Saturday, August 22, 2015

En banc we go?

As Marcia just discussed, the D.C. Circuit recently issued its decision in its rehearing in National Association of Manufacturers v. SEC (“NAM”), and it once again held that neither the SEC nor Congress may require public companies to disclose whether they use in their products certain “conflict minerals” that originated in the Democratic Republic of Congo or adjoining countries.  Marcia has a really important discussion of the question whether a disclosure requirement is even likely to be effective to accomplish Congress’s goals, but I also find the new opinion fascinating and fraught in its own right – and, incidentally, deeply disdainful toward the en banc opinion in American Meat Institute v. U.S. Department of Agriculture, 760 F.3d 18 (D.C. Cir. 2014) (“AMI”).  Probably not coincidentally, neither of the two judges in the NAM majority were part of the en banc decision in AMI, because both have senior status (the third member of the NAM panel, Judge Srinivasan, was in the AMI majority, and dissented in NAM).

[More after the jump]

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August 22, 2015 in Ann Lipton | Permalink | Comments (2)

Saturday, August 15, 2015

Choosing a casebook

The school year begins soon, and I'll be teaching Business Enterprises.  (That's what Tulane calls the basic BA/Corps class.)

One of my first tasks was to select a casebook.  There are a lot of options, and it was interesting for me to analyze how each reflects the philosophy/policy preferences of its authors.  I suppose I should have predicted that the Klein/Ramseyer/Bainbridge book would open its discussion of corporations with the Boilermakers case, and its characterization of corporate governance documents as a "contract" among shareholders.  The Allen/Kraakman/Subramanian book heavily emphasizes economic analyses.   Unsurprisingly, the casebook partially authored by my co-blogger Joan Heminway (i.e., the Branson/Heminway/Loewenstein/Steinberg/Warren book) demonstrates a particular interest in alternative entities, and Hazen/Markham seems to feel derivative actions have dominated far too much academic attention (and also that Dodge v. Ford Motor Co. needs to be retired).

One significant point of variation is how far the books go in integrating state and federal law.  As federal securities regulation expands, it clearly poses a problem for casebook authors (and business professors!) in terms of organizing the material in a coherent fashion.  It's harder to simply divide the class into state governance law and federal disclosure law (which is how I remember learning it, anyway), and the casebook authors all have different approaches.  Ultimately, I chose the Hazen/Markham book, in part because organizationally, it comes closest to reflecting how I think about matters in my own head, so I figured it would be easiest for me to teach. 

I'm still assigning Dodge, though.



August 15, 2015 in Ann Lipton | Permalink | Comments (0)

Saturday, August 8, 2015

Amended Pleadings in Securities Cases – Second Circuit to the Rescue

In Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 2015 U.S. App. LEXIS 12800 (2d Cir. July 24, 2015), the Second Circuit reversed the district court’s dismissal of state law fraud claims arising out of the sale of hybrid CDOs.  The court spent an extraordinary amount of time discussing the concept of loss causation, although to be honest, I’m not at all confident that the extended discussion actually clarifies matters, at least in those circuits that already follow Second Circuit law on the subject. 

(There is currently a circuit split on the definition of loss causation under the federal securities laws, and a newly-filed cert petition asking the Supreme Court to resolve it.  But I digress.)

What I actually was excited to see was the Second Circuit’s discussion of the conditions under which plaintiffs should be permitted to amend their pleadings.

As I previously posted, courts are all over the map about allowing amended pleadings in securities fraud cases.  Some courts are extremely permissive; others essentially grant plaintiffs only one bite at the apple (although that standard is usually more applicable to federal, rather than state, claims).  Many courts have held that if plaintiffs want the opportunity to replead their claims in order to meet particularity requirements, they must proffer their proposed amendments prior to the ruling on the motion to dismiss.  The theory is, plaintiffs should not be allowed to sit on relevant evidence, let the court make its ruling, and only then announce that they have new facts in their possession; instead, plaintiffs should promptly alert the court if they have additional facts that bolster their allegations.

