Monthly Archives: July 2012

Update on Corporate Deferred Prosecution and Non-Prosecution Agreements

The following post comes to us from Joseph Warin, partner and chair of the litigation department at the Washington D.C. office of Gibson, Dunn & Crutcher, and is based on a Gibson Dunn memorandum by Mr. Warin and Jeremy Joseph. The full memo, including footnotes and appendix, is available here.

Deferred Prosecution Agreements (“DPAs”) and Non-Prosecution Agreements (“NPAs”) (collectively, “agreements”) in recent years have become a primary tool of the U.S. Department of Justice (“DOJ”) for resolving allegations of corporate criminal wrongdoing. Since 2000, DOJ entities have entered into 230 reported agreements with corporate entities, extracting a total of $31.6 billion in fines, penalties, forfeitures, and related civil settlements. The U.S. Securities and Exchange Commission (“SEC”), which announced the adoption of DPAs and NPAs as part of its Cooperation Initiative in January 2010, has since entered into three NPAs without monetary penalties and one DPA, which included disgorgement. With these agreements, companies obtain finality and closure and agree not to commit further legal violations and to undertake specific cooperation and compliance obligations in exchange for DOJ or the SEC agreeing to forgo enforcement action. In the DOJ context, the two agreement types differ in one material respect: for DPAs, DOJ files a criminal information in federal court, while NPAs generally are not filed in court.

During the last 12 years, DOJ and the SEC have employed DPAs and NPAs in some of the most high-profile cases and continue to turn to them in cases where they believe criminal conduct may have occurred but for a variety of reasons, including a company’s extensive cooperation, internal management shakeups, or the grave risk of collateral consequences to the corporate entity, a conviction through a guilty plea would not be equitable. In the final analysis, DOJ’s increasing reliance on DPAs and NPAs demonstrates its recognition that they are precision instruments to resolve allegations of corporate wrongdoing. The SEC, which recently embraced DPAs and NPAs, and the United Kingdom, which appears to be in the process of doing so, recognize that these agreements can be fine-tuned to help reward cooperation and mitigate collateral consequences.


Rulemaking on Margin Requirements for Uncleared Derivatives

Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. This post is based on a Davis Polk client memorandum.

On July 6, the Basel Committee on Banking Supervision (the “BCBS”) and the International Organization of Securities Commissions (“IOSCO”) released a consultation paper on margin requirements for uncleared derivatives (the “BCBS/IOSCO paper”). In response, the CFTC reopened the comment period for its proposed rule on margin requirements for uncleared swaps until September 14, 2012.

The BCBS/IOSCO paper is similar in many important ways to the proposals issued by the CFTC and banking regulators under Dodd-Frank (the “U.S. regulators’ proposals”). For example, in order to decrease systemic risk and promote clearing, the BCBS/IOSCO paper and the U.S. regulators’ proposals both generally endorse subjecting uncleared transactions between financial entities to initial and variation margin requirements and would not allow initial margin amounts to be netted between the two counterparties to the transaction. However, the BCBS/IOSCO paper differs from the U.S. regulators’ proposals in a number of critical ways. For example, the BCBS/IOSCO paper:


Reputation and Opportunistic Behavior in the VC Industry

The following post comes to us from Vladimir Atanasov of the Mason School of Business at the College of William and Mary; Vladimir Ivanov of the U.S. Securities and Exchange Commission; and Kate Litvak, Professor of Law at Northwestern University.

In the paper, Does Reputation Limit Opportunistic Behavior in the VC Industry? Evidence from Litigation against VCs, forthcoming in the Journal of Finance, we use a hand-collected database of lawsuits filed against U.S. venture capitalists (VCs) to examine the role of reputation in limiting opportunism in the VC industry. The lawsuits in our sample serve as a proxy for alleged opportunistic behavior by the defendant VCs. Based on the lawsuit plaintiff, we further identify whether the defendant VCs allegedly behaved opportunistically against founders, limited partners, other VCs, buyers of VC-backed startups, or other parties (angels, creditors, employees, etc.).

We choose proxies for VC reputation (or alternatively the intensity of VC relationships) with each of the four main types of plaintiffs as follows. First, the number of deals that a VCs invests in serves as proxy for the VC’s reputation with founders. Second, we use the amount of funds under management to proxy for the VC’s reputation with limited partners. Third, the VC’s network centrality, defined as the scaled number of relationships that a VC has with other VCs, serves as proxy for the VC’s reputation with other VCs. Last, we use the percentage of companies in the VC’s portfolio that go public to proxy for the VC’s reputation with buyers of VC-backed startups.


