Securities Law Prof Blog

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

Saturday, May 11, 2013

Klausner et alia on D&O Insurance in Securities Class Actions

How Protective is D&O Insurance in Securities Class Actions? — An Update, by Michael Klausner, Stanford Law School; Jason Hegland, Stanford Law School; and Matthew Goforth, Stanford Law School, was recently posted on SSRN.  Here is the abstract:

Nearly all securities class actions that are not dismissed settle. Very few are tried to judgment. Who pays into settlements — the corporation, its directors and officers, or its D&O carrier? Companies buy D&O insurance in order to protect themselves and their directors and officers from liability. But D&O policies have exclusions, limits, retentions, and other terms that might result in the carrier paying less than the full amount of a settlement. So, as an empirical matter, who pays when a company settles? We provide some basic statistics on that question, which reveal that in fact D&O insurance is quite protective. Focusing on individual officers’ contributions to settlements, we find that these are quite rare, even in cases in which the SEC has imposed a serious penalty on the same individuals for the same misconduct.

May 11, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Branson on Proposals for Corporate Governance Reform

Proposals for Corporate Governance Reform: Six Decades of Ineptitude and Counting, by Douglas M. Branson, University of Pittsburgh School of Law, was recently posted on SSRN.  Here is the abstract:

This article is a retrospective of corporate governance reforms various academics have authored over the last 60 years or so, by the author of the first U.S. legal treatise on the subject of corporate governance (Douglas M. Branson, Corporate Governance (1993)). The first finding is as to periodicity: even casual inspection reveals that the reformer group which controls the "reform" agenda has authored a new and different reform proposal every five years, with clock-like regularity. The second finding flows from the first, namely, that not one of these proposals has made so much as a dent in the problems that are perceived to exist. The third inquiry is to ask why this is so? Possible answers include the top down nature of scholarship and reform proposals in corporate governance; the closed nature of the group controlling the agenda, confined as it is to 8-10 academics at elite institutions; the lack of any attempt rethink or redefine the challenges which governance may or may not face; and the continued adhesion to the problem as the separation of ownership from control as Adolph Berle and Gardiner Means perceived it more than 80 years ago.

May 11, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Friday, May 10, 2013

Nominations Open for Tamar Frankel Fiduciary Prize

The Institute For The Fiduciary Standard, a non-profit organization based in Washington, D.C., has created a prize—to be known as the Tamar Frankel Fiduciary Prize—which will be awarded annually to a person who has made a “significant contribution to the preservation and advancement of fiduciary principles in public life.”  The award is named after Professor Tamar Frankel, an expert on fiduciary duties and investment management and a longtime Professor at Boston University Law School.

The chairman of the Nominating Committee is Professor John C. Coffee, Jr. of Columbia University Law School.  Nominations are invited from the public, but the deadline is May 23rd.  Additional information is available at the CLS Blue Sky Blog.

May 10, 2013 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

SEC Considers a NAV for Institutional Prime Funds

There has been much anticipation about what, if anything, Chairman White will do about money market funds, a notable failure of the previous Chairman Schapiro.  Several in the media are reporting that the  Commissioners are considering a staff proposal that would require institutional prime funds, the riskiest money market mutual funds, to adopt a floating share price, but not other money market funds.  Inv News, SEC floats small step in money market fund reform

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

Council of Institutional Investors Urges SEC to Curb Abuses of 10b5-1 Trading Plans

The Council of Institutional Investors has written its second letter to the SEC calling for re-examination of Rule 10b5-1 trading plans, which allow corporate insiders to trade in their company's stock pursuant to advance plans, and issuance of guidance or further rulemaking to prevent abuses.  CII notes that "Since the issuance of our letter, evidence continues to mount that many companies and company insiders have adopted practices that are inconsistent with the spirit, if not the letter of Rule 10b5-1" and cites articles in the Wall St. Journal.

The WSJ also featured the CII's letter in today's issue:  SEC Is Pressed to Revamp Executive Trading Plans

May 10, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, May 9, 2013

NASAA Files Amicus Brief in Schwab Class Action Waiver Appeal

Several amicus briefs have been filed in the appeal of FINRA's disciplinary proceeding against Charles Schwab for including in its customer agreement a class action waiver, contrary to FINRA rules.  A FINRA hearing panel ruled that the FINRA rules were unenforceable because they were preempted by the Federal Arbitration Act; the case is now on appeal before FINRA's NAC.  While the docket in the appeal is confidential, NASAA posted its amicus brief on its website.  Professor Jill Gross and I also filed an amicus brief (Download Amicus Brief Final) that is a distillation of our recent law review article, Investor Protection Meets the Federal Arbitration Act, 1 Stanford J. Complex Litigation 1 and also available at

May 9, 2013 in Other Regulatory Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

SEC & FINRA Issue Alert on Pension or Settlement Income Streams

The SEC and FINRA issued an investor alert, Pension or Settlement Income Streams – What You Need to Know Before Buying or Selling Them.  The investor alert informs investors about the risks involved when selling their rights to an income stream or investing in someone else’s income stream.  The alert urges investors considering an investment in pension or settlement income streams to proceed with caution.

