Monthly Archives: August 2011

SEC Settlements with Companies Soar in 2011

Elaine Buckberg is Senior Vice President at NERA Economic Consulting.

In our recent report, SEC Settlements Trends: 1H 2011 Update, my co-authors (Jan Larsen and James Overdahl) and I document that the SEC settled with 344 defendants in the first half of its 2011 fiscal year (“1H11”), putting the agency on pace to settle with 688 defendants for the full year, in line with the 681 settlements in FY10. This stability in overall settlements, however, contrasts with a substantial shift in their composition. The number of company settlements rose by 43% to 114, an annual pace of 228, compared with 160 for the entire 2010 fiscal year. As a result, company settlements made up 33% of 1H11 settlements. Individual settlements declined 12% to 230, an annual pace of 460, compared with 521 in FY10.

However, individual accountability remained an important theme in 1H11. Indeed, four of the 10 largest settlements in 1H11 were with individuals, including the $310 million default judgment entered against Milowe Allen Brost and Gary Allen Sorenson, which also rates as the ninth-largest SEC settlement since the passage of the Sarbanes-Oxley Act (“SOX”). Other individual defendants settling with the SEC in 1H11 included Jacob “Kobi” Alexander, former CEO of Comverse Technology, and Joseph P. Nacchio, former CEO of Qwest Communications.


Court Rules Argentine Central Bank Reserves Immune

H. Rodgin Cohen is a partner and senior chairman of Sullivan & Cromwell LLP focusing on acquisition, corporate governance, regulatory and securities law matters. This post is based on a Sullivan & Cromwell LLP publication by Sergio J. Galvis and Joseph E. Neuhaus. Sullivan & Cromwell represented the Central Bank of Argentina in the case which is discussed below.

In an important sovereign immunity decision, the United States Court of Appeals for the Second Circuit recently ruled that the immunity provided to central bank assets in the Foreign Sovereign Immunities Act (the “FSIA”) does not depend on whether the central bank is “independent” from the parent state. Rather, ruling on an issue of first impression, the Court held that the immunity depends only on whether the assets are used for “central banking functions.” The Court therefore vacated attachments that bondholders of the Republic of Argentina had obtained on approximately $100 million of reserves of the Central Bank of Argentina (known by its initials in Spanish as “BCRA”) held at the Federal Reserve Bank of New York (the “FRBNY”). NML Capital, Ltd. v. Banco Central de la República Argentina, No. 10-1487- cv(L), — F.3d —, 2011 WL 2611269, at *19-20 (2d Cir. July 5, 2011). Sullivan & Cromwell LLP represented BCRA in the case.


CSX Case Highlights Need for SEC Action on Derivatives

Theodore Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Mirvis, Adam O. Emmerich, and Adam M. Gogolak. A paper from the Program on Corporate Governance discussing Section 13(d) rule changes, titled “The Law and Economics of Blockholder Disclosure,” is available here.

A divided panel of the U.S. Court of Appeals for the Second Circuit has finally issued its opinion in the CSX case in which the District Court addressed whether the long party in a cash-settled total-return equity swap should be considered the beneficial owner of the underlying shares for reporting purposes under Section 13(d) of the Williams Act. (See our memo of June 2008 on the District Court’s decision.) The majority opinion — issued nearly three years after the appeal was argued — declined to resolve the beneficial ownership issue, noting that there was disagreement within the panel on the subject. Instead, the panel considered only whether a “group” had been formed under Section 13(d) as to the shares held outright by the defendant activist funds. The majority opinion also addressed whether and under what circumstances a party should be precluded from voting shares acquired during a period when it was in violation of its disclosure obligations under Section 13(d). CSX Corp. v. The Children’s Inv. Fund Mgmt. (UK) LLP, Docket Nos. 08-2899-cv, 08-3016-cv (2d Cir. July 18, 2011).


SEC Enforcement

The following post comes to us from Rebecca Files of the School of Management at The University of Texas at Dallas.

In the paper, SEC Enforcement: Does Forthright Disclosure and Cooperation Really Matter? forthcoming in the Journal of Accounting and Economics as published by Elsevier, I investigate SEC enforcement leniency by exploring whether the SEC rewards firm cooperation and forthright disclosures following a restatement. I develop models that explain SEC sanctions and SEC monetary penalties, and then assess the incremental impact of cooperation and forthright disclosures. I consider a firm to have cooperated with the SEC if it voluntarily initiates an independent investigation into its misconduct. Forensic accountants, legal counsel, or independent committees of directors usually perform the investigations and the firm subsequently passes the information on to the SEC.

I follow the SEC’s 2001 Seaboard Report in defining forthright disclosures as those that are timely, complete, and effective. Timeliness captures the speed with which managers release information to market participants, and it is defined as the number of days between the end of the violation period and the first public announcement of the misconduct. I define complete and effective disclosures in two ways, with both capturing the visibility of misconduct-related disclosures to investors and the SEC. The first identifies where information about the misconduct is placed within a press release. I consider information disclosed in the headline of a press release (rather than the text or footnotes) to be the most effective form of disclosure, as it increases the likelihood that investors and SEC staff will notice and react to the information (Files et al. 2009; Gordon et al. 2009). The second identifies the type of SEC filing used to report the misconduct, with disclosure in a Form 8-K or an amended periodic filing considered the most effective.


New Standards in Counterparty Credit Risk Management

Margaret E. Tahyar is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. This post is based on a Davis Polk client memorandum.

Last week the federal banking agencies released interagency supervisory guidance designed to create new, and higher, best practices for counterparty credit risk (CCR) management at banking organizations—including banks, bank holding companies, and U.S. branches and offices of foreign banks. [1] As a result of the release, all banking organizations will need to review their existing policies and procedures against the new guidance. Although the guidance builds on existing standards, based on our work with a number of banking organizations in our global credit risk management practice, we believe that the guidance will require changes and upgrades for many organizations. Moreover, in our view, this guidance is the first of a number of regulatory pronouncements in the area of credit risk management that banking organizations should expect this summer and through the end of the year. For example, the final rules on credit exposure reports to significant companies under Section 165(d) of the Dodd-Frank Act are expected by August, proposed rules on the concentration limits for systemically important firms to counterparty credit exposure in Section 165(e) of the Dodd-Frank Act are expected sometime this summer, and finally, between now and the end of the year, the Federal Reserve and the other banking agencies are expected to clarify how and to what extent they propose to implement Basel III, including the CCR requirements under Basel III.


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