Securities Law Prof Blog

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

Friday, March 2, 2012

Former Brookstreet Ordered to Pay $10 Million Penalty for CMO Fraud

The SEC announced that a federal judge in Los Angeles has ordered Stanley C. Brooks, the former CEO of Brookstreet Securities Corp., to pay a $10 million penalty in a securities fraud case related to the financial crisis.

The SEC charged Brooks and Brookstreet with fraud for systematically selling risky mortgage-backed securities to customers with conservative investment goals. Brookstreet and Brooks developed a program through which the firm’s registered representatives sold particularly risky and illiquid types of Collateralized Mortgage Obligations (CMOs) to more than 1,000 seniors, retirees, and others for whom the securities were unsuitable. Brookstreet and Brooks continued to promote and sell the risky CMOs even after Brooks received numerous warnings that these were dangerous investments that could become worthless overnight. The fraud caused severe investor losses and eventually caused the firm to collapse.

The judge granted summary judgment in favor of the SEC on February 23, finding Brookstreet and Brooks liable for violating Section 10(b) of the Securities Exchange Act of 1934 as well as Rule 10b-5.

March 2, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Approves Consolidated FINRA Best Execution Rule

The SEC approved FINRA’s proposed rule change to adopt FINRA Rules 5310 (Best Execution and Interpositioning) and 6438 (Displaying Priced Quotations in Multiple Quotation Mediums) in the consolidated rulebook (Consolidated FINRA Rulebook). FINRA Rule 5310 is the new consolidated rule governing members’ best execution requirements that is based largely on NASD Rule 2320 (Best Execution and Interpositioning). The Supplementary Material to Rule 5310 draws substantially from NASD IM-2320 (Interpretive Guidance with Respect to Best Execution Requirements) but includes several new provisions concerning securities with limited quotation or pricing information available, foreign securities, customer instructions on routing orders, and regular and rigorous review of execution quality. Rules 5310 and 6438 become effective on May 31, 2012.

Regulatory Notice 12-13

March 2, 2012 | Permalink | Comments (0) | TrackBack (0)

FINRA Considers Allowing Private Vendors Access to BrokerCheck

In February, FINRA issued a request for comment on  Ways to Facilitate and Increase Investor Use of BrokerCheck Information (Regulatory Notice 12-10), in which it explained:

FINRA requests comment on ways to facilitate and increase investor use of BrokerCheck information. Specifically, FINRA requests comment on potential changes to the information disclosed through BrokerCheck, the format in which the information is presented and strategies to increase investor awareness of BrokerCheck.

An article in Investment News explains that FINRA is considering allowing private vendors access to the database of disciplinary and licensing information that could make the information much more user-friendly.  InvNews, Finra may give up lock on BrokerCheck

Comment Period Expires: April 6, 2012


March 2, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

How Does the SEC Count its Enforcement Actions?

Both SEC Chairman Schapiro and Enforcement Director Khuzami cite increased number of enforcement actions as evidence that the restructuring of the enforcement division has produced results.  Specifically, they say  that the agency filed 735 actions in fiscal 2011, which they call a record-breaking performance.  Yet, according to a Bloomberg study, 31% of those 735 actions were not new, but follow-on administrative proceedings to institute penalties or bar people from the industry.  Excluding the follow-on proceedings, the SEC filed 499 cases in fiscal 2011, fewer than the 520 new cases filed in fiscal 2009 (the year prior to the restructuring).  Bloomberg, SEC Accounting Doesn’t Add Up in 2011 Enforcement Record Cited by Schapiro

March 2, 2012 in News Stories, SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 29, 2012

Former Qwest CFO Settles Securities Fraud Charges

The SEC announced that it settled charges against Robert S. Woodruff, the former chief financial officer of Qwest Communications International Inc., a Denver-based telecommunications company. According to the SEC’s complaint, from at least April 1, 1999 through March, 2001, Woodruff and others at Qwest engaged in a large-scale financial fraud that hid from the investing public the true source and nature of the company’s revenue and earnings growth. The complaint alleged that, although Qwest publicly touted its purported growth in services contracts which would provide a continuing revenue stream, in fact, the company fraudulently and repeatedly relied on revenue recognition from one-time sales of assets known as “IRUs” and certain equipment without making required disclosures. The complaint also alleged that Woodruff and others fraudulently and materially misrepresented Qwest’s performance and growth to the investing public. The complaint further alleged that Woodruff sold Qwest stock in violation of the insider trading prohibition of the securities laws.

Woodruff agreed to a Final Judgment that finds that he is liable for disgorgement of $1,731,048, plus prejudgment interest of $640,427, imposes a civil penalty of $300,000; and prohibits  him from acting as an officer or director of a public company for a period of five years. It is anticipated that the Commission will ask the Court to add the disgorgement, interest and penalty to a Fair Fund which was established in SEC v. Qwest Communications, Inc., Civ No. 04-cv-1267 (D. Colorado).

February 29, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 28, 2012

SEC & CFTC Propose Rule to Deter Identity Theft

The SEC announced a rule proposal to help protect investors from identity theft by ensuring that broker-dealers, mutual funds, and other SEC-regulated entities create programs to detect and respond appropriately to red flags.  The SEC issued the proposal jointly with the Commodity Futures Trading Commission (CFTC). (Download Identity.Theft.ic-29969[1])

The rule proposal would require SEC-regulated entities to adopt a written identity theft program that would include reasonable policies and procedures to:

Identify relevant red flags.
Detect the occurrence of red flags.
Respond appropriately to the detected red flags.
Periodically update the program.

