April 2009


From the editors of CCH Federal Securities Law Reporter, CCH Blue Sky Law Reporter and the securities publications of Aspen Publishers, this update describes important developments covered in these publications, as well as timely topics of interest generally to federal and state securities practitioners. This update includes a new feature, “Market Crisis Resources,” a compilation of links to vital information on the current market crisis. Also included is a “Hot Topic of the Month,” with research tips and references to CCH and Aspen source material on point. Finally, this update includes a preview of IPO Vital Signs, an advanced IPO research analysis tool, for IPO professionals and pre-IPO companies.

To view past issues of the Securities Update, please visit http://business.cch.com/updates/securities

If you have questions or comments concerning the information provided below, please contact me at rodney.tonkovic@wolterskluwer.com.

 

CCH Federal Securities Law Reporter

SEC Adopts Adjustments to Monetary Penalty Amounts
The SEC has adopted adjustments to the civil monetary penalty amounts that it may collect under the Securities, Exchange, Investment Company and Investment Advisers Act, as well as penalty amounts collected by the Public Company Accounting Oversight Board. The agencies are required by statute to adopt regulations at least every four years to adjust for inflation the maximum amount of the civil monetary penalties under the statutes they administer. Release No. 33-9009 at ¶88,448 (ip access user).

SEC Permits PDFs for Form ID Authenticating Documents
The SEC adopted rule and form amendments that allow applicants for EDGAR access codes using Form ID to submit their authenticating documents by attaching them to their online Form ID applications as PDFs as an alternative to submitting the documents by fax. The amendments are intended to enhance the efficiency of processing Form ID applications. Release No. 33-9013 at ¶88,452 (ip access user).

Dismissed Employee Lacked Evidence of Fraud
A 7th Circuit panel affirmed a district court ruling under the Sarbanes-Oxley Act whistleblower provisions that an employee was not fired in retaliation for reporting fraud. An employee of a cable TV provider claimed that she was fired for reporting that a contractor was being paid for work that was not being performed. According to the employee, her supervisor was initially receptive to her complaint, but after a meeting with a representative of the contractor, directed that the full contract amount be paid. The employee then filed a complaint via proper company channels that the supervisor had violated the company's ethics code. The employee was terminated approximately one month later as part of a reduction in force.

The panel found that there was no objective basis for the employee to believe that a fraud was being committed. The panel found that the record did not support the employee's version of the events. According to the panel, the records did not show that the supervisor ordered payment of any amounts not properly earned. Additionally, the employee's ethics complaint indicated that the supervisor was seeking a negotiated settlement, and there was no evidence that any such settlement figure had been reached at that time. Therefore, stated the court, there was no basis to conclude that the supervisor had authorized full payment, and, accordingly, no subjective or objective basis to believe that a fraud had been committed. The conduct described in the plaintiff's claims, stated the court, was "far too ambiguous to support an objectively reasonable belief that a fraudulent payment had been ordered."

Finally, the panel noted that the employee's entire department was eliminated, and there was no evidence that the reduction was for anything other than financial reasons. According to the appeals panel, the plaintiff "simply has no evidence indicating that her termination was attributable to something other than the financial problems that necessitated" the overall reduction in force. A dissenting judge argued that there were several factual matters that warranted determination by a jury. Noting that an "employee should not have to wait until the fraud has been accomplished to register a concern, "the judge stated that it appeared that the employee reasonably believed that her findings were being "swept under the rug" and that the contractor was going to be paid in full. The judge also thought it plausible that retaliation against the employee could have been hidden within the reduction in force. Harp v. Charter Communications, Inc. (7thCir) is reported at ¶95,088 (ip access user).

