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

On June 17, the Securities and Exchange Commission announced that the exchanges and the Financial Industry Regulatory Authority filed proposed rules to implement a series of thresholds for breaking erroneous trades. Currently, the exchanges and Electronic Communications Networks all treat clearly erroneous trades differently with respect to thresholds and timing for reporting such trades. The current proposal comes in response to the May 6 market disruption and complements the SEC’s recent approval of stock-by-stock circuit breakers. “Establishing clear and transparent standards for breaking trades helps provide certainty in advance as to which trades will be broken, and allows market participants to better manage their risks,” said SEC Chairman Mary Schapiro.

Under the proposed rules for stocks in the S&P 500 Index, stock trades would be broken if the transaction price falls too far below the last sale price: 

• For stocks priced $25 or less, trades would be broken if the trades are at least 10% away from the circuit breaker trigger price.
• For stocks priced $25 to $50, trades would be broken if the trades are 5% away from the circuit breaker trigger price.
• For stocks priced more than $50, trades would be broken if the trades are 3% away from the circuit breaker trigger price.

For all stocks not included in the S&P 500 Index, stock trades would be broken at specified levels for events involving multiple stocks depending on how many stocks are involved: 

• For events involving between 5 and 20 stocks, trades would be broken that are at least 10% away from the last sale price.
• For events involving more than 20 stocks, trades would be broken that are at least 30% away from the last sale price.

The proposed rules, which are proposed to be in effect on a pilot basis until December 10, will be published in the Federal Register for a 21-day public comment period.

To read the SEC’s order addressed to FINRA requesting comment, click here.

See also the June 11 edition of Corporate and Financial Weekly Digest discussing the SEC’s approval of rules requiring the exchanges and FINRA to implement stock-by-stock circuit breakers.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Joshua A. Penner

In a letter to the Chicago Mercantile Exchange dated June 3, the Commodity Futures Trading Commission has provided guidance on the potential impact of newly adopted Securities and Exchange Commission Rule 22e-3 on the investment of customer segregated funds, by futures commission merchants (FCMs) and derivatives clearing organizations (DCOs), in money-market mutual funds (MMMFs) under CFTC Rule 1.25. SEC Rule 22e-3 authorizes MMMFs to suspend redemptions if necessary to facilitate an orderly liquidation of the fund.

Rule 1.25 generally permits customer segregated funds to be invested in an MMMF, subject to the requirement that any such MMMF be “legally obligated to redeem an interest and to make payment in satisfaction thereof by the business day following a redemption request.” Among the exceptions to this next-day redemption requirement is the existence of “emergency conditions,” as “set forth in Section 22(e) of the Investment Company Act of 1940.” Section 22(e) allows the SEC to “by rule or regulation determine the conditions under which (i) trading shall be deemed to be restricted and (ii) an emergency shall be deemed to exist.…”

The CFTC has determined that SEC Rule 22e-3 qualifies as a “rule or regulation” under Section 22(e) describing when an emergency condition will be deemed to exist. Consequently, FCMs and DCOs may continue to invest customer funds in an MMMF that otherwise qualifies as a permitted investment under Rule 1.25, notwithstanding the right of the MMMF to suspend redemptions to facilitate an orderly liquidation of the fund.

The CFTC Staff Letter providing the interpretation can be found here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Joshua A. Penner

The Commodity Futures Trading Commission, acting pursuant to CFTC Regulation 30.10, has granted an exemption from certain of the CFTC’s foreign futures and options regulations to firms designated by Bursa Malaysia Derivatives Berhad (Bursa Derivatives) who offer and sell foreign futures and options on futures contracts to customers located in the United States.

In granting the exemption, the CFTC determined that the regulatory framework established by Malaysian law and the rules of Bursa Derivatives is comparable to that imposed by the Commodity Exchange Act and CFTC regulations. The exemption is limited to brokerage activities undertaken on behalf of customers located in the United States with respect to transactions on or subject to the rules of Bursa Derivatives for products that customers located in the United States may trade, and is conditioned on an eligible firm making and maintaining certain representations to the National Futures Association relating to compliance with applicable provisions of Malaysian law and the rules of Bursa Derivatives.

The Federal Register notice of the order can be found here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Jessica M. Garrett

Hampton Porter Investment Bankers, LLC, was a registered securities broker-dealer whose owners and top-level managers were found to have engaged in a “pump and dump” scheme. According to the U.S. Court of Appeals for the Ninth Circuit, certain publicly traded companies granted Hampton Porter (or its owners) large blocks of free, or deeply discounted, stock. In return, Hampton Porter drove up the price of these thinly traded stocks by pressuring clients into purchasing shares, by discouraging clients from selling shares, and by refusing in some instances to execute clients’ sales orders. In the meantime, Hampton Porter sold its shares at artificially inflated prices.

The government indicted Hampton Porter’s owners, managers and senior brokers, alleging that each participated in a securities fraud conspiracy. Hampton Porter’s owners and managers pleaded guilty, but the senior brokers, including defendants Bryan Laurienti, Curtiss Parker, Donald Samaria, David Montesano, and Michael Losse, pleaded not guilty. The senior brokers conceded that a fraudulent scheme existed but argued that they had not joined the conspiracy. The jury acquitted Mr. Losse, but found the remaining brokers guilty on all counts. The Ninth Circuit affirmed defendants’ convictions but vacated their sentences and remanded for further proceedings due to technical errors in the trial court’s application of applicable sentencing guidelines.

While the Ninth Circuit addressed a number of defenses to the government’s claims, the court’s discussion on the duties of brokers to disclose bonus commissions to their clients is particularly noteworthy.

Count One of the indictment alleged that defendants conspired to commit securities fraud in violation of 18 U.S.C. Section 371, by individually acting, or aiding and abetting an act, in furtherance of the fraudulent scheme in connection with client purchases of “house stocks.” Specifically, the government alleged that Hampton Porter failed to disclose to its customers that company brokers received “bonus commissions” when a client purchased shares of four targeted stocks, referred to by defendants as “house stocks.” These bonus commissions were potentially many times larger than the ordinary commission (which was disclosed to customers) that the brokers would be paid for the sale of “non-house stocks.” Further, the brokers could lose those their bonus commissions if clients sold their “house stocks.”

To prove the conspiracy count, the government had to show that a conspiracy existed, that a particular defendant knew the purposes of the conspiracy and joined the conspiracy, and that some member of the conspiracy (including the owners and managers) performed an overt act in furtherance of the conspiracy. The court found that the undisclosed bonus commissions—even if not independent criminal conduct—were nevertheless sufficient circumstantial evidence of defendants’ agreement to join the conspiracy.

In affirming the convictions, the court held that a broker has a duty to disclose material information about a stock purchase if the broker and client have a fiduciary relationship or a similar relationship of trust and confidence. Notably, the court strongly suggested that it might uphold criminal liability even in the absence of a trust relationship where a defendant fails to disclose material information about bonus commissions (e.g., where, as here, a defendant discloses the ordinary commission applicable to most stocks, but not the bonus commission applicable to four “house stocks”). (U.S. v. Laurienti, 2010 WL 2473573 (C.A.9 (Cal.) June 16, 2010))

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Jessica M. Garrett

The U.S. District Court for the Southern District of New York recently denied defendant Nicolette Loisel’s motion to dismiss a Securities and Exchange Commission complaint against her and four co-defendants, which alleged, among other things, violations of Section 10(b) of the Securities Exchange Act and Rule 10(b)(5), promulgated thereunder.

