Securities Law Prof Blog

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

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Wednesday, March 21, 2007

Blockbuster CEO Resigns

Blockbuster CEO John Antioco announced yesterday he would leave the company at the end of this year.  He and Carl Icahn, a 16% shareholder, have been battling for two years over his compensation and strategy for the corporation.  Last month the board refused to pay Antioco the full amount of the 2006 bonus he claimed he was entitled to; they have agreed to a $3.1 million bonus.  Antioco also gets $5 million for leaving.  See NYTimes, Blockbuster Chief Agrees to Exit Deal; WSJ, Icahn Gets His Way at Blockbuster As Chief Antioco Calls It Quits.

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

Two High-Profile Trials Begin

Two high-profile trials got underway this week.  First, the trial, in Chicago, of Lord Conrad Black, accused of looting millions of dollars from the company he formerly controlled, Hollinger International, see NYTimes, Trial Begins for Ex-Chief of Hollinger; WSJ, Conrad Black Fights Back at Trial.  Second, the trial in Colorado of Joseph P. Nacchio, former CEO of Qwest Communications, accused of selling over $100 million of Qwest stock on inside information; see NYTimes, Insider Trading Is Disputed at Trial of Ex-Chief of Qwest, WSJ, Nacchio Trial Tests Emotions.  Both promise to be interesting, although the opening statements of each side sounded predictable.  Prosecutors call the defendants' conduct "cheating," while defense counsel portray both men as "family men."

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

WSJ Highlights New York Times' Struggles with Shareholder Activist

In a front page story, the Wall St. Journal focuses on how the New York Times dealt with a shareholder's campaign to improve the financial performance and governance at the newspaper.  For almost two years it rebuffed him, but finally Hassan Elmasry, a portfolio manager at Morgan Stanley with a 5% stake in the paper, got to meet with the full Board of Directors to discuss his recommendations for improvement.  Other companies watched and learned.  See WSJ, How a Money Manager Battled New York Times .

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

Private Equity Firms Go Retail

Private equity firms are buying up retailers.  The attraction is that they are mature businesses that generate a steady stream of income.  Apollo Management and Claire's Stores announced a $3.1 billion deal.  Earlier deals by other firms include Dollar General for $6.9 billion, and, at the other end of the spectrum, Neiman Marcus at $4.9 billion. See WSJ, Apollo to Acquire Claire's, .Adding to Retail Holdings

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

Tuesday, March 20, 2007

SEC March 21 Open Meeting Agenda

Agenda for SEC March 21 Open Meeting:

Item 1: Termination of a Foreign Private Issuer's Registration of a Class of Securities Under Section 12(g) and Duty to File Reports Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934

The Commission will consider whether to adopt a new rule that will enable a foreign private issuer meeting specified conditions to terminate its Securities Exchange Act of 1934 registration and reporting obligations under Section 12(g) regarding a class of equity securities and its Section 15(d) reporting obligations regarding a class of equity or debt securities. The Commission will also consider whether to adopt a rule amendment that will apply the exemption from Exchange Act registration under Rule 12g3-2(b) to a class of equity securities immediately upon the effective date of the issuer's termination of registration and reporting obligations under the new exit rule.

March 20, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Cyberkey Solutions with Securities Fraud

The Securities and Exchange Commission today announced a civil injunctive action alleging that a Utah-based corporation and its Chief Executive Officer made at least $1.5 million selling shares to investors while disseminating false claims of a lucrative purchase order from the Department of Homeland Security (DHS).

In its complaint, filed today in the United States District Court for the Eastern District of Pennsylvania, the Commission alleged that Cyberkey Solutions, Inc. of St. George, Utah, and its CEO James E. Plant, between November 2005 and the present, have engaged in an ongoing unregistered offering of Cyberkey shares, promoted with a series of false press releases describing a putative purchase order worth in excess of $24 million from DHS to buy Cyberkey’s flash memory drives. In fact, the Commission’s complaint alleges, Cyberkey had no business relationship at all with DHS. Additionally, according to the complaint, Cyberkey and Plant made other false statements to unsuspecting investors, including statements claiming Cyberkey had shipped products to DHS and received payments pursuant to the phony purchase order, and that Cyberkey was in the process of preparing and releasing audited financials.

