Securities Law Prof Blog

Atkins on SEC Regulation

Excerpts from SEC Commissioner Paul Atkins' speech at Finance Dublin:

[discussing the three recent reports discussing the competitiveness of US capital markets]

Although the perspectives and findings of each group were unique, there is a common thread of very important SEC-related issues among them. Among other things, each report recommended: (1) quick and substantial changes to the rules and guidance implementing section 404 of the Sarbanes-Oxley Act, (2) streamlined and coordinated regulatory processes that require meaningful cost benefit analyses, and (3) involvement jointly by the President's Working Group (which is made up of the Secretary of the Treasury and the chairmen of the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission, and the Commodity Futures Trading Commission) to provide transparency and predictability in the enforcement process.

We at the SEC cannot and should not ignore these findings and recommendations. We must clear the cobwebs and incorporate how the world has changed through technology and innovation when we consider whether to shed some of our weighty regulatory precedent. We need to ask ourselves a question that Secretary Paulson has recently posed: "Have we struck the right balance between investor protection and market competitiveness - a balance that assures investors the system is sound and trustworthy, and also gives companies the flexibility to compete, innovate, and respond to changes in the global economy?"The reports can help us answer this question.

Former Monster General Counsel Settles Back-Dating Charges

The SEC today announced that it has settled its enforcement action against Myron F. Olesnyckyj, the former general counsel of Monster Worldwide, Inc. In a parallel criminal action, Olesnyckyj pleaded guilty to one count of securities fraud and one count of conspiracy to commit securities fraud and has agreed to pay a forfeiture of $381,000. Olesnyckyj has not yet been sentenced in the criminal action.

On February 15, 2007, the Commission filed its action against Olesnyckyj. The complaint alleged that, from 1997 through 2003, Olesnyckyj backdated stock options grants to coincide with the dates of low closing prices for the Company's common stock, resulting in grants of in-the-money options to numerous individuals. Olesnyckyj personally profited by receiving backdated options. The complaint further alleged that Olesnyckyj misled Monster's outside auditors in an attempt to hide the backdating scheme by providing documentation to them that misrepresented the grant date of the stock option awards.

SEC Re-opens Reg SHO Amendment Comment Period

The SEC is re-opening the comment period on the "Amendments  to Regulation SHO" it proposed in Securities  Exchange  Act  Release  No. 54154 (July 14, 2006), 71 FR 41710 (July  21,2006).  Publication  is expected in the Federal Register during the week  of  April  2,  2007.     (Rel. 34-55520; File No. S7-12-06).

NYSE Guidance on Portfolio Margin Requirements

NYSE Regulation has posted on its website guidance concerning portfolio margin requirements.

SEC Will Review Rule 12b-1 Fees

The year's agenda at the SEC includes review and possible revision of Rule 12b-1 that regulates the sales fees that mutual funds charge to pay for distribution costs, says Andrew Donohue, the Director of Investment Management division.  See WSJ, SEC Will Review Mutual-Fund Sales Fee.

Shareholder Proposals at Goldman Sachs Complain about Nature Preserve

Two Goldman Sachs shareholders have included shareholder proposals on the management proxy statement, complaining that the company's donation of land in Chile to a nature preserve is a waste of corporate assets.  Goldman Sachs has made big money in the energy field while becoming known as Wall St.'s "green" investment banker.  See WSJ, Goldman's Green Streak Is Questioned As Two Investors Seek Focus on Profit.

New Century's Bankruptcy Expected

New Century Financial Corp., the poster child for the collapse of the subprime mortgage industry, is expected to file for bankruptcy soon, as both Barclays Bank and Morgan Stanley took back loans that secured New Century's financing and plan to auction them off.  See WSJ, Analysts Say Bankruptcy Filing
From New Century Is Imminent.

Supreme Court Set to Hear Securities Cases This Week

The Supreme Court will hear oral argument tomorrow in the Credit Suisse case (whether SEC regulation of IPOs displaces antitrust regulation) and, on Thursday, in the Tellabs case (the standard for pleading scienter under PSLRA).  The Wall St. Journal reviews these, as well as other decisions that have gone against the plaintiffs in recent years.  See WSJ, Securities Suits on Trial.

SEC Files Securities Fraud Charges against Stockman

The SEC filed civil  fraud  charges  against  auto  parts  manufacturer Collins & Aikman Corporation  (C&A),  David  A.  Stockman (Stockman), who served as C&A's former  Chief  Executive  Officer  and    Chairman of the  Board  of  Directors,  and  eight  other  former  C&A directors and officers.   The SEC's complaint alleges  that  between  2001  and  2005,  Stockman personally directed  fraudulent  schemes  to  inflate  C&A's  reported income by accounting improperly for supplier payments. In  furtherance of those schemes,  the  complaint  alleges  that  Stockman  and  other defendants obtained false documents from suppliers designed to mislead C&A's external auditors. According to the complaint, when  aspects  of the schemes were discovered in March  2005,  Stockman  embarked  on  a public campaign to mislead investors, potential financiers and  others by minimizing the extent of the fraudulent accounting and hiding C&A's dire financial condition. During the time Stockman was engaged in this fraudulent conduct, he was  collecting  millions  of  dollars  of  the management fees C&A paid to Stockman's private equity fund,  Heartland Industrial Partners. The other former officers,  including  the  Chief Financial Officer, Corporate Controller, and Treasurer, and  a  former member of C&A's Board of Directors, are alleged to  have  participated in the accounting schemes or the campaign to  mislead  investors.  (This is in addition to criminal charges also filed today.)

