Securities Law Prof Blog

Gateway Capital Partner Pleads Guilty

Howard Schneider, partner at investment fund Gateway Capital, pleaded guilty in Manhattan to wire fraud.  He allegedly used millions of investors' funds for personal expenses.  WSJ, Guilty Plea in Fraud Case.

Form S-4 Filed For Dow Jones Acquisition

The preliminary Form S-4 filed for the acquisition of Dow Jones by News Corp. states that advisers to the publisher contacted 21 "potential transaction partners," but generated no counter-offers to Murdoch's $60 per share bid.  The document also sets forth a detailed chronology of events from the initial contact in March until the announcement of the merger on August 1.  The Dow Jones shareholders meeting is expected to be held in October.  WSJ, Dow Jones Didn't Get A Viable Rival Offer.

NYSE Euronext Files 10-Q Using XBRL

The SEC announced that NYSE Euronext is the first stock exchange to submit financial reporting information using interactive data, joining more than 40 public companies that are leading the way in making filings more accessible and understandable to investors. The SEC's voluntary interactive data filing program allows public companies to submit documents in eXtensible Business Reporting Language (XBRL) format as exhibits to periodic reports and investment company act filings. Participants in the program provide the SEC with feedback on benefits or deficiencies involved with submitting XBRL filings. The SEC staff, in return, provides expedited reviews of all of their registration statements and Form 10-Ks.

Skilling Asks for New Trial

Former Enron CEO Jeffrey Skilling, convicted of multiple counts of securities fraud and sentenced to more than 24 years in prison, has requested a new trial, claiming "Profound, inherent weaknesses in the government's case -- not just gaps in its evidentiary proof, but doubts about its basic theories of criminality -- motivated the government to resort to novel and incorrect legal theories, demand truncated and unfair trial procedures, and use coercive and abusive tactics" in his appeal to the Fifth Circuit.  WSJ, Former Enron CEO Skilling Makes Appeal for New Trial.

Upcoming SEC Historical Society Events

The SEC Historical Society has posted on its website a number of interesting programs, including a Fireside Chat on Accounting Aspects of the FCPA on Sept. 18 at 3 p.m. moderated by Professor Theresa Gabaldon at GW Law School.

Drexel Colloquium on Brennan's "Impossible Frontiers"

Drexel University's Program in Business & Entrepreneurship Law is presenting a faculty colloquium with Professor Thomas Brennan entitled "Impossible Frontiers" on Friday Sept. 28 at 10:30 a.m. (this is a change from a previously posted date). Here is the abstract of Professor Brennan's paper:

A key concept of the Capital Asset Pricing Model is the Mean-Variance Efficient Frontier, the collection of portfolios of n assets having mean-variance characteristics that cannot be improved upon. We study Mean-Variance Efficient Frontiers for which every portfolio on the frontier has at least one negative weight, i.e., for every portfolio, at least one asset is sold short. We call such a frontier an "impossible frontier" because the CAPM requires that the market portfolio—the portfolio of all n assets where the weight of each asset is proportional to that asset’s market capitalization—lie somewhere on the efficient frontier. Whether a frontier is impossible depends upon the particular values of the set of expected returns and covariances of the assets. In the two-asset case, we find that impossible frontiers occur only under certain unusual circumstances. However, for three assets or more, we find impossible frontiers in more common situations. Moreover, as the number of assets grows, we show that the probability that a generically chosen frontier is impossible tends to one. In fact, we find that for large n, nearly a quarter of all assets on a frontier are expected to have negative weights for every portfolio on the frontier. We also show that the expected minimum amount of short selling across points on frontiers grows linearly with n. Finally, we find that an impossible frontier remains impossible even if constraints are placed on the amount of short selling allowed in each portfolio.

More information is available at Drexel's website.

