Securities Law Prof Blog

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

Thursday, April 18, 2013

SEC Files Insider Trading Charges Against Former Proprietary Trader

The SEC filed an insider trading case against Joseph M. Mancuso, a former proprietary trader at the registered broker-dealer Schottenfeld Group, LLC, charging him with using inside information to trade ahead of five separate corporate acquisition announcements in 2007, resulting in illicit profits of approximately $350,000. 

The SEC's complaint alleges that Mancuso used material, nonpublic information he was tipped by his good friend and colleague, Zvi Goffer, also a former proprietary trader at Schottenfeld, to trade ahead of the announced acquisitions of Avaya, Inc., 3Com Corp., Axcan Pharma Inc., Hilton Hotels Corp. and Kronos Inc. As alleged in the complaint, the inside information Goffer tipped Mancuso concerning the 3Com, Axcan and Avaya acquisitions was misappropriated by two attorneys at the law firm Ropes & Gray, Arthur Cutillo and Brien Santarlas. The SEC alleges that Cutillo and Santarlas had access to inside information about potential acquisitions involving their firm's clients, and that Goffer paid them kickbacks in exchange for the information, using their mutual friend Jason Goldfarb as a conduit. As alleged in the complaint, Goffer traded on this inside information and tipped the information to Mancuso and others who also traded.

The SEC's complaint alleges that the inside information Goffer tipped to Mancuso concerning the Hilton and Kronos acquisitions came through Gautham Shankar, another former proprietary trader at Schottenfeld. As alleged in the complaint, Shankar was tipped the inside information by Thomas Hardin, a managing director at the hedge fund adviser Lanexa Management. The complaint alleges that Hardin was tipped the information by Roomy Khan, a consultant to a New York-based investment adviser, who had received the inside information from her friend, a credit rating company analyst. The SEC alleges that Goffer also paid kickbacks in exchange for this information. As alleged in the complaint, Goffer traded on this inside information and tipped Mancuso and others who also traded.

The SEC previously charged Goffer, Cutillo, Santarlas, Goldfarb, Shankar, Hardin, and other defendants in connection with this insider trading scheme.

April 18, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Investment Adviser with Defrauding CALPERS

The SEC charged Umesh Tandon, the CEO of investment advisory firm Simran Capital Management, with lying to the California Public Employees' Retirement System (CalPERS) and other current and potential clients about the amount of money managed by the firm.  Tandon has agreed to settle the SEC's fraud charges.

Institutional investors such as CalPERS often use assets under management (AUM) as a metric to screen prospective investment advisers soliciting their business. An SEC investigation revealed that while pitching Simran's services, Tandon falsely certified to CalPERS that his firm satisfied its minimum AUM requirements. After fraudulently obtaining the business from CalPERS, Tandon also falsely inflated Simran's AUM in communications with other potential clients with whom he touted his firm's relationship with CalPERS. Tandon also fraudulently reported an inflated AUM in filings with the SEC, and he later attempted to mislead SEC examiners during a routine examination of Simran.

According to the SEC's order instituting settled administrative proceedings against Tandon, he represented to CalPERS in May 2008 that Simran met explicit AUM requirements and managed at least $200 million as of Dec. 31, 2007. In fact, Simran managed approximately $80 million at that time. Evidence indicates that Tandon was aware that Simran did not meet the CalPERS requirements for AUM.

Tandon neither admitted nor denied the findings, and agreed to be barred from the securities industry and pay disgorgement of $20,018, prejudgment interest of $1,680, and a penalty of $100,000.

April 18, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 17, 2013

SEC's Walter: Implementing JOBS Act is An Agency Priority

SEC Commissioner Elisse B. Walter testified today before the House Subcommittee on Oversight and Investigations, Committee on Financial Services, on The Implementation of Title II of the JOBS Act.  In her written statement, she acknowledged that Title II rulemaking was required to be completed within 90 days of the JOBS Act's enactment and noted that public comment on the proposed rule was sharply divided:

Sixty-one commenters, including the majority of professional and trade associations/organizations, law firms and legal associations that submitted letters, expressed general support for the proposal, with many stating generally that the elimination of the prohibition on general solicitation or general advertising would facilitate capital formation. In addition, several supporters recommended that the proposed framework for verifying accredited investor status be supplemented in the final rule by including a non-exclusive list of specific verification methods that could be relied upon by issuers seeking greater certainty that they are satisfying the verification requirement. Eighty-one commenters expressed general opposition to the Commission’s proposal, including the Investor Advisory Committee formed by the Commission as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, all of the investor organizations, and all but one of the federal and state officials who submitted letters. Some of these commenters stated that the proposed rules, if adopted, would result in an increase in fraudulent securities offerings, with a number recommending that the Commission consider additional safeguards, such as those recommended in certain pre-proposing release comment letters. Currently, staff in the Divisions of Corporation Finance and Risk, Strategy, and Financial Innovation are developing recommendations for the Commission’s consideration as to how best to move forward with implementation of Title II.

