Securities Law Prof Blog

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

Saturday, March 2, 2013

Laby on Regulatory Implications of Morrison

Regulation of Global Financial Firms after Morrison v. National Australia Bank, by Arthur B. Laby, Rutgers University School of Law - Camden, was recently posted on SSRN.  Here is the abstract:

In 2010, the U.S. Supreme Court decided Morrison v. National Australia Bank Ltd., which rewrote the law of extraterritoriality, shattering decades of precedent. After Morrison was decided, Congress, the U.S. Securities and Exchange Commission, and commentators have focused on the case's enforcement implications. This Article is different. This Article focuses not on enforcement but rather on the regulatory implications of the decision, arguing that Morrison calls into question the SEC’s ability to regulate and require registration of non-U.S. domiciled firms. By asserting a strong presumption against extraterritorial application of the securities laws and invalidating the conduct and effects test, the Court overturned doctrines the SEC has relied on for many years when regulating non-U.S. domiciled broker-dealers and investment advisers. These regulatory implications are of paramount importance to the SEC’s regulatory program and to investor protection, but they have gone largely unnoticed in Morrison’s aftermath. The goal of this symposium contribution is to identify the regulatory implications and the challenges they pose.

March 2, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

SEC Requests Comments on Standards of Conduct for Investment Advice Providers

The SEC has been promising it for some time, and on March 1 it finally released a request for data and other information relating to the benefits and costs of standards of conduct applicable to broker-dealers and investment advisers when they provide personalized investment advice about securities to retail customers. According to the release ( Download 34-69013):

Specifically, the SEC is requesting data and other information from the public and interested parties about the benefits and costs of the current standards of conduct for broker-dealers and investment advisers when providing advice to retail customers, as well as alternative approaches to the standards of conduct.

While the SEC is particularly interested in receiving empirical and quantitative data and other information, all interested parties are encouraged to submit comments, including qualitative and descriptive analysis of the benefits and costs of potential approaches and guidance.

The SEC recognizes that retail investors are unlikely to have significant empirical and quantitative information, and welcomes any information they would like to provide.

March 2, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Friday, March 1, 2013

Coffee on the Future of Insider Trading

Mapping the Future of Insider Trading Law: Of Boundaries, Gaps, and Strategies, by John C. Coffee Jr., Columbia Law School; European Corporate Governance Institute (ECGI); American Academy of Arts & Sciences, was recently posted on SSRN.  Here is the abstract:

The current law on insider trading is arbitrary and unrationalized in its limited scope in a number of respects. For example, if a thief breaks into your office, opens your files, learns material, nonpublic information, and trades on that information, he has not breached a fiduciary duty and is presumably exempt from insider trading liability. But drawing a line that can convict only the fiduciary and not the thief seems morally incoherent. Nor is it doctrinally necessary.

The basic methodology handed down by the Supreme Court in SEC v. Dirks and United States v. O’Hagan dictates (i) that a violation of the insider trading prohibition requires conduct that is 'deceptive' (the term used in Section 10(b) of the Securities Exchange Act of 1934), and (ii) that trading that amounts to an undisclosed breach of a fiduciary duty is 'deceptive.' This formula illustrates, but does not exhaust, the types of duties whose undisclosed breach might also be deemed deceptive and in violation of Rule 10b-5. Many forms of theft or misappropriation of confidential business information could be deemed sufficiently deceptive to violate Rule 10b-5. More generally (and more controversially), the common law on finders of lost property might be used to justify a duty barring recipients from trading on information that has been inadvertently released or released to them without lawful authorization. Still, current law has stopped short of generally prohibiting the computer hacker and other misappropriators who make no false representation.

This article surveys possible means by which to rationalize current law and submits that the SEC can and should expand the boundaries of insider trading by promulgating administrative rules paralleling and extending the rules it issued in 2000 (namely, Rules 10b5-1 and 10b5-2). Specific examples are suggested.

At the same time, this article acknowledges that the goal of reform should not be to achieve parity of information and that there are costs in attempting to extend the boundaries of insider trading to reach all instances of inadvertent release. Deception, it argues, should be the key, both for doctrinal and policy reasons.

March 1, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Thursday, February 28, 2013

Occupy the SEC Sues Agencies to Compel Implementation of Volcker Rule

Members of Occupy the SEC, an unincorporated association that advocates for regulatory reforms in the banking and financial system, have filed suit against Ben Bernanke and other financial regulators in federal district court (E.D.N.Y.), seeking declaratory, injunctive and mandamus relief to compel defendants to issue a joint Final Rulemaking under 12 U.S.C. 1851 or Dodd-Frank 619 (the "Volcker Rule").  Plaintiffs assert that almost three years have passed since the enactment of Dodd-Frank and defendants have yet to finalize regulations implementing the Volcker Rule.  They allege that although some banks have pared down their proprietary trading activities, other banks have not done so, thereby putting at risk money that is held by bank depositors like the plaintiffs.  They assert this violates the mandatory provision that specifies that defendants "shall" adopt rules implementing the provisions of  Dodd-Frank 619 within nine months after completing a study by the FSOC relating to the Volcker Rule, which study was completed in January 2011.  Plaintiffs further assert they have exhausted their administrative remedies, since Occupy the SEC previously issued a 325 page comment letter petitioning the agencies to avoid "any delay in [the Rule's] full and aggressive implementation."  The complaint also alleges that SEC Commissioner Gallagher recently stated publicly that he believed the agencies would be better off prioritizing other matters.  Taylor v. Bernanke, Case 1:13-cv-01013-ARR-JMA Filed 02/26/13

