Securities Law Prof Blog

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

Friday, January 18, 2013

FINRA Announces Changes to Subpoena Rules in Arbitration

FINRA announced that the SEC has approved amendments to the Arbitration Codes relating to subpoenas and orders to direct the appearance of witnesses and production of documents without subpoenas.  The Customer and Industry Codes of Arbitration Procedure (Codes) provide arbitrators with the authority to issue subpoenas for the appearance of witnesses and the production of documents. The Codes also authorize arbitrators to order FINRA member firms and their employees and associated persons to produce documents and/or to appear as witnesses without using the subpoena process. The SEC approved amendments to the Codes which direct arbitrators, in most instances, to issue orders (arbitrator orders), instead of issuing subpoenas, when industry parties seek the appearance of witnesses or the production of documents from non-party firms or their employees or associated persons.

The amendments add procedures for non-parties to object to subpoenas and for parties and non-parties to object to arbitrator orders of production. They also standardize procedures under the Codes relating to service of motions for subpoenas and arbitrator orders; service of issued subpoenas and arbitrator orders; and time frames for responding to subpoenas and arbitrator orders, making them operationally consistent.

Effective Date: February 18, 2013


January 18, 2013 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

9,001 Website Names on "Crowdfunding"!

The Wall St. Journal reports that NASAA has found 9,001 website names containing the word "crowdfund."  The association has reviewed about 2000 of these site names and concluded that about 200 warrant a closer watch.  WSJ has reviewed the list and find that many of the names apparently are designed to appeal to certain groups based on gender, race or religion, i.e. "christiancrowdfunds"; others apparently are looking for the investor hoping to get rich, i.e., "getrichcrowdfunding" and "crowdfundingjackpot."

Meanwhile, the SEC has not yet promulgated crowdfunding rules, having missed a January 1 deadline.

WSJ, Crowdfunding Efforts Draw Suspicion

January 18, 2013 in News Stories, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Is there a Role for CFPB in Regulating Retirement Savings Industry?

The Consumer Financial Protection Bureau is considering whether it has the authority to protect retirement savings, reports Bloomberg.  Richard Cordray, bureau director, provided no additional details.  The Bureau's concern is that retirees may fall prey to financial scams as they confront the difficulties of inadequate savings and low investment returns.  The SEC and the Dept of Labor have authority to regulate many types of retirement savings funds, but investor advocates have expressed concern about the vigor of their efforts.  Bloomberg, Retirement Savings Accounts Draw U.S. Consumer Bureau Attention

January 18, 2013 in News Stories, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Treasury Moves Forward with Plan to Sell Off Remaining GM Stock

The U.S. Department of the Treasury is moving forward with its plan to sell its approximately 300.1 million remaining shares of General Motors (GM) common stock with the initiation of a pre-arranged written trading plan.  According to the press release,

Under the plan, Treasury will proceed with its December 2012 announcement that it intends to sell its shares into the market in an orderly fashion and fully exit its remaining GM investment within the next 12-15 months, subject to market conditions. That previous announcement was made in connection with GM’s repurchase of 200 million shares of GM common stock from Treasury, which was also completed in December 2012.

 Treasury’s sale of its GM common stock is part of its continuing efforts to wind down the Troubled Asset Relief Program (TARP).  

January 18, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, January 17, 2013

Former Trader Settles Insider Trading Charges in connection with 3Com Merger

The SEC settled charges against Eric Rogers, a former proprietary trader at the now-defunct registered broker-dealer Spectrum Trading, LLC.  The SEC alleged that Rogers used inside information to trade ahead of the September 28, 2007 announced acquisition of 3Com Corp. 

According to the SEC, Arthur Cutillo and Brien Santarlas, two former attorneys at the law firm Ropes & Gray LLP, misappropriated from their law firm material, nonpublic information, including the 2007 announced acquisition of 3Com.  As alleged in the complaint, Cutillo tipped the inside information, through another attorney, to Zvi Goffer, a proprietary trader at the broker-dealer Schottenfeld Group LLC, in exchange for kickbacks.  The SEC alleges that Goffer tipped the inside information to, among others, his brother Emanuel, who worked with Rogers at Spectrum.  The complaint alleges that Emanuel Goffer tipped the information to Rogers, who, based on that information, purchased 3Com securities in a proprietary account at Spectrum, resulting in total illicit profits of approximately $207,000.  Rogers’ personal share in the trading profits was $103,500.

The SEC settlement waives disgorgement of Rogers' trading profits, and no civil penalty will be imposed, in light of Rogers’ financial condition.  The SEC previously charged Cutillo, Santarlas, Zvi Goffer, Emanuel Goffer and nine other defendants in connection with this insider trading scheme. 

