Securities Law Prof Blog

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

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Friday, June 13, 2008

Final Report of the 2007 SEC Govt-Business Forum on Small Business Capital Formation

The Small Business Investment lncentive Act of 1980 mandates that the SEC host an annual forum that focuses on the capital formation concerns of smalll business. A major purpose of the Forum is to provide a platform for small business to highlight perceived unnecessary impediments in the capital-raising process and address whether they can be eliminated or reduced. Each Forum seeks to develop recommendationsfor governmental and private actions to improve the environment for small business capital formation, consistent with other public policy goals, including investor protection. The 2007 Forum was held on September 24,2007.  Its Final Report, including recommendations, was just published.  Here are the recommendations of the securities regulation breakout groups.

1. We support the Commission's Section 12(g) rule proposal and recommend that it be clarified to ensure that employee option holders are not considered within the definition of holders of record for purposes of the limitation under Exchange Act Section 12(g).
2. We support application of uniform disqualification provisions regarding all offerings seeking to rely on ReguIation D.
3. We support the Commission's proposal to shorten the integration safe harbor in Regulation D from six months to 90 days.
4. We support addition of the proposed $750,000 investment-based test as an alternative means of qualifying as an "accredited investor,"as defined in Rule 501 of Regulation D.
5. We support the Commission's proposed new Rule 507 of Regulation D establishing a new exemption permitting limited advertising.

6. We recommend that the Commission take the lead in adopting rules, in coordination with the states, to create a limited federal registration exemption and simplified system of state registration and regulation for M&A and business brokers who act as intermediaries and advisors in the purchase and sale of existing businesses.
7. We recommend that the Commission adopt rules recommended by the 2005 Private Placement Broker-Dealer Task Force Report of the American Bar Association to facilitate capital raising by small business owners, as well as prospective buyers, to fund smalI businesses.
8. We recommend that "private placement brokers" be allowed to raise capital through private placements of an issuer's securities with one or more "accredited investors" in amounts per issuer of up to 10 percent of the investor's net worth (excluding their primary residence), with full written disclosure of the broker's compensation, and in aggregate amounts of up to at least $10 million pcr issuer, periodically adjusted for inflation.
9. Eliminate the Proposed 20 Percent of Public Float Ceiling on Form S-3/F-3 for Registrations by Smaller Reporting Companies.
10. Expand the Availability of Form S-3 Resale Registration to Unlisted Reporting Companies.
11. Simplify Rule 144 Tolling Provisions.
12. Improve the Quality of and Access to Public Information about Non-Reporting Companies.

June 13, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Former Knight CEO Cleared of Fraud Charges

A federal district court in New Jersery ruled, after a 14-day bench trial, that the SEC did not prove that former Knight Equity Markets CEO Kenneth Pasternak defrauded the firm's customers.  The SEC alleged that Pasternak failed to execute customers' orders at the best price and made millions in excessive compensation.  Knight is one of the largest market makers in Nasdaq stock.  WSJ, Pasternak Cleared of SEC Trading-Fraud Allegations.

June 13, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, June 12, 2008

SEC Institutes Market Timing Charges Against Invesco Funds Salesperson

The SEC issued an Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934, Section 203(f) of the Investment Advisers Act of 1940, and Section 9(b) of the Investment Company Act of 1940 (Order) against Michael K. Brugman (Respondent). The Order alleges that from mid-2001 through December 2002, Respondent, who was at that time a securities salesman for Invesco Funds Group, Inc. (IFG), accepted personal payments totaling over $3 million from various entities in exchange for procuring market timing capacity within the Invesco funds. The Order further alleges that Respondent never disclosed these payments to IFG even though, as IFG’s agent and fiduciary and pursuant to a written agreement Respondent had with IFG, he had a duty to do so. As a result of this conduct, the Order alleges that Respondent willfully violated Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder.  A hearing will be held by an Administrative Law Judge to determine whether the allegations contained in the Order are true, to provide the Respondent an opportunity to dispute these allegations, and to determine what, if any, remedial sanctions are appropriate and in the public interest. The Order requires the Administrative Law Judge to issue an initial decision no later than 300 days from the date of service of the Order, pursuant to Rule 360(a)(2) of the Commission’s Rules of Practice.

