I’m Ready for My Close-up: SEC Puts the Focus on Moviemaker Over Hostile Takeover Maneuvers

In a story right out of the movies, complete with “poison pills” and “white squires,” the SEC announced on March 13, 2014 that motion picture company Lions Gate Entertainment Corporation settled charges that it failed to disclose to investors a set of “extraordinary” corporate transactions designed to thwart takeover efforts by investor Carl Icahn.

The tale of intrigue and midnight board meetings can be traced to Icahn’s efforts, beginning in 2008, to acquire control of Lions Gate. Despite his eventually gaining beneficial ownership of nearly 40 percent of Lions Gate’s outstanding shares, the company rejected various demands from Icahn over the years, including a demand to appoint five of the twelve seats on the Board of Directors.  In March, 2010, Icahn made a tender offer with a premium over the market price to entice shareholders to sell.  To thwart Icahn’s tender offer, Lions Gate adopted a poison pill and began to look for ways to keep the company out of Icahn’s hands. Read More

Investors Get a Voice at the Regulator: SEC Names Its First Head of the Office of the Investor Advocate

Though investors might have assumed that the entire Securities and Exchange Commission was their advocate to begin with, on February 12th the agency announced that it had hired Rick Fleming to be its very first Investor Advocate in the recently created Office of the Investor Advocate (“OIA”).

In hiring Fleming, the SEC is implementing Title IX of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which amended the Securities Exchange Act of 1934 by creating, among other things, an Investor Advisory Committee, the OIA, and an ombudsman to be appointed by the Investor Advocate.  Fleming comes to the SEC from his most recent job as Deputy General Counsel at the North American Securities Administrators Association where he advocated for state securities regulators in matters before Congress and the SEC.  Fleming previously spent several years in Kansas state government, including some fifteen years in the state’s Office of the Securities Commissioner. Read More

Can Your Director Bank on the Business Judgment Rule?

Ever had one of those days where you think you’re acting with good faith, diligence, and care, and yet you still get sued by the FDIC?  The directors and officers of the now defunct Buckhead Community Bank in Georgia find themselves in the government’s crosshairs and, unlike their D-and-O counterparts at public companies, a federal court in Georgia thinks it’s not so clear that they’ll be able to claim the protections of the business judgment rule to avoid the FDIC’s claim that they caused the bank to lose millions of dollars.

The background in this case reads like so many others in similar suits around the country.  According to the FDIC, the bank implemented an “aggressive growth strategy” beginning in 2005 that resulted in a 240 percent increase in the bank’s loan portfolio through 2007, primarily from gains in the bank’s “high-risk real estate and construction loans.”  The bank’s adversely classified assets grew from twelve percent to more than 200 percent of its tier-1 capital, and by December 2009 the bank had landed in FDIC receivership.  The FDIC later sued the bank’s directors and officers in federal court alleging that they were negligent for repeated violations of the bank’s loan policy, underwriting requirements, banking regulations, and “prudent and sound banking practices.” Read More

Does Your Director Have a Guilty Conscience? SEC to Press for More Admissions

Some of the SEC’s enforcement targets are no longer in denial, or at least they won’t be if a recent policy shift at the regulator takes hold.  In a widely-reported letter on June 17, 2013 and then again in public remarks the next day, SEC Chairperson Mary Jo White indicated that the Commission would step up efforts to secure actual admissions of guilt in some cases rather than relying on the far more typical no-admit/no-deny settlements which have the advantage of avoiding litigation but which have also left some judges, politicians, and the public flat.

The purported change comes at a time when the SEC is facing criticism from a number of circles for settling high-profile cases. Among the loudest critics of the SEC’s settlement policy has been U.S. District Judge Jed Rakoff, who in November 2011 would not approve a $285 million settlement between the SEC and Citigroup in which Citigroup did not admit liability. As Judge Rakoff explained:  “Here, the S.E.C.’s long-standing policy—hallowed by history, but not by reason—of allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations, deprives the Court of even the most minimal assurance that the substantive injunctive relief it is being asked to impose has any basis in fact.”

