Securities Law Prof Blog

Perspectives on The Past Week's Stories

The biggest stories include the SEC's deregulatory efforts on behalf of small companies.  The SEC has been under tremendous pressure to exempt small public companies from SOX section 404.  Instead, on Wednesday, it approved interpretive guidance that it expects will allow for reduced costs in implementing internal controls, particularly at smaller public companies.  The SEC says that companies should focus on what really matters -- risk and materiality.  It also said that smaller companies, which become subject to SOX 404 this year for the first time, should benefit from the "scalability" (I didn't know that was a word!) and flexibility of the new approach.  PCAOB provided similar relief for auditors at its Thursday meeting.

The SEC this week also proposed rules on capital-raising by small companies.  The proposed rules address recommendations made by the SEC's Advisory Committee on Smaller Public Companies and include:  a new system of securities regulation for smaller public companies (up to $75 million in public float); availability of shelf registration to companies with a float below $75 million; and a shortened holding period of six months under Rule 144 for restricted securities.

The other big news item is China's decision to invest in something other than U.S. Treasury bills.  It will purchase $3 billion of non-voting securities in private equity firm The Blackstone Group.  This will constitute a less than 10% stake in the firm, which is going public soon.

Dombalagian on Regulating Information

Licensing the Word on the Street: The SEC's Role in Regulating Information, by ONNIG H. DOMBALAGIAN, Tulane Law School, was recently posted on SSRN.  Here is the abstract:

Information is said to be the lifeblood of financial markets. Securities markets rely on corporate disclosures, quotes, prices, and indices, as well as the market structures, products and standards that give them meaning, for the efficient allocation of capital. The availability of and access to such information on reasonable terms is one of the essential characteristics of strong financial markets. And yet because information is a commodity, policymakers must balance the desire to provide access to such public goods against the need to maintain appropriate incentives for information producers.

The Securities and Exchange Commission faces the primary challenge of regulating the balance between the commercial and social value of information in securities markets. In some areas, the Commission has all but extinguished private rights. In other areas, it has deferred to federal or state intellectual property doctrines. In yet other areas, the SEC has created intricate entitlements tailored to historical market structures. Against this backdrop, self-regulatory bodies, securities intermediaries, and other entities have staked out proprietary claims in their information products as permitted by state and federal law.

Today, with the demutualization of the New York Stock Exchange and the Nasdaq Stock Market, as well as the completed and impending mergers of various national and international exchanges, we are rapidly moving away from the paradigm of the dominant national exchange to the reality of competing national and global trading venues. These changes in securities market structure are likely to generate numerous disputes over the allocation of rights and interests in securities information. It is thus increasingly urgent that the Commission articulate some statement of policy to govern the regulation of information rights.

Johnson & Brunet on Securiites Arbitration

Substantive Fairness in Securities Arbitration, by JENNIFER J. JOHNSON and EDWARD BRUNET, Lewis & Clark College - Law School, was recently posted on SSRN.  Here is the abstract:

Securities arbitration today is premised on the cliche that arbitrators will apply undefined "fair and equitable" standards of decision. We contend that fairness and equity cannot exist in a vacuum and that the rule of law provides the only sensible standard to guide securities arbitrators. Moreover, we argue that the rule of law provides the legitimizing foundation under which securities arbitration must occur.

We will develop two related propositions in this essay. The first is that to achieve fairness, securities arbitration needs procedures that apply substantive legal principles. We call this the need for substantive fairness.The second proposition, much more embedded in the real world, asserts that application of substantive law occurs sporadically and inconsistently in present-day securities arbitration.

We first set forth a theory of substantive adjudicatory fairness relying on mainstream modern legal philosophers such as John Rawls, Lon Fuller, Harry Jones, and Joseph Raz. In addition to unequivocally advocating a rule of law approach for adjudication, these theorists emphasize the relationship of the application of legal rules to notions of fair notice.

This essay next chronicles and critiques developments regarding standards of decision in modern securities arbitration. We examine the work of securities arbitration administrators and regulators as it relates to the goal of substantive fairness. We show that NASD has equivocated between allowing the arbitrators complete discretion to decide cases on any grounds they choose and providing directives for selected questions that only sometimes facilitate the application of legal principles. NASD has flirted with substantive law but intentionally avoided fully embracing it. We advocate a change in securities arbitration -- that of publically and systematically mandating application of the rule of law in NASD awards. Such a change is long overdue and would facilitate a shift to a fairer, less standardless arbitration of customer-broker dispute resolution.

