Securities Law Prof Blog

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

Saturday, June 9, 2007

Will the US Take A Stand on Scheme Liability?

What position will the U.S. take on "scheme liability" under Rule 10b-5?  The Washington Post reported last week that the SEC voted to file a brief with the Supreme Court on the side of investors in the Charter Communications case, arguing that a participant's involvement in a scheme could be so extensive that he is a primary violator and not just an aider-and-abetter against whom private parties cannot recover.  The SEC asserted this position several years ago in the Enron litigation.  However, the Treasury Department has urged the government to take a contrary position, reflecting Secretary Paulson's concerns that regulation and liability are having an adverse competitive effect on US markets.  The decision rests with the Solicitor General's office, and we should know on Monday when briefs for the investors are due.  See WPost, Investors, Advocates Worry About U.S. Position on Fraud Recovery

June 9, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Friday, June 8, 2007

SEC Will Impose Hefty Penalty on Nortel for Financial Fraud

The Wall St. Journal reports that the SEC will fine Nortel $100 million for accounting fraud violations.  Nortel restated its financial results in 2005 and admitted that it overstated its revenues by $3.4 billion.  If this report is true (WSJ attributes it to an inside source at Nortel), it should dispel the notion that the SEC's new policy requiring enforcement staff to seek approval before beginning settlement negotiations that could include a corporate penalty would result in lower amounts.   See WSJ, SEC Plans to Fine Nortel Up to $100 Million for Fraud.

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

PCAOB Proposed Auditing Standard No. 5 Filed with SEC

PCAOB filed with the SEC a proposed rule on Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That is Integrated with an Audit of Financial Statements, and Related Independence Rule and Conforming Amendments.

June 8, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Panelists for SEC Roundtable on Mutual Recognition

The SEC announced the final agenda and participants for the upcoming roundtable on mutual recognition scheduled for June 12, 2007.  The roundtable will examine how retail and institutional investors, U.S. and non-U.S. exchanges, global and regional broker-dealers, and others may be impacted by a selective mutual recognition regulatory regime. In addition, a separate panel will consider the issue of how the SEC can best assess regulatory comparability and convergence.

The roundtable will begin at 9 a.m. with opening remarks by SEC Chairman Christopher Cox. The agenda and participants are as follows:

9:15 a.m.
The Impact on U.S. Market Participants of Increased Foreign Market Access
Moderators: Erik Sirri, Director, Division of Market Regulation
John White, Director, Division of Corporation Finance

Stephen E. Bepler, Capital Research and Management Company
Duane Kelly, Vanguard Group
Catherine R. Kinney, NYSE Euronext
Chris Concannon, The NASDAQ Stock Market, Inc.
Meyer S. Frucher, Philadelphia Stock Exchange
Jonathan Howell, London Stock Exchange
Roberta Karmel, Brooklyn Law School

11:15 a.m.
The Impact on U.S. Market Participants of Increased Foreign Broker-Dealer Access to U.S. Investors
Moderators: Erik Sirri, Director, Division of Market Regulation
Ethiopis Tafara, Director, Office of International Affairs

Harold Evensky, Evensky & Katz
Edward F. Greene, Citigroup
David Grayson, Auerbach Grayson & Co.
Christopher Amato, E* Trade
James R. Allen, Hilliard Lyons
David Aufhauser, UBS Investment Bank

2:00 p.m.
Defining and Measuring the Comparability of Regulatory Regimes
Moderators: Ethiopis Tafara, Director, Office of International Affairs
Erik Sirri, Director, Division of Market Regulation

Harvey L. Pitt, Kalorama Partners, LLC
Alan L. Beller, Cleary Gottlieb
Richard G. Ketchum, NYSE Regulation Inc.
Allen Ferrell, Harvard Law School
David Ruder, Northwestern University School of Law

Real time and archived audio webcasts will be accessible at Materials related to the roundtable including the day's agenda, the list of panelists, and the comments that have been received by the Commission will be accessible at

June 8, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

European Investors Want Spinoffs

A shareholders' group at UK's Vodafone is calling for management for a restructuring, including a possible sale or spin-off of Vodafone's 45% interest in Verizon Wireless.  A number of European companies are being pressured by activist shareholders to sell all or part of themselves.  See WSJ, Agitation at Vodafone Shows Activists Can Be Small or Big; NYTimes, Vodafone Investors Seek Verizon Wireless Spinoff.

