No Private Right to Sue Under SOX; Only SEC May Enforce

US District Judge Steward Dalzel has ruled ruled that Section 304 of the Sarbanes-Oxley Act -- which provides for disgorgement of profits and bonuses from top corporate executives -- does not provide a private right of action for shareholders to file a derivative suit.

HCA Trading Analysis and a Different Insider Scandal?

Having handled a number of insider trading cases, and being a fan of a trading strategy that involves following insiders, the Frist and HCA story is interesting to me, and I did some research.

There may be a different story here.

First, Frist. He should be able to make a compelling argument that his sales were based on public information - the sales by insiders in late May, early June. If his version of the events at his web site is correct, he sought approval to direct the sale in April, received the approval sometime in April, and sent the letter directing the sale in "mid-June." The sell off by insiders was in early June.

Watching insiders is an accepted investment strategy, one that I employ myself. Having been a securities attorney and stock market afficiando for over 20 years, I know that insiders know more than I know. I also know that watching what insiders do with their own money can give significant insight into the prospects for a company.

Reading between the lines, and looking at the trading, it appears that this is exactly what he did. Tigerhawk has a pretty good analysis of the timing of the trades.

Some have called the insider sells "shovelling stock out the door" and a massive selloff, but that is not truly the case. Those sales were not pure sells, they were option excerises. Pretty routine stuff. You get an option with a strike price of $26, you wait a few years, the stock goes up to $55, you excerise the option, sell the stock, and pocket a $29 a share profit. No problem, perfectly legal.

But the question becomes why did all of those insiders decide to excerise their options in the first week of June? Most of their options were good for another 2 years. Obviously I don't know why they excerised during those days, but I am sure that the SEC and the DOJ are asking that question. Why then? What happened, and what did they know about the upcoming quarterly earnings report?

DeLay indicted in campaign finance probe

DeLay indicted in campaign finance probe - Politics - MSNBC.com: "DeLay indicted in campaign finance probe"

While not a securities law issue, and not intended to turn this into a political blog, given the securities law problems of the Senate Majority Leader, the indictment of the House Majority Leader seemed like a relevant item.

The leaders of both Houses of Congress under criminal scrunity?

Frist Knew About Blind Trust Investments

Uh Oh. Senator Frist has in the past denied that he was aware of the investments in his blind trust. That should be obvious, since it is a BLIND trust.

But the AP is reporting that he was actually updated several times during 2002 about his investments in the trust.

From the story:
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Frist, asked in a television interview in January 2003 whether he should sell his HCA stock, responded: "Well, I think really for our viewers it should be understood that I put this into a blind trust. So as far as I know, I own no HCA stock"

Frist, referring to his trust and those of his family, also said in the interview, "I have no control. It is illegal right now for me to know what the composition of those trusts are. So I have no idea."

Documents filed with the Senate showed that just two weeks before those comments, the trustee of the senator's trust, M. Kirk Scobey Jr., wrote to Frist that HCA stock was contributed to the trust. It was valued at $15,000 and $50,000.
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HCA subpoenaed over Sen. Frist's shares

Here it comes. Reuters is reporting that a "federal investigation" is ongoing into Senate Majority Leader Bill Frist's sale of HCA Inc. One would assume that the reference is to the SEC, but the article says that "[t]he sale has also drawn the attention of the Securities and Exchange Commission, which has sought information from Frist." Key word being "also."

Frist is maintaining that he sold the stock in order to avoid the appearance of impropriety, and to avoid criticism of a potential conflict of interest. What he has not explained is why he sold the stock in July of this year, rather than years ago when he took office. If appearances or conflicts were the reason, we would have expected to see the sale when he took office, or when he was criticized for the conflict, not now.

According to the article a Frist spokesman said that Frist "will provide the SEC any information that it needs with respect to this matter." That sounds promising, although he is a politician. That sentence could actually mean that he will provide information that HE thinks the SEC needs.

Senate Majority Leader Frist In Insider Trading Scandal?

This securities law news story first broke with an AP story, and was picked up on the political blogs. According to the AP, Senate Majority Leader Bill Frist asked the trustee of his BLIND trust to sell all of his stock in his family's hospital corporation, HCA, Inc.

In what may simply be an incredible coincidence, the shares of the company were near a 52 week high when Frist and other insiders sold their stock. It tanked a month later.

The sales were nothing to sneeze at, over 700,000 shares were sold which were worth $42 million.

Insider trading? It might be, and it might not be, given the 52 week high, it could really be a coincidence. But the SEC needs to look into this.

And someone needs to look into Frist's "blind" trust. How is a politician and an insider directing sales of stock that is in a blind trust? Incredibly, Frist has apparently deflected criticism of the inherent conflict was criticized for holding stock in the nation's largest for-profit hospital chain while directing legislation on Medicare reform and patient issues, by relying on the blind trust.

Apparently the trust wasn't so blind, since he was able to reach in and sell the stock just before it dropped.

Merrill Lynch to Buy Advest

More consolidation in the industry?

