Investor Lawyers Blog

SEC To Enhance Company Filings Scrutiny with Broader Corporate Review Process

Published on: January 2, 2013 | by Shepherd Smith Edwards & Kantas, LLP

BNA reports that sources say that the Securities and Exchange Commission will likely widen its corporate filing review process to improve how it scrutinizes financial statements that are publicly filed by registered companies, as well as other documents. The program, referred to as “continuous review,” was set up a few years ago to focus on financial institutions that received Troubled Asset Relief Program support from the government. This focus is likely to grow to include large financial service firms.

The SEC started its process of continuous reviews on a number of companies in the Corporation Finance Division’s Assistant Director Office No. 12 (AD 12). Nine banks that had obtained over $120B in taxpayer funds through the Capital Purchase Program, which is a TARP program, were analyzed. Unlike the regular review process, which examines a company’s Form 10K filings every three years, this program looks at all documents and filings on a continuous basis.

Sarbanes-Oxley Act

Ex-Hedge Fund Portfolio Managers Convicted in $72M Insider Trading Scams

Published on: January 1, 2013 | by Shepherd Smith Edwards & Kantas, LLP

A jury has convicted Anthony Chiasson and Todd Newman, two ex-hedge fund portfolio managers, of securities fraud and conspiracy charges related to the parts they played in insider trading scams that caused them to illegally profit about $72M. Newman was previously with Diamondback Capital Management, LLC while Chiasson was with Level Global Investors, LP.

According to United States Attorney for the Southern District of New York Preet Bharara, the defendants made trades using insider information about NVIDIA Corporation (NVDA) and Dell Inc. (DELL). Research analysts at different investment firms gave them the material, nonpublic information.

Chiasson was found guilty of five counts of securities fraud. On just the two technology companies’ stocks, he had made Level Global $68.5 million. Newman, who made his fund approximately $3.8 million, was convicted of four securities fraud counts. Both men could spend years behind bars.

The massive insider trading operation ran from 2007 to 2009. Level Global, a $4 billion hedge fund, underwent liquidation 2011 following a 2010 FBI raid. Diamondback told its clients in December that it too was shutting down shop following similar raids.

Meantime, the research analysts accused of giving Chiasson and Newman the information have also pled guilty to related criminal charges: Jon Horvath, previously with Sigma Capital Management; Jesse Tortora, also previously with Diamondback and who had worked under Newman; Danny Kuo, formerly with Trust Company; Sandeep Goyal, formerly with Neuberger Berman; Spyridon Adondakis, who had worked at under Chiasson at Level Global. Tortora, Goyal and Adondakis were cooperating witnesses that testified in this latest criminal trial.

Operation Perfect Hedge
The investigation and prosecution of these men are part of Operation Perfect Hedge, which is the name given to the FBI’s systematic efforts to target insider trading involving hedge funds. Since October 2009, Bharara’s office has charged 79 people with insider trading-71 of them have either been convicted or they entered guilty pleas.

More Blog Posts:
$78M Insider Trading Scam: “Operation Perfect Hedge” Leads to Criminal Charges for Seven Financial Industry Professionals, Stockbroker Fraud Blog, January 18, 2012
Texas Securities Fraud: SEC Charges Life Partners Holdings Inc. in Life Settlement Scam, Stockbroker Fraud Blog, January 4, 2012 Continue Reading ›

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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Stockbroker Fraud Headlines: Wells Fargo Banker Charged Over $11M Insider Trading, Morgan Stanley to Resolve Facebook IPO Action for $5M, & SEC Accuses Canadian Broker of Inadequate Day Trader Supervision

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

Wells Fargo Banker and 8 Others Accused of Alleged $8M Insider Trading Scam

The U.S. Attorney for the Western District of North Carolina is charging Wells Fargo (WFC) investment banker John Femenia and eight alleged co-conspirators with involvement in an alleged $11 million insider trading scam. Femenia is accused of stealing confidential data from his employer and its clients about acquisitions and mergers that were pending. He then either directly or via others tipped his co-conspirators, receiving kickbacks in return.