Apparently, the SEC was listening to Judge Rakoff and others, but the consequences of this policy shift are unclear. For example, in her public remarks, Ms. White explained that “public accountability” cases were “quite important”—“and if you don’t get them, you litigate them.” Ms. White elaborated, adding that, “to some degree it turns on how much harm has been done to investors, [and] how egregious the fraud is.” As to any specific criteria the SEC would apply in seeking admissions of guilt, the regulator explained that such admissions might be appropriate in instances to safeguard against risks posed by the defendant to the investing public or where the defendant obstructed the SEC’s investigative process. In addition, two recent nominees to the SEC, Kara M. Stein and Michael Piwowar, stated during their confirmation hearings that they supported the policy shift. Read More

Inside Out: NASDAQ Proposes Rule to Require Internal Auditing

The NASDAQ Stock Market recently submitted a proposed rule change that would require all companies listed on the NASDAQ to maintain an internal audit function. The function would “provide management and the audit committee with ongoing assessments of the Company’s risk management processes and system of internal control.” In addition, the company’s audit committee would be required to meet periodically with the internal auditors and oversee the internal audit function. If implemented, the rule would require companies listed prior to June 30, 2013 to establish the internal audit function by December 31, 2013. Companies listed after June 30, 2013 would have to establish the function prior to listing.

The purpose of the proposed rule is to ensure that listed companies have a mechanism to regularly review and assess their internal controls and ensure management and audit committees receive information about risk management. The NASDAQ also believes the internal audit function will assist companies in complying with Rules 13a-15 and 15d-15, which require management to evaluate a company’s internal controls on a quarterly basis.

Despite the rule’s requirement of an internal audit function, the proposed language permits companies “to outsource this function to a third party service provider other than its independent auditor.” So, while the rule permits the internal audit work to be done by an outside third party, the company cannot engage the same auditing firm as both its internal and external auditor. In other words, the company needs both an independent outside auditor that cannot act as the inside auditor and an inside auditor that can be an outside auditor as long as it’s not the independent outside auditor.

Although most companies listed on the NASDAQ already have an internal audit function, the proposed rule would bring the NASDAQ into alignment with the New York Stock Exchange, which already requires its listed companies to have an internal audit function. See NYSE Listed Company Manual Section 303A.07(c).

The deadline for comments on the proposed rule is March 29, 2013.

Consenting Adults: D.C. Circuit Tells Press to Stay Out of SEC-AIG Relationship

What happens between a mature multinational insurance corporation and its regulator is nobody’s business, or so says the United States Court of Appeals for the D.C. Circuit, which issued an opinion in SEC v. AIG on February 1, telling the press that it couldn’t have reports prepared by an AIG consultant under a consent decree with the SEC.

In 2004—years before AIG would rise to infamy in the financial collapse—the SEC charged AIG with securities violations, and the result was a consent decree requiring, among other things, that AIG hire a consultant to review AIG’s transaction policies and procedures and to prepare reports. The court supervising the decree later allowed disclosure of the consultant’s reports twice: to the Office of Thrift Supervision and the House of Representatives. Sue Reisinger, a reporter for Corporate Counsel and American Lawyer, wanted to know what the consultant found at the government bailout recipient. Not being a regulator or constitutionally-created legislative body, Ms. Reisinger turned to the courts for access. The district court found that the consultant’s reports were “judicial records” to which Reisinger had a common law right of access. The court of appeals disagreed.

Whether something is a judicial record depends on the role it plays in the adjudicatory process. The court of appeals noted that the consultant’s reports were not relied upon by the district court in any way, and thus never found their way into the fabric of the court’s record or decision-making process. Though merely filing the reports with the court would not have been sufficient to transform them into the type of judicial records Reisinger sought, the court of appeals held that filing was “very much a prerequisite.” Thus, while the terms of the decree requiring a consultant were surely important to the district court, the court was agnostic as to the eventual content of the reports. In other words, Reisinger had the substantive cart before the procedural horse, and whatever those reports eventually contained, their import did not work to make them judicial records. Read More

Pick Your Poison: Regulators Find Overvalued Assets, Securities Fraud, and Insider Trading at Failed Thrift

In a case involving all of the hallmarks of the housing and economic crisis, on September 25, 2012 the SEC announced that it had charged three Nebraska bank executives and the CEO’s son with violations of securities fraud and insider trading laws stemming from subprime lending, undercapitalization, and the ultimate demise of TierOne Bank.

