by T. GormanPosted on Posted in SECActions

Market Timing/Late Trading is Winding Down, Permitting Enforcement to Focus on Other Areas

Last week we reviewed recent enforcement actions involving the Foreign Corrupt Practices Act in connection with the criminal action against Chiquita, although that case was not specifically based on the FPCA (post of 3/21/07).  Clearly the FPCA is an area of increasing focus for both the SEC and DOJ. 

The reverse is true of market timing/late trading.  Since the initial efforts of former New York Attorney General Eliot Spitzer several years ago, this has been a key focus for the SEC Enforcement Division.  Market timing of course is not in and of itself a violation of the federal securities laws.  Although the SEC has claimed repeatedly that late trading is a violation of the securities laws, its argument is questionable at best.  Nevertheless, in recent years the SEC enforcement staff has conducted a wide-ranging investigation into the practices, largely under an omnibus order of investigation.  From that investigation the SEC has brought a number of cases, typically tying the market timing/late trading conduct to some other practice that clearly violates the securities laws.  

Last year the SEC continued to bring cases in this area.  For example: 

In the Mater of Prudential Equity Group, (Aug. 28, 2006), www.sec.gov;/litigation/admin/2006/34-54371.pdf  Prudential consented to the entry of an order directing it to pay $600 million as a global settlement with the SEC, U.S. Attorney’s Office, the Mass. Securities Division, the NASD, the New Jersey Bureau of Securities, the New York Attorney Generals Office and the NYSE to resolve a claimed illegal market timing scheme.  This case is also a good example of the benefits of parallel proceedings for all parties (see Series: Part III, post dated 2/28/07).  A group of regulators were able to coordinate to investigate a common practice yielding obvious economies in the use of resources; the company was able to achieve a global settlement.  

SEC v. James Tambone and Robert Hussey, (D. Mass. Dec. 28, 2006), www.sedc.gov/litigation/litreleases/2007/lr19962.htm  In this case, the court dismissed claims brought by the SEC against two former executives of Columbia Funds Distributor Inc., in connection with a claimed undisclosed market timing scheme.  

In the matter of Flynn, (Aug. 2, 2006), www.sec.gov/litigation/aljdec/2006/id316rgm.pdf.  An ALJ dismissed aiding and abetting charges alleging that former CIBC director Paul Flynn aided a late trading and market timing scheme.  This was the second time Mr. Flynn prevailed in actions based on this conduct.  Earlier former New York Attorney General Spitzer dismissed criminal charges against Mr. Flynn based on the same conduct. 

In contrast to the FCPA, which will become an area of increasing focus in 2007, we can expect to see cases in the market timing/late trading area winding down.  While cases will still be brought in 2007 in this area, expect them to be the remnants of the earlier investigative efforts.  This will permit the Enforcement Division to shift resources to focus on other areas such as insider trading, financial fraud and the Foreign Corrupt Practices Act.  This suggests that issuers and their executives should carefully review their compliance procedures in those areas. 
 

by T. GormanPosted on Posted in SECActions

First the SEC tried to make them register. Suit was brought and they won, the SEC lost. The U.S. Court of Appeals for the District of Columbia struck down the efforts of the SEC to directly regulate hedge funds last summer. Goldstein v. SEC, 451 F. 3d 873 (D.C.Cir. 2006). Then SEC Chairman Cox vowed before congress that “hedge funds are not, should not be, and will not be unregulated.” www.sec.gov/news/testimony/2006/ts07250cc.htm Subsequently, the SEC proposed rules focused on hedge funds. Proposed Rule 206(4)-8 would prohibit investment advisors from making false statements to investors. Proposed Rules 509 and 216 would require accredited investors to have at least $2.5 million in investments — that is, it limits the class of persons who can purchase shares in the private placements used by the funds which are exempt from the registration requirements of the federal securities laws. www.sec.gov/rules/proposed/2006/33-33-8766.pdf The SEC also continues to bring enforcement actions against hedge funds using primarily the antifraud provisions of the federal securities laws. See, e.g., SEC v. Langley Partners, L.LC. et al., (D.D.C. March 14, 2006), www.sec.gov/litigation/litreleases/lr19607.htm (settled enforcement action which alleged insider trading and sale of unregistered securities regarding 23 PIPE offerings); SEC v. Deephaven Capital Management, LLC., et al., (D.D.C. May 2, 2006), www.sec.gov/litigation/litreleases/2006/lr19683.htm (settled enforcement action which alleged insider trading in connection with 19 PIPE offerings). This could be viewed as regulation by consent decree. Now however we have role reversal. Yesterday huge private equity firm Blackstone made landmark IPO filing with the SEC. Blackstone, founded by Pete Peterson in 1985, reportedly has about $78.7 billion in assets under management of which $31.1 billion are from its private equity business, $17.7 billion are in its real estate division and another $29.9 billion in its alternative assets unit. Blackstone reportedly posted $1.1 billion in revenue in 2006 with net income of $2.3 billion. The IPO would seek to raise as much as much as $4 billion through a public offering.

While the Blackstone filing is clearly significant, it is not the first. Earlier this year U.S. Fortress sold shares in an IPO. The February IPO raised $634 million for the firm. What is perhaps more significant however is that the shares from the IPO opened up 89% on the first day of trading. That kind of dramatic share price increase is reminiscent of the boom in the late 1990s and suggests significant public interest and appetite for hedge fund shares. So as regulators in Washington continue to debate the need for regulation of these huge market players, if the actions of Blackstone are any indication it may be that we will see more funds coming in to the market like Blackstone.