Archive for the ‘Securities Litigation & Enforcement’ Category

SEC Charges Hedge Fund Adviser for Prohibited Transactions and Retaliating Against Whistleblower

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday July 27, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from David A. Vaughan and Catherine Botticelli, Partners at Dechert LLP, and is based on a Dechert legal update authored by Mr. Vaughan, Ms. Botticelli, Brenden P. Carroll, and Aaron D. Withrow.

The U.S. Securities and Exchange Commission (SEC or Commission) issued a cease and desist order on June 16, 2014 (the Order) against Paradigm Capital Management, Inc. (Paradigm) and its founder, Director, President and Chief Investment Officer, Candace King Weir (Weir). [1] The Order alleged that Weir caused Paradigm’s hedge fund client, PCM Partners L.P. II (Fund), to engage in certain transactions (Transactions) with a proprietary account (Trading Account) at the Fund’s prime broker, C.L. King & Associates, Inc. (C.L. King). Paradigm and C.L. King were allegedly under the common control of Weir. The Order further alleged that, because of Weir’s personal interest in the Transactions and the fact that the committee designated to review and approve the Transactions on behalf of the Fund was conflicted, Paradigm failed to provide the Fund with effective disclosure and failed effectively to obtain the Fund’s consent to the Transactions, as required under the Investment Advisers Act of 1940 (Advisers Act).

…continue reading: SEC Charges Hedge Fund Adviser for Prohibited Transactions and Retaliating Against Whistleblower

2014 Mid-Year Securities Enforcement Update

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday July 20, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Marc J. Fagel, partner in the Securities Enforcement and White Collar Defense Practice Groups at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn publication; the full publication, including footnotes, is available here.

Our mid-year report one year ago presented an exciting opportunity to discuss a time of great change at the SEC. A new Chair and a new Director of Enforcement had recently assumed the reins and begun making bold policy pronouncements. One year later, things have stabilized somewhat. The hot-button issues identified early in the new SEC administration—admissions for settling parties, a growing number of trials (and, for the agency, trial losses), and a renewed focus on public company accounting—remain the leading issues a year later, albeit with some interesting developments.

…continue reading: 2014 Mid-Year Securities Enforcement Update

Shift from Voluntary to Mandatory Disclosure of Risk Factors

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday July 17, 2014 at 9:23 am
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Editor’s Note: The following post comes to us from Karen K. Nelson, the Harmon Whittington Professor at Accounting at Rice University, Jones Graduate School of Business, and Adam C. Pritchard, the Frances and George Skestos Professor of Law at University of Michigan Law School.

In our paper, Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors, we investigate public companies’ disclosure of risk factors that are meant to inform investors about risks and uncertainties. We compare risk factor disclosures under the voluntary, incentive-based disclosure regime provided by the safe harbor provision of the Private Securities Litigation Reform Act, adopted in 1995, and the SEC’s subsequent disclosure mandate, adopted in 2005.

…continue reading: Shift from Voluntary to Mandatory Disclosure of Risk Factors

2014 Mid-Year Update on Corporate Non-Prosecution and Deferred Prosecution Agreements

Posted by Joseph Warin, Gibson, Dunn & Crutcher LLP, on Wednesday July 16, 2014 at 9:02 am
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Editor’s Note: Joseph Warin is partner and chair of the litigation department at the Washington D.C. office of Gibson, Dunn & Crutcher. The following post and is based on a Gibson Dunn client alert; the full publication, including footnotes and appendix, is available here.

As the debate continues over whether and how to punish companies for unlawful conduct, U.S. federal prosecutors continue to rely significantly on Non-Prosecution Agreements (“NPAs”) and Deferred Prosecution Agreements (“DPAs”) (collectively, “agreements”). Such agreements have emerged as a flexible alternative to prosecutorial declination, on the one hand, and trials or guilty pleas, on the other. Companies and prosecutors alike rely on NPAs and DPAs to resolve allegations of corporate misconduct while mitigating the collateral consequences that guilty pleas or verdicts can inflict on companies, employees, communities, or the economy. NPAs and DPAs allow prosecutors, without obtaining a criminal conviction, to ensure that corporate wrongdoers receive punishment, including often eye-popping financial penalties, deep reforms to corporate culture through compliance requirements, and independent monitoring or self-reporting arrangements. Although the trend has been robust for more than a decade, Attorney General Eric Holder’s statements in connection with recent prosecutions of financial institutions underscore the dynamic environment in which NPAs and DPAs have evolved.

…continue reading: 2014 Mid-Year Update on Corporate Non-Prosecution and Deferred Prosecution Agreements

A New Tool to Detect Financial Reporting Irregularities

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday July 9, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Dan Amiram and Ethan Rouen, both of the Accounting Division at Columbia University, and Zahn Bozanic of the Department of Accounting and MIS at Ohio State University.

Irregularities in financial statements lead to inefficiencies in capital allocation and can become costly to investors, regulators, and potentially taxpayers if left unchecked. Finding an effective way to detect accounting irregularities has been challenging for academics and regulators. Responding to this challenge, we rely on a peculiar mathematical property known as Benford’s Law to create a summary red-flag measure to capture the likelihood that a company may be manipulating its financial statement numbers.

