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On August 5th, Robert Khuzami, the new Director of the SEC's Division of Enforcement, gave a wide ranging speech about the "top-to-bottom scrub" that the Division has gone through post-Madoff. For a scrub overview see this memo from Edwards Angell Palmer & Dodge.
One of the things Khuzami promised is a faster investigative process. He has removed at least one procedural roadblock by convincing the Commission to delegate to him the power to issue Formal Orders of Investigation. He plans to delegate this power to "senior officers" of the Division. To encourage SEC investigators to move with a will, he is taking away thier tolling agreements. Tolling agreements, he said, would become the "exception, not the rule. (I, for one, had no idea that tolling agreements were the rule!)"
A tolling agreement is a contract between litigants where both parties agree not to use the statute of limitations as a defense. Section 3.1.2 of the SEC Enforcement Manual says that "[s]uch requests are often made in the course of settlement negotiations to allow time for sharing of information in furtherance of reaching a settlement." Khuzami appears to believe they were also used to maintain a leisurely investigative pace.
The SEC Enforcement Manual appears to back Khuzami's interpretation - it notes laconically that investigators should "[t]ry to avoid multiple requests for tolling agreements by asking for a suitable period of time [...] it is ultimately more efficient to overestimate rather than underestimate the time need to complete the investigation."
*yawn*
Last week, Jed Rakoff, a District Court Judge in the Southern District of New York, refused to approve a settlement between the SEC and Bank of America. Rakoff was widely praised for taking a principled stand against shoddy disclosure and the SEC's tacit approval of same.
But that's not what I want to talk about. I want to make the case that Jed Rakoff is the Kevin Bacon of the securities bar. Before Rakoff was a judge he was a federal prosecutor, and eventually, the Chief of Business Fraud for the US Attorney's Office, SDNY. He succeeded John R. Wing who would become Peter Madoff's lawyer (his boss at the SDNY was future Whitewater Indepedent Counsel Robert Fiske). Upon leaving the US Attorney's Office in 1980 he became a partner at Mudge Rose (Richard Nixon's law firm). Among his clients was Kidder Peabody M&A specialist-turned-government-informer Martin Siegel. Siegel testified against Ivan Boesky who was defended by short-lived SEC chair Harvey Pitt. In 1990, Rakoff left Mudge Rose and joined Pitt's firm, Fried Frank. In 1995, when President Clinton appointed him to be a District Court Judge (replacing David Edelstein who heard some of the Kidder Peabody civil suits, 686 F Supp 413, 752 F Supp 624) he completed the triangle - he'd been a prosecutor, a defense attorney, and now a judge.
If you know me, you are only two degrees away from Rakoff - he taught a class on Federal Criminal Law I took in law school (I got a C) and I used to work at Fried Frank, too.
Is it a small world, or is it just me?
The Wall Street Journal reports that Banco Santander SA, one of the largest Madoff "feeders," is the first such fund to offer money to settle possible legal claims brought by Irving Pickard, the bankruptcy trustee for Madoff Investment Securities.
10b-5 Daily reports that the Fourth Circuit reversed a district court's dismissal of a marketing-timing suit against Janus Capital (In re Mutual Funds Investment Litig. 2009 WL 1241574, 4th Cir. May 7, 2009). In the decision, the Circuit Court made several important holdings on fraud-on-the-market and scheme liability post-Stoneridge.
The City of Milan is suing UBS, Deutsche Bank, JPMorgan Chase and Depfa Bank for fraud related to the sale of 35 billion euros of derivatives. An Italian court seized $345 million belonging to the banks. NYT DealBook reports that the banks have decided to drop an appeal of the seizure.
D&O Diary reports that a subprime-related lawsuit against MoneyGram International has survived a dismissal motion. MoneyGram is accused by its shareholders of rigging its balance sheet to make its subprime investment losses look less catastrophic (In re MoneyGram International, Inc. Securities Litigation, 08-CV-00883, US Dist Ct. Dist. of Minn.)
