Securities Law Prof Blog

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

Friday, February 15, 2013

SEC Freezes Assets in Swiss Account in Heinz Insider Trading Investigation

It was reported this morning that the SEC had opened an investigation into possible insider trading in connection with the acquisition by Berkshire Hathaway of H.J. Heinz Co., and here's the official announcement from the SEC:

The Securities and Exchange Commission today obtained an emergency court order to freeze assets in a Zurich, Switzerland-based trading account that was used to reap more than $1.7 million from trading in advance of yesterday’s public announcement about the acquisition of H.J. Heinz Company.

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In a complaint filed in federal court in Manhattan, the SEC alleges that prior to any public awareness that Berkshire Hathaway and 3G Capital had agreed to acquire H.J. Heinz Company in a deal valued at $28 billion, unknown traders took risky bets that Heinz’s stock price would increase. The traders purchased call options the very day before the public announcement. After the announcement, Heinz’s stock rose nearly 20 percent and trading volume increased more than 1,700 percent from the prior day, placing these traders in a position to profit substantially.

The SEC alleges that the unknown traders were in possession of material nonpublic information about the impending acquisition when they purchased out-of-the-money Heinz call options the day before the announcement. The timing and size of the trades were highly suspicious because the account through which the traders purchased the options had no history of trading Heinz securities in the last six months. Overall trading activity in Heinz call options several days before the announcement had been minimal.

The emergency court order obtained by the SEC freezes the traders’ assets and prohibits them from destroying any evidence.

February 15, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Obtains Default Judgment Against "America's Prophet"

The SEC announced today that a Manhattan federal district court entered default judgments against Sean David Morton (Morton), whom the SEC describes as "a nationally-recognized psychic who bills himself as 'America's Prophet'," and his wife, relief defendant Melissa Morton, and corporate shell entities co-owned by the Mortons (including the Prophecy Research Institute).  The SEC charged Morton with engaging in a multi-million offering fraud. According to the Commission's complaint, Morton fraudulently raised more than $5 million from more than 100 investors for his investment group, which he called the Delphi Associates Investment Group (Delphi Investment Group).

According to the Commission's complaint, Morton used his monthly newsletter, his website, his appearances on a nationally syndicated radio show called Coast to Coast AM, and appearances at public events, to promote his alleged psychic expertise in predicting the securities markets, and to solicit investors for the Delphi Investment Group. During these solicitations, Morton made numerous materially false representations. For example, Morton falsely told potential investors that he has called all the highs and lows of the stock market, on their exact dates, over a fourteen year period. In private one-on-one correspondence with potential investors, Morton was even more aggressive in his solicitation. For example, Morton wrote to a potential investor urging he invest more money in the Delphi Investment Group "RIGHT NOW…[Because] [o]nce the DOLLAR starts to DROP, which will happen soon, we are set to make a FORTUNE!"

Bizarrely, according to the SEC, the defendants never properly answered the allegations in the complaint. Instead, the Mortons filed dozens of papers with the Court claiming, for instance, that the Commission is a private entity that has no jurisdiction over them, and that the staff attorneys working on the case do not exist.

February 15, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, February 14, 2013

Merck Settles Securities Fraud Class Actions Over Cholesterol Drug Study

Merck agreed to pay $688 million to settle securities fraud class actions claiming that it misled investors by delaying the release of an unfavorable study over the efficacy of its cholesterol drug Vytorin.  Plaintiffs alleged that Merck and Schering-Plough knew of the study for nearly two years, but did not release it until 2008.  After it was made public, the stock prices of both companies dropped, as did the sales of the drug.

A jury trial was scheduled to begin in March.  In the settlement Merck does not admit to any wrongdoing.  Its press release states that:

“This agreement avoids the uncertainties of a jury trial and will resolve all of the remaining litigation in connection with the ENHANCE study,” said Bruce N. Kuhlik, executive vice president and general counsel of Merck. “We believe it is in the best interests of the company and its shareholders to put this matter behind us, and to continue our focus on scientific innovations that improve health worldwide.”

