Federal Securities Law Blog

SEC Charges Revlon with Misleading Shareholders in Going Private Transaction

Robert J. Tannous — Thu, 13 Jun 2013 14:10:24 -0500

On June 13, 2013, the Securities and Exchange Commission (“SEC”) charged Revlon with violating federal securities laws when the company misled shareholders during a going private transaction. Specifically, the SEC found that Revlon violated Section 13(e) of the Securities Exchange Act of 1934 and Rule 13e-3(b)(1)(iii), which prohibits issuers and their affiliates in going private transactions from directly or indirectly engaging in any act, practice, or course of business that operates or would operate as a fraud or deceit.

In its investigation, the SEC found that in connection with a voluntary exchange offer to satisfy a significant debt to its controlling shareholder, Revlon erected “informational barriers” or engaged in what one employee termed as "ring fencing" that deprived the Revlon independent board members from knowing critical information (i.e., a third-party financial adviser found that the consideration offered in the transaction was inadequate for tendering 401(k) shareholders). The trustee administering Revlon's 401(k) plan determined that 401(k) members could only tender their shares if a third-party financial adviser made an "adequate consideration determination," which involved assessing whether the value of the preferred stock 401(k) participants would receive was at least equal to the fair market value of the exchanged common stock shares.

The SEC's order determined that, in an attempt to avoid a potential disclosure obligation, Revlon undertook a number of actions to avoid receiving the adequate consideration determination from the third-party adviser, including the following:

Revlon amended the trust agreement it had with the trustee to ensure that the trustee would not share the adequate consideration determination with Revlon;
Revlon ensured that it was not a party to any engagement letter concerning the adequate consideration determination;
Revlon directed the trustee to inform the company of its decision whether to allow 401(k) members to tender their shares without any reference to the adequate consideration determination; and
In a notice sent to the 401(k) participants and publicly filed as an exhibit to the exchange offer documents, Revlon removed the explicit term "adequate consideration" and replaced it with citations to ERISA statutes.

The SEC's order found that Revlon's ring-fencing conduct resulted in various materially misleading disclosures to its shareholders. For example, Revlon represented in its offering documents that its board's process was full, fair, and complete in determining the fairness of the exchange offer. In fact, however, the process was compromised because Revlon's board was unable to consider the adequate consideration determination as part of its process to evaluate and ultimately approve the offer. Revlon agreed to settle the SEC's charges and pay an $850,000 penalty.

Introduction of H.R. 2274 - The Small Business Mergers, Acquisitions, Sales and Brokerage Simplification Act of 2013

Robert J. Tannous — Thu, 13 Jun 2013 08:47:13 -0500

H.R. 2274, the Small Business Mergers, Acquisitions, Sales and Brokerage Simplification Act of 2013, was introduced in the U.S. House of Representatives by Rep. Bill Huizenga on June 6, 2013. The bill is intended to reduce the regulatory costs incurred by buyers and sellers of smaller privately held companies for professional business brokerage services. The legislation would create a simplified system for registration through a public notice filing with the Securities and Exchange Commission ("SEC") and would require appropriate client disclosures, pertaining to “M&A brokers” and their associates. An M&A broker relying on this legislation would not be permitted to (i) receive, hold, transmit or have custody of the funds or securities to be exchanged in the transfer of ownership of an “eligible privately held company,” or (ii) engage on behalf of an issuer in a public offering of securities.

An “M&A broker” means a broker engaged in the business of effecting the transfer of ownership of an eligible privately held business , whether acting for the seller or buyer, through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the eligible privately held company, if the broker reasonably believes that (i) upon consummation of the transaction, the acquirer, acting alone or in concert with, will control and, directly or indirectly, will be active in the management of the eligible privately held company or the business conducted with the assets of the eligible privately held company; and (ii) if the person is offered securities in exchange for securities or assets of the eligible privately held company, such person will, prior to being bound to close the transaction, receive or have access to the most recent year-end balance sheet, income statement, statement of changes in financial position and statement of owner’s equity of the issuer of the securities to be offered in exchange, and, if the financial statements are audited, the related report of the independent auditor, a balance sheet dated not more than 120 days before the date of the offer, and information pertaining to the management, business, results of operations for the period covered by the financial statements and material loss contingencies of the issuer.

An “eligible privately held company” means a company that (i) is privately held and not required to file periodic information, documents or reports with the SEC, and (ii) in the fiscal year immediately preceding the fiscal year in which the business broker is initially engaged with respect to the securities transaction, the company meets either or both of the following conditions:

EBITDA is less than $25 million;
gross revenues are less than $250 million

We expect that SEC registered broker dealers and their associates will have an opinion on this legislation.

