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Supreme Court upheld most of the key provisions of the Bipartisan Campaign Reform Act (BCRA) in a nearly 300-page decision handed down on December 10, 2003. The outcome is seen as a significant victory for campaign reform advocates. The case, McConnell v. Federal Election Commission, consolidated eleven separate legal challenges filed against the campaign finance law, which was enacted in 2002.
Although the Court found some relatively insignificant portions of BCRA to be unconstitutional, the justices upheld the major elements of the law, including its two central provisions: 1) a ban on giving "soft money" to the national political parties; and 2) limits on the ability of corporations and others to broadcast "electioneering communications" that mention candidates in the weeks preceding an election. These and most other contentious provisions were decided on a 5-4 vote, with Justices Stevens and O'Connor writing the majority opinion in which Justices Souter, Ginsburg, and Breyer joined.
The decision brings to a close an expedited appeal process that resulted in a 1,600-page ruling in May by a three-judge district court panel in Washington and a specially scheduled, four-hour session for oral arguments before the Supreme Court in early September. With the first presidential primaries of 2004 less than 60 days away, parties, candidates, political action committees, and individuals finally know with certainty the rules for financing the upcoming elections.
Key Elements of the Decision
Soft Money
Unlike the lower court's decision, the Supreme Court completely upheld BCRA's ban on contributions to the national political parties of soft money, which describes the unlimited corporate and union funds on which the parties grew dependent in the 1990s. Soft money (so called to contrast it with more - difficult - to raise federal campaign contributions, which are known as hard money) was not regulated under previous federal campaign finance laws. Parties were allowed to raise unlimited amounts of soft money so long as the contributions were not used in direct connection with federal elections. Instead, parties used soft money for state campaign activities and advertising designed to affect federal elections.
In December 10, 2003's decision, the Court concluded that large soft money contributions have a corrupting influence. "The evidence in the record shows that candidates and donors alike have in fact exploited the soft-money loophole," Justices Stevens and O'Connor wrote, "the former to increase their prospects of election and the latter to create debt on the part of officeholders, with the national parties serving as willing intermediaries."
Related soft money restrictions were also upheld, including requirements that state and local parties (many of which may accept soft money under state law) use hard money for certain federal election activities. The Court also let stand BCRA's prohibition against national party officials and federal officeholders raising soft money for state and local parties that may legally raise such funds. The Court described such provisions of the law as "valid anticircumvention measures."
Electioneering Communications
BCRA's restrictions on "electioneering communications," which is a new term defined in the law, were also upheld in today's ruling. The campaign reform law prohibits corporations and labor unions from funding electioneering communications, which are broadcast issue advertisements that mention a federal candidate and are run in the weeks preceding an election in the candidate's state or district. Typically, these advertisements focus on a particular policy issue and draw attention to a candidate or officeholder's position on that issue. Under prior law, such ads did not need to be paid for with hard money so long as they did not include express advocacy, i.e., they did not directly advocate the election or defeat of a candidate by using such words as "elect," "vote for," "defeat," or "support."
In upholding the new electioneering communications restrictions, the Court noted that the "express advocacy line, in short, has not aided the legislative effort to combat real or apparent corruption, and Congress enacted BCRA to correct the flaws it found in the existing system." The standards included in the electioneering communications definition Œ namely, broadcast advertisements that identify a candidate, are aired within a certain period before an election, and are targeted to a particular audience Œ were found by the Court to be "both easily understood and objectively determinable."
Other Provisions
The Court held as invalid two BCRA provisions. One would have prohibited the national parties from making both "independent expenditures" on behalf of a candidate and "coordinated expenditures" on behalf of the same candidate. The justices held that requiring parties to choose between the two methods of support placed an unconstitutional burden on the parties' right to make unlimited independent expenditures.
Today's decision also rejected BCRA's prohibition against contributions to federal candidates and committees by minors. Sponsors argued that individual contribution limits could be evaded by donors who gave indirectly through their young children, but the Court found the government's interest to be too attenuated and the provision overinclusive. For either substantive or procedural reasons, the Court let stand other provisions of BCRA that raised federal hard money contribution limits for individuals; established a procedure to waive certain limits when an opponent is able to self-finance a campaign (the "millionaires' amendment"); required that candidates authorize and appear in campaign ads; and required that broadcasters make available to the public records of politically related broadcasting requests.
Impact and Outlook
The Supreme Court's decision to uphold the soft money ban will have two primary results. First, it will, to some extent, help refocus the process on hard money contributions, which are subject to limits and are raised in smaller increments from individuals or political action committees (PACs). By banning soft money to the parties and increasing the individual contribution limits, BCRA raised the importance of hard money, rewarding individuals, who can give twice as much as before to candidates, and rewarding such groups as corporate PACs that can raise significant sums from employees and shareholders.
At the same time, the decision will likely expand the influence of interest groups that have already grown in importance since BCRA was enacted. In the majority opinion, Justices Stevens and O'Connor acknowledged that "Money, like water, will always find an outlet." Soft money donors, prevented from giving to the national parties, have instead begun to support state parties and organizations which operate independent of the parties. In some cases, these groups are staffed by former party officials and seek to portray themselves as the soft money vehicles of choice for promoting the interests of one party or the other. Moreover, elected federal officials will continue to be able to play a role in the activities of some of these groups, despite the language in the law prohibiting them from raising soft money. Under Federal Election Commission (FEC) regulations, elected officials may attend, speak at, or be a featured guest at a fundraising event for a state, district, or local party committee, including events at which soft money is raised.
Although the primary BCRA case is now decided, debate over the future of the law will continue in the weeks and months ahead as the 2004 election approaches. The Supreme Court's decision paves the way for other cases to proceed, including those challenging some of the FEC's regulations implementing BCRA. The FEC is also expected to revisit some of its rulemakings and to issue revised guidance to take into account the Court's holdings. Please let us know if we can provide any additional information about the BCRA case or about compliance with BCRA generally. We will continue to monitor developments in this area, and we look forward to working with our clients to develop political strategies that serve their needs and are consistent with the changing legal landscape.
Gertz v. Welch
Cite as: 418 U.S. 323, 94 S.Ct. 2997
GERTZ
v.
ROBERT WELCH, Inc.
Certiorari to the U.S. Court of Appeals for the Seventh Circuit
No. 72-617
Argued November 14, 1973
Decided June 25, 1974
A Chicago policeman named Nuccio was convicted of murder. The victim's family retained petitioner, a reputable attorney, to represent them in civil litigation against Nuccio. An article appearing in respondent's magazine alleged that Nuccio's murder trial was part of a Communist conspiracy to discredit the local police, and it falsely stated that petitioner had arranged Nuccio's "frame-up," implied that petitioner had a criminal record, and labeled him a "Communist-fronter." Petitioner brought this diversity libel action against respondent. After the jury returned a verdict for petitioner, the District Court decided that the standard enunciated in New York Times Co. v. Sullivan, 376 U.S. 254, which bars media liability for defamation of a public official absent proof that the defamatory statements were published with knowledge of their falsity or in reckless disregard of the truth, should apply to this suit. The court concluded that that standard protects media discussion of a public issue without regard to whether the person defamed is a public official as in New York Times Co. v. Sullivan, supra, or a public figure, as in Curtis Publishing Co. v. Butts, 388 U.S. 130. The court found that petitioner had failed to prove knowledge of falsity or reckless disregard for the truth and therefore entered judgment n. o. v. for respondent. The Court of Appeals affirmed. Held:
1. A publisher or broadcaster of defamatory falsehoods about an individual who is neither a public official nor a public figure may not claim the New York Times protection against liability for defamation on the ground that the defamatory statements concern an issue of public or general interest. Pp. 339-348.
(a) Because private individuals characteristically have less effective opportunities for rebuttal than do public officials and public figures, they are more vulnerable to injury from defamation. Because they have not voluntarily exposed themselves to increased risk of injury from defamatory falsehoods, they are also more deserving of recovery. The state interest in compensating injury to the reputation of private individuals is therefore greater than for public officials and public figures. Pp. 343-345.
(b) To extend the New York Times standard to media defamation of private persons whenever an issue of general or public interest is involved would abridge to an unacceptable degree the legitimate state interest in compensating private individuals for injury to reputation and would occasion the additional difficulty of forcing courts to decide on an ad hoc basis which publications and broadcasts address issues of general or public interest and which do not. Pp. 345-346.
(c) So long as they do not impose liability without fault, the States may define for themselves the appropriate standard of liability for a publisher or broadcaster of defamatory falsehood which injures a private individual and whose substance makes substantial danger to reputation apparent. Pp. 347-348.
2. The States, however, may not permit recovery of presumed or punitive damages when liability is not based on knowledge of falsity or reckless disregard for the truth, and the private defamation plaintiff who establishes liability under a less demanding standard than the New York Times test may recover compensation only for actual injury. Pp. 348-350.
3. Petitioner was neither a public official nor a public figure. Pp. 351-352.
(a) Neither petitioner's past service on certain city committees nor his appearance as an attorney at the coroner's inquest into the death of the murder victim made him a public official. P. 351.
(b) Petitioner was also not a public figure. Absent clear evidence of general fame or notoriety in the community and pervasive involvement in ordering the affairs of society, an individual should not be deemed a public figure for all aspects of his life. Rather, the public-figure question should be determined by reference to the individual's participation in the particular controversy giving rise to the defamation. Petitioner's role in the Nuccio affair did not make him a public figure. Pp. 351-352.
471 F.2d 801, reversed and remanded.
POWELL, J., delivered the opinion of the Court, in which STEWART, MARSHALL, BLACKMUN, and REHNQUIST, JJ., joined. BLACKMUN, J., filed a concurring opinion, post, p. 353. BURGER, C. J., post, p. 354, DOUGLAS, J., post, p. 355, BRENNAN, J., post, p. 361, and WHITE, J., post, p. 369, filed dissenting opinions.
Wayne B. Giampietro argued the cause and filed briefs for petitioner.
Clyde J. Watts argued the cause and filed a brief for respondent.
MR. JUSTICE POWELL delivered the opinion of the Court.
This Court has struggled for nearly a decade to define the proper accommodation between the law of defamation and the freedoms of speech and press protected by the First Amendment. With this decision we return to that effort. We granted certiorari to reconsider the extent of a publisher's constitutional privilege against liability for defamation of a private citizen. 410 U.S. 925 (1973).
I
In 1968 a Chicago policeman named Nuccio shot and killed a youth named Nelson. The state authorities prosecuted Nuccio for the homicide and ultimately obtained a conviction for murder in the second degree. The Nelson family retained petitioner Elmer Gertz, a reputable attorney, to represent them in civil litigation against Nuccio.
Respondent publishes American Opinion, a monthly outlet for the views of the John Birch Society. Early in the 1960's the magazine began to warn of a nationwide conspiracy to discredit local law enforcement agencies and create in their stead a national police force capable of supporting a Communist dictatorship. As part of the continuing effort to alert the public to this assumed danger, the managing editor of American Opinion commissioned an article on the murder trial of Officer Nuccio. For this purpose he engaged a regular contributor to the magazine. In March 1969 respondent published the resulting article under the title "FRAME-UP: Richard Nuccio And The War On Police." The article purports to demonstrate that the testimony against Nuccio at his criminal trial was false and that his prosecution was part of the Communist campaign against the police.
In his capacity as counsel for the Nelson family in the civil litigation, petitioner attended the coroner's inquest into the boy's death and initiated actions for damages, but he neither discussed Officer Nuccio with the press nor played any part in the criminal proceeding. Notwithstanding petitioner's remote connection with the prosecution of Nuccio, respondent's magazine portrayed him as an architect of the "frame-up." According to the article, the police file on petitioner took "a big, Irish cop to lift." The article stated that petitioner had been an official of the "Marxist League for Industrial Democracy, originally known as the Intercollegiate Socialist Society, which has advocated the violent seizure of our government." It labeled Gertz a "Leninist" and a "Communist-fronter." It also stated that Gertz had been an officer of the National Lawyers Guild, described as a Communist organization that "probably did more than any other outfit to plan the Communist attack on the Chicago police during the 1968 Democratic Convention."
These statements contained serious inaccuracies. The implication that petitioner had acriminal record was false. Petitioner had been a member and officer of the National Lawyers Guild some 15 years earlier, but there was no evidence that he or that organization had taken any part in planning the 1968 demonstrations in Chicago. There was also no basis for the charge that petitioner was a "Leninist" or a "Communist-fronter." And he had never been a member of the "Marxist League for Industrial Democracy" or the "Intercollegiate Socialist Society."
The managing editor of American Opinion made no effort to verify or substantiate the charges against petitioner. Instead, he appended an editorial introduction stating that the author had "conducted extensive research into the Richard Nuccio Case." And he included in the article a photograph of petitioner and wrote the caption that appeared under it: "Elmer Gertz of Red Guild harrasses Nuccio." Respondent placed the issue of American Opinion containing the article on sale at newsstands throughout the country and distributed reprints of the article on the streets of Chicago.
Petitioner filed a diversity action for libel in the United States District Court for the Northern District of Illinois. He claimed that the falsehoods published by respondent injured his reputation as a lawyer and a citizen. Before filing an answer, respondent moved to dismiss the complaint for failure to state a claim upon which relief could be granted, apparently on the ground that petitioner failed to allege special damages. But the court ruled that statements contained in the article constituted libel per se under Illinois law and that consequently petitioner need not plead special damages. 306 F. Supp. 310 (1969).
After answering the complaint, respondent filed a pretrial motion for summary judgment, claiming a constitutional privilege against liability for defamation. [FN 1] It asserted that petitioner was a public official or a public figure and that the article concerned an issue of public interest and concern. For these reasons, respondent argued, it was entitled to invoke the privilege enunciated in New York Times Co. v. Sullivan, 376 U.S. 254 (1964). Under this rule respondent would escape liability unless petitioner could prove publication of defamatory falsehood "with `actual malice' -- that is, with knowledge that it was false or with reckless disregard of whether it was false or not." Id., at 280. Respondent claimed that petitioner could not make such a showing and submitted a supporting affidavit by the magazine's managing editor. The editor denied any knowledge of the falsity of the statements concerning petitioner and stated that he had relied on the author's reputation and on his prior experience with the accuracy and authenticity of the author's contributions to American Opinion.
[FN 1] Petitioner filed a cross-motion for summary judgment on grounds not specified in the record. The court denied petitioner's cross-motion without discussion in a memorandum opinion of September 16, 1970.
The District Court denied respondent's motion for summary judgment in a memorandum opinion of September 16, 1970. The court did not dispute respondent's claim to the protection of the New York Times standard. Rather, it concluded that petitioner might overcome the constitutional privilege by making a factual showing sufficient to prove publication of defamatory falsehood in reckless disregard of the truth. During the course of the trial, however, it became clear that the trial court had not accepted all of respondent's asserted grounds for applying the New York Times rule to this case. It thought that respondent's claim to the protection of the constitutional privilege depended on the contention that petitioner was either a public official under the New York Times decision or a public figure under Curtis Publishing Co. v. Butts, 388 U.S. 130 (1967), apparently discounting the argument that a privilege would arise from the presence of a public issue. After all the evidence had been presented but before submission of the case to the jury, the court ruled in effect that petitioner was neither a public official nor a public figure. It added that, if he were, the resulting application of the New York Times standard would require a directed verdict for respondent. Because some statements in the article constituted libel per se under Illinois law, the court submitted the case to the jury under instructions that withdrew from its consideration all issues save the measure of damages. The jury awarded $50,000 to petitioner.
Following the jury verdict and on further reflection, the District Court concluded that the New York Times standard should govern this case even though petitioner was not a public official or public figure. It accepted respondent's contention that that privilege protected discussion of any public issue without regard to the status of a person defamed therein. Accordingly, the court entered judgment for respondent notwithstanding the jury's verdict. [FN 2] This conclusion anticipated the reasoning of a plurality of this Court in Rosenbloom v. Metromedia, Inc., 403 U.S. 29 (1971).
[FN 2] 322 F. Supp. 997 (1970). Petitioner asserts that the entry of judgment n. o. v. on the basis of his failure to show knowledge of falsity or reckless disregard for the truth constituted unfair surprise and deprived him of a full and fair opportunity to prove "actual malice" on the part of respondent. This contention is not supported by the record. It is clear that the trial court gave petitioner no reason to assume that the New York Times privilege would not be available to respondent. The court's memorandum opinion denying respondent's pretrial motion for summary judgment does not state that the New York Times standard was inapplicable to this case. Rather, it reveals that the trial judge thought it possible for petitioner to make a factual showing sufficient to overcome respondent's claim of constitutional privilege. It states in part:
"When there is a factual dispute as to the existence of actual malice, summary judgment is improper.
. . . . .
"In the instant case a jury might infer from the evidence that [respondent's] failure to investigate the truth of the allegations, coupled with its receipt of communications challenging the factual accuracy of this author in the past, amounted to actual malice, that is, `reckless disregard' of whether the allegations were true or not. New York Times [Co.] v. Sullivan, [376 U.S. 254,] 279-280 [(1964)]." Mem. Op., Sept. 16, 1970.
Thus, petitioner knew or should have known that the outcome of the trial might hinge on his ability to show by clear and convincing evidence that respondent acted with reckless disregard for the truth. And this question remained open throughout the trial. Although the court initially concluded that the applicability of the New York Times rule depended on petitioner's status as a public figure, the court did not decide that petitioner was not a public figure until all the evidence had been presented. Thus petitioner had every opportunity, indeed incentive, to prove "reckless disregard" if he could, and he in fact attempted to do so. The record supports the observation by the Court of Appeals that petitioner "did present evidence of malice (both the `constitutional' and the `ill will' type) to support his damage claim and no such evidence was excluded . . . ." 471 F.2d 801, 807 n. 15 (1972).
Petitioner appealed to contest the applicability of the New York Times standard to this case. Although the Court of Appeals for the Seventh Circuit doubted the correctness of the District Court's determination that petitioner was not a public figure, it did not overturn that finding. [FN 3] It agreed with the District Court that respondent could assert the constitutional privilege because the article concerned a matter of public interest, citing this Court's intervening decision in Rosenbloom v. Metromedia, Inc., supra. The Court of Appeals read Rosenbloom to require application of the New York Times standard to any publication or broadcast about an issue of significant public interest, without regard to the position, fame, or anonymity of the person defamed, and it concluded that respondent's statements concerned such an issue. [FN 4] After reviewing the record, the Court of Appeals endorsed the District Court's conclusion that petitioner had failed to show by clear and convincing evidence that respondent had acted with "actual malice" as defined by New York Times. There was no evidence that the managing editor of American Opinion knew of the falsity of the accusations made in the article. In fact, he knew nothing about petitioner except what he learned from the article. The court correctly noted that mere proof of failure to investigate, without more, cannot establish reckless disregard for the truth. Rather, the publisher must act with a "`high degree of awareness of . . . probable falsity.'" St. Amant v. Thompson, 390 U.S. 727, 731 (1968); accord, Beckley Newspapers Corp. v. Hanks, 389 U.S. 81, 84-85 (1967); Garrison v. Louisiana, 379 U.S. 64, 75-76 (1964). The evidence in this case did not reveal that respondent had cause for such an awareness. The Court of Appeals therefore affirmed, 471 F.2d 801 (1972). For the reasons stated below, we reverse.
[FN 3] The court stated:
"[Petitioner's] considerable stature as a lawyer, author, lecturer, and participant in matters of public import undermine[s] the validity of the assumption that he is not a `public figure' as that term has been used by the progeny of New York Times. Nevertheless, for purposes of decision we make that assumption and test the availability of the claim of privilege by the subject matter of the article." Id., at 805.
[FN 4] In the Court of Appeals petitioner made an ingenious but unavailing attempt to show that respondent's defamatory charge against him concerned no issue of public or general interest. He asserted that the subject matter of the article was the murder trial of Officer Nuccio and that he did not participate in that proceeding. Therefore, he argued, even if the subject matter of the article generally were protected by the New York Times privilege, under the opinion of the Rosenbloom plurality, the defamatory statements about him were not. The Court of Appeals rejected this argument. It noted that the accusations against petitioner played an integral part in respondent's general thesis of a nationwide conspiracy to harass the police:
"[W]e may also assume that the article's basic thesis is false. Nevertheless, under the reasoning of New York Times Co. v. Sullivan, even a false statement of fact made in support of a false thesis is protected unless made with knowledge of its falsity or with reckless disregard of its truth or falsity. It would undermine the rule of that case to permit the actual falsity of a statement to determine whether or not its publisher is entitled to the benefit of the rule.
"If, therefore, we put to one side the false character of the article and treat it as though its contents were entirely true, it cannot be denied that the comments about [petitioner] were integral to its central thesis. They must be tested under the New York Times standard." 471 F.2d, at 806.
We think that the Court of Appeals correctly rejected petitioner's argument. Its acceptance might lead to arbitrary imposition of liability on the basis of an unwise differentiation among kinds of factual misstatements. The present case illustrates the point. Respondent falsely portrayed petitioner as an architect of the criminal prosecution against Nuccio. On its face this inaccuracy does not appear defamatory. Respondent also falsely labeled petitioner a "Leninist" and a "Communist-fronter." These accusations are generally considered defamatory. Under petitioner's interpretation of the "public or general interest" test, respondent would have enjoyed a constitutional privilege to publish defamatory falsehood if petitioner had in fact been associated with the criminal prosecution. But this would mean that the seemingly innocuous mistake of confusing petitioner's role in the litigation against Officer Nuccio would destroy the privilege otherwise available for calling petitioner a Communist-fronter. Thus respondent's privilege to publish statements whose content should have alerted it to the danger of injury to reputation would hinge on the accuracy of statements that carried with them no such warning. Assuming that none of these statements was published with knowledge of falsity or with reckless disregard for the truth, we see no reason to distinguish among the inaccuracies.
II
The principal issue in this case is whether a newspaper or broadcaster that publishes defamatory falsehoods about an individual who is neither a public official nor a public figure may claim a constitutional privilege against liability for the injury inflicted by those statements. The Court considered this question on the rather different set of facts presented in Rosenbloom v. Metromedia, Inc., 403 U.S. 29 (1971). Rosenbloom, a distributor of nudist magazines, was arrested for selling allegedly obscene material while making a delivery to a retail dealer. The police obtained a warrant and seized his entire inventory of 3,000 books and magazines. He sought and obtained an injunction prohibiting further police interference with his business. He then sued a local radio station for failing to note in two of its newscasts that the 3,000 items seized were only "reportedly" or "allegedly" obscene and for broadcasting references to "the smut literature racket" and to "girliebook peddlers" in its coverage of the court proceeding for injunctive relief. He obtained a judgment against the radio station, but the Court of Appeals for the Third Circuit held the privilege applicable to the broadcast and reversed. 415 F.2d 892 (1969).
This Court affirmed the decision below, but no majority could agree on a controlling rationale. The eight Justices [FN 5] who participated in Rosenbloom announced their views in five separate opinions, none of which commanded more than three votes. The several statements not only reveal disagreement about the appropriate result in that case, they also reflect divergent traditions of thought about the general problem of reconciling the law of defamation with the First Amendment. One approach has been to extend the New York Times test to an expanding variety of situations. Another has been to vary the level of constitutional privilege for defamatory falsehood with the status of the person defamed. And a third view would grant to the press and broadcast media absolute immunity from liability for defamation. To place our holding in the proper context, we preface our discussion of this case with a review of the several Rosenbloom opinions and their antecedents.
[FN 5] MR. JUSTICE DOUGLAS did not participate in the consideration or decision of Rosenbloom.
In affirming the trial court's judgment in the instant case, the Court of Appeals relied on MR. JUSTICE BRENNAN'S conclusion for the Rosenbloom plurality that "all discussion and communication involving matters of public or general concern," 403 U.S., at 44, warrant the protection from liability for defamation accorded by the rule originally enunciated in New York Times Co. v. Sullivan, 376 U.S. 254 (1964). There this Court defined a constitutional privilege intended to free criticism of public officials from the restraints imposed by the common law of defamation. The Times ran a political advertisement endorsing civil rights demonstrations by black students in Alabama and impliedly condemning the performance of local law-enforcement officials. A police commissioner established in state court that certain misstatements in the advertisement referred to him and that they constituted libel per se under Alabama law. This showing left the Times with the single defense of truth, for under Alabama law neither good faith nor reasonable care would protect the newspaper from liability. This Court concluded that a "rule compelling the critic of official conduct to guarantee the truth of all his factual assertions" would deter protected speech, id., at 279, and announced the constitutional privilege designed to counter that effect:
"The constitutional guarantees require, we think, a federal rule that prohibits a public official from recovering damages for a defamatory falsehood relating to his official conduct unless he proves that the statement was made with `actual malice' - that is, with knowledge that it was false or with reckless disregard of whether it was false or not." Id., at 279-280. [FN 6]
[FN 6] New York Times and later cases explicated the meaning of the new standard. In New York Times the Court held that under the circumstances the newspaper's failure to check the accuracy of the advertisement against news stories in its own files did not establish reckless disregard for the truth. 376 U.S., at 287-288. In St. Amant v. Thompson, 390 U.S. 727, 731 (1968), the Court equated reckless disregard of the truth with subjective awareness of probable falsity: "There must be sufficient evidence to permit the conclusion that the defendant in fact entertained serious doubts as to the truth of his publication." In Beckley Newspapers Corp. v. Hanks, 389 U.S. 81 (1967), the Court emphasized the distinction between the New York Times test of knowledge of falsity or reckless disregard of the truth and "actual malice" in the traditional sense of ill-will. Garrison v. Louisiana, 379 U.S. 64 (1964), made plain that the new standard applied to criminal libel laws as well as to civil actions and that it governed criticism directed at "anything which might touch on an official's fitness for office." Id., at 77. Finally, in Rosenblatt v. Baer, 383 U.S. 75, 85 (1966), the Court stated that "the `public official' designation applies at the very least to those among the hierarchy of government employees who have, or appear to the public to have, substantial responsibility for or control over the conduct of governmental affairs."
In Time, Inc. v. Hill, 385 U.S. 374 (1967), the Court applied the New York Times standard to actions under an unusual state statute. The statute did not create a cause of action for libel. Rather, it provided a remedy for unwanted publicity. Although the law allowed recovery of damages for harm caused by exposure to public attention rather than by factual inaccuracies, it recognized truth as a complete defense. Thus, nondefamatory factual errors could render a publisher liable for something akin to invasion of privacy. The Court ruled that the defendant in such an action could invoke the New York Times privilege regardless of the fame or anonymity of the plaintiff. Speaking for the Court, MR. JUSTICE BRENNAN declared that this holding was not an extension of New York Times but rather a parallel line of reasoning applying that standard to this discrete context:
"This is neither a libel action by a private individual nor a statutory action by a public official. Therefore, although the First Amendment principles pronounced in New York Times guide our conclusion, we reach that conclusion only by applying these principles in this discrete context. It therefore serves no purpose to distinguish the facts here from those in New York Times. Were this a libel action, the distinction which has been suggested between the relative opportunities of the public official and the private individual to rebut defamatory charges might be germane. And the additional state interest in the protection of the individual against damage to his reputation would be involved. Cf. Rosenblatt v. Baer, 383 U.S. 75, 91 (STEWART, J., concurring)." 385 U.S., at 390-391.
Three years after New York Times, a majority of the Court agreed to extend the constitutional privilege to defamatory criticism of "public figures." This extension was announced in Curtis Publishing Co. v. Butts and its companion, Associated Press v. Walker, 388 U.S. 130, 162 (1967). The first case involved the Saturday Evening Post's charge that Coach Wally Butts of the University of Georgia had conspired with Coach "Bear" Bryant of the University of Alabama to fix a football game between their respective schools. Walker involved an erroneous Associated Press account of former Major General Edwin Walker's participation in a University of Mississippi campus riot. Because Butts was paid by a private alumni association and Walker had resigned from the Army, neither could be classified as a "public official" under New York Times. Although Mr. Justice Harlan announced the result in both cases, a majority of the Court agreed with Mr. Chief Justice Warren's conclusion that the New York Times test should apply to criticism of "public figures" as well as "public officials." [FN 7] The Court extended the constitutional privilege announced in that case to protect defamatory criticism of nonpublic persons who "are nevertheless intimately involved in the resolution of important public questions or, by reason of their fame, shape events in areas of concern to society at large." Id., at 164 (Warren, C. J., concurring in result).
[FN 7] Professor Kalven once introduced a discussion of these cases with the apt heading, "You Can't Tell the Players without a Score Card." Kalven, The Reasonable Man and the First Amendment: Hill, Butts, and Walker, 1967 Sup. Ct. Rev. 267, 275. Only three other Justices joined Mr. Justice Harlan's analysis of the issues involved. In his concurring opinion, Mr. Chief Justice Warren stated the principle for which these cases stand -- that the New York Times test reaches both public figures and public officials. MR. JUSTICE BRENNAN and MR. JUSTICE WHITE agreed with the Chief Justice on that question. Mr. Justice Black and MR. JUSTICE DOUGLAS reiterated their view that publishers should have an absolute immunity from liability for defamation, but they acquiesced in the Chief Justice's reasoning in order to enable a majority of the Justices to agree on the question of the appropriate constitutional privilege for defamation of public figures.
In his opinion for the plurality in Rosenbloom v. Metromedia, Inc., 403 U.S. 29 (1971), MR. JUSTICE BRENNAN took the New York Times privilege one step further. He concluded that its protection should extend to defamatory falsehoods relating to private persons if the statements concerned matters of general or public interest. He abjured the suggested distinction between public officials and public figures on the one hand and private individuals on the other. He focused instead on society's interest in learning about certain issues: "If a matter is a subject of public or general interest, it cannot suddenly become less so merely because a private individual is involved, or because in some sense the individual did not `voluntarily' choose to become involved." Id., at 43. Thus, under the plurality opinion, a private citizen involuntarily associated with a matter of general interest has no recourse for injury to his reputation unless he can satisfy the demanding requirements of the New York Times test.
Two Members of the Court concurred in the result in Rosenbloom but departed from the reasoning of the plurality. Mr. Justice Black restated his view, long shared by MR. JUSTICE DOUGLAS, that the First Amendment cloaks the news media with an absolute and indefeasible immunity from liability for defamation. Id., at 57. MR JUSTICE WHITE concurred on a narrower ground. Ibid. He concluded that "the First Amendment gives the press and the broadcast media a privilege to report and comment upon the official actions of public servants in full detail, with no requirement that the reputation or the privacy of an individual involved in or affected by the official action be spared from public view." Id., at 62. He therefore declined to reach the broader questions addressed by the other Justices.
Mr. Justice Harlan dissented. Although he had joined the opinion of the Court in New York Times, in Curtis Publishing Co. he had contested the extension of the privilege to public figures. There he had argued that a public figure who held no governmental office should be allowed to recover damages for defamation "on a showing of highly unreasonable conduct constituting an extreme departure from the standards of investigation and reporting ordinarily adhered to by responsible publishers." 388 U.S., at 155. In his Curtis Publishing Co. opinion Mr. Justice Harlan had distinguished New York Times primarily on the ground that defamation actions by public officials "lay close to seditious libel . . . ." Id., at 153. Recovery of damages by one who held no public office, however, could not "be viewed as a vindication of governmental policy." Id., at 154. Additionally, he had intimated that, because most public officials enjoyed absolute immunity from liability for their own defamatory utterances under Barr v. Matteo, 360 U.S. 564 (1959), they lacked a strong claim to the protection of the courts.
In Rosenbloom Mr. Justice Harlan modified these views. He acquiesced in the application of the privilege to defamation of public figures but argued that a different rule should obtain where defamatory falsehood harmed a private individual. He noted that a private person has less likelihood "of securing access to channels of communication sufficient to rebut falsehoods concerning him" than do public officials and public figures, 403 U.S., at 70, and has not voluntarily placed himself in the public spotlight. Mr. Justice Harlan concluded that the States could constitutionally allow private individuals to recover damages for defamation on the basis of any standard of care except liability without fault.
MR. JUSTICE MARSHALL dissented in Rosenbloom in an opinion joined by MR. JUSTICE STEWART. Id., at 78. He thought that the plurality's "public or general interest" test for determining the applicability of the New York Times privilege would involve the courts in the dangerous business of deciding "what information is relevant to self-government." Id., at 79. He also contended that the plurality's position inadequately served "society's interest in protecting private individuals from being thrust into the public eye by the distorting light of defamation." Ibid. MR. JUSTICE MARSHALL therefore reached the conclusion, also reached by Mr. Justice Harlan, that the States should be "essentially free to continue the evolution of the common law of defamation and to articulate whatever fault standard best suits the State's need," so long as the States did not impose liability without fault. Id., at 86. The principal point of disagreement among the three dissenters concerned punitive damages. Whereas Mr. Justice Harlan thought that the States could allow punitive damages in amounts bearing "a reasonable and purposeful relationship to the actual harm done . . .," id., at 75, MR. JUSTICE MARSHALL concluded that the size and unpredictability of jury awards of exemplary damages unnecessarily exacerbated the problems of media self-censorship and that such damages should therefore be forbidden.
III
We begin with the common ground. Under the First Amendment there is no such thing as a false idea. However pernicious an opinion may seem, we depend for its correction not on the conscience of judges and juries but on the competition of other ideas. [FN 8] But there is no constitutional value in false statements of fact. Neither the intentional lie nor the careless error materially advances society's interest in "uninhibited, robust, and wide-open" debate on public issues. New York Times Co. v. Sullivan, 376 U.S., at 270. They belong to that category of utterances which "are no essential part of any exposition of ideas, and are of such slight social value as a step to truth that any benefit that may be derived from them is clearly outweighed by the social interest in order and morality." Chaplinsky v. New Hampshire, 315 U.S. 568, 572 (1942).
[FN 8] As Thomas Jefferson made the point in his first Inaugural Address: "If there be any among us who would wish to dissolve this Union or change its republican form, let them stand undisturbed as monuments of the safety with which error of opinion may be tolerated where reason is left free to combat it."
Although the erroneous statement of fact is not worthy of constitutional protection, it is nevertheless inevitable in free debate. As James Madison pointed out in the Report on the Virginia Resolutions of 1798: "Some degree of abuse is inseparable from the proper use of every thing; and in no instance is this more true than in that of the press." 4 J. Elliot, Debates on the Federal Constitution of 1787, p. 571 (1876). And punishment of error runs the risk of inducing a cautious and restrictive exercise of the constitutionally guaranteed freedoms of speech and press. Our decisions recognize that a rule of strict liability that compels a publisher or broadcaster to guarantee the accuracy of his factual assertions may lead to intolerable self-censorship. Allowing the media to avoid liability only by proving the truth of all injurious statements does not accord adequate protection to First Amendment liberties. As the Court stated in New York Times Co. v. Sullivan, supra, at 279: "Allowance of the defense of truth, with the burden of proving it on the defendant, does not mean that only false speech will be deterred." The First Amendment requires that we protect some falsehood in order to protect speech that matters.
The need to avoid self-censorship by the news media is, however, not the only societal value at issue. If it were, this Court would have embraced long ago the view that publishers and broadcasters enjoy an unconditional and indefeasible immunity from liability for defamation. See New York Times Co. v. Sullivan, supra, at 293 (Black, J., concurring); Garrison v. Louisiana, 379 U.S., at 80 (DOUGLAS, J., concurring); Curtis Publishing Co. v. Butts, 388 U.S., at 170 (opinion of Black, J.). Such a rule would, indeed, obviate the fear that the prospect of civil liability for injurious falsehood might dissuade a timorous press from the effective exercise of First Amendment freedoms. Yet absolute protection for the communications media requires a total sacrifice of the competing value served by the law of defamation.
The legitimate state interest underlying the law of libel is the compensation of individuals for the harm inflicted on them by defamatory falsehood. We would not lightly require the State to abandon this purpose, for, as MR. JUSTICE STEWART has reminded us, the individual's right to the protection of his own good name
"reflects no more than our basic concept of the essential dignity and worth of every human being -- a concept at the root of any decent system of ordered liberty. The protection of private personality, like the protection of life itself, is left primarily to the individual States under the Ninth and Tenth Amendments. But this does not mean that the right is entitled to any less recognition by this Court as a basic of our constitutional system." Rosenblatt v. Baer, 383 U.S. 75, 92 (1966) (concurring opinion).
