Securities Law Prof Blog

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

Thursday, March 8, 2007

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.

March 8, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

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.

March 8, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

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.

March 8, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 7, 2007

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,, or by mail to Brooklyn Law School, 250 Joralemon Street, Brooklyn, New York 11201.

March 7, 2007 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

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.

March 7, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

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.

March 7, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

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.

March 7, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

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.

March 7, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

"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.

March 7, 2007 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

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!

March 7, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

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.

March 7, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

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

March 7, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

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.

March 7, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 6, 2007

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.

March 6, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

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)

March 6, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

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

March 6, 2007 in News Stories | Permalink | Comments (0) | TrackBack (1)

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.

March 6, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

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

March 6, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, March 5, 2007

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.

March 5, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

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.

March 5, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)