Securities Law Prof Blog

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

Saturday, October 13, 2012

SEC Settles Charges in Insider Trading Case Involving Pearson-Global Education Merger

The SEC filed new charges in its pending insider trading case against several Chinese citizens and a Chinese-based entity. The SEC previously charged the defendants in complaints filed on December 5 and 14, 2011, with insider trading after they reaped more than $2.8 million in profits by trading in advance of a publicly announced merger between London-based Pearson plc and Beijing-based Global Education and Technology Group, Ltd.

The SEC’s second amended complaint, filed on October 4, 2012, names a new defendant, Jie Meng. According to the SEC’s second amended complaint, Meng was a friend of Angela Yang’s (a/k/a/ Yang Yan), a resident of Beijing, China. Yang worked for Pearson and was privy to the details concerning the Global Education acquisition before the transaction was made public. In the fall of 2011, Yang told Meng that Pearson was going to acquire Global Education and that if the buyout was successful, the stock price of Global Education would increase. Yang also told Meng that the information about the Global Education acquisition was “top secret” and asked Meng not to tell anybody about the acquisition out of fear of losing her job. Yang then sent Meng $40,000 to purchase Global Education securities. Meng used Yang’s $40,000 plus approximately $35,000 from the bank account Meng shared with previously charged defendant Song Li to purchase 24,592 shares of Global Education securities in Li’s brokerage account.

The second amended complaint also alleges that Pearson and Global Education each announced before trading began on November 21, 2011 that Pearson agreed to acquire all of Global Education’s outstanding stock for $294 million. Global Education’s stock price increased 97 percent that day, from $5.37 to $10.60. On November 21 and 22, 2011, Meng sold a total of 20,592 Global Education shares at an average price of $10.51 per share, resulting in profits of over $142,000. Soon thereafter, Meng requested that the brokerage firm liquidate Li’s account and issue Li a check for the proceeds of Meng’s trading. However, as a result of asset freeze orders imposed in the SEC’s case, those proceeds have remained frozen in Li’s account.

The SEC’s second amended complaint charges Meng with violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Without admitting or denying the allegations of the second amended complaint, Meng consented to the entry of a final judgment enjoining Meng from future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, ordering Meng to pay disgorgement, jointly and severally with Li, of $142,052 plus prejudgment interest of $2,141 for a total of $144,193, and ordering a civil penalty against Meng in the amount of $71,000. The second amended complaint also dismisses Li as a defendant, names her as a relief defendant, and orders her to pay, joint and severally with Meng, disgorgement plus prejudgment interest totaling $144,193. The monetary sanctions will be paid out of the frozen funds.

With respect to the other defendants in the pending action, Lili Wang consented to the entry of a final judgment enjoining her from future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, ordering Wang to pay disgorgement of $197,117.80 plus prejudgment interest of $1,474.15 for a total of $198,591.95, and ordering a civil penalty against Wang in the amount of $197,117.80. The cases against the remaining defendants, Yonghui Zhang, Xuechu Yang, Sha Chen, Zhi Yao, and All Know Holdings Ltd., are pending. The Court’s previous orders freezing the balance of the remaining defendants’ trading profits remain in effect.


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

Thursday, October 11, 2012

Draft Registration Statements Required to be Filed on EDGAR Beginning Oct. 15

The SEC announced that draft registration statements will be required to be submitted and filed on EDGAR beginning Oct. 15.  The SEC had previously announced that EDGAR had been updated to allow certain Emerging Growth Companies and foreign private issuers to submit draft registration statements for non-public review and that filing on EDGAR would be voluntary for a brief period until the EDGAR Filer Manual for EDGAR Release 12.2 became effective.

The Commission recently adopted the revised EDGAR Filer Manual for Release 12.2, and it is expected to be published in the Federal Register on October 15, 2012. Consequently, beginning October 15, 2012, draft registration statements and amendments as well as related correspondence must be submitted or filed via the EDGAR system.

October 11, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Fines Guggenheim Securities for Failing to Supervise CDO Traders

FINRA fined Guggenheim Securities, LLC of New York $800,000 for failing to supervise two collateralized debt obligation (CDO) traders who engaged in activities to hide a trading loss. FINRA sanctioned the two traders: Alexander Rekeda, the former head of Guggenheim's CDO Desk, was suspended for one year and fined $50,000; Timothy Day, a trader on Guggenheim's CDO Desk, was suspended for four months and fined $20,000.

