Securities Law Prof Blog

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

Tuesday, January 31, 2012

Will STOCK Act "Repair Deficit of Trust Between Washington and the American People"?

Spurred on by President Obama's State of the Union address, the Senate yesterday voted, by a vote of 93-2,  to take up the Stop Trading on Congressional Knowledge Act of 2012 (STOCK Act).  This would allow the Senate to move on to consideration of the bill.  The White House issued a statement, calling it "an important step to repair the deficit of trust between Washington and the American people."

S. 2038(Download 112th_S.2038[1]) would prohibit members of Congress and Congressional employees from using any nonpublic information derived from the individual's position, or gained from performance of the individual's duties, for personal benefit.  It would make clear that members and employees are not exempt from the insider trading prohibitions and owe a duty of trust and confidence to Congress, the U.S. government and its citizens.  The SEC is also given authority to issue rules to implement the prohibition.

In addition, the bill would require public filing and disclosure of financial disclosure forms of members of Congress and Congressional staff.

There has been no action on the proposed legislation at the House.

January 31, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, January 30, 2012

SEC Charges Former Execs at British Sub of NYSE Company with Accounting Fraud

The SEC charged four former senior executives and accountants at the British subsidiary of NYSE-listed Symmetry Medical Inc, a manufacturer of medical devices and aerospace products, for their roles in an accounting fraud that was so pervasive that it distorted the financial statements of the parent company.  The SEC also reached settlements with the company’s former CEO and current CFO, who were not involved or aware of the scheme at the subsidiary, to recover bonus compensation and stock profits they received while the fraud was occurring and inflating company profits.

The SEC alleges that vice president for European operations Richard J. Senior, finance director Matthew Bell, controller Lynne Norman, and management accountant Shaun P. Whiteley orchestrated and carried out the fraud at Thornton Precision Components (TPC), which is the Sheffield, England-based subsidiary of Symmetry Medical Inc. The accounting scheme involved the systematic understatement of expenses and overstatement of assets and revenues at TPC, and materially distorted Symmetry’s financial statements for a three-year period.

The four executives and accountants, as well as Symmetry in a separate administrative proceeding, agreed to settle the SEC’s charges, and the subsidiary’s two outside auditors formerly of Ernst & Young LLP UK agreed to suspensions for their deficient audits.

According to the SEC’s complaint filed in federal court in South Bend, Ind., Symmetry’s annual financial statements for 2005 and 2006 as well as other reporting periods were materially misstated as a result of misconduct in the reporting of TPC’s financials. In a separate complaint also filed in the same federal court, the SEC is seeking reimbursement for bonuses and other incentive-based and equity-based compensation received by Symmetry’s former CEO Brian S. Moore under Section 304 of the Sarbanes-Oxley Act. Under the settlement, subject to court approval, Moore agreed to reimburse $450,000 to Symmetry.

The SEC also instituted separate settled administrative proceedings against Symmetry and its CFO Fred L. Hite. The SEC finds that Hite failed to provide an internal audit status report concerning TPC to Symmetry’s Audit Committee in July 2006. For its part, Symmetry agreed to a cease-and-desist order against future financial reporting, books-and-records and internal controls violations.

The SEC separately instituted and settled administrative proceedings against two associate chartered accountants in the United Kingdom – Christopher J. Kelly and Margaret Hebb née Whyte – who were the former audit partner and audit manager on Ernst & Young LLP UK’s audits of TPC for its 2004 to 2006 fiscal years (in the case of Kelly) and its 2005 and 2006 fiscal years (in the case of Hebb).  

January 30, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Reports that 76% of Investors Chose All-Public Panels in First Year of Choice

On Feb. 1, 2011, the SEC approved the FINRA rule change that permits customers to select panels consisting solely of all-public arbitrators (i.e., no industry arbitrator).  After nearly a year in operation, Linda Fienberg, head of FINRA's arbitration program, reports that 76% of investors chose the all-public option, according to Investment News.  Ms. Fienberg says this is a "bit surprising," because the numbers in the pilot program were lower.  The pilot program, however, could only be used by customers of a few large brokerage firms that voluntarily participated and could not be used in cases where the individual registered representative was named as a party.

