Securities Lawyer Blog

It's worth noting so we will. The Securities Lawyer Blog cannot end this month's postings without noting the largest penalty ever imposed on a Wall Street firm.

Two weeks ago, the Securities and Exchange Commission (SEC) revealed that Goldman, Sachs & Co. has agreed to pay $550 million and to reform its business practices for its part in subprime-related investment collapse. The settlement was recently approved by United States District Court Judge Barbara Jones.

In the SEC's complaint filed this past April, the firm was alleged not only to have affirmatively misstated key facts, but also to have omitted them. The problems for the firm centered on the performance of subprime residential mortgage-backed securities. Investors were not told about the role that the hedge fund Paulson & Co. Inc. played in the Collateralized Debt Obligation (CDO) portfolio selection process. Paulson's interests were not aligned with those of investors. In fact, Paulson had "taken a short position against the CDO."

In Goldman's consent, the firm did not admit or deny the allegations, but did acknowledge that its marketing materials contained incomplete information. The firm also called it "a mistake" not to have disclosed the role of Paulson in the portfolio selection process because their interests were "adverse" to Collateralized Debt Obligation (CDO) investors.

Robert Khuzami, Director of the SEC's Division of Enforcement put it this way: "[t]his settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing."

As part of the settlement, Goldman is permanently enjoined from violating the antifraud provisions of the Securities Act of 1933. The payment includes $250 million to investors harmed in these transactions. The firm will also be required to reform its review and approval process with regard to mortgage securities offerings, including written marketing materials, as well as the role of key functions in theprocess, including counsel and compliance personnel.

Continue reading "Goldman and the $550 Million SEC Settlement" »

The Securities Lawyer Blog has posted previously on brokers who have paid the ultimate price for creating and allowing market manipulations and other bad dealings. We have also noted when broker-dealers fail to supervise or detect bad dealings.

In a recent case, Deutsche Bank's compliance department apparently did its job and now one of its former brokers is permanently barred. A hearing panel at the Financial Industry Regulatory Authority (FINRA) issued this ruling on a complaint filed by FINRA in December 2008. The decision will be final, unless appealed.

Big Manipulations
Essentially, the broker involved was alleged to have manipulated the price of a biosciences stock seeking to create big gains for a hedge fund client, his family and himself. The panel's litany of findings are a roadmap for noncompliance and self-dealing.

Mr. Edward Brokaw was located in a Connecticut office of Deutsche Bank Securities. He is said to have executed a deliberate effort to drive the biosciences stock value down and in so doing, enhance the value of contingent value rights (CVRs) for this stock.

The hedge fund client held about 18.5 million CVR's for the bioscience stock, which amounted to about 30 percent of the total outstanding CVR's. The broker and his family owned over 200,000 of these. As the stock value dropped the CVR values increased and a big payout would result for CVR holders.

Bad Calls
The evidence against the barred-broker included recorded sell orders that were placed at the firm's trading desk. And the decision by the hearing panel included evidence that orders were taken by the trading desk to sell off large share holdings of the bioscience stock by the hedge fund resulting in a drop of value.

Further, another call "explained the pricing of the CVRs and the strategy behind the hedge fund's instructions to sell close to the market's open and close" and included a statement that this game was to be played for the next 15 days. Ultimately, it was found that this was a deliberate effort to depress the stock's price.

Compliance Works
After three days, Deutsche Bank's compliance personnel picked-up on the aggressive trading pattern and stopped sales of the biosciences stock for the hedge fund. Mr. Brokaw was suspended and terminated for these trades.

Another policy at Deutsche Bank was found to have been violated in that order tickets were not created as received, but rather were aggregated for each day "with a false notation that the order was given by the client directly to the trading desk rather than to Brokaw - thus circumventing automatic branch office compliance review of the orders"

Continue reading "Done Deal -- Former Deutsche Bank Broker Permanently Barred " »

Recently, the Securities Lawyer Blog posted that the Financial Industry Regulatory Authority (FINRA) was set to take over responsibility for performing market surveillance and enforcement functions that were previously conducted by NYSE Regulation.