In its complaint, the Securities and Exchange Commission alleged that Ms. Loisel and co-defendant, Roger Shoss, were part of a “complex securities fraud ring” that carried out a scheme between 2003 and 2007, in which nearly two dozen defunct public corporations were “hijacked.” The scheme included a series of maneuvers to bring void or inactive corporations back into existence, such as changing the corporate names and obtaining new Committee on Uniform Securities Identification Procedures (CUSIP) numbers and ticker symbols for the corporations. The SEC alleged that defendants made fraudulent statements to various secretaries of state, the Nasdaq Corporate Data Operations and the Standard & Poors CUSIP Bureau, and improperly utilized certain exemptions from securities registration requirements. The defendants allegedly caused the “hijacked” corporations to offer and improperly sell unregistered shares into the market.

In moving to dismiss the SEC’s complaint, Ms. Loisel argued that the SEC had not pled its claim of securities fraud with the heightened level of particularity required under Federal Rule of Civil Procedure 9(b), which requires that a complaint (1) specify the statements that the plaintiff contends were fraudulent; (2) identify the speaker; (3) state where and when the statements were made; and (4) explain why the statements were fraudulent.

The court found that the complaint “amply complies” with the heightened pleading standard required for fraud claims. Specifically, the court found that the following allegations sufficiently particularized the SEC’s fraud charges: (1) Ms. Loisel took part in a fraudulent scheme in which her role included making false and fraudulent statements in Transfer Agent Verification forms, in opinion letters, and in documents sent to the CUSIP Bureau and Nasdaq Reorganization; (2) Ms. Loisel opined that corporations were exempt from registration requirements of the securities laws based on information that she knew to be false; (3) Ms. Loisel sought to change CUSIP identification numbers and stock tickers in order to pass off private corporations as reactivated public corporations in an effort to allow the sale of unregistered stock; and (4) Ms. Loisel knew that a representation in “Rule 504 opinion letters”—that all investors of the relevant securities resided in Texas—was false at the time she made the representation.

The court rejected the argument that the SEC’s allegations were insufficient for failing to identify the date of the alleged misrepresentations, instead finding that the above allegations provided “detailed notice of the charges leveled against [Ms. Loisel].” (S.E.C. v. Boock, 2010 WL 2398915 (S.D.N.Y. June 15, 2010))

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Christina Grigorian

On June 21, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation (collectively, the Banking Agencies) issued final guidance regarding incentive compensation arrangements at financial organizations that are intended to be consistent with safe and sound practices (Guidance). The Guidance applies to all the banking organizations supervised by the Banking Agencies, including national banks; state member banks; state nonmember banks; savings associations; U.S. bank holding companies; savings and loan holding companies; the U.S. operations of foreign banks with a branch, agency or commercial lending company in the United States; and Edge and agreement corporations (each, a Covered Institution). With regard to scope within each Covered Institution, the Guidance applies to senior executives as well as employees who, either individually or as part of a group, have the ability to expose the banking organization to material amounts of risk.

The Guidance is the result of the Federal Reserve’s analysis of incentive compensation practices at large, complex banking organizations. In conducting this review, the Federal Reserve noted the following deficient areas: (1) many firms need better ways to identify employees that expose banking organizations to material risk; (2) many firms are not fully capturing the risks involved in incentive compensation; (3) many firms are using deferral arrangements to adjust for risk, but are not tailoring such deferrals according to the type and duration of the risk; and (4) many firms do not have adequate mechanisms to evaluate whether established practices are successful in balancing risk.

Three key principles are identified in the Guidance: (1) incentive compensation arrangements at a banking organization should provide employees incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risk; (2) these arrangements should be compatible with effective controls and risk management; and (3) these arrangements should be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

The Guidance also states that the Federal Reserve will prepare a report in consultation with the other Banking Agencies at the conclusion of 2010 on trends and developments in compensation practices at banking organizations.

For more information, click here.

• Email This
• Print
• Comments
• Trackbacks

Last week, through negotiations among the House of Representatives and Senate conferees on the financial services reform legislation, agreement was reached on the scope of a proposed insurance office within the U.S. Treasury Department to be led by a newly appointed Director.

The Senate Banking Committee, in its press release on progress on the draft legislation, reported that the new office would be called the Federal Insurance Office, the name selected in the House version of the measure. This office would monitor the insurance industry, undertake a study on ways to modernize insurance regulation and provide recommendations to Congress. The office would also examine the extent to which traditionally underserved communities, minorities, and low- and moderate-income persons have access to affordable insurance products. The office would have no authority over health insurance.

In the international arena, the new Federal Insurance Office would have the power to pre-empt state insurance measures that are found to discriminate against non-U.S. insurers subject to certain bilateral or multilateral agreements between the U.S. and foreign governments or regulatory authorities regarding prudential matters. Such a finding would be reported to certain House and Senate Committees, and the relevant state would also be notified of the potential pre-emption and offered the opportunity to comment.

One of the most controversial sections of the original bill, which has been opposed by state insurance regulators, authorized the new Federal Insurance Office to recommend that an insurer and its affiliates be designated an entity that could pose a systemic risk and, accordingly, subject to regulation as a non-bank financial company by the Federal Reserve. It is unclear at this time whether that section will undergo further amendment in the negotiations among the congressional conferees.

For additional information and updates on the financial reform bill conference process, click here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Daniel B. Lange and Michael R. Durnwald

Certain provisions of the Patient Protection and Affordable Care Act (PPACA), as amended by the Health Care and Education Reconciliation Act of 2010, do not apply to “grandfathered” group health plans, or have a delayed effective date for such plans. A grandfathered group plan is generally a plan in which an individual was enrolled on March 23, 2010 (the date of PPACA’s enactment). However, PPACA did not offer any insight on what would cause a plan to lose its grandfathered status, leading many employers to be hesitant to make any changes to their plans for fear of losing such status.

On June 14, the federal government issued guidance (Guidance) on grandfathered plan status, which, among other things, provides the reasons a plan in existence on March 23, 2010, will nonetheless lose its grandfathered status. Specifically, this status may be lost if:

• the plan eliminates all or substantially all benefits to diagnose or treat a particular condition;
• the plan increases a percentage cost-sharing requirement (e.g., coinsurance requirement);
• the plan increases a fixed-amount cost sharing requirement (e.g., deductible, out-of-pocket limit) other than a co-pay more than 15 percentage points over the medical inflation rate (e.g., a 36% deductible increase if medical inflation is 20%); 
• the plan increases a fixed-amount co-pay more than certain thresholds over the medical inflation rate;
• the employer decreases its contribution rate more than five percentage points below its contribution rate as of March 23, 2010;
• the plan adds or decreases certain annual or lifetime limits; or
• the plan is not a collectively-bargained plan and enters into a new insurance policy, even if the new policy provides the same coverage and cost-sharing as the old insurance policy (policy renewal is not considered entering into a new policy).

Because the changes above are the only changes that may cause a plan to lose its grandfathered status, a grandfathered plan may generally modify its provisions to comply with federal/state law or voluntarily comply with PPACA, or change its third-party administrator.

