Securities Mosaic® Blogwatch
May 18, 2012
FAF, FASB Prepare for Further Action on Private Companies
by

As the Financial Accounting Foundation (FAF - the overseer of the FASB) prepares to meet next week to discuss next steps on its proposal for private company standard-setting, here is a summary of recent developments relating to FAF and FASB regarding private companies.

FAF To Discuss Proposed Structure for Private Co Standard-Setting
As previously reported, and as confirmed in the FAF's agenda for its May 23 meeting, the group will discuss feedback on its proposed Plan to Establish the Private Company Standards Improvement Council (PCSIC) (FAF Plan).

See our previous reporting on FAF's summary of comments received on the proposal, including more than 7,000 comment letters received, and feedback received at public roundtable sessions, here. Read the comment letter filed by FEI's Committee on Private Company Standards (CPC-S).

Wild-Card: Impact of Potential SEC Action on IFRS
A wild card issue in the public company arena that could have an indirect impact on private company standard setting could be the U.S. Securities and Exchange Commission's upcoming actions as it examines whether to permit or require U.S. public companies to file their financial statements with the SEC using International Financial Reporting Standards, as published by the International Accounting Standards Board.

One such means of potential action would be the "incorporation" of IFRS standards into U.S. GAAP by FASB, such as through continued standard-by-standard convergence, via an approach referred to as "endorsement" (or colloquially as "condorsement" - combining convergence and endorsement by an official standard-setting body in a particular country, which is common practice around the world; based on a May, 2011 SEC staff paper and related comments by FAF in November 2011, FASB could take on such a role in the U.S.).

How an SEC decision on incorporation of IFRS in the U.S. will impact private companies (in terms of potential changes in FASB's role and approach to developing and amending U.S. GAAP) will continue to be a topic of interest.

Decision-Making Framework for Private Cos. Discussed at FASB Education Session
Earlier this week (Mon., May 10), FASB discussed during an Education Session its research project on developing a Decision-Making Framework for Private Companies.

Definition of Non-Public Entity (Private Company)
In related news, see also earlier FEI reporting on FASB's tentative decisions defining the scope of a "non-public entity" (more informally referred to as a "private company"), including with respect to conduits, in the FEI blog.

FASB Meets with Private Co, Small Co. Advisory Committees

Last week, FASB met jointly with its Small Business Advisory Committee (SBAC) and its Private Company Financial Reporting Committee (PCFRC) - formed jointly a number of years ago by FASB and the American Institute of Certified Public Accountants). The advisory groups will also hold separate meetings. (See the SBAC Handout.)

PCFRC will potentially be replaced by a new private company standard-setting advisory group currently under consideration by the FAF, noted above.

May 18, 2012
Campaign Contributions and Governmental Financial Management
by R. Christopher Small

Editor's Note: The following post comes to us from Craig Brown of the Department of Finance at the National University of Singapore.

In the paper, Campaign Contributions and Governmental Financial Management: Evidence from State Bond Pricing, which was recently made publicly available on SSRN, I study campaign-finance agency costs related to pricing in the $2.9 trillion state and local government bond market. By selecting a contributing underwriter directly, the government could incur significant costs with respect to government bond underpricing. There is no comparable impact when an underwriter is chosen through an auction. Through the use of a control function approach, I show that the decision to select a contributing underwriter is endogenous to first-day returns. When underpricing is expected, the government's propensity to choose a contributing underwriter decreases as expected underpricing increases. This evidence supports the idea that there are significant agency costs associated with campaign contributions and the evidence remains robust after a battery of checks.

This paper's results lend support to the political agency cost model. Consistent with the common assertion that the election is the primary disciplining mechanism for political executives in a political agency cost model (Besley, 2006), the likelihood that a contributing underwriter is chosen is decreasing in the closeness to the next election. Consistent with the idea that laws can discipline politicians directly and through taxpayer monitoring, the likelihood that the government does not choose an auction to select an underwriter is decreasing in the quality of conflict-of-interest laws and freedom-of-information laws; the likelihood that the government chooses a contributing underwriter is decreasing in the quality of freedom-of-information laws.

This paper's results show, through the link between expected underpricing and underwriter choice, the important role of financial sophistication and suggest that, for government financial executives, effective financial education and competitive wages could improve taxpayer welfare. Moreover, this paper's results lend support to the campaign-finance channel of political agency costs. The governor's margin of victory, a proxy for other politician-agency-costs, has no effect on bond underpricing in a specification that accounts for campaign contributions; the underpricing effect is largely through the selection of a contributing underwriter. Furthermore, agency costs are present when contributions are made to the agent most responsible for contracting with the underwriter. Treasurers are the political executives most responsible for state funding. When treasurer campaign contributions are acknowledged, the results are robust.

Consider the quantitative importance of this paper's results. Bonds are typically issued in a series. The median amount for a given serial issue is $200 million; the average amount is $293 million. Based on these figures and an average naive underpricing effect of approximately 4%, states are leaving $8 million on the table (per issue) at the median and $11.72 million per issue on average based on the naive underpricing effect. The average two-year cumulative contribution amount in the sample is $3,026.80. For the contributing underwriters that are chosen, the average is $7,314.77; the median is $1,650.

Based on these figures, the returns to campaign contributions seem "excessive."

No easy policy solution exists for the political agency problem presented in this paper. Any employee of an underwriter (or an associated bank holding company) has the right to contribute to his or her candidate of choice. Moreover, campaign contributions could merely serve as a proxy for side payments to political executives. But as with the case of construction firms (Rose-Ackerman, 1975), tax-paying citizens can incur substantial costs when financial service firms become noncompetitive in seeking government business. Paradoxically, this paper's results suggest that underwriters could be competing on the dimension of campaign contributions; bond prices increase with the total amount of underwriter campaign contributions received by the governor.

A commonly proposed solution for the agency costs of security issuance requires that states use the competitive method for financing. This option has problems of its own; there could be reasons for using the negotiated method that are unrelated to agency costs. In addition to what states can do, regulators should consider applying Rule G-37 to all underwriter employees and consultants.

The full paper is available for download here.

May 18, 2012
Balancing Act
by Lyle Roberts

There is rarely a dull moment when Judge Frank Easterbrook writes a securities litigation opinion. In Fulton County Employees Retirement System v. MGIC Investment Corp., 675 F.3d 1047 (7th Cir. April 12, 2012) (Easterbrook, J.) the court addressed a credit crisis case in which a mortgage loan insurer allegedly made misstatements about the liquidity of an affiliated company. The decision includes a few interesting holdings.

(1) MGIC stated in a press release that the affiliated company (in which MGIC held a 46% interest) had "substantial liquidity," but eleven days later announced that its investment in the affiliated company was "materially impaired." The court concluded that the liquidity statement was inactionable both because it was true when made and because the press release contained specific warnings about the liquidity risk at the affiliated company.

(2) Moreover, the court noted that the events that led to the material impairment of the investment were known to the market. To the extent that the "whole world knew that firms that had issued, packaged, or insured subprime loans were in distress," MGIC was in no better position to foresee what would happen to its investment than anyone else.