The alert explains that

Anyone receiving a monthly pension or regular distributions from a settlement following a personal injury lawsuit may be targeted by salespeople offering an immediate lump sum in exchange for the rights to some or all of the payments the person would otherwise receive in future.  Typically, recipients of a pension or structured settlement will sign over the rights to some or all of their monthly payments to a factoring company in return for a lump-sum amount, which will almost always be significantly lower than the present value of that future income stream.

The investor alert contains a checklist of questions to consider before selling away an income stream.

May 9, 2013 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

Falcone Agrees to Two-Year Bar as Associated Person of Investment Adviser

Philip A. Falcone, the CEO of Harbinger Group and Harbinger Capital, and the SEC's Enforcement Division have reached an agreement in principle to settle two SEC enforcement actions, according to a 10-Q filed by Harbinger Group.  Under the terms of the settlement, Falcone will be barred for a period of two years from acting as an associated person of any broker, dealer, or investment adviser.  After two years, Falcone may seek the SEC's consent to have the ban lifted. The settlement does not prevent Falcone from owning or controlling Harbinger Group or from serving as an officer or director of the company.  Harbinger agreed to pay $18 million and to be overseen by a monitor to ensure compliance with the agreement.  Neither Falcone nor Harbinger admitted or denied the allegations of fraud.

The SEC charged that Falcone put his own interests, including maintaining a "lavish lifestyle," above those of his investors.

WSJ, Falcone Reaches Deal With SEC

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

Wednesday, May 8, 2013

FINRA Fines 3 Firms for Failing to Establish AML Programs

FINRA announced that it has fined three firms a total of $900,000 for failing to establish and implement adequate anti-money laundering (AML) programs and other supervisory systems to detect suspicious transactions. FINRA also fined and suspended four executives involved.

FINRA imposed the following sanctions:

  • Atlas One Financial Group, LLC – Miami, Florida – fined $350,000; Napoleon Arturo Aponte, former Chief Compliance Officer and AML Compliance Officer, fined $25,000 joint and severally with the firm, and suspended for three months in a principal capacity
  • Firstrade Securities, Inc. – Flushing, New York – fined $300,000
  • World Trade Financial Corporation (WTF) – San Diego, CA – fined $250,000; President and Owner Rodney Michel fined $35,000 and suspended in all capacities except as a financial operations principal for four months; Chief Compliance Officer Frank Brickell fined $40,000 and suspended from association in all capacities for nine months; trade desk supervisor and minority owner Jason Adams fined $5,000 and suspended for three months in a principal capacity


May 8, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 7, 2013

SEC Charges Traders with Paying Kickbacks to Venezuelan Official

The SEC charged four individuals with ties to Direct Access Partners (DAP), a New York City brokerage firm, in a scheme involving millions of dollars in illicit bribes paid to a high-ranking Venezuelan finance official to secure the bond trading business of a state-owned Venezuelan bank.  According to the SEC's complaint, the global markets group at DAP executed fixed income trades for customers in foreign sovereign debt. DAP Global generated more than $66 million in revenue for DAP from transaction fees on riskless principal trade executions in Venezuelan sovereign or state-sponsored bonds for Banco de Desarrollo Económico y Social de Venezuela (BANDES). A portion of this revenue was illicitly paid to BANDES Vice President of Finance, María de los Ángeles González de Hernandez, who authorized the fraudulent trades.

The SEC's complaint charges the following individuals for the roles in the kickback scheme:

•Tomas Alberto Clarke Bethancourt, who lives in Miami and is an executive vice president at DAP. Known as "Tomas Clarke," he was responsible for executing the fraudulent trades and maintaining spreadsheets tracking the illicit markups and markdowns on those trades.
•Iuri Rodolfo Bethancourt, who lives in Panama and received more than $20 million in fraudulent proceeds from DAP via his Panamanian shell company, which then paid Gonzalez a portion of this amount.
•Jose Alejandro Hurtado, who lives in Miami and served as the intermediary between DAP and Gonzalez. Hurtado was paid more than $6 million in kickbacks disguised as salary payments from DAP, and he remitted some of that money to Gonzalez.
•Haydee Leticia Pabon, who is Hurtado's wife and received approximately $8 million in markups or markdowns on BANDES trades that were funneled to her from DAP in the form of sham finders' fees.