Breeden's Candidates Elected to H&R Block Board

Shareholders of H&R Block elected Richard C. Breeden and two of his candidates to the board.  Breeden, former SEC Chair and current activist hedge fund manager, wants the company to return to its core tax preparation business and has criticized management for not getting out of the subprime mortgage business sooner.  NYTimes, Critic of H&R Block’s Performance Is Elected to Board; WSJ, H&R Block Holders Vote To Install Breeden Picks.

Regulators Look into Rating Agencies' Conflicts

The SEC and several state regulators (including New York and Ohio) are investigating the performance of the rating agencies and its effect on the subprime mortgage market.  The agencies have been criticized because of their slowness in downgrading their ratings of subprime debt.  Regulators are looking into the conflicts of interest, since the agencies assist in the marketing of the debt by assigning ratings that enable them to be sold.  WSJ, Ratings Firms' Practices Get Rated.

SEC Settles Pump and Dump Scheme

The SEC announced a settled civil action against two Arizona-based scammers alleging their participation in an elaborate market manipulation scheme that involved unlawfully taking public seven microcap companies, inflating their share prices, and dumping millions of shares into the public market. The defendants, Mesa, Ariz.-based recidivist Michael Saquella (a.k.a., Michael Paloma), 47, and Scottsdale, Ariz.-based trader Lawrence Kaplan, 63, agreed to be permanently enjoined, barred from future penny stock deals, and to disgorge nearly $3 million in ill-gotten gains.  In a related criminal action, the U.S. Department of Justice announced today that Paloma and Kaplan have pleaded guilty in federal court in Alexandria, Virginia for their participation in stock manipulation schemes. On August 20, 2007, Paloma pleaded guilty to a criminal information charging him with one count of conspiracy to commit securities fraud and one count of electronic mail fraud. On July 25, 2007, Kaplan pleaded guilty to a criminal information charging him with one count of conspiracy to commit securities fraud. Each of these charges carries a maximum sentence of five years in prison. The written plea agreements and supporting documentation for both defendants were unsealed yesterday.

The Commission's complaint alleges that, over the past four years, Paloma repeatedly passed himself off to principals of private, cash-strapped companies as a legitimate financier, persuading company principals to issue to Paloma-affiliated entities large controlling blocks of stock. Paloma then obtained bogus opinions of counsel that permitted transfer agents to issue share certificates to his entities free of legends restricting resale. The Commission further alleges that, once his entities acquired the "free-trading" shares, Paloma then coordinated manipulative public trading — carried out, in part, by Kaplan — which artificially inflated the value of each issuer's stock. With the appearance of an active trading market established, Paloma coordinated the dissemination of millions of false and/or misleading blast fax and spam e-mails touting the companies' shares. Ultimately, Paloma and Kaplan dumped stock of the microcap issuers into the public market at the artificially inflated prices, realizing profits of $2,155,000 and $677,000, respectively.  After Paloma and Kaplan liquidated their holdings of each company's stock, they ceased trading and the market for the shares collapsed.

SEC Announces Agenda for Second Seniors Summit

The Securities and Exchange Commission and three other organizations today announced the panelists and agenda for an upcoming Seniors Summit at the SEC to combat investment fraud and abusive sales practices against older Americans.

The second annual Seniors Summit will help older Americans identify and avoid common scams, better assess "free lunch" investment seminar invitations and other sales practices, and better protect themselves from the social persuasion tactics used by fraudsters. The SEC will host the event on Sept. 10 with the North American Securities Administrators Association (NASAA), the Financial Industry Regulatory Authority (FINRA), and AARP.

SEC Settles Failure to Supervise Charges in Fraud Against Seniors

More from the SEC on crackdowns against senior fraud:  it settled enforcement actions against Commonwealth Equity Services, LLP, based in Waltham, Mass.; Detwiler, Mitchell, Fenton & Graves, Inc., based in Boston; and James X. McCarty, a resident of South Dennis, Mass. for failing to reasonably supervise former registered representative Bradford J. Bleidt, who engaged in a multi-million dollar fraud while they were overseeing him. At least forty of Bleidt's victims were over age 70 at the time the Commission charged him.  Bleidt was associated with Commonwealth from 1991 to 2001 and with Detwiler from 2001 to 2004. In 2004, he was charged by the Commission and the Massachusetts Securities Division with securities fraud stemming from a scheme in which he misappropriated more than $31 million from over 100 victims. Bleidt is currently serving an 11-year jail term as a result of related criminal charges brought by the United States Attorney's Office in Boston. He pled guilty to those charges in 2005.  The SEC's Order against Commonwealth finds that it failed to establish reasonable policies and procedures for responding to red flags related to Bleidt's outside business activities.