In addition, the Guidance imposes disclosure and recordkeeping requirements on a plan in order to maintain its grandfathered status. All plan materials provided to plan participants describing the plan’s benefits must include a statement that the plan is grandfathered and list contact information for questions and complaints (the Guidance provides model language). To comply with the recordkeeping requirement, the plan must maintain records documenting the terms of the plan’s coverage as of March 23, 2010 (as well as any other supporting documentation) and make those records available for examination upon request.

The Guidance can be found here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Steven G. Eckhaus and Evan A. Belosa

Among the myriad provisions of the pending financial reform bill is the creation of a viable whistleblower system under which informants who report securities laws violations to the Securities and Exchange Commission will be provided with monetary rewards. The plan is based in part on the success of the Internal Revenue Service’s similar whistleblower program.

Under proposed Section 922 of the Restoring American Financial Stability Act of 2010 (the Senate Bill), the SEC will be required to pay a reward to individuals who provide “original information” to the SEC that results in monetary sanctions to the violating party exceeding $1 million. The award can range from 10% to 30% of the amount that is recouped, with the actual amount of the award at the discretion of the SEC. Section 922 prohibits the SEC from providing an award to a whistleblower who is convicted of a criminal violation related to the judicial or administrative action for which the whistleblower provided information; who gains the information from a government investigation, report or audit; who fails to submit information to the SEC as required by an SEC rule; or who is an employee of the U.S. Department of Justice or a regulatory agency, a self-regulatory organization, the Public Company Accounting Oversight Board or a law enforcement organization.

The Senate Bill would explicitly provide for whistleblower retaliation protection, so as to prevent employers from firing or otherwise discriminating against those taking advantage of this law. Section 922 creates a prohibition against retaliation and a private right of action for employees who have suffered retaliation.

Section 922 of the Senate Bill closely resembles Section 7203 of the House of Representatives’ earlier Wall Street Reform and Consumer Protection Act of 2009, H.R. 4173 (the House Bill). The key difference, however, is that the Senate Bill provides for a 10% floor on whistleblowing awards, while the House Bill provides for no floor.

Reconciliation of the House and Senate Bills is underway, with debate on these sections scheduled for next week.

The Senate Bill can be accessed here.
HR 4173 can be accessed here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Louis Froelich

The Securities and Exchange Commission has approved amendments relating to the reporting of over-the-counter (OTC) transactions in non-National-Market-System stocks to the OTC Reporting Facility (ORF). Effective November 1, firms must comply with amended rules on applicable trade report modifiers when reporting such transactions. Among other things, the amendments reorganize the format and structure of Financial Industry Regulatory Authority Rule 6622(a) so that it conforms generally to the trade reporting rules of the Alternative Display Facility and Trade Reporting Facilities. Although not yet required under current FINRA Rule 6622(a), firms are already permitted to use certain of the amended trade report modifiers when reporting to the ORF.

Click here to read FINRA Regulatory Notice 10-29.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Louis Froelich

On June 10, the Financial Industry Regulatory Authority began a pilot program in which it will halt trading otherwise than on an exchange with respect to securities included in the S&P 500 Index where the primary listing market has issued a trading pause due to extraordinary market volatility. The pilot program is part of a coordinated effort among FINRA, the Securities and Exchange Commission and other self-regulatory organizations to provide for a coordinated means to address potentially destabilizing market volatility and will end on December 10, 2010. FINRA said that it anticipates these trading-pause rules will soon be expanded to include additional securities, such as exchange-traded funds, within the pilot period.

Click here to read FINRA Regulatory Notice 10-30.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Joshua A. Penner

The Commodity Futures Trading Commission and the Securities and Exchange Commission will hold a joint advisory meeting to discuss emerging regulatory issues. The meeting is open to the public and will be held at 1 p.m. (EDT) on Tuesday, June 22, in the Auditorium, Room L-002, at the SEC’s Washington, D.C., offices at 100 F Street, NE. Representatives from various exchanges and firms will testify on the market events of May 6.

Notice of the meeting can be found here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Joshua A. Penner

The Chicago Mercantile Exchange (CME) has announced new rules that, subject to the CME Clearing House Risk Committee and other approvals, would require customer “cleared over-the-counter (OTC) derivatives” to be held in a separate account. The CME rules implement recent amendments to the Commodity Futures Trading Commission’s Bankruptcy Rules, Part 190, creating a new, separate customer account class for “cleared OTC derivatives.” When the new rules become effective, existing customer positions in cleared OTC derivatives, currently held in CFTC Rule 30.7 secured amount accounts, will be required to be transferred to separate cleared OTC derivative customer accounts. Clearing futures commission merchants (FCMs) will be required to maintain funds for all amounts owed to cleared OTC customers in cleared OTC customer accounts and to prepare daily statements for cleared OTC customers. Clearing FCMs will be required to compute their cleared OTC customer requirement, the funds held in cleared OTC customer accounts and any excess (or deficiency) of funds in cleared OTC customer accounts. The rules will also require clearing FCMs to call for and collect performance bond collateral for positions in cleared OTC derivatives. FCMs will also be required to open new bank and safekeeping accounts for cleared OTC customer assets.

The CME plans to provide clearing firms with testing opportunities for the new cleared OTC derivatives account class in late July. The rules are expected to become effective on September 13.

The CME Advisory Notice can be found here.
 

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Joshua A. Penner

The Commodity Futures Trading Commission has declined to approve a proposed rule amendment by the Options Clearing Corporation (OCC) that would have classified certain foreign currency exchange contracts with a nominal exercise price such as $0.01 as securities options. OCC contended in the submission that, other than the low strike price, the products were essentially the same as the cash-settled, foreign currency options currently cleared by OCC and, therefore, these products should be subject to the exclusive jurisdiction of the Securities and Exchange Commission, be traded on national securities exchanges and treated and cleared as securities options.

The CFTC rejected this analysis, however, and noted that, because the nominal strike price resulted in the products being deep in the money from inception, the option premium would be economically indistinguishable from the value of a futures contract on the underlying asset. The CFTC concluded that products are not bona fide options and therefore are subject to the Commodity Exchange Act and must be traded exclusively on a designated contract market or a derivatives transaction execution facility.

The denial notice from the CFTC can be found here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Joshua A. Penner

The Commodity Futures Trading Commission has requested public comment on a petition for exemptive relief filed by Hard Eight Futures, LLC, a registered commodity trading advisor, pursuant to Section 4(c) of the Commodity Exchange Act (CEA). The requested relief would permit persons qualifying as “eligible contract participants” (ECPs), as defined in Section 1a(12) of the CEA, to trade foreign-listed security index futures contracts on broad-based indices without a prior grant of no-action relief to the listing exchange. Currently, such contracts may only be offered and sold to U.S. persons (including ECPs) after the listing exchange has received no-action relief.

The relief requested in the petition would be limited to indices of which the underlying securities are principally traded on, by or through a non-U.S. market, and would be further conditioned upon the existence of a Memorandum of Understanding between the CFTC and the regulator of the listing exchange. If the petition were granted in its current form, ECPs seeking to rely upon this relief would be required to file a notice containing certain specified information regarding such ECP and the relevant contract to be traded with the CFTC, and the exemption would then take effect 10 business days thereafter (absent CFTC objection).

In its request for comment, the CFTC has raised several questions regarding the petition, including whether additional conditions should be imposed upon the requested relief. Comments must be submitted by July 19.

