Securities Law Prof Blog

SEC Expands Inquiry into Credit Ratings Agencies

The SEC expanded its investigation into credit ratings agencies to look at how the agencies detect and handle errors in their ratings.  Last week it was reported that Moody's failed promptly to correct triple-A ratings that resulted from errors in computer coding.  WSJ, SEC Widens Ratings-Agencies Probe.

Former VP of Drug Company Settles Insider Trading Charges

The federal district court for the Southern District of New York entered a Final Judgment against defendant Alexander Yaroshinsky in SEC v. Yaroshinsky, restraining and enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. The SEC alleged that Yaroshinsky, a former Vice President of Clinical Operations and Biostatistics for Connetics Corporation, learned material non-public information concerning the FDA staff's preliminary analysis of the carcinogenicity tests of Velac Gel, an acne drug then being developed by Connetics, and tipped his co-defendant Victor Zak to this information and then traded on it himself. Yaroshinsky consented to the entry of the judgment without admitting or denying any of the allegations of the Commission's complaint. Yaroshinsky is liable for disgorgement in the amount of $354,927, plus prejudgment interest thereon in the amount of $84,275, and a civil penalty of $283,798. Zak settled charges related to this case last yeardisgorgement of $138,569 for his own trades, plus an equal civil penalty of $138,569 and prejudgment interest of $32,902. He is also paying the $216,358 in disgorgement that Zak was unable to pay, plus prejudgment interest thereon of $51,373 and a civil penalty of $145,229.

Broker-Dealer Settles Charges It Intervened in ARS Auctions

The SEC settled administrative proceedings against broker-dealer First Southwest Co., which, as part of its broker-dealer business, underwrote and managed a limited number of auctions for auction rate securities.  The SEC alleged that the firm had, without adequate disclosure, intervened in auctions by bidding for its proprietary account to prevent failed auctions and all-hold auctions, and, in some instances, the intervention affected the clearing rate.  In assessing a civil penalty of $150,000, the SEC noted that it considered the firm's cooperation in the investigation and its relatively small share of the auction rate securities markets.  It also considered, however, that the firm did not self-report the practices to the SEC.

The Last Days of Bear Stearns

Over two months later, what do we know about the collapse of Bear Stearns?  Bear's CEO Alan Schwartz blames an unforeseen "market tsunami."  The Wall St. Journal, in the first of a three-part series, looks at the role internal dissension played in bringing about its downfall.  It reports that at early as August 2007 individuals within and outside the firm were calling for it to raise additional capital and reduce its inventory of mortgage-related securities, but to no avail, in large part, according to the WSJ, to the firm's reluctance to replace CEO James Cayne, much blamed by the newspaper in an earlier article for his disengaged attitude toward the firm's troubles.  WSJ, Lost Opportunities Haunt Final Days of Bear Stearns.

SEC Reverses Position on Shareholders' Proposals on Universal Health Care

The SEC, in a reversal of its position, told several companies, including United Health and Boeing, that they cannot exclude from the management proxy statement shareholders' resolutions urging universal health insurance coverage under Rule 14a-8's exclusion for ordinary business decisions, but instead must treat it as an issue of social policy.  Religious groups and labor unions have submitted the same health care proposal to three dozen corporations.  At some companies, the proposing shareholders agreed to withdraw the proposal in exchange for a dialogue with the corporation on the issue.  NYTimes, S.E.C. Backs Health Care Balloting .

Fed and SEC Work Out Oversight Relationship over Big Banks

What will be the future of financial regulation?  Treasury Secretary Paulson's Blueprint would make the Treasury Dept. the uber-financial regulator (with a diminished role for the SEC), while SEC Chairman Cox, in recent weeks, has advocated for that agency's increased supervisory role over the major investment banks that it currently oversees through its Consolidated Supervised Entities (CSE) system.  The Washington Post explores how the Federal Reserve and the SEC are working out their joint involvement in the aftermath of the Fed's rescue of Bear Stearns.  A special unit, created in the New York Fed that reports directly to its President Timothy Geithner, is composed of staff members from both the bank supervision and markets groups and has been accompanying the SEC on its visits to the big investment banks.  Meanwhile the SEC is preparing a Memorandum of Understanding to formalize their information-sharing and cooperative efforts.  WPost, Fed Keeps Watch on Wall St. -- From the Inside. 

