May 14, 2013

SEC Roundup: Regulator Addresses CDS Portfolio Margin Program & Ex-Commission Officials Want DC Circuit to Grant SIPC Protection to Stanford Ponzi Scam Victims

Ex-Commission Officials, Others Want DC Circuit to Grant Stanford Ponzi Scam Victims SIPC Protection
Former SEC Officials, law professors, and trade groups are among those pressing the U.S. Court of Appeals for the District of Columbia Circuit to reject the regulator’s bid to compel Securities Investor Protection Corporation coverage for the investors who were bilked in R. Allen Stanford’s $7 billion Ponzi scam. Inclusion under the Securities Investor Protection Act would allow the fraud victims to obtain reimbursement for losses.

However, SIPC, which is a federally mandated non-profit corporation, doesn’t believe that the Stanford investors, who purchased certificates of deposit from Stanford International Bank Ltd. in Antigua, fall under this protection. Following a failure to act on the SEC’s request to initiate liquidation proceedings for brokerage firm Stanford Group Co., the regulator asked the court for a novel order that would make the organization comply.

Last year, the district court rejected the SEC’s application, finding that Stanford’s investors were not, for Securities Investor Protection Act purposes, covered. The agency then went to the DC Circuit.

Now, in an amicus brief filing, the academics and ex-SEC officials, including Paul Atkins and Joseph Grundfest, are arguing that the appeals court should turn down the regulator’s bid to expand who is “covered through SIPC” because it would not be in line with statutory history, “contravenes” the statute’s “plan language,” and is in conflict with over four decades of judicial precedent.


SEC Division of Trading and Markets Address Credit Default SwapsPortfolio Margin Program Questions
In other SEC news, its Division of Trading and Markets recently addressed questions related to temporary approvals that were given to several brokerage firms/ futures commission merchants that allow their involvement in a program that would mix and position portfolio margin customer positions in cleared credit default swaps.

The SEC is now granting conditional exemptive relief from certain 1934 Securities Exchange Act requirements related to a program that would portfolio and mix margin customer positions in certain cleared CDSs. In March, the Commission gave conditional approval to Goldman Sachs & Co. (GS), J.P. Morgan Securities LLC (JPM), and five other banks to take part in the program. They now can temporarily determine the portfolio margin figures for client positions in commingled CDs according to a model created by ICE Clear Credit, the largest credit default swaps clearing house in the world, while division staff assess the financial firms’ margin methodologies.

Now, ICE Clear Credit participants have questions. They want to know what is the margin treatment of a portfolio that has just single-name CDS positions as well as what is the clearing participants' affiliates’ margin treatment. Responding, SEC division staff said that a FCM/BD client account that has just single-name CD positions would be subject to applicable margin requirements per FINRA Rule 4240. They also said that BD/FCM clearing participants have to deal with affiliates’ single-name CD positions as if they were “customer positions” for margin purposes. SEC staff said that this is in line with FINRA and Commission broker-dealer financial responsibility rules regarding how affiliates are to be treated.

Read the SEC's Response to Questions About CDS Portfolio Margin Program (PDF)

Read the Amicus Filing to the DC Circuit


More Blog Posts:
Medical Capital Fraud Lawsuit Against Wells Fargo Must Proceed, Institutional Investor Securities Blog, April 10, 2013

FINRA Bars Former Wells Fargo Advisors Broker that Bilked Child with Cerebral Palsy, Stockbroker Fraud Blog, April 26, 2012

Standard & Poor’s Seeks Dismissal of DOJ Securities Fraud Lawsuit Over RMBS and CDO Ratings Issued During the Financial Crisis, Institutional Investor Securities Blog, May 9, 2013

April 3, 2013

“Substituted Compliance” Should Regulate Cross-Border Swaps, Says SEC Chairman Elisse Walter

According to Securities and Exchange Commission Chairman Elisse Walter, the best way to regulate global over-the-counter derivatives regulation is via “substituted compliance.” Such an approach would let a market participant comply with domestic requirements in a certain area through compliance with comparable foreign regulation while also allowing the domestic regulator to keep applying specific policy requirements of local law when the foreign one fails to impose requirements or protections that compare.

Per its Dodd-Frank Wall Street Reform and Consumer Protection Act Title VII mandate, the SEC intends to put forth a proposal on how to tackle cross-boarder issues. Although the Commission hasn’t figure out how it will go forward with this proposal, Walter stressed that “substituted compliance” could act as a “a reasonable and necessary middle ground” between making foreign participants abide by domestic regulation and widely recognizing foreign swap regimes. She believes that while efforting to give the maximum substituted compliance possible, properly tailored cross-border regulation would take care of the potentially significant regulatory gaps that are likely to exist between jurisdictions.

Walter believes that regulators need to be participating in the world debate on how to cut down systemic risk. Also, noting that brokerage firms, investment advisers, and other market participants that the SEC oversees differs from traditional banking institutes, Walter cautioned that failure to identify these key differences ups the risk that there will be weaker financial institutions and less options for businesses looking for investment capital.

If you are an institutional investor who has been the victim of securities fraud, please contact Shepherd Smith Edwards and Kantas, LTD LLP right away. We would be happy to provide you with a complimentary, no obligation case evaluation.