The CFTC’s request for comment is available here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Joshua A. Penner

The Commodity Futures Trading Commission has issued an exemption, pursuant to Section 4(c) of the Commodity Exchange Act (CEA), which would permit options and futures on ETFs Physical Swiss Gold Shares and ETFs Physical Swiss Silver Shares to be traded and cleared, in the case of options contracts, as options on securities, and in the case of futures contracts, as security futures contracts. The exemption is consistent with prior CFTC action on similar exchange-traded fund products, which have gold and silver, both regulated commodities, as their primary underlying assets, and thus implicate potentially overlapping areas of authority between the CFTC and the Securities and Exchange Commission. In conjunction with the exemption, the CFTC also approved a requested change to the rules of the Options Clearing Corporation (OCC) to permit the OCC to clear these products.

The CFTC press release regarding the exemption and rule change is available here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Gregory C. Johnson

The Securities and Exchange Commission does not have to allege that the chief executive officer (CEO) or the chief financial officer (CFO) of a public company engaged in malfeasance in order for the agency to seek reimbursement to the issuer of bonuses paid to the CEO if wrongful conduct results in a restatement, an Arizona federal court ruled.

The SEC has requested a court order that would direct Maynard Jenkins, former CEO of CSK Auto Corp., to pay back about $4 million in bonuses he received when CSK’s earnings were inflated because of a purported fraud at CSK. Although there were no indications that Mr. Jenkins knew about the fraud, the SEC argued that he was still subject to the reimbursement provisions of Section 304 of the Sarbanes Oxley Act of 2002 (SOX), which provide that CEOs and CFOs must reimburse incentive pay to the issuer if a company restates its earnings because of “material noncompliance of the issuer, as a result of misconduct.”

Jenkins sought dismissal of the SEC request, contending that company officials are only subject to SOX clawback provisions if they personally engaged in wrongdoing. The U.S. District Court for the District of Arizona disagreed, holding that the plain text of the statute showed that Congress wanted to recover bonuses based on a company’s noncompliance with SOX standards, rather than on the wrongdoing of individual officers. However, the District Court narrowed its holding to the pleadings stage of litigation, explaining that defendants may be able to demonstrate that the application of the SOX clawback provisions would be overly punitive in particular circumstances and thus would run afoul of constitutional requirements. (S.E.C. v. Jenkins, 2010 WL 2347020 (D. Ariz. June 9, 2010))

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Gregory C. Johnson

Negotiations over the renewal of an expired contract did not extend the terms of the business relationship between the negotiating parties, a Pennsylvania federal court ruled, thus a “limitation of suit” provision in the expired agreement foreclosed the plaintiff’s contract claims.

Storyville Enterprises in 1996 executed a 10-year franchise agreement with tobacco retailer Tinder Box Intl., Ltd., which required either party to bring a claim “arising out of or under [the] agreement” within one year of its accrual. The contract lapsed in October 2006, but neither party was aware of the expiration until four months later. After negotiations to extend the contract faltered, Tinder Box sued Storyville in November 2007 for breach of contract and other tort claims in U.S. District Court for the Eastern District of Pennsylvania.

Tinder Box argued that its contract claims were timely because post-expiration negotiations had prolonged the terms of the franchise agreement, based on the general principle that the provisions of an expired contract will govern the business relations between two parties if such relations continue. The District Court held that this principle did not apply because the terms of the contract clearly showed that the parties intended for the agreement to last 10 years and for it only to be altered in writing. Accordingly, all claims predicated on the contract were barred by the limitations provision. (Tinder Box Intern., Ltd. v. Patterson, 2010 WL 2302298 (June 7, 2010))

• Email This
• Print
• Comments
• Trackbacks

On June 17, the four federal bank and thrift regulatory agencies announced a proposed change to the Community Reinvestment Act (CRA) regulations to support stabilization of communities affected by high foreclosure levels. The proposed change specifically would encourage depository institutions to support the Neighborhood Stabilization Program (NSP) administered by the U.S. Department of Housing and Urban Development (HUD). Specifically, the agencies propose to revise the term “community development” to include loans, investments and services by financial institutions that support, enable or facilitate projects or activities that meet the criteria described in Section 2301(c)(3) of the Housing and Economic Recovery Act of 2008 (HERA) and are conducted in designated target areas identified in plans approved by HUD under the NSP, established pursuant to the HERA and the American Recovery and Reinvestment Act of 2009. The proposed rule would provide favorable CRA consideration to such activities that, pursuant to the requirements of the program, benefit low-, moderate-, and middle-income individuals and geographies in designated target areas.

Under the NSP, HUD has provided funds to state and local governments and nonprofit organizations for the purchase and redevelopment of abandoned and foreclosed properties. The agencies’ proposal would encourage depository institutions to make loans and investments and provide services to support NSP activities in areas with HUD-approved plans. The proposal would supplement existing CRA consideration for community development activities, including neighborhood stabilization activities. For example, for NSP areas identified in HUD-approved plans, the agencies would provide CRA consideration for activities that benefit individuals with incomes of up to 120% of the area median and geographies with median incomes of up to 120% of the area median. NSP-eligible activities would receive favorable consideration under the new rule only if conducted within two years after the date when NSP program funds are required to be spent.

Comments on the proposed rule must be submitted no later than 30 days from the date of its publication in the Federal Register, which is expected shortly.

Separately, the agencies also announced today they will hold four hearings to consider public comment on all aspects of the CRA regulations during the summer of 2010.

Read more.

• Email This
• Print
• Comments
• Trackbacks

In a speech delivered on June 16, the Chancellor of the Exchequer announced that the UK Government intended to transfer the regulatory functions of the UK Financial Services Authority (FSA) to the Bank of England and certain proposed new regulatory bodies. The FSA will cease to exist in its current form. In its place, the government intends to establish the following new entities between now and the end of 2012:

• Prudential Regulation Authority (PRA)—The PRA, which will be a subsidiary of the Bank of England, will be responsible for the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies. Hector Sants, the current FSA Chief Executive, will become the PRA chief executive and also a deputy governor of the Bank of England.
• Consumer Protection and Markets Authority (CPMA)—The CPMA will regulate firms providing financial services to consumers. It will also be responsible for retail and wholesale financial services conduct of business. 
• Financial Policy Committee (FPC)—The FPC will be a committee of the Bank of England. It will have responsibility for macro issues potentially affecting economic and financial stability. An interim FPC will be established during the course of 2010. The Governor of the Bank of England will chair the FPC, and its members will include the PRA chief executive and the CPMA chair.
• Economic Crime Agency (ECA)—The ECA will be created to prosecute economic and financial crimes. This is currently in the hands of a number of agencies, including the FSA, the Serious Fraud Office, the Office of Fair Trading and the Serious Organised Crime Agency.

A consultation document providing details of the Government’s proposals will be issued shortly.

Read more.

• Email This
• Print
• Comments
• Trackbacks

On June 14, the European Commission published a consultation on Derivatives and Market Infrastructures. This follows on from its October communication on future policy actions to ensure efficient, safe and sound derivatives markets (as reported in the October 23, 2009, edition of Corporate and Financial Weekly Digest).

The consultation addresses a number of topics, including: clearing and risk mitigation of over-the-counter derivatives contracts; requirements for central counterparties (CCPs); interoperability between CCPs; and reporting obligations and requirements for trade repositories.

The consultation closes on July 10, 2010. The Commission will then prepare a formal legislative proposal, currently scheduled to be published in September.

Read more.

