Securities Mosaic® Blogwatch
November 21, 2014
Are Securities Lawyers Stuck in a Time Warp?
by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation

Editor's Note: The following post comes to us from Phillip Goldstein of Bulldog Investors.

"[T]he fact that a federal statute has been violated and some person harmed does not automatically give rise to a private cause of action in favor of that person."
-Touche Ross & Co. v. Redington, 442 U.S. 560, 568, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979).

In June 2008, I posted a short piece on this website entitled A Different Perspective on CSX/TCI: Should Courts Reject a Private Right of Action Under Section 13(d)? In that posting, I questioned whether, after Alexander v. Sandoval, 532 U.S. 275 (2001), a private right of action existed to enforce the Williams Act, in that case, section 13(d) of the 1934 Securities and Exchange Act. It drew a grand total of zero comments.

Let's fast forward to the lawsuit du jour. Allergan and one of its employees who was a shareholder that sold some shares while Bill Ackman was buying and before Valeant announced its intent to acquire Allergan have sued Ackman in the United States District Court for the Central District of California for allegedly violating Rule 14e-3. Judge David O. Carter concluded that Allergan did not have standing to sue Ackman but that that a selling shareholder did have standing and that there were "serious questions" that need to be decided by a jury to determine whether Ackman violated Rule 14e-3. A number of respected commentators have weighed in on the merits of the case and about a potential class action lawsuit to recoup Ackman's "illegal" profits.

What the securities bar, Ackman's lawyers, and Judge Carter all seem to have missed is that there is no private right of action whatsoever to enforce Section 14e or Rule 14e-3!

As far as I can tell, Ackman's lawyers never raised the issue in the full day hearing held on October 28, 2014. After hours of listening to technical arguments about the meaning of ambiguous terms relating to Rule 14a-3, Judge Carter concluded by saying: "The number of areas I am still struggling with, one of those is standing. That is why I repeatedly asked you to address that particular area. There is not a lot of law that supports either position, frankly."

Judge Carter was wrong but given the lack of guidance from Ackman's lawyers, he at least attempted, via a lengthy footnote in his ruling of November 4, 2014, to examine whether "a private right of action exists under Rule 14e-3." Citing only so-called "ancien regime" pre-Sandoval cases, he concluded that a "contemporaneous" seller like the Allergan employee had standing to sue an alleged violator of Rule 14e-3.

However, in Sandoval, the Supreme Court stated that, absent evidence of a congressional intent to create a private cause of action to enforce a statute or rule, no court may do so "no matter how desirable... as a policy matter, or how compatible with the statute." In a subsequent decision, Gonzaga Univ. v. Doe, 536 U.S. 273 (2002), the Court was emphatic: ("[C]lear and unambiguous terms" are "required for Congress to create new rights enforceable under an implied private right of action.").

Here is the text of Section 14(e), the basis for Rule 14e-3:

It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer or request or invitation for tenders, or any solicitation of security holders in opposition to or in favor of any such offer, request, or invitation. The Commission shall, for the purposes of this subsection, by rules and regulations define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative.

In short, the Supreme Court has ruled that there is no private right to sue to enforce a rule if none of the following exists.

  • 1. The applicable statutory provision expressly authorizes private parties to sue.
  • 2. The provision contains "rights-creating" language, i.e., the focus of the provision is on the class of persons whose welfare Congress intended to further (rather than on the regulated entity).
  • 3. There are no other provisions in the statute that expressly provide for a private right of action (because, if there are such provisions, that would indicate an intent by Congress to foreclose a private right of action to enforce a provision lacking such language).
  • 4. The provision would otherwise be unenforceable.

It does not take a Harvard Law School degree to see that none of these conditions exists with respect to Section 14(e). Also, it is not hard to find plenty of post-Sandoval opinions in which these standards were applied. Here are three relevant opinions issued by the Ninth Circuit Court of Appeals:

I defy anyone to distinguish between these cases and Allergan Inc. v. Valeant Pharmaceuticals. Maybe I am off base but it seems that every securities lawyer either (a) believes the securities laws are exempt from Supreme Court precedent, or (2) is stuck in an ancien regime pre-Sandoval time warp where a private right of action is liberally granted by courts.

The bottom line is that only the SEC can sue Ackman to enforce Rule 14e-3. But, someone with a law degree has to say it to Judge Carter. (Whether the SEC would actually sue Ackman is doubtful but I will leave that question for another day.)