(3) The plaintiffs also alleged that certain statements made by officers of the affiliated company during MGIC's earnings call were fraudulent. The court held that (a) MGIC's ownership interest in the affiliated company was insufficient to establish that it "controlled" the affiliate (especially given that another company also had a 46% stake) for purposes of control person liability, and (b) pursuant to the recent Janus decision, MGIC could not be held liable as a "maker" of the affiliated company's statements and had no duty to correct them.

Holding: Dismissal affirmed.

Quote of Note: "The press release went on to detail problems that MGIC was encountering, including the liquidity risk at [the affiliated company]. The goal of this paragraph was to let investors know about the trouble without painting too gloomy a picture. A balancing act of that nature cannot sensibly be described as fraud."

May 19, 2012
Regulatory Complexity and Uncertainty: The Capital Requirements Directive IV
by Noam Noked

Editor's Note: The following post comes to us from Vincent O’Sullivan, member of the FS Regulatory Centre of Excellence, PwC, UK, and Stephen Kinsella, Lecturer in Economics at the Kemmy Business School, University of Limerick.

Regulation is the most important factor influencing strategic change at financial institutions and is the second largest threat - after economic uncertainty - to growth prospects, according to PwC's Annual Global CEO Survey [1]. The survey, which is in its fifteenth consecutive year, canvassed CEOs at over 250 financial institutions in 42 countries late last year and provides a good barometer on market sentiment. The significance of regulation as a change driver in the financial sector has grown steadily since the recent crisis. Based on PwC's face-to-face interviews with CEOs of some of the world's largest financial institutions, it is clear, though, that it is not simply regulatory change, but regulatory complexity and uncertainty that are really dampening confidence in growth.

Upgrading the European Union (EU) prudential regime for banks in line with the Basel III proposals is an excellent example of both regulatory complexity and uncertainty. In July 2011, the European Commission [2] released two proposals to introduce the new regime. The bulk of the existing EU prudential regime, with the amendments necessary to introduce Basel III, is recast into a regulation - the Capital Requirements Regulation (CRR) - amongst other things to support the parallel EU goal of harmonising and deepening the internal market through a single rule book. In addition, a Directive - Capital Requirements Directive IV (CRD IV) - sets out requirements in a limited number of areas where Member State discretion is still necessary, for example in relation to corporate governance.

In an attempt to meet the target January 2013 launch date of the new regime in line with recommendations of the Basel Committee, the two EU legislators - the Council of Economic and Finance Ministers (Council) and the European Parliament - are working furiously in parallel to agree the amendments they each want to see to the Commission's proposals.

European financial ministers (the ECOFIN Council [3]) made "huge progress" in finalising their position on the CRD IV on 2 May, according to the Danish Presidency [4]. Although full and final agreement eluded ministers during the meeting which endured through to the early hours of 3 May, clear progress was made on a number of fundamental issues, leaving only some technical details to be resolved. This paves the way for a final agreement on a text on which to begin negotiations with the European Parliament (EP) at the next ECOFIN meeting on 15 May 2012.

The EP's Economic and Monetary Affairs (ECON) Committee has deferred its own vote until 14 May to enable further debate which, given the 2,195 amendments to the text introduced in the EP, appears warranted. In spite of these delays, the commitment of both the Council and the ECON committee to finalise the regime - in line with the Basel III deadlines - holds firm.

There are a couple of critical issues which, regardless of the outcome of the debates in ECOFIN and the ECON vote, are likely to engender ongoing discussion as the negotiations enter the next stage.

Michel Barnier [5], Internal Market and Services Commissioner, emphasised in his opening comments on 2 May that the EU is committed to a "faithful, complete and prompt" adoption of the Basel III regime. However he also reiterated that certain European specificities need to be addressed, given that the regime will be applied to all the EU's 8,300 or some banks, arguing that this did not go against the Basel regime overall. Some ministers are worried about the nature of some of these specificities. For example, George Osborne, the UK Chancellor, is concerned about the requirements for bancassurers, seeing the possibility for banks to include holdings in insurance companies (in the same group) in own funds as watering down the regime overall.

The other key issue relates to the flexibility to be awarded to individual countries to increase capital requirements in face of emerging national or cross-border systemic risks. Ministers generally understood the need for countries whose banking industry constitutes a large proportion or multiple of GDP to have such a facility - a concept supported by the Basel Committee, the International Monetary Fund, the Financial Stability Board and the European Systemic Risk Board (ESRB) (see below) in recent months - questions remain about the level of additional capital that can be applied by national regulators without consultation with the European Banking Authority (EBA) or other national regulators, as a crucial issue is the potential knock-on effect cross-border, and the relative power of home and host country regulators in determining additional capital requirements.

Worth noting, on 2 April, the ESRB published a letter from its President Mario Draghi [6] to EU legislators which advocated the permission of "constrained discretion, with workable safeguards, for macro-prudential authorities at both Member State and Union level to tighten calibrations (while leaving definitions untouched) of commonly defined prudential requirements".

Over and above the macro-prudential measures already embedded in the CRD IV regime, the ESRB believes that an EU macro-prudential framework should be developed which takes account of "risks from a wide range of sources: from within the financial system (given intra-system interconnections and contagion between banks, and between banks and others including nonregulated entities or 'shadow banks'); from the system to the real economy; and from strong feedback mechanisms between the two." The ESRB believes this framework should be constructed on three principles: flexibility, scope to act early and effectively, and efficient coordination.

According to the letter, in terms of flexibility, national and EU macro-prudential authorities should be empowered to tighten Pillar 1 calibrations temporarily, or mandate additional disclosures when the need arises. They should also have the power to be proactive, stepping in before significant imbalances or unstable interconnections can build-up. However, to ensure that such constrained discretion does not create distortions, macro-prudential authorities need to ensure efficient ex-ante coordination "to limit possible negative externalities or unintended effects for the sustainability of the single market in financial services or for the economies of other Member States." According to the ESRB, as the EU macro-prudential overseer, it would be best placed amongst the EU institutions to orchestrate this coordination.

Further clarity on these issues will be forthcoming soon but the debate will continue. The Danish Presidency is committed to achieving political agreement on the CRD IV package before the end of its term on 30 June 2012, so we should have a much clearer picture of the way forward in a matter of weeks. But the 2,195 amendments tabled on the texts in ECON are a clear indication of the complexities involved and how ambitious this timeline may prove to be. Some fear the old adage more haste, less speed may come into play, or worse the end result may be suboptimal from both an EU and international perspective if the legislation is rushed through.

EBA starts filling in the gaps

The EU regime will reflect the transitional elements of the Basel III regime, with different rules coming into effect progressively over a five year period. However, key elements of the regime will need to be in place from the 1 January 2013 launch date. To implement CRD IV/CRR, the European Banking Authority (EBA), the pan-European banking regulator, will have to prepare over 30 regulatory technical standards and 13 implementing technical standards on the CRD IV before the regime takes effect on 1 January 2013. Further implementing measures will follow in relation to subsequent milestones in the process.

Therefore, contrary to normal practice, the EBA is already working on some important regulatory technical standards (RTS) which will underpin the regime, while recognising that they are still working with a potentially moving target. On 4 April, the EBA [7] published the first of two sets of proposals for RTS relating to own funds. These proposals cover 14 RTS; proposals for a further 7 will be issued later. The consultation period on the first set of proposals will run until 4 July, by which time, in theory, the primary text will have been finalised.

