Securities Law Prof Blog

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

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Tuesday, July 24, 2007

Hartford Group Settles Market-Timing Charges

The Hartford Financial Services Group announced that it had settled charges involving market-timing and other improper practices with state regulators.  It will pay $115 million, including $84 million to investors harmed by the practices.  It also said the SEC had closed its market-timing investigation without bringing charges.  NYTimes, Hartford Group Pays $115 Million to Settle a Claim of Illegal Trading; WSJ, Hartford Settles 'Market-Timing' Cases.

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

Allison LBO Postponed

In another sign of difficult conditions in the debt-financing market, the LBO of Allison Transmission (a GM unit) to two private equity firms was postponed because of problems in selling the $3.1 billion in bonds to pay for the deal.  WSJ, GM's Allison Hits a Financing Snag.

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

Expedia Reduces Size of Stock Buyback

Expedia scaled back its stock repurchase plan, from 116.7 million shares (more than one-third of the outstanding shares) to 25 million shares, citing the cost of borrowing.  WSJ, Expedia Is Knocked for a Loop; NYTimes, Expedia Reduces Its Buyback Plan

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

Monday, July 23, 2007

Commissioner Atkins on SEC's New Fraud Rule For Advisers to Pooled Investment Vehicles

In his Remarks at the July 11 SEC Open Meeting: An Antifraud Rule For Advisers To Pooled Investment Vehicles, Commissioner Paul S. Atkins disagreed with the text of the SEC press release that stated that the new Rule is negligence-based:

If implemented properly and reasonably, this rule will be a benefit to investors and the marketplace. If, on the other hand, we overreach and turn this rule into nothing more than a negligence-based rule designed to make a federal case out of unintentional mistakes, it will advance no one's interests, and the rule may well end up to be the subject of a legal challenge that will test the bounds, and our interpretation of Sections 206(4) and 15(c)(2).

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

Chair Cox's Statement on SEC Terrorism Link

For those wishing to read Chair Cox's statement about why the SEC took down the controversial link that was supposed to help investors become informed about companies that were doing business with state sponsors of terrorism, see Statement by Securities and Exchange Commission Chairman Christopher Cox Concerning Companies' Activities in Countries Known to Sponsor Terrorism.

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

Bancroft Family Meets to Consider Murdoch's Offer for Dow Jones

Members of the Bancroft family will hold a meeting today in Boston to discuss the News Corp's offer to buy Dow Jones.  They are expected to take several days to think over the deal; Rupert Murdoch has said he expects the family to decide promptly.  At $60 per share, their entire shareholdings are worth more than $1.2 billion, compared to less than $750 million before the bid.  If the public shareholders overwhelmingly approve the deal, it may be that less than one-third of the Bancroft family votes are needed to approve the deal. NYTimes, A Family Meets Today to Hear the Complexities of a Bid for Dow Jones.

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

Cerberus and United Rentals Expected to Announce Deal

Cerberus Capital Management and United Rentals are expected to announce that Cerberus will acquire the largest equipment-rental company for $4 billion ($34.50 per share).  United Rentals announced in April that it was looking for a buyer.  Reports that the private equity deals are over may be premature.  WSJ, Cerberus Nears Deal for United Rentals.

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

Sunday, July 22, 2007

Thel on Free Writing

Free Writing, by STEVEN THEL, Fordham University - School of Law, was recently posted on SSRN.  Here is the abstract:

In 2005 the SEC effectively ended most restrictions on the use of written offering materials in public distributions of securities. Previously, the only written offering materials permitted were terse announcements and dense statutory prospectuses. Less formal written offering material, known as free writing, could be distributed at the end of the offering process but only to people who had previously been sent a copy of the final statutory prospectus

Under the Commission's new regime, all sorts of written offering material may be distributed much earlier in the process. Offering participants are now permitted to communicate with a new disclosure device - modeled on free writing - called the free writing prospectus. They may now, from a very early date, disseminate free writing prospectuses - containing almost any kind of information in whatever form they choose - and often without any requirement that they deliver a statutory prospectus at all.

