July 2009


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. 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

SEC Publishes Proxy Access Proposals
The SEC published rule proposals that would change the federal proxy rules to facilitate the rights of shareholders to nominate directors to a company’s board. The Commission had voted 3-2 to propose the new rules at the Commission’s May 20th open meeting. Proposed Rule 14a-11 would allow shareholders to include their nominees for director in the company’s proxy materials if they have been shareholders of the company for at least one year and satisfy a minimum holdings test based on the company’s market value. The proposed rule would apply to all Exchange Act reporting companies, including investment companies, other than debt-only companies.

Shareholders would be required to sign a statement declaring their intent to own the shares through the annual meeting, and would be required to certify that they are not holding their stock for the purpose of changing control of the company, or to gain more than minority representation on the board of directors. The nominating shareholder would be liable for any false or misleading statements in information provided to the company that is then included in the company’s proxy materials. Release No. 33-9046 is reported at ¶88,639 (ip access user).

Staff Accounting Bulletin Conforms Guidance With FASB Pronouncements
The Office of the Chief Accountant and the Division of Corporation Finance issued Staff Accounting Bulletin No. 112 to make their interpretive guidance consistent with current accounting and auditing guidance and SEC rules and regulations. The bulletin brings the guidance into conformity with recent pronouncements by the Financial Accounting Standards Board on business combinations and noncontrolling interests in consolidated financial statements. Under Topic 2, on business combinations, the staff retitled a previous reference to the purchase method since it is now referred to as the acquisition method. Other guidance was either amended or removed. The bulletin also amended or removed guidance under Topic 5 on miscellaneous accounting, and the Topic 6 interpretations of Accounting Series Releases and Financial Reporting Releases. The bulletin contains a question and answer format under each of those topics which involve fact-specific scenarios. Staff Accounting Bulletin No. 112 is reported at ¶75,579 (ip access user).

Short-Swing Claims in Brocade Case Time-Barred
Short-swing liability claims under Exchange Act Section 16(b) were time-barred, concluded a 9th Circuit panel. The claims involved the grant of call options by Brocade Communication System, Inc. Brocade officers have been involved in other civil and criminal litigation connected to options backdating. The trial court dismissed the claim because the plaintiff failed to allege facts sufficient to establish that Brocade's grants of call options were not exempt under Exchange Act Rule 16b-3(d). The district court rejected the plaintiff's theory that defendants' transactions did not qualify for the Rule 16b-3(d)(1) exemption because the call options were backdated.

The appeals panel expressed doubt that "the plaintiff had an obligation to affirmatively plead the inapplicability of any exemption to Section 16(b)," but found it unnecessary to reach that issue because the claims were precluded by the statute of limitations. The plaintiff asserted that the limitations period should be tolled because the defendants filed inaccurate disclosures under Section 16(a), including statements by the defendants that the call options granted by Brocade were covered by a Rule 16b-3 exemption. According to the court, such a view would be "inconsistent with the statutory scheme because it would effectively eliminate the two-year limitations period in any case that turned on the applicability of an exemption." Roth v. Reyes (9thCir) is reported at ¶95,244 (ip access user).

Review of SEC Order Denied
A District of Columbia Circuit panel denied a petition for review of an SEC order. After repeated failures to respond to requests for information, the NASD had expelled a member firm and permanently barred its president from associating with any NASD member. The SEC sustained the sanctions as neither excessive nor oppressive. In an earlier decision, the panel found that the SEC had abused its discretion by failing to address mitigating factors and by affirming the severe sanctions imposed by the NASD without identifying any remedial, rather than punitive, purposes for the sanctions. On remand, the SEC again sustained the sanctions.

On appeal, the firm argued that the Commission gave insufficient weight to mitigating factors, specifically that the failure to respond was of no potential monetary benefit, did not result in any injury to the investing public and that the information requested did not relate to injurious conduct or conduct of potential monetary benefit. The Commission responded that failure to respond "undermines NASD's ability to detect misconduct" and that the responses, if given, "could have revealed improper expense sharing and unreported securities transactions." The panel held that the Commission did not abuse its discretion and complied with the panel's mandate on remand.

The firm then argued that the Commission abused its discretion in determining that the sanctions were remedial. The panel disagreed, finding that the Commission reasonably determined that sanctions were necessary. Moreover, the court noted that, as long as the sanction is neither excessive nor oppressive, the Commission is not required "to choose the least onerous of the sanctions." Paz Securities, Inc. v. SEC (DofCCir) is reported at ¶95,241 (ip access user).

