Securities Law Prof Blog

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

Thursday, January 31, 2013

Ex-Peregrine CEO Sentenced to 50 Years for Stealing Customers' Money

Russell Wasendorf Sr., the disgraced CEO of collapsed commodities firm Peregrine Financial Group, was sentenced to 50 years in prison for embezzling more than $215 million from his customers.  Wasendorf attempted suicide and left a note confessing his crime last summer.  The judge ignored requests for leniency and followed the government's recommendation.

NYTimes Dealbook, Ex-Peregrine Chief Sentenced to 50 Years in Prison

January 31, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Announces Panelists for Roundtable on Decimalization

The SEC has released the agenda and list of speakers for its February 5 Roundtable on Decimalization.  The Roundtable will evaluate the impact of tick sizes on the securities markets.

January 31, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Fordham Securities Moot Court Seeks Judges

The Irving R. Kaufman Memorial Securities Law Moot Court Competition at Fordham Law School is looking for competition judges.  Here are the details:

Each spring, Fordham University School of Law hosts the Irving R. Kaufman Memorial Securities Law Moot Court Competition. Held in honor of Chief Judge Kaufman, a Fordham Alumnus who served on the United States Court of Appeals for the Second Circuit, the Kaufman Competition has a rich tradition of bringing together complex securities law issues, talented student advocates, and top legal minds.

This year’s Kaufman Competition will take place on March 22-24, 2013. The esteemed final round panel includes Judge Paul J. Kelly, Jr., of the Tenth Circuit; Judge Boyce F. Martin, Jr., of the Sixth Circuit; Judge Jane Richards Roth, of the Third Circuit; and Commissioner Troy A. Paredes, of the United States Securities and Exchange Commission. The competition will focus on two issues that arise in the fallout of Ponzi schemes: whether the “stockbroker safe harbor” of the Bankruptcy Code applies to Ponzi scheme operators, and the application of SLUSA, which was recently granted cert by the Supreme Court.

We are currently soliciting practitioners and academics to judge oral argument rounds and grade competition briefs. No securities law experience is required to participate and CLE credit is available.

Information about the Kaufman Competition and an online Judge Registration Form is available on our website, Please contact Michael N. Fresco, Kaufman Editor, at [email protected] or (561) 707-8328 with any questions.

January 31, 2013 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 30, 2013

SEC Charges Five with Florida Resort Ponzi Scheme

The SEC charged five former real estate executives who defrauded investors into believing they were funding the development of five-star destination resorts in Florida and Las Vegas when they were actually buying into a Ponzi scheme.  According to the SEC, Cay Clubs Resorts and Marinas raised more than $300 million from nearly 1,400 investors nationwide through a network of hundreds of sales agents, marketing seminars, and podcasts that touted the profitability of purchasing units at Cay Clubs resort locations.  Investors were promised immediate income from a guaranteed 15 percent return and a future income stream through a rental program that Cay Clubs managed.  Alas, according to the SEC, the venture was a classic Ponzi scheme.  

The SEC’s complaint filed in U.S. District Court for the Southern District of Florida charges the following former Cay Clubs executives:

Fred Davis Clark, Jr. – president and CEO
David W. Schwarz – chief accounting officer
Cristal R. Coleman – manager and sales agent
Barry J. Graham – sales director
Ricky Lynn Stokes – sales director

The SEC’s complaint seeks financial penalties from Clark, Coleman, and Stokes and the disgorgement of ill-gotten gains plus prejudgment interest by all five executives.  The complaint also seeks injunctive relief to enjoin them from future violations of the federal securities laws as well as an accounting and an order to repatriate investor assets.

January 30, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

District Court Addresses "Unique Question" of Stock Manipulation by Corporate Officer

A federal district court addressed what it called "the unique question" of whether a Rule 10b-5 violation can be committed by corporate officers by a scheme centered around manipulating the restricted nature of the company's shares under Rule 144 in order to gain control over the stock's "float" and enrich themselves at the detriment of the corporation.  Advanced Multilevel Concepts, Inc. v. Bukstel (E.D. Pa. Jan. 25, 2013) (Download Advanced Multilevel Concepts Inc. v. Bukstel[1]).  The court concludes that the Supreme Court's precedents extend to this manipulative scheme. 

