Securities Mosaic® Blogwatch
May 22, 2015
Application of the Federal Mail and Wire Fraud Statutes to Criminal Liability for Stock Market Insider Trading and Tipping
by William K.S. Wang

After the Supreme Court's unanimous decision in Carpenter v. United States, [1] the federal mail and wire fraud statutes became potent prosecutorial weapons against insider trading when the information-owner is the victim. This post examines how criminal liability under the federal mail and wire fraud statutes supplements traditional SEC authority to pursue insider trading. SEC Rules 14e-3 and 10b-5 cover a great deal of stock market insider trading and tipping, but certainly not all. For instance, Rule 14e-3 is confined to the tender offer context.

As illustrated by the recent case of United States v. Newman,[2] the Rule 10b-5 "classical relationship" theory may not be available for some insider trading and tipping.[3] With stock market insider trading and tipping generally, a possible alternative to the Rule 10b-5 "classical relationship" theory is Rule 10b-5 misappropriation. Somewhat similar to Rule 10b-5 misappropriation is mail/wire fraud on the confidential-information property-owner. This latter breach might be more extensive than, co-extensive with, or less extensive than Rule 10b-5 misappropriation (although Rule 10b-5 does not apply to insider trading that does not relate to a "security," e.g., commodities insider trading).

Suppose, however, neither Rule 10b-5 misappropriation nor mail/wire fraud on the information-owner is available, perhaps because the information source/owner gave permission to trade or tip[4] or possibly because the defendant disclosed in advance to the information source/owner the plan to trade or tip.[5] In that situation, an alternative possible victim of mail/wire fraud is the party on the other side of the insider trade. It is uncertain whether, for stock market insider traders, the necessary mail/wire fraud relationship is broader, narrower, or the same as the requisite Rule 10b-5 "classical relationship." Thus far, virtually no courts have considered the insider trader's mail/wire fraud duty to disclose to the party on the other side of the transaction. Under mail/wire fraud, a stock market insider trader might conceivably have a duty to disclose to the party on the other side even in the absence of a Rule 10b-5 "classical relationship." A related unexamined issue is whether an employee engaging in an insider trade of her company's stock could be criminally liable under two different mail/wire fraud theories with two separate mail/wire fraud victims: the company/information-owner and the party on the other side of the trade.[6]

With stock market insider trading for mail/wire fraud, the materiality standard may be: (1) laxer (beyond "reasonable person") or (2) in cases involving deprivation of informational property, different (importance to the owner of the information as opposed to a stock market investor). Consequently, the government may be able to use mail/wire fraud when SEC Rule 10b-5 does not apply.

As noted earlier, the Second Circuit recently made it harder to meet the Rule 10b-5 tests for tipper and tippee liability. Under the Rule 10b-5 "classical relationship" theory and probably the Rule 10b-5 misappropriation doctrine, the initial tipper must receive a "personal benefit." Under the Rule 10b-5 "classical relationship" theory and probably the Rule 10b-5 misappropriation doctrine, each direct and remote tippee must "know or should know" of the initial tipper's violation. It is unclear whether the same requirements apply to the mail/wire fraud liability of tippers and tippees. Again, were the standards laxer for mail/wire fraud, the government would be able to use mail/wire fraud when Rule 10b-5 does not apply.

With stock market insider trading, several Supreme Court Justices[7] and Judge Ralph K. Winter[8] have said that mail/wire fraud is broader than Exchange Act Section 10(b)/SEC Rule 10b-5. In the insider trading case, O'Hagan, the Supreme Court majority said: "Just as in Carpenter, so here, the 'mail fraud charges are independent of [the] securities fraud charges, even [though] both rest on the same set of facts.'"[9]

For stock market insider trading, some elements of liability may be different and possibly easier to satisfy under mail/wire fraud than under SEC Rule 10b-5. The courts have largely failed to explore these differences.


[1] 484 U.S. 19 (1987).

[2] 773 F.3d 438 (2d Cir. 2014).

[3] See id. at 451-55. For discussion of Newman, see Part III(B)(5) of my article.

In the Supreme Court case that created the "classical relationship" theory, Chiarella v. United States, 445 U.S. 222 (1980), the defendant himself was not liable under the doctrine. See id. at 225-35.

[4] For discussion of why no Rule 10b-5 misappropriation occurs if the information source grants permission to trade or tip, see United States v. O’Hagan, 521 U.S. 642, 653–55, 659 n.9 (1997); William K.S. Wang & Marc I. Steinberg, Insider Trading (3d ed. 2010) § 5.4 nn.551–53 and accompanying text.

