This Week In Securities Litigation (October 31, 2008)
Fall out from the market crisis continues with settlements in the ARS market and continued concerns about the impact of short selling. The SEC followed up on its earlier settlement with Fidelity Investments regarding improper payments to obtain brokerage business by brining a series of settled administrative proceedings against Lazard Capital Markets, LLC and four individuals involved in the improper payments. In private actions, the CSX/hedge fund saga continues with a shareholders suit against the two hedge funds to recover what are claimed to be short swing profits. And, the U.S. attorney prosecuting criminal actions against two former Bear Stearns hedge fund managers was denied a stay sought in a parallel SEC enforcement action based on the same charges.
The market crisis
Governments and regulators around the world continue working to resolve the market crisis. Market participants are also struggling with the impact of the crisis. Teva Pharmaceutical Industries, a Jerusalem-based drug manufacturer, issued a press release stating that it has received $100 million as part of a settlement from an institution that acted as a broker in making its auction rate securities investments. The company did not disclose the institution that made the payment, citing confidentiality restrictions.
The Teva deal followed three additional settlements in the ARS market announced by FINRA late last week. In that announcement, FINRA reached agreements in principle with City National Securities, BNY Mellon Capital Markets and Harris Investor Services. Those settlements generally followed the pattern set by the New York AG and the SEC in earlier ARS settlements. Accordingly, it provides a buy back essentially for retail investors and an arbitration procedure to resolve questions regarding consequential damages. In addition, the firms agreed to pay fines of $315,000 for CNS, $250,000 for BNY Mellon and $150,000 for Harris.
New York Attorney General Andrew Cuomo released a letter dated October 29, 2008 that he sent to nine different firms regarding the payment of bonuses by firms that received taxpayer funds under the Troubled Asset Relief Program or TARP. Specifically, Mr. Cuomo requested “a detailed accounting regarding your expected payments to top management in the upcoming bonus season. … Obviously, we will have grave concerns if your expected bonus pool has increased in any way as a result of your receipt or expected receipt of taxpayer funds from TARP.” The letter was sent to Bank of America, Bank of New York Melon, Citigroup, Goldman Sachs, J.P. Morgan Chase, Merrill Lynch, Morgan Stanley, State Street and Wells Fargo.
Finally, foreign regulators continue to have concerns about short trading. Japan joined the ranks of countries restricting short sales by putting a temporary ban on naked short selling. The ban will take effect on November 4 and continue through March 31, according to the Japanese Financial Services Agency. New disclosure obligations are also being imposed on short sellers with a position of over 0.25% in the security. The JFSA is the latest regulator to focus on short selling as discussed here.
SEC enforcement actions
The SEC filed five settled administrative proceedings against Lazard Capital Markets, LLC and four of its employees. The Orders for Proceedings were based on claims that over $600,000 in improper payments were made by three employees for entertainment to traders at Fidelity Investments to generate brokerage business. Lazard Capital is a privately held registered broker dealer. The three traders were David Tashjian, Robert Ward and W. Daniel Williams. In addition, Gregory Rice, the former head of equity sales and the trading desk for Lazard, and the company were charged with failure to supervise.
All of the actions were settled. Lazard consented to the entry of an order under which it was censured. In addition, the company agreed to pay over $1.8 million in disgorgement along with prejudgment interest and a penalty of $600,000. Mr. Rice agreed to the entry of an order under which he is suspended from acting in a supervisory capacity for any broker or dealer for six months and to the payment of a penalty of $60,000. Mr. Williams agreed to the entry of a cease and desist order and will be suspended from being associated with a broker or dealer or serving in acting capacity for three months. Mr. Tashjian agreed to the entry of a cease and desist order, a suspension from being associated with any broker or dealer for nine months and the payment of a penalty of $75,000. Mr. Ward consented to the entry of a cease and desist order and under which he will be prohibited from being affiliated with an investment advisor for six months. He also agreed to pay a penalty of $50,000. In the Matter of Lazard Capital Markets LLC, Adm. Proc. File No. 3-13281 (Oct. 30, 2008); In the Matter of Robert A. Ward, Adm. Pro. File No. 3-13282 (Oct. 30, 2008); In the Matter of David L. Tashjian, Adm. Pro. File No. 3-13284 (Oct. 30, 2008); In the Matter of W. Daniel Williams, Adm. Pro. File No. 3-13285 (Oct. 30, 2008); In the Matter of Louis Gregory Rice, Adm. Pro. File No. 3-13282 (Oct. 30, 2008).
Previously, the Commission filed a settled administrative proceeding against Fidelity Investments and thirteen of its then current or former employees. That action was based on the same conduct detailed in the actions filed this week.
Finally, the court in SEC v. Cioffin and Tannin, Case No. 08-CV-2457 (E.D.N.Y. June 19, 2008) refused to issue a blanket stay requested by the U.S. Attorney’s Office which is conducting a parallel criminal case. That ruling, discussed here, is in a case which charges two former Bear Stearns traders with securities fraud in the wake of the collapse of two Bear hedge funds. The court stated that it would consider the propriety of specific requests as they are made in the SEC’s case. The Commission did not take a position on the USAO’s request.
The latest chapter in the CSX-The Children’s’ Investment Fund/3G Capital Partners saga began this week. Now, a shareholder of CSX has filed suit to recover what it claims are short swing profits from the two hedge funds. The complaint seeks to have the trading profits paid to CSX.
Previously, as discussed here and here, CSX lost a bid to sterilize the shares held by the two hedge funds in a ruling last June by Judge Kaplan. That ruling was affirmed on appeal.