Madoff Investor Was SIPA "Customer" Despite Delay in Purported Trading
An investor who wired $10 million to the Madoff securities firm six days before Mr. Madoff was arrested for securities fraud was a customer of the firm within the meaning of the Securities Investor Protection Act even though the fund was closed until the new year and no trade ever took place. A federal bankruptcy judge ruled that the funds were wired and held in the Madoff firm's account for the purpose of investing when the funds reopened. Regardless of whether the funds were to be invested immediately or upon the investor's authorization, the court said the sole purpose of wiring the funds to the firm's account was to effectuate future securities transactions. The customer relinquished all control over the funds once the wire was processed. The investor did not allege that the wired funds were to be escrowed or in any way segregated from other customer funds. The investment needed to establish customer status under SIPA was triggered the moment the funds were deposited in the firm's account.

The funds deposited in the Madoff firm's account constituted customer property within the meaning of SIPA, so they must be allocated in accordance with the Act's provisions and cannot be returned to the investor. The trustee is expressly directed by SIPA to distribute customer property pro rata among claimants who qualify as customers, the court noted, and any contrary distribution of the funds would preclude the trustee from exercising his statutorily mandated duties and would run afoul of SIPA's clear command. The court rejected the investor's attempt to compare the circumstances surrounding the allegations to a thief who breaks into an individual's home and steals money. Unlike a victim of theft, the court said the investor voluntarily entrusted funds to the Madoff firm for the purpose of purchasing securities through that firm. SIPC v. Bernard L. Madoff Investment Securities LLC (SD NY Bankr.) is reported at ¶95,089 (ip access user).

Prejudgment Interest Was Part of Pecuniary Gain
A 7th Circuit Panel affirmed the judgment of a district court in favor of the SEC in an action against an officer of a waste management company. The district court had ordered that a civil penalty and disgorgement be paid by a company officer who had been found liable for securities law violations by a jury. The officer was ordered to disgorge bonuses he had received, plus prejudgment interest, because the bonuses were tied to the company's earnings per share figures which were artificially inflated by the officer's violations.

On appeal, the officer first argued that the claim for penalties was untimely because the claims accrued when the violations occurred, and the suit was filed more than five years later. The panel declined to decide when a claim accrues under the statute, but stated that "a victim of fraud has the full time from the date that the wrong came to light, or would have done had diligence been employed," and that this also applies to the United States when it is enforcing the laws. In this case, a press release put the SEC on notice, and the claim was timely filed afterward. The panel also found that the district court correctly treated the officer's bonuses plus prejudgment interest as "pecuniary gain." The officer argued that the interest was not part of his pecuniary gain, but the panel noted that this argument had been rejected many times. "[The officer's] "pecuniary gain" is the amount he obtained by his fraudulent accounting, plus the economic return he made (or could have made) by investing that sum between 1992 and the date of disgorgement. And prejudgment interest is the right way to estimate the second component." The panel then directed that the district court on remand calculate the amount of the officer's bonuses according to the company's restated profits. SEC v. Koenig (7thCir) is reported at ¶95,077 (ip access user).

CCH Blue Sky Law Reporter

Hawaii Reduces Certain Securities Fees by 50% in 2009
Hawaii has reduced certain securities fees by 50% to the following amounts. The reduced amounts take effect from January 1, 2009 through December 31, 2009. On January 1, 2010, the original (and higher) fees will be reinstated. NOTE: The fee for Rule 505 and 506 offerings under federal Regulation D remains at $100. ¶20,567 (ip access user).

Indiana Proposes Rule Changes to Coordinate with New Securities Act
Rule amendments and repeals, along with new rules, were proposed by the Indiana Securities Division to align the rules with the new Indiana Securities Act that took effect July 1, 2008. The proposals would pertain to federal covered securities, exemptions, registrations of securities, broker-dealers, agents, investment advisers, investment adviser representatives and administrative hearing procedures but a substantial portion of the existing rule text would remain unchanged. Instead, most of the rules would be nonsubstantively amended to add the correct numerical references to the new Indiana Securities Act and proposed rules, provide the official citations to federal securities acts such as the Securities Exchange Act of 1934 and the Investment Company Act of 1940, change NASD references to FINRA, remove or replace the word "said" and such" with "the" or "these" as appropriate, and nonsubstantively amended to make certain provisions applicable to both "he" and "she" or "his" and "her." ¶24,571 (ip access user) et. seq.

