Securities Law Prof Blog

SEC Announces Executive Compensation Disclosure

The SEC has launched "Executive Compensation Disclosure" that, it says, will enable investors to compare what 500 of the largest American companies are paying their top executives. The SEC is implementing its vision of XBRL interactive data to make disclosures more accessible to investors.  According to the SEC press release, "investors can quickly glimpse the total annual pay as well as dollar amounts for salary, bonus, stock, options and company perks. They can instantly compare those executive compensation figures with other companies by sorting according to industry or size."  It includes direct links to companies' proxy statements, including footnotes and the companies' explanation of their compensation decisions.

Chair Cox on SWFs

Today, the world's sovereign wealth funds (SWFs) are larger than all of the world's hedge funds combined.  SEC Chair Cox has recently spoken publicly about SWFs, and, in light of the fact that SWFs are taking significant positions in major Wall St. institutions, I thought it would be useful to review what he has said about them.  In a Dec. 5, 2007 lecture at the AEI Legal Center for the Public Interest, entitled "The Rise of Sovereign Business," Chair Cox noted that SWFs are "challenging conventional approaches to the respective roles of government and the private sector."  Dissolving borders, he notes, requires us to face the reality that many of the world's governments do not attach the importance we do to private economic ordering  as the operating premise of the capital markets.  So he identifies the issue as:if the distinction between government and private activity in our capital markets is increasingly blurred, is there a point at which the "free market" as defined by Adam Smith stops being that and morphs into something else? 

Chair Cox also noted several specific issues that SWFs present for the SEC.  One is enforcement -- what happens when the SEC investigates an entity that is controlled by the government?  Is it likely that the SEC would get the assistance of its overseas regulatory counterparts?  In addition, questions of conflicts of interest and opportunities for political corruption increase.  Will SWFs always direct their affairs in furtherance of investment returns, or will they use those resources in pursuit of other government interests?  Another important issue is transparency, as to which Chair Cox noted that "the track record to date of most SWFs does not inspire confidence."  This could result in serious disparities of information, with a resulting loss in investor confidence.  The answer, however, is not to restrict SWFs' access to capital markets, but to work to ensure the transparency of sovereign investment.

SEC Investigates Mortgage Valuations on Wall St.

The SEC is conducting more than three dozen investigations into mortgage-securities pricing, including at many of the big Wall St. firms like Bear Stearns, Merrill Lynch, Morgan Stanley and UBS.  Issues include whether they should have disclosed earlier the declining values of their mortgage securities portfolios and how they priced the securities, including whether they valued the same securities held in their own trading accounts higher than those held in the asset management group or trading accounts of customers.  WSJ, Pricing Probes On Wall Street Gather Steam.

SEC Investigates Inflated Appraisals at Washington Mutual

The SEC is investigating Washington Mutual, the nation's largest S&L and one of the largest home-mortgage lenders, on issues related to inflated appraisals on home mortgages.  Last month the New York State Attorney General filed a lawsuit that, while not naming WaMu as a defendant, alleges that it put pressure on an appraisal company to inflate property valuations.  WaMu said that it is cooperating with the SEC inquiry and that an internal investigation shows there was no systematic effort to inflate appraisals.  WSJ, SEC Probes WaMu on Appraisals.

2007 Class Action Filings Up

Class action filings in 2007 are up 58% over 2006, according to a NERA study.  A total of 198 were filed through Dec. 15, 38 related to subprime mortgages.  Even excluding subprime mortgages and backdating stock options, class action filings are up almost 40%.  Average settlements for 2007 are $33.2 million, compared with $22.7 million in 2006.  NYTimes, Class-Action Cases Rise, Fueled by Subprime Troubles. 

Akzo Nobel Settles FCPA Charges with SEC

The SEC has settled another FCPA case involving kickbacks made under the U.N. Oil for Food Program.  The SEC filed books and records and internal controls charges against Akzo Nobel N.V., a Netherlands-based pharmaceutical company, alleging that from 2000 to 2003, two of Akzo Nobel's subsidiaries authorized and made $279,491 in kickback payments in connection with their 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 in connection with Akzo Nobel's subsidiaries' sales to Iraq bypassed the escrow account and were paid by third parties to Iraqi-controlled accounts in Lebanon and Jordan.

Akzo Nobel consented to the entry of a final judgment permanently enjoining it from future violations and agreed to disgorge $1,647,363 in profits, plus $584,150 in pre-judgment interest, and to pay a civil penalty of $750,000. The SEC stated that it took the company's prompt remedial acts into account.

Chair Cox Speaks on Cross-Border Securities Markets Mergers

Chair Cox gave the keynote address at a conference at Columbia University on Cross-Border Securities Markets Mergers on Dec. 19.

Bear Stearns Announces 4th Quarter Loss

Another day, another financial institution announces a loss because of mortgage writedowns.  Bear Stearns reports a net loss of $854 million for the fourth quarter and a revenue loss of $379 million.  Its top executives will forego their annual bonuses.  WSJ, Mortgage Bets Bite Bear Stearns.

