Securities Law Prof Blog

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

Monday, April 28, 2008

Yahoo Does Not Respond to Microsoft's Deadline

Saturday was the deadline Microsoft gave Yahoo to agree to a deal.  Now Microsoft must decide whether to back away or go forward with a hostile tender offer and proxy contest as Steve Ballmer stated several weeks ago.  Many of Microsoft's own executives, however, are said to oppose the deal as diverting resources from other projects.  WSJ, Microsoft Confronts Tough Choice on Yahoo.

April 28, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Mars Negotiates to Buy Wrigley

Mars, privately owned by the Mars family (M&M's, Mars, Snickers) reportedly has struck a deal to acquire the Wm. Wrigley Jr. Co. (chewing gum, Lifesavers, Altoids) for approximately $22 billion.  Warren Buffett's Berkshire Hathaway will provide Mars with financing.  Wrigley's market value on Friday was $17.3 billion.  Mars is the world's largest maker of chocolate by sales.  NYTimes, Candy Maker Reported Near Deal for Chewing Gum Giant; WSJ, Mars, Buffett Team Up in Wrigley Bid.

April 28, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, April 27, 2008

Hamermesh on Shareholders' Inspection Rights

Twenty Years after Smith v. Van Gorkom: An Essay on the Limits of Civil Liability of Corporate Directors and the Role of Shareholder Inspection Rights, by LAWRENCE A. HAMERMESH, Widener University School of Law, was recently posted on SSRN.  Here is the abstract:

With director monetary liability for lack of care (appropriately, in the author`s view) fading or disappearing altogether since Smith v. Van Gorkom, litigation invoking the duty of care seems increasingly unlikely to serve as a vehicle for public scrutiny of, and reputational sanctions for, director conduct that is substandard but does not involve self-interest or lack of good faith. It is therefore increasingly important to examine when information obtained through the exercise of stockholder inspection rights can be made public. A recent case involving the Walt Disney Company - but not the well-known litigation involving Michael Ovitz' termination compensation - addresses the issue of confidential treatment of such information. Prompted by the Court of Chancery's treatment of the issue, this Article proposes that the courts review and balance a number of factors - the subject matter of the information, the level of public interest in the information, the motives of the stockholder in seeking the information and (perhaps) ultimately seeking to make it public, and the context in which the information was generated - to determine whether information afforded pursuant to stockholder inspection rights should remain confidential.

April 27, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Zitzewitz on Mutual Fund Settlements

An Eliot Effect? Prosecutorial Discretion in Mutual Fund Settlement Negotiations, 2003-7, by ERIC ZITZEWITZ, Dartmouth College, was recently posted on SSRN.  Here is the abstract:

This paper examines the negotiated settlements of 20 market timing and late trading cases, comparing the restitution obtained for shareholders with an estimate of shareholder dilution. This restitution ratio varies from 0.04 to 5, or from 0.1 to 10 if penalties are included. While some of this variation is explained by differences in the defendants' conduct, controlling for this, settlement negotiations that involved New York as well as the Security and Exchange Commission (SEC) resulted in restitution ratios that were higher by a factor of 5-10. An analysis that uses the firms' headquarters location and customers' state of residence as an instrument for New York's involvement suggests that this difference is causal, and not the result of New York involving itself in cases likely to lead to large settlements. Given the much larger staff and institutional expertise of the SEC, it is likely that these differences in outcomes are due to differences in aggressiveness, not prosecutorial resources. Differences in aggressiveness are consistent with popular conceptions of the regulators' career concerns, as well as with theories of industry focus and regulatory capture.

April 27, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Harner on Activist Debt Investing

The Corporate Governance and Public Policy Implications of Activist Distressed Debt Investing, by MICHELLE M. HARNER, University of Nebraska College of Law, was recently posted on SSRN.  Here is the abstract:

Activist institutional investors traditionally have invested in a company's equity to try to influence change at the company. Some of these investors, however, are now purchasing a company's debt for this same purpose. They may seek to change a company's management and board personnel, operational strategies, asset holdings or capital structure.

The chapter 11 bankruptcy cases of Allied Holdings, Inc. and its affiliates exemplify the strategies of activist distressed debt investors. In the Allied cases, Yucaipa Companies, a distressed debt investor, purchased approximately 66% of Allied's outstanding general unsecured bond debt. Yucaipa used this debt position to exert significant influence over Allied's chapter 11 cases and business operations, including its labor contract with the Teamsters. Yucaipa emerged as Allied's majority shareholder under Allied's confirmed plan of reorganization.

