Securities Law Prof Blog

Eyes on HP Shareholder Meeting

A much-anticipated event next Wednesday -- Hewlett-Packard's shareholders will vote on a proxy access proposal that management reluctantly included on the proxy statement.  The proposal is the first shareholder vote at a major corporation on a proxy access proposal and would allow a shareholder holding more than 3% of the stock for more than 2 years to use the management proxy statement to nominate candidates.  Major shareholder advisory firms are recommending a yes vote.  See NYTimes, Battle Lines Are Drawn in Hewlett Proxy Issue.

Conrad Black's Trial Set to Begin Next Week

Expect another headline-producing corporate scandals trial beginning next week, with the fraud and racketeering trial of Lord Conrad Black, former head of the publisher that at one time owned the London Telegraph, the Jerusalem Post and the Chicago Sun Times, among other newspapers.  In his heyday, Black was known for his jet-setting with notables like Henry Kissinger, lavish lifestyle and the envirionment of "corporate kleptocracy," as federal monitor (and former SEC Commissioner) Richard Breedon's report called it.  Among other things, the corporation purchased private papers of FDR for $9 million, so Black could research a book he was writing on the President.  See WSJ, Fraud Trial Looms For Jet-Setting Publishing Mogul.

Conferences on Wall St

Expect a lot of hand-wringing next week about Wall St.'s loss of competitive edge.  On Monday the Chamber of Commerce will release its report on the topic, followed on Wednesday with its First Annual Capital Markets Summit:  Securing America's Competitiveness.  On Tuesday, the Treasury Department will host its own conference, and speakers are expected to call for flexible accounting standards and less regulatory overlap.  The Chamber of Commerce has been quiet about its recommendations, although one participant says the report will recommend companies stop giving quarterly earnings guidance.  See WSJ, Business Leaders, Washington Aim to Fix Wall Street's Ailment.

Citigroup-Nikko Cordial Deal too Low?

Two major shareholders of Nikko Cordial, the scandal-ridden Japanese brokerage firm, say that Citigroup's $11 billion offer to buy Nikko is too low, leading to speculation that Citigroup will increase its price.  The acquisition would mark a significant incursion into the Japanese market for Citigroup in its quest to take over the world.  See WSJ, Another Nikko Cordial Shareholder Calls Citigroup's Offer Too Low.

Enron Investors Settlement with Arthur Andersen Approved

The court approved a $72.5 million settlement of investors' claims against Arthur Andersen in the Enron class action securities fraud action.  Plaintiffs' attorneys said it was the most they could get from the defunct accounting firm.  Investors' attorneys have already obtained more than $7.3 billion from Enron's banks and lawyers.  See WPost, Arthur Andersen Settlement Approved for Enron Investors.

Proposed Changes to SEC Financial Responsibility Rules

The SEC has published for comment amendments to its Financial Responsibility Rules for broker-dealers -- the net capital, customer protection, books and records and notification rules.

SEC Report on Options Order Routing and Execution

The Commission’s staff today released a report summarizing the results of recent examinations and analysis of routing and execution practices in equity options. The “Report Concerning Examinations of Options Order Routing and Execution” can be found on the Commission’s website.  The SEC’s Office of Compliance Inspections and Examinations, with the staff from the Division of Market Regulation, conducted a series of examinations of the options order routing practices of eight broker-dealers that have a significant amount of retail options order flow. In addition, the Office of Economic Analysis conducted an analysis of quote competition among the options markets. Today's staff report describes broker-dealers’ current order routing practices, including the use of “smart routing” technology, opportunities for price improvement for retail options orders, and payment for order flow and internalization practices. Among other things, the staff found the following.

Many firms have begun to utilize order routing technology — often called “smart routers” — to ensure that marketable retail customer options orders are sent to the market displaying the best price.

While there has been improvement in order routing firms’ processes to seek and obtain best execution for their retail customers’ options orders, multiple market centers often display the same best price, so firms frequently rely on other competitive factors, such as payment for order flow and other inducements, to determine to which market center to route customer orders.

The amount of quote competition in the options markets has increased since 2000. For the most actively-traded options series, there are at least four exchanges quoting at the NBBO for more than half of the trading day, and the NBBO is at the minimum increment for a significant portion of the trading day.

