Monday, April 27, 2009
FINRA is proposing a major expansion of its BrokerCheck service — to make records of final regulatory actions against brokers permanently available to the public, regardless of whether they continue to be employed in the securities industry. Under current rules, a broker's record generally becomes unavailable to the public two years after he or she leaves the securities industry and is therefore no longer under FINRA's jurisdiction. BrokerCheck is a free online service through which investors can instantly see the employment, qualifications and disciplinary history of more than 650,000 brokers under FINRA's jurisdiction. FINRA estimates there are more than 15,000 individuals who have left the securities industry after being the subject of a final regulatory action and whose disciplinary history is not currently available on BrokerCheck.
FINRA filed its rule proposal to expand BrokerCheck with the Securities and Exchange Commission (SEC) late last week. The SEC will publish the proposal in the Federal Register and solicit public comment in the near future.
In 2008, individuals used BrokerCheck to conduct 11.6 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999.
SETON HALL LAW REVIEW Symposium
October 30, 2009
Seton Hall Law School
Securities Regulation and the Global Economic Crisis: What Does the Future Hold?
CALL FOR PAPERS
The SETON HALL LAW REVIEW will be hosting a Symposium on October 30, 2009, at Seton Hall Law School in Newark, NJ, to address the role of securities regulation in the current global financial crisis. Specifically, this event will examine the origins and genesis of the crisis, address the future of securities regulation domestically and internationally, and attempt to anticipate the role of government agencies, self-regulatory organizations, and private market participants in shaping and effectuating regulation. This Symposium will bring together experts from both public and private sectors, as well as from the legal and academic communities, to explain, debate, and assess the challenges and opportunities presented by the current and prospective landscape of global securities regulation.
Persons interested in participating as a speaker and/or in publishing a piece in the special Symposium issue of the SETON HALL LAW REVIEW should submit a CV and a 200-word abstract of their presentation to Laura Fant, Symposium Editor, by May 15, 2009. Laura Fant may be reached at (617) 480-7428 / [email protected]. Prospective speakers or panelists should indicate whether they would be interested in submitting a paper based on their presentation for publication. Contributions are welcome from scholars and practitioners in all disciplines.
Saturday, April 25, 2009
The SEC will hold a roundtable on May 5 to further discuss whether short sale price test restrictions or short sale circuit breakers should be adopted. The Commission voted unanimously on April 8 to propose two approaches to restrictions on short selling. If adopted, the price test approach would apply on a permanent market-wide basis, and the circuit breaker approach would apply to a particular security during severe market declines in the price of that security.
Roundtable participants will include leaders from self-regulatory organizations, trading venues, the financial services industry, investment firms, and the academic community. The final agenda and list of panelists will be announced at a later date.
The 8th Circuit, in Gallus v. Ameriprise Financial (4/08/09) -- an excessive mutual fund fees case under Investment Company Act section 36(b), reversed the district court's grant of summary judgment for the defendant because it found that the lower court construed too narrowly the extent of the defendants' duties in its analysis of the Gartenberg factors.
We believe that the proper approach to § 36(b) is one that looks to both the adviser’s conduct during negotiation and the end result. ...We conclude that the district court erred in holding that no § 36(b) violation occurred simply because Ameriprise’s fee passed muster under the Gartenberg standard. Although the district court properly applied the Gartenberg factors for the limited purpose of determining whether the fee itself constituted a breach of fiduciary duty, it erred in rejecting a comparison between the fees charged to Ameriprise’s institutional clients and its mutual fund clients. ...
Likewise, the district court should not have engaged in so limited a scope of review. Ameriprise’s conduct must be evaluated independent from the result of the negotiation. The district court concluded that Ameriprise did not breach its fiduciary duty in one way (by setting a fee that was exorbitant relative to that of other advisers), but it should have also considered other possible violations of § 36(b). Specifically, the court should have determined whether Ameriprise purposefully omitted, disguised, or obfuscated information that it presented to the Board about the fee discrepancy between different types of clients. The record indicates that there are material questions of fact on this issue.