Kansas Proposes Fee Increases for Investment Companies and Prohibition on Senior-Specific Professional Designations
Rule changes to increase the notice filing fees for investment company and unit investment trust securities were proposed by Kansas Office of the Securities Commissioner, together with rule provisions prohibiting securities industry persons from using senior-specific professional designations or certifications to offer or sell securities to senior citizens or to advise them about investments. Comments must be submitted by April 20, 2009; a public hearing on the rule proposals will be held April 22. ¶26,403E (ip access user), ¶26,405M (ip access user), ¶26,414D (ip access user).

Massachusetts No Longer Requires Certain SEC-Filed FOCUS Reports
Broker-dealers are no longer required to file with the Massachusetts Securities Division a copy of the FOCUS report required by SEC Rule 17a-5(d). ¶31,659 (ip access user).

Utah Amends 506 Exemption Rule to Accommodate Electronic Form D
Utah's 506 exemption rule was amended by the Securities Division to accommodate electronic Form D that issuers have the option of filing electronically through March 15, 2009 but will be required to file electronically with EDGAR starting March 16, 2009. ¶57,415N (ip access user).

Wisconsin Permanently Adopts Prohibition Against Using Senior Certifications or Designations
Persons in the securities industry such as broker-dealers, agents, investment advisers or investment adviser representatives are prohibited from using certain professional designations that state or imply specialized knowledge of the financial needs of senior citizen investors. The use of these "senior designations" by industry persons is a dishonest, unethical practice under §551.412(4)(m) [¶64,127 (ip access user)] of the Wisconsin Uniform Securities Law. Only those professional designations attained through prescribed training offered by a nationally accredited institution are approved professional designations by the Wisconsin Securities Division. ¶64,566 (ip access user), ¶64,586 (ip access user), ¶64,661 (ip access user), ¶64,662 (ip access user).

Exchange Act Preempted Challenges to "Stock Borrow Program."
The Eighth Circuit Court of Appeals has held that the Securities Exchange Act of 1934 (Act) preempted state law misrepresentation claims against three self-regulatory organizations that provide securities clearing and settlement services. In Pet Quarters, Inc. v. Depository Trust and Clearing Corp., a corporation and several of its shareholders argued that the "Stock Borrow Program" (Program) operated by the clearing agencies had permitted "naked short selling" of the corporation's shares. The plaintiffs further alleged that the Program allowed predatory investors to implement a "death spiral" scheme through the short sale of these "phantom shares," thereby driving down the price of the stock and putting the corporation out of business.

The appellate court ruled, however, that the plaintiffs' challenges would conflict with Congressional directives in Section 17A of the Act, which allows the U.S. Securities and Exchange Commission to facilitate the establishment of a national clearing and settlement system. The appellate court reasoned that a favorable ruling on any of the claims that the clearing agencies had misrepresented the nature, operation, or efficiency of the Program would conflict with the Commission's control of that system, posing an obstacle to Congressional objectives. The appellate court concluded, therefore, that the complaint presented substantial federal questions and that the district court properly dismissed the claims on the basis of conflict preemption. The decision is reported at ¶74,757 (ip access user).

Aspen Federal Securities Publications

Financial Reporting Handbook, by Michael Young
The latest release, Release 22 (ip access user), is now live on the IRN Corporate Governance Integrated Library. This reference provides quick access to critical aspects of financial reporting. In addition to covering the Sarbanes-Oxley Act, SEC rules and regulations, standards of the Independence Standards Board and the AICPA and requirements of the New York Stock Exchange, NASDAQ, and the American Stock Exchange, the Financial Reporting Handbook tackles important underlying themes such as the centrality of the audit committee, the individual responsibility of executives, and the integrity of the outside auditor.

Hot Topic of the Month

This month's hot topic is Regulation D. Regulation D is a series of rules that exempt certain limited securities offerings from the registration requirements of Securities Act Section 5. In general, Regulation D permits issuers to effect securities offerings without registering them under Section 5 if the issuer and the offering satisfy certain conditions.