Case Remanded for Rule 11 Sanctions
An 11th Circuit panel affirmed a district court's judgment dismissing an action brought by the owners of 50 percent of a limited liability company. The action arose out of the sale of a fifty-percent interest in the company from one of its two groups of owners to the other. The seller agreed to sell after the buyer represented that no third party was providing funds to pay the seller. The buyer refused to disclose, stating that the seller was bound by the parties' buy-sell agreement, and the third party maintained that it was not involved, so the seller eventually transferred its interest to the buyer. Later, the seller discovered that a third party had been involved and filed against the buyer in state court for breach of fiduciary duty and against the third party in federal court for violations of state and federal securities laws. The seller lost both cases on summary judgment.

On appeal, the panel found that the complaint failed to show evidence from which a jury could infer that the sellers would not have sold their interest in the company. According to the panel, the evidence indicated that the company's principals would have no choice but to sell their share even if they had known about the third party's involvement. Regarding the state law claims, the panel agreed with the district court's judgment that the sellers failed to establish a breach of fiduciary duty or a case of aiding and abetting.

The panel then found that the district court abused its discretion in refusing to sanction the sellers' attorney for failing to comply with the requirements of Rule 11(b) of the Federal Rules of Civil Procedure in bringing their federal claims. The Private Securities Litigation Reform Act requires courts to review pleadings to determine if the parties have engaged in abusive litigation. The panel stated that it was an error for the district court to treat the fifteen claims brought by five plaintiffs as a whole rather than individually. Had it done so, the panel continued, "it would have concluded that the securities fraud claims of [the company's] co-plaintiffs' were patently frivolous," and "a reasonably competent attorney would have reached the same conclusion." The panel also noted that the attorney certified that the sellers relied on misrepresentations about the third party's involvement while "knowing that the allegation lacked evidentiary support and that the claim would fail." There was similarly no support for the sellers' controlling person and breach of fiduciary duty claims. The panel reversed and remanded the case for the imposition of sanctions. Ledford v. Peeples (11thCir) is reported at ¶95,238 (ip access user).

CCH Blue Sky Law Reporter

Kansas Adopts Prohibition on Senior-Specific Professional Designations
Kansas-registered broker-dealers, agents and investment advisers are prohibited by the Kansas Uniform Securities Act from using certain professional designations that state or imply specialized knowledge of the financial needs of senior investors. The use of these "senior designations" by a broker-dealer, agent or investment adviser is a fraudulent, unethical practice. Only those professional designations attained through prescribed training offered by a nationally recognized accredited institution are approved professional designations by the Securities Commissioner. ¶26,403E (ip access user), ¶26,414D (ip access user).

Shareholders' Preemptive Rights Did Not Equate to "Control"
In Trans Pacific Interactive, Inc. v. U.S. Telemetry Corp., the Louisiana Court of Appeal affirmed the grant of an exception of no cause of action regarding the defendant shareholders' liability as control persons under the Louisiana Blue Sky Law. The plaintiff had alleged that an issuer of securities had made material misrepresentations that caused the plaintiff to exchange a radio spectrum license in exchange for shares of stock, a transaction that ultimately resulted in substantial financial losses to the plaintiff. Adopting the reasoning of the trial court, the appellate court held that the plaintiff's petition contained no factual allegations to support a claim that the defendants incurred secondary liability because they controlled the operations of the issuer. Although the defendants possessed certain preemptive rights as strategic shareholders of the issuer, this did not equate to "control" within the meaning of the statute. The decision is reported at ¶74,769 (ip access user).