• Email This
• Print
• Comments
• Trackbacks

On June 14, the European Commission published a consultation on short selling, which sets out options being considered by the Commission for a pan-European regime for the regulation of short selling.

The consultation focuses on five key areas: scope; transparency; risks of uncovered short sales; emergency powers for national regulatory authorities; and potential exemptions.

The consultation closes on July 10, 2010. The Commission will then prepare a formal legislative proposal, currently scheduled to be published in September.

Read more.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by David S. Kravitz

On June 4, the Securities and Exchange Commission’s Division of Corporation Finance added new Compliance and Disclosure Interpretations (C&DIs) and revised or withdrew others.

Included in the SEC’s new C&DIs is the following guidance:

• The new Item 5.07 of Form 8-K requirement to report the number of shareholder votes cast for, against or withheld applies to any matter submitted to a vote of security holders, through the solicitation of proxies or otherwise.
• Although Rule 415(a)(4) permits an issuer to register an “at-the-market” offering of equity securities without identifying an underwriter in its registration statement, the SEC has not changed its interpretation that market makers, specialists or ordinary broker-dealers that purchase registered equity securities as principal from an issuer or sell such equity securities for the issuer as an agent will ordinarily be deemed a statutory underwriter within the meaning of Section 2(a)(11) of the Securities Act of 1933 (Securities Act), even in the absence of any written agreement with the issuer.

• Email This
• Print
• Comments
• Trackbacks

On June 10, the Securities and Exchange Commission announced that it approved rules requiring the exchanges and the Financial Industry Regulatory Authority to implement new stock-by-stock circuit breakers. Under the rules, if a stock in the S&P 500® Index experiences a 10% change in price over the preceding five minutes, trading in such stock will be paused for a five-minute period. The pause is designed to allow the markets to attract new trading interest in the paused stock and provide time for buyers and sellers to trade at rational prices. The SEC anticipates that the exchanges and FINRA will begin implementing the rules as early as June 11.

The rules were first proposed jointly by the exchanges and FINRA in response to the May 6 market plunge, in which severe price volatility led to a large number of trades being executed at prices more than 60% below pre-decline prices. The rules will be in effect on a pilot basis until December 10 and will be limited to stocks in the S&P 500® Index, but SEC Chairman Mary Schapiro “hope[s] to rapidly expand the program to thousands of additional publicly traded companies.” In addition to the new stock-by-stock circuit breaker rules, the SEC is working with the exchanges to consider re-calibrating market-wide circuit breakers currently in place, none of which were triggered on May 6.

To read the SEC’s order addressed to the exchanges, click here.
To read the SEC’s order addressed to FINRA, click here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Christian B. Hennion

The Commodity Futures Trading Commission has published for comment proposed rules requiring a designated contract market (DCM) offering co-location or proximity hosting services to ensure that all market participants have equal access to such services. Under the proposed rules, access to co-location services must be “equitable, open and fair,” and may not be offered on a discriminatory basis to select market participants or select categories of market participants. To this end, the proposed rules would also require that fees charged for co-location services be imposed in a uniform, non-discriminatory manner. “Fees shall not be used as an artificial barrier to access by any market participants.” The proposed rules further provide that a DCM that offers co-location services must disclose monthly to the public on its website the longest, shortest and average latencies for each connectivity option provided by the designated contract market. This latter information would permit a market participant to assess whether incurring the benefit of co-location services is worth the cost.

Comments on the proposed rules must be submitted by July 12.

The CFTC proposal may be accessed here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Brian Schmidt

The U.S. District Court for the District of South Carolina set aside the convictions of two employees of Medical Manager Corporation for conspiracy to commit mail, wire and securities fraud. In the indictment, the government asserted, among other things, that the defendants had conspired to manipulate the company’s revenue and earnings to fraudulently inflate the market price of its stock and to use the fraudulently inflated stock to facilitate the acquisition of certain target companies. After a jury trial in which the defendants were convicted, the defendants moved to set aside the verdict on the ground that the statute of limitations had started to run when a merger that allegedly resulted from the conspiracy was consummated.

The government argued that the statute of limitations had not run because the conspiracy continued as long as the defendants received benefits from it, pointing to the receipt of stock options by the defendants several years after the merger. The district court rejected the government’s argument, holding that the court “cannot accept the de facto position that but for the conspiracy, defendants would not have received stock options.” In so holding, the court pointed out that the company was successful and that employees who were not alleged to be part of the conspiracy also received options. In addition, the court held that the receipt of the options was not evidence of a continuing conspiracy because the government had not introduced any evidence that the value of the stock options had been inflated as a result of the alleged fraud. (United States v. Kang, Crim. No.: 9:05-CR-00928, 2010 U.S. Dist LEXIS 53003 (D.S.C. May 27, 2010))

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Brian Schmidt

The U.S. Court of Appeals for the Second Circuit has affirmed a district court ruling that held that the “plain meaning” of the contract between AT&T Corporation and KATEL Limited Liability Company with respect to the exchange of telephone calls between the United States and Kyrgyzstan did not require exclusivity.

KATEL sued AT&T for, among other things, breach of contract. The two companies had contracted so that KATEL would build and own the necessary infrastructure for the telecommunications traffic in Kyrgyzstan and AT&T would use it for a fee. Although AT&T used KATEL’s service for several years, it switched to another company in Kyrgyzstan several years after the contract was signed. AT&T subsequently stopped using the other company, choosing instead to send the traffic to a third-party carrier who then took care of the routing.

The case turned on the interplay between two contractual provisions: one section in the parties’ agreement required that all communications traffic from AT&T be routed directly on the AT&T-KATEL circuits, unless the direct circuits could not handle the traffic; the other section permitted each company to enter into “similar service agreements with other parties.” KATEL argued that the first provision gave it the exclusive right to handle all AT&T calls to Kyrgyzstan. The district court rejected KATEL’s argument and the Second Circuit affirmed, ruling that KATEL’s interpretation of the first section could not be reconciled with the other terms in the agreement. As the Second Circuit explained, the contractual provision allowing the parties to enter into “similar service agreements with other parties” is inconsistent with an exclusive dealing arrangement. Thus, although the first provision appeared to give KATEL broad rights, because interpreting that provision broadly in light of the plain meaning of the second provision would lead to an “illogical result,” it could not be accepted. (KATEL Ltd. Liab. Co. v. A.T&T. Corp., No. 09-1575-CV, 2010 U.S. App. LEXIS 10806 (2d Cir. May 27, 2010))

• Email This
• Print
• Comments
• Trackbacks

Recent market conditions have contributed to an increase in bargain purchases, such as the acquisition of failed bank assets and liabilities. In general, a bargain purchase occurs when the fair value of the net assets acquired in a business combination exceeds the fair value of the consideration transferred by the acquiring institution. Generally accepted accounting principles (GAAP) require this excess, previously referred to as “negative goodwill,” to be recognized immediately as a gain in earnings, which increases both GAAP equity and regulatory capital.

On June 7, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of Thrift Supervision (collectively, the agencies) issued guidance to address supervisory considerations related to bargain purchase gains (BPGs) and the impact such gains have on the licensing approval process, including certain supervisory and licensing conditions that may be imposed on the acquiring bank. The guidance also highlights the accounting and reporting requirements unique to business combinations resulting in bargain purchase gains and FDIC- and NCUA-assisted acquisitions of failed institutions (assisted acquisitions). The guidance does not add to or modify existing regulatory reporting requirements issued by the agencies or current accounting requirements under GAAP.

