Securities Lawyer Blog

Auction Rate Securities (ARS) have cost firms a great deal in settlements with both investors and regulatory authorities. Although many firms have completed settlements with regard to these securities, some are just now completing their troubled ARS histories with regulatory settlements.

Earlier this week, SunTrust Robinson Humphrey, Inc. (SunTrust RH) and SunTrust Investment Services, Inc. (SunTrust IS) agreed to settle with The Financial Industry Regulatory Authority (FINRA) for $4.6 million related to Auction Rate Securities sales and marketing.

The firm has been repurchasing millions of dollars of the failed ARS from their customers, as have many other broker-dealers. The firm will continue to settle with its investors and participate in FINRA's special arbitration program in which some investors are able to make their case for payment of consequential damages.

The settlement was reached to resolve claims made by the agency that SunTrust RH had failed adequately to disclose such issues as risks associated with theses securities and the potential for auction failures. These allegations are similar to those that have been made against many firms that sold ARS. In addition, FINRA alleged that the firm had not supervised or trained sales personnel. The related entity SunTrust IS, was fined $400,000 for an alleged deficiency with regard to sales material, as well as deficiencies with sales training and procedures.

The FINRA findings included allegations that the firm was aware of the potential for ARS failures, but that some sales people continued to sell the firm's ARS issues, hoping to reduce inventory. In addition, SunTrust RH sales personnel represented that these issues were safe and liquid. And finally, the firm stopped supporting these auctions, aware that they were likely to become frozen.

Detailed information on ARS procedures and background, for both investors and industry professionals, can be found on FINRA's website.

New York City's Wall Street law firm, Gusrae Kaplan Nusbaum PLLC, represents brokers and traders before all regulatory agencies. Please contact our law firm to talk with one our lawyers about representation and our litigation and advisory practice. The expertise and experience, as well as the regulatory background of our preeminent lawyers, is invaluable in dealing with a wide variety of legal matters and issues.

Last year, the U.S. Securities and Exchange Commission (SEC) adopted a rule that would have given major shareholders of publicly traded companies greater nominating power for corporate directors. Yesterday, the U.S. Court of Appeals for the D.C. Circuit issued a decision stating that it would not approve the agency's proposed proxy access rule, which had been mandated after the Congressional push for financial reform and overhaul under the Dodd-Frank Act.

The SEC has proposed about 70 rules thus far and according to SEC Chairman Mary Schapiro, the commission must evaluate the " 'efficiency, competition and capital formation' " of every proposed rule. Chairman Schapiro testified before the United States Senate Committee on Banking, Housing and Urban Affairs the day before the court's ruling on the proxy access rule. The loss in this case is not the first for the agency that is seeking to carry out its assigned duties under Dodd-Frank.

The rule before the court was supported by investor advocates, but was then challenged by the US Chamber of Commerce and the Business Roundtable. The court agreed with these groups who had argued that special interest investors would not necessarily put shareholder value as paramount when nominating directors.

The court voiced its concern that the rule could impose serious costs to companies as they fight these shareholders' attempts to remove and replace board members. The court found the rule to be "arbitrary and capricious" in that in their view the commission had not provided sufficient data as to improvement of board performance or increase in shareholder value.

Major shareholders representing special interests, such as unions and pension funds, could have a serious impact on the costs of the process and according to the court, these costs were not adequately considered. The shareholders' nominees would have been included in proxy materials with management's nominees.

The court wrote in it's decision that " 'the commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.' "

The SEC has issued several statements all of which have said options are being considered as to next steps in view of the court's decision.

The New York firm of Gusrae Kaplan Nusbaum PLLC represents industry members in matters involving a broad spectrum of issues before all regulatory entities. Contact our law firm to consult with one of our attorneys.

Last week, the Securities and Exchange Commission (SEC) settled a major action with J.P. Morgan Securities LLC (JPMS) in which the firm and its affiliates have agreed to pay over $200 million. The SEC had filed an action that alleged the firm had "fraudulently rigged" nearly 100 bond reinvestment transactions in over 30 states.

The settlement includes payments that will be returned to municipalities and other entities, as well as payments to settle parallel actions that were brought by other affected entities.

The allegations essentially involved "secret arrangements" that the firm is claimed to have had with bidding agents. The arrangement allowed the firm access to competitors' bids putting the issuers and the investors at a severe disadvantage and ensuring the firm's profits.

The allegations in the complaint for violations of federal securities laws, also involve a specific practice in which the proceeds of tax-exempt securities were not invested at fair market value because an actual fair market price was not possible to set given the lack of a fair competitive bidding process.

The alleged practices involved a lengthy time frame from 1997 through 2005 and the impact was wide spread. The alleged "fraudulent practices, misrepresentations and omissions" are said to have impacted the fairness of the bidding process and the price that municipalities paid for reinvestment of proceeds.

The SEC's action was filed in the United States District Court for the District of New Jersey and claims that the "last looks" practice enabled the firm to win bids unfairly and facilitated submission of rigged non-winning bids. The SEC noted that the "fraudulent conduct jeopardized the tax-exempt status of billions of dollars in municipal securities because the supposed competitive bidding process that establishes the fair market value of the investment was corrupted."

Related actions include an enforcement matter against a former marketing executive involved with the scheme who cooperated with the investigation as well as other prior matters involving corruption in the reinvestment industry. The SEC notes that the investigation in continuing which could mean that more actions are to follow against other firms involved in this area.

New York City's Gusrae Kaplan Nusbaum PLLC, represents broker-dealers and firms before all regulatory agencies. Please contact our law firm for a confidential consultation with one our lawyers. Our highly-respected, preeminent lawyers have decades of experience and expertise representing Wall Street broker-dealers and firms.

Earlier this week, the SEC confirmed that $230 million in holdings of a hedge fund's offshore account are back in the United States. Overall, enforcement actions are said by the SEC to have returned over $2 billion to investors last year. The underlying case charges an individual, his investment advisory firm and a hedge fund management entity that managed three hedge funds with involvement in a Ponzi scheme.

The SEC advised the US District Court for the District of Connecticut that the funds are in a bank account in this country and in accord with the court's prior rulings, will remain frozen as the case proceeds. Judge Janet Bond Arterton had entered an order earlier this month that froze the hedge funds' assets and ordered them returned to the United States. She had already frozen the assets of other defendants.

Notably, Ethiopis Tafara, the Director of the SEC's Office of International Affairs was quoted in the SEC's press release saying, " 'In this case, the ability to freeze and repatriate the alleged financial crime proceeds was critical to the SEC's effective enforcement of the U.S. securities laws.' "

The SEC's action alleges that the individual defendant and his unregistered investment advisory firm "misappropriated at least $53 million in investor funds and used the money for self-dealing transactions." Specifically, it is alleged that he improperly transferred investors' monies over which he had personal control and then invested the monies for his personal benefit and that of entities over which he had control "running a multi-year, multi-million dollar Ponzi scheme."

An additional investment advising entity, hedge funds they managed and affiliated entities were recently named in the litigation in a second amended complaint "as relief defendants for allegedly holding funds tainted by the Ponzi scheme."

The charges against various defendants include alleged violations of Sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.

The New York firm of Gusrae Kaplan Nusbaum PLLC represents broker-dealers in regulatory and enforcement matters. Our lawyers advise clients and defend industry members in matters involving a broad spectrum of issues before all regulatory entities. Contact our law firm to consult with one of our attorneys.