She concluded by stating that the rulemaking "is a priority for the agency."

April 17, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Call for Papers for National Business Law Scholars Conference: Deadline Extended to May 31

We have received an enthusiastic response to the Call for Papers for the National Business Law Scholars Conference, scheduled for June 12-13, at The Ohio State University School of Law.  We will have additional openings for anyone who would like to make a presentation but has not yet responded.  Thus, we have extended the deadline to MAY 31st.  See the Call for Papers, reposted below with the extended deadline date, for details on how to submit:

National Business Law Scholars Conference: Call-for-Papers

The National Business Law Scholars Conference (NBLSC)  will be held on Wednesday, June 12th and Thursday, June 13th at The Ohio State University Michael E. Moritz College of Law in Columbus, Ohio.  This is the fourth annual meeting of the NBLSC, a conference which annually draws together dozens of legal scholars from across the United States and around the world.  We welcome all on-topic submissions and will attempt to provide the opportunity for everyone to actively participate.  Junior scholars and those considering entering the legal academy are especially encouraged to participate. 

To submit a presentation, email Professor Eric C. Chaffee at with an abstract or paper by MAY 31, 2013.  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 late May.

Conference Organizers:

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


April 17, 2013 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 16, 2013

FINRA Fines Merrill $1 Million for Best Execution Failures in Non-Convertible Preferred Shares Transactions

FINRA fined Merrill Lynch, Pierce, Fenner & Smith Inc. $1.05 million for failing to provide best execution in certain customer transactions involving non-convertible preferred securities executed on one of its proprietary order management systems (ML BondMarket), and for failing to have an adequate supervisory system and written supervisory procedures in place. Merrill Lynch was also ordered to pay more than $323,000 in restitution, plus interest, to customers who did not receive best execution for their trades in non-convertible preferred securities. Additionally, FINRA has required Merrill Lynch to revise its written supervisory procedures regarding ML BondMarket best execution obligations within 30 business days.

FINRA found that Merrill Lynch had programmed a faulty pricing logic into ML BondMarket that only incorporated quotations published on the primary listing exchange for that non-convertible preferred security. As a result, in instances when there was a better quote on a market other than the primary listing exchange, that quote was not reflected on ML BondMarket. The firm instead executed 12,259 transactions in non-convertible preferred securities with its customers on ML BondMarket at prices that were inferior to the National Best Bid and Offer (NBBO).



April 16, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Judge Marrero Approves $600 Million SAC Insider Trading Settlement, Conditioned on Disposition of Citigroup Appeal

On March 15, 2013 the SEC filed an amended complaint against CR Intrinsic Investors, Mathew Martoma and Sidney Gilman and five relief defendants, alleging that CR Intrinsic participated in an insider trading scheme that caused hedge fund portfolios managed by CR Intrinsic and S.A.C. Capital Advisors to generate approximately $275 million in illegal profits.  The same day the SEC also submitted to the federal district court for its approval a final judgment as to CR Intrinsic that contained a permanent injunction against future violations, required CR Intrinsic, on a joint and several basis with the relief defendants, to disgorge approximately $275 million, together with $51.8 million pre-judgment interest, and a civil penalty of approximately $275 million.  The SEC also submitted to the court for its approval final judgments with respect to the five relief defendants.  On March 28, Judge Victor Marrero held a conference to consider the proposed settlements and to discuss issues raised by some courts in reviewing regulatory agency settlements containing "neither admit nor deny" provisions such as those contained in the proposed final judgments.  Today the court released Judge Marrero's decision and order, in which he granted approval of the Final Judgments "conditioned upon the disposition of the pending appeal in the U.S. Court of Appeals for the Second Circuit in S.E.C. v. Citigroup Global Markets, Inc., 11 Civ. 7387 (S.D.N.Y.)."

