Institutional Investor Securities Blog

The Securities and Exchange Commission's Division of Risk, Strategy and Financial Innovation’s director Craig Lewis wants members of the public to be more proactive about offering information regarding investor-protection related benefits and costs during the rulemaking process. At the Pennsylvania Association of Public Employee Retirement Systems’s spring forum, Lewis said that it would help the regulator if it was given if not quantitative data, then qualitative, descriptive, and thorough information so it could better comprehend the possible effect a rule might have on investor protection.

According to the Commission’s recently published guidance on how it performs economic analysis to support rulemaking, there are four basic elements, including:

1) Identifying the justification for why there should be a rulemaking.
2) Defining the baseline to use to measure the economic impact of the regulatory action (meaning, what is the world like now sans the regulation?)
3) Determining what (if any) reasonable regulatory approaches there might be.
4) Evaluating the economic impact of the proposed rule, as well as that of the principal regulatory options.

Lewis, who was clear that his views and opinions were his own and not necessarily that of the Commission said that Risk Fin’s economic analysis is key to the agency’s mission to protect investors. One example he pointed to was the SEC’s recent request for information on a uniform fiduciary duty for broker-dealers and investment advisers that give personalized retail investment advice. He said that data submitted was able to identify the need for a regulatory action for investor protection, which makes the latter reason for there to be a rulemaking.

Commenting on this story, Shepherd Smith Edwards and Kantas, LTD, LLP Founder William Shepherd said: “After the stock market crash of 1929, Congress passed laws to regulate securities offerings, to regulate securities markets and to create the SEC. The US securities markets soon became the gold standard for the world. Investors worldwide relied on the transparency and protection of our markets which gave them greater confidence to invest here than elsewhere in the world. The “costs” of regulation to the securities industry were far outweighed by the “benefits” to everyone, including Wall Street. Now, everyone, including financial types, doesn’t like rules and regulations that constrain us. Yet, the dawn of the 21st century hatched a new era of deregulation, including the U.S. financial industry. The foxes of Wall Street were unleashed upon the henhouse and the results are history. Hens (investors) were eaten worldwide, and a financial collapse ensued, which may or may not have been averted. Meanwhile, new efforts to “re-regulate” the U.S. financial markets have been met with expected resistance from those adverse to return of the rules. The sad part is that, instead of welcoming their new clout (or bite) some of the “fox hounds” at the SEC are more concerned about the welfare of the foxes than the hens.”

If you worry that you may have been the victim of securities fraud, do not hesitate to contact SSEK right away to ask for your free case evaluation.

Investor Protection Through Economic Analysis, by Craig Lewis, SEC, May 23, 2013

Division of Economic and Risk Analysis, SEC

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Gold, once a hot commodity in the markets, is, at least for now, considered incredibly passé. ETF Trends editor Tom Lydon says that over 600,000 pounds of gold have been disposed of this year. He says that gold is out of favor for at least a couple of reasons: Central Banks aren’t as interested, and investors are currently looking more to back stocks and bonds, since both are doing relatively well.

Lydon, however, was quick to point out that gold isn’t gone for good, especially when investors will want to hedge against inflation and markets when the need arises once again. Meantime, investors may be opting to buy just a small amount of gold to stick in their portfolios.

Gold ETFs
A gold exchange traded fund is a commodity ETF made up of one principal asset: Gold. That said, the fund is usually made up of gold backed-gold derivative contracts, which means the investor doesn’t own actual gold. Instead, when a gold ETF is redeemed, an investor gets cash equal to the gold’s value.

A Gold ETF exposes the investor to gold’s performance. It also may serve as an industry ETF, exposing investor to the gold mining industry or providing foreign exposure.

Gold ETFs have their disadvantages. In specific instances, a Gold ETF may not come with the same capital gain tax breaks as more traditional ETFs. Also, there may be an asset management fee, which would make the return a little less than the gold price increase. Additional costs may also be involved, such as a commission or a brokerage free. Some gold ETFs can also be very illiquid, which can impact when they can be sold and bought.

Investing in Gold ETFs isn’t necessarily that simple. The SPDR Gold Trust exchange-traded fund (GLD) was one pretty hot ETF commodity for awhile. Yet, only “authorized participants,” and not regular investors, could redeem or create shares. These participants are typically securities market participants, such as registered brokerage firms (Goldman Sachs (GS), Citi (C), JPMorgan Chase (JPM), Morgan Stanley (MS), Merrill Lynch-Bank of America (BAC) and others), that have agreements with the sponsor and trustee. Meantime, regular shareholders don’t have redemption rights and the Trust doesn’t have to ensure the gold, meaning that it isn’t liable for damage, loss, fraud, or theft.

Critics have accused GLD, and the entire ETF industry in general, of offering investors “on-demand liquidity” that in certain instances are based an underlying assets that are a lot less liquid and that this can distort underlying market prices.

If you believe you may have suffered losses because of Gold ETF fraud, contact our securities lawyers right away. Investing in certain exchange-traded funds isn’t for everyone and it is important that when your registered representative or investment adviser recommended an investment to you, it was not only appropriate according to the degree of financial risk that your portfolio could handle but also that the ETF was suitable for your goals and objectives.

Gold ETFs Are Liquidating By the Ton, Yahoo.com, May 21, 2013

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Morgan Stanley, Citigroup, Wells Fargo, and UBS to Pay $9.1M Over Leveraged and Inverse ETFs, Stockbroker Fraud Blog, May 3, 2012

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US Senators John Thune (R-SD), Richard Burr (R-NC), and Tom Coburn (R-Okla) have introduced a bill that would mandate that public pension plans reveal more information about the way they calculate liabilities and assets or place at risk the favorable tax treatment for bonds that are issued by the states and cities. S. 799 is a companion legislation to a bill that was recently unveiled in the US House of Representatives.

Like S. 799, SRLR 710 would make pension plans notify the Treasury Department about what assumptions and methods they use to determine assets, debt, and liabilities. Failure to abide by these tougher disclosure requirements would lead to the revocation of tax exemptions for specific bonds put out by municipalities and states. The senators’ bill also would prohibit federal bailout for any public pension funds.

Another Republican, Rep. Ann Wagner from Missouri, recently presented HR 1626, which would prohibit the Securities and Exchange Commission from being able to make companies reveal their political spending. The legislation, co-sponsored by Rep. Scott Garrett (R-N.J.), would amend the 1934 Securities Exchange Act.

It was nearly two years ago that a group of law professors petitioned the SEC to mandate the disclosure of how much companies allot toward political spending. Many have called on the Commission to push such rulemaking forward. However, some Republicans believe that ordering this type of disclosure exceeds the bandwidth of the SEC’s mission, which they say doesn’t include discretionary rules.

Political spending by companies is also an issue that Rep. Michael Capuano (D-Mass.) and Sen. Robert Menendez (D-N.J.) are tackling. Their bills, HR 1734 and S. 824, would mandate that companies get majority shareholder approval before they can use funds for political contributions and notify the SEC of such spending. Corporate shareholders would have to approve an “overall political budget.”
Both men introduced similar bills during the 112th Congress with no success.

In other news, Rep. Louise Slaughter (D-N.Y.) is requesting that law firm Greenberg Traurig LLP to disclose what its relationships are in the political intelligence industry because of allegations that the firm may have communicated market-moving data about Medicare Advantage to Height Securities, a political intelligence firm. Height Securities then allegedly passed the information on to certain clients and several insurers’ shares reportedly went soaring.

Slaughter, who introduced the original draft of the Stop Trading on Congressional Knowledge Act in 2006, made the request to Greenberg Traurig CEO Richard Rosenbaum in writing. A spokesperson for the law firm says that it no longer has a relationship with Height and that Greenberg Traurig has since concluded that providing government relations services to those in political intelligence can lead to unintended use of such services.

Meantime, Representatives Carolyn Maloney from New York and Maxine Waters from California, two other Democratic lawmakers, are asking the lawmakers tasked with appropriations to make sure that the funding the SEC receives for the next fiscal year is $1.674 billion, which is what President Barack Obama also wants. Their letter, signed by 51 other lawmakers, noted how it is imperative that Congress “fully fund” the regulator so that effective rulemaking and proper oversight of the securities market can happen.

Shepherd Smith Edwards and Kantas, LTD, LLP is a securities fraud law firm that represents institutional investors throughout the US.

Greenberg Traurig law firhttp://www.govtrack.us/congress/members/ann_wagner/412548m at the center of ‘political intelligence’ case, Washington Post, May 6, 2013

S. 779: Public Employee Pension Transparency Act

HR 1626: Focusing the SEC on Its Mission Act

Democrats Urge Appropriators to Fully Fund SEC, Committee on Financial Services-Democrats, April 23, 2013

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In light of the US Supreme Court’s decision in Kiobel v. Royal Dutch Shell Petroleum Co., the attorney for GE Energy (USA) wants the Court of Appeals for the Fifth Circuit to dismiss would-be whistleblower Khaled Asadi’s appeal to have his lawsuit, contending that his firing violates the protections provided to him under the 2010 Dodd-Frank Act, reinstated. Asadi filed his complaint against the company last year claiming that his former employer had violated the whistleblower anti-retaliation provisions. The dual Iraqi and US citizen says that he was let go from his job after he told GE Energy’s ombudsman and his supervisor about a hiring situation that could violate the Foreign Corrupt Practices Act.

A district court, however, threw out his case, finding that, per the Supreme Court’s ruling in Morrison v. National Australia Bank Ltd., applying the anti-retaliation provisions to behavior that happened abroad is precluded. Asadi then went to the Fifth Circuit, arguing that Dodd-Frank protects employees that report violations of any rule, law, or regulation that is under SEC jurisdiction. He claims that these protections extend to US citizens who work abroad and report information about securities violations.

Asadi believes that the way Dodd-Frank incorporates the FCPA supports his claim that the whistleblower protections do have “extraterritorial applicability.” He noted that the anti-corruption statute has a “clear statement rule” that is applicable to individuals and companies outside the US.

In the Kiobel ruling, the justices voted to affirm the dismissal of the Alien Tort Statute claims submitted by Nigerian nationals against certain British, Nigerian, and Dutch companies over the alleged aiding and abetting of the Nigerian government in numerous law of nations violations, including torture and extrajudicial killings. Chief Justice Roberts wrote that the presumption against extraterritoriality can apply to ATS claims and that there is nothing in the statute that successfully counters this presumption. Now, GE Energy’s legal representation contends that like the Supreme Court’s ruling in Kiobel, the district court’s decision in this case also depended on the presumption against extraterritoriality.

Please contact our institutional investment fraud law firm to find out whether you have a securities case.

Asadi v. G.E. Energy (USA)

Morrison v. National Australia Bank

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The Federal Reserve Board has moved closer toward being able to designate certain firms as Systemically Important Nonbank Financial Institutions. Earlier this month it set up a key rule that lets the Financial Stability Oversight Council name these SIFIs. The Federal Reserve would be their consolidated supervisor.

The rule defines when a firm is “predominantly” involved in financial activities. An SIFI would need to have at least $50 billion in overall consolidated assets or have risk exposures that could harm the US financial system should it fail. Among the companies that will likely get the SIFI designation are Prudential Financial Inc., GE Financial, MetLife Inc., and American International Group Inc.

A company will be considered as primarily involved in activities that the Bank Holding Company Act deems “financial in nature,” if at least 85% of its assets or revenues are related to such activities. However, the Fed has decided that involvement in physically settled derivatives transactions would generally not be considered a financial activity. This is to protect companies, such as manufacturers and farmers, that work with derivatives to hedge against supply price modifications.

The list of activities (encompassing 12 pages) that are considered financial in nature include: investing for others, lending, insuring against harm or loss, offering investment or financial advisory services, underwriting, selling interests in asset pools, servicing loans, and underwriting. SIFIs will have to turn in reports to the Federal Reserve, the Federal Deposit Insurance Corp., and FSOC about their credit exposure to other key nonbank financial institutions and key bank holding companies. They also will need to report on credit exposure to entities that are significant to them.

The new rule provides definitions for the terms "significant bank holding company” and "significant nonbank financial company.” These terms are key because when FSOC is deciding whether a company is an SIFI that the Fed must supervise, it has to look at the nature and extent of that firm’s transactions and its relationships with other key SIFIs and key holding companies.

Establishing which nonbank companies can qualify as SIFIs takes a way a key stumbling block that was preventing FSOC from being able to identify them. The Fed has the power to make SIFIs get rid of operations that it considers too high risk, raise capital levels so that they factor in the risk levels involved, and outline living wills to help close down an institution should it fail.

The new rule to designate SIFIs doesn’t go into effect until May 6. However, it is unlikely that FSOC will name any nonbank firms as SIFIs for a while. Some firms are expected to oppose such a designation because of the burdens it comes with it.

Institutional Investor Fraud
Our securities lawyers represents institutions that have been the victim of investment fraud. If you believe your losses were due to the misconduct/error of another entity or an individual, contact Shepherd Smith Edwards and Kantas, LTD LLP today.

Regulators one step closer to naming SIFIs, The Deal Pipeline, April 4, 2013

Federal Deposit Insurance Corp.

Federal Stability Oversight Council

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Under Rule of Practice 102(e), SEC to File More Securities Cases Against Lawyers
According to the Commission, it intends to bring even more cases against lawyers under its Rule of Practice 102(e). The amount cases had already gone up in the wake of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act and the 2002 Sarbanes-Oxley Act. Now, the regulator’s Office of the General Counsel is getting referrals from its Enforcement Division about possible lawyer misconduct.

The cases being brought generally involve alleged securities violations, such as active involvement in financial fraud and the obstruction of probes, with judgment errors and close calls not included. Per rule 102(e), the SEC can bar or censure individuals from practicing or appearing before it for different reasons. Some attorneys, however, are worried about the way the regulator interprets the rule, such as what ‘active participation’ in fraud actually entails. There are also concerns that the rule could be used as a “tactical tool” against attorneys.

Social Media Now An Avenue for Announcing Material Information
The Securities and Exchange Commission says that companies can now use social media to make material information announcements, as long as investors are notified which sites to go to for this data. This is the first time that the subject of Regulation Fair Disclosure to corporate information published on social media sites was directly addressed. The announcement was issued in a rare report pursuant to the 1934 Securities Exchange Act’s Section 21(a).

The report was spurred by Netflix Inc. (NFLX) CEO Reed Hastings’s Facebook post June 2012 announcing that subscribers had experienced more than 1 billion hours of content. The SEC later sent a Wells notice to the company saying that the information should have been disclosed through other avenues. However, following an investigation, the regulator discovered that there has been uncertainty over the way Regulation FD and the Commission’s 2008 Guidance applies to disclosures that take place through social media.

