Corporate & Financial Weekly Digest : Corporate Finance Lawyers & Attorneys for Legal Developments in Business & Financial Services

Co-authored by James B. Anderson

On May 19, the Securities and Exchange Commission published a notice soliciting comments on amendments to NASDAQ’s Listing Rules. NASDAQ filed the rule change with the SEC on May 14 and has designated the proposed rule change as constituting a non-controversial rule change, which renders the proposal effective upon filing with the SEC.

Proposed Amendments

The NASDAQ Listing Rules require that a listed company notify NASDAQ when an executive officer of such company becomes aware of any material noncompliance with NASDAQ’s corporate governance requirements contained in the Rule 5600 series. According to the SEC release, NASDAQ has consistently interpreted this notification requirement such that any noncompliance with the corporate governance requirements contained in the Rule 5600 series would be considered material. The proposed amendment to Rule 5625 would clarify this interpretation by NASDAQ by requiring notification of any noncompliance. The proposed amendments would also make conforming changes to Rule 5615(a)(3) and IM-5615-3, which, among other things, require a foreign private issuer to provide notice of noncompliance, and to Rule 5250, which cross references the requirement to provide notice of noncompliance.

Comments should be submitted within 21 days after publication in the Federal Register.

Click here for the full text of the proposed amendments.

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Co-authored by James B. Anderson

On May 21, the Securities and Exchange Commission’s Chief Accountant, James Kroeker, testified on behalf of the SEC before the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises of the U.S. House Committee on Financial Services. Mr. Kroeker discussed the status of the following accounting and auditing standards matters the SEC is working on with the Financial Accounting Standards Board (FASB) and the Public Company Accounting Oversight Board (PCAOB).

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Co-authored by Louis Froelich

The Financial Industry Regulatory Authority and the Depository Trust & Clearing Corporation (DTCC) are establishing a program that will provide FINRA staff with direct and routine access to position reports and similar information that DTCC (and its affiliates and subsidiaries) provides to its participants. Under the arrangement, FINRA staff may make specific information requests regarding a firm that is both a FINRA member firm and a DTCC participant. FINRA and DTCC are planning to develop an automated process for the exchange of such information. Although FINRA currently has access to this information from its member firms, it believes that direct access from DTCC will provide more timely information with greater efficiency.

Click here to read the FINRA Information Notice.

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Co-authored by Louis Froelich

The Financial Industry Regulatory Authority is seeking comment on a proposal to expand its registration requirements to include as qualified and registered persons certain “back-office” operations personnel of a member firm. Accordingly, FINRA is proposing a new registration category for “Operations Professionals,” which generally would include those persons who have decision-making and/or oversight authority over certain “covered functions” as specified in the proposed rule, such as activities relating to sales and trading support and the handling of customer assets. In addition to the licensing and exam requirements, FINRA also is proposing a continuing education requirement for such persons. FINRA believes these measures will enhance the regulatory structure surrounding a member firm’s back-office operations and will help ensure investor protection mechanisms are in place in all areas of a member firm’s business that could harm a customer, a firm, the integrity of the marketplace or the public. Comments are due to FINRA by July 12.

Click here to read FINRA Regulatory Notice 10-25.

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Co-authored by Jessica M. Garrett

Judge John Koeltl in the U.S. District Court for the Southern District of New York recently denied a motion to dismiss a securities class action arising, in part, from the Lehman Brothers bankruptcy filing.

On July 9, 2008, JA Solar Holdings Co., Ltd., a China-based manufacturer of high-performance solar cells, purchased a $100 million note issued by Lehman Brothers Treasury Co. B.V. (Lehman Treasury), a subsidiary of Lehman Brothers Holdings, Inc. (Lehman Brothers). According to the complaint, the note was supposed to have 100% principal protection and was guaranteed by Lehman Brothers.

Lehman Brothers filed for bankruptcy on September 15, 2008, prior to the note’s maturity date, and Lehman Treasury subsequently failed to pay the note when it came due on October 9, 2008. On November 12, 2008, JA Solar announced that it had recorded a $100 million impairment charge on the value of the note. That day, JA Solar’s stock price declined by 28%.

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Co-authored by Jessica M. Garrett

Three attorneys were recently sanctioned under the Private Securities Litigation Reform Act of 1995 (PSLRA). The PSLRA requires, among other things, that at the conclusion of a securities litigation, courts must determine whether the parties complied with Rule 11 of the Federal Rules of Civil Procedure, and, if Rule 11 has been violated, impose mandatory sanctions. Further, the PSLRA creates a presumption that an award of attorneys’ fees and costs is the most appropriate sanction.

In general, Rule 11 requires attorneys to certify that information contained in a pleading or other paper is accurate, is supported by evidence and the law, and is not being presented for an improper purpose.

