Danny DeVito’s character, Larry the Liquidator, in the 1991 film Other People’s Money confessed, “I love money more than the things it can buy….but what I love more than money is other people's money.” As it turns out, Larry the Liquidator was a little ahead of his time, because these days, everyone it seems loves leverage – the tool that allows investors to make large investments using other people’s money.
Continue Reading...Imagine a world in which regulators and members firms always got along - where member firms proactively brought problems to regulator attention and sanctions were obsolete (or significantly reduced). Can such a utopia ever exist? Maybe.
Comments from senior SRO personnel attending this year's Annual Forum On Responding To Broker-Dealer Litigation & Regulatory Enforcement held last week in NYC may surprise you. From the regulator's perspective, member firms have been slow to bring to their attention problems which firms may have known about for several months or even years. In turn, when member firms later, during an SRO investigation, ask for lesser sanctions, regulators are less likely to credit the member firm's cooperative efforts. Why, you ask? Credibility. Member firms are comprised of people, regulators are people, and they interact. Relationships are formed, broken, strengthened and weakened through these interactions and earning credibility on the front end may pay huge dividends for member firms faced with an investigation down the road.
Discussion during this year's conference compared and contrasted hypothetical member firms who took the initiative and contacted SRO's prior to receiving notice of a regulatory investigation versus firms who waited, and why these firms would be treated differently by regulators. A regulator wants to know about a problem sooner rather than later for obvious reasons. But member firms have concerns as well. Disclosing a problem before a firm has time to get its hands around the issues would serve no purpose and might send the organization and regulators on a wild goose chase. Similarly, some member firm representatives expressed concern that even when steps were taken to disclose problems early on and efforts were made to resolve issues hand in hand with regulators, no credit was given.
Comments from both sides boil down to a lack of trust. Right or wrong, firms must overcome the perception of playing "hide the ball" with regulators and, conversely, regulators should consistently reward firms for proactively bringing problems to their attention. A member firm that informs regulators about a problem but asks for more time to conduct its own internal investigation and takes substantive steps to correct any problems identified, necessarily stands a better chance of obtaining credit for its efforts than a firm on the opposite end of the spectrum who is perceived to be stymieing regulatory investigations.
A middle-ground both sides can live with and perhaps even like exists. It is just going to take effort and trust from both sides to get there.
Confused about whether equity indexed annuities are securities? You are not alone. Comments made during the 4th Annual Forum On Responding To Broker-Dealer Litigation & Regulatory Enforcement suggest that state regulators are equally unable to categorize these hybrid products. Indeed, depending on the state, EIA's might be viewed as insurance, securities, both or neither. The problem is apparent. Inconsistent classification leads to inconsistent regulation which, in turn, leads to mixed signals to firms and employees regarding the sales of these products. For example, if State X treats an EIA as an insurance product but State Y treats an EIA as a security, a firm selling EIA's in both states may need to develop one or more different sets of guidelines for the sales of the same products under applicable state laws, and could be dealing with an insurance division in one state but the securities division in another.
For those states on the fence (and there are several) about whether to treat EIA's as securities, and then how to determine suitability of these products, a pragmatic idea was offered up that investment "planning" should be targeted rather than the product itself. That is, customer suitability for purchasing an EIA could be determined by looking at a multitude of factors such as what types of products held by the customer were being liquidated (if any) to purchase the EIA, what other types of investments were in the customer's portfolio at the time, and what the customer was told about the EIA. Regulator comments suggest that EIA's are not considered unsuitable products per se. Rather, it is the marketing of these and similar products that has captured regulator attention.
Only time will tell whether NASAA will propose model guidelines for state securities regulators to adopt regarding treatment of EIA's. In the meantime, EIA's and similar hybrid products in "limbo" will remain a question mark in everyone's minds.
Ouch. On Tuesday, Tyco International announced that it will pay nearly $3 billion in cash payments to settle 32 securities class action lawsuits involving Tyco stock. This is reportedly the largest securities class action settlement by a single corporate defendant, and the fourth largest single payout to investors. (San Francisco Chronicle article on the settlement)
The shareholder claims arose after Tyco’s former Chief Executive, Dennis Kozlowski, and other former executives were accused of looting the company of millions and artificially inflating the company’s value by over $5 billion. Kozlowski -- who was convicted of grand larceny, falsification of business records, and conspiracy in an alleged scheme to defraud investors -- was sentenced to up to 25 years in prison. Kozlowski became the poster child of corporate greed for his use of Tyco monies for extravagant parties, including an alleged $1 million for his ex-wife's birthday bash on the Italian island of Sardinia, and lavish furnishings for his Manhattan apartment, such as a $15,000 umbrella stand and a $6,000 shower curtain. (More on Kozlowski)
Continue Reading...Spanning the globe to uncover a constant variety of insider-trading schemes, the SEC announced Thursday that U.S. prosecutors had charged a former Credit Suisse investment banker with 25 counts of securitizes fraud for allegedly leaking tips ahead of nine acquisitions to investors who used the tips to profit illegally. The alleged culprit was based in New York. One of the alleged tippees lived in Pakistan. And the SEC received cooperation from, among other regulatory authorities, the Swiss Federal Banking Commission and the Financial Services Authority of the United Kingdom, to piece together phone and brokerage records from across the globe.
Continue Reading...In recent months, plaintiffs’ attorneys from across the country have rushed to file derivative lawsuits premised on allegations of illegal backdating. In many cases, this mad scramble by the Plaintiffs’ Bar has resulted in companies being sued several times in multiple jurisdictions (in both state and federal court) over the same alleged wrongdoing. When this happens, companies are not only forced to fight the underlying allegations of wrongdoing, but they are also required to coordinate a complex and often costly multi-jurisdictional defense.
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