January 21, 2013
Will Mary Jo White be the Next SEC Chair?
The "buzz" is that President Obama will nominate Mary Jo White as the next SEC Chair. The nomination would send a message of the importance of SEC enforcement, as Ms. White would be the first prosecutor to serve as Chair. Ms. White served as U.S. Attorney in Manhattan from 1993-2002, where she made her reputation prosecuting terrorists and Mafia figures. Currently she represents corporate defendants as the head of the litigation department at Debevoise & Plimpton. Here is her bio from the firm's website:
When Mary Jo White left her post as US Attorney for the Southern District of New York in January, 2002, she was acclaimed for her nearly nine years as the leader of what is widely recognized as the premier US Attorney’s office in the nation. She had supervised over 200 Assistant US Attorneys in successfully prosecuting some of the most important national and international matters, including complex white collar and international terrorism cases. Ms. White rejoined Debevoise in 2002, and became Chair of the firm's over 225 lawyer Litigation Department. She is a Fellow in the American College of Trial Lawyers and the International College of Trial Lawyers. Ms. White is the recipient of numerous awards and is regularly ranked as a leading lawyer by directories that evaluate law firms. In addition, Ms. White has served as a Director of The Nasdaq Stock Exchange, and on its Executive, Audit and Policy Committee. She is also a member of the Council on Foreign Relations
January 18, 2013
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.
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
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 14, 2013
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 11, 2013
BATS Reports Numerous Bad Trades Over Four Years
BATS Exchange reported that in the past four years there have been numerous instances where trades were not executed at the best available price. The trades affected about 250 customers and cost about $420,000.
The Wall St. Journal reports on the impact on BATS and more generally on investor confidence in the trading markets and the regulators that regulate them. The SEC reportedly met on Thursday to discuss. WSJ, Now Up to BATS: Damage Control
December 19, 2012
Treasury Plans to Sell Off GM Stock Within 12-15 Months
The U.S. Dept. of Treasury announced that, as part of its continuing efforts to wind down its investments in the Troubled Asset Relief Program (TARP), it intends to fully exit its investment in General Motors (GM) within the next 12-15 months, subject to market conditions.
Treasury currently holds 500.1 million shares of GM common stock. It intends to exit that investment through the following means:
•GM will purchase 200 million shares of GM common stock from Treasury at $27.50 per share. This transaction is expected to close by the end of the year. (GM also issued a press release to this effect.)
Treasury intends to sell its other remaining 300.1 million shares through various means in an orderly fashion within the next 12-15 months, subject to market conditions. Treasury intends to begin its disposition of those 300.1 million common shares as soon as January 2013 pursuant to a pre-arranged written trading plan.
UBS Pays $1.5 Billion to Settle LIBOR Charges
The U.S. Dept of Justice announced criminal charges against UBS Securities Japan for scheming to manipulate the LIBOR rate. The company has agreed to plead guilty, admit to criminal conduct and pay a $100 million fine. The parent company, UBS AG, agreed to pay a $400 million penalty, admit and accept responsibility for its misconduct, and continue cooperating with the DOJ. In all, UBS will pay about $1.5 billion in criminal and regulatory penalties and disgorgement. In addition, the government announced that two former UBS traders have been charged with conspiracy. As described by Assistant AG Lanny Breuer:
The bank’s conduct was simply astonishing. Hundreds of trillions of dollars in mortgages, student loans, credit card debt, financial derivatives, and other financial products worldwide are tied to LIBOR, which serves as the premier benchmark for short-term interest rates. In short, the global marketplace depends upon an accurate LIBOR. Yet UBS, like Barclays before it, sought repeatedly to fix LIBOR for its own ends – in this case, so UBS traders could maximize profit on their trading positions, and so the bank wouldn’t appear vulnerable to the public during the financial crisis.