Do all-public panels arrive at results that are more favorable to investors?  There has not yet been examination of the data, and this will certainly be carefully watched by observers.  Meanwhile, the consensus is that the FINRA arbitration forum gets high marks for instituting this change.

Perhaps, in light of the popularity of the all-public panel (a result that does not surprise me), FINRA will next consider a rule change to make all-public panels the default option.  Under the current rule, unless the all-public panel is selected within a relatively short time frame, the claimant is stuck with the default choice -- one industry and two public arbitrators.  This can create confusion and an unfortunate choice by the per se claimant or inexperienced counsel.

Inv News, All-public panels are a hit with investors, Finra says

January 30, 2012 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Friday, January 27, 2012

New Residential Mortgage-Backed Securities Working Group Hopes to Restore America's Trust in Financial Sector

Here is more information on the joint state-federal mortgage abuse investigation unit announced by President Obama in the State of the Union address, from New York AG's website:

The new Residential Mortgage-Backed Securities Working Group ...brings together the Department of Justice (DOJ), several state law enforcement officials – led by Attorney General Schneiderman - and other federal entities to investigate those responsible for misconduct contributing to the financial crisis through the pooling and sale of residential mortgage-backed securities. It builds upon ongoing state and federal investigations, while also launching new ones.

The goals of this joint investigation will be to:

Hold accountable any institutions that violated the law;
Compensate victims and help provide relief for homeowners struggling from the collapse of the housing market, caused in part by this wrongdoing; and
To help us finally turn the page on this destructive period in our nation’s history.

...the new working group will include 55 Department of Justice attorneys, analysts, agents and investigators. As it begins its work, 15 attorneys – civil and criminal – and 10 FBI agents and analysts will be initially assigned to the working group. An additional 30 attorneys, investigators and other staff from U.S. Attorney’s Offices around the country will join the working group’s efforts, in addition to existing state and federal investigations into similar misconduct under those authorities. 

January 27, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Thursday, January 26, 2012

SEC Charges Latvian Trader with Hacking into Customers' Accounts

The SEC charged a trader in Latvia for conducting a widespread online account intrusion scheme in which he manipulated the prices of more than 100 NYSE and Nasdaq securities and caused more than $2 million in harm to customers of U.S. brokerage firms.  The SEC also instituted related administrative proceedings today against four electronic trading firms and eight executives charged with enabling the trader’s scheme by allowing him anonymous and unfiltered access to the U.S. markets.

According to the SEC’s complaint filed in federal court in San Francisco, Igors Nagaicevs broke into online brokerage accounts of customers at large U.S. broker-dealers and drove stock prices up or down by making unauthorized purchases or sales in the hijacked accounts. This occurred on more than 150 occasions over the course of 14 months. Nagaicevs – using the direct, anonymous market access provided to him by various unregistered firms – traded those same securities at artificial prices and reaped more than $850,000 in illegal profits.

According to the SEC’s orders instituting administrative proceedings against the four electronic trading firms, they allowed Nagaicevs to trade through their electronic platforms without first registering as brokers. Each of the trading firms provided him online access to trade directly in the U.S. markets through an account held in the firm’s name. These firms gave Nagaicevs a gateway to the U.S. securities markets while circumventing the protections of the federal securities laws, including requirements for brokers to maintain and follow adequate procedures to gather information about customers and their trading.

One firm and two individuals each agreed to settle the charges. 

