Securities Law Prof Blog

NYSE Extends Lowering of Market Cap Standard and Application of Stock Price Criteria

NYSE Euronext announced that the New York Stock Exchange will extend until June 30, 2009 the temporary lowering of its market-capitalization standard for listed companies.  Through the same period, the NYSE also will suspend the application of its stock-price criteria.  According to the announcement, "Today’s action reflects the Exchange’s determination that suitable companies should remain listed during the current period of unusual market volatility and decline."

Specifically, the NYSE is addressing two continued-listing requirements:

• The NYSE on Jan. 23 temporarily changed to $15 million from $25 million the minimum global market capitalization required of listed issues.   This temporary change is now extended until June; it otherwise would have expired on April 22.
• The Exchange is suspending until June 30, 2009, the application of its stock-price standard, which applies to stocks whose average closing price falls below $1 over a consecutive 30-day trading period.
  

NASAA Statement on President Obama's Principles for Regulatory Reform

Fred Joseph, President of the North American Securities Administrators Association (NASAA) and Colorado Securities Commissioner, released a statement on President Obama’s announcement yesterday of the core principles that will guide his administration’s efforts to reshape how the nation’s financial  industry and markets are regulated. NASAA Statement on Obama Administration's Principles for Financial Services Regulatory Reform.

SEC Charges Colorado Resident with Sales of Unregistered Securities

The SEC filed a complaint charging Phillip R. Trujillo and his company, Wealth Management Resources, a Colorado LLC, with conducting a fraudulent offering of unregistered "units" in three Colorado LLCs, PTV 22, PTV 33, and PTV 44 (PTVs). The Commission alleged that Trujillo induced investors to invest over $5 million based on false representations regarding guaranteed monthly returns, and safety and liquidity of principal. The Commission also alleged that Trujillo continued to make these false representations to later investors after he had already failed to pay promised monthly returns and to refund principal upon the request of earlier investors. Trujillo allegedly induced later investors to invest an additional $1.7 million after defaulting on obligations to earlier investors.

SEC Charges Idaho Resident in Alleged Ponzi Scheme

The SEC filed a Complaint on February 26, 2009, in the United States District Court for the District of Idaho, alleging that Daren L. Palmer ("Palmer") and his investment business Trigon Group, Inc. ("Trigon") raised at least $40 million as part of a Ponzi scheme that has defrauded at least 55 investors. According to the Commission's Complaint, from at least 1996 until October 2008, Palmer and Trigon defrauded investors by representing that invested funds would be used in a riskless trading program that earned annual returns of 20 percent or more. The Complaint alleges that Palmer and Trigon sold securities in the form of promissory notes and investment contracts in unregistered transactions, and told investors that their principal would be invested in indexes, S&P 500 options or futures, currency futures and stocks in a way that would generate high returns with no risk. The Complaint alleges that, instead, Palmer and Trigon were using funds put into the program by later investors to pay fictitious returns to earlier investors in a classic Ponzi scheme. The Commission's Complaint further alleges that Palmer used investor funds to build a partially completed $12 million home in Idaho Falls, Idaho, to purchase snowmobiles, to pay himself compensation of $25,000 to $35,000 a month, and for other personal expenses. The Complaint also alleges that while Palmer told investors he was licensed to sell securities, he has never been licensed to sell securities and that neither Palmer nor Trigon is registered with the Commission in any capacity.

The Commission asked the court to order a preliminary injunction enjoining Palmer and Trigon from future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and enjoining Palmer from future violations of Section 15(a) of the Exchange Act. In addition, on February 26, 2009, the court signed an order freezing all assets of Palmer and Trigon and appointing a receiver in the matter.

Statement From Chairman Schapiro on Proposed Budget for SEC

The following is a statement from SEC Chairman Mary L. Schapiro regarding the President's FY 2010 budget request for the SEC, which represents a 13 percent increase over its FY 2008 budget:

"The President's requested budget increase for the SEC would enable us to increase our staff and use new technology to pursue risk-based approaches that would better detect fraud and ensure stronger oversight of the nation's securities markets. We appreciate these additional resources that would help strengthen and reinvigorate the SEC and rededicate our commitment to the protection of investors."

