Securities Law Prof Blog

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

Friday, October 19, 2012

SEC Posts Text of Proposed Rule on Requirements for Security-Based Swap Dealers

The SEC has posted on its website the release on the proposed rule regarding Capital, Margin and Segregation Requirements for Security-Based Swap Dealers and Majority Security-Based Swap Participants and Capital Requirements for Broker-Dealers.  Comments are due 60 days after publication in the Federal Register. ( Download 34-68071[1])

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

SEC Reports on Registration of Private Fund Advisers, Notifies Mid-Sized Advisers

The SEC staff released a report on the number of advisers to private funds that have registered with the SEC pursuant to Dodd-Frank's investment adviser registration requirements.  As of Oct. 1, 2012, there are (Including the 2,557 private fund advisers who had registered previously) a total of 4,061 advisers to one or more private funds are now registered with the SEC.   A total of 11,002 investment advisers now are SEC-registered, with 37% advising hedge funds and other private funds. Assets under management at SEC-registered advisers has risen about $5.7 trillion, or 13%, even though the number of advisers fell about 15% as the Dodd-Frank Act required mid-sized advisers to move from federal to state oversight.

In addition, Dodd-Frank required mid-sized advisers to move from federal to state registration by June 28. To date, more than 2,300 mid-sized advisers – those managing less than $100 million of assets – have made the transition to state regulation.  In an effort to finalize the transition, the Commission today issued a notice identifying 293 advisers who may no longer be eligible for registration with the SEC because they manage less than $100 million or have failed to comply with other SEC requirements.  




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

Thursday, October 18, 2012

SEC Issues Third Report on Implementing Organizational Reform Recommendations

Yesterday the SEC posted on its website the Third Report on the Implementation of SEC Organizational Reform Recommendations as required by section 967 of Dodd-Frank, which directed the SEC to engage an independent consultant to conduct a broad and independent assessment of the agency's internal operations, structure, funding and the agency's relationships with SROs.  The consultant issued its report in March 2011; this is the third of four agency reports on the implementation of the consultant's recommendations. (Download Sec-organizational-reform-recommendations-101712[1])

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

SEC Charges Three in ".44 Magnum" Investment Fraud

The SEC today charged a purported money manager and two of his chief marketers with defrauding investors in a fake company he created that bore a similar name to what was formerly one of Germany's largest banks.  According to the SEC, Geoffrey H. Lunn operated the $5.77 million investment scheme with assistance from Darlene A. Bishop and Vincent G. Curry. Lunn portrayed himself as the vice president of Dresdner Financial, a firm whose executives he claimed had connections to Dresdner Bank and was purportedly planning to purchase several other banks to expand its operations.

Lunn, Bishop, and Curry solicited investors for their ".44 Magnum Leveraged Financing Program" that they promised could turn an investment of just $44,000 into $2 million within 10 to 12 banking days.  Needless to say, it was fake. According to the SEC's complaint, Lunn admitted in sworn testimony during the SEC's investigation that, "It was a con, basically."

According to the SEC's complaint, Lunn also testified to SEC investigators that it was a "one-eyed man" using the alias "Robert Perello" who actually created Dresdner and the Magnum program. Lunn testified that Perello told him that he named the program accordingly because "when people found out they'd been ripped off, they would buy a .44 Magnum and shoot themselves in the head." Lunn claimed that Perello threatened to kill him and his family if he did not cooperate in the Dresdner scheme, and that he gave the cash he withdrew from investor funds and the Western Union transfers to Perello. Lunn is the only person who claims to have met Perello in person, saying he does not know Perello's true identify or current whereabouts and that his only distinguishing characteristic is that he has just one eye. Despite Lunn's assertions, no individual resembling Perello has been identified or located.

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

Hong Kong Firm Agrees to Pay $14 Million to Settle Insider Trading Charges

The SEC announced that Well Advantage, a Hong Kong-based firm charged with insider trading in July, has agreed to settle the case by paying more than $14 million, double the amount of its alleged illicit profits. The proposed settlement is subject to judicial approval.