SEC Issues Investor Alert for Private Oil & Gas Offerings

William Kelly — Wed, 05 Jun 2013 14:32:18 -0500

We previously blogged about securities regulation of interests in oil and gas exploration and development. Industry participants, state and federal securities regulators have recently cautioned investors regarding investing in oil and gas ventures.

At the federal level, the U.S. Securities and Exchange Commission (SEC) issued an investor alert aimed at private oil and gas offerings. In addition to the usual cautions to investors to do their homework on these deals, the SEC encouraged investors to verify that the person offering the investment is licensed as a broker-dealer. The SEC recently stepped up its efforts to pursue “finders” and other unlicensed persons compensated by issuers to assist in finding investors. Companies raising investment funds need to understand that persons who they engage to assist in selling investments are required to have a securities license. Failure to do so exposes the issuer to civil liability, including rescission claims by investors, and potential criminal liability in cases where material misstatements or omissions are made in the private placement memorandum or other offering material, or other fraudulent activity is present. The investor alert cites several examples of recent enforcement actions where such illegal activity was involved.

At the state level, the North American Securities Administrators Association (as the name implies, an association in which all the securities administrators are members), recently issued a similar investor alert. This covers much of the same ground as the SEC investor alert, but focuses more on recommended investor due diligence.

Though these alerts are directed at investors, they are useful to issuers and their advisors in two respects:

They highlight compliance issues that need to be addressed in any oil and gas securities offering, and
They offer guidance on key disclosures unique to oil and gas offerings that should be included in any private placement memorandum or similar disclosure document.

These investor alerts suggest that federal and state securities regulators are giving heightened scrutiny to offerings of oil and gas investments. Issuers and other participants would be well advised to examine their offering processes and disclosure documents with an eye toward compliance with the securities laws.

SEC Issues FAQs on Conflict Minerals & Resource Extraction

Robert J. Tannous — Fri, 31 May 2013 09:48:48 -0500

On May 30, 2013, the Securities and Exchange Commission (“SEC”) issued 12 Frequently Asked Questions (“FAQs”) providing guidance on various aspects of Securities Exchange Act of 1934 (“Exchange Act”) Section 13(p), Rule 13p-1 and Item 1.01 of Form SD relating to disclosure regarding the use of conflict minerals from the Democratic Republic of the Congo or adjoining countries.

The Guidance offered by the Conflict Minerals FAQs includes:

The conflict mineral rule applies to all issuers that file reports with the SEC under Exchange Act Sections 13(a) or 15(d), whether or not the issuer is required to file such reports.
An issuer that only engages in those activities customarily associated with mining, including gold mining of lower grade ore, is not considered to be “manufacturing” those minerals.
An issuer must determine the origin of conflict minerals, and make any required disclosures regarding conflict minerals, for itself and all of its consolidated subsidiaries.
An issuer that specifies that its logo be etched into a generic product that is manufactured by a third party is not considered to be “contracting to manufacture” the product.
An issuer is required to conduct a reasonable country of origin inquiry with respect to conflict minerals included in generic components included in products it manufactures or contracts to manufacture. There is no distinction between the components of a product that an issuer directly manufactures or contracts to manufacture and the “generic” ones it purchases to include in a product.
The packaging or container that contains a conflict mineral sold with a product is not considered to be part of the product.
An issuer that manufactures or contracts for the manufacturing of equipment they use in providing a service they sell is not required to report on the conflict minerals in that equipment.
An issuer that manufactures or contracts for the manufacturing of any tools, machines, or other equipment that contain conflict minerals for it to use in the manufacture of products, are not considered products, even if such tools, machines, or other equipment are later sold.
Following an initial public offering, the issuer must start providing conflict mineral reporting for the first reporting calendar year that begins no sooner than eight months after the effective date of its initial public offering registration statement.
The failure to timely file a Form SD regarding conflict minerals does not cause an issuer to lose eligibility to use Form S-3.

On the same day, the SEC issued 9 FAQs providing guidance on various aspects of Exchange Act Section 13(q), Rule 13q-1 and Item 2.01 of Form SD, which require disclosure of certain payments made by resource extraction issuers to foreign governments or the U.S. federal government for the purpose of the commercial development of oil, natural gas or minerals.