Two individuals Settle Insider Trading Charges in Engineered Support Systems Stock

The U. S. District Court for the Eastern District of Missouri entered a Final Judgment by consent against Defendants Matthew E. Kopsky and Ronald W. Davis, resolving charges of insider trading in the securities of Engineered Support Systems, Inc. ("ESSI"). The Court's Judgment enjoined Kopsky and Davis from future violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and ordered Kopsky to pay $381,590 in disgorgement and prejudgment interest, and a civil penalty of $276,259, and ordered Davis to pay a civil penalty of $107,062. Kopsky and Davis settled the Commission's claims without admitting or denying the allegations of the Complaint.

The Commission's complaint in this matter was filed on February 26, 2007, and alleged that Davis, ESSI's former President of Business Development, tipped Kopsky, his friend and former broker, prior to each of ESSI's first three quarterly earnings announcements in 2003, and that Kopsky purchased ESSI securities for himself, family members, and clients based upon material, nonpublic information he received from Davis. According to the complaint, Kopsky earned an aggregate profit of $276,259 on these trades, including $107,062 for himself and his wife, and $169,197 for his clients.

As part of the settlement, Kopsky has agreed to a suspension from association with any broker, dealer, or investment adviser, for a period of twelve months, based on the Court's entry of a permanent injunction against him.

Former Zomax CEO Settles Insider Trading Charges

On February 17, 2009, the U.S. District Court for the District of Minnesota entered a Final Judgment against James T. Anderson, the co-founder and former CEO of Zomax, Inc. The Commission's complaint, which was filed on June 6, 2005, alleged that Anderson made false and misleading disclosures concerning Zomax's projected revenue and earnings for the third quarter of 2000 and engaged in insider trading. The Commission's complaint alleged that Anderson sold his entire holdings of Zomax stock in advance of the company's announcement of substantially lower-than-expected revenues and earnings for the quarter, thereby avoiding millions of dollars in losses, as the price of the stock dropped sharply following the announcement.

Without admitting or denying the allegations in the complaint, Anderson consented to the entry of a Final Judgment in which he is permanently enjoined from future violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), and 16(a) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-13, 16a-3 and 16a-8(b)(3)(i) thereunder. The Final Judgment also prohibits Anderson from serving as an officer or director of any publicly traded company. Pursuant to the Final Judgment, Anderson is liable for disgorgement of $6,701,400 plus prejudgment interest of $1,340,280, for a total of $8,041,680. As part of the Final Judgment, any amounts paid by Anderson toward satisfaction of the restitution, forfeiture, and fines totaling $3,427,937.50 that Anderson was ordered to pay in a related criminal proceeding styled as United States v. James T. Anderson et al., Case No. 05-cr-249 (D. Minn.), shall be credited dollar-for-dollar toward the satisfaction of the total monetary judgment in the Commission's case.

SEC Charges New York Resident with "Funds of Funds" Fraud

The SEC charged Mark Bloom and his firm North Hills Management LLC with securities fraud and obtained an emergency court order to freeze their assets and halt an alleged investment scheme involving the marketing of a "fund of funds" investment vehicle. According to the SEC's complaint, Bloom, through North Hills, raised approximately $30 million from 40 to 50 investors between 2001 and 2007 by representing that the assets would be invested in a diverse group of hedge funds. Instead, Bloom misappropriated more than $13.2 million of investor funds to furnish a lavish lifestyle that included the purchase of luxury homes, cars and boats for himself and his wife, who is named as a relief defendant. The remaining funds were invested in a single fund which itself turned out to be fraudulent.

According to the SEC's complaint, beginning in November 2007, one of the Fund's largest investors, a charitable trust (the "Trust") that funds children's schools began to serve Bloom with redemption requests, which Bloom repeatedly evaded. To date, Bloom has failed to honor the Trust's redemption requests in full and claims that he does not have the means to do so. The Trust is owed more than $9.5 million on its investment.

