Securities Law Prof Blog

D.C. Circuit Throws Out SEC Rule on Fee-Based Accounts

Financial Planning Association v. SEC, 2007 WL 935733 (Mar. 30, 2007):

The D.C. Circuit (by a 2-1 decision) threw out the SEC's rule that exempted broker-dealers offering fee-based accounts to their customers from regulation as investment advisers.  Because broker-dealers have an exemption under section 202(a)(11)(C) of the Investment Advisers Act where their advice is "solely incidental" to their business as broker-dealers and they receive no "special consideration" for their advice [i.e., for commission-based accounts], the SEC has no authority to grant broker-dealers another exemption under section 202(a)(11)(F), which gives the SEC authority to exempt "other" persons not within the intent of the statute.  The court relied principally on the statutory language,  but it also looked to the legislative history of the IAA and the agency's longtime policy prior to adopting this rule, initially on a temporary basis to allow broker-dealers to offer fee-based accounts.  In recent years, brokerage firms have heavily marketed fee-based accounts as revenues from commissions have dropped.

More Allegations in TXU Insider Trading Case

On March 28, the U.S. District Court  for  the  Northern  District  of Illinois in Chicago entered a  Temporary  Restraining  Order  freezing assets of Sunil and Seema Sehgal, a married  couple  residing  in  the United Kingdom. The Court issued the order following the  Commission's filing of an Amended Complaint, which added the Sehgals to the insider trading case that was previously  filed  on  March  2,  2007,  against certain Unknown Purchasers of TXU call options. The Amended Complaint alleges that the Sehgal's made highly profitable and suspicious purchases of 700 call option contracts for  the  common stock of TXU Corp. in January and February 2007. These  purchases  were made in  advance  of  a  public  announcement  that TXU  had  executed  a  merger  agreement  with private equity groups headed by Kohlberg Kravis Roberts &  Co.,  Texas Pacific Group and Goldman Sachs & Co.    The complaint alleges that as a result of the increase  in  price  of  TXU  stock  following  the  Announcement, the illicit profits on  the  Sehgal's  option  contracts total approximately $270,000.

  The Commission's complaint against the Unknown Purchaser alleges  that between February 21 and February 23 - prior to the  public  disclosure of the merger agreement - the  Unknown  Purchasers, using overseas accounts, purchased over 8,020  call  option  contracts  for  TXU  stock.  The  unrealized  illicit  profits  on  these  option contracts total approximately $5.4 million. On  March  28,  2007,  the District Court also approved an extension of the asset  freeze  as  to the Unknown Purchasers who purchased  TXU  securities  through  CreditSuisse in Zurich and Fimat Banque  Frankfurt  Zweigniederlassung.  The Court also approved a 60-day extension of the asset freeze as  to  the   Unknown Purchaser who traded through UBS AG London.

Form U-5 Statements Have Absolute Privilege, New York Court Rules

The New York Court of Appeals held that brokerage firms have an absolute privilege against defamation suits with respect to statements made on the U-5 Forms filed upon termination of a broker's employment.  Previously, the law was unclear whether the privilege was absolute or qualified.  Answering a question certified to it by the 2d Circuit, New York's highest court (in a 4-2 decision) said that absolute privilege followed from the "Form U-5's compulsory nature and its role in the NASD's quasi-judicial process, together with the protection of public interests."  Rosenberg v. MetLife, 2007 WL 922920 (Mar. 29, 2007).

Tribune Receives a Higher Bid

Ronald Burkle and Eli Broad, two L.A. billionnaires, have made a last minute bid for the Tribune Co. of $34, topping Sam Zell's offer by one dollar.  Like Zell's, it involves the use of an ESOP.  The Tribune board has been considering bids for some time and meets on Friday to consider the bids.  See NYTimes, 2 Billionaires Make Offer for Tribune ; WSJ, Tribune Suitor Zell Is Used to Bucking Trends.

Dell Finds "Evidence of Misconduct" in Accounting Practices

Dell announced that its internal investigation found "evidence of misconduct" in its accounting practices over the past several years and that its 10-K filing would be delayed.  Both the SEC and DOJ are investigating its accounting practices.  See NYTimes, Dell Reports It Has Found ‘Misconduct’ ; WSJ, Dell's Internal Accounting Probe Uncovers Evidence of Misconduct.

Take Two Shareholders Vote for Change

A shareholder group led by Oppenheimer Funds voted in five (or 6, depending on whose account you read) new directors at the annual meeting of Take-Two yesterday.  The new board then met and fired the CEO.  Take-Two has been unprofitable and in the midst of a back-dating options scandal.  Its previous CEO pled guilty last month on charges related to back-dating.  See NYTimes, Stockholders Oust Chief at Take-Two ; WSJ, Take-Two Holders Succeed in Board Coup.

SEC Open Meeting on Proposed 404 Auditing Standard

The Securities and Exchange Commission announced it will hold an open meeting on April 4, 2007, to discuss the Public Company Accounting Oversight Board’s (PCAOB) proposed auditing standard for Section 404 of the Sarbanes-Oxley Act and the coordination of that proposed standard with the Commission’s related pending proposal to provide guidance for management of public companies implementing Section 404. Both proposals were published for public comment in December 2006, and the comment periods for both proposals ended on Feb. 26, 2007.

Nicor Settles Fraud Charges

The Securities and Exchange Commission today announced that Nicor, Inc., a major Chicago-area natural gas distributor, and Jeffrey Metz, its former Assistant Vice President and Controller, will pay more than $10 million to settle charges that they engaged in improper transactions, made material misrepresentations, and failed to disclose material information regarding Nicor's gas inventory in order to meet earnings targets and increase the company's revenues under a performance-based rate plan administered by the Illinois Commerce Commission.

