Securities Law Prof Blog

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

Friday, May 24, 2013

SEC Charges Dallas Trader with Front-Running

The SEC announced fraud charges and an asset freeze against Daniel Bergin, a senior equity trader at Cushing MLP Asset Management, a Dallas-based investment advisory firm, who allegedly profited by placing his own trades before executing large block trades for firm clients that had strong potential to increase the stock's price.

According to the SEC, Bergin secretly executed hundreds of trades through his wife's accounts in a practice known as front running. Bergin illicitly profited by at least $520,000 by routinely purchasing securities in his wife's accounts earlier the same day he placed much larger orders for the same securities on behalf of firm clients. Bergin concealed his lucrative trading by failing to disclose his wife's accounts to the firm and avoiding pre-clearance of his trades in those accounts. Bergin also attempted to hide his wife's accounts from SEC examiners.

According to the SEC's complaint, Bergin realized at least $1.7 million in profits in his wife's accounts from 2011 to 2012 as a result of his illegal same-day or front-running trades. More than $520,000 of the $1.7 million represents profits from approximately 132 occasions in which Bergin placed his initial trades in his wife's account ahead of clients' trades.

The SEC's complaint names Bergin's wife Jacqueline Zaun as a relief defendant for the purpose of recovering Bergin's illegal trading profits in her accounts.

May 24, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Obama Nominates Piwowar and Stein to SEC

The White House announced that it is nominating two individuals to seats on the SEC:

Michael Sean Piwowar, of Virginia, to be a Member of the Securities and Exchange Commission for a term expiring June 5, 2018, vice Troy A. Paredes, term expiring.  Mr. Piwowar is the chief Republican economist for the Senate Banking Committee.

Kara Marlene Stein, of Maryland, to be a Member of the Securities and Exchange Commission for a term expiring June 5, 2017, vice Elisse Walter, term expired.  Ms. Stein is a legal counsel and senior policy adviser to Sen. Jack Reed (D-R.I.).


May 24, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, May 23, 2013

Former Goldman Banker Settles SEC "Pay-to-Play" Charges

Neil M.M. Morrison, a former VP in the investment banking division of Goldman, Sachs, settled SEC charges that he engaged in a "pay-to-play" scheme.  The SEC alleged that starting in July 2008 Morrison was employed by Goldman to solicit municipal underwriting business from the Massachusetts Treasurer's Office, among others.  During the period from November 2008 to October 2010, Morrison was also substantially engaged in the political campaigns of Timothy Cahill, then-Treasurer of Massachusetts, and worked on the campaign during Goldman Sach work hours and using Goldman Sachs resources.  The SEC found that Morrison's campaign activities constituted valuable undisclosed "in-kind" campaign contributions to Cahill attributable to Goldman Sachs.  At the same time he was working on the campaign, he actively solicited municipal securities business from the Treasurer's Office.

The SEC barred Morrison from the securities industry with the right to apply for reentry after five years and also imposed a $100,000 fine.  In re Neil M.M. Morrison, Sec. Exch. Act Rel. 69627 (May 23, 2013)

May 23, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

ISS Settles SEC Charges that Employee Sold Confidential Proxy Voting Results for Tickets

The SEC charged proxy adviser Institutional Shareholder Services (ISS) with failing to safeguard the confidential proxy voting information of clients participating in a number of significant proxy contests. ISS, which is registered with the SEC as an investment adviser, agreed to settle the charges by paying $300,000 and retaining an independent compliance consultant.

According to the SEC, an ISS employee provided a proxy solicitor with material, nonpublic information revealing how more than 100 ISS institutional shareholder advisory clients were voting their proxy ballots. In exchange for voting information, the proxy solicitor provided the ISS employee with meals, expensive tickets to concerts and sporting events, and an airline ticket. The breach was made possible in part because ISS lacked sufficient controls over employee access to confidential client vote information, as this employee gathered the data by logging into the ISS voting website from home or work and using his personal e-mail account to communicate details to the proxy solicitor. The employee no longer works at ISS.

According to the SEC's order instituting settled administrative proceedings, the breach occurred from approximately 2007 to 2012. ISS failed to establish or enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information by ISS employees. Specifically, ISS lacked sufficient controls over employee access to databases of confidential client vote information.

*    *    *

Today's Wall St. Journal has an article, by Joann S. Lublin and Kirsten Grind, on For Proxy Advisers, Influence Wanes, reporting that the influence of ISS and Glass Lewis is waning, as the management of companies are increasingly reaching out to institutional investors for support on key votes and money managers are increasingly relying on their own research.  For example, both ISS and Glass Lewis recommended voting for the shareholder proposal to split the CEO and Chairman positions at JP Morgan Chase, yet it received only 32% of the vote.  The SEC settlement certainly creates additional reputational problems for ISS.

May 23, 2013 in News Stories, SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 22, 2013

Five Broker-Dealers Settle with Massachusetts over Improper Sales of REITs

The Massachusetts Securities Division announced a settlement with five independent broker-dealers for improper sales of REITs that will return over $11 million to Massachusetts investors.  The firms are Ameriprise Financial Services, Commonwealth Financial Services, Lincoln Financial Advisors, Securities America, and Royal Alliance Associates.

