Thursday, June 20, 2013
The SEC charged a China-based company and its CEO with fraudulently misleading investors about its financial condition by touting cash balances that were millions of dollars higher than actual amounts. The SEC alleges that China MediaExpress, which purports to operate a television advertising network on inter-city and airport express buses in the People's Republic of China, began falsely reporting significant increases in its business operations, financial condition, and profits almost immediately upon becoming a publicly-traded company through a reverse merger in 2009. In addition to grossly overstating its cash balances, China MediaExpress also falsely stated in public filings and press releases that two multi-national corporations were its advertising clients when, in fact, they were not. The company's chairman and CEO Zheng Cheng signed the public filings and attested to their accuracy. After suspicions of fraud were raised by the company's external auditor and an internal investigation ensued, Zheng attempted to pay off a senior accountant assigned to the case.
According to the SEC's complaint, after China Media materially misrepresented its financial condition, its stock price tripled to more than $20 per share.
Wednesday, June 19, 2013
It has been widely reported that SEC Chair White stated that the agency will seek admissions in settlements in certain cases, because "public accountability in particular kinds of cases can be quite important." Reuters, UPDATE 2-U.S. SEC to seek admissions in some settlements -White
Although described as a big change in enforcement policy, a majority of cases still will be settled without requiring any admissions from the defendants. Since becoming SEC Chair, there has been speculation about whether White, a former prosecutor, would change the "neither admit nor deny" policy. Senator Elizabeth Warren has pressed the SEC for details on its settlement policy. Meanwhile, the Second Circuit has not yet issued an opinion in its review of the SEC and Citigroup settlement, which Judge Rakoff refused to approve because he had no basis for determining the fairness of the settlement.
Tuesday, June 18, 2013
Deloitte Financial Advisory Services agreed to a one-year suspension from consulting work at financial institutions regulated by the New York State Dept. of Financial Services because of alleged misconduct during its consulting work at Standard Chartered on anti-money laundering issues. It also agreed to make a $10 million paymment and to implement a set of reforms designed to address conflicts of interest in the consulting industry. CUOMO ADMINISTRATION REACHES REFORM AGREEMENT WITH DELOITTE OVER STANDARD CHARTERED CONSULTING FLAWS
According to the press release, in 004, Standard Chartered executed an agreement with the New York State Banking Department and Federal Reserve Bank of New York, which identified several compliance and risk management deficiencies in the anti-money laundering and Bank Secrecy Act controls at Standard Chartered's New York branch. The agreement required Standard Chartered to retain a qualified independent consulting firm to review anti-money laundering issues at the bank. Standard Chartered engaged Deloitte to conduct that review.
DFS’s investigation into Deloitte’s conduct during its consultant work at Standard Chartered found that the company:
■Did not demonstrate the necessary autonomy required of consultants performing regulatory work. Based primarily on Standard Chartered's objection, Deloitte removed a recommendation aimed at rooting out money laundering from its written final report on the matter to the Department. The recommendation discussed how wire messages or “cover payments” on transactions could be manipulated by banks to evade money laundering controls on U.S. dollar clearing activities.
■Violated New York Banking Law § 36.10 by disclosing confidential information of other Deloitte clients to Standard Chartered. A senior Deloitte employee sent emails to Standard Chartered employees containing two reports on anti-money laundering issues at other Deloitte client banks. Both reports contained confidential supervisory information, which Deloitte FAS was legally barred by New York Banking Law § 36.10 from disclosing to third parties.
Crowdfunding Securities, by Andrew A. Schwartz, University of Colorado Law School, was recently posted on SSRN. Here is the abstract:
A new federal statute authorizes the online "crowdfunding" of securities, a new idea based on the concept of "reward" crowdfunding practiced on Kickstarter and other websites. This method of selling securities had previously been banned by federal securities law but the new CROWDFUND Act overturns that prohibition.
This Article introduces the CROWDFUND Act and explains that it can be expected to have two primary effects on securities law and capital markets. First, it will liberate startup companies to use peer networks and the Internet to obtain modest amounts of capital at low cost. Second, it will help democratize the market for financing speculative startup companies and allow investors of modest means to make investments that had previously been offered solely to wealthy, so-called “accredited” investors.
This Article also offers two predictions as to how securities crowdfunding will play out in practice. First, it predicts that companies that sell equity via crowdfunding may find themselves the subject of hostile takeovers (though the founders of such companies can easily avoid that outcome if they act with a little foresight). Second, it predicts that issuers may prefer to crowdfund debt securities, such as bonds, rather than equity. The Article concludes with a few thoughts on the SEC’s implementation of the Act in light of the potential for fraud.
Adapting to the New Shareholder-Centric Reality, by Edward B. Rock, University of Pennsylvania Law School, was recently posted on SSRN. Here is the abstract:
After more than eighty years of sustained attention, the master problem of U.S. corporate law — the separation of ownership and control — has mostly been brought under control. This resolution has occurred more through changes in market and corporate practices than through changes in the law. This Article explores how corporate law and practice are adapting to the new shareholder-centric reality that has emerged.