Because standardized execution quality statistics are not provided by each of the options exchanges, most firms analyze only the execution quality provided to their own customer orders. The lack of standardized, widely available execution quality data may affect thorough best execution reviews by firms.

The Report concludes that these findings support the Commission’s efforts to encourage the options markets to quote in penny increments and support the need for standardized execution quality data in best execution analyses for the options market.

Latest on CVS-Caremark Merger

CVS made what it calls its "best and final" offer for Caremark, raising the cash dividend from $6 to $7.50, for a deal valued at $26 billion.  The Caremark shareholders are scheduled to vote on the merger on March 16.  ExpressScripts' rival bid is still higher at $26.3 billion, but it faces regulatory delays with the FTC.  SeeNYTimes, CVS Again Increases Its Offer for Caremark and WSJ, CVS Makes 'Final' Bid to Secure Caremark.

Fallout from AOL-Time Warner Merger

Time Warner has added $145 million to reserves, bringing the total spent on shareholder claims related to the AOL-Time Warner merger to a whopping $3.75 billion.  See WSJ, Time Warner Sets Reserve to Resolve Final Suits.

Levitt Calls for Accounting Reform

Former SEC Chair Arthur Levitt calls for reforming the Financial Accounting Standards Board and the Governmental Accounting Standards Board, which he charges have been captured by special interest groups, in an opinion piece in the WSJ, Standards Deviation.

Cox Says Proxy Access Rule on the Way

SEC Chair Cox told reporters that the agency will put out for public comment a proxy access rule favorable to investors later this year, in time for adoption before the 2008 proxy season.  Skeptics will recall earlier SEC predictions of a rule in time for the 2007 proxy season.  See WSJ, Making 'Great Deal of Progress' On Proxy Access, SEC's Cox Says.

Pinnacle Founder Indicted, Charged with Ponzi Scheme

Real estate promoter, Gene O'Neal, founder of Pinnacle Development Partners, was indicted in Atlanta on charges of running a Ponzi scheme.  O'Neal allegedly raised $69 million from 2,000 investors by promising 25% returns in 45 or 60 days by purchasing and selling distressed properties and advertised in publications like Newsweek and WSJ.  A federal receiver was appointed to recover assets for the investors. Mr. O'Neal denies all charges. See NYTimes, Real Estate Promoter Is Indicted and WSJ, Pinnacle Development Head Faces Ponzi Scheme Charges.

Big 4 Push for Limits on Damages

The Big Four accounting firms' latest push to get caps on damages is reported in the Washington Post, with the establishment of a Public Policy Center and talks with SEC officials, who have been meeting with unnamed "outside experts" to consider safe harbors or arbitration of claims.  A breath of fresh air comes from Bevis Longstreth, a former securities and exchange commissioner during the Reagan administration: "It's just unacceptable to cap liability and not even look at profit.  No one knows what the profits are because there is no transparency."  See WPost,  Accounting for the Future.

Former Gateway Execs Guilty of Securities Fraud

The Securities and Exchange Commission announced that a federal court jury late yesterday returned a verdict in the SEC's favor on all charges against the former chief financial officer, John J. Todd, and the former controller, Robert D. Manza, of Gateway Inc., the personal computer manufacturer. Todd and Manza were accused of engaging in a fraudulent revenue and earnings manipulation scheme to meet Wall Street analysts' expectations in 2000, and for concealing from the investing public important information about the success of Gateway's PC business.

SEC Roundtable on Use of Interactive Data

The Securities and Exchange Commission announced today that Vanguard Group Chairman and CEO John J. Brennan will be the keynote speaker at the Commission's March 19 roundtable on the use of interactive data by public companies and mutual funds to improve disclosure for individual investors.  Mr. Brennan is expected to discuss how the new interactive data will allow investors to easily gather and compare mutual fund risk and return information, including costs and performance that might otherwise be buried deep within disclosure documents.

The Commission welcomes feedback on any aspect of the use of interactive data. The information that is submitted will become part of the public record of the roundtable.  For further information, see  Commission Announces March 19 Roundtable: Creating Interactive Data to Serve Investors.

