Securities Law Prof Blog

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

Tuesday, May 20, 2008

Greenberg Implicated in AIG-Gen Re Case

The judge who presided over the trial of five former insurance executives found guilty for their role in a sham deal between AIG and General Re to boost AIG's loss reserves stated that there was "sufficient evidence" for a jury to conclude that the scheme begann with a phone call made by former AIG CEO Maurice Greenberg.  Greenberg has not been indicted and has maintained his innocence.  WSJ, Greenberg Role Seen In AIG-Gen Re Case.

May 20, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Fifth Third Sues over Losses in Citigroup Hedge Fund

Fifth Third Bank sued Transamerica Life Insurance and Clark Consulting to recover $323 million in damages resulting from their investment of Fifth Third's BOLI-related assets (bank-owned life insurance program) in a Citigroup fixed-income hedge fund, Falcon Fund, that has lost 75% of its value.  According to the complaint, the defendants failed in their obligations to monitor and manage Fifth Third's investment in the Fund on behalf of the bank.  According to the Wall St. Journal, several other banks, in addition to retail investors at Citigroup's Smith Barney unit, invested in the Falcon Fund.  WSJ, Citigroup Hedge-Fund Loss Weighs on Three Banks.

May 20, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Microsoft Proposes New Deal to Yahoo

Microsoft has proposed to Yahoo a deal that involves Microsoft's buying the search business and taking a stake in Yahoo, while Yahoo would sell or spin off its Asian assets, including its stake in Alibaba Group, a Chinese internet company.  The proposal is seen as an effort by Microsoft to kill Yahoo's search-related advertising deal with Google.  Yahoo's reaction to the Microsoft proposal is described as "lukewarm."  NYTimes, Details of Microsoft Offer to Yahoo; WSJ, Microsoft Sees Yahoo Being Split in New Offer.

May 20, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, May 19, 2008

SEC v. Berry

As attorneys are well aware, the SEC has been bringing enforcement actions against inhouse counsel, particularly with respect to backdating stock options.  Since there are, to date, few opinions, every one is of interest.  Recently, the federal district court for the Northern District of California granted in part a motion to dismiss by Lisa Berry, a former General Counsel at two public corporations who, the SEC alleges, backdated options at both corporations.  The court found that the five-year statute of respose was applicable to the SEC's request for civil penalties (but not to its requests for other kinds of relief), but that the SEC could amend its complaint to allege equitable tolling because of the attorney's fraudulent concealment.  The court also held that the SEC's conclusory pleading that the attorney reviewed, discussed and finalized corporate filings was insufficient to plead scienter.  The court also rejected  the defendant's argument that the SEC could not bring aiding and abetting charges against her, since it did not charge any primary violators.  "While the argument may have some equitable appeal, it has no legal basis."  SEC v. Berry, 2008 WL 2002537 (N.D.Cal. May 7, 2008).

May 19, 2008 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

SEC Obtains Asset Freeze Against Plus Money, Inc.

The federal district court for the Southern District of California entered an order preliminarily enjoining defendants Plus Money, Inc. and Matthew La Madrid from violating the antifraud provisions of the federal securities laws and freezing the assets of both the defendants and the relief defendants (the Premium Return Fund Limited-Liability Limited Partnerships I through III (the "Premium Return Funds"), the Return Fund LLCs I through VI (the "Return Funds"), Palladium Holding Company, and Donald Lopez).  The court order also appointed Stephen J. Donell as permanent receiver over Plus Money, the Premium Return Funds and the Return Funds.

On April 28, 2008, the Commission filed an emergency civil injunctive action and a complaint alleging that since May 2004, Plus Money, an entity controlled by La Madrid, has acted as investment adviser to the Premium Return Funds, and that from May 2004 through July 2007, the Premium Return Funds had raised approximately $30.6 million from at least 300 investors. The complaint further alleges that La Madrid told prospective investors that he would use their money to pursue an investment strategy solely focused on the buying and selling of covered calls. However, the defendants failed to disclose to their clients that in the fall of 2007, Plus Money transferred $10 million from the Premium Return Funds to relief defendant Palladium Holding Company, an entity controlled by relief defendant Lopez, or that Palladium used about half that amount to engage in short-sale transactions involving Treasury Bonds and transferred most of the remainder to various individuals and entities, many of which are associated with or controlled by Lopez. In its complaint, the Commission seeks the return of ill-gotten gains with prejudgment interest, and penalties against the defendants.