In mid-June, the agreement was finalized and FINRA has now taken over the regulatory functions for the following markets and exchanges: NYSE Euronext's U.S. equities and options markets; New York Stock Exchange; NYSE Arca, and NYSE Amex.
This adds to FINRA's scope of responsibility as it already provides regulatory services to several other markets and exchanges including the NASDAQ Stock Market and NASDAQ Options Market, among others.

The move towards consolidation in these functions is intended to create what NYSE's Euronext COO Lawrence Leibowitz called "a consistent and completely integrated approach to regulation."

FINRA's Chairman and CEO, Richard Ketchum echoed this view noting that the consolidation is a "significant step in addressing the fragmented trading environment, which has eroded the ability of regulators to get a complete picture of market activity." He went on to call this a "more holistic, unified approach" that will benefit markets and protect investors.

According to Nasdaq.com, Mr. Ketchum had previously warned that multiple regulators created potential for loopholes, avoidance of oversight and created an "incomplete picture" of the overall market.

The oversight for these regulatory services will continue to be provided by NYSE Euronext, through its subsidiary NYSE Regulation. Costs for this function and staffing should remain at prior levels, although some staff is expected to move over to FINRA.

Continue reading "NEWS UPDATE: FINRA TAKES OVER SURVEILLANCE AND ENFORCEMENT" »

The mortgage crisis? It's not over and the SEC just reminded us of that.

Earlier this week, the Securities and Exchange Commission (SEC) charged Thomas Priore, the owner and president of ICP Asset Management, LLC (ICP) and affiliated broker-dealer and holding company firms, with fraud. The action relates to the management of mortgage investment products.

Specifically, the civil action, filed in the United States District Court for the Southern District of New York, charges that Mr. Priore and affiliates fraudulently managed collateralized debt obligations (CDO's). The defendants intend to vigorously defend themselves against these charges and have issued a statement that they acted in their clients' best interests at all times.

The filing of this action is part of the SEC's ongoing investigation surrounding the financial crisis and its relationship to such products as CDO's and the major losses suffered during this period with these sorts of investments.

The impact alleged in this case is big. The SEC's allegations include "fraudulent practices and misrepresentations" that resulted in four multi-billion dollar CDO's to lose millions of dollars. Additionally, the defendants are alleged to have secured large advisory fees and undisclosed profits related to these investments at the "expense of their clients and investors," taking advantage of the distressed market for their own benefit.

The SEC also claims that the defendants allowed trades for the CDO's knowing that the prices were inflated and that clients would be exposed to overpayment and potential losses.

The SEC's New York Regional Office Director, George S. Canellos, put it this way: "The CDOs were complex but the lesson is simple: collateral managers bear the same responsibilities to their clients as every other investment adviser." He continued saying that advisers will be held accountable when clients' trust is violated.

Related Web Resources

For more background on this case and other aspects of the mortgage crisis, go to law.com.

Continue reading "SEC Files Fraud Action Related to Housing Woes " »

This week brings news of the opinion issued (after a ruling earlier this year) by Judge Rakoff in the class action case brought by the Public Employee's Retirement System of Mississippi. Judge Rakoff does not need to be introduced to Securities Lawyer Blog readers - to review prior postings on his rulings, click here and here.

Judge Rakoff weighed in this week on the ratings agencies role in evaluations for securities offerings. The plaintiffs' claimed that the defendants including Moody's and McGraw-Hill Companies' Standard & Poor's were actually acting as underwriters. This claim was dismissed with prejudice. The plaintiffs' argued that securities were issued based on ratings agency evaluations and that these evaluations formed the basis of allegedly false and misleading statements in offering documents.

Calling this claim an "extremely broad view of what constitutes an underwriter" the opinion points out that under Sections 7 and 11 of the Securities Act of 1933 the security rating that is assigned by a nationally recognized statistical rating organization is not considered part of the registration statement prepared or certified by a person within the meaning of these sections. The opinion also notes that the SEC does not interpret underwriters as falling under these definitions.

According to law.com, there are a few defendants left in the case after dismissal of Merrill Lynch subsidiaries Merrill Lynch Mortgage Lending and First Franklin Financial, JPMorgan, ABN Amro, and Credit-Based Asset Servicing and Securitization. The remaining claims are now those brought against individual Merrill executives, Merrill Lynch Mortgage Investors, and Merrill Lynch, Pierce, Fenner & Smith.

