Securities Mosaic® Blogwatch
August 27, 2014
Securities Litigation in the Roberts Court: An Early Assessment
by John Coates

Editor's Note: John Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School.

This article, Securities Litigation in the Roberts Court: An Early Assessment, provides a preliminary quantitative and qualitative appraisal of the Roberts Court's securities law decisions. In the Roberts Court, decisions that "expand" or "restrict" the reach of securities law have occurred in roughly the same 50/50 proportion as in the Rehnquist Court after the departure of Justice Powell, and polarization (5-4 votes and dissents) has decreased. A simple political attitudinal model fails to account for these developments. The article proposes that Roberts Court's securities law decisions are better understood in the context of Chief Roberts' background as an appellate litigator and the Roberts Court's broader "procedural revolution," which has been more prominent in contract, commercial, and antitrust cases. This procedure-based analysis is then used to predict likely outcomes of securities law cases to be argued in the October 2014 term and to forecast the types of cases that are likely to gain the Court's attention moving forward.

Building on the research of Professors Thomas Sullivan and Robert Thompson on "private law" cases from 1972 to 1987, I developed a comprehensive dataset of securities law, antitrust law, and economic issue cases from Chief Vinson to Chief Roberts. Part I of the article details several initial findings. First, securities law cases make up a larger portion of the Roberts Court's docket compared to all Courts dating back to Chief Vinson, but the increased share is due largely to the decrease in the Court's total docket, which has shrunk by over half since Chief Burger. The Roberts Court has continued to hear on average one to two securities law cases per year (fifteen overall).

Dissent and polarization - overall and in securities law - have not increased under Chief Roberts. Securities law cases have in fact seen far fewer minority votes (15%) and 5-vote majority decisions (20%) than under Chief Rehnquist (22% and 39%), and the case that most restricted the reach of securities law was actually Morrison, a unanimous decision. The Court has maintained a balance between expansive and restrictive outcomes, distinguishing it from the highly expansive pre-Powell era and the restrictive Powell era.

A qualitative assessment fairly well matches the quantitative data. Beside Morrison, the case law mainly consists of modest, status quo-preserving decisions, while resolving some Circuit splits stemming from Congress's several revisions to the securities law statutes since the mid-1990s. The effects of Morrison seem likely to dominate those of expansive decisions like Troice and Lawson, such that Roberts' Court's securities law decisions are more restrictive overall than a count of the decisions would suggest - but not strongly so.

Part II details how the balance between expansive and restrictive decisions, combined with decreased polarization, calls into question an attitudinal model's explanation of case outcomes. Such a model would predict that Republican-appointees would vote for restrictive (business/manager-friendly) decisions while Democrat-appointees would vote expansively (consumer/worker-friendly). This model, however, correctly predicts only 50% of actual case outcomes - precisely the same as a coin flip.

Outcomes better fit a model organized on two other dimensions: (a) procedural/substantive, and (b) bright-lines/standards. Unanimity is exhibited in most securities law procedural cases, and when the Court strikes down bright-line rules, and so appear to explain decisions where party affiliation fails. Combining these dimensions in a simple model correctly (if conjecturally, given the small sample size) catalogues 70% of cases as expansive/restrictive. It also fits perfectly the first case decided after developing the hypothesis, Halliburton II. In that case, the Court rejected two bright-line rules, was procedural (adding a pre-certification defense to Rule 10b-5 class actions), and was modestly restrictive.

Part III briefly reviews Chief Roberts's background as an appellate litigator and the Court's broader "procedural revolution" to help put in context the Court's aversion to bright-line rules and its focus on procedure in securities litigation. The Court's securities law decisions may be viewed as part of a broader retrenchment on civil procedure that has effectively limited litigation against businesses in cases like Goodyear and Twombly, while preserving judges' discretion by rejecting bright-line rules. The Roberts Court's preferences for standards and preservation of judge discretion match up well with the experiences and intuitions of an appellate litigator.

Several predictions follow, including that the Court is more likely to grant certiorari in procedural securities law cases. The two certiorari grants for securities cases in the October 2014 term in fact involve procedure. The question in IndyMac MBS is whether the filing of a class action tolls the limitations period under the Securities Act. Based on the above, the answer will probably be "not necessarily." In Omnicare, the question is whether a plaintiff must plead a statement of opinion was subjectively disbelieved or simply untrue under Section 11 of the Securities Act. This article suggests the answer will be the former.

