SEC Wants Flash Order Ban

Washington, D.C., Sept. 17, 2009 — The Securities and Exchange Commission today unanimously proposed a rule amendment that would prohibit the practice of flashing marketable orders.

A flash order enables a person who has not publicly displayed a quote to see orders less than a second before the public is given an opportunity to trade with those orders. Investors who have access only to information displayed as public quotes may be harmed if market participants are able to flash orders and avoid the need to make the order publicly available.

“Flash orders may create a two-tiered market by allowing only selected participants to access information about the best available prices for listed securities,” said SEC Chairman Mary Schapiro. “These flash orders provide a momentary head-start in the trading arena that can produce inequities in the markets and create disincentives to display quotes.”

Currently, flash orders are permitted as result of an exception to Rule 602 of Regulation NMS that exempts these orders from requirements that apply generally to other orders. The Commission is concerned that the Rule 602 exception may no longer be necessary or appropriate in today’s highly automated trading environment.

The Commission today voted unanimously to propose the elimination of the flash order exception from Rule 602. If adopted, the proposed amendment would effectively prohibit all markets – including equity exchanges, options exchanges, and alternative trading systems – from displaying marketable flash orders.

In its proposal, the Commission is seeking public comment and data on a broad range of issues relating to flash orders, including the costs and benefits associated with the proposal. It also seeks comment on whether the use of flash orders in the options markets should be evaluated differently than their use in the equity markets.

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Additional Materials

• Fact Sheet About Flash Orders
• Submit comments on this proposal
• Proposed Rule Release No. 34-60684

Insiders Sold 31 Times as Much Stocks as They Bought in August

Our friends at The Wall Street Journal have come up with some interesting research:

In August, corporate insiders — officers and directors of public companies — sold nearly 31 times as much stock as they bought. From last September through this past March, in the depths of the bear market, that ratio was just 2 to 1, according to TrimTabs Investment Research of Sausalito, Calif. The long-term average is about 7 to 1.

The people who run companies don’t know exactly what the future holds, but they do know more about their own firms than outsiders do. If they are furiously selling, how eagerly should the rest of us be buying?

(Read more after the jump…)

Research: Following Insider Transactions is Profitable

When it comes to investing, Gina Moore thinks actions speak louder than words. The portfolio manager at Aronson + Johnson + Ortiz, a Philadelphia investment firm with $17 billion under management, says she doesn’t talk with executives of companies she’s investing in. Instead, she studies the amount of insider buying and selling of company shares. “Like most money managers, I think the quality of a company’s management is a key part of its investment performance,” she says. “But executives are always trying to sell you on their companies when you talk to them. Insider transactions signal where they really think their company is going without the corporate spin.”

In an environment where trust in Wall Street is possibly at an all-time low, insider knowledge is extremely valuable. Studies have shown that mimicking insider behavior has been one of the few consistent means of beating the market. The best-known academic research was published by a University of Michigan Ross School of Business finance professor, Nejat Seyhun, in his 1998 book, Investment Intelligence from Insider Trading. He examined insider activity from 1975 to 1995 and found that stocks bought but not sold by insiders outperformed the market by 7.5 percentage points, on average, during the 12 months that followed the insider purchases. By contrast, companies with insider selling underperformed the market by 6.1 points. Subsequent research has confirmed this insider effect not only on individual companies but also on the market as a whole: If insiders in aggregate are buying more than selling, it is bullish for the market, and vice versa.

(read more on BusinessWeek after the jump…)

SEC Moves to Curtail Abusive Naked Short Selling

Washington, D.C., July 27, 2009 — The Securities and Exchange Commission today announced several actions that would protect against abusive short sales and make more short sale information available to the public.

“Today’s actions demonstrate the Commission’s determination to address short selling abuses while at the same time increasing public disclosure of short selling activities that affect our markets,” said SEC Chairman Mary Schapiro.

First, the Commission made permanent an interim final temporary rule, Rule 204T, that seeks to reduce the potential for abusive “naked” short selling in the securities market. The new rule, Rule 204, requires broker-dealers to promptly purchase or borrow securities to deliver on a short sale. The temporary rule, approved by the SEC in the fall of 2008, was set to expire on July 31.

Second, the Commission and its staff are working together with several self-regulatory organizations (SRO) to make short sale volume and transaction data available through the SRO Web sites. This effort will result in a substantial increase over the amount of information presently required by another temporary rule, known as Temporary 10a-3T. That rule, which will expire on August 1, applies only to certain institutional money managers and does not require public disclosure.