Read Chairman Elisse Walter's Speech for the ASIC Forum, SEC, March 24, 2013


More Blog Posts:
Deutsche Bank Settles Massachusetts CDO Case for $17.5 Million, Stockbroker Fraud Blog, April 1, 2013

Citigroup Will Pay $730M in Bond Lawsuit Alleging It Misled Debt Investors, Institutional Investor Securities Blog, March 20, 2013

November 6, 2012

Top Financial Regulators Speak Out Against Bill They Claim Gives the White House Authority Over Rulemaking

The heads of the Office of the Comptroller of the Currency, the Federal Reserve, the Securities and Exchange Commission, the Consumer Financial Protection Bureau, the National Credit Union Administration, and the Federal Deposit Insurance Corporation have sent a letter to Senators Susan Collins (R-Maine) and Joseph Lieberman (I-Conn) about bill S. 3468: Independent Agency Regulatory Analysis Act of 2012. Lieberman is the chair of the Senate Committee on Homeland Security and Governmental Affairs, the committee to which S. 3467 has been referred.

The regulators believe that, if approved, the legislation would give the White House “unprecedented authority” over independent agencies’ rulemaking and policy functions. For example, would let the president of the United States mandate that independent agencies turn in proposed rules to the Office of Management and Budget for approval. It also would require the agencies to analyze the benefits and costs of new regulations, which is a process that they have up to now been exempt from.

The letter reminds Lieberman and Collins, who is a ranking committee member and a cosponsor of the proposal, that Congress set up the independent regulatory agencies to exercise policymaking functions separate from any administration’s control. By requiring that the agencies give their rulemakings to OMB’s Office of Information and Regulatory Affairs, say the regulators, the president would gain power to affect the rulemaking and policy functions of these agencies, taking away that independence. They also believe that the bill gets in the way of their ability to make needed rules in a timely way, which would likely lead to litigation.

Shepherd Smith Edward and Kantas, LTD, LLP founder and securities lawyer William Shepherd finds the regulators’ letter ironic: “With billions of lobbying dollars, Wall Street exercises tremendous power over legislators and legislation. Federal securities ‘regulators’ include only industry self-regulating organizations or the SEC. Problems with self-regulation are self-evident. Meanwhile, the SEC is run by former members of the securities industry and operated by hopeful future industry participants from those they are regulating. The SEC is part of the executive branch of our government, so why shouldn’t the chief executive have input into the SEC’s operations?”

Financial regulators are not the only ones opposing S. 3468. Some consumer groups also have taken a stand against the bill. In its own letter, the Americans for Financial Reform, which is made up of a coalition of organizations, also writes about how it believe the legislation would subject regulators to Washington’s authority. The group also argues that the legislation would create additional, unnecessary, and expensive requirements to the process that has to happen to complete oversight rules for the biggest banks while potentially delaying or derailing the financial safeguards that our economy needs for protection.

Read the letter to Lieberman and Collins (PDF)


More Blog Posts:

House Financial Services Committee Hears Arguments Over Who Should Oversee Investment Advisers, Stockbroker Fraud Blog, June 9, 2012

Securities Law Roundup: Ex-Sentinel Management Group Execs Indicted Over Alleged $500M Fraud, Egan-Jones Rating Wants Court to Hear Bias Claim Against SEC, and Oppenheimer Funds Pays $35M Over Alleged Mutual Fund Misstatements, Stockbroker Fraud Blog, June 13, 2012

Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked, Institutional Investor Securities Blog, May 22, 2012

SEC Practice of Settling Enforcement Actions Without Requiring Defendants to Deny or Admit to Allegations Gets Support from Federal Judges and Democrats, Institutional Investor Securities Blog, May 26, 2012

May 26, 2012

SEC Practice of Settling Enforcement Actions Without Requiring Defendants to Deny or Admit to Allegations Gets Support from Federal Judges and Democrats

At a House Financial Services Committee hearing on May 17, a number of Democratic lawmakers spoke out against the Securities and Exchange Commission's practice of settling securities enforcement actions without making defendants deny or admit to the allegations. There is concern that companies might see this solution as a mere business expense.

The hearing was spurred by U.S. District Court for the Southern District of New York Judge Jed Rakoff’s rejection of the SEC’s $285 million securities settlement with Citigroup (C) over its alleged misrepresentation of its role in a collateralized debt obligation that it marketed and structured in 2007. Citigroup had agreed to settle without denying or admitting to the allegations.

Rakoff, however, refused to approve the deal. In addition to calling for more facts before the court could accurately judge whether or not to approve the agreement, he spoke out against the SEC’s policy of letting defendants off the hook in terms of not having to deny or admit to allegations when settling. The U.S. Court of Appeals for the Second Circuit later went on to stay Rakoff’s ruling that SEC v. Citigroup Global Markets, Inc. go to trial.

At this Congressional hearing, a number of the lawmakers were “sympathetic” to Rakoff’s reasoning, said Rep. Carolyn Maloney (D-N.Y.). Rep. Al Green (D-Texas) stressed the importance of holding businesses accountable for alleged wrongdoings. The Democrats, however, were clearly mindful of the fact that SEC did not have the resources to take on additional, lengthy lawsuits, as well as of the delays that a change in the SEC’s current settlement policy would cause for investors seeking financial recovery, and they did not call for any actual policy change.

Meantime, SEC Enforcement Director Robert Khuzami, who was also at the hearing, talked about how not only would securities cases take longer to resolve if defendants were made to deny or admit wrongdoing when settling, but also, there would be a lot less settlements.