In addition to UBS Japan’s agreement to plead guilty, two former UBS traders – Tom Alexander William Hayes and Roger Darin – have been charged, in a criminal complaint unsealed today, with conspiracy to manipulate LIBOR. Hayes has also been charged with wire fraud and an antitrust violation. There was nothing subtle about these traders’ alleged conduct. In one instance, according to the complaint, Hayes explained to a junior rate submitter that he and Darin “generally coordinate” and “skew the libors a bit.” In another instance, according to the complaint, Hayes told a trader at another bank that, “3m libor is too high cause i have kept it artificially high.”
The scope of the misconduct admitted to by UBS AG and UBS Japan is far-reaching. For years, traders at UBS sought to manipulate the bank’s LIBOR submissions for their own profit. The traders had positions in interest rate swaps that depended on UBS’s LIBOR submissions. And, on numerous occasions, they caused UBS to make LIBOR submissions that directly benefited their own trading books. UBS’s manipulation was extensive, and covered several currencies and interest rates.
Make no mistake: for UBS traders, the manipulation of LIBOR was about getting rich. As one broker told a UBS derivatives trader, according to the statement of facts appended to our agreement with the bank, “mate yur getting bloody good at this libor game . . . think of me when yur on yur yacht in monaco wont yu.”
The CFTC also issued a press release.
December 18, 2012
Treasury Sells Off Last of AIG Common StockU.S. Treasury is no longer a shareholder in AIG common stock, down from 1.655 billion shares (92 percent of outstanding common stock) in January 2011. The Treasury announced the last sale of its shares. According to the press release, Treasury and the Federal Reserve have fully recovered the combined $182.3 billion they committed to stabilize AIG during the financial crisis – with an additional $22.7 billion positive return.
December 11, 2012
Treasury Agrees to Sell Remaining AIG Shares
The U.S. Department of the Treasury announced that it has agreed to sell all of its remaining 234,169,156 shares of American International Group, Inc. (AIG) common stock at $32.50 per share in an underwritten public offering. The aggregate proceeds to Treasury from the common stock offering are expected to total approximately $7.6 billion. According to the Treasury's press release:
Giving effect to today's offering, the overall positive return on the Federal Reserve and Treasury's combined $182 billion commitment to stabilize AIG during the financial crisis is now $22.7 billion. To date, giving effect to the offering, Treasury has realized a positive return of $5.0 billion and the Federal Reserve has realized a positive return of $17.7 billion.
December 05, 2012
Big Lots CEO Steps Down as SEC Looks into Stock SalesYesterday Big Lots Inc. announced that its CEO Steven Fishman intends to retire to spend time with his family. Today the Wall St. Journal headline is that the SEC is conducting an inquiry into Fishman's $10 million sale of Big Lots stock in advance of the company's release of bad news in March 2012. The WSJ cited Fishman's sale in its recent article that highlighted executives' trading in their companies' stock under Rule 10b5-1 plans. WSJ, Big Lots Chief Probed by SEC
November 26, 2012
Schapiro Steps Down; Walter is new SEC Chair
SEC Chairman Mary Schapiro announced that she will leave the Commission on Dec. 12, concluding her nearly four-year tenure. The SEC release notes that she is one of the longest serving SEC chairman, having served longer than 24 of the previous 28. The release also include a list of SEC accomplishments under her tenure. The White House has already named current SEC Commissioner Elisse B. Walter as the new Chair. Several other names had been floated, but Ms. Walter gets the top job. Her appointment does not require Senate confirmation, since she is a sitting Commissioner.
Here is Ms. Walter's bio from the SEC website:
Elisse B. Walter was appointed by President George W. Bush to the U.S. Securities and Exchange Commission and was sworn in on July 9, 2008. Under designation by President Barack Obama, she served as Acting Chairman during January 2009.
Prior to her appointment as an SEC Commissioner, Ms. Walter served as Senior Executive Vice President, Regulatory Policy & Programs, for FINRA. She held the same position at NASD before its 2007 consolidation with NYSE Member Regulation.
Ms. Walter coordinated policy issues across FINRA and oversaw a number of departments including Investment Company Regulation, Member Education and Training, Investor Education and Emerging Regulatory Issues. She also served on the Board of Directors of the FINRA Investor Education Foundation.