The size of the settlement is impressive because, unlike many securities fraud class actions, there were no parallel government actions.

NYTimes,  Merck Settles Investor Suits Over Cholesterol Drug

February 14, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)

Former Stanford Execs Get 20-Year Sentences for Role in Ponzi Scheme

Two former executives of Stanford Financial Group were sentenced today for their roles in Allen Stanford's Ponzi scheme.  The former chief accounting officer, Gilbert Lopez, and former controller, Mark Kuhrt, each received sentences of 20 years in prison.  A jury convicted them on numerous fraud counts last November.

NYTimes, Ex-Stanford Executives Get 20 Years Over Roles in $7 Billion Fraud

February 14, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC's Walter Says Staff Plans to Seek Information from Public on Retail Financial Advice Providers

We have not heard much lately from the SEC about a "uniform fiduciary duty" for broker-dealers and investment advisers.  Today, at a Senate Banking Committee hearing on "Wall Street Reform: Oversight of Financial Stability and Consumer and Investor Protections,"  SEC Chairman Elisse B. Walter stated (in her written testimony)  that since the publication of the IA/BD Study by the SEC staff, in January 2011:

the staff, including the Commission’s economists, continues to review current information and available data about the marketplace for personalized investment advice and the potential impact of the study’s recommendations. While we have extensive experience in the regulation of broker-dealers and investment advisers, we believe the public can provide further data and other information to assist us in determining whether or not to adopt a uniform fiduciary standard of conduct or otherwise use the authority provided under Section 913 of the Dodd-Frank Act. To this end, the staff is drafting a public request for information to obtain data specific to the provision of retail financial advice and the regulatory alternatives. The request aims to seek information from commenters – including retail investors, as well as industry participants – that will be helpful to us as we continue to analyze the various components of the market for retail financial advice.

The written testimony also summarizes other steps taken by the agency to implement Dodd-Frank.


February 14, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 13, 2013

SEC Approves 2013 PCAOB Budget

The SEC approved the 2013 budget of the Public Company Accounting Oversight Board (PCAOB) and the related annual accounting support fee as required by the Sarbanes-Oxley Act of 2002.  The PCAOB budget totals $245.6 million and will be funded primarily by the collection of an accounting support fee totaling $234 million.

Highlights of the PCAOB’s Proposed 2013 Budget and Accounting Support Fee

A proposed 2013 budget of $245.6 million

A proposed 2013 accounting support fee totaling $234 million allocated as follows:
$207.5 million to be assessed on issuers
$26.5 million to be assessed on broker-dealers

The PCAOB’s 2013 budget represents an increase of approximately 8 percent over its 2012 budget of $227.7 million. The increase is primarily attributable to an increase in the PCAOB’s audit inspections program, including additional staff to:

Perform inspections of audits of SEC-registered broker-dealers (a class of audits overseen by the PCAOB as a result of the Dodd-Frank Act).

Perform international inspections.

Implement planned improvements to the PCAOB’s inspections program, including the reporting and processes for assessing quality control remediation efforts.

The 2013 budget will be funded mostly by the 2013 accounting support fee of $234 million, which is approximately 9 percent higher than the 2012 accounting support fee of $215 million.

February 13, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Massachusetts Securities Division Calls on SEC to Study Use of PDAAs by Investment Advisers

Massachusetts Securities Division filed a letter with the SEC, requesting the SEC to address what the Division  calls a "key investor protection issue:" investment advisers including mandatory pre-dispute arbitration provisions in the advisory contracts (PDAAs).  It urges the SEC to use its authority under Dodd-Frank section 921 to commence a study of investment advisers requiring pre-dispute arbitration, "a practice that appears to be inconsistent with the fiduciary duty that advisers owe their customers."