The full article is available for download here.

August 27, 2014
The Law and Economics of Benchmark Manipulation
by Andrew Verstein

The following post comes to us from Andrew Verstein, Assistant Professor of Law at Wake Forest University School of Law. It is based on his recent article, "The Law and Economics of Benchmark Manipulation," which is forthcoming in the Boston College Law Review and is available here.

This is a period of unremitting market manipulation. Allegations have rocked the markets in interest rates, foreign currency, gold, palladium, milk, oil, biofuels, natural gas, and aluminum, to say nothing of the inexorably rising tide of stock price manipulation. By all accounts, manipulation is in its season.

The abundance of market abuse could be surprising given the daunting challenges scholars believe manipulative traders must overcome. Here is a quick version of one skeptical argument: to drive up the global price of an asset - say, silver - you have to buy a truly enormous amount. But you can't get rich unless you can sell at the inflated price, and whatever forces raised the price while you bought will reverse when you try to sell. In theory, the plummeting price should precisely evaporate your profits. In the meantime, you had to pay to transport and store a quarter of the world's silver. If theory predicts that it is hard to manipulate prices, then why is manipulation so widespread?

In an article forthcoming in the Boston College Law Review, I argue that manipulation scholarship and law both reflect an outdated view of markets. Both are fixated on prices. The reality is that markets care relatively little about prices. Instead, markets care about price benchmarks, and so do the manipulators who prey upon them.

Price benchmarks are institutions that represent prices. For example, the Dow Jones Industrial Average approximates the stock market, just as the Consumer Price Index summarizes the cost of living. Markets are far too vast and complex, and the notion of "price" far too elusive, for anyone to actually do much with prices. Toyotas are sold and resold all around the country, with different features and quality levels. No rational person would try to discover and analyze all this data. But no one wants to overpay either. Instead, one might rationally consult the Kelley Blue Book for its price assessment for the car in question. The Kelley Blue Book is a price benchmark that compiles market data and distills it into a single comprehensible number.

Benchmarks serve us well, but their rise is a mixed blessing. Our increasing reliance on benchmarks has made them an attractive target for manipulation. We trust these benchmarks enough to write them into contracts, administrative regulations, and statutes. Once the benchmark is hardwired into legal relationships, manipulating the proxy pays off just as much as manipulating the underlying reality. For example, if the manipulator has agreed to sell oil at the benchmark price, tampering with the benchmark has the same effect as moving the worldwide supply of oil.

At the same time, it is considerably easier to bias a benchmark than the "real" market price. By their nature, benchmarks describe a market based on some small slice of it. Careful manipulators can bias that slice. It is a daunting task to corner the world currency market, but it may be less daunting to corner the 2% of the market whose price is considered by the leading benchmark. By shrinking the domain over which the manipulator must exercise influence, benchmarks manipulation circumvents the principal challenges to manipulation identified by scholars.

As a result of widespread hardwiring of benchmarks into legal relationships, as well as their susceptibility to influence, market manipulation is increasingly synonymous with benchmark manipulation. This is true in currency markets, commodity markets such as the trade of crude oil, and even equity securities. Indeed, properly understood, most equity market manipulation can be characterized as benchmark manipulation.

This realization is significant for regulators who would reduce the incidence and damage of market manipulation. For decades, our market abuse laws have fixated on manipulation-by-fraud. Yet fraud requires reasonable reliance upon a misstatement. Worryingly, benchmark manipulation can proceed without anyone making a fraudulent statement or trade, as the manipulator understands and exploits the benchmark's rules. And because of hardwiring, manipulation can pay even if the victim knows the full truth about all of the relevant facts. A contract calling for payment at the benchmark price calls for that level of payment even if the benchmark price looks pretty screwy. Benchmark manipulation fits poorly in our dominant manipulation enforcement paradigm. Instead, our market abuse regime should proscribe manipulation of benchmarks as its own distinct harm.