The SEC filed an emergency action against Well Advantage to freeze its assets less than 24 hours after the firm placed an order to liquidate its entire position in Nexen Inc. The SEC alleged that Well Advantage had stockpiled shares of Nexen stock based on confidential information that China-based CNOOC Ltd. was about to announce an acquisition of Nexen. Well Advantage sold those shares for more than $7 million in illicit profits immediately after the deal was publicly announced. Well Advantage is controlled by prominent Hong Kong businessman Zhang Zhi Rong, who also controls another company that has a "strategic cooperation agreement" with CNOOC.

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

FINRA Expels EKN for Defying SEC Order

FINRA has expelled EKN Financial Services, Inc. of Melville, NY, for numerous compliance violations and for allowing its CEO, Anthony Ottimo, to act as a supervisor after being barred from acting in that capacity by the SEC in June 2008. FINRA barred Ottimo from the securities industry and barred the firm's former President, Thomas Giugliano, from acting in a principal capacity, suspended him from the securities industry for one year and fined him $150,000. EKN, through Ottimo and Giugliano, also violated numerous NASD/FINRA and SEC rules and federal securities laws, including anti-money laundering (AML) violations, net capital deficiencies and widespread reporting failures.

FINRA found that from 2008 through 2011, Ottimo acted in a supervisory role despite an SEC order that barred him from associating with any broker or dealer in a supervisory capacity, and acted as CEO despite not being registered as a principal. During the relevant period, EKN and Giugliano repeatedly misrepresented to FINRA that Ottimo was no longer acting as EKN's CEO, as a principal or as a supervisor. In 2011, EKN lied to FINRA examiners, reporting that since 2008, it had "never filled" the CEO position when, in fact, FINRA's investigation revealed that EKN's own documents indicated that from 2008 through 2011, Ottimo was listed as EKN's CEO and was operating in that capacity. As CEO, Ottimo supervised other EKN personnel, negotiated and executed agreements, controlled its finances, retained signatory authority over its bank accounts, and represented himself as EKN's CEO to its clearing firm and other third parties.

In addition, FINRA found that EKN, Ottimo and Giugliano, who was aware of EKN and Ottimo's regulatory violations, committed numerous AML violations, including failing to establish an adequate AML compliance program to detect and report suspicious activity, and failed to meet minimum net capital requirements during certain periods from September 2008 to November 2010 



October 18, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 17, 2012

SEC's Economist Addresses SIFMA

The Expanded Role of Economists in SEC Rulemaking by Craig M. Lewis, Chief Economist and Director, Division of Risk, Strategy, and Financial Innovation, U.S. Securities & Exchange Commission

(SIFMA Compliance & Legal Society Luncheon October 16, 2012)

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

SEC Charges Hedge Fund Adviser with Overvaluing Assets under Management

The SEC charged a former $1 billion hedge fund advisory firm and two executives with scheming to overvalue assets under management and exaggerate the reported returns of hedge funds they managed in order to hide losses and increase the fees collected from investors.  The SEC alleges that New Jersey-based Yorkville Advisors LLC, founder and president Mark Angelo, and chief financial officer Edward Schinik enticed pension funds and other investors to invest in their hedge funds by falsely portraying Yorkville as a firm that managed a highly-collateralized investment portfolio and employed a robust valuation procedure. They misrepresented the safety and liquidity of the investments made by the hedge funds, and charged excessive fees to the funds based on the fraudulently inflated values of the investments.

This is the seventh case arising from the SEC’s Aberrational Performance Inquiry, an initiative by the Enforcement Division’s Asset Management Unit that uses proprietary risk analytics to identify hedge funds with suspicious returns. Performance that is flagged as inconsistent with a fund’s investment strategy or other benchmarks forms a basis for further investigation and scrutiny.

The SEC alleges that Yorkville and the two executives:

  • Failed to adhere to Yorkville’s stated valuation policies.
  • Ignored negative information about certain investments by the funds.
  • Withheld adverse information about fund investments from Yorkville’s auditor, which enabled Yorkville to carry some of its largest investments at inflated values.
  • Misled investors about the liquidity of the funds, collateral underlying the investments, and Yorkville’s use of a third-party valuation firm.

The SEC alleges that by fraudulently making Yorkville’s funds more attractive to potential investors, Angelo and Schinik enticed more than $280 million in investments from pension funds and funds of funds. This enabled Yorkville to charge the funds at least $10 million in excess fees based on the inflated values of Yorkville’s assets under management.

