Posts Tagged ‘Disclosure’

SEC Charges Corporate Officers with Fraud

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday August 17, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from R. Daniel O’Connor, partner focusing on securities enforcement at Ropes & Gray LLP, and is based on a Ropes & Gray Alert authored by Mr. O’Connor, Marko S. Zatylny, Kait Michaud, and Michael J. Vito.

On July 30, 2014, the Securities and Exchange Commission (“SEC”) advanced a novel theory of fraud against the former CEO (Marc Sherman) and CFO (Edward Cummings) of Quality Services Group, Inc. (“QSGI”), a Florida-based computer equipment company that filed for bankruptcy in 2009. The SEC alleged that the CEO misrepresented the extent of his involvement in evaluating internal controls and that the CEO and CFO knew of significant internal controls issues with the company’s inventory practices that they failed to disclose to investors and internal auditors. This case did not involve any restatement of financial statements or allegations of accounting fraud, merely disclosure issues around internal controls and involvement in a review of the same by senior management. The SEC’s approach has the potential to broaden practical exposure to liability for corporate officers who sign financial statements and certifications required under Section 302 of the Sarbanes-Oxley Act (“SOX”). By advancing a theory of fraud premised on internal controls issues without establishing an actionable accounting misstatement, the SEC is continuing to demonstrate that it will extend the range of conduct for which it has historically pursued fraud claims against corporate officers.

…continue reading: SEC Charges Corporate Officers with Fraud

2014 Mid-Year Securities Litigation Update

Editor’s Note: The following post comes to us from Jonathan C. Dickey, partner and Co-Chair of the National Securities Litigation Practice Group at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn publication.

It almost goes without saying that the first half of 2014 brought with it the most significant development in securities litigation in decades: the U.S. Supreme Court decided Halliburton Co. v. Erica P. John Fund, Inc.—Halliburton II. In Halliburton II, the Court declined to revisit its earlier decision in Basic v. Levinson, Inc.; plaintiffs may therefore continue to avail themselves of the legal presumption of reliance, a presumption necessary for many class action plaintiffs to achieve class certification. But the Court also reiterated what it said 20 years ago in Basic: the presumption of reliance is rebuttable. And the Court clarified that defendants may now rebut the presumption at the class certification stage with evidence that the alleged misrepresentation did not affect the security’s price, making “price impact” evidence essential to class certification.

…continue reading: 2014 Mid-Year Securities Litigation Update

UK Proposed Register of Individuals with Significant Control over Non-Public Companies

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday August 2, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Wayne P.J. McArdle, Partner in the London office of Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn alert by Mr. McArdle, James Barabas, and Edward A. Tran.

On June 25, 2014, the UK Government published the Small Business, Enterprise and Employment Bill [1] which, among other things, proposes that all UK companies (other than publicly traded companies reporting under the Disclosure and Transparency Rules (DTR5)) be required to maintain a register of people who have significant control over the company. The Bill is part of the UK Government’s initiative to implement the G8 Action Plan to prevent the misuse of companies and legal arrangements agreed at the Lough Erne G8 Summit in June 2013, which we discussed in our client alert entitled “Through the Looking Glass: The Disclosure of Ultimate Ownership and the G8 Action Plan” (June 20, 2013). [2] In broad terms, the G8 Action Plan is designed to ensure the integrity of beneficial ownership and basic company information and the timely access to that information by law enforcement and tax authorities.

…continue reading: UK Proposed Register of Individuals with Significant Control over Non-Public Companies

Do Banks Always Protect Their Reputation?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday July 30, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from John Griffin and Richard Lowery, both of the Department of Finance at the University of Texas at Austin, and Alessio Saretto of the Finance Area at the University of Texas at Dallas.

A firm’s reputation is a valuable asset. Arguably, conventional wisdom suggests that a reputable firm will always act in the best interest of their clients to preserve the firm’s reputation. For example, in his testimony/defense of Goldman Sachs before Congress, the Chairman and CEO Lloyd Blankfein states, “We have been a client-centered firm for 140 years and if our clients believe that we don’t deserve their trust, we cannot survive.” In our forthcoming Review of Financial Studies article entitled Complex Securities and Underwriter Reputation: Do Reputable Underwriters Produce Better Securities?, we examine the extent to which this conventional wisdom holds with complex securities.

