Securities Law Prof Blog

Investment Adviser Consents to Prime Bank Fraud

The SEC announced today that, on January 29, 2007, the U.S. District Court for the Northern District of Illinois entered a Final Judgment in the Commission's civil action against Directors Financial Group, Ltd. ("DFG"), an Illinois investment adviser formerly registered with the Commission, and Sharon E. Vaughn, DFG's owner and operator. In addition to relief previously ordered, the Court's Final Judgment requires Vaughn to pay a $200,000 civil penalty. Vaughn consented to the Final Judgment without admitting or denying the allegations of the Complaint.

The Commission filed its Complaint on March 2, 2006, alleging that Vaughn and DFG defrauded their private hedge fund clients in Directors Performance Fund, L.L.C. (the "Fund"). According to the Complaint, Vaughn and DFG, among other things (1) invested the Fund's assets in a fraudulent Prime Bank trading scheme (the "Trading Program") contrary to the Fund's disclosed trading strategy, (2) failed to investigate the Trading Program or its promoters, (3) entered into an undisclosed profit sharing agreement that ceded 25% of the Fund's purported profits to one of the Trading Program's promoters, (4) gave control of the Fund's assets to the Trading Program's promoters in violation of the terms of the Fund's prospectus, and (5) tried to cover up their fraud by withholding documents from — and providing fake documents to — the Commission's exam staff.  See SEC v. Sharon E. Vaughn and Directors Financial Group, Ltd., Case No. 06-C-1135 (N.D. Ill.)
   

Market-Timing Allegations Against CIBC Reps

IN THE MATTER OF MICHAEL SASSANO, DOGAN  BARUH,  ROBERT  OKIN  and  R.
SCOTT ABRY

   On  January  31,  the   Commission   issued   an   Order   Instituting Administrative Proceedings  against Michael Sassano, Dogan Baruh, Robert Okin and R.  Scott  Abry, alleging that Sassano  and Baruh, former registered representatives with CIBC World Markets Corp. and Fahnestock & Co., Inc.,  collaborated  with  numerous  hedge  fund customers to deceptively market time mutual funds through a variety of deceptive practices. Mutual funds, for  example,  repeatedly  detected Sassano's, Baruh's, and their customers' fraudulent  conduct  from  at least 1999 until September 2003, and sent World Markets and Fahnestock numerous letters and emails  complaining  about  this  abusive  market timing. In response to the mutual funds' efforts to  stop  the  market timing, Sassano and Baruh used numerous strategies to help their hedge fund customers deceive the mutual funds. Okin, the  Head  of CIBC's Private Client Services, and Abry, Sassano's and Baruh's branch manager, supervised Sassano and  Baruh  and  knew  of,  and  assisted, Sassano and Baruh's deceptive market timing practices.

   The Division of Enforcement seeks  cease-and-desist orders, disgorgement, civil penalties, prejudgment interest,  and  all    other remedial sanctions  that  are  appropriate  and  in  the  public    interest. (Rels. 33-8778; 34-55208; IA-2587;  IC-27692;  File  No.  3-12554).

      

Former General Counsel of Comverse Consents to Sanctions in Rule 102(e) Proceeding

William Sorin, former General Counsel of Comverse Technologies, consented to sanctions under Rule 102(e) in connection with the backdating stock options scandal involving that company and Kobi Alexander.  This follows the entry of a consent injunction in federal district court enjoining Sorin from future violations of federal securities laws.  The Commission's  complaint  alleges,  among
other things, that  beginning  no  later  than  1991,  and  continuing    through 2001, Sorin engaged in a  fraudulent  scheme  with  Comverse's   former Chairman and Chief Executive Officer, and from  at  least  1998   with Comverse's former Chief Financial Officer, to grant  undisclosed, in-the-money options to themselves and  others,  by  backdating  stock  option grants to coincide with historically low annual  and  quarterly   closing  prices  for  Comverse's  stock.  Among  other   things,   the   Commission's Complaint alleges that Sorin created company records that falsely indicated that Comverse's compensation committee had  approved   a grant of stock options on a date when, in reality, no such corporate   action took place. The complaint also alleges that Sorin created false   company records  that  facilitated  a  similar  backdating  scheme  at Ulticom,  Inc.,  another  public  company  that  is  a  majority-owned   subsidiary of Comverse.

Speech by NASD Vice Chair

In a speech before the Securities Traders Association, Doug Shulman, Vice Chair of NASD, addressed a number of issues, including the following:  the merger of the NYSE and NASD regulatory arms, the effect of technology and product convergence on the markets, and Regulation NMS.

NYSE-TSE Alliance Announced

The NYSE and Tokyo Stock Exchange agreed to an alliance that could ultimately lead to cross-listings of securities, in NYSE's latest move toward globalization.  See WSJ, Tokyo Exchange, NYSE Agree to Form an Alliance.  For more details, see the NYSE press release.

Altria Announces Spinoff of Kraft

As expected, Altria announced that it would split up Altria and Kraft Foods.  The transaction will take place by the end of March, and Altria shareholders will get .7 share of Kraft for every Altria share they own.  WSJ, Altria Board Approves Spinoff Of Company's Kraft Foods Unit.

Banks' Buybacks of Shares on the Increase

Banks turn to share buybacks as regulation makes it increasingly difficult to lend money.  See WSJ, Capital Idea:Banks Turn To Buybacks.

