Securities Law Prof Blog

Dow Jones and Murdoch Close to Final Terms

The terms of News Corp's offer for Dow Jones, as negotiated between representatives of Murdoch and Dow Jones, are expected soon.  The New York Times published the accord to protect the Wall St. Journal's independence today, which provides for a special committee, comprised of independent community and journalistic leaders, who could block the hiring and firing of top editors, go to court to enforce the agreement, conduct internal investigations and publish the findings.  See NYTimes, Tentative Deal on Wall Street Journal Safeguards.

Congress Subpoenas Executive Compensation Consultant

Gretchen Morgenson's column in the New York Times today discusses conflicts of interest between executive compensation consultants and the companies they advise.  A few month ago, Henry A. Waxman, Chair of the House Committee on Oversight and Government Reform, asked a number of consulting firms to provide information on their client relationships and revenues for the past five years.  Yesterday Towers Perrin received a government subpoena for the information.  See NYTimes, Subpoena for Advisers on Salaries.

SEC Settles Market Timing Charges with Former Trautman Wasserman Officer

On June 29,  the  SEC  settled an administrative hearing with Jerome Snyder, the former Chief Administrative  Officer of Trautman Wasserman & Company, Inc. (TWCO).  The SEC alleged that Snyder participated in a scheme to defraud  mutual  funds  through  deceptive market timing. Snyder received  numerous warning or kick out letters from mutual funds requesting TWCO to  stop market timing, but Snyder did not stop the market timing as the  funds requested. Instead, Snyder signed numerous account opening  forms  for TWCO and assisted in procuring multiple broker numbers  for  two  TWCO brokers, who then used the multiple accounts  and  broker  numbers  to deceive mutual funds about the identity of their customers in order to market time mutual funds.

   

SEC Extends Temporary Exemption for Banks

The SEC extended the temporary exemption of banks from the definition of "broker" until Sept. 28.  The SEC and Federal Reserve Board apparently need still more time to review public comments on proposed rules implementing the bank broker exemptions in section 3(a)(4) of the Exchange Act added by Gramm-Leach-Bliley.  The agencies have been so slow in implementing these rules that Congress enacted legislation in October 2006 mandating prompt implementation.

SEC Announces Results of Penny Quoting Pilot

The SEC announced today that early results from the Penny Quoting Pilot program show lowered trading costs for retail trades. An analysis of reports from the options exchanges by the Commission's Office of Economic Analysis indicate that the Pilot has been successful in narrowing average quoted spreads, which enables investors to trade options at better prices. The reduction in spreads also has led to a reduction in payment for order flow.

The Penny Quoting Pilot began in January 2007 after SEC Chairman Christopher Cox urged each of the options exchanges to begin quoting a limited number of options in pennies.

More information and links to the reports from options exchanges are available at the SEC website.

Weiss, Lerach Reportedly Rejected Guilty Pleas

The Wall St. Journal reports that Melvyn Weiss and William Lerach rejected offers to plead guilty in the Los Angeles case involving allegedly illegal kickbacks to lead plaintiffs in class action suits.  Neither lawyer has been indicted.  See WSJ, Weiss, Lerach Reject Offer to Plead Guilty.

SEC Moving Forward in Dow Jones Insider Trading Investigation

The SEC is moving forward with its insider trading charges against a Hong Kong couple, Kan King Wong and Charlotte Ka, who allegedly purchased a large amount of Dow Jones stock before the public announcement of News Corp.'s buyout offer.  The agency is scheduling formal interviews, including one with Dow Jones director, David Li, who has connections with Ms. Ka's father.  See WSJ, SEC to Press
Case in Trading Of Dow Jones.

Scrushy Sentenced in Bribery Case

Richard M. Scrushy, founder and former CEO of HealthSouth, who was not convicted of securities fraud in connection with the collapse of the company, was sentenced to seven years for bribing a state official in Alabama.  Since being fired from HealthSouth, Scrushy has become an ordained minister.  See WSJ, Scrushy Gets Nearly 7 Years in Bribery Case.

Former CEO of Certificate Companies Pleads Guilty to Theft

The SEC announced that, on June 26, 2007, John J. Lawbaugh ("Lawbaugh"), the former Chairman of the Board of Directors, Chief Executive Officer, and majority shareholder of 1st Atlantic Guaranty Corp. ("1st Atlantic") and Chairman and CEO of SBM Certificate Company ("SBM"), both face-amount certificate companies registered with the Commission, pleaded guilty to stealing over $1.2 million from 1st Atlantic and SBM, admitting that he had diverted those funds to his own use, as well as pleading guilty to wire fraud and tax evasion charges

SEC Sets July 6 For End of Tick Test

On June 13, 2007, the Commission voted to remove the tick test of Rule 10a-1 and to amend Regulation SHO to provide that no short sale  price test, including any price test of any exchange or national  securities association,  shall  apply  to  short  sales  in  any  security.   The Commission has established a compliance date of July 6, 2007  for  the changes.