June 12, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Staff Proposes Changes to Oil and Gas Reporting Requirements

The SEC's Division of Corporation Finance and Office of the Chief Accountant announced that they have prepared for the Commission's consideration recommendations for updating and modernizing the reporting requirements for oil and gas companies.  The current reporting requirements concerning oil and gas reserves were adopted more than 25 years ago. The recommendations that the SEC staff are providing to the Commission reflect the significant changes in the oil and gas industry since adoption of the original reporting requirements, including improved technology and alternate resources. Among other things, the recommended proposals would allow oil and gas companies to provide investors with additional information about their oil and gas reserves.  The SEC staff's recommendations were preceded by a Concept Release issued by the Commission on Dec. 12, 2007, in which the Commission solicited comment on whether changes in the reporting requirements were needed and appropriate. The Commission received approximately 80 comment letters, which were generally supportive of updating the reporting requirements to reflect the changes that have taken place in the industry since adoption of the present requirements. 

Issuance of a rule proposal by the Commission based on staff recommendations would require Commission approval, followed by a public comment period.

June 12, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA's Annual Report Now Available

Microsoft and Yahoo Discussions are Over

Yahoo announced that its discussions with Microsoft are over, and no deal of any kind is in the works. Its press release stated that after numerous discussions involving various alternatives, Microsoft made clear it had no further interest in acquiring the entire company, and the Yahoo board rejected Microsoft's alternative of acquiring Yahoo's search business.

June 12, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Court Says Hedge Funds Broke Securities Law But Can Vote CSX Shares

In a much-followed case, a federal district court in New York ruled that two hedge funds, Children's Investment Fund of Britain and 3G Capital Partners, that seek to elect a slate of directors at CSX Corp. had violated federal securities laws by not disclosing their positions in equity swaps.  The funds own 8.7% of CSX stock and have positions in equity swaps that amount to another 12.3% of the stock.  Citing Second Circuit precedent, the judge said that he could not bar the funds from voting their shares at the June 26 annual meeting and that any remedy was with the SEC.  NYTimes, Hedge Funds Can Vote at CSX Meeting

June 12, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Belgian Brewer Bids for Anheuser-Busch

InBev of Belgium, brewer of Beck's and Bass beers, made an unsolicited $46.4 billion takeover offer for Anheuser-Busch, brewer of Budweiser and Bud Light.  Anheuser-Busch, which has been controlled by the two families for almost 150 years, is expected to fight the takeover, but the company does not have a staggered board, and the family, which owns less than 4% of the stock, does not have supervoting shares.  Warren Buffett is the second largest shareholder.  The combined company would be the world's largest brewer.  NYTimes, Brewer Bids $46 Billion for Anheuser-Busch; WSJ, InBev Uncorks Anheuser Takeover Bid.

June 12, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 11, 2008

SEC Obtains Asset Freeze Against Lincoln Funds Int'l

The SEC filed a complaint in federal district court in Orange County California charging advisory firm Lincoln Funds International, Inc. and its three principals, who raised at least $21 million from nearly 400 investors nationwide, in an alleged securities fraud scheme that involved its biotechnology investment fund companies.  According to the complaint, one of the defendants, James L. DeMers, cleaned out all of the cash in the Lincoln Funds' accounts earlier this month by transferring approximately $2.9 million to his own separate company. The SEC obtained a temporary restraining order, asset freeze and other emergency relief in a civil action to halt the defendants' fraudulent activities and strip them of any ill-gotten gains. Simultaneous with the filing of the complaint, the California Department of Corporations issued an Order against two of the individuals and Lincoln Funds ordering them to desist and refrain from offering, buying or selling securities in the state by means of any false or misleading statements.

The SEC's complaint charges Lincoln Funds and its predecessor, Brookstone Capital, Inc., and their principals, Robert L. Carver, his son Robert L. Carver, II, and DeMers. The complaint also names as relief defendants Lincoln Biotech Ventures LP, Lincoln Biotech Ventures II, and LP Lincoln Biotech Ventures III LP — the three biotechnology venture funds created and controlled by the defendants. Also named is MacAuslan Capital Partners, LLC, a company controlled by DeMers. These relief defendants held cash or other assets acquired from investor proceeds. Robert Carver has been the subject of at least five state administrative orders including three by the California Department of Corporations since 1996.

The federal district court granted the SEC's application for a temporary restraining order against the defendants and issued orders freezing the defendants' and relief defendants' assets and prohibiting the destruction of documents. The Court also appointed a temporary receiver over the assets of Brookstone Capital, Lincoln Funds, and its affiliates, including the three Lincoln Biotech Venture funds. 