As the opinion in the class action case was issued, and quite coincidentally, as Mr. Warren Buffet weighed in on the ratings agencies after having been subpoenaed to the Financial Crisis Inquiry Commission on the business practices of the ratings agencies. Mr. Buffett testified at the same hearing as Moody's Investor Services CEO, Raymond McDaniel.

The subpoena was issued after several attempts by the Commission to bring Buffett to the table voluntarily. Berkshire Hathaway is the largest Moody's shareholder and Mr. Buffett has been a big seller of Moody shares as well.

To view Mr. Buffett's testimony on the ratings agencies click here.

Continue reading "Class Dismissed -- Claims Against Ratings Agencies Ousted by Judge Rakoff" »

Recent experience has shown that back-office operations can at times be quite problematic for investors. The Securities Lawyer Blog has posted on instances in which back-office has caused real harm to customers. FINRA appears to seek to put an end to that, or at least regulate those involved.

This past week the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 10-25 in which it requests comment on its proposal that would make some important additions to its regulatory scope. Comments on this new proposed rule are due prior to July 12, 2010. The rule would be subject to SEC approval.

The Notice concerns a new proposed rule that would provide greater oversight to back office operations. Specifically, the new rule would establish expanded registration requirements that would apply to those "individuals engaging in, or supervising, activities related to sales and trading support, and handling of customer assets."

This means that in addition to broker dealers, those individuals who are part of the operations staff that support broker dealer activities will now be subject to registration. The new rule would apply to certain individuals involved in activities that could impact investors and customers in a significant way. The rule would not only require their registration, but also would require testing and continuing education.

According to FINRA, "[t]hese employees perform an integral role inside the firms, and their actions can have meaningful connections to the safety of customer funds, accounts and transactions, and the overall integrity of firm books and records." Recent history seems to bear this out.

Specifically, the individuals that are intended to fall under this new rule are those involved with valuation models, and manage such activities as trade confirmations, account statements, trade settlement and margin. Additionally, those individuals who oversee such activities as stock loan/securities lending, prime brokerage, receipt and delivery of securities, and/or financial regulatory reporting would also be covered by this registration rule.

FINRA notes that the SEC has suggested that raising awareness of back-office personnel and ensuring a level of knowledge of the securities industry would be advisable. FINRA's goal appears to be the enhanced likelihood that individuals involved in these activities understand their obligations and become more aware of potential problems, as well as have a basic knowledge of the industry and its high level of regulation.

Continue reading "Back-Office Personnel Targeted for Registration and Education" »

Regulatory enforcement continues to keep the Financial Industry Regulatory Authority (FINRA) busy. Another large set of fines imposed for alleged Regulation SHO violations was announced earlier this week for two broker dealers, Deutsche Bank Securities ($575,000) and National Financial Services ($350,000), respectively.

Simply stated, short sales are subject to Regulation SHO, which requires that brokers or dealers secure and document a "locate" prior to a short sale. The "locate" is necessary for a short sale to be accepted or ordered to ensure that the security can be borrowed and delivered.

Calling the locate "an essential component of ensuring that short sales are executed properly," James S. Shorris, FINRA Executive Vice President and Acting Chief of Enforcement, stated that "[t]he failure to design, implement and supervise systems that reasonably ensure that shares of a security are available to be borrowed before a short sale is executed significantly undermines the effectiveness of Regulation SHO."

The specific problem for these firms was similar, as was the end result of their system failures with regard to ensuring compliance with Regulation SHO. Each firm did maintain systems to block short sale orders that did not have a documented "locate." But in both cases there were exceptions to that which end up being fairly costly and had the effect of failing to block short sales that did not have a locate associated with them.

What FINRA found when sampling short sale orders for each of these firms, was a failure to ensure that a locate had been secured before such trades were executed. In Deutsche Bank's case the block was disabled in "certain instances" and in NFS' case, a separate system applied to "certain customers."

