In an open meeting scheduled for November 19, the Securities and Exchange Commission will consider proposing rules that would increase the statutory threshold for registration by investment advisers with the SEC, require advisers to hedge funds and other private funds to register with the SEC, and address reporting by certain investment advisers that are exempt from registration. Other proposed rules to be considered would implement new exemptions from the registration requirements of the Investment Advisers Act of 1940 for advisers to venture capital funds and advisers with less than $150 million in private fund assets under management in the United States, and clarify the meaning of certain terms included in a new exemption for foreign private advisers.

To read the SEC News Digest click here.

Nine months after the U.S. District Court for the Southern District of Texas approved a fee application in the In re Enron class action litigation, plaintiff Michael Brown, an unnamed member of the class, brought a new action in the same court, asserting claims of fraud and breach of fiduciary duty against Thomas Bilek and his law firm, seeking disgorgement of the $16 million in attorneys’ fees awarded Mr. Bilek for his work in the litigation. In the Enron litigation, pursuant to the Private Securities Litigation and Reform Act (PSLRA), the court had appointed the Regents of the University of California as lead plaintiff. The Regents selected Milberg Weiss Bershad Hynes & Lerach LLP as lead counsel for the class, and the district court approved that selection. Milberg Weiss, whose California office was handling the matter, chose Mr. Bilek and his law firm to serve as local counsel in the Southern District of Texas.

Mr. Brown filed his complaint on behalf of the putative class of shareholders of Enron Corporation who participated in and received monies as a result of the settlement of the class action. Mr. Brown’s complaint alleged that in connection with the fee application in the Enron litigation, Mr. Bilek had provided false and exaggerated information regarding his work on behalf of the class. Mr. Brown asserted that these fraudulent misrepresentations resulted in Mr. Bilek being awarded attorneys’ fees in the inflated amount of more than $16 million, which ultimately reduced the recovery to the class members. Mr. Brown sought disgorgement of the attorneys’ fees Mr. Bilek received.

The district court dismissed Mr. Brown’s complaint and the Fifth Circuit affirmed, ruling that Mr. Brown’s claims were “inextricably woven” into the Enron litigation and could only have been brought by lead plaintiff in that litigation. The court held that “an unnamed class member may not circumvent a PSLRA lead plaintiff’s authority by filing an independent tort lawsuit on behalf of members of the class complaining of acts and omissions that occurred in the context of the PSLRA-governed litigation.” The court went on to note that, assuming the allegations were worth pursuing and the facts on which the claims were based were not known at the time the fees were approved, the claims should have been made by the lead plaintiff in a Rule 60(b) motion to set aside the judgment. (Brown v. Bilek, No. 09-20654 (5th Cir. Nov. 12, 2010))

Kitchin Associates LLC is a Pennsylvania limited liability company that is no longer in business. Richard Kitchin and his son were the members of Kitchin LLC and each held a 50% ownership interest in the entity. In a bankruptcy court proceeding, the Joan I. Glisson Trust asserted a claim against Mr. Kitchin in the amount of $257,047.63, arising from an unsatisfied mortgage loan to Kitchin LLC, the proceeds of which were used to purchase a property in Pennsylvania. Mr. Kitchin was not a party to the loan transaction, but did execute the loan documents in his capacity as a member of Kitchin LLC. The Trust asserted that Mr. Kitchin should be personally liable for Kitchin LLC’s loan, asserting that the corporate veil should be pierced because he directly participated in the company’s torts and because he was subject to personal liability under an alter ego theory.

The Bankruptcy Court for the Eastern District of Pennsylvania found that the Trust’s attempt to pierce the corporate veil based on Mr. Kitchin’s alleged participation in the torts of the company failed as a matter of law because the Trust’s claims against Kitchin LLC sounded in contract, not tort. However, applying the equitable remedy of alter ego liability, the court held that the corporate veil should be pierced because the Trust had demonstrated that Mr. Kitchin controlled the company and that injustice would result if the corporate fiction was maintained, the two elements necessary to pierce the corporate veil under Pennsylvania law.

First, the court found that Mr. Kitchin exercised sufficient control over Kitchin LLC to impose alter ego liability because he directed the company to engage in the transactions that depleted the company’s assets. In particular, as confirmed by his son, Mr. Kitchin directed that the company transfer money from Kitchin LLC to pay the debts of another company he controlled. In addition, the court held that the second element necessary for alter ego liability was also present because Mr. Kitchin, “along with his son, disregarded the corporate form and acted as though the assets of Kitchin LLC were theirs to manage and distribute without regard to its creditors.” As a result, it held that the corporate veil could be pierced to hold Mr. Kitchin liable for the debts of the company. (In re Richard R. Kitchin, Jr. and Donna Kitchin, No. 09-17891-MDC (Bankr. E.D. Pa. Nov. 9, 2010))

On November 17, the Federal Reserve Board issued guidelines for evaluating proposals by large bank holding companies (BHCs) to undertake capital actions in 2011, such as increasing dividend payments or repurchasing or redeeming stock. According to the Board, “The criteria provide a common, conservative approach to ensure that BHCs hold adequate capital to maintain ready access to funding, continue operations, and continue to serve as credit intermediaries, even under adverse conditions.” Bank holding companies should consult with Federal Reserve staff before taking any actions that could result in a diminished capital base, including actions such as increasing dividends, implementing common stock repurchase programs, or redeeming or repurchasing capital instruments more broadly (planned capital actions).

