Securities Law Prof Blog

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

Thursday, January 19, 2012

Can Carlyle Group Require Investors to Arbitrate All Disputes (and no Class Arbitration)?

Carlyle Group, L.P., the private equity firm, is preparing to go public and has filed with the SEC a registration statement that discloses that its partnership agreement will require arbitration of all investors' disputes, including federal securities claims.  In addition, the agreement provides that investors may only bring claims in their individual capacities and not as a class action.  The agreement also contains a confidentiality agreement, so that parties cannot disclose any of the arbitration materials, including any awards. Here is the registration statement as filed with the SEC.  The Registration Statement contains other anti-investor provisions that Steven Davidoff has ably analyzed in his New York Times  Dealbook blog, Carlyle Readies an Unfriendly I.P.O. for Shareholders.

I have written two law review articles exploring the possibility that publicly traded issuers may seek to compel arbitration and prohibit class arbitration: 

Arbitration of Investors' Claims Against Issuers: An Idea Whose Time Has Come?, Law and Contemporary Problems (forthcoming) and available on SSRN, and

Eliminating Securities Fraud Class Actions Under the Radar, 2009 Columbia Bus. Law Rev. 802 and available on SSRN.

As I describe in those articles, arbitration of investors' claims against public issuers is an "idea whose time has come" for over twenty years.  Although proposals to require arbitration have been floated periodically, publicly traded domestic issuers and their counsel have not seriously pursued them, probably because of legal obstacles to their implementation, including the fact that the SEC has never publicly repudiated its staff position that an arbitration provision in a publicly traded issuer's governance documents would violate the anti-waiver provisions of the federal securities laws.  In addition, until the recent U.S. Supreme Court opinion in AT&T Mobility LLC v. Concepcion, issuers and their counsel may not have perceived significant advantages to arbitration to warrant challenging the SEC on this issue and risking criticism in the court of public opinion.  However, Concepcion is a game-changer; in that case the Court upheld a provision in a consumer contract that disallowed class arbitration.  Accordingly, I predicted that issuers may be able to achieve an advantage to the adoption of an arbitration provision that they were not able to achieve previously -- the elimination of the securities class claim!  My prediction has now come to pass.

Will the SEC try to stop Carlyle?  When Christopher Cox was SEC Chairman, there were rumors that the agency was giving consideration to allowing issuers to require arbitration.  Moreover, there are already foreign private issuers whose securities are traded in the U.S. markets that require arbitration, the best known of which is Royal Dutch Shell.  In light of these developments, some Commissioners may be ready to back away from the agency's previous opposition to arbitration clauses in public issuer's governance documents.

To my knowledge only two of the current Commissioners have stated publicly an opinion on the use of mandatory arbitration in investors' agreements with their broker-dealers.  Commissioners Elisse Walter and Luis Aguilar have previously expressed reservations about the use of mandatory arbitration clauses in customers' brokerage agreements, so I would expect that they would not look favorably on Carlyle's arbitration agreement, which is a considerable extension of the concept of an "agreement" for purposes of the Federal Arbitration Agreement.  It is likely that it would come down to SEC Chair Mary Schapiro, who previously was the CEO of FINRA, which sponsors the primary arbitration forum for the securities industry.  To date she has been circumspect about expressing a view on mandatory arbitration.  Even assuming that she supports mandatory arbitration of customer-broker disputes, the Carlyle "agreement" mandating arbitration does not bear much resemblance to the arbitration agreements entered into between customers and their brokers.  The latter involve an actual, one-on-one contractual rrelationship (albeit standard-form) between the customer and the broker.  Including a arbitration provision in a governance document that is included in a Registration Statement and that purports to bind all subsequent investors may be a "bridge too far" for Ms. Schapiro.  

Certainly the Carlyle Group is pushing the envelope here with its "take it or leave it" attitude.  I hope the SEC shows some backbone and doesn't let this go by without a fight. 

