Securities Law Prof Blog

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

Sunday, 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 28, 2012 in News Stories, SEC Action | Permalink | Comments (1) | TrackBack (0)

Wednesday, 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.

WSJ, Gupta Sentenced to 2 Years in Prison

NYTimes, Rajat Gupta Gets 2 Years in Prison




October 24, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

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.

NYTimes, Federal Prosecutors Sue Bank of America Over Mortgage Program

WSJ, U.S. Sues BofA for $1 Billion Over Mortgage Losses


October 24, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, October 15, 2012

Broker Invents Investors for Broadway Production of Rebecca

Federal authorities have charged Mark C. Hotton, the stockbroker who acted as intermediary in the financing of the Broadway flop Rebecca, with criminal fraud.  According to the complaint (available at the New York Times website), Hotton invented investors and their interest in the production in order to secure $60,000 from the Broadway producers for his efforts.  According to U.S. District Attorney Preet Bharara:

As described in the criminal complaint, Mark Hotton perpetrated stranger-than-fiction frauds both on and off Broadway.  As part of one alleged scheme, Hotton concocted a cast of characters to invest in a major musical — investors who turned out to be deep-pocketed phantoms. To carry out the alleged fraud, Hotton faked lives, faked companies and even staged a fake death, pretending that one imaginary investor had suddenly died from malaria.

Hotton also allegedly used the same invented investors to defraud a Connecticut real estate company that was looking for financing.

October 15, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 2, 2012

New York AG Sues Over Bear's Role in Marketing Residential Mortgage-Backed Securities

Yesterday the New York State Attorney General brought a civil suit against Bear, Stearns & Co. (now J.P. Morgan Securities LLC) under the state's Martin Act arising out of Bear's role in connection with the creation and sale of residential mortgage-backed securities ("RMBS" to investors prior to the firm's 2008 collapse.  AG Eric Schneiderman is co-chair of the Residential Mortgage-Backed Securities Group formed by the DOJ in January 2012.  According to the complaint:

At the heart of Defendants' fraud was their failure to abide by their representations that they took a variety of steps to ensure the quality of the loans underlying their RMBS, including checking to confirm that those loans were originated in accordance with the applicable underwriting guidelines, i.e., the standards in place to ensure, among other things, that loans were extended to borrowers who demonstrated the willingness and ability to repay.

As a result, the complaint alleges, defendants' misconduct constituted "a systemic fraud on thousands of investors."  The complaint does not set forth with specificity the requested relief beyond an injunction, an accounting, disgorgement, restitution and damages.

The AG's allegations are similar to those made in a number of private lawsuits currently before the courts.

AG's complaint (Download 108632018-nyagvjpmc[1])

GMorgenson, NYTimes, JPMorgan Unit Is Sued Over Mortgage Securities Pools

AG's Press Release, A.G. Schneiderman Sues JPMorgan For Fraudulent Residential Mortgage-backed Securities Issued By Bear Stearns


October 2, 2012 in News Stories, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Friday, September 28, 2012

Bank of America Settles Class Action over Merrill Merger for $2.43 Billion

Bank of America agreed to pay $2.43 billion to settle claims it mislead its shareholders about the 2009 acquisition of Merrill Lynch.  This is the largest settlement of a shareholder suit related in the financial crisis.  Bank of America denied plaintiffs' allegations that it made false and misleading statements about the financial condition of Merrill and the Bank and said it was settling "to eliminate the uncertainties, burden and expense of further protracted litigation."  WSJ, BofA to Pay $2.43 Billion in Merrill Settlement

September 28, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Former SAC Analyst Pleads Guilty in Insider Trading

Jon Horvath, a former analyst at SAC Capital, pleaded guilty to insider trading and agreed to cooperate with prosecutors in an investigation of an alleged $62 million insider trading scheme.  Horvath stated that he obtained non-public information about Dell earnings in August 2008 and about Nvidia Corp. in May 2009 that he shared with his portfolio manager, who executed trades based on the information.  NYTimes, Ex-Analyst at Unit of Cohen's SAC Capital Admits Insider Trading

September 28, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 19, 2012

Senate Banking Committee Hearing on Computerized Trading

The Senate COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS SUBCOMMITTEE ON SECURITIES, INSURANCE, AND INVESTMENT has taken an interest in computerized trading and will conduct a hearing Sept. 20 on “Computerized Trading: What Should the Rules of the Road Be?”

The witnesses will be Mr. David Lauer, Market Structure and High-Frequency Trading Consultant, Better Markets; Mr. Andrew Brooks, Head of U.S. Equity Trading, T. Rowe Price; Mr. Chris Concannon, Partner and Executive Vice President, Virtu Financial, LLC; and Mr. Larry Tabb, Founder and CEO, TABB Group. Their written statements are posted on the Committee's website.

