December 4, 2007
Broker Settles Charges He Traded in Advance of Tender Offer Announcement
The SEC announced that it settled charges against David W. Knall, a registered representative and investment adviser, for trading in advance of Dick's Sporting Goods Inc.'s June 21, 2004, announcement that it intended to acquire Galyan's Trading Company, Inc. via a tender offer. The SEC alleged that Knall, by purchasing 10,000 shares of Galyan's stock prior to the public announcerment of the tender offer was able to cover a previously established short position in his brokerage account and avoid losses. The day after the public announcement, Galyan's stock closed at $16.68, a 50.3% increase from the previous day's closing price of $11.10.
SEC Files Backdating Charges Against Maxim, CFO and CEO
The SEC filed civil charges against Maxim Integrated Products, Inc., a Silicon Valley semiconductor company, and the company's former CEO and CFO, alleging that they reported false financial information to investors by improperly backdating stock option grants to Maxim employees and directors. The SEC alleges that former CFO Carl W. Jasper helped the company fraudulently conceal tens of millions of dollars in compensation expenses through the use of backdated, "in-the-money" option grants. In a separate action, former President, CEO, and Chairman of the Board John F. Gifford agreed to pay more than $800,000 in disgorgement, interest, and penalties to settle charges relating to his role in the options backdating. Maxim similarly has agreed to settle the Commission's charges against it.
The Commission's complaints, filed in federal district court in San Jose, allege that Maxim routinely provided potentially lucrative in-the-money options to employees and backdated the paperwork to make it appear that the options had been granted on an earlier date. As a result, the company overstated its net income by more than 10% for its fiscal years 2003 through 2005.
The Commission's complaints also allege that former CFO Jasper was aware of the improper backdating practices, drafted backdated grant approval documents for Maxim's CEO to sign, and disregarded instructions from CEO Gifford to record an expense in connection with certain backdated options. According to the Commission, Gifford should have known that the company was not reporting expenses for those in-the-money stock options and instead was falsely reporting that they were granted at fair market value.
Maxim, without admitting or denying the Commission's allegations, consented to a permanent injunction against violations of the antifraud and other provisions of the federal securities laws. Gifford, also without admitting or denying the allegations, agreed to a permanent injunction against further violations of certain provisions of the federal securities laws and also agreed to disgorge a portion of his bonuses (totaling $652,681 with prejudgment interest) and pay a $150,000 civil penalty.
Lehman Brothers Acquires Specialist Operations from Van Der Moolen
Lehman Brothers will establish a floor-based market making firm on the trading floor of the New York Stock Exchange, by acquiring certain assets related to the operations of Van der Moolen Specialists, USA LLC. A Lehman Brothers affiliate will have responsibility for 416 NYSE-listed issues including 308 operating companies when it begins operations on December 10, 2007. The completion of the transaction, which includes the transfer of certain Van der Moolen staff and technology, is subject to regulatory approvals.
Buffett May Testify in Trial of General Re and AIG Executives
Federal prosecutors intend to call Warren Buffett as a witness in the fraud trial of four executives of General Re (a subsidiary of Berkshire Hathaway) and one AIG executive set to begin in January. The government charges that the five executives engaged in sham transactions to inflate AIG's reserves. Mr. Buffett has previously said that while he knew of the transactions he did not know that they were illegal. A lawyer for one defendant has said that Buffett knew the details. NYTimes, Buffett Is Named as a Witness in the Fraud Trial of 5 Insurance Executives.
Freddie and Fannie's Role in the Subprime Crisis
What is the role of Fannie Mae and Freddie Mac in the subprime crisis? They are government-chartered, publicly owned corporation, and therein lies the conflict. Can they bail out the homeowner facing foreclosure and still meet their fiduciary duty to their shareholders? Both companies' reputations were badly tarnished in recent years because of accounting scandals to inflate the bottom line. WPost, Fannie, Freddie Face Conflicting Demands.
December 3, 2007
Broadcom VP of HR Pleads Guilty to Obstruction of Justice
Nancy Tullos, a former vice president of Human Resources at Broadcom Corp., agreed to plead guilty to obstruction of justice in the government's investigation of options backdating at that company. She was accused of instructing a subordinate to delete an email that was evidence of backdating. CFO.com. VP of HR Faces Prison for Backdating.
