Securities Law Prof Blog

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

Saturday, June 30, 2012

Guttentag on the JOBS Act's Periodic Disclosure Requirements

Michael Guttentag (Loyola Los Angeles) presented his paper, Patching a Hole in the Jobs Act: How and Why to Rewrite the Rules that Require Firms to Make Periodic Disclosures (Indiana Law Journal, forthcoming), at the National Business Law Scholars Conference, which University of Cincinnati College of Law hosted on June 27-28.  Here is the abstract:

This article considers if or when firms in the United States should be required to comply with federal periodic disclosure requirements. Such a consideration is timely. Provisions in the Jumpstart Our Business Startups Act of 2012 have made it much easier for firms to avoid federal periodic disclosure obligations, but these provisions were enacted based upon on a virtually non-existent legislative record and upended rules established only after careful consideration almost fifty years earlier.

Determining which firms should be required to comply with federal periodic disclosure requirements is best done in the context of a broader understanding of the history and economics of periodic disclosure regulation. This article provides such an understanding. The history of periodic disclosure regulation in the United States is traced back to its origins in the eighteenth century, and the economic analysis of periodic disclosure regulation is updated and refined to incorporate recent findings.

Building on this historical and economic understanding of periodic disclosure regulation, I consider anew if or when firms should be required to comply with federal periodic disclosure requirements. The analysis uncovers a flaw in the structure of the rules currently used to determine which firms must make periodic disclosures. To rectify this structural problem, I suggest that firms with a market capitalization of less than $35 million or fewer than 100 beneficial shareholders be granted an automatic exemption from periodic disclosure requirements. All other firms should be provided a choice between: 1) complying with federal periodic disclosure obligations, or 2) implementing measures that would mitigate the need for disclosure regulation, such as restricting share tradability or committing to an acceptable alternative disclosure regime.

June 30, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Peter Madoff Agrees to 10-Year Prison Term and Forfeiture of Assets

Peter Madoff pleaded guilty on Friday to a variety of charges, although he denied that he knew of Bernard's Ponzi scheme.  He admitted that he cheated on his taxes, put his wife on the payroll for a $100,000 no-show job, and submitted false filings to regulators.  He agreed to serve 10 years in prison and forfeit all of his assets.

Manwhile, the SEC brought civil charges, charging Peter with committing fraud, making false statements to regulators, and falsifying books and records in order to create the false appearance of a functioning compliance program over Madoff’s fraudulent investment advisory operations.

Also, according to the SEC’s complaint, Bernie Madoff realized in late 2008 that his decades-long scheme was on the verge of collapse. He told Peter Madoff that he could not pay billions of dollars of investor redemption requests and wanted to distribute remaining investor money to family, friends, and favored employees before the scheme collapsed. Peter Madoff then helped choose which family, friends and employees to pay, and rushed to withdraw $200,000 from BMIS’s bank account for himself before the fraud’s final downfall.

June 30, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, June 28, 2012

Schapiro Testifies on Implementing JOBS Act

SEC Chairman Chairman Mary L. Schapiro testified on the "JOBS Act in Action Part II: Overseeing Effective Implementation of the JOBS Act at the SEC" before the House Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs Oversight and Government Reform Committee, on June 28, 2012.

June 28, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Adopts Procedures for Review of Clearing Agency Actions

The SEC adopted rules that establish procedures for its review of certain clearing agency actions. The rules were required by Dodd-Frank, which called for a new regulatory framework for trading in over-the-counter derivatives, including swap agreements.

The rules detail how clearing agencies will provide information to the SEC about security-based swaps that the clearing agencies plan to accept for clearing. The information is intended to aid the SEC in determining whether such security-based swaps are required to be cleared.

The SEC also adopted rules requiring clearing agencies that are designated as "systemically important" to submit advance notice of changes to their rules, procedures, or operations if the changes could materially affect the nature or level of risk at those clearing agencies.

Most of the final rules will become effective 60 days after the date of publication in the Federal Register.

June 28, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Software Company with Bribing Morgan Chase Subsidiary to Get Business

The SEC charged that FalconStor Software, Inc., a Long Island, N.Y., data storage company, misled investors about bribes it paid to obtain business with a subsidiary of J.P. Morgan Chase & Co.  FalconStor admitted to the bribery scheme and agreed to pay a $2.9 million penalty and to institute enhanced compliance measures to settle the SEC’s civil lawsuit, filed in U.S. District Court for the Eastern District of New York. The settlement is subject to court approval. FalconStor will pay an additional $2.9 million as part of a deferred prosecution agreement with the U.S. Attorney’s Office for the EDNY, which filed a related criminal case against the Melville, N.Y., company.

