Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Saturday, July 17, 2010

Colombo on Williams Act Disclosure

Effectuating Disclosure Under the Williams Act, by Ronald J. Colombo, Hofstra University - School of Law, was recently posted on SSRN.  Here is the abstract:

The importance of adequate, timely disclosure of critical information to investors and the capital markets has never been more greatly appreciated. In furtherance of such disclosure, within the specific context of rapid stock accumulations that implicate potential changes in corporate control, Congress passed the Williams Act in 1968. Unfortunately, thanks largely to an early Supreme Court decision interpreting the Act, the remedies available to private litigants foster noncompliance and gamesmanship. Fortunately, this decision is open to reinterpretation – and arguably ripe for relegation as bad law. Such a turn of events would give rise to a remedial regime that furthers, rather than undermines, the important disclosure objectives of the Williams Act.

July 17, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

AIG Plans Stock Offering to Pay Ohio Funds Settlement

How is AIG going to pay the $725 million settlement with the Ohio pension funds?  According to AIG's 8-K Report:

Under the terms of the Settlement, if consummated, AIG will pay an aggregate of $725 million, $175 million of which is to be paid into escrow within ten days of preliminary court approval. AIG’s obligation to fund the remainder of the settlement amount is conditioned on its having consummated one or more common stock offerings raising net proceeds of at least $550 million prior to final court approval (“Qualified Offering”). AIG has agreed to use best efforts, consistent with the fiduciary duties of AIG’s management and Board of Directors, to effect a Qualified Offering, but the decision as to whether market conditions or pending or contemplated corporate transactions make it commercially reasonable to proceed with such an offering will be within AIG’s unilateral discretion. In the event that AIG effects a registered secondary offering of common stock on behalf of the U.S. Department of the Treasury (“Treasury”) resulting in Treasury receiving proceeds of at least $550 million, then market access will be deemed to have been demonstrated and AIG shall be deemed to have consummated a Qualified Offering. AIG, in its sole discretion, also may fund the $550 million from other sources. If AIG does not fund the $550 million before final court approval of the Settlement, the plaintiffs may terminate the agreement, elect to acquire freely transferable shares of AIG common stock with a market value of $550 million provided AIG is able to obtain all necessary approvals, or extend the period for AIG to complete a Qualified Offering.

July 17, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

AIG Agrees to Pay $725 Million to Settle Claims Brought by Ohio Pension Funds

Ohio Attorney General Richard Cordray announced a $725 million securities class action settlement against American International Group, Inc. (AIG) and certain individual directors and officers. The settlement resolves allegations of AIG’s wide-ranging fraud from October 1999 to April 2005 involving anti-competitive market division, accounting violations and stock price manipulation, and brings total expected recovery for AIG shareholders to over $1 billion. The settlement is subject to court approval.

Three Ohio public pension funds, represented by the Attorney General, led the class action suit:  the Ohio Public Employees Retirement System (OPERS), the State Teachers Retirement System of Ohio and the Ohio Police and Fire Pension Fund (collectively the "Ohio Funds").

Taken together, recovery for AIG shareholders in this case is expected to be $1.0095 billion, Cordray said. It is the tenth-largest securities class action settlement in U.S. history, and the first and only billion-dollar class action settlement since the financial crisis began to unfold in 2008.

As part of the total case involving AIG, the Ohio Funds and the Ohio Attorney General’s Office previously announced a $72 million settlement with General Reinsurance Corporation, a $97.5 million settlement with PricewaterhouseCoopers LLP and a $115 million settlement with CEO Maurice R. "Hank" Greenberg and other AIG executives (Howard I. Smith, Christian M. Milton and Michael J. Castelli) and related corporate entities (C.V. Starr & Co., Inc. and Starr International Co., Inc.).

AIG has agreed to pay $725 million to the shareholder class in the primary settlement. An initial payment of $175 million will be payable after entry of a court order granting preliminary approval of the settlement. The remaining $550 million may be funded by AIG through one or more common stock offerings. If AIG does not fund the $550 million before court approval of the settlement, the plaintiffs may terminate the agreement, elect to acquire freely transferable shares of AIG common stock with a market value of $550 million provided AIG is able to obtain all necessary approvals, or extend the period for AIG to complete a stock offering in order to fund the remainder of the settlement.

