Securities Law Prof Blog

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

Saturday, December 31, 2011

Coates on Proposed Securities Law Reforms

The Testimony of John C. Coates IV, Harvard Law School, Before the U.S. Senate Subcommittee on Securities, Insurance and Investment on Proposed Securities Law Reforms was recently posted on SSRN.  Here is the abstract:

Amid an economic downturn caused in part by financial deregulation, it is odd to most people outside the Beltway that Congress should be actively considering (and indeed have passed in the House) a raft of proposal for more financial deregulation. Yet the politics for both parties require efforts to generate job growth, without spending or taxing, and some deregulatory proposals may plausibly do that. The following testimony takes up three themes related to pending proposals to revise securities laws to (among other things) deregulate widely held but unlisted companies and banks, to permit unregistered "crowdfinancing," and to loosen constraints on small public offerings: (1) the proposals under review all raise the same general trade-off, which is best understood not as economic growth vs. investor protection, but as increasing economic growth by reducing the costs of capital-raising vs. reducing economic growth by raising the costs of capital; (2) no one can with any degree of certainty predict whether any proposal on its own, much less in combination, will increase job growth or reduce it, because the evidence that would allow one to make that prediction with confidence is not available; and (3) the proposals are thus all best viewed as proposals for risky but potentially valuable experiments, and should be treated as such – with an open mind, but also with caution and care. A general suggestion follows: any proposal should contain a sunset, with the SEC directed to study the effects of the proposal during a "test" phase, and authorized to re-adopt the proposals if their benefits exceed their costs. Specific comments on each bill are contained in Part III of the testimony.

December 31, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Romano on Financial Regulation

Regulating in the Dark, by Roberta Romano, Yale Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

Foundational financial legislation is typically adopted in the midst or aftermath of financial crises, when an informed understanding of the causes of the crisis is not yet available. Moreover, financial institutions operate in a dynamic environment of considerable uncertainty, such that legislation enacted even under the best of circumstances can have perverse unintended consequences, and regulatory requirements correct for an initial set of conditions can become inappropriate as economic and technological circumstances change. Furthermore, the stickiness of the status quo in the U.S. political system renders it difficult to revise legislation, even though there may be a consensus to do so. This essay contends that the best means of responding to this dismal state of affairs is to include, as a matter of course, in crisis-driven financial legislation and its implementing regulation two key procedural mechanisms: (1) a requirement of automatic subsequent review and reconsideration of the legislative and regulatory decisions at some future point in time; and (2) regulatory exemptive or waiver powers, that encourage, where feasible, small scale experimentation, as well as flexibility in implementation. Both procedural devices will better inform and calibrate the regulatory apparatus, and could thereby mitigate, at least on the margin, the unintended errors which will invariably accompany financial legislation and rulemaking originating in a crisis. Given the centrality of financial institutions and markets to economic growth and societal well-being, it is exceedingly important for legislators acting in a financial crisis with the best of intentions, to not make matters worse.

December 31, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Thomas et alia on Say on Pay and Corporate Governance

Dodd-Frank's Say on Pay: Will it Lead to a Greater Role for Shareholders in Corporate Governance?, by Randall S. Thomas, Vanderbilt Law School; European Corporate Governance Institute (ECGI); Alan R. Palmiter, Wake Forest University - School of Law; and James F. Cotter , Wake Forest University Calloway School, was recently posted on SSRN.  Here is the abstract:

"Say on pay" gives shareholders an advisory vote on a company's pay practices for its top executives. Beginning in 2011, Dodd-Frank mandated such votes at public companies. The first year of "say on pay" under the new legislation may have changed the dialogue and give-and-take in the shareholder-management relationship at some companies, particularly on the question of executive pay.

We study the evolution of shareholder voting on "say on pay" - beginning in 2006 as a fledgling shareholder movement to get "say on pay" on the corporate ballot, evolving as a handful of companies and later the financial firms receiving TARP funds conducted "say on pay" votes, and leading to Dodd-Frank’s extension of the process to all public companies.

