Securities Law Prof Blog

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

Friday, March 15, 2013

SEC Charges San Diego Lawyers in International "Pump and Dump" Scheme

The SEC charged a group of Canadian stock promoters, two San Diego attorneys, a Bahamas-based broker-dealer, and other participants in an international “pump-and-dump” scheme involving two publicly traded U.S. companies, Pacific Blue Energy Corporation and Tradeshow Marketing Company Ltd.

According to the SEC’s complaint, Canadian stock promoters John Kirk, Benjamin Kirk, Dylan Boyle, James Hinton, and their associates, used false and misleading promotions to pump up trading in the stock of the two microcap companies and made millions when they secretly dumped their own shares. The SEC alleges that the promoters sent investors false and misleading emails about the companies through two websites they controlled, Skymark Research and Emerging Stock Report, and used “boiler room” sales calls to tout the stocks, falsely claiming that the recommendations were based on independent research by Skymark and Emerging Stock Report.

The SEC also alleges that San Diego-based attorneys Luis Carrillo and Wade Huettel were central participants in the scheme who helped the promoters conceal their ownership interests in the companies, drafted misleading public filings, and provided misleading legal opinions. As part of the scheme, their law firm, Carrillo Huettel LLP, secretly received proceeds of stock sales in the form of a sham “loan.”

The SEC is seeking to have the defendants return their allegedly ill-gotten gains, with interest, and to bar Carrillo, Huettel, de Beer, John Kirk, Benjamin Kirk, Boyle, and Hinton from participating in penny stock offerings and from serving as public company officers or directors. The SEC is seeking civil monetary penalties from the attorneys, their law firm, and from de Beer.

March 15, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Hedge Fund Sigma Capital Agrees to Settle Insider Trading Charges Involving Expert Networks

The SEC announced another settlement today stemming from its investigation of expert networks and insider trading.  Hedge fund advisory firm Sigma Capital Management has agreed to pay nearly $14 million to settle charges that the firm engaged in insider trading based on nonpublic information obtained through one of its analysts about the quarterly earnings of Dell and Nvidia Corporation.  Jon Horvath, a former analyst at Sigma Capital, previously agreed to a settlement in which he admitted liability.  In addition, the SEC named two affiliated hedge funds – Sigma Capital Associates and S.A.C. Select Fund – as relief defendants that unjustly benefited from Sigma Capital’s violations. S.A.C. Select Fund is an affiliate of S.A.C. Capital.

The SEC’s complaint alleges that Horvath provided Sigma Capital portfolio managers with nonpublic details about quarterly earnings at Dell and Nvidia after he learned them through a group of hedge fund analysts with whom he regularly communicated. Based on the confidential information, Sigma Capital traded Dell and Nvidia securities in advance of earnings announcements in 2008 and 2009 for $6.425 million in gains for its hedge fund affiliates.

Sigma Capital agreed to pay disgorgement of $6.425 million plus prejudgment interest of $1,094,161.92 and a penalty of $6.425 million.

March 15, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

S.A.C. Affiliate Agrees to Pay over $600 Million to Settle Insider Trading Charges

Big headlines this Friday afternoon:  the SEC announced that Stamford, hedge fund advisory firm CR Intrinsic Investors--an affiliate of S.A.C. Capital Advisors-- has agreed to pay more than $600 million to settle SEC charges that it participated in an insider trading scheme involving a clinical trial for an Alzheimer’s drug being jointly developed by two pharmaceutical companies. The settlement is the largest ever in an insider trading case, requiring CR Intrinsic to pay $274,972,541 in disgorgement, $51,802,381.22 in prejudgment interest, and a $274,972,541 penalty.

The SEC charged CR Intrinsic with insider trading in November 2012, alleging that one of the firm’s portfolio managers Mathew Martoma illegally obtained confidential details about the clinical trial from Dr. Sidney Gilman, who was selected by the pharmaceutical companies — Elan Corporation and Wyeth — to present the final drug trial results to the public.

