Securities Law Prof Blog

Sixth Circuit: Lawyers Performing Ordinary Legal Work are not Statutory Sellers under Kentucky Statute

The Sixth Circuit recently held that an attorney who performs traditional legal services for a company offering its securities to the public cannot be held liable as an offeror or seller of the securities or as an agent of the seller who materially aids the sale of securities, under the Kentucky securities statute.  Bennett v. Durham (6th Cir. June 28, 2012).  (Download BennettvDurham)

Durham was an attorney who represented two oil and gas exploration companies in connection with their sales of securities, including drafting the documents for the deals.  He also made himself available to answer prospective investors' questions, all the while, according to plaintiffs, knowing that the documents contained material misstatements and that the securities were neither registered nor exempt from registration.  The court relied on Pinter v. Dahl, 486 U.S. 622 (1988) and determined that there was no reason to think that Kentucky courts would construe the words differently.  The court emphasized that plaintiffs did not allege any facts that would show that Durham performed any services other than "ordinary legal work securities lawyers do every day."  Plaintiffs "cite no case holding an attorney liable under the Uniform Securities Act merely for drafting documents, providing advice and answering client questions." 

Claims Court Allows Former Controlling Shareholder of AIG to Sue Government

Starr International Company, which was the controlling shareholder of AIG before the federal bailout, sued the U.S. government on a variety of theories.  Essentially it asserted that the government, rather than providing liquidity support offered to other financial institutions, exploited AIG's vulnerable financial situation by becoming the controlling lender and controlling shareholder in September 2008.  According to Starr, the government took control of AIG so that it could use the corporation and its assets to provide a "backdoor bailout" to other financial institutions and that the government took AIG's property without due process or just compensation.  On July 2, the U.S. Court of Federal Claims granted in part and denied in part the government's motion to dismiss the claims.  It also deferred the issue of whether Starr adequately pled a demand on AIG's board or the futility of such a demand.  The government is required to file an answer by July 16.  (Download StarrvsUS11212011[1]) 

Court Rejects SEC's Broad Definition of Customers: Stanford Investors Out of Luck

As I previously blogged, on July 3 the federal district court (D.C.) denied the SEC's application for an order compelling SIPC to commence a liquidation proceeding to protect customers who purchased CDs issued by an Antiguan bank marketed by the Stanford Group Company, a now-defunct broker-dealer that was a member of SIPC.  I now have read the court's opinion which concludes that the SEC failed to meet its burden of proving that SIPC "has refus[ed] ... to commit its funds or otherwise to act for the protection of customers of any member of SIPC."  (Download SECvSIPC)

While expressing sympathy to the plight of the Stanford customers who purchased the CDs, the court noted its duty to apply the statute as written by Congress.  The key issue in the dispute is whether the persons who purchased the CDs were "customers" of SGC within the meaning of the statute.  The court reviews the law and finds it well-settled that "the critical aspect of the 'customer' definition is the entrustment of cash or securities to the broker-dealer for the purpose of trading securities."  To prove entrustment, the claimant must prove that the SIPC member actually possessed the claimant's funds or securities.  Pursuant to facts stipulated by the parties, the SEC cannot show that SGC ever physically possessed the investors' funds at the time that the investors made their purchases.  The investors wrote checks or wired funds to the bank for the purpose of buying the CDs; the funds were never deposited into a SGC account.  Under a literal meaning of the statute, the investors were not customers of SGC.  The court declined the SEC's invitation to adopt a broader construction of the statute, finding that it did not square with the agency's longstanding interpretation of SIPA and was contrary to the statutory language.