The proposed rule would include guidelines and examples of red flags to help firms administer their programs.

Section 1088 of the Dodd-Frank Act transferred authority over certain parts of the Fair Credit Reporting Act from the Federal Trade Commission (FTC) to the SEC and CFTC for entities they regulate. The proposed rules are substantially similar to rules adopted in 2007 by the FTC and other federal financial regulatory agencies that were previously required to adopt such rules.



February 28, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Michael Douglas Speaks Out Against Insider Trading!

The government has a public service announcement announcement against insider trading by none other than Michael Douglas, who played that infamously greedy Wall St. villain Gordon Gekko.  He warns us that if a deal sounds too good to be true it probably is and urges those with knowledge of insider trading to contact the FBI.  Watch it on Youtube.

Meanwhile, DOJ says it is building insider-trading cases against approximately 120 individuals, including hedge fund traders and company insiders, in its ever-expanding criminal investigation.  WSJ, Insider Targets Expanding

February 28, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wells Fargo Gets Wells Notice About Mortgage-Backed Securities Offerings

Wells Fargo & Co. has received a Wells notice from the SEC regarding disclosures in its mortgage-backed securities offering documents, including whether it adequately disclosed risks associated with mortgage-backed securities.  According the Wall St. Journal, the SEC is conducting similar investigations at a number of Wall St. firms, including Bank of America, Citigroup, Deutsche Bank and Goldman Sachs.  WSJ, Wells Fargo Discloses SEC Wells Notice

February 28, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, February 27, 2012

ProPublica Compares Versions of the STOCK Act

ProPublica's Lena Groeger provides a side-by-side comparison of the House and Senate versons of the STOCK Act, along with real-life scenarios that illustrate activities that the bill targets.  It's well worth checking out.  Taking Stock of the Stock Act: A Side-by-Side Comparison

February 27, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, February 26, 2012

Black on the SEC and the FCPA

I recently posted on SSRN my paper, The SEC and the Foreign Corrupt Practices Act: Fighting Global Corruption is Not Part of the SEC's Mission.  Here is the abstract:

In recent years, as both the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have stepped up their enforcement efforts, the Foreign Corrupt Practices Act (FCPA) has been the subject of harsh criticism. Although critics have identified a variety of flaws in both the law and its enforcement, no one has seriously questioned a basic policy choice: why an agency whose mission is to protect investors is charged with civil enforcement of the FCPA’s anti-bribery provisions. Congress conferred this authority on the SEC in 1977 despite the agency’s statements that it did not fit within its mission. For over twenty years the SEC brought few actions involving allegations of foreign bribery and supported Congressional efforts to consolidate enforcement in the DOJ. By contrast, the SEC began to enforce the FCPA in the early 2000s with increasing enthusiasm. It has set up a specialized unit and publicized its large settlements, without ever providing an explanation of how enforcing the foreign bribery provision relates to the agency’s mission “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

I first review the legislative history, the “quiet” years prior to the early 2000s, and the SEC’s aggressive enforcement since then. I then make two arguments. First, since combating global corruption is not part of the agency’s mission, enforcement of the FCPA should be consolidated in the DOJ. Second, while “agency creep” is often described as resulting from agencies’ self-aggrandizing efforts to expand their power, the history of the FCPA illustrates a different problem: Congress giving an agency a power that it does not want and that diverts scarce resources from its core mission.

This paper is prepared for the Ohio State Law Journal's March 16 symposium on "The FCPA at Thirty Five and its Impact on Global Business."  For more information about the symposium, see the OSU website.  My paper is a work-in-progress, and I would be grateful for comments.


February 26, 2012 in Law Review Articles, Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Frankel on Universal Fiduciary Principles

Towards Universal Fiduciary Principles, by Tamar Frankel, Boston University School of Law, was recently posted on SSRN.  Here is the abstract:

This Article focuses on unifying fiduciary law in Civil Law and the Common Law systems. The problems that fiduciary law addresses are similar throughout history and in all societies. However, the legal systems which address these problems differ. While in the Common Law fiduciary law is founded on property law, in the Civil Law similar fiduciary principles are found in the category of contract. However, the reach and basis of contract law in each system differ. Common Law judges tend to strictly enforce the parties’ contract terms while Civil Law allows for far more judicial discretion to impose fairness principles on the parties’ contract terms. This Article offers a number of ways in which the two systems of law can coincide and concludes and suggests by-passing the differences between the two systems by focusing on the results reached in each and at the same time following the models of dual systems.

February 26, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Posner & Weyl on Financial Innovation

An FDA for Financial Innovation: Applying the Insurable Interest Doctrine to 21st Century Financial Markets, by Eric A. Posner, University of Chicago - Law School, and E. Glen Weyl, University of Chicago; University of Toulouse 1 - 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 complex 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. We propose that when firms invent new financial products, they be forbidden to sell 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 they satisfy a test for social utility that focuses on whether the product will likely be used more often for hedging than for 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 26, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)