Winship on Fair Funds

Fair Funds and the Compensation Conundrum, by VERITY WINSHIP, Fordham University School of Law, was recently posted on SSRN.  Here is the abstract:

The Fair Fund provision of Sarbanes-Oxley allows the Securities and Exchange Commission ("SEC") to direct money penalty amounts to injured investors. Because of the provision, large penalties mean potentially large SEC-obtained investor compensation, heralding a new compensatory role for the agency. The SEC has announced that it will direct money to injured investors whenever possible, but has not articulated clear priorities. This Article fills the gap by introducing terms of debate and proposing a framework for the SEC's exercise of its discretion under Fair Funds.

The Article introduces the concept of "public class counsel," a public actor that has the dual function of deterrence and victim compensation. The concept describes - and suggest limits to - the SEC's role in a system in which public and private remedies for securities law violations increasingly converge. The Article then draws on the analogy between the "public class counsel" and the "private attorney general" to propose an answer to the following question: When should the SEC exercise its discretion to create a Fair Fund? It suggests that the SEC focus on distributing penalties gathered from aiders and abettors of securities fraud because such an approach would minimize two significant concerns with investor compensation: first, that compensation of injured investors often amounts to a transfer of money among equally innocent investors and, second, that giving the SEC and private actors a role in compensation risks duplication of costs.

Jordan & Hughes on Self-Regulation

Which Way for Market Institutions? The Fundamental Question of Self-Regulation, by CALLY E. JORDAN, University of Melbourne - Law School, and PAMELA S. HUGHES, Blake, Cassels & Graydon LLP, was recentlly posted on SSRN.  Here is the abstract:

It is a fundamental question. How should financial market institutions be regulated? Is self-regulation alive and well, at least in some parts of the world, for some market functions? Or, despite a last gasp here and there, is self-regulation shuffling towards extinction? In particular, the wave of demutualizations and consolidations of exchanges has prompted questions as to traditional roles, governance models and the nature of regulation of exchanges. Demutualization of exchanges has been a catalyst for these debates, but the debates are not new. Although numerous studies have discussed the advantages and disadvantages of a self-regulatory structure for exchanges and other market institutions, few have considered the interaction of factors that have determined the traditional allocations of regulatory powers: market history, business culture, legal system, the concept of public interest, the corporate form, the political system, forces of internationalization. How have these factors affected the allocation of regulatory power? Will the self-regulatory model of market institution, where it has been dominant, be pushed to the margins by the interplay of these various factor, as in the UK? Do unitary regulators oust self-regulatory principles? Is self-regulation in the US merely a façade? Are small and emerging markets adopting outdated self-regulatory models at the behest of the international financial institutions? Do self-regulatory organizations have a new role to play as liaison between national and supranational regulators? It may be too soon to definitively answer the questions posed by this paper, but for the moment, self regulation is here to stay; it just might not be staying where it used to.
 

Attorney Settles SEC Charges of Authoring Fraudulent Legal Opinion

The SEC charged Global Development & Environmental Resources, Inc., and individual defendants with securities fraud for their participation in a fraudulent scheme to evade registration requirements and a "pump and dump" stock manipulation scheme. The SEC also settled fraud charges against California-based securities attorney, Carmine J. Bua, who authored a fraudulent legal opinion, which authorized the issuance of purportedly unrestricted Global shares. The SEC alleges that from June through August 2005, defendants engaged in a complex scheme to evade the registration requirements by obtaining a fraudulently backdated convertible promissory note, using a forged assignment to assign the note to three foreign entities and then converting the note into unrestricted Global shares. The complaint alleges that defendant Bua drafted the assignment and legal opinion letter authorizing the issuance of unrestricted shares, despite possessing information which undermined the validity of the note and its subsequent assignment.  The complaint further alleges that the defendants then engaged in a "pump-and-dump" scheme by arranging for Global to issue numerous press releases that contained false and misleading information relating to Global's purported clients, pending contracts and revenue projections.

Upon the filing of the Commission's complaint, and without admitting or denying the allegations in the complaint, Bua consented to the entry of a final judgment permanently enjoining him from violating Section 5 of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and to a penny stock bar. Bua has agreed to pay disgorgement and civil penalties in an amount to be determined at a later date.