January 26, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)


The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) released its most recent Quarterly Report to Congress on Jan. 26, 2012 (Download SIGTARP.January_26_2012_Report_to_Congress[1]), and it makes for interesting reading.  From the executive summary:

TARP will continue to exist for years. TARP programs that support the housing market and certain securities markets are scheduled to last until as late as 2017, and Treasury can spend an additional $51 billion on these programs during those years. Taxpayers are still owed $132.9 billion in TARP funds, and taxpayers will never get back some of these funds. Some programs were designed as a Government subsidy with no return to taxpayers. Treasury has already written off or realized losses of $12 billion and Treasury predicts losses on other TARP investments. The Congressional Budget Office recently increased its estimated cost of TARP to $34 billion. One fallout of slow economic recovery is that it slows Treasury’s progress in recouping outstanding TARP funds. Unwinding Treasury investments in 458 institutions, including American International Group, Inc. (“AIG”), General Motors Corp. (“GM”), Ally Financial Inc. (“Ally Financial”), and community banks, in the near term could prove challenging as markets remain volatile and banks struggle to stay on their feet. Financial stress continues to pose obstacles to economic recovery, in part due to an 8.5% unemployment rate, decreased consumer confidence, nonperforming mortgages, and job cuts and asset sales by some of the nation’s largest institutions.

The U.S. Government continues to own 77% of AIG, 32% of GM and 74% of Ally.  Unwinding these investments is "likely to take several years." 

The Report also summarizes the findings of its previously released report examining executive compensation determinations made by the Office of the Special Master for TARP Compensation (Kenneth Feinberg), which found that

former Special Master Kenneth Feinberg could not effectively rein in excessive compensation at these companies because he was under the constraint that his most important goal was to get the companies to repay TARP.

SIGTARP goes on to paint a gloomy picture and epress continuing concerns about executive compensation:

There has been little fundamental change in the compensation structures at the largest institutions. The integrity of our financial system remains at risk, with many former TARP recipients now designated as systemically important financial institutions (“SIFIs”) that continue with compensation structures that may encourage risk taking. The implicit guarantee that came from the Government’s unprecedented intervention resulted in moral hazard, and companies continue to engage in risky behavior. SIFIs have a responsibility to discipline risk taking that could potentially trigger systemic consequences, including as it relates to compensation. Because companies generally have shown little or no appetite for reforming executive compensation practices, the economy remains at risk that compensation could play a material role in the event of a future crisis.

January 26, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

New York AG Will Head New Mortgage Investigation Unit

In his State of the Union Address, President Obama announced that he would create a financial crimes unit to crack down on fraud:

We’ll also establish a Financial Crimes Unit of highly trained investigators to crack down on large-scale fraud and protect people’s investments. 

This surprised me because I thought that's what the DOJ and the SEC were supposed to do, and, according to their officials, are doing.

President Obama also announced a state-federal coalition to deal with mortgage fraud:

And tonight, I’m asking my Attorney General to create a special unit of federal prosecutors and leading state attorney general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis. (Applause.) 
This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.

Again, one can question why an aggressive investigation on either the state or federal level has not taken place before.  Nevertheless, more information is emerging about this state-federal investigation, which apparently will be led by New York State AG Eric Schneiderman.   After the State of the Union Address, AG Schneiderman released the following statement:

"I would like to thank President Obama for his leadership in the creation of a coordinated investigation that marshals state and federal resources to bring justice for the victims of the misconduct that caused the mortgage crisis.

"In coordination with our federal partners, our office will continue its steadfast commitment to holding those responsible for the economic crisis accountable, providing meaningful relief for homeowners commensurate with the scale of the misconduct, and getting our economy moving again.

"The American people deserve a robust and comprehensive investigation into the global financial meltdown to ensure nothing like it ever happens again, and today's announcement is a major step in the right direction."

Bloomberg reports that the mortgage investigation unit will focus on bank conduct that caused the housing bubble and bust, including the securitization of loans.  The unit will include DOJ, SEC and IRS officials and will be part of a task force created in 2009 to investigate and prosecute financial fraud cases.  Bloomberg, Obama Creates Unit to Probe Mortgage Misconduct by Banks



January 26, 2012 in News Stories, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 25, 2012

FINRA Fines Merrill Lynch for Not Letting Brokers Arbitrate Bonus Disputes

FINRA fined Merrill Lynch, Pierce, Fenner & Smith $1 million for failing to arbitrate disputes with employees relating to retention bonuses. Registered representatives who participated in the bonus program had to sign a promissory note that prevented them from arbitrating disagreements relating to the note, forcing the registered representatives to resolve disputes in New York state courts, which greatly limits the ability of defendants to assert counterclaims in such actions.