TierOne Bank was a century-old thrift that had traditionally focused on loans to the agricultural and residential sectors in Midwestern states, but like many banks caught up in the housing boom, in 2004 TierOne expanded into riskier loans in then-exploding markets such as Nevada, Florida, and Arizona. All of these markets would collapse just a few years later, leaving banks like TierOne with significant losses on their books. As a result, in June 2008, the Office of Thrift Supervision gave TierOne a choice: maintain elevated core and risk-based capital ratios or face enforcement action—the top leaders at TierOne allegedly chose neither.

Rather than increase capital ratios or accept an OTS enforcement action, CEO Gilbert Lundstrom, COO James Laphen, and Chief Credit Officer Don Langford allegedly materially understated TierOne’s loan and OREO losses. Not to be confused with the cookie, “OREO” in the banking context refers to “other real estate owned”—in this case real estate that TierOne had repossessed. Though TierOne was left holding real estate from failed markets around the country, its executives allegedly ignored the fact that the value of these assets was based on stale and inadequately discounted appraisals, and consequently made misstatements in its 2008 10-K and a number of other filings. Read More

The Tip Is In the Mail: Court Tries to Make Sense of Dodd-Frank’s Whistleblower and Retaliation Provisions and Asks Whether It’s Enough Just to Send a Letter

In what may be one of the first Dodd-Frank retaliation claims to make it past a motion to dismiss, a federal court on September 25, 2012 issued a ruling attempting to harmonize the definition of “whistleblower” under the landmark statute with its protections against employer retaliation for engaging in whistleblower activities. Acting in accord with the SEC’s final rule on the statute as well as opinions from the few federal courts to have weighed in on the subject, the court sided with the alleged whistleblower.

For some eighteen years, Richard Kramer had served as the vice president of human resources and administration at Trans-Lux Corporation. In that role, he had a number of responsibilities related to Trans-Lux’s ERISA-governed pension plan. Concerned with what he saw as conflicts of interest and deficiencies in the pension plan committee’s composition and reporting, Kramer went to Trans-Lux’s leadership and later the board’s audit committee to sound the alarm. Kramer eventually sent a letter to the SEC the old-fashioned way—by regular mail—a choice that would later have significance in the case.

Within hours of Kramer reaching out to Trans-Lux’s audit committee with his concerns, Trans-Lux’s CEO and another Trans-Lux employee reprimanded Kramer, and went downhill from there: Kramer’s staff was reassigned, an investigation into him was launched by Trans-Lux’s in-house counsel, his responsibilities were diminished, and he was eventually terminated. Kramer later sued Trans-Lux, claiming among other things that the Company had retaliated against him in violation of Dodd-Frank. Trans-Lux moved to dismiss. Read More

Federal Court Tosses Out Much of SEC’s Case Against Former IndyMac Execs

A federal judge in California gutted the SEC’s case against the former CEO and former CFO of IndyMac Bank by granting partial summary judgment against the SEC and eliminating most of the claims. S.E.C. v. Perry, No. CV 11-1309 (C.D. Cal. May 21, 2012).   (Transcript)  The SEC had alleged that in 2008, IndyMac’s former CEO Michael W. Perry and former CFO A. Scott Keys participated in filing false and misleading disclosures in SEC filings.  (Complaint) The SEC claimed that even as Perry and Keys were receiving information regarding IndyMac’s rapidly deteriorating financial condition, the two executives made misleading statements and omissions regarding the bank’s liquidity, capital-raising needs and activities, and capital ratio, which the SEC alleged was an important indication of the bank’s soundness. Despite the breadth of the SEC’s allegations, U.S. District Judge Manuel Real of the Central District of California granted the defendants’ motion for partial summary judgment, leaving few issues for trial. Read More