Ten Things the SEC Will Not Tell Investors

We enjoyed and concurred with this list from MarketWatch writer Quentin Fottrell--- these are some of the many reasons we are here to represent investors. The SEC will never tell you:

“We will never live up to your expectations.”

To be fair, experts also point out that the agency faces a near-impossible job as the watchdog of Wall Street....

“The damage is often done before we get involved.”

By the time the SEC takes an enforcement case, the worst of the losses and abuse have occurred, critics charge....

“Do as we say, not as we do.”

The SEC stresses that firms should keep diligent records and never shred important files. But in fact, the regulator has allegedly done exactly that....

“We may have to scale back our responsibilities.”

The U.S. Senate Appropriations Committee last year approved $1.4 billion to fund the SEC, but experts say the agency needs more money to handle increased responsibilities under the Dodd-Frank...

“...and we need to better manage the money we do have.”

While the SEC has said it needs more money to better police the financial industry, critics say it isn’t managing the funds it has well....

“We can’t always protect the most vulnerable.”

The SEC is well aware that the elderly are particularly vulnerable when it comes to financial scams. It has even produced a special investment guide for seniors. Unfortunately, the commission is ill-equipped to do much more to protect that age group....

“Our own employees prove difficult to regulate.”

Regulation, like charity, starts at home, say experts. The SEC has had many highly embarrassing incidents of its staff behaving badly....

“...and our best people leave and work against us.”

Many critics of the SEC, including some members of Congress, have charged that the SEC is undermined by the fact that many employees leave to work for companies overseen by the commission....

“We’re sometimes chummy with Wall Street.”

Just ask Gary Aguirre, the former SEC investigator...

“We’ll miss the next Bernie Madoff.”

Experts say that the next Bernie Madoff is probably out there right now lurking in the shadows. The SEC is a minnow compared with the industry it regulates....

To review the full article, go here.


Reed Kathrein investigates MF Global and Jon Corzine - interviewed by SyndicatedNews.NET 

The following is my interview with SyndicatedNews.net when the MF Global fraud first became news. It was posted on November 3, 2011. I discuss how Jon Corzine took a gamble with MF Global and lost.


Why Investors Need Private Litigation to Protect Their Investments

Investors often question why they need to become involved in private securities litigation. "Isn't the SEC protecting us?" is a common statement. We then point out that the SEC is an underfunded and understaffed (by at least 400 employees), and has other barriers which prevent it from carrying out its mandate, according to a March 10, 2011 report by the Boston Consulting Group.

Now a report released on May 13, 2011 by the Project on Government Oversight questions the SEC's ability to remain independent in light of the a "revolving door" through which SEC staffers leave the agency for jobs at law and accounting firms that advise the public companies they once regulated, according to a Washington Post review of the report .

"The financial meltdown of 2008 brought renewed focus to the integrity and aggressiveness of federal government oversight of the financial system," the report's executive summary states. "One of the most important agencies overseeing financial markets and investor protection is the [SEC]."

The report is based on the groups analyses of hundreds of SEC documents obtained under the Freedom of Information Act—mainly statements that former employees file post-government employment statements if they plan to represent a client before the Commission within two years of leaving the SEC.. According to the report:

  • Between 2006 and 2010, 219 former SEC employees filed 789 post-employment statements indicating their intent to represent an outside client before the Commission, with half (403) coming from the Division of Enforcement.
  • Some former SEC employees filed statements within days of leaving the Commission, with one employee filing within 2 days of leaving
  • There are 131 entities providing legal, accounting, consulting, and other services that were identified as new employers in the statements. Some entities recruited numerous SEC employees during the five-year period.
  • POGO identified instances in which former SEC employees may have been required to file statements during the five-year period but did not
  • The SEC Office of Inspector General has identified cases in which the revolving door appeared to be a factor in staving off SEC enforcement actions and other types of SEC oversight, including cases involving Bear Stearns and the Stanford Ponzi scheme
  • One recent empirical study uncovered several significant and systematic biases in the SEC's enforcement patterns and found indirect evidence to support the contention that "post-agency employment at higher salaries may operate as a quid pro quo in return for favorable regulatory treatment"
  • Some statements indicate that the former employee did participate in or have responsibility for a related matter while they worked at the SEC, but that they discussed the matter with an ethics officer who advised them they could contact Commission staff on that issue on behalf of their new client

The Project on says that its findings lend credence to the concerns of SEC critics wary of the commission's ability to remain independent and notes that the troubling traffic moves two ways. "The revolving door also operates in the opposite direction, where individuals come from entities regulated by the SEC to work for the Commission," states the POGO report. "The general concern is that a conflict of interest could bias SEC oversight and undermine public confidence in the SEC's work, as acknowledged by the current SEC Chairman."

