Saturday, December 8, 2007
Pandora's Ballot Box, or a Proxy With Moxie? Majority Voting, Corporate Ballot Access, and The Legend of Martin Lipton Reexamined, by J.W. VERRET, Delaware Court of Chancery, was recently posted on SSRN. Here is the abstract:
The Delaware General Assembly has recently adopted an amendment to the Delaware General Corporation Law (DGCL) which provides that where shareholders have adopted a majority voting bylaw for corporate elections over the traditional plurality scheme, a corporation may not subsequently amend its bylaws to return to plurality voting without shareholder approval. This article compares this provision to other approaches and attempts to explain the reasons underlying its adoption. The article also briefly summarizes the evolving shareholder empowerment debate and analyzes the majority voting provision in the context of that discussion. This article also describes some unique and unanticipated interactions between majority voting bylaws and various other working parts of corporation and securities laws affecting the shareholder franchise, a carefully protected right in Delaware jurisprudence. The most prevalent corporate strategies responding to this movement are explored and the difficulties of implementing majority voting are described. Finally, voting schemes from the political sphere are analyzed in an attempt to find analogous lessons for the corporate arena. The article ends with some predictions about future developments which will hinge on the outcome of SEC rules proposals, further DGCL revisions, and the responses of Delaware incorporated entities.
This article blends three distinct groups of thought: (i) theoretical corporate law scholarship and financial regulatory theory; (ii) interpretation of Delaware Court of Chancery cases; and (iii) practical analysis on the future of the majority voting movement and the strategic choices facing boards of directors in the aftermath of the Delaware amendments and corollary Securities and Exchange Commission and New York Stock Exchange regulatory initiatives. The result is a developed framework for how majority voting could serve to alter significantly the balance of power between shareholders and board members, with the magnitude of that effect contingent on the result of pending governance changes at forums, board responses, and the continuing evolution of the Delaware General Corporation Law. The presence of activist shareholders will be an especially important phenomenon affecting this analysis. The article also briefly explores one alternative to majority voting, the runoff election proposal, to allow that concept to enter into the debate. As a secondary thesis to the ideas summarized above, this article will also respond to Martin Lipton's latest article, The Many Myths of Lucian Bebchuk, which summarizes Lipton's views as the leading voice against the shareholder empowerment movement. This article will argue that, though there are many valid criticisms of the shareholder empowerment movement, Lipton's latest invective diatribe is bereft of them.
Taking Stock of the First Amendment's Application to Securities Regulation, by ANTONY PAGE, was recently posted on SSRN. Here is the abstract:
Securities regulations that compel or prohibit corporate disclosure have faced little First Amendment scrutiny, even though at least some of this compelled disclosure fits squarely within the Supreme Court's definition of protected commercial speech. Although several scholars argued otherwise in the late 1980s and early 1990s, most academics have rejected the application of the First Amendment to securities regulation. This article examines whether the so called securities exemption to the First Amendment is warranted.
Protecting Financial Markets: Lessons from the Subprime Mortgage Meltdown, by STEVEN L. SCHWARCZ, Duke University School of Law, was recently posted on SSRN. Here is the abstract:
Why has the recent subprime mortgage meltdown undermined financial market stability notwithstanding the protections provided by market norms and financial regulation? This article attempts to answer that question by identifying anomalies and obvious protections that failed to work, and then testing hypotheses that might explain the anomalies and failures. The resulting explanations provide critical insights into protecting financial markets.
Friday, December 7, 2007
The SEC announced that it filed civil actions alleging securities fraud in five separate kickback schemes uncovered by an FBI sting operation conducted pursuant to a recent cooperation agreement between the FBI and the Commission. The defendants are insiders or promoters of publicly traded companies who made stock sales to a hedge fund in exchange for illegal kickbacks to an individual whom they believed to be the hedge fund manager, but who was in reality an undercover FBI agent. The SEC alleges that, in each case, the undercover FBI agent purporting to be a hedge fund manager told the seller or promoter that the kickback had to be kept secret, because buying stock in exchange for kickbacks would violate his fiduciary obligations to the hedge fund. The FBI agent also told the seller or promoter that he had created a phony consulting company to which the kickback could be paid pursuant to a consulting agreement. The sellers or promoters were told that the consulting entity did not exist, that no actual consulting work would be performed, and that the phony consulting arrangement was simply a means to secretly funnel a kickback to the purported hedge fund manager. All of the defendants agreed to pay a kickback. With one exception, the defendants actually paid the promised kickback after the hedge fund bought the stock defendants were promoting. Every buy transaction had a material effect on the stock trading volume of the companies in question.
