Tuesday, May 15, 2012
SEC Commissioners Gallagher and Paredes have issued a statement regarding the SEC's May 4, 2012 order approving a proposed rule change by the Municipal Securities Rulemaking Board consisting of an interpretive notice concerning the application of MSRB Rule G-17 to underwriters of municipal securities.
In our view, neither the MSRB’s nor the Commission’s analysis in this rulemaking is rigorous enough to pass muster.
Any rulemaking — whether by a self-regulatory organization, such as the MSRB, or by the Commission itself — should be the product of a careful and balanced assessment of the potential consequences that could arise. Such an assessment should entail a thorough analysis of both the intended benefits and the possible costs of a proposed rulemaking in order to ensure that any regulatory decision to proceed with the initiative reflects a well-reasoned conclusion that the benefits will come at an acceptable cost. This requires identifying the scope and nature of the problem to be addressed, determining the likelihood that the proposed rulemaking will mitigate or remedy the problem, evaluating how the rule change could impact affected parties for better and for worse, and justifying the recommended course of action as compared to the primary alternatives.
The decision-making process that led to the Commission’s approval of the MRSB’s proposed rule change falls far short of meeting this benchmark. Accordingly, we do not support the Commission order approving the MSRB’s proposed rule change regarding Rule G-17.
The SEC announced that Edward J. Marino, the former chief executive officer of Connecticut-based Presstek, Inc., has agreed to settle previously-filed charges that he aided and abetted Presstek’s violations of Section 13(a) of the Securities and Exchange Act of 1934 (“Exchange Act”) and Regulation FD. On March 9, 2010, the Commission filed a civil injunctive action against Marino and Presstek, a manufacturer and distributor of high-technology digital imaging equipment. The Commission's complaint alleged that on September 28, 2006, while acting on behalf of Presstek, Marino selectively disclosed material non-public information regarding Presstek's financial performance during the third quarter of 2006 to a partner of a registered investment adviser. According to the complaint, within minutes of receiving the information from Marino, the partner decided to sell all of the shares of Presstek stock managed by the investment adviser. The complaint alleged that Presstek violated of Section 13(a) of the Exchange Act and Regulation FD when it did not simultaneously disclose to the public the information provided by Marino to the partner, and that Marino aided and abetted those violations.
Without admitting or denying the Commission’s allegations, Marino has consented to the entry of a civil judgment requiring him to pay a $50,000 civil penalty. At the time the case was originally filed in March 2010, Presstek agreed to settle the Commission's charges by consenting to a judgment that enjoins Presstek from further violations of Section 13(a) of the Exchange Act and Regulation FD and ordered it to pay a $400,000 civil penalty.
Monday, May 14, 2012
The New York Court of Appeals recently held that a hedge fund's compliance officer, who was an at will employee, had no claim for wrongful discharge because he was allegedly discharged for confronting the CEO about his front-running transactions. Sullivan v. Harnisch (Download Sullivan.050812). According to New York's highest court, exceptions to the state's at-will doctrine are narrow; it specifically declined to extend Wieder v. Skala, 80 NY2d 628, which recognized a wrongful discharge claim in the context of an attorney who claimed he was dismissed because of his insistence that the law firm report professional misconduct committed by another attorney at the firm.
A majority of the judges rejected the plaintiff's assertion that "compliance with securities laws was central to his relationship with [the hedge fund] in the same way that ethical behavior as a lawyer was central in Wieder to the plaintiff's employment at a law firm." Noting that the plaintiff did not associate with other compliance officers in a firm where all were subject to self-regulation as members of a common profession and that plaintiff was not even a "full-time compliance officer," the court said that "it is simply not true that regulatory compliance ... 'was at the very core and, indeed, the only purpose' of [plaintiff's] employment."
Moreover, according to the court, "the existence of federal regulation furnishes no reason to make state common law more intrusive." If Congress wants to create protection for compliance officers, it is free to do so.
