Wednesday, April 4, 2007
DaimlerChrysler confirmed it was in talks to sell Chrysler with unidentified potential buyers. It will be unlikely to realize anything close to its 1998 purchase price of $36 billion. Chrysler lost $1.5 billion in 2006 and has a $19 billion liability for health care costs. See NYTimes, DaimlerChrysler in Talks on Chrysler; WSJ, DaimlerChrysler Confirms Talks Over Future of Chrysler Division.
Tuesday, April 3, 2007
On April 3, the SEC issued an Order Instituting Cease-and- Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934(Order) against Danny Edward Moudy. The Order finds that Moudy, during his tenure as the Chief Executive Officer of UCAP, Inc., knew or should have known that UCAP overstated mortgage revenue during fiscal year ended Sept. 30, 2002. Specifically, Moudy caused UCAP to record only half of an adjustment necessary to make the company's financial statements comply with generally accepted accounted principles (GAAP). Moudy knew or should have known that failing to record the full mortgage revenue adjustment enabled UCAP to meet improperly a key financial covenant required to save the company's sole line of credit. As a result, UCAP's 2002 Form 10-KSB understated the company's pre-tax loss by $378,000 or seven percent. Further, on Jan. 15, 2003, Moudy caused UCAP to issue an earnings release for fiscal 2002. Moudy should have known that the release incorrectly reported $730,000 in pre-tax income, excluding non-recurring restructuring charges, resulting in an overstatement of 107 percent. UCAP should have reported a pre-tax income, excluding non-recurring restructuring charges, of $353,000. The SEC settled related fraud charges against UCAP's former CFO and the former engagement partner of its outside auditor.
Tenet Healthcare, its former CFO, and former chief accounting officer settled SEC charges for failing to disclose that Tenet's revenues were inflated for a three-year period because of a loophole in the Medicare reimbursement system. The former general counsel did not settle. See WSJ, Tenet to Pay $10 Million to Settle SEC Charges Over Profit Disclosure.
New Century Financial, the poster child for the subprime mortgage industry, filed for bankruptcy protection yesterday. Last year, it issued about $51.6 billion of subprime mortgages. In recent weeks, the NYSE delisted its stock; lenders took back the mortgages that secured the company's financing, and some state regulators barred it from doing business in their states. See WPost, Huge Mortgage Lender Files for Bankruptcy; WSJ, New Century Buys Time With Bankruptcy Filing; NYTimes, Home Lender Is Seeking Bankruptcy.
First Data, the credit card processor, accepted KKR's offer to buy the company for $26 billion, the second largest LBO. Shareholders will receive $34 per share. See NYTimes, K.K.R. Offer of $26 Billion Is Accepted by First Data. The WSJ reports high trading volume in First Data call options and credit-default swap contracts before the public announcement, suggesting a leak of inside information. See WSJ, First Data Trades Suggest Leak.
As expected, the Tribune Co. accepted Sam Zell's offer to buy the company (excluding the Cubs baseball team), ending a long drawn out auction process. Shareholders will receive $34 per share, in a deal valued at about $13.2 billion (including assumption of debt). The buyout will be highly leveraged, leaving the company with about ten times its cash flow in debt, and will be accomplished through the vehicle of an ESOP. Newspapers noted the low break-up fee of $25 million, which suggests the possibility of further bidding.See WPost, Chicago Magnate To Control Tribune; NYTimes, Chicagoan Puts Up $315 Million to Win $8.2 Billion Tribune Co.; WSJ, Zell Wins Tribune In Bid to Revive A Media Empire.
Monday, April 2, 2007
The SEC released, on March 29, its Report on Refunds, Sales Practices and Revenues from Periodic Payment Plans that was required by section 4(c) of the Military Personnel Financial Services Protection Act. As you will recall, newspapers had publicized the fact that servicemen were talked into purchasing mutual funds that were so expensive that they hadn't been sold to the general public for years.
The SEC announced that on Feb. 28, 2007, the U.S. District Court for the Southern District of Ohio entered Final Judgments against defendants Steven E. Thorn (Thorn), Derrick McKinney (McKinney), Rick Malizia (Malizia) and his company, RMAZ, LLC (RMAZ), and Craig Morgan (Morgan) for their roles in raising approximately $75 million from investors in a series of fraudulent prime bank schemes and using investor funds to conduct a massive Ponzi scheme. The Court also entered a Final Judgment against Edgar Mojica (Mojica) in connection with his receipt of ill-gotten gains from the defendants during the fraudulent scheme. In a related criminal proceeding, Thorn was sentenced to 97 months in prison. The SEC alleged that from February 1998 through April 2001, the defendants and others raised approximately $75 million through the offer and sale of investments in a series of purported European bank trading programs. The defendants told investors that the programs involved the trading of bank instruments issued by foreign banks; they promised investors returns ranging as high as 200 percent per month; they assured investors that the investments were risk free; and they warned investors that participation in the trading programs required total secrecy and confidentiality. In reality, the defendants dissipated much of the investors' funds to pay personal and business expenses, purported returns to earlier investors, payments to the relief defendants, and undisclosed salaries and fees for themselves.
KKR has struck a deal to acquire First Data, the credit card processing company, for a price in the range of $24-$27 billion, the latest in a series of LBOs by private equity firms of large public companies with steady cash flows. Unlike many of the other recent deals ("club deals"), KKR has no partners in this LBO. See WSJ, KKR to Acquire First Data; NYTimes, Kohlberg Kravis Near Deal to Buy First Data.
