Securities Law Prof Blog

Ingersoll-Rand Settles FCPA Charges in Iraq Oil for Food Program

The SEC filed Foreign Corrupt Practices Act books and records and internal controls charges against Ingersoll-Rand Company Ltd., a New Jersey-based industrial equipment company, in the U.S. District Court for the District of Columbia. The Commission's complaint alleges that from 2000 through 2003, four of Ingersoll-Rand's subsidiaries entered into contracts in which $963,148 in kickback payments were made and $544,697 in additional payments were authorized in connection with sales of humanitarian goods to Iraq under the U.N. Oil for Food Program (the "Program"). The kickbacks were characterized as "after-sales service fees" ("ASSFs"), but no bona fide services were performed. The kickbacks paid by Ingersoll-Rand's subsidiaries and third parties diverted funds out of the escrow account and into an Iraqi slush fund. The contracts submitted to the U.N. did not disclose that the illicit payments were included in the inflated contract prices. The complaint also alleges that $8,000 in "pocket money" and travel expenses were paid to Iraqi government officials in connection with a trip to Italy.

Ingersoll-Rand, without admitting or denying the allegations in the Commission's complaint, consented to the entry of a final judgment permanently enjoining it from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, ordering it to disgorge $1,710,034 in profits, plus $560,953 in pre-judgment interest, and to pay a civil penalty of $1,950,000. Ingersoll-Rand is also ordered to comply with certain undertakings regarding its FCPA compliance program. Ingersoll-Rand will also pay a $2,500,000 fine pursuant to a deferred prosecution agreement with the U.S. Department of Justice, Fraud Section.

Merrill Lynch Post-O'Neal

Besides looking for a new CEO, Merrill Lynch needs to deal with the regulators.  SEC enforcement reportedly is looking into the adequacy of Merrill's disclosures about its losses in the credit markets and how it values its holdings of CDOs and subprime mortgages.  Merrill reported better-than-expected earnings for the second quarter in mid-July as the market's troubles were intensifying.  Then on Oct. 5 it announced a projected $5 billion loss which turned out to be $8.4 billion by Oct. 24.  A shareholders class action has already been filed.

Meanwhile, Stan O'Neal walks away with $161.5 million.  He doesn't get a bonus for 2007.  WSJ, Merrill's Job:Cleaning Up And Moving On;

Countrywide CEO Sued Over Stock Repurchases

A pension fund filed a shareholders derivative suit against Countrywide Financial CEO and 13 current and former directors in California.  The suit alleges that the corporation repurchased $2 billion of its shares in order to allow executives to sell $842 million of their personal holdings at inflated prices from April to October 2007.  NYTimes, Pension Fund Sues Countrywide Officers.

Court Finds Former Corporate Counsel Committed Securities Fraud

On October 25, 2007, the federal district court in New York, after a trial, issued a decision finding Moneesh K. Bakshi, former corporate counsel to Ramoil Management Ltd., liable for securities fraud for having submitted false and misleading documents to the SEC, specifically: (1) submitting a false and misleading Form10-KSB for the year ended December 31, 1999, which included a phony audit opinion; and (2) filing four false and misleading Forms S-8, which fraudulently issued shares of Ramoil stock to four offshore consulting firms in exchange for non-existent "consulting services," and included false attorney opinion letters by Bakshi. The Court enjoined Bakshi from future violations of the securities laws, ordered him to pay a $100,000 civil penalty, and enjoined Bakshi from representing clients before the Commission and filing any documents with the Commission.

SEC's Donohue Testifies on Mutual Fund Disclosure Reform

Andrew J. Donohue, Director, Division of Investment Management, SEC, testified on Improving Disclosure for Workers Investing for Retirement before the Ways and Means Committee, U.S. House of Representatives, on October 30, 2007.  His remarks focused on the SEC's mutual fund disclosure reform initiatives.

SEC and FINRA Sponsor Outreach Compliance Program

The SEC and FINRA announced a new initiative to further promote strong compliance practices at broker-dealer firms for the protection of investors.  The CCOutreach BD program will help broker-dealer chief compliance officers (CCOs) ensure effective communication about compliance risks, maintain effective compliance controls, and foster strong compliance programs within their firms.

The SEC's Office of Compliance Inspections and Examinations, in coordination with the Division of Market Regulation, will sponsor the CCOutreach BD program together with FINRA. The program will feature a National Seminar at SEC headquarters in Washington, D.C., tentatively scheduled for March 2008, as well as regional compliance seminars across the country. These meetings will provide the opportunity for open discussions on effective compliance practices and timely compliance issues in ever-changing markets.

