Securities Law Prof Blog

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

Wednesday, August 31, 2011

SEC Halts Fraud by Manager of Startup Quantitative Hedge Fund

The SEC announced an asset freeze against a Chicago-area money manager, Belal K. Faruki, and his advisory firm Neural Markets LLC .  The SEC charged them with lying to prospective investors in their startup quantitative hedge fund. A federal court today entered a preliminary injunction order in the case, which was unsealed earlier this week.

The SEC alleges that defendants solicited sophisticated individuals to invest in the "Evolution Quantitative 1X Fund," a hedge fund they managed that supposedly used a proprietary algorithm to carry out an arbitrage strategy involving trading in liquid exchange-traded funds (ETFs). Faruki and Neural Markets falsely represented the existence of investor capital and that trading was generating profits when, in fact, losses were being incurred. They defrauded at least one investor out of $1 million before confessing the losses, and were soliciting other wealthy investors before the SEC obtained a court order to halt the scheme.

The SEC filed its complaint under seal on Aug. 10, 2011, and that same day the court granted the SEC's request for emergency relief including a temporary restraining order and asset freeze. The court lifted the seal order on August 29, and the preliminary injunction order entered today with the defendants' consent continues the terms of the temporary restraining order until the final resolution of the case.

August 31, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Seeks Comment on Asset-Backed Issuers and Mortgage-Related Pools Under Investment Company Act

The SEC seeks public comment on the treatment of asset-backed issuers as well as real estate investment trusts (REITs) and other mortgage-related pools under the Investment Company Act.  Through an advance notice of proposed rulemaking, the SEC is seeking public input on possible amendments the agency might consider proposing to Rule 3a-7, which excludes certain issuers of asset-backed securities from having to comply with the requirements of the Investment Company Act.

Through a separate concept release, the SEC is seeking public interpretations of a provision in the Act – Section 3(c)(5)(C) – that may be used by some companies engaged in the business of acquiring mortgages and mortgage-related instruments such as some REITs.

Public comments should be received within 60 days from the date of publication in the Federal Register.

August 31, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Seeks Comment on Use of Derivatives by Mutual Funds

The SEC seeks public comment on a wide range of issues raised by the use of derivatives by mutual funds and other investment companies regulated under the Investment Company Act.  The SEC is seeking public input through a concept release and will use the comments received in response to this concept release to help determine whether regulatory initiatives or guidance is needed that would continue to protect investors and fulfill the purposes underlying the Investment Company Act.  The concept release is a continuation of the SEC’s ongoing review of mutual funds’ use of derivatives announced last year.

Public comments should be received within 60 days from the date of publication in the Federal Register.

August 31, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

The Uniform Fiduciary Standard for Securities Professionals -- Part I

It is well documented that retail customers are confused about the different titles, services and duties of the securities professionals who offer them investment advice.  Through history and evolution, two different regulatory systems that turn on an increasingly incoherent distinction between investment advisers and broker-dealers are in place to regulate investment advice providers.  If we were designing a regulatory system from scratch, it is hard to imagine that the current version would get many votes.  Accordingly, Dodd-Frank § 913 required the SEC to conduct a study to evaluate: 

The effectiveness of existing legal or regulatory standards of care (imposed by the  Commission, a national securities association, and other federal or state  authorities) for providing personalized investment advice and recommendations  about securities to retail customers; and 
Whether there are legal or regulatory gaps, shortcomings, or overlaps in legal or  regulatory standards in the protection of retail customers relating to the standards  of care for providing personalized investment advice about securities to retail  customers that should be addressed by rule or statute.

The SEC staff completed the required study in January 2011.

While the statute does not mandate that the SEC take any action, SEC Chair Mary Schapiro recently stated that she hopes that the agency will release for public comment this fall a proposal for a uniform fiduciary standard for all securities professionals that provide retail investment advice. This rulemaking will be a long and controversial process as it involves the future regulation of two industries that take pride in their different traditions and compete head-on for the retail investors’ business.  Moreover, if final rules are adopted and challenged in court, the D.C. Circuit has made it abundantly clear that it will critically review the SEC’s assessment of the costs and benefits of rules implementing Dodd-Frank; see Business Roundtable v. SEC (D.C. Cir. July 22, 2011).