SEC Announces NRSRO Applications

The SEC announced that each of the credit rating agencies previously identified as a nationally recognized statistical rating organization (NRSRO) has applied to be registered with the Commission. Consequently, they may continue to represent themselves or act as NRSROs during Commission consideration of their applications.

The firms are:

A.M. Best Company, Inc.
DBRS
Fitch, Inc.
Japan Credit Rating Agency, Ltd.
Moody's Investors Service
Rating and Investment Information, Inc.
Standard and Poor Ratings Services

NASD Settles Mutual Fund Sales Violations Against Four Firms

The regulators continue to bring enforcements actions against broker-dealers who do not recommend the suitable class of mutual fund shares or improperly price the fund shares.  For the latest example:

NASD announced today that it has settled cases against four firms involving mutual fund sales violations.  NASD imposed a $473,000 fine against MML Investors Services, Inc., of Springfield, MA, and a $354,000 fine against NYLIFE Securities LLC, of New York, NY for improper Class B share sales. Securities America, Inc., of Omaha, NE was fined $322,000 for improper Class B and Class C share sales.  NASD also fined Northwestern Mutual Investment Services, LLC, of Milwaukee, WI, $100,000 for failure to have adequate supervisory systems and procedures to ensure that clients received Net Asset Value (NAV) pricing when appropriate under NAV transfer programs. MML's settlement included similar findings without a fine.

In resolving the Class B and Class C share cases, MML, NYLIFE and Securities America have agreed to remediation plans that cover over 10,200 transactions and at least 1,080 households.

In resolving the NAV cases, MML and Northwestern will provide additional remediation to customers who qualified for, but did not receive the benefit of, available NAV transfer programs. Total NAV remediation for MML, including remediation already paid to customers, is estimated at approximately $2.56 million. For Northwestern, total remediation is estimated at $2 million, in addition to the previous conversion of approximately $2.0 million in Class B shares to Class A shares. "The cases announced today are the result of NASD's continuing commitment to help ensure that sales of mutual funds - the investment product most commonly held by investors - are made appropriately and with the benefit of full consideration of all available share classes and pricing features," said James S. Shorris, NASD Executive Vice President and Head of Enforcement. "These firms failed to implement reasonable supervisory procedures to ensure that these considerations were addressed on a consistent basis."

NYSE Delays Opening of Three Stock Because of Brokerage Errors

Perhaps someone more knowledgeable than I can explain how this can happen: The NYSE delayed the opening of three stocks due to erroneous orders sent to the Exchange by a brokerage firm: Jefferies Group, Inc. (NYSE: JEF), AT&T (NYSE: T) and Wyeth (NYSE: WYE) due to a series of erroneous orders sent to the Exchange by a brokerage firm. Floor professionals recognized the problem before trading began, thus avoiding public trading at incorrect prices on the NYSE.

ISS Backs CME Bid for CBOT

The proxy advisory firm, Institutional Shareholders Services, recommends that shareholders of Chicago Board of Trade Holdings vote yes for the proposed merger with Chicago Mercantile Exchange.  The shareholders' meeting is July 9. IntercontinentalExchange has made a rival bid; ISS says ICE is not as good a fit.  See WSJ, Advisory Firm Backs CME Deal.

Massachusetts Charges UBS in connection with Soliciting Hedge Fund Business

Massachusetts securities regulators accused UBS of "dishonest and unethical practices," alleging that its investment banking division gave hedge-fund managers perquisites like below-market office and low-interest loans in exchange for brokerage business.  The state's complaint describes a "hedge fund hotel," where, in addition to office space, hedge funds were provided with office furniture, receptionist, internet access, free meals and baseball tickets.  See NYTimes, A State Questions UBS Ties to Hedge Funds; WSJ, Hedge Funds' Gift Grabs.

SEC Charges Simpson Capital with Late Trading

The SEC announced that on June 27 it filed civil fraud  charges against Simpson Capital Management, Inc. (Simpson  Capital),  a  hedge fund manager, Robert A. Simpson, its president and owner, and John  C. Dowling, Simpson Capital's head trader. In its complaint, the Commission alleges that, between May 2000 and September 2003,  Simpson and Dowling defrauded hundreds of mutual funds and their shareholders of approximately $57 million when  they  placed thousands of illegal "late trades" after  the  close  of  the  market, which enabled them to trade based on after-market events  while  still obtaining the prices in effect before the market  closed.  Defendants' late trades  were  part  of  a  profitable  investment  strategy  that depended for its success on mutual fund trading based  on  information obtained after the markets closed at 4:00 p.m. ET.