January 19, 2012 in SEC Action, Securities Arbitration | Permalink | Comments (0) | TrackBack (0)

National Business Law Scholars Conference: Call for Papers

The National Business Law Scholars Conference (NBLSC), formerly known as the Midwest Corporate Legal Scholars Conference, will be held on Wednesday, June 27th and Thursday, June 28th at University of Cincinnati College of Law in Cincinnati, Ohio.  This is the third annual meeting of the NBLSC, which has been renamed this year to reflect its national scope and the widely varied interests of its participants.  We welcome all on-topic submissions and will attempt to provide the opportunity for everyone to actively participate.  We will also attempt to assign a commentator for each paper presented.  Junior scholars are especially encouraged participate, and we will hold a special “how-to” panel for prospective business law scholars discussing the job market and transitioning into the legal academy. 

To submit a presentation, email Professor Eric C. Chaffee at with an abstract or paper by April 15, 2012.  Please title the email “NBLSC Submission – {Name}”.  If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance”.  Please specify in your email whether you are willing to serve as a commentator or moderator.  A conference schedule will be circulated in early June.

Conference Organizers:

Barbara Black (University of Cincinnati)
Eric C. Chaffee (University of Dayton)
Steven M. Davidoff (The Ohio State University)

January 19, 2012 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 18, 2012

SEC Seeks Public Comment for Financial Literacy Study

The SEC published on its website a request for public comment (Download 34-66164[1]) on financial literacy and investor disclosure issues that it is studying as part of a review mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Section 917 of the Dodd-Frank Act directs the SEC to conduct a study of retail investors’ financial literacy and submit its findings to Congress by July 21, 2012. The SEC is using qualitative and quantitative research, including investor testing, to help inform the study. To supplement its research, the SEC also is seeking public comment on financial literacy and investor disclosure issues.

Consistent with the Dodd-Frank Act’s specifications for the study, the SEC is seeking comment on methods to improve the timing, content, and format of disclosures to investors regarding financial intermediaries, investment products, and investment services. It also requests comment on information that retail investors need to make informed financial decisions on hiring a financial intermediary or purchasing an investment product or service typically sold to retail investors, including mutual funds. In addition, the SEC seeks comment on how to make investment expenses and conflicts of interest in investment transactions more transparent to investors.

January 18, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges Florida Bank and CEO with Misleading Investors about Loan Risks

The SEC charged BankAtlantic Bancorp, the holding company for one of Florida’s largest banks, and its its CEO and chairman Alan Levan with misleading investors about growing problems in one of its significant loan portfolios early in the financial crisis.  According to the SEC, they made misleading statements in public filings and earnings calls in order to hide the deteriorating state of a large portion of the bank’s commercial residential real estate land acquisition and development portfolio in 2007. BankAtlantic and Levan then committed accounting fraud when they schemed to minimize BankAtlantic’s losses on their books by improperly recording loans they were trying to sell from this portfolio in late 2007.

According to the SEC’s complaint, BankAtlantic and Levan knew that a large portion of the loan portfolio — which consisted primarily of loans on large tracts of lands intended for development into single family housing and condominiums — was deteriorating in early 2007 because many of the loans had required extensions due to borrowers’ inability to meet their loan obligations. Some loans were kept current only by extending the loan terms or replenishing the interest reserves from an increase in the loan principal. Levan knew this negative information in part from participating in the bank’s Major Loan Committee that approved the extensions and principal increases. BankAtlantic and Levan also were aware that many of the loans had been internally downgraded to non-passing status, indicating the bank was deeply concerned about those loans.

The SEC’s complaint seeks financial penalties and permanent injunctive relief against BankAtlantic and Levan to enjoin them from future violations of the federal securities laws. The complaint also seeks an officer and director bar against Levan.

