Wednesday, April 20, 2011

SEC Needs Comments from Investors

Looking to have some input into securities regulations? The SEC is seeking comments on the effectiveness of existing investor education efforts as part of a review mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

While it is unknown how much attention the SEC pays to public comments, we do know that the comments are reviewed and often included by the Commission in its reports. When the Commission asks for comments on rule proposals, some of those comments do result in a modification to a proposed rule, so it might we worthwhile to express your opinions and concerns.

Section 917 of the Dodd-Frank Act directs the SEC to conduct a study of retail investors’ financial literacy and submit its findings to Congress by July 21, 2012. Among other things, Section 917 states that the study must identify “the most effective existing private and public efforts to educate investors.”

The Commission is seeking public comment to better understand the details and effectiveness of current programs, and help ensure that the study includes all relevant programs. “We want to know more about what’s out there and what’s working in the world of investor education,” said Lori J. Schock, Director of the SEC’s Office of Investor Education and Advocacy.

The public comment period will remain open for 60 days following publication of the request in the Federal Register.

As part of its investor education effort, the SEC recently upgraded its website devoted exclusively to investor education. The site has been redesigned and expanded with more information about a variety of topics including how to research investments and investment professionals, understand fees, and prepare for life events. The updated also includes materials targeted to such specific groups as members of the military, teachers, and retirees. Videos, interactive quizzes, and additional investor education resources are expected to be added to the website in coming months. More...

Tuesday, April 19, 2011

Actor Larry Hagman Settles with Citigroup

When Actor Larry Hagman (Dallas and I Dream of Jeanie) sued Citigroup for mismanagement of his investments, and won, the case made headlines. Of course there was the story that JR Ewing sued his financial advisor, but then there was the amount of the award - $1.1 million in damages, and $10 million in punitive damages.

But the award has been used in the press to argue that arbitration is bad - you see, Citigroup appealed! Imagine that, a punitive damage award that is 10 times the compensatory damages and they had the nerve to appeal!

Some commentators seem to forget that customers, and firms, have a RIGHT to appeal an arbitration award. It is a right that is rarely excerised, and is rarely successful, but it is a right. And given such a significant punitive damage award, that would be tossed by most judges if a jury imposed such an amount, it was not a surprise to see Citigroup appeal the award. Add to that the fact that the arbitrators tacked on an additional $400,000 in attorneys fees, and an appeal was almost a guarantee.

What was even more newsworthy, but completely overlooked by those same commentators, was the fact that Citigroup WON the appeal. The arbitration award was thrown out. I have not been able to locate the decision, but Bloomberg reported that the award was vacated because one of the arbitrators failed to disclose that he had been involved in a similar lawsuit in 2007.  Sounds like Citigroup was well within its rights to appeal the decision.

But we will never know the outcome. The NYT is reporting that Hagman and Citigroup settled their dispute - Shades of J.R. Ewing: Citigroup and Larry Hagman Reach Accord -

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Saturday, April 16, 2011

ADR, Securities Law and Facebook

There was big news last week in the Facebook world - the 9th Circuit affirmed the dismissal of the suit by the Winklevoss twins against Mark Zuckerberg in the case of Facebook, Inc. vs. ConnectU, Inc. The case involves claims by the twins that Zuckerberg stole their source code for ConnectU and used it to create Facebook.

The decision is not the resolution of the dispute, which was settled years ago, with the twins receiving $180 million in stock and $20 million in cash. They certainly did not lose, but what they did lose was their attempt to set aside the settlement based on claims of securities fraud committed during the mediation of the original dispute.

Professor Jill Gross has a detailed analysis of the case, which she said "involved the interaction of three of my favorite things: ADR, Securities Law and Facebook." I wouldn't put Facebook up there with ADR and Securities Law, but the Professor's analysis is worth a read at her blog - ADR, Securities Law and Facebook – I “like”.


Thursday, April 14, 2011

More Insider Trading - SEC Accuses Former Hedge Fund Manager

While the type and frequency of enforcement cases that are filed are largely under the control and selection of the SEC Staff, there have been a rash of insider trading cases in recent weeks.

Yesterday the SEC charged a former hedge fund portfolio manager with insider trading in a bio-pharmaceutical company based on confidential information about negative results of the company’s clinical drug trial.

The SEC alleges that Dr. Joseph F. “Chip” Skowron, a former portfolio manager for six health care-related hedge funds affiliated with FrontPoint Partners LLC, sold hedge fund holdings of Human Genome Sciences Inc. (HGSI) based on a tip he received unlawfully from a medical researcher overseeing the drug trial. HGSI’s stock fell 44 percent after it publicly announced negative results from the trial of Albumin Interferon Alfa 2-a (Albuferon), and the hedge funds avoided at least $30 million in losses.

