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

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Ringed Book

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 →

Tracing Meets Twombly: Ninth Circuit Sets Section 11 Pleading Standards For Aftermarket Purchasers

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In a precedent setting decision, the Ninth Circuit affirmed dismissal of a putative class action in In re Century Aluminum Co. Securities Litigation, significantly raising the pleading bar in Section 11 cases. Plaintiffs alleged that Century Aluminum and its underwriters, Credit Suisse and Morgan Stanley, issued false and misleading statements in connection with a secondary offering. The Ninth Circuit applied the Twombly/Iqbal “plausibility” standard, holding that those decisions no longer make it possible for plaintiffs to simply allege without plausible supporting facts that their shares can be “traced” back to a secondary offering. The court’s decision in Century Aluminum may mean that Ninth Circuit plaintiffs filing suit under Section 11 who rely on aftermarket purchases, and cannot otherwise plead plausible facts they purchased in the secondary offering itself, face a near impossible uphill battle at the pleading stage when alleging tracing.

Section 11 provides a remedy to shareholders who purchase securities under “a materially false or misleading registration statement.” When shares are issued under only one such registration statement, this tracing requirement is not a problem. However, when shares are issued under multiple registration statements, tracing back to the allegedly misleading registration statement can be extremely difficult. The court acknowledged that tracing to a secondary offering is “often impossible,” but noted that the tracing requirement “is the condition Congress has imposed for granting access to the ‘relaxed liability requirements’ that Section 11 affords.”

Century Aluminum issued 49 million shares in an Initial Public Offering that were already trading when plaintiffs purchased their shares. In a prospectus supplement on January 28, 2009, an additional 25 million shares entered the market. Plaintiffs alleged they had standing to pursue a Section 11 claim because they “purchased Century Aluminum Common Stock directly traceable to the Company’s Secondary Offering.” In support of their tracing theory, plaintiffs argued that their shares were purchased on dates that showed sharp spikes in trading activity, indicating the flood of new shares as a result of the allegedly misleading prospectus supplement. READ MORE →

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 →

CFTC Tightens Hold on Swap Participants

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On September 10, 2012, the CFTC issued rules mandating new record-keeping and registration requirements for swap dealers and major swap participants in the $700 trillion derivative global market. The rules were published in the Federal Register on September 11, 2012 and will take effect on November 13, 2012. The issuance finalizes rules adopted in a 5 to 0 CFTC vote on August 27, 2012. The rules were issued under Section 731 of the Dodd Frank Act, which amended the Commodity Exchange Act to require the adoption of standards relating to the confirmation, processing, netting, documentation, and valuation of swaps. Through these regulations, CFTC aims to effectively regulate swap dealers and major swap participants, and impose rigorous clearing and trade execution requirements on a previously unchecked derivatives market.

A swap is a derivative product in which counterparties exchange the cash flows of their financial instrument for the cash flows of the other party’s instrument. Swaps can include currency swaps, interest rates swaps, and, more recently, credit default swaps.

The final rules require swap dealers and major swap participants to timely and accurately confirm swap transactions by the end of the first business day following the date of execution. The rules also mandate portfolio reconciliation on a daily, weekly, and quarterly basis, and portfolio compression as a risk management tool. Furthermore, swap dealers and participants must now establish and enforce policies and procedures that are reasonably designed to ensure that each dealer and participant and its counterparties agree to all of the terms in the swap trading relationship documentation. The rules also require dealers and participants to agree with their counterparties regarding the methods, procedures, rules, and inputs for swap valuations. READ MORE →