The allegations involve a company that went public via a reverse merger and the issuance of over seven million shares of company stock by the CEO to his confederates to dilute the other shareholders' holdings.  The CEO, in turn, counterclaims that the plaintiffs and the former inhouse counsel committed securities fraud when the attorney gained control of a substantial part of the stock's float to make trades that enriched himself.  (Although not at all relevant to the holding, one of the peripheral players in this drama is named Learned Hand!)

January 30, 2013 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 29, 2013

Brooklyn Law Hosts Compliance Symposium on Feb. 8

Brooklyn Law School hosts a symposium on Feb. 8 on The Growth and Importance of Compliance in Financial Firms: Meaning and Implications.  Here is the description:

Over the past decade, the compliance function in financial firms, in particular broker-dealers and investment advisers, has grown in size and importance. While this phenomenon is an integral part of life for compliance officers and legal practitioners who advise these firms, compliance has received relatively little attention from legal scholars. This symposium will provide the opportunity for financial and securities law scholars to evaluate and criticize, from their respective theoretical perspectives, the growing importance of compliance in financial firms, as well as comment upon particular compliance duties and issues. The conference includes noted legal practitioners, compliance specialists and regulators, who can assist the scholars in their reflection and offer their own perspectives and insights on the compliance phenomenon.

CLE credit is available.  More information, including the agenda, is at the Brooklyn Law website.

January 29, 2013 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

SEC Charges Texas Trader with Affinity Fraud Aimed at Lebanese-Druze Communities

The SEC charged Firas Hamdan, a day trader in Sugar Land, Texas, with "affinity fraud."  According to the SEC, Hamdan targeted fellow members of the Houston-area Lebanese and Druze communities in his supposed high-frequency trading program and provided them falsified brokerage records that drastically overstated assets and hid his massive trading losses.

The SEC alleges that Hamdan raised more than $6 million during a five-year period from at least 33 investors. Hamdan told prospective investors that he would pool their investments with his own money and conduct high-frequency trading using a supposed proprietary trading algorithm. Hamdan promised annual returns of 30 percent and assured investors that his program was safe and proven when in reality it generated $1.5 million in losses. The SEC is seeking an emergency court order to halt the scheme and freeze Hamdan’s assets and those of his firm, FAH Capital Partners.

The complaint seeks various relief including a temporary restraining order, preliminary and permanent injunctions, disgorgement of ill-gotten gains with prejudgment interest, and financial penalties.

January 29, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Approves Changes to FINRA Rule on Information & Testimony Requests

The SEC recently approved amendments to FINRA Rule 8210 to:

clarify the scope of FINRA’s authority under Rule 8210 to inspect and  copy the books, records and accounts of member firms, associated persons and persons subject to FINRA’s jurisdiction;
specify the method of service for certain unregistered persons under  the rule; and
authorize service of requests under the rule on attorneys who are representing firms, associated persons or persons subject to FINRA’s jurisdiction.

The text of the amended rule, including Supplementary Material, is available at the FINRA website.  The amendments are effective on February 25, 2013.

January 29, 2013 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, January 28, 2013

Treasury Again Approves Excessive Pay for Execs at Bailed-Out Companies

The Special Inspector General for the TARP Program released a report, Treasury Continues Approving Excessive Pay for Top Executives at Bailed-Out Companies (Download 2013_SIGTARP_Bailout_Pay_Report[1]).  The title essentially says it all, but here are some snippets offering more detail:

SIGTARP found that once again, in 2012, Treasury failed to rein in excessive pay. In 2012, OSM approved pay packages of $3 million or more for 54% of the 69 Top 25 employees at American International Group, Inc. (“AIG”), General Motors Corporation (“GM”), and Ally Financial Inc. (“Ally,” formerly General Motors Acceptance Corporation, Inc.) – 23% of these top executives (16 of 69) received Treasury-approved pay packages of $5 million or more, and 30% (21 of 69) received pay ranging from $3 million to $4.9 million. Treasury seemingly set a floor, awarding 2012 total pay of at least $1 million for all but one person. Even though OSM set guidelines aimed at curbing excessive pay, SIGTARP previously warned that Treasury lacked robust criteria, policies, and procedures to ensure those guidelines are met. Treasury made no meaningful reform to its processes. Absent robust criteria, policies, and procedures to ensure its guidelines were met, OSM’s decisions were largely driven by the pay proposals of the same companies that historically, and again in 2012, proposed excessive pay. With the companies exercising significant leverage, the Acting Special Master rolled back OSM’s application of guidelines aimed at curbing excessive pay.