Living Wills: Key Lessons from the First Wave

Margaret E. Tahyar is a partner in Davis Polk & Wardwell LLP’s Financial Institutions Group. This post is based on a Davis Polk publication.

The first wave filers – the largest and most complex domestic and foreign bank holding companies – have now filed their living wills and the public portions have been posted on the FDIC’s and the Federal Reserve’s websites. Based on our experience advising a number of banking institutions on their resolution plans, and based on the public portions of the plans, we believe there are lessons to be learned for second and third wave filers, even in this early stage of an iterative process. At the same time, these lessons should be drawn carefully in light of the fact that the business models and legal structures of the second wave filers are somewhat different from the first wave filers, and those of the third wave filers are very different. Any lessons learned from the first wave should also be tempered by the fact that the standard format for the living wills that the regulators required in the first wave is likely to change for second and third wave filers. With that in mind, we suggest the following key lessons from the first wave filers based on what is known immediately after their public filings.


Gender Composition of Boards Important for Competitiveness

The following post comes to us from Beth Brooke, Global Vice Chair of Public Policy at Ernst & Young, and discusses a report from the Committee for Economic Development, titled Fulfilling the Promise: How More Women on Corporate Boards Would Make America and American Companies More Competitive. A blog post about the report is available here; the full report is available here.

Corporate America often says we are facing a pipeline problem when challenged with the troubling reality that women occupy only 16 percent of Fortune 500 board seats. Yet to bump the percentage of U.S. board seats filled by women up by one percentage point, it would only take about 50 women joining the boards of these companies. There is no doubt there are far more than 50 qualified women interested in U.S. board seats right now.

Despite a professed desire by many U.S. companies for greater diversity and female representation, there has been virtually no improvement in recent years in the senior ranks. In the meantime, on goes the brain drain — as senior women are now being competitively recruited to serve on the boards of non-U.S.-based companies.

The situation is urgent. U.S.-headquartered companies are failing to meet the career needs of half their available highly skilled labor and falling behind international competitors that are taking aggressive action to increase the number of women on their boards. That is the central finding of a new report, Fulfilling the Promise: How More Women on Corporate Boards Would Make America and American Companies More Competitive, from the business-led Committee for Economic Development (CED).


Institutional Shareholders and Their “Oversight” of Executive Compensation

Joseph Bachelder is founder and senior partner of the Bachelder Law Firm. This post is based on an article by Mr. Bachelder, with assistance from David T. Ling and Andy Tsang, which first appeared in the New York Law Journal.

Today’s post addresses the increasing influence of institutional shareholders on executive pay. Prior posts have examined the role of proxy advisors in giving advice on how shareholders, especially institutional shareholders, should vote on say-on-pay under Dodd-Frank Section 951. [1] Today’s discussion focuses on the institutional shareholders themselves.

While institutional shareholders own a major portion of the share value of U.S. public corporations, the “ultimate owners” are, to a large extent, millions of individuals for whose benefit the equity in these corporations is being held by the institutional shareholders. (These individuals will be referred to in the post as “ultimate owners.”)

The original setting-aside of the assets that are the source of these investments is made by the individuals themselves or by others on their behalf (such as by their employers). These assets of the ultimate owners are being held for purposes such as educating children, providing for retirement, protecting against casualty and providing health and life insurance.


SEC “Obey-the-Law” Injunctions Held Invalid

The following post comes to us from Jonathan R. Tuttle, partner in the litigation department at Debevoise & Plimpton LLP, and is based on a Debevoise & Plimpton memorandum by Mr. Tuttle, Paul R. Berger, Andrew J. Ceresney, Colby A. Smith, Mary Jo White, Bruce E. Yannett, and Ada Fernandez Johnson.

The Eleventh Circuit Court of Appeals dealt a blow to the Securities and Exchange Commission (“SEC”) and its long-standing practice of seeking broad federal court injunction orders directing defendants to refrain from any future violations of securities laws, often referred to as “obey-the-law” injunctions. In SEC v. Goble, No. 11-12059, 2012 WL 1918819 (11th Cir. May 29, 2012), the Eleventh Circuit vacated the “obey-the-law” injunctions entered against defendant Richard Goble, the founder of North American Clearing, Inc. (“North American”), because the injunctions did not satisfy Federal Rule of Civil Procedure 65(d)(1), which requires that injunctions describe, “in reasonable detail. . . the act or acts [sought to be] restrained or required.” Although the decision appears to widen an existing gap between the Eleventh and Second Circuits on the propriety of “obey-the-law” injunctions in SEC settlements, the full impact of the Goble decision remains unclear. The Eleventh Circuit’s strongly worded opinion and careful analysis could prompt other courts to question the benefit and efficacy of the SEC’s frequent practice of seeking such broad “obey-the-law” injunctions.