The Guidance offered by the Resource Extraction FAQs includes:

A reporting issuer that is not engaged in commercial development of oil, natural gas or minerals itself but whose subsidiary or entity under its control engages in those activities would be considered a resource extraction issuer and would be subject to the disclosure requirement.
A company that provides services associated with the exploration, extraction, processing and export of a resource will not be considered a “resource extraction issuer.”
A company providing transport services will not generally be considered to be a resource extraction issuer unless the activities are directly related to the export of the resource.
Penalties and/or fines related to resource extraction paid to government agencies are not reportable as fees.
A resource extraction issuer is not permitted to provide the payment information on an accrual basis, but rather on an unaudited, cash basis for the year in which the payments are made.
If a resource extraction issuer has many sources of income in a particular country and pays corporate level income tax on the consolidated amount, the issuer does not have to segregate income to report the amount corresponding solely to resource extraction activities. A resource extraction issuer may elect to segregate income from exploration, extraction, processing and export from income earned on other business activities in a particular country and disclose income taxes paid solely on the income generated by the commercial development activities.
The failure to timely file a Form SD regarding payments by resource extraction issuers does not cause an issuer to lose eligibility to use Form S-3.

SEC and CFTC Red Flag Rules Become Effective May 20, 2013

Jack J. Gravelle — Wed, 15 May 2013 15:38:12 -0500

The Securities and Exchange Commission and the Commodity Futures Trading Commission have adopted rules that require most broker-dealers, mutual funds, investment advisers, and certain other regulated entities to create programs to prevent identity theft. The new rules become effective May 20, 2013, and entities regulated by the new rules must comply by November 20, 2013.

Regulated entities subject to the rules must develop identity theft prevention programs to detect “red flags” signaling potential identity theft, to respond appropriately to such red flags, and to periodically update detection programs as identity theft risks change.

Among other requirements, the Red Flag Rules apply to “financial institutions” that offer or maintain “covered accounts.” “Covered accounts” are defined broadly to include personal accounts designed to permit multiple transactions and any account with a reasonably foreseeable risk of identity theft to customers. “Financial institutions” include any entity that holds a transaction account belonging to a consumer on which the account holder can make withdrawals to pay third parties. Examples cited by the SEC include:

a broker-dealer that offers custodial accounts;
a registered investment company that enables investors to make wire transfers to other parties or that offers check-writing privileges; and
an investment adviser that directly or indirectly holds transaction accounts and that is permitted to direct payments or transfers out of those accounts to third parties.

Many of these entities likely have identity theft prevention programs because they were previously required by Federal Trade Commission rules; however some entities, such as investment advisers, may have avoided scrutiny of their programs due to lax enforcement and may face increased attention now that the SEC and CFTC are charged with enforcing the Red Flag Rules for these entities.

Regulated entities should evaluate current red flag programs in the context of the SEC’s and CFTC’s new enforcement duties to determine if improvements are needed.

The Timken Board: Between a Rock and a Hard Place

Robert J. Tannous — Tue, 07 May 2013 10:45:21 -0500

On May 7, 2013, Timken Co. announced that its shareholders approved a nonbinding proposal from activist shareholders (Relational Investors and Calstrs—California State Teachers' Retirement System, who together own 7.28% of the Company) to spin-off the Company's steel business into a separate entity. The Company's Board had opposed the proposal.

The Company said that 47% of outstanding shares (53% of the shares voted) were voted in favor of the plan to create a separate company, while 41% of outstanding shares (47% of the shares voted) voted against the proposal.

In a joint statement released on May 7, 2013, Relational and Calstrs stated that Timken's Board "must now acquiesce to the will of the shareholders consistent with their fiduciary duties." On the same date, Chairman Tim Timken Jr. stated, "We appreciate the thoughtful feedback we've received from our shareholders on the spin-off proposal as well as their broader input on corporate governance and capital allocation. The board will carefully evaluate the views of our shareholders and announce next steps within 45 days."

The real work for the Timken Board now begins. The Board will need to work through their fiduciary duties to act in the best interests of all their shareholders and determine an appropriate course of action. Merely acquiescing to shareholders' favoring the nonbinding proposal will not necessarily fulfill their fiduciary obligations. Prior to the vote, as part of their fiduciary obligations, the Board determined that the proposal and subsequent spin-off were not in the best interests of the shareholders. The real question for them now is, other than the vote which was by no means overwhelming, what has changed? It is these types of situations that test the true mettle of a director. Timken's Board is between a rock and a hard place and there are no easy answers.

