Securities Law Prof Blog

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

A Member of the Law Professor Blogs Network

Saturday, November 20, 2010

SEC Proposes Two Sets of Rules for Security-Based Swaps

At its open meeting on Friday, the SEC proposed two sets of rules relating to security-based swaps.  The first would require security-based swap data repositories (SDRs) to register with the SEC. The proposed rules also lay out other requirements with which SDRs must comply.  The second proposal would set forth how security-based swap transactions should be reported and publicly disseminated.

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act generally authorizes the SEC to regulate security-based swaps. The SEC's proposals aim to increase accountability and transparency in the security-based swap market.  The SEC is seeking public comment on the proposed rules for a period of 45 days following their publication in the Federal Register.

November 20, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Friday, November 19, 2010

SEC Proposes New Rules on Investment Adviser Oversight

At its open meeting today the SEC voted to propose new rules to strengthen the SEC's oversight of investment advisers and fill key gaps in the regulatory landscape.  The SEC's proposed rules would implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that, among other things:

  • Facilitate registration of advisers to hedge funds and other private funds with the SEC.
  • Implement the Dodd-Frank Act's mandate to require reporting by certain advisers that are exempt from SEC registration.
  • Increase the asset threshold for advisers to register with the SEC.
  • Define "venture capital fund" and provide clarity regarding certain exemptions to investment adviser registration.

The SEC also proposed amendments to rules that would require disclosure of greater information by investment advisers and the private funds they manage, as well as amendments that would revise the Commission's pay-to-play rule.

The SEC is seeking public comment on the proposed rules for a period of 45 days following their publication in the Federal Register.

Here is the text of the proposals:

Rules Implementing Amendments to the Investment Advisers Act of 1940

Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers

November 19, 2010 in SEC Action | Permalink | Comments (1) | TrackBack (0)

Wells Pays Citi $100 Million to Settle Wachovia Dispute

Wells Fargo and Citigroup settled their dispute arising from Wells' acquisition of Wachovia after Citigroup had offered to buy Wachovia in October 2008.  Wells will pay Citi $100 million.

November 19, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, November 18, 2010

SEC Grants Accelerated Approval of New FINRA Suitability Rule

The SEC granted approval, on an accelerated basis, to FINRA's proposed rule change to adopt FINRA Rule 2090 (Know Your Customer) and FINRA Rule 2111 (Suitability) in the consolidated FINRA rulebook.  FINRA originally filed with the SEC the proposed rule change on July 30, 2010.  The Commission published the proposed rule change in the Federal Register, and 22 comments were filed in response.  On September 21, 2010, FINRA responded to the comments and filed Amendment No. 1 to the proposed rule change.  The amendment relates to the deletion of NYSE Rule 405(1) through (3), NYSE Supplementary Material 405.10 through .30, and NYSE Rule Interpretations 405/01 through /04 from the current FINRA rulebook.

November 18, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Takes Up Investment Advisers, Security-Based Swaps at Nov. 19 Meeting

SEC Open Meeting Agenda for November 19, 2010
Item 1: Rules Implementing Amendments to the Investment Advisers Act of 1940
Item 2: Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers

Item 3: Security-Based Swap Data Repository Registration, Duties, and Core Principles
Item 4: Regulation SBSR — Reporting and Dissemination of Security-Based Swap Information

November 18, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Two Former Madoff Employees with Involvement in Ponzi Scheme

The SEC charged two longtime employees at Bernard L. Madoff Investment Securities LLC (BMIS) with playing key roles in the Madoff Ponzi scheme. One employee produced phony account statements for investors and feathered her own accounts for personal gain, while the other conspired to cash out Madoff's friends and family as the fraud collapsed in addition to creating phony account statements and tracking the Ponzi scheme bank account.

The SEC alleges that Annette Bongiorno, who began working for BMIS in an administrative capacity in 1968, regularly created false books and records and helped mislead investors in telephone conversations and through account statements and trade confirmations that reported securities transactions that never happened and positions that never existed. Bongiorno also created false trades in her own BMIS accounts that enabled her to cash out millions of dollars more than she deposited.

The SEC further alleges that JoAnn Crupi, who was responsible for supervising the primary bank account used in BMIS's investment advisory operations, helped facilitate the fraud and mislead investors, auditors, and regulators into believing that BMIS was a legitimate enterprise. When the fraud was on the verge of collapse, Crupi helped decide which accounts should be cashed out and prepared checks for those selected investors, many of them who were friends or family of Madoff.