FINRA Fines Oppenheimer for Inaccurate Breakpoint Data

FINRA fined Oppenheimer & Co. Inc. $1 million for submitting mutual fund breakpoint data to FINRA that the firm knew to be inaccurate, as well as for related supervisory deficiencies. FINRA also ordered the firm to engage an independent consultant to evaluate its policies, systems and procedures for responding to information requests from regulators.  FINRA's (then NASD) initial request to Oppenheimer for a breakpoint assessment was made in March 2003 as part of a review of approximately 2,000 broker-dealers that sold front-end load mutual funds in 2001 and 2002. That request followed findings by NASD and other regulators that showed that nearly one in three mutual fund transactions in front-end load mutual funds that appeared eligible for a breakpoint discount did not receive one. 

FINRA found that on two occasions, June 11, 2003, and Nov. 20, 2003, Oppenheimer submitted inaccurate and incomplete data in response to NASD's request to perform a self-assessment of its mutual fund breakpoint discount practices. Each of Oppenheimer's self-assessment submissions so completely and fundamentally failed to comply with the regulatory request that FINRA was unable to rely on Oppenheimer's data to analyze the firm's breakpoint compliance both in absolute terms and in relation to the approximately 2,000 other registered firms that contemporaneously submitted breakpoint self-assessments.

Oppenheimer settled the matter without admitting or denying the charges, but consented to the entry of FINRA's findings and dismissal of charges against Oppenheimer CEO Albert Grinsfelder Lowenthal.

Baseball Player vs. Broker -- Who's Worth More?

Who's worth more, the soon-to-be former New York Yankee Alex Rodriguez or the soon-to-be former Merrill Lynch CEO Stanley O'Neal?  Rodriguez reportedly is looking for $30 million a year and is willing to give up the three-year potential of $91 million remaining on his Yankees contract; NYTimes, Rodriguez Not Greedy by Standard of Wall St.  Meanwhile, the less successful O'Neal, whose resignation has not yet been announced, reportedly is negotiating tough for his exit package, expected to bring him about $160 million.  He earned about that amount on his nearly five years on the job.  WSJ, O'Neal's Last Big Deal as Chief Executive: Determining the Terms of His Exit Package.

Lerach Will Be Sentenced in January

William S. Lerach pleaded guilty yesterday to conspiracy to obstruct justice for concealing illegal payments to a named plaintiff in a securities class action.  Sentencing will occur in January.  The plea agreement with Mr. Lerach does not include an agreement to cooperate with the government.  The law firm Milberg Weiss and Mr. Weiss remain defendants in the criminal case.  NYTimes, Leading Class-Action Lawyer Pleads Guilty to Conspiracy

NYSE-Joint Venture to Encourage Block Trades

The NYSE and a consortium of 12 brokerage firms announced a joint venture to encourage block trades again.  It will specialize in matching orders for 10,000 or more shares privately.  The NYSE wants the lucrative block trades business, and the big investors want greater ease and more privacy.  WSJ, Shhh, NYSE Aims to Bring Back Blocks.

O'Neal Will Get About $159 Million to Leave

What will soon-to-be former Merrill Lynch CEO Stanley O'Neal receive after the corporation lost $8.4 billion?  The estimate for his walk-away compensation amounts to $159 million --- about $30 million in retirement benefits and another $129 million in stock and options.  This is in addition to the approximately $160 million in total compensation during his almost-five years on the job.  NYTimes, The Price of Any Departure Will Be at Least $159 Million.

New Trading Rules Go into Effect in EU

New rules that will eliminate many of the barriers to trading securities within the European Union will go into effect this week.  The Markets in Financial Instruments Directive (MiFID) is expected to reduce the customers' costs in trading securities, which today are substantially higher in Europe than in the US.  In addition, firms will owe their customers a duty of best execution.  Firms, however, are complaining about compliance costs.  WSJ, New Rules to Cut Hassle, Expense Of Trades in EU.

The Growth of Private Markets and Rule 144A Sales

The proliferation of private securities markets operated by the big investment banks shows the increasing importance of Rule 144A offerings as businesses seek to raise funds through sales of unregistered securities.  Multiple underwriters on deals, and investment firms' willingness to participate in offerings in rivals' markets, are also common.  The Wall St. Journal asks if it will lead to consolidation of the private markets.  WSJ, Rival Bankers Teaming Up In Private Securities Sales.

