Wednesday, June 27, 2007
No fireworks or surprises at the testimony of the five SEC Commissioners before the House Financial Services Committee hearing yesterday, as, for four hours, the Commissioners fielded a "grab bag of questions" (as the Washington Post put it) from the Representatives. Barney Frank pronounced that "the commission as currently constituted has hit the right balance." The Congresspersons expressed concern about class action suits and the agency's refusal to grant another delay for small businesses to comply with section 404. In response to a question, Chair Cox said the agency has opened about a dozen investigations into CDOs and CLOs, complex financial products that are key components of LBO financing. See WPost, Questioning the SEC, Gently; NYTimes, Chairman Denies That S.E.C. Favors Business; WSJ, SEC Probes CDOs and Bear Funds.
Investor pushback has hit the LBO bond market, as underwriters for U.S. Foodservice pulled a $1.55 billion LBO bond offering and postponed plans to sell another $2 billion in loans to finance the buyout. Two private equity firms are acquiring the company from Royal Ahold NV. Investors are putting up resistance to some of the terms in LBO deals, particularly payment-in-kind features that allow the borrower to make interest payments in more debt instead of cash. See WSJ, Bonds Becoming a Tougher Sale.
Tuesday, June 26, 2007
Remarks Before the NAVA Compliance and Regulatory Affairs Conference, by Andrew J. Donohue. Director, Division of Investment Management, SEC, Washington, D.C., June 25, 2007, addresses the "hot topics" under consideration by Investment Management.
The SEC announced the filing of a settled civil action against Kevin B. Collins, an employee of IBM, for aiding and abetting Dollar General Corporation's commission of accounting fraud. The Commission filed the civil action against Collins in the United States District Court for the Middle District of Tennessee. As set forth in the Commission's complaint, Collins assisted Dollar General's commission of accounting fraud through a sham transaction that was designed to achieve a particular accounting result for Dollar General. Also today, the Commission instituted a settled cease-and-desist proceeding against IBM for its role in the Dollar General fraud and for IBM's own books and records violations.
Testimony Concerning A Review of Investor Protection and Market Oversight with the Five Commissioners of the Securities and Exchange Commission Before House Committee on Financial Services Full Committee Hearing, June 26, 2007, is posted at the SEC website. The written testimony focuses on all the "hot issues" currently before the SEC, including globalization, enforcement efforts, corporate penalties, fraud against seniors and military, improved disclosure in mutual funds and 401(k) plans, access to corporate information through the internet and interactive data, proxy access, and (of course) SOX and section 404.
CFO.com reports that Chair Cox said during the hearing that the SEC will issue later this summer a concept release exploring the possibility of moving to a principles-based accounting system.
The SEC today announced settled enforcement actions against London-based hedge fund adviser GLG Partners, L.P. for illegal short selling in connection with 14 public offerings. During a two-year period, GLG made more than $2.2 million in illegal profits in four of its managed hedge funds by committing multiple violations of Rule 105 of Regulation M of the Securities Exchange Act of 1934. Rule 105, designed to prevent manipulative short selling, prohibits covering certain short sales with securities obtained in a public offering. GLG agreed to a cease-and-desist order and payment of more than $3.2 million in disgorgement, prejudgment interest, and penalties. In accepting GLG’s settlement offer, the SEC considered remedial acts undertaken by GLG, and GLG’s cooperation in the SEC’s investigation.
Without admitting or denying the findings, GLG consented to the SEC order that finds, from July 2003 through May 2005, GLG violated Rule 105 on 16 occasions in 14 different public offerings in the following funds: GLG Market Neutral Fund; GLG North American Opportunity Fund; GLG Technology Fund; and GLG European Long Short Fund. At the time, GLG did not have any policies, procedures or training on Rule 105. See SEC Sues London-Based Hedge Fund Adviser GLG Partners, L.P. for Illegal Short Selling in Connection with Public Offerings.
The Dow Jones board and Rupert Murdoch have apparently reached agreement on a set of editorial protections for the Wall St. Journal. Now it remains to be seen if there will be negotiations over the price and what the members of the Bancroft family will do. See WSJ, Dow Jones, News Corp. Agree On Set of Editorial Protections.