The complaint at issue alleged fraud based on a series of false and misleading statements concerning Australia and New Zealand Banking Group Limited’s financial results and future performance. The allegations in the original complaint were made upon information and belief, and were based upon plaintiffs’ attorneys’ analysis of publicly available news articles and analyst reports. Following submission of the original complaint, a lead plaintiff for the class was appointed, who subsequently filed an amended complaint. The amended complaint abandoned certain allegations contained in the original complaint and identified new misleading statements.

The court found that the original complaint violated Rule 11 because one paragraph containing material allegations central to the viability of the entire pleading was “utterly lacking in [evidentiary] support.”

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Co-authored by David J. Gonen

On Monday, the Supreme Court unanimously ruled that the National Football League’s collective licensing of team logos should be subject to scrutiny under the antitrust laws. This decision has potentially important implications for parties to joint ventures, IP licensing consortia, and other entities that involve collaboration among competitors or industry participants.

The NFL’s 32 teams market their intellectual property through a joint venture called NFL Properties. The joint venture acts as a single licensing agent for all 32 NFL teams. For years, NFL Properties granted nonexclusive licenses to a number of competing apparel manufacturers, who incorporated team logos into fan apparel. In 2000, NFL Properties changed its policy and granted Reebok a 10-year exclusive license to sell trademarked headwear for all 32 teams. American Needle, a licensee whose agreement with NFL Properties was not renewed when Reebok received the exclusive license, sued, alleging that the agreement between the NFL, its teams, NFL Properties, and Reebok constituted a restraint of trade that violated Section 1 the Sherman Act.

The NFL defendants argued that Section 1 of the Sherman Act did not apply to them because NFL Properties was a single entity and Section 1 only applies to conduct involving multiple parties. They argued that under Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 771 (1984), they were incapable of conspiring with one another in violation of Section 1 because they were a single economic enterprise, at least with respect to the challenged conduct. In Copperweld, the Court held that the coordinated activity of a parent corporation and its wholly owned subsidiary must be viewed as that of a single enterprise for purposes of Section 1. The Court this week declined to extend Copperweld protection to the NFL because “[w]hen each NFL team licenses its intellectual property, it is not pursuing the common interests of the whole league but is instead pursuing interests of each corporation itself.” The Court’s ruling only addresses whether the joint licensing is covered by Section 1 of the Sherman Act. It does not address whether the license is legal. The case will now return to the district court, where American Needle must prove that the licensing practice unreasonably harms competition.

The ruling makes it clear that joint ventures comprising separate economic actors will not enjoy blanket immunity and instead will be analyzed according to how their collective actions affect competition. (Am. Needle, Inc. v. NFL, No. 08-661, Slip Op. (May 24, 2010))

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Co-authored by J. Bradley Clair

On May 17, the U.S. Department of Labor delivered a draft of the Unemployment Compensation Act of 2010 to Congress. The Act is designed to help states fight employer fraud that results in payments of excess unemployment benefits. The Act would permit states to deposit up to 5% of recovered unemployment compensation overpayments in a fund from which money may be withdrawn to “deter, detect and collect” erroneous payments to individuals, the misclassification of employees as independent contactors, or other violations of state law relating to employer fraud or evasion of contributions. States would also be required to assess a penalty of at least 15% of the amount of the erroneous payment that resulted from claimant fraud. When announcing the draft, Secretary of Labor Hilda Solis stated, “The Unemployment Compensation Integrity Act would give states the additional resources and tools they need to guarantee that only those who are eligible for benefits receive them and employers who defraud the system pay their fair share of taxes.”

To read the text of the draft, click here.

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On May 20, the UK Financial Services Authority (FSA) announced that it had fined Simon Eagle £2.8 million (approximately $4 million) and prohibited him from working in financial services as a result of the deliberate market abuse scheme he had carried out in 2003-2004. The fine, made up of a penalty of £1.5 million (approximately $2.2 million) and disgorgement of profits of £1.8 million (approximately $2.6 million), is the largest fine ever imposed by the FSA on an individual.

Mr. Eagle acquired SP Bell Ltd (SPB), an agency stockbroker, in May 2003 and became its chief executive. Between July 2003 and May 2004 he carried out a complex and prolonged scheme that ramped up the share price of Fundamental-E Investments (FEI) for his own benefit at the expense of other FEI investors and misusing accounts of SPB clients.

This case is linked to the fines totalling £4.25 million (approximately $6.2 million) imposed on Winterflood Securities Limited and two of its traders (as reported in the April 3, 2009, edition of Corporate and Financial Weekly Digest and confirmed on April 22, 2010, after an appeal to the Court of Appeal) for their role in misuse of rollovers and delayed rollovers that created a false market for FEI shares and misleading the market.

