October 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.

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

Emergency Economic Stabilization Act Fails in House
The Emergency Economic Stabilization Act failed by a vote of 228 to 205 in the House of Representatives. The White House hopes to modify the proposal to secure sufficient votes from Republican representatives to pass the measure.

As proposed, Section 105 of the draft bailout bill would have required the Secretary of the Treasury to “review the current state of the financial markets and the regulatory system" and to report to Congress by April 2009 on “the current state of the regulatory system and its effectiveness at overseeing the participants in the financial markets, including the over-the-counter swaps market and government-sponsored enterprises. The required report was to provide recommendations on whether any participants in the financial markets that are currently outside the regulatory system should become subject to the regulatory system and how to enhance the clearing and settlement of over-the-counter swaps. In Section 117, the Comptroller was charged with studying the role of leverage in the markets. The purpose of the study would be to determine the extent to which leverage and sudden deleveraging of financial institutions precipitated the current financial crisis. The study was to examine the proper regulatory role of the Federal Reserve, the SEC, the Secretary of the Treasury and the banking regulators with respect to monitoring leverage and curtailing excessive leveraging. The study would have been due to Congress in June 2009.

In addition, Section 132 of the draft bailout bill would have authorized the SEC to suspend the operation of FAS 157, the fair value measurement standard, by rule, regulation or order for any issuer as required by the public interest and the protection of investors. Section 133 of the bill would also have required the SEC to conduct a study of mark-to-market accounting and the fair value measurement standard with regard to financial institutions. The study, to have been conducted in consultation with Treasury and the Federal Reserve, would have examined: 1) the effects of FAS 157 on financial institution balance sheets; 2) the impacts of such accounting on the current crisis; 3) the relationship between the standard and quality financial reporting; 4) the FASB standard-setting process; 5) the advisability and feasibility of modernizing the standard and 6) available alternatives to FAS 157. The SEC would have been required to report to Congress concerning the study within 90 days. Section 132 also contained a savings provision which specified that the bill did not restrict or limit any current authority of the SEC. Finally, the act would have given the SEC a crucial role in overseeing the Secretary of the Treasury in the exercise of extraordinary, but judicially reviewable, power in purchasing illiquid mortgage-backed securities from financial institutions.

The bill proposed an oversight body called the Financial Stability Oversight Board composed of the chairs of the SEC and the Federal Reserve, the HUD secretary, the director of the Federal Home Finance Agency and the Treasury secretary. The board would select its own chair, but it could not be the Secretary of the Treasury.

SEC Adopts Rules to Deal with Market Emergencies
In several emergency orders, the SEC adopted rules to curb abusive naked short selling. The Commission also adopted other measures in response to recent market developments, including restrictions on short sales of financial firm securities, antifraud and disclosure requirements, and issuer repurchase modifications. SEC also amended two of the orders concerning the short sale bar and Form SH. The SEC banned short selling in the stocks of almost 800 financial institutions out of a concern that short selling in the securities of a wider range of financial institutions may be causing sudden and excessive fluctuations of the prices of such securities in such a manner so as to threaten fair and orderly markets. The order was later amended to keep in place an exception for bona fide market making in derivatives in the securities of any included financial firm.

The SEC also adopted two new interim rules
Rule 242.204T, which requires that short sellers and their brokers deliver securities by the close of business on the settlement date and imposes penalties for the failure to do so. Rule 10b-21 expressly targets fraudulent short selling transactions. It covers short sellers who deceive broker-dealers or any other market participants and makes clear that those who lie about their intention or ability to deliver securities in time for settlement are violating the law when they fail to deliver. The SEC also issued a new disclosure rule requiring hedge funds and other large investors to disclose their short positions on new Form SH in order to ensure transparency in short selling. The Commission is permitting the non-public filing of Form SH in order to maintain fair and orderly securities markets and prevent substantial disruption in the securities markets.