In a parallel action, the U.S. Attorney's Office for the Southern District of New York announced criminal charges against Gonzalez as well as Clarke and Hurtado.


May 7, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, May 6, 2013

Treasury Announces Plan to Sell Remaining GM Shares

The U.S. Department of the Treasury announced the next step in its plan to sell its approximately 241.7 million remaining shares of General Motors (GM) common stock with the initiation of a second pre-defined written trading plan.  Treasury’s sale of its GM common stock is part of its continuing efforts to wind down the Troubled Asset Relief Program (TARP). 
In December 2012, GM repurchased 200 million shares of GM common stock from Treasury.  At that time, Treasury also announced that it intended to sell its remaining 300 million shares into the market in an orderly fashion and fully exit its GM investment within the next 12-15 months, subject to market conditions.

May 6, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)

NASAA Writes SEC About Class Action Waivers

The North American Securities Administrators Association (NASAA) has addressed a letter to SEC Chair White to comment on Charles Schwab's class action waiver that it now includes in its brokerage agreements.  Although the class action waiver violates FINRA Rules, a FINRA hearing panel recently concluded that FINRA could not enforce its rules against Schwab because they were "anti-arbitration" in violation of the Federal Arbitration Act.  The Hearing Panel's decision is currently on appeal before FINRA's internal appellate body.  NASAA reiterates its long standing opposition to mandatory arbitration of customers' disputes and reminds the SEC that "Section 921 [of Dodd-Frank] provides the SEC the authority, by rule, to prohibit or impose limitations on the use of mandatory arbitration clauses in broker-dealer and investment adviser customer contracts."

NASAA concludes by "commend[ing] the SEC for taking several steps over the years to improve the arbitration forum and process, and encourage[ing] the SEC to take further action to ensure that investors who are forced into arbitration receive the fairest forum possible."

May 6, 2013 in Other Regulatory Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

SEC & Harrisburg Settle Fraud Chages: SEC Addresses Disclosure Obligations of Public Officials

For the first time, the SEC has charged a municipality for misleading statements made outside of its securities disclosure documents. The SEC charged the City of Harrisburg, Pa., with securities fraud for its misleading public statements when its financial condition was deteriorating and financial information available to municipal bond investors was either incomplete or outdated.  An SEC investigation found that the misleading statements were made in the city’s budget report, annual and mid-year financial statements, and a State of the City address. Harrisburg has agreed to settle the charges.

The SEC separately issued a report addressing the disclosure obligations of public officials and their potential liability under the federal securities laws for public statements made in the secondary market for municipal securities.

The SEC found that Harrisburg failed to comply with requirements to provide certain ongoing financial information and audited financial statements for the benefit of investors holding hundreds of millions of dollars in bonds issued or guaranteed by the city. As a result of Harrisburg’s non-compliance from 2009 to 2011, investors had to seek out Harrisburg’s other public statements in order to obtain current information about the city’s finances. However, very little information about the city’s fiscal situation was publicly available elsewhere. Information that was accessible on the city’s website such as its 2009 budget, 2009 State of the City address, and 2009 mid-year fiscal report either misstated or failed to disclose critical information about Harrisburg’s financial condition and credit ratings.

According to the SEC’s order instituting settled administrative proceedings, Harrisburg is a near-bankrupt city under state receivership largely due to approximately $260 million in debt the city had guaranteed for upgrades and repairs to a municipal resource recovery facility owned by The Harrisburg Authority. As of March 15, 2013, Harrisburg has missed approximately $13.9 million in general obligation debt service payments.

According to the SEC’s order, Harrisburg had not submitted annual financial information or audited financial statements since submitting its 2007 Comprehensive Annual Financial Report (CAFR) to a Nationally Recognized Municipal Securities Information Repository (NRMSIR) in January 2009. Beginning in July 2009, Harrisburg was obligated to submit financial information and notices such as principal and interest payment delinquencies and changes in bond ratings to a central repository known as the Electronic Municipal Market Access (EMMA) system maintained by the Municipal Securities Rulemaking Board (MSRB). Harrisburg did not submit its 2008 CAFR to EMMA, instead erroneously submitting it to a former NRMSIR on March 2, 2010. Harrisburg did not submit its 2009 CAFR to EMMA until Aug. 6, 2012, and did not submit its 2010 CAFR to EMMA until Dec. 20, 2012. The city did not submit material event notices about its failure to submit annual financial information or its credit rating downgrades until March 29, 2011, after the SEC had commenced its investigation.

The SEC’s order requires Harrisburg to cease and desist from committing or causing violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The city neither admits nor denies the findings in the order. In the settlement, the SEC considered Harrisburg’s cooperation in the investigation and the various remedial measures implemented by the city to prevent further securities laws violations.


