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On Friday, hedge fund manager Philip Falcone filed two motions to dismiss SEC charges against him and his firm, Harbinger Capital.  (A prior post on the charges is here.)  One set of charges accuses Falcone of a “short squeeze” — buying up securities to “squeeze” short sellers into paying more to cover their shorts — and Falcone argues there is nothing fraudulent about that:
Continue Reading Falcone Says “So What” to SEC Allegations

The SEC has walked away from its fraud case against Edward Steffelin, a financial adviser who helped J.P. Morgan structure a CDO deal. On Friday, Judge Miriam Cedarbaum approved the SEC’s decision to dismiss the case with prejudice. The SEC had alleged that Steffelin knew that a hedge fund had helped select the assets for the CDO and then bet against the CDO and that Steffelin had failed to make sure that the hedge fund’s involvement was disclosed to investors. Steffelin was the first individual in a case arising out of the financial crisis who was charged by the SEC with only negligence under the securities laws, instead of intentional fraud.
Continue Reading SEC Dismisses Fraud Action Against CDO Manager With Prejudice

Trial in the SEC’s securities fraud action against several entities and individuals who managed the Reserve Primary Fund – the money market fund that “broke the buck” four years ago after Lehman Brothers announced its bankruptcy – is slated to begin on October 1, 2012. Earlier this week, in anticipation of the looming trial date, Judge Paul Gardephe issued a series of evidentiary rulings. They were a mixed bag for the parties. On the one hand, Judge Gardephe rejected the SEC’s attempt to prevent the Reserve Fund defendants from pursuing an advice of counsel defense. On the other, he ruled that two of defendants’ expert witnesses could not testify at trial. These rulings could have a substantial effect on the trial or on any settlement negotiations between the parties.
Continue Reading Judge Gardephe Allows Reserve Fund Defendants to Proceed with Advice of Counsel Defense

Last Friday, Judge Crotty denied the attempt of three former Fannie Mae executives to dismiss the SEC’s charges that they mislead investors about the company’s exposure to subprime mortgages. Judge Crotty found that the SEC had adequately alleged that Fannie Mae’s “quantitative subprime disclosures were misleading” because “they failed to include all loans that fell within [Fannie Mae’s] subprime and Alt-A description.” In allowing the SEC’s civil fraud suit to proceed, Judge Crotty rejected the defendants’ argument that they were exempt from liability because the Securities Exchange Act of 1934 does not apply to employees of any “independent establishment of the United States,” and Fannie Mae, as a government-sponsored enterprise chartered by the federal government, qualifies as such an establishment. Although Judge Crotty held that Fannie Mae is a government instrumentality, he concluded that it is not an “independent establishment” within the meaning of the Act given that it is a publicly-traded corporation managed and controlled by a Board of Directors elected by its shareholders.
Continue Reading Judge Crotty Rejects Ex-Fannie Mae Executives’ Bid to Dismiss SEC Charges

The SEC’s 2003 settlement with 10 investment banks over their research analysts’ conflicts of interest included a $55 million fund for a foundation to make grants to advance investor education. In an order dated yesterday, Judge Pauley, upon reviewing the foundation’s most recent report to the Court, severely criticized the foundation for its apparent waste, and ordered the SEC to provide further details. For example, Judge Pauley observed:
Continue Reading Judge Pauley Criticizes SEC-Created Investor Education Foundation For Waste