Saturday, May 26, 2018
Call for Papers
AALS Section on Business Association
New Voices in Business Law
January 2-6, 2019, AALS Annual Meeting
The AALS Section on Business Associations is pleased to announce a “New Voices in Business Law” program during the 2019 AALS Annual Meeting in New Orleans, Louisiana. This works-in-progress program will bring together junior and senior scholars in the field of business law for the purpose of providing junior scholars with feedback and guidance on their draft articles.
FORMAT: Scholars whose papers are selected will provide a brief overview of their paper, and participants will then break into simultaneous round tables dedicated to the individual papers. Two senior scholars will provide commentary and lead the discussion about each paper.
SUBMISSION PROCEDURE: Junior scholars who are interested in participating in the program should send a draft or summary of at least five pages to Professor Jessica M. Erickson at firstname.lastname@example.org on or before August 10, 2018. The cover email should state the junior scholar’s institution, tenure status, number of years in his or her current position, whether the paper has been accepted for publication, and, if not, when the scholar anticipates submitting the article to law reviews. The subject line of the email should read: “Submission—Business Associations WIP Program.”
Junior scholars whose papers are selected for the program will need to submit a draft to the senior scholar commentators by December 14, 2018.
ELIGIBILITY: Junior scholars at AALS member law schools are eligible to submit papers. “Junior scholars” includes untenured faculty who have been teaching full-time at a law school for ten or fewer years. The Committee will give priority to papers that have not yet been accepted for publication or submitted to law reviews.
Pursuant to AALS rules, faculty at fee-paid non-member law schools, foreign faculty, adjunct and visiting faculty (without a full-time position at an AALS member law school), graduate students, fellows, and non-law school faculty are not eligible to submit. Please note that all presenters at the program are responsible for paying their own annual meeting registration fees and travel expenses.
Monday, June 10, 2013
U.S. Supreme Court: Arbitrator's Decision Allowing Class Arbitration Survives Limited Judicial Review under FAA
The Supreme Court today unanimously held that a court has no power to vacate an arbitrator's interpretation of an arbitration agreement permitting class arbitration under section 10(a)(4) of the Federal Arbitration Act, so long as (1) the parties agreed that the arbitrator should decide whether their contract authorized class arbitration and (2) the arbitrator based on his decision on an interpretation of the arbitration agreement. Oxford Health Plans LLC v. Sutter (U.S. June 10, 2013).
The Court thus reaffirmed the narrow grounds for vacating an arbitrator's decision under section 10(a)(4) for exceeding his powers. The Court, in essence, found that Oxford got what it bargained for -- it "chose arbitration and it must now live with that choice." The Court distinguished its earlier decision in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662, because there the parties had stipulated that they had not agreed to class arbitration and thus the arbitrator could not order class arbitration based on the parties' consent. The court also noted that the Court would have faced a different issue if Oxford had argued that the availability of class arbitration was a question of arbitrability, an issue that Stolt-Nielsen had left open. The Court emphasized that nothing in the opinion should be taken to reflect any agreement with the arbitrator's interpretation of the contract.
Justices Alito, with Justice Thomas concurring, wrote a brief concurrence to note that it was unclear whether absent class members would be bound by the arbitrator's ultimate resolution, since they had not consented to the arbitrator's interpretation of the contract. Justice Alito thus makes clear that his view that the availability of class arbitration should not be decided by the arbitrator, absent the stipulation of the parties in the case before the Court.
Oxford Health Plans is an affirmation of the very narrow grounds for judicial review of an arbitrator's decision. While the class arbitration in this case can go forward, it is unlikely to lead to very many class arbitrations, as corporate defendants increasingly are including explicit class action waivers in their arbitration agreements.
Thursday, June 6, 2013
Fabrice Tourre, the former VP in the structured products correlation desk at Goldman Sachs, lost his attempt to get the SEC charges against him dismissed based on Morrison v. National Australia Bank. The SEC is suing Tourre, as readers of this Blog surely know, for his role in the infamous ABACUS CDO that Goldman sold to investors. The SEC alleges various misstatements and omissions concerning the role of Paulson & Co., Inc. in structuring the CDO, i.e., Paulson helped to select the assets that would determine the CDO's value and also shorted over $1 billion of those assets through credit default swaps. The narrow question addressed in the court's June 4 opinion is whether the events that took place in the U.S. are sufficient to render any fraud that occurred actionable under SEA section 10(b) or SA section 17(a). Tourre moved for summary judgment on the SEC's 17(a) claims to the extent it alleged fraud in offers made to two specified foreign investors and unspecified domestic investors. The district court denied Tourre's motion for partial summary judgment, holding that, for claims of fraud "in the offer" of securities, SA 17(a) requires that the relevant offer of securities be made in the U.S. The court rejected Tourre's arguments that (1) if the sale is not domestic, neither the sale nor the offer is actionable under Morrison, and (2) an offer is actionable if and only if it is both domestic and ultimately unconsummated.
The district court based its analysis on the plain meaning of SA section 17(a). Because the Dodd-Frank Act effectively reversed Morrison in the context of SEC enforcement actions, the primary holdings of this opinion affect only pre-Dodd-Frank conduct. With respect to Tourre, it means that his trial is still scheduled to commence in about six weeks.