The SEC's complaints against Bongiorno and Crupi specifically allege that by their actions, they violated Section 17(a) of the Securities Act; violated and aided and abetted violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and aided and abetted violations of Sections 204, 206(1) and 206(2) of the Advisers Act and Rule 204-2 thereunder and Sections 15(c) and 17(a) of the Exchange Act and Rules 10b-3 and 17a-3 thereunder. Among other things, the SEC's complaints seek financial penalties and court orders requiring Bongiorno and Crupi to disgorge their ill-gotten gains.

 

November 18, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Rattner Settles SEC Charges for $6.2 Million; New York AG Seeks Lifetime Ban from Securities Industry

The much-anticipated settlement between the SEC and the former Car Czar, Steven Rattner, was announced today, and the New York Attorney General announced it had filed two actions against Rattner.

In the SEC settlement, Rattner agreed to settle the SEC’s charges by paying $6.2 million and consenting to a bar from associating with any investment adviser or broker-dealer for at least two years.  The agency charged Rattner with participating in a widespread kickback scheme to obtain investments from New York’s largest pension fund.  The SEC alleged that Rattner secured investments for his firm Quadrangle from the New York State Common Retirement Fund after he arranged for a firm affiliate to distribute the DVD of a low-budget film produced by the Retirement Fund’s chief investment officer and his brothers. Rattner then caused Quadrangle to retain Henry Morris – the top political advisor and chief fundraiser for former New York State Comptroller Alan Hevesi – as a “placement agent” and pay him more than $1 million in sham fees even though Rattner was already dealing directly with then-New York State Deputy Comptroller David Loglisci and did not need an introduction to the Retirement Fund.

The SEC alleges that after receiving pressure from Morris, Rattner also arranged a $50,000 contribution to Hevesi’s re-election campaign. Just a month later, Loglisci increased the Retirement Fund’s investment with Quadrangle from $100 million to $150 million. As a result of the $150 million investment with Quadrangle, the Retirement Fund paid management fees to a Quadrangle subsidiary. By virtue of his partnership interest in Quadrangle and its affiliates, Rattner’s personal share of these fees totals approximately $3 million.

The SEC previously charged Morris and Loglisci for orchestrating the fraudulent scheme that extracted kickbacks from investment management firms seeking to manage the assets of the Retirement Fund. The SEC charged Quadrangle earlier this year.

Meanwhile, the New York AG filed two lawsuits against Rattner, alleging he paid kickbacks in order to obtain $150 million in investments in Quadrangle from the New York State Common Retirement Fund (“CRF”).  The two lawsuits seek at least $26 million from Rattner and his immediate lifetime ban from the securities industry in New York.

In the first action, Cuomo added Rattner as a defendant to a forfeiture action pending in New York State Supreme Court, New York County, against Henry “Hank” Morris and David Loglisci, and seeks to recover $13 million obtained by Rattner, and millions in future fees and profits.

In the second action, Cuomo filed a lawsuit against Rattner under the Martin Act and the Executive Law, including the Tweed Law, in New York State Supreme Court, New York County, seeking over $13 million in civil recoveries, millions in future fees and profits, as well as additional remedies including injunctive relief.

In a third action, as part of the Martin Act lawsuit, Cuomo filed an application to permanently ban Rattner from engaging in the securities business in the State of New York. The application for an immediate securities ban is based on the fact that Rattner engaged in fraud and refused to answer 68 questions based on his fifth amendment privilege.

Cuomo filed the two lawsuits today after a long-running investigation into corruption at the CRF under former Comptroller Alan Hevesi. In April of this year, Quadrangle entered a settlement with the Attorney General’s Office whereby it agreed to pay a total of $7 million, comply with the Attorney General’s Public Pension Fund Reform Code of Conduct, and cooperate with the investigation as to Rattner.

November 18, 2010 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, November 17, 2010

U.S. Expects to Sell Half its GM Shares at $33

The U.S. Department of the Treasury announced today that it has agreed to sell 358,546,795 shares of its General Motors (GM) common stock at $33.00 per share, as part of GM's initial public offering.  The underwriters in the offering have a 30-day option to purchase up to 53,782,019 additional shares of common stock from Treasury on the same terms and conditions to cover over-allotments, if any.  If the underwriters' over-allotment option is exercised in full, the aggregate gross proceeds to Treasury from the offering are expected to be approximately $13.6 billion, before giving effect to any fees associated with the offering. 