FINRA found that Merrill Lynch, after merging with Bank of America in January 2009, implemented a bonus program to retain certain high-producing registered representatives and purposely structured it to circumvent the requirement to institute arbitration proceedings with employees when it sought to collect unpaid amounts from any of the registered representatives who later left the firm. In January 2009, Merrill Lynch paid $2.8 billion in retention bonuses structured as loans to over 5,000 registered representatives.  Also, Merrill Lynch structured the program to make it appear that the funds for the program came from MLIFI, a non-registered affiliate, rather than from the firm itself, allowing it to pursue recovery of amounts due in the name of MLIFI in expedited hearings in New York state courts to circumvent Merrill Lynch's requirement to arbitrate disputes with its associated persons. Later that year, after a number of registered representatives left the firm without repaying the amounts due under the loan, Merrill Lynch filed over 90 actions in New York state court to collect amounts due under the promissory notes, thus violating a FINRA rule that requires firms to arbitrate disputes with employees.

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


January 25, 2012 in Other Regulatory Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Class Action Waiver in FLSA Case Remains Unenforceable After Concepcion, According to S.D.N.Y.

The Southern District of New York recently denied a motion to reconsider a prior ruling that refused to send a matter to arbitration because an individual arbitration would prevent the plaintiff from vindicating her statutory rights.  Sutherland v. Ernst & Young, 10 Civ. 3332 (MHD) (Jan. 13, 2012).  Judge Wood rejected E&Y's argument that the U.S. Supreme Court's opinion in AT&T Mobility v. Concepcion (which held that California's Discover Rule, striking down class waivers as unconscionable in contracts of adhesion, was preempted by the FAA) mandated a reversal of her earlier decision.  In Sutherland, the plaintiff  brought a class action against her former employer charging violations of the Fair Labor Standards Act.  E&Y sought to send the matter to arbitration based on an arbitration agreement that required arbitration on an individual basis only.  Judge Wood had previously held that the plaintiff would be unable to vindicate her statutory rights on an indvidual basis because of the costs associated with an individual claim in relation to any expected recovery (Sutherland asserted her losses were approximately $1800.)  She based her decision on the Second Circuit's opinion in Italian Colors Restaurant v. American Express Travel Related Services Co., 634 F.3d 187 (2d Cir. 2011) (AmEx II), which held that the enforceability of a class action waiver must be determined on a case-by-case basis, including the cost of vindicating the claim when compared to the plaintiff's potential recovery. 

In its motion for rehearing, E&Y argued that Concepcion overruled the case-by-case analysis set forth in the Second Circuit's AmEx II opinion and required the court to give effect to the class waiver provision.  Judge Wood, however, did not agree.  Although she acknowledged that the applicability of Concepcion to her previous order was "a close question," she found that the facts in the present case were significantly different from those in Concepcion, because, unlike the Concepcions, Sutherland was not able to vindicate her statutory rights absent a collection action.  She noted that the Supreme Court emphasized the provision in the AT&T arbitration agreement that would ensure that the Concepcions would be able to obtain redress for their claims and, in fact, were better off in arbitration than as members of a class action.  In contrast, Sutherland demonstrated that she would not be able to obtain representation or vindicate her rights on an individual basis because of the small amount of her claim.  Accordingly, Sutherland's case is analogous to situations where the Supreme Court has stated that it would not enforce contractual agreements that would operate "as a prospective waiver of a party's right to pursue statutory remedies."

In addition, Judge Wood relied on the fact that while the Discover Rule was a state common law contract doctrine and accordingly preempted by the FAA, the analysis under AmEx II is based on federal courts' interpretation of the FAA itself.