Thursday, May 16, 2013
Last month Steven Davidoff (the New York Times' Deal Professor) wrote a column on the hostile takeover bid for CommonWealth REIT by two hedge funds: What’s at Stake in the Fight Over a REIT (Apr. 18, 2013). He highlighted the fact that CommonWealth has a bylaw provision that requires arbitration of any shareholders' disputes. Apparently when the REIT filed its registration statement for its public offering with the SEC, the agency, consistent with its longstanding position that such arbitration provisions in public corporations violate the antiwaiver provisions in federal securities laws, required the REIT to delete the provision. But not to be thwarted, after the offering, the CommonWealth board amended the bylaws and reinstated the arbitration clause. As Davidoff nicely frames the issue:
"If the Maryland court upholds CommonWealth's arbitration provision, more companies like Commonwealth can simply adopt these bylaws. They can then take aggressive positions to resist a takeover, and the results will be sent to the black hole of an arbitration conducted in secret and with no timeline for an outcome."
At least as of now, CommonWealth is victorious. On May 8, 2013, the Circuit Court for Baltimore City held that the arbitration bylaw is enforceable. In a case of first impression for the Maryland courts, the court emphasized that arbitration is strongly favored as a matter of public policy and applied contract law principles to determine that there was both mutual assent and consideration to make the arbitration bylaw enforceable as a contract term. Although the court's language is broad and states that constructive knowledge is sufficient, the court also found that the plaintiffs -- who, the court noted, were "two very sophisticated parties" -- had actual knowledge of the arbitration bylaw and assented to it by their stock purchases. The court also rejected plaintiffs' arguments that defendants' unilateral power to amend the bylaws made the agreement unfairly one-sided, citing case law that courts should not look beyond the "four corners" of the arbitration agreement in determining whether it is valid and enforceable. "Because the Trustees' power to amend or revoke the Arbitration Bylaws springs from legitimate, legal sources, outside the "four corners" of the Arbitration Agreement -- namely, the company's Declaration of Trust and Maryland REIT law -- Plaintiffs' argument must fail."
So, to quote Professor Davidoff again, we now have our first ruling on this critical issue, "with real consequences for the takeover market." I suspect that an appeal is under serious consideration.
Corvex Management LP v. CommonWealth REIT (Baltimore City Circuit Court 5/8/13)
Tuesday, April 16, 2013
Judge Marrero Approves $600 Million SAC Insider Trading Settlement, Conditioned on Disposition of Citigroup Appeal
On March 15, 2013 the SEC filed an amended complaint against CR Intrinsic Investors, Mathew Martoma and Sidney Gilman and five relief defendants, alleging that CR Intrinsic participated in an insider trading scheme that caused hedge fund portfolios managed by CR Intrinsic and S.A.C. Capital Advisors to generate approximately $275 million in illegal profits. The same day the SEC also submitted to the federal district court for its approval a final judgment as to CR Intrinsic that contained a permanent injunction against future violations, required CR Intrinsic, on a joint and several basis with the relief defendants, to disgorge approximately $275 million, together with $51.8 million pre-judgment interest, and a civil penalty of approximately $275 million. The SEC also submitted to the court for its approval final judgments with respect to the five relief defendants. On March 28, Judge Victor Marrero held a conference to consider the proposed settlements and to discuss issues raised by some courts in reviewing regulatory agency settlements containing "neither admit nor deny" provisions such as those contained in the proposed final judgments. Today the court released Judge Marrero's decision and order, in which he granted approval of the Final Judgments "conditioned upon the disposition of the pending appeal in the U.S. Court of Appeals for the Second Circuit in S.E.C. v. Citigroup Global Markets, Inc., 11 Civ. 7387 (S.D.N.Y.)."
In his decision Judge Marrero make clear that he is troubled by the use of "neither admit nor deny" language "as they permit CR Intrinsic and the Relief Defendants to resolve the serious allegations against them involving a massive insider trading scheme 'without admitting or denying the allegations of the Complaint.'" Because of the pendency of the Second Circuit's decision in Citigroup, addressing the issue of whether the district courts have the authority to reject settlements on account of this language, the Judge determined it was appropriate to approve the settlement "subject to a condition that it would become final upon a definitive determination in the Citigroup appeal that the district courts lack authority to reject such settlements on the basis of reservations about the 'neither admit nor deny' provision."
In the event the Second Circuit does leave ground for district courts to accord higher scrutiny to such terms, Judge Marrero goes on to express his concerns about the use of such provisions. He recognizes that courts must perform "a very delicate balancing act" and must avoid second-guessing or undue meddling in agency settlement decisions. But he also finds it inconceivable that "Congress intended the judiciary's function in passing upon these settlements as illusory...."
Judge Marrero suggests that there is a middle ground, a role for judicial scrutiny in high-profile cases:
Quantitatively, they should be gauged by the staggering amounts of money, both profits and losses, that typically are involved in underlying wrongdoing that is alleged, with huge numbers of victims seriously injured worldwide, correspondingly matched by the perceived outsized rewards the offenders seek to derive from the illicit and damaging behavior. Qualitatively, the measure of these events should be taken by the sheer magnitude of the culpability the offending conduct presumptively would entail -the higher levels of daring, of risk-taking, of outright abuse that manifest tougher grades of arrogance and greed, as well as cavalier disdain for victims and the public good alike.
Judge Marrero notes, in particular, that less than four months after the SEC initially filed its complaint, CR Intrinsic and the relief defendants reached agreement with the SEC and agreed to pay essentially everything that the SEC demanded and arguably as much as the SEC would be able to recover if it prevailed at trial. Yet the defendants are not "admitting nor denying" the allegations:
In this Court's view, it is both counterintuitive and incongruous for defendants in this SEC enforcement action to agree to settle a case for over $600 million that would cost a fraction of that amount, say $1 million, to litigate, while simultaneously declining to admit the allegations asserted against it by the SEC. An outside observer viewing these facts could readily conclude that CR Intrinsic and the Relief Defendants essentially folded, in exchange for the SEC's concession enabling them to admit no wrongdoing.