This case involved three types of claims:

AIG engaged in accounting fraud, culminating in a $3.9 billion restatement in May 2005 that included numerous different types of transactions, including allegations relating to a $500 million no-risk fraudulent reinsurance transaction that AIG entered into with General Reinsurance Corp. in order to artificially boost AIG's reported claims reserves. One AIG executive and four Gen Re executives were found guilty of securities fraud in relation to that transaction.
AIG paid tens of millions of dollars in undisclosed contingent commissions to insurance brokers and participated in a bid-rigging scheme with insurance brokers and certain insurance companies in order to divide the market for certain types of insurance.
AIG engaged in straightforward stock price manipulation, in which company executives ordered company traders to inflate AIG stock price.

July 17, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Friday, July 16, 2010

SEC and Trident Microsystems Settle Options Backdating Charges

Backdating stock options is such old news, but the SEC announced the settlement of charges against Trident Microsystems, Inc., a Santa Clara, California-based provider of integrated circuits, Trident's founder and former Chief Executive Officer, Frank C. Lin, and Trident's former Chief Accounting Officer, Peter Jen, alleging violations related to stock option backdating.  The SEC alleged that from at least 1993 to May 2006, Trident, through the conduct of Lin and Jen, engaged in a fraudulent and deceptive scheme to provide undisclosed compensation to executives and other employees, concealing millions of dollars in expenses from the Company's shareholders. According to the complaint, Lin used, and directed others to use, hindsight to select for stock option grants dates that coincided with the dates of low closing prices for the Company's stock. Lin backdated stock option documentation to make it appear as if options had been granted on earlier dates, resulting in disguised "in-the-money" option grants to Company employees, officers, and on at least one occasion to directors. Among the alleged backdating practices, Trident backdated offer letters to newly hired employees and "parked" low-priced options under the names of certain employees which were later allocated to different employees in subsequent months when Trident's stock price increased. The complaint alleges that Jen was aware of some of the backdating practices during at least 1998 to 2006 and that he approved backdated grants to certain employees.

Trident, Lin, and Jen agreed to settle the matter without admitting or denying the allegations of the Commission's complaint.

July 16, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Views on Goldman Settlement

The consensus on the SEC-Goldman settlement is that the bank got off easy (one headline described it as a "token" settlement), but it may have enhanced the SEC's reputation, so win-win.  Here is a representative sampling of the press:

InvNews, Goldman's 'punishment': Two weeks' earnings

NYTimes, With Goldman Humbled, What Next for Regulators?

WSJ, But Who Won? Sizing Up Goldman’s Deal With the SEC

WPost, Top 5 reasons Goldman Sachs settlement has meat on the bone

July 16, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, July 15, 2010

SEC Press Conference on Goldman Settlement

Robert Khuzami, SEC Enforcement Division Director, emphasized the following points in his remarks at the press conference announcing the Goldman settlement:

Largest penalty every -- $300 million, plus $250 million in restitution

Settlement achieves goals of deterrence and accountability.  Goldman admits deficient disclosure in its marketing materials.  Goldman agrees to cooperate in ongoing litigation against Fabrice Tourre.

Disclosure obligations apply, no matter how complex the instrument, no matter how sophisticated the investor.

Settlement subject to judicial approval.

July 15, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)


The SEC today announced that Goldman, Sachs & Co. will pay $550 million and reform its business practices to settle SEC charges that Goldman misled investors in a subprime mortgage product just as the U.S. housing market was starting to collapse.  In agreeing to the SEC's largest-ever penalty paid by a Wall Street firm, Goldman also acknowledged that its marketing materials for the subprime product contained incomplete information.

In its April 16 complaint, the SEC alleged that Goldman misstated and omitted key facts regarding a synthetic collateralized debt obligation (CDO) it marketed that hinged on the performance of subprime residential mortgage-backed securities. Goldman failed to disclose to investors vital information about the CDO, known as ABACUS 2007-AC1, particularly the role that hedge fund Paulson & Co. Inc. played in the portfolio selection process and the fact that Paulson had taken a short position against the CDO.

In settlement papers submitted to the U.S. District Court for the Southern District of New York, Goldman made the following acknowledgement:

Goldman acknowledges that the marketing materials for the ABACUS 2007-AC1 transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was "selected by" ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson's economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.

Goldman agreed to settle the SEC's charges without admitting or denying the allegations by consenting to the entry of a final judgment that provides for a permanent injunction from violations of Section 17(a) of the Securities Act of 1933. Of the $550 million to be paid by Goldman in the settlement, $250 million would be returned to harmed investors through a Fair Fund distribution and $300 million would be paid to the U.S. Treasury.