Universal Banks Performing Well in Difficult Times

Some investors have questioned whether the synergies are really there at the universal banks, or whether they would be more profitable if broken up into their constituent parts.  At least to date, however, the three universal banks -- Citigroup, J.P. Morgan, and Bank of America -- are outperforming investment banks.  When the credit and mortgage markets are under stress, they can fall back on traditional banking business.  WSJ, Do-It-All Banks' Big Test.

Wall St. Couple Pleads Guilty to Insider Trading Charges

Jennifer Wang, a former finance vp at Morgan Stanley, and her husband, Ruben Chen, a former hedge fund analyst at ING, pleaded guilty to insider trading charges.  The couple was arrested in May as part of a federal crackdown.  According to the complaint, they netted about $600,000 trading on advance information about the acquisition of Genesis Health Care.  NYTimes, Guilty Plea for Couple in Insider Trading Case; WSJ, Couple Plead Guilty To Insider Trading.

Testimony on Fraud Aimed at Seniors

Testimony today before the Senate Special Committee on Aging included:

SEC Chair Cox, Protecting Senior Citizens from Investment Fraud

NASAA President Borg, Advising Seniors About Their Money: Who Is Qualified - and Who Is Not?

SIFMA issued a press release on the topic.

SEC Market Reg Director Testifies on Credit Markets

Erik R. Sirri, Director of Market Regulation, SEC testified today on Recent Events in the Credit and Mortgage Markets and Possible Implications for U.S. Consumers and the Global Economy, before the Financial Services Committee, U.S. House of Representatives.

Saks Settles Accounting Charges

On September  5,  the  SECfiled  a  civil  injunctive  action charging Saks Incorporated, owner  of  luxury  department  store  Saks Fifth Avenue among other retail chains, with violating  the  financial reporting, books-and-records, and internal control provisions  of  theSecurities Exchange Act of 1934. Saks has agreed to settle  the  case,without admitting or denying the  Commission's  allegations,  and  has agreed to an injunction barring future violations of these provisions.  The Commission's complaint,  filed  in  federal  court  in  Manhattan, alleges that from the mid-1990s until 2003, certain employees  of  the company's Saks Fifth Avenue Enterprises division (SFAE) engaged in two deceptive practices in order to achieve their  financial  targets  for the month, quarter or retail season and that these practices  resulted in the company's overstatement of income by material  amounts  in  its financial statements for its 2000, 2001, and 2002 fiscal years and for two quarters in fiscal 2001 and 1999. According to the complaint,  the improper accounting by Saks resulted from aggressive financial targets the company set for SFAE, the belief by some  SFAE  buyers  that  they were  expected  to  achieve  their  targets  by  deceptive  means,  if necessary, and Saks' lack of adequate internal controls.  The deceptive practices consisted of the  intentional  over-collection of vendor allowance, or VA, and the improper deferral -- or rolling -- of markdowns of goods whose value was impaired. As  a  result  of  the vendor allowance over-collection, Saks overstated its net  income  for the fiscal year ended Feb. 3, 2001 by 7.0%; overstated its net  income for the fiscal year ended Feb. 2, 2002 by 32.3%;  overstated  its  net income for fiscal year ended Feb. 1, 2003 by 42.6%; and overstated its net income by 3.6% for the fiscal year  ended  Jan.  31,  2004.  As  a result of the markdown rolling, Saks overstated its net income in  the second quarter of fiscal year 1999 by 86.5%; and understated its  loss in the second quarter of fiscal year 2001 by 10.4%.

