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Republican senators have even more questions for Pequot. What's the right metaphor - Jarndyce and Jarndyce? Susan Lucci? The Hundred Years War? 40 SRLR 2109
Nice report on the SEC's most recent open meeting including why defining "annuity contract" is controversial. 40 SRLR 2102
Detailed report about the appointments of Schapiro and Gensler. 40 SRLR 2101
The New York Stock Exchange has extended until March 27th the expiration of NYSE Rule 48. Rule 48 was adopted in December of 2007 (NYSE Info Memo No. 07-110) to allow the NYSE to delay opening if there is "extremely high market volatility that would have a Floor-wide impact on the ability of specialists to arrange for the timely opening."
In October of 2008, Rule 48 was amended (NYSE Info Memo No. 08-48) to provide a suspension of "market-at-close" orders. MOC orders are placed during the trading day but executed at the close at the closing price. Information Memo 08-48 also added an section 48.10 which provides that Rule 48 will expire at the end of 2008.
The NYSE says it is extending the expiration of Rule 48 so it can move the MOC part to Rule 123C.
As I mentioned yesterday, I found five complaints against Madoff and his feeder funds on Westlaw. This morning I spent sometime looking them over. The stories are the same - money invested with a hedge fund changes hands until it comes to rest with Madoff - Madoff steals it. A number of things surprised me: many of the complaints try to use 10(b) to reach the feeder funds. In light of Stoneridge (see this post on Race to the Bottom) this seems a chancy strategy. I was also surprised by how little actual investment management goes on in the hedge fund biz.
For a link to a continuously-updated list of suits, see this post.
Here's a quick summary:
12/18/08, 2008 WL 5267855, SDNY, 1:08cv11002
plntf: The Calibre Fund LLP
def: J. Ezra Merkin
atty: Susman Godfrey LLP
Calibre Fund gave Merkin's Ascot Partners Fund $10 million which Merkin gave to Madoff. Calibre is trying to prevent Ascot from distributing any money.
claims:
- fraud
- negligence
- breach of fiduciary duty
- breach of contract
12/16/08, 2008 WL 5243584, SDNY, 1:08cv10922
plntf: New York Law School
defs: Ascot Partners LLP, Merkin, Bdo Seidman LLP
atty: Abbey Spanier Rodd & Abrams LLP
This is a class action complaint. NYLS gave $3 million to Ascot which it gave to Madoff.
claims:
- 10(b)
- 20(a)
- fraud
- negligent misrepresentation
- breach of fiduciary duty
12/16/08, 2008 WL 5243585, SDNY, 1:08cv10930
plntf: Scott Barrie
defs: Gabriel Capital LP, Merkin, Bdo Seidman LLP
atty: Abbey Spanier Rodd & Abrams LLP
This is a class action complaint. It was produced by the same law firm as the NYLS complaint.
- 10(b)
- 20(a)
- fraud
- negligent misrepresentation
- breach of fiduciary duty
12/15/08, 2008 WL 5267808, CD Cal, 2:08cv08260
plntf: Michael Chaleff
defs: Bernard Madoff, Bernard Madoff Investment Securities, Stanley Chais, Brighton Company
atty: Hagens Berman Sobol Shapiro LLP
This is a class action complaint. Michael Chaleff invested with an LA hedge fund called CMG, ltd. CMG gave his money to Stanley Chais who gave it to Madoff. Apparently, Chais funneled $250 million to Madoff. Chaleff obviously believes theres some money to be got from Madoff himself.
claims:
- 10(b)
- 20(a)
12/12/08, 2008 WL 5231154, EDNY, 2:08cv05026
plntf: Irwin Kellner
defs: Bernard Madoff, Bernard Madoff Investment Securities, John Does 1-100
atty: Ruskin Moscou Faltischek PC
This is a class action complaint. Kellner invested $3 million directly with Madoff. Kellner's lawyers used every arrow in their quiver.
