Monday, January 28, 2008
The SEC recently settled administrative proceedings against Heartland Advisors, Inc. (Heartland), a Wisconsin-based investment adviser, and several current and former employees of Heartland. The Order finds that from March 1, 2000 into October 2000, Heartland negligently mispriced certain bonds owned by two high-yield municipal bond funds. The funds' portfolios included several municipal bonds that were valued by the funds at prices above their fair values. As a result, throughout that time period, the funds' net asset values were incorrect, the funds' shares were incorrectly priced, and investors purchased and redeemed fund shares at prices that benefited redeeming investors at the expense of remaining and new investors. On October 13, 2000, Heartland devalued the bonds, thereby resulting in approximately $60 million in monetary losses to shareholders.
The Order imposes civil penalties, disgorgement, and prejudgment interest totaling $3,907,095.
The SEC settled a civil action against David B. Duncan, a former Arthur Andersen LLP ("Andersen") partner and former global engagement partner for the Enron engagement, in connection with the audits of Enron Corp.'s financial statements. Duncan, without admitting or denying the allegations, consented both to a settled civil action charging him with violating the antifraud provisions and to a related administrative proceeding permanently suspending him from appearing or practicing before the Commission.
In its Complaint against Duncan, the Commission alleged that, for the years 1998 through 2000, Duncan was reckless in not knowing that the unqualified audit reports he signed on behalf of Andersen were materially false and misleading. The Complaint also alleged that the Fraud Risk Assessment questionnaires prepared by the engagement team and reviewed by Duncan documented that Enron used "highly aggressive accounting … practices" and entered into "unusual" year-end transactions that posed difficult "substance over form" questions. In addition, an internal Andersen document prepared each year by Duncan and others on the engagement team noted that Enron's use of complex "form over substance" and related party transactions created an "extreme" or "very significant" financial reporting risk. Despite these risks, Duncan failed to exercise due professional care and the necessary skepticism required under Generally Accepted Auditing Standards ("GAAS") to ensure Enron's financial statements were presented in conformity with Generally Accepted Accounting Principles ("GAAP").
In related administrative proceedings, three other Andersen partners, Thomas H. Bauer, Michael M. Lowther and Michael C. Odom, consented, without admitting or denying the Commission's findings, to settled administrative proceedings which found that they had each engaged in improper professional conduct in connection with their Enron work, and each was denied the privilege of appearing or practicing before the Commission.
Citigroup will partner with a Chinese brokerage firm, Central China Securities Holdings Co., to compete for investment banking business in China. The arrangement, which requires approval from Chinese regulators, will allow Citigroup to earn fees for underwriting offerings on the Shanghai and Shenzhen exchanges. Goldman Sachs and UBS already have partnerships with Chinese firms. WSJ, Citigroup Finds a Partner For China Underwriting.
David Li, CEO of the Bank of East Asia and former director of Dow Jones & Co., reportedly will soon settle with the SEC allegations that he was involved in trading on inside information before the public announcement that News Corp. would seek to acquire Dow Jones. The settlement is said to require payment of $8 million, but will not include an officer or director ban. The SEC previously brought an action against a husband and wife, Kan King Wong and Charlotte Ka On Wong Leung, charging them with purchasing Dow Jones shortly before the announcement and subsequently selling it for a $8 million profit. Mr. Li is a friend of Ms. Leung's father, Michael Leung. WSJ, Ex-Dow Jones Director In Settlement With SEC.
Sallie Mae settled its lawsuit against the former buyers who backed out of the $25 billion buyout and claimed that new legislation cutting federal subsidies to student lenders was a material adverse change that allowed them to walk away without paying the $900 million termination fee. The defendants, who include the J.C. Flowers private equity firm and banks JPMorganChase and Bank of America, will refinance about $30 billion in debt that is falling due soon, an arrangement that will ease Sallie Mae's credit troubles. NYTimes, Sallie Mae Settles Suit Over Buyout That Fizzled
Two hedge funds, Firebrand Partners and Harbinger Capital Partners, owning 4.9% stake in the New York Times, announced their intent to name four directors. In a letter to the Times, Firebrand said it wanted the company to sell some assets and focus on digital publishing and would not seek to change the Times' two-class share structure that enables the Ochs-Sulzberger family to control the board. A Morgan Stanley investment fund recently ended its two-year campaign to make changes at the newspaper publisher. NYTimes, Hedge Fund’s Letter Explains Intentions Regarding The Times; WSJ, Hedge Fund Seeks to Sway New York Times.
Angelo Mozilo, chair and CEO of mortgage lender Countrywide Financial Corp., and the public face of the mortgage crisis, will forfeit $37.5 million of severance pay and benefits in response to political outrage. He is expected to step down when the Bank of America completes its acquisition of the mortgage lender later this year. WSJ, Countrywide CEO Forfeits $37.5 Million as He Exits.
Sunday, January 27, 2008
Are Retail Investors Better Off Today?, by BARBARA BLACK, University of Cincinnati - College of Law, was recently posted on SSRN. Here is the abstract:
In recent years, investors' attitudes towards the securities industry plummeted, in reaction to both the conflicted research and the mutual fund scandals. In both instances, Congress and the regulators responded by asserting the need for reforms to restore the confidence of the retail investor.
This paper first reconsiders the importance of investor confidence and argues that, in an era where adults are required to invest in the markets, the government has a moral obligation to assure that investor confidence in the markets is warranted. This paper examines the SEC's reforms, as well as its investor education initiatives, through the lens of morality and assesses whether they have improved the environment for retail investors. It concludes that the most optimistic assessment is that the SEC has plenty of unfinished business to attend to.
