March 4, 2008
Diebold Calls UTC's Bid "Opportunistic"
Diebold rebuffed United Technologies Corporation's $2.64 billion bid. According to John N. Lauer, Diebold's nonexecutive chairman, “U.T.C.’s proposal is an opportunistic attempt to buy Diebold at a time when shareholders do not have sufficient data to evaluate the offer and as such, the board believes that it would be irresponsible to engage in discussions with U.T.C. at this time.” Diebold has been under SEC investigation for improper revenue recognition and has not filed financial information with the SEC since March 31, 2007. In addition, in January it said it would restate its financial statements from 2003 through 2006. WSJ, Diebold Rejects Offer By United Technologies; NYTimes, Diebold Rejects Takeover Advance.
March 3, 2008
Jury Finds Former Applix CFO Committed Fraud
The SEC announced that on February 15, 2008 a jury found Walter T. Hilger, former Chief Financial Officer of Applix, Inc, an Internet software company, liable for fraudulent conduct, including the falsification of books and records, in a civil injunctive action involving improper revenue recognition by Applix. The jury found former Applix CEO Alan C. Goldsworthy not liable for any securities law violations. The verdict followed a four week trial in Boston, Massachusetts.
The SEC's complaint alleged that Goldsworthy, Hilger and former Applix Director of World-Wide Operations Mark E. Sullivan participated in two fraudulent revenue recognition schemes, causing Applix to report inflated revenue and understated net loss figures for the year ended December 31, 2001 and for the quarter ended June 30, 2002.
The Court had previously entered a final judgment by consent against Sullivan on January 9, 2008. The final judgment enjoins Sullivan from future violations of federal securities laws and orders Sullivan to pay a $25,000 civil money penalty. Sullivan consented to the judgment without admitting or denying the allegations in the Commission's complaint.
SEC Proposes New Rules for Foreign Private Issuers
The SEC proposed changes to its rules relating to foreign private issuers that are intended to improve the accessibility of the U.S. public capital markets to these issuers, as well as to enhance the information that is available to investors. These amendments are part of a series of initiatives that seek to address changes in the disclosure and other requirements applicable to foreign private issuers in light of market developments, new technologies and other matters in a manner that promotes investor protection, cross-border capital flows and the elimination of unnecessary barriers to our capital markets.
The proposed amendments would: (1) Permit foreign issuers to test their qualification to use the forms and rules available to foreign private issuers on an annual basis, rather than on the continuous basis that is currently required; (2) Accelerate the filing deadline for annual reports filed on Form 20-F by foreign private issuers under the Exchange Act by shortening the filing deadline from 6 months to within 90 days after the foreign private issuer’s fiscal year-end in the case of large accelerated and accelerated filers, and to within 120 days after a foreign private issuer’s fiscal year-end for all other issuers, after a two-year transition period; (3) Eliminate an instruction to Item 17 of Form 20-F that permits certain foreign private issuers to omit segment data from their U.S. GAAP financial statements; and (4) Amend Rule 13e-3 under the Securities Exchange Act by adding cross-references to the new termination of reporting and deregistration rules for foreign private issuers.
In addition, the SEC is soliciting comments on proposals to: (5) Require foreign private issuers that are required to provide a U.S. GAAP reconciliation to do so pursuant to Item 18 of Form 20-F; (6) Amend Form 20-F to require foreign private issuers to disclose information about changes in the issuer’s certifying accountant, the fees and charges paid by holders of American Depositary Receipts, the payments made by the depositary to the foreign issuer whose securities underlie the American Depositary Receipts, and, for listed issuers, the differences in the foreign private issuer’s corporate governance practices and those applicable to domestic companies under the relevant exchange’s listing rules; and (7) Require foreign private issuers to provide certain financial information in annual reports on Form 20-F about a significant, completed acquisition that is significant at the 50% or greater level.
Genesco and Finish Line Settle Dispute over Merger
Genesco Inc. and The Finish Line reached a settlement that terminated both their merger agreement and the financial commitment that Finish Line had with UBS, just before start of a trial in Tennessee. UBS and Finish Line will pay Genesco a total of $175 million in cash along with shares of Finish Line common stock equal to 12 percent of Finish Line’s outstanding shares of stock after the shares are issued. Genesco and Finish Line would then enter into a mutual standstill agreement. Last June Finish Line agreed to acquire Genesco but later said that UBS had doubts about Genesco's financial performance, which led to Genesco's lawsuit to compel Finish Line to complete the deal. CFO.com, Shoe Merger Comes Untied.
