Securities Law Prof Blog

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

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Friday, August 17, 2012

Former Baseball Player Eddie Murray Settles Insider Trading Charges with SEC

Earlier the week the SEC filed fraud charges against a college football coach, allegin he ran a Ponzi scheme.  Today it accused a former professional baseball player, Eddie Murray, of insider trading.  Murray agreed to settle the SEC’s charges by paying $358,151.

Last year the SEC accused former professional baseball player Doug DeCinces and three others of insider trading on confidential information ahead of an acquisition of Advanced Medical Optics Inc.  DeCinces agreed to pay more than $3.3 million to settle the SEC’s charges.  Today the agency charged the source of those illegal tips about the impending transaction – DeCinces’s close friend and neighbor James V. Mazzo, who was the Chairman and CEO of Advanced Medical Optics. The SEC also is charging two others who traded on inside information that DeCinces tipped to them – DeCinces’ former Baltimore Orioles teammate Eddie Murray and another friend David L. Parker, who is a businessman living in Utah.  The SEC alleges that Murray made approximately $235,314 in illegal profits after Illinois-based Abbott Laboratories Inc. publicly announced its plan to purchase Advanced Medical Optics through a tender offer.

The SEC’s case continues against Parker and Mazzo, the latter of whom was directly involved in the tender offer and tipped the confidential information to DeCinces along the way.

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

Thursday, August 16, 2012

SEC Charges Former Georgia Football Coach with Running a Ponzi Scheme

The SEC announced fraud charges against Jim Donnan, a former college football coach who teamed with an Ohio man to conduct an $80 million Ponzi scheme that included other college coaches and former players among its victims.  According to the SEC, Donnan, a College Football Hall of Fame inductee who guided teams at Marshall University and the University of Georgia and later became a television commentator, conducted the fraud with his business partner Gregory Crabtree through a West Virginia-based company called GLC Limited. Donnan and Crabtree told investors that GLC was in the wholesale liquidation business and earning substantial profits by buying leftover merchandise from major retailers and reselling those discontinued, damaged, or returned products to discount retailers. They promised investors exorbitant rates of return ranging from 50 to 380 percent. However, only about $12 million of the $80 million raised from nearly 100 investors was actually used to purchase leftover merchandise, and the remaining funds were used to pay fake returns to earlier investors or stolen for other uses by Donnan and Crabtree.

According to the SEC’s complaint filed in federal court in Atlanta, the scheme began in August 2007 and collapsed in October 2010. Donnan recruited the majority of investors by approaching contacts he made as a sports commentator and as a coach. For instance, he capitalized on his influence over one former player by telling him, “Your Daddy is going to take care of you” … “if you weren’t my son, I wouldn’t be doing this for you.” The player later invested $800,000.

The SEC’s complaint charges Donnan, who lives in Athens, Ga., and Crabtree, who resides in Proctorville, Ohio, with violations of the antifraud and registration provisions of the federal securities laws. The complaint also names two of Donnan’s children and his son-in-law as relief defendants for the purpose of recovering illicit funds that Donnan steered to them.

August 16, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Oracle Agrees to Pay $2 Million to Settle FCPA Charges Against India Subsidiary

The SEC charged Oracle Corporation with violating the Foreign Corrupt Practices Act (FCPA) by failing to prevent a subsidiary from secretly setting aside money off the company's books that was eventually used to make unauthorized payments to phony vendors in India. Oracle agreed to pay a $2 million penalty to settle the SEC's charges.

The SEC alleges that employees of the India subsidiary structured transactions with India's government on more than a dozen occasions in a way that enabled Oracle India's distributors to hold approximately $2.2 million of the proceeds in unauthorized side funds. Those Oracle India employees then directed the distributors to make payments out of these side funds to purported local vendors, several of which were merely storefronts that did not provide any services to Oracle. Oracle's subsidiary documented certain payments with fake invoices.  According to the SEC's complaint filed in U.S. District Court for the Northern District of California, the misconduct occurred from 2005 to 2007.

The settlement takes into account Oracle's voluntary disclosure of the conduct in India and its cooperation with the SEC's investigation, as well as remedial measures taken by the company, including firing the employees involved in the misconduct and making significant enhancements to its FCPA compliance program.

August 16, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 15, 2012

FINRA Expels WJB Capital for Misstating Financial Records

FINRA expelled WJB Capital Group, Inc. for misstating its financial records and for engaging in securities transactions while it was below its required net capital. FINRA also barred the firm's Chief Executive Officer, Craig A. Rothfeld, from the securities industry, and barred the firm's Chief Financial Officer, Gregory S. Maleski, from acting in a principal capacity.