In October 2008, as the result of a failed trade, Guggenheim's CDO Desk acquired a €5,000,000 junk-rated tranche of a collateralized loan obligation (CLO). After unsuccessful attempts by Guggenheim's CDO Desk to sell the position, Rekeda and Day persuaded a hedge fund customer to purchase the CLO for $950,000 more than it had previously agreed to pay by falsely presenting the CLO as part of a package of securities a third party offered for sale. FINRA found that in an attempt to hide the trading loss on the CLO position, the traders provided the customer with order tickets that increased the price for the CLO position and decreased the price of the other positions that were part of the transaction. When the customer inquired about the pricing adjustments, Day, at Rekeda's direction, lied and said a third-party seller of the CLO position had already settled the trade at a higher price and requested the customer pay this higher price. The customer agreed to overpay for the CLO and in return, Day and Rekeda agreed to compensate the customer through other transactions, including pricing adjustments on six other CLO trades, a waiver of fees the customer owed in connection with resecuritization transactions, and a cash payment to the customer. The records created to document the transactions did not indicate any connection to the overpayment for the CLO.

FINRA found Guggenheim failed to conduct adequate review of the CDO Desk's trades, documentation concerning transactions by traders on the desk, and the traders' email communications. As part of the settlement, Guggenheim must retain an independent consultant to review and make recommendations concerning the adequacy of its supervisory procedures.

October 11, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 10, 2012

SEC Investor Advisory Committee Schedules Telephonic Meeting on JOBS Act Rulemaking

Notice of Telephonic Meeting of SEC's Dodd-Frank Investor Advisory Committee.

SUMMARY: The Securities and Exchange Commission Investor Advisory Committee is providing notice that it will hold a telephonic meeting on Friday, October 12, 2012. The meeting will begin at 12:00 p.m. (EDT) and end at 1:00 p.m. and will be open to the public via telephone at 1-866-606-4717, participant code 3877211.

The agenda for the meeting includes discussion of and voting on a recommendation from the Investor as Purchaser subcommittee regarding the Jumpstart Our Business Startups Act (JOBS Act) requirements on general solicitation and general advertising in Rule 506 private placements.

DATES: Written statements should be received on or before October 12, 2012.

October 10, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Proposes to Extend Temporary Rule on Principal Trades

The SEC proposes to amend rule 206(3)-3T under the Investment Advisers Act of 1940, a temporary rule that establishes an alternative means for investment advisers that are registered with the Commission as broker-dealers to meet the requirements of section 206(3) of the Investment Advisers Act when they act in a principal capacity in transactions with certain of their advisory clients. The amendment would extend the date on which rule 206(3)-3T will sunset from December 31, 2012 to December 31, 2014. (Download Ia-3483[1])

October 10, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NASAA Urges SEC to Rethink Proposal to Eliminate Ban on Advertising in 506 Offerings

Yesterday the president of NASAA, Arkansas Securities Commissioner Heath Abshure, joined three investor advocates in sharply criticizing the SEC's proposed JOBS Act rulemaking that implements the elimination of the prohibition against general solicitation in Rule 506 and Rule 144A offerings.(Download 33-9354[1])

Abshure, along with representatives from AARP, the AFL-CIO, and the Consumer Federation Of America, called on the SEC to withdraw its proposal and craft a new rule that promotes capital formation without sacrificing investor protection. (The comment period on the rule expired last week.)

“People don’t seem to think so, but this is a drastic change to the face of securities regulation,” Abshure said. “Rule 506 offerings already are the most frequent financial product at the heart of state enforcement investigations and actions. Lifting the advertising ban on these highly risky, illiquid offerings, without requiring appropriate safeguards, will create chaos in the market and expose investors to an even greater risk of fraud and abuse. Without adequate investor protections to safeguard the integrity of the private placement marketplace, investors should and will flee from the market, leaving small businesses without an important source of capital.”

October 10, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Historical Society: Accounting and Sarbanes-Oxley

2012 Deloitte Fireside Chats:  The Profession Looks at Sarbanes-Oxley

Live Audio Broadcast on

Tuesday, October 16th , 2:00 – 3:00 pm ET
Questions for the chat may be submitted to through October 15th.

Moderator: Professor Mark Peecher, University of Illinois


Alan Beller, Cleary Gottlieb Steen & Hamilton LLP; and former Director, SEC Division of Corporation Finance

Joseph Ucuzoglu, Deloitte LLP; and former Senior Advisor and Professional Accounting Fellow, SEC Office of the Chief Accountant


October 10, 2012 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Heminway on SEC Disclosure Rules for ABS

The SEC’s New Line-Item Disclosure Rules for Asset-Backed Securities: MOTS or TMI?, by Joan MacLeod Heminway, University of Tennessee College of Law, was recently posted on SSRN.  Here is the abstract:

Despite the lack of a dominant explanation for the level of risk assumed by investors in asset-backed securities in the period preceding the financial crisis, the U.S. Congress proposed and passed new disclosure prescriptions addressing various aspects of the secondary mortgage market as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This essay asks whether certain disclosure provisions embraced in Dodd-Frank and the related regulations of the U.S. Securities and Exchange Commission are merely new and necessary components of a disclosure infrastructure that the SEC has been building for years for the protection of investors and markets — more of the same (MOTS) — or whether they represent unnecessary window dressing (or worse yet, harmful overregulation) in calling for excessive additional information — too much information (TMI

October 10, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Utset on Conduct as Securities Fraud

Fraudulent Corporate Signals: Conduct as Securities Fraud, by Manuel A. Utset, Florida State University College of Law, was recently posted on SSRN.  Here is the abstract:

Paying a dividend, repurchasing shares, underpricing an IPO, pledging collateral, and borrowing using short-term, instead of long-term debt, are all forms of corporate communications: they are “corporate signals” that tell investors certain things about a company’s operations and current financial position, and about the managers’ confidence of its future performance. This article provides the first comprehensive analysis of the relationship between corporate signals and securities fraud. The incentive to communicate using corporate signals has increased in recent years, a phenomenon that, I argue, is due to the growing complexity of public corporations, and, importantly, to a number of changes in Federal securities laws, aimed at better deterring fraud and making companies more transparent. The article makes three major contributions. First, it identifies this deep connection between the use of corporate signals (both truthful and deceptive) and recent changes in securities laws. Second, it identifies significant social costs associated with corporate signaling (which commentators and policymakers have overlooked); signals, I show, encourage stock bubbles, lead to costly “signaling races”, and to the loss of information about companies and industries. Third, the article provides a normative account of how a lawmaker would go about designing anti-fraud provisions under the securities laws, if its goal is to reduce total fraud, and not simply to re-channel deceptive practices, from the realm of written and oral statements to that of deceptive corporate signals.

October 10, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Nagy & Painter on Selective Disclosure by Federal Officials

Selective Disclosure by Federal Officials and the Case for an FGD (Fairer Government Disclosure) Regime, by Donna M. Nagy, Indiana University Maurer School of Law, and Richard W. Painter, University of Minnesota Law School, was recently posted on SSRN.  Here is the abstract:

This Article addresses a problem at the intersection of securities regulation and government ethics: the selective disclosure of market-moving information, by federal officials in the executive and legislative branches, to securities investors outside the government who use that information for trading. These privileged investors, often aided by political intelligence consultants, can profit substantially from their access to knowledgeable sources inside the government. In most instances, however, neither the disclosure nor the trading violates the antifraud provisions of the federal securities laws (under which the insider trading prohibitions arise). This legally protected favoritism undermines investor confidence in the fairness and integrity of securities markets – and in government itself. Congress considered these consequences in the debates leading up to the Stop Trading on Congressional Knowledge (STOCK) Act of 2012. But it wisely opted to study the role of political intelligence in financial markets before legislating further.

To address securities trading on the basis of selectively disclosed government information, this Article examines an analogous situation in the private sector that plagued individual investors until relatively recently. Selective disclosure of issuer-information by corporate executives, to securities analysts and professional investors, had been regarded as blatantly unfair yet, in most instances, not illegal. Regulation FD, which the Securities and Exchange Commission (SEC) adopted in 2000, addressed this unfairness by looking beyond the construct of fraudulent tipping and trading under Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. The solution involved regulating the timing and manner of disclosures by corporate insiders, rather than the conduct of outsiders who gather and trade on the basis of those disclosures. Regulation FD embraced this approach for publicly-traded companies, and corporate executives have been adhering to it for more than a decade.

This Article proposes an analogous FGD regime – standing for Fairer Government Disclosure – that would prompt federal agencies, as well as Members of Congress and their staffs, to deploy a variety of strategies that could substantially reduce the amount of selective disclosure of nonpublic government information to persons who are likely to use it in securities trading. The Article first gathers together press reports, agency and congressional correspondence, and other materials that demonstrate the ubiquity of selective disclosure in the federal government. It then analyzes insider trading law to show that most of these instances of selective disclosure are not illegal. The Article concludes that the problem can be solved – or at least curtailed – with more effective internal controls on the federal officials who selectively disclose government information. It thus begins a discussion as to how such controls could be developed without compromising the quality and timeliness of disclosures to persons, including voters, who must have information in order to make informed decisions.