Using results from an empirical analysis of data from the pre-Dodd-Frank period, we project that the new mandatory management-sponsored “say on pay” proposals will attract strong shareholder support at most companies, while poorly performing companies with high pay levels can expect shareholder dissent. These projections are confirmed by early results in the first year of post-Dodd-Frank experience with “say on pay.”

Our empirical analysis of the pre-Dodd-Frank data supports the potential importance of third party voting advisor recommendations, particularly by the ISS, on executive pay proposals. The raw data show 20 percent swing in shareholder support for management “say on pay” proposals associated with a negative ISS recommendation. However, once we take into account the different recommendations issued by management and ISS, the net effect of an ISS negative recommendation on the overall shareholder vote is relatively small at most companies. Nevertheless, the early Dodd-Frank results show that all 37 companies that failed to obtain majority support in these advisory votes had received negative ISS recommendations.

The early results show that companies that initially received negative “say on pay” recommendations by the ISS often modified their disclosure filings or changed their pay practices. This may indicate to a growing role for shareholders in influencing executive pay practices and more generally corporate governance.

December 31, 2011 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Judge Rakoff's Supplemental Order in Citigroup

On December 29 Judge Rakoff issued a supplemental order to its December 27 order denying the SEC's request for a stay pending interlocutory appeal.  Almost simultaneously with the Judge's issuance of the first order, the Second Circuit granted the agency's request for a stay.   In the supplemental order Judge Rakoff expresses his displeasure with the SEC's conduct in filing the emergency motion, charging it with misleading both the appellate court and the district court.(Download Dist Ct Sup Order Dec 27 2011)

Specifically, Judge Rakoff says that the SEC, in its "emergency motion" to the Second Circuit, exaggerated the urgency of the request.  The SEC stated that Citigroup had only until January 3, 2012 to file an answer or to move to dismiss the complaint and this deadline interfered with a central provision of the negotiated settlement -- that Citigroup would not deny the SEC's allegations.  Judge Rakoff stated that this statement was misleading because, among other things, the SEC knew that Citigroup planned to file a motion to dismiss which would not constitute a denial of the allegations.  In addition, the parties had not argued before the district court that January 3 was a critical date.

With respect to misleading the district court: according to Judge Rakoff, the SEC and Citigroup had a telephone conference with the Judge at 3 p.m. on December 27 without informing him that the SEC had previously filed the emergency motion with the Second Circuit.  About an hour later, the Second Circuit granted the request to stay and the district court issued its order denying the stay.  Perturbed by these developments, Judge Rakoff issued the supplemental order both to inform the appellate court and to admonish the parties to be more forthcoming. 

Judge Rakoff's order illustrates an interesting wrinkle in this appeal.  Since both the SEC and Citigroup want the district court to approve the settlement, there is no party in this litigation to present the arguments, first, that there is no basis for an interlocutory appeal, and, second, the argument on the merits: that the district court acted within its authority in refusing to approve the settlement.  Clearly Judge Rakoff is concerned that the appellate court is operating with incomplete and one-sided information.  Who speaks for the district court?

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

Thursday, December 29, 2011

Hungarian Telecom Company Settles FCPA Charges

The SEC today charged the largest telecommunications provider in Hungary and three of its former top executives with bribing government and political party officials in Macedonia and Montenegro to win business and shut out competition in the telecommunications industry.  According to the SEC, three senior executives at Magyar Telekom Plc. orchestrated, approved, and executed a plan to bribe Macedonian officials in 2005 and 2006 to prevent the introduction of a new competitor and gain other regulatory benefits. Magyar Telekom's subsidiaries in Macedonia made illegal payments of approximately $6 million under the guise of bogus consulting and marketing contracts. The same executives orchestrated a second scheme in 2005 in Montenegro related to Magyar Telekom's acquisition of the state-owned telecommunications company there. Magyar Telekom paid approximately $9 million through four sham contracts to funnel money to government officials in Montenegro.

