Last week, Scottrade Inc. became the latest entity to admit wrongdoing in connection with settling SEC charges. In a January 29, 2014 administrative order, the brokerage firm not only agreed to a $2.5 million penalty, but also admitted that it violated federal securities laws when it failed to provide the SEC with complete and accurate “ blue sheet” trading data. This settlement marks the fourth such admission since the Commission’s June 2013 modification to its “no admit/no deny” settlement policy.
Most civil law enforcement agencies – including the SEC – generally do not require entities or individuals to admit or deny wrongdoing in order to reach a settlement. The SEC regularly utilizes this “no admit/no deny” policy, finding it an effective tool to facilitate settlements. In June 2013, however, the Commission announced a revision to this longstanding policy, indicating that it would require public admissions of wrongdoing in selected cases, including those involving “egregious” fraud or intentional misconduct, as well as those involving significant investor impact or that are otherwise highly visible. Since then, the Commission has obtained admissions in three previous settlements. Read More
In a recent speech to the Securities Enforcement Forum, SEC Chair Mary Jo White fleshed out the Commission’s plan to pursue all violations of federal securities laws, “not just the biggest frauds.” She also addressed the looming question of whether this approach makes the best use of the agency’s limited resources.
Chair White compared the SEC’s strategy of pursuing all forms of wrongdoing, no matter how big or small, to the “broken window” theory of policing, which was largely credited for reducing crime in New York City under Mayor Rudy Giuliani. According to the “broken window” theory, a broken window which remains unfixed is a “signal that no one cares, and so breaking more windows costs nothing.” On the other hand, a broken window which is fixed indicates that “disorder will not be tolerated.” Chair White postulated that the same theory applies to the US securities markets: minor violations that go ignored may lead to larger violations, and may foster a culture where securities laws are treated as “toothless guidelines.” Characterizing the SEC as the investors’ “cop,” she declared that the SEC needs to be a “strong cop on the beat,” understanding that even the smallest securities violations have victims. Read More
Can shareholders of a government-sponsored enterprise successfully challenge the constitutionality of a government takeover of the entity? Shareholders of Fannie Mae and Freddie Mac will try to do so in a $41 billion class action filed against the United States in the Court of Federal Claims on June 10, 2013. Plaintiffs allege that even though the Federal Housing Finance Authority’s 2008 takeover of the mortgage giants benefited the nation as a whole, it harmed the companies’ shareholders and violated their constitutionally protected private ownership rights.
Congress established Fannie Mae and Freddie Mac to expand the nation’s secondary mortgage market by increasing the availability of funds to finance mortgages and home ownership. The government operated Fannie and Freddie until 1968 and 1989, respectively, when the companies were reorganized as “government-sponsored enterprises,” or federally chartered private corporations. Since then, both companies have operated as shareholder-owned, publicly traded corporations. But in 2008, in the midst of the financial crisis, both companies were placed under the conservatorship of FHFA, pursuant to the Housing and Economic Recovery Act (HERA).
Plaintiffs allege that prior to the 2008 takeover, the government adjusted the companies’ lending standards and capital restraints to encourage the companies to purchase a greater number of risky subprime securities. While this ultimately led to significant weaknesses in the companies’ portfolios, Plaintiffs contend that the companies nonetheless remained adequately capitalized and financially sound, and did not need the conservatorships. According to Plaintiffs, the government improperly bullied the companies’ boards into acquiescing in the takeover. Read More
Agreeing to take up yet another securities case, the Supreme Court granted cert on January 18 in three related appeals arising out of the alleged multi-billion dollar Ponzi scheme involving R. Allen Stanford’s Stanford International Bank. The Court’s decision in this case will likely resolve a circuit split over the scope of the preclusion provision of the Securities Litigation Uniform Standards Act (SLUSA).