The SEC charged China Natural Gas Inc., a China-based natural gas company, and Qinan Ji, its former CEO, for defrauding investors by secretly loaning company funds to benefit the executive's son and nephew while failing to disclose the true nature of the loans.
The SEC alleges Ji, who remains chairman of China Natural Gas Inc., coordinated two short-term loans totaling more than $14 million in January 2010. One loan went to a real estate firm co-owned by Ji’s son and nephew through a sham borrower. The other loan went to a business partner of the real estate firm. Ji signed the company’s SEC filings that falsely stated the loans were made to third parties. Ji then lied about the true borrower to China Natural Gas’s board, investors, and auditors as well as during the company’s internal investigation.
The SEC also alleges that in the fourth quarter of 2008, China Natural Gas paid $19.6 million to acquire a natural gas company but did not timely and properly report the transaction in its SEC filings. As with the loans, Ji approved the acquisition without obtaining prior authorization from the board.
The SEC’s complaint seeks a final judgment that imposes financial penalties, bars Ji from acting as an officer or director of a public company, and permanently enjoins Ji and China Natural Gas from future violations of these provisions.
The SEC suspended trading in the securities of 379 dormant companies because of concern that they could be hijacked by fraudsters and used to harm investors through reverse mergers or pump-and-dump schemes. The SEC website sets forth the names of all 379 companies. The trading suspension marks the most companies ever suspended in a single day by the agency. An initiative tabbed Operation Shell-Expel by the SEC's Microcap Fraud Working Group utilized various agency resources including the enhanced intelligence technology of the Enforcement Division's Office of Market Intelligence to scrutinize microcap stocks in the markets nationwide and identify clearly dormant shell companies in 32 states and six foreign countries that were ripe for potential fraud.
The federal securities laws allow the SEC to suspend trading in any stock for up to 10 business days. Subject to certain exceptions and exemptions, once a company is suspended from trading, it cannot be quoted again until it provides updated information including accurate financial statements.
Regular readers of this blog will recall that Charles Schwab and FINRA are involved in a dispute over the SRO's rules that prohibit broker-dealers from requiring customers to give up their rights to bring class actions in court. Last fall Schwab amended its customers' agreements to include such a prohibition in reliance on AT&T Mobility v. Concepcion. FINRA promptly brought a disciplinary proceeding against the firm, and Schwab, in turn, brought an action in federal district court seeking a declaratory judgment that FINRA could not enforce its rules, first, because the FINRA rules do not really prohibit class action waivers and, second, even if it does, the rules violate the FAA.
On May 11, the federal district court granted FINRA's motion to dismiss the complaint because the court lacks jurisdiction to hear the case. The court held that Schwab failed to exhaust its administrative remedies and that the failure to exhaust administrative remedies is jurisdictional. In addition, even if failure to exhaust is only an element of a claim, Schwab failed to show that it meets the requirements for an exception to the requirement of administrative exhaustion.
The 21-page opinion emphasizes that the issues involved in this case are squarely within the expertise of FINRA and the SEC and do not involve any constitutional claims (unlike the issues in SEC v. Gupta dealing with retroactive application of Dodd-Frank).
Charles Schwab & Co., Inc. v. FINRA (N.D. Cal. May 11, 2012) (Download Order Granting Def's MTD)
Sunday, May 13, 2012
The Extraterritorial Application of U.S. Securities Fraud Prohibitions in an Increasingly Global Transactional World, by Joan MacLeod Heminway, University of Tennessee College of Law, was recently posted on SSRN. Here is the abstract:
This draft working paper, prepared for a French academic forum entitled “American Law Today: A Transatlantic Glance,” is a brief essay on the current and potential future extraterritorial reach of Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 adopted by the U.S. Securities and Exchange Commission under Section 10(b). The essay does three principal things. First, it summarizes the key antifraud rules in context. Next, it describes (in brief) the history and current state of the academic and political debate on the extraterritoriality of Section 10(b) and Rule 10b-5 (including commentary on the U.S. Supreme Court’s opinion in Morrison v. Nat’l Austl. Bank Ltd. and reactions to the recently released report of the Securities and Exchange Commission in compliance with Congress’s mandate under the Dodd-Frank Wall Street Reform and Consumer Protection Act). Finally, before briefly concluding, the essay suggests a way forward for Congress in light of the current state of the extraterritoriality debate.
