From the Wall Street Journal: Securities-fraud plaintiffs don’t often get good news when their cases reach the current Supreme Court, but this week the court, in a 9-0 decision, ”reaffirmed one of its earlier rulings that the duty to disclose hinges instead on whether a reasonable investor would regard an omitted fact as a significant part of the ‘total mix’ of information that affects a decision on whether to trade stock.” The case involved a company called Matrixx Initiatives Inc., the maker of Zicam nasal spra. Matrixx had received a number of reports that the spray caused a loss of smell, but didn’t disclose them because it concluded that the total wasn’t statistically significant. The company’s shares plunged nearly 70 percent in 2009 after the Food and Drug Administration issued a warning about the product, citing the reported health problems.
Rajat Gupta, a former director of Goldman Sachs & Co., says the Securities and Exchange Commission is trying to retroactively apply the Dodd-Frank financial reform law by bringing action against him before an administrative law judge, where he won’t have the right to a trial by jury, instead of in federal court. Gupta is accused of giving inside information to the founder of the Galleon Group hedge fund. The Courthouse News Service says that the SEC has brought cases against 27 other defendants but filed all of them in federal court. Gupta is asking the court to block the SEC from bring the case, because he says the retroactive application of the law would violate his right to due process. || More from Deal Book
Jonathan Weil says at Bloomberg.com that the Securities and Exchange Commission is jumping through hoops to not accuse any of the country’s major financial firms of cooking their books, despite the obvious evidence in front of them. That might be because in many cases, like at Fannie Mae and Freddie Mac, at least one government agency not only knew about but also sanctioned the accounting irregularities that contributed to their implosions. “The toughest challenge for the SEC will be finding violations that the government didn’t know about while they were going on,” Weil says.
The frenzy over Facebook’s pre-IPO trading might be attracting fraudsters, FINRA announced in a statement today. Private companies sometimes allow their employees and others with shares to make private trades ahead of public offerings, but because the markets in such shares aren’t well-regulated, it’s difficult to know who actually owns legitimate shares. FINRA says if investors aren’t careful, they could end up forking over cash only to find that they’ve bought non-existent shares.
233 FBI agents are assigned to investigate securities fraud cases, while 110 focus on corporate fraud. According to FBI Director Robert Mueller, the bureau had more than 2300 open financial investigations at the end of its 2010 fiscal year. Mueller gave those numbers at a Congressional hearing, after Rep. John Conyers (D-Michigan) asked why there hadn’t been more cases stemming from the financial crisis, according to Reuters.
Raymond Bowman, former president of Taylor, Bean and Whitaker Mortgage Corp., pleaded guilty to bank, wire and securities fraud conspiracy charges, according to Courthouse News Service. The government had accused Bowman and his co-conspirators of selling non-existant mortgage loans to Colonial Bank, which caused it to go under in late 2009. He could face up to 10 years in prison at his sentencing in June.
Colonial BancGroup Inc., the Montgomery, Ala.-based parent company of Colonial Bank, had sought more than $500 million in taxpayer aid through the Troubled Asset Relief Program in 2008. Authorities alleged that the fraudulent or impaired mortgages that Taylor, Bean and Whitaker sold Colonial were presented as high-quality liquid assets during of the TARP application process.
The judge said, in her ruling dismissing the case, that “the cast of characters” — Boeing, several high-powered and high-profile lawyers, private investigators and a confidential informant –, were worthy of a “a contemporary novel,” according to the Chicago Tribune. But, it turned out the confidential informant wasn’t much of an informant at all. He admitted to never having seen the documents that the plaintiff’s attorneys claimed he did. Investors who brought the case alleged that Boeing misrepresented the status of its new 787 Dreamliner passenger jet.
Kevin Evans, an attorney in Colorado, sued the SEC under the Freedom of Information Act and the agency has now revealed that employees and contractors across the country have been caught looking at porn on the government’s — and taxpayers’ — dime. “In response to the suit, the SEC has disclosed that the employees and contractors reprimanded for online randiness worked at SEC offices in Atlanta, Boston, Chicago, Denver, Fort Worth, Los Angeles and at agency headquarters in D.C.,” says the Wall Street Journal. Evans, though, won’t be getting the names of the employees disciplined. A judge ruled those are private.
The disclosure rules haven’t changed much in nearly three decades. Among the possibilities for updates: more information about credit ratings, including situations where companies shop around for better ratings and more information on and oversight of 13F forms, filed by institutional investment managers, according to the Center for Public Integrity.
You might want to think about what’s on your Facebook wall. “The SEC is now asking registered advisers about their social media policies, and we have heard that examiners are writing up findings on firms that do not have written policies and documented procedures around the use of social media,” says Moshe Silver, at CNNMoney.com. The warning for financial professionals is that the agency might view even personal communications through sites like Twitter, Facebook and LinkedIn as attributable to the firms they work for (if they say, for example, link to company press release or otherwise talk about work) and are therefore responsible for the content.