Clearing Agency Rulemaking Process Gets Streamlined
The SEC has finalized a rule that streamlines the rulemaking process for clearing agencies that are registered with both the regulator and the Commodity Futures Trading Commission. The 1934 Securities Exchange Act’s rule 19b-4 amends an interim rule that lets SRO rule changes go into effect upon filing, as long as the proposed modifications are not related mainly to securities futures and they don’t impact the securities clearing operations of the agencies.

The latest amendments bring non-securities products, including security-based swaps and swaps that aren’t mixed, under the umbrella of the interim rule. The final rule is supposed to make sure that the clearing agencies involved don’t have to deal with unnecessary delays in implementing changes to rules that primarily involve non-security products and that modifications are filed with the SEC.

If you suspect that your financial losses are a result of institutional investor fraud, please contact Shepherd Smith Edwards and Kantas, LTD, LLP right away.

Read the Amendment to Dual Filing Clearing Agencies' Rule Filing Requirements, SEC (PDF)

Read the Report Addressing Disclosures Over Social Media (PDF)

The SEC Rules of Practice (PDF)

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In Senior Executives Association v. United States, U.S. District Court for the District of Maryland Judge Alexander Williams said that the privacy rights of thousands of senior federal workers could be violated if a Stop Trading on Congressional Knowledge Act provision, which mandates that these employees’ financial information is disclosed online, goes into effect.

The court noted that exposure from disclosure online is greater than what existed under the old regime of disclosure. Under the old requirements, per the Ethics in Government Act, federal employees’ financial reports had to individually requested, while the requestor had to name itself. Information about the legal parameters of use was provided.

Meantime, a Congressionally mandated study, which was recently released, reports that broad online disclosure of government workers’ financial data is possibly dangerous and should be indefinitely delayed. Conducted by a National Academy of Public Administration panel, “An Independent Review of the Impact of Providing Personally Identifiable Financial Information Online” found that the STOCK Act's disclosure requirement could hurt federal agency missions, as well as workers. Among the worries brought up: possible identity theft and potential exploitation by foreign intelligence services and others. There were also concerns that access to what has normally been private financial formation, including debt and other financial losses, could now be used to suss out who might be most vulnerable to bribes and other financial inducements. The study recommends that lawmakers indefinitely suspend this provision.

Noting that only approximately 450 financial reports for senior federal employees were sought over two years under the old disclosure regime, Judge Williams suggested that the privacy of over 28,000 workers eclipses the privacy loss “associated with” the old system.

“The goal of the legislation was to place the same type restrictions on Congresspersons and Senators, their staff, and other government workers that the rest of us face: No trading on insider information!” Said Securities Lawyer William Shepherd. “Folks in Washington get lots of inside information, such as how laws will effect companies, who is getting government contracts, etc. This is information we could all get rich on – and many do! So, what happens when one writes a law to prevent themselves from an unfair advantage over you and me? Well, they could write a law that is unconstitutional so the courts will throw it out. This way, they appear to be taking action – but nothing happens in the long run. The result is that they can keep making money unfairly without worrying about breaking the law.”

Senior Executives Association et al v. United States of America et al, Justia

STOCK Act (PDF)

An Independent Review of the Impact of Providing Personally Identifiable Financial Information Online (PDF)

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Continue reading "Federal Workers’ Privacy Rights if STOCK Act Provision Mandating Online Disclosure of Financial Data Goes Into Effect, Says District Court Judge" »

The American Securitization Forum recently experienced an upheaval when most of its board resigned over a dispute with its executive director on the topics of bonuses and governance. The group is the primary trade association for the securitization industry, which generated over $500 billion of new bonds around the world.

Among those that resigned are JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC), Citigroup (C), and Deutsche Bank (DB). Sources that spoke on the grounds of anonymity said that the departures now place the future of the forum in peril. Also no longer on the ASF board are Fitch Ratings Ltd., Amherst Securities Group LP, Natixis SA, and Moody's Investors Service.

The different board members stepped down after they were unable to remove the ASF board’s executive director Tom Deutsch. Even though they disagreed with the bonuses he received, they couldn’t displace him because of existing documents regarding governance.

The ASF website reports that its members are comprised of investors, issuers, rating companies, financial intermediaries, trustees, legal accounting firms, and servicers. Founded as part of the Securities Industry and Financial Markets Association in 2002, the association was involved in a contentious break from the latter in 2010. Deutsche was granted to set up ASF as its own entity and at first he was not just its director but also its only member. The governing structure set up then was supposed to be short-term.

Our securities law firm represents institutional and individual investors seeking to recover losses sustained because of investment fraud.

American Securitization Forum

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According to The Wall Street Journal, the major print media don’t believe that the country’s premier corporate litigation forum should be able to arbitrate business disputes. On Monday, News Corp, the news publication’s parent company, was joined by The New York Times Company, the Associated Press, the Washington Post, Atlantic Media, Inc., Bloomberg L.P., Reuters America LLC, and other media companies and groups in a friend-of-the-court brief to the U.S. Court of Appeals for the Third Circuit. They are pushing for a state law that gives the state’s Delaware Court of Chancery the power to arbitrate business disagreements in secret to be found unconstitutional. The outcome of this case could affect how business disputes in Corporate America are settled.

It was last year that U.S. District Judge Mary A. McLaughlin struck down a program by the Delaware Chancery Court that let its judges preside over arbitration disputes. Her decision was a victory to Delaware Coalition for Open Government, which is the civic group that filed a lawsuit against the court’s judges. The judges are the ones that filed the appeal.

The media’s brief wants the appeals court to affirm McLaughlin’s ruling and acknowledge the “strong presumption” that champions open access to judicial proceedings and the First Amendment rights of the media and the public to that access. Supposedly backing the concept of judicial arbitration is the idea that Delaware, which is dependent on corporate tax, wants to take advantage of having its chancery court be a go-to venue for corporate litigation, including class action lawsuits.

The coalition contends that the closed-door proceedings of the Chancery Court violate the First Amendment. Agreeing with the plaintiff, Judge McLaughlin had said that judicial arbitration should be, like civil trials, open to the public.

Last month, the US Chamber of Commerce filed its brief supporting the Chancery Court judges, who claim that they are merely providing an alternative for companies that would otherwise secretly settle their disputes via regular arbitration. Their side seems to be concerned that public proceedings would scare businesses off and that not only would such entities lose the chance to adjudicate disagreements in a forum that works but also this might cause injury to shareholders and the markets.

Our stockbroker fraud lawyers represent institutional and individual investors. Your initial case evaluation with one of our experienced securities arbitration attorneys is free.

‘Judicial Arbitration’ Is Unconstitutional, Say Newspapers, The Wall Street Journal, January 15, 2012

Federal Judge: Delaware’s Secret Court Arbitration Is Unconstitutional, Insurance Journal, September 5, 2012

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This month, the Clearing House Association put out a paper with nine new recommendations about an emerging plan for the central clearing of derivatives. It was in April that the International Organization of Securities Commissions and the Bank for International Settlement's Committee on Payment and Settlement Systems issued final standards geared toward making clearing, payment, and settlement systems more able to withstand financial defaults and shocks.

The Clearing House Association is warning about what it perceives as unrealistic and poorly defined expectations for Clearing Members and how this might end up creating additional problems. This issue involves indicators that there is friction between experts, international regulators, and standard-setters on how to utilize central counterparties to ease financial contracts’ traffic through global markets. The bank-owned association said that although it considered the CPSS-IOSCO standards a key beginning in tackling the issues associated with financial market infrastructures, under the new standards, we may be left with the problem of clearing member firms that provide important support to central counterparties ending up with too much of the burden. The Clearing House Association wants to make sure that liability for clearing members is ascertainable and limited. It is calling on central counterparties to make sure that the proper governance structures and liquidity demands and liquidity management protocols on clearing members are assessed in the wake of conflicting, new demands, such as:

• Liability for clearing members that is manageable, limited, and can be ascertained.
• Proper “skin in the game” for central counterparties.
• Margin requirements to protect clearing members that aren’t defaulting from those that are.
• Realistic expectations for clearing members when liquidity demands are made by central counterparties.
• Coordinating liquidity demands placed on clearing members to prevent them from getting overwhelmed with intraday margin calls.
• Restrictions on the how and when central counterparties can modify practice standards or rules during a crisis.
• Greater transparency on central counterparties so that clearing Members can monitor risk.
• The ability to isolate loss liabilities within central counterparties so that contagion doesn’t occur.

The Clearing House Association says that the recommendations are intended to offer general principals as new rules are made known.

Our institutional investment fraud lawyers represent clients throughout the US. Contact our securities fraud law firm today.

Key Banking Group Wants More Protection For Clearing Members Under New Framework, Bloomberg/BNA, December 19, 2012

Clearing House Association

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In a record first involving the Federal Deposit Insurance Company suing the auditors of a failed bank, the government agency has filed a lawsuit against Crowe Horwath LLP (CROHORP) and PricewaterhouseCoopers LLP for over $1 billion for their alleged failure to detect the securities fraud perpetuated by Taylor Bean & Whitaker Mortgage Corp. that led to the demise of Colonial Bank. Taylor Bean was one of the bank’s biggest clients. The two auditors are accused of gross negligence, professional malpractice, and breach of contract for not spotting the scam.

According to the FDIC’s complaint, two Colonial mortgage lending employees, Teresa Kelly and Catherine Kissick, let Taylor Bean officials divert money from the bank without it getting collateral in return. This resulted in Taylor Bean allegedly stealing nearly $1 billion from Colonial by promising it would provide the bank with mortgages that it had actually sold to other banks. The FDIC contends that not only did Kissick and Kelly know about Bean’s fraud but also they made it possible for the cash to be illegally diverted. The two of them would later plead guilty to aiding Taylor Bean’s fraud.

In 2009, Alabama banking regulators seized Colonial. The downfall of Colonial Bank is considered one of the biggest bank failures in our nation’s history and Is expected to cost the FDIC’s insurance fund about $5 billion.

Although auditing firms usually tend to benefit from pari delicto, a common-law doctrine that prevents one wrongdoer from suing another for money made from a joint wrongdoing (and since employees’ actions are usually imputed to the corporation, in this case Colonial typically would also be considered a wrongdoer), the FDIC's securities case portrays the Colonial lending officials as rogue employees who were working against the bank’s interest—especially as Colonial was harmed by the fraud when it lent Taylor Bean hundreds of millions of dollars that had been secured by loans that didn’t exist or were worthless. If the FDIC succeeds in demonstrating that Kissick and Kelly were working for their own benefit, then in pari delicto may not provide Pricewaterhouse Coopers and Crowe Horwath with such protections.

Meantime, Pricewaterhouse Coopers’s legal team is contending that Colonial’s employees acted to protect Colonial from loss and that Taylor Bean had been paying the bank $20-30 million/month in interest. The defendants are also arguing that auditors shouldn’t have been expected to discover the fraud that was so well hidden that the FDIC and OCC didn’t uncover it either when they conducted targeted exams.

A Tale of Two Lawsuits -- PricewaterhouseCoopers and Colonial Bank, Forbes, November 10, 2012

FDIC Sues Auditors Over Colonial Bank Collapse, Smart Money/Dow Jones, November 15, 2012

Federal Deposit Insurance Corporation

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Continue reading "FDIC Sues Pricewaterhouse Coopers & Crowe Horwath for Over $1B Over Alleged Failure to Detect Large Fraud That Led to Colonial Bank’s Collapse" »

According to Attorney Daniel Duchovny, who is the special counsel to the Securities and Exchange Commission Corporation Finance Division's Office of Mergers and Acquisitions, a two-track merger and acquisition structure known as the Burger King structure could cause certain 1934 Securities Exchange Act provisions to be triggered. Named after the burger chain’s private acquisition equity that took place in 2010, the Burger King structure allows companies to go after a traditional one-step merger and a tender offer at the same time. Firms involved in such deals have to agree that if the company that is doing the acquiring is unable to arrive at the majority of shares (usually 90%) through the tender offer, midway through the process they can choose to do a one-step merger instead. Duchovny, who spoke during the Practising Law Institute webcast on September 6, made clear to emphasize that these views are his own.

At issue, says Duchovny, is that this dual structure may conflict with the 1934 Act’s Rule 14e-5, which, reports BNA, “prohibits buying or offering to buy the target company's securities outside a tender offer.” The one-step merger path could activate this prohibition because the acquiring company has to submit a preliminary proxy statement with the Commission. Duchovny noted that this filing could be viewed as a deal to buy securities “outside the tender offer.”

The SEC is currently trying to see whether the transaction structure does actually violate rule 14e-5. Meantime, Commission staff intend to get in touch with acquiring firms that exhibit plans to submit a preliminary proxy statement related to a Burger King-style transaction, warn about the possible “application of the rule,” and ask for a hold off on the submission of a definitive proxy statement before the expiration of the tender offer period. However, bidders looking for no-action relief from the Commission to submit a definitive proxy statement should be ready to tackle the agency’s concerns, said Duchovny, including that this type of solicitation is only speculative, the filer may not have to complete it, there may be a possible exception that the deal is one that not many shareholders support, there may be potential shareholder confusion, and that, seeing as there are other deal tools, there may not be a compelling enough need for the exception. Duchovny said that although the SEC has granted no-action relief before under Rule 14e-5, he emphasized that companies shouldn’t assume that this relief exists for general reliance.

One attorney who worked on the original Burger King transaction has advised that lawyers working on this type of deal should make sure that when companies submit a definitive or preliminary proxy statement they are not possibly tripping Rule 14e-5. He doesn’t recommend filing a definitive statement prior to the tender offer’s expiration date. And while a more conservative approach, which is to wait until that period ends and to then submit a preliminary proxy statement exists, he suggests going the middle road when using the Burger King structure: start the tender offer, let the SEC know of plans to submit a preliminary proxy statement, and turn in only that statement while the tender offer is still outstanding.