That rule sounds logical but, as I argued in my prior post, is actually tremendously unfair in practice, because the particularity requirements for pleading securities fraud – whether under the federal rules or under the PSLRA – are so idiosyncratic that it is very difficult for plaintiffs to be able to tell, in advance, what deficiencies might exist in their complaint and what new facts might fill the holes.  Making matters worse, any newly-proffered facts offered prior to an initial ruling on the motion to dismiss would introduce extensive delays into the process.

Well, in Loreley, the Second Circuit agreed with me (vindication!!).  As the court wrote:

[T]he procedure by which the district court denied leave to amend was improper. The court required the parties to attend a pre-motion conference and to exchange, in preparation, letters of no more than three pages regarding Defendants' anticipated motion to dismiss for failure to state a claim. The Federal Rules of Civil Procedure do not speak to the use of pre-motion conferences. Such conferences are not in themselves problematic, however, and indeed may in many instances efficiently narrow and/or resolve open issues, obviating the need for litigants to incur the cost of more extensive filings. The impropriety occurred not when the district court held the pre-motion conference but when, in the course of the conference, it presented Plaintiffs with a Hobson's choice: agree to cure deficiencies not yet fully briefed and decided or forfeit the opportunity to replead. Without the benefit of a ruling, many a plaintiff will not see the necessity of amendment or be in a position to weigh the practicality and possible means of curing specific deficiencies.

Our opinion today, of course, leaves unaltered the grounds on which denial of leave to amend has long been held proper, such as undue delay, bad faith, dilatory motive, and futility—none of which were a basis for the denial here. No improper purpose is alleged. And while leave may be denied where amendment would be futile, the approach taken by the district court was not rooted in futility. Rather, the court treated Plaintiffs' decision to stand by the complaint after a preview of Defendants' arguments—in the critical absence of a definitive ruling—as a forfeiture of the protections afforded by Rule 15. This was, in our view, premature and inconsistent with the course of litigation prescribed by the Federal Rules…

I totally agree.

August 8, 2015 in Ann Lipton | Permalink | Comments (0)

Saturday, August 1, 2015

Halliburton – have we learned nothing?

The Halliburton district court finally issued its decision (.pdf) on the plaintiffs’ renewed motion for class certification – and I’m afraid it’s exactly as incoherent as the most pessimistic predictions might have anticipated.

The district court recognized that, after Halliburton I, it was prohibited from making loss causation determinations as part of the class certification inquiry.  However the district court did hold that if there is no price movement in response to an alleged disclosure (and there is also no price movement when the misstatement is first made), that fact establishes there was no artificial inflation originally. 

In other words, the court believed that the absence of affirmative evidence of price inflation is evidence of absence, and sufficient to carry the defendants’ burden to prove that any misstatements had no effect on prices.  (To be fair, from the opinion, it appears the plaintiffs themselves urged this position).

The court went on to find that the Halliburton defendants had shown there was no price movement on almost all of the alleged corrective disclosure dates – and so class certification would be denied as to those dates.  However, because there was price movement for one disclosure date – December 7, 2001, the last day of the proposed class period – class certification would be granted as to that date.

The problem is, the plaintiffs were seeking class certification for all persons who purchased Halliburton stock from the start of the fraud until the end of the fraud.  The court’s ultimate determination – that one disclosure date was sufficient and others were not – tells the reader nothing about what class can be certified, as though the court had forgotten the entire purpose of the exercise.  I suppose we’ll find out the class definition if an order follows, but for now, the opinion sheds almost no light on that subject.

[More under the jump]

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August 1, 2015 in Ann Lipton | Permalink | Comments (0)

Saturday, July 25, 2015

Sauce for the goose ... ?

Caribbean Cruise Line recently won an interesting victory when Florida’s Fourth District Court of Appeal held that it could pursue an unfair trade practices claim against the Better Business Bureau for awarding it an “F” rating.  See Caribbean Cruise Line, Inc. v. Better Bus. Bureau of Palm Beach County, Inc., 2015 Fla. App. LEXIS 8497 (Fla. Dist. Ct. App. 4th Dist. June 3, 2015).

