Securities Law Prof Blog

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

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Saturday, April 13, 2013

FINRA Board Scheduled to Consider Changes to Customer Arbitration Rules

At its April 18 meeting the FINRA board of governors will consider a proposed rule change to the Customer Code of Arbitration, to make it easier for customers to select a panel consisting of all public arbitrators (in claims over $100,000).  Currently, the default option is a panel consisting of two public and one industry arbitrator, and a customer must make an election to select an all-public panel option.  The proposed rule change, as described on the FINRA website:

The Board will consider proposed amendments to FINRA Rule 12403 (Cases with Three Arbitrators) to simplify the arbitration panel selection rules. Rather than requiring the customer to elect a panel-selection method, parties in all customer cases with three arbitrators would get the same selection method. All parties would see lists of 10 chair-qualified public arbitrators, 10 public arbitrators and 10 non-public arbitrators. The proposed rules permit four strikes on each of the public arbitrator lists. However, any party could select an all-public arbitration panel by striking all of the arbitrators on the non-public list.

When FINRA first proposed giving customers the option of selecting an all-public panel, I applauded the concept, but worried that pro se claimants might lose the option inadvertently by failing to make the election within the prescribed time period.  I suggested that the default should be an all-public option and that customers could elect to include one industry arbitrator.  FINRA was not receptive to my suggestion.

Since adoption of the all-public option, FINRA has stated that customers are electing for an all-public panel more frequently than it had anticipated, so this proposal may be in response to that.  In any event, it is a welcome development, and I hope that the Board of Governors will view the proposal favorably.

The board of governors will also consider amendments to the Discovery Guide relating to e-discovery, described as follows:

The Board will consider proposed amendments to the Discovery Guide used in customer arbitration proceedings to provide general guidance on e-discovery issues and product cases. The guidance, which would appear in the introduction to the Discovery Guide, would emphasize flexibility in the discovery process. FINRA is not proposing to amend the Document Production Lists, which specify documents that are presumptively discoverable in customer cases. The proposed amendments would also clarify existing provisions in the introduction relating to affirmations.

 

April 13, 2013 in Other Regulatory Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Thursday, April 11, 2013

FINRA Charges Online Broker with Fraud in Sales of Promissory Notes to Athletes

FINRA filed a Temporary Cease-and-Desist Order (TCDO) to halt further fraudulent activities by Washington, D.C.-based Success Trade Securities, Inc. and its CEO & President, Fuad Ahmed, as well as the misuse of investors' funds and assets. FINRA also issued a complaint against Success Trade Securities and Ahmed charging fraud in the sales of promissory notes issued by the firm's parent company, Success Trade, Inc., in which Ahmed holds a majority ownership interest. FINRA filed the TCDO, to which Ahmed and the company agreed, thus immediately freezing their activities, based on the belief that ongoing customer harm and depletion of investor assets are likely to continue before a formal disciplinary proceeding against Success Trade Securities and Ahmed will be completed.

 Success Trade Securities is an online broker-dealer that operates through Just2Trade and LowTrades.

In its complaint, FINRA alleges that Success Trade Securities, Ahmed and other registered representatives at the firm sold more than $18 million in Success Trade promissory notes to 58 investors, many of whom are current or former NFL and NBA players, while misrepresenting or omitting material facts. Specifically, FINRA's complaint alleges that Ahmed and Success Trade Securities misrepresented that they were raising $5 million through the sale of promissory notes and continued to make this representation, even as the sales exceeded the original offering by more than 300 percent. Most of the notes promised to pay an annual interest rate of 12.5 percent on a monthly basis over three years, with some notes promising to pay interest as high as 26 percent.

 

 

April 11, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Ex-KPMG Partner Charged with Insider Trading in Criminal and Civil Charges

No doubt readers of this Blog have been following with interest the developments about the ex-partner of accounting firm KPMG (now identified as Scott London), who has admitted to passing along confidential information about audit clients to a friend (now identified as Bryan Shaw).  London has now been charged criminally with conspiracy to commit securities fraud through insider trading in Los Angeles, and the SEC has brought civil charges.  The complaint says London tipped off Shaw about five KPMG clients (previously only Herbalite and Skechers were identified) in exchange for bags of cash, concert tickets and a Rolex watch.  London allegedly made about $1 million profit in trades.  The illegal activity began in October 2010 and continued for 18 months.