March 20, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NASD Notice re. Portfolio Margin Risk Disclosure Statement

Portfolio Margin Risk Disclosure Statement and Written Acknowledgement to be Furnished to Customers Using a Portfolio Margin Account -- NASD Notice to Members 07-14 - March 2007

Executive Summary
As announced in Notice to Members (NTM) 07-11 (February 2007), recent amendments to NASD Rule 2520 (Margin Requirements) permit members to margin certain products according to a prescribed portfolio margin methodology on a pilot basis. Related amendments to Rule 2860 (Options) require that a disclosure statement and written acknowledgement for use with the proposed portfolio margin program be furnished to customers using a portfolio margin account. This Notice sets forth the language required for the written disclosure statement and acknowledgment pursuant to Rule 2860(c).

Member firms participating in, or planning to participate in, the Portfolio Margin Risk pilot program should refer to Attachment A of this Notice for sample disclosure and acknowledgement statements.

March 20, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Fifth Circuit Rejects Aiding and Abetting Claims Against Enron Investment Bankers

The Fifth Circuit has thrown out the Enron shareholders' securities fraud class action suit against three investment banking firms just weeks before the trial was set to begin. The Fifth Circuit held that at best the plaintiffs stated that the banks had aided and abetted the management's fraud, but that they owed no duty to the shareholders, thus rejecting plaintiffs' theory that the banks were primary participants of a scheme to defraud.  This may mark the end of the class action.  See WPost, Investors Defeated In Enron Decision Investment Banks Ruled Not Liable; NYTimes, Court Rejects Suit Against Enron Banks; WSJ, Enron Class-Action Lawsuit Blocked.

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

Economic Crime Punishable by Death in China

In China's new economy, financial frauds that harm small investors are taken seriously.  The Washington Post reports on the case of Wang Zhedong, who is sentenced to death for selling ant farms that he said contained valuable ants (used for medicinal purposes) for about $1300, when they were worth closer to $25.  See WPost, Ant Fraud Yields Death Sentence.   

March 20, 2007 in News Stories | Permalink | Comments (1) | TrackBack (0)

Monday, March 19, 2007

NASAA Announces Speakers for its Mar. 22 Symposium

The North American Securities Administrators Association, Inc. (NASAA) today announced panelists for its March 22 public symposium, “Protecting Investors and the Integrity of Financial Markets,” and also set plans to broadcast the event live on the Internet. The Symposium will be moderated by Mercer Bullard (U.Mississippi), a leader in the fight for shareholder rights, and will feature a diverse panel of experts to respond to recent suggestions that U.S. capital markets are losing their competitive edge because of burdensome regulations and regulators who are aggressively protecting investors. Panelists include:

James D. Cox, Professor, Duke University School of Law;
Tanya Solov, Illinois Director of Securities;
Willis Riccio, Partner, Adler, Pollock & Sheehan; 
Nancy Smith, Vice President, Investment Services, AARP Financial; and
Charles Prestwood, former Enron employee.

March 19, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

NASD Announces Updated BrokerCheck

NASD announced a updated version of its BrokerCheck public disclosure program that allows members of the public to obtain information about brokers.  Beginning today, NASD BrokerCheck is available online 24 hours a day, seven days a week. Vastly improved search options make finding an individual broker or firm faster and easier. When they find that a broker or firm has "disclosure events" such as criminal actions, customer complaints and disciplinary actions by regulators, investors no longer have to make a separate request for a disclosure report to be sent via email at a later time. Instead, the disclosure report is available online within seconds. Finally, an educational component has been added to the service, to help investors view any disclosure events in the appropriate context when evaluating a particular firm or broker.

March 19, 2007 in Other Regulatory Action | Permalink | Comments (1) | TrackBack (0)

Press Awaits Blackstone IPO

Blackstone Group, the private equity firm, has not even announced an IPO yet, but that doesn't stop the financial press from writing about it.  How much information about how private equity firms make their money will the general public learn from the mandated disclosure?  Not much, thinks the New York Times; see Behind the Veil at Blackstone? Probably Another Veil.  Enough to make other private firms nervous, suggests the Wall St. Journal, see Blackstone Plan Could Reshape Private EquityListing Would Require.

March 19, 2007 in News Stories | Permalink | Comments (0) | TrackBack (1)

New Century Financial Board's Role in Crisis Management

The Wall St. Journal focuses on the board of directors at New Century Financial Corp. in an article on the role of the independent directors when the corporation is in difficulty.  See WSJ, More Outside Directors Taking Lead in Crises.

March 19, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, March 18, 2007

Perspective on The Past Week's Stories

The debate over whether regulation is causing the US capital markets to become less competitive played out in two high-profile conferences in Washington D.C. this week -- Treasury Secretary Paulson's Capital Markets Conference and the U.S. Chamber of Commerce Conference -- although neither produced the headlines that perhaps their sponsors hoped for.  The crash and burn of New Century Financial Corp. epitomized the subprime mortgage industry as the NYSE suspended trading in its stock.  Finally, hedge funds, as always, got their share of attention -- Lehman Bros. bought a stake in D.E. Shaw hedge fund, The private equity firm Blackstone Group reportedly is planning an IPO, and the House Financial Services Committee holds a hearing. 