Zillow, Inc. To Use Twitter For Earnings Call

Andrew R. Trafford — Thu, 25 Apr 2013 14:57:58 -0500

The real estate website company Zillow, Inc. announced it would use Twitter and Facebook to field questions on its first quarter earnings call. The company claims that it is the first to take questions in this manner, but will continue to take questions in the traditional way - from those dialed into the call. This announcement comes in the wake of the SEC relaxing the rules related to the use of social media to comply with Regulation FD.

Regulation FD requires companies to disseminate material information about itself in a manner reasonably designed to reach the general public broadly and non-selectively. By utilizing social media as a means to receive questions, Zillow is further advancing the use of social media in corporate communications. As we wrote before, companies should tread carefully with regard to social media usage.

SEC Social Media Guidance - Tread Carefully

Erin F. Siegfried — Fri, 05 Apr 2013 12:28:07 -0500

As discussed in a post on April 2, 2013, the SEC issued a report on that date that contained guidance on the use of social media to publicly disclose material information under Regulation FD.

The report centered on the SEC investigation of Netflix and Netflix CEO, Reed Hastings, and whether Regulation FD was violated when Mr. Hastings disclosed on his Facebook page favorable news about the number of hours that Netflix streamed in a month. The SEC decided not to bring enforcement action against Netflix or Mr. Hastings, making recognition that there has been market uncertainty about the application of Regulation FD to social media.

Regulation FD provides that a public company, or anyone acting on its behalf, may not disclose material, nonpublic information to market professionals or securityholders when it is reasonably foreseeable that someone may trade on the basis of the information, unless such information is simultaneously disclosed to the public in a method reasonably designed to provide broad, non-exclusionary distribution of information to the public.

It is important to remember that whether disclosures comply with Regulation FD must be evaluated on a case-by-case basis. The SEC stated in the report that the disclosure of material nonpublic information on the personal social media site of a corporate officer, without advance notice to investors that the site may be used for this purpose, is unlikely to satisfy Regulation FD. The SEC explained that this is true regardless of the number of subscribers. The report focused on the fact that a company must notify the market about which forms of communication, including the social media channels, it intends to use for the dissemination of material nonpublic information.

The SEC expects issuers to rigorously examine the factors outlined in its 2008 website guidance that are taken into account when determining whether a particular channel is a recognized channel of distribution for communicating with investors. A company should ask itself several questions. Is the proposed channel of distribution one that is practical for investors to monitor? Do investors need “lead time” to register to use the channel of distribution? Is the company comfortable using only that channel of distribution for communications to investors? In any event, the company must be confident that the channel of distribution will provide for broad, non-exclusionary distribution of information to the public and it must provide adequate advance notice of the use of such channel to its investors. As best practices continue to evolve, companies should strongly consider continuing to use press releases, conference calls, and current reports on Form 8-K in addition to any social media channels to distribute material nonpublic information.

SEC Confirms Use of Social Media for Company Announcements

Erin F. Siegfried — Tue, 02 Apr 2013 15:52:00 -0500

The SEC issued a report today that clarifies that companies may use social media outlets to make key announcements in compliance with Regulation FD (Fair Disclosure) so long as investors have previously been alerted about which social media outlet(s) will be used to disseminate such information.

Regulation FD requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-selectively. Companies should review the SEC guidance issued in 2008 regarding the dissemination of information via websites, as that guidance also applies to questions relating to communication through social media.

The SEC report relates to an inquiry by the Division of Enforcement into a post made by Netflix CEO, Reed Hastings, on his personal Facebook page that Netflix's monthly online viewing had exceeded one billion hours for the first time. The SEC did not initiate enforcement action or allege wrongdoing by Hastings or Netflix, recognizing that there has been market uncertainty about the application of Regulation FD to social media.

SAC Capital: SEC Shatters Record for Largest Insider Trading Fine

Andrew R. Trafford — Tue, 26 Mar 2013 12:05:51 -0500

Last week, the SEC reached a settlement with CR Intrinsic Investors, LLC, which tore up the record books on insider trading cases. CR Intrinsic, an affiliate of SAC Capital, agreed to pay over $600 million to settle charges of using nonpublic information about clinical pharmaceutical trials to earn profits of over $274 million.

As an affiliate of SAC Capital, one of the nation's largest investment firms, the ongoing investigation of CR Intrinsic was highly publicized. There were speculations that the investigation's true target was SAC Capital CEO Steve Cohen. SAC was eventually named as a relief defendant in the case, putting them on the hook directly to pay back profits earned from the scheme.