The temporary orders terminate at 11:59 p.m. on October 1, 2008 unless further extended by the Commission. Release Nos. 34-58572 at ¶88,274 (ip access user); 34-58588 at ¶88,275 (ip access user); 34-57591, at ¶88,276 (ip access user); 34-57592, at ¶88,277 (ip access user); 34-58611, at ¶88,278 (ip access user); 34-57591A, at ¶88,279 (ip access user).

Commission Publishes New Foreign Company Disclosure Requirements
The SEC published amendments to rules affecting foreign issuers that had been unanimously approved at the August 27, 2008 open meeting. The three sets of rules include foreign issuer reporting enhancements that will update Securities Exchange Act filing requirements and enhance disclosure required by foreign private issuers in response to changes in foreign filing requirements, market practices, and other areas of SEC regulation. New cross-border exemptions include codifications of existing interpretive positions and exemptive orders in the cross-border area, as well as amendments to allow specified foreign institutions to report beneficial ownership on Schedule 13G to the same extent as their U.S. institutional counterparts. A third set of adopted rule amendments will eliminate the current written application and paper submission requirements under Rule 12g3-2(b) by automatically exempting a foreign private issuer from Section 12(g) under specific conditions. Release Nos. 33-8959 at ¶88,287 and 34-58597 at ¶88,286 will be published in Report No. 2347; Release No. 34-58465 at ¶88,268 (ip access user).

Non-Culpable Inferences "More Compelling" in Tellabs Analysis
A fraud complaint did not meet the Tellabs standard for pleading scienter, concluded an 8th Circuit panel. In affirming a district court's pre-Tellabs dismissal of claims based on several accounting errors and resulting restatements by Ceridian Corp., an information services and human resources outsourcing firm, the court found that the non-culpable inferences of negligence and mistake raised by the allegations were more compelling than the inferences of fraud.

The class alleged that Ceridian's senior officers participated in a scheme to artificially inflate the company's financial results by exploiting a weak or corrupt system of internal controls to commit numerous violations of Generally Accepted Accounting Principles. Initially, the appellate panel agreed with the lower court finding that the sheer number and magnitude of the financial restatements, "an amalgam of unrelated GAAP violations," without more, did not raise a sufficient inference of scienter. When viewed as a whole, however, the court found that the various allegations failed to meet the Tellabs standard. Of particular note was the court's holding on allegations that the officers must have known that their Sarbanes-Oxley Act certifications concerning the effectiveness of the company's internal controls were false, in light of the subsequent revelations of accounting errors and control deficiencies. "Allegations that accounting errors were discovered months and years later do not give rise to a strong inference that the certifications were knowingly false when made," stated the court, as the panel concluded that the complaint did not identify any specific factual basis for inferring that the officers knew their certifications were false. The court in effect observed that the plaintiffs' interpretation of the certification requirement would turn the provision into a strict liability measure, because scienter would be established in every case where there was an accounting error or auditing mistake.

Other allegations of insider trading and bonus awards were also not sufficiently suspicious. An ongoing SEC investigation which produced no adverse findings also did not show scienter, and a compelling inference that the senior officers knew of the series of GAAP violations could not be drawn from the dismissal of several mid-level accounting personnel. "The flaw in this argument," observed the court, "is that the opposing inferences --that the SEC investigation uncovered no evidence of fraud, and that accounting personnel and corporate officers responsible for the accounting function were fired or forced to depart for incompetence, not fraud-are more compelling in the absence of particular facts giving rise to a strong inference of fraud." In re Ceridian Corp. Securities Litigation (8thCir) is reported at ¶94,837 (ip access user).

 

9th Circuit Discusses Tellabs Standard
A district court will re-examine scienter allegations against Washington Mutual and its senior officers in light of the U.S. Supreme Court's Tellabs opinion following a 9th Circuit panel decision. As alleged, the officers made materially false or misleading statements concerning the company's ability to manage mortgage-related risks, because the bank was unprepared for interest rate volatility because it failed to integrate its information systems to permit it to keep a close watch on its hedging activities. The district court, in a pre-Tellabs decision, found that the scienter allegations were sufficient because knowledge by the officers of the company's "core operations" could be inferred from their positions.