FINRA found that from 2009, when WJB Capital began to experience financial difficulties, through 2011, Rothfeld and Maleski misstated WJB's financial position on the firm's balance sheet. In one example, Rothfeld and Maleski converted $9.8 million in compensation previously paid to 28 employees into forgivable loans. As a result, the firm also failed to provide for the appropriate payment of taxes. Had WJB appropriately recorded these loans and tax obligations, its balance sheet would have reflected substantial losses in addition to those that it was already experiencing.

In addition, Rothfeld and Maleski misclassified certain items as allowable for net capital purposes; as a result, at various times in 2011, WJB engaged in securities transactions when it was below its minimum required net capital. For example, the firm improperly included receivables related to "non-deal road-shows" when they were not allowable assets under the net capital rule. As a result of the misclassification of these receivables, WJB misstated its FOCUS report and net capital calculations by at least $1 million on a monthly basis for approximately two years. The firm also misclassified a $1.5 million loan it received from its clearing firm as an allowable asset for net capital. Rothfeld, Maleski and WJB also failed to reasonably supervise the firm's financial and accounting functions.

August 15, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 14, 2012

SEC & Wells Fargo Settle Mortgage-Backed Securities Claim for $6.5 Million

The SEC and Wells Fargo settled charges that Wells Fargo’s brokerage firm and a former vice president sold investments tied to mortgage-backed securities without fully understanding their complexity or disclosing the risks to investors.  Wells Fargo agreed to pay more than $6.5 million to settle the SEC’s charges. The money will be placed into a Fair Fund for the benefit of harmed investors.

According to the SEC, Wells Fargo improperly sold asset-backed commercial paper (ABCP) structured with high-risk mortgage-backed securities and collateralized debt obligations (CDOs) to municipalities, non-profit institutions, and other customers. Wells Fargo did not obtain sufficient information about these investment vehicles and relied almost exclusively upon their credit ratings. The firm’s representatives failed to understand the true nature, risks, and volatility behind these products before recommending them to investors with generally conservative investment objectives.

According to the SEC’s order instituting settled administrative proceedings, the improper sales occurred from January 2007 to August 2007. The SEC’s order finds that Wells Fargo and its registered representatives failed to have a reasonable basis for their recommendations and failed to disclose to their customers the risks associated with the complex SIV-issued ABCP investments, including the nature and volatility of the underlying assets.

The SEC also charged former vice president Shawn McMurtry for his improper sale of SIV issued ABCP. McMurtry exercised discretionary authority in violation of Wells Fargo’s internal policy and selected the particular issuer of ABCP for one longstanding municipal customer. McMurtry did not obtain sufficient information about the investment and relied almost entirely upon its credit rating.

Wells Fargo and McMurtry consented to the SEC’s order without admitting or denying the findings. Wells Fargo agreed to pay a $6.5 million penalty, $65,000 in disgorgement, and $16,571.96 in prejudgment interest. McMurtry agreed to be suspended from the securities industry for six months and pay a $25,000 penalty.

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

Henning on the Goldman Sachs Investigations

Last week the DOJ closed a criminal investigation of Goldman Sachs and its CEO Lloyd Blankfein, and the firm announced that the SEC decided not to pursue a civil fraud case related to subprime mortgage debt.Peter Henning (Wayne State) has a good analysis of this situation and expresses the view that:

When the story of the financial crisis is finally written, this may turn out to be the denouement of the government’s investigations of Wall Street for potential wrongdoing that contributed to the financial crisis in 2008.

 New York Times Dealbook, Is That It for Financial Crisis Cases?

August 14, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Peregrine CEO Indicted on Federal Fraud Charges

Russell R. Wasendorf Sr., CEO of Peregrine Financial Group, was indicted yesterday by a federal grand jury in Iowa on multiple counts of submitting false reports to the CFTC.  Last month Wasendof confessed to stealing over $100 million in clients' funds and attempted suicide.  NYTimes Dealbook, Peregrine Chief Is Indicted in Brokerage Fraud Case

August 14, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, August 13, 2012

SEC Orders CFO to Pay $15.6 Million Penalty

The SEC ordered Nancy Shao Wen Chu, the former CFO of a defunct company, Soyo Group, Inc., to pay $15,600,000 in penalties for committing securities fraud.  Although it sounds like a astronomically large amount, it was imposed in a default judgment, so the SEC likely is not expecting payment anytime soon.   