This was an unusual holding, because BBB ratings are usually treated as protected “opinion” speech under the First Amendment.  Caribbean Cruise Lines got around that, however, by claiming it was not attacking the rating itself, but BBB’s allegedly false representations regarding its methodology for generating the rating.  The court accepted that BBB’s statements about its methodology were factual and, if false, could be the subject of a lawsuit.

If that sounds familiar, it should – it’s exactly the argument that plaintiffs have used in litigation involving mortgage-backed securities.  Numerous plaintiffs have successfully argued that statements regarding appraisals and LTV ratios were false not because the appraisers’ opinions were false, but because the securitizers falsely described the methodology used to reach those opinions. 

Considering the complaints that have been lodged against the BBB, I suppose a decision like this was only a matter of time.  Still, I have to wonder how much this decision will be used to challenge local cartels, versus how much it will be used to flyspeck unfavorable reviewers.

July 25, 2015 in Ann Lipton | Permalink | Comments (0)

Saturday, July 18, 2015

All Your Stock Are Belong to DTC

A few days ago, Vice Chancellor Laster issued an interesting opinion in In re Appraisal of Dell.  He held that Delaware’s “continuous holder” requirement for appraisal litigation applies at the record holder level – that is, the level of DTC.  Because in this case, due to a technical error, DTC transferred the ownership of the shares to the beneficial owners’ brokers’ names – the street names – the beneficial owners could not maintain their appraisal petition. 

[More under the jump]

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July 18, 2015 in Ann Lipton | Permalink | Comments (0)

Saturday, July 11, 2015

Guns versus Butter

This week, the Third Circuit issued is long-awaited decision in Trinity Wall Street v. Wal-Mart Stores, Inc. (.pdf), detailing its reasons for its earlier holding that Trinity Wall Street’s shareholder proposal addressing gun sales was excludable from Wal-Mart’s proxy statement.  The decision is interesting in several respects, not the least of which is an apparent split among the panelists regarding the shareholder wealth maximization norm.

[More under the jump]

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July 11, 2015 in Ann Lipton | Permalink | Comments (3)

Saturday, July 4, 2015

Well, that's a novel use of crowdfunding

Crowdfunding’s a popular topic here at BLPB, but here’s a use that hadn't occurred to me.

Apparently, a former SEC lawyer is using Kickstarter to fund an investigation into the fees that CalPERS pays for its private equity investments.   

It all started when CalPERS announced that it didn’t know what it was paying in private equity fees.

This was somewhat surprising.  CalPERS has the money, and is assumed to have the sophistication, to bargain for its interests and at least require firms to make the appropriate disclosures.

Nonetheless, it appeared to be in the dark about its own fee payments.

To be fair, NYC’s Comptroller recently claimed to be shocked by NYC funds' fees, and the SEC has now begun to aggressively investigate private equity fee and expense disclosure.  It even recently settled a case with KKR alleging that it improperly allocated expenses to fund investors that it should have partially absorbed itself.

 Still, one would have thought that CalPERS, of all funds, could protect itself.

Enter Edward A. H. Siedle, who is seeking public support for his investigation of CalPERS’s fees.  Apparently, he’s done this before: he recently issued a crowd-funded report on Rhode Island’s state pension fund, concluding that the fund experienced $2 billion in “preventable losses.”

I’m not sure what the broader lesson is here, but there are certainly plenty of candidates – the versatility of crowdfunding?  The dysfunctions of public pension funds generally, or CalPERS specifically?  The opacity of private equity?  The problems inherent in the SEC’s assumption that assets correlate with sophistication?   Or maybe it’s a just a story about the decline of local reporting, because honestly, these are the kinds of stories we might once have expected to be covered by local news outlets.  Does the “sharing economy” mean we have to “share” public goods like news reporting? 

Apparently so.

