Securities Law Prof Blog

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

Tuesday, November 30, 2010

Madoff Trustee Seeks Clawbacks from Net Winners

The trustee for Bernard Madoff's bankruptcy estate filed about 100 lawsuits against Madoff investors who he asserts were "net winners," seeking to clawback their fictitious profits.  He faces a December 11 deadline for filing lawsuits.  WSJ, Madoff Trustee Goes After 'Net Winners'

November 30, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Schedules Second Field Meeting on Municipal Securities Markets

The SEC will hold its second field hearing to examine the municipal securities markets on Tuesday, Dec. 7, 2010 at 9:00 a.m. at its DC offices. The hearing will include panel discussions focusing on market stability and liquidity, investor impact, self-regulation, accounting and Build America Bonds

November 30, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Meets Dec. 3 to Consider Proposed Rules on Swaps Dealers

The SEC's next Open Meeting is December 3.  The subject matter of the Open Meeting will be:

The Commission will consider a recommendation to propose joint rules with the Commodity Futures Trading Commission relating to the definitions of "Swap Dealer," "Security-Based Swap Dealer," "Major Swap Participant," Major Security-Based Swap Participant," and "Eligible Contract Participant."


November 30, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Recent New York State and Federal Court Decisions Reject "Martin Act Preemption" Doctrine

A persistent and unresolved question in New York state investor protection law is whether common-law causes of action for breach of fiduciary duty and gross negligence are preempted by the state's Martin Act.  A majority of the federal courts in the Southern District of New York have, in recent years, held that, except for fraud, the Martin Act forecloses any private common-law causes of action.  Recently, however, Judge Victor Marrero, in a scholarly analysis of the history of the Martin Act and the preemption doctrine, held that the Martin Act does not preclude any private common law causes of action; Anwar v. Fairfield Greenwich Limited, No. 09 Civ. 01 18 (VM) (S.D.N.Y. July 29, 2010).

New York's Supreme Court, Appellate Division, First Dept. has now addressed the issue and also concluded that common-law causes of action for breach of fiduciary duty and gross negligence are not preempted by the Martin Act; Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc. (Appel. Div. First Dept. Nov. 23,2010). In reaching this conclusion, the First Department quoted Judge Marrero's "cogent and forceful" argument that to find Martin Act preemption would "leave [ ] the marketplace arguably less protected than it was before the Martin Act's passage, which  can hardly have been the goal of its drafters."  The court also relied on the New York Attorney General's amicus brief that argued that "the purpose or design of the Martin Act is in no way impaired by private common-law claims that exist independently of the statute, since statutory actions by the Attorney General and private common-law actions both further the same goal, namely, combating fraud and deception in securities transactions."

The First Department now joins the Second Department and the Fourth Department in rejecting the argument that the Martin Act preempts properly pleaded common-law causes of action.  While definitive word must come from the New York Court of Appeals, it is encouraging to see that both the federal and state courts in New York are finally rejecting this pernicious preemption doctrine that has denied many investors their right to bring claims for the harm caused by negligent conduct or breach of fiduciary duty of their investment advice providers.

(Hat tip:  Jill Gross)

November 30, 2010 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

SEC Charges Former Deloitte Tax Partner with Insider Trading Scheme

The SEC today charged Arnold McClellan, a former Deloitte Tax LLP partner, and his wife Annabel with repeatedly leaking confidential merger and acquisition information to family members overseas in a multi-million dollar insider trading scheme.  According to the SEC's complaint, Arnold McClellan had access to highly confidential information while serving as the head of one of Deloitte's regional mergers and acquisitions teams. He provided tax and other advice to Deloitte's clients that were considering corporate acquisitions.

The McClellans allegedly provided advance notice of at least seven confidential acquisitions planned by Deloitte's clients to Annabel's sister and brother-in-law in London. After receiving the illegal tips, the brother-in-law took financial positions in U.S. companies that were targets of acquisitions by Arnold McClellan's clients. His subsequent trades were closely timed with telephone calls between Annabel McClellan and her sister, and with in-person visits with the McClellans. Their insider trading reaped illegal profits of approximately $3 million in U.S. dollars, half of which was to be funneled back to Annabel McClellan.

