Securities Law Prof Blog

MBIA Reports $2.3 Billion Net Loss for Fourth Quarter

MBIA, the largest bond insurer, reported a $2.3 billion fourth quarter net loss and a $3.5 billion write-down of its credits derivatives portfolio.  Warburg Pincus purchased $500 million worth of stock to provide much-needed capital.  MBIA's triple-A credit rating, which is necessary to insure municipal bonds, may be at risk; Moody's is said to be reviewing it.  WSJ, Derivatives Write-Downs Hit MBIA. 

Cuomo's Investigation into Subprime Mortgage Pools Intensifies

New York State Attorney General Andrew Cuomo is using the state's Martin Act (made famous by his predecessor Eliot Spitzer's investigations into analysts' conflicts) in the investigation into whether Wall St. firms failed to disclose adequately that loans it was packaging for sale included "exception" loans, or loans that did not meet minimum lending standards.  Under the Martin Act, which has both civil and criminal remedies, securities fraud is easier to prove.  Clayton Holdings, a company that provides due diligence on mortgage pools for Wall St., is cooperating in the investigation.  WSJ, State Subprime Probe Takes a New Tack.

Meanwhile, again like his predecessor, Mr. Cuomo is engaged with a turf war with federal regulators, in this case, the Office of Federal Housing Enterprise Oversight, which oversees Freddie Mac and Fannie Mae.  Both are investigating allegations of mortgage fraud and fraudulent appraisals.  WSJ, Tensions Rise in Lending Probes.

Atkins on Attorney-Client Privilege

SEC Commissioner Paul S. Atkins, in Remarks at the Federalist Society Lawyers' Chapter of Dallas, Texas, on January 18, 2008, said the attorney-client privilege was under siege due to the aggressive actions of the DOJ and SEC.

NASAA's Legislative Agenda

The North American Securities Administrators Association (NASAA) identified its initiatives and legislative agenda for the second session of the 110th Congress.  The initiatives fall into five broad categories: 1.  Preserving the authority of state regulators to protect investors; 2. strengthening the mechanisms currently in place that provide redress to investors for wrongdoing by industry participants; 3. maintaining federal laws designed to insure corporate accountability and shareholder confidence; 4. promoting sound and effective regulatory initiatives, and 5. improving the scope and breadth of investor education efforts.  NASAA, 2008 Pro-Investor Legislative Agenda.

UBS Announces $4 Billion Net Loss for 2007

UBS announced it would write-off a higher than expected $14 billion because of the U.S. mortgage markets and would post a $4 billion net loss for the year.  Its fourth quarter net loss was $11.4 billion.  NYTimes, UBS Takes a $14 Billion Hit; WSJ, UBS to Post Record Full-Year Loss On Further Mortgage Write-Downs.

Comverse Internal Probe Finds Additional Wrongdoing

A Comverse Technology investigation found that, in addition to backdating stock options, Kobi Alexander, its former CEO now living in Namibia, manipulated the company's earnings and falsified dates when he exercised some stock options.  WSJ, Probe Finds Comverse Executives Falsified Results.

FBI Investigates Suprime Mortgage Fraud

The FBI is investigating 14 unidentified companies for fraud in the subprime mortgage markets, including accounting fraud and insider trading.  Since the 1990s, th eFBI has investigated mortgage fraud in the primary real estate market.  WSJ, U.S. Probes 14 Companies In Subprime Investigation.

Former Bayou CFO Sentenced to 20 Years

Daniel Marino, former CFO of Bayou Management, was sentenced to 20 years for his role in defrauding investors out of more than $400 million.  Marino, who pleaded guilty in 2005, said he was "truly sorry."  WSJ, Former CFO of Bayou Management Gets 20 Years for Investor Fraud.

SEC Settles Fraud Charges Involving Unregistered Offerings

On January 25, 2008, the federal district court for the Northern District of Georgia entered an order permanently enjoining Coadum Advisors, Inc. ("Coadum"), et alia, ("collectively "defendants") from violations of the federal securities laws and continued a freeze of defendants' assets.The SEC alleged that the defendants engaged in fraud in conjunction with a series of four securities offerings which began in early 2006 and raised approximately $30 million from at least 150 investors. The Complaint alleged that the defendants falsely represented to investors that they would receive a return of from 3 to 6% per month; misrepresented that their principal was protected; and failed to disclose that the defendants have made loans to themselves from the investor proceeds. Furthermore, the Complaint alleged that the defendants falsely represented in monthly account statements to investors that they have earned approximately 4% per month, and that all or most of their principal was in escrow. Finally, the Complaint alleged that, without disclosure to investors, Coadum and Mansell have also "borrowed" in excess of $3 million of, or against, the investors' funds and have disbursed approximately $5 million to related parties.

