Securities Lawyer Blog

The Securities & Exchange Commission (SEC) has settled the four-year old stock option-backdating case against Jacob "Kobi" Alexander, Comverse Technology Inc.'s former chair. As he fights extradition from Namibia, Mr. Alexander has settled with the SEC for $53 million in disgorgement and penalties. However, the Department of Justice's 35-count criminal indictment for alleged offenses including conspiracy and securities fraud await the beleaguered former executive.

The case began in the summer of 2009, when the SEC filed suit against Alexander and two other Comverse executives in U.S. District Court for the Eastern District of New York, for what it calls a "long-running backdating stock options scheme." In its complaint, the SEC alleged that Mr. Alexander and two others carried out a "fraudulent scheme to grant in-the-money options to themselves and to others by backdating stock option grants to coincide with historically low closing prices of Comverse common stock."

The backdated options were alleged to have been put into a fund that was then used to recruit key personnel. According to the SEC, the result of this scheme was that the company "materially overstated its net income and earnings per share for more than a decade."

The settlement with the SEC requires Mr. Alexander to pay $47.6 million in disgorgement and prejudgment interest as well as a $6 million penalty, which the SEC notes is "one of the largest penalties ever imposed in a stock options backdating case." Mr. Alexander is also permanently barred as serving as an office or director of a public company and is enjoined from violating antifraud and other provisions of the federal securities laws.

The settlement must be approved by the federal district court. For more detailed background on this matter, see SEC Litigation Release Nos. 19796 (August 9, 2006), 19878 (October 24, 2006), 19964 (January 10, 2007).

The Wall Street law firm, Gusrae Kaplan Nusbaum PLLC has decades of experience in advising and representing members of the broker-dealer community. Please contact our firm at any time to consult with one of our lawyers.

FINRA's Regulatory Notice 10-54 is a "concept proposal" prompted by Dodd-Frank and related SEC mandates, to address the underlying obligations of broker-dealers and investment advisers "to facilitate simple and clear disclosures of material conflicts by both broker-dealers and investment advisers." The proposal seeks to enhance retail investors' understanding of the business, relationships and conflicts of their brokers and would require "each firm to timely provide to retail customers a statement of services, conflicts and duties." Comment on the Notice must be submitted by December 27, 2010.

The Notice focuses on disclosures at the commencement of the business relationship with retail customers and the benefit to those customers of a disclosure in plain English of a "firm's accounts and services, its associated conflicts of interest and any limitations on duties owed to the customer." A "retail customer" is distinct from institutional accounts under NASD Rule 3110(c)(4) which include banks, savings and loans, insurance companies, registered investment companies, registered investment advisers "or any entity (which includes natural persons) with total assets of at least $50 million."

RN 10-54 should be consulted for detailed information. Briefly summarized, the scope of the disclosure document would include such information as: the types of brokerage accounts and services the firm provides to retail customers; disclosures that enable existing and prospective retail customers to evaluate services provided, and products offered, to retail customers; and, the limitations on those services.

Another area of disclosure includes specific information about fees associated with brokerage accounts and financial or other incentives that a firm or its registered representatives are provided on the recommendation of certain products, investment strategies or services. This area of disclosure is fairly extensive including commissions and other compensation.

Finally, the Notice addresses disclosure of "conflicts that may arise between a firm and its customers, as well as those that may arise in meeting the competing needs of multiple customers, and how the firm manages such conflicts." The limitations on the duties a firm owes to its customers is also included in the proposed disclosure with regard to such things as "the ongoing suitability of an investment or portfolio of investments" and other more specific limitations.

FINRA is interested in comments on whether this rule is too broad or too narrow, whether the disclosure should be both electronic and hard copy and other feedback on the what should or should not be included to ensure that the disclosure is meaningful and does not overwhelm retail customers.

Please contact New York City's Gusrae Kaplan Nusbaum PLLC, for more information on FINRA RN 10-54 or questions regarding our broker-dealer advisory services and representation before regulatory entities.

In the grand scheme for Goldman, Sachs & Co., a $650,000 FINRA fine is not a major financial hit. However, this fine closes a chapter on some big headaches for the firm.

FINRA announced the imposition of the fine earlier this week, after Goldman Sachs settled allegations that the firm failed to timely update Form U4 for two registered representatives. Goldman did not admit or deny the allegations.

The firm was required to update Form U4 within 30 days after the Securities and Exchange Commission (SEC) filed a "Wells Notice" for each of these representatives, including Fabrice Tourre. The "Wells Notices" provided formal notice that the two representatives were each the subject of SEC investigations.