Where appropriate, EBA has built on guidelines from its predecessor, the Committee of European Banking Supervisors (CEBS) to draft some aspects of the RTS (e.g. hybrids and core capital). The EBA is planning a public hearing in June on this consultation.

The draft RTS covers the following areas:

  • Foreseeable charges or dividends: a firm is required to deduct all "reasonable" foreseeable charges and dividends from profits before it can count as eligible Common Equity Tier 1 (CET 1).
  • Other deductions from CET 1 capital and from Own Funds: the EBA presents how deductions will work against CET 1 and Own Funds for capital instruments of financial institutions and insurance/reinsurance undertakings, losses of the current financial year, deferred tax assets, defined benefits pension fund assets and foreseeable tax charges.
  • Capital instruments of mutuals, cooperative societies or similar institutions: the EBA outlines certain legal and contractual features (e.g. it must not require the applicable institution to make payments to the holder of an instrument during periods of market stress) that must be satisfied for capital instruments from other types of financial institutions to consider as CET 1.
  • Indirect funding of capital instruments: tight restrictions on the applicable forms and nature of indirect funding of capital instruments to count towards CET 1 are laid down by the EBA. To be considered as indirect funding, the investor or external entity should not be included within the scope of prudential consolidation of the applicable institution.
  • Limitations on redemption of own funds instruments: the competent authority will have power to issue further redemptions on CET 1 instruments in addition to those included in the contractual or legal provisions governing the firm.
  • General requirements: this covers provisions related to indirect holdings arising from index holdings, supervisory consent for reducing own funds, and various associated disclosure requirements to holders/supervisors. The EBA provides some further details on how the national supervisor may waive deductions from own funds during times of stress.
  • Grandfathering of own funds: the EBA outlines that reclassifying an own funds instrument grandfathered into the new regime will not affect a firm's capital calculation.

EBA is required to submit its final draft RTS to the European Commission by 1 January 2013. However, these will only become law once the Commission has endorsed them, the Council and European Parliament have raised no objections, and the RTS are published in the Official Journal in the form of delegated acts. This "sign-off" procedure will take at least six months so time is not on the EBA's side.

If you introduce bail-in debt, will creditors bail-out?

Consistent with the Basel III framework, all forms of Additional Tier 1 capital under CRD IV require a permanent write-down feature to enable banks to replenish themselves in times of crisis. In the RTS discussed above, the EBA indicates that the amount to be deducted should at least be equal to the amount needed to immediately return the institution's CET 1 ratio to the desired regulatory level. The write-down must apply on a pro rata basis to all holders of Additional Tier 1 instruments and firms can only institute write-ups after meeting strict profitability conditions.

Michel Barnier [8], EU Commissioner responsible for internal market and services, provided details on the forthcoming EU crisis management and resolution framework in a speech on 2 April 2012. The framework is designed to mitigate the need for public bail-out in the future. In this regard, the possibility of forcing losses automatically on more types of creditors than is currently envisaged in CRD IV through debt write-down is one of the "central" proposals being considered by the EC, according to Barnier.

In a draft discussion paper [9] on 30 March 2012, the European Commission's Directorate General for Internal Market and Services outlined that debt write-down tools should be designed to give resolution authorities the power to write-off all shareholder equity and either write-off all types of subordinated liabilities or convert them into equity claim. The debt write-down tools can be used both in a going concern scenario and a liquidation scenario, according to the discussion paper. The power would be exercised when an institution triggers the conditions (not yet specified) for entering into resolution.

Paul Tucker [10], Deputy Governor of the Bank of England, and the man leading the Financial Stability Board's recovery and resolution work programme, believes that banks have "nowhere to hide" in the post crisis era and must take the necessary steps to enable them to survive stress in the future without relying on Government support. In a speech given at the Institute for Law and Finance Conference, Frankfurt 3 May 2012, Tucker believes that the intense focus on bail-in by financial institutions is "mistaken". All resolution tools, whichever ones are chosen, place losses on to debt holders and creditors "because that is the only place they can go". The Bail-in only differs from other tools in that it applies losses up front based upon a valuation rather than at the end when assets are liquidated. As such, it "prospectively avoids an unnecessary destruction of value", according to Tucker.

The new EU framework will also seek to give national resolution authorities a common and effective set of measures and powers to deal with banking crises at the earliest possible stage, including:

  • preparatory and preventative measures: including requirements for firms to prepare recovery and resolution plans
  • powers to take remedial action early on in the process: such as replacing management, implementing a recovery plan or requiring a firm to divest itself of activities or business lines that pose an excessive risk to its financial soundness
  • resolution tools: such as powers to effect the takeover of a failing bank or firm by a sound institution, or to transfer all or part of its business to a temporary bridge bank.

The European Commission believes that a properly functioning resolution regime, with robust bail-in tools, could bring a number of benefits to public finances, the financial system, the entities in difficulty and the creditors themselves. The bail-in tools in particular would have minimized the impact of the current crisis on public finances, according to the Commission. The resolution regime is an essential complement of both the CRD IV prudential regime, and the macro-prudential toolbox being developed by the ESRB. It is hoped that it will enable the smooth resolution of individual banks which get into trouble without causing negative reverberations throughout the financial system, either nationally or internationally.

Raising capital

Clearly, banks are going to need to raise even more capital with the arrival of CRD IV and, in due course, the new resolution regime. Analysts have estimated that European banks must roll-over around 1.7 trillion euro of senior debt of more than a year's maturity during the next two years which could leave little room to raise additional capital from new debt issuance, even without new restrictions relating to permanent write-down features making certain forms of debt less attractive to investors. So, with opportunities to raise additional capital restricted, selling assets is an alternative. Research [11] shows that European banks have already unveiled plans to slash a total of 1.2 trillion euro of assets this year: British and French banks taking the lead in deleveraging.

The complexities increase when taken in a global context. Despite assurances to the contrary, it is not clear when, or even if, the United States (US) will adopt the Basel III regime. The recently introduced Collins Amendment seems to be gaining little traction in the US legislature. If introduced the regime will not be applied to all US banks, just the twenty or so largest. However, US banks are being challenged by the rigours of the Volcker Rule, which is also leading to deleveraging by US and non-US banks.

The CRD IV/CRR regime will undoubtedly change banks' funding patterns and sources of capital in the future. Raising funds from private markets in the wake of the crisis is proving both difficult and expensive. The more institutions that deleverage simultaneously, the more price pressure comes into play so being an early mover may be critical. Creditors are requiring higher margins to hold bank debt because they have increased awareness of the inherent riskiness of banks' operations. The funding pressures on financial institutions over the next couple years are likely to continue to increase, even if we are fortunate enough to avoid further sovereign debt shocks in Europe and the global economy begins to turn the corner.

While some European stakeholders are strongly advocating close adherence to the Basel III regime, the fact that the new regime will be applied to all banks and investment firms operating in the EU throws up particular regional and national challenges and concerns. It is far from clear at this stage - with less than eight months to go - what the regime to be launched on 1 January 2013 will look like. The European Parliament has also picked up on the fact that this primarily micro-prudential regime needs appropriate linkage to wider crisis management and bank resolution requirements, but we are still waiting for the European Commission's proposals for those initiatives. This is clearly not an optimal scenario for planning strategically, or for efficient and cost-effective implementation.