The court also expressed concern about the pendency of the related criminal proceeding against Mortoma. The dismissal of charges against Martoma or an acquittal at trial could make the SEC's decision to include "neither admit nor deny" provisions in the settlements of the other defendants appear reasonable. Conversely, a guilty plea or conviction at trial could establish facts potentially decisive to the SEC's allegations of wrongdoing in this enforcement action. The pendency of the criminal proceeding, which might be resolved in a matter of months, provided the judge with an additional reason not to rubber stamp the proposed final judgments.
Judge Marrero also identified "two important, potentially counterproductive effects" that would flow from approval of these settlements:
First, final approval at this time would deny the private plaintiffs of the benefit of a resolution that potentially could ease the burden of proving their case, prolong their litigation, and diminish the amount they could recover....Second, to the extent it takes the parties longer to resolve the private litigation, it imposes a heavier burden on the courts. The Court must accord these adverse effects serious consideration where, as here, they result from a policy or practice of the Government.
Finally, Judge Marrero identified another serious shortcoming of settlements that include "neither admit nor deny" language: "that of the public and its interest in knowing the truth in matters of major public concern."
the Court once again emphasizes that, while [judicial] deference is particularly appropriate in unexceptional cases, courts must bring to bear enhanced scrutiny in reviewing proposed consent judgments in certain extraordinary cases alleging extraordinary public and private harms, in recognition of their particular importance to the public interest notwithstanding the deference normally accorded the policy decisions of federal administrative agencies."
Judge Marrero's opinion is well worth reading. However the Second Circuit decides the Citigroup appeal, it is certain that the debate on this issue will not be over. (Download SECvSAC)
Wednesday, April 10, 2013
The Second Circuit today affirmed a district court's dismissal of investors' claims against the SEC for failing to adequately investigate Bernard Madoff despite numerous warnings. The appeals court affirmed because the Discretionary Function Exception (DFE) of the Federal Tort Claims Act shields the SEC's conduct from plaintiffs' claims. Molchatsky v. US (11-2510-cv(L), decided Apr. 10, 2013Download Molchatsky v US)
The court noted that:
The DFE is not about fairness, it “is about power”... .; the sovereign “reserve[s] to itself the right to act without liability for misjudgment and carelessness in the formulation of policy,” ... “[T]he DFE bars suit only if two conditions are met: (1) the acts alleged to be negligent must be discretionary, in that they involve an ‘element of judgment or choice’ and are not compelled by statute or regulation and (2) the judgment or choice in question must be grounded in ‘considerations of public policy’ or susceptible to policy analysis.”.... Plaintiffs bear the initial burden to state a claim that is not barred by the DFE....
Here, Plaintiffs have failed to make the necessary showing.
Thursday, April 4, 2013
The Second Circuit recently reviewed a broker-dealer's disclosure obligations to its customers regarding margin maintenance requirements for margin accounts. In WC Capital Management, LLC v. UBS Securities, LLC (Docket No. 11-122-cv, decided Apr. 1, 2013) (Download WCCapitalvWillowCreek), the court held that a broker satisfies its disclosure obligations under Rule 10b-16(a) to disclose "conditions under which additional collateral can be required" when it discloses its generally applicable margin policies regarding the circumstances that may lead it to reevaluate the adequacy of the collateral in a customer's account and also indicates that more specific information about its margin policies is available. In particular, the broker does not have to disclose "the precise, complex formulas it uses to calculate its collateral requirements." Finally, Rule 10b-16(b)-- which requires brokers to provide at least 30 days written notice in advance of "any changes in the terms and conditions under which credit charges will be made" -- does not require the broker to provide advance notice before changing its margin policies. The court specifically did not address whether customers have a private right of action under Rule 10b-16.
The SEC filed an amicus brief in support of UBS's interpretation of Rule 10b-16. It explained that the Rule is purely a disclosure rule that does not require broker-dealers to adopt particular margin policies; it only requires that firms that do adopt such policies provide "useful guidance" to investors. More detailed information about margin policies may not, in fact, be useful to investors because brokerage firms may change their margin policies without notice. Hence, investors are "better served by the disclosure of relevant factors with an explicit warning that the brokerage firms can impose different requirements at any time."
With respect to the Rule 10b-16(b) claim, the court relied on the Rule's plain meaning, as well as the SEC's long-held interpretation, that margin policies and credit charges are two separate concepts.
Tuesday, March 26, 2013
A recent opinion from the S.D.N.Y. granted class certification to a class of investors in several mutual funds in the Smith Barney Family of Funds because the plaintiffs successfully invoked the Affiliated Ute presumption of reliance. The allegations stemmed from a previous SEC settlement alleging that the Funds failed to disclose that they did not pass along cost savings achieved by reducing transfer agent fees to the Funds, but instead allowed an affiliated firm to pocket the difference. In re Smith Barney Transfer Agent Litigation (05 Civ. 7583 (WHP) dec. Mar. 21, 2013) (Download SmithBarney.032113)
Defendant argued that class certification was unwarranted because there was no class-wide reliance presumption available. Plaintiffs conceded that the fraud-on-the market presumption was not available because the securities did not trade in an efficient market and instead relied on the less commonly invoked Affiliated Ute presumption, which is available only in claims "involving primarily a failure to disclose." As the court observed, the distinction between misstatements and omissions is often illusory. Noting that the Affiliated Ute presumption is a "pragmatic one," the court found that the heart of plaintiffs' claim is the failure to disclose the transfer agent scheme that generated profits for the affiliate at the Funds' expense. Moreover, class representatives had testified that disclosure of the transfer agent scheme would have affected their investment decisions.