At long last, the criminal trial against Conrad Black and other executives of Hollinger International is wrapping up, as the attorney for defendant Mark S. Kipnis, the former general counsel for Hollinger, made his closing argument. Kipnis is accused of assisting the other defendants in receiving noncompete payments that should have gone to the company and receiving a $150,000 bonus for his efforts. See NYTimes, Hollinger’s Former Lawyer Described as Trustworthy.
All five SEC Commissioners will testify today at a hearing of the House Financial Services Committee, chaired by Barney Frank, for the first time in 10 years. Frank has expressed interest in section 404, naked short selling, SEC enforcement policy, increased proxy access. Private equity and the collapse of the subprime lendng market are also expected to be topics. See WSJ, (Entire) SEC Makes House Call.
Monday, June 25, 2007
The SEC has remanded to the NYSE a proceeding against Warren E.Turk, a former NYSE member and former specialist associated with an NYSE member firm. The NYSE censured and permanently barred Turk based on his failure to testify in connection with its investigation of improper trading practices by NYSE specialists. Turk claims that the NYSE could not force him to testify because, at the time the NYSE requested his testimony, Turk was the subject of a criminal investigation and could therefore invoke the Fifth Amendment's right against self-incrimination. Turk argues that the right against self-incrimination applied to the NYSE because, under the particular facts and circumstances of this case, the NYSE engaged in "state action" in conducting its investigation of Turk. The Commission rejected Turk's argument that the NYSE is a state actor generally and found that the evidence Turk has presented thus far in support of his state action argument is insufficient to establish that the NYSE has engaged in state action. It concluded, however, that "it is appropriate to provide Turk an opportunity to develop a full evidentiary record on the state action question."
The SEC announced today that on June 21, 2007, it filed a motion seeking appointment of a receiver to operate Universal Express, Inc.The SEC's request for relief follows a permanent injunction entered earlier this year against the company prohibiting it from future violations of the securities registration and anti-fraud provisions of the federal securities laws. On February 21, 2007, the Southern District of New York entered an Opinion and Order determining that Universal Express had issued over 500 million shares of common stock between April 2001 and January 2004 without filing registration statements for those transactions. Additionally, the Court found that Universal Express issued several false and misleading press releases, and ordered the company to pay over $9 million in disgorgement and an additional $9 million in civil penalties. A Final Judgment against Universal Express, Richard Altomare and Chris G. Gunderson was entered on April 2, 2007. Contrary to the provisions in the Final Judgment, the company has not paid the disgorgement and civil penalties ordered. Universal Express, Richard Altomare, and Chris Gunderson filed on June 2, 2007 a notice of appeal challenging the District Court's decision. No hearing date on the SEC's motion for appointment of a receiver has been set.
John Hancock Investment Management Services and its affiliates settled SEC charges relating to revenue sharing arrangements from 2001-2004. The firms agreed to institute compliance policies and procedures and disgorgements of approxixmately $14.8 million, plus prejudgment interest, to the affected funds.
SEC Website Allows Investors to Obtain Corporate Disclosures on Business with State Sponsors of Terror
In the latest of a series of steps to use the Internet and interactive computer technology to make public company disclosures more accessible to investors, Securities and Exchange Commission Chairman Christopher Cox today announced that the SEC has added to its Web site a software tool that permits investors to obtain information directly from company disclosure documents about their business interests in countries the U.S. Secretary of State has designated “State Sponsors of Terrorism.” The information comes from the companies’ most recent annual reports as filed with the SEC.
Five countries are currently on the U.S. State Department list: Cuba, Iran, North Korea, Sudan, and Syria. (In addition to its support for terrorism, the Sudanese government has also been widely recognized as complicit in genocidal activities in Sudan’s Darfur region.) See SEC Adds Software Tool for Investors Seeking Information on Companies’ Activities in Countries Known to Sponsor Terrorism.