Kaufman on Ethical Standards

Nationalizing Ethical Standards for Securities Lawyers, by MICHAEL J. KAUFMAN, was recently posted on SSRN.  Here is the abstract:

In his article, The Corporate/Securities Attorney as a Moving Target - Client Fraud Dilemmas, Marc Steinberg does an outstanding job of identifying the complex and significant ethical issues currently confronting securities lawyers. In this article, I attempt to explore the important legal and political implications of Professor Steinberg's salient points. First, the article places the absence of an independent obligation of an attorney to blow-the-whistle on a client in the context of evolving federal securities law precedent. Although the Seventh Circuit was unwilling to create a federal common law obligation to blow the whistle, other circuits have come close to doing so, creating a patchwork of judicial authority on ethical questions. Second, the article argues that the Sarbanes-Oxley Act, and the SEC Rules promulgated pursuant to its authority, may indeed impose upon attorneys a federal duty to disclose client confidences in certain situations. Third, the article observes that the creation of such a federal duty is consistent with a broader trend in securities law jurisprudence toward the creation of national standards. Finally, the article also suggests that an attorney's breach of the newly-created federal duty to blow-the-whistle on the client could itself give rise to a viable private right of action for securities fraud.

Tsuk Mitchell on Shareholder Democracy

Shareholders as Proxies: The Contours of Shareholder Democracy, by DALIA TSUK MITCHELL, The George Washington University Law School, was recently posted on SSRN.  Here is the abstract:

This article explores the long-standing suspicion of the individual shareholder and the corresponding ambivalence about shareholder democracy as it is seen in conversations about the shareholder's role in the modern public corporation throughout the twentieth century.

The article examines two competing conceptions of the shareholder's role in the corporation: one focuses on the role of shareholders as investors, the other emphasizes the role of shareholders as potential participants in corporate management. I argue that scholars and reformers who have conceived of shareholders as investors limited the locus of shareholder democracy to the market. The writings of Louis Brandeis, Henry Manne, and Chancellor Allen offer examples of this vision. At the same time, scholars and reformers who argued that shareholders should have a more active role in corporate management (including William Ripley, Adolf Berle, William Douglas, and the early New Dealers) were reluctant to give shareholders meaningful access to the corporate decision-making processes. They feared not only that shareholders were too passive to participate in corporate management, but also that they could not be trusted to make the correct decisions. For the most part, these scholars ended up using the rhetoric of shareholder democracy (and the shareholders) as a proxy to achieving other goals. In the course of the twentieth century, these scholars' goals shifted from taming the power of the control group to constraining management to legitimating managerial power. More important, because they refused truly to empower shareholders, these scholars' attempts presumably to promote shareholder democracy ultimately emptied the idea of shareholder democracy of content. Gradually, the rhetoric of democracy became an apology for the status quo.

Gross on Securities Arbitration

McMahon Turns Twenty: The Regulation of Fairness in Securities Arbitration, by JILL GROSS, Pace Law School, was recently posted on SSRN.  Here is the abstract:

In light of the twentieth anniversary of the Supreme Court's decision in Shearson v. McMahon enforcing a pre-dispute arbitration clause in a brokerage customer's account agreement, the author revisits the asuumptions of the McMahon Court supporting its conclusion that arbitration is fair to investors. The article first explores the various sources of law, including the Federal Arbitration Act, which could require fairness in securities arbitration. The article then examines the Securities and Exchange Commission's oversight of securities arbitration, particularly in the last ten years. The article concludes that the SEC sufficiently regulates the fairness of securities arbitration, and thus the McMahon paradigm appears to be working.

Cunningham on Board Expertise

Rediscovering Board Expertise: Legal Implications of the Empirical Literature, by LAWRENCE A. CUNNINGHAM, George Washington University Law School, was recently posted on SSRN.  Here is the abstract:

This paper reviews and draws insights from recent empirical research in financial accounting on the value of director expertise for financial reporting quality. Among important consequences of Sarbanes-Oxley is an increase in the percentage of accounting experts on boards of directors, particularly on audit committees.

The research reviewed here documents the value of this expertise in promoting financial reporting quality measured in terms of “accounting earnings management” (artificial bookkeeping manipulations). These findings contrast with well-known evidence showing little value arising from director independence.

The research holds numerous implications and raises important questions, including the following:

1. It shows that accounting expertise is more valuable than other kinds of financial expertise, suggesting that the SEC should reconsider its definition of this concept.