In any event - happy 4th of July!  Have a classic depiction of patriotism in celebration:


July 4, 2015 in Ann Lipton | Permalink | Comments (3)

Saturday, June 27, 2015

Insider Trading Profits as a Proxy for Intrafirm Information Flow

Chen Chen, Xiumin Martin, Sugata Roychowdhury, and Xin Wang have posted a paper to SSRN that attempts to identify firms that suffer from poor internal information flow by comparing the relative insider trading profits of high level managers and low level managers.  They find that when lower level managers make higher profits – suggesting that they have better information than higher level officers – the firm’s external financial reporting suffers.

[More under the cut]

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June 27, 2015 in Ann Lipton | Permalink | Comments (0)

Saturday, June 20, 2015

Greetings from New Orleans - and also Musings on the AIG Verdict

I’ve just moved down to New Orleans to join the faculty at Tulane Law School (my bio will be updated  ... um, eventually), where I’ll be teaching Business Enterprises and Securities Regulation to start.  As you can imagine, Louisiana is quite a change from both North Carolina and, before that, NYC.  One thing I noticed right off the bat is that most of the banks in Louisiana are local/regional institutions – not many national banks have branches here.  Which means that, as a former plaintiffs’ attorney, for the first time in my adult memory I have a bank account with a financial institution I haven’t sued.

(Sidenote: That was actually kind of an issue when I worked for the law firm then-known as Milberg Weiss.  I was told we had trouble getting firmwide health insurance because we’d sued all the carriers and they didn’t want to do business with us.)

Anyway, as I procrastinate from unpacking....

*actual representation of my apartment

....the big news that has my attention is the AIG verdict.  There have already been conflicting views on what it portends for future bailouts, but what fascinates me is how much of the opinion is devoted to the judge’s moral condemnation of the Fed’s actions, and his moral absolution of AIG, even though the relative good or evil of either player was really not relevant to his ultimate holding.

[More under the jump]

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June 20, 2015 in Ann Lipton | Permalink | Comments (0)

Saturday, June 6, 2015

Diversity in the legal profession

There have been a few recent articles in the news discussing diversity - or its lack - among lawyers.

First, Deborah Rhode writes in the Washington Post that law is one of the whitest professions.  People of color make up one fifth of law school grads but only 7 percent of law firm partners - and those numbers drop to 2 or 3 percent in BigLaw.  She argues that among other barriers, unconscious bias still plays a role in hindering the advancement of African American lawyers.  She also points out that women, as well, struggle to make partner - perhaps reflecting the difficulty that women have walking the tightrope of being aggressive enough to do their jobs, but not so aggressive that they come off as unfeminine.

Picking up on these themes, the American Lawyer recently published a report on how BigLaw is failing women.  Sometimes, these failures are attributed to demanding work schedules that make it difficult for women to shoulder responsibilities for childcare - which is why one law firm was recently profiled in the New York Times for hiring mainly women, and allowing them to adjust their schedules around their parenting responsibilities.  But flexible work schedules aren't always a step in the right direction; this article about the lack of women's advancement in consulting makes two important points.  First, "family-friendly" policies that allow women to work flexible schedules may undermine their advancement by signaling a lack of commitment to the firm, and second, that many people continue to harbor biases against women - including the assumption that women with children are not fully committed to work - regardless of the hours they keep.  The article suggests that instead of adopting flexible work schedules, firms should simply not require long hours of any employees - a suggestion that, not surprisingly, firms are not anxious to adopt.

Based on my law firm experience, these themes resonate.  I saw very, very few nonwhite lawyers.  There were also far fewer women partners than men partners.  (One thing I remember: in group meetings, men routinely talked over and interrupted the women, making it very difficult even for women partners to have their voices heard.) 

I don't know what the solution is, but I do think the issues are real ones.  And, as Rhode points out, because lawyers often have critical roles in society - in government, and other policymaking roles - it's important that the profession be welcoming to all.

June 6, 2015 in Ann Lipton | Permalink | Comments (2)

Saturday, May 30, 2015

Janus and the Stock Promoters

Section 10(b) of the Securities Exchange Act prohibits anyone from engaging in manipulative or deceptive activities in connection with a securities transaction.  Rule 10b-5, promulgated under Section 10(b), prohibits anyone from “mak[ing] any untrue statement of a material fact” or “omit[ting] to state a material fact necessary in order to make the statements made… not misleading" in connection with securities transactions.

