Articles Posted in Securities and Exchange Commission

Look Out for Rule Recommendations on Consolidated Audit Trail, Market-Wide Circuit Breaker Changes, and Limit Up-Limit Down Mechanisms

Published on: March 10, 2012 | by Shepherd Smith Edwards & Kantas, LLP

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.

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

Published on: March 7, 2012 | by Shepherd Smith Edwards & Kantas, LLP

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.

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

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

Published on: March 5, 2012 | by Shepherd Smith Edwards & Kantas, LLP

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.

SEC Chairwoman Defends ‘No Wrongdoing’ Settlements

Published on: February 27, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Securities and Exchange Commission Chairwoman Mary L. Schapiro said that the agency’s practice of reaching settlements with financial firms without them having to admit wrongdoing has “deterrent value” despite the fact that some of these firms have been charged more than once for violating the same securities laws. Schapiro noted that the commission ends up bringing a lot of the same kinds of securities cases so that people don’t forget their obligations or that they are being watched by an entity that will hold them responsible.

The SEC will often settle securities fraud cases with a financial firm my having the latter pay a fine and not denying (or admit) that any wrongdoing was done. Expensive court costs are avoided and a resolution is reached.

The SEC has said that financial firms won’t settle if they have to acknowledge wrongdoing because this could make them liable in civil cases filed against them over the same matters. Schapiro says the SEC only settles when the amount it is to receive by settling is about the same as it would likely get if the commission were to win the lawsuit in court.

SEC Gets Initial Victory in Lawsuit Against SIPC Over Payments Owed to Stanford Ponzi Scam Investors

Published on: February 10, 2012 | by Shepherd Smith Edwards & Kantas, LLP

U.S. District Court Judge Robert Wilkins says that the Securities and Exchange Commission doesn’t need to go through a full civil trial in order to make the Securities Investor Protection Corp. start liquidation proceedings to compensate the victims of Allen Stanford’s $7B Ponzi scam for their losses. This ruling is a partial victory for the SEC, which has been trying to get the brokerage industry-funded nonprofit to help the investors recoup their losses. The dispute between the two groups has centered around the interpretation of the SIPC’s mission and whether or not it supports the SEC’s efforts to protect investors.

SIPC had been pushing for a trial. However, Wilkins said that a trial doesn’t comport with the agency’s purpose, which is to give immediate, summary proceedings upon the failure of a securities firm. Wilkins is mandating a “summary proceeding” that would be fully briefed by the end of this month. However, in regards to the SEC claim that it should be able to determine when the SIPC has failed to fulfill its duties, Wilkins said that this was for the court to decide.

SIPC has a reserve fund that is there to compensate investors that have suffered losses because a brokerage firm has failed. Under SIPC protections, customers of a broker that has failed can receive up to $500,000 in compensation ($250,000 in cash). Although not intended as insurance against fraud, SPIC covers the financial firm’s clients but not those that worked with an affiliate, such as an offshore bank. For example, Stanford International Bank is an Antiguan bank, which means that it should fall outside SIPC-provided protections. However, Stanford Group Company, which promoted the CDs to the investors, is a member of SIPC. (Also, SEC has maintained that Stanford stole from the brokerage firms’ clients by selling the CDs, which had no value, and that this was not unlike the Bernard L. Madoff Ponzi scam that credited $64B in fake securities to client accounts.)

Meantime, Stanford has been charged by both federal prosecutors and the Commission with bilking investors when he and his team persuaded them to buy $7B in bogus CDs from Stanford International Bank. He then allegedly took billions of those dollars and invested the cash in his businesses and to support his lavish lifestyle. Stanford’s criminal trial is currently underway.

Wilkins noted that even if the SEC’s lawsuit against SIPC succeeds, this wouldn’t mean that Stanford’s victims would get their money right away. It would still be up to a Texas court to decide on claims filed by former Stanford clients.

