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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.
