Federal Securities Law Source

Monthly Archives: April 2012

Happy Fifth Anniversary!

Today marks the fifth anniversary for our Federal Securities Law Blog.  We look forward to providing many more years of content on federal securities laws, news, and developments.  Many thanks to all who contributed to the success of our Blog.…

Former Morgan Stanley Executive Pleads Guilty to Conspiring to Evade Internal Accounting Controls Under the FCPA in China, While Morgan Stanley Avoids Prosecution Due to Internal Controls

On Wednesday, April 25, 2012, DOJ announced that Garth Peterson, a former managing director for Morgan Stanley’s real estate business in China, pled guilty in federal court in Brooklyn, New York for participating in a conspiracy to evade the internal accounting controls which the company was required to maintain under the FCPA. Because Morgan Stanley had a system of internal controls designed to assure that its employees were not bribing government officials, the Government did not prosecute the company. The SEC also announced that it brought and settled a case against Mr. Peterson.…

Wall Street Journal Article Details How SEC Inadvertently Revealed The Identity of A Whistleblower During An Investigation UPDATED On April 27, 2012

An article by Scott Patterson and Jenny Strasburg in the Wall Street Journal today revealed that, during an investigation of Pipeline Trading Systems LLC, an SEC attorney showed a witness a notebook which included handwritten notes from a whistleblower, and the witness recognized the handwriting and was able to tell his employers who the whistleblower was. The Whistleblower agreed to speak to the Journal and be identified, and detailed how he was treated both before and after he blew the whistle on Pipeline’s activities.  UPDATE: As discussed below, the SEC denies inadvertently disclosing the whistleblower’s identity.  …

SEC Files Case Against Chinese Company For Misrepresentations Regarding the Use of Its IPO Proceeds

On Monday, April 23, 2012, the SEC announced that it had filed a case against SinoTech Energy Limited, an oil field services company based in China, with intentionally misleading investors about the value of its assets and its use of $120 million in IPO proceeds. The SEC also charged CEO Guoqiang Xin and former CFO Boxun Zhang for their involvement in the fraud. The Complaint, filed in federal court in Louisiana, alleges that the company’s IPO registration statement misled investors about the acquisition and value of a key asset lateral hydraulic drilling units ("LHD Units") that are central to its business. In addition, the SEC charged Qingzeng Liu, SinoTech’s chairman and controlling shareholder, with misappropriating at least $40 million of SinoTech’s cash between June, 2011 and August 2011.…

BusinessWeek Article Provides Detailed Look Into The Inner Workings of the SEC’s Investigation of Raj Rajaratnam

An April 19, 2012 article by Devin Leonard of BusinessWeek profiles Sanjay Wadhwa, currently a deputy chief of the SEC’s market abuse group. The article takes a close look at the insider trading investigation of Raj Rajaratnam (and the many leads that investigation has yielded). Although many bloggers point out situations where the SEC or prosecutors are criticized (this blog included, in entries such as here and here), the BusinessWeek article, entitled "The SEC: Outmanned, Outgunned and On a Roll," is instructive in highlighting how the SEC overcomes disadvantages and what it has done to improve its investigative efforts in recent years.…

SEC to Republish Exchange Act Registration Revocations and Stop Orders on EDGAR


The SEC announced that beginning on April 19, 2012, the SEC staff will begin to republish via EDGAR Commission orders pursuant to Exchange Act Section 12(j) revoking a company’s Exchange Act registration and Commission stop orders pursuant to Securities Act Section 8.

Although these orders are currently posted on the SEC’s website as administrative orders, they have not been posted on EDGAR. The SEC staff will begin with the most recently issued orders and go backwards through 2004. New orders will be published on EDGAR when issued going forward.


Publishing on EDGAR will allow a viewer to see the order in the context of all of a company’s public flings. In addition, the SEC will note in search results if a company’s Exchange Act registration has been revoked.

SEC Chairman Schapiro Testifies Before A Congressional Committee About Improvements in Economic Analysis in Commission Rulemakings

On Tuesday, April 17, 2012, Mary Schapiro, the Chairman of the SEC, appeared before the House Subcommittee on TARP, Financial Services and Bailouts to testify about the steps the SEC has taken and is taking to strengthen our economic analyses in the rulemaking process. Chairman Schapiro acknowledged that "economic analysis is a critical element of the SEC’s rulemaking obligation," and that "the unprecedented rulemaking burden generated by passage of the Dodd-Frank Act has tested the resources and analytical capabilities of the agency." However, she explained, the Commission has "learned a great deal and our rulemaking processes have continued to evolve." She told the Subcommittee that the SEC’s "new guidance reflects many of the current best practices, which the agency will refine in the future as necessary to ensure high quality economic analysis in its rulemaking."…

SEC Issues Additional JOBS Act FAQs: Generally Applicable Questions on Title I of the JOBS Act

On April 16, 2012, the SEC Division of Corporation Finance issued additional Frequently Asked Questions to provide guidance on the implementation and application of the Jumpstart Our Business Startups Act (the "JOBS Act"), based on its current understanding of the JOBS Act and in light of its existing rules, regulations and procedures. These FAQs address questions of general applicability under Title I of the JOBS Act. Title I provides scaled disclosure provisions for emerging growth companies, including, among other things, two years of audited financial statements in the Securities Act of 1933 registration statement for an initial public offering of common equity securities, the smaller reporting company version of Item 402 of Regulation S-K, and no requirement for Sarbanes-Oxley Act Section 404(b) auditor attestations of internal control over financial reporting. Title I also enables emerging growth companies to use test-the-waters communications with Qualified Institutional Buyers or "QIBs" and institutional accredited investors and liberalizes the use of research reports on emerging growth companies.

