September 2007


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.

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

CCH Federal Securities Law Reporter

Comments Sought on IFRS Use by U.S. Issuers
The SEC is seeking comments on a concept release concerning the use of International Reporting Standards as published by the International Accounting Standards Board by U.S. issuers. The SEC is seeking information on the potential significance and effect of any such change to investors, issuers, and market participants, as well as on the accounting profession in general. Release No. 34-56217 at ¶87,944 (ip access user).

IRS Reference Numbers Removed from Filings
The SEC removed references to the inclusion of an issuer’s IRS identification number on certain disclosure documents and schedules. The SEC no longer uses these numbers and they are not used by investors. Release No. 33-8339 at ¶87,941 (ip access user).

EDGAR Filer Manual Updated
The SEC adopted revisions to the EDGAR Filer Manual. The changes were intended to reflect updates to the EDGAR system, including the expanded use of interactive data and recent rulemaking on foreign issuers, transfer agents and accelerated filers. Release No. 33-8834 at ¶87,945 (ip access user).

Advisory Committee Seeks Comments on Financial Reporting Improvements
An SEC advisory committee is seeking comment on a discussion paper concerning improvements to financial reporting. The committee seeks comment on, among other topics, rules versus principles-based accounting, compliance matters, usefulness and functionality of financial reports and the use of International Financial Reporting Standards. Release No. 33-8836 at ¶87,946 (ip access user).

2nd Circuit: Short Sales Were Not Manipulative
A panel of the 2nd U.S. Circuit Court of Appeals affirmed the dismissal of fraud claims. As alleged by the issuer, the defendants fraudulently induced the company to sell to them its convertible preferred stock. The defendants then aggressively short sold the company's common stock and converted the preferred stock to cover their short positions. The alleged consequence was a death spiral in the price of the issuer's stock and large profit for the defendants.

The appellate court concluded that the issuer failed to show how the transactions were unlawfully manipulative. According to the appellate panel, a market manipulation claim requires "a showing that the alleged manipulator engaged in market activity aimed at deceiving investors as to how other market participants have valued a security." The panel noted that "short selling - even in high volumes - is not, by itself, manipulative," and that "to be actionable as a manipulative act, short selling must be willfully combined with something more to create a false impression of how market participants value a security." In this instance, the court found that the issuer pleaded only "speculative inferences" rather than specific facts indicating unlawful manipulative conduct.

The panel also found that the district court properly dismissed the claims on scienter grounds. There were explanations for the defendants' conduct that did not involve fraud that were more likely than any inference of scienter, concluded the court. The court found that it could be concluded that the parties "simply entered into mutually beneficial financing transactions." In addition, because the issuer failed to show that the defendants engaged in "any short sales or other potentially manipulative activity, there is no circumstantial evidence of manipulative intent." ATSI Communications, Inc. v. The Schaar Fund, Ltd. (2ndCir) is reported at ¶94,363.

Lack of Loss Causation Precludes Audit Firm Claim
Because shareholders of a company involved in a merger "cannot point to sufficient record evidence to show that the very facts misrepresented or omitted" by an audit firm "were a substantial factor in causing" their economic loss, a grant of summary judgment for the firm was proper. A 3rd Circuit panel found that the claims at most indicated that the alleged misstatements and omissions resulted in an inflated value of the merger partner's stock. Under the U.S. Supreme Court's holding in Dura Pharmaceuticals, Inc. v. Broudo (2005 CCH Dec. ¶93,218 (ip access user)), an inflated purchase price by itself does not show loss causation. McCabe v. Ernst & Young, LLP (3rdCir) is reported at ¶94,364.

CCH Blue Sky Law Reporter

CALIFORNIA Continues NASDAQ Listed Securities Exemptions Following SEC Certification of NASDAQ Stock Market as a National Securities Exchange
The former exemptions from issuer and nonissuer qualification requirements for securities listed or approved for listing on the NASDAQ National Market System were reestablished by the California Corporation Commissioner as exemptions for securities listed or approved for listing on the NASDAQ Global Market, following the SEC's certification of the NASDAQ as a national securities exchange with the new name of NASDAQ Global Market. The exemptions from issuer and nonissuer qualification requirements under Sections 25100(o) and 25101(a) of the California Securities Act, respectively, cover securities listed or approved for listing upon notice of issuance on either the NASDAQ Global Market and NASDAQ Global Select Market, the two tiers of the NASDAQ Global Market, as well as any warrant or right to purchase or subscribe to one of these securities. ¶12,664 (ip access user), ¶12,665 (ip access user).

MINNESOTA Conforms Accredited Investor, Limited Offering, Existing Securityholder, Merger and Employee Benefit Exemptions, and NSMIA Investment Company and Rule 506 Federal Preemptions to New Uniform Securities Act
The accredited investor, limited offering, existing securityholder, merger, and employee benefit exemptions, as well as federally registered investment company offerings and Rule 506 offerings under Sections 18(b)(2) and 18(b)(4)(D) of the Securities Act of 1933 of NSMIA, were reestablished by the Minnesota Department of Commerce to conform to the newly adopted Uniform Securities Act that took effect August 1, 2007. ¶33,610 (ip access user).