Judge John G. Koeltl of the U.S. District Court for the Southern District of New York, entered an order temporarily restraining the defendants, freezing their assets, ordering accountings, and approving the appointment of a receiver. The SEC's complaint also seeks a final judgment permanently enjoining the defendants from future violations of the federal securities laws and ordering them to pay financial penalties and disgorge ill-gotten gains with prejudgment interest.

C2 Options Exchange Files Application for National Securities Exchange

The SEChas published for public comment C2 Options Exchange, Incorporated's application (File No. 10-191) for registration as a national securities exchange under Section 6 of the Securities Exchange Act of 1934. Rel. 34-59441

SEC Expected to Get 13% Increase in 2010 Budget

The Wall St. Journal reports that the SEC will receive a 13% increase in funding in the 2010 budget, bringing it to just over $1 billion.  The funds will be used to beef up staff and use of technology to better detect fraud and strengthen markets.  WSJ, SEC May Get 13% Funding Increase.

Obama Calls for Regulatory Reform

President Obama calls for a sweeping reform of Wall St. regulations to avoid a repeat of the financial meltdown.  According to the President, the economy cannot sustain 21st century markets with 20th century regulation.   The question is, of course, what kind of regulation are we talking about?  Specifically, is this the regulatory mode presented by Treasury Secretary Paulson in the March 2008 Blueprint, or some plan that will be more protective of investors who have lost so much in the financial meltdown?  NYTimes, Obama Urges Quick Action on Wall Street Reform.

SEC Charges Two with Misappropriating Over $500 Million in Investors' Assets

The SEC took emergency action and obtained an asset freeze against two New York residents and their three affiliated entities, who, it charges, orchestrated an investment fraud involving the misappropriation of as much as $554 million in investor assets.  The SEC alleges that Paul Greenwood and Stephen Walsh promised investors that their money would be invested in a stock index arbitrage strategy. Instead, Greenwood and Walsh essentially treated their clients' investments as their personal piggy bank to purchase multi-million dollar homes, a horse farm and horses, luxury cars, and rare collectibles such as Steiff teddy bears. The SEC has obtained an emergency court order freezing the assets of Greenwood and Walsh as well as their companies: WG Trading Investors, L.P. (WGTI), which is an unregistered investment vehicle; WG Trading Company, Limited Partnership (WGTC), which is a registered broker-dealer located in Greenwich, Conn.; and Westridge Capital Management, Inc. (Westridge), which is a registered investment adviser located in Santa Barbara, Calif.

According to the SEC's complaint, filed in federal court in Manhattan, the SEC alleges that Greenwood and Walsh have been orchestrating the fraudulent investment scheme through their affiliated entities since at least 1996. The SEC alleges that they solicited a number of institutional investors, including educational institutions and public pension and retirement plans, by promising to invest their money in an "enhanced equity index" strategy that involves purchasing and selling equity index futures and engaging in equity index arbitrage trading. However, Greenwood and Walsh have been misappropriating hundreds of millions of dollars of investor funds for their personal use instead of investing the money in the enhanced equity index strategy. In fact, Greenwood and Walsh misappropriated as much as $554 million of the $667 million that Westridge clients invested in WGTI. Greenwood and Walsh have provided some of the investors' money to their spouse and ex-spouse, respectively, who are also named as relief defendants in the SEC's complaint.

Judge George B. Daniels of the U.S. District Court for the Southern District of New York entered an order temporarily restraining the defendants, freezing their assets, and ordering accountings and approving the appointment of a receiver over WGTI, WGTC and Westridge. The SEC's complaint also seeks a final judgment permanently enjoining the defendants from future violations of the federal securities laws and ordering them to pay financial penalties and disgorge ill-gotten gains with prejudgment interest.

The U.S. Attorney's Office (USAO) for the Southern District of New York announced parallel criminal charges against Greenwood and Walsh earlier today, and the U.S. Commodity Futures Trading Commission (CFTC) filed related charges against Greenwood, Walsh and their affiliated entities.