Federal Securities Law Blog’s Monthly Review (April 15, 2012 Edition)

Today, the Federal Securities Law Blog takes a look back at the last 30 days in the federal securities world in a regular feature which appears on approximately the 15th of each month. Although our prior monthly reviews have examined litigation issues, we will be expanding our review to cover other issues. The biggest news this month has been the April 5, 2012 passage of the Jumpstart Our Business Startups Act ("JOBS Act"). The JOBS Act and other matters from the last month are discussed in greater detail after the jump.…

Ohio Supreme Court Vacates Lower Court Decision Which Limited the Ability of the Director of the Ohio Department of Commerce to Recover Proceeds From a Ponzi Scheme

In a per curiam Opinion issued this morning, the Ohio Supreme Court ruled that the beneficiaries of life insurance policies purchased by Roy Dillabaugh, who operated a Ponzi scheme, did not have standing to appeal a trial court’s order which ruled that that the Director of the Ohio Department of Commerce ("the Director") was entitled to seek recovery of the insurance premiums paid for life insurance policies, but not the entire amount paid out under the policy. Significantly, the Supreme Court vacated the portion of the ruling of an intermediate appellate court that the Director lacked the authority to sue third-parties, such as the beneficiaries of the policy, and that the Director lacked the authority to seek an injunction against them to prevent them from disposing of the proceeds of the insurance policy. In short, because the trial court had not ordered any relief imposed on the beneficiaries, they lacked standing to appeal and therefore the subsequent intermediate decision never should have occurred and was vacated.…

SEC Issues Additional JOBS Act FAQs: Changes to the Requirements for Exchange Act Registration and Deregistration

On April 11, 2012, the SEC Division of Corporation Finance issued additional Frequently Asked Questions to provide guidance on the implementation and application of the Jumpstart Our Business Startups Act (the "JOBS Act"), based on its current understanding of the JOBS Act and in light of its existing rules, regulations and procedures. These FAQs address questions relating to the changes to the requirements for Securities Exchange Act of 1934 (the "Exchange Act") registration and deregistration. Specifically, the FAQs address questions relating to how these changes affect the requirement of issuers (including bank holding companies) to register a class of equity security under Section 12(g) of the Exchange Act and the ability of bank holding companies to deregister a class of equity security under Section 12(g) of the Exchange Act or to suspend a reporting obligation under Section 15(d) of the Exchange Act.

SEC Announces the Formation of a New Investor Advisory Committee

On Monday, April 9, 2012, the SEC announced that it had formed the new Investor Advisory Committee and identified the 21 members who will serve on that Committee. The new Committee, mandated by Section 911 of the Dodd-Frank Act, replaces a prior Investor Advisory Committee. The Commission described the Committee as being "made up of individuals with a broad range of backgrounds and experiences."…

SEC Issues JOBS Act FAQs

On April 10, 2012, the SEC Division of Corporation Finance issued Frequently Asked Questions to provide guidance on the implementation and application of the Jumpstart Our Business Startups Act (the “JOBS Act”), based on its current understanding of the JOBS Act and in light of its existing rules, regulations and procedures. These FAQs address questions relating to the confidential submission of registration statements for review pursuant to new Securities Act Section 6(e). Section 6(e) provides that an emerging growth company may confidentially submit to the SEC a draft registration statement for confidential, non-public review by the SEC staff prior to public filing, provided that the initial confidential submission and all amendments are publicly filed not later than 21 days before the date on which the issuer conducts a road show, as defined in Securities Act Rule 433(h)(4).

The JOBS Act – Creation of the “Emerging Growth Company”

On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act of 2012, the JOBS Act. The Act implements measures relating to the IPO process and reporting requirements for a new category of issuer known as the “emerging growth company,” or EGC. The Act defines an EGC as a company with annual gross revenues of less than $1 billion during its most recent fiscal year. A company will retain its EGC status until the earliest of:

·         The first fiscal year after its annual revenues exceed $1 billion.

·         The first fiscal year following the fifth anniversary of its IPO.

·         The date on which the company had, during the previous three-year period, issued more than $1 billion in non-convertible debt.

·         The date on which the company qualifies as a large accelerated filer.

IPO Process


The Act amends applicable federal securities laws to exempt EGCs from:

·         The requirement to publicly file an IPO registration statement. An EGC may confidentially submit its registration statement and any amendments to the SEC.

