Comment Period Open on Proposed Changes to Gifts and Entertainment.

The Proposed IM would supersede prior staff guidance regarding business entertainment practices. The overriding principle of the new IM is that a member or its associated persons should not do or give anything of value to an employee of a customer that is intended or designed to cause, the employee to act in a manner that is inconsistent with the best interests of the customer. The proposed IM provides detailed guidance regarding written policies and procedures that members must adopt.

The New York Stock Exchange announced that it would seek approval from to amend its gifts and entertainment rule.

Comments on the Proposed IM are due by February 23, 2006.

Rule 3012 Notice for Limited Size and Resources Exception Due March 16, 2006

A rule change in 2004 made a number of supervisory changes. A significant change was that only a person senior to or “otherwise independent” of a producing manager may conduct the producing manager’s day-to-day supervisory reviews. However, Rule 3012 provides an exception for any member firm that is so limited in size and resources (the “limited size and resources” exception) that the member does not have sufficient senior or “otherwise independent” persons who can conduct the required supervisory reviews. In such situations, a principal who is sufficiently knowledgeable of the member’s supervisory control procedures may conduct the required supervisory reviews. Firms using that exemption are required to notify the NASD of the intended use of the exempton.

However, the electronic notification system was not in place until now. Members who have been relying on the exception must notify the NASD by March 16, 2006 (30 days after the notification system is active).

If your small firm has questions regarding the new rules and the reporting provisions, feel free to contact me at astarita@seclaw.com

More Heat On Hedge Funds

Businesses has an article that claims that hedge funds are under scrutiny for insider trading, and that there will be a flurry of insider trading cases against hedge funds this year.

While the article has an "anti-fund" slant, if the information is correct, we can expect to see a new line of insider trading cases this year - and hedge funds are not going to be the only targets. The concept of using an investment in a private placement to obtain leverage and information upon which to trade is the new theory.

Should the Securities Industry Have Just One Set of Rules? - New York Times

The SIA will be releasing a proposal and guidelines to completely revamp the self regulatory system for the securities markets. The proposal would eliminate the NASD and NYSE as regulators, and create one regulatory organization.

The purpose is to eliminate duplication of effort and regulation. However, no one has identified a problem with duplication of effort. The NYSE and NASD do a good job of avoiding that potential duplication of regulation of firms that are members of the NYSE, with the NYSE taking the lead on those investigations and audits.

Do we really need to overhaul the entire system? Maybe so, and some have been calling for an overhaul (or even elimination) of self-regulation. But a consolidation to avold the overlap between the two regulators?

Pastor Urges Followers To Securities Fraud

A pastor who has threatened a boycott of Microsoft has apparently taken another tact - he wants his followers to buy up Microsoft's stock and then dump it on May 1.

I can't imagine what this guy is thinking. Microsoft has a market cap of 280 BILLION DOLLARS. It trades an average of 60 MILLION shares a day, has 10 BILLION shares outstanding. Not to mention that over 60% of its float is held by insiders and institutions.

But the good reverend has got this all figured out. He wants everyone to buy one or two shares, and then dump them on May 1, to drive the price down, presumably to punish Microsoft for not caving to his demands.

Lets see, he will need to have his followers sell something like 30 million shares on May 1. If each of his followers buy 2 shares...are there that many people in the entire state of Washington?

And what happens on May 2, assuming this happens? If the stock moves at all, it undoubtedly pops right back up.

Has anyone taken a look to see if the pastor has a position in the stock?

And didn't he just attempt to conspire to violate the securities laws?

Attorneys as Defendants in Securities Class Actions?

From Lyle Roberts at The 10b-5 Daily: "Although the Supreme Court's prohibition on aiding and abetting liability in private securities fraud actions has generally shielded law firms, in some cases courts have found that the law firms acted as primary violators. Plaintiffs have added fuel to that fire by arguing that even if a law firm did not make (or substantially participate in) a misrepresentation to the market, it can be held liable as a primary participant in a fraudulent scheme. "

Spitzer's Emails Come Into Play

According to this Wall Street Journalarticle in the litigation against Dick Grasso and Hank Greenberg, the defendants are seeking testimony and internal documents from Mr. Spitzer. According to the article "[t]heir lawyers say they are looking for evidence that Mr. Spitzer improperly pressured witnesses and their own corporations into admitting wrongdoing and implicating Messrs. Grasso and Greenberg, who deny doing anything illegal."

We knew this was going to be a massive battle, and it certainly is shaping up that way. While Grasso and Greenberg mount that attack, Kenneth Langone, another defendant, has apparently moved for dismissal against him. Readers may recall one of my favorite all time quotes by Mr. Langone regarding this litigation

-"I'm nuts, I'm rich, and boy, do I love a fight. I'm going to make them sh*t in their pants. When I get through with these f**king captains of industry, they're going to wish they were in a Cuisinart at high speed."

It's here, and more here.

The SEC - DOJ Conspiracy and Perjury Traps

Every securities and white collar criminal defense attorney is aware of the problems in dealing with the SEC when there is a potential criminal proceeding. The existence of a potential indictment for the actions that the SEC is investigating is a significant problem. Your client settles the SEC case, cooperates with the SEC, and then gets indicted.

Most of us assume that the SEC is giving all of our client's information to the US Attorney, and proceed accordingly. However, even the best laid defense plans can backfire.