In Defense of Private Equity

Is there a backlash against private equity funds?  Yes, says a WSJ columnist, citing Clear Channel Communications, and it is not deserved.  The question is why can't public company managers produce the same profits for their shareholders that the private firms do?  See WSJ, Private Equity's Successes Stir Up A Backlash That May Be Misdirected.

Investing Club in Trouble with Investors

BetterInvesting, a NFP umbrella group of investment clubs, once riding high, is facing dissension from many of its mostly senior volunteers, who question its high expenses and governance practices.  Meanwhile, it is trying to recruit new investors, particularly teenagers, and has received a grant to teach investing to high schoolers. See WSJ, Peeved Members Of Investing Clubs Turn on Leaders.

Icahn's Interested in Motorola

Carl Icahn is at it again.  He announced yesterday that he is seeking a seat on the board of directors of Motorola.  He has only a 1.4% interest in the company, whose stock prices has been in a decline for some months.  Last year, Icahn threatened Time-Warner  with a proxy contest before backing down.  See NY Times, Icahn Seeks Board Seat at Motorola. The story also makes page one of the WSCJ, Icahn Bid Adds To Woes Dogging Motorola's CEO.

Investors Love Tobacco

The New York Times features Altria's proposed spinoff of Kraft Foods, in an article discussing investors' positive reactions about the spinoff and the tobacco industry.  Altria's a cash cow -- although regulation of smoking increases, people still smoke and apparently will pay any price for cigarettes.  See Tobacco’s Stigma Aside, Wall Street Finds a Lot to Like .

PIPE Offering Fraud Action Settled

FORMER SG COWEN MANAGING DIRECTOR AGREES TO A PERMANENT INJUNCTION AND PAYS $150,000 IN CIVIL PENALTIES TO SETTLE CHARGES OF INSIDER  TRADING AND FRAUD IN CONNECTION WITH "PIPE" OFFERINGS.

The Commission's complaint alleged that, during 2001, Pollet traded in the
   securities of ten public companies after receiving  confidential  non-
   public information that these entities were either engaged in, or were
   contemplating engaging in, "PIPE" financings. A "PIPE"  is  a  private
   investment in public equity. Specifically, the complaint alleged  that
   Pollet routinely sold short the publicly traded securities of the PIPE
   issuers prior to the close of the PIPE transaction in order to lock in
   gains for SG Cowen's proprietary account.

NYSE, TSE Alliance Expected

The Tokyo Stock Exchange is "very close" to an agreement on an alliance with the NYSE, according to TSE's chief executive.  John Thain, head of NYSE, predicts that this should eventually led to uniform regulation of cross-border transactions.  WSJ, NYSE, Tokyo Stock Exchange Are 'Very Close' to an Alliance.

BackDated Stock Options an Issue in Battle for Caremark

Did a promise of protection against charges of backdating stock options cause Caremark's board to favor CVS's bid for the company over Express Scripts?  So alleges Express Scripts in a lawsuit charging the Caremark board with breaching its obligations to obtain the best price for the shareholders.  See WSJ, Caremark Options Probes Ruffle Deal.

No Longer Plain Vanilla Index Funds

Index funds with high fees?  That's the new product in the funds industry, as companies create higher-risk index funds with a specific focus -- as a fund that index dividend-paying stocks or stocks of companies that are buying back their own stock.   See WSJ, Investors Bombarded By Index-Fund Choices.

London's AIM Attracts U.S. Small Caps

Clara Furse, the CEO of the London Stock Exchange, writes a WSJ commentary on the Alternative Investment Market (AIM) of the LSE and how it is attracting U.S. small caps to its market.  In the last 12 months, 23 U.S. companies have joined, raising a total of over $1 billion in capital.  See Taking AIM at Small Caps.

Congress Tackles Executive Pay

Congress has attached to the bill raising the minimum wage a provision that caps at $1 million per year the amount of deferred compensation.  Other attempts to limit executive compensation may follow.  See WSJ, Strike One for Executive Pay.

SEC Approves Use of Market Forces to Value Employee Stock Options

The SEC, for the first time, has approved a market-based method for valuing employee stock options in a letter to Zions Bancorp.  The move could lead to reduced reported values for the options.  See SEC Clears Market-Based WayTo Value Staff Stock Options.

Chinese Stock Market Overheated?

The WSJ reports that, the Chinese stock market boom is drawing more investors to the capital and, with it, risky practices familiar to the U.S. dot.com era -- including using funds borrowed from credit card companies and mortgage on the house to invest in the market.  See Stock Frenzy In China Stokes Official Concern.

SEC Commissioner Atkins on Hedge Fund Regulation

SEC Commissioner Paul Atkins spoke on hedge fund regulation at the Ninth Alternative Investment Roundup on Jan. 29.  He reviewed the history of attempted regulation of hedge funds, including the SEC's controversial rule -- invalidated last summer by the D.C. Circuit -- that would have required registration of hedge fund advisers.  He also discussed the narrower proposed rule put out for comment in December which will clarify the SEC's authority to bring enforcement actions against investment advisors for fraud against investors and will narrow the pool of investors eligible to invest in hedge and private equity funds.  On the latter, the Commissioner expressed concern about the rule as a barrier to entry for newly established hedge fund advisors.