The settlement also requires remedial action by Goldman in its review and approval of offerings of certain mortgage securities. This includes the role and responsibilities of internal legal counsel, compliance personnel, and outside counsel in the review of written marketing materials for such offerings. The settlement also requires additional education and training of Goldman employees in this area of the firm's business. In the settlement, Goldman acknowledged that it is presently conducting a comprehensive, firm-wide review of its business standards, which the SEC has taken into account in connection with the settlement of this matter.

The settlement is subject to approval by the Honorable Barbara S. Jones, United Sates District Judge for the Southern District of New York.

Today's settlement, if approved by Judge Jones, resolves the SEC's enforcement action against Goldman related to the ABACUS 2007-AC1 CDO. It does not settle any other past, current or future SEC investigations against the firm. Meanwhile, the SEC's litigation continues against Fabrice Tourre, a vice president at Goldman.

July 15, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Considers Mutual Fund Distribution Fees at July 21 Meeting

The SEC will hold an Open Meeting on July 21, 2010 to consider:

The Commission will consider a recommendation to propose for public comment a new rule and rule and form amendments under the Investment Company Act of 1940, the Securities Act of 1933, and the Securities Exchange Act of 1934, to reform the regulation of distribution fees paid by registered open-end management investment companies (funds). The recommended proposal would provide a new framework for how funds currently use their assets to pay for sales and distribution expenses pursuant to rule 12b 1 under the Investment Company Act, and would revise disclosure requirements for transaction confirmations pursuant to rule 10b-10 under the Securities Exchange Act.
The Commission will consider whether to adopt amendments to Part 2 of Form ADV and related rules under the Investment Advisers Act of 1940. The amendments would require investment advisers to provide clients with narrative brochures containing plain English descriptions of the advisers' businesses, services, and conflicts of interest. The amendments also would require advisers to electronically file their brochures with the Commission and the brochures would be available to the public through the Commission's website.

July 15, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Big News from SEC Enforcement Later Today?

The SEC website announces that the SEC Enforcement Division  is holding 4:45 P.M. News Conference
to make a significant announcement.  Stay tuned ...

July 15, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Judge Dismisses Case Against JPMorgan in Madoff-Related Charges

Because it's been a long time since there's been anything to say about Madoff--

A judge in federal district court in Manhattan dismissed a law suit brought against JPMorgan by MLSMK Investments, alleging that the bank knew about the fraud, finding the "red flags" were not sufficient.  InvNews,  JPMorgan off the hook in Madoff-linked lawsuit.

July 15, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

FINRA Issues Warning about High-Yield Investment Programs

FINRA warned investors today about Internet-based Ponzi schemes called high-yield investment programs (HYIPs), which purport to offer returns of 20, 30, 100 percent or more per day. HYIPs are unregistered investments sold by unlicensed individuals using sophisticated-looking websites.  The con artists behind HYIPs are experts at using social media — including YouTube, Twitter and Facebook — to lure investors and create the illusion of social consensus that these investments are legitimate, but investors should know that HYIPs are just Internet-based scams.

 As FINRA's investor alert HYIPs—Hazardous to Your Investment Portfolio points out, many HYIPs have a worldwide reach: the recently exposed Pathway to Prosperity scheme allegedly defrauded over 40,000 investors in over 120 countries of $70 million. The Federal Bureau of Investigation has reported that the number of new HYIP investigations during fiscal year 2009 increased more than 100 percent over fiscal year 2008. In order to help combat this growing online fraud, FINRA will be using search engine advertising to direct online investors searching for HYIPS to today's Investor Alert.

HYIPs display multiple signs of fraud, including the promise of extraordinarily high returns. For example, the Genius Fund HYIP at one time promised 36 to 40 percent daily, with two-day yields of 106 percent. Many of the con artists behind HYIPs use existing investors to keep their Ponzi schemes growing by paying current investors "referral bonuses" of up to 25 percent for bringing in new recruits.

July 15, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Senate Passes Dodd-Frank

Passage of the financial reform package dragged on so long, it doesn't seem like there's much more to be said until the knotty implementation issues.  The Senate passed the legislation by a vote of 60-39, and the President is expected to sign next week.  Here's some initial thoughts from the press:

NYTimes, Congress Passes Bill to Overhaul Financial Regulation

WSJ, Senate Passes Sweeping Finance Overhaul

WPost, Senate passes financial overhaul bill 

July 15, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 14, 2010

Finally, Financial Reform?