Former Tyco CFO Loses Motion to Dismiss SEC Charges
A federal district judge denied a motion to dismiss SEC fraud charges made by Richard Power, former CFO of Tyco. The SEC alleges that Power designed and implemented fraudulent accounting practices that inflated the company's operating income by hundreds of millions of dollars. Co-defendants previously settled with the SEC. CFO.com, SEC Unleashed to Pursue Ex-Tyco CFO.
Nasdaq Opens a Beijing Office
Nasdaq opens an office in Beijing that gives it legal status to solicit Chinese companies for listings directly in China. Previously, it had a presence in China that did not allow direct contact with companies. So far this year, it has listed 19 mainland Chinese companies, up from 9 last year, for a total of 52 listings with a market capitalization of $57 billion. WSJ, Nasdaq Opens Beijing Office to Woo Listings.
E*Trade's Portfolio Sale May Set Market Floor
How much are mortgage-backed securities worth these days? Citadel Investment Group purchased E*Trade's $3 billion portfolio for an average of 27 cents on the dollar, which may set a market floor for CDOs. According to an E*Trade October report, 60% of its assets in the portfolio were rated double-A or better. WSJ, A CDO Floor of 27 Cents on the Dollar?
December 2, 2007
Recent 9th Circuit Opinion Deals with Misrepresentation, Materiality Issues
The Ninth Circuit recently discussed the requirement of a misstatement of material fact under 33 Act Section 12(a)(2) in the context of a merger between a public corporation and a private corporation, Miller v. Thane Int'l, 2007 WL 4147327, 9th Cir. 11/26/07. The proxy statement sent to shareholders of the acquired corporation represented that the acquiring corporation expects to have its shares approved for listing on Nasdaq and that it had already received Nasdaq approval (subject to meeting $5 bid requirement). Both statements were literally true. Because the company's investment bankers advised the company to wait to list the shares until completion of an anticipated secondary offering (which never took place), the shares in fact were never listed on Nasdaq. First, the 9th Circuit said the district court committed "clear error" when it found that the acquiring corporation did not make a misrepresentation, since statements literally true on their face may be misleading when considered in context. Second, the appeals court held that the district court committed error when it found that, even if there was a misrepresentation, it was not material, since the market price did not drop even after it was clear that the shares were not trading on Nasdaq. The appeals court said it was error to consider the movement of stock prices that did not trade in an efficient market.
However, plaintiffs have a remaining obstacle -- loss causation. The defendants argued that since the district court found that the market did not react to the fact that the shares were not listed, plaintiffs could not establish loss causation. The Ninth Circuit remanded to the district court for consideration of this issue.
Weiss on PSLRA After a Decade
The Lead Plaintiff Provisions of the PSLRA After a Decade, or “Look What's Happened to My Baby,” by ELLIOTT J. WEISS, University of Arizona College of Law, was recently posted on SSRN. Here is the abstract:
In 1995, my colleague John Beckerman and I had an experience shared by very few legal academics. We wrote an article recommending dramatic changes in the manner securities class actions are organized and saw Congress enact into law a bill that included essentially all the recommendations we had made. The article was Let the Money Do the Monitoring: How Institutional Investors Can Reduce Agency Costs in Securities Class Actions, 104 Yale L.J. 2053 (1995); the law was the Private Securities Litigation Reform Act of 1995 (“PSLRA”); the relevant provisions, now generally known as “the lead plaintiff provisions,” prescribe procedures for the selection of lead plaintiffs and lead counsel in securities class actions.
In this Essay, I recount some aspects of the unique history of the lead plaintiff provisions and reflect on what has happened in the decade or so that they have been in effect. The Essay has six parts. Part I describes the questions that led Professor Beckerman and me to undertake research concerning the dynamics of securities class actions and summarizes our findings and recommendations. Part II sets forth our perspective on how our recommendations came to be enacted into law. Part III describes post-enactment developments that have been consistent with our expectations – most notably, the emergence of institutional investors as major players in securities class action litigation and the related increase in investors' recoveries. Part IV describes post-enactment developments that we did not anticipate, including one precipitated by the emergence of the Internet and another that involves the difficulty, which we should have anticipated, that courts have had in deciding which class member has the largest loss and therefore is the presumptive lead plaintiff. In Part V, we conclude that even had Congress followed a more deliberative process before enacting our recommendations into law, it probably would not have come up with a substantially better approach for organizing the process by which lead plaintiffs and lead counsel are appointed in securities class actions. In Part VI, we recommend that Congress clarify the language of the statute in one minor respect and that courts make changes in how they deal with two administrative issues relating to securities class action litigation.