Securities Law Prof Blog

SEC Charges National Lampoon with Market Manipulation

The SEC charged seven individuals and two corporations, including National Lampoon, Inc., with engaging in three separate fraudulent schemes to manipulate the market for publicly traded securities through the payment of prearranged kickbacks. Other defendants include National Lampoon's CEO, Daniel S. Laikin, as well as stock promoters, a consultant, and an officer of another company. The Commission's actions, filed in federal district court in Philadelphia, allege that, in each case, individuals who controlled the stock of a public company arranged with corrupt promoters and others to generate purchases of the company's stock in exchange for cash kickbacks. In each case, a witness secretly cooperating with the government (the "CW") was paid a kickback to make purchases in the stock. The goal of the manipulators was to create the appearance of market interest, induce public purchases of the stock, and ultimately increase the stock's trading price. For example, the Commission alleges that Daniel Laikin and another defendant paid at least $68,000 in cash kickbacks for the purchase of National Lampoon stock in order to artificially inflate the stock price.

National Lampoon, Inc., headquartered in Los Angeles, California, is a media and entertainment company that develops, produces and distributes media projects including feature films, television programming, online and interactive entertainment, home video, and book publishing. The company produced such widely known films as National Lampoon's Animal House, and the National Lampoon Vacation series. National Lampoon's common stock is registered with the Commission and is listed on the NYSE Alternext, formerly the American Stock Exchange ("AMEX"). Daniel S. Laikin, of Los Angeles, California, has been the Chief Executive Officer of National Lampoon since 2005. Laikin controls approximately 40 percent of the voting stock of National Lampoon.

SEC Settles SEC Charges Involving Former S&P Analyst

The SEC settled insider trading chargese against Carl Loizzi, Rick A. Marano and William Marano.  The SEC charged that, on two separate occasions, Rick Marano, a former senior analyst in the Life Insurance Group at Standard & Poor's Financial Rating Services (S&P), misappropriated material, non-public information obtained through his employment regarding proposed business transactions and tipped that information to his brother, William Marano, and Loizzi, a friend and former business partner of William Marano's. In total, the unlawful trading produced profits of over $1,100,000.

Without admitting or denying the allegations of the complaint, Rick Marano, William Marano and Loizzi each consented to the entry of a final judgment that permanently enjoins them from violating Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 10b-5. The final judgments against Rick Marano and Loizzi require them to pay disgorgement of $45,000 and $305,000, respectively. The final judgments waive the remaining disgorgement and do not impose civil penalties based upon the defendants' sworn representations regarding their financial condition.

The complaint alleged that, in late April 2000, through his employment at S&P, Rick Marano misappropriated material, non-public information regarding a potential acquisition of ReliaStar Financial Corporation (ReliaStar) by ING Groep and, on or about April 27, 2000, tipped that information to William Marano and/or Loizzi. The complaint further alleged that defendants then purchased ReliaStar call option contracts (Loizzi also purchased ReliaStar common stock). The complaint charged that after the proposed acquisition was announced, Loizzi, William Marano and Rick Marano reaped trading profits of approximately $596,000, $200,000 and $83,000, respectively, on their sales of ReliaStar securities. The complaint further alleged that approximately one year later, Rick Marano again misappropriated material, non-public information regarding a potential acquisition of American General Corporation (AGC) by American International Group and tipped William Marano and/or Loizzi, who then purchased AGC call option contracts on April 3, 2001. Finally, the complaint charged that after the proposed acquisition was announced, Loizzi and William Marano reaped trading profits of approximately $253,000 and $20,000, respectively, on the sale of their AGC options.

In parallel criminal proceedings brought by the United States Attorney's Office for the Southern District of New York, Rick Marano, William Marano and Loizzi entered guilty pleas. Rick Marano was sentenced to a prison term of 15 months and fined $5,000, William Marano was sentenced to 24 months probation and fined $1,000 and Loizzi was sentenced to 36 months probation and fined $3,000.

