Securities Law Prof Blog

Plumlee & Plumlee on Financial Reporting

Assurance on XBRL for Financial Reporting, by DAVID PLUMLEE, University of Utah - David Eccles School of Business, and MARLENE PLUMLEE, University of Utah - School of Accounting and Information Systems, was recently posted on SSRN.  Here is the abstract:

"Tagging" financial information using eXtensible Business Reporting Language (XBRL) creates documents that are computer readable and searchable. Since 2004, the Securities and Exchange Commission (SEC) has taken steps toward requiring XBRL to be used in its filings, including a voluntary filing program. Once XBRL is required, investors are likely to demand assurance on the tagging process. The PCAOB has issued guidance on attest engagements regarding XBRL financial information furnished under the SEC's current voluntary filer program, which relies on the auditor agreeing a paper version of the XBRL-related documents to the information in the official EDGAR filing. While this process may be adequate for the current paper-oriented reporting paradigm, the power of XBRL is that it allows individual pieces of financial data to be extracted from the SEC's financial database outside the context of the statements as a whole. This article provides some background on the SEC's efforts to incorporate XBRL into its filing process and a brief overview of the technical aspects of XBRL. Its principal focus is on several important questions that assurance guidance must address in a "data centric" reporting environment, such as, what constitutes an error or what does materiality mean when individual pieces of financial data will be used outside the context of the financial statements? It also describes some XBRL-related areas where academic research can and should provide inputs to the process of developing guidance for XBRL-document assurance.

Palmiter & Taha on Mutual Fund Investors

Mutual Fund Investors: Divergent Profiles, by ALAN R. PALMITER, Wake Forest University - School of Law, and AHMED E. TAHA, Wake Forest University - School of Law, was recently posted on SSRN.  Here is the abstract:

Mutual funds are owned by almost half of all U.S. households, manage over $12 trillion dollars in assets, and have become a primary vehicle for investment and retirement savings. Who are mutual fund investors? The answer is critical to regulatory policy. Fund investors, by selecting the funds in which they invest, play a central role in determining asset allocation and in controlling the fees funds charge. Thus, the functioning of the mutual fund market turns on the knowledge and financial sophistication of fund investors.

This article examines the profiles of mutual fund investors presented by the mutual fund industry, by the SEC, and by an extensive empirical academic literature produced primarily by finance professors. The industry portrays fund investors as diligent, fairly sophisticated, and guided by professional financial advisers. The industry claims that the result is a competitive mutual fund market as fund investors demand low costs and solid performance. The SEC's regulatory policy paints a more cautious portrait of fund investors. While acknowledging that many investors have limitations, the SEC touts improved disclosure by the industry as a sufficient antidote. The academic literature, however, finds that fund investors are generally ignorant and financially unsophisticated. Most investors are unaware of even the basics of their funds, do not take costs (especially ongoing costs) into account when they invest, and chase past fund performance, despite little evidence that past returns predict future returns. Fund investors who use financial advisers do no better.

The SEC's belief that fund investors can fend for themselves, once armed with adequate disclosure, fails to appreciate the extent of investors' limitations. Instead, the findings of the academic literature suggest that policymakers should rethink the current regulatory approach. Disclosure may not be enough.

Sjostrom on Rule 144A Equity Offerings

The Birth of Rule 144A Equity Offerings, by WILLIAM K. SJOSTROM Jr., Northern Kentucky University - Salmon P. Chase College of Law, was recently posted on SSRN.  Here is the abstract:

In a groundbreaking deal closed in May 2007, Oaktree Capital Management LLC, a leading private U.S. hedge fund advisory firm, sold a 15% equity stake in itself for $880 million. The deal is groundbreaking because it was not structured as an initial public offering (IPO), traditionally the only option for an equity offering of this size by a private company. Instead, it was structured as a private placement under Rule 144A of the Securities Act of 1933. Rule 144A enables a company to market and sell securities through an underwriter to institutional investors without registering the offering with the Securities and Exchange Commission as is required for an IPO. Had the Oaktree deal been structured as an IPO, it would have been the sixth largest by a domestic issuer in 2007.

Oaktree's novel use of Rule 144A is driven by two factors. First, passage of the Sarbanes-Oxley Act of 2002 has made it much more expensive to be a public company thereby decreasing the attractiveness of an IPO. Second, the emergence of a centralized trading market for Rule 144A equity securities has improved their liquidity thus increasing the attractiveness of a Rule 144A equity offering. Consequently, a tipping point has been reached where the value of pursuing a Rule 144A equity offering exceeds the value of pursuing an IPO for some firms. The purpose of this article is to explore this development. Specifically, the article analyzes the legal framework of Rule 144A and details the burgeoning Rule 144A trading market. It then compares the costs and benefits of an IPO to those of a Rule 144A equity offering and theorizes about a firm's calculus for choosing one structure over the other. Finally, the article argues that Rule 144A equity offerings are firmly grounded in public policy and thus recommends regulatory reforms to improve their viability.