SEC Bars Hedge Fund Manager for Market-Timing

On  September  4,  the  SEC issued   an   Order   Instituting Administrative  Proceedings  Pursuant  to  Section   203(f)   of   the Investment  Advisers  Act  of  1940,  Making  Findings,  and  Imposing Remedial  Sanctions  (Order)  against  Brent  William  Federighi,  who previously ran two San Francisco-based hedge funds known as Ilytat and Gage Capital.  The Order finds that on Aug. 22, 2007, a final judgment was entered by consent against  Federighi,  permanently  enjoining  him  from  future violations of Rule 10b-5.  The Commission's complaint alleged that from 2000 to 2003,  Federighi, who co-managed the Ilytat hedge fund and later managed the Gage  hedge fund after Ilytat closed, deliberately exploited  a  loophole  in  the mutual fund order entry system used by  the  hedge  funds'  broker  in order to place mutual fund trades after the 4:00 p.m.  (Eastern  time) market close while still  receiving  the  current  day's  mutual  fund price. Some trades were placed as late as 5:45 p.m. (Eastern time).  Based on the above, the Order bars Federighi from association with any investment  adviser  with  the  right  to  reapply  after  18  months.  Federighi consented to the issuance of the Order without admitting  or denying any of the findings, except he admitted to the  entry  of  the
injunction. (Rel. IA-2641; File No. 3-12743).

SEC Settles Charges Against Boston Exchange for Specialist Violations

The SEC settled an enforcement action against the Boston Stock Exchange and its former president James B. Crofwell for failing to enforce Exchange rules to prevent specialists from trading for their own accounts ahead of marketable customer orders.  The Commission's Order against the Exchange and Crofwell finds that the Exchange's failure allowed hundreds of violations per day to go undetected even after the Commission staff had repeatedly warned the Exchange it needed to improve its surveillance systems.  According to the Commission's Order, from 1999 to 2004, the Exchange and Crofwell failed to enforce Exchange rules that prohibited Exchange dealer specialist firms from trading securities for their own benefit at the expense of their customers. Without admitting or denying the findings in the Commission's Order, the Exchange and Crofwell each consented to a censure and an order to cease and desist from future violations of Section 19(g) of the Exchange Act, which requires exchanges to enforce rules governing member firms. The Exchange further agreed to comply with specific undertakings contained in the Order, including expenditure of at least $1 million to retain a third-party consultant to conduct comprehensive audits of the Exchange's surveillance, examination, investigation and disciplinary programs relating to trading, and implementation of the consultant's recommendations.

SEC Files Charges Alleging $428 Million Fraud Aimed at Seniors

Fraud against seniors is certainly in the news these days.  The SEC today filed charges stemming from a $428 million securities fraud that victimized thousands of seniors and other investors throughout the United States. The SEC's action, filed in federal district court in Chicago, Ill., charges 26 defendants and alleges that they participated in a massive fraud that involved the sale of securities in the form of "Universal Leases." The investments were structured as timeshares in several hotels in Cancun, Mexico, coupled with a pre-arranged rental agreement that promised investors a high, fixed rate of return. The fraudulent Universal Lease scheme eventually collapsed, leaving investors with losses that exceed $300 million.  The SEC alleges that Michael E. Kelly and those working with him duped thousands of U.S. investors into using their retirement savings to buy Universal Leases on the false promise of safe and guaranteed returns. The SEC alleges that from 1999 until 2005, Kelly and others raised at least $428 million through the Universal Lease scheme from investors throughout the United States, with more than $136 million of the funds invested coming from IRA accounts. The SEC further alleges that a nationwide network of unregistered salespeople who sold the Universal Leases collected undisclosed commissions totaling more than $72 million. For most of the scheme, the complaint alleges, Kelly and his organization used new investor funds raised in the scheme to make illusory "rental income" payments to Universal Lease investors. The SEC also alleges that Kelly and others ran the scheme from Cancun through a number of foreign entities in Mexico and Panama.  According to the SEC's complaint, Kelly and others told investors that Universal Leases would generate guaranteed income through the leasing of investor timeshares by a large, independent leasing agent. In fact, the complaint alleges, the leasing agent was a small Panamanian travel agency controlled by Kelly, and for most of the scheme its payments to investors came from accounts funded by money raised from new investors. Further, the complaint alleges that Kelly and the other defendants failed to disclose several key facts about the Universal Lease investment, including the risks of the investment and that more than $72 million in investor funds were used to pay commissions as high as 27 percent to the selling brokers.