May 6, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sunday, May 5, 2013

Langevoort on Contemporary Law of Insider Trading

'Fine Distinctions' in the Contemporary Law of Insider Trading, by Donald C. Langevoort, Georgetown University Law Center, was recently posted on SSRN.  Here is the abstract:

William Cary’s opinion for the SEC in In re Cady, Roberts & Co. built the foundation on which the modern law of insider trading rests. This paper — a contribution to Columbia Law School’s recent celebration of Cary’s Cady Roberts opinion, explores some of these — particularly the emergence of a doctrine of “reckless” insider trading. Historically, the crucial question is this: how or why did the insider trading prohibition survive the retrenchment that happened to so many other elements of Rule 10b-5? It argues that the Supreme Court embraced the continuing existence of the “abstain or disclose” rule, and tolerated constructive fraud notwithstanding its new-found commitment to federalism — which I call the (fictional) “Cary-Powell compromise” — because it accepted the central premise on which the expressive function of insider trading regulation is based: manifestations of greed and lack of self-restraint among the privileged, especially fiduciaries or those closely related to fiduciaries, threaten to undermine the official identity of the public markets as open and fair. But enough time may have passed that we may have lost sight of the compromise associated with this fiction and started acting as if insider trading really is the worst kind of deceit. The result is pressure on doctrine to expand, using anything plausible in the 10b-5 toolkit. The aim is to tie this concern more clearly to the uneasy deceptiveness of insider trading, first using somewhat familiar examples such as the debate over whether possession or use is required for liability and the supposed overreach of Rule 10b5-2. Each of these settings brings us back to the centrality of intent, reminding us that the Cary-Powell compromise has in mind a form of purposefulness that is closely tied to greed and opportunism, making insider trading a sui generis form of securities fraud. That takes us to the most jarring recent development in insider trading law, the emergence (particularly in SEC v. Obus) of recklessness as an alternative basis for liability.

May 5, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Bebchuk, et alia on Pre-Disclosure Acquisitions by Activist Investors

Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy, by Lucian A. Bebchuk, Harvard Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Alon P. Brav, Duke University - Fuqua School of Business; Robert J. Jackson Jr., Columbia Law School;and Wei Jiang, Columbia Business School - Finance and Economics, was recently posted on SSRN.  Here is the abstract:


A rulemaking petition recently submitted to the Securities and Exchange Commission by the senior partners of a prominent law firm urges the SEC to accelerate the timing of the disclosure of accumulations of large blocks of stock in public companies. Relying upon a few recent anecdotes, the petition argues that existing rules have been rendered obsolete by changes in trading technology that enable activist investors to accumulate increasingly large blocks of stock before disclosing.

In this Article, we provide the first systematic evidence on all disclosures by activist investors and the first empirical analysis of this subject. We find that key factual premises underlying the petition, including the assumption that pre-disclosure accumulations have increased considerably over time, are not supported by the evidence. Moreover, we show that accelerating the timing of disclosure could have adverse effects on public-company investors and identify important but overlooked consequences of the considered reform of disclosure rules. Our analysis provides empirical evidence that should inform the SEC’s consideration of this issue — and a foundation on which subsequent empirical and policy analysis can build.

May 5, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Padfield on Concession Theory

Rehabilitating Concession Theory, by Stefan J. Padfield, University of Akron School of Law, was recently posted on SSRN.  Here is the abstract:

In Citizens United v. FEC, a 5-4 majority of the Supreme Court ruled that, “the Government cannot restrict political speech based on the speaker's corporate identity.” The decision remains controversial, with many arguing that the Court effectively overturned over 100 years of precedent. I have previously argued that this decision turned on competing conceptions of the corporation, with the majority adopting a contractarian view while the dissent advanced a state concession view. However, the majority was silent on the issue of corporate theory, and the dissent went so far as to expressly disavow any role for corporate theory at all. At least as far as the dissent is concerned, this avoidance of corporate theory may have been motivated at least in part by the fact that concession theory has been marginalized to the point where anyone advancing it as a serious theory risks mockery at the hands of some of the most esteemed experts in corporate law. For example, one highly-regarded commentator criticized the dissent by saying: “It has been over half-a-century since corporate legal theory, of any political or economic stripe, took the concession theory seriously.” In this Essay I consider whether this marginalization of concession theory is justified. I conclude that the reports of concession theory’s demise have been greatly exaggerated, and that there remains a serious role for the theory in discussions concerning the place of corporations in society. This is important because without a vibrant concession theory we are primarily left with aggregate theory and real entity theory, two theories of the corporation that both defer to private ordering over government regulation.

May 5, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)