Endnotes

[1] PwC (2012) 15th Annual Global CEO Survey, London http://www.pwc.com/gx/en/ceo-survey

[2] European Commission (2011) New proposals on capital requirements, European Commission: Brussels, http://ec.europa.eu/internal_market/bank/regcapital/index_en.htm#crd4

[3] European Commission (2012) Revised rules on Capital Requirements (CRD IV), European Commission: Brussels, http://ec.europa.eu/commission_2010-2014/barnier/headlines/news/2012/05/20120503_en.htm

[4] As quoted in Wall Street Journal (G. Smith, V. Mock and L. Norman), Future Bank-Capital Rules Clearer After EU Meeting, 3 May 2012, http://online.wsj.com/article/SB10001424052702303877604577382020185698622.html

[5] Michel Barnier (2012) Statement by Commissioner Barnier (in French), European Commission, Brussels, http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/12/301&format=HTML&aged=0&language=EN&guiLanguage=en

[6] Draghi, M. (2012) Principles for the development of a macro-prudential framework in the EU in the context of the capital requirements legislation, European Systemic Risk Board: Frankfurt, http://www.esrb.europa.eu/pub/pdf/2012-03-29_CRR-CRD_letter.pdf?dafdc180851e9f99b38d4678f4cc5c74

[7] European Banking Authority (2012) Consultation paper on Draft Regulatory Technical Standards on Own Funds, European Banking Authority: London, http://www.eba.europa.eu/News–Communications/Year/2012/Consultation-paper-on-Draft-Regulatory-Technical-S.aspx

[8] Barnier, M. (2012) Bank crisis resolution - Commission engages in final technical discussion with stakeholders, European Commission: Brussels, http://ec.europa.eu/commission_2010-2014/barnier/docs/speeches/20120330/statement_en.pdf

[9] European Commission (2012) Discussion paper on the debt write-down tool –bail-in, DG Internal Market Working Paper, European Commission: Brussels, http://ec.europa.eu/internal_market/bank/docs/crisis-management/discussion_paper_bail_in_en.pdf

[10] Paul Tucker (2012), "Resolution: a progress report", Speech given at the Institute for Law and Finance Conference, Frankfurt 3 May 2012, http://www.bis.org/review/r120507b.pdf

[11] O'Sullivan, V. and S. Kinsella (2011) 2012: the year of deleveraging in Europe?, Financial Regulation International, 15 (1) pp 1-6, http://www.i-law.com/ilaw/doc/view.htm?id=280280

May 19, 2012
Rajat K. Gupta on Trial: The SEC's Civil Complaint
by Kirstin Dvorchak

On October 26, 2011, the day Rajat K. Gupta ("Gupta") was arrested on five counts of securities fraud and one count of conspiracy to commit securities fraud, the Securities and Exchange Commission ("SEC" or "the Commission") filed a civil complaint in the United States District Court for Southern New York, pursuant to its authority under Section 20(b) of the 1933 Securities Act and Section 21(d) of the 1934 Act. 15 U.S.C. Sec. 77t(b), and 15 U.S.C. Sec. 78u(d) respectively, alleging Gupta violated Section 10(b) of the Act, Rule 10b-5, and Section 17(a) of the Act.

The SEC brought suit against both Gupta and his alleged co-conspirator, Raj Rajaratnam ("Rajaratnam"). Rajaratnam was recently tried and convicted for insider trading; he was sentenced to 11 years in prison, and he received a $10 million fine, and a $53.8 million forfeiture. The complaint seeks permanent injunctions against Gupta and Rajaratnam, "enjoining each from engaging in the transactions, acts, practices, and courses of business…" The SEC seeks disgorgement of all profits and/or losses avoided. Gupta would also be barred from serving as an officer or director of any issuer that has a class of securities registered with the SEC or that is required to file reports and enjoined from associating with any broker, dealer, or investment advisor.

The complaint alleged an "extensive insider trading scheme conducted by Gupta and Rajaratnam." The SEC alleged that Gupta disclosed material nonpublic information that he had access to as a result of his positions on the board of directors for Goldman Sachs Group, Inc. ("Goldman Sachs") and The Procter & Gamble Company ("P&G"). Gupta allegedly called Rajaratnam on several occasions after board meetings, and Rajaratnam, as managing partner of large hedge fund investment company Galleon Management LLP ("Galleon"), would cause the fund to buy or sell shares to gain profit or avoid losses.

The complaint focuses on four alleged insider trading incidents. The first was trades that occurred before the $5 billion investment in Goldman Sachs by Berkshire Hathaway, which was publicly announced after market close on September 23, 2008. The SEC alleged that Gupta learned of the potential for the Berkshire investment during a board meeting on September 21, 2008. The next morning Gupta placed a four minute phone call to Rajaratnam's office. Rajaratnam caused Galleon to purchase over 100,000 Goldman Sachs shares. The next day, September 23, Rajaratnam placed a call to Gupta's office and then again directed Galleon to purchase 50,000 Goldman Sachs shares. A special telephonic meeting of the Goldman Sachs board was called at 3:15 p.m. on September 23, 2008. During the meeting the board approved the Berkshire investment and a public equity offering. Immediately after disconnecting from the board meeting, Gupta called Rajaratnam's office. Just minutes before market close, Galleon purchased 217,200 Goldman Sachs shares. Goldman Sachs stock increased 6.36% the day following the announcement of the Berkshire investment. On September 24, 2008, Rajaratnam liquidated Goldman Sachs shares, generating $800,000.

The second alleged insider trading surrounded Goldman Sachs' 2008 fourth quarter financial results. In October 23, 2008, during a telephonic board meeting, Gupta learned that Goldman Sachs was operating an estimated loss of $1.96 per share. Twenty-three seconds after disconnecting from the board meeting, Gupta placed a thirteen minute phone call to Rajaratnam. At the opening of the market the next day, Galleon sold all of this Goldman Sachs stock. Rajaratnam allegedly stated that he "heard the prior day from a member of the Goldman Sachs Board that the company was actually going to lose $2 per share." Galleon avoided a loss of more than $3.6 million dollars by selling the Goldman Sachs shares before the public announcement of the quarter's loss in December 2008.

The third insider trading alleged surrounded Goldman Sachs' 2008 second quarter financials. One week before the announcement of Goldman Sachs' financials, Gupta spoke with the company's chief executive about the company's strong financial position. Later that same night Gupta called Rajaratnam at his home. Minutes after the market opened the next day, Galleon purchased over 7,350 shares of Goldman Sachs stock. Over the next few days Rajaratnam purchased an additional 350,000 shares. Rajaratnam caused Galleon to sell call options, profiting by approximately $9.3 million. The following day after the announcement, Rajaratnam caused Galleon to sell Goldman Sachs shares, profiting by over $9 million.