The UK Financial Services Authority (FSA) has announced charges against the two relatives — James and Miranda Sanders of London. The FSA also charged colleagues of James Sanders whom he tipped with the nonpublic information in the course of his work at his London-based derivatives firm. Sanders's tippees and clients made approximately $20 million in U.S. dollars by trading on the inside information.

The SEC alleges that between 2006 and 2008, James Sanders used the non-public information obtained from the McClellans to purchase derivative financial instruments known as "spread bets" that are pegged to the price of the underlying U.S. stock. The trading started modestly, with James Sanders buying the equivalent of 1,000 shares of stock in a company that Arnold McClellan's client was attempting to acquire. Subsequent deals netted significant trading profits, and eventually James Sanders was taking large positions and passing along information about Arnold McClellan's deals to colleagues and clients at his trading firm as well as to his father.

The SEC's complaint charges Arnold and Annabel McClellan with violating the antifraud provisions of the federal securities laws. The complaint seeks permanent injunctive relief, disgorgement of illicit profits with prejudgment interest, and financial penalties.


November 30, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Madoff Investors Fail to Show Uncontroverted Evidence of Peter Madoff's Involvement in Bernie's Fraud

An interesting case in the federal district court in New Jersey involves the attempt by some of Bernie Madoff's investors to recover damages from Bernie's brother Peter Madoff on a control person theory.  Peter Madoff worked at Bernard L. Madoff Investment Securities (BMIS) for almost forty years, serving as its senior managing director, director of trading, chief compliance officer and general counsel.  According to the Uniform Application for Investment Adviser Registration filed by BMIS with the SEC, Peter Madoff was listed as a control person.  The court earlier denied defendant's motion to dismiss the complaint in The Lautenberg Foundation v. Madoff (D.N.J. Sept. 9, 2009) (Civ. Act. 09-816(SRC)).

In a recent opinion (Nov. 19, 2010), the court denied plaintiffs' motion for a summary judgment on the count alleging control person liability under section 20(a) of the Securities Exchange Act.  Applying the Third Circuit precedent, Rochez Brothers v. Rhoades, 527 F.2d 880 (3d Cir. 1975), the court set forth the elements of a 20(a) claim as follows: (1) the defendant controlled another person or entity; (2) the controlled person or entity committed a primary violation of the securities laws; and (3) the defendant was a culpable participant in the fraud.  For purposes of the summary judgment motion, the court assumed that the first and second elements were met and focused on the element of culpable conduct. 

Under Third Circuit precedent, inaction that intentionally furthers the fraud committed by the controlled person or entity establishes culpable participation, but mere inaction is insufficient.  The court notes that plaintiff's argument was essentially that Peter Madoff, because of his position in the firm, must be at fault for not implementing appropriate safeguards.  However, the court stated that the record contained "a dearth of evidence as to what controls and procedures are considered standard or even minimally requisite in the industry."  Moreover, "we know very little of what Bernard Madoff did and how he did it."  While Peter's long association in his brother's business, his corporate positions, and the scope of the fraud  cast "substantial suspicion" about Peter's involvement, that is insufficient to impose control person liability.  Accordingly, because there is insufficient specific evidence of Peter's conduct and responsibilities, plaintiffs' motion for summary judgment fails.

November 30, 2010 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

SEC's Inspector General Find No Improper Conduct in SEC's BofA Investigation

The SEC's Inspector General has posted its Semi-Annual Report to Congress Apr. 1  -- Sept. 30, 2010 on its website.  Among the items discussed is its Investigation of the Circumstances Surrounding the SEC’s Proposed Settlements with Bank of America, Including a Review of the Court’s Rejection of the SEC’s First Proposed Settlement and an Analysis of the Impact of Bank of America’s Status as a TARP Recipient (Report No. OIG-522).  During its investigation, OIG analyzed the SEC enforcement actions against BofA, including the first proposed settlement and its rejection by the Court; the second proposed settlement and its acceptance by the Court; and what role, if any, BofA's status as a TARP recipient played in the SEC's investigation, charging decisions and settlement discussions.