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

"Buyout Fatigue?"

Could rising interest rates and falling stock prices put a stop to the private equity deals?  A whopping $250 billion will be raised in coming months in high yield bonds and other debt to finance buyouts, but some report "buyout fatigue."  See WSJ, Market Pressures Test Resilience Of Buyout  Boom.  In addition, some savvy shareholders are learning to hold out for higher stock prices, making deals more expensive.  The sweetened bid for Biomet is the latest example of this trend; see NY Times, Biomet Accepts Sweetened Takeover Offer.

Meanwhile, there are signs of more failed LBOs.  Companies that have gone private are generating cash that exceeds their debt interest payments by just 1.7 times -- a ten-year low.  (It was 2.4 times last year, and 3.4 times two years ago.)  The Wall St. Journal also reports on several LBOs that are in trouble, including Linens 'n' Things, the Star Tribune in Minneapolis, Freescale Semiconductor Holdings, and Realogy.  See WSJ, Boom Aside, Not All LBOsLook So Hot.

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

Thursday, June 7, 2007

Wynn and Analog Announce Stock Buybacks

Two big stock repurchase programs announced:  Wynn Resorts approved a repurchase program (for both its common stock and convertible debentures) up to $1.2 billion, and Analog Devices approved an additional $1 billion to its repurchase authorization, bringing it to $1.4 billion.  More to follow if markets continue to drop?  See Wynn, Analog Buybacks: Start of a Surge?

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

Activision Reports SEC Investigation into Backdating

Activision reported in its 10-Q that the SEC has begun a formal investigation into the company's stock option grant practices.  Earlier this year the company reported that a special committee found instances of backdating from 1994 through 2006 and that four unnamed individuals -- including former heads of legal, finance, and human resources and an outside legal advisor -- were implicated.  See, SEC Probes Activision's Stock-Option Practices.

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

Cox Reviews New Auditing Standard with Audit Committee Members

SEC Chair Cox, in Remarks to the Annual Meeting of the Association of Audit Committee Members on June 1, walked through the improvements to PCAOB's new auditing standard that will replace AS 2.

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

Another Bidder for Dow Jones Emerges?

Brian Tierney, who last year purchased two Philadelphia newspapers, said he didn't think the Murdoch bid for Dow Jones was overpriced and that "if there were an explicit process we would be inclined to participate in conjunction with others."  See WSJ, Media Executive Shows Interest in Dow Jones.

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

Hedge Funds Say Bear Stearns Manipulated Subprime Loans Market

Did Bear Stearns act improperly in buying up weak subprime loans to prop up the sinking market for securities backed by subprime loans?  Some hedge funds that were betting against the market through their purchase of credit default swaps (CDS) think so and also complain about Bear's proposal to the International Swaps & Derivatives Association to change its rules expressly to permit this practice.  See WSJ, The Sure Bet Turns Bad.

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

Wednesday, June 6, 2007

NASD Fines Citigroup for Misleading Retirement Seminars at BellSouth

NASD announced today that it has fined Citigroup Global Markets, Inc., $3 million to settle charges relating to the use of misleading materials in retirement seminars and meetings for BellSouth employees in North Carolina and South Carolina. NASD also ordered Citigroup to pay approximately $12.2 million in restitution to more than 200 former BellSouth employees.

