March 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. 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

Interactive Data Rules Published
The SEC published two releases detailing amendments adopted in December 2008 requiring public companies and mutual funds to use interactive data for financial information. For public companies, interactive data financial reporting will occur on a phased-in schedule, with the largest companies who file using U.S. GAAP required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2009. The remaining companies will be required to file with interactive data on a phased-in schedule over the next two years. The rule amendments requiring mutual funds to provide risk/return summary information using interactive data require companies to provide financial statement information in a format that can be downloaded directly into spreadsheets, analyzed in a variety of ways using commercial off-the-shelf software, and used within investment models in other software formats. Mutual funds will provide the risk/return summary section of their prospectuses to the Commission and on their web sites in interactive data format using XBRL. Release Nos. 33-9002 (public companies) and 33-9006 (mutual funds) at ¶88,435 (ip access user) and ¶88,442 (ip access user).


Comment Period for Proposed IFRS Roadmap Extended
The SEC extended the comment period for a release proposing a roadmap for the potential use of financial statements prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board by U.S. issuers for purposes of their filings with the Commission. The original comment period for Release No. 33-8982 (¶88,409 (ip access user), scheduled to end on February 19, 2009, has been extended for 60 days until April 20, 2009. The proposed multi-year plan sets out several milestones that, if achieved, could lead to the required use of IFRS by U.S. issuers by 2014. As part of the roadmap, the release contains a rule proposal that would permit the use of IFRS by a limited number of U.S. issuers where this would enhance the comparability of financial information to investors. Release No. 33-9005 at ¶88,441 (ip access user).

SEC Publishes New Rules for Credit Rating Agencies, Re-Proposes Others
In two separate releases, the SEC published rules adopted and re-proposed in December for nationally recognized statistical rating organizations. The amended rules include a requirement to provide transition statistics for each asset class of credit ratings for which the NRSRO is registered or is seeking registration provided in one, three and ten year periods. NRSROs must also disclose the extent to which the verification performed on assets underlying or referenced by a structured finance transaction was relied upon in determining the credit ratings, as well as the extent to which assessments of the quality of originators of structured finance transactions played a part in determining the credit rating, and must provide additional information about their surveillance processes. NRSROs also must keep records of any complaints with respect to the performance of a credit analyst in determining, maintaining, monitoring, changing or withdrawing a credit rating and provide an annual report to the SEC.

The re-proposed amendments would prohibit an NRSRO from issuing a rating for a structured finance product that is paid for by the product's issuer, sponsor or underwriter, unless the information about the product that is provided to the NRSRO to determine and monitor the rating is also made available to other NRSROs. The SEC also proposed an amendment to Regulation FD to permit the disclosure of material nonpublic information to NRSROs regardless of whether they make their ratings publicly available. Release Nos. 34-59342 (adopted amendments) and 34-59343 (re-proposed amendments) at ¶88,346 (ip access user) and ¶88,347 (ip access user).

Expert Testimony Failed to Establish Loss Causation
A 10th Circuit panel affirmed a district court's grant of summary judgment in a class action involving the spinoff of a subsidiary. The class action was filed on behalf of purchasers of stock in a telecommunications subsidiary of an energy company who alleged that the company made false or misleading statements regarding the financial condition and prospects for future success of the subsidiary. After the subsidiary was spun off, its stock prices declined in the midst of an industry-wide meltdown, and it eventually filed for bankruptcy. The investors relied on the testimony of an expert witness to establish loss causation, but the district court found that the expert failed to differentiate between losses attributable to fraud and losses attributable to other forces. As a result, the expert's testimony was not admitted and the class was unable to establish loss causation and damages. The class appealed the exclusion of the expert's testimony and the grant of summary judgment.

The panel examined the two scenarios presented by the expert to demonstrate loss causation. Under the "leakage theory," the fraud was not revealed to the market in a single corrective disclosure but instead through a gradual revelation of concealed risks. The panel agreed with the district court's assessment that this method of identifying the loss attributable to the alleged fraud was "unreliable" in that it failed to describe how the fraud was revealed to the market and further failed to show a causal connection between the revelation and a corresponding loss. The other scenario presented, the "corrective disclosure theory," focused on price declines after four specific disclosures. The court stated that "a close inspection of each allegedly corrective disclosure shows that the district court did not abuse its discretion in finding that the truth they revealed was not sufficiently within the zone of risk such that [the expert] could show that it was the revelation of the fraud, and not other factors, that caused the subsequent declines in price." The panel accordingly affirmed the exclusion of the expert's testimony.

