Saturday, June 8, 2013
The Danger of Difference: Tensions in Directors’ Views of Corporate Board Diversity, by Kimberly D. Krawiec, Duke University - School of Law; John M. Conley, University of North Carolina (UNC) at Chapel Hill - School of Law; and Lissa L. Broome, University of North Carolina (UNC) at Chapel Hill - School of Law, was recently posted on SSRN. Here is the abstract:
This Article describes the results from fifty-seven interviews with corporate directors and a limited number of other persons (including institutional investors, search firm personnel, and the like) regarding their views on corporate board diversity. It highlights numerous tensions in these views. Most directors, for instance, proclaim that diverse boards are good, but very few directors can articulate their reasons for this belief. Some directors have suggested that diverse boards work better than non-diverse boards, but gave relatively few concrete examples of specific instances where a female or minority board member made a special contribution related to that director’s race or gender. Many directors noted the importance of collegiality and getting along in the boardroom, while simultaneously extolling the advantages of different perspectives in avoiding group think. Although all acknowledged the importance of fitting in, few considered whether this impeded the role of “outsiders” providing a diverse perspective. This Article also explores directors’ thoughts on why progress in improving board diversity has been so slow if most agree that diversity is an important goal.
Dynamic Regulation of the Financial Services Industry, by Wulf A. Kaal, University of St. Thomas, Minnesota - School of Law, was recently posted on SSRN. Here is the abstract:
Governance adjustments via stable rules in reaction to financial crises are inevitably followed by relaxation, revision, and retraction. The economic conditions and the corresponding requirements for optimal and stable rules are constantly evolving, suggesting that a different set of rules could be optimal. Despite the risk of future crises, anticipation of future developments and preemption of possible future crises do not play a significant role in the regulatory framework and academic literature. Dynamic elements in financial regulation as a supplemental optimization process for rulemaking could help facilitate rulemaking when it is most needed – ex-ante before crises – to curtail the effects of crises and suboptimal regulatory outcomes – ex-post after crises. By including dynamic elements, the regulatory sine curve of financial regulation could be optimized in relation to the phase-shifted first derivative (cosine curve) that describes common elements of financial crises. Dynamic regulation could help dampen the degree of volatility of both the cosine curve and the regulatory sine curve by creating an anticipatory regulatory response to financial crises.
The Pension System and the Rise of Shareholder Primacy, by Martin Gelter, Fordham University School of Law; European Corporate Governance Institute (ECGI), was recently posted on SSRN. Here is the abstract:
This article explores the influence of the pension system on corporate governance, which has so far received little attention in the corporate law literature. While the shareholder-centric view of corporate governance is strong today, this is a relatively recent development. “Managerial capitalism” began to give way to shareholder capitalism over the past three decades. This Article argues that changes in the pension system, specifically the shift from defined-benefit plans to defined-contribution plans that began in the 1970s, have been a major force pushing the corporate governance system toward shareholder primacy. While in traditional pension plans, workers depended primarily on their employer’s ability to fund pensions, in today’s system retirement benefits strongly depend on capital markets. Shareholder wealth thus became more important for larger segments of society, and pro-shareholder policies became more important relative to pro-labor policies strengthening employees’ position vis-à-vis their employers. Consequently, shareholder primacy became the dominant factor in corporate governance debates. Managers today claim to focus on this objective and are less well positioned to take the interests of their firm’s employees or other groups into account. The political economy of corporate governance underwent a seismic shift. While it is not clear whether shareholders truly benefit from most reforms, these have been largely supported by the center-left given their apparent beneficial effects for shareholders and consequently the middle class. For the same reason, unions have been among the most eager proponents of shareholder activism.