Yet where regulators do seek to directly engage with benchmarks, they must do so with a sophisticated understanding of how benchmarks work and how they are used, or else may threaten to increase both risks and costs. Unfortunately, the European Commission did not demonstrate such understanding in its Proposed Regulation of Benchmarks. Among other faults, the EC proposed increasing the "objectivity" of benchmarks. While objectivity is superficially desirable, foreign exchange benchmarks are relatively objective, and yet they have been the site of what Britain's chief market regulator recently called the "biggest series of quantifiable wrongdoing in the history of our financial services industry." Clear, mathematical methodologies give regulators a sense of comfort but they give manipulators a blueprint for market abuse. Appropriate regulation of the benchmark space must preserve subjectivity and flexibility, while giving good incentives for robust benchmarks.

In the end, there are tradeoffs between benchmark robustness, accuracy, cost and other values underlying benchmarks' usefulness. However, a better balance can be struck if benchmarks' manipulative potential is better understood.

August 27, 2014
SEC -- USAO Charge IR Executive With Insider Trading
by Tom Gorman

The SEC may be developing theme based insider trading cases. In recent weeks the agency brought two insider trading actions centered on golfing friends. SEC v. O'Neill, Civil Action No. 1:14-cv-13381 (D. Mass. Filed August 18, 2014); SEC v. McPhail, Civil Action No. 1:14-cv-12985 (D. Mass. Filed July 11, 2014).

Now it is investor relations professionals. Last month the Commission brought an insider trading case against one investor relations executive. SEC v. McGrath, 14-cv-3483 (S.D.N.Y. Filed July 22, 2014). A second investor relations executive was named in an insider trading case by the agency yesterday. SEC v. Lucarelli, Civil Action No. 14-cv-6933 (S.D.N.Y. Filed August 26, 2014). The Manhattan U.S. Attorney's Office filed parallel criminal charges. U.S. v. Lucarelli (S.D.N.Y.).

Michael Lucarelli was the Director of Market Intelligence at Lippert/Heilshorn & Associates, an investor relations firm. He began work at the firm in August 2012. Previously, he had been employed at another investor relations firm for a number of years.

When he accepted his new position, Mr. Lucarelli was furnished with the firm's Code of Conduct. It prohibited insider trading. Mr. Lucarelli acknowledged obtaining the Code in an e-mail to the firm. The firm routinely had material non-public information regarding clients. Mr. Lucarelli's role was to develop new client relationships for the firm. In that role he did not routinely review drafts of firm press releases.

In January 2008 the executive opened a brokerage account. At the time Mr. Lucarelli did not disclose that he worked for an investor relations firm. Rather, he told the brokerage firm that he was self-employed. He repeated this procedure in subsequent years when he moved his account to other brokerage firms.

Beginning in August 2013 and continuing through at least August 2014, Mr. Lucarelli is alleged to have used his position at the firm to obtain inside information regarding at least 20 clients. In each instance he traded in advance of a corporate event, purchasing securities and making illicit profits. Overall he is alleged to have had profits of almost $1 million by the SEC. The criminal complaint, based on 12 instances of insider trading, alleges illicit trading profits of over $538.000.

On July 24, 2014 the FBI obtained a search warrant for Mr. Lucarelli's office at the firm. During the search, which was conducted without his knowledge, a locked briefcase was seized. Inside was a draft press release for firm client TREX Company. The press release contained the second quarter 2014 financial results for the company. The search of his office was completed the next day.

As the search was being completed Mr. Lucarelli began purchasing shares of TREX. From July 25, 2014 through August 1, 2014 Mr. Lucareli acquired a net position of 37, 400 shares of TREX. Before the opening of the market on August 4, 2014 the firm announced its financial results. Pre-tax earnings had increased 23%. TREX also announced revenue guidance for the third fiscal quarter of 2014. It was up 27% over the comparable period in the prior year. Within two hours of the announcement Mr. Lucarelli sold 35,058 of the 37,400 shares he had purchased, yielding profits of almost $90,000.

The SEC's complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 14(e). See Lit. Rel. No. 23074 (August 26, 2014). The criminal complaint alleges 13 counts of securities fraud. Both cases are pending.

August 27, 2014
Bank Directors: Beware of Expanded Fiduciary Duties
by Randi Morrison

In this American Banker article, Luse Gorman's John Gorman discusses his concerns about - and opposition to - suggestions made by academics and others that bank directors' fiduciary duties be broadened in the risk oversight area. His article was triggered by a recent speech by Federal Reserve Gov. Daniel Tarullo where Gov. Tarullo appeared to support the notion of expanding bank directors' fiduciary duties - referencing a recent "provocative" academic paper proposing a simple negligence standard for expanded board oversight responsibility for risk-taking by "systemically important" financial institutions.