SWFs' Power Raise Concerns over Political Control

Sovereign wealth funds (SWFs) are increasingly in the headlines as they provide the cash for troubled US financial institutions, Morgan Stanley being the most recent example.  Should we be worried about foreign political involvement in these businesses?  The IMF is working on a code of best practices for SWFs, and the Organization for Economic Cooperation & Development is preparing a code for the recipients of the investments.  Both are expected to be released in preliminary form next spring.  WSJ, Wanted: SWFs' Money Sans Politics.

S&P Cuts a Bond Insurer's Rating

The ratings agencies have been subject to some criticism for not reacting quicker to the mortgage market crisis.  In a sign that the market's troubles are not over, yesterday Standard & Poors cut the bond rating of one bond insurer, ACA Financial Guaranty, from A to CCC and, while not cutting their ratings, assigned a "negative outlook" to four other companies that guarantee debt linked to home mortgages.  ACA announced it had negotiated a postponement of its contractual commitment to post $1.7 billion in collateral if its rating fell, but it needs to find a more permanent solution.  NYTimes,
Bond Insurer Cut to Junk; Negative Outlook for 4 More.

Government Savings Plan Confronts Frequent Traders

The Thrift Savings Plan is a 401(k)-type plan established by Congress for government employees to save for their retirement.  Last month its board voted to limit participants to two trades a month, because some investors trying to beat the market were driving up transaction costs for the Plan.  The problem is especially acute in its international stock fund.  Predictably some participants are organizing an opposition campaign, saying they have a right to trade whenever they want.  The SEC requires mutual fund boards to consider taking steps to prevent market-timing in their funds.  WPost, Too-Frequent Traders?

SEC Advisory Committee on Financial Reporting Sets Agenda for Jan. 11 Meeting

The SEC Advisory Committee on Improvements to Financial Reporting will hold a public meeting on Jan. 11, to discuss its progress report on the Committee's work to date in the areas of substantive complexity, standard setting, audit process, and compliance and delivery of financial information.

SEC Publishes Final Rules on Smaller Reporting Companies

The SEC has published its final rules on Smaller Reporting Company Regulatory Relief and Simplification, which expands the number of companies that qualify for its scaled disclosure requirements for smaller reporting companies.

SEC Settles Charges Against Former Refco Executive

The SEC filed a settled civil injunctive action against Santo C. Maggio, a former senior executive of Refco Inc. and its corporate predecessor, Refco Group Ltd. (together, Refco). Maggio was an executive vice president at Refco and headed Refco's registered broker-dealer subsidiary. The Commission's complaint alleges that Maggio played a significant role in concealing hundreds of millions of dollars of related party receivables and also alleges that Maggio participated in certain practices that inflated Refco's financial results.  Yesterday both the SEC and DOJ filed charges against Refco's principal outside attorney Joseph P. Collins in connection with the Refco fraud. 

SEC Obtains Order in Alleged $250 Million Offering Fraud

The SEC obtained a partial final judgment and order for permanent injunction and other relief against Edward P. May ("May") and E-M Management Company LLC ("E-M"), in connection with an alleged $250 million offering fraud that allegedly involved phony Las Vegas casino and resort telecommunication deals and may have involved as many as 1,200 investors, many of whom are senior citizens. May and E-M consented to the Order without admitting or denying the allegations of the SEC's complaint. The Order indicates that the Court will determine the specific amounts, if any, of disgorgement and civil penalties against May and E-M at a separate hearing upon notice and motion by the SEC.

The SECalleged that May, through E-M, raised as much as $250 million between 1998 and July 2007 from investors living in Michigan, California, Florida, Illinois, New York, Ohio and New Jersey. According to the allegations of the complaint, May and E-M sold securities in the form of interests in limited liability companies ("LLCs"), and told investors that these LLCs had been contracted to install and provide telecommunications equipment and services to major Las Vegas hotel chains and casinos.The complaint goes on to allege that May and E-M, both orally and in writing, promised returns in the form of monthly payments to investors for a period as long as 12 to 14 years, and "guaranteed" that investors, at a minimum, would receive the promised payments for approximately the first 20 to 24 months after they invested.  The SEC's complaint further alleged that, in reality, the LLCs did not have any telecommunication contracts with the establishments identified in offering materials provided by May and E-M.

NYSE Firms Post Big Third Quarter Losses

NYSE member firms that conduct business with the public reported third quarter 2007 after-tax loss of $2.49 billion and revenues of $78.79 billion, compared with $2.64 billion after-tax profit and revenues of $81.76 billion in third quarter 2006.  NYSE, NYSE Member Firms Report Third-Quarter 2007 Results.

Meanwhile, Morgan Stanley is getting a $5 billion investment from China's sovereign wealth fund, after posting a $9.4 billion write-down due to bad bets on mortgages.  The China fund will acquire preferred shares that will convert into just under 10% of the common stock.  Morgan Stanley joins Citigroup, Bear Stearns, and UBS in receiving bailouts from Asia and the Middle East.  WSJ, Morgan Gets Infusion From China After Swinging to a Quarterly Loss.

