December 2008


From the editors of CCH Federal Securities Law Reporter, CCH Blue Sky Law Reporter and the securities publications of Aspen Publishers, this update describes important developments covered in these publications, as well as timely topics of interest generally to federal and state securities practitioners. This update includes a new feature, “Market Crisis Resources,” a compilation of links to vital information on the current market crisis. Also included is a “Hot Topic of the Month,” with research tips and references to CCH and Aspen source material on point. Finally, this update includes a preview of IPO Vital Signs, an advanced IPO research analysis tool, for IPO professionals and pre-IPO companies.

To view past issues of the Securities Update, please visit http://business.cch.com/updates/securities.

If you have questions or comments concerning the information provided below, please contact me at rodney.tonkovic@wolterskluwer.com.

 

CCH Federal Securities Law Reporter

Money Market Funds Interim Rule Adopted
 The SEC adopted an interim final temporary rule under the Investment Company Act of 1940 to provide regulatory relief for money market funds that choose to participate in the Treasury Department’s temporary guaranty program. The program includes a procedure for the orderly liquidation of money market fund assets in certain circumstances. Interim final temporary Rule 22e-3T will permit money market funds that commence liquidation under the Treasury Department program to temporarily suspend redemptions of outstanding shares and postpone the payment of redemption proceeds. Release No. IC-28487 will be published in Report 2355 at ¶88,410.

SEC Releases IFRS Roadmap
The SEC released its proposed roadmap for the potential use of financial statements prepared in accordance with international financial reporting standards by U.S. issuers. The roadmap was approved by the Commission on August 27. The roadmap sets forth several milestones that, if achieved, could lead to the required use of IFRS by U.S. issuers in 2014. The roadmap also includes discussion of various areas of consideration for market participants related to the eventual use of IFRS in the U.S. Release No. 33-8982 will be published in Report 2355 at ¶88,409.

11th Circuit: SLUSA Dismissal of Claims Against Merrill Lynch Proper
State law claims brought by the Instituto de Prevision Militar, a Guatemalan agency charged with administering benefits for the country's military personnel, against Merrill Lynch were preempted by the Securities Litigation Uniform Standards Act (SLUSA), concluded an 11th Circuit panel. As alleged, an entity called Pension Fund of America solicited IPM to invest agency funds and deposit those funds with Merrill Lynch. IPM claimed that it relied on Merrill Lynch's reputation when it decided to invest more than $7.7 million in "retirement trust accounts" comprised of a life insurance component and a mutual fund component. IPM claimed that Merrill Lynch subsequently allowed Pension Fund of America to unlawfully transfer to itself more than $3 million from the IPM account. In Florida state court, IPM sued Merrill Lynch, but re-filed the action in federal court to comply with a federal case management order. The complaint alleged state law claims of negligence, breach of fiduciary duty and fraud. Subsequently, pursuant to an order of the federal district court, on IPM's motion, the instant case, a securities class action and a similar lawsuit against Lehman Brothers were consolidated for discovery purposes. The district court then held that all IPM claims were preempted by SLUSA. A second complaint, which added an Exchange Act fraud claim, was also dismissed.

The first step in the appellate panel's analysis was to determine if the claim was a "covered class action." There are two definitions of such a claim under SLUSA. The first is a single lawsuit involving more than 50 persons, or an action with a representative of unnamed parties similarly situated, while the second involves any group of lawsuits filed in the same court involving common questions of law or fact, in which damages are sought on behalf of more than 50 persons and the lawsuits are joined, consolidated, or otherwise proceed as a single action for any purpose. The "single lawsuit" with more than 50 claimants definition was inapplicable, as IPM was a single entity suing in its own name, and was not established for the purpose of litigation. With regard to the second, the court found, however, that the claims fit within the "group of lawsuits" definition of a covered class action. The actions were in the same court and satisfied the numerosity requirement. Despite IPM's claims that the suits did not involve common legal and factual questions, the appellate panel found that "how PFA represented itself to IPM is a common issue of fact critical to all three cases" and "whether these representations were "in connection with the purchase or sale" of a security is a common question of law."