In the article, Gorman notes that expanding directors' duties in this manner would expose boards to liability for good faith judgments as to risk management, increase litigation and expense, require boards to function in a management capacity, and discourage board service by capable candidates.

Kevin LaCroix echoes those concerns in this blog. Like Kevin, I too acknowledge stepping into an already-unfolding debate, but just have to note that I am similarly concerned about the implications of such a proposal. Among other things, it seems almost certain that the pool of aspiring and well-qualified bank board directors would shrink measurably as their potential liabilities increase, which would reduce overall board effectiveness - seemingly totally counter to the objectives of the proposal. Kevin's blog further discusses his seemingly well-founded concerns that the notion of broadened fiduciary duties would quickly expand beyond just systematically important financial institutions to additional - or potentially all - bank directors.

On the Other Hand: Proposed Increased Protection for Australia's Directors

While here in the US we are dealing with discourse around expanding bank directors' fiduciary duties, proposals to limit director exposure to liability are being floated in Australia. This paper outlines the Australian Institute of Company Directors' proposal for a new director defense to supplement the statutory business judgment rule.

The statutory business judgment rule is limited to a director's duty of care and diligence - leaving directors exposed to liability for actions/omissions related to other Corporations Act provisions and laws that may impose personal liability. The Institute's surveys (described in the paper) suggest that directors' exposure to personal liability under the current regulatory scheme adversely impacts their decision-making and discourages their willingness to accept new board appointments. The proposed Honest & Reasonable Director Defense is designed to provide directors with appropriate protection.

The proposed defense is as follows:

[section number] - Honest and reasonable director defence

Notwithstanding any other provision of this Act or the ASIC Act, if a director acts (or does not act) and does so honestly, for a proper purpose and with the degree of care and diligence that the director rationally believes to be reasonable in all the circumstances, then the director will not be liable under or in connection with any provision (including any strict liability offence) of the Corporations Act or the ASIC Act (or any equivalent grounds of liability in common law or in equity) applying to the director in his or her capacity as a director.

What is "Proxy Insight?"

In this podcast, Seth Duppstadt discusses how the new service - Proxy Insight - works, including:

- What is Proxy Insight?
- How does it differ from a proxy advisor?
- How does it differ from a governance ratings firm?
- Any surprises since you launched?


- by Randi Val Morrison

August 26, 2014
How Far Does Section 10(b) Reach? The Second Circuit Says That A Domestic Transaction Is Necessary, But Not Sufficient, To Invoke U.S. Securities Laws
by Kevin Askew

In a long-awaited opinion issued on August 15 in Parkcentral v. Porsche, the Second Circuit limited the extraterritorial reach of the U.S. securities laws, affirming the dismissal of securities claims brought by parties to swap agreements that were entered into in the United States but were based on the price of foreign securities. Although the Parkcentral opinion offers an important interpretation of the Supreme Court's 2010 opinion in Morrison v. National Australia Bank, the Second Circuit declined to set forth a bright-line rule for determining when a securities fraud claim based on domestic transactions in foreign securities is sufficiently "domestic" to be subject to U.S. securities laws, thereby leaving the door open to future litigants to confront this issue in securities cases involving foreign elements.

In Morrison, the Supreme Court found that Section 10(b) of the Exchange Act does not apply extraterritorially based on a lack of congressional intent to overcome the strong presumption against the extraterritorial application of domestic laws. In so holding, the Court rejected a long line of Second Circuit cases that allowed the application of Section 10(b) to claims involving foreign securities so long as the claims involved either significant conduct in the U.S. or some effect on U.S. markets or investors. The Supreme Court reasoned that the Second Circuit's so-called "conduct test" and "effects test" improperly extended the geographic reach of the U.S. securities laws beyond Congress's intent, and would interfere with foreign countries' own securities regulations. Instead, the Court adopted a new "clear test," holding that Section 10(b) applies only to claims based on: (1) "transactions in securities listed on domestic exchanges" or (2) "domestic transactions in other securities."