On appeal, the panel reviewed the allegations in light of Tellabs, and found that when reviewing the complaint as a whole, "[a]llegations that rely on the core-operations inference are among the allegations that may be considered in the complete PSLRA analysis." Such allegations regarding management's role in a company may be relevant and help to satisfy the PSLRA scienter requirement in three circumstances, stated the court:

First, the allegations may be used in any form along with other allegations that, when read together, raise an inference of scienter that is "cogent and compelling, thus strong in light of other explanations." This view takes such allegations into account when evaluating all circumstances together. Second, such allegations may independently satisfy the PSLRA where they are particular and suggest that defendants had actual access to the disputed information...Finally, such allegations may conceivably satisfy the PSLRA standard in a more bare form, without accompanying particularized allegations, in rare circumstances where the nature of the relevant fact is of such prominence that it would be "absurd" to suggest that management was without knowledge of the matter.

Because the lower court did not have the benefit of the Tellabs decision, the appellate panel vacated the order and remanded the case for further review in light of recent case law. South Ferry LP v. Killinger (9thCir) is reported at ¶94,833 (ip access user).

CCH Blue Sky Law Reporter

Kansas Amends Exchange Listing Exemption, Net Worth Standards in NASAA Policy Statement Rule, and Registration, Custody and Dishonest Practice Rules for IAs and IA Reps
Changes to the exchange listing exemption, the net worth standards in a NASAA policy statement rule, and the registration, custody and dishonest practice rules for investment advisers and investment adviser representatives were adopted by the Kansas Office of the Securities Commissioner. ¶26,405F (ip access user), ¶26,407A (ip access user), ¶26,414 (ip access user), ¶26,414D (ip access user), ¶26,414H (ip access user).

Washington Amends its Regulation D Rules
Changes to Washington's Regulation D rules were adopted by the Department of Financial Institutions to coordinate with the SEC's adoption of amendments to federal Regulation D authorizing electronic filing of Form D through EDGAR. ¶61,751 (ip access user), ¶61,753 (ip access user), ¶61,754 (ip access user).

Defendants Required to Prove NSMIA Preemption by Proving Exemption
Consistent with rulings in several recent federal and state court decisions, the Minnesota Supreme Court has held that the National Securities Markets Improvement Act of 1996 (NSMIA) does not preempt state registration requirements with respect to securities that purport to be, but are not in fact, federal "covered securities" under Rule 506 of Regulation D. In Risdall v. Brown-Wilbert, Inc., the plaintiff investors had contended that the defendant sellers could not claim NSMIA preemption because their use of an Internet advertisement in a later, aborted offering violated Regulation D's prohibitions against the use of any form of general solicitation or general advertising. Reversing the decision of the lower court, the state high court ruled that the plain language of both NSMIA and Rule 506 indicates that federal law only preempts state registration requirements with respect to securities that actually satisfy the Rule's terms and conditions. The opinion is reported at ¶74,727 (ip access user).

Aspen Federal Securities Publications

A Practical Guide to Section 16: Reporting and Compliance, Fourth Edition, edited by Stanton P. Eigenbrodt
The 2009 Supplement (ip access user) is live on the IRN Corporate Governance Integrated Library. This publication contains complete information on reporting and filing procedures to comply with the complex shareholder, SEC, public disclosure, and stock exchange requirements. This latest update includes revised chapters relating to tax-conditioned plans, the treatment of trusts, merger and acquisition implications, and pre-IPO planning to avoid retroactive effects of Section 16. In addition, the chapter on the reporting scheme is significantly revised, including 31 updated exhibits containing examples of Form 3, Form 4, and Form 5.