OIG reports its findings, including:

  1. Despite the Court's rejection of the SEC's first proposed settlement with BofA, the evidence did not show that SEC staff failed to diligently and zealously investigate potential securities law violations.
  2. OIG did not find evidence of improper conflicts of interest that formed the basis of the initial Congressional inquiry, but it did find that BofA's status as a TARP recipient had an impact on the favorable settlement that the staff first recommended to the Commission. 
  3. The OIG found that the enforcement staff felt pressure to bring a case against BofA promptly because of the internal interest in the case and its high-profile nature.
  4. Greater coordination and collaboration among law enforcement agencies would have more efficiently utilized government resources and sped up the investigation.

In a fascinating discussion, the Report recounts at length the SEC's decision not to name individual defendants.  It notes the differences in legal theory that were considered by the enforcement attorneys negotiating the first settlement and those who negotiated the second settlement (the first team was unaware that individuals could directly violate Rule 14a-9 and thought that Rule 10b-5, and its requirement of scienter, was the only viable theory; the second team did not suffer the same confusion), as well as difficulties created by ongoing investigations by the New York AG and the TARP Inspector General.  According to the SEC attorneys, the NYAG refused to share information and provide witness transcripts requested by the SEC; because the Court had limited the number of depositions the SEC could take, the SEC was not always able to remedy the refusal to produce transcripts and had to rely on attorney proffers.


November 30, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Harvard Business Law Review Launches Online Edition

The Harvard Business Law Review, which will publish its inaugural print edition in the spring, has just launched its online supplement, HBLR Online.  Updated frequently, it will feature brief essays by leading practitioners, academics, and policymakers on a variety of topics.  My comment, FINRA Proposed Rule Change Would Give Customers Option of All-Public Arbitration Panels, appears here.

November 30, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Monday, November 29, 2010

Labor Dept. Proposes Rule to Improve Disclosure on Target Date Retirement Funds

The U.S. Department of Labor's Employee Benefits Security Administration today announced a proposed rule on target date retirement funds and other similar investments offered in 401(k)-type pension plans. The proposed rule would amend the "qualified default investment alternative regulation" and the "participant-level disclosure regulation" to enhance and provide more specificity regarding the information that must be disclosed to participants and beneficiaries concerning investments in target date funds.

The proposed amendments require new disclosures about the design and operation of target date or similar investments, including an explanation of:

The investment's asset allocation.
How that allocation will change over time, with a graphic illustration.
The significance of the investment's "target" date.
The proposed amendments also require a statement concerning the risk that a participant investing in a TDF may lose money in that investment, even close to retirement.

The comment period on the proposed regulation will run until Jan. 14, 2011.

The SEC also has pending a proposed rule relating to the marketing of target date funds.

November 29, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Sunday, November 28, 2010

Black on Behavioral Economics and Securities Arbitration

Can Behavioral Economics Inform Our Understanding of Securities Arbitration?, by Barbara Black, University of Cincinnati - College of Law, was recently posted on SSRN.  Here is the abtract:

The classical economic approach assumes that parties take rational account of the effects of ADR on the likely disposition of their disputes and adopt predispute arbitration agreements (PDAAs) when they mutually benefit the parties. Accordingly, there should be a presumption in favor of enforcing PDAAs so long as the parties have entered into them knowingly and voluntarily, but there is generally no reason for the state to favor PDAAs. In contrast, critics of mandatory consumer arbitration believe that, as a practical reality, consumers cannot bargain over PDAAs and have little choice but to accept the deal offered by the business. In addition, relying on the behavioral economics literature, they assert that consumers typically are not as rational as classic economic theory supposes.

The opposing positions in this debate over consumer arbitration have been well fleshed out in the academic literature. This paper will focus specifically on securities arbitration in the FINRA forum, where there are unique differences in the FINRA process that add complexity to this issue. I pose three questions regarding the staying power of PDAAs and explore whether classic or behavioral economic theory can help answer them. I then explore what would happen if the SEC or Congress prohibited PDAAs in customers' agreements. I conclude that if Congress or the SEC prohibits PDAAs in securities arbitration, the effect on the FINRA arbitration forum may not be beneficial to investors withsmall claims.