claims:
- RICO
- 10(b)
- 12
- fraud
- negligent misrepresentation
- breach of fiduciary duty
- conversion
- unjust enrichment
- deceptive practices under NY Genl Bus Law
- fraudulent transfer under NY Debtor & Creditor Law
Last week my alma mater, New York Law School, sued (complaint here) J. Ezra Merkin the Chairman of the Board of GMAC LLC (you know, the bank). Merkin's day job is managing hedge funds, but it appears he had lots of free time because all he did was hand money to Bernie Madoff. New York Law School was a limited partner in a Merkin fund called Ascot Partners LP. Some of Merkin's other academic clients include Tufts, NYU and Yeshiva University.
Complaints against Madoff, his feeder funds and any auditors within reach are proliferating. Many of them have made their way into the FED-FILING-ALL database on Westlaw. A search for BERNARD /3 MADOFF turned up six:
New York Law School v J Ezra Merkin, Ascot Capital & BDO Seidman (2008 WL 5243584)
The Calibre Fund v J Ezra Merkin & Ascot Capital (2008 WL 5267855)
Scott Barrie v Gabriel Capital, J Ezra Merkin & BDO Seidman (2008 WL 5267808)
Michael Chaleff v. Stanley Chais & The Brighton Company (2008 WL 5267808)
Irwin Keller v Madoff & Does 1-100 (2008 WL 5231154)
SEC v. Madoff (2008 WL 5197070)
A docket search turned up:
USA v Madoff (SDNY 1:08MJ02735)
NYU v Gabriel Capital (NY Supreme Ct., 603803/2008)
A last fond look back at 2008, from some of my favorite securities-law blogs:
From NYT DealBook:
The Deal Professor's Year-in-review.
2008 in deals.
From Reuters DealZone:
New Year's Resolutions for private equity.
From Race to the Bottom (I love this):
The Five Worst Shareholder Decisions of 2008
Introduction
5. CA, Inc. v AFSMCE, 953 A2d 227
4. McPadden v. Sidhu, 2008 WL 4017052
3. In re Trankaryotic Therapies, Inc., 954 A2d 346
2. Portnoy v Cryo-Cell Int'l, Inc., 940 A2d 43
1. Wood v Baum, 953 A2d 136
The SEC is attempting to designate a central credit default swaps counterparty (for more on CDS counterparties see this post) for the small piece of the CDS market it can regulate (anything that isn't a swap, thank you very much Gramm-Leach-Bliley). Today it announced that it had exempted LCH.Clearnet Ltd and Liffe (the derivatives trading business of NYSE) from a whole bunch of requirements to allow them to immediately bring their CDS trading and clearing service (opened on 12/22 in Europe) here. Broker-dealers were granted an exemption to allow them to use the Liffe system.
On the 26th, the Federal Reserve announced that GMAC's quest to become a bank holding company had ended succesfully. As I blogged last week, it has been a long road. Let's hope they show their appreciation by boxing up something for the poor.More from Reuters.
SEC Uncertainty (everybody sing!)
NYT DealBook - Can the SEC regain its mojo? Mojo? That sure is some hep talk. I can't believe people think the Times is stuffy.
TPM Muckraker - SEC is "in a state of complete panic."
Other Stuff
DealBook: BCE sues over failed LBO
Compliance Week: Paying executives with mortgage backed securities.
Enron settlement funds to be distributed.
Commodity Online: Gary Gensler will be the new head of the CFTC. I guess thay means we're still going to have a CFTC?
It looks grim for GMAC Finance (GMAC): their quest to become a bank holding company is on the rocks again. I'm not counting them out, though - they don't give up easy.