According to the SEC, FalconStor’s now deceased co-founder, chairman, and former chief executive ordered the bribes, which were paid to three executives of the subsidiary, JPMorgan Chase Bank, National Association, and their relatives, starting in October 2007. Lavish entertainment at casinos, and payments in cash, traveler’s checks, gift cards, and grants of FalconStor options and restricted stock, helped FalconStor secure a multi-million dollar contract with the J.P. Morgan Chase subsidiary, the SEC said.

The J.P. Morgan Chase subsidiary became one of FalconStor’s largest customers and FalconStor touted the relationship in earnings calls and releases as proof of the strength of its products and its strides in moving to direct sales rather than relying on third-party distributors. The SEC said FalconStor never told investors about the bribes and inaccurately recorded the payments as “compensation,” “sales promotion,” or “entertainment” expenses.

FalconStor’s CEO resigned in September 2010, after admitting that he had been involved in improper payments to a customer, and FalconStor’s stock fell by more than 22 percent on the news.

June 28, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Fund Adviser Falcone with Fraud

The SEC filed fraud charges against New York-based hedge fund adviser Philip A. Falcone and his advisory firm, Harbinger Capital Partners LLC for illicit conduct that included misappropriation of client assets, market manipulation, and betraying clients. The SEC also charged Peter A. Jenson, Harbinger’s former Chief Operating Officer, for aiding and abetting the misappropriation scheme. Additionally, the SEC reached a settlement with Harbinger for unlawful trading.

In a separate, settled action, the SEC charged Harbert Management Corporation, whose affiliates served as the managing members of two Harbinger-related entities, as a controlling person in the market manipulation.

The SEC alleges that Falcone used fund assets to pay his taxes, conducted an illegal “short squeeze” to manipulate bond prices, secretly favored certain customers at the expense of others, and that Harbinger unlawfully bought equity securities in a public offering, after having sold short the same security during a restricted period.

The SEC filed actions in U.S. District Court for the Southern District of New York against Falcone, Jenson, and Harbinger, and, in connection with the illegal trading scheme, separately instituted and settled administrative and cease-and-desist proceedings against Harbinger.

In particular, the SEC alleges that:

Falcone fraudulently obtained $113.2 million from a hedge fund that he advised and misappropriated the proceeds to pay his personal taxes;
Falcone and two Harbinger investment managers through which Falcone operated manipulated the price and availability of a series of distressed high-yield bonds by engaging in an illegal “short squeeze;”
Falcone and Harbinger secretly offered and granted favorable redemption and liquidity rights to certain strategically-important investors in exchange for those investors’ consent to restrict redemption rights of other fund investors, and concealed the arrangement from the fund’s directors and investors; and
Harbinger engaged in illegal trades in connection with the purchase of common stock in three public offerings after having sold the same securities short during a restricted period.

June 28, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Simplified Arbitration's Dollar Limit Raised to $50,000

FINRA Rules 12800 and 13800 (Simplified Arbitration) of the Customer and Industry Codes of Arbitration Procedure (Codes) provide streamlined arbitration procedures for claimants seeking damages of $25,000 or less. The SEC approved amendments to the Codes to raise the dollar limit for simplified arbitration from $25,000 to $50,000. The amendments are effective on July 23, 2012, for all cases filed on or after
the effective date.

June 28, 2012 in Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Peter Madoff Expected to Plead Guilty Today

Peter Madoff, brother of Bernard, will plead guilty to criminal charges and accept a prison term of 10 years today.  He has agreed to forfeit $143 billion.  The plea does not involve any admission that Peter knew about the illegal Ponzi scheme, but confirms allegations that he was a sham compiance officer who exercised no effective oversight over the firm's operations.