Former Gemstar-TV Guide CEO Indicted on Obstruction of Justice Charge

The SEC announced that on May 13, 2008, Henry C. Yuen, the former chairman and chief executive officer of Gemstar-TV Guide International, Inc., was indicted on a felony charge of obstructing a Commission investigation.  The indictment alleges that during an investigation regarding accounting irregularities at Gemstar-TV Guide, the Commission issued a subpoena to Yuen requiring him to produce documents. After receiving the subpoena, Yuen allegedly began deleting from his computer various documents that were called for by the subpoena. In addition, the day before Yuen was scheduled to appear for testimony in the Commission investigation, Yuen allegedly ran a program on his computer that made it impossible to recover the documents he had previously deleted.

The SEC's complaint, filed in June 2003, alleged that from June 1999 through September 2002, Yuen participated in Gemstar's fraudulent overstatement of revenues by at least $248 million. After a three week trial in December 2005, the court found in favor of the Commission and against Yuen on all claims and ordered Yuen to pay over $22 million in disgorgement and penalties. On April 1, 2008, the Ninth Circuit affirmed the district court's ruling.

Rating Firms Switch Analysts at Issuers' Request

Additional evidence that raises doubts about the independence of the bond rating agencies -- all three rating companies, Moody's, Fitch, and S&P, acknowledge that on some occasions they have changed the analysts assigned to rate an issuer's bonds after the issuer or its bank requested it.  Various reasons where given, such as that the analyst did not respond to telephone calls or asked too many questions.  WSJ, At Request of Bond Issuers or Bankers, Credit-Rating Firms Switch Analysts.

Yahoo Postpones Annual Meeting

Yahoo filed its preliminary proxy materials with the SEC on May 22, with nine of the current 10 directors up for re-election (one, Michael Kozel, has resigned), and postponed the date of the annual meeting from July 3 to the end of July, pending SECreview and clearance of the proxy materials.  Talks continue between Microsoft and Yahoo over Microsoft's offer to acquire parts of Yahoo's business, which some see as an excuse to resume merger discussions.  The Wall St. Journal explores the connections among the key players at both companies -- former employees of Donaldson Lufkin & Jenrette, friends of Carl Icahn, and directors of Berkshire Hathaway.  WSJ, Yahoo, Microsoft and the Ties That Bind.

Eight individuals Indicted in Stock Lending Kickbacks Investigation

Federal prosecutors indicted eight more individuals in connection with a scheme involving illegal kickbacks paid by brokerage firms in connection with stock lending.  Those indicted include former stock-lending supervisors at Morgan Stanley and Janney Montgomery Scott.  Eighteen people previously pleaded guilty.  WSJ, Eight More Are Charged In Stock-Lending Probe.

Canadian Court Blocks BCE Buyout

A Canadian appellate court sided with the bondholders of Canadian telecommunications company BCE Inc. and held that the company's LBO is unfair to them.  According to the court,

"The Board should have considered the interests (including reasonable expectations) of the [bondholders]. In Canada, the directors of a corporation have a more extensive duty...giving consideration to the interests of all stakeholders, which, in this case, includes the [bondholders]."

Is this an accurate expressesion of Canadian law, or will the decision be overturned on appeal?  Any experts in Canadian corporate law out there?  WSJ, BCE Buyout Blocked in Canada Court.

Shareholder Votes On Say on Pay Down at Big Banks

Shareholder support for "say-on-pay" proposals at the four big banks -- Merrill Lynch, Citigroup, J.P. Morgan Chase, and Morgan Stanley -- averaged 37% of shareholder votes.  While that's a healthy percentage, it's down from last year's average of 43% for the same companies -- a surprising result given the drop of stockholder value and the generous compensation packages at those firms.  In contrast, shareholder support for the proposal at all U.S. corporations is roughly the same as last year.  WSJ, Say-on-Pay Doesn't Play on Wall Street.

Former Investor Relations Director of Provide Commerce Settles Insider Trading Charges

The SEC filed an insider trading action against Gordon C. Bigler, the former director of corporate finance and investor relations for Provide Commerce, alleging that Bigler traded in Provide Commerce stock immediately after learning confidential information about its pending acquisition by Liberty Media.  The SEC's complaint, filed in federal district court in San Diego, California, alleges that Bigler learned of Liberty's proposed acquisition price for Provide Commerce of $33 per share prior to the merger in an email from Provide Commerce's chief financial officer on November 15, 2005. Bigler traded within an hour of receiving the inside information, buying 4,500 Provide Commerce shares. On the first trading day after Provide Commerce publicly announced the acquisition, Provide Commerce's stock price increased more than 10.5 percent, and its trading volume increased 1,045 percent. Shortly after the announcement, Bigler sold his Provide Commerce shares for a profit of $41,622.78.

