Monday, January 28, 2008
Angelo Mozilo, chair and CEO of mortgage lender Countrywide Financial Corp., and the public face of the mortgage crisis, will forfeit $37.5 million of severance pay and benefits in response to political outrage. He is expected to step down when the Bank of America completes its acquisition of the mortgage lender later this year. WSJ, Countrywide CEO Forfeits $37.5 Million as He Exits.
Sunday, January 27, 2008
Are Retail Investors Better Off Today?, by BARBARA BLACK, University of Cincinnati - College of Law, was recently posted on SSRN. Here is the abstract:
In recent years, investors' attitudes towards the securities industry plummeted, in reaction to both the conflicted research and the mutual fund scandals. In both instances, Congress and the regulators responded by asserting the need for reforms to restore the confidence of the retail investor.
This paper first reconsiders the importance of investor confidence and argues that, in an era where adults are required to invest in the markets, the government has a moral obligation to assure that investor confidence in the markets is warranted. This paper examines the SEC's reforms, as well as its investor education initiatives, through the lens of morality and assesses whether they have improved the environment for retail investors. It concludes that the most optimistic assessment is that the SEC has plenty of unfinished business to attend to.
Branding the Small Wonder: Delaware's Dominance and the Market for Corporate Law, by OMARI SCOTT SIMMONS, Wake Forest University School of Law, was recently posted on SSRN. Here is the abstract:
The Delaware brand is to corporate law what Google is to search engines. Brands are of immense value in today's business environment and beyond. Brands have been used to describe a range of items such as products, people, sports clubs, and even geographic locations. In the market for corporate charters, Delaware, particularly its legal regime, is a brand. Delaware's preeminence in the market for corporate charters has lasted for nearly a century and Delaware shows no sign of relinquishing its dominance. Traditional accounts of Delaware's dominance, i.e., race-to-the-bottom theories, race-to-the-top theories and their progeny, provide an incomplete descriptive assessment of charter competition. The branding discussion provides an important missing chapter in the story of Delaware's sustained dominance. Unlike the proliferation of race theories over the past thirty years, active debate exploring the connection between branding and Delaware's competitive advantage in the charter competition context is underdeveloped. This article fills a gap in the legal literature and argues the Delaware brand is a mixture of tangible and intangible elements that has significant implications for Delaware, incorporating firms, and U.S. corporate governance.
When Bad Stocks Make Good Investments: The Role of Hedge Funds in Leveraged Buyouts, by JIEKUN HUANG, Boston College - Department of Finance, was recently posted on SSRN. Here is the abstract:
I examine the role of hedge funds in leveraged buyout transactions. I find significant increases in hedge fund holdings of buyout targets before the announcement. The presence of hedge funds as shareholders of the target firm prior to the announcement is positively related to initial buyout premiums. This effect is robust and economically significant: A two standard deviation increase in the hedge fund ownership of the target before the announcement is associated with an increase of 7% in premiums. I also show that this relationship is stronger for firms with less liquid stocks. Moreover, for low-premium offers, greater hedge fund net buying during the announcement quarter is associated with a greater likelihood and magnitude of an upward revision of the premium. The evidence is consistent with the hypothesis that hedge funds play an active and strategic role and increase the wealth of target shareholders.
Attorneys as Arbitrators, by STEPHEN J. CHOI, New York University - School of Law, JILL E. FISCH, Fordham University - School of Law, ADAM C. PRITCHARD, University of Michigan Law School, was recently posted on SSRN. Here is the abstract:
We study the role of attorneys as arbitrators in securities arbitration, using a dataset of 422 randomly selected arbitrators and their 6724 arbitration awards from 1992 to 2006. We find that arbitrators who also represent brokerage firms or brokers in other arbitrations award significantly less compensation to investor-claimants than other arbitrators. This relation between representing brokerage firms and arbitration awards remains significant even when we control for political outlook. We find no significant effect for attorney-arbitrators who represent investors or both investors and brokerage firms. We report that ideology also correlates significantly with arbitration awards - arbitrators who donate money to Democratic political candidates award greater compensation than arbitrators who donate to Republican candidates.
Because the arbitration award is the product of the panel, not a single arbitrator, we also study the dynamics of panel interaction. We find that the position of chair is an important factor in assessing the arbitrator's influence (although the financial conflicts of other arbitrators may also affect arbitration awards). Coalitions among the other arbitrators are also important. If the chair and another panelist possess a common attribute, the effect on the arbitration award increases.
Finally, we provide evidence that the 1998 NASD reforms to the arbitration process - which introduced party control over the composition of panels - ameliorated, but did not eliminate, the effect that attorneys who represent brokers have on outcomes. We find no significant effect from the NASD's 2004 reforms.
Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom, by J. ROBERT BROWN Jr., University of Denver Sturm College of Law, and SANDEEP GOPALAN, Arizona State University - College of Law, was recently posted on SSRN. Here is the abstract:
Corporate law scholarship is replete with those who favor an enabling approach to regulation, with companies having the right to opt in to particular requirements or regimes. Opting in (or out) permits private ordering and allows for efficient relationships that are a product of bargaining between owners and managers.
This paper tests the core claim of scholars in the nexus of contracts tradition - that private ordering as a process of bargaining creates optimal rules. We do this by analyzing empirical evidence in the context of waiver of liability provisions. The article examines the history of these provisions, emphasizing that they arose in Delaware not from an effort to overturn Van Gorkom but from a decision to intervene in the market for D&O insurance. In other words, their genesis was owed to a desire to interfere with market forces with respect to insurance.
The Delaware model allowed companies to opt in to a regime that eliminated monetary damages for breach of the duty of care through amendments to the articles of incorporation. The contractarian approach would suggest that shareholders and management would use this authority to negotiate agreements that are in their mutual best interests. If a process of bargaining is at work as they claim, the opt-in process ought to result in a variety of practices, with some companies adopting waiver of liability provisions, others not, while still others modify the provisions to only waive liability in particular circumstances. These provisions, therefore, represent a laboratory for determining whether, and the degree to which, bargaining to achieve more efficient private arrangements actually occurs.
Our analysis reveals that the diversity predicted by a private ordering model is not borne out by the evidence. Instead, the evidence shows that one categorical rule (liability for breach of the duty of care) was merely replaced by another (no liability for a breach of the duty of care), with no evidence that the change increased efficiency. The article demonstrates that bargaining does not take place as the contractarian thesis would predict and that the so called private ordering does not necessarily result in greater efficiency
Friday, January 25, 2008
South Texas College of Law seeks one or more visitors for either or both semesters of the 2008-09 academic year. Priority will be given to applicants interested in teaching torts, evidence, and business courses (e.g., corporations, agency and partnership, securities regulation, corporate finance, and mergers and acquisitions). Applicants should submit a current c.v. and indicate a preference for one or both semesters and a desired course package.
(Chair -- Faculty Appointments Committee)
The SEC published on its website a "small entity compliance guide" prepared by SEC staff to summarize and explain the changeover to the SEC's new Smaller Reporting Company System by Small Business Issuers and Non-Accelerated Filer Companies.
As New York State Insurance Superintendent Eric Dinallo explores ways to bail out the bond insurers that guarantee municipal bonds and other debt, he is encountering resistance from Wall St. Part of the problem is that the firms may not have the money to invest; another may be their disinclination to work with Mr. Dinallo, who was one of Eliot Spitzer's chief attorneys in his investigations into Wall St. firms a few years ago. WSJ, Bond-Insurer Rescue Effort Faces Wall Street Skepticism.
SEC Commissioner Paul S. Atkins says Stoneridge, far from being an anti-investor decision, upholds the rule of law and protects investors from the greedy securities plaintiffs' bar, in a commentary in today's WSJ, Stoneridge and the Rule of Law.
Politicians, academics and the general public will at some time perhaps debate the effect sovereign wealth funds are likely to have both on the companies they are investing in and more generally the U.S. economy, but to date all have been quiet as the SWFs have provided the funds that big financial institutions like Merrill Lynch and Citigroup need to repair their bad business decisions. The Wall St. Journal addresses some of the longterm implications and the well-funded lobbying campaign that, since the 2006 Dubai Port's failed attempt to invest in a U.S. port operator, has worked to make foreign investments acceptable. WSJ, Lobbyists Smoothed the Way For a Spate of Foreign Deals.
Thursday, January 24, 2008
John W. White, Director, Division of Corporation Finance,SEC, spoke on Corporation Finance in 2008 — A Focus on Financial Reporting, at 35th Annual Securities Regulation Institute, San Diego, California, on January 23, 2008. In his remarks, he identified:
two themes that are driving our activities this year, particularly possible rulemaking plans. The biggest area of focus for us in 2008 is financial reporting, including reviewing the Commission's new Advisory Committee on Improvements to Financial Reporting (CIFiR), which is actually planning to vote on a number of recommendations to be included in a progress report in a few weeks. Within financial reporting (very broadly defined), I am including use of interactive data, IFRS for U.S. issuers, various proposed recommendations of the CIFiR (including on materiality and restatements and use of websites for disseminating financial information), SOX 404 and even oil and gas disclosures. The other leading area of focus for this year in Corporation Finance is international matters, which I discussed at some length last week in London, in remarks titled "Corporation Finance in 2008 — International Initiatives."
