Securities Law Prof Blog

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

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Friday, February 10, 2012

SEC Charges California Hedge Fund Manager with Insider Trading

The SEC charged Douglas F. Whitman, a hedge fund manager, and his Menlo Park, Calif.-based firm for their involvement in the insider trading ring connected to Raj Rajaratnam and hedge fund advisory firm Galleon Management.  The SEC alleges that Whitman and Whitman Capital illegally traded based on material nonpublic information obtained from Rajaratnam associate Roomy Khan, who was Whitman's friend and neighbor. Khan tipped Whitman with confidential details about Polycom Inc.'s fourth quarter 2005 earnings and Google Inc.'s second quarter 2007 earnings prior to the public announcements of those financial results by the companies. Whitman Capital reaped nearly $1 million in ill-gotten gains by trading on Khan's illegal tips, according to the SEC's complaint.


According to the SEC's complaint, filed in federal court in Manhattan, the inside information about Polycom and Google used by Whitman is the same information that the SEC has previously alleged Khan provided to many of her hedge fund contacts, including Rajaratnam as well as Robert Feinblatt and Jeffrey Yokuty at Trivium Capital.

The SEC has charged 30 defendants in its Galleon-related enforcement actions

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

Ethics Office Investigates Bachus for Trading on Nonpublic Information

The Washington Post reports that the Office of Congressional Ethics has notified Rep. Spencer Bachus, chairman of the House Financial Services Committee, that it has found probable cause that he violated the ethics rules because of trading on nonpublic information.  Rep. Bachus said in a statement that he welcomes the opportunity to present facts and set the record straight.  The ethics investigation reportedly began last year.  Rep. Bachus is a frequent trader, especially making short-term trades in stock options.  WPost, Rep. Spencer Bachus faces insider-trading investigation  

February 10, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, February 9, 2012

SEC Charges Former Pharma Employee with Insider Trading

The SEC charged a former employee of Takeda Pharmaceuticals International, Inc. with trading on inside information about the Japanese firm’s business alliances and corporate acquisitions.  Brent Bankosky, a former Senior Director in Takeda’s U.S.-based business development group, agreed to pay more than $136,000 to settle the SEC’s charges.

The SEC’s complaint alleges that Bankosky reaped more than $63,000 of profits, achieving a 169% rate of return, by trading on non-public information about two business transactions in 2008. Takeda’s business development group worked on the transactions, a strategic alliance with Cell Genesys, Inc., and the acquisition of Millennium Pharmaceuticals, Inc., which were referred to internally by their code names, Project Ceres and Project Mercury. Bankosky’s trading violated U.S. securities laws and Takeda’s policies, which forbade employees from disclosing or trading based on inside information.

According to the SEC’s complaint, almost immediately after Bankosky joined Takeda in January 2008 as a Director in its business development group, he began to misuse confidential corporate information for his personal benefit.

February 9, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Ernst & Young Settles PCAOB Disciplinary Order for Audit Failures

The Public Company Accounting Oversight Board announced a settled disciplinary order censuring Ernst & Young LLP, imposing a $2 million civil money penalty against the firm, and sanctioning four of its current and former partners for violating PCAOB rules and standards.  The $2 million civil money penalty is the Board's largest civil money penalty to date. The respondents agreed to settle without admitting or denying the Board's findings.

The order related to three E&Y audits of Medicis Pharmaceutical Corporation, and a consultation stemming from an internal E&Y audit quality review of one of the audits.  James R. Doty, PCAOB Chairman, summarized E&Y's failings:

These audit partners and Ernst & Young — the company's outside auditor for more than 20 years — failed to fulfill their bedrock responsibility. The auditor's job is to exercise professional skepticism in evaluating a public company's accounting and in conducting its audit to ensure that investors receive reliable information, which did not happen in this case.

February 9, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 8, 2012

Cantor Releases His Version of STOCK Act

House Majority Leader Eric Cantor released his version of the STOCK Act.  It expands the prohibition on trading on nonpublic information to the executive branch (which is already prohibited).  It also  deletes the provision added by Senator Grassley that would require political intelligence consultants to disclose their activities and instead calls for a study of the issue.  See Seung Min Kim, Eric Cantor under fire for STOCK Act tweaks, Politico.  While Democrats are dismayed about this deletion, in fact, registration of political intelligence consultants is the wrong way to address the problem of inequal access to government information, as Professor Richard Painter argues in a blog on the Legal Ethics Forum, Senate Adds Flawed Political Intelligence Amendment to Insider Trading Bill.  Professor Painter argues that the right approach is to restrain officials from leaking nonpublic information through an approach similar to Regulation FD.

The House passed its version on Thursday.  NYTimes, House Passes Bill Banning Insider Trading by Members of Congress

February 8, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, February 6, 2012

SEC Settles Foreign Bribery Charges Against Smith & Nephew

The SEC announced a settlement with Smith & Nephew PLC to resolve SEC charges that the global medical device company violated the Foreign Corrupt Practices Act (FCPA) when its subsidiaries bribed public doctors in Greece for more than a decade. Smith & Nephew PLC, headquartered in London, England, is a global medical device company with operations around the world.