The Collision Between the First Amendment and Securities Fraud, by Wendy Gerwick Couture, University of Idaho College of Law, was recently posted on SSRN. Here is the abstract:
This Article seeks to correct the imbalance that occurs when the First Amendment and securities fraud collide. Under current precedent, securities analysts, credit rating agencies, and financial journalists are subject to differing liability standards; depending on whether they are sued for defamation or for securities fraud. Under New York Times v. Sullivan, 376 U.S. 254, 279-80 (1964), First Amendment protections apply in the defamation context in order to prevent the chilling of valuable speech, yet courts have declined to extend these protections to the securities fraud context. This imbalance threatens to chill valuable speech about public companies. To prevent the dangerous chilling effect of potential securities fraud liability, this Article contends that the New York Times protections should apply equally in securities fraud cases. Therefore, under this Article’s recommendation, a securities fraud claim asserted against a non-commercial speaker for speech concerning a public company cannot prevail absent a showing of actual malice, by clear and convincing evidence, and subject to independent appellate review.
The SEC charged Whittier Trust Company and fund manager Victor Dosti, a South Pasadena, Calif.-based wealth management company and a former fund manager, with insider trading on non-public information about technology companies. The charges are the agency’s latest in its ongoing investigation into expert networks and hedge fund trading.
According to the SEC, Whittier Trust Dosti participated in an insider trading scheme involving the , securities of Dell, Nvidia Corporation, and Wind River Systems. Dosti traded on confidential information that he obtained from Danny Kuo, a Whittier Trust fund manager who Dosti supervised. Kuo was charged by the SEC in January 2012 and is currently cooperating with the investigation.
Whittier Trust and Dosti agreed to pay nearly $1.7 million to settle the charges.
Thursday, June 6, 2013
The SEC obtained an emergency court order to freeze the assets of a trader in Bangkok, Thailand, who made more than $3 million in profits by trading in advance of last week's announcement that Smithfield Foods agreed to a multi-billion dollar acquisition by China-based Shuanghui International Holdings.
According to the SEC, Badin Rungruangnavarat purchased thousands of out-of-the-money Smithfield call options and single-stock futures contracts from May 21 to May 28 in an account at Interactive Brokers LLC. Rungruangnavarat allegedly made these purchases based on material, nonpublic information about the potential acquisition> Among his possible sources is a Facebook friend who is an associate director at an investment bank to a different company that was exploring an acquisition of Smithfield. After profiting from his timely and aggressive trading, Rungruangnavarat sought to withdraw more than $3 million from his account on June 3.
According to the SEC's complaint filed under seal yesterday in U.S. District Court for the Northern District of Illinois, Smithfield publicly announced on May 29 that Shuanghui agreed to acquire the company for $4.7 billion, which would represent the largest-ever acquisition of a U.S. company by a Chinese buyer. Smithfield, which is headquartered in Smithfield, Va., is the world's largest pork producer and processor. Following the announcement, Smithfield stock opened nearly 25 percent higher than the previous day's closing price.
The SEC is warning investors about the potential risks of investing in binary options and has charged a Cyprus-based company with selling them illegally to U.S. investors. Binary options are securities in the form of options contracts whose payout depends on whether the underlying asset - for instance a company's stock - increases or decreases in value. In such an all-or nothing payout structure, investors betting on a stock price increase face two possible outcomes when the contract expires: they either receive a pre-determined amount of money if the value of the asset increased over the fixed period, or no money at all if it decreased.
The SEC alleges that Banc de Binary Ltd. has been offering and selling binary options to investors across the U.S. without first registering the securities as required under the federal securities laws. The company has broadly solicited U.S customers by advertising through YouTube videos, spam e-mails, and other Internet-based advertising. Banc de Binary representatives have communicated with investors directly by phone, e-mail, and instant messenger chats. Banc de Binary also has been acting as a broker when offering and selling these securities, but failed to register with the SEC as a broker as required under U.S. law.
The SEC and the Commodity Futures Trading Commission (CFTC) today issued a joint Investor Alert to warn investors about fraudulent promotional schemes involving binary options and binary options trading platforms. Much of the binary options market operates through Internet-based trading platforms that are not necessarily complying with applicable U.S. regulatory requirements and may be engaging in illegal activity.