*    *    *

There are two lessons to be learned from OSM’s 2012 pay-setting process and decisions:

First, guidelines aimed at curbing excessive pay are not effective, absent robust policies, procedures, or criteria to ensure that the guidelines are met. This is the second report by SIGTARP to warn that the Office of the Special Master, after four years, still does not have robust policies, procedures, or criteria to ensure that pay for executives at TARP exceptional assistance companies stays within OSM’s guidelines. ...

*    *    *

Second, while historically the Government has not been involved in pay decisions at private companies, one lesson of this financial crisis is that regulators should take an active role in monitoring and regulating factors that could contribute to another financial crisis, including executive compensation that encourages excessive risk taking....



January 28, 2013 in News Stories, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Announces Agenda for Advisory Committee on Small & Emerging Companies

The SEC announced the agenda for a February 1 meeting of its Advisory Committee on Small and Emerging Companies.  The Committee will consider recommendations about trading spreads for smaller exchange-listed companies, creation of a separate U.S. equity market limited to sophisticated investors for small and emerging companies, and disclosure rules for smaller reporting companies.

January 28, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Former Jefferies Trader with Defrauding Purchasers of MBS

The SEC charged Jesse Litvak, a former broker at Jefferies & Co., with defrauding investors while selling mortgage-backed securities (MBS) in the wake of the financial crisis so he could generate additional revenue for his firm.  The U.S. Attorney’s Office for the District of Connecticut also announced criminal charges against Litvak.

According to the SEC’s complaint, in the course of his job performance as a managing director on the MBS desk at Jefferies,  Litvak would buy a MBS from one customer and sell it to another customer.  On many occasions he would lie about the price at which his firm had bought the MBS so he could re-sell it to the other customer at a higher price; on other occasions, he would mislead purchasers by creating a fictional seller to purport that he was arranging a MBS trade between customers.  The SEC alleges that Litvak generated more than $2.7 million in additional revenue for Jefferies through his deceit. 

According to the SEC’s complaint, Litvak worked in the Stamford, Conn., office at Jefferies, and his misconduct lasted from 2009 to 2011.  Litvak’s customers included some funds created by the U.S. government under a program designed to help strengthen the markets for MBS during the financial crisis. 

January 28, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Columbia Law School Launches Blog on Corporations and Capital Markets

Congratulations to Columbia Law School, which has launched its CLS Blue Sky Blog, focusing on Corporations and the Capital Markets, which, according to its press release

offers analysis of noteworthy developments in the worlds of financial reform, securities regulation, corporate governance, and more. It also collects in a special column—called the “Filter”—each business day’s five most interesting news items or blog posts.

According to Professor John Coffee, “We are hoping for an interactive dialogue among the bar, academia, and regulators that can range from technical issues to broader theoretical issues that may rise up into the blue sky.” 

January 28, 2013 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Saturday, January 26, 2013

Gilson & Gordon On Activist Investors

The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights, by Ronald J. Gilson, Stanford Law School; Columbia Law School, and Jeffrey N. Gordon, Columbia Law School; European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

Equity ownership in the United States no longer reflects the dispersed share ownership of the canonical Berle-Means firm. Instead, we observe the reconcentration of ownership in the hands of institutional investment intermediaries, which gives rise to what we call “the agency costs of agency capitalism.” This ownership change has occurred because of (i) political decisions to privatize the provision of retirement savings and to require funding of such provision and (ii) capital market developments that favor investment intermediaries offering low cost diversified investment vehicles. A new set of agency costs arise because in addition to divergence between the interests of record owners and the firm’s managers, there is divergence between the interests of record owners – the institutional investors – and the beneficial owners of those institutional stakes. The business model of key investment intermediaries like mutual funds, which focus on increasing assets under management through superior relative performance, undermines their incentive and competence to engage in active monitoring of portfolio company performance. Such investors will be “rationally reticent” – willing to respond to governance proposals but not to propose them. We posit that shareholder activists should be seen as playing a specialized capital market role of setting up intervention proposals for resolution by institutional investors. The effect is to potentiate institutional investor voice, to increase the value of the vote, and thereby to reduce the agency costs we have identified. We therefore argue against recent proposed regulatory changes that would undercut shareholder activists’ economic incentives by making it harder to assemble a meaningful toe-hold position in a potential target.