In Parkcentral, the Second Circuit considered claims which, on their face, appeared to satisfy the second prong of the Morrison test. Plaintiffs were international hedge funds that entered into swap agreements pegged to the price of Volkswagen shares, which are not traded on domestic exchanges. Plaintiffs claimed that Porsche, also a German corporation, and its executives made fraudulent statements about Porsche's intentions to acquire VW stock, resulting in a dramatic rise in the VW stock price that caused Plaintiffs (who essentially held a short position in VW stock) to lose money. Porsche was not a party to any of the securities-based swap agreements entered into by Plaintiffs, and Porsche's alleged misconduct took place primarily in Germany. Plaintiffs argued that because they entered into their VW swap agreements in the U.S., their claims were based on "domestic transactions in other securities" and therefore subject to U.S. securities laws because they satisfied the second prong of the Morrison test.

The Second Circuit declined to adopt Plaintiffs' argument, and instead held that the Morrison test only set forth necessary but not sufficient conditions for the application of domestic securities laws to claims with foreign elements. The court found that, while the Parkcentral Plaintiffs' claims met the necessary condition of being based on a domestic transaction, they were not sufficiently "domestic" to justify the application of U.S. securities laws. In particular, Plaintiffs' claims were based on a German company's statements, made primarily in Europe, regarding another German company whose shares were traded exclusively in Europe, and were the subject of an investigation by German regulatory authorities and litigation in German courts. The court found that subjecting Porsche to litigation in the U.S. under these circumstances raised the potential for regulatory and legal overlap and conflict that Congress would not have intended and were inconsistent with the presumption against extraterritorial application of domestic laws.

The Second Circuit was careful to make clear that its decision was based only on the precise facts before it, and that it was not purporting to offer a new test to be used in applying Morrison to securities claims involving foreign elements in future cases. The court's opinion suggests that it does not believe that Morrison's "clear test" is so clear after all, and leaves open the following question: Where a claim satisfies Morrison's necessary conditions for the application of domestic securities laws, what is required for that claim to be sufficiently "domestic" to warrant their application? This question will likely continue to be litigated, in the Second Circuit and elsewhere.

August 26, 2014
What the SEC's New Chief Accountant Needs to Worry About
by Edith Orenstein

The announcement earlier today by the U.S. Securities and Exchange Commission that James (Jim) Schnurr has been appointed as the new Chief Accountant critical juncture for the regulator continues to deal with the fallout of the 2008 credit crisis as well as a string of outstanding issues, such as accounting convergence and the rise of cybercrime.

Schnurr joins the SEC and takes on the accounting reigns as the regulator continues to struggle with complex financial crisis enforcement cases - such as the Bank of America case settled last week - that are still in process of being fleshed out.

Further, there is some uncertainty in some corners as to which way the SEC may turn on how to treat the use of International Financial Reporting Standards (IFRS) as published by the International Accounting Standards Board (IASB) in the U.S.; that is, by U.S. registrants. And, there are always a myriad of registrant issues and ongoing oversight of U.S. Financial Accounting Standards Board (FASB) standard-setting matters as it winds down the convergence agenda and moves on its own projects.

This includes the implementation of the revenue recognition standard, completion of the leases standard and financial instruments and credit loss standards. This year's implementation of the Committee of Sponsoring Organizations of the Treadway Commission (COSO's) updated Internal Control - Integrated Framework for the first time as of Dec. 15, 2014 is another major item companies are dealing with and the SEC will be watching.

Additionally, Dodd–Frank Wall Street Reform and Consumer Protection Act rulemaking continues, along with matters on the docket for tomorrow's SEC open meeting, such as a more detailed asset-by-asset disclosures for pools of Asset Backed Securities (ABS) and rulemaking relating to derivatives and credit rating agencies. The SEC Chairman, along with the Director of the Division of Corporation Finance, have also emphasized they want to see action on the SEC's Disclosure Initiative, which will undoubtedly involve the Chief Accountant as well, and the issue of Cybersecurity .Although this not directly an "accounting or disclosure" issue per se - it definitely has disclosure implications.

