Securities Law Prof Blog

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

Saturday, December 15, 2012

Lowell Milken Institute for Business Law & Policy Accepting Applications for Fellowship

UCLA School of Law's Lowell Milken Institute for Business Law and Policy is now accepting applications for the Lowell Milken Institute Law Teaching Fellowship.  This fellowship is a full-time, year-round, one or two academic-year position (approximately July 2013 through June 2014 or June 2015). The position involves law teaching, legal and policy research and writing, preparing to go on the law teaching market, and assisting with organizing projects such as conferences and workshops, and teaching. No degree will be offered as part of the Fellowship program.

Additional information is available at the Institute's website.

December 15, 2012 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Woody on Conflict Minerals Legislation

Conflict Minerals Legislation: The SEC's New Role as Diplomatic and Humanitarian Watchdog, by Karen E. Woody, Independent, was recently posted on SSRN.  Here is the abstract:

Buried in the voluminous Dodd-Frank Wall Street Reform and Consumer Protection Act is an oft-overlooked provision requiring corporate disclosure of the use of “conflict minerals” in products manufactured by issuing corporations. This article scrutinizes the legislative history and lobbying efforts behind the conflict minerals provision to establish that, unlike the majority of the bill, its goals are moral and political, rather than financial. Analyzing the history of disclosure requirements, the article suggests that the presence of conflict minerals in a company’s product is not inherently material information, and that the Dodd-Frank provision statutorily renders non-material information material. The provision, thus, forces the SEC to expand beyond its congressional mandate of protecting investors and ensuring capital formation by requiring issuers engage in additional non-financial disclosures in order to meet the provision’s humanitarian and diplomatic aims. Further, the article posits that the conflict minerals provision is a wholly ineffective means to accomplish its stated humanitarian goals, and likely will cause more harm than good in the Democratic Republic of Congo. In conclusion, this article proposes that a more efficient regulatory model for conflict minerals is the Clean Diamond Trade Act and the Kimberley Process Certification Scheme.

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

Pollman on Marketplaces for Trading Private Company Stock

Information Issues on Wall Street 2.0, by Elizabeth Pollman, Loyola Law School Los Angeles, was recently posted on SSRN.  Here is the abstract:

Billions of dollars have flooded new online marketplaces for trading private company stock. These marketplaces stand poised to become important, lasting features of the private company world as they provide a central meeting place for buyers and sellers and potentially increase the liquidity of private company stock. Increased liquidity is particularly important to investors in start-up companies, as these companies have faced longer periods of time before going public or being acquired. The new marketplaces also raise significant information issues, however, that threaten their legitimacy and efficiency. This Article is the first to examine these information issues — lack of information, asymmetric information, conflicts of interest, and insider trading — as well as possible solutions that would allow the markets to continue to evolve while promoting their integrity and investor protection goals. Specifically, the Article proposes establishing a minimum information requirement for secondary trading in private company stock and reexamining the thresholds for accredited investor status in order to ensure that market participants can fend for themselves without additional protections. The Article also examines potential responses to insider trading in these markets, arguing that a case exists for the SEC to take action in the private market context, since harm may be cognizable and the arguments for regulating insider trading are as strong in the private market arena as in the public.

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

SEC Releases Annual Report on NRSROs

SEC Staff Released its Annual Report on Nationally Recognized Statistical Rating Organizations As Required by Section 6 of the Credit Rating Agency Reform Act of 2006.( Download Nrsroannrep1212)

The Act requires the Commission to submit an annual report to the Committee on Banking, Housing, and Urban Affairs of the U.S. Senate and the Committee on Financial Services of the U.S. House of Representatives that, with respect to the year to which the report relates:

• Identifies applicants for registration as nationally recognized statistical rating
organizations (“NRSROs”) under Section 15E of the Securities Exchange Act of 1934
(“Exchange Act”);
• Specifies the number of and actions taken on such applications; and
• Specifies the views of the Commission on the state of competition, transparency, and
conflicts of interest among NRSROs.