According to the N.C. government, the insider trading scam resulted in $11M in profits. While six of the co-conspirators opted to plead guilty to conspiracy to commit insider trading, Femenia and the other two have been indicted on multiple charges of conspiracy and insider trading. The same defendants, and another person, are also named in the SEC lawsuit over the scheme.

SEC Intends to Examine 25% of Investment Advisers That Had To Register, Per Dodd-Frank Act, by End of 2014

Published on: December 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to SEC Office of Compliance Inspections and Examinations Director Carlo di Florio, by December 31, 2014, the Commission plans to have examined 25% of the investment advisers that had to register with it after the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 issued its mandate. This will be done via “presence exams” at these investment firms.

The exams will concentrate on the issues of marketing, valuation, conflicts of interest, portfolio management, and asset verification. Also, the agency’s enforcement division will focus on private fiduciary duties.

According to di Florio, based on “preliminary observations” from initial presence exams it appears that even though a lot of longtime private investment firms have done a good job in constructing compliance risk management and control programs that work, OCIE examiners still noticed that there were numerous issues when they conducted initial exams, such as deficiencies related to conflicts of interest mismanagement. One example of this is the inflation of certain fees to conceal losses. Also, examiners found that some expenses, such as property rent and salaries, were inappropriately charged to funds instead of to the fund manager.

CFTC Roundup: Japan Securities Clearing Corp. Gets Relief Despite Not Registering as a Derivatives Clearing Organization & the Final Oral Communications Records Rule is Approved, as is Interim Final Rules for Major Swap Participants and Swap Dealers

Published on: December 26, 2012 | by Shepherd Smith Edwards & Kantas, LLP

No Enforcement Action Against Japan Securities Clearing Corp. Despite Failure to Register as a Derivatives Clearing Organization

The Commodity Futures Trading Commission Division of Clearing and Risk has decided not to recommend that an enforcement action be taken against Japan Securities Clearing Corp. for not registering as a derivatives clearing organization. Enforcement action also won’t be recommended against the corporation’s clearing participants for not clearing yen-dominated interested rate swaps through a registered DCO.

The Commission had recently finalized its clearing requirement determination, which mandates that market participants clear certain CDS classes based on European and North American corporate entities and certain interest rate swaps classes. Under the relief, JSCC will be able to clear credit default swaps (“iTraxx Japan index and yen-denominated interest rate swaps that reference the Tokyo Interbank Offered Rate or LIBOR”, said the CFTC), as long as it doesn’t accept (and none of its qualified clearing participants offer) swaps for clearing for a US customer.

Stockbroker Fraud Headlines: Securities Claims Against Lehman Underwriters Are Dismissed, NYSE Euronext Works on Kill-Switches Plan, and SEC Calls for Structured Products Ratings Roundtable

Published on: December 24, 2012 | by Shepherd Smith Edwards & Kantas, LLP

Securities Claims Against Lehman Brothers Holdings Inc. Underwriters Are Dismissed

The U.S. District Court for the Southern District of New York has thrown out the California Corporations Code claims made against the underwriters of two offerings of Lehman Brothers Holdings Inc. debt securities per the precluding of the 1998 Securities Litigation Uniform Standards Act. This, despite the fact that the securities case was brought by one plaintiff and lacks class action allegations.

The SLUSA’s enactment had occurred to shut a 1995 Private Securities litigation Reform Act loophole that let plaintiffs filing lawsuits in state courts circumvent the Act’s tougher securities fraud pleading requirements. It generally allows for federal preemption of state law class actions contending misrepresentations related to the buying or selling of a covered security. However, the court granted the motion to dismiss noting that even though the securities case was brought only on the State Compensation Insurance Fund’s behalf, it is still a covered class action within the act’s meaning.

GAO Says Most Financial Regulators Don’t Have the Procedures/Policies to Coordinate Dodd-Frank Rules

Published on: December 24, 2012 | by Shepherd Smith Edwards & Kantas, LLP

According to a recent Government Accountability report, the majority of regulators don’t have the formal procedures and policies needed to coordinate with each other on the interagency rules that the Dodd-Frank Wall Street Reform and Consumer Protection Act is requiring. As of earlier this month, regulators had reportedly coordinated on just 19 of the 54 substantive regulations that the GAO had examined. The GAO’s report is the yearly review that is required by Congress of how well Dodd-Frank is being implemented.