The panel then affirmed the grant of summary judgment in favor of the company. According to the court, the class still failed to present evidence that the declines in price were the result of the fraud being revealed to the market rather than some other factor. Given the evidence presented, stated the court, there was no way that a jury would be able determine whether the alleged fraud caused the loss. In re Williams Securities Litigation -- WCG Subclass (10thCir) is reported at ¶95,069 (ip access user).

Madoff Enjoined, Disgorgement and Penalty Ordered
Bernard Madoff consented to a partial judgment imposing a permanent injunction and other relief in an SEC enforcement action. The district court (SD NY) ordered that Madoff and Bernard L. Madoff Investment Securities LLC be permanently enjoined from violating the antifraud provisions of the Securities Act, Exchange Act and the Investment Advisers Act. The court also ordered that Madoff pay disgorgement, prejudgment interest and a civil penalty in amounts to be determined upon motion of the Commission. SEC v. Madoff (SD NY) is reported at ¶95,070 (ip access user).

Whistleblower Claim Fails, 1st Circuit Finds Fraud Belief Not Reasonable
A former employee seeking Sarbanes-Oxley Act whistleblower protection acted in good faith, concluded a 1st Circuit panel. Under an objective analysis, however, his belief that the company was engaged in fraud was not reasonable. The employee complained that the company improperly handled customer returns. In some instances, as claimed, the company would issue credit without proper documentation, while credits due would be denied in other cases. He was subsequently terminated, and the company claimed that the termination was for performance reasons not connected to his statements concerning improper conduct.

The Department of Labor administrative law judge dismissed the Sarbanes-Oxley Act complaint, as did the federal district court. The district court concluded that the belief that Staples was engaged in accounting fraud was not reasonable. On appeal, the 1st Circuit stated that "the complaining employee's theory of such fraud must at least approximate the basic elements of a claim of securities fraud." The complaint failed to approach this level, according to the panel. Disagreements with management about internal tracking systems and other elements of corporate efficiency were not protected under the whistleblower statute, held the court. Day v. Staples, Inc. (1stCir) is reported at ¶95,062 (ip access user).

Proof of Loss Causation Was Not a Prerequisite to Rule 23 Certification
A district court (ND Cal) granted a motion to certify a class in a fraud action against a manufacturer. The investors alleged that the company misrepresented its financial health by overstating its inventory of a raw material required for the production of components for solar cells. The court held that the class met the requirements of Rule 23 after finding that a report revealing the possibility of fraud was a partial disclosure that did not deprive purchasers of the fraud-on-the-market presumption after its release. Also, potential complications regarding the computation of damages did not mandate an earlier end to the class period because the class was unified by its interest in proving the same conduct, and the stock price at which any given class member bought should be readily discernible.

The court then rejected the company's reliance on 5th Circuit precedent, holding that a plaintiff must prove loss causation in order to use the fraud-on-the-market presumption. According to the court, proof of loss causation is not a prerequisite to Rule 23 certification in the 9th Circuit, and the company's other arguments that loss causation would preclude certification were unpersuasive. In re LDK Solar Securities Litigation (ND Cal) is reported at ¶95,054 (ip access user).

CCH Blue Sky Law Reporter

Florida Prohibits Industry Persons From Using Certifications or Professional Designations that Imply Specialized Knowledge of Seniors' Financial Needs
The use of professional designations or certifications by dealers and their associated persons, or by investment advisers and their associated persons, that state or imply a specialized knowledge of the financial needs of senior citizens is a dishonest, unethical practice under §517.161 (1)(d) and (1)(h) at ¶17,115 (ip access user) of the Florida Securities and Investor Protection Act. Only those professional designations attained through prescribed training offered by a nationally accredited institution are approved professional designations by the Florida Office of Financial Regulation. ¶17,463 (ip access user), ¶17,463A (ip access user), ¶17,463C (ip access user).