BOSC Settles Unsuitable DVA Sales Charges

FINRA continues to crack down on sales of deferred variable annuities to senior citizens.  It fined Banc One Securities Corporation (BOSC) of Chicago $225,000 for making unsuitable sales of deferred variable annuities to 23 customers and for having inadequate systems and procedures governing annuity exchanges. Twenty-one of the 23 customers were over 70 years old.  FINRA is also requiring the firm to allow each of the 23 customers to sell their variable annuities without penalty. Ordinarily, these variable annuities would have been subject to a six-year "surrender period" during which time the customers would have been required to pay surrender charges as high as 7 percent of the amount invested if they were sold in the first two years. The firm will also pay restitution of about $6,500 to two customers who incurred surrender charges when exchanging annuities.

In 2006, BOSC merged with J.P. Morgan Securities, Inc.

FINRA found that in each of the 23 transactions between January 1, 2004, and June 30, 2005, BOSC representatives recommended that the customers exchange their fixed annuities then paying a minimum of 3 percent, for variable annuities. Following the exchange, the customers placed 100 percent of their assets into the fixed rate feature of the variable annuity, which paid a maximum of 3 percent - as recommended by BOSC representatives. All but one of the fixed annuities were beyond the surrender period - that is, the customers were not subject to any financial penalties if they withdrew any of their funds from the fixed annuity. Each of the newly purchased variable annuities was subject to a six-year surrender period requiring the customers to pay a penalty if they withdrew more than the sum of their earnings and 10 percent of their principal. FINRA found that each of these 23 recommendations was unsuitable, given the customer's age, investment objective, financial situation and income needs.

The settlement cites one example of an 80-year old customer who exchanged a fixed annuity earning 3 percent for a variable annuity, in which he invested the entire $80,000 balance in the fixed income feature, which also paid 3 percent interest. This new variable annuity was subject to a six-year surrender period. Within the first year of owning the variable annuity, the customer withdrew $9,000. Sixteen months after buying the variable annuity, the customer liquidated it and incurred a $4,628 surrender fee.

In concluding this settlement, BOSC neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

CME, Nymex in Merger Talks

The Chicago Mercantile Exchange, the world's largest market for derivatives trading, and the New York Mercantile Exchange, a leader in energy and metals trading, are in talks about a $11 billion merger.  CME would acquire Nymex for a combination of cash and stock for an estimated price of $119 per share.  NYTimes, Commodities Markets in New York and Chicago Discuss Merger ; WSJ, CME-Nymex: Good Deal?

SEC Criticizes Disclosure on Executive Pay Policies

As the SEC has increased its scrutiny of how corporations describe their executive compensation policies, it has expressed dissatisfaction at how many companies describe the role of individual performance in pay decisions.  In the past year the SEC sent out two rounds of letters to corporations about their descriptions of their pay policies.  Letters from 26 completed cases are posted on the SEC website.  The Wall St. Journal suggests this could lead corporations to focus less on individual performance as a measure of success and instead focus on corporate financial targets like earnings and stock prices.  WSJ, SEC Unhappy With Answers on Executive Pay.

Lazar Sentenced for Perjury

Seymour M. Lazar, a former Milberg Weiss client who received secret payments for serving as leading plaintiff in securities class actions, was sentenced to six months' home detention and a $600,000 fine for perjury.  He previously forfeited $1.5 million in a plea agreement.  NYTimes, Ex-Client Sentenced in Law Firm Case.

Former SafeNet CFO Sentenced in Backdating Case

Carole D. Argo, former CFO of SafeNet, was sentenced to six months in prison and fined $1 million for her role in backdating millions of dollars' worth of employee stock options.  The judge said he imposed a lenient sentence because of her charitable work; the sentencing guidelines called for 9-10 years.  NYTimes, Backdating Case Brings a Prison Term.

SEC Settles Charges Against Heartland Advisors for Mispricing Bonds

The SEC recently settled administrative proceedings against Heartland Advisors, Inc. (Heartland), a Wisconsin-based investment adviser, and several current and former employees of Heartland.  The Order finds that from March 1, 2000 into October 2000, Heartland negligently mispriced certain bonds owned by two high-yield municipal bond funds. The funds' portfolios included several municipal bonds that were valued by the funds at prices above their fair values. As a result, throughout that time period, the funds' net asset values were incorrect, the funds' shares were incorrectly priced, and investors purchased and redeemed fund shares at prices that benefited redeeming investors at the expense of remaining and new investors. On October 13, 2000, Heartland devalued the bonds, thereby resulting in approximately $60 million in monetary losses to shareholders.