Shepherd Smith Edwards and Kantas, LTD, LLP is a securities fraud law firm dedicated to helping investors of financial fraud recoup their losses. Our institutional investment fraud lawyers can help you determine whether you've got a case.
SEC Gains Asset Freeze in Insider Case Against Broker Over Burger King Acquisition, BNA/Bloomberg, September 24, 2012

More Blog Posts:
Insider Trading Roundup: SEC Settlement Reached Over Alleged Tips In Insurers’ Merger, Court Won’t Throw Out Criminal Charges Related to Info From AA Member, & Asset Freeze Approved Against Broker In Burger King Acquisition, Stockbroker Fraud Blog, September 28, 2012

Why Were Two Former Morgan Stanley Smith Barney Brokers Not Named As Defendants in Securities Lawsuit by State Regulators Over $6M Now Missing From Wisconsin Funeral Trust?, Stockbroker Fraud Blog, September 27, 2012

Institutional Investment Fraud Roundup: Ex-Hedge Fund Managers’ Guilty Plea Over Bilking Investors of Almost $1M Get 3-Year Prison Term, SEC Sues Investment Adviser Over Alleged $37M Ponzi, and SEC Files Lawsuit Over Purported “Fund of Funds” Scam, Institutional Investor Securities Blog, September 26, 2012

The United States Treasury Department has sold $18 billion of American International Group Inc. (AIG) stock in a public offering. The sale cut the government ‘s stake in the insurance company to approximately 21.5% while making it a $12.4B profit on the bailouts that occurred during the economic crisis. This could be largest secondary offering in our nation’s history. AIG’s shares were sold at $32.50 each.

Meantime, AIG repurchased $5B of its shares with the remaining going to the broader public. In a securities filing, the insurance company said that it intends to use $3B of short-term securities and cash and $2B in proceeds from its sale of its stake in AIA Group to repurchase its stock.

Now, underwriters have 30 days to purchase another $2.7B of AIG shares. The deal’s underwriters include Citigroup Inc. (C), Deutsche Bank, AG (DB), Credit Suisse (CS), Goldman Sachs Group Inc. (GS), Wells Fargo & Co. (WFC), JPMorgan (JPM), Royal Bank of Canada's (RY) RBC Capital Markets division, Bank of America Corp's (BAC) Merrill Lynch division (MER), Morgan Stanley (MS), and Barclays PLC (BCS).

This is the government’s largest sell-down of AIG shares since bailing out the insurer. It had even pledged up to $182.3B to bolster AIG in the wake of growing subprime losses at one point. In return, the government acquired a close to 80% stake in AIG.

To date, the government, which used taxpayer funds to keep some companies afloat during the economic crisis, has gotten back $342 billion of the $411 billion that it through Troubled Asset Relief Program. That said, over 300 small banks that were given funding through TARP still need to pay back taxpayers.

In May, the GAO estimated that taxpayers might profit by $15.1 billion on the AIG bailout. Overallotment, if exercised, will allow the government to arrive at that amount. (The government has been reducing its stake in AIG since early last year. With the overallotment option of the stock sale, the government’s stake will go from 53% to 15.9%.)

According to Reuters, with the Treasury’s ownership stake in it dropping under 50%, because AIG is the owner of a small bank the Federal Reserve will begin regulating it as a savings and loan holding company. This means that AIG will have to be in compliance with the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act’s new rules, such as the Volcker law, which places a limit on a large financial firm’s being able to have stakes in hedge funds and private equity firms or trade for their own account.

The government’s bailout of AIG after Lehman Brothers filed for bankruptcy about four years ago had totaled $182 billion. Now, Chief Executive Robert Benmosche is saying that the financial rescues, paid back at a profit, have left the insurer positioned for success. The government has also been paid back in huge part the bailout loans it gave to other large financial institutions. However, it still is owed much from its rescues of Chrysler and General Motors and the billions of dollars it used to keep Fannie Mae and Freddie Mac afloat.

Treasury sells big chunk of AIG stock at a profit, Reuters, September 11, 2012

Treasury Sells More AIG Shares: $20.7B Total Cuts Stake To 15.9%, Forbes, September 11, 2012
U.S. Plans $18 Billion Sale of AIG Stock, The Wall Street Journal, September 10, 2012

Continue reading "US Government Sells $18B of AIG Stock and Turns a $12.4B Profit" »

Broker-dealer Biremis Corp. and its CEO and president Peter Beck agreed to be barred from the securities industry to settle Financial Industry Regulatory Authority allegations that they committed supervisory violations related to the prevention of manipulative trading, securities law violations, and money laundering. The SRO says that even though the financial firm’s specialty was executing trades for day traders, it had only obtained order flow from two clients outside the US from June 2007 through June 2010 and that both had connections to Beck.

FINRA contends that the broker-dealer and Beck did not set up a supervisory system that could be expected to comply with the regulations and laws that prohibit trading activity that is manipulative, such as “layering,” which involves making non-bona-fide orders on one side of the market to create a reaction that will lead to an order being executed on the other side. The SRO also says that Beck and Biremis did not set up an anti-money laundering system that was adequate, which caused the brokerage firm to miss warning signs of certain suspect activity so that it could report them in a timely manner.

Meanwhile, FINRA has also been attempting to deal with the issue of conflicts of interests via sweep letters, which it sent to a number of broker-dealers. The SRO is seeking information about how the financial firms manage and identify conflicts of interest. In addition to requesting meetings with each of them, FINRA wants the brokerage firms to provide, by September 14, the department and employee names of those in charge of conflict reviews, information about the kinds of documents that are prepared after such evaluations, and the names of who gets the final documents and reports after the conflict reviews.

Another area where regulators have been taking a hard look is the financial market infrastructures. The International Organization of Securities Commissions and the
Committee on Payment and Settlement Systems put out a joint report last month providing guidance about resolution and recovery regimes that apply to financial market infrastructures. The “Recovery and resolution of financial market infrastructures” is a follow-up report to the "Key Attributes of Effective Resolution Regimes for Financial Institutions" by the Financial Stability Board.

The board had said that financial market infrastructures needed to be subject to resolution regimes in a manner that was appropriate to them. This report tackles these matters as they apply to financial market infrastructures, including important payment systems, central counterparties, central securities depositories, trade repositories, and securities settlement systems.

FINRA Expels Biremis, Corp. and Bars President and CEO Peter Beck, FINRA, July 31, 2012

Recovery and resolution of financial market infrastructures (PDF)

FINRA Launches Conflict-of-Interest Sweep of BDs, AdvisorOne, August 9, 2012

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MSRB Seeks Public Comment on New Fiduciary Duty Rule for Municipal Advisors, Institutional Investor Securities Blog, February 21, 2011

$1.2 Billion of MF Global Inc.’s Clients Money Still Missing, Stockbroker Fraud Blog, December 10, 2011

Continue reading "Institutional Investor Securities Roundup: Biremis, Corp. Settles Securities Violation Charges with Industry Bar, FINRA Contacts Broker-Dealers About Conflicts of Interest Via Sweeps Letters, & Regulators Examine Financial Market Infrastructures " »

The U.S. Bankruptcy Court for the Southern District of New York has decided that claims stemming from soft dollar credits aren’t qualified to avail of Securities Investor Protection Act. According to Judge James Peck, this is the first time a court has had to determine whether soft dollar claims qualify as customer claims under SIPA.

The motion was filed by James Giddens, the Lehman Brothers Inc. trustee, who sought to affirm the denial of securities claims made by dozens of hedge funds and money managers seeking to get back soft dollar credits in their accounts with Lehman. Soft dollars are commission credits that can be used for buying research and brokers services that fall under the Securities Exchange Act of 1934’s Section 28(e)’s “safe harbor” parameters. (Generally, a soft dollar arrangement includes an understanding or agreement through which a discretionary money manager obtains research or other services from a broker-dealer. This is done in return for brokerage commission from transactions involving the accounts of discretionary clients.) While Giddens decided that these claims did not have SIPA protection and were “general unsecured claims,” a number of claimants disagreed.

The bankruptcy court, however, sided with Giddens. The court said that not only are soft dollar credits not securities and can only be used for the purposes identified under the Securities Exchange Act of 1934’s Section 28(e), but also, soft dollar accounts are “exclusively” available to “brokerage and research services” that a broker provides and cannot go toward the purchase of securities. Therefore, said Judge James Peck, Soft Dollar Claimants’ claims involving their Soft Dollar Accounts can’t be dealt with as if they were customer claims made under SIPA.

The bankruptcy court disagreed with claimants’ argument that because the credits could be used for research that would direct the clients in their purchase of securities there was a “sufficient connection” between a securities purchase and the soft dollars. The claimants had argued that this type of link made them customers under SIPA’s meaning. The court said no, finding that under the statute, the definition of a customer is meant to be “narrowly construed” and credits that can only go toward market research expenses are not tangential or direct enough to fulfill SIPA’s definition of what is a customer.

The court also disagreed with the claimants’ argument that the credits, which are proceeds of securities that have been sold or converted, should be considered customer property under SIPA. The court said that soft dollar credits are associated not with securities trade proceeds but with broker-dealer commissions. Peck also said that considering their character and source, the “credits are not customer property.” The court said that the claims were “really breach of contract claims” falling under the unsecured claims umbrella.

Soft-Dollar Credits Not Entitled To SIPA Coverage, Bankruptcy Court Rules, Bloomberg/BNA, July 12, 2012

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Continue reading "No SIPA Coverage for Soft Dollar Credits, Says Bankruptcy Court " »

Participants at the D.C. Bar panel on June 21 talked about whether the Jumpstart Our Business Startups Act is going to increase private placements but at a cost to public markets. The JOBS Act, which was enacted in April, facilitates the IPO process for emerging growth companies, ups the threshold for activating registration requirements, creates, under Regulation A, new exempt securities of up to $50 million, and gets rid of the general advertising and solicitation restrictions for Regulation D Rule 505 offerings.

Meantime, Attorney Tyler Gellasch, who is Sen. Carl Levin’s (D-Mich.) counsel (he was clear to articulate that his views are his own and don’t necessarily reflect the opinions of the senator), also said that he doesn’t expect there to be a lot of IPOs with this easing of rules for private offerings. He noted that while changes to Reg D Rule 506’s offerings would broaden the world of private securities, the greater threshold now provided for issuer registrations under the 1934 Securities Exchange Act has “significantly” reduced the impetus for going public.

Gellasch believes that many investors have become mistrusting of IPOs in the wake of so many of them lately not performing well upon completion of their first year. The controversies this year involving the IPOs of Facebook (FB) and BATS Global Markets Inc. haven’t helped.

He also talked about how Congress failed to perform its own cost-benefit analysis when it enacted the statute and that no extensive hearings took place about the new requirements. Among the unforeseen circumstances that have already developed are the efforts that have been made reverse merger companies to employ the on-ramp provisions to obtain a foothold in US markets.

Gellasch said that JOBS Act brings up questions that it fails to answer, such as whether the benefits that the act creates for some entities should also be given to other entities that are similar and involved in analogous circumstances. (For example, while mutual fund advertising continues to be very regulated, hedge funds are getting to avail of fewer restrictions imposed on their advertising.) He also wondered about who is now responsible for supervising Rule 506 offerings, determining whether advertisements and solicitations are accurate, and ensuring that offerings don’t turn into boiler rooms as they relate to the act’s crowdfunding provisions.

Gellasch wants to know who will now be liable for investor losses.

JOBS Act Will Increase Private Placements But Not Help Public Markets, Panelists Say, Bloomberg/BNA, June 22, 2012

The JOBS Act (PDF)

More Blog Posts:
Investor Groups, Securities Lawyers, and Business Community Comment on the JOBS Act Reg D’s Investor Verification Process, Institutional Investor Securities Blog, June 24, 2012

SEC Investor Advisory Committee Members Warn the Commission Not to Neglect Its Rulemaking Duties Even While Working to Implement the JOBS Act, Institutional Investor Securities Blog, June 21, 2012

Should Retail Investors Be Given Greater Access to IPO Information?, Stockbroker Fraud Blog, June 29, 2012

Continue reading "Will the JOBS ACT Will Expand Private Offerings But Hurt Public Markets?" »

NYSE Euronext (NYX) CEO Duncan Niederauer wants the Securities and Exchange Commission to act on a rulemaking proposal from 2009 that seeks to improve transparency in “dark pools.” Testifying in front of a House Financial Services Committee panel, Niederauer talked about how the dramatic increase in off-exchange trading has resulted in a U.S. equity market structure that continues to become more bifurcated. During the June 20 hearing, held by the committee’s Capital Markets Subcommittee, participants looked at the U.S. equity market structure and how it affects competition and innovation.

Dark pools, which are off-exchange private trading venues that don’t show quotes to the public, are involved in about 15% of off-exchange trading. It was in 2009, even before the flash crash of May 6, 2010 that the SEC issued a proposal that would expose dark pools by making certain actionable order information subject to SEC quoting requirements. (The proposal also would substantially reduce the threshold volume that activates public display obligations for ATSs from 5% to .25%.)

At the hearing, Niederauer pressed regulators and policy makers to even matters out between alternative trading systems and exchanges, while recommending the fair distribution across all trading pools of regulatory costs. He also suggested that national exchanges be given permission to avail of lighter disclosure requirements under Regulation ATS (Alternative Trading System), which regulates non-exchange trading venues.

Niederauer talked about how the NYSE would also like to compete. He said that instead of making alternative trading venues deal with the SEC process, exchanges should be given the same advantages that Reg ATS-regulated entities get to avail of. Not everyone agreed with him. Knight Capital Group Inc. CEO and Chairman Thomas Joyce cautioned that trying to even out the playing field between brokerage firms and exchanges is a matter of “apples and oranges,” especially considering that they don’t have the same requirements and needs. He also spoke about how dark pools are used by institutional investors to make large trades without impacting quoted prices. Meantime, Invesco equity trading global head Kevin Cronin, who testified for Investment Company Institute, talked about how institutional investors depend on dark pool to protect their trades.

Cronin also weighed in on the issue SEC’s study of tick size, which is the tiniest increment that a stock price can move by. (The tick size for US equity markets is $.01.) He is recommending that a wide-ranging pilot program be set up to look at the varying minimum spreads in all kinds of stocks and that this would drum up valuable data that the Commission could use to decide whether there should be changes made to tick sizes. Niederauer said that NYSE should be in charge of the pilot project and coordinate with interested issuers.

To schedule your free securities case evaluation with one of our experienced institutional investment fraud attorneys, contact Shepherd Smith Edwards and Kantas, LTD, LLP today.

NYSE Head Calls on SEC to Revive Proposal to Shed Light on ‘Dark Pools, Bloomberg/BNA, June 21, 2012

House Committee on Financial Services

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Ex-Money Concepts Registered Representative Faces SEC Charges For Running Astrology-Influenced Ponzi Scam, Stockbroker Fraud Blog, June 30, 2012

The Securities and Exchange Commission has approved a one-year pilot for a plan meant to shield equity markets from volatile price changes. The plan is based on two initiatives from the Financial Industry Regulatory Authority and the national securities exchanges.