The SEC alleged that between January 2007 and November 2008, Soyo, through the actions of Chu and another defendant, booked over $47 million in fraudulent sales revenues arising from at least 120 fictitious transactions. The scheme had the effect of nearly doubling Soyo’s net revenues for 2007 over the previous year. Soyo’s share price thus increased from a low of $.28/share in the first quarter of 2007, to a high of $1.80/share in the fourth quarter of 2007. The SEC alleged that Chu actively participated in the fraudulent sales transactions and took deliberate steps to hide the scheme from Soyo’s auditor.

Further, the SEC alleged that in order to obtain additional bank financing for Soyo and keep its existing line of credit from defaulting, Chu also misled Soyo’s investors, its primary lending bank, and its auditor regarding a six million dollar debt-for-equity transaction Soyo was negotiating with a vendor. Despite that fact that discussions with the vendor were not finalized and subject to cancelation, Chu signed and caused to be filed a Soyo Form 10-Q for the quarter ended June 30, 2008, reporting that the transaction was complete, eliminating an outstanding accounts payable of slightly over $6 million, and thereby reducing Soyo’s current liabilities by 14% and its accounts payable by 42%.

The Court ordered the maximum third-tier penalty of $130,000 against Chu for each of the 120 fictitious transactions she concocted.

August 13, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sunday, August 12, 2012

DeHaan on the Revolving Door & SEC Enforcement

Does the Revolving Door Affect the SEC’s Enforcement Outcomes?, by Ed DeHaan, University of Washington - Michael G. Foster School of Business; Simi Kedia, Rutgers Business School; Kevin Koh, Nanyang Technological University (NTU) - Nanyang Business School; and Shivaram Rajgopal, Emory University - Goizueta Business School, was recently posted on SSRN.  Here is the abstract:

We provide empirical evidence on the consequences of the “revolving door” phenomenon at the SEC. If future job opportunities make SEC lawyers exert more enforcement effort to showcase their expertise, then the revolving door phenomenon will promote more aggressive regulatory activity (the “human capital” hypothesis). In contrast, SEC lawyers can relax enforcement efforts in order to curry favor with prospective employers in the private sector (the “rent seeking” hypothesis”). We collect data on the career paths of 336 SEC lawyers that span 284 SEC enforcement actions against fraudulent financial reporting over the period 1990-2007. We find evidence consistent with the human capital hypothesis. Specifically, the intensity of enforcement efforts, proxied by the fraction of losses collected as damages, the likelihood of criminal proceedings and the likelihood of naming the CEO as a defendant, are higher when the SEC lawyer leaves to join law firms that defend clients charged by the SEC. Our evidence is thus inconsistent with popular concerns that revolving doors undermine the SEC’s enforcement efforts.

August 12, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Abrantes-Metz & Sokol on Libor Manipulation

The Lessons from Libor for Detection and Deterrence of Cartel Wrongdoing, by Rosa M. Abrantes-Metz, Global Economics Group, LLC; New York University - Leonard N. Stern School of Business - Department of Economics, and D. Daniel Sokol, University of Florida - Levin College of Law; University of Minnesota School of Law, was recently posted on SSRN.  Here is the abstract:

In late June 2012, Barclays entered into a $453 million settlement with UK and U.S. regulators due to its manipulation of Libor between 2005 and 2009. Among the agencies that investigated Barclays is the Department of Justice Antitrust Division (as well as other antitrust authorities and regulatory agencies from around the world). Participation in a price fixing conduct, by its very nature, requires the involvement of more than one firm.

We are cautious to draw overly broad conclusions until more facts come out in the public domain. What we note at this time, based on public information, is that the Libor conspiracy and manipulation seems not to be the work of a rogue trader. Rather it seems to have been organized across firms and required the active knowledge of a number of individuals at relatively high levels of seniority among certain Libor setting banks. Collusion across firms is at the core of illegal antitrust behavior. The Supreme Court has deemed the pernicious effects of cartels so central to antitrust’s mission that it has stated that cartels are “the supreme evil of antitrust.”

The involvement of more than one bank in such a cartel is a significant corporate governance failure due to the coordination that such a cartel would have required among the various cartel members. That the Libor cartel seems to have occurred in such a highly regulated industry after a wave of corporate governance reforms post-Enron and a push to greater internal compliance in the early 2000s is perhaps even more surprising. Yet, the very nature of what may have occurred regarding Libor manipulation, in hindsight, seems rather obvious. The rate did not move for over a year until the day before the financial crisis of 2009 hit. Also, quotes by the member banks that were submitted under seal moved simultaneously to the same number from one day to the next during that time period. Had any member bank that set Libor or indeed any antitrust authority undertaken an econometric screen, they would have detected these anomalies, undertaken a more in-depth investigation and discovered the wrongdoing.