Leuz & Wysocki on Financial Reporting

Economic Consequences of Financial Reporting and Disclosure Regulation: A Review and Suggestions for Future Research, by CHRISTIAN LEUZ, University of Chicago - Graduate School of Business; European Corporate Governance Institute (ECGI); University of Pennsylvania - Wharton Financial Institutions Center, and PETER D. WYSOCKI, Massachusetts Institute of Technology (MIT) - Economics, Finance, Accounting (EFA), was recently posted on SSRN.  Here is the abstract:

This paper surveys the theoretical and empirical literature on the economic consequences of financial reporting and disclosure regulation. We integrate theoretical and empirical studies from accounting, economics, finance and law in order to contribute to the cross-fertilization of these fields. We provide an organizing framework that identifies firm-specific (micro-level) and market-wide (macro-level) costs and benefits of firms' reporting and disclosure activities and then use this framework to discuss potential costs and benefits of regulating these activities and to organize the key insights from the literature. Our survey highlights important unanswered questions and concludes with numerous suggestions for future research.

"The Dysfunctional Board: Causes and Cures

The Corporate Law Center at the University of Cincinnati College of Law presented its 21st Annual Corporate Law Symposium on March 14 on "The Dysfunctional Board: Causes and Cures," before a packed audience consisting of students, practitioners, and academics.  The panelists were of uniformly high quality, and the audience's enthusiastic participation in the Q&A sessions made for lively discussions.  The webcast of the program will be shortly posted on the CLC site, and the papers will appear in a forthcoming issue of the University of Cincinnati Law Review.  Here is a synopsis of the Program:

Panel I: The Underlying Causes of Dysfunctionality

Franklin A. Gevurtz, McGeorge (The Function of Dysfunctional Boards) started us off with the hard question: what is the board's function?  After arguing that none of the models (managing, monitoring, mediating) works, he reviewed the origins of the modern corporate board in English trading companies and medieval councils.  From this he argued that the board's purpose is to be a representive body; thus, it is dysfunctional only when it is not an elected body.  If a board is divided because the shareholders are divided, it has fulfilled its function.
Jayne W. Barnard, William & Mary (Narcissism, Over-Optimism, Fear, Anger and Depression: The Interior Life of Corporate Leaders) examined common CEO pathologies and how they can lead to recurring behavior, such as overcommitment to previous decisions, overestimation of ability to execute takeovers, overpayment in tender offers, and preoccupation with perquisites and personal myth making.  She also proposed some solutions, including the board's awareness of these characteristics in succession planning and expanding the board's monitoring role to take into account these issues.
John S. Stith (Porter Wright & Morris) focused on the Ohio corporation statute, particularly its constituency statute, and noted that the law expects that the board will perform a variety of roles, including mediation.

Panel II: Competing Expectations for Board Performance

Lissa Lamkin Broome and Kimberly D. Krawiec, both from UNC (The Road to Board Diversity: A Case Study from North Carolina) described their empirical study on diversity on public boards, consisting of a series of confidential, semi-structured interviews with corporate directors.  For this Symposium, they limited their discussion to an analysis of the rationale for board diversity, in particular, the signaling function.  They noted that through board diversity corporations may seek to signal workplace equality, attention to women and minorities in the development in products and services, and, more generally, that they are law-abiding and forward-looking.  They could not conclude, however, that board diversity is a stable signal in all cases, since board diversity may not be too costly to fake a signal.
Lawrence A. Cunningham, GW (Rediscovering Board Expertise: Legal Implications of the Empirical Literature) began by noting that despite the fascination with board independence, there is little evidence that it has improved board performance.  Accounting expertise, however, has been shown to improve the quality of financial statements, although the SEC's definition of "accounting expertise" is too broad for this purpose.  Thus, audit committee members add real value, but may not get greater benefits and may have greater liabilities, than other directors.  He argued that the incentives for expertise need to change.
Tamr Frankel, BU (Corporate Boards of Directors: Advisors or Supervisors?) emphasized the importance of culture in the two components of board service: advisory and supervisory.  She noted that boards need to strike the appropriate balance between micromanagement and window-dressing.  Boards must create a culture where extremes are not allowed.  She emphasized the importance of the board's "muddling through" -- to try and if it fails, then try something else.
Gary P. Kreider (Keating, Muething & Klekamp) noted that for shareholders corporate financial performance is what matters.  He also predicted that shareholders' access to the corporate ballot for purposes of nominating directors is likely to come soon.