November 21, 2014
Ballard Spahr discusses Risk Retention Rules
by Keith R. Fisher

A final credit risk retention rule was recently issued with respect to asset-backed securities (ABS) by the prudential bank regulators (the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency) and the Securities Exchange Commission, and, with respect to residential mortgage assets only, the Federal Housing Finance Agency and the Department of Housing and Urban Development. The final rule bears little resemblance to the approach originally proposed in April 2011 but is essentially (i.e., with the exception of a few details) identical to the rule as re-proposed in September 2013.

The rulemaking was mandated by Section 941 of the Dodd-Frank legislation. Dodd-Frank added Section 15G to the Securities Exchange Act of 1934 (Section 15G) and required a sponsor or securitizer of ABS to retain at least 5 percent of the credit risk of the assets collateralizing the ABS issuance, subject to certain exemptions and authorization to the agencies to fine-tune the requirements in certain circumstances.

The final rule generally contemplates risk retention through holding a vertical interest (at least 5 percent of each class of ABS issued), a horizontal interest (a first-loss residual interest in an amount equal to at least 5 percent of the par value of all ABS interests issued), or a combination of the two (an "L-shaped interest"). The percentages, in the case of a combination, must be determined as of the securitization's closing date. Calculation of the percentages will be based, in the horizontal case, on the "fair value" of the securitization interests, and, in the vertical case, at par value. These different valuation methodologies must be used, pro rata, in a combination of the horizontal and vertical approaches.

Given the prolixity of the rule (550 pages), it is not possible to detail every nuance, but the following key points, organized by category, are worthy of mention:

Transaction-specific retention options apply to:

  • Revolving securitization pools
  • Asset-backed commercial paper conduits
  • Commercial mortgage-backed securities (MBS)
  • The MBS of the government-sponsored entities (GSEs)
  • Open-market collateralized loan obligations (CLOs)


  • Government guaranteed securitizations
  • Qualifying "pass through" resecuritizations
  • ABS backed by auto loans, commercial loans, and commercial real estate loans if specified underwriting standards are met
  • Qualified residential mortgage loans (QRMs)
  • Certain community-focused and 3-4 unit residential mortgage loans
  • Certain predominantly foreign securitizations (no more than 10 percent involvement by U.S. persons)


  • Hedging or transferring retained interests is prohibited for specified time periods after closing:

- For residential MBS, on or after seven years after the closing date, or alternatively the later of five years after the closing date or the date on which the total unpaid principal balance diminishes to 25 percent of the original principal balance

- For all other ABS, the latest of two years after the closing date, the date on which the unpaid principal balance of the collateralizing assets is reduced to 33 percent of the original unpaid principal balance as of the closing, or the date on which total unpaid principal obligations under the ABS interests issued in the securitization is reduced to 33 percent of the original unpaid principal obligations as of the closing

Perhaps the most significant aspects of the final rule - certainly from the perspective of the real estate and mortgage banking industries - are those dealing with QRMs. First, the rule requires no minimum down payment for QRMs, thereby abandoning the 20 percent requirement that was a feature of the original 2011 proposal. Second, the final rule defines QRM coextensively with the definition of "qualified mortgage" (QM) under the "ability-to-repay" rules of the Consumer Financial Protection Bureau.

As noted, mortgage loans that meet the QRM definition are exempt from risk retention requirements, as are those for 3-4 residential units and those having a community focus (but are not otherwise eligible for QRM status). The latter are those exempt from the ability-to-repay requirement under the CFPB's QM rule and include loans made:

  • Under programs administered by a housing finance agency
  • By an entity designated by the Treasury Department as a Community Development Financial Institution
  • By a HUD-designated Down Payment Assistance through a Secondary Financing Provider
  • By certain HUD-designated Community Housing Development Organizations
  • By certain eligible nonprofit organizations
  • Under a program authorized under Sections 101 and 109 of the Economic Stabilization Act of 2008

As Section 15G provides that the definition of QRM can be "no broader than" the definition of QM, the agencies felt they had no choice but to exempt these loans as well.

The final rule does, however, provide that the QRM definition will be revisited four years after the final rule becomes effective and every five years thereafter, or at any other time upon the request of any one of the agencies, in order to determine whether the QM definition is still the appropriate standard.