Finally, the court found that the "plain language" of the consolidation requirement was easily satisfied because the actions "undeniably were consolidated by the district court for discovery purposes." The court rejected the plaintiff's argument that the "consolidation...for any purpose" language was not meant to cover bona fide individual actions like this case. Even though the panel conceded that IPM's theory of congressional intent draws some support from the overall structure of the act, the provision's "unambiguous" language was controlling. The court cautioned that if IPM sought to avoid SLUSA preclusion, it should have raised that issue as an objection to discovery consolidation. Because "IPM expressly requested that the court consolidate all three cases for discovery purposes," the agency "cannot now complain about the consequences of its own request." Instituto de Prevision Militar v. Merrill Lynch (11thCir) will is reported at ¶94,888 (ip access user).

Attorneys Liable for False Statements Made to Third Parties
A 9th Circuit panel reversed a district court's holding that the former chief financial officer of a company failed to state a claim upon which relief could be granted. The action arose out of a settled civil suit filed against the CFO after she resigned from the company due to concerns about illegal conduct. Under the settlement, the CFO received a substantial amount of the company's common stock, but shortly after the settlement was finalized, the company's CEO was indicted, and the stock received in the settlement "plummeted in value." The former CFO then brought an action against the company's attorneys, alleging that she relied on the attorneys' false representations that there was no criminal investigation targeting the CEO. The district court (DC Ariz) dismissed the CFO's federal fraud claims and numerous state law claims.

The district court relied on state law in finding that the CFO had no right to rely on opposing counsels' statements. The panel disagreed, finding that the district court erred due to the well-settled principle that claims arising under a federal statute are appropriately decided under federal law. The panel then found that an attorney can be liable under Exchange Act Section 10(b) for statements made to third parties. According to the panel: "An attorney who undertakes to make representations to prospective purchasers of securities is under an obligation, imposed by Section 10(b), to tell the truth about those securities. That he or she may have an attorney-client relationship with the seller of the securities is irrelevant under Section 10(b)." The panel accordingly held that the CFO alleged sufficient facts to survive a motion to dismiss and that the complaint satisfied the Private Securities Litigation Reform Act pleading requirements. Thompson v. Paul (9thCir) is reported at ¶94,884 (ip access user).

Class Certification Denied on Loss Causation Grounds
The U.S. District Court for the Northern District of Texas refused to certify a class on loss causation grounds in an action against Halliburton Co. The court agreed that the plaintiffs met all the requirements for certification except for meeting the 5th Circuit's loss causation standard established in Oscar Private Equity Investments v. Allegiance Telecom, Inc. in 2007. This requirement, as described by the district court, "imposes an exceedingly high burden on [p]laintiffs at an early stage of the litigation." Because the plaintiffs failed to link "the alleged corrective disclosures with prior actionable misrepresentations," the court declined to certify the class. Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co. (ND Tex) will be published in Report 2355 at ¶95,002.

Market Crisis Resources

This section provides links to vital information on the current market crisis. We offer a compendium of newsletter articles, white papers, primary source documents (e.g., regulations, releases, guidance, etc.), and other information to help track and understand the recent market upheavals and ensuing regulatory response.

For current coverage of legislative and regulatory developments concerning the market crisis, please see Jim Hamilton's World of Securities Regulation blog at http://jimhamiltonblog.blogspot.com

See SEC Today for daily coverage of SEC news and policymaking, including a cover story detailing an issue or event of interest to the securities industry (see e.g., 11-24-08 (ip access user)

Federal Securities Law Reporter

Other reporters

White Papers and Memos

  • Financial Regulation Reform: What to Expect in the 111th Congress, by James Hamilton, (Nov. 2008) (ip access user)
  • The Other Bailout: How the Fed is Financing the Financiers, and Related SEC Disclosure, by Mark S. Nelson (Nov. 2008) (ip access user)
  • The Economic Bailout: An Analysis of the Emergency Economic Stabilization Act, by Katalina M. Bianco and John M. Pachkowski (Oct. 2008) (ip access user)
  • Market Crisis Focus on Short Selling: SEC Adopts Rules to Curb Abusive Practices, by James Hamilton (Sept. 2008) (ip access user)
  • Congress Overhauls Regulatory Regime for Fannie Mae and Freddie Mac, by James Hamilton (Aug. 2008) (ip access user)
  • The Subprime Lending Crisis: Causes and Effects of the Mortgage Meltdown, by Katalina M. Bianco (April 2008) (ip access user)

Newsletters and Updates

CCH Blue Sky Law Reporter

Colorado Modifies Investment Company and 1933 Act Exemptions; Limits Use of Senior Certifications or Designations Exemptions for securities issued by investment companies and for transactions in securities made under Section 3(b) or 4(2) of the Securities Act of 1933 were modified by the Colorado Securities Division. Additionally, the NASAA Model Rule on the use of senior-specific certifications and professional designations was adopted for Colorado. ¶13,425 (ip access user), ¶13,427 (ip access user), ¶13,437 (ip access user), ¶13,448 (ip access user).