Per the Act, interagency consultation and coordination on specific rules has to take place. Coordination is also occurring when at least two regulators work together of their own volition to eliminate regulation overlap or duplication.

Yet, said the GAO, seven of nine agencies don’t even have written procedures and policies to facilitate rulemaking coordination. The two that do are the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. One agency that has made some progress in this matter since last year is the Consumer Financial Protection Bureau.

Dismissal of Double Derivative Delaware Securities Lawsuits Over The Bank of America-Merrill Lynch Merger is Affirmed by the Second Circuit

Published on: December 22, 2012 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Court of Appeals for the Second Circuit has affirmed the dismissal of Lambrecht v. O’Neal and Sollins v. O’Neal, two double derivative actions that were brought under Delaware law for Bank of America Corp. (BAC) and its subsidiary Merrill Lynch & Co. The cases were brought by Merrill shareholders contending wrongdoing. (Because Bank of America acquired Merrill, following the stock-for-stock swap, these shareholders are now BofA shareholders.)

The actions were an attempt to make Bank of America board of directors mandate that Merrill sue some of the subsidiary’s officials over allegedly reckless investments that were made. Finding that the actions were a result of unprecedented losses experienced by Merrill because it had invested aggressively in mortgage-baked securities (including collateralized debt obligations) before it was acquired by Bank of America, the district law court dismissed both actions for different but related reasons under Delaware law. In Sollins, the court said that the plaintiff’s predecessor-in-interest submitted the action without making presuit demand on the board yet did not demand futility. As for the Lambrecht action, while that lawsuit made three demands on the Bank of America board, it did not demonstrate that the bank had wrongfully denied the request that claims be made against ex-Merrill officials.

The Second Circuit, in its unpublished summary order, said that it sees no error in the rulings made by the district court. The appeals court noted that while Sollins suggested that Bank of America was “complicit” in Merrill’s alleged pre-merger wrongdoing involving the subprime market by letting the latter issue bonuses at 2007 levels, consenting to indemnify Merrill directors over pre-merger wrongdoing, approving the merger without figuring out Merrill’s growing losses, sealing the deal despite serious misgivings about the firm’s financial state, and not doing a good enough job of notifying investors about losses, his arguments are not properly placed. The district court was therefore correct in stating that the plaintiff cannot “boostrap” his claims against Merrill related to the subprime market onto the merger-related allegations against Bank of America to get around the demand request.

Reviving Antifraud Lawsuit Over Alleged Market-Timing Practices From Over Five Years Ago is Not the Answer, Say Ex-SEC Officials

Published on: December 22, 2012 | by Shepherd Smith Edwards & Kantas, LLP

In their amicus curiae brief, a number of ex-SEC Commissioners and top officials told the U.S. Supreme Court that the decision by the U.S. Court of Appeals for the Second Circuit to revive the agency’s antifraud cases against investment advisory officials Bruce Alpert and Marc Gabelli was a mistake. The men, who are Gabelli Funds LLC’s COO and portfolio manager, respectively, are accused of taking part in allegedly questionable market-timing practices involving the selling and buying of mutual fund shares to take advantage of short-term price swings.

Per the SEC’S 2008 securities case, Alpert and Gabelli committed these alleged violations between September 1999 and August 2002. While the district court threw out most of the lawsuit, finding that the majority of allegations were either untimely or not legally sufficient, the appeals court disagreed and reversed that ruling. It said that the defendants failed to fulfill the burden of demonstrating that a reasonably diligent plaintiff would have identified the alleged fraud more than five years before the SEC submitting its action.

Amicus curiae brief: A brief is a statement of the law and the impact on the law or other persons if a case if decided a certain way. “Amicus curiae,” is Latin for “friend of the court.” This “friend” can be any non-party to the lawsuit that has an opinion about it. Feasibly, there could be 100 such briefs, but the court would only be interested in those from credible groups, persons or lawyers.