After this offering, Treasury's ownership of GM's outstanding shares of common stock will decline by nearly half – from 60.8 percent to 36.9 percent (33.3 percent if the underwriters exercise their over-allotment option in full).

November 17, 2010 in News Stories | Permalink | Comments (0) | TrackBack (0)

Former Kmart CEO Ordered to Pay $5.5 Million

On November 15, 2010, the United States District Court for the Eastern District of Michigan entered an Amended Final Judgment against Charles C. Conaway, the former Chief Executive Officer of Kmart Corporation, ordering that he pay disgorgement of $3 million, representing part of a retention loan paid to him by Kmart, and a civil penalty of $2.5 million.  On August 23, 2005, the SEC charged Conaway with misleading investors about Kmart's financial condition in the months preceding the company's bankruptcy. On June 1, 2009, a jury returned a verdict in the SEC's favor on all charges following a three-week trial in Ann Arbor, Michigan.  On March 3, 2010, the court ordered Conaway to pay disgorgement in the amount of $5 million, together with prejudgment interest thereon in the amount of $2.85 million, and a civil penalty of $2.5 million.  The Amended Final Judgment represents a compromise of that judgment reached while Conaway's case was on appeal. 

November 17, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Two New York Firms Settle SEC Charges Involving Failure to Protect Non-Public Information

The SEC settled charges that two affiliated New York-based firms and their former chief compliance officer failed to have adequate policies and procedures to prevent misuse of nonpublic information.  One of the firms - investment adviser Buckingham Capital Management Inc. (BCM) - also was charged with supplementing and altering its records prior to turning them over to SEC examination staff.

In administrative proceedings against BCM and its broker-dealer parent company, The Buckingham Research Group Inc. (BRG), the SEC found that the firms failed to establish, maintain, and enforce written policies and procedures reasonably designed to prevent misuse of material, nonpublic information, including forthcoming BRG research reports. The former chief compliance officer for both firms, Lloyd Karp, was charged with aiding and abetting and causing the failures.

BRG provides equity research to hedge funds, broker-dealers, and other institutional customers and is known for its research in the retail, apparel, and footwear industry, which is the primary focus of BCM's investments. The firms share common office space and management, and BCM's trading accounts for approximately 25 percent of BRG's commission revenue.

In its order instituting administrative proceedings, the SEC found that when BCM began preparing for an SEC examination in 2006, the firm discovered that it was missing pre-approval forms for more than 100 employee trades. Instead of producing the incomplete employee trading records to the SEC exam staff, BCM created new forms to replace the missing ones. BCM then produced the existing records along with the newly-created forms to the SEC examination staff without telling the staff what it had done. BCM also replaced incomplete compliance logs with newly-created completed logs and turned the completed logs over to SEC staff without disclosing what had been done. These compliance documents were particularly important because they were intended to address deficiencies identified in an earlier SEC exam of the firm.

The Commission found that whenever there was a material research event, BRG's written policy required research analysts to complete a certification form attesting that they had maintained confidentiality of the material research information. However, in practice, BRG required an analyst to complete a certification form only where a BCM portfolio had traded in the same direction as the research. Moreover, in some instances, analyst certifications were lacking, incomplete, or dated long after the research event had occurred.

The Commission also found that, until May 2009, BCM's written policy required that people with access to material, nonpublic information report "all business, financial or personal relationships that may result in access to material, non-public information." However, BCM required employees to report only relationships that actually did result in access to material, nonpublic information. BCM also failed to conduct the required annual review of its policies and procedures for 2005.

Without admitting or denying the SEC's findings, BRG agreed to pay a $50,000 penalty, BCM agreed to pay a $75,000 penalty, and Karp agreed to pay a $35,000 penalty. They also consented to an order that censures all of the respondents and requires that both firms engage an independent consultant to review and make recommendations regarding their compliance policies and procedures.

