Articles Posted in Miscellaneous

Major Newspapers Say Judicial Arbitration by Delaware’s Court of Chancery is Unconstitutional

Published on: January 15, 2013 | by Shepherd Smith Edwards & Kantas, LLP

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.

IOSCO Complex Products Report Does Not Get SEC Commissioners’ Approval Votes

Published on: January 7, 2013 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has failed to approve the International Organization of Securities Commission’s final report on the suitability requirements for distributing complex financial products. Commissioners Troy Paredes and Daniel Gallagher say they disapprove of its release. They don’t think it accurately portrays relevant law and that the US regulatory regime should not conform to it.

IOSCO believes that the 2008 economic collapse brought up serious concerns about how the increasing complexity of certain financial products has made it harder for clients to see the risks involved.

The report lays out nine principals to make sure there is proper customer protection related to complex financial instruments. Among the principals: intermediaries must implement policies to note the difference between non-retail and retail clients as they relate to financial instruments and execute “reasonable steps” to handle conflicts of interest, while exposing the risks should the client’s interest potentially be compromised; firms have to set up specific internal policies that support suitability requirements; and that intermediaries that recommend certain complex instruments have to take reasonable steps to make sure that their counsel is grounded upon a reasonable assessment that the financial product’s risk-reward profile and structure is aligned with the customer’s knowledge, experience, investment goals, inclination toward risk, and capacity to handle loss.

Clearing House Association Wants Greater Protections for Clearing Members

Published on: December 31, 2012 | by Shepherd Smith Edwards & Kantas, LLP

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.

Clearing House Association

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SEC Inquiring About Wisconsin School Districts Failed $200 Million CDO Investments Made Through Stifel Nicolaus and Royal Bank of Canada Subsidiaries, Stockbroker Fraud Blog, June 11, 2010

Wisconsin School Districts Sue Royal Bank of Canada and Stifel Nicolaus and Co. in Lawsuit Over Credit Default Swaps, Stockbroker Fraud Blog, October 7, 2008

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

Published on: November 20, 2012 | by Shepherd Smith Edwards & Kantas, LLP

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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Burger King Structure Could Activate Certain 1934 Securities Exchange Act Prohibitions, Says SEC’s Special Counsel

Published on: September 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

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.

US Government Sells $18B of AIG Stock and Turns a $12.4B Profit

Published on: September 11, 2012 | by Shepherd Smith Edwards & Kantas, LLP

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

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

Published on: August 8, 2012 | by Shepherd Smith Edwards & Kantas, LLP

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)

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FINRA, SEC Need to Employ Better Oversight Over Investor Education Funds, Says District Court

Published on: July 30, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. District Court for the Southern District of New York says that the Securities and Exchange Commission is not a doing a good enough job in providing oversight of $55 million in investor education funds and the way that the money is being disbursed. The funds come from the $1.4 Global Research Analyst Settlement that was reached with top investment banks, including Citigroup (C), JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS), and others, in 2003, over securities research that had been allegedly flawed and biased. The case is SEC v. Bear Stearns & Co.

Now, Judge William H. Pauley III, who is tasked with supervising how the settlement is implemented, is contending that the SEC should have been raising red flags about the FINRA Investor Education Foundation’s “opaque” project spending and operational expenses. The court is asking the foundation and the SEC to turn in certain information, including detailed accounting of receipts and spending for 2011 and 2010, by the end of August. The foundation also has provided additional details about its operating costs.

The court has said that disbursing the funds has been a challenging process. After the Investor Education Entity, which was created to use the funds, failed to take off, in 2005 the court let the SEC move the $55 million to the foundation under the premise that the regulator would provide oversight while turning in quarterly reports.( As of December 31, 2011 the foundation had given out approximately $44.7 million of the funds through education and grant programs.)

However, in an opinion that issued in 2009, the court questioned why the foundation paid $800,000 in administrative expenses while giving just $6.5 million to grantees. And in this most recent decision, the court is once again asking why, considering the type of projects involved, the foundation seems to spend a “disproportionately high” amount. Pauley pointed to several examples, including a daylong seminar involving 130 attendees in West Virginia that cost $58,000 and a financial fraud conference last November that the foundation co-sponsored in DC that took place at a posh hotel.

The court also said that the quarterly reports that it has received are “bereft” of the details that they should provide, and it is wondering why the eight “primary” states that have been the target of the foundation’s educational activities don’t necessarily appear to be the ones with the “greatest investor education needs.”

FINRA Investor Education Foundation spokesperson George Smaragdis has said that the foundation will give over the information that the court is asking for but that it doesn’t agree with the majority of the court’s statements.

SEC v. Bear Stearns

FINRA Investor Education Foundation

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Stanford Ponzi Scam Investors File Class Action Lawsuit Suing The Securities and Exchange Commission, Stockbroker Fraud Blog, July 25, 2012 Continue Reading ›

No SIPA Coverage for Soft Dollar Credits, Says Bankruptcy Court

Published on: July 21, 2012 | by Shepherd Smith Edwards & Kantas, LLP

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.

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NYSE Proposal for Retail Order Execution Pilot Program Gets SEC Approval

Published on: July 12, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has approved the New York Stock Exchange LLC and NYSE Amex LLC proposal for a pilot program that lets them set up for one year a private trade execution venue for retail investors. The “retail liquidity program” will go up against internalizing brokerage firms for retail order flow while offering price improvements at mere fractions of a penny. (Currently retail brokers send most of their orders through broker dealers that internalize or execute them in over-the-counter markets instead of bilateral exchanges.)

According to NYSE Euronext (NYX), the program will be implemented on the NYSE MKT and NYSE on August 1 and is complimentary to the trade execution options that currently exist for retail investors. The program is for direct use by retail brokerages and market intermediaries that work with retail order flow providers.

In a release issued last week, NYSE Euronext executive vice president Joseph Mecane said that giving improved prices for retail orders in an exchange environment lets individual investors afford new economic incentives while creating greater liquidity, transparency, and competition through the US cash equities marketplace. The program will set up two new market participant classes at NYSE exchange: 1) retail member organizations that will turn in retail orders to the exchanges and 2) retail liquidity providers that will have to give price improvements as interest that is more competitively priced than the exchange’s best protected bid/offer as a tradeoff for specific economic benefits. A NYSE member can qualify as a liquidity provider by obtaining approval as a market maker or supplementary liquidity provider on the exchange, while demonstrating that it can meet retail liquidity provider requirements.