Investor Lawyers Blog

The 10 Leading SEC Enforcement Developments Of 2006 (Part I)

Published on: April 20, 2007 | by Shepherd Smith Edwards & Kantas, LLP

1. Stop Options Backdating

More than 100 companies were investigated by the Department of Justice and the SEC because of an article published in the Wall Street Journal in March 2006. The newspapers had asked a finance professor to give it a list of companies that made stock option grants that led to large stock market gains. The Journal studied several of the companies on the list and found that several of the option grant patterns found could not have happened without backdating. The article resulted in one of the largest securities investigations ever. The DOJ and the SEC only filed a few backdating cases, including cases against Comverse Technology, Inc. and Brocade Communication Systems, Inc.

2. Corporate Civil Penalties Guidance

Registered Limited Liability Partnerships Interests Investment Contracts Are Within Federal Securities Laws’ Meaning, Says U.S. Court of Appeals for the 11th Circuit

Published on: April 19, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Interests involving registered limited liability partnerships (RLLPs) are contracts within the federal securities laws’ meaning, according to the U.S. Court of Appeals for the 11th Circuit. The court reversed a ruling made against the Securities and Exchange Commission (SEC) for its enforcement action against two promoters and their company, Merchant Capital LLC.

According to the appeals court, the SEC filed an enforcement action against Merchant Capital LLC, Steven Wyer, and Kurt Beasley. The commission had alleged violations of the federal securities laws’ registration and antifraud provisions. Beasley and Wyre had established Merchant to take part in buying, reselling, and collecting charged-off consumer debt from financial institutions.

Merchant started raising money in 2001 by soliciting individuals to become partners in Colorado RLLPs that were eventually sold as freestanding entities. Although Merchant had organized 28 RLLPs with 485 partners, it did not reveal that the different partnerships existed. Its RLLPs ended up with more than $26 million in total capitalization.

SEC Commissioner Says Simplified Disclosure Document Will Help Retirees Make Investment Decisions

Published on: April 18, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Roel Campos, the Securities and Exchange Commissioner says that he is working on a campaign to create a simplified, prospectus-like disclosure document that would give investors clear, concise information about the performance and cost of their retirement plan assets.

Campos said it was a “given” that retirees would be on their own when managing their retirement funds because Corporate America was continuing to move away from defined benefit funds. Because of this, Campos said that retirees needed to obtain performance information so they could effectively manage their accounts. In order to do a good job managing their own investment funds, however, retirees need information about costs they are paying based on their investment decisions.

The retirement plans are subject to ERISA, and because of this, the SEC will be working with the Labor Department, which is in charge of administering the 1974 Employee Retirement Income Security Act, to implement the commission’s initiative.

NASD Hearing Panel Sanctions Former Knight Securities Executives for Supervisory Failures

Published on: April 13, 2007 | by Shepherd Smith Edwards & Kantas, LLP

An NASD Hearing Panel issued $100,000 in fines against Kenneth Pasternak, former CEO of Knight Securities, L.P. (now known as Knight Equity Markets, L.P.), and John Leighton, former head of the firm’s Institutional Sales Desk, for supervisory violations in connection with fraudulent sales to institutional customers in 1999 and 2000.

In addition, Pasternak was suspended in all supervisory capacities for two years, while Leighton was barred in all supervisory capacities.

In March 2005, NASD’s Department of Market Regulation charged Pasternak and Leighton with failure to supervise the firm’s leading institutional sales trader, Joseph Leighton, who is John Leighton’s brother. The NASD complaint also charged Pasternak with failing to establish and enforce a supervisory system designed to ensure compliance with federal securities laws and NASD rules.

Enron Shareholders Want The U.S. Supreme Court to Review 5th Circuit Certification Decision

Published on: April 12, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Enron Corp. shareholders that are suing three big investment banks for their alleged roles in helping Enron hide its failing financial position have petitioned the U.S. Supreme Court to look at a ruling made by the U.S. Court of Appeals for the Fifth Circuit that reverses the certification of a single plaintiff case. The court had ruled on March 19 that while Enron had a duty to its shareholders, banks do not.

The appeals court concluded that the plaintiffs did not have a right to a presumption of reliance on the banks’ failure to reveal their alleged participation in the Enron controversy. It also ruled that the plaintiffs do not have a right to the presumption of reliance afforded by the “fraud-on-the-market” concept.

In their certiorari petition, filed by the University of California Regents on behalf of Enron shareholders, the plaintiffs say that the Supreme Court needs to review the case to resolve a “clear conflict” in the circuits and lower courts about the meaning of so-called “scheme liability.” They also said that the appeals court decision was not correct.

NASD Warns Investors – Not Brokers – of the Risks Associated with Using Margin to Purchase Securities

Published on: April 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

Washington, DC – The NASD today issued an updated Investor Alert warning investors – not brokers – about the risks associated with trading on margin. Since the release of a previous Alert on this topic in 2003, the amount of debt taken on by investors to buy securities has reached a record high of $321.2 billion in February 2007.

“We are concerned too many investors are unaware they could suffer substantial financial losses by using debt to purchase securities,” said Mary L. Schapiro NASD Chairman and CEO. “By updating our Alert on this topic, we hope to remind investors not to underestimate the risks involved.”