In related criminal prosecutions, the United States Attorney's Office for the Southern District of Florida today announced the criminal indictments of 6 individuals involved in the schemes.
FINRA issued Regulatory Notice 07-59, Supervision of Electronic Communications, containing guidance setting forth principles for firms to consider when developing supervisory systems and procedures for electronic communications that are reasonably designed to achieve compliance with applicable federal securities laws and SRO rules. The guidance was issued in final form after FINRA released it earlier this year for comment. In the guidance FINRA makes clear that it expects a firm to have supervisory policies and procedures to monitor all electronic communications technology used by the firm and its associated persons to conduct its business.
The SEC is investigating rumors that caused the price of Alliance Data Systems stock to fall, according to the Wall St. Journal. On November 29, an email was circulated around Wall St. that Blackstone Group was backing out of or renegotiating the price of its LBO of the company. ADS stock prices have returned to their previous levels. WSJ, SEC Probes More Merger-Rumor Trades.
The SEC announced a record $468 million settled enforcement action in an options backdating case against William W. McGuire, M.D., the former Chief Executive Officer and Chairman of the Board of UnitedHealth Group Inc. The settlement is the first with an individual under the "clawback" provision (Section 304) of the Sarbanes-Oxley Act to deprive corporate executives of their stock sale profits and bonuses earned while their companies were misleading investors. It includes a $7 million penalty, the largest against an individual in the backdating case.
The Commission's complaint alleges that from 1994 through 2005 McGuire repeatedly caused the company to grant undisclosed, in-the-money stock options to himself and other UnitedHealth officers and employees. In March 2007, UnitedHealth restated its financial statements for each year from 1994 through 2005, and disclosed material cumulative pre-tax errors in stock-based compensation accounting that totaled $1.526 billion for that period.
The Commission's complaint further alleges that from 1994 through 2005, McGuire personally received more than 44 million split-adjusted UnitedHealth options, most or all of which were backdated. McGuire exercised and sold more than 11 million of these backdated options for an in-the-money gain of more than $6 million. McGuire also received nearly $5 million of incentive-based cash bonuses in 2005 and 2006 tied to earnings per share targets that UnitedHealth would not have achieved under financial statements restated due to errors in stock-based compensation accounting.
According to the Wall St. Journal, Dr. McGuire retains about 24 million options currently worth about $800 million, as well as $530 million in pay from 1991-2006. WSJ, Ex-CEO Agrees To Give Back $620 Million.
The New York Times profiles New York Attorney General Andrew Cuomo's investigation into the subprime mortgage market and compares it with Eliot Spitzer's tainted analyst research investigation. At the heart of each is what Wall St. knew about the securities it was selling and what they told the investing public. NYTimes, Another New York Attorney General Starts a Wall Street Crusade.
Thursday, December 6, 2007
A study by three academics,Mercer Bullard, Geoff Friesen, and Travis Sapp, financed by the Zero Alpha Group, a group of independent fee-based advisers, Investor Timing and Fund Distribution Channels, concludes that "investors who transact through investment professionals using conventional distribution arrangements experience substantially poorer performance than investors who purchase no-load funds" and question "the value added by investment professionals who sell mutual fund shares through conventional distribution arrangements."
The SEC has filed a complaint alleging that from December 2002 through August 2005, Sidney Mondschein, former branch manager of a California office of WFS Investments, Inc., sold the names and other confidential personal information of over 500 of his customers, virtually all of them senior citizens, to six different insurance agents. According to the complaint, Mondschein sold this information as sales "leads" to enable insurance agents to solicit these customers, many of whom had already purchased fixed or equity-indexed annuity products, to buy additional annuity products.To facilitate this fraudulent scheme, Mondschein created a separate entity, called UNCI, Inc., to market insurance leads, collect leads fees, and participate in the commissions that those leads generated. In addition, according to the complaint, Mondschein developed an extensive securities liquidation business that he marketed exclusively to insurance agents, who recommended to their clients that they use Mondschein, instead of their existing broker, to sell their securities. The complaint alleges that Mondschein collected substantial brokerage commissions and other fees for selling the securities of elderly persons to fund their annuity purchases.