This report relates to the period from June 26, 2011 to June 25, 2012 (the “reporting
period”) and provides an overview of Commission rulemaking and other actions relating to NRSROs and addresses the items specified in Section 6 of the Rating Agency Act for the reporting period.

December 15, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

BBB & FINRA Foundation Launch Website on Smart Investing

Can a website make us better investors?  The Better Business Bureau and the FINRA Investor Education Foundation hope so.  They have launched a new consumer website, BBB Smart Investing, which is "designed to help investors make smarter investing decisions while avoiding fraud, risky investments and unlicensed brokers."

 According to the Federal Trade Commission and the Canadian Anti-Fraud Centre, consumers reported losing more than $1.5 billion to all types of scams in 2011. FINRA Foundation research has found that investors are overconfident in their knowledge of financial management, particularly baby boomers, who are most often the target of investment scams. A telephone survey found that 92 percent felt "somewhat" or "very" confident about managing their finances, with almost 80 percent describing themselves as "somewhat" or "very" knowledgeable about investing. But only 44 percent got a passing grade on a basic financial literacy knowledge test.







December 15, 2012 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Thursday, December 13, 2012

FINRA Issues Guidance on Suitability Rule's Definition of "Customer" and "Investment Strategy"

FINRA issued further Guidance on FINRA's Suitability Rule (Regulatory Notice 12-55).  Its revised Rule 2111became effective in July 2012, and FINRA previously issued Regulatory Notice 12-25 to address frequently asked questions.  This most recent Notice addresses two issues:  the scope of the terms "customer" and "investment strategy."  FINRA has also created a suitability web page to consolidate information about the Rule.

December 13, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 12, 2012

SEC Approves FINRA Rule Change on Use of Subpoenas and Orders of Appearance in Arbitration

The SEC has approved a non-controversial FINRA rule change relating to the use of subpoenas and orders of appearance in arbitration proceedings.  Specifically, the rule change amends the Customer and Industry Codes of Arbitration Procedure (1) to provide that when FINRA member firms and/or
employees or associated persons of FINRA members who are parties to an arbitration (collectively, “Member Parties”) seek the appearance of witnesses by, or the production of documents from, FINRA members (and individuals associated with the member) who are not parties to the arbitration (collectively, “Non-Party Members”), FINRA arbitrators shall (unless circumstances dictate otherwise) issue orders for the appearance of witnesses or the production of documents, instead of issuing subpoenas; (2) to add procedures for any non-party (Non-Party Member or otherwise) receiving a subpoena to object to the subpoena; (3) to provide that if an arbitrator issues a subpoena to a Non-Party Member at the request of a Member Party, the Member Party making the request is (unless the panel directs otherwise) responsible for paying the reasonable costs of the appearance of witnesses by or the production of documents from the Non-Party Member; (4) to add procedures for any party to an arbitration to file a motion requesting arbitrators issue an order for the appearance of any employee or associated person of a FINRA member (collectively, “Associated Persons”) or the production of documents from such Associated Persons or members; (5) to add procedures for any party to an arbitration receiving a motion for an order and draft order to object to the order; (6) to add procedures for how the party to the arbitration that requested the order must serve the order (if issued); (7) to add procedures for any Non-Party Member receiving an order to object to the order; and (8) to add procedures for how parties to an arbitration must share documents received in response to an order issued to a Non-Party Member. ( Download 34-68404)

December 12, 2012 in Other Regulatory Action, SEC Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Hedge Fund Manager Agrees to Pay $44 Million for Illegal Trading in Chinese Stocks

The SEC charged  Sung Kook “Bill” Hwang, the founder and portfolio manager of Tiger Asia Management and Tiger Asia Partners, with conducting a pair of trading schemes involving Chinese bank stocks and making $16.7 million in illicit profits. He and his firms have agreed to pay $44 million to settle the SEC’s charges.  In a parallel action, the U.S. Attorney’s Office for the District of New Jersey today announced criminal charges against Tiger Asia Management.