NYTimes, Madoff’s Brother Sets Plea Deal in Ponzi Case

June 28, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 26, 2012

Lawmakers Tweak Their Portfolios After Talking with Administration Officials

In case you missed it, this is well worth reading: 

On Sunday the Washington Post reports on 34 members of Congress who reworked their financial portfolios during the financial crisis after phone calls or meetings with Treasury Secretary Henry Paulson, Timothy Geithner or Fed Chairman Bernanke, according to the newspaper's examination of appointment calendars and congressional disclosure forms.  The lawmakers changed portions of their portfolios 166 times within two business days of speaking or meeting with administration officials.  The paper did not turn up evidence of insider trading.  According to Professor Richard Painter (Minnesota), "Members of Congress are still loosey-goosey about what they require of themselves."  WPost, Lawmakers reworked financial portfolios after talks with Fed, Treasury officials

June 26, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Charges Adviser with Charging Fees For Nonexistent Services

The SEC sued AMMB Consultant Sendirian Berhad (AMC), a Malaysian investment adviser, alleging that for more than a decade, AMC charged a U.S. registered fund for advisory services that AMC did not provide. Kuala Lumpur-based AMC served as a sub-adviser to the Malaysia Fund, Inc., a closed-end fund that invests in Malaysian companies, whose principal investment adviser is Morgan Stanley Investment Management, Inc. (MSIM). The SEC alleges that AMC misrepresented its services during the fund’s annual advisory agreement review process for each year for more than 10 years, and AMC collected fees for advisory services that it did not provide.

AMC, a unit of AMMB Holdings Berhad, one of Malaysia’s largest banking groups, agreed to pay $1.6 million to settle the SEC’s charges, without admitting or denying the allegations. The case follows the SEC’s recent related action against the Malaysia Fund’s primary adviser, MSIM, and is part of an inquiry into the investment advisory contract renewal process by the SEC Enforcement Division’s Asset Management Unit.

According to the SEC, AMC submitted a report to the Malaysia Fund’s board of directors each year that falsely claimed that AMC was providing specific advice, research, and assistance to MSIM for the benefit of the fund. In reality, the SEC’s complaint said AMC’s services were limited to providing two monthly reports based on publicly available information that MSIM did not request or use. AMC’s advisory agreement with the fund was terminated in early 2008 after the SEC’s examination staff inquired about the services AMC was purportedly providing to the fund.


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

Facebook Finds Qualified Woman to Sit on its Board of Directors

I thought Facebook was curiously tone-deaf when it did not take the occasion of its IPO to address the lack of diversity on its board of directors, specifically the fact there were no women on the board.  This was especially curious since its COO, Sheryl Sandberg, is one of the foremost advocates on behalf of women advancing in the workforce. Yesterday, Facebook appointed Ms. Sandberg as a director -- she joins seven guys.  One small step .... Facebook Names Sheryl Sandberg to Its Board of Directors

June 26, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, June 25, 2012

NY Attorney General Announces $410 Million Settlement with Ezra Merkin

The New York Attorney General announced a $410 million settlement with J. Ezra Merkin, who controlled four funds that invested over $2 billion with Bernard M. Madoff on behalf of hundreds of investors.  Investors in the funds, Ariel Fund Ltd., Gabriel Capital L.P., Ascot Fund Ltd. and Ascot Partners L.P., lost in excess of $1.2 billion, while Merkin received hundreds of millions of dollars in management fees.

Under the agreement, Merkin will pay $405 million to compensate investors over a three-year period, and $5 million to the State of New York to cover fees and costs. This is the first settlement resulting from a government action against Merkin.

In April 2009, the Office of Attorney General charged Merkin with violations of the Martin Act, General Business Law § 352; and Executive Law § 63(12) for concealing Madoff’s control of the Merkin Funds and for breaches of his fiduciary duty to manage the funds prudently. The lawsuit sought damages, disgorgement of all fees by Merkin, and injunctive relief.

Depending on the size of their losses, eligible investors will be entitled to receive over 40 percent of their cash losses. Pursuant to a claims process, investors who were not aware of Merkin’s delegation to Madoff will receive a defined percentage of their losses, while those who were aware of Madoff’s role will be eligible to receive a smaller recovery. In addition, all investors are likely to receive additional payments at a future date when the Madoff Estate is able to distribute moneys recovered by Irving Picard, the Securities Investor Protection Corporation Trustee for the liquidation of Madoff’s Estate, who is not involved in Attorney General Schneiderman’s settlement.

For nearly two decades, Merkin presented himself as a skilled money manager and used his social and charitable connections to raise over $4 billion from hundreds of individuals, charities, and other investors. Merkin turned over to Madoff all of the money in the Ascot Funds, and a substantial portion of the Ariel and Gabriel Funds.

