Securities Law Prof Blog

Massachusetts Files Complaint Against UBS for Marketing of Auction Rate Securities

The Massachusetts Securities Division has filed a complaint against UBS Securities LLC and UBS Financial Services, alleging violations of the Massachusetts Uniform Securities in connection with the sale of auction rate securities (ARS) to retail customers.  According to the complaint, the sales were typically made with the express representation that the investments were liquid, safe, money-market instruments, whose interest rates would reset at periodic auctions, and that they could be sold at the next auction.  Instead, as UBS knew, no true auctions existed for many of these securities.  In addition, UBS failed to disclose to its customers the conflicts of interest because of UBS's dual role in underwriting the securities and selling them to their customers.  The requested relief includes requiring UBS to offer rescission of the ARS sales at par, censure, and administrative fines.  In re UBS Securities, LLC (filed June 26, 2008).

SEC Obtains Temporary Relief Against Alleged Ponzi Scheme

The federal district court for the Western District of New York granted the SEC's motion for preliminary injunction and other relief against defendants Watermark Financial Services Group, Inc. ("Watermark Financial"), Watermark M-One Holdings, Inc. ("Watermark Holdings"), M-One Financial Services, LLC ("M-One"), Watermark Capital Group, LLC ("Watermark Capital"), Guy W. Gane, Jr., and Lorenzo Altadonna. The SEC's complaint, filed on May 15, 2008, alleges that from at least May 2005 to the present, Gane and M-One orchestrated a securities offering fraud that has raised at least $5.7 million from approximately 90 investors, including a number of senior citizens, through the sale of debentures and promissory notes issued by the various entity defendants. Gane is a principal of each of the issuing entities. The complaint further alleges that the defendants told investors that their money would be used to purchase or develop real estate, but instead Gane: (i) used new investor funds to pay back earlier investors; (ii) misappropriated investors' funds by using them to pay himself, his family, and others; and (iii) transferred substantial portions of investor funds to Denkon, Inc., Guy W. Gane, III, and Jenna Gane for no apparent consideration. In addition, the complaint alleges that the debentures offering was not registered with the Commission and that Gane violated the broker-dealer registration provisions of the federal securities laws.

Entered on June 18, 2008, the court's order continues in place various forms of interim relief initially ordered by the court on May 16, 2008, when the court granted the Commission's application for a temporary restraining order and other relief to halt the fraud orchestrated by Gane and the other defendants. The litigation is pending.

New York Law Firm Can be Liable as Aider & Abettor of Securities Fraud under Oregon Statute

A disappointed investor in a hedge fund, residing in Oregon, can sue the New York law firm that drafted the offering documents for aiding and abetting the securities fraud of the principal, who had already pleaded guilty to securities fraud violations, under the Oregon securities statute.  The federal district court for the S.D.N.Y.  ruled against the defendant on a motion to dismiss and rejected its arguments that federal law preempted the statute statute and the state statute violated the dormant commerce clause.  The court did, however, agree with defendant that plaintiff failed to allege that the securities were not federally covered securities and dismissed the claim based on sale of unregistered securities.  The court noted that the U.S. Supreme Court, as recently as Stoneridge Investment Partners v. Scientific-Atlanta, Inc., recognized state authority to regulate and enforce its own fraud statutes in the securities area independent of federal law.  It also found nothing in National Securities Markets Improvement Act (NSMIA) that preempts state oversight of fraud or deceit in the securities area.  The Oregon Blue Sky Statute, modeled on the ALI's 1956 Uniform Securities Act, expressly provides a cause of action against aiders and abettors of securities fraud, and the Oregon Supreme Court has previously found that attorney preparation of legal materials for an offering qualifies as participating in or materially aiding under the statute.  The court noted that while the principal probably lied to the law firm, the statute requires the defendant to establish its due diligence as an affirmative defense.  Houston v. Seward & Kissel, LLP, 2008 WL 818745 (S.D.N.Y. Mar. 27, 2008).

NASAA's Legislative Agenda

The North American Securities Administrators Association (NASAA) identified its initiatives and legislative agenda for the second session of the 110th Congress.  The initiatives fall into five broad categories: 1.  Preserving the authority of state regulators to protect investors; 2. strengthening the mechanisms currently in place that provide redress to investors for wrongdoing by industry participants; 3. maintaining federal laws designed to insure corporate accountability and shareholder confidence; 4. promoting sound and effective regulatory initiatives, and 5. improving the scope and breadth of investor education efforts.  NASAA, 2008 Pro-Investor Legislative Agenda.

SEC Sustains NASD's Findings in Research Reports Case

The SEC sustained  NASD's  findings  of  violation  against Donner Corporation International, a former NASD member  firm,  Jeffrey L. Baclet, its former president and sole owner, and Vincent M.  Uberti and Paul A. Runyon, former registered representatives of Donner.  NASD found that Donner, Baclet, Uberti, and Runyon violated  Section  10(b)and Rule  10b-5,  and NASD Rules  2120,  2210,  and  2110  by  preparing  and  disseminating research reports which contained material misstatements and omissions.  NASD found further that Donner, Baclet, and Uberti violated NASD  Rule 2110 by failing to disclose in certain  Donner  research  reports  the compensation Donner  received  for  writing  the  reports.  NASD  also determined that Donner and Baclet violated NASD Rules 3010, 2210,  and 2110 by failing to establish and maintain adequate written supervisory procedures and by failing  to  ensure  written  approval  of  Donner's  research reports by a firm principal.

Bloomberg-Schumer Report on Financial Markets' Competitiveness

NYC Mayor Michael Bloomberg and NY Senator Charles Schumer issued a report  that warns that "if we do nothing, within ten years while we will remain a leading regional financial center, we will no longer be the financial capital of the world." It finds, among other things, that:  the U.S. regulatory framework is a "thicket of complicated rules, rather than a streamlined set of commonly understood principles."  It calls for re-examination of SOX implementation, legal reforms to reduce meritless litigation, and easing immigration restrictions. 

NASAA to Announce Pro-Investor Agenda

NASAA announced it would hold a news conference setting forth its Pro-Investor Agenda for the 110th Congress on Jan. 25. NASAA To Unveil Pro-Investor Legislative Agenda for 110th Congress  As described on its website: NASAA’s legislative agenda will include a focus on the regulatory structure of capital markets, the securities arbitration system, hedge funds and pension protection, as well as other issues of concern to state securities regulators and investors.

Ohio Appellate Court Decision on Jurisdiction, Preemption

For those interested in state securities law, the Ohio appellate court recently (12/26/06) issued an opinion dealing with a private offering, purportedly under SEC Rule 506, that used a website to solicit offerees.  The court held that (1) state did not have jurisdiction over certain defendants  where the only contact with the state was a passive website; and (2) state regulation was not preempted simply because the offering was purportedly made under Rule 506.  On the latter issue, the court declined to follow a federal court decision (Temple v. Gorman) to the contrary.  See In re Blue Flame Energy Corp., 2006 WL 3775856(Oh. App. 12/26/06)