Ann Lipton offers an interesting analysis of the pleading implications of the Supreme Court's recent Omnicare decision, which dealt with whether and when opinions can give rise to 1933 Act Section 11 claims.
Ann Lipton offers an interesting analysis of the pleading implications of the Supreme Court's recent Omnicare decision, which dealt with whether and when opinions can give rise to 1933 Act Section 11 claims.
John Coffee highlights an important wrinkle in the legislation proposed by the Delaware state bar to ban fee shifting bylaws and charter provisions:
Fee-shifting bylaws and charter provisions are only precluded “in connection with an intracorporate claim.” What is that? Proposed new Section 115 of the DGCL would define “intracorporate claim” to mean “claims, including claims in the right of the corporation, (I) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (II) as to which this title confers jurisdiction upon the Court of Chancery.” ...
Coffee goes on to point out, I think correctly, that the legislative language appears to have been carefully crafted to permit fee shifting bylaws that apply to federal securities regulation:
Before we assume that the narrow phrasing of Sections 102 and 109 was an oversight by the Corporation Law Council, we need to consider the alternative possibility: namely, that they deliberately wrote it narrowly. Why? This is speculative and may sound cynical, but the Corporation Law Council may have wanted to cover only traditional “Delaware-style” litigation (where the interests of the Delaware Bar on both sides were jeopardized if “loser-pays” fee-shifting were to reduce the volume of such litigation). In contrast, securities litigation tends not to be brought in Delaware nor to involve Delaware counsel in most cases. If the goal was to protect the local Bar, nothing more needed to be done than to exempt “Delaware-style” litigation from the impact of “loser pays” fee shifting.
Because I believe that the bill is intended to protect the interests of the Delaware bar, I find that a very plausible hypothesis.
Coffee goes on to offer a detailed preemption analysis, which concludes--albeit somewhat tentatively--that state laws authorizing (even implicitly) fee shifting bylaws that apply to federal securities regulation would be invalid.
Apropos of which, William Sjostrom has a new article out that deals with the preemption issue:
The Article examines the intersection of fee-shifting bylaws and federal private securities fraud suits. Specifically, the Article hypothesizes about the effects fee-shifting bylaws would have, if enforceable, on private securities fraud litigation. It then turns to the validity of fee-shifting bylaws under federal law and concludes that they are invalid as applied to securities fraud claims. In light of this conclusion, the Article considers whether Congress should pass legislation to validate fee-shifting bylaws and determines that it should not.
Note: The Appendix at the end of the Article includes some data on corporations that have adopted fee-shifting bylaws or charter provisions between May 8, 2014 and March 16, 2015.
The Intersection of Fee-Shifting Bylaws and Securities Fraud Litigation (March 19, 2015). Washington University Law Review, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2580943
I recommend reading both pieces.
What is it about Omnicare, Inc., that generates such awful judicial opinions? The Delaware supreme court's decision in Omnicare v. NCS Healthcare, 818 A.2d 914 (Del. 2003), was one of that Court's worst decisions.
And now in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, Justice Kagan gets off on the wrong foot with her very first sentence:
Before a company may sell securities in interstate commerce, it must file a registration statement with the Securities and Exchange Commission (SEC).
Granted, she recovered almost immediately by observing in the next paragraph that:
With limited exceptions not relevant here, an issuer may offer securities to the public only after filing a registration statement.
But, as a FB friend of mine observed, why didn't somebody correct the over broad opening sentence?
As for the merits of the decision, Richard Booth aptly observes that "The bottom line is that Omnicare resolves an issue that most thought settled already, while ignoring the standard(s) of care that remain applicable under the 1933 Act." Alison Frankel similarly noted that:
This is getting to be an annual rite. The U.S. Supreme Court agrees to take a case that could significantly reshape the securities class action business. Defendants get their hopes up, loading the docket with amicus briefs calling on the justices to impose new restrictions on the cases. But ultimately the justices leave the status quo more or less intact, to the relief of shareholder lawyers across the land.
My friend and UCLAW colleague James Park has posted his article Bondholders and Securities Class Actions (January 15, 2015), available at SSRN: http://ssrn.com/abstract=2550398. Here's the abstract:
Prior studies of corporate and securities law litigation have focused almost entirely on cases filed by shareholder plaintiffs. Bondholders are thought to play little role in holding corporations accountable for poor governance leading to fraud. This Article challenges this conventional view in light of new evidence that bond investors are increasingly recovering losses through securities class actions. From 1996 through 2000, about 3% of securities class action settlements involved a bondholder recovery. From 2001 through 2005, the percentage of bondholder recoveries increased to about 8% of all securities class action settlements. Bondholders were involved in 4 of the 5 and 19 of the 30 largest securities class action settlements, and tended to recover in frauds associated with a credit downgrade. By 2005, almost half of all securities class actions alleged claims on behalf of all public investors, not just shareholders. The rise in bondholder recoveries is evidence that securities fraud has increased in severity over time, causing harm to a broader range of corporate stakeholders. Certain frauds can be understood as transferring wealth from bondholders to shareholders. In providing a remedy for such transfers, bondholder class actions are an example of the continuing evolution of the securities class action.
