Category Archives: Securities Litigation & Enforcement

In re Kingate

David Parker is a partner in the Litigation and Risk Management practice at Kaplan, Kleinberg, Kaplan, Wolff & Cohen, P.C. The following post is based on a Kleinberg Kaplan publication.

The U.S. Court of Appeals for the Second Circuit, in In re Kingate Management Limited Litigation, recently made it significantly easier for plaintiffs in the Second Circuit and New York, Connecticut and Vermont state courts to bring class actions alleging violations of state law in litigation involving certain types of securities. By allowing these claims to proceed under state law, the Second Circuit has signaled that plaintiffs may now be able to avoid the rigorous pleading standards of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), which requires that pleadings contain robust fraud allegations pleaded with particularity. The PSLRA also requires that plaintiffs allege the defendant acted with scienter—in other words, that the defendant knew the alleged statement was false at the time it was made, or was reckless in not recognizing that the alleged statement was false.

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Increased Risk for Preferred Stockholders in Ensuring Mandatory Redemptions

Philip Richter is co-head of the Mergers and Acquisitions Practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Mr. Richter, Abigail Pickering BombaJohn E. Sorkin, and Gail Weinstein. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The Delaware Chancery Court’s holding in TCV v. TradingScreen (Feb. 26, 2015; redacted March 27, 2015) has increased the risk for preferred stockholders in their being able to exit their investments under mandatory redemption provisions. The decision is on interlocutory appeal to the Delaware Supreme Court.

The Chancery Court held that a corporation’s ability to redeem preferred stock upon the occurrence of an event triggering mandatory redemption is implicitly restricted by the common law limitation that a corporation may not take action that would result in its not having the ability to continue as a going concern or to pay its debts as they come due. Thus, based on TradingScreen, a company cannot legally redeem preferred stock if, in the board’s judgment, doing so would render it unable to continue as a going concern and to pay its debts as they come due—even if:

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The SEC as the Whistleblower’s Advocate

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s recent address at the Ray Garrett, Jr. Corporate and Securities Law Institute–Northwestern University School of Law in Chicago, Illinois; the full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I am very honored to address the Garrett Institute, one of the most important programs in the country for corporate and securities lawyers, and to be in David’s home territory of Northwestern Law School where he served as Dean before going on to serve as a very distinguished Chairman of the SEC in the late 1980s.

Although the Garrett Institute was established 35 years ago to honor former SEC Chairman Ray Garrett, Jr., I really first came to learn about him when I did a bit of research for a speech I gave in honor of former SEC Commissioner Al Sommer on the importance of the SEC as an independent agency. Mr. Sommer, himself a legendary Commissioner, was recommended by Chairman Garrett to succeed him as Chairman. Seemingly, that did not come to pass because Commissioner Sommer was a Democrat during a Republican administration. That, however, did not stop Chairman Garrett, a Republican, from recommending the person he thought would be the best for the job.

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SEC Broadens Focus on and Requirements for 13D Amendment Disclosure

Philip Richter is co-head of the Mergers and Acquisitions Practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Mr. Richter, Steven Epstein, Abigail Pickering Bomba, and Gail Weinstein. Related research from the Program on Corporate Governance about blockholder disclosure includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

The SEC recently announced settlements of charges against insiders relating to three different going private transactions. The settlement orders (the “Orders”) reflect a general increased focus by the SEC on insiders’ compliance with Schedule 13D amendment requirements in connection with going private transactions (and possibly other extraordinary transactions), as well as possibly expanded requirements for disclosure of steps taken during the preliminary stage of consideration of a transaction. The charges were against eight directors, officers or major stockholders for their respective failures to file timely amendments to their Schedule 13D filings to disclose their plans to take the companies private. The charges were based on steps these parties had taken in furtherance of the going private transactions, but that had only been disclosed months (or in some cases years) afterward in the proxy statements or Schedule 13E-3 statements relating to the transactions. READ MORE »

How United States v. Newman Changes The Law

Jon N. Eisenberg is partner in the Government Enforcement practice at K&L Gates LLP. This post is based on a K&L Gates publication by Mr. Eisenberg. The complete publication, including footnotes, is available here.

In unsuccessfully seeking rehearing in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), reh’g denied, Nos. 13-1837, 13-1917 (2d Cir. Apr. 3, 2015), the Government acknowledged that the Second Circuit’s recent decision in Newman “will dramatically limit the Government’s ability to prosecute some of the most common, culpable, and market-threatening forms of insider trading,” and “arguably represents one of the most significant developments in insider trading law in a generation.” As we discuss below, Newman is a well-deserved generational setback for the Government. It reflects the Second Circuit’s reasonable reaction to Government overreach, and it establishes brighter lines to cabin prosecutorial and SEC discretion in bringing future criminal and civil insider trading actions.

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Implications of the Supreme Court Omnicare Decision

Boris Feldman is a member of Wilson Sonsini Goodrich & Rosati, P.C. This post is based on a WSGR alert authored by Mr. Feldman, Robert G. Day, Catherine Moreno, and Michael Nordtvedt.