Panel III: The Board as Compliance Officer

Peter J. Henning, Wayne State (Board Dysfunction: Dealing with the Threat of Corporate Criminal Liability) focused on board decisions made in response to reports of alleged misconduct in the context of four recent examples: Enron, Chiquita, United HealthCare and Staples.  He recommended the creation of a Zapata committee consisting of directors that are not tainted by the alleged corporate misconduct with the authority to effect real change.
Miriam H. Baer, NYU (Corporate Policing and Corporate Governance: What Can We Learn from Hewlett-Packard's Pretexting Scandal?) first examined Hewlett-Packard's pretexting scandal.  She then explained and examined the contradictions between corporate governance principles and corporate policing practices.  The government insists on effective corporate compliance programs, and given boards' lack of expertise and limited tools, we should not be surprised if we see more clashes between corporate governance and compliance.
Clifford A. Roe, Jr. (Dinsmore & Shohl) concluded by identifing common themes that had emerged in the course of the day's discussion: the uncertainty about the board's function, the competing expectations for board performance, and the difficulties these present to board members.

    

SEC Trading & Markets Div. on Bear Stearns

The SEC's Division of Trading and Markets today issued the following statement regarding The Bear Stearns Companies:

"The decision by the Federal Reserve Bank of New York to provide The Bear Stearns Companies temporary funding through J.P. Morgan Chase & Co. today followed a significant deterioration in Bear Stearns' liquidity on Thursday. The Division of Trading and Markets has monitored both the capital and the liquidity of the firm on a daily basis in recent weeks. The purpose in doing so on a firm-wide basis has been to consider all potential impacts on the financial health of the two major U.S. registered broker-dealers and the other regulated entities in the Bear Stearns consolidated group.

"As of its most recent capital calculation as of the end of February 2008, Bear Stearns' holding company capital exceeded relevant regulatory standards. According to the information supplied to the SEC by Bear Stearns as of Tuesday, March 11, the holding company had a substantial capital cushion. In addition, as of March 11, the firm had over $17 billion in cash and unencumbered liquid assets.

"Beginning on that day, however, and increasingly throughout the week, lenders and customers of Bear Stearns began to remove funds from the firm, despite its stable capital position. As a result, Bear Stearns' excess liquidity rapidly eroded.

"The Division is continuing to monitor Bear Stearns' condition with a view to the safety of its regulated entities including its registered broker-dealers. The Division believes that Bear Stearns' registered broker-dealers remain in compliance with Commission capital rules.

"The SEC also is working closely with the Department of the Treasury, the Federal Reserve, and the Federal Reserve Bank of New York to ensure that our regulatory actions contribute to orderly and liquid markets."

Former Lason Executives Settle Accounting Fraud Charges

The SEC settled fraud charges against Gary L. Monroe, William J. Rauwerdink, John R. Messinger, and Robert T. Bassman, the former CEO, CFO, COO and Controller, respectively, of Lason, Inc., a document management company based in Troy, Michigan. The Final Judgment against Bassman orders him to pay disgorgement and prejudgment interest of $240,761.70, payment of all but $35,000 of which is waived on the basis of his financial condition. The defendants consented to the entry of the Final Judgments without admitting or denying the allegations against them.

The SEC alleged that during 1998 and 1999, the defendants engaged in a fraudulent scheme to overstate Lason’s earnings in order to meet or exceed Wall Street expectations. The scheme culminated in the third quarter of 1999, when Lason’s earnings were overstated by approximately 65%.

The defendants profited from the scheme through their salaries as well as bonuses, stock options and executive loans that were affected by Lason’s artificially inflated stock price.
In 2007, in a related criminal action, Monroe and Messinger pled guilty to making false statements to a federal agency (the Commission) and Rauwerdink pled guilty to conspiracy and making false statements to a federal agency. Monroe, Messinger and Rauwerdink were sentenced to 15 months, 12 months, and 45 months imprisonment respectively. In addition, Monroe and Messinger were ordered to pay restitution of $20 million, and Rauwerdink was ordered to pay restitution of $285 million.

Bear Stearns Reports Financing Arrangement With JPMorgan Chase

The Bear Stearns Companies Inc. announced today it reached an agreement with JPMorgan Chase & Co. (JPMC) to provide a secured loan facility for an initial period of up to 28 days allowing Bear Stearns to access liquidity as needed. Bear Stearns also announced that it is talking with JPMorgan Chase & Co., regarding permanent financing or other alternatives.

Alan Schwartz, president and chief executive officer of The Bear Stearns Companies Inc., said, "Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity. We have tried to confront and dispel these rumors and parse fact from fiction. Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated. We took this important step to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations."