Because of its importance to retail investors, I plan to devote a number of posts to this topic in the weeks ahead.  This post describes the January 11, 2011 SEC staff study’s recommendations.  (Parentheticals refer to the report’s page numbers.)  Future posts will describe responses to the report and other recent developments relating to the regulation of investment advisers and broker-dealers under Dodd-Frank.

The Bottom Line

The SEC staff study recommends that the SEC promulgate rules that would apply “expressly and uniformly to both broker-dealers and investment advisers, when providing personalized investment advice about securities to retail customers, a fiduciary standard no less stringent than currently applied to investment advisers under Advisers Act Sections 206(1) and (2)” (v-vi).  In particular, the SEC should adopt the “uniform fiduciary standard,” which the study describes as follows:

“the standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice” (vi). 

The staff considered, but ultimately rejected recommending, alternatives to the uniform fiduciary standard, such as repealing the broker-dealer exclusion in the Investment Advisers Act and imposing the standard of conduct and other requirements of the Investment Advisers Act on broker-dealers.

The study sets forth a number of recommendations to implement through rulemaking or interpretive guidance the uniform fiduciary standard and its component duties of loyalty and care.  These recommendations are phrased generally and thus postpone the difficult task of working out the standard’s specific contours, e.g.:

• The SEC “should identify specific examples of potentially relevant and common material conflicts of interest in order to facilitate a smooth transition to the new standard by broker-dealers and consistent interpretations by broker-dealers and investment advisers” (vi).

It is worth noting that “ [t]he Staff is of the view that the existing guidance and precedent under the Advisers Act regarding fiduciary duty, as developed primarily through Commission interpretive pronouncements under the antifraud provisions of the Advisers Act, and through case law and numerous enforcement actions, will continue to apply” (vi-vii). This suggests that the existing law is well-developed.  To the contrary, since the Investment Advisers Act does not provide customers with a private right of action for faulty investment advice, there is a paucity of case law addressing investors’ remedies outside of Rule 10b-5, which requires scienter.

Duty of Loyalty

Conflicts of Interest.   “A uniform standard of conduct will obligate both investment advisers and broker-dealers to eliminate or disclose conflicts of interest. The Commission should prohibit certain conflicts and facilitate the provision of uniform, simple and clear disclosures to retail investors about the terms of their relationships with broker-dealers and investment advisers, including any material conflicts of interest” (vii).  More specifically, the study provides:

 Elimination of Conflicts:
The SEC should consider “whether rulemaking would be appropriate to prohibit certain conflicts, to require firms to mitigate conflicts through specific action, or to impose specific disclosure and consent requirements” (vii)


The SEC should consider the most effective means of disclosure, i.e., “which disclosures might be provided most effectively (a) in a general relationship guide akin to the new Form ADV Part 2A that advisers deliver at the time of entry into the retail customer relationship, and (b) in more specific disclosures at the time of providing investment advice (e.g., about certain transactions that the Commission believes raise particular customer protection concerns)” (vii)

The SEC also should consider “the utility and feasibility of a summary relationship disclosure document containing key information on a firm’s services, fees, and conflicts and the scope of its services (e.g., whether its advice and related duties are limited in time or are ongoing)” (vii)

Principal Trading.  The SEC “should address through interpretive guidance and/or rulemaking how broker-dealers should fulfill the uniform fiduciary standard when engaging in principal trading” (vii)
Duty of Care

The SEC “should consider specifying uniform standards for the duty of care owed to retail investors …. Minimum baseline professionalism standards could include, for example, specifying what basis a broker-dealer or investment adviser should have in making a recommendation to an investor” (vii)

Personalized Investment Advice About Securities

The SEC “should engage in rulemaking and/or issue interpretive guidance to explain what it means to provide ‘personalized investment advice about securities’” (vii)

Harmonization of Regulation

  The staff also identified other areas where regulation of investment advisers and broker-dealers differs and recommended that the SEC consider whether regulation in those areas “should be harmonized for the benefit of retail investors”(viii)

• Advertising and Other Communications
• Use of Finders and Solicitors
• Supervision
• Licensing and Registration of Firms
• Licensing and Continuing Education Requirements for Persons Associated with Broker-Dealers and Investment Advisers
• Books and Records