The SEC’s complaint against CR Intrinsic, Martoma, and Dr. Gilman alleged that during phone calls arranged by a New York-based expert network firm for which Dr. Gilman moonlighted as a medical consultant, he tipped Martoma with safety data and eventually details about negative results in the trial about two weeks before they were made public in July 2008. Martoma and CR Intrinsic then caused several hedge funds to sell more than $960 million in Elan and Wyeth securities in a little more than a week.

In an amended complaint filed today, the SEC added S.A.C. Capital Advisors and four hedge funds managed by CR Intrinsic and S.A.C. Capital as relief defendants because they each received ill-gotten gains from the insider trading scheme.

The settlement is subject to the approval of Judge Victor Marrero of the U.S. District Court for the Southern District of New York. The settlement would resolve the SEC’s charges against CR Intrinsic and the relief defendants relating to the trades in the securities of Elan and Wyeth between July 21 and July 30, 2008. The settling parties neither admit nor deny the charges. The settlement does not resolve the charges against Martoma, whose case continues in litigation. The court previously entered a consent judgment against Dr. Gilman requiring him to pay disgorgement and prejudgment interest, and permanently enjoining him from further violations of the anti-fraud provisions of the federal securities laws.

March 15, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, March 14, 2013

Massachusetts Fines Deutsche Bank Securities $17.5 Million for Conflicts in Marketing CDOs

The Commonwealth of Massachusetts fined Deutsche Bank Securities $17.5 million for conflicts in marketing collateralized debt obligations (CDOs) in a matter settled by a consent order.  According to the allegations, DBSI, which underwrote approximately $32.2 billion of CDOs between 2004-08, failed to disclose conflicts of interest arising from its various roles in proposing the structure for, co-investing in, and serving as the structurer for, a $1.56 billion hybrid CDO.  Specifically, DBSI did not disclose that a proprietary trading group within the firm partnered with a hedge fund to determine how the CDO would be structured and marketed.

March 14, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Fordham's Securities Moot Court Needs Judges March 22-24

Each spring, Fordham University School of Law hosts the Irving R. Kaufman Memorial Securities Law Moot Court Competition. This year’s Kaufman Competition will take place on March 22-24, 2013.  The competition focuses on two issues that arise in the fallout of Ponzi schemes: whether the “stockbroker safe harbor” of the Bankruptcy Code applies to Ponzi scheme operators, and the application of SLUSA, which was recently granted cert by the Supreme Court.

With the Competition fast approaching, the Competition still needs a few good lawyers to judge oral argument rounds.  No securities law experience is required to participate and CLE credit is available.  You can register online to serve as a judge.

Please contact Michael N. Fresco, Kaufman Editor, at or (561) 707-8328 with any questions.

March 14, 2013 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 13, 2013

2011 Survey Shows 51% Increase in FINRA Fines

Sutherland Asbil & Brennan has released the findings of its annual FINRA Sanctions Survey, a review of FINRA disciplinary actions.  FINRA filed 1488 disciplinary actions in 2011, up from the 1310 cases in 2010.  The number of individuals barred by FINRA increased significantly, from 288 in 2010 to 329 in 2011.  Fines increased from $45 million in 2010 to $68 million in 2011.  The report identifies as top enforcment issues: advertising, short selling, auction rate securities, suitability, and improper form.

Annual Sutherland FINRA Sanctions Survey Shows a 51% Jump in Fines in 2011

March 13, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 12, 2013

Mary Jo White Identifies Dodd-Frank and JOBS Act Rulemaking as a Priority

Mary Jo White is testifying today before the Senate Banking Committee about her nomination for Chair of the SEC.  In her written statement (Download White Testimony) she identified the following priorities:

  • finish the rulemaking mandates contained in Dodd-Frank and the JOBS Act;
  • importance of robust economic analysis in rulemaking;
  • strengthen the enforcement function;
  • effective regulation of high-speed, high-tech, and dispersed marketplace without undue cost and without undermining its vitality;
  • ensure that SEC has the cuttling-edge technology and expertise to keep pace with the markets.