GMAC (which is controlled by Cerberus Capital) owns a Utah-chartered bank called GMAC Bank. Ironically, the profitable GMAC Bank is a subsidiary of GMAC's mortgage-backed securities business, Residential Capital (ResCap). What GMAC would like to do is rid itself of ResCap, own GMAC Bank directly, and turn GMAC Bank into a regular deposit-taking institution. Before this can happen, GMAC needs to get approval from the Fed to be a bank holding company. The Fed won't grant GMAC's application unless GMAC improves its debt-to-equity ratio.
So, on November 20th, GMAC made offers to buy outstanding debt from large bondholders (see 8-K, 11/20/09). The debt tender period ended on December 19th with not enough takers. Plan B involved stronger incentives. GMAC attempted to coax recalcitrant bondholders who hedged their investment in GMAC by buying credit default swaps (see 8-K, 12/19/08). GMAC planned a debt-for-equity swap with ResCap that would, essentially, make all the CDS' valueless. Pacific Investment Management, a major bondholder, wasn't intimidated. They still said "no" to the debt swap.
Presumably there's a Plan C?
Coverage of Bernard Madoff's scam in the New York Times has focused on how Madoff used his status in the Jewish community in Palm Beach as a lever to get money and avoid due diligence. Scams which abuse ties of trust in close-knit communities are called “affinity fraud.”
To paraphrase one prominent securities regulator, "You can trust me because I'm like you" is a siren song that has been used in recent years to defraud many investors.
Fairfax, "WITH FRIENDS LIKE THESE . . .": TOWARD A MORE EFFICACIOUS RESPONSE TO AFFINITY-BASED SECURITIES AND INVESTMENT FRAUD, 36 Ga. L. Rev. 63, 64 (2001)
Affinity fraud has been the subject of investor alerts from the SEC and the NASAA. Because this type of fraud often targets poor and minority investors there have been calls to recognize that affinity fraud causes special harm. One such proposal would increase penalties (Fairfax, 36 Ga. L. Rev. 63,(2001)) another would adopt an alternative materiality threshold to make such cases easier to maintain (Sachs, MATERIALITY AND SOCIAL CHANGE: THE CASE FOR REPLACING " THE REASONABLE INVESTOR" WITH "THE LEAST SOPHISTICATED INVESTOR" IN INEFFICIENT MARKETS 81 Tul. L. Rev. 473, 473 (2006)).
However, as the Wall Street Journal pointed out, abuse of trust cuts across lines of wealth, and class. Lisa M. Farifax, Professor of Law and Director of the Business Law Program at the University of Maryland, argues that "even generally savvy individuals will succumb to such fraud because it preys on one's ... instinct to trust members within their own affinity group." Professor Margaret V. Sachs, Robert Cotton Alston Chair in Corporate Law at the Georgia University Law School, agrees that Madoff's victims may have been "more vulnerable than they would have been under other cirucumstances." Many of Madoff’s “investors” were just as easily taken in as those with limited investment smarts.
Madoff's victims are likely to be classified as "sophisticated investors" - the least protected class of individual investors. To determine if an individual investor is sophisticated, a court will consider "wealth[,] … age, education, professional status, investment experience, and business background." (4 Bromberg & Lowenfels on Securities Fraud § 7:444 (2d ed.)) Sophisticated investors have a "duty to investigate the facts surrounding a securities transaction which [...]is greater than the corresponding duty of a novice." (Fletcher, SOPHISTICATED INVESTORS UNDER THE FEDERAL SECURITIES LAWS, 1988 Duke L.J. 1081, 1092)
Does it make sense to use wealth and age as the tests of investor sophistication? Should protections developed for the least privileged be extended to the most? Professor Sachs thinks so "concievably, in an action brought by the SEC or the DOJ, but not in a private action." Professor Fairfax concedes that "some may view such victims as less sympathetic because they appear to be more sophisticated or well off," but "they too may need protection because they are - at least in this context - especially vulnerable and thus less likely to be vigilant."