The fourth alleged incident was based on P&G's 2008 second quarter financials. On January 29, 2009, Gupta met telephonically with P&G's Audit Committee and they discussed expectations for the company to grow 2-5% in the fiscal year. That afternoon, Gupta called Rajaratnam. Rajaratnam allegedly stated that "he had learned from a contact on Procter & Gamble's Board that the company's organic sales growth would be lower than expected." Galleon then sold short 180,000 P&G shares. After the public announcement stock declined 6.39%, resulting in $570,000 of avoided loss.

As a director, Gupta owed fiduciary duties to Goldman Sachs and P&G. Disclosing material nonpublic information about the companies would constitute a breach of the fiduciary duty of confidentiality. Additionally, Goldman Sachs's guidelines provided that board meetings were confidential, and directors who had knowledge of material nonpublic information were prohibited from buying or selling the company's stock or recommending others do so. P&G's policy prohibited directors in possession of material nonpublic information, from conveying the information to others.

The primary materials for this case may be found on the DU Corporate Governance website.

May 19, 2012
Does JP Morgan's $[2] Billion Loss Implicate Board Oversight? (Part 2)
by Stefan Padfield

Last week I blogged (here) that if we assume a corporate board's duty of oversight includes monitoring risk exposure, then it should constitute a per se violation of that duty for a board to rule on a particular risky strategy without understanding the nature of the risk. Stephen Bainbridge disagreed (here) for the following reasons: First, such a rule would discourage appropriate risk-taking.

As the federal Second Circuit explained in Joy v. North … "[B]ecause potential profit often corresponds to the potential risk, it is very much in the interest of shareholders that the law not create incentives for overly cautious corporate decisions."

Second, such a rule would run counter to the business judgment rule, which precludes courts from imposing liability for bad business decisions.

As Chancellor Chandler correctly recognized in Citigroup, "asking the Court to conclude … that the directors failed to see the extent of Citigroup's business risk and therefore made a 'wrong' business decision by allowing Citigroup to be exposed to the subprime mortgage market…. [constitutes the] kind of judicial second guessing [that] the business judgment rule was designed to prevent, and even if a complaint is framed under a Caremark theory, this Court will not abandon such bedrock principles of Delaware fiduciary duty law."

Finally, per se rules are inappropriate in this context because what courts really should be doing is "reconciling the competing claims of authority and accountability" by "balancing competing concerns" rather than blindly applying bright-line rules.

As a general matter, I don't disagree with any of Bainbridge's propositions. However, I believe they are all subject to exceptions, and a failure to demonstrate a proper understanding of relevant risk exposure may constitute such an exception. To begin with, we want to encourage appropriate risk-taking, not recklessness. One cannot optimize risk exposure without understanding the complexities of the particular strategy. As Frank Partnoy discussed in terms of the recent financial crisis (here):

[O]ne of the great ironies, I think, of the financial crisis was that the senior people at the Wall Street banks apparently didn't understand or capture the magnitude of their own financial institutions' exposure to these risks, which is really stunning, if you think about it, that the people who are in charge of these banks don't know what will happen when there's a 30 percent decline in housing prices. If you think about it, if you're the director or the CEO of a bank, isn't that the one thing you should understand? What will happen to my institution if the following financial variable changes by 30 percent? That kind of worst-case scenario analysis is why you're being paid millions of dollars. That's precisely what these people should have been doing.

Secondly, if we understand the business judgment rule to be about distinguishing "honest errors" from "intentional misconduct," then I think signing off on a particular strategy without an appropriate understanding of the risk is closer to intentional misconduct than honest error. Post-2008 it is very difficult to take seriously any director's claim that they didn't realize they needed to get up to speed on risk-exposure. Obviously, I would include reasonable reliance on an appropriate expert as satisfying this requirement, but you need more than the 2012 equivalent of Van Gorkom assuring you that house prices will go up forever.

Finally, while I agree courts frequently need the flexibility of standards that allow for the balancing of competing interests, a bright-line rule that requires directors to understand the risk-creating strategy they are reviewing as a part of their Caremark duties seems to me to appropriately give business leaders something else they crave: clear guidance. In other words, where red flags present themselves in connection with a particularly risky investment strategy, a board would be on notice that ignoring those red flags without being able to verbalize the scope of the risk would constitute an utter failure of oversight.

PS-Over at the Glom (here), David Zaring has posted some great links on the JP Morgan loss.

May 20, 2012
Rajat K. Gupta on Trial: Gupta Loses on Motions
by Kirstin Dvorchak

In United States v. Gupta, No. 11 Cr. 907(JSR), 2012 WL 1066804 (S.D.N.Y. Mar. 27, 2012), the Southern District of New York dismissed four motions filed by defendant Rajat Gupta.

Gupta filed a motion to dismiss Count 2 of his criminal indictment on January 3, 2012. Gupta argued that the language of the indictment, including phrases such as "at least approximately 350,000 shares," and "certain Galleon Funds," violated his Fifth Amendment rights by allowing the government to prove charges based on evidence that may not have been presented to the Grand Jury. The court denied this motion for two reasons.

First, the court stated Gupta's claim that the Grand Jury was not presented with evidence was based on "sheer conjecture." Grand Jury proceedings are confidential and have been historically protected as such. The court refused to inquire into the Grand Jury proceedings, stating it would require something "far more definite" before it would do so.

Second, the court explained that there is no requirement for specific and exact numbers of shares, or specific entities that traded shares, in Grand Jury proceedings on insider trading. An indictment that describes a crime "with enough detail to provide fair notice and protect against double jeopardy" is constitutional and meets the requirements of Rule 7 of the Federal Rules of Criminal Procedure ("Fed. R. Crim. P."). The court reasoned that Count 2 of the indictment met this standard because it provided Gupta with specific information he allegedly passed to Rajaratnam, the dates shares were traded, information showing the trades occurred through Galleon, and the minimum number of shares allegedly traded. The court stated this gave Gupta the ability to adequately prepare for his defense and the ability to invoke the double jeopardy clause in any subsequent trial if need be.

Gupta also filed a motion to consolidate several counts of the indictment as multiplicitous on January 3, 2012. The court denied this motion as premature for failing to satisfy the two reasons to consolidate. Multiplicitous counts should be consolidated because "charging multiple counts for the same offense 'may improperly prejudice a jury by suggesting that a defendant has committed not one but several crimes.'" The court advised Gupta that it never reads or sends the indictment to the jury, and that opening statements do not include a recital of the counts; therefore, there is no potential for prejudice until much later in the trial. At that point the court will be able to evaluate a multiplicity claim.

The second reason for consolidation is to avoid the potential for a defendant to be punished twice for the same crime in violation of the double jeopardy clause of the Constitution. The court reasoned this concern arises at the sentencing stage and should not be addressed during the pre-trial phrase. Accordingly, the court dismissed without prejudice the motion to consolidate the counts as premature, allowing Gupta to raise the claim again if and when it becomes ripe.

Additionally on January 3, 2012, Gupta filed a motion to strike prejudicial surplusage pursuant to Fed. R. Crim. P. 7(d). He sought to remove the phrases "for example" and "among other things" when used in allegations relating to how he profited from the alleged conspiracy from the indictment. The court stated that while this motion was filed to strike prejudicial surplusage, the motion argued that the language impermissibly broadened the indictment, allowing the Government to introduce evidence never presented to the Grand Jury. The court dismissed this argument, as it did in Gupta's motion to dismiss; it is "unsupported speculation" and the phrases do not alter the allegations, but merely indicate the evidence to be presented will not be limited to items listed in the indictment. For these reasons, the court dismissed the motion to strike.