Apart from these measures, the Commission is continuing to actively consider proposals on a short sale price test and circuit breaker restrictions.

Third, the Commission intends to hold a public roundtable on September 30 to discuss securities lending, pre-borrowing, and possible additional short sale disclosures. The roundtable will consider, among other topics, the potential impact of a program requiring short sellers to pre-borrow their securities, possibly on a pilot basis, and adding a short sale indicator to the tapes to which transactions are reported for exchange-listed securities.

Overview

Short selling often can play an important role in the market for a variety of reasons, including contributing to efficient price discovery, mitigating market bubbles, increasing market liquidity, promoting capital formation, facilitating hedging and other risk management activities, and importantly, limiting upward market manipulations. There are, however, circumstances in which short selling can be used as a tool to manipulate the market.

“Naked” Short Sales: In a “naked” short sale the investor sells shares “short” without first having borrowed them. Such a transaction is permitted because there is no legal requirement that a short seller actually borrow the shares before effecting a short sale.

But, before effecting a short sale, Rule 204T requires that the broker-dealer, as opposed to the seller, “locate” an entity that the broker reasonably believes can deliver the shares within three days after the trade — what’s known as T+3. Also, if reasonable, a broker-dealer may rely on a short seller’s assurance that the short seller has located his or her own lender that can deliver shares in time for settlement.

“Fails-to-deliver”: If an investor or its broker-dealer does not deliver shares by T+3, a “failure to deliver” occurs. Where an investor or its broker-dealer neither locates nor delivers shares, a “naked” short sale has occurred.

A “fail to deliver” can occur for legitimate reasons, such as mechanical errors or processing delays. Further, a “fail to deliver” could occur as a result of a long sale — that is the typical buy-sell transaction — as well as a short sale.

“Fails to deliver”, such as fails resulting from potentially abusive “naked” short selling, may have a negative effect on shareholders, potentially depriving them of the benefits of ownership such as voting and lending. They also may create a misleading impression of the market for an issuer’s securities.

Adopting Regulation SHO: Due to its concerns regarding persistent “fails to deliver” and potentially abusive “naked” short selling, the Commission adopted Regulation SHO, which became effective in early 2005. This regulation imposes, among other things, the requirement that broker-dealers locate a source of borrowable shares prior to selling short.

In addition, it requires that firms that clear and settle trades must purchase shares to close out these “fails to deliver” within a certain time frame, 13 days. This “close-out” requirement only applies to certain equity securities with large and persistent “fails to deliver,” known as threshold securities.

The requirement included two major exceptions: the so-called “grandfather” and “options market maker” exceptions. Both of these exceptions provided that certain “fails to deliver” in threshold securities never had to be closed out. The Commission eliminated both exceptions in August 2007 and September 2008, respectively.

(Click here for more…)

Additional Materials

• Rule 204: Amendments to Regulation SHO (Release No. 34-60388)

Mark Cuban Beats SEC Insider Trading Case

One of my favorite dotcom billionnaire, Mark Cuban, investor in many Internet startups such as Broadcast.com (sold to Yahoo! for 4.6 billion), backer of NAKEDpizza and owner of the Dallas Mavericks basketball team, has seen the insider trading charges

Read more about it on MarketWatch, or go to Mark Cuban blog for interesting insights.

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• Judge nixes SEC insider call on Mavericks’ owner Cuban (thestar.com)

SEC Freeze Assets in $485 Million Nationwide Ponzi Fraud

The Securities and Exchange Commission obtained a temporary restraining order and emergency asset freeze in a $485 million offering fraud and Ponzi scheme orchestrated by Paul R. Melbye, Brendan W. Coughlin and Henry D. Harrison through a company they owned and controlled, Provident Royalties LLC. In addition to the asset freeze, the court has appointed a receiver to preserve and marshal assets for the benefit of investors.

The Commission alleges that from at least June 2006 through January 2009, Provident made a series of fraudulent offerings of preferred stock and limited partnership interests for the purpose of generating promised returns through investments in oil and gas assets. The complaint alleges the sales were made through 21 affiliated entities to more than 7,700 investors throughout the United States. It is also alleged that Provident Asset Management, LLC, an affiliated broker-dealer, made some direct retail sales of securities, but primarily solicited unaffiliated retail broker-dealers to enter into placement agreements for each offering, and those retail broker-dealers sold the stock to retail investors nationwide.