This essay explores the use of econometric screens as a tool to improve detection of potential price fixing cartel behavior as a method to police the firm from illegal behavior either by enforcement authorities or via firms themselves.

August 12, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Rose on State Enforcement of National Policy

State Enforcement of National Policy: A Contextual Approach (with Evidence from the Securities Realm), by Amanda M. Rose, Vanderbilt Law School, was recently posted on SSRN.  Here is the abstract:

This Article addresses a topic of contemporary public policy significance: the optimal allocation of law enforcement authority in our federalist system. Proponents of “competitive federalism” have long argued that assigning concurrent enforcement authority to states and the federal government can lead to redundant expense, policy distortion, and a loss of democratic accountability. A growing literature responds to these claims, trumpeting the benefits of concurrent state-federal enforcement — most notably the potential for state regulators to remedy under-enforcement by captured federal agencies. Both bodies of scholarship are right, but also incomplete. What is missing from this rather polarized debate is a deep appreciation for how context matters. This Article moves beyond the abstract case for or against concurrent state-federal enforcement, and provides a systematic account of the variables that will influence its desirability in disparate regulatory settings. To illustrate the significance of these variables, the Article also provides an empirically-grounded case study of one of the most contentious areas of concurrent state-federal authority — securities fraud enforcement against nationally traded firms.

August 12, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Romano on International Regulation of Financial Institutions

For Diversity in the International Regulation of Financial Institutions: Redesigning the Basel Architecture, by Roberta Romano, Yale Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

This paper challenges the prevailing view of the efficacy of harmonization of international financial regulation and provides a mechanism for facilitating regulatory diversity within the Basel accords framework. Recent experience suggests that regulatory harmonization can increase, rather than decrease, systemic risk. By incentivizing financial institutions worldwide to follow broadly similar business strategies, regulatory error contributed to a global financial crisis. Furthermore, the fast-moving, dynamic nature of financial markets renders it improbable that regulators will be able to predict with confidence what optimal capital requirements or other regulatory policies are to reduce systemic risk, the objective of global harmonization efforts, nor what future financial innovations, activities or institutions might generate systemic risk. The paper contends, accordingly, that there would be value added from increasing the flexibility of the international financial regulatory architecture and advocates, as a means of implementing that goal, fostering regulatory diversity and experimentation within the existing Basel framework. It proposes making the Basel architecture more adaptable by creating a procedural mechanism by which departures along multiple dimensions from Basel’s strictures would be permitted while providing safeguards, given the limited knowledge that we do possess, against the ratchetting up of systemic risk from such departures. The core of the proposal is peer review of proposed deviations from Basel, and ongoing monitoring of departures, for their impact on global systemic risk. If a departure were found to increase systemic risk, it would be disallowed. Such a mechanism would improve the quality of regulatory decisionmaking by generating information on what regulation works best under what circumstances, and by providing a safety valve against a harmonized regulatory error’s increasing systemic risk, by reducing the likelihood that international banks worldwide will follow broadly similar flawed strategies in response to regulatory incentives

August 12, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Levitin on Derivatives Clearinghouses

The Tenuous Case for Derivatives Clearinghouses, by Adam J. Levitin, Georgetown University Law Center, was recently posted on SSRN.  Here is the abstract:

Mandatory use of swaps clearinghouses represent the major regulatory response to the systemic risk from credit derivatives. Scholars are divided on the merits of clearinghouses; some scholars see them as reducing systemic risk, others contend they increase it.

The case for swaps clearinghouses comes down to two propositions: (1) that clearinghouses are better able to manage risk than dealer banks in the over-the-counter derivatives market, and (2) that clearinghouses are better able to absorb risk than dealer banks. Both propositions are heavily dependent on the details of clearinghouse design, the shape of the clearinghouse market, and the manner of its regulation.

In theory, however, a well-designed clearinghouse boasts one major advantage over dealer-banks: capital. Clearinghouses can have deep capital structures, including callable capital from their members. Clearinghouses thus diffuse losses out across their membership, thereby avoiding catastrophic losses to any single institution. If designed properly, a clearinghouse should be much more resilient to losses than an individual dealer bank. Clearinghouse owners, however, are likely to pursue lower capitalization, leaving it up to regulators to ensure sufficient capitalization.

Clearinghouses concentrate risk and also potentially encourage greater risk taking via underpricing to gain market share. Therefore, if they lack sufficient capital, they can present a dangerous increase in systemic risk relative to dealer banks. Thus, the case for clearinghouses remains tenuous and ultimately dependent upon the still-to-be-determined particulars of their regulation.

August 12, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)