In a virtual course on how to bring—or not bring—an M&A strike suit, on June 30, a Delaware Chancery Court dismissed all shareholder claims against a merger target and its acquirer, ending nearly two years of litigation. Though the allegations are familiar in the strike-suit context, the 45-page opinion which this ~$100 million merger yielded is notable for its methodical tour of Delaware fiduciary-duty law, 102(b)(7) exculpatory provisions, and so-called Revlon duties. The roadmap opinion should be required reading for directors considering a merger.
Defendants Ramtron International and Cypress Semiconductor both work in the technology industry and the two began their courtship in 2011. Though shareholder-plaintiff Paul Dent couldn’t prevent the 2012 Ramtron-Cypress marriage, he continued to hold out for a better dowry, naming Ramtron’s board and Cypress in a suit alleging that Cypress aided and abetted Ramtron’s board in breaching its duty to shareholders, and seeking quasi-appraisal of his shares. Vice Chancellor Parsons disposed of these claims, taking the time to explain in unusual detail why the allegations utterly failed. Read More
Some things are better left unsaid. Especially, it seems, when they involve political intelligence shared by a congressional aide with a lobbyist linked to a political intelligence firm serving Wall Street traders.
The sharing of political-insider scoop has recently caused Congress to be subpoenaed for an insider trading investigation that will likely test recent legislation enacted to curb trading on non-public political information. The SEC subpoenaed Rep. David Camp (R., Mich.) for records, and the Justice Department subpoenaed Camp’s aide Brian Sutter, staff director of the House Ways and Means Committee’s healthcare subpanel, to testify before a federal grand jury. Read More
On June 27, 2014, the U.S. Court of Appeals for the D.C. Circuit issued an important, unanimous decision upholding the assertion of attorney-client privilege for an internal investigation. The decision is especially significant because it (a) forcefully reversed a growing trend in the D.C. federal district courts that had narrowly applied the attorney-client privilege to internal investigations and (b) confirmed that communications made during the course of an internal investigation – e.g., interviews and interview notes and reports – are privileged whenever a primary purpose of the communication was to obtain legal advice.
The case involves a False Claims Act claim against Kellogg, Brown & Root (“KBR”), a former Halliburton subsidiary, regarding alleged fraud and other unlawful conduct violating the company’s code of business conduct. The plaintiff sought various materials relating to KBR’s investigation of the alleged conduct. Non-lawyers, acting at the direction of in-house lawyers, conducted the interviews.
On June 18, 2014, Judge Victor Marrero of the U.S. District Court for the Southern District of New York approved the SEC’s no-admit, no-deny consent decrees in its insider trading case against CR Intrinsic Investors, LLC and affiliated entities. In approving the decrees, however, the court called on the SEC to take a “wait and see” approach in cases involving parallel criminal actions arising out of the same transactions alleged in its complaint.
The decision follows the much-anticipated opinion in SEC v. Citigroup Global Markets(“Citigroup IV”), in which the Second Circuit vacated Judge Rakoff’s order refusing to approve a no-admit, no-deny consent decree between the SEC and Citigroup. The Second Circuit found that district courts are required to enter proposed SEC consent decrees if the decrees are “fair and reasonable,” and if the public interest is not disserved. A court must focus on whether the consent decree is procedurally proper, and cannot find that a proposed decree disserves the public based on its disagreement with the SEC’s use of discretionary no-admit, no-deny settlements.
Today the Supreme Court rejected calls from lawyers, economists and corporate associations to overrule the “fraud-on-the-market” theory that makes it possible to litigate federal securities fraud claims as class actions, instead handing defendants a modest procedural victory. In Halliburton Co. v. Erica P. John Fund, Inc., the Court declined to overrule a decision that for more than twenty-five years has been used by securities plaintiffs to certify thousands of federal class actions, but also recognized that defendants can rebut class certification by showing that allegedly misleading statements did not affect the price of a company’s securities. Halliburton kills what had been a growing movement to eliminate federal securities fraud class actions for all intents and purposes.
Plaintiff-respondent Erica P. John Fund, Inc. (the “Fund”) purchased stock in Halliburton and lost money when Halliburton’s stock price dropped upon the release of certain negative news regarding the company. The Fund filed suit against Halliburton and its CEO David Lesar (collectively, “Halliburton”), alleging that Halliburton had made knowing or severely reckless misrepresentations concerning those topics, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. Read More
On June 16, 2014, the SEC issued its first-ever charge of whistleblower retaliation under section 922 of the Dodd-Frank Act, charging a hedge fund advisor and its owner with “engaging in prohibited principal transactions and then retaliating against the employee who reported the trading activity to the SEC.” Read More
Michael Lewis’ new book Flash Boys: A Wall Street Revolt has caused a commotion on Wall Street, on Capitol Hill, and with law enforcement agencies. The SEC is the latest government agency to examine and propose new rules on alternative exchanges and high-frequency trading. The SEC’s latest proposals and enforcement actions raise questions about the agency’s plans to effectively regulate and enforce these activities and its ability to do so.
