Howard B. Sirota

Tuesday, October 20, 2009

How To Protect Public Investors In America

Here are ten ways to protect public investors in America:

1. End the practice of SEC and FINRA to permit settling defendants to deny the settled allegations in subsequent civil litigation by public investor victims, thus giving the investors collateral estoppel as a matter of law. The present practice is the defendant neither admits nor denies the allegations, but is barred from denying the allegations in any forum except the one where it court. While this may force more cases to trial and require more Enforcement staff, the end result is that anyone adjudicated to have violated the federal securities laws is ruined financially so, in the long run, there is a genuine deterrent effect.

2. Expand SIPC insurance coverage of public investors, excluding institutions, to cover losses up to $1 million in adjudicated open-market frauds by issuers and others through a de minimis per share surcharge of .00001 per share to be paid by the broker-dealer executing the buy side of the trade. This covers losses that cannot be recovered from the wrongdoers.

3. Increase required broker-dealer minimum net capital to $1 million.

4. Require auditors to carry $1 million of insurance coverage for every public company audit client.

5. Require every market-maker making a market in a Bulletin Board or Pink Sheet stock to file a Rule 15c2-11 form before commencing to make a market, and a quarterly update for each stock. Add an enhanced certification, to be personally signed by the head of trading and the chief compliance officer, stating: "I have thoroughly reviewed the most recent filings, press releases and financial statements of the issuer XYZ, and hereby certify that our quotations and the trades which we executed were made at prices which reasonably reflect the financial condition of the issuer and its business prospects."

6. Ban "Flash" Trading or any other arrangements to pay for order flow as inside market information that is simply legalized front-running of public customer orders.

7. End mandatory arbitration of investor claims against their broker including an industry representative as a mandatory included arbitrator, making the panels exclusively public arbitrators unaffiliated with the industry.

8. Make securities class actions like Federal False Claims Act or other qui tam actions re original whistleblower cases claiming to uncover a securities fraud. The case is filed under seal for 90 days. The SEC can choose to take over and litigate the case itself and the whistleblower get a flat 15% of the recovery, or the SEC declines and the private litigant goes forward for a flat 30% of the recovery.

9. A flat-out ban on any form of "pay-to-play" direct or indirect in connection with the purchase or sale of a security. Prohibit any payment to anyone for introducing or finding business from any public or union pension fund PERIOD.

10. Require adjudicated securities violators to register with the SEC and provide a quarterly update of a complete report of any direct or indirect relationship with any public company or broker-dealer or hedge fund, including a list of all securities purchased or sold.

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