In his decision Judge Marrero make clear that he is troubled by the use of "neither admit nor deny" language "as they permit CR Intrinsic and the Relief Defendants to resolve the serious allegations against them involving a massive insider trading scheme 'without admitting or denying the allegations of the Complaint.'"  Because of the pendency of the Second Circuit's decision in Citigroup, addressing the issue of whether the district courts have the authority to reject settlements on account of this language, the Judge determined it was appropriate to approve the settlement "subject to a condition that it would become final upon a definitive determination in the Citigroup appeal that the district courts lack authority to reject such settlements on the basis of reservations about the 'neither admit nor deny' provision." 

In the event the Second Circuit does leave ground for district courts to accord higher scrutiny to such terms, Judge Marrero goes on to express his concerns about the use of such provisions.  He recognizes that courts must perform "a very delicate balancing act" and must avoid second-guessing or undue meddling in agency settlement decisions.  But he also finds it inconceivable that "Congress intended the judiciary's function in passing upon these settlements as illusory...." 

Judge Marrero suggests that there is a middle ground, a role for judicial scrutiny in high-profile cases:

Quantitatively, they should be gauged by the staggering amounts of money, both profits and losses, that typically are involved in underlying wrongdoing that is alleged, with huge numbers of victims seriously injured worldwide, correspondingly matched by the perceived outsized rewards the offenders seek to derive from the illicit and damaging behavior. Qualitatively, the measure of these events should be taken by the sheer magnitude of the culpability the offending conduct presumptively would entail -the higher levels of daring, of risk-taking, of outright abuse that manifest tougher grades of arrogance and greed, as well as cavalier disdain for victims and the public good alike.

Judge Marrero notes, in particular, that less than four months after the SEC initially filed its complaint, CR Intrinsic and the relief defendants reached agreement with the SEC and agreed to pay essentially everything that the SEC demanded and arguably as much as the SEC would be able to recover if it prevailed at trial.  Yet the defendants are not "admitting nor denying" the allegations:

In this Court's view, it is both counterintuitive and incongruous for defendants in this SEC enforcement action to agree to settle a case for over $600 million that would cost a fraction of that amount, say $1 million, to litigate, while simultaneously declining to admit the allegations asserted against it by the SEC. An outside observer viewing these facts could readily conclude that CR Intrinsic and the Relief Defendants essentially folded, in exchange for the SEC's concession enabling them to admit no wrongdoing.

The court also expressed concern about the pendency of the related criminal proceeding against Mortoma.  The dismissal of charges against Martoma or an acquittal at trial could make the SEC's decision to include "neither admit nor deny" provisions in the settlements of the other defendants appear reasonable.  Conversely, a guilty plea or conviction at trial could establish facts potentially decisive to the SEC's allegations of wrongdoing in this enforcement action.  The pendency of the criminal proceeding, which might be resolved in a matter of months, provided the judge with an additional reason not to rubber stamp the proposed final judgments.

Judge Marrero also identified "two important, potentially counterproductive effects" that would flow from approval of these settlements: 

First, final approval at this time would deny the private plaintiffs of the benefit of a resolution that potentially could ease the burden of proving their case, prolong their litigation, and diminish the amount they could recover....Second, to the extent it takes the parties longer to resolve the private litigation, it imposes a heavier burden on the courts. The Court must accord these adverse effects serious consideration where, as here, they result from a policy or practice of the Government.

Finally, Judge Marrero identified another serious shortcoming of settlements that include "neither admit nor deny" language: "that of the public and its interest in knowing the truth in matters of major public concern."

In conclusion:

the Court once again emphasizes that, while [judicial] deference is particularly appropriate in unexceptional cases, courts must bring to bear enhanced scrutiny in reviewing proposed consent judgments in certain extraordinary cases alleging extraordinary public and private harms, in recognition of their particular importance to the public interest notwithstanding the deference normally accorded the policy decisions of federal administrative agencies."

