Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, July 16, 2007

SEC Obtains TRO Against Alleged Ponzi Scheme

The SEC, on July 12, filed an emergency action to halt an ongoing $45 million securities offering that the SEC alleges to be a Ponzi-like scheme. Named in the Commission's complaint are Terchi Liao (a.k.a. Nelson Liao), of Arcadia, California, and two entities he controls, also of Arcadia, AOB Commerce, Inc. and AOB Asia Fund I, LLC. The Commission's complaint alleges that since mid-2004, the defendants have raised more than $45 million from hundreds of investors nationwide through their unregistered offering and sale of promissory notes that purportedly pay guaranteed interest of up to 5.5% per month.  The complaint also names four other Southern California entities controlled by Liao as relief defendants based on their receipt of investor funds. A United States District Judge for the Central District of California issued a temporary restraining order halting the securities offering, appointing a temporary receiver over AOB Commerce and AOB Asia Fund, and the relief defendants. The court also temporarily froze the assets of the defendants and the relief defendants.

July 16, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Lear Shareholders Reject Icahn's Buyout

Shareholders of Lear Corp. rejected a board-approved buyout offer from Carl Icahn today.  Although Icahn was persuaded to raise the price from $36 to $37.25, some large shareholders continued to believe the price was too low.  WSJ, Lear Holders Reject Icahn Offer.

July 16, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

New York Attorney General Announces Settlement with UBS Over Fee-Based Accounts

The New York State Attorney General announced a $23.3 million settlement with UBS Financial Services for inappropriately steering customers into the fee-based accounts of its InsightOne brokerage program.  It is the largest settlement involving fee-based accounts.  UBS has agreed to reimbuse customers $21.3 million and pay a $2 million penalty.

In the lawsuit, the AG charged that UBS placed thousands of traditional brokerage customers into the fee-based accounts by falsely promising comprehensive and sophisticated financial advice.  In addition, the complaint charged that UBS was aware that the fee-based accounts were unsuitable for many customers who engaged in infrequent trading.  The press release gives a number of horror stories, including a 91-year-old customer who was charged more than $35,000 for four trades over two years.

The D.C. Circuit recently vacated a SEC rule that would have exempted brokerage firms offering fee-based programs from regulation as investment advisers.

July 16, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Investors and Management Negotiate Changes in Corporate Policy

This year's proxy season saw more behind the scenes discussions among investors and corporate management about corporate governance issues and less posturing at the shareholders' annual meetings, according to the Wall St. Journal.  Twenty-four percent of shareholder proposals were withdrawn as of July 6, suggesting that changes in policy had been agreed to in advance of the meeting.  At least 70 companies agreed to adopt a majority-vote requirement for directors' elections.  See WSJ, Firms, Investors Trying More Talk, Less Acrimony.

July 16, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)


What Whole Foods CEO John Mackey did is called sock-puppeting, which the New York Times defines as "creating a fake online identity to praise, defend or create the illusion of support" for one's own self or company.  According to the article, Mackey is not an isolated example, although it does not name very many additional examples from the corporate world besides former Hollinger International CEO Conrad Black (just convicted on four counts of fraud and obstruction of justice), who reportedly posted an item blaming short sellers for the poor performance of the company's stock.  See NYTimes, The Hand That Controls the Sock Puppet Could Get Slapped. 

July 16, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, July 15, 2007

Park on Securities Regulation

The Competing Paradigms of Securities Regulation, by JAMES J. PARK, Brooklyn Law School, is now available on SSRN.  Here is the abstract:

The securities industry is simultaneously governed by specific rules and general principles. When a rule is violated, the regulatory response is clear, enforce the rule. But what happens when conduct does not violate a rule but violates a principle? A regulator can make it clear through rulemaking that the conduct is prohibited going forward. Or, the regulator can punish the conduct through what I call a “principles-based” enforcement action. This Article examines the differences between rulemaking and principles-based enforcement and proposes criteria to guide regulators in choosing between these regulatory tools in communicating legal norms to the regulated.

The approaches reflect two competing paradigms. Rulemaking reflects the mentality that securities regulation is a technical enterprise that should be left to experts who have created a comprehensive, efficient, administrative scheme. Principles-based enforcement actions reflect the demand that regulators punish conduct violating principles reflecting public values. For the most part, the regulated prefer a predictable regulatory regime, which rulemaking provides, while the public prefers decisive responses, which can be provided by principles-based enforcement actions.

Based on these preferences, public choice theory would predict that regulators are more likely to respond to misconduct not violating a particular rule by aggressively enforcing principles when public influence is high and more likely to respond through rulemaking when the influence of the regulated is high. But this account is too simplistic – while interest groups can be influential, securities regulators are constrained in their regulatory choices by the nature of the evidence establishing the misconduct.

Ideally, in choosing between principles-based enforcement and rulemaking, regulators should take into account both the need for a predictable regulatory regime and the need to punish conduct that violates principles. They should consider: (1) whether the principle being enforced is well-established or novel; (2) whether the application of the principle is consistent with existing rules; (3) the strength and specificity of the evidence establishing the misconduct; and (4) whether the conduct caused foreseeable public harm.

July 15, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Hurt on IPOs and Disintermediation

Initial Public Offerings and the Failed Promise of Disintermediation, by CHRISTINE HURT, University of Illinois College of Law, was recently posted on SSRN.  Here is the abstract:

  At the beginning of this millennium, the future of initial public offerings conducted using an Internet-based auction method in the United States seemed very bright. The Internet, and web-based technologies, promised disintermediation in the IPO markets just as it had in other markets where producers could be linked with consumers without costly intermediaries. In a world in which a buyer would choose to pay a certain price (X) for a product, the producer of that product would prefer to capture as close to 100% of X as possible and not share unnecessarily with intermediaries. The market for initial public offerings is no different from other markets; a small number of investment banks and the underwriters and brokers they employ act as intermediaries that distribute and market offerings for a substantial fee, including a customary discount on the offering price that benefits the intermediaries. However, web-based auction IPOs have the potential of allowing issuers to avoid these investment banks and sell directly to the public at closer to the market price (100% of X), not the bookbuilding underprice (approximately 80% of X), minus the substantial underwriting fee.

However, the number of online auction IPOs each year is miniscule compared with the number of IPOs conducted in the U.S. using the traditional bookbuilding method. Although the market saw an increased number of auction IPOs in 2005, following Google's 2004 auction IPO, the market for online IPO auctions against stalled beginning in 2006. Proponents of these IPOs must explain why the auction IPO model has not challenged, much less replaced, bookbuilding as the dominant offering method in the U.S. This Article argues that although the Internet works well to eliminate intermediaries formerly necessary for distribution, the Internet cannot reliably eliminate intermediaries used by the public for creating demand networks and establishing third-party certification. Because of the power of investment banks and their demand networks, the base market price (X) of any product will be increased (X + Y). Therefore, an issuer must determine whether more profit is to be made by sharing revenues with Wall Street intermediaries and receiving 80% of (X + Y) than capturing 100% of merely X. In addition, to attempt to ignore these powerful Wall Street intermediaries comes with great risk. In certain cases, those who attempt to sidestep intermediaries may find themselves capturing not 100%(X) but 100% of a depressed market price (X-Z). Given this choice, rational issuers will choose the bookbuilding method, which promises .80(X + Y).

July 15, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)