Financial Reporting Handbook, by Michael Young
The latest release, Release 20 (ip access user), will soon be 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 the series of emergency orders addressing short sales. The SEC is authorized to take temporary action in the event of an emergency with respect to any matter subject to regulation under the securities laws, both by the SEC and the securities self-regulatory organizations. Emergency actions are generally limited to a 10-business day period, but may be extended, if necessary, in the public interest and for the protection of investors. In no event, however, may such an order continue in effect for more than 30 calendar days.

The Commission recently issued a series of six emergency orders addressing the current financial markets crisis. The SEC adopted rules to curb abusive naked short selling that apply to the securities of all public companies, including all companies in the financial sector. The new rule requires that short sellers and their brokers deliver securities by the close of business on the settlement date and imposes penalties for the failure to do so. A previous emergency order had only applied to 19 major financial firms, including Freddie Mac and Fannie Mae. The SEC also banned short selling in the stocks of almost 800 financial institutions out of a concern that short selling in the securities of a wider range of financial institutions may be causing sudden and excessive fluctuations of the prices of such securities in such a manner so as to threaten fair and orderly markets. The SEC also adopted a new Rule 10b-21 targeting fraudulent short selling transactions, issued a new disclosure rule requiring hedge funds and other large investors to disclose their short positions, and temporarily eased restrictions on the ability of securities issuers to repurchase their securities.

A short sale is defined as any sale of a security which the seller does not own or any sale which is consummated by the delivery of a security borrowed by, or for the account of, the seller. In a naked short sale, the seller does not borrow or arrange to borrow the securities in time to make delivery to the buyer within the standard three-day settlement period and then fails to deliver the security when delivery is due. Naked short selling is considered to be an abusive practice that can have negative effects on the market.

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:

SEC Today

  • SEC Issues Emergency Orders to Halt Short Selling in Stocks of Financial Institutions (9-22-08) (ip access user)
  • SEC Adopts Rules to Curb Abusive Short Selling (9-18-08) (ip access user)

Federal Securities Law Reporter

  • Report letter (9-24-08) (ip access user)
  • Release Nos. 34-58572 at ¶88,274 (ip access user); 34-58588 at ¶88,275 (ip access user); 34-57591, at ¶88,276 (ip access user); 34-57592, at ¶88,277 (ip access user); 34-58611, at ¶88,278 (ip access user); 34-57591A, at ¶88,279 (ip access user)
  • Exchange Act Rule 12(k)(1), at ¶23,372 (ip access user)
  • CCH Explanations (e.g., ¶22,701.020 (ip access user)

Jim Hamilton’s World of Securities Regulation (http://jimhamiltonblog.blogspot.com) (e.g. 9-23-08, 9-22-08, 9-19-08, 9-17-08)

White Papers and Memos – A white paper written by CCH Principal Analyst James Hamilton explaining the SEC’s emergency orders in response to the market crisis will appear in the white papers database shortly.

Reporting on related developments concerning the current market crisis may also be found in current and forthcoming issues of the Subprime, Mortgage and Securitization Law Update (e.g., September 2008 (ip access user)), the International Securities and Financial Reporting Update (e.g., September 2008 (ip access user)) and the Hedge Funds and Private Equity: Risk Management and Regulatory Update (October 2008 (ip access user))

IPO Vital Signs

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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.

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#172 - IPO Investment Banks

Review 2008 IPO investment bank activity by...

  • Investment Bank
    • IPOs as Lead Manager
    • Count
    • Percentage of Total
    • Aggregate Offering Amount
  • IPOs as Co-Manager
    • Count
    • Percentage of Total
    • Aggregate Offering Amount
  • IPOs as a Member of the Syndicate
    • Count
    • Percentage of Total

** equal credit joint underwriting mandates **

Tip! Click on For the period at the top of the table to open a calendar function and use the drop down boxes to select a date range, then click the [REFRESH] button to update the Vital Sign table of data. After the table is updated you can click [CLOSE] to close the calendar function and maximize the viewable area.

Click on blue numbers to drill down for more information. Click Column headings to re-sort the table’s data.