[5] For discussion of why Rule 10b-5 misappropriation might not occur if the defendant discloses in advance to the information source the plan to trade or tip, see O’Hagan, 521 U.S. at 653–55, 659 n.9; Wang & Steinberg, supra note 4, § 5.4.1[B] nn.612–14 and accompanying text.

[6] For discussion of the overlap between the Rule 10b-5 misappropriation doctrine and the Rule 10b-5 "classical relationship" theory, see Wang & Steinberg, supra note 4, § 5.4.11.

[7] In Carpenter itself, the Supreme Court split evenly on the Rule 10b-5 misappropriation convictions, but unanimously upheld the mail/wire fraud convictions based on the deprivation of confidential information-property. See Carpenter v. United States, 484 U.S. 19 (1987).

In their concurring and dissenting opinion in the insider trading case of United States v. O’Hagan, 521 U.S. 642 (1997), Justice Thomas, and Chief Justice Rehnquist stated that they would reverse O'Hagan's convictions under Rule 10b-5 (because of a rejection of the Rule 10b-5 misappropriation doctrine) but in effect sustain O'Hagan's mail fraud convictions. See id. at 680–701 (Thomas, J., and Rehnquist, C.J., concurring in part and dissenting in part). Justice Thomas (and Chief Justice Rehnquist) commented:

While the majority may find it strange that the "mail fraud net" is broader reaching than the securities fraud net, ante, at 2220, n. 25 [521 U.S. at 678 n.25], any such supposed strangeness-and the resulting allocation of prosecutorial responsibility between the Commission and the various United States Attorneys-is no business of this Court, and can be adequately addressed by Congress if it too perceives a problem regarding jurisdictional boundaries among the Nation’s prosecutors.

Id. at 701 n.13.

Invoking the rule of lenity, Justice Scalia, with almost no discussion, also said that he would reverse the Rule 10b-5 convictions but in effect affirm the mail fraud convictions. See id. at 679 (Scalia, J., concurring in part and dissenting in part).

Technically, the Court remanded to the Eighth Circuit for consideration of O'Hagan's objections to his mail fraud convictions not considered by the Eighth Circuit. See id. at 677-78. Justice Scalia joined in this part of the majority’s opinion. See id. at 679 (Scalia, J., concurring in part and dissenting in part). Justice Thomas and Chief Justice Rehnquist concurred in this part of the majority’s opinion. See id. at 680, 700–01 (Thomas, J., and Rehnquist, C.J., concurring in part and dissenting in part).

On remand, the Eighth Circuit affirmed O'Hagan's convictions on the mail fraud and other counts. See United States v. O'Hagan, 139 F.3d 641 (8th Cir. 1998).

[8] See United States v. Chestman, 947 F.2d 551, 581-82 (2d Cir. 1991) (Winter J., dissenting):

I am unclear as to whether the [tipper's] breach of duty and the tippee's knowledge of that breach as required by Dirks is coextensive with the similar requirements in [the mail/wire fraud decision] in Carpenter. The Dirks rule is derived from securities law, and its limitation to information obtained through a breach of fiduciary duty is, as noted, influenced by the need to allow persons to profit from generating information about firms so that the pricing of securities is efficient. The Carpenter rule, however, is derived from the law of theft or embezzlement, and a tippee's liability may be governed by rules concerning the possession of stolen property. Logic is therefore not a barrier to the growth of disparate rules concerning a tippee's liability depending on whether Section 10(b) or mail fraud is the source of law. However, because under any such disparity in rules the Section 10(b) charge would be harder to prove than a mail fraud charge, I need not explore the issue further.

[9] United States v. O’Hagan, 521 U.S. 642, 678 (1997) (bracketed material in original) (quoting Brief for United States 46-47).

The preceding post comes to us from William K. S. Wang, Professor of Law at the University of California Hastings College of Law. The post is based on his recent article entitled "Application of the Federal Mail and Wire Fraud Statutes to Criminal Liability for Stock Market Insider Trading and Tipping," which is forthcoming in Volume 70 of the University of Miami Law Review and available here

May 22, 2015
Recommended Reading: ISS Corporate Solutions ExecComp Insights
by Bruce S. Mendelsohn & Jesse Michael Brush

This week, we highlight the May 2015 edition of ISS Corporate Solutions ExecComp Insights which provides an analysis of the latest trends in executive compensation.