SEC Settles Insider Trading Charges Against Former Exec of Drug Manufacturer

The U.S. Securities and Exchange Commission today simultaneously filed and settled civil charges against Shashikant C. Shah, formerly Vice President of Quality Control, Quality Assurance and Regulatory Affairs of now-defunct generic drug manufacturer Able Laboratories, Inc., alleging that during a 16-month period, Shah reaped $909,000 in profits by selling Able's common stock while possessing material, non-public information about Able's faulty quality control testing practices. Before halting operations in May 2005 after an internal review uncovered such testing improprieties, Able developed, manufactured and sold at least 40 generic drugs including numerous antibiotic, analgesic and antipsychotic medications.

Also on March 8, 2007, in a related criminal action filed by the United States Attorney's Office for the District of New Jersey, Shah pleaded guilty to one count of conspiracy to commit securities fraud and to distribute misbranded and adulterated drugs. Three former supervisory chemists under Shah, Jose Concepcion, Ashish Macwan and Jyotin Parikh, also pleaded guilty to separate criminal informations charging each with one count of conspiracy to distribute misbranded and adulterated drug products. Shah and the three chemists each face a maximum of five years in federal prison and a $250,000 fine. The issue of restitution will be determined by the sentencing court.

SEC's Operation Spamalot

The Securities and Exchange Commission this morning suspended trading in the securities of 35 companies that have been the subject of recent and repeated spam email campaigns. The trading suspensions - the most ever aimed at spammed companies - were ordered because of questions regarding the adequacy and accuracy of information about the companies.

The trading suspensions are part of a stepped-up SEC effort - code named "Operation Spamalot" - to protect investors from potentially fraudulent spam email hyping small company stocks with phrases like, "Ready to Explode," "Ride the Bull," and "Fast Money." It's estimated that 100 million of these spam messages are sent every week, triggering dramatic spikes in share price and trading volume before the spamming stops and investors lose their money.

EDF Goes Wall St.

The Environmental Defense Fund, which played a role in the negotiations for the $38 billion LBO of TXU, announced that it has hired investment banker Perella Weinberg Partners as its adviser.  TXU is entering the "market test" phase and will be soliciting bids to top that of Texas Pacific and KKR.  See NYTimes, Environmental Group Behind the TXU Deal Hires a Banker

Congress Scrutinizes McNulty Memo

DOJ's revised policies on corporate fraud investigations (known as the McNulty memo, replacing the Thompson memo) continue to draw criticism from lawmakers as not doing enough to protect the confidentiality of corporate documents and the rights of corporate employees.  The House Judiciary Committee will hold a hearing today, and several prominent lawyers are expected to testify.  See NYTimes,  Some Lawyers Urge More Safeguards on Rights in Corporate Fraud Cases

Stout on Proxy Access

UCLA's Lynn Stout argues in a Wall St. Journal Commentary that increased shareholder access to management's proxy statement accelerates the trend toward privatization of public corporations.  According to her, directors and officers are tired of the "shrill, often conflicting and apparently endless demands" of shareholder activists and turn to private equity.  See WSJ, Democracy by Proxy

Take Two Investors Plan to Take Control

A group of Take Two investors, holding a total of 46% of shares, announced yesterday that it intends to take control of the company.  Take Two has been much in the news lately because of civil and criminal charges relating to stock option backdating and low profits. The investors include several hedge and mutual funds.  Take-Two issued a statement saying it was pleased that the investors recognized its value.  See NYTimes, Shareholders of Take-Two Plot a Revolt and WSJ, Take-Two Shareholders Are Plotting Board Battle.

ExpressScripts Raises Bid to Beat CVS-Caremark Merger

ExpressScripts increased the cash portion of its $26.1 billion bid for Caremark, but appears to be running out of time as the March 16 shareholder vote on the $25.7 billion CVS-Caremark merger approaches.  Yesterday the Delaware Chancery Court refused to postpone further the shareholders' meeting.  ExpressScripts also faces rgulatory hurdles at the FTC.  See NYTimes, Drug Manager Raises Its Bid for Caremark but Sees Delay and WSJ, Express Scripts Is Dealt Setback By FTC in Bid for Caremark.

