22-10-09(11:02:31)

Financial Services: Prompting an SEC complaint

By: James J. Eccleston
Shaheen, Novoselsky, Staat, Filipowski & Eccleston

Recently the Securities and Exchange Commission filed a federal lawsuit against Morgan Keegan & Company Inc. alleging widespread sales-practices violations in connection with its underwriting, marketing and sale of auction rate securities (ARS).

The SEC’s complaint contains a treasure trove of alleged facts against Morgan Keegan, which investors, and their lawyers, should find to be fascinating reading. As background, auction rate securities are bonds (issued primarily by municipalities and student loan entities) or preferred stock (issued by closed-end funds) that provide for interest rates or dividend yields that are periodically reset through auctions. Auctions fail when there are not enough bids at the auction to cover the securities for sale. If an auction fails, then the issuer (the municipality, student loan entity or closed-end fund) must pay a pre-determined maximum rate or yield, but, importantly, the ARS is illiquid at that point in time and until the next successful auction.

Let’s highlight the key allegations of the SEC’s complaint. First, Morgan Keegan underwrote 60 ARS issues with a total par value of about $1.1 billion. Additionally, Morgan Keegan resold to its customers another $1.1 billion of auction rate securities that other broker dealers had underwritten. For its efforts between June 2007 and February 2008, Morgan Keegan was paid about $4.3 million in fees and commissions.

Second, the SEC concludes that, between 2002 and Feb. 27, 2008, a majority of the ARS auctions for which Morgan Keegan served as the lead broker dealer would have failed without Morgan Keegan’s participating in the auctions by placing bids for its own account. Morgan Keegan’s participation thus gave the impression, and provided false reassurance, that an ARS was liquid.

In fact, when Morgan Keegan stopped supporting ARS auctions beginning Feb. 27, 2008, the auctions started failing on a widespread basis. By March 20, 2008, Morgan Keegan customers were left holding about $1.2 billion of illiquid securities.

That figure remained at $272 million as of July 15, 2009.

Third, the SEC alleges that Morgan Keegan violated securities laws by selling auction rate securities through misrepresentations and omissions of fact — both to the firm’s customers and to its brokers as well! For example, the SEC charges that Morgan Keegan never disclosed to its customers or to its brokers the level of the firm’s participation that had been required to prevent failed auctions. Furthermore, Morgan Keegan routinely sold ARS issues as an “attractive alternative” to money market funds, “liquid and safe” and “guaranteed.” Not until March 20, 2008 — five weeks after ARS auctions had begun failing on a widespread basis — did Morgan Keegan institute an “enhanced disclosure” policy requiring customers to sign a detailed warning before purchasing. The SEC appears particularly disturbed that no action was taken earlier to properly train brokers and/or warn customers. The Morgan Keegan credit committee notes, dated Aug. 30, 2007, reflect that Morgan Keegan’s general counsel “expressed concern” during the meeting about how auction rate securities were being sold and “asked how we can make sure people know [auction rate securities are] not a money market.”

Fourth, Morgan Keegan knew of “significant and increasing risks associated with ARS” in late 2007 and 2008. For example, on Jan. 18, 2008, Morgan Keegan’s head of retail ARS warned of a “sell off” for Morgan Keegan’s auction rate securities, which “could potentially cause a failed auction.”

Between Jan. 22, 2007, and Feb. 13, 2008, Morgan Keegan witnessed its normal-sized ARS inventory of about $20 million mushroom to $75 million. By Feb. 21, 2008, the inventory ballooned to $180 million. At that point, Morgan Keegan’s credit committee “definitively capped the firm’s ARS inventory at $185 million,” which, according to the SEC’s complaint, meant “effectively withdrawing the firm’s support for future auctions.” The SEC concludes, “Morgan Keegan-managed auctions then began to fail on a widespread basis.”

Fifth, rather than alert its customers or notify its brokers of auction failures and its decision to stop supporting auctions, Morgan Keegan actually accelerated sales of auction rate securities in late 2007 and 2008.

The SEC finds particular fault with the Morgan Keegan’s credit committee’s looking to “broaden the demand” for auction rate securities when it met on Feb. 19, 2008, several days after other firms’ ARS auctions had started failing on a widespread basis.

Worse still, the SEC alleges that Morgan Keegan downplayed the liquidity risks, for example, in December 2007 (”Check out Santa’s ARS Specials”), and in January (”yields from ARS are so attractive” due to “seasonality”). Perhaps most alarming is the series of e-mails uncovered by the SEC in which Morgan Keegan discouraged its brokers from selling their customers’ ARS holdings.

In its lawsuit the SEC requests, among other things, an order or rescission for all auction rate securities that Morgan Keegan sold prior to March 20, 2008.

That relief certainly is justified.

An International Perspective: Not guilty, just foreign

By Kwabena Appenteng
Greene and Letts

Soon after I arrived in Chicago and obtained my Illinois driver’s license, a bright light, loud siren and stocky looking gentleman curtly informed me that I had broken the law.

