Joomla! site syndication http://securitiesalerts.com Wed, 08 Sep 2010 23:38:52 +0100 FeedCreator 1.7.2 http://securitiesalerts.com/images/M_images/joomla_rss.png http://securitiesalerts.com Joomla! site syndication http://securitiesalerts.com/content/view/58/2/ A recent decision by the Commission adjudicating an application for a Confidentiality Order highlighted a rarely invoked provision of the SEC’s Rules of Procedure. In so doing, the Commission signaled its intention to place a higher priority on substantive fairness over procedural technicalities.In Matter of Thomas C. Bridge, et al., SEC Rel. No. 34-58329 (August 7, 2008), individuals in an SEC administrative enforcement proceeding sought Commission review of an administrative law judge’s Initial Decision.  In the course of that proceeding, they requested that the Commission issue a Confidentiality Order under SEC Rule of Practice 322, to exclude their tax returns from the public record.  Rule 322 allows any party to "file a motion requesting a protective order to limit from disclosure to other parties or to the public documents or testimony that contain confidential information."The Commission granted the protective order, holding that, at that stage of the proceeding, the potential harm from public disclosure outweighed the potential benefits. In a footnote to the Opinion (footnote 3), the Commission also made an important statement about fairness. On the merits of the application, the staff of the SEC’s Division of Enforcement had not opposed the issuance of a Confidentiality Order.  Nevertheless, one of the applicants’ submissions had been filed late, and the Division contended that the submission should therefore be disregarded, to the detriment of the application.  To make its point, the Division asked the Commission for leave to submit a "sur-reply memorandum." The Commission refused.  It pointed out that the Division's application itself conflicted with a provision of the Rules, one limiting them to a single brief, and it added that Rule 103(a) of the SEC's Rules of Practice, 17 C.F.R. § 201.103(a), requires that the Rules "be construed and administered to secure the just, speedy, and inexpensive determination of every proceeding."  "The Division," said the opinion, "in making its motion, offers no strong justification for deviating from these directives."Despite the appearance of this ruling in a mere footnote, it represents an important statement of purpose -- that the Commission will not allow procedural technicalities, or the inequality of resources, to trump fair decision-making. News - Enforcement Proceedings -- Evidence and Procedure Sat, 16 Aug 2008 15:14:44 +0100 http://securitiesalerts.com/content/view/57/2/ The facts and analysis presented here are summarized from decisions rendered by an NYSE Hearing Officer, an NYSE Hearing Panel and the NYSE Board of Directors in Matter of X, H.P. Hearing Board Case 07-148 (2007 - 2008):  http://www.nyse.com/pdfs/07-148.PDFSummary of the FactsDuring a busy trading day on August 21, 2003, an NYSE Floor Broker received and executed orders from one of his firm’s clients, a hedge fund. The client had purchased about a million shares of a volatile NYSE security, and learned, near the middle of the day, that another 500,000 shares were available for purchase, but were in the form of "sell stop" orders.The situation can be understood only by understanding the nature of a "sell stop order." Such orders have no standing in the market until the stock trades at or below a stated "election price." If the order has an election price of $4.25, as in this case, and the stock is trading at $4.27, the order remains inactive and dormant. But if the stock trades at $4.25 or lower, it automatically becomes either a "market order" (to be executed at the best price available thereafter) or a "limit order" (to be executed at the stated limit price or better), depending on the customer’s choice of terms.When the hedge fund learned of these sell stop orders, it sent the Floor Broker’s employer two new orders – one to sell 100,000 shares and one to buy 500,000 shares. The Floor Broker’s Trading Assistant took the orders, and although he knew that they came from the same hedge fund, he did not know whether they came from the same customer or customer account. So the Trading Assistant approached a senior officer of his firm and asked him whether the two orders could be executed concurrently. Following this discussion, the Trading Assistant informed the Floor Broker that the senior officer had said Yes.The Floor Broker executed the sell order first. He did not