It is interesting to note that the Second Circuit itself may not be so confident about the continuing validity of AmEx II after Concepcion.  In light of the Supreme Court's decision the Second Circuit panel that decided AmEx II announced that it "is sua sponte considering rehearing" (Aug. 2, 2011).   It has not spoken on the subject since issuing that statement. 

January 25, 2012 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Monday, January 23, 2012

Diamondback Settles Insider Trading Charges; SEC Cites Its Cooperation

The SEC announced that Diamondback Capital Management LLC has agreed to pay more than $9 million to settle insider-trading charges brought by the Commission on Jan. 18. The SEC said it considered the substantial cooperation that Diamondback provided, including conducting extensive interviews of staff, reviewing voluminous communications, analyzing complex trading patterns to determine suspicious trading activity, and presenting the results of its internal investigation to federal investigators. As part of the proposed settlement, the hedge fund adviser also has entered into a non-prosecution agreement with the U.S. Attorney’s Office for the Southern District of New York.

Under the proposed settlement, Diamondback will give up more than $6 million of allegedly ill-gotten gains and pay a $3 million civil penalty. In addition, Diamondback consented to a judgment that permanently enjoins it from future violations of federal anti-fraud laws. The proposed settlement would resolve charges of insider trading by Diamondback in shares of Dell Inc. and Nvidia Corp. in 2008 and 2009.

The SEC also filed charges against a second hedge fund advisory firm and seven individuals, including a former Diamondback analyst and former Diamondback portfolio manager. 

January 23, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sunday, January 22, 2012

Spindler on Mandatory Long Term Compensation

Hidden Costs of Mandatory Long Term Compensation, by James C. Spindler, University of Texas School of Law; McCombs School of Business, University of Texas at Austin, was recently posted on SSRN.  Here is the abstract:

After the 2008 financial panic, long term compensation measures have gained favor as a way to limit managerial opportunism and excessive risk-taking. These measures, which may become mandatory for systemically important institutions, include restriction (i.e., deferral) of stock grants for a period of years, and, in the event of performance reversals, divestment of deferred stock and clawbacks of bonus compensation. These measures are considered uncontroversial enough that some have suggested that all public companies, not just systemically important firms, should adopt them.

In this article, I argue that benefits of long term compensation have been overstated while the potential downsides have been largely ignored. Restricted periods for equity grants must be large compared to the executive’s tenure in order to have a great effect upon behavior overall, and mandatory clawback provisions end up transferring what would have been bonus pay into salary. Further, to the extent that long-term compensation does affect behavior, these consequences are not necessarily good. I show that given fairly reasonable assumptions of executive risk aversion, information content of long term and short term price signals, and managerial control over the timing of project execution and disclosure, a long-term focus can have significant negative effects.

January 22, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

McDonnell on Too Big To Fail

Financial Regulation Reform and Too Big to Fail, by Brett McDonnell,
University of Minnesota Law School, was recently posted on SSRN.  Here is the abstract:

Perhaps the leading critique of the Dodd-Frank Act is that it does too little to address the problem of too big to fail (“TBTF”) financial institutions. The critique of TBTF institutions has two main components. The economic argument focuses on a major moral hazard problem. The political argument focuses on the political clout of TBTF institutions. There are important truths in both the economic and the political argument against TBTF institutions. However, there are also important limits to the truth of both arguments. I believe the limits are more central than the truths, and that if anything Dodd-Frank has gone too far in focusing on TBTF institutions. This paper first explores the truths and limits of the economic argument, and then does the same for the political argument. It then lays out a map for my own preferred approach to the TBTF problem. In the short run, we need relatively modest but firm regulation. Dodd-Frank looks pretty good in many ways, but still needs some important fixes. The longer run is more daunting: we need to find ways to develop alternative financial and other institutions that are smaller and more focused on community and other stakeholder interests.