In Lormand v. US Unwired, Inc. (5th Cir. 4/09/09), the Fifth Circuit considered the issue of loss causation in partially affirming, partially reversing the district court's ruling on a MTD. Plaintiffs were able to establish loss causation as to alleged misrepresentations about a phone company's subprime program, in part because of facts showing that defendants understood adoption of the program (forced on them by Sprint) would be disastrous to the company. This strengthened the loss causation link between the misrepresentations and stock price decline.
In SEC v. Gann (5th Cir. 4/17/09), the Fifth Circuit affirmed a district court's judgment that a broker that facilitated his customers' market-timing activities violated Rule 10b-5, although its affirmance seemed somewhat begrudging. In a seven-month period, the broker concluded 2500 trades in the mutual funds of 56 companies and received 69 block notices. On the question of scienter, the court mused:
The SEC is essentially enforcing corporate regulations on behalf of the various mutual funds. Because market timing itself is not illegal, the SEC had to prove an intent to deceive to fit Gann’s behavior within Section 10(b) and Rule 10b-5. This creates a dilemma for the courts, which are asked to determine whether the defendant’s legal acts are made illegal by his compliance or noncompliance with corporate regulations that companies sometimes suspend or ignore, either tacitly or expressly, depending on the circumstances of that particular trade. ... We emphasize again, however, that market timing is not illegal. The SEC’s prosecution of Gann is based on the fund companies’ regulations and Gann’s violation of those regulations. The SEC’s chief evidence of Gann’s intent to deceive was his use of numerous account and registration numbers that actually represented his (and Fasciano’s) work for HCM. The SEC contended that Gann’s efforts were meant to circumvent the funds’ regulations for his own gain and that of his customer. We perceive the evidence in this case to be in equipoise, making critical the question of credibility. The district court found Gann not credible and sided with the SEC. Based on this express finding, the district court adopted the SEC’s version of the facts. Credibility is uniquely “the province of the trier of fact,” and we defer to it.
A press release from University of Nebraska:
Study unlocks language of CEOs; provides 'heads-up' for auditors
Honesty, attitude and behavior of CEOs, sometimes referred to as “tone-at-the-top,” mean a lot to analysts and shareholders of any company, especially as firms try to protect their reputations during an economic downturn.
One tool CEOs use to manage confidence in their firms is their annual letter to shareholders, something a pair of University of Nebraska-Lincoln researchers have looked at closely in recent months. What they found can potentially predict which companies are likely to make it through difficult financial times with their reputation intact – and which ones may merit a closer look from regulators, analysts and auditors.
The study, by UNL College of Business Administration professors John Geppert and Janice Lawrence, used content analysis software on dozens of the yearly letters from CEOs to their shareholders. The computer analysis’ discovery: Chairmen at high-reputation firms have a distinct language style, using shorter words and clear language. Meanwhile, CEOs at less reputable firms use more complex phrases, buzzwords and a more muddled writing style.
“These differences in word choice in the CEOs’ letters to shareholders are not readily apparent to the naked eye, but the computer program picked up on these subtle differences. The results find the words used at companies with ethical reputations are short and to the point – fewer adjectives – and the words that are used are more concrete. That means these words have one understood meaning,” Lawrence said.
“Firms with less ethical reputations use longer words and more adjectives and the words they choose are less concrete – words with multiple meanings. Perhaps these words could be characterized as ‘weasel’ words.”
For example, a passage from a high-reputation firm’s chairman, written to shareholders in 2002, read like this: “As a leading provider of low-cost mortgage capital for home buyers to finance their homes, our firm is at the center of the housing industry, one of the strongest growth sectors in America.” Meanwhile, a CEO at a less reputable firm said: “…we remain committed to being good stewards of our asset base and to taking action regarding underperforming assets wherever possible.”
Geppert and Lawrence’s study, which appeared in a recent issue of Corporate Reputation Review, could help regulators and auditors evaluate CEO shareholder letters for clues as to which companies merit further investigation. Lawrence said that fraud happens when the opportunity, motivation and ability to rationalize the occurrence of fraud come together.
CEOs always have, by the nature of their position, the opportunity and the motivation to commit fraud, but the hard part to determine is the ability to rationalize fraud - the mindset of the head of the company.
“It is hard to gather evidence about the CEO mindset, yet tone-at-the top is critical to company ethical behavior and firm reputation,” Lawrence said. “Our research could be called a ‘heads-up’ to the auditors and regulators such as the SEC.”