GLG Partners, a London-based hedge fund that is well known in Europe, plans to go public in the US through a $3.4 billion merger with Freedom Acquisition Holdings, a special purpose acquisition company listed on the American Stock Exchange. GLG was originally a division of Lehman Brothers, which continues to own 15%. After the merger, GLG will be listed on the NYSE. See NYTimes, Hedge Fund Based in London to Go Public in United States; WSJ, GLG Partners Two-Stepping To U.S. Listing.
Sunday, June 24, 2007
Academics in Wonderland: The Team Production and Director Primacy Models of Corporate Governance, by GEORGE W. DENT Jr., Case Western Reserve Law School, was recently posted on SSRN. Here is the abstract:
This paper examines the Team Production and Director Primacy Models of corporate governance, finds them wanting, and explains why corporate governance is moving toward shareholder primacy and why this will benefit not only investors but the whole American economy.
The director primacy model posits that shareholders are so ill-informed and so divided in their interests that they would self-destruct if they controlled the firm. Accordingly they tie their own hands by ceding control to a board of independent directors. Advocates of the team production theory often agree with the foregoing but stress the importance to the firm of other constituencies, or stakeholders, including suppliers, customers, creditors and, especially, employees. To obtain the needed commitments from these stakeholders firms must credibly promise to treat them well, but these arrangements are too complex to be specified in contracts. If shareholders controlled the firm, they could renege on their implicit promises to stakeholders. Accordingly, firms hand control to a board of disinterested directors who act as mediating hierarchs to balance the interests of all constituencies.
These theories are riddled with internal contradictions and fail many tests of empirical verification. In my article I expose these problems and show that the current reality of corporate governance is not control by independent, disinterested directors but by CEOs. I then discuss why the alternative--shareholder primacy--has not been achieved. I describe both the obstacles to shareholder control and current trends that are facilitating a stronger investor voice. Finally, I suggest that these trends and new ideas may soon lead to real shareholder primacy, and that this will benefit not only investors but the whole American economy.
The Shareholder Communication Rules and the Securities and Exchange Commission: An Exercise in Regulatory Utility or Futility?, by J. ROBERT BROWN Jr., University of Denver Sturm College of Law, was recently posted on SSRN. Here is the abstract:
One of the most difficult problems in the corporate governance area concerns communications with beneficial owners. The Securities and Exchange Commission has a set of complex rules that interact with requirements of the stock exchanges that govern the process of distributing proxy and other materials to beneficial owners. In addition, the Commission permits, by rule, some direct contact between the company and its beneficial owners, at least where the beneficial owners do not object. The rule, however, is lengthy, complex and does not work effectively. This article, although written back in the late 1980s, discusses the system of communicating with beneficial owners and the problems with the existing system.
Sarbanes-Oxley's Effects on Small Firms: What is the Evidence? , by EHUD KAMAR, University of Southern California - Gould School of Law and Harvard Law School; PINAR KARACA-MANDIC, RAND Corporation; and ERIC L. TALLEY, UC Berkeley (Boalt Hall) School of Law, RAND Corporation and University of Southern California - Law School, was recently posted on SSRN. Here is the abstract:
This article presents an overview of the regulatory regime created by the Sarbanes-Oxley Act of 2002 (SOX) and its implications for small firms. We review the available evidence in three distinct domains: compliance costs, stock price reactions, and firms' decisions to exit regulated securities markets.
Saturday, June 23, 2007
On May 23, the SEC announced that it was proposing a series of measures to modernize and improve its capital raising and reporting requirements for smaller companies. This week it issued two releases setting forth some of the specifics. Release 33-8812 proposes modification of the eligibility requirements for use of Form S-3 so that companies with a public float below $75 million can use Form S-3 and can also take advantage of shelf registration. Release 33-8813 proposes revisions to Rule 144 to shorten the holding period for resales of restricted securities and revisions to Rule 145 to eliminate the presumptive underwriter doctrine.