Although my alleged infringement consisted of nothing more than misinterpreting a road sign, in my mind my dreams of passing character and fitness and being sworn in as a member of the Illinois bar rested in the gloved hands of the officer at my window. Unsure of what to do, I retorted in the most plausible manner I could think of: “Officer, I am new to Chicago, and this country, and didn’t realize that what I was doing was illegal. …”

Slowly, as though trying to decipher the logic behind my defense, the officer wrote a warning and wished me the best.

Although I have not pleaded “not-guilty-by-reason-of-being-a-foreigner” since that faithful traffic stop, recent developments suggest that such a plea may soon become a viable defense to other infringements of the law, influential enough to be considered by juries and persuasive enough to mitigate sentences handed down by courts.

Advocates of this defense point to the case of Nary Chao, a 28-year-old Cambodian woman prosecuted last year in Las Vegas. Ms. Chao was charged with felony sexual assault of a minor under age 14 after her son informed child protective services that his mother kissed his genitals while he was sleeping.

As loathsome as this act may sound to many of us, to Cambodians and citizens of other Asian countries the act is merely a culturally acceptable expression of parental love. Recognizing this, prosecutors subsequently allowed Ms. Chao to plead to a misdemeanor and did not require her to register as a sex offender. To people unfamiliar with Cambodian culture, Ms. Chao’s actions would likely be described as nauseating, and illegal, deserving of a more severe punishment than that which she received.

To members of the Cambodian community, and some members of the Asian community within the United States, however, Ms. Chao’s actions would likely be deemed unworthy of meriting even the punishment that she received, as they amounted to nothing more than an accepted cultural act. Herein lies the problem.

As a nation of immigrants, the United States houses hundreds of cultural communities, each with their own set of beliefs and practices. Yet despite this rich cultural diversity, the rigid laws that control, and that judges and juries must apply, often conflict with these cultural practices. And they prevent the “perpetrators” from using their cultural background as a defense.

Interestingly, this issue was inadvertently touched upon by newly appointed Supreme Court Justice Sonya Sotomayor in her now- infamous 2001 speech at the University of California, Berkeley, School of Law.

In her speech, Justice Sotomayor recognized the importance of diversity on the bench and the effect of background and personal experiences in judicial decision-making. Whether or not Justice Sotomayor would agree with considering a defendant’s cultural background as a factor in their defense is a question only she could answer.

However, her recognition of the need for cultural diversity of thought amongst judges makes for more than just a controversial speech when looked at through the eyes of a defendant like Nary Chao. Whereas a judge raised in small-town Illinois may not see past the details of Ms. Chao’s crime, a judge or jury familiar with Cambodian or Asian culture may understand her behavior and choose to impose a reduced sentence or no sentence at all upon her.

Judges are not able to independently re- define criminal activity or make legal that which is illegal. As we were taught through our painfully-long negligence law lectures in law school, whether an individual meant to break the law or harm someone is not a factor contemplated by the law. What matters is whether or not you broke the law. To many people the discussion, and this column, should end here for that very reason: immigrants who break the law should be punished to the same extent as everyone else. End of story.

But as rigid as the law may be, punishing to the full extent of the law individuals who had no intention of breaking the law, and had deep-rooted cultural reasons for engaging in their behavior, surely sounds unjust to even the most callous, culturally insensitive litigator or judge amongst us.

Invariably, as the immigrant population within the United States continues to grow so will the number of immigrants tried in the federal and state courthouses across the country. Whereas some of these cases may be simple civil suits, others may be more serious infringements of the law — behavior typically “permitted” within their country of origin — such as spousal rape or arranged marriages of underage girls.

Although many argue that these immigrant offenders should be treated no differently from any other offender, others contend that they should be permitted to provide the judge or jury with evidence of their cultural background, laws, or practices as part of their defense. Whether courts and lawyers around the country will allow this, however, is a question on which the jury is still out.

Q & A: Carrie M. Risatti

By Olivia Clarke

Carrie M. Risatti

Age: 36

Education: She earned her undergraduate degree from the University of Wisconsin in 1995, and her law degree from Washington and Lee University School of Law in 1999.

Professional: A principal at Much Shelist, she is a member of its real estate practice group, where she represents clients in all aspects of real estate development and finance.

1. What is the most unusual thing that has happened to you as a lawyer?

I clerked in the Virginia courts after law school, and one of my cases was a murder-for-hire case. It was really interesting, and probably the most dramatic thing I’ve been involved with. … During my clerkship my office made a right angle with the lock-up where the defendants who were being brought in for hearings or trials waited. Every morning they would bring them in at 6 o’clock. By the time you came in at 8 or 8:30 they’d been there for several hours.