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

SEC Proposes Requirements for Traders of Derivatives

The SEC voted today to put out for public comment proposed rules that would establish capital, margin, and segregation requirements for security-based swap dealers and major security-based swap participants. In addition, the proposed rules would enhance the capital requirements for the large broker-dealers that have been approved to use internal models in computing their net capital.  The proposals stem from Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Chairman Schapiro stated that "If today’s proposal passes, the SEC will have proposed — and in some cases adopted — substantially all of the rules that create the new regulatory regime for derivatives within our jurisdiction." 

While the text of the proposed rules is not yet available, the SEC has posted a Fact Sheet at its website describing the proposed rules and also has a webpage depicting the regulatory regime for security-based swaps and details what happens as a transaction occurs.

Opening Statement at the SEC Open Meeting by Chairman Mary L. Schapiro

WashPost, SEC proposes setting minimum capital levels, other requirements for traders of derivatives

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

Tuesday, October 16, 2012

SEC Takes Up Capital, Margin & Segregation Rules for Security-Based Swap Dealers Tomorrow

The SEC posted its Open Meeting Agenda for its October 17, 2012 meeting:

The Commission will consider whether to propose capital, margin, and segregation requirements for security-based swap dealers and major security-based swap participants, and amendments to Rule 15c3-1 under the Exchange Act for broker-dealers.

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

SEC Issues Report on Enforcement of Rule 12g5-1(b)(3)

In the JOBS Act Congress required the SEC to prepare a report on the Authority to Enforce Exchange Act Rule 12g5-1 and Subsection (b)(3), to determine "if new enforcement tools are needed to enforce the anti-evasion provision contained in subsection (b)(3) of the Rule."  That report is now posted on the SEC's website. (Download Authority-to-enforce-rule-12g5-1[1])

As background, under Section 12(g) of the Exchange Act, as amended by the JOBS Act, the reporting requirements are not triggered if the issuer has less than 2,000 holders of record of its equity securities and less than 500 holders of record who are not accredited investors.  Rule 12g5-1(b)(3), intended to prevent circumvention of Section 12(g), states that if the issuer knows or has reason to know that the form of holding securities of record is used primarily to circumvent the provisions of Section 12(g) or 15(d) of the Act, the beneficial owners of such securities shall be deemed to be the record owners thereof.  In particular, concerns were raised about the impact on the reporting requirements of the creation of special purpose vehicles used to pool investor funds and purchase securities and as to whether such SPVs could be used to facilitate evasion of the registration and reporting requirements.

In the study the staff concluded:

The current enforcement tools available to the Commission are adequate to enforce the anti-evasion provision of Rule 12g5-1. While difficult to detect at the outset, once the staff is alerted to a potential circumvention of Section 12(g), the current authority to investigate potential violations of the securities laws provides the staff with a wide variety of tools to gather facts. The increase in the Section 12(g) threshold from 500 holders of record to 2000 included in the JOBS Act may reduce the motivation of issuers and others to engage in circumvention efforts, although it is possible that the requirement to register if the number of non-accredited holders of record exceeds 500 may mitigate that effect. Since those changes were just recently enacted, time will need to pass before the impact, including the impact on possible circumvention efforts, can be assessed. We therefore have no particular legislative recommendations regarding enforcement tools relating to Rule 12g5-1(b)(3) at this time.


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

SEC Posts Staff Guidance on Shareholder Proposals

The SEC's Division of Corporation Finance posted on the SEC website Staff Legal Bulletin No. 14G (CF) on Shareholder Proposals.  It describes the purpose of the bulletin:

This bulletin is part of a continuing effort by the Division to provide guidance on important issues arising under Exchange Act Rule 14a-8. Specifically, this bulletin contains information regarding:

the parties that can provide proof of ownership under Rule 14a-8(b)(2)(i) for purposes of verifying whether a beneficial owner is eligible to submit a proposal under Rule 14a-8;

the manner in which companies should notify proponents of a failure to provide proof of ownership for the one-year period required under Rule 14a-8(b)(1); and

the use of website references in proposals and supporting statements.

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

SEC Grants Accelerated Approval to FINRA's JOBS Act Rule Changes

On October 11, 2012, the SEC posted on its website a Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change to Amend NASD Rule 2711 and Incorporated NYSE Rule 472 to Conform with the Requirements of the Jumpstart Our Business Startups Act and Related Changes (Download 34-68037[1]).  Comments are due 21 days after publication in the Federal Register. 