With respect to benefits, the study states that “the Staff believes that the uniform fiduciary standard and related disclosure requirements may offer several benefits, including the following:

• Heightened investor protection;
• Heightened investor awareness;
• It is flexible and can accommodate different existing business models and fee structures;
• It would preserve investor choice;
• It should not decrease investors’ access to existing products or services or service providers;
• Both investment advisers and broker-dealers would continue to be subject to all of their existing duties under applicable law; and
• Most importantly, it would require that investors receive investment advice that is given in their best interest, under a uniform standard, regardless of the regulatory label (broker-dealer or investment adviser) of the professional providing the advice” (viii)


The study notes that it is “sensitive to the costs that could be incurred by investors, broker-dealers, investment advisers, and their associated persons due to any change in legal or regulatory standards related to providing personalized investment advice to retail investors” (143).   It also observes that “costs associated with possible regulatory outcomes are difficult to quantify” and that the rulemaking process would provide commenters the opportunity to provide information on costs (144).  The study then goes on to discuss costs associated with three options: eliminating the broker-dealer exclusion (which it identifies as the most expensive and which it does not recommend), adopting a uniform fiduciary standard, and additional harmonization of the regulatory regime.

 With respect to adopting a uniform fiduciary standard, the study reviews various options broker-dealers might take in response to new regulation and sums up by stating the obvious:

[T]o the extent that broker-dealers respond to a new standard by choosing from among a range of business models, such as converting brokerage accounts to advisory accounts, or converting them from commission-based to fee-based accounts, certain costs might be incurred, and ultimately passed on to retail investors in the form of higher fees or lost access to services and products. Any increase in costs to retail investors detracts from the profitability of their investments (162).

Similarly, with respect to additional harmonization, the study states:

Ultimately, the costs associated with additional harmonized standards would depend on various factors, including which and how many standards are harmonized, whether the harmonization had an overall greater impact on broker-dealers or on investment advisers, how broker-dealers and investment advisers decide to respond to such harmonization (e.g., by pursuing any of the potential outcomes described above, or others not contemplated in this Study), and the extent to which any increased costs on intermediaries (i.e., broker-dealers and investment advisers) were passed on to retail customers (163).

Future posts will review and assess responses to the SEC staff study on Section 913.





August 31, 2011 | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 30, 2011

Former Beazer CFO Agrees to Give Up Bonus Compensation

The SEC announced a settlement with James O'Leary, the former chief financial officer of Beazer Homes USA, to recover his bonus compensation and stock sale profits from the period when the Atlanta-based homebuilder was committing accounting fraud.  According to the SEC’s complaint, O’Leary is not personally charged with misconduct, but is required under Section 304 of the Sarbanes-Oxley Act to reimburse Beazer more than $1.4 million that he got after Beazer filed fraudulent financial statements during fiscal year 2006.

Without admitting or denying the SEC’s allegations, O’Leary agreed to reimburse Beazer $1,431,022 in cash within 30 days of entry of the court order approving the settlement. This amount includes O’Leary’s entire fiscal year 2006 incentive bonus: $1,024,764 in cash incentive compensation and $131,733 previously received from Beazer in exchange for all restricted stock units he received as additional incentive compensation for fiscal year 2006. The settlement amount also includes $274,525 in stock sale profits. The SEC’s settlement with O’Leary is subject to court approval.

August 30, 2011 in SEC Action | Permalink | Comments (1) | TrackBack (0)

SEC Seeks Judicial Review of the Definition of a Broker

The Eleventh Circuit will have an opportunity to weigh in on the elusive distinction between a "broker" and a "finder" if the SEC is successful in persuading a Florida federal district court to certify the issue in SEC v. Sky Way Global LLC (No. 8:09-cv-455-T-23TBM, Decided Apr. 1, 2011).  In this case, according to the district court, the SEC failed to meet its burden to show that the defendant Kramer "engaged in the business of effecting transactions in securities in the accounts of others." 