Minnesota Proposes Securities Rules to Coordinate with 2007 Uniform Securities Act
New rules involving federal covered securities, exemptions from registration and securities registrations, broker-dealers, agents, investment advisers and federal covered investment advisers were proposed by the Minnesota Department of Commerce to coordinate with the State's Uniform Securities Act that took effect on August 1, 2007. ¶33,401 (ip access user), et. cet.

Ohio Adopts Electronic Filing Rule for Investment Company and Rule 506 Offerings and Prohibition Against Senior-Specific Professional Designations
Rule changes adopted by the Ohio Securities Division permit investment companies and Rule 506 issuers to make electronic filings, prohibit industry persons from using certain senior-specific professional designations, require investment advisers to file Part II of Form ADV, clarify an investment adviser's use of the IARD and CRD, retitle the NASDAQ to be consistent with federal nomenclature, add the NASDAQ to the exchange listing exemption and substitute "FINRA" for "NASD." ¶45,522 (ip access user), ¶45,532 (ip access user), ¶45,536A (ip access user), ¶45,554 (ip access user).

Texas Repeals Specific Programs and Guidelines in Favor of NASAA Programs and Guidelines
Texas programs and guidelines for affiliated transactions, asset-back securities, corporate securities definitions, debt securities, equipment, impoundment of proceeds, oil and gas, options and warrants, preferred stock, promoter's equity investment, promotional shares, real estate, real estate investment trusts, specificity in use of proceeds, underwriting expenses, unsound financial condition and unequal voting rights were repealed by the State Securities Board and replaced by incorporating by reference the NASAA policies and guidelines for these securities. ¶55,590D (ip access user).

"Delaware Carve-Out" Preserved State Law Class Action
A federal appellate court (9th Cir.) has held that the savings clause of the Securities Litigation Uniform Standards Act of 1998 (SLUSA) preserved a state law class action brought by shareholders of a closely held California corporation that merged with an issuer of nationally traded securities. In Madden v. Cowen & Co., sixty-three shareholders alleged that an investment bank committed negligent representation and professional negligence in issuing a fairness opinion regarding the transaction just a few months prior to the bankruptcy of the acquiring firm. Although the suit constituted a "covered class action" otherwise subject to preclusion under SLUSA, the appellate panel concluded that the suit did not fall within SLUSA's preemptive scope because the savings clause, or "Delaware carve-out," permits a shareholder to bring a class action that: (i) is based on the law of the state in which the issuer of the relevant securities is incorporated; and (ii) involves a shareholder communication made by or on behalf of the issuer with respect to a tender or exchange offer for those securities. As the plaintiffs' action arose under California law and involved a fairness opinion provided by the defendant investment bank on behalf of the California corporation, the Delaware carve-out applied to the suit. Madden v. Cowen & Co (9th Cir) is reported at ¶74,754 (ip access user).