According to the SEC, Hwang and the funds committed insider trading by short selling three Chinese bank stocks based on confidential information received in private placement offerings. Hwang and his advisory firms then covered the short positions with private placement shares purchased at a significant discount to the stocks’ market price. They separately attempted to manipulate the prices of publicly traded Chinese bank stocks in which Hwang’s hedge funds had substantial short positions by placing losing trades in an attempt to lower the price of the stocks and increase the value of the short positions. This enabled Hwang and Tiger Asia Management to illicitly collect higher management fees from investors.

The SEC also charged Raymond Y.H. Park for his roles in both schemes as the head trader of the two hedge funds involved.  Park also agreed to settle the SEC’s charges. 

The SEC further alleges that on at least four occasions from November 2008 to February 2009, Hwang and his firms, with Park’s assistance, attempted to manipulate the month-end closing prices of Chinese bank stocks publicly listed on the Hong Kong Stock Exchange.

The settlements, which are subject to court approval, require Hwang, Tiger Asia Management, and Tiger Asia Partners to collectively pay $19,048,787 in disgorgement and prejudgment interest — including $16,257,918 that Tiger Asia Management will pay directly to criminal authorities. Each of them has agreed to pay a penalty of $8,294,348 for a grand total of $44 million. Park agreed to pay $39,819 in disgorgement and prejudgment interest, and a penalty of $34,897. With the exception of Tiger Asia Management, the defendants neither admit nor deny the charges.

December 12, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 11, 2012

Treasury Agrees to Sell Remaining AIG Shares

The U.S. Department of the Treasury announced that it has agreed to sell all of its remaining 234,169,156 shares of American International Group, Inc. (AIG) common stock at $32.50 per share in an underwritten public offering. The aggregate proceeds to Treasury from the common stock offering are expected to total approximately $7.6 billion.  According to the Treasury's press release:

Giving effect to today's offering, the overall positive return on the Federal Reserve and Treasury's combined $182 billion commitment to stabilize AIG during the financial crisis is now $22.7 billion. To date, giving effect to the offering, Treasury has realized a positive return of $5.0 billion and the Federal Reserve has realized a positive return of $17.7 billion.

December 11, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Charges Consultant with Fraud For Role in Chinese Firms' Reverse Mergers

The SEC charged Huakang “David” Zhou, a New Jersey-based consultant, with violating securities laws and defrauding some investors while helping Chinese companies gain access to the U.S. capital markets. According to the SEC, Zhou and his consulting firm Warner Technology and Investment Corporation located more than 20 private companies in China to bring public in the U.S. through reverse mergers and committed various securities laws violations in the course of advising those companies and later assuming operational roles at some of them.  After earning millions of dollars in consulting fees, Zhou and his firm have left several failed Chinese companies in their wake in the U.S. markets including China Yingxia International, whose registration was revoked after the company collapsed amid fraud allegations.  The SEC has previously charged several individuals and firms with misconduct related to China Yingxia, including Zhou’s son.

The SEC alleges that the elder Zhou engaged in varied misconduct ranging from non-disclosure of certain holdings and transactions to outright fraud.  For instance, Zhou failed to disclose to investors in one company that he engaged in questionable wire transfers of their money to evade Chinese currency regulations, and he orchestrated an elaborate scheme to meet the requirements necessary to list a purported Chinese real estate developer on a national securities exchange.  Zhou also stole $271,500 in investment proceeds from a capital raise to make mortgage payments on a million-dollar condo where his son lives in New York City. 

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, Warner Technology and Investment Corporation advertises itself on its website as the first U.S. consulting firm that successfully brought a Chinese private company public in the U.S. through a reverse merger with an OTCBB trading company.  Zhou’s misconduct occurred from at least 2007 to 2010.  After completing the reverse mergers, Zhou strongly influenced or even directed many of his clients’ newfound U.S. presence and obligations as public companies.  He opened and controlled U.S. bank accounts for many of his clients to pay for services rendered and receive any proceeds from fundraising done in the U.S.  This enabled Zhou to control how and when offering proceeds were wired to China, and gave him the ability to direct money to himself purportedly to collect fees or repay loans made to the companies.