Ironically, because Deutsche Bank's systems had some outages that at times precluded data involving locates to be imported, the firm disabled the system altogether during outages. This occurred over a four-year period. No system was created to ensure that during the period when the system was disabled, another review was in place. This allowed short sales to go through that otherwise were not in compliance with the locate requirement.

Similarly, NFS maintained an automated system, but also excepted some firms that circumvented automatic blocks and allowed manual locate requests and approvals with account representatives. This occurred over a similar time-frame to that of the Deutsche Bank's challenges with regard to compliance with Regulation SHO. The FINRA press release called this a "flawed system."

In both instances, FINRA also found that the review processes for these firms on this type of trading was not adequate nor were the implementation of supervisory systems. The violations of Regulation SHO apparently could have been avoided had these systems been developed and reviewed for compliance.

To learn more about on Regulation SHO and short selling practices, visit investopedia.com.

Continue reading "SHO Down -- Nearly $1 Million in Fines for Regulation SHO Violations" »

During the past several years, many investment companies have closed branches or have closed completely. One Los Angeles-based company will feel some pain for a while over regulatory problems with its former Long Island offices.

Westpark Capital, Inc., has been ordered to pay $100,000 in fines and $300,000 in restitution to those customers impacted by several alleged failures, says the Financial Industry Regulatory Association (FINRA). The problems for Westpark derive from its Long Island operations in which it is alleged that brokers churned their customers' accounts and made both unauthorized and unsuitable trades.

The allegations include failures between 2006-2007 to: (1) establish and maintain an adequate system for supervising its brokers, including failures to monitor customer account activities despite former disciplinary records and customer complaints on suitability and authorization; (2) monitor excessive trading; and, (3) supervise managers with either little experience or prior disciplinary histories.

The firm will not only pay monetary fines, but is also dealing with suspensions of a former Chief Compliance Officer who is suspended for four months and is set to pay a $5,000 fine as well as its current Chief Operations Officer who is suspended for three months as a principal and set to pay a $20,000 fine.

Apparently, Westpark hired brokers that already had disciplinary histories themselves or had worked for broker-dealers that had such records. Some of these broker-dealers had even been expelled by the securities industry.

FINRA's Executive Vice President and Executive Director of Enforcement, James S. Shorris had some harsh words for the firm's hiring and operational practices saying that they failed to "recognize and respond adequately to both broker and customer account-related issues" which "resulted in significant customer harm."

Specific complaints and actions involving individual brokers in these cases are available for review on FINRA's website.

Related Web Resources

For more information on broker status, visit the BrokerCheck® service on the FINRA website.

Continue reading "Hands Off Doesn't Pay -- $400,000 for Westpark Capital to Customers and FINRA Fines" »

Remember February of 2008? It was a cold winter for investors holding Auction Rate Securities (ARS) when the auctions went into a deep freeze and never thawed.

The Securities Lawyer Blog has previously posted on the many issues with ARS and related auction failures. Now ARS have resurfaced as the Financial Industry Regulatory Authority (FINRA) announced two more settlements with major firms.

FINRA says it has completed ARS settlements amounting to fines of almost $5 million with 14 firms and that those firms have returned over $2 billion to impacted investors. The two recent settlements are with HSBC Securities (USA), fined $1.5 million and US Bancorp Investments, Inc. fined $275,000.

In the HSBC matter, FINRA revealed that the firm had returned over 90 percent to ARS investors. However, there were additional investors who had for various reasons not received the repurchase of their ARS holdings. The settlement includes a repurchase offer to those customers who did not previously receive a repurchase of their holdings.

In the US Bancorp Investments matter, the firm had previously repurchased customer ARS holdings.

Reiterating the failure of these firms "to adequately disclose the risks associated with auction rate securities," James S. Shorris, FINRA Executive Vice President and Executive Director of Enforcement stated that ... "FINRA's first priority has been to ensure investor access to the money frozen in their ARS investments. We are pleased that these firms have completed or agreed to complete offers to buy back frozen ARS from their customers."

FINRA found that each of these firms had engaged in the sale of ARS with representations to their customers that these were safe and liquid. In HSBC's case, FINRA found that marketing materials were not fair and balanced.