D&O Diary brings to our attention another novel subprime suit that survived a motion to dismiss: Nomura Securities was sued over a securitization transaction it was involved in with LaSalle Bank. Nomura settled with LaSalle and then turned on their law firm (Cadwalader) suing them for malpractice. On May 21st, a New York Superior Court Judge let Nomura's suit against Cadwalader go forward. If you look at the original complaint on Westlaw (2006 WL 5426806) you will notice that Nomura's lawyer was Marc Dreier.
Reuters is reporting that two SEC lawyers are being investigated for insider trading.
The Carlyle Group has agreed to pay twenty million smackeroos to settle charges that it bribed officials of New York State's Common Retirement Fund (via The Financial Times).
The Securities Law Professor Blog has a post about the SEC's case against two lawyers in Georgia who were running a "144 opinion mill" called 144 Opinions, Inc. 144 Opinions issued 29 opinions which allowed a company called Mobile Ready Entertainment to sell 22 million unregistered shares.
Through exempt transactions, corporate insiders often acquire unregistered stock of reporting issuers. Such stock is called "restricted" because it can't be resold without first being registered under section 3 of the '33 Act. Section 4 of the Act contains exemptions from that general requirement. One of the exemptions is for transactions "by a person other than an issuer, underwriter or dealer." The definition of underwriter (s. 2(a)(11)) is broad. Rule 144 was developed as a safe harbor to enumerate situations where a reseller is not an underwriter to allow unregistered securities to be resold without being registered.
FINRA says securities fraud lawsuit filings are up 86% this year. (via About Broker Fraud Blog).
GAO report says that under ex-Chair Cox the SEC was a "hinderance" to its own enforcement staff (via Bloomberg).
Robert Khuzami intends to make the Division of Enforcement "more smart" by creating specialized enforcement units (via WSJ).
The Corporate Counsel Blog on SEC enforcement past, present and future.
Every day it looks more and more like the hedge fund industry was full of managers who collected fees, but did no management. According to the New York Times DealBook the SEC's Division of Enforcement is very busy digging into the business of about 150 such "hedge funds". In even more depressing hedge-news, Hedge Fund Law Blog reports that the SEC has penalized a hedge fund due diligence firm for recommending a fund that was really a ponzi scheme because they didn't do any diligence.
The New York Times reports that Robert Stanford has been found in Virginia. The denoument of the manhunt was ... they served him with papers! Not exactly a shoot-out, but we take what we can get. In further Stanford-alia the SEC has put up some more pages - a "statement" and an investor information page.
Linda Thomsen is really, finally out and Robert Kzuhami is really, actually, totally in as SEC Director of Enforcement. I noticed Linda Thomsen's comments on the press release about Stanford. Does that explain the holdup?
The SEC appears to have uncovered another multi-billion-dollar "investment scheme." No one is using the Ponzi descriptor, yet. Click here for the SEC's press release, litigation release and complaint and here for the "Stanford Scandal in Pictures" on FT Alphaville.
I linked to a story (below) from the New York Times. In response, I got an email from Victor Teicher's lawyers regarding his trading ban. The letter is below. I hereby express no opinion on the whole thing.
In light of your article, I believe that it is important for you to be made aware of the letter sent by Victor Teicher’s legal council to the New York Times:
"We are counsel to Victor Teicher, who is referenced in a misleading and false way in a February 14, 2009 article about Ezra Merkin's lawsuit with NYU. We write to demand an immediate retraction of statements in that article which suggest directly or indirectly that Mr. Teicher acted in violation of a bar by the Securities and Exchange Commission when he provided services to certain of Mr. Merkin's funds in certain periods in the 1990's into the beginning of 2000.
Those statements are false because Mr. Teicher was permitted, pursuant to an express agreement with the SEC, to be associated with unregistered investment advisors such as Mr. Merkin, until a final, unappealable order was issued by the Courts that the SEC had jurisdiction over unregistered investment advisors. After that final ruling was issued in the beginning of 2000, Mr. Teicher observed his agreement with the SEC to the letter and promptly stopped working for Mr. Merkin's funds. Your statement that he continued to be associated with those funds until 2001 is also false.