May 22, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

South Miami Settles SEC Charges of Defrauding Bond Investors

The SEC charged the City of South Miami, Fla., with defrauding bond investors about the tax-exempt financing eligibility of a mixed-use retail and parking structure being built in its downtown commercial district.  According to its release:

An SEC investigation found that the city of 11,000 residents located in Miami-Dade County borrowed approximately $12 million in two pooled, conduit bond offerings through the Florida Municipal Loan Council (FMLC). South Miami's participation in those offerings enabled it to borrow funds at advantageous tax-exempt rates. The city represented that the project was eligible for tax-exempt financing in various documents for the second offering that were relied upon by bond counsel in rendering its tax opinion. However, South Miami failed to disclose that it had actually jeopardized the tax-exempt status of both bond offerings by impermissibly loaning proceeds from the first offering to a private developer and restructuring a lease agreement prior to the second offering.

South Miami agreed to settle the charges and retain an independent third-party consultant to oversee its policies, procedures, and internal controls for municipal bond disclosures.

May 22, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Will Provide Surveillance Oversight of More than 90% of U.S. Equities Trading Volume

FINRA issued an announcement that Direct Edge®, the third largest stock exchange operator in the U.S., and FINRA have agreed that FINRA will provide market surveillance services on behalf of Direct Edge's two licensed stock exchanges.  Under this agreement, FINRA will have surveillance oversight of more than 90% of U.S. equities trading volume. Direct Edge expects the new arrangement will become operative in the fourth quarter of 2013. Currently, FINRA performs examination and disciplinary services on behalf of Direct Edge. With this agreement, all of Direct Edge's third-party regulatory services will be consolidated with FINRA.

May 22, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 21, 2013

Lew Reiterates Need for Money Market Fund Reform in Senate Testimony

Treasury Secretary Lew testified today before the Senate Banking Committee on the Financial Stability Oversight Council (FSOC) Annual Report to Congress.  His written testimony identified seven areas of risks to U.S. financial stability:

·         First, market participants and regulatory agencies should take steps to reduce vulnerabilities in wholesale funding markets that can lead to destabilizing fire sales. 
·         Second, significant reform in the housing finance system is still needed.
·         Third, government agencies, regulators, and businesses should take action to address operational risks from internal control and technology failures, natural disasters, and cyber-attacks, which can cause major disruptions to the financial system.
·         Fourth, as recent developments with the London Interbank Offered Rate (LIBOR) have demonstrated, reforms are needed to address the reliance on voluntary, self-regulated, and self-reported reference interest rates.
·         Fifth, financial institutions and market participants should be cognizant of interest rate risk, particularly given the historically low interest rate environment of the past few years. 
·         Sixth, long-term fiscal imbalances that have potential economic and financial market impacts should be addressed.
·         Finally, regulators need to continue to keep a close eye on potential threats to U.S. financial stability from adverse developments in the global economy.

With respect to the first risk, Wholesale Funding Markets, the Secretary's written testimony focused on the need for additional reforms related to money market mutual funds:

The Council remains concerned that vulnerabilities in wholesale funding markets could lead to destabilizing fire sales.  Specifically, run-risk vulnerabilities related to money market mutual funds (MMFs), which became apparent during the financial crisis, still remain, despite an initial set of reforms implemented in 2010.  In November 2012, the Council issued proposed recommendations for public comment to implement structural reforms of MMFs to reduce the likelihood of runs.  Council members should also examine whether similar reforms are warranted for other cash management vehicles. 

 The Secretary's testimony noted that:

The Council is also authorized to issue recommendations to a regulatory agency when financial activities and practices are creating risk for U.S. financial markets.  In November 2012, the Council issued for public comment proposed recommendations to the SEC with three alternatives for reform to address the structural vulnerabilities of MMFs.  The Council is currently considering the public comments on the proposed recommendations.  If the SEC moves forward with meaningful structural reforms of MMFs before the Council completes its process, the Council expects that it would not issue a final recommendation to the SEC.  However, if the SEC does not pursue additional reforms that are necessary to address MMFs’ structural vulnerabilities, the Council should use its authorities to take action in this area.

May 21, 2013 in News Stories, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC's Walter: No Review of Mandatory Arbitration Before 2014

SEC Commissioner Elisse Walter personally thinks that the SEC should take a hard look at mandatory arbitration of investors disputes with their broker-dealers and financial advisers, but says that the SEC will not have time to undertake a review before 2014.  Reuters, SEC review of brokerages use of arbitration not seen in 2013.  The agency continues to be busy with Dodd Frank and JOBS Act reforms, as well as money market fund reform.