On March 24, 2015, the U.S. Supreme Court issued its decision in Omnicare, Inc., et al. v. Laborers District Council Construction Industry Pension Fund et al., addressing when an issuer may be held liable for material misstatements or omissions under Section 11 of the Securities Act of 1933 for statements of opinion in a registration statement.

Among other things, the Supreme Court held that an issuer may be held liable under Section 11 for a statement of opinion, even one that is sincerely held, if its registration statement omits facts about the issuer’s inquiry into, or knowledge concerning, a statement of opinion and if those facts conflict with what a reasonable investor, reading the statement fairly and in context, would take from the statement itself.

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Regulators Working Together to Serve Investors

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent remarks at the North American Securities Administrators Association Annual NASAA/SEC 19(d) Conference; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

It is my honor to deliver the opening remarks for today’s [April 14, 2015] North American Securities Administrators Association (“NASAA”) and Securities and Exchange Commission (“SEC”) 19(d) Conference. For those who are keeping count, this is my seventh year as the SEC’s liaison to NASAA. It has been a privilege to serve you in this role, which I have done since my early days as a Commissioner. Before I begin my remarks, however, let me issue the standard disclaimer that the views I express today are my own, and do not necessarily reflect the views of the SEC, my fellow Commissioners, or members of the staff.

NASAA and the SEC have a long history of working together to provide a robust regulatory environment for businesses to grow and to protect the investors who fuel that growth. Today is a clear example of that partnership, where representatives from the SEC and state regulators come together to share ideas for increasing cooperation and collaboration. This partnership is crucial to achieving our common goal of protecting investors, maintaining market integrity, and facilitating capital formation.

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The SEC Opens a New Front in Whistleblower Protection

Wayne Carlin is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Carlin, John F. Savarese, and David B. Anders.

For some time, SEC officials have expressed concern about confidentiality agreements that may deter corporate employees from submitting whistleblower reports. The SEC has now brought its first enforcement action in this area, a settled case in which the respondent agreed to pay a $130,000 civil penalty without admitting or denying the SEC’s findings. According to the SEC’s order, the company required its employees to sign confidentiality agreements at the outset of interviews in internal investigations. The agreements prohibited witnesses from communicating with anyone else any of “the subject matter discussed during the interview.” Such communication was permissible only if the employee first obtained authorization from the company’s legal department. The SEC found that this practice violated Rule 21F-17, which prohibits taking “any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications.”

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SEC Enforcement Actions for Failure to Update 13D Disclosures

The following post comes to us from James Moloney, partner and co-chair of the Securities Regulation and Corporate Governance Practice Group at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn publication by Mr. Moloney and Andrew Fabens, with assistance from Lauren Traina.

On Friday, March 13, 2015, the SEC announced that it had settled a string of 21C administrative proceedings brought against eight officers, directors, and shareholders of public companies for their failure to report plans and actions leading up to planned going private transactions. The SEC press release can be found here. In doing so, the SEC sent another strong reminder to those that beneficially own more than 5% of the equity securities of a public company to keep their 13D disclosures current.

The respondents included a lottery equipment holding company, the owners of a living trust, and the CEO of a Chinese technical services firm. According to the SEC, the respondents in each of these cases failed to report various plans and activities with respect to the anticipated going private transactions, including when the parties: (i) determined the form of the going private transaction; (ii) obtained waivers from preferred shareholders; (iii) assisted in arriving at shareholder vote projections; (iv) informed management of their plans to take the company private; and (v) recruited shareholders to execute on the proposals. In one case the respondents were charged for failure to report owning securities in the company that was going private. In another case, the respondents reported their transactions months or years later. The proceedings resulted in cease-and-desist orders as well as the imposition of civil monetary penalties ranging from $15,000 to $75,000 per respondent.

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Preparing for the Regulatory Challenges of the 21st Century

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent remarks at the Georgia Law Review’s Annual Symposium, Financial Regulation: Reflections and Projections; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

During my tenure as an SEC Commissioner, our country’s economy has experienced extreme highs and lows. In fact, the country experienced the worst financial crisis since the Great Depression, followed by the current period of significant economic growth where the stock market has grown by around 165% from the low point of the financial crisis.

I have had a front-row seat to all of this, as I became an SEC Commissioner just weeks before the financial crisis hit our nation. As a result, I witnessed first-hand just how fragile our capital markets can be, and the need for a robust and effective SEC to protect them. First, let me provide a snapshot of what went on. I was sworn-in as an SEC Commissioner on July 31, 2008. Within a few weeks, on September 15, 2008, Lehman Brothers filed for bankruptcy. To give you a sense of its rapid decline, within 15 days, its share price went from $17.50 per share to virtually worthless. The demise of Lehman Brothers is often seen as the first in a rapid succession of events that led to an unimaginable market and liquidity crisis. These events included:

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