The SEC issued the following statement regarding The Bear Stearns Companies:

The Securities and Exchange Commission has been in close contact with the Department of the Treasury, the Federal Reserve, and the Federal Reserve Bank of New York during discussions concerning an agreement by J.P. Morgan Chase & Co. to provide a secured loan facility to The Bear Stearns Companies. We will continue to work closely together in a way that contributes to orderly and liquid markets.

FINRA issued the following statement about Bear Stearns:

FINRA, in coordination with the Securities and Exchange Commission (SEC) and other regulatory authorities, has been monitoring the U.S. broker-dealer subsidiaries of Bear Stearns & Co. Inc. These broker dealers (Bear, Stearns & Co Inc., Bear, Stearns Securities Corp., Bear Wagner Specialists LLC) remain in compliance with the SEC's and FINRA's capital rules.

FINRA Revises Portfolio Margin Risk Disclosure Statements

FINRA has revised the sample portfolio margining risk disclosure and acknowledgment statements that member firms must provide to customers who have been approved for portfolio margin. This replaces the March 2007 sample risk disclosure and acknowledgment statements.  Portfolio Margin Release.

SEC Suspends Trading in 26 Stocks in Corporate Hijacking Cases

The SEC suspended trading in the securities of 26 companies that appear to have usurped the identity of defunct or inactive publicly-traded corporations using a tactic known as corporate hijacking. The Commission ordered the suspensions because of questions regarding the adequacy and accuracy of information pertaining to their status as publicly-traded companies.  The trading suspensions are part of the SEC's stepped-up effort to address fraud involving the securities of non-exchange traded, or microcap, securities. These are the first actions resulting from the recent formation of the Enforcement Division's microcap fraud working group. In March 2007, the Commission suspended trading in the securities of 35 companies as part of the SEC's Anti-Spam Initiative, which targets potentially fraudulent spam e-mail.

SEC Charges Three with Insider Trading in Connection with Eurex Merger with ISE

The SEC filed an insider trading case against three individuals alleging illegal tipping and trading in advance of the April 30, 2007, announcement of Eurex Frankfurt A.G.'s $2.8 billion cash merger agreement with International Securities Exchange Holdings, Inc.  The defendants, John F. Marshall, Vice Chairman of ISE, Alan L. Tucker, and Mark R. Larson were all partners in Marshall Tucker & Associates, L.L.C., a New York-based financial consulting partnership. The SEC's complaint alleges that Marshall received detailed and current information regarding the highly confidential ISE-Eurex merger talks, and tipped Tucker and Larson. According to the complaint, Tucker and Larson then purchased ISE securities resulting in illegal profits totaling approximately $1.1 million and $31,000, respectively.

Simultaneous with the filing of the SEC action, the U.S. Attorney's Office for the Southern District of New York announced the filing of a criminal complaint charging the three men with conspiracy to commit securities fraud.

FINRA Issues Notice on Developing New Consolidated Rulebook

Following the consolidation of NASD and NYSE Regulation into FINRA, FINRA established a process to develop a new consolidated rulebook, which is outlined in the attached Notice. The new FINRA Rules will apply to all FINRA members and will be proposed in phases to the SEC. As rules approved by the SEC become effective, they will replace the existing NASD Rules and incorporated New York Stock Exchange (NYSE) Rules.

NASAA Announces 2008 Public Policy Conference

The North American Securities Administrators Association (NASAA) today announced the line-up of speakers and panels for its 2008 Public Policy Conference, which will be held April 1 in Washington, D.C.  The conference brings together securities regulators, financial services industry representatives, policy makers, and the media, for an in-depth look at key public policy issues concerning securities regulation and investor protection.  Senator Jack Reed (D-RI), a senior member of the Senate Banking Committee and Chairman of the Subcommittee on Securities, Insurance, and Investment, will deliver the conference’s opening keynote address. SEC Chairman Christopher Cox will deliver the luncheon keynote address.

The conference also will feature two panel discussions on current policy issues facing securities regulators and Wall Street. The first panel will outline what is at stake for investors as distinctions blur between investment advisers and brokers and as the SEC continues its ongoing review of how these two financial service providers are regulated. The second panel will delve into the current debate over principles- and rules-based securities regulation, spurred by the U.S. Department of the Treasury’s Review of the Regulatory Structure Associated with Financial Institutions. Panelists will include Roel Campos, former SEC Commissioner, and Lynn E. Turner, former Chief Accountant of the SEC.,Registration information and other details are available on the NASAA website.

Goldman Plans to Underwrite SPAC Offerings

Offerings of blank check companies -- now upgraded to Special Purpose Acquisition Companies (SPACs) -- are hot, comprising almost 25% of all IPOs in the US last year.  Goldman Sachs is the last major securities firm that has declined to underwrite SPACs, saying that the typical 20% stake in acquired companies allotted to management is too generous and dilutive of public shareholders' interest.  Goldman plans to join the club, but reportedly will underwrite SPACs that cap the management's stake at 10%.  WSJ, Goldman to Join the SPAC Field.