November 17, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 16, 2010

GAO Report Underscores Need to Address Long-Term Sustainability of Government's Fiscal Policies

Since 1992, GAO has published long-term fiscal simulations showing federal deficits and debt levels under both "Baseline Extended" and an "Alternative" set of assumptions. GAO has regularly updated these twice a year. GAO developed its long-term model in response to a bipartisan request from Members of Congress concerned about the long-term effects of fiscal policy.  According to its fall 2010 summary:

GAO's annual fall update of its long-term simulations underscores the need to address the long-term sustainability of the federal government's fiscal policies. While the economy is still fragile and in need of careful attention, there is wide agreement on the need to look not only at the near-term but also at steps that begin to change the long-term fiscal path as soon as possible without slowing the recovery. With the passage of time the window to address the long-term challenge narrows and the magnitude of the required changes grows. The federal government faces long-term fiscal pressures that predate the economic downturn and are driven on the spending side largely by rising health care costs and an aging population. GAO's simulations show continually increasing levels of debt that are unsustainable over the long-term. ...

The Federal Government's Long-Term Fiscal Outlook: Fall 2010 Update

November 16, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

GAO Finds Improvements in TARP Financial Reporting

The Emergency Economic Stabilization Act of 2008 (EESA), which authorized the Secretary of the Treasury to implement the Troubled Asset Relief Program (TARP) and established the Office of Financial Stability (OFS),  requires the annual preparation of financial statements for TARP, and further requires GAO to audit these statements.

GAO audited OFS’s fiscal years 2010 and 2009 financial statements for TARP to determine whether, in all material respects, (1) the financial statements were fairly stated, and (2) OFS management maintained effective internal control over financial reporting. GAO also tested OFS’s compliance with selected provisions of laws and regulations.  According to the GAO's summary:

In GAO’s opinion, OFS’s fiscal years 2010 and 2009 financial statements for TARP are fairly presented in all material respects. GAO also concluded that, although internal controls could be improved, OFS maintained, in all material respects, effective internal control over financial reporting as of September 30, 2010. GAO found no reportable noncompliance in fiscal year 2010 with the provisions of laws and regulations it tested.

During fiscal year 2010, OFS sufficiently addressed the issues that resulted in a significant deficiency in fiscal year 2009 regarding OFS’s verification procedures over the data used for asset valuations such that we no longer consider this to be a significant deficiency as of September 30, 2010. In
addition, OFS addressed many of the issues related to the other significant deficiency we reported for fiscal year 2009 concerning its accounting and financial reporting processes. However, the remaining control issues along with other control deficiencies in this area that we identified in fiscal year 2010 collectively represent a continuing significant deficiency in OFS’s internal control over its accounting and financial reporting processes. While this deficiency is not considered a material weakness, it merits management’s attention.

FINANCIAL AUDIT Office of Financial Stability (Troubled Asset Relief Program) Fiscal Years 2010 and 2009 Financial Statements

November 16, 2010 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

GAO Finds Failure of Internal Controls at SEC

The SEC is required to prepare and submit to Congress and the Office of Management and Budget audited financial statements. GAO, under its audit authority, audited SEC’s financial statements to determine whether (1) the financial statements are fairly stated, and (2) SEC management maintained effective internal control over financial reporting. GAO also tested SEC’s compliance with selected provisions of significant laws and regulations. GAO also reported on SEC’s assessment of its internal control over financial reporting.  In summary, the GAO found:

In GAO’s opinion, SEC’s fiscal years 2010 and 2009 financial statements are fairly presented in all material respects. However, in GAO’s opinion, SEC did not maintain effective internal control over financial reporting as of September 30, 2010, due to material weaknesses involving SEC’s internal control over information systems and its financial reporting and accounting processes. GAO’s opinion on SEC’s internal control over financial reporting is consistent with SEC’s assessment of its internal control over financial reporting. GAO found no reportable instances of noncompliance with the provisions of laws and regulations it tested.

Since SEC began preparing financial statements in 2004, it has struggled with maintaining effective internal control over financial reporting. SEC has taken actions to address previously reported deficiencies. For example, it took sufficient actions during fiscal year 2010 such that its controls over its fund balance with Treasury and its risk assessment processes are no longer considered significant deficiencies. Notwithstanding this progress, as of September 30, 2010, GAO identified continuing deficiencies over SEC’s information security, financial reporting process, budgetary resources, and registrant deposits, combined with newly identified deficiencies in the areas of information systems, disgorgements and penalties and required supplementary information. These deficiencies were judged to represent two material weaknesses in internal control that have reduced assurance that data processed by its information systems are reliable and appropriately protected and have resulted in errors and misstatements in SEC’s financial reporting during the fiscal year. SEC made the necessary adjustments and was able to prepare financial statements that were fairly stated in all material respects by fiscal year end.

