Holland & Hart Securities Blog

SEC Posts Enforcement "Red Book" on its Website

The SEC recently posted its internal manual used by the Division of Enforcement on the Internet at http://www.sec.gov/divisions/enforce/enforcementmanual.pdf.   Publicizing the manual, which provides guidance to the Enforcement staff, is expected to promote consistency among regional offices and the SEC Headquarters.  More consistency is needed, because different SEC offices continue to employ different policies in key areas.  For instance, the New York, Los Angeles and Philadelphia offices routinely deny defense lawyers access to investigative transcripts of witnesses other than the lawyers’ clients, whereas other regional offices and certain Associate Regional Directors in SEC Headquarters routinely grant such access, in the absence of unusual circumstances.  The Red Book avoids resolving this contradiction by merely stating that granting access to the investigative file is discretionary and should be considered on a case-by-case basis.  The amount of process received by particular proposed defendants/respondents should not depend on which SEC office is investigating them. 

Section 12(j) Proceedings – The End of All Public Trading

Reporting public companies that are delinquent in their filings need to beware of the potential consequences of an enforcement action under Section 12(j) of the Securities Exchange Act of 1934, which could include the end of all public trading in their stock. 

 

In a previous article I noted how the SEC is increasingly using its powers under Section 12(j) to revoke registration of companies’ stock.  Between September 8 and 12, 2008, the SEC issued orders either instituting proceedings under that section, or revoking the registration of the stock of dozens of public companies, many of which were the subject of reverse mergers.  These orders highlight the problems associated with inactive or “dirty” shells and the need to conduct due diligence before acquiring them. 

SEC Charges Six Microcap Companies, Four Officers

On August 6, the SEC filed two separate complaints in the U.S. District Court for the Central District of California against six microcap companies, four officers and four sham consultants for engaging in unregistered public offerings that dumped billions of shares on the market through so-called employee stock option and consulting programs.

 

NW Tech, AAC, Winsted Holdings, Zann Corp., and Global Materials have agreed to settle the charges, without admitting or denying the allegations in the complaints, by consenting to the entry of final judgments permanently enjoining them from future violations of the registration provisions and, with respect to Global Materials, the antifraud provisions and ordering them to pay disgorgement plus prejudgment interest with waiver based on inability to pay.

The Subprime Crisis: A Major Shift in Priorities for the SEC

Caught flatfooted by the meltdown in the subprime mortgage market, the SEC belatedly is investigating whether any wrongdoing occurred.  The origin of the subprime crisis is worth revisiting.  In a business environment featuring increasing home prices and significant demand for homes, “prime” borrowers with good credit locked in their rates.  Mortgage lenders extended credit to “subprime” borrowers with poor credit, who, due to poor underwriting practices, often were allowed to borrow more than they could repay. 

 

This practice was facilitated by the issuance of asset-backed securities. Mortgage lenders sold the loans to third parties who packaged them into pools and sold the cash flows to investors in the form of mortgage-backed securities. In turn, these third parties resecuritized the mortgage-backed securities to create collateralized debt obligations or "CDOs."

HOW TO ACHIEVE A LENIENT SETTLEMENT WITH THE SEC

A recent settlement in an SEC case against an attorney accused of engaging in an illegal scheme to “pump and dump” the shares of a microcap company demonstrates the value of persistence and good lawyering in litigation against the agency. In an earlier article posted on this blog, I wrote that SEC v. Packetport.com, Inc., Civ. No. 3:05-CV-1747 (D. Conn.) (Nov. 16, 2005), a civil injunctive action filed in the U.S. District Court, was consistent with previously announced factors that the SEC stated it would apply when considering when to bring charges against lawyers.