   The complaint alleges that Simpson Capital is the  investment  adviser to two hedge funds, Simpson Partners, L.P. and Simpson Offshore,  Ltd. (collectively, the Simpson Funds).  Between  May  2000  and  September 2003, Simpson Capital, through Simpson and Dowling, used five separate introducing broker-dealers to place more than 10,700  trades  in  over 375 mutual funds after 4:00  p.m.  ET,  and  improperly  received  the current day's net asset value (NAV). The  Commission's  complaint  further  alleges  that  Simpson  was  an investor in the Simpson Funds and,  as  a  result  of  the  fraudulent trading, Simpson personally earned at least $19 million  in  fees  and profits. Dowling received more than $996,000  in  salary  and  bonuses during the late trading scheme.  The  Commission's  complaint  alleges  that  by  their  conduct,   the defendants violated Section 10(b) of the Securities  Exchange  Act  of 1934 and Rule  10b-5  thereunder.

Cox Announces Advisory Committee on Improvements to Financial Reporting

Chairman Christopher Cox today announced the establishment of an advisory committee that will examine the U.S. financial reporting system with the goals of reducing unnecessary complexity and making information more useful and understandable for investors.  The SEC Advisory Committee on Improvements to Financial Reporting will study the causes of complexity and recommend to the Commission how to make financial reports clearer and more beneficial to investors, reduce costs and unnecessary burdens for preparers, and better utilize advances in technology to enhance all aspects of financial reporting.

Chairman Cox said that the Commission will direct the advisory committee to conduct its work with a view toward removing practical and structural impediments that reduce transparency or unnecessarily increase the cost of preparing and analyzing financial reports to the detriment of the investor. The advisory committee will focus on the following areas before making recommendations to the Commission:

the current approach to setting financial accounting and reporting standards;
 
the current process of regulating compliance by registrants and financial professionals with accounting and reporting standards;
 
the current systems for delivering financial information to investors and accessing that information;
 
other environmental factors that drive unnecessary complexity and reduce transparency to investors;
 
whether there are current accounting and reporting standards that impose costs that outweigh the resulting benefits, and
 
whether this cost-benefit analysis is likely to be impacted by the growing use of international accounting standards.

As part of its consideration of these areas, the advisory committee will focus on how technology can help address accounting complexity by making financial information more useful to a greater number of investors. Through the power of XBRL, hyperlinks, and other technological advances, the opportunity exists to redesign the financial reporting system to deliver the type and level of information that investors need to access their preferred indicators of company performance.

NASD Fines Wells Fargo For Failure to Disclose Analyst's Conflict

NASD announced today that it censured and fined Wells Fargo Securities, LLC of San Francisco $250,000 - and imposed a $40,000 fine and 60-day supervisory suspension against its former Director of Research, Douglas van Dorsten - for failing to disclose in a research report that the lead analyst on the report had accepted a job at Cadence Design Systems, a San Jose, CA company that was the subject of the report.  NASD also announced that it filed a complaint against Jennifer Jordan, the former Wells Fargo research analyst, for failing to disclose in a series of three research reports that she was pursuing employment and then had accepted a job with Cadence, which was the subject of all three reports. As part of her compensation package with Cadence, Jordan was to receive 15,000 shares of Cadence stock, along with the option to purchase an additional 75,000 shares, once she started working at Cadence.

NASD's disciplinary actions concern three research reports issued by Wells Fargo in February, March, and April of 2005. The subject of the research reports, Cadence, designs semi-conductors for use in the global electronics market. In each report, Jordan was listed as the lead analyst.  See NASD Fines Wells Fargo Securities $250,000 for Failing to Disclose Analyst's Employment with Covered Company in Research Report.

Former Countrywide Financial Executives Admit Insider Trading

Three former executives at Countrywide Financial Corp. have agreed to plead guilty to insider trading charges for trading in their company's stock after they learned that the company's third quarter 04 results were below analysts' expectations.  See NYTimes, 3 Ex-Officers at Bank Admit Insider Trading.

Paulson Wants Overhaul of Regulatory System

Treasury Secretary Henry Paulson wants to overhaul the regulatory system over capital markets and has set up a group to make recommendations by next year.  Plans could include consolidation of bank regulators and adoption of best practices standards by hedge fund managers and investors to alleviate market risks.  See WSJ, Paulson to Launch Review Of U.S. Regulatory System.