The Staff of the Securities and Exchange Commission has announced its intention to recommend to the Commission that enforcement proceedings alleging a violation of Regulation FD be instituted against Netflix, Inc. and its CEO, Reed Hastings, because of a posting on Mr. Hastings’ personal Facebook page. Mr. Hastings’ webpage had more than 200,000 followers, including reporters who covered the posting in the traditional press. The posting was also the subject of a tweet by TechCrunch, which has approximately 2.5 million followers on Twitter.

This article, Regulation FD in the Age of Facebook and Twitter: Should the SEC Sue Netflix?, is in the form of an amicus Wells Submission suggesting that the Commission would, for nine distinct reasons, be prudent not to initiate an action on the facts of the Netflix posting. In particular, the public record suggests that the posting did not contain material information, was not a selective disclosure, and because of its spread through social media constituted a “broad non-exclusionary distribution” that did not violate Regulation FD. A prosecution would also diverge dramatically from all prior Regulation FD enforcement proceedings, and would violate the Commission’s prior representations not to “second guess” good faith efforts to comply with Regulation FD. In addition, the posting is not inconsistent with the Commission’s 2008 Guidance on the Use of Company Webpages — guidance that is seriously outdated because of the emergence of social media.

…continue reading: Regulation FD in the Age of Facebook and Twitter

Federal securities class action activity decreased in the first six months of 2011, according to Securities Class Action Filings—2011 Mid-Year Assessment, a semiannual report prepared by the Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research. A total of 94 federal securities fraud class actions were filed in the first half of the year, representing a 9.6 percent decrease from the 104 filings in the second half of 2010. This decline includes a drop in credit-crisis filings; there were just two such filings in the first half of 2011. Twenty-four filings related to Chinese reverse mergers accounted for 25.5 percent of all filings in the first half of 2011. There were 21 traditional M&A filings in the first half of 2011, which constituted 22.3 percent of all filings. Taken together, Chinese reverse mergers and traditional M&A filings constituted 47.9 percent of all securities fraud class action complaints filed during the last six months, up from 32.7 percent in the last six months of 2010.

…continue reading: Moderate Decrease in Federal Securities Fraud Class Action Filings in First Half of 2011

Administrative agencies are wise not to contradict themselves when rulemaking: contradictions invite courts to overturn agency action as arbitrary and capricious. Also like Charles Barkley’s claim that he was misquoted in his autobiography, contradictions spawn skepticism as to the credibility of an entire enterprise.

This simple observation strikes a death knell for the Securities and Exchange Commission’s 2009 proposed Proxy Access Rules. If adopted, these rules would dramatically transform the process by which directors of publicly traded corporations are nominated and elected. They would establish a “Mandatory Minimum Access Regime” under which corporations would be compelled, even against the will of the shareholder majority, to provide proxy access in accordance with SEC-established standards. Shareholders could, by majority vote, set less stringent access standards, but could not adopt more stringent proxy access rules.

The Commission proposes to add one new rule and amend an existing rule:

• Proposed Rule 14a-11 would provide for proxy access in the event a nominating shareholder, or group of shareholders, of a large accelerated filer have, for at least one year, held one percent or more of the company’s voting securities. Access would not be available to stockholders seeking a change in control, or to stockholders seeking more than a limited number of seats on a board. Nominating stockholders would be required to make certain disclosures, subject to the antifraud provisions of Rule 14a-9. These disclosures include representations that the nominees satisfy the objective criteria for director independence set forth in listing standards, that there is no agreement with the company regarding the nomination of the nominees, and that the nominating stockholders intend to continue holding the requisite number of shares through the date of the stockholder meeting. Disclosure would also be required of relationships between the nominating stockholders, the nominee, and the company, if any.

• Modifications to Rule 14a-8(i)(8) would recast the election exclusion so as to require that companies include in their proxy materials stockholder proposals that would amend, or propose to amend, the company’s governing documents regarding shareholder nominations. The proposals could not, however, weaken or eliminate the proxy access criteria prescribed by proposed Rule 14a-11.

Taken together, the Proposed Rules create a mandatory form of proxy access to be imposed on all publicly traded corporations subject to the rule, even if the majority of each corporation’s shareholders object strenuously to the operation of the Proposed Rules. The Proposed Rules would permit modifications making access easier for stockholder-nominated directors, but forbid modification making access more difficult. Again, the will of the shareholder majority is irrelevant to the Commission. The Proposed Rules are thus accurately described as creating a “Mandatory Minimum Access Regime.”

The text of the Proposing Release is, however, at war with the text of the Proposed Rules in a clash that generates two profound contradictions. Each contradiction is sufficiently material that there is little prospect that the Proposed Rules can withstand challenge under the Administrative Procedure Act (“APA”).

…continue reading: Internal Contradictions in the SEC’s Proposed Proxy Access Rules