SEC

SEC Settles with Fund Directors for Failure to Satisfy Valuation Responsibilities

By Ropes & Gray LLP | Posted on

[Editor’s Note: The following post is authored by Ropes & Gray LLP]

On June 13, 2013, the SEC filed an order settling administrative proceedings against eight former directors of five Regions Morgan Keegan open- and closed-end funds that had been heavily invested in securities backed by subprime mortgages in the lead-up to the 2008 financial crisis. In the Order, the SEC found that the directors caused the funds to violate Rule 38a-1 under the Investment Company Act of 1940, which requires funds to adopt and implement written policies and procedures reasonably designed to prevent violations of the federal securities laws. (more…)

Weekly News Update: SEC Sues Over Unlawful Distribution of Securities and Announces New Enforcement Initiatives

By James Kollar | Posted on

The Securities and Exchange Commission recently announced charges against ten Argentine citizens who unlawfully sold millions of shares of Biozoom, Inc. in unregistered transactions. The SEC also obtained an emergency order to freeze assets in the U.S. brokerage accounts of the defendants. The ten Argentinians allegedly received more than one-third of Biozoom’s shares when the company changed their name from Entertainment Art and moved from producing leather bags to developing biomedical technology. In a one month span, the defendants then sold more than 14 million of the shares for a profit of almost $34 million, of which almost $17 million was wired to overseas bank accounts. Their U.S. brokerage accounts, which include approximately $16 million in cash, are subject to the asset freeze. According to the SEC’s complaint, the defendants claimed they had purchased their shares from Entertainment Art shareholders between November and March. However, the SEC has said that these agreements were false because the Entertainment Art shareholders had sold all of the stock three years earlier. “Today’s action, along with the SEC’s trading suspension order last week, demonstrate the SEC’s ability and commitment to act swiftly to halt ongoing illegal conduct and preserve assets,” Antonia Chion, associate director of SEC enforcement, said in the agency’s statement.

The Securities and Exchange Commission announced three new initiatives that will build on its Division of Enforcement’s ongoing efforts to concentrate resources on high-risk areas of the market and bring new technology and analytical capacity to bear in its investigations. The new Financial Reporting and Audit Task Force will be dedicated to detecting fraudulent financial reporting and is designed to enhance ongoing enforcement efforts related to accounting and disclosure fraud. The enforcement division also formed the Microcap Fraud Task Force to target abusive trading in securities by microcap companies, focusing on those that do not regularly report their financial results publicly. In addition, the SEC has created the Center for Risk and Quantitative Analytics, which will support and coordinate the division’s risk identification and assessment through data and analysis. The initiatives are an indication of the SEC’s increasingly vigorous approach to identifying fraud. “By directing resources, skill, and experience to high-impact areas, we will increase the potential for uncovering financial statement and microcap fraud early and bring more cases aimed at deterring these types of unlawful activity,” division co-director Andrew Ceresney said in the release.

SEC Forecasts an Increase in Whistleblower Cases and Awards

By Goodwin Procter LLP | Posted on

[Editor’s Note: The following post is authored by Goodwin Procter LLP]

On June 12, 2013, the U.S. Securities & Exchange Commission announced its second-ever whistleblower award under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  Having received over 3,000 whistleblower tips in the first year of the revamped program, the SEC made its first whistleblower award in August of 2012 and is expected to issue an increasing number of awards in the coming months. (more…)

Ponzi Scheme Results in SEC Charges for Two Dallas-Based Broker-Dealers

By James Kollar | Posted on

Recently the SEC charged two executives of a medical insurance company with operating a $10 million Ponzi scheme that victimized at least 80 investors.

The SEC alleges that Duncan J. MacDonald and Gloria Solomon solicited investments for Global Corporate Alliance (GCA) by falsely promoting the company as a proven business with strong revenue. In reality, the business had no operating history and virtually no sales.
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In a Policy Shift, SEC Considers Forcing Offenders to Admit Wrong-Doing; Critics Worry that the Result Will Prove Counter-Productive for Enforcement

By Luke Burton, J.D. Candidate 2015 | Posted on

In a change of course, the Securities and Exchange Commission has begun to discuss the idea of requiring admissions of guilt in civil cases. The possibility of forcing firms to admit guilt has drawn criticism from some circles, as opponents say that the proposal may produce adverse results in enforcement.