On April 30, the court issued a temporary restraining order halting the defendants' conduct and temporarily freezing the assets of the defendants and the relief defendants. The May 16 preliminary injunction order continues the asset freeze indefinitely and prohibits the defendants from violating Sections 206(1), (2) and (4) of the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder

May 19, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Obtains Asset Freeze in UK Related to U.S. Hedge Fund Enforcement Action

The High Court of Justice in London issued an order freezing assets held in the United Kingdom by Glenn Manterfield, a citizen of the United Kingdom and a resident of Sheffield, England. Manterfield is a defendant in a pending SEC enforcement action in which the SEC obtained emergency relief, including an asset freeze, against Manterfield and others in connection with an alleged on-going fraudulent hedge fund operation.

On February 29, 2008, the Commission filed a limited notice application with the High Court of Justice, Queen's Bench Division seeking an emergency order freezing approximately $1 million in assets held by Manterfield in the United Kingdom. The Commission filed the application after learning that a separate freeze order previously obtained by British authorities against Manterfield's assets might be lifted. After a hearing on the Commission's application on February 29, 2008, the British Court issued an order freezing the assets until Thursday, March 6, 2008. Manterfield consented to continue the freeze until an evidentiary hearing could be held to determine whether the freeze should be extended. An evidentiary hearing was held in the High Court of Justice on April 30, 2008 and May 1, 2008. On May 16, 2008, the British Court issued an order continuing the freeze of Manterfield's assets until the resolution of the Commission's pending enforcement action in the United States.

The Commission had previously filed its U.S. enforcement action on April 12, 2007 in the U.S. District Court in Massachusetts against Manterfield, Evan Andersen, of Boston, Massachusetts, and Lydia Capital, LLC, a registered investment adviser based in Boston, Massachusetts. The Commission's Amended Complaint alleges that, between June 2006 and April 2007, Manterfield and Andersen, acting through Lydia, engaged in a scheme to defraud more than 60 investors, who invested approximately $34 million in Lydia Capital Alternative Investment Fund LP, a hedge fund managed by Lydia. The Amended Complaint alleges that defendants told investors that they intended to use the Fund's assets to acquire a portfolio of life insurance polices in the life settlement market. According to the Amended Complaint, Manterfield, Andersen, and Lydia made a series of material misrepresentations and omissions, including but not limited to: (1) materially overstating, and in some instances completely fabricating the Fund's performance; (2) inventing business partners, offices, and investors in an attempt to legitimatize the firm and concealing the truth as to why key vendors and banks ceased relationships with the defendants; (3) lying about Manterfield's significant criminal history, and failing to disclose a February 2007 criminal asset freeze in England; (4) lying about how the Fund planned to address certain material risks and failing to disclose others; and (5) misstating the nature of the Fund's assets and its investment process. In addition, the Amended Complaint alleges that Manterfield and Andersen misappropriated millions of dollars of investors' funds by withdrawing investor monies to which they were not entitled.

On April 12, 2007, the U.S. District Court issued a temporary restraining order that, among other things, froze the three defendants' assets. On May 3, 2007, following a hearing before the Court on May 2, 2007, the Court issued a consented-to preliminary injunction and ordered a continuation of an asset freeze of the defendants' assets. The action is pending against all three defendants.

May 19, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Obtains TRO Against Watermark Financial Services Group

The SEC obtained a temporary restraining order in the federal district court for the Western District of New York against Watermark Financial Services Group, Inc. ("Watermark Financial"), Watermark M-One Holdings, Inc. ("Watermark Holdings"), M-One Financial Services, LLC ("M-One"), Watermark Capital Group, LLC ("Watermark Capital"), Guy W. Gane, Jr., and Lorenzo Altadonna from violating the federal securities laws.  The SEC's complaint alleges that from at least May 2005 to the present, Gane and M-One orchestrated a securities offering fraud that has raised at least $5.7 million from approximately 90 investors, including a number of senior citizens, through the sale of debentures and promissory notes issued by the various entity defendants. The complaint further alleges that the defendants told investors that their money would be used to purchase or develop real estate, but instead Gane: (i) used new investor funds to pay back earlier investors; (ii) misappropriated investors' funds by using them to pay himself, his family, and others; and (iii) transferred substantial portions of investor funds to Denkon, Inc., Guy W. Gane, III, and Jenna Gane for no apparent consideration. In addition, the complaint alleges that the debentures offering was not registered with the Commission and that Gane violated the broker-dealer registration provisions of the federal securities laws.