June 25, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Friday, June 22, 2012

Judge Approves "Chump Change" Settlement with Two Former Bear Fund Managers

Judge Frederic Block, Senior Judge on the federal district court in E.D.N.Y., recently approved, with reluctance, an SEC consent judgment with former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin for "chump change," because the SEC persuaded him that its power to recover losses for investors was limited.  SEC v. Cioffi (E.D.N.Y. 6/18/12)(Download Cioffi.061812[1])

Cioffi and Tannin were managers of two Bear Stearns hedge funds that collapsed in 2007.  The government brought criminal securities fraud changes against the men; a jury acquitted them in 2009.  The SEC persisted in its civil action and earlier this year presented a proposed consent decree for judicial approval.  It would require Cioffi to pay $800,000 and Tannin $250,000 as well as impose industry bars for three and two years, respectively. 

Noting that investors' losses amounted to approximately $1.6 billion, the judge initially questioned the adequacy of the settlement.  The SEC persuaded the court, however, that the agency had limited power to recoup investors' losses, since it was limited to seeking disgorgement of profits.  The judge also expressed concern over the obstacles Congress had placed on private litigation in the PSLRA.  The judge reluctantly approved the settlement and invited Congress to consider whether the government should do more to aid victims of securities fraud. 

June 22, 2012 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Thursday, June 21, 2012

Schapiro on JP Morgan Chase

SEC Chairman Mary L. Schapiro testified on “Examining Bank Supervision and Risk Management in Light of JPMorgan Chase’s Trading Loss” before the House Committee on Financial Services on June 19, 2012.

June 21, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Schapiro Testifies on Money Market Fund Reforms

SEC Chairman Mary L. Schapiro testified on “Perspectives on Money Market Mutual Fund Reforms” before the Senate Committee on Banking, Housing, and Urban Affairs on June 21, 2012.  Her testimony discussed the history of money market funds, the remaining systemic risk they pose to the financial system even after the 2010 reforms, and the need for further reforms to protect investors, taxpayers and the broader financial system.

June 21, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Stock Lending Charges Against New Jersey Businessman

The SEC charged a New Jersey businessman with running a stock-lending scheme that defrauded public company officials and brought restricted stock to the market.  The case is the second the SEC has brought this year involving stock lending. In March, the SEC charged two executives and their California-based firm with defrauding corporate officials in an $8 million stock-lending scheme.

Ayuda Equity Funding, LLC and AmeriFund Capital Holdings and owner Manuel M. Bello agreed to settle the SEC’s complaint without admitting or denying the allegations. Bello and the firms jointly agreed to return $3.2 million of allegedly ill-gotten gains, plus interest. Bello also agreed to pay a $500,000 penalty and be permanently barred from the securities industry.

According to the SEC’s complaint, Ayuda and AmeriFund reaped more than $3.2 million of illegal gains on loans to public company officers and directors who put up stock as collateral. Although some borrowers received written and oral assurances that the stock would not be sold as long as they did not default on their loan payments, Ayuda and AmeriFund sold the shares before or soon after making the loans, the SEC alleged.

The SEC also alleged that in at least 35 loan transactions, Ayuda and AmeriFund sold the borrowers’ restricted shares into the market without registering the transactions and the firms and Bello themselves failed to register with the SEC as brokers or dealers.

In a separate administrative proceeding, the SEC charged Howard L. Blum, alleging that he brokered numerous transactions for Ayuda without being registered as a broker or dealer. Blum, without admitting or denying the SEC’s findings, agreed to return more than $1 million of allegedly ill-gotten gains, plus interest, pay a $50,000 penalty, and be suspended from the securities industry for twelve months.

June 21, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Fines Merrill $2.8 Million for Overcharging Customers

FINRA announced that it fined Merrill Lynch, Pierce, Fenner & Smith, Inc. $2.8 million for supervisory failures that resulted in overcharging customers $32 million in unwarranted fees, and for failing to provide certain required trade notices. Merrill Lynch has provided $32 million in remediation, plus interest, to the affected customers.

 FINRA found that from April 2003 to December 2011, Merrill Lynch failed to have an adequate supervisory system to ensure that customers in certain investment advisory programs were billed in accordance with contract and disclosure documents. As a result, the firm overcharged nearly 95,000 customer accounts fees of more than $32 million. Merrill Lynch has since returned the unwarranted fees, with interest, to the affected customers.