The SEC's allegations involve efforts on the part of Kramer to solicit sales of stock in Skyway Aircraft. Pursuant to a "cooperative"  agreement between Kramer andd another defendant Baker (through his company Affiliated Holdings) to share with each other business opportunities and split fees, Kramer introduced Talib, a registered broker, to Baker and Skyway.  Talib ultimately sold $14 million of Skyway shares to investors, for which Kramer received between $189,000 and $200,000.  This transaction, however, according to the court, did not make Kramer a broker because his only involvement was to bring the two parties together.  Specifically, Kramer did not participate in negotiations or in any way promote an investment in Skyway to Talib or his investors.

Kramer also told "a small but close group" about Skyway, directed them to Skyway's website, opined that Skyway was a "good investment" and received from Baker Skyway shares when he reported the number of Skyway shares members of this group purchased through registered brokers (20% of reported shares).  The court thought this activity was "odd, but not 'broker' activity."  The court concludes that Kramer's conduct was similar to the activity of an "associated person" of an unregistered broker, who, in this case, was Baker or his company Affiliated Holdings.  Kramer did not contact a broker to encourage the broker to sell Skyway shares, did not field investor inquiries, and did not counsel investors to purchase Skyway shares.

According to an BNA Securities Law Daily Report, the federal district court preliminarily agreed to certify as final the judgment to permit the agency to appeal the judgment.  Defendant Kramer has until August 31 to show cause wny the motion should not be granted.

The definition of a "broker" is an important one, and further judicial explication would be welcome.

August 30, 2011 in Judicial Opinions | Permalink | Comments (2) | TrackBack (0)

Monday, August 29, 2011

SEC Finds Broker Misrepresented Risks of Equity-Linked Notes

In an administrative proceeding the SEC and David G. Brouwer settled allegations that during 2007 and 2008, Brouwer recommended equity-linked notes to many of his customers and told customers that the equity-linked notes were safe when in fact they were not.  He also failed to disclose certain of the investment’s material risks and failed to adequately disclose that there was a possibility that the equity-linked notes would convert into the underlying securities at a value less than the invested principal. Further, Brouwer’s recommendations of equity-linked notes were unsuitable for at least two customers, based on their stated risk tolerance, investment objectives and other factors.

Based on the above, the Order bars David G. Brouwer from association with any broker, dealer, investment adviser, municipal securities dealer, municipal adviser, transfer agent, or nationally recognized statistical rating organization, and orders him to pay disgorgement of $33,000 and prejudgment interest of $6,137.25 and a civil money penalty in the amount of $33,000. David G. Brouwer consented to the issuance of the Order without admitting or denying any of the findings.

August 29, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Two Floridians with Running Ponzi Scheme Directed at Teachers and Retirees

The SEC charged two Florida men, John Davis Risher and Daniel Joseph Sebastian, with operating a Ponzi scheme that fraudulently raised approximately $22 million from more than 100 investors, many of whom were Florida teachers or retirees.   According to the SEC’s complaint, Risher and Sebastian marketed the fund under the names Safe Harbor Private Equity Fund, Managed Capital Fund, and Preservation of Principal Fund. They described themselves in fund offering documents as “two unique individuals” who used their expertise to “create an investment vehicle that would allow investors to capitalize from both bull and bear markets.”  Risher boasted to investors that he had substantial experience in trading equities and providing wealth and asset management services. In reality, Risher had a lengthy criminal history, spending 11 of the last 21 years in jail.

The SEC seeks permanent injunctions, disgorgement, and financial penalties against Risher and Sebastian.  The U.S. Attorney’s Office for the Middle District of Florida, which conducted a parallel investigation of this matter, has filed criminal charges against Risher.

August 29, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Issues Additional Guidance on Social Networking Websites

In August 2011 FINRA issued Regulatory Notice 11-39, Guidance on Social Networking Websites and Business Communications, to supplement its January 2010 Regulatory Notice 10-06, which provided guidance on the application of FINRA rules governing communications with the public to social media sites. The 2011 Release is in response to additional questions from firms and provides further clarification concerning application of the rules to new technologies.

