Both attorneys and the targets of civil securities investigations need to understand that the dotted line between civil and criminal investigations is becoming more hazy, and criminal prosecutions of alleged securities law violators are becoming more common. At Cosgrove Law, LLC, we have had civil defendants come to us that had previously and unknowingly waived their constitutional rights to remain silent and testified (and incriminated themselves) in response to a civil investigatory demand. Some of them were represented by prior counsel when they did so.
State securities regulators frequently and contemporaneously share the fruits of their investigations with federal and state criminal investigatory authorities, such as the FBI or the U.S. Postal Service. Some state regulators--namely Attorneys General--have contemporaneous civil and criminal jurisdiction. Although we had thorough written guidelines regarding the need to erect and maintain "Chinese Walls" and avoid crossover during parallel proceedings when I ran the Missouri Attorney General's Consumer Protection Division, and worked as the Chief Consumer Protection Prosecutor in the Massachusetts Attorney General's Criminal Division, many regulators confronted with the case law regarding the prohibitions against using civil compulsory process to feed a criminal investigation appear to have been confronted with alien information. Counsel for a civil defendant must quickly identify the potential for criminal exposure and understand the limitations on purported civil investigations. On the other hand, attorneys representing defrauded investors should have the knowledge and experience necessary to identify those situations when a report to a criminal investigatory agency is appropriate. They must also understand that threatening to do so in an attempt to foster a civil resolution is strictly prohibited.
On a side note, just this past week, the Missouri Securities Division's most recent Chief Enforcement Counsel joined our law firm. We expect that she will be a great asset to our versatile securities, white collar defense and commercial litigation practice.
Sunday, August 30, 2009
Thursday, August 27, 2009
THE ALTERNATIVE UPTICK RULE GAINS STRENGTH
On August 17, 2009, the SEC announced that it has reopened the comment period for its proposed "Amendments to Regulation SHO" for 30 days to allow additional feedback on the alternative uptick rule, an alternative short selling price test that would allow short selling only at a price above the current national best bid.
In its original "Amendments to Regulation SHO," proposed April 2009 in Securities Exchange Act Release No. 59748, the SEC proposed two approaches to restrictions on short selling: the "short sell price test," which would apply on a market-wide and permanent basis; and the "circuit breaker," which would apply only to a particular security during a severe market decline in the price of that security. The SEC also sought comment on the alternative uptick rule in its April 2009 proposal, including whether it would be preferable to the "short sell price test," and whether it would be more effective as a market-wide permanent price test restriction or in conjunction with the "circuit breaker" approach.
The SEC received almost 4,000 comments to its April 2009 proposal, and there was some evidence of support for the alternative uptick rule. As such, to ensure that investors and industry professionals have a full opportunity to comment on the alternative uptick rule, the SEC has published a supplemental request for comment specifically on the rule.
Click here for the SEC's complete notice of re-opening of the comment period and its supplemental request for comment.
In its original "Amendments to Regulation SHO," proposed April 2009 in Securities Exchange Act Release No. 59748, the SEC proposed two approaches to restrictions on short selling: the "short sell price test," which would apply on a market-wide and permanent basis; and the "circuit breaker," which would apply only to a particular security during a severe market decline in the price of that security. The SEC also sought comment on the alternative uptick rule in its April 2009 proposal, including whether it would be preferable to the "short sell price test," and whether it would be more effective as a market-wide permanent price test restriction or in conjunction with the "circuit breaker" approach.
The SEC received almost 4,000 comments to its April 2009 proposal, and there was some evidence of support for the alternative uptick rule. As such, to ensure that investors and industry professionals have a full opportunity to comment on the alternative uptick rule, the SEC has published a supplemental request for comment specifically on the rule.
Click here for the SEC's complete notice of re-opening of the comment period and its supplemental request for comment.
Tuesday, August 25, 2009
THE SEC AND CFTC TO HOLD JOINT MEETINGS ON HARMONIZATION OF REGULATION
In June 2009, the Obama administration released its White Paper on Financial Regulatory Reform, which called on the SEC and CFTC (“Commodity Futures Trading Commission”) to “make recommendations to Congress for changes to statutes and regulations that would harmonize regulation of futures and securities.” On August 20, 2009, in accordance with the Obama administration’s recommendations, the two agencies announced that they will hold joint meetings to discuss assessments of the current regulatory scheme, harmonization of the agencies’ rules, and recommendations for changes to statutes and regulations. SEC Chairman Mary Schapiro said she hopes the joint meetings will help “increase transparency, reduce regulatory arbitrage and rebuild confidence in our markets.”