Aspen Federal Securities Publications

A Practical Guide to SEC Proxy and Compensation Rules, Fourth Edition, edited by Amy L. Goodman, John F. Olson, and Lisa A Fontenot. The 2009 Supplement (ip access user) to the Fourth Edition is now live on the IRN Corporate Governance Integrated Library. This analytical treatise includes comprehensive analysis of the SEC’s revised executive compensation disclosure rules and discusses the increase of shareholder activism. The 2009 Supplement continues to be written by a team of experts with a wealth of practical experience in counseling clients on these issues and includes: an updated discussion of executive and Board compensation practices with discussion of the requirements in the Emergency Economic Stabilization Act of 2008 and American Recovery and Reinvestment Act of 2009; a revised Chapter 3 on the Compensation Discussion and Analysis section of the proxy statement, including a detailed review of SEC guidance and comments issued to companies to assist preparation of their CD&A; a discussion of the developing practices and experiences of companies during the first year of e-proxy; an updated discussion of the shareholder communications rules, recent experience regarding dissident Board slates, and legislative developments and new advance notice model Bylaw provisions; a revised chapter regarding shareholder proposals including a discussion of recent SEC no-action letters and 2009 SEC guidance regarding the shareholder proposal process; a revised chapter on considerations in adopting equity incentive plans reflecting current RiskMetrics Group policies regarding executive compensation practices and stock plans; and new appendices, including Treasury Department executive compensation guidelines and SEC guidance regarding the “say on pay” requirements applicable to TARP recipients, and proposed (now adopted) NASDAQ corporate governance rule amendments.

Regulation of Securities: SEC Answer Book, Third Edition, by Steven Mark Levy. The 2009-2 Supplement (ip access user) is live on the IRN Securities Integrated Library. This practical guide aids the reader in understanding and complying with the day-to-day requirements of the federal securities laws that affect all public companies. Using a question-and-answer format similar to that which the SEC has embraced, this guide provides clear, concise, and understandable answers to the most frequently asked securities compliance questions. In this latest update, Chapter 2, which is completely rewritten and renamed Electronic Filing, expands and updates the discussion on preparing and transmitting documents electronically, obtaining a temporary or continuing hardship exemption, making modular submissions and segmented filings, and providing financial statements to the SEC and on the company’s Web site in interactive data format using XBRL. Chapter 4, Audit Committee, has also been completely rewritten to address the demanding role of the audit committee in protecting the interests of shareholders, and includes new material on administering the accounting engagement, complying with audit committee proxy statement disclosure rules, communicating with the auditor about critical accounting policies and alternative disclosure treatments within GAAP, disclosing financial expert information, establishing procedures for handling reports of corporate wrongdoing, guarding against fraudulent interference with the work of the independent auditor, and understanding the liability risks for audit committee members and how to reduce them. Chapter 12, which is rewritten and renamed Using the Internet, explains the role of the company Web site as a supplement or alternative to EDGAR, and adds new material on the format and readability of information appearing on the Web site, document delivery through electronic media, the SEC’s “access equals delivery” rule for the final prospectus, Web site posting of proxy materials, Regulation FD—Fair Disclosure—considerations, electronic shareholder forums, Web site solicitation of offshore securities transactions, Web site posting of interactive data, and the company’s potential liability for Web site content. Other updates to the treatise include: discussion of the status of derivatives as “securities;” the status of the SEC’s reputation for competence in light of failures in its oversight of Bear Stearns, Bernard Madoff, and others who figure in the current financial crisis; key considerations for establishing disclosure controls and procedures in order to ensure that all financial and other information required to be disclosed is gathered, analyzed, and passed along in a timely manner to employees who prepare disclosures and top executives who certify them for truthfulness; eligibility of foreign institutions to be considered qualified institutional investors for purposes of filing Schedule 13G; revised securities law exemptions that apply to cross-border transactions in order to entice bidders and issuers in such transactions to permit U.S. security holders to participate in the same manner as other security holders; protections from liability for forward-looking statements; and revisions to the definition of a Rule 13e-3 going private transaction.

Investment Adviser’s Legal and Compliance Guide, by Terrance J. O’Malley. The 2009 Supplement (ip access user) is now live on the IRN Investment Management Integrated Library. This title reflects the most current discussion of legal and compliance topics for investment advisers, including fundamental issues arising under the Adviser Act, and incorporates the latest SEC guidance provided in rule releases, policy statements, no-action letters, and SEC staff speeches. This 2009 update includes information about new filing requirements on Form SH for certain advisers who engage in short sales; updated information regarding the ability of advisers to show past specific recommendations in client marketing materials; the latest SEC staff guidance regarding the application of Rule 206(4)-3, the cash solicitation rule, to arrangements involving the referral of investors to private funds; additional compliance testing considerations for advisers with custody of client assets; new information for addressing market manipulation, including activities relating to false rumors; additional information about business continuity plans; additional “Examination Alerts,” “Regulatory Alerts,” and “Compliance Tips”’ throughout the Guide; and includes the latest version of the Advisers Act, the rules, and Form ADV.