The Order imposes civil penalties, disgorgement, and prejudgment interest totaling $3,907,095.

Former Andersen Accountants for Enron Settle SEC Charges

The SEC settled a civil action against David B. Duncan, a former Arthur Andersen LLP ("Andersen") partner and former global engagement partner for the Enron engagement, in connection with the audits of Enron Corp.'s financial statements.  Duncan, without admitting or denying the allegations, consented both to a settled civil action charging him with violating the antifraud provisions and to a related administrative proceeding permanently suspending him from appearing or practicing before the Commission.

In its Complaint against Duncan, the Commission alleged that, for the years 1998 through 2000, Duncan was reckless in not knowing that the unqualified audit reports he signed on behalf of Andersen were materially false and misleading. The Complaint also alleged that the Fraud Risk Assessment questionnaires prepared by the engagement team and reviewed by Duncan documented that Enron used "highly aggressive accounting … practices" and entered into "unusual" year-end transactions that posed difficult "substance over form" questions. In addition, an internal Andersen document prepared each year by Duncan and others on the engagement team noted that Enron's use of complex "form over substance" and related party transactions created an "extreme" or "very significant" financial reporting risk.  Despite these risks, Duncan failed to exercise due professional care and the necessary skepticism required under Generally Accepted Auditing Standards ("GAAS") to ensure Enron's financial statements were presented in conformity with Generally Accepted Accounting Principles ("GAAP").

In related administrative proceedings, three other Andersen partners, Thomas H. Bauer, Michael M. Lowther and Michael C. Odom, consented, without admitting or denying the Commission's findings, to settled administrative proceedings which found that they had each engaged in improper professional conduct in connection with their Enron work, and each was denied the privilege of appearing or practicing before the Commission.

Citigroup Enters Underwriting Arrangement in China

Citigroup will partner with a Chinese brokerage firm, Central China Securities Holdings Co., to compete for investment banking business in China.  The arrangement, which requires approval from Chinese regulators, will allow Citigroup to earn fees for underwriting offerings on the Shanghai and Shenzhen exchanges.  Goldman Sachs and UBS already have partnerships with Chinese firms.  WSJ, Citigroup Finds a Partner For China Underwriting.

Former Dow Jones Director In Settlement Talks with SEC

David Li, CEO of the Bank of East Asia and former director of Dow Jones & Co., reportedly will soon settle with the SEC allegations that he was involved in trading on inside information before the public announcement that News Corp. would seek to acquire Dow Jones.  The settlement is said to require payment of $8 million, but will not include an officer or director ban.  The SEC previously brought an action against a husband and wife, Kan King Wong and Charlotte Ka On Wong Leung, charging them with purchasing Dow Jones shortly before the announcement and subsequently selling it for a $8 million profit.  Mr. Li is a friend of Ms. Leung's father, Michael Leung.  WSJ, Ex-Dow Jones Director In Settlement With SEC.

Sallie Mae Settles Suit for New Financing

Sallie Mae settled its lawsuit against the former buyers who backed out of the $25 billion buyout and claimed that new legislation cutting federal subsidies to student lenders was a material adverse change that allowed them to walk away without paying the $900 million termination fee.  The defendants, who include the J.C. Flowers private equity firm and banks JPMorganChase and Bank of America, will refinance about $30 billion in debt that is falling due soon, an arrangement that will ease Sallie Mae's credit troubles.  NYTimes, Sallie Mae Settles Suit Over Buyout That Fizzled

Two Hedge Funds Seek to Elect 4 Directors to NY Times

Two hedge funds, Firebrand Partners and Harbinger Capital Partners, owning 4.9% stake in the New York Times, announced their intent to name four directors.  In a letter to the Times, Firebrand said it wanted the company to sell some assets and focus on digital publishing and would not seek to change the Times' two-class share structure that enables the Ochs-Sulzberger family to control the board. A Morgan Stanley investment fund recently ended its two-year campaign to make changes at the newspaper publisher.  NYTimes, Hedge Fund’s Letter Explains Intentions Regarding The Times; WSJ, Hedge Fund Seeks to Sway New York Times.