Magyar Telekom's parent company Deutsche Telekom AG also is charged with books and records and internal controls violations of the Foreign Corrupt Practices Act (FCPA).

Magyar Telekom agreed to settle the SEC's charges by paying more than $31.2 million in disgorgement and pre-judgment interest. Magyar Telekom also agreed to pay a $59.6 million criminal penalty as part of a deferred prosecution agreement announced today by the U.S. Department of Justice. Deutsche Telekom settled the SEC's charges, and as part of a non-prosecution agreement with the Department of Justice agreed to pay a penalty of $4.36 million.

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

Wednesday, December 28, 2011

The Latest on the SEC v. Citigroup Appeal

On December 27, Judge Rakoff denied the SEC and Citigroup's motion to stay all proceedings in the district court pending determination of the "purported appeal."  Citing the principle that interim appeals are strongly disfavored in federal court, he stated that the filing of a "plainly unauthorized notice of [interlocutory] appeal" does not divest the district court of jurisdiction (Download Dist Ct Order Dec 27 2011)

The Second Circuit, on the same day, issued an order that the SEC's emergency motion to stay proceedings and expedite appeal will be submitted to motions panel on January 17 and that in the interim, the district court proceedings are stayed.

December 28, 2011 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

SEC Amends Net Worth Standard for Accredited Investors

The SEC amended its rules to exclude the value of a person’s home from net worth calculations used to determine whether an individual may invest in certain unregistered securities offerings. The changes were made to conform the SEC’s definition of an “accredited investor” to the requirements of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

Under the amended rule, the value of an individual’s primary residence will not count as an asset when calculating net worth to determine “accredited investor” status. The amendments also clarify the treatment of borrowing secured by a primary residence for purposes of the net worth calculation. Under certain circumstances, they also permit individuals who qualified as accredited investors under the pre-Dodd-Frank Act definition of net worth to use that prior net worth standard for certain follow-on investments.

December 28, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Plastics Industry Exec Ordered to Pay $49.5 Million for Lying in 13D Filings

The SEC recently announced the successful resolution of its trial against a plastics industry executive charged with lying in SEC filings regarding his ownership of Musicland Stores Corporation stock. Alfred S. Teo, Sr. and a trust he controlled have been ordered by a federal judge to pay $49.5 million in a final judgment against them.

Teo, who is chairman of several private companies that are some of the largest producers of plastic bags in North America, was charged by the SEC in 2004 with filing false and misleading 13D forms and failing to make other required filings from 1998 to 2001.  Following a 10-day trial in May in federal court in Newark, N.J., a jury returned a verdict finding Teo liable for securities fraud and disclosure violations on all counts against him. The jury also found the MAAA Trust controlled by Teo liable for disclosure violations.

The evidence at trial showed that Teo, who lives in Kinnelon, N.J., and Fisher Island, Fla., lied in SEC filings about the amount of shares he controlled in order to avoid triggering Musicland’s shareholders rights plan or “poison pill.” Teo understood that triggering the poison pill would have significantly diluted his stock and caused massive losses to him. Teo deceptively purchased millions of Musicland shares well above the poison pill threshold, which he eventually sold to receive illicit profits.

Specifically, the court ordered Teo and the trust to pay $17,422,054.13 in disgorgement plus $14,649,034.89 in prejudgment interest, and penalties of $17,422,054.13. In addition to that $49,493,143.15 final judgment, Teo previously paid $996,782.68 in disgorgement and prejudgment interest for insider trading violations pursuant to a court order in this case on March 15, 2010. Teo also paid a $1 million fine and was sentenced to a 30-month prison term in a parallel criminal action for his insider trading crimes.

December 28, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

GE Funding Capital Markets Settles SEC Fraud Charges Involving Reinvestment of Municipal Bond Proceeds

The SEC and GE Funding Capital Market Services recently settled securities fraud charges involving participation in a wide-ranging scheme involving the reinvestment of proceeds from the sale of municipal securities.  GE Funding CMS agreed to settle the SEC’s charges by paying approximately $25 million that will be returned to affected municipalities or conduit borrowers. The firm also entered into agreements with the Department of Justice, Internal Revenue Service, and a coalition of 25 state attorneys general and will pay an additional $45.35 million.