Louisiana Adopts Compensatory Benefit Plan Exemption and Third Party Solicitor Rule
An exemption for compensatory benefit plans and a rule defining third party solicitors were adopted by the Louisiana Office of Financial Institutions. The compensatory benefit plan exemption is available for an issuer's offers or sales of a security in connection with a written compensatory benefit plan or contract if the offers and sales qualify for a registration exemption under SEC Rule 701.A third party solicitor is an investment adviser representative whose investment advisory business involves only referring individuals to other investment adviser firms, does not provide advice to individuals about specific investments, and whose fees consist only of referral fees received from the investment adviser firms to whom the investment adviser representative made referrals. ¶28,520, ¶28,535 (ip access user).


Allegations of Deceptive Market Timing Stated a Martin Act Claim
The Supreme Court of New York (County of New York) has ruled that a complaint filed by the New York Attorney General successfully stated a claim under the New York Blue Sky Law (Martin Act) by alleging that the defendants deceptively evaded restrictions against “market timing” in the purchase and sale of mutual fund shares. In State v. Samaritan Asset Management Services, Inc., the Attorney General sought a permanent injunction and restitution in an action against a hedge fund sponsor and several affiliated persons, claiming that the defendants engaged in fraudulent conduct by improperly bundling trade orders through various brokers in order to circumvent the mutual funds’ restrictions against excessive short term trading.

Although no New York court had ruled on the issue, the court relied in part on several federal court decisions which held that similar deceptive and evasive actions constituted a violation of federal Rule 10b-5. Moreover, it was well settled under New York law that an omission, concealment, or suppression of information may be actionable as a fraudulent practice under the Martin Act’s provisions. Accordingly, the court ruled that the Attorney General’s complaint sufficiently alleged that the use of multiple accounts and omnibus accounts to evade market timing restrictions constituted fraudulent practices as defined by the Martin Act. The decision is reported at ¶74,739 (ip access user).

Aspen Federal Securities Publications

Securities Regulation, by The Late Louis Loss, Joel Seligman, and Troy Paredes
The 2009 Cumulative Supplement (ip access user), which published in November, updates the cornerstone Securities Regulation treatise. Part of the Securities Integrated Library on IRN, the supplement fully incorporates the large number of legislative, regulatory, and case law changes in the past year, including the SEC’s adoption of amendments to rules under the Investment Company Act of 1940 pursuant to the Sudan Accountability and Divestment Act of 2007; the SEC’s adoption of the antifraud rule—new Rule 206(4)-8 under the Investment Advisers Act; the SEC’s announcement of the creation of a new Office of Interactive Disclosure; the SEC’s adoption of Form S-11 amendments to permit historical incorporation by reference; the SEC’s adoption of amendments to the eligibility requirements for Forms S-3 and F-3 for private offerings; the SEC’s adoption of a number of regulatory changes intended to ameliorate the regulatory burden smaller reporting companies encounter and to afford smaller companies regulatory simplification; guidance on Item 402 disclosures; the SEC adoption of rule amendments terminating the requirement that foreign private issuers using IFRS as issued by the IASB reconcile their financial statements to U.S. GAAP and the SEC’s steps for implementing mutual recognition; the SEC’s adoption of new rules permitting termination of a foreign private issuer’s registration of a class of securities under § 12(g) of the Exchange Act and the duty to file reports under the Exchange Act; the SEC’s adoption of amendments to Rule 14a-8(i)(8) and future proposals to amend the rule in light of the Second Circuit’s decision in American Fed. of State, County & Mun. Employees v. American Int’l Group, Inc.; the adoption of final rules by the SEC and Federal Reserve Board to implement the broker exceptions for banks relating to third-party networking arrangements, trust and fiduciary activities, sweep activities, and custody and safekeeping activities; and a discussion of the SEC, the Office of the Comptroller, the Office of Thrift Supervision, the Federal Reserve System, and the FDIC issuance of a final interagency statement on Sound Practices Concerning Elevated Risk Complex Structured Finance Transactions (CSFTs) applicable to banks, bank holding companies, depository institutions, and SEC registered broker-dealers and investment advisers.