Recently, several Section 10(b) lawsuits have been filed alleging that companies hired stock promoters to pen enthusiastic articles about the companies’ prospects.  The lawsuits were apparently inspired by an exposé published at Seeking Alpha regarding stock promoter practices.  The CEO of one of the companies involved was ultimately arrested on charges of criminal securities fraud, both for hiring promoters, and for more garden variety manipulative practices.

In all of these cases, the promotional articles did not disclose that they were paid promotions, nor did they accurately disclose their authorship.  Instead, they were either published under colorful pseudonyms like “Wonderful Wizard,” and “Equity Options Guru,” or under more mundane fictional attributions, such as “James Ratz.”  (A name certainly likely to inspire trust….). 

These cases raise a number of interesting technical questions regarding the scope of Section 10(b), not the least of which is, can the plaintiffs get around Janus?

[More under the jump]

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May 30, 2015 in Ann Lipton | Permalink | Comments (0)

Saturday, May 23, 2015

Did legal realism kill scholarship for judges?

Judge Diane Wood of the Seventh Circuit has published an essay in the Yale Law Journal that surveys citations to legal scholarship emerging from the Seventh Circuit.  She argues that movements like Legal Realism and its descendants challenge the concept of “judging” as a distinct activity from lawmaking, and as a result, scholarship that emerges from these traditions is not helpful to a sitting judge attempting to identify “what the law is.”  She further argues that within the academy, the effect is exacerbated by a norm that values theoretical scholarship over practical “doctrinal” work, and hypothesizes that the type of doctrinal scholarship that judges are most likely to find useful is also more likely to be found in journals that carry less prestige.

Interestingly, Jeffrey Lynch Harrison and Amy Rebecca Mashburn reached similar conclusions.  They studied judicial citations and found that judges – far less than academics – do not appear sensitive to the prestige in which an article appears, thus kicking off a debate regarding the purpose and value of legal research (see posts here and here).  Among other things, Michael Risch defends legal scholarship on the grounds that its usefulness – to judges, to practitioners – is not the point; it is a good in and of itself.

I’m a recent convert from practice to academia, and that’s a sentiment I’ve frequently heard (usually as I’m being advised to write less like a practitioner).  And while I don’t disagree with it, I also can’t help but notice that academics take quite a bit of pride in having their articles cited in judicial opinions – suggesting that their, um, revealed preferences are perhaps more nuanced.

In any event, I was recently thinking about how very often, both in my current research and earlier in my practice, I’ve found that some of the most interesting and helpful law review articles are the most thoroughly doctrinal – the ones that carefully synthesize and explain existing law, regardless of whether they also offer a more abstract theoretical framework, a realist attack on existing precedent, or recommend bold new path for change.  

But beyond that, I think the indictment of legal scholarship as too theoretical is at least somewhat unfair.  As Deborah Merritt points out, the citation counts actually aren’t all that bad, especially if one assumes a greater number of articles are consulted but not cited.  Certainly, there are plenty of highly theoretical works out there that may not be of immediate relevance in a particular dispute, and thus don't end up being cited in judicial opinions, but I also found that when I was practicing, I was able to find a number of more concrete pieces in my area (possibly it’s easier when you practice business law).  Sometimes I cited them in my briefing, which I assume increased their chances of being cited by judges (I know of at least one case where that occurred). 

In my experience, however, the biggest impediments to citation of legal scholarship from the practice end were twofold:  First, in any brief, space is at a premium.  I often could not afford to cite a law review article and possibly edge out court decisions that the judges might find more authoritative.  (And space may soon become even more scarce)

Second, and relatedly, I often found that legal scholarship was a few years behind the issues in which I was enmeshed.  Law review articles were most helpful to me when they dealt with a cutting-edge issue on which precedent had not hardened, but it can take years for an issue to bubble up in judicial opinions to the point where academics notice it.  From a practitioner’s perspective, by then it may be too late; the existing judicial opinions are what you want to address.  The solution to that, I suppose, is for academics to maintain contact with practitioners, so they can be alerted to new legal developments.