The settlements arise from extensive law enforcement investigations into widespread corruption in the municipal reinvestment industry. In the past year, federal and state authorities have reached settlements with four other financial firms, and 18 individuals have been indicted or pled guilty, including three former GE Funding CMS traders.

According to the SEC’s complaint filed in U.S. District Court for the District of New Jersey, in addition to fraudulently manipulating bids, GE Funding CMS made improper, undisclosed payments to certain bidding agents in the form of swap fees that were inflated or unearned. These payments were in exchange for the assistance of bidding agents in controlling and manipulating the competitive bidding process.

The SEC alleges that from August 1999 to October 2004, GE Funding CMS illegally generated millions of dollars by fraudulently manipulating at least 328 municipal bond reinvestment transactions in 44 states and Puerto Rico. GE Funding CMS won numerous bids through a practice of “last looks” in which it obtained information regarding competitor bids and either raised a losing bid to a winning bid or reduced its winning bid to a lower amount so that it could make more profit on the transaction. In connection with other bids, GE Funding CMS deliberately submitted non-winning bids to facilitate bids set up in advance by certain bidding agents for other providers to win. GE Funding CMS’s fraudulent conduct also jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted.

In settling the SEC’s charges without admitting or denying the allegations, GE Funding CMS agreed to pay a $10.5 million penalty along with disgorgement of $10,625,775 with prejudgment interest of $3,775,987. The Commission recognized GE Funding CMS’s cooperation in its investigation.

December 28, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Comment Period on Volcker Rule Extended until Feb. 13

Four federal agencies extended until February 13, 2012 the comment period on a proposal to implement the so-called Volcker Rule of the Dodd-Frank Act.  The comment period was extended as part of a coordinated interagency effort to allow interested persons more time to analyze the issues and prepare their comments. Originally comments were due by January 13, 2012.

The proposal was issued by the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission.

December 28, 2011 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

Bank of New York Mellon Settles Charges of ARS Manipulation

The Bank of New York Mellon Corp. (BNYM) recently settled a joint  investigation into manipulative trading of auction rate securities as facilitated by employees of Mellon Financial Markets LLC (MFM), a subsidiary of BNYM by the New York Attorney General, the Texas State Securities Board and the Florida Office of Financial Regulation. Under the agreement, BNYM will pay $1,300,000 in penalties, fees and costs to the States of New York, Texas and Florida.

According to the allegations, from January 22, 2008 through February 22, 2008, MFM, acting as an intermediary broker on behalf of the Citizens Property Insurance Corporation (CPIC), enabled CPIC to purchase large quantities of its own auction rate securities by placing CPIC’s bids in CPIC’s own auctions as though they were the bids of an independent third-party buyer.  CPIC knew that underwriter broker-dealers managing CPIC’s auction rate securities would have rejected CPIC’s bids on its own auctions as self-dealing transactions, and solicited MFM's assistance to overcome this problem.  MFM agreed to submit CPIC trades into the auctions in order to help CPIC avoid detection, thus facilitating CPIC’s trading by helping CPIC conceal its identity from the underwriter broker-dealers.  CPIC’s bids were at below-market rates and resulted in CPIC’s auctions clearing at rates significantly lower than would have resulted had CPIC not intervened in those auctions with its own bids.

The MFM traders and their managers understood that CPIC’s bidding would set clearing rates lower than they would have been in the absence of such bidding, and that this would be both detrimental and objectionable to other investors bidding on or holding CPIC’s auction rate securities.  Some MFM employees even expressed doubts about whether such trading was legal.  Yet no one at MFM sought legal advice about the propriety of the trading in advance, or brought the proposed trading to the attention of compliance staff at MFM or BNYM.

The trading continued until BNYM’s compliance staff discovered it and ultimately ordered it to stop.  MFM earned approximately $300,000 in fees from this conduct.