At the other end of the spectrum are CLOs, which remain fully subject to the 5 percent risk retention requirement even though, unlike securitized mortgage loans, none of them played any part in the making of the financial crisis that led to Section 15G's enactment. Indeed, in sharp contrast to the QRM scenario, the agencies actually rejected a number of burden-reducing measures urged by commentators.

Take, for example, the municipal bond financing technique known as tender option bonds (TOBs), which involve deposit of a highly rated municipal bond into a trust and issuance by the trust of two classes of securities: floating rate, puttable securities, and an inverse floating rate security. TOBs provide municipalities with access to a diverse investor base and a more liquid market. Because subjecting TOB sponsors (predominantly banks) to risk retention requirements significantly increases the costs, the final rule will likely have an adverse impact on local governments indirectly receiving funding from such programs, and decrease the availability of tax-exempt investments for money market funds. Yet, notwithstanding the rather benign and low-risk nature of these instruments, the agencies refused to adopt any of a plethora of mitigating suggestions offered by industry commentators.

Adoption of the final rule was not without controversy and a fair degree of rancor, as strong dissenting votes, with accompanying statements, were cast at both the FDIC and the SEC. The rule has already seen criticism from Capitol Hill, and [when] Republicans gain control of the Senate[...], one can expect the introduction of legislation that may undo, in whole or in part, this rule and certain other controversial aspects of Dodd-Frank.

The full and original memorandum was published by Ballard Spahr LLP on October 28, 2014, and is available here.

November 21, 2014
SEC: Number of Whistleblower Reports Continues to Increase
by Kevin LaCroix

The number of whistleblower reports to the SEC increased again in the latest fiscal year, according to the annual report of the SEC whistleblower office. The report, which the SEC is required by the Dodd-Frank Act to provide to Congress annually, is entitled the "2014 Annual Report to Congress on the Dodd-Frank Whistleblower Program" and can be found here.

According to the report, there were 3,620 whistleblower reports to the SEC during the 2014 fiscal year (which ended on September 30, 2014). That represents an increase of 382 (11.8%) over the 3,238 that were filed in the 2013 fiscal year. The number of reports has increased each fiscal year since the program's inception. Overall, there have been a total of 10,193 whistleblower reports since the program commenced toward the end of the 2011 fiscal year.

The agency still has made relatively few of the whistleblower bounty awards authorized under the Dodd-Frank Act, although the number of awards is slowly increasing. The agency has now made a total of 14 whistleblower awards, nine of which were made during the 2014 fiscal year; as the report notes, the agency made more awards in the 2014 fiscal year than in all the other years of the program combined. Most significantly, the 2014 awards included a single award of $30 million, which, as discussed in greater detail here, is the largest bounty award the agency has made. Significantly, the $30 million award was also the fourth award under the program to a foreign-domiciled individual, meaning that 28.5% of the small number of awards have gone to non-U.S. whistleblowers.

The report also notes that in addition to new awards during the year, the amount of awards previously made increased during the year as size of the recoveries from the wrongdoers increased, either in the agency's own proceedings or in other parallel proceedings.

In addition to making awards, during the year the agency also denied awards to other whistleblowers. The agency reports that it has denied a total of 19 claims for whistleblower awards, with 12 of those denials taking place during the 2014 fiscal year. Among other reasons for award denials is that the information provided by the whistleblower was not "original"; the filing for the award was not timely made; or that information provided by the whistleblower did not lead to a successful enforcement action.

The agency also noted in the report that it has taken steps to curb abuses of the program. Apparently one individual has submitted 143 different applications in responses to Notices of Covered Actions as well as numerous other forms trying to establish his right to a whistleblower award. (A "NoCa" is an item posted on the agency's website identified Commission actions that resulted in monetary sanctions of over $1 mm, allowing anyone who believes they are entitled to a whistleblower award to submit an application.) The individual's filings apparently contained numerous deficiencies. While the individual was given an opportunity to remedy the deficiencies, he failed to do so. The Commission entered an order providing that the individual was ineligible for an award on any of the items he purported to identify to the agency or in any future covered or related action.

The most common categories of complaints reported by the whistleblowers to the SEC during the 2014 fiscal year were Corporate Disclosures and Financials (16.9%), Offering Fraud (16%), and Manipulation (15.5%).

During the 2014 fiscal year, individuals from all 50 states submitted whistleblower reports, as well as from Puerto Rico and the District of Columbia. The states with the highest numbers of reports were California (556, or about 15% of all reports); Florida (264); Texas (208); and New York (206).