At the acquisition date, the acquiring bank will not have obtained all of the information necessary to measure the fair value of the assets acquired and the liabilities assumed in the business combination in accordance with the applicable GAAP requirements. Accordingly, GAAP allows the acquiring bank to initially record provisional fair values based on the best information available at the acquisition date. The acquiring bank should, however, retrospectively adjust these provisional amounts to reflect new information obtained during the measurement period about facts and circumstances that existed as of the acquisition date that, if known, would have affected the acquisition-date fair value measurements. Due to these potential retrospective adjustments, the acquisition-date estimated BPG and, therefore, the acquiring bank’s regulatory capital, are subject to adjustment during the GAAP measurement period. As articulated in the guidance, although BPGs are included in the computation of regulatory capital for reporting purposes, a financial institution’s primary regulator may determine that the acquisition-date estimated BPG lacks sufficient permanence as a component of regulatory capital for supervisory and licensing decision-making purposes. As such, certain supervisory and licensing conditions may be imposed on the acquiring bank related to, but not limited to, the following: (1) capital preservation; (2) dividend limitations; (3) independent audits, or agreed-upon procedures engagements; (4) independent valuations; and (5) legal lending limits.

Read more.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Christina Grigorian

On June 7, the Federal Deposit Insurance Corporation (FDIC) issued Financial Institution Letter 29-2010, Guidance on Deposit Placement and Collection Activities by FDIC-Insured Institutions and Their Affiliates (Guidance). In the Guidance, the FDIC addressed the issue of agreements between insured depository institutions (or such institutions’ affiliates) and third-party affinity groups or trade associations (each, a group) to collect and place deposits.

The FDIC notes that the practice used by the groups, which receive referral fees for the entity’s introduction to the depositor, may raise concerns under the FDIC’s rules regarding “pass through” deposit insurance. According to the FDIC, “pass through” insurance means the insurance coverage (up to $250,000 currently) “passes through” the fiduciary to the actual owners of the funds if three requirements are met: (1) the institution’s records expressly disclose the fiduciary relationship on behalf of others; (2) the records maintained by either the institution, the fiduciary, or an authorized third party identify the actual owner or owners of the funds in the account and their respective ownership interest in the account; and (3) the funds actually are owned by the customer(s) and not the entity performing in a fiduciary capacity.

In addition, the Guidance notes that the institutions receiving such deposits are generally accepting “brokered deposits.” Although well capitalized insured institutions may receive brokered deposits without restriction, an adequately capitalized institution cannot accept brokered deposits unless the institution obtains a waiver from the FDIC. Undercapitalized institutions may not accept brokered deposits at all.

Finally, the FDIC notes that marketing materials, customer statements and disclosures must be accurate and not misleading and must correctly represent whether such funds will receive FDIC deposit insurance coverage.

For more information, click here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Marc M. Tract

Ambac Financial Group, Inc., the parent of Ambac Assurance Corporation (AAC), announced yesterday that it had terminated all of its remaining exposure to collateralized debt obligations (CDOs) of asset-backed securities (ABS) totaling $16.4 billion. The termination or commutation involved entry by AAC into a settlement agreement with counterparties to outstanding credit default swaps with Ambac Credit Products that were guaranteed by AAC. Under the settlement agreement, in exchange for the termination of the CDO of ABS obligations, AAC paid to the counterparties a total of (1) $2.6 billion in cash, and (2) $2.0 billion in newly issued surplus notes of AAC. The surplus notes bear an interest rate of 5.1% and have a maturity date of June 7, 2020. Payments of interest and principal on the surplus notes are subject to the prior approval of the Wisconsin Commissioner of Insurance. The counterparties to the settlement and commutation agreements were Banco Bilbao of Argentina, Banco Santander, Barclays Plc, BNP Paribas, CIBC, Commerzbank, Credit Agricole, Deutsche Bank, Natixis, Rabobank Nederland, RBS, Société Generale, and UBS, as well as Citigroup.

The proposed commutation arrangements had been challenged in litigation initiated by a group of hedge funds and investment managers alleging that the holders of the CDOs were receiving preferential treatment. The Wisconsin court overseeing the rehabilitation of AAC by the state insurance commissioner rejected the challenge earlier this month.

On March 24, AAC created a segregated account and consented to rehabilitation of that account by the Wisconsin Commissioner of Insurance. Under Wisconsin law, the segregated account is accorded special treatment akin to collateral supporting a secured obligation, treated almost as a separate insurer from AAC, and was established to hold many of the financial guaranty insurance policies against which there were, or were likely to be, significant claims made against AAC, particularly policies insuring residential mortgage-backed securities and other structured finance transactions. The policies in the segregated account represent more than $35 billion in obligations. In conjunction with the creation of the segregated account, a Wisconsin state court approved the Insurance Commissioner’s imposition of a temporary injunction to halt payments under policies and other contracts allocated to the segregated account, as well as actions or claims against subsidiaries of AAC whose equity interests were made part of the segregated account. The injunction was instituted to permit the Commissioner to prepare a plan of rehabilitation to protect the interests of policyholders, creditors and the public by maximizing AAC’s resources available to pay claims, to provide a fair and orderly payment procedure, and to reform and revitalize AAC. A rehabilitation for a troubled insurer represents a regulatory action taken to avoid liquidation. The segregated account and order of rehabilitation were approved after AAC stated it was unable to file fourth quarter or full-year 2009 results. For the third quarter of 2009, AAC had posted losses of $573 million.

For further details on the commutation arrangements, see the Form 8-K filed by Ambac at www.sec.gov.

• Email This
• Print
• Comments
• Trackbacks

A federal judge in Rhode Island last week issued a ruling that raised questions as to whether life insurers can rely on state insurable interest laws to void sales of stranger-originated annuities.

In suits brought by Western Reserve Life Assurance Co. of Ohio and Transamerica Life Insurance Co. against broker-dealers and an estate planning attorney, the carriers alleged that the defendants had paired investors with terminally ill individuals whose variable annuities provided a guaranteed death benefit. The annuitants were paid to participate in the plan under which annuities were issued in their names, but the premiums were paid for by investors. Under the terms of the annuity, if the annuitant died, his or her beneficiaries would be entitled to receive the principal originally invested, even if the underlying investments had decreased in value. Variable annuities are often sold as retirement-savings vehicles as the amounts contributed are invested in securities and the value grows over time on a tax-deferred basis. Upon retirement, an annuitant can withdraw the principal and convert it into a stream of lifetime annual payments or leave it for her heirs. In the alleged scheme, the investors purportedly used a longer-term investment product for short-term gain.

In the arrangement challenged in Rhode Island, the carriers claimed the annuities should be declared void because the beneficiaries, who were unrelated to the annuitants, had no insurable interest in their continued lives. The judge distinguished the annuities from life insurance policies, holding that no insurable interest was required for these annuities and that the marketing materials for the product presented the death benefit as “an ancillary perk,” not as a central feature. While dismissing the carriers’ claims for rescission, the judge let stand certain fraud, conspiracy and other claims against the defendants. The decision represents a setback for life insurance companies, but its ultimate precedential impact is unclear. (Western Reserve Life Assurance Co. of Ohio v. Conreal LLC, et al. (U.S.D.C., District of Rhode Island, C.A. No. 09-470 S.))