December 28, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

FINRA Fines Credit Suisse for Reg SHO Violations

FINRA recently fined Credit Suisse Securities (USA) LLC $1.75 million for violating Regulation SHO (Reg SHO) and failing to properly supervise short sales of securities and marking of sale orders. As a result of these violations, Credit Suisse entered millions of short sale orders without reasonable grounds to believe that the securities could be borrowed and delivered and mismarked thousands of sales orders.

FINRA found that from June 2006 through December 2010, Credit Suisse's Reg SHO supervisory system regarding locates and the marking of sale orders was flawed and resulted in a systemic supervisory failure that contributed to significant Reg SHO failures across its equities trading business. During the time period, Credit Suisse released millions of short sale orders to the market without locates, including threshold and hard to borrow securities. The locate violations extended to numerous trading systems, aggregation units and strategies. In addition, Credit Suisse mismarked tens of thousands of sale orders in its trading systems. The mismarked orders included short sales that were mismarked as "long," resulting in additional violations of Reg SHO's locate requirement.

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

December 28, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

FINRA Fines Barclays $3 Million for Misrepresenting Delinquency Data on Subprimes

FINRA recently fined Barclays Capital Inc. $3 million for misrepresenting delinquency data and inadequate supervision in connection with the issuance of residential subprime mortgage securitizations (RMBS).

FINRA found that from March 2007 through December 2010, Barclays misrepresented the historical delinquency rates for three subprime RMBS it underwrote and sold. The inaccurate delinquency data posted on Barclays' website was referenced as historical information in five subsequent RMBS investments and contained errors significant enough to affect an investor's assessment of subsequent securitizations. Additionally, Barclays failed to establish an adequate system to supervise the maintenance and updating of relevant disclosure on its website.

In settling this matter, Barclays neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

December 28, 2011 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 21, 2011


I'm on holiday. Check back on December 28.

December 21, 2011 | Permalink | Comments (0) | TrackBack (0)

SEC: Judge Rakoff Committed Error in Requiring Adjudication or Admission of Facts

On December 15, the SEC filed papers seeking review of Judge Rakoff’s rejection of the $285 million settlement with Citigroup in the Second Circuit.  The agency subsequently filed in federal district court a Memorandum of Law in Support of its Motion for Stay Pending Appeal in which it develops the legal argument that is the basis for its appeal – namely, that the district court erred in requiring an adjudication or admission of facts as a condition for the entry of the proposed consent judgment.  In addition, the SEC argues, a stay of the proceedings (currently scheduled for a July trial date) is appropriate because otherwise the agency will be required to expend resources on litigating this matter while the appeal is pending instead of pursuing other enforcement activities.

Essentially the SEC’s argument is that Judge Rakoff’s rejection is an outlier.  In its brief the SEC states that “[it] is unaware of any court that has ever before required that ‘proven or acknowledged facts’ be established as a condition to the approval of a proposed consent judgment submitted by a federal government agency.”  In addition, the relief provided for in the proposed settlement is a reasonable approximation of the relief the agency would likely recover if it prevailed at trial.  Finally, the public was adequately informed about Citigroup’s misconduct because of the detailed allegations in its complaint.  Accordingly, “the Commission made the reasonable judgment that expending additional resources to attempt to obtain an adjudication of the facts is not justified in light of the adequacy of the relief obtained, the litigation risks associated with trial, and the need to devote those resources to other matters.”

On December 20, Citigroup filed a Memorandum in Support of the SEC’s Motion for a Stay Pending Appeal.

December 21, 2011 in Judicial Opinions, SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 20, 2011

UCLA Institute Accepting Applications for Law Teaching Fellowship

The Lowell Milken Institute for Business Law and Policy at UCLA School of Law is now accepting applications for the Lowell Milken Institute Law Teaching Fellowship.  This fellowship is a full-time, year-round, one or two academic-year position (approximately July 2012 through June 2013 or June 2014).  The position involves law teaching, legal and policy research and writing, preparing to go on the law teaching market, and assisting with organizing projects such as conferences and workshops, and teaching.  No degree will be offered as part of the Fellowship program.