The settlement, which requires $274 million in disgorged profits, another $274 million as a penalty, and $52 million in interest, dwarfs the SEC’s previous high-water mark for insider trading, the $157 million paid by Raj Rajaratnam. Another SAC affiliate, Sigma Capital, settled insider trading charges earlier in the week for $14 million, bringing the total fine levied on the SAC group to $616 million. For more, The Economist's blog wonders about the wider implications.

This Week in SEC Enforcement Activity

Andrew R. Trafford — Fri, 15 Mar 2013 10:31:40 -0500

State of Illinois Charged With Misleading Muni Bond Investors

The SEC charged the state of Illinois with failing to inform municipal bond investors of potential issues with its pension funding plan. The state failed to disclose that its pension obligations were at risk of “structural underfunding” issues associated with the state’s statutory funding plan, and misrepresented the overall risk associated with the pension’s financial condition. Illinois offered $2.2 billion in bonds during 2005 to 2009.

Oppenheimer & Co. Fund Managers Charged With False Valuations

Two investment advisers of Oppenheimer & Co. were charged with false representations in connection with private equity funds they manage. On quarterly reports, the managers falsely used their own internal valuations to claim that their largest holding had seen improved underlying performance. Oppenheimer agreed to settle the claims for over $740,000 in penalties, and returned $2.3 million to investors.

Redondo Beach, California Real Estate “Ponzi-like” Scheme Charged, Assets Frozen

The SEC charged Alvin R. Brown with running a Ponzi-like scheme focused on senior citizen investors, claiming high returns for investments in real estate and rental properties in California and other western states. Brown used new investments to make payments to previous investors and withdrew cash for personal use. The investment’s website featured the seals of various financial and regulatory entities, including the SEC, NYSE, NASDAQ and the state of California, falsely implying their endorsement of the investment. The full, very colorful complaint is worth a read.

Twin British Brothers Settle Charges of Penny Stock “Pump-and-Dump”

Alexander and Thomas Hunter, twin brothers from Great Britain, settled charges this week of developing and disseminating software advertised as a “stock-picking robot” that analyzed market data and suggested stocks to subscribers. The twins developed the first version of the software at the age of 16. The brothers then marketed to penny stock promoters, who paid them to rig the software and promote their penny stocks. They settled for $175,000 in penalties.

SEC Enforcement Activity: March 4-8

Andrew R. Trafford — Fri, 08 Mar 2013 11:38:44 -0500

Mark Cuban Insider Trading Case Set For Trial

Mark Cuban, the charismatic owner of the NBA’s Dallas Mavericks, lost his attempt to dismiss the SEC’s insider trading case against him, sending it to trial. The district court judge in Dallas said the ruling was “in some respects a close one.” Mr. Cuban is charged in connection with a 2004 sale of his stock in Mamma.com, allegedly after learning non-public information about an upcoming equity offering. Read the original complaint here.

California Lawyer Charged For Fraudulent “Opinion Mill”

The SEC charged Brian Reiss, a lawyer in Huntington Beach, California, with fraudulently issuing legal opinions about penny stock offerings. Mr. Reiss is alleged to have set up an “opinion mill” through his website, 144letters.com, offering computer-generatedopinion letters used to justify lifting restrictions on a desired stock. The SEC alleged that Mr. Reiss offered a “volume discount” rate for bulk orders of letters. In churning out opinion letters, Mr. Reiss allegedly made multiple false and misleading statements about various stocks.

Penny Stock Promoter Charged With Misleading Newsletter Subscribers

Colin McCabe, a Canadian stock promoter, was charged with misleading subscribers to his investment advice newsletters. Mr. McCabe, who recommended penny stocks to subscribers through his newsletter Elite Stock Report, allegedly made false claims about the methodology of his research, failed to disclose he was being paid to promote stocks he recommended, and misrepresented the assets of one issuer he represented. The SEC said that Mr. McCabe claimed his advice was the work of a team of expert researchers, when in fact he conducted only cursory online research alone. In addition, Mr. McCabe is alleged to have accepted more than $16 million in promotion fees for stocks before recommending them to subscribers.

Trader Using “Free-Riding” Scheme Given $640k Judgment

A district court in New Jersey entered final judgment in the SEC’s case against Scott Kupersmith. Mr. Kupersmith was charged with operating a “free-riding” scheme, quickly buying and selling stocks between two brokerage accounts without having enough securities or cash to cover the trades. The scheme netted Mr. Kupersmith $640,000 in illicit profits, which the court ordered to be disgorged. In addition, Mr. Kupersmith’s scheme caused roughly $2 million in losses to the victim broker-dealers.