SEC Mulls Over Penalties in Backdating Settlement

Today's WSJ story on backdating stock options focuses on how the SEC will quantify the ill-gotten gains and harm caused by backdating -- issues that are apparently causing the SEC trouble as it is considering whether to approve a $7 million settlement with Brocade Communications, a settlement that is likely to be the model for future settlements.   In its January 2006 statement on corporate penalties, the SEC stated that the two primary considerations in determining corporate penalties are the presence or absence of a direct benefit to the corporation as a result of the violation and the degree to which the penalty will recompense or further harm the injured shareholders.  The WSJ reports that Brocade submitted a report to the SEC to demonstrate that it did not benefit from the wrongdoing.  Some members of Congress recently criticized the SEC for the slow pace of the backdating investigations.   See WSJ,  Options Fines: A Hard Call.

AALS Sec Reg Call for Papers

Call for Papers: An Evaluation of the Recent Regulatory Reforms and Litigation
AALS Securities Regulation Section Meeting January 2008 in New York City

After the collapse of Enron, Adelphia, Worldcom and other high flyers of the 1990s, there was a crisis of confidence in American business and securities regulators. Numerous federal and state enforcement and regulatory actions occurred in the wake of these scandals. These included: the passage of the Sarbanes-Oxley Act of 2002; the research analyst prosecutions by the New York Attorney General and the Securities and Exchange Commission and the reform of the regulation of analysts; and prosecutions of mutual funds and reform of mutual fund governance. A torrent of criminal prosecutions and civil litigation under Rule 10b-5 and other securities law statutes also occurred.

Numerous law review articles have been written, explaining, praising or criticizing these developments.  Currently, several high-powered decision makers have asserted that the U.S. capital markets are becoming less competitive than overseas markets due, in part, to the U.S. regulatory and litigation environment.  Further, there has been a push back in the courts as to expansive interpretations by the SEC of its authority and expansive district court opinions regarding the reach of the anti-fraud provisions.

We are seeking papers for the January 2008 meeting of the AALS Securities Regulation Section in New York discussing any aspect of these developments.  A broad range of topics is possible, and we hope to have a lively discussion on whether regulatory and litigation developments have gone too far, not far enough or have appropriately dealt with the problems which led to the 1990s stock market bubble and its collapse. A special issue of the Brooklyn Journal of Corporate, Financial & Commercial Law will be devoted to these papers.

Please submit an abstract of any proposed papers and any available drafts  to Roberta S. Karmel at Brooklyn Law School by March 30, 2007, roberta.karmel@brooklaw.edu, or by mail to Brooklyn Law School, 250 Joralemon Street, Brooklyn, New York 11201.

Commmissioner Atkins before International Bankers

SEC Commissioner Paul Atkins recently spoke before the Annual Washington Conference of the Institute of International Bankers, addressing Reg NMS, International Financial Reporting Standards, Foreign Deregistration, and SOX Section 404.

Commissioner Campos on Hedge Funds

Commissioner Roel C. Campos recently spoke before the Hedge Fund Institutional Forum Corporate Funds Roundtable.  He started out by criticizing the media's reaction to the President's Working Group Paper on Private Pools of Capital that, in his view, overemphasized its market discipline approach.  He also gave his views on hedge fund advertising, listed "funds of hedge funds," and hedge fund IPOs.

Cox at the IFRS Roundtable

Excerpts from Chairman Cox's Address to the SEC Roundtable on International Financial Reporting Standards (March 6,2007):

At the same time, the FASB and the IASB have embarked on a project to converge accounting standards, which as I noted was formalized in the Norwalk Agreement. Over the past few years, these efforts have gone far to reduce differences between the two sets of standards, and by all accounts, have improved both IFRS and GAAP in the process.

But accounting standards are complicated, and changing them can be difficult. And that inherent difficulty has led some to the view that the convergence of IFRS and U.S. GAAP is impossible — thus rendering the elimination of the reconciliation requirement an eternally unattainable goal. So let me repeat that we do not expect to see total convergence or even a specific level of convergence before eliminating the reconciliation requirement. Instead, there must be a robust and active process in place for converging IFRS and U.S. GAAP. If the process is in place, then the current differences will be minimized in due course.