Allied is not an isolated example. In 2006, distressed debt investors raised a record $19 billion in investment funds. The research shows that some investors are using these investment funds for activist purposes. Indeed, activist distressed debt investing is on the rise in both the United States and the United Kingdom. This activism is changing the dynamics of corporate restructurings and presenting new challenges for corporate management and public policymakers.

April 27, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Rosen on Executive Compensation

Who Killed Katie Couric? And Other Tales from the World of Executive Compensation Reform, by KENNETH M. ROSEN, University of Alabama - School of Law, was recently posted on SSRN.  Here is the abstract:

With average Americans perturbed about executive pay, government officials are taking action. Officials appear to be racing against each other to battle corporate excess. The U.S. Securities and Exchange Commission (SEC) engaged in major rulemaking related to the disclosure of executive compensation, and Congress quickly considered executive compensation legislation. More reform, however, is not always better. Concurrent reform by multiple regulators presents perils.

This Article adds to the dialogue about scandal-driven reform. While much discussion exists about the advisability of particular reforms, the focus here is on the process of reform. The Article conducts a comparative analysis of the SEC and House of Representatives' reform processes, which reveals that different policy-making processes may be more or less likely to yield positive reforms. The Article argues that promoting distinct, more delineated roles for certain public actors could improve synergies between regulatory reform efforts.

Part I explores how the SEC's response to the public notice and comment process for its compensation disclosure rulemaking shows how administrative agencies properly can tailor regulation in a deliberative fashion. Part II then provides the contrasting story of the House's passage of H.R. 1257 that illustrates the pitfalls of scandal-driven reform. Unfortunately, the House's actions followed disturbing trends in mandating content for SEC regulation and in failing to account adequately for synergies between concurrent regulatory efforts.

Part III concludes by suggesting a framework identifying when congressional action on business regulation seems most appropriate given concurrent regulatory efforts. The Article identifies Congress's important potential role in settling authority issues, providing oversight to administrative agency reforms, and being prepared to intervene when agencies are recalcitrant about enacting necessary rule changes. In offering this framework, the Article moves beyond executive compensation issues to see how Congress might deal with other crises of confidence in business regulation. Areas for potential application of the framework include the regulation of hedge funds, imported toys and other consumer products, proxy voting, and subprime lending.

April 27, 2008 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Friday, April 25, 2008

SEC Director of Investment Management Outlines Agenda

Andrew J. Donohue, Director, Division of Investment Management, SEC, outlined the following agenda for the Division at an April 24, 2008, Keynote Address at the Practicing Law Institute, Investment Management Institute 2008:

I expect the remainder of 2008 to be an exciting time for those of us at the Commission and, similarly, those of you who practice in the investment management area. I am hopeful that the Commission and its staff will be addressing three fundamental issues of critical importance to America’s investors. They are the structure of the mutual fund disclosure regime, the payment of distribution-related fees from fund assets as permitted by rule 12b-1 under the Investment Company Act, and the appropriate regulatory framework that should govern relationships between financial professionals and retail investors as discussed in the recent report issued by the RAND Corporation.

None of these is a new issue.  Let's hope that the SEC can finally accomplish some meaningful reform in the mutual fund area to provide better protection for retail investors.

April 25, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (3)

H&R Block Financial Advisors Exonerated in Enron Sales Proceeding

A FINRA hearing panel dismissed a November 2004 complaint against H&R Block Financial Advisors alleging sales practices and supervisory violations relating to sales of Enron Corporation bonds during the one-month period immediately preceding Enron's filing for bankruptcy protection on Dec. 2, 2001.  The panel ruled that FINRA's Department of Enforcement failed to show by a preponderance of evidence that H&R Block registered representatives misrepresented or omitted material facts in connection with sales of Enron bonds, or that the firm failed to implement adequate supervisory systems and procedures.

April 25, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (3)

Countrywide's CEO Does Well

Countrywide Financial's CEO Angelo Mazilo made $121.5 million in 2007 from exercising stock options under a Rule 10b5-1 plan.  He also received $22.1 million in compensation -- $1.9 million in salary, $20 million in stock and option awards, no bonus.  Countrywide, in contrast, lost $704 million, and its shares declined 79%.  NYTimes, A Losing Year at Countrywide, but Not for Chief.