August 29, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Saturday, August 27, 2011

Choi, et alia on Mutual Fund Voting

Voting Through Agents: How Mutual Funds Vote on Director Elections, by Stephen J. Choi, New York University (NYU) - School of Law; Jill E. Fisch, University of Pennsylvania Law School - Institute for Law and Economics, and Marcel Kahan, New York University (NYU) - School of Law, was recently posted on SSRN.  Here is the abstract:

Shareholder voting has become an increasingly important focus of corporate governance, and mutual funds control a substantial percentage of shareholder voting power. The manner in which mutual funds exercise that power, however, is poorly understood. In particular, because neither mutual funds nor their advisors are beneficial owners of their portfolio holdings, there is concern that mutual fund voting may be uninformed or tainted by conflicts of interest. These concerns, if true, hamper the potential effectiveness of regulatory reforms such as proxy access and say on pay. This article analyzes mutual fund voting decisions in uncontested director elections. We find that mutual funds use a variety of strategies to economize on the costs of making voting decisions, including having funds in the same fund family vote in lockstep, voting virtually always in accordance with management recommendations, and voting virtually always in accordance with recommendations of ISS. Smaller fund families employ these strategies to a greater extent than larger families.

We further adduce evidence on how ISS recommendations affect fund voting. Funds that account for less than 10% of the assets in our sample exhibit a strong tendency to follow ISS recommendations, a much smaller percentage than funds that virtually always follow management recommendations (approximately 25% of assets). A much larger percentage (36% of the assets) votes in accordance with ISS withhold recommendations in approximately 50% of the cases. We conclude that the influence of ISS is due more to funds’ measured evaluation of the ISS recommendations rather than to funds blindly following these recommendations.

We find no evidence that funds in families that are affiliated with commercial banks, investment banks, or insurance companies have a stronger proclivity than independent funds to vote in accordance with management recommendations or to shield their votes from criticism in order to maintain good business relations or generate new business for their affiliates.

The largest fund families - Vanguard, Fidelity, and American Funds, each of which individually accounts for roughly 11% of total mutual fund assets - vote substantially differently both from each other and from ISS recommendations. This is strong evidence of heterogeneity in the voting behavior of mutual funds in director elections.

Finally, we examine the factors associated with high (in excess of 30%) withhold votes in director elections. An ISS withhold recommendation, in conjunction with at least one of four factors - a withhold vote by Fidelity, the director missing 25% of board meetings, the company having ignored a shareholder resolution that received majority support, and a Vanguard withhold vote on outside directors with business ties to the company - is associated with a 49% probability of receiving a high withhold vote. Directors in these groups account for 48% of all directors who received high withhold votes. By contrast, an ISS withhold recommendation that is not combined with one of these factors is associated with only a 21% probability of a high withhold vote, and the general probability of a high withhold vote is a mere 2%. These findings suggest steps that companies and directors should take to try to avoid high withhold votes. They are also evidence that not all ISS recommendations have the same impact on voting outcomes.

August 27, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Bradford on Crowdfunding & Federal Securities Laws

Crowdfunding and the Federal Securities Laws, by C. Steven Bradford, University of Nebraska College of Law, was recently posted on SSRN.  Here is the abstract:

Crowdfunding - the use of the Internet to raise money through small contributions from a large number of investors - may cause a revolution in small-business financing. Through crowdfunding, smaller entrepreneurs, who traditionally have had great difficulty obtaining capital, have access to anyone in the world with a computer, Internet access, and spare cash to invest. Crowdfunding sites such as Kiva, Kickstarter, and IndieGoGo have proliferated and the amount of money raised through crowdfunding has grown to billions of dollars in just a few years.

Crowdfunding poses two issues under federal securities law. First, some, but not all, crowdfunding involves selling securities, triggering the registration requirements of the Securities Act of 1933. Registration is prohibitively expensive for the small offerings that crowdfunding facilitates, and none of the current exemptions from registration fit the crowdfunding model. Second, the web sites that facilitate crowdfunding may be treated as brokers or investment advisers under the ambiguous standards applied by the SEC.

I consider the costs and benefits of crowdfunding and propose an exemption that would free crowdfunding from the regulatory requirements, but not the antifraud provisions, of the federal securities laws. Securities offerings of $250,000 or less would be exempted if (1) each investor invests no more than $250 or $500 a year and (2) the offering is made on an Internet crowdfunding site that meets the exemption’s requirements. Exempted offerings would be required to include a funding target and could not close until that target was met. Until then, investors would be free to withdraw.