Could This Happen Here?

Erin F. Siegfried — Thu, 07 Mar 2013 14:06:25 -0500

Last weekend, voters in Switzerland strongly backed a plan giving shareholders unprecedented authority over executive pay. The Minder Initiative, named after the Swiss businessman who created it, was supported by approximately 68% of Swiss voters. The measure gives shareholders of Swiss companies the power to approve or block proposed compensation for executives and directors.

Novartis AG and UBS AG are two of the multinational companies listed in Switzerland that will be affected by the Minder proposals. The proposals now go to the government for legislative drafting. Implementation is not expected until 2014 at the earliest.

Switzerland has provided a supportive environment for Mr. Minder's ideas. In 2008, the Swiss government was forced to bail out UBS, the country's largest bank. Also lending support to the success of the Minder Initiative was Daniel Vasella, the departing chairman of Novartis. He was to receive 72 million Swiss francs ($76 million) over six years as part of his exit. Novartis went back to the drawing board on Mr. Vasella's package after it created backlash among the Swiss people.

SEC Publishes Handbook For Foreign Issuers: "Accessing U.S. Capital Markets"

Andrew R. Trafford — Wed, 27 Feb 2013 09:42:19 -0500

This month the SEC released a handbook for foreign companies interested in registering and issuing securities on U.S. exchanges. The handbook, titled “Accessing the U.S. Capital Markets – A Brief Overview for Foreign Private Issuers,” explains the eligibility requirements for “foreign private issuer” status and the unique registration and reporting rules that apply to foreign companies.

In general, any foreign company is free to list its securities on U.S. exchanges so long as it complies with the securities laws like a domestic company. But certain foreign companies can enjoy a special set of rules, some of which relax reporting and registration requirements, if they qualify as a “foreign private issuer.” The SEC’s handbook explains the basic standard for eligibility under Regulation C and Rule 3b-4, the two-pronged “shareholder test” and “business contacts test.”

The handbook also describes the benefits of qualifying as a “foreign private issuer,” including exemption from some proxy rules, exemption from the disclosure requirements of Regulation FD, and autonomy over accounting standards and reporting forms. Foreign private issuers nevertheless must report and register their securities, and the handbook outlines the individualized rules that apply. Because foreign companies may be unfamiliar with U.S. securities laws, the SEC offers the option to submit “confidential” filings that will be reviewed by the staff and returned with comments. The handbook also discusses the standard forms for foreign issuers, the process of deregistration, and exemptions for offerings made outside the U.S.

SEC Enforcement Activity: Feb. 11- 15

Andrew R. Trafford — Mon, 18 Feb 2013 09:35:12 -0500

Second Circuit Hears Oral Argument on SEC-Citigroup Settlement

Last November, a federal judge in New York rejected a proposed settlement between the SEC and Citigroup in connection with charges of misleading investors at the beginning of the financial crisis. This week the Second Circuit Court of Appeals heard oral arguments in the case, which saw the SEC and Citigroup join forces against the District Court. Jim Hamilton has a good analysis of the proceedings here.

Former Stanford Financial Group Executives Sentenced to 20 Years

The last two defendants in the case against Allen Stanford’s $7.2 billion ponzi scheme were each sentenced this week to 20 years in prison. Gilbert Lopez and Mark Kuhrt, the group’s chief accountant and controller, were found guilty by a jury in a Houston federal court of wire fraud and conspiracy. Allen Stanford, the primary defendant in the case, received a 110-year prison sentence in March 2012. More from Reuters.

Trader Settles “Cherry-Picking” Charges for $7 Million

Howard Berger and his wife agreed to a consent judgment with the SEC, settling charges that Berger “cherry-picked” profits from his hedge funds. The SEC alleged that Berger had engaged in “cherry-picking,” skimming profitable trades from his hedge fund and transferring them into his wife’s brokerage account. The scheme reaped an alleged $6.8 million in profit for the couple, who settled for around $7 million.

Insider Trading: SEC Wins Judgment In Healthcare Tipping Ring

A federal court in New York awarded final judgment to the SEC in connection with their charges against three members of a tipping ring. Alexander Vorobieva, Igor Poteroba, and Aksey Koval all benefitted from information about healthcare related transactions including acquisitions and tender offers. The ring began with Poteroba, who learned of upcoming transactions in his capacity as an investment banker in UBS’ Global Healthcare Group. Poteroba then informed Koval, who tipped Vorobieva. The final entry included a judgment against Vorobieva of over $2 million.