2. Although accounting earnings management has declined since SOX, real earnings management (substantive business decisions taken to achieve accounting results, like delaying or accelerating investment in a new plant) may be rising. Do audit committee financial experts have a role to play in policing the latter?

3. What role do such experts have in determining the degree of conservatism that a firm uses in its financial reporting, demand for which may differ as among shareholders, bondholders, employees and others?

4. It is customary to see independence and expertise as trade offs. This may be correct when expertise arises from insider status, but incorrect when the expertise is substantive knowledge in a discipline, such as accounting.

5. Law has traditionally encouraged director independence and discouraged expertise but, this research suggests, that may be backwards and certainly requires reconsideration.

SIFMA's White Paper on Securities Arbitration

SIFMA's Oct. 25 testimony before House Subcommittee on Commercial and Administrative Law on the "Arbitration Fairness Act" is posted on its website, a more concise version of its White Paper on Securities Arbitration, subtitled "the success story of an investor protection focused institution that has delivered timely, cost-effective, and fair results for over 30 years."

The Arbitration Fairness Act is the most recent Congressional expression of concern about the securities arbitration process that dates back to the McMahon decision itself.  My objections to the White Paper are not so much with its position; I have previously written that, with all its flaws, the securities arbitration process is reasonably fair and that most investors are probably better off in arbitration than in court.  I just wish that SIFMA had invested its resources into contributing new research or new insights to this perennial debate.  Instead, the White Paper is principally a rehash of the old arguments and relies heavily on old studies – e.g., a 1988 study comparing arbitration and litigation, the 1992 GAO study, the 1999 Tidwell study based on NASD party evaluations. The most argumentative portion of the White Paper is devoted to a critique of the recently released Solin Report.  While I have previously pointed out difficulties with the analysis in the Solin Report, its authors base their arguments on an empirical examination of a substantial number of arbitration awards.

The White Paper, for example, faults the Solin Report for its failure to account for what the White Paper characterizes as the “particularly aggressive claimants’ bar” in the early 2000s which filed, in its view, a large number of meritless claims, specifically, the tainted research claims.  I think, however, that the poor rate of success of the tainted research cases in arbitration is a topic worthy of more dispassionate study.  Given the public exposure of statements by analysts that they were lying about their expectations for the stocks, why were the arbitrators apparently so willing to blame the investors instead of the firms?  Contrary to the White Paper, I personally do find it surprising that arbitrators awarded damages in fewer than one-third of the analyst cases.  Unlike the White Paper, I have doubts that the explanation lies with the aggressive claimants’ bar. 

FINRA Censures UBS for Late CRD Disclosures

FINRA announced today that it has censured and fined UBS Financial Services, Inc. (UBS) $370,000, for making hundreds of late disclosures to FINRA's Central Registration Depository (CRD) of information about its brokers, including customer complaints, regulatory actions and criminal disclosures. Those reporting violations occurred over a three-year period, from January 2002 through December 2004.  FINRA's findings included:

From January 2002 through December 2004, UBS failed to report on time 559 required disclosures on Forms U4 and U5 relating to reportable customer complaints, regulatory actions and criminal disclosures, representing a non-compliance rate of over 18 percent. During the same time period, the firm failed to have supervisory systems and procedures in place reasonably designed to achieve compliance with reporting obligations for timely disclosures.

From January 2002 through December 2004, UBS failed to disclose on Forms U4 and U5 at least 24 reportable written customer complaints that the firm had received.

As part of the settlement, UBS agreed to conduct an internal audit to evaluate the effectiveness of its system for timely compliance with certain Forms U4 and U5 reporting obligations. In addition, the firm agreed that an officer of the firm will certify that such audit has occurred and that recommendations from the audit have been or will be implemented.  In settling this matter, UBS neither admitted nor denied the allegations, but consented to the entry of FINRA's findings.

Former CEO of DHB Industries Arrested for Insider Trading

David Brooks, the former CEO of body armor-maker DHB Industries (n/k/a Point Blank Solutions) was arrested on conspiracy, insider trading, and other charges involving an alleged scheme to inflate the company's performance from 2000-2006.  The indictment also alleges that Brooks used company funds (about $ 5 million) for a whole array of personal and family expenses, including expenses related to his children's Bat/Bar Mitzvahs and his wife's cosmetic surgery.  WSJ, Former DHB Industries Chief Is Charged With Insider Trading.

The SEC also brought civil charges against Mr. Brooks.  At the time of the alleged conduct, Brooks was subject to an SEC injunction entered by a federal court in December 1992 against future violations of the antifraud provisions.