Many corporations are providing their shareholders even more information about executive compensation than the SEC rules require, in the name of transparency. However, the additional compensation does not necessarily meet with the approval of activist shareholders, and it could be misleading. For example, Lucian Bebchuk criticizes profiles of El Paso executives, which include summaries of stock option grants and other information. See WSJ, Does It Pay to Tell Investors
Extra Compensation Details?
The Tribune board of directors met over the weekend to consider the competing bids of Sam Zell (at $33 per share) and Burkle/Broad (at $34 per share). It is reported that it has agreed to sell the company to Zell if he increases his bid again. See WSJ, Tribune Appears To Be Nearing A Deal With Zell; NYTimes, Real Estate Tycoon Increases Bid for Tribune; WPost, Suitor for Tribune Co. Raises Bid at 11th Hour.
Sunday, April 1, 2007
At least for securities regulation professors, the news this week was in the courtroom. The U.S. Supreme Court heard oral arguments in two important cases: Credit Suisse (does the 33 Act preempt the antitrust laws in the regulation of IPO practices) and Tellabs (what is the standard for pleading scienter under PSLRA). In addition, the Supreme Court has accepted certiorari in another securities case addressing again the aiding and abetting issue. In the lower courts, two trials got a great deal of attention -- Lord Conrad Black, on allegations that he treated Hollinger Int'l like his personal piggy bank, and Joseph Nacchio, on insider trading charges for selling Qwest Communications stock.
On the regulatory front, the SEC adopted a rule that will make it easier for foreign private issuers to deregister their shares.
New on SSRN: The Screening Effect of the Private Securities Litigation Reform Act, by STEPHEN J. CHOI, New York University - School of Law, KAREN K. NELSON, Rice University - Jesse H. Jones Graduate School of Management, and ADAM C. PRITCHARD, University of Michigan Law School. Here is the abstract:
Prior research shows that the PSLRA increased the significance of merit-related factors, such as the presence of an accounting restatement or insider selling, in determining the incidence and outcomes of securities fraud class actions. (Johnson, Nelson, and Pritchard, 2007). This result, however, is consistent with two possible hypotheses. First, the PSLRA may have reduced solely the incidence of non-meritorious litigation. Second, the PSLRA may have changed the definition of merit, effectively precluding claims that would have survived and produced a settlement pre-PSLRA. This paper tests these alternative hypotheses. We find that pre-PSLRA claims that settled for nuisance value would be less likely to be filed under the PSLRA regime. We also find, however, that pre-PSLRA non-nuisance claims would be less likely to be filed post-PSLRA period. The latter result, which we refer to as the screening effect, is particularly pronounced for claims lacking obvious hard evidence indicia of fraud (an accounting restatement or an SEC investigation). This screening effect is stronger if the claims also lacked evidence of abnormal insider trading. By contrast, we find that pre-PSLRA claims with hard evidence or abnormal insider trading would be no less likely to be filed in the post-PSLRA period. We also examine the likelihood of settlement for pre-PSRLA claims if they had been filed in the post-PSLRA period, and find a similar screening effect for case outcomes. We conclude that Congress effectively changed the definition of merit in adopting the PSLRA, discouraging suits that would have produced a non-nuisance outcome prior to the law's enactment.
New on SSRN: Reforming Punishment of Financial Reporting Fraud, by SAMUEL W. BUELL, Washington University School of Law . Here is the abstract:
Present sentencing law in criminal cases of financial reporting fraud is embarrassingly flawed. The problem is urgent given that courts are now regularly sentencing corporate offenders, sometimes (but sometimes not) to extremely punitive terms of imprisonment. Policing of fraud by multiple jurisdictions in a federal system means that principled sentencing law is necessary not only for first-order policy reasons but also for coordination of sanctioning efforts. Proportionality and rationality demand that sentencing law have an agreed scale for measuring cases of financial reporting fraud in relation to each other, a sound methodology for fixing a given case on that scale, and a reasoned calibration of that scale. Current federal law, which controls most such cases and is a focal point for non-federal cases and public debate, is close to sensible on the first score but far off the mark on the other two. In this contribution to a symposium on “Fraud and Federalism,” I describe problems in present law and offer relatively uncontroversial reform measures that could substantially improve the law governing sentencing of financial reporting fraud.
New on SSRN: Recent Changes in Disclosure Regulation: Description and Evidence, by JENNIFER E. BETHEL, Babson College. Here is the abstract:
Technology has dramatically reduced the cost of disclosing information to investors and created new conduits for securities' sales. The result is stock ownership, both direct and indirect, has never been more widely distributed. Equally important, changes have occurred in the institutional market for new offerings. Bought deals, Internet road shows, the preeminence of mutual funds and pension funds, and foreign investors and issuers have changed the market. In the wake of these changes, the SEC's disclosure policy has evolved. The evidence suggests we have moved from a world where information was released relatively infrequently and with significant lags to a world where information is released relatively rapidly on a continuous basis to as many investors as possible.
STEVEN M. DAVIDOFF, Wayne State University School of Law , has posted Securities Regulation Treasure Hunt on SSRN that should prove helpful to all teachers of securities regulation. Here is his abstract:
This is a treasure hunt I assigned my Spring 2007 securities regulation class. It was a successful pedagogical exercise. It not only provided hands-on practice locating SEC and other governmental sources, but the items required and questions asked (hopefully) forced them to think practically about the securities law issues previously covered. Not to mention that everyone had a fun time while learning.
I welcome comments or additional items. I will keep a database of them and update this post periodically for any colleagues who wish to use these materials.