March 12, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, March 11, 2013

Illinois Bar Association: Non-Attorney Representatives in FINRA Arbitrations Are Practicing Law

The Illinois State Bar Association recently issued an opinion stating that a nonlawyer's representation of parties in a FINRA arbitration generally constitutes the unauthorized practice of law. (Download Ill.13-03[1])  The inquiring attorney served as the chair of an arbitration panel that was hearing a dispute between customers and a brokerage firm and became aware that the customers were represented by a nonlawyer employee of a company, not a law firm, that regularly represents customers in FINRA arbitrations. 

The opinion letter notes that FINRA Arbitration Rule 12208 provides that parties may be represented by a nonlawyer "unless state law prohibits such representation."  In a thoughtful review of the policy implications as well as Illinois law, the bar association recognized that FINRA arbitrations do not "involve the same degree of legal complexities and formality" as a court proceeding, but "we nonetheless are of the strong belief that the actions of a party representative in a typical FINRA proceeding ... involves the giving of legal advice and the rendering of services requiring the use of legal knowledge or skill as to constitute the practice of law."

The opinion letter also states that the attorney/arbitrator who becomes aware of the nonlawyer's representation of a party should inform FINRA and, if necessary, notify the agency that has jurisdiction to investigate unauthorized practice of law in Illinois.  The opinion reassures, however, that "it is not our view...that an attorney having taken such steps could be said to be assisting the unauthorized practice should he or she not withdraw as an arbitrator in the event that the steps taken do not result in the discontinuation of the nonlawyer representation."

March 11, 2013 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Oppenheimer Advisers Settles Charges of Misleading Investors about Valuation and Performance

The SEC charged two investment advisers at Oppenheimer & Co. with misleading investors about the valuation policies and performance of a private equity fund they manage. Oppenheimer agreed to pay more than $2.8 million to settle the SEC’s charges. The Massachusetts Attorney General’s office today announced a related action and additional financial penalty against Oppenheimer.

According to the SEC, Oppenheimer Asset Management and Oppenheimer Alternative Investment Management disseminated misleading quarterly reports and marketing materials stating that the fund’s holdings of other private equity funds were valued “based on the underlying managers’ estimated values.” However, the portfolio manager of the Oppenheimer fund actually valued the fund’s largest investment at a significant markup to the underlying manager’s estimated value, a change that made the fund’s performance appear significantly better as measured by its internal rate of return.

According to the SEC’s order instituting settled administrative proceedings, the Oppenheimer advisers marketed Oppenheimer Global Resource Private Equity Fund I L.P. (OGR) to investors from around October 2009 to June 2010. OGR is a fund that invests in other private equity funds, and it was marketed primarily to pensions, foundations, and endowments as well as high net worth individuals and families.

Without admitting or denying the findings, Oppenheimer agreed to pay a $617,579 penalty and return $2,269,098 to those who invested in OGR during the time period when the misrepresentations were made. Oppenheimer consented to a censure and agreed to cease and desist from committing or causing any future violations of the securities laws. The firm is required to retain an independent consultant to conduct a review of its valuation policies and procedures.

Oppenheimer will pay an additional penalty of $132,421 to the Commonwealth of Massachusetts in the related action taken by the Massachusetts Attorney General.

March 11, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Illinois Settles SEC Charges of Misleading Pension Disclosures

The SEC charged the State of Illinois with securities fraud for misleading municipal bond investors about the state’s approach to funding its pension obligations. According to the SEC, Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition. The state also misled investors about the effect of changes to its statutory plan.

Illinois, which implemented a number of remedial actions and issued corrective disclosures beginning in 2009, agreed to settle the SEC’s charges.  This enforcement action marks the second time that the SEC has charged a state with violating federal securities laws in their public pension disclosures. The SEC charged New Jersey in 2010 with misleading municipal bond investors about its underfunding of the state’s two largest pension plans.