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Ann M. Kim

On May 19, the Internal Revenue Service issued final regulations that clarify when public companies must allow plan participants to voluntarily divest employer stock allocated to their retirement plan accounts. The regulations only apply to public companies that maintain defined contributions plans (typically referred to as 401(k) plans or profit-sharing plans) where employer stock is an available investment alternative. The regulations require that, subject to certain limited exceptions, participants must always be able to move their own contributions (including rollover contributions) out of employer stock funds. In addition, employer contributions must be eligible for movement from the employer stock fund once the participant has provided three years of service to the company.

The regulations finalize rules first enacted by Congress in 2006. The Pension Protection Act of 2006 required greater diversification rights for public employer stock funds in order to address situations where a company’s stock was falling but retirement plan participants were powerless to diversify their accounts and minimize their losses. While the increased flexibility helps participants who will no longer be locked in to one, undiversified investment, the new rules can also help plan fiduciaries avoid liability for maintaining the stock fund in times when the value is declining.

In order to comply with the final regulations, retirement plans must have at least three other diverse investment alternatives available under the plan (although, plans typically have many more alternatives). In addition, the plan cannot impose any direct or indirect conditions on investment in, or divestment of, employer stock that do not apply to other plan investment alternatives. For example, with limited exception, the final regulations would not permit a restriction that permanently prohibits amounts from being reinvested in employer stock if it was previously divested from employer stock.

While interim diversification guidance is currently in effect, the final regulations become effective for plan years beginning on and after January 1, 2011.

The final regulations can be found here.

• Email This
• Print
• Comments
• Trackbacks

On June 10, the UK Financial Services Authority (FSA) issued its annual report covering the year ended March 31, 2010. The FSA emphasized its priorities and targets including:

• a radically changed approach to prudential supervision, particularly of high impact firms, including stress testing, accounting reviews, challenges to business models, detailed liquidity assessments and reviews of remuneration policy;
• a fundamental change in its enforcement approach, aiming for “credible deterrence” and pursuing market abuse and management responsibility far more aggressively;
• the launch of a new approach to “conduct” risk, improving customer protection in retail markets by earlier intervention to reduce the scale and frequency of problems potentially leading to customer detriment; and
• the need for increased involvement in international and European regulatory initiatives.

Among many specific issues addressed in the 127-page report was market confidence. While highlighting action taken and planned against insider dealing and market abuse, the market confidence section of the report highlighted the result of FSA’s latest Market Cleanliness Study, which showed a further increase (from 29.3% to 30.6%) in the number of takeovers preceded by abnormal pre-announcement price movements.

Read more.

• Email This
• Print
• Comments
• Trackbacks

The UK Financial Services Authority (FSA) has recently written to the chief executive officers of all firms handling client money and assets seeking a response before June 30:

• confirming that their controls over the handling of client money and assets have been reviewed by management;
• stating whether or not the firm is in compliance with its obligations respecting client money and assets; and 
• identifying the person at the firm with overall responsibility for compliance with FSA’s client money and assets rules.

The letter follows up an FSA communication earlier this year that pointed out significant weaknesses and failings discovered during visits to firms carried out in late 2009. It also comes at the same time as several highly publicized disciplinary actions and fines imposed by the FSA on regulated firms for client money failings.

In addition, the FSA focused on this area in its Annual Report (see “FSA Annual Report Published,” above), in which it stated its concern that firms “were not always achieving an adequate level of client money protection, thereby potentially threatening market confidence in the UK financial services industry.” The FSA added that it had taken and would continue to take “various actions to address risk in this area. We have increased dedicated visits to firms, and have expanded, and continue to expand, the level of resource within the FSA dedicated to client money and assets supervision.”

Read more.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by James B. Anderson

On June 2, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) announced modifications to their timetable for, and prioritization of, standards being developed by these boards in connection with improving U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) and achieving convergence of GAAP and IFRS. According to the joint statement issued by the FASB and IASB, these boards had previously set June 2011 as the target date for completing all major convergence projects. During the past few months, stakeholders voiced concerns about their ability to provide input on the large number of exposure drafts of standards planned for publication in the second quarter of this year. In response, the FASB and IASB are developing a modified strategy to take account of these concerns that would prioritize certain major projects and stagger publication of exposure drafts, resulting in the extension of the target completion dates for some convergence projects to the second half of 2011.

The Securities and Exchange Commission’s Chairman, Mary Schapiro, issued a statement on June 2 in which she indicated that the modification by the FASB and IASB to the timing for completion of certain convergence projects should not impact the SEC staff’s analyses under the Work Plan issued by the SEC in February 2010, the results of which will aid the SEC in its evaluation of the impact that the use of IFRS by U.S. issuers would have on the U.S. securities market. Chairman Schapiro also stated that the SEC remains on schedule for its determination in 2011 of whether and how to incorporate IFRS into the financial reporting system for U.S. issuers.

Click here for the full text of the joint statement issued by the FASB and IASB.
Click here for the full text of Chairman Schapiro’s statement.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Louis Froelich

The Securities and Exchange Commission has approved several Financial Industry Regulatory Authority amendments to the reporting provisions regarding the OTC Reporting Facility (ORF). Effective June 28, firms are required to report restricted equity securities transactions traded pursuant to SEC Rule 144A to ORF by 8 p.m. Eastern Time. In addition, the amendments change the definition of “OTC Equity Security” (also effective June 28) to align the term more closely with SEC rule terminology and improve consistency across the FINRA rulebook. FINRA also has amended the ORF rules to add an exception to the reporting requirements for OTC Equity Securities transactions reported on or through an exchange.

Click here to read FINRA Regulatory Notice 10-26.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Joseph Iskowitz

On May 28, the House of Representatives passed the American Jobs and Closing Tax Loopholes Act of 2010 by a vote of 215 to 204. Among other things, the bill would tax a specified percentage of the income allocated to an interest in an investment fund or an investment real estate partnership held by the fund’s manager or other persons related to the manager disproportionately to capital invested—often referred to as the “carried interest”—as well as the gain from a sale of such interest as ordinary income. The bill would treat 50% of such income and gain as ordinary income prior to January 1, 2013, and 75% of such income and gain as ordinary income thereafter. Amounts treated as ordinary income under the provisions of the bill would also be deemed “self-employment income” for purposes of the self-employment tax, although the largest part of the self-employment tax is still capped. The bill is proposed to be effective January 1, 2011, for funds whose taxable year is the calendar year. The bill will now be sent to the Senate for its approval, and if approved, the bill is expected to be signed into law by President Obama.

To read the text of the bill, click here.

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Jonathan Rotenberg

The U.S. District Court for the Northern District of Texas denied defendants’ motion to dismiss plaintiffs’ claims under Sections 14(a), 10(b) and 29(b) of the Securities Exchange Act, and state law violations for insider trading and misappropriation of information.

Plaintiffs, shareholders of Fossil, Inc., sued derivatively on behalf of the corporation, alleging that defendants, current or former directors or officers of the company, backdated stock option grants to themselves, to other top Fossil executives and to Fossil employees. Plaintiffs further alleged that defendants concealed the backdating scheme, and refused to exercise Fossil’s legal rights to compel disgorgement of the wrongly obtained incentive proceeds.

