Securities Law Prof Blog

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

Monday, October 29, 2012

SEC Institutes Stop Order Proceeding Against Caribbean Pacific Marketing

The SEC announced that it instituted proceedings to determine whether to issue an order that would prevent sales of shares in Caribbean Pacific Marketing, Inc., based on allegations that the company's disclosure is misleading.  In proceedings instituted against Caribbean Pacific on October 29, 2012, the SEC's Division of Enforcement alleges that Caribbean Pacific's registration statement is materially misleading because it omits any information about William J. Reilly and his position within the company as a de facto executive officer and control person. The Division of Enforcement alleges that Reilly is a disbarred attorney subject to a court order barring him from any penny stock offering, from serving as a corporate office and director, and from violating certain federal securities laws. In addition, Reilly was suspended from appearing or practicing before the Commission as an attorney, with a right to reapply after three years.

The Commission instituted the proceedings against Caribbean Pacific to determine whether the allegations by the Division of Enforcement are true, to give the company an opportunity to respond to the allegations, and to determine whether a stop order should be issued.

On October 23, the U.S. Attorney's Office for the Southern District of Florida filed a criminal complaint against Reilly, alleging securities fraud.

October 29, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Hurricane Sandy: Everything Shut Down

From the SEC's website:

Hurricane Sandy Information

The EDGAR system is operating normally and filer support teams are available. During this weather emergency, we understand that filers may be unable to submit their filings.

The U.S. equities markets are closed Monday and Tuesday. The SEC will remain in close consultation with the markets as the situation warrants.

SEC offices in DC, New York, Philadelphia, and Boston are closed to the public.

October 29, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sunday, October 28, 2012

Bring Back Fractional Pricing? Everything Old is New Again

Should the SEC bring back fractional pricing of securities so that securities firms can make greater profits at the expense of investors?  The SEC  is seriously considering a pilot program to explore this, according to Wall St. Journal, SEC Weighs Bringing Back Fractions in Stock Prices

If this sounds strange to you, you're not alone.  Decimal pricing of stocks came about eleven years in order to lower investors' costs, and the research shows that it has done so.  But some smaller companies complain that investment banks aren't interested in selling their stocks because they won't make enough money.  The JOBS Act, which gives us crowdfunding, also required the SEC to study decimal pricing.  In July the SEC released its study that concluded:

As discussed above, though there is literature on the types of benefits that lower spreads bring to the market, there is less available information related to how lower spreads may have negatively impacted capital formation, especially with respect to the complex, competitive dynamics and economic incentives of market intermediaries who provide liquidity. More so, as discussed among participants at the Advisory Committee meeting, there are a number of other factors that have influenced the IPO market in addition to decimalization.
( Download Decimalization-072012)

October 28, 2012 in News Stories, SEC Action | Permalink | Comments (1) | TrackBack (0)

SEC Charges Kohl's Employee with Assisting Financial Fraud at Carter's

On October 24, 2012, the SEC charged Michael Johnson, a divisional merchandise manager at Kohl's, a national department store, with assisting the financial fraud at Carter's, Inc, a manufacturer of children's clothing. Specifically, the SEC alleges that Johnson assisted Joseph Elles, a former Executive Vice President of Sales at Carter's, in concealing his financial fraud from senior Carter's management. That scheme caused Carter's to materially misstate its net income and expenses in several financial reporting periods between 2004 and 2009.

The SEC's complaint, filed in the United States District Court for the Northern District of Georgia, alleges that between 2004 and 2009, Elles fraudulently manipulated the amount of discounts that Carter's granted to Kohl's, Carter's largest wholesale customer in order to induce Kohl's to purchase greater quantities of Carter's clothing for resale. In an effort to conceal the scheme, Elles persuaded Kohl's to defer subtracting the discounts from payments until later periods. Elles also persuaded Johnson, who handled the Carter's account at Kohl's to sign a false confirmation that misrepresented to Carter's accounting personnel the timing and amount of those discounts. By concealing the amount of discounts that had been promised to Kohl's, Elles and Johnson caused Carter's to materially understate it expenses in certain quarters and materially overstate its earnings in those quarters.