…continue reading: A New Tool to Detect Financial Reporting Irregularities

A Few Things Directors Should Know About the SEC

Posted by Mary Jo White, Chair, U.S. Securities and Exchange Commission, on Friday June 27, 2014 at 9:00 am
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Editor’s Note: Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s remarks to the Twentieth Annual Stanford Directors’ College; the full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The SEC today has about 4,200 employees, located in Washington and 11 regional offices across the country, including one in San Francisco that is very ably led by Regional Director Jina Choi, who is here [June 23, 2014]. Many of you have likely had some contact with our Division of Corporation Finance, which, among other things, has the responsibility to review your periodic filings and your securities offerings. Some of you that work for or represent a company that we oversee know our staff in our National Exam Program, and I imagine a few of your companies know something about our Enforcement Division staff. Our other major divisions are Investment Management, Trading and Markets and the Division of Economic and Risk Analysis.

So that is just a quick snapshot of the structure of the SEC and as you undoubtedly know, the SEC has a lot on its regulatory plate that is relevant to you—completion of the mandated rulemakings under the Dodd Frank Act and JOBS Act, adopting a final rule on money market funds, enhancing the structure and transparency of our equity and fixed income markets, reviewing the effectiveness of disclosures by public companies, to name just a few. But what you may not be as focused on is the mindset of the agency on some other things that are also relevant to you as directors.

…continue reading: A Few Things Directors Should Know About the SEC

Recent Developments in Whistleblower Protections

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday June 26, 2014 at 9:11 am
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Editor’s Note: The following post comes to us from Edmond T. FitzGerald, partner and head of the Executive Compensation Group at Davis Polk & Wardwell LLP, and is based on a Davis Polk client memorandum by Linda C. Thomsen, Antonio Perez-Marques, and Kyoko T. Lin. The complete publication, including footnotes, is available here.

The Sarbanes-Oxley Act of 2002 (“SOX”), the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) and the Consumer Financial Protection Act (“CFPA”) impose overlapping anti-retaliation provisions that generally prohibit retaliation against corporate “whistleblowers.” Recent headlines of whistleblower awards granted to individuals, especially under Dodd-Frank, underscore the fact that, even if a company’s economic exposure arising from the alleged violation of these provisions may be relatively circumscribed—generally limited to amounts based on the compensation of the employee who is allegedly retaliated against—the “real world” exposure, in the form of reputational and regulatory risk, can be significantly greater.

…continue reading: Recent Developments in Whistleblower Protections

Supreme Court Upholds Fraud-On-The-Market Presumption in Halliburton

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday June 24, 2014 at 4:00 pm
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Editor’s Note: The following post comes to us from Wilson Sonsini Goodrich & Rosati, P.C. and is based on a WSGR alert by Douglas Clark and Ignacio Salceda. The Supreme Court’s reconsideration of Basic and related legal questions are analyzed in detail in a Harvard Law School Discussion Paper by Professors Lucian Bebchuk and Allen Ferrell, Rethinking Basic, that has been published in the May 2014 issue of The Business Lawyer, and discussed earlier on the Forum here and here.

On June 23, 2014, the United States Supreme Court issued its much-anticipated decision in Halliburton Co. v. Erica P. John Fund, Inc. Halliburton called into question the very foundation of a securities class action—the presumption of class-wide reliance. A unanimous Court answered the question today, and the presumption of reliance lives. The Court’s decision may, however, have given defendants new opportunities to rebut the presumption in the earlier stages of a case.

…continue reading: Supreme Court Upholds Fraud-On-The-Market Presumption in Halliburton

Comparing Insider Trading in the US and Europe

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday June 19, 2014 at 9:24 am
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Editor’s Note: The following post comes to us from Marco Ventoruzzo of Pennsylvania State University, Dickinson School of Law, and Bocconi University.

In the European Union insider trading has been regulated much more recently than in the United States, and it can be argued that, at least traditionally, it has been more aggressively and successfully enforced in the United States than in the European Union. Several different explanations have been offered for this difference in enforcement attitudes, focusing in particular on resources of regulators devoted to contrasting this practice, but also diverging cultural attitudes toward insiders. This situation has evolved, however, and the prohibition of insider trading has gained traction also in Europe. Few studies have focused on the substantive differences in the regulation of the phenomenon on the two sides of the Atlantic.

…continue reading: Comparing Insider Trading in the US and Europe

The Elusive Promise of Reducing Shareholder Litigation Through Corporate Bylaws

Posted by Holly J. Gregory, Sidley Austin LLP, on Monday June 9, 2014 at 9:25 am
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Editor’s Note: Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. This post is based on a Sidley update, and is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Corporations today are routinely subject to expensive shareholder litigation for which shareholders ultimately foot the bill. Even weak shareholder claims pose significant costs and uncertainty, and exert significant settlement pressures, on corporations. Several recent state court decisions, however, underscore the potential for corporate bylaws, including those adopted by boards, to reduce incentives for the plaintiffs’ bar to file such lawsuits:

  • The Delaware Court of Chancery has upheld, at least as a general matter, the statutory and contractual validity of board-adopted bylaws that seek to limit the forum for intra-corporate litigation.
    • State courts in Louisiana, New York and Illinois have, in turn, enforced Delaware exclusive forum clauses.
  • The Delaware Supreme Court has upheld the statutory and contractual validity of bylaws that allocate the cost of intra-corporate litigation to a losing plaintiff.
  • A state court in Maryland has upheld a corporate bylaw that requires the arbitration of intra-corporate disputes.

…continue reading: The Elusive Promise of Reducing Shareholder Litigation Through Corporate Bylaws

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