A Troubled Asset Relief Program search criteria has recently been added to the M&A Transactions database on Westlaw Business. To find capsule descriptions of all one hundred and thirty (who knew!) transactions scroll down to the "deal description" pull-down menu and click on "EESA 2008 Transaction." Each deal summary includes dates, value and links to the relevant filings.
See this Compliance Week post by Bruce Carton to enjoy the mobius-strip chronology of the investigation of Pequot Capital.
This post on Naked Capitalism discusses an under-reported *upside* of mark-to-market accounting. In the third quarter, banks reclassified $610 billion in assets as "level 3" under FAS 157. The reclassification gives them much more flexibility in determining what the assets are worth.
The Center for Audit Quality (via Compliance Week) has good news for issuers who have lost accelerated filer status because their stock price is in the toilet: you don't have to file that SOX 404 auditor certification!
To be an accelerated filer, an issuer must have at least $70 million in market capitalization (market capitalization is number of shares outstanding multiplied by share price). For example, Astronics Corporation (Nasdaq:ATRO) fell below the accelerated filer cut-off in late November when its share price got below $8.22. At its current price ($8.10 x 8.51 million shares out) its market cap it $68.94 million. Earlier this year, it had a market cap of $455 million! Flotek Industries (NYSE:FTK) has had an even harder come down. In January it was a "large accelerated filer" with a market cap of $842 million. Now, after a 90% decline in share price, it has a market cap of $71.07 million.
SOX 404 has been the subject of much issuer consternation and the SEC repeatedly delayed its application to non-accelerated issuers.
Securities Docket has a post about the SEC's announcement that it is planning to distribute the fair fund from the Bear Stearns market-timing case. There's also a link to the text of the distribution plan.
Race to the Bottom has a nice summary of the corporate governance provisions of the Auto Industry Financing and Restructuring Act (HR 7231) as well as a status update.
Today, the Congressional Oversight Panel for Economic Stabilzation released its first report. The report is structured as a series of questions directed to Treasury. The questions are rather withering and it ain't hard to tell what the Panel thinks. For instance: "We ask Treasury to articulate ... its overall strategy ... and how its strategic shifts since September 2008 fit into that overall strategy." They'd also like to know if the Treasury has secured terms "comparable to those received in recent private transactions, such as those with Warren Buffet (and Goldman Sachs) and the Abu Dhabi Investment Authority (and Citigroup)?"
SEC transparency took another giant leap forward yesterday when the Division of Corporation Finance posted their internal accountant's handbook on the web. The Financial Reporting Manual has been around since 1990, but it wasn't available to the public (though most law firm libraries seem to have a much-photocopied bootleg). Back in November, John White promised this was going to happen: "(SEC Chief Accountant) Wayne (Carnall) is in the process of updating our training manual for the Division’s accountants and, in light of the level of outside interest in getting copies of this document, we plan to publish the manual on our website in the near future."
The Manual hasn't been updated since 2000, but Compliance Week reports that Wayne Carnall called the changes "very limited." Going forward, the Manual will be updated every quarter.
Take at look at the "Signs of the Apocalypse" category on the Daily Deal's Dealscape blog.
SEC Chairman Cox thinks mark-to-market (FAS 157) is a good system, says the New York Times.
Reuters reports that the JP Morgan / Bear Stearns merger has survived a court challenge.
The Harvard Corporate Governance blog provides the full text of the ABA report on merger agreement terms, aka the "Deal Points" study. As well as the full text of the court's opinion in JP Morgan / Bear Stearns matter.
EDGAR, meet EMMA. Today, the SEC announced that it had adopted new rules designating the electronic filing system at the Municipal Securities Rulemaking Board, called EMMA, the central repository for disclosure about municipal finance transactions. Municipal securities are those issued or guaranteed by a government entity. They are exempt from '33 Act registration under section 3(a)(2).
The offering document in a muni finance deal is called an "official statement" and as any librarian who tried to obtain an official statement can tell you, the existing disclosure system is pretty spotty. Presently, there are four designated municipal finance document repositories. None have everything and not all are internet-accessible.
