David Boies is representing Greenberg.

July 19, 2012 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 18, 2012

SEC Enters Preferred Prosecution Agreement with Amish Fund

The SEC announced that the Amish Helping Fund (AHF), a non-profit corporation that offers securities to fund mortgage and construction loans to young Amish families in Ohio, will ensure that its investors receive more timely and accurate information under a deferred prosecution agreement reached with the SEC.  The SEC investigated the AHF, which was formed in 1995 by a group of Amish elders interested in furthering the Amish way of life, and alleges that AHF’s offering memorandum, drafted in 1995, was not updated for 15 years and thus contained material misrepresentations about the fund and the securities being offered.

The SEC release, however, goes on to state that:

Despite violating federal securities laws by disseminating a stale offering memorandum, the SEC found no evidence that AHF investors suffered any undue harm or investment losses as a result of these misrepresentations.

When informed of its alleged violations by the SEC, AHF immediately cooperated, updated its offering memorandum, and took other significant remedial steps in an expedited manner. Therefore, the SEC has entered into a Deferred Prosecution Agreement (DPA) and will not file an enforcement action against AHF provided it adheres to the provisions of the agreement. AHF is entering into a DPA with the SEC as part of the Cooperation Initiative the Enforcement Division announced in 2010 to facilitate and reward cooperation in SEC investigations.

Under the terms of the DPA, the SEC will refrain from filing an enforcement action against AHF if the company complies with certain undertakings. Among other things, AHF has updated and corrected its offering materials and agreed to register its new securities offerings and provide current investors with timely and accurate financial information.

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

SEC Charges Mizuho Securities USA with Misleading Purchasers of CDOs

The SEC charged the U.S. investment banking subsidiary of Japan-based Mizuho Financial Group and three former employees with misleading investors in a collateralized debt obligation (CDO) by using “dummy assets” to inflate the deal’s credit ratings. The SEC also charged the firm that served as the deal’s collateral manager and the person who was its portfolio manager.  According to the SEC’s complaint against Mizuho Securities USA Inc., the firm made approximately $10 million in structuring and marketing fees in the deal.

Everyone charged by the SEC agreed to settlements without admitting or denying the charges. Mizuho consented to the entry of a final judgment requiring payment of $10 million in disgorgement, $2.5 million in prejudgment interest, and a $115 million penalty. The settlement, which requires court approval, also permanently enjoins Mizuho from violating Sections 17(a)(2) and (3) of the Securities Act.

The SEC alleges that Mizuho structured and marketed Delphinus CDO 2007-1, a CDO that was backed by subprime bonds at a time when the housing market was showing signs of severe distress. The deal was contingent upon Mizuho obtaining credit ratings it used to market the notes to investors. When its employees realized that Delphinus could not meet one rating agency’s newly announced criteria intended to protect CDO investors from the uncertainty of ratings downgrades, they submitted to the rating firm a portfolio containing millions of dollars in dummy assets that inaccurately reflected the collateral held by Delphinus. Once the firm rated the inaccurate portfolio, Mizuho closed the transaction and sold the notes to investors using the misleading ratings. Delphinus defaulted in 2008 and eventually was liquidated in 2010. Mizuho sustained substantial losses from Delphinus.

According to the SEC’s settled administrative proceedings against the three former Mizuho employees responsible for the Delphinus deal, Alexander Rekeda headed the group that structured the $1.6 billion CDO, Xavier Capdepon modeled the transaction for the rating agencies, and Gwen Snorteland was the transaction manager responsible for structuring and closing Delphinus. Delaware Asset Advisers (DAA) served as Delphinus’s collateral manager and the DAA portfolio manager was Wei (Alex) Wei.

In the related administrative proceedings against Rekeda, Capdepon, and Snorteland, the SEC found that Rekeda violated Sections 17(a)(2) and (3) of the Securities Act, and Capdepon and Snorteland violated Section 17(a). Rekeda and Capdepon each agreed to pay a $125,000 penalty while the decision on whether there will be a penalty for Snorteland will be decided at a later date. Rekeda agreed to be suspended from the securities industry for 12 months, Capdepon and Snorteland each agreed to be barred from the securities industry for one year, and all three agreed to cease and desist from further violations of the respective sections of the Securities Act they violated.

The SEC instituted settled administrative proceedings against DAA and Wei based on their post-closing conduct. DAA consented to the entry of an order requiring the firm to pay disgorgement of $2,228,372, prejudgment interest of $357,776, and a penalty of $2,228,372. Wei consented to the entry of an order requiring him to pay a $50,000 penalty and suspending him from associating with any investment adviser for six months. Both DAA and Wei consented to cease and desist from violating Section 17(a)(2) and (3) of the Securities Act and Section 206(2) of the Advisers Act.

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

Tuesday, July 17, 2012

Options Traders Settle SEC Short-Selling Allegations

The SEC announced that two options traders whom the agency charged earlier this year with short selling violations have agreed to pay more than $14.5 million to settle the case against them.  According to the SEC, Jeffrey A. Wolfson and Robert A. Wolfson engaged in naked short selling by failing to locate shares involved in short sales and failing to close out the resulting failures to deliver. According to the SEC’s orders settling the administrative proceedings against the Wolfsons, they made illegal naked short sales from July 2006 to July 2007. The Wolfsons made approximately $9.5 million in illegal profits from their naked short selling transactions.


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

SEC's Office of Chief Accountant Releases Work Plan on Global Accounting Standards

The SEC's Office of the Chief Accountant recently published its final staff report on the Work Plan related to global accounting standards.(Download Ifrs-work-plan-final-report[1])  At the time the SEC directed the staff to prepare the work plan, it indicated that the information obtained through the Work Plan would aid the Commission in evaluating the implications of incorporating International Financial Reporting Standards (IFRS) into the financial reporting system for U.S. companies.

The SEC staff says it welcomes feedback on the final staff report.

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

Sunday, July 15, 2012

Pritchard on Abolishing IPOs

Revisiting 'Truth in Securities Revisited': Abolishing IPOs and Harnessing Private Markets in the Public Good, by Adam C. Pritchard, University of Michigan Law School, was recently posted on SSRN.  Here is the abstract:

This essay explores the line between private and public markets. I propose a two-tier market system to replace initial public offerings. The lower tier would be a private market restricted to accredited investors; the top tier would be a public market with unlimited access. The transition between the two markets would be based on issuer choice and market capitalization, followed by a seasoning period of disclosure and trading in the public market before the issuer would be allowed to make a public offering. I argue that such system would promote not only efficient capital formation, but also investor protection.

July 15, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

U.S. Indicts Provident Founders for Mail Fraud

Two founders of Provident Royalties LLC, Brendan Coughlin and Henry Harrison, were indicted last week on multiple counts of mail fraud.  From 2006-09, firms sold Provident oil and gas deals promising 18% returns  to over 7500 investors for a total of $485 million.  The SEC settled civil charges earlier this year, and FINRA suspended from the industry Coughlin and Harrison for two years.  Inv News, Provident Royalties founders indicted in $485M private placement fraud case


July 15, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)