His views were backed by a number of attending Republican lawmakers who support the SEC’s settlement policy. Committee Chairman Spencer Bachus (R-Ala.) said he felt that agencies should have the primary discretion when it comes to deciding whether to settle or try a case, while Vice Chairman Jeb Hensarling (R-Texas) also said that eliminating the SEC’s policy would result in a huge increase in the number of securities lawsuits.

Earlier this month, at the Alan B. Levenson Symposium in Washington, current and former judges spoke for federal judges’ right to turn down settlement agreements if they didn’t think they had been given enough facts or considered the deals to be fundamentally unfair. They spoke about the importance of judicial independence and how judges shouldn’t be forced to merely rubber stamp settlement deals. For example, U.S. District Court for the District of Columbia Judge Beryl Howell said that regardless of whether parties had agreed to a settlement, a court still must be given sufficient facts to be able to determine whether a deal is reasonable.

Contact our SEC securities lawyers at Shepherd Smith Edwards and Kantas, LTD, LLP today.

Examining the Settlement Practices of U.S. Financial Regulators, House.gov, May 17, 2012

Courts Must Reject Settlement Pacts Where Necessary, Former, Current Judges Say, Bloomberg BNA, May 15, 2012

SEC v. Citigroup Global Markets, Inc., Justia (the Opinion and Summary)


More Blog Posts:
SEC Looks Likely to Win Appeal in $285M Securities Settlement that Judge Rakoff Rejected, Institutional Investor Securities Blog, March 15, 2012

Citigroup’s $285M Settlement With the SEC Is Turned Down by Judge Rakoff, Stockbroker Fraud Blog, November 28, 2012

Citigroup’s $75 Million Securities Fraud Settlement with the SEC Over Subprime Mortgage Debt Approved by Judge, Stockbroker Fraud Blog, October 23, 2010

May 22, 2012

Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked

In a letter to the Federal Reserve Board, the Securities and Exchange Commission, the Commodity Futures Trading Commission the Office of the Comptroller of the Currency Administrator of National Banks, and the Federal Deposit Insurance Commission, Senators Jeff Merkley (D-Ore.) and Carl Levin (D-Mich.) spoke out against what they are calling the current draft of the Volcker rule’s “JPMorgan loophole,” which they say allows for the kinds of trading activities that resulted in the investment bank’s recent massive trading loss. Merkley and Levin want the regulators to make sure that the language in October’s draft version is more stringent so that “clear bright lines” exist between legitimate activities and proprietary trading activities that should be banned (including risk-mitigating hedging and market-making).

According to Levin and Merkley, who are both principal co-sponsors of the Volcker rule and its restrictions on proprietary trading, the regulation’s latest draft disregarded “clear legislative language and clear statement of Congressional intent” and left room for “portfolio hedging.” Under the law, risk-mitigating hedge activities are allowed as long as they aim to lower the “specific risks” to a financial firm’s holdings, including contracts or positions. This is supposed to let banks lower their risks by letting them to take part in actual, specific hedges. However, the senators are contending that because the language that was necessary to enforce wasn’t included in the last draft, hence the "JPMorgan loophole" (among others) that will allow proprietary trading to occur even after the law goes into effect. They blame pressure from Wall Street lobbyists for these gaps.

The senators are pressing the regulators to get rid of such loopholes and put into effect a solid Volcker Rule, with stricter language, and without further delays. They noted that despite getting trillions of dollars in public bailout money, a lot of large financial firms continue to fight against the “most basic… reforms,” which is what they believe that Wall Street has been doing with its resistance to the Volcker rule. (Also in their letter, Levin and Merkley reminded the regulators that it was proprietary trading positions that resulted in billions of dollars lost during the recent economic crisis.)

SSEK Talking to Investors About JPMorgan Trading Losses
JPMorgan Chase's (JPM) over $2 billion loss was on a series of complex derivative trades that it claims were made to hedge economic risks. Now, according to a number of people who work at trading desks that specialize in the kind of derivatives that the financial firm used when making its trades, the financial firm's loss has likely grown to closer than $6 billion to $7 billion.

Read the Letter by Merkley and Levin

Volcker Rule Resource Center, SIFMA


More Blog Posts:
JPMorgan Chase Had No Treasurer When Chief Investment Office Made Trades Resulting In More than $2B Loss, Reports WSJ, Institutional Investor Securities Blog, May 19, 2012

JPMorgan Chase Shareholders File Securities Lawsuits Over $2B Trading Loss, Institutional Investor Securities Blog, May 17, 2012

SEC Chairman Mary Schapiro Stands By Agency’s 2011 Enforcement Recordhttp://www.stockbroker-fraud.com/lawyer-attorney-1132963.html, Stockbroker Fraud Blog, March 15, 2012

Continue reading "Senate Democrats Want Volcker Rule’s “JP Morgan Loophole” Allowing Portfolio Hedging Blocked" »

April 26, 2012

SEC to Make Sure Rule Writing Process Incorporates Better Cost-Benefit Analysis

In the wake of criticism that the Securities and Exchange Commission has not done enough to assess its rules’ economic impact, its Office of the General Counsel and Risk, Strategy, and Financial Innovation Division is providing staff with guidance that it needs to conduct a more thorough economic analysis during the entire rule writing process. One of the requirements is that there must be a cost-benefit evaluation when rules that are congressionally mandated or discretionary are involved. This guidance is now binding.