Crisis, Scandal and Financial Reform During the New Deal, by Michael A. Perino, St. John's University School of Law, was recently posted on SSRN. Here is the abstract:
This chapter in the forthcoming Oxford Handbook of the New Deal provides a brief overview of the major financial reform legislation passed during the first term of the Roosevelt administration. After describing the structural flaws in the pre-New Deal regulatory landscape, the chapter illustrates how the stock market crash of 1929, the onset Great Depression, and the banking crisis of 1933 helped create the climate in which financial reform could pass. In particular, it highlights the crucial role that the Senate investigation of Wall Street — commonly known as the Pecora investigation, after its chief counsel, Ferdinand Pecora — played in building the clamor for financial reform. The chapter then catalogs the major banking and securities legislation adopted during the Roosevelt administration’s first term and demonstrates the transient nature of the political moments that crises and scandals create. In the immediate aftermath of the crisis, reform proposals passed with little effective opposition. As the crisis receded, however, organized lobbying efforts grew more powerful and were often successful in diminishing reform proposals.
Regulating Insider Trading in the Post-Fiduciary Duty Era: Equal Access or Property Rights?, by Stephen M. Bainbridge, University of California, Los Angeles (UCLA) - School of Law, was recently posted on SSRN. Here is the abstract:
This essay was prepared for a forthcoming book on the law and economics of insider trading.
In Chiarella and Dirks, the Supreme Court based insider trading liability on a breach of a disclosure obligations arising out of a fiduciary relationship. The resulting narrowing of the scope of insider trading liability met substantial resistance from the Securities and Exchange Commission (SEC) and the lower courts. Through both regulatory actions and judicial opinions, the SEC and the courts gradually chipped away at the fiduciary duty rationale. In recent years, the trend has accelerated, with several developments having substantially eviscerated the fiduciary duty requirement.
The current unsettled state of insider trading jurisprudence necessitates rethinking the foundational premises of that jurisprudence from first principles. This essay argues that the correct rationale for regulation insider trading is protecting property rights in information. Although that rationale obviously has little to do with the traditional concerns of securities regulation, this article further argues that the SEC has a sufficiently substantial advantage in detecting and prosecuting insider trading that it should retain jurisdiction over the offense.
Toward a Public Enforcement Model for Directors' Duty of Oversight, by Renee M. Jones, Boston College - Law School, and Michelle Welsh, Monash University - Faculty of Business and Economics, was recently posted on SSRN. Here is the abstract:
This Article proposes a public enforcement model for the fiduciary duties of corporate directors. Under the dominant model of corporate governance, the principal function of the board of directors is to oversee the conduct of senior corporate officials. When directors fail to provide proper oversight, the consequences can be severe for shareholders, creditors, employees, and society at large.
Despite general agreement on the importance of director oversight, courts have yet to develop a coherent doctrine governing director liability for the breach of oversight duties. In Delaware, the dominant state for U.S. corporate law, the courts tout the importance of board oversight in dicta, yet emphasize in holdings that directors cannot be personally liable for oversight failures, absent evidence that they intentionally violated their duties.
We argue that some form of external enforcement mechanism is necessary to ensure optimal conduct from corporate leaders. Unfortunately, the disciplinary force of shareholder litigation has been vitiated by procedural rules and doctrines that make it exceedingly difficult for plaintiffs to prevail in derivative litigation. Because private shareholder litigation no longer fulfills its traditional role, the need exists for alternative mechanisms for director accountability.