Some tension necessarily exists between the need for a vigorous and uninhibited press and the legitimate interest in redressing wrongful injury. As Mr. Justice Harlan stated, "some antithesis between freedom of speech and press and libel actions persists, for libel remains premised on the content of speech and limits the freedom of the publisher to express certain sentiments, at least without guaranteeing legal proof of their substantial accuracy." Curtis Publishing Co. v. Butts, supra, at 152. In our continuing effort to define the proper accommodation between these competing concerns, we have been especially anxious to assure to the freedoms of speech and press that "breathing space" essential to their fruitful exercise. NAACP v. Button, 371 U.S. 415, 433 (1963). To that end this Court has extended a measure of strategic protection to defamatory falsehood.
The New York Times standard defines the level of constitutional protection appropriate to the context of defamation of a public person. Those who, by reason of the notoriety of their achievements or the vigor and success with which they seek the public's attention, are properly classed as public figures and those who hold governmental office may recover for injury to reputation only on clear and convincing proof that the defamatory falsehood was made with knowledge of its falsity or with reckless disregard for the truth. This standard administers an extremely powerful antidote to the inducement to media self-censorship of the common-law rule of strict liability for libel and slander. And it exacts a correspondingly high price from the victims of defamatory falsehood. Plainly many deserving plaintiffs, including some intentionally subjected to injury, will be unable to surmount the barrier of the New York Times test. Despite this substantial abridgment of the state law right to compensation for wrongful hurt to one's reputation, the Court has concluded that the protection of the New York Times privilege should be available to publishers and broadcasters of defamatory falsehood concerning public officials and public figures. New York Times Co. v. Sullivan, supra; Curtis Publishing Co. v. Butts, supra. We think that these decisions are correct, but we do not find their holdings justified solely by reference to the interest of the press and broadcast media in immunity from liability. Rather, we believe that the New York Times rule states an accommodation between this concern and the limited state interest present in the context of libel actions brought by public persons. For the reasons stated below, we conclude that the state interest in compensating injury to the reputation of private individuals requires that a different rule should obtain with respect to them.
Theoretically, of course, the balance between the needs of the press and the individual's claim to compensation for wrongful injury might be struck on a case-by-case basis. As Mr. Justice Harlan hypothesized, "it might seem, purely as an abstract matter, that the most utilitarian approach would be to scrutinize carefully every jury verdict in every libel case, in order to ascertain whether the final judgment leaves fully protected whatever First Amendment values transcend the legitimate state interest in protecting the particular plaintiff who prevailed." Rosenbloom v. Metromedia, Inc., 403 U.S., at 63 (footnote omitted). But this approach would lead to unpredictable results and uncertain expectations, and it could render our duty to supervise the lower courts unmanageable. Because an ad hoc resolution of the competing interests at stake in each particular case is not feasible, we must lay down broad rules of general application. Such rules necessarily treat alike various cases involving differences as well as similarities. Thus it is often true that not all of the considerations which justify adoption of a given rule will obtain in each particular case decided under its authority.
With that caveat we have no difficulty in distinguishing among defamation plaintiffs. The first remedy of any victim of defamation is self-help -- using available opportunities to contradict the lie or correct the error and thereby to minimize its adverse impact on reputation. Public officials and public figures usually enjoy significantly greater access to the channels of effective communication and hence have a more realistic opportunity to counteract false statements than private individuals normally enjoy. [FN 9] Private individuals are therefore more vulnerable to injury, and the state interest in protecting them is correspondingly greater.
[FN 9] Of course, an opportunity for rebuttal seldom suffices to undo harm of defamatory falsehood. Indeed, the law of defamation is rooted in our experience that the truth rarely catches up with a lie. But the fact that the self-help remedy of rebuttal, standing alone, is inadequate to its task does not mean that it is irrelevant to our inquiry.
More important than the likelihood that private individuals will lack effective opportunities for rebuttal, there is a compelling normative consideration underlying the distinction between public and private defamation plaintiffs. An individual who decides to seek governmental office must accept certain necessary consequences of that involvement in public affairs. He runs the risk of closer public scrutiny than might otherwise be the case. And society's interest in the officers of government is not strictly limited to the formal discharge of official duties. As the Court pointed out in Garrison v. Louisiana, 379 U.S., at 77, the public's interest extends to "anything which might touch on an official's fitness for office . . . . Few personal attributes are more germane to fitness for office than dishonesty, malfeasance, or improper motivation, even though these characteristics may also affect the official's private character."
Those classed as public figures stand in a similar position. Hypothetically, it may be possible for someone to become a public figure through no purposeful action of his own, but the instances of truly involuntary public figures must be exceedingly rare. For the most part those who attain this status have assumed roles of especial prominence in the affairs of society. Some occupy positions of such persuasive power and influence that they are deemed public figures for all purposes. More commonly, those classed as public figures have thrust themselves to the forefront of particular public controversies in order to influence the resolution of the issues involved. In either event, they invite attention and comment.
Even if the foregoing generalities do not obtain in every instance, the communications media are entitled to act on the assumption that public officials and public figures have voluntarily exposed themselves to increased risk of injury from defamatory falsehood concerning them. No such assumption is justified with respect to a private individual. He has not accepted public office or assumed an "influential role in ordering society." Curtis Publishing Co. v. Butts, 388 U.S., at 164 (Warren, C. J., concurring in result). He has relinquished no part of his interest in the protection of his own good name, and consequently he has a more compelling call on the courts for redress of injury inflicted by defamatory falsehood. Thus, private individuals are not only more vulnerable to injury than public officials and public figures; they are also more deserving of recovery.
For these reasons we conclude that the States should retain substantial latitude in their efforts to enforce a legal remedy for defamatory falsehood injurious to the reputation of a private individual. The extension of the New York Times test proposed by the Rosenbloom plurality would abridge this legitimate state interest to a degree that we find unacceptable. And it would occasion the additional difficulty of forcing state and federal judges to decide on an ad hoc basis which publications address issues of "general or public interest" and which do not -- to determine, in the words of MR. JUSTICE MARSHALL, "what information is relevant to self-government." Rosenbloom v. Metromedia, Inc., 403 U.S., at 79. We doubt the wisdom of committing this task to the conscience of judges. Nor does the Constitution require us to draw so thin a line between the drastic alternatives of the New York Times privilege and the common law of strict liability for defamatory error. The "public or general interest" test for determining the applicability of the New York Times standard to private defamation actions inadequately serves both of the competing values at stake. On the one hand, a private individual whose reputation is injured by defamatory falsehood that does concern an issue of public or general interest has no recourse unless he can meet the rigorous requirements of New York Times. This is true despite the factors that distinguish the state interest in compensating private individuals from the analogous interest involved in the context of public persons. On the other hand, a publisher or broadcaster of a defamatory error which a court deems unrelated to an issue of public or general interest may be held liable in damages even if it took every reasonable precaution to ensure the accuracy of its assertions. And liability may far exceed compensation for any actual injury to the plaintiff, for the jury may be permitted to presume damages without proof of loss and even to award punitive damages.
http://www.casp.net/gertz-1.html
A Securities Lawyer's Take on Proposed Anti-Money Laundering Initiatives: A "Brave New World" for Broker-Dealers?
by Soo J. Yim
Without question, the September 11th terrorists' attacks marked the beginning of a new regulatory environment for the securities industry. For broker-dealers in particular, Year 2002 may serve as an official turning point, starting, as it has, with two significant regulatory initiatives from the Department of Treasury ("Treasury") to implement the anti-money laundering provisions of the PATRIOT Act.1 The first proposal seeks to regulate so-called "correspondent accounts" that broker-dealers may provide to foreign banks,2 while the second would require broker-dealers to file Suspicious Activity Reports ("SAR") with Treasury's Financial Crimes Enforcement Network ("FinCEN"). 3
As currently drafted, these proposals are expected to have far reaching implications for the securities industry. In particular, they are likely to cause many broker-dealers to re-examine the various ways in which different types of customer accounts are opened and handled, including the manner in which accounts are administered by multiple parties as a part of standard clearing or prime brokerage arrangements. Indeed, virtually all broker-dealers coming into contact, directly or indirectly, with accounts used by foreign banks to effect securities transactions may be required to incorporate the anti-money laundering provisions as a part of their day-to-day compliance program .
In this article, we first summarize the proposal relating to "correspondent accounts" and discuss its potential implications for different categories of broker-dealers, including clearing brokers and prime brokers. We then engage in a similar analysis of the second proposal relating to SAR filing. Both proposals are subject to the public comment process, presenting industry participants with opportunities for persuading Treasury to modify its proposed rules so that the final rules are better tailored to the specific businesses in which broker-dealers engage. The comment period on the "correspondent account" proposal is open until February 11, 2002. The comment period on the SAR proposal is open until March 1, 2002, with the adoption of a final rule statutorily mandated by July 1, 2002.
I. Correspondent Account Proposal
A. Overview. Many of the anti-money laundering provisions of the PATRIOT Act focus on cross-border financial transactions and seek to combat international money laundering by preventing unlawful access to the American financial system. As currently drafted, Treasury's proposed rule requires all broker-dealers registered with the Securities and Exchange Commission ("SEC")-as well as banks and other covered financial institutions-(1) to confirm that the foreign banks to which they offer "correspondent accounts" are not shell banks and are not using their U.S. correspondent accounts to provide services to shell banks; and (2) to obtain specific information regarding the ownership of, and the name and address of the agent for service of process in the United States for, their foreign correspondent banks.
B. Scope of Accounts. At the outset, it is important to note how broadly the proposed rule applies. It covers any "correspondent account" established, administered or maintained by a covered financial institution for a foreign bank.4 The term "correspondent account" is broadly defined in the statute; as applied to banks, it covers any "account established to receive deposits from, make payments on behalf of a foreign financial institution, or handle other financial transactions related to such institution."5
Treasury has taken the position that in order to "maintain parity" between banks and broker-dealers, the correspondent account definition should apply equally broadly to broker-dealers. For example, the term "correspondent account" would include the following types of customer accounts provided by a broker-dealer:
Accounts to buy, sell, hold, and lend securities either in a proprietary account or an omnibus account for trading on behalf of a foreign bank's customers on a fully disclosed or non-disclosed basis;
Prime brokerage accounts for foreign banks;
Accounts for foreign banks for trading foreign currency; and
Various forms of custody accounts for foreign banks.
Indeed, as proposed, practically any account that a broker-dealer offers to a foreign bank would be considered a correspondent account subject to the rule's requirements. Treasury has requested comment on the scope of this definition. Specifically, it has asked whether certain types of accounts might pose such minimal money laundering risks that they should be excluded from the definition of a correspondent account. Treasury also has asked whether the inclusion of certain accounts in the definition would have adverse business consequences.
C. Shell Bank Provisions. Under the proposed rule, a broker-dealer must ensure that each foreign bank to which it provides a correspondent account (1) is not a shell bank; and (2) is not using the U.S. account to provide services to any shell banks.6 A broker-dealer that fails to obtain the necessary information from a foreign bank would be required to close its correspondent account with that bank. Note the foregoing restrictions against dealing with shell banks would not be applicable to foreign shell banks that are "regulated affiliates." Under the proposed rule, regulated affiliates are defined as affiliates of a depository institution, credit union, or foreign bank that are subject to supervision and examination by a banking authority in the country regulating the depository institution, credit union or foreign bank.
D. Foreign Bank Ownership Information. The proposed rule requires broker-dealers to obtain information and maintain records regarding the "owners" of each foreign bank to which they provide a correspondent account. Broker-dealers also must obtain the name and address of a person who resides in the United States and is authorized to accept service of legal process on behalf of the foreign bank.
Treasury proposes that the term "owner" include those capable of exercising substantial power over the foreign bank, consisting of the following:
A "Large Direct Owner" is a person who or an entity that (A) has a 25% or greater voting interest in the foreign bank or (B) controls the election of a majority of the bank's board of directors or other ruling body. Broker-dealers must obtain the identity of each Large Direct Owner.
A "Small Direct Owner" is a person who or an entity that has less than a 25% voting interest in the foreign bank. In general, broker-dealers need not know the identities of Small Director Owners, except as specified.
An "Indirect Owner" is a person who or an entity that (A) has a 50% or greater voting interest ("majority ownership") in any Large Direct Owner of the foreign bank (or in a chain of majority owners) and is not, in turn, majority owned by some other person or (B) has a majority ownership of two or more Small Direct Owners that together own 25% or greater voting interest in the foreign bank and is not, in turn, majority owned by any other person. Broker-dealers must know the identities of all Indirect Owners.
E. Model Certification Forms. The proposed rule does not prescribe the method by which broker-dealers obtain the requisite shell bank status and ownership information from a foreign bank to which they offer a correspondent account. Treasury, however, has provided a model certification form that may be sent by broker-dealers to the foreign bank for the foreign bank to complete. Use of the certification form would provide a "safe harbor" for purpose of compliance with the relevant statutory and regulatory requirements.
As a practical matter, almost all covered financial institutions, including broker-dealers, are expected to rely on the Treasury supplied certification form. The certification must be signed on behalf of the foreign bank by an individual who attests (i) that he or she has "read and understands" the certification; (ii) that the information contained in it is "true and correct;" and (iii) that he or she understands that the statements in the certification may be provided to the U.S. government for purpose of fulfilling official U.S. government functions. Treasury also mandates periodic verification and updating; at least once every two years, a covered financial institution must verify the information previously provided by the foreign bank. The proposed rule includes a "re-certification" form that may be used for this purpose.
F. Service of Summons of Subpoena. The government may subpoena records from a foreign bank that maintains a correspondent account with a broker-dealer and request records from that foreign bank related to the correspondent account, including deposit records of the foreign bank that are maintained outside the United States. If the foreign bank does not respond to the subpoena, the broker-dealer must terminate the correspondent relationship within 10 days. Failure to do so could result in a substantial civil penalty (of up to $10,000 per day) for the broker-dealer.
G. Compliance Deadlines. If a broker-dealer currently provides a correspondent account to a foreign bank, it must request all of the required information from the foreign bank within 30 days after the publication of a final rule and obtain the information within 90 days after such publication; failure to do so would mean that the broker-dealer must close that account. However, broker-dealers would be well advised to act more promptly-Treasury has made it clear that it expects all covered financial institutions immediately to cease providing correspondent accounts to any foreign bank that they have reason to know is a shell bank.
H. Potential Implications. Given the sweeping definition of what constitutes a "correspondent account," the proposed rule, if adopted in its current form, would have a substantial impact on existing account relationships and related arrangements found in the securities industry. It would affect a wide range of different customer accounts, causing many broker-dealers to re-examine various ways in which different types of customer accounts are opened and handled.
Clearing Brokers. Broker-dealers that clear for introducing brokers on a fully disclosed basis should anticipate that their clearing business will be affected by the proposed rule. Under the proposed rule, if an introducing broker opened a brokerage account for a foreign bank, both the introducing broker and its clearing broker carrying the account would be deemed to be providing correspondent accounts. It is not clear to what extent compliance with the proposed anti-money laundering requirements may be allocated between the introducing broker and its clearing broker.
Prime Brokers. Treasury has specifically identified a prime brokerage account provided to a foreign bank as a correspondent account. It is unclear, however, if an account established by an executing broker in the name of the prime broker for the benefit of the foreign bank would also qualify as a correspondent account and, if so, whether and how the prime broker and the executing broker (and potentially, the executing broker's clearing broker) might allocate the regulatory responsibility for complying with the proposed requirements.
Mutual Fund Accounts. A number of broker-dealers allow their customers to purchase mutual fund shares through accounts that are held directly with mutual funds, rather than through standard brokerage accounts. Although mutual fund companies are not subject to Treasury's correspondent account proposal, it is unclear whether these accounts, if used by a foreign bank for its own behalf or on behalf of its customers, could be viewed as a type of correspondent account offered by the broker-dealer, given its role as the "broker of record" for the transaction.
Wrap and Other Managed Accounts. Treasury has indicated that various custody accounts provided by broker-dealers to foreign banks would qualify as correspondent accounts. A number of investment advisory services entail establishing custody arrangements with broker-dealers. For example, a "wrap program" is typically centered around a broker-dealer that has accounts of the participating customers separately opened and identified on its books. Again, it is unclear whether a wrap program or any investment managed account service provided by a broker-dealer to a foreign bank for the benefit of the foreign bank's customers would give rise to a correspondent account.
Foreign Bank Affiliates of Domestic Broker-Dealer. Accounts held by U.S. broker-dealers in the name of their foreign bank affiliates meet the definition of correspondent account in the proposed rule. Thus, the domestic broker-dealer will be required to collect and maintain ownership information related to their affiliates. Further, the U.S. government may subpoena the foreign bank for records related to the account. If the foreign bank does not respond, the U.S. broker-dealer must sever the correspondent relationship. This dramatically increases the U.S. government's leverage over foreign banks with U.S. affiliates. It also puts the foreign bank in a very difficult position, especially where there are privacy laws restricting the production of the subpoenaed documents in the jurisdiction where the foreign bank affiliate is located.
Outstanding Obligations Due from Foreign Correspondent Banks. A U.S. broker-dealer that has outstanding contracts with a foreign correspondent bank in an account at the U.S. broker-dealer may be at risk in the event the U.S. government delivers a notice to the broker-dealer requiring that it terminate the relationship within 10 days. U.S. broker-dealers may want to review the default provisions in agreements with foreign correspondent banks to ensure that the broker-dealer may close-out any contracts in the event the broker-dealer receives a notice to terminate the relationship.
II. Broker-Dealer SAR Proposal
A. Background. Treasury has long promised that it would extend the existing SAR regime (currently applicable to banks and their affiliates) to all broker-dealers; for one reason or another, however, it never issued a rule requiring broker-dealers to file SARs with FinCEN. Section 356 of the PATRIOT Act finally forced Treasury's hand, mandating that a final rule be promulgated by July 1, 2002. Under the proposed rule, broker-dealers must report suspicious transactions to FinCEN on a new form entitled "Suspicious Activity Report—Brokers or Dealers in Securities ("SAR-BD"), which will be separately released in draft form for public comment. In general, the substance of the proposed rule closely tracks the existing SAR requirements that apply to banks; as such, there appears to be little in the rulemaking that is wholly unexpected.
B. Scope. The proposed rule applies to all broker-dealers registered or required to be registered with the SEC, including insurance broker-dealers whose business is limited to the sale of variable annuity products. It also appears to apply to bank-affiliated broker-dealers, which are currently subject to the bank SAR rules. Treasury notes: "It is anticipated that, when this proposed rule becomes effective, the federal bank supervisors will amend or repeal, as appropriate, any duplicative suspicious activity reporting requirements for [bank-affiliated] broker-dealers."
C. Reporting Requirements. The proposed rule requires reporting of suspicious transactions that are "conducted or attempted by, at or through" a broker-dealer that involve at least $5,000 in funds or assets.7
A transaction should be reported by a broker-dealer where the broker-dealer knows or suspects that the transaction involves any federal criminal violation committed or attempted against or through a broker-dealer, or where the broker-dealer "knows, suspects, or has reason to suspect" that the transaction (i) involves funds derived from an illegal activity, or was conducted in order to disguise funds or assets derived from illegal activity, (ii) was designed to evade the requirements of the Bank Secrecy Act, or (iii) appears to serve no business or apparent lawful purpose or is not of a type in which that particular customer would be expected to engage.
FinCEN has provided a number of examples in which the facts would suggest that a report should be filed under the proposed rule, including the following:
Frequent and large-scale use of wire transfer facilities with nominal or nonexistent securities transactions;
A refusal to provide information necessary for the broker-dealer to make reports or keep records required by law;
The provision of false information;
Attempts to change or cancel a transaction after learning of currency transaction reporting or information verification or recordkeeping requirements;
Attempts to transmit or receive funds in a manner that disguises the country of origin or destination, or the identity of any of the parties; or
Repeated use of an account as a temporary storage place for funds from multiple sources without a clear business purpose for such use..
D. Exceptions. The proposed rule sets out two exceptions to the new reporting requirements. First, broker-dealers need not file a SAR-BD to report lost, stolen, missing, or counterfeit securities. Broker-dealers instead will continue to report such incidents under existing SEC rules. Second, a SAR-BD does not need to be filed to report a violation of federal securities laws or rules of a self-regulatory organization by an employee or other registered representative of the broker-dealer (unless it is a possible violation of the currency and foreign transactions reporting and recordkeeping requirements).
E. Non-Disclosure & Civil Liability Safe Harbor. The proposed rule prohibits both the disclosure of information (except to law enforcement and regulatory agencies) filed in a SAR-BD and disclosure of the fact that a transaction was reported. This prohibition applies regardless of whether the report was filed voluntarily or was required under the rule. The proposed rule provides protection from liability for reporting suspicious transactions and for failing to disclose that a transaction has been reported. This safe harbor applies to reports that were voluntarily made as well as reports that were required to be filed. The proposed rule also clarifies that the safe harbor applies to arbitration proceedings.
F. Potential Implications. A determination as to whether a SAR-BD will need to be filed will require knowledge of the facts and circumstances relating to each customer of a broker-dealer. As a practical matter, this means that each broker-dealer would be required to have appropriate "know their customers" (KYC) procedures in place so that the broker-dealer can discern "red flags" indicative of activities and transactions that require reporting. Indeed, the development of such procedures should be a major component of a comprehensive anti-money laundering program that all broker-dealers will be required to implement under Section 352 of the PATRIOT Act.8 As with the correspondent account proposal, the broker-dealer SAR filing requirement is expected to affect a wide range of different customer accounts.
Clearing Brokers. Under the proposed rule, a clearing broker is not exempt from the SAR filing requirement with respect to customers of an introducing broker for whom it clears. Indeed, for some of the "red flags" identified by FinCEN (e.g., unusual wire transfers), a clearing broker arguably would be in the best position to detect any suspicious activity. Moreover, it is unclear to what extent, if any, a clearing broker would be required to review transaction data across customer accounts at multiple introducing brokers, where the clearing broker somehow has a reason to know that such accounts are controlled by a single customer.
Prime Brokers. Similar to clearing brokers, a prime broker is responsible for handling customer funds and securities, while customer orders may be executed away from the prime broker. While the suitability concepts imposed under the SRO rules may be allocated to the executing broker for regulatory compliance purposes, it appears reasonably clear that the prime broker would not be exempt from the SAR filing requirement with respect to an unusual movement of funds and securities initiated by any customer through the prime brokerage account.
Online Brokerage Accounts. The fact that an online brokerage firm does not solicit any customer orders or make any recommendations for the purchase or sale of a security does not mean that it would be exempt from the SAR filing requirement. Because the KYC procedures called for by an anti-money laundering program do not hinge on whether or not a broker-dealer has made an investment recommendation, even an online brokerage firm should have an appropriate compliance program in place to prevent the firm from being used by potential money launderers.
Investment Advisory Services. The proposed rule does not provide any guidance on what information a broker-dealer should review in order to determine what is an unusual or suspicious activity. For example, it is unclear if a broker-dealer who is dually registered as an investment adviser must review all customer information potentially available to the firm, regardless of whether such information is obtained in the context of providing brokerage account services or investment advisory services. To the extent that there are "information barriers" (or a Chinese Wall) separating the broker-dealer operations from the investment-advisory operations within one legal entity, it is unclear if information should be shared across such barriers for the SAR filing purposes.
III. Conclusions
In many respects, Treasury's new anti-money laundering initiatives demonstrate the difficulties of promulgating one common set of rules to cover all participants in the financial services industry. As compared to banks, the broker-dealer industry shows a higher degree of specialization that reflects an increasing trend toward "unbundling" of services in the delivery of investment goods and services. Indeed, a vast majority of some 6,000 broker-dealers registered with the SEC consist of small, boutique firms that have entered into various contractual relationships with other broker-dealers for the provision of key services, such as trade execution, clearance and settlement. In the coming months, Treasury will face a steep learning curve, as representatives from the securities industry are expected to voice their concerns regarding how the proposed anti-money laundering rules would affect the day-to-day operation of broker-dealers.
http://www.cybersecuritieslaw.com/wslawyer/yim.htm
Automated Detection of Online Securities Scams
ASIC Reportedly Has Launched Research Project To Automate Detection of Online Securities Scams
On February 3, the Australian Securities and Investments Commission launched what is said to be the "largest language technology research project ever initiated in Australia" to develop an automated system to detect online securities scams. The initiative, called ScamSeek, reportedly will constantly search for Web sites that involve securities scams and will match information gleaned from such sites against public and private databases and alert authorities to sites that require further analysis.
Internet scams will be easier to detect thanks to a new automatic web classification system being developed by the Australian Securities and Investments Commission (ASIC).
ASIC today launched a $1 million joint research project with the Capital Markets Cooperative Research Centre (CMCRC), the University of Sydney and Macquarie University to develop the system.
ASIC said it was the largest language technology research project ever initiated in Australia.
"The internet represents enormous opportunities for scams and rip-off artists," ASIC director of electronic enforcement Keith Inman said.
"The system we are developing through this joint project will be an eye that never sleeps, constantly seeking out sites that we can take action against.
ScamSeek will be able to determine potential risk by scanning entities against public and private databases.
It will also be able to assess the risk associated with information on a website, identify people and companies mentioned and mark sites that are above the acceptable risk threshold for further analysis.
Ex-Ill. Governor Ryan to Be Arraigned
By MAURA KELLY Associated Press Writer
CHICAGO (AP) - For months, former Gov. George Ryan has deflected questions about a corruption probe surrounding his tenure as secretary of state and governor. Now, prosecutors are demanding answers.
Ryan, 69, was scheduled to appear in federal court Tuesday to answer charges of racketeering conspiracy, mail fraud, tax fraud, filing false tax returns and making false statements.
Ryan was expected to enter a plea of innocent at his arraignment.
The indictment is the latest in the government's 5 1/2-year Operation Safe Road investigation of corruption under Ryan that began as an inquiry into bribes paid for drivers licenses.
The 22-count indictment that could send Ryan to prison for many years alleges that Ryan took payoffs, gifts and vacations in return for letting associates profit off state contracts and leases.
Ryan, a Republican who served as secretary of state from 1991 to 1999 and governor from 1999 to January, has said he knew there was a culture of corruption in the secretary of state's office but was unaware of the specifics.
Ryan became the 66th person charged in the investigation and the fourth former Illinois governor to be indicted by a federal grand jury in as many decades.
Outside Illinois, Ryan is best known as an ardent critic of the way capital punishment is carried out. He declared a moratorium on executions in Illinois after it was discovered that 13 wrongfully convicted men had been sent to death row.
In January, just before leaving office, he cleared out Illinois' death row, pardoning four condemned prisoners and commuting the death sentences of 167 others to life in prison.
The scandal was a factor in his 2001 decision not to seek a second term, and his unpopularity was considered a major reason GOP candidates were routed statewide in 2002, including the election of a Democratic governor for the first time since 1972.
http://news.findlaw.com/ap_stories/other/1110/12-23-2003/20031223001505_07.html
www.citizen.org
www.eff.org
www.epic.org
www.johndoes.org
www.casp.net
www.cybersecuritieslaw.com
Q&A on the Pentagon's "Total Information Awareness" Program
What is the Total Information Awareness (TIA) Program?
TIA may be the closest thing to a true "Big Brother" program that has ever been seriously contemplated in the United States. It is based on a vision of pulling together as much information as possible about as many people as possible into an "ultra-large-scale" database, making that information available to government officials, and sorting through it to try to identify terrorists. Since the amount of public and private information on our lives is growing by leaps and bounds every week, a government project that seeks to put all that information together is a radical and frightening thing.
Who runs the program?
TIA is run by the Defense Advanced Research Projects Agency (DARPA), a branch of the Department of Defense that works on military research. It is headed by John Poindexter, the former Reagan-era National Security Adviser known for his involvement in the Iran-Contra scandal, who famously said that it was his duty to withhold information from Congress.
Is this program unique?
No. There is another effort underway that could bring about a similar result: an airline profiling system called CAPS II. CAPS II would collect massive amounts of information about the tens of millions of American who fly each year and use that information to create profiles. Its use in the airline context gives it a lot more surface appeal, and it has been presented in a far less threatening manner, but it is based on the same faulty premise that terrorism can be prevented by collecting hoards of information about everyone and then subjecting them to a virtual dragnet.
How much information would be available to the program?
Virtual dragnet programs like TIA and CAPS II are based on the premise that the best way to protect America against terrorism is to for the government to collect as much information as it can about everyone - and these days, that is a LOT of information. They could incorporate not only government records of all kinds but individuals' medical and financial records, political beliefs, travel history, prescriptions, buying habits, communications (phone calls, e-mails and Web surfing), school records, personal and family associations, and so on.
In the last decade we have witnessed an enormous explosion in the amount of tracking and information of individuals in the United States, due mainly to two factors:
Technology. The explosion of computers, cameras, location-sensors, wireless communication, biometrics, and other technologies is making it a lot easier to track, store, and analyze information about individuals' activities.
The commercialization of data. Corporations in recent years have discovered that detailed information about consumers is extremely valuable, and are in the process of figuring out how to squeeze every available penny out of this revenue source. That is why consumers are increasingly being asked for their information everywhere they turn, from product registration forms to loyalty programs to sweepstakes entry forms. As a result, private sector incentives are now aligned with the interests of those in government who wish to track everyone's behavior. The government has not been shy about buying that data, and it is envisioned as a primary source for the TIA database.
The information that is generated and retained about our activities is becoming so rich that if all that information about us was put together, it would almost be like having a video camera following us around. Programs like TIA would make such "data surveillance" a reality.
What is wrong with the TIA Program?
There are five major problems with the concept behind programs like "Total Information Awareness" and CAPS II:
It would kill privacy in America. Under this program, every aspect of our lives would be catalogued and made available to government officials. Americans have the right to expect that their lives will not become an open book when they have not done, and are not even suspected of doing, anything wrong.
It harbors a tremendous potential for abuse. The motto of the TIA program is that “knowledge is power,” and in fact the keepers of the TIA database would gain a tremendous amount of power over American citizens. Inevitably, some of them will abuse that power. An example of the kind of abuses that can happen were chronicled in a July 2001 investigation by the Detroit Free Press (and December 2001 followup): the newspaper found that police officers with access to a database for Michigan law enforcement had used it to help their friends or themselves stalk women, threaten motorists, track estranged spouses – even to intimidate political opponents. Experience has shown that when large numbers of Americans challenge the government’s policy (for example in Vietnam), some parts of the government react by conducting surveillance and using it against critics. The unavoidable truth is that a super-database like TIA will lead to super-abuses.
It is based on virtual dragnets instead of individualized suspicion. TIA would represent a radical departure from the centuries-old Anglo-American tradition that the police conduct surveillance only where there is evidence of involvement in wrongdoing. It would seek to protect us by monitoring everyone for signs of wrongdoing - by instituting a giant dragnet capable of sifting through the personal lives of Americans. It would ruin the very American values that our government is supposed to be protecting.
It would not be effective. The program is based on highly speculative assumptions about how databases can be tapped to stop terrorism, and there are good reasons to suspect that it would not work at all (see below).
It fails basic balancing tests. The benefits of this program in stopping terrorism are highly speculative, but the damage that it would do to American freedom is certain.
Why would TIA be ineffective?
There is no question that if government agents track the lives and activities of everyone, they will probably experience some marginal improvement in their ability to stop terrorism - though even a perfect totalitarian society could not stop every attack (the Nazis were unable to stop attacks by the Resistance in France and other occupied nations during World War II, for example). And there is no question that many other, more direct steps that the U.S. is taking will significantly improve our security. The real question is how much additional safety would a TIA program bring us over and above all the other steps we're taking (tightened borders, improved overseas intelligence, increased airport security, etc).
There is good reason to think the answer is: not much at all. Some versions of TIA described by Defense officials are based on the dubious premise that "terrorist patterns" can be ferreted out from the enormous mass of American lives using techniques known as "data mining" that try to identify hidden patterns in large masses of data. What attracts proponents of this scheme is that data mining has proven very successful in some commercial contexts, such as the discovery of suspicious spending patterns that indicate credit card fraud. The problem is that in order to be effective, data miners need an enormous amount of sample data to work from. Credit card companies experience a vast amount of fraud, which allows them to go back and find patterns of behavior that are associated with it. But as horrific as the 9/11 attacks were, there have been very few overall incidents of terrorism within the United States in the recent past, so it is difficult to understand how these programs will be able to identify true patterns of suspicious behavior, and easy to imagine how they will simply end up reflecting the beliefs and prejudices of their programmers about what that behavior looks like (and there's no need to sift through data about millions of citizens to do that).
A debate appears to be underway within government over the utility of data mining to fight terrorism. Publicly, TIA officials have recently said that they never intended to carry out such data mining. Even their more modest descriptions of what TIA would do, however, are of questionable effectiveness and would devastate privacy. (See the May 2003 ACLU report on the questions TIA must answer for Congress: Total Information Compliance.)
In fact, a program like TIA could actually reduce our security by draining resources from more effective measures like improved collection of on-the-ground foreign intelligence.
In the wake of the September 11 attacks, numerous intelligence experts declared that the government’s problem was a failure to sift targeted intelligence information from the masses of useless data. The TIA solution to that problem would be to exponentially increase the amount of junk data that the government collects. You don’t find a needle in a haystack by bringing in more hay.
If TIA is implemented, it will probably fail at preventing the next terrorist attack. But once created, that kind of failure is unlikely to lead to the program being shut down. Instead, it will probably just spur the government into an ever-more furious effort to collect ever-greater amounts of personal information on ever-more people in a vain effort to make the concept work. We would then have the worst of both worlds: poor security and a super-charged surveillance tool that would destroy Americans' privacy and threaten our freedom.
What can I do to help stop this program?
There are at least four things you can do to help stop the blatantly un-American goal of "Total Information Awareness"
Educate yourself about this program and tell your friends about it.
Use the ACLU's "Action Alert" page to send a free and easy fax to President Bush asking him to pull the plug on this research.
Let your member of Congress know how you feel (locate your member here and check out tips on writing your elected representatives.
Support the ACLU's efforts to fight this program by joining us.
For more on TIA see the ACLU analysis: Is the Threat From TIA "Overblown"? and the ACLU Report Total Information Compliance.
http://www.aclu.org/Privacy/Privacy.cfm?ID=13652&c=130
Defunct Big Brother Spying Program Resurfaces as “Little Brother” in Seven States
NEW YORK—The American Civil Liberties Union today filed simultaneous state “Freedom of Information Act” requests in Connecticut, Michigan, New York, Ohio and Pennsylvania about those states’ participation in the new “MATRIX” database surveillance system. It also released an Issue Brief explaining the problems with the program, which also operates in Florida and Utah.
“Congress killed the Pentagon’s ‘Total Information Awareness’ data mining program, but now the federal government is trying to build up a state-run equivalent,” said Barry Steinhardt, Director of the ACLU’s Technology and Liberty Program.
“In essence, the government is replacing an unpopular Big Brother initiative with a lot of Little Brothers,” he added, noting that the program is receiving $12 million from the Departments of Justice and Homeland Security. “What does it take for the message to get through that government spying on the activities of innocent Americans will not be tolerated?”
The ACLU’s requests, which were filed under individual states’ open-records laws, come on the heels of a federal Freedom of Information Act request it filed October 17. A similar request was also filed in Florida, where the program originated. The goal of the requests is to find out what information sources the system is drawing on – information program officials have refused to disclose – as well as who has access to the database and how it is being used.
According to Congressional testimony and news reports, The Matrix (which stands for “Multistate Anti-Terrorism Information Exchange”) creates dossiers about individuals from government databases and private-sector information companies that compile files on Americans’ activities for profit. It then makes those dossiers available for search by federal and state law enforcement officers. In addition, Matrix workers comb through the millions of files in a search for “anomalies” that may be indicative of terrorist or other criminal activity.
While company officials have refused to disclose details of the program, according to news reports the kind of information to be searched includes credit histories, driver’s license photographs, marriage and divorce records, Social Security numbers, dates of birth, and the names and addresses of family members, neighbors and business associates.