May 19, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Files Charges Against Former AOL Time Warner Executives for Inflating Ad Revenues

The SEC filed civil fraud charges against eight former executives of AOL Time Warner Inc. for their roles in a fraudulent scheme that caused the company to overstate its advertising revenue by more than $1 billion. In its complaint, filed in the United States District Court for the Southern District of New York, the SEC alleges that from at least mid-2000 to mid-2002, John Michael Kelly, former Chief Financial Officer of AOL Time Warner; Steven E. Rindner, former senior executive in the company's Business Affairs unit; Joseph A. Ripp, former Chief Financial Officer of the company's AOL division; and Mark Wovsaniker, former head of Accounting Policy, engineered, oversaw, and executed fraudulent round-trip transactions in which AOL Time Warner effectively funded its own advertising revenue by giving purchasers the money to buy online advertising that they did not want or need. Online advertising revenue was a key measure by which analysts and investors evaluated the company. The defendants made or substantially contributed to statements to investors that included the company's fraudulent financial results. Kelly and Wovsaniker, both certified public accountants, also are charged with misleading the company's external auditor about the fraudulent transactions.  The complaint seeks injunctive relief, disgorgement of ill-gotten gains plus prejudgment interest, civil monetary penalties, and officer and director bars against each of them.

The SEC also settled charges against four other former AOL Time Warner executives who participated in the scheme.  David M. Colburn, former the head of the Business Affairs unit; Eric L. Keller, former senior manager in the Business Affairs unit; James F. MacGuidwin, former Controller; and Jay B. Rappaport, former senior manager in the Business Affairs unit, have agreed to permanent injunctions against future federal securities violations. All of them have agreed to pay disgorgement and prejudgment interest and civil penalties. Colburn will pay disgorgement and prejudgment interest of $3,222,107 and a penalty of $750,000; MacGuidwin will pay disgorgement and prejudgment interest of $2,100,000 and a penalty of $300,000; Rappaport will pay disgorgement and prejudgment interest of $493,629 and a penalty of $250,000; and Keller will pay disgorgement and prejudgment interest of $699,868 and a penalty of $250,000. Colburn and MacGuidwin have agreed to be barred from serving as officers or directors of a public company for ten years and seven years, respectively. The settlements are subject to court approval.

May 19, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Staples Begins Tender Offer for Dutch Office Goods Supplier

Staples Inc. launched a tender offer for the ordinary shares of Dutch office-goods supplier Corporate Express NV after Corporate Express refused to negotiate with Staples.  Staples said the offering price reflects a 90% premium over the closing price before rumors of the takeover.  The tender offer is conditioned upon the tender of a minimum of 75% of the ordinary share capital.  WSJ, Staples Begins Tender Offer For Corporate Express.

May 19, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Settles Backdating Charges Against Brooks Automation

The SEC settled a civil injunctive action against Brooks Automation, Inc., a semiconductor capital equipment company, that alleged that it overstated income and understated employee compensation expenses in its financial statements by $64.5 million during the period from 1996 through 2005 as a result of its failure to properly account for employee stock options. According to the complaint, a backdated exercise in 1999 by former President and CEO Robert J. Therrien and other grants for which the company improperly accounted resulted in Brooks overstating its net income by as much as 30% in fiscal year 2000 alone. Brooks misstated in its public filings that all stock options were granted at or above the fair market value of the stock on the date of the award, when that was not the case. Brooks also filed misstated financial statements with the SEC in its Forms 10-K and 10-Q that did not recognize compensation expense for the company's stock option grants, as required by generally accepted accounting principles.

The Complaint alleges that, in November 1999, Therrien, upon learning that an option to exercise 225,000 shares had expired worthless the preceding August, participated in creating, and signed, false documents resulting in the issuance of in-the-money options to him, which he immediately exercised, to purchase 225,000 shares of Brooks. As a result of his fraudulent exercise alone, Therrien received $5.7 million in undisclosed compensation from Brooks. Therrien was previously charged by the Commission in a separate, unsettled action filed in July 2007.

The Complaint further alleges several instances of company-wide options grants with purported grant dates that were inaccurate. For example, according to the complaint, the option grant with a purported date of October 1, 2001 in fact was not finalized until November 30, 2001. During that period the price of Brooks' stock rose by more than $11 per share, producing immediate compensation to the recipients of the grant of approximately $22 million, which Brooks failed to disclose in its financial reports.