However, SEC Chairman Mary Schapiro was quick to point out to the House Oversight Subcommittee on TARP and Financial Services that many of the rules that are written already follow this guidance. Now, staff will assess the cost-benefits of 28 rules that the Commission is proposing in the wake of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The guidance comes following a report that was issued in January. In it, the Office of the Inspector General blamed the SEC for not conducting cost-benefit analysis when writing Dodd-Frank mandated rules. In addition to providing more comprehensive cost-benefit analysis, the SEC must also note the justification for the proposed rule, identify reasonable options to the rule, evaluate any economic repercussions, and find a baseline point for beginning the analysis. The SEC will be hiring more than three dozen economists to join its staff. If the Commission ends up being able to properly implement this guidance, then Congress may have to legislate.

Commenting on this recent development, Shepherd Smith Edwards and Kantas, LTD, LLP Partner and Institutional Investment Fraud Lawyer William Shepherd said, “How high should the cost of regulations be on a mega-billion dollar industry with record profits in a recession after just ripping off investors worldwide for trillions of dollars because of lack of regulations? Wall Street is an industry of whiners who thinks they are the victims because the cops say slow down in a construction zone or school district.”

Rep. Scott Garrett (R-NJ), who authored HR 2308, the SEC Regulatory Accountability Act that similarly seeks to enhance the Commission’s cost-benefit analysis in similar fashion as the guidance, still plans to keep pushing for his bill’s passage. HR 2308 made it through the House Financial Services Committee a couple of months ago.

Garrett would prefer for the cost-benefit mandate to become statute so that the requirements that the SEC must meet are clear, which should hopefully ensure that any rules the Commission does end up writing doesn’t slow economic growth. Garrett’s spokesperson sent BNA an email stressing that another reason it was important for the order to become law rather than mandated SEC guidance is that that future SEC chairmen might choose not to adhere to it.

Our securities fraud attorneys at Shepherd Smith Edwards and Kantas, LTD, LLP represent institutional and individual investors throughout the United States.

New SEC Guidance Directs Staff to Enhance Cost-Benefit Analysis in Rulewriting Process, Bloomberg/BNA, April 18, 2012

Garrett Urges SEC Chairman to Support Cost-Benefit Analysis, US Congressman Scott Garrett, Congressman Garrett, April 25, 2012

Office of the General Counsel and Risk, Strategy, and Financial Innovation Division

More Blog Posts:
Broker Fiduciary Rule Delayed by Cost-Benefit Analysis, SEC Says, Institutional Investor Securities Blog, March 7, 2012

FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty, Institutional Investor Securities Blog, November 28, 2011

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

March 21, 2012

SEC Chairman Schapiro Says Jumpstart Our Business Startups Act Needs Better Investor Protections

Earlier this month, Securities and Exchange Commission Chairman Mary Schapiro wrote a letter to Senate Banking Committee Chairman Tim Johnson (D-S.D.) over her concerns that modifications needed to be made to the Jumpstart Our Business Startups Act to make sure that investor protections are enhanced. The US Senate is heading toward a final vote on the Start-Up Focused JOBS Act. The Republican-introduced bundle of bills is geared toward helping along capital growth by loosening reporting requirements and securities law registration. The US House passed its version of the legislation on March 8.

Today, the Senate’s version passed by a 76-22 vote through a procedural process to end debating over the Act. However, before the final vote can be made, the senators must first vote on two amendments, including one that would toughen the limits on how much money a very small investor may place in a crowd-funding offering.

The SEC is also working on a number of capital formation initiatives. In her letter, Schapiro wrote about what she considered were problems with HR 3606, including what she considered its too broad of a definition an “emerging growth company,” which are firms with under $700 million in public float and less than $1 billion in yearly gross revenue. She believes that this very expansiveness could get rid of important investor protections in even very big companies. Schapiro also thinks that the JOBS Act would “weaken” key protections by getting rid of safeguard that were implemented after the dot-com era-related research scandals, while reversing SRO-established rules that put into place “mandatory quiet periods” for stopping banks from using conflicted research as a reward to insiders that chose a particular bank as an underwriter.

The SEC Chairman also worried that the bill would limit the autonomy of auditing and accounting standard setting, let emerging growth companies use pre-filing communications to “test the waters” without having to be responsible for this information, allow these companies to turn in their registration statements confidentially without requiring public feedback (and, as a result, lessening the SEC staff’s ability to give effective reviews,) and decrease investor protections in its crowdfunding provisions. She also said that the JOBS Act should give the SEC longer timelines to allow for rulemaking. As an example, she pointed to the 180-day deadline for promulgating the rules under the bill’s crowdfunding section. She said this wasn’t enough time and that 18 months was needed, not six.

Schapiro is not the only one with reservations about the JOBS Act. The Council of Institutional Investors wrote a letter to the US House expressing its concerns about the inadequate investor protections under the bill’s “emerging growth company “definition. Senate Majority Whip Dick Durbin (D-Ill.) also has issues with several of the bill’s provisions. He says the JOBS Act can be improved so that jobs will be created and small businesses will grow. He was particularly concerned with a provision that would temporarily exempt “emerging growth companies” from certain regulations, saying that over 90% of US companies going public would thus become exempt. He also believes shat investor exposure to fraud would become inevitable

Our stockbroker fraud law firm helps investors recoup their losses. Shepherd Smith Edwards and Kantas, LTD, LLP represents clients in arbitration and the courts.