SEC v. SIPC; SIPC Wins

Readers may recall that the SEC sued SIPC to force it to pay investors in Allen Stanford's Ponzi scheme.  SIPC maintained it could not pay them because the investors did not lose money in a failed brokerage, the purpose of SIPA insurance, but because they purchased CDs from an Antiguan bank.   Although initially the SEC agreed with SIPC's position, it subsequently changed its mind and brought this law suit.  Today, the WSJ reports, a federal district court in D.C. ruled that the SEC failed to meet its burden in proving that the victims were eligible under the statute.  The SIPC CEO, in a statement, emphasized that it felt its hands were tied because of narrow purpose of the statute -- to ensure custody of customer funds.

WSJ, SEC Loses Bid to Get SIPC to Pay Stanford Ponzi Claims

GAO: Will JOBS Act Increase Number of Reg A Offerings?

The GAO issued a report on Factors That May Affect Trends in Regulation A Offerings (GAO-12-839, Jul 3, 2012), a timely topic since the JOBS Act increased the cap for Reg A offerings from $5 million to $50 million.  This is what the GAO found:

The number of Regulation A offerings filed and qualified (that is, cleared) by the Securities and Exchange Commission (SEC) has declined significantly after peaking in fiscal years 1997 and 1998, respectively. In particular, offerings filed since 1997 decreased from 116 in 1997 to 19 in 2011. Similarly, the number of qualified offerings dropped from 57 in 1998 to 1 in 2011. Securities attorneys GAO interviewed suggested that the decrease in filings after 1997 could be attributed to a number of factors, including the increased attractiveness of Regulation D. The National Securities Markets Improvement Act of 1996 preempted state registration requirements for other categories of securities including certain Regulation D offerings, which are also exempt from SEC registration. In contrast, Regulation A offerings are generally subject to state securities laws and must go through a federal filing and review process. In recent years, businesses have used Regulation D and registered public offerings to a greater extent than Regulation A.

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Multiple factors appear to have influenced the use of Regulation A and views vary on whether raising the offering threshold will increase its use. The factors included the type of investors businesses sought to attract, the process of filing the offering with SEC, state securities laws, and the cost-effectiveness of Regulation A relative to other SEC exemptions. For example, identifying and addressing individual state’s securities registration requirements can be both costly and time-consuming for small businesses, according to research, an organization that advocates for small businesses, and securities attorneys that GAO interviewed. Additionally, another SEC exemption is viewed by securities attorneys that GAO met with as more cost-effective for small businesses. For example, through certain Regulation D filings small businesses can raise equity capital without registering securities in individual states, as long as other requirements are met. State securities administrators, a small business advocate, and securities attorneys with whom GAO met had mixed views on whether the higher maximum offering amount ($50 million) under the JOBS Act would lead to increased use of Regulation A. For example, some thought that the higher threshold could encourage greater use of Regulation A, while others told us that many of the factors that have deterred its use in the past likely will continue to make other options more attractive.

 

SEC Will Take Up JOBS Act Changes to Rules 506 and 144A

At its next Open Meeting on August 22, the SEC will consider rules to eliminate the prohibition against general solicitation and general advertising in Rule 506 and Rule 144A offerings, as mandated by the JOBS Act.

Other items include:

• whether to adopt rules regarding disclosure and reporting obligations with respect to the use of conflict minerals to implement the requirements of Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
• whether to adopt rules regarding disclosure and reporting obligations with respect to payments to governments made by resource extraction issuers to implement the requirements of Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

FINRA Launches Pilot Program for Large Arbitration Cases

FINRA announced the launch of a pilot program specifically designed for large arbitration cases involving claims of $10 million or more. The program enables parties to customize the administrative process to better suit special needs of a larger case and allows them to bypass certain FINRA arbitration rules. Participation in the pilot program, which began today, is voluntary and open to all cases; but in order to be eligible, all parties will be required to pay for any additional costs of the program and must be represented by counsel.

FINRA gives some examples how parties may customize the process:

have additional control over the method of arbitrator appointment and the qualifications of arbitrators;
hire non-FINRA arbitrators for their case;
develop their own procedures for exchanging information prior to the hearing;
have expanded discovery options such as depositions and interrogatories; and
choose from a wider selection of facilities.