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.
Wednesday, June 5, 2013
The U.S. Department of the Treasury announced that it plans to sell 30 million additional shares of General Motors Company (GM) common stock in an underwritten public offering in conjunction with GM’s inclusion to the S&P 500 index effective as of the close of trading on June 6, 2013. The UAW Retiree Medical Benefits Trust will also participate in the proposed offering by selling 20 million shares, making the total offering size 50 million shares.
In December 2012, GM repurchased 200 million shares of GM common stock from Treasury. At that time, Treasury also announced that it intended to sell its remaining 300 million shares into the market in an orderly fashion and fully exit its GM investment within the next 12-15 months, subject to market conditions. Since then, Treasury has been selling GM shares through its pre-defined written trading plans.
Treasury’s sale of its GM common stock is part of its continuing efforts to wind down the Troubled Asset Relief Program (TARP).
The SEC charged Laidlaw Energy Group, a microcap company whose stock was suspended from trading recently, and its CEO Michael B. Bartoszek, who allegedly profited from selling his shares while investors were unaware of the company’s financial struggles. According to the SEC, Laidlaw Energy Group and its CEO Bartoszek sold more than two billion shares of Laidlaw’s common stock in 35 issuances to three commonly controlled purchasers at deep discounts from the market price. Laidlaw did not register this stock offering with the SEC, and no exemptions from registration were applicable. Bartoszek knew that the purchasers were dumping the shares into the market usually within days or weeks of the purchases to make hundreds of thousands of dollars in profits. Laidlaw’s $1.2 million in proceeds from these transactions was essentially the sole source of funds for the company’s operations during most of its existence. Laidlaw, which is based in New York City, purports to be a developer of facilities that generate electricity from wood biomass.
The SEC alleges that these transactions diluted the value of shares previously purchased by common investors in the market, who were not told about the huge blocks of cheap stock Laidlaw was selling. Investors also were not aware that Laidlaw relied on these transactions to fund its operations entirely. The SEC suspended trading in Laidlaw stock in June 2011.
According to the SEC’s complaint filed in federal court in Manhattan, Bartoszek violated insider trading laws when he personally sold more than 100 million shares of Laidlaw common stock from December 2009 to June 2011, and made more than $318,000 in profits. As a result of the volume of Bartoszek’s sales and the lack of current, publicly available information about the company, these sales also violated the registration requirements of the federal securities laws.
The SEC seeks disgorgement plus prejudgment interest, financial penalties, and injunctive relief, and is seeking penny stock and officer and director bars against Bartoszek.
Tuesday, June 4, 2013
The House Committee on Financial Services will hold a hearing tomorrow June 5 on “Examining the Market Power and Impact of Proxy Advisory Firms.” According to the Committee's memorandum,
This hearing will examine the growing importance of proxy advisory firms in proxy solicitations and corporate governance, including the effect that proxy advisory firms have on corporate governance standards for public companies, the voting policies that proxy advisory firms have adopted, the market power of proxy advisory firms in an industry effectively controlled by two firms, and potential conflicts of interest that may arise when proxy advisory firms provide voting recommendations. This hearing will also examine proposals offered by the Securities and Exchange Commission (SEC) that seek to modernize corporate governance practices in order to improve the communications between public companies and their shareholders.
The Witness List includes
•The Honorable Harvey L. Pitt, Chief Executive Officer, Kalorama Partners, on behalf of the U.S. Chamber of Commerce
•Mr. Timothy J. Bartl, President, Center on Executive Compensation
•Mr. Niels Holch, Executive Director, Shareholder Communications Coalition
•Mr. Michael P. McCauley, Senior Officer, Investment Programs and Governance, Florida State Board of Administration
•Mr., Jeffrey D. Morgan, President and Chief Executive Officer, National Investor Relations Institute
•Ms. Darla Stuckey, Senior Vice President, Society of Corporate Secretaries & Governance Professionals
•Mr. Lynn E. Turner
FINRA fined Wells Fargo and Banc of America a total of $2.15 million and ordered the firms to pay more than $3 million in restitution to customers for losses incurred from unsuitable sales of floating-rate bank loan funds. FINRA ordered Wells Fargo Advisors, LLC, as successor for Wells Fargo Investments, LLC, to pay a fine of $1.25 million and to reimburse approximately $2 million in losses to 239 customers. FINRA ordered Merrill Lynch, Pierce, Fenner & Smith Incorporated, as successor for Banc of America Investment Services, Inc., to pay a fine of $900,000 and to reimburse approximately $1.1 million in losses to 214 customers.