Court Orders Disgorgement from One Wall St and Other Defendants for Sales of Unregistered Securities

On December 11, 2008 the United States District Court for the Eastern District of New York entered final judgments against defendants One Wall Street, Inc. ("One Wall Street"), Donte C. Jarvis, Willis "Bill" White III, and Cecil Baptiste, also known as John Latorri ("Baptiste") (collectively, the "defendants") and enjoined them from future violations of the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933 and of the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Court ordered each of them to pay disgorgement, prejudgment interest and a civil monetary penalty. In addition the Court entered a final judgment against relief defendant La Shondra Hatter, Jarvis' wife, ordering her to pay disgorgement. Previously, on October 24, 2007, the Court had entered default judgments against each of these parties and reserved ruling on the Commission's motions for disgorgement, prejudgment interest and civil monetary penalties pending the recommendations of Magistrate Judge Arlene Rosario Lindsay for a determination of the amounts of each claim. In entering the final judgments, the Court adopted Judge Lindsay's recommendations, dated September 4, 2008.

The judgments order the disgorgement of the ill-gotten gains obtained by the defendants from at least 64 investors, many of whom were senior citizens, and at least one of whom lost a significant part of his life savings as a result of defendants' fraud. Considering the defendant's significant fraudulent conduct, the Court also imposed third-tier civil penalties on each of them and barred each of them from further violations of the registration and anti-fraud provisions of the federal securities laws.

The Commission's complaint alleged that One Wall Street, Jarvis, White, and Baptiste sold unregistered shares of One Wall Street to investors through numerous oral and written false and misleading statements. These defendants, together with Alan Brown, against whom a final judgment was entered in January 2008, raised at least $1.925 million from the investing public.

Judge Garaufis ordered that: (i) One Wall Street and Jarvis disgorge $1,925,620, together with prejudgment interest of $526,379.03, and pay a civil penalty of $1,925,620; (ii) White disgorge $1,000, together with prejudgment interest of $275.94, and pay a civil penalty of $30,000; and (iii) Baptiste disgorge $198,619.08, together with prejudgment interest of $47,895.44, and pay a civil penalty of $198,619.08. Judge Garaufis further ordered the relief defendant Hatter to disgorge the $166,570.80 she received from Jarvis, together with prejudgment interest of $32,122.07.

Siemens Settles FCPA Charges

The SEC settled charges that Siemens Aktiengesellschaft ("Siemens"), a Munich, Germany-based manufacturer of industrial and consumer products, violated the anti-bribery, books and records, and internal controls provisions of the Foreign Corrupt Practices Act ("FCPA"). Siemens has offered to pay a total of $1.6 billion in disgorgement and fines, which is the largest amount a company has ever paid to resolve corruption-related charges. Siemens has agreed to pay $350 million in disgorgement to the SEC. In related actions, Siemens will pay a $450 million criminal fine to the U.S. Department of Justice and a fine of €395 million (approximately $569 million) to the Office of the Prosecutor General in Munich, Germany. Siemens previously paid a fine of €201 million (approximately $285 million) to the Munich Prosecutor in October 2007.

The SEC alleged that between March 12, 2001 and September 30, 2007, Siemens violated the FCPA by engaging in a widespread and systematic practice of paying bribes to foreign government officials to obtain business. Siemens created elaborate payment schemes to conceal the nature of its corrupt payments, and the company's inadequate internal controls allowed the conduct to flourish. The misconduct involved employees at all levels, including former senior management, and revealed a corporate culture long at odds with the FCPA.

During this period, Siemens made thousands of payments to third parties in ways that obscured the purpose for, and the ultimate recipients of, the money. At least 4,283 of those payments, totaling approximately $1.4 billion, were used to bribe government officials in return for business to Siemens around the world.

Without admitting or denying the Commission's allegations, Siemens has consented to the entry of a court order permanently enjoining it from future violations and ordering it to comply with certain undertakings regarding its FCPA compliance program, including an independent monitor for a period of four years. On December 15, 2008, the court entered the final judgment. Since being approached by SEC staff, Siemens has cooperated fully with the ongoing investigation, and the SEC considered the remedial acts promptly undertaken by Siemens. Siemens' massive internal investigation and lower level employee amnesty program was essential in gathering facts regarding the full extent of Siemens' FCPA violations.

