Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, February 26, 2007

More on TXU LBO

KKR and Texas Pacific, who have offered $69.25 to acquire TXU Corp., the Texas utility, in what is the new "largest LBO" ever, have negotiated a cease-fire with environmental groups and have pledged that TXU will become more green,  including reducing the number of controversial coal plants from 11 to 3.  See NYTimes, A Buyout Deal That Has Many Shades of Green  and WSJ, Bidders Try to Pre-Empt Gridlock in TXU Deal .  The NYTmes also profiles Henry Kravis in a separate story; see For TXU, One of the Street’s Fabled Barbarians Is Back in the Hunt

February 26, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Stanley Sporkin on his Own

Stanley Sporkin, former head of SEC's enforcement division, former CIA head, former U.S. District Judge, former partner of Wachtell Lipton, is now on his own, as a lawyer and consultant, advising on securities compliance and other matters.  Among his clients is troubled giant BP.  See WPost, Sporkin's New Post: Working For Himself

February 26, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, February 25, 2007

Eleventh Circuit: Section 11 Really Does Have a Reliance Requirement

APA Excelsior III v. Premiere Technologies, 2007 WL 286258 (11th Cir.(2/2/07).   The 11th Circuit affirmed a district court's dismissal of a complaint filed under 33 Act section 11 brought by investors who were 30% shareholders in a corporation that merged with defendant corporation. The stock issued pursuant to the merger was registered under section 11, and the registration statement allegedly contained false and misleading statements.  Finding that plaintiffs were sophisticated investors who had not exercised their due diligence rights in any meaningful way, the court said could not show reasonable reliance on the registration statement.  Since section 11 does not require a showing of reliance (except in one narrow instance, not applicable here), the court looked at legislative history to interpret section 11 as setting forth a presumption of reliance (and not a strict liability statute) and further found the presumption was rebutted in this instance because of its "pre-registration commitment theory."

February 25, 2007 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

4th Cir. Opinion on PSLRA, Loss Causation

Teachers Retirement System v. Hunter, 2007 WL 509787 (4th Cir. 2/20/07).  Plaintiff alleged a channel-stuffing scheme involving 6 other companies that went on for almost four years, allegedly to inflate the stock price.  The majority trashed the plaintiff's 168-page complaint, finding it short on substance.  It upheld the district court's dismissal of the compaint both for failure to meet the standards of pleading scienter under the PSLRA and for failure to plead adequately loss causation.  In holding that loss causation must be pled with specificity, the 4th Circuit found that the drop in stock price was caused by fallout of an intra-family dispute and was not causally related to misrepresentations.

February 25, 2007 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Perspective on The Past Week's Stories

There was a lot of interesting speculation about the possibility that DaimlerChrysler would get rid of Chrysler somehow, but it's all talk at this time.  Otherwise, as in past weeks, it was more news about options backdating  (including incriminating emails from Mercury and a report on fugitive Kobi Alexander's activities in Namidia) and hedge funds throwing their money and power around (and Treasury Paulson's Task Force telling us not to worry about it)

February 25, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Scholarship on PSLRA

SSRN has posted Incentivizing Institutional Investors to Serve as Lead Plaintiffs in Securities Fraud Class Actions  by CHARLES SILVER (University of Texas at Austin) and SAM DINKIN.

Here's the abstract:

By enacting the Private Securities Litigation Reform Act of 1995 (PSLRA), Congress sought to put institutional investors in charges of securities class actions. In an important respect, this effort has failed. Although pension funds for public sector employees and labor unions often volunteer to serve as lead plaintiffs, private institutional investors do not. The participation of public sector and union funds may also reflect political contributions and ideological beliefs, rather than the PSLRA.

The passivity of private sector funds and the importance of ideology and political contributions as motivations for public sector and union funds reflects the incentives created by the PSLRA, which prohibits bonus payments for lead plaintiffs and encourages investors to free-ride.

This Article sets out three possible amendments to the PSLRA designed to give investors of all types selective incentives to serve as lead plaintiffs. One would give lead plaintiffs bonuses tied to the size of their holdings. The second proposal would sell 20% of the class-wide recovery to the class member willing to pay the most for it, while also requiring the lead plaintiff to pay half the class' attorneys' fees from this portion. The third proposal would auction off 30% of the recovery, while requiring the lead plaintiff to pay 100% of the class' attorneys' fees. The second and third proposals would encourage lead plaintiffs to set class counsel's fees at efficient rates.

February 25, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Scholarship on Wall St Scandals

SSRN has posted Wall Street Scandals: The Curative Effects of Law and Finance by WILLIAM G. CHRISTIE (Vanderbilt University - Finance) and ROBERT B. THOMPSON (Vanderbilt University - School of Law).

Here's the abstract:

This paper studies three scandals that embroiled U.S. financial markets during the past decade, including the Nasdaq market-makers' use only of odd-eighths quotes, the abuse of specialist power on the New York Stock Exchange, and the mutual fund scandal. We attempt to attribute the resolution of these situations to the curative effects of markets versus regulation. We argue that the intervention of the legal system through regulation and/or litigation is often necessary to help resolve the misalignment of incentives needed for markets to accomplish their goal of maximizing value. The paper suggests that there exists an important synergy between financial markets and law that is often overlooked.

February 25, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Saturday, February 24, 2007

LSE-TSE Alliance

the London Stock Exchange and Tokyo Stock Exchange agreed to facilitate market access and creat a 24-hour trading market.  This is the latest in a number of trans-border alliances between exchanges.  TSE previously entered an alliance with the NYSE; LSE fought off attempts to be acquired by Nasdaq.  See NY Times, London and Tokyo Exchanges to Collaborate

February 24, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

More on Backdating at Take Two

Take Two announced that 5 independent directors received backdated stock options and have agreed to repay the corporation.  See NYTimes, 5 Will Repay Take-Two Over Options.