It includes:

  • The hidden complexities of executive compensation
  • Early results from the equity plan scorecard (part 2)
  • Latest trends in executive pay
  • Proxy season update: changes in CEO pay
May 22, 2015
SEC Villians Of The Week?
by David Zaring

The SEC announced an indictment against a financial advisor that got a bunch of public Georgia pension funds to invest in its own affiliated product. Which I guess sounds kind of dodgy - you're obligated to offer advice in the best interests of your client, and yet you're pushing your own investment vehicle. The strange thing about the case, however, is that it isn't about that sort of breach of fiduciary duty. Instead, the SEC, a federal agency, is going after Gray and its principals because they failed to comply with Georgia law. From the SEC's release:

The SEC's Enforcement Division alleges the investments violated Georgia law in the following ways:

  • A Georgia public pension fund's investment is limited to no more than 20 percent of the capital in an alternative fund. Two of the pension funds' investments surpassed that limit.
  • The law requires at least four other investors in an alternative fund at the time of a Georgia public pension fund's investment. There were fewer than four other investors in GrayCo Alternative Partners II L.P. at the time of these investments.
  • There must be at least $100 million in assets in an alternative fund at the time a Georgia public pension fund invests. GrayCo Alternative Partners II LP has never reached that amount.

Gray knew this was coming, and knew that the SEC wouldn't be taking them to court, but rather before one of its own judges. It had already filed suit alleging that the ALJ program is unconstitutional - and among the many problems with these types of suits, imagine the timing and ripeness challenges presented by litigation premised on "we think the SEC may be bringing administrative proceedings against us in the future."

Still, I think this case is interesting. Shouldn't Georgia be bringing it instead of the SEC?

May 22, 2015
Delaware Court: Compensation Awards to Directors Subject to Entire Fairness
by See Editor's Note
Editor's Note:

Robert B. Schumer is partner, chair of the Corporate Department, and co-head of the Mergers and Acquisitions Group at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss Client Memorandum. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In Calma v. Templeton, the plaintiff alleged that a board of directors breached their fiduciary duties in awarding themselves restricted stock units (RSUs) pursuant to a stockholder-approved equity incentive compensation plan. The Court of Chancery held on a motion to dismiss that (i) the directors were interested in the award of the RSUs, and (ii) although the stockholders had approved the plan under which the RSUs were awarded, stockholder approval of the plan could not act as ratification because the plan did not include enough specificity as to the amount or form of compensation to be issued. The court, therefore, held that the awards were to be reviewed under the non-deferential entire fairness standard, rather than under the business judgment rule, and declined to dismiss the plaintiff's breach of fiduciary duty claim.

In 2005, a majority of the stockholders of Citrix Systems, Inc. approved an equity incentive compensation plan that, by 2014, encompassed 48.6 million total shares, of which 16 million could be awarded as RSUs. The only limit on the amount of compensation that could be issued to any eligible beneficiary, including the non-employee directors, under the plan was a cap of 1 million shares or equivalent RSUs per director per calendar year, which in 2014 amounted to $55 million in value. The awards being challenged generally ranged from approximately $253,000 to $339,000 per year per director and were made by the board's compensation committee, whose members were independent but were also recipients of the awards.

The plaintiff filed a derivative suit challenging the awards under theories of breach of fiduciary duty, waste of corporate assets and unjust enrichment. On a motion to dismiss, the Court of Chancery held:

  • The stockholder approval of the plan did not amount to ratification of the challenged awards because the stockholders had approved only the generic outlines of a compensation plan, and did not approve any action bearing "specifically on the magnitude of compensation to its non-employee directors"-In so holding, the Court noted that Delaware does not embrace a "blank check" theory of stockholder ratification, whereby approval by stockholders of prospective director action within "broad parameters would insulate all future action by the directors within those parameters from attack." Rather, approval of more "specific" board decisions is required. The Court differentiated other cases where, for example, the stockholders had approved a compensation plan that was in effect self-executing by setting specific awards to be granted upon election to the board and annually (Steiner v. Meyerson), where the plan included ceilings on awards each year based on factors such as committee service or appointment as the lead director or board chair (In re 3COM Corp.) or otherwise included specific details as to the actual awards to be granted. Accordingly, the challenge to the awards in this case was subject to review under the entire fairness standard, rather than the deferential business judgment rule, and was found, on the facts alleged, to survive a motion to dismiss. Among the facts that contributed to the Court's decision were that the Citrix board, in setting director compensation, relied on a peer group (as identified by the company in its SEC filings) that the plaintiff argued should not have included companies with much higher market capitalizations, revenue and net income than Citrix.
  • The non-employee directors were interested in the RSU award, and therefore entire fairness review applied-The Court of Chancery held as a threshold matter that demand was excused because "the law is skeptical that an individual can fairly and impartially consider whether to have the corporation initiate litigation challenging his or her own compensation." Further, the Court noted that "director self-compensation decisions are conflicted transactions" that require a showing of fairness to the corporation in the absence of a valid act of ratification.