The meetings, which will be held on September 2-3, 2009, will consist of five panels and will cover a wide range of topics, including the regulation of exchanges and markets; the regulation of intermediaries; the regulation of clearance and settlement; enforcement; and the regulation of investment funds.
For more information on the joint meetings, please see the Meeting Notice.
The meetings, which will be held on September 2-3, 2009, will consist of five panels and will cover a wide range of topics, including the regulation of exchanges and markets; the regulation of intermediaries; the regulation of clearance and settlement; enforcement; and the regulation of investment funds.
For more information on the joint meetings, please see the Meeting Notice.
Thursday, August 13, 2009
THE SEC’S ENFORCEMENT DIVISION IS TAKING ON NEW ENFORCEMENT INITIATIVES
Since Robert Khuzami took over as Director of the SEC’s Enforcement Division (“Division”), the Division has introduced a number of new initiatives to increase its effectiveness. These initiatives include a restructuring of the Division, an overhaul of its operation, and a renewed effort to bring enforcement actions against wrongdoers.
In a recent speech by Mr. Khuzami before the New York City Bar Association, he acknowledged the criticism the SEC has endured as a result of the Bernard Madoff scandal, and responded by saying that the Madoff scandal “should not be permitted to obscure the 75-year tradition of vigorous enforcement [by the Division]…to protect the investing public.” With that mindset, Mr. Khuzami has put into motion four main initiatives with the goal of increasing investor protection.
First, the Division will be creating national specialized units focused on particular, specialized areas of securities law. Mr. Khuzami indicated that the Division will initially have five specialized units: (1) Asset Management Unit; (2) Market Abuse Unit; (3) Structured and New Products; (4) Foreign Corrupt Practices Act; and (5) Municipal Securities and Public Pensions. The goal of this initiative is to make the Division more efficient and more knowledgeable, thereby leading to better investigations.
Second, the Division plans to streamline its management structure and internal processes. With regard to the management structure, the Division will be moving away from its decentralized structure and redeploying its branch chiefs to focus on conducting investigations, thereby minimizing the number of managers (i.e., decision-makers). In addition, Mr. Khuzami will be assuming full power to issue formal orders of investigations, which he plans to delegate to senior officers throughout the Division. This initiative aims to move cases along more quickly, thereby giving the Division more time to focus on new matters.
Third, the Division has created an Office of Market Intelligence, which will have the sole responsibility of collecting, analyzing and monitoring all tips, complaints and referrals the SEC receives each year. This Office will give the Division the ability to focus its investigations on the most credible tips, thereby increasing the efficiency of its investigations.
Finally, the Division is working to increase the incentives offered to individuals to promote cooperation with SEC investigations. This would provide the Division with access to more concrete information, thereby allowing the Division to more effectively uncover wrongdoing.
As is evident, Mr. Khuzami has implemented a plan to once again make the SEC a powerful enforcement mechanism. The results are already apparent in that since late January 2009, the Division has opened 10% more investigations, has filed 147% more temporary restraining orders, and has filed roughly 30% more enforcement actions.
A complete copy of Mr. Khuzami's speech can be found here.
In a recent speech by Mr. Khuzami before the New York City Bar Association, he acknowledged the criticism the SEC has endured as a result of the Bernard Madoff scandal, and responded by saying that the Madoff scandal “should not be permitted to obscure the 75-year tradition of vigorous enforcement [by the Division]…to protect the investing public.” With that mindset, Mr. Khuzami has put into motion four main initiatives with the goal of increasing investor protection.
First, the Division will be creating national specialized units focused on particular, specialized areas of securities law. Mr. Khuzami indicated that the Division will initially have five specialized units: (1) Asset Management Unit; (2) Market Abuse Unit; (3) Structured and New Products; (4) Foreign Corrupt Practices Act; and (5) Municipal Securities and Public Pensions. The goal of this initiative is to make the Division more efficient and more knowledgeable, thereby leading to better investigations.