Defendants argued that plaintiffs’ Sections10(b) and 14(a) claims should be dismissed because the complaint failed to meet the heightened pleading requirements set forth in the Private Securities Litigation Reform Act (PSLRA). Defendants argued that plaintiffs’ complaint failed to give rise to strong inferences that defendants acted with at least severe recklessness by approving the backdated options, and thus plaintiff failed to sufficiently plead scienter under Section 10(b). The court rejected defendants’ arguments and found that the complaint contained specific and particularized allegations that each individual defendant knew of the backdating of options as well as false and inflated reports of earnings, and sold company stock without disclosing the materially adverse information.

Defendants also contended that the complaint failed to plead facts that created a strong inference that any defendant acted with negligence by failing to disclose the backdating scheme in the company’s proxy solicitations, and that the Section 14(a) claim must be dismissed. The court concluded that the PSLRA standard was satisfied because the complaint alleged that (1) each defendant signed and approved proxy statements falsely representing that options were granted in accordance with shareholder approved plans, and (2) each defendant was negligent in not knowing the correct and omitted material facts that the options were in fact backdated, because each defendant had previously approved granting millions of backdated options. (In re Fossil, Inc., Derivative Litigation, No. 06-cv-1672, 2010 WL 2102327 (N.D. Tex. May 19, 2010))

• Email This
• Print
• Comments
• Trackbacks

Co-authored by Jonathan Rotenberg

The U.S. District Court for the Eastern District of New York allowed plaintiff’s deceptive business practice, false advertising and unjust enrichment claims based on the misleading packaging of a food product to proceed.

Plaintiff’s claims stemmed from plaintiff’s purchase of a box of a food product, Berry Green. Plaintiff alleged that Berry Green lists only its metric weight, and not its weight according to the U.S. Customary or “imperial unit” system. Plaintiff further alleged that Berry Green comes in a non-transparent box that is 6 5/8 inches tall, and that, inside the box, there is a 5 5/8 inches tall jar that is only half-full with the product.

In finding that plaintiff could pursue her deceptive business practices claim, the court concluded that the allegations in the complaint that the Berry Green packaging gives the false impression that consumers bought more than they actually received was sufficient to plead the “materially misleading” element of a deceptive business practices claim. The court found that plaintiff’s allegation that had she understood the true amount of the product she would not have purchased it sufficiently pled that plaintiff was injured as a result of the materially misleading packaging. The district court also denied defendant’s motion to dismiss plaintiff’s false advertising claim, because allegations of excessive slack-fill in packaging stated a claim for false advertising. (Waldman v. New Chapter, Inc., No. 09-CV-3514, 2010 WL 2076024 (E.D.N.Y. May 19, 2010))

• Email This
• Print
• Comments
• Trackbacks

On May 20, the Office of the Comptroller of the Currency issued interagency guidance for reviewing compliance with the joint rule promulgated by the U.S. Treasury Department and the Federal Reserve Board pursuant to the Unlawful Internet Gambling Enforcement Act of 2006 (UIGEA or Act).

The Act prohibits gambling businesses from knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the Internet and that is unlawful under any federal or state law (termed “restricted transactions” in the Act). Pursuant to the Act, Treasury and the Federal Reserve Board (in consultation with the U.S. Attorney General) promulgated regulations requiring financial institutions and certain other participants in designated payment systems to establish and implement policies and procedures reasonably designed to prevent or prohibit the processing of restricted transactions. Compliance with the rule was required as of June 1.

The rule requires certain participants in the designated payment systems to establish policies and procedures that are reasonably designed to identify and block or otherwise prevent or prohibit restricted transactions. A “participant” is defined as “an operator of a designated payment system, a financial transaction provider that is a member of, or has contracted for financial transaction services with, or is otherwise participating in, a designated payment system, or a third-party processor.” The term “participant” does not include a participant’s customer unless the customer is also a financial transaction provider participating on its own behalf in the designated payment system.

The interagency examination guidance includes an overview of the UIGEA and the joint rule (Federal Register, 73 FR 69382, November 18, 2008), a summary chart of the obligations of non-exempt participants (Appendix A), and the examination procedures (Appendix B).

Read more.

• Email This
• Print
• Comments
• Trackbacks

On June 2, the UK Financial Services Authority (FSA) announced the imposition of a prohibition order on Andrew Charles Kerr together with a fine of £100,000 (approximately $145,000) for market abuse. At the time of his offense, Mr. Kerr was a broker with Sucden Limited. The FSA said that the company had cooperated fully with the FSA and there was no criticism of its supervision of Mr. Kerr nor of its internal procedures.

In August 2007, Client X, one of Mr. Kerr’s clients, held a 2000 contract put options position on an exchange-traded coffee futures contract. Implementing a strategy planned with Client X, Mr. Kerr executed a series of trades designed to artificially increase the price of the coffee future during the trading period when the options reference price was determined. The intent was that the resulting price change would lead to the reference price moving above the strike price so that Client X would avoid incurring a loss on its put options position. By so doing Mr. Kerr committed market abuse by creating a false or misleading impression as to the price of the coffee futures contract and the options reference price.

The FSA determined that while the strategy was instigated by Client X, Mr. Kerr actively encouraged and participated in the market manipulation. It was a serious case of market abuse. In addition, Mr. Kerr provided false and misleading information during the FSA’s investigation. This further demonstrated to the FSA that he lacked the integrity required of a fit and proper person and that he posed a risk to the FSA’s statutory objective of maintaining confidence in the financial system. Accordingly, a prohibition order and substantial fine was the appropriate penalty.

Alexander Justham, the FSA’s Director of Markets, said: “Market manipulation is a serious offence. Kerr breached the standards expected of approved persons and has paid the price. Participants in the futures and options markets should be in no doubt about how seriously the FSA views manipulation which disrupts proper pricing mechanisms and risks a false market in the underlying commodity.”

Read more.

• Email This
• Print
• Comments
• Trackbacks

On June 2, the UK Financial Services Authority (FSA) announced that, after a jury trial at Southwark Crown Court, not guilty verdicts had been entered against a finance director and two lawyers (present or past partners in City of London firms). The charges arose from profits alleged to have been made by the lawyers as a result of their trading in the shares of the finance director’s technology company based on inside information provided by him when the company was taken over in 2006.

This case follows several successful recent criminal prosecutions by the FSA in insider trading cases. Margaret Cole, FSA Director of Enforcement and Financial Crime, stated that the FSA will continue with insider dealing prosecutions. She said that the FSA remains “100 per cent committed to the strategy of achieving credible deterrence. Bringing criminal prosecutions sends a message, loud and clear, that insider dealing is a serious crime and we are not afraid to pursue cases through the criminal courts.”

Read more.

• Email This
• Print
• Comments
• Trackbacks

On May 26, the Committee of European Securities Regulators (CESR) published its report CESR/10-453 Technical Details of the Pan-European Short Selling Disclosure Regime.

CESR/10-453 follows on from CESR’s A Model for a Pan-European Short Selling Disclosure Regime (CESR/10-088) (see the March 5, edition of Corporate and Financial Weekly Digest).

The technical details set out in CESR/10-453 relate to the key areas identified in CESR/10-088 as needing in-depth explanation and elaboration. Accordingly, further detail is provided on the following issues:

1) Determination of economic exposure for the purposes of calculating a net short position
2) Calculating changes of net short positions
3) Netting and aggregation within an organizational structure
4) The mechanics of disclosure
5) Exemptions from disclosure obligations

Read more.

• Email This
• Print
• Comments
• Trackbacks