Free writing is not subject to liability under section 12(a)(2) of the Securities Act, but free writing prospectuses are. This paper shows that the exemption of free writing from liability, generally taken to be a drafting error, operates as a carrot to encourage security sellers to disseminate statutory prospectuses. Noting that security sellers have been reluctant to use free writing prospectuses broadly because of liability concerns, it then argues that free writing prospectuses containing false statements should not be subject to liability under section 12(a)(2) unless they are widely distributed before a final statutory prospectus is available. This conclusion does not depend on any particularly controversial view of market efficiency or morality, but follow from the premises that led the SEC to permit free writing prospectuses in the first place. Moreover Congress recognized as much in 1933 when it exempted free writing. Despite substantial questions about the rulemaking authority that the SEC relied upon to allow the use of free writing prospectuses and to extend liability for their use to issuers in firm commitment offerings, it does have authority to exempt them from section 12(a)(2). The paper concludes with a reexamination of Gustafson v. Alloyd Co.

July 22, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Gordon on The "Prudent Retiree Rule"

The 'Prudent Retiree Rule': What to Do When Retirement Security is Impossible? , by JEFFREY N. GORDON, Columbia Law School, was recentlly posted on SSRN.  Here is the abstract:

Policy debates about the appropriate risk levels for individual retirement plans and social retirement plans (like social security) often pay insufficient attention to the inescapable trade-off between “payment risk” (the risk of insufficient funding for anticipated benefits) and “short fall risk” (the risk of insufficient benefits for a satisfactory retirement). Thus a “prudent retiree rule” would permit a prudent level of “contingent funding” of retirement payouts. Contingent funding - basing benefit expectations on funding sources that may not materialize - increases payment risk, yet pension systems without some contingent funding will produce inferior benefits in most states of the world, increasing shortfall risk. Contingent funding can take different forms: underfunding (in an actuarial sense) of defined benefit promises, which means reliance on the firm's continued profitability; a tilt toward equity investments in a defined contribution plan, including an appropriate level of employer own stock, and reliance on pay-as-you-go (PAYGO) funding of social security benefits in which each generation funds its predecessor's benefits. The case for the prudent retiree rule is strengthened through a better appreciation of the underlying risks to retirement security: demographic risk (too many retirees relative to workers); economic risk (insufficient economic growth) and distributional risk (non-effort-based individual economic outcomes). Policies that address these risks can significantly reduce the risks associated with contingent funding.

July 22, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Saturday, July 21, 2007

SEC Takes Down Website Link on Business with Terrorist States

Just a month ago, the SEC posted on its website a list of companies that do business with countries that are considered state sponsors of terror, with links to the descriptions in the corporate documents.  The S.E.C. list named 29 companies whose 2006 annual reports had mentioned doing business in Cuba, 57 in Iran, 8 in North Korea, 35 in Sudan and 24 in Syria.   “No investor should ever have to wonder whether his or her investments or retirement savings are indirectly subsidizing a terrorist haven or genocidal state,” the S.E.C. chairman, Christopher Cox, said at the time. 

Last night, however, the SEC took down the tool, after a storm of criticism about its accuracy.  Companies complained  that they were listed even if they disclosed minimal contacts that had been discontinued.  Both the Chair and ranking Republican member of the House Financial Services Committee wrote to the SEC and criticized the list as unfair and ill-conceived. While the SEC said it was temporarily suspending the site, it added that it might conclude that it was not necessary after all.  NYTimes, S.E.C. Rethinks Lists Linking Companies and Terrorist States; WSJ, SEC Halts Watch List Tool.

July 21, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Friday, July 20, 2007

SIFMA Urges Continuance of Rule 12b-1 Fees

SIFMA filed a comment letter with the SEC, following up on the agency's June 19 Roundtable Discussion on Rule 12b-1 fees, where Chair Cox questioned whether there was a continuing justification for allowing use of fund assets to promote sales activities.  SIFMA stated that it would be a major mistake to discontinue the fees because they play an important role in opening up the financial markets to investors.