However, the updated Form U4 was not filed until after the SEC had filed suit against Tourre and Goldman for allegedly misleading the public with regard to subprime offerings. This was more than seven months after the required 30-day period. Goldman has settled the underlying case with the SEC for $550 million, while Tourre continues to litigate the matter.

A major issue with regard to the untimely filings, was FINRA's finding that Goldman's supervisory procedures and systems were inadequate to make certain that the requisite disclosures were made when "registered employees received notice that they were the subject of a regulatory investigation." According to FINRA, the firm's "written supervisory procedures, manuals and policies were inadequate." Specifically, "Wells Notices" were not included as triggering events for disclosure in the firm's procedures and policies.

Goldman will now review its supervisory procedures and systems for updating and reporting. Citing the inability of investors and other market participants to "adequately assess" these individuals through BrokerCheck®, FINRA noted that the firm's "failures [also] impacted the ability of FINRA and other securities regulators to discharge their registration, examination and oversight duties."

Related Web Resources

For more information on BrokerCheck®, click here.

The New York firm, Gusrae Kaplan Nusbaum PLLC, represents broker-dealers before regulatory and enforcement agencies. Please contact our firm for more information and to learn more about our areas of expertise and practice.

FINRA has issued Regulatory Notice 10-57 to help firms develop funding and risk management programs in the event of another serious credit crisis. It seems clear that FINRA expects the lessons of the past to instruct the future and in this Notice it seeks to assist broker-dealers in making sure they are ready for a worst-case scenario.

Noting that a credit crisis could severely impact operations costs and perhaps make funding unavailable, FINRA "expects broker-dealers to develop and maintain robust funding and liquidity risk management practices to prepare for adverse circumstances." It also "expects broker-dealers affiliated with holding companies to undertake these efforts at the broker-dealer level."

DIrected mainly to broker-dealers that carry inventory positions and carry customer accounts, the Notice states that all broker-dealers should find this a valuable resource. It outlines practices that were identified through the review of 15 mid-sized and large broker-dealers.

The Notice provisions are not meant as an exhaustive list, but do provide solid guidance, suggesting that each broker-dealer "consider the practices that are best suited to its operations, whether or not they are mentioned in this Notice." The following is a summary of what is found in the full Notice.

1. Risk Limits and Reporting
This portion of the Notice urges that the governing board and senior management be fully informed on their firm's risk management policies and procedures and "should participate in setting and periodically re-evaluating the level of funding and liquidity risk the organization is willing to accept to meet its business goals." The expectation is that senior management communicate this through the organization and across all business lines. The suggested analysis includes escalation procedures and risk reporting.

2. Independent Risk Oversight
In this area it is suggested that broker-dealers "use staff that is independent of business lines to ensure that the firm does not exceed the levels of risk tolerance set by the governing board and senior management" and also give that staff sufficient resources and authority. Functions suggested include exposure analysis, stress tests and other monitoring for early warning signs of potential liquidity challenges.

3. Maturity Profile of Funding Sources
This item cautions the '[o]ver reliance on shorter-term funding to finance longer-term assets' which was "a significant factor in the severe difficulties faced by some financial firms during the credit crisis." Specific suggestions to avoid potential exposure are outlined and should be consulted.

4. Red Flags of Potential Funding and Liquidity Problems
This section of the Notice outlines a fairly lengthy list of red flags that should trigger immediate action by management.

5. Inventory Valuation
In this section of the Notice, FINRA provides a list of controls that should be used by broker-dealers to identify the "true liquidation value of inventory holdings" which are
"essential for an effective funding and liquidity management program." The use of staff that is technically competent and independent from the lines of business is encouraged to "evaluate pricing decisions" and "challenge pricing assumptions."

6. Stress Testing
A critical component of the liquidity and risk management is effective stress-testing to assist broker-dealers in identifying and quantifying "potential liquidity strains" and analyzing "effects on its cash-flows, profitability and solvency."

7. Contingency Funding Plan
This area suggests the ways broker-dealers can react to a credit crisis with contingency funding, including procedures for senior management and governing boards to formally sign off on these plans.

8. Use of Customer Assets
This section assists in the analysis for compliance under Exchange Act Rule 15c3-3, which requires broker-dealers to calculate how much it needs, if any, to deposit on behalf of customers in its reserve bank accounts for the exclusive benefit of those customers.

In its conclusion FINRA makes it very clear that broker-dealers must be proactive in developing funding and liquidity risk management practices, as well as ensuring they are rigorously followed.

For more information on FINRA Regulatory Notice 10-57 and for representation before FINRA and other regulatory and enforcement bodies, please contact the Wall Street law firm of Gusrae Kaplan Nusbaum PLLC.