Securities Law Prof Blog

Arner on Global Financial Regulation

Adaptation and Resilience in Global Financial Regulation, by Douglas W. Arner, Asian Institute of International Financial Law; University of Hong Kong - Faculty of Law, was recently posted on SSRN.  Here is the abstract:

The global credit crisis of 2008 has demonstrated beyond any doubt that pre-existing international arrangements were insufficient to preserve stability in the global financial system, resulting in the most serious global economic and financial crisis since the Great Depression. This article examines the agenda being pursued through the Group of 20 (G-20), Financial Stability Board (FSB) and related organizations to reform international financial regulation in the wake of the global financial crisis, focusing on whether the international regulatory agenda in fact addresses the fundamental sources of systemic risk underlying the global crisis. In addressing this question, the article begins by suggesting the basic elements of a financial regulatory system to effectively address systemic risk, arguing that in each case, the global financial crisis has highlighted specific failures of the pre-crisis regulatory approach, then provides an overview and analysis of international responses to the global financial crisis, focusing on the G-20 and FSB. The article concludes, arguing that, while much has been achieved to date, the post-crisis international regulatory reforms that have been agreed would not have prevented the global financial crisis nor are sufficient to lay the foundations for future global financial stability.

Rajaratnam Jury Will Begin Deliberations Next Week

Next week the jury will start deliberations in the Raj Rajaratnam insider trading case, and we'll all await its outcome.  Wednesday and Thursday of this week were devoted to closing arguments, although the prosecutor's rebuttal carries over until Monday.  Reading the accounts of the closing statements, I confess I felt sorry for the jurors; after six weeks of testimony, they had to listen to both sides go back and forth on the now very familiar themes.  The government's closing argument (5 hours!) emphasized several of the more than 40 taped phone conversations introduced into evidence and took the jury through a number of examples where it alleges RR received tips from insiders.  The defense repeated its theme -- RR used publicly available information and good analysis to make his trading decisions.  It also sought to discredit the testimony of the government witnesses and called them liars.

Now we'll sit back and wait.

SEC and CFTC to Hold Public Roundtable on Swaps

The SEC and the CFTC will hold a public roundtable to discuss the schedule for implementing final rules for swaps and security-based swaps under the Dodd-Frank Act on May 2-3, 2011 at the CFTC’s headquarters.  Both meetings will be open to the public.

The roundtable is expected to include panel discussions of (1) compliance dates for new rules for existing trading platforms and clearinghouses and the registration and compliance with rules for new platforms, such as swap and security-based swap execution facilities, and data repositories for swaps and security-based swaps; (2) compliance dates for new requirements for dealers and major participants in swaps and security-based swaps; (3) implementation of clearing mandates; (4) compliance dates for financial entities such as hedge funds, asset managers, insurance companies and pension funds subject to a clearing mandate and other requirements; and (5) considerations with regard to non-financial end users.

 

SEC Will Consider Swap Rules on April 27

The SEC's next Open Meeting is scheduled for April 27, 2011.  The subject matter will be:

• The Commission will consider whether to propose joint rules with the Commodity Futures Trading Commission relating to the definitions of “Swap,” “Security-Based Swap,” “Security-Based Swap Agreement,” the regulation of mixed swaps, and books and records requirements regarding security-based swap agreements.
• 
  The Commission will consider whether to propose regulations with respect to removing references to credit ratings in various rules under the Securities Exchange Act of 1934.

NYSE Sticks with Deutsche Boerse

NYSE Euronext announced today that:

its Board of Directors, consistent with its fiduciary duties and advised by its financial and legal advisors, has unanimously reaffirmed its combination agreement with Deutsche Boerse AG (XETRA:DB1) and reaffirmed its rejection of the proposal from Nasdaq OMX Group, Inc. (Nasdaq: NDAQ) and IntercontinentalExchange, Inc. (NYSE: ICE). 

Speaking on behalf of the Board, NYSE Euronext Chairman Jan-Michiel Hessels said: “Our Board has reviewed the information recently provided by Nasdaq/ICE in connection with their proposal and concluded that this proposal is substantially the same as what was previously rejected.    Consequently, our view has not changed. This proposal does not provide compelling value, has unacceptable execution risk and is therefore not in the best interests of NYSE Euronext shareholders.”