Judge Hands SEC Initial Victory In Suit Against Insurance Fund, The Wall Street Journal, February 9, 2012

Securities Investor Protection Corporation
Compensating Stanford’s Investors, NY Times, June 20, 2011

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

SEC Sues SIPC Over R. Allen Stanford Ponzi Payouts, Stockbroker Fraud Blog, December 20, 2011

CFTC and SEC May Need to Work Out Key Differences Related to Over-the-Counter Derivatives Rulemaking

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

In their efforts to move forward with rulemaking for over-the-counter derivatives, some are saying that the Commodities Futures Trading Commission and the Securities and Exchange Commission may find themselves grappling with differences that could pose a challenge for industry participants. For example, differences between proposed and final regulations could set up compliance issues. Also, the regulators appear to be working at separate paces to put into effect the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Title VII, which issued a directive to both regulators ordering them to establish a regulatory regime to oversee swaps.

According to reform legislation, security-based swaps are swaps based on one loan or security or on a securities index that is narrowly based. In general, the CFTC’s jurisdiction includes all swaps except for security-based swaps, which the SEC oversees.

With the other types of swaps under its charge, the CFTC has to write a lot more swap regulations compared to the SEC. So far, under Title VII the CFTC has finalized 25 swap rules. The SEC has adopted three. (Just last January, the CFTC adopted rules addressing cleared swaps customer collateral segregation, registering significant swap participants and swap dealers, and business conduct for swap dealers interacting with counterparties.) However, together the regulators have jointly put forward proposals for definitions for products and key entities under Title VII. These definitions, however, have yet to be made final and some have expressed concern that the regulators are forging forward with adopting final rules without adopting the key definitions that certain requirements will be relying upon.

Despite Tougher Investigations, SEC is Still Letting Wall Street Firms Avoid Punishments for Financial Fraud

Published on: January 29, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to The New York Times, by allowing that there be exemptions to certain regulations and laws, the Securities and Exchange Commission is letting Goldman Sachs, JPMorganChase, Bank of America, and other large financial firms avoid the liability that is supposed to come with losing securities fraud lawsuits while still making it possible for them to avail of the certain advantages that make it easier for them to raise investor money.

The newspaper analyzed investigations conducted by the SEC in the last decade and discovered almost 350 instances involving the federal agency giving Wall Street firms and other financial institutions a break. In one example cited by The New York Times, although JPMorganChase has settled six securities fraud cases in the past 13 years, the financial firm has also been granted at least 22 waivers. (Waivers may grant permission to underwrite certain bond and stock sales and/or manage mutual fund portfolios.) Another example involves Merrill Lynch and Bank of America (The two financial firms merged in 2009) settling 15 securities fraud cases while being granted at least 39 waivers.

Former regulators and securities experts say that granting the Wall Street firms the waivers gave them certain powerful advantages. According to former SEC chairman David S. Ruder, without the waivers a financial firm that agrees to settle securities fraud charges could be faced with “vast repercussions” that could prevent them from staying in operation.

SEC officials say the waivers are to allow for the stock and bond markets to stay accessible to companies that have the actual need to raise capital, which they believe is just as important as protecting investors. While the SEC has taken away certain privileges in securities fraud cases over misleading or false statements that were made about a financial firm’s own business, it doesn’t do the same when a Wall Street firm faces civil charges for allegedly lying about a specific security that it created and it is selling.

Many believe that the government is continuing to be “too soft” on Wall Street—even as the SEC has toughened up its investigations against financial firms accused of alleged fraud. Recently, there have been federal judges that have spoken out against the SEC’s habit of letting financial firm’s settle by letting them promise not to violate the law again. More than half the waivers issued have gone to Wall Street firms that had settled fraud charges at least once before.

The SEC has complained that settling is more affordable for it than going to court. However, even as the Commission has turned to Congress for tougher laws against fraud as well as increased penalties, why have nearly half of the waivers it has granted gone to Wall Street firms that have settled fraud charges in the past with the promise to never violate those laws again? That’s what many want to know.