November 28, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Wang & Steinberg on Insider Trading

Introduction: Insider Trading, by William K. S. Wang, University of California, Hastings College of the Law, and Marc I. Steinberg, Southern Methodist University (SMU) - Dedman School of Law, from INSIDER TRADING, Third Edition, Oxford University Press, 2010, was recently posted on SSRN.  Here is the abstract:

This paper is the introductory chapter to Insider Trading (Oxford University Press 3d ed. 2010). This treatise analyzes the application of various laws to stock market insider trading and tipping. Among the federal laws are Exchange Act section 10(b), SEC Rule 10b-5, mail/wire fraud, SEC Rule 14e-3, Exchange Act section 16, and Securities Act section 17(a). The state law discussed is both state common law and a state law claim by the issuer.

Another chapter addresses government enforcement of the insider trading/tipping prohibitions. A chapter on compliance programs deals with how firms can try to prevent illegal insider trading and tipping. Two chapters compare the harmful and allegedly beneficial effects of stock market insider trading and discuss the harm to individual investors from each specific insider trade.

November 28, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Bartlett & Poulsen on Buyout Returns

The Determinants of Buyout Returns: Does Transaction Strategy Matter?, by Robert P. Bartlett III, University of California, Berkeley - School of Law; University of California, Berkeley - Berkeley Center for Law, Business and the Economy, and Annette B. Poulsen, University of Georgia - Department of Banking and Finance, was recently posted on SSRN.  Here is the abstract:

This paper reexamines one of the most studied questions in the scholarship of leveraged buyouts (LBOs): how do LBO sponsors create value for their investors in take-private acquisitions? In so doing, the paper makes two significant contributions to our understanding of LBOs. Most importantly, the paper provides the first-ever analysis of the equity returns to LBO sponsors. Due to data limitations, prior studies have traditionally relied on total returns to an LBO (that is, returns to both debt and equity investors) to analyze the source of LBO value creation. Drawing on a unique database of LBO transactions, this paper examines instead the actual internal rates of return (IRRs) realized by LBO sponsors on a deal-by-deal basis, thereby permitting a direct analysis of how LBO sponsors create value for their investors in leveraged buyouts. Second, the paper demonstrates how the traditional approach to examining the determinants of LBO returns overlooks a number of important LBO transaction strategies that are used to enhance a sponsor’s equity returns. In particular, the paper demonstrates that a significant component of LBO sponsor returns stems not from operating performance changes but from timing tactics that LBO sponsors use to accelerate the liquidation of their investments and thereby increase their IRRs. Among other things, this latter finding helps explain the gradual bias of private equity firms away from IPOs as an exit strategy for their portfolio investments and towards cash acquisitions.

November 28, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Friday, November 26, 2010

GM IPO Totals $23.1 Billion

General Motors Company announced today that the underwriters have exercised in full their over-allotment options to purchase an additional 71.7 million shares of common stock from the selling stockholders, for a total of $2.37 billion, and an additional 13 million shares of mandatory convertible junior preferred stock from the company, for a total of $650 million, in connection with the previously announced public offering of common and mandatory convertible junior preferred stock of General Motors.  The exercise of the over-allotment options brings the total offering size to $23.1 billion.


November 26, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Fordham Seeks Teams and Practitioners for Securities Law Moot Court Competition

Fordham Law School is hosting the 2011 Irving R. Kaufman Memorial Securities Law Moot Court Competition, which will take place in NYC March 25-27, 2011.  The Competition offers teams the opportunity to test appellate advocacy skills before leading jurists, securities regulators, academics, and practitioners.  Judge Brett M. Kavanaugh (D.C. Cir.), Judge Paul J. Kelly, Jr. (10th Cir.), Judge Boyce F. Martin, Jr. (6th Cir.), S.E.C. Commissioner Troy A. Paredes, and Judge Richard A. Posner (7th Cir.) have agreed to serve as the final round panel.
Fordham is now seeking a few teams to round out the competition (registration deadline is Dec. 6), and a bevy of practitioners to serve as preliminary round judges and grade competitor briefs.  They need help from anyone interested, with all levels of experience, whether in litigation, transactions, securities, finance, in-house, or public service, and CLE credit is available.  Additional information and online sign-up is at   

November 26, 2010 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Wednesday, November 24, 2010

Taxpayers Get $11.7 Billion from GM IPO

The U.S. Department of the Treasury announced that with the delivery of $11.7 billion in proceeds from the initial public offering of General Motors (GM), the total amount of Troubled Asset Relief Program (TARP) funds returned to taxpayers now exceeds $250 billion.