NYSE President Goes to Paris

NYSE President Catherine Kinney is relocating to Paris to oversee operations in Europe, as the merger with Euronext NV is completed next week.  The merger creates the largest market operator in the world.  See WSJ, NYSE Veteran Heads to Paris To Oversee Euronext Integration.

TXU Faces $210 million Fine from Texas

The $32 billion buyout of Texas utility TXU by KKR and other investors may be more difficult after Texas energy regulators recommended a $210 million payment for allegedly manipulating the energy market two years ago.  See WSJ, TXU Could Face $210 Million Payment.

SEC Initiatives on Short Sale Regulation

Speech by SEC Staff: Short Sale Regulation: A Targeted Approach for Efficient Markets
by James A. Brigagliano Associate Director, Office of Trading Practices and Processing, Division of Market Regulation ,U.S. Securities and Exchange Commission -- is available on the SEC website.  He discusses initiatives to modernize the regulation of short sales, specifically proposed amendments to Regulation SHO, Rule 105 of Regulation M and short sale price tests.

SEC Charges Two Enron Inhouse Counsel

On March 28, the SEC charged two former in-house  attorneys  of  Enron Corp., Jordan H.  Mintz,  a  former  Enron  Vice  President  and General Counsel of Enron's Global  Finance  group  (EGF)  and  Rex  R. Rogers, a former Enron Vice President and Associate  General  Counsel, in  connection   with   a   fraudulent   scheme   to   make   material misrepresentations in, and to omit material disclosures from,  Enron's public filings. The Commission's complaint charges  Mintz  and  Rogers with violating the antifraud  and  other  provisions  of  the  federal securities laws, and aiding and abetting  Enron's  violations  of  the antifraud  and  periodic  reporting  provisions.  In   addition,   the complaint charges Mintz with violating the books and records and lying to auditors provisions, and Rogers with aiding and abetting violations of  the  insider  stock  sale  reporting  provision  by  Enron's  then Chairman, Kenneth  Lay.  Mintz,  as  General  Counsel  of  EGF,   was responsible for managing the related party disclosures in Enron's 2000 Proxy Statement (incorporated  in  its  2000  Form  10-K)  and  second quarter 2001  Form  10-Q,  and  closing  a  fraudulent  related  party transaction  while  knowingly  or  recklessly  disregarding  that  the transaction was in  fulfillment  of  a  secret  oral  side  agreement.  Rogers, as Enron's top securities  lawyer,  was  responsible  for  the timing and content of all Enron's SEC filings.

Tellabs Oral Argument

Tellabs, Inc. v. Makor Issues & Rights was argued today before the U.S. Supreme Court.  Here's the link to the transcript.

Testimony at Black and Nacchio Trials

At the criminal trial of Lord Conrad Black,  former head of Hollinger International, a lawyer for a buyer of some newspapers from Hollinger Int'l testified that he saw co-defendant Mark Kipnis, a Hollinger Int'l lawyer, write a note directing payment of $9.5 million of the purchase price directly to Black.  See NYTimes, Hollinger Trial Witness Tells of Payment Note .  Meanwhile, at the criminal inside trading trial of Joseph Nacchio, former head of Qwest Communications, a government witness testified that Nacchio told her he had classified information that the corporation would get lucrative government contracts.  Nacchio's defense is expected to be that he did not sell his stock based on inside information that the corporation did not meet its forecasted earnings, because he had confidential information about government contracts.  See NYTimes, Qwest Chief Knew U.S. Fiber Optic Needs .

$14 Million Arbitration Award Upheld Against Merrill

A federal district court refused to vacate a $14 million defamation award by a NYSE arbitration panel to three former Merrill Lynch brokers who said that they were fired as scapegoats in the market-timing scandal.  The court cited the narrow grounds for vacating an arbitration award.  See WSJ, Court Upholds Award to Brokers Fired by Merrill.

Supreme Court hears oral argument in Credit Suisse Antitrust Case

Oral argument was held yesterday before the Supreme Court in Credit Suisse Securities v. Billings, where plaintiffs are attempting to sue underwriting firms under the antitrust laws for IPO practices that defendants say should be exclusively regulated under the securities laws.  The Justices' questions suggested that they might decide the case on "primary jurisdiction" grounds.  See WSJ, Wall Street Appeals to High Court.

SEC and FASB Reach Accord on SEC Role in Appointments

The Foundation that oversees the Financial Standards Accounting Board signed an agreement that gives the SEC advance notice and consultation rights about appointments to FASB, concluding several months of negotiations about the SEC's role.  Opinions are divided whether this mark a shift toward a more political FASB or just confirmation of the SEC's existing role.  See WSJ, SEC Is to Get More Sway Over FASB

SEC Chief Accountant Profiled

The Washington Post profiles SEC Chief Accountant, Conrad W. Hewitt, 70, who previously was a bank regulator, partner at an accounting firm, and director of a number of public companies that were implementing Sarbanes Oxley controls.  He is now working on streamlining those regulations and caused a flap by calling for a cap on damages for accountants.  See WPost, A Businessman Who Keeps the Books.

SEC Final Rule on Foreign Private Issuer's Deregistration

The SEC's Final Rule, Termination of a Foreign Private Issuer's Registration of a Class of Securities under section 12(g) and Duty to File Reports under sections 13(a) or 15(d), is now posted on its website.  The rule permits a foreign private issuer to terminate its registration requirements by meeting a quantitative benchmark designed to measure U.S. market interest for its equity securities that does not depend on a head count of the issuer's U.S. securities holders (designed to eliminate the "Hotel California" problem).

SEC Testimony on Appropriations Request

SEC Chair Christopher Cox's Testimony Concerning Fiscal 2008 Appropriations Request is available on the SEC website.