Yet Another Ponzi Scheme

10 06 2009

This time two it involves California men allegedly involved in a $80million Ponzi scheme.  The SEC is now suing them for fraud.  From Bloomberg:

An important thing to note about Ponzi schemes, especially in trying to avoid them, is that they largely target specific ethnic groups, and are committed by members of that ethnic group.  The imfamous Madoff Ponzi scheme targeted wealthy Jews and their families.  No, Kevin Bacon isn’t Jewish, but his wife Kira Sedgwick is Jewish.  This ponzi scheme was instigated by two Korean-Americans, and targeted the local Korean community.


Madoff Victims and the Securities Investor Protection Corporation

9 06 2009

The New York Times online has an article on how Madoff Victims may be compensated.  Included is a brief discussion of the Securities Investor Protection Corporation or SIPC.   The SIPC may be the only source of relief for some of the victims, and unfortunately, many of the elderly victims may not be eligible for SIPC relief.  From the New York Times Article:

The approach they seek would produce a significantly higher tally of cash losses than the formula being used by the court-appointed trustee overseeing the claims process for the Securities Investor Protection Corporation, a government-chartered agency financed by the brokerage industry….

Customers who qualify are eligible for up to $500,000 in immediate compensation from SIPC. Those whose eligible losses exceed that amount would divide up the assets recovered by the trustee.

Thousands of long-term investors, including elderly people who lived for decades on withdrawals from their Madoff accounts, do not qualify for SIPC payments because they withdrew considerably more over time than they originally entrusted to Mr. Madoff, Barry Lax, a lawyer for the plaintiffs, said.

The SIPC is like the FDIC for securities investors.  It is a government mandated, non-profit insurance company set up to protect the accounts of securities investors.  However, unlike the FDIC, it is not a federal agency, but a self-funded corporation.  Although it is not administered by the government, government officials play a role in that some of its governors are appointed by the President of the United States, under the bill that orginally created the corporation.  Generally, investors are insured for up to $500,000 per account.   Most of the securities traded on Wall Street are covered, however, failure to execute  trades transacted under naked short selling are not.

Lawmakers eyes “Naked” Short Selling

4 06 2009

No, naked short selling has nothing to do with the flashy jackets traders wear on trading room floors.  Short selling is basically selling shares that you do not own, for the purpose of buying them back at a lower price.  The difference between the selling price and the buy back price is the trader’s gain.  Short selling comes in two flavors, regular and “naked”.   In a normal short sale, the seller borrows the shares from the owner.  In a “Naked” short sale, the seller doesn’t even borrow the share.  The main problem with short selling is that it artificially drives down the price of shares by increasing the supply of available shares.  Under normal suppy-demand economics, this drives down the price.  With the naked variety, there is the problem with “failure to deliver”, which occures when the stock isn’t delivered to the owner, particularly because the seller never owned it in the first place.  Aggressive short selling was largely blamed for the failure of Lehman Brothers and Bears Sterns.

Over the summer,  the SEC created rules requiring pre-borrowing before a trader can sell shares from certain financial firms.  The Wall Street Journal has an article on recommendations for further regulation.

One idea is to require that traders borrow shares before they try to sell a stock short, known as a preborrow. Last summer, the SEC issued an emergency rule requiring preborrowing for certain financial firms’ shares, but the industry said it was too expensive, and the requirement was abandoned….

The statement came after the Government Accountability Office found that SEC regulations issued earlier this decade only temporarily slowed cases of “failure to deliver,” which occurs when the seller of a security doesn’t deliver the security to the buyer during a required period. These cases can occur for a variety of reasons, including naked short selling.

An SEC spokesman said the SEC appreciates the GAO’s recommendations and is focused on short selling, including examining a preborrow requirement.

Great Post on Basic Securities Law

3 06 2009

The FindLaw Blotter , a criminal law blog hosted on as a wonderful post on the basics of securities laws, and the crimes with in.  The post uses the recent conviction of Charles Conaway, the former CEO of Kmart, as its background.  Conaway was convicted of misleading Kmart’s investors prior to its 2002 bankruptcy.   Here is the Securities and Exchange Commissions release on Conaway’s Conviction.