sell the stock outright, but offered the stock in the Trading Crowd. In this way, the Floor Broker did not establish a new price but permitted independent buyers to respond to his offer. In the trading that followed, the Floor Broker sold 15,000 shares and then 35,000 shares from the 100,000-share order. In the process, the stock’s price declined by a "two-cent differential between the highest price at which he traded and the electing sale price, represent[ing] a .0046% movement in the stock’s price as the Floor Broker sold 50,000 shares. The Floor Broker’s sale, at $4.25, "elected" the sell stop orders and converted them into conventional "market orders."The Floor Broker then executed the buy order, purchasing 500,000 shares – not at prices below $4.25, but at the same price as the electing sale – $4.25. Motion and Cross-Motion for Summary DispositionNYSE Enforcement, having charged the Floor Broker with market manipulation and with violating "just and equitable principles of trade," filed a motion for summary disposition. Such motions, made under recent changes in NYSE hearing procedure, seek a "summary" determination of guilt – without benefit of a hearing, without giving the accused an opportunity to examine and cross-examine live witnesses, and without giving the accused an opportunity to present his case before a panel of three, consisting of two securities industry representatives and an NYSE Hearing Officer. Under the previous system of procedure, determinations of guilt or innocence, with rare exceptions, could be made only by majority vote of a three-person Hearing Panel. The current system of procedure permits such decisions to be made on the basis of documents and briefs alone, by a Hearing Officer in the employ of the NYSE, acting alone. The Floor Broker opposed Enforcement’s motion for summary disposition and cross-moved for dismissal of the Charges. The Hearing Officer granted in part the Floor Broker’s motion to dismiss, rejecting the charge of market manipulation. It found that "Enforcement had failed to state a cause of action for intentional misconduct." [H.P. Penalty Decision at p. 5, and Hearing Officer’s Decision on Motions, at 9-10]. Nevertheless, in the same decision, the Hearing Officer granted Enforcement’s motion for summary disposition with respect to their charge that the Floor Broker had engaged in "conduct inconsistent with just and equitable principles of trade." Because the Hearing Officer had summarily found the Floor Broker guilty of one charge, he scheduled a further proceeding, before a full, three-person Hearing Panel, but limited the topics to be reviewed there to the assessment of appropriate sanctions.Hearing on SanctionsIn the ensuing hearing on sanctions, "Enforcement sought a penalty of a censure, a one-month suspension, and a $50,000 fine." (Hearing Panel Penalty Decision at p. 5.)  In support of its recommendation, Enforcement urged the Hearing Panel to emulate the penalty determinations of two previous NYSE disciplinary decisions. The Hearing Panel refused, finding that these previous cases involved much worse conduct, namely, a "knowing and intentional . . . scheme to improperly elect stop orders . . . [and] more egregious conduct with greater adverse market impact than the instant case." (Id.) Paradoxically, both of the previous cases "resulted in lesser sanctions than those sought by Enforcement herein." (Id.)In the case at hand, the Hearing Panel further remarked that Enforcement had failed "to state a cause of action for scienter [intent to deceive, manipulate or defraud]," that the Floor Broker had relied on professional advice, that the event had been "an isolated single incident, which took place over a time period of about 75 seconds," and that the Floor Broker’s actions "constituted a one-time error in professional judgment by an otherwise conscientious, well-regarded Floor broker with a spotless regulatory and disciplinary record." Id. at 5-8.After a detailed analysis of the facts and of the rules and decisions relating to the assessment of sanctions, the Hearing Panel refused to suspend the Floor Broker, but imposed a censure and a $5,000 fine. (Id. at p. 8.)Appeal to the NYSE Board of DirectorsEnforcement appealed to the NYSE Board, seeking reversal of the Hearing Officer’s dismissal of their charge of market manipulation.  