May 23, 2015 in Ann Lipton | Permalink | Comments (2)

Saturday, May 16, 2015

I, for one, welcome our new computerized trading overlords

So the big securities news this week was the “hoax” bid to buy Avon Products.

Apparently, a hoaxster filed a fake offer to take over Avon Products with EDGAR, the SEC’s online database.

The filing caused a brief spike in the price of Avon shares.  (As of the drafting of this blog post, Avon shares were still trading slightly higher than they were before the offer was filed).  The details of the filing are as yet unknown, but presumably, whoever filed the release profited off the spike.

DealBook points out that this kind of incident may prompt the SEC to conduct some kind of preliminary vetting of filings with EDGAR, but one of the more interesting questions – as Matt Levine argues – concerns the definition of “materiality” for securities laws purposes.  Ordinarily, false statements (such as a false representation concerning a takeover bid) are only prohibited to the extent they are “material” to a “reasonable” investors.  Most human investors would likely have recognized the dubiousness of the offer (it named a law firm that doesn’t exist, and misspelled the name of the offeror); computerized traders, however, did not.  (And perhaps humans then followed on, seeking to capitalize on the chaos caused by computers.)  Indeed, a previous spike occurred when Tesla filed an April Fool’s Day press release announcing the release of a (fictional) new product.

Margaret Sachs has previously recognized that courts tend to vary their notion of the “reasonable investor” given the context in which a fraud occurs.  Courts tend to assume a very high degree of sophistication for fraud on the market claims concerning widely-traded securities, but when it comes to Ponzi schemes and other frauds aimed at vulnerable populations, courts lower the bar.

Which of course raises the question whether we need a whole new definition of materiality aimed at the computers who do the majority of today’s trading.  Tom C.W. Lin has recently published an article on precisely this topic, arguing, among other things, that computerized trading and algorithmic investors should be considered as a type of reasonable investor at whom regulations are aimed.

May 16, 2015 in Ann Lipton | Permalink | Comments (0)

Saturday, May 9, 2015

A Business Law Professor’s Take on Williams-Yulee

In Williams-Yulee v. The Florida Bar (.pdf), the Supreme Court rejected a First Amendment challenge to the Florida Canon of Ethics that bans judicial candidates from personally soliciting campaign contributions.  And I realize this is an odd case to discuss on this blog – nothing about it explicitly engages business law issues – but bear with me as I get to the (perhaps, ahem, somewhat attenuated) business-related point.

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May 9, 2015 in Ann Lipton | Permalink | Comments (0)

Saturday, May 2, 2015

Saturday Long Read

The gripping story of how an accountant took on Halliburton and won.

It's the story of Tony Menendez, a Halliburton accountant who believed that the company was incorrectly recognizing revenue.  When the company wouldn't correct its practices, he went to the SEC.  Halliburton learned of the complaint,  Menendez was ostracized, and the SEC investigation was dropped.  This kicked off a years-long battle in which Menendez sought protection under SOX as a whistleblower, ultimately culminating in a decision from the Fifth Circuit. 

What the article does not discuss, though, is the legal issue that dominated the case - namely, what legally qualifies as an adverse action for SOX purposes.  Halliburton executives disclosed Menendez's identity to the rest of the accounting department, and his coworkers shunned him; thus, the critical question was, did disclosure of his identity, coupled with ostracism, constitute a materially adverse action?  See Halliburton, Inc. v. Administrative Review Bd., 771 F.3d 254 (5th Cir. 2014).  Notably, just last month, the Fifth Circuit - in a very closely divided decision - decided not to rehear the case en banc, over the lengthy dissent of Judge Jolly.  See Halliburton Co. v. Admin. Review Bd., United States DOL, 596 Fed. Appx. 340 (5th Cir. 2015)).

Anyway, the article presents a rather a riveting David-and-Goliath story that, among other things, highlights the risks inherent in the practice of government agencies relying on internal investigations when deciding whether to take an enforcement action.