Chicago Mercantile and Nymex Near Deal

CME Group, parent of Chicago Mercantile Exchange, the largest US exchange operator, may announce a definitive deal to buy energy exchange operator Nymex Holdings soon.  The two have been in exclusive talks since January.  If the deal closes, CME would be worth about $35 billion.  Last year CME acquired the Chicago Board of Trade.  WSJ, Chicago Merc Nears Deal With Nymex.

Electronic Arts Plans Tender Offer for Take-Two

Electronic Arts plans a tender offer for all shares of Take-Two at $26.  Take-Two's board previously rejected its unsolicited bid for the same price, which at that time was a 50% premium over the market price, and described the offer as too low and ill-timed.  Take-Two is the publisher of Grand Theft Auto.  WSJ, EA's Take-Two Saga Turns Hostile.

SEC Publishes Text of Proposed Rule on ETFs

The SEC released the text of a proposed new rule under the Investment Company Act of 1940 that would exempt exchange-traded funds (“ETFs”) from certain provisions of that Act and its rules. The rule would permit certain ETFs to begin operating without obtaining an exemptive order from the Commission. According to the SEC, the rule is "designed to eliminate unnecessary regulatory burdens, and to facilitate greater competition and innovation among ETFs." The Commission also is proposing amendments to its disclosure form for open-end investment companies to provide more useful information to investors who purchase and sell ETF shares on national securities exchanges. In addition, the SEC is proposing a new rule to allow mutual funds (and other types of investment companies) to invest in ETFs to a greater extent than currently permitted under the Investment Company Act.  Release Nos. 33-8901; IC-28193; File No. S7-07-08; Exchange-Traded Funds.

SEC Trading & Markets Director Testifies on Municipal Bond Turmoil

Erik R. Sirri, Director, Division of Trading and Markets, U.S. Securities and Exchange Commission, testified on Municipal Bond Turmoil: Impact on Cities, Towns and States, before the Committee on Financial Services, U.S. House of Representatives, on March 12, 2008.  He describes the current difficulties in the municipal bond market and states:

Due to the severity and immediacy of the auction-rate market decline and implications for investors, Commission staff is developing appropriate guidance to facilitate orderly markets and continue to protect investors. The guidance would be designed to clarify that, with appropriate disclosures, and compliance with certain other conditions, municipal issuers can provide liquidity to investors that want to sell their auction-rate securities without triggering market manipulation concerns. This may also have the secondary effect of easing the substantial financial burden on municipal issuers and conduit borrowers from unusually high interest rates. It also should facilitate an orderly exit from this market by municipal issuers and conduit borrowers who seek to do so.

Spitzer's Legacy on Wall St.

What will be Governor Spitzer's legacy as the crusading Attorney General?  Did he accomplish meaningful reforms in the Global Settlement and market-timing investigations, or was it all for show?  The Wall St. Journal quotes Professor Tamar Frankel, at Boston University Law School: "Whether for his own purposes or not, he was the one that put the brakes on"  and "stopped the slippery slope" that many in the financial-services industry were operating under around the turn of the century.  (For my own assessment of the Global Settlement, see Are Retail Investors Better Off Today?)  Even many of Spitzer's supporters believe he may have gone too far in his campaigns against NYSE's Dick Grasso and AIG's Maurice Greenberg.  And, of course, if you act self-righteous, you actually have to be holier-than-thou.  WSJ, Debate Continues on Whether Wall Street Changes Have Aided Investors.

Corporate Buyback Programs Are Down

Have buybacks become passe?  CFO.com reports that, even when their stock prices could use the boost, corporation are cutting back on stock repurchases, with the exception of IBM, which announced a huge buyback program last month.  Corporations may feel they need the cash on hand.  CFO.com, Where Have All the Buybacks Gone?

Court Enters Default Judgment in Phony Tender Offer Manipulation Case

The federal district court for the Southern District of New York entered a judgment permanently enjoining the partnership Hollingsworth, Rothwell & Roxford ("HRR") from future violations of the anti-manipulation and tender offer anti-fraud provisions of the federal securities laws. HRR was ordered to pay $900,000 in civil monetary penalties.  The court also entered a judgment permanently enjoining Theodore Roxford a/k/a Lawrence David Niren ("Roxford") from future violations and ordered him to pay $900,000 in civil monetary penalties. Both judgments were entered by default.

The SEC alleged that beginning in 2003, Roxford and HRR made false and materially misleading statements in connection with purported tender offer announcements for five publicly-traded companies - Sony Corporation, Zapata Corporation, Edgetech Services, Inc., Playboy Enterprises, Inc., and PeopleSupport, Inc. Roxford and HRR publicized the phony offers through press releases, internet message board postings, and in at least one filing with the Commission. They made these fake offers in order to manipulate the price of the target companies' stock by inducing investors to purchase the stock.