Coates on Mutual Fund Reform

Reforming the Taxation and Regulation of Mutual Funds: A Comparative Legal and Economic Analysis, by John C. Coates IV, Harvard Law School, was recently posted on SSRN.  Here is the abstract:

Most Americans invest through mutual funds. A comparison of US tax and securities law governing mutual funds with laws governing other collective investments, in both the US and in the EU, shows: (a) mutual funds are taxed less favorably and regulated more extensively in the US than direct investments or other collective investments, including alternatives available only to wealthy investors; (b) the structure of US regulation - numerous proscriptive bright-line rules written nearly 70 years ago, subject to SEC exemptions - makes success of US mutual funds dependent on the resources, responsiveness and flexibility of the SEC; (c) the US fund industry continues to be the world leader, but now lags domestic and foreign competitors, primarily because of US tax and securities law; and (d) while formal laws imposed on mutual funds in other countries are as or more restrictive and inflexible in most respects than US law, the resources and responsiveness of foreign fund regulators exceed the SEC in its oversight of mutual funds. The paper discusses a number of reforms to improve the treatment of middle class investments, including improvements in mutual fund taxation, ways to enhance the flexibility and resources of US fund regulators, modifications of the existing ban on asymmetric advisor compensation and the exclusion of foreign funds, and unjustified disparities in the treatment of mutual funds and mutual fund substitutes.

Law Profs File Amicus Brief in Sec. 36(b) Investment Co. Appeal

Supreme Court Amicus Brief of Law Professors in Support of Certiorari, Jones v. Harris Associates, No. 08-586, was recently posted on SSRN by William A. Birdthistle, Chicago-Kent College of Law.  Amici curiae law professors filed this brief to urge the Court to grant the petition for certiorari and to clarify the proper scope of the fiduciary duty under Section 36(b) of the Investment Company Act that investment advisers owe to mutual fund shareholders with respect to the compensation that advisers receive. The brief addresses the Seventh Circuit's decision to disavow the long-established Gartenberg precedent and to hold, instead, that so long as an adviser make[s] full disclosure and play[s] no tricks, a plaintiff cannot prevail in a Section 36(b) action. Amici argue that the Seventh Circuit's decision creates a circuit split, elides a critical provision from the statutory text, and engages in a superficial market analysis.

Langevoort on Global Competition

U.S. Securities Regulation and Global Competition, by Donald C. Langevoort, Georgetown University Law Center, was recently posted on SSRN.  Here is the abstract:

This essay introduces and comments on three articles in the Virginia Law & Business Review that address important questions of international competitiveness and U.S. securities regulation: the evolution of the Rule 144A market as a way for foreign issuers to tap U.S. capital without submitting to a mandatory disclosure regime; the emergence of international accounting standards to which the SEC seems eventually ready to submit; and "best execution" differences between trading platforms in the U.S. and the E.U.

The Rich are Stupid Investors too

Since courts and commentators frequently like to bemoan the naivete and greed of retail investors, I get a deep sense of satisfaction when the "smart money" turns out to be equally stupid.  We have seen many examples of this in the past few months with the fall of the mighty banks that, as it turned out, failed to grasp the riskiness of the exotic investments in their portfolios.  A few weeks ago, the New York Times ran an excellent article detailing Citigroup's failure to heed red flags as it engaged in ever-riskier bets, NYTimes, Citigroup Saw No Red Flags Even as It Made Bolder Bets (Nov. 23, 2008).  Now this week two massive frauds perpetrated on wealthy investors have been exposed, both catching the regulators apparently by surprise. 

Bernard Madoff is frequently described in the press as a "Wall St. fixture." Madoff founded the firm bearing his name in 1960 and has been a prominent member of the securities industry throughout his career. Madoff served as vice chairman of the NASD, a member of its board of governors, and chairman of its New York region. He was also a member of NASDAQ Stock Market's board of governors and its executive committee and served as chairman of its trading committee.  This week he allegedly informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme." The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.  According to regulatory filings, the Madoff firm had more than $17 billion in assets under management as of the beginning of 2008. It appears that virtually all assets of the advisory business are missing.