As part of the earlier settlement, the SEC had established a Fair Fund and distributed more than $100 million to the Funds. Defendant argued that the claims of named plaintiffs who participated in the Fair Fund distribution were atypical. The court, however, rejected this argument; typicality focuses on the nature of plaintiffs' claims, not on possible defenses to the claims. In addition, while the securities law prohibits double recovery, there is no evidence that the named plaintiffs had been fully compensated.
Judge Scheindlin (S.D.N.Y.) addressed an important securities law issue that is the subject of academic debate more often than the basis of a judicial opinion: how to rebut the fraud on the market (FOTM) presumption of reliance. GAMCO Investors, Inc. v. Vivendi, S.A. (09 Civ. 7962 (SAS) decided Feb. 28, 2013) (Download VivendiSDNYopinion) presented that issue in a case where Vivendi was collaterally estopped from denying any of the elements of plaintiffs' section 10(b) claims except for reliance; plaintiffs were entitled to the FOTM presumption of reliance; and neither truth on the market nor allegations of no price impact were available as defenses to the presumption. Moreover, the parties agreed that during the relevant period plaintiffs did not possess non-public corrective information about Vivendi's misstatements; the plaintiffs did not directly rely on Vivendi's material misstatements; during the relevant period, the market for Vivendi's ADS's was efficient. In short, the only issue was whether Vivendi could rebut the FOTM presumption of reliance. A bench trial was held on this issue, after which the court concluded that indeed Vivendi had successfully rebutted the presumption because the plaintiffs "did not rely on the inflated market value of Vivendi ADS's as an 'unbiased assessment of [their] value.'"
The plaintiffs, a number of companies affiliated with Gabelli Asset Management, Inc.,purchased Vivendi securities during a period when Vivendi made misstatements to cover up its liquidity crisis. Plaintiffs allege that the misstatements inflated the market price of Vivendi ADS's and consequently harmed the plaintiffs when they relied on the inflated price in making their purchases. The court, however, found that plaintiffs' investment philosophy was based on the intrinsic "Private Market Values" of a company, i.e., "the price that an informed industrialist would be willing to pay for it, if each of its segments were valued independently in a private market sale." Plaintiffs' investment philosophy was to invest in companies whose PMVs are substantially higher than their market capitalizations.
The court specifically found that plaintiffs believed that Vivendi's liquidity crisis was a short-term concern that made it a more attractive investment because it reduced the market price of Vivendi securities without reducing its PMV. Consistent with this, plaintiffs were increasing their Vivendi holdings during the period when corrective disclosures about the liquidity crisis were introduced into the marketplace. Accordingly, Vivendi's liqudity crisis was irrelevant to plaintiffs' decision to purchase Vivendi securities.
The court cautioned that this was an "extraordinary case" because Vivendi was able to rebut the FOTM presumption in an efficient market by establishing that plaintiffs did not, in fact, rely on the inflated market value of the securities and that "it cannot be said that but for Vivendi's misstatements and omissions about its liquidity condition, Plaintiffs would not have transacted in Vivendi ADS's." The court further stated that the holding was "sharply limited to its unusual facts, and should not be taken to suggest that sophisticated institutional investors or value-based investors are not entitled to the [FOTM] presumption in general."
Monday, March 18, 2013
The D.C. district court recently rebuffed the efforts of an association of attorneys who represent public investors in securities arbitrations to obtain records related to the SEC's oversight of the FINRA arbitration forum under the Freedom of Information Act. Public Investors Arbitration Bar Association v. SEC (No. 11-2285(BAH), Mar. 14, 2013). Plaintiff sought records related to the arbitrator selection process of FINRA. The court agreed with the SEC that the records were exempt under FOIA Exemption 8, which exempts from disclosure any matters "contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of an agency responsible for the regulation or supervision of financial institutions." (Download PIABA.SEC)
The dispute centered on whether the records sought by plaintiff are "related to examination, operating, or condition reports prepared by, on behalf of, or for the use of" the SEC. The court based its decision on the "plain meaning" of the exemption, as well the legislative purpose behind the exemption, which is to safeguard the relationship between the financial institution and its supervising agency, to ensure the institution's continuing cooperation.
The court also addressed an issue that the parties did not address: the definition of "financial institution" and its application to FINRA. The plaintiff conceded that FINRA was a "financial institution" for purposes of Exemption 8, based on a 2010 amendment to the Securities Exchange Act. The Court first reviewed the short history of in Dodd-Frank section 9291, which provided that the SEC shall not be compelled to disclose records obtained for regulatory and oversight activities. Only a few months after its enactment, Congress repealed section 9291 because of its concern that it allowed the SEC to keep secret virtually any information it obtained through its examination authority. However, at the same time it repealed section 9291, Congress amended the Securities Exchange Act to clarify that "any entity the SEC regulates under the Securities Exchange Act will be considered a financial institution for the purpose of FOIA Exemption 8." The court expressed its puzzlement: "Congress appears to have given back with the FOIA what it simultaneously intended to take away by repealing Section 9291." The Court also expressed skepticism that a self-regulatory organization like FINRA would qualify as a "financial institution" as that term is normally understood. Nevertheless, it concluded that plaintiff's arguments about an overly broad exemption must be made to Congress, given the broad language.