FINRA Launches Market Data Section on its Website

FINRA has launched what it describes as "one of the most comprehensive, content-rich, free online information resources for retail investors - and the only one with a strong emphasis on fixed-income securities."  The new Market Data section of its website includes detailed data on equities, options, mutual funds and a wide range of bonds - corporate, municipal, Treasury and Agency. It offers a full profile for every exchange-listed company, including company description, recent news stories and Securities and Exchange Commission filings, and an interactive list of domestic securities the company issues. In addition to information on individual securities, the site also provides familiar equities indices and the FINRA-Bloomberg Active U.S. Corporate Bond Indices for investment-grade and high-yield bonds. It also features U.S. Treasury Benchmark yields, market news an economic calendar and other information indicating current market conditions.

FINRA fines AXA Advsors for Unsuitable Fee-Based Accounts

The regulators continue to fine securities firms for marketing fee-based accounts to investors for whom the arrangement was not suitable because of the infrequency of their trading activity.  FINRA announced  that it has fined AXA Advisors, LLC, $1.2 million for failing to adequately supervise its fee-based brokerage business and distributing misleading sales literature for its fee-based brokerage account program, CapAdvantage, between 2001 and 2005.

FINRA also ordered AXA Advisors to return $1.4 million in fees to approximately 1,800 customers who were inappropriately placed or kept in fee-based brokerage accounts. The firm is voluntarily refunding customers an additional $1.2 million, making the total amount returned to CapAdvantage customers more than $2.6 million. AXA Advisors also unilaterally took steps to enhance its system and procedures and to close accounts that were not appropriate for CapAdvantage. FINRA considered these steps taken by AXA Advisors in determining the sanctions in this case.

FINRA found that AXA Advisors allowed many investors with less than $50,000 in assets to open CapAdvantage accounts. For example, one customer opened a fee-based account with just $2,000 and AXA Advisors assessed fees until the account was depleted of all funds. The firm also allowed numerous customers to maintain accounts in the program and pay for those accounts even though they did no trading for years. For example, one customer maintained an average account balance of more than $3.5 million, but did no trades from 2002 through 2004. Yet, during that period, the firm deducted approximately $73,000 in asset-based fees.

In settling this matter, the firm neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

D.C. Focuses on Securities Fraud Against Elderly

Quote of the day from SEC Chair Cox: "Every rock that we turned over seemed to have a bug or a worm crawling out underneath.  In each of the sweeps we conducted, we found significant fraud." Fraud perpetrated on the elderly is the focus of two hearings; the specific issues concern "free lunch" investment seminars and bogus titles for advisers claiming special expertise in retirement planning.  Today the Senior Special Committee on Aging will hold a hearing; on Sept. 10 the SEC holds its Second Summit on Seniors.  WPost, Investment Pitches Prey On Elderly.

NYSE Euronext Will Open China Office

China's securities regulators will allow NYSE Euronext to become the first foreign stock exchange to open an office in China.  It will be located in Beijing.  WSJ, China Backs NYSE To Open in China.

Home Depot Halfway Through Stock Buyback

About 290 million Home Depot Inc. shares were tendered in response to the company's modified Dutch auction tender offer. Home Depot said it would repurchase 289.6 million shares at $37 a share, or a total of $10.7 billion, bringing to 48 percent of its previously stated goal of a $22.5-billion buyback.  The company will use about $8 billion in net proceeds from its sale of HD Supply, and $2.7 billion in cash for the repurchases. CFO.com, Home Depot Halfway to $22.5b Buyback Goal.