Judge Marrero's opinion is well worth reading.  However the Second Circuit decides the Citigroup appeal, it is certain that the debate on this issue will not be over.  (Download SECvSAC)

April 16, 2013 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Denver Businessman Settles SEC Insider Trading Charges in Delta Petroleum Stock

The SEC charged Scott Reiman, described as a prominent Denver-based businessman, with insider trading based on confidential information he obtained from the CEO of Delta Petroleum that was about to secure a huge investment.   According to the SEC, Reiman obtained the inside information ahead of the company’s announcement that it had secured a $684 million investment from private investment firm Tracinda. After the major investment was publicly announced, Delta Petroleum’s stock price jumped almost 20 percent and Reiman reaped substantial illicit profits. The SEC previously charged Reiman’s source, then-CEO Roger Parker, as well as another trader, Michael Van Gilder, in this insider trading investigation.

To settle the SEC’s charges, Reiman agreed to pay nearly $900,000 and be barred from the securities industry and from serving as an officer or director of a public company for at least five years.

According to the SEC’s order instituting proceedings, Reiman is the founder and president of the Denver-based investment firm Hexagon Inc. He received repeated tips from Parker about Tracinda’s potential investment in Delta Petroleum. On three occasions in late November and early December 2007, Reiman bought Delta Petroleum stock or highly speculative option contracts shortly after speaking to Parker, including once within minutes after getting off the phone with him. When Delta publicly announced the Tracinda investment on Dec. 31, 2007, the value of Reiman’s fraudulently obtained Delta Petroleum securities soared nearly 20 percent.

April 16, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, April 15, 2013

Reuters: OCC Will Fault JP Morgan over Madoff Accounts

Reuters reports that the Office of the Comptroller of the Currency is expected to issue a cease and desist order against JP Morgan Chase, which served as Bernard Madoff's bank, for failing to conduct adequate due diligence and report suspicious activity under the anti-money laundering regulations.  No timing for the regulatory action was given.  Exclusive: U.S. Regulator to Fault JPMorgan Over Madoff Accounts

April 15, 2013 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Charges Rogue Trader with Bringing Down Brokerage Firm

The SEC charged David Miller, a former institutional sales trader at Rochdale Securities, a Connecticut-based brokerage firm, with scheming to personally profit from placing unauthorized orders to buy Apple stock. When the scheme backfired, it ultimately caused the firm to cease operations.

Miller agreed to a partial settlement of the SEC's charges and also pleaded guilty today in a parallel criminal case.

The SEC alleges that on Oct. 25, 2012, Miller misrepresented to Rochdale Securities LLC that a customer had authorized the Apple orders and assumed the risk of loss on any resulting trades. The customer order was to purchase just 1,625 shares of Apple stock, but Miller instead entered a series of orders totaling 1.625 million shares at a cost of almost $1 billion. Miller planned to share in the customer's profit if Apple's stock profited, and if the stock decreased he would claim that he erred on the size of the order. The stock wound up decreasing after an earnings announcement later that day, and Rochdale was forced to cease operations in the wake of covering the losses suffered from the rogue trades.

To settle the SEC's charges, Miller will be barred in separate SEC administrative proceedings from working in the securities industry or participating in any offering of penny stock. In the partial settlement in court, Miller agreed to be enjoined from future violations of the antifraud provisions of the federal securities laws. A financial penalty will be determined at a later date by the court upon the SEC's motion.

In the criminal proceeding, Miller pleaded guilty to charges of wire fraud and conspiracy to commit securities and wire fraud. He will be sentenced on July 8.

April 15, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Charges JTF with Fraud in February 2012 Sales of AWSR Stock

 FINRA filed a complaint against John Thomas Financial (JTF), of New York, NY, and its Chief Executive Officer, Anastasios "Tommy" Belesis, charging fraud in connection with the sale of America West Resources, Inc. (AWSR) common stock, intimidation of registered representatives, trading ahead, failing to provide best execution for customer orders and various other violations. The complaint also names Michele Misiti, Branch Office Manager; John Ward, trader; Joseph Castellano, Chief Compliance Officer; and Ronald Vincent Cantalupo, Regional Managing Director.

JTF and many of its customers owned AWSR stock as a result of participation in the company's private financings. According to the complaint, on Feb. 23, 2012, the price of AWSR common stock, which at the time was thinly traded on the OTC Bulletin Board, spiked higher, by over approximately 600 percent, opening at 28 cents per share, peaking at $1.80 per share and eventually closing the day at $1.29 per share. On the same day, JTF sold 855,000 shares, the majority of its proprietary position in AWSR, reaping proceeds of more than $1 million.