These material weaknesses are likely to continue to exist until SEC’s accounting system is either significantly enhanced or replaced, key accounting activity in other systems is fully integrated with the accounting system at the transaction level, information security controls are significantly strengthened, and appropriate resources are dedicated to maintaining effective internal controls.

GAO, FINANCIAL AUDIT, Securities and Exchange Commission's Financial Statements for Fiscal Years 2010 and 2009.

November 16, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Monday, November 15, 2010

SEC Releases its Annual Report

The SEC posted on its website its 2010 Performance and Accountability Report.

November 15, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Announces Agenda for Nov. 19 Open Meeting

The SEC announced the subject matter of its next Open Meeting, on November 19, 2010:

The Commission will consider whether to propose new rules and rule amendments under the Investment Advisers Act of 1940 to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rules and rule amendments are designed to give effect to provisions of Title IV of the Dodd-Frank Act that, among other things, increase the statutory threshold for registration by investment advisers with the Commission, require advisers to hedge funds and other private funds to register with the Commission, and address reporting by certain investment advisers that are exempt from registration.

The Commission will consider whether to propose rules that would implement new exemptions from the registration requirements of the Investment Advisers Act of 1940 for advisers to venture capital funds and advisers with less than $150 million in private fund assets under management in the United States. These exemptions were enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposed rules also would clarify the meaning of certain terms included in a new exemption for foreign private advisers.

The Commission will consider whether to propose new rules under Section 763(i) of the Dodd-Frank Wall Street Reform and Consumer Protection Act governing the security-based swap data repository registration process, the duties of such repositories, and the core principles applicable to such repositories.

The Commission will consider whether to propose Regulation SBSR under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act to provide for the reporting of security-based swap information to registered security-based swap data repositories or the Commission and the public dissemination of security-based swap transaction, volume, and pricing information.

November 15, 2010 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Law Profs File Amicus Brief in Case Addressing Definition of Materiality

In January the Supreme Court will hear oral argument in Matrixx Initiatives Inc. v. Siracusano, a securities fraud action that addresses again the definition of materiality under Rule 10b-5.  The issue is whether the application of a test of statistical significance to adverse event reports for widely distributed drugs will result in a bright-line test for materiality that is inconsistent with the Northway/Basic test.  Recently a group of law professors, spearheaded by Jay Brown (Denver), filed an amicus curiae brief (Download Matrixx09-1156 bsac Professors at Law) in support of respondents, as did the United States (Download MatrixxAmicus_Pltfs_SG_SEC.

The Ninth Circuit's opinion, reversing the district court's dismissal of investors' claim, is reported at 585 F.3d 1167 (9th Cir. 2009).

November 15, 2010 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Sunday, November 14, 2010

Zaring on Resolution Authority

A Lack of Resolution, by David T. Zaring, University of Pennsylvania - Legal Studies Department, was recently posted on SSRN.  Here is the abstract:

 The failure to resolve – that is, impose a quick death penalty on – enormous financial intermediaries such as Lehman Brothers and AIG damaged the ability of the government to respond to the financial crisis. But expanding resolution authority to cover new systemically significant institutions – which is one of the lynchpins of financial regulatory reform  – poses a problem of legitimacy with constitutional implications, as resolution authority is usually exercised with almost no predeprivation process and little postdeprivation compensation. At the same time, banking regulators have failed, every time they have been given more resolution authority, to exercise that authority when it is needed.

This Article reassesses resolution authority. It proposes (1) domestic solutions to protect against government overreach and (2) an international context to deal with the problem of underreach. First, it proposes that the government make an ex ante public list of potentially nationalizable institutions and, ex post, provide the owners of seized institutions a brief window in which to buy their institutions back from the regulators who took them. This proposal would add both a process check and a market check to this most severe form of decisionmaking. At the same time, this Article also proposes internationalizing the context of the decision to use resolution authority by including expert multinational committees of regulators in the decision. Because these regulators are somewhat insulated from ordinary domestic politics, this twofold approach is more likely to encourage the appropriate resolution of the largest institutions than any solely domestic approach.