Read More:    http://www.sec.gov/litigation/litreleases/2009/lr21118.htm

Madoff Is Sentenced to 150 Years for his “Extraordinarily Evil” Fraud

A federal judge senteced Bernard L. Madoff  to 150 years for the white-collar criminal Bernard Madoff who devastated thousands of people, calling his Ponzi-scheme crimes “extraordinarily evil”.

In pronouncing the sentence — the maximum he could have handed down — Judge Denny Chin turned aside Mr. Madoff’s own assertions of remorse and rejected the suggestion from Mr. Madoff’s lawyers that there was a sense of “mob vengeance” surrounding calls for a long prison term.

“Objectively speaking, the fraud here was staggering,” the judge said. “It spanned more than 20 years.”

The sentencing came at the end of a 90-minute hearing in which victims of the $65 billion fraud told a packed courtroom that the judge should show no mercy and Mr. Madoff himself stood up from the defense table to acknowledge the damage he had inflicted and express regret.

(read more on the NYTimes here)

Madoff Fraud: Prosecutors ask for 150 years in prison

On Friday prosecutors asked the judge, Denny Chin, to give Mr. Madoff the statutory maximum of 150 years in prison, or at least a term that would effectively be a life sentence. His attorney has asked for far less — as few as 12 years. Lawyers expect him to receive 25 to 35 years.

Bernard Madoff’s appearance before a federal judge in New York on Monday morning to receive his criminal sentence will likely mark his last courtroom stand and seal his legacy as one of history’s most successful and reviled swindlers.

Yet despite his fate, Mr. Madoff has relied on the same qualities that helped him perpetrate his multibillion-dollar fraud — his chilly self-control and obsession with detail and loyalty — to try to manage his epic downfall.      (Read more after the jump…)

Mark Cuban’s legal troubles: Unprecedented tactics by the SEC

The insider trading suit filed against Cuban by the U.S. Securities and Exchange Commission last year is scheduled to receive its first hearing Tuesday when attorneys present oral arguments on a motion by the billionaire owner to have the case dismissed.

The hearing will provide yet another window to a case that has captured the attention of the country’s legal minds, some of whom believe it represents an unprecedented step by the SEC.

“The basis on which they’re going after Cuban hasn’t been tried before,” said Peter Henning, a law professor at Wayne State University in Detroit who formerly worked as an attorney in the SEC’s enforcement division. “Whether the SEC is going to be able to stretch (its authority) that far certainly remains to be seen.”

The SEC alleges that Cuban engaged in insider trading when he sold his shares in a Canadian Internet search engine company, Mamma.com Inc., after receiving confidential information that the company planned to sell additional shares through a private offering in 2004. Cuban was able to avoid more than $750,000 in losses by selling his shares, according to the SEC.    (read more after the jump…)

$12 Billions Withdrawn from Bernard Madoff Accounts

About $12 billion was pulled out of accounts at Bernard L. Madoff’s firm in 2008, according to several people briefed on an analysis of Mr. Madoff’s business records.

Irving H. Picard’s suits seek to recoup withdrawals.

About $6 billion, or half, was taken out in just the three months before the financier was arrested in December and charged with operating an extensive Ponzi scheme, these people said.

Those figures offer a bit of hope for Mr. Madoff’s thousands of defrauded customers. Under federal law, the trustee overseeing the Madoff bankruptcy can sue to retrieve that money from the investors who withdrew it.

Indeed, the trustee, Irving H. Picard of Baker & Hostetler, filed two lawsuits on Tuesday seeking the return of a total of $6.1 billion, which he estimated had been withdrawn over the last decade.

One case seeks the return of $5.1 billion from various trust funds and partnerships run by Jeffry M. Picower, a prominent Palm Beach, Fla., investor whose charitable foundation was considered one of the notable victims of Mr. Madoff’s fraud.

Mr. Picard also sued to recover $1 billion withdrawn last year by Harley International, a hedge fund based in the Cayman Islands and administered by a unit of the Dutch bank Fortis.

Both lawsuits were filed in Federal Bankruptcy Court in Manhattan. And both assert that the defendants, as professional investors, should have realized that their profits were too high and too consistent — and Mr. Madoff’s paperwork and procedures were too sloppy — to be legitimate.

But the complaint against Mr. Picower goes further, accusing him of participating in a web of transparently false transactions with Mr. Madoff that were aimed at compensating him for “perpetuating the Ponzi scheme” at the expense of other investors.

In 1999, for example, one of Mr. Picower’s accounts posted an annual profit of more than 950 percent, the suit said. That account was one of two that reported annual returns from 1996 to 1999 ranging from 120 percent to more than 550 percent, the suit said.   (from the NYTimes, More after the Jump…)