We look to Australian corporate law for solutions to the problem of enforcing the duty of oversight. Australian corporate law encompasses a range of enforcement mechanisms for directors’ duties. The Australian Securities and Investments Commission (ASIC) has power to sue to enforce directors’ statutory duties. ASIC can seek a range of penalties for breach of duty, including pecuniary penalties and officer and director bars. ASIC has prevailed in a number of high-profile actions against directors of public companies in recent years. Despite the relative rigor of enforcement in Australia, capable directors continue to serve and its economy has thrived.
The Article explores several possibilities for incorporating public enforcement into the U.S. corporate governance system. We consider SEC enforcement of fiduciary duties and enforcement by states’ attorneys general. We also consider empowering state judges to impose bars on future service, as an alternative to tort-based damages awards. Regardless of the exact model of public enforcement, the reforms advanced here would help provide for greater director accountability and thus better motivate directors to perform their duties responsibly.
Friday, May 11, 2012
SEC Chairman Mary Schapiro gave a speech at the Investment Company Institute's General Membership Meeting in which she reiterated her position that money market funds need additional regulation: We saw what happened in 2008." Her remarks (as reported in Investment News; the speech is not yet posted on the SEC website) suggested that she favors a floating NAV, but she says she wants to hear suggestions from the industry. The reforms put in place in 2010 were positive but not sufficient: "We can't sit by when we see systematic risks and not have a discussion about it." Inv News, Schapiro sticks to her guns on money funds
Meanwhile, three SEC Commissioners (Paredes, Gallagher, and Aguilar) released a statement in opposition to an IOSCO report exploring further regulation of the money market fund industry and seeking comments:
We feel that it is important to state for the record that the Consultation Report does not reflect the views and input of a majority of the Commission. In fact, a majority of the Commission expressed its unequivocal view that the Commission’s representatives should oppose publication of the Consultation Report and that the Commission’s representatives should urge IOSCO to withdraw it for further consideration and revision. Accordingly, the Consultation Report cannot be considered to represent the views of the U.S. Securities and Exchange Commission.
(Statement concerning publication by IOSCO on April 27, 2012 of the “Consultation Report of the IOSCO Standing Committee 5 on Money Market Funds: Money Market Fund Systemic Risk Analysis and Reform Options.”)
Thursday, May 10, 2012
The SEC settled charges with Martin Currie, a Scotland-based fund management group, that it fraudulently used one of its U.S. fund clients to rescue another client, a China-focused hedge fund struggling in the midst of the global financial crisis. Martin Currie agreed to pay a total of nearly $14 million to the SEC and the United Kingdom's Financial Services Authority (FSA) to settle the charges that it steered a U.S. publicly-traded fund called The China Fund Inc. into an investment to bolster the hedge fund. The hedge fund had acquired a significant and largely illiquid exposure to a single Chinese company. Martin Currie directly alleviated the hedge fund's liquidity problems by deciding to use the China Fund — to the detriment of the fund and its shareholders — in a bond transaction that reduced the hedge fund's exposure.
According to the SEC's order, the firm managed the China Fund side-by-side with the hedge fund through its SEC-registered investment adviser subsidiaries. These funds and other Martin Currie accounts made similar investments in Chinese companies under the direction of two senior portfolio managers based in Shanghai. One company was Jackin International, a printer-cartridge recycling company listed on the Hong Kong Stock Exchange.
According to the SEC's order, in June 2007, Martin Currie's lead portfolio manager in Shanghai caused the hedge fund to purchase $10 million of unlisted illiquid Jackin bonds that deviated from the fund's normal equities-trading strategy. Martin Currie improperly classified those bonds as cash in its risk-management system, and as a result the liquidity and credit risks associated with the hedge fund's exposure to Jackin weren't revealed until November 2008 after the hedge fund had purchased additional Jackin bonds. By that time, the hedge fund's total investment in Jackin had come close to breaching the fund's limit on portfolio exposure to a single issuer.