During the 2014 fiscal year, the agency also received whistleblower reports from a total of 60 foreign countries, and since the program's inception, the agency has received reports from a total of 83 different countries. The countries with the largest numbers of reports during fiscal 2014 were the United Kingdom (70); India (69); Canada (59); and China (32).

It is interesting to note that while the SEC whistleblower program has attracted numerous reports from overseas whistleblower, and while over a quarter of the bounty awards so far have been made to overseas whistleblowers, the Second Circuit recently held that the Dodd-Frank Act's anti-retaliation provisions do not protect overseas whistleblowers (as discussed here). It remains to be seen whether the involvement of overseas whistleblowers will remain as active given this absence of anti-retaliation protection.

The report also contains some interesting information about the characteristics of the individuals that received bounty awards during 2014. Among other things the agency notes that in two instances the individuals receiving the awards only brought their information to the SEC after attempting to report the violation internally within their own companies and only after their company failed to take corrective action. The report quotes the head of the agency's Whistleblower Office as saying that the awards to these two individuals "drive home another important message - that companies not only need to have internal reporting mechanisms in place, but they must act upon credible allegations of potential wrongdoing when voiced by their employees."

Though the SEC has now made a number of bounty awards, including the record $30 million award, the agency's powder is dry. The report notes that the Investor Protection Fund (which was provided by Congress in the Dodd-Frank Act and out of which whistleblower reports are made) at the end of the 2014 fiscal year had a balance of $437.8 million. Clearly the agency will be making many more awards in the future, which in turn should encourage other whistleblowers to come forward.

An ABA TIPS Webinar about Interrelatedness Issues: Readers of this blog know that one of the most vexing D&O insurance coverage issues involves questions of whether or not multiple claims are or are not interrelated. An upcoming webinar presented by the American Bar Association Tort Trial & Insurance Practice Section's Professionals' Officers' and Directors' Liability Committee will address this perennial issue.

On December 3, 2014, from 1:00 pm to 2:30 pm EST, my good friend Perry Granof of the Granof International Group will be moderating a webinar panel to discuss this topic. The panel will include Serge Adams of the Schuyler, Roche & Crisham law firm, Ommid Farashahi of the Bates Carry law firm, Neil Posner of the Much Shelist law firm, and Carol Zacharias of ACE. Information about the webinar including registration directions can be found here.

November 21, 2014
This Week In Securities Litigation (Week ending November 21, 2014)
by Tom Gorman

The Commission filed another settled FCPA action this week. The proceeding named two U.S. citizens living abroad as Respondents. The DOJ issued an Opinion discussing successor liability.

The DC Circuit agreed to rehear the suit which challenged the SEC's conflict minerals rules issued under Dodd-Frank. The Court will consider the only issue in which it had ruled against the SEC. That question focused on a First Amendment issue regarding a portion of the rule which required the publication of certain information. The issue will be reconsidered in view of another recent ruling by the Circuit Court.

Finally, SEC enforcement brought actions centered on: a misappropriation claim; three cases involving stock manipulation claims; and an based on an action offering fraud.


Trading suspension: The Commission suspended trading in Bravo Enterprises Ltd., Immunotech Laboratories Inc., and Myriad Interactive Media Inc., each of which touted operations related to the prevention or treatment of ebola (here).

Rules: The SEC Adopted Rules to Improve Systems Compliance and Integrity designed to strengthen the technology infrastructure of the markets (here).

Staff accounting bulletin: The SEC Staff Released an Accounting Bulletin to Update Guidance on Pushdown Accounting (here).

Remarks: Commissioner Kara M. Stein delivered remarks at the 15th Annual "Live from the SEC" Conference, Washington, D.C. ( November 13, 2014). Her remarks focused on capital formation (here).

Remarks: Andrew Ceresney, Director, Division of Enforcement, addressed the 31st International Conference on the Foreign Corrupt Practices Act, National Harbor, Maryland (November 19, 2014). His remarks focused on prosecutions against individuals, the importance of compliance, cooperation and the statutory concept of "anything of value" under the Act (here).

Remarks: Norm Champ, Director of Investment Management, addressed the ALI 2014 Conference on Life Insurance Company Products, Washington, D.C. (November 13, 2014). His remarks included comments on the on-going disclosure review, alternative mutual funds, the risk and examinations office and disclosure for mutual funds (here).