FINRA Proposes Public Access to Historic TRACE Data

FINRA is proposing to adopt a FINRA policy providing for public access to historic TRACE data and to establish fees to offset the costs of developing and maintaining the new Historic TRACE database.  TRACE data is the first complete database of transaction-level pricing information ever compiled on the U.S. OTC corporate bond market.  The transaction data provided will include all transactions reported to TRACE since July 1, 2002, except Rule 144A transactions.

SEC Market Reg Director to Testify on Credit Markets

Erik Sirri, Director  of  the  Division  of  Market  Regulation at the SEC, will  testify  before  the  House Financial Services Committee on Wednesday, Sept. 5, 2007. Mr.  Sirri's testimony, which concerns recent events in  the  credit  and  mortgage markets, will be delivered at a hearing of the Committee which will be held in Room 2128 of the Rayburn House Office Building at 10:30 a.m.

Senate Hearing on Advising Seniors Sept. 5

Both SEC Chair Christopher Cox and NASAA President/ Alabama Securities Commission Director Joseph P. Borg will present testimony on ongoing efforts to protect senior investors from fraud, this Wednesday, September 5, before the U.S. Senate Special Committee on Aging, chaired by Sen. Herb Kohl (D-WI),at a hearing entitled “Advising Seniors About Their Money: Who Is Qualified - and Who Is Not?” The hearing is scheduled for 3 p.m., September 5 in Room 628, Dirksen Senate Office Building.

SEC Staff Will Propose Interim Rule on Principal Trading by Dual Registrants

SIFMA has posted on its website an outline of proposed principal trading relief that it says the SEC staff has indicated it would recommend that the SEC adopt on an interim basis effective October 1.  The interim rule would provide relief from the written notice requirement under Section 206(3) of the Investment Advisers Act for principal trades executed with customers on a non-discretionary basis.  It would not address the obligations of a firm under Sections 206(1) or 206(2), and it would be available only to firms registered both as investment advisers and as broker-dealers.  It would apply to any principal trade that does not involve a security issued by the dual registrant or a transaction in which the dual registrant acts as an underwriter (with an exception for offerings of investment grade debt securities).  Firms would be required to provide written notice to and obtain written consent from a non-discretionary investment advisory customer before relying on the interim rule.  The interim rule will have a 24-month sunset provision, which is designed to provide the SEC with time to consider the results of a study being conducted by the RAND Corp.

Nasdaq Sets Deadline for LSE Bids

Nasdaq has set a soft deadline of Friday for expressions of interest in buying its 31% stake in the London Stock Exchange, valued at $1.7 billion.  Nasdaq made two unsuccessful attempts to buy LSE and now needs the cash to finance its bid for the Nordic exchange operator OMX AB, which faces competition from the Borse Dubai.  So far Nasdaq has received no offers for LSE; It appears that a large minority stake in an enterprise that does not want a change of control is not a desirable commodity.  WSJ, Nasdaq Sets a Deadline In Bidding for LSE Stake.

First Data LBO Debt Goes on the Market

This week, in what is expected to be a test of the credit markets, seven banks will be offering for sale $24 billion in loans and bonds to finance the LBO of First Data Corp. to Kohlberg Kravis Roberts.  In the next few months, over $330 billion in LBO debt needs to be financed.  NYTimes, Banks to Test Debt Market This Week; WSJ, LBO Players Will Jockey Over Terms.

The Wall St. Journal's Heard on the Street column reports that the shares of Lehman Brothers are down 30%, just behind Bear Stearns as the worst-performing investment bank.  Lehman is more dependent on the bond market than most of the other investment banks.  WSJ, It's Déjà Vu for Lehman Stock.

10(b) Scheme Liability Symposium

Case Western Reserve University School of Law is presenting a symposium on Section 10(b) Scheme Liability on October 9, from 8:45 a.m. -- 1 p.m. for those in the Cleveland vicinity.