But as lawyers who must sympathize with those underpaid SEC staffers, we do feel it is our civic duty to list your "new employers" found in the report. According to the following table, taken from the report, these firms are standing by to offer you a job:

Table 4: Top 11 New Employers
Ranked by Number of Mentions in Post-Employment Statements, 2006 – 2010


Statements Listing Firm as New Employer

DLA Piper[


Deloitte & Touche LLP


Paul, Weiss, Rifkind, Wharton & Garrison LLP


O'Melveny & Myers LLP


Merrill Lynch


Wilmer Cutler Pickering Hale and Dorr LLP


Ernst & Young


Davis Polk & Wardwell LLP


Reed Smith, LLP


Sidley Austin LLP


Stradley Ronon Stevens & Young LLP





Reed Kathrein Speaking at Opal Public Pensions Conference 

Reed Kathrein, HAGENS BERMAN SOBOL & SHAPRIO, will speak on Legal Issues Facing Public Pensions session at Opal's upcoming Public Funds Summit conference from 12:15 p.m. untill 1:15 p.m. on Thursday, January 13, 2011 The Pheonician in Scottsdale Arizona. The moderator will be Michael VanOverbeke, General Counsel, ANN ARBOR (MI) CITY EMPLOYEES' RETIREMENT SYSTEM. Other panelists include Jonathan Barry Forman, Trustee, OKLAHOMA PUBLIC EMPLOYEES PENSION FUND. Mr. Kathrein will focus his presentation on Pending and Recent Court Decisions and Their Potential Impact on Public Pension Plans in the area of Securities Fraud. Topics include current filing trends, pending Supreme Court decisions and the impact of Morrison on cross-border litigation.


Telenav IPO Fraud and MF Global - What Do the Class Actions and Our Investigation Have In Common 

Our firm recently announced an investigation into potential fraud claims against TeleNav Inc. (Nasdaq: TNAV) relating to its May 13 initial public offering. We have now received information that leads us to believe that a strong case exists, worthy of consideration by investors. At the same time, the Second Circuit just issued a decision in  Iowa Pub. Employees' Ret. Sys. v. MF Global, Ltd., that favorably clarifies the applicable law. 

TeleNav provides cell phone carriers with navigation applications for their cell phones. Sprint Nextel Corp. provided TeleNav with more than 55 percent of its revenues. TeleNav's major competitors include Google, Garman and other companies providing their own navigation services. 

Just three months after the IPO, TeleNav revealed it was renegotiating a key contract with Sprint that would likely lead to substantially lower revenues. TeleNav's stock immediately plummeted nearly 40 percent.

 The usual barebones lawsuits were filed by several other law firms alleging TeleNav knew its shares would nosedive before going public in May. However, these lawsuits are the subject of criticism. For example, one blogger argued here that TeleNav disclosed it was renegotiating its contract with Sprint as early as October 2009 in a registration statement with the U.S. Securities and Exchange Commission: 

"Our current agreement with Sprint expires on December 31, 2011; however, our right to be Sprint’s exclusive provider of Sprint Navigation expires on December 31, 2010. Commencing on December 31, 2010, Sprint may terminate its agreement with us at any time by giving us 30 business days prior written notice. Our failure to renew or renegotiate this agreement on favorable terms or at all, a termination of our agreement by Sprint or our failure to otherwise maintain our relationship with Sprint would substantially reduce our revenue and significantly harm our business, operating results and financial condition."  