To settle the SEC's charges, Gordon C. Bigler has consented, without admitting or denying the allegations in the complaint, to a final judgment permanently enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, to pay $41,622.78, representing the disgorgement of his illegal trading profits and prejudgment interest, and to pay a civil penalty of $41,622.78. The settlement is subject to approval by the court.

First Quarter Securities Issuance Reached $1.43 Trillion

According to the latest Research Quarterly released by the Securities Industry and Financial Markets Association (SIFMA), securities issuance in the first quarter of 2008 reached $1.43 trillion, an increase from the $1.36 trillion issued in the fourth quarter of 2007 but substantially lower than the $1.81 trillion issued in the first quarter of 2007. The year-over-year issuance decline was the result of the uncertain capital market conditions over the past year. The sharpest declines occurred in the most credit risk sensitive sectors, including nonagency or private-label mortgage-related securities and high-yield bonds. Investment-grade corporate bonds experienced a more modest volume decline, and agency debt and mortgage-backed pass-through securities volumes rose on a year-over-year basis.

Law & Society Annual Meeting Sessions from Corporate and Securities Law Women Scholars

For those attending the Law and Society Annual Meeting next week (May 29-June 1) in Montreal, I hope you will mark the following six programs on your calendar.  All are organized by the Corporate and Securities Law Women Scholars under the capable leadership of Faith Stevelman (NYLS).

Thursday 8:15 - 10:00 a.m.  Securities Markets, Risk and Corporate Fraud: Looking Beyond Private Civil Litigation. Principal presenters include: Jayne Barnard (William & Mary), Donna Nagy (Indiana-Bloomington), Rebecca Roiphe (NYLS).

Friday 12:30 -- 2:15 p.m.  Firms, Markets, and Social Welfare: The Role of Business Law.  Principal presenters include: Claire Moore Dickerson (Tulane), Renee Jones (Boston College), Christiana Ochoa (Indiana-Bloomington), Janis Sarra (British Columbia).

Saturday 8:15 -- 10:00 a.m. Law, Value, and Wealth: Markets and Securities Law.  Principal presenters include: Christine Hurt (Illinois), Lisa Fairfax (Maryland), Elizabeth Nowicki (Tulane).

Saturday 4:30 -- 6:15 p.m.  Corporate Governance and Employees: Caught in the Crossfire.  Principal presenters include: Kelli Alces (Florida State), Katrice Bridges (Penn State), Julie Goldscheid (CUNY).

Sunday 8:15 -- 10:00 a.m.  Changing Perspectives on the Corporate Board, its Role and Functions.  Principal presenters include: Lynne Dallas (San Diego), Kimberly Krawiec (UNC), Erica Beecher-Monas (Wayne State).

Sunday 10:15 -- noon.  Trends in Securities Litigation and Settlements.  Principal presenters include: Margaret V. Sachs (Georgia), Verity Winship (Fordham), Faith Stevelman (NYLS).

I hope to see you there!

FINRA Warns About Misleading Investors About Expertise

FINRA issued a regulatory notice to remind firms of their obligation to supervise representatives' communications with the public used to establish their expertise. FINRA is concerned that some representatives are misrepresenting their investment acumen by using ghostwritten communications that mislead investors.

Former U.S. Foodservice CFO Consents to Injunction

The SEC announced that the federal district court for the District of Maryland entered a final judgment against defendant Michael Resnick, former CFO of U.S. Foodservice (USF). The judgment permanently enjoins Resnick from violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5 and 13b2-1 thereunder and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder. Resnick was permanently barred from serving as an officer or director of a public company. The judgment also orders Resnick to pay approximately $353,750 in disgorgement and prejudgment interest thereon in the amount of $141,529, but waives payment of all disgorgement and prejudgment interest and does not impose a civil penalty, based on the sworn representations in Resnick's Statement of Financial Condition and other documents and information submitted to the Commission.

The SEC alleged that Resnick and others at USF, then a subsidiary of Royal Ahold (Koninklijke Ahold N.V.), participated in a scheme to overstate Royal Ahold's income by $700 million or more in Commission filings and other public announcements for at least fiscal years 2001 and 2002.  Resnick consented to the judgment without admitting or denying the allegations.