The complaint alleges that while JTF sold its shares at the height of the price spike, the firm received at least 15 customer orders to sell more than one million shares, yet only entered one of these orders for execution on Feb. 23, 2012. Instead, JTF and Belesis prevented the orders from being executed on the same day they were received and some customer orders were executed the following day or days after at prices grossly inferior to those obtained by the firm while other customer orders were not entered or executed at all. AWSR is now in bankruptcy and the customers' investments are virtually worthless.

In addition, the complaint alleges that JTF and Belesis, through Misiti and Castellano, lied to the firm's registered representatives and customers about the reasons the customer shares could not be sold on Feb. 23, 2012, including that there was a problem with the clearing firm's trading systems, there was insufficient volume on that day to fill the orders, and the shares could not be sold because they were restricted under the Securities Act of 1933.


April 15, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Sunday, April 14, 2013

Bebchuk on the Myth of Insulating Boards

The Myth that Insulating Boards Serves Long-Term Value, by Lucian A. Bebchuk, Harvard Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

According to a central and influential view in corporate law writings and debates, shareholder interventions, and the fear of such interventions, lead companies to take myopic actions that are costly in the long term; consequently, it is claimed, insulating boards from such pressure serves the long-term interests of companies as well as of their shareholders. This board insulation claim has been regularly invoked in a wide range of contexts to support limits on shareholder rights and involvement, and has had considerable success and influence. In this paper, I subject this view to a comprehensive examination, and I find it wanting.

In contrast to what insulation advocates commonly assume, short investment horizons and imperfect market pricing do not imply that board insulation will be value-increasing in the long term. I show that, even assuming such short horizons and imperfect pricing, shareholder activism, and the fear of shareholder intervention, will produce not only long-term costs but also some significant countervailing long-term benefits.

Furthermore, there is a good basis for concluding that, on balance, the negative long-term costs of board insulation exceeds its long-term benefits. To begin, the behavior of informed market participants reflects their beliefs that shareholder activism, and the arrangements facilitating it, are overall beneficial for the long-term interest of companies and their shareholders. Moreover, a review of the available empirical evidence provides no support for the claim that board insulation is overall beneficial in the long term; to the contrary, the body of evidence favors the view that shareholder engagement, and arrangements that facilitate it, serve the long-term interests of companies and their shareholders.

I conclude that the claims made by insulation advocates have a shaky conceptual foundation and are not supported by the data. Policy makers and institutional investors should reject arguments for board insulation in the name of long-term value.

April 14, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Skeel & Jackson on Dynamic Resolution of Large Financial Institutions

Dynamic Resolution of Large Financial Institutions, by David A. Skeel Jr., University of Pennsylvania Law School; European Corporate Governance Institute (ECGI), and Thomas H. Jackson, University of Rochester, was recently posted on SSRN.  Here is the abstract:

One of the more important issues emerging out of the 2008 financial crisis concerns the proper resolution of a systemically important financial institution. In response to this, Title II of Dodd-Frank created the Orderly Liquidation Authority, or OLA, which is designed to create a resolution framework for systemically important financial institutions that is based on the resolution authority that the FDIC has held over commercial bank failures. In this article, we consider the various alternatives for resolving systemically important institutions. Among these alternatives, we discuss OLA, a European-style bail-in process, and coerced mergers, while also extensively focusing on the bankruptcy code. We argue that implementing several discrete modifications to Dodd-Frank, as well adopting an ambitious Chapter 14 proposal written by a working group at the Hoover Institution is the best way forward for establishing a strong resolution framework.

April 14, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Cunningham Podcast on Warren Buffett & Corporate Governance

Lawrence Cunningham (George Washington Law) has a podcast, Inside Track with Broc: Larry Cunningham on Warren Buffett's View of Governance & Securities Law (4/8/13).  In this podcast, Larry discusses the Third Edition of "The Essays of Warren Buffett: Lessons for Corporate America" (the first version dates back to 1997 and actually began as a law review conference) as it applies to corporate governance and securities regulation, including:

•What are some of the venerable principles of corporate governance that reappear in this edition?
•What's new for Warren concerning corporate governance?
•Who does Warren think was responsible for the financial crisis and how has responsibility been apportioned?
•What about compliance and assuring integrity through the ranks?
•For Warren, what's the toughest battle to fight in terms of compliance?
•What's the appropriate response when improprieties are found?