SEC Gets Emergency Relief in Market-Manipulation Scheme Involving Computer Hacking

The SEC announced that on Tuesday, March 6, 2007, it won an emergency court order freezing assets in a Latvian-based bank's trading account being used to conduct a hi-tech market manipulation scheme. The Commission's enforcement action is the third filed in as many months involving market manipulation schemes conducted through online account intrusions.  The Commission alleged that the account, maintained by relief defendant JSC Parex Bank based in Riga, Latvia, had been used by one or more unknown offshore sub-account holders to launch a "pump and dump" manipulation scheme involving the stocks of fifteen different public companies. As part of the scheme, the unknown traders hacked into unsuspecting investors' online brokerage accounts at seven different brokerage firms, selling off investors' positions and using the proceeds to pump up the market for the stocks subject to the scheme. Through this technique, the unknown traders generated at least $732,941 in illicit profits and cost U.S. brokerages some $2 million in losses.

The Commission's complaint alleges a complex scheme that combines electronic intrusions into online brokerage accounts with a traditional market manipulation. From at least December 2005 through December 2006, one or more foreign-based unknown traders purchased, through four sub-accounts of an omnibus trading account titled in the name of Relief Defendant JSC Parex Bank and held at Pinnacle Capital Markets LLC of North Carolina, shares in 15 U.S.-based Nasdaq-traded companies. These unknown traders then hacked into unsuspecting investors' online brokerage accounts at seven major online broker-dealers and sold off investors' existing securities holdings. They then used the proceeds to buy shares on the open market of the thinly traded issuers the unknown traders had previously purchased in their own sub-accounts. This illicit account activity artificially heightened the share price and trading volume for each of the thinly traded issues and enabled the unknown traders to sell their holdings at a substantial profit, realizing at least $732,941 in ill-gotten gains, and possibly more. The unknown traders also used electronic means to hide their identities and mask the means by which they intruded into accounts.

"Understanding Your Brokerage Account Statements"

SIFM, NASAA and SIPC today released updated editions of  “Understanding Your Brokerage Account Statements,” available in English and Spanish.  The guide, which provides investors with tips on analyzing their monthly statement, includes new content on fee based accounts, as well as answers to frequently asked questions, details on common features of most brokerage account statements, a step-by-step checklist on how to review them, and an extensive glossary of investment terms that investors may come across while reviewing their statements.

PSLRA and the 7th Amendment

Suja Thomas, my colleague here at UC Law who teaches civil procedure, has just posted on SSRN a provocative paper entitled "The Seventh Amendment Problem in PSLRA" in anticipation of the upcoming argument before the Supreme Court in Tellabs.  Suja has previously written that summary judgment motions violate the 7th Amendment right to a jury trial.  In this paper, she examines PSLRA's heightened requirement for scienter and finds it constitutionally problematic and not comporting with the substance of the common law jury trial.  She also proposes an alternative standard to dismiss a securities fraud claim that comports with the 7th Amendment.

Well worth reading for those of us who don't ordinarily think about the 7th Amendment!

401(k) Fees under Congressional Scrutiny

The House Education and Labor Committee held a hearing yesterday on fees charged on 401(k) plans, the first of two planned hearings.  According to one witness, an independent consultant, fees often total 3.5-5% of assets when 1.5% would be more appropriate.  In addition, lawmakers heard complaints that fees were hard to figure out.  Mutual fund industry representatives disputed the charge that the fees are too high or hidden.  See WPost,  Lawmakers Scrutinize Fees for 401(k) Plans.

Shareholders Don't Like Clear Channel Sale

The shareholders' vote on the Clear Channel sale to two private equity firms for $18.7 billion is less than 3 weeks away and appears to be in trouble.  Institutional investors like Fidelity say the price is too low, while the buyers say they can't pay more.  Approval of two-thirds of all shares is required.  See NYTimes, Buyout Bid Becomes Proxy Fight

More BackDating Dirt

The WSJ continues its "all stock options backdating all the time" coverage with a new focus:  dozens of corporations used the post-9/11 stock market decline as an opportunity to backdate stock options.  Corporations previously said that the grant of stock options at that time was mere "coincidence," but now it appears that the options, in fact, were granted later and back-dated.  See WSJ, Companies Say Backdating Used In Days After 9/11.

