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Law Professors and the SEC

Race to the Bottom has an interesting article and I learned something new.

The White House announced that Troy Paredes from the University of Washington in St. Louis would be appointed to the Commission to replace Paul Atkins. What I didn't know is that there is a long history of law professors as members of the Commission - including William Douglas, James Landis, Bill Carey and David Ruder.

I guess I never really thought about it, but the inclusion of law professors on the Commission should prove to be a beneficial balance to the regulators who seem to keep popping up there - our present Chairman excluded of course.

The entire article is at http://www.theracetothebottom.org/home/law-professors-and-the-securities-and-exchange-commission.html

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UBS Investigated for Tax Fraud

According to Bloomberg.com, the Department of Justice is investigating whether UBSank helped clients evade American taxes.

The article reports that the Justice Department is investigating UBS's conduct in relation to services provided by Swiss-based client advisers to U.S. clients between 2000 and 2007. The SEC is also investigating whether UBS employees in Switzerland who advised U.S. clients failed to register with the agency as required, according to the article.

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Ailing UBS sells assets to BlackRock - InvestmentNews

Ailing UBS sells assets to BlackRock: Investment News reports - "Facing more than $37 billion in subprime-related write-downs, UBS AG announced today a preliminary deal with New York-based asset manager BlackRock Inc. to sell off some of its troubled assets"

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Restrictive View of 10b-5 Statute of Limitations Prevails

Law.com - Judge Finds Securities Lawsuit Over Zyprexa Is Time-Barred

Judge Jack B. Weinstein, in the federal district court in New York, dismissed a securities class action case against Eli Lilly and Company that challenged the drug manufacturer's alleged misrepresentations about the anti-psychotic drug Zyprexa, holding that the plaintiffs failed to file their suit within the statute of limitations.

Judge Weinstein rules that the plaintiffs The "reasonably should have known" that they sustained damages because of Eli Lilly's purported fraud more than two years before filing the suit.

Federal securities laws claims have a two part statute of limitations - 5 years from the event or 2 years after the discovery of the facts constituting the violation.

While the plaintiff's argued that the two years began to run with the publication of three investigative articles about the drug in The New York Times in December 2006, Judge Weinstein ruled that the time began when when documentation supporting these potential claims first became available to attorneys and institutional investors.

That is a difficult position for individual investors, because despite Reg FD, access to information is not always equal, and the ability to process such information is not always present. Maybe attorneys and institutions knew when seeing the documentation, but that does not mean that investors knew of the fraud at that time.

But this may be a sign of things to come, as the pendulum of justice continues its swing back to corporate America:

The individual unsophisticated investor's lack of awareness is ignored; the law tilts the substantive-procedural balance against such a consumer. It applies the much-debated caveat emptor principle favoring greater and freer commerce by limiting litigation, and requiring dismissal of this case.

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Citigroup in Trouble?

Citigroup just sold $4.5 billion of shares of its stock, and sold an additional $6 billion preferred stock sale. Reports are that it is likely to face more write-downs in the future and may need to raise even more capital.

According to reports of analyst reports, Citigroup management has shifted from believing it was essentially done raising new capital to signaling it is interested in raising more capital.

The willingness to raise more money is a warning sign to some investors, because companies are typically reluctant to issue equity capital, which can be dilutive and boost dividend obligations.

The financial services meltdown isn't over yet. How many brokers are going to be jumping ship in light of this piece of news?

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Citigroup Loses $5.1 Billion and 9,000 jobs

Losing $5.11 billion dollars in a quarter is bad enough, but Citigroup is also cutting 9,000 jobs. I wonder how many of those jobs are going to be in the executive suite?

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Merrill Lynch posts big loss - Yahoo! News

Merrill Lynch posted a nearly $2 billion first-quarter loss, and said it plans to cut 4,000 jobs after suffering several billion dollars of write-downs for subprime mortgages and other risky assets.

Merrill Lynch posts big loss - Yahoo! News

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Comment Period on Motions to Dismiss Ends Thursday

As everyone now knows, FINRA has a rule proposal pending to eliminate motions to dismiss in arbitrations. The comment period ends on Thursday, and very few comments have been submitted. The ones that have been made are almost uniformly in favor of the rule.

FINRA's proposal will effectively eliminate motions to dismiss in arbitrations prior to the presentation of Claimant's case. While those motions are rarely granted, some are granted, and motions made during the course of discovery are also granted. Such motions are a valid part of the arbitration process, and serve to limit the scope of a proceeding, or the length of a hearing.

And there are times when a motion to dismiss should be made at the outset, and all of these motions will be banned under the new proposal - for example, motions based on the statute of limitations, motions based on an absolute privilege, and motions based on res judicata.

FINRA claims that the proposal is necessary because arbitrations are being delayed by frivolous motions. Of course, if that is true, there are other ways to deal with the issue, rather than simply ban motion practice.

Before motion practice goes the way of subpoena issuance, you might consider submitting a comment on the proposed rule.

The comment period ends on Thursday, April 10.

The rule proposal is at http://www.sec.gov/rules/sro/finra/2008/34-57497.pdf

The comment page is at http://www.sec.gov/comments/sr-finra-2007-021/finra2007021.shtml

You can submit comments at http://preview.tinyurl.com/47wsh8

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Ex-Brookstreet brokers file $36M claim

According to InvestmentNews, five brokers at the center of the collapse of Brookstreet Securities Corp. have filed a $36 million arbitration complaint against Brookstreet’s former clearing firm, National Financial Services LLC, alleging that hundreds of millions of dollars that clients lost in highly leveraged collateralized mortgage obligations were directly attributable to National Financial Services’wrongful conduct.

According to the article, the brokers are alleging that NFS forced a liquidation of customer securities. I don't know anything about the case, but if those are margin liquidations in customer accounts, without more that is a difficult case. Marging agreements allow for the liquidation of margined securities to meet a call, and while a particular case will turn on the language of the margin agreement, the agreements that I am familiar with allow the clearing firm to do just about anything.

But, agreements can be modified by writings, and by conduct, so this one will be interesting to watch. And there is the twist that it is the brokers, not the customers, who are suing.

If anyone has a copy of the pleadings, I would appreciate a copy - at astarita@beamlaw.com.

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SEC Charges Five San Diego Officials with Securities Fraud

It is rare that you see the SEC filing charges against government officials, but yesterday the Commission announced that it had filed securities fraud charges against five former San Diego city officials who played key roles in the city’s inadequate municipal securities disclosures in 2002 and 2003.

According to the press release (linked above) the SEC charged the former officials for failing to disclose to the investing public buying the city’s municipal bonds that there were funding problems with its pension and retiree health care obligations and those liabilities had placed the city in serious financial jeopardy.

The SEC’s complaint, filed in federal district court in San Diego, charges former City Manager Michael Uberuaga, former City Treasurer Mary Vattimo, former Auditor & Comptroller Edward Ryan, former Deputy City Manager of Finance Patricia Frazier, and former Assistant Auditor & Comptroller Teresa Webster.

This might be one way to get politicans to be candid with the masses.

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