·         The requirement to include three years of audited financial statements in an IPO registration statement. EGCs only need to include two years of audited financial statements. Likewise, the MD&A need only include two years of discussion and analysis.

·         Restrictions on communications ahead of public offerings, provided the EGC communicates only with qualified institutional buyers or accredited investors. This allows EGCs to “test the waters” before a contemplated offering.

The Act also

SEC Files SOX Clawback Case Against Former CEO and CFO of Surgical Products Manufacturer

On Monday, April 2, 2012, the SEC announced that it has filed suit in federal court in Austin, Texas against Michael A. Baker, the former CEO of ArthroCare Corporation, and Michael Gluk, the former CFO, to recover bonus compensation and stock sale profits they received during an accounting fraud at the company. As the SEC pointed out in its press release, the two men "are not charged with personal misconduct, but they are still required under Section 304 of the Sarbanes-Oxley Act to reimburse ArthroCare for bonuses and stock profits that they received after the company filed fraudulent financial statements during 2006, 2007, and the first quarter of 2008."…


President Obama signed into law today the Stop Trading on Congressional Knowledge Act of 2012 or the STOCK Act. The STOCK Act bans insider trading by members of Congress and their staff as well as various other executive branch and judicial branch employees.

The STOCK Act also amends the Ethics in Government Act of 1978 to require a government-wide shift to electronic reporting and on-line availability of pubic financial disclosure information. In addition, members of Congress and covered governmental employees must report certain investment transactions within 45 days after a trade. Members of the public will be able to search this electronic database.


There are also various other elements of the STOCK Act related to ethics, including: 

  • required disclosure of personal mortgages for members of Congress and certain other high level governmental officials;
  • limitation on members of Congress and other high level governmental officials that they only may participate in IPOs that are available to the general public at large;
  • expanded pension forfeiture for members of Congress who commit acts of corruption while elected; and
  • required notification for members of Congress and other high level governmental officials with their ethics office when starting a job negotiation to leave the government.

The STOCK Act also requires the GAO and CRS to produce a report on the role of political intelligence firms in the financial markets.


While the STOCK Act passed Congress with bi-partisan support, some commentators believe the final product was watered-down because it omitted a provision that would have regulated so called “political

Government’s Opposition to Motion to Suppress in Carson FCPA Case Argues That Statements Made To Corporate Counsel During An Internal Investigation Do Not Violate The Employees’ Fifth Amendment Rights

In a Brief filed on April 2, 2012, the Government argued that the statements by defendants in an FCPA case that were given to their employer during an internal investigation should not be suppressed because the employer’s "actions were not the result of any pressure or influence from the government sufficient to convert the Company’s lawyers to state actors," and because defendants could not "show that their statements were involuntary." The Government was addressing a Motion to Suppress filed on March 5, 2012 in the Carson case in which defendants argued that because Control Components, Inc. ("CCI") had collaborated with DOJ during the investigation, it was a Government agent whom improperly compelled statements from the defendants during an internal investigation in violation of their Fifth Amendment rights. The Court has scheduled a hearing on the Motion for May 14, 2012.…

JOBS Act Update: $50 Million Public Offering Exemption (“Super” Regulation A)

Section 401 of the Jumpstart Our Business Startups Act, or JOBS Act (expected to be signed into law by President Obama on April 5, 2012) permits securities offerings of up to $50 million in any 12-month period under a new exemption to be established by the SEC under Section 3(b) of the Securities Act of 1933.  Regulation A (the small public offering exemption) provides the current exemption under Section 3(b), which is capped at $5 million and is not available to Exchange Act reporting companies.  The $5 million cap is arguably one of the biggest disadvantages of a Regulation A offering.

Securities issued under the new $50 million exemption may be sold publicly and will not be considered restricted securities.  The new exemption requires the SEC to issue implementing rules regarding delivery of the offering statement and other information about the issuer to investors.  Issuers must file audited financial statements annually and may solicit interest in the offering before filing an offering statement, subject to additional rules to be set by the SEC.  The JOBS Act does not set a deadline for this rulemaking.

Discovery Issues in the Parallel Rajat Gupta Cases – Judge Rakoff Directs SEC To Turn Over Witness Interview Materials From the Investigation to Prosecutors For Review Under Brady and Potential Disclosure to Defendant

On March 26, 2012, Judge Jed Rakoff issued an Opinion and Order in the two related cases against Rajat Gupta, granting in part a Motion to Compel and ordering the SEC to turn over to the U.S. Attorney’s Office materials relating to 44 witnesses (who were interviewed by the SEC and prosecutors jointly during the investigations of Mr. Gupta). He further ordered the prosecutors to review those memoranda and promptly turn over to the defense any material under Brady v. Maryland, 373 U.S. 83 (1963) (material exculpatory evidence to the defense – including evidence that could allow the defense to impeach the credibility of a prosecution witness). The ruling identifies another possible method (albeit a limited one) for a party seeking discovery from the SEC’s investigative file).…