One initiative involves a "limit up-limit down" proposal that would not allow for trades in US listed stocks beyond a certain range to be determined by recent prices. This will replace single-stock circuit breakers.

With the new mechanism, trades in individually listed equity securities wouldn’t be able to take place beyond a certain price band, which would be a percentage level lower and higher than the price of the security in the most recent five minutes. For securities that are more liquid, set levels would be 5% or 10%, with percentages doubling during closing and opening periods. For securities priced at $3/share or lower, there will be wider price bands.

The second proposal involves modifying current market-wide circuit breakers that can stop trading taking place in exchange-listed securities on US markets. The current market-wide circuit breakers have only been triggered once (in 1997) since they were adopted nearly 24 years ago. These changes will reduce the percentage-decline threshold for triggering a trading stop that is market-wide, while shortening the duration of time that the cessation lasts.

SEC Chairman Mary Schapiro has said that the initiatives are the result of a lot of work done to come up with a sophisticated, effective, and doable way to take care of markets in the wake of too much volatility. She also talked about how in today’s electronic markets, there is a need for a properly calibrated automated way to limit or pause trading should prices change too much or too quickly.

The SEC, FINRA, and the exchanges plan to closely monitor the pilot to ensure that any rules that are permanently approved are as effective as possible. February 4, 2013 is the deadline for implementing all these changes.

Shepherd Smith Edwards and Kantas, LTD LLP Partner and securities lawyer William Shepherd, however, is already skeptical of this new plan: “Such limits are not new and are of questionable value. Commodities markets have limit circuit breakers, as do a number of stock markets outside the US. The SEC has employed limits from time to time, notably after the stock market crash of 1987. This latest effort comes as a result of the so-called ‘flash crash’ in 2010. While no definitive cause was ever determined, many observers insist that stock manipulation by large players was involved. If implemented at all, as before, any such limits would likely be short lived.”

Our securities lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP represent institutional and individual investors.

SEC Approves Proposals to Address Extraordinary Volatility in Individual Stocks and Broader Stock Market, SEC, June 1, 2012

SEC approves plan to ease volatility in US stocks, Reuters, June 1, 2012

More Blog Posts:
Look Out for Rule Recommendations on Consolidated Audit Trail, Market-Wide Circuit Breaker Changes, and Limit Up-Limit Down Mechanisms, Institutional Investor Securities Blog, March 10, 2012

Several Claims in Securities Fraud Lawsuit Against Ex-IndyMac Bancorp Executives Are Dismissed by Federal Judge, Institutional Investor Securities Blog, May 30, 2012

SEC and CFTC Say They Found Out About JPMorgan’s $2B Trading Loss Through Media, Stockbroker Fraud Blog, May 31, 2012

It’s been less than one week since US House passed a package of six bills that would open up capital flow to small businesses. Now, it is the Senate is preparing to introduce its own version of legislation to assist small businesses in raising capital. Both Republican and Democrat senators are expected to work together to push forward the bills package, which would ease up the restrictions of SEC regulations to attract investors and help out startups and small businesses.

The legislation, which made it through the House by a 390-23 vote, has President Barack Obama’s support. Called the Jumpstart Our Business Startups Act (H.R. 3606), the bills would allow crowdfunding (this involves raising capital from a bigger pool of small-scale investors that the Commission has not classified as “accredited.”), increase the shareholder reporting trigger for all community banks and companies, set up an initial public offering “on-ramp” for emerging growth companies, increase the Regulation A offering cap to $50 million, and eliminate the general solicitation ban.

The House also approved several amendments to the package. Among these was one that would up the shareholder threshold for all firms to $2,000. The original bill had only increased the threshold to 1,000. Per the amendment, only 500 shareholders under the 2,000 limit can be non-accredited. Another amendment mandates that the Securities and Exchange Commission conduct a study regarding whether it can enforce the Exchange Act’s Rule 12g5-1.

While the Senate’s small business capital legislation will likely have many similarities to the House’s version, with the Senate bill, the Export-Import Bank would be given new legislative authority. This independent agency helps US companies trying to make sales internationally with financing. Also, whereas the House legislation is comprised of six bills, the Senate’s small business legislation takes up just three of the bills and with modifications.

The first bill would set up a classification for new emerging growth companies that would phase in specific SEC regulations over five years. This should help lower the expenses of going public. Companies would be able to keep this status for this time period or until exceeding $1B in yearly gross revenue. Another bill increases the ceiling for how many shares a private company can sell during a public offering before being required to register with the SEC, from $5 million to $50 million. Meantime, the third bill calls for getting rid of SEC crowdfunding restrictions.

Additional investor protections are expected. Also, several other bills involving small businesses will likely be included.

Contact our securities fraud attorneys at Shepherd Smith Edwards and Kantas, LTD LLP today. Our investment fraud law firm represents institutional and individual clients.

Senate follows House in introducing bill to help small businesses raise capital, Associated Press/Washington Post, March 12, 2012

House Clears Legislative Package To Ease Flow of Capital to Small Firms, Bloomberg/BNA, March 9, 2012

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US Sentencing Commission is Open to Public Comment on Proposed Amendments that Could Impact Insider Trading Convictions, Institutional Investor Securities Blog, February 29, 2012

Democrats Want to Volcker Rule to Be Clear About Banks Being Allowed to Invest in Venture Capital Funds, Stockbroker Fraud Blog, February 28, 2012

Securities and Exchange Commission's Division of Trading and Market Associate Director David Shillman reported that the staff is almost ready to recommend three market rules for adoption. He noted that the Commission would likely bundle recommendations dealing with consolidated audit trail, market-wide circuit breaker changes, and limit up-limit down mechanisms. Schillman made his comments at SEC Speaks, which was sponsored by the Practising Law Institute, on February 24.

FINRA and the national securities exchanges submitted the proposal on limit up-limit down last year. Per the proposal, trades in listed securities would need to be executed within a range connected to recent instrument prices. The limits are set up to take the place of single stock circuit breakers (pilot basis-approval was given). Shillman noted that although single stock circuit breakers “have worked relatively well," they are a “relatively blunt instrument” and a wrong trade can happen prior to the break’s activation. Such mistakes would be avoided with limit up-limit-down.

The exchanges and FINRA also proposed to update current market-wide circuit breakers, which would tighten the trigger-window for a market-wide stoppage to a 7% index from a 10% price movement. The pause that occurs in trading would also be shortened. Meantime, in 2010, the SEC had proposed a “consolidated audit trail,” which would be a national database for capturing in real time details on the National Market System securities and listed options. The customer’s identity would be included in the data.

Also addressing the audience at SEC speaks wasTrading Markets associate director Brian Bussey. He spoke about the Commission’s attempts to adopt final entity definitions for swaps. Bussey noted that even if the SEC were to adopt product and entity definitions, market participants are still anticipating an “implementation plan” for swaps rules (per the Dodd-Frank Wall Street Reform and Consumer Protection Act). The plan would include compliance dates for different rules, per the law’s Title VII. Prior to adopting the plan, there will be a concept release asking for comment.

Associate director Michael Macchiaroli, who also spoke, stated that current staff members believe that security-based swap dealers should have to contend with current net capital rule that involves a net liquid assets test. Broker-dealers that become swap dealers and those that are solely security-based swap dealers would also be subject to the same requirements. He said that financial firms, depending on their qualifications, will either be able to use models to calculate required capital or they will have to deal with a prescribed grid. Minimum capital requirements will vary from $100 million to $5 billion.

Contact our stockbroker fraud law firm to request your free case evaluation. Shepherd Smith Edwards and Kantas, LTD LLP represents investors nationwide.

SEC Staffer Says Recommendations On Volatility, CAT Proposals Coming Soon, , Bloomberg BNA Daily, March 2, 2012

Dodd-Frank Wall Street Reform and Consumer Protection Act (PDF)

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Carlyle Group will no longer be including a controversial arbitration clause initial public offering filing. The private equity giant had filed its IPO documents last year but has since been pressed by regulators and investors to drop the clause, which would have prevented company shareholders from submitting class action lawsuits and instead require that they go through a confidential arbitration process.

There had been concern from the Securities and Exchange Commission, lawmakers, and investors that the clause would prevent shareholders from bringing claims against the Carlyle Group in the event of wrongdoing. Earlier this month, the private equity group’s spokesperson Christopher W. Ullman said that after talking with the SEC and its investors, the Carlyle Group was withdrawing the proposed provision. Ullman was also quick to clarify that the original intent of the clause was to make the process for potential claims more cost-effective for everyone involved.

However, there is also the possibility that if the company had chosen not to withdraw the arbitration clause, the SEC may not have allowed the IPO to go forward. Senators Robert Menendez (D-NJ), Al Franken (D-Minn.), and Richard Blumenthal (D-Conn.) had even recently written to SEC chairwoman Mary L. Schapiro asking the SEC to block the IPO offering if the clause, which they believed would take away investors’ rights, wasn’t removed.

In their letter, the senators reminded the SEC that private securities litigation remains an “indispensable tool” that allows defrauded investors to get back their losses without needing to depend on the government. They cited the Exchange Act’s Section 10(b), which establishes an investor’s private right of action to file a lawsuit against an insurer for deceitful/fraudulent statements and actions allegedly committed when selling securities. The senators also said that making individuals only be able to go through the confidential arbitration process for shareholder claims would limit their ability to enforce their rights under the Exchange Act’s Section (10b), which would then violate the Act’s Section 29(a)’s statutory language.

The Senators wrote about how they believed that private arbitration significantly limits or doesn’t allow for pretrial discovery, which can then make complex securities claims impossible to prove. They also said that the private arbitration system generally favors the companies that retained their services as opposed to the individual shareholder with a claim. (Ullman said the Carlyle Group decided to take the arbitration clause out even before the senators had sent their letter to Schapiro.)

The Carlyle Group is shooting for its IPO to happen during the first half of the year. Last year, the firm revealed that about 36% of its assets are in private equity funds. Approximately 21% are in the areas of energy and real estate, while approximately 29% are in funds of funds. Carlyle Group has over 1,400 hundred investors in more than 73 nations. Its executives have gotten up to 60% of their compensation based on how the funds they focus on perform—the remaining amount is based on the performance of the firm. The filing says that once Carlyle becomes a public company, it executives will obtain about 45% of their compensation from their own funds’ returns, which is more in line with the industry average.

Our institutional investment fraud attorneys represent clients throughout the US. We also have clients abroad with securities fraud claims and lawsuits against financial firms in the US.

Carlyle Drops Arbitration Clause From I.P.O. Plans, New York Times, February 3, 2012

Carlyle Drops Forced Arbitration Clause In IPO, The Wall Street Journal, February 3, 2012

Private equity giant Carlyle files for IPO, Reuters, September 6, 2011

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With Confirmation of Richard Cordray as Its Director, The Consumer Financial Protection Bureau Can Finally Get to Work, Institutional Investor Securities Blog, January 4, 2012

SEC and SIPC Go to Court to Over Whether SIPA Protects Stanford Ponzi Fraud Investors, Stockbroker Fraud Blog, February 6, 2012

Continue reading "Pressure from Regulators and Investors Prompts Carlyle Group to Drop Arbitration Clause from its IPO Filing" »

US President Barack Obama overrode a Republican blockade in the Senate today when he appointed Richard Cordray as director of The Consumer Financial Protection Bureau. The new agency, which was designated the key regulator and protector of the average citizen over the Wall Street wealthy when financial regulations were overhauled 18 months ago, has, until now, been crippled by its lack of leadership.

Consumer advocates are applauding Mr. Obama’s appointment. Senate Republicans, however, expressed anger at the President’s move, which they are calling an unprecedented end run that has let him circumnavigate the confirmation process. House Speaker John A. Boehner (R-Ohio) expressed concern that Obama’s “cavalier action” could damage the Constitution’s established system of checks and balances.

However, (the Los Angeles Times reports that) not only will this appointment likely be challenged in court, but also, it could raise doubts about how much influence it will really have as a government watchdog for consumers in the financial marketplace—especially if Cordray’s appointment is later found to be unconstitutional.

In the meantime, the Consumer Financial Protection Bureau can now really get to work. Among its numerous powers are the ability to act against financial firms that sell products or take part in practices that are considered deceptive, unfair, or abusive (involving instruments such as prepaid charge cards and private education loans) and the ability to create new regulations for credit cards, mortgages, and other banking products.

Obama nominated Cordray, who was formerly Ohio attorney general and had taken aggressive action when investigating the mortgage and banking industries, in July. While 53 senators voted to confirm him, Cordray was 60 votes short of what he needed to beat a Republican filibuster.

The US Constitution gives our nation’s president the authority to fill temporary vacancies when the Senate isn’t in session. This power has allowed past presidents to use temporary appointments to overcome Senate opposition to nominees. However, with recess appointments, unless they are later confirmed, appointees can only serve for two years.

Following his appointment today, Cordray vowed to make supervising nonbank financial institutions a primary priority. Until now, these companies have had little oversight. In a blog post published on the bureau’s Web site, Cordray spoke about the CFPB now being able to help the banking and nonbanking markets run “fairly, transparently, and competitively.” He also spoke about how the lack of “regular federal oversight” leading up to the financial crisis resulted in community banks, credit unions, and other businesses ignoring responsibility even as consumers were harmed.

Shepherd Smith Edwards and Kantas, LTD LLP is a stockbroker fraud law firm that represents victims of securities fraud.

Appointment Clears the Way for Consumer Agency to Act, NY Times, January 4, 2011

Richard Cordray appointment 'turns lights on' at consumer bureau, Los Angeles Times, January 4, 2011

Consumer Financial Protection Bureau

More Blog Posts:
Former US Treasury Secretary Henry Paulson Told Hedge Funds About Fannie Mae and Freddie Mac Bailouts in Advance, Institutional Investor Securities Blog, November 30, 2011

Bonds Defeat Stocks For the First Time Since Prior to the Civil War, Institutional Investor Securities Blog, November 26, 2011

Long Island Rail Road Disability Fraud Leads to 11 People Charged, Stockbroker Fraud Blog, October 29, 2011

Continue reading "With Confirmation of Richard Cordray as Its Director, The Consumer Financial Protection Bureau Can Finally Get to Work" »

According to Bloomberg.com, former US Treasury Secretary Henry Paulson told a number of Wall Street executives in advance that the government was planning on Taking Control of Freddie Mac and Fannie Mae. This information, reportedly delivered to them at the Eton Park Capital Management LP offices on July 21, 2008 when Paulson was still in office, came just one day after he told the New York Times that the Office of the Comptroller of the Currency and the Federal Reserve were inspecting both mortgage giants’ books and that he expected that this would give the markets a sign of confidence.