October 16, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Monday, October 15, 2012

Broker Invents Investors for Broadway Production of Rebecca

Federal authorities have charged Mark C. Hotton, the stockbroker who acted as intermediary in the financing of the Broadway flop Rebecca, with criminal fraud.  According to the complaint (available at the New York Times website), Hotton invented investors and their interest in the production in order to secure $60,000 from the Broadway producers for his efforts.  According to U.S. District Attorney Preet Bharara:

As described in the criminal complaint, Mark Hotton perpetrated stranger-than-fiction frauds both on and off Broadway.  As part of one alleged scheme, Hotton concocted a cast of characters to invest in a major musical — investors who turned out to be deep-pocketed phantoms. To carry out the alleged fraud, Hotton faked lives, faked companies and even staged a fake death, pretending that one imaginary investor had suddenly died from malaria.

Hotton also allegedly used the same invented investors to defraud a Connecticut real estate company that was looking for financing.

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

FINRA Requests Comments on Revised Proposal on Debt Research

FINRA seeks comment on a revised proposal addressing debt research conflicts of interest that includes amended exemptions for research distributed to certain institutional investors and for firms with limited principal debt trading activity. The revised proposal also includes other changes in response to comments on the prior proposal set forth in Regulatory Notice 12-09.

The text of the proposed rule can be found at

The comment period expires Dec. 10, 2012.

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

Geffen on Mutual Fund Sales Notice Fees

Mutual Fund Sales Notice Fees: Are a Handful of States Unconstitutionally Exacting $200 Million Each Year?, by David M. Geffen, Dechert LLP, was recently posted on SSRN.  Here is the abstract:

As background, the article describes the political compromise struck in 1996 between Congress and state securities regulators. That year, Congress enacted the National Securities Markets Improvement Act of 1996 (NSMIA), which effected multiple changes to the federal securities laws to promote efficiency and capital formation by eliminating overlapping federal and state securities regulations.

With respect to mutual funds, NSMIA resolved the problem of overlapping regulation by preempting state substantive regulation and registration requirements of mutual funds, thereby providing for exclusive federal jurisdiction over the contents of a mutual fund’s prospectus and operation of each fund. NSMIA was welcomed by the mutual fund industry because it eliminated the “crazy quilt” of regulation that had made registration of mutual fund shares unnecessarily cumbersome — in some cases leading mutual funds to restrict their fund offerings to residents of certain states.

However, in order to secure the acquiescence of the states and secure NSMIA’s enactment, NSMIA preserved state authority to require mutual funds to file sales reports and to pay state filing fees based on those sales in connection with the sales reports. A handful of states have taken unfair advantage of this fee loophole.

Today, in six “Premium Fee States,” – Texas, Washington, Minnesota, Wisconsin, Nebraska and West Virginia – the notice filing fees paid by mutual funds are disproportionately greater than the notice filing fees paid by mutual funds to the remaining states. While the six states account for only 15% of the U.S. population, each year, these six states are paid approximately 50%, or approximately $200 million, of the total notice filing fees paid by mutual funds to all states.

The article examines the constitutional validity of the Premium Fee States’ disproportionate notice filing fees as state “regulatory fees” and as state taxes. It concludes that, regardless of whether these fees are deemed to be regulatory fees or taxes, the Premium Fee States’ notice filing fees are constitutionally invalid and, therefore, should be struck down.

The ramifications of striking down the Premium Fee States’ notice filing fees would be significant. Collectively, over the last three years, the Premium Fee States have unconstitutionally exacted approximately $600 million from mutual funds. These mutual funds and, therefore, the funds’ investors, may be able to recover roughly this amount from the Premium Fee States (or more, assuming a longer statute of limitations and the application of statutory interest). Prospectively, eliminating the annual $200 million unconstitutional exaction would be equivalent, in present value dollars, to a one-time savings by mutual funds and their investors of between $2 billion and $4 billion.

The article also examines a variety of issues that mutual funds’ advisers and boards of trustees/directors may want to consider in developing strategies to recover notice filing fees previously exacted unconstitutionally by the Premium Fee States, and to persuade the Premium Fee States to reduce their notice filing fees to adhere to constitutional requirements.

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