After conducting its own internal investigation, Carter's was required to issue restated financial results for the affected periods.

The SEC is seeking permanent injunctive relief and financial penalties against Johnson.

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

Couture on Criminal Securities Fraud

Criminal Securities Fraud and the Lower Materiality Standard, by Wendy Gerwick Couture, University of Idaho College of Law, was recently posted on SSRN.  Here is the abstract:

First, this essay argues that the materiality standard is lower under the relatively new criminal securities fraud provision, § 807 of the Sarbanes-Oxley Act, 18 U.S.C. § 1348, than under the traditional securities fraud provision, § 10(b) of the Securities and Exchange Act of 1934. In particular, in the context of alleged misrepresentations, § 1348 probably imposes a subjective materiality standard rather than an objective standard. In the context of insider trading, § 1348 probably imposes a source-oriented standard rather than an investor-oriented standard. Next, this essay considers the implications of this lower materiality standard in criminal securities fraud prosecutions under § 1348, including the chilling of legitimate market behavior, undue prosecutorial discretion, and disruption of the ordinary relationship between civil and criminal liability. Although these aforementioned concerns are also implicated by the mail and wire fraud statutes, this essay contends that § 1348 imposes a marginal impact. Finally, in light of these implications and this marginal impact, this essay offers guidance to market participants when engaging in behavior that might be within the broader scope of § 1348, to courts when interpreting § 1348, and to Congress when considering the appropriate incentives to encourage voluntary disclosure, securities analysis, and corporate transactions.

October 28, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Friday, October 26, 2012

SEC Charges Insurance Exec with Insider Trading in Delta Petroleum Stock

The SEC charged Michael Van Gilder, an insurance company CEO, with insider trading based on confidential information he obtained in advance of a private investment firm acquiring a significant stake in a Denver-based oil and gas company. The SEC alleges that Van Gilder learned from a Delta Petroleum Corporation insider that Beverly Hills-based Tracinda — which has previously owned large portions of companies such as MGM Resorts International, General Motors, and Ford Motor Company — was planning to acquire a 35 percent stake in Delta Petroleum for $684 million. Van Gilder subsequently purchased Delta Petroleum stock and highly speculative options contracts. He tipped several others, encouraging them to do the same, including a pair of relatives via an e-mail with the subject line “Xmas present.” After Tracinda’s investment was publicly announced, Delta Petroleum’s stock price shot up by almost 20 percent. Van Gilder and his tippees made more than $161,000 in illegal trading profits.

The U.S. Attorney’s Office for the District of Colorado today announced a parallel criminal action against Van Gilder.

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

SEC Charges Silicon Valley Exec with Tipping Rajaratnam

The SEC charged Kris Chellam, a former senior executive at a Silicon Valley technology company, with illegally tipping convicted hedge fund manager Raj Rajaratnam with nonpublic information that allowed the Galleon hedge funds to make nearly $1 million in illicit profits.  According to the SEC's complaint, Chellam tipped Rajaratnam in December 2006 with confidential details from internal company reports indicating that Xilinx Inc. would fall short of revenue projections it had previously made publicly. The tip enabled Rajaratnam to engage in short selling of Xilinx stock to illicitly benefit the Galleon funds. Chellam tipped Rajaratnam, who was a close friend, at a time when Chellam had his own substantial investment in Galleon funds and was in discussions with Rajaratnam about prospective employment at Galleon. Chellam was hired at Galleon in May 2007.

Chellam has agreed to pay more than $1.75 million to settle the SEC’s charges. The settlement is subject to court approval.

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

Massachusetts Fines Citi $2 Million for Tech Analyst's Improper Disclosures

Massachusetts Securities Division fined Citigroup $2 million for failing to supervise tech analyst Mark Mahaney and a junior analyst who improperly disclosed confidential information about Facebook's IPO and Google's revenue estimates.  Citigroup fired Mahaney, who is a top-ranked internet analyst.  Citigroup admitted to the statement of facts and agreed to cease and desist from violating state securities laws.