The study suggests that in a time when corporate earnings are down, chairmen may be more inclined to craft letters designed to influence more than inform.
“The choice of words matters; it reflects subtle beliefs, motives and intentions that are difficult to hide,” said Geppert. “Investors are wise to scrutinize the Chairman’s letter for unnecessary qualifiers and ‘filler’ language.”
Geppert is an associate professor of finance. His research focuses on investments, time series analysis and international finance. Lawrence is Director of the Business Ethics Program and is an associate professor of accountancy. Her research interests include fraud, auditor skepticism and business ethics.
For more information:
(Thanks to Steve Smith at UNebraska)
I am participating in the 15th Institute of Law and Economic Policy (ILEP) conference in Scottsdale Arizona on "Recoveries for Victims of Securities Fraud." ILEP is a public policy research and educational foundation established to preserve, study and enhance access to the civil justice system by all consumers. This year the conference was co-sponsored by Iowa College of Law, which will publish the papers.
The program began Thursday evening with a lively roundtable discussion moderated by Francis McGovern (Duke) on The Role of Mediating in Compensating Plaintiffs. Other participants included Kenneth Feinberg and retired U.S. District Judge Stanley Sporkin.
Friday's morning sessions dealt with the difficult issues of Dura and Daubert as panelists discussed loss causation and damages. Frank Partnoy (San Diego) analyzed the concept of Dura fraud and the ability of management to engage in strategic behavior to mask the price decline after corrective disclosure that post-Dura courts focus on. Allen Farrell (Harvard) and Atanu Sahara (Compass Lexecon) presented a paper focusing on the foreseeability of the housing market downtown and presented data to show that it was not until the end of 2007/beginning of 2008 that the market anticipated a serious downturn in housing prices.
Michael Saks (Arizona) provided background and context on Daubert and judicial treatment of expert testimony. Fred Dunbar (NERA Economic Consultants) presented a paper on Estimating Financial Fraud Damages with Response Coefficients, and Frank Torchio (Forensic Economics) presented a paper on Proper Event Study Analysis in Securities Litigation. While the titles may sound dry, the presentations generated lively discussion and debate among the panelists and audience.
The afternoon session dealt with the Global Economy. Stephen Choi and Linda Silberman (both of NYU) presented their paper on Transnational Litigation and Global Securities Class Action Lawsuits, and Hannah Buxbaum (Indiana-Bloomington) presented her paper on Personal Jurisdiction over Foreign Directors in Cross-Border Securities Litigation.
Another session, led by Francis McGovern (Duke), focused on practical issues involving Distribution of Funds in Class Actions and Claims Administration.
Finally, SEC Commissioner Elisse Walter was the dinner speaker, speaking about reforming the regulation of broker-dealers and investment advisers and suggesting an approach that would harmonize the current inconsistent regulation and the divergent duties financial professionals owe retail investors.
I hope this brief synopsis conveys the variety and depth of the presentations at this conference. Those interested in the topic will look forward to reading the papers in final form in Iowa's Journal of Corporation Law.
Thursday, April 23, 2009
The Wall St. Journal reports that as early as next week the SEC will approve a NYSE Rule that will no longer permit brokers to exercise discretionary voting and vote customers' shares in uncontested elections. If true, this will be a major victory for activist shareholders. The proposed rule change has lanquished at the SEC for years; at one point, the SEC said they would take it up as part of a larger review of the shareholder proxy process, but that never happened. In February the SEC finally put the rule change out for public comment.. SR-NYSE-2006-92.
New York Attorney General Andrew Cuomo has been conducting an investigation into Bank of America's merger with Merrill Lynch. While the impetus of the investigation may have been Merrill's payment of bonuses prior to the acquisition, it has moved well beyond that. The Attorney General has posted on its website a letter to Congress, the SEC and other regulators about its findings. Among them, BofA CEO Kenneth Lewis testified that BofA considered exercising the MAC clause to call off the merger because of Merrill's deteriorating financial condition, but Treasury Secretary Paulson threatened to remove Lewis and the board of directors if they did so, because of the shock it would cause the financial system. In addition, Paulson said that he did not keep the SEC in the loop during these crucial discussions. Read all about it. ATTORNEY GENERAL CUOMO LETTER REGARDING BANK OF AMERICA - MERRILL LYNCH MERGER
Tuesday, April 21, 2009
SEC Commissioner Luis A. Aguilar presented a speech on "Making Investors a Priority in Regulatory Reform" in Boston, Massachusetts on April 17, 200. The three topics he addressed were:
the SEC's role in regulatory reform,
the role of a systemic regulator, and
the role of independent directors.