 According to the Wall Street Journal, David Lauer "is part of a growing chorus of industry insiders blowing the whistle on approved trading techniques that they say are designed by the traders who derive the most benefit. " WSJ, High-Speed Trading in the Spotlight

September 19, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 11, 2012

Treasury Announces an Expected Overall Positive Return of $182 Billion on AIG Bailout

On Sept. 10 U.S. Treasury announced that it planned to sell approximately 553.8 million shares of AIG common shares at $32.50 in an underwritten public offering, for expected proceeds of $18 billion.  Today it issued another release on the forthcoming offering, announcing that it expects to receive an additional $2.7 billion from the offering because the underwriters exercised their over-allotment option, bringing the total anticipated proceeds to $20.7 billion.

After the offering, Treasury's common stock ownership in AIG would decrease from approximately 53.4% to 15.9%.  According to the release:

The overall commitment that Treasury and the Federal Reserve made to stabilize AIG during the financial crisis totaled approximately $182.3 billion. Through repayments of principal and reductions/cancellations in commitments ($178.8 billion), as well as additional income from interest, fees, and other gains ($18.6 billion), Treasury and the Federal Reserve have now recovered a combined total of $197.4 billion (giving effect to the offering) – representing a positive return of $15.1 billion to date compared to the original combined $182.3 billion commitment. Future sales of Treasury's remaining AIG common stock holdings will provide an additional return to taxpayers.

 NYTimes Dealbook's Andrew Ross Sorkin features an interview with Neil Barofsky, former TARP special inspector general, who continues to assert that Treasury will suffer significant losses from the bailout.  NYTimes, Plot Twist in the A.I.G. Bailout: It Actually Worked

September 11, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, September 10, 2012

Treasury Plans to Reduce AIG Ownership Below Majority

The U.S. Treasury hopes to reduce its ownership interest in AIG (once 92%, now about 53%) to less than majority ownership.  It announced that it has launched an underwritten public offering of $18.0 billion of its AIG common stock.  AIG has indicated that it intends to purchase up to $5.0 billion of the common stock sold by Treasury in this offering at the initial public offering price. Treasury will also grant to the underwriters in the offering a 30-day option to purchase up to an additional $2.7 billion in common stock from Treasury to cover over-allotments, if any.

Citigroup, Deutsche Bank Securities Inc., Goldman, Sachs & Co., and J.P. Morgan Securities LLC have been retained as joint global coordinators. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc., Morgan Stanley & Co. LLC, RBC Capital Markets, LLC, UBS Securities LLC, Wells Fargo Securities, LLC, Credit Suisse Securities (USA) LLC and Macquarie Capital (USA) Inc. have been retained as joint bookrunners for the offering.

September 10, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, September 6, 2012

Second Circuit Revives Insider Trading Case Against Hedge Fund Manager

The Second Circuit revived an insider trading case brought by the SEC against Nelson Obus, a New York hedge fund manager.  The SEC charged that Obus received a stock tip from Thomas Strickland, a former employee at GE, that Sunsource was about to be acquired by Allied Capital.  GE was looking into financing the acquisition.  The federal district court had dismissed the case in late 2010, ruling that neither Strickland nor GE was a corporate insider of SunSource and that the SEC had not "demonstrated the requisite degree of deceptive conduct on the part of any defendant."

The Appeals Court, however, disagreed and stated that the SEC "has established genuine questions of fact about whether Obus knew that Strickland had breached a duty to GE Capital and whether Obus traded in SunSource stock while in knowing possession of material non-public information...."

NYTimes, Appeals Court Revives Insider Trading Case Against Obus

September 6, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Emails Show How the Revolving Door Spins at the SEC

Bloomberg Business Week has a not-to-be-missed article exploring the "revolving door" at the SEC.  It obtained through a FOIA request emails between Annette Nazarath, a former SEC Commissioner now at Davis Polk, and various SEC officials, including Chairman Mary Schapiro and former General Counsel David Becker.  The emails do not show any improper conduct, but nevertheless provide further evidence that big name law firms who employ former SEC officials can provide their clients with influence and access unavailable to the rest of us.  Business Week, Top Bank Lawyer’s E-Mails Show How SEC's Door Spins

September 6, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Friday, August 31, 2012

Court Rules that Delaware Chancellors Serving as Arbitrators is Unconstitutional

A federal district court ruled that a Delaware law that allows the Chancellors to conduct arbitrations in business disputes is unconstitutional.  The judge ruled that since the proceeding "is essentially a civil trial," the public has a right of access to the proceedings.  In arbitration the parties "still submit their dispute to a sitting judge acting pursuant to state authority, paid by the state, and using state personnel and facilities."  There have been six cases arbitrated under the law, but there is no public record of five of them.  The arbitrations, which cost a minimum of $12,000, were expected to be an additional source of revenue for the state.

The Chancellors named as defendants said that they would appeal the ruling, which put the United States at a competitive disadvantage in providing businesses with efficient methods for resolving business disputes.