WSJ, Citi Analyst Fired After Facebook Disclosure

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

Thursday, October 25, 2012

Former J. Crew Exec Settles SEC Insider Trading Charges

The SEC has agreed to settle insider trading charges against Frank A. LoBue, a former Director of Store Operations at J.Crew Group, Inc. (J.Crew). According to its complaint, LoBue used material, nonpublic information about sales and expenses of the company’s stores to purchase J.Crew common stock in advance of earnings announcements in May and August 2009.  The Commission’s complaint alleges that in the course of his employment LoBue regularly received nonpublic information about J.Crew’s “Stores” component, which comprised approximately 70% of the company’s sales and used this information on two occasions to purchase shares in advance of the company's earnings releases.

LoBue has consented to the entry of a proposed final judgment permanently enjoining him from further violations; ordering him to pay disgorgement of $60,735.60, plus prejudgment interest thereon of $6,749.33; and imposing a civil penalty in the amount of $60,735.60. The proposed settlement is subject to the approval of the District Court.

October 25, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Industry Groups Challenge SEC's Conflict Minerals Rule

The National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable  recently brought suit challenging the SEC's adoption of the conflict minerals rule.  Although Dodd-Frank requires the SEC to adopt a rule on corporate disclosure of information about conflict minerals, the petitioners assert that the rule should be modified or set aside in whole or in part. ( Download NAM v. SEC[1])

The petitioners filed their petition in both the D.C. Circuit and the D.C. district because of confusion over which court has jurisdiction.  The SEC agrees with petitioners that the D.C. Circuit has jurisdiction over the case under Exchange Act 25(a).

October 25, 2012 in Judicial Opinions, SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 24, 2012

Rajat Gupta Sentenced to Two Years for Tipping Rajaratnam

Rajat Gupta, former head of McKinsey & Co. and former director of Goldman Sachs and Procter & Gamble, was sentenced to two years in prison for his conduct in passing along material inside information to Raj Rajaratnam, in addition to a $5 million fine and one year of supervised release after serving his sentence.  Prosecutors asked for up to ten years in prison.  Judge Rakoff received numerous letters from prominent businessmen and others, urging leniency.  During the hearing, Judge Rakoff said:

"I think the record, which the government really doesn't dispute, bears out that he is a good man. But the history of this country and the history of the world, I'm afraid, is full of examples of good men who do bad things."

Gupta's attorneys will appeal.

WSJ, Gupta Sentenced to 2 Years in Prison

NYTimes, Rajat Gupta Gets 2 Years in Prison




October 24, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

DOJ Sues BofA for $1 Billion Over "Spectacularly Brazen" Fraud

Another lawsuit was filed today against Bank of America, this one in connection with the "hustle" home loan program it acquired with its purchase of Countrywide Financial in 2008.  According to the U.S. District Attorney's office in Manhattan, the bank churned out mortgages without conducting sufficient due diligence and then got rid of the loans by selling them to Fannie Mae and Freddie Mac without warning them of their defects.  The government calls it "spectacularly brazen" fraud and seeks $1 billion.

NYTimes, Federal Prosecutors Sue Bank of America Over Mortgage Program

WSJ, U.S. Sues BofA for $1 Billion Over Mortgage Losses


October 24, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 23, 2012

NASAA Reports Increase in Enforcement Actions Against Investment Advisers

NASAA released its annual enforcement report, compiling statistics on enforcement actions by state securities regulators for 2011.  The survey reports a significant increase in enforcement actions against investment adviser firms last year:  they nearly doubled to 399 in 2011 and accounted for 15 percent of all enforcement actions handled by state securities regulators.

The majority of the investment fraud cases reported by state securities regulators featured unregistered individuals selling unregistered securities. More than 800 reported actions involved unregistered securities, and more than 800 actions involved unregistered firms or individuals. For the second consecutive year, Regulation D Rule 506 private offerings and real estate investment schemes were the most reported products at the heart of state securities enforcement actions.(Download 2012-Enforcement-Report-on-2011-Data[1])


October 23, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Adopts Final Rule on Clearing Agency Standards

The SEC adopted yesterday new Rule 17Ad-22,which establishes minimum requirements regarding how registered clearing agencies must maintain effective risk management procedures and controls as well as meet the statutory requirements under the Exchange Act on an ongoing basis. (Download 34-68080[1])