July 20, 2007 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Updates on Options Backdating Crimes

The former general counsel and former chief accounting officer at Take-Two Interactive Software pleaded guilty yesterday to falsifying business records in connection with the backdating of stock  options in 2001-02.  Its former CEO pleaded guilty to similar charges in February.  NYTimes, 2 Ex-Officials of Take-Two Plead Guilty.  At the trial of former Brocade Communications Systems CEO Gregory Reyes on backdating, the judge said might not rule on whether to dismiss the charges until after the jury returns a verdict.  Previously, the judge asked the prosecutors about their evidence that would establish that Reyes understood the accounting rules.  NYTimes, Judge Still Weighing Brocade Charges.  In addition, the former CEO of Engineered Support Systems and his son were indicted on backdating charges, a week after the SEC filed civil charges against them.  WSJ, Suit Claims Monster's Ex-Chief Had Backdating Role.

July 20, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Senate Committee Investigates "Certified Senior Advisers"

A Senate committee is investigating the practices of some insurance companies of holding out their sales agents as having special expertise in advising senior citizens about their financial needs.  The committee asked insurance companies and training companies to provide their materials.  A few weeks ago the New York Times ran a feature story on how an agent could become a "certified senior adviser" with minimal instruction.  Massachusetts regulators have cracked down on this practice, and the NASD has posted warnings on its website.  NYTimes, Senate Panel Investigates How Insurers Sell to Elderly.

July 20, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, July 19, 2007

Agenda for SEC July 25 Open Meeting

Agenda for SEC Open Meeting -- Wednesday,  July 25:

     1. The Commission will consider whether  to  approve  the  Public Company Accounting Oversight Board's Auditing Standard No. 5,  An Audit of  Internal  Control  Over  Financial  Reporting  that  is Integrated with an  Audit  of  Financial  Statements,  a  Related Independence Rule 3525, and Conforming Amendments.

     2. The Commission will consider whether to adopt rule  amendments to Exchange Act Rule 12b-2 and Rule 1-02  of  Regulation  S-X  to define the term "significant deficiency."

     3. The Commission will consider  whether  to  publish  a  Concept Release to  solicit  public  comment  on  allowing  U.S  issuers, including investment companies subject to the Investment  Company Act of 1940, to prepare financial statements in  accordance  with International  Financial  Reporting  Standards  as  published  in English by  the  International  Accounting  Standards  Board  for purposes  of  complying   with   the   Commission's   rules   and regulations.

     4. The Commission will consider whether to propose amendments  to the proxy rules under the Securities Exchange  Act  of  1934  for operating  and   investment   companies   regarding   shareholder proposals, disclosure about shareholder  proponents,  shareholder communications, and related matters.

July 19, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Chair Cox on Integrity in the Municipal Market

Integrity in the Municipal Market, by Chairman Christopher Cox, U.S. Securities and Exchange Commission, Los Angeles, California, July 18, 2007:

In this speech, Chair Cox points to the size of the municipal bond market today; nearly $2.5 trillion of municipal securities are outstanding.  In addition, 36% of all municipal securities are owned directly by households.  He goes on to say:

One would think, given the size and importance of this market, and the prevalence of individual investors and older Americans in municipal trading and investing, that investors in municipal bonds can rest assured that their interests are fully protected by the same high standards that operate everywhere else in the U.S. capital markets. Not exactly. And not even close

Our recent SEC enforcement actions in the municipal area, together with the expert observations of Commission staff, indicate an urgent need to improve the quality and the availability of disclosure documents and financial information for municipal securities. We need to take immediate steps to improve governmental accounting, and to insure that issuers make financial information available more quickly. And we need to increase the understanding and involvement of issuer officials in the disclosure process, so that process becomes subject to appropriate disclosure controls and procedures.

Chair Cox goes on to suggest a number of legislative solutions to provide better investor protection.

