The Pursuit of Negligent Brokers: the SEC Lowers Its Burden For Bringing Civil Actions

By By Joe Santiesteban, J.D. Class of 2014 | Posted on

SEC officials say they are going to start filing more civil suits against securities brokers based on claims of negligence only. This would be a significant deviation from their current practice of primarily suing firms for intentional fraud, which often carries steeper penalties, but also has a significantly higher burden of proof.

The SEC’s typical enforcement strategy is to file suits for intentional fraud against firms, rather than individual brokers. While the SEC often settles for claims of negligence, it rarely sues for negligence only.  For instance, during the week of September 25th, the SEC News Digest reported updates on 29 of its enforcement proceedings, only one of which was for a suit based primarily on negligence. In addition, most of the SEC’s lawsuits resulting from the financial crisis, including its suits against Goldman Sachs and Bank of America, have been for intentional fraud and have not included penalties for any individual broker or executive. Moreover, individual brokers or company executives who participate in the alleged misconduct are often not named in the lawsuits or avoid being named as part of the settlement.

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Update: 298 Page Volcker Rule Proposal Leaves Much To Be Desired (And Decided); Issue #1: Market Making

By Peter Benesch, J.D. Class of 2013 | Posted on

On October 12th the Federal Reserve, FDIC, Office of the Comptroller of the Currency, and SEC submitted the long-awaited proposal for implementation of Section 619 of the Dodd-Frank Act, widely referred to as the “Volcker Rule.” Legislators included this section in the Dodd-Frank Act in order to divide commercial banking and depository functions, which are federally insured, from banks’ investment activities (commonly referred to as “proprietary trading”). Given the fact that many large commercial banks, such as Bank of America and JP Morgan Chase, derive a significant portion of their revenue (8% and 9%, respectively) from their trading desk, the details of the rule could have enormous implications for the future financial strength and stability of depository institutions.

The proposal has several large exceptions to its prohibition on proprietary trading in order to allow banks to continue to provide important financial services to their customers. One of the largest exceptions is for market making. Market making can involve a number of activities, but at its core it consists of financial institutions accepting client requests to purchase (or sell) any given security without that financial institution immediately going out into the market and finding a seller (or buyer). In order to facilitate this process, financial institutions involved in market making may maintain a stock of various securities that they buy and sell to clients as needed to meet client demand. Under the new proposal, banks would be allowed to purchase and sell securities under the premise of market making so long as: a.) the bank “holds itself out” as being willing to buy and sell those securities to and/or from clients, b.) the purchases or sales do not exceed “reasonably expected near term demands” of clients, c.) the activities are primarily intended to generate income from fees, commissions, and bid-ask spreads (as opposed to appreciation or depreciation in the securities themselves), and d.) the compensation arrangements of employees engaged in market making is not designed to reward large returns that may result from the appreciation or depreciation of the securities themselves.

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Say-On-Pay: Will It Turn Into Sue-On–Pay?

By By Anne-Marie Weber, J.D. Class of 2012 | Posted on

With this year’s annual shareholder meetings largely in the rear-view mirror, one of the issues worth taking a retrospective glance at is the advisory say-on-pay votes required by section 951 of the Dodd-Frank Act. The mandatory requirement of a shareholder vote on a corporate board’s compensation decisions (say-on-pay) has been controversial since its introduction given that, as a general principle of Corporation Law, directors enjoy discretion to set the compensation of company executives.

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Is Google “Cooking” It?

By By Arusyak Abrahamyan, J.D. Class of 2012 | Posted on

It was not long ago when Google was under the spotlight for Google Books Settlement. Now it looks like the lawsuits are piling up on Google. There are about 9 antitrust cases filed against the mega-search engine in the EU, one of which was filed by Microsoft against Google for dominating the search market as well as other areas such as the mobile-related realm. A number of small companies have also filed complaints against Google here in the US.  The Department of Justice (DOJ) will review Google’s $400 million purchase of Admeld Inc., an Internet advertising company, to investigate whether the deal had an adverse effect on competition. Furthermore, the Federal Trade Commission (FTC) is conducting an antitrust investigation of Google’s dominance in the search-engine industry.

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Flying Under the Radar, New Municipal Advisor Rules May Alter the Municipal Securities Landscape

By By Andrew Sioson, J.D. Class of 2013 | Posted on

Dodd-Frank mandates fundamental changes in the oversight of the municipal securities market. Section 975 amends section 15B of the Securities Exchange Act of 1934 by requiring that municipal advisors register with the SEC in a similar manner as traditional investment advisors. The proposal has been met with controversy, as critics like Clifford Kirsch, a partner at Sutherland Asbill & Brennan, state that the proposal “goes much further than what was anticipated in Dodd-Frank.”