The SEC's civil complaint states that London was the audit partner for Deckers Outdoor Corp.  In addition, London obtained inside information about two impending mergers involving two former KPMG clients -- RSC Holdings and Pacific Capital Bancorp --that he allegedly tipped to Shaw.

WSJ, Former KPMG Partner Is Charged

SEC, SEC Charges Former KPMG Partner and Friend with Insider Trading

April 11, 2013 in News Stories, SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 10, 2013

Second Circuit Affirms Dismissal of Negligence Suit Against SEC Because of Madoff

The Second Circuit today affirmed a district court's dismissal of investors' claims against the SEC for failing to adequately investigate Bernard Madoff despite numerous warnings.  The appeals court affirmed because the Discretionary Function Exception (DFE) of the Federal Tort Claims Act shields the SEC's conduct from plaintiffs' claims.  Molchatsky v. US (11-2510-cv(L), decided Apr. 10, 2013Download Molchatsky v US)

The court noted that:

The DFE is not about fairness, it “is about power”... .; the sovereign “reserve[s] to itself the right to act without liability for misjudgment and carelessness in the formulation of policy,” ... “[T]he  DFE bars suit only if two conditions are met: (1) the acts alleged to be negligent must be discretionary, in that they involve an ‘element of judgment or choice’ and are not compelled by statute or regulation and (2) the judgment or choice in question must be grounded in ‘considerations of public policy’ or susceptible to policy analysis.”.... Plaintiffs bear the initial burden to state a claim that is not barred by the DFE....
Here, Plaintiffs have failed to make the necessary showing.

 

April 10, 2013 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

SEC Submits Budget Request for FY 2014

The SEC has submitted its budget request for fiscal year 2014, requesting $1.674 billion.  The agency seeks to hire an additional 676 positions.  The request also identifies the SEC's priorities.  (Download Secfy14congbudgjust[1])

April 10, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Adopts Identity Theft Rules

The SEC adopted rules requiring broker-dealers, mutual funds, investment advisers, and certain other entities regulated by the agency to adopt programs to detect red flags and prevent identity theft.  The agency adopted the rules jointly with the CFTC.

The final rules require certain entities regulated by the SEC such as broker-dealers, mutual funds, and investment advisers to adopt an identity theft program.  The program should include policies and procedures designed to:

  • Identify relevant types of identity theft red flags.
  • Detect the occurrence of those red flags.
  • Respond appropriately to the detected red flags. 
  • Periodically update the identity theft program.

The final rules will become effective 30 days after publication in the Federal Register, and the compliance date will be six months after the effective date.

April 10, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 9, 2013

SEC Takes Up Identity Theft Rules April 10

The SEC takes up Identity Theft Red Flags Rules at its April 10, 2013 Open Meeting.  It will  consider whether to adopt new rules and guidelines, jointly with the Commodity Futures Trading Commission, to require certain entities that are subject to the Commissions' respective enforcement authorities to establish programs to address risks of identity theft.

April 9, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Announces Speakers for Roundtable on Fixed Income Markets

The SEC announced the speakers for its April 16 roundtable on Fixed Income Markets, which will focus on ways to improve the transparency and efficiency of the fixed income markets.  They include:

Panel 1: Current Market Structure for Municipal Securities
Robert F. Auwaerter, Principal and Head of the Fixed Income Group at The Vanguard Group Inc.
John Bonow, CEO at The PFM Group
Larry Bowden, Executive Vice President and Director of Fixed Income Sales and Trading at Stephens Inc.
Ric Edelman, Chairman and CEO at Edelman Financial Services
Joseph A. Hemphill III, CEO at Regional Brokers Inc.
Burton Hollifield, Professor of Financial Economics at Carnegie Mellon University
Craig A. Noble, Managing Director and Head of Retail Fixed Income at Wells Fargo Advisors
Benjamin S. Thompson, CEO and Managing Principal at Samson Capital Advisors LLC
Thomas S. Vales, Chairman and CEO at TMC Bonds LLC  
 