A recent Second Circuit opinion, Levitt v. J.P. Morgan Securities (No. 10-4596-cv, Mar. 15, 2013), brought back memories of a notorious broker-dealer fraud.(Download Levitt 03152013) Sterling Foster & Co. was a broker-dealer that engaged in numerous market manipulation schemes. The allegations in this class action suit involve SF's activities as an underwriter for an IPO in the mid-1990s (!), in which it entered into secret agreements with the insiders to "pump-and-dump" the stock. The plaintiffs in this class action are former SF customers who purchased the securities in the IPO. Since SF is no longer around, they seek to hold the clearing broker, Bear Stearns, liable alleging that it participated in the fraud. The district court granted class certification on the Rule 10b-5 claim. While acknowleding that it is "well-established" that a clearing broker owes no duty of disclosure to the clients of the introducing broker, the district court made an exception because "a preponderance of the evidence shows that Bear Stearns participated in Sterling Foster's scheme in such a way as to trigger a duty to disclose."
On appeal, however, the Second Circuit reversed. In reviewing the precedent, the appellate court affirmed previous rulings that where a clearing broker provided normal clearing services, it would not be liable for the introducing broker's misconduct. It also acknowledged a limited category of cases in which district courts have permitted claims to proceed against a clearing broker, in instances where the clearing broker "assumed direct control of the introducing firm's operations and its manipulative scheme." However, the Second Circuit found that the district court misapplied this approach: the plaintiffs allege, at most, that Bear Stearns, "knowing of the fraud, joined in, permitted and facilitated said fraud and market manipulation;" plaintiffs do not allege that Bear instigated or directed the manipulative scheme. The Second Circuit held that this did not allege sufficient participation to create a duty of disclosure on the part of the clearing broker -- assuming that such a duty of disclosure existed in the first place. Because there was no duty to disclose, plaintiffs could not avail themselves of the presumption of reliance under Affiliated Ute. Accordingly, plaintiffs could not satisfy the predominance requirement of Rule 23(b)(3).
Wednesday, February 27, 2013
The U.S. Supreme Court announced two decisions today involving federal securities law issues.
In Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, the Court held that proof of materiality is not a prerequisite to certification of securities fraud class actions. While I will have more to say about this opinion later, it is a significant victory for the plaintiffs' securities bar. (Download Amgen opinion)
According to the court, the "pivotal inquiry ... is whether proof of materiality is needed to ensure that the questions of law or fact common to the class will 'predominate over any questions affecting only individual members' as the litigation progresses." The Court answered its question "no" for two reasons: First, because materiality is judged according to an objective standard, it can be proved through evidence common to the class. Second, a failure of proof on the common question of materiality would not result in individual questions predominating. Instead, it would end the case, for materiality is an essential element of a securities fraud claim. The Court rejected defendants' calls to require proof of materiality on policy grounds, noting that Congress had determined not to undo the "fraud-on-the-market" theory that allowed for federal securities fraud class actions. Justice Ginsburg wrote the opinion; three Justices (Scalia, Thomas and Kennedy) dissented.
The SEC, however, suffered a defeat in Gabelli v. SEC, in which the Court unanimously held that the five year statute of limitations applicable to government actions seeking civil penalties begins to run when the fraud occurs and not when it is discovered. The Court found this was the natural reading of the statutory language. In addition, there were sound policy reasons not to read into the statute a discovery rule exception. In particular, such an extension "would leave defendants exposed to Government enforcement actions not only for five years after their misdeeds, but for an additional uncertain period into the future." (
Friday, February 22, 2013
I have previously discussed David Einhorn's lawsuit against Apple, charging that the company violated federal proxy rules because its proposal to amend the company's certificate of incorporation violated the SEC's unbundling rule. The proposal, if adopted, would amend the certificate of incorporation in several ways. Einhorn objected to one of them, an amendment eliminating the board's power to issue blalnk check preferred stock without shareholder approval, but said he wanted to vote in favor of the others (amendment to implement majority voting for directors, amendment setting a par value for the stock). Today a federal district judge agreed with Einhorn and issued an injunction against the shareholder vote, scheduled for February 27.
Monday, February 18, 2013
An interesting, albeit technical, issue under the federal proxy rules will be argued tomorrow in federal district court in Manhattan. David Einhorn and his hedge fund, Greenlight Capital, seek a preliminary injunction to enjoin Apple from counting the votes cast by proxy on an Apple Proposal to amend its certificate of incorporation at its February 27 shareholder meeting. According to plaintiffs, the Apple Proposal #2 violates SEC Rule 14a-4(a)(3) and (b)(1), the "anti-bundling rule," which requires that the proxy "shall identify clearly and impartially each separate matter intended to be acted upon.... "
The Proposal in question would amend the certificate of incorporation in (at least) three ways:
(i) eliminate certain language relating to the term of office of directors in order to facilitate the adoption of majority voting for the election of directors, (ii) eliminate “blank check” preferred stock, (iii) establish a par value for the Company’s common stock of $0.00001 per share and (iv) make other conforming changes...
According to plaintiffs, this is really three separate proposals, and they want to vote against only the amendment eliminating preferred stock. They argue that forcing them to vote up or down on the entire package of amendments is precisely the kind of decision that the SEC unbundling rule is designed to protect them from having to make. This argument does have the advantage of simplicity. In a close case, why not unbundle the proposals to give the shareholders the maximum amount of choice?
Apple, however, counters that the motion for preliminary injunction should be denied since plaintiffs are not likely to succeed on the merits: the proposal is a single proposal to amend the certificate of incorporation and does not bundle material matters (i.e., these are technical amendments). Apple asserts that the proposal does not put the plaintiffs to an unfair choice since all the amendments are pro-shareholder and supported by corporate governance advocates like CALPERS (whose application to file an amicus brief was denied by the court as unnecessary). Apple also asserts that many corporations have asked their shareholders to vote on single proposals to amend the certificate in several different respects, without objection by the SEC or shareholders. Finally, Apple argues that the motion for a preliminary injunction should be denied because, in any event, the plaintiffs have not made a clear showing that they would suffer immediate and irreparable harm if the shareholder vote goes forward; if the Proposal is adopted by the shareholders and a court ultimately finds that it violated SEC rules, the Proposal could easily be undone (in contrast to a vote on a merger, which would be infeasible to unwind).