OHIO Clarifies Dealer Recordkeeping and Financial Statement Requirements
Persons not required by federal or Ohio law to license as a broker or dealer with the SEC are permitted to comply with Ohio-prescribed books and records requirements set forth in a new rule in lieu of complying with the requirements contained in Section 15 of the Securities Exchange Act of 1934. Other amendments require dealers licensed in Ohio that file reports required by Section 15 of the 1934 Act to provide a copy of those reports to the Division on request and permit the Division to examine the books and records of any licensed dealer or dealer applicant. Dealers not affiliated with the National Association of Securities Dealers must file with the Division within 90 days of their fiscal year-end a manually signed and duly verified duplicate of their current fiscal year-end report required by 17 C.F.R. 240.17a-5. A dealer licensing application pending for more than 180 days that does not contain corrected deficiencies may be terminated by the Division through the CRD. ¶45,535B (ip access user), ¶45,536 (ip access user).

New Smart Chart Added: Financial Statement Requirements for Issuers
Issuers that register securities by qualification or coordination in the various states need to file quarterly and/or annually with those states’ securities commission offices certain financial statements such as balance sheets and income statements. This new Smart Chart sets forth each jurisdiction’s financial statement requirements.

Corporate Stockholder not Liable as a Control Person
The Louisiana Court of Appeal held that a corporate stockholder and its affiliate were not liable as control persons under the Louisiana Blue Sky Law. The plaintiff investors had claimed that the defendants were liable for the alleged misrepresentations of an issuer of securities because they had the contractual and voting power to guide the issuer's management and policies. The appellate court ruled that the affiliate could not be held liable for the actions of an employee serving on the issuer's board of directors because it neither had appointed the employee to the board nor owned stock in the issuer. Additionally, although the corporate stockholder had appointed the director, its minority ownership stake and sole seat on the board did not provide the element of direction or control necessary to establish control person liability. Southeast Wireless Network, Inc. v. U.S. Telemetry Corp. is reported at ¶74,641 (ip access user).

Aspen Federal Securities Publications

Securities Regulation, by the late Louis Loss, Joel Seligman & Troy Paredes
The new Fourth Edition of Volumes II and XI (Finding Devices) of the cornerstone Securities Regulation treatise published in late August. Part of the Securities Integrated Library on IRN, this Fourth Edition volume fully incorporates the large number of legislative, regulatory, and case law changes since Securities Regulation, Third Edition was published.

Corporate Legal Compliance Handbook, edited by Frederick Z. Banks and Theodore L. Banks
The 2007 Supplement is live on the IRN Corporate Governance Integrated Library. This publication contains expert analysis of leading practitioners on key compliance subjects to enable the reader to develop an effective compliance program for their company. The latest update includes answers to the following questions: Can a chief executive accused of financial malfeasance escape termination for cause? Has the Department of Justice really changed its policy with regard to prosecution of corporations? Will a court compel production of telephone text messages? Will refusal to produce attorney-client privileged communications be considered non-cooperation by a prosecutor? May a company advance legal fees to an employee accused of a crime without being accused of obstructing justice? Should a compliance program also include “fuzzy” subjects like ethics? What does the Department of Health and Human Services think of lawyers as compliance officers? What role does COSO play in compliance? In the era of the iPod, is it time to podcast for compliance? Is there an obligation to worry about minority shareholders? If you hear about something bad your company did in the newspaper, can you file a qui tam action under the False Claims Act? Can you be liable for signing a false Sarbanes-Oxley certification if you didn’t know it was false? Is there a private right of action under Sarbanes-Oxley?

A Practical Guide to SEC Proxy and Compensation Rules, Fourth Edition, edited by Amy L. Goodman and John F. Olson
The new Fourth Edition will be live on the IRN Corporate Governance Integrated Library in early September. This new edition includes comprehensive analysis of the SEC’s revised executive compensation disclosure rules and discusses the increase of shareholder activism. The new edition continues to be written by a team of experts with a wealth of practical experience in counseling clients on these issues. The new Fourth Edition includes: a new chapter on the Compensation Disclosure and Analysis section, now required to accompany the executive compensation disclosures tables; a revised chapter on nonqualified deferred compensation in light of changes to Section 409A of the Internal Revenue Code and the new regulations adopted under that section; a new chapter on director independence determinations; a revised chapter on related person transactions in light of the SEC amendments to Item 404 of Regulation S-K; and a revised chapter on the shareholder proposal process to reflect the changing practices and SEC interpretations in this area.

Hot Topic of the Month

This month’s hot topic is scheme liability. This theory of fraud liability has emerged in recent securities class actions as a way to circumvent the Supreme Court’s 1994 Central Bank decision. In Central Bank, the Court held that there is no private action for aiding and abetting securities fraud by “secondary actors” — e.g., lawyers, accountants and investment bankers — who advise the primary actor alleged to have committed securities fraud. (There can still, however, be aiding and abetting liability in SEC enforcement actions.) In recent years, some federal courts have allowed private actions against secondary actors under the theory that these persons helped further the fraudulent scheme. To resolve the split in the lower courts, the Supreme Court will revisit Central Bank this year or next, in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc (No. 06-43).

This issue is of intense interest not just to plaintiffs’ attorneys who have advanced the theory, but also to law firms that advise secondary actors such as accountants and investment banks, as well as transactional attorneys (who themselves can be secondary actors).

We publish scheme liability 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:

#324.SIC Codes

Use IPO Vital Sign #324 to…

  • Review the number and percentage of companies going public in each SIC Code
  • Analyze trends over time

and drill down into the different SIC Codes to see

  • IPO issuers’ company names and business descriptions
  • Review “Prospectus Summary” first paragraphs (Final Prospectus business descriptions)
  • Issuers’ headquarters by country and state
  • Offer amounts
  • Offer dates

Tip! Click on blue numbers to drill down for more information.

Select a number of issuers’ final prospectus business descriptions by clicking in boxes of those you wish to review in the third column (placing a check-mark in each box), and clicking the [COMPARE] button at the top of the fourth column.