The American Banker’s Association (ABA) filed a petition on December 24, 2013, in the United States Court of Appeals for the District of Columbia challenging a provision of the recently approved final version of the Volcker Rule (the Final Rule) requiring community banks to divest their holdings in a commonly held debt instrument known as Collateralized Debt Obligation backed by Trust-Preferred Securities or TruPS-backed CDO.
Volcker Rule challenged in Court: Will Regulators Accede or Demur?
SEC Issues New Guidance On “Bad Actor” Disqualification From Rule 506 Offerings
On December 4, 2013, the staff of the Securities and Exchange Commission (SEC) Division of Corporation Finance issued new guidance regarding the “bad actor” disqualification provisions of Rule 506(d) of Regulation D under the Securities Act of 1933 (Securities Act) and the related disclosure requirements of Rule 506(e) through an update to its Securities Act Rules Compliance and Disclosure Interpretations (C&DIs). The 14 new CD&Is provide important clarification to the final rules approved by the SEC earlier this year and additional guidance to issuers seeking to comply with the new requirements of Rules 506(d) and 506(e) of Regulation D under the Securities Act. This advisory summarizes some of the more significant of these new CD&Is.
Click here to read the entire Advisory.
Master Limited Partnerships, newly re-discovered investment structures, are on the rise
A Master Limited Partnership (MLP) is a publicly traded partnership (PTP). It is essentially a partnership, or a limited liability company (LLC) that has chosen partnership taxation, that trades on a public exchange (NYSE, NASDAQ, etc.) or over the counter market.
Prospectus Disclosure Regime in Europe — the Proportionate Disclosure Regime and Supplementary Prospectuses
Regulators have recently clarified two important aspects of the prospectus regime that applies across the European Economic Area pursuant to the Prospectus Directive (Directive 2003/71/EC as amended by Directive 2010/73/EU). The Prospectus Directive provides the overarching European regulatory framework for the publication of prospectuses in connection with debt and equity securities being offered to the public or admitted to trading on regulated markets in the EEA.
JPMorgan Chase Suffers First Quarterly Loss Under CEO Jamie Dimon
Due in large part to the $9.2 billion it set aside to cover mounting legal expenses, JPMorgan Chase, the nation’s largest bank, suffered its first quarterly loss under CEO Jamie Dimon. JPMorgan reported a loss of $380 million, or 17 cents per share for the third quarter, compared with a profit of $5.71 billion, or $1.40 per share just a year earlier. This cast a somber tone for the unusually humble Dimon, stating that the loss was “very painful for me personally.”
Week in Review: SAC Insider Trading and Google’s Growth
SAC Capital Advisors has been under intense pressure from government regulators—and it appears that its chief, Stephen A. Cohen, may be ready to make a deal. Amongst the biggest provisions under negotiation on insider trading charges, as reported this week by the New York Times, is a requirement that SAC may be required to exit the investment advisor business entirely. While Cohen could still manage his personal fortune, he would not be allowed to invest with others’ money; this represents a major strategy shift for the once-famed hedge fund. What’s more, the deal will likely require SAC to admit to criminal misconduct and the parties have “agreed in principle” (according to the Huffington Post) to record-setting penalties and restitution upwards of $1 billion. The plea agreement is no yet a done-deal and either party may yet balk at the proposal, but it will represent a significant victory for the government if its goes through.
Google is on the rise once again. The dominant search-engine company’s stock traded above $1,000 per share this morning for the first time, up more than 13%. Google exceeded analysts’ expectations, reporting a 23% rise in Internet-related revenue last quarter as the company’s focus on mobile-based content and advertising proved successful. The shift towards smartphones, iPads, and tablets has pushed down cost-per-click ad revenue, but growth Google’s traffic and ad volume has ‘outpaced’ this trend according to a Reuters interview.
Recap: Is Venture Finance in China Possible?
On October 2, 2013, the Berkeley Center for Law, Business and the Economy (BCLBE) hosted a lunchtime talk on venture finance in China by Arman Zand, Senior Vice President of SPD Silicon Valley Bank in Shanghai, China. Zand, a Haas MBA (class of ‘09), spent the last four years in Shanghai establishing Silicon Valley Bank’s (SVB) joint venture with Shanghai Pudong Development Bank (SPD). Unlike other banks, SVB is a financial institution designed to serve entrepreneurial and early stage tech companies.
In his presentation titled “Is Venture Finance in China Possible? The View from Silicon Valley,” Zand spoke about recent developments in China’s economy, some challenges he faced in developing China’s first venture capital bank and lessons he learned along the way.
Before delving into the main issues with developing a venture capital bank in Shanghai, Zand gave a brief explanation of recent developments in China’s economy. He explained that China’s economic development is rapidly moving forward with the hopes of transitioning from a labor economy to an innovation economy that embraces SMEs, or small and medium-sized enterprises.
Subsequently, Zand explained some of the challenges he faced while in China, including working with Chinese banks that are primarily mortgage lenders. The majority of all bank loans in China require real assets to serve as collateral; however, entrepreneurial companies only have IP collateral: trademarks, patents, software code and the like. The lack of real estate makes venture finance “extremely challenging.”
Nevertheless, a recent development in which Shanghai announced a new free trade zone (FTZ) could create a superior environment for venture finance. (more…)
Week in Review: Government Shuts Down, Twitter Ramps Up
Twitter, Inc. publicly filed its IPO documents on Thursday, revealing the microblogging company’s financials for the first time. Analysts expect the seven-year-old site to be valued in the $10- to $15-billion range, although it is still unprofitable. Rapid growth has been outmatched (for now) by accelerated expenