Securities Law Prof Blog

SEC Website Links to Short Sale Volume and Transaction Data

The SEC now posts on its website SHORT SALE VOLUME AND TRANSACTION DATA.  It states that:

To increase the transparency surrounding short sale transactions, several self-regulatory organizations (SROs) are providing on their websites daily aggregate short selling volume information for individual equity securities.  The SROs are also providing website disclosure on a one-month delayed basis of information regarding individual short sale transactions in all exchange-listed equity securities.  For short sale data provided by a specific SRO, you can click on the hyperlinks below.

SEC's Small Business Capital Formation Program Will be Held Nov. 19

The Program for the 28th Annual SEC Government-Business Forum on Small Business Capital Formation (November 19, 2009) is posted at the SEC website.
 

Wells Fargo Settles ARS Charges with State Securities Regulators

NASAA today announced another settlement (in principle) with a securities firm over its sales of auction rate securities (ARS).  Wells Fargo Investments LLC agreed to return approximately $1.3 billion to the firm's clients who have had their funds frozen in the ARS market.  The settlement requires Wells Fargo Investments to extend offers to repurchase ARS from all customers nationwide by approximately February 18, 2010.  Wells Fargo Investments is a brokerage unit of San Francisco-based Wells Fargo & Company.

The settlement is the result of an investigation led by the Securities Division of the Washington State Department of Financial Institutions into allegations that Wells Fargo misled clients by falsely assuring them that ARS securities were a safe, liquid alternative to cash, certificates of deposit or money market funds. The ARS markets froze in February 2008, triggering complaints from investors who could not withdraw money from their accounts. At the time of the market failures, customers of Wells Fargo Investments nationwide held an estimated $2.95 billion in ARS.

Under the terms of the settlement, Wells Fargo agreed to buy back at par value by approximately April 18, 2010 all auction rate securities purchased through its brokerage unit by investors before February 13, 2008. The settlement agreement also calls for Wells Fargo to:

• Fully reimburse certain investors who sold their auction rate securities at a discount after the market failed;
• Consent to a special, public arbitration procedure to resolve claims of consequential damages suffered by investors covered by the settlement as a result of their inability to access their funds; and
• Pay to the states monetary penalties of $1.9 million. 

 

FINRA Fines MetLife for Supervisory Failures over Brokers' Email

FINRA announced today that it has fined MetLife Securities, Inc., and three of its affiliates a total of $1.2 million for failing to establish an adequate supervisory system for the review of brokers' email correspondence with the public. The fine also resolves charges of failing to establish adequate supervisory procedures relating to broker participation in outside business activities and private securities transactions.  Those failures allowed two MetLife Securities brokers to engage in undisclosed outside business activities and private securities transactions without detection by the firm, costing some firm customers millions of dollars.

The three MetLife Securities affiliates are New England Securities Corp., Walnut Street Securities, Inc. and Tower Square Securities, Inc. All are headquartered in New York.

 From March 1999 to December 2006, MetLife Securities and its affiliate broker-dealers had in place written supervisory procedures mandating that all securities-related emails of brokers be reviewed by a supervisor. However, the firms did not have a system in place that enabled supervisors to directly monitor the email communications of brokers. Instead, the firms relied on the brokers themselves to forward their emails to supervisors for review. To monitor compliance with the email-forwarding requirement, the firms encouraged — but did not require — managers to inspect brokers' computers for any emails that had not been forwarded as required. But brokers were able to delete their emails from their assigned computers, thus rendering spot-checks unreliable.

 The firms also conducted annual branch audits, which were likewise ineffective because they did not allow for timely detection of email-forwarding failures. Moreover, the method employed by the auditors to identify email-forwarding deficiencies (prior to July 2005) was itself flawed, consisting mainly of a review of hard-copy files for any correspondence (including emails) that had not been forwarded. Brokers were therefore able to withhold emails without detection by the firm and conceal evidence or "red flags" of misconduct contained in their emails.

 FINRA also found that the firms' inability to ensure compliance with the email-forwarding requirement meant they could not adequately enforce their own supervisory procedures relating to outside business activities and private securities transactions.

 In concluding this settlement, the firms neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

 

Davidoff on BofA-ML Merger Testimony

Great blog by NYTimes Deal Professor Steven Davidoff on the mysteries contained in former BofA GC Mayopoulos's testimony today before the House committee investigating the BofA-ML merger.  His bottom line -- to which I heartily concur -- move on to more serious issues.  Some Mysteries in the BofA-Merrill Deal

Walters' Testimony on House Financial Stability Improvement Act Discussion Draft

Testimony Concerning the Discussion Draft of The Financial Stability Improvement Act of 2009, by Commissioner Elisse B. Walter, SEC, Before the Committee on Agriculture, United States House of Representatives. November 17, 2009

SEC Charges Two Former Officers of Tivia with Accounting Fraud

The SEC charged two former Silicon Valley executives for improperly inflating the reported financial results at Santa Clara, Calif., semiconductor company Tvia, Inc.  The SEC alleges that Tvia's former Vice President of Worldwide Sales, Benjamin Silva III, made side deals with customers and concealed the terms from Tvia's executives and auditors, which fraudulently caused the company to report millions of dollars in excess revenue. The SEC further alleges that Tvia's former Chief Financial Officer Diane Bjorkstrom also played a role in Tvia's improper accounting, allowing Tvia to recognize revenue on merchandise shipped to a customer weeks before the customer had agreed to accept it, and failing to act on red flags surrounding Silva's misconduct.  Bjorkstrom agreed to settle the SEC's charges against her by paying a $20,000 penalty.

The SEC's complaint, filed in federal district court in San Jose, alleges that Silva's side agreements illegally inflated Tvia's revenue by approximately $5 million from September 2005 through June 2006. This caused the company's quarterly revenue to be consistently overstated, including by as much as 165 percent in one quarter. The SEC further alleges that in order to divert auditors' attention from delinquent customer payments, Silva fraudulently applied payments from new customers to old receivables.

According to the SEC's complaint, Silva's misconduct allowed him to meet his revenue targets at the company. For his efforts in meeting those targets, Silva received an award of options to buy 70,000 shares of Tvia stock. Before the fraud was discovered in early 2007, Silva exercised and sold all of his available Tvia options for a profit of $300,000.

The SEC's complaint against Silva charges him with violations of the antifraud, reporting, books and records and internal control provisions of the federal securities laws, and seeks a permanent injunction, disgorgement of Silva's ill-gotten gains plus prejudgment interest, and a financial penalty. The SEC also seeks a court order permanently barring Silva from acting as an officer or director of any public issuer.

In the settled enforcement action against Bjorkstrom, she consented without admitting or denying the SEC's allegations to an order requiring her to pay the penalty and banning her from appearing or practicing before the SEC as an accountant for a period of two years.

SEC Approves Major Expansion of BrokerCheck Disclosure

FINRA announced that the SEC has approved  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.  Disclosure records for former brokers will be available on BrokerCheck beginning November 30.

"It is possible that a (former broker) could become a financial planner or work in another related field where his securities record would help members of the public decide if they should accept his financial advice or rely on his advice or expertise," the SEC said in its order approving the BrokerCheck expansion. It added that providing information on final regulatory actions against former brokers "will help members of the public to protect themselves from unscrupulous people and thus….should help prevent fraudulent and manipulative acts and practices, and protect investors and the public interest."

 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.

 Records for those individuals will become available on November 30 and will include any final sanction (such as bars, suspensions and fines) imposed by the SEC, the Commodity Futures Trading Commission, any federal banking agency, the National Credit Union Administration, any other federal regulatory agency, any state regulatory agency, any foreign financial regulatory authority or any self-regulatory organization (such as FINRA). Those individuals' records generally will also disclose administrative information such as employment and registration history, the individual's most recently submitted comments and the dates and names of qualification examinations passed by the individual.

 

TARP Special Inspector General Releases Report on Payments to AIG Counterparties

As noted earlier, the Office of the Special Inspector General for TARP released its report on Factors Affecting Efforts to Limit Payments to AIG Counterparties (SIGTARP report on AIG).  Here are its summary conclusions (note in particular the last sentence):

 (1) the original terms of federal assistance to AIG, including the high interest rate it adopted from the private bank’s initial term sheet, inadequately addressed AIG’s long term liquidity concerns, thus requiring further Government support; (2) FRBNY’s negotiating strategy to pursue concessions from counterparties offered little opportunity for success, even in light of the willingness of one counterparty to agree to concessions; (3) the structure and effect of FRBNY’s assistance to AIG, both initially through loans to AIG, and through asset purchases in connection with Maiden Lane III effectively transferred tens of billions of dollars of cash from the Government to AIG’s counterparties, even though senior policy makers contend that assistance to AIG’s counterparties was not a relevant consideration in fashioning the assistance to AIG; and (4) while FRBNY may eventually be made whole on its
loan to Maiden Lane III, it is difficult to assess the true costs of the Federal
Reserve’s actions until there is more clarity as to AIG’s ability to repay all of its
assistance from the Government. SIGTARP also draws lessons that should be
learned regarding the importance of transparency and the enormous impact that ratings agencies had on the AIG bailout (emphasis added).

Obama Administration Creates New Interagency Financial Fraud Enforcement Task Force

The Obama Administration announced today the creation of an interagency Financial Fraud Enforcement Task Force to strengthen efforts to combat financial crime. The Department of Justice will lead the task force and the Department of Treasury, HUD and the SEC will serve on the steering committee. The task force's leadership, along with representatives from a broad range of federal agencies, regulatory authorities and inspectors general, will work with state and local partners to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, address discrimination in the lending and financial markets and recover proceeds for victims.

The task force replaces the Corporate Fraud Task Force established in 2002

GAO Reports SEC's Continuing Lack of Effective Internal Controls over Financial Reporting

The GAO released today its audit of the SEC's Financial Statements for Fiscal Years 2009 and 2008.  In the GAO’s opinion, SEC’s fiscal years 2009 and 2008 financial statements are fairly presented in all material respects. However, in GAO’s opinion, SEC did not have effective internal control over financial reporting as of September 30, 2009.

The report goes on to state:

During this year’s audit, we identified six significant deficiencies that collectively represent a material weakness in SEC’s internal control over financial reporting. The significant deficiencies involve SEC’s internal control over (1) information security, (2) financial reporting process, (3) fund balance with Treasury, (4) registrant deposits, (5) budgetary resources, and (6) risk assessment and monitoring processes. These internal control weaknesses give rise to significant management challenges that have reduced assurance that data processed by SEC’s information systems are reliable and appropriately protected; impaired management’s ability to prepare its financial statements without extensive compensating manual procedures; and resulted in unsupported entries and errors in the general ledger.

In connection with its prior audits, GAO made numerous recommendations to SEC to address the internal control issues that continued to persist during fiscal year 2009. GAO will continue to monitor SEC’s progress in implementing the recommendations that remain open as of the date of this report.

SEC Proposes Amendments to "Dark Pools" of Liquidity

The SEC is proposing to amend the regulatory requirements of the Securities Exchange Act of 1934 (“Exchange Act”) that apply to non-public trading interest in National Market System (“NMS”) stocks, including so-called “dark pools” of liquidity. First, it is proposing to amend the definition of “bid” or “offer” in Exchange Act quoting requirements to apply expressly to actionable indications of interest (“IOIs”) privately transmitted by dark pools and other trading venues to selected market participants. The proposed definition would exclude, however, IOIs for large sizes that are transmitted in the context of a targeted size discovery mechanism. Second, the Commission is proposing amendments to the display obligations of alternative trading systems (“ATSs”) in Regulation ATS under the Exchange Act, including a substantial lowering of the trading volume threshold in Regulation ATS that triggers public display obligations for ATSs. Third, the Commission is proposing to amend the joint-industry plans for publicly disseminating consolidated trade data to require real-time disclosure of the identity of dark pools and other ATSs on the reports of their executed trades. The proposals are intended to promote the Exchange Act goals of transparency, fairness, and efficiency.  Comments are due 90 days after publication in the Federal Register.

Bancinsurance Corp. Settles SEC Accounting Charges

The SEC filed a settled civil injunctive action against Ohio insurance company Bancinsurance Corporation ("Bancinsurance" or the "Company"), and its chief executive officer, John S. Sokol ("Sokol"), charging them with securities fraud and other violations of the federal securities laws. The Commission's complaint alleges that Bancinsurance failed to account properly for more than $2 million of reinsurance claims, and that Sokol-Bancinsurance's president at the time-failed to ensure that the Company's principal financial officer or its external auditors were informed of the claims. As a result, the Company's financial condition in its Form 10-K for fiscal year 2003 and its Form 10-Q for the first quarter of fiscal year 2004 was materially misstated. Sokol agreed to pay a $60,000 civil penalty, and both Bancinsurance and Sokol agreed to be permanently enjoined from violating the antifraud and other provisions of the federal securities laws.

SEC Brings Charges Alleging "Green" Ponzi Scheme

The SEC charged four individuals and two companies involved in perpetrating a $30 million Ponzi scheme in which they persuaded more than 300 investors nationwide to participate in purported environmentally-friendly investment opportunities.  The SEC alleges that Wayde and Donna McKelvy, who were previously married and living in the Denver area, particularly targeted elderly investors or those approaching retirement age to finance such "green" initiatives of Pennsylvania-based Mantria Corporation as a supposed "carbon negative" housing community in rural Tennessee and a "biochar" charcoal substitute made from organic waste. The McKelvys promoted Mantria investment opportunities through their Denver-based company Speed of Wealth LLC. With the help of two other promoters who are Mantria executives — Troy Wragg and Amanda Knorr of Philadelphia — they convinced investors attending seminars or participating in Internet "webinars" to liquidate their traditional investments such as retirement plans and home equity to instead invest in Mantria.

The SEC alleges that the "green" representations were laced with bogus claims, and investors were falsely promised enormous returns on their investments ranging from 17 percent to "hundreds of percent" annually. In fact, Mantria's environmental initiatives have not generated any significant cash, and any returns paid to investors have been funded almost exclusively from other investors' contributions.

The SEC's complaint, filed in federal court in Denver, charges Mantria and Speed of Wealth as well as the McKelvys, Wragg and Knorr, and seeks an emergency court order to freeze their assets. The SEC's complaint charges each of the defendants with violating the antifraud and offering registration provisions of the securities laws. The SEC also charged all of the defendants except for Mantria with violating broker-dealer registration requirements. The SEC seeks injunctions, disgorgement, and financial penalties from the defendants.

Report Faults Fed's Handling of AIG Bailout

It is reported this evening that the New York Fed (under Timothy Geithner), in its rush to bail out AIG last November, "refused to use its considerable leverage" to negotiate and obtain concessions from AIG's counter-parties.  As a result, AIG's trading partners (including Goldman) got paid in full with taxpayer dollars.  The report, prepared by Neil Barofsky, the special inspector general for TARP, is due out tomorrow.  NYTimes, Report on Inquiry Faults Handling of A.I.G. Bailout; WSJ, Audit Is Critical of N.Y. Fed in AIG Bailout.

Coffee on Litigation Governance

Litigation Governance: Taking Accountability Seriously, by John C. Coffee Jr., Columbia Law School; European Corporate Governance Institute (ECGI); American Academy of Arts & Sciences, was recently posted on SSRN.  Here is the abstract:

Both Europe and the United States are rethinking their approach to aggregate litigation. In the United States, class actions have long been organized around an entrepreneurial model that uses economic incentives to align the interest of the class attorney with those of the class. But increasingly, potential class members are preferring exit to voice, suggesting that the advantages of the U.S. model may have been overstated. In contrast, Europe has long resisted the U.S.’s entrepreneurial model, and the contemporary debate in Europe centers on whether certain elements of the U.S. model - namely, opt-out class actions, contingent fees, and the “American rule” on fee shifting - must be adopted in order to assure access to justice. Because legal transplants rarely take, this Essay offers an alternative “non-entrepreneurial model” for aggregate litigation that is consistent with European traditions. Relying less on economic incentives, it seeks to design a representative plaintiff for the class action who would function as a true “gatekeeper,” pledging its reputational capital to assure class members of its loyal performance. Effectively, this model marries aspects of U.S. “public interest” litigation with existing European class action practice. Examining the differences between U.S. and European practice, this Essay argues none of these differences are dispositively prohibitive and that functional substitutes, including an opt-in class action and third party funding, could be engineered so as to yield roughly comparable results. Although the two systems might perform similarly in terms of compensation, the ultimate question, it argues, is the degree to which a jurisdiction wishes to authorize and arm a private attorney general to pursue deterrence for profit.

Rose on Multi-Enforcer Approach to Securities Fraud Deterrence

The Peril and Promise of a Multi-Enforcer Approach to Securities Fraud Deterrence: A Framework for Analysis, by Amanda M. Rose, Vanderbilt University Law School, was recently posted on SSRN.  Here is the abstract:

Participants in the United States’ national securities markets face potential fraud liability at the hands of the SEC, class action plaintiffs, and state regulators. Does this “multi-enforcer” approach to securities fraud deterrence make sense? How does one even go about answering that? This Article tackles the second question, filling a current void in the securities fraud literature by elucidating the circumstances that must prevail in order for a multi-enforcer approach to serve the cause of optimal deterrence. It thus situates debates over the preemption of state securities fraud enforcement authority and the desirability of private Rule 10b-5 enforcement within a framework of rational inquiry, and clarifies the empirical questions that must ultimately drive their resolution.

Black on Hewlett-Packard

The Story of Hewlett-Packard, by Barbara Black, University of Cincinnati - College of Law, was recently posted on SSRN.  Here is the abstract:

With the development of the modern corporation, corporate boards have been the locus of corporate authority, and particularly since the 1980s, boards and their performance have been under intense scrutiny. Nevertheless, corporate law has not developed a consistent theory for what boards are supposed to do; instead, it sends mixed messages about the functions and expectations of boards and the appropriate people to sit on them. The HP saga illustrates some of the dilemmas faced by directors confronted by these competing pressures.

Gross on Grounds to Challenge FINRA Arbitrators

Grounds to Challenge FINRA Arbitrators, by Jill Gross, Pace Law School, was recently posted on SSRN.  Here is the abstract:

This short article describes the grounds and processes parties can invoke to challenge the neutrality of arbitrators appointed to decide their disputes filed with FINRA Dispute Resolution, either pre-hearing or post-award.

SEC Announces Speakers for Forum on Small Business Capital Formation

The SEC announced the agenda, speakers and panelists for its November 19 forum on small business capital formation. The morning forum panels will focus on the state of small business capital formation and the SEC's "accredited investor" definition. In the afternoon, forum breakout groups will develop recommendations to facilitate small business capital formation.

Participants include:

The State of Small Business Capital Formation

Todd Flemming, Infrasafe, and Small Business and Entrepreneurship Council
Anna T. Pinedo, Morrison & Foerster
Andrew J. Sherman, Jones Day, and Adjunct Professor, Smith School of Business, University of Maryland
Barry E. Silbert, SecondMarket
Eric R. Zarnikow, Office of Capital Access, U.S. Small Business Administration 
 
Academic Perspectives on the SEC's "Accredited Investor" Definition

Prof. Rutheford B. Campbell, Jr., University of Kentucky College of Law
Prof. Jill E. Fisch, University of Pennsylvania Law School
Prof. Donald C. Langevoort, Georgetown University Law Center
Prof. William K. Sjostrom, James E. Rogers College of Law, University of Arizona