The SEC's order says that as the global financial crisis deepened, the hedge fund faced a significant increase in redemption requests by its investors, exacerbating the fund's liquidity problems. At the same time, Jackin was starved for capital to continue funding its operations and make debt payments to bondholders such as the hedge fund. In response to the hedge fund's overlapping problems, Martin Currie decided to use the China Fund to purchase $22.8 million in convertible bonds from a Jackin subsidiary. The subsidiary instantly lent $10 million of the proceeds to Jackin, which in turn redeemed $10 million in otherwise-illiquid bonds held by the troubled hedge fund. The bond transaction closed in April 2009.
According to the SEC's order, Martin Currie officials were aware that the China Fund's involvement presented a direct conflict of interest and may have been unlawful. In an attempt to cure that conflict, they sought and obtained approval from the China Fund's board of directors. However, they failed to disclose that proceeds of the fund's investment would be used to redeem bonds held by another client — the hedge fund. Martin Currie also failed to sufficiently consider whether the investment's rationale and pricing were in the China Fund's best interests.
The SEC's order noted that the China Fund's bond investment in the Jackin subsidiary turned out poorly. In April 2011, the China Fund sold the bonds for about 50 percent of their face value for a loss of $11.5 million.
The SEC's order found that Martin Currie engaged in separate improper conduct by failing to follow the China Fund's policies and procedures for fair valuing the convertible bonds at issue. Between April 2009 and October 2010, Martin Currie advised the China Fund's board to value the convertible bonds at cost ($22.8 million) while failing to disclose information that was relevant for the board to fair value the bonds.
Wednesday, May 9, 2012
David Blech was permanently barred from the securities industry in 2000 for fraud. But according to the SEC, that did not stop him from carrying out a complex market manipulation scheme in biopharmaceutical stocks. The SEC alleges that Blech established more than 50 brokerage accounts in the names of family members, friends, and even a private religious institution and used those accounts to buy and sell significant amounts of stock in two biopharmaceutical companies in order to create the artificial appearance of activity in their securities so he could maintain their market price and use it to his own financial advantage. Blech also solicited investments for biopharmaceutical companies – including the two companies whose stock he manipulated.
According to the SEC’s complaint, Blech engaged in his scheme at various points in 2007 and 2008, specifically manipulating the stocks of Pluristem Therapeutics Inc. and Intellect Neurosciences Inc. Blech first opened dozens of nominee accounts at several broker-dealers in the names of his wife, uncle, and sister-in law as well as a longtime friend and a company he controlled, and a religious institution that is managed by Blech’s cousin. Blech then used the accounts to engage in deceptive activities and carry out matched trades in Pluristem’s and Intellect’s stocks. Blech’s activity in these thinly-traded securities artificially inflated the stock price of both companies and created the false impression of a liquid market for each company. Blech then used the artificially inflated stock price to sell off his holdings of Pluristem and Intellect through the nominee accounts, and as collateral for a line of credit he established in his wife’s name.
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges against Blech.
The SEC’s complaint seeks a final judgment ordering Blech and his wife to disgorge their ill-gotten gains plus prejudgment interest, pay financial penalties, and be permanently enjoined from future violations of the provisions of the federal securities laws they violated. The complaint seeks orders requiring Blech to comply with a prior SEC order barring him from association with a broker or dealer, and prohibiting him from various other stock activities.
The SEC charged former Detroit mayor Kwame M. Kilpatrick, former city treasurer Jeffrey W. Beasley, and the investment adviser to the city’s public pension funds with a secret exchange of lavish gifts to peddle influence over the funds’ investment process. According to the SEC, Kilpatrick and Beasley, who were trustees to the pension funds, solicited and received $125,000 worth of private jet travel and other perks paid for by MayfieldGentry Realty Advisors LLC, an investment adviser whose CEO Chauncey Mayfield was recommending to the trustees that the pension funds invest approximately $117 million in a real estate investment trust (REIT) controlled by the firm. Neither Kilpatrick and Beasley nor Mayfield and his firm informed the boards of trustees about these trips and the conflicts of interest they presented. The funds ultimately voted to approve the REIT investment, and MayfieldGentry received millions of dollars in management fees.