SEC Files Civil Charges Against Promoters of "Teach Me to Trade" Program

I have often wondered why there was not a crackdown on the infomercials shown on television and other"investor workshops." The SEC today filed civil fraud charges against Linda Woolf and David Gengler, two promoters who allegedly made millions selling a get-rich-quick stock trading system.  (If you go to its website, you can see videos of the sales pitch.)  The SEC alleges that they duped seniors and others who had attended free introductory seminars into believing they would make extraordinary stock market profits if they bought expensive "Teach Me to Trade" (TMTT) classes, mentoring, and computer software.  In order to con victims into paying as much as $40,000 for TMTT products and services, the Commission alleges that Woolf and Gengler lied about their success with the trading system, when in truth neither Woolf nor Gengler ever purchased TMTT's products or became successful traders.

In one infomercial Woolf told how she used to be an elementary school teacher and was able to replace her entire income after attending TMTT workshops. "I had no idea it was that easy to learn how to make money in the stock market," Woolf said. In another infomercial, Gengler claimed, "If you can simply follow steps and follow our principles, you'll make money. It's that simple."  Instead, the Commission alleges, Woolf and Gengler are unsuccessful traders, with Woolf having never declared a trading profit on her federal tax returns and Gengler typically declaring losses, or no profits. However, Woolf reaped approximately $4 million in commissions from selling TMTT packages, and Gengler made approximately $2.25 million, according to the Commission's complaint.

SEC and CFTC Announce New Cooperation Agreement

Turf wars between the SEC and the CFTC have existed since the latter agency's creation and have only intensified over the years with the proliferation of complex products.  Today the agencies announced what the press release describes as a "ground-breaking mutual cooperation agreement" to establish a closer working relationship between their agencies. The agreement establishes a permanent regulatory liaison between the agencies, provides for enhanced information sharing, and sets forth several key principles guiding their consideration of novel financial products that may reflect elements of both securities and commodity futures or options.

The agencies also announced their plans to consider two new derivative products under the agreement and issued notices requesting public comment on two new products. Both products would be based on the streetTracks ® Gold Trust Shares (Gold Shares). One product is an option that would be traded on options exchanges, and the other is a future that would trade on a single stock futures exchange. The requests for comment will be published in the Federal Register shortly.

In addition, the Options Clearing Corporation, which is subject to the joint jurisdiction of the agencies in certain areas, recently filed with both the SEC and the CFTC for approval to clear and settle both of the new products. Both agencies expect to act on these filings expeditiously and issue notices for public comment in the near future.

The two new products have raised questions about how they best should be regulated under federal law. Other recent products, such as credit default options, have raised similar questions. The Memorandum of Understanding addresses how the agencies will approach products that raise these issues in this burgeoning area of financial innovation. It also establishes a framework that will facilitate discussions and coordination regarding issues in other areas of common regulatory interest between the two agencies, such as portfolio margining, foreign security index products, and the oversight of firms registered with both agencies.

Private Equity on the Skids

The reversals of fortune for private equity firm continue to confound, as The Blackstone Group (which, you will remember went public just last year)announced an 89% earnings drop for the last quarter in 2007 and Carlyle Capital may be close to insolvency.  NYTimes, Buyout Industry Staggers Under Weight of Debt . However, Blackstone's Steven A. Schwarzman still has $100 million to give to the New York Public Library in exchange for naming rights.  NYTimes, A $100 Million Donation to the N.Y. Public Library.

Activist Shareholder Considers Withhold Vote Campaign Against Morgan Stanley's Mack

At last year's annual meeting, Morgan Stanley CEO and Chair John J. Mack said: "Do we take a lot of risk? Yes, I think this firm has the capacity to take a lot more risk than it has in the past.”  What will he say this year?  Meanwhile, CtWInvestment Group, the activist shareholder, considers a campaign to withhold votes from Mr. Mack's re-election as director, in an effort to persuade the company to split the CEO and Chair positions.  NYTimes, Morgan Stanley Chief Grappling With New Risk.

University of Cincinnati Symposium on Dysfunctional Boards

The University of Cincinnati College of Law and Law Review Present

The Dysfunctional Board: Causes and Cures

March 14, 2008, 8:00 a.m. - 3:30 p.m.

This Program will be Webcast at the Corporate Law Center website.  In addition, you will be able to participate in the question and answer sessions by emailing questions to the panels.  The email address will be announced during the conference and posted on the website.

PROGRAM

Panel 1: The Underlying Causes of Dysfunctionality

9:00 -- 10:30 a.m.

