Securities Law Prof Blog

Settlement In Action Against Former Tyco Officer

The Commission today announced that  it  had  submitted  to  the  U.S. District Court for the  Southern  District  of  New  York  a  proposed settled Final  Judgment  as  to  Defendant  Edward  Federman,  in  the Commission's previously filed civil injunctive action against Federman and two  other  former  executives  of  Tyco  International  Ltd.  The proposed settlement is based on the allegations  in  the  Commission's complaint concerning Federman's involvement in  fraudulent  accounting practices at Tyco in violation of the federal securities laws.  Without admitting or  denying  the  allegations  in  the  Commission's complaint, Federman consented to the entry of a  final  judgment  that  would permanently enjoin him  from  violating  the  corporate  record-keeping provisions of the federal securities laws and from aiding  and abetting  violations  of  the  antifraud,  periodic   reporting,   and   corporate record-keeping provisions. The proposed final judgment would also order Federman to pay disgorgement in the amount  of  $1,651,064, plus prejudgment interest thereon in the amount of $799,693.10, and  a civil penalty in the amount of  $200,000.  Finally,  pursuant  to  the proposed final judgment, Federman would be barred from serving  as  an officer or director of a public company for a period of five years.  Edward Federman was, from 1999 until his resignation  in January 2001, the  Executive  Vice  President  and  Chief Financial Officer of Tyco's Electronics division.

 

ALJ Revokes Registration of Impax Labs Stock

An administrative law judge has issued  an  Initial  Decision  in  the matter  of  Cosmetic  Center, Inc.,  et  al.   finding   that   Impax Laboratories, Inc. (Impax) has violated Section 13 of the Securities Exchange Act of 1934 and Exchange Act Rules by repeatedly  failing  to file required periodic reports. The administrative law judge  rejected Impax's arguments that unique circumstances prevented it  from  filing the required reports and that sufficient information was available  to the public. The Initial  Decision  finds  that  it  is  necessary  and appropriate for the protection of investors to revoke the registration of each class of Impax's registered securities. (Initial Decision  No. 329; File No. 3-12519)

Traders Charged With Manipulation in Stock Buyback

Following a joint investigation, NASD and the Chicago Stock Exchange (CHX) today announced fines and suspensions against two traders for artificially inflating the price of the stock of Material Science Corporation (MSC), a New York Stock Exchange-listed company, in connection with MSC's repurchase of its stock.  NASD imposed a $25,000 fine and a three-month suspension on Klaus Offenbacher, a trader with NASD-registered First Analysis Securities Corporation of Chicago. Offenbacher is receiving credit for a 60-day suspension already imposed by his employing firm.  CHX imposed a $20,000 fine and a two-month suspension on Bruce Kaminski, a floor broker with Dougall & Associates of Chicago, a CHX Participant firm.

The regulators' joint investigation found that Offenbacher was responsible for repurchasing MSC stock on behalf of the issuer pursuant to the company's stock repurchase program. MSC wanted its repurchases to fall within the safe harbor provision of the Securities and Exchange Commission's (SEC) rule governing issuer buy-backs, which provides that issuer purchases cannot be the opening purchase of the day and cannot exceed the highest independent bid or last independent transaction price.

The regulators found that on Aug. 21, 2006, Offenbacher received authorization from MSC to repurchase 100,000 shares of MSC stock pursuant to the repurchase program. The same day, Offenbacher located an institutional customer willing to sell a 174,300-share block of MSC stock with a limit price of $9.90. Later that day, Offenbacher attempted to contact the principals of MSC to get approval to purchase the entire block. MSC stock closed that day at a price of $9.80 per share. Early the following day, Offenbacher received approval from MSC's principals to purchase the block at $9.90 per share. Before the market opened, Offenbacher directed Kaminski to purchase 1,000 shares of MSC stock at $9.90 per share, in the event MSC opened below $9.90 per share. When MSC opened at $9.75 per share, Kaminski executed the 1,000 share transaction at $9.90 per share which artificially drove the stock's price up 15 cents to the level Offenbacher needed to execute the cross trade.

Kaminski's execution of the 1,000-share transaction on the New York Stock Exchange established an artificial reference price at which the larger block transaction was then executed on the CHX. As a result, the regulators found that Offenbacher and Kaminski knowingly and intentionally artificially increased the market price of MSC stock in an attempt to make it appear that the purchase fell within the SEC's safe harbor provision for issuer buy-backs.  Both individuals settled without admitting the charges.  See NASD and Chicago Stock Exchange Fine and Suspend Traders for Cross-Market Manipulation

Is There Too Much Hope?