SEC Permanently Suspends Attorney From SEC Practice
The SEC has permanently suspended from practicing before the Commission an attorney who took a primary role in his client's fraud and filed false and misleading documents with the SEC. Moneesh K. Bakshi was suspended based on an injunction entered against him by the U.S. District Court for the Southern District of New York. The court found that Bakshi misused his role as corporate counsel for Ramoil Management Ltd. to violate, and aid and abet Ramoil's violations of, the federal securities laws. In part as a result of Bakshi's fraud, Ramoil's stock price rose to an all-time high of $20 per share, before plunging to less than 10 cents per share and eventually being de-listed. On Oct. 25, 2007, the District Court entered a decision and order in the SEC's favor against Bakshi for his knowingly filing a Form 10-KSB that included an unsigned and falsified audit report; and for knowingly making false representations in registration statements on Forms S-8 and supporting opinion letters related to Ramoil issuing shares for consulting services that were never performed. The SEC's temporary suspension against Bakshi, imposed Dec. 28, 2007, became permanent when no petition to lift the suspension was received. The SEC determined that allowing Bakshi to continue appearing and practicing before the SEC would not be in the public interest because of Bakshi's willful violations of the federal securities laws.
NY Attorney General Enters Agreements with Freddie Mac, Fannie Mae
New York Attorney General Cuomo announced agreements with Fannie Mae, Freddie Mac and OFHEO that require Fannie Mae and Freddie Mac to buy loans only from banks that meet new standards designed to ensure independent and reliable appraisals. The agreements also create a new independent organization to implement and monitor the new appraisal standards. The companies also agree to establish a Home Valuation Code of Conduct. NEW YORK ATTORNEY GENERAL CUOMO ANNOUNCES AGREEMENT WITH FANNIE MAE, FREDDIE MAC, AND OFHEO.
What's Michael Eisner Up To?
Have you been wondering what Michael Eisner has been doing since he left Disney in 2005? He invested in a video-sharing website and digital studio and can claim as an early success "Prom Queen," a murder mystery series distributed on MySpace and other websites. Soon to follow -- "The All-For-Nots," a series about a indie band. NYTimes, The Very Model of a Modern Media Mogul.
United Technologies Makes Unsolicited Bid for Diebold
United Technologies Corp. announced an unsolicited cash bid to acquire all the shares of Diebold, the maker of ATMs and voting machines, for $2.63 billion, or $40 per share, a 66% premium. UTC announced the offer, saying that Diebold had rejected UTC's efforts to negotiate a deal for two years. Diebold had previously told UTC the deal was not in the best interests of the company and its shareholders and requested UTC not to contact the board again. UTC said it had the cash to do the deal. WSJ, United Technologies Offers $2.63 Billion for Diebold; NYTimes, Diebold Receives a Takeover Offer.
U.K. Committee Warns of Increased Regulation of CDOs
An influential committee in the U.K. investigating the collapse of the credit markets concludes that the complex debt products were so hard to understand that no one, including bank executives, understood their risks. The Treasury Select Committee's report on Stability and Transparency wanrs of increased regulation unless banks do a better job of explaining the risks. WSJ, U.K. Panel Warns of Tighter
March 2, 2008
Rose on Securities Litigation Reform
Reforming Securities Litigation Reform: A Proposal for Restructuring the Relationship Between Public and Private Enforcement of Rule 10b-5, by AMANDA M. ROSE, Vanderbilt University Law School, was recently posted on SSRN. Here is the abstract:
For years, commentators have debated how to reform the controversial Rule 10b-5 class action, without pausing to ask whether the game is worth the candle. Is private enforcement of Rule 10b-5 worth preserving, or might we be better off with exclusive public enforcement? This fundamental and neglected question demands attention today more than ever. An academic consensus has now emerged that private enforcement of Rule 10b-5 cannot be defended on compensatory grounds, at least in its most common form (a fraud-on-the-market class action brought against a non-trading issuer). That leaves the oft-cited, but under-theorized, rationale that private enforcement is a necessary supplement to the securities fraud deterrence efforts of the SEC. When this justification is critically examined, however, it proves to be highly debatable. A rich body of law and economics scholarship teaches that bounty hunter enforcement of an overbroad law, like Rule 10b-5, may lead to overdeterrence and stymie governmental efforts to set effective enforcement policy (even assuming away strike suits and the agency costs that attend class action litigation); if private enforcement is nevertheless desirable - a contestable proposition - it is because a world without it might result in even greater deviations from optimal deterrence, due to SEC budgetary constraints, inefficiency and/or capture.