The rule change is, presumably, motivated by the collapse of the market for auction-rate securities. What, I hear you ask (or was that the wind?), is an auction rate security, and what do they have to do with muni finance?
Auction-rated securities were invented in the late 1980's (Tucson Electric Co., 3/88). They were marketed as an alternative to holding cash because, although they didn't mature for many years, they could, theoretically, be re-sold every few days through a private auction process. Municipalities adopted auction-rate debt as a favorite financing device. In February of 2008 the auction process ground to a halt and the securities became unsaleable. For more on the ARS debacle, read Erik Sirri's testimony here and Martha Coakley's here. If that isn't enough, how about an article from the New York Times?
Allow me to provide a concrete example: in January of 2002, the Dormitory Authority of the State of New York issued $450 million auction-rate bonds on behalf of the Sloan Kettering Memorial Cancer Center. The proceeds were used to redeem older bonds. The bonds come due in 2036, but there is supposed to be a repricing auction every seven days. The last auction before the market collapsed was in April of 2008. All the bonds were for sale and there was one bidder. This bidder offered to buy about $18 million in bonds at 2.1% interest.
I got all this info from one of the designated repositories, DAC Bond.
Today brought yet another legal entanglement for the lawyer also know as Marc Dreier, sole partner of the Olsen-twin-representing firm Dreier LLP. Dreier just made bail in Toronto. He's alleged to have impersonated Michael Padfield, Senior Investment Counsel for the Ontario Teachers Pension Plan, for the purpose of snookering Fortress Investment Group out of $50 million. Dreier will return to New York to face an unrelated SEC complaint alleging he's been selling phony securities.
Dreier continues the tradition, pioneered by Thomas Haythe, of Manhattan lawyers embarrassing themselves in Canada.
Primary Reserve Fund, the giant money market fund that broke the buck earlier this year, has posted a plan of liquidation on its website. Securities Docket notes that part of the plan is to offer holders ninety-eight-and-half cents for each dollar they invested. Holders who accept the offer agree not to sue.
2009 is approaching and we're all getting ready for the merriest time of year: proxy season. There have been a number of developments of note and most center around rule 14a-8. 14a-8 is a mechanism allowing shareholders to get their proposals on the ballot at a company's annual meeting. Since proposals from shareholders generally make management do stuff they don't want to, management tends to fights back by asking the SEC's permission (via no-action letter) to exclude such proposals.
On November 7th, the SEC issued Staff Legal Bulletin 14D providing guidelines under 14a-8 for proposals directing the Board to amend the issuer's charter.
A group of law professors, led by Lucien Bebchuk, is suing Electronic Arts over its exclusion of a proposed resolution creating internal corporate guidelines for 14a-8 proposals. Link here to a post on Harvard Corporate Governance blog for more info and links to the briefs.
Shareholders of Alaska Air Group have proposed that the company amend its charter to limit the company's potential damages in a private lawsuit based on rule 10b-5. This has never been tried, but at least one law professor theorized that it is possible. The courts will decide, I suppose. Click to link to the proposal (via Securities Docket).
SEC Currents has a slightly weirder roundup of shareholder proposals including: Monsanto's proposed loyalty oath and Apple's attempt to avoid an environmental sustainability report.
Finally, the New York Law Journal recently published Charles Nathan's seasonal predictions.
No periods today! The New York Times is reporting that the shareholders of Merrill Lynch and Bank of America have approved the merger of their respective companies. For them that's lookin', the final proxy statement was filed 11/3/08 on form DEFM14A and the S-4 is dated 10/2/08. The NYT article links to the press releases.
Securities Docket has a post today about office shuffling at the SEC. "The SEC has countless things that it needs to accomplish right now but its going to need to do so while living out of boxes." The move is being called the "restacking project." It has its own newsletter.