February 24, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Court Postpones Vote on Caremark-CVS Merger

The Delaware Chancery Court told Caremark that it must provide its shareholders information about their right to vote no on the Caremark-CVS merger and seek appraisal rights to determine the value of their shares.   The shareholder vote was scheduled for March 9.  See Judge Refuses to Halt Deal
Between Caremark-CVS.

February 24, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Criminal Investigation into Backdating at KB Home

KB Home announced that a criminal investigation into backdating stock options is ongoing and it is not the target.  Last November the company fired CEO Bruce Karatz and top human resources officer Gary Ray after an internal investigation showed a number of instances of backdating from 1998.  See NY Times, New Inquiry on Options at KB Home and WSJ, Former KB Officials Face U.S. Backdating Probe.

February 24, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Bayou Hedge Fund Investors Can Sue on Fraudulent Conveyance Theory

A bankruptcy judge in New York held that investors who lost money in the failed hedge fund Bayou Management could seek to recoup $140 million withdrawn from the fund before its collapse in 2005, on the ground that the withdrawals were fraudulent conveyances intended to defraud creditors.  See WSJ, Bayou Investors Who Lost Money in Collapse Can Sue Other Investors.

February 24, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Latest on Former Comverse CEO

What's Kobi Alexander, former CEO at Comverse, up to, after fleeing the U.S. to avoid criminal charges on backdating stock options?  He's still in Namibia and has started a company dealing in construction, tourism, and agriculture.  See NY Times, U.S. Fugitive Starts Over in Namibia.

February 24, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Record High for Margin Debt

Margin debt at brokerage firms reached $285.6 billion at end of last month, topping the previous high of 278.5 billion in March 2000.  Does this reflect unhealthy speculation or healthy investor confidence?  See NY Times, A Mountain of Margin Debt May Not Be Cause for Concern.

February 24, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

KKR & Co. Plans to Acquire TXU

KKR & Co. (remember Henry Kravis?) is reportedly finalizing a deal to acquire the controversial Texas utility, TXU Corp.,  The New York Times says it will be for $45 billion, which would make it largest LBO to date; the Wall St. Journal says it will be for $32 billion.  Environmental groups criticize TXU's plans to build eleven coal-fired power plants in Texas.   KKR is partnering with Texas Pacific Group.  See NY Times, At $45 Billion, New Contender for Top Buyout and WSJ, Buyout Firms Seek Utility TXU For $32 Billion.

February 24, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Friday, February 23, 2007

SEC Corporate Finance Status Report

Speech by SEC Staff: The Promise of Transparency — Corporation Finance in 2007 by John W. White
Director, Division of Corporation Finance U.S. Securities and Exchange Commission, 29th Annual Conference on Securities Regulation and Business Law Dallas, Texas February 23, 2007

In this speech, Mr. White outlines the initiatives of Corporation Finance, including: foreign private issuer deregistration (working hard on proposed rule because of June 30 deadline when some foreign private issuers will have to file 404 reports); guidance to management on required assessments under SOX section 404; e-proxy; executive compensation disclosure (waiting, like everyone else, to see the results of the new rules); process access (the "elephant in the room" after the 2d Cir. AIG opinion); international financial standards; interactive data; PIPEs; Restatementsand Item 4.02 of Form 8_K; and Small Business Capital Raising and Private Offering Reform  (the "long-lost uncle" in the course of being found again).  Well-worth reading for anyone wanting to keep up-to-date on the staff's thinking.

February 23, 2007 in SEC Action | Permalink | Comments (1) | TrackBack (0)

Backdating Options Investigations -- No End in Sight?

There are many ongoing investigations about options backdating that seem to drag on.  A New York Times focuses on the $7 million settlement that Brocade Communications agreed to pay last July, which has not yet been approved by the SEC.  Does this signal disagreement among the Commissioners?  Some say the SEC is just taking its time to understand the situation better.  NYTimes, The Slow Pace of Justice on Options Backdating.

February 23, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

More International Alliances Between Stock Exchanges

Every day the news reports cross-border alliances between stock exchanges.  The Deutsche Borse is acquiring 5% interest in the Bombay Stock Exchange, the NYSE is acquiring 5% in the National Stock Exchange in India, and the Tokyo Stock Exchange is exploring an alliance with the London Exchange after making an alliance with the NYSE.  Are these real partnerships or just for show?  See NY Times, Stock Exchanges in a Rush to Forge Links With One Another and WSJ, London, Tokyo Stock Exchanges To Develop Jointly Traded Products.

February 23, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

No News on Chrysler Sale

Don't expect any announcements about a sale of Chrysler for weeks or months, said Chrysler CEO Thomas LaSorda in an e-mail message to employees, telling them to stay focused on revamping efforts.  Meanwhile, morale is low at DaimlerChrysler, as cost-cutting measures go into effect.  See NYTimes, Watchwords at Chrysler Are Hurry Up and Wait. Meanwhile, Daimler Chrysler plans to offer financial information about Chrysler selectively and not hold a formal auction open to all bidders, says WSJ, Chrysler's Big Secrets To Be Told With Care.

February 23, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Bankruptcy Decision Has Prime Brokers Worried

The ramifications of last month's bankruptcy court decision, requiring Bear Stearns to turn over to the bankruptcy estate of a failed hedge fund client $160 million, are explored in NY Times, The Bankruptcy Development That Has Wall St. Worried.  The court found that Bear Stearns failed to adequately investigate red flags that would have disclosed the fraud.  Prime brokerage, providing services to hedge funds, is lucrative business on Wall St. these days.

February 23, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)