In a WSJ commentary, Burton Malkiel warns of "irrational complacency" and wonders if securities prices are overpriced in the face of the substantial risks to the market and world economy.  His practical advice -- review your asset allocation and consider rebalancing your portfolio.  See WSJ, Irrational Complacency?

Too Much Debt?

Are more Long Term Capital Management collapses in the future?  The Wall St. Journal calls it the "leverage binge" and reports that regulators are worried because Wall St. is lending lots of money to hedge funds without the controls that are required in extending credit to brokerage firms and other regulated entities.  See WSJ, OUTER LIMITS As Funds Leverage Up, Fears of Reckoning Rise.

Wang and Steinberg on Insider Trading

Two chapter from the new edition of Insider Trading (PLI 2d ed. 2006), by WILLIAM K.S. WANG, University of California, Hastings College of the Law, and MARC STEINBERG, Southern Methodist School of Law, are posted on SSRN.  Here is the abstract: 

This paper is the Introductory chapter to Insider Trading (PLI 2d ed. 2006). Insider Trading is a two-volume treatise that analyzes the application of various laws to stock market insider trading and tipping. Among the federal laws are Exchange Act section 10(b), SEC rule 10b-5, mail/wire fraud, SEC rule 14e-3, Exchange Act section 16, and Securities Act section 17(a),. The state laws discussed are the common law, the Uniform Securities Act, and the California and New York securities statutes.

Another chapter addresses government enforcement of the insider trading/tipping prohibitions. A chapter on compliance programs deals with how firms can try to prevent illegal insider trading and tipping. Two chapters compare the harmful and allegedly beneficial effects of stock market insider trading and discuss the harm to individual investors from each specific insider trade.

Brown on Corporate Governance and SEC

Essay: Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure, by J. ROBERT BROWN Jr., University of Denver Sturm College of Law, was recently posted on SSRN.  Here is the abstract:

This article explores the role of the Securities and Exchange Commission in the corporate governance process. Traditionally, most have viewed substance as a matter for the states and disclosure for the Commission. This “neat” dichotomy has been long accepted but little examined.

The Commission was always meant to play a role in the governance process. Congress assigned to the SEC the authority to regulate disclosure in part to prevent various abusive practices by management, including the payment of excessive compensation and self perpetuation. Disclosure largely eliminated secrecy but did end self interest. Instead, pressure built on states to loosen substantive standards. Disclosure, therefore, contributed to the continued decline in substantive standards under state law.

With the link between substantive standards and accurate disclosure increasingly apparent, the Commission began to intervene into the governance process more directly, employing disclosure as a mechanism designed to alter the behavior of officers and directors. The approach, however, didn't work particularly well. Disclosure couldn't entirely compensate for the declining substantive standards under state law.

These dynamics have changed significantly with the adoption of Sarbanes-Oxley. The Commission has now become more overtly involved in the governance process. The impact of these changes have yet to be fully realized but they contain the potential for a profound shift in the traditional approach to corporate governance.

Cremers and Romano on Mutual Fund Voting Disclosure

Institutional Investors and Proxy Voting: The Impact of the 2003 Mutual Fund Voting Disclosure Regulation, by MARTIJN CREMERS, Yale School of Management, and ROBERTA ROMANO, Yale Law School; National Bureau of Economic Research (NBER), was recently posted on SSRN.  Here is the abstract:

This paper examines the impact on shareholder voting of the mutual fund voting disclosure regulation adopted by the SEC in 2003, using a paired sample of proposals submitted before and after the rule change. We focus on how voting outcomes relate to institutional ownership and the voting behavior of mutual funds. While voting support for management has decreased over time, there is no evidence that mutual funds' support for management declined after the rule change, as expected by advocates of disclosure. In fact, in the context of management-sponsored proposals on executive equity incentive compensation plans, mutual funds appear to have increased their support for management after the rule change. We also find that this result is not due to changes in compensation plan features, nor that voting outcomes were plausibly related to broker voting, which was eliminated in a parallel 2003 stock exchange rule change. Finally, there is some evidence that firms with greater mutual fund ownership adopt a higher frequency of sponsoring executive equity incentive compensation plans, which could partly explain our findings.

