Securities Regulation and Litigation Lawyer & Attorney : OverRegd Blog : Lindquist & Vennum Law Firm, Minneapolis and Denver

Mark Cuban, the co-founder of Broadcast.com and often-outspoken owner of the NBA's Dallas Mavericks, recently launched a controversial new web publication at Sharesleuth.com. The basic object of Sharesleuth.com is to conduct investigations and identify and report on "suspect companies." For the investigation and reporting, Cuban has hired a business reporter named Chris Carey, formerly with the St. Louis-Dispatch. Once identified, Sharesleuth.com says it will "shine a spotlight on questionable companies," and will "name names and show evidence, by linking to documents, photographs, and other information." The controversial part is that Sharesleuth.com has already disclosed that Cuban will make personal investments based upon the information discovered, prior to the publication of the information on the website.

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A Warning Flag From The NASD For The Life Settlement Industry:
"A variable life settlement may be a valuable option for insureds who otherwise would surrender their policies or allow them to lapse. However, variable life settlements are not for everyone."

NASD Notice to Members 06-38 August 2006. Here it comes insurance folks - suitability review by the NASD. If you are encouraging a policy holder to sell a variable life insurance product in the secondary market, you are subject to NASD regulation.

What is a life settlement? What does the regulation of it by the NASD mean?

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A challenge to the SEC's rulemaking authority was recently successful in Goldstein v. Securities and Exchange Comm'n, No. 04-1434 (D.C. Cir. June 23, 2006). http://pacer.cadc.uscourts.gov/docs/common/opinions/200606/04-1434a.pdf.
In that case, the Federal Court of Appeals for the D.C. Circuit vacated the SEC's rule requiring most hedge fund advisers to register with the SEC under the Investment Advisors Act of 1940. The SEC's "hedge fund rule" (Rule 203(b)(3)-2) required most hedge fund advisers to register with the SEC if the funds they advise have fifteen or more shareholders, limited partners or beneficiaries. Prior to this rule, hedge fund managers were often exempt from registration under the Act's "private adviser exemption," which allows advisers with less than fifteen "clients" over the past 12 months to avoid registration, and the SEC had interpreted "client" to refer to the fund entity itself rather than individual investors. Through its hedge fund rule, however, the SEC changed from its prior position by equating "client" with "investor", thereby requiring most all hedge fund managers to register.

In vacating the rule, the Court rejected the SEC's argument that it had authority to impose any susceptible meaning on the term "client" where the term had not been defined in the Advisers Act. The court emphasized that under the Advisers Act and elsewhere, the adviser's duties run to the fund and not to the individual investors. In electing to vacate the rule, the Court determined that the SEC did not adequately explain "how the relationship between hedge fund investors and advisers justifies treating the former as clients of the latter."

The Goldstein decision demonstrates that at least the D.C. Circuit takes seriously the substantive limits on agency rule-making power. It also demonstrates the importance of industry involvement in creating a record at the rulemaking stage. The regulatory road regarding hedge funds, however, will not end here. As demonstrated by the SEC's recent testimony in Senate committee hearings on the regulation of hedge funds, there will be increased efforts to regulate hedge funds and their advisers either through new rulemaking efforts or legislation. http://banking.senate.gov/index.cfm.

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As executives of Brocade Communications Systems appeared in court on charges of securities fraud for allegedly backdating stock option grants, Christopher Cox noted that the new stock option grant rules were one of the highlights of his first year as SEC Chairmen. Indeed, Cox noted that at least 80 companies are currently under SEC scrutiny for possible backdating of stock options. And on Thursday, the Cheesecake Factory, Inc. announced that it is one of those companies under scrutiny, while several other companies announced that they had launched internal investigations into their option grant practices.

By contrast, Molex, Inc. announced Wednesday that it had "misdated" stock options for executives going back to 1995, distinguishing this from the fraudulent backdating practice. The Molex options were reportedly issued on incorrect dates, which lead to $685,000 in overpayments to more than 10 executives. However, the company reported that: no one would profit from the incorrect dates; the company would not need to restate its earnings; and, the SEC had been advised.

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On July 28, the U.S. Court of Appeals for the Second Circuit affirmed a twenty-five year sentence for former WorldCom CEO Bernard Ebbers. To no avail, Ebbers complained that his sentence, which most foresee as a life sentence for Ebbers, age 65, was too severe when compared to sentences meted out to other WorldCom officials who cooperated with the government's prosecution. The outcome came as another significant sentencing victory for the Justice Department in securities fraud cases, as earlier during July the U.S. Court of Appeals for the Eleventh Circuit reversed a seven-day prison sentence for former Health South CFO Hugh Martin, and a sentence to probation for former Southern Pride Contractors Inc. Comptroller Michael Crisp. In both cases, the Court found such light sentences to be unreasonable, citing applicable United States Sentencing Guidelines for securities fraud cases. In the Martin case, the Eleventh Circuit noted that Martin paid a $2.4 million money judgment forfeiture at sentencing. The Court of Appeals reasoned that a probationary sentence under these circumstances would send a message that wealthy corporate executives can buy their way out of prison.

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