There were about a dozen people present at the Eton Park gathering, including the hedge fund’s founder Eric Mindich, at least five former Goldman Sachs Group Inc. alumni, Lone Pine Capital LLC founder Stephen Mandel, Och-Ziff Capital Management Group LLC’s Daniel Och, TPG-Axon Capital Management LP’s Dinakar Singh, Kynikos Associates Ltd.’s James Chanos, GSO Capital Partners LP co-founder Bennett Goodman, Evercore Partners Inc.’s Roger Altman, and Quadrangle Group LLC co-founder Steven Rattner.

Paulson reportedly spoke about placing Freddie Mac and Fannie Mae into “conservatorship,” which would then allow the firms to stay in business. He said that the two government-sponsored enterprises’ stock, as well as numerous classes of preferred stock, would be eliminated. One fund manager who was there that day said he was surprised at Paulson’s wiliness to reveal such details.

Paulson did not do anything illegal when he gave out this insider information. However, any of the executives who were there today could have traded on this inside information. Whether anyone did is a mystery, seeing as firm-specific short stock sales cannot be tracked with public documents.

The US government seized Frannie and Freddie a couple of weeks after the Eton Park gathering and control of the firms was handed over to the Federal Housing Finance Agency.

At the time, Paulson said that the failure of Freddie and Fannie was not an option—considering that over $5 trillion in mortgage-backed securities and debt that the two of them had issued belonged to central banks and other investors throughout the world.

Last year, the Los Angeles Times reported that taxpayer loss from the government takeover could go as high as almost $400 billion. The FHFA said it was looking to offset some of this by getting billions of dollars back from banks that sold Fannie and Freddie bad loans. By September of 2010—two years after the seizure—the cost of the bailouts had already hit $148.2 million and concerns arose when the Obama Administration announced that it was raising the $400 billion cap on the government’s commitment to the two mortgage giants through 2012.

Our securities fraud lawyers represent clients though sustained severe losses when the housing market collapsed. Unfortunately, broker misconduct contributed to a number of these losses.

How Paulson Gave Hedge Funds Advance Word of Fannie Mae Rescue, Bloomberg.com, November 29, 2011

Losses from Fannie Mae, Freddie Mac seizures may near $400 billion, Los Angeles Times, September 16, 2011

U.S. Seizes Mortgage Giants, Wall Street Journal, September 8, 2008

Related Web Resources:
MF Global Shortfall May Be More than $1.2B, Says Trustee, Stockbroker Fraud Blog, November 26, 2011

Bonds Defeat Stocks For the First Time Since Prior to the Civil War, Institutional Investor Securities Blog, November 26, 2011

Wells Investment Securities Agrees to $300,000 Fine by FINRA for Alleged Use of Misleading Marketing Materials for REIT Offerings, Institutional Investor Securities Blog, November 23, 2011

Continue reading "Former US Treasury Secretary Henry Paulson Told Hedge Funds About Fannie Mae and Freddie Mac Bailouts in Advance" »

According to Bloomberg.com, the largest gains in bonds in nearly 10 years have overtaken returns on stocks over the last 3 decades. This is the first time that this has occurred since before the American Civil War. Bonds reportedly have become assets to buy because the US inflation rate had a 1.5% average this year and the Federal Reserve made the decision to keep target interest rates for overnight loans between banks at close to 0 through 2013.

Bianco Research reports that long-term government bonds have added 11% annually on average over the last thirty years—defeating the S & P 500’s 10.8% rise. Prior to this last 30-year period, stocks had been outperforming bonds over every 3-decade period since 1861.

More 2011 facts as reported by Bloomberg:

• Per Bank of America Merrill Lynch indexes, fixed-income investments moved forward 6.25%--nearly 3 times the 2.18% increase in the Standard & Poor’s 500 Index through the second to the last week of October.
• Debt markets are on target to return 7.63%--the most in 9 years.
• Bank of America Merrill Lynch’s U.S Master Treasury index reports that US government debt has risen 7.23%.
• There has been an 8.17% return on municipal securities
• Corporate notes have experienced a 6.24% gain
• Mortgage bonds have gone up 5.11%
• There has been a .25% return on the S&P GSCI index of 24 commodities

Meantime, there continues to be resistance to purchasing debt. According to Bloomberg, the bears did not predict that Americans would continue to boost savings while paring debt. A lot of that cash ended up in fixed-income markets while investors and banks continue to look for high quality-debt as unemployment stayed constant. Meantime, Europe’s own financial crisis appears ready to send the world’s economy into another meltdown.

While the US savings rate has tripled since 2005 at approximately 3.6% and averaging 5.1% since December 2008, debt mutual funds have brought in $789.4 billion. Since the end of last year, banks have upped up the holdings of government-backed mortgage securities and Treasuries to $1.68 trillion. Foreign investors have also upped their investment in Treasuries ($4.57 trillion in August). Meanwhile, government bonds are expected to experience their largest gains since 2009 with defaults dropping last quarter and states and cities lowering their expenses rather than missing making debt payments.

Over the last few years, our stockbroker fraud attorneys have witnessed many investors sustain financial losses, many of which were incurred as a result of broker misconduct and other acts of securities fraud that contributed to the economic collapse. Shepherd Smith Edwards and Kantas LLP represents institutional and individual investors throughout the US. We also represent a number of clients abroad.

Say What? In 30-Year Race, Bonds Beat Stocks, Bloomberg, October 31, 2011

More Blog Posts:
Wells Investment Securities Agrees to $300,000 Fine by FINRA for Alleged Use of Misleading Marketing Materials for REIT Offerings,Institutional Investor Securities Blog, November 23, 2011

Morgan Stanley Faces $1M FINRA Fine for Excessive Markups and Markdowns on Corporate and Municipal Bond Transactions, Institutional Investor Securities Blog, September 17, 2011

Former Texan and First Capital Savings and Loan To Pay $4.5M for Alleged Foreign Currency Ponzi Scheme, Stockbroker Fraud Blog, November 11, 2011

Maurice R. “Hank” Greenberg, the former CEO of American International Group Inc., is suing the federal government for taking over the insurance giant in 2008. Greenberg is seeking $25 billion.

Greenberg’s Star International, which was AIG’s largest stakeholder when the government rescue took place, filed his lawsuit in the U.S. Court of Federal Claims. He contends that the government bailout and takeover of AIG was unconstitutional. The amount of damages he is seeking was arrived at from the value of the 80% AIG stake that the government got for its $182 billion bailout.

The money let AIG pay off Goldman Sachs and other counterparties, as well as compensate its executives with $182 million in bonuses. The public, however, was outraged when AIG executives were still awarded excessive compensation packages—especially considering that AIG lost $61.7 during the fourth quarter of 2008 alone. The insurer had to sell off some assets to repay the government, and Greenberg’s stake in the company suffered as a result.

Now, he is claiming that the federal government used AIG to get money to the insurance company’s trading partners. He contends that by obtaining an almost 80% stake in the insurer for bailing it out, the government took valuable property from AIG shareholders and that this violates the Fifth Amendment, which prevents the taking of private property for public use without appropriate compensation.

Greenberg’s opposition to the government bailout comes as no surprise. Earlier this year, he wrote in the Wall Street Journal that the government overstepped when it took preferred stock with the option to change these into common stock. Such transactions were performed without the approval of shareholders, which he believes violates Delaware law. AIG was incorporated there.

Last year, the Treasury Department upped its stake in AIG to 92.1% when it turned preferred shares into common shares. However, it sold some of its shares to investors in May so its ownership percentage in AIG is now at 77%. It is still trying to recover over $41 billion from the sale of the rest of its stake.

AIG Bailout
The government seized control of AIG not long after it became clear that Lehman Brothers Inc. was going to have to shut down. Per the terms of the agreement, the Fed said it would lend AIG $85 billion, and the government was given the substantial equity stake. The takeover came on the heels of the government also seized Freddie Mac and Freddie Mae as they stood on the brink of collapse. Merrill Lynch & Co, which was also in trouble, agreed to let Bank of America Corp. buy it.

Starr Sues Over AIG Bailout, Insurance Networking, November 21, 2011

Former AIG chief sues U.S. for $25 billion, MSNBC, November 21, 2011

U.S. to Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash as Credit Dries Up, The Wall Street Journal, September 16, 2008

Continue reading "Ex-AIG CEO Sues Government For $25B Over 2008 Takeover of Insurance Giant" »

Leaders from all over Europe will meet this Sunday with the intention of coming up with a plan to overcome the sovereign debt crisis. 17 nations, who all share the euro currency, are trying to reach a deal to strengthen its EFSF (European Financial Stability Facility) fund (which has already assisted in bailing out Ireland and Portugal), present a strategy to bolster European banks, and agree on a new aid package for Greece, which is in financial trouble.

This is not the first time euro zone leaders have gathered in the last year and a half to try to solve the debt problem. During their last effort in July, they reached a deal to give Greece about 110 billion euros and aid while the nation’s private creditors were to sustain an approximately 20% loss on their bond holdings. That deal, however, has since fallen apart, which is why there is a summit in Brussels this Sunday. Meantime, in an attempt to make the Sunday gathering a success, Euro-area leaders are meeting in Frankfurt meeting now to try to resolve certain disagreements in advance.

According to the Washington Post, the specter of the Lehman Brothers bankruptcy has been hanging over European leaders, who are committed to not making the same mistakes made by the Federal Reserve and the Bush Administration that led to the US’s economic crisis in 2008. Although that was a domestic emergency here, the ripples were felt globally and the Europeans don’t want that to happen again this time around. Per the Post, when European Central Bank President Jean-Claude Trichet warned US officials against letting Lehman file for bankruptcy, he’d cautioned that doing so would be “something…exceptionally grave.”

Reverberations soon followed. For example, after one market mutual fund’s shares dropped to under $1 because it had invested heavily in short-term loans to Lehman, others then pulled their investments out of money market funds. Because no one knew what other banks might be at risk of failing, lending between them stopped. Global markets then went into upheaval.

US leaders have learned much from the 2008 economic crisis. The Washington Post says that now it is the Obama Administration’s that is pressing Europe to take aggressive action to solve its debt crisis. If Greece fails, Portugal, Ireland, Spain, and France may follow. Who knows what would happen next.

Shepherd Smith Edwards & Kantas LTD LLP founder and Stockbroker Fraud Attorney William Shepherd offers this analysis:

After the financial crash of 1929, U.S. legislation was passed, including securities laws and regulations and the Glass Steagall Act (banks, brokerage and insurance companies were separated). Barriers were enforced to prevent unfair trade acts and policies. For the next seven decades the U.S. economy boomed and our financial system became the envy of the world.

Those changes made in the 1930’s were implemented despite cries that such legislation, regulation and protection for our economy would doom capitalism. Generation after generation of so-called “free-traders” and “free marketers” continued their drones to return to yesteryear - an era in which globalists could do as they pleased in their race to the bottom for the sake of profit for the few at the expense of the rest of us.

By the 1990’s, billions financed a lopsided body of “thought” that a return to the 1920’s would cure world problems and lead us into a new and better future. Wise folks screamed that a return to “deregulation” of the financial system and instantly forcing Western World workers into competition with near-slave labor in third-world nations would lead to dire consequences. But true wisdom was overwhelmed by the bought-and-paid-for-voices that occupied major political parties.

Reversal to the 1920’s … fait accompli. The result was both predictable and predicted. Welcome back the 1930’s … except, where is an “FDR” who can reverse the insanity of the last decade?

Ghost of Lehman Brothers haunts European politicians and bankers, Washington Post, October 18, 2011

Europe's leaders take another swing at debt crisis, Chicago Tribune, October 19, 2011

More Blog Posts:
UBS to Pay $2.2M to CNA Financial Head for Lehman Brothers Structured Product Losses, Stockbroker Fraud Blog, January 4, 2011

Lehman Brothers Lawsuit Claims Its Bankruptcy Was In Part Due to JP Morgan Chase’s Seizure of $8.6 Billion in Cash Reserves, Stockbroker Fraud Blog, June 14, 2010

Claims for Losses at Lehman Brothers and in Investments into Lehman Brothers Financial Instruments Gain New Life as Court Uncovers Stunning New Evidence, Stockbroker Fraud Blog, March 21, 2010

Continue reading "European Leaders Work to Get a Grip on Debt Crisis" »

The Securities Industry and Financial Markets Association is recommending a number of best practices for financial firms that work with Expert Networks and their Consultants.
According to SIFMA, expert networks are entities that receive a fee to refer industry professionals, known as consultants, to third parties. Although the acknowledges how helpful these networks can be in helping broker-dealers implement and design investment strategies while offering advice, information, market expertise, analysis, or other expertise in making investment decisions, SIFMA General Counsel Ira Hammerman said in a release that these best practices should help with compliance while helping avoid what could like “impropriety.” The government has recently targeted them when investigating insider trading.

Among the recommendations:
1) Establishing policies and procedures for how to use Expert Networks and Consultants. SIFMA is recommending a risk-based approach for figuring out what controls should be put in place.

2) Providing training for associated persons that deal with Expert Networks and Consultants on matters such as insider training, information barriers, confidential information, conflicts of interest, or material, non-public information (MNPI).

3) Ensuring that supervisory oversight is integrated into a financial firm’s use of Expert Networks and associated consultants.

4) Setting up policies and procedure that mandate that financial firms act quickly on “red flags” that may indicate there is a possibility of disclosure of confidential information of conflicts of interest or MNPI.

5) Establishing written agreements with Expert Networks over arrangements that are substantial or repeating in nature, such as those involving making sure that Consultants are checked for securities law violations, preventing Consultants from revealing MNPI or Confidential Information, requiring that Consultants undergo periodic training or communication about certain restrictions, and requiring that Consultants are periodically certified as to the adherence of these limits.

6) Setting up procedures on how to advice Expert Networks-affiliated Consultants about Confidential Information and MNPI.

7) Establishing procedures for getting non-confidential, relevant information from an Expert Network or one of its Consultants about employment and arrangements where a Consultant may have access to Confidential Information or MNPI, as well as setting up appropriate controls for assessing risks of dealing with Consultants that work with Expert Networks that have Confidential Information or MNPI.

In providing these best practices, however, SIFMA wants to make clear that these are only intended as guidance and are not mandates for how financial firms must work with Expert Networks and Consultants.