July 19, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Former SmartForce Officers and Former Outside Auditior Settle SEC Accounting Charges

The SEC today brought settled enforcement actions against four former executives at SmartForce PLC, the company's former outside auditor, and its former audit engagement partner in connection with the software company's overstatement of revenue by $113.6 million and net income by $127 million during a 3½-year period ending in mid-2002.  According to the complaint, the financial statements of SmartForce, which has since merged into SkillSoft PLC., failed to comply with generally accepted accounting principles (GAAP) by, among other things, recognizing revenue improperly from various types of transactions in which the company engaged, including multiple-element arrangements, reciprocal transactions, and reseller agreements.

The Commission instituted both administrative and civil actions against former SmartForce Chief Financial Officer David C. Drummond and two former vice presidents of finance, Patrick E. Murphy and John P. Hayes. The Commission filed an injunctive action against Patrick T. Chew, former controller of SmartForce's subsidiary in the United States ("SmartForce US"). The four former SmartForce executives will pay a total of $2.3 million in disgorgement, interest, and penalties.

The Commission also instituted proceedings against Ernst & Young Chartered Accountants and the lead partner on the SmartForce engagement, Denis O'Hogan, for engaging in improper professional conduct in connection with multiple audits and periodic reviews of SmartForce's financial statements. Ernst & Young Chartered Accountants were censured and agreed to pay $725,000, an amount equal to its audit fees.

July 19, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 18, 2007

SEC Settles Accounting Fraud Charges at Quovadx

On July 17, 2007, the SEC filed a civil action in federal court in Colorado charging Lorine Sweeney, the former President and Chief Executive Officer of Quovadx, Inc., and Gary Scherping, Quovadx's former Chief Financial Officer, with participating in a fraudulent scheme to overstate Quovadx's software licensing revenue in 2003. The Commission also instituted settled enforcement proceedings against Quovadx, a Colorado software company, two of its former officers and a high-ranking salesperson, and the principals of three of its customers.

July 18, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Obtains Consent Judgment Against Alleged Spammer

On July 16, 2007, a consent and final judgment was entered against Samuel Aaron Meltzer, whom the SEC identifies as a professional internet spammer. Meltzer consented to the entry of the final judgment, without admitting or denying the allegations of the Commission's complaint.  According to the complaint, Meltzer, in return for compensation from stock promoters and issuers, sent millions of unsolicited emails and created numerous websites to promote various penny stocks. In order to conceal his identity — and to avoid the detection of web hosts seeking to stop Internet spam — Meltzer operated under at least thirty different assumed Internet identities.

July 18, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Files Accounting Fraud Charges Against Former OM Group Officers

On July 18, 2007, the SEC filed civil fraud charges against James Materna, the former chief financial officer of OM Group, John Holtzhauser, the former controller of OM Group, and Paul Venesky, the former controller of OMG Americas, a subsidiary, for accounting fraud.   According to the Complaint,  the improper accounting practices were done with the intent to manage earnings and resulted in the filing of materially false and misleading financial statements. In March 2005, after conducting an internal investigation, OM Group issued a restatement reducing its retained earnings for the relevant period by $64 million as a result of the fraud.  On July 18, 2007, the Commission issued a settled cease-and-desist order that finds that OM Group violated the antifraud, reporting, books and records, and internal controls provisions.

July 18, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC May Charge Dow Jones Director in Inside Trading Case

This is the week for news about Dow Jones.  First, the board announced its approval of the deal to sell the company to News Corp, after months of intermittent negotiations.  Now, following up on an earlier story about inside trading in Dow Jones stock, the SEC notified David Li, a Dow Jones director, that it plans to bring civil charges against him.  The SEC previously charged a Hong Kong couple who made profitable trades in Dow Jones stock before the public announcement of Murdoch's interest; Mr. Li has business and social ties to the father of the wife.  WSJ, SEC to File Civil Charges Against Dow Jones Director.

July 18, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)