Senate moves forward on JOBS bill, UPI, March 21, 2012

Speech by SEC Chairman: Remarks at the Society of American Business Editors and Writers (SABEW) Annual Convention, SEC, March 15, 2012

Durbin Says House ‘JOBS Act' Will Do Away With Investor Protections, The Hill, March 20, 2012


More Blog Posts:

As the US House Passes Package of Bills to Open Capital Market Flow to Small Businesses, the Senate Prepares Similar Legislation, Institutional Investor Securities Blog, March 13, 2012

House To Vote On GOP Legislation Related to Small Business' Access to Capital, Institutional Investor Securities Blog, March 5, 2012

Leahy Amendment Would Provide Whistleblower Protection While Holding SEC and CFTC Accountable If They Don’t Follow Up on Tips, Stockbroker Fraud Blog, May 25, 2010

March 7, 2012

US Supreme Court's Janus Ruling May Compel SEC to File More Aiding, Abetting, and Control Person Liability Securities Claims

According to the Securities and Exchange Commission Enforcement Division’s Chief Counsel Joseph Brennan, the US Supreme Court’s ruling in Janus Capital Group Inc. v. First Derivative Traders is impacting the types of violations the federal regulator is now filing against defendants. Brennan says to look out for more possible control person liability and aiding and abetting claims. Speaking at the SEC Speaks conference by the Practising Law Institute in Washington, Brenner said the views he was expressing are his own.

In the high court’s 2011 ruling, the decision honored, under Rule 10b-5 of the 1934 Securities Exchange Act, a narrow perspective of primary liability in a private lawsuit. The majority held that an investment adviser who was a legally separate entity from the mutual fund that submitted an allegedly prospectus couldn’t be held primarily liable in a private action even if that adviser had played a key role in developing the statement. Justice Clarence Thomas wrote that the statement’s maker is the entity or person with final authority over the statement (including its content and how it should be communicated).

The Exchange Act’s SEC Rule 10-b5(b) makes it illegal to either issue any statement of material fact that is untrue or leave out a key fact. The Supreme Court’s ruling establishes an even higher pleading bar in private securities fraud cases where the plaintiff wants to hold defendants liable for other’s misstatements.

The ruling, however, has not had a big impact on who the SEC can charge. It also hasn’t had a big influence on SEC enforcement decisions involving other statutes and provisions.

Also discussing Janus at the same gathering was SEC Deputy Solicitor John Avery. He noted while that the decision signified a significant “change” and the “narrowing” of how primary liability for issuing false or misleading statements is defined, it remains unclear whether SEC actions are covered under the ruling. While some district courts have found that Janus applies to SEC actions, federal appellate courts have not issued any decisions related to this matter.

Avery said that the ruling has, however, changed the way the SEC files charges. The federal agency, which is authorized to pursue aiders and abbettors accused of violative conduct, might now charge those that played a role in creating the statement as abbettors and aiders even though they wouldn’t be liable per Janus. However, in certain cases, this authority won’t work too well.

Meantime, federal courts are starting to deal with whether Janus is applicable beyond the context of Rule 10b-5. In four out of five SEC cases, the courts have ruled against applying Janus outside the rule.

Contact our securities fraud law firm to request your free case evaluation.


SEC Looking to Aiding/Abetting Claims In Wake of Janus Decision, Official Says, BNA Securities Law Daily, February 27, 2012

Janus Capital Group Inc. v. First Derivative Traders and the Law of Unintended Consequences, Forbes, September 21, 2011

Read the Supreme Court's Opinion (PDF)


More Blog Posts:

Securities Fraud: Mutual Funds Investment Adviser Cannot Be Sued Over Misstatement in Prospectuses, Says US Supreme Court, Stockbroker Fraud Blog, June 16, 2011

Janus Avoids Responsibility to Mutual Fund Shareholders for Alleged Role in Widespread Market Timing Scandal, Stockbroker Fraud Blog, June 11, 2007

SEC Chairwoman Defends ‘No Wrongdoing’ Settlements, Institutional Investor Securities Blog, February 27, 2012


Continue reading "US Supreme Court's Janus Ruling May Compel SEC to File More Aiding, Abetting, and Control Person Liability Securities Claims " »

March 5, 2012

House To Vote On GOP Legislation Related to Small Business' Access to Capital

This week, the House is slated to vote on a Republican legislative package to make it easier for small businesses to access capital. On February 28, House Majority Leader Eric Cantor (R-Va.) presented his Jumpstart Our Business Startups Act’s final version, which is comprised of six bills that would revise securities laws to make this capital flow happen. Included in this package is a bill calling for more shareholder reporting triggers for community banks. Meantime, Senate Majority Leader Harry Reid (D-Nev) has said he plans to push forward a similar package in the US Senate.

As both the House and Senate move forward with their legislative packages, Senator Scott Brown (R-Mass) is asking the Senate to push forward his bill, which would allow for a crowdfunding-related securities registration exemption. His bill (S. 1971) and Sen. Jeff Merkley's (D-Ore.) S. 1970 similarly are pressing for letting issuers raise up to $1 million yearly through crowdfunding. However, Merkley’s bill establishes a part for states to play in regulating crowdfunding securities, while Brown’s bill does not. The Senator from Massachusetts believes a national framework is necessary, rather than making entrepreneurs comply with each state’s securities law mandate. Also, while Merkeley’s bill calls for giving investors a private right of action to file a civil suit against fraud issuers, Brown doesn’t believe this is necessary and sees current fraud laws as “solid” and merely in need of enforcement. He did, however, say that he and Merkeley share the same desire for investor protection.