To qualify for the exemption, crowdfunding sites must (1) be open to the general public; (2) provide public communication portals for investors and potential investors; (3) require investors to fulfill a simple education requirement before participating; (4) prohibit certain conflicts of interest; (5) not offer investment advice or recommendations; and (6) notify the SEC that they are hosting crowdfunding offerings. Sites that meet these requirements would not be treated as brokers or investment advisers.

August 27, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Krug on Investment Adviser Regulation and Hedge Funds

Institutionalization, Investment Adviser Regulation, and the Hedge Fund Problem, by Anita K. Krug, University of Washington School of Law, was recently posted on SSRN.  Here is the abstract:

 This Article contends that more effective regulation of investment advisers could be achieved by recognizing that the growth of hedge funds, private equity funds, and other private funds in recent decades is a manifestation of institutionalization in the investment advisory context. That is, investment advisers today commonly advise these “institutions,” which have supplanted other, smaller investors as advisory clients. However, the federal securities statute governing investment advisers, the Investment Advisers Act of 1940, does not address the role of private funds as institutions that now intermediate those smaller investors’ relationships to investment advisers. Consistent with that failure, investment adviser regulation regards a private fund, rather than the fund’s investors, as both the “client” of the fund’s adviser and the “thing” to which the adviser owes its obligations. The regulatory stance that the fund is the client, which recent financial regulatory reform did not change, renders the Advisers Act incoherent in its application to investment advisers managing private funds and, more importantly, thwarts the objective behind the Advisers Act: investor protection. This Article shows that policymakers’ focus should be trained primarily on the intermediated investors – those who place their capital in private funds – rather than on the funds themselves and proposes a new approach to investment adviser regulation. In particular, investment advisers to private funds should owe their regulatory obligations not only to the funds they manage but also to the investors in those funds

August 27, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Brown on Business Roundtable v. SEC

Shareholder Access and Uneconomic Economic Analysis: Business Roundtable V. SEC, by J. Robert Brown Jr., University of Denver Sturm College of Law, was recently posted on SSRN.  Here is the abstract:

Business Roundtable v. SEC, arose out of a legal challenge to what is probably the most controversial rule ever adopted by the Securities and Exchange Commission (SEC or Commission). Rule 14a-11 mandated that public companies allow long term shareholders to include nominees for the board of directors in the company’s proxy statement. The rule held out the promise that shareholders would be able to more easily nominate and elect their own candidates to the board. Access was popular among shareholders and strenuously opposed by public companies.

The DC Circuit struck down the rule, imposing a “nigh impossible” standard with respect to the applicable economic analysis. The decision far exceeded the standards set out by Congress and the courts with respect to cost/benefit analysis. Moreover, in making its decision, the panel relied on mistaken interpretations of the fiduciary obligations of both boards and pension plans. The short term impact of the decision is to make more difficult the implementation of a shareholder access rule. The long term implications are more severe. The decision effectively discourages the SEC from using rulemaking as a means of establishing legal requirements and instead encourages the use of more informal and less uniform methods such as no action letters and enforcement proceedings.

August 27, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Pope on Crowdfunding & Small Offering Exemption

Crowdfunding Microstartups: It's Time for the Securities and Exchange Commission to Approve a Small Offering Exemption, by Nikki D. Pope, Santa Clara University School of Law, was recently posted on SSRN.  Here is the abstract:

As social networking websites and crowd-based problem-solving initiatives gain popularity, entrepreneurs have begun to consider them as possible tools in a fundraising method, known as “crowdfunding.” Current federal and state securities regulations, however, limit the ways in which such fundraising methods can be employed by entrepreneurs and early-stage companies. This article focuses on federal securities rules and regulations and recommends changes the Securities and Exchange Commission (the “Commission”) can implement in federal securities rules and regulations to foster such funding initiatives and facilitate capital formation, while achieving its mission to protect investors from fraudulent investment practices.

August 27, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Friday, August 26, 2011

Bernanke on The U.S. Economy

Ben Bernanke gave his much-anticipated speech on The Near- and Longer-Term Prospects for the U.S. Economy in Jackson Hole, in which not much was said.