For additional information, download this: Download Lowell Milken Institute Law Teaching Fellowship Advertisement 2011-12 final

December 20, 2011 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Aon Settles FCPA Charges with SEC and DOJ

The SEC settled allegations against Aon Corporation (Aon), an Illinois-based global provider of risk management services, insurance and reinsurance brokerage, involving violations of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (FCPA). Aon will pay a total of approximately $14.5 million in disgorgement and prejudgment interest to the SEC. In a related action, Aon will pay a $1.764 million criminal fine to the U.S. Department of Justice (DOJ).

The Commission’s complaint alleges that Aon’s subsidiaries made over $3.6 million in improper payments to various parties between 1983 and 2007 as a means of obtaining or retaining insurance business in those countries. The complaint alleges that some of the improper payments were made directly or indirectly to foreign government officials who could award business directly to Aon subsidiaries, who were in position to influence others who could award business to Aon subsidiaries, or who could otherwise provide favorable business treatment for the company’s interests. The complaint alleges that these payments were not accurately reflected in Aon’s books and records, and that Aon failed to maintain an adequate internal control system reasonably designed to detect and prevent the improper payments.

According to the Commission’s complaint, the improper payments made by Aon’s subsidiaries fall into two general categories: (i) training, travel, and entertainment provided to employees of foreign government-owned clients and third parties; and (ii) payments made to third-party facilitators. Aon subsidiaries made these payments in various countries around the world, including Costa Rica, Egypt, Vietnam, Indonesia, United Arab Emirates, Myanmar, and Bangladesh. The complaint alleges that Aon realized over $11.4 million in profits from these improper payments.

Without admitting or denying the allegations in the Commission’s complaint, Aon consented to the entry of a final judgment permanently enjoining it from future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and ordering the company to pay disgorgement of $11,416,814 in profits, together with prejudgment interest thereon of $3,128,206, for a total of $14,545,020. Aon’s proposed settlement offer has been submitted to the court for its consideration. In a related criminal proceeding, DOJ announced today that Aon has entered into a non-prosecution agreement under which the company will pay a $1.764 million criminal fine for the misconduct. Aon cooperated with the Commission’s and DOJ’s investigations and implemented remedial measures during the course of the investigations.

December 20, 2011 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Former Football Player and Attorney in Pump-and-Dump Fraud

The SEC charged a purported heart monitoring device company and six individuals involved in a series of fraudulent schemes to artificially inflate the company’s stock. Among those charged are a former pro football player, a Hollywood talent agent, and an attorney who masterminded the scheme.  According to the SEC. Heart Tronics installed former pro football player Willie Gault as a figurehead co-CEO along with former Hollywood executive J. Rowland Perkins in order to generate publicity for the company and foster investor confidence. Meanwhile behind the scenes, California-based attorney Mitchell J. Stein was controlling most of the company’s business activities, hiring promoters to tout Heart Tronics stock on the Internet, and reaping nearly $8 million from secret trades that he orchestrated.

According to the SEC’s complaint filed in federal court in Los Angeles, Gault and Perkins rarely questioned Stein’s fraudulent agenda and abdicated their fiduciary responsibilities under the Sarbanes-Oxley Act. Stein and Gault together defrauded one investor into making a substantial investment in Heart Tronics based on false representations that his money would fund the company’s operations. Instead, Stein and Gault diverted the investor’s proceeds for personal use, including the purchase of Heart Tronics stock in Gault’s personal brokerage account “Catch 83” to create the false appearance of volume and investor demand for the stock.

In a parallel criminal investigation, the U.S. Department of Justice today announced the arrest of Stein.

The SEC’s complaint charges the defendants with various violations of the federal securities laws and seeks disgorgement of ill-gotten gains with prejudgment interest financial penalties and permanent injunctive relief.