January 22, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Nelson on Say on Pay and Derivative Shareholder Litigation

Ending the Silence: Shareholder Derivative Suits and Amending the Dodd-Frank Act so 'Say on Pay' Votes May Be Heard in the Boardroom, by William Alan Nelson II, George Washington University - Law School, was recently posted on SSRN.  Here is the abstract:

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) has broad and deep implications that will touch every corner of the financial services industry, as well as multiple other industries. This article is the first to fully examine shareholder derivative lawsuits filed after a negative “say on pay” vote on executive compensation under the Dodd-Frank Act. The article begins by providing a history of “say on pay” votes and examining the “say on pay” provisions of the Dodd-Frank Act. The article transitions into a discussion of how the Dodd-Frank “say on pay” provisions are currently being utilized by shareholders in derivative lawsuits. Specifically, the article will analyze in detail the legal theories raised and remedies sought by the litigants in the only two post-Dodd-Frank decisions that have been handed down by courts to date.

Based on this analysis, the article provides recommendations for companies on how to re-write their “pay for performance” executive compensation policies and how to respond positively and actively to a negative “say on pay” vote on executive compensation. The article concludes by proposing an amendment to the Dodd-Frank Act which, if promulgated, would provide that a second successive negative “say on pay” vote (50% or more of shareholder votes cast against the proposed executive compensation package) on executive compensation would prompt a vote on a “spill” resolution and, if that resolution passes, all directors, except for the managing director, must stand for re-election at a special “spill” meeting within 90 days of the annual shareholder meeting where the “spill” resolution passed.

January 22, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Thursday, January 19, 2012

Can Carlyle Group Require Investors to Arbitrate All Disputes (and no Class Arbitration)?

Carlyle Group, L.P., the private equity firm, is preparing to go public and has filed with the SEC a registration statement that discloses that its partnership agreement will require arbitration of all investors' disputes, including federal securities claims.  In addition, the agreement provides that investors may only bring claims in their individual capacities and not as a class action.  The agreement also contains a confidentiality agreement, so that parties cannot disclose any of the arbitration materials, including any awards. Here is the registration statement as filed with the SEC.  The Registration Statement contains other anti-investor provisions that Steven Davidoff has ably analyzed in his New York Times  Dealbook blog, Carlyle Readies an Unfriendly I.P.O. for Shareholders.

I have written two law review articles exploring the possibility that publicly traded issuers may seek to compel arbitration and prohibit class arbitration: 

Arbitration of Investors' Claims Against Issuers: An Idea Whose Time Has Come?, Law and Contemporary Problems (forthcoming) and available on SSRN, and

Eliminating Securities Fraud Class Actions Under the Radar, 2009 Columbia Bus. Law Rev. 802 and available on SSRN.

As I describe in those articles, arbitration of investors' claims against public issuers is an "idea whose time has come" for over twenty years.  Although proposals to require arbitration have been floated periodically, publicly traded domestic issuers and their counsel have not seriously pursued them, probably because of legal obstacles to their implementation, including the fact that the SEC has never publicly repudiated its staff position that an arbitration provision in a publicly traded issuer's governance documents would violate the anti-waiver provisions of the federal securities laws.  In addition, until the recent U.S. Supreme Court opinion in AT&T Mobility LLC v. Concepcion, issuers and their counsel may not have perceived significant advantages to arbitration to warrant challenging the SEC on this issue and risking criticism in the court of public opinion.  However, Concepcion is a game-changer; in that case the Court upheld a provision in a consumer contract that disallowed class arbitration.  Accordingly, I predicted that issuers may be able to achieve an advantage to the adoption of an arbitration provision that they were not able to achieve previously -- the elimination of the securities class claim!  My prediction has now come to pass.

Will the SEC try to stop Carlyle?  When Christopher Cox was SEC Chairman, there were rumors that the agency was giving consideration to allowing issuers to require arbitration.  Moreover, there are already foreign private issuers whose securities are traded in the U.S. markets that require arbitration, the best known of which is Royal Dutch Shell.  In light of these developments, some Commissioners may be ready to back away from the agency's previous opposition to arbitration clauses in public issuer's governance documents.