An Experiment on Mutual Fund Fees in Retirement Investing

The following post comes to us from Jill E. Fisch, Professor of Law at the University of Pennsylvania Law School, and Tess Wilkinson-Ryan of the University of Pennsylvania Law School.

In our paper, An Experiment on Mutual Fund Fees in Retirement Investing, we report the results of a new experiment studying the impact of mutual fund fees on consumer investment decisions. The importance of fees to overall investor returns, especially in the context of long-term investing like retirement accounts, is frequently overlooked. Morningstar’s Director of Mutual Fund Research recently observed, “If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision.” But there is evidence that many investors are paying high fees. One study estimates that in 2007 alone, retail investors paid $206 million more in S&P index fund expenses than they would have paid had all investments been in the lowest-fee funds.

Why are investors willing to pay high fees? Are existing fee levels the result of robust market competition or do market failures or investor biases limit market discipline? In his recent Jones v. Harris opinion, Judge Easterbrook took the efficient market position, concluding that market forces will lead investors to reject funds that charge excessive fees in favor of more fairly-priced alternatives. Under this view, investors will only pay higher fees when those fees are justified. Judge Posner countered, in dissent, with an empirical question: do high fees really affect investor behavior? A growing collection of evidence suggests that Judge Posner’s skepticism is well-founded; in the market for mutual funds, uninformed investors do not appear able or willing to distinguish between cheap and expensive funds.


The Volcker Rule’s Impact on Foreign Banking Organizations

The following post comes to us from Dwight C. Smith, partner focusing on bank regulatory matters at Morrison & Foerster LLP, and is based on a Morrison & Foerster memorandum.

The Volcker Rule, as embodied in the Dodd-Frank Act and reflected in proposed regulations, generally prohibits “banking entities” from engaging in proprietary trading and from investing in or sponsoring private equity and hedge funds. [1] These “banking entities” include foreign banks that maintain branches or agencies in the U.S. or that own U.S. banks or commercial lending companies in the United States. These banks, as well as their parent holding companies, are referred to in U.S. regulations as “foreign banking organizations,” or “FBOs,” and we will use this term throughout this paper. [2] This bulletin evaluates how Volcker, as construed by proposed regulations, impacts the proprietary trading and investment fund-related activities of FBOs outside the United States.

Generally, the Dodd-Frank Act exempts proprietary trading by FBOs that is conducted solely outside the United States, and, provided that no ownership interest in a fund is offered or sold in the United States, investment fund-related activities by FBOs conducted solely outside the United States. The exemptions are available under the Dodd-Frank Act for FBOs (or their affiliates) not controlled by U.S.-based banking entities as long as the activities in question are conducted consistent with the exemption accorded FBOs for activities conducted outside the United States pursuant to Sections 4(c)(9 ) or 4(c)(13) of the Bank Holding Company Act. Accordingly, the exemptions are not available for activities conducted by the U.S. branches or agencies of FBOs, or by U.S. banks or U.S. commercial lending companies owned by FBOs.


2012 Proxy Season Review: Overall Trends in Shareholder Proposals

James Morphy is a partner at Sullivan & Cromwell LLP specializing in mergers & acquisitions and corporate governance. This post is an abridged version of a Sullivan & Cromwell publication, titled 2012 Proxy Season Review, available in full here.

The 2012 proxy season saw a continued high rate of governance-related shareholder proposals at large U.S. public companies, including proposals on separation of the roles of the CEO and chair, the right to call special meetings, action by written consent, declassified boards and majority voting. As in prior years, these governance-related proposals received high levels of support, and were the category of proposal that had the best chance of receiving shareholder approval. Proposals on social issues (particularly those related to political contributions and lobbying costs) and compensation-related issues (including equity retention policies) also remained common but, as in the past, these proposals rarely received a majority vote, generally had lower levels of support than governance-related proposals, and served primarily as a vehicle for shareholder activists to express their views.


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