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

For those of you following the Tellabs case, the Supreme Court heard oral argument from the parties on March 28, 2007. (For those of you unfamiliar with the Tellabs case follow this link overregd.lindquist.com/2007/01/articles/litigation-trends/one-to-watch-supreme-court-to-raise-curtain-on-securities-fraud-proof/  to a brief explanation of the facts and holding in the case and the potential significant impact on securities fraud pleading). While the Court has obviously not yet reached a decision, questions posed by the Court to counsel for the parties may likely signal key issues the Court may already be considering in whatever decision is ultimately reached.

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Economic growth in China and strong performances by indexes reflecting stocks traded on well-known Chinese stock exchanges are fueling both legitimate and illegitimate ways to invest in China. Concerned about fraudulent schemes, the NASD on April 23 issued an Alert warning of pump and dump schemes involving the sale of bogus stock in “China” companies. Too often, these companies have no affiliation whatsoever to China or its stock markets. "The fact that a company has 'China' in its name can be misleading, especially since most of the companies being peddled are not even incorporated in China," said NASD Chairman and CEO Mary L. Schapiro.  www.nasd.com/PressRoom/NewsReleases/2007NewsReleases/NASDW_019000

The sales pitches for the bogus stock are sent by e-mail, faxes, and even cell phone text messages. The scheme includes the following typical warning flags:

·        unsolicited messages sent by strangers;

·        promises of extraordinary rates of return;

·        purported “inside” information about the company; and

·        an alleged need to act now to get in on the action.

Through their “pump and dump” scheme, promoters or insiders buy the stock in the touted “China” company low and then use their fraudulent efforts to pump up the stock's price. They then sell their shares at an opportune time for a handsome profit, leaving investors holding the bag. Investors are left with stock shares that they might as well paper their walls with since the stock value has plummeted to a price much lower than when they purchased it.

Just as an oil or gas boon can trigger a wave of dubious investments, so too has China's strong economic growth.  For some, the time is ripe to score big or lose it all.  The key is to be informed in the process.

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It looks like federal regulators will propose new rules this year requiring more stringent fee disclosures for mutual funds, insurance companies and others managing retirement plans.  SEC Chairman Christopher Cox recently stated his desire that companies managing mutual funds and retirement funds be required to report "one simple number" encompassing all expenses and fees in their products.   The goal is to make fees and trading costs more transparent and easy to read for investors and those selling the product as well.  www.latimes.com/business/la-fi-hiddenfees4apr04,1,2894056.story

This lofty goal is easier said than done.  In the first place, devising disclosure rules for a variety of investments and retirement plans involves more than one regulator.  While the SEC oversees mutual funds, the Department of Labor (DOL) has wide authority over 401(k) and other employer-sponsored retirement plans.  It, too, has announced a desire to require investment companies to provide fuller and more understandable disclosures.   www.investmentnews.com/apps/pbcs.dll/article  The SEC, DOL and other regulators will need to collaborate to ensure that changes to disclosure requirements under different laws are complementary.

The complexity of annuities, mutual funds, and retirement plans also makes the "one simple number" approach difficult.  Simpler but fuller disclosures -- if attainable -- would be a positive step for investors and the financial industry in general.  Particularly if the rules adopted provide for more uniform and consistent disclosures across the industry, which would enable investors and planners to better compare products, leading to enhanced competition and reduced plan costs.  At this stage, the SEC is gathering comments, with a formal rule proposal anticipated later this year.

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The New York Court of Appeals determined that a broker who has been fired may not sue his former brokerage firm for defamation based on the reasons provided by the firm on the Form U-5 for terminating the broker. 

The U.S. Second Circuit Court of Appeal asked New York’s highest court whether statements made by an employer on a NASD employee termination notice (Form U-5) are subject to an absolute or a qualified privilege in a defamation lawsuit. In Rosenberg v. MetLife, Inc., 2007 NY Slip Op 02627 (N.Y., March 29, 2007),  http://www.courts.state.ny.us/reporter/3dseries/2007/2007_02627.htm, the New York Court of Appeals responded by finding that there was an absolute privilege. This decision, if followed by other courts, would effectively barr terminated brokers from suing their former employers for defamation based on statements on a Form U-5. 

Rosenberg, a financial service representative in MetLife’s Brooklyn office, was terminated by MetLife after an audit. As required by NASD rules, MetLife completed a Form U-5 explaining the reasons for the termination.

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