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

Monday, October 22, 2012

FINRA Fines David Lerner Associates for Unfair Sales Practices: CEO is Suspended for One Year

FINRA has ordered David Lerner Associates, Inc. (DLA) to pay approximately $12 million in restitution to affected customers who purchased shares in Apple REIT Ten, a non-traded $2 billion Real Estate Investment Trust (REIT) DLA sold, and to customers who were charged excessive markups. As the sole distributor of the Apple REITs, DLA solicited thousands of customers, targeting unsophisticated investors and the elderly, selling the illiquid REIT without performing adequate due diligence to determine whether it was suitable for investors. To sell Apple REIT Ten, DLA also used misleading marketing materials that presented performance results for the closed Apple REITs without disclosing to customers that income from those REITs was insufficient to support the distributions to unit owners.

FINRA also fined DLA more than $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations (CMOs) it sold over a 30 month period, and for related supervisory violations.

In addition, FINRA fined David Lerner, DLA's founder, President and CEO, $250,000, and suspended him for one year from the securities industry, followed by a two-year suspension from acting as a principal. David Lerner personally made false claims regarding the investment returns, market values, and performance and prospects of the Apple REITs at numerous DLA investment seminars and in letters to customers. To encourage sales of Apple REIT Ten and discourage redemptions of shares of the closed REITs, he characterized the Apple REITs as, for example, a "fabulous cash cow" or a "gold mine," and he made unfounded predictions regarding a merger and public listing of the closed Apple REITs, which he inappropriately claimed would result in a "windfall" to investors.

FINRA also sanctioned DLA's Head Trader, William Mason, $200,000, and suspended him for six months from the securities industry for his role in charging excessive muni and CMO markups. The sanctions resolve a May 2011 complaint (amended in December 2011) as well as an earlier action in which a FINRA hearing panel found that the firm and Mason charged excessive muni and CMO markups.

 FINRA also required DLA to retain independent consultants to review and propose changes to its supervisory systems and training on both sales of non-traded REITs and pricing of CMOs and municipal bonds. In addition, DLA agreed to revise its advertising procedures, including videotaping sales seminars attended by 50 or more people for three years, and is required for one year to pre-file all advertisements and sales literature with FINRA at least 10 days prior to use.



October 22, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Sunday, October 21, 2012

Cotter et alia on Say on Pay

The First Year of 'Say on Pay' Under Dodd-Frank: An Empirical Analysis and Look Forward, by James F. Cotter, Wake Forest University Calloway School; Alan R. Palmiter, Wake Forest University - School of Law; and Randall S. Thomas, Vanderbilt University - Law School; European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

In this article, we ask whether Dodd-Frank has made a difference in how shareholders vote on executive pay practices and whether the Act has changed the dynamic in shareholder-management relations in U.S. companies. Using voting data from the first year of “say on pay” votes under Dodd-Frank, we look at the patterns of shareholder voting in advisory votes on executive pay. Consistent with our expectations based on the more limited experience with “say on pay” voting before Dodd-Frank, shareholders in the first year under Dodd-Frank gave generally broad support to management pay packages.

Yet, during the first year under Dodd-Frank, not all pay packages received strong shareholder support. At some companies, management suffered the embarrassment of failed “say on pay” votes – that is, less than 50% of their company’s shareholders voted in favor of the proposal. In particular, we find that poorly-performing companies with high levels of “excess” executive pay, low total shareholder return, and negative voting recommendations from the third-party voting advisor Institutional Shareholder Services (ISS) experienced greater shareholder “against” votes than at other firms. ISS and other third party voting advisors appeared to have played a significant role in mobilizing shareholder opposition at these firms – and often a management response.

Although these votes are non-binding and corporate directors need not take action even if the proposal fails, most companies receiving negative ISS recommendations or experiencing low levels of “say on pay” support undertook additional communication with shareholders or made changes to their pay practices – reflecting a change in their interactions with shareholders. During 2012, the second year of “say on pay” under Dodd-Frank, we find similar patterns, with companies responding proactively when the company comes onto shareholders’ radar screens because of an unfavorable ISS recommendation or an earlier poor, or failed, “say on pay” vote in 2011. We use four case studies to illustrate this new dynamic.