Remarks: Chairman Timothy G. Massad addressed the CME Global Financial Leadership Conference (November 14, 2014). In his remarks the Chairman discussed the importance of U.S. leadership in regulatory reform, his basic core principles, the cross boarder challenge and cybersecurity (here).

Remarks: Commissioner J. Christopher Giancario addressed the U.S. Chamber of Commerce with remarks titled Re-Balancing Reform: Principles for U.S. Financial Market Regulation in Service to the American Economy (November 20, 2014). His remarks focused on six key principles for financial market reform (here).

SEC Enforcement - Filed and Settled Actions

Statistics: This week the SEC filed 5 civil injunctive action and 1 administrative proceedings, excluding 12j and tag-along-actions.

Market access: In the Matter of Wedbush Securities Inc., Adm. Proc. File No. 3-15913 (November 20, 2014) is a settlement in a previously filed action which named as Respondents the broker dealer, Jeffrey Bell, the firm's EVP for the Correspondent Services Division, and Christina Fillhart, a senior V.P. in the same division. The initial proceeding alleged violations of the market access rule as detailed here. Each Respondent resolved the claims. The firm admitted to violating the federal securities laws and to the facts set forth in a nine page addendum attached to the Order which essentially outline the action. It will also implement certain undertakings. The individuals resolved the claims without admitting or denying the allegations alleged in the Order except as to the jurisdiction of the Commission. Wedbush consented to the entry of a cease and desist order based on Exchange Act Sections 15(c)(3) and 17(a) and to a censure. In addition, the firm agreed to pay a penalty of $2,447,043.38. Mr. Bell consented to the entry of a cease and desist order based on the same Sections. He also agreed to pay disgorgement of $25,000, prejudgment interest and a penalty of $25,000. Ms. Fillhart consented to the entry of a cease and desist order based on the same Sections. She also agreed to pay disgorgement of $25,000 along with prejudgment interest. A civil penalty was not imposed based on financial condition.

Misappropriation: SEC v. Scipione, Civil Action No. 8:14cv2886 (M.D. Fla. Filed November 18, 2014) is an action which names as a defendant Albert Scipione, previously a registered representative, and the managing member of Traders Cafe, LLC. Beginning in December 2012, and continuing until October 2013, Mr. Scipione and his business partner, Matthew Ionne, solicited investors to establish accounts at Traders Cafe. The purpose was to day trade in the hopes of making profits. Investors were assured that their funds would be held in segregated accounts and used only for day trading or other related specific business purposes. Investors deposited about $367,000 with Traders Cafe. In addition, one investor put $150,000 directly into the business. From the beginning, customers encountered problems and many cancelled their accounts. Mr. Scipione and his partner diverted much of the investor money to their personal use. Eventually less than $1,200 remained. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a). The case is pending. Previously, Mr. Ionno settled charges with the Commission. The U.S. Attorney's Office filed parallel criminal charges against both men. Mr. Scipione has pleaded guilty. See Lit. Rel. No. 23136 (November 19, 2014).

Manipulation: SEC v. Forum National Investments Ltd., Civil Action No. 5:14-cv-02376 (C.D. Cal. Filed November 18, 2014) is a case which names as defendants the company, Daniel Clozza, its CEO, and three penny stock promoters, Robert Dunn, William Anguka and Ahmad Ghaznawi. Forum National initially sold memberships in a travel club and chartered its yacht and later was engaged in the life settlement business. By September 2011 Forum was experiencing significant financial difficulties. In November Mr. Clozza sought introductions to internet promotional companies through which he met the other defendants who were retained to assist in promoting the company. Subsequently, Messrs. Anguka and Ghaznawi disseminated web pages and internet news letters touting Forum’s business prospects. Despite the fact that there was no basis for the claims, the stock price, quoted in the pink sheets, climbed rapidly from about $0.35 in May 2012 to over $2.00 per share in June 2012. Mr. Dunn, along with relatives and associates of Mr. Clozza, sold more than one million shares of Forum stock, profiting from the inflated, artificial price. The Commission's complaint alleges violations of Exchange Act Sections 10(b) and 13(a) and Securities Act Section 17(b). The Commission also initiated an administrative proceeding against Forum under Exchange Act Section 12(j). The actions are pending. See Lit. Rel. No. 23135 (November 19, 2014).