Merrill Lynch also failed to provide timely trade confirmations to customers in certain advisory programs due to computer programming errors. As a result, from July 2006 to November 2010, Merrill Lynch failed to send customers trade confirmations for more than 10.6 million trades in over 230,000 customer accounts. In addition, Merrill Lynch failed to properly identify whether it acted as an agent or principal on trade confirmations and account statements relating to at least 7.5 million mutual fund purchase transactions. At various times, Merrill Lynch also failed to deliver certain proxy and voting materials, margin risk disclosure statements and business continuity plans.


June 21, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 20, 2012

SEC Adopts New Rule on Listing Standards for Compensation Committees & Compensation Advisers

The SEC approved a rule that directs national securities exchanges to adopt listing standards for public company boards of directors and compensation advisers. (Download 33-9330[1]) The new rule, required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, requires exchange listing standards to address:

  • The independence of the members on a compensation committee
  • The committee’s authority to retain compensation advisers
  • The committee’s consideration of the independence of any compensation advisers and
  • The committee’s responsibility for the appointment, compensation, and oversight of the work of any compensation adviser.

Once an exchange’s new listing standards are in effect, a listed company must meet the standards in order for its shares to continue trading on that exchange.

The SEC also amended its proxy disclosure rules to require new disclosures from companies about their use of compensation consultants and conflicts of interest.

The new rule and rule amendments will take effect 30 days after publication in the Federal Register. No later than 90 days after effectiveness, each exchange that lists equity securities must propose listing standards that comply with the new rule. The new listing standards must be approved by the Commission within one year of the new rule becoming effective.

June 20, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

AALS Section on Transactional Law and Skills -- Call for Papers

I am pleased to post this Call for Papers on behalf of the AALS Section on Transactional Law and Skills:

AALS Section on Transactional Law and Skills
Call for Papers
January 2013 Annual Meeting

             The AALS Section on Transactional Law and Skills will meet during the AALS Annual Meeting in New Orleans, Louisiana, from 1:30 pm – 3:15 pm on Saturday, January 5, 2013.  Please note this program in your calendar.  We hope to see you there.

             We are soliciting papers for presentation at the Annual Meeting.  The topic for this year’s session is: Researching and Teaching Transactional Law and Skills in an Increasingly Global World.

Two presenters will be chosen on the basis of paper summaries submitted in response to this Call for Papers. The topic encompasses the scholarship and teaching of international and comparative transactional law and cross-border transactions. The Executive Committee encourages submissions on a broad range of transactional law and skills issues related to this year’s topic. Paper proposals focused on the teaching of international and comparative transactional law and skills are welcomed, but the Executive Committee is especially interested in papers that explore international and cross-border transactions from an empirical, doctrinal, or theoretical perspective.  The Executive Committee specifically encourages submissions from junior scholars.

            If you are interested in presenting a paper, please submit a summary of no more than three double-spaced pages, by e-mail, on or before Monday, July 30, 2012. You also may submit a complete draft of your paper. Send your submission to Joan Heminway at The University of Tennessee College of Law ([email protected]). Papers will be reviewed and selected for presentation at the program by members of the Executive Committee of the Section on Transactional Law and Skills:

Afra Afsharipour, Treasurer (U.C. Davis)

Eric Gouvin, Chair-Elect (Western New England)

Joan Heminway, Chair (Tennessee)

Lyman Johnson (Washington and Lee/St. Thomas)

Therese Maynard (Loyola Los Angeles)

Gordon Smith, Secretary (BYU)

Tina Stark, Past Chair (Boston University)          

             Authors of accepted papers will be notified by August 31, 2012.  Please pass this Call for Papers along to any colleagues who may be interested.

June 20, 2012 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 19, 2012

Chamber of Commerce Issues Report on Dangers of MM Fund Reform

The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC) released a white paper titled, “Money Market Mutual Fund Reform: The Dangers of Acting Now”, which examines the impacts of possible reforms to money market mutual funds (MMMFs) on businesses, municipalities, individual investors and the overall economy.  The paper, authored by Georgetown University Professor James J. Angel, finds that contemplated reforms intended to reduce the chance of runs on MMMFs could, in fact, have the opposite effect and increase systemic risk.  Reforms could have far reaching consequences well beyond the fund industry. ( Download Angel-Costs-and-Costs-of-MMMF-Reforms-draft-6.18.2012-FINAL[1])

June 19, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)