Regarding the issue of the Securities and Exchange Commission’s capital formation efforts on small businesses, SEC Division of Corporation Finance Director Meredith Cross said it is hard right now for the regulator to evaluate their impact. Cross, who was part of a panel at the Practising Law Institute's SEC Speaks conference on February 24, said her views are her own.

Cross said the division is prioritizing a number of actions for 2012, including completing its asset-backed securities and Dodd-Frank Wall Street Reform and Consumer Protection Act rulemaking, making headway in regards to proxy plumbing initiatives, and beginning the process of updating the Commission’s beneficial ownership reporting rules.

Right now the SEC is working on a number of capital formation initiatives. Staffers are also putting together a concept release that will seek public feedback on whether the general solicitation ban, which prevents issuers from using advertising or employing general solicitation to draw investors to private offerings should be reassessed.

Throughout the US, contact Shepherd Smith Edwards Karats, LTD, LLP to speak with an experienced securities fraud lawyer about your institutional fraud case. Your first consultation is free.

Brown Renews Plea for Senate To Advance Crowdfunding Exemption, Bloomberg/BNA, March 2, 2012


More Blog Posts:

Senate Passes Bill Banning Congressional Insider Trading, Institutional Investor Securities Blog, February 8, 2012

Insider Trading: Former FrontPoint Partners Hedge Fund Manager Pleads Guilty to Criminal Charges, Institutional Investor Securities Blog, August 20, 2012

$78M Insider Trading Scam: "Operation Perfect Hedge” Leads to Criminal Charges for Seven Financial Industry Professionals, Stockbroker Fraud Blog, January 18, 2012

November 28, 2011

FINRA May Put Forward Another Proposal About Possible SEC Rule Regarding Fiduciary Duty

According to FINRA CEO and Chairman Richard G. Ketchum, the SRO may put out a second concept proposal about its stance regarding disclosure obligations related to a possible Securities and Exchange Commission rulemaking about formalizing a uniform fiduciary duty standard between broker-dealers and investment advisers. Currently, the 1940 Investment Advisers Act defines the investment advisers’ fiduciary obligation to their clients, while broker-dealers are upheld to suitability rules that will be superseded next August by two FINRA rules regarding broker-dealer suitability standards.

The Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 913, however, said that it is SEC’s responsibility to determine whether these current regulatory and legal standards s are still effective and if any regulatory shortcomings that exist need to be filled. In July 2010, the SEC asked stakeholders for feedback about this mandates. After receiving over 3,000 public comments, it issued a study recommending that there be a uniform fiduciary standard for both types of representatives when giving advice to retail clients. The SEC could put out its proposed rule by the end of this year.

FINRA is working with the Commission on this and plans to stay involved in the process. It was just last year that the SRO put out a concept proposal seeking public comment about the idea that broker-dealers should have to provide retail investors with certain disclosures at the start of a business relationship. These clients would be required to give a written statement detailing the kids of services and accounts they provide, any conflicts of interests, and limits on duties that they are entitled to expect. FINRA said that regardless of what a unified fiduciary standard would look like, retail investors would benefit from getting this disclosure document at the start and that such a mandate is an “outright necessity.

Regard this proposed fiduciary standard rule, Shepherd Smith Edwards and Kantas founder and stockbroker fraud lawyer William Shepherd said: “The goal is to lower the duties of Wall Street. The term “fiduciary duty” was defined by courts centuries ago. Since passage of the Investment Advisor’s Act of 1940 – 71 years ago – no special definition of the “fiduciary duty” of financial advisors has been necessary. Current law does not exempt stockbrokers from a fiduciary duty when the circumstances arise in which the broker has assumed the role of a fiduciary. Example: ‘I will take care of you and properly invest your money for you.’ What is being currently proposed is nothing more than a “safe harbor” for brokerage firms to disclose their conflicts, etc. Is it time to occupy Wall Street?”

Our securities fraud attorneys are committed to helping our institutional investor clients recoup their losses from negligent broker-dealers and investment advisers.

Disclosure of Services, Conflicts and Duties, FINRA, October 2010

Study on Investment Advisers and Broker-Dealers, SEC (PDF)


More Blog Posts:

Don’t Create Uniform Fiduciary Standard for Broker-Dealers and Investment Advisers, Say Some Republicans to the SEC, Institutional Investor Securities Blog, October 7, 2011

SEC’s Proposal on Implementing Whistleblower Rule Draws Mixed Reactions, Institutional Investor Securities Blog, January 3, 2011

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

November 5, 2011

Banco Espirito Santo S.A. Settles for $7M SEC Charges Alleging Violations of Investment Adviser, Broker-Dealer, and Securities Transaction Registration Requirements

Without denying or admitting to wrongdoing, Banco Espirito Santo S.A. a banking conglomerate based in Portugal, has consented to pay nearly $7M in disgorgement, prejudgment interest, and civil penalties to settle Securities and Exchange Commission allegations that it violated securities transaction, investment adviser, and broker-dealer registration requirements. The bank has also agreed to a bar from future violations, as well as an undertaking that it pay a minimum interest rate to US clients on securities bought through BES.