January 18, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Fines Citigroup for Failure to Disclose Conflicts in Research Reports

FINRA fined Citigroup Global Markets, Inc. $725,000 for failing to disclose certain conflicts of interest in its research reports and research analysts' public appearances.  Citigroup failed to disclose potential conflicts of interest inherent in their business relationships in certain research reports it published from January 2007 through March 2010. Citigroup and/or its affiliates managed or co-managed public securities offerings, received investment banking or other revenue from, made a market in the securities of and/or had a 1 percent or greater beneficial ownership in covered companies, and did not make these required disclosures in certain research reports. In addition, Citigroup research analysts failed to disclose these same potential conflicts of interest in connection with public appearances in which covered companies were mentioned. 

FINRA found that Citigroup failed to disclose the required information because the database it used to identify and create the disclosures was inaccurate and/or incomplete due primarily to technical deficiencies. In addition, Citigroup failed to have reasonable supervisory procedures in place to ensure that the firm was populating its research reports with required disclosures.


January 18, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Stanford's Competent to Stand Trial, Judge Rules

R. Allen Stanford, allegedly the most notorious Ponzi schemer after Bernie Madoff, will go to trial next week.  A Texas federal judge rejected motions by defense attorneys that Stanford was not competent to stand trial and that they needed more time to prepare for trial.  Stanford has pleaded not guilty to 14 counts of fraud involving bogus high-interest certificates of deposit at Antigua-based Stanford International Bank.  NYTimes, Trial Set for Texas Financier

January 18, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

DOJ, SEC Bring Insider Trading Charges Against Seven Fund Managers

The Wall St. Journal reported earlier today on arrests of seven people in New York, Boston and California on insider trading charges, which the newspaper describes as "a broadening of the government's long-running investigation of employees of public companies sharing confidential information with hedge-fund analysts and traders."  Among those arrested were a former portfolio manager at Diamondback Capital Management, an analyst with Sigma Capital Management (an affiliate of SAC Capitol Advisors) and a co-founder of former hedge fund group Level Global Investors.  WSJ, Federal Officials Charge Seven in Insider Probe .

The SEC soon followed and announced charges against two hedge fund advisory firms and the same seven fund managers alleging a $78 million insider trading scheme about Dell’s quarterly earnings and other similar inside information about Nvidia Corporation.

The SEC alleges that a network of closely associated hedge fund traders at Stamford, Conn.-based Diamondback Capital Management LLC and Greenwich, Conn.-based Level Global Investors LP illegally obtained the material nonpublic information about Dell and Nvidia and in turn tipped several others.  According to the SEC’s complaint, the illicit gains in the Dell insider trades exceeded $62.3 million, and the illicit gains in the Nvidia insider trades exceeded $15.7 million. The SEC’s complaint seeks a final judgment ordering the defendants to disgorge their ill-gotten gains plus prejudgment interest, ordering them to pay financial penalties, and permanently enjoining them from future violations of these provisions of the federal securities laws.

January 18, 2012 in News Stories, SEC Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 17, 2012

UBS Affiliate Settles SEC Charges It Mispriced Securities in Mutual Funds

The SEC charged an investment advisory arm of UBS with failing to properly price securities in three mutual funds that it managed, resulting in a misstatement to investors of the net asset values (NAVs) of those funds. UBS Global Asset Management (UBSGAM) agreed to pay $300,000 to settle the SEC’s charges.

According to the SEC’s order instituting administrative proceedings against UBSGAM, the firm purchased on behalf of the mutual funds approximately 54 complex fixed-income securities in June 2008 at an aggregate purchase price of approximately $22 million. Most of the securities were part of subordinated tranches of nonagency mortgage-backed securities whose underlying collateral generally consisted of mortgages that did not conform to the requirements necessary for inclusion in mortgage-backed securities guaranteed or issued by Ginnie Mae, Fannie Mae, or Freddie Mac. The securities purchased also included asset-backed securities and collateralized debt obligations.

The SEC’s order finds that following the purchases, all but six of the securities were then valued at prices substantially in excess of the transaction prices, including many at least 100 percent higher. The valuations used by UBSGAM were provided by pricing sources (broker-dealers or a third-party pricing service) that did not appear to take into account the prices at which the mutual funds had purchased the securities. By using the valuations provided by broker-dealers or a third-party pricing service instead of the transaction prices, UBSGAM caused the mutual funds to not follow their own written valuation procedures.