Mr. Hessels continued: “The Board is intensely focused on shareholder value, and we remain confident that the combination with Deutsche Boerse creates substantially more value for our shareholders.  The combined company will be a global leader across all major asset classes, with the financial strength, balance sheet flexibility and synergy potential to drive revenue and earnings growth and new product innovation.  The scale and strength of the business, along with its world-class management team, positions the company to shape and capitalize on the industry’s evolution and global development.”

Ameriprise, Securities America Seek Court Approval of Settlement

Ameriprise Financial and Securities America have reached an $80 million settlement with investors in class actions involving two failed investments, Provident Royalties and Medical Capital.  The settlement requires judicial approval, and the federal district court judge in Dallas rejected a previous proposed settlement.  The firms also agreed to pay $70 million to investors who filed arbitration claims.  InvNews, Ameriprise, investors seek court's OK on deal

Final Call for Papers: Midwest Corporate Scholars Conference June 15

We have had an enthusiastic reponse to the call for papers for the second annual Midwest Corporate Law Scholars Conference (MCLSC) meeting, which will be held on Wednesday, June 15th, at The Ohio State University Michael E. Moritz College of Law in Columbus, Ohio.  The meeting is open to all corporate law scholars, and, to date, over thirty have indicated they plan to attend.  It is not too late to participate; we have extended the deadline for submissions to May 15.  We welcome all on-topic paper submissions and will attempt to provide the opportunity for all submitted papers to be presented.  Junior scholars are particularly encouraged to submit papers, and we will attempt to assign a commentator for each junior paper presented.

To submit a presentation, email Profess Eric C. Chaffee at [email protected] with an abstract or paper by May 15, 2011. Please title the email “MCLSC Submission – {Name}”. If you would like to attend, but not present a paper email Professor Chaffee with an email entitled “MCLSC Attendance”.  Please specify in your email whether you are willing to serve as a commentator.

A conference schedule will be circulated in the latter part of May.  Presentations will start in the morning and end late afternoon. Ohio State is graciously providing breakfast and lunch at the conference.  In addition, we will arrange an informal gathering at a local watering hole the evening before the conference for those who are interested.

We hope to see you soon!

Conference Organizers

Barbara Black
Eric C. Chaffee
Steven M. Davidoff

SEC Schedules Roundtable on IFRS for July 7

The SEC staff announced that it will sponsor a roundtable on July 7 to discuss benefits or challenges in potentially incorporating International Financial Reporting Standards (IFRS) into the financial reporting system for U.S. issuers.  The event will feature three panels representing investors, smaller public companies, and regulators. The panel discussions will focus on topics such as investor understanding of IFRS and the impact on smaller public companies and on the regulatory environment of incorporating IFRS.  A final agenda including a list of participants and moderators will be published closer to the event date. The roundtable will be open to the public with seating on a first-come, first-served basis, and will be available via webcast on the SEC website.

The SEC staff welcomes feedback on the topics to address at the roundtable and suggestions for potential roundtable participants.

Madoff Victims Can't Sue Government for SEC's Incompetence

In Molchatsky v. U.S. (S.D.N.Y. Apr. 19, 2011), the federal district court held that two Madoff victims could not sue the U.S. government under the Federal Tort Claims Act for the SEC's "gross negligence" in failing to discover the fraud.  The opinion recounts at some length the allegations of the agency's ineptitude, largely taken from the SEC Office of Inspector General's Report, but nevertheless ultimately agrees with the government that the agency's conduct is protected under the Discretionary Function Exception (DFE) of the Federal Tort Claims Act.  Because the SEC's decision regarding whom to investigate and how to conduct an investigation are discretionary,  any negligence or even abuse of that discretion is shielded from suit by sovereign immunity.  The court explains that

[T]he DFE bars suit only if two conditions are met: (1) the acts alleged to be negligent must be discretionary, in that they involve an “element of judgment or choice” and are not compelled by statute or regulation and (2) the judgment or choice in question must be grounded in ‘considerations of public policy’ or susceptible to policy analysis,” ....