A Slow News Day

Both the New York Times and the Wall St. Journal have long articles on big stories that do not, however, contain much new information.  If these stories particularly interest you or you think there's a detail you have missed, the Times highlights the dueling lawsuits at Dow Chemical relating to the conmpany's firing of two executives for allegedly shopping the company to private equity firms without board authorization; see A Duel at Dow Chemical.  The WSJ focuses on former SEC Chief Accountant Lynn Turner's recent departure from Glass Lewis because the firm was sold to a Chinese media company, Xinhua Financial.  Turner learned about the sale when he received an angry phone call from former SEC Chair Arthur Levitt asking Turner about it.  See A Star's Bombshell Exit From Glass Lewis.

SEC Prevails in Accounting Fraud Case Involving Insurance

Timothy Harcharik, director of risk management at Brightpoint Inc., was found liable for violating the securities laws because of his involvement in the company's use of insurance to hide the company's losses.  AIG previously settled DOJ and SEC charges that it sold insurance products to companies, including Brightpoint, to inflate earnings.  See NYTimes, S.E.C. Wins Verdict on Insurance Abuse

SEC's Donohue Speaks on Hedge Fund Regulation

Andrew J. Donohue, Director, Division of Investment Management, U.S. Securities and Exchange Commission, spoke at a SIFMA conference on regulatory developments in the hedge fund industry.

Overstock Directors Resign Because of Lawsuit

Two directors have now resigned from Overstock.com Inc.'s board of directors because of CEO Patrick Byrnes's $3.5 billion lawsuit against several major brokerage firms alleging a market manipulation scheme that drove down the price of the company's stock.  Ray Groves was the latest, resigning Thursday.  Byrnes calls the lawsuit his "jihad," other executives have spoken out against the lawsuit, including Byrnes's father, who had been chair.  See WSJ, Overstock Director Resigns,Citing Suit Against Brokers.

SEC Investigation into Dow Chemical

Remember the recent firing by Dow Chemical of two longtime executives, Romeo Kreinberg and J. Pedro Reinhard, for allegedly engaging in unauthorized talks to sell the company?  That has led to suits and counter-suits between Dow Chemical and the former executives.  Now the SEC has opened an inquiry into the matter and is also investigating suspicious trading in the stock of both Dow Chemical and DuPont last fall when Dow Chemical was making undisclosed overtures to take over DuPont.  See NYTimes, Investigation Is Said to Open on Dow Chemical.

PCAOB Eases Auditing Standard on internal Controls

PCAOB voted to reduce the costs of auditors' internal controls reviews mandated by Sarbanes Oxley section 404.  The changes are subject to SEC approval, which earlier this week issued management guidance reducing the burdens of complying with section 404.  See WSJ, Sarbanes-Oxley Audit Rules Likely to Ease.

NYSE Proposal to End Broker Voting Excludes Mutual Funds

Last fall the NYSE proposed a controversial change that would change current practice and bar brokers from voting shares when shareholders do not in uncontested directors' elections. Yesterday it announced that it has been revised to exclude mutual funds, in response to objections by the mutual fund industry based on the increased costs that would result from requiring shareholder solicitation to vote.  Smaller companies, however, who raised similar concerns, are not exempted from the proposal.  See WSJ, Mutual Funds Sway NYSE on Vote Plan.

NASDAQ Will Acquire Nordic Exchange

NASDAQ failed in its attempt to buy the London Stock Exchange, so instead it's buying Nordic exchange operator OMX AB?  OMX operates exchanges in Scandanavia and the Baltic region and also operates trading systems for other exchanges, including the Hong Kong exchange.  The acquisition may be a prelude to a renewed effort by NASDAQ to acquire LSE.  See WSJ, For Nasdaq, a Nordic Track.