Continue Reading Federal Reserve Issues Large Bank Capital Guidance

On November 17, the Federal Reserve Board requested comment on a proposed rule to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that give banking firms a defined period of time to conform their activities and investments to the Volcker Rule. The Volcker Rule generally prohibits banking entities from engaging in proprietary trading in securities, derivatives or certain other financial instruments, and from investing in, sponsoring or having certain relationships with a hedge fund or private equity fund. The statute generally provides banking entities two years to bring their activities and investments into compliance with the Volcker Rule, and allows the Board to extend this conformance period for specified periods under certain conditions. The proposed rule does not address other aspects of the Volcker Rule that are subject to separate rulemaking requirements by other agencies.

Continue Reading Federal Reserve Issues Proposed Conformance Period Rules for the Volcker Rule

On November 10, the UK Financial Services Authority (FSA) circulated its proposals for increased disclosure requirements for bankers’ remuneration. Under these proposals, British banks will have to provide a more detailed breakdown of the pay of senior managers and employees who have a material impact on each bank’s risk profile in any single year. Banks will be obliged to supply the total amount paid in cash and share bonuses, deferred remuneration (awarded and outstanding) and severance payments made to employees. The proposals will enter into force at the start of 2011, and their requirements will begin to apply with respect to pay awarded for work during 2010.

There is a short consultation period of a month for these proposals, which are designed to implement European provisions enacted earlier this year as part of the revised Capital Requirements Directive.

As several other member states (including Germany and France) have not yet produced their equivalent rules, the FSA has been criticized in some quarters for compromising London’s status as a European financial center by providing for its rules to be effective from January 2011.

Read more.

On November 11, the UK Financial Services Authority (FSA) published its Policy Statement 10/17 (feedback on its “taping of mobile phones” consultation and final rules). This follows the FSA’s consultation paper CP10/7 of March 2010, which proposed the removal of the mobile phone exemption from the FSA taping rules. The CP10/7 consultation period ended in June of this year.

The FSA confirmed that the exemption will be removed. As a result, from November 14, 2011, the following will be required of FSA regulated firms:

  • all relevant communications made with, sent from or received on mobile phones and other handheld electronic communication devices that are issued by firms for business purposes must be recorded and stored for six months; and
  • reasonable steps must be taken to ensure that such communications do not take place on personal devices that cannot be recorded for privacy reasons.

To read the policy statement, click here.

On November 17, the UK government announced another step towards the creation of the new “post-Financial Services Authority” (FSA) UK regulatory regime (as described in the June 18 and July 30 editions of Corporate and Financial Weekly Digest). The projected Consumer Protection and Markets Authority (CPMA) will take responsibility for criminal prosecution of insider dealing as well as the listing role currently handled by the FSA in its capacity as UK Listing Authority.

The UK Treasury emphasized that the government was “absolutely committed to prosecuting financial crime,” adding that “after much consideration we have decided that for the moment the FSA’s powers of prosecution will lie with the new CPMA rather than the new Economic Crime Agency (ECA). The government recognizes the importance to the City of London of a strong markets division being established within the CPMA and giving it these powers will make it a stronger and more credible regulator.”

The Treasury added that the government “remains committed to the creation of a strong and powerful new ECA to tackle serious economic crime coherently and effectively.” The ECA will combine the Serious Fraud Office with parts of the Office of Fair Trading and several smaller agencies.

Read more.

Two of the European Parliament’s groupings, the Socialists and the European People’s Party (EPP), have expressed their approval of the report of Dr. Kay Swinburne MEP, which recommended tougher rules on high-frequency trading and dark pools.

The report suggested that a lack of transparency in the financial system was an “aggravating factor” in the financial crisis. It also blamed the Markets in Financial Instruments Directive (MiFID) for problems in the financial market that have arisen since its adoption in 2007.

Although the economic and monetary affairs committee will not directly impact regulatory changes or legislation, this support for harsher rules is indicative of the European Parliament’s views at a time when the European Commission is preparing for a much-anticipated formal review of the MiFID in 2011.

To read Dr. Swinburne’s report, click here.

On November 11, the European Parliament announced that it had adopted the Alternative Investment Fund Managers Directive (AIFMD) by a vote of 513 to 92 with three abstentions.

The deadline for member state implementation will be a date in 2013, two years after the final approved version of the Directive is published in the EU Official Journal.

The detailed implementation of many areas of the Directive will depend on “level 2” rules and guidelines which will be prepared over the coming months by the European Securities and Markets Authority.

To read the provisional version of the AIFMD, click here.