The press reports that many investors were suspicious of Madoff's activities -- the fact that he consistently achieved 10% returns, the secrecy surrounding his investment policies, the fact that his statements were audited by a small, obscure accounting firm -- and the SEC had previously investigated him and apparently found nothing to warrant bringing charges.  NYTimes, Look at Wall St. Wizard Finds Magic Had Skeptics (Dec. 13, 2008).

The alleged scam perpetrated by high-profile attorney Marc S. Dreier sounds equally crude and audacious.  According to today's New York Times, Dreier talked his way into a conference room at Solow Realty and proceeded to use the setting to sell phony promissory notes "issued" by Solow Realty.  He was arrested in Toronto when he apparently tried the same scam but could not get past the receptionist at the offices of the Ontario Teachers' Pension Plan.  He may have bilked investors out of as much as $380 million with his various scams. And what did Dreier do with the money?  Apparently it not only supported his lavish life style, but that of the 200-some lawyers at his law firm.  According to Dreier's lawyer, he attracted the "best and the brightest" legal talent by paying them top dollar.  Well, maybe not so bright -- not only are those lawyers now looking for jobs but the Times also reports that Dreier allowed malpractice coverage to lapse.  NYTimes, Lawyer Seen as Bold Enough to Cheat the Best Investors (Dec. 14, 2008).

Let's stay tuned for further developments.

SEC Charges Bernard Madoff with Running a Ponzi Scheme

Following on the arrest of Bernard L. Madoff for criminal securities fraud, the SEC charged Madoff and his investment firm, Bernard L. Madoff Investment Securities LLC, with securities fraud for a multi-billion dollar Ponzi scheme that he perpetrated on advisory clients of his firm. The SEC is seeking emergency relief for investors, including an asset freeze and the appointment of a receiver for the firm.

The SEC's complaint, filed in federal court in Manhattan, alleges that Madoff yesterday informed two senior employees that his investment advisory business was a fraud. Madoff told these employees that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme." The senior employees understood him to be saying that he had for years been paying returns to certain investors out of the principal received from other, different investors. Madoff admitted in this conversation that the firm was insolvent and had been for years, and that he estimated the losses from this fraud were at least $50 billion.

According to regulatory filings, the Madoff firm had more than $17 billion in assets under management as of the beginning of 2008. It appears that virtually all assets of the advisory business are missing.

Madoff founded the firm in 1960 and has been a prominent member of the securities industry throughout his career. Madoff served as vice chairman of the NASD, a member of its board of governors, and chairman of its New York region. He was also a member of NASDAQ Stock Market's board of governors and its executive committee and served as chairman of its trading committee.

FBI Arrests Bernie Madoff

The Wall St. Journal reports that Bernard L. Madoff, founder of Bernard L. Madoff Investment Securities, was arrested by the FBI and charged with criminal securities fraud.  The complaint states that he told some employees that his business was a "giant Ponzi scheme."  WSJ, Madoff Charged With Securities Fraud.

SEC Open Meeting Dec. 17

SEC Open Meeting - December 17, 2008 - 10:00 a.m.

The subject matter of the open meeting will be:

The Commission will consider whether to approve the 2009 budget of the Public Company Accounting Oversight Board and will consider the related annual accounting support fee for the Board under Section 109 of the Sarbanes-Oxley Act of 2002.
The Commission will consider whether to adopt amendments to provide for companies’ financial statement information to be filed with the Commission in interactive data format, according to a specified phase-in schedule.
The Commission will consider whether to adopt amendments to provide for mutual fund risk/return summary information to be filed with the Commission in interactive data format. The Commission will also consider whether to adopt amendments to permit investment companies to submit portfolio holdings information under the Commission’s interactive data voluntary program without being required to submit other financial information.
The Commission will consider whether to adopt amendments that would define terms related to annuity contracts under the Securities Act of 1933, and whether to adopt amendments related to periodic reporting requirements under the Securities Exchange Act of 1934.

