Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Tuesday, March 18, 2008

SEC Staff on Bear Stearns Situation

The SEC website has posted Answers to Frequently Asked Investor Questions Regarding The Bear Stearns Companies, Inc.  As part of a response to a question about SEC involvement in the JPMorgan Chase/Bear Stearns merger, the SEC stated:

The Division of Enforcement wrote a letter concerning investigations and potential future inquiries into conduct and statements by Bear Stearns before the public announcement of the transaction with JPMorgan. The staff declined to provide assurances about possible future enforcement actions. The letter states that reaching conclusions about those inquiries would be premature. In the letter, the Division confirmed that, consistent with prior statements and guidance by the SEC, the staff would favorably take into account the circumstances of the JPMorgan acquisition of Bear Stearns when considering whether to recommend enforcement action against JPMorgan arising out of statements made by Bear Stearns in the 60 days before the public announcement of the merger

March 18, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Yahoo Releases Three-Year Financial Plan

Yahoo! today filed an investor presentation that details the Company's three-year financial plan and strategic initiatives which hopes to roughly double operating cash flow over the next three years from $1.9 billion to $3.7 billion and generate $8.8 billion in revenue excluding traffic acquisition costs (revenue ex-TAC) in 2010.  The plan represents the company's justification for refusing to negotiate with Microsoft, and management is expected to make the presentation to major shareholders.  According to the company's press release,

The presentation supports the unanimous determination by the Company's board of directors that Microsoft's January 31, 2008 unsolicited acquisition proposal substantially undervalues Yahoo!. The board cited Yahoo!'s global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as its substantial unconsolidated investments, as factors in its decision. Yahoo!'s board of directors is continuing to evaluate all of its strategic alternatives to maximize value for Yahoo! stockholders.

March 18, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Abu Dhabi Issues Nine Principles on Investments

Abu Dhabi, in response to concerns about the growing power of its investment fund, said that it would not use its SWF for political purposes.  A letter sent to Treasury Secretary Paulson and other Western officials set forth nine general principles that guide Abu Dhabi's investments, but does not provide specific commitments to limit the power of its purse.  WSJ, Abu Dhabi Sets Investment Code.

March 18, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Is it Time to Reform the System?

The SEC has been on the sidelines after its Friday announcement that it was keeping a close watch on Bear Stearn's financial condition, as the Fed stepped in to engineer a bailout and attempt to restore confidence in the markets.  This makes sense as only the Fed has the money to supply in a liquidity crisis.  But with the finger-pointing over who should have done what sooner may well come calls for a unified system of financial-services regulation.  WSJ, Crisis Highlights SEC's Limits.

March 18, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Bear Stearns-JP Morgan Deal Coverage

All the news is about JP Morgan Chase's steal of a deal for Bear Stearns, so just peruse your favorite news source.  Both the NY Times and the Wall St. Journal give riveting accounts of how the deal came together over the weekend.  Some interesting facts about the deal:  Morgan originally offered a price in the low double digits, but the price dropped as Morgan looked at Bear's books and it became clear that the Fed wanted this deal.  If the deal does not go through, Morgan has an option to buy Bear Stearns headquarters in Manhattan and an option to buy nearly 20% of Bear Stearns stock at $2.  It is not clear what would happen to Morgan's managerial oversight and the Fed guarantees if the Bear shareholders vote down the deal.  The Morgan CEO James Dimon emerges as the big winner, and no one is saying what happens to Bear CEO Alan Schwartz.  Bear employees emerge as the big losers, as Bear encouraged all its employees to invest in its stock; one-third of it is owned by employees.

Conspiracy theorists wonder about the role of short sellers in bringing about the demise of Bear Stearns.  More generally, there is criticism about why the government is rushing to bail out Wall St. and not helping homeowners who lose their homes to foreclosure.  And finally, everyone is wondering whether Lehman is next.  That firm has gone on an offensive to assure the market that its financial health is just fine.

For some of the coverage, see NYTimes, Aftershocks of a Collapse, With a Bank at the Epicenter and At Lehman, Allaying Fears About Being the Next to Fall; WSJ, The Week That Shook Wall Street:
Inside the Demise of Bear Stearns
and Lehman Finds Itself In Center of a Storm.      