If you are an investor that has suffered losses you believe were caused by broker misconduct, you should talk to a securities fraud attorney right away.

More on the SIFMA best practices, SIFMA

More Blog Posts:
SEC and SIFMA Divided Over Whether Merrill Lynch Can Be Held Liable for Alleged ARS Market Manipulation, Institutional Investor Securities Blog, July 29, 2011

Commodities Industry Fears being held to Regulatory Standards of Securities Industry, Institutional Investor Securities Blog, February 4, 2011

Micah S. Green, Expected New CEO of Largest Securities Industry Group, Resigns During Scandal, Stockbroker Fraud Blog, May 18 2007

Continue reading "SIFMA Offers Up Best Practices for How Financial Firms Can Interact with Expert Networks" »

Securities and Exchange Commission Chairman Mary Schapiro has been taking some heat because the agency allowed David Becker, a former SEC general counsel, to help develop policy regarding compensation for the victims of the Bernard Madoff Ponzi scam should be compensated even though Becker was someone who benefited from the scheme. SEC Inspector General H. David Kotz has asked the Justice Department to look into whether Becker violated any laws as a result and whether criminal charges should be filed.

At a House hearing this week, Becker testified that SEC ethics officials told him that there was no conflict of interest preventing him from taking on this task. Attendees at the hearing criticized Schapiro for letting Becker participate in establishing compensation policy even though he had inherited his own Madoff account. Schapiro has already admitted that she was wrong in allowing him to stay involved.

Some lawmakers believe that Becker’s participation in this type of policy planning is just one more incident that has caused the public to lose faith in the SEC, which didn’t even realize for almost 20 years that Madoff had been running a multibillion-dollar scam. They are now raising questions about leadership within the agency, the ability of SEC senior management to make decisions, and possible flaws in the Commissions procedures and policies as they apply to ethical matters.

On Tuesday, Kotz issued a report stating that Becker took part “personally and substantially” in matters in which he had a financial interest. Also per his report, Kotz said that the ex-General Counsel had recommended to commissioners that they put into place a policy that would value Madoff clients’ claims in a manner that would have restricted the court-appointed trustee’s power to sue Ponzi scheme beneficiaries to get back fictitious profits. Becker is one of those beneficiaries.

Earlier this year, the trustee, Irving Pickard, filed a lawsuit against Becker and his siblings contending that about $1.5 million of the money in their mom’s account was a bogus profit that should go tot the fund designated to pay back victims of Madoff’s Ponzi scam. Becker, who maintains that he never considered there to be a conflict of interest (he says that on two occasions, the ethics committee even advised him that this was correct) said that if he knew then that the trustee would sue him later he would have recused himself from working on the compensation policy.

According to Reuters, while some lawmakers don’t believe that Becker broke any laws, many are wondering why he didn’t decide on his own to not get involved in Madoff-related SEC matters.

Bernard L. Madoff Investment Securities LLC’s multibillion-dollar Ponzi Scam, which cost investors billions, wasn’t discovered until the end of 2008. Madoff has been sentenced to 150 years behind bars.

SEC head under fire as ex-official says he got OK, Chron.com, September 23, 2011

Some lawmakers doubt ex-SEC lawyer broke the law, Reuters, September 22, 2011

More Blog Posts:
Madoff Trustee Files Securities Lawsuit Against Safra National Bank of New York Seeking to Recover Almost $111.7M for Ponzi Scam Investors, Institutional Investor Securities Blog, May 12, 2011

Texas Congressmen Seek Answers from SEC Chairwoman Regarding Conflict of Interest Related to Madoff Debacle, Stockbroker Fraud Blog, March 8, 2011

Madoff Investors Who Were Victims of “Ponzi” Scam Contact Securities Fraud Law Firm Shepherd Smith Edwards & Kantas LTD LLP to Explore Recovery Options, Stockbroker Fraud Blog, December 17, 2008

Continue reading "SEC Chairman Criticized For Allowing Ex-Commission Official that Benefited from the Bernard Madoff Ponzi Scam to Help Craft Policy Regarding Victims’ Compensation " »

President Barack Obama says he supports Senate bill, S. 1544, which would let companies sell up to $50 million in securities in a public offering without having to register with the SEC. That’s a huge leap from the current $5 million threshold that is allowed under Regulation A of the 1933 Securities Act.

Called the Small Company Capital Formation Act, Senators Jon Tester (D-Mont.) and Pat Toomey (R-Pa.) introduced the bill earlier this month. If passed, Tester said it would relieve some regulatory burdens. S. 1544 is almost identical to H.R. 1070, which Rep. David Schweikert (R-Ariz.) introduced in the House earlier this year.

Senator Tester says that the new rule will help entrepreneurs create jobs and raise additional capital. Greater transparency of offers would also be enhanced, giving investors access to more information. On his Web site, Tester speaks about the need to do everything possible to push for “innovation, entrepreneurship, and job creation.” Tester says the bill streamlines new companies’ ability to be successful and have the capital they need for growth. With this capital, they can concentrate on succeeding rather than getting mired in “government paperwork.” Senator Pat Toomey has the Small Company Capital Formation Act will make it easier for small companies and start-ups to go public.

Meantime, Republican lawmakers have introduced a series of job bills that could also affect securities laws. The Entrepreneur Access to Capital Act, H.R. 2930, exempts crowdfunding from the 1933 Securities Act‘s registration requirements for business individuals who invest under $10,0000 or under 10% of their annual income and companies that raise under $5 million. In his jobs plan, President Obama has also said that he supports this proposed measure.

Other Republican Bills:
H.R. 2930: Introduced by Rep. Patrick McHenry (R-N.C.), this bill would exclude crowdfunding from the 500 shareholder cap of the 1934 Securities Exchange Act, while preempting state regulation. McHenry said that if passed the bill would give smaller investors a chance to get into startups, which they currently cannot do because of current SEC regulation.

S. 1538: Known as the Regulatory Time-Out Act, this bill would set up a one-year moratorium on key regulations with a $100 million or greater yearly effect on the economy.

Access to Capital for Job Creators Act: Introduced by GOP whip Rep. Kevin McCarthy (R-Calif.), the bill would get rid of the SEC’s current ban on general solicitation. Currently, the Commission’s Section 4(2) of the 1933 Act or its Rule 506 of Regulation D doesn’t let private placement issuers use general solicitation or advertising to get investors to put money in their offerings. McCarthy believes that this ban keeps small companies from being able to draw in capital that they need.

Our securities fraud attorneys are here to help investors that have been victims of financial fraud recoup their losses.

Republican Lawmakers Sponsor Slew Of Job Bills Impacting Securities Laws, BNA Securities Law Daily, September 16, 2011

American Jobs Act, White House, September 8, 2011

Tester, Toomey introduce bill to help businesses raise capital, cut red tape, and create jobs, Senate.gov, September 12, 2011

More Blog Posts:
Wedbush Securities Ordered by FINRA to Pay $2.8M in Senior Financial Fraud Case Over Variable Annuities, Stockbroker Fraud Blog, August 31, 2011

FDIC Objects to Bank of America’s Proposed $8.5B Settlement Over Mortgage-Backed Securities, Stockbroker Fraud Blog, August 30, 2011

$63 Million Mortgage-Backed Securities Lawsuit Against Bank of America is Second One Filed by Western and Southern Life Insurance Co. Against the Financial Firm, Institutional Investor Securities Blog, August 29, 2011

Continue reading "President Obama Supports Senate Bill Raising SEC Registration Exemption to $50M " »

According to the Office of the Inspector General, by failing to abide by its own practices when hiring Henry Hu as Division of Risk director, as well as the guidelines provided by the Office of Personnel Management, the Securities and Exchange Commission unnecessarily spent $100,000. Details of these findings were provided in a report released by the SEC late last month.

The “unprecedented arrangement” with Hu covered his living expenses in DC when he worked as an SEC division director between 9/09 through 1/11. He is now back at work as a professor at the University of Texas Law School.

Specifically faulted over this matter was ex-SEC Executive Director Diego Ruiz, who the Office of Personnel Management said was the person mainly responsible for the offer to cover Hu’s living costs while he worked for the Commission. Ruiz, who has resigned from the agency, was also allegedly involved in the SEC’s misuses of its independent leasing authority. Because Ruiz is no longer with the agency, no disciplinary action will be taken against him.

Hu was approached by the SEC after an op-ed piece that he’d written about Goldman Sachs was published. In his article, Hu talked about how the financial firm’s use of credit default swaps related to its loans to AIG had resulted in an distorted incentive because it let Goldman Sachs not have to deal with economic exposure to losses on the loans even as it retained its right to call the loans. SEC Chairman Mary Schapiro later offered him a position at the agency as head of a new unit that would colloquially be called the “Office of Smart People.”

The SEC paid back the University of Texas 314,198.26 for Hu’s benefits and salary. The agency also spent approximately $120,000 to cover Hu’s plane fare, living costs, and housing. The per diem that Hu was given was a first for the SEC and not in line with OPM guidelines.

The offer to Hu did not include a cap on how much the agency would pay for living expenses. Per the SEC report, and even as these costs mounted, the agency did not attempt to renegotiate the terms of the agreement when it was renewed with Hu.

Usually federal employees are given a $9,000 relocation allowance. However, SEC Chairman Mary Schaprio, reportedly told the OIG that she believed the agreement with Hu was similar to other hiring arrangements previously made with the SEC.

The OGI is recommending that the SEC’s COO establish guidelines for arramagnements made under the Intergovernmental Personnel Act, which was the statute used to hire Hu. Guidelines should include specifics regarding when a per diem arrangement like the one made with Hu can be offered and financial caps should be included.

Securities Fraud
Contact our securities fraud law firm. Shepherd Smith Edwards and Kantas represents institutional and individual investors throughout the US.

OIG: SEC Blew $100,000 by Not Following Guidance in Hire Arrangements for Director, BNA Securities Law Daily, September 30, 2011

Read the OIG Report (PDF)

More Blog Posts:
SEC’s Proxy Access Rule is Rejected by Appeals Court, Stockbroker Fraud Blog, August 5, 2011

Advisory Performance Fee Rule Limit Adjusted by the SEC, Stockbroker Fraud Blog, July 30, 2011

Bill Funding SEC at $1.185B for Fiscal Year 2012 Approved by House Committee, Stockbroker Fraud Blog, June 24, 2011

Venedie Roberto Valencia, a former Bank of America employee, is now sentenced to 15 months in federal prison for a mortgage scam he was involved in that used stolen identities to buy homes in Southern California that weren’t being sold. The sentence comes after Valencia, 27, pleaded guilty and admitted that he forged a document linked to bogus bank accounts. As part of his penalty, Valencia must pay $51,688 in restitution.

Valencia’s sentence comes two years after co-conspirator licensed real estate agent Felix Pichardo was sentenced to eight years over the same mortgage scam. Pichardo was asked to pay $770,000 in restitution. Per court documents, the latter used bogus identities on loan applications to buy mortgages on real estate properties that weren’t for sale.

After pleading guilty in 2009, Pichardo admitted that he used to people’s identities to gain access to mortgage loans for properties even though their owners weren’t selling.. Pichardo then cause separate loan applications for $360,000 and $417,000 to be sent to AmTrust bank. The applications were turned in without the consent of the property owner. Pichardo and another conspirator, Latrice Shaunte Borders pocketed the loan proceeds.

Borders also pleaded guilty to criminal charges (for bank fraud) in 2009. She too was ordered to pay $ restitution.

Mortgage Scams
Unfortunately, mortgage fraud occurs more often than we’d like to think. In the process, lenders and borrowers are being bilked of millions of dollars.

Last year, the owners of Premier One Lending Group were indicted for allegedly securing over $30 million in loans through the use of hundreds of loan applications that upped the actual assets and income of the borrowers. Bogus bank documents and income verification documents were also given to lenders. Also last year, more than a dozen people were arrested in connection with a mortgage scheme in Ventura County, California that resulted in the loss of millions of dollars when the homes foreclosed.

In a separate mortgage fraud case, prosecutors filed a civil lawsuit accusing a number of real estate professionals over their involvement in an alleged scam to get unqualified buyers mortgage loans that were insured by the government. Bank statements, pay stubs, government agency letters over benefits that didn’t exist, and other documents were allegedly fabricated.

Meantime, in an unrelated case, mortgage brokerage firm owner Mikhail Kosachevich and his loan processor Jeffrey Gerken were sentenced to 33 months and six months in prison, respectively, over a mortgage scam that cost lenders at least $7 million.

Recently, three mortgage professionals and a title agent were accused of scamming senior citizens. Using the 1st Continental Mortgage Company in Florida, in 2009 and 2010, they allegedly processed 14 reverse mortgages and secured $2.5 million in reverse mortgage loans that the Federal Housing Administration had insured. The money wasn’t used to pay for existing loans and about $1 million in illegal loan proceeds were said to have been pocketed.

Former Bank of America employee sentenced in mortgage fraud scheme, Los Angeles Times, August 29, 2011

Reverse mortgage scam targeted seniors, Miami Herald, July 6, 2011

LANCASTER REAL ESTATE AGENT SENTENCED TO EIGHT YEARS IN FEDERAL PRISON FOR MORTGAGE FRAUD SCHEME, Justice.com, December 14, 2009

O.C. mortgage firm busted in crackdown, OC Register, June 17, 2010

More Blog Posts:
Democrats Call for Shareholder Approval of Corporate and Political Spending, Institutional Investor Securities Blog, August 2, 2011

Securities Lawsuits Expected to Reach Record High in ’11, Says Advisen Ltd. Report, Institutional Investor Securities Blog, April 23, 2011

Dodd-Frank Reforms Will Lower Deficit by $3.2B Over the Next Decade, Estimates CBO, Institutional Investor Securities Blog, April 8, 2011

Continue reading "Ex-Bank of America Employee Pleads Guilty to Mortgage Fraud Scam Using Stolen Identities to Buy Homes Not For Sale" »

Senate and House Democrats have brought forward a revised proposal that would mandate that shareholders are notified of and approve any spending of corporate money towards political spending. The Shareholder Protection Act of 2011, which was introduced by Rep. Mike Capuano (D-Mass.) and Sen. Robert Menendez (D-N.J.), will hopefully curb unaccountable political spending by company executives, while giving shareholders a say in whether a company should get involved in electoral politics.