Specifically, NASD found that Citigroup failed to adequately supervise a team of brokers based in Charlotte, NC, who used misleading sales materials during dozens of seminars and meetings for hundreds of employees of BellSouth Corporation. As a result of these presentations, more than 400 BellSouth employees opened over 1,100 accounts with the Citigroup brokers. Most of these employees were unsophisticated investors with minimal experience in the financial markets who retired in their mid-50s, well before the BellSouth retirement age of 62. They generally were of modest means, with retirement savings of less than $350,000. These employees typically cashed out their pensions and 401(k) accounts, and invested these proceeds and other retirement assets with the Citigroup brokers.
NASD found that from 1994 to 2002 the brokers conducted more than 40 seminars, without obtaining firm approval for the seminars or seminar sales materials. Following the seminars, they met with BellSouth employees. Using charts, graphs, handouts and other documents at the seminars and meetings, the brokers' sales presentations led the employees to expect that for 30 years they could earn approximately 12 percent annually on their investments and withdraw approximately 9 percent annually.

One document projected the amount a generic 53-year-old BellSouth employee would earn from an initial investment of $300,000. The projection sheet suggested that this typical employee would earn more than $1.8 million, could withdraw from $27,000 to $69,000 annually, and still have more than $770,000 in principal remaining 30 years later, at age 83. During their face-to-face meetings, many employees received a customized version of this document, which projected the amount of money the employee could expect to have after 30 years, based upon the employee's current age, assets and monthly expenses. A broker told one couple: "I'm going to tell you by way of expectations that you should be able to expect 12%. That is not guaranteed, but I feel like good times, bad times, ugly times, beautiful times, we should be able to average 12 . . . We expect to earn 12%. We pay out 9%. … [b]asically, 10 years down the road you are looking at doubling your money. … We may do 15, may do 18 or 20. But good times, bad times, I think that we would do 12%."  See Citigroup Global Markets to Pay Over $15 Million to Settle Charges Relating to Misleading Documents and Inadequate Disclosure in Retirement Seminars, Meetings for BellSouth Employees.

June 6, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Prudential Finance Will Shut Down Equity Trading Business

Insurance company Prudential Financial has apparently concluded that equity research and trading is not profitable without investment banking support.  After trying to find a buyer for its equity research, sales and trading business, it announced today that it will close the operations, which only accounted for $260 million of the company's $24.8 billion in revenues last year.  See WSJ, Prudential Financial Plans
To Exit Equity Research.

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

The Latest on Dow Jones-Murdoch

The main union for the Dow Jones employees has reached out to Ronald W. Burkle and his private equity firm Yucaipa Companies for assistance in looking for alternative bids for the company.  Burkle and Yucaipa frequently work with unions on business deals; it is not known if they themselves are interested in competing with Murdoch.  Burkle previously made unsuccessful attempts to acquire some Knight Ridder newspapers and the Tribune Company.  See NYTimes, Dow Jones Union Seeks Billionaire’s Help in Finding Alternative Bidder to Murdoch.

The Wall St. Journal today focuses on Board Chair M. Peter McPherson and the difficult role of the board of directors in the face of the direct negotiations between the members of the Bancroft family and Murdoch.  See WSJ, Dow Jones Chairman Emerges As Key Player in Bid.

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

GM Shareholders' Meeting Noisy But Uneventful

General Motors CEO Rick Wagoner listened to shareholders' criticism for over two hours at the annual shareholders' meeting, but at the end of the day all the management nominees for the board were easily elected over the dissident slate.  Two management proposals on executive compensation passed, and all ten shareholders' proposals were defeated.  A proposal that would allow 10% of votes to call a special shareholders' meeting received the most votes at 41%; a proposal calling for cumulative voting received 26%, down from last year's 56%.  See NYTimes, G.M. Chief Tells Shareholders to Take Long View; WSJ, GM Chief Cites Progress.

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

Tuesday, June 5, 2007

Online Discussion on Global Securities Offerings

SEC Historical Society Online Program
June 6, 2007

"Beyond Borders: A New Approach to the Regulation of Global Securities Offerings" - Wednesday, June 6th - 12:00 noon to 1:30 pm ET. Join Edward F. Greene, General Counsel, Citi Markets and Banking, as he discusses his recommendations on facilitating a world-wide securities marketplace while still maintaining investor protections, with David B.H. Martin, Covington & Burling LLP; Alan L. Beller, Cleary Gottlieb Steen & Hamilton LLP; Craig Beazer, General Electric Company; and Elisse B. Walter, NASD. The broadcast is available free of charge; no advance registration is required.

