Securities Law Prof Blog

Market-Timing Agreement Enforced

In Prusky v. Reliastar Life Ins. Co., 2007 WL 43641 (E.D. Pa. 01/05/07), the court ordered specific performance of a contract that gave plaintiff the right to engage in market-timing in the mutual fund sub-accounts within the variable life insurance policies and rejected the defendant's defense of impracticability.

Frankel & Cunningham on Market Timing

Tamar Frankel and Lawrence Cunningham's paper, The Mysterious Ways of Mutual Funds: Market Timing, is now available on SSRN and is well worth reading for those of us who have read the newspaper accounts but looked for more scholarly analysis of the issues.  Here is the abstract:

Abstract:      
The term market timing was little known outside the arcane world of mutual funds until state attorneys general from across the country popularized it. The term's innocuous-sounding ring assumed a more pernicious note when the mysterious ways of mutual funds became more transparent. In its pernicious sense, market timing denominates mutual fund insiders using the inscrutable structures of mutual funds to provide benefits selectively to favored participants at the expense of less favored participants.

Mutual fund shares are not like common stocks; investments made using these vehicles are unlike those made through traditional securities markets. While the peculiar features of mutual funds were manifested in the contemporary environment, these peculiarities are inherent in the very structure of mutual funds. Regulatory efforts dating to the 1940s recognize these realities and regulatory reforms of the early 2000s struggle to respond in much the way earlier reforms did.

The wide range of reforms that have been adopted and proposed may overlook this reality, however. By correcting this oversight, and unveiling the historical and contemporary landscape, this Article provides more realistic appraisals for increasing the integrity of the mutual fund investment vehicle. Chief among these is a deeper point: critical to sustaining the mutual fund as an important institution in the financial system is a renewed appreciation of concepts of trust and professionalism. [emphasis added: amen to that]

EOP Postpones Shareholder Vote in LBO Battle

In  what is expected to be the largest LBO to date, Equity Office Properties Trust announced it is postponing next week's shareholder vote on the Blackstone deal for two days, giving Vornado a chance to increase its $46 billion offer.  Vornado's is valued higher than Blackstone's, but contains a stock component, while Blackstone's is all-cash.  See NYTimes, Vornado Under Pressure to Sweeten Its Bid for Office Landlord.  for the Washington Post's take on the situation, see Equity Endorses Blackstone Bid.

Profiles of Carl Icahn and Motorola

The NY Times profiles Carl Icahn, in the news this week because of his purchase of a shareholder stake in Motorola.  See From Raider to Activist, but Still Icahn .  Another story discusses the problems at Motorola, stemming from the cell phone as fasion accessory phenomenon.  See Cellphone Envy Lays Motorola Low.

Gordon Macklin Remembered

The WSJ has a remembrance of Gordon Macklin, who died this week, and his pivotal role in the transformation of NASDAQ into an electronic trading market.  See WSJ, Ushering in Age of the Electronic Stock Market

News About Rich Old Men and their Children

The WSJ has two stories about how powerful men and their children get along in business.  See WSJ, Sumner Redstone Settles Suit With Son Over Family's Fortune and WSJ, All of Murdoch's Children Receive Big News Corp. Stakes.

Herbalife -- The Revolving Door

Herbalife was public, then private, then public, and now announces a bid to go private again by the same equity fund that did the previous deals and remains the largest shareholder.  The premium is about 14.8%.  See WSJ, Herbalife Receives $2.7 Billion Offer.

2d Cir. Affirms Dismissal of Deloitte

In Lattanzio v. Deloitte Touche, 2007 WL 259877 (2d. Cir. 1/31/07), the Court upheld the dismissal of a securities fraud class action against the accounting firm arising from alleged misstatements in Warnaco's financial statements.  The court held that the requirement that the auditing firm review the unaudited statements did not make the maker of the unaudited statements for purposes of Central Bank and did not give rise to a duty to correct any misstatements.  In addition, plaintiffs failed to allege loss causation -- a connection between the misstatements and the losess suffered as a result of Warnaco's bankruptcy.  In particular, Deloitte's "going concern" warning would give investors adequate warning of the risk of bankruptcy, even if the underyling financial information was inaccurate.

Highest NY Court to Consider Form U-5 Privilege Issue

An important and unresolved question is whether securities firms can be sued for libel if the information they are required to disclose on Form U-5 about an employee's employment termination is incorrect.  The New York Court of Appeals will hear arguments in a case this month that should resolve the split among New York courts between an absolute and a qualified privilege.  WSJ gives background on the issue in  Some Brokers Can't Flee Past.

Improper Accounting Allegations Against Dell

A class action suit was filed in Texas against Dell and its auditors, PriceWaterhouseCoopers, alleging that the computer company engaged in improper accounting practices in its partnership with Intel, to inflate revenues.  William Lerach filed the complaint.  See WSJ, Dell's Woes Mount as Investors File Improper-Accounting Suit.

BackDated Options Little Longterm Effect on Stock Prices

WSJ studies the stock prices of companies that reported backdated stock options and finds that many of them have bounced back shortly after the news broke.  While many corporations have had to restate their financial statements, the effect on the bottom line remains substantially the same, and to some investors the drop in price from the bad publicity created buying opportunities.  See Buy a 'Backdating' Stock?

