Securities Law Prof Blog

Going Fishing

I will be on vacation until August 4.

Finance Association Releases Report on Industry Reforms

The Institute of International Finance, an association of leading financial services firms with more than 380 members across the world, released a 200-page report detailing best practice reforms for the industry. The report represents the global industry’s response to the turmoil in financial markets that was triggered by the U.S. subprime mortgage market crisis in mid-2007.  The report proposes Principles of Conduct together with Best Practice Recommendations on critical issues such as risk management, compensation policies, valuation of assets, liquidity management, underwriting and the rating of structured products as well as boosting transparency and disclosure.

State Securities Regulators Show Up at Wachovia's Door

A team of ten securities regulators from Missouri, Illinois, Massachusetts, New Jersey, Pennsylvania and other states entered Wachovia Securities’ headquarters in St. Louis seeking documents and records related to its marketing of auction rate securities. The inspection sought information concerning Wachovia Securities’ sales practices, internal evaluations of the auction rate securities market and marketing strategies. The Missouri Secretary of State has also served subpoenas on over a dozen Wachovia Securities agents and executives to gather more information.

NASAA set up a task force to coordinate investigations into ADRs.  Last month the Massachusetts securities regulator filed a fraud complaint against UBS Securities, and other states are looking into practices at other firms as well, including including Commerce Bank N.A. and Stifel, Nicolaus & Company, Incorporated. Many investors have complained to the state regulators that they are not able to liquidate their ARS investments, despite promises by brokers that the investments are liquid.

SIFMA on SEC's Short Selling Emergency Order

Here is SIFMA's statement on the SEC's emergency order on short selling:

“SIFMA understands the SEC’s objectives and supports their efforts both to enforce the law against illegal naked short selling and to root-out false rumors. Such behaviors simply cannot be countenanced.

“SIFMA has reviewed the SEC’s order, and in consultation with our members, today approached the SEC with questions about its scope and application. We hope to solicit clarification on several important issues to ensure the market continues to operate smoothly and with the necessary liquidity.”

SEC Publishes Rule 14a-8 No-Action Letters

The SEC posted to its website no-action letters involving Rule 14a-8 issued after Jan. 1, 2008 and those issued between Oct. 1, 2007 and Dec. 31, 2007.

Two NYSE Specialists Settle Illegal Trading Practices Proceedings

Two NYSE specialists settled SEC administrative proceedings charging them with illegal trading practices (interpositioning and trading ahead) from 1999 through June 30, 2003.  In one proceeding, the specialist was barred from the industry and agreed to pay a $100,000 civil penalty; in the other, the specialist was censured and agreed to pay a $75,000 penalty.

SEC Files Two Microcap Manipulation Cases

The SEC filed two separate market manipulation enforcement cases involving microcap stocks: one involving Homeland Safety International, Inc. (originally incorporated as Sniffex, Inc.) and the other  involving three issuers — National Storm Management Group, Inc.("NLST"); Deep Rock Oil and Gas, Inc.("DPRK"); and Global Beverages Solutions ("GBVS. Mark B. Lindberg was charged in both cases and has settled them without admitting or denying the allegations in the two complaints. In the Sniffex complaint, the Commission also named Sniffex; its President Paul B. Johnson, and others as defendants.

Allegations in the Sniffex Complaint
The Commission's complaint filed in the Northern District of Texas alleges that from October 2004 through April 2006, defendants Mihaylov and Markov acquired control of Sniffex — and carried out a $32 million pump-and-dump fraud scheme in concert with the other defendants. They acquired Sniffex in 2004 as a "shell" company from defendant Lindberg who agreed to provide them 15 million shares of so-called "free-trading" stock. To do this, Lindberg, Mihaylov, Markov, and Johnson, Sniffex's President, participated in a sham SEC Rule 504 stock offering that ultimately resulted in scheme participants obtaining virtually all of the company's purportedly free-trading stock.

Allegations in the National Storm, Deep Rock, and Global Beverage Complaint
The Commission's complaint filed in the Northern District of Oklahoma alleges that defendant Lindberg and other members of a Shell Creation Group ("SCG") manipulated at least three penny stocks from 2004 through 2006, including NLST, DPRK, and GBVS. Lindberg and the other members of the SCG, including attorneys, stock promoters, and financiers, worked together to acquire unrestricted shares of the three issuers and to profit by selling these shares into the market while manipulating the price of the stock by means of distributing promotional materials and coordinated trading. The SCG reaped profits in excess of $20 million from the sale of NLST, DPRK, and GBVS stock, and Lindberg personally reaped over $6.2 million in ill-gotten gains from this illegal conduct.

Beaufort S.C. Mayor Settles SEC Insider Trading Charges

The SEC charged the mayor of Beaufort, S.C., with insider trading on non-public information that he obtained while doing consulting work for a California biotechnology company. According to the Commission's complaint, Mayor William J. Rauch purchased stock in Advanced Cell Technology, Inc., immediately after one of its executives informed him about a breakthrough embryonic stem cell technique that the company was about to disclose publicly. Rauch was told the information was confidential, and he had previously signed an agreement with the company that barred him from using confidential company information for his own benefit. Rauch has agreed to settle the Commission's charges without admitting or denying the allegations and to pay $20,708 in disgorgement, $2,576 in prejudgment interest, and a $20,708 penalty.