SEC and Zurich Financial Services Settle Fraud Action

The SEC announced the filing and settlement of charges against Zurich Financial Services Group for aiding and abetting a fraud by Converium Holding AG involving the use of finite reinsurance transactions to inflate improperly Converium’s financial performance. Under the settlement, Zurich consents to the entry of a final judgment directing it to pay a $25 million penalty plus $1 in disgorgement and, in a related administrative proceeding, consents to the entry of a cease-and-desist order against it.

The Commission’s complaint, filed today, alleges that beginning in 1999, the management of Zurich’s reinsurance group, which operated under the name Zurich Re, developed three reinsurance transactions for the purpose of obtaining the financial benefits of reinsurance accounting. However, in order for a company to obtain the benefits of reinsurance accounting, the reinsurance transaction must transfer risk. Here, Zurich Re management designed the transactions to make them appear to transfer risk to third-party reinsurers, when, in fact, no risk was transferred outside of Zurich-owned entities. For two of the transactions at issue, Zurich Re ceded risk to third-party reinsurers, but took it back through reinsurance agreements – known as retrocessions – with another Zurich entity. For the third transaction, Zurich Re ceded the risk to a third-party reinsurer but simultaneously entered into an undisclosed side agreement with the reinsurer pursuant to which Zurich Re agreed to hold the reinsurer harmless for any losses realized under the reinsurance contracts. Because the ultimate risk under the reinsurance contracts remained with Zurich-owned entities, these transactions should not have been accounted for as reinsurance.

The complaint also alleges that, in March 2001, Zurich announced its intent to spin off its reinsurance group in an initial public offering. Zurich then created and capitalized Converium, which assumed the rights and obligations of Zurich’s assumed reinsurance business. On December 11, 2001, Zurich spun off Converium in an IPO. At the conclusion of the IPO, the members of Zurich Re management responsible for the three reinsurance transactions ceased to be affiliated with Zurich. As a result of the improper accounting treatment the reinsurance transactions received, the historical financial statements in Converium’s IPO documents, including the Form F-1 it filed with the Commission, were materially misleading. Among other things, Converium understated its reported loss before taxes by approximately $100 million (67%) in 2000 and by approximately $3 million (1%) in 2001. In addition, for certain periods, the transactions had the effect of artificially decreasing Converium’s reported loss ratios for certain reporting segments – the ratio between losses paid by an insurer and premiums earned that is frequently cited by analysts as a key performance metric for insurance companies.

The complaint further alleges that Converium’s misstatements relate to fact that were material to investors who purchased shares in the IPO. Through the IPO, which was the largest reinsurance IPO in history, Zurich raised significantly more than it would have raised had Zurich and Converium not improperly inflated Converium’s financial performance.

The Commission’s complaint alleges that Zurich aided and abetted Converium’s violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

In connection with the settlement, Zurich has agreed, without admitting or denying the allegations in the Commission’s complaint, to pay a $25 million penalty, plus $1 in disgorgement. In a related administrative proceeding, Zurich has also agreed, without admitting or denying the Commission’s findings, to the issuance of an order that requires Zurich to cease and desist from committing or causing any violation and any future violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

SEC Settles Charges Against 8 Former Fidelity Brokers

The SEC announced settlements of an enforcement action against eight former employees of Fidelity Investments' equity trading desk, who will collectively pay more than $1 million to settle SEC charges for improperly receiving travel, entertainment, and gifts paid for by outside brokers courting business from Fidelity.  The SEC instituted administrative proceedings on March 5, 2008, against 10 former Fidelity employees, including former vice president and head of the trading desk, Scott E. DeSano. The SEC's orders issued today find that DeSano and former Fidelity equity traders Timothy J. Burnieika, David K. Donovan, Edward S. Driscoll, Jeffrey D. Harris, Christopher J. Horan, Steven P. Pascucci and Kirk C. Smith violated the federal securities laws by accepting prohibited compensation from brokers including among them private jet trips, lodging and premium sports tickets. In addition, the Commission also found that DeSano was a cause of Fidelity's failures to seek best execution for its clients and to disclose conflicts of interest to its clients, and that DeSano failed to supervise the 10 traders.