FSA Director of Enforcement and Financial Crime Margaret Cole said: “This scheme was rotten throughout and at the core was Simon Eagle. He showed a breathtaking disregard for his clients, for his duty as an approved person and chief executive and for the effect of his scheme on markets. He has played procedural games in an attempt to avoid being held accountable for his actions and this tough action shows that we are determined to keep dishonest cheats, like Simon Eagle, out of financial services.”

To read more about Simon Eagle, click here.
To read more about Winterflood, click here.

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On May 25, the UK Financial Services Authority (FSA) announced that it had prohibited John White, a former employee of Seymour Pierce Limited, from working in financial services for committing fraud.

As reported in the October 16, 2009, edition of Corporate and Financial Weekly Digest, the FSA fined Seymour Pierce £154,000 (approximately $222,000) for failing to establish effective controls to prevent an employee committing fraud; Mr. White was that employee.

FSA Director of Enforcement and Financial Crime Margaret Cole said: “We expect people who work in the financial services industry to behave with honesty and integrity, yet White’s conduct was anything but. As this case demonstrates, we are committed to deterring behaviour of this kind by punishing anyone found to have committed such misconduct.”

Read more.

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The UK tax authority, Her Majesty’s Revenue and Customs (HMRC) has issued its new Offshore Funds Practice Manual. This sets out official guidance as to which funds will be treated as “offshore funds” for UK tax purposes and details of HMRC’s approach as to how offshore funds will be treated. The redemption or sale of an interest in an offshore fund by a UK investor is treated as income, rather than as a capital disposal. This means that, for example, UK personal investors would be charged income tax (at rates of up to 50%) rather than capital gains tax (at a flat rate of 18%) on a redemption or sale of their interest in the fund.

The most significant changes are that:

1. A fund will be able to avoid being treated as an offshore fund for tax purposes if it becomes a “reporting fund”. A “reporting fund” will be obliged to report all of its income to HMRC, and any UK investors will be taxed on their share of that income, regardless of whether or not they have actually received this income. Previously, a fund needed to actually distribute at least 85% of its income to investors in order to avoid offshore fund treatment.
2. There are significant changes to the definition of an offshore fund. A fund need no longer be a “collective investment scheme” within the UK Financial Services and Markets Act. Instead, subject to certain exceptions, it will be treated as an offshore fund if it has certain characteristics. These are that (i) the fund is not a UK tax resident; (ii) the fund enables investors to take part in any benefit arising from the acquisition, holding, management or disposal of assets; (iii) the investors do not have day-to-day control of the management of the assets; and (iv) a reasonable investor would expect to be able to realize his investment based entirely or almost entirely by reference to the net asset value of the assets under management or to any index.

The new Offshore Funds Practice Manual sets out in some detail how HMRC intends to apply these new rules.

Read more.

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Co-authored by Jonathan D. Weiner

The Securities and Exchange Commission recently published the Final Report from its Forum on Small Business Capital Formation, held in November 2009. The Small Business Investment Incentive Act of 1980 requires the SEC to host an annual forum that focuses on the capital formation concerns of small businesses. The purposes of the forum are to provide a platform for small business to highlight perceived unnecessary impediments in the capital raising process and to develop recommendations for government and private action to improve the environment for small business capital formation. Participants in the forum, consisting of members of various business and professional organizations, developed and ranked 26 securities law recommendations, including the following:

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Co-authored by Joshua A. Penner

The Commodity Futures Trading Commission and Securities and Exchange Commission have announced that the first meeting of the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues will be held on Monday, May 24.

The Joint Committee will discuss the preliminary findings of the staffs of the CFTC and SEC related to the unusual market events of May 6.

The meeting will be streamed live on the Internet at www.sec.gov.
The CFTC press release regarding the meeting can be found here.

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Co-authored by Gregory C. Johnson

The U.S. Court of Appeals for the Fifth Circuit affirmed a damages award levied against an education company that defamed its competitor by making comments about the competitor’s business prospects to potential customers.

The College Network, Inc. (TCN), which sells study guides to nursing students, told about 40 sales agents during a 2006 regional training session that there was no need to worry about smaller competitor Moore Educational Publishers, Inc. (MEP), because that firm was “out of business” or was “going out of business.” A TCN regional director encouraged agents to repeat these statements to potential customers to secure sales. In a subsequent lawsuit, MEP asserted a defamation claim against TCN predicated on the statements, and the jury—among other things—found the statements were defamatory and awarded $49,386 in reputational damages.