Having falsely suggested that Mr. Teicher's association with Mr. Merkin's funds was illegal, your article goes on to suggest that Mr. Teicher's 2007 and 2008 applications to modify his industry bar falsely claimed that he had complied with the securities laws and did not disclose his supposed illegal association with Mr. Merkin's funds. All of those false statements are libelous per se, and must be immediately and prominently retracted.
We note that had your reporters followed proper journalistic practices and attempted to contact Mr. Teicher or his representative prior to publication of this article, they would have learned the true facts. The failure to seek comment or clarification from Mr. Teicher is inexcusable and Mr. Teicher will pursue all available remedies.”
Stillman, Friedman & Shechtman, P.C.
Here's the originial post:
The New York Times reports that one of Madoff-feeder-boss J Ezra Merkin's chief investment advisers was actually in jail for securities fraud while he was working for Merkin.
“Victor Teicher, a convicted felon, and his staff were the persons actively managing the majority of the Ariel assets, and that hundreds of millions of dollars of Ariel’s funds had also been delivered for management to Madoff — even though Teicher had warned Merkin than Madoff’s returns were not possible.”
That quote is from a document filed by NYU in its suit against Merkin (NYU v. Gabriel Capital Corp., NY Sup. Ct., 603803/2008).
For more on Victor Teicher see: US v. Teicher, 987 f2d 112 (1992), SEC v. Teicher, 1995 WL 326050; SEC v. Teicher, 1995 WL 95076; SEC v. Teicher, 1998 WL 65657, see also: 2008 WL 4587535, 2007 WL 3254806.
The Wall Street Journal is reporting that Mary Schapiro has chosen Robert Khuzami, a former federal prosecutor and currently a lawyer at Deutsche Bank, to replace Linda Chatman Thomsen as head of enforcement at the SEC.
This is getting confusing. Linda Thomsen hasn't officially been given the heave-ho, but the speculation has already provoked strong reaction - see: Linda Thomsen: Scapegoat at Race to the Bottom.
Elliot Ness-ification of securities enforcement seems to be the coming trend.
Update: late this afternoon, the SEC announced that Linda Thomsen is resigning.
Securities Docket is reporting that the Washington Post is reporting that Mary Schapiro is looking for someone to replace Linda Thomsen as the head of the SEC's Division of Enforcement.
Another terrific article from the increasingly genuis Currents Extra on banks that have gone back for more TARP money.
And ... Pequot. Again!
Republican senators have even more questions for Pequot. What's the right metaphor - Jarndyce and Jarndyce? Susan Lucci? The Hundred Years War? 40 SRLR 2109
Nice report on the SEC's most recent open meeting including why defining "annuity contract" is controversial. 40 SRLR 2102
Detailed report about the appointments of Schapiro and Gensler. 40 SRLR 2101
The SEC's chief administrative law judge Brenda Murray rejected a request from the SEC's Office of Inspector General to discipline Division of Enforcement personnel for their handling of the investigations of Pequot Capital and Bear Stearns. Securities Docket obtained the internal orders. They are available here.
John White, the Chief of the SEC Division of Corporation Finance, recently announced that he is returning to his old job at Cravath. White was appointed by Chairman Cox in 2006.
Many thanks to diligent reader bc for correcting my huge faux pas. John White is head of Corporation Finance, not Enforcement. My excuse is that I have enforcement on the brain these days. Also, I'm dumb.
'34 Act rule 14a-8 allows shareholders, even those with very small holdings, to submit proposals for consideration at a company's annual meeting. If the company wants to exclude a shareholder's proposal, it must seek no-action letter relief. Last week, the Division of Corporation Finance issued Staff Legal Bulletin No. 14 to provide guidance and help streamline the 14a-8 process.