March 18, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, March 17, 2008

Court Enters Judgment against Former Connecticut Majority Senate Leader

On March 13, 2008, the federal district court for the District of Connecticut entered a judgment imposing sanctions against William A. DiBella, the former Majority Leader of the Connecticut State Senate, and his consulting firm, North Cove Ventures, L.L.C. for their roles in aiding and abetting then Treasurer of the State of Connecticut, Paul J. Silvester in a fraudulent investment scheme. Pursuant to the scheme, Silvester had invested $75 million in state pension funds with Thayer Capital Partners, a Washington, DC-based private equity firm, and arranged for Thayer to pay DiBella a percentage of the investment, though he did not do work to justify the payment.  The court ordered DiBella to disgorge $374,500 (the amount of his ill-gotten gains from the scheme) and to pay $307,127.45 in prejudgment interest. In addition, the Court imposed a penalty of $110,000. The Court declined to enter a permanent injunction or an officer-and-director bar against DiBella.

Previously, the Commission brought and settled charges against Silvester, Thayer, Malek, and two Thayer affiliates

March 17, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Publishes Text of Naked Short Sales Antifraud Rule

The SEC released for public comment the text of its proposed antifraud rule to address fails to deliver securities that have been associated with “naked” short selling. The proposed rule is intended to highlight the liability of persons that deceive specified persons about their intention or ability to deliver securities in time for settlement, including persons that deceive their broker-dealer about their locate source or ownership of shares and that fail to deliver securities by settlement date.

March 17, 2008 in SEC Action | Permalink | Comments (1) | TrackBack (0)

FINRA Proposes Amendment to Motion to Dismiss Procedures

FINRA Dispute Resolution is proposing to amend NASD Rules 12206 and 12504 of the Code of Arbitration Procedure for Customer Disputes (“Customer Code”) and NASD Rules 13206 and 13504 of the Code of Arbitration Procedure for Industry Disputes (“Industry Code”) by providing specific procedures that will govern motions to dismiss, and amending the provision of the eligibility rule related to dismissals. Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change and Amendment No. 1 Relating to Amendments to the Code of Arbitration Procedure for Customer Disputes and the Code of Arbitration Procedure for Industry Disputes to Address Motions to Dismiss and to Amend the Eligibility Rule Related to Dismissals.

March 17, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Approves FINRA Rule Amending Definition of Public Arbitrator

The SEC approved a FINRA proposal to amend the definition of public arbitrator in Rule 12100(u) of the Customer Code and Rule 13100(u) of the Industry Code to add a provision that would prevent an attorney, accountant, or other professional from being classified as a public arbitrator, if the person’s firm derived $50,000 or more in annual revenue in the past two years from professional services rendered to any persons or entities listed in Rule 12100(p)(1) of the Customer Code or Rule 13100(p)(1) of the Industry Code relating to any customer disputes concerning an investment account or transaction, including but not limited to, law firm fees, accounting firm fees, and consulting fees.FINRA stated that the proposed amendment, in conjunction with the existing 10 percent revenue limitation, would further improve its public arbitrator roster by ensuring that arbitrators whose firms receive a significant amount of compensation from any persons or entities associated with or engaged in the securities, commodities, or futures business are removed from the public roster.  National Association of Securities Dealers, Inc. (n/k/a Financial Industry Regulatory Authority, Inc.); Order Approving Proposed Rule Change to Amend the Definition of Public Arbitrator.

March 17, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Publishes NYSE Proposal on Listing Standards for SPACs

The SEC published the NYSE proposal to amend the Exchange’s Listed Company Manual (the “Manual”) to adopt listing standards for special purpose companies formed for the purpose of raising capital in an initial public offering and entering into an undetermined business combination. The filing also proposes the adoption of requirements that (i) any equity security listing on the Exchange must have a closing price or, if listing in connection with an initial public offering (“IPO”), an IPO price per share of at least $4 at the time of initial listing and (ii) convertible debt issuances listed on the Exchange must have an aggregate market value or principal amount of no less than $10,000,000.  New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change to Adopt New Initial and Continued Listing Standards to List Special Purpose Acquisition Companies.