On Wednesday, the SEC announced that it has voted to adopt new regulations governing the conduct of Nationally Recognized Statistical Rating Organizations. The rules themselves haven't been released yet, but based on the SEC's "Fact Sheet" they have been diluted some since being proposed in June.
More when the rules appear.
The Harvard Corporate Governance Blog has a post from George Bason of Davis Polk about the Treasury's final implementing regulations for the Foreign Investment National Security Act of 2007 (FINSA). FINSA amended what is known as the Exon-Florio process. Exon-Florio, administered by the Treasury's Committee on Foreign Investment in the United States, gives the President power to examine and even stop acquisitions of certain US businesses by foreign entities.
The Corporate Counsel Blog has this post about how recommendations on executive compensation from the recent meeting of the G20 look a lot like provisions of the Emergency Economic Stabilization Act.
Finally, the Business Law Prof Blog has a post about a lawsuit brought by a hedge fund called Greenwich Financial Services seeking to modify an agreement between Countrywide and 11 state Attorneys General. The agreement modified a bunch of mortgages written by Countrywide. The problem, Greenwich argues, is that Countrywide no longer owns the mortgages it agreed to modify (Greenwich Financial Services v. Countrywide Home Loan Inc., Superior Ct. for NY County, 650474/2008). More from the New York Times here.
Now that the 11/14 deadline is well past, it seems like a propitious time to summarize TARP money handed out to smaller banks. The deals, listed below, involve 41 banks and range from $4 million to almost $7 billion. The grand total for all the transactions is about $31 billion. Putting together this list gave me the same feeling that I used to get if I spent too long in ABC Carpet & Home - I started to lose perspective about what constitutes a lot of money. I found myself thinking "Why did Heritage Financial bother if all they got was a lousy 3.6 million bucks?"
See this post for a summary of big-bank TARP transactions, and this Reuters article for TARP scorecard of all transactions as of the date of the deadline.
If you'd like a copy of the list below as a Word doc, email me and I'll send it to you.
1st Financial Services Corp, 11/18, $16
Associated Banc-Corp, 11/21, $525
Ameris Bancorp, 11/21, $52
BB&T Corp, 11/19, $3,100
Banner Corp, 11/24, $124
Boston Private Financial, 11/24, $154
Broadway Financial Corp, 11/19, $9
Capital One Financial Corp, 11/18, $3,550
Cascade Financial, 11/26, $38
Centerstate Banks of Florida, 11/24, $4,200
City National Corp, 11/24, $395
Comerica Inc, 11/19, $2,250
Columbia Banking System Inc, 11/21, $77
First Community Bancshares, 11/24, $41
First Community Corp, 11/25, $11
First Horizon National Corp, 11/17, $866
First Niagara Financial Group, 11/25, $186
First Pactrust Bancorp Inc, 11/21, $19
HF Financial Corp, 11/24, $25
Heritage Commerce Corp, 11/26, $40
Heritage Financial Corp, 11/25, $4
Huntington Bancshares, 11/14, $1,400
KeyCorp, 11/20, $2,500
Marshall & Ilsley Corp, 11/14, $1,700
Northern Trust Corp, 11/17, $1,500
Pacific Capital Bancorp, 11/26, $180
Porter Bancorp, Inc, 11/24, $35
Provident Bankshares, 11/17, $151
Regions Financial Corp, 11/18, $3,500
Severn Bancorp, 11/24, $23
TCF Financial, 11/14, $54
Taylor Capital Group, 11/24, $104
Trustmark Corp, 11/25, $215
UCBH Holdings Inc, 11/20, $298
US Bancorp, 11/14, $6,600
Umpqua Holdings Corp, 11/14, $214
Valley National Bancorp, 11/17, $300
Washington Federal, 11/17, $200
Webster Financial Corp, 11/24, $400
Western Alliance BanCorporation, 11/25, $140
Zions Bancorporation, 11/17, $1,400