November 24, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Announces Second Hearing on Muni Securities Market

The SEC announced the agenda and speakers for its second field hearing to examine the municipal securities markets at its Headquarters in Washington, D.C., on December 7. Topics will include market stability and liquidity, investor impact, and self-regulation.

This is the second in a series of hearings, which SEC Chairman Mary Schapiro first announced in May, taking place across the country and examining a wide range of issues that affect investors in the municipal securities market. Following the hearings, the Commission will release a staff report addressing information learned, including their recommendations for further action the Commission should pursue, which may include rulemaking, recommendation for changes in industry “best practices,” or legislation.

November 24, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Feds Arrest Networking Executive in Insider-Trading Probe

The Wall St. Journal reports that federal authorities have made their first arrest in the three-year investigation into insider trading rings.  Don Ching Trang Chu, identified as an Asia expert on the website of Primary Global Research LLC, was arrested today before he was scheduled to leave the country.  According to prosecutors, he arranged for firm's consultants to provide inside information about earnings releases for publicly traded companies.  WSJ, Networking Firm Executive Charged in Insider Trading Case

U.S. Attorney, SDNY Press Release

November 24, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 23, 2010

Former Comverse CEO Settles SEC Backdating Charges

The SEC today settled civil charges against Jacob “Kobi” Alexander, the co-founder and former Chairman and Chief Executive Officer of Comverse Technology, Inc., arising out of his role in the company’s long-running stock options backdating scheme.  Shortly before the SEC filed its complaint in 2006, Alexander fled to Namibia, where he currently resides and is fighting extradition to the United States to face criminal charges.

Under the terms of the settlement, Alexander will pay $47.6 million in disgorgement and prejudgment interest and a $6 million penalty, which is one of the largest penalties ever imposed in a stock options backdating case.  Alexander will also be permanently enjoined from violating the antifraud and related provisions of the federal securities laws and will be permanently barred from serving as an officer or director of a public company.

Separately, the United States Attorney’s Office for the Eastern District of New York today filed a stipulation of settlement of their civil forfeiture action against certain of Mr. Alexander’s assets   This settlement is subject’s the court’s approval.

November 23, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, November 22, 2010

FBI Raids Three Hedge Funds in Insider-Trading Probe

For the past few days, the Wall St. Journal has been reporting on a blockbuster federal investigation of insider-trading rings involving hedge funds and independent analysts.  Today it reports that the FBI raided the offices of three hedge funds:  Diamondback Capital Management LLC and Level Global Investors LP (run by former managers of Steven Cohen's SAC Capital Advisors) and Loch Capital Management LLC, based in Boston.  It reports that indictments may be announced by year-end.  WSJ,  FBI Raids Three Hedge Funds Amid Insider-Trading Case.

November 22, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Morris Pleads Guilty in New York's "Pay to Play" Kickback Scheme

New York AG announced a felony guilty plea by Henry “Hank” Morris, the chief political adviser to former Comptroller of the State of New York Alan Hevesi, for his involvement in a pay-to-play kickback scheme at the Office of the New York State Comptroller.  Morris used the pension fund for a pay-to-play scheme in which he personally received approximately $19 million in fees from billions of dollars in pension deals and steered investments to friends and political associates.

Morris pleaded guilty to a felony violation of the Martin Act, a class E felony, and faces up to four years in prison. The sentence will be determined by the judge on February 1, 2011. According to today’s plea agreement, Morris will forfeit $19 million that will go to the state pension fund. He will also be permanently banned from the securities industry in New York State and will be prohibited from soliciting or receiving investments from the State of New York or any governmental entity within the State. In addition, Morris will be prohibited from holding any public position or entering into any contractual relationship with the State of New York or any governmental entity within the State.

Today’s announcement marks the eighth guilty plea in Cuomo’s three-year investigation into corruption involving the Office of the New York State Comptroller and the state pension fund. The charges allege a complex criminal scheme involving numerous individuals operating at the highest political and governmental levels under former Comptroller Alan Hevesi. Through this scheme, Hevesi, Morris, and certain of their political allies and friends reaped tens of millions of dollars in kickbacks, bribes, and sham consulting and finder fees connected to pension fund investments.

November 22, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)