According to the SEC, between 2004 and 2009 and while not registered as an investment adviser or broker-dealer in the US, BES offered investment advice and brokerage services to about 3,800 US resident clients and customers. Most of them were immigrants from Portugal. Also, allegedly the securities transactions were not registered even though they did not qualify for a registration exemption.

The SEC says that by acting as an unregistered investment adviser and broker-dealer BES violated sections of the Exchange Act and the Advisers Act. The bank violated the Securities Act when it allegedly sold and offered securities in this country without registration or the exemption.

The SEC says BES used its Department of Marketing, Communications, and Customer Research in Portugal to send out marketing materials to clients outside the country. Customers in the US ended up getting materials not specifically designed for US residents. BES also worked with a customer service call center to service its US customers. Via phone, these clients were offered securities and other financial products. The representatives were not registered as SEC broker-dealers and had no US securities licenses even though they serviced US clients. US Customers were also offered brokerage services through ESCLINC, which is a money transmitter service in Rhode Island, Connecticut, and New Jersey. ESCLINC acted as a contact point for the investment and banking activities of BES’s US clients.

Registration Provisions
The SEC has set registration provisions in place to help preserve the securities markets’ integrity as well as that of the financial institutions that serve as “gatekeepers,” said SEC New York regional office director George S. Canellos. He accused BES of “brazenly” disregarding these provisions.

State securities laws and US mandate that investment advisers, brokers, and their financial firms be registered or licensed. You should definitely check to make sure that whoever you are investing with or seeking investment advice from his properly registered. It is also important for you to know that doing business with a financial firm or a securities broker that is not registered can make it hard for you to recover your losses if that entity were to go out of business and even if the case is decided in your favor (whether in arbitration or through the courts.)

Banco Espirito Santo To Pay Nearly $7 Mln To Settle SEC Charges, The Wall Street Journal, October 24, 2011

Portugese Bank Agrees to $7M Settlement With SEC Over Alleged Registration Breaches, BNA Broker-Dealer Compliance Report


More Blog Posts:
President Obama Supports Senate Bill Raising SEC Registration Exemption to $50M, Institutional Investor Securities Blog, September 16, 2011

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

EagleEye Asset Management LLC Sued by SEC and CFTC for Alleged Forex Trading Scam, Stockbroker Fraud Blog, September 28, 2011

Continue reading "Banco Espirito Santo S.A. Settles for $7M SEC Charges Alleging Violations of Investment Adviser, Broker-Dealer, and Securities Transaction Registration Requirements " »

April 8, 2011

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

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" »

April 7, 2011

Wells Fargo Settles SEC Securities Fraud Allegations Over Sale of Complex Mortgage-Backed Securities by Wachovia for $11.2M

For a payment of $11.2 million, Wells Fargo & Co. will settle US Securities and Exchange Commission allegations that Wachovia Capital Markets LLC misled investors and improperly sold two collateralized debt obligations in 2007 and 2006. Wachovia was bought by Wells Fargo in 2008.

Wells Fargo Securities now manages Wachovia. By agreeing to settle, the investment bank is not admitting to or denying the findings.

According to the SEC, Wachovia Capital Markets LLC, now called Wells Fargo Securities, violated securities law anti-fraud provisions when it sold the complex mortgage-backed securities to investors despite the red flags indicating that there was trouble brewing with the US housing market.

The SEC says that Wachovia charged excessive markups in the sale of part of a $1.5 billion CDO called Grand Avenue II. Unable to sell the CDOs $5.5 million equity portion in October 2006, it kept the shares on the trading desk while dropping their value to 52.7 cents on the dollar. Wachovia later sold the shares for 90 and 95 cents on the dollar to an individual investor and the Zuni Indian tribe. Both did not know that they had purchased the shares at a price that was 70% above their accounting value. The transaction went into default in 2008.

The SEC claims that in 2007, Wachovia Capital Markets misrepresented to investors in Longshore 3, a $1.3 billion CDO, that assets had been acquired from Wachovia affiliates on an “arms’-length basis” when actually, 40 residential mortgage-backed securities were transferred at $4.6 million over market prices. The SEC contends that Wachovia was trying to avoid sustaining losses by transferring the assets at “stale” prices.

Related Web Resources:
Wells to pay $11.2 M in case, Seeking Alpha, April 6, 2011

Wells Fargo-Wachovia settles CDO claim with SEC for $11 million, Housing Wire, April 5, 2011

CDO News, New York Times

Mortgage-Backed Securities, SEC.gov


More Blog Posts:
Goldman Sachs Sued by ACA Financial Guaranty Over Failed Abacus Investment for $120M, Institutional Investor Securities Blog, January 10, 2011

Houston Man Indicted in Alleged $17M Texas Securities Fraud, Stockbroker Fraud Blog, December 23, 2010

Goldman Sachs COO Says Investment Firm Shorted 1% of CDOs Mortgage Bonds But Didn’t Bet Against Clients, Stockbroker Fraud Blog, July 14, 2010

Continue reading "Wells Fargo Settles SEC Securities Fraud Allegations Over Sale of Complex Mortgage-Backed Securities by Wachovia for $11.2M" »

January 29, 2011

SEC Adopts New Rules Regarding Shareholder Say-On-Pay

The Us Securities and Exchange Commission has adopted a “say-on-pay” rules that will allow the shareholders of publicly listed companies to weigh in on executive compensation via advisory votes. The new rules, which implements a Dodd-Frank Wall Street Reform and Consumer Protection Act, gives shareholders more input regarding executive compensation. This should hopefully help curb the practice of paying financial firm executives lavish compensation packages. The SEC approved the vote by 3-2 on Tuesday.