SEC halts alleged Ponzi scheme in Boca Raton - 2005-09-05

The SEC has alleged that a Boca Raton company sold $8 million in unregistered securities to at least 120 investors since November 2003 in a Ponzi scheme. In a Ponzi scheme, funds from new investors are used to pay interest to earlier investors. Ponzi schemes ultimately collapse under their own weight as the promoter is unable to find enough new investments to continue to pay earlier investors their interest.

The SEC alleges that the "investors" purchased nine-month "accounts receivable purchase notes" and were promosed 2 percent guaranteed monthly interest. Some larger investors received promises of 3 percent or 4 percent monthly returns, and were also offered a monthly ½ percent referral fee on any new investments.

The SECo claims that the defendants made undisclosed payments to sales agents and misappropriated investor funds to purchase a yacht, automobiles, jewelry and real estate, as well as diverting newly invested funds to pay interest.

This is simply amazing. In this information age, how can anyone make an investment which promises 24 percent a YEAR, without realizing that the investment has an excellent chance of being a scam? The interest rate at a bank is less than 3%, and these guys are offering 24%. Does anyone not know that this is either the riskiest investment on the face of the earth or a scam?

It is one thing to be in an investment and to have a 24% return. That certainly does happen, and can happen with a savy securities professional managing the money or with some luck. But to invest based on a representation of 24% a year in the future is simply foolishness.

8 Former Partners of KPMG Indicted

I always thought that accountants were pretty smart folks. Sure, there are a few here and there who aren't - but that is true for all professions, including lawyers.

Today's announcement of the indictment of former KPMG partners therefore brought a little surprise. While the indictment for tax fraud and obstruction, was not a surprise - the criminal investigation has been going on for over a year, one of the allegations was interesting.

According to the NYT article, one of the partners sent an email which discussed upcoming testimony, and which said that the best strategy was 'the less said the better.' As a result, the e-mail message continued, the record will reflect repeated 'I don't knows,' 'I don't recalls,' and 'I was out of the loops' - the rope-a-dope/Enron defense."

Can someone explain what presumably bright, intelligent and business-savy individuals do not get about obstruction of justice and lying to investigators? Where these guys in a cave when Martha Stewart was being prosecuted for lying to federal investigators?

And why don't prospective defendants understand that their email is retrievable?

States Squander Stock Research Settlement Funds?

We all know that the Spitzer Research Settlement funds were not going to go to investors. Although $400 million is supposed to go to investors, that has not happened yet. While the sum is not significant when compared to the losses suffered by investors, they have not even seen that money, despite the passage of nearly three years.

Spitzer also did not get an admission of wrongdoing, or anything that investors could use against the firms in their individual arbitrations. He left investors on their own in their arbitrations, leaving them to prove the fraud on their own, over and over again in each individual arbitration. No admission of wrongdoing, no court order that found fraud; nothing.

What Spitzer did get was great press, a ton of headlines, and tons of money for his office and the other Attorneys General. The states all split the other $1 billion dollar settlement among themselves.

That money was supposed to be used for investor education and to address the fraud that occurred, but that simply is not happening.

The reason? Give a politician money, and he will do what he does best - he will spend it. Whether is it is a tax dollar or a settlement dollar, they can't seem to help themselves - they just spend it.

Sure, $52 million is tied up in court, but the rest is gone, according to Forbes. You see, the politicians decided that the money, 1 BILLION dollars was not enough to make meaningful restitution to investors, and it was "too hard" to figure out who should get what, so they just spent the money.

California used its $43 million to plug a budget gap, using just $3 million for investor education (whatever that means). Virginia politicians tried to get its $8.9 million in to the general fund, but state law prevented them from doing that, and the money is going to a special fund for building schools. (Not exactly investor education, but at least it is something).

While the entire concept of giving the money to the States, rather than the SEC for distribution to investors, was foolhardy, it appears that some politicians actually figured out a good use for some of the money. Some states created programs to teach high school students about the market, and money, but in large part it appears that this money was simply used by the states to plug budget gaps.

Some of the money has been placed in a pool waiting for worthwhile projects. What happened to that pool of money? The administrator of the pool invested it, AND LOST $75 MILLION IN THE MARKET!

This is simply an outrage. The underlying analyst fraud was bad enough. Investors lost millions and millions of dollars in the market crash in 2000, a large part of which was caused by the research analysts. The firms ponied up significant bucks $1.4 billion dollars in penalties and settlements, and the states are simply squandering it, filling in their own budget gaps, and hoping to keep the politicians in office.

Speaking of which, according to Forbes, the Georgia Secretary of State used half of its settlement funds on an advertising campaign promoting investor awareness - featuring the Georgia Secretary of State, who just happens to be running for Governor. Never mind the fact that no reasonable person could believe that running TV commercials is meaningful or lasting investor education, the Secretary of State featured herself in the commercials!

We need another investigation - this time of the politicians't they have a fiduciary duty to us? Isn't this a clear breach of that duty?