Plaintiff, however, cannot carry her burden of burden to establish subject matter jurisdiction:

Scandalous and outrageous as Plaintiffs' allegations (and findings of the OIG Report on which they are based) are, Plaintiffs fail to identify any specific, mandatory duty that the SEC violated in its numerous instances of sloppy, uninformed, irresponsible behavior. ... That the conduct in question defied common sense and reeked of incompetency does not indicate that any formal, specific, mandatory policy was “likely” violated. Plaintiffs have not identified any mandatory directive that requires, for instance, that a certain type of investigative team investigate a certain type of complaint, that investigative teams be staffed with employees with a certain amount of experience or level of expertise, that investigations begin within a certain window of time after a complaint is received, or that teams or offices share information or coordinate investigations in a particular way.

With respect to the second, public policy prong, the court observed that:

The DFE protects the agency's ability to exercise properly the full scope of its discretion by insulating from civil litigation even those discretionary decisions that were, improperly, actually made for inappropriate reasons. Indeed, the DFE expressly provides that it applies to claims “based upon the exercise or performance or the failure to exercise or perform a discretionary function or duty on the part of a federal agency or an employee of the Government whether or not the discretion involved be abused.” 28 U.S.C.A. § 2680(a) (West 2006) (emphasis supplied).

 

 

Debate on Pace of Dodd-Frank Reform

Treasury Deputy Secretary Neal S. Wolin addressed criticisms of Dodd-Frank reform efforts today in prepared remarks made at the Pew Charitable Trusts:

Last summer, the President signed into law a comprehensive set of reforms to the financial system.
 
But as the important work of implementation proceeds, critics of the Dodd-Frank Act have engaged in a broad set of attacks against the law and its implementation.
            * * *
Some complain about the pace of reform.
 
Some say that there’s a lack of coordination by the regulators. 
 
Some argue that transparency in the derivatives markets will harm liquidity, or that margin requirements will unnecessarily tie up capital.  
 
Some complain that our reforms will unfairly disadvantage U.S. firms as they compete globally. 
 
Some say the new consumer agency will stifle consumer choice and innovation, that it will interfere with existing regulators, or that it’s not accountable to anyone.
 
And some even say we can’t afford to pay for reform. 
 
I want to address these criticisms one by one.

SIFMA, in turn, issued a response that stated, in part:

Implementation of the Dodd-Frank Act is too important not to be done right for the sake of meeting arbitrary deadlines.  SIFMA shares the same goal as Secretary Wolin: full implementation of the Dodd-Frank Act, so to bring greater clarity, oversight, and confidence to our markets and financial institutions that play a key role in America’s economic growth and job creation.

Financial Services Committee Chairman Spencer Bachus issued the following comment in response to Deputy Treasury Secretary Neal Wolin’s remarks: 

All of us know that on the highway ‘speed kills.’  Speed can also kill jobs when Washington rushes sweeping regulations into place without giving the public adequate time to comment. The comment period for Dodd-Frank rules has sometimes been barely 30 days.  At the current breakneck pace, it is difficult for individual firms – especially small businesses – and the public at large to meaningfully participate and offer their insights and observations.  The implementation of the massive Dodd-Frank Act may be daunting for regulators, it may be intimidating for them, but that’s no excuse to limit the public’s participation and abandon sound rulemaking practices.”

SEC Requests Comment on Investor Education Efforts

The SEC published a request for public comment on the effectiveness of existing investor education efforts as part of a review mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Section 917 of the Dodd-Frank Act directs the SEC to conduct a study of retail investors’ financial literacy and submit its findings to Congress by July 21, 2012. Among other things, Section 917 states that the study must identify “the most effective existing private and public efforts to educate investors.”

The Commission is seeking public comment to better understand the details and effectiveness of current programs, and help ensure that the study includes all relevant programs. The public comment period will remain open for 60 days following publication of the request in the Federal Register.