SEC Finalizes ARS Settlements with Citi and UBS

The SEC finalized settlements with Citigroup Global Markets, Inc. (Citi) and UBS Securities LLC and UBS Financial Services, Inc. (UBS), that will provide nearly $30 billion to tens of thousands of customers who invested in auction rate securities before the market for those securities froze in February.  The settlements resolve the SEC's charges that both firms misled investors regarding the liquidity risks associated with auction rate securities (ARS) that they underwrote, marketed and sold. Previously, on August 7 and 8, 2008, the Commission's Division of Enforcement announced preliminary settlements with Citi and UBS, respectively.

The settlements, which are subject to court approval, will restore approximately $7 billion in liquidity to Citi customers who invested in ARS, and $22.7 billion to UBS customers who invested in ARS.

Without admitting or denying the SEC's allegations, Citi and UBS agreed to be permanently enjoined from violations of the broker-dealer fraud provisions and to comply with a number of undertakings.

The Citi settlement provides:

Citi will offer to purchase ARS at par from individuals, charities, and small businesses that purchased those ARS from Citi, even if those customers moved their accounts.
Citi will use its best efforts to provide liquidity solutions for institutional and other customers, including, but not limited to, facilitating issuer redemptions, restructurings, and other reasonable means, and will not take advantage of liquidity solutions for its own inventory before making those solutions available to these customers.
Citi will pay eligible customers who sold their ARS below par the difference between par and the sale price of the ARS.
Citi will reimburse eligible customers for any excess interest costs associated with loans taken out from Citi due to ARS illiquidity.

The UBS settlement provides:

UBS will offer to purchase at par from all current or former UBS customers who held their ARS at UBS as of February 13, 2008, or purchased their ARS at UBS between October 1, 2007 and February 12, 2008, even if they moved their accounts. Different categories of customers will receive offers from UBS at different times.
UBS will not liquidate its own inventory of a particular ARS without making that liquidity opportunity available, as soon as practicable, to customers.
UBS will pay eligible customers who sold their ARS below par the difference between par and the sale price of the ARS.
UBS will reimburse customers for any excess interest costs incurred by using UBS's ARS loan programs.

The Commission alerts investors that, in most instances, they will receive correspondence from Citi and UBS, and that they must advise the respective firm that they elect to participate in these settlements, or they could lose their rights to sell their ARS. Further, if eligible customers incurred consequential damages because of the illiquidity of their ARS, they may participate in special FINRA arbitrations.

Both Citi and UBS will also be permanently enjoined from violating the provisions of Section 15(c) of the Exchange Act of 1934, which prohibit the use of manipulative or deceptive devices by broker-dealers. Both firms also face the prospect of financial penalties to the Commission. After the buy back periods are substantially complete, the Commission may consider imposing a financial penalty against Citi and/or UBS based on the traditional factors the Commission considers for penalties and based on whether the individual firm has fulfilled its obligations under its settlement agreement.

SEC Publishes Municipal Bond Disclosure Amendments

The SEC published on its website its recently adopted amendments to a rule under the Securities Exchange Act of 1934 (“Exchange Act”) relating to municipal securities disclosure. This final rule amends certain requirements regarding the information that the broker, dealer, or municipal securities dealer acting as an underwriter in a primary offering of municipal securities must reasonably determine that an issuer of municipal securities or an obligated person has undertaken, in a written agreement or contract for the benefit of holders of the issuer’s municipal securities, to provide. Specifically, the amendments require the broker, dealer, or municipal securities dealer to reasonably determine that the issuer or obligated person has agreed: to provide the information covered by the written agreement to the Municipal Securities Rulemaking Board (“MSRB” or “Board”), instead of to multiple nationally recognized municipal securities information repositories (“NRMSIRs”) and state information depositories (“SIDs”); and to provide such information in an electronic format and accompanied by identifying information as prescribed by the MSRB. The Commission’s rulemaking is intended to improve the availability of information about municipal securities to investors, market professionals, and the public generally. Concurrently, the SEC approved a companion proposal by the MSRB relating to its Electronic Municipal Market Access(“EMMA”) system for municipal securities disclosures. Finally, the SEC withdrew proposed amendments to the Rule, issued in 2006, that would have eliminated the MSRB as a location to which issuers could submit certain municipal disclosure documents.