The SEC’s order further finds that because the securities were not properly or timely priced at fair value, the NAVs of the funds were misstated between one cent and 10 cents per share for several days in June 2008. Consequently, the mutual funds sold, purchased, and redeemed their shares based on inaccurately high NAVs on those days.

January 17, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

House Committee Schedules Hearing on Volcker Rule

The House Financial Services Committee (Capital Markets and Government Sponsored Enterprises Financial Institutions and Consumer Credit Subcommittees) is holding a Joint hearing entitled “Examining the Impact of the Volcker Rule on Markets, Businesses, Investors and Job Creation” on anuary 18, 2012.  Here is the witness list: 

Panel I

•The Honorable Daniel K. Tarullo, Governor, Board of Governors of the Federal Reserve System
•The Honorable Mary Schapiro, Chairman, Securities and Exchange Commission
•The Honorable Gary Gensler, Chairman, Commodity Futures Trading Commission
•The Honorable Martin J. Gruenberg, Acting Chairman, Federal Deposit Insurance Corporation
•Mr. John Walsh, Acting Comptroller of the Currency, Office of the Comptroller of the Currency

Panel II

•Mr. Anthony J. Carfang, Partner, Treasury Strategies, on behalf of the U.S. Chamber of Commerce
•Mr. Douglas J. Elliott, Fellow, Economic Studies, The Brookings Institution
•Mr. Scott Evans, Executive Vice President, President of Asset Management, TIAA-CREF
•Prof. Simon Johnson, Ronald A. Kurtz (1954) Professor of Entrepreneurship, MIT Sloan School of Management
•Mr. Alexander Marx, Head of Global Bond Trading, Fidelity Investments
•Mr. Douglas J. Peebles, Chief Investment Officer and Head of Fixed Income, AllianceBernstein, on behalf of the Securities Industry and Financial Markets Association
•Mr. Mark Standish, President and Co-CEO, RBC Capital Markets, on behalf of the Institute of International Bankers
•Mr. Wallace Turbeville, on behalf of the Americans for Financial Reform

January 17, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, January 15, 2012

Davidoff on Airgas and Strategic Judicial Decision-Making

A Case Study: Air Products v. Airgas and the Value of Strategic Judicial Decision-Making, by Steven M. Davidoff, Ohio State University (OSU) - Michael E. Moritz College of Law, was recently posted on SSRN.  Here is the abstract:

When is it appropriate for Delaware judges to act strategically? This case study documents and analyzes Air Products’ $5.8 billion unsuccessful, hostile offer for Airgas, reviewing the decisions made by the Delaware courts in adjudicating the most prominent takeover bid of 2010. The three court opinions in Air Products v. Airgas show how Delaware courts strategically decide cases and the effect of this decision-making on the course of Delaware corporate law and Delaware’s constituencies. The Airgas case ultimately provides a useful lesson for when, if ever, strategic considerations should influence the outcome of individual Delaware corporate law disputes.

January 15, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Cain & Davidoff on State Competition for Corporate Litigation

A Great Game: The Dynamics of State Competition and Litigation, by Matthew D. Cain, University of Notre Dame - Department of Finance, and Steven M. Davidoff, Ohio State University (OSU) - Michael E. Moritz College of Law, was recently posted on SSRN.  Here is the abstract:

We provide a multi-dimensional picture of jurisdictional competition for corporate litigation by examining merger litigation in a hand-collected sample of 955 takeovers from 2005-2010. We find that entrepreneurial plaintiffs’ attorneys drive this competition by bringing suits in jurisdictions which have previously awarded more favorable judgments and higher fees and by avoiding unfavorable jurisdictions. States with an interest in attracting corporate litigation respond in-kind by adjusting judgments and awards to re-attract litigation. Competing states award higher attorneys’ fees and dismiss fewer cases when attorneys have been migrating to other jurisdictions. Our findings illuminate the dynamics of jurisdictional competition for corporate litigation