They also requested that the Board of Directors impose a much harsher penalty. The Floor Broker appealed as well, seeking reversal of the Hearing Officer’s finding that he had violated "just and equitable principles of trade." The Board’s Committee for Review ("CFR"), "after consideration of the Record in this matter, written submissions filed by the parties and oral argument, . . . recommended to the NYSE Regulation Board of Directors" that it dismiss all charges and vacate the sanctions. The Board accepted CFR’s recommendation. At the end of its Decision, the Board instructed that, "This Decision is intended to end the litigation in this matter. Unless Respondent appeals, the Board instructs that no hearing or other proceeding be initiated by the Hearing Officer or the Panel." (NYSE Board Decision at p. 1). © 2008 Brunelle & Hadjikow, P.C. News - Regulatory and Judicial Decisions Sun, 20 Jul 2008 05:48:05 +0100 http://securitiesalerts.com/content/view/47/2/ The SEC has proposed a comprehensive revision of its Rule 15a-6, to make it easier and less expensive for foreign financial service firms to provide investment research and sell securities to certain U.S. investors. This now appears as Proposed Rule Release No. 34-58047 ("Exemption of Certain Foreign Broker and Dealers [from U.S. broker-dealer registration]") (June 27, 2008).Currently, the rule allows foreign broker-dealers to provide research to U.S. institutional investors, but requires that the solicitation of orders be "chaperoned" by a U.S. broker-dealer. The proposed rule would substantially reduce the role of the U.S. broker-dealer, would retain several of the Rule’s requirements and would modify others. Among other things, a foreign broker-dealer would be permitted to interact with U.S. institutional investors that invested $25 million or more, or with natural persons that owned or controlled investments of more than $25 million. Foreign broker-dealers are currently permitted to interact only with institutions having financial assets of over $100 million.In place of the current requirement that a U.S. broker-dealer "chaperone" most aspects of the transaction, the proposed Rule suggest two alternatives:Alternative No. 1The foreign broker-dealer could effect all aspects of the transaction, including the maintenance of custody over the funds and assets, provided the foreign broker-dealer made certain disclosures and conducted a "foreign business" (defined as the business of a foreign broker-dealer with qualified investors and foreign resident clients where at least 85 percent of the aggregate value of the securities purchased or sold in transactions conducted pursuant to the proposed rule by the foreign broker-dealer is derived from transactions in foreign securities). Under this approach, all books relating to the transactions would have to be maintained both by the foreign broker-dealer and by the U.S. broker-dealer.Alternative No. 2The foreign broker-dealer could effect all aspects of a transaction with a qualified investor in both U.S. and foreign securities, provided that a U.S. registered broker-dealer maintained custody of the qualified investor's funds and securities and maintained books and records reflecting such transactions. There would be no "foreign business test" under the second approach, and the foreign broker-dealer could effect all aspects of the transactions with a qualified investor in both U.S. and foreign securities, provided a U.S. registered broker-dealer maintained custody of the qualified investor's funds and securities in connection with the transactions, along with all related books and records. The proposed rule contains many other provisions of significance, and the SEC has allotted a 60-day period for the receipt of comments (through August 27, 2008). News - SEC Trading Rules, Domestic and Foreign Sat, 28 Jun 2008 06:24:31 +0100 http://securitiesalerts.com/content/view/43/2/ The Supreme Court has limited the reach of SEC Rule 10b-5 in situation involving secondary parties who conduct business transactions with an issuer. News - SEC Rules -- Small Offerings and Private Offerings Sat, 28 Jun 2008 06:04:49 +0100 http://securitiesalerts.com/content/view/44/2/ Ordinarily, the Courts presume the validity of the SEC’s interpretations of its own Rules. A recent decision of the U.S. District Court in Manhattan proves that there are limits to this deference, and that it can only occur when the SEC has widely published its interpretation and has done so prior to the events in controversy. In SEC v. Lyon, 529 F. Supp. 2d 444 (S.D.N.Y. January 2008) (Stein, J.), the SEC faced a motion to dismiss its claim that the purchase of privately issued PIPE shares, followed by short sales of the corresponding public shares, all with the potential that the short sales with be covered with stock obtained upon issuance of the PIPE