To my knowledge only two of the current Commissioners have stated publicly an opinion on the use of mandatory arbitration in investors' agreements with their broker-dealers.  Commissioners Elisse Walter and Luis Aguilar have previously expressed reservations about the use of mandatory arbitration clauses in customers' brokerage agreements, so I would expect that they would not look favorably on Carlyle's arbitration agreement, which is a considerable extension of the concept of an "agreement" for purposes of the Federal Arbitration Agreement.  It is likely that it would come down to SEC Chair Mary Schapiro, who previously was the CEO of FINRA, which sponsors the primary arbitration forum for the securities industry.  To date she has been circumspect about expressing a view on mandatory arbitration.  Even assuming that she supports mandatory arbitration of customer-broker disputes, the Carlyle "agreement" mandating arbitration does not bear much resemblance to the arbitration agreements entered into between customers and their brokers.  The latter involve an actual, one-on-one contractual rrelationship (albeit standard-form) between the customer and the broker.  Including a arbitration provision in a governance document that is included in a Registration Statement and that purports to bind all subsequent investors may be a "bridge too far" for Ms. Schapiro.  

Certainly the Carlyle Group is pushing the envelope here with its "take it or leave it" attitude.  I hope the SEC shows some backbone and doesn't let this go by without a fight. 

January 19, 2012 in SEC Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

National Business Law Scholars Conference: Call for Papers

The National Business Law Scholars Conference (NBLSC), formerly known as the Midwest Corporate Legal Scholars Conference, will be held on Wednesday, June 27th and Thursday, June 28th at University of Cincinnati College of Law in Cincinnati, Ohio.  This is the third annual meeting of the NBLSC, which has been renamed this year to reflect its national scope and the widely varied interests of its participants.  We welcome all on-topic submissions and will attempt to provide the opportunity for everyone to actively participate.  We will also attempt to assign a commentator for each paper presented.  Junior scholars are especially encouraged participate, and we will hold a special “how-to” panel for prospective business law scholars discussing the job market and transitioning into the legal academy. 

To submit a presentation, email Professor Eric C. Chaffee at [email protected] with an abstract or paper by April 15, 2012.  Please title the email “NBLSC Submission – {Name}”.  If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance”.  Please specify in your email whether you are willing to serve as a commentator or moderator.  A conference schedule will be circulated in early June.

Conference Organizers:

Barbara Black (University of Cincinnati)
Eric C. Chaffee (University of Dayton)
Steven M. Davidoff (The Ohio State University)

January 19, 2012 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 18, 2012

SEC Seeks Public Comment for Financial Literacy Study

The SEC published on its website a request for public comment (Download 34-66164[1]) on financial literacy and investor disclosure issues that it is studying 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. The SEC is using qualitative and quantitative research, including investor testing, to help inform the study. To supplement its research, the SEC also is seeking public comment on financial literacy and investor disclosure issues.

Consistent with the Dodd-Frank Act’s specifications for the study, the SEC is seeking comment on methods to improve the timing, content, and format of disclosures to investors regarding financial intermediaries, investment products, and investment services. It also requests comment on information that retail investors need to make informed financial decisions on hiring a financial intermediary or purchasing an investment product or service typically sold to retail investors, including mutual funds. In addition, the SEC seeks comment on how to make investment expenses and conflicts of interest in investment transactions more transparent to investors.

January 18, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Florida Bank and CEO with Misleading Investors about Loan Risks

The SEC charged BankAtlantic Bancorp, the holding company for one of Florida’s largest banks, and its its CEO and chairman Alan Levan with misleading investors about growing problems in one of its significant loan portfolios early in the financial crisis.  According to the SEC, they made misleading statements in public filings and earnings calls in order to hide the deteriorating state of a large portion of the bank’s commercial residential real estate land acquisition and development portfolio in 2007. BankAtlantic and Levan then committed accounting fraud when they schemed to minimize BankAtlantic’s losses on their books by improperly recording loans they were trying to sell from this portfolio in late 2007.