Panel 2: Current Market Structure for Corporate Bonds and Asset-Backed Securities
Steven C. Genyk, Managing Director and Head of Fixed Income Capital Markets at Janney Montgomery Scott LLC
Michael A. Goldstein, Professor of Finance, Donald P. Babson Chair in Applied Investments, and Chair of the Finance Department at Babson College
Nancy Mueller Handal, Managing Director and Head of Structured Finance at MetLife
Colin Heffron, CEO at GFI Group Inc.
Jonathan Horne, Executive Vice President and Portfolio Manager at Pacific Investment Management Company
Richard M. McVey, Chairman and CEO at MarketAxess
Kevin Molloy, Managing Director of Fixed Income at NYSE Bonds
Eric J. Pitt, Managing Director at J.P. Morgan Securities
Neil M. Schloss, Treasurer and Vice President at Ford Motor Company
Robert G. Smith, President, Chief Investment Officer and Principal at Sage Advisory Services Ltd. Inc.  
 
Panel 3: Potential Improvements to the Market Structure for Municipal Securities
Robert F. Auwaerter, Principal and Head of the Fixed Income Group at The Vanguard Group Inc.
Burton Hollifield, Professor of Financial Economics at Carnegie Mellon University
Lynnette Kelly, Executive Director at the Municipal Securities Rulemaking Board
Jason Lehman, Co-CEO and Managing Member at Headlands Technologies LLC
Marshall Nicholson, President at Knight BondPoint
Craig A. Noble, Managing Director and Head of Retail Fixed Income at Wells Fargo Advisors
Paige W. Pierce, President and CEO at RW Smith
Benjamin S. Thompson, CEO and Managing Principal at Samson Capital Advisors LLC
J. Ben Watkins, Director of Bond Finance, State of Florida, and Chairman of the Government Finance Officers Association Debt Committee
Brad Winges, Managing Director and Head of Fixed Income, Sales, Trading and Underwriting at Piper Jaffray Investment Management
 
Panel 4: Potential Improvements to the Market Structure for Corporate Bonds and Asset-Backed Securities
Steven C. Genyk, Managing Director and Head of Fixed Income Capital Markets at Janney Montgomery Scott LLC
Nancy Mueller Handal, Managing Director and Head of Structured Finance at MetLife
Colin Heffron, CEO at GFI Group Inc.
Richard G. Ketchum, Chairman and CEO at FINRA
Richard M. McVey, Chairman and CEO at MarketAxess
Kevin Molloy, Managing Director of Fixed Income at NYSE Bonds
Neil M. Schloss, Treasurer and Vice President at Ford Motor Company
Dexter Senft, Managing Director at Morgan Stanley
Robert G. Smith, President, Chief Investment Officer and Principal at Sage Advisory Services Ltd. Inc.
Kumar Venkataraman, Chairman of the Finance Department and Fabacher Endowed Professor of Alternative Asset Management at Southern Methodist University Cox School of Business
Christopher J. Vogel, Managing Director and Global Head of Fixed Income and Currency Trading at Blackrock Inc. 
 

April 9, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, April 8, 2013

SEC Charges Former Medical Device Company Employee with Tipping Brother in Expert Networks Case

The SEC charged ThanhHa Bao, who worked in the finance department at Abaxis Inc., a medical device manufacturer, with illegally tipping confidential financial data to her brother, Tai Nguyen, who illegally traded in the company's stock and enabled his hedge fund clients to do the same.  The SEC alleges that  Nguyen's trading in advance of the company's quarterly earnings announcements generated $144,910 in illicit profits. Nguyen, who was charged by the SEC last year, also passed confidential information to clients of his equity research firm Insight Research, including hedge fund managers.  In a parallel criminal proceeding, Nguyen pleaded guilty and has been sentenced to a year and a day in prison. He also agreed to a criminal forfeiture of $400,000.

To settle the SEC's charges, Bao has agreed to pay $144,910 and be barred from serving as an officer or director of a public company for five years.