TCN appealed, arguing that there was insufficient evidence to award MEP reputational damages. The court rejected TCN’s argument, however, as evidence introduced at trial showed that several of MEP’s potential customers had declined purchases based on their perception that the company was failing, and that a correlation existed between the timing of TCN’s statements and an unexplained drop in MEP’s sales. This evidence sufficiently connected the defamatory statements to reputational harm to MEP and supported the jury’s verdict. (College Network Inc. v. Moore Educational Pub. Inc., 2010 WL 1923763 (5th Cir. May 12, 2010))

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Co-authored by Gregory C. Johnson

An aircraft seller’s fraud claims against a manufacturer were dismissed after a federal court in Connecticut ruled that the seller did not reasonably rely on a “target” delivery date and caused its own injuries by entering restrictive resale contracts.

Aviamax Aviation Ltd. agreed to purchase an airplane from Bombadier Aerospace Corp. and had also contracted to sell the plane to a third party, who had agreed to accept delivery by any date. After substantial delays, Bombadier, in an amended agreement, committed to a “target date” of August 30, 2008, spurring Aviamax to cancel the original resale contract and execute a more lucrative deal with a prospective customer that hinged on timely delivery. After further delays scuttled this second deal, and a third, Aviamax sued Bombadier for fraud and negligent misrepresentation, asserting that Bombadier lied about its ability to meet the delivery schedule.

The U.S. District Court for the District of Connecticut dismissed Aviamax’s claims. The court held that the “target date” in the amended agreement, as well as other provisions that governed other possible delays, demonstrated that Aviamax could not reasonably rely on the delivery schedule in the amended contract. Additionally, the court held that Aviamax caused its own injuries by canceling the original “no-deadline” deal and entering the subsequent contracts, which might have been more lucrative but which involved hard deadlines that Aviamax could not reasonably expect to meet. (Aviamax Aviation Ltd. v. Bombardier Aerospace Corp., 2010 WL 1882316 (D. Conn. May 10, 2010))

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Co-authored by Gary W. Howell

Employers sponsoring group health plans should begin to focus on plan amendments that may be required in the “near term” under the recently adopted health care reform act, known as the Patient Protection and Affordable Care Act, as amended (PPACA).

Unlike PPACA’s numerous and complicated rules, incentives, subsidies, penalties and effective dates applicable to the health care industry, insurers, employers and individual citizens, the requirements for making near-term amendments to employer-sponsored group health plans are limited in number and easily understood.

Here is a list of the most important requirements that become effective with respect to group health plans (both insured and self-insured) for plan years beginning on and after September 23 (section numbers below refer to applicable sections of PPACA):

1. the elimination of pre-existing condition limitations for participants under age 19 (section 1255);
2. the elimination of lifetime limits on the dollar value of “essential health benefits” (section 2711);
3. regulated annual limitations on the dollar value of essential health benefits (section 2711);
4. no rescission or cancellation of coverage, except for fraud or misrepresentation (section 2712);
5. designated preventive care services and immunizations must be provided, with no cost-sharing with participants (section 2713);
6. dependent coverage must be extended to adult children until age 26 (section 2714);
7. participants must be notified of material changes in a group health plan at least 60 days prior to the effective date of the change (section 2715);
8. rules restricting discrimination in eligibility and coverage in favor of “highly compensated employees”, currently applicable only to self-insured plans, are to be extended to insured plans (section 2716);
9. new procedures for appealing denied claims will provide for an external review process (section 2719);
10. a patient’s “bill of rights” will remove certain restrictions on access to primary care providers, emergency services, pediatric specialists and obstetrical and gynecological care (section 2719A);
11. W-2s for 2011 must show the cost of health coverage (section 1514); and
12. over-the-counter medicines cannot be reimbursed by a flexible spending account unless prescribed by a doctor (section 9003).

Some of the above changes are optional for “grandfathered” plans (i.e., plans in existence on March 23) (section 1251).

The list is finite, but so is the time period for making these changes. Plan Administrators should begin to review their plan documents, noting where changes will be required, and then begin discussions with their insurers, third party administrators and counsel to ensure a timely and coordinated implementation of these changes.

PPACA may be found here.

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As a result of votes on May 17 and May 18, respectively, of the European Parliament’s Economic and Monetary Affairs Committee (ECON) and European finance ministers at the meeting of the Economic and Financial Affairs Council (ECOFIN), there are now Parliament and Council draft texts of the Alternative Investment Fund Managers (AIFM) Directive. These competing texts will serve as the basis for negotiations at a series of “trilogue” meetings, which will take place starting shortly between representatives of the Parliament, Council and European Commission. Once a compromise text is agreed and approved by ECOFIN, it will be sent for approval by a plenary session of the Parliament. At present, the target date for the plenary vote is July 6. The provisions of the Directive when formally approved will then be implemented by individual EU member states and will come into force in July 2012 or later.

Among the areas on which there is substantial divergence between the ECON and ECOFIN texts are the terms under which funds and managers established outside the EU can market to EU investors. Accordingly, until the trilogue process is completed and the final text of the Directive has been published, it will not be possible to know the shape of the regulatory regime that will begin to apply from 2012.

Read more.

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