In Flash Boys, Michael Lewis—author of Liar’s Poker, Moneyball, The Blind Side, and The Big Short—follows a “small group of Wall Street investors” who he says “have figured out that the U.S. stock market has been rigged for the benefit of insiders and that, post-financial crisis, the markets have become not more free but less, and more controlled by the Big Wall Street banks.” High frequency trading is a type of trading using sophisticated technological tools and computer algorithms to rapidly trade securities in fractions of a second to profit from the slightest market blips. High frequency trading is done over traditional exchanges. In contrast, dark pools are alternative electronic trading systems conducted outside traditional exchanges that institutional investors use, sometimes to hide their trading intentions or to move the market with large orders.
A California federal jury sided against the U.S. Securities and Exchange Commission on Friday, June 6, finding the founder of storage device maker STEC Inc. not guilty on insider trading charges. This is the second insider trading loss in a week for the SEC, following a May 30 defeat in which a New York federal jury rejected insider trading allegations against three defendants, including hedge fund manager Nelson Obus.
In STEC, the SEC alleged that founder Manouchehr Moshayedi made a secret deal with a customer to conceal a drop in demand in advance of a secondary offering. According to the complaint, Moshayedi knew that one of STEC’s key customers, EMC Inc., would demand fewer of STEC’s most profitable products than analysts expected. The SEC alleged that he then made a secret deal that allowed EMC to take a larger share of inventory in exchange for a steep, undisclosed discount.
Summer is coming, but this is probably not the vacation Southern District of New York Judge Jed Rakoff had in mind. On June 4, 2014, the Second Circuit vacated Judge Rakoff’s order refusing to approve the SEC’s $285 million settlement with Citigroup regarding a 2007 collateralized debt obligation (“CDO”) offering. The highly anticipated opinion – the decision did not come down until more than a year after oral argument – sharply limits the instances in which a court may reject or even modify a Commission settlement, even when the SEC does not extract an admission of facts or liability. The decision, which comes at a time when the SEC has been seeking and obtaining more admissions from public companies in connection with settlements, is sure to have a significant impact on the agency’s future approach toward settlements and admissions.
Though the facts of the underlying case are almost a footnote at this point, the SEC had alleged that in 2007, Citigroup negligently represented its role and economic interest in structuring a fund made up of tranches of CDOs. As with similar allegations against Goldman Sachs and its ABACUS CDO, the SEC alleged that Citigroup hand-picked many of the mortgage-related assets in the fund while telling investors that the assets were selected by an independent advisor. The SEC further alleged that Citigroup chose mortgage-backed assets that it projected would decline in value and in which it had taken short positions. Thus, according to the SEC, Citigroup sold investors assets on the hope the CDOs would increase in value, while Citigroup had selected and bet against these same assets on the belief they would actually decrease in value. The SEC alleged that Citigroup was able to reap a substantial profit from shorting the assets it selected for the fund, while fund investors lost millions.
The SEC suffered a blow very recently when Judge James Lawrence King of the U.S. District Court for the Southern District of Florida entered summary judgment dismissing the entirety of its alleged Ponzi scheme case on statute of limitations grounds. SEC v. Graham, 2014 WL 1891418 (S.D. Fla. May 12, 2014). The court’s order is a significant application of last year’s Supreme Court decision in Gabelli v. SEC, 133 S. Ct. 1216 (2013), in that (i) it applies the applicable statute of limitations to sanctions that have usually been considered equitable, rather than punitive, in nature; and (ii) it holds that the applicable statute of limitations is a jurisdictional threshold on which the SEC bears the burden, not an affirmative defense on which the defendant bears the burden.
In Graham, the SEC alleged that five defendants defrauded nearly 1,400 investors of more than $300 million by marketing unregistered securities as real estate investments and guaranteeing an immediate 15% profit and future rental revenue on certain resort properties. According to the SEC, the defendants were using the new deposits to pay earlier investors in a classic Ponzi-scheme. After the defendants abandoned their efforts with the collapse of the real estate and credit markets in 2007, the SEC embarked on a seven-year investigation, and ultimately brought suit in January of 2013. The SEC alleged five counts of violations of federal securities laws, and sought not only civil penalties but also injunctive relief and disgorgement of all ill-gotten gains. The defendants moved for summary judgment on the ground that the five-year statute of limitations under 28 U.S.C. § 2462 time-barred all of the SEC’s claims. Section 2462 states, “Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued ….”
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