April 25, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, April 24, 2008

SEC Institutes Market Timing Suit Against Former Portfolio Manager of A Gabelli Fund

The SEC filed a civil fraud action in the United States District Court for the Southern District of New York against Marc J. Gabelli, the former portfolio manager of the Gabelli Global Growth Fund (GGGF), currently known as GAMCO Global Growth Fund, and Bruce Alpert, Chief Operating Officer of GGGF's adviser, Gabelli Funds LLC (Gabelli Funds), in connection with an undisclosed market timing arrangement with Folkes Asset Management, currently known as Headstart Advisers Ltd. (Headstart). The complaint alleges that from September 1999 until August 2002, Marc Gabelli authorized Headstart to place market timing trades in GGGF while Gabelli Funds was rejecting other market timers. In return, Headstart maintained its investment in other affiliated funds.
 
Over a two-year period, Headstart's internal rates of return on its three accounts were 185 percent, 160 percent, and 73 percent, respectively, while the rate of return for other GGGF shareholders was at most negative 24.1 percent. Gabelli Funds financially benefited from the market timing in that it earned advisory fees from both the market timing and Headstart's investment in the affiliated hedge fund.
 
In a related administrative proceeding, the SEC settled administrative proceedings against Gabelli Funds, a registered investment adviser, in connection with the undisclosed market timing by Headstart. Gabelli Funds was censured, ordered to cease and desist its securities law violations, and ordered to pay $9.7 million in disgorgement, $1.3 million in prejudgment interest, and a penalty of $5 million, for a total payment of $16 million. As described in the Order, Gabelli Funds' payment will be distributed to shareholders harmed by the market timing activity during the relevant period.

April 24, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Market Timing Charges Against Pritchard Capital

The SEC settled market-timing and late-trading charges against Pritchard Capital Partners, LLC, Thomas Pritchard and Elizabeth McMahon.  Pritchard Capital is a registered broker-dealer headquartered in Mandeville, Louisiana, and Thomas Pritchard is the firm's managing director. McMahon was formerly associated with Pritchard Capital in its New York office from approximately March 2001 through January 2004.  The SEC's order finds that from November 2001 through approximately July 2003, Pritchard Capital allowed some of its market timing customers, who provided 25% of the firm's revenue in 2003, to late trade mutual fund shares through its New York office.

April 24, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Issues Alert on Event-Linked Securities

FINRA issued an alert to inform investors about event-linked securities—financial instruments that allow investors to speculate on a variety of events, including catastrophes such as hurricanes, earthquakes, and pandemics ("cat bonds").

The market for event-linked securities has grown substantially since they were first developed in the mid-1990s. At present, these products are not offered directly to individual investors. But various funds, including mutual funds and closed-end funds, have purchased or are authorized to purchase them on behalf of individual investors. While not widespread, holdings of event—linked securities in these funds—especially high income funds-are also not unusual.

Event-linked securities currently offer higher interest rates than similarly rated corporate bonds. But, if a triggering catastrophic event occurs, holders can lose most or all of their principal and unpaid interest payments.

The Alert advises investors to to find out whether any funds they own invest in cat bonds or other similar event-linked instruments and to consider whether the fund manager has adequate resources and expertise to evaluate the risks of event-linked securities and whether they are a sound investment.

April 24, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (1)

FINRA Proposes Rule Change Regarding Complaints of Brokers'Sales Practices

FINRA is seeking comment on proposed rule amendments that would require registered firms - for the first time - to report allegations of sales practice violations against an individual broker made in arbitration claims that do not name the broker as a respondent.  Under current practice, firms are required to report customer allegations against a broker in an arbitration claim only if the legal document specifically names the broker as a respondent. A settlement or ruling resolving the allegations also need not be reported if the broker is not named as a respondent. Increasingly in recent years, claimants and their lawyers have been naming only the firm in arbitrations; as a result, neither the allegations of sales practice violations made against the unnamed brokers nor the dispositions of those proceedings are reported to CRD.

Currently, customer complaints and settlements involving an amount of $10,000 or more are reportable to CRD, a threshold that has been in place for years without being adjusted for inflation. FINRA is proposing raising that threshold to $15,000 to more accurately reflect today's business conditions.