Branding the Small Wonder: Delaware's Dominance and the Market for Corporate Law, by OMARI SCOTT SIMMONS, Wake Forest University School of Law, was recently posted on SSRN. Here is the abstract:
The Delaware brand is to corporate law what Google is to search engines. Brands are of immense value in today's business environment and beyond. Brands have been used to describe a range of items such as products, people, sports clubs, and even geographic locations. In the market for corporate charters, Delaware, particularly its legal regime, is a brand. Delaware's preeminence in the market for corporate charters has lasted for nearly a century and Delaware shows no sign of relinquishing its dominance. Traditional accounts of Delaware's dominance, i.e., race-to-the-bottom theories, race-to-the-top theories and their progeny, provide an incomplete descriptive assessment of charter competition. The branding discussion provides an important missing chapter in the story of Delaware's sustained dominance. Unlike the proliferation of race theories over the past thirty years, active debate exploring the connection between branding and Delaware's competitive advantage in the charter competition context is underdeveloped. This article fills a gap in the legal literature and argues the Delaware brand is a mixture of tangible and intangible elements that has significant implications for Delaware, incorporating firms, and U.S. corporate governance.
When Bad Stocks Make Good Investments: The Role of Hedge Funds in Leveraged Buyouts, by JIEKUN HUANG, Boston College - Department of Finance, was recently posted on SSRN. Here is the abstract:
I examine the role of hedge funds in leveraged buyout transactions. I find significant increases in hedge fund holdings of buyout targets before the announcement. The presence of hedge funds as shareholders of the target firm prior to the announcement is positively related to initial buyout premiums. This effect is robust and economically significant: A two standard deviation increase in the hedge fund ownership of the target before the announcement is associated with an increase of 7% in premiums. I also show that this relationship is stronger for firms with less liquid stocks. Moreover, for low-premium offers, greater hedge fund net buying during the announcement quarter is associated with a greater likelihood and magnitude of an upward revision of the premium. The evidence is consistent with the hypothesis that hedge funds play an active and strategic role and increase the wealth of target shareholders.
Attorneys as Arbitrators, by STEPHEN J. CHOI, New York University - School of Law, JILL E. FISCH, Fordham University - School of Law, ADAM C. PRITCHARD, University of Michigan Law School, was recently posted on SSRN. Here is the abstract:
We study the role of attorneys as arbitrators in securities arbitration, using a dataset of 422 randomly selected arbitrators and their 6724 arbitration awards from 1992 to 2006. We find that arbitrators who also represent brokerage firms or brokers in other arbitrations award significantly less compensation to investor-claimants than other arbitrators. This relation between representing brokerage firms and arbitration awards remains significant even when we control for political outlook. We find no significant effect for attorney-arbitrators who represent investors or both investors and brokerage firms. We report that ideology also correlates significantly with arbitration awards - arbitrators who donate money to Democratic political candidates award greater compensation than arbitrators who donate to Republican candidates.
Because the arbitration award is the product of the panel, not a single arbitrator, we also study the dynamics of panel interaction. We find that the position of chair is an important factor in assessing the arbitrator's influence (although the financial conflicts of other arbitrators may also affect arbitration awards). Coalitions among the other arbitrators are also important. If the chair and another panelist possess a common attribute, the effect on the arbitration award increases.
Finally, we provide evidence that the 1998 NASD reforms to the arbitration process - which introduced party control over the composition of panels - ameliorated, but did not eliminate, the effect that attorneys who represent brokers have on outcomes. We find no significant effect from the NASD's 2004 reforms.
Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom, by J. ROBERT BROWN Jr., University of Denver Sturm College of Law, and SANDEEP GOPALAN, Arizona State University - College of Law, was recently posted on SSRN. Here is the abstract:
Corporate law scholarship is replete with those who favor an enabling approach to regulation, with companies having the right to opt in to particular requirements or regimes. Opting in (or out) permits private ordering and allows for efficient relationships that are a product of bargaining between owners and managers.
This paper tests the core claim of scholars in the nexus of contracts tradition - that private ordering as a process of bargaining creates optimal rules. We do this by analyzing empirical evidence in the context of waiver of liability provisions. The article examines the history of these provisions, emphasizing that they arose in Delaware not from an effort to overturn Van Gorkom but from a decision to intervene in the market for D&O insurance. In other words, their genesis was owed to a desire to interfere with market forces with respect to insurance.
The Delaware model allowed companies to opt in to a regime that eliminated monetary damages for breach of the duty of care through amendments to the articles of incorporation. The contractarian approach would suggest that shareholders and management would use this authority to negotiate agreements that are in their mutual best interests. If a process of bargaining is at work as they claim, the opt-in process ought to result in a variety of practices, with some companies adopting waiver of liability provisions, others not, while still others modify the provisions to only waive liability in particular circumstances. These provisions, therefore, represent a laboratory for determining whether, and the degree to which, bargaining to achieve more efficient private arrangements actually occurs.
Our analysis reveals that the diversity predicted by a private ordering model is not borne out by the evidence. Instead, the evidence shows that one categorical rule (liability for breach of the duty of care) was merely replaced by another (no liability for a breach of the duty of care), with no evidence that the change increased efficiency. The article demonstrates that bargaining does not take place as the contractarian thesis would predict and that the so called private ordering does not necessarily result in greater efficiency