SEC Staff Speech On Mutual Fund Directors

Excerpts from Keynote Address at the Mutual Fund Directors Forum Institute by Andrew J. Donohue Director, Division of Investment Management, U.S. Securities and Exchange Commission:

I have committed to focus this year on reaching out to fund directors, with the ultimate goal of determining what the SEC and the staff of the Division of Investment Management can do to enable you to be more effective in your oversight role. My goal is not to make your jobs easier, but to allow you to be more effective.....

Another piece of advice that I continually give to fund managers is to get back to basics. Fund managers should be focusing on their basic compliance duties and obligations, some of which have - surprisingly - been overlooked. For example, the Investment Company Act prohibits the payment of a dividend or distribution from any source other than net income unless the payment is accompanied by a written statement identifying the source of the payment. This is a basic and fundamental requirement. However, last year, the Commission settled a case in which three closed-end funds, over a four-year period, made 98 distributions that included a return of capital. None of those distributions was accompanied by the required written statement. I was shocked that a requirement so fundamental was so thoroughly ignored.

Former Monsanto Officer Settles SEC Action

The SEC filed a settled complaint against Charles Martin ("Martin"), the former Government Affairs Director for Asia for Monsanto Company ("Monsanto"), a global producer of technology-based solutions and agricultural products. In its complaint, the Commission alleged that in 2002, Martin authorized and directed an Indonesian consulting firm ("Consulting Firm") to pay a bribe of $50,000 to a senior Indonesian Ministry of Environment official ("the Senior Environment Official"). The complaint alleged that the illegal payment was made to influence the Senior Environment Official to repeal language in a decree that was unfavorable to Monsanto's business in Indonesia.  Martin agreed to pay a $30,000 penalty.  SEC v. Charles Michael Martin, Case No. 1:07CV0434 (D.D.C.) (filed March 6, 2007)

U.S. Supreme Court Won't Hear Ebbers' Appeal

Bernie Ebbers has run out of appeals.  The U.S. Supreme Court, without comment, declined to review his conviction for his role in the Worldcom accounting fraud.  Convicted on 9 counts of conspiracy, securities fraud and other crimes, he attempted to appeal two issues: (1) the trial court should have required the government to grant immunity to several defense witnesses, and (2) the trial court improperly instructed the jury that he could be convicted for "conscious avoidance" of the fraud.  See NYTimes, Justices Turn Down Appeal by Ebbers

A&P Will Acquire Pathmark

A&P will acquire its rival Pathmark in another sign of the increasing consolidation in the grocery store business.  It will offer Pathmark shareholders $9 in cash and 0.12963 in stock in a friendly tender offer.   The acquisition is valued at $1.3 billion, including assumption of debt. The combined business will consist of 550 stores in the northeast.  See NYTimes, A.& P. to Buy Pathmark, a Rival Grocer and WSJ, Grocery Chain A&P Agrees to Buy Rival Pathmark for $677.3 Million.

Citigroup Makes Bid for Japanese Brokerage

Citigroup, the largest U.S. bank, announced a cash all-shares tender offer for Japanese brokerage firm, Nikko Cordial, the third largest brokerage firm in Japan.  Nikko currently is threatened with delisting from the Tokyo Stock Exchange because of an accounting fraud at its merchant bank.  See NYTimes,  Citigroup Launches Takeover Bid for Nikko Cordial and WSJ, Citigroup Bids for Control
Of Japan's Nikko Cordial.

SEC's Roundtable on International Financial Reporting Standards

The SEC's Roundtable on InternationalFinancial Reporting Standards "Roadmap" will be held March 6, beginning at 10 A.M.  The program will be webcast live.  The roundtable will feature panel dscussions by a broad range of stakeholders in the US capital markets and will discuss topicsrelated to the potential effects of a co-existence of IFRS and US GAAP models in the US capital markets. For the panelists, see 2007-30.