Shareholders would get a vote on "golden parachute” pay packages related to an acquisition or merger and companies would have to offer up more disclosures. Although the vote on say-on-pay is non-binding, companies will likely want to avoid being associated with a “no” vote. Some companies, including Apple Inc. and Microsoft Corp, have already adopted say-on-pay proposals on their own.

Also that day, the SEC proposed new reporting requirements for private fund advisers, with advisers to private funds valued at more than $1 billion upheld to more frequent and rigorous reporting. Reporting requirements would vary depending on the type of fund. Meantime, advisers to funds valued at under $1 billion would only have to report once a year on leverage, credit providers, fund strategy, and credit risk related to trading partners.

In addition, advisers of large hedge funds would also be required to disclose more information than private equity fund managers because hedge funds are considered more high risk and use leverage more often than private equity funds. Per SEC Chairman Mary Schapiro, the toughest reporting requirements under the rule would affect approximately 200 large hedge fund advisers in the US who represent over 80% of assets under management, as well as some 250 large private equity fund advisers.

The rule requires that the Financial Stability Oversight Council be given better information about hedge funds, liquidity funds, and private equity funds. This is for making sure that trading activities do not endanger the wider marketplace.

The SEC is also proposing to make it tougher for individuals to qualify as “high net-worth” when it comes to certain high risk investments.


Related Web Resources:
SEC adopts shareholder say-on-pay rules

SEC, in Split Vote, Adopts 'Say on Pay' Rule, Wall Street Journal, January 25, 2011

Say-on-pay rule proposal, SEC, January 25, 2011

Financial Stability Oversight Council, US Department of the Treasury

Continue reading "SEC Adopts New Rules Regarding Shareholder Say-On-Pay" »

January 27, 2011

SEC Proposes New Rule to Verify Swap Transactions

Under Rule 15Fi-1, the Securities and Exchange Commission’s proposed rule under the 1934 Securities Exchange Act, certain security-based swap participants and security-based swap dealers would provide counterparties with an electronic “trade acknowledgement” to acknowledge and verify specific security-based swap transactions. The SEC’s proposal comes under the Dodd-Frank Wall Street Reform and Consumer Protection Act’s mandate that the commission set up standards for the documentation and confirmation of SBS transactions.

Per the proposal, an SBC entity would have to fulfill the following requirements:
• Depending on how the transaction is executed, give trade acknowledgement within 15 minutes, 30 minutes, or 24 hours of execution.

• Electronic processing of security-based transactions for SBS entities that have the capability.

• Written policies and procedures designed to get verification of the terms delineated in the trade acknowledgement.

The proposed rule would specify which SBC entity has to provide trade acknowledgement, let an SBS entity fulfill the requirements of the rule through the processing of the transaction through a registered clearing house, identify which details must be contained in the trade acknowledgement, and for SBS Entities that are also brokers, give limited exemption from the requirements of Rule 10b-10 under the Exchange Act.

Other recent SBS-related rules that the SEC has proposed under the Dodd-Frank Act deal with the mandatory clearing of security-based swap, the defining of security-based swap terms, security-based swap reporting and repositories, security-based swap fraud, and security-based swap conflicts.

Related Web Resources:
SEC Proposes Rule for the Timely Acknowledgment and Verification of Security-Based Swap Transactions, SEC.gov, January 14, 2011

Proposed Rule, SEC (PDF)

Continue reading "SEC Proposes New Rule to Verify Swap Transactions " »

January 13, 2011

SEC Extends Temporary Rule Allowing Principal Trades by Investment Advisers Registered as Broker-Dealers

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" »

November 21, 2010

SEC Adopts Direct Access Rule Prohibiting "Naked" Access to ATSs or Exchanges

The Securities and Commission has adopted a rule that prohibits brokers from having “naked” access to alternative trading systems (ATS) or exchanges while requiring brokers with market access to put into place supervisory procedures and risk management controls to prevent market errors and other problems. Under the 1934 Securities Exchange Act's new Rule 15c3-5, both broker-dealers that belong to an ATS or an exchange and ATS broker-dealer operators that allow direct trading by persons who aren’t dealers or brokers must put into place certain supervisory procedures and controls to effectively get rid of “naked” access arrangements (also known as “unfiltered” access arrangement) that have allowed customers to bypass broker-dealers and their risk management controls completely while giving them direct electronic access to an ATS or an exchange.

Also per the new rule, new risk management controls must be put into place to stop orders that exceed capital thresholds or pre-set credit, do not comply with regulatory requirements, or appear erroneous in another way. Brokers-dealers also must implement certain controls before the orders are sent to ATSs or exchanges, set up, document, and maintain procedures to regularly evaluate the risk management controls, and tackle any problems as soon as possible.

The SEC believes that to put into place these new systems will initially cost broker-dealers some $100 million. Maintenance of the systems is expected to cost about $100 million a year.

Related Web Resources:
SEC Adopts New Rule Preventing Unfiltered Market Access, SEC.gov, November 3, 2010

SEC rule to clamp down on ‘naked access,' Financial Times, November 4, 2010

Continue reading "SEC Adopts Direct Access Rule Prohibiting "Naked" Access to ATSs or Exchanges" »

November 19, 2010

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

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 " »

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