In recent times, the SEC has chosen not to force firms to admit guilt, and has instead opted to levy fines as its primary method of enforcement. Proponents of this model say that it helps the SEC avoid protracted litigation and keeps enforcement out of the courts. The SEC itself has previously advocated for no-admission settlements, touting as benefits the avoidance of court costs and a reduction of the risks associated with litigation. The SEC also noted that having fewer trials allows the agency to pursue more enforcement actions, rather than focusing the majority of their resources into a handful of cases. (more…)

SEC Proposes Amendments to Money Market Fund Rates

By Davis Polk & Wardwell LLP | Posted on

[Editor’s Note: The following post is authored by Davis Polk & Wardwell LLP]

On June 5, 2013, the Securities and Exchange Commission (the “SEC”) proposed amendments to rules under the Investment Company Act of 1940 (the “Investment Company Act”) and related requirements that govern money market funds (“MMFs”). The SEC’s proposal is the latest action taken by U.S. regulators as part of the ongoing debate about systemic risks posed by MMFs and the extent to which previous reform efforts have addressed these concerns. (more…)

Revlon Settles SEC Charge Regarding a “Going Private Transaction”

By Sarah G. Nowland, J.D. Candidate 2014 | Posted on

Recently the SEC investigated Revlon, Inc., and found that Revlon “engaged in various acts described as ‘ring-fencing’ . . . to avoid receiving an opinion from a third-party financial advisor who ultimately found that the terms of Revlon’s proposed ‘going-private’ transaction did not provide for adequate consideration.”  Without admitting or denying guilt, Revlon is settling the charge by paying an $850,000 penalty.  (more…)

FTO Analysis Necessary for Crowdfunding

By Sarah G. Nowland, J.D. Candidate 2014 | Posted on

Financing through crowdfunding is an attractive way for startups and small businesses to raise capital by receiving small amounts from a large number of investors.  The method will only increase in popularity after the SEC finalizes the provisions for equity-based crowdfunding.  There are, however, potential IP problems inherent in crowdfunding.  In order to attract investors, companies have to publicly disclose detailed information about their business.  Competitors can then use this information to find IP violations and sue the budding business.  In order to prevent or prepare for this situation, companies using crowdfunding should conduct a thorough freedom to operate (FTO) analysis. (more…)

CFTC Asked to Extend Cross-Border Exemption

By Sarah G. Nowland, J.D. Candidate 2014 | Posted on

Several trade groups, including the Futures Industry Association (FIA), have asked the Commodity Futures Trading Commission (CFTC) for a six month extension of an Exemptive Order from the Dodd-Frank cross-border derivatives rules.  The request points out three benefits of a possible extension.

First, the extension would give swap market participants more time to consider the SEC’s “recent proposals relating to its regulation of cross-border security-based swap activities.”  Second, “failing to extend the Exemptive Order in the absence of final cross-border guidance could increase uncertainty for international market participants.”  Third, an earlier expiration of the Exemptive Order “could jeopardize the productive and cooperative efforts underway towards meeting G20 commitments on an international basis.”  (more…)

Self-Regulatory Organization Rule Changes Part 2

By Sarah G. Nowland, J.D. Candidate 2014 | Posted on

This week, four proposed rule changes became effective for self-regulatory organizations. The Miami International Securities Exchange LLC (MIAX) filed two of the adopted rule changes: 1) permitting the listing of additional strikes until the closing of trading on the second business day prior to expiration in unusual market conditions; and 2) expanding the number of expirations available under the Short Term Option Series Program.  The NASDAQ OMX PHLX LLC (Phlx) filed the other two adopted rule changes: 1) adopting a strategy fee cap applicable to jelly rolls; and 2) amending the Permit Fee and certain Options Trading Floor Fees, including a technical amendment to the Pricing Schedule.

The third rule change adopts a strategy fee cap applicable to jelly rolls, which are “transactions created by entering into two separate positions simultaneously.”*  The two positions are buying a put and selling a call that have the same price and expiration, and selling a put and buying a call with the same price but a different expiration.  (more…)