SEC Freezes Assets in Swiss-Based Account From Suspected Heinz Acquisition Insider Trading Scheme

Robert J. Tannous — Fri, 15 Feb 2013 16:41:10 -0500

On February 15, 2013, the Securities and Exchange Commission ("SEC") issued a press release announcing that it had obtained an emergency court order to freeze assets in a Swiss-based trading account that was used to gain more than $1.7 million from insider trading activities in connection with yesterday's announced acquisition of H.J. Heinz Company.

In a complaint filed in Federal Court in Manhattan, the SEC alleges that, prior to any public disclosure of Berkshire Hathaway's and 3G Capital's agreement to acquire Heinz for approximately $28 billion, unknown traders purchased call options on the day prior to the announcement of the merger. The announcement of the merger caused Heinz’s stock to increase nearly 20 percent on substantially increased trading volume from the prior day, allowing the traders to realize substantial gains from their trades. The SEC further alleges that the traders were in possession of material nonpublic information about the Heinz acquisition when they purchased out-of-the-money Heinz call options prior to the announcement. Additionally, these trades were made through an account that had no history of trading Heinz securities during the last six months, and on in a period where there was minimal trading in activity in Heinz call options.

Disclosure of Corporate Political Spending

Jack J. Gravelle — Thu, 07 Feb 2013 11:19:02 -0500

The Securities and Exchange Commission could propose rules requiring public company disclosure of spending on political activities as early as April 2013, according to the Unified Agenda of Federal Regulatory and Deregulatory Actions. The Unified Agenda is the official list of proposed regulatory activities throughout the Federal Government. The proposal listed in the Unified Agenda states only that the Division of Corporation Finance is considering whether to recommend that the SEC issue a proposed rule to require that public companies provide disclosure to shareholders regarding the use of corporate resources for political activities.

Investor activism on corporate political spending has increased significantly since the Supreme Court’s 2010 ruling in Citizens United v. FEC allowed corporations to make unlimited independent campaign expenditures for political candidates. In 2011, a group of corporate and securities professors referred to as the Committee on Disclosure of Corporate Political Spending filed a petition with the SEC in support of a rule requiring public company disclosure of political spending.

Political spending proposals offered by shareholders range from proposals that simply require disclosure to more restrictive proposals that prohibit spending (“stop spending”) or require shareholder approval of spending (“say-on-spending”). Many companies have voluntarily adopted policies requiring disclosure of political spending, including over half of the S&P 100 (although the policies vary significantly).

If the SEC does offer a proposed rule, it will likely be opposed by business trade associations that spend money to influence political campaigns, such as the U.S. Chamber of Commerce.

SEC Division of Corporation Finance Issues Updated Financial Reporting Manual

Robert J. Tannous — Fri, 25 Jan 2013 11:52:34 -0500

On January 18, 2013, the SEC Division of Corporation Finance issued an updated Financial Reporting Manual. The Manual was updated for issues related to significance testing for related businesses, auditor responsibility for cumulative period from inception amounts, PCAOB requirements for auditors of non-issuer financial statements, and other changes. A full summary of the changes in the updated Manual can be found here.

SEC Enforcement Activity: Jan. 14-18

Andrew R. Trafford — Fri, 18 Jan 2013 17:03:37 -0500

SEC Settles with Pond Securities In Market Manipulation Case

Four defendants - Andreas Badian, Jeffrey Graham, Pond Securities, and Ezra Birnbaum - agreed to settle charges of market manipulation, the SEC announced this week. In a complaint filed in April 2006, the SEC alleged that the defendants manipulated the stock of Sedona Corporation and violated record-keeping rules by falsely creating trade tickets. Without admitting or denying the allegations, the defendants agreed to disgorgement of profits and civil penalties of over $700,000.

Read the SEC release here.

SEC Wins Summary Judgment Against Matrix Holdings For Fraudulent Investment Schemes

Francis E. Wilde, his company Matrix Holdings, Inc., and other individuals were ordered to pay over $13 million after a California federal court granted the SEC’s summary judgment motion. The SEC alleged that the defendants orchestrated two fraudulent investment schemes. In one, Wilde, through Matrix Holdings, used a fraudulently obtained Treasury bond to open a line of credit and pay personal expenses, creditors, and debt holders of Matrix. In the other scheme, Wilde and the others induced investors to contribute to a “bank guarantee funding” program, stealing the investor deposits through undisclosed fees and Ponzi-style payments to old investors.