Raising Capital: Private Placement Forms & Techniques, Third Edition, by J. Robert Brown, Jr., The Late Herbert B. Max. The 2009 Supplement (ip access user) is live on the IRN Securities Integrated Library. This unique resource provides practice tested forms and up-to-date expert guidance for successfully launching private placement investment transactions. The authors illustrate a variety of proven techniques for raising capital and explain ways to accommodate the investor’s demands for protection while maintaining the flexibility necessary for efficient operation and growth in today’s business and regulatory environment. This latest update contains a revised chapter on Subchapter S Corporations, which includes agreements such as a Shareholders Agreement, Stock Purchase Agreement for Acquisition of Subchapter S Corporation, Stock Purchase and Transfer Restriction Agreement, Shareholders Purchase Agreement, Trust Supplement to Shareholders Agreement, and a Merger Agreement Between a C Corporation and an S Corporation, and also includes a variety of covenants, warranties, and resolutions relating to S corporations; an updated chapter on Small Business Investment Companies (SBIC), including relevant forms and provisions such as SBIC Management Assessment Questionnaire and License Application, Agreement and Plan of Merger Involving SBIC, provision providing SBIC covenants, provision providing for regulatory compliance cooperation, and bylaws of SBIC corporation; and a revised chapter discussing partnerships and their tax and securities law implications, which chapter now contains 60 forms including agreements, certificates, and sample contract clauses.

Financial Reporting Handbook, by Michael Young. The latest release, Release 23 (ip access user), published in June and is live on the IRN Corporate Governance Integrated Library. This reference provides quick access to critical aspects of financial reporting. In addition to covering the Sarbanes-Oxley Act, SEC rules and regulations, standards of the Independence Standards Board and the AICPA and requirements of the New York Stock Exchange, NASDAQ, and the American Stock Exchange, the Financial Reporting Handbook tackles important underlying themes such as the centrality of the audit committee, the individual responsibility of executives, and the integrity of the outside auditor.

Hot Topic of the Month

This month’s hot topic is scheme liability. The federal securities laws do not provide investors with a private right of action against persons who aid and abet violations of the antifraud provisions of the Exchange Act. In its 1994 decision, Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., the U.S. Supreme Court said that the statutory prohibition did not include giving aid to a person who commits a manipulative or deceptive act. Policy arguments were advanced both in support of and against an aiding and abetting cause of action, but policy considerations could not override the Court's interpretation of the text and structure of the Act. The scheme liability theory of fraud liability emerged in federal courts as a way to circumvent the Central Bank decision and allow private actions against secondary actors under the theory that these persons helped further the fraudulent scheme.

In January 2008, the Supreme Court revisited this issue with regard to claims for "scheme liability" in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. The Court found that parties involved in a series of allegedly fraudulent transactions who made no public statements or misrepresentations could not be liable to investors in a private action. In rejecting scheme liability in this case, Justice Kennedy wrote that such a theory "does not answer the objection that petitioner did not in fact rely upon respondents' own deceptive conduct." The court concluded that the acts of the non-speaking parties" which were not disclosed to the investing public, are too remote to satisfy the reliance requirement." The court also cautioned that such an expansion of fraud liability could "allow plaintiffs with weak claims to extort settlements from innocent companies." This risk could be disruptive to the marketplace, as contracting parties could face increased costs and foreign firms could be deterred from doing business in the United States.

We publish information in a wide range of resources (e.g., Federal Securities Law Reporter, Insights – Amy L. Goodman, Securities Regulation Loss & Seligman, etc.), and document types (cases, laws, regulations, 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:

#1001 IPO Offerings

Evaluate IPO professional firms (“IPO Team Members”) by IPO activity for 2009.

Review IPO Team Members by fourteen characteristics

  • Offer Date
  • SIC Code
  • Ticker Symbol
  • Exchange
  • Offer Price
  • Number of Shares
  • Gross Spread
  • Offer Amount
  • Market Capitalization
  • Revenue
  • Net Income
  • Net Worth
  • Days in Registration
  • Estimated Out-of-Pocket Expenses

Tip! To get a comparative reading of all going concern disclosures highlighted in this IPO Vital Sign, click the [All] button located in the Going Concern Disclosure column header. Click the compare button to open up the full disclosure window. To deselect all of the disclosures, click the [None] button, also located in the column header.