Brown on US Financial Regulatory Structure

The Tyranny of the Multitude is a Multiplied Tyranny: Is the United States Financial Regulatory Structure Undermining U.S. Competitiveness? , by ELIZABETH F. BROWN, University of St. Thomas, St. Paul/Minneapolis, MN - School of Law, was recently posted on SSRN.  Here is the abstract:

If imitation is the highest form of flattery, the United States may feel very flattered by the fact that other nations have modeled many of their regulations governing financial services (securities, banking, and insurance) on U.S. regulations. In fact, the United States government and the American Bar Association have been encouraging other nations to copy the way that the United States regulates financial services for over two decades. Some nations have not only adopted laws and regulations similar to U.S. financial regulations but have enacted legal reforms to permit lawsuits similar to U.S. class actions.

No other nation, however, has sought to copy the federal and state regulatory structure that the United States uses to supervise and regulate financial services. The United States has over 115 federal and state agencies involved in regulating some aspect of financial services and Congress is contemplating adding new agencies to the list.

In fact, the rest of the world is moving in the other direction. Over the past decade fifty nations have consolidated their financial services regulators and sixteen nations, including the United Kingdom, Germany and Japan, have created single financial services agencies. When consolidating their regulators, these nations have streamlined the regulatory procedures and eliminated outdated or duplicative regulations. For example, the UK Financial Services Authority reduced the listing rules for new securities by 40 percent. As a result, these streamlined regulatory structures have given these countries a competitive advantage over the United States.

This article explores how the United States regulatory structure is undermining U.S. competitiveness in the area of financial services. This article examines why the U.S. regulatory structure hinders U.S. competitiveness more than any particular law, such as the Sarbanes-Oxley Act. The article also discusses what actions federal and state regulators could take to minimize the problems created by the current structure and to move towards a more consolidated or integrated regulatory framework.

Gulinello on State Mandatory Disclosure

The Mandatory Disclosure of State Corporate Law, by CHRISTOPHER JOHN GULINELLO, Northern Kentucky University - Salmon P. Chase College of Law, was recently posted on SSRN.  Here is the abstract:

The disclosure of information on state corporate law should be high on the agenda of the ongoing mandatory disclosure debate. State corporate law plays a central role in the governance of public firms and despite the intense focus legal academia places on state corporate law, public companies are not required to disclose much information about the corporate law of their respective states of incorporation. This article makes a case for mandating public companies to disclose information about state corporate law as part of their regular disclosures. State corporate law is an important part of the information investors need to evaluate corporate governance risk. Mandatory disclosure of state corporate law would reduce the costs of disseminating information in a market where there are 51 possible jurisdictions for which investors need to research and process information on state corporate law. In addition, mandatory disclosure of state corporate law would better ensure that this information is incorporated into the price of securities when there is a possibility the market largely ignores some important aspects of state corporate law.

Ninth Circuit Finds Securities Registered under Form S-8 Were Invalidly Sold to Raise Capital

In SEC v. Phan, 2007 WL 2429365 (9th Cir. Aug. 29, 2007), the Ninth Circuit affirmed the district court's grant of summary judgment for the SEC, finding a violation of section 5 of the Securities Act (sales of unregistered securities),  where the CEO of a financially troubled corporation directed a consultant to resale shares registered on Form S-8 (available for employee compensation shares) to an investor to raise capital for the corporation.  Even if the shares were originally validly issued to the consultant on Form S-8 (an issue on which there were disputed issues of fact), the consultant's resale was not covered by the Form S-8 registration.  The Ninth Circuit, however, reversed the district court's summary judgment in favor of the SEC on the fraud claim, holding that the one undisputed misstatement -- that the consultant would be required to pay $1.25 million in cash upon exercise of the option -- was not material as a matter of law, since there were disputed factual assertions that the consultant promised to give a promissory note in lieu of cash.  The court said it could not hold as a matter of law that reasonable investors would consider the difference between cash and a promissory note material.