Congress passed SLUSA in 1998 because plaintiffs were bringing class actions in state court to get around the tough pleading standards and other limitations imposed by the Private Securities Litigation Reform Act of 1995. SLUSA precludes state law class actions involving misrepresentations made “in connection with” the purchase or sale of a security covered under SLUSA. Lower courts have struggled with the meaning of those three words: “in connection with.” If a state court case has anything at all to do with securities, will it fail?How closely must a claim relate to the sale of covered securities before SLUSA bars state law remedies? The Supreme Court is about to weigh in on these questions.
In the Stanford ponzi scheme cases, the plaintiffs are investors who purchased CDs issued by Stanford International Bank. The investors asserted claims against third-party advisors (including law firms and an insurance broker) under Texas and Louisiana law, alleging that the investors were duped into believing the CDs were backed by safe securities. Although the CDs themselves were not securities covered by SLUSA, the third-party advisors argued that SLUSA nevertheless barred the state law claims because the alleged misrepresentations related to the SLUSA-covered securities that purportedly backed the CDs. The district court agreed, dismissing the actions. But the Fifth Circuit reversed the district court, holding that the alleged fraudulent scheme was only “tangentially related” to the trading of securities covered by SLUSA. The Fifth Circuit agreed with the Ninth Circuit that misrepresentations are not made “in connection with” sales of SLUSA-covered securities when they are only “tangentially related” to those sales. This means the Fifth and Ninth Circuits are at odds with the Second, Sixth, and Eleventh Circuits, which have all adopted broader views of SLUSA’s preclusion provision.
The third-party advisor defendants asked the Supreme Court to resolve the split, and the Supreme Court agreed, given that the circuit split threatensinconsistent outcomes in some of the biggest, mostcomplex, and multi-layered securities cases. The Court’s resolution will likely go a long way towards defining the role of state courts in adjudicating important class actions relating to securities issues.
On September 10, 2012, the CFTC issued rules mandating new record-keeping and registration requirements for swap dealers and major swap participants in the $700 trillion derivative global market. The rules were published in the Federal Register on September 11, 2012 and will take effect on November 13, 2012. The issuance finalizes rules adopted in a 5 to 0 CFTC vote on August 27, 2012. The rules were issued under Section 731 of the Dodd Frank Act, which amended the Commodity Exchange Act to require the adoption of standards relating to the confirmation, processing, netting, documentation, and valuation of swaps. Through these regulations, CFTC aims to effectively regulate swap dealers and major swap participants, and impose rigorous clearing and trade execution requirements on a previously unchecked derivatives market.
A swap is a derivative product in which counterparties exchange the cash flows of their financial instrument for the cash flows of the other party’s instrument. Swaps can include currency swaps, interest rates swaps, and, more recently, credit default swaps.
The final rules require swap dealers and major swap participants to timely and accurately confirm swap transactions by the end of the first business day following the date of execution. The rules also mandate portfolio reconciliation on a daily, weekly, and quarterly basis, and portfolio compression as a risk management tool. Furthermore, swap dealers and participants must now establish and enforce policies and procedures that are reasonably designed to ensure that each dealer and participant and its counterparties agree to all of the terms in the swap trading relationship documentation. The rules also require dealers and participants to agree with their counterparties regarding the methods, procedures, rules, and inputs for swap valuations. Read More
On May 4, 2012, the Southern District of New York denied in part, and granted in part UBS’s motion to dismiss the Federal Housing Finance Agency’s (“FHFA”) federal securities and state law misrepresentation claims stemming from pre-2008 securitizations. This opinion is noteworthy because of its analysis regarding the Housing and Economic Recovery Act of 2008’s impact on the relevant statute of limitations.
In July 2011, FHFA, as Fannie Mae’s (“Fannie”) and Freddie Mac’s (“Freddie) federal conservator, sued UBS regarding $6.4 billion in residential mortgage-backed securities purchased by the two government sponsored entities between September of 2005 and August 2007. FHFA alleged that UBS violated, inter alia, Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (“33 Act”) by preparing and distributing offering documents which contained material misrepresentations regarding the securities underlying mortgage loans. Read More
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