January 26, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Friday, January 25, 2013

Wrona on Standards of Conduct for Investment Advisers and Broker-Dealers

The November 2012 issue of The Business Lawyer features an article entitled The Best of Both Worlds: A Fact-Based Analysis of the Legal Obligations of Investment Advisers and Broker-Dealers and a Framework for Enhanced Investor Protection by James S. Wrona, Vice President and Associate General Counsel at FINRA.   The author provides an indepth analysis of the development of the standards of conduct for investment advisers and broker-dealers and the current debate that is usually referred to the dichotomy between the fiduciary standard required of investment advisers and the suitability standard applicable to broker-dealers.  The article concludes with a framework for robust investor protection and recommends additional obligations on both financial advice providers "to achieve truly universal standards of conduct that are in investors' best interests."  The citation is 68 Bus. Law. 1 (2012), and it is available in hard copy or at the ABA website.

January 25, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Stanford Receiver Can Recover Interest Payments for Net Winners

The Texas federal district court that has exclusive jurisdiction over the receivership estate of R. Allen Stanford's Ponzi scheme recently held that the receiver could avoid interest payments made to those investors who received payments in excess of their principal investment ("Net Winners"). 

In Janvey v. Alguire (N.D. Tax. Jan. 22, 2013) (Download Janvey.012213[1]), the court first held that, as a matter of law, Stanford operated a Ponzi scheme, based on the declarations of an expert.  Next, the court addressed the issue of whether the Net Winners provided value for their interest payments.  The court acknowledged that, although courts almost universally hold that the transfer of "false profits" from a Ponzi scheme is not made in exchange for value, courts are split where the investor receives payments in the form of interest on the principal.  After reviewing the case law, the court sides with those courts that choose not to enforce investment contracts with a Ponzi scheme.  Accordingly, the Net Winners failed to provide value in exchange for the interest they received.  Noting that for victims of a Ponzi scheme, "everyone is a loser," the court decided that "avoiding the interest payments is the most equitable and just solution to a difficult problem."

The court found that the order "involves a controlling question as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation."  Therefore, he certified the order for interlocutory appeal.


January 25, 2013 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Thursday, January 24, 2013

Mary Jo White Nominated to Chair the SEC

It is now official -- President Obama has nominated Mary Jo White to chair the SEC.  By picking a lawyer who made her reputation as an effective, aggressive prosecutor (former U.S. District Attorney for Southern District of New York), he clearly wants to send a message about the importance of tough enforcement.  In his brief remarks, according to the Washington Post, the President said that while much has been done "we also need cops on the beat to enforce the law" and that "You don't mess with Mary Jo."  If confirmed, she would be the first prosecutor to head up the agency.

The President also nominated Richard Cordray, a former attorney general of Ohio, to continue to head up the Consumer Financial Products Bureau.  Mr. Cordray was a recess appointment in 2011, because Republicans made clear that they would not confirm him.

January 24, 2013 in News Stories, SEC Action | Permalink | Comments (0) | TrackBack (0)

Securities Firms' Attempt to Avoid Arbitration Fails -- Again

The securities industry fought hard for the power to require brokerage customers to arbitrate all disputes with their firms.  But some firms appear to think that arbitration is only a good dispute resolution mechanism when they want it and are challenging arbitration proceedings brought by dissatisfied users of their services.  UBS Financial Services, Inc. v. Carilion Clinic (4th Cir. No. 12-2066, Jan. 23, 2013) is a recent example.(Download UBSFinancial.012313[1])

Carilion, a not-for-profit organization that operates hospitals and clinics in Virginia, decided in 2005 to issue municipal bonds and retained UBS and Citigroup Global Markets to advise it on the structure of the bond issues and to assist it in implementing the financing plan.  UBS and Citigroup recommended the issuance of auction-rate bonds and acted as underwriters and lead broker-dealers in the $234 million offering.  Unfortunately, in early 2008 the auction-rate bond market collapsed for the bonds, when UBS and Citigroup stopped submitting support bids.  Carilion was forced to refinance and lost millions of dollars.  Carilion filed an arbitration claim with FINRA, claiming that the firms misled it and asserting claims under both state and federal securities laws.  UBS and Citigroup filed a declaratory judgment action and sought a preliminary injunction against the arbitration, asserting that Carilion was not a "customer" entitled to bring an arbitration under FINRA's rules.  They further argued that Carilion had waived arbitration through the forum selection clause contained in one of the contracts among the parties.  The district court rejected both arguments, and the Fourth Circuit affirmed.