Raising even more issues, the Matrix is operated by a private company, Seisint Inc. of Boca Raton, Florida. Ironically, the company’s founder was forced to resign after information about his own past came to light: according to Florida police, he was formerly a drug smuggler who had piloted multiple planeloads of cocaine from Colombia to the U.S.
“Members of Congress who voted to close down TIA in the belief that they were ending this kind of data mining surveillance must demand more information about The Matrix,” said Steinhardt. “And then they should shut it down too.”
Copies of the ACLU’s state and federal FOIA requests as well as the Issue Brief about The Matrix are online at http://www.aclu.org/Privacy/Privacy.cfm?ID=14240&c=130, and can also be accessed at www.aclu.org/privacy.
A special Web feature about the defunct TIA program is online at http://www.aclu.org/Privacy/Privacylist.cfm?c=130.
http://www.aclu.org/Privacy/Privacy.cfm?ID=14257&c=130
The United States is at risk of turning into a full-fledged surveillance society. There are two simultaneous developments that are behind this trend:
The tremendous explosion in surveillance-enabling technologies. George Orwell’s vision of “Big Brother” has now become technologically possible.
Even as this technological surveillance monster grows in our midst, we are weaking the legal restraints that keep it from trampling our privacy.
The good news is that the drift toward a surveillance society can be stopped. Unfortunately, right now the big picture is grim.
http://www.aclu.org/Privacy/Privacy.cfm?ID=14240&c=130&cfnocache=true
www.citizen.org,
www.eff.org,
www.epic.org,
www.johndoes.org,
www.casp.net,
www.cybersecuritieslaw.com,
cyber.findlaw.com/expression/censorship.html
Internet Free Speech
Cases Litigated By Public Citizen's Litigation Group
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Right to Speak Anonymously
Right to Identify Company Criticized by Name
Liability of Gripe Site Operator for Violations by Message Board Speakers
Use of Brand Name in Domain Names and Metatags
Legal Perils and Legal Rights of Internet Speakers (Outline of Speech by Paul Alan Levy)
Miscellaneous
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Right to Speak Anonymously
Dendrite International v. Does 1 through 14
Company providing and servicing software for the pharmaceutical industry sued four anonymous posters, two of them current or former employees, alleging defamation, disclosure of trade secrets, and breach of employment contract. Public Citizen filed an amicus brief in support of opposition by two posters to subpoena to Yahoo! After Court entered order protecting these two posters, the company appealed denial of subpoena regarding one of the posters.
Memorandum of Public Citizen as Amicus Curiae in Opposition to the Requested Discovery, July 11, 2000
Decision of Superior Court of New Jersey, Chancery Division, November 23, 2000
Brief on Appeal of Amici Curiae Public Citizen and the ACLU of New Jersey -- March 29, 2001
Decision of the Appellate Division of the New Jersey Superior Court -- July 11, 2001 -- PDF
Comments of Paul Alan Levy on the July 11, 2001 Decision of the New Jersey Superior Court
Donato v. Moldow
Brief as amicus curiae argues that even if anonymous Internet speakers do not appear in court through counsel to object to a motion by public officials seeking to identify them, the court has an independent duty to ensure that the plaintiff has a strong enough case to justify overriding their free speech rights. Brief also argues that citizen who runs web site cannot be held liable for allegedly defamatory or harassing messages posted by other persons on his web site's message board.
Equidyne Corp. v. Doe
Equidyne Corporation sued several anonymous posters alleging that, in violation of their employment agreements, they posted confidential inside information on the Raging Bull and Yahoo! message boards about Equidyne. After one of the Does, Aeschylus_2000, moved to quash arguing that he was not an employee, Equidyne changed theories and argued that, by urging viewers to give their proxies to a recently announced slate of challengers for the company's board, Aeschylus has violated the SEC's proxy rules both by not disclosing his identity, his shareholdings, and similar data, and by supporting a slate that has itself not complied with the disclosure rules. The district judge agreed to apply a standard similar to the one adopted by the New Jersey courts in Dendrite v. Doe, but found that Equidyne had shown a prima facie case under federal securities laws, and that the prima facie case did not include a showing of actual damages. Our amicus brief urges the Third Circuit to adopt New Jersey's Dendrite standard, to require trial judges to observe the Dendrite procedures more scrupulously, and to send the case back for more careful consideration of whether disclosure is proper under that rule
Equidyne Amicus Brief - June 17, 2003
Hollis-Eden Pharmaceuticals, Inc. v. Does
Pharmaceutical company sued several anonymous message board posters who expressed opinions critical of its corporate leadership and marketing efforts. Public Citizen has moved to quash the subpoena and to dismiss the suit as one designed to suppress free speech.
Memorandum in Support of Motion to Strike
Reply Memorandum in Support of Motion to Strike
Court's Ruling on Special Motion to Strike and Motion to Quash Subpoena -- March 20, 2001 (PDF File)
Hritz v. Doe
First Amendment defense against attempt by company official to identify an anonymous Message Board critic
Brief
Brief defending the removal of a pre-litigation petition for discovery of the identity of an anonymous speaker.
iXL Enterprises v. Doe
Suit by company alleging that one of its employees was violating his obligations by posting comments about the company on a Yahoo! message board; because plaintiff has been told that defendant is not an employee, motion to quash alleges that this is a deliberate effort to chill free speech
Motion to Quash
Recording Industry Association of America v. Verizon Internet Services
The RIAA served two subpoenas on Verizon, seeking to identify two subscribers who allegedly offered hundreds of copyrighted songs available for download through the KaZaA peer-to-peer file sharing system. RIAA invoked a provision of the Digital Millenium Copyright Act that authorizes such subpoenas. RIAA objected, and appealed from an order enforcing the subpoenas on the ground that the DMCA does not allow subpoenas where the copyrighted files remain on the subscriber's own computers, and that the law was unconstitutional because it permitted subpoenas to be issued by a court's clerk rather than requiring the copyright owner to file a lawsuit against the subscriber and seek discovery under John Doe procedures.
Public Citizen submitted an amicus curiae brief arguing that the statute incorporates the Federal Rules of Civil Procedure, which have, in turn, been construed to require notice and an opportunity to argue that the right of anonymous speech outweighs the right to identify alleged wrongdoers in particular cases. Because the statute indirectly requires notice, and because notice was in fact given and on the facts of the case the balancing test does not justify withholding the identities, Public Citizen argued that the decision should be affirmed.
Verizon Appellate Amicus Brief - May 15, 2003
Thomas & Betts Corporation v. Does 1 through 50
Memorandum of Points and Authorities in Support of Special Motion to Strike
WRNN-TV Associates v. Doe
This case was settled and the following Memorandum was never filed. The Memorandum is provided for reference purposes. The settlement agreement is posted below.
Memorandum in Support of Motion of Jane Doe to Quash Subpoena and Deposition
Settlement Agreement
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Right to Identify Company Criticized by Name
Alitalia v. Porta
Trademark suit in federal court in New York by airline seeking to suppress a web site posted atwww.alitaliasucks.comby an unhappy customer whose luggage was lost. Company has moved to for a preliminary injunction claiming that the domain name violates the new anti-cybersquatting law; defendant argues that this law was not violated and that, in any event, the First Amendment protects his speech.
Brief
Bosley v. Kremer
California company brought suit in Illinois against a California man who runs web sites devoted to the alleged misconduct of the company, as reported in various media sources and detailed in law enforcement investigations. Public Citizen moved to dismiss, arguing that there was no basis for suing in Illinois, that in any event the California anti-SLAPP statute comes to Illinois with the case, and that the defendant is entitled to use the company's name in the domain names for his web sites.
MEMORANDUM IN SUPPORT OF DEFENDANT KREMER'S MOTIONS TO DISMISS, August 21, 2001
Circuit City Stores, Inc. v. Steven C. Shane
Memorandum in Opposition to Motion for Preliminary Injunction and in Support of Motion to Dismiss
Coca Cola Company et al v. Purdy
Anti-abortion activist registered domain names using several different companies' trademarks as a way of drawing public attention to websites denouncing abortion through graphic photographs of dismembered fetuses. After he was sued, he added a small amount of content related to the companies. Public Citizen argued that, because his websites were not "about" the companies whose trademarks he was using, his use of the trademarks in the domain names could not be justified. We argued, however, that if Purdy developed content that was specific to the companies and proposed to use domain names that fairly described the contents of such websites, an injunction forbidding any domain name that did not use a critical word within the domain name could become overbroad.
Purdy Amicus Brief - February 14, 2003
Crown Pontiac v. Ballock
In this cyberspeech case, Public Citizen defended Thomas Ballock's right to criticize the Crown Pontiac car dealership. Mr. Ballock purchased a defective car from Crown and was very unhappy with Crown's response to his complaints, so he posted a gripe site on the Internet in which he used Crown's name in the domain name and text. Mr. Ballock's site clearly stated that it was not Crown's official website, but rather a site critical of Crown. Crown sued Mr. Ballock under trademark and cybersquatting laws, but was eventually forced to drop its lawsuit and pay Mr. Ballock more than $6000 for the damages he incurred from Crown's attempt to enjoin his website.
Memorandum Opinion (9/22/03)
Answer (6/10/03)
Motion to Dissolve Preliminary Injunction (6/10/03)
Falwell v. Cohn
Dismissal Order- March 2003
Brief filed in Uniform Dispute Resolution Procedure explaining why critic of Jerry Falwell is entitled to use Falwell's full name as the domain name for a web site parodying Falwell for his comments about the reasons why the September 11 bombing happened and his penchant of citing the Bible at his political opponents.
Memorandum in Support of Motion to Dismiss
Nissan Motor Co. v. Nissan Computer Corp.
A federal district judge decided that Uzi Nissan did not infringe the trademark of the Nissan auto companies by creating a web site for the Nissan Computer Company at the addresses nissan.com and nissan.net, but that the use of the domain name for ads for automaobile products was infringement, and also that use of the domain name for advertising and for ciriticism of Nissan Motor Co. diluted Nissan's trademark. As a remedy, the judge allowed Uzi Nissan to keep his domain names, but forbade him from including any advertising AND from including anything critical of Nissan Motor. Public Citizen argued, in a brief filed with the Court of Appeals for the Ninth Circuit, that once advertising was forbidden on the website it became noncommercial and hence beyond the reach of teh federal trademark laws, that, in any event, neither the First Amendment nor the trademark laws would tolerate an injunction barring use of the Nissan name in a domain name for a website that criticizes Nissan Motor.
Amicus Brief on Dilution Appeal - August 2003
Unseal Motion - August 2003
Amicus Brief- March 2003
Servicemaster, et al. v. Virga
Defendant's Memorandum in Opposition to the Motion for a Preliminary Injunction and in Support of her Motion to Dismiss
Reply brief, February 18, 2000
Taubman v. Mishkoff
A Dallas resident created a web site praising a local shopping mall, the Shops at Willow Bend, using the domain name shopsatwillowbend.com, and was sued for his trouble by the mall developer, the Taubman Company, who claimed that the web site and domain name violated its trademark in the mall's name. When the web operator created a new web site called using names like taubmansucks.com and shopsatwillowbendsucks.com to protest the wasteful litigation against him, the developer sought a preliminary injunction asking that the new sites be stricken as well.
Amicus brief of Public Citizen, 11/12/01
Argues that neither the domain name nor the web site violates Taubman's trademark rights, and in any event the First Amendment protects the web site operator's right to use these names to attack Taubman's conduct
Stay Memorandum, 1/15/02
Argues that district court's preliminary injunction against the Taubmansucks web site should be stayed because it is a prior restraint on defendant's non-commercial criticism of the plaintiff, its lawyers, and the trial judge's decisions, and because the trademark laws do not regulate the use of a trademarked name to identify the subject of Internet criticism
Decision granting the stay sought in the foregoing brief, 3/11/02
Memorandum in Support of Defendant's Motion for Summary Judgment, 3/15/02
Motion for summary judgment on all claims against both the "gripe" site and the underlying fan site for a Texas shopping mall.
TMI, Inc. v. Maxwell
Brief for Defendant Appellant - July 31, 2003
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Liability of Gripe Site Operator for Violations
by Message Board Speakers
Northwest Airlines, Inc. v. Teamsters Local 2000, et al.
Memorandum in Support of Motion to Dissolve Temporary Restraining Order Against Individual Defendants Ted Reeve and Kevin Griffin, 1/19/2000
Memorandum in Support of Mandamus or Summary Reversal, 1/31/00
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Use of Brand Names in Domain Names and Metatags
Pacifica Web Sites -
Pacifica Foundation threatened trademark litigation against several groups that used its name in domain names for web sites that criticized actions of foundation leadership in suppressing dissent on its radio stations, but withdrew the threat in the face of Public Citizen's explanations of why such law suits could not succeed.
Letter from Public Citizen to Pacifica Counsel
Paccar v. Telescan - Trademark suit by manufacturer against retailer who sells manufacturer's goods on its web site.
Amicus Curiae Brief - argues that because the brand names properly describe the subject of the retailer's web pages, they may fairly be used in domain names and meta tags for those web pages.
Miscellaneous
SIU v. Swanson
Plaintiff, the Seafarers International Union, and its lawyers sought a temporary injunction preventing Robert Swanson from criticizing either the Union or the Paul McAndrew Law Firm on his website. The District Court for Clinton County, Iowa denied the injunction as to the Union, but granted it on behalf of the law firm. Public Citizen moved for interlocutory review of the injunction, which constitutes an unconstitutional prior restraint granted on behalf of a non-party to the lawsuit.
Interlocutory Appeal Petition - December 22, 2003
Interlocutory Appeal Brief - December 22, 2003
http://www.citizen.org/litigation/briefs/IntFreeSpch/articles.cfm?ID=5801
E. Van Cullens v. John Doe
John Doe is an anonymous poster to two Internet message boards who made two statements critical of a publicly-traded company currently run by Plaintiff Cullens. In an effort to prevent Doe from further posting his opinions about the company on the Internet, Cullens filed a libel suit against Doe in Illinois and asked a California court to force disclosure of Doe's identity. Doe has sought to quash and strike the subpoena, asking the court to grant Doe protection under California's Anti-SLAPP statute. This would force Cullens to establish a probability of success on each of his claims, and if he cannot, would award attorneys fees and costs to Doe.
At issue: Whether California court processes allow the mere allegation of defamation to trump First Amendment right to anonymous online speech.
EFF Role: Representing Doe in defense of California subpoena along with Charles Lee Mudd Jr., counsel for Illinois portion of action.
Court Documents
Motion of Quash PDF 4.6M
Motion to Strike PDF 1.5M
Declaration of Cindy Cohn in Support of Motion to Quash PDF 679k
Notice of Motion to Quash PDF 417k
Notice of Motion to Strike PDF 485k
Illinois Case Documents
Memorandum for Motion to Dismiss PDF 200K
Motion to Dismiss PDF 176K
http://www.eff.org/Privacy/Anonymity/Cullens_v_Doe/
SEC Adopts Disclosure Rules On Nominating Committee Processes And Shareholder Communication With Board
Disclosure Regarding Shareholder Communication with the Board of Directors
On November 19, 2003, the U.S. Securities and Exchange Commission adopted new rules that it believes will "grant security holders greater access to the nomination process and greater ability to exercise their rights and responsibilities as owners of their companies." These new rules are effective for proxy or information statements sent to shareholders after January 1, 2004 and periodic reports filed with the SEC after January 1, 2004, even if filed before a 2004 proxy statement is released.
Disclosure Regarding Nominating Committee Processes
Current SEC rules require each company to disclose in its proxy statement whether it has a standing nominating committee or a committee performing similar functions, and, if the company does not have a nominating committee, the reasons why the board chose not to have such a committee. Under the recently adopted New York Stock Exchange corporate governance listing standards, each NYSE-listed company will be required to have a nominating committee composed entirely of independent directors by the earlier of its first annual meeting after January 15, 2004, or October 31, 2004. Even though Nasdaq decided not to require its listed companies to have a nominating committee, we recommend that all Nasdaq-listed companies also establish a nominating committee composed entirely of independent directors.
The new SEC rule will require additional disclosure in proxy statements of information about the company's director nomination process. Companies must make the following disclosures in each proxy statement covering the election of directors:
If the company does not have a nominating committee, it must disclose the reasons why the board believes it appropriate not to have such a committee and identify each director who participates in considering nominees. For purposes of the new SEC rule, whatever group of directors (including the entire board, if applicable) participates in the selection of nominees is treated as a nominating committee. Thus, all companies must provide the information required by the new SEC rule.
If the nominating committee has a charter, the company must indicate whether a copy is available to shareholders on the company's website. If the charter is available on the company's website, the company also must disclose the website address. If the charter is not available on the company's website, the charter must be included as an appendix to the company's proxy statement at least once every three years. If a current copy of the charter is not available on the company's website and is not included as an appendix to a particular company's proxy statement, the company must identify the prior proxy statement that included the charter. If the nominating committee does not have a charter, the company must so state.
The recently adopted NYSE listing standards require that each listed company adopt a written charter for its nominating committee to define the committee's basic purpose and responsibilities. We recommend that all public companies, whether listed on the NYSE or Nasdaq, adopt a written charter for the nominating committee. Although not required by the new SEC rules, we recommend that the charter be available on each company's website, as well as included as an appendix to the proxy statement at least once every three years.
We suggest that each public company include the information required by the new SEC rules (as discussed below) in its nominating committee's charter. This is particularly true for Nasdaq-listed companies because they are not required to adopt corporate governance guidelines.
The company must disclose whether the members of its nominating committee are independent, as defined in the applicable listing standards.
The NYSE's new listing standards now require that each listed company have a nominating committee composed entirely of independent directors. We recommend that all public companies have nominating committees composed entirely of independent directors.
If a company has a nominating committee but is not NYSE or Nasdaq listed, it must disclose whether the nominating committee members are independent, as defined by the NYSE, Nasdaq, or another national securities exchange of the company's choice, with the chosen definition disclosed in the proxy statement. Thereafter, the company must apply the chosen independence standard consistently from year to year, and the company must use the same standard to determine the independence of its audit committee and nominating committee members.
If the nominating committee has a policy regarding consideration of director candidates recommended by shareholders, the company must disclose the material elements of that policy, the procedure shareholders must follow to submit candidates, and whether the committee will consider directors recommended by shareholders. If the nominating committee does not have a policy, the proxy statement must include a statement of that fact and a statement of the basis for the board's view that it is appropriate for the company not to have such a policy.
We recommend that each company adopt policies covering consideration of any director nominees recommended by shareholders. We suggest including these policies in the nominating committee charter.
The company must describe any minimum qualifications for director that the nominating committee believes must be met by any candidate for director, as well as any specific qualities or skills that the nominating committee believes that one or more directors must possess.
We recommend that each company immediately begin to consider how to articulate the minimum qualifications necessary to serve on the board and those qualities or skills that all directors should possess. Again, we suggest these be included in the nominating committee charter.
The company must describe the nominating committee's process for identifying and evaluating nominees for director, including nominees recommended by shareholders, and any differences in the manner by which shareholder nominees will be evaluated.
We suggest also including this process in the nominating committee charter. We recommend that nominating committees evaluate shareholder candidates by the same process as management or board recommended candidates.
The company must disclose whether any of the following categories of persons or entities recommended each nominee approved by the nominating committee for inclusion in the proxy statement: shareholder, non-management director, chief executive officer, other executive officer, third- party search firm, or other source (which must be specified). This disclosure does not apply to nominees who are executive officers or existing directors standing for re-election.
If the company pays a fee to a third party to identify or evaluate or assist in identifying or evaluating possible nominees, it must disclose the function performed by the third party.
If, by a date not later than 120 days before the first anniversary of the proxy statement for the last annual meeting (or if the date of the current year's annual meeting is more than 30 days before or after the anniversary date of the previous year's meeting, a reasonable time before the company begins to print and mail its proxy statement for the current year), the nominating committee received a nominee from a shareholder (or a group of shareholders) that beneficially owned more than 5 percent of the company's voting common stock for at least one year, the company must disclose:
- the name of the candidate and the shareholder or shareholder group that recommended the candidate; and
- whether the nominating committee chose to nominate the candidate.
Disclosure Regarding Shareholder Communication with the Board of Directors
The SEC also adopted a number of specific disclosure requirements regarding communications by shareholders with the board of directors.1 Under the newly adopted rules, each public company will be required to provide the following disclosures regarding the processes for shareholder communications with its board:
A statement whether the board of directors has a process for shareholders to communicate with the board and, if the company does not, a statement of the basis for the board's view that it is appropriate not to have such a process.
We recommend that all companies establish a process by which the shareholders may send written communications directly to the board of directors, as we think it would be difficult for any public company's board to articulate why it believes such a process is unnecessary.
If the company has a process for shareholders to send communications to the board of directors:
- a description of the manner by which shareholders may send communications to the board and, if applicable, to specified individual directors; and
- if shareholder communications are not sent directly to board members, a description of the company's process for determining which communications will be.
We suggest that companies inform shareholders to direct any communications through the company to a designated independent director, such as the audit committee chair or the lead independent director. We think the process should permit only written communications from shareholders, and each company should decide which types of written communication are allowed (i.e., e-mail and/or letters). We think it unnecessary for management to screen shareholder communications. Instead, we recommend that companies forward all shareholder communications to the board member chosen as the liaison for shareholder communications.
A description of the company's policy, if any, regarding board members' attendance at annual shareholder meetings and identification of the number of board members who attended the prior year's annual shareholder meeting.
We recommend that all companies adopt a policy that requires directors to attend annual meetings absent extenuating circumstances.
ENDNOTES
1 Communications from an officer or director of the company will not be viewed as shareholder communications for purposes of the disclosure requirement. Communications from an employee of the company will be viewed as shareholder communications only if made solely in such employee's capacity as a shareholder. Shareholder proposals submitted under Exchange Act Rule 14a-8 are also not subject to these disclosure requirements.
http://www.mondaq.com/article.asp?articleid=23791&lastestnews
The Cayman Islands maintains a robust anti-money laundering regime, which it began implementing as early as 1984. The creation of the Cayman Islands Monetary Authority ("CIMA") in 1996 put in place a central regulator ensuring that financial services continued to meet international standards.
Following the Organisation for Economic Cooperation and Development ("OECD"), Financial Action Task Force ("FATF") and Financial Stability Forum ("FSF") initiatives and the KPMG Report, there was an unprecedented flurry of legislative activity, which updated the statutory framework to meet the highest international standards. This effort was recognised by confirmation on 21 June 2002 that the Cayman Islands had addressed all previous deficiencies and no longer required non-cooperative-jurisdiction monitoring by FATF.
Regulation in the Cayman Islands continues to evolve and whilst the jurisdiction is keen not to diminish the flexibility of its regulatory system, it recognises that a proactive approach is required in order to maintain its standing as a leading financial centre.
The recent accounting scandals in the US, terrorism and challenging economic conditions onshore guarantee that offshore centres will continue to be scrutinised, starting with a financial sector assessment programme launched by the International Monetary Fund ("IMF"). The IMF is scheduled to visit the Cayman Islands in May 2003.
SUMMARY OF PRINCIPAL FEATURES OF THE TERRITORY'S ECONOMY AND FINANCIAL OPERATIONS
The Cayman Islands has two principal industries – tourism and financial services. The forecast recurrent revenue for the territory for the first six months of 2003 is US $225 million, of which approximately US $60 million is directly attributable to the financial industry. A further US $65 million is raised by duties (primarily import duty) and further significant amounts are raised by work permit fees. A substantial proportion of both duties and work permit fees is referable to the financial services industry.
TERRITORY RISK ASSESSMENT FOR MONEY LAUNDERING THREATS
The Cayman Islands is a very small territory with a population of just over 40,000. Accordingly, potential money laundering risks are primarily limited to the misuse of the financial system.
Suspicions are sometimes aroused when it is disclosed that banks in the Cayman Islands have in excess of $900 billion in assets. However, only seven per cent. of the assets in Cayman's banking sector are derived from transactions between a bank and its individual customers. Ninety-three per cent of banking assets in the Cayman Islands are generated by transactions occurring between institutions, the majority being between major international banks. The world’s top international banks use Cayman Islands branches or subsidiaries for a number of reasons, including:
better access to the eurodollar market;
more tax efficient funding structures;
low reserve requirements;
cost-effective administration provided by licensed and well-regulated "Class A" banks.
HSBC, UBS and Barclays are examples of international financial service providers with long-established Cayman Islands subsidiaries or branches. The Cayman Islands branches are well regulated as the main branch is subject to regulation in its onshore jurisdiction and the sub-branch is regulated in the Cayman Islands. Moreover, these branches cannot be established in the Cayman Islands without the consent of the regulator in the onshore jurisdiction, such as the Federal Reserve in the US and the FSA in the UK.
The perceived risk of the misuse of offshore corporate vehicles in facilitating money laundering is evidenced by the OECD report issued on 27 November 2001, "Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes". In response to this report, the International Tax and Investment Organisation and the Society of Trust and Estate Practitioners issued a rebuttal report entitled "Towards a Level Playing Field", which outlined the weaknesses of the OECD report. The fact is that the formation and maintenance of companies in the Cayman Islands is a licensable activity with each service provider being subject to regulatory supervision, including onsite inspections by the regulator.
SUMMARY OF LAWS/REGULATIONS IN PLACE AND THEIR APPLICABILITY
International cooperation agreements
OECD commitment
In May 2000 the Cayman Islands gave a letter of commitment to the OECD relating to alleged harmful tax competition. Under the letter of commitment, the Cayman Islands Government will implement a plan to share bank account information with foreign Governments that are conducting criminal tax evasion investigations for the first tax year after 31 December 2003, and on civil and administrative tax matters for the first tax year after 31 December 2005.
Tax information exchange agreement
On 27 November 2001 the Cayman Islands entered into a tax information exchange agreement with the US. The agreement is structured to conform with the Cayman Islands’ OECD commitment of May 2000. The implementation procedure will require that information be provided only in response to a specific request which is relevant to a tax examination or investigation conducted in accordance with the laws of the requesting state. Requests will be submitted by foreign tax authorities to a competent authority in the Cayman Islands who will act in a capacity similar to that in which the Cayman Islands Chief Justice has acted pursuant to other international information exchange agreements. Confidentiality provisions will ensure that information that has been exchanged is adequately protected from unauthorised disclosure.
It is likely that there will be further bilateral tax information exchange agreements. However, the Cayman Islands Government has made it clear that it will not enter into any agreements with countries that have legislation discriminating against the Cayman Islands.
EU Savings Directive
What has become known as the Savings Directive is part of a package of measures by the European Commission to tackle "harmful tax competition" in the European Union. It is designed to address the ability of "residents of Member States …. to avoid any form of taxation in their Member State of residence on interest they receive in another Member State".
The current form of the Savings Directive is a compromise solution following the failure of Member States to agree on the original proposal for the imposition of withholding tax on interest payments (which would have had a serious effect on the Eurobond market in London). In implementation of the requirement that Member States "promote the adoption of the same measures" in their dependent or associated territories, the UK Government has committed its Caribbean dependent territories, including the Cayman Islands, to their adoption and has threatened to "legislate" for them.
The Savings Directive requires the reporting of certain information relating to interest payments (including dividend payments by certain investment vehicles whose investments in debt instruments exceeds a certain percentage) to individuals resident in Member States. That information is to be provided by the paying agent (essentially, the last intermediary in a chain of intermediaries), who is also responsible for determining the residence of the payee.
The Cayman Islands Government is concerned that any application of the Savings Directive to the Islands, without equivalent application to their competitors, will result in little benefit to the European Union at a disproportionate cost to the Islands. The UK Government is aware from its own regulatory impact assessment that implementation of the Savings Directive will result in significant additional costs to both the public and private sectors in the UK, and the same will undoubtedly be true in the Cayman Islands.
The Cayman Islands has declined to commit to the implementation of the measures in the Savings Directive, and is now bringing legal proceedings to challenge the legality of certain aspects of the Savings Directive.
International Cooperation laws
The Confidential Relationships (Preservation) Law (1995 Revision) makes it a criminal offence, subject to a number of exceptions, for any person who obtains confidential information during the course of business to divulge such information to a third party. However, the Mutual Legal Assistance (United States of America) Law (1999 Revision) implemented in the Cayman Islands is a bilateral treaty between the UK and the US and provides the legal machinery whereby the US can request, through the MLAT Authority (currently the Chief Justice of the Cayman Islands), the disclosure in connection with the investigation or prosecution of criminal activity, of information which would otherwise be confidential.
The Monetary Authority (Amendment) (International Cooperation) Law 2000 enabled the Cayman Islands Monetary Authority ("CIMA") to access and share information with overseas regulators (subject to a number of safeguards), including in appropriate regulatory circumstances, information regarding the identity of customers.
Money laundering
Applicable laws
Misuse of Drugs Law (2000 Revision).
Misuse of Drugs (International Cooperation) Law (2000 Revision).
The Proceeds of Criminal Conduct Law (2001 Revision):
Proceeds of Criminal Conduct (Designated Countries) Order 1997;
Money Laundering Regulations, 2000;
Proceeds of Criminal Conduct (Amendment) (Financial Intelligence Units) Law, 2001 (Law 7 of 2001);
Proceeds of Criminal Conduct (Designated Countries) (Further Designation of Countries) Order, 2001;
Money Laundering (Amendment) (Client Identification) Regulations, 2001;
Money Laundering (Amendment) (Electronic Payments) Regulations, 2001;
Money Laundering (Amendment) Regulations, 2001;
Money Laundering (Amendment) Regulations, 2002;
Money Laundering (Client Identification) (Extension of Period) Order, 2002.
Commentary
The Misuse of Drugs Law, the Misuse of Drugs (International Cooperation) Law, the Proceeds of Criminal Conduct Law (the "PCCL") and the Money Laundering Regulations (the "Regulations") comprise the base of the anti-money laundering legislation. The Regulations apply to all financial service providers conducting "relevant financial business".
It is important to note that "relevant financial business" is not limited to those activities requiring licences but extends to other financial activities including real-estate business, money transmission services and relevant legal services.
The Regulations require anyone engaged in relevant financial business to have in place systems and training to prevent money laundering. In particular, procedures must be in place for:
identification of clients;
keeping records of evidence of client identification;
reporting of suspicious transactions;
internal controls and communication;
employee anti-money laundering training.
The PCCL and the Regulations provide that a person is guilty of a criminal offence if in the course of his trade, profession, business or employment he knows or suspects that another person is engaged in money laundering and he does not disclose to the Financial Reporting Unit the information on which his knowledge or suspicion is based as soon as reasonably practical.
Protection is provided for the breach of rules of legal privilege, and for breach of any other law arising directly from the reporting of such a suspicion.
Guidance notes
To supplement the legislation, CIMA and the professional associations engaged in financial services have issued the Guidance Notes on the Prevention and Detection of Money Laundering in the Cayman Islands (the "Guidance Notes"). These aim to provide consistency in the interpretation and implementation of the Regulations in relation to the key areas of:
client identification and verification;
record-keeping procedures;
internal reporting procedures;
reporting of suspicious transactions and staff training;
and they represent the financial services industry best practice.
The Guidance Notes will be taken into account by the courts in determining whether a person conducting relevant financial business has complied with the Regulations; however, they should not be relied upon in respect of points of law. Reference for that purpose should be made to the appropriate legislation. The Guidance Notes are available on CIMA’s website at www.cimoney.com.ky.
ASSESSMENT OF TERRITORY AGAINST FATF FORTY RECOMMENDATIONS AND MUTUAL EVALUATION RESULTS
Initial report
In February 2000 FATF issued criteria for identifying non-cooperative countries and territories. This was followed by a report during June 2000 in which FATF cited the Cayman Islands for the absence of certain legislative elements required by anti-money laundering criteria.
All of these areas have since been addressed. Legislative action has been taken to ensure that many of the guidelines, which existed previously within a "Code of Practice", have become legal requirements.
Following two rounds of mutual evaluation, FATF concluded on 21 June 2002 that the Cayman Islands has addressed all Recommendations requiring "specific action" and restored it to "cooperative" status.
Ongoing process
FATF decided in October 2000 to begin a review of the Forty Recommendations. At the end of March 2002 a consultation paper was issued and this document was open for comment until 31 August 2002. These comments are available for review on the FATF website. Invited representatives of non-FATF countries and jurisdictions, the financial and other affected sectors and other interested parties met during October 2002 to discuss the proposals. All views received are still being considered. The FATF has also adopted Eight Special Recommendations against terrorist financing. These recommendations have been developed in addition to the existing Forty Recommendations.
In January 2002 FATF member jurisdictions completed the first phase of a self assessment exercise and all countries have been invited to participate on the same terms as the FATF members.
ROLE AND ACTIVITIES OF FINANCIAL REGULATORS AND EXPECTATIONS OF COMPLIANCE ACTIVITY
Regulators
There are two bodies responsible for financial services regulation in the Cayman Islands. These are the Cayman Islands Monetary Authority and the Stock Exchange Authority. CIMA is responsible for the day-to-day supervision of banks, trust companies, mutual funds, mutual fund administrators, insurance and company managers.
The Stock Exchange Authority is responsible for the regulation of the Cayman Islands Stock Exchange ("CSX") including the approval of any rules that the CSX wishes to introduce.
CIMA is a statutory agency created by the Cayman Islands Government and is a top-quality regulator that aligns itself with "best practice" standards at an international level. CIMA adopted a strategic initiative to upgrade supervisory standards by implementing onsite inspections in 1998. The inspections are intended to improve regulatory efficiency and effectiveness.
Onsite work includes a review and assessment of an institution’s:
risk-management policies, procedures and control environment; and
compliance with laws, regulations and supervisory directives.
During the inspection individual transactions are tested to evaluate the effectiveness of the controls, and they are risk profiled using international benchmark standards such as the Basel Core Principles and the International Association of Insurance Supervisors’ Principles.
Following through on its prior commitment, the Cayman Islands Government passed the necessary legislation which became effective on 22 January 2003 for CIMA to become an independent regulatory authority. This action has satisfied one of the key recommendations made by KPMG in its 2000 Review of Financial Regulation in Caribbean Overseas Territories and Bermuda.
NATURE OF REPORTING REGIME – FRU INFORMATION
The Financial Reporting Unit ("FRU") is comprised of experienced and senior officers of the Royal Cayman Islands Police ("RCIP"), who form an integral part of the anti-money laundering system.
The FRU is a stand-alone unit that reports directly to a committee consisting of [senior members of the Cayman Islands Government and] the Attorney General.
The FRU is responsible for receiving suspicious activity reports ("SARs") and investigating and prosecuting money laundering offences. It also undertakes all international enquiries, deals with international requests for assistance (from the Chief Justice and the Attorney-General’s office) and routinely carries out vetting for CIMA.
Under existing laws, the Cayman Islands has cooperated, through the FRU, on an "all crimes" basis, exchanging information with other jurisdictions in the fight against international crime.
On 13 June 2001 the FRU was admitted to the Egmont Group of Financial Intelligence Units, an international organisation that includes approximately 69 similar agencies.
The FRU has recently come under scrutiny as a result of the collapsed Euro Bank case, and it is likely that some restructuring will take place in the near future. However, the role of the FRU as an important part of the anti-money laundering system remains unquestioned.
RELEVANT ACTIVITIES BY LAW ENFORCEMENT
Terrorism Bill
On 25 September 2002 the Government of the Cayman Islands pledged its support to the US authorities. This pledge was rapidly followed by a proposal from the Attorney-General for the introduction of comprehensive legislation to deal with terrorism and its financing.
The legislation has been drafted and is currently under review by the Attorney-General. It is expected to:
provide a definition of what constitutes "terrorism"; and
address the issues surrounding the sources of financing of terrorist acts.
Current anti-money laundering legislation is directed at criminal activity involving illegal proceeds of crime and allows for the freezing of such assets. To stop terrorism it is necessary to stem the flow of funds, some of which may well be from legitimate sources.
REFERENCES TO SOURCES OF INFORMATION
www.cimoney.com.ky
www.caymanfinance.gov.ky
www.camlg.org.ky
www.oecd.org
www.ustreas.gov
Guidance Notes on the Prevention and Detection of Money Laundering in the Cayman Islands.