…continue reading: Do Banks Always Protect Their Reputation?

SEC Guidance May Lessen Investment Adviser Demand for Proxy Advisory Services

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.

Recently issued SEC staff guidance addresses concerns that have been raised about proxy advisory firms by emphasizing that the investment adviser that retains and pays a proxy advisory firm is uniquely positioned to monitor the proxy advisory firm and is required to actively oversee the firm if it wants to benefit from the firm’s services to discharge its fiduciary duty. As a result of the greater oversight exercised by all of their investment adviser clients, the proxy advisory firms will presumably respond by enhancing their policies, processes and procedures, as well as the transparency of these policies, processes and procedures. In turn, the corporate community may indirectly benefit to some degree.

…continue reading: SEC Guidance May Lessen Investment Adviser Demand for Proxy Advisory Services

Communicating Voluntary Disclosure of Corporate Political Spending

Posted by Charles Nathan, RLM Finsbury, on Monday July 28, 2014 at 9:14 am
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Editor’s Note: Charles Nathan is partner and head of the Corporate Governance Practice at RLM Finsbury. This post is based on an RLM Finsbury commentary by Mr. Nathan. Work from the Program on Corporate Governance about corporate political spending includes Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert Jackson, discussed on the Forum here. A committee of law professors co-chaired by Bebchuk and Jackson submitted a rulemaking petition to the SEC concerning corporate political spending; that petition is discussed here.

Over the past several years, judicial decisions involving Citizens United, McCutcheon and SpeechNow.org have lifted caps on total political contributions, and also expanded the number of avenues through and amounts which companies can lawfully contribute to political campaigns. Corporate donations can still be made to recipients like political action committees and third-party organizations (such as trade associations). Now, however, companies can also contribute directly to campaigns and to organizations that support candidates and political causes, including Section 501(c)(4) social welfare organizations.

…continue reading: Communicating Voluntary Disclosure of Corporate Political Spending

Banks: Parallel Disclosure Universes and Divergent Regulatory Quests

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday July 21, 2014 at 9:10 am
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Editor’s Note: The following post comes to us from Henry T. C. Hu, Allan Shivers Chair in the Law of Banking and Finance at the University of Texas School of Law.

Legal and economic issues involving mandatory public disclosure have centered on the appropriateness of either Securities and Exchange Commission (SEC) rules or the D.C. Circuit review of SEC rule-making. In this longstanding disclosure universe, the focus has been on the ends of investor protection and market efficiency, and implementation by means of annual reports and other SEC-prescribed documents.

In 2013, these common understandings became obsolete when a new system for public disclosure became effective, the first since the SEC’s creation in 1934. Today, major banks must make disclosures mandated not only by the SEC, but also by a new system developed by the Federal Reserve and other bank regulators in the shadow of the Basel Committee on Banking Supervision and the Dodd-Frank Act. This independent, bank regulator-developed system has ends and means that diverge from the SEC system. The bank regulator system is directed not at the ends of investor protection and market efficiency, but instead at the well-being of the bank entities themselves and the minimization of systemic risk. This new system, which stemmed in significant part from a belief that disclosures on the complex risks flowing from modern financial innovation were manifestly inadequate, already dwarfs the SEC system in sophistication on the quantitative aspects of market risk and the impact of economic stress.

…continue reading: Banks: Parallel Disclosure Universes and Divergent Regulatory Quests

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

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

The Effects of Mandatory Transparency in Financial Market Design

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday June 25, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Paul Asquith, Professor of Finance at Massachusetts Institute of Technology (MIT); Thomas Covert of the Economics Area at the University of Chicago; and Parag Pathak of the Department of Economics at Massachusetts Institute of Technology (MIT).

Many financial markets have recently become subject to new regulations requiring transparency. In our recent NBER working paper, The Effects of Mandatory Transparency in Financial Market Design: Evidence from the Corporate Bond Market, we study how mandatory transparency affects trading in the corporate bond market. In July 2002, the Trade Reporting and Compliance Engine (TRACE) program began requiring the public dissemination of post-trade price and volume information for corporate bonds. Dissemination took place in four phases over a three-and-a-half year period, with actively traded, investment grade bonds becoming transparent before thinly traded, high-yield bonds.

…continue reading: The Effects of Mandatory Transparency in Financial Market Design

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