August 26, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, August 25, 2011

Buffett Invests $5 Billion in BofA

Bank of America Corporation announced today that it reached an agreement to sell 50,000 shares of Cumulative Perpetual Preferred Stock with a liquidation value of $100,000 per share to Berkshire Hathaway, Inc. in a private offering. The preferred stock has a dividend of 6 percent per annum, payable in equal quarterly installments, and is redeemable by the company at any time at a 5 percent premium.

Berkshire Hathaway will also receive warrants to purchase 700,000,000 shares of Bank of America common stock at an exercise price of $7.142857 per share. The warrants may be exercised in whole or in part at any time, and from time to time, during the 10-year period following the closing date of the transaction. The aggregate purchase price to be received by Bank of America for the preferred stock and warrants is $5 billion in cash.

"Bank of America is a strong, well-led company, and I called Brian to tell him I wanted to invest in it," said Berkshire Hathaway Chairman and Chief Executive Officer Warren Buffett. "I am impressed with the profit-generating abilities of this franchise, and that they are acting aggressively to put their challenges behind them. Bank of America is focused on their customers and on serving them well. That's what customers want, and that's the company's strategy."

August 25, 2011 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC's Next Meeting Considers Investment Company Act Issues

The next SEC Open Meeting is scheduled for August 31, 2011.  The subject matter of the Open Meeting will be:

Item 1: The Commission will consider whether to issue a concept release and request public comment on a wide range of issues under the Investment Company Act raised by the use of derivatives by investment companies regulated under that Act.
Item 2: The Commission will consider whether to issue two related releases. The first release is an advance notice of proposed rulemaking to solicit public comment on possible amendments to Rule 3a-7 under the Investment Company Act, the rule that provides certain asset-backed issuers with a conditional exclusion from the definition of investment company. The second release is a concept release to solicit public comment on interpretive issues related to the status under the Investment Company Act of companies that are engaged in the business of acquiring mortgages and mortgage-related instruments.

August 25, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Top 10 Investor Scams

The North American Securities Administrators Association (NASAA) recently released its annual list of financial products and practices that threaten to trap unwary investors, many by taking advantage of investors troubled by lingering economic uncertainty and volatile stock markets.

The following alphabetical listing of the Top 10 financial products and practices that threaten to trap unwary investors was compiled by the securities regulators in NASAA’s Enforcement Section.

PRODUCTS: distressed real estate schemes, energy investments, gold and precious metal investments, promissory notes, and securitized life settlement contracts.

PRACTICES: affinity fraud, bogus or exaggerated credentials, mirror trading, private placements, and securities and investment advice offered by unlicensed agents.

August 25, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 24, 2011

SEC Obtains A Default Judgment Against Analyst in Galleon Insider Trading Case

The federal district court in S.D.N.Y. entered a Final Judgment by Default as to Deep Shah on August 23, 2011, in the SEC’s insider trading case, SEC v. Galleon Management, LP, et al., 09-CV-8811 (SDNY) (JSR). At the time of the alleged conduct, Shah was employed at Moody’s as a lodging industry analyst. The Commission alleged that Shah violated the federal securities laws by, among other things, tipping Roomy Khan, then an individual investor, to material, nonpublic information about: (a) the July 2007 acquisition of Hilton Hotels Corp. by the Blackstone Group; and (b) the March 2007 acquisition of Kronos Inc. by Hellman & Friedman. Khan traded on the basis of this information and also tipped others, who traded. Khan and others paid Shah cash for the inside information he tipped to Khan. Shah left Moody’s in late 2007 or early 2008, and he is believed to currently reside in India. Shah has failed to appear, answer or otherwise defend the Commission’s action.

August 24, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 23, 2011

SEC Warns About Advance Fee Funds Targeting Deaf Investors

The SEC’s Office of Investor Education and Advocacy issued an Updated Investor Alert to alert investors about “Imperia Invest IBC” and similarly-named companies that have a track record of targeting deaf investors to invest in “advance fee fraud” schemes. Advance fee fraud gets its name from the fact that an investor is asked to pay a fee up front -- in advance of receiving any proceeds, money, stock or warrants -- in order for the deal to go through. The bogus fee may be described as a “processing fee”, a commission, regulatory fee or tax, or some other incidental expense. Sometimes, advance fee frauds brazenly target investors who have already lost money in investment schemes.

August 23, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)