Municipal securities, such as municipal bonds, are issued by local governments and cities to fund their operations, as well as large projects. Historically, the municipal securities market has been less regulated than other capital markets, but Section 975 of Dodd-Frank significantly increases regulatory oversight of issuers and industry professionals. In December 2010, the SEC proposed rules specifying potential registration requirements and criteria governing mandatory registration for municipal securities advisors. Until Dodd-Frank, the activities of these advisors were largely unregulated. However, regulators came to the conclusion that change was needed when several municipalities were rocked by unscrupulous advice regarding the issuing of securities. For instance, Jefferson County, Alabama is in the midst of rare municipal bankruptcy proceedings after it relied on advice from JPMorgan and borrowed 3.2 billion dollars in floating instead of fixed rate debt. With the proposed municipal advisor rule, the SEC intends to protect municipalities from excessive risks and fees.

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Lower Court Decisions Show that Concepcion’s Scope Remains Unresolved

By James Nguyen, J.D. Class of 2013 | Posted on

Updating a prior post on the impact of the Concepcion decision, two recent lower court cases have demonstrated the limits of Concepcion’s reach and identify at least two particular claims that could render class-action waivers unenforceable: unconscionability and Magnuson-Moss Act claims.

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California’s Response to Dodd Frank and the Repeal of the “Private Advisers” Exemption

By Charles Rogerson, J.D. Class of 2013 | Posted on

By Charles Rogerson

The Commissioner of the California Department of Corporations is considering amending Rule 260.204.9 of Title 10 of the California Code of Regulations in response to the repeal of the “private advisers” exemption mandated by the Dodd-Frank Act. The former exemption, found in the Investment Advisers Act of 1940 (“Advisers Act”), had allowed specified investment advisers with fewer than fifteen clients in any twelve-month period to forgo SEC registration. Notably, the exemption counted each fund as a single client, not each individual investor. This exemption had a corollary in the California Code under 260.204.9. As amended by Dodd-Frank, the Advisers Act requires investment advisers with assets in excess of a specified statutory amount ($25 to $100 million) to register with the SEC.

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Will Concepcion Allow Arbitration Agreements to Squash Consumer Class Actions?

By James Nguyen, J.D. Class of 2013 | Posted on

Not entirely—at least that’s the conclusion according to this article in the most recent ABA Infrastructure issue.The key holding of the Supreme Court decision in AT&T Mobility LLC v. Concepcion–that the Federal Arbitration Act (FAA) preempts any state rule invalidating class-action waivers (such as the Discover Bank v. Super. Ct. rule in California prohibiting non-class arbitration clauses)–significantly bolsters the already superior bargaining power of defendants in class-action suits and undermines the ability ofconsumers to even undertake these suits. (There is already some evidence that banks have increased adoption of arbitration clauses as a result of the decision)

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The Network Lecture Series: Nathan Bush’s Corruption and Fraud in China Part II

By By Mike Perez, J.D. Candidate Class of 2012 | Posted on

On August 29th, 2011, Nathan Bush, Partner at O’Melveny & Myers, Beijing, delivered a lecture titled “Corruption & Fraud in Contemporary China: Challenges for U.S. Companies & Investors.” Mr. Bush’s lecture addressed two equally important questions:

(1) What pressures do U.S. companies face when operating in China, and

(2) What challenges do Chinese companies face when listing on American stock exchanges?

In answering the first of these queries, Mr. Bush took the lecture attendees through a brief history of Chinese political and social culture, Chinese anti-bribery laws, the Foreign Corrupt Practices Act, Dodd-Frank’s strengthened whistleblower protections, and the U.K. Bribery Act. In tackling the second question, Mr. Bush focused on reverse- takeover mergers of shell U.S. companies listed on American stock exchanges by Chinese companies and the recent intensification of investigations into those companies’ dealings.

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DOJ Puts the Brakes on Proposed AT&T T-mobile Merger

By Peter Benesch, J.D. Class of 2013 | Posted on

On August 31, the Department of Justice (DOJ) brought suit to block the proposed merger of AT&T and T-mobile, the second and fourth largest mobile phone service providers in the nation. The DOJ asserts that the combination would result in “higher prices, fewer choices, and lower quality products.”
The DOJ’s argument is bolstered by the observation that T-mobile has been an engine for innovation and competition in the market in the past, as it was the first carrier to bring Android-powered handsets to market and to introduce various unlimited service plans. However Deutsche Telekom, the company that owns T-mobile, has stated that that it no longer plans on investing capital in the U.S. mobile phone service market. This statement, if credible, would make it more difficult for a court to conclude that T-mobile would be able to continue to serve as a source of competition and innovation in the future.

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