The Cayman Islands Anti-Money Laundering Group ("CAMLG").
The Cayman Islands Compliance Association ("CICA").
The International Tax and Investment Organisation.
The Society of Trust and Estate Practitioners.
The Cayman Islands Government Statistics Office.
Given the protracted bear market in US and European equity markets in recent years, it may be surprising to the casual observer to discover that hedge funds and in particular offshore hedge funds have continued to expand and attract investors. The figures released by the Cayman Islands Monetary Authority ("CIMA") continue to reflect a strong demand for offshore services, in particular regulated mutual funds have grown by 50% over the figures for 2000. The appeal of hedge funds is that they aim to provide returns regardless of prevailing market conditions. The appeal of Cayman is a combination of factors.
Part of the continued success of Cayman as the domicile of choice for offshore funds can be attributed to its recognition of the current regulatory zeitgeist and its willingness to set standards rather than simply react to those suggested or imposed by others. The foresight shown by the Cayman financial services industry in adopting stringent anti-money laundering policies and procedures in 2000 has paid off as the regulatory bar has now been raised onshore as well as offshore. Leaving aside the question as to whether or not there is a level playing field for both the OECD member states and the offshore centres, the greater flexibility and lighter regulatory touch available offshore for non-retail business gives sophisticated and well-regulated offshore centres an advantage in attracting capital.
The area of hedge funds provides an illuminating example of the interaction between offshore and onshore and perhaps gives an indication as to where the plethora of international initiatives, industry consolidations and the ongoing redefinition of financial and legal service providers will lead us. At present the hedge fund industry comprises more than 6,000 funds with assets of more than $600 billion and it is estimated that the industry will have assets of more than $1 trillion in the next five to ten years. Cayman dominates the offshore market with approximately 65% of the market share. Institutional investors continue to move into hedge funds and State Street Global Advisors, the largest institutional fund manager in the world, recently announced that it is creating a dedicated hedge fund strategies group. Furthermore, there is an increasing recognition amongst mainstream managers and onshore regulators that there is a place for hedge funds and the long/short strategies they employ beyond sophisticated and institutional investors and restrictions on retail investors, especially in the fund of funds arena are slowly being lifted.
The convergence of regulatory requirements has contributed to the internationalization of fund service providers, which in turn has led to opportunities for offshore centres, such as Cayman, to attract the best of the onshore world to an offshore setting. A recent example of this dynamic at work was the establishment of a physical presence in Cayman of a number of the leading specialist hedge fund auditors (outside the big four) following the introduction of a local audit sign off policy in 2002.
Many developments in offshore hedge fund structures can be attributed to developments onshore. The ongoing drive for greater corporate governance in the US and the expected rules to be introduced by the SEC on investment managers in 2004 following its review of the hedge fund industry will have implications offshore. However, in many cases the requirements of offshore law and procedure are substantially similar to those onshore and it is increasingly evident that developments offshore have come around due to changes in circumstances (such as prevailing economic conditions) which are neither onshore nor offshore, but universal. A good example of this is the capture of performance fees. The classic hedge fund model involves a manager receiving a fixed management fee and a performance fee which will be a percentage of the net profits of the fund. In order to ensure equitable treatment amongst investors it has long been an established practice that some form of per investor method be utilised to capture the performance fees so that investors who subscribe for shares at different times only pay the performance fee on the amount by which the value of the shares which they hold increased during a financial period. There are a number of different methods in use, the most common are the use of series accounting (whereby a separate series of shares is issued on each subscription date and their performance is separately tracked to ensure accurate collection of the performance fee) and equalisation (whereby each shareholder has the same amount of capital at risk and collection of the performance fee is collected by redeeming or issuing an appropriate amount of shares). It is usual for performance fees to be subject to a high water mark or loss carryforward provision so that an investor only pays performance fees on its shares to the extent that the net asset value ("NAV") of the shares exceeds their previous highest NAV. Over the last few years during the prolonged bear market, the performance fee capture methodology has been refined to allow for a rebasing of the loss carryforward (or high water mark) so that losses will only be carried forward for, say, one financial period, so that the manager will receive a performance fee on growth thereafter. Where performance has been poor investors have redeemed out of a fund, which has necessitated the liquidation of underlying positions. In recognition of the need to ensure equality of treatment between redeeming and remaining shareholders, many funds have instituted gateway provisions so as to rollover redemption requests beyond certain thresholds, eg. no more than 25% of existing shares may be redeemed on any redemption date with the excess requests being carried over to the next available redemption date.
Another economic development, which has led to different structural approaches, is the attraction of seed and strategic investors. When setting up a hedge fund a manager will be hoping to attract a significant investor to provide him with the critical mass required to employ his strategy. Hedge fund incubators and strategic investors know their worth and will frequently seek to extract more favourable treatment than that being offered to standard shareholders and described in the offering memorandum. Typically a strategic investor will request reduced fees and improved liquidity terms, either by way of an exemption from a lock up (if applicable) on redemptions or waiver of redemption fees. In addition the strategic investor may require certain information regarding the underlying positions held by the fund. Dealing with rebate of fees is quite straightforward as it is a matter between the manager and the investor, but variations in other offering terms of shares are more problematic. Accordingly, the articles of association of hedge funds are being drafted more broadly to allow the directors specific and express discretion to enter into side letters and to designate additional classes or sub-classes of shares to give effect to such arrangements and to ensure equality of treatment amongst members of the same class or sub-class.
By keeping the constitutional documents broad it is possible for hedge funds to cater for a wide variety of different investors. The economic terms of the shares might be equivalent, but where there are tax or regulatory implications it is common to provide the affected investors with non-voting shares or shares with a restricted aggregate number of votes regardless of equity held (a reverse Bushell v Faith provision).
The legal developments in offshore hedge funds will continue to reflect the market developments and, although there will always be a difference of emphasis between the offshore and onshore world, it is increasingly the case that there is one global market and trends in that market, such as the consolidation of service providers, the emergence of pre-eminent jursidictions and the globalisation of approach, will be as relevant to Cayman as they are to the onshore financial centres.
The use of offshore special purpose vehicles ("SPVs") in securitisation transactions is a long- established practice. The Cayman Islands continue to enjoy a dominant role in this field, which they have attained by offering the following key legal, political and professional elements that arrangers, originators and investors seek out:
(1) a cutting-edge legislation (the result of close co-operation between the public sector and government), a creditor-friendly legal system based on English common law, recognition of foreign law-governed security interests and the absence of direct or indirect taxation;
(2) a stable political and economic environment, the result (in part) of the Cayman Islands’ status as a British Overseas Territory, which has supported the AAA rating of Cayman Islands SPVs by international rating agencies; and
(3) the availability and selection of top-flight professionals and service providers, trained in the leading North American and European financial centres, to provide initial and on-going support to Cayman Islands SPVs.
The combination of these factors have made the Cayman Islands the location of choice for structuring all types of cross-border securitisations.
Overview of a Securitisation Structure
Securitisation structures are many and varied but certain elements are common to all. In its most simple form a securitization structure involves the sale of income-generating assets by an originator to an SPV established, usually by an investment bank or other financial institution, specifically for that purpose. The SPV finances the acquisition of the assets by the issue of debt securities ("Notes") or equity securities or both. The cash flow derived from those assets services payment obligations under Notes and distributions on equity securities. The eventual redemption or sale proceeds of the underlying assets will be used by the SPV to repay the principal on Notes upon maturity and to redeem equity securities.
The SPV creates fixed and floating charges over the purchased assets, the accounts into which the receivables deriving from those assets are paid, and all of the SPV’s other property, undertaking and assets, to secure its obligations in respect of the Notes. This security is granted in favour of a security trustee for the benefit of the holders of Notes, any guarantor and the providers of any other credit enhancement (usually a swap counterparty). The transaction is invariably structured on a limited recourse basis so that the liability of the SPV is limited to the secured assets and their proceeds of realisation.
Formation of the SPV
The SPV in a typical structured finance transaction is incorporated under the Companies Law (2003 Revision) as an exempted company limited by shares, and the remainder of this article refers to an SPV in that form. The incorporation process is very straightforward. No governmental authorisations or licences are required for the formation of the SPV which can, if necessary, be set up within twenty-four hours. Government fees, based on the authorised share capital of the SPV, are payable upon incorporation, and at the beginning of each calendar year thereafter. Most SPVs are set up with an authorised share capital of US$50,000 or less to qualify for the minimum registration fee of US$574 (the maximum fee is US$1,722). The share capital of the SPV may be denominated in any currency and there are no minimum requirements in respect of issued or paid up capital.
Constitutional Documents
The constitution of the SPV is contained in two documents, the Memorandum of Association and the Articles of Association.
The Memorandum of Association contains the name of the SPV, the location of the registered office, details of the authorised share capital and details of the objects and powers of the SPV. These objects and powers may be listed, in full and limited to those listed or expressed to be unrestricted and give the SPV full power and authority to carry out any object not prohibited by law. Typically, the corporate powers and objects will be restricted, particularly where the securities issued by the SPV are to be rated.
The Articles of Association govern the administration of the SPV. They contain details of the rights attaching to shares and the manner in which those rights can be exercised, provisions governing the issue, transfer and redemption or repurchase of shares, the appointment and removal of Directors, the powers and duties of the Directors, the proceedings of the Directors, declaration and payments of dividends and rights on dissolution.
Shareholders
The SPV need only have one shareholder, who need not be resident in the Cayman Islands. In the case of a typical off-balance sheet SPV, the shares of the SPV are held subject to charitable trusts by a Cayman Islands trust company which will also provide directors and administrative services to the SPV. As an alternative to the charitable trust, it is possible to establish a purpose trust, under The Special Trust (Alternative Regime) Law 1997, to hold the shares of the SPV.
Corporate Formalities
The SPV must be run as an independent entity to avoid the risk of a court piercing the corporate veil and treating it as an agent of the originator of the transaction. Furthermore, the directors of the SPV owe fiduciary duties and duties of skill and care to the SPV, and must act in good faith and in its best interests. It is therefore important that the corporate formalities of the transaction are properly documented with full board minutes setting out the terms of the transaction, the potential liabilities of the SPV, the manner in which they will be satisfied or discharged and the benefit accruing to the SPV (usually in the form of a transaction fee).
The SPV is required to maintain a registered office in the Cayman Islands, provision of which is normally part of the administrative services provided by the trust company, and to maintain registers of directors and officers, shareholders and of mortgages and charges granted by the SPV over its assets. The only public registration requirements relating to mortgages and other security interests in the Cayman Islands relate to certain personal chattels, ships and aircraft registered in the Cayman Islands and real estate located in the Cayman Islands.
Continuing Requirements
The continuing requirements for a Cayman Islands exempted company are minimal. An exempted company must file an annual return, together with the appropriate annual filing fee (described above) with the Registrar of Companies. The annual return simply confirms that the requirements of the Companies Law as far as they relate to exempted companies have been complied with and that the SPV has conducted its operations mainly outside the Cayman Islands. The SPV must notify the Registrar of Companies of any changes to its constitutional documents, its registered office or its directors and officers.
Publicly Available Information
The only information which is publicly available from the Registrar of Companies in relation to an exempted company is the type of company (i.e. exempted), the location of its registered office and whether the company is active, is in liquidation or has been dissolved.
Accounts
The SPV not required to have its accounts audited nor do any accounts need to be filed with any Cayman Islands authority. However, it is required by the Companies Law to keep books of account which give a true and correct view of its affairs. The accounts need not be kept in the Cayman Islands.
Tax and Exchange Controls
The Cayman Islands is a tax-neutral jurisdiction and therefore does not impose any direct taxes on the SPV or the Noteholders or indirect taxes by way of withholdings on payments made on Notes or equity securities issued by the SPV. This is supported by an undertaking given by the Cayman Islands Government that the exempted company will not be subject to any tax imposed by any law enacted in the Cayman Islands for a period of at least twenty years from the date of the undertaking. This undertaking may be renewed, if necessary, usually for a period of a further ten years. There are no foreign exchange controls in the Cayman Islands.
Offering of Securities
There are no requirements that a prospectus be filed with any public body in the Cayman Islands in connection with any offer of securities, unless those securities are to be listed on the Cayman Islands Stock Exchange. An SPV which is an exempted company may not, unless it is listed on the Cayman Islands Stock Exchange, make any invitation to the public in the Cayman Islands to subscribe for its securities. For these purposes, the public in the Cayman Islands does not include another exempted company or an ordinary non-resident company incorporated in the Cayman Islands.
Discovery . Scope And Reach Of Domestic Discovery For Use In Foreign Proceedings. Section 1782 of Title 28 authorizes a federal district court to grant discovery to an "interested person" "in a proceeding in a foreign or international tribunal, including criminal investigations conducted before formal accusation." 28 U.S.C. § 1782. The Supreme Court granted certiorari in Intel Corp. v. Advanced Micro Devices, Inc., No. 02-572, to address the scope of this provision, and in particular to determine (1) whether under this provision the district court may grant discovery seeking information that the foreign jurisdiction itself would not allow the party to obtain through discovery, and (2) whether the provision authorizes the district court to grant discovery to a non-litigant in connection with a foreign investigation, or instead grants discovery only to litigants involved in an actual judicial or quasi-judicial proceeding.
Advanced Micro Devices ("AMD") filed a complaint with the European Commission ("Commission") in October 2000, alleging that Intel was violating European Union ("EU") competition laws. AMD’s filing automatically triggered a "preliminary investigation" . which remains ongoing . at the conclusion of which the Commission will decide whether to undertake formal prosecutorial action. AMD urged the Commission to demand from Intel documents that Intel had produced in a private antitrust dispute in the United States, but the Commission declined. Under EU law, AMD has no right to compel Intel to provide these documents either to the Commission or to AMD itself. Undeterred, AMD applied to the United States District Court for the Northern District of California for discovery under 28 U.S.C. § 1782, and asked the court to order Intel to produce these same documents to AMD, with the intention of forwarding the documents to the Commission. The district court denied AMD’s application, finding that the Commission’s preliminary inquiry was not adjudicative and, thus, not a "proceeding" within the meaning of Section 1782.
The Ninth Circuit reversed. See Advanced Micro Devices, Inc. v. Intel Corp., 292 F.3d 664 (9th Cir. 2002). The court began its analysis by noting that Section 1782’s language is "broad and inclusive." Id. at 667. While the court implicitly agreed that the Commission’s preliminary inquiry was not itself adjudicative, it held that the inquiry was "at minimum, one leading to quasi-judicial proceedings" (id. at 667) and, thus, covered by Section 1782. Noting that Congress had specifically removed from Section 1782 the requirement that the foreign proceeding be "pending," furthermore, the court held that a quasi-judicial proceeding need not be "imminent" for a district court to order discovery. Id. Finally, the Ninth Circuit determined that nothing in the text or legislative history of Section 1782 required a party seeking discovery to make a threshold showing that "what is sought" would be "discoverable in the foreign proceeding." Id. at 669.
The Ninth Circuit’s ruling deepens a well established circuit split regarding the breadth of discovery permissible under Section 1782. Several courts, including the First and Eleventh Circuits, have construed the statute to permit discovery only of material that would be subject to discovery in the foreign proceeding itself. See In re Application of Asta Medica, S.A., 981 F.2d 1, 5-7 (1st Cir. 1992); In re Request for Assistance from Ministry of Legal Affairs of Trinidad & Tobago, 848 F.2d 1151, 1156 (11th Cir. 1988). As the First Circuit explained, a "foreign discoverability" requirement would avoid one party receiving a discovery advantage over the other, and would prevent offense to foreign tribunals. Asta Medica, 981 F.2d at 5-6. In contrast, the Second, Third, and Ninth Circuits have focused on the plain text of Section 1782, and have held that the provision contains no such limitation. See In re Bayer AG, 146 F.3d 188, 191-96 (3d Cir. 1998); In re Metallgesellschaft AG, 121 F.3d 77, 79 (2d Cir. 1997).
The Ninth Circuit’s decision also raises two other, related, questions about the scope of Section 1782. First, the parties dispute whether the Commission’s investigation is, or is sufficiently close to being, "a proceeding in a foreign or international tribunal" under 28 U.S.C. § 1782. Intel asserts that the Commission’s preliminary investigation is non-adjudicative, and that any eventual judicial proceeding reviewing the Commission’s investigative determination is insufficiently "imminent" to qualify as a "proceeding." Joined by the Solicitor General, AMD argues that Section 1782 is not limited only to imminent proceedings. Second, Intel argues that because AMD is merely a complaining witness . rather than a litigant in an ongoing proceeding . AMD does not qualify as an "interested person" authorized to seek discovery under Section 1782. AMD, again joined by the Solicitor General, argues that there is no textual basis for limiting discovery only to litigants.
The Solicitor General, however, objects to the Ninth Circuit’s decision on a separate ground from those raised by Intel. According to the Solicitor General, the court of appeals erred by failing to acknowledge that district courts have discretion whether to authorize discovery under Section 1782. Thus, although taking the position that Section 1782 contains no statutory bar on the discovery sought by AMD, the Solicitor General argues that the district court should use its discretion to refuse to order Intel to produce that material.
This case is of significant importance to every company that does business in foreign countries. Foreign agencies and regulatory bodies entertain thousands of complaints each year. If each of those complaints could be used to impose onerous discovery obligations in federal court, companies could be overwhelmed with such requests. Such a system also would invite abuse by allowing companies to gain access to their competitors’ sensitive business information, or to engage in "fishing expeditions" for possible future United States litigation, by filing a complaint in a foreign company and seeking related discovery in federal court.
Federal Court Authority to Compel Agency Action . Public Lands. Section 706(1) of the Administrative Procedure Act ("APA") authorizes judicial review "to compel agency action unlawfully withheld or unreasonably delayed." 5 U.S.C. § 706(1). The Supreme Court granted certiorari in Norton v. Southern Utah Wilderness Alliance, No. 03-101, to determine whether this provision allows courts to review the adequacy of an agency’s day-to-day management of public lands under statutory standards and the agency’s own land use plans.
The plaintiffs, a group of environmental organizations, sued the Bureau of Land Management under Section 706(1), alleging that the Bureau had violated the Federal Land Policy and Management Act ("FLPMA"), 43 U.S.C. § 1701 et seq., and the National Environmental Policy Act ("NEPA"), 42 U.S.C. § 4321 et seq., by failing properly to regulate the use of off-road vehicles in "Wilderness Study Areas." Under the FLPMA, the Bureau may classify public lands as Wilderness Study Areas, which Congress later may designate for wilderness preservation; until Congress affirmatively declares or rejects a Study Area as protected wilderness, the Bureau must manage the area "so as not to impair [its] suitability * * * for preservation." 43 U.S.C. § 1782(c). The environmental groups sought an injunction compelling the Bureau to implement provisions of its land use plans relating to the use of off-road vehicles in Wilderness Study Areas and to take a "hard look" under the NEPA at whether the agency should prepare supplemental environmental impact statements for areas affected by increased use of such vehicles.
The district court granted the Bureau’s motion to dismiss for lack of subject matter jurisdiction, reasoning that, as long as an agency is taking some steps toward fulfilling its mandatory, nondiscretionary duties, its actions are not subject to judicial review under Section 706(1). Southern Utah Wilderness Alliance v. Babbitt, No. 99-CV-852, 2000 WL 33914094 (D. Utah Dec. 22, 2000). The court also held that Section 706(1) does not provide a basis for challenging the Bureau’s alleged failure to implement provisions of its land use plans, and that the Bureau does not have a clear duty under the NEPA to consider whether to supplement its prior environmental impact statements.
A divided panel of the Tenth Circuit reversed and remanded the case for consideration on the merits, holding that the environmental groups could challenge the Bureau’s management of the Wilderness Study Areas under Section 706(1). Southern Utah Wilderness Alliance v. Norton, 301 F.3d 1217 (10th Cir. 2002). In the court’s view, the Bureau has a mandatory, nondiscretionary duty under the FLPMA not to impair the suitability of those regions for designation as protected wilderness . a duty that is therefore enforceable under Section 706(1). Id. at 1229, 1233. The Tenth Circuit also concluded that the district court had subject matter jurisdiction to consider claims that the Bureau had violated its own land-use plans (id. at 1235) and that the district court had erred in holding that the environmental groups had failed to state a valid claim under the NEPA (id. at 1236-40). Judge McKay dissented in part, opining that Section 706(1) should not become a jurisdictional vehicle for programmatic attacks on day-to-day agency operations. Id. at 1242-43. In the dissent’s view, that section authorizes challenges to true administrative inaction, but does not allow judicial review of agency efforts that allegedly do not satisfy completely the agency’s statutory obligations. Id. at 1243.
This case most concretely affects businesses having interests relating to the government’s management of public lands. Because the Supreme Court may clarify the circumstances under which any agency may be judicially compelled to comply with statutory obligations in the conduct of its day-to-day operations, however, this case also may affect many other businesses subject to ongoing regulatory oversight.
Diversity of Citizenship — Exceptions to "Time-of-Filing" Rule. Article III, section 2 of the U.S. Constitution extends the judicial power of the federal courts to suits in which there is complete diversity of citizenship among the parties to the action, i.e., suits between citizens of different states, or between a state (or a citizen thereof) and a foreign state (or a citizen thereof). Ordinarily, complete diversity must exist at the time the suit is filed in order to establish federal jurisdiction. The Supreme Court granted certiorari in Atlas Global Group, L.P. v. Grupo Dataflux, No. 02-1689, to decide whether a suit that has proceeded to a jury verdict must be dismissed when there existed no diversity of citizenship at the time suit was filed, but a unilateral business transaction by the plaintiff created diversity before trial began.
Atlas Global Group, L.P. ("Atlas Global") sued Grupo Dataflux ("Dataflux") in federal district court asserting claims for breach of contract and quantum meruit. Jurisdiction was predicated solely, and erroneously, upon the parties’ alleged diversity of citizenship. At the time the complaint was filed, Atlas Global’s partnership consisted of five members, two of which were citizens of Mexico. Because the Supreme Court has held that a partnership is a citizen of each jurisdiction in which its individual partners are citizens, Atlas Global therefore was a citizen of Mexico when it filed its complaint, as was the defendant, Dataflux. Despite the absence of diversity, the case proceeded in the district court for three years. Then, shortly before trial, Atlas Global completed a business transaction that removed its two Mexican partners, thereby creating complete diversity between the parties.
Trial was held on the breach of contract claim, and the jury returned a verdict in favor of Atlas Global. Before the court entered judgment on the verdict, Dataflux moved for the first time to dismiss the case on the ground that diversity jurisdiction did not exist when the complaint was filed. The district court granted the motion and denied Atlas Global’s motion to alter or amend the judgment.
A divided panel of the Fifth Circuit reversed, holding that an action need not be dismissed for lack of diversity when, "before the verdict is rendered, or a ruling is issued, the jurisdictional defect is cured." 312 F.3d 168, 174 (2002). In so holding, the court created a third exception to the "time-of-filing" rule for diversity jurisdiction. Previously, in Newman-Green, Inc. v. Alfonso-Larrain, 490 U.S. 826 (1989), the Supreme Court held that a federal court may, under Federal Rule of Civil Procedure 21, dismiss a dispensable non-diverse party from a case in order to perfect diversity jurisdiction. And in Caterpillar, Inc. v. Lewis, 519 U.S. 61 (1996), the Supreme Court held that it was not necessary to vacate the judgment of a district court that had failed to remand a case that was improperly removed on diversity grounds when complete diversity was established before the trial commenced. The Fifth Circuit held that its exception serves the very same principles on which the Supreme Court had grounded the prior exceptions to the "time-of-filing" rule — namely, promotion of judicial economy and of finality.
The Fifth Circuit’s decision creates a split among the federal courts of appeals. While the Fifth Circuit interprets Newman-Green and Caterpillar broadly to allow for additional exceptions to the time-of-filing rule where considerations of judicial economy and finality are promoted thereby, the District of Columbia Circuit has held that those considerations "are insufficient [outside of the removal context] to warrant a departure * * * from the bright-line rule that citizenship and domicile must be determined as of the time a complaint is filed." See Saadeh v. Farouki, 107 F.3d 52, 57 (D.C. Cir. 1997).
Because the Fifth Circuit’s exception permits a plaintiff unilaterally to rectify defects in diversity jurisdiction, this case is important to all businesses that litigate in federal court.
Mineral Rights . Pittman Act . Reservation to United States of Rights to Sand and Gravel. The Pittman Underground Water Act of 1919 (the "Pittman Act"), 43 U.S.C. §§ 351-359 (repealed 1964), authorized grants, or "patents," of up to 640 acres of federal public land in Nevada to applicants who successfully developed underground water sources, but required that such patents reserve to the United States "all the coal and other valuable minerals" on the patented land. The Supreme Court granted certiorari in BedRoc Ltd., LLC v. United States, No. 02-1593, to decide whether the statutory reservation of "valuable minerals" includes common materials such as sand and gravel that had no market value when the patent was issued.
In 1940, Newton and Mabel Butler secured a patent under the Pittman Act for 560 acres in Lincoln County, Nevada. At that time, there was no local market for the abundant sand and gravel on the property. In the early 1990s, after the growth of the city of Las Vegas created demand for the material, the lessee of a successor owner began to extract and sell sand and gravel from the property. Petitoner BedRoc Limited, LLC, acquired the property in 1995 and has continued the sand and gravel operation.
On March 26, 1993, the Bureau of Land Management ("BLM") issued a trespass notice to then-owner Earl Williams, claiming that the sand and gravel on the property were reserved to the United States. Shortly thereafter, the BLM issued a decision finding Williams in trespass, and in 1997 the Interior Board of Land Appeals ("IBLA") affirmed. Earl Williams, 140 I.B.L.A. 295 (1997). BedRoc and Williams brought an action to quiet title in federal district court. The district court granted summary judgment to the United States, ruling that sand and gravel are "valuable materials" reserved to the United States under the Pittman Act. 50 F. Supp. 2d 1001 (D. Nev. 1999).
The Ninth Circuit affirmed. 314 F.3d 1080 (2002). Concluding that the statutory text is ambiguous, the court turned to legislative history and other sources to determine whether Congress intended to include sand and gravel within the reservation of "valuable minerals." As evidence that it did, the court cited congressional debate indicating that all minerals were reserved (id. at 1087-1088), and pointed to contemporaneous federal publications describing sand and gravel as among the country’s "mineral resources" (id. at 1088-1089). The court also relied on Watt v. Western Nuclear, Inc., 462 U.S. 36, 103 (1983), in which the Supreme Court determined that gravel was reserved to the United States in grants made under the Stock-Raising Homestead Act, which was enacted three years before the Pittman Act. The court rejected BedRoc’s argument that the question whether sand and gravel were "valuable minerals" was factual and site-specific, deciding instead that "the question is a straightforward legal one regarding congressional intent as to the scope of the mineral reservation contained in the statute." 314 F.3d at 1090.
This case is of obvious interest to businesses holding interests in land patented under the Pittman Act. Because the Ninth Circuit’s ruling that sand and gravel are "valuable minerals" may be applied to other grants of federal land, the Supreme Court’s decision also may affect other businesses across the western United States that extract sand and gravel or rely on their abundant supply for construction projects.
Tax Injunction Act - Federal-Court Jurisdiction Over Litigation Challenging Tax Credits. The Tax Injunction Act ("TIA") prohibits federal courts from "enjoin[ing], suspend[ing] or restrain[ing] the assessment, levy or collection of any tax under state law where a plain, speedy and efficient remedy may be had" in state court. 28 U.S.C. § 1341. The Supreme Court granted certiorari in Hibbs v. Winn, No. 02-1809, to determine whether either the TIA or the principles of federal-state comity that underlie it bar federal-court litigation challenging the constitutionality of state tax credits . in particular, an Arizona credit for contributions made to organizations that provide tuition grants to sectarian schools.
Arizona Revised Statute Section 43-1089, enacted in 1997, allows taxpayers to reduce their state tax liability by claiming a credit of up to $625 for contributions to organizations called School Tuition Organizations ("STOs"). STOs provide educational scholarships to students attending private schools. Under Arizona law, STOs are permitted to — and most STOs do — limit their grants to students attending parochial schools maintained by a single religious sect or to children of families who belong to a particular religious faith. The Arizona Supreme Court has held that the STO program does not violate the Establishment Clause. See Kotterman v. Killian, 972 P.2d 606 (Ariz.), cert. denied, 528 U.S. 921 (1999).
Plaintiffs, Arizona taxpayers, sued in federal court arguing that, despite the Arizona Supreme Court’s decision in Kotterman, the STO program constitutes an impermissible government subsidy of religious schools in violation of the Establishment Clause. The state moved to dismiss the lawsuit, arguing that, because plaintiffs challenged Arizona’s "assessment" of state income taxes, the district court lacked subject matter jurisdiction pursuant to the TIA and to underlying principles of comity. The district court agreed.
The Ninth Circuit reversed. 307 F.3d 1011 (2002). According to the court of appeals, the term "assessment" as used in the TIA means either (1) the estimation of the value of property or income as a basis for taxation, or (2) the imposition of a tax or other charge. The court concluded that neither definition covers the allowance of a tax credit, which merely affects the calculation of taxes after a taxpayer’s gross income has been determined. Id. at 1015. According to the Ninth Circuit, the TIA does not preclude lawsuits like this one, because a decision striking a tax credit would increase state revenues. Id. at 1017. The Ninth Circuit also rejected the argument that principles of comity warranted dismissing the lawsuit: "[A]n ultimate judgment on the merits for plaintiffs here — much less the conduct of this litigation — would have no effect at all on the implementation of any other Arizona tax provisions, nor would it chill the activities of Arizona tax collectors." Id. at 1019-20. The Ninth Circuit subsequently denied rehearing en banc, over a two-judge dissent. 321 F.3d 911 (2003).
Because states frequently grant tax credits to implement a wide variety of policy choices, this case is of significant interest to almost every business.
Bankruptcy — Abrogation of State Sovereign Immunity. The U.S. Constitution’s Bankruptcy Clause, Art. I, § 8, Cl. 4, empowers Congress to establish "uniform laws on the subject of bankruptcies throughout the United States." The Supreme Court granted certiorari in Tennessee Student Assistance Corp. v. Hood, No. 02-1606, to determine whether the Bankruptcy Clause gave Congress the authority to abrogate state sovereign immunity in bankruptcy cases.
Pamela Hood signed promissory notes for student loans guaranteed by the Tennessee Student Assistance Corporation ("TSAC"), a governmental corporation created by the Tennessee legislature. In June 1999, Hood received a discharge on her no-asset Chapter 7 bankruptcy petition. Because 11 U.S.C. § 523(a)(8) prohibits the discharge of student debts held by a government body except upon a showing of "undue hardship," Hood subsequently filed an adversary proceeding in the Bankruptcy Court for the Western District of Tennessee, seeking a hardship discharge of her student loan under Section 523. In 11 U.S.C. § 106(a), Congress specifically abrogated state sovereign immunity with respect to such actions.
TSAC moved to dismiss the complaint, arguing that Congress lacked authority to abrogate its sovereign immunity. The bankruptcy court denied the motion to dismiss, holding that Section 106(a)’s abrogation of state sovereign immunity was a valid exercise of Congress’s power under the Bankruptcy Clause. 2002 WL 33965623 (July 24, 2000). The Bankruptcy Appellate Panel for the Sixth Circuit affirmed the district court’s decision. 262 B.R. 412 (2001).
The Sixth Circuit affirmed. 319 F.3d 755 (2003). The court acknowledged that in Seminole Tribe of Florida v. Florida, 517 U.S. 44, 72-73 (1996), the Supreme Court ruled that "[t]he Eleventh Amendment restricts the judicial power under Article III, and Article I cannot be used to circumvent the constitutional limitations placed upon federal jurisdiction." 319 F.3d at 761. The court of appeals concluded, however, that by including the Bankruptcy Clause in the Constitution and conferring on Congress "the power to make uniform laws" regarding bankruptcy (id. at 762), "the states shed their immunity from suit along with their power to legislate." Id. at 765. The Sixth Circuit recognized that its holding conflicts with decisions of five other circuits, which have held, relying on Seminole Tribe, that Congress may not validly abrogate state sovereign immunity by relying on its Bankruptcy Clause powers. See Sacred Heart Hosp. of Norristown v. Pennsylvania (In re Sacred Heart Hosp. of Norristown), 133 F.3d 237 (3d Cir. 1998); Schlossberg v. Maryland (In re Creative Goldsmiths of Wash. D.C., Inc.), 119 F.3d 1140 (4th Cir. 1997), cert. denied, 523 U.S. 1075 (1998); Department of Transp. & Dev. v. PNL Asset Mgmt. Co. LLC (In re Fernandez), 123 F.3d 241, amended by 130 F.3d 1138 (5th Cir. 1997); Nelson v. LaCrosse County Dist. Attorney (In re Nelson), 301 F.3d 820 (7th Cir. 2002); Mitchell v. Franchise Tax Bd. (In re Mitchell), 209 F.3d 1111 (9th Cir. 2000).
This case has important implications for the business community. States are creditors in the majority of the 1.5 million bankruptcy petitions filed each year. The Supreme Court’s decision will determine whether states and their agencies can be required to participate in adversary proceedings under the Bankruptcy Code — for example, proceedings to recover money or property or to determine the validity, priority or extent of a lien or other interest in property.
The Impact Of The Sarbanes-Oxley Act On Nonpublic Companies
Information contributed by Rothgerber Johnson & Lyons LLP
09 December 2003
Article by Philip A. Feigin
For the most part, the sweeping Sarbanes-Oxley Act of 2002 (SOXA) applies only to "issuers," i.e., companies that must file periodic reports with the U.S. Securities and Exchange Commission (SEC). The changes intended by the new law are so broad and fundamental that it will be many years before they are all incorporated and fully appreciated. Over and above the intended changes, it is inevitable that some collateral, and perhaps unintended, effects and consequences will result as well. It is this broader, potential impact that should give rise to concern among those companies that are not issuers under the SOXA definition.
Primarily, the SOXA is an array of new regulatory powers the federal government can bring to bear on public companies and those who serve them. The SOXA includes some new and enhanced criminal provisions, as well as some authority under which private civil actions may be brought. Given that, why should private companies care about the SOXA?
Many of the issues addressed in the SOXA were on lists of "best practices" in corporate management. They are now minimum standards for public companies. Failing to comply is illegal. The bar has been raised considerably. Private companies must keep the minimum standards set in the SOXA in mind for a multitude of reasons. Many private companies want to become public companies. Others are building toward profitability in the hope of being acquired by other, perhaps public, companies. Private companies often seek credit from banks and other commercial lenders, and seek to raise equity through nonpublic offerings of securities. It is difficult to escape dealing with the regulators one way or another.
For example, a private company considering a public offering or being considered by another company for acquisition or merger will soon discover that it must have audited financials for three years from an independent auditor, independent directors, and a functioning, independent board audit committee. There can be no outstanding loans to directors (which can be a very sore point in clearing from the books on short notice). In the company governance structure, shareholder approval of certain executive compensation arrangements will be required. These features and more may necessitate a convulsion of change in company operations and culture if not incorporated into the central structure of the enterprise gradually, and long before going public is considered.
It also remains to be seen to what extent, if any, the minimum standards for public companies will seep into other areas. For instance, will commercial lenders begin to ask if potential borrowers have independent directors and auditors? Will bank regulators examining loan portfolios inquire of the bank if the borrower has an independent auditor and an independent board of directors? Will potential investors begin to give enhanced weight to the presence or absence of independent auditors and boards of directors? Clearly, the materiality of such factors has been heightened given recent scandals from a securities disclosure perspective, be it a private placement or a public offering prospectus. Is it possible that corporate governance and similar SOXA subjects will factor into determinations of the suitability of broker-dealer recommendations? Obviously, no one knows for sure, but the prospects of these and other such considerations reaching this level of importance are greater certainly today than in years past, and those who discount or ignore them altogether have simply not gotten the message.