In all, our findings suggest that the Dodd-Frank “say on pay” mandate has not broadly unleashed shareholder opposition to executive pay at U.S. companies, as some proponents had hoped for. Nonetheless, it has affected pay practices at outlier companies experiencing weak performance, high executive pay levels, which are identified by proxy advisory firms like ISS. In addition, mandatory “say on pay” seems to have led management to be more responsive to shareholder concerns about executive pay and perhaps toward corporate governance generally. This shift in management-shareholder relations may be the most important consequence of the Act thus far.

October 21, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Fisch on Business Roundtable

The Long Road Back: Business Roundtable and the Future of SEC Rulemaking, by Jill E. Fisch, University of Pennsylvania Law School - Institute for Law and Economics, was recently posted on SSRN.  Here is the abstract:

The Securities and Exchange Commission has suffered a number of recent setbacks in areas ranging from enforcement policy to rulemaking. The DC Circuit’s 2011 Business Roundtable decision is one of the most serious, particularly in light of the heavy rulemaking obligations imposed on the SEC by Dodd-Frank and the JOBS Act. The effectiveness of the SEC in future rulemaking and the ability of its rules to survive legal challenge are currently under scrutiny.

This article critically evaluates the Business Roundtable decision in the context of the applicable statutory and structural constraints on SEC rulemaking. Toward that end, the essay questions the extent to which deficiencies in the SEC’s rulemaking process can accurately be ascribed to inadequate economic analysis, arguing instead that existing constraints impede the SEC’s formulation of regulatory policy, and that this failure was at the heart of Rule 14a-11.

Bad rules make bad law, and Rule 14a-11 was a bad rule. This essay argues that the flaws in SEC rule-making are quite different, however, than those identified by the DC Circuit. Moreover, in the case of Rule 14a-11, Congress played a critical role by explicitly authorizing the SEC to adopt a proxy access rule. By substituting its own policy judgment for that of Congress, the DC Circuit threatens not just the ability of administrative agencies to formulate regulatory policy, but the ability of Congress to direct agency policymaking

October 21, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Friday, October 19, 2012

SEC Posts Text of Proposed Rule on Requirements for Security-Based Swap Dealers

The SEC has posted on its website the release on the proposed rule regarding Capital, Margin and Segregation Requirements for Security-Based Swap Dealers and Majority Security-Based Swap Participants and Capital Requirements for Broker-Dealers.  Comments are due 60 days after publication in the Federal Register. ( Download 34-68071[1])

October 19, 2012 in Film, SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Reports on Registration of Private Fund Advisers, Notifies Mid-Sized Advisers

The SEC staff released a report on the number of advisers to private funds that have registered with the SEC pursuant to Dodd-Frank's investment adviser registration requirements.  As of Oct. 1, 2012, there are (Including the 2,557 private fund advisers who had registered previously) a total of 4,061 advisers to one or more private funds are now registered with the SEC.   A total of 11,002 investment advisers now are SEC-registered, with 37% advising hedge funds and other private funds. Assets under management at SEC-registered advisers has risen about $5.7 trillion, or 13%, even though the number of advisers fell about 15% as the Dodd-Frank Act required mid-sized advisers to move from federal to state oversight.

In addition, Dodd-Frank required mid-sized advisers to move from federal to state registration by June 28. To date, more than 2,300 mid-sized advisers – those managing less than $100 million of assets – have made the transition to state regulation.  In an effort to finalize the transition, the Commission today issued a notice identifying 293 advisers who may no longer be eligible for registration with the SEC because they manage less than $100 million or have failed to comply with other SEC requirements.  




October 19, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Thursday, October 18, 2012

SEC Issues Third Report on Implementing Organizational Reform Recommendations

Yesterday the SEC posted on its website the Third Report on the Implementation of SEC Organizational Reform Recommendations as required by section 967 of Dodd-Frank, which directed the SEC to engage an independent consultant to conduct a broad and independent assessment of the agency's internal operations, structure, funding and the agency's relationships with SROs.  The consultant issued its report in March 2011; this is the third of four agency reports on the implementation of the consultant's recommendations. (Download Sec-organizational-reform-recommendations-101712[1])

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