The Division recently sent 710 state-registered Massachusetts advisers surveys that requested specific information about arbitration.  Responses were voluntary, and the response rate was 50%.  Nearly half of the advisers who responded to the survey reported that they include a PDAA in their advisory contract.

There has never been a study of how many investment advisers require PDAAs, what forum those advisers requiring PDAAs use for resolving the disputes, and what the outcomes are in those disputes.  An SEC study of this issue would provide important information for addressing the question of whether customers of advisory clients receive fairer outcomes in court or in arbitration.  Without information, we can only speculate.

The Securities Division letter to the SEC and the survey results are posted on its website.

February 13, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 12, 2013

Senate Banking Committee Schedules Hearing on Wall St. Reform

The Senate Committee on Banking, Housing and Urban Affairs will hold a hearing on Feb. 14, 2013 on Wall Street Reform: Oversight of Financial Stability and Consumer and Investor Protections.  Here is the list of witnesses:

•Honorable Mary J. Miller
Under Secretary for Domestic Finance
U. S. Department of the Treasury
•The Honorable Daniel K. Tarullo
Board of Governors of the Federal Reserve System
•The Honorable Martin J. Gruenberg
Acting Chairman
Federal Deposit Insurance Corporation
•The Honorable Thomas J. Curry
Comptroller of the Currency
Office of the Comptroller of the Currency
•The Honorable Richard Cordray
Consumer Financial Protection Bureau
•The Honorable Elisse B. Walter
U.S. Securities and Exchange Commission
•Honorable Gary Gensler
U.S. Commodity Futures Trading Commission


February 12, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)

POGO Reports on SEC's Revolving Door

The Project on Government Oversight (POGO) is a nonpartisan independent watchdog that investigates waste, fraud and abuse throughout the federal government, according to its website.  It recently released its second study on the "revolving door" at the SEC, Dangerous Liaisons: Revolving Door at SEC Creates Risk of Regulatory Capture.  Whether or not you agree with the premise of the report, it is worth reading.  In addition, POGO performed a public service by obtaining from the SEC, through FOIA requests, disclosure statements filed by former SEC employees from 2001 through 2010, which are searchable online through its SEC Revolving Door Database.

The Report also contains a number of sensible recommendations, including

  • let the public see where federal employees go after they leave the government, and disclose their ethics agreements
  • extend the cooling off periods for employees who enter and leave the agency
  • give the public more information about agency actions
  • give the SEC the resources it needs
  • other players should do their part.

February 12, 2013 in News Stories, SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Feb. 13 Meeting Takes Up PCAOB Budget

The SEC will hold an Open Meeting on February 13, 2013, where it will consider whether to approve the 2013 budget of the Public Company Accounting Oversight Board and will consider the related annual accounting support fee for the Board under Section 109 of the Sarbanes-Oxley Act of 2002.

February 12, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, February 11, 2013

Fraud Scheme Targets Foreign Investors with Lure of U.S. Citizenship

On Feb. 8 the SEC announced charges and an asset freeze against Anshoo R. Sethi, an Illinois resident,  charging him with defrauding foreign investors seeking profitable returns and a legal path to U.S. residency through a federal visa program.   According to the SEC, Sethi created A Chicago Convention Center (ACCC) and Intercontinental Regional Center Trust of Chicago (IRCTC) and fraudulently sold more than $145 million in securities and collected $11 million in administrative fees from more than 250 investors primarily from China. Sethi duped investors into believing that by purchasing interests in ACCC, they would be financing construction of the “World’s First Zero Carbon Emission Platinum LEED certified” hotel and conference center near Chicago’s O’Hare Airport. Investors were misled to believe their investments were simultaneously enhancing their prospects for U.S. citizenship through the EB-5 Immigrant Investor Pilot Program, which provides foreign investors an avenue to U.S. residency by investing in domestic projects that will create or preserve a minimum number of jobs for U.S. workers.