SEC Charges Suspended Broker with Running Fraudulent Hedge Funds

The SEC charged Westgate Capital Management, LLC, a Pearl River, N.Y., investment management firm, and its managing member, James M. Nicholson, with operating a large-scale scheme that defrauded hundreds of investors of millions of dollars by providing them with misleading marketing materials that significantly overstated investment returns and by misrepresenting the value of the assets under management.  The SEC alleges that they solicited investors with false claims of an almost unbroken eight-year string of monthly investment successes. Neither the firm nor its principal is registered with the SEC.  The SEC is seeking a court order to freeze assets, and the U.S. Attorney's Office for the Southern District of New York announced parallel criminal charges against Nicholson.

The SEC alleges Nicholson sought to further his fraud by creating a fictitious accounting firm and providing some of his investors with bogus audited financial statements. Nicholson apparently concocted this imposter firm under the name of an actual accountant while using his own telephone number and driver's license to set up a "virtual office."

According to the SEC's complaint, by late 2008, the funds had sustained such losses that Nicholson and Westgate could no longer honor redemption requests. They hid the losses from investors with misrepresentations and false sales brochures. Nicholson further attempted to hide losses in the Westgate fund family by other devices. He closed one fund that was heavily invested in the bankrupt Lehman Brothers and folded its assets into another Westgate fund. He issued bad checks to some investors seeking to cash out, and ultimately suspended all investor redemptions due to what he called investors' "irrational behavior."

Nicholson was barred from the brokerage industry in 2001 for failing to reply or supplying false information in response to inquiries from the National Association of Securities Dealers (now known as the Financial Industry Regulatory Authority).

SEC Adjusts Civil Penalties for Inflation

The SEC adopted a final rule adjusting the maximum amounts of the civil monetary penalties for the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Company Act of 1940, the Investment Advisers Act of 1940, and certain penalties under the Sarbanes-Oxley Act of 2002. This rule implements the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended by the Debt Collection Improvement Act of 1996, which requires the Commission, at least once every four years, to adopt a regulation adjusting for inflation the maximum amount of civil monetary penalties provided for in statutes administered by the Commission. The purpose of the inflationary adjustment is to maintain the level of deterrence effectuated by the civil monetary penalties and not to allow such deterrent effect to be diminished by inflation.

Court Says Thain Can Name Recipients of Merrill Bonuses

A New York State judge ruled that former Merrill Lynch CEO John Thain could identify the Merrill employees who received the largest bonuses last year before the securities firm was acquired by Bank of America.  At a deposition before the NYS Attorney General, Thain said that BoA prohibited him from disclosing the names.  The judge said the names could not be publicly disclosed at this time.  InvNews, Thain cleared to dish on Merrill bonuses.

Ketchum Appointed FINRA CEO

As expected, Richard G. (Rick) Ketchum has been appointed FINRA's Chief Executive Officer, replacing the new SEC Chair Mary Schapiro. Ketchum currently serves as CEO of New York Stock Exchange (NYSE) Regulation and as Chairman of FINRA's Board of Governors, a position he has had since FINRA was created in 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration operations of NYSE Regulation. He will continue in his role as FINRA's Chairman.  Finra also announced that Steve Luparello, currently FINRA's Interim CEO, will become Vice Chairman and continue to oversee FINRA's regulatory operations.

Prior to becoming CEO of NYSE Regulation, Ketchum served as the first chief regulatory officer of the New York Stock Exchange, a position he began in 2004. Ketchum was also one of the lead architects of the consolidation of NASD and major portions of NYSE Regulation into FINRA.  From June 2003 to March 2004, Mr. Ketchum was General Counsel of the Corporate and Investment Bank of Citigroup Inc., and a member of the unit's planning group, Business Practices Committee and Risk Management Committee.

Earlier in his career, Ketchum spent 12 years at NASD and The Nasdaq Stock Market, Inc., where he served as president of both organizations. He also spent 14 years at the SEC, eight of those as director of the division of Market Regulation.

Ketchum is a 1972 graduate of Tufts University and earned his Juris Doctor degree from New York University School of Law in 1975. He is a member of the bar in both New York and the District of Columbia.