Prior to joining NASD, Ms. Walter served as the General Counsel of the Commodity Futures Trading Commission. Before joining the CFTC in 1994, Ms. Walter was the Deputy Director of the Division of Corporation Finance of the Securities and Exchange Commission. She served on the SEC's staff beginning in 1977, both in that Division and in the Office of the General Counsel. Before joining the SEC, Ms. Walter was an attorney with a private law firm.
Ms. Walter is a member of the Academy of Women Achievers of the YWCA of the City of New York and the inaugural class of the ABA's DirectWomen Institute. She also has received, among other honors, the Presidential Rank Award (Distinguished), the SEC Chairman's Award for Excellence, the SEC's Distinguished Service Award, and the Federal Bar Association's Philip Loomis and Manuel F. Cohen Younger Lawyer Awards.
She graduated from Yale University with a B.A., cum laude, in mathematics and received her J.D. degree, cum laude, from Harvard Law School. Ms. Walter is married to Ronald Alan Stern, and they have two sons, Jonathan and Evan.
Press accounts frequently describe Schapiro's four years as "bruising" (e.g. NYTimes, Schapiro, Head of S.E.C., Announces Departure ). She was charged with the task of restoring the agency's reputation after the Madoff scandal, restoring investor confidence in the securities markets after the financial crisis, and implementing reforms called for in the Dodd-Frank Act. She is credited with re-invigorating the Enforcement Division, among other accomplishments. However, she was frequently called to testify at Congressional oversight hearings that questioned the agency's competence on various issues, and an important SEC rule on proxy access was thrown out by the D.C. Circuit for insufficient analysis of the costs of the rule. Most recently, the Commission was unable to reach consensus on additional regulation of money market funds.
November 21, 2012
Attorneys Plead to Fraud Charges in Profiting from Variable Annuities On Lives of Terminally-Ill
Two Rhode Island lawyers, Joseph Caramadre and Raymond Radhakrishnan, pleaded guilty to fraud in federal district court, for selling variable annuities to help investors profit off the deaths of terminally ill people. Authorities said that the men concealed from the terminally-ill individuals and their families that their identities would be used on annuities purchased by Caramadre and others. They were also charged with lying to insurers and the broker-dealers that processed the annuity applications.
November 19, 2012
Refco's Former Outside Counsel Again Convicted of Deceiving Investors
Joseph Collins, former Mayer Brown partner and outside counsel for failed futures firm Refco, Inc., was convicted last week by a Manhattan jury for the second time of fraud. His prior conviction had been tossed because of communications between a juror and the trial judge without the presence of Collins' attorney. The jury convicted him on seven counts on charges he helped Refco executives defraud investors by hiding transactions that concealed losses.
November 16, 2012
Attorney Convicted for Obstructing SEC Investigation into Client's Ponzi Scheme
On Nov. 12, a federal district judge in California convicted David Tamman, a former partner at the law firm Nixon Peabody LLP for obstructing an SEC investigation into whether one of the law firm's former clients was running a Ponzi scheme. Tamman was convicted on all ten counts on which he was tried: one count of conspiring to obstruct justice, five counts of altering documents, one count of being an accessory after the fact to co-defendant John Farahi’s mail and securities fraud crimes (via NewPoint Financial Services), and three counts of aiding and abetting Farahi’s false testimony before the SEC.
According to the SIGTARP press release:
The evidence at trial showed that immediately after the SEC made a surprise inspection of Farahi’s business, Tamman met with Farahi and began altering and backdating documents to make it appear that Farahi had been disclosing to investors that Farahi was himself taking the majority of investors’ funds. Those altered documents were later produced to the SEC and falsely represented by Farahi to be the actual documents that had earlier been given to investors. The evidence at trial also showed that Tamman created and backdated promissory notes and supplemental disclosure documents and lied to his partners and co-counsel about the creation and alteration of documents that the SEC was seeking.