January 15, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Matsusaka & Ozbas on Shareholder Empowerment

Shareholder Empowerment: The Right to Approve and the Right to Propose, by John G. Matsusaka, University of Southern California - Marshall School of Business; USC Gould School of Law, and Oguzhan Ozbas, University of Southern California - Marshall School of Business - Finance and Business Economics Department, was recently posted on SSRN.  Here is the abstract:

This paper develops a theory to explore the effect of shareholder empowerment on corporate decision making. We highlight important distinctions between the right to approve and the right to propose. Our main implications concern the right to propose: when shareholders can initiate their own proposals, managerial agency problems can be significantly controlled; however, the right to propose can also worsen corporate decisions by inducing managers to inefficiently accommodate extreme shareholder groups. Our analysis suggests that the right to approve managerial proposals (such as director nominations or new investment) constrains managers but not enough to bring about efficient actions. We identify implications of our analysis for a variety of current regulatory issues concerning director elections, proxy access, bylaw amendments, and shareholder voting.

January 15, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Langevoort & Thompson on Contemporary Securities Regulation

'Publicness' in Contemporary Securities Regulation, by Donald C. Langevoort, Georgetown University Law Center, and Robert B. Thompson, Georgetown University Law Center, was recently posted on SSRN.  Here is the abstract:

Securities regulation is under a great deal of stress as Congress and the Securities and Exchange Commission (SEC) seek to balance the promotion of capital formation and investor protection in the face of rapid technological innovation and political disagreement. Much of the stress comes along the murky border between public and private that defines the degree of regulation companies face, often invoking the hyper-technical “metaphysics” of regulatory arbitrage occurring outside the public arenas of SEC rule-making and enforcement. Our paper considers a variety of seemingly disparate controversies along this border — Facebook’s attempted capital raising efforts that challenged how we define public company status under the Securities Exchange Act; the explosion in reverse mergers as forms of backdoor registration, especially among Chinese issuers; and the battle to define PIPE financing as either a primary or secondary offering under the Securities Act. We argue that the difficulties here are manifestations of our failure to theorize adequately the public-private divide and we suggest ways to think about the issues in terms of a more coherent approach to both the scope and objectives of the two main securities statutes. Our two most prominent securities statutes maintain disparate approaches to publicness and continue to use archaic thresholds like “record” ownership that need to be modernized. We also suggest that the definition of public company under the Exchange Act be revised to separately address those with a large financial and economic footprint, with a second category of smaller and newer issuers that would be subject to a narrower set of core disclosure obligations. More generally, our paper addresses the institutional challenges faced by the SEC in the face of increasingly rapid technological change. Such change constantly creates new unregulated spaces that are occupied by private actors through regulatory arbitrage before the SEC can respond thoughtfully, of which each of the foregoing controversies is an example.

January 15, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Don't Expect a Fiduciary Duty Standard Anytime Soon

On Jan. 22, 2011, the SEC delivered to Congress its report, mandated under Dodd-Frank, on a fiduciary duty standard for all investment advisers and broker-dealers that make personalized investment advice to retail customers.  Although Dodd-Frank does not require the SEC to promulgate a universal fiduciary duty standard, Chairman Mary Schapiro repeatedly stated throughout 2011 that the agency planned to do so soon.  It is now 2012, and it appears unlikely that the agency will propose a standard this year.  The SEC website lists the action as "dates to be determined," and last week Ms. Schapiro sent a letter to Rep. Garrett, Chairman of the House Financial Services Capital Markets Subcommittee, stating that the agency will gather information for an economic analysis of the impact of such a standard and is drafting a public request for information.  Gathering and analyzing the information could take all of 2012; indeed, some believe the fate of any proposal turns on the Presidential election.  For further information, see Inv. News, Broker fiduciary rule officially in limbo

January 15, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)