 

FINRA Suspends Pinnacle Partners for Violating Temporary Cease and Desist Order

FINRA suspended indefinitely Pinnacle Partners Financial Corporation, of San Antonio, TX, and its President, Brian K. Alfaro, for failure to comply with a FINRA Temporary Cease and Desist Order prohibiting their fraudulent misrepresentations. The suspension resulted from FINRA's Notice of Suspension that alleged that Pinnacle and Alfaro had continued to make fraudulent oral and written misrepresentations and omissions in connection with their offer and sale of certain oil and gas joint interests, and had otherwise failed to comply with the terms of the Temporary Order FINRA issued on January 21, 2011. 

FINRA filed a complaint against Pinnacle and Alfaro on Dec. 3, 2010, alleging that Alfaro and Pinnacle operated a "boiler room" in which numerous brokers placed thousands of cold calls on a weekly basis to solicit investments in oil and gas drilling joint ventures Alfaro owned or controlled. The complaint further asserts that Pinnacle raised more than $10 million from over 100 investors, and that Alfaro diverted some of the customer funds for unrelated business and personal expenses. The hearing on these allegations will be Sept.12, 2011, at which time the Hearing Panel will consider the merits of these claims and whether to order additional penalties.

 

NASDAQ/ICE Prepared to Pay $350 Million Reverse Termination Fee

NASDAQ and ICE increased the pressure on NYSE Euronext by announcing additional steps they have taken to "demonstrat[e] their commitment to pursuing their superior proposal with NYSE Euronext and providing greater certainty to the NYSE Euronext Board:"

• A proposed merger agreement has been submitted to the NYSE Euronext Board that is consistent with the terms of the current business combination agreement with Deutsche Boerse;
• NASDAQ OMX and ICE are prepared to pay a reverse termination fee of $350 million (USD), in the event that they are unable to obtain necessary antitrust and competition approvals;
• NASDAQ OMX and ICE have received fully committed financing of $3.8 billion from a group of leading institutions; and
• Actions necessary to start the U.S. antitrust review processes have been taken and those reviews are expected to commence shortly.

The release also stated that "[t]he NASDAQ OMX/ICE proposal remains superior by a significant and inescapable margin. Based on April 18th closing prices, the NASDAQ OMX/ICE proposal outlined in the proposed merger agreement is valued at $42.67 per NYX share. This is 21%, or $2 billion, above the $35.29 value per NYX share under the Deutsche Boerse transaction."

SEC Announces Settlement of Insider Trading Charges Involving DRS Technologies

The SEC announced a proposed settlement with two Italian citizens, Oscar Ronzoni and Paolo Busardò, their investment vehicle, Tatus Corp., and another related entity, A-Round Investment SA, for alleged insider trading in the securities of DRS Technologies, Inc.  Ronzoni, Busardo, and their related entities have agreed to settle the Commission’s charges by, among other things, paying approximately $1.46 million in disgorgement and penalties.  In its October 2010 Amended Complaint, the Commission alleges that Ronzoni, Busardò, Tatus, and A-Round purchased DRS call options that were out-of-the-money and set to expire in the near term while in possession of material, nonpublic information concerning the acquisition of DRS. If approved, the settlement would bring this litigation to a close and bring the total disgorgement and penalties collected in this civil action to approximately $4.4 million.

 

SEC Charges Financial Services Firm with Ponzi Scheme

The SEC filed a civil action against AIC, Inc., a financial services holding company for three broker-dealers and an investment adviser based in Richmond, Virginia, and its President and CEO, Nicholas D. Skaltsounis. The Complaint alleges that Skaltsounis devised and orchestrated an offering fraud and Ponzi scheme by offering and selling more than $7.7 million in AIC promissory notes and stock. Also named in the Complaint are AIC’s subsidiary, Community Bankers Securities, LLC (“CB Securities”), a broker-dealer, along with associated stockbrokers John B. Guyette, of Greeley, Colorado, and John R. Graves, of Pensacola, Florida, who was also an investment adviser.

The Complaint alleges that, from at least January 2006 through November 2009, Skaltsounis fraudulently offered and sold AIC promissory notes and stock to at least 74 investors in at least 14 states, many of whom were elderly, unsophisticated brokerage customers of CB Securities. Skaltsounis, Guyette, and Graves misrepresented and omitted material information to investors relating to, among other things, the safety and risk associated with the investments, the rates of return on the investments, and how AIC would use the proceeds of the investments.  The Complaint also alleges that AIC promised to pay interest and dividends ranging from 9 to 12.5 percent on the promissory notes and stock knowing that it did not have the ability to pay those returns.