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

SEC Charges Fund Manager with Illegal Trading to Benefit Fund

The SEC charged Steven B. Hart, a New York-based fund manager, with conducting a pair of illegal trading schemes to financially benefit his investment fund Octagon Capital Partners LP.  The SEC alleges that Hart made $831,071 during a four-year period through illicit trading while he also worked as a portfolio manager and employee at a New Jersey-based firm that served as an adviser for several affiliated investment funds.  In one scheme, Hart illegally matched 31 pre-market trades to benefit his own fund at the expense of one of his employer’s funds.  In the other scheme, Hart conducted insider trading in the securities of 19 issuers based on nonpublic information he learned in advance of their offering announcements. Furthermore, Hart signed two securities purchase agreements in which he falsely represented that he had not traded the issuer's securities prior to the public announcement of the offerings in which he had been confidentially solicited to invest.

Hart agreed to pay more than $1.3 million to settle the SEC’s charges.


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

National Business Law Scholars Conference: Call for Papers

The 2013 National Business Law Scholars Conference (NBLSC)  will be held on Wednesday, June 12th and Thursday, June 13th at The Ohio State University Michael E. Moritz College of Law in Columbus, Ohio.  This is the fourth annual meeting of the NBLSC, a conference which annually draws together dozens of legal scholars from across the United States and around the world.  We welcome all on-topic submissions and will attempt to provide the opportunity for everyone to actively participate.  Junior scholars and those considering entering the legal academy are especially encouraged to participate. 

To submit a presentation, email Professor Eric C. Chaffee at with an abstract or paper by April 15, 2013.  Please title the email “NBLSC Submission – {Name}”.  If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance”.  Please specify in your email whether you are willing to serve as a commentator or moderator.  A conference schedule will be circulated in late May.

Conference Organizers:

Barbara Black (University of Cincinnati)
Eric C. Chaffee (University of Dayton)
Steven M. Davidoff (The Ohio State University)

December 11, 2012 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Monday, December 10, 2012

PCAOB Concerned About Deficiencies in Audits of Internal Controls over Financial Reporting

The Public Company Accounting Oversight Board today released a report summarizing inspection observations related to deficiencies in registered public accounting firms' audits of the internal control over financial reporting (ICFR) at public companies.  The report, "Observations from 2010 Inspections of Domestic Annually Inspected Firms Regarding Deficiencies in Audits of Internal Control over Financial Reporting," provides information about the nature and frequency of deficiencies in firms' audits of internal control over financial reporting detected during the PCAOB's 2010 inspections of eight domestic registered firms that have been inspected every year since the PCAOB inspection program began.

The report is based on PCAOB inspections that examined portions of approximately 300 such audits. It describes the most pervasive deficiencies identified in those audits and also includes information on the potential root causes of the deficiencies.

According to the Executive Summary:

The Board is concerned about the number and significance of deficiencies identified in firms' audits of internal control during the 2010 inspections, which generally involved reviews of the integrated audits of financial statements and internal control ("integrated audits") for issuers' fiscal years ending in 2009. This report describes the most pervasive deficiencies identified in firms' auditing of internal control during the 2010 inspections, and also includes information on the potential root causes of the deficiencies. Although not specifically described in this report, the Board is also concerned that the rate of these deficiencies increased during the Board's 2011 inspections. The Board emphasizes, however, that the findings described in this report should be considered against the broader background that, in many cases, the Inspections staff did not identify significant audit deficiencies in the portions of audits of internal control that were reviewed in 2010 and 2011, an encouraging fact that reflects well on the firms' ability to implement AS No. 5 appropriately when their engagement teams approach the issues properly.

The report is available at PCAOB's website.