Read the SEC Release here.

Insider Trading: Former Trader Settles Charges in Connection with 3Com Corp Acquisition

Eric Rogers, former trader at Spectrum Trading LLC, has agreed to settle charges of insider trading. Rogers was a tippee at the end of the scheme, which began when two attorneys at Ropes & Gray LLP misappropriated information about an upcoming acquisition of 3Com Corp. Rogers’ initial penalty of over $127,000 in penalties was waived due to his personal financial condition.

Read the SEC release here.

Insider Trading: Georgia Resident Settles Charges In Connection With Southwest-AirTran Merger

The SEC announced it has charged John Darden, a resident of Georgia, with insider trading in connection with the 2010 merger agreement between Southwest Airlines Company and Airtran Holdings, Inc. Darden purchased 40,000 common shares of the company after learning of the merger from an AirTran board member. Darden agreed to pay approximately $330,000 in disgorged profits and civil penalties.

Read the SEC complaint here.

SEC Approves SRO Listing Standards Relating to Independence of Compensation Committees

Erin F. Siegfried — Thu, 17 Jan 2013 10:16:24 -0500

The SEC has approved the listing standard changes relating to compensation committee independence and consultants for both Nasdaq and the NYSE.

The proposed listing standards implement Rule 10C-1 under the Securities Exchange Act of 1934, which was added by the Dodd-Frank Act.

With respect to the Nasdaq listing standard changes, most listed companies will be required to comply with the new rules, but Nasdaq has exempted "smaller reporting companies" from compliance. First, by July 1, 2013, the listed company must have a formal written charter that provides:

The compensation committee will review and reassess the adequacy of the charter on an annual basis;
The scope of the committee's responsibilities and how it carries out those responsibilities, including structure, processes, and membership requirements;
The committee's responsibility for determining or recommending to the board for determination, the compensation of the CEO and all other executive officers of the company, and provide that the CEO may not be present during voting or deliberations on his or her compensation; and
The committee's responsibilities and authority with respect to retaining its own advisers; appointing, compensating, and overseeing such advisers; considering certain independence factors before selecting advisers; and receiving funding from the company to engage them.

The compensation committee may select, or receive advice from, a compensation consultant, legal counsel or other adviser, other than in-house legal counsel, only after taking into consideration the following factors:

The provision of other services to the company by the person that employs the compensation consultant, legal counsel or other adviser;
The amount of fees received from the company by the person that employs the compensation consultant, legal counsel or other adviser, as a percentage of the total revenue of the person that employs the compensation consultant, legal counsel or other adviser;
The policies and procedures of the person that employs the compensation consultant, legal counsel or other adviser that are designed to prevent conflicts of interest;
Any business or personal relationship of the compensation consultant, legal counsel or other adviser with a member of the compensation committee;
Any stock of the company owned by the compensation consultant, legal counsel or other adviser; and
Any business or personal relationship of the compensation consultant, legal counsel or other adviser or the person employing the adviser with an executive officer of the company.

The rule clarifies that nothing in the rule requires a compensation consultant, legal counsel or other adviser to be independent, only that the committee considered the enumerated independence factors before selecting, or receiving advice from, a compensation adviser. Further, the committee is not required to conduct an independence assessment for a compensation adviser that acts in a role limited to the following activities for which no disclosure is required: (a) consulting on any broad-based plan that does not discriminate in scope, terms, or operation, in favor of executive officers or directors of the company, and that is available generally to all salaried employees; and/or (b) providing information that either is not customized for a particular company or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice.

By the earlier of a listed company's first annual annual meeting after January 14, 2014, or October 14, 2014, the company's compensation committee must comply with the new director independence standards applicable to the compensation committee. The listed company must have a compensation committee composed of at least two members, each of whom must be an independent director as defined in Nasdaq's rules, and not accept directly or indirectly any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries, not including (i) fees received as a member of the compensation committee, the board of directors, or any other board committee; or (ii) the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the company, provided that such compensation is not contingent in any way on continued service. The board must also consider whether a director is affiliated with the company and whether such affiliation would impair the director's judgment as a member of the compensation committee.

A listed company must certify to Nasdaq, no later than 30 days after the final implementation deadline applicable to it, that it has complied with the committee charter and independence provisions.