SEC Approves NASD Rule re. Subpoenas in Arbitration

The SEC approved NASD Regulation's rule relating to third party subpoenas in arbitration which will authorize only arbitrators (and not attorneys, as in some states) to issue subpoenas.  Here is the executive summary of NASD Notice to Members 07-13 - March 2007:

Executive Summary
The Securities and Exchange Commission (SEC) has approved amendments to the subpoena rule as set forth in Rule 10322 of the NASD Code of Arbitration Procedure (Code) to allow only arbitrators to issue subpoenas, whether for discovery in arbitration or for appearance at a hearing before the arbitrators. The SEC also approved an amendment to the payment of arbitrators rule as set forth in IM-10104 to provide for the payment of a $200 honorarium per case for each arbitrator who considers contested motions for the issuance of subpoenas.

Hedge Funds Buy Up Uranium

Hedge funds are being blamed for a lot of things.  Now it's the increased price of uranium, as speculators drive up the prices, reflecting renewed interest in nuclear power.  Uranium is not traded on any exchange, and unlicensed parties cannot take possession of it.  See WSJ, New Exotic Focus For Hedge Funds:Uranium Market.

Perspective on The Past Week's Stories

The SEC is mounting another offensive on insider trading.  The SEC described as  "brazen" the group of Wall St. professionals who engaged in a longstanding scheme to profit in inside information, stealing information from UBS and Morgan Stanley, to the tune of $15 million in profits.  In addition, the SEC broke another trading scheme where the perpetrators allegedly hacked into computers to get advance copies of press releases at a number of corporations.

It was not a good week for lawyers.  Kent Roberts, former GC of McAfee, was indicted for his role in stock option backdating, and Louis Zehil, a former corporate attorney at McGuire Woods, was charged in a PIPES fraud.

Finally, the stock market "correction" at the beginning of the week -- while it certainly got a lot of attention -- was "old news" by the end of the week -- until the next time. 

White on Credit Rating Agency Reform Act

"A New Law for the Bond Rating Industry -- For Better or For Worse? " by LAWRENCE J. WHITE, Stern School of Business, NYU, is on bepress Law Collection.  Here is the abstract:

With little fanfare last September, President Bush signed the Credit Rating Agency Reform Act of 2006. This new legislation has the potential to change the way that the credit rating industry is regulated by the Securities and Exchange Commission. So as to provide a better understanding of the significance of the new law, this paper first provides a brief recounting of the bond rating industry's history and the SEC's haphazard regulation of this industry over the past 31 years. The paper then outlines the important provisions of the new act and comments on the possible routes that the SEC could follow in implementing it.

Asare, Cunningham & Wright on SOA

"The Sarbanes-Oxley Act: Legal Implications and Research Opportunities" by Stephen K. Asare, University of Florida; Lawrence A. Cunningham, Boston College; and Arnold Wright, Boston College, is on bepress Law Collection.  Here is the abstract:

Congress passed the Sarbanes-Oxley Act to restore investor confidence, which had been deflated by massive business and audit failures, epitomized by the demise of the Enron Corporation and Arthur Andersen LLP. The Act altered the roles and responsibilities of auditors, corporate officers, audit committee members, as well as other participants in the financial reporting process. We evaluate the potential legal implications of some of the Act’s major provisions and anticipate participants’ likely responses. Our evaluation suggests that these provisions will significantly change behavior, increase compliance costs and alter the legal landscape. We also identify promising avenues for future research in light of the new landscape

McGreevy on Rule 10b5-1

Maureen McGreevy's (American U.) Insider Waiting: The New Loophole under 10b5-1 is on bepress Law Collection.  Here is the abstract:

In October, 2000, the Securities and Exchange Commission (SEC) enacted Rule 10b5-1 which provides an affirmative defense for individuals charged with insider trading. The Rule states that a person is not deemed to have traded on the basis of material non-public information if, before he or she gained knowledge of that material, non-public information, the person had entered into a trading plan under which he or she contracted to sell the securities in question. As a result of this rule, many corporate executives have established what have become to be known as 10b5-1 trading plans in order to protect themselves from liability for insider trading.
While 10b5-1 trading plans provide effective protection for innocent executives who wish to trade company stock against allegations of insider trading brought by the SEC, the plans may also have the adverse effect of providing a safe harbor for some executives who may, in fact, be guilty of insider trading. My proposed topic will explore whether or not participants in such plans have found a loophole through which they can delay the release of information which may negatively impact the price of stock until after scheduled sales within their plans are executed, thereby avoiding the personal financial loss they would otherwise suffer should the trades go forward but while still maintaining their affirmative defenses under Rule 10b5-1 since their trades are nonetheless carried out under an established trading plan. I will consider this possible loophole in light of the recent stock option scandal in which company executives have been found to withhold positive information regarding company performance until after options have been granted to them in order to lower the strike price of the options and thereby maximize their returns upon the sale of the options.