Monday, April 20, 2009
On April 17, 2009, the SEC charged a Philadelphia-area investment adviser and its principal with misappropriating millions of dollars in client assets and obtained an emergency court order freezing their assets. According to the Commission's complaint, since mid-2005 Donald Anthony Walker Young, of Coatesville, Pennsylvania, through Acorn Capital Management, LLC ("Acorn Capital"), a registered investment adviser controlled by Young, has misappropriated more than $23 million from investors buying into limited partnership interests in Acorn II, L.P., ("Acorn LP") which invested in publicly traded securities. Young used investor funds to pay other investors and directly stole some of the money to purchase a vacation home in Palm Beach, Florida, and pay personal expenses related to horse ownership and racing, construction, boats, limousines, chartered aircraft and other luxuries. According to the Commission's complaint, the defendants refused to provide Commission staff with client files, account statements, general ledgers and other documents that are statutorily required to be maintained and produced by registered investment advisers.
The Honorable John R. Padova, U.S. District Judge for the Eastern District of Pennsylvania, has issued an order granting a temporary restraining order, freezing assets, and imposing other emergency relief. The Court also froze the assets of three named relief defendants — Oak Grove Partners, L.P., W. B. Dixon Stroud, Jr. and Neely Young, Young's wife. The complaint alleges violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and Sections 204, 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rules 204-2 and 206(4)-8 thereunder. In addition to the emergency relief already obtained, the complaint seeks disgorgement of the defendants' ill-gotten gains plus pre-judgment interest, civil penalties, and permanent injunctions barring future violations of the charged provisions of the federal securities laws. The complaint also seeks disgorgement from the relief defendants.
Sunday, April 19, 2009
Treatment Differences and Political Realities in the GAAP-IFRS Debate, by William W. Bratton, Georgetown University Law Center; European Corporate Governance Institute (ECGI), and Lawrence A. Cunningham, George Washington University Law School, was recently posted on SSRN. Here is the abstract:
The Securities Exchange Commission has introduced a "Roadmap" that describes a process leading to mandatory use of IFRS by domestic issuers by 2014. The SEC justifies this initiative on the grounds that global standardization yields cost savings and an ultimate gain in comparability, facilitating the search for global opportunities by U.S. investors and making U.S. capital markets more attractive to foreign issuers.
This paper enters an objection, noting that the stakes include more than the choice of the framework for standard setting. The accounting treatments themselves are at issue, treatments that for the most part concern domestic reporting firms and domestic users of financial statements.
We present a treatment by treatment comparison of GAAP and IFRS and go on to discuss the differences' implications. FASB maintained its independence during its 35 year history in the teeth of opposition from corporate management, which experienced a steady diminution of its zone of financial reporting discretion.
A switch to IFRS would allow management to reclaim some of the lost territory. Meanwhile, the interest group alignment that protected FASB, comprised of auditing firms, actors in the financial markets, and the SEC, has disintegrated as U.S. capital market power has waned in the face of international competition. Management is the shift's incidental beneficiary, with possible negative effects for reporting quality in domestic markets.
Marking to Market: Can Accounting Rules Shake the Foundations of Capitalism?, by Rchard A. Epstein,
University of Chicago - Law School; Stanford University - Hoover Institution on War, Revolution and Peace, and M. Todd Henderson, University of Chicago - Law School, was recently posted on SSRN. Here is the abstract:
Mark-to-market accounting helps create asset bubbles and exacerbate their negative collateral consequences when they burst. It does the latter by forcing the hand of counterparties to demand collateral even when it is inefficient to do so. Watchful waiting and inaction is often the more efficient course of action. Yet often this is the road not taken, out of fear of litigation and regulatory sanctions. Nonetheless, as a business matter, forbearance on foreclosure may well make sense if the party is optimistic about future values and a collateral call would generate assets sales that, under present mark-to-market rules, would negatively impact these values. But if the party forbears and is wrong about the future values, shareholders may sue the firm for not exercising its legal rights in order to protect their interests. Because future values are uncertain, litigation costs are high, and courts are likely to make some mistakes, firms will demand excessive levels of collateral.
