Monday, March 5, 2007
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.
Sunday, March 4, 2007
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.
"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.
"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
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.
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.
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.