by T. GormanPosted on Posted in SECActions

SEC recently filed yet another enforcement action claiming fraud under the headline “SEC Refiles Action Against Two Former Columbia Executives for Conduct Relating to Mutual Fund Market Timing Arrangements.” Lit. Rel. No. 19708 http://sec.gov/litigation/litreleases/2006/lr19708.htm This, of course, is not the first action the SEC and others have filed concerning “market timing.” What is of concern is that no matter how many headlines the SEC and other regulators generate, market timing in and of itself is not fraud and does not violate the federal securities laws. The trading technique know as “market timing” only becomes a legitimate enforcement issue if it is coupled with other conduct such as disclosure violations or a scheme to defraud. Despite this well know fact, the drum beat of headlines from the SEC’s enforcement staff and others has no doubt led the investing public to believe that “market timing” equals securities fraud. It does not.

The refiled complaint in this case well illustrates the point. The initial complaint was dismissed by Judge Nathaniel M. Gorton at page 13 of his opinion because “[i]n essence, the SEC has not alleged that the defendants made any untrue or misleading statement of material fact.”

In contrast, the headline grabbing cases filed by the SEC which involved market timing actually centered on schemes to defraud – not a simple claim that traders had engaged in “market timing.” See, e.g., SEC v. PIMCO Advisors Fund Management LLC, http://sec.gov/litigation/litreleases/lr18697.htm; In the Matter of Banc of America Capital Management, LLC, Lit. Rel. No. 33-8538 http://sec.gov/litigation/admin/33-8538.htm; In the Matter of Strong Capital Management, Inc., Lit. Rel. No.34-49741 http://sec.gov/litigation/admin/34-49741.htm.The new complaint filed in the Tambone case is based on a claimed “scheme” to defraud, disclosure violations and undisclosed “sticky asset” arrangements – not simply market timing. One can only hope that in its zeal to prosecute market timing the allegations of the refiled complaint are backed by solid facts rather than merely descriptive words. Compare SEC v. Gonzalez de Castilla, 99 Civ. 3999 (RW), 2001 WL 940560 (S.D.N.Y. Aug. 20, 2001) (denying motion to dismiss in insider trading case where SEC complaint in part alleged that material non-public information about a cross boarder take over had been conveyed by a defendant attorney who was a partner in a prominent law firm in Mexico, to his family members and others) with SEC v. Gonzalez de Castilla, 184 F. Supp. 2d 365 (S.D.N.Y. 2002) (granting defense motion for summary judgment as to all defendants where the undisputed evidence demonstrated that claimed tipper attorney did not learn about the take over until the day of its public announcement and after defendants had completed virtually all of their securities trades).Tambone.pdf

by T. GormanPosted on Posted in SECActions

The NASD has withdrawn charges against former Credit Suisse First Boston (now Credit Suisse (USA)) investment banker Frank Quattrone. In March 2003, the NASD charged Mr. Quattrone with “spinning,” claiming that he used the lure of popular initial public offerings to draw financing business to his firm. Ironically, Credit Suisse decided not to fight similar charges brought against the firm and settled by agreeing to a consent decree and the payment of a $150 million in penalties and disgorgement. http://sec.gov/litigation/litreleases/consentcsfb.pdfThe decision by the NASD is latest legal victory for Mr. Quattrone, who has maintained steadfastly his innocence in the face of an array of charges by the government and regulators. Previously, the government charged Mr. Quattrone with obstruction of justice based on a case that centered on a single e-mail. The initial criminal trial ended in a hung jury. While Mr. Quattrone was convicted in a retrial, the Second Circuit court of appeals reversed his conviction earlier this year (see related discussion below). The government has not decided whether to appeal or retry Mr. Quattrone.Shortly after the Second Circuit decision, the SEC overturned an NASD order banning Mr. Quattrone from the brokerage business for life (see related article below). The decision yesterday by the NASD to withdraw charges against Mr. Quattrone, thus, marks his fourth victory against the government and regulators. For further discussion of the NASD decision see: www.businessweek.com/ap/financialnews/D8HVS5SGO.htm; Andrew Ross Sorkin, NASD Ends Case Against Quattrone, N.Y. Times, June 2, 2006; Randall Smith, Regulators Drop Civil Case Against Frank Quattrone, Wall St. J., June 2, 2006, at C1.