FINRA will be accepting public comments on the proposals for 30 days, or until May 27.

April 24, 2008 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles False Rumors and Short-Selling Charges

The SEC charged Paul S. Berliner, a Wall Street trader formerly associated with Schottenfeld Group LLC, with securities fraud and market manipulation for intentionally spreading false rumors about The Blackstone Group's acquisition of Alliance Data Systems (ADS) while selling ADS short.The SEC alleged that five months ago, Berliner disseminated the false rumor through instant messages to numerous individuals, including traders at brokerage firms and hedge funds. The false rumor also was picked up by the media.  Heavy trading in ADS stock ensued, and within 30 minutes the false rumor had caused the price of ADS stock, trading at approximately $77 per share, to plummet to an intraday low of $63.65 per share - a 17 percent decline. In response to the unusual trading activity, the New York Stock Exchange temporarily halted trading in ADS stock. Later in the day, ADS issued a press release announcing that the rumor was false. By the close of trading, the price of ADS stock recovered to its pre-rumor price of approximately $77 per share. Berliner profited by short selling ADS stock during its precipitous decline.

Without admitting or denying the allegations in the SEC's complaint, Berliner agreed to settle the charges against him by consenting to the entry of a final judgment enjoining him from future violations of the antifraud and anti-manipulation provisions of the federal securities laws, and requiring him to disgorge $26,129 in profits and interest, pay a maximum third-tier penalty of $130,000, and consent to the entry of a Commission Order barring him from association with any broker or dealer.

April 24, 2008 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Is Microsoft-Yahoo Merger Dead?

Maybe the Microsoft-Yahoo merger is over.  Microsoft reportedly has a list of nominees for the Yahoo board in the event it decides to go forward with a hostile takeover, and this Saturday is the date Microsoft previously gave Yahoo to decide whether to enter into friendly negotiations or face a hostile bid.  However, CEO Steve Ballmer suggested that Microsoft might give up the fight in the face of  skepticism from Microsoft employees about the deal.  WSJ, CEO Says Microsoft Could Forgo Yahoo.

April 24, 2008 in News Stories | Permalink | Comments (1) | TrackBack (0)

Estate of James Brown Sues Morgan Stanely

The estate of singer James Brown brought a lawsuit charging that Morgan Stanley failed to prevent the late singer's manager from stealing money from his investment account.  The lawyers for the estate say there is no mandatory arbitration agreement.  Morgan Stanley said that the suit was without merit.  NYTimes, Stewards of James Brown Estate Sue Morgan Stanley.

April 24, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 23, 2008

Warren Buffett on Corporate America

Larry Cunningham (GW) has edited a second edition of Warren Buffett's legendary essays.  Among the "hot topics" touched upon in this edition are stock options, excessive CEO pay, derivatives, foreign currency trading, and management succession.  You can preorder the book in time for Berkshire Hathaway's annual meeting.

April 23, 2008 in Professional Announcements | Permalink | Comments (0) | TrackBack (1)

SEC Refuses to Respond to Congressional Inquiry on Bear Stearns

The SEC refused to respond to a congressional request for information about why it dropped two investigations begun in 2005 into Bear Stearns' methods of valuing complex debt securities.  The agency cited its confidentiality policy.  WSJ, SEC Rebuffs Lawmakers Over Bear.

April 23, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

EBay Brings Shareholders Suit against Craigslist

EBay, which owns almost 25% of Craiglist (that it acquired from a disgruntled ex-employee or from Craigslist itself, depending on whom you ask), filed a shareholders' derivative suit in Delaware against Craigslist, saying that undisclosed actions unfairly diluted its interest.  EBay said the complaint was under seal because of confidentiality restrictions.  NYTimes, EBay Files a Stockholder Lawsuit Against Craigslist.

April 23, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)

CFTC Puts on Hold Changes in Face of Agriculture Industry Concerns

The CFTC placed on hold proposals that would have raised the amount that financial speculators could hold and would have exempted commodity index funds from those limits.  At a hearing representatives from the agricultural industry, who use commodity futures as a hedge against declines in crop prices, blamed speculators for the increased volatility in agricultural futures.  NYTimes, Regulators Back Away From Changes to Commodity Hedging.

April 23, 2008 in News Stories | Permalink | Comments (0) | TrackBack (0)