Manipulation: SEC v. Noel, Civil Action No. 3:14-CV-5054 (N.D. Cal. Filed November 17, 2014) names as a defendant Joseph Noel, the CEO of YesDTC Holdings, Inc., a firm he created through a reverse merger in 2009. In February 2009 Mr. Noel formed Sonoma Winton, LLC and appointed his daughter as the sole member, although he continued to control the entity. During 2011 Mr. Noel is alleged to have conducted two pump-and-dump schemes. In each of the schemes Mr. Noel prepared and had issued false and misleading press releases touting the business of the firm which supposedly specialized in direct-to-consumer marketing. In each instance the share price spiked upward significantly. In each instance Mr. Noel secretly sold shares through Sonoma. Overall he netted about $300,000 in profits from the two schemes. The complaint alleges violations of Exchange Act Sections 10(b) and 16(a), and Securities Act Sections 5(a), 5(c) and 17(a). The action is pending. See Lit. Rel. No. 23134 (November 17, 2014).

Manipulation: SEC v. Thompson, Civil Action No. 14 CV 9126 (S.D.N.Y. Filed November 17, 2014) is an action which names as defendants: Anthony Thompson, a penny stock promoter who controlled OTC Solutions LLC; Jay Fung, a penny stock promoter who controlled Pudong, LLC; Eric Van Nguyen, a penny stock promoter who controlled Golden Dragon Media, Inc.; John Babikian who operated a penny stock promotion business primarily through the web site; and Kendall Thompson, the wife of Anthony Thompson. This action centers on five pump-and-dump schemes involving the shares of Blast Applications Inc., Smart Holdings, Inc., Blue Gem Enterprise, Inc., Lyric Jeans, Inc., and Mass Hysteria Entertainment Company, Inc. In each scheme the defendants acquired a significant amount of the stock in the firm and in some instances a majority. Misleading newsletters were then sent to prospective investors. After the share price was inflated the defendants sold their shares. Subsequently, the share price dropped, leaving investors with losses. The manipulations took place between November 2009 and September 2010. The defendants had profits of at least $10 million. The complaint alleges violations of Securities Act Sections 17(a) and 17(b) and Exchange Act Section 10(b). The case is in litigation.

Offering fraud: SEC v. Azar, Civil Action No. 14-cv-3598 (D. Md. Filed November 14, 2014). Wilfred Azar has been the majority owner of Empire Corporation, both defendants, since 1999. Joseph Giordano, also a defendant, was the branch manager and a registered representative associated with a registered broker-dealer. In addition, he is the sole owner, General Manager and President of Giordano Asset Management, a one-time registered investment adviser which served as the adviser to the Giordano fund.

Mr. Azar became President and CEO of Empire when he acquired the company from his grandfather, its founder. The company owned and operated a 250,000 square foot, ten-story office building in Glen Burnie, Maryland. Rental income from the building was the primary source of revenue for the company. For several years prior to acquiring the company, Mr. Azar sold bonds as secondary financing for its operations. He continued this practice after acquiring Empire. Shortly after acquiring Empire Mr. Azar arranged for the broker where his long time friend and business associate, Joseph Giordano was employed, to custody the bonds so that holders could place them in an IRA account. While Mr. Giordano's firm cautioned him to only sell the bonds on an unsolicited basis and prohibited him from recommending them, he ignored the restrictions. At the same time, Mr. Azar arranged for Broker A, associated with another registered broker-dealer, to sell the bonds. Collectively, Messrs. Azar, Giordano and Broker A raised over $7 million from about 50 investors. Investors were assured that Empire as a successful, profitable business. They were also told that their funds would be used to further develop the business. In fact the financial condition of the firm was deteriorating as it debt increased due in part to the diversion of funds by Mr. Azar to support his other unprofitable businesses and life style. By 2010 the Defendants were unable to recruit new investors. Empire was no longer able to repay existing investors. Most of the investors lost substantially all of their investment. The SEC's complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4) and Investment Company Act Section 34(b). The action is pending. A parallel criminal action was filed against Mr. Azar by the U.S. Attorney's Office for the District of Maryland. See Lit. Rel. No. 23232 (November 14, 2014).


In the Matter of Stephen Timms, Adm. Proc. File No. 3-16281 (November 17, 2014) is a proceeding which names as Respondents Stephen Timms and Yasser Ramahi, both U.S. citizens residing abroad, who were employed by FLIR Systems, Inc. The firm, founded in 1978, makes thermal imaging and other sensing products and systems, night vision and infrared camera systems. Mr. Timms was, at the time of the events at issue here, the head of FLIR's Middle East office in Dubai. Mr. Ramahi worked in business development in the same office. He was one of the executives responsible for obtaining business in the firm's Government Systems division for the Arabia Ministry of Interior.