Floating-rate bank loan funds are mutual funds that generally invest in a portfolio of secured senior loans made to entities whose credit quality is rated below investment-grade. The funds are subject to significant credit risks and can also be illiquid.
FINRA found that Wells Fargo and Banc of America brokers recommended concentrated purchases of floating-rate bank loan funds to customers whose risk tolerance, investment objectives, and financial conditions were inconsistent with the risks and features of floating-rate loan funds. The customers were seeking to preserve principal, or had conservative risk tolerances, and brokers made recommendations to purchase floating-rate loan funds without having reasonable grounds to believe that the purchases were suitable for the customers. FINRA also found that the firms failed to train their sales forces regarding the unique risks and characteristics of the funds, and failed to reasonably supervise the sales of floating-rate bank loan funds.
In concluding the settlement, Wells Fargo and Banc of America neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Monday, June 3, 2013
On May 31, 2013, the SEC charged Robert A. Gist (“Gist”), an Atlanta attorney and former sports agent, and Gist, Kennedy & Associates, Inc. (“Gist Kennedy”), a company that Gist controls, with defrauding at least 32 customers out of at least $5.4 million while acting as an unregistered broker from approximately 2003 to the present.
According to the SEC’s complaint, Gist obtained the customers’ funds on the fraudulent pretense that he would invest conservatively in corporate bonds and other securities. Instead, Gist used the funds for his personal expenses, for the payment of purported dividends and proceeds from securities sales that he falsely claimed to have purchased on behalf of his customers, and for the operation of a company that he controlled until early 2013 known as ENCAP Technologies, LLC. The complaint further alleges that Gist regularly created and provided the customers of Gist Kennedy with fictitious account statements.
Without admitting or denying the SEC’s allegations, Defendants Gist and Gist Kennedy agreed to settle the case against them. The settlement is pending final approval by the court and would require disgorgement of $5.4 million plus prejudgment interest and civil penalties to be determined.
The SEC charged PACCAR, a commercial truck manufacturer, and a subsidiary with various accounting deficiencies that clouded their financial reporting to investors in the midst of the financial crisis. PACCAR and its subsidiary PACCAR Financial Corp. agreed to settle the SEC’s charges.
According to the SEC’s complaint filed in federal court in Seattle, PACCAR is a Fortune 200 company that designs, manufactures, and distributes trucks and related aftermarket parts that are sold worldwide under the Kenworth, Peterbilt, and DAF nameplates. From 2008 through the third quarter of 2012, PACCAR failed to report the results for its parts business as a separate segment from its truck sales as required under Generally Accepted Accounting Principles (GAAP). For example, PACCAR’s 2009 annual report showed $68 million in income before taxes for its truck segment. However, PACCAR documents and board materials reviewed by senior executives depicted the trucks business with a $474 million loss and the parts business with $542 million profit to arrive at the net income before taxes of $68 million. By at least 2008, PACCAR should have been reporting aftermarket parts as a separate segment in its SEC filings, but failed to do so until year-end 2012.
The SEC charged PACCAR with violations of the reporting, books and records and internal control provisions of the federal securities laws, and charges PACCAR Financial Corp. with violations of the books and records and internal control provisions. Without admitting or denying the charges, they agreed to the entry of a permanent injunction and PACCAR agreed to pay a $225,000 penalty. The settlement, which is subject to court approval, takes into account that PACCAR and PACCAR Financial Corp. have implemented a number of remedial measures to enhance their internal accounting controls and improve their compliance with GAAP.