MODERATOR: John S. Stith, Esq., Porter Wright & Morris LLP, Cincinnati

PRESENTERS:

Franklin A. Gevurtz, Distinguished Professor and Scholar, University of the

Pacific, McGeorge School of Law

The Function of Dysfunctional Boards

An examination of the historical and political origins of the corporate

board of directors and what it tells us about Hewlett-Packard.

Jayne W. Barnard, James Goold Cutler Professor, College of William and

Mary, Marshall-Wythe School of Law

Narcissism, Over-Optimism, Fear, Anger and Depression: The Interior Life of

Corporate Leaders

An exploration of the cognitive biases and personal demons that may

drive leaders to foolish acts and several structural responses to the most

common CEO pathologies.

Panel 2: Competing Expectations for Board Performance

10:45 a.m. -- 12:30 p.m.

MODERATOR: Gary P. Kreider, Esq., Keating Muething & Klekamp, LLP, Cincinnati

PRESENTERS:

Lissa Lamkin Broome, Professor, University of North Carolina School of Law

Kimberly D. Krawiec, Professor, University of North Carolina School of Law

The Road to Board Diversity: A Case Study from North Carolina

Empirical research on the hurdles and successes of board diversity and its

impact on board decision-making.

Lawrence A. Cunningham, Professor, George Washington University Law School

Rediscovering Board Expertise: Legal Implications of the Empirical Literature

An examination of the relative importance of independence versus

expertise on the board of directors, especially as it relates to the audit

committee.

Tamar Frankel, Professor and Michaels Faculty Research Scholar, Boston

University School of Law

Corporate Boards of Directors: Advisors or Supervisors?

An analysis of the role of boards as advisors vs. supervisors, and the issues of

mediation among the two conflicting power positions as well as cause and cure.

Panel 3: The Board as Compliance Officer

1:45 - 3:15 p.m.

MODERATOR: Clifford A. Roe, Jr., Esq., Dinsmore & Shohl, LLP, Cincinnati

PRESENTERS:

Peter J. Henning, Professor, Wayne State University Law School

Board Dysfunction: Dealing with the Threat of Corporate Criminal Liability

An analysis of how boards respond to corporate malfeasance and, in some

instances, enable companies and their CEOs to commit corporate malfeasance.

Miriam H. Baer, Acting Assistant Professor, New York University School of Law

Corporate Policing and Corporate Governance: What Can We Learn from

Hewlett-Packard’s Pretexting Scandal?

An examination of the tension between law enforcement norms and

corporate governance norms, the deception gap between private and

public law enforcement, and the implications of these tensions for public

companies and their Boards.

The Corporate Law Symposium is generously sponsored by the law firm of Dinsmore & Shohl LLP.

Governor Spitzer, Linked to Prostitution Ring, Apologizes

This afternoon both the New York Times and the Wall St. Journal reported that Governor Eliot Spitzer had been involved in a prostitution ring, apparently caught in a federal wiretap arranging for the services of a prostitute in Washington D.C. last month.  This afternoon Governor Spitzer appeared to confirm these reports as he made a brief public statement in which he apologized to his family and to the public, but also stated that: "I do not believe that politics in the long run is about individuals. It is about ideas, the public good and doing what is best for the State of New York."

Unfortunately, politics is about individuals.  The kickback scandals of Milberg Weiss and William Lerach gave corporate defendants a powerful weapon to use against securities fraud class actions, and they have used it with great effectiveness, to argue that the greed of the private securities bar, and not vindication of investors' rights, was the force behind private litigation. Now Governor Spitzer has given corporate America yet another reason to attack the bona fides of those who seek to hold them accountable.  While the Governor may assert that his transgressions are moral and personal and have nothing to do with his record of public service, for Wall St. he is the face of the government prosecutor against greed and corruption in the mutual funds and tainted analysis scandals.  For years, they have argued that his headline-grabbing investigations were done to further his political career, and to this one could reasonably say so what?  However, a crusader's credibility is based, to a great extent, on his personal probity, and his critics are certain to make the most out of this.  And who can blame them?  Wall St. may be corrupt, but the Governor is immoral.

It's a sad day for investors' advocates.
 

Bainbridge on Say on Pay

Remarks on Say on Pay: An Unjustified Incursion on Director Authority, by STEPHEN M. BAINBRIDGE, University of California, Los Angeles - School of Law, was recently posted on SSRN.  Here is the abstract:

These remarks were presented to the Penn Law and Economic Institute's Chancery Court Program on Say on Pay: A Positive Contribution To Corporate Effectiveness and Accountability Or An Unprincipled and Costly Incursion Into Director Authority?

Proponents of H.R.1257 or similar federal legislation entitling shareholders to vote on executive compensation must carry their burden of proving three distinct claims: First, that there is an executive compensation problem justifying legislative intervention. Second, say on pay is an effective solution to the problem. Third, that any such legislative intervention should be imposed at the federal level.