Gupta also filed a Fed. R. Crim. P. 7(f) motion on January 3, 2012, seeking a court order requiring the Government to supply particulars detailing:

  • "Gupta's alleged management role and economic interest in an entity called 'Galleon International'";
  • "the 'ownership stake' that Rajaratnam 'awarded' Gupta in Galleon Special Opportunities";
  • "'financial benefits' Gupta 'received and hoped to receive' as a result of his ownership interest in the Voyager fund";
  • "the number of specific shares involved in the alleged trades based on insider information, i.e. particularizing what is meant by 'at least approximately 350,000 shares' of Goldman Sachs in March 2007 (sic)";
  • "the specific Galleon funds involved in each trade"; and
  • "the quantity, cost, and strike price of the 'call option contracts' described in Count One."

The court stated Gupta had already received this information through the indictment, the discovery already provided by the Government, discovery available through the SEC civil case, Rajaratnam's previous criminal proceedings, and a bill of particulars already provided by the Government. Even if the information sought had not been available to Gupta from these other sources, the court stated that the "highly specific evidentiary detail" sought is not appropriate for a bill of particulars. Therefore, the court dismissed the motion.

The primary materials for this case may be found on the DU Corporate Governance website.

May 21, 2012
Neither Admit Nor Deny Is Not The Issue In SEC Settlements
by Tom Gorman

The SEC's long established settlement practice of resolving enforcement actions without requiring an admission of liability - that is, on a neither admit nor deny basis- came under scrutiny again last week. On May 17, 2012 a House Committee held hearings on the question. Earlier in the week the Commission and Citigroup filed briefs in the Second Circuit Court of Appeals in SEC v. Citigroup, the enforcement action in which District Court Judge Jed Rakoff rejected the proposed settlement while citing the practice. The Second Circuit filings presented the unusual specter of the agency and the defendant in a major enforcement action combining forces.

In defense of its position in each venue, the SEC correctly points out that the "neither admit nor deny" policy is one of long standing. Since the early days of its enforcement program the agency has utilized this policy, although it has been bolstered and tweaked. A requirement was added which precludes a settling defendant from publicly repudiating the facts in the SEC complaint. Recently, the Enforcement Division, with the approval of the Commission, began requiring that parties who have admitted the underlying facts in another proceeding or been convicted acknowledge those admissions in the settlement papers with the Commission, Nevertheless, the policy has remained constant.

In testimony before the House, and in the Second Circuit, the agency also correctly pointed out that its policy is consistent with that of many other federal and state law enforcement agencies and encourages settlement. In fact the policy as applied by the SEC is more stringent than that of many other agencies which do not preclude a settling defendant from denying the underlying facts. The policy also fosters settlement by avoiding needless litigation by defendants seeking to avoid the potential liability that would arise from related private actions if they were required to make admissions in a settlement with the SEC.

Despite the validity of these points, they fail to deal with the underlying issue in Citigroup, a question also involved Bank of America. In both cases the Court raised significant issues about the proposed settlements, questioning the "neither admit nor deny" policy, the adequacy of the settlement terms and the facts presented to the Court. In both cases the Court stated it had insufficient facts from which to evaluate the proposed settlement. In Bank of America the Court repeatedly questions the propriety of not naming individuals as defendants. In Citigroup the Judge stated that the factual allegations in the complaint depicted an intentional fraud, yet the charges were negligence.

If the "neither admit nor deny" policy was the key issue, the Court would not have signed off in the Bank of America settlement. It did, but only after receiving additional factual material from the SEC and the NY AG who filed a similar action. After reviewing that evidence, and a revision of the remedies by the parties, the Court entered the settlement on a "neither admit nor deny" basis. This is fully consistent with Judge Rakoff's determinations in other SEC cases as the agency has noted.

In Citigroup the Court did not enter the settlement. It was not furnished with any additional evidentiary materials and the parties did not offer to modify the proposed remedies. While the parties answered a series of questions, the Court continued to claim it had insufficient facts to evaluate the settlement. Thus, unlike Bank of America, where the key question about the complaint was answered, in Citigroup it was not- the apparent mismatch between the facts and the charges remains unexplained.

The resolution of this seeming mismatch is of critical importance. Commission enforcement actions serve not just to address the specific violations in the case but also to give notice about the views of the agency on important questions of law and policy. Each case makes a statement and is part of a larger overall national enforcement program.

When the documents prepared by the Commission contain what appears to be a fundamental inconsistency, it muddles the enforcement message. In Citigroup that message has been lost through the inconsistency as well as in the dialogue about the Commission's policy. Regardless of the outcome of the Congressional hearings and the Citigroup appeal, if the Commission is going to have an effective enforcement program it must deliver a clear message.

ABA Program: The New Era of FCPA Enforcement and the Collapse of the Africa Sting Cases: Time to Reevaluate? Tuesday June 5, 2012, 12:00 PM to 1:30 PM EST, Live in Washington, DC and webcast.

Moderators: Thomas O. Gorman, Partner, Dorsey & Whitney LLP, Washington, D.C. and Frank C. Razzano, Partner, Pepper Hamilton, LLP, Washington, D.C.

Panel: John D. Buretta, Deputy Asst. AG, Criminal Division, DOJ, Washington, D.C.; Charles E. Cain, Deputy Chief FCPA Unit, SEC, Washington, D.C.; France Chain, Senior Legal Analyst, Anti-Corruption Division, OECD, Paris, France; Prof. Mike Koehler, Butler University, Indianapolis, Ind.; Hon. Stanley Sporkin, Washington, D.C.; Greg D. Andres, Partner, Davis Polk, New York, New York; Eric Bruce, Partner, Kobre & Kim, New York, New York. Live Presentation from Washington, DC.

Co-hosted by Dorsey & Whitney LLP and Pepper Hamilton, LP at Penthouse at Hamilton Square, 600 Fourteenth St., N.W. Washington, D.C. Click here for more information (here)

May 21, 2012
Emerging Growth Companies: You Have Been Warned
by Kevin LaCroix

In order to try to boost the number of companies going public, the recently enacted JOBS act provides for certain procedural and reporting advantages for "Emerging Growth Companies," which are defined in the Act as companies within five years of their IPO and with revenues less than $1 billion. A number of companies planning IPOs are already taking advantage of the new provisions. But at the same time, those same companies are warning investors that their status as Emerging Growth Companies may itself be a risk of which investors should be aware.

As discussed at greater length here, the JOBS Act contains a number of IPO "on ramp" procedures designed to ease the process and burdens of the "going public process" for Emerging Growth Companies (EGCs). The "on ramp" advantages are intended to ease the going public process. For example, EGCs can elect to submit their IPO registration statement for SEC review on a confidential, nonpublic basis, although the registration statement must be publicly filed at least 21 days before the IPO roadshow.

The Act also provides for reduced disclosure and reporting burdens for EGCs for as long as five years after an IPO - as long as the company continues to meet the definitional requirements. For example, an EGC will not be subject to Section 404(b) of the Sarbanes Oxley Act requiring an outside auditor's attestation report on the company's internal controls. Similarly, an EGC would be exempt from the requirements under the Dodd-Frank Act to hold shareholder advisory votes on executive compensation and on golden parachutes.