According to the SEC’s complaint, the EB-5 program enables foreign investors to possibly qualify for a green card if they invest $1 million (or $500,000 in a “Targeted Employment Area” with a high unemployment rate) in a project that creates or preserves at least 10 jobs for U.S. workers, excluding the investor and his or her immediate family. Sethi and his companies used the lure of a pathway to U.S. citizenship to convince investors to wire a minimum of $500,000 apiece plus a $41,500 “administrative fee” to U.S. bank accounts. These administrative fees are separate from the investment capital that the EB-5 program requires to be deployed into a job-creating enterprise. More than $11 million in administrative fees were collected with the claim that they were fully refundable to investors if their visa applications are rejected. Sethi and his companies have instead been spending those funds.

In addition to the temporary restraining order and asset freeze granted by the court, the SEC’s complaint seeks permanent injunctions and other monetary relief.

February 11, 2013 in Film, SEC Action | Permalink | Comments (0) | TrackBack (0)

Einhorn Raises Issue of Interpeting SEC's Unbundling Rule

As Securities Law Prof Blog readers probably know, David Einhorn through his hedge fund, Greenlight Capital, is a significant SH in Apple.  Einhorn is dissatisfied because he says that Apple has $137 Billion in cash ($145 per share) on its balance sheet and has “an obligation to examine all options to create and unlock additional value” for its SHs. Einhorn advocates that Apple unlock shareholder value by distributing to existing SHs a perpetual,  high-yield preferred stock that would enable SHs to own and trade separately the preferred shares and the existing common shares.

Apple's annual SH meeting is scheduled for Feb. 27.  On the agenda is a management proposal  to amend the certificate of incorporation in several ways (Proposal 2), including eliminating the power of the BOD to issue preferred shares without SH approval.  Specifically,

the amendment of the Company’s Restated Articles of Incorporation would (i) eliminate certain language relating to the term of office of directors in order to facilitate the adoption of majority voting for the election of directors, (ii) eliminate “blank check” preferred stock, (iii) establish a par value for the Company’s common stock of $0.00001 per share and (iv) make other conforming changes.

Greenlight opposes this amendment because it would “hinder [Apple’s] ability to unlock value for shareholders.” It recently sent a letter to SHs, urging them to vote against Proposal 2 because it is “value destructive” and “impedes the boards’ flexibility.”  CALPERS is also soliciting Apple SHs, urging them to support Apple management on Proposal 2 as enhancing SH rights. In a Feb. 7 statement, Apple stated that the company is actively discussing other ways about returning additional cash to SHs and that it will thoroughly evaluate the Greenlight proposal.  Regarding Proposal 2, Apple stated that:

As a part of our efforts to further enhance corporate governance and serve our shareholders’ best interests, Proposal #2 in our proxy includes some recommended changes to our articles of incorporation. These changes were recommended independently of Greenlight’s proposal and would not preclude Apple from adopting their concept. Contrary to Greenlight’s statements, adoption of Proposal #2 would not prevent the issuance of preferred stock. Currently, Apple’s articles of incorporation provide for the issuance of “blank check” preferred stock by the Board of Directors without shareholder approval. If Proposal #2 is adopted, our shareholders would have the right to approve the issuance of preferred stock. As such, Proposal #2 has the support of many of our shareholders.

 Greenlight has also filed suit in S.D.N.Y. asserting that Proposal 2 violates the SEC’s proxy rules because it contains three amendments to the Certificate of Incorporation, contrary to SEC rules that do not permit the bundling of separate matters presented for SH vote (Rule 14a-4(a)(3), Rule 14a-4(b)(1)).  It seeks a preliminary injunction against the shareholder vote.  The Court has scheduled a Feb. 22 oral argument on the application for a preliminary injunction.



February 11, 2013 in Judicial Opinions, News Stories | Permalink | Comments (0) | TrackBack (0)