If any of these claims fail, the case for a federal say on pay law collapses. In these remarks, I hope to demonstrate that none of the three holds up to close examination.

Baker & Griffith on D&O Insurance and Settlements

How the Merits Matter: D&O Insurance and Securities Settlements, by TOM BAKER, University of Connecticut School of Law, and SEAN J. GRIFFITH, Fordham Law School, was recently posted on SSRN.  Here is the abstract:

This Article seeks what may be the holy grail of securities law scholarship - the role of the merits in securities class actions - by investigating the relationship between settlements and D&O insurance. Drawing upon in-depth interviews with plaintiffs' and defense lawyers, D&O claims managers, monitoring counsel, brokers, mediators, and testifying experts, we elucidate the key factors influencing settlement and examine the relationship between these factors and notions of merit in civil litigation. We find that, although securities settlements are influenced by some factors that are arguably merit-related, such as the sex appeal of a claims liability elements, they are also influenced by many that are not, including, most obviously, the amount and structure of D&O insurance. The virtual absence of adjudication results in payment to the plaintiffs' class for every claim surviving the motions stage and, as importantly, a lack of authoritative guidance about merit at settlement. Without adjudication, the weight of various factual patterns is untested, and the validity of competing damages models remains unknown. Parties structure their settlement by reference to other settlements, but these are opaque and subject to the same set of distortions. In this murky environment, plaintiffs and defendants collude to pressure the D&O insurer to settle on terms that may not reflect the ultimate merits of the claim. More adjudication, we argue, would be the best solution to the problem, but barring that, disclosure of D&O insurance and settlement terms would offer some improvement.

Rose on SWFs

Sovereigns as Shareholders, by PAUL ROSE, Ohio State University - Michael E. Moritz College of Law, was recently posted on SSRN.  Here is the abstract:

This paper considers the increasing impact of sovereign wealth funds as equity investors. Sovereign investment has been viewed with suspicion because sovereign wealth funds, as tools of sovereign entities, could be used for political rather than investment purposes. While this risk is considerable, much of the discussion surrounding sovereign investment ignores or minimizes the mitigating effect of a number of regulatory, economic and political factors. This paper argues that continued care, but not additional regulation, is necessary to ensure that U.S. interests are not jeopardized by sovereign investment in U.S. enterprises. However, while the U.S. is able to protect its interests within its markets, other countries may not have the regulatory structure or political power to adequately defend their interests. Additionally, U.S. interests could be harmed by politically-motivated sovereign investment in other countries. As a result, this paper argues in support of efforts to establish a code of conduct for sovereign investment.

Chiappinelli on Definition of Security

Reinventing a Security: Arguments for a Public Interest Definition, by ERIC A. CHIAPPINELLI, was recently posted on SSRN.  Here is the abstract:

The traditional test for evaluating whether a particular investment vehicle is covered under the securities law is in dire need of reform. Under the traditional test, coverage turns entirely on the private needs of private investors rather than on the public needs of the national securities markets. Considerations of the American capital formation and secondary trading markets or those markets' ability to compete in foreign markets remain untouched. The introduction of more sophisticated investment vehicles provides an opportunity to amend the traditional analysis to better address the broader public interest. Considerations of the national markets can be integrated harmoniously into the traditional analysis for the purposes of making securities coverage determinations. Adding a public interest component to the test would provide a useful supplement to the traditional approach. This article analyzes the current approach; moving through a discussion of how the Supreme Court determines what is and what is not a security before delving into the deficiencies of the current approach. An expanded calculus that includes a public interest test is needed so that capital formation, secondary trading markets, and issues of market regulation are explicitly considered. A public interest test is entirely consonant with the traditional touchstones of congressional intention and prior case law. On multiple occasions Congress has acted by amendment to bring a portion of the financial markets under greater regulation in order to protect the public interest. This article illustrates that in the absence of the public interest calculus the traditional test is insufficient. It is therefore important that the courts consider the larger, national implications of securities coverage through the application of a public interest test.

Schwarcz on Subprime Mortgage Crisis

Markets, Systemic Risk, and the Subprime Mortgage Crisis, by STEVEN L. SCHWARCZ, Duke University School of Law, was recently posted on SSRN.  Here is the abstract:

The subprime mortgage crisis is undermining financial market stability and has the potential to cause a true systemic breakdown. This short and accessible essay, which is based on the author's 2008 Roy R. Ray Lecture at SMU Law School, uses this crisis to demonstrate that existing protections against systemic risk, which focus on banks and largely ignore financial markets, are misguided. Because companies increasingly access financial markets without going through banks, an effective framework for containing systemic risk must focus on markets.