Aspen Federal Securities Publications

Broker-Dealer Law and Regulation, Fourth Edition, by Norman S. Poser and James A. Fanto
The 2009 Supplement (ip access user) is now live on both the IRN Investment Management and the Exchanges & SROs Integrated Libraries. The 2009 Supplement includes an in-depth discussion of the financial crisis of 2007-2008 and its impact upon and implications for broker-dealers, including an account of the emergency efforts of the Federal Reserve, the SEC’s actions to restrict short selling, the Emergency Economic Stabilization Act of 2008 and its Troubled Asset Relief Program, and the Treasury Department’s Capital Purchase Program; an examination of the regulatory implications of the sub-prime financial crisis for broker-dealers, which includes a discussion of the dominance of the financial holding company and the demise of investment bank holding companies and a consideration of the Treasury Department’s “Blueprint” for regulatory reform; proposed and consummated changes in the regulatory structure of the securities industry, including the 2008 Treasury Department proposals, and the consolidation of self-regulatory authority in FINRA; a discussion of the proposed amendments to Rule 15a-6 and other regulatory developments with respect to the solicitation activities of foreign broker-dealers in the United States; an examination of proposed amendments to Regulation S-P to deal with, among other things, privacy protection for customers when a broker changes employment to another broker-dealer and enhancements to the information security programs of broker-dealers, especially to protect customer information against Internet and other online attacks and hacking and to establish procedures for unauthorized use of and access to customer personal information; a detailed discussion of FINRA’s guidance to firms on their review and supervision of electronic communications, its proposal to revise, consolidate, and simplify existing NASD and NYSE rules on supervision and supervisory procedures, and its supervisory requirements for deferred variable annuities, also included is consideration of supervisory procedures that a broker-dealer should take to deal with the risk of a “rogue trader”; a consideration of the SEC’s proposed guidance to mutual fund directors in their management of portfolio practices of investment advisers to funds, including soft dollar practices, and of its proposed amendments to Part 2 of Form ADV that require an adviser’s disclosure of these practices; a discussion of valuation issues on securities positions that have arisen during the crisis and their implications for broker-dealers’ net capital determinations, as well as an in-depth review of FINRA’s proposed financial responsibility rules that concern broker-dealers’ net capital determinations and consolidate existing NASD and NYSE rules on the subject; a discussion of the circumstances under which an investment banker owes fiduciary duties to its corporate clients; recent case law on the issue of causation in a private suit under Rule 10b-5, in light of the Supreme Court's decision in Dura Pharmaceuticals; and an examination of the Supreme Court’s decision in Hall Street Associates v. Mattel, on the enforceability of an agreement between parties, broadening the scope of judicial review of any future arbitration beyond the judicial review provisions of the Federal Arbitration Act.

Hot Topic of the Month

This month's hot topic is shareholder proposals. A shareholder proposal is a shareholder's recommendation that the company and/or its board of directors take an action, which the shareholder intends to present at a shareholder meeting. Exchange Act Rule 14a-8 dictates when a company must include shareholder proposals in its proxy materials issued before an annual or special shareholder meeting. A registrant that receives a shareholder proposal within the prescribed time before the solicitation must include the proposal in its proxy statement, identify the proposal in the form of proxy, and give recipients of the proxy material a means by which to vote on the proposal, if the proposing shareholder meets the eligibility conditions and if the proposal does not fall within any enumerated ground for exclusion.

Rule 14a-8 enumerates thirteen substantive grounds on which management may exclude proposals. Exclusion is proper, for example, if the proposal: would require the registrant to violate state, federal, or foreign law; concerns the election of directors; violates the SEC's proxy rules, including the anti-fraud rule; or concerns matters that relate to the registrant's ordinary business operations. The company has the burden of showing that it is entitled to exclude the proposal and must submit to both the SEC and the proponent copies of the proposal, an explanation of the reasons why the company believes that exclusion is proper and a supporting opinion of counsel, in the case of grounds based on state or foreign law.

At a recent conference, the Chief Counsel and Associate Director of the SEC reviewed the shareholder proposal season and said the hot topics this year are the power to call special meetings and executive compensation. The number of proposals is up this year from the same time last year.

Federal Securities Law Reporter

SEC Today

Insights – Amy L. Goodman (e.g., “The Bylaw Groundswell: Advance Notice Provisions in the Wake of CSX” (November 2008) (ip access user)
Securities Regulation – Loss, Seligman & Paredes (e.g., Chapter 6.C.4 (ip access user))
Jim Hamilton’s World of Securities Regulation (http://jimhamiltonblog.blogspot.com/ e.g., 11-10-08)

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:

What are the financial profiles of IPO issuers?

#581 - IPO Issuer's Financial Profile

Use IPO Vital Sign #581 to review...

  • IPO Issuer & Business DescriptionsI
  • IPO Offer Date
  • SIC Code
  • Issuer’s HQ Country/State
  • Revenue
  • Net Income
  • Net Worth
  • Offer Amount
  • Lead Managers

Tip! Click column headings to sort the data in an order more useful for answering your questions. Use Ranked by in the upper left hand corner of the table to select multiple columns by which to rank the data. For instance, you can select SIC Code in ascending order and then Revenue in descending order to sort IPOs in order of SIC and revenue size.