The SEC alleges that, from 1997 to June 2008, two of Smith &Nephew PLC’s subsidiaries, including its U.S. subsidiary, Smith & Nephew Inc., used a distributor to create a slush fund to make illicit payments to public doctors employed by government hospitals or agencies in Greece. Smith &Nephew PLC agreed to settle the SEC’s charges by paying more than $5.4 million in disgorgement and prejudgment interest. In addition, Smith &Nephew PLC agreed to retain an independent compliance monitor for a period of eighteen months to review its FCPA compliance program.

Smith &Nephew PLC’s U.S. subsidiary, Smith & Nephew Inc., agreed to pay a $16.8 million fine to settle parallel criminal charges announced by the U.S. Department of Justice today.

February 6, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sunday, February 5, 2012

Posner & Weyl on Limiting Speculation on Derivatives

A Proposal for Limiting Speculation on Derivatives: An FDA for Financial Innovation, by Eric A. Posner, University of Chicago - Law School, and E. Glen Weyl, University of Chicago; Toulouse School of Economics, was recently posted on SSRN.  Here is the abstract:

The financial crisis of 2008 was caused in part by speculative investment in sophisticated derivatives. In enacting the Dodd-Frank Act, Congress sought to address the problem of speculative investment, but merely transferred that authority to various agencies, which have not yet found a solution. Most discussions center on enhanced disclosure and the use of exchanges and clearinghouses. However, we argue that disclosure rules do not address the real problem, which is that financial firms invest enormous resources to develop financial products that facilitate gambling and regulatory arbitrage, both of which are socially wasteful activities. We propose that when investors invent new financial products, they be forbidden to market them until they receive approval from a government agency designed along the lines of the FDA, which screens pharmaceutical innovations. The agency would approve financial products if and only if they satisfy a test for social utility. The test centers around a simple market analysis: is the product likely to be used more often for hedging or speculation? Other factors may be addressed if the answer is ambiguous. This approach would revive and make quantitatively precise the common-law insurable interest doctrine, which helped control financial speculation before deregulation in the 1990s.

February 5, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Velasco on Aspiration and Corporate Fiduciary Duties

The Role of Aspiration in Corporate Fiduciary Duties, by Julian Velasco, University of Notre Dame, was recently posted on SSRN.  Here is the abstract:

Corporate law is characterized by a pervasive divergence between standards of conduct and standards of review. Courts often opine on the relatively-demanding standard of conduct, but their verdicts must be based on the more forgiving standard of review. Commentators defend this state of affairs by insisting that it provides guidance to directors without imposing ruinous liability. However, the dichotomy can lead many, especially those who focus on the bottom line, to call into question the meaningfulness of standards of conduct. Of particular concern is the increasing popularity, in legal and scholarly circles, of the notion that fiduciary duty standards of conduct are aspirational and unenforceable. This theory, which I will call the “aspirational view”, is misguided. The use of the term "aspirational" is especially problematic. Whatever else aspirational may mean, it does not mean obligatory or mandatory. Whether by design or only by effect, this has the potential to undermine fiduciary duties significantly. In this article, I will argue that fiduciary duty standards of conduct are duties — fully binding on actors even when they are not enforced. I will also argue that the unenforced duty is a meaningful concept because people obey the law for many different reasons, and not simply out of fear of punishment.

February 5, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Lipson on Defining Securitization

Re: Defining Securitization, by Jonathan C. Lipson, University of Wisconsin Law School, was recently posted on SSRN.  Here is the abstract:

This Article fills a gap in commercial finance law. Despite the fact that “securitization” has become enormously important to capital markets — and is sometimes blamed for the credit crisis — we have no agreed understanding of the term. Various regulators and commentators have generated a wide range of definitions, but many are vague or omit crucial elements. Perhaps most surprising, the Dodd-Frank financial services reform — the most aggressive attempt yet to regulate securitization — does not define it at all. How can we regulate something without a shared conception of what it is?

This Article assesses data on the performance and function of securitizations to develop a normative definition of the term based on its essential elements (its inputs, structure, and outputs) and its legitimate social and economic functions, namely providing a more effective means of connecting buyers and sellers of capital than traditional methods of financing, such as bank lending or issuing shares of stock.

The definition offered here distinguishes “true” securitizations from other transactions, such as collateralized debt obligations and Enron’s structured financings, which may satisfy current legal definitions of a securitization, but which in fact lack one or more essential elements, and which therefore fail to perform the important social and economic functions captured by the normative definition advanced here.

The Article concludes by summarizing the benefits of a better definition of securitization.

February 5, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Schwarcz on Defining Securitization

What is Securitization? And for What Purpose?, by Steven L. Schwarcz, Duke University - School of Law, was recently posted on SSRN.  Here is the abstract:

In Re: Defining Securitization, Professor Jonathan Lipson attempts to define a “true” securitization transaction. My article engages Lipson’s, exploring how securitization should be legally defined. As a starting point, even a normative approach to defining a financial concept should be pragmatic, taking into account how the concept is used in the real world. The definition also should take into account dynamically changing financial markets and, in what I call an audience-adaptive approach, the different perspectives of policymakers and lawmakers, market participants and their lawyers, regulators and judges, and other members of the “audience” affected by the definition.

February 5, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)