The SEC settled an enforcement action alleging a deliberate "pump and dump" scheme to defraud investors in the stock of Aimsi Technologies, against Defendants Aimsi Technologies, Inc. and Winfred Fields. The SEC filed its action on an emergency basis on May 16, 2005, alleging that Aimsi, Fields and the other defendants acquired a substantial stake in the shares of Aimsi, orchestrated a fraudulent promotional campaign to drive up the price and trading volume of Aimsi's stock, and then sold their shares at a substantial profit to the investing public after their plan succeeded. The Complaint alleges that before the Commission suspended trading in Aimsi's stock on Dec. 15, 2004, the defendants earned illicit trading profits of at least $3.1 million.
On January 15, 2008, the federal district court for the Southern District of New York entered final judgments on consent against Aimsi and Fields.
Why aren't there any stock repurchase programs when investors could really use them? Corporations frequently buy their own shares in the open market as a way of maintaining the stock price, yet buybacks are down. A Wall St. Journal article suggests several reasons: corporations used up their available cash buying shares at more expensive prices, corporations are reluctant to spend cash in these times of financial crisis, buybacks are a sign of confidence in the market, which is lacking these days, there is no longer the need for defensive buybacks. WSJ, Where Have Buybacks Gone?
New York state insurance regulators are trying to solve one of Wall St.'s biggest concerns -- the solvency of bond insurers Ambac Financial Group and MBIA, Inc. Bond insurers guarantee the principal and interest payments of municipal bonds. Both have attempted to raise additional capital as higher defaults put their ratings at risk. The state insurance regulator arranged a meeting to discuss a Wall St. bailout. WSJ, New York Seeks Bailout of Bond Insurers.
Societe General, France's second largest bank, announced a $7.16 billion write-down due to "massive fraudulent directional positions" by a single trader in charge of futures hedging on European equity market indices. The unnamed trader concealed losses through an elaborate scheme of fictitious transactions. The loss is the largest from a rogue trader. Both the trader and his supervisor were fired. WSJ, Societe Generale Hit By Fraud, Write-Downs.
Wednesday, January 23, 2008
In addition to its financial difficulties, Sallie Mae disclosed that the SEC has sought information about the company's disclosures and actions last December when some of the company's officers and directors sold their Sallie Mae shares. WSJ, SLM Swings to Quarterly Loss, Says SEC Is Looking at Disclosures.
The SEC announced a settled enforcement action against Andrew J. McKelvey, the former Chief Executive Officer of Monster Worldwide, Inc., for his participation in a multi-year scheme to secretly backdate stock options granted to Monster officers, directors and employees. Although McKelvey did not receive backdated options, he benefited from the scheme by granting backdated options to four individuals he personally employed, including three pilots and a mechanic. Under the settlement, McKelvey will pay $275,989.72 in disgorgement and prejudgment interest, will be barred from serving as an officer or director of a public company, and will be enjoined from violations of the anti-fraud, reporting and other provisions of the federal securities laws. McKelvey agreed to the settlement without admitting or denying the allegations in the complaint.
The SEC alleged that, beginning in 1997, McKelvey backdated stock option grants to coincide with the dates of low closing prices for the Company's common stock, resulting in grants of in-the-money options to numerous individuals. McKelvey understood that backdating options to coincide with low closing prices for Monster stock without recognizing a compensation expense was contrary to accounting rules and contrary to representations in Monster's SEC filings. McKelvey also caused Monster to misrepresent in its periodic filings and proxy statements filed with the Commission that all stock options were granted at the fair market value of the stock on the date of the award and caused Monster to overstate its aggregate pretax operating income by approximately $339.5 million, for fiscal years 1997 through 2005.
James G. Marquez, co-founder of several Bayou Management hedge funds, was sentenced to 51 months in prison and ordered to pay $6.26 million in restitution for scheming to defraud investors into investing in the funds by misrepresenting their profitability. Samuel Israel III, former Bayou CEO, and Daniel Marino, former Bayou CFO, previously pled guilty. NYTimes, Hedge Fund Founder Sentenced for Fraud.
Reactions to the Supreme Court's denial of cert in the Enron appeal:
"Our thinking was, if there was room for private actions, we'd be in a situation of a litigation free-for-all, that there'd really be no limiting principle here," said Robin Conrad, an executive at the U.S. Chamber of Commerce.
"From a public policy standpoint, it's an outrageous result," said former SEC Commissioner Harvey J. Goldschmid. You can't turn down Enron without understanding the signal you're sending." WPost, Court Declines Enron Investors' Appeal. For other reactions, see NYTimes, Supreme Court Won’t Hear Complaint by Enron Investors; WSJ, Justices Rebuff Enron Holders.