According to Apple, Einhorn and Greenlight are using this litigation to pressure Apple into acceding to their demand for the creation of a high-yield preferred stock to unlock shareholder value. Apple is certainly right about the plaintiffs' motivation. Nevertheless, the question for the court is whether the voting decisions of Apple shareholders are likely to be distorted by the Proposal, which forces them to make a unitary decision, up or down, about several amendments to the certificate of incorporation on different matters. To this securities professor at least, it raises a nice question about what "each separate matter" means.
Monday, February 11, 2013
As Securities Law Prof Blog readers probably know, David Einhorn through his hedge fund, Greenlight Capital, is a significant SH in Apple. Einhorn is dissatisfied because he says that Apple has $137 Billion in cash ($145 per share) on its balance sheet and has “an obligation to examine all options to create and unlock additional value” for its SHs. Einhorn advocates that Apple unlock shareholder value by distributing to existing SHs a perpetual, high-yield preferred stock that would enable SHs to own and trade separately the preferred shares and the existing common shares.
Apple's annual SH meeting is scheduled for Feb. 27. On the agenda is a management proposal to amend the certificate of incorporation in several ways (Proposal 2), including eliminating the power of the BOD to issue preferred shares without SH approval. Specifically,
the amendment of the Company’s Restated Articles of Incorporation would (i) eliminate certain language relating to the term of office of directors in order to facilitate the adoption of majority voting for the election of directors, (ii) eliminate “blank check” preferred stock, (iii) establish a par value for the Company’s common stock of $0.00001 per share and (iv) make other conforming changes.
Greenlight opposes this amendment because it would “hinder [Apple’s] ability to unlock value for shareholders.” It recently sent a letter to SHs, urging them to vote against Proposal 2 because it is “value destructive” and “impedes the boards’ flexibility.” CALPERS is also soliciting Apple SHs, urging them to support Apple management on Proposal 2 as enhancing SH rights. In a Feb. 7 statement, Apple stated that the company is actively discussing other ways about returning additional cash to SHs and that it will thoroughly evaluate the Greenlight proposal. Regarding Proposal 2, Apple stated that:
As a part of our efforts to further enhance corporate governance and serve our shareholders’ best interests, Proposal #2 in our proxy includes some recommended changes to our articles of incorporation. These changes were recommended independently of Greenlight’s proposal and would not preclude Apple from adopting their concept. Contrary to Greenlight’s statements, adoption of Proposal #2 would not prevent the issuance of preferred stock. Currently, Apple’s articles of incorporation provide for the issuance of “blank check” preferred stock by the Board of Directors without shareholder approval. If Proposal #2 is adopted, our shareholders would have the right to approve the issuance of preferred stock. As such, Proposal #2 has the support of many of our shareholders.
Greenlight has also filed suit in S.D.N.Y. asserting that Proposal 2 violates the SEC’s proxy rules because it contains three amendments to the Certificate of Incorporation, contrary to SEC rules that do not permit the bundling of separate matters presented for SH vote (Rule 14a-4(a)(3), Rule 14a-4(b)(1)). It seeks a preliminary injunction against the shareholder vote. The Court has scheduled a Feb. 22 oral argument on the application for a preliminary injunction.
Friday, February 8, 2013
William Alper, a Manhattan attorney, attended the oral argument today in SEC v. Citigroup at the request of the Securities Law Prof Blog and filed the following report. He cautions that it is difficult to convey accurately the Q&A, but I think you'll agree that he has done a darn good job in capturing the essence. He notes that although the oral argument was scheduled for only 29 minutes, it went on much longer than that. The judges asked many questions and were obviously engaged.
Securities and Exchange Commission v Citigroup Global Markets Inc.
February 8, 2013
United States Court of Appeals
For the Second Circuit
Judges: Rosemary S. Pooler, Raymond J. Lohier, Jr., Susan L. Carney
The courtroom was so overcrowded that additional seating was set up in the ante room where more than 50 people watched on closed circuit TV. SEC v Citigroup was first on the calendar and once the argument was concluded nearly everyone inside or outside the courtroom left.
Counsel for SEC began by arguing that the District Court (Judge Rakoff) had adopted an inappropriate “bright line” rule. Question was asked whether the District Court had said held the parties had provided insufficient information to warrant approval of the settlement/injunction but that the SEC contended the information provided was sufficient. Counsel answered that the information provided was sufficient. Asked by a judge what information was available to Judge Rakoff, SEC counsel referred to the Complaint, the settlement agreement negotiated by counsel at arms’ length, that it contained no ambiguity and that it did not require excess resources to enforce.
Asked by a judge whether the allegations in the Complaint were sufficient to support approval of the settlement, SEC counsel argued that they were. He was then asked whether more information had been available to the Court which approved settlement in the Bank of America case, counsel agreed, but noted that Bank of America had agreed to submission of a statement of facts without admitting to any of them and had given the District Court additional evidence.
One of the judges noted that Judge Rakoff had not been satisfied with the answers supplied by the parties to his 9 questions. SEC counsel agreed, but noted that many of Judge Rakoff’s questions were policy questions and that Judge Rakoff had complained, in refusing to approve the settlement, that he’d been provided no facts established by trial or by admission.