As fascinating and puzzling as are the direct impacts and implications of the SOXA, it again is an array of federal authority, mandates, and remedies. Of far greater concern is the universe of private civil action. In enacting the SOXA, Congress was not the only revolutionary to toss tea into the corporate harbor. In tandem with the mood of the country that formed the underpinning of the SOXA and the accompanying regulations, significant and dramatic changes have taken place in the interpretation of Delaware corporate law, the body of law and the courts that serve as the standards for all state corporate law jurisprudence.
Whether the companies involved were publicly traded giants or smaller corporations was irrelevant to the recent decisions. These decisions applied to the board of directors, the individual independent directors, and the management of any (Delaware) corporation with shareholders.
The focus of these decisions has been the protections traditionally afforded to directors of a corporation under the business-judgment rule. Members of the board of directors of a corporation have been shielded from personal liability for errors or mistakes in judgment pertaining to law or fact, if they were able to demonstrate that they exercised prudent business judgment, i.e., if they discharged their duties in good faith and with that diligence, care, and skill that ordinarily prudent people would exercise in similar circumstances, in a manner they reasonably believed to be in the best interests of the corporation. In performing their duties, directors have been entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data, if prepared or presented by corporate officers and employees, corporate lawyers, accountants, other experts, and other directors who serve on board committees on which they do not serve.
Generally, the business-judgment rule defense has not been available if the director is not independent or does not act in good faith or exercise due care. Absent evidence of fraud, bad faith, or self-dealing, the business-judgment rule usually applies to shield individual directors from personal liability. In making their business decision, they are presumed to act on an informed basis, in good faith, and in the honest belief they are acting in the best interests of the corporation (and the shareholders). The law does not require them to do the best job possible, just a reasonable job under the circumstances.
However, recent decisions and public statements by the Delaware judiciary have signaled a sea change in what is to be expected of independent directors generally, and more specifically the breadth of business-judgment rule protections. If the presumptive protection of the business judgment is defeated, under Delaware law the corporation is prohibited from indemnifying a director from liability for monetary damages as well. Colorado’s statutes are no more lenient than those in Delaware. In a recent case, the Delaware court went so far as opining that independent directors could be held personally liable for damages for their "deliberate indifference" to important matters. In doing so, they breached their duty of good faith.
At this point, it is problematic to attempt to predict "how high is up." In the wake of the many corporate scandals, courts have yet to opine in any decision that independent directors did enough to shield them from personal liability under the protection of the business-judgment rule. For any company that has independent shareholders or some other form of outside investor, the handwriting is on the wall: It’s not your money!
The mood and intent of Congress, the courts, regulators, and the public make it clear that corporate management and boards of directors are being held to the standards of a full fiduciary. They are charged with handling investor/shareholder funds almost as if they were deposits at a bank.
For private companies, there are core concepts in all of this that enlightened management should strongly consider embracing. Boards of directors should include a healthy proportion of independent directors selected by shareholders or other independent board members. Financial statements should be audited, and the auditor should be independent, i.e., perform no other services for the company. Corporate governance standards should be clear, incorporated into governing documents (articles of incorporation or bylaws), and not be subject to amendment without shareholder approval. Corporate loans to insiders (officers and directors) should be discouraged or prohibited altogether. If allowed, the rules governing them should be explicit and subject to board approval and oversight. Shareholder communication should be a major feature of corporate culture. In essence, what should be established is a system of checks and balances between the board and management, not unlike that between Congress and the executive branch.
All this will likely mean surrendering some authority and control by the owner-founder-president of a private company to independent people. That can be a scary thought for anyone in that position. To avoid the problem, the answer, although impractical in most circumstances, is simple: Don't seek and take investment capital from those outside the company. If you have outside investors, this is a brave new world, with heightened expectations and demands on us all.
At Rothgerber Johnson & Lyons LLP, our attorneys are poised to assist in navigating these new and treacherous waters. These are not things that are just happening to the "other guys." They affect all of us.
Phil Feigin is a partner in RJ&L's Denver office where his practice is focused on state and federal securities law, compliance, and litigation. As the former Colorado Securities Commissioner and Executive Director of the North American Securities Administrators Association in Washington, D.C., he has extensive local and national regulatory, court, and legislative experience. He has served as an expert witness on securities matters in more than 60 criminal, civil, and arbitration proceedings in Colorado, New Mexico, Nevada, Washington, and Florida. He has testified in Congress on investor issues, and for many years has been quoted in local and national media on financial issues of concern.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
http://www.mondaq.com/article.asp?articleid=23621&hotopic
United States: Bush Has Signed Federal Anti-Spam Legislation to Take Effect January 1, 2004
22 December 2003
By Liisa M. Thomas and Ashok M. Pinto*
Overview
Effective January 1, 2004, a new federal law will preempt all existing state anti-spam laws, including an amendment to the California anti-spam law that was to go into effect on January 1, 2004. The California amendment would have prohibited sending unsolicited commercial email messages. The new federal law, the CAN-SPAM Act, will allow that practice to continue. By preempting state laws, the CAN-SPAM Act also removes an individual’s right to sue for receipt of unwanted email, a welcome relief for many companies.
Introduction
Unwanted commercial email has surged to epidemic proportions. Until yesterday’s passage of the CAN-SPAM Act ("Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003")1 the Federal Trade Commission and states’ attorneys general attacked spam using deceptive trade practices acts or similar laws.2 State legislators also created a complex and conflicting patchwork of anti-spam laws to combat the annoying messages flooding Americans’ email inboxes.3 All of these laws, however, failed to stop spam.
California’s recent amendment to its anti-spam law (which would have been effective January 1, 2004) may not have been any more effective at stopping spam than the other legislative approaches, but it would have had a clear negative effect for legitimate businesses: stifling commerce by prohibiting the sending of any unsolicited commercial email messages.4 In large part to block the implementation of the California law, President Bush signed the CAN-SPAM Act yesterday. The Act, which goes into effect on January 1, 2004, preempts all state anti-spam laws including California’s.5
Compliance with the CAN-SPAM Act
Under the CAN-SPAM Act, companies can send (1) "transactional or relationship" emails, (2) commercial email messages where the recipient has given affirmative consent, and (3) unsolicited commercial email messages. Different requirements apply to sending each type of communication. "Commercial email messages" are defined as those that have as their primary purpose advertising or promoting "a commercial product or service."6 The FTC has until December 16, 2004 to issue regulations further defining an email message’s primary purpose.7
In order to send "transactional or relationship" email messages, a company must (1) use accurate, non-misleading header, sender, origination, and transmission information and (2) ensure that the message does not disguise the computer used to initiate the message.8 The Act contemplates a variety of transactional and relationship messages, falling into five general categories.
First are those transactional or relationship emails that facilitate or confirm a commercial transaction the recipient has already entered into with the sender.9 Second, transactional messages may provide product safety or warranty information for a product or service that the recipient has used or purchased.10 The third type of transactional messages pertain to a subscription, membership, account, loan, or other kind of ongoing business relationship. These messages would contain information about the service features, about the recipients’ standing, or account balance details.11 Fourth, transactional emails may provide information about an employment relationship or benefit plan.12 Finally, transactional messages may be those that deliver products or services, including product updates or upgrades.13 The CAN-SPAM Act grants the FTC rulemaking authority to change the definition as necessary to accommodate new technology or practices.14 Including an advertisement in a transactional or relationship message does not make that email a "commercial electronic mail message" for purposes of the CAN-SPAM Act.15
If the email is not a transactional or relationship message, it can still be sent, whether or not a company has received affirmative consent. If affirmative consent is received, the sender must follow requirements for sending transactional or relationship messages, and must also supply a functioning return email address or another Internet-based mechanism through which the recipient can "opt out." The company must also notify the recipient that he or she may opt out if desired. Finally, the email must contain the sender’s valid physical postal address.16 If a company has not received affirmative consent, the company must also provide "clear and conspicuous" notice that the message is an advertisement or solicitation.17 Clear and conspicuous notice does not need to appear in the subject line. This is different from many state anti-spam laws, which required using "ADV" in the subject line of all advertising emails.18 The CAN-SPAM Act calls for the FTC to study whether it would be appropriate to require that commercial emails be identifiable as advertisements in their subject lines.19
In order to obtain valid consent (and avoid stating that the commercial email is advertising), the recipient must have "expressly consented to receive the message."20 Consent can either be requested ("may we send you this message?" or "we will send you this message unless you say no") or can be presumed if the individual, at his or her own initiative, contacts the company to receive a commercial email message. Consent can also be obtained indirectly on the company’s behalf if the third party has disclosed in a "clear and conspicuous" fashion that the company (sender) may send commercial email messages.21
Opt out mechanisms in commercial email messages must be valid for at least 30 days, and requests must be processed within ten days of receipt.22 Vendors sending messages on their clients’ behalf will violate the CAN-SPAM Act if the vendor knew – or should have known – that the individual opted out.23
Penalties and Enforcement
In addition to resolving the patchwork of compliance requirements, the CAN-SPAM Act also unifies – and heightens – the penalties to which a company could be subject. Fines of up to $2 million can be levied, and a three-year prison sentence may be assessed for predatory and abusive commercial practices.24 This system, while severe, unifies the disparate approach taken by the states. For example, penalties for violating the California law beginning January 2004 would have been $1,000 for each unsolicited email, and up to $1 million per incident.25 Most other states exacted lower penalties, from $10 in Illinois to $500 in Maryland.26
The FTC is the primary body authorized to enforce the CAN-SPAM Act, although other federal agencies may enforce the Act to the extent that companies who send email are subject to the regulatory authority of that body.27 States’ attorneys general, state officials, or other relevant state agencies may bring cases under the Act, although those actions are limited if a federal action by the FTC has been initiated or is pending.28 In contrast to state laws, violating ISP policies is not a violation of the CAN-SPAM Act.29 ISPs may, however, bring suit under the CAN-SPAM Act.30 The CAN-SPAM Act does create some recourse for individual litigants. A person who identifies a violation can collect a bounty of at least 20% of the civil penalty collected.31
Perhaps recognizing that the CAN-SPAM Act may have little effect on the amount of spam consumers receive daily in their inboxes, the Act requires the FTC to prepare a report that assesses the Act’s effectiveness, and to study how to deal with spam that originates offshore.32 The Federal Communications Commission and the FTC are also directed to collaborate in issuing rules regulating commercial messages on mobile phones.33 As a final mechanism for consumer protection, Congress has authorized the FTC to study the planning and development of a Do-Not-Email Registry. Although the Act does not require the creation of such a registry, the FTC must report back to Congress regarding the feasibility of implementing the list and an approximate timetable for doing so.34 It seems unlikely that the FTC will support such a database, however.
Conclusion
The CAN-SPAM Act’s unified national standard for addressing unwanted commercial emails simplifies legal compliance for businesses. Perhaps a larger benefit for companies, the Act removes an individual’s ability to sue for receipt of unwanted email.
The information contained herein is intended as a service to our clients, and should not be substituted for legal advice. What commercial email can be sent and what requirements must be met will turn on the specific facts. Gardner Carton & Douglas’s privacy practice can assist you in managing this or other issues that arise when conducting online marketing activities.
Endnotes
1 S. 877, 108th Cong. (2003).
2 15 U.S.C. §§ 41-58; Cal. Bus. & Prof. Code §§ 17200 et. seq.; 6 Del C. §§ 2531-36 (Del.); 815 ILCS (2001) 510/1 et seq. (Ill.); N.Y. Gen. Bus. Law § 349. See also FTC v. Westby, File No. 032-3030; FTC v. Drees, File No. 022-3234; FTC v. Freitas, File No. 022-3235; FTC v. Silverman, File No. 022-3302.
3 Most states require that a company sending bulk email messages not misrepresent the sender of the message. See Conn. Gen. Stat. § 53-451; C.R.S. 6-2.5-103; Del. Code Ann. tit. § 937; Idaho Code § 48-603E; 815 ILCS 511; Iowa Code § 714E.2 (2001); La. R.S. 14:73.6; N.D. Cent. Code § 51-27-02; 15 Okla. St. § 776.1; R.I. Gen. Laws § 11-52-1; Wash. Rev. Code § 19.190.020; W. Va. Code § 46A-6G-2.
4 S.B. 186, 2003 Reg. Sess. (Cal. 2003) (to be codified at Cal. Bus. & Prof. Code §§ 17529 et seq.).
5 The state laws are preempted except to the extent that they prohibit falsity and deception in any portion of a commercial email. S. 877, § 8(b).
6 S. 877, § 3(2)(A).
7 S. 877, § 3(2)(C).
8 S. 877, § 5(a); 18 U.S.C. § 1030(e)(2)(B) (2003).
9 S. 877, § 3(17)(A)(i).
10 S. 877, § 3(17)(A)(ii).
11 S. 877, § 3(17)(A)(iii).
12 S. 877, § 3(17)(A)(iv).
13 S. 877, § 3(17)(A)(v).
14 S. 877, § 3(17)(B).
15 S. 877, § 3(2)(D).
16 S. 877, § 5(a)(5)(iii).
17 S. 877, §§ 5(a)(5)(A)(i) – (iii); § 5(a)(5)(B).
18 Alaska Stat. § 45.50.479; Cal. Bus. & Prof. Code § 17538.4(g); Col. Rev. Stat. § 6-2.5-103(4); 815 Ill. Comp. Stat. 511/10; Ind. Code. § 24-5-22-8; Kan. Stat. Ann. § 50-6,107; Me. Rev. Stat. Ann. Tit. 10 § 1497; Minn. Stat. § 325F.694; N.M. Stat. Ann. § 57-12-23; N.D. Cent. Code § 51-27-04; 15 Okla. St. § 766.6; S.D. Codified Laws § 37-24-6; Tenn. Code Ann. § 47-18- 2501(e); Tex. Bus. & Com. Code Ann. § 466.003; Utah Code Ann. § 13-36- 103.
19 S. 877, § 11(2).
20 S. 877, § 3(1)(A).
21 S. 877, § 3(1)(B).
22 S. 877, §§ 5(a)(3)(A)(i), (ii); §§ 5(a)(5)(A)(i) – (iii); § 5(a)(5)(B).
23 S. 877, § 5(a)(4)(A).
24 S. 877, § 4, §§ 1037(b)(2)(B) – (D) (amending Chapter 47of title 18, United States Code); S. 877 § 7(f).
25 S.B. 186, 2003 Reg. Sess. (Cal. 2003) (to be codified at Cal. Bus. & Prof. Code § 17529.8(a)(1)(B)).
26 720 Ill. Comp. Stat. 5/16D-3(b)(4); Md. Code Ann. § 14-3003(1).
27 S. 877, § 7(b).
28 S. 877, § 7(f)(8).
29 See S. 877, § 8(c); see, e.g., Cal. Bus. & Prof. Code § 17538.45(c); La. R.S. 14:73.6.
30 S. 877, § 7(g).
31 S. 877, § 11(1)(A).
32 S. 877, § 10(b).
33 S. 877, § 14(b).
34 S. 877, § 9.
*The authors are indebted to the research assistance of Mr. Michael McDonald.
Copyright 2003 Gardner Carton & Douglas
This article is not intended as legal advice, which may often turn on specific facts. Readers should seek specific legal advice before acting with regard to the subjects mentioned here.
http://www.mondaq.com/article.asp?articleid=23813&searchresults
Growing corporate scandals being uncovered through a growing international network of whistleblowers is being enhanced by the rising popularity of bringing about the greater good for the greatest possible number as increasing numbers of individuals become more informed and educated on the broad range of information available on the internet.
In fact the information age has been deemed the predecessor to the beginnings of what is being dubbed the "Wisdom Age", which started at the tail end of the last millennium. Three new words being brought to the forefront of international currency dealings are "wisdomage", "ethicism" and "magicism".
The speed at which information is being transmitted, evaluated, absorbed and duplicated by the collective international mind is mushrooming along the parallel lines of Moore’s Law, wherein the processing speeds of personal computers doubles every 18 months.
http://www.mondaq.com/article.asp?article_id=23809
SEC Releases Guidance Regarding MD&A
FOR IMMEDIATE RELEASE
2003-179
Washington, D.C., Dec. 19, 2003 - The Securities and Exchange
Commissions today issued an interpretive release providing guidance regarding
Management's Discussion & Analysis of Financial Condition and Results of
Operations, commonly called MD&A, included in reporting companies
disclosure documents.
The guidance reminds companies of existing disclosure requirements and
provides additional guidance, designed to elicit more informative and
transparent MD&A that satisfies the principal objectives of MD&A: (1) to
provide a narrative explanation of a company's financial statements
that enables investors to see the company through the eyes of management;
(2) to enhance the overall financial disclosure and provide the context
within which financial information should be analyzed; and (3) to
provide information about the quality of, and potential variability of, a
company's earnings and cash flow, so that investors can ascertain the
likelihood that past performance is indicative of future performance.
Specifically, the guidance issued today emphasizes that MD&A should not
be merely a recitation of financial statements in narrative form or an
otherwise uninformative series of technical responses to MD&A
requirements, neither of which provides the important management perspective
called for by MD&A. Instead, the release encourages top-level management
involvement in the drafting of MD&A, and provides guidance regarding:
--the overall presentation and focus of MD&A (including through
executive-level overviews, a focus on the most important information and a
reduction of duplicative information);
--emphasis on analysis of financial information;
--known material trends and uncertainties;
--key performance indicators, including non-financial indicators;
--liquidity and capital resources; and
--critical accounting estimates.
The release does not create new legal requirements, nor does it modify
existing legal requirements.
A copy of the release can be found on the Commission's Web site at
http://www.sec.gov/rules/interp/33-8350.htm under "Regulatory Actions /
Interpretive Releases."
Use every means to stop naked short selling sometimes called counterfeit shares. Naked short selling increases the volume of shares way beyond the number issued and effectively dilutes the value of the stock. Many of the smaller, most innovative companies are being forced out of business by the short sellers. Since the mid 1990's, the SEC has been aware of naked short selling and failed to adequately respond to investor and company complaints alike. In recent years the FBI, SEC, and the Royal Canadian Mounted Police have conducted investigations into naked short selling and followed these sales through money laundering schemes used by criminal elements. Those elements jeopardize our Homeland Security. Unbelievably, the practice of naked short selling still continues to this day regardless of where the profits are going.
If the SEC has failed to take adequate counter measures to stop this illegal trading practice, we not only need to know about it, but we request an accounting of their actions. Hopefully this will be done as soon as possible.
Richard Wismer
http://edgar.sec.gov/rules/proposed/s72303/dwismer120703.htm
http://www.fpif.org/papers/juggernaut/
http://dictionary.reference.com/search?q=juggernaut
I invest some of my savings in securities and recently have begun to realize the American trading system lacks integrity. Had I known the practice of "naked shorting", a synonym for selling what doesn't exist, was taking place in the OTC and Pink Sheet markets I would have stayed away and saved myself a sizable chunk of my savings. I now understand why I got such a runaround from the brokers when I requested delivery of my certificates. I was encouraged instead to sell my investment - for a commission - while all along the legitimate company issued shares that I thought I paid for didn't even exist!
Naked shorting is an industry racket that artificially depresses the price of securities by flooding the market with "stock credits" - market makers who sell these phantom shares enjoy greater leverage than if they were required to borrow stock and deliver within a reasonable period of time as do the regular shorters like me. There should not be two types of shorting, one for the public and another for people in the industry.
Delivery of securities should be made commensurate in time with payment for securities.
John O'Brien
http://edgar.sec.gov/rules/proposed/s72303/jobrien120903.htm
http://dictionary.reference.com/search?q=masses
Re: Regulation SHO (Short Sales)
Dear Sirs,
I would like to comment on a number of issues surrounding the proposed 'Regulation SHO.' I have been a professional trader and principal at proprietary trading firms for the last four years, having been in the 'trenches,' I have a great deal of insight into the practical workings of the US equities markets. This experience has led me to conclude that while certain aspects of Regulation SHO will be beneficial, other of the proposed rules would have severe deleterious consequences.
First and foremost I want to address the 'Bid Test' rule. In practice, I feel that any 'uptick' limitation on short selling is very antiquated, and irrelevant in today's market. If my memory serves me, the original '0+ tick' rule was part of the Securities Exchange Act of 1934 as a direct response to the 'bear raids' that occurred during 'the crash,' and subsequent market decline. The US equities markets have changed greatly in the last 70 years... spreads have been reduced to pennies, liquidity is exponentially higher, as is volume. The 'bear raids' of our father's day just aren't possible in today's global investment community, so this isn't a real concern anymore. What is a concern, is if the 'uniform bid test' proposal is passed, liquidity will actually be less and intraday trading will be more volatile. This actually seems counterintuitive, however if you look at examples where a 'market sell order' comes in on an ECN ("pegging" one penny above the bid) you see far larger down moves, than if the shorter would just 'hit the bids.' An example of this can be seen on December 5th, 2003 in COCO. An erroneous large sell order came in on the BTRD ECN that was pushing the stock down one penny above the bid. The sell order drove the stock down 19 points, and when the order was filled, the stock rallied 4 points in seconds.
One way to prove my theory would be to implement the pilot program in which all bid test rules would be suspended for a two year period. Everyone has their beliefs and opinions... this sounds like an outstanding way to test the soundness of any case being made to keep a bid test rule.
Now I would like to comment on what I believe is the most egregious rule that is being considered, the exemption of market makers from the bid test qualification if they are engaged in 'bona fide market making activities.' Back in the 1970's the base of deployable capital at the major investment banks in the US was around $20-50mm, today it's more like $20bn. Investment banks derive more and more profits from proprietary trading... they are essentially acting as mega hedge funds. Look at Lehman Brothers most recent earnings, they recorded revenues very close to the previous quarter, except capital markets revenues doubled to $1.67bn. They maintained their earnings by essentially 'day-trading' equities. Goldman Sachs has increased their 'value at risk' from $47mm to $64m. Giving market makers exemptions from bid test rules is giving these 'day-traders' a huge advantage over the general public... the 'public' that the SEC is entrusted to protect.
In spite of my disagreements with the bid test rule, I do believe there should be at some level where 'un-restricted short selling' should be collared. The proposed 10% 'circuit breaker' over a trading day should suffice to prevent sheer panic in a day of major market collapse.
I hope these points will be taken into consideration when evaluating these matters.
Cordially,
Carl Z. Giannone
General Securities Representative
Limited Representative Equities Trader
General Securities Principal
Trillium Trading, LLC.
417 Fifth Avenue
New York, NY 10017
http://edgar.sec.gov/rules/proposed/s72303/cgiannone121003.htm
Based on the discussion and answers to follow, I suggest consideration of the following rules governing short selling in all public exchanges:
1. If a DTCC market maker or broker dealer (“members”) may short a stock, then short selling of that stock shall be open to all investors, including retail investors, subject to reasonable margin requirements. All margin shall be actually held in the accounts of the member, i.e., no letters of credit, etc. A member may not short any stock for its own account unless immediately thereafter its assets will exceed its liabilities by an amount greater than or equal to the margin charged to non-members for their short positions.
2. Total covered short interest in a stock is capped at 100% of outstanding shares. Naked short selling of a stock is capped at 30% of outstanding shares. Once the naked short cap is reached, members must surrender their short positions to satisfy short sell purchases of customers. A member’s and its customers’ naked short positions shall be closed prior to a regular short interest position being created. A member may substitute a customer’s naked short position for a regular short position.
3. Short positions in all stocks shall be reconciled at the end of each trading day by the DTCC. In the event an aforementioned cap is exceeded, the DTCC shall order a pro rata reduction by all market makers and broker dealers on the next trading day until the cap is reestablished. In any calendar quarter wherein the volume of trading of a stock is in excess of 25% of its outstanding shares, further naked shorting of that stock for the balance of that quarter shall be prohibited.
4. By 9:00 p.m. (ET) on each trading day, a member of the DTCC shall report, whether or not its position is “flat,” for each stock owned by it and/or its customers, the following: Stock (XYZ); Total Shares Outstanding; Member’s Customers’ Shares Owned; Member’s Shares Owned; Member’s Customers’ Total Short Positions - Covered; Member’s Customers’ Total Short Positions - Naked; Member’s Total Short Positions - Covered; Member’s Total Short Positions - Naked. A responsible managing officer (RMO) of the member shall certify under penalty of perjury based upon information and belief and reasonable inquiry that such reports to the DTCC are true and correct. From time to time, members’ books and records shall be audited by federal banking examiners.
5. Naked short sales in violation of the aforementioned rules shall be deemed fraud on a customer. Members (particularly wholesale market makers) cooperating to close short positions in a stock shall be deemed market manipulation. Members’ daily short position history for each stock shall be publicly available at the close of each trading day, 30 days in arrears.
DISCUSSION:
The Depository Trust and Clearing Corporation (DTCC, a private broker dealer and market maker membership organization) and the SEC correctly state that the issues surrounding naked short selling are not germane to the manner in which its subsidiary Depository Trust Company (DTC) operates as a depository registered as a clearing agency. (See References 1 and 2 below) The DTCC clears and nets members’ positions while the members keep track of their customers’ positions. The DTCC simply knows its members’ net positions in a stock, long or short.
The SEC has described in its comments its belief that most specialists and market makers seek a net‘‘flat’’ position in a security at the end of each day and often ‘‘offset’’ short sales with purchases such that they are not required to make delivery under the security settlement system. (See Reference 3 below) Therein lies a significant problem.
In the case of regular shorting, the DTCC does not even add up all members’ short positions to determine that there are actually shares to borrow, i.e., members are borrowing on already once borrowed shares and in some cases short positions exceed shares available to borrow. Recognizing this, Equilend and SecFinex are private initiative of key members of the DTCC to facilitate real and orderly borrowing of securities for short sales. (See Reference 4 below)
Naked short selling of OTC stocks goes one step further by waiving the pretense of borrowing shares as part of a short sale. A broker dealer member sells a share to its customer that does not exist - an artificial or “virtual” share. (See Reference 5 below) A broker member keeps the customer’s purchase money while “crediting” the customers account with the intent, in the future, to actually deliver a real share. The broker member then has a “flat” position described above of one share in a customer account and one virtual share short, and no interaction with marketplace through “broker internalization” and no delivery requirement. Market liquidity and efficiency are enhanced by this procedure since customers can continue to “buy and sell” closely held and illiquid shares through virtual shares. Moreover, when liquidity isn’t readily available, wholesale market makers can step forward to do what an ECN can’t do - take risks (i.e., naked short) on behalf of their clients.
(See Broker/Dealer Internalization: http://www.knight?sec.com/How_the_Trade_Gets_Done/HowStock.asp)
Since members and exchanges, but not the SEC (See Reference 6 below), prohibit retail customers from shorting a stock with a price under $5, almost all naked shorting is done by brokers dealers and/or market makers who make a profit by actually buying the previously credited share, with the customer’s purchase money, in the marketplace once the price has dropped. Because of the dilution caused by naked short selling, the long term price trend for most OTC stocks is down. However, to hedge their naked short positions, the broker dealers, market makers and exchanges permit hedge funds, institutional investors, and foreign investors to add through regular shorting procedures to the members’ naked short positions with a 50% margin further protecting the entire pool of naked short positions. Foreign investors’ short sales can be facilitated through the NASDAQ London office and U.S. market makers having London satellite offices. In the less usual case where an OTC stock price begins to rise, the broker dealers and market makers can clear their naked short naked positions first and before too much upward momentum is built by artificially controlling the bid and the ask.
Justifications offered for naked short selling are liquidity and efficiency. Currently, naked shorting achieves both objectives since the sale of non-existent shares is profitable and unlimited with bankruptcy of the target company the preferred result. However, the enrichment of a few by destroying promising U.S. companies is obscene and supports offshore money laundering, drug running, terrorism and organized crime world wide. It is one thing to let air out of a stock and quite another to destroy it with the aforementioned consequences.
I have the following comments to the SEC’s staff questions:
ANSWERS TO SEC’S QUESTIONS:
Q. What harms result from naked short selling? Conversely, what benefits accrue from naked short selling?
Penny stocks often have the bare minimum 300 shareholders necessary to publicly trade and these shareholders believe the value of the penny company is going up. These stocks are therefore illiquid and trade inefficiently, e.g., a few low volume trades can turn a penny stock into a dollar stock while a few other trades can do the reverse. Even if retail investors were permitted by the OTC and Pinks to short penny stock, most would not because of significant risks if the penny stock follows its natural bias upward caused by its pool of “true believer” shareholders. Naked short selling provides virtual (i.e. “counterfeit”) shares to the market place to avoid day to day panic buying. There are always enough counterfeit shares to keep the penny stock low.
At some point, market makers and broker dealers can become so locked into their naked short positions that they simply cannot afford to let the underlying stock rise. The market makers and broker dealers prolonged dissipation of buying energy for promising penny stocks through the sale of counterfeit shares leads to the collection of a large pool of customers’ purchase money for the shares, double or triple the outstanding shares of the underlying company in customer accounts, a paper credit to the customers’ statements for the nonexistent shares, and an incentive to either drive the underlying company out of business or repeatedly over time drive the underlying stock up on low volume and then plunge the underlying stock on large volume to cover the naked short positions, i.e., a process to actually free up and deliver real underlying shares to the customers who cannot be shaken loose. By trading in a circle, market makers and broker dealers can create the illusion of volume on the upside. All this can be accomplished without interference from the DTCC.
Since market makers and broker dealers control the market price, to shake off the naked shorts, the underlying company is force to sell out (probably to a potential competitor seeking to acquire the disruptive technology), to delist to the pink sheets to avoid centralized OTCBB/ DTCC clearing thereby making naked short selling more inefficient and more dangerous, to go private forcing all naked shorts out, or to give these market manipulators significant time to unwind their naked short position during which the underlying company is unable to obtain additional financing or is tempted to accept death spiral financing, particularly when management is more interest in continuation of their pay than appreciation of their stock. However, each of the alternatives requires that the penny company actually be valuable and have some residual strength.
According to Paul Harrison of the Federal Reserve Board, short selling and naked short selling have been around for 400 years - at least. (See Reference 7) Given such longevity, this writer is willing to accept that short selling has some efficacy. But when one broker can sell 162% of a company’s outstanding shares and still maintain a “flat” position, it doesn’t take other brokers long to follow and dilute the outstanding shares by a factor of 3 or more. As a famous wag once said, “You got to keep the game honest enough for the suckers to play.” The market place has reached that point, and through the internet, we suckers finally have a sense of what is really going on. The SEC must cap, track, and audit short selling to realize its perceived benefits without permitting the continued selling of air to investors as was historically the case.
Q. Are there negative tax consequences associated with naked short selling, in terms of dividends paid or otherwise?
Yes. When the market makers and broker dealers are permit to kill the gold goose, the government losses all the future taxes at the corporate and individual level. In addition, most penny stock losses are short term capital losses offsetting the investor’s short term capital gains so the government loses out again.
Q. What is the appropriate manner by which short sellers can comply with the requirement to have ‘‘reasonable grounds’’ to believe that securities sold short could be borrowed? Should short sellers be permitted to rely on blanket assurances that stock is available for borrowing, i.e., ‘‘hard to borrow’’ or ‘‘easy to borrow’’ lists? Is the equity lending market transparent enough to allow an efficient means of creating these lists?
SecFinex and Equilend. See Reference 4 below. If caps are imposed and tracked at the DTCC, the SEC will know if the lists are working and correct lists that are not providing accurate information. In fact, caps make such lists less relevant.
Q. Should short sales effected by a market maker in connection with bona fide market making be excepted from the proposed ‘‘locate’’ requirements? Should the exception be tied to certain qualifications or conditions? If so, what should these qualifications or conditions be?
Absolutely not!!!! Unless caps are implemented so it becomes easy to verify “bona fide market making activity.”
Q. Should the proposed additional delivery requirements be limited to securities in which there are significant failures to deliver? If so, is the proposed threshold an accurate indication of securities with excessive fails to deliver? Should it be higher or lower? Should additional criteria be used?
As suggested above, the DTCC should settle the market place every night just like the banks do. A solid currency in stock has become as important as our money. The DTCC is already a member of the Federal Reserve System. Broker dealers and market makers should be subject to announced and unannounced audits by federal bank examiners with penalties equal to those imposed for bank fraud, etc. If DTCC members want their private entity to perform settlement and custody functions, they really have to do so in the public interest rather than their own.
Q. Are the proposed consequences for failing to deliver securities appropriate and effective measures to address the abuses in naked short selling? If not, why not? What other measures would be effective? Should broker-dealers buying on behalf of customers be obligated to effect a buy-in for aged fails?
Until the DTCC knows that broker dealers are putting IOU’s in their customers’ accounts rather than shares via “flat” positions, how will “failures” to deliver be discovered? Aged fails can be concealed by simply rolling real shares in customer accounts from one aged failure to another.
Q. Is the restriction preventing a broker dealer, for a period of 90 calendar days, from executing short sales in the particular security for his own account or the account of the person for whose account the failure to deliver occurred without having pre borrowed the securities an appropriate and effective measure to address the abuses in naked short selling? Should this restriction apply to all short sales by the broker-dealer in this particular security? Should the restriction also apply to all further short sales by the person for whose account the failure to deliver occurred, effected by any broker dealer?
The broker deal should also be force to immediately eliminate its entire short positions in the particular security for the same period.
Q. Should short sales effected by a market maker in connection with bona-fide market making be exempted from the proposed delivery requirements targeted at securities in which there are significant failures to deliver? If so, what reasons support such an exemption, and how should bona-fide market making be identified?
Bona-fide market making is short term. Without consolidated reporting at the DTCC level, bona-fide market making is simply a claimed justification not subject to proof.
Q. Under what circumstances might a market maker need to maintain a fail to deliver on a short sale longer than two days past settlement date in the course of bonafide market making? Is two days the appropriate time period to use?
I have no comment.
Q. Are there any circumstances in which a party not engaging in bona-fide market making might need to maintain a fail to deliver on a short sale longer than two days past settlement? If so, can such positions be identified? Should they be excepted from the proposed borrow and delivery requirements, and if so, why, and for how long?
I have no comment except to say that I am SURE that such positions cannot be identified and are concealed all the time.
Q. Are the delivery requirements in proposed Rule 203(a) appropriate?
I have no comment.
I am not an expert on market regulation but I support the foregoing discussion and answers with excerpts from internet available documents cited below. If I am wrong on some of my contentions I apologized, but by design or otherwise, it not easy for an outsider to piece together exactly what is going on behind the market curtain. But something smells behind that curtain and abusive short selling should be the next shoe to drop like Eron, Worldcom, NYSE pay and oversight scandals, mutual/ hedge fund after hours trading, etc. Thank you for your consideration.
Sincerely,
Alden James
P.S. I request that you scan, publish and post comments received through non-electronic means, particularly those received from the industry. This would be educational for the investing public, initiate further feedback, and reduce fears that the industry is seeking only cosmetic changes to assuage public outrage while maintaining the currently profitable status quo at the expense of the investing public and the national interest.
REFERENCES:
Reference 1. (http://www.dtcc.com/PressRoom/2003/nakedshorts.html)
DTCC Statement On Alleged Short Selling And Issuers Withdrawal From DTC
New York, January 23, 2003 — In recent months, a number of small OTCBB companies have announced plans to withdraw from The Depository Trust Company (DTC), a subsidiary of The Depository Trust &Clearing Corporation (DTCC), and move to physical certificate ownership only of their shares, ostensibly to reduce the alleged short selling or “naked short selling" in their shares.
Why the statements by issuers on this subject are lacking in merit
The rules governing short selling are the same in a physical environment as they are in a book-entry environment. Moving to physical securities does not inhibit short selling in any way. The rules governing short selling are the same, and are made and enforced by the SEC and major markets. Those are Rule 3370 for NASD members and Rule 440B for New York Stock Exchange members. DTC rules do not allow its participants to be short in deliveries to other participant firms. While a brokerage firm can lend shares to an investor, the brokerage firm cannot be short in delivering shares to another brokerage firm through DTC. If necessary, a firm can and must borrow shares from one or more brokerage firms that currently have enough shares in inventory to lend. Brokers who fail to deliver shares owed at DTC are subject to penalties.
Reference 2. (http://www.nakedshortselling.com/news/NAANSS_July09‑2003.htm)
On June 4, the SEC stated "the issues surrounding naked short selling are not germane to the manner in which DTC operates as a depository registered as a clearing agency. Decisions to engage in such transactions are made by parties other than DTC. DTC does not allow its participants to establish short positions resulting from their failure to deliver securities at settlement. While the Commission appreciates commenters' concerns about manipulative activity, thoseconcerns must be addressed by other means."