By carefully explicating the relative advantages and disadvantages of private Rule 10b-5 enforcement versus exclusive public enforcement, this Article reveals a new and better way to remedy the shortcomings of the Rule 10b-5 class action. It proposes that policymakers adopt an oversight approach to securities litigation reform by, for example, granting the SEC the ability to screen which Rule 10b-5 class actions may be filed, and against whom. By muting the overdeterrence threat of private litigation and placing the SEC back firmly at the helm of Rule 10b-5 enforcement policy, this approach would mitigate the primary disadvantages of private enforcement. Moreover, by preserving a private check on SEC inefficiency and capture and allowing the SEC to continue to supplement its budget with private enforcement resources, it would do so without eliminating the primary advantages of the current system. This approach stands in stark contrast to prior securities litigation reforms, which have responded to the overdeterrence threat posed by Rule 10b-5 class actions by rigidly narrowing the scope of private liability. This Article argues that an oversight approach to securities litigation reform carries distinct advantages over this narrowing approach, and ought to receive serious consideration in the ongoing policy debate.
Bainbridge on Insider Trading
The Iconic Insider Trading Cases, by STEPHEN M. BAINBRIDGE, University of California, Los Angeles - School of Law, was recently posted on SSRN. Here is the abstract:
This essay traces the evolution of insider trading jurisprudence, focusing on the three iconic Supreme Court decisions: Chiarella, Dirks, and O'Hagan. The essay argues that all three cases were seriously flawed because each failed to cohere as to either policy or doctrine. Just as a child might break his toy by attempting to force a square peg into a round hole, the Supreme Court made a hash of insider trading law (and Rule 10b-5 generally) by attempting to force insider trading into a paradigm - securities fraud - that does not fit
Bhagat & Romano on Event Studies Part II
Event Studies and the Law: Part II: Empirical Studies of Corporate Law, by SANJAI BHAGAT, University of Colorado at Boulder - Department of Finance, and ROBERTA ROMANO, Yale Law School; National Bureau of Economic Research (NBER), was recently posted on SSRN. Here is the abstract:
This article is the second part of a review of the event study methodology, which has proved to be one of the most successful uses of econometrics in policy analysis. In this part we focus on the methodology's application to corporate law and corporate governance issues. Event studies have played an important role in the making of corporate law and in corporate law scholarship. The reason for this input is twofold. First, there is a match between the methodology and subject matter: the goal of corporate law is to increase shareholder wealth, and event studies provide a metric for measurement of the impact upon stock prices of policy decisions. Second, because the participants in corporate law debates share the objective of corporate law, to adopt policies that enhance shareholder wealth, their disagreements are over the means to achieve that end. Hence, the discourse can be empirically informed. The article concludes by sketching the methodology's use in evaluating the economic effects of regulation. While event studies' usefulness for policy analysis is by now familiar in the corporate law setting, we hope that our two-part review will suggest appropriate applications to other fields of law.
Bhagat & Romano on Event Studies Part I
Event Studies and the Law: Part I: Technique and Corporate Litigation, by SANJAI BHAGAT, University of Colorado at Boulder - Department of Finance, and ROBERTA ROMANO, Yale Law School; National Bureau of Economic Research (NBER), was recently posted on SSRN. Here is the abstract:
Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This article is the first in a set of two that review the use and impact of the event study methodology in the legal domain. This article begins by briefly reviewing the event study methodology and its strengths and limitations for policy analysis. It then reviews in detail how event studies have been used to evaluate the wealth effects of corporate litigation: defendants experience economically meaningful and statistically significant wealth losses upon the filing of the suit, whereas plaintiff firms experience no significant wealth effects upon filing a lawsuit. Also, there is a significant wealth increase for defendant firms when they settle a suit with another firm, in contrast to other types of plaintiffs, and in contrast to the settling plaintiff firms. These findings suggest that, at a minimum, lawsuits are not a value-enhancing way for corporations to settle their disagreements with other corporations. In addition, the market appears to impose a higher sanction on firms than actual criminal sanctions, and reputational losses are of equal magnitude for civil fines as for criminal ones. The article concludes with some recommendations for researchers: the standards for conducting an event study are well established; researchers can increase the power of an event study by increasing the sample size, and by narrowing the public announcement period to as short a time frame as possible. The companion article reviews the use of event studies in corporate law and regulation.