Month: January 2013

Another Securities Case for the Supreme Court. Next Up: Ponzi Scheme Cases

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Agreeing to take up yet another securities case, the Supreme Court granted cert on January 18 in three related appeals arising out of the alleged multi-billion dollar Ponzi scheme involving R. Allen Stanford’s Stanford International Bank. The Court’s decision in this case will likely resolve a circuit split over the scope of the preclusion provision of the Securities Litigation Uniform Standards Act (SLUSA).

Congress passed SLUSA in 1998 because plaintiffs were bringing class actions in state court to get around the tough pleading standards and other limitations imposed by the Private Securities Litigation Reform Act of 1995. SLUSA precludes state law class actions involving misrepresentations made “in connection with” the purchase or sale of a security covered under SLUSA. Lower courts have struggled with the meaning of those three words: “in connection with.” If a state court case has anything at all to do with securities, will it fail?How closely must a claim relate to the sale of covered securities before SLUSA bars state law remedies? The Supreme Court is about to weigh in on these questions.

In the Stanford ponzi scheme cases, the plaintiffs are investors who purchased CDs issued by Stanford International Bank. The investors asserted claims against third-party advisors (including law firms and an insurance broker) under Texas and Louisiana law, alleging that the investors were duped into believing the CDs were backed by safe securities. Although the CDs themselves were not securities covered by SLUSA, the third-party advisors argued that SLUSA nevertheless barred the state law claims because the alleged misrepresentations related to the SLUSA-covered securities that purportedly backed the CDs. The district court agreed, dismissing the actions. But the Fifth Circuit reversed the district court, holding that the alleged fraudulent scheme was only “tangentially related” to the trading of securities covered by SLUSA. The Fifth Circuit agreed with the Ninth Circuit that misrepresentations are not made “in connection with” sales of SLUSA-covered securities when they are only “tangentially related” to those sales. This means the Fifth and Ninth Circuits are at odds with the Second, Sixth, and Eleventh Circuits, which have all adopted broader views of SLUSA’s preclusion provision.

The third-party advisor defendants asked the Supreme Court to resolve the split, and the Supreme Court agreed, given that the circuit split threatensinconsistent outcomes in some of the biggest, mostcomplex, and multi-layered securities cases. The Court’s resolution will likely go a long way towards defining the role of state courts in adjudicating important class actions relating to securities issues.

The Final Geithner Tally: TARP Bailout Pays Big Dividends For Taxpayers

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As U.S. Secretary of Treasury Timothy Geithner steps down, Treasury released a January 18, 2012 update on the Troubled Asset Relief Program (“TARP”). This most recent update highlights an often misunderstood reality — Geithner’s signature program was a smashing success. As to the bailout of the too-big-to-fail banks and AIG, the truth is that TARP has generated tens of billions of dollars in profit for American taxpayers.

The hallmark of Treasury’s work during Mr. Geithner’s tenure has been its administration of the TARP. Although created in 2008 under the previous Secretary, Henry Paulson, Mr. Geithner has had responsibility for enlarging and steering TARP since January 2009. TARP came under significant criticism for use of taxpayer funds to bail out banks from diverse constituencies, spawning both the “Occupy” movement and contributing to the 2010 Republican takeover of the House of Representatives. Nevertheless, Mr. Geithner and the Treasury Department argued that TARP ultimately would produce a profit for the government. Four years later, that forecast has proven correct, at least with respect to funds provided to financial institutions, as many TARP investments have generated tens of billions of dollars in profit for American taxpayers.

The Capital Purchase Program (“CPP”) has been the primary driver of federal profits. The CPP made funds available for the Treasury Department to purchase mortgages, mortgage-backed securities, and preferred stock from financial institutions. Treasury disbursed nearly $205 billion under the CPP and, according to the Treasury’s January 18, 2012 TARP update, already has received over $220 billion in total cash back, a return of over 7%. This profit was mainly the result of dividends and gains received through Treasury’s ownership of bank stock and other assets. READ MORE →

Federal Trade Commission Announces New Hart-Scott-Rodino Thresholds

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Merge Sign

The Federal Trade Commission has announced the following new Hart-Scott-Rodino (HSR) filing thresholds, which will be effective for transactions closing on or after Feb. 11, 2013.

Any acquisition of voting securities and/or assets requires premerger notification to the FTC and the Department of Justice under the HSR Act and the regulations promulgated thereunder (16 C.F.R. Sections 801 – 803) if the following tests are satisfied and if no exemption applies (15 U.S.C. Section 18a(a)(2)).

Where a premerger notification is required, both parties must file, the acquiring person must pay a filing fee ($45,000 for transactions valued in excess of $70.9 million but less than $141.8 million, $125,000 for transactions valued at $141.8 million but less than $709.1 million or $280,000 for transactions valued at $709.1 million or more) and the parties must observe a 30-day waiting period prior to closing. READ MORE →

Shareholder Demands: Accepted, Refused or Deferred? Let’s ask RUSH.

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Chairs Around a Table

When a shareholder makes a demand on a company to pursue litigation, the company’s board can look to generally well-developed law to determine how to evaluate the demand. Though there is no one particular procedure a board must employ, there are numerous cases that explain how the board must inform itself about the demand in order to reach a good faith, “rational business decision” about whether to accept or refuse.

The rules for considering a shareholder demand are pragmatic, and afford corporate boards a dependable road map for responding to shareholder requests.

One open question (at least in Delaware, where it matters most) has been whether a board’s informed, good faith decision to defer action on a demand constitutes a “rational business decision” that is protected by the business judgment rule. Delaware courts have long held that while an informed board can refuse a demand, the one thing a board cannot do is nothing. At the same time, however, corporations often face the circumstance where there are follow-on shareholder litigation demands entirely duplicative of existing litigations or investigations. In those circumstances, a board could have any number of business justifications for wanting to defer action on the demand until the ongoing proceedings are resolved, but that would seem to violate the rule against doing nothing.

Genius rock lyricist Geddy Lee of RUSH once wrote “If you choose not to decide, you have still made a choice.”

Accordingly, the Ninth Circuit and certain federal district courts have recognized that a board’s informed, good faith decision to defer action on a demand during pending litigation or investigations is itself a decision that can be shielded by the business judgment rule. For example, in 2009, the Ninth Circuit found there was a “compelling” business justification for deferring action on a demand where the company’s pursuit of the demand’s allegations could be cast as an admission of wrongdoing in ongoing litigation. READ MORE →