November 14, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Schwarcz on Securitization

Leverhulme Lecture: The Future of Securitization, by Steven L. Schwarcz, Duke University - School of Law, was recently posted on SSRN.  Here is the abstract:

The securitization of subprime mortgage loans is widely viewed as a root cause of the financial crisis. This lecture balances the costs and benefits of securitization, focusing on what went wrong and on what needs to be fixed to curtail securitization's abuses and make it viable again as an important financing tool. Finally, the lecture examines alternatives to securitization, focusing on covered bonds and comparing and contrasting covered bonds and securitization.

November 14, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Eisenberg & Miller on Attorney Fee Clauses

The English vs. The American Rule on Attorneys Fees: An Empirical Study of Attorney Fee Clauses in Publicly-Held Companies’ Contracts, by Theodore Eisenberg, Cornell University - School of Law, and Geoffrey P. Miller, New York University - School of Law, was recently posted on SSRN.  Here is the abstract:

We study attorney fee clauses in a data set of 2,350 contracts contained as exhibits in Form 8-K filings by reporting corporations. Because 8-K filings are required only for material events, these contracts likely are negotiated by sophisticated parties and, therefore, provide evidence of efficient ex ante solutions to contracting problems. The American Rule for compensating attorneys requires each party to pay its own attorney, win or lose; the English Rule (applicable rule in most of the world) requires the losing party to pay the winner’s reasonable fees. Adoption of the English Rule or other loser-pays arrangements has frequently been proposed as a solution to perceived U.S. litigation problems. But the vast theoretical modeling literature on fees has reached no consensus. Empirical reality should help assess the models and provide new insights. Because contracting parties can opt out of the American Rule and into a loser-pays rule at low cost, we expect such opt-outs to occur frequently if the English Rule more efficiently compensates counsel. Our data show, however, that the American Rule is preferred about as often as the English Rule (or similar loser-pays rules). Choosing the American Rule is associated with the following contractual features: specific kinds of contracts, the presence of a non-U.S. party, the absence of arbitration clauses and jury trial waivers, selection of New York law in contracts other than underwriting contracts, and a likely long-term relation between the parties. It is inversely associated with an increasing degree of contract standardization. Sophisticated parties thus often perceive the American Rule to be value-enhancing compared to loser-pays systems but contracting parties that opt out of U.S. courts through arbitration clauses, or eliminate jury trials through jury waiver clauses tend to reject the American Rule. The findings suggest that theoretical models should resist the assumption that a single attorney fee rule is most efficient in all contexts and that models should strive to account for real-world factors associated with fee clauses.

November 14, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Bebchuk et alia on Staggered Boards

Staggered Boards and the Wealth of Shareholders: Evidence from a Natural Experiment, by Lucian A. Bebchuk, Harvard University - Harvard Law School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Alma Cohen, Tel Aviv University - Eitan Berglas School of Economics; Harvard Law School; National Bureau of Economic Research (NBER), and Charles C. Y. Wang, Stanford University; Harvard University - Harvard Law School, was recently posted on SSRN.  Here is the abstract:

While staggered boards are known to be negatively correlated with firm valuation, such association might be due to staggered boards’ either bringing about or merely being the product of the tendency of low-value firms to have staggered boards. In this paper, we use a natural experiment setting to identify how market participants view the effect of staggered boards on firm value. In a recent and not-fully-anticipated recent ruling, the Delaware Chancery Court approved the legality of a shareholder-adopted bylaw that shortened the tenure of directors whose replacement was precluded by a staggered board by moving the company’s annual meeting up from August to January. We find that the decision was accompanied by abnormal and economically meaningful positive stock returns to firms with a staggered board, relative to firms without a staggered board.

The identified positive stock returns were especially pronounced for firms likely to be impacted by the decisions, because (i) their past annual election took place in later months of the calendar year, (ii) they are incorporated in Delaware or (iii) do not have supermajority voting requirements that make it difficult for shareholders to amend the bylaws. The identified positive stock returns were also especially pronounced for firms for which control contests are especially relevant because of their (i) below-industry return on assets, (ii) relatively small firm size, and (iii) absence of supermajority voting requirements making a merger of the company difficult.

Our findings are consistent with market participants’ viewing staggered boards as bringing about a reduction in firm value. They are thus consistent with the policies of leading institutional investors in favor of proposals to repeal classified boards, and with the view that continuation of the ongoing process of board declassification by many public firms will enhance shareholder value.

November 14, 2010 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)