Wintoki on SOX and Exchange Listing Requirements

Corporate Boards and Regulation: The Effect of the Sarbanes-Oxley Act and the Exchange Listing Requirements on Firm Value, by M. BABAJIDE WINTOKI, Terry College of Business, University of Georgia, was recently posted on SSRN.  Here is the abstract:

The Sarbanes-Oxley Act of 2002 and recently modified exchange listing requirements impose uniformly high levels of outside director monitoring on all firms. However, recent research in finance suggests that corporate governance structures, including boards of directors, are chosen endogenously by firms in response to their unique operating and contracting environments. Using the relative costs and benefits of outside director monitoring as a benchmark, I find significant cross-sectional variation in the wealth effects around the announcement and passage of these regulations. I find that firms which have high monitoring costs and fewer benefits from outside monitoring benefited less from the regulations. In particular, I find that the wealth effects around the passage of these new regulations are positively related to firm size and age, and negatively related to growth opportunities and the uncertainty of the firm's operating environment. The results suggest that a blanket one size fits all governance regulation may be detrimental to certain firms, particularly young, small, growth firms operating in uncertain business environments, that are costly for outsiders to monitor.

Perspective on The Past Week's Stories

The big news for law professors and corporate attorneys is the SEC's complaint charging Nancy Heinan, former GC at Apple, with securities fraud for backdating stock options.  The complaint focuses on two stock option grants.  One involved the grant of 4.8 million options to six executives (including Heinan and Anderson, the former CFO who settled with the SEC).  According to the complaint, in late January Heinan provided Steve Jobs with a list of daily closing prices for Apple stock for the month of January and suggested a date for the stock option grant. The complaint does not allege that Jobs responded to this, but alleges that on February 1 Heinan told Anderson that Jobs had agreed on a date of January 17.  Heinan then allegedly directed her staff to prepare an unanimous written consent showing board approval of the grant on January 17.  The other grant involved 7.5 million options to Jobs that was finalized on December 18, 200, after months of negotiations over the vesting schedule, and then backdated to October 19.  The complaint alleged that Heinan created fictitious minutes for a special board meeting on October 19.

On the same day that the SEC charged Heinan and settled with Anderson, Anderson released a statement through his attorney in which he stated that in late January he advised Jobs about the accounting implications of backdating and charged that Jobs misled him by telling him the board had earlier approved the grant. Apple has previously said that Job helped in selecting option grant dates, but did not understand the accounting issues.

Another significant settlement -- outside directors of Just For Feet settled misrepresentations, conflict of interest, breach of fiduciary duty and bad faith claims with the bankruptcy trustee for $41.5, reportedly the largest settlement by outside directors.  The company failed in 1999 because of an accounting fraud.

Black Criminal Trial Still Going On

The criminal trial of Conrad Black, former Chair of Hollinger International is still going on, just having completed its sixth week of testimony.  All the members of the Audit Committee have or will be testifying, with the central issue being whether they were lied to or whether they were inattentive.  Marie-Joseph Kravis, an economist who is usually identified as the wife of Henry Kravis, and Richard Burt testified this week; James R. Thompson, former Illinois governor, is also expected to testify.  At issue are millions of dollars in non-compete payments that were paid to Black and other individuals instead of to the company.  See NYTimes, Ex-Hollinger Audit Panel Member Testifies.

Ponzi Schemer Armstrong Will Begin Criminal Sentence

Martin A. Armstrong, who pled guilty to running a $3 billion Ponzi scheme through his investment fund, Princeton Economics International, has already served seven years in jail for civil contempt, having refused to turn over assets to the court-appointed receiver.  Now he will begin to serve his five-year sentence for the crime.  See NYTimes, Jailed 7 Years for Contempt, Adviser Is Headed for Prison; WSJ, Judge Lifts a Sanction on Armstrong.

Baker Hughes Settles FCPA Charges

The Securities and Exchange Commission today announced the filing of a settled enforcement action charging Baker Hughes Incorporated, a Houston, Texas-based global provider of oil field products and services, with violations of the Foreign Corrupt Practices Act (FCPA). Baker Hughes has agreed to pay more than $23 million in disgorgement and prejudgment interest for these violations and to pay a civil penalty of $10 million for violating a 2001 Commission cease-and-desist Order prohibiting violations of the books and records and internal controls provisions of the FCPA.

In the same complaint, the SEC also charged Roy Fearnley, a former business development manager for Baker Hughes, with violating and aiding and abetting violations of the FCPA. Fearnley has not reached any settlement with the Commission regarding these charges.

Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, said, "Baker Hughes committed widespread and egregious violations of the FCPA while subject to a prior Commission cease-and-desist Order. The $10 million penalty demonstrates that companies must adhere to Commission Orders and that recidivists will be punished."  See SEC Charges Baker Hughes With Foreign Bribery and With Violating 2001 Commission Cease-and-Desist Order.