SEC's Emergency Order on Short-Selling

The SEC issued an emergency order to enhance investor protections against "naked" short selling in the securities of Fannie Mae, Freddie Mac, and primary dealers at commercial and investment banks. The SEC's order will require that anyone effecting a short sale in these securities arrange beforehand to borrow the securities and deliver them at settlement. The order will take effect at 12:01 a.m. ET on Monday, July 21. In addition to this emergency order, the SEC will undertake a rulemaking to address these issues across the entire market.

The Commission's emergency order, pursuant to its authority under Section 12(k)(2) of the Securities Exchange Act of 1934, will be effective at 12:01 a.m. ET on July 21, 2008 and will terminate at 11:59 p.m. ET on July 29, 2008. The Commission may extend the order to continue it in effect thereafter if the Commission determines that the continuation of the order is necessary in the public interest and for the protection of investors, but for no more than 30 calendar days in total duration.

The securities identified in the Commission's order:

BNP Paribas Securities Corp.   
Bank of America Corporation   
Barclays PLC   
Citigroup Inc.   
Credit Suisse Group
Daiwa Securities Group Inc.   
Deutsche Bank Group AG   
Allianz SE   
Goldman, Sachs Group Inc   
Royal Bank ADS   
HSBC Holdings PLC ADS   
J. P. Morgan Chase & Co.   
Lehman Brothers Holdings Inc.   
Merrill Lynch & Co., Inc.   
Mizuho Financial Group, Inc.   
Morgan Stanley   
UBS AG   
Freddie Mac 
Fannie Mae   

SEC Takes Emergency Action to Curb Short Sales

The SEC announced emergency action to curb short-selling in the stock of Fannie Mae and Freddie Mac, as well as the securities firms (Lehman, Goldman Sachs, Merrill Lynch, Morgan Stanley), in effect for 30 days.  Brokers will be required to pre-borrow stocks before short sales, and the lending broker will not be permitted to let other brokers use the stock for their short sales.  Chairman Cox said the SEC will undertake a rulemaking to address the broader issues of short-selling.  WSJ, SEC Curbs Shorting of GSE Stocks, Considers Limits for Wider Market.

Cox Testifies on Regulatory Responses to Financial Markets

SEC Chairman Christopher Cox testified on Recent Developments in U.S. Financial Markets and Regulatory Responses before the U.S. Senate Committee on Banking, Housing and Urban Affairs on July 15, 2008.  His testimony referred to over four dozen pending enforcement investigations related to the subprime crisis as well as investigations into possible manipulation through false rumors and short-selling, accounting issues and OTC derivatives market.

NYSE Posts its Market Surveillance Sweep Letter on Rumors

NYSE has posted on its website its and FINRA's  Market Surveillance Sweep Letter on Rumors, which asks for an extensive list of documents and other information relating to the firm's compliance policies.

SEC Sends Subpoenas to Hedge Fund Advisers

On Sunday the SEC announced that it was examining internal controls at securities firms against  manipulation of stock prices through spreading false rumors.  Today the Wall St. Journal reports that the SEC has sent subpoenas to a number of hedge fund advisers seeking information about short sales and options trading in the stock of Bear Stearns and Lehman Brothers.  WSJ, Hedge Funds Subpoenaed in SEC Probe. 

SEC Charges Mobile Ready Entertainment with Artificially Inflating Stock Price

The SEC (Commission) filed a civil action in the United States District Court for the Northern District of Georgia against Mobile Ready Entertainment Corp. (Mobile Ready) and its former co-chief executive officers Michael H. Magolnick (Magolnick) and Craig A. Mora (Mora). The Commission alleges that, between January and July 2007, Magolnick and Mora, acting through Mobile Ready, created artificial demand for Mobile Ready stock through the issuance of false and misleading press releases that contained baseless revenue projections and identified contracts for future business that did not exist. These false and misleading press releases inflated the per share price and trading volume of Mobile Ready. The complaint alleges that Magolnick and Mora thereafter made additional false statements in efforts to obtain unfounded legal opinion letters supporting their sales of Mobile Ready shares, which were not freely tradable. As a result of their efforts to artificially inflate the market for Mobile Ready stock and their obtaining baseless legal opinions supporting their sales, Magolnick and Mora sold personal holdings of more than 2 million restricted shares each.

The Commission alleges that, by their misconduct, defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and that Magolnick and Mora further violated Sections 5(a) and 5(c) of the Securities Act of 1933. The Commission seeks against the defendants permanent injunctive relief, and, with respect to Magolnick and Mora, an accounting, disgorgement of ill-gotten gains plus prejudgment interest, civil penalties, and penny-stock and officer-director bars.