We view this case as a helpful reminder that in order for ratification of self-interested compensation awards to be effective, companies cannot rely on stockholder approval of generic compensation plans but instead must provide stockholders with specific details of, or limits on, the compensation to be approved.

May 22, 2015
Intercept Pharmaceuticals Securities Litigation Continues: Plaintiffs Adequately Alleged Scienter Regarding Defendants' Failure to Disclose Safety Issues
by Nicole Jones

A purported class of investors ("Plaintiffs") brought actions pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 against Intercept Pharmaceuticals, Inc. ("Intercept") and its Chief Executive Officer and Chief Medical Officer (collectively, "Defendants") in the United States District Court for the Southern District of New York alleging the omission of negative information from drug trial results in a press release. In re Intercept Pharmaceuticals, Inc. Securities Litigation., No. 14 Civ. 1123, 2015 BL 58016 (S.D.N.Y. Mar. 4, 2015).

Defendants moved to dismiss the Consolidated Amended Complaint ("CAC") under Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure and pursuant to 15 U.S.C. § 78u-4 of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), arguing the Plaintiffs failed to adequately allege scienter. The court found the pleading sufficient and denied the Defendants' Motion to Dismiss.

According to the allegations, Intercept is a publicly traded biopharmaceutical company that was developing obeticholic acid ("OCA") as a treatment for liver ailments, including nonalcoholic steatohepatitis ("NASH"), for which there is no approved drug. The National Institute of Diabetes and Digestive and Kidney Diseases ("NIDDK") conducted a trial, known as "FLINT," to test OCA as a treatment for NASH. The trial was stopped early on the basis of "efficacy" and "significant lipid abnormalities" in patients.

After becoming aware of the findings through a series of conversations and emails between the Chief Medical Officer and NIDDK's Scientific Advisor, according to the allegations, Intercept issued a press release and held a conference call with analysts and investors regarding the conclusion of the FLINT trial. The Company did not mention the finding of lipid abnormalities. Following the release, Intercept's stock price rose from $73.39 to $497 per share between January 9 and 10, 2014, ultimately closing at $445.83. After receiving media requests for additional information, NIDDK released a statement disclosing the findings of lipid abnormalities, causing Intercept's stock price to drop to $190.71 per share by January 13, 2014.

Plaintiffs filed suit alleging, among other things, that Intercept violated the antifraud provisions by omitting to mention the  "the significant lipid abnormalities" identified in the trial.  Defendants moved to dismiss, arguing Plaintiffs failed to adequately plead scienter.

Under FRCP 9(b), the pleading requirements for securities fraud are heightened. In addition, the PSLRA requires a plaintiff to allege particular facts that "give rise to a strong inference that the defendant acted with the required state of mind." This inference can be established by alleging facts that demonstrate the "defendants had both motive and opportunity to commit fraud" or "strong circumstantial evidence of conscious misbehavior or recklessness."

The court found Intercept's alleged failure to mention the lipid abnormalities gave rise to "a sufficient inference of scienter." Intercept was informed the trial was stopped on the basis of a positive and a negative development (lipid abnormalities), and Intercept chose to selectively report only the positive development, which created a "real possibility of misleading investors." Concerned the information would "cause issues," Intercept sought approval for the selective disclosure, evidencing the decision was made knowingly.

Because the court found that the allegations in the complaint were sufficient to establish that Intercept acted consciously and recklessly in failing to disclose the lipid abnormalities, Plaintiffs' allegations were deemed sufficient to adequately plead scienter pursuant to Rule 9(b) and the PSLRA. Accordingly, the court denied Defendants’ Motion to Dismiss.