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

Amici Briefs in Tellabs Case

Here is a list of the amicus briefs filed in Tellabs, Inc. v. Makor Issues & Rights, Ltd., which will be argued before the U.S. Supreme Court on March 28.  The issue is the appropriate standard for determining whether plaintiff met the PSLRA requirement of pleading facts giving rise to a "strong inference of scienter."

Briefs for Respondents (the plaintiff):

  • Regents of the University of California, CALPERS and 7 law professors (Cox, Buxbaum, Frisch, Friedman, Partnoy, Steinberg, and Eisenberg)
  • NASAA
  • Amalgamated Bank as Trustee (oldest labor-owned bank)
  • Center for Study of Responsive Law and Public Citizen
  • German Association for the Protection of Shareholders, et al.
  • Council of Institutional Investors
  • Ohio and 23 other states, territories and commonwealths
  • Arkansas and 7 other states and 2 public retirement funds
  • New York State and other states' retirement funds
  • American Association for Justice
  • National Conference on Public Employee Retirement Systems and National Association of Shareholder and Consumer Attorneys
  • Allan N. Littman and William I. Edlund

The following were filed on behalf of Petitioner (defendant):

  • Washington Legal Foundation
  • American Institute of Certified Public Accountants et al.
  • New England Legal Foundation
  • Technet, The Information Technology, et al.
  • Joseph Grundfest et al
  • Pixelplus Co. and Quest Software
  • DOJ and SEC
  • SIFMA and U.S. Chamber of Commerce

March 18, 2007 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Accounting Scandals Scholarship

Corporate Governance Consequences of Accounting Scandals: Evidence from Top Management, CFO and Auditor Turnover by ANUP AGRAWAL University of Alabama - Culverhouse College of Commerce & Business Administration and TOMMY COOPER University of Alabama - Culverhouse College of Commerce & Business Administration, is now on SSRN.  Here is the abstract:

This paper examines the consequences of accounting scandals to top management, top financial officers, and outside auditors. We examine a sample of 518 U.S. public companies that announced earnings-decreasing restatements during the 1997-2002 time period and an industry-size matched sample of control firms. Using logistic regressions that control for other determinants of management turnover, we find strong evidence of greater turnover for CEOs, top management and CFOs of restating firms compared to the control sample. The magnitudes of these effects are even larger for restatements that are more serious, that have worse effects on stock prices, or that result in negative restated earnings. We find no consistent evidence that auditor turnover is higher for restating firms. Our paper provides evidence of efficient functioning of internal corporate governance mechanisms following a corporate disaster, and complements the literature on motives and causes of such disasters.

March 18, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (1)

Scholarship on Principles-Based Securities Regulation

New Governance, Compliance, and Principles-Based Securities Regulation  by CRISTIE L. FORD
University of British Columbia Faculty of Law; Columbia Law School , is now available on SSRN.  Here is the abstract:

The UK securities regulator, the Financial Services Authority, claims that its "principles-based" approach to securities regulation is simply "better" than what it characterizes as the prescriptive, rules-based American approach. The striking shift in financial sector business from New York to London over the last two years has brought the question of the wisdom of principles-based regulation into sharp relief. In fact, an FSA-style regulatory approach may also be taking hold in Canada, through the agency of the province of British Columbia. This paper examines BC's innovative proposals for a principles-based securities regime through the lens of New Governance theory. I argue that the BC approach is significant in that its outcome-oriented, collaborative, pragmatic, and open-ended methods share features with promising New Governance approaches to regulation and public problem-solving more generally. Principles-based regulation is especially noteworthy with regard to firm compliance processes, because it seeks to engage firms in their own endogenous learning about compliance. Moreover, New Governance is a necessary complement to principles-based securities regulation. It provides a rational, systematic means through which industry learning and the input of third party stakeholders can fill in the content of otherwise vague principles. This paper identifies, and develops provisional responses to, some of the challenges arising from applying New Governance theory to the specific context of securities regulation. Those challenges include justifying imposing on industry the costs of articulating the content of principles ex post (as opposed to rules, which impose costs on regulators/legislators ex ante); reconciling "light touch" regulation with a "rolling best practices rulemaking" regime; confirming that industry has incentives to innovate, particularly in compliance processes; and identifying means for addressing capacity issues associated with requiring diverse industry actors to interpret principles for themselves.

March 18, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)