These securities were recommended as safe and liquid even after the credit crisis began and failure of the auctions became a possibility. FINRA found that one broker suggested that the firm email a warning to customers that the auctions could fail. The suggested email to customers was not permitted by management and retail brokers continued to recommend ARS.

The situation with US Bancorp also involved marketing materials (provided by other securities firms) that did not adequately disclose ARS risks, were not balanced and did not disclose material differences between money market securities and ARS while comparing the yields of the two types of securities. Additional problems included failure of due diligence prior to including ARS on the firm's approved products list.

As part of the settlement, both firms have agreed to participate in the FINRA-administered arbitration program that allows resolution of claims of consequential damages for those customers that suffered such damages when their ARS funds were not available to them.

Apparently, there are more investigations on ARS ongoing and future FINRA settlements are likely.

Related Web Resources

For more information on the special arbitration program for ARS, go to FINRA.

Continue reading "The Big Freeze Still Thawing as ARS Settlements Continue" »

Late last year, the Securities Lawyer Blog posted on $600,000 in fines imposed by the Financial Industry Regulatory Authority (FINRA) on Scottrade, Inc. for what FINRA found to be an inadequate money-laundering program.

On April 1, 2010, FINRA announced that it has "fined Scottrade, Inc. $200,000 for violating pattern day trading margin rules and for extending credit to customers in violation of federal securities laws and banking regulations."

This time, FINRA found that the firm had permitted some margin account customers to trade even after their account values had fallen below the minimum equity required to continue. The problem centered around high volume traders whose minimum equity fell below the $25,000 required to continue trading. FINRA noted that the minimum is intended to limit risks that day-traders can present to both the market and to clearing firms as they leverage their positions throughout the day.

According to FINRA, the problem for Scottrade was that from February 2006 through October 2007, the firm failed to ensure that pattern day traders were restricted from trading when their account values fell below the required minimum. Rather, the firm provided those traders a written notice telling them to bring their account value to the $25,000 minimum prior to further trading.

Those pattern day traders who did not bring their account values up, were permitted to continue trading and received a second written warning from Scottrade. It was only after a failure to bring accounts up to the minimum that Scottrade restricted these traders from continuing to day trade. Over 11,000 day traders, trading nearly 172,000 day trades were allowed to continue trading in violation of the rules.

Pattern day traders are customers who day trade four or more times within five business days. These traders are required by FINRA rules to maintain at least $25,000 in their margin accounts.

Compounding this problem, Scottrade was also found by FINRA to have improperly extended credit to some cash account customers. These credit extensions were permitted to go beyond the time frame established under Federal Reserve Regulation T. Customers who did not have funds to cover stock purchases were sent a "sellout" letter when the funds were due. According to FINRA, this improperly permitted the customer to have additional days to pay for the transactions beyond the time frames allowed under Regulation T.

Related Web Resources

More information on margin accounts and Regulation T can be found on the SEC's website.

Continue reading "Not Another Fine Day for Scottrade -- $200,000 for Securities and Banking Issues." »

Last week some names were named inadvertently by defense counsel trying to get more from the government in what could become a very very big antitrust action.

By way of background, the Department of Justice filed a criminal antitrust action, U.S. v. Rubin/Chambers, Dunhill Insurance Services Inc., in the U.S. District Court, Southern District of New York naming over a dozen Wall Street firms. The indictment issued in October 2009.

In the antitrust case, the government alleges that various firms conspired to pay below-market interest rates to U.S. state and local governments on investments. The alleged conspiracy is also claimed to have provided the opportunity to the firms to reap profits at the expense of taxpayers.

In addition to naming such firms as UBS and JPMorgan Chase & Co. in the action, last week counsel for a former employee of the indicted advisory firm CDR Financial Products Inc., included a list of "co-conspirators" who have not been charged. Seeking more specific evidence from the government, they apparently "inadvertently" included the names of companies and individuals - but the list has now been stricken from the exhibit after a request to the court.

The DOJ case involves guaranteed investment contracts that are purchased by governmental entities such as cities, states and school districts with funds derived from the sale of municipal bonds. These contracts are then used to secure a return on funds needed for projects such as construction.

