Securities Law Prof Blog

SEC Announces $2 Billion in Fair Fund Distributions in 2009

The SEC issued a press release last week announcing that, for the first time, more than $2 billion has been distributed in a calendar year to injured investors as a result of SEC enforcement actions and proceedings.

In 2009, distributions to injured investors have been made in 31 cases brought by the Commission, involving illegal conduct ranging from accounting fraud to pump-and-dump schemes to mutual fund market timing. Among the distributions this year were more than $840 million to approximately 257,000 injured AIG investors, more than $320 million to approximately two million injured investors in Alliance Capital mutual funds, and more than $240 million to approximately 700,000 injured Bear Stearns investors.

SEC Charges New Orleans Hurricane Restoration Company with Securities Fraud

The SEC charged a Dallas and New Orleans-based hurricane restoration company and several executives for lying about non-existent business deals in the wake of Hurricane Katrina, and fraudulently inflating the company's stock price before the company's CEO sold millions of dollars in company shares.  The SEC alleges that Home Solutions of America, Inc. recorded millions of dollars in bogus revenue and issued a series of materially false press releases boasting robust financial results following Katrina and other weather-related disasters, thus inflating the company's stock price. The stock price later plummeted after large insider stock sales, the filing of private securities lawsuits alleging fraud, and the company's public announcement that it would restate its financial statements. Home Solutions then-CEO Frank Fradella, who is among seven individuals charged by the SEC in the scheme, dumped approximately $6.8 million worth of stock into the inflated market.

The SEC's complaint charges Home Solutions, Fradella, Marshall and Mattich with violations of the antifraud, reporting, books and records and internal control provisions of the federal securities laws and seeks permanent injunctive relief, financial penalties, and as to the individuals, full disgorgement with interest and officer and director bars.

Four others charged today by the SEC simultaneously agreed to settle on the following terms, without admitting or denying the allegations in the complaint:

Supreme Court Grants Cert in Foreign Cubed Action

The U.S. Supreme Court accepted certiorari today in Morrison v. National Australia Bank Ltd., 547 F.3d 167 (2d Cir. 2008), an important case dealing with the extraterritorial effect of federal securities law.  The Second Circuit affirmed the district court's holding that it should not exercise jursidiction over a class action where (1) foreign plaintiffs are suing (2) a foreign issuer in an American court for violations of American securities laws based on securities transactions in (3) foreign countries (so-called foreign cubed action).  The U.S. Solicitor General had filed a petition advising the Court not to grant certiorari.

According to the petitioners, the issues presented are:

I. Whether the antifraud provisions of the United States securities laws extend to transnational frauds where: (a) the foreign-based parent company conducted substantial business in the United States, its American Depository Receipts were traded on the New York Stock Exchange and its financial statements were filed with the Securities Exchange Commission (“SEC”); and (b)the claims arose from a massive accounting fraud perpetrated by American citizens at the parent company's Florida-based subsidiary and were merely reported from overseas in the parent company's financial statements.

II. Whether this Court, which has never addressed the issue of whether subject matter jurisdiction may extend to claims involving transnational securities fraud, should set forth a policy to resolve the three-way conflict among the circuits ( i.e., District of Columbia Circuit versus the Second, Fifth and Seventh Circuits versus the Third, Eighth and Ninth Circuits).

III. Whether the Second Circuit should have adopted the SEC's proposed standard for determining the proper exercise of subject matter jurisdiction in transnational securities fraud cases, as set forth in the SEC's amicus brief submitted at the request of the Second Circuit, and whether the Second Circuit should have adopted the SEC's finding that subject matter jurisdiction exists here due to the “material and substantial conduct in furtherance of” the securities fraud that occurred in the United States.

Boston Jury Finds Former Fidelity Investments Trader Engaged in Insider Trading

The SEC announced that a federal jury in Boston returned a verdict on Nov. 20, 2009 in favor of the SEC against a former Fidelity Investments trader for insider trading. David K. Donovan, of Massachusetts, was found to have engaged in insider trading in stock of Covad Communications Group, Inc. ("Covad"). The jury found Donovan's co-defendant, David R. Hinkle of Texas, not liable for insider trading.

In its complaint, the SEC had alleged that, between July and Sept. 2003, Donovan obtained confidential information on Fidelity's internal order database that Fidelity was purchasing a substantial amount of Covad common stock for its advisory clients. The Commission's complaint alleged that after viewing Fidelity's orders and being denied permission by Fidelity to buy Covad stock in his own personal account, Donovan caused purchases of the stock to be made in early August 2003 in the account of his mother. According to the Commission's complaint, Donovan's mother profited after later selling the Covad stock in early Sept. 2003, after the price of Covad stock had increased.

The jury heard closing arguments in the seven-day trial on Nov. 19, 2009 and announced its verdict the next day. In rendering its verdict, the jury found that David Donovan engaged in insider trading by knowingly giving to his mother material, nonpublic information concerning Covad stock in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Although the jury found that Donovan tipped his mother to inside information about Covad, it did not find that he tipped co-defendant David Hinkle to inside information, and did not find Hinkle liable for insider trading.

SEC Obtains Asset Freeze Against Minnesota Foreign Currency Trading Venture

On November 23, 2009, the federal district court for the District of Minnesota issued an Asset Freeze Order against all assets of Trevor G. Cook (Cook), Patrick J. Kiley (Kiley), both Minnesota residents, and UBS Diversified Growth LLC, Universal Brokerage FX Management LLC, Oxford Global Advisors LLC, and Oxford Global Partners LLC (the Defendant Companies), four shell companies owned or controlled by them. The court also issued an asset freeze order against several Relief Defendant Companies: Basel Group LLC, Crown Forex LLC, Market Shot LLC, PFG Coin and Bullion, Oxford FX Growth L.P., Oxford Global FX LLC, Oxford Global Managed Futures Fund L.P, UBS Diversified FX Advisors LLC, UBS Diversified FX Growth L.P., and UBS Diversified FX Management LLC. The court also entered a freeze order against certain assets of relief defendants Clifford and Ellen Berg, who received investor funds from Cook. In addition, Judge Davis issued an order appointing a receiver over all of these assets. The court issued the freeze and receivership orders under seal while the assets were being secured, and the seal has now been lifted.

The SEC alleges that from at least July 2006 through at least July 2009, Cook and Kiley, through the Defendant Companies, raised at least $190 million from at least 1,000 investors through the sale of unregistered investments in a purported foreign currency trading venture by misrepresenting that they would deposit each investor's funds into a separate account in the investor's name to trade in foreign currencies and generate annual returns of 10 percent to 12 percent. They also misrepresented that their foreign currency trading program involved little or no risk and that investors' principal would be safe and could be withdrawn at any time. The SEC alleges that Cook and Kiley did not place each investor's money into a segregated account in the name of the investor. Instead, they pooled the investors' funds in bank and trading accounts in the names of entities that they controlled, including the Defendant and Relief Defendant companies. The SEC alleges that Cook and Kiley misappropriated $42.8 million of investors' money, including $18 million that Cook used to buy ownership interests in two trading firms; $12.8 million that Cook and Kiley transferred to Panama to purportedly finance the construction of a casino; $2.8 million that Cook used to acquire the Van Dusen Mansion and $4.8 million that Cook lost through gambling. Cook and Kiley also misspent approximately $51 million to make Ponzi-like payments to earlier investors. The SEC further alleges that Cook and Kiley placed $108 million of investors' funds into banking and trading accounts in the names of their various shell companies and used some of this money to trade foreign currencies, resulting in losses of at least $48 million.

The SEC's complaint charges Cook, Kiley, and the Defendant Companies with violating 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. In addition to the emergency relief already obtained, the complaint seeks preliminary and permanent injunctions and disgorgement from all defendants as well as financial penalties from Cook and Kiley, and disgorgement of ill-gotten gains from the relief defendants. A hearing on the SEC's motion for preliminary injunction has been set for December 4, 2009 at 9:30 a.m. at 300 South Fourth Street, 202 U.S. Courthouse, Minneapolis, MN.

None of the entities named in this action using the UBS name are affiliated with UBS, AG, the Switzerland-based global financial services firm.

More SEC Rulemaking on NRSROs

The SEC continues its rulemaking to improve rating agencies.  Today it adopted rule amendments that impose additional disclosure and conflict of interest requirements on nationally recognized statistical rating organizations (“NRSROs”) in order to address concerns about the integrity of the credit rating procedures and methodologies at NRSROs.

In addition, the agency is proposing rule amendments and a new rule that would impose additional requirements on nationally recognized statistical rating organizations (“NRSROs”). The proposed amendments and rule would require an NRSRO: (1) to furnish a new annual report describing the steps taken by the firm’s designated compliance officer during the fiscal year with respect to compliance reviews, identifications of material compliance matters, remediation measures taken to address those matters, and identification of the persons within the NRSRO advised of the results of the reviews; (2) to disclose additional information about sources of revenues on Form NRSRO; and (3) to make publicly available a consolidated report containing information about revenues of the NRSRO attributable to persons paying the NRSRO for the issuance or maintenance of a credit rating.

Finally, the SEC announced that it is deferring consideration of action with respect to a proposed rule that would have required an NRSRO to include, each time it published a credit rating for a structured finance
product, a report describing how the credit ratings procedures and methodologies and credit risk characteristics for structured finance products differ from those of other types of rated instruments, or, alternatively, to use distinct ratings symbols for structured finance products that differentiated them from the credit ratings for other types of financial instruments.

The SEC is also soliciting comments regarding alternative measures that could be taken to differentiate NRSROs’ structured finance credit ratings from the credit ratings they issue for other types of financial instruments through, for example, enhanced disclosures of information. The Commission also is soliciting comment on whether the rule amendments being adopted today in a separate release designed to remove impediments to determining and monitoring non-issuer-paid credit ratings for structured finance products should be extended to create a mechanism for determining non-issuer-paid credit ratings for structured finance products that were issued prior to the rule becoming effective (e.g., to allow for non-issuer-paid credit ratings for structured finance products of the 2004-2007 vintage).

FINRA Fines Terra Nova Financial for Improper Soft Dollar Payments

FINRA fined Terra Nova Financial, LLC, of Chicago, $400,000 for making more than $1 million in improper soft dollar payments to or on behalf of five hedge fund managers, without following its own policies to ensure the payments were proper.  Terra Nova was also charged with failing to properly supervise its soft dollar program, failing to implement adequate supervisory procedures and failing to retain its business-related electronic instant messages. Terra Nova also failed to timely respond to FINRA's requests for productions of various documents, including emails and instant messages, thus delaying FINRA's investigation.

 As part of the settlement, Terra Nova is required to retain an independent consultant to review and enhance its policies, systems and procedures relating to its soft dollar operations.

 FINRA found that starting in 2004, Terra Nova set up soft dollar accounts for eight hedge funds to encourage the funds to execute trades with the firm. Terra Nova collected a portion of the commissions generated by the funds' trading in separate soft dollar accounts and from those accounts paid invoices from the fund managers or third parties for various services. Federal securities laws allow advisors to use soft dollars to pay for research or brokerage-related expenses. But advisors may only use soft dollars to pay for personal expenses or other non-research or non-brokerage related expenses if those types of payments were previously disclosed to investors and if they are made in accordance with the terms of the fund's organizing documents.   

FINRA found that in 2004 and 2005, Terra Nova made numerous improper soft dollar payments to or on behalf of five hedge fund advisors totaling more than $1 million. Some payments (for estate planning fees, administrative staff and accounting expenses) were not allowed by the fund documents. Other payments made directly to the funds' managers were improper because Terra Nova did not receive written authorization from a third party evidencing that the payments were appropriate, as required by fund documents that the firm had or should have obtained under its own policies.

Fifth Circuit Holds Stanford Receiver Could Not "Clawback" Interest Payments from Innocent Investors

The Fifth Circuit, in Janvey v. Adams (No. 09-10761 Nov. 13, 2009)(Download Opinion_of_Appeals_Court_from_Hearing_Regarding_Claw_Backs), recently held that the receiver for the Stanford interests, appointed to conserve, hold, manage and preserve the value of the receivership estate, had no authority to recover payments of interest from investors who received the payments prior to the receivership.  The receiver wanted to recover the payments as assets of the estate and distribute them pro rata to all victims of the fraud.  The SEC, however, argued that it would be inequitable to allow the receiver to bring "clawback" claims against innocent investors.  The court agreed with the SEC.

The Court examined the lightly-analyzed issue of who may be named as a "relief defendant" in SEC enforcement actions and applied a two-prong test: a relief defendant (1) has received ill-gotten funds, and (2) does not have a legitimate claim to those funds.  While the investors certainly received ill-gotten funds, the receiver failed to establish that the investors lacked a legitimate claim to the proceeds.  It was undisputed that the investors received the payments as interest pursuant to written CD agreements with the Stanford Bank.  Since the investors could not be considered proper relief defendants, the district court lacked authority to freeze their accounts. 

While the Fifth Circuit's opinion does not discuss issues under fraudulent conveyance law, the holding suggests that this court would not consider such theories favorably.

SEC's Inspector General Makes Recommendations on Inspection of Investment Advisers

The SEC's Office of Inspector General released its final report on its investigation into why the SEC did not discover Madoff's Ponzi scheme, even after his investment advisory business registered with the SEC. The Review of the Commission’s Processes for Selecting Investment Advisers and Investment Companies for Examination (Nov. 19, 2009) contains 11 recommendations designed to improve OCIE’s process for selecting investment advisers and investment companies for examination:

We recommend that OCIE implement a procedure requiring, as part its process for creating a risk rating for an investment adviser, that OCIE staff perform a search of Commission databases containing information about past examinations, investigations, and filings related to the investment adviser.

We recommend that OCIE change the risk rating of an investment adviser based on pertinent information garnered from all Divisions and Offices of the Commission, including information from OCIE examinations and Enforcement nvestigations, regardless of whether the information was learned during an examination conducted to look specifically at a firm’s investment advisory business.

Further, Enforcement and OCIE should establish and adhere to a joint protocol providing for the sharing of all pertinent information (e.g., securities laws violations, disciplinary history, tips, complaints and referrals) identified during the course of an investigation or examination or otherwise.

We recommend that OCIE establish a procedure to thoroughly evaluate negative information that it receives about an investment adviser and use this information to determine when it is appropriate to conduct a cause examination of an investment adviser, and when it becomes aware of negative information pertaining to an investment adviser, it examine the investment adviser’s Form ADV filings and document and investigate discrepancies existing between the adviser’s Form ADV and information that OCIE previously learned about the registrant.

We further recommend that OCIE establish a procedure to thoroughly evaluate an investment adviser’s Form ADV when OCIE becomes aware of issues or problems with an investment adviser.

We also recommend that OCIE re-evaluate the point scores that it assigns to advisers based on their reported assets under management and their reported number of clients to which they provide investment advisory services and assign progressively higher risk weightings to firms accordingly.

Further, we recommend that a Commission rulemaking be instituted that would require additional information to be reported as part of Form ADV and that the proposed rule providing for Amendments to Form ADV be finalized. We also recommend that OCIE develop and adhere to policies and procedures for conducting third party verifications, such that OCIE verifies the existence of assets, custodian statements, and other relevant criteria.

We believe that implementation of the recommendations contained in this report will significantly improve OCIE’s operations and its process for selecting investment advisers and investment companies for examination.

The OIG also asks the SEC to provide a written corrective action plan within 45 days.

Bhagat & Romano on Executive Compensation

Reforming Executive Compensation: Simplicity, Transparency and Committing to the Long-Term, by Sanjai Bhagat, University of Colorado at Boulder - Department of Finance, and Roberta Romano, Yale Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

This Article advances an executive compensation reform proposal that is specifically addressed to firms receiving government financial assistance and thought to pose a systemic risk, although we think that all firms should consider its adoption. Executive compensation reform should lead to policies that are simple, transparent, and focused on creating and sustaining long-term shareholder value. With these criteria in mind, we suggest that incentive compensation plans should consist only of restricted stock and restricted stock options, restricted in the sense that the shares cannot be sold nor the options exercised for a period of at least two to four years after an individual resignation or last day in office. We would permit a minor amount to be paid out to executives currently to address tax, liquidity, and premature turnover concerns that the proposal could induce. We believe that this approach will provide superior incentives for executives(and traders whose actions can substantially impact an organization) to manage firms in investors longer-term interest, and diminish their incentive to make public statements, manage earnings, or accept undue levels of risk, for the sake of short-term price appreciation. By reducing management incentive to take on unwarranted risk, our proposal would therefore also decrease the probability that public resources will be dissipated in bailouts of financial firms, particularly those deemed by public officials as “too big to fail.”

Higginbotham on Developing Policy for Disclosure

'See No Evil, Hear No Evil, Speak No Evil' - Developing a Policy for Disclosure by Counsel to Public Corporations, by F. Michael Higginbotham, University of Baltimore School of Law, was recently posted on SSRN.  Here is the abstract:

The purpose of this article is to develop policy and guidelines for counsel to observe when deciding whether and in what fashion he or she should disclose previously undisclosed information concerning an ongoing or future illegality committed by his or her corporate client. In developing these policies and guidelines, this article will discuss the current (1982) ABA policy and the relevant case law concerning corporate counsel's duty of disclosure, and proposed rules 1.13(b) and (c) of the 1980 ABA Discussion Draft and the 1981 Final Draft of Rules of Professional Conduct.

SEC Charges Former Shuffle Master Executive with Insider Trading

On November 19, 2009, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the District of Nevada against R. Brooke Dunn, a former executive at Shuffle Master, Inc., and Nicholas P. Howey for illegal insider trading in Shuffle Master stock and options prior to an announcement of disappointing financial results by Shuffle Master.

The SEC's Complaint alleges that, on February 26, 2007, after he first learned that Shuffle Master would announce disappointing preliminary financial results, Dunn called Howey and provided him with material nonpublic information relating to Shuffle Master's anticipated announcement. Howey then immediately sold all of his previously-purchased Shuffle Master stock and calls and purchased Shuffle Master puts. The next day, after Shuffle Master announced its disappointing financial news, Howey sold all of the Shuffle Master puts he purchased the previous day. Through the foregoing transactions, Howey profited by (or avoided losses of) approximately $237,000.

The Complaint charges Dunn and Howey with violating 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 and seeks permanent injunctions, disgorgement of illegal trading profits, prejudgment interest, and civil penalties. The Complaint also seeks an order barring Dunn from serving as an officer or director of a public company.

Henry Hu's Testimony on Derivatives Legislation

Testimony Concerning the Over-the-Counter Derivatives Markets Act of 2009 by Henry T. C. Hu, Director of the Division of Risk, Strategy, and Financial Innovation, U.S. Securities and Exchange Commission, Before the House Committee on Financial Services, October 7, 2009.

SEC Finds Broker-Dealer Orchestrated Lating Trading Fraud

The SEC, in an administrative proceeding, found that Joseph John VanCook, a former salesperson and partial owner of Pritchard Capital Partners, LLC, a registered broker-dealer, willfully violated Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5 by orchestrating a fraudulent scheme involving "late trading" of mutual fund shares, i.e., "the unlawful practice of permitting mutual fund orders received after the 4:00 p.m. [fund share] pricing time to receive the [net asset value, or "NAV"] calculated at or as of 4:00 p.m. that day, instead of 4:00 p.m. the following trading day." The Commission found that VanCook accepted and recorded orders to trade mutual fund shares from clients before 4:00 p.m. but permitted three hedge fund clients to change or cancel those orders after the markets closed at 4:00 p.m. without recording the time at which they made those final trading decisions. The Commission found that, in submitting those orders to his firm's clearing broker, VanCook created "the false impression that final orders associated with [those] accounts were placed before 4:00 p.m. and were therefore entitled to that day's NAV when in fact they were not."

The Commission concluded that, as a result of VanCook's scheme, his "late-trading clients obtained an undisclosed advantage, at the expense of other shareholders of the relevant mutual funds, when they learned of market-moving information and were able to buy, exchange, or sell mutual fund shares at NAVs set before the market-moving information was released. The mutual funds at issue were deceived into providing improper prices for those orders contrary to their prospectus language and transmitting and effecting orders contrary to their published policies and procedures, as well as applicable rules and regulations, thereby harming or causing the risk of harm to shareholders who made investment decisions premised upon improper prices and suffered dilution to the value of their shares." The Commission also found that VanCook aided and abetted and willfully caused the Firm to violate Exchange Act Section 17(a)(1) and Exchange Act Rule 17a-3(a)(6) by failing to make and keep current certain books and records in that he established the order-taking system by which the time of receipt of his late-trading clients' final trade decisions was not recorded.

For these violations, which the Commission noted involved "nearly 5,000 late mutual fund orders effecting the purchase and sale of billions of dollars' worth of mutual fund shares," VanCook was barred from association with any broker or dealer and ordered to cease and desist from committing future violations of the antifraud provisions, to pay disgorgement plus prejudgment interest, and to pay a civil money penalty. (Rel. 34-61039; File No. 3-12753)

House Financial Services Committee Passes Amendment to Dismantle Firms "Too Large to Fail"

On Nov. 18 the House Financial Services Committee passed an amendment offered by Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, to the Financial Stability Improvement Act by a vote of 38-29.  The Kanjorski amendment would empower federal regulators to rein in and dismantle financial firms that are so large, inter-connected, or risky that their collapse would put at risk the entire American economic system, even if those firms currently appear to be well-capitalized and healthy.  Therefore, American taxpayers should no longer be on the hook for bailouts, as financial companies would not be able to become “too big to fail.” The Kanjorski amendment outlines clear and objective standards for regulators to examine financial companies and reduce the level of risk their activities pose to our financial stability and our economy.

The Kanjorski amendment expands on a segment of the Financial Stability Improvement Act, by enabling federal action to address financial companies that are deemed “too big to fail” before resolution authority is needed.  The amendment transfers such mitigatory action from the Federal Reserve to the Financial Services Oversight Council and establishes objective standards for the Council to effectively evaluate companies to determine whether they are systemically risky.  Additionally, the amendment provides clear checks and balances by requiring the Council to consult with the President before taking extraordinary mitigatory actions.  A financial company also has the right to appeal any actions.

SEC Sues Investor Relations Firm and Others for Illegal Sales of Securities

The SEC filed a civil action in the U.S. District Court for the Middle District of Florida, alleging that investor relations firm Big Apple Consulting USA, Inc. ("Big Apple"), its wholly-owned subsidiary MJMM Investments, LLC ("MJMM"), and four of its executives-CEO Marc Jablon, vice president Matthew Maguire, MJMM president Mark Kaley, and Keith Jablon, vice president of another Big Apple subsidiary-made public misrepresentations and material omissions about the financial state of CyberKey Solutions, Inc., ("CyberKey") while the two entities sold hundreds of millions of CyberKey shares. These CyberKey shares were sold under no registration statement and no legitimate exemption from registration. The SEC also charged Big Apple and MJMM with acting as unregistered broker-dealers, and Marc Jablon, Maguire, and Kaley with aiding and abetting the two entities' violations in that respect.

According to the SEC's complaint, the Big Apple executives learned by August 8, 2006, that CyberKey's only significant source of revenue, a supposed $25 million purchase order from the U.S. Department of Homeland Security ("DHS"), could not be located by DHS itself and almost certainly did not exist. Despite this knowledge, the Big Apple team continued to promote CyberKey and its business relationship with DHS and sold hundreds of millions of CyberKey shares into the public market. In addition to planning and editing press releases, Big Apple used a telephone calling room of 14 to 50 callers to promote CyberKey stock, including the company's relationship with DHS, to registered brokers. In doing so, Big Apple and MJMM acted as dealers in connection with the distribution of CyberKey stock and as brokers by participating in securities transactions at key points in the chain of distribution of CyberKey shares.

The SEC's complaint requests permanent injunctions, disgorgement of ill-gotten gains plus prejudgment interest, and civil penalties against all of the defendants. The complaint also seeks penny stock bars against Big Apple, MJMM, Maguire, and Marc Jablon.

SEC & CFTC Issue Joint Orders on Security-Based Futures Contracts

The SEC and the CFTC issued two joint orders related to security-based futures contracts that clarify each Commission's respective jurisdiction and allow additional products to underlie security futures.

The first joint order excludes certain foreign and domestic volatility indexes that are based on broad-based security indexes from the definition of "narrow-based security index". As a result of the joint order, futures on foreign and domestic volatility indexes that meet the criteria contained in the joint order are treated as "broad-based security indexes" and subject to the exclusive jurisdiction of the CFTC. Options on such volatility indexes are subject to the federal securities laws and the jurisdiction of the SEC. The joint order, contained in SEC Release No. 34-61020, became effective on November 17.

The second joint order allows security futures products to be based on any security that is eligible to underlie an exchange-listed security option, including certain unregistered debt securities. This joint order, which is contained in SEC Release No. 34-61027, became effective on November 19.