Rules 501, 502 and 503 impose general requirements that all transactions must satisfy to qualify for a Regulation D exemption. These requirements supplement any applicable conditions required for a particular exemption under Rules 504, 505, or 506. In other words, a transaction qualifying for exemption under Regulation D, whether pursuant to Rule 504, Rule 505, or Rule 506, must satisfy the Rule 501 - 503 requirements in addition to any other conditions imposed by the particular exemptive rule.

In February 2008, the SEC adopted changes to Form D, the official notice of an offering of securities made without registration under the Securities Act in reliance on an exemption provided by Regulation D. The information required by Form D must be filed with the SEC electronically through a new online filing system that will be accessible from any computer with Internet access. The data filed will be available on the SEC Web site and will be interactive and searchable. In addition, the SEC revised Form D and Regulation D to reflect the electronic filing requirement and to simplify and restructure Form D and update and revise its information requirements.

We publish related information in a wide range of resources (e.g., Federal Securities Law Reporter, SEC Today, Insights – Amy L. Goodman, Securities Regulation – Loss, Seligman & Paredes, etc.), and document types (laws, regulations, releases, newsletter articles, treatise discussion). For example:

Federal Securities Law Reporter

  • Securities Act Regulation D at ¶2373 (ip access user) through ¶2379A (ip access user)
  • Release No. 33-6455 at ¶2380 (ip access user)
  • Securities Act Form D at ¶7341 (ip access user)
  • Release No. 33-8891, at ¶88,057 (ip access user)
  • CCH Explanations (e.g., ¶2380D.010 (ip access user))

SEC Today

  • Rules and Related Matters: Electronic Filing and Revision of Form D (2-6-08) (ip access user)
  • Rules and Related Matters: Revisions of Limited Offering Exemptions In Regulation D (8-3-07) (ip access user)

Insights – Amy L. Goodman (e.g., “SEC Provides Private/Public Offering Integration Guidance” (September 2007) (ip access user)
Corporate Finance and the Securities Laws – McLaughlin & Johnson (e.g., Chapter 7.07 (ip access user))
Securities Regulation – Loss, Seligman & Paredes (e.g., Chapters 3.C.7.b (ip access user)
Jim Hamilton’s World of Securities Regulation (http://jimhamiltonblog.blogspot.com/ e.g., 4-2-07)

IPO Vital Signs

IPO Vital Signs, an advanced IPO research analysis tool, assists IPO professionals and pre-IPO companies satisfy their most challenging research needs and answers hundreds of mission critical questions for all the players in the IPO process. IPO Vital Signs’ tabular data analyses focus on issues surrounding client advisement, deal negotiation, and prospectus disclosure.

IPO Week in Review, a weekly e-newsletter to keep professionals up to date with recent filing and going public activity, is an important element of the IPO Vital Signs system or is available by separate subscription. Coverage includes a monthly feature article on recent trends in going public in the U.S.

To see how an IPO Vital Sign works click on the Vital Sign title below:

Should Counsel Include That New Risk Factor?
Drafting & Due Diligence: Easily identify issuers disclosing a particular Risk Factor by reviewing our lists of topic sentences taken from the Risk Factors sections of recent IPO prospectuses. Also create a check list of risk factors disclosed by IPO issuers with similar characteristics to review against your company’s potential risk factors.

#733 - Risk Factors Section

List of Risk Factors

Review Lists of Risk Factors by:

  • Issuer
  • SIC Code
  • Offer Date
  • Length of Risk Factors Section (pages)
  • No. of Risk Factors in Section
  • List of Risk Factors Disclosures
  • Offer Amount
  • Lead Manager
  • Issuer’s / Underwriters’ Law Firm

Tip! Compare disclosures by 1) clicking the boxes in the 6th column to select IPO disclosures for comparison, and 2) clicking the [COMPARE] button at the top of the column.

Search for specific text in the Disclosure Compare window by striking [CTRL] + [F] keys to access the "Find" function. Enter a word or text string and click the [Find Next] button.

To help select comparables (e.g. SIC Code, IPO Law Firm, or Lead Manager), re-sort the table by clicking column headings.