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

FINRA Proposes to Allow Non-Party Associated Persons to Seek Expungement Relief

FINRA, at its December 2012 Board meeting, discussed several rulemaking items, including:

Expungement for Unnamed Persons in Arbitration Claims

The Board authorized FINRA to file a proposal with the SEC that establishes three different procedures that would permit registered persons who are identified for alleged sales practice violations in an arbitration claim, but are not named as parties in that claim (unnamed persons), to seek expungement relief. The unnamed person could seek relief under Rule 12805 by asking a party to the customer-initiated arbitration in writing to seek expungement on his or her behalf. Alternatively, the registered person could initiate In re proceedings under new Rule 13807 at the conclusion of the underlying customer-initiated arbitration case. Finally, the unnamed person could seek expungement relief at the conclusion of the customer’s case by asking the panel for an expungement based on the record compiled in the underlying case. The proposal incorporates many of the comments and suggestions received on Regulatory Notice 12-18, as well as feedback from several FINRA committees. FINRA believes that these proposals provide unnamed persons with a remedy to seek redress concerning allegations that could impact their livelihoods, yet maintains the protections of FINRA’s expungement rules to ensure the integrity of the CRD records.

 Conflicts of Interest Relating to Recruitment Compensation Practices

The Board authorized FINRA to seek comment in a Regulatory Notice on a proposed rule that would require a member firm that provides, or has agreed to provide, to a registered person enhanced compensation in connection with the transfer of employment (or association) of the registered person from another financial services firm (previous firm), to disclose the details of the enhanced compensation to any former customer of the registered person at the previous firm who is contacted about moving or moves their account to the new firm. The proposal would require such disclosure for one year following the date the registered person associates with the new firm. The proposed rule would not apply to enhanced compensation of less than $50,000 or to customers that meet the definition of an institutional account pursuant to FINRA Rule 4512(c), except any natural person or a natural person advised by a registered investment adviser.

December 10, 2012 in Other Regulatory Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

SEC Charges Eight Former Fund Directors with Violating Asset Pricing Responsibilities

The SEC issued an order charging eight former members of the boards of directors overseeing five Memphis, Tenn.-based mutual funds with violating their asset pricing responsibilities under the federal securities laws. The mutual funds involved were the RMK High Income Fund, RMK Multi-Sector High Income Fund, RMK Strategic Income Fund, RMK Advantage Income Fund, and Morgan Keegan Select Fund. The funds, which were invested in some securities backed by subprime mortgages, fraudulently overstated the value of their securities as the housing market was on the brink of financial crisis in 2007. The SEC and other regulators previously charged the funds’ managers with fraud, and the firms later agreed to pay $200 million to settle the charges.

Under the securities laws, fund directors are responsible for determining the fair value of fund securities for which market quotations are not readily available. According to the SEC’s order instituting administrative proceedings against the eight directors, they delegated their fair valuation responsibility to a valuation committee without providing meaningful substantive guidance on how fair valuation determinations should be made. The fund directors then made no meaningful effort to learn how fair values were being determined. They received only limited information about the factors involved with the funds’ fair value determinations, and obtained almost no information explaining why particular fair values were assigned to portfolio securities.

The SEC’s order alleges that the fund directors caused the funds’ violations of Rules 22c-1, 30a-3(a) and 38a-1 under the Investment Company Act of 1940.

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

Sunday, December 9, 2012

Torres-Spelliscy on the SEC's Regulation of Money in Politics

Safeguarding Markets from Pernicious Pay to Play: The SEC's Money in Politics Model for Regulatory Intervention, by Ciara Torres-Spelliscy, Stetson University - College of Law; Stetson University College of Law, was recently posted on SSRN.  Here is the abstract:

At first blush, the SEC’s regulation of money in politics may seem to fall outside of its jurisdiction, but this is a mistake. This view ignores three previous times when the SEC stepped in to curb pay to play: (1) in the municipal bond market in 1994; (2) in the public pension fund market in 2010; and (3) in investigating questionable payments post-Watergate from 1974 to 1977. The result of the first two interventions led to new Commission rules and the third intervention resulted in the Foreign Corrupt Practices Act (a federal statute).