May 2, 2015 in Ann Lipton | Permalink | Comments (0)

Thursday, April 23, 2015

What counts as scienter?

An ongoing issue in many securities cases concerns the precise state of mind necessary to satisfy the element of scienter in a Section 10(b) violation.  The basic dispute is about whether the defendant must have intended to harm investors, or whether it is sufficient if the defendant simply intended to mislead them.

One would have thought this issue was settled by the Supreme Court’s decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988).  There, the defendants lied to investors by falsely claiming that they were not engaged in merger negotiations.  The lie was not intended to harm anyone; if anything, the defendants intended to benefit investors by concealing the talks so as not to prejudice a beneficial deal.  The Supreme Court did not weigh in on the definition of scienter per se, but it did emphasize that the defendants’ benign motives would not immunize them from liability.  As the Court put it, “[W]e think that creating an exception to a regulatory scheme founded on a prodisclosure legislative philosophy, because complying with the regulation might be ‘bad for business,’ is a role for Congress, not this Court.”

Similarly, in Nakkhumpun v. Taylor, 2015 U.S. App. LEXIS 5547 (10th Cir. Apr. 7, 2015), the Tenth Circuit rejected a defendant’s argument that his false statements – in that case, false characterizations as to why a corporate asset sale had fallen through – were intended to benefit investors by attracting new deal partners.  The Tenth Circuit held that whatever the defendant’s ultimate motive, Section 10(b) liability would be imposed if he intentionally or recklessly misled investors.

Nonetheless, courts continue to sporadically define Section 10(b) scienter in a more limited manner.

[More under the jump]

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April 23, 2015 in Ann Lipton | Permalink | Comments (0)

Saturday, April 18, 2015

When is a fine not a fine?

It was recently announced that the SEC has reached a settlement in its lawsuit against Freddie Mac executives Richard Syron, Patricia Cook, and Donald Bisenius.  The basic allegation in the case was that these executives violated Section 17 of the Securities Act and Section 10(b) of the Exchange Act by dramatically understating Freddie Mac’s exposure to subprime mortgages.  The executives falsely claimed that Freddie Mac’s portfolio included $2 to $6 billion of subprime loans, when the true figure was closer to $141 billion to $244 billion.  Freddie Mac’s exposure to subprime loans ultimately caused it to experience dramatic losses, thus harming investors.

The SEC ran into difficulty because there is no accepted definition of “subprime.”  The SEC alleged that investors understood the term to refer to certain loans issued with a high likelihood of default, such as loans with high loan to value and debt to income ratios.  The executives, however, claimed that “subprime” was understood by investors only to refer to loans that were designated as subprime by their originators.

The case has now settled, and, under the terms of the settlement, the executives will make payments to a Fair Funds account for the benefit of investors, in the amounts of $250K, $50K, and $10K, respectively. 

Unusually, this is not your classic “no admit, no deny” settlement.  Instead, it appears to be straight up “no admit,” because after the settlement was reached, Bisenius said that "The dismissal of the case today under these terms vindicates me completely."

Perhaps even more unusually, the payments are characterized as neither fines nor disgorgements.  Instead, they are described as “donations.”  Meanwhile, the amounts – coincidentally! – were calculated in proportion to the stock and options granted to the defendants during the (alleged) fraud period.

So what gives?

As far as I can tell, the euphemism is because of who’s paying.  The settlement amounts will be paid by insurance (which itself is paid for by Freddie Mac).  D&O insurance tends to exclude coverage for disgorgement and regulatory fines, see Lawrence J. Trautmana & Kara Altenbaumer-Price, D&O Insurance: A Primer, 1 Am. U. Bus. L. Rev. 337 (2011-12); Jon N. Eisenberg, How Much Protection Do Indemnification and D&O Insurance Provide?, and the SEC has taken the position that contracts to indemnify for Securities Act violations are unenforceable as against public policy.  See 17 C.F.R. §229.512. 

But I guess the SEC doesn't feel too strongly about it, because by characterizing the payments as donations rather than fines or disgorgement, the defendants are able to get the benefit of insurance and avoid paying out of pocket.