Second, the Division plans to streamline its management structure and internal processes. With regard to the management structure, the Division will be moving away from its decentralized structure and redeploying its branch chiefs to focus on conducting investigations, thereby minimizing the number of managers (i.e., decision-makers). In addition, Mr. Khuzami will be assuming full power to issue formal orders of investigations, which he plans to delegate to senior officers throughout the Division. This initiative aims to move cases along more quickly, thereby giving the Division more time to focus on new matters.
Third, the Division has created an Office of Market Intelligence, which will have the sole responsibility of collecting, analyzing and monitoring all tips, complaints and referrals the SEC receives each year. This Office will give the Division the ability to focus its investigations on the most credible tips, thereby increasing the efficiency of its investigations.
Finally, the Division is working to increase the incentives offered to individuals to promote cooperation with SEC investigations. This would provide the Division with access to more concrete information, thereby allowing the Division to more effectively uncover wrongdoing.
As is evident, Mr. Khuzami has implemented a plan to once again make the SEC a powerful enforcement mechanism. The results are already apparent in that since late January 2009, the Division has opened 10% more investigations, has filed 147% more temporary restraining orders, and has filed roughly 30% more enforcement actions.
A complete copy of Mr. Khuzami's speech can be found here.
Tuesday, August 4, 2009
NEW SEC SHORT-SALE RULES ALREADY IMPACTING MAJOR STOCK EXCHANGES
On July 31, 2009, we briefly discussed the SEC's decision to make permanent its temporary Rule 204T, which attempts to curb short-sale abuses by strengthening the close-out requirements of Regulation SHO for failures to deliver securities resulting from investor short-selling in the securities market. As we noted, since the SEC's adoption of temporary Rule 204T, there has been a significant decline in the number of "failures to deliver" resulting from short-selling.
A recent article by the Wall Street Journal indicates that the SEC's permanent enactment of Rule 204T is already having an impact on the nation's largest stock exchanges. Specifically, "[b]oth NYSE Euronext (NYX) and Nasdaq OMX Group Inc. (NDAQ) are now aggregating daily company-by-company short-sale data on all trades that take place on their exchanges." According to the article, Nasdaq plans to eventually seek SEC approval to charge for this information, a request which seems clearly inconsistent with the SEC's purpose behind Rule 204T.
Our attorneys have more than two decades of combined experience in the areas of securities regulation and securities fraud litigation.
Click here to read the entire Wall Street Journal article.
A recent article by the Wall Street Journal indicates that the SEC's permanent enactment of Rule 204T is already having an impact on the nation's largest stock exchanges. Specifically, "[b]oth NYSE Euronext (NYX) and Nasdaq OMX Group Inc. (NDAQ) are now aggregating daily company-by-company short-sale data on all trades that take place on their exchanges." According to the article, Nasdaq plans to eventually seek SEC approval to charge for this information, a request which seems clearly inconsistent with the SEC's purpose behind Rule 204T.
Our attorneys have more than two decades of combined experience in the areas of securities regulation and securities fraud litigation.
Click here to read the entire Wall Street Journal article.
Friday, July 31, 2009
SHORT-SELLING GETS A LONG-TERM OVERHAUL
In an effort to curb abusive short sales and provide public investors with greater disclosure, the SEC made permanent the amendments contained within Interim Final Temporary Rule 204T of Regulation SHO. The temporary rule, enacted in 2008, was originally set to expire on July 31, 2009. However, due to the documented success of Rule 204T, the SEC decided to adopt the rule long-term with some minor modifications.
Short selling is a form of advanced trading whereby a trader essentially bets on the failure, at least in the short-term, of a company. In a typical scenario, an investor sells borrowed securities to a particular buyer for full ownership, with the intent to buy back equivalent shares once the price has declined. The seller then returns the equivalent shares to the lender, thus satisfying any obligations to the lender and profiting from the decline in share price.
In a second and more problematic scenario, an investor sells securities to a particular buyer without having first arranged to borrow the shares which the investor sold. In essence, the investor sells securities in which he or she has no rights with the hope that the investor will then be able to purchase equivalent securities at a diminished price prior to the clearing time period at which delivery to the buyer must be made. This type of trading is commonly known as “naked” short-selling.