Reference 3. http://www.sec.gov/rules/proposed/34-48709.pdf
Naked short selling has sparked defensive actions by some issuers designed to combat the potentially negative effects on shareholders, broker dealers, and the clearance and settlement system. Some issuers have taken actions to attempt to make transfer of their securities ‘‘custody only,’’ thus preventing transfer of their stock to or from securities intermediaries such as the Depository Trust Company (DTC) or broker-dealers. A number of issuers have attempted to withdraw their issued securities on deposit at DTC, which makes the securities ineligible for book entry transfer at a securities depository. Withdrawing securities from DTC or requiring custody-only transfers undermine the goal of a national clearance and settlement system, designed to reduce the physical movement of certificates in the trading markets. The Commission is proposing an exception from these requirements for short sales executed by specialists or market makers but only in connection with bona-fide market making activities. We believe a narrow exception for market makers and specialists engaged in bona fide market making activities is necessary because they may need to facilitate customer orders in a fast moving market without possible delays associated with complying with the proposed ‘‘locate’’rule. Moreover, we believe that most specialists and market makers seek a net‘‘flat’’ position in a security at the end of each day and often ‘‘offset’’ short sales with purchases such that they are not required to make delivery under the security settlement system.
Reference 4. http://db.riskwaters.com/public/showPage.html?page=7476
London, October 17th 2002 - Securities financing has been an area of the securities industry that has long been a sticking point for straight-through processing initiatives, as highlighted by the Securities Industry Association (SIA) in both its next-day settlement and STP plans. Movements towards increased STP in this area have been boosted significantly this year with the live trading of two online securities lending platforms, SecFinex and Equilend. Equilend has been trading live for three months and in that time has facilitated more than $120 billion in lending transactions. This trading has up to now been achieved through the founding ten members of Equilend alone, though the group has been attempting to extend its client base since its launch.
The first addition to the group of ten has now occurred, Equilend confirms, with the signing of Deutsche Bank. Jean-Paul Musicco, managing director and global head of securities lending at Deutsche Bank, expects its membership of the platform to add value to clients through increased automation. Securities lending activity at Deutsche had previously been carried out through manually intensive processes, such as using faxes and phone calls and redundant back-office processes. By using the platform Deutsche will be able to electronically trade and automate back-office functions building an STP environment.
The founding members of Equilend are Barclays Global Investors, Bear Stearns, Goldman Sachs, JP Morgan Chase, Lehman Brothers, Merrill Lynch, Morgan Stanley, Northern Trust, State Street and UBS Warburg.
Reference 5. (http://schwert.ssb.rochester.edu/short.htm)
Short Sales, Damages and Class Certification in 10b - 5 Actions
Robert C. Apfel Bondholder Communications Group, New York, NY 10004John E. Parsons Charles River Associates, Boston, MA 02116G. William Schwert University of Rochester, Rochester, NY 14627and National Bureau of Economic Research Geoffrey S. Stewart Jones Day Reavis &Pogue, Washington, DC 20004
In a short sale, an investor sells a share of stock he does not own, and only later purchases a share to close out the transaction. The short seller profits when the price of the stock declines. A peculiar feature of short sales is the apparent increase in the number of shares of stock beneficially held by investors over and above the actual number of shares issued by the corporation....
3.1. Short Selling
Mechanics conceptually the simplest way to implement a short sale is something like a forward contract: a short sale is a sale at a price fixed now for delivery later.6 Another relatively simple way to implement a short sale is to take advantage of the window of time allowed for the actual delivery of shares on a sale. A seller of stock has three days to make delivery of the stock sold. A short seller can execute a sale if he is able to obtain a share for delivery within this window of time. A short sale made without possession of an actual share is called a naked short. In practice, short selling is more commonly facilitated through an accompanying borrowing transaction. The short seller enters into an agreement to borrow a share from one investor in order to sell it to another investor. The short seller hopes to be able to purchase a shore at a later date and at a lower price. He can then return this share to the investor from whom he had originally borrowed one. The short seller’s profit is the difference between the initially high selling price and the later low buying price, less the costs of borrowing the stock in the interim. When borrowing a share, the short seller agrees to return a like kind and amount of stock within a specified period of time, and also posts collateral as security for the loaned stock. The lender of the stock earns a profit by charging a fee for the loan and by investing the collateral less a rebate on such earnings paid to the borrower. The lender continues to expect to enjoy the gains from any increase in the price of the stock (and suffers the loss from any decrease) since she will receive the share back at the end of the loan period and can then sell it at the higher (or lower) price. The borrower also typically agrees to make the lender whole for any cash distributions made on the stock during the period of the loan.
3.2. The Apparent Expansion of Beneficial Ownership Due to Short Sales...
In this sense the short sale has resulted in an apparent expansion of the beneficial ownership of the company’s shares. Where previously investors had held beneficial ownership in only two shares of the company’s stock, now investors hold beneficial ownership in three shares. This expansion is only apparent, however, as it must be. The short seller who issues a sort of‘artificial’ share creates the apparent expansion in the beneficial ownership. He takes the mirrored position, paying a dividend when the corporation pays a dividend, enjoying a loss when the third shareholder enjoys a gain and vice-versa. After netting out the short seller, the total beneficial ownership matches the number of shares actually issued by the firm. There is an expansion of beneficial ownership when the short seller himself has been left out of the equation ,but taking the short seller’s offsetting position into account there is no expansion.
3.4.1. Institutional Changes in Custody Practices
Before 1973, almost all settlements of stock transactions were made by delivery of physical stock certificates. A “stock power” on the back of the certificate would be endorsed in favor of the purchaser. Short sellers typically had to obtain physical certificates to borrow from lenders. Lenders with physical certificates registered in their names had to endorse their stock over to the borrower. This was in accordance with Article 8 of the Uniform Commercial Code. In the standard Securities Loan Agreements published by the Security Industry Association as well as the standard customer agreements between brokerages and their customers, the parties agree that the lending customer waives his right to vote proxies for any securities that have been lent. The reason for this waiver of the right to vote is operationally critical to the stock loan transaction. On the record date for the proxy or annual shareholders meeting, only the “stock holder of record” is entitled to vote. Among our hypothetical customers,‘K’ and ‘L’, only L, the purchaser of the lent shares (who bought her shares from the short) is entitled to vote at the meeting. If the lender of the shares, K, had them out on loan on the record date, she is not entitled to vote. In these circumstances it would have been clear that investor K owned the artificial share while investor L owned the actual share. In lending her share, investor K surrendered ownership in the actual share and substituted ownership in the artificial share. Circumstances changed significantly starting in 1973 because of the adoption of the practice of holding securities in nominee name (“street name”) through intermediaries including brokers, banks and securities depositories. The move to holding securities in street name was part of a wider shift that followed on the securities industry’s paperwork crisis in the late 1960’s, when processing problems associated with the physical certificated transfer of millions of securities caused a major disruption in the financial industry. The Depository Trust Company(DTC) was created in 1973 as a privately operated ‘Federal Reserve for stocks’ designed to provide efficient, secure and accurate central custody and post trade processing services for transactions in the United States securities markets. The DTC is owned by several hundred brokerage firms, financial institutions (collectively, the DTC “participants”), and the New York and American Stock Exchanges. Its vaults in New York contain over $23 trillion of securities, including stocks, corporate bonds, mutual funds, warrants, and municipal bonds and government obligations. The DTC carries out two major functions. The first is the immobilization of the securities of DTC participants, which reduces the need for participants to maintain their own certificate safekeeping facilities. Second, the DTC maintains a computerized book-entry system in which changes of ownership among participants are recorded. This replaces costly, problem-prone physical delivery of securities for settlement. The DTC holds all securities in “fungible status” (also known as “fungible bulk”), with the DTC’s computers recording ownership of aggregate amounts of each security in the name of a participant firm. The DTC does not maintain records describing the ownership of securities by individual customers, other than for the holdings of major institutions that are themselves DTC participants. Instead, the DTC regards the participant firms as the nominal holders, in “street name”, of all their customers’ securities. Customer level record keeping is the responsibility of the participant firms. The DTC’s book entry system allows participants to deposit securities for safekeeping, transfer them conveniently to other participants, collect payment for the securities transferred and withdraw certificates, if desired by a customer. It is the widespread use of these services by DTC participants that creates economies of scale, permitting low-cost processing and speed without the sacrifice of security and accuracy. In 1999, for example, the DTC processed more than 189 million computer book entry deliveries between brokers and clearing corporations, with a value of over $94 trillion. Today over 72% of all common shares issued by NASDAQ-listed companies are immobilized at the DTC, and not held by the investors themselves. Not all changes in security ownership result in DTC transfers. The National SecuritiesClearing Corporation (NSCC) operates clearing, netting and settlement services that assist member firms in processing transactions. The NSCC compares buy and sell transactions and nets them down to reduce the number of transactions requiring a transfer of securities positions on the books of DTC. For example, if, during the same day, customers of Merrill Lynch sell customers of Goldman Sachs 50,000 shares of XYZ stock, and customers of Goldman Sachs sell customers of Merrill Lynch 50,000 shares of XYZ stock in numerous separate transactions, the NSCC will automatically net down the transactions, and no transfers will result on DTC books. In 1999, DTC and NSCC combined together under a new umbrella organization called Depository Trust and Clearing Corporation (DTCC).Under the standard arrangements between customers and their brokerage and banking firms, the securities held in brokerage accounts are commingled in a single fungible mass. For example, if Merrill Lynch had five customers who held CLC stock on a single day, Merrill Lynch would hold all of the shares of these five customers in a single commingled fungible bulk account at DTC in Merrill Lynch’s name. Of course, Merrill would have a record of the identity of the investors whose stock is represented in the mass. Consequently, where securities are held in street name, the task of keeping records as to which individual customer owns how much of which security is the responsibility of the brokerage firm. In the absence of paper shares, the only written evidence that an individual customer has of his or her holdings are brokerage statements or trade confirmation slips. The typical brokerage customer margin account agreements allow the brokerage to hypothecate or lend the customers’ securities without notice or benefit to the customer. It is the brokerage that earns interest on the loan, and not the shareholder, and this fact is acknowledged in the account agreement. When brokerage firms lend their customers’ stock, they do so out of the general pool of marginable fungible securities held by the firm. Having deposited all of their customers’ securities into a fungible mass, they cannot and do not keep records documenting the ownership of the securities that have been lent. Brokers cannot tell their customers when their stock has been lent (or returned) because it is the fungible pool of stock that serves as the source of the loans. In fact, this pool of stock has no identifying characteristics linking it to particular customers, because it is simply an electronic entry at the DTC and the brokerage. The move to holding shares in street name significantly complicates identifying which investor holds an actual share and which investor holds an artificial share. Figures 8A, 8B and8C reproduce the short sale transaction previously shown in Figures 3A through 3C, with the difference that shares may be owned through a broker and kept at a brokerage account. In Figure8 investors J and K have bought their shares through the broker who holds them in street name. The short seller borrows a share from the broker. In contrast to the example shown in Figure 3B,in which investor K knows that its share had been lent, in the example shown in Figure 8B,neither investor K nor J knows that one of their shares has been lent. Customers whose shares are held in street name do not possess an actual stock certificate evidencing their ownership. The only written evidence an individual customer has of his or her holdings are the records of the brokerage, including statements or trade confirmation slips.
4.1. “Real” and “Artificial” Shares
As pointed out above, the act of shorting a share of stock creates an artificial share. These artificial shares are called “shares”, but they are not. They are not stock that is issued by the company; they are not authorized for issuance by the company’s Board of Directors. In fact, in some cases the sum of these artificial shares and the real shares exceeds the number of shares the company even is authorized to issue. The shares are not registered with (or approved for sale by) the Securities &Exchange Commission, and the company neither sells, nor receives value for, them. See Committee on Government Operations Report, 3-5, 24. Similarly, these are not shares of stock that have an entitlement to dividends or distributions from the company and, to the extent they even have a right to vote, it is pursuant to the contract between the short seller and the brokerage firms that loaned the stock, not because they are actually “shares” of a company’s stock. The artificial nature of these shares is even more telling in the case of “naked”short sales, that is, where a short seller sells stock without first borrowing it. One of the perplexing questions about short sale transactions is the issue of who truly“owns” the share that is loaned. The question is a difficult one because, according to the standard industry Master Securities Loan Agreement, both the lender of the share and the short seller each have some rights that fall within the rubric of “ownership”. For example, the SIA's Master Securities Loan Agreement stipulates that the short seller will enjoy “all of the incidents of ownership,” including the right to transfer title to the share. On the other hand, the lender of the share retains the right to dividends and, it seems, the right to vote the share when the shares are held through a broker and the DTC in a fungible mass. Under the federal securities laws, the fact that the short seller has the right to transfer title to the share indicates that he is the “owner”. “A person shall be deemed to own a security if (1)he or his agent has the title to it….” 17 C.F.R. § 240.3b-3 (1998). This conclusion is supported by other evidence, notably the fact that a person who buys that share from the short seller is, under the securities laws, considered the share’s new owner. Id., § 240.3b.3(2). But if this is true, then the “share” that still appears on the customer account statement of the brokerage firm as belonging to the lender of the share must be the “artificial” share.
4.2 “Are Artificial Shares “Securities”?
This, in turn, leads to the questions whether that “artificial” share is itself some form of a“security” within the meaning of the federal securities laws and whether that “artificial” share is a security upon which a lawsuit can be brought. Although there is room for debate, the more persuasive view is that the “artificial” share is not a security. As noted before, the “artificial”share is not even a “share” to begin with: it simply is called a “share” because of the bookkeeping conventions of brokerage houses. In terms of economic and legal reality, the artificial share is a different thing to different people. To the brokerage house that loaned the actual share to the short seller, the artificial “share” is actually nothing more than a contract right to make the short seller return the real share (or another real share) at some date in the future at the end of the loan period.11 It is worth remembering that the character of a securities loan is different for the brokerage firm than for the short seller. From the short seller's point of view, the transaction is a borrowing of stock and the pledging of cash collateral to secure the short seller's obligation to return the stock at a future date. The short seller will earn modest interest on that cash collateral, but also pay the brokerage firm a fee for letting him borrow the share. At the end of the transaction, the short seller returns the stock, and receives in return the cash collateral he posted. From the brokerage's standpoint, on the other hand, the transaction is a short-term loan of cash(i.e., the cash collateral posted by the short seller) from the short seller to the brokerage house, collateralized by the stock the brokerage pledges to the short seller. When the transaction is unwound, the short seller repays his borrowing of stock and the brokerage house repays its borrowing of cash. Thus, while these two cross-loans are outstanding, the brokerage's firm's right in the “real share” is simply the right to get its collateral back when it repays its loan from the short seller. The “artificial share” held on the brokerage house's books is a reflection of this right to the return of collateral.12 As such, it does not have the obvious characteristics of a “security” as that term generally is understood. Indeed, to the extent that it represents a contract right to obtain a security that itself might change in value over time, the artificial share resembles creatures like “stock appreciation rights”, which have been held to not be securities. See Clay v. Riverwood Int’l Corp., 157 F.3d 1259, 1264 (11th Cir. 1998). See also Marine Bank v. Weaver,455 U.S. 551, 560-61 (1982); Caiola v. Citibank, N.A., 2001 U.S. Dist. LEXIS 3736* (S.D.N.Y2001) (swap contracts); Procter &Gamble Co. v. Bankers Trust Co., 925 F. Supp. 1270 (S.D.Oh. 1996) (swap contracts); In re EPIC Mortgage Ins. Litig., 701 F. Supp. 1192, 1247 (E.D. Va.1988), aff’d in part, rev ‘d in part, sub nom. Foremost Guar. Corp. v. Mentor Say. Bank, 910F.2d 118 (4th Cir. 1990).
Although it is possible to liken these artificial shares to stock options, the analogy is a weak one. First, artificial shares do not have the same characteristics as stock options. Artificial shares are not — like stock options — expressly included within the definition of “security” in §3(a)(10) of the Securities Exchange Act of 1934. 15 U.S.C. § 78(c). Second, where options are traded on established markets, artificial shares are not traded at all and probably could not be. In fact, the value of artificial shares should not fluctuate at all, since they are a fully-collateralized contract right to obtain the return of a specified share of stock at a fixed time.
Even if these artificial shares were some form of a security, it remains unclear that theywould be a security upon which an issuer could be sued. In the area of puts and calls, courts are divided on the issue whether a company that issues the stock underlying the put or call relates can itself be sued for securities fraud by holders of the puts or calls. 13 See, e.g., Laventhall v. General Dynamics Corp., 704 F.2d 407, 414 (8th Cir. 1983); Data Controls N., Inc. v. Financial Corp. of Am., Inc., 688 F. Supp. 1047, 1050 (D. Md. 1988), aff’d, 875 F.2d 314 (4th Cir. 1989);Starkman v. Warner Communications, Inc., 671 F. Supp. 297, 304-7 (S.D.N.Y. 1987); Bianco v. Texas Instnu. Inc., 627 F. Supp. 154, 161 (N.D. Ill. 1985). But see Deutschman v. Beneficial Corp., 841 F.2d 502, 508 (3d Cir. 1988). In Fry v. UAL Corp. 84 F3d 936, 939 (1996), the Seventh Circuit held that option traders did have standing to sue under Rule 10b-5. Curiously, the court found this to follow from the fact that short sellers were held to have standing in Zlotnick v. TIE Communications, 836 F.2d 818, 821 (3d Cir. 1988), although Zlotnick specifically distinguished between option traders and short sellers.14
Many of the characteristics of options that have caused courts to reject them as proper grounds for a securities fraud action apply with at least equal force to artificial shares. Like stock options, the issuer did not issue the artificial shares and has no ability to control their issuance. See Laventhall, 704 F.2d at 410-11; Bianco, 627 F. Supp. at 159. Short sale transactions are more risky than buying shares of stock. See Laventhall, 704 F.2d at 410; DataControls, 688 F. Supp. at 1050; Bianco, 627 F. Supp. at 161. Finally, artificial shares do not represent capital investment in the issuer. See Laventhall, 704 F.2d at 411; Data Controls, 688F. Supp. at 1049.15
4.3 Class Certification
The twin facts (1) that there is no right to bring or maintain a federal securities action based on the holding of “artificial” shares and (2) that it is all but impossible to distinguish between real and artificial shares make it difficult for a court to grant class certification to a plaintiff class in circumstances where there has been a high level of short-selling. Although there are various reasons for this, the most fundamental reason is that class certification in these circumstances will lead to an enormous volume of false claims for damages.
As mentioned before, there are at least three classes of persons who might be included in a securities class action case against the issuer of a stock. The first would be the short sellers themselves, since they were indeed “purchasers” of the stock during the class period. See, e.g., Zlotnick, 836 F.2d at 820-21. The second group would be the investors whose stock was loaned by their brokerage firms to short sellers. The third group consists of those investors who purchased the borrowed shares from the short sellers.
At the outset, one question is simple to answer. Most courts have concluded that the short sellers themselves should not be included within a plaintiff class of purchasers. Courts have reasoned that short sellers, because they are gambling that the stock will drop in value, cannottake advantage of the fraud-on-the-market method for providing reliance and must instead show individual reliance. See, e.g., Zlotnick v. TIE Communications, 836 F.2d 818, 823 (3d Cir.1988). This generally is fatal to participation in a class action. In the Computer Learning Centers case it was the inclusion of short sellers in the class that was the basis for the court’s denial of class certification. 183 F.R.D. at 491-92.
The question becomes more difficult when one looks at the two remaining categories of potential class members. Much of the analysis turns, as it must, on the method by which class members are identified and upon which claims for damages are submitted.
In a customary class action lawsuit under the federal securities laws, an investor proves his membership in the class and claims his damages by submitting to plaintiffs’ counsel copies of the confirmation slips he received from his broker showing that he purchased the stock at a particular time for a particular price. But, as pointed out before, in a short sale, there are two different people who will hold confirmation slips evidencing the purchase of the same share. Both holders of real shares and holders of artificial shares will have in their possession evidence showing that they have purchased the stock and, further, the transfer agent’s records (from which the list of class members ultimately is compiled) will show that both people were members of the plaintiff class.
There is no easy way to disentangle this overlapping ownership. Unlike the regime during the days of paper certificates, stock held in “street name” does not have certificate numbers or any other form of numerical identifier to distinguish one investor’s stock share from another. In fact, revised UCC Article 8 (which governs dealings in investment securities)stipulates that, in a book-entry system, a shareholder owns only a pro rata share of his broker’s overall holdings of any given security. UCC § 8-503(b). “The idea that discrete objects mightbe traced through the hands of different persons has no place in the Revised Article 8 rules for the indirect holding systems.” § 8-503, Official Comment 2. In other words, since all securities of any given issuer are fungible, it is not possible to determine whose stock is being loaned in the first place. Lacking a system to trace down which stock is being loaned, it is impossible to determine in any individual case whose stock is being sold or is being purchased in a short sale and, ultimately, who it is who holds real shares and who holds artificial shares.
This becomes both a legal problem and a practical problem with profound legal implications. On the purely legal level, this becomes an issue of legal standing to bring a claim. By definition, a class in a securities action may consists only of those persons who purchased the defendant company’s securities, and were damaged thereby. This is a necessary element of standing that each class member must meet before he can bring and maintain suit in the first place. See, e.g., Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 750 (1975). The burden of proving standing rests with each plaintiff, not with the defendant. See Sea Shore Corp. v. Sullivan, 158 F.3d 51, 54 (1st Cir. 1998); Takhar v. Kessler, 76 F.3d 995, 1000 (9th Cir. 1996).Where there has been a high incidence of short selling, the defendants will raise the defense of lack of standing against each member of the class. As noted before, there are serious issues whether the holders of the “artificial” shares – whoever they might be – owned a “security” at all or, alternatively, owned a security that they could sue upon. In addition, since the “artificial”members of the Class may not all be artificial for the same reason, each class member’s proof of standing will vary considerably.16 And since this would cause individual questions topredominate over common ones, class certification would be inappropriate under F.R. Civ. P.23(b).
Even past this threshold, there are pervasive problems of class certification. In most cases, both the investor whose shares were loaned and the investor who purchased those shares from the short seller will believe themselves to be holders of the security in question and also have confirmation slips from their brokers that document their purchase of the share. Both will thus seek membership in the class and also, ultimately, submit claims for payment of damages. This fact guarantees a large number of false claims, since owners of “artificial” shares will be claiming damages they are not entitled to. Moreover, because there is no way of knowing who is a “artificial” claimant and who is a “real” claimant, a court asked to certify such a class would do so only by creating a massive liability for the defendant issuer for damages to people who had no right to damages.
5. Conclusion
The only certain way to mitigate these problems would be to limit the class to those shareholders who held paper certificates or whose brokerage accounts do not permit the lending of securities. This would eliminate the problem of “artificial” shares altogether, although at the cost of seriously reducing the size of the class. Another means of mitigating the burdens would be to develop a model that applies a pro rata discount in damages to claimants who had accounts with brokerage firms that loaned securities, such discount to reflect the number of shares that were loans and when they were loaned. But the use of any such model will result in an impossible administrative problem. It would require extensive discovery of various brokerage houses and short sellers, and require the court and the litigants to engage in a detailed attempt to reconstruct the trading positions of thousands of dealers, brokerage houses and investors in millions of shares of stock over the months of the class period. Various courts have made clear that it is inappropriate to certify a class when damages cannot be determined by a formula and the court would have to preside over a series of mini-trials on damages. See, e.g., Windham v. American Brands, Inc., 565 F.2d 59, 70 (4th Cir. 1977). In the Computer Learning Centers case the court did not address the standing and certification issues pertaining to the holders of artificial shares since class certification was denied on the basis of the inclusion of the short sellers themselves. While the court gave leave for an amended class to be proposed, the case settled before this was done.
End Notes to Reference 5
5 Paul Asquith and Lisa Meulbroek, “An empirical investigation of short interest,” Harvard Business School working Paper 96-012, Table 1, results for 1993, the most recent date for which they present data. The data show that mean short interest has been increasing over time.
6 This is how Judge Posner characterizes a short sale in Sullivan &Long v. Scattered, 47 F.3d 857, 858.
11 To the brokerage house’s customer, the share remains the “securities entitlement” that he has always had to demand that the brokerage house hold, deliver or sell the share. See revised UCC § 8-501.
12 In fact, the Master Securities Loan Agreement permits the return of cash or other things of equivalent value instead of stock, demonstrating the insignificance of the stock itself in the transaction.
13 A more extensive review can be found in Elizabeth M. Sacksteder, Securities regulation for a changing market: option trader standing under rule 10b-5, Yale Law Journal 97, March 1988, 623-642.
14 Zlotnick was also questionable authority in another respect. Zlotnick held that short sellers had standing to sue precisely because they had been both sellers and purchasers of the actual security, since the short sellers sold the security when they shorted the stock and purchased the security when they covered. 836 F.2d 818, 821. Both steps, obviously, involved transactions in “real” shares of stock, and not artificial shares.
15 There is an interesting circumstance created by the broker’s repeated lending, then collection, of the investor’s shares. Since title to the shares passes to the short seller with each loan, and title also presumably returns to the brokerage house with each return, it would seem from a legal standpoint that the brokerage house is constantly selling and re-purchasing the shares during the periods of time it is lending securities. It is an anomaly of short selling, though, that when the brokerage house repurchases the shares (i.e., obtains their return from the short-seller),it does not do so at the market price, but rather does so at the contractual price agreed with the short seller (i.e., the market price at the time the securities were loaned). Consequently, the price the brokerage house “pays” for the shares when they are returned is not a product of any information known to the market at that time of the repurchase and, thus, the brokerage house cannot be considered to have relied upon it. Since reliance upon information known contemporaneously to the market is an element of a § 10(b) and Rule 10b-5 claim, any such re-purchases of shares when the share lending is unwound should not be a purchase that would give the brokerage house (or, by implication, its clients the investors) rights to sue.
16 Because of the manner in which short sales work, the question of who holds the real share and who holds the artificial share may depend on the timing and circumstances of each short sale. For example, an investor who purchased from a “naked” short may never have owned a real share of stock; an investor who purchased from a short seller but who had not yet taken delivery of the stock on the day the company’s stock price fell may not have been a purchaser of stock on the day the damages occurred; and so on. In each of these cases, there will be a need for each plaintiff to demonstrate that it purchased stock on the relevant dates and this, in turn, requires a particularized factual inquiry into the circumstances of each claim.
Reference 6. (http://sec.broaddaylight.com/sec/FAQ_18_6386.shtm)
The SEC does not have any specific rules limiting short sales at a specific price. In theory, all stocks can be shorted, including those, for example, below $5.00. But in reality, brokerage firms may impose their own policies about what stocks can be shorted, such as a minimum stock price. In addition, depending on where the stocks trade, they may be subject to certain restrictions.
Reference 7. (http://icf.som.yale.edu/pdf/hist_conference/Paul_Harrison.pdf)
The Economic Effects of Innovation, Regulation, and Reputation on Derivatives Trading: Some Historical Analysis of Early 18th Century Stock Markets
Paul Harrison, Federal Reserve Board
2. Financial Innovation on Early Stock Markets:
The stock exchange has not been a static institution. During the early 1700s (but also prior to) a variety of innovations in market structure took hold. Many of these innovations appear to have explicit roots in the desire of market participants to reduce transactions costs. The most obvious innovation is perhaps the development of centralized trading at the coffeehouse trading sites of “exchange alley” and the eventual focus on Jonathan’s and evolution into a more formal stock exchange. Centralized trading had the clear effect of reducing information and “shoe leather” costs. In addition, as I will argue later, it may have helped foster the formation of reputations and therefore of “reputation effects.”
Other innovations made it easier – that is less costly – for investors to trade by facilitating transactions without the trouble of actually transferring property rights. For instance, most trades were done for the “difference,” so that possession of the shares need not be exchanged. Trading for the difference was an important development accomplished either by “keeping” fictitious holdings properly accounted for in a broker’s account or, most likely, by purchasing a forward contract to be settled at a future date. These innovations greatly simplified trading because for most securities it was a laborious process to be the official “holder of record” of the share. Ownership typically required being entered into the company’s books at their offices (Dickson, 1967). Of course the initial capital required to support a trade for the difference as opposed to an outright purchase was also much less. Another common innovation allowed trades in fictitious partial shares, to make the denomination more affordable to non-high-income individuals. In addition, brokers facilitated client’s trading by allowing them to trade on credit or margin. Also, the stock exchange developed a clearing-house mechanism between the brokers and eventually instituted regular quarterly settlement dates as existed in Holland (Dickson, 1967). At the settlement date, a given trader might have made both purchases and sales. Instead of having to settle each individual trade, the “rescountre” allowed for trades to be systematically settled on a net balance basis (De La Vega, 1688, Mortimer, 1801), thereby simplifying settlement and again reducing transactions costs, in this case for brokers. At the settlement date, rather than settling, investors could extend the contract for an additional premium. Not only did forward transactions allow traders to avoid possessing shares and to trade with less capital, but they similarly made it possible for speculators to easily – that is with reduced cost – take the short position in the stock. Put and call options also traded frequently and for similar reasons. Taken together, derivative contracts, by all accounts, almost certainly outstripped cash/spot trades (see Harrison, 1999, Banner, 1998, and Dickson, 1967). Not much is known about the exact form of the contract used for derivative trades. Dickson (p. 491) discusses a typical option contract (apparently in use for much of the early 1700s) which specified the parties, the shares, the position, the price, and the date (which were “on or before” dates) and a premium. But traders also used simple covenants and indentures to record trades. Dickson examines the trades of Sir Stephen Evance and finds that Evance recorded a series of apparent forward trades “undertaking to deliver stock in six months’ time at a given price; when the premium is stated it amounted to roughly 20 percent.” This 20 percent premium for a forward contract is assumed to be the margin requirement, since forwards were typically for the difference, but it could be that even these trades “to deliver” were of the option variety. It is possible that not much distinction was made between an option and a forward. Market critics certainly lumped them together when assailing trading practices. Derivative trades were often called “time trades” or “time bargains” or “jobbing” trades and were criticized as mere gambling or imaginary trading “in the air.” However, a close reading Sir John Barnard’s Act – the 1734 act outlawing derivative trading – suggests that the two types of derivatives were distinct and Banner’s (1998, p.28) reading of Houghton’s 1694 market primer suggests that forwards were distinct from options at that time too....
5. Regulation Does Not Necessarily Effect the Market:
But all of the regulations were ineffective at eliminating the time trades and had little effect on the behavior of market participants. Derivative trades in England and Amsterdam for the second half of the seventeenth century and the first half of the eighteenth century (before Barnard’s Act)were already viewed as gambling contracts under the law and thus were unenforceable in court. Shirkers (renegers) could not be sued for failing to uphold their end of the contract. Yet the derivative trade flourished and subsequent critics repeatedly called for the regulation of stock jobbers and the elimination of time bargains, especially in the early eighteenth century after options became widely used and, as we have seen, after the South Sea Bubble. For example, a typical critic (“An examination ... ,” 1720, 19) lamented, “I should think it a great Happiness to the Nation, that buying without Money, or selling without Stock, could be prevented, which is a practice worse than wagering.”The clearest evidence that the regulations did not have their intended effect is the repeated calls for new regulation. Short-selling bans in Amsterdam were repeated every few years. Despite the failure of the Acts of 1697 and 1708 to curb stock jobbing, and the difficulty in even getting the Bill passed, there is some evidence that contemporaries thought that Sir John Barnard’s Act would be effective. However, in the event, it seems clear that the Act was generally in effective at preventing the trade for time, because in 1746 and again in 1756 and again in 1771 similar Bills were introduced to repeatedly curb time trades. The 1746 and 1756 bills were entitled (emphasis added): “A bill more effectually to prevent the infamous practice of stock-jobbing.”Given the continued use of time trades in earlier Amsterdam and London when they already held no legal standing, it is probably not surprising that the explicit prohibition did not eliminate them either. Banner (1998, p.106) notes the same phenomenon and cites a number of later sources, but also one from the 1740s, as pointing to the ongoing use of derivative contracts despite their being illegal. Mortimer (1801) similarly notes continued use of derivatives trades in the middle 1700sand calls Barnard’s Act “ineffectual.”Similarly, restrictions on gaming and gambling, which like the early derivative contracts were legally unenforceable, were also continuously repeated over this time period. Notably, in 1708“An act to prevent the laying of wagers relating to the publick” and again in 1710 “An Act for the better preventing of excessive and deceitful gaming.” Here too the moral message is muddled by the government’s need to raise funds. In fact, new war loans in the 1740s brought with them new public lotteries and sales of shares of tickets (down to a sixteenth) and the subsequent stock jobbing of lottery tickets. The stock-jobbers, similar to their practices for trading stocks, sold lottery numbers without owning actual tickets. This was called the “hiring” of tickets, and Parliament outlawed it in 1743 and (of course, it had to be repeated) again in 1744, since the government wanted to monopolize the revenue from issuing tickets. After hiring was outlawed, the jobbers took to offering a similar service under the guise of ticket “insurance”.
De Marchi, Neil and Paul Harrison. (1994) “Trading ‘in the wind,’ and with guile: the troublesome matter of the short selling of shares in seventeenth century Holland,” in Higgling: Transactors and Their Markets in the History of Economics, edited by Neil De Marchi and Mary S. Morgan, annual supplement to volume 26 of the History of Political Economy, Durham: Duke University Press.
Reference 8: (http://www.investrend.com/articles/article.asp?analystId=0&id=6037&topicId=160&level=160
’Extreme Short Selling’ Rocks London Markets /
December 2, 2003. (FinancialWire) Naked short selling, which apparently robs American investors thousands, perhaps millions of dollars every day, is causing an uproar in Britain. In the U.S., the controversy, the subject of Regulation SHO, which is available at the U.S. Securities and Exchange Commission web site through January 5, has embroiled at least 119 public companies, including some 13 brokers, including Ameritrade Holding Corp. (NASDAQ: AMTD), Deutsche Bank AG (NYSE: DB), and E*Trade Group, Inc. (NYSE: ET). The London controversy centers on Room Service (LSE: RSV). Britains Financial Services Authority is considering a “crack down” on short‑selling after being alerted to a massive short position in an AIM‑listed company which has left a group of private investors claiming unfair treatment, according to the British press. Press reports said the city watchdog said it had taken a "keen interest" in the case and was "working closely" with the London Stock Exchange to see whether regulations had been breached. Room Service, a cash shell, had been founded to operate an online food delivery service, and a huge short position by Evolution Beeson Gregory, a market‑maker in the company, is believed to have developed. It is estimated that the broker has sold stock more than the entire value of Room Service, equaling as much as 162% of the company. Because of that, Evolution has been unable to deliver shares, the investors group has alleged. Of course in the U.S., that is an every day occurrence in an untold number of stocks. The FSA had investigated short selling earlier in the year, and stated that the practice has a “positive impact” on the market, sounding a bit like the “anonymous” detractors recently quoted by Business Week. Now it says it is launching an inquiry into “extreme short‑selling.” In March, the FSA imposed disclosure rules on short‑selling after a review of the practice. Some thirteen on the list of 119 U.S. companies, such as FleetBoston (NYSE: FBF), Goldman, Sachs &Co. (NYSE: GS), Knight Securities, LP (NASDAQ: NITE), Ladenburg Thalmann &Co., Inc. (AMEX: LHS), M. H. Myerson &Co., Inc. (NASDAQ: MHMY), Olde / H&R Block (NYSE: HRB), Charles Schwab (NYSE: SCH), Toronto‑Dominion’s (NYSE: TD), TD Waterhouse Group and vFinance, Inc. (OTCBB: VFIN). A.G. Edwards, Inc. (NYSE: AGE), Ameritrade Holding Corp. (NASDAQ: AMTD), Deutsche Bank AG (NYSE: DB), and E*Trade Group, Inc. (NYSE: ET), have been accused by one or more public companies as allegedly participating in short selling activities or abuses, or of failing to settle trades.
http://edgar.sec.gov/rules/proposed/s72303/ajames121103.htm
There's a rule that the market makers use ... a rule that only has less than two hundred words in it ... and that rule allows them to naked short an OTCBB or Pink Sheet stock into oblivion.