NY AG and AES Agree on Climate Change Disclosures

New York Attorney General Andrew M. Cuomo today announced an agreement that requires the AES Corporation (AES) - a global energy company operating in 29 countries with annual revenues exceeding $16 billion - to disclose timely and relevant information to investors about financial risks associated with the production of global warming pollution. Today’s agreement with AES follows the landmark settlements Cuomo reached last year with two other major energy companies, Dynegy, Inc. and Xcel Energy, to protect investors by ensuring disclosure of potential financial risks for carbon-intensive companies from new and upcoming regulatory efforts related to climate change.

Under the Attorney General’s agreement, AES must disclose material risks associated with climate change in its annual summary report on the company’s performance (Form 10K) to the Securities and Exchange Commission (SEC). These required disclosures include an analysis of material financial risks from climate change related to:

Present and probable future climate change regulation and legislation
Climate-change related litigation
Physical impacts of climate change

Through the agreement, AES has committed to a broad array of additional climate change disclosures including:

Current carbon emissions
Projected increases in carbon emissions from planned coal-fired power plants
Company strategies for reducing, offsetting, limiting, or otherwise managing its global warming pollution emissions and expected global warming emissions reductions from these actions
Corporate governance actions related to climate change, including if environmental performance is incorporated into officer compensation.

New regulatory efforts to reduce global warming pollution, including New York’s regulation of carbon emissions from power plants, as well as pending federal actions, can impact a carbon-intensive company’s financial outlook through the costs incurred to comply. Potential investors must be aware of such material risks in order to make an informed investment decision.

AES generates and distributes energy in 29 countries and reported revenues of $16.1 billion in 2008. The company has a worldwide total power generation capacity of approximately 43,000 megawatts and an international distribution network serving more than 11 million people.

In the U.S., AES operates 17 power facilities, the majority of which are fueled by coal, with a total generation capacity of almost 12,000 megawatts. The company’s U.S. plants emitted a reported 42 million tons of carbon dioxide in 2006, placing AES among the top 20 of the largest emitters of global warming pollution by energy companies in the country.

In New York state, the company operates four coal-fired power plants generating more than 1,200 megawatts under the name AES Eastern Energy: AES Cayuga (Lansing, Tompkins County), AES Greenridge (Dresden, Yates County), AES Somerset (Barker, Niagara County) and AES Westover (Johnson City, Broome County).

In September 2007, Attorney General Cuomo subpoenaed five major energy companies for information on whether disclosures to investors in filings with the SEC adequately described their financial risks related to emissions of global warming pollution. The subpoenas were issued under New York State’s Martin Act, a 1921 state securities law that grants the Attorney General broad powers to access the financial records of businesses. The Attorney General reached agreements with Xcel and Dynegy in 2008. Cuomo’s inquiry into the disclosures of the remaining companies subpoenaed in 2007 - Dominion Resources and Peabody Energy - is ongoing.

The Attorney General noted that AES cooperated fully with his office’s inquiry.

Ohio AG Sues Rating Agencies

Ohio Attorney General Richard Cordray today filed a lawsuit against Standard & Poor’s, Moody’s and Fitch. The lawsuit, filed in United States District Court for the Southern District of Ohio on behalf of five Ohio public employee retirement and pension funds, charges the rating agencies with wreaking havoc on U.S. financial markets by providing unjustified and inflated ratings of mortgage-backed securities in exchange for lucrative fees from securities issuers.

The lawsuit alleges the rating agencies gave many of these exotic investments the highest investment-grade credit rating. This rating – often referred to as “AAA”– is consistent with the credit ratings given to the safest corporate bonds, and it assured institutional investors, including the Ohio funds, that the investments were extremely safe with a very low risk of default. According to preliminary estimates, the improper ratings cost the Ohio Funds losses in excess of $457 million.

(Hat tip:  Darrell Miller)

SEC Approves Expansion of BrokerCheck Disclosure

Here is the link to the SEC's Order Approving a Proposed Rule Change Relating to Availability of Information Pursuant to FINRA Rule 8312 (FINRA BrokerCheck Disclosure).  I blogged yesterday about the amendment to maintain the information on broker dealers permanently available, even if the individuals left the industry.