House Continues Investigation into Sallie Mae Stock Sale

The House Education Committee has been investigating Sallie Mae head Alfred Lord's sale of 400,000 shares in February, just days before President Bush announced cuts in government subsidies and a resulting drop in the stock price.  Yesterday it released a Sallie Mae document disclosing a December meeting between Sallie Mae mid-level executives and government budget officials.  The company maintains that budget cuts were not discussed, Lord was not briefed on the meeting, and the timing of the stock sale was coincidence.  In recent months Sallie Mae agreed to a private equity deal for $25 billion.  It also replaced its CEO Thomas Fitzpatrick in an effort to improve its dealings with the Democratic majority.  See WPost, OMB Talks Preceded Sallie Mae Stock Sale. 

SEC Proposed Rules for Smaller Company Capital-Raising

PROPOSED  MODERNIZATION  OF  SMALLER   COMPANY   CAPITAL-RAISING   AND DISCLOSURE REQUIREMENTS:

On May 23, the Commission proposed a series of six  measures  to  modernize  and  improve  its capital  raising  and reporting requirements for smaller companies. Many  of  the  proposals address key recommendations made by the SEC's  Advisory  Committee  on Smaller Public Companies in its final report. They include:

        * A new  system  of  securities  regulation  for  smaller  public companies that would make scaled regulation available to  a  much larger group of smaller public companies;

        * Modified eligibility requirements so companies  with  a  public float below $75 million can take advantage  of  the  benefits  of shelf registration;

        * A new exemption from Securities Act  registration  requirements for sales of securities to a newly defined category of "qualified purchasers" in which limited advertising would be permitted;

        * Shortened holding periods under Securities  Act  Rule  144  for restricted securities to  reduce  the  cost  of  capital  and  to increase access to capital;

        * New exemptions  for  compensatory  employee  stock  options  so Exchange Act registration requirements  would  not  be  triggered solely by a company's compensation decisions; and

        * Electronic filing of the form filed by companies making private or limited offerings to ease burdens  for  filers  and  make  the information filed more readily available.

Roundtable with Former SEC Chairs

I wanted to find out what Chair Cox and five former SEC chairs talked about in last night's Roundtable.  The only account I could find is posted on CFO.com which says they chatted about international accounting standards and hedge funds and agreed that problems with hedge funds are sure to come.

Corp Fin Guidance Updated

The SEC's Division of Corporation Finance has updated its guidance under Exchange Act Section 16 and Related Rules and Forms.

SEC Announces Roundtable on Selective Mutual Recognition

The Securities and Exchange Commission announced today that it will host a roundtable discussion in June on the topic of selective mutual recognition. Selective mutual recognition would involve the SEC permitting certain types of foreign financial intermediaries to provide services to U.S. investors under an abbreviated registration system, provided those entities are supervised in a foreign jurisdiction under a securities regulatory regime substantially comparable (but not necessarily identical) to that in the United States. The roundtable will explore whether selective mutual recognition would benefit U.S. investors by providing greater cross-border access to foreign investment opportunities while preserving investor protection.

The roundtable will take place on June 12, 2007, and will consist of a series of panels designed to reflect the views of different constituencies, including investors, exchanges, and broker-dealers. A separate panel also will consider the issue of how the SEC can best assess regulatory comparability and convergence.

SEC Adopts Final Rules under Credit Rating Agency Reform Act

The Securities and Exchange Commission today voted to adopt final rules to implement provisions of the Credit Rating Agency Reform Act of 2006 (Public Law No. 109-291), which was enacted on Sept. 29, 2006. The Credit Rating Agency Reform Act defines the term "nationally recognized statistical rating organization" (NRSRO), provides authority for the Commission to implement registration, recordkeeping, financial reporting, and oversight rules with respect to registered credit rating agencies, and directs the Commission to issue final rules no later than 270 days after its enactment (or by June 26, 2007).

"The goal of this new law is to improve credit ratings quality by fostering competition, accountability, and transparency in the credit rating industry," said SEC Chairman Christopher Cox. "The heart of the Act calls on the Commission to replace the barriers to entry that had previously existed. The replacement is a transparent and voluntary Commission registration system that favors no particular business model."