While turning over information to the US Attorney is probably perfectly legal, it is unseemly, and certainly unfair. Truth on the Market, a new blog by a group of law professors, addresses the issue and a related issue of "perjury traps" where the SEC and the DOJ get together before the SEC takes a witnesses testimony, to set the witness up.

After all, an obstruction or perjury case is much easier to prove than the underlying crime, so why not set the defendant up for a lay-up?

Supreme Court Clears Way for Possible Blackberry Injunction

Not a securities law case, but one with some significance to securities law practitioners. The Supreme Court has refused to hear RIM's appeal means that U.S. District Judge James R. Spencer in Richmond, Va., could impose an injunction against the company and block BlackBerry use among many of its owners in the United States.

Third Circuit Affirms Dismissal Based on Inquiry Notice SOL

The Third Circuit has affirmed the dismissal of a complaint by mutual fund investors against Alliance Capital arising from the fund's investments in Enron. The decision contains an excellent analysis of the law of inquiry notice as same applies to a securities fraud cause of action, and dismissed the claims because of the numerous newspaper articles surrounding Enron's demise.

UBS Fined $49.5 Million For Market Timing Failures

The market timing fines keep on coming against the major brokerage firms. The NYSE finded UBS Financial Services a total of $49.5 million for failure to supervise deceptive market-timing activities engaged in by brokers, failure to establish appropriate procedures for supervision and control, and failure to maintain adequate books and records.

The fine is a result of a joint proceeding brought by the State of New Jersey's Bureau of Securities and the Exchange for the activities of the firm's brokers during 2000 and 2001, and the fine.

Only 18 million of the 49 million will be used to compensate UBS customers. The balance will go to the State and the Exchange.

Shapiro Appointed to Succeed Glauber at NASD

Mary Shapiro, the President of the NASD's Regulatory Policy and Oversight Division (what we call NASDR) has been selected to succeed Robert R. Glauber as the Chairman and Chief Executive Officer of the entire NASD.

She will not take the reins until December 2006, but the announcement was made yesterday "to ensure a smooth handover."

Annoying Anonymous Web Postings and Email Now a Crime

It's true. Declan McCullagh at news.com reported on Friday that you can't post annoying messages or send annoying messages any more without using your real name. It is a crime, punishable by two years in prison.

I thought McCullagh was mistaken. Such a crime is so dumb that it I figured he was misreading the amendments. After all, it is one of those convoluted amendments that are nearly impossible to follow.

But he is correct. Contained in the Violence Against Women and Department of Justice Reauthorization Act are amendments to the telecommunications act.

The net effect of the amendments is that it is that annoying anonymous postings are now a crime.

Here is the section, as amended (and substituting definitions for defined terms:

Whoever...utilizes any device or software that can be used to originate telecommunications or other types of communications that are transmitted, in whole or in part, by the Internet... without disclosing his identity and with intent to annoy, abuse, threaten, or harass any person...who receives the communications...shall be fined under title 18 or imprisoned not more than two years, or both.

Has Congress lost its mind? Do they even have a clue what they did when they enacted this amendment?

NASD Fails as a Test Giver

Almost 2,000 people trying to qualify as stockbrokers were flunked in last 14 months because of a software error in a test program, the NASD said Friday, according to press reports.

A software flaw has been identified as the problem, but 2,000 people undoubtedly re-took a test that they actually passed.

Imagine if a software problem caused a problem at your firm? Would the NASD be so understanding?

Brokers Win $14 Million Defamation Claim

For those of you who thought that U-5 defamation was a dead issue, a New York Stock Exchange arbitration panel has awarded three Merrill Lynch brokers $14 million in damages for defamation. They also denied the firm's claims for $2 million in forgiveable loans.

According to an article in the Wall Street Journal, the action arose from the Millennium trading scandal. Merrill fired the brokers for accepting market timing trades and violating company policy. The brokers claimed that Merrill endorsed their trading strategy.

Another interesting part of the story is that the brokers were employed in the Fort Lee New Jersey office of Merrill. Merrill was fined 13.5 million dollars by regulators for failing to supervise its brokers "in New Jersey" according to the Wall Street Journal.

The award is a significant, and very public, reminder to firms that they need to be very careful what they do and say when the terminate brokers. Firms are certainly in a tough spot - if they don't disclose enough, they run the risk of a regulatory review for incomplete U-5s. If they say too much, they run the risk of a defamation claim.

But this story does not appear to be about a firm finding itself between a rock and a hard place. Reading between the lines, it appears that the firm attempted to use the brokers as scapegoats to save itself and perhaps more senior executives. Claim ignorance, fire the brokers and tell the regulators that we did all we could, and took immediate action. Firms then hope that the regulators will overlook the fact that the underlying conduct was going on for years, with the knowledge of the firm, and the firm, not the brokers, were the prime beneficiaries of that conduct.

If that was the case, the strategy backfired...to the tune of $27 million dollars in damages and fines.

NASD Year In Review

The NASD pats itself on its back every year with a year in review, and this year is no different. New trading systems, efforts to "demystify" the bond markets, and prohibitions on cash sales contests all make the release. (Can anyone explain why it has taken so long for them to do anything about sales contests? Can there be a clearer conflict of interest?).

The good news is that arbitration proceedings are down, with only 6,000 claims filed last year (the math makes that about one claim per firm last year.

The linked press release details the major fines and regulatory concerns.

Bird Flu Stock Scam Warning

The NASD has issued an Investor Alert, warning investors to be wary of faxes, spam and text messages promising large returns from Bird Flu cures.