Former Employees at Leumi and Oppenheimer Settle Order Flow Allegations

The SEC settled charges alleging that two former registered representatives, Victor P. Machado, a former fixed income trader at two related entities, Leumi Investment Services Inc. ("LISI"), a registered broker-dealer, and Bank Leumi USA ("BLUSA") (collectively "Leumi"), and Frank Lu, a former salesperson at Oppenheimer & Co. Inc. ("OPCO"), a registered broker-dealer and investment adviser, engaged in a fraudulent trading scheme. As alleged in the Complaint, from May 2003 through mid-August 2004, Machado and Lu engaged in a scheme to direct Leumi's securities order flow to OPCO in exchange for secret gratuities and entertainment that Lu provided to Machado. The Complaint also alleges that Machado routinely directed a substantial flow of orders to OPCO for execution at prices that were favorable to OPCO and detrimental to Leumi's own customers. The Complaint further alleges that as a result of Machado's and Lu's conduct, Leumi and its customers were harmed by approximately $1.1 million.

Machado has consented to the entry of a final judgment that (i) permanently enjoins him from committing, or aiding and abetting, future securities law violations, and (ii) based on Machado's financial condition, waives the payment of disgorgement and prejudgment interest and does not impose a civil penalty. As part of his settlement, Machado has also agreed to the issuance of an administrative order that bars him from association with any broker or dealer.

Lu has consented to the entry of a final judgment that (i) permanently enjoins him from committing future violations of the antifraud provisions of the federal securities laws, and (ii) based on Lu's financial condition, orders him to pay partial disgorgement of $100,000, and does not impose a civil penalty. As part of his settlement, Lu has also agreed to the issuance of an administrative order that bars him from association with any broker, dealer, or investment adviser.

New York AG Seeks More Information from Thain on ML Bonuses

The New York Attorney General's office asked a state judge to order former Merrill Lynch CEO John Thain to provide more information about those bonuses paid before Merrill's merger with Bank of America last year.   In a court filing, the AG's office said that at a deposition last week Thain refused to answer questions about the "determination and amount of individual bonus awards for all but five employees at Merrill Lynch."  Those five reportedly received no bonuses.  The AG has also subpoenaed BoA CEO Kenneth Lewis.  WSJ, Cuomo Seeks More Testimony From Thain.

Diamondback Capital Management Settles Reg M Charges

On February 20, the Commission settled administrative charges against Diamondback Capital Management, LLC. The Order finds that from August 2005 until October 2005, Diamondback willfully violated Rule 105 of Regulation M on four occasions. On each occasion, in connection with a follow-on offering, Diamondback sold securities short within five business days before the pricing of the offering, and covered the short sale, in whole or in part, with shares purchased in the offering. The violative trades generated profits of $94,014 for Diamondback's hedge-fund client.

The Commission's Order censures Diamondback and orders it to cease and desist from committing or causing any violations or any future violations of Rule 105 of Regulation M and to pay disgorgement of $94,014 and prejudgment interest of $21,154 and a civil penalty of $47,007. Diamondback consented to the issuance of the Order without admitting or denying the Commission's findings, except as to the Commission's jurisdiction over it and the subject matter of these proceedings. In The Matter of Diamondback Capital Management, LLC

NASAA Requests Comment on Policy Statement on Multi-State Review of Requests for Interpretive Opinions

The NASAA Coordinated Interpretations Project Group requests comment from the public on the adoption of a new Statement of Policy Regarding Multi-State Review of Requests for Interpretative Opinions and No-Action Letters.  The comment period begins February 20, 2009 and will remain open for 30 days.  Here is the introduction to the proposed statement of policy:

Many state securities regulators have the authority issue “no-action letters” in which staff confirms that a transaction carried out under a set of assumed facts will not result in a recommendation for enforcement action. Some states also issue “interpretive opinions” in which staff provides guidance by indicating how a provision of law applies to a situation presented. These types of no-action letters and interpretive opinions are authorized by subsection 413(e) of the Uniform Securities Act of 1956, as amended, and subsection 605(d) of the Uniform Securities Act (2002).
Subsection 420(b)(7) of the 1956 USA and subsection 608(c)(9) of the 2002 USA authorize the states to cooperate with each other in the development of no-action letters and interpretive opinions in order to encourage uniform interpretation of laws and maximize the effectiveness of regulation. Toward those ends, NASAA proposes this Statement of Policy.