Blips Illegal, Says Texas Court

A federal district court in Texas ruled that the aggressive tax shelters marketed by KPMG known as Blips were ilegal.  The first ruling on the legitimacy of this tax shelter, it is expected to give a boost to the New York prosecutors' case against the accounting firm.  See NY Times, Court Rejects Tax Shelter Once Sold by KPMG .

SEC Approves Auction to Value Options

New York Times reports on the SEC's tentative approval of an auction approach to valuing stock options that was approved by the SEC staff in a letter to Zion Bancorp, which plans to market the auction of new securities, called "Esoar," to establish the value of companies' stock options.  The SEC says that auditors still need to review the results before using the value in the financials.  See S.E.C. Approves New Method for Companies to Value Stock Options

Senate Report Criticizes SEC Investigation

Senators Specter and Grassley released an interim report critical of the SEC's investigation of hedge fund Pequot Capital Management.  “At best, the picture shows extraordinarily lax enforcement by the S.E.C.,” Senate investigators concluded. “At worse, the picture is colored with overtones of a possible cover-up.”   The report also suggests that former SEC attorney Gary Aguirre was fired because of his persistence.  The Senate inquiry is also looking into whether SEC officials made false statements to the Senate. See NY Times, Senate Report Says S.E.C. Botched Hedge Fund Inquiry.

Battle for EOP Continues

Vornado announced it has increased its bid for Equity Office Properties Trust to $56 per share in cash and stock.  EOP is the target of competing bids from Vornado and Blackstone, in what would be the largest LBO in the US.

Houston Attorney Settles SEC Charges of Registration Violations

On February 1, the Commission  filed  to  amend  its  complaint  in  a lawsuit against Allixon International Corp.,  a  Delaware  corporation based in South Korea, to name Houston attorney Hank A. Vanderkam as  a defendant. Vanderkam is the former securities counsel to Allixon.  The SEC filed the original lawsuit in November 2005  against  Allixon  and other defendants to halt an ongoing unregistered distribution  of  1.3 million shares of Allixon's common stock.

   The amended complaint  alleges  that  Vanderkam  participated  in  the illegal  distribution  of  the  1.3  million  Allixon  shares,   which represented 94% of the company's float. The 1.3  million  shares  were issued to two offshore entities without a restrictive legend based  on  Vanderkam's opinion letter that the Allixon  stock  offering  complied with "Section (sic) 504 of Regulation D and the laws of the  State  of Texas." In fact, the offering failed to comply with  the  requirements of Rule 504 under Regulation D of the Securities Act of 1933, and  the offering was never registered in, and had no connection to, the  State of  Texas.  The  two  offshore  entities,   defendants   Silver   Lake  Investments, Inc. and Crescendo Investments Inc., were control persons of Allixon who allegedly sold over 900,000 of the  Allixon  shares  in the Pink Sheets for approximately $4.3 million.

Vanderkam consented to the entry of an agreed final judgment,  permanently  enjoining  him from future violations of the  securities-registration  provisions and other relief.  In addition, the consent  order  bars  Vanderkam  from  issuing  opinion letters under Rule 504 of Regulation D. [SEC v. Allixon  International  Corp., et al., Civil Action No. 3:05-CV-2260-P, United States District Court for the Northern District of Texas, Dallas Division] (LR-19987)

SEC Settles Fraud Charges Agst Enterasys Asst. Controller

On Jan. 30, 2007, the Commission filed a settled civil fraud action in the United States District Court for the  District  of  New  Hampshire against  Anthony  L.  Hurley,  the  former  assistant  controller  for Enterasys Networks, Inc. and  its  former  parent  company,  Cabletron Systems, Inc.

   The complaint alleges that from  March  2000  through  December  2001,Hurley participated in a company-wide scheme to  fraudulently  inflate revenues at Enterasys and its former parent  company,  Cabletron,  and thereby convince the market that Enterasys was a  viable  independent company with consistently strong revenue growth.

      Hurley, without admitting or denying the allegations of the complaint, consented to an injunction against future violations.  Additionally, Hurley consented to paying disgorgement in the amount of $24,498, plus prejudgment interest in the amount of $7,526, reflecting the full amount of his ill gotten gains. In a related  criminal  case, Hurley pled guilty to one count of wire fraud and cooperated with  the U.S. Attorney's Office for  the  District  of  New  Hampshire  in  the prosecution of U.S. v. Barber et al., Criminal  No.  04-126  (D.N.H.). [SEC v. Anthony L. Hurley, Civil  Action  No.  07cv022,  D.N.H.]  (LR-19986)

SEC Proposes to Expand its Interactive Data Voluntary Programs

At its Jan. 31 meeting, the Securities and Exchange Commission voted to publish for comment rule amendments that would expand the agency's interactive data voluntary program to enable mutual funds to submit data tagged risk/return summary information. The Commission also voted to propose rules required under the Credit Rating Agency Reform Act of 2006. 

SEC Corp Fin Guidance on Exec Comp Disclosure

On Jan. 24, 2007 Corporate Finance issued guidance on Item 402 of Reg. S-X -- Executive Compensation.  Eighteen pages in length, there are questions and answers of general applicability, as well as interpretive responses regarding particular situations.

Roger J. Dennis Dean at Drexel

Roger J. Dennis, Professor and Provost at Rutgers-Camden, has been named the Dean at Drexel University's new law school.  Roger's scholarship, including MATERIALITY AND THE EFFICIENT CAPITAL MARKET MODEL: A RECIPE FOR THE TOTAL MIX, is well-known to all of us. Congratulations, Roger!