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

Today is the opening day of the annual SIFMA conference, held this year in Orlando. This morning's general session, moderated by Gary Lynch, executive vice president and chief legal officer of Morgan Stanley, included panelists James Brigagliano of the SEC; Richard Ketchum of NYSE Regulation, Inc.; John Moloney of Moloney Securities Company Inc.; and Mary Schapiro, Chief Executive Officer of FINRA. SIFMA's kick-off topic was "NYSE and NASD Merger -- How is it Working?"

Mary Schapiro (FINRA) commented that the merger has gone well and has met her expectations at this stage, noting:

• The governance board is in place;
• The business processes used by NYSE and NASD are largely consolidated;
• A mid-2009 date is anticipated for the completion of combining the technologies from NYSE and NASD, having already retired 14 systems; and
• The completion of a consolidated rule book will take time, and is made more complex by a rapidly changing environment, both on the regulatory side and in the market place. It is likely that there will be rules coming out for comment by Spring.

Although it has not yet been a year since the merger, Richard Ketchum (NYSE Regulation) believes that the industry has already benefitted by a more efficient and effective single examination program, and through the interpretation of the rules through one body. He also noted that the ability to create a consolidated set of rules constitutes a one-in-a-lifetime opportunity to step back and look at the rules fresh.

John Moloney (Moloney Securities) noted that from a small firm perspective, there are varied opinions on the effectiveness of the merger, but many small firms do view the examinations to be more poignant and drill-down as to what is important.

The Panel also discussed whether principle-based regulation or rule-based regulation should control. Mary Schapiro commented that while principles are very valuable, she did not view them as replacing the rule book. Mr. Ketchum agreed, noting that principles can bring a level of confidence, guidance, and framework for the rules themselves.

Gary Lynch (Morgan Stanley) questioned whether a two-tier system of regulation makes sense for institutional and retail markets. In terms of any "carve-out" from the rules for institutional clients, James Brigagliano (SEC) agreed with Mary Schapiro that a broad institutional carve-out would be extremely hard, that there is a need to look at regulation on a rule-by-rule basis, and that the most challenging aspect to any carve-out is determining sophistication (i.e., just because the investor is large with a lot of assets to invest doesn't necessarily mean it is sophisticated).

In terms of enforcement, Mr. Ketchum and Ms. Schapiro noted that taking a more risk-based focus on examinations makes sense, so that regulator's resources are focused on those firms with the highest risk to the public. With that, the hundreds of conference participants packed in the auditorium-style room disbursed to the various break-out sessions.

Stay tuned for an update about tomorrow's general session which focuses on current SEC issues.

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The SEC voted unanimously yesterday to propose a new rule intended to enhance the SEC's ability to crack down on naked short sales and failures to deliver shares that are used in such sales, Reuters reported. 

Short selling involves sales of borrowed shares, in the hope of repurchasing them later at a lower price. Naked short selling involves sales without first borrowing the shares or making an "affirmative determination" that the shares can be borrowed.

The SEC adopted Regulation SHO four years ago in an effort to curtail short-selling abuses. However, the SEC’s enforcement powers under Regulation SHO are limited. Stating the obvious, SEC Chairman Christopher Cox explained, “Reg SHO can’t be effective without enforcement.” According to Mr. Cox, the SEC's new proposed rule is designed to give Regulation SHO “teeth.” Under the new proposal, the SEC would create an antifraud rule specifically targeting targets sellers who intentionally deceive broker-dealers or purchasers about their ability to meet delivery deadlines. 

The SEC is seeking public comment on its proposal.

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John B. Torkelsen, an expert witness heavily utilized by the Plaintiffs' securities bar over the past several years to "testify on such issues as damages allegedly suffered by plaintiffs' classes and the appropriate value of settlements reached in several class action cases around the country," entered into a plea agreement before the Eastern District of Pennsylvania Federal Court, in which he plead guilty to perjury, admitting that "he lied to numerous federal judges across the county who were presiding over securities class actions."

Boiled down, Torkelsen had told various courts that he was an independent expert, yet certain law firms that hired him did so on a contingent fee basis and then concealed the payment arrangement from the courts. According to a Department of Justice litigation release, in furtherance of the scheme, the firms would then "submit to courts requests for reimbursement of fees already paid to Torkelsen when, in fact, the fees had not been paid and would not be paid unless the court awarded fees to the law firms; cause Torkelsen to submit declarations in which he falsely stated under oath that he had been retained on a non-contingent basis when, in fact, he had been retained on a contingent basis; cause Torkelsen to write-off fees he had incurred in class actions in which the law firms did not obtain a successful result; and cause Torkelsen to submit inflated fee requests in other class actions, billing for work that Torkelsen did not actually perform, in order to allow Torkelsen to make up for fees he did not recover in unsuccessful class actions."

Dishonesty has no place in the courtroom. At the end of the day, plaintiffs and defendants alike, as well as their counsel, are well-served by removal of such elements.

A detailed discussion of this case can be found on the Department of Justice's website at www.usdoj.gov/usao/cac/pressroom/pr2008/020.html

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