Dow Jones Director States Opposition to Murdoch Bid

There hasn't been much to report about Rupert Murdoch's bid for Dow Jones lately.  A branch of the Bancroft family (the controlling shareholders, in case anyone has forgotten) called a family meeting for Wednesday to discuss options, but many did not attend.  One of the non-attendees, Christopher Bancroft, who is a Dow Jones director and a trustee of one of the family trusts, made his first public statement about the bid, saying he opposes it because he fears loss of journalistic independence.  See WSJ, Key Dow Jones Holder Cites Opposition To Murdoch Bid.

Qwest Shareholders Vote Down "Say on Pay"

Qwest Communications shareholders voted down three shareholders' proposals relating to executive compensation, including a "say on pay" proposal that was defeated 67% to 20%.  See NYTimes, Qwest Holders Reject Proposals on Pay.

Warren Buffett's Search for a Successor Turns into The Apprentice

Austan Goolsbee, economics professor at the University of Chicago Graduate School of Business, has a column in today's New York Times in which he expresses his disillusionment about Warren Buffet.   Mr. Buffett has announced a competition to pick his successor.  The top candidates will have a $5 billion portfolio to manage for two years, and the best performer gets the job.  This defies the empirical evidence that incentives skew performance and makes Mr. Buffett seem as cheesy as Donald Trump.  In addition, Berkshire Hathaway's publicly traded Class B shares have not outperformed the S&P 500, says Professor Goolsbee.  See NYTimes, ‘The Apprentice: Omaha Edition,’ Starring Warren Buffett.

SEC Approves Guidance on SOX 404

Today the SEC unanimously approved guidance for management to use in evaluating internal controls over financial reporting.  The guidance is intended to make it easier to comply with section 404 and reduce the costs of compliance.  One of the biggest cost reductions is expected to come from a rule that will require auditors to provide only one opinion on internal controls, instead of the currently required two -- one on the controls, one on management's process in assessing the controls.  Tomorrow PCAOB is expected to approve a comparable standard for auditors.  See WSJ, SEC Approves Guidance To Ease Sarbanes-Oxley Rules.

Hewlett-Packard Settles Charges re. Director's Resignation

The Securities and Exchange Commission today filed settled administrative charges against Hewlett-Packard Company for failing to disclose the reasons for a director’s abrupt resignation in the midst of HP’s controversial investigation into boardroom leaks. The Commission found that several months before the public revelation of the company’s leak investigation, an HP director objected to the company’s handling of the matter and resigned from the Board, yet HP failed to disclose the reasons for his resignation as required by federal securities laws. The Commission’s Order charges HP with violating the public reporting requirements of the Securities Exchange Act of 1934. Without admitting or denying the Commission’s findings, HP consented to an order that it cease and desist from committing or causing violations of these provisions.

Opening Remarks from SEC Open Meeting on Internal Controls

Excerpts from Statement by SEC Staff: SEC's Proposed Interpretive Guidance to Management for Section 404 of Sarbanes-Oxley Act, by Zoe-Vonna Palmrose, Deputy Chief Accountant, U.S. Securities and Exchange Commission, SEC Open Meeting, Washington, D.C., May 23, 2007:

The Commission's proposed interpretive guidance was centered around two broad principles. These principles have not changed in the guidance we are presenting today. The first principle is that management should evaluate whether it has implemented controls that adequately address the risk that a material misstatement in the financial statements would not be prevented or detected in a timely manner. The second principle is that management's evaluation of evidence about the operation of its controls should be based on its assessment of risk. Under the guidance, management can align the nature and extent of its evaluation procedures with those areas of financial reporting that pose the highest risks to reliable financial reporting (that is, whether the financial statements are materially accurate). As a result, management may be able to use more efficient approaches to gathering evidence, such as self-assessments, in low-risk areas and perform more extensive testing in high-risk areas. By following these two principles, we believe companies of all sizes and complexities will be able to implement our rules effectively and efficiently....

Nonetheless, based on the comments received, we did make modifications to the proposed interpretive guidance in a number of areas. For example, we made revisions to better align it with the PCAOB's proposed auditing standard, to provide clarification on the role of entity-level controls, as well as on the nature of on-going monitoring activities in relation to management's evaluation, and to enhance the guidance on fraud risk considerations.

SEC Recognizes Rating and Investment Information as NRSRO

In a May 21, 2007 no-action letter, the SEC's Division of Market Regulation recognizes Rating and Investment Information, Inc. as a nationally recognized statistical rating organization.  This allows broker-dealers to consider its credit ratings for purposes of the net capital rule.