Tuesday, April 12, 2011

More Insider Trading Allegations - Now By Corporate Attorneys

Last week, the SEC charged a corporate attorney and a Wall Street trader with insider trading in advance of at least 11 merger and acquisition announcements involving clients of the law firm where the attorney worked.

The SEC alleges that Matthew H. Kluger, who formerly worked at Wilson Sonsini Goodrich & Rosati, and Garrett D. Bauer did not have a direct relationship with each other, but were linked only through a mutual friend who acted as a middleman to facilitate the illegal scheme. Kluger and Bauer communicated with the middleman using public telephones and prepaid disposable mobile phones in order to avoid detection. According to the SEC’s complaint, Kluger accessed information on 11 mergers and acquisitions involving the law firm’s clients and then tipped the middleman. In at least nine instances, the middleman passed the information on to Bauer, who illegally traded for illicit profits totaling nearly $32 million. According to the SEC, the transactions occurred during a period of three years. More...

Monday, April 11, 2011

Firms Must Protect Customer Information - Always

Regulation S-P prohibits financial institutions from disclosing private personal information about their customers to third parties, without the customer's authorization, and is designed to protect consumers against unauthorized access to their personal information.

While the regulation has a noble goal, it is also a trap for the unwary brokerage firm, and I frequently see firms get caught in a Reg S-P violation without ever intending to do so. One example is in discovery. I handle a fair amount of employment litigation, representing firms and brokers in their employment disputes. Those cases often involve the exchange of customer records during discovery, and every so often I come across a firm which thinks nothing of producing customer account information in the litigation. That is a violation of Regulation S-P, regardless of the fact that the production is required in litigation. The information has to be redacted before production.

The SEC has provided another example of an unintentional violation, and charged three former brokerage executives for failing to protect confidential information about their customers. According to the Commission, when GunnAllen Financial Inc. was winding down its business operations last year, its former president and former national sales manager violated customer privacy rules by improperly transferring customer records to another firm. The SEC also accused the firm's compliance director with failing to enforce the supervisory procedures in an unrelated incident.

According to the settlement agreements, the president allowed 16,000 annuity and mutual fund account applications to be transfered to the Sales Manager's new firm. It appears that what actually happened is that the Sales Manager downloaded the applications, and once at his new firm, sent a letter to those customers, advising them that GunnAllen could no longer service their accounts, and that he and his new partners were going to service the accounts, and offering to let the customers opt out of the transfer of their account to the new firm.

While there is undoubtedly a proper motive behind these actions, and those customers do need to have someone handle their accounts, the procedure is backwards, and the letter should have been sent before the transfer, and should have been sent by GunnAllen, not the new firm. Customers would have been given the opportunity to opt out before the disclosure of their information, and the conduct would have been in compliance with Regulation S-P.

According to the settlement, GunnAllen did exactly that, sending a letter to the customers notifying them of the closing of the firm and providing them with information and choices as to how they wanted their accounts handled. But the Sales Manager jumped the gun, and two days after the letter was sent, arranged for the transfer of the accounts.

The individuals settled the charges with the SEC. The President and the Sales Manager each received a censure and a $20,000 fine. More...

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Friday, April 1, 2011

Now Scientists Are Trading on Inside Information?

The law of insider trading is still evolving, and has been since I started practicing law 30 years ago. Back in the 1980's I was part of the team that defended an SEC civil case against an employee of a financial printer who was accused of trading on inside information that he obtained because of his position as a proofreader. After a three week trial, an appeal to the Second Circuit, and a denial of a petition for a writ of cert was denied, the misappropriation theory of insider trading was born.

There have been hundreds of cases since then, involving cab drivers, truck drivers, loading dock employees, computer technicians, and more than an handful of corporate executives who have been accused of insider trading. Now we can add scientists to the list. The SECcharged a U.S. Food and Drug Administration (FDA) chemist with insider trading on confidential information about upcoming announcements of FDA drug approval decisions, generating more than $3.6 million in illicit profits and avoided losses.

The SEC alleges that Cheng Yi Liang illegally traded in advance of at least 27 public announcements about FDA drug approval decisions involving 19 publicly traded companies. Some announcements concerned the FDA’s approval of new drugs while others concerned negative FDA decisions. In each instance, he traded in the same direction as the announcement. Liang went to great lengths to conceal his insider trading. He traded in seven brokerage accounts, none of which were in his name. One belonged to his 84-year-old mother who lives in China.

The SEC Press Release with a copy of the complaint is at