The New Chief Accountant

Schnurr, who recently retired as Vice Chairman and Senior Professional Practice Director of Deloitte LLP, will officially start with the SEC in October. According to the SEC's announcement of Schnurr's selection issued earlier today, Schnurr's career with Deloitte (stretching close to four decades) includes serving as senior partner overseeing the firm's policy for SEC and financial reporting, as well as serving as a senior partner for mergers and acquisition services, deputy managing partner for professional practice, including responsibility for quality control and risk management of audit and advisory services. Schnurr's high level of responsibility for technical activities at his firm led to his becoming very familiar with - as they did with him - various regulatory and standard-setting bodies, including through his services as a member of advisory groups of the Financial Accounting Standards Board (FASB), the Public Company Accounting Oversight Board Standards Advisory Group (SAG), and various advisory groups and committees of the American Institute of Certified Public Accountants (AICPA).

In a statement included in the SEC's announcement, SEC Chairman Mary Jo White emphasized, "Jim's broad expertise in accounting, reporting, and risk management will help foster investor confidence by holding companies accountable for their financial reporting requirements."

Former Chief Accountants Comment

Reaching out to a number of former SEC Chief Accountants for input on the appointment of Schnurr as the next in a long line of successors in what must be one of the toughest jobs on the planet, I received feedback from a number of them. Former SEC Chief Accountant Don Nicolaisen, who served under former SEC Chairman William Donaldson, and co-chaired the U.S. Treasury's Advisory Committee on the Audit Profession, praised Schnurr's appointment as Chief Accountant, saying, "Jim is an excellent choice. He brings an exceptional balance of experience, sound judgment and common sense to the role. I'm very pleased that he has committed to the challenges ahead."

Lynn E. Turner's take on the matter, perhaps not unsurprisingly given Turner's legacy as Chief Accountant during then-Chairman Arthur Levitt, Jr.'s tenure, and considering his outspoken point of view on various PCAOB advisory committees including the SAG and the Investor Advisory Group, was that, "[Schnurr's appointment] continues the Big 4 "capture" of the office.

I believe that Chairman White's statement about leveraging Schnurr's expertise to "hol[d] companies accountable for their financial reporting requirements" is something that observers will be watching for, in addition to Schnurr's participation on SEC rulemaking initiatives and FASB and PCAOB oversight (and perhaps, indirectly, IASB oversight or IOSCO/ IFRS Monitoring Board related) oversight initiatives.

Industry Groups, Standard Setters Praise Appointment

Among the first of the industry groups and standard-setters to release congratulatory statements were Financial Executives International (FEI) President and CEO Marie N. Hollein, who stated, "Mr. Schnurr's distinguished career in audit and related services, as well as his technical and leadership skills will be of great benefit to all of the SEC's constituents," adding, "We look forward to working with him in his new role and providing support for the SEC... We also thank the current Chief Accountant Paul Beswick for his service and look forward to working with him and his team through the transition." Financial Accounting Foundation (FAF) President and CEO Terri Polley (the FAF oversees the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board or GASB) who praised how, "During the course of his distinguished career, [Schnurr] has demonstrated a commitment to interpret and apply standards in a manner that promotes the transparency, quality and usefulness of financial reporting," and Cindy Fornelli, Executive Director of the Center for Audit Quality (CAQ), who noted, "The CAQ welcomes the opportunity to work with Jim to help ensure that companies are providing accurate and complete financial information that is so critical to the effective functioning of our capital markets."

Taking on a Tough Job, at a Tough Time

In my view, it will be interesting to see how Schnurr, whose experience runs extremely broad and deep, may be integrated directly - or indirectly - with the SEC Enforcement Division's Financial Reporting and Audit Task Force. I have noted from time to time that being a standard setter or regulator must be one of the toughest jobs in the world.

The post What the SEC's New Chief Accountant Needs to Worry About appeared first on Financial Executives International Daily.

August 26, 2014
Dodd-Frank Whistleblowing Check-In
by David Zaring

Joe Nocera thinks that the new SEC whistleblower program is a winner, as it is rewarding people who go first to the firm, and only then to the agency, and the promise of a payday.

The Dodd-Frank law has provisions intended to protect whistle-blowers from retaliation, but there are certain aspects of being a whistle-blower that it can't do anything about. "People started treating me like a leper," recalls Lloyd. "They would see me coming and turn around and walk in the other direction." Convinced that the company was laying the groundwork to fire him, he quit in April 2011, a move that cost him both clients and money. (Lloyd has since found employment with another financial institution. For its part, MassMutual says only that "we are pleased to have resolved this matter with the S.E.C.")