A judge asked whether Judge Rakoff should not have asked for more facts and SEC counsel said that under the law, it wouldn’t have been necessary for approval of the settlement.
A judge asked whether the District Court was entitled in deciding whether to approve the settlement to look at the complaint in Stoker. SEC counsel replied that it was beyond the legitimate scope of the District Court’s review of the settlement. That SEC refused to bring additional charges in light of Stoker was permissible, because SEC, as a government agency, has discretion and the District Court is not entitle to go beyond that. The District Court’s power to review the settlement is limited to the injunctive relief, e.g., to determine whether there were ambiguous terms in the settlement.
Q: How could the District Court assess whether third parties would be harmed by the settlement with only the Complaint to go on? Could it ask 3d parties to submit facts?
A: That could happen in, e.g., a Title VII case, where the potential for harm to 3d parties is much more apparent, but not here.
Q: Why was an injunction necessary at all, in light of the fact the SEC almost never takes action to enforce them?
A: The possibility of enforcement proceedings is “useful” and has collateral effect as, for example, in SEC v. Cioffi, (EDNY(?)).
Judge Rakoff asked for admissions from Citigroup that could be used for collateral estoppel purposes.
Q: What if the district court asked for facts “short of admissions”?
A: The District Court had ample “evidence” from the complaint, the SEC’s 28 page response to the District Court’s 9 questions and Citi’s 20 page response to them. All of the questions were fully answered. WARNING: Corporations won’t settle if findings that could be used for collateral estoppel purposes were made or required. 2d Circuit precedent states that the District Court shouldn’t second guess the agency and defendant.
Q: Didn’t the District Court say it could not exercise its judgment and couldn’t make a judgment?
A: District Court said that either trial or admissions [to establish facts] were required.
Q: What if the District Court required something more than it was given, but short of admissions, should the Court of Appeals remand?
A: Many more words with colorful analogies but, “No.”
Q: Didn’t Harvy Pitt say the SEC could meet the District Court’s requirements?
A: The law doesn’t require admissions by settling party to settle or for District Court to approve settlement.
Q: The “admissions” argument is a “red herring” because the District Court didn’t and couldn’t demand them.
Pro Bono Counsel's Argument
Basic disagreement among the parties is what the District Court actually required of the parties: Appellants argue he required admissions or a trial to establish facts. That’s just not so.
Q: District Court’s Order, p. 4, states that the court hadn’t been given proven or admitted facts. Doesn’t that require admissions or trial to establish facts?
A: District Court didn’t require an admission of liability, but rather facts that could be the basis for proof of liability. The “proof” could be documents, deposition testimony.
Q: So the Court’s ruling requires proof from the parties?
A: None was required, but there’s no rule that the District Court can’t ask, and Citi did provide evidence in support of it’s application to the Court for a stay, stating that courts can require evidentiary submissions. The District Court also had admissions from the 2 criminal cases.
Q: Did the acquittal in Stoker support the settlement in this case?
A: Yes, it would have, but it occurred after the District Court had already made its decision in this case. It might be sufficient now [on remand].
Q: You agree that the District Court can’t require an admission of liability?
Q: Would it be inappropriate to ask for facts necessary to establish liability?
A: It isn’t necessary to determine liability and the District Court’s questions and the answers did not.
Q: Did the Bank of America settlement establish facts estopping B of A?
Q: But Bank of America settlement led to the filing of many lawsuits based on the facts of that case?
A: Yes, but without collateral estoppel/factual findings that could be used in subsequent cases.
Q: Why is an Article III judge entitled to determine what’s necessary in the public interest instead of the relevant agency?
Rule 23, and the fact that the settlement incorporated an injunction subject to judicial enforcement.
Q: SEC acknowledged a gap between total damage caused by the alleged acts and the amount Citigroup agreed to pay.
A: This case is different from Stoker: No criminal charges, not allegations of Citi’s scienter.
Q: Why isn’t it the SEC’s responsibility to determine the strength of its own cases, as other agencies and prosecutors do?
A: The SEC can, it is entitled to deference, but the District Court is not required to approve automatically what the SEC has agreed to. It has its own standards to apply and uphold.
Q: SEC/Citi argue that many facts were given to the court.
A: No evidence, e.g., deposition testimony, was submitted.
Q: It isn’t sufficient for the agency to state important facts, the District Court may require sworn testimony, affidavits?
A: The submissions were “lawyer talk”, not “proof” or “evidence”.
Q: In light of the results in Stoker, does the District Court now have sufficient information?
Counsel (Wing): The statement at the end of the District Court’s opinion was a “rhetorical flourish”.
Q: After Stoker, what is there left for the District Court to do on remand?
A: Stoker resolves Judge Rakoff’s questions and shows why the District Court was properly concerned.
Q: It showed the weakness of the SEC’s case?
A: Yes, but now the District Court has that information to us in doing its job.
Rule 23 is very different from this case because District Courts have a fiduciary responsibility to protect others, not, as here, where there’s an agency entitled to deference.
Q: What relief should we give, reverse and approve the settlement?
Q: In light of Stoker, should we direct approval of the settlement on remand or just give the District Court the opportunity to take Stoker into account?
A: Yes, and perhaps give the parties a chance to back out of the settlement.
Q: Can’t we remand with an opportunity for the parties to appeal immediately if they wish?
A: Stoker is not a case to which Citi was a party – it can’t be the basis for fact finding in this case.