November 15, 2012
Staff Report on MF Global Failure Reopens Debate on SEC-CFTC Merger
The staff report prepared for the House Subcommittee on Oversight & Investigations, Committee on Financial Services, investigating the collapse of MF Global was released today. (Download MFGlobalStaffReport111512) The report finds that Jon Corzine caused MF Global's bankruptcy and put customer funds at risk through his excessively risky business model and lack of systems and controls. The report recommends that Congress consider enacting legislation that imposes civil liability on officers and directors who sign a FCM's financial statements or authorize specific transfers from customers' segregated accounts for regulatory shortfalls.
In addition, the report reopens the perennial debate over whether the SEC and CFTC should be merged. It finds that "The SEC and the CFTC Failed to Share Critical Information about MF Global
with One Another, Leaving Each Regulator with an Incomplete Understanding." It recommends:
The apparent inability of these agencies to coordinate their regulatory oversight efforts or to share vital information with one another, coupled with the reality that futures products, markets and market participants have converged, compel the Subcommittee to recommend that Congress explore whether customers and investors would be better served if the SEC and the CFTC streamline their operations or merge into a single financial regulatory agency that would have oversight of capital markets as a whole.
November 12, 2012
Jury Clear Money Fund Founders of Fraud Charges
The SEC lost an important enforcement action against Bruce Bent and his son Bruce Bent II, who were charged with misleading investors in attempts to stop a run on their Reserve Fund in September 2008. The fund "broke the buck." The jury found that two of the Bents' companies violated securities laws, but cleared both Bents of federal securities charges -- the son was found liable on one negligence count. This is yet another example of the regulators' inability to persuade juries to hold individuals responsible for their actions during the financial crisis.
October 28, 2012
Bring Back Fractional Pricing? Everything Old is New Again
Should the SEC bring back fractional pricing of securities so that securities firms can make greater profits at the expense of investors? The SEC is seriously considering a pilot program to explore this, according to Wall St. Journal, SEC Weighs Bringing Back Fractions in Stock Prices
If this sounds strange to you, you're not alone. Decimal pricing of stocks came about eleven years in order to lower investors' costs, and the research shows that it has done so. But some smaller companies complain that investment banks aren't interested in selling their stocks because they won't make enough money. The JOBS Act, which gives us crowdfunding, also required the SEC to study decimal pricing. In July the SEC released its study that concluded:
As discussed above, though there is literature on the types of benefits that lower spreads bring to the market, there is less available information related to how lower spreads may have negatively impacted capital formation, especially with respect to the complex, competitive dynamics and economic incentives of market intermediaries who provide liquidity. More so, as discussed among participants at the Advisory Committee meeting, there are a number of other factors that have influenced the IPO market in addition to decimalization.
( Download Decimalization-072012)
October 24, 2012
Rajat Gupta Sentenced to Two Years for Tipping Rajaratnam
Rajat Gupta, former head of McKinsey & Co. and former director of Goldman Sachs and Procter & Gamble, was sentenced to two years in prison for his conduct in passing along material inside information to Raj Rajaratnam, in addition to a $5 million fine and one year of supervised release after serving his sentence. Prosecutors asked for up to ten years in prison. Judge Rakoff received numerous letters from prominent businessmen and others, urging leniency. During the hearing, Judge Rakoff said:
"I think the record, which the government really doesn't dispute, bears out that he is a good man. But the history of this country and the history of the world, I'm afraid, is full of examples of good men who do bad things."
Gupta's attorneys will appeal.
NYTimes, Rajat Gupta Gets 2 Years in Prison
DOJ Sues BofA for $1 Billion Over "Spectacularly Brazen" Fraud
Another lawsuit was filed today against Bank of America, this one in connection with the "hustle" home loan program it acquired with its purchase of Countrywide Financial in 2008. According to the U.S. District Attorney's office in Manhattan, the bank churned out mortgages without conducting sufficient due diligence and then got rid of the loans by selling them to Fannie Mae and Freddie Mac without warning them of their defects. The government calls it "spectacularly brazen" fraud and seeks $1 billion.