Florida Securities Litigation & Arbitration Blog by Jay Eng

STATE STREET BANK AND TRUST SETTLES WITH SEC OVER MORTGAGE-BACKED SECURITIES

On February 4, 2010, State Street Bank and Trust Company entered into a settlement with the Securities and Exchange Commission without admitting or denying the findings of the SEC in the settlement Order. During the subprime mortgage crisis the SEC found that State Street engaged in a course of business that misled investors about the extent of subprime mortgage-backed securities held in certain unregistered funds under its management.

As a result of State Street’s conduct, investors in State Street’s funds lost hundreds of millions of dollars during the subprime market meltdown in mid-2007.

State Street offered investments in certain collective trust funds to institutional investors, including pension funds, employee retirement plans, and charities. These funds included two substantially identical funds – referred to together as the Limited Duration Bond Fund (the “Fund”) – made available to different categories of investors. Other actively-managed bond funds and a commodity futures index fund managed by State Street (“the related funds”) also invested in the Fund. State Street established the Fund in 2002 and marketed the Fund by saying it utilized an “enhanced cash” investment strategy that was an alternative to a money market fund for certain types of investors. By 2007, however, the Fund was almost entirely invested in or exposed to subprime residential mortgage-backed securities (“subprime investments”). Nonetheless, State Street continued to describe the Fund to prospective and current investors as having better sector diversification than a typical money market fund, while failing to disclose the extent of its exposure to subprime investments.

When the subprime market collapsed in mid-2007, many investors in the Fund and the related funds were unaware that the Fund had such significant exposure to subprime investments. In fact, the Fund’s offering materials, such as quarterly fact sheets, presentations to current and prospective investors, and responses to investors’ requests for proposal, contained misleading statements and/or omitted material information about the Fund’s exposure to subprime investments and use of leverage. As a result, many investors either had no idea that the Fund held subprime investments and used leverage, or believed that the Fund had very modest exposure to subprime investments and used little or no leverage.

See the SEC Press Release here.

February 5, 2010 Posted by Jay Eng | Brokerage, Exchange Act, Fraud, Law, SEC, linkedin | , , , , , , , , , | No Comments Yet

NEW YORK ATTORNEY GENERAL SUES BANK OF AMERICA OVER MERRILL LYNCH MERGER

On February 4, 2010, the New York Attorney General filed a complaint in New York State Suprme Court. The lawsuit alleges that Bank of America (“BOA”) and certain executives violated New York’s Martin Act, the state’s Blue Sky law. The complaint alleges that BOA “intentionally failed to disclose massive losses at Merrill so that shareholders would vote to approve the merger.” The Securities and Exchange Commission has filed a similar action alleging the violation of federal securities laws.

February 5, 2010 Posted by Jay Eng | Blue Sky Laws, Fraud, Law, Merger, Private Securities Litigation Reform Act, SEC, linkedin | , , , , , , , , | No Comments Yet

FINRA INVESTOR EDUCATION FOUNDATION ANNOUNCES GRANTS FOR LAW SCHOOL CLINICS

On January 28, 2010, FINRA Education Foundation announced grants to create law school clinics at Florida International University, Howard University, Pepperdine University, and Suffolk University to provide legal assistance to “underserved investors involved in securities disputes.” These grants are intended to “help fill the gap in legal representation for investors with small claims who do not have the financial resources to obtain legal counsel.”

January 29, 2010 Posted by Jay Eng | FINRA, Florida | , , , , , | No Comments Yet

SEC FILES NEW COMPLAINT AGAINST BANK OF AMERICA OVER MERRILL LYNCH MERGER

On January 11, 2010, District Judge Jed Rakoff rejected the Securities and Exchange Commission’s request to file a amended complaint. The SEC stated that the proposed amended complaint alleged that “that Bank of America learned prior to the Dec. 5, 2008, shareholder meeting vote that Merrill Lynch experienced a net loss of $4.5 billion in October and estimated that it had experienced billions of dollars of additional losses in November. The actual and estimated losses together represented approximately one-third of the value of the merger at the time of the shareholder meeting and more than 60 percent of the aggregate losses Merrill Lynch sustained in the preceding three quarters combined.”