June 5, 2007 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Ex-CA Executive Agrees to Pay $29.7 Million

Former CA executive Stephen Richards, now in prison serving a seven-year term, agreed to pay $29.7 million in restitution as part of his guilty plea for his role in a scheme to artifically inflate CA's revenues.  Previously former CEO Sanjay Kumar (serving a 12-year prison term) agreed to pay $798.6 million, and the company agreed to pay $225 million.  See WSJ, Ex-CA Sales Chief Agrees to Pay
$29.7 Million in Restitution.

June 5, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Cox Testifies on Section 404 and Small Business

Excerpt from Testimony Concerning Section 404 of the Sarbanes-Oxley Act and Small Business by Chairman Christopher Cox, U.S. Securities & Exchange Commission, Before the Committee on Small Business, U.S. House of Representatives, June 5, 2007:

It is our intention that the SEC's new 404 guidance for management and the PCAOB's new AS 5 will work together to clearly delineate the company's responsibility for the methods and procedures it uses in its internal controls evaluation process, on the one hand, and the auditor's responsibility for opining on management's assessment, on the other hand. In combination, the Commission's guidance and the PCAOB's new auditing standard should result in management using a top-down, risked-based approach to its evaluation of internal controls. And they should shift discussions between managers and auditors away from management's evaluation process to what matters most to investors — the risk that material misstatements in the company's financials won't be prevented or detected in a timely manner.

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

IBM Settles SEC Charges Related to Expensing Stock Options

The SEC announced today a settled enforcement action against International Business Machines Corporation for making materially misleading statements in a chart concerning the impact that the company's decision to expense employee stock options would have on its first quarter 2005 (1Q05) and fiscal year 2005 (FY05) financial results. The misleading chart caused analysts to lower their earnings per share (EPS) estimates for the company.  The Commission found that IBM provided the misleading information during an April 5, 2005 conference call with analysts. The call was simultaneously webcast, and a transcript and the accompanying exhibits were filed with the Commission in a Form 8-K. During the call, IBM announced that beginning in 1Q05 it would report stock options as an expense in its financial statements and advised analysts to adjust their earnings models to account for the change. At the time, IBM expected that its stock options expense for 1Q05 would have a $0.10 impact on first quarter EPS results and estimated a $0.39 impact on FY05 EPS results. However, IBM did not disclose this information. IBM included a misleading chart in its presentation which, to many analysts, conveyed that the EPS impact of IBM's stock options expense would be $0.14 for 1Q05 and $0.55 for FY05. After IBM's April 5 announcement, the majority of analysts reduced their EPS estimates by these amounts.

The Commission's Order finds that IBM did not disclose its expected stock options expense because it was concerned that analysts would add back to their EPS estimates any year-to-year reduction in the options expense instead of using the reduction to off-set an unrelated, previously-announced increased pension expense. According to the Order, management wanted to avoid this outcome because it would have increased the expected growth rate that analysts had set for IBM, which would have been difficult for the company to achieve because of the year-to-year increase in pension expense.

On April 14, 2005, IBM announced its 1Q05 financial results and disclosed earnings of $0.85 per share, which was $0.05 less than the amount that many analysts were expecting following the April 5 presentation. IBM also disclosed that its equity compensation expense was $0.10 per share for 1Q05, or $0.04 lower than what many analysts had understood IBM's April 5 misleading chart to have indicated it would be. IBM's stock price dropped $6.94 the next day, or over 8%, closing at $76.33.

Without admitting or denying the Commission's findings, IBM consented to the issuance of the Order, which requires IBM to cease and desist from committing or causing violations of these provisions.

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

Union's Study of Mutual Funds Show Support for Management on Compensatiion

A study of the twenty-nine largest mutual fund complexes shows that funds supported 75.8% of management proposals involving executive compensation in the twelve months ending June 2006.  The results of the study, conducted by the American Federation of State, County and Municipal Employees, are consistent with the previous year's.  See WSJ, Mutual Funds Keep Backing Firms on Pay.

June 5, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)