According to the SEC’s complaint, members of Kilpatrick’s administration began to exert pressure on Mayfield in early 2006 after he supported Kilpatrick’s opponent in his 2005 re-election and hired that candidate’s daughter at MayfieldGentry. Beasley met with Mayfield in February 2006 and told him he was “in the dog house” with Kilpatrick and offered to help him “clear the air.” Throughout 2007, Mayfield appeared before the boards of trustees for Detroit’s public pension funds recommending the REIT investment. Meanwhile, the SEC alleges, MayfieldGentry began footing the bills for trips taken by Kilpatrick, Beasley and others that extended beyond business.
The SEC seeks disgorgement of ill-gotten gains, penalties, and permanent injunctions, including an injunction against Kilpatrick and Beasley to prohibit them from participating in any decisions involving investments in securities by public pensions.
The SEC announced an enforcement action against Shanghai-based Deloitte Touche Tohmatsu CPA Ltd. for its refusal to provide the agency with audit work papers related to a China-based company under investigation for potential accounting fraud against U.S. investors. According to the SEC, the agency has been making extensive efforts for more than two years to obtain documents related to the firm’s work for the company, which issues U.S. securities registered with the SEC. The firm is charged with violating the Sarbanes-Oxley Act, which requires foreign public accounting firms to provide audit work papers concerning U.S. issuers to the SEC upon request. D&T Shanghai has nonetheless failed to provide the documents, citing Chinese law as the reason for its refusal. SEC staff also has sought to obtain the relevant audit work papers through international sharing mechanisms, yet these efforts have been unsuccessful.
This is the first time the Commission has brought an enforcement action against a foreign audit firm for failing to comply with a Section 106 request.
Tuesday, May 8, 2012
Judge Requests Financial Information From Former Lehman Officers Before Ruling on Fairness of Proposed Settlement
Before deciding whether to approve a proposed $90 million settlement with the former directors and officers of Lehman Brothers (to be paid entirely from D&O insurance), Judge Lewis Kaplan requested additional financial information to assess the ability of the individual officer defendants to satisfy a judgment in the event the plaintiffs did not settle and ultimately prevailed. In re Lehman Brothers Sec. & ERISA Litig. (S.D.N.Y. May 3, 2012). The memorandum and order offers a concise description of the realties of class action settlements involving individual defendants. (Download Lehman.050712)
As Judge Kaplan explains, the individual defendants began the litigation with $250 million in insurance coverage. By the end of 2010, the remaining coverage was down to $180 million, and there were many actual and potential claims against the fund in addition to this litigation. In settlement negotiations, the insurance carrier took the position it would only contribute to a settlement that resolved all claims against the individual defendants. The individual defendants insisted that they would not make any financial contributions to a settlement and would not disclose personal financial information to the lead plaintiffs or their counsel.
Because lead counsel was conscious of the bad press coverage that would likely result if the individual defendants did not contribute financially to a settlement, it sought to break the impasse by engaging a former federal district court judge, Judge Martin, to determine whether the five officer defendants' combined liquid assets exceeded $100 million. Despite the focus on liquid assets, Judge Martin required the defendants to complete net worth questionnaires that disclosed all their assets, including non-liquid assets such as secondary residences, retirement accounts, artwork, jewelry, etc. He then answered precisely the question asked of him: he was satisfied that the liquid net worth of the officer defendants was substantially less than $100 million.
Judge Kaplan, however, determined that he did not have sufficient information to sign off on the proposed settlement. Acknowledging that lead counsel are able and distinguished, the judge allowed that "their judgment may prove to be within the range of reasonableness despite the modest amount of the settlement when considered against these defendants' potential exposure." But the very limited charge they gave to Judge Martin -- focusing on liquid net worth -- does not provide the court with sufficient information to determine the fairness of the proposed settlement, including "the ability of the defendants to withstand a greater judgment."