In November 2008 FLIR entered into a contract with the Arabia Ministry to sell thermal binoculars. The agreement was worth about $12.9 million. The factory acceptance test was a key condition to the fulfillment of the contract. The firm expected that a successful contract would lead to others. In May 2009 FLIR signed another agreement. This contract called for the integration of its cameras into the product of another firm, again for the Arabia Ministry. The contract was valued at $17.4 million. Messrs. Ramahi and Timmins were involved with the negotiations for both contracts.

In February 2009 Messrs. Ramahi and Timms began preparing for the factory acceptance test, scheduled for July 2009 in Billerica, Massachusetts. The next month Mr. Timms, in the presence of Mr. Ramahi, provided five Ministry officials with watches as gifts. Each watch cost about $1,424, according Mr. Timms. The invoices were submitted to the company for payment. Subsequently, arrangements were made for the Ministry officials to go on what Mr. Timms later called a "world tour" in connection with the test - travel that extended over twenty nights in luxury hotels. The factory tour took place in Boston in one afternoon. The company paid all expenses. When the finance department flagged the expenses for the watches and later the travel it was furnished with false information and invoices. Following the inspection, the Ministry told FLIR to ship the thermal binoculars. Later the Ministry ordered additional binoculars.

The Order alleges violations of Exchange Act Sections 30A, 13(b)(2)(A) and 13(b)(5). Each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. Mr. Timms agreed to pay a civil money penalty of $50,000. Mr. Ramahi will pay a penalty of $20,000.

Opinion: The DOJ issued Opinion Procedure Release No. 14-02 (November 7, 2014). It addressed the question of successor liability. It is a basic principle of corporate law that a company assumes certain liabilities when merging with or acquiring another company, according to the opinion. Thus where a purchaser acquires the stock of a seller and integrates the firm into its operations, successor liability may be conferred upon the purchaser, including for FCPA violations. At the same time, liability cannot be conferred where there is none. In this case, where the firm to be acquired paid bribes but none of the acts were subject to the jurisdiction of the United States, the acquisition does not confer liability on the acquiring firm. The Department declined prosecution based on the facts presented.

Criminal cases

Insider trading: U.S. v. Braverman (S.D.N.Y.) is an action which names as a defendant Dmitry Braverman, formerly employed as a senior systems engineer at a prominent national law firm. Between 2010 and 2011 Mr. Braverman engaged in at least four trades based on inside information regarding potential mergers that he obtained from the law firm where he was employed. He closed out the last of those trades on the day another firm employee, Matthew Kluger, was arrested on separate insider trading charges. Subsequently, he opened a new brokerage account and placed four more trades using firm information. Overall he made about $300,000 in illicit trading profits. This week he pleaded guilty to a one count information alleging securities fraud.

Court of Appeals

Conflict mineral rules: National Association of Manufactures v. SEC, No. 1:13-5252 (Order dated November 18, 2014) is an action which initially challenged the conflict mineral rules written under Dodd-Frank by the Commission. The initial ruling by the Court upheld, in large part, the rules. The Court struck down, however, one provision on First Amendment grounds regarding the publication of certain information (here). The Court has now agreed to rehear that issue based on its en banc ruling in American Meat Institute v. U.S. Department of Agriculture, 760 F. 3d 18 (D.C. Cir. 2014).


Unlicensed FX business: The Australian Securities Investment Commission initiated proceedings against Vault Market Pty Ltd and its sole director Anamul Amin. The Commission alleged that the firm was an unlicensed FX business, conducted through a website. Over 800 investors had invested almost $1.1 million. The court found that the firm acted without a license and engaged in misleading and deceptive conduct and that Mr. Amin had contravened the law. Both defendants admitted to their conduct during the proceeding. Mr. Amin was banned from the financial services industry for eight years and from managing a corporation for five years.

Related party loans: The ASIC initiated proceedings against LM Investment Management Ltd founder Peter Drake based on a series of loans authorized between the fund and another entity Mr. Drake owned and controlled in 2011 and 2012. The loans were supposed to be for a certain real estate development. At the time the fund entered into administration no development had taken place.

