by T. GormanPosted on Posted in SECActions

A short squeeze was at the center of a recent SEC complaint brought against well known investment adviser Philip Falcone. SEC v. Falcone, 12 Civ 5027 (S.D.N.Y. Filed June 27, 2012). There the Commission alleged that Mr. Falcone purchased the float and more for an outstanding security so that he could force the short interest holders against whom he had a grudge to buy from him to cover – a short squeeze. The shorts came and were forced to pay monopoly rents. The plan worked, with one small glitch – Mr. Falcone was named as a defendant in a Commission fraud complaint.

Now the Commission has filed another complaint centered on a short squeeze. In this case however the manipulative technique was going to be used by the investors. Yet in the end the investors became the victims of another manipulative technique called scalping.

Jerry Williams moderated a popular stock trading discussion website known as the Monk’s Den. Over time he developed a large group of followers who often implemented his trading suggestions.

In 2009 Mr. Williams began touting a trading technique he called “Float Lock Down.” The strategy called for a group of investors to take advantage of market makers in penny stocks by purchasing the float and holding it. This would squeeze market makers who supposedly were naked shorts. In essence, the Float Lock Down was a short squeeze. Mr. Williams recommended two candidates for this technique. On was Cascadia Investments, Inc. The other was Green Oasis Environmental, Inc. During 2010 he promoted this approach on the Monk’s Den and at in person seminars he conducted.

Investors were not told that Mr. Williams had been hired by Cascadia and Green Oasis to promote their stocks. The two companies paid him with millions of free or heavily discounted shares. As his followers executed the Float Lock Down, Mr. Williams employed another manipulative technique – scalping. As his followers bought and held the securities of the two companies, Mr. Williams sold his shares netting him profits of over $2.4 million.

Mr. Williams utilized the same approach with a fund he helped created called the U.S. High Performance Fund. As its investment adviser Mr. Williams bought several thousand shares of Green Oasis for the fund as part of a claimed Float Lock Down. From his personal account, however, he sold shares of Green Oasis for his personal profit.

The Commission’s complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is in litigation. SEC v. Williams, Case No 3:12-cv-01068 (D. Conn. Filed July 20, 2012).

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by T. GormanPosted on Posted in SECActions

Discussions regarding the use of international accounting standards have gone on for years. During that time the Commission has considered and studied the question. In 2010 the agency directed the staff and specifically the Office of the Chief Accountant to develop and execute a work plan. That plan was published in February of the same year. Now that Office has published its Final Report which is titled: Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System For U.S. Issuers.

The Report acknowledges the benefit of a single set of high quality, globally accepted accounting standards for investors. It is not, however, a plan for the adoption of international accounting standards for U.S. issuers. Nor is it a plan for the convergence of U.S. and international standards. Rather, it is a series of observations and considerations about the International Financial Reporting Standards or IFRS and their issuer, the IASB. In this regard the Report is similar to a recent staff report to Congress under Dodd-Frank on the advisability of adopting legislation which would give the fraud sections of the securities laws extraterritorial reach in private actions as was done for SEC and DOJ cases. That report did not advocate or oppose such legislation. Rather, was essentially a series of pros and cons regarding the adoption of such legislation.

The Report on IASB standards begins with the observation that U.S. issuers would not favor designating them as authorative: “[e]arly in the Staff’s research, it became apparent to the Staff that pursuing the designation of the standards of the IASB as authoritative was . . . not supported by the vast majority of participants in the U.S. capital markets . . . “ The Staff then pointed to three factors which influenced its decision to focus on alternatives:

  • Influence on standard setting. Few jurisdictions provide for the use of standards issued by the IASB without measures to ensure their suitability. An endorsement process, for example, may give an adopting jurisdiction more influence over the standards.
  • Burden of Conversion. While conceding that incorporation of IFRS could not occur without some cost and effort, the majority of issuers expressed concern about moving directly to those standards because of the perceived significant expense and possible confusion for investors.
  • Reference to U.S. GAAP. Many laws, regulations and contracts have U.S. GAAP imbedded in them.

The balance of the Report is a series of observations about the international standards and their issuer. Those include:

  • Development of IFRS. While the IASB has made significant progress in developing comprehensive standards, development is required in some areas. The same can be said about U.S. GAAP, but the report says that the “perception among U.S. constituents [is] that the ‘gap’ in IFRS is greater.”
  • Interpretive Process. The IFRS Interpretations Committee is charged with reviewing on a timely basis widespread issues that arise with respect to the standards and provide authoritative guidance. The Report concludes that the IFRC IC “should do more to address issues on a timely basis” although recent changes have been made to improve the process.
  • IASB’s Use of National Standard Setters. To develop standards that can be incorporated in various jurisdictions the IASB must understand the intricacies of specific domestic reporting and regulatory systems. To do this the Report suggests that the IASB “consider greater reliance on national standard setters.”
  • Global Application and Enforcement. One key to the use of global standards is consistency of application and enforcement. Achieving this will require increased cooperation among global regulators such as the SEC.
  • Governance of the IASB. Like other international organizations, the IASB is independent but does not have a mandate tied to any single capital market. As it relates to the needs of U.S. investors the Report notes that “it may be necessary to put in place mechanisms specifically to consider and to protect the U.S. capital markets – for example, maintaining an active FASB to endorse IFRSs.”
  • Status of Funding. The IFRS Foundation is a non-profit that has no ability to compel or require funding. The Report states that its “most significant concern about the funding approach is the continued reliance on the large public accounting firms to provide funds to the IASB.”

These points are provided, according to the Report, to inform the Commission’s ultimate consideration of global accounting standards.

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