June 11, 2008 in SEC Action | Permalink | Comments (40) | TrackBack (0)

SEC Proposes Credit Rating Agency Reforms

The SEC voted to formally propose a comprehensive series of credit rating agency reforms to bring increased transparency to the ratings process and curb practices that contributed to recent turmoil in the credit markets.  The proposed rulemaking continues the implementation of new regulatory authority that the SEC recently received from Congress to register and oversee nationally recognized statistical rating organizations (NRSROs).  The proposed rules are designed to regulate the conflicts of interests, disclosures, internal policies, and business practices of credit rating agencies.

The SEC is proposing the rulemaking in three parts, with the first two portions being proposed today and the third portion to be considered on June 25.

The first part of the Commission's rule proposal would:

Prohibit a credit rating agency from issuing a rating on a structured product unless information on assets underlying the product was available.

Prohibit credit rating agencies from structuring the same products that they rate.

Require credit rating agencies to make all of their ratings and subsequent rating actions publicly available. This data would be required to be provided in a way that will facilitate comparisons of each credit rating agency's performance. Doing this would provide a powerful check against providing ratings that are persistently overly optimistic, and further strengthen competition in the ratings industry.

Attack the practice of buying favorable ratings by prohibiting anyone who participates in determining a credit rating from negotiating the fee that the issuer pays for it.

Prohibit gifts from those who receive ratings to those who rate them, in any amount over $25.

Require credit rating agencies to publish performance statistics for 1, 3, and 10 years within each rating category, in a way that facilitates comparison with their competitors in the industry.

Require disclosure by the rating agencies of the way they rely on the due diligence of others to verify the assets underlying a structured product.

Require disclosure of how frequently credit ratings are reviewed; whether different models are used for ratings surveillance than for initial ratings; and whether changes made to models are applied retroactively to existing ratings.

Require credit rating agencies to make an annual report of the number of ratings actions they took in each ratings class, and require the maintenance of an XBRL database of all rating actions on the rating agency's Web site. That would permit easy analysis of both initial ratings and ratings change data.

Require the public disclosure of the information a credit rating agency uses to determine a rating on a structured product, including information on the underlying assets. That would permit broad market scrutiny, as well as competitive analysis by other rating agencies that are not paid by the issuer to rate the product.

Require documentation of the rationale for any significant out-of-model adjustments.

The second part of the SEC's proposal would require credit rating agencies to differentiate the ratings they issue on structured products from those they issue on bonds, either through the use of different symbols, such as attaching an identifier to the rating, or by issuing a report disclosing the differences between ratings of structured products and other securities.

The SEC states that the third set of recommendations "are being designed to ensure that the role the SEC has assigned to ratings in its rules is consistent with the objective of having investors make an independent judgment of risks and of making it clear to investors the limits and purposes of credit ratings for structured products."

Public comments on today's proposed amendments and rule must be received by the SEC within 30 days after their publication in the Federal Register.

June 11, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Yahoo Says An Icahn Win Would Trigger Severance Benefits Plan

Yahoo's employee severance plan, adopted as a response to Microsoft's takeover offer and triggered by a change of control,  would be triggered if Carl Icahn is successful in his bid to take control of the board of directors, according to Yahoo.  The plan calls for severance benefits to be paid to certain employees if their employment is terminated after a control change.  Yahoo estimated the costs of the plan between $514-$845 million; Icahn puts the costs at a much higher figure.  Icahn has called for the board to rescind the plan, and a shareholders suit in Delaware seeks to have a court invalidate the plan.  WSJ, Yahoo Says an Icahn Win Triggers Plan.

June 11, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Yahoo Says An Icahn Win Would Trigger Severance Benefits Plan

Yahoo's employee severance plan, adopted as a response to Microsoft's takeover offer and triggered by a change of control,  would be triggered if Carl Icahn is successful in his bid to take control of the board of directors, according to Yahoo.  The plan calls for severance benefits to be paid to certain employees if their employment is terminated after a control change.  Yahoo estimated the costs of the plan between $514-$845 million; Icahn puts the costs at a much higher figure.  Icahn has called for the board to rescind the plan, and a shareholders suit in Delaware seeks to have a court invalidate the plan.  WSJ, Yahoo Says an Icahn Win Triggers Plan.

June 11, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 10, 2008

Cabelvision's Compensation Consultant Pays in Settlement

In what is said to be a first, a compensation consultant to Cablevision will pay the company $2 million to settle a derivative suit charging backdating of stock options.  The total settlement involves 16 individuals, including directors, officers and general counsel, and a total of $34.4 million in cash and other consideration.  CFO.com, Comp Consultant to Pay for Backdating.