Brooks, without admitting or denying the allegations in the Commission's complaint, agreed to settle the matter by consenting to a permanent injunction from further violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-13 thereunder.

May 19, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SPAC IPOs are Down

The number of "special purpose acquisition company" (SPAC) or "blank check" offerings has declined since the beginning of the year.  In January and February 2008 11 of 20 IPOs were SPAC offerings; since then, only 2 of 12 IPOs were SPACs.  Of the 139 SPAC IPOs since 2005, 39 have successfully completed acquisitions, and 11 have liquidated.  SPACs generally promise to return the shareholders money if they do not make an acquisition in two years.  WSJ, 'Blank-Check' IPOs Are Losing Edge.

May 19, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Microsoft Issues Statement Regarding Yahoo!

Microsoft announced that it is continuing to explore and pursue its alternatives to improve and expand its online services and advertising business in the following statement:

“In light of developments since the withdrawal of the Microsoft proposal to acquire Yahoo! Inc., Microsoft announced that it is continuing to explore and pursue its alternatives to improve and expand its online services and advertising business.  Microsoft is considering and has raised with Yahoo! an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo!  Microsoft is not proposing to make a new bid to acquire all of Yahoo! at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties. 

“There of course can be no assurance that any transaction will result from these discussions.”

May 19, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, May 18, 2008

Bainbridge on Investor Activism

Investor Activism: Reshaping the Playing Field?, by STEPHEN M. BAINBRIDGE, University of California, Los Angeles - School of Law, was recently posted on SSRN.  Here is the abstract:

Shareholders of U.S. corporations historically tended towards rational apathy. Holding small blocks that were unable to affect the outcome of the vote and faced with the considerable costs associated with gathering sufficient information to make an informed decision, they adopted the so-called Wall Street Rule (it was easier to switch than fight). In the last 15 years or so, a growing number of commentators and investor activists have claimed that the rising importance of institutional investors has the potential to reshape the field by empowering shareholders to become active players in corporate governance.

This paper situates investor activism in the so-called director primacy theory of corporate governance. In so doing, it demonstrates that the separation of ownership and control typical of U.S. public corporations has significant efficiency benefits. It then argues that shareholder activism threatens to undermine the advantages of director primacy without offering significant countervailing gains.

Accordingly, the paper concludes that pending regulatory proposals to expand shareholder governance rights should be viewed with suspicion.

May 18, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Broome & Krawiec on Board Diversity

Signaling Through Board Diversity: Is Anyone Listening?, by LISSA L. BROOME, University of North Carolina at Chapel Hill - School of Law, and KIMBERLY D. KRAWIEC, University of North Carolina at Chapel Hill - School of Law, was recently posted on SSRN.  Here is the abstract:

The ethnic and gender make-up of corporate boards has been the subject of intense public and regulatory focus in many countries, including the United States, in recent years. Of particular interest has been quantitative research on the impact, if any, of board diversity on corporate performance. This body of work leaves substantial gaps in our understanding of the precise mechanisms by which board diversity may alter the corporate environment, if indeed it does. In this symposium, we discuss some preliminary findings from our first 21 of a series of confidential, semi-structured interviews of 45 to 90 minutes in length with corporate directors. Due to multiple board service, these interviews represent 60 public company board experiences.

We limit our discussion in this Symposium to an analysis of the rationale for board diversity that figured most prominently in the interviews with our initial sample of respondents: signaling theory. Although signaling is frequently mentioned by our respondents and other researchers as a rationale supporting board diversity, we conclude that the distribution of costs and benefits of board diversity in "good" firms versus "bad" firms is unknown. We thus are unable to conclude that "bad" firms are not mimicking the signal, undermining the stability of board diversity as a meaningful signal. We, therefore, approach blanket assertions of the signaling benefits of board diversity with caution. We conclude that the signaling rationale for board diversity is at its strongest under particular conditions that may not exist at all corporations at all times.