Because solving the shareholder–manager agency cost problem aggravates shareholder–creditor agency costs, I focus on implications for creditors. After considering how debt contracts, compensation arrangements, and governance structures can work together to limit shareholder–creditor agency costs, I turn to available legal doctrines that can respond to opportunistic behavior that slips through the cracks: fraudulent conveyance law, restrictions on distributions to shareholders, and fiduciary duties. To sharpen the analysis, I analyze two controversies that pit shareholders against creditors: a hypothetical failed LBO, and the attempts by shareholders of Dynegy Inc. to divert value from creditors through the manipulation of a complex group structure. I then consider some legal implications of a shareholder-centric system, including the importance of comparative corporate law, the challenges to the development of fiduciary duties posed by the awkward divided architecture of U.S. corporate law, the challenges for Delaware in adjudicating shareholder-creditor disputes, and the potential value of reinvigorating the traditional "entity" conception of the corporation in orienting managers and directors.
Will the Federal Insurance Office Improve Insurance Regulation?, by Elizabeth F. Brown, Georgia State University - Department of Risk Management and Insurance, was recently posted on SSRN. Here is the abstract:
Prior to the financial crisis, insurance was the only financial service that did not have a federal regulator but relied almost exclusively on state insurance regulators. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) began a process to address this lack of federal oversight by creating the Federal Insurance Office (FIO) within the U.S. Treasury Department. Before the crisis, state regulation of insurance was sharply criticized for its lack of uniformity, its inefficiency, and the impediments that it posed for developing international insurance norms. In the wake of the financial crisis, questions have also been raised about whether state insurance regulation was equipped to deal with the potential systemic risks posed by the insurance firms, like American Insurance Group, Inc.
The Dodd-Frank Act contains provisions that begin to tackle each of these issues, primarily through the creation of FIO. This Article will look at the creation of FIO and the role that FIO is playing to address the systemic risks posed by insurance and insurance-like products and firms and the development of insurance norms. This Article will also examine the arguments raised by many within the insurance industry that greater federal oversight of insurance is unnecessary because the state regulation already provided adequate solvency protections, insurance companies do not pose the types of systemic risks posed by banks and investment firms, and market discipline is stronger in the insurance industry than in the banking industry.
FINRA filed with the SEC a proposed rule change to amend the Discovery Guide (“Guide”) used in customer arbitration proceedings to provide general guidance on electronic discovery (“e-discovery”)issues and product cases and to clarify the existing provision relating to affirmations made when a party does not produce documents specified in the Guide. The proposed rule change fulfills FINRA’s commitment to review the topics of e-discovery and product cases with the Discovery Task Force (“Task Force”) that FINRA established in 2011. FINRA believes that the proposedrevisions to the Guide will reduce the number and limit the scope of disputes involving document production in customer cases, thereby improving the arbitration process for the benefit of public investors, broker-dealer firms, and associated persons.
Public comments are due 45 days after publication in the Federal Register.
FINRA Files Proposed Rule Change to Simplify Selection of All-Public Arbitrator Panel in Customer Disputes
FINRA has filed with the SEC a proposed rule change to amend FINRA Rule 12403 of the Code of Arbitration Procedure for Customer Disputes (“Customer Code”) to make it easier for parties to select an all-public arbitrator panel in cases with three arbitrators. Comments are due 45 days after publication in the Federal Register.
Under the proposed rule change, FINRA would no longer require a customer to elect a panel selection method. Instead, parties in all customer cases with three arbitrators would get the same selection method. FINRA would provide all parties with lists of ten chair-qualified public arbitrators, ten public arbitrators, and ten non-public arbitrators. FINRA would permit the parties to strike four arbitrators on the chair-qualified public list and four arbitrators on the public list. However, any party could select an all-public arbitration panel by striking all of the arbitrators on the nonpublic list. (Rel. 34-69762)
In its accompanying Release, FINRA gives statistics since implementation of the All Public Panel Option:
[C]ustomers in approximately three-quarters of eligible cases have chosen the All Public Panel Option. Customers using the Majority Public Panel Option have done so by default 77 percent of the time,
rather than by making an affirmative choice (i.e., these customers did not make an
election in their statement of claim or accompanying documentation, and did not respond
to the follow-up letter FINRA sent).
As of March 31, 2013, customers selecting the All Public Panel Option have chosen to strike all of the non-public arbitrators in 66 percent of the cases during the ranking process. Customers have ranked one or more non-public arbitrators in 34 percent of cases and four or more in 13 percent of cases proceeding under the All Public Panel Option. Industry parties have ranked one or more non-public arbitrators in 97 percent of cases and have ranked four or more non-public arbitrators in 90 percent of cases.
FINRA has been tracking the results of arbitration awards decided by all public panels and majority public panels since implementation of the rule change. For the period February 1, 2011 through March 31, 2013, investors prevailed 49 percent of the time in cases decided by all public panels and 34 percent of the time in cases decided by majority public panels.
An explanation of how the firm is currently using social media (e.g., Facebook, Twitter, LinkedIn, blogs) at the corporate level in the conduct of its business.
An explanation of how the firm's registered representatives and associated persons generally use social media in the conduct of the firm's business.
An explanation of the measures that your firm has adopted to monitor compliance with the firm's social media policies (e.g., training meetings, annual certification, technology).
A tabular list of your firm's top 20 producing registered representatives (based on commissioned sales) who used social media for business purposes to interact with retail investors and the type of social media used by each individual for business purposes during this time period.