June 10, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Will Consider Proposed NRSRO Rules Tomorrow

The SEC's Open Meeting Agenda for Wednesday, June 11, 2008:

Item 1: Nationally Recognized Statistical Rating Organizations
Office:  Division of Trading and Markets
The Commission will consider whether to propose rules relating to Nationally Recognized Statistical Rating Organizations.

June 10, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Proposes Rule Requiring Interactive Data for Mutual Fund Risk/Return Summary

The SEC has published for public comment a proposed rule on Interactive Data for Mutual Fund Risk/Return Summary.  The proposed rule would require mutual funds to provide risk/return summary information to the SEC and on their Web sites in interactive data format using the eXtensible Business Reporting Language (“XBRL”). The interactive data would be provided as an exhibit to registration statements. The risk/return summary information could be downloaded directly into spreadsheets, analyzed in a variety of ways using commercial off-the-shelf software, and used within investment models in other software formats. The proposed rules are intended not only to make risk/return summary information easier for investors to analyze, but also to assist in automating regulatory filings and business information processing. The SEC is also proposing to permit investment companies to submit portfolio holdings information in its interactive data voluntary program without being required to submit other financial information. Comments on the proposed rule should be submitted on or before August 1, 2008.

June 10, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

CEOS Get Big "Golden Coffins"

The Wall St. Journal focuses on "golden coffins," or death benefits, paid to CEOs who die in office, about which, thanks to the SEC's compensation rule changes, companies are required to give more disclosure.  Compensation critics describe death benefits as the ultimate pay that is not based on performance.  A chart gives details on some of the biggest numbers, including Brian Roberts, Comcast CEO, who will get close to $300 million if he dies in office.  WSJ, Companies Promise CEOs Lavish Posthumous Paydays.

June 10, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, June 9, 2008

NY Fed's Geithner Calls for Greater Oversight

Timothy Geithner, President of the Federal Reserve Bank of New York and the principal architect of the bailout of Bear Stearns, called for tougher regulation of the financial markets and increased Fed supervision to prevent future crises.  Geithner also said that the New York Fed is hosting a meeting of seventeen firms that represent 90% of trading in credit derivatives to discuss reform, including creation of a clearing house for credit-default swaps.

June 9, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Yahoo Sets Annual Meeting for August 1

Yahoo filed its proxy statement for its August 1 annual meeting and urged shareholders to re-elect the current board of directors and reject Carl Icahn's slate, saying that the board is committed to maximizing shareholder value and that Icahn has "no credible plan" except to sell the company to Microsoft.

June 9, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Lehman Announces $2.8 Billion Loss

Lehman Brothers said that it lost $2.8 billion in the second quarter and plans to raise $6 billion by selling stock, $4 billion in common stock (increasing its outstanding by 25%) and $2 billion in convertible preferred shares.  The loss is Lehman's first since it went public in 1994 and is about four times worse that Wall St. had estimated.  CFO Erin Callan said that the new capital would be used to expand business.  WSJ, Lehman Plans Higher Capital Raising, Expects to Post $2.8 Billion Net Loss.

June 9, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Sunday, June 8, 2008

Duffie & Hu on Global Derivative Markets

Competing for a Share of Global Derivatives Markets: Trends and Policy Choices for the United States, by DARRELL DUFFIE, Stanford Graduate School of Business; National Bureau of Economic Research (NBER), and HENRY T.C. HU, University of Texas at Austin - School of Law, was recently posted on SSRN.  Here is the abstract:

This is a preliminary study on the status of the U.S. in the global market for derivatives-related services. We include some of the policy choices available to enhance this status. We begin with a review of the importance of active and efficient derivatives markets for the U.S. economy. We then analyze the status of U.S. derivatives-market service providers in both over-the-counter and exchange-based markets. We then discuss factors that play a role in determining where a provider of derivatives services is located.

By far the dominant factors are the regional concentration of customers and overall financial market activities. We also consider regulatory and legal factors, and access to specialized human resources, among other factors. We recommend the development and maintenance of a dataset bearing on the co-location advantages of financial services firms within the U.S., particularly in and near New York City, along with data pertinent to related human resources.

Our analysis departs from the view expressed in some competitiveness circles as to a presumed wholesale migration of financial activity from New York and London and as to the dominant role of regulatory differences in such migration.

June 8, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)