The SEC's charges stem from its ongoing investigations into expert networks that have uncovered widespread insider trading at several hedge funds and other investment advisory firms.

April 8, 2013 in SEC Action | Permalink | Comments (1) | TrackBack (0)

White Confirmed as SEC Chairman

The Senate confirmed Mary Jo White as SEC Chairman today, without any debate.

April 8, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, April 7, 2013

Krug on Entity-Centrism in Financial Services Regulation

Escaping Entity-Centrism in Financial Services Regulation, by Anita K. Krug, University of Washington School of Law, was recently posted on SSRN.  Here is the abstract:

In the ongoing discussions about financial services regulation and its proper goals, implementation, and enforcement — encompassing considerations on how best to protect clients and customers and under what circumstances markets function most effectively — one critically important topic has not been recognized, let alone addressed. That topic is what this Article calls the “entity-centrism” of financial services regulation. Laws and rules are entity-centric when they assume that financial services firms are stand-alone entities, operating separately from and independently of any other entity. They are entity-centric, therefore, when the specific requirements and obligations they comprise are addressed only to an abstract and solitary “firm,” with little or no contemplation of affiliates, parent companies, subsidiaries, or multi-entity enterprises. Moreover, regulatory entity-centrism is not an isolated phenomenon, as it permeates the laws and rules that govern a firm’s becoming regulated, the substantive requirements to which the firm must adhere, and the firm’s ultimate insolvency or liquidation. In addition, entity-centrism does not discriminate among financial services activities: it can be discerned in laws and rules covering investment advisers, broker-dealers, futures commission merchants, mutual funds and other registered investment companies, and beyond. In other words, entity-centrism in financial services regulation is pervasive. It is also deeply problematic.

This Article is the first scholarly work to call attention to entity-centrism as manifested in financial services regulation, to show why entity-centrism counters regulatory objectives, and to assess possible explanations for it. The Article does so primarily through evaluating two recent regulatory failures, namely, the bankruptcy of MF Global, a large futures brokerage firm that became insolvent in late 2011, and the Ponzi scheme orchestrated by the Stanford Financial Group, which came to light in 2009. These case studies reveal how entity-focused laws and rules privilege entity boundaries over the various ways in which multiple entities (or entities and individuals) work together as a common enterprise. In particular, they show how entity-centrism, by insisting that the subject and/or beneficiary of regulatory obligations is cohesive and complete in-and-of itself, ignores how the interests that regulation exists to further may be situated outside the entity, leaving those interests unprotected. The case studies also demonstrate that entity-centrism ignores how actors outside the entity may use the entity to manipulate or escape regulatory obligations, again leaving the relevant interests without the protections that regulation contemplates. Accordingly, this Article contends that financial services regulation should look past entity boundaries and that lawmakers and regulators should think more broadly, critically, and creatively to address the persistent and significant regulatory difficulties that entity-centrism has spawned.

April 7, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Cunningham & Greenberg on AIG

The AIG Story (Chapter 18, Nationalization), by Lawrence A. Cunningham, George Washington University Law School, and Maurice R. Greenberg, Starr International Company, Inc, was recently posted on SSRN.  Here is the abstract:

This is the final chapter of The AIG Story, a book about the growth of a large international insurance company that pioneered the opening of new markets and helped forge milestone international trade agreements, followed by an account of its near-destruction, first at the hands of an overzealous state attorney general and underwhelming board of directors, and then, as detailed in this chapter, at the hands of federal government officials overwhelmed by a financial crisis they could not understand. This chapter begins in mid-2008, when AIG’s losing financial products bets presented the company with a huge liquidity problem, though it commanded nearly a trillion dollars in assets that made it entirely solvent. The world’s largest banks faced both liquidity and solvency problems that threatened a global financial meltdown. Swooping into the maelstrom, the U.S. Treasury and New York Fed engineered a solution that portrayed AIG as the greatest villain of the crisis and its treatment by the government as a rescue of the company. The truth is more complex and this chapter of the book explains, in what Kirkus has aptly described, reviewing the book, as “a useful contribution to the ongoing shaping of the story of the recent financial crisis.”