The Alert, Investing with Borrowed Funds: No “Margin” for Error, explains that investors who cannot satisfy margin calls can have large portions of their accounts liquidated under the market conditions at the time, favorable or unfavorable. That liquidation can result in substantial losses. Some of the risks associated with opening a margin account explained in the Alert are:

JP Morgan Chase and Co. Not Liable For Securities Fraud Related To Enron Collapse, Says New York District Court

Published on: April 11, 2007 | by Shepherd Smith Edwards & Kantas, LLP

For a second time, the U.S. District Court for the Southern District of New York told J.P. Morgan Chase &Co. shareholders that they cannot hold the investment bank responsible for securities fraud related to its alleged complicity in helping Enron cover up its true financial situation.

Judge Sidney H. Stein said the second amended complaint had the same flaws as the first complaint: The Enron shareholders, not the investment bank’s shareholders are the victims of Enron’s collapse and therefore the ones defrauded-if the allegations were borne out.

According to the plaintiffs, they became investors in JPM Chase because it was known for its financial discipline and integrity. The bank, however, was unlawfully helping and abetting Enron’s wrongful conduct. Its reputation suffered after its role in the Enron scandal was revealed.

Citigroup May Reduce Compliance in Cost Cutting Move.

Published on: April 10, 2007 | by Shepherd Smith Edwards & Kantas, LLP

At a time when The New York Stock Exchange is paying-off National Association of Securities Dealers members to take over its compliance responsibilities, private firms are seeking to reduce oversight evern further. For decades the securities industry has insisted its self-regulatory structure works best to protect the public. Yet, after massive fraud was discovered on Wall Street and billions lost by investors, instead of tighter reins on the industry oversight is shrinking.

The latest to reduce compliance may be Citigroup, now the largest financial firm on Wall Street, culminating with the amalgamation of Smith Barney and a number of other fiancial firms. According to the New Yok Times, after “a series of messy scandals”, including questionable research and alleged participation in such failures as Enron and WorldCom, Citigroup increased its compliance efforts. Yet, in an article this week, the Times states that that firm is now poised to reduce oversight of its operations.

Under pressure from investors, Citigroup CEP Charles O Prince, III will soon to release plans for a cost-cutting overhaul. Prince’s plan is reportedly to eliminate or reassign more than 26,000 jobs, or about 8 percent of the work force, as part of a broad effort to streamline the bank’s unwieldy global operations and get its costs under control. Citigroup’s consumer and investment banking businesses are expected to face severe cuts, but legal and compliance departments are likely to also take a hit, according to those who have been briefed on the plans.

Commodities Regulators Accuse Firms of Misrepresenting Public

Published on: April 9, 2007 | by Shepherd Smith Edwards & Kantas, LLP

The Commodity Futures Trading Commission filed enforcement actions in the U.S. District Court for the Southern District of New York March 22 against nine firms with names identical to or extremely close to those of legitimate firms and exchanges. The actions accuse the firms of fraud while soliciting customers to purchase commodity futures and options contracts (CFTC v. American Futures and Options Exchange, S.D.N.Y., No. 07-CV-2377, 3/22/07; AFTC v. International Energy Exchange, S.D.N.Y., No. 07-CV-2378, 3/22/07; CFTC v. New York Petroleum Option Exchange, S.D.N.Y., No. 07-CV-2379, 3/22/07; CFTC v. New York Options Exchange, S.D.N.Y., No. 07-CV-2376, 3/22/07).

The CFTC also stated that the defendants used misrepresentations on their Web sites to defraud the public out of millions of dollars. Customers were solicited to trade futures and options on energy and currency. In reality, however, the defendants actually invented phony exchanges and brokers to deceive clients.

Those charged–some of which share the names of legitimate firms–are New York Options Exchange (NYOEX); Tahoe Futures; International Energy Exchange (INTENX); Vitol Capital Management; New York Petroleum Option Exchange (NYPOE); HPR Commodities; American Futures and Options Exchange; Metro Financials; and American Futures and Options Trading Commission (AFOTC).

NASD Form U-5 Notice of Termination Statements Are ‘Absolutely Privileged,’ Says A Divided New York Court of Appeals

Published on: April 9, 2007 | by Shepherd Smith Edwards & Kantas, LLP

A Federal Appeals Court in New York reversed prior decisions and decided that statements in a NASD Notice of Termination Form U-5 are subject to absolute privilege from defamation actions. The Securities Industry and Financial Markets Association claim the ruling is a victory for investors and that firms will now be encouraged, rather than discouraged, from offering investors full disclosure regarding a broker that has participated in any wrongful actions. Yet, observers believe it is the brokerage industry itself that won a victory.

In Judge Victoria A. Graffeo’s opinion, the court discussed that Chaskie Rosenberg was hired as a financial services representative in 1997 for defendant Metropolitan Life Insurance Company’s All-Boro agency. Based in Brooklyn, the agency served members of the local Hasidic Jewish community. Most of its employees were also Hasidic Jews.

MetLife performed an agency audit in 1999 because the agency accepted third-party checks to pay for life insurance policy premiums. Following another audit, MetLife shut the agency down and moved employees to a different office. Rosenberg was let go after a third audit by MetLife. ‘