Cox Speaks to Accountants

SEC Chairman Christopher Cox spoke today before the AICPA National Conference on Current SEC and PCAOB Developments.

SEC Charges Moscow Broker Dealer with Soliciting Sales of Russian Stock

The SEC charged a Moscow-based unregistered broker-dealer for registration and reporting violations, alleging that it solicited institutional investors in the U.S. to purchase and sell small cap stocks of Russian companies without registering as a broker-dealer with the SEC or meeting the requirements for an exemption.

In addition to instituting administrative proceedings against OOO CentreInvest Securities (CI-Moscow), the SEC charged its registered U.S. affiliate, CentreInvest, Inc. (CI-New York) and four individuals: CI-Moscow's former executive director Dan Rapoport, CI-New York's former managing director, FINOP and CFO Svyatoslav Yenin, CI-New York's former head of sales Vladimir Chekholko, and CI-New York's chief compliance officer William Herlyn.  In the administrative proceeding, the SEC's Division of Enforcement alleges that from about 2003 through November 2007, CI-Moscow and Rapoport solicited investors in the U.S. both directly, and indirectly, through CI-New York, Yenin, Chekholko and Herlyn. CI-Moscow and Rapoport were not registered as a broker-dealer as required by law, nor did they meet the requirements for the exemption from registration for foreign broker-dealers.

The SEC's Division of Enforcement also alleges that Yenin and Herlyn were responsible for the filing of amendments to CI-New York's broker-dealer disclosure form that failed to disclose CI-Moscow and Rapoport's control of CI-New York, or that the license of the CI-New York's parent company had been revoked by the Cyprus SEC. The Division further alleges that CI-New York either failed to maintain business-related emails, or failed to produce them at the request of the Commission's staff as required by law, and that Yenin was responsible for CI-New York's failure to maintain these business-related e-mails.

The SEC's Division of Enforcement is seeking cease-and-desist orders, orders directing respondents to provide accountings, pay disgorgement and financial penalties, and orders imposing any remedial action appropriate in the public interest, including, but not limited to, bars from association with any broker or dealer, or revocation of registration. A hearing will be held before an Administrative Law Judge to determine whether the allegations of the Enforcement Division in the SEC's order are true, and if so, what relief is appropriate. The Commission ordered the Administrative Law Judge to issue a decision not later than 300 days from the date of service of the order.

SEC Charges New York Attorney with Selling Bogus Notes

On December 8, 2008, the SEC filed a civil injunctive action in United States District Court for the Southern District of New York alleging that New York attorney Marc S. Dreier engaged in an elaborate scheme, that violated the antifraud provisions of the federal securities laws and raised at least $113 million from the sale of bogus promissory notes. According to the SEC's complaint, Dreier is the founder and managing partner of Dreier LLP, a 250-attorney law firm headquartered in Manhattan.

According to the SEC, since at least October 2008, Dreier has been marketing fake promissory notes, including bogus notes of a New York-based real estate development company, to hedge funds and other private investment funds, and has closed at least three sales. According to the complaint, Dreier created an elaborate charade designed to convince purchasers that the notes were genuine. He allegedly distributed phony financial statements and audit opinion letters of a reputable accounting firm, and recruited confederates to play the parts of representatives of legitimate companies involved in the transactions, even creating dummy email addresses and telephone numbers.

According to the Commission's complaint, Dreier directed that two purchasers of the bogus notes wire payment to what appeared to be his law firm's escrow account. At least one note purchaser discovered the fraud and demanded, and received, the return of its investment. Approximately $100 million in known proceeds from the sale of the bogus notes remains unaccounted for.

The SEC's complaint alleges that, among other fake securities, Dreier has been offering fictitious promissory notes of a New York-based real estate development company (the "developer"), a former client of Dreier and his firm. Since at least October of this year, Dreier has approached at least three different investment funds with an offer to sell them, at a deep discount, various short-term, unsecured promissory notes supposedly issued by the developer. Two of the investment funds agreed to purchase the notes (one fund purchased notes in two separate transactions) and forwarded approximately $113 million to an account in the name of "Dreier LLP Attorney Trust Account" in payment. A third fund was offered the notes, but declined to participate.