When these three previous SEC interventions into the role of money in politics are examined, a principled model emerges for when the Commission’s regulatory intervention is appropriate. The principled model, hereinafter known as the “Money in Politics Model,” has the following characteristics: there must be (1) a potential for market inefficiencies; (2) a problem that is not likely self-correct through normal market forces; (3) a lack of transparency; (4) a material amount of aggregated money at stake; and (5) a high probability for corruption of the government.

The Money in Politics Model’s characteristics were present in the all three past SEC interventions. As will be explained in more detail below, in the municipal bond market and public pension funds, there was an endemic problem of pay to play between state elected officials and businesses eager to contract with them for lucrative fees. The post-Watergate investigation revealed even more profound problem of secret corporate funds used for political contributions domestically and bribes of foreign officials abroad.

So does the post-Citizens United world of corporate political spending rise to the same level as these three previous examples? Does post-Citizens United political spending fit the SEC’s Money in Politics Model and merit the SEC’s intervention? This article will argue that the Model fits and the SEC should act.

The SEC is not new to the inherent conflicts of interest between business and government, especially when elected officials have the ability to make private contractors in the financial services industry rich through commissions and fees. The risk of corruption is intrinsic in such a situation. Here corruption is best captured by the definition as “the misuse of public … office for direct or indirect personal gain.” What is new as of January 2010, thanks to Citizens United, is the potential for every publicly traded company to try to influence the government not just through traditional lobbying, but also through campaign expenditures. This new problem merits a new SEC intervention to reveal the campaign activities of public companies.

December 9, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Squire on the Benefits of a Clearinghouse in a Financial Crisis

The Speed and Certainty Benefits of a Clearinghouse in a Financial Crisis, by Richard Squire, Fordham University School of Law, was recently posted on SSRN.  Here is the abstract:

The Article argues that the primary benefit of a clearinghouse in a financial crisis is to accelerate payouts to creditors when a trading firm fails. Through netting, clearinghouses provide immediate payouts to creditors who otherwise would have to wait for slower bankruptcy payouts. Quicker payouts reduce illiquidity and uncertainty, two sources of systemic risk. Clearinghouse netting can reduce illiquidity and uncertainty even if the clearinghouse is itself insolvent. Unlike benefits of clearinghouses purported by other scholars, faster payouts are not zero-sum: besides accelerating payouts to members, clearinghouses ease the administrative burden on the failed member’s bankruptcy trustee or receiver, permitting quicker payouts to non-clearinghouse creditors as well. By identifying faster payouts as the main systemic benefit of clearinghouses, this Article shows that there is a high degree of complementarity between the Dodd-Frank Act’s clearing mandate, which requires central clearing of swap contracts, and the statute’s “orderly liquidation authority” for large financial firms. The clearing mandate will reduce the need for the liquidation authority to be invoked, and when the authority is invoked the mandate will simplify the FDIC’s duties as receiver.

December 9, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Green & Podgor on Corporate Internal Investigations

Unregulated Corporate Internal Investigations: Achieving Fairness for Corporate Constituents, by Bruce A. Green , Fordham University School of Law, and Ellen S. Podgor, Stetson University College of Law, was recently posted on SSRN.  Here is the abstract:

This Article focuses on the relationship between corporations and their employee constituents in the context of corporate internal investigations, an unregulated multi-million dollar business. The classic approach provided in the 1981 Supreme Court opinion, Upjohn v. United States, is contrasted with the reality of modern-day internal investigations that may exploit individuals to achieve a corporate benefit with the government. Attorney-client privilege becomes an issue as corporate constituents perceive that corporate counsel is representing their interests, when in fact these internal investigators are obtaining information for the corporation to barter with the government. Legal precedent and ethics rules provide little relief to these corporate employees. This Article suggests that courts need to move beyond the Upjohn decision and recognize this new landscape. It advocates for corporate fair dealing and provides a multi-faceted approach to achieve this aim. Ultimately this Article considers how best to level the playing field between corporations and their employees in matters related to the corporate internal investigation.

December 9, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)