October 10, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Griffith on Derivative Clearinghouses

Governing Systemic Risk: Towards a Governance Structure for Derivatives Clearinghouses, by Sean J. Griffith, Fordham Law School, was recently posted on SSRN.  Here is the abstract:

Derivatives transactions create systemic risk by threatening to spread the consequences of default throughout the financial system. Responding to the manifestations of systemic risk exhibited in the financial crisis, policy-makers have sought to solve the problem by requiring as many derivatives transactions as possible to be “cleared” (essentially guaranteed) by a clearinghouse. The clearinghouse will centralize and, through the creation of reserve accounts, seek to contain systemic risk by preventing the consequences of default from spreading. This centralization of risk makes the clearinghouse the new locus of systemic risk, and the question of systemic risk management thus becomes a question of clearinghouse governance. Unfortunately, each of the likely players in clearinghouse governance — dealers, customers, and investors — has significant incentive problems from the perspective of systemic risk management. I will argue that the policy-makers’ responses to these problems — focusing on voting caps and director independence — are inadequate to address the problem of systemic risk inherent in derivatives transactions. I argue, instead, in favor of the adoption of a new board structure more reflective of the public-private role of clearinghouses and suggest that models for this new governance structure can be found outside of traditional U.S. corporate governance norms in the dual-board structure of continental Europe.

October 10, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Schwarcz on Financial Disintermediation

Regulating Shadows: Financial Disintermediation and the Need for a Common Language, by Steven L. Schwarcz, Duke University - School of Law, was recently posted on SSRN.  Here is the abstract:

Financial disintermediation, or the removal of the need for bank intermediation between markets and the users of funds, has so transformed the financial system that scholars are finding it increasingly difficult to communicate about financial regulation. This article argues that legal scholars could better communicate by speaking in terms of the fundamental market failures underlying the disintermediated financial system (sometimes called the “shadow banking” system). The traditional perspectives and tools of legal scholars primarily address two market failures: information failure and agency failure. To a limited extent, they also address a third market failure: externalities. By amplifying systemic risk, however, disintermediation increases the potential magnitude of — and thus makes it even more important for scholars to address — externalities. But discussing externalities as a type of market failure can be confusing and counterintuitive because externalities are fundamentally consequences, not causes, of failures. Scholars could better communicate about the disintermediated financial system, the article contends, by denoting the cause of externalities as “responsibility failure” — a firm’s ability to externalize all or a portion of the costs of taking an action. The article also shows how a rudimentary common language using the terms information failure, agency failure, and responsibility failure could help legal scholars, and thus policymakers and regulators informed by their research, to communicate about financial regulation.

October 10, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Monday, October 8, 2012

SEC Charges Four Brokers with Overcharging Customers $18.7 Million

Last Friday the SEC charged four brokers who formerly worked on the cash desk at an interdealer broker firm  with illegally overcharging customers $18.7 million by using hidden markups and markdowns and secretly keeping portions of profitable customer trades.  The brokers are Marek Leszczynski, Benjamin Chouchane, Gregory Reyftmann, and Henry Condron. Interdealer brokers typically operate only as agents and execute large volumes of securities trades on behalf of customers for low commissions. The cash desk where these brokers worked executed trades in U.S. and Canadian stocks, and customers were primarily large foreign institutions and foreign banks. The firm’s internal records show that customers were to be charged flat commission rates between $0.005 and $0.02 per share.

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Leszczynski and Chouchane. Condron has pled guilty to criminal charges.

The SEC alleges that the brokers purported to charge customers very low commission fees that were typically pennies or fractions of pennies per transaction, but in reality they were reporting false prices when executing the orders to purchase and sell securities on behalf of their customers. The brokers made their scheme especially difficult to detect because they deceptively charged the markups and markdowns during times of market volatility in order to conceal the fraudulent nature of the prices they were reporting to their customers. The surreptitiously embedded markups and markdowns ranged from a few dollars to $228,000 and involved more than 36,000 transactions during a four-year period. Some fees were altered by more than 1000 percent of what was being told to customers.

The SEC further alleges that when a customer placed a limit order seeking to purchase shares at a specified maximum price, the brokers filled the order at the customer’s limit price but used opportune times to sell a portion of that order back to the market to obtain a secret profit for the firm. They falsely reported back to the customer that they could not fill the order at the limit price. Meanwhile, the brokers made millions of dollars in illicit performance bonuses based on the fraudulent earnings they were generating on the cash desk.

The SEC’s complaint alleges that the scheme spanned from 2005 to 2009. Reyftmann, Chouchane, and Leszczynski were sales brokers on the cash desk who were responsible for finding customers, developing relationships, and taking orders from customers. Reyftmann supervised the cash desk. Condron was a sales trader and middle-office assistant on the cash desk who entered orders received from the sales brokers and ensured the orders were executed.

The SEC is seeking disgorgement of ill-gotten gains with prejudgment interest, financial penalties, and a permanent injunction against the brokers.

October 8, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)