Accordingly, Judge Kaplan ordered that the defendants' personal financial information that had previously been provided to Judge Martin be turned over to the court for an in camera review.
Monday, May 7, 2012
Will the SEC ever adopt tougher regulations for money market funds, in the face of intense industry resistance? If not, will Treasury or the Fed seek other ways to regulate MM funds? According to the Wall St. Journal, federal regulators are looking for a Plan B in the event the SEC does not act and considering whether the Financial Stability Oversight Council could take on the task. WSJ, Regulators Seek Plan B on Money Funds
GAO posted a further report on the government's bailout of AIG on its website: Government's Exposure to AIG Lessens as Equity Investments Are Sold (GAO-12-574, May 7, 2012). Its summary states:
Since GAO’s last report in July 2011, more of the assistance provided by the Department of the Treasury (Treasury) and the Board of Governors of the Federal Reserve System (Federal Reserve) to benefit American International Group, Inc. (AIG) has been repaid. As of March 22, 2012, the remaining assistance to AIG was $46.3 billion, including unpaid dividends and accrued interest. This amount includes Treasury’s $35.9 billion investment in AIG common stock and a balance of $8.3 billion owed by Maiden Lane III to the Federal Reserve Bank of New York (FRBNY). This remaining assistance was down from $92.5 billion in March 2011 and $154.7 billion in December 2010. Several indicators show that as of March 2012, the government’s remaining outstanding assistance to AIG has continued to be reduced, mostly because of repayments on the FRBNY loan to Maiden Lane II; repayment of AIA Aurora, LLC, a special purpose vehicle; and sales of Treasury’s common stock in AIG. The government’s outstanding assistance to AIG is largely composed of Treasury’s common stock in AIG. Treasury’s sales of AIG stock in May 2011 and March 2012 have yielded total proceeds of $11.8 billion and reduced Treasury’s ownership to 70 percent of the company. Based on the $30.83 closing share price of AIG common stock on March 30, 2012, Treasury could recoup the total value of assistance extended to AIG and take in an additional $2.7 billion including dividends. The remaining assistance through Maiden Lane III will likely be repaid in full and net additional returns to the government. When all the assistance is considered, the amount the federal government ultimately takes in could exceed the total support extended to AIG by more than $15.1 billion. This analysis is primarily based on repayments and recoveries and market valuation of AIG’s stock and does not include estimates of subsidy costs associated with the assistance. The actual repayment of the remaining assistance continues to depend on AIG’s long-term health, the timing of Treasury’s sale and the share price of AIG stock, among other things. As Treasury arranges to sell its stock in AIG to exit the company, several indicators suggest that the most likely buyers will be institutions, many of whom already have considerable holdings in other insurance companies.
Several indicators show that in 2011, AIG had positive net income and its insurance operations were stable and profitable. AIG had a net income for 2011 of $18.5 billion, primarily attributable to an income tax benefit and divested businesses. AIG’s operating cash flows declined in 2011, which was mostly due to cash payments covering several years of accrued interest and fees on the FRBNY revolving credit facility and reduction in cash flows from the absence of a full year of operating cash flows of foreign life subsidiaries that were sold during the year. Also, payments on catastrophic loss claims and asbestos liabilities reduced operating cash flows. The indicator on AIG’s quarterly insurance operating performance shows that AIG was profitable in most quarters and that investment income contributed considerably to that profitability, including several quarters when insurance underwriting by itself was not profitable. The sustainability of any positive trends in AIG’s operations will depend on how well it manages its business in the current economic environment. GAO will continue to monitor these issues.
Treasury also recently announced that it agreed to sell about 164 million shares of AIG common stock at $30.50 in an underwritten public offering. As part of the offering, AIG agreed to purchase about 65.5 million shares.