SEC Announces Agendas and Panelists for Proxy Roundtables

The Securities and Exchange Commission today announced the agendas and participants for the final two roundtables in its series of roundtables on the proxy process. The Roundtable on Proxy Voting Mechanics, scheduled for May 24, 2007, from 9:00 a.m. to 12:30 p.m., will cover topics including: (1) share ownership and voting; (2) broker proxy voting; and (3) shareholder communications.
The Roundtable on Proposals of Shareholders, scheduled for May 25, 2007, from 9:00 a.m. to 12:30 p.m., will cover topics including: (1) state law rights of shareholders; (2) communication between shareholders and the company; and (3) the relationship between state law rights and the federal proxy rules.  See the press release for the complete list of panelists.

BISYS Group Settles Financial Reporting, Internal Controls Charges

The Securities and Exchange Commission announced today the filing and settlement of charges that The BISYS Group, Inc., a leading provider of financial products and support services, violated the financial reporting, books-and-records, and internal control provisions of the Securities Exchange Act of 1934. BISYS has agreed to settle the case, without admitting or denying the Commission's allegations. The company will consent to the entry of a judgment upon charges of violating the reporting, books-and-records and internal controls provisions of the securities laws. It has agreed pay approximately $25 million in disgorgement and prejudgment interest.

Mark K. Schonfeld, Director of the Commission's New York Regional Office, said, "This is a case study in internal control failures under earnings pressure. The settlement delivers meaningful relief to investors harmed by BISYS's misconduct."

MGM Mirage Forms Independent Committee to Study Kerkorian's Bid

MGM Mirage announced that it has set up a committee of independent directors to study controlling shareholder Kirk Kerkorian's offer to buy two properties (including the Bellagio) and possibly a restructuring of the company.  There is speculation that Kerkorian's bid will lead to an auction for the whole company.  See WSJ, Kerkorian Sets Up Delicate Dance at MGM and NYTimes, MGM Mirage Forms Independent Board to Study Kerkorian Offer. 

Hedge Fund Investors Charge UBS With Harm to Fund

Investors in failed hedge fund Wood River are suing prime broker UBS, saying it used confidential information about the fund's portfolio to make money for itself at the expense of the fund.  Wood River owned an undisclosed large block of stock in Endwave, which violated both section 13(d) and its own publicly-stated policy against concentrating more than 10% of its portfolio in one stock.  The complaint charges that UBS knew management was violating the rules, but instead of taking steps to cure the problem, it used the Endwave shares to assist short sellers in the stock and made $100 million in profits.  The founder of the hedge fund, John Whittier, is charged with criminal fraud for the fund's violations of its investment policies.  See WSJ, Lawsuit Against UBS Spotlights Prime Brokers.

Securities Fraud Judgment Against C.E.C. Industries Officers

On May 8, 2007, the Honorable Henry H. Kennedy, U.S. District Judge for the District of Columbia, entered judgment against defendants Gerald H. Levine and Marie A. Levine in the Commission's litigation against them for violations of the federal securities laws. In addition to finding both Levines liable for securities fraud and other federal securities law violations, the Court held the defendants jointly and severally liable for disgorgement of $217,368.59 plus prejudgment interest and ordered them to pay, jointly and severally, a civil penalty of $200,000. The Court also enjoined the Levines for a period of ten years from violating the anti-fraud provisions of the federal securities laws, and barred each of them for a period of ten years from serving as an officer or director of a public company.

The judgment followed a December 2006 hearing during which the Court heard evidence on what remedies should be imposed as a result of the October 2003 jury verdict that found that the defendants had fraudulently overstated the assets of C.E.C. Industries Corporation (CEC) and filed false annual and quarterly reports with the Commission. In his Findings of Fact and Conclusions of Law, Judge Kennedy stated, among other things, that "[t]he Levines undertook a complex scheme of stealth and concealment by which they defrauded investors and brought financial gain to themselves," and that they were the "undisputed kingpins" of the scheme. Judge Kennedy further stated the Levines "utterly failed to acknowledge their wrongdoing or show contrition."  For further information, see the SEC press release.