Stephanie Jensen, the former VP of human resources at Brocade Communications, was convicted of charges related to backdating stock options. She was accused of doctoring paperwork for new hires that received backdated stock options. Her attorney argued that her client did not have a finance background and did not understand the accounting implications. The CEO of Brocade was convicted on backdating charges in August. WSJ, Brocade Ex-Official Convicted.
Wednesday, December 5, 2007
The SEC's next Open Meetings are scheduled for Tuesday, December 11, 2007, at 10:00 a.m., Thursday, December 13, 2007 at 9:00 a.m., and Monday, December 17, 2007 at 9:00 a.m.
The subject matter of the Open Meeting scheduled for Tuesday, December 11, 2007 will include:
whether to approve the 2008 budget of the Public Company Accounting Oversight Board and the related annual accounting support fee for the Board under Section 109 of the Sarbanes-Oxley Act of 2002.
whether to adopt amendments to the eligibility requirements of Form S-3 and Form F-3 of the Securities Act of 1933 to allow companies that do not meet the current public float requirements of the forms to register primary offerings of their securities, subject to certain restrictions, including the amount of securities those companies may sell pursuant to the expanded eligibility standard in any one-year period.
whether to adopt amendments to mandate electronic filing of Form D and revise the information requirements of that form.
whether to publish a concept release to solicit public comment concerning possible revisions to the oil and gas reserves disclosure requirements.
The subject matter of the Open Meetings to be held on Thursday, December 13, 2007 at 9:00 a.m. and on Monday, December 17, 2007 at 9:00 a.m. will be roundtable discussions on whether to provide U.S. issuers the choice of reporting their financial results under International Financial Reporting Standards. The roundtables will further explore the matters covered in the Commission’s Concept Release on Allowing U.S. Issuers to Prepare Financial Statements in Accordance with International Financial Reporting Standards (Release 33-8831; 34-56217) and the responses received.
The SEC gets downright effusive when it talks about interactive data, as a press release today proclaims "SEC's Office of Interactive Disclosure Urges Public Comment as Interactive Data Moves Closer to Reality for Investors." The release goes on to "herald the release for public comment of computer labels that will help companies make their financial disclosures more useful for investors." The goal is to make quarterly and annual financial reports available in interactive data form so that people more easily locate and analyze desired information. The interactive data is encoded in a format known as eXtensible Business Reporting Language (XBRL), which allows companies to map their financial information to a set of computer codes that represent U.S. GAAP accounting standards. The SEC's Office of Interactive Disclosure, created in October to lead the transformation to interactive financial reporting by public companies, encourages broad public review of the taxonomy and the corresponding instructions about how to create a financial statement in XBRL.
The New York State Attorney General's Office sent subpoenas to several Wall St. firms, including Merrill Lynch, Bear Stearns and Deutsche Bank, seeking information relating to the packaging and selling of debt tied to high-risk mortgages. The investigation is looking into the firms' underwriting standards, including the adequacy of their review of the quality of the mortgages, and their relationships with credit rating agencies. WSJ, Wall Street Firms Are Subpoenaed.
Former Morgan Stanley analyst Jennifer Wang and her husband Reuben Chen, a former ING hedge fund analyst, were each sentenced to one and a half years in prison for insider trading. Prosecutors changed that the couple traded on information Ms. Wang misappropriated from her employer, profiting by $600,000. The judge postponed Ms. Wang's sentence until after her husband's was completed, so that one of them would be at home with their infant. NYTimes, Couple Sentenced for Insider Trading.
Reflecting further difficulties from the credit crisis, Fannie Mae announced it would raise $7 billion in an offering of non-convertible preferred stock. It also will cut its quarterly dividend from 50 cents to 35 cents per share. Last week, Freddie Mac raised $6 billion. WPost, Fannie Mae to Issue $7 Billion In Stock to Help Steady Itself.
Tuesday, December 4, 2007
Now that it is current in its SEC filings, Dell announced a $10 billion stock buyback program, nearly 20% of its stock. "Dell is committed to a long-term share repurchase program as part of an overall capital allocation plan that supports growth and also returns value to shareholders," said Michael Dell, chairman and CEO. CFO.com, Dell to Repurchase $10 Billion of Stock.
Temple-Inland announced that it has borrowed $2.14 billion and plan to use the proceeds to pay a special dividend of $10.25 per share (about $1.1 billion), reduce debt by $700 million, and other corporate purposes. This comes less than two weeks after Carl Icahn increased his stake in the company to just under 10%. CFO.com, Icahn Gets His from Temple-Inland.