When Form S-3 was revised in 1992, the SEC stated that the $75 million float requirement would limit use of Form S-3 principally to corporations traded on the NYSE or NASDSQ who were generally followed by at least three analysts. (In today's dollars, $75 million would be between $100-110 million). Indeed, the SEC's heavy reliance on the efficient markets hypothesis was the guiding principle behind the adoption of the tiered registration system, including Form S-3 and its incorporation by reference of 34 Act filings into the 33 Act registration statement. Today, the SEC believes that more companies should benefit from the greater flexibility and efficiency in accessing capital markets afforded by Form S-3. Citing the great advances in electronic dissemination and accessibility to company information since the last revisions to Form S-3, the SEC has dramatically expanded the use of Form S-3 and the periodic takedowns of securities permitted by shelf registration. The proposed rule would permit registrants (other than shell companies) to use Form S-3 for primary offerings, whether or not they satisfy the $75 million public float requirement, so long as they do not sell more than 20% of their public float over any twelve-month period and otherwise satisfy the Form S-3 requirements (i.e., the company must be a reporting company and must have timely filed all required 34 Act reports in the past 12 months). This would include companies quoted on the OTC Bulletin Board and the Pink Sheets quotation services. The cap of 20%, the SEC states, should be large enough to help issuers meet their financing needs but small enough to take into account the effect the issuances could have on the market for thinly traded securities. In the release the SEC emphasizes the advantages to smaller companies of shelf registrations. While it recognizes the concern that this would allow periodic takedowns without any further SEC staff review since the initial filing of the registration statement, it believes this risk is justified by the benefits for smaller companies. Comments are due August 27. The release contains a number of questions on which the SEC would like to receive comment. To me an important one, as stated by the SEC, is: in what way is market following an important criterion in light of technological changes?
There are two principal proposed revisions to Rule 144 to ease the restrictions of the Rule and to increase the liquidity of restricted securities and thus decrease the cost of capital. First, the Rule would reduce the holding period for restricted securities of 34 Act companies to six months (currently, it is one year), subject to increasing the holding period, for up to six months, if the holder engaged in hedging transactions during that time. The SEC believes that six months is a reasonable indication that an investor has assumed the economic risk of the investment and is therefore not an "underwriter." Second, the Rule would substantially reduce restrictions on resales by non-affiliates after they have satisfied the holding period. Non-affiliates of reporting companies would only be subject to the current public information requirement for one year after the acquisition of the securities. Non-affiliates of both reporting and non-reporting companies could resell their securities after one year without any other conditions. As is usual with Rule 144, there are plenty of technicalities, and the SEC has a two very useful charts (at p. 12 and p. 26 of the release) tracking the changes. The SEC has rewritten the Preliminary Note in "plain English," and it is startling in its brevity. As a securities law professor, I found the Preliminary Note's discussion of the principles behind the Rule and, in particular, its discussion of "when a person is deemed not to be engaged in a distribution" very helpful. I will be sorry to see it go.
Finally, the proposed changes to Rule 145 would, first, eliminate the presumptive underwriter position in paragraph (c), except for transactions involving shell companies. This is a long overdue change to my mind, since the presumptive underwriter doctrine did not make much sense in this context. Second, the resale provisions in paragraph (d) would be changed to conform with the changes in Rule 144.
If people thought the Dow Jones board's involvement in the negotiations with Murdoch would speed matters up, they must think again. The Dow Jones board has proposed to Rupert Murdoch a Special Committee on Editorial and Journalistic Independence and Integrity -- how pompous can you get? The proposal is apparently about the same as the one that the Bancroft family proposed in early June, and Murdoch's reaction was reported to be frustration. See NYTimes, Latest Plan From Dow Jones Is Said to Frustrate Murdoch; WSJ,Dow Jones Sends News Corp. Its Plan To Protect Editorial Independence.
Forget the ports deal -- I can't get used to the idea of the investment arm of Dubai owning Barneys! I remember when Barneys was a discount men's store owned by Barney Pressman and watched with bemusement as it transformed itself into a symbol of edgy, too-cool-for-most-of-us New York fashion. Now Jones Apparel, struggling to remain afloat, sold Barneys for $825 million to Istithmar -- a good deal considering Jones bought the stores in 2004 about half that amount. See WSJ, Jones Apparel to Sell Barneys To Dubai Firm for $825 Million.