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

May 21, 2015
Effective Regulatory Oversight and Investor Protection Requires Better Information
by See Editor's Note
Editor's Note:

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar's remarks at a recent open meeting of the SEC; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

It is said that, "knowledge is power." Knowledge, however, requires information. And there is no doubt we live in an age of information. The advent of the Internet and the breathtaking technological advances we have witnessed over the last few decades have given us access to more information than at any time in history. The available data seems to be limitless-and all available at the touch of a fingertip.

Yet, when I joined the Commission, it quickly became apparent that the SEC did not have the breadth and quality of information necessary to do its job effectively. As our country experienced the worst financial crisis since the Great Depression, and, as things began to unravel, I sought data and information to analyze the impact of what was occurring-only to find that much of the information available to the Commission was missing, stale, or incomplete.

For example, just weeks into my tenure, a large money market fund "broke the buck," and it quickly became clear that the information received by the Commission on money market fund holdings was too stale to be of regulatory use. I recall asking the then-Director of the Division of Investment Management whether other money market funds were at risk, only to be told something to the effect that, "we're not sure and we're calling around to get information." Needless to say, it is not the answer you want to hear or say. Instead, you want more definitive answers; answers based on reliable information that will enable you to make critical decisions. Simply stated, the SEC did not have timely, reliable information to allow it to determine whether other funds were also susceptible to a liquidity crisis. Clearly, data deficiency has serious ramifications.

As a result, from my early days as a Commissioner, I have been a strong advocate for the collection of high-quality data at the SEC. For example, during the drafting of what led to the 2010 money market reforms, I championed a rule requiring money market funds to provide monthly disclosures of their investment portfolios, which would provide the Commission with more current information to allow timelier monitoring of money market fund holdings Surprisingly, even with a clear need for this data, there were skeptics who doubted the benefits of collecting such data.

Ultimately, the Commission adopted this rule in 2010, and today the SEC staff and the staff at other regulatory agencies rely heavily on the data to monitor money market funds activities. In fact, there is no equivalent transparency for similarly situated products. Indeed, a former Director of the Division of Investment Management noted that the Commission "benefitted greatly from the monthly data that Form N-MFP [provided] about money market fund holdings." The staff's ongoing analysis of the new money market fund data, and its review of the gross yield of funds as a marker of risk, has proved useful to monitoring for fraud and other discrepancies. For example, in 2013, the review of Form N-MFP resulted in an enforcement action when the staff noted that a money market fund's performance was consistently different from the rest of the market. In addition, during the Eurozone crisis in 2011, the new data allowed the Commission staff to determine that money market funds were not-as had been widely speculated-overexposed to Irish banks and other European securities during the crisis. The staff is able to use "real time" data on money market funds' portfolio holdings to great effect, and the staff's review of the monthly information often raises questions that prompt the staff to reach out to advisers for answers.

The money market fund experience demonstrated that effective oversight of our capital markets requires that the SEC be well informed through better data collection and analysis.

Similarly, early in my tenure, I started to advocate for improved data about the trading markets. As a result, I heard about a nascent project to try to create a Consolidated Audit Trail ("CAT") to develop, implement, and maintain a consolidated tracking system for all quotation and trading activity in exchange listed securities. I searched out the staff with knowledge about this project and learned about the potential benefits of the information that could be derived from such a project. It became very clear to me that CAT could improve Commission oversight by allowing the SEC staff to monitor the markets more effectively, identify and address potential risks before they metastasize into larger problems, and analyze historical data more efficiently. Moreover, I learned that CAT could also be a game-changer with respect to combatting financial fraud, which is more difficult to identify today because of market fragmentation and automated trading.

In light of these clear benefits, I fought hard to make sure that the CAT project was added to the Commission's formal regulatory agenda, and I continue to press for its prompt implementation. It is clear that the data to be provided by CAT will also enhance the Commission's regulatory efficiency.

In addition to the money market fund disclosure rule and CAT, I have fought for and supported many other data gathering rules at the SEC spanning the entire regulatory horizon, including rules affecting derivatives activities (including credit default swaps), municipal advisors, credit rating agencies, hedge funds, and many others. I have also been a public voice as to the benefits of high quality, interactive data that can allow the Commission, investors, academics, and the public to better analyze corporate information and market information.