SEC Roundtable of former SEC Chairs

SEC Chairman Christopher Cox today announced that on May 23, 2007, from 5-6 p.m., five former chairmen of the U.S. Securities and Exchange Commission will join him for a roundtable discussion. In addition to Chairman Cox, roundtable participants will include: William H. Donaldson, 2003-05, Chairman, Donaldson Enterprises; Roderick M. Hills, 1975-77, Partner, Hills and Stern LLP; Arthur Levitt, 1993-2001, Senior Advisor, The Carlyle Group; Harvey L. Pitt, 2001-03, CEO and Founder of Kalorama Partners; and David S. Ruder, 1987-89, William W. Gurley Memorial Professor of Law at Northwestern School of Law.

For additional information, see the SEC press release, but don't look for an agenda, because one was not included.      

Ownership Questions at the Proxy Advisory Firms

Who owns the proxy advisory firms, and does it affect the quality of their services?  A Wall St. Journal article today explores these questions and looks at the two leaders, Glass Lewis & Co. and Institutional Shareholder Services.  Glass Lewis is wholly owned by Shanghahi's Xinhua Finance Ltd., rising concerns about the influence of the Chinese government.  Two employees -- Lynn Turner (former SEC chief accountant) and Jonathan Weil (former WSJ reporter)-- recently resigned, citing concerns with the parent company's conduct.  ISS, in turn, is owned by risk management firm RiskMetrics Group, that purportedly is considering an IPO.  The longstanding concern about ISS is the conflict of interest between its proxy advisory services, where it advises shareholders how to vote on corporate governance matters, and its consulting services, where it advises companies on how to improve their corporate governance policies.  The conflict could be exacerbated if ISS goes public.  See WSJ, Proxy-Advisory Firms Encounter Concerns on Owners' Influence.

"Big Boy" Letters under Legal Scrutiny

Jenny Anderson's column in today's New York Times explores the disclosure duties relating to the use of "big boy" letters -- a promise by the purchaser not to sue the seller frequently used in private sales of securities.  In a case scheduled to go to trial in New York next month, a hedge fund, R2, is suing Smith Barney, which sold $20 million of World Access bonds while in possession of confidential information about the company's distressed financial situation.  The initial purchaser, the Jefferies Group, resold the bonds to R2, without disclosing the existence of the "big boy" letter it agreed to sign.  Two days later the World Access bonds plummeted in value.  Lawyers interviewed by Ms. Anderson divided on whether Smith Barney and the Jefferies Group acted improperly.  See NYTimes, Side Deals in a Gray Area.   

NYSE's Ketchum on NYSE-NASD Consolidation

Richard G. Ketchum, Chief Executive Officer, NYSE Regulation, Inc. On “Consolidation of NASD and the Regulatory Functions of the NYSE: Working Towards Improved Regulation,” May 17, 2007 Testimony Given before the Subcommittee on Securities, Insurance and Investment of the U.S. Senate Committee on Banking, Housing and Urban Affairs

SEC Historical Society Broadcast on Insider Trading

Online Broadcast Tomorrow at www.sechistorical.org

Fireside Chat: Insider Trading - Tuesday, May 22nd - 3:00 pm ET.
Learn more about the persistence of insider trading fraud and why the SEC views it as the "capital crime" of securities regulation by joining Mark Radke of LeBoeuf Lamb Greene & MacRae LLP, a former Chief of Staff to SEC Chairman Harvey Pitt; and Donna Nagy of Indiana University School of Law in discussion with moderator Professor Theresa Gabaldon of The George Washington University School of Law. The Fireside Chat is available free of charge; no advance registration is required.

China Will Invest in Private Equity Firm

China is going to diversify its portfolio beyond U.S. Treasury bills and make a $3 billion investment in The Blackstone Group.  It will make the purchase of non-voting shares as part of The Blackstone Group's upcoming IPO.  The stake will be less than 10% of the firm, and China will agree to hold it for four years.  See NYTimes, China to Buy a Stake in Blackstone; WSJ, China Puts Cash To Work in Deal With Blackstone.

