Securities Law and Regulations

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.

Democrats Want to Volcker Rule to Be Clear About Banks Being Allowed to Invest in Venture Capital Funds

Published on: February 28, 2012 | by Shepherd Smith Edwards & Kantas, LLP

With regulators tasked with finalizing the Volcker rule, Democratic lawmakers want them to make sure that the rule makes clear that banks are allowed to invest in venture capital funds. The proposed rule is geared toward lowering financial system risk by not letting banks to take part in proprietary trading, while limiting how much they can invest in private equity and hedge funds.

The lawmakers, 26 of whom have written to the federal agencies working on the rule, noted that venture capital firms are not as high risk as private equity and hedge funds. The Volcker rule would be an implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s Section 619. Once finalized, it will go into effect on July 21.

Meantime, European Union Council of Ministers President Margrethe Vestager wants to make sure that the Volcker rule treats non-U.S. sovereign debt and US government securities the same. Vestager wrote to Federal Reserve Chairman Ben Bernanke making her case that the federal agencies need to make sure the extraterritorial application of the Volcker rule doesn’t happen. Vestager is concerned that otherwise the competition for non-US banks would be impeded.

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

Published on: November 28, 2011 | by Shepherd Smith Edwards & Kantas, LLP

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.

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

Published on: November 5, 2011 | by Shepherd Smith Edwards & Kantas, LLP

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.)

More Blog Posts:

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

President Obama Supports Senate Bill Raising SEC Registration Exemption to $50M

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

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

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

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

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

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

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

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

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

American Jobs Act, White House, September 8, 2011

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

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

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

Published on: April 8, 2011 | by Shepherd Smith Edwards & Kantas, LLP

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

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

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

Published on: April 7, 2011 | by Shepherd Smith Edwards & Kantas, LLP

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 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:

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

SEC Adopts New Rules Regarding Shareholder Say-On-Pay

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

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, 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

SEC Proposes New Rule to Verify Swap Transactions

Published on: January 27, 2011 | by Shepherd Smith Edwards & Kantas, LLP

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)