by T. GormanPosted on Posted in SECActions

The SEC continued to focus on the current market crisis and possible manipulation through short selling and rumors. In addition, the agency filed another settled insider trading actions, one of the key areas of emphasis for the enforcement program.

The market crisis

The SEC continued its focus on the current market crisis, reportedly issuing investigative subpoenas to Goldman Sachs Group, Inc., Deutsche Bank AG and Merrill Lynch & Co. as part of its probe of possible manipulative trading in the shares of Lehman Brothers Holdings Inc., and Bear Stearns, according to a Bloomberg.com report on Wednesday. The subpoenas from the Enforcement Division appear to be part of a larger review and inquiry by the SEC into what may be manipulative trading which combines false rumors and short selling.

On Sunday, the agency took the unusual step of issuing a press release announcing an inspection of Wall Street firms aimed at ensuring that firms have proper procedures in place to prevent manipulation through false rumors. That announcement was made at the same time the Treasury Department was discussing propping up Freddie Mac and Fanny Mae whose shares had tumbled last week amid rumors that the mortgage giants were experiencing financial stress as discussed here.

The SEC followed the Sunday announcement with a release on Tuesday announcing an emergency rule which will impose certain limits on short selling in the shares of Fannie Mae, Freddie Mac, and primary dealers at commercial and investment banks. Specifically, the rule will require short sellers of the shares of the designated entities to arrange before the trade to borrow the securities and deliver them at settlement. The rule, which goes into effect on July 21, 2008, is aimed, according to the SEC, at unlawful manipulation through naked short selling.

This rule followed SEC Chairman Cox’s congressional testimony on Monday. There the Chairman discussed the new emergency rule and noted that the Enforcement Division has about four dozen open inquiries focused on the current market crisis as discussed here.

Insider trading

The SEC filed another settled insider trading case on Wednesday, SEC v. Rauch, Case No. CV 08 3416 (N.D. Cal. filed July 15, 2008). The complaint charges the current mayor of Beaufort, South Carolina with insider trading in the shares of Advanced Cell Technology, Inc., a company for which he was acting as a consultant. Specifically, the SEC’s complaint alleges that William Rauch was told by company officials about a significant new development which was soon to be announced in a press release and in an article in a scientific journal. Immediately after learning the information, Mr. Rauch set up brokerage accounts in the names of his children. After confirming the information with the company, he purchased $11,000 worth of stock. Following the public announcement of the event the share price increased from $0.40 to $1.83 and then later declined. Mr. Rauch, who held his shares, made a profit of about $20,000.

To resolve the matter Mr. Rauch consented to the entry of a permanent injunction prohibiting future violations of Section 10(b) and Rule 10b-5 thereunder. In addition, he agreed to an order requiring that he pay more than $20,000 in disgorgement, over $2,500 in prejudgment interest and a penalty of $20,708.

by T. GormanPosted on Posted in SECActions

SEC Chairman Cox testified before the Senate Committee on Banking, Housing and Urban Affairs on Tuesday, detailing in part efforts by the Division of Enforcement regarding the recent crisis in the financial markets. Noting that the “SEC’s mission [is] to protect investors, maintain orderly markets, and promote capital formation” the Chairman told the Committee that the agency currently has over four dozen pending investigations in the subprime area. Those inquiries “fall primarily into three broad categories: first, subprime lenders; second, investment banks, credit rating agencies, issuers and others involved in the securitization process; and third, banks and broker-dealers who sold mortgage-backed investments to the public.”

The Chairman went on to highlight key areas in which the Enforcement Division is focusing its efforts. Those include:

• Whether mortgage lenders properly accounted for the loans in their portfolios and set up the correct loan loss reserves;

• Whether investment banks and broker-dealers defrauded retail customers by making false representations or putting investors into unsuitable mortgage backed investments. As an example of these kinds of inquiries, the Chairman pointed to the action recently brought by the SEC and the U.S. Attorney’s Office against two former portfolio managers at Bear Stearns Asset Management, discussed here, who were accused of deceiving investors in an effort to prevent them from selling their shares in the funds which eventually collapsed last summer;

• Inquiries into the spreading of false rumors which can undermine market confidence and be manipulative. The SEC is coordinating its efforts in this regard with other market regulators as part of an industry-wide sweep discussed here.

In other parts of his testimony Chairman Cox’ went on to detail the efforts of other divisions to deal with the current market crisis, including the recent staff report on credit rating agencies, discussed here, and the proposed rules for those agencies.

Overall, Chairman Cox detailed a comprehensive effort by the agency to deal with the complex issues of the current market crisis. The testimony had a strong, positive overtone.

The current market crisis clearly requires a comprehensive effort to deal with the continually unfolding problems. While the SEC is only one of the regulators dealing with these issues, clearly a strong and vigorous enforcement program is essential, as the Chairman suggested. The SEC’s enforcement program has long been critical to its mission. Yet, in recent times many have seen it as inconsistent and less than effective. Its performance during this crisis may decide whether those critics are correct.