I give you that history so that it should come as no surprise that I am pleased that the two proposed rules that the Commission considers today will significantly enhance the available data, and its use:

  • First, the Commission is proposing new rules, forms, and amendments, to update and enhance the disclosure and reporting framework for registered investment companies ("RICs"), such as mutual funds and exchange-traded funds; and
  • Second, the Commission is proposing rules and form amendments that seek to improve the quality of information that investment advisers retain and report to the Commission.

These rules will result in more useable, complete, and high-quality information that will have a significant impact across the regulatory landscape. In particular, the additional information, much of it in a structured and searchable format, should have a positive impact on the way investors can obtain information about their investment advisers and their RIC investments. The information will also improve the way market participants and interested parties collect, aggregate, and analyze data and trends, as well as enhance the quality and depth of available information. Lastly, of course, the information will help enhance the Commission’s risk monitoring, examination, enforcement, and other oversight functions.

Investment Company Reporting Modernization

The first proposal we consider today involves significant and substantive changes to the rules and forms under the Investment Company Act of 1940. Many of these changes will enhance the Commission's oversight functions and improve the disclosures received by investors. To this end, the proposed rules have the following important components:

  • First, the rules would require certain RICs to report information about their portfolio holdings to the Commission on a monthly basis on new Form N-PORT. Timely and frequent reporting of portfolio holdings will help the Commission carry out its regulatory responsibilities in many programmatic areas, including examinations, enforcement, fund monitoring, policymaking, and disclosure review.
  • Second, the rules would standardize disclosures on derivatives in investment company financial statements. These enhanced disclosures will provide investors with clear and consistent disclosures across many funds to help investors make more informed investment decisions.
  • Third, the rules would require RICs, other than face-amount certificate companies, to report certain census-type information to the Commission annually on new Form N-CEN. This information will enhance the Commission’s understanding of industry trends, inform policy, and aid the Commission’s examination staff.

In addition, the requirements to submit information in a structured data format will improve the retrieval, searchability, and analysis of relevant fund data by the SEC staff and the public alike. This will allow investors, regulators, and market participants to organize and analyze large amounts of data and information more efficiently. These are all positive features of the proposed rules.

The proposed release, however, is not all about data gathering. In particular, there is one feature that would permit RICs, after satisfying certain conditions, to transmit shareholder reports by making them accessible on an Internet website, rather than printing and mailing the reports to the shareholders. The release, however, makes it clear that this new feature raises a number of questions. For example, while this "access equals delivery" model would certainly result in cost savings, it could also result in unintended consequences, such as creating unnecessary hurdles that could discourage shareholders from reading the shareholder reports.

These concerns are borne from the Commission's prior experience and the staff's investor research. After the Commission's adoption of the e-proxy rules, we have witnessed declining retail investor participation in the proxy voting process. The e-proxy rules required issuers to post their proxy materials on an Internet website, and then provide shareholders with notice that the proxy materials were available on their website. Under these rules, issuers have the option to continue to provide paper copies. Issuers that declined to use the paper option, and only use e-delivery, adopted the so-called "notice and access" model.

As I noted several years ago, retail investor voting, already at low numbers, plummeted at those companies using the notice and access model. Indeed, statistics demonstrated that the level of voting participation by investors at companies relying on the notice and access model decreased over 30% as to large investors, and over 60% as to smaller investors. Even more disconcerting are suggestions by some observers that the notice and access model may have led to fewer shareholders even actually reading the proxy materials.

In fact, the Commission staff's empirical research in connection with today's proposal shows that some investors continue to prefer to receive paper reports, and some demographic groups of investors are less likely to use the Internet. Significantly, there is also a risk that even those investors who prefer to use the Internet may be less likely to review reports that are delivered electronically, as compared to reports that are delivered in paper format.

Thus, based on our experience with the e-proxy rules, and the staff's investor research, this is an area where the Commission should proceed with caution before adopting a similar notice and access model that adversely affects the benefits of shareholder reports.

To this end, I thank the staff for responding to my concerns and including a more fulsome discussion in the release of the issues raised by this aspect of the proposal. I also appreciate the staff's efforts to add various safeguards, redundancies, and other features to make it clearer to investors what occurs if they do not respond to notices about the conversion to web access. I encourage commenters, particularly investors, to respond to questions in the release as to this aspect of the proposal. Their input will allow the Commission to make a more informed decision.

Proposed Amendments to Form ADV and Advisers Act Rules

Let me now turn to the second proposal on today's agenda. Here, the Commission considers proposed amendments to Part I of Form ADV and to various rules under the Investment Advisers Act of 1940 ("Advisers Act"). In particular, the proposed amendments should improve the quality and depth of the data that investment advisers disclose and, thereby, enhance the Commission's risk monitoring and oversight of investment advisers' business activities. Moreover, the new information in Form ADV should help investors in making informed decisions in the selection and retention of advisers.