Senator Charles Grassley says he's not going to vote for the financial reform legislation; the media predict that exactly 60 Senators will vote for it.  The vote is scheduled for tomorrow.

July 14, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Issues Concept Release on Proxy System Overhaul

The SEC today voted unanimously to issue a concept release seeking public comment on the U.S. proxy system and asking whether rule revisions should be considered to promote greater efficiency and transparency.  It has been nearly 30 years since the Commission last conducted a comprehensive review of the proxy voting infrastructure. The SEC’s concept release focuses on the accuracy and transparency of the voting process, the manner in which shareholders and corporations communicate, and the relationship between voting power and economic interest.  There will be a 90-day public comment period for the concept release after it is published in the Federal Register.

July 14, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 13, 2010

UC Law Seeks Applications for Faculty Positions in Corporate Law

The University of Cincinnati College of Law invites applications from entry-level and lateral candidates for as many as two tenure-track or tenured faculty positions in a broad number of areas, including agency/partnership/unincorporated business associations,  civil procedure, commercial law, corporations, criminal law, criminal procedure, employment and labor law, evidence, immigration, international law, property, torts, and wills and trusts.  We also seek applications for visiting faculty positions in those areas.  All applicants should have a distinguished academic background and either great promise or a record of excellence in both scholarship and teaching. The University of Cincinnati is committed to a diverse faculty, staff, and student body.  We encourage applications from women, people of color, persons with disabilities, and others whose background, experience, and viewpoints would contribute to the diversity of our faculty. Contact:  Professor Verna L. Williams, Chair, Faculty Appointments Committee; University of Cincinnati College of Law; P.O. Box 210040; Cincinnati, OH 45221-0040. 

July 13, 2010 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Senate Expected to Vote on Dodd-Frank this Thursday

The Senate is expected to vote on the Dodd-Frank Act on Thursday morning, with at least 55 Democrats, 3 Republicans and 2 Independents  voting for its passage.  WPost, Reid: Final vote on bank regulation on Thursday.

July 13, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

D.C. Circuit Vacates FIA Rule 151A As Arbitrary and Capricious

Last summer (July 21, 2009) the D.C. Circuit issued its opinion in American Equity Investment Life Insurance Co. v. SEC involving the agency's authority to issue Rule 151A, which provides that fixed index annuities are not "annuities" exempt under Securities Act 3(a)(8) and therefore are subject to the registration requirements.  The Court held that while the SEC's interpretation of "annuity contract" was reasonable under Chevron, it failed to properly consider the effect of the Rule upon efficiency, competition and capital formation as required by section 2(b) of the Act.  It remanded the Rule to the SEC for further consideration.  On July 12, 2010 the D.C. Circuit "reissued" its opinion and vacated the Rule because the SEC's section 2(b) analysis was arbitrary and capricious.(Download American EquityInvestment_2010)

July 13, 2010 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Monday, July 12, 2010

FHFA Issues Subpoenas to Banks About Mortgage Securities

The Federal Housing Finance Agency issued 64 subpoenas to collect information about mortgage-backed securities issued by Wall St. banks that Fannie Mae and Freddie Mac invested in during the housing boom, a first step toward possible litigation for fraud.  WSJ, U.S. Subpoenas Wall Street Banks on Mortgage Securities

July 12, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Approves FINRA Rule Change to Increase Names on Arbitrator Lists

The SEC approved a proposed rule change (SR-FINRA-2010-022), filed by the Financial Industry Regulatory Authority to amend the Codes of Arbitration Procedure to increase the number of arbitrators on lists generated by the Neutral List Selection System. Publication is expected in the Federal Register during the week of July 12.

July 12, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Sunday, July 11, 2010

Senate Vote on Dodd-Frank Expected This Week

The Senate is expected to vote on the financial reform legislation this week.  The Dodd-Frank Act will rquire the SEC to conduct a number of studies (some with short deadlines) and engage in rulemaking on a number of issues.  Expect other projects to be put on the back burner.  WSJ, SEC Enters Overdrive to Prepare for Overhaul.

July 11, 2010 in News Stories | Permalink | Comments (1) | TrackBack (0)