Prior to 2010, corporations weren’t allowed to spend on federal campaigns—that is, until the US Supreme Court ruled last year that they could give money to non-profit groups with issue-based advertising. The decision, in Citizens United v. Federal Election Commission, worried many Democrats because that kind of spending is protected from public disclosure laws dealing with campaign contributions. (Prior to that there was the legislature known as the DISCLOSE ACT, which Congress blocked in 2010. The DISCLOSE ACT mandated that there be more disclosure regarding union and corporate money that is given to outside organizations for political purposes.

Per this new measure, companies that want to put money into campaigns would have to get shareholders to approve a budget for this. A corporation’s board of directors would have to approve expenditures greater than $50,000 and these would have to be publicly disclosed. Payments to outside organizations for political purposes would also have to be disclosed.

The bill also covers spending for:
• “Electioneering communications” involving a federal candidate.
• Messages directly calling for a vote for or against a candidate.

Melendez, who served as Democratic Senatorial Campaign Committee chairman, said that he considers it “fundamentally wrong” for corporations to influence elections and be able to make decisions about our nation’s policies. He said that during his time as chair, he saw corporate funding of about $70 million to combat candidates that he supported.

It does not appear likely that Republicans and campaign finance regulation opponents will back this new proposal. Center for Competitive Politics President Sean Parnell has said that with its “regulations on their political speech,” the Shareholder Protection Act is a “thinly disguised effort to silence the business community.” He called the bill an attack on the First Amendment and wants Congress to reject it.

Citizens United v. Federal Election Commission
In a 5-4 decision, the Supreme Court ruled that the government is not allowed to ban corporations from engaging in political spending in candidate elections and that to do so is a regulation of political speech and free speech. President Barack Obama said the Supreme Court’s decision was a victory for Wall Street firms, oil companies, health insurance companies and other powerful interests.

Citizens United v. Federal Election Commission overruled two precedents. McConnell v. Federal Election Commission upheld the portion of the Bipartisan Campaign Reform Act of 2002 (it limits union and corporate campaign spending) and Austin v. Michigan Chamber of Commerce upheld limits on corporate spending directed at either opposing or supporting a political candidate.

Our institutional investment fraud lawyers work hard to help our clients, who have suffered financial losses because of misconduct by Wall Street firms and/or their their employees get their money back. Unfortunately, it is the investors who end up suffering because of broker misconduct.

Related Web Resources:
Senator wants shareholders to have a say, NorthJersey, July 14, 2011

Justices, 5-4, Reject Corporate Spending Limit, NY Times, January 21, 2010

Citizens United v. Federal Election Commission (PDF)

H.R. 2517: Shareholder Protection Act of 2011, GovTrack

More Blog Posts:
Securities Lawsuits Expected to Reach Record High in ’11, Says Advisen Ltd. Report, Institutional Investor Securities Blog, April 23, 2011

Dodd-Frank Reforms Will Lower Deficit by $3.2B Over the Next Decade, Estimates CBO, Institutional Investor Securities Blog, April 8, 2011

Reductions to SEC’s Budget Will Cause Staff Furloughs, Says Schapiro, Stockbroker Fraud Blog, March 24, 2011

Continue reading "Democrats Call for Shareholder Approval of Corporate and Political Spending" »

Per Advisen Ltd’s latest quarterly report on securities litigation, the number of securities lawsuit filings will likely set a new record high for yet another year in a row. Records were set in 2008, 2009, and 2010 following the credit crisis. Advisen’s quarterly report was sponsored by ACE.

John Molka III , the report’s author, says that even with the credit crisis has eased up, the submission of securities lawsuits has not. 1,293 securities lawsuits were filed in 2010. Now, Advisen is saying that based on the number of securities complaints filed during the first quarter of 2011, you can expect the number of lawsuits for this year to beat that number. Molka speculates that this “elevated level of filings” could be the “new normal.”

During Q1 2011, 362 securities lawsuits were filed—a 47% jump from the number of complaints that were submitted in Q1 2010. Compare this first quarter to last year’s last quarter when 342 securities complaints were filed. Also, with 1,448 new filings as this year’s first quarter annualized rate, that’s already12% more than last year’s total filings. The complaints include those for breach of fiduciary duty, shareholder derivative cases, securities fraud, and securities class actions.

Although securities fraud complaints comprised the greatest portion of filings for the first quarter, breach of fiduciary duties lawsuits, which include merger objection complaints, are the real cause of securities lawsuit growth. Meantime, 18% of new filings were securities class action complaints, which in the past made up over 1/3rd of securities lawsuits. Securities class action lawsuits, however, still make up for the majority of the largest settlements. During this first quarter, the average securities class action case settled for $54.6 million.

Related Web Resources:
2011 on Track for Record Securities Lawsuit Filings, Advisen, April 19, 2011

Securities Litigation Reaches a Crescendo (The Full Report)

More Blog Posts:
Pump & Dump Scam Alleged in $600 Million Lawsuit Against Law Firm Baker & McKenzie, Institutional Investor Securities Blog, April 13, 2011

Class Members of Charles Schwab Corporation Securities Litigation Can Still Opt Out to File Individual Securities Claim, Stockbroker Fraud Blog, December 6, 2010

Securities Fraud Lawsuit Against Calamos Investments Filed on Behalf of Calamos Convertible Opportunities and Income Fund Shareholders, Stockbroker Fraud Blog, September 17, 2010

Continue reading "Securities Lawsuits Expected to Reach Record High in ’11, Says Advisen Ltd. Report" »

According to the Congressional Budget Office, between 2010 and 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act will lower the federal deficit by $3.2 billion as it takes in more money than what will go toward enforcement and implementation. CBO Director Douglas Elmendorf released the cost projection at a recent House Financial Services Oversight and Investigations Subcommittee hearing on the reform law.

Although Dodd-Frank will require $10.2 billion in direct spending over the next decade, it will take in $13.4 billion, said Elmendorf. He said that revenues would come mainly from fees assessed on different financial institutions and participants as new rules determine how financial firms can do business and what it will cost them.

The Government Accountability Office has said it could cost over $1 billion to implement Dodd-Frank, a bill that nearly all House Republicans were against. CBO said that even though Dodd-Frank calls for $37.8 billion in spending, savings that the law creates will lower that amount by $27.6 billion, which equals the $10.2 billion projection for final spending. Also, federal deposit insurance changes will lower costs by $16.3 billion and lower TARP authority by $11 billion.

CBO also noted that to create new agencies, including the Financial Stability Oversight Council, Office of Financial Research, Consumer Financial Protection Bureau, and Office of National Research, the government will spend $6.3 billion. It will also spend $100 million to change the current oversight structure, as well as $1.5 billion for subsidies to assist homeowners in foreclosure. A liquidation program for insolvent financial entities is expected to cost $20.3 billion.

Throughout the US, our securities fraud attorneys represent clients that have sustained financial losses because of broker and investment advisor misconduct.

CBO Says Dodd-Frank Act Will Reduce U.S. Deficit by $3.2 Billion, Bloomberg, March 30, 2011

CBO Says Dodd-Frank Reforms Will Reduce Deficit by $3.2B Over Decade, BNA Securities Law Daily, March 31, 2011

Congressional Budget Office

More Blog Posts:
Commodities Industry Fears being held to Regulatory Standards of Securities Industry, Stockbroker Fraud Blog, February 4, 2011

Impartiality of SEC Report by Boston Consulting Group Questioned by Key House Republicans, Institutional Investors Securities Blog, March 30, 2011

Continue reading "Dodd-Frank Reforms Will Lower Deficit by $3.2B Over the Next Decade, Estimates CBO" »

American International Group Inc. is reorganizing Chartis, its property and casual insurer, into two global groups—one consumer and one commercial. AIG executive vice president, finance, risk and investments Peter D. Hancock has been named Chartis’s chief executive officer, while current Chartis CEO Kristian P. Moor is to become vice chairman.

John Q. Doyle, who was formerly Chartis US’s CEO will head the global commercial business, while current chief administrative officer Jeffrey L. Hayman will be in charge of the global consumer business group. Both men will report to Hancock. The reorganization will section Chartis into four regions: U.S./Canada, Europe, Growth Economies, and Far East.

It was just this February that Chartis had to put aside $4.2 billion for loss reserve increases. According to AIG CEO Robert Benmosche, strengthening claims management, underwriting, risk management, and reserving so that the right risk-adjusted returns are earned remain top priorities. Benmosche promised to rebuild businesses needed to pay back the firm’s $182.3 billion government rescue. Benmosche, who is undergoing treatment for cancer, intends to step down in 2012.

Chartis has over 45 million clients internationally located in over 160 nations. Last year, the insurer wrote $31.6 billion in net premiums. Meantime, AIG’s stock performance has been less than stellar with a 26% drop since the start of the year.

Related Web Resources:
AIG Revamps Chartis, Makes Hancock Head After Reserve Boost, Bloomberg, March 31, 2011

AIG Reorganizes Chartis, Its Global Property Casualty Business; Peter Hancock Named Chartis CE, Market Watch, March 31, 2011

Continue reading "AIG Reorganizes Property and Casualty Insurer Chartis " »

Rep. Randy Neugebauer (R-Texas), who is the Financial Services Oversight Subcommittee chairman, and Rep. Spencer Bachus (R-Ala.), the House Financial Services Committee chairman, have sent a letter to US Securities and Exchange Commission Chairman Mary Schapiro asking her about Boston Consulting Group Inc.’s recent report on the recent report on SEC reform. Even though BCG is an independent consultant, the two GOP members are questioning the report’s impartiality.

In their letter, they asked Schapiro to disclose what (if any) editorial input the SEC provided on the content of the BCG report. They also want to see any earlier drafts that BCG may have sent the SEC Chairman. Neugebauer and Bachus said that given the regulatory failures from the 2008 economic collapse, it was important that BCG was allowed compete independence to do its job and that the report did not undergo any editorial deletions, review, or insertions by the SEC.

Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 967 had directed the SEC to retain the services of an independent consultant to analyze the agency’s structure and operation, as well as suggest reforms. BCG issued its report on March 10. Among its recommendations: for the SEC:

• Hire staff with “high-priority” skills
• Invest in key technology systems,
• Improve oversight over SROs (self-regulatory organizations)
• If Congress determines that the SEC cannot fulfill expectations by further optimizing its resources, the lawmaking body should “relax” funding constraints

BCG has said that it stands by the report’s “integrity and independence.” Meantime, Schapiro has said that the report confirms her own worries that the SEC lacks the resources to do all that it is expected to accomplish.

Our institutional investment fraud lawyers have successfully represented clients throughout the US.

Related Web Resources:
Integrity of report on SEC questioned, Washington Post, March 18, 2011

Statement From Chairman Schapiro on Independent Consultant Report of SEC Organization and Operations, SEC, March 10, 2011

Read the BCG Report (PDF)

SEC Needs to Keep a Closer Eye on FINRA, Says Report, Stockbroker Fraud Blog, March 15, 2011

Continue reading "Impartiality of SEC Report by Boston Consulting Group Questioned by Key House Republicans" »

As Bloomberg News columnist Ann Woolner points out, in most US Securities and Exchange Commission where a settlement is reached, the defendant usually ends up not having to admit to doing anything wrong. Instead, the securities fraud agreement is accompanied by the boilerplate caveat that says that by settling, the plaintiff is doing so without “without admitting or denying” wrongdoing.

Granted, there are certain cases where a conviction or guilty plea in a related criminal case makes it clear that a wrongful action did take place. One might also say that by agreeing to settle and pay a huge financial sum, the plaintiff is admitting to the wrongdoing without actually admitting to doing anything wrong. However, as Woolner points, not all defendants of US Securities and Exchange Commission cases are also charged in criminal court over the alleged securities fraud. Even when a settlement is reached, without an admission, the exact nature of the fraud is often left unclear.

SEC spokesperson John Nestor says that of the over 600 securities lawsuits filed every year, only about 20 of them ever go to trial. Nestor notes that the SEC’s primary objective in any civil case is to secure the proper sanctions against wrongdoers and not making them admit wrongdoing is a way to get this done. Many violators will give up a great deal to avoid being held liable in civil court. They also have little incentive to confess because this could help the securities fraud lawsuits of plaintiffs.

U.S. District Judge Jed Rakoff says that letting securities defendants get away with not admitting what they have done is a “disservice to the public.” Meantime, SEC commissioner also says that he wants defendants to “take accountability” and “issue mea culpas.” He also wants companies to stop putting out press releases suggesting that the SEC overreacted.

Related Web Resources:
Uncle Sam Wants Your Cash, Not Confession: Ann Woolner, Bloomberg, March 24, 2011

US Securities and Exchange Commission

More Blog Posts:
Bank of America to Pay $137M Over Alleged Investment Scam To Pay Municipalities Low Interest Rates on Investments and $9M Over Alleged Bid-Rigging Scheme to Nonprofits, Institutional Investors Securities Blog, December 16, 2010

NJ Settles Municipal Bond Offering Fraud Charges with SEC, Institutional Investors Securities Blog, September 30, 2010

Federal Judge to Approve Citigroup’s $75M Securities Settlement with SEC Over Bank’s Subprime Mortgage Debt Reporting to Investors, Institutional Investors Securities Blog, September 29, 2010

Continue reading "SEC Securities Settlements Often Don’t Come with Admission of Wrongdoing" »

The Financial Industry Regulatory Authority wants the District of Columbia Court of Appeals to reverse the D.C. Superior Court's decision to not dismiss Amerivet Securities Inc.’s lawsuit against the SRO. The broker-dealer wants to inspect FINRA’s records and books.

Amerivet Securities filed its complaint in August 2009 under the Delaware General Corporation Law’s Section 220, which lets a shareholder examine a company’s records and books for “any proper purpose.” The broker-dealer says it needs to inspect FINRA's books and documents in order to expose the corporate wrongdoing related to the SRO's 2008 investment losses and and allegedly inflated executive pay practices.

When our securities fraud attorneys covered this case more than a year ago, we noted that Amerivet had accused FINRA of failing to supervise and regulate a number of its larger member firms, including Lehman Brothers, Merrill Lynch, Bernard L. Madoff Investment Securities Inc., Bear Stearns and Co, and Stanford Financial Group. The broker-dealer also claimed that FINRA recklessly pursued high-risk investment strategies that were not appropriate for preserving capital. (Read our previous Stockbroker Fraud Blog post to find out more.) Last month, Judge John Mott ruled in favor of Amerivet and noted that pursuant to Section 220, the broker-dealer had asserted a proper purpose for wanting to make its inspection.