FINRA Rule 12200 requires member firms to arbitrate disputes with customers when the customer requests arbitration and the dispute "arises in connection with the business activities of the member."  UBS and Citigroup asserted that Carilion was not their "customer" because that term, as used in the FINRA rule, is limited to "investors."  Carilion, in contrast, asserted that customer means anyone "who purchases some commodity or service."  The Fourth Circuit agreed with Carilion, finding the broader interpretation is consistent with the purposes of FINRA arbitration and consistent with generally accepted meaning of customer.  Thus, it held that "when FINRA uses 'customer' in Rule 12200, it refers to one, not a broker or dealer, who purchases commodities or services from a FINRA member in the course of the member's business activities insofar as those activities are covered by FINRA's regulation, namely the activities of investment banking and the securities business."

The Fourth Circuit also rejected the firms' argument that the forum selection clause, which provides that "all actions and proceedings arising out of this Agreement ... shall be brought in the United States District Court of the County of New York."  This was "a straightforward issue of contract interpretation," said the Court.  It found that the natural reading of the clause was to require any litigation to be brought in the designated court; "it would never cross a reader's mind that the clause provides that the right to FINRA arbitration was being superseded or waived," especially since the clause did not even use the word arbitration.

The Fourth Circuit relied on a previous opinion from the Second Circuit, UBS Financial Services, Inc. v. West Virginia Hospitals, 660 F.3d 643 (2d Cir. 2011), involving substantially similar facts.  

January 24, 2013 in Judicial Opinions, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 23, 2013

FINRA Seeks Temporary Cease and Desist Order Against Westor Capital

FINRA announced  that it has filed for a Temporary Cease-and-Desist Order against Westor Capital Group, Inc. and its President, Chief Compliance Officer and Financial and Operations Principal, Richard Hans Bach, to immediately stop the further misappropriation and misuse of customer funds and securities. In addition, FINRA issued a complaint against Westor and Bach, charging them with failing to allow customers to withdraw account balances and deliver securities, misusing customer securities, failing to maintain physical possession or control of securities, and for operating an unapproved self-clearing business.

 According to FINRA, Westor's primary business is trading in microcap securities through its own accounts held at several different brokerage firms and has ineffective measures to track and reconcile its customers' stock positions, making it possible for Westor and Bach to conceal the improper use of securities, the complaint alleges.

January 23, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Eisinger: Bad Behavior at Morgan Stanley

Not to be missed -- ProPublica's Jesse Eisinger reviews Morgan Stanley documents made public last week in a lawsuit brought in Manhattan state court by a Taiwanese bank that purchased a CDO from the firm in 2006.  According to the article, "the documents suggest a pattern of behavior larger than this one deal: people across the bank understood that the American housing market was in trouble. They took advantage of that knowledge to create and then bet against securities and then also to unload garbage investments on unsuspecting buyers."  Morgan Stanley's defense, of course, is that the buyers were sophisticated investors that should have done their own due diligence.  Read it and see what you think.  NYTimes Dealbook, Financial Crisis Suit Suggests Bad Behavior at Morgan Stanley

January 23, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 22, 2013

Colorado Federal District Court Refuses to Approve SEC Settlement

A federal district court judge for the District of Colorado has refused to approve a proposed SEC settlement.  In a terse order that does not describe the SEC's allegations against defendants Bridge Premium Finance LLC et al., Judge John L. Kane stated that he "refuse[d] to approve penalties against a defendant who remains defiantly mute as to the veracity of the allegations against him.  A defendant's options in this regard are binary: he may admit the allegations or he may go to trial."  In addition, the judge objected to the language in the consents and the proposed final judgments in which the defendants waived their rights to the entry of findings of fact and conclusions of law and their rights to appeal, because "[t]hese findings are important to inform the public and the appellate courts."  SEC v. Bridge Premium Finance LLC (D. Col. Jan. 17, 2013, Case No. 1:12-cv-02131-JLK-BNB)

The Second Circuit will hear the SEC and Citigroup's appeal from Judge Rakoff's refusal to approve their proposed settlement on February 8.

January 22, 2013 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)