Alltel Latest to Announce LBO

Alltel Corp., the wireless phone company known for its "My Circle" plan, is the latest public company to announce a LBO.  Two private equity firms have offered to pay $71.50 per share, for a total of $27.51 billion, the largest buyout in the wireless industry.  See NYTimes, Equity Firms to Buy Alltel in $27.5 Billion Deal; WSJ, TPG, Goldman Arm Land Alltel.

Perspectives on the Past Week's News

The big news this week is Cerberus's winning bid to take Chrysler off the hands of Daimler Chrysler by purchasing a 80.1% interest.  Daimler Chrysler is so relieved to undo the 9-year merger that it is investing an additional $677 million in the company.  Other U.S. auto makers are hopeful that Chrysler can make a deal with the unions about pension and health care benefits that will be helpful to them all.  Other note-worthy events include two decisions to take no action.  The SEC, to the outrage of the brokerage industry, decided not to seek rehearing of the D.C. Circuit's decision in FPA v. SEC (invalidating the exemption from the Investment Advisers Act for brokerage fee-based accounts).  The Dow Jones board of directors decided not to take any action on Murdoch's bid so long as a majority of the voting control remains opposed to the bid.

Rapp on SOX Whistleblowers

Recently posted on SSRN:   Beyond Protection: Invigorating Incentives for Sarbanes-Oxley Corporate and Securities Fraud Whistleblowers, by GEOFFREY CHRISTOPHER RAPP, University of Toledo - College of Law . 

Abstract:      

Section 806 of the Sarbanes-Oxley Act of 2002 (“SOX”) recognized the importance of private actors in bringing to light information about corporate financial and accounting fraud. That section provides some protection for whistleblowers against retaliation for objecting to, and reporting, violations of the federal securities laws. While this limited protection is a step in the right direction, current law does not go far enough to encourage whistleblowers to risk incurring the adverse social, psychological, and economic consequences of exposing serious corporate and securities fraud. This Article develops the “bounty” model for rewarding SOX whistleblowers, and argues that sound public policy counsels its adoption and implementation. By giving whistleblowers a share of the recovery of those damaged by corporate and financial fraud (a “bounty”), the law could increase incentives for whistleblowing. The federal False Claims Act provides a sensible precedent.

Bainbridge on Shareholder Voting Rights

Recently posted on SSRN: The Scope of the Sec's Authority Over Shareholder Voting Rights, by STEPHEN M. BAINBRIDGE, University of California, Los Angeles - School of Law.

Abstract:   

At a May 2007 Roundtable on "The Federal Proxy Rules and State Corporation Law," the Securities and Exchange Commission posed the following question for discussion: "What should be the relationship of federal and state law with respect to shareholders' voting rights and ability to govern the corporation?" To answer that question, this essay reviews the legislative history of Section 14(a) and of the Securities Exchange Act generally, as well as the leading judicial precedents. It concludes that, as a general rule of thumb, federal law appropriately is concerned mainly with disclosure obligations, as well as procedural and antifraud rules designed to make disclosure more effective. In contrast, regulating the substance of corporate governance standards is a matter for state corporation law.

The author was an invited panelist at the May 7th Roundtable and submitted this essay as his written comments.

Simkovic on Open Market Stock Repurchases

Recently posted on SSRN:  The Effect of Enhanced Disclosure on Open Market Stock Repurchases, by MICHAEL SIMKOVIC, John M. Olin Center for Law and Economics at Harvard Law School; McKinsey & Co. (starting September 2007) 

Abstract: 

Publicly traded companies distribute cash to shareholders primarily in two ways - either through dividends or through anonymous repurchases of the companies' own stock on the open market. Companies must announce a repurchase authorization, but do not actually have to repurchase any stock, and until recently did not have to disclose whether or not they were in fact repurchasing any stock. Scholars and regulators noticed that companies frequently announced repurchases but then appeared not to complete them. Scholars and regulators became concerned that such announcements might be used by insiders to exploit public investors. To increase transparency and reduce opportunities for exploitive behavior, the SEC required that companies disclose their repurchase activity for the past quarter in their 10-Q and 10-K filings beginning in January 2004. This paper tracks the 365 repurchase programs announced in 2004 and finds that since the SEC disclosure requirement went into effect, companies are more likely to complete their announced repurchases and do so within a shorter time period after the repurchase announcement.