Ernst & Young Consents to Sanction

The SEC issued  an  Order  Instituting  Public Administrative and Cease-and-Desist Proceedings  Pursuant  to  Section 21C of the Securities Exchange Act of 1934  and  Rule  102(e)  of  the Commission's Rules of Practice, Making Findings, and Imposing Remedial Sanctions against Ernst & Young, LLP. In  the  Order,  the  Commission sanctioned E&Y for conduct arising out of  the  firm's  violations  of auditor independence  standards.  Without  admitting  or  denying  the Commission's findings, E&Y consented to the issuance of the Order.  In its Order, the Commission found that, throughout 2001, E&Y, through National Office partner Michael S. Joseph, helped develop  and  market
an accounting product for one client,  American  International  Group, Inc., and advised an audit client, The PNC Financial  Services  Group, Inc., on the accounting treatment for a version of that  product  that PNC purchased. The Commission found  that  as  a  result  of  Joseph's actions,  E&Y  compromised  its  auditor  independence.  Because E&Y was  not  independent, the firm did  not  conduct  independent  reviews  of  PNC's  financial statements for the second and third quarters of 2001  and,  therefore, was a cause of PNC's violations of reporting provisions of the federal securities laws that require quarterly reviews of financial statements to be conducted by an independent accountant.

NASD's Schapiro Speaks

Mary Schapiro, Chair and CEO of NASD, spoke before SIFMA's Compliance and Legal Division's 38th Annual Seminar, on the effects of the consolidation of the NYSE and NASD regulatory arms, as well as principles-based regulation and other issues.  See Remarks by Mary L. Schapiro Chairman & CEO, NASD.

Two Former Execs Indicted

Two former executives were indicted today on securities fraud charges.  Gary Gerhardt, former CFO of Engineered Support Systems Inc., was indicted in connection with allege backdating of stock options from 1996-2002.  See WSJ, Engineered Support Ex-CFO Is Indicted in Options Case.  David Stockman, former CEO of Collins & Aikman, was indicted on charges related to alleged improper accounting of rebate transactions.  See WSJ, David Stockman Is Indicted In Securities-Fraud Case.

Supreme Court Accepts Cert in Aiding and Abetting Case

The U.S. Supreme Court accepted certiorari in an aiding and abetting securities fraud claim.  Specifically the question presented is:  Does the Central Bank decision foreclose claims for deceptive conduct under Rule 10b-5 (a) and (c) when respondents engaged in transactions with a public corporation with no legitimate business or economic purpose except to inflate artificially the public company's financial statements, but made no public statements concerning these transactions?  The lower court decision is Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc., 443 F.3d 987 (8th Cir.)  The Docket Number is 06-43.

Auction for Tribune Co. Nearing End

The board of Tribune Co. is scheduled to meet this week to consider offers to buy the company, which put itself on the auction block last fall.  Two bidders have criticized the process, saying that Sam Zell, whose offer is currently the favorite, got an unfair advantage by receiving more detailed information to assist him in structuring his proposal.  See WSJ, Tribune Suitors Criticize Auction.

Blackstone Warns of Risks

Many have warned that if the public is invited to the party, it must be over.  The SEC filing in The Blackstone Group IPO gives warnings that its years of peak performance may be over and cites the drying up of low-cost debt in the global financial markets as a risk.  See WSJ, Funding Deals On the Cheap Grows Harder.

Perspective on The Past Week's Stories

The long-awaited Blackstone Group IPO offering 10% for $4 billion was filed this week.  Other news comes from the courts:  the 5th Circuit held that investors could not sue the investment banks in Enron for aiding and abetting; the district court dismissed the constitutional challenge to PCAOB; and two high-profile trials began -- Lord Conrad Black (Hollinger Int'l) for looting, and Josph Nacchio (Qwest Communications) for insider trading.

6th Circuit Decides NSMIA Preemption Issue

Brown v. Earthboard Sports USA, 6th Circuit Mar. 16, 2007, 2007 WL 777491:

NSMIA preempts state registration of "covered securities" issued "pursuant to" a Reg D exemption.  Federal and state courts have split on the conditions for establishing the applicability of the NSMIA preemption to unregistered offerings purportedly exempt under Reg D.  Specifically, must the offering actually meet the conditions for an exemption under Reg D, or is it enough that the offering was purportedly made under Reg D?  Reversing the district court, the 6th Circuit held that the offering must actually qualify for the Reg D exemption for NSMIA preemption to apply.  The court relied on the statutory language to reach this conclusion.

The 6th Circuit also reversed the district court on its conclusion that, as a matter of law, a non-reliance clause in the subscription agreement precluded the purchaser from establishing reliance on the broker's misrepresentations, since determining reasonable reliance requires a contextual analysis.

Morgan Stanley Announces Spin-off of Discover

Morgan Stanley announced its plans to spin off its credit card operation, Discover, to its shareholders in a SEC filing.  The move has been long expected, as the credit card business was not seen as a key part of the investment firm's image.  See WSJ, Morgan Files to Spin Off Discover.

Hedge Fund Manager Brings First Amendment Challenge in Massachusetts

A hedge fund manager, Bulldog Investors, has sued the Massachusetts securities regulator, asserting that the state's restrictions on information posted on Bulldog's website violate the First Amendment.   The state had previously charged that the website was an unregistered offering of securities.  See WSJ, Hedge-Fund Manager Sues Massachusetts Over Restrictions.

Thomsen on Hedge Fund Fraud

Linda Chatman Thomsen, Director of Enforcement at the SEC, gave a speech before the Investment Adviser Association 9th Annual IA Compliance Best Practices Summit 200, in which she discussed recent enforcement actions involving conflicts of interest between mutual fund advisers and the funds, as well as the increasing number of enforcement actions against hedge funds, noting that "We are seeing more and more hedge fund managers engaged in trading violations. These violations include market manipulation, deceptive market timing and late trading, illegal short selling and, of course, insider trading."