Wednesday, January 30, 2013
A federal district court addressed what it called "the unique question" of whether a Rule 10b-5 violation can be committed by corporate officers by a scheme centered around manipulating the restricted nature of the company's shares under Rule 144 in order to gain control over the stock's "float" and enrich themselves at the detriment of the corporation. Advanced Multilevel Concepts, Inc. v. Bukstel (E.D. Pa. Jan. 25, 2013) (Download Advanced Multilevel Concepts Inc. v. Bukstel). The court concludes that the Supreme Court's precedents extend to this manipulative scheme.
The allegations involve a company that went public via a reverse merger and the issuance of over seven million shares of company stock by the CEO to his confederates to dilute the other shareholders' holdings. The CEO, in turn, counterclaims that the plaintiffs and the former inhouse counsel committed securities fraud when the attorney gained control of a substantial part of the stock's float to make trades that enriched himself. (Although not at all relevant to the holding, one of the peripheral players in this drama is named Learned Hand!)
Friday, January 25, 2013
The Texas federal district court that has exclusive jurisdiction over the receivership estate of R. Allen Stanford's Ponzi scheme recently held that the receiver could avoid interest payments made to those investors who received payments in excess of their principal investment ("Net Winners").
In Janvey v. Alguire (N.D. Tax. Jan. 22, 2013) (Download Janvey.012213), the court first held that, as a matter of law, Stanford operated a Ponzi scheme, based on the declarations of an expert. Next, the court addressed the issue of whether the Net Winners provided value for their interest payments. The court acknowledged that, although courts almost universally hold that the transfer of "false profits" from a Ponzi scheme is not made in exchange for value, courts are split where the investor receives payments in the form of interest on the principal. After reviewing the case law, the court sides with those courts that choose not to enforce investment contracts with a Ponzi scheme. Accordingly, the Net Winners failed to provide value in exchange for the interest they received. Noting that for victims of a Ponzi scheme, "everyone is a loser," the court decided that "avoiding the interest payments is the most equitable and just solution to a difficult problem."
The court found that the order "involves a controlling question as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation." Therefore, he certified the order for interlocutory appeal.
Thursday, January 24, 2013
The securities industry fought hard for the power to require brokerage customers to arbitrate all disputes with their firms. But some firms appear to think that arbitration is only a good dispute resolution mechanism when they want it and are challenging arbitration proceedings brought by dissatisfied users of their services. UBS Financial Services, Inc. v. Carilion Clinic (4th Cir. No. 12-2066, Jan. 23, 2013) is a recent example.(Download UBSFinancial.012313)
Carilion, a not-for-profit organization that operates hospitals and clinics in Virginia, decided in 2005 to issue municipal bonds and retained UBS and Citigroup Global Markets to advise it on the structure of the bond issues and to assist it in implementing the financing plan. UBS and Citigroup recommended the issuance of auction-rate bonds and acted as underwriters and lead broker-dealers in the $234 million offering. Unfortunately, in early 2008 the auction-rate bond market collapsed for the bonds, when UBS and Citigroup stopped submitting support bids. Carilion was forced to refinance and lost millions of dollars. Carilion filed an arbitration claim with FINRA, claiming that the firms misled it and asserting claims under both state and federal securities laws. UBS and Citigroup filed a declaratory judgment action and sought a preliminary injunction against the arbitration, asserting that Carilion was not a "customer" entitled to bring an arbitration under FINRA's rules. They further argued that Carilion had waived arbitration through the forum selection clause contained in one of the contracts among the parties. The district court rejected both arguments, and the Fourth Circuit affirmed.
FINRA Rule 12200 requires member firms to arbitrate disputes with customers when the customer requests arbitration and the dispute "arises in connection with the business activities of the member." UBS and Citigroup asserted that Carilion was not their "customer" because that term, as used in the FINRA rule, is limited to "investors." Carilion, in contrast, asserted that customer means anyone "who purchases some commodity or service." The Fourth Circuit agreed with Carilion, finding the broader interpretation is consistent with the purposes of FINRA arbitration and consistent with generally accepted meaning of customer. Thus, it held that "when FINRA uses 'customer' in Rule 12200, it refers to one, not a broker or dealer, who purchases commodities or services from a FINRA member in the course of the member's business activities insofar as those activities are covered by FINRA's regulation, namely the activities of investment banking and the securities business."
The Fourth Circuit also rejected the firms' argument that the forum selection clause, which provides that "all actions and proceedings arising out of this Agreement ... shall be brought in the United States District Court of the County of New York." This was "a straightforward issue of contract interpretation," said the Court. It found that the natural reading of the clause was to require any litigation to be brought in the designated court; "it would never cross a reader's mind that the clause provides that the right to FINRA arbitration was being superseded or waived," especially since the clause did not even use the word arbitration.
The Fourth Circuit relied on a previous opinion from the Second Circuit, UBS Financial Services, Inc. v. West Virginia Hospitals, 660 F.3d 643 (2d Cir. 2011), involving substantially similar facts.
Tuesday, January 22, 2013
A federal district court judge for the District of Colorado has refused to approve a proposed SEC settlement. In a terse order that does not describe the SEC's allegations against defendants Bridge Premium Finance LLC et al., Judge John L. Kane stated that he "refuse[d] to approve penalties against a defendant who remains defiantly mute as to the veracity of the allegations against him. A defendant's options in this regard are binary: he may admit the allegations or he may go to trial." In addition, the judge objected to the language in the consents and the proposed final judgments in which the defendants waived their rights to the entry of findings of fact and conclusions of law and their rights to appeal, because "[t]hese findings are important to inform the public and the appellate courts." SEC v. Bridge Premium Finance LLC (D. Col. Jan. 17, 2013, Case No. 1:12-cv-02131-JLK-BNB)
The Second Circuit will hear the SEC and Citigroup's appeal from Judge Rakoff's refusal to approve their proposed settlement on February 8.