It allows them to literally create, out of thin air, as many shares as they need to maintain an orderly market.
"(B) Proprietary short sales
No member shall effect a "short" sale for its own account in any security unless the member or person associated with a member makes an affirmative determination that the member can borrow the securities or otherwise provide for delivery of the securities by the settlement date. This requirement will not apply to transactions in corporate debt securities, to bona fide market making transactions by a member in securities in which it is registered as a Nasdaq market maker, to bona fide market maker transactions in non-Nasdaq securities in which the market maker publishes a two-sided quotation in an independent quotation medium, or to transactions which result in fully hedged or arbitraged positions."
This rule allows a market maker to create a share in a company by simply taking the money from the buyer and making an electronic entry into their brokers' account, and the broker then electronically credits the buyer with one share of that company.
But several things that no one is aware of take place in this transaction. 1. The buyer thinks that his share actually exists, but unless he or she has read his account agreement very carefully, he won't understand that all he did is give money to someone other than the company and never got any actual proof of ownership. His certificate, presumably, is sitting at the DTCC. 2. The market maker filling the order for one share has the buyer's money, and gave nothing except electronic acknowledgement of receipt of it ... the electronic entry in the buyer's account.
One very important thing to understand here, is that at no point in this process, did the company in which the buyer 'invested' ever get one single dime of the money paid by the buyer for that share. There is a tremendous misconception out there that causes many to assume that when they buy a share of a company's stock, the company gets the money.
This is only true if the buyer is buying an IPO, or a private placement of shares from the company. In any other sale or purchase of a stock by an investor, the company does not even see the money.
This is particularly vexing when one begins to understand what happens in naked shorting situations. Situations where the provision that allows for naked shorting to maintain an orderly market is abused.
Understand that whoever is doing the naked shorting is the one receiving the money. They keep it. For as long as it is convenient to do so. That is where the abuse of the rule comes in.
That rule was created to allow for market makers, who by becoming market makers, agree to 'make a market' in certain stocks. That means that they will sell you a share, or buy a share from you, even if there isn't any available, or there are no other buyers for it. The Market makers' job is at least partly, to provide liquidity to the market. In thinly traded securities, or securities where there is a small public float, the market makers' ability to naked short is crucial to the liquidity of the market in that security.
The abuse takes place when the market maker for whatever reason determines that the market for a particular security has become "disorderly". Too much buying pressure, for instance, can cause a price spike in that security that would have no relationship to the true book value of the security. The market maker then determines that he will naked short to fill orders, knowing that by doing so, the price will not explode on unusually high demand because he can literally issue new shares under this rule. The market maker then waits, with an open naked short position in that stock, until the buying pressure subsides, and he can buy enough shares back at lower prices to cover his naked short position.
The rule does not have any time requirements and that allows for the market maker to keep a naked short position open for potentially years. In reality, until the buying pressure subsides enough for him to buy back at lower prices however many shares he needs to fill previously filled orders that make up his naked short position, it simply stays open, and the money sits in his account.
Someone is going to ask the question, "So, how big are all those naked short positions, anyhow?"
There is another provision that says that the market makers do not have to publish their open naked short positions. Never. At all. All OTCBB and Pink Sheet securities can be naked shorted - indefinitely - by market makers under this rule, and there is no way that an investor can discover if there is an open naked short position in a stock he may be interested in, or even how big that short position is.
So far, the SEC does not see a strong need to correct this situation, either.
Think about it. There are unlimited amounts of shares that were never authorized or issued by a company made available to the unsuspecting investor. They are authorized and issued by the market makers under this rule, and the company never gets any money from the sale of shares created under this rule.
The temptation to abuse this rule is irresistable. Just do the math. A million naked shorted shares sold by a market maker at 0.01 (one cent) is $10,000 that the market maker keeps in his account, and that the company does not get. At 0.10 (ten cents) the market maker gets to keep $100,000. Now, that is for each million shares that the market maker creates.
Under this rule, if a company and/or a group of shareholders begin to suspect a short position exists in their security, they can not discover this from any published source. The price of the stock remains constant, or goes down, even though there is unusually heavy buying ... buying that goes on for years in some cases.
The company thinks that there is someone illegally shorting their stock in an attempt to ruin the company. The shareholders think that the company is illegally printing shares behind their backs and is scaming them. Eventually, this distrust between the company and it's shareholders becomes so great that investors start selling, or the company, already damaged by a supressed share price, is forced to issue additional shares into the market because other collateral-backed loans can not be made with share prices so suppressed.
This is what the market maker is waiting for ... sometimes for as long as years. In both cases, the market maker eventually gets his naked short position covered, and all it cost was the company's reputation, the shareholders' money, and the SEC's full cooperation by allowing this abuse of the rule.
There is a third situation that the market makers naked short into ... a stock that is a likely prospect for failure. In that case, they just continue naked shorting no matter what, keeping the price suppressed, and eventually the company files for bankruptcy, and ... the company goes out of business, the shareholders lose their investment ... and the market maker keeps the proceeds of his continued naked shorting.
A good question for the SEC would be, "Seeing as how the companies that failed never got the proceeds of the sale of stock over and above their issued and outstanding, but the market makers did, isn't the SEC allowing actual fraud to take place, and condoning it by the creation and continued existance of this rule?"
Like it or not, the SEC has allowed securities fraud to run rampant in the OTCBB and Pink sheet stock markets by simply looking the other way and allowing the market makers to target the OTCBB and Pink sheet markets as a source of huge amounts of cash, literally stolen from investors by the third party creation of shares by an entity other than the the issure - the company.
This rule is nothing less than blanket permission by the SEC for market makers to become the issuers of company stock, no matter what the company's official authorized and issued amounts are.
http://edgar.sec.gov/rules/proposed/s72303/rseitl121203.htm
Your agency and I have had many cross words regarding what I have asserted to you as your agency's apathy regarding the illegal naked -selling of stocks I have invested in (namely PCBM). Those cross words have been especially harsh with particular SEC officers. However, I now wish to commend you on the Proposed Regulation SHO, in the hopes that you will strictly enforce this regulation and clean up the market and returning integrity to the market at all investment levels. The application of this regulation must be across the board, not just on larger cap stocks, as stealing money from Americans and from our economy, at whatever level, is financially devastating to both individuals and to the American economy. Think about it, what is the difference if the thieves are permitted to illegally naked short and steal from only our investors in micro-cap companies. They are still stealing from America and from Americans.
Based upon my own reading, I understand that 3-4 TRILLION dollars is stolen from our economy each year by those who basically counterfeit shares of stock, in the hopes of companies they short being driven out of busines and then making the unjust windfall profit. If any person were to counterfeit money, the FBI would have them in shackles immediately upon discovery of this nefarious act. Yet similar conduct, regarding selling shares that are not in existence, is a plague upon our economy, robbing good, honest Americans of those dreams ordinary available that have made our nation the envy of the world.
Our entire GNP is between 9-10 TRILLION dollars, meaning that these thieves are leaching out of the country between 33%- 40% of the nations GNP every year. I have read that these stolen funds, via illegal naked shorting, ends up funding everything form organized criminal activity to terrorists who use the money to attack our troops and our citizens, both abroad and domestically. What could we do with an extra 3-4 TRILLION dollars in the economy each year? Congress just approved 87 billion dollars to fund the war effort and this allocation was painful. Just imagine what a multiple of 50 of those funds remaining in our economy each year could do for America? What would such funds do for small businesses? For people who need jobs? For government to reduce the deficit? To aid the poor and sick? The possibilities are almost unlimited.
America needs your dedication, your wisdom and your unwavering help to make this situation right. Just as the military is working so hard to overcome terrorism in its' physical manifestation, you must act as the protectors of our economy. You are on the front line of defense for America to stop the evil people from stealing money from our economy and from our citizens to fund their criminal activities and those very attacks we fear the most. I implore you to rise above all other possible motivations and or distractions, policies, or anything else that might dissuade your actions, to make use of Regulation SHO and make a difference.
You are uniquely positioned to help make America stronger and more importantly a safer place to live. I pray you act with wisdom commensurate to your authority.
Sincerely,
Allan F. Treffry, Esq.
http://edgar.sec.gov/rules/proposed/s72303/atreffry121503.htm
I am a securities professional and have been involved in the market , mostly small and micro-caps for over 20 years. The regulations included in proposed regulation SHO should be inacted ASAP. There IS a very large abusive short selling contingent in the US OTC markets and IMO its not only related to Toxic Financings. Please inact this regulation to preserve the integrity of the markets and finally put an end to the de-valuation of small companies through the artificial increase in the floats of those type of companies.
Thank You
William D. Coogle
http://edgar.sec.gov/rules/proposed/s72303/wcoogle121503.htm
Short selling has destoryed many retirement accounts. I ask that short selling be removed. Stock value should be based on profit,and equity of a corporation. Short selling by big corperations kill retirement accounts.. Corporations. can push a stock value down just by selling short, over and over, then purchasing stocks to a lower value. I have a retirement account that has lost value of 60%.. and the stock market value is Dow-10,102... thanks to short selling.
http://edgar.sec.gov/rules/proposed/s72303/rmeeks121503.htm
RE THE 'SHO'OR NAKED SHORTING ISSUE.BUT MORE SO I AM WRITING TO DOCUMENT THE FRAUD OF NAANSS AND JAMES DALE DAVIDSON TO USE THE NAKED SHORT SCARE TO DEFRAUD INVESTORS TO HOLD LONG WHILE THEY DUMP OFFSHORE ONSHORE DEBENTURES AND 'PREFERRED SHARES THEY GET FROM THEIR 'SPECIAL' RELATIONS WITH CORRUPT PENNY STOCK 'MANAGEMENT'.I REALLY HAVE NOTHING AGAINST SHORTING AS LONG AS SHARES EXIST FOR THAT PURPOSE ON MARKET BUT NOT SHARES THAT DON'T EXIST.HOWEVER I BELIEVE THIS IS MORE PREVELANT IN BULL MARKETS.RECENTLY THERE HAS BEEN MUCH SAID ABOUT STOPPING NAKED SHORTING AND I BELIEVE THE PRINCIPALS IN THIS ARE DEBENTURE AND PREFERRED SHARE RECIPIENTS IN PENNY STOCKS WORKING WITH CORRUPT PENNY STOCK MANAGEMENT.ENDOVASC IS A PRIME EXAMPLE OF THIS AND THEY WORK WITH JAMES DALE DAVIDSON AND HIS STOP NAKED SHORTING,'NAANSS' SCAM.
UNFORTUNATELY EVEN 'FAMED TRIAL LAWYER O'QUINN' HAS BEEN TAKEN IN OR IS WORKING HAND IN HAND I THE DECECPTION OF NAIVE 'INVESTORS'SUCH AS MYSELF WHO HAVE LOST VITUALLY EVERYTHING IN THE FRAUD.
YES NAANS IS IS FRONT FOR DEBENTURE DUMPERS AND 'MMS'SUCH AS SCHWAB CAPITAL KNOW THIS.SCHWAB HAS THREATENED ME WITH THEIR LAWYERS THOUGH THEY HAVE STOLEN EVERYTHING ALREADY WITH THE PIGS THEY PUMPED AND TOOK TO MARKET THAT FELL TO PENNYS.YES I WAS DALING IN PENNY STOCKS WITHIN LESS THAN A YEAR OF BUYING THE FIRST STOCK IN MY LIFE!! AND ALL THOSE $30 OR SO 'TECH' STOCKS SAID 'STRONG BUY'. I KNEW NOTHING.
SO THEY BROKE REG 15 G I THINK IT IS ON MY HEAD.
ANYWAY BELOW IS WHAT I AM WRITING IN RETROSPECT,TOO LATE FOR ME I'M AFRAID,BUT IT SHOULDN'T BE.THEY SHOULD RETURN MY $200,000 +.
I AM NOW WRITING ABOUT THE 'NAKED SHORT SCAM' OF DAVIDSON ET.AL.TO POST ON RIPOFFREPORT.COM AS YOU CAN READ BELOW.
SINCERELY,
TONY RYALS
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On Tue, 16 Dec 2003 14:46:28
Tony Ryals wrote:
Dear Attorney O'Quinn,
I think you should consider the possibility that Summers and Cantrell of Endovasc have used your name for fraud just as they did that of cardiologist Antonio Colombo in 2001 when they conned me into buying over half million shares.(Since then, fraudulantly reverse split to give to a myriad of 'insiders' I never knew existed,such as James Dale Davidson, offshore debenture dumper etraordinaire, who claimed Bill Clinton killed his employee,former CIA Chief Colby.Even the 'transfer agent'to the offshores himself,Alexander Walker,of Nevada Agency and Trust Co.,got in on the 'action'.Both of these characters received some, but not enough, SEC scrutiny.
Below you will see the beginning of my article-complaint re this subject.You will recall that Mr.Summers used your name in his businesswire pr of last year claiming you had discovered an 'oversold position'of more than one million shares from my 'broker'Schwab and thus I should buy a 'cert' quickly from his transfer agent Walker,who was an EVSC,'INSIDER'AS IT TURNED OUT. MMS may at times naked short but you nor Summers provided any proof and Summers further defrauded me using your good name and reputation.I am beginning to understand what I term the 'naked short scam'of James Dale Davidson all too well.Of the millions or billions you liken naked shorting to,much is now being lost to make naive 'investors go long. They are defrauded by the 'insiders' themselves,such as Davidson.Whole websites are being run by debenture and 'preferred share' dumpers to convince defrauded investors they are being taken by by market makers when it is the likes of James Dale Davidson and an off shore pump dump scam.
I am sad to see you and your reputation be used in this manner.The use of your name by Summers while he and insiders dumped untold shares is what defrauded me.Maybe you should consider representing those who were defrauded rather than those doing the defrauding.
Sincerely,
Tony Ryals
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On Tue, 16 Dec 2003 13:04:30
Tony Ryals wrote:
frank,it continues.didn't know what i was writing.still don!t.could you check this out and give me some feedback.looks like an article more than complaint.
tony
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Category:
Liars Submitted: 12/12/2003 12:46:17 PM
Modified: 12/12/2003 12:46:00 PM
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James Dale Davidson chief promoter,inventor of 'stop naked short scam' cyberfraud Blaine,Washington www.investorcomm.com/company.htm
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Company James Dale Davidson
Address:
Bermuda ? Alexandria,Virginia ?
Internet
U.S.A.
Phone: 866-872-0077
Fax:
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James Dale Davidson is the man who started the stop naked shorting scam 'ICI-NAANSS' to camouflage his own debenture and preferred share dumping.
Though supposedly separate entities,Investor Communications International receives or purchases dirt cheap shares of penny stock from companies they do public relations for,which is to say they pump stock they dump on the market and on unsuspecting 'investors'.'NAANSS' on the other hand is the acronym for 'National Association Against Naked Short Selling'.
Logically one would conclude these two entities would be juxtaposed against one another and that any organization set up to stop 'market makers'or brokers from dumping unaccounted for shares into the market to destroy or collapse share price value(i.e.NAANSS) would also oppose the dumping of artificially cheap shares issued by management to stock pumpers(i.e.ICI). But strangely enough as 'our-street.com and Businessweek's Weise have pointed out these to entities share the same office space and the same telephone in Blaine,Washington !!
Gary Weiss's Businesweek of December 8,2003 article that reveals the telephone-office connection of NAANSS and ICI , which is not proudly touted by these offshore-onshore debenture dumping touts,is quoted below:
'There's no doubt that shorts often drive down the prices of thinly traded stocks. The problem is that such stocks often became tempting to shorts only because they are richly priced as a result of manipulation. A good example of that took place in the mid-1990s, when several microcap brokerage firms, including Hanover Sterling & Co., collapsed after shares they had promoted to sky-high levels were attacked by aggressive shorts. Hanover brokers and managers were subsequently imprisoned for stock fraud.
Shorts argue that if naked-shorting had not taken place during the microcap crime wave of the 1990s, such stocks would have climbed even higher before they crashed. In the past, the SEC was loath to act against naked shorting, but it now has succumbed to organized pressure -- including a letter-writing campaign encouraged by more than 100 microcap companies, organized as the National Assn. Against Naked Short-Selling (NAANSS).
'The arguments used by the organized opponents of naked shorting, lamenting the supposed depredations of short-sellers, are so repetitious that the SEC has categorized their comment letters -- which are piling up at the agency -- as "Letter Types A, B, C and D."
So who is behind this campaign? Calls to the NAANSS were answered at a firm called Investor Communications International, whose clients include companies attacked by shorts. Their anger is understandable. The market is a ruthless place, but it's supposed to be. The SEC should let it work -- and not cave in to this campaign to suppress the only force that can curb hype in the resurgent microcap market.'
Personally,I believe the answer lies with keeping naked shorting,which has to do with shares that are not existent,illegal,on otcbb or penny stocks,as they are on any other market.Personally, as a victim of NAANSS FRAUD TO OBSCURE THEIR OFFSHORE DEBENTURE DUMPING AND MONEY LAUNDERING,THEY SHOULD BE ROUNDED UP AND PUT UNDER A JAIL TILL THEY CAN BE BROUGHT TO COURT.
(mention o'quinn)
The GAO has recently stated they have trouble tracking money used for terrorist activities.The ability of James Dale Davidson et.al.,founder in the 1960's of the 'National Taxpayers Union'not only defrauds Americans and others who invest in American 'securities'but drags his ill gotten gains offshore so as not to pay taxes on what he steals.
Several years ago a New Zealand group looking into Mr.Davidson's purchase of property in that country raised concerns not only with his shady securities dealings outside New Zealand but with an American business partners involvement with 'terrorist' activities in Africa.This was before 9/11 and had to do with supporting guerillas who his Louisiana friend felt were serving a noble cause.However the Al Quaeda also feel they are serving a noble cause.
Now,what are examples of a few of his recent penny stock pumps known off hand? ? EVSC OR Endovasc,where where he was snuck quietly onto and off of their audit committeee.He pumped and promoted the stock through his pump publications. But there are no filings for what he dumped or shorted,and no one investigates.And there is the Canadian heart stent firm,'MIVT'. Genemax,of course,was his poster stock for how he and his insiders were being naked shorted by mms until the greed of himself and his associates led to heavy dumping on the real naive and defrauded investors led into his pump scheme.
Endovasc Announces Appointments to Audit and Compensation Committees
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216 of 397 DOCUMENTS
Copyright 2002 PR Newswire Association, Inc.
PR Newswire
August 23, 2002, Friday
SECTION: FINANCIAL NEWS
DISTRIBUTION: TO BUSINESS AND MEDICAL EDITORS
LENGTH: 928 words
HEADLINE: Endovasc Announces Appointments to Audit and Compensation Committees
DATELINE: MONTGOMERY, Texas, Aug. 23
BODY:
Endovasc Ltd., Inc. (OTC Bulletin Board: ENVC; Berlin: ED7) announced today four new appointments to its Audit and Compensation Committees, in accordance with the Sarbanes-Oxley Act of 2002.
"We are pleased to have these distinguished gentlemen join our board. Their vast experience and wisdom will be of great value to Endovasc. We will be able to utilize their expertise as we move forward in bringing our life-saving drugs and therapies to market," said Dr. David P. Summers, Chief Executive Officer of Endovasc Ltd., Inc.
In addition to Mr. Rudiger Beuttenmuller, whose appointment was announced in June, the following have accepted appointments:
Kenneth F. Reilly, J.D.
Judge Reilly currently serves as Presiding Judge of the City of Montgomery, Texas and is an author and lecturer of national renown. He has previously served as an Attorney Advisor to the United States government, as a Legal Counsel to one of America's largest state legislatures, as President of an oil & gas exploration and development company, and as President of a public interest legal foundation dedicated to the preservation of the free enterprise system. Today, in addition to his judicial duties, Judge Reilly travels across America speaking on the subject and benefits of environmental regulatory compliance. He is a graduate of the University of Houston (B.S.) and the South Texas College of Law (J.D.), both with honors. Born and reared in Connecticut, Judge Reilly relocated to Texas after completion of service in the United States Air Force and currently resides in close proximity to the principal offices of the Company.
Kenneth Beverly, CPA
Mr. Beverly currently serves as Managing Partner at Newman & Company, PLLC. He received a BBA in Accounting from the University of Houston. Following two years active-duty service in the U.S. Army, he began his career in 1972 with Schulse, Hartwig & Co as a Certified Public Accountant. Six years later, he started Beverly, Hajovsky & Co., where he was Senior Partner. In 1988, he opened Kenneth Beverly & Associates, P.C., and in 2001, Beverly, Newman & Company, PLLC was formed. Mr. Beverly is a member of the Houston Chapter of CPAs, Texas Society of CPAs, and the American Institute of CPAs. He works primarily in the area of tax compliance and planning for closely held corporations.
James Dale Davidson, B.A., M.A. M. Litt. (Oxon)
Mr. Davidson is a private investor and analyst. He founded Agora, Inc. a worldwide publishing group with offices in Baltimore, London, Dublin, Paris, Bonn, Johannesburg, Melbourne and other cities. He also founded The Hulbert Financial Digest and Strategic Investment. In conjunction with Lord Rees-Mogg, co-editor of Strategic Investment and former editor of the Times of London, he co-authored a series of books on financial markets. Mr. Davidson also is a current or recent director of a number of companies, many of which he helped to found. They include GeneMax, MIV Therapeutics, BEVsystems, New Paradigm Capital (Bermuda), Anatolia Minerals Development Corporation, and Wharekauhau Holdings (New Zealand). In addition, Mr. Davidson is a director of Plasmar, S.A. (La Paz, Bolivia), Martinborough Winery Ltd. (New Zealand), and New World Premium Brands Ltd. (New Zealand). He is the editor of Vantage Point Investment Advisory, a private financial newsletter with a worldwide circulation.
Frank Bagrier, MBA
Mr. Bagrier currently serves as a Senior Portfolio Manager and Senior Vice President-Investments at UBS/PaineWebber. He began his career in 1965 with Public Service Electric & Gas Company. He subsequently served four years in the Air Force, and then completed his education with a BBA and an MBA from Southwest Texas State University in 1974. After one year as a financial analyst with Conoco, Mr. Bagrier joined Merrill Lynch in 1975, where he became a member of the Executive Club. He joined UBS/PaineWebber in 1980, and is a President's Club Member, and holds a Certified Financial Planner License. He provides financial and estate planning advice to individuals and institutional clients.
About Endovasc
Endovasc Ltd., Inc. is a biotechnology company focused in the area of cardiovascular disease, pioneering drug delivery technology designed to deliver and release drugs to their intended targets in an efficient and controlled manner. The Company's products and processes include: Liprostin(TM), ANGIOGENIX(TM) (Nicotine Receptor Agonist), PROStent(TM) stent-coating technology, and a biodegradable resorbable prosthesis.
The foregoing statements are made under the "Safe Harbor" Private Securities Litigation Reform Act of 1995 and may contain forward-looking statements that involve risks and uncertainties that may not be evident at the time of this release. For more information about Endovasc, please visit www.endovasc.com . (Investor questions and requests for materials can be submitted online.)
To sign up for Endovasc shareholder alerts, please visit http://www.endovasc.com/html/e-list.html .
Contact Information: Investor Relations, Endovasc Ltd., Phone: +1-936-448-2222, Fax: +1-936-582-2250, InvestorRelations@endovasc.com.
MAKE YOUR OPINION COUNT - Click Here http://tbutton.prnewswire.com/prn/11690X91504703
SOURCE Endovasc Ltd., Inc.
CONTACT: Investor Relations of Endovasc Ltd., +1-936-448-2222, or Fax, +1-936-582-2250, InvestorRelations@endovasc.com
Although most of these share holding insiders seem to originate from 'offshore,such as Bermuda or Bahamas,they must depend on onshore market makers such as Ameritrade, Schwab Capital,Etrade,and smaller 'market makers to do ther dirty deads and scam defraud and return tyeir stolen profits back offshore to avoid taxes.
And they must have fraudulant or corrupt 'transfer agents' to issue stock shares in collusion with the corrupt penny stock executives they work with onshore.
'BEVI',or Bevsystems, and 'CPLY' WHERE Davidson has or had a mafia related partner according to a 'Businessweek' investigation,named Mr.Press.(Paradoxically,he accused former President Bill Clinton of mafia ties among other things as we sall see below.)
So why don't the 'market makers'such as Schwab Capital,Etrade, Ameritrade,et.al.,stop or litigate,with Mr.Davidson and his ilk for accusing them of naked shorting ? Perhaps because they have in the past when supply of shares exceeded demand or their own employees manipulated the market.Schwab actually threatened me with litigation for simply enquiring as to whether Endovasc and it's 'famed trail lawyer'O'Quinn's accusation of their naked shorting was true!!
Also because market makers make money off the frauds and 'pumps'purpatrated on the naive investing public.So James Dale Davidson and his ilk bring them 'good' business,much better than a common shareholder or account holder such as I would,by their fraudulant 'pumps'or protions of penny stocks through the internet or mass mailings that should be prosecuted as wire fraud.
And his history stock pumps are much longer than that and not all limited to OTCBB or 'penny stock' market.Below is from 'our-street.com'and mentions Mr.Press and the Businessweek' expose:
ChampionLyte Products, Inc. was a failed and about to go bankrupt company when controlling interest was acquired by a group of unknown investors led by two very well known players in the world of questionable stock transactions. James Dale Davidson, a high profile self styled venture capitalist and stock guru and Robert Press former president of the failed Finantra Capital. Davidson is well known as a result of his association as founder of Agora, Inc. and his various promotional newsletters. So popular is he that he has recently been mentioned in connection to an SEC action against Agora. http://www.sec.gov/litigation/complaints/comp18090.htm We must admit, however that we are impressed with his bravado if nothing else. After realizing that his tactics were of interest to the SEC, Davidson not only publicly claimed that "the SEC also lies. I know because the SEC field office in Utah has lied about me. And I suspect that these lies are the culmination of a carefully laid plan to discredit GeneMax and punish the company for raising troublesome issues about naked short selling, which has also embarrassed the SEC." He came right back in a subsequent newsletter and recommended to his subscribers that they each purchase $1,000 worth of a number of stocks he was touting including BEVsystems. The trouble with this is that he failed to tell his readers that he was a Director of the company and had been dumping shares as early as a few months prior to his May newsletter. Davidson also failed to even disclose his ownership in ChampionLyte and if it hadn't been for an Our-Street.com inquiry to management of ChampionLyte, this fact may never have surfaced. Apparently Mr. Davidson didn't feel the need to file the 13D that is customary at times like this.
Of course, Mr. Davidson's involvement calls into question a certain transaction involving ChampionLyte. The supposed Cross Marketing or Joint Marketing agreement between ChampionLyte and BEVsystems in which BEVsystems gives ChampionLyte $125,000 worth of S-8 stock and ChampionLyte gives BEVsytems up to $100,000 in cash each and every month is a most questionable transaction and was never disclosed as a related party transaction despite Mr. Davidson's obvious involvement in both companies.
The connections between ChampionLyte and BEVsystems go beyond this one agreement and Mr. Davidson's heavy involvement in both companies. BEVsystems recently issued a significant amount of stock to a company that shares office space with ChampionLyte and which also shares an office address with Mr. Press' Finantra Capital.
Another common thread between the two companies is that they both share the same Investor Relations Group, Peter Nasca Associates. By some strange coincidence, this is the same Peter Nasca who is now working for Epixtar Corporation as their Investor Relations representative and previously worked for Robert Press and his Finantra Capital. Mr. Press also has an interesting background. He was or is the President of Finantra Capital, formerly known as Medley Credit Acceptance. http://www.businessweek.com/1997/50/b3557003.htm.
He also was the President of Performance Capital Management, Inc.
http://www.ftc.gov/opa/2000/08/performance.htm and was also affiliated with PCM Securities, (check out this Mob On Wall Street article) http://www.businessweek.com/1996/51/b35061.htm.
In fact, according to Business Week, Press was also an officer with PCM Securities.
In fairness to current management of ChampionLyte, it would appear that, beverage people were put in place by those controlling the company and the stock business and the stock deals were left to those with stock experience. They only have token stock positions and their resume's indicate more experience in the field of the beverage business and less in the area of public stock matters. At least that is our opinion in the matter. We guess it is a good thing that they are surrounded by people like Robert Press and James Davidson to help guide them in the ways of the market. (We say that with tongue firmly planted in cheek).
In our opinion, the tight little group of Davidson, Press and Nasca and the companies they touch deserve a lot of looking into.
On a final note, we would like to point out that James Davidson, portrays himself as an outspoken opponent of naked short-sellers. As we have pointed out in the past, one of the worst enemies of emerging companies and the best friend of the naked short-sellers are the discount based convertible fundings better known as "toxic fundings" or "death spirals". Given these facts, we would like to call everyone's attention to the fact that a group called the Advantage Fund, I, LLC recently cut a deal with ChampionLyte at a conversion factor of 70% of the bid and the very same Advantage Fund I, LLC can be found as a significant holder and seller of BEVsystems shares as well. Who besides James Dale Davidson was connected to both these companies in a way that could get this funding handled for the Advantage Fund I, LLC. Could it be that Mr. Davidson is a wolf in sheep's clothing? Or is someone running around companies where he is a director and/or significant shareholder and pushing these death spirals through over his vehement objections?
It should be further noted that The Advantage Fund I, LLC also shares the same address with ChampionLyte Holdings, and Kinghtsbridge Capital and that these two funding groups are related to not only this address but also the address of Finantra Capital and Mr. Robert Press who of course partnered up with Davidson for the takeover of ChampionLyte. Of course none of this is disclosed but you have a right to know!
Now this from a Genemax article by Stocklemon.com from last year:
Yet, whereas Sam Waksal was the CEO of Imclone, Stocklemon believes that the problems with Genemax are not from the Chairman or CEO, but rather on the level of stock promotion and the individuals and groups that brought Genemax into their publicly traded hell. Dr. Julia Levy is a highly respected individual who deserves the utmost respect. Dr. Wilfred Jeffries is similarly a respected researcher who is dedicated to his work. Stocklemon does not have much information on CEO Ron Handford besides him being the former CEO of a mineral company on the Vancouver Exchange named Ouro Brasil (COU.V).
Investor Communications International, Inc. http://www.investorcomm.com/index.htm
It appears to Stocklemon that Investor Communications International, Inc. (.ICI.) is the mouthpiece of Genemax. They owned the shell that Genemax merged into and they also serve as an investor relations company for Genemax. Stocklemon is always skeptical when an investor relations firm has such a large stake in a publicly traded company. According to Genemax.s last filing dated August 19, 2002, Investor Communications International, Inc. owns 554,470 shares of Genemax. Furthermore, Genemax pays ICI a monthly retainer of $10,000.
According these filings,
On October 9, 2000 the Company entered into a management services agreement with Investor Communications International, Inc. ("ICI"), a significant shareholder, to provide management and investor relations services for the Company. During the period ended June 30, 2002, the Company incurred $248,300 in fees and $8,782 in interest to ICI. During the period ended June 30, 2002 the Company repaid ICI $322,000 for amounts owing. As of June 30, 2002, $17,356 is owing to ICI for fees, cash advances and interest. The Company subsequently entered into a new consulting services agreement whereby ICI will provide various corporate services on a month-by-month basis for a fee of $10,000 per month plus expenses.
This is not the first stock that ICI has been involved with. Over the past two years, Stocklemon can document three other companies (i.e Vega Atlantic, Intergold Corp, and Hadro Resources), which have been involved with ICI. http://www.10kwizard.com/files.php?sym=&pcname=&cik=&exp=investor+communications+interna... .04 cents http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=vatl&sid=0&o_symb=vatl&f... IGCO- .015 cents http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=igco&sid=0&o_symb=igco&f... HDRS- .16 cents http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=igco&sid=0&o_symb=igco&f... Hadro Resources http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=hdrs&sid=0&o_symb=hdrs&x...
It appears to Stocklemon that the last stock that ICI was involved with was Hadro Resources (OTC:HDRS). We find it interesting how the pattern of GMXX closely follows that of Hadro Resources.Here are some similarities between Hadro Resources and Genemax:
1. They both have the same mailing address on their filings: 435 Martin Street, Suite 2000 Blaine, Washington 98270;
2. Grant Atkins is both the President of Hadro and a director of Genemax. Mr. Atkins gave an interview (please see link below) in which he discusses the naked shorting of Genemax while presiding as the President of Hadro. Oddly enough, Mr. Atkins. bio in the 10Q of GMXX, fails to mention that he is the CEO of Hadro Resources; http://bigcharts.marketwatch.com/news/articles.asp?guid={C42DAAFF-71C5-42F4-A480-3B3FE6F9AF71}&n...
3. Both Hadro Resources and Genemax got their listing in Frankfurt. http://translate.google.com/translate?hl=en&sl=de&u=http://www1.boersenman.de/BM/HOME/compan... resources%26hl%3Den%26lr%3D%26ie%3DUTF-8%26oe%3DUTF-8; http://translate.google.com/translate?hl=en&sl=de&u=http://www.finanznachrichten.de/nachrich...
4. Alexander Cox is a Beneficial Owner of Hadro Resources and Genemax. http://www.10kwizard.com/filing.php?param=repo%3Dtenk-sym%3Dhdrs-sdate%3D20010822-edate%3D20020822-s...
How Can We Get Some?
To this point, Genemax has funded itself with the aid of ICI. Please see the quote below which illustrates the type of funding that ICI has provided. And no, what you are about to read is not a misprint.
In May 2002, the Company completed a private placement of 2,000,000 common shares at a price of $0.125 per share for proceeds of $250,000.. http://www.10kwizard.com/filing.php?param=repo%3Dtenk-sym%3Dgmxx-sdate%3D20010822-edate%3D20020822-s...
Enough About the Shorts, What About The Business?
Stocklemon always questions when a company seems to be more concerned about their stock activity than they are about their actual business. In the past three months, Genemax has released a plethora of press releases that deal with the stock activity and the alleged .naked shorting. of their security. Stocklemon suggests that instead of worrying so much about the shorting, Genemax should ask themselves these two important questions:
1. How can we reinstate investor confidence; and
2. How can we return shareholder value.
It is the opinion of Stocklemon that if Genemax can justify its market capitalization and give confidence to the investor that this is not just another pump-n-dump, then maybe the shorts will get away from the stock. Instead of another press release about short sellers, how about a release explaining in detail how to cure cancer with only $185,000 in the bank.
Who Is James Dale Davidson?
James Davidson is one of largest individual shareholder in Genemax with holdings of 1,250,000 shares. According to Genemax.s website, he is also the Chief Financial Officer and Secretary of the Company. It appears to Stocklemon that Mr. Davidson is quite an erudite gentleman with a risumi that would impress even the most harshest critic. He is a publisher, lecturer, and director of many public and private companies. Stocklemon is of the belief that Mr. Davidson should add to his list of credentials the title of .stock promote. Mr. Davidson is the founder of Agora Publishing which publishes reports on investment opportunities.
Mr. Davidson profiled IGSTF in one of his past newsletters. Please click on the link below to see some of the bold claims made by Mr. Davidson. Stocklemon has never read a more aggressive report, that sells the dream more, than the one presented by Mr. Davidson. Stocklemon suggests that the regulators take a look at the statements made by his newsletters. http://www.agora-inc.com/reports/VPI/RoutetoProfits/
He is currently doing the same promotion with Genemax. According to his report,
As I write this, we are also offering a couple of absolutely stunning medical and biotech breakthrough opportunities to investors. One of them is a breathtaking gene therapy that offers incredible hope for cancer patients. In animal trials, two-thirds of mice injected with human lung cancer tumors with the biomass equivalent of basketballs were cured using this treatment. And this technology has already been hailed in Nature Biotech, one of the most prestigious journals in the world. GeneMax Pharmaceuticals has already turned down several offers to go public that management deemed inadequate given the company's huge potential. It is currently entertaining a new proposal, however, of enormous potential benefits to Strategic Opportunities initial investors. http://www.agora-inc.com/reports/STO/StartTheProfits/
By the way, we at Stocklemon were wondering - just how does a mouse have a tumor the size of a basketball? In the same newsletter, Mr. Davidson discusses another stock that he is involved in called BEVsystems International, which currently trades at .19 cents. He writes about BEVsystems International as follows, BEVsystems International is poised to skyrocket to similar valuations. I'm not at liberty to disclose the exciting endorsement agreement and takeout financing arrangements under way, but I can assure you that our ground floor investors stand to make exponential profits. And it's just one of several life-changing and wealth-building options for my select group of "adventure" investors. http://www.agora-inc.com/reports/STO/StartTheProfits/
Where is the Disclosure?