James has also posted a very detailed executive summary of the article on the Harvard corporate governance blog. Highly recommended.
Marcia Narine has a nice post summarizing the current craziness surrounding Rule 14a-8.
SEC Rule 14a-8(i)(7) provides that a shareholder proposal need not be included in the company's proxy materials if the proposal relates to a matter of "ordinary business." The idea is to keep shareholders from using proposals to micromanage companies. But Jim Hamilton notes that:
The National Association of Manufacturers (NAM) has filed an amicus brief in support of Wal-Mart Stores, Inc.'s appeal regarding a shareholder proposal on gun sales. Wal-Mart has appealed a district court decision holding that a shareholder proposal concerning the sale of certain guns should have been included in Wal-Mart's proxy materials for its 2014 annual shareholders meeting and should not be excluded in 2015. NAM posits that a proposal attempting to influence the types of products a retailer may sell clearly relates to an "ordinary business" matter (Trinity Wall Street v. Wal-Mart Stores, Inc., January 21, 2015).
You would think so, but the SEC and the courts have essentially gutted the exception. If the Wal-Mart case is not reversed, however, the rule will essentially have been repealed. As Hamilton notes:
Citing Trinity's claims that the products at issue could have the potential to impair Wal-Mart's reputation or be offensive to community values, NAM contends that this subject matter is "inherently subjective and open-ended." Where retailers sell a wide variety of products to an array of consumers, many products could offend someone, somewhere. The shareholder proposal rules are not meant to be a referendum on how a retailer selects its inventory, NAM says, and "[i]f the mix of products a retailer chooses to stock and sell is not subject to the ordinary business exception, that exception is rendered a nullity."
The problem is that the SEC takes the position that "proposals relating to such matters but focusing on sufficiently significant social policy issues (e.g., significant discrimination matters) generally would not be considered to be excludable, because the proposals would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote." It doesn't take a very imaginative proponent to twist virtually any corporate activity so as to raise "significant social policy issues." Want Nabisco to stop making Oreos? Bleat at length about childhood obesity. Want Wal-Mart to stop selling some article of clothing? Bloviate about sweatshops. And so on.
In sum, the SEC and the courts have completely undermined Rule 14a-8(i)(7) and thereby are allowing shareholders increasing ability to micromanage corporations. It's time to put the genie back in that bottle. And stopper it.
With the sad passing of my friend and mentor Henry Manne, it seems appropriate to point out that he is one of the few American legal scholars whose works have been collected into a single set of three edited volumes. The Collected Works of Henry G. Manne consists of:
Volume 1, The Economics of Corporations and Corporate Law, includes Manne's seminal writings on corporate law and his landmark blend of economics and law that is today accepted as a standard discipline, showing how Manne developed a comprehensive theory of the modern corporation that has provided a framework for legal, economic, and financial analysis of the corporate firm.
Volume 2, Insider Trading, uses Manne's ground-breaking Insider Trading and the Stock Market as a framework for many of Manne s innovative contributions to the field, as well as a fresh context for understanding the complex world of corporate law and securities regulation.
Volume 3, Liberty and Freedom in the Economic Ordering of Society, includes selections exploring Manne's thoughts on corporate social responsibility, on the regulation of capital markets and securities offerings, especially as examined in Wall Street in Transition, on the role of the modern university, and on the relationship among law, regulation, and the free market.
I was honored to be chosen as the editor for the second volume. You can download my introduction, Manne on Insider Trading, from SSRN: http://ssrn.com/abstract=1096259
Here at PB.com we love a good scrap, especially when we're a mere observer. The increasingly nasty slugfest beweet Jonathan Macey and Joe Grundfest and Dan Gallagher has been an especially good one. But it's getting to the point where you need a flowchart to keep track of things, espcially because now there are new players to watch.
Macey's latest blast is here and kindly offers this summation of the debate so far:
This post is my second—and I hope final—response to the unsuccessful attempts by SEC Commissioner Daniel Gallagher and Professor Joseph Grundfest to address my criticism of the paper released by them last month (hereinafter “the Paper,” described on the Forum here). In my first post, “SEC Commissioner, Law Professor Wrongfully Accuse SRP of Securities Fraud” (hereinafter “My First Post,” available on the Forum here), I analyzed the spurious claims against the Shareholder Rights Project (SRP) that Gallagher/Grundfest put forward. In this post I address the authors’ most recent reply to my latest post. ...