Since the enactment of these provisions, a number of commentators have noted that while these JOBS Act provisions may serve the laudable goal of easing the IPO process, these provision also introduce risks for investors. Nor are these remarks just coming from sideline commentators. Indeed many of the most specific warnings are coming from the companies themselves.

In her May 15, 2012 CFO.com article entitled "A New Risk Factor: The JOBS Act" (here), Sarah Johnson reports that for many of the companies taking advantage of the JOBS Act IPO on-ramp provisions, the fact that the companies are relying in the JOBS Act "is itself a risk factor." Her article notes that in recent days, at least 13 companies "have warned investors in their prospectuses filed with the Securities and Exchange Commission that the JOBS Act's breaks on SEC rules could actually be a turnoff." By way of example, she quotes Cimarron Software's recently filed S-1, in which the company states that "we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors."

In a May 14, 2012 post on his CorporateCounsel.net blog entitled "JOBS Act: EGC Status as a Risk Factor" (here), Broc Romanek takes a detailed look at one of the recent IPO filings, the S-1 that LegalZoom filed in connection with its proposed initial public offering. He notes that right on the cover page of the filing, the company warns that "we are an 'emerging growth company' under the federal securities laws, and will be subject to reduced public company reporting requirements." Among other things, the company notes in its filing that it will be taking advantage of the JOBS Act reporting exemptions as long as the company qualifies to do so, adding that "we cannot predict if investors will find our common stock less attractive because we rely on these exemptions." The company further notes that "if some investors find our common stock less attractive as a result, there may be less active trading for our common stock and our stock price may be more volatile."

These disclosures not only have the virtue of warning investors that the companies' status as emerging growth companies may make their stock less attractive. The warnings may, according to one commentator quoted in the CFO.com article, provide "cheap insurance" that could help the company if it later runs into trouble. As the commentator noted, if the emerging growth company is later sued, the company can say "We warned you that there weren't auditors looking independently at this."

These emerging growth companies advisory statements may indeed represent good precautionary disclosure. But it is fair to ask whether the cautionary statements go quite far enough. It is one thing to say that the company's reduced reporting requirements may make the company's stock less attractive. What the companies don't seem to be saying, at least not directly, is that the reduced reporting requirements could make their reported financial results less reliable. As a plaintiff's lawyer quoted in the CFO.com article notes, the emerging growth companies' precautionary disclosure may forewarn that their stock may not trade as high or as frequently as it might otherwise, but they are not saying that as a result of the reduced reporting requirements you "may get a nasty surprise" when the company no longer qualifies for the exemptions.

All of which says that while companies are now just trying to adjust to the newly enacted IPO process and reporting provisions, we will have to wait to see how all of this plays out in the securities litigation arena. For now, the companies taking advantage of the new rules do seem to be recognizing that while the new processes do present certain advantages, they do involve possibly increased risks as well.

The one thing that is certain is that because of the JOBS Act's broad definition of "emerging growth companies," a very larger percentage of companies going public will be eligible to take advantage of the new rules. Indeed, according to one report, of the 113 companies that went public in 2011, only 15 (or 13%) would not have qualified for the JOBS Act's IPO on-ramp procedures.

In other words, the disclosure issues discussed above, and the related liability concerns, could be an issue for a significant number of companies. Indeed, if the JOBS Act achieves its fundamental goals, these considerations could be a concern for an increasingly larger number of companies.

Delaware Seminar on Corporate and LLC Law: On Tuesday May 22, 2012, I will be participating in a panel the Delaware State Bar Association Corporate Law Section's annual "Recent Developments in Delaware Corporate and Alternative Entity Law" seminar. The seminar will be co-chaired by Francis Pileggi of the Eckert Seamans firm and also the author of the Delaware Corporate and Commercial Litigation Blog, and his law partner Kevin F. Brady and R. Montgomery Donaldson of the Montgomery McCracken Walker & Rhoads firm. Pileggi's recent post on his blog about the event can be found here.

The panel I will be participating in is entitled "Corporate Law Updates Via Blogs," and my fellow panelists will include Doug Batey of the Stoel Rives law firm and the author of theLLC Law Monitor blog; University of Illinois Law Professor Christine Hurt, of The Conglomerate blog; and Boston College Law Professor Brian Quinn, of The M&A Law Prof blog. Batey's recent blog post about our upcoming panel can be found here.

Our panel should afford the panelists an opportunity to reflect and comment upon the blogging process and experience. Along those lines, in an interesting May 18, 2012 post entitled "What Then is Blogging" (here), Dick Cassin of the indispensable The FCPA Blog sets out some of his views and thoughts about blogs and blogging. (Thanks to Cassin for quoting one of my prior blog posts).

Looking for Life in All the Wrong Places?: A May 18, 2012 Wall Street Journal article entitled "Searching a Billion Planets for Life" (here) describes scientists' efforts to write a recipe for "perfect planet" - that is, a place that is "not too cold, not too hot, not too toxic and chemically suitable for life as we know it" as a way to aid in the search for "potentially habitable alien worlds."

The challenge for the scientists is that the process of trying to come up with the recipe leaves them "grappling with the nature of life itself." Perhaps the most fundamental problem is that the analysis depends on presumptions "based on life as we know it" - that is, life on Earth.

The potential limitations of this Earth-biased analysis are revealed most dramatically just by looking at what has happened in recent years to our knowledge about life on Earth. Through a series of interesting discoveries, our awareness of the range of conditions in which life on Earth can thrive has expanded far beyond what was previously thought possible.

An interesting article in the May/June 2012 issue of The Economist's Intelligent Life magazine entitled "Some Like it Very Hot" (here) takes a look at the scientific advances that have revealed the teeming existence of "hyper-resilient microbes," organisms that can survive "levels of heat, cold, pressure, radiation and salt or acid concentrations that previously would have been thought fatal to all living things." These previously unknown organisms, now known as extremophiles, have been found deep beneath the sea floor; in the depths of Mexican caverns; in the core of nuclear reactors; in hydrothermal vents on the sea bed; and are constantly being discovered in ever more unlikely and seemingly inhospitable environments.

Among many other things, these discoveries show that "life can sustain itself in many more environments than was previously thought possible." This realization not only has enormous implications for the study of life on Earth; it has also given new life to the "idea that life is dispersed throughout the universe and is disseminated on meteorites or asteroids." Or to put it another way, "the bandwidth of survivable environments - and therefore, forms of life, has broadened enormously."

The implication for scientists hoping to increase their chances of finding life beyond Earth by narrowing their search only to the "perfect planets," may be that by narrowing their search, they may actually diminish their chances of finding outside our planet. But on the positive side, the likelihood that life outside of earth might exist and someday might actually be discovered both seem to have increased significantly.