January 17, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 16, 2013

Coffee-SEC Debate on SEC Enforcement Continues

In a post a few days ago, I reviewed the debate between Professor John Coffee and the SEC Enforcement Directors about the effectiveness of the agency's enforcement efforts.  Directors Khuzami and Canellos took issue with Professor Coffee's numbers.  Today Professor Coffee responds, with additional data about the median value of SEC settlements, and attaches the Power Point slides from his recent address on SEC Enforcement. (Coffee, SEC Enforcement:Rhetoric and Reality)  He also reiterates:

The most important claim I make is that the nature of corporate litigation has changed, partly as a result of “ediscovery” and the often millions of emails and related documents in the typical large case.  It is no longer feasible for a handful of SEC attorneys (even if all are diligent and able) to litigate effectively against the squadrons of associates that a large firm can throw at a complex case.  The result is a mismatch.  Hence, when facing a major financial institution, the SEC tends out of necessity to settle cheaply or not sue at all (as in Lehman).  My proposed answer to this problem is that the SEC should do what other financial regulators are already doing (including the FDIC):  namely, hiring independent counsel on a negotiated contingent fee basis.  Khuzami and Canellos object that I would cause the SEC to abandon prosecutorial discretion.  Nonsense!  The SEC would conduct the initial investigation and decide whether a suit was justified.  But, it would now hold increased leverage in negotiations because it could credibly threaten suit by independent counsel (who would only take the case only if they judged it to be promising).  SEC discretion would remain because the case would go forward only if the SEC’s staff decided that it had merit.  Such an approach would go far towards solving the SEC’s budgetary crisis, because attorneys’ fees would be earned only if a recovery was obtained and only out of the recovery (thus not depleting the SEC’s budget).


January 16, 2013 in Law Review Articles, SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Advisory Committee on Small Companies Releases Recommendations

The SEC's Advisory Committee on Small and Emerging Companies released draft committee recommendations(Download Draft-committee-recommendations-statement-020113[1]) today, which include:

  Immediately provide for a meaningful increase in tick size as a necessary step toward encouraging the reestablishment of an infrastructure designed to increase liquidity for small public companies.
 Encourage the establishment of an exchange limited to accredited investors where disclosure requirements for listed companies would be appropriately limited in light of the absence of retail investors.
 Rationalize the disclosure framework for small cap companies by raising the market capitalization threshold for small reporting companies (SRCs) and extending to SRCs the benefits granted to emerging growth companies under the JOBS Act.
 Further ease the compliance burden on SRCs by exempting SRCs from other requirements that result in significant costs for SRCs without generating information necessary to making an informed investment decision.

January 16, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Announces Voluntary Telephone Mediation in Small Claims

FINRA announced that it is launching a pilot program offering parties in simplified cases pro bono or reduced-fee telephone mediation. Participation in the pilot program is voluntary and open to cases involving claims of $50,000 or less.

Linda Fienberg, President of FINRA Dispute Resolution, said, "Telephone mediation is a lower-cost alternative, and would benefit dispute resolution forum users in many ways. Besides eliminating the travel and preparation costs typically associated with in-person mediation, telephonic mediation offers greater convenience and flexibility, and is a practical alternative for all parties involved."

 Parties interested in participating in the pilot can notify FINRA, and FINRA staff will notify eligible parties about the pilot program.


Mediators would serve on a pro bono basis on cases involving claims of $25,000 or less in damages. Reduced-fee mediation ($50 per hour) would be available on cases with damage claims between $25,000.01 and $50,000. FINRA will not charge any administrative fee for these cases.

January 16, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Extends Comment Period for Proposed Rule Regulating Security-Based Swap Dealers

On November 23, 2012, the SEC published a proposed rule for public comment to establish capital, margin, and segregation requirements for security-based swap dealers and major security-based swap participants under the Securities Exchange Act of 1934 and amend capital requirements for broker-dealers. The Commission is extending the time period in which to provide the Commission with comments. until February 22, 2013.

Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers

January 16, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, January 14, 2013

FINRA Proposes to Tighten Definition of "Public Arbitrator"

FINRA has filed with the SEC a proposed rule change that would further tighten the definition of a "public arbitrator" to exclude persons associated with a mutual fund or hedge fund from serving as public arbitrators and to require individuals to wait for two years after ending certain affiliations before they may be permitted to serve as public arbitrators. FINRA believes that the proposed changes "would improve investors’ perception about the fairness and neutrality of FINRA’s public arbitrator roster."  FINRA has amended the definition of public arbitrator a number of times since 2004 to exclude from the definition individuals with connections to the securities industry.  In the accompanying release, FINRA states that recently investor representatives have raised concerns that they do not perceive certain arbitrators as public because of their background or experience.  This proposed rule change is in response to those concerns.  Although the public arbitrator definition does not expressly prohibit individuals associated with mutual funds and hedge funds from serving as public arbitrators, FINRA believes that, because of their association with the financial services industry, they should not serve as public arbitrators.  Its current practice is to exclude these individuals from the public roster.