The Commission seeks permanent injunctions and civil penalties against Skaltsounis, AIC, CB Securities, Guyette, and Graves and also seeks disgorgement plus prejudgment interest against Skaltsounis, AIC, CB Securities, and Guyette.

ProPublica Reporters Receive Pulitzer for Reporting on Wall Street

Congratulations to ProPublica reporters Jesse Eisinger and Jake Bernstein, who have been awarded a Pulitzer Prize for National Reporting for their stories on how some Wall Street bankers, seeking to enrich themselves at the expense of their clients and sometimes even their own firms, at first delayed but then worsened the financial crisis.

Defense Rests in Rajaratnam Insider Trading Case

The defense rested this afternoon after the prosecution concluded its cross-examination of expert witness Gregg Jarrell, which accounts describe as "heated" as the sides went back-and-forth over what information was publicly available at the time Rajaratnam received information about the companies.  Closing arguments are expected later this week. 

Taub on the Levin-Coburn Report

The Senate Investigations Subcommittee released last week the Levin-Coburn Report on the financial crisis, which Senator Levin's press release describes thus:

Concluding a two-year bipartisan investigation, Senator Carl Levin, D-Mich., and Senator Tom Coburn M.D., R-Okla., Chairman and Ranking Republican on the Senate Permanent Subcommittee on Investigations, today released a 635-page final report (PDF, 6MB) on their inquiry into key causes of the financial crisis.  The report catalogs conflicts of interest, heedless risk-taking and failures of federal oversight that helped push the country into the deepest recession since the Great Depression.

Reading the Report was on my weekend 'to-do" list, but it didn't get done.  Fortunately, I don't feel the need to read it now because Jennifer Taub (soon to join Vermont Law School) has an insightful critique at the Pareto Commons, bipartisan senate panel report slams banks and bureaucrats: “please sir, i want some more”

I commend it to you.

 

Auditors can be Liable for Broadcom's Backdating Fraud, According to 9th Circuit

Courts have been reluctant to find that auditing firms can be primarily liable for misstatements contained in audited finanical statements.  Recently, however, the 9th Circuit upheld plaintiffs' allegations of Ernst & Young's involvement in Broadcom's stock options backdating scheme from 2000-2006, in New Mexico Investment Council v. Ernst & Young LLP (9th Cir. Apr. 14, 2011).  Reversing the district court, the Appeals Court held that plaintiffs' allegations of scienter were sufficient to state a claim.  Plaintiffs' allegations centered around three events: (1) a large grant of options on May 26, 2000 for which EY was given no documentation; (2) options granted in 2001 during a period when Broadcom's compensation committee did not have a quorum due to the death of one of its members; and (3) EY's direct involvement in 2003 with corrective reforms to Broadcom's prior options practices.

The Appeals court rejected the defendant's argument that the allegations were no more than negligence and emphasized the duties that auditors owe to the corporation's shareholders and creditors and ultimately the investing public.

 

Ferrell on Broker-Dealer Mark-Ups

The Law and Finance of Broker-Dealer Mark-Ups, by Allen Ferrell, Harvard Law School; European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

The prices charged retail customers by broker-dealers for less-liquid, lower-priced securities have been of long-standing regulatory concern. In particular, the National Association of Securities Dealers (succeeded now by the Financial Industry Regulatory Authority) has long had regulations prohibiting broker-dealers from charging excessive “mark-ups” and “mark-downs.” This paper, using a unique dataset generously provided by the National Association of Securities Dealers tracking some 161,635 equity transactions involving fourteen broker-dealers and retail customers in largely less liquid, lower-priced securities over the course of the 2003-2005 period, provides the first comprehensive analysis of the determinants of the mark-ups and mark-downs charged by broker-dealers. In particular, the effect of broker-dealer solicitation, broker-dealer participation in the trade as a principal, stock price volatility, stock price level, trade volume and the bid-ask spread are examined on the size of mark-ups and mark-downs charged. This analysis is placed in the context of the law on mark-ups and mark-downs.