Other risk disclosures in the registration statement warn that the Sprint contract could be impacted by competitors offering equivalent or free competitive service: 

“Competitors could begin offering (location-based services) that have at least equivalent functionality to ours for free. For example, Google offers free voice guided, turn by turn navigation as part of its Google Maps product for mobile devices based on the Android 1.6 and higher operating system platform, and Nokia announced its latest version of Ovi Maps on its smartphones, which also provides turn by turn navigation functions. Competition from these free offerings may reduce our revenue and harm our business. If our wireless carrier partners can offer these (location-based services) to their subscribers for free, they may elect to cease their relationships with us, alter or reduce the manner or extent to which they market or offer our services, or require us to substantially reduce our subscription fees or pursue other business strategies that may not prove successful. 

The blogger goes on to write: 

“It is a common practice for specialized US law firms to seek class action status on such topics (GPS manufacturer SiRF faced the same type of complaint few years ago), but here their case seems particularly weak. It is however a pain in the neck for TeleNav.” 

Mighty strong risk disclosures, right? Wrong! This is where MF Global and our investigation come in to play. 

Suppose the facts show that prior to the IPO, TeleNav was so concerned about the upcoming contract negotiations with Sprint and the competition, that it wanted to go public before Sprint pulled the plug on their relationship.  If TeleNav knew nothing more than the risk disclosures above, it is doubtful that they could be held liable for not disclosing their fears and belief so long as they said nothing about their fears and belief. 

Suppose, however, that TeleNav knew before the IPO that Sprint was complaining about the resources it devotes to TeleNav's product – called "Sprint Navigation" – and told TeleNav management that it was in favor of Google's free navigation services instead of TeleNav's on Sprint's Android devices. Further, suppose Sprint told TeleNav it would not pre-load TeleNav’s product on Sprint's Android devices, but that TeleNav could sell their own services through Sprint Zone, forcing TeleNav to start its own branding efforts. 

Now we have a case! Just this week a federal appellate court clarified when risk disclosures are material misrepresentations or omissions. In Iowa Pub. Employees' Ret. Sys. v. MF Global, Ltd., the Second Circuit Court of Appeals stated: 

Investors are interested in issuer statements only insofar as those statements bear on the future. While it is true that predictions about the future can represent interpretations of present facts (and vice versa), there is a discernible difference between a forecast and a fact, and courts are competent to distinguish between the two.  

A forward-looking statement (accompanied by cautionary language) expresses the issuer's inherently contingent prediction of risk or future cash flow; a non-forward-looking statement provides an ascertainable or verifiable basis for the investor to make his own prediction. 

The line can be hard to draw, and we do not now undertake to draw one. However, a statement specifying the risk of default is distinct from a statement of present or historical financial instability, even though they both bear upon the same risk. And a statement of confidence in a firm's operations may be forward-looking and thus insulated by the bespeaks-caution doctrine -even while statements or omissions as to the operations in place (and present intentions as to future operations) are not. 

Thus, the Court found that characterizations of MF Global's risk-management system-that the system was “robust,” for example - invited the inference that the system would reduce the firm's risk. It went on to find that bespeaks caution did not apply insofar as those characterizations communicate present or historical fact as to the measures taken. Cautionary words about future risk cannot insulate from liability the failure to disclose that the risk has transpired. 

So too with TeleNav, the key question will be whether the "bespeaks caution" doctrine applies to TeleNav's description of its contract with Sprint, the expiration of that contract and the threat of the competitors. Our investigation causes us to believe that the risk of renegotiation of the Sprint contract was not just a possibility, but a current reality in which TeleNav's management knew they were in trouble. It was not a future risk, but one that had already transpired by the time of the IPO. 

I have lectured to corporate executives over the last 20 some years about this classic type of IPO fraud. It's often the one chance in a lifetime to cash in on millions by selling stock to the public. The temptation to hide or ignore bad news is great and accompanied by the mantra, “just get it done.” Risk disclosures are often written with this in mind, and the lawyers who draft them do a great disservice to their clients and the investors when the risks have already begun to manifest. 

Hagens Berman continues to investigate this matter, and to represent investors who purchased TeleNav stock before July 30, 2010. You may read more on the Hagens Berman website here, or read the press release here. To be eligible to be a lead plaintiff you must move by November 2, 2010. Contact Reed Kathrein at 510-725-3030 for a consultation or email Hagens Berman at tnav@hbsslaw.com.