Let me highlight a few salient points in the release:

  • First, advisers would be required to enhance disclosures as to separately managed accounts. The information should improve the SEC staff's ability to spot emerging trends or regulatory risks.
  • Second, today's rules request more detailed and nuanced disclosure in Form ADV regarding the adviser and its business-such as requiring information on assets under management from non-U.S. clients, and additional information about an adviser's affiliation with wrap fee programs.
  • Third, the rules would codify the Commission staff's prior guidance that allows affiliated private fund advisers to file a single Form ADV. This streamlined registration process, known as "umbrella registration," provides better and clearer data about groups of advisers that operate as a single business.
  • Finally, advisers would be required to retain additional materials relating to the performance or rate of return for accounts that they manage. This information should be useful to the Commission and the public in examining and evaluating performance claims by advisers.

These amendments to the Advisers Act and Form ADV should result in greater transparency of the practices and services provided by investment advisers. This will benefit both investors and the regulatory and examination programs of both the Commission and state securities regulators.


Ultimately, greater access to high-quality usable information fosters confidence in investment decisions and in regulatory actions and initiatives. Moreover, better data helps the Commission fulfill its mission of protecting investors, fostering capital formation, and ensuring fair, orderly, and efficient markets. For these reasons, I will support both sets of proposed rules.

May 21, 2015
Chancery Explains Res Judicata, Collateral Estoppel and Acquiescence
by Francis Pileggi

Brevan Howard Credit Catalyst Master Fund Limited v. Spanish Broadcasting System, Inc., C.A. No. 9209-VCG (Del. Ch. May 19, 2015). This letter decision explains the nuances and elements of the following principles on which it granted a motion to dismiss: res judicata, collateral estoppel and acquiescence. The first two deal with issue preclusion. Res judicata restricts the same cause of action, whereas collateral estoppel prevents the re-litigation of a factual issue previously adjudicated.

The court recites the five-part test that must be satisfied before res judicata operates to bar a claim. See n. 9. The court also provides the four-part test for applying the collateral estoppel doctrine. See n. 10. In addition, the court explains the significant differences between the two doctrines. See n. 11.

The court also provides the three prerequisites for applying the doctrine of acquiescence. See n. 18

Res judicata and collateral estoppel are commonly known concepts but their nuances and their specific prerequisites are not as well known. The concept of acquiescence is even less well known as a useful defense to bar certain claims in appropriate circumstances.

The elements of acquiescence were recently described by the Delaware Supreme Court (as quoted in this case), as follows:

A claimant has full knowledge of his rights and the material facts and (1) remains inactive for a considerable time; or (2) freely does what amounts to recognition of a complained of act; or (3) acts in a manner inconsistent with the subsequent repudiation, which leads the other party to believe the act has been approved. For the defense of acquiescence to apply, conscious intent to approve the act is not required, nor is a change of position or resulting prejudice.

Id. (citing Klaassen v. Allegro Dev. Corp., 106 A.3d 1035, 1047 (Del. 2014)).

Another recent Chancery decision in an unrelated case, also applied collateral estoppel to bar claims that had been previously litigated. See Asbestos Workers Local 42 Pension Fund v. Bammann, C.A. No. 9772 (Del. Ch. May 21, 2015).

View today's posts

5/22/2015 posts

CLS Blue Sky Blog: Application of the Federal Mail and Wire Fraud Statutes to Criminal Liability for Stock Market Insider Trading and Tipping
AG Deal Diary: Recommended Reading: ISS Corporate Solutions ExecComp Insights
Conglomerate: SEC Villians Of The Week?
HLS Forum on Corporate Governance and Financial Regulation: Delaware Court: Compensation Awards to Directors Subject to Entire Fairness
Race to the Bottom: Intercept Pharmaceuticals Securities Litigation Continues: Plaintiffs Adequately Alleged Scienter Regarding Defendants' Failure to Disclose Safety Issues
HLS Forum on Corporate Governance and Financial Regulation: Effective Regulatory Oversight and Investor Protection Requires Better Information
Delaware Corporate and Commercial Litigation Blog: Chancery Explains Res Judicata, Collateral Estoppel and Acquiescence

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.