Capital Markets Handbook, Edited by John C. Burch, Jr. and Bruce S. Foerster
The 2009 Supplement (ip access user) published in November and is now live on both the Securities Integrated Library and the International Business Integrated Library on IRN. This supplement includes new information relating to the Bear Stearns “bailout” — another step in the vast expansion in the influence and power of the Federal Reserve Bank; increased SEC filing fees; updated and expanded treatment of Rule 144A and the PORTAL Market, including the agreement of major firms to cooperate with NASDAQ on a single platform to track the number of investors and fulfill reporting requirements under Section 12 of the ’34 Act, and to allow securities that settle by a process other than through DTC PORTAL eligibility; amendments that permit companies with less than $75 million in float to register on Form S-3/F-3, expanding the number of companies eligible for shelf registration and Registered Direct or Registered PIPE offering techniques; amendments to Rule 144 classifying investors as “affiliates” and “non-affiliates,” reducing the holding period and changing the threshold for filing Form 144; updates to various Appendices; and an expanded Glossary.

U.S. Regulation of the International Securities and Derivatives Markets, Ninth Edition published in November and will soon be live on both the Securities Integrated Library and the International Business Integrated Library on IRN. This resource provides the only available comprehensive analysis of the application of U.S. securities and commodities laws to participants and transactions in securities and derivatives in the international capital and financial markets. This publication provides in-depth analysis of the legal framework for all types of securities offerings—from registered ADR programs and private placements to common stock and highly structured instruments. It also offers guidance on U.S. regulations governing securities brokers and dealers, foreign banks, investment companies and investment advisers, as well as futures commission merchants, commodity pool operators and commodity trading advisors. The new Ninth Edition reflects the many changes in the law and other developments since publication of the Eighth Edition, including the substantial liberalization of the rules allowing foreign private issuers to terminate their Exchange Act reporting obligations; the acceptance by the SEC of financial statements of foreign private issuers prepared in accordance with IFRS, as issued by the IASB, without a reconciliation to U.S. GAAP; the PCAOB’s new auditing standard regarding internal control over financial reporting and the SEC’s guidance to management on its assessment of internal control over financial reporting; the development of market practice in respect of the changes introduced by the Securities Offering Reforms adopted in 2005; the recent revisions to Rule 144 under the Securities Act, which substantially liberalize the requirements for the public resale of privately placed securities; the implementation of the Market in Financial Instruments Directive, a key component of the European Union’s Financial Services Action Plan; the adoption by the SEC and the Board of Governors of the Federal Reserve System of Regulation R, the so-called “push-out” rules relating to permissible securities activities by banks under the Gramm-Leach-Bliley Act of 1999; and recent decisions by the U.S. Supreme Court narrowing the scope of Exchange Act Rule 10b-5 and requiring greater specificity in pleadings to avoid a motion to dismiss claims under that rule.

 

Corporate Secretary’s Answer Book, by Cynthia Krus
The 2009 Supplement published in November and will soon be live on the IRN Corporate Governance Integrated Library. The supplement adds a new chapter that provides extensive guidance of the various rules and procedures applicable to SOX whistleblower claims; a new chapter discussing electronic communications, including the forms electronic communications may take and the federal securities laws impacting and impacted by such communications; a summary of the SEC’s guidance regarding companies’ CD&As; coverage of the SEC’s new guidance relating to corporate websites; and the latest corporate governance developments. A significant number of new questions are added such as: Can a company call for the adjournment of a specific proposal in order to solicit additional votes for that proposal? What are the “full set delivery” and “notice only” models for electronic delivery under the e-proxy rules? Are shareholders submitting proposals relating to climate change and environmental issues? Can board committees use external advisors or conduct investigations? Are audit committees required to hold executive sessions every quarter? Are audit committees required to review quarterly financial statements or earnings releases? Can companies aggregate multiple transactions required to be reported on Form 4? Do the amendments to Rule 144 affect Form 4? What is a stock repurchase program? Are any companies incorporating social responsibility provisions into their formation documents? How does a company become a B Corporation? What is the SEC’s current guidance regarding website disclosure? Do advance notice bylaw provisions serve to protect corporations from untimely shareholder proposals? Is posting information on a company’s website considered selective disclosure? Do the exchanges offer any guidance regarding compliance with the corporate governance listing standards?