NYTimes, Judge Rules Against Arbitration by a Delaware Court

WSJ, Delaware Arbitration Procedure Overturned

August 31, 2012 in News Stories | Permalink | Comments (1) | TrackBack (0)

Wednesday, August 29, 2012

Citigroup Agrees to Settle Securities Fraud Class Action for $590 Million

Citigroup and plaintiffs have agreed to settle for $590 million a securities fraud class action lawsuit that alleged that officers and directors "concealed the company's failure to write down impaired securities containing subprime debt" when it became apparent that the collapse in the mortgage market would require writedowns.  Citigroup issued a statement, saying it "will be pleased to put this matter behind us."  The settlement is subject to the approval of Judge Stein (S.D.N.Y.)  NYTimes, Citigroup in $590 Million Settlement of Subprime Lawsuit

August 29, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, August 27, 2012

SEC Rethinking Quiet Period Rules

The Wall St. Journal reports that the SEC is reviewing whether to ease the restrictions on pre-IPO communications imposed on issuers and others.   This is in response to complaints that retail investors were kept in the dark about developments at Facebook prior to its IPO.  WSJ, Regulators Rethink Pre-IPO Chatter.  The WSJ also published Mary Schapiro's letter to Rep. Darrell Issa on this subject (Download Secipoletter0826[1]).

August 27, 2012 in Film, News Stories | Permalink | Comments (0) | TrackBack (0)

Why Did SEC Commissioner Aguilar Oppose Money Market Fund Reform?

Today's New York Times features a story on SEC Commissioner Luis Aguilar's decision to oppose SEC Chairman Schapiro's proposal to reform money market funds.  His was the swing vote on the 5-member Commission.  According to Aguilar, he objected to the approach taken by Schapiro and cited the need for additional information.  The Times reports that Aguilar has met frequently with industry representatives this year.  Aguilar also worked for the industry as an attorney from 1994-2002.  NYTimes, A Regulator’s Key Role in Failed Mutual Fund Reform

August 27, 2012 in Current Affairs, News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 21, 2012

Interview with Professor Frankel on Ponzi Schemes

In case you missed it:  today's New York Times has an extensive interview with Professor Tamar Frankel (Boston University), in which she answers questions about her most recent book, The Ponzi Scheme Puzzle: A History and Analysis of Con Artists and Victims, which explores the psychology of con artists based on her analysis of 100 financial frauds around the world.  NYTimes, Examining the Ponzi Scheme Through the Mind of the Con Artist

August 21, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 14, 2012

Henning on the Goldman Sachs Investigations

Last week the DOJ closed a criminal investigation of Goldman Sachs and its CEO Lloyd Blankfein, and the firm announced that the SEC decided not to pursue a civil fraud case related to subprime mortgage debt.Peter Henning (Wayne State) has a good analysis of this situation and expresses the view that:

When the story of the financial crisis is finally written, this may turn out to be the denouement of the government’s investigations of Wall Street for potential wrongdoing that contributed to the financial crisis in 2008.

 New York Times Dealbook, Is That It for Financial Crisis Cases?

August 14, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Peregrine CEO Indicted on Federal Fraud Charges

Russell R. Wasendorf Sr., CEO of Peregrine Financial Group, was indicted yesterday by a federal grand jury in Iowa on multiple counts of submitting false reports to the CFTC.  Last month Wasendof confessed to stealing over $100 million in clients' funds and attempted suicide.  NYTimes Dealbook, Peregrine Chief Is Indicted in Brokerage Fraud Case

August 14, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, August 6, 2012

Debate over Adviser SRO Heats Up Again

Representative Spencer Bachus, Chairman of the House Financial Services Committee, has an op-ed piece in today's Wall St. Journal called "Financial Advisers, Police Yourselves," in which he calls for support of the Investment Adviser Oversight Bill that would authorize the establishment of one or more SROs to supplement the SEC's examinations for investment advisers.  The alternative that has been floated is allocation of additional funds so the SEC can conduct more exams.  Rep. Bachus, in response to this, states:

But the SEC has informed Congress that even if it received increased funding this year, it would be able to examine only one in 10 investment advisers annually. This is unacceptable.

Additionally, this approach ignores the SEC's poor track record leading up to the financial crisis. The SEC failed to protect investors and detect fraud even though evidence about the Madoff and Stanford Ponzi schemes was handed to them by insider informants on a silver platter.

As Investment News notes, on July 25 Rep. Bachus suspended his bill after Rep. Maxine Walters introduced a bill that would allow the SEC to charge advisers user fees to fund exams and said that no legislation would move forward until consensus was reached.  Representatives of the investment adviser industry expressed disappointment with Mr. Bachus's statement.  Inv News, Game on: Bachus reopens SRO debate, snipes at advisers 


August 6, 2012 in News Stories, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)