FINRA also proposes to add a two-year "cooling off" period before FINRA permits certain individuals to serve as public arbitrators.  This change would affect, among others, attorneys, accountants and other professionals whose firm derived $50,000 or more in annual revenue in the past two years from professional services rendered to certain financial industry entities relating to any customer disputes concerning investments.  Under the current rule, the individual may begin serving as a public arbitrator as soon as the individual ends the affiliation that was the basis for the exclusion.  FINRA notes that in one instance an individual applied to be a public arbitrator just one month after retiring from a lengthy career at a law firm that represented securities industry clients. (Download 34-68632[1])


January 14, 2013 in Other Regulatory Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

SEC Enforcement Directors Respond to Professor Coffee's Criticisms: Who's Got the Facts Straight?

Professor John Coffee (Columbia) recently wrote a column, SEC enforcement: What has gone wrong?, in which he asserts that:

A disturbingly persistent pattern has emerged in U.S. Securities and Exchange Commission enforcement cases that involves three key elements: (1) The commission rarely sues individual defendants at large financial institutions, settling instead with the entity only; (2) when it does sue individual defendants, it frequently loses; and (3) the penalties collected by the commission from corporate defendants are declining and, in any event, are modest in proportion to the profits obtained.

In the view of Professor Coffee, the SEC simply does not have the resources to investigate cases as deeply as the private bar (both defense and private plaintiffs' bar) can.  He suggests that the SEC retain private counsel on a contingent-fee basis to litigate large cases that the agency cannot adequately staff.

Robert Khuzami, the exiting Director of the SEC's Enforcement Division, and Deputy Director George Canellos, have now responded.  In Unfair claims, untenable solution, they assert that Coffee has his facts wrong on all three assertions.  (1) he inaccurately stated that the median SEC settlement dropped in amount; (2) he is wrong to suggest that the SEC rarely sues individuals; and (3) his suggestion that the SEC frequently loses cases against individual defendants is "dramatically at odds with the facts."  Not surprisingly, then, the SEC lawyers disagree with Coffee's proposed solution.

[Coffee] proposes that for big litigation matters the SEC engage private lawyers compensated based on a percentage of the monies they collect. However, that solution assumes that the SEC's general goal is to sue as many deep-pocketed parties, and collect as much in penalties, as possible. But, as enforcer of the nation's securities laws, the SEC's goal is aggressively to uphold the law and serve the interests of justice. That means evaluating each case fairly, suing only those whom the evidence shows violated the law, assessing relative culpability of different participants, and assessing a penalty that is appropriate for the particular violation — which could be anything from a serious fraud to an unintentional violation of a more technical requirement.

Moreover, assessing penalties is by no means the only objective of the SEC. In cases against individuals, other forms of relief can be of great importance, such as banning a violator from the securities industry or from serving as an officer or director of a public company. Similarly, in cases against companies, the SEC frequently seeks to achieve meaningful corporate reform, such as effecting changes in management, improving the company's culture of compliance and enhancing the company's policies and procedures.

 Khuzami and Canellos close by referring to "the existing limits on the SEC's authority" and suggest that recently proposed legislation to expand the SEC's power to assess penalties could address Coffee's concerns about the inadequacy of penalties.

January 14, 2013 in News Stories, SEC Action | Permalink | Comments (0) | TrackBack (0)

Sunday, January 13, 2013

The Business Lawyer Solicits Articles and Essays

The Editorial Board of The Business Lawyer is soliciting submission of articles and essays for Volumes 68 and 69. TBL is the flagship scholarly journal of the American Bar Association Section of Business Law. It reaches 41,000 readers on a quarterly basis. Authors must submit exclusively to the journal and submissions are peer-reviewed. We generally give authors a response in about two weeks. TBL provides a good forum to reframe scholarly articles published elsewhere for an audience of judges and practitioners. Past authors include Bernard Black, Henry Wu, Lucian Bebchuk, Joseph Grundfest, Guhan Subramanian, Vice Chancellor Leo Strine, former Chief Justice of the Delaware Supreme Court Norman Veasey, Larry Hamermesh, Starvros Gadinis, Roberta Karmel, Jonathan Lipson, and Barbara Black.

Articles should be submitted to Diane Babal, Production Manager, at Questions about submissions can be addressed to Associate Editor-in-Chief, Professor Gregory Duhl, at

January 13, 2013 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)