S.E.C. Is Avoiding Tough Sanctions for Large Banks, The New York Times, February 3, 2011

SEC Seeks to Impose Tougher Penalties for Securities Fraud, Institutional Investor Securities Fraud, December 29, 2011

SEC Issues Emergency Order to Stop $26M “Green” Ponzi Scam, Institutional Investor Securities Fraud, October 13, 2011

Securities and Exchange Commission Charges Investment Adviser with Committing Securities Fraud on LinkedIn, Stockbroker Fraud Blog, January 6, 2012

UBS Global Asset Management to Pay $300,000 to Settle SEC Charges Related to Alleged Mutual Fund Price Violations

Published on: January 19, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission says that UBS Global Asset Management will pay $300,000 to resolve charges that it did not give securities in three mutual fund portfolios the proper price. This alleged failure caused investors to receive a misstatement regarding the funds’ net asset values. By agreeing to settle the charges, UBSGAM is not admitting to or denying the findings.

The SEC start investigating UBSGAM after SEC examiners conducted a routine check of the financial firm. According to its order, in 2008 UBSGAM bought about 54-complex fixed-income securities of $22 million, which was an aggregate purchase price. The majority of the securities were part of subordinated tranches of nonagency MBS with underlying collateral, which were were mortgages that weren’t in compliance with requirements to be part of MBS-guaranteed or to have been issued by Fannie Mae, Freddie Mac, or Ginnie Mae. CDO’s and asset-backed securities were among these securities.

After the securities were bought, 48 of them were priced substantially over the transaction price. This is because the pricing sources that provided the valuations to UBSGAM didn’t appear to factor in the price that the funds paid for the securities. Some quotations were not priced on a daily basis, while others were formulated using ending price from the last month. It wasn’t until over 2 weeks after UBSGAM started getting price-tolerant reports pointing out such discrepancies that it’s Global Valuation Committee finally met.

By using the prices that the 3rd party pricing service or a broker-dealer provided, the SEC contends that the mutual funds did not abide by their own valuation procedures, which mandate that the securities use the transaction price value until the financial firm makes a fair value determination or gets a response to a price challenge based on the discrepancy noted in the price tolerance report. The transaction price can be used for 5 business days, when a decision would have to be made on the fair value. The SEC concluded that by not making sure that these procedures were being followed, the financial firm caused the mutual funds to violate the Investment Company Act’s Rule 38a-1.

The SEC also determined that due to the securities not being timely or properly priced at fair value for a number of days in 2008, the funds were misstated (up to 10 cents in some cases) and they were then purchased, sold, or redeemed based on NAVs that were not accurate and higher than they should have been.

Read the SEC’s Order Against UBS (PDF)

More Blog Posts:
SIFMA Wants FINRA to Take Tougher Actions Against Brokers that Don’t Repay Promissory Notes, Institutional Investor Securities Blog, January 17, 2012

Raymond James Financial to Buy Morgan Keegan from Regions Financial for $930 Million, Institutional Investor Securities Blog, January 14, 2012

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

SEC Seeks to Impose Tougher Penalties for Securities Fraud

Published on: December 29, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has issued a proposal seeking to impose larger penalties on wrongdoers. The proposal comes in the wake of criticism that the agency isn’t doing enough to punish the persons and entities that played a role in the recent credit crisis and calls for:

• Capping fines issued against individuals at $1 million/violation rather than just $150,000.
• Raising penalties against firms from $725,000/action to $10 million.
• Multiplying by three how much the SEC can seek using an alternative formula that calculates the violator’s gains.
• Permission to determine penalties according to how much investors lost because of an alleged misconduct.
• Permission to triple the penalty if the defendant is a repeat offender and has committed securities fraud within the last five years.

The proposal was included in a letter sent to Senator Jack Reed by SEC Chairman Mary Schapiro last month. Reed heads up a subcommittee that oversees the Commission. In her letter, Schapiro said she believed the proposed changes would “substantially” improve the agency’s enforcement program.

The SEC has come under fire for failing to detect a number of major scandals before they blew up, including the Madoff Ponzi scam and the Enron fraud. Recently, US District Judge Jed Rakoff, who rejected the SEC’s proposed $285 million securities settlement with Citigroup, questioned a system that allows wrongdoers to pay a fine, as well as other penalties, without having to admit or deny wrongdoing. Now, the Commission appears to be working hard to rehabilitate its image so that it can be thought of as an effective and credible regulator of the securities industry.