In its motion to dismiss, FINRA argued that it should get complete immunity from legal challenge. Also, FINRA said that because the Amerivet can’t maintain a derivative lawsuit against the SRO, the broker-dealer lacks a proper purpose to inspect the books it wants to see. When the court decided not to dismiss the case, however, it noted that although FINRA is immune from private lawsuits asking for damages related to regulator activity, this complaint isn’t looking for recovery. Rather, it wants to be able to examine FINRA’s records.

Related Web Resources:
Amerivet Wins Round In Amerivet V. FINRA, Daily Markets, March 5, 2011

Delaware General Corporation Law

Brokerage Firm Amerivet Securities Inc. Sues FINRA for Alleged Misconduct, Stockbroker Fraud Blog, August 26, 2009

Read the 2009 Complaint

The Securities and Exchange Commission has filed and settled securities charges against DHB Industries Inc. without the US defense contractor receiving any penalty. The maker of bulletproof vests for US law enforcement and military agencies, now called Point Blank Solutions, has consented to not committing the alleged violations in the future. SEC charges, however, are still pending against ex-DHB Industries board members Gary Nadelman, Cary Chasin, and Jerome Krantz.

The SEC claims that between 2003 and 2005, the three men let senior managers overstate data in financial reports. The federal agency also contends that as a result of the ex-board members’ “willful blindness,” ex-DHB Industries CEO David Brooks was able to take $10 million from the company and move the funds into another company under his control. Brooks, who is also accused of using another $4.7 million for personal expenses, and ex-DHB Industries COO Sandra Hatfield, were convicted of securities fraud and other charges in criminal court last year.

The SEC wants restitution and civil fines from Krantz, Chasin, and Nadelman. According to the New York Times, it is surprising that the federal regulator has actually filed civil charges against the three men. Save for perhaps a tarnished reputation, corporate directors tend to remain unscathed in cases of securities fraud. For example, no financial firms’ outside directors were named as defendants in SEC cases related to the credit crisis.

While some are expressing hope that the SEC is charting a new course with this case, it is difficult to discern at this point whether this is a one-time deal or the start of a new trend. For a while, there were concerns that the independent director post, assigned specific duties under the Sarbanes-Oxley law in 2002, might be harder to fill because of fear of liability. However, the SEC has only filed cases against them in incidents of alleged severe recklessness. Also, in an attempt to bring in good directors, companies have been offering better pay.

Are board directors held to too low of a standard that allows them to get away with too much?

Related Web Resources:
SEC Charges Military Body Armor Supplier and Former Outside Directors With Accounting Fraud, SEC, February 28, 2011

SEC charges defense contractor, 3 ex-directors, Bloomberg, February 28, 2011

For Directors at DHB Securities, SEC Keeps the Bar Low, New York Times, March 3, 2011

The Sarbanes-Oxley Act of 2002

More Blog Posts:
Former DHB Industries CEO and COO Found Guilty of Nearly $200M Securities Fraud Scam, Stockbroker Fraud Blog, September 16, 2010

$35.2 Million Shareholder Settlement Against DHB Industries Overturned by Circuit Court, Institutional Investor Securities Blog, October 21, 2010

Continue reading "SEC Files Securities Charges Against DHB Industries and Three Ex-Board Members" »

In its latest 10-K filing with the US Securities and Exchange Commission, Goldman Sachs Group Inc. says that its “reasonably possible” losses from legal claims may be as high as $3.4 billion. The investment bank’s admission comes after the SEC told corporate finance chiefs that the should disclose losses “when there is at least a reasonable possibility” they may be incurred regardless of whether the risk is so low that reserves are not required.

Goldman admits that it hasn’t put side a “significant” amount of funds against such possible losses and its estimate doesn’t factor in possible losses for cases that are in their beginning stages. The $3.4 billion figure comes from a calculation of three categories of possible liability. Also factored in were the number of securities sold in cases where purchasers of a deal underwritten by Goldman Sachs are now suing the financial firm and cases involving parties calling for Goldman Sachs to repurchase securities.

Between 2009 and 2010, the financial firm reported a 38% decline in net income from $13.4 billion to $8.35 billion. Trading revenue dropped while non-compensation expenses, which were affected by regulatory proceedings and litigation, went up 14%. It was just last year that the investment bank paid $550 million to settle SEC charges that it misled investors when selling a mortgage-linked investment in 2007. Goldman Sachs is still contending with state and federal securities complaints alleging improper disclosure related to mortgage-related products. As of the end of 2010, estimated plaintiffs’ aggregate cumulative losses in active cases against Goldman Sachs was at approximately $457 million.

Related Web Resources:
Goldman Sachs Puts ‘Possible’ Legal Losses at $3.4 Billion, Bloomberg Businessweek, March 1, 2011

Form 10-K, SEC

Worst-Case Scenario Losses for JP Morgan & Chase May Be As High as $4.5 Billion, Institutional Investors Securities Blog, February 28, 2011

Goldman Sachs Settles SEC Subprime Mortgage-CDO Related Charges for $550 Million, Stockbroker Fraud Blog, July 30, 2010

Continue reading "Goldman Sachs Reports $3.4 Billion in “Reasonably Possible” Losses from Legal Claims " »

According to the Financial Crisis Inquiry Commission, the 2008 financial crisis could have been avoided, but, instead it was caused by Wall Street’s thoughtless risk-taking, corporate mismanagement, and government regulation-related failures. The New York Times says that the FCIC blames the Federal Reserve, two administrations, and other regulators for allowing the excessive packaging and sale of loans, poor mortgage lending, and risky bets on securities backed by loans. The FCIC reached its conclusions after 19 days of interviews and hearings. Over 700 witnesses were involved. The findings can be found in a 576-page book and transcripts and raw material are to be placed online.

However, not all 10 commission members are endorsing the final report. The three Republican members have put together their dissent that concentrates on a narrower set of causes. A fourth Republican panel member, Peter J. Wallison, has his own reason for dissent. The six Democrat members have endorsed the report.

The majority report places some blame on former Fed chair Alan Greenspan and his successor Ben S. Bernanke. While Greenspan was in charge of the central bank when the housing bubble was expanding, Bernanke was instrumental in responding to the financial crisis when it happened. The report describes the Bush Administration’s response as “inconsistent,” such as when it let Lehman Brothers collapse even after bailing out Bear Stearns. The decision by the Clinton Administration to shield over-the-counter derivates from regulation in 2000 is considered a “key turning point” leading to the economic collapse.

Also receiving some of the blame is current Treasury Secretary Timothy F. Geithner, who once served as Federal Reserve Bank of New York head. The report says that the New York Fed failed to detect signs that there were problems at Lehman and Citigroup. Regulators were blamed for not having the “political will” to scrutinize and hold responsible the institutions they were tasked with overseeing. Meantime, the FCIC says that the Securities and Exchange Commission failed to stop risky practices and make banks hold greater capital so that there would be a cushion for possible losses. It also accuses the Office of Thrift Supervision and the Office of the Comptroller of the Currency of stopping states from curtailing abuses.

Related Web Resources:
Financial Crisis Was Avoidable, Inquiry Finds, The New York Times, January 25, 2011

The FCIC Report

FCIC Report Misses Central Issue: Why Was There Demand for Bad Mortgage Loans?, Huffington Post, January 31, 2011

Continue reading "The 2008 Financial Crisis was Avoidable, Says FCIC" »

The US Securities and Exchange Commission has adopted amendments to delay the expiration date of Rule 206(3)-3T under the 1940 Investment Advisers Act. The temporary rule, which was supposed to expire on December 31, 2010, will now stay in effect until December 31, 2012.

Rule 206(3)-3T gives investment advisers that are also broker-dealers who are registered with the SEC another way to satisfy the Advisers Act’s Section 206(3) requirements when they work in a principal capacity with certain advisory clients. Section 206(3) does not allow investment advisers to effect or take part in a transaction for a client while acting either as broker for a person besides the client or as principal for its own account unless the client has been informed of the role that the adviser is playing and has given his or her consent. The SEC says it is completing its study on broker-dealers and investment advisers, per the Dodd-Frank Wall Street Reform and Consumer Protection Act mandate, and it will deliver the report to Congress by January 21.

Under Rule 206(3)-3T, an adviser is allowed to comply with Section 206(3) of the Advisers Act by, among other things:

• Providing written prospective disclosure about principal trade conflicts.
• Getting revocable written consent from the client that prospectively gives the adviser the authority to enter into principal transactions.
• Making certain written or oral disclosures and getting the client’s consent prior to each principal transaction.
• Sending the client confirmation statements that disclose that the adviser notified the client that it could act in a principal capacity and it has the client’s consent.
• Giving the client an annual report that itemizes the principal transactions.

Related Web Resources:
Advisers Act Rule 206(3)-3T (Temporary Rule Regarding Principal Trades with Certain Advisory Clients), SEC

The “New” SEC is Acting Just Like The “Old” SEC by Protecting the Securities Industry from Responsibility for its Actions, Stockbroker Fraud Blog, December 9, 2010

1940 Investment Advisers Act

Continue reading "SEC Extends Temporary Rule Allowing Principal Trades by Investment Advisers Registered as Broker-Dealers" »

The Securities and Exchange Commission will be taking a closer look at the actions of ex- Ferris, Baker Watts, Inc. General Counsel Theodore Urban. Urban has been accused of failing to reasonably supervise stockbroker Stephen Glantz, who was involved a stock market manipulating scam with Innotrac Corp. stock.

It is rare for the SEC to examine the actions of a general counsel. However, the agency says it is looking at the case because the proceedings bring up key “legal and policy issues," such as whether Urban acted reasonably in the manner that he oversaw Glantz and chose to respond to signs of broker misconduct. The case also brings up the questions of whether securities professionals such as Urban should be made to “report up” and if his status as a lawyer and his role as “FWB’s general counsel affect is liability for supervisory failure.”

Earlier this year, Securities & Exchange Commission Administrative Law Judge Brenda Murray ruled that Urban did not inadequately supervise Glantz and that the proceedings against him be dropped. Murray said that per the 1934 Securities Exchange Act, a person cannot be held liable for supervisory deficiencies if appropriate procedures for detecting and stopping the violations were applied, She said that Urban had no reasonable grounds to think that procedures had not been followed.

However, Murray’s decision isn’t final until the SEC enters its final order, and on Tuesday the commission declined Urban’s motion requesting that the SEC affirm Murray’s ruling. Division lawyers have said that Murray’s decision was not consistent with previous SEC precedent, lowers the standards that supervisors at dealers, brokers, and investment advisers must meet, and did not protect the investing public by making Urban accountable to sanctions.

SEC to Review Actions of Bank General Counsel Who Supervised Rogue Broker, Law.com, December 9, 2010

Read the SEC order denying motion for summary affirmance (PDF)

Read the administrative law judge's ruling (PDF)

Ex-Ferris, Baker Watts, Inc. General Counsel Did Not Fail to Properly Supervise Broker Fraudster, Says SEC Judge, Stockbroker Fraud Blog, September 30, 2010

Continue reading "Actions of Former Ferris, Baker Watts, Inc. General Counsel Accused of Supervising Rogue Broker to be Reviewed by SEC" »

The US Department of Labor has put out a final regulation that establishes the fiduciary requirements for disclosure in 401 (k)’s and other participant-directed individual account plans. The final regulation was issued under the Employee Retirement Income Security Act of 1974. The DOL guidance also comes with a final amendment to the regulation that already exists under ERISA § 404(c), 29 C.F.R. § 2550.404c-1.

The disclosure requirements answer a number of questions, including:
• Who is responsible for disclosing information to beneficiaries and participants in individual account plans that are participant-directed?
What information must be disclosed?
• What are the rules when dealing with target date funds, fixed-return investments, annuities, and employer securities?
• What type of disclosure is required?
• When should disclosure of information be made to participants and beneficiaries?
• Who should disclose the information?

Under the final regulation, the plan administrator of an individual account plan must make sure that beneficiaries and participants are made aware of their responsibilities and rights in regards to their investments. They also must receive enough information about the plan, investment alternatives, and fees and expenses so that they can make informed decisions.

Under the final regulation, participants and beneficiaries of "covered individual account plans" must receive disclosure in four categories of information, including:
• General Operational and Identification Information
• General Plan Administrative Expenses
• Individual Expenses
• Investment-Related Information

Plan administrators also have to automatically disclose certain performance benchmarks and data, including the average annual return of the investment over 1, 5, and 10 calendar year periods, as well as provide a statement noting that past performance does not guarantee that the results in the future will be the same. Designated investment alternatives that have a stated or fixed return for the term of the investment must come with a disclosure that includes the term of the investment and the fixed or stated annual return rate.

For more details, contact Shepherd Smith Edwards and Kantas founder and securities fraud attorney William Shepherd.

Related Web Resources:
U.S. Department of Labor Issues Final Regulation on Fiduciary Requirements for Participant Disclosure in Participant-Directed Individual Account Plans & A Final Amendment to the Regulation under ERISA Section 404(c), Proskauer, October 27, 2010

Employee Retirement Income Security Act — ERISA, US Department of Labor

Stockbroker Fraud Blog

Continue reading "Final Regulation for Disclosure in Participant-Directed Individual Account Plans Issued by US Department of Labor " »

This month, Russian President Dmitry Medvedev signed into law amendments to his country’s securities legislation. He signed the Federal Law No. 264-FZ to amend provisions of Federal Law No. 39-FZ “On Securities Market.” The State Duma, the Parliament’s lower house, and the Federation Council have all adopted the new amendments, which went into effect on October 7. However, the new amendments, however, are not applicable to non-publicly traded companies that have less than 500 shareholders.

The amendments are geared towards improving corporate disclosure and transparency. The list of who can receive relevant information and those that must disclose data are specified. For example, Russian securities issuers must now disclose financial reports, including those filed in accordance with International Financial Reporting Standard, as well as accounting reports. They must also reveal the identities of primary beneficiaries of controlled entities and controlling shareholders’ identities. Signs of insolvency should be included in disclosed information about beneficiaries and shareholders. Companies must also provide information about board meetings and not just annual general meetings.

Securities Fraud and Institutional Investors
Our stockbroker fraud lawyers work with institutional investors throughout the US to recoup their financial losses sustained because of broker-misconduct, investment adviser errors, or securities fraud. We also represent clients outside the US with securities fraud claims against companies that are based in this country.

Related Web Resources:
Russian President Dmitry Medvedev approves amendments to securities law, Export.By

Recent changes in Russian corporate and securities law, IFLR1000

Continue reading "Amendments to Russian Securities Law Aim to Enhance Transparency and Corporate Disclosure" »