April 7, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Badawi on Merger Class Actions and Multi-Jurisdictional Litigation

Merger Class Actions in Delaware and the Symptoms of Multi-Jurisdictional Litigation, by Adam B. Badawi, Washington University in Saint Louis - School of Law, was recently posted on SSRN.  Here is the abstract:

Recent research on corporate litigation has focused on three trends: the growth in percentage of mergers that result in litigation, the migration of cases away from Delaware, and the increasing prevalence of merger litigation occurring simultaneously in multiple jurisdictions. This Symposium Article uses a new and unique dataset of public company litigation to track how these trends have affected filings and litigation tactics in the Delaware Court of Chancery from 2004 to 2011. The data confirm that Delaware appears to have experienced a decline in filings during the early and middle periods of the sample, but the data also shows that there has been a sharp increase in the number of the number of acqusition-related cases filed in Delaware in 2010 and 2011.

The rise of concurrent, multi-jurisdictional litigation and the litigation tactics that it encourages are the likely reasons for the growth of acquisition-related cases in Delaware. While some plaintiffs’ attorneys may have left Delaware to escape the Chancery’s threats of lower attorneys’ fees and merit-based selection of lead counsel, in the current environment a Delaware filing may provide strategic advantages as foreign jurisdictions become saturated with filings. For example, lawyers may try to take control of a case by moving for expedited proceedings in Delaware or they may try to complicate negotiations over the selection of lead plaintiffs’ counsel. The threat of using these tactics may increase the possibility that a plaintiff will receive some share of a fee award either in Delaware or in a case being litigated elsewhere.

This article explores how the rules Delaware uses to manage deal cases may enable strategic behavior in the context of multi-jurisdictional litigation. This discussion provides reasons to believe that the use of tactics such as requesting expedited proceedings, contesting consolidation of cases, and involving out-of-state counsel earlier in proceedings should increase as multi-jurisdictional litigation increases. The empirical evidence provides substantial support for these theories. The article concludes with an assessment of how the observed increase in strategic tactics may affect debates over how and whether to respond to the rise of multi-jurisdictional litigation.

April 7, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Schwarcz on Transactional Lawyers and Shadow Banking

Lawyers in the Shadows: The Transactional Lawyer in a World of Shadow Banking, by Steven L. Schwarcz, Duke University - School of Law, was recently posted on SSRN.  Here is the abstract:

This article, which is based on the author’s keynote address at an April 5, 2013 conference at American University Washington College of Law on “Transactional Lawyering: Theory, Practice, & Pedagogy,” examines the role of transactional lawyers in a world of shadow banking. By reducing the dominance of banks as financial intermediaries, shadow banking has transformed the financial system, causing transactional lawyers to face an array of novel issues. This article focuses on one of those issues: to what extent should transactional lawyers address the potential systemic consequences of their client’s actions? First, the article shows that the legal system itself inadvertently enables or requires firms operating as shadow banks to engage in uniquely risky behavior, without protecting against the resulting systemically risky externalities. That finding, in turn, broadens the legal ethics inquiry to two issues: what duty should transactional lawyers have to try to improve the legal system to protect against those externalities, and what duty should transactional lawyers have to try to prevent those externalities, assuming the legal system is not improved.

April 7, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

SEC Approves FINRA's Tightening of "Public Arbitrator" Definition

The SEC approved a FINRA proposed rule change to amend the definition of "public arbitrator" in its Customer and Industry Codes of Arbitration.  Specifically, the proposed rule change would (a) exclude persons associated with a mutual fund or hedge fund from serving as public arbitrators and (b) require individuals to wait for two years after ending certain affiliations before they may be permitted to serve as public arbitrators.   This amendment is another tightening of the definition of "public arbitrator" to exclude individuals with close ties to the securities industry.  SEC, Release No. 34-69297; File No. SR-FINRA-2013-003, Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change to Amend the Customer and Industry Codes of Arbitration Procedure to
Revise the Public Arbitrator Definition
(Apr. 4, 2013)

April 7, 2013 in Other Regulatory Action, SEC Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)