December 20, 2011 | Permalink | Comments (0) | TrackBack (0)

New York's Highest Court Holds that Investors Can Bring Common Law Claims for Breach of Fiduciary Duty and Gross Neglience

In a short and sweet opinion, the New York Court of Appeals significantly improved investor protection in New York state law today by holding that the state's Martin Act does not preempt an investor's common law claims for breach of fiduciary duty and gross negligence.  Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Management Inc., 2011 NY Slip Opinion 09162 (Dec. 20, 2011).  The lower state courts had split on this question, and the federal district court in S.D.N.Y., in particular, had asserted preemption.

Plaintiff, Morgan Investment Management, alleged that J.P. Morgan had mismanaged the investment portfolio of an entity (Orkney Re II) whose obligations MOM guaranteed.  As an express third-party beneficiary of an investment management agreement between J.P. Morgan and Orkney, MOM alleged that J.P. Morgan invested Orkney's assets heavily in high-risk securities and failed to diversify the portfolio or advise Orkney of the risks.  In addition, it alleged that J.P. Morgan improperly made investment decisions in favor of another Orkney investor that was a J.P. Morgan client.

The Supreme Court granted J.P. Morgan's motion to dismiss the complaint in its entirety on grounds of preemption.  The Appellate Division, however, modified by reinstating the breach of fiduciary duty and gross negligence claims, thus setting up the appeal to the Court of Appeals.

The Court of Appeals rejected J.P. Morgan's argument that the common law breach of fiduciary duty and gross negligence claims must be dismissed because they are preempted by the Martin Act in short order.  The Court stated that "[legislative intent is integral to the question of whether the Martin Act was intended to supplant nonfraud common-law claims."  Moreover, it was "well settled that 'when the common law gives a remedy, and another remedy is provided by statute, the latter is cumulative, unless made exclusive by the statute'....We have emphasized that 'a clear and specific legislative intent is required to override the common law' and that such a prerogative must be 'unambiguous'...."  The Court found no evidence in the plain text of the Martin Act that the legislature contemplated the elimination of common-law claims.

True, we have held that the Martin Act did not "create" a private right of action to enforce its provisions ....But the fact that "no new per se action was contemplated by the Legislature does not ... require us to conclude that the traditional...forms of action are no longer available to redress injury...."

Accordingly, an investor may bring a common-law claim that is not entirely dependent on the Martin Act for its viability, and "[m]ere overlap between the common law and the Martin Act is not enough to extinguish common-law remedies."

Finally, the Court recognized that policy concerns supported its conclusion because private actions further the goal of combating fraud and deception in securities transactions.  Quoting Judge Marrero from the S.D.N.Y. (whose scholarly opinion in Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 354, was instrumental in rethinking the analysis in the lower courts' preemption decisions), the Court concluded that to hold otherwise would leave the marketplace "less protected than it was before the Martin Act's passage, which can hardly have been the goal of its drafters...'"



December 20, 2011 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

SEC & DOJ Settle Charges Against Madoff Employee

The SEC and the DOJ announced that they have settled charges against a long-time Madoff employee,Enrica Cotellessa-Pitz, involving falsification of books and records in order to hide Madoff’s fraudulent investment advisory operations from regulators.

The SEC alleges that Cotellessa-Pitz, who worked at Bernard L. Madoff Investment Securities LLC (BMIS) for more than 30 years, assisted in falsifying BMIS’s internal accounting records in order to misclassify hundreds of millions of dollars of income purportedly generated by BMIS’s investment advisory operations. Cotellessa-Pitz also falsified financial statements filed with the SEC and other regulators as well as materials that were prepared to deceive SEC staff examiners, federal and state tax auditors, and other external reviewers.

The U.S. Attorney’s Office for the Southern District of New York announced parallel criminal charges against Cotellessa-Pitz, who has pled guilty and also consented to the entry of a partial judgment in the SEC’s civil case against her. Subject to court approval, the proposed partial judgment will impose a permanent injunction against Cotellessa-Pitz and require her to disgorge ill-gotten gains and pay a fine in amounts to be determined by the court at a later date.

December 20, 2011 | Permalink | Comments (0) | TrackBack (0)