According to Investment News, another way that the SEC may be attempting to re-establish itself is by targeting investment advisers. The Commission has reported filing a record 140 actions against these financial professionals in fiscal 2011, which is a 30% increase from 2010. One reason for this may be that a lot of the actions deal with inadequate paperwork that can easily be identified, which is causing the agency to quickly score a lot of “successes.” This approach to enforcement is likely allowing the SEC to discover small fraud cases before they turn into huge debacles. (If only SEC staffers had requested the appropriate documents related to trades made by Bernard Madoff’s team years ago, his Ponzi scam may have been discovered before the losses sustained by investors ended up hitting $65 million.

The agency’s revitalized efforts are likely prompting some financial firms to work harder on compliance. Investors can only benefit from this.

SEC’s Schapiro Asks Congress to Raise Limits on Securities Fines, Bloomberg/Businessweek, November 29, 2011

More Blog Posts:
SEC Files Charges in $27M Washington DC Ponzi Scam, Stockbroker Fraud Blog, November 21, 2011

Former Fannie Mae and Freddie Mac Executives Face SEC Securities Fraud Charges, Institutional Investor Securities Blog, December 16, 2011

Banco Espirito Santo S.A. Settles for $7M SEC Charges Alleging Violations of Investment Adviser, Broker-Dealer, and Securities Transaction Registration Requirements, Institutional Investor Securities Blog, November 5, 2011

Former Fannie Mae and Freddie Mac Executives Face SEC Securities Fraud Charges

Published on: December 16, 2011 | by Shepherd Smith Edwards & Kantas, LLP

The Securities and Exchange Commission has charged six ex-executives of the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) with securities fraud. The Commission claims that they not only knew that misleading statements were being made claiming that both companies had minimal holdings of higher-risk mortgage loans but also they approved these messages.

The six people charged are former Freddie Mac CEO and Chairman of the Board Richard F. Syron, ex-Chief Business Officer and Executive Vice President Patricia L. Cook, and former ex-Single Family Guarantee Executive Vice President Donald J. Bisenius. The three ex-Fannie Mae executives that the SEC has charged are former CEO Daniel H Mudd, ex-Fannie Mae’s Single Family Mortgage Executive Vice President Thomas A. Lund, and ex- Chief Risk Officer Enrico Dallavecchia.

In separate securities fraud lawsuits, the SEC accuses the ex-executives of causing Freddie Mac and Fannie Mae to issue materially misleading statements about their subprime mortgage loans in public statements, SEC filings, and media interviews and investor calls. SEC enforcement director Robert Khuzami says that the former executives “substantially” downplayed what their actual subprime exposure “really was.”

The SEC contends that in 2009, Fannie told investors that its books had about $4.8 billion of subprime loans, which was about .2% of its portfolio, when, in fact, the mortgage company had about $43.5 billion of these products, which is about 11% of its holdings. Meantime, in 2006 Freddie allegedly told investors that its subprime loans was somewhere between $2 to 6 billion when, according to the SEC, its holdings were nearer to $141 billion (10% of its portfolio). By 2008, Freddie had $244 billion in subprime loans, which was 14% of its portfolio.

Yet despite these facts, the ex-executives allegedly continued to maintain otherwise. For example, the SEC says that in 2007, Freddie CEO Syron said the mortgage firm had virtually “no subprime exposure.”

It was in 2008 that the government had to bail out both Fannie and Freddie. It continues to control both companies. The rescue has already cost taxpayers approximately $150 billion, and the Federal Housing Finance Administration, which acts as its governmental regulator, says that this figure could rise up to $259 billion.

Today, Freddie Mac and Fannie Mae both entered into agreements with the government that admitted their responsibility for their behavior without denying or admitting to the charges. They also consented to work with the SEC in their cases against the ex-executives.

The Commission is seeking disgorgement of ill-gotten gains plus interest, financial penalties, officer and director bars, and permanent and injunctive relief.

SEC Charges Former Fannie Mae and Freddie Mac Executives with Securities Fraud, SEC, December 16, 2011

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

Morgan Keegan Settles Subprime Mortgage-Backed Securities Charges for $200M, Stockbroker Fraud Blog, June 29, 2011

Freddie Mac and Fannie May Drop After They Delist Their Shares from New York Stock Exchange, Stockbroker Fraud Blog, June 25, 2010