Unregistered broker: The ASIC entered an order against Scott Logan for providing financial services between April 2011 and June 2013 without being registered. Specifically, during the period, through Shore Capital he traded in contracts for difference on behalf of retail clients when not authorized and without holding an Australian financial services license. Later he traded on behalf of retail clients when he held a license only for wholesale clients.


Investment fund fraud: The Serious Frauds Office announced that a former director of investment firm Imperial Consolidated Group, William Godley, was ordered to pay £1.5 million which will be used to compensate victims of the fraud within six months and a three year prison term in default of payment. In 2010 Mr. Godley was convicted of conspiracy to defraud in an international scheme that raised over £250 million from about 3,000 investors who were told their funds would be used to finance a commercial loan business. Instead the money was misappropriated.

November 21, 2014
Studies: Bridging Company/Investor Sustainability Gaps
by Randi Morrison

The largest studies of CEOs and investors to date on sustainability reveal consensus on the value of sustainability generally, but a huge disconnect in CEOs' and investors' views on certain fundamental aspects of sustainability - particularly how well companies are (or aren't) communicating their sustainability story.

These results reflect some of the major gaps:

  • 80% of CEOs believe that their company is approaching sustainability as a route to competitive advantage. Only 14% of investors believe that the companies they invest in are doing so.
  • 74% of CEOs believe that their company is measuring both positive & negative impacts of activities on sustainability outcomes. Only 17% of investors believe that the companies they invest in are doing this.
  • 57% of CEOs believe that their company is able to set out in detail a strategy for seizing opportunities presented by sustainability. Just 8% of investors believe that the companies they invest in are able to do this.
  • 38% of CEOs believe that their company is able to accurately quantify the business value of sustainability initiatives. Only 7% of investors believe that the companies they invest in can do so.

Notably, investors identified certain shortcomings in their own approach to sustainability as being part of the problem. They acknowledged viewing sustainability as merely a risk management/mitigation issue rather than an opportunity for company growth, differentiation and competitive advantage. Additionally, they noted a need to strengthen their knowledge and capabilities in order to ask the right questions on sustainability, and challenges in identifying which issues have a material effect on their investments.

Investors also identified certain financial market structural challenges - such as a short-term investment focus and quarterly reporting requirements - that contribute to the disconnect. Among the factors they identified to help bridge the communications gap and better integrate sustainability into the global markets are longer term investment strategies and the use of common, industry-wide sustainability metrics - on par with financial performance measures - to enable more accurate identification and comparison of industry leaders.

See the suggested concrete company and investor action steps on page 18 of the investor report, and this PRI release discussing the survey results.

How to React to SASB

The Sustainability Accounting Standards Board (SASB) is self-described as an independent non-profit whose mission is to develop and disseminate sustainability accounting standards that help publicly-listed companies disclose material factors in compliance with SEC requirements. This recent Baker & McKenzie memo does a fine job of succinctly describing how SASB works - as well as the legal and practical implications resulting from SASB's work and its increasing visibility and influence.

See also this article where SASB directors Aulana Peters and Elisse Walter discuss the basis for SASB and its sustainability disclosure scheme - including a good explanation of how its standards are designed merely to help companies meet their existing disclosure obligations under Regulation S-K.

Access SASB's standards and additional resources in our "Social Responsibility" Practice Area.

More on "The Mentor Blog"

We continue to post new items daily on our blog - "The Mentor Blog" - for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– UK Regulators Assess & Reject US Whistleblower Bounty Scheme
– Survey: Boards' Risk Concerns Warrant Focus on Crisis Planning
– General Counsels: Tips for Managing Governance Demands & Risks
– CAQ Field Testing of PCAOB's Auditor Report Proposal: Implementation Challenges
– Survey: Earnings Call Practices


– by Randi Val Morrison

View today's posts

11/21/2014 posts

HLS Forum on Corporate Governance and Financial Regulation: Are Securities Lawyers Stuck in a Time Warp?
CLS Blue Sky Blog: Ballard Spahr discusses Risk Retention Rules
The D&O Diary: SEC: Number of Whistleblower Reports Continues to Increase
SEC Actions Blog: This Week In Securities Litigation (Week ending November 21, 2014) Blog: Studies: Bridging Company/Investor Sustainability Gaps

Blog posts are subject to copyrights held by the authors and are republished here with permission. Views expressed are those of the authors alone. Infringement Notification.