SEC Charges Two Former Morgan Stanley Advisors with Market Timing

The SEC recently filed a civil fraud action against  two former Morgan Stanley DW, Inc. (MSDW) financial advisors, Darryl  A. Goldstein and Christopher O'Donnell, for allegedly engaging in  a  fraudulent  market timing scheme. The  SEC alleged that  Goldstein  and  O'Donnell engaged  in  a  number  of  deceptive practices to defraud at least 50 mutual  fund  companies  and  their  shareholders by circumventing the funds'  restrictions  on  market-timing.  The conduct alleged occurred from January  2002  until  August  2003  and generated approximately  $1  million  in net commissions or asset-based fees for the  defendants. 

In    a  related  administrative  proceeding,  Morgan  Stanley  &  Co. Incorporated (MS&Co.), as successor to MSDW, consented to the issuance of  a  Commission  order  which  found  that MSDW failed reasonably to supervise  four  financial  advisors  who engaged in  the fraudulent market timing scheme and also allowed multiple mutual fund  trades  to  be placed or amended after the 4:00 p.m. ET close of trading  but  priced  at  the net asset value determined at the market close. Without  admitting or denying the findings, MS&Co. consented to a censure and an order to pay disgorgement,  including  prejudgment  interest,  of  $5,120,000 and a penalty of $11,880,000, for a total of $17 million.

In  another  related  administrative  proceeding,  Marc  H. Plotkin, a former  MSDW financial advisor who worked with Goldstein, consented to the  issuance of a Commission order which found that Plotkin willfully aided  and  abetted  and  caused  securities fraud violations  Without admitting or denying the findings, Plotkin  consented to an order to pay a civil  penalty  of  $90,000 and to be barred from association with any broker,  dealer,  or  investment adviser with the right to reapply for association  after  one year.

SEC and DOJ Charge Refco's Outside Attorney

The SEC today filed a civil injunctive action against Joseph P. Collins, a partner at the law firm of Mayer Brown LLP and the longtime, primary outside attorney for Refco Group Ltd. The Commission's complaint alleges that Collins substantially assisted Refco Group Ltd. and its corporate successor Refco Inc. in their failure to disclose hundreds of millions of dollars in related party indebtedness and related party transactions. The complaint alleges that Collins aided and abetted Refco's violations of Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 10b 5. In addition, the U.S. Attorney's Office for the Southern District of New York today announced the filing of criminal charges against Collins for his role in the Refco fraud.

The SEC alleges that Collins, in the course of representing Refco, learned that Refco Group Holdings, Inc. (RGHI), a non-Refco entity controlled by Phillip R. Bennett, Refco's chief executive officer, owed Refco hundreds of millions of dollars. In addition, the complaint alleges that Collins worked on, and oversaw other attorneys' work on, short-term transactions that occurred regularly at the end of Refco fiscal periods from February 2000 through May 2005. In these transactions, a Refco subsidiary, at the end of a fiscal period, loaned hundreds of millions of dollars to a third party that, in turn, was obligated to loan an equal amount simultaneously to RGHI. The transactions were reversed shortly after the fiscal periods ended. In these transactions, Refco assumed hundreds of millions of dollars in potential liabilities, in the form of guaranties and indemnification that it extended to the third parties to protect them from a default by RGHI or claims that might arise out of the loans.

In 2004, Refco placed $600 million in senior subordinated notes with certain financial institutions pursuant to an offering circular. In 2005, Refco commenced its initial public offering of common stock. The SEC alleges that the offering circular failed to disclose RGHI's indebtedness, the period end transactions, and the related potential liabilities and that the registration statement failed to disclose the indebtedness and the potential liabilities. The complaint further alleges that Collins, while aware of the indebtedness and the transactions, reviewed and revised sections of the offering circular and the registration statement, without inserting requisite disclosures regarding the indebtedness, the period-end transactions, and the potential liabilities.

The Wall St. Journal has the text of the indictment.

Sallie Mae Chair's Stock Sales in the News Again

Sallie Mae Chairman Alfred L. Lord's stock sales made news this year.  Last Friday the company announced that Lord sold 90% of his stock apparently to meet a margin call.  Last February he sold about $18.3 million of his shares just before the administration announced a proposal to cut student loan subsidies.  Lord said he didn't know anything about the proposal.  The Chair still has plenty of stock options.  WPost, A Reversal of Fortune For Sallie Mae Chairman.

Bear Stearns Fund Manager under Investigation

Federal prosecutors reportedly are investigating the actions of a Bear Stearns fund manager who took about $2 million of his own money out of one of the Bear Stearns internal funds that subsequently collapsed.  According to reports, at the time Ralph Cioffi moved his money into a different fund, he was still making optimistic forecasts about the fund.  WSJ, Bear Manager's Actions Are Subject of Inquiry.