On January 12, 2010, the SEC filed a separate lawsuit concernig these new allegations made in connection with its merger with Merrill Lynch. The new complaint was filed in the Southern District of New York, Case No. 10 Civ 0215.

On September 14, 2009, the District Court rejected a proposed settlement between Bank of America and the SEC. SEC v. Bank of America, Case No. 09 Civ. 6829 (S.D.N.Y.)

January 14, 2010 Posted by Jay Eng | Exchange Act, Fraud, Law, Merger, SEC, linkedin | , , , , , , , , , , , , , , , | 1 Comment

NINTH CIRCUIT SAYS LEAD PLAINTIFF SELECTS LEAD COUNSEL, NOT TRIAL JUDGE

On November 5, 2009, the Ninth Circuit issued an Opinion regarding the PSLRA’s provision for selection of lead counsel after the trial court did not appoint as lead counsel, the law firm selected by the court-appointed lead plaintiff. The Court noted:

The statute expressly provides that lead plaintiff has the power to select lead counsel, suggesting that the identity of the party selecting lead counsel was of substantial importance to Congress. Nor does the statute, framed in mandatory language, designate any other actor as authorized to select lead counsel or suggest that the district court may appropriate this authority. It would be difficult for the statute to be more clear that it is the lead plaintiff who selects lead counsel, not the district court.

The clause subjecting the lead plaintiff’s selection of counsel “to the approval of the district court” in no way suggests that a district court shares in the lead plaintiff’s authority to select lead counsel or that isapproval of a lead plaintiff’s choice divests the lead plaintiff of this authority. The ordinary reading of this clause merely gives the district court the limited power to accept or reject the lead plaintiff’s selection. Given that the PSLRA indisputably assigns to the lead plaintiff the power to select lead counsel, it would be incongruous to conclude that this power shifts to the district court following disapproval of a lead plaintiff’s selection of lead counsel. Instead, the opposite conclusion is compelled. The logical interpretation of the statute’s failure to provide an intricate procedure for the district court to follow after rejecting the lead laintiff’s selection is that the power to select lead counsel remains in the hands of the lead plaintiff. Any other result would allow the district court in all cases to reject lead counsel and then proceed to appoint its own choice.

(Citations omitted).

November 12, 2009 Posted by Jay Eng | Exchange Act, Law, Lead Counsel, Private Securities Litigation Reform Act, Securities Class Actions, linkedin | , , , , , , , , , | 1 Comment

SEC ISSUES UPDATED GUIDANCE ON INTERPRETATION OF ACCOUNTING RULE FOR OIL & GAS INDUSTRY

On October 30, 2009, the SEC issued updated guidance on how its staff interprets accounting rules concerning the oil and gas industry. The changes in Staff Accounting Bulletin No. 113 include:

• changing the price used in determining quantities of oil and gas reserves;

• eliminating the option to use post-quarter-end prices to evaluate write-offs of excess capitalized costs under the full cost method of accounting;

• removing the exclusion of unconventional methods used in extracting oil and gas from oil sands or shale as an oil and gas producing activity; and,

• removing certain questions and interpretative guidance which are no longer necessary.

November 3, 2009 Posted by Jay Eng | Accounting, Law, SEC, linkedin | , , , , , , , , , , | 1 Comment

SENIOR SUPERVISORS GROUP ISSUES A REPORT TITLED RISK MANAGEMENT LESSONS FROM THE GLOBAL BANKING CRISIS OF 2008

On October 21, 2009, the Senior Supervisors Group issues a report titled Risk Management Lessons from
the Global Banking Crisis of 2008 discussing the “vulnerabilities of financial firms whose business models depended too heavily on uninterrupted access to secured financing markets, often at excessively high leverage levels.” The Group identifed, among other things that, a number of weakness including:

“• the failure of some boards of directors and senior managers to establish, measure, and adhere to a level of risk acceptable to the firm;
• compensation programs that conflicted with the control objectives of the firm;
• inadequate and often fragmented technological infrastructures that hindered effective risk identification and measurement; and
• institutional arrangements that conferred status and influence on risk takers at the expense of independent risk managers and control personnel.”

October 22, 2009 Posted by Jay Eng | Compliance, Internal Control, Law, Risk Management, SEC, linkedin | | No Comments Yet

UnitedHealth Securities Litigation Objectors, Rejected.