What seems to be missing in the above paragraph about BEVsystems International is the disclosure statement which states Mr. Davidson.s relationship with BEVsystems International. Writing a newsletter carries responsibilities to your readers. Stocklemon does not believe that Mr. Davidson has fulfilled these responsibilities. Just last week, Mr. Davidson hosted an investment seminar in San Francisco http://awaionline.com/dr/. Stocklemon is curious to know if Mr. Davidson presented Genemax as one of his .serious profit opportunities.. If he did, did he properly disclose his relationship to the company? We believe that this could present a serious conflict of interests that should be addressed by Mr. Davidson.
Below are three other stocks that James Davidson was and/or is involved in:
1. BEVS- .19 cents http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=bevs&sid=0&o_symb=bevs
2. ALIAF (Pink Sheets) - .89 cents http://finance.yahoo.com/q?s=ALIAF.PK&d=t
3. MIVT- .32 cents http://finance.yahoo.com/q?s=MIVT.OB&d=t
Offshore Companies
It is Stocklemon's experience that whenever there are large amounts of offshore holders in a company, there is a higher propensity for the stock to go lower. There are many reasons why offshore accounts are used but notice two common denominators, (a) none of these accounts are in the names of individuals; and (b) many are located in known tax and security havens. The following are a list of some of the offshore holders:
Latitude 32 Holdings Ltd. Shareholder Mareva House 4 George Street Nassau, Bahamas
Aberdeen Holdings Limited Shareholder 16 Market Street Belize City, Belize
Calista Capital Corp. P.O. Box W-961 St. Johns Antigua West Indies (1) Common Stock
Spartan Asset Group P.O. Box W-960 St. Johns Antigua West Indies 14
Pacific Rim Financial Inc. C/o Arundel House 31A St. James Square London SW1Y 4JR United Kingdom (1) Common Stock
Eastern Capital Corp. C/o Northbrook Farm Bentley Farnham Hampshire GU10 5EU United Kingdom (1) Common Stock
Eiger Properties Inc. C/o P.O. Box CH-4002 Basel, Switzerland (1) Common Stock
Rising Sun Capital Corp. 96 Front Street Hamilton HM12 Bermuda
Don't Forget About The Business
The Company has not yet begun phase one clinical trials on their proprietary product. According to their filings,
Management of the Company believes that an estimated $15,000,000 is required over the next three years for payment of expenses associated with the balance of pre-clinical development and commencement of Phase I clinical trials for the TAP Technology and for corporate expenses.
http://www.10kwizard.com/filing.php?param=repo%3Dtenk-sym%3Dgmxx-sdate%3D20010822-edate%3D20020822-s...
It is the belief of Stocklemon that this could cause extreme dilution to the stock IF the money was ever able to be raised. Furthermore, nothing is to guarantee success of the TAP product. It has not yet been tested on humans and has a long road ahead. Stocklemon hopes and prays for all cancer research to be successful. We hope that Dr. Jeffries will make a difference in his research. Unfortunately, we do not believe the vehicle of GMXX and the promoters behind it have the same interest in the company as Dr. Jeffries does. It would be a shame to have a bad stock deal get in the way of good research.
Conclusion
Where there is smoke, there is fire. If the investors of Genemax would like to know why there is so much naked shorting in their stock and why the short sellers seem to be targeting them, they have to look no further than there major shareholders. We believe that the above report has thoroughly outlined sufficient reasons for even the most ardent supporter of Genemax to have healthy skepticism about the true viability of this Company. Stocklemon has always said If you can't bet on the horse, then bet on the jockey. Stocklemon is merely reporting this information as a caveat emptor to anyone who might think about investing in this Company. We hope that one day soon cancer will be completely eradicated in the human body. Similarly, we hope that one day the cancer of stock promotion will be eliminated in our public marketplace.' (end stocklemon.com)
James Dale Davidson is also the same man that ran the Clinton killed Vince Foster scam for Richard Mellon-Scaife.And when former CIA Chief William Colby died mysteriously,he blamed Clinton for that as well!! But the funny(peculiar) thing is,Colby was Davidson's employee at the time of his death in 1995. He used Colby's name on his stock pump scams to lend credibility to his scams.He even used Colby's name on his letterhead to accuse Clinton of Vince Foster's death !!!,possibly without permission Colby's permission, but we''ll never know because he's dead !!!
And on top of it all, Davidson makes a complete joke of the FBI, and laughs in their face and ridicules them, as you can see below from his mailings and internet propaganda at the time he used Colby's name to accuse Clinton of murder.Strangely he even accuses Ken Star of covering up for Clinton in the pre Monica Lewinski era.
BELOW IS A PORTION OF HIS 'CLINTON KILLED VINCE FOSTER' PROMOTION USING THE VERY SAME MAILING LIST HE NORMALLY WOULD USE TO PUMP THE STOCKS HE PROMOTES.FORMER CIA CHIEF COLBY'S NAME WAS USED FOR THIS AS WELL ALTHOUGH WE FIND NO PROOF COLBY WANTED HIS NAME USED.COLBY WAS ORIGINALLY PAID TO LEND HIS NAME TO DAVIDSON'S STOCK PROMOTIONS.
'We at Strategic Investment believe that the evidence in this case overwhelmingly points to murder. It is a threat to the credibility of America's justice system that possible obstruction of justice by the Park Police and the FBI is whitewashed.'
JAMES DALE DAVIDSON
For Immediate Release
October 25, 1995
For More Info Contact: Anne Dunne: 410-576-0900
EXPERTS SAY FOSTER "SUICIDE" NOTE IS A FORGERY
At a press conference this morning at Washington's Willard Hotel, James Dale Davidson announced the findings of an international panel of forensic experts who examined a copy of a note that was found in Foster's briefcase shortly after his death.
The panel of three forensic handwriting experts have determined that the note is a forgery, and not written by the late Deputy White House Counsel.
James Dale Davidson, Editor of Strategic Investment, a premier world financial newsletter, offered the following statement today:
Ladies and Gentlemen, Strategic Investment has asked a forensic panel of handwriting experts to examine the so-called "suicide" note, said to have been written by the late Vincent Foster.
The panel's conclusions were collected over a three month period. Each panelist worked independently and came to their own conclusions without interference.
They completed their study with far greater care, thoroughness, and apparent accuracy than the federal institutions that were intended to protect us. It is indeed ironic, that Vincent Foster, as the number two lawyer in the White House and one of the highest ranking law enforcement officials in this land--would have his own death covered up.
The fabrication of a "suicide" note by high officials, is just one more indication that Vincent Foster did not commit suicide.
With us today are our expert panel whose reports you have copies of, as well as the torn note, and a set of known documents written by Vincent Foster.
Mr. Reginald E. Alton, from Oxford Univeristy, has flown in for this conference. He is a world-recognized expert on handwriting and manuscript authentication. For 30 years he has lectured at Oxford on handwriting, and has engaged in forensic document examination.
Recently he ruled on the authenticity of C.S. Lewis's Diaries. He has been consulted by British police authorities and has testified in British courts on both criminal and civil matters involving questioneddocuments.
He has determined the note to be a forgery.
Mr. Vincent Scalice, is formerly a homicide expert with the New York City Police Department. He is a certified Questioned Document Examiner with the American Board of Forensic Examiners. He has 22 years experience as a document examiner, and has worked for some of the countryUs largest institutions in this capacity, for example Citicorp and Chemical Bank.
He has determined the note to be a forgery.
Mr. Ronald Rice has 18 years experience performing civil, criminal and forensic handwriting examination. He is a consultant to the Massachusetts Attorney General's office. He has examined documents on a number of celebrated cases, and recently was asked by CNN to examine notes written by O.J. Simpson.
He too has determined the note to be a forgery.
Three experts--70 years of combined forensic examination experience--conclude forgery.
Both the Park Police and later the FBI determined the note to have been written by Mr. Foster.
But look more closely. The Capitol Police handwriting expert compared the so-called Foster note to only one document--which is not in keeping with a proper and complete examination. We learn today from Mr. Christopher Ruddy, the reporter from the Pittsburgh Tribune-Review, the Park Police used the services of [a] Sergeant from the Capitol Police who has never been certified as a document examiner.
Later the FBI, and former Special Counsel Robert Fiske reports, found the note to have been written by Foster, again by comparing it to a single document and several checks written by Foster. Like so much of the duplicity in the Fiske report, we learn that the checks proved an inconclusive match to the note. The FBI violated standard forensic procedures to match the document.
Former FBI Director William Sessions has charged that his firing the day before Foster's death led to a "compromised" investigation into the death. Political considerations have guided Foster's death investigation from the beginning. Allegedly, in America, no one is above the law. But the investigations, by the Park Police, Fiske, and the Beltway insider Kenneth Starr, show that the law applies differently to different people.
We at Strategic Investment believe that the evidence in this case overwhelmingly points to murder. It is a threat to the credibility of America's justice system that possible obstruction of justice by the Park Police and the FBI is whitewashed.
Tony
antigua
Guatemala
http://edgar.sec.gov/rules/proposed/s72303/tryals121603.htm
Here is the hole I am referring to: http://www.sec.gov/rules/proposed/34-48709.htm#IIC1
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The Commission is proposing an exception from these requirements for short sales executed by specialists or market makers but only in connection with bona-fide market making activities.49 We believe a narrow exception for market makers and specialists engaged in bona fide market making activities is necessary because they may need to facilitate customer orders in a fast moving market without possible delays associated with complying with the proposed "locate" rule. Moreover, we believe that most specialists and market makers seek a net "flat" position in a security at the end of each day and often "offset" short sales with purchases such that they are not required to make delivery under the security settlement system.
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That is a hole big enough to drive a truck through it. Let me see instead of driving the price from 1 dollar to 10 cents in a matter of days, it will take a couple of weeks longer. Market makers and specialists are free to have naked short positions as long as they balance everything by the time of settlement, which gives them a couple of days to cover and short again. While they are covering they short again, simultaneously. They have no limits on number of naked short positions, as long as they are trading within the trend for the stocks. So now they will have to establish a trend to trade within.
Looks to me it is business as usual, except criminals, drug lords and terrorists are not invited.
Dear Securities and Exchange Commission,
I oppose Regulation SHO as it is now written. I am concerned that it will cause financial chaos in the markets, especially in the Bulletin Board market unless other steps are taken to prevent unfettered abuses by unethical stock promoters.
Short selling is a necessary part of the market as it is the only true counter measure to stock promotions. I believe unless short sellers can effectively borrow stocks or be allowed to short sell naked, troubles within the micro-cap markets will grow far worse.
In addition to opposing the elimination of naked short selling, I favor the following measures to reduce abuse within the markets.
Eliminate all toxic funding. Allow private placements at any price but require public disclosure (press releases) for any sales at less than 85% of market price.
Require more complete disclosure of all promotional compensation including the name and relationship of any party paying for promotion. Additionally all disclosure must accompany any published information.
Require any offshore corporation providing funding to a public company must also disclose all parties with a beneficial interest in the offshore corporation.
If the SEC decides to eliminate naked short selling then I recommend these additional measures to mitigate the losses which I feel will occur.
Require full Directors and Officers insurance for any company trading on the Bulletin Board.
Establish minimum standards for a company to trade on the Bulletin Board. Those standards must include:
Minimum non-affiliate float equal to at least 35% of the total issued and outstanding.
Minimum of 100 non-affiliate shareholders, each with a minimum position of at least $1,000 prepaid cash invested.
Minimum of at least 60% of the float in street name in order to qualify for bid and ask quotations. If street name stock falls below this level, then a work out market will be established.
Establish either a bounty/ reward system or contract for outside professional due diligence watch dog services to offset the reduction of independent investigation now provided by professional short seller.
Yours truely
http://www.sec.gov/rules/proposed/s72303/s72303typeg.htm
I've been an investor in Nasdaq and OTC stocks for quite some time now. What I've seen happening on these markets the last couple of years has amazed me. I see companies that trade millions of shares each day while giving out good press releases and yet their price has come down gradually during this period to a mere freezing point.
Naked shorting is a virus that needs to be stopped. I liked the comment that Richard Altomare CEO of Universal Express (USXP.OB) was saying on an interview a few weeks ago. Naked shorting is like playing poker where your opponent always tells you that his cards beat your cards but he never shows his cards. He only takes your money. This is something that can not be tolerated. As an organisation you have the responsibility to insure that every investor on every market you control has a fair chance of seeing his investment being treated in a fair and correct manner. Naked shorting is in my opinion neither fair nor correct.
I welcomed your proposal regarding shorting and naked shorting. However, what are you planning to do with all the current short stocks. Are you going to force market makers and brokers to come clean with the past and cover their existing short position? I would hope so. There are many small investors that have lost their life savings to these shorters. It would be nice to see some or all of it returned to the rightful owners.
One of my investments is Pinnacle Business mgt (PCBM.PK). This company is currently under investigation by the SEC since May 2002. Since then we've seen some Wild West scenario's in the trading of PCBM. I never understood how the trading on a stock that is under the watchful eye of the SEC can be so manipulated each and every day. We've been on zero bid for months now, still millions and even Billions are traded every day with no effect on the price. Very strange things have happened with this company and we the investors have been out in the cold during all this time. I suspect naked shorting is the root of all problems that happened with Pinnacle. Anyway, shareholders have at least the right to know the true story .
I end up with thanking the commission for their efforts to stop naked short selling. I hope we can see a more honest cleaner market in the upcoming months when you stop the daily abuse that has been happening in especially the OTC markets.
Regards from Belgium
http://www.sec.gov/rules/proposed/s72303/s72303typee.htm
It is now October 30, 2003. Fours years have now past since the SEC went out and sought comments on "Short Selling" problems in our securities markets. What the SEC received in 1999 was some 3000 comment letters with nearly two thirds (2000) of those letters with complaints of "Abusive Naked Short" selling.
Now, SEC officials expect proposed reforms will prove to be controversial with corporations and investors. (Comment): Certainly controversy will reign as the proponents of the status quo are in a win situation with the current rigged system and would prefer it stay that way, while Small Companies and Small Investor (specifically the OTC-Pinks) are looking only for a level playing field.
The buzz word they (the status quo use is Liquidity), the market needs liquidity, when in essence, Naked Shorting or the selling of Counterfeit Shares, not to be confused with shorting, allows the sellers "full Control of the Price Per Share". This creates heavy dilution, which causes a spiraling downward pressure on the PPS until most companies and shareholders give up. One would ask, How is someone(s) or somebody(s) Or system is allowed by law to sell to the public something which they do not own or have not borrowed?. How is someone(s) or somebody(s) or system is allowed by law to arbitrarily increase either the Authorized, Operating or Float or all of a company's stock by selling billions and billions of shares into the market to a unsuspecting public that currently has no recourse. Which leads to the ultimate question, where's the fiduciary responsibility of the SRO's (NASD - NAS) and the ultimate over-see'r the (SEC)???, as we see by the below paragraph, the SEC has been well aware of the issue of Naked Shorting for over five (5) years. It certainly would appear that they also support the Status Quo as opposed to the protecting small companies and small investors, BTW, which is their charter, as nothing has happened in the way of regulation during this five (5) year period.
Note in their own words: (Excerpts of SEC Meeting on 10/22/2003) SEC Commissioner Paul Atkins noted the agency got more than 3,000 letters when it floated reforms in 1999, and predicted an even bigger reaction to the latest plan, SHO. Fact: In the SEC's open public Meeting today, they, (The SEC) used the terms "Abusive", "Manipulate", and "Problem" many times as they once again identified the concerns of Investors and Companies over illegal "Naked Shorting".
"(Question? Abusive to who or what, Companies, Shareholders, Brokers, Market Makers, DTC, CEDE) (Answer - Companies & Shareholders)
"(Question? "Manipulate" Manipulate what),(Answer - Market & PPS for who's favor, The Status Quo)
"(Question "Problem" Problem for who, (Answer, I would like to think for the regulators this time, to include the SEC. The companies and Shareholders have already taken a beating, even though many still hold on hoping for change. Perhaps its time for the likes of the N.Y AG, Mr Spitzer to get to the solution
Once again, in that same meeting, The SEC highlighted the fact that the pile of "Unsettled Positions" were growing as short sellers were not locating shares to borrow in order to fulfill the obligations of the sale. All of this should be alarming news, with the SEC admitting that stock manipulation is in action. I ask, is it??
As a result of Tuesday's meeting, we would like to thank you Chairman Donaldson and your Commissioners' for coming out and stepping up to the plate on this. Thank you for voicing your concerns over what is going wrong in our markets. While your message was less than direct to those who continue with this abuse, at least the SEC has come forth with a proposal. I would throw out a full commendation to the group, as the SEC's recommendation still falls a bit short. Let me elaborate with a few comments. The SEC made a public statement that identified that not only has a "manipulative practice" been taking place regarding short selling, but that they have known about it since 1999, have done nothing to resolve it, and are seeking the help and advice of the commentary to propose reforms because the one they have on the table is still weak for the following.
One area of weakness that the SEC has totally avoided in this session was, "The illegal shares on the table today"? Today, much of the settlement issues date back to initial short positions, but since those shorts have had "settlement failures" that date back longer than the current president has held office, we now have other problems to deal with. The Short sold to a long and failed settlement, the long, tired of the beating he's taken with the stock because of illegal shorting and the downslide of the PPS, decides to sell his long share to another long buyer. He did not sell short, but since the originating trade never settled, that long trade "must/will" fail as well. Now the question becomes, who tracks these trades and the stockpile of them on the broker's books today? Today's Bookkeeping mess is a culmination of bad settlements that date back to the 1999 comment period and no longer trade as short settlement failures but now trade as long settlement failures.
Another area that the SEC stayed away from was the failures of our Broker Dealers in this settlement process. The Terms "Suspend the short seller" for 90 days is great but that order flow comes through a broker. "Today's problems are due to our Brokers lack of desire in trade settlement". Today's Long trades fail settlement because they failed to settle the previous short sales. "Reforms today need to be Trade Settlement reforms NOT Short sale reforms". Our Brokers need to be held accountable to fulfill the contract between themselves and their clients. No investor would allow their broker to fail settlement on a long trade because they would be signing up for self dilution. The SEC needs to go after the brokers, who, like the short seller themselves, benefited from this "Abusive Trading". They were actually partners in the game as they fed off each other. In my opinion, the SEC took what has come to be expected out of them, Baby Steps. What we see in the current enforcement arena by comparison, The AG of NY walks like a grown up while the SEC continues to struggle at the baby step paces. So be it.
Lastly, the SEC's rule change as proposed, will only deal with a portion of the current problem, and in regards to this particular rule, only one side of the problem. It takes two brokers to complete a trade, buyer and seller. The buying broker cannot buy without a equal participant on the other side, and to penalize only one side because they are selling counterfeit shares, is only going after half of the problem. What about the buying broker, who is supposed to make "Affirmative determination" that shares he just bought for his customer, are on the way.
Now, by tightening the rules for "BOTH" sides of the transaction, it would cause brokers to self police each other, as opposed to cooperatively looking the other way, on fail to delivers, as well as fail to receives, etc, etc. In my opinion, the SEC has not been proactive on this issue, but rather, reactive ( by about 4 years) and still fail in their mandate, as some back doors still appear to be swinging wide open, for the Status Quo.
I, as a small investor, am only marginally happy with the attempt so far. I was hoping by this time for a complete cure, not a halfhearted attempt to pacify some rather than all. With that said I'm still happy that we are now making forward progress, cause something is better nothing.
In conclusion, from my perspective the market lacks ETHICS, the Commissioners, responsible for oversight of the markets, should never cower to politics with someone else's money. Each Commissioner needs to be held responsible for their inaction over these past years and I would certainly not be waiting until these new reforms are put in place before I lashed out at the Wall Street Community that continues to sit on unsettled trades without the desire or ambition to settle them. I'm sorry, but in my opinion, our SEC has failed to hold any of the Wall Street Firms accountable for their actions at any appreciable level that makes it painful for them to continue. Delays cost, and the SEC is nothing but a huge delay. BTW... This was not ungrateful you just read. This was hostility at an inept, out of touch Governmental Agency, that hides behind immunity when it comes to accountability. Hostility you Mr. Chairman should have had with regards to our SRO's who have failed to take appropriate actions over these past years against their member firms
Sincerely,
Attach:
http://www.sec.gov/rules/proposed/s72303/s72303typed.htm
WOW!!! Has our Financial securities regulators pulled a fast one here or what. Yesterday the SEC put out a release that contained this item:
3. Proposed Regulation SHO
The Commission will consider whether to propose for public comment new Regulation SHO regulating short sales under the Securities Exchange of 1934, which would replace current Rules 3b-3, 10a-1 and 10a-2. Among other things, Regulation SHO would institute a new uniform bid test, applicable to exchange-listed and Nasdaq National Market System securities, that would allow short sales to be effected at a price above the consolidated best bid. Regulation SHO would also suspend the operation of the proposed bid test for specified highly liquid securities on a two-year pilot basis. Regulation SHO would also require short sellers in all equity securities to locate securities to borrow before selling short, and add further requirements to address "naked" short selling.
The Commission will also consider simultaneously whether to propose for public comment amendments to Rule 105 of Regulation M, which addresses short sales prior to a public offering, to eliminate the shelf offering exception and to address transactions designed to evade the Rule.
To understand what the SEC has and is stating, all you need to do is understand a few key points.
While Short Selling is part of the Equity Markets, Securities laws require that the short sale be settled through proper borrowing of a security for delivery (Affirmative Determination). The ONLY exception to that rule in today's laws is with regards to the less liquid Penny stocks where Market Makers are allowed to short a stock without Affirmative Determination (Ability to borrow) to maintain an orderly liquid Market. That would infer that this Regulation SHO, in which the SEC wants to enforce the ability to borrow before executing the trade, is nothing more than re-stating present day law. Law that the SEC has failed to enforce and thus wants to re-state it to allow them the opportunity to cover up the fact that they have failed in prior enforcement.
Naked Short Selling. The SEC has now publicly come out several times and used the phrase and identified it's realities. The question is, is there any laws that allow Naked Short Selling to exist? Can the SEC provide us with the Chapter and verse in which it exists? How can the SEC allow "Naked short Selling" to exist if in fact it is illegal? The SEC is once again attempting to create Regulations to deter securities violations that exist today without regulation. That is like stating that since there is no law that specifically states that you cannot kill a person with a screwdriver, you can continue to do so until we change the laws that specifically mention the screwdriver. Naked Short Selling is Market Manipulation
Our Securities Laws are very clear when it comes to identifying Market Manipulation. The illegal selling of shares by which massive dilution takes place can only be Market Manipulation. The imbalance between Supply and Demand is excessive and it creates a depressed market that restricts any positive growth regardless of the Business developments. With regards to short selling, only those shorts that can meet Affirmative determination are allowed. If you are talking stocks where the Market Makers can sell without affirmative determination than all those shares must be in the Market Maker accounts as shorts. If that quantity is excessive than they were not keeping an orderly market but manipulating the market. If they are NOT in their accounts but were passed through to clients than they violated the affirmative determination laws.
Overall, I commend the SEC for taking these necessary steps. I wonder, however, why they need to delay immediate actions waiting for approval of a regulation that already exists today. We have Affirmative Determination Laws, we have Market Manipulation Laws, and we have no regulation that would allow Naked Short selling by anybody but a Market Maker. We also have trade settlement laws that would force any offshore sales that enter US Markets to meet US requirements at the Brokerage Houses. They may not have the same borrowing requirements as the US but when the trade enters the US, it is an obligation of the buying US broker to enforce settlement on the trade. All we need to do today is enforce today's laws and we would be much better off.
-------------------------------------------------------
I'm as happy as the next person, about this upcoming *action* on the SEC's part, but I too have to admit, I will be watching with a wary eye, that our so called regulator is not about to pull a fast one, here.
(signature)
Investor - PCBM
http://www.sec.gov/rules/proposed/s72303/s72303typec.htm
THE SEC (THE BIG QUESTION MARK - PROACTIVE - REACTIVE - IDLE??)
For those living the battle cry of positive pro-active reforms out of the Securities and Exchange Commission, may expect to wait a long time. The fact is, the SEC, as recently observed, cannot bring them selves to enforce existing rules or enact appropriate legislation to curtail the rampant fraudulent practices of Wall Street. As Securities Police, they have failed miserably and frankly without some sort of oversight, will continue. Most of that failure could be looked at as intentional, as it would appear only the elite have their support, while the small investor is on the outside looking in and hopelessly crying foul. We use the word "Proactive" earlier. Well, what is Proactive?, could it mean that the regulatory group would be looking not only at the past but also thinking about what could and will happen next with any reforms they impose. The SEC needs to be one step ahead of crime and not one step and many years behind. The crimes of Wall Street will never be solved treating only the symptoms, identifying and attacking the "Problem" will guarantee resolution. Does the investor have more insight to what's currently wrong with the markets or are the regulators just looking the other way?.
In my opinion, the word Reactive probably describes them (the SEC) best, for only after several States AG's have turned up the heat on Wall Street crime have the SEC responded somewhat in kind
Case in Point: Proposed Reform
Last Wednesday, October 22, 2003, the SEC had an open public meeting to address what it calls Reform SHO. This would be a reform to short selling rules that would combat, among other things, the "Illegal Naked Shorting" that they (the SEC) have been tracking since the late 1990's. In their proposals, the SEC has presented options for reform, which include 90 day banning of a Short Seller who fails to properly borrow shares to settle a trade in T+3+2. While this appears "action oriented and logical", it is far from a pro-active reform. In fact, if you look at the industry wide abuses of today, it would not change much of anything, and here's why.
1.) It is not the short seller, but the Market Maker or Broker-Dealer, who is responsible for insuring that shares can be borrowed prior to execution. Why the SEC penalizes the Seller instead of the Wall Street Institution is beyond me. The penalty should be imposed on the firm that allowed the trade to be executed illegally. Our Wall Street Firms, under the Patriots Act, is required to know their client. If their client is about to do something illegal, they should not take the order.
2.) The 90 day banishment from shorting that security is moot if the short sale itself was enough to manipulate the stock price. Example, I can sell short for 5 consecutive days under these guidelines and once that first days worth of trades failed settlement under T+3+5 I am barred from further shorting. In illiquid stocks, 5 consecutive days of short selling could drive the stock values down tremendously. The additional repercussion that's introduced is the fear that's instilled in the long shareholders could drive the PPS down further as selling is induced, then, I could cover all my short positions during the 90 day period.
3.) Much of the illegal shorting comes from Financing packages called Convertible Debentures. In finance deals like this, the 'Bank(s)" are allowed, under the present short selling rules in place to short against fully hedged or arbitrage positions due them. As long as they do not short more shares than they are due under this deal, they can short the stock as a long trade on the shares due in the Convert. As such, and under this condition, the abusive nature of shorting the stock to yield a better convert value will not be covered under the proposed SHO reform as there are NO LAWS on trade settlement from the long side. I think they call these "loopholes'.
4.) Current market abuses seen every month are a result of the mis-tagging of trades. Many Short sales are improperly tagged by the firms, thus short sales are now tagged as long sales. Again, under the proposed reform, the short seller can be working with one or more firms to do so to manipulate the stock through shorting while having the trades mis-tagged. The Long trades will fail settlement but will not be flagged by the short sale settlement failure system proposed. It then becomes a reliance on the snail like pace of enforcement to catch the error and have the situation corrected. In the mean time the manipulation is already done.
I am not an industry expert. In fact, I knew very little about wall Street Operations until recent exposures over the past few years has soured me. What I now know is that the Securities and Exchange Commission is over their heads. Their allegiance to the Wall Street Institutions, and the protection of the business models and profitability, cloud the nature of the abuses we uncover daily. The above examples presented should be known by an Industry Insider like Chairman Donaldson but he appears to be too close to the industry to see what is truly wrong with it. Here would be my answer to Regulation SHO.
Recommendation:
1.) Trade settlements of "all" trade executions shall be conducted under T+3 + 5 (Short or Long Trades). This allows for an initial failure in settlement and then an allowance for a buy in to take place and delivery of that guaranteed share. Failure to comply under these guidelines would yield a fine to the Selling Brokerage or Market making firm for executing an order they could not fulfill.
2.) Trade settlement Failures that Fall outside T+3+5+5 would yield additional fines of up to $1000.00/trade to both the executing Buyers and Seller's Brokerage or Market Making firm. Once an initial failure occurs, it then becomes a failure by the buying firm if they do not press the issue. The buying firm is obligated to their client who has paid for a stock and thus, they must police the selling firm. Having Brokers police each other with potential loss of income on both sides would be a good thing. Brokers execute settlement NOT clients.
3. ) No short sale execution shall take place to open up a Market where that short sale would result in a 5% or more drop in Market Capitalization. This will prevent a short sale from dictating a trading pattern on an illiquid stock. Today we see short sales open up at 10, 15, 20,% below previous day close based on the Gaps set by Market Makers on illiquid stocks. That initial trade, sometimes representing less than $100.00 in value, will drive sell-offs with panicked investors.
4.) No short sale on any stock would be allowed below a 7.5% reduction from a previous day close. This would prevent what I would call the "Piling On" in a sell-off that can only drive people further out of their holdings.
5.) To maintain liquidity in available short positions, no short seller can hold on to a short position for a period longer than 90 days. This will eliminate the massive sell-off in short sales during a Bankruptcy in which the short seller can fail to ever cover the trade. This 90 day window will also provide for a continuous flow of available shares to borrow on a given security.
In Conclusion
The Markets are intended to be fair and equitable for all. Trade Settlement Failures in any Market, under any circumstance, is a mechanism for abuse and should not happen. Wall Street Regulators are made up of independent Self-regulatory groups. Having Brokers regulate each other through shared fines would stop the "Hand Shakes" that take place today. "You don't force me to settle and I won't force you". Now they both would pay for violating the rights of the Client. What's really needed, is a reform with teeth. These rules would capture much of the past, present, and future violations that take place because trade settlement would be a controlled and monitored status. It would circumvent much of the abuses the SEC still continues to ignore.
The recommendations are short, simple and to the point. They also put the blame squarely where it belongs and that is the Wall Street Institutions. Yes there are bad guys out there but they need these institutions to turn their heads if they are to succeed in manipulating the markets. The SEC should and does know it but they fail to take charge of the situation. WHY????
(signature)
http://www.sec.gov/rules/proposed/s72303/s72303typeb.htm
Some good links about stock scams, frauds, and other deceit and how to avoid them.
*****************************************************************
Exposing fraud, confidence games, scams, rip-offs, swindles, rackets, shell games, deceptions and flimflam.
http://www.flimflam.com/
http://www.steroidworld.com/scam.htm
From the fraud bureau. Need help????? http://www.fraudbureau.com/
http://www.fraudbureau.com/investor/101/
http://www.realityatthesec.com/Gary_Goodenow/home.htm
From the SEC
http://www.sec.gov/consumer/cyberfr.htm
http://www.sec.gov/investor/online/pump.htm
http://www.sec.gov/divisions/enforce/internetenforce.htm
http://www.sec.gov/complaint.shtml. This link to report scum, errrrr scammers
Canada's version of the sec!!!!! http://www.bcsc.bc.ca/default.asp
How to avoid being scammed
t.com/http://www.fool.com/specials/2000/sp000223fraud.htm
What to do if you are scammed. It talks about the value of posting on message boards to let others know about the scam.
http://www.ripoffreport.com/
http://www.fool.com/specials/2000/sp000223fraud8.htm
How to do your dd on a company
http://www.archive.org/
http://www.fool.com/school/13steps/stepeight.htm
Electronic Privacy Information center
http://epic.org/
A journal of foreign policy, finance, ethics, and culture
http://rittenhouse.blogspot.com/2002_10_13_rittenhouse_archive.html#85575991
The name speaks for itself.....
http://www.americanpolitics.com/
African 419 email scam letters, report them here.....
http://www.secretservice.gov/alert419.shtml
FEDERAL TRADE COMMISSION PRIVACY INITIATIVES
Educating consumers and businesses about the importance of personal information
privacy. Includes an online form to report identity theft.
http://www.ftc.gov/privacy/index.html
Our Mission:
To provide useful information to investors that will enable them to effectively identify, fight and end securities fraud. Each section contains basic information about securities fraud as well as links to additional resources.
http://www.endfraud.com/
NEW YORK STATE ATTORNEY GENERAL
REPORT ON MICRO-CAP STOCK FRAUD
http://www.oag.state.ny.us/investors/microcap97/report97a.html
The Consumer Sentinel is a partially public Web destination packed with a pile of information about fraud on the Internet.
http://www.consumer.gov/sentinel/
Great list of various scams of all kinds,,,,,,,,http://www.adminresources.com/psa/
Tired of junk email, and the scams that come with them??????? Email the gumperment @ uce@ftc.gov !!!!!!!!!!!!
Ian's OTC FRAUD/BBX board....... http://www.investorshub.com/boards/board.asp?board_id=1523
Identity Theft sitehttp://www.fightidentitytheft.com/index.html
Fraud and scam searchers................
http://www.securitiessleuth.com/
Internet Sites of Interest to Investors
http://www.epl.ca/Investors/Bookmarks.htm
"The #1 Publication on Internet Fraud"
http://www.scambusters.org/
This is the official website of the National Association Against Naked Short Selling
http://www.nakedshortselling.com/
This website is dedicated to exposing Agencies and Individuals who are using the Internet to defraud persons seeking friendship or a partner abroad, especially in the CIS and Eastern Europe.
http://www.scamalert.freeservers.com/index.html
http://www.quatloos.com/
All the current Online Fraud news
http://onlinefraud.newstrove.com/
http://www.fraud.org/welcome.htm http://www.fraudsandscams.com/index.shtml
Scammer phone callers
http://www.phonebusters.com/Eng/index.html
Federal Trade Commission Complaint form. This site and the one below must not allow hot linking, just cut and paste the addy in your browser.
https://rn.ftc.gov/dod/wsolcq$.startup?Z_ORG_CODE=PU01
econsumer.gov Complaint Form
https://www.econsumer.gov/imsn/wimsnery2$com.main?p_lang_seq=1
The offical internet blacklist!!!!!
http://www.blacklist.com/
Rip Off report!!!!!!!!!!
http://www.badbusinessbureau.com/
http://stocklemon.com/index.html
WE ARE TAKING BACK OUR STREET!
http://www.our-street.com/home.htm
Site telling of some of the bullchit ways of otc trading
http://www.betrayedinvestor.com/Naked.htm
Thread disclaimer;;
DISCLAIMER - Nothing in the contents transmitted on this board should be construed as an investment advisory, nor should it be used to make investment decisions. There is no express or implied solicitation to buy or sell securities. The author(s) may have positions in the stocks or financial relationships with the company or companies discussed and may trade in the stocks mentioned. Readers are advised to conduct their own due diligence prior to considering buying or selling any stock. All information should be considered for information purposes only. No stock exchange has approved or disapproved of the information contained herein. Also, any opinion given here , is just that , an honest opinion, nothing more, Take what you like , and leave the rest.
Please post a link , when possible, so storys and article content may be verified!!!
"It is not necessary to change. Survival is not mandatory."
-W. Edwards Deming
"When bad men combine, the good must associate; else they will fall one by one, an unpitied sacrifice in a contemptible struggle."
-Edmund Burke, Thoughts on the Cause of Present Discontents, 1770
Short Sales
[Release No. 34-48709; File No. S7-23-03]
The following information on Letter Type A,
or variations thereof, was submitted by
18 individuals or entities.
Letter Type A:
http://edgar.sec.gov/rules/proposed/s72303/s72303typea.htm