Broker Settles Market-Timing Charges

On July 11, the SEC issued a settled order (Order) against Dogan Baruh (Baruh) in a previously instituted administrative proceeding.  The Order finds that Baruh, a former registered representative (RR) at CIBC World Markets Corp. (CIBC) and Fahnestock & Co., Inc. (Fahnestock), engaged in a scheme to defraud mutual fund companies. Between June 1998 and September 2003, Baruh and certain other registered representatives (the brokers) actively assisted market timing customers in deceiving mutual funds. CIBC, Fahnestock and the brokers received hundreds of letters and emails from mutual funds regarding their market timing trading activities. Baruh and the brokers repeatedly ignored these communications, and continued to work with their market timing customers to implement their market timing strategies up until the point when mutual funds threatened to terminate their dealer agreements with CIBC or Fahnestock.  The Order directs Baruh to cease and desist from committing or causing any violations and any future violations of federal securities laws, bars Baruh from association with any broker, dealer or investment adviser, and prohibits him from serving or acting as an employee, officer, director, member of an advisory board, investment adviser or depositor of, or principal underwriter for, a registered investment company or affiliated person of such investment adviser, depositor, or principal underwriter. Finally, the Order directs Baruh to pay disgorgement of $1 and a civil money penalty in the amount of $325,000. Baruh consented to the issuance of the Order without admitting or denying the Commission's findings, except as to the Commission's jurisdiction over him and the subject matter of the proceedings.  In the Matter of Michael Sassano, Dogan Baruh, Robert Okin, and R. Scott Abry

Bylaws Require Activist Shareholders to Disclose Stock Information

The Wall St. Journal reports that many public companies, including Pfizer, Monsanto and Sara Lee, have amended their bylaws to require that investors who propose directors or shareholders' resolutions disclose their activities in the company's shares, including borrowing or lending shares and hedges to protect against price declines.  WSJ, Companies Alter Bylaws To Pry Data Out of Activists.

Anheuser Busch Agrees to Acquisition by InBev

InBev and Anheuser-Busch announced an agreement to combine the two companies, forming the world’s leading global brewer. Anheuser-Busch shareholders will receive $70 per share in cash, for an aggregate equity value of $52 billion.  The combined company will be called Anheuser Busch InBev. Both companies’ Boards of Directors have unanimously approved the transaction, and InBev has fully committed financing for the purchase.  The combination of Anheuser-Busch and InBev will create the global leader in the beer industry and one of the world’s top five consumer products companies.

The company will make St. Louis, Missouri the headquarters for the North American region and the global home of the flagship Budweiser brand. InBev CEO Carlos Brito will be chief executive officer of the combined company. The Board of Directors of the combined company will be comprised of the existing directors of the InBev Board, Anheuser-Busch President and CEO August Busch IV and one other current or former director from the Anheuser-Busch Board.

The transaction is subject to the approval of InBev and Anheuser-Busch shareholders, and other customary regulatory approvals. Shareholders of both companies will have an opportunity to vote on the proposed combination at special shareholder meetings that will be scheduled at a later date.  The combination is expected to be completed by the end of 2008.

SEC Seeks to Quash Rumor-Spreading

The SEC announced that it and other securities regulators will immediately conduct examinations aimed at the prevention of the intentional spread of false information intended to manipulate securities prices. The examinations will be conducted by the SEC's Office of Compliance Inspections and Examinations, as well as the Financial Industry Regulatory Authority and New York Stock Exchange Regulation, Inc. The securities laws require that broker-dealers and investment advisers have supervisory and compliance controls to prevent violations of the securities laws, including market manipulation. Examiners will focus on these controls and whether they are reasonably designed to prevent the intentional creation or spreading of false information intended to affect securities prices, or other potentially manipulative conduct. These examinations are in addition to the Commission's enforcement investigations into alleged intentional manipulation of securities prices through rumor-mongering and abusive short selling that are already underway.

FINRA, NYSE Regulation and the Options Regulatory Surveillance Authority recently reminded industry firms that intentionally spreading false rumors or engaging in collusive activity to affect the financial condition of an issuer are violative activities, and further reminded market participants to review their internal controls and procedures to prevent this type of conduct.

Sen on 10b5-1 Plans

Are Insider Sales Under 10b5-1 Plans Strategically Timed?, by RIK SEN, New York University, was recently posted on SSRN.  Here is the abstract:

Previous research and numerous media articles suggest that sales executed under 10b5-1 trading plans are strategically timed. However, we find no significant difference in stock price performance following plan sales and non-plan sales. We demonstrate that price contingent orders (e.g. limit orders), a common feature in trading plans, give rise to empirical patterns that have been taken as evidence of strategic timing of sales. Event study methods employed in previous research on plan sales are shown to give biased estimates of post-event abnormal returns when the events are not exogenous to past returns.

Verret on SEC Certification to Delaware Court

SEC Certification to the Delaware Supreme Court, by J.W. VERRET, George Mason University - School of Law, was recently posted on SSRN.  Here is the abstract:

This essay, recently featured in the Corporate Governance Advisor, describes a recent development in the Delaware Constitution that permits the Securities and Exchange Commission to certify questions of law directly to the Delaware Supreme Court. This essay analyses the effect of this new capability and predicts its importance to proxy fights. This issue has recently come alive, with the SEC's certification of a bylaw proposal by AFSCME to the Delaware Supreme Court to determine its legality for the purposes of the SEC's consideration of a no-action request.