On September 4, 2009, District Judge Rosenbaum entered an Order in the In re UnitedHealth Group Incorporated PSLRA Litigation, Case No. 06-CV-1691 (JMR/FLN) (D. Minn. Sep. 4, 2009), denying the petition of certain objectors to the settlement who argued that the Court’s reduction of attorney’s fees to class counsel from $110 million to $64.8 million was in part due to their objection. The Court soundly rejected this contention and had harsh words for objector’s counsel, stating:

“These objectors have contributed nothing. Instead, in a pleading which may charitably be described as disingenuous, Objectors’ Counsel argue they assisted the Court in finding class counsel’s fee request unreasonable. They claim their efforts convinced the Court to reduce class counsel’s fee from $110 million to $64.8 million. They have the temerity to suggest they are the ones who saved the class $45 million in attorney fees, entitling them to a six-figure fee of their own. Their suggestion is laughable. If the Court may be permitted an egregious paraphrase of Winston S. Churchill: Seldom in the field of securities litigation was so little owed by so many to so few….Their goal was, and is, to hijack as many dollars for themselves as they can wrest from a negotiated settlement. Objectors’ eight-page-long, two-week-late pleading presented no facts, offered no law, and raised no argument upon which the Court relied in its deliberation or ruling concerning class counsel’s motion for fees.”

(Emphasis added).

In re UnitedHealth Group Incorporated PSLRA Litigation, Case No. 06-CV-1691 (JMR/FLN), 2009 WL 2868399 (D. Minn. Sep. 4, 2009).

September 21, 2009 Posted by Jay Eng | Exchange Act, Law, Private Securities Litigation Reform Act, Securities Class Actions, linkedin | , , , , , , , , , , , , , , | No Comments Yet

JUDGE RAKOFF REJECTS BANK OF AMERICA SETTLEMENT WITH SEC IN CONNECTION WITH THE MERRILL MERGER

On September 14, 2009, District Judge Rakoff entered an Order rejecting the proposed settlement between Bank of America and the SEC. See prior blog regarding this settlement.

September 14, 2009 Posted by Jay Eng | Exchange Act, Law, SEC, linkedin | , , , , , , , , , , , , , , , , , , , , , , , , , , , | 1 Comment

EIGHTH CIRCUIT RULES NOVASTAR COMPLAINT FAILED TO PLEAD FALSE & MISLEADING STATEMENTS WITH SPECIFICITY

In In re: 2007 Novastar Financial Inc., Securities Litigation, No. 08-2452 (8th Cir. Sept. 1, 2009), the Eighth Circuit recently addressed the issued of whether the plaintiffs’ complaint satisfied the pleading requirements of the PSLRA which requires a plaintiff to “specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading.”

In Novastar, the lead plaintiff filed a 104 page consolidated complaint. The consolidated complaint included a thirty-six page section which “reproduce[d], either in their entirety or lengthy excerpts from, press releases, SEC filings, and transcripts of conference calls made by Novastar and the individual defendants during the class period.” Noting that the “PSLRA’s heightened pleading requirements compel the plaintiff to ‘plead the ‘who, what, when, where and how’ of the misleading statements or omissions,’” the Eighth Circuit stated:

[Lead Plaintiff] also argues that the district court erred in concluding that his complaint failed to specify the reasons why the allegedly misleading statements were false or misleading. However, absent an indication of precisely what statements [Lead Plaintiff] alleges to be misleading, it is difficult, if not impossible, to determine whether the complaint adequately specified why each statement was misleading. Even if we were able to identify specific statements that were alleged to be misleading, we would still conclude that [Lead Plaintiff's] complaint failed to specify the reasons why each statement was false or misleading. The complaint does not provide any link between an alleged misleading statement and specific factual allegations demonstrating the reasons why the statement was false or misleading, as the PSLRA requires. See Cerner, 425 F.3d at 1083; 15 U.S.C. § 78u-4(b)(1). Instead, the complaint merely contains “[a] litany of alleged false statements, unaccompanied by the pleading of specific facts indicating why those statements were false.”

September 8, 2009 Posted by Jay Eng | Exchange Act, Law, Private Securities Litigation Reform Act, Securities Class Actions, linkedin | , , , , , , , , , , , , | No Comments Yet

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