Abusive short-selling, and particularly naked short-selling, has been of particular concern to the SEC in that the practice often results in a “failure to deliver,” whereby an investor is unable to deliver the shares he or she has borrowed or sold within the specified time frame. A “failure to deliver” can create a misleading impression of the market for investors, and can have the effect of depriving rightful shareholders of the benefits of ownership.
As such, in 2005 the SEC enacted Regulation SHO, which targets abusive “naked” short-selling by attempting to reduce failures to deliver. Rule 204T, adopted on a temporary basis in October 2008, strengthens the close-out requirements of Regulation SHO for failures to deliver securities resulting from investor short-selling in the securities market. The SEC’s permanent enactment of Rule 204T provides strong evidence of the SEC’s determination to tackle the problems associated with abusive short-selling.
Short selling is a form of advanced trading whereby a trader essentially bets on the failure, at least in the short-term, of a company. In a typical scenario, an investor sells borrowed securities to a particular buyer for full ownership, with the intent to buy back equivalent shares once the price has declined. The seller then returns the equivalent shares to the lender, thus satisfying any obligations to the lender and profiting from the decline in share price.
In a second and more problematic scenario, an investor sells securities to a particular buyer without having first arranged to borrow the shares which the investor sold. In essence, the investor sells securities in which he or she has no rights with the hope that the investor will then be able to purchase equivalent securities at a diminished price prior to the clearing time period at which delivery to the buyer must be made. This type of trading is commonly known as “naked” short-selling.
Abusive short-selling, and particularly naked short-selling, has been of particular concern to the SEC in that the practice often results in a “failure to deliver,” whereby an investor is unable to deliver the shares he or she has borrowed or sold within the specified time frame. A “failure to deliver” can create a misleading impression of the market for investors, and can have the effect of depriving rightful shareholders of the benefits of ownership.
As such, in 2005 the SEC enacted Regulation SHO, which targets abusive “naked” short-selling by attempting to reduce failures to deliver. Rule 204T, adopted on a temporary basis in October 2008, strengthens the close-out requirements of Regulation SHO for failures to deliver securities resulting from investor short-selling in the securities market. The SEC’s permanent enactment of Rule 204T provides strong evidence of the SEC’s determination to tackle the problems associated with abusive short-selling.
Wednesday, July 29, 2009
NEW REGULATIONS FOR SOLICITORS
NASAA proposed a new model rule today pertaining to solicitors. The stated goal of the Proposed Rule is to keep intact the increased investor protection standards presently required by the states and at the same time it seeks to limit or clarify the conditions under which investment advisors, their representatives, and solicitors must operate.
This rule should be examined by investment advisors who use solicitors to help in their business as well as investors or potential investors who have been contacted by others on behalf of an investment advisor or investment firm.
The Proposed Rule defines a “Solicitor” as an individual or entity who, either directly or indirectly, receives a fee or economic benefit for referring, offering, or otherwise negotiating for the sale of investment advisory services to clients on behalf of an investment advisor.
This rule offers exemptions for a solicitor who provides impersonal services such as written marketing materials or statistical information that is not directed towards the needs of a specific client. An additional exemption exists where there is a written agreement between the investment advisor and the solicitor for the solicitor to provide services and this relationship is disclosed in writing to the client prior to the time the client signs a written investment advisory contract. The rules for solicitors do not apply to a partner, officer, director or employee of an investment advisory firm. This Proposed Rule does not relieve a person of any fiduciary duties or other obligations to which they may be subject to under any law.
NASAA is accepting comments on the Proposed Rule until Monday, August 17. A complete copy of the proposed rule can be found at this website: http://www.nasaa.org/issues___answers/regulatory_activity/11095.cfm#
This Proposed Rule follows the SEC’s announcement on July 22, 2009 that it has proposed a rule aimed to end “pay to play” practices by investment advisors who seek to manage public funds for state and local governments. The overall goal of this proposed rule is to restrict the use of campaign contributions in exchange for the opportunity to manage such funds. One of the provisions of the proposed rule specifically bans the use of solicitors to act directly or indirectly on their behalf in securing an opportunity to manage funds for state and local governments.
The full text of this Proposed Rule has not yet been released by the SEC.
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