And as you can imagine, probably not unlike many law students, I didn’t have a lot of contact with inmates before that. As you can also imagine, given that the door to the judge’s chambers was right by lock-up, there were a lot of locks. I would sit there every morning going through a string of deadbolts and codes. I got to spend a good 10 minutes every morning with the inmates, who were not shy. …

The defendant for the murder-for-hire case was by himself … and he was quiet and very, very intelligent in a deeply disturbing way. And, he would ask me questions. After the first day of trial, he greeted me in the morning and had gone online the night before. He knew a lot of information about me. At the time, when I was hearing it, it kind of rattled me because I thought he knew everything about me. He was a nice person, which was the weird thing. You would sit in court all day and see all this evidence being presented, and it presented obviously a very different picture of him.

2. If you could have lunch with anyone, living or dead, who would it be and why?

Coco Chanel.

I think she is often overlooked as someone who has done a great deal for women, especially women professionals. She owned her own company; she never gave it up. As a transactional lawyer, I deal a lot with businesses and I realize how hard it is to start a company and keep a company successful over years and years. … The fact that she did this at a time when women were not allowed to vote, women were not allowed to have bank accounts. … She really did something quite remarkable and it was so far outside of the standard idea of what a woman’s life should be at that time. …

She is known for being uncompromising and unrelenting and very unconventional, which are categories I think, as lawyers, we probably strive to possess in ourselves and our own practices. But she is quoted often as saying fashion is everywhere. Fashion is in the streets, because it’s how you choose to present yourself to the world, which as a lawyer is a big part of my job. Whether or not my clients often get the deal that they want depends on how I present that deal to the other side. It’s a concept that I think about very often in my life and I think it’s probably a concept that transcends the ideas of fashion. …

3. What advice do you have for new or future lawyers?

Always remember that civility is your greatest strength. I went to a law school that is founded on the principles of an honor system and a speaking tradition. When I started my practice in Virginia, these are principles that are almost force-fed to new attorneys by the Virginia bar. … Then I came to Chicago — to a much more sophisticated bar and there are so many more lawyers and we work at such a fast pace — and that isn’t the central focus of the bar. And that’s not a judgment or an indictment against Illinois. It’s the practical reality and the difference in the nature of the practice. As I’ve grown in practice I’ve realized how absolutely fundamental it is. I think it’s very easy to get caught up in what you’re doing … and it’s easy to forget that this community isn’t that big, and all you have to sell is ultimately your character and your integrity. …

4. What do you like the most and the least about being a lawyer?

My favorite part of practicing law is advising my clients. I think, especially in this economy, my practice demands that I be a counselor of law. My job is to holistically advise my clients, and always be cognizant of what their objectives are in any transaction. And that’s great and it’s really, really fun to have a relationship with clients and watch them grow their businesses and do projects and get deals done.

My least favorite part of practice is dealing with difficult opposing counsel. It’s hard to do deals when everyone isn’t on the same page that we are going to do something together, and this is the beginning of a relationship for our clients; and that ideally there are no winners or losers.

I find most attorneys, they want their clients and the transaction to succeed just as much as I do. But occasionally you get someone who is not on board with that plan.

5. If you didn’t become a lawyer, what career would you have chosen?

I, a year ago, helped my sister open a bridal salon in Manhattan. And I’m in the process of designing a line of accessories for her store, and will eventually design a line of gowns. … I am taking classes at night and on weekends over at The Art Institute, and am taking their art and fashion design classes, and it’s an amazing program. … If I wasn’t a lawyer I would be in this program full time and pursuing that.

6. What is your favorite childhood vacation?

My parents sent my sister and me to foreign language sleep-away camps in the summer. And I know it sounds like band camp, but it was great. We loved it. It was probably the most influential experience in my childhood in terms of influencing my world view. …

7. What is your favorite Chicago restaurant?

I love Cafe Spiaggia because they have this wild boar gnocchi that is out of this world.

Social Scene: 40 Under 40 10th Anniversary Celebration at Aqua

We celebrated the 10th Anniversary of our 40 Illinois Attorneys Under Forty magazine at a recent reception at Aqua. All 40 Under 40 alumni were invited to attend. It was a great networking event that featured some of city’s finest lawyers. Enjoy the photos by Colleen O’Brien.

20-10-09(9:46:06)

20-10-09(9:06:21)

40 Under 40 Turns 10!

It has been 10 years since Law Bulletin Publishing Company published its first 40 Illinois Attorneys Under Forty to watch. The members of the 40 Under Forty Committee received more than 1000 nominations this year from around the globe promoting the state’s up and coming lawyers. Each of these young lawyers came with amazing accomplishments and recommendations, so what does it take then to earn recognition as a young lawyer to watch? Intelligence, passion, scores of successful verdicts, hard work for their clients, a desire to help the community and willingness to work hard at one of the country’s most important professions. Congratulations to the 2009 honorees and all the past recipients of the 40 Under Forty award. Click on this link to read our special 40 Illinois Attorneys Under Forty to watch or click on the magazine below:

Katz Law Office

Social Scene: 40 Under 40 Lawyers 2009

2009’s 40 Under 40 Lawyers enjoyed a reception at Hotel 71. Click on the photo to read the caption. Photos by Lindsay Macfarland.

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