Personally, I find all of this quite fascinating and even exciting. The possibility that life in the universe is not rare but could actually be quite common and even widely dispersed represents an entirely new way of looking at things. Instead of the Earth as a lone life-bearing vessel whirling through an empty, heartless void, it could instead be one of countless places where life is thriving. Of course, the possibility that life elsewhere might be merely microbial might not satisfy the most febrile science fiction fantasies. It would of course be much more exciting if there seemed to be a greater likelihood of discovery of intelligent life beyond earth. But it may be too much to hope for, to expect to find intelligent life beyond earth. After all, think of how hard it is to find intelligent life on our own planet.

In Case You Missed It: For the second weekend in a row, a major European soccer title has been determined in a last-minute come from behind victory. Last Sunday, it was Manchester City scoring two goals in stoppage time in their final game of the season to capture the English Premier League crown. This Saturday, Chelsea, playing against Bayern Munich on the German team's home field, won the UEFA Champions League club team title in almost equally dramatic fashion, winning in a penalty kick shootout.

Bayern Munich had many chances to put the game away, and seemingly had the game won when they finally scored on a Thomas Mueller header in the 82nd minute. But then with just two minutes left in regulation, on Chelsea's first corner kick of the game, Didier Drogba scored on a header to tie the game. As regulation time expired the game went into extra time (a thirty minute overtime period).

Drogba's fine goal to tie the game looked like it might have been naught when early in extra time he committed a foul by tripping Franck Ribery in the penalty area. It seemed like another golden opportunity for Bayern Munich to put the game away, but Chelsea's goalie, Petr Cech, stopped Arjen Robben's penalty kick. The 30-minute period ended with the teams still tied, setting up a penalty kick shootout.

Bayern Munich once again appeared to have the advantage as its goalie, Manuel Neuer, stopped the first Chelsea penalty kick from Juan Mata. After each team had attempted three penalty kicks, Bayern had made all three of its attempts, while Chelsea had only made two. Bayern substitute, Ivica Olic then missed his team's fourth shot while Ashley Cole made the next shot for Chelsea, bringing the two teams even. On Bayern Munich's fifth and final shot, Bastian Schweinsteiger, who looked as if taking the penalty kick was about the last thing in the world he wanted to do, hit the post. Drogba, looking calm and confident, smashed his kick into the corner of the net, securing Chelsea's improbable victory. The game-winner might be the 34-yearold Drogba's last act for Chelsea, as his contract with the team expires this summer.

It was a great game, although the Bayern Munich fans are not the only ones unhappy about the outcome. Tottenham Hotspurs, who finished fourth in the English Premier League and therefore otherwise qualified for the UEFA Champions League competition, were dispossessed of the spot by Chelsea's win. Chelsea, which didn't otherwise qualify for the Champions league (since they finished sixth in the Premier League), secured an automatic spot in next year's Champions League competition with their win on Saturday. Since only four teams from each participating country can compete, that meant that Chelsea's win forced Tottenham out of its spot.

With all of this great end of season soccer just completed, it is even more exciting to look forward to the Euro 2012 national team championship competition, which kicks off on June 8, 2012 in Poland and Ukraine.

May 21, 2012
Jobs Act: More EGC Confidential Submissions Go Public
by Broc Romanek

Jobs Act: More EGC Confidential Submissions Go Public

Last week, I blogged how LegalZoom was one of the first companies to announce its upcoming IPO after first submitting its registration statement under Corp Fin's confidential submission policy and I analyzed the risk factors and other EGC-related disclosures in that Form S-1.

There have now been about a dozen Form S-1s filed by EGCs- most of them likely emerging from confidential submission but not all- including:

- Blue Earth
- Cimarron Software
- Kythera Biopharmaceuticals
- OncoMed Pharmaceuticals
- Plesk Corp
- Shutterstock
- Simple Products Corp
- Supernus Pharmaceuticals

By the way, I disagree that EGC risk factors are a "turn-off" as mentioned in this article. As I wrote in my recently-posted "Risk Factors Handbook," companies typically have between 20-30 risk factors in their disclosure- with IPOs having even more. Facebook has about 50. Do you think one more risk factor will even be noticed by the rare investor who bothers to read a prospectus?

I just announced an August 15th webcast- "JOBS Act Update: Where Are We Now"- that will analyze evolving market practices and the latest from the SEC. The program features Corp Fin Deputy Director Lona Nallengara, Steve Bochner, Joel Trotter, Michael Kaplan and Dave Lynn.

NYSE Proposes Listing Qualification Changes to Accommodate JOBS Act

In the "Dodd-Frank Blog," Jill Radloff gives us this news:

The ripple effect of the JOBS Act is beginning to show as the NYSE has proposed to adjust its listing qualification standards to reflect that emerging growth companies, or ECGs, under the JOBS Act only need to present two years of audited financial statements.

In its rule filings, the NYSE notes that its initial listing standards require listing applicants to meet theapplicable financial criteria over a period of three fiscal years. As the staff of the NYSE bases its determination as to a company's compliance with the financial initial listing standards only on publicly available audited financial data, an EGC which availed itself of the right to file only two years of audited financial data as part of its initial public offering registration statement or subsequent registration statements would be unable to qualify for listing under those particular financial listing standards. The NYSE proposes to amend the initial financial listing standards in Sections 102.01C and 103.01B to permit an EGC to meet the applicable standard on the basis of the two years of audited financial data actually reported, rather than the three years of financial data that would otherwise be required.

The proposed amendment would only be applicable to EGCs that actually avail themselves of their ability to report only two years of audited financial information. Under the proposed amendments, EGCs would still be required to meet the same aggregate financial requirements, but would be required to do so over a two-year period rather than a three-year period, if they have availed themselves of the JOBS Act provision allowing EGCs to file only two years of audited financial statements.

May-June Issue: Deal Lawyers Print Newsletter

This May-June issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:

- Lessons Learned: Martin Marietta Materials vs. Vulcan Materials
- Delaware Chancery Enjoins Hostile Bid Based on Confidentiality Agreement Breach
- The JOBS Act: Implications for Private Company Acquisitions and M&A Professionals
- After the JOBS Act: The Increased Need for Common Sense
- Groping for Gold: $305 Million in Plaintiff Attorney Fee Awards Under Grupo Mexico

If you're not yet a subscriber, try a no-risk trial to get a non-blurred version of this issue on a complimentary basis.

- Broc Romanek

View today's posts

5/21/2012 posts

FEI Financial Reporting Blog: FAF, FASB Prepare for Further Action on Private Companies
The Harvard Law School Forum on Corporate Governance and Financial Regulation: Campaign Contributions and Governmental Financial Management
The 10b-5 Daily: Balancing Act
The Harvard Law School Forum on Corporate Governance and Financial Regulation: Regulatory Complexity and Uncertainty: The Capital Requirements Directive IV
Race to the Bottom: Rajat K. Gupta on Trial: The SEC's Civil Complaint
Race to the Bottom: Does JP Morgan's $[2] Billion Loss Implicate Board Oversight? (Part 2)
Race to the Bottom: Rajat K. Gupta on Trial: Gupta Loses on Motions
SEC Actions Blog: Neither Admit Nor Deny Is Not The Issue In SEC Settlements
D & O Diary: Emerging Growth Companies: You Have Been Warned
CorporateCounsel.net Blog: Jobs Act: More EGC Confidential Submissions Go Public

Blog posts are subject to copyrights held by the authors and are republished here with permission. Views expressed are those of the authors alone. Infringement Notification.