May 18, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Black on Empirical Evidence of Institutional Investor Monitoring

The Value of Institutional Investor Monitoring: The Empirical Evidence, by BERNARD S. BLACK, University of Texas at Austin School of Law; McCombs School of Business, University of Texas at Austin; European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

This Article collects the available evidence as of 1992 on the potential value of institutional investor monitoring of large U.S. public companies. The evidence is suggestive rather than conclusive. There are a number of systematic shortfalls in the functioning of large public firms. Institutions could potentially address some of these shortfalls. The institutions are best able to address issues that are common to a number of companies, and less able to respond to company specific failures. Large institutions do little monitoring, but there is some evidence that other large outside shareholders can engage in valuable monitoring, and little evidence that greater shareholder oversight is harmful. Monitoring by financial institutions in Germany, Japan, and Great Britain appears to have significant benefits

May 18, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Black on Institutional Investor Voice

Agents Watching Agents: The Promise of Institutional Investor Voice, by BERNARD S. BLACK, University of Texas at Austin School of Law; McCombs School of Business, University of Texas at Austin; European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

This article discusses the potential promise and limits of oversight of corporate managers by major institutional investors. I discuss the reasons to believe that, at least for systemic issues that arise at many firms, there can be value is assigning one set of loosely watched agents (institutional money managers) to watch another set (corporate managers). This is partly because, as long as it takes a number of institutions to strongly influence corporate actions, the institutions can also watch each other, thus reducing the risk that any one of them will extract private benefits from the firm. The case for shared institutional voice (with six or ten institutions, often different types of institutions, exercising joint influence) is stronger than the case for direct institutional control of a firm by a particular institution.

May 18, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Haslem on Mutual Fund Arbitrage

Mutual Fund Arbitrage and Other Practices: Sources of Explicit and Opportunity Costs, by JOHN A. HASLEM, University of Maryland - Robert H. Smith School of Business, was recently posted on SSRN.  Here is the abstract:

Mutual fund advisors often approve frequent trading arbitrage and late trading that may or may not be consistent with any specific limits on redemptions over a specific period of time. To increase advisor profits, these arrangements normally also require trader investment of "sticky assets" to "grow" fund assets.

However, these actions lower both actual and potential long-term shareholder returns. When this occurs, independent directors either have not been informed or they have acquiesced in the decision. In any case, independent directors have not performed their primary fiduciary duty as shareholder watchdogs.

In addition, mutual fund advisors engage in various other practices to increase their profits, again, knowingly at the price of lower long-term shareholder returns. These high cost practices include illegal "late trading" arbitrage; distribution and marketing (and advertising) costs, including 12b-1 fees; commissions and implicit trading costs plus "revenue sharing" payments to brokers for "shelf space," and other undisclosed practices; "soft dollar" commissions (and implicit trading costs) paid to brokers in return for research studies and data; increased brokerage commissions and implicit trading costs from larger trade sizes that further offset economies of scale; and high portfolio risk to boost annual returns to maintain shareholders and attract "performance chasers."

These costly mutual fund advisor practices reflect strong agency conflicts with shareholders that should be specifically prohibited. Independent directors need to assert control over advisor intentions and actions to allow these practices and provide disclosure for each. Disclosure should include complete normative transparency of disclosure to shareholders, independent director analysis of fund actions and behaviors relative to "best use" industry guidelines, and disclosure of all advisor intentions or decisions to use any practices that are costly to shareholder interests and returns.


May 18, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Baer on Corporate Policing & Corporate Governance

Corporate Policing and Corporate Governance: What Can We Learn from Hewlett-Packard's Pretexting Scandal?, by MIRIAM H. BAER, New York University School of Law, was recently posted on SSRN.  Here is the abstract:

When Hewlett Packard (HP) announced in September 2006 that its Board Chairman, Patricia Dunn, had authorized HP's security department to investigate a suspected Board-level press leak and that the investigation included tactics such as obtaining HP Board members' and reporters' telephone records through false pretenses (conduct known as "pretexting"), observers vehemently condemned the operation as illegal and outrageous. In congressional testimony, however, Dunn defended the investigation as "old fashioned detective work." Although Dunn would later claim that she was unaware of key aspects of the investigation, her description was not so far off. The police routinely rely on deception to investigate and apprehend wrongdoers. Although it is tempting to view HP's pretexting episode as a one-time scandal, the episode illuminates a more important, largely unexplored, conflict between corporate policing and corporate governance.

This Article analyzes the tension between the board's competing responsibilities of overseeing its internal corporate police and implementing the norms and structures that presumably create ethical (and therefore "good") corporate governance. As the HP scandal aptly demonstrates, law enforcement techniques that rely primarily on deception are likely to conflict with corporate governance norms such as trust and transparency. After outlining the problem, the Article considers its broader policy implications.

May 18, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)