In this environment, the high transaction costs of coordination and fear of potential antitrust liability can combine to cause a rush to seize or demand collateral, even when collective forbearance would be more efficient. These problems of imperfect litigation and antitrust rules will sometimes cause action to be taken when inaction would be the more efficient course. Deleveraging cascades will result, thereby increasing the risk of financial meltdown.
This article explores these and other issues surrounding the mark-to-market controversy. No system of valuing a firm’s assets and liabilities is perfect, so our critique of mark to market does not clinch the case for the reinstating historical cost accounting. Rather our goal is to simply point out previously unrecognized problems with mark to market, based on their interaction with the legal system. Armed with an understanding of how litigation risk can influence market participants’ behavior under different valuation rules may help standard setters in the industry modify the existing rules to reduce the chance of future market meltdowns.
A Research Based Perspective on SEC’s Proposed Rule on ROADMAP FOR Potential Use of Financial Statements Prepared in Accordance With International Financial Reporting Standards (IFRS) by U.S. Issuers, by Karim Jamal, University of Alberta - Department of Accounting & Management Information Systems; Robert H. Colson, Grant Thornton LLP; Robert J. Bloomfield, Cornell University - Samuel Curtis Johnson Graduate School of Management; Theodore E. Christensen, Brigham Young University - Marriott School of Management; Stephen R. Moehrle, University of Missouri at St. Louis - Accounting Area; James A. Ohlson, Arizona State University; Stephen H. Penman, Columbia University - Department of Accounting; Gary Previts, Case Western Reserve University - Department of Accountancy; Thomas L. Stober, University of Notre Dame - Department of Accountancy; Shyam Sunder, Yale School of Management; Ross L. Watts, Massachusetts Institute of Technology (MIT) - Sloan School of Management, was recently posted on SSRN. Here is the abstract:
The Securities and Exchange Commission (SEC) issued a call for comment on a proposal to adopt a Roadmap for potential use of international financial reporting standards (IFRS) by U.S. Companies. We comment on five key issues raised by the SEC proposal. First, we propose that the need for a global regulator is overstated. A global regulator is unlikely to help achieve the stated goals of comparability and consistency of financial reporting on a global basis. We favor allowing U.S. companies to choose use of U.S. GAAP or IFRS rather than mandating one global monopoly set of standards. Second, we agree that the focus on auditing is a very relevant issue that deserves more attention from standard setters. Gains from adopting principles based accounting standards such as IFRS are likely to be realized only if auditors are also principles based. Third, while we have serious concerns about governance and financing mechanisms of IASB, we recommend that all regulatory actions cannot be held to a standstill while structural changes are made to the IASB. Fourth, we are not in favor of requiring reconciliation schedules from U.S. companies using IFRS. We view such reconciliations as being costly and unnecessary. Fifth, we recommend that the SEC pay more explicit attention to the educational and professional judgment consequences of its proposals.
This comment was developed by the Financial Accounting Standards Committee of the American Accounting Association and does not represent an official position of the American Accounting Association
Confronting the Circularity Problem in Private Securities Litigation, by Jill E. Fisch, University of Pennsylvania Law School, was recently posted on SSRN. Here is the abstract:
Many critics argue that private securities litigation fails effectively either to deter corporate misconduct or to compensate defrauded investors. In particular, commentators reason that damages reflect socially inefficient transfer payments - the so-called circularity problem. Fox and Mitchell address the circularity problem by identifying new reasons why private litigation is an effective deterrent, focusing on the role of disclosure in improving corporate governance.
The corporate governance rationale for securities regulation is more powerful than the authors recognize. By collecting and using corporate information in their trading decisions, informed investors play a critical role in enhancing market efficiency. This efficiency, in turn, allows the capital markets to discipline management, producing a governance externality that improves corporate decision-making and benefits non-trading shareholders. As this article shows, this governance externality justifies compensating informed traders for their fraud-based trading losses.