... In a subsequent post titled “A Response to Professor Macey” (hereinafter “the First Reply,” available on the Forum here), Professor Grundfest attempted to offer a “point by point” detailed response to my analysis. In a response titled Professor Grundfest’s Reply Demonstrates that He and Commissioner Gallagher Wrongfully Accused the SRP (“My First Response”, available on the Forum here), I showed that (i) the First Reply dramatically modifies and weakens the authors’ allegations and (ii) the First Reply itself demonstrates, in conceding some key points that I made and in failing to address some others, that Gallagher/Grundfest wrongfully accused the SRP and should withdraw their allegations.
“There you go again”: Earlier this week, the Forum published a reply to My First Response (“the Second Reply,” available on the Forum here) authored by Professor Grundfest and endorsed by Commissioner Gallagher.
Meanwhile Tamar Frankel claims that SEC Commissioner Gallagher violated SEC rules and will now have to recuse himself from matters relating to proposals and players in question. Which prompted Broc Romanek to ruminate on the question.
Jonathan Macey blogs that:
In their recent paper “Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors” posted on December 10, 2014, a sitting Commissioner of the Securities and Exchange Commission and a former SEC Commissioner accuse theShareholder Rights Project at Harvard Law School (SRP) of violating the anti-fraud provisions of the securities laws. The alleged fraud occurred when institutional investors represented by the SRP proposed shareholder resolutions encouraging shareholders in U.S. public companies to vote to de-stagger their companies’ boards.
Macey then offers a lengthy analysis of the paper, which concludes that "the SRP proposals were not fraudulent or misleading," which leads Macey to posit that:
Gallagher and Grundfest's real quarrel is not limited to the SRP proposals: it reflects a general indictment of the way that the SEC staff currently handle 14a-8 proposals. Not enough succor is provided by the SEC to companies who wish to exclude shareholders’ proposals according to Gallagher and Grundfest. Accusing an academic institution and a professor of committing fraud appears to me to be a strange way to criticize the SEC staff or to press for a change in enforcement practices, particularly when the accusation is being made by a sitting government official.
Tyler Cowen piles on, calling the Gallagher/Grundfest paper "a dangerous precedent" that represents a threat to "academic freedom," without exactly explaining why that's the case.
Cowen's complaint strikes me as silly. Academic freedom is not a license to commit fraud. Moreover, Gallagher and Grundfest are not complaining about the SRP's academic work but about their work as advocates of a shareholder proposal. So even if the SRP is chilled in making shareholder proposals (something that seems exceedingly unlikely), the SRP remains free to express its views in countless other ways.
My take is that Gallagher and Grundfest went way over the top on this one. And that's too bad because the long run effect is likely to give succor to the SRP and its ilk in their ongoing effort to remake American corporate governance according to their mistaken and misbegotten views.
In a post a while back, I noted a WSJ op-ed by Russell Ruan discussing the SEC's pattern of overblown statements in press releases dealing with enforcement actions. In it, I noted that the SEC also has a tendency to trumpet cases when filed while failing to acknowledge when it later loses such cases. It turns out that Ryan had previously noted that same phenomenon:
More than three months ago, the Supreme Court unanimously dismissed Securities and Exchange Commission penalty claims against investment adviser Marc Gabelli because the SEC took too long to file its case. But you wouldn't know that if you monitored the case on the SEC website. You'd find the regulator's initial fraud allegations against Mr. Gabelli but no official acknowledgment that the Supreme Court has significantly gutted the case.
The same is true for many other cases the SEC loses or abandons in court. ...
Like other federal agencies, the SEC has long been good at publicizing its initial accusations of wrongdoing—which is fair enough—but not so good at letting the public know when those accusations turn out to be unfounded or an overreach. ...
... today's SEC publicity is permanent and widely dispersed. The regulator's accusations can persist indefinitely among the top search-engine results for the names of those accused.
This presents an issue of fairness and transparency for a venerable agency where I proudly served from 1994 to 2004.
Walter Olson has the details. Here's the key point:
According to [WaPo] reporter Sudarsan Raghavan, these provisions “set off a chain of events that has propelled millions of [African] miners and their families deeper into poverty.” As they have lost access to their regular incomes, some of these miners have even enlisted with the warlord militias that were the law’s targets.
But go read the whole thing.
As I explained in my book The Complete Guide to Sarbanes-Oxley:
SOX § 203 requires registered public accounting firms to rotate (1) the partner having primary responsibility for the audit and (2) the partner responsible for reviewing the audit every five years. The audit committee must ensure that the requisite rotation actually takes place.