Frist Not Charged in HCA Stock Sales

The DOJ and the SEC notified former Senate majority leader Bill Frist that they have concluded their 18-month investigation into his 2005 sales of HCA stock (a chain of hospitals started by Frist and his brother) shortly before a drop in the stock price and will not bring insider trading charges.  Frist maintained that the sales were made to eliminate any appearance of conflict of interest. See WPost, Frist Not Charged as Investigators Close Probe of His Hospital Stock Sales.

Academic Study on Foreign Private Issuers

The WSJ highlights an academic study that disputes the frequently-made assertion that Sarbanes Oxley caused foreign private issuers to flee the U.S. capital markets in favor of London.  Instead, the study (authored by Craig Doidge of U. of Toronto and Andrew Karolyi and Rene Stulz of OSU) finds that the decline in foreign listings since 2002 reflects the fact that there are fewer foreign companies meeting the profile for U.S. listing. It also finds that U.S. investors are still willing to pay a premium for foreign stocks listed on the U.S. markets.  See WSJ, Maybe U.S. Markets Are Still Supreme.  The study is available at SSRN.

Citigroup Completes Nikko Tender Offer

After a long and difficult tender offer, Citigroup acquired 56.2% of Nikko Cordial, Japan's third largest brokerage firm that is recovering from an accounting scandal.  Together with its previous stock ownership, it now owns 61% of Nikko Cordial.  See WSJ, Citigroup Wins Majority Of Nikko Cordial's Stock.

Harman Buyout Offers Shareholders Equity in the Deal

Harman International Industries has agreed to be acquired by KKR and Goldman Sachs for $7.8 billion.  What makes the deal unusual is that current shareholders will have the choice of taking $120 cash or shares in the new company in exchange for their stock.  Public shareholders will not own more than 27% of the new company; if too many shareholders want stock, the stock participation will be prorated.  The shares will not be traded on an exchange.  The stock option may be to avoid criticism over the price that has persisted in the proposed Clear Channel Communications buyout.  See WSJ, Unusual Buyout
Offers a Piece To Shareholders. 

SEC and German Regulator Sign MOU

The Securities and Exchange Commission and the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, or BaFin) today signed a comprehensive arrangement to facilitate their supervision of internationally active firms and their oversight of markets.

At a meeting in Berlin, SEC Chairman Christopher Cox and BaFin President Jochen Sanio executed a memorandum of understanding (MOU) that provides clear mechanisms for consultation, cooperation, and exchanges of information between their agencies. The MOU sets forth the terms and conditions for the sharing of information about regulated entities and financial groups that operate in the United States and Germany and, in view of the growing trend toward cross-border exchange affiliations, outlines a framework for cooperation in the oversight of markets in both countries.  See SEC, German BaFin Sign Regulatory Cooperation Arrangement.

NASAA Announces Speakers for Investor Protection Conference

The North American Securities Administrators Association (NASAA) announced today that U.S. Senator Robert P. Casey (D-PA) and former Securities and Exchange Commissioner Harvey J. Goldschmid will be the featured speakers at its May 8 Public Policy Conference in Washington, D.C.  Under the banner, “Because Every Investor Deserves Protection,” this year’s conference will showcase investor protection issues of concern to both state securities regulators and the securities industry, NASAA President and Alabama Securities Commission Director Joseph P. Borg said. The conference will be held at the Renaissance Mayflower Hotel, 1227 Connecticut Avenue, N.W. in Washington, D.C.

Following Senator Casey’s address, NASAA will sponsor a Public Policy Forum entitled “Investor Protection Through Effective Enforcement and Regulation” to showcase how strong and effective regulation enhances the strength of our nation’s capital markets. The panel, to be moderated by Arizona Securities Director Matthew J. Neubert, will feature: Edmund Mierzwinski, Consumer Program Director, U.S. Public Interest Research Group; Damon Silvers, General Counsel, AFL-CIO; Bryan Lantagne, Director of the Massachusetts Securities Division; Ira Hammerman, Senior Vice President and General Counsel, Securities Industry and Financial Markets Association (SIFMA); and Jake Zamansky, principal, Zamansky & Associates.

The Forum will be followed by a luncheon keynote address by Columbia University law professor and former SEC Commissioner Goldschmid.

Tribune Begins Tender Offer for One-Half its Shares

Tribune began the first stage of its $8.2 billion LBO by commencing the tender offer for one-half its shares at $34 per share.  Meanwhile, Tribune's deteriorating financial condition raises questions about whether it will be able to service the debt created by the LBO.  It reported a 6% decline in print-advertising revenues, compared with February projections of only a 3% decline.  The Chandler Trust, the 20% shareholder that is the driving force behind the LBO, will sell as many of its shares in the tender offer as it can.  See WSJ, Tribune Opens Offer For Half of Its Shares.