April 14, 2013 in Law Review Articles, Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Baer on Baker & Griffith's Ensuring Corporate Misconduct

Some Thoughts on the Porous Boundary between Ordinary and Extraordinary Corporate Fraud (Book Review of ENSURING CORPORATE MISCONDUCT by Tom Baker and Sean J. Griffith, 2010), by Miriam H. Baer, Brooklyn Law School, was recently posted on SSRN.  Here is the abstract:

This is a book review of Tom Baker and Sean Griffith’s 'Ensuring Corporate Misconduct'. Their book provides an exhaustive and illuminating analysis of how corporations contract for director and officer (D&O) liability insurance. Based on extensive interviews with insurance carriers and corporate risk officers, Baker and Griffith conclude that D&O liability insurance has created a moral hazard within the public corporation. Managers, who have incentives to take advantage of shareholders, are inadequately deterred by civil liability for securities fraud because D&O insurance effective shields them from any payout. Accordingly, Baker and Griffith argue for reforms that would reduce this moral hazard.

Baker and Griffith’s arguments are persuasive and should make any reader think twice about the value of D&O insurance. Their critique, however, seems to make light of the fact that corporate fraud can trigger criminal investigations, and ultimately criminal penalties for individuals who engage in or conspire to commit fraud. Although the authors agree that D&O insurance provides no protection against criminal penalties and investigations, they nevertheless presume that much of the conduct that gives rise to civil securities fraud litigation (so-called “ordinary fraud”) is unlikely to trigger criminal and public enforcement proceedings. This Review questions whether there in fact exists such a distinct boundary between “ordinary” and “extraordinary” corporate frauds. To the contrary, one would expect the rational corporate officer to be wary that any fraud case might trigger an investigation by public enforcers. If that is the case, then the porous boundary between criminal and civil fraud may lessen Baker and Griffith’s rightful concerns about moral hazard. With these thoughts in mind, the Review then addresses several of Baker and Griffith’s proposed reforms.

April 14, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Saturday, April 13, 2013

FINRA Board Scheduled to Consider Changes to Customer Arbitration Rules

At its April 18 meeting the FINRA board of governors will consider a proposed rule change to the Customer Code of Arbitration, to make it easier for customers to select a panel consisting of all public arbitrators (in claims over $100,000).  Currently, the default option is a panel consisting of two public and one industry arbitrator, and a customer must make an election to select an all-public panel option.  The proposed rule change, as described on the FINRA website:

The Board will consider proposed amendments to FINRA Rule 12403 (Cases with Three Arbitrators) to simplify the arbitration panel selection rules. Rather than requiring the customer to elect a panel-selection method, parties in all customer cases with three arbitrators would get the same selection method. All parties would see lists of 10 chair-qualified public arbitrators, 10 public arbitrators and 10 non-public arbitrators. The proposed rules permit four strikes on each of the public arbitrator lists. However, any party could select an all-public arbitration panel by striking all of the arbitrators on the non-public list.

When FINRA first proposed giving customers the option of selecting an all-public panel, I applauded the concept, but worried that pro se claimants might lose the option inadvertently by failing to make the election within the prescribed time period.  I suggested that the default should be an all-public option and that customers could elect to include one industry arbitrator.  FINRA was not receptive to my suggestion.

Since adoption of the all-public option, FINRA has stated that customers are electing for an all-public panel more frequently than it had anticipated, so this proposal may be in response to that.  In any event, it is a welcome development, and I hope that the Board of Governors will view the proposal favorably.

The board of governors will also consider amendments to the Discovery Guide relating to e-discovery, described as follows:

The Board will consider proposed amendments to the Discovery Guide used in customer arbitration proceedings to provide general guidance on e-discovery issues and product cases. The guidance, which would appear in the introduction to the Discovery Guide, would emphasize flexibility in the discovery process. FINRA is not proposing to amend the Document Production Lists, which specify documents that are presumptively discoverable in customer cases. The proposed amendments would also clarify existing provisions in the introduction relating to affirmations.


April 13, 2013 in Other Regulatory Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

Thursday, April 11, 2013

FINRA Charges Online Broker with Fraud in Sales of Promissory Notes to Athletes

FINRA filed a Temporary Cease-and-Desist Order (TCDO) to halt further fraudulent activities by Washington, D.C.-based Success Trade Securities, Inc. and its CEO & President, Fuad Ahmed, as well as the misuse of investors' funds and assets. FINRA also issued a complaint against Success Trade Securities and Ahmed charging fraud in the sales of promissory notes issued by the firm's parent company, Success Trade, Inc., in which Ahmed holds a majority ownership interest. FINRA filed the TCDO, to which Ahmed and the company agreed, thus immediately freezing their activities, based on the belief that ongoing customer harm and depletion of investor assets are likely to continue before a formal disciplinary proceeding against Success Trade Securities and Ahmed will be completed.