The SEC suspended trading in the securities of 61 empty shell companies that are delinquent in their public filings and seemingly no longer in business, the SEC's second-largest trading suspension. Thinly-traded dormant microcap companies are frequently used by fraudsters in "pump-and-dump" schemes.
Through its Operation Shell Expel initiative, the SEC suspended trading in a record 379 companies in a single day last year.
Friday, May 31, 2013
The SEC will consider money market fund reform again. Its agenda for its June 5 meeting is:
•The Commission will consider a recommendation to propose amendments to certain rules under the Investment Company Act that govern the operation of money market funds and related amendments to Form PF under the Investment Advisers Act.
The SEC announced that the subject of an enforcement inquiry in Florida has has been criminally charged with obstructing justice and lying to SEC investigators looking into his real estate securities offerings to investors.
The U.S. Attorney’s Office for the Southern District of Florida has filed criminal charges against former broker Robert J. Vitale. According to the criminal information filed in U.S. District Court for the Southern District of Florida, the SEC issued subpoenas to Vitale and his investment company Realty Acquisitions & Trust in order to identify investor funds and assets related to the securities offerings. The SEC investigators subpoenaed Vitale for all related bank records and took his sworn testimony.
The criminal information alleges that Vitale lied about the existence of two separate bank accounts that he did not disclose to the SEC. Vitale was charged by the SEC several years ago for participating in a pump-and-dump market manipulation scheme. Vitale later settled the charges in federal district court and was barred from the brokerage industry.
Wednesday, May 29, 2013
The FINRA Investor Education Foundation released the results of America's State-by-State Financial Capability Survey. The survey features a clickable map of the United States and allows the public, policymakers and researchers to delve into and compare the financial capabilities of Americans across all 50 states and the nation as a whole.
The State-by-State Financial Capability Survey, which surveyed more than 25,000 respondents, was developed in consultation with the U.S. Department of the Treasury, other federal agencies and the President's Advisory Council on Financial Capability. It found a significant disparity in financial capability across state lines and demographic groups.
The five measures of financial capability used to rank the states measure how well Americans are managing their day-to-day finances and saving for the future. The national averages among survey respondents for these key measures are below.
Fewer than half (41 percent) of Americans surveyed reported spending less than their income.
Over a quarter (26 percent) of Americans reported having unpaid medical bills.
More than half of Americans (56 percent) do not have rainy-day savings to cover three months of unanticipated financial emergencies.
Over a third of Americans (34 percent) reported paying only the minimum credit card payment during the past year.
On a test of five basic financial literacy questions, the national average was 2.88 correct answers.
"This survey reveals that many Americans continue to struggle to make ends meet, plan ahead and make sound financial decisions—and that financial literacy levels remain low, especially among our youngest workers. No matter how you slice and dice it, this rich, new dataset underscores the need for us to continue to explore innovative ways to build financial capability among consumers," said FINRA Foundation Chairman Richard Ketchum.
The SEC charged France-based oil and gas company Total S.A. with violating the Foreign Corrupt Practices Act (FCPA) by paying $60 million in bribes to intermediaries of an Iranian government official who then exercised his influence to help the company obtain valuable contracts to develop significant oil and gas fields in Iran. Total, whose securities are publicly traded on the New York Stock Exchange, agreed to pay more than $398 million to settle the SEC’s charges and a parallel criminal matter announced today by the U.S. Department of Justice.
The SEC alleges that Total made more than $150 million in profits through the bribery scheme. Total attempted to cover up the true nature of the illegal payments by entering into sham consulting agreements with intermediaries of the Iranian official and mischaracterizing the bribes in its books and records as legitimate “business development expenses” related to the consulting agreements. Total had inadequate systems to properly review the consulting agreements and lacked sufficient internal controls to comply with federal laws prohibiting bribery.