Read the post on Findlaw Blotter.

Others Weigh In on Sotomayor

30 05 2009

Other blogs have weighed in on Supreme Court Nominee Sonia Sotomayor, and her impact thus far on securities law.  Some of them are very interesting.  The National Law Journal has some interesting comments on Sonia Sotomayor and litigation on Rule 10b-5.  Rule 10b-5 is the corner stone of almost all securities litigation.  The rule is a prohibition of fraud and deceit by both act or omission, in connection with any purchase or sale of securities, and has been used in many cases involving insider trading.  For any attorney engaged in securities litigation as a part of their practice, a Supreme Court Justice’s opinion on the rule is important in deciding how to proceed with their case.  From National Law Journal:

Under the business umbrella, for example, “there’s not a corporation out there, as well as the plaintiffs’ bar, that doesn’t know how important and critical is the issue of the private right of action under 10b-5 of the securities law,” said corporate law scholar J. Robert Brown of the University of Denver Sturm College of Law. “But I doubt it will come up.”

Rule 10b-5 is the leading statutory basis for private securities fraud claims, he said. The Supreme Court’s most recent decision in this area — Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc. — was a 5-3 victory for third-party business defendants by the Court’s conservative wing. The decision evinced hostility toward 10b-5 actions and a desire to contain them, said Brown. Just last week the Court agreed to decide another key 10b-5 challenge involving when the statute of limitations begins to run. Merck & Co. Inc. v. Reynolds , No. 08-905.

Retiring Justice David Souter dissented in Stoneridge . Although Sotomayor authored a relatively pro-investor ruling in Merrill Lynch v. Dabit (vacated and remanded by the Supreme Court in 2006), her opinions reflect no discernible philosophy in this area, said Brown and others.

Courthouse News Service has also weighed in on Merrill Lynch v. Dabit, a case covered in a previous post on Lots Stocks and Gavel.

In an interview after the conference, Resident Fellow Theodore Frank of the conservative think tank American Enterprise Institute said the descriptions of Sotomayor as a firm believer in judicial modesty “contradict behavior exhibited by a number of Sotomayor’s actual opinions.”
Frank gave an example, “She went out of her way to give a crabbed anti-business reading of the Securities Litigation Uniform Standards Act that was reversed 8-0 by the Supreme Court.”
Frank here is referring to the 2005 Dabit v. Merrill Lynch case, where investors holding securities argued that misleading statements prompted them to retain securities they otherwise would have sold.
Here, the question rode on whether lawyers bringing the securities class action were able to bring the case in state court as a way of avoiding federal legislation designed to stop the perceived abuse of federal class action securities fraud litigation.
As a member of the Second Circuit Court of Appeals, Sotomayor allowed the suits, but when the case made its way to the Supreme Court, the justices voted 8-0 to reverse the decision, deciding that the act applies in state court cases, as well.

See Also: Sonia Sotomayor and Securities Litigation

Cuban Turns Tables on SEC

29 05 2009

Both the Dallas Morning News and Bloomberg are reporting that Dallas Mavericks owner, and one time Chicago Cubs ownership contender, Mark Cuban, is suing the Securities and Exchange Commission claiming that the government agency is illegaly witholding information he requested through the Freedom of Information Act. From the Dallas Morning News:

The billionaire owner of the Dallas Mavericks is seeking a court order to make the nation’s securities cop turn over documents related to its insider-trading investigation of him.

Cuban filed a request for the records in December under the Freedom of Information Act.

“The SEC improperly refused to produce any records,” according to Cuban’s lawsuit.

An SEC spokesman was not immediately available for comment.

The Freedom of Information Act (FOIA)  is a law enacted by Congress in 1966 which allows the Federal Government to release information controlled by the government.  The government retains control over the type of information which can be released, and may deny requests based on the sensativity of the information.  The type of information Cuban seeks is very low on the government sensetivity level.  It is doubtful that the investigation of Mark Cuban’s alleged insider trading is a matter of National Security.  Further such documents relating to the investigation should be released through normal disclosure.  Though FOIA applies to the Federal Government, states have their own versions.  Here is an excellent website with more information on FOIA and how to request information.