shares, would be regarded as a violation of Section 5 of the Securities Act. In a rare repudiation of the SEC in the interpretation of its own Rules, the Court found this theory to be unsupported by clear and widely published interpretations, and therefore unenforceable.First, we will define terms. A "PIPE" transaction (meaning "Private Investment in Public Equities") is a private offering of new shares of an issue of which other shares have been registered and are currently outstanding. Investors in a PIPE typically acquire the shares at a discount, with the understanding that the issuer will, within a short time, register the PIPE shares with the SEC for public sale. Then the PIPE investors can resell the shares at a profit. But registration and public sale of the new shares frequently causes the price of the public shares to fall. Accordingly, upon purchasing the PIPE shares, the investors are expected, after acquiring the shares, to hedge against potential loss on the shares by selling other, publicly traded shares of the same issue, short. Later, the PIPE investors may cover their short sales with publicly traded shares. To facilitate the cover, the short seller will, at the time of the short sale, perform a "locate" -- locating publicly traded shares that they can borrow and deliver against the short sale. Sometimes, according to the SEC, the investor plans to cover the short sale only after the public registration of the PIPE shares. In Lyon, the SEC argued that this happened with four of the defendants’ PIPE investments, and that the defendants, in effect, sold their privately acquired shares to the public at a time when the shares were not yet registered. Their so doing, alleged the SEC, violated Section 5 of the Securities Act, the statute that prohibits the public sale of stock unless the stock has been registered or either the stock or the sale is exempt from registration. In Lyon, the Court found that the SEC had not given unequivocal and public utterance to this theory of liability, and therefore could not enforce its interpretation as though it had the force of law. According to the Court:"The SEC also relies on a series of agency releases, proposals and requests for comment that it considers strong support for its interpretation of section 5. The Court recognizes its duty to give effect to an agency's regulation containing a reasonable interpretation of an ambiguous statute." Christensen v. Harris County 529 U.S. 576, 586-87 (2000), citing Chevron USA, Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984); see also Clearing House Ass’n, LLC v. Cuomo, 510 F.3d 105, 117-18 (2d Cir. 2007). However, this Court has found section 5 unambiguous with respect to whether a security used to close a short position is considered "sold" under the statute at the time when the short position is first established. Even if Chevron deference were applicable here, none of the agency materials cited by the SEC constitutes an agency determination that the security used to close a short position is the security sold via the short sale. As is set forth below, these documents provide negligible support for the SEC's view of short sales."To support its claim, the SEC cited a "concept release" on short selling that the SEC issued in 1972. It stated "concerns" for the propriety of transactions somewhat resembling those before the Court, but did not express a clear prohibition. A 1974 Rule Proposal Release by the SEC suffered from the same infirmity. In Lyon, moreover, the Court found no "preconceived plan" to distribute unregistered shares.  The use of converted "distribution shares" to cover the short sale, the Court noted, had been possible, but not inevitable.  Accordingly, the Court dismissed that part of the SEC's case, finding that, on the law, the SEC's case was not plausible."  The SEC has been similarly constrained in other cases, notably that of Upton v. SEC, 75 F.3d 92-98 (2d Cir. 1996), where the Second Circuit declared that:"Due process requires that laws give the person of ordinary intelligence a reasonable opportunity to know what is prohibited.  Although the Commission's construction of its own regulations is entitled to "substantial deference,' we cannot defer to the Commission's interpretation of its rules if doing so would penalize an individual who has not received fair notice of a regulatory violation. This principle applies, albeit less forcefully, even if the rule in question carries only civil rather than criminal penalties." (Citations omitted.) News - SEC Rules -- Small Offerings and Private Offerings Sat, 28 Jun 2008 06:08:29 +0100