According to the SEC’s complaint, BankAtlantic and Levan knew that a large portion of the loan portfolio — which consisted primarily of loans on large tracts of lands intended for development into single family housing and condominiums — was deteriorating in early 2007 because many of the loans had required extensions due to borrowers’ inability to meet their loan obligations. Some loans were kept current only by extending the loan terms or replenishing the interest reserves from an increase in the loan principal. Levan knew this negative information in part from participating in the bank’s Major Loan Committee that approved the extensions and principal increases. BankAtlantic and Levan also were aware that many of the loans had been internally downgraded to non-passing status, indicating the bank was deeply concerned about those loans.

The SEC’s complaint seeks financial penalties and permanent injunctive relief against BankAtlantic and Levan to enjoin them from future violations of the federal securities laws. The complaint also seeks an officer and director bar against Levan.

January 18, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Fines Citigroup for Failure to Disclose Conflicts in Research Reports

FINRA fined Citigroup Global Markets, Inc. $725,000 for failing to disclose certain conflicts of interest in its research reports and research analysts' public appearances.  Citigroup failed to disclose potential conflicts of interest inherent in their business relationships in certain research reports it published from January 2007 through March 2010. Citigroup and/or its affiliates managed or co-managed public securities offerings, received investment banking or other revenue from, made a market in the securities of and/or had a 1 percent or greater beneficial ownership in covered companies, and did not make these required disclosures in certain research reports. In addition, Citigroup research analysts failed to disclose these same potential conflicts of interest in connection with public appearances in which covered companies were mentioned. 

FINRA found that Citigroup failed to disclose the required information because the database it used to identify and create the disclosures was inaccurate and/or incomplete due primarily to technical deficiencies. In addition, Citigroup failed to have reasonable supervisory procedures in place to ensure that the firm was populating its research reports with required disclosures.


January 18, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Stanford's Competent to Stand Trial, Judge Rules

R. Allen Stanford, allegedly the most notorious Ponzi schemer after Bernie Madoff, will go to trial next week.  A Texas federal judge rejected motions by defense attorneys that Stanford was not competent to stand trial and that they needed more time to prepare for trial.  Stanford has pleaded not guilty to 14 counts of fraud involving bogus high-interest certificates of deposit at Antigua-based Stanford International Bank.  NYTimes, Trial Set for Texas Financier

January 18, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

DOJ, SEC Bring Insider Trading Charges Against Seven Fund Managers

The Wall St. Journal reported earlier today on arrests of seven people in New York, Boston and California on insider trading charges, which the newspaper describes as "a broadening of the government's long-running investigation of employees of public companies sharing confidential information with hedge-fund analysts and traders."  Among those arrested were a former portfolio manager at Diamondback Capital Management, an analyst with Sigma Capital Management (an affiliate of SAC Capitol Advisors) and a co-founder of former hedge fund group Level Global Investors.  WSJ, Federal Officials Charge Seven in Insider Probe .

The SEC soon followed and announced charges against two hedge fund advisory firms and the same seven fund managers alleging a $78 million insider trading scheme about Dell’s quarterly earnings and other similar inside information about Nvidia Corporation.

The SEC alleges that a network of closely associated hedge fund traders at Stamford, Conn.-based Diamondback Capital Management LLC and Greenwich, Conn.-based Level Global Investors LP illegally obtained the material nonpublic information about Dell and Nvidia and in turn tipped several others.  According to the SEC’s complaint, the illicit gains in the Dell insider trades exceeded $62.3 million, and the illicit gains in the Nvidia insider trades exceeded $15.7 million. The SEC’s complaint seeks a final judgment ordering the defendants to disgorge their ill-gotten gains plus prejudgment interest, ordering them to pay financial penalties, and permanently enjoining them from future violations of these provisions of the federal securities laws.

January 18, 2012 in News Stories, SEC Action | Permalink | Comments (0) | TrackBack (0)