Securities Regulation in Cyberspace, by Howard M. Friedman
The 2009 Supplement (ip access user) published in November and will soon be live on the IRN Securities Integrated Library. This treatise analyzes the interweaving of technology and the securities laws, providing in-depth review of the tremendous impact technological advancements such as the Internet have had, and will continue to have, on securities regulation. The 2009 Supplement includes proposed rules calling for mandatory tagging of financial statements in XBRL, and their posting on company websites; amendment of proxy rules to facilitate the use of electronic shareholder forums; mandated electronic filing of Form D; new rules calling for publication of home-country information online by foreign companies exempted from 1934 Act reporting obligations; proposal of new summary prospectus rule for mutual funds; proposed rules on exchange traded funds requiring online disclosure of fund’s portfolio, net asset value, and closing price; proposed rules requiring mutual funds to tag risk/return data in XBRL; the SEC’s 21st Century Disclosure Initiative; proposed rule requiring online disclosure by rating agencies of rating changes; and an updated and expanded list of online resources for lawyers.

Hot Topic of the Month

This month's hot topic is fraud pleading standards. As stock prices tumble across the board, investors may seek to recover their losses in class action litigation against issuers. However, recent decisions from the federal circuit courts suggest that significant obstacles now hinder the road to recovery.

In order to recover, among other elements, plaintiffs must plead and prove that the defendants acted with fraudulent intent (scienter) and that their actions caused the plaintiffs' financial losses. With regard to scienter, courts have long recognized that it is insufficient merely to claim that individual defendants were senior officers of a company. However, recent circuit court cases have reached different conclusions on the question of whether an inference may be drawn that senior management must be aware of matters involving the company's "core operations," including any fraudulent conduct, and whether "collective scienter" may be actionable in the absence of a sufficient inference of scienter attributable to a particular individual.

The question of loss causation becomes more challenging in a rapidly declining market, as investors can find it difficult to attribute stock price declines to company-specific fraud rather than general market conditions. Pleading loss causation has evolved into "mini-trials" at a very early stage in the proceedings, and plaintiffs are expected to present expert testimony that specifically links the alleged fraud to the financial losses.

The strictest standard may be found in the Texas-based 5th Circuit, where plaintiffs must prove by a preponderance of the evidence the existence of a sufficient and specific causal link between corrective disclosures of alleged fraudulent misstatements and stock price drops. In contrast, the San Francisco-based 9th Circuit recently took a much more permissive view, stating that "[s]o long as the complaint alleges facts that, if taken as true, plausibly establish loss causation," the case may proceed.

We publish related information in a wide range of resources (e.g., Federal Securities Law Reporter, SEC Today, Insights – Amy L. Goodman, Securities Regulation – Loss, Seligman & Paredes, etc.), and document types (laws, regulations, releases, newsletter articles, treatise discussion). For example:

IPO Vital Signs

IPO Vital Signs, an advanced IPO research analysis tool, assists IPO professionals and pre-IPO companies satisfy their most challenging research needs and answers hundreds of mission critical questions for all the players in the IPO process. IPO Vital Signs’ tabular data analyses focus on issues surrounding client advisement, deal negotiation, and prospectus disclosure.

IPO Week in Review, a weekly e-newsletter to keep professionals up to date with recent filing and going public activity, is an important element of the IPO Vital Signs system or is available by separate subscription. Coverage includes a monthly feature article on recent trends in going public in the U.S.

To see how an IPO Vital Sign works click on the Vital Sign title below:

#161 – IPO Lawyers

Who are the leading IPO lawyers??
Review IPO lawyer activity based on

  • Number of IPOs (combined)
  • Issuer's/Underwriters’ Representations
  • Aggregate IPO Offer Amount

    Hint! 1) Click a blue number to see more details on the IPOs represented, and 2) click a column heading to re-sort the table to see leadership in different categories (click once to rank ascending, twice for descending).