The earnings on such investment contracts can be collected by the Internal Revenue service. These contracts are supposed to be subject to competitive bidding so that the governmental entities are assured of receiving a fair return.

The advisory firm, CDR, and several current and former executives were indicted last October, and recently several former CDR employees have agreed to cooperate with the DOJ. The firm was the subject of a government raid in 2006.

This alleged "conspiracy" may also involve some of the bailed-out banks and individual defendants at those institutions.

For more information and details on the history and developments in the case, please go to bloombergnews.com.

Continue reading "Inadvertent List Hits in DOJ Antitrust Action" »

The Securities Lawyer Blog has posted several times about the Securities and Exchange Commission's (SEC) prosecution of backdating cases and the difficulties the SEC has encountered in these proceedings.

Last month, we posted on the SEC's decision not to go forward with a civil action when former Broadcom executives were acquitted and criminal cases dismissed.

In another case the Securities Lawyer Blog has been following, the Ninth Circuit overturned the conviction of Gregory Reyes, who had been CEO of Brocade Communications Systems. The court found that prosecutors in the case had knowingly made false statements during closing arguments.

The SEC's woes with backdating prosecutions appear to be continuing. The Reyes retrial has been moving forward for the past two weeks in the United States Federal DIstrict Court, Northern District and defense counsel have requested that the trial court declare a mistrial.

The basis for the request is alleged prosecutorial misconduct. The defense is claiming that the prosecution "knew or should have known" that a key witness Stephen Beyer, formerly with Brocade's human resources department, provided false testimony.

The testimony at issue centers on Mr. Beyer's statements that his former employer, KLA-Tencor's stock options "auto-pricing" practice differed drastically from that at Brocade. The defense is claiming that this testimony is central to the prosecution's case as they have sought to establish that Brocade's employees had concern about the options backdating practices and that human resources employees had tried to suppress the audit trail.

However, the defense in the Brocade case claims that the two options pricing systems were not different, as evidenced by the SEC's suit against KLA-Tencor.

Judge Breyer has now been asked either to declare a mistrial or to strike Mr. Beyer's testimony from the record in the Brocade matter, which would fairly well disassemble the prosecution's case.

Related Web Resources

Background on options backdating can be found at the SEC's spotlight section on this issue.

Continue reading "Mistrial at Retrial? Government Woes May Continue in Backdating Prosecution" »

Last week, the Securities and Exchange Commission (SEC) announced that Kmart Corporation's former Chief Executive Officer, Charles C. Conaway, has been ordered to pay in excess of $10 million in disgorgement, prejudgment interest and civil penalties.

This matter dates back to August 2005, when the SEC filed an action against Mr. Conaway, alleging that prior to the company's bankruptcy, he misled investors with regard to Kmart's financial condition.

In June 2009, after a three-week trial held in the United States District Court for the Eastern District of Michigan, the jury returned a verdict in favor of the SEC. The SEC had alleged that Mr. Conaway engaged in material misrepresentations and omissions with regard to the liquidity of the company. Specifically, he was alleged to have been responsible for making these misrepresentations in the Management's Discussion and Analysis ("MD&A") section of Kmart's Form 10-Q for the third quarter and nine months ended October 31, 2001, and in an earnings conference call with analysts and investors.

The SEC had argued in the case that Mr. Conaway, along with Kmart's former Chief Financial Officer, John T. McDonald, failed to disclose why the company had engaged in a huge overbuy in 2001 and how that had impacted the company's liquidity. The jury agreed with the SEC's allegation that the MD&A disclosure misstated the reasons for this inventory build-up. The company claimed this was due to "seasonal inventory fluctuations and actions taken to improve our overall in-stock position." The SEC's position was that this was materially misleading since the actual reason for much of this inventory mess was due to "reckless and unilateral purchase of $850 million of excess inventory."

After this occurred the company began to pull back on timely payments to vendors and by the end of the third quarter 2001, in essence had borrowed $570 from its vendors in slow payments. Then the executives misrepresented the reasons behind the failure to pay vendors and its impact on liquidity. Many vendors stopped shipping products to the company in late 2001 and the company filed for bankruptcy in January 2002.