Hannes & Yadlin on Takeovers

Sharon Hannes and Omri Yadlin's (both of Tel Aviv U.) The SEC Regulation of Takeovers: Some Doubts from a Game Theory Perspective and a Proposal for Reform, is in the bepress Law Collection.  Here is the abstract:

In theory, a hostile tender offer poses a threat to the target shareholders who, for strategic reasons, may tender their shares in response to an inferior bid. It has therefore been suggested that the decision to tender be made separately from the shareholder vote on the actual merits of the bid. While the regulator has never adopted this proposal, market forces in the poison pill era did generate a mechanism with a similar effect. To overcome a poison pill (a mechanism implemented by managers to thwart bids), the bidder must win the shareholders’ vote in a proxy contest that is aimed at redeeming the poison pill, and only thereafter can the tender offer be consummated. Thus, a coercive bid, which is inimical to the target shareholders as a group, would be rejected in the shareholder vote, even if the majority of the shareholders were willing to tender their shares for strategic reasons. Neither the literature nor this mechanism when operated in practice contends, however, with the hurdles set by the non-transparency of shareholders’ tendering preferences for their peers. Consider, for instance, a partial bid for 50% of the target corporation’s stock. With such a bid, there is no guarantee that all tendered shares will be purchased. If shareholders holding more than 50% of the target’s outstanding capital decide to tender their shares, the bidder will purchase a prorated share from each of them. And the more shareholders who tender their shares, the fewer shares purchased from each tendering shareholder. This feature of partial bids complicates the decision for target shareholders. Not only do they have to consider the stand-alone value of the target, the bid price, and the post-acquisition value of non-tendered shares, they also have to guess what fraction of the target stock is going to be tendered. Put differently, unlike in an any-or-all-shares bid, the shareholders in a partial bid can only guess at the value per share they will receive for any given fraction of tendered shares. Interestingly, a mild change in procedure could significantly simplify the decision for shareholders in partial bids. If the tendering period were to culminate prior to when the shareholder vote on the bid is conducted and the final tally of the tender then made public, shareholders would not be forced to guess the tendering preferences of their peers. When voting for or against the bid, they would know exactly what fraction of shares have been tendered, giving them a better sense of the value they will receive for their tendered shares if the bid is approved in the shareholder vote. This simple procedure would thus overcome an important challenge inherent to partial bids at virtually no cost, making shareholders less likely to approve a bid that they will later regret. Moreover, and as we shall illustrate in this paper, the revealed preferences of informed shareholders could, at times, signal bidder qualities to uninformed shareholders, which would enable the latter to thwart indiscernibly harmful bidders.

Colombo on Analyst Fraud

Ronald J. Columbo, Hofstra University, has just posted Buy, Sell or Hold?  Analyst Fraud from Economic and Natural Law Perspectives in the bepress Law Collection.  Here is the abstract:

Investor protection and healthy capital markets are commonly acknowledged as the objectives historically driving U.S. federal securities legislation and policy. Less commonly appreciated, or perhaps intentionally neglected, is the critical role that virtue was understood to play in realizing these objectives by the architects and original enforcers of the securities laws. This understanding has largely been lost, in no small part, due to the success that “law and economics” has had in dominating securities law thinking. This Article posits that this original understanding can be rediscovered, and the role of virtue restored to its rightful place in securities regulation, via application of a natural law approach to securities law issues. Within the context of the recent research analyst conflict-of-interest problem, this Article compares a natural law approach to the problem with a law and economics approach. The conclusion reached is that the natural law approach is preferable on account of its endorsement of solutions that are more comprehensive, and, moreover, more harmonious with the historical values and objectives of U.S. securities law.