The complaint is available at

 (Thanks to Jennifer Taub for alerting me to this)

February 28, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)

China-Based Company and Former CFO Settle SEC Accounting Charges

The SEC and Keyuan Petrochemical, a China-based petrochemical company, and its former chief financial officer settled charges of accounting and disclosure violations, with defendants agreeing to pay more than $1 million.  According to the SEC, Keyuan Petrochemicals, which was formed through a reverse merger in April 2010, systematically failed to disclose to investors numerous related party transactions involving its CEO, controlling shareholders, and entities controlled by management or their family members. Keyuan also operated a secret off-balance sheet cash account to pay for cash bonuses to senior officers, travel and entertainment expenses and an apartment rental for the CEO, and cash and non-cash gifts to Chinese government officials.

The SEC further alleges that Keyuan’s then-CFO Aichun Li, who lives in North Carolina, played a role in the company’s failure to disclose the related party transactions. Li was hired to ensure the company’s compliance with U.S. accounting and financial reporting regulations, and she received information and encountered red flags that should have indicated that the company was not properly identifying or disclosing related party transactions. Despite such knowledge, Li signed Keyuan’s registration statements and quarterly reports that failed to disclose material related party transactions.

Keyuan agreed to pay a $1 million penalty and Li agreed to pay a $25,000 penalty to settle the SEC’s charges. They consented to the entry of a judgment permanently enjoining them from violations of the respective provisions of the Securities Act and Exchange Act. Li also agreed to be suspended from appearing or practicing as an accountant before the Commission with the right to apply for reinstatement after two years. The proposed settlement, in which Keyuan and Li neither admit nor deny the charges, is subject to court approval.

February 28, 2013 in Film, SEC Action | Permalink | Comments (0) | TrackBack (0)

UCLA Search for Executive Director -- Lowell Milken Institute

UCLA School of Law has posted a position for Executive Director of its Lowell Milken Institute for Business Law & Policy.  This is a full-time, academic, non-tenure track position.  Attached is the complete job posting. (Download Job posting_Executive Director of the Lowell Milken Institute for Business Law Policy rev 2-27-13)

February 28, 2013 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 27, 2013

Supreme Court Decides Amgen and Gabelli

The U.S. Supreme Court announced two decisions today involving federal securities law issues. 

In Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, the Court held that proof of materiality is not a prerequisite to certification of securities fraud class actions.  While I will have more to say about this opinion later, it is a significant victory for the plaintiffs' securities bar. (Download Amgen opinion)

According to the court, the "pivotal inquiry ...  is whether proof of materiality is needed to ensure that the questions of law or fact common to the class will 'predominate over any questions affecting only individual members' as the litigation progresses."  The Court answered its question "no" for two reasons: First, because materiality is judged according to an objective standard, it can be proved through evidence common to the class. Second, a failure of proof on the common question of materiality would not result in individual questions predominating. Instead, it would end the case, for materiality is an essential element of a securities fraud claim. The Court rejected defendants' calls to require proof of materiality on policy grounds, noting that Congress had determined not to undo the "fraud-on-the-market" theory that allowed for federal securities fraud class actions.  Justice Ginsburg wrote the opinion; three Justices (Scalia, Thomas and Kennedy) dissented. 

The SEC, however, suffered a defeat in Gabelli v. SEC, in which the Court unanimously held that the five year statute of limitations applicable to government actions seeking civil penalties begins to run when the fraud occurs and not when it is discovered.  The Court found this was the natural reading of the statutory language.  In addition, there were sound policy reasons not to read into the statute a discovery rule exception.  In particular, such an extension "would leave defendants exposed to Government enforcement actions not only for five years after their misdeeds, but for an additional uncertain period into the future." ( Download Gabelli)

February 27, 2013 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 26, 2013

FINRA Enforcement Will Appeal Charles Schwab Victory

As readers of this blog know, last week a FINRA hearing officer refused to enforce FINRA's rules prohibiting broker-dealers from including class action waivers in their customers' agreements, in a big win for Charles Schwab.  FINRA Enforcement announced today it will appeal the decision to FINRA's National Adjudicatory Council.

February 26, 2013 in Other Regulatory Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Trustee for Medical Capital Notes Settles Investors' Claims for $114 Million

Medical Capital aggressively marketed its promissory notes in "private placements" to thousands of unsophisticated investors from 2003-2007, in what was almost certainly a Ponzi scheme.  Medical Cap collapsed in 2009 after the SEC charged it with fraud, and investors have brought numerous lawsuits and arbitration proceedings against brokers and other intermediaries.  Yesterday the Bank of New York Mellon Corp., a trustee for Medical Cap notes, agreed to pay $114 million to investors.  Investors claimed that Med Cap executives used the account as their personal piggy bank and the bank received substantial fees for its services.  A lawsuit against another trustee, Wells Fargo, continues.

Investment News, Bank of NY Mellon to pay $114M in private-placement settlement

February 26, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)