Friday, April 17, 2009
On April 17, the SEC settled administrative charges against American Skandia Investment Services, Inc. (ASISI) that ASISI engaged in market-timing related misconduct as investment adviser to the American Skandia Trust (AST) portfolios underlying variable annuities issued by American Skandia Life Assurance Corporation (ASLAC). As a result of its misconduct, ASISI will pay disgorgement of $34 million and a civil penalty of $34 million for a total payment of $68 million to a Fair Fund.
The Order finds that from at least January 2000 through in or around September 2003, ASISI negligently failed to consider and adequately investigate credible complaints from sub-advisers of certain AST funds that market timing was having a detrimental effect on the performance of the funds. In doing so, ASISI negligently failed to inform the AST Board of Trustees of significant information concerning market timing and its potential effects. As a result, the AST Board of Trustees had insufficient information regarding the potential causes of the sub-advisers' investment results in certain of the AST sub-accounts, and ASISI's implementation of its own market-timing policies and procedures. In addition, the AST Board lacked adequate information to consider whether the sub-accounts had adequate policies and procedures in place with respect to market timing.
Based on the above Order, ASISI shall cease and desist from committing or causing any violations and any future violations of Section 206(2) of the Advisers Act. The Order censures ASISI pursuant to Section 203(e) of the Advisers Act. The Order also requires ASISI to pay disgorgement of ill-gotten gains in the amount of $34 million and civil monetary penalties of $34 million. ASISI has undertaken to undergo a compliance review by a third party by no later than 2009. In the Matter of AMERICAN SKANDIA INVESTMENT SERVICES, INC.
The Wall St. Journal reports that Steven Rattner, the leader of President Obama's auto task force, is implicated in the alleged kickback scheme involving the New York State pension fund that both the SEC and the New York AG are investigating. WSJ, Rattner Involved in Inquiry on Fees.
On May 21, 2008, FINRA filed with the SEC a proposed rule change to amend certain provisions of NASD Rule 2821 (Sales Practice Standards and Supervisory Requirements for Transactions in Deferred Variable Annuities). The Rule, as originally adopted, required supervisory review of all deferred variable annuities, and a determination of suitability, whether or not the transaction was recommended by the broker. After a comment period and revisions by FINRA, the SEC declared the proposed rule change effective. A significant change is that a suitability determination would only be required for recommended transactions. As explained in the adopting release:
Paragraph (c) of NASD Rule 2821 requires principals to treat all transactions as if they have been recommended for purposes of the rule. Following the Commission’s approval of the rule, however, several commenters asked that the Commission and FINRA reconsider this approach. As FINRA stated in the notice, some commenters asserted that applying the rule to non-recommended transactions would have unintended and harmful consequences. In particular, these commenters claimed that applying the rule to non-recommended transactions would effectively force out of the deferred variable annuities business some firms that offer low priced products, but that do not make recommendations or pay transaction-based compensation. In addition, commenters stated that, absent a recommendation, a customer should be free to invest in a deferred variable annuity without interference or second guessing from a broker-dealer. In response, FINRA proposed to limit the rule’s application to recommended transactions. In the notice, FINRA explained that limiting the rule to recommended transactions would be consistent with the approach taken in its general suitability rule, Rule 2310. FINRA also stated that this change would not detract from the effectiveness of Rule 2821 because at firms that permit registered representatives to make recommendations concerning deferred variable annuities, the vast majority of purchases and exchanges of deferred variable annuities are recommended. FINRA offered further support for the rule change by stating that non-recommended transactions pose fewer concerns regarding conflicts of interest and less of a need for heightened sales-practice requirements. FINRA also indicated that this change would promote competition by allowing a wide variety of business models to exist, including those premised on keeping costs low by, in part, eliminating the need for a sales force and large numbers of principals. Finally, FINRA stated that attempts by registered representatives to mischaracterize transactions as non-recommended would be mitigated by the requirement that firms implement reasonable measures to detect and correct circumstances when brokers mischaracterize recommended transactions as non-recommended.
Two commenters representing retail investors -- PIABA and the Cornell Securities Arbitration Clinic -- disagreed with the proposed change and argued that registered representatives could falsely assert that an unsuitable transaction was not recommended. While FINRA acknowledged the concern, it responded that it would be mitigated by the requirement that broker-dealers implement reasonable measures to detect and correct circumstances in which transactions can be mischaracterized.