Though the SEC's fair funds statute does contemplate that donations may be included in a fund, see 15 U.S.C. § 7246(b), the settlement is an outlier, by SEC standards.  According to Urska Velikonja’s article, Public Compensation for Private Harm: Evidence from the SEC's Fair Fund Distributions, 67 Stan. L. Rev. 331 (2015), executives who pay fines and disgorgement to an SEC fair fund typically pay out of pocket – an important feature, if the SEC is to avoid the criticism that fair fund distributions suffer from the same “circularity” problem that plagues private lawsuits. 

Given all of this, one wonders why the SEC even bothered.  If they thought they had a case, they could have just taken it to trial, risks be damned. And if they had doubts about the merits of the case, they should have simply dropped the matter.

One possibility is that the SEC believed its legal case was too weak for trial but that the reimbursement to investors was worth it – after all, circularity criticisms notwithstanding, not all investors are diversified, and some may have suffered losses that they did not make up in gains elsewhere.  But that's not the motivation here, because the SEC will not establish a new fund to compensate investors for the alleged fraud.  Instead, the defendants' donations will be added to an existing fair fund that was set up for the SEC's earlier case against Freddie Mac, brought in 2007, regarding accounting fraud that took place from 1998 through 2002.  Which apparently means that the SEC will not even pretend to distribute the funds to the investors who were harmed by the more recent misconduct. 

(I suspect this is because the SEC believes it lacks authority to establish a fund consisting solely of donations, with no penalties or disgorgements.)

In any event, $310K is a rather paltry sum if investor compensation was the goal; according to the parallel private lawsuit (dismissed on the pleadings, see Ohio Pub. Emples. Ret. Sys. v. Fed. Home Loan Mortg. Corp., 2014 U.S. Dist. LEXIS 155375 (N.D. Ohio Oct. 31, 2014)), Freddie Mac’s misrepresentation of its subprime exposure resulted in over $6 billion in losses to shareholders.

So the point is, if paid by insurance, the amounts aren’t large enough to deter, and as it stands, they are facially not even intended to compensate.  Instead, the settlement seems an exercise in face-saving – the SEC believed it had a weak legal case (though possibly a strong moral one) but didn’t want to exit the field with nothing at all.  The whole adventure thus raises the question whether face-saving payments are appropriate for regulators to collect (as well as the question whether much face-saving was actually accomplished).

April 18, 2015 in Ann Lipton | Permalink | Comments (0)

Saturday, April 11, 2015

Disclosure Strategies After Dura

In Dura Pharmaceuticals, Inc. v. Broudo, 544 US 336 (2005), the Supreme Court held that to bring a fraud-on-the-market action under Section 10(b), shareholders would have to plead and prove the element of “loss causation,” namely, that disclosure of the fraud caused the company's stock price to drop, resulting in plaintiffs’ losses.

Since Dura was decided, there has been concern that companies might try to avoid liability by strategically disclosing information in a manner that would make it more difficult for plaintiffs to establish stock price effects.

In their new paper, Disclosure Strategies and Shareholder Litigation Risk, Michael Furchtgott and Frank Partnoy take significant steps toward establishing that these fears are well-grounded.

[More under the cut]

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April 11, 2015 in Ann Lipton | Permalink | Comments (2)

Saturday, April 4, 2015

How Would a Forum Selection Bylaw Play Out in This Scenario?

When forum selection bylaws first became a thing, the response from the plaintiffs’ bar was a bit muted.  This is because at least some plaintiffs’ firms viewed forum selection bylaws as beneficial, in that they had the potential to cut down on competition among plaintiffs’ firms for control over a given case.  No longer would a firm filing a case in Delaware have to fear that a competing firm, filing a case in another jurisdiction, would settle on sweetheart terms – or worse, end up getting dismissed, with collateral estoppel effects – before the Delaware firm had a chance litigate. 

 Which brings us to the Walmart litigation and a dispute between two plaintiffs’ firms.

 [More under the jump]

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April 4, 2015 in Ann Lipton | Permalink | Comments (1)