Saturday, May 5, 2012
Delaware Corporate Litigation and the Fragmentation of the Plaintiffs’ Bar, by John Armour, University of Oxford - Faculty of Law; University of Oxford - Said Business School; European Corporate Governance Institute (ECGI); Bernard S. Black, Northwestern University - School of Law; Northwestern University - Kellogg School of Management; European Corporate Governance Institute (ECGI); and Brian R. Cheffins,
University of Cambridge - Faculty of Law; European Corporate Governance Institute (ECGI), was recently posted on SSRN. Here is the abstract:
Since 2000 a growing proportion of lawsuits against directors of public companies incorporated in Delaware have been filed outside Delaware. There has also been a large increase in the likelihood of litigation challenging for M&A transactions involving Delaware targets, and the likelihood that suits involving the same transaction will be filed both in Delaware and elsewhere. In this Article we explore one potential cause for these trends -- intensified competition between plaintiffs’ law firms. We trace the development of the plaintiffs’ bar from the 1970s to the present and identify three changes that plausibly contributed to the out-of-Delaware trend and a higher litigation rate: 1) stronger competition among plaintiffs’ lawyers specializing in securities litigation also affected the corporate law side of the plaintiffs’ bar, 2) changes in how the Delaware courts selected lead counsel encouraged non-Delaware filing by firms who were unlikely to win lead counsel status in Delaware, 3) potential obstacles associated with launching a suit in a jurisdiction other than Delaware become less of a concern to the plaintiffs’ bar.
Narrow Banking: An Overdue Reform that Could Solve the Too-Big-To-Fail Problem and Align U.S. And U.K. Regulation of Financial Conglomerates, by Arthur E. Wilmarth Jr., George Washington University Law School, was recently posted on SSRN. Here is the abstract:
This article is based on testimony presented on December 7, 2011, before the Subcommittee on Financial Institutions and Consumer Protection of the Senate Committee on Banking, Housing, and Urban Affairs. The article provides an update and extension of my previous work showing that: (1) the U.S., U.K. and other developed nations provided enormous subsidies for “too-big-to-fail” (“TBTF”) financial institutions during the financial crisis, thereby creating dangerous distortions in our financial markets and economies; (2) large financial conglomerates follow a hazardous business model that is riddled with conflicts of interest and prone to speculative risk-taking; (3) the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) creates helpful new tools for regulating systemically important financial institutions (“SIFIs”) and dealing with their potential failure, but Dodd-Frank does not completely close the door to government bailouts of creditors of SIFIs; (4) Dodd-Frank relies on the same regulatory techniques – including capital-based regulation and prudential supervision – that failed to prevent the banking and thrift crises of the 1980s and the current financial crisis; and (5) Dodd-Frank also depends on many of the same federal agencies that failed to stop excessive risk-taking by financial institutions during the credit boom that preceded both crises.
In view of Dodd-Frank’s shortcomings, the article reiterates my proposals for more extensive structural reforms and activity limitations that would (i) prevent SIFIs from using federal safety net subsidies to support their capital markets activities, and (ii) make it easier for regulators to separate banks from their nonbank affiliates when financial conglomerates fail. Congress should mandate a pre-funded Orderly Liquidation Fund (“OLF”) and should require all bank and nonbank SIFIs to pay risk-based assessments to the OLF to provide for the future costs of resolving failed SIFIs. Congress should also mandate a “narrow bank” structure for financial conglomerates that would (a) protect the Deposit Insurance Fund from the risks created by nonbank affiliates of SIFI-owned banks, and (b) prevent narrow banks from transferring their FDIC-insured, low-cost funding advantages to their nonbank affiliates. My recommended reforms are similar to the “ring-fencing” proposal issued by the U.K. Independent Commission on Banking and endorsed by the Cameron coalition government. The narrow bank concept provides a promising way for the U.S. and the U.K. to adopt a common approach for regulating financial conglomerates. If the U.S. and the U.K. adopted consistent regimes for controlling the risks posed by SIFIs, they would place great pressure on other developed nations to follow suit.