As alleged in the complaint, all of the offers were accompanied by documents that Dreier subsequently admitted he knew were fabricated. Dreier offered the notes for sale even though he knew that the developer had never issued the notes, had not authorized Dreier to market them and indeed knew nothing of their existence or Dreier's offers or sales.

The complaint further alleges that in marketing the notes, Dreier provided the hedge funds with fabricated documents including a "form" note and related agreements, "audited financial statements," and purported audit letters, which bore the forged signature of the developer's auditor, but which were printed on purported stationary of the developer's auditing firm. Dreier did not tell representatives from the hedge funds that the notes were bogus, that the "audited financial statements" and audit opinion letters were fabricated, or that the developer had never issued the notes or authorized Dreier to market them, despite Dreier's knowledge of these matters.

 
The Commission seeks emergency and preliminary relief, including the asset freeze, appointment of a receiver and temporary restraining order and preliminary injunction, as well as a final judgment permanently enjoining Dreier from committing future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, ordering him to pay civil penalties and disgorgement of ill-gotten gains with prejudgment interest, and provide an accounting.

Investors in Municipal Bonds Get Their Own EDGAR

It's about time -- the SEC announced that it has unanimously approved measures to provide greater transparency in the municipal securities market, so that investors can obtain free, readily accessible information online on municipal bonds.  Unlike investors in corporate securities who have direct access to free company information through the SEC’s EDGAR system, average investors in municipal securities currently have no free and convenient way to get important information about the municipal bonds in which they invest.  Currently, municipal securities investors who want ongoing disclosure information about a municipal bond first must locate it on their own at one of the four Nationally Recognized Municipal Securities Information Repositories (NRMSIRs). Then once they find a source, investors have to pay significant fees to get the information they want and may experience considerable delays while waiting for the documents to be delivered to them by mail or fax.

The rule amendments approved by the SEC designate the MSRB as the central repository for ongoing disclosures by municipal issuers. Under a separate MSRB rule change, its Electronic Municipal Market Access (EMMA) system would make these disclosures available to investors in the same manner that the SEC’s EDGAR system does for corporate disclosures.  EMMA will operate as a consolidated, online portal where investors can instantly access, for free, all of the key information produced by municipal bond issuers about their bonds. Offering documents, real-time trade prices, and education resources already are available on EMMA at  http://www.emma.msrb.org/.

In order to provide adequate transition time, the SEC’s rule amendments and the MSRB’s rule change will be effective on July 1, 2009.

Pan & Jackson on Regulatory Competition

Regulatory Competition in International Securities Markets: Evidence from Europe - Part II, by Eric J. Pan, Yeshiva University - Benjamin N. Cardozo School of Law, and Howell E. Jackson, Harvard Law School, was recently posted on SSRN.  Here is the abstract:

This article presents the second installment of an empirical investigation into regulatory competition in international securities markets. It contributes to the current debate about competitiveness of U.S. capital markets by offering an account of transatlantic capital raising practices at the height of technology boom of the 1990s and before the passage of the Sarbanes-Oxley Act of 2002 and the corporate scandals that precipitated the Act. This article provides evidence that European issuers in the late 1990s were already turning away from U.S. public capital markets. While regulatory considerations appear to have played a role in that trend, even more important were the growing importance of private means of access of U.S. capital, the increased off-shore presence of U.S. institutional investors, and the relatively unsatisfactory trading performance of many foreign issuers that had gone to the trouble of obtaining U.S. public listings early in the 1990s. The picture of transatlantic capital raising presented in our survey suggests that the recent decline in competitiveness of U.S. capital markets may well be more a product of long-standing trends in global financial markets than a response to the Sarbanes-Oxley Act or other requirements of federal securities laws. We have supplemented our original analysis with a post-script from the vantage point of 2008 to draw connections between our findings and those of recent academic literature.