May 21, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)

FINRA Fines LPL for Systemic Email Failures & Misstatements to FINRA

FINRA fined LPL Financial LLC (LPL) $7.5 million for 35 separate, significant email system failures, which prevented LPL from accessing hundreds of millions of emails and reviewing tens of millions of other emails. Additionally, LPL made material misstatements to FINRA during its investigation of the firm's email failures. LPL was also ordered to establish a $1.5 million fund to compensate brokerage customer claimants potentially affected by its failure to produce email.

FINRA found that:

As LPL rapidly grew its business, the firm failed to devote sufficient resources to update its email systems, which became increasingly complex and unwieldy for LPL to manage and monitor effectively. The firm was well aware of its email systems failures and the overwhelming complexity of its systems. Consequently, FINRA found that from 2007 to 2013, LPL's email review and retention systems failed at least 35 times, leaving the firm unable to meet its obligations to capture email, supervise its representatives and respond to regulatory requests. Because of LPL's numerous deficiencies in retaining and surveilling emails, it failed to produce all requested email to certain federal and state regulators, and FINRA, and also likely failed to produce all emails to certain private litigants and customers in arbitration proceedings, as required.


FINRA also found that

In addition, LPL made material misstatements to FINRA concerning its failure to supervise 28 million DBA emails. In a January 2012 letter to FINRA, LPL inaccurately stated that the issue had been discovered in June 2011 even though certain LPL personnel had information that would have uncovered the issue as early as 2008. Moreover, the letter stated that there weren't any "red flags" suggesting any issues with DBA email accounts when, in fact, there were numerous red flags related to the supervision of DBA emails that were known to many LPL employees.

In addition, LPL likely failed to provide emails to certain arbitration claimants and private litigants. LPL will notify eligible claimants by letter within 60 days from the date of the settlement and the firm will deposit $1.5 million into a fund to pay customer claimants for its potential discovery failures. Customer claimants who brought arbitrations or litigations against LPL as of Jan. 1, 2007, and which were closed by Dec. 17, 2012, will receive, upon request, emails that the firm failed to provide them. Claimants will also have a choice of whether to accept a standard payment of $3,000 from LPL or have a fund administrator determine the amount, if any, that the claimant should receive depending on the particular facts and circumstances of that individual case. Maximum payment in cases decided by the fund administrator cannot exceed $20,000. If the total payments to claimants exceed $1.5 million, LPL will pay the additional amount.


May 21, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Monday, May 20, 2013

NASAA Releases Report on IA Switch

NASAA released a report on the regulatory transfer of more than 2100 investment advisers from federal to state oversight, IA Switch Report, The IA Switch: A Successful Collaboration to Enhance Investor Protection.  According to NASAA, the IA Switch "was one of the most significant achievements in the history of the North American Securities Administrators Association (NASAA)."  The Switch stemmed from Section 410 of the Dodd-Frank Act, which raised the assets under management threshold for state regulation of investment advisers from $25 million to $100 million.

The report documents the work that went into the successful completion of the Switch. It draws from a survey completed by state securities regulators on the effect of the Switch;  detailed interviews with NASAA members who were key players throughout the Switch;  and industry feedback.


May 20, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Sunday, May 19, 2013

SEC Charges Atlanta Resident with Fraud in Prime Bank Investment Scheme

The SEC recently filed an emergency action in federal court in Atlanta, charging Robert Fowler (Fowler) and his company, US Capital Funding Series II Trust 1 (US Capital), with violations of the federal securities laws for defrauding investors in a “prime bank” investment scheme.

The Commission's complaint alleges that, since at least August 2012, Fowler and US Capital have raised at least $350,000 from investors by falsely promising high profits for investing in standby letters of credit or bank guarantees that would purportedly grant the investors loans, the proceeds of which would be invested for a significant profit. Fowler and US Capital instead misappropriated investor funds for personal and business uses. Fowler was actively soliciting additional investors for his scheme, the complaint alleged.

According to the complaint, Fowler targeted foreign-born small business owners with little or no experience in finance or investing.


May 19, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Bullard on the 401(k) Plan Large Menu Defense

The Social Costs of Choice, Free Market Ideology and the Empirical Consequences of the 401(k) Plan Large Menu Defense, by Mercer Bullard, University of Mississippi - School of Law, was recently posted on SSRN.  Here is the abstract:

Regulatory reforms have recently improved 401(k) plan participation rates, but recent decisions by certain courts threaten to reverse that trend. These courts have substituted their free market ideology for fiduciary duties under ERISA in dismissing claims against plan sponsors on the ground that the menu offered was so large as to abrogate the sponsors’ ERISA duties. Under the “large menu defense,” courts have held that, even assuming a failure to exercise due care in selecting plan options, the employer can nonetheless claim the protection of the employee-control safe harbor under ERISA because, when the plan’s menu is sufficiently large, the plan participant is deemed to have exercised legal control over the relevant investment decision. The courts’ interpretation of the control safe harbor contradicts the plain meaning of the statute. Far worse, the courts’ free market assumption that large menus will increase participants’ wealth is empirically false. Research has shown that large 401(k) menus result in lower participation rates, overly conservative allocations, inferior investment options and other adverse effects that, collectively, cost workers billions of dollars every year.

May 19, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)