The court's order will require Conaway to pay disgorgement in the amount of $5,000,000, prejudgment interest of $2,853,432 and a civil penalty of $2,500,000. Additional specifics are currently being negotiated by the parties with regard to the handling of a stay, pending the appeal of this matter.

Related Web Resources

Click here for more information on disclosure requirements in Form 10Q and related filings.

Continue reading "Court Orders Former Kmart CEO to Pay $10 Million " »

Last week, the Securities and Exchange Commission (SEC) filed a complaint in the U.S. District Court for the Southern District of New York against Daniel Bonventre. Mr. Bonventre is alleged to have made a career of falsifying records in Bernard Madoff's back room operations.

The purpose of the alleged fraud was not only to create enrichment for Madoff's key players, but also to create a false appearance of legitimate income. Apparently, for about three decades, Mr. Bonventre was responsible for the back office operations of the now infamous Ponzi scheme -- also known as Bernard L. Madoff Investment Securities LLC (BMIS). Specifically, he managed the accounting and securities clearing functions.

The SEC claims that Bonventre not only knew investors' monies were not being used to purchase securities, but lined his own pockets to the tune of $1.9 million placing false backdated so-called trades in his own account.

Not surprisingly, this latest filing is the seventh enforcement matter brought in the Madoff matter. Prior SEC actions include those against Madoff, auditors, computer programmers and others involved in the elaborate scheme. Guilty pleas have been entered for criminal charges brought in these matters.

According to the SEC's litigation release Mr. Bonventre hid the liabilities to investors and assets received from them. Mr. Bonventre is alleged by the SEC to have assisted Madoff and his close advisor Frank DiPascali, Jr., in lying to investors and regulators when BMIS operations came under review. The operational losses of BMIS were kept secreted behind a wall of $750 million in investor funds employed to "artificially improve reported revenue and income."

In the words of the SEC, "[w]ith Bonventre's assistance, they made serial misrepresentations to external reviewers by manufacturing reams of false reports and data."

Related Web Resources

Information on SEC Madoff-related matters can be located at accounting and auditing enforcement releases and litigation releases at www.sec.gov.

Continue reading "More Guilty Please? $1.9 Million Illicit Profits for Madoff's Chief Back Room Operator" »

Client representation is front and center of the life of a lawyer and these days representation often includes media strategy and planning. But in one case, media strategy is currently front and center in the retrial of a former executive.

As the retrial of Gregory Reyes, former CEO of Brocade Communications Systems, Inc., begins, the issue of attorney client privilege is part of the prosecution's strategy. The Department of Justice is pushing the court to allow statements made in a press release by Reyes' former counsel, Richard Marmaro. Marmaro's statements were intended to help his client, but the government would like to use the statements as evidence against him.

In the first instance, Marmaro said that his client did not backdate options. But at trial he argued that although backdating did occur, it was not illegal. Also at issue are the files kept on Reyes by the public relations firm that was representing him.

United States Federal District Court Judge Charles Breyer who sits in the Northern District of California presided over the first trial and will also preside over the retrial. The first trial ended in conviction but was thrown out by the Ninth Circuit after it was alleged that the government knowingly made false statements in closing arguments.

The critical issue with regard to waiver is whether Reyes provided information to his lawyer knowing that that information would become public. Reyes' new lawyers have filed a motion to quash the subpoena that was issued to the PR firm, saying the statements made by counsel were necessary and that information received by the PR firm should not have to be produced. They argue counsel was responding to the intensity of media created by the government at the outset of the case.

Judge Breyer has indicated he might well allow Reyes' former attorney Marmaro's quotes and other information from the PR firm into evidence. According to the Judge, "an argument could be made that it's not a confidential communication." If the Judge Breyer allows this into evidence, it could damage the defense case especially when coupled
with the potential testimony that the company's finance department had knowledge of the backdating.

The Securities Lawyer Blog has posted on the recent BofA waiver issue. The development of the law as regards attorney-client privilege is something to watch carefully. The Reyes matter is instructive in the care that must be taken in creating and implementing a media
litigation strategy as well as the use outside of outside firms to support these efforts.

Resources on the Reyes trial and retrial can be found at law.com

Continue reading "Talking Points Or Taking Points? Privilege Waiver on the Line." »