In November 2012, MassMutual agreed to pay a $1.6 million fine; Lloyd's $400,000 award is 25 percent of that. It was a slap on the wrist, but more important, the company agreed to lift the cap. This will cost MassMutual a lot more, but it will protect the investors who put their money - and their retirement hopes - on MassMutual's guarantees. Thanks to Lloyd, the company has fixed the defect without a single investor losing a penny.

Could be. The most difficult cases of this kind are those posed by lawyers or compliance officers who go outside their firm, rather than staying within it, when they raise questions. That's something that seems to be happening at Vanguard right now, and Dave McGowan thinks such disclosures should be okay. Disclosing private documents more broadly, he feels, looks more like theft:

a former in-house lawyer who has filed a complaint in NY alleging Vanguard has underpaid federal taxes. Vanguard is reported to accuse the lawyer of breaching confidentiality; the lawyer has asked the SEC to intervene on his side.

Such cases may raise two distinct issues: the report itself, which may fall within exceptions to confidentiality in a Model Rules jurisdiction or under the SEC's rules, and backup for the report in the form of information -- such as documents either in hard copy or digital form -- the reporting lawyer might take from his or her employment. Even if we assume the report is protected the taking of documents raises distinct issues regarding client property.

I tend to think those issues should be resolved as issues regarding the report are resolved -- i.e., taking such information does not violate a duty to a client to the extent the information is reasonably necessary to facilitate a permissible report. In essence the report would create a privilege (in the tort law sense) covering the disclosure to enforcement officials or courts; no privilege would attach if the lawyer put the documents up on the internet or mailed them to a reporter.

August 26, 2014
Man the Barricades (Or the Bleachers) -- Reg AB Is Here
by Rick Jones

As I write this, we are awaiting SEC's vote scheduled for tomorrow, August 27, on final Regulation AB2 Rule and the NRSRO Rules. I say "man the barricades or the bleachers" because I'm not sure whether there is much to do except watch these unfold.

Reg AB is coming to us almost three years after the last comprehensive re-proposal was published of the SEC's 2010 effort at restating Reg AB. Having just reread the 2011 republication of Reg AB to prepare for the Great Unveiling, I was struck by how much was uncertain, and how extensive were industries' comments. In both the first and second round of Reg AB rulemaking, there could be a lot of difficult surprises in this release, notably including the extension of Reg AB to the 144A market and weaponization of officer certifications on the structure and asset quality of securitizations under the new Rule. Another interesting question is what the transition rule will be. I hope it's long. I'm prepared to be disappointed.

And let's not forget the NRSRO Rule. Last thing we saw from the SEC on this topic was a white paper where the SEC literally threw up its hands in frustration over what to do with the Franken Amendment. God knows what will be in this set of rules.

Remarkably, the preparation of these two Rules has been a leak-free environment. No one seems to know much about them. So, we will get to enjoy the full measure of surprise tomorrow when we begin to read through these things.

What do we do if there are existential risks to capital formation in these Rules? What do we do if there are things here that simply do not make any sense? Do we have recourse? Well, it may be easier to climb onto the bleachers and watch this potentially game changing set of rules role out, I think we need to resist that and think about the barricades. I suspect that there will be much to do.

View today's posts

8/27/2014 posts

HLS Forum on Corporate Governance and Financial Regulation: Securities Litigation in the Roberts Court: An Early Assessment
CLS Blue Sky Blog: The Law and Economics of Benchmark Manipulation
SEC Actions Blog: SEC -- USAO Charge IR Executive With Insider Trading Blog: Bank Directors: Beware of Expanded Fiduciary Duties
Securities Litigation and Regulatory Enforcement Blog: How Far Does Section 10(b) Reach? The Second Circuit Says That A Domestic Transaction Is Necessary, But Not Sufficient, To Invoke U.S. Securities Laws
Financial Executives International Daily » Financial Reporting: What the SEC's New Chief Accountant Needs to Worry About
Conglomerate: Dodd-Frank Whistleblowing Check-In
Crunched Credit: Man the Barricades (Or the Bleachers) -- Reg AB Is Here

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