March 17, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Files Complaint in Alleged Stock Touting Scheme

The SEC filed a civil injunctive action in the United States District Court for the Middle District of Florida against two penny stock promoters, Robert M. Esposito and Gregory A. King; Anscott Industries, Inc., a microcap company headquartered in Wayne, New Jersey; and Jack R. Belluscio, Anscott's chairman and chief executive officer. The Commission charges that Esposito, King, Belluscio and Anscott participated in a fraudulent touting scheme of Anscott stock.  The complaint alleges that in April 2003, Esposito orchestrated a reverse merger between Anscott (then a private company) and Liquidix, Inc., a public shell company which, after the merger, changed its name to Anscott. According to the complaint, Belluscio, on behalf of Anscott, issued 4 million shares of Anscott stock to Esposito as compensation for arranging the reverse merger and for future stock promotion work. The complaint further alleges that Belluscio, on behalf of Anscott, filed a fraudulent Form S-8 registration statement with the Commission for the 4 million shares of Anscott issued to Esposito, which improperly enabled Esposito to sell these shares to the public during the fraudulent touting scheme.

As alleged in the complaint, after the reverse merger and the issuance of shares to Esposito, Esposito paid King, another penny stock promoter with whom Esposito had worked previously, to prepare and disseminate materially false and misleading tout sheets promoting Anscott stock. The Commission alleges that these tout sheets — crafted to appear like independent investment newsletters and entitled the Wall Street Bulletin — recommended Anscott as a "strong buy," and were disseminated to the public through fax spamming from late May 2003 through July 2003.

March 17, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

CME and Nymex Sign Deal

The Chicago Mercantile Exchange operator CME Group signed an agreement to acquire Nymex Holding, a $9.3 billion deal that will expand the CME into energy trading.  WSJ, CME Signs Deal for Nymex.

March 17, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Nacchio Conviction Reversed, Remanded for New Trial

The 10th Circuit Court of Appeals reversed the conviction of Joseph Nacchio, former CEO of Qwest Communications, for insider trading.  Nacchio was convicted last April on 19 counts of insider trading and sentenced to six years in prison.  The Court (2-1)held the district court committed error when it excluded expert testimony from Northwestern law professor and private consultant Daniel Fischel.  He was expected to testify that the economic evidence was inconsistent with the government's allegation that his stock sales were made on the basis of material inside information.  The Court remanded the case for a new trial before a different trial judge.  The Denver Post has full coverage of this case, including a summary of Professor Fischel's proferred testimony.

March 17, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Federal Reserve Will Lend Money to Securities Dealers

For the first time, the Federal Reserve will lend money to securities dealers, effective immediately and extending for at least six months.  The move is intended to provide financial institutions with greater assurance of access to funds.   WSJ, Central Bank Offers Loans To Brokers, Cuts Key Rate Historic Steps; NYTimes, Fed Acts to Rescue Financial Markets.

March 17, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

JP Morgan Chase Will Acquire Bear Stearns and Immediately Guarantee Trading Obligations

Bear Stearns agreed to be acquired by JP Morgan Chase in a stock for stock exchange that values Bear Stearns stock at about $2 per share, or $236 million.  As recently as Friday, Bear Stearns had a market capitalization of about $3.5 billion.  The Federal Reserve Bank will provide as much as $30 billion in financing for Bear Stearns' less liquid assets.  Effective immediately JP Morgan will guarantee Bear Stearns' trading obligations and provide management oversight of its operations.  As the press has frequently noted in the past few days, Bear Stearns refused to participate in the 1998 bailout of Long-Term Capital Management that the Federal Reserve Bank of New York brokered with Wall St. firms.

The deal is subject to shareholder approval, and in a conference call last night, one Bear Stearns shareholder asked why this deal was better than Chapter 11.  About one-third of Bear Stearns shares are held by employees.  JPMorgan Chase Press Release; WSJ, J.P. Morgan Buys Bear in Fire Sale, As Fed Widens Credit to Avert Crisis; NYTimes, JP Morgan Pays $2 a Share for Bear Stearns.

March 17, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)