March 11, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sunday, March 10, 2013

Lin on the New Investor

The New Investor, by Tom C. W. Lin, University of Florida - Fredric G. Levin College of Law, was recently posted on SSRN.  Here is the abstract:

A sea change is happening in finance. Machines appear to be on the rise and humans on the decline. Human endeavors have become unmanned endeavors. Human thought and human deliberation have been replaced by computerized analysis and mathematical models. Technological advances have made finance faster, larger, more global, more interconnected, and less human. Modern finance is becoming an industry in which the main players are no longer entirely human. Instead, the key players are now cyborgs: part machine, part human. Modern finance is transforming into what this Article calls cyborg finance.

This Article offers one of the first broad, descriptive, and normative examinations of this sea change and its wide-ranging effects on law, society, and finance. The Article begins by placing the rise of artificial intelligence and computerization in finance within a larger social context. Next, it explores the evolution and birth of a new investor paradigm in law precipitated by that rise. This Article then identifies and addresses regulatory dangers, challenges, and consequences tied to the increasing reliance on artificial intelligence and computers. Specifically, it warns of emerging financial threats in cyberspace, examines new systemic risks linked to speed and connectivity, studies law’s capacity to govern this evolving financial landscape, and explores the growing resource asymmetries in finance. Finally, drawing on themes from the legal discourse about the choice between rules and standards, this Article closes with a defense of humans in an uncertain financial world in which machines continue to rise, and it asserts that smarter humans working with smart machines possess the key to better returns and better futures.

March 10, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Fried on Favoring Long-Term Shareholders

The Uneasy Case for Favoring Long-Term Shareholders, by Jesse M. Fried, Harvard Law School, was recently posted on SSRN.  Here is the abstract:

Proposals to favor long-term shareholders of public firms are based on a widely-held belief: that long-term shareholders, unlike short-term shareholders, benefit from managers maximizing the long-term economic value generated by the firm. This belief, I show, is mistaken. Long-term shareholders, like short-term shareholders, can benefit from managers destroying economic value. My analysis suggests that the case for shifting power from short-term to long-term shareholders is substantially weaker than it might appear.

March 10, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Bruner on Corporate Purpose in Post-Crisis Financial Firms

Conceptions of Corporate Purpose in Post-Crisis Financial Firms, by Christopher M. Bruner, Washington and Lee University - School of Law, was recently posted on SSRN.  Here is the abstract:

American "populism" has had a major impact on the development of U.S. corporate governance throughout its history. Specifically, appeals to the perceived interests of average working people have exerted enormous social and political influence over prevailing conceptions of corporate purpose - the aims toward which society expects corporate decision-making to be directed. This article assesses the impact of American populism upon prevailing conceptions of corporate purpose - contrasting its unique expression in the context of financial firms with that arising in other contexts - and then examines its impact upon corporate governance reforms enacted in the wake of the financial and economic crisis that emerged in 2007.

I first explore how populism has historically shaped conceptions of corporate purpose in the United States. While the "employee" conceptual category best encapsulates the perceived interests of average working people in the non-financial context, the "depositor" conceptual category best encapsulates their perceived interests in the financial context. Accordingly, American populism has long fostered strong emphasis on the interests of bank depositors, resulting in striking corporate architectural strategies aimed at reducing risk-taking to ensure firm sustainability - notably, imposing heightened fiduciary duties on directors and personal liability on shareholders. I then turn to the crisis, arguing that growing shareholder-centrism over recent decades goes a long way toward explaining excessive risk-taking in financial firms - a conclusion rendering post-crisis reforms aimed at further strengthening shareholders a surprising and alarming development. While populism has remained a powerful political force, it has expressed itself differently in this new environment, fueling a crisis narrative and corresponding corporate governance reforms that not only fail to acknowledge the role of equity market pressures toward excessive risk-taking in financial firms, but that effectively reinforce such pressures moving forward.

I conclude that potential corporate governance reforms most worthy of consideration include those aimed at accomplishing precisely the opposite, which may require resurrecting corporate architectural strategies embraced in the past to reduce risk-taking in financial firms. As a threshold matter, however, we must first grapple effectively with a more fundamental and pressing social and political problem - the popular misconception that financial firms exist merely to maximize stock price for the short-term benefit of their shareholders.

March 10, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)