There now appears to be evidence that rotating audit partners does contibute to improved disclosure:
The main purpose of audit partner rotation is to bring a "fresh look" to the audit engagement while maintaining firm continuity and overall audit quality. Despite mandatory audit partner rotation being required in the U.S. for over 35 years, to-date there has been limited empirical evidence speaking to the effectiveness of U.S. auditor partner rotations given that audit partner information is not disclosed in U.S. audit reports. Using SEC comment letter correspondences to identify U.S. audit partner rotations, we provide initial evidence among publicly-listed companies suggesting that audit partner rotation in the U.S. supports a "fresh look" at the audit engagement. Specifically, we find that audit partner rotation results in substantial increases in material restatements (129 to 135 percent) and write-downs of impaired assets (one percent of market value). Overall, these findings suggest that audit partner rotation supports auditor independence and is an important component of quality control for U.S. accounting firms.
Citation: Laurion, Henry and Lawrence, Alastair and Ryans, James, U.S. Audit Partner Rotations (October 27, 2014). Available at SSRN: http://ssrn.com/abstract=2515586
Note that this result does not support audit firm rotation. As I also noted in my book Complete Guide to Sarbanes-Oxley: Understanding How Sarbanes-Oxley Affects Your Business, as a matter of good practice, a company ought to consider rotating audit firms periodically so as to get the benefit of a fresh set of eyes. Some corporate governance experts recommend doing so at least every ten years. In addition, governance experts recommend rotating audit firms if a substantial number of former company employees have gone to work for the audit firm or vice-versa.
But should good practice be made mandatory?
My concern is that consolidation of the accounting profession has made auditor rotation extremely difficult. As I explained in my book Complete Guide to Sarbanes-Oxley: Understanding How Sarbanes-Oxley Affects Your Business, SOX prohibits a public corporation from obtaining a wide range of non-audit accounting and consulting services from the accounting firm that performs their audit. Many public corporations get a wide array of such non-audit services from all 3 of the other Big 4 accounting firms. Rotating the auditing firm thus will be pretty complicated, as firms have to reshuffle their non-audit services. It'll be even more complicated if the firms are subject to some sort of cooling off period between when they provide audit services and can begin providing non-audit services (and vice-versa).
One key reform of the accounting profession thus ought to be promoting smaller accounting firms as viable alternatives to the Big 4.
In today's WSJ, Russell Ryan argues that the SEC is puffing its press releases beyond the bounds of what is legally and ethically appropriate:
Press releases are par for the course when the Securities and Exchange Commission files a case in federal court that it must later prove to a judge or jury. But the agency is increasingly shunting cases into its own administrative proceedings, where it initiates the prosecution and ultimately decides guilt or innocence—along with the severity of any sanctions—subject to only limited review in court.
Given the SEC’s peculiar quasi-judicial role in these cases, you might think the agency would refrain from gratuitously stoking prehearing publicity against the accused. Think again. The SEC now routinely issues press releases when it files charges in administrative cases it will eventually decide. This practice calls into question the agency’s ability to decide those cases fairly and impartially.
He then reciews the relevant case law, persuasively arguing that the SEC is routinely violating the relevant standards.
SEC press releases also blur the distinction between allegation and fact. Sporadic sentences begin with verbiage acknowledging the unproven nature of what follows, but most are declarative statements without any caveat or, worse, begin with ambiguous phrases like “according to the Commission’s order.” Some releases—including one in July 2013 announcing administrative charges against hedge-fund titan Steven Cohen —claim that an SEC investigation has already “found” wrongdoing, though official facts are supposed to be “found” only after a subsequent hearing.
Ryan does not mention the SEC's further offense of trumpeting charges but never acknowledging losses. Mark Cuban provides an excellent case in point. A 2008 press release announced that:
"Insider trading cases are a high priority for the Commission. This case demonstrates yet again that the Commission will aggressively pursue illegal insider trading whenever it occurs," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement.
Scott W. Friestad, Deputy Director of the SEC's Division of Enforcement, said, "As we allege in the complaint, Mamma.com entrusted Mr. Cuban with nonpublic information after he promised to keep the information confidential. Less than four hours later, Mr. Cuban betrayed that trust by placing an order to sell all of his shares. It is fundamentally unfair for someone to use access to nonpublic information to improperly gain an edge on the market."
With only one qualifying phrase acknowledging that the statements made by the SEC relate to allegations, on balance the press release sounds as though Cuban has already been found to have "betrayed" a trust by committing "illegal insider trading."
In any case, whether you think that press release helps prove Ryan's point or not, consider that the SEC never issued a press release acknowledging that a jury found for Cuban and not the SEC. An impartial arbitrator would give losses at least as much publicity as victories.