 Success Trade Securities is an online broker-dealer that operates through Just2Trade and LowTrades.

In its complaint, FINRA alleges that Success Trade Securities, Ahmed and other registered representatives at the firm sold more than $18 million in Success Trade promissory notes to 58 investors, many of whom are current or former NFL and NBA players, while misrepresenting or omitting material facts. Specifically, FINRA's complaint alleges that Ahmed and Success Trade Securities misrepresented that they were raising $5 million through the sale of promissory notes and continued to make this representation, even as the sales exceeded the original offering by more than 300 percent. Most of the notes promised to pay an annual interest rate of 12.5 percent on a monthly basis over three years, with some notes promising to pay interest as high as 26 percent.



April 11, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Ex-KPMG Partner Charged with Insider Trading in Criminal and Civil Charges

No doubt readers of this Blog have been following with interest the developments about the ex-partner of accounting firm KPMG (now identified as Scott London), who has admitted to passing along confidential information about audit clients to a friend (now identified as Bryan Shaw).  London has now been charged criminally with conspiracy to commit securities fraud through insider trading in Los Angeles, and the SEC has brought civil charges.  The complaint says London tipped off Shaw about five KPMG clients (previously only Herbalite and Skechers were identified) in exchange for bags of cash, concert tickets and a Rolex watch.  London allegedly made about $1 million profit in trades.  The illegal activity began in October 2010 and continued for 18 months.

The SEC's civil complaint states that London was the audit partner for Deckers Outdoor Corp.  In addition, London obtained inside information about two impending mergers involving two former KPMG clients -- RSC Holdings and Pacific Capital Bancorp --that he allegedly tipped to Shaw.

WSJ, Former KPMG Partner Is Charged

SEC, SEC Charges Former KPMG Partner and Friend with Insider Trading

April 11, 2013 in News Stories, SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 10, 2013

Second Circuit Affirms Dismissal of Negligence Suit Against SEC Because of Madoff

The Second Circuit today affirmed a district court's dismissal of investors' claims against the SEC for failing to adequately investigate Bernard Madoff despite numerous warnings.  The appeals court affirmed because the Discretionary Function Exception (DFE) of the Federal Tort Claims Act shields the SEC's conduct from plaintiffs' claims.  Molchatsky v. US (11-2510-cv(L), decided Apr. 10, 2013Download Molchatsky v US)

The court noted that:

The DFE is not about fairness, it “is about power”... .; the sovereign “reserve[s] to itself the right to act without liability for misjudgment and carelessness in the formulation of policy,” ... “[T]he  DFE bars suit only if two conditions are met: (1) the acts alleged to be negligent must be discretionary, in that they involve an ‘element of judgment or choice’ and are not compelled by statute or regulation and (2) the judgment or choice in question must be grounded in ‘considerations of public policy’ or susceptible to policy analysis.”.... Plaintiffs bear the initial burden to state a claim that is not barred by the DFE....
Here, Plaintiffs have failed to make the necessary showing.


April 10, 2013 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

SEC Submits Budget Request for FY 2014

The SEC has submitted its budget request for fiscal year 2014, requesting $1.674 billion.  The agency seeks to hire an additional 676 positions.  The request also identifies the SEC's priorities.  (Download Secfy14congbudgjust[1])

April 10, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Adopts Identity Theft Rules

The SEC adopted rules requiring broker-dealers, mutual funds, investment advisers, and certain other entities regulated by the agency to adopt programs to detect red flags and prevent identity theft.  The agency adopted the rules jointly with the CFTC.

The final rules require certain entities regulated by the SEC such as broker-dealers, mutual funds, and investment advisers to adopt an identity theft program.  The program should include policies and procedures designed to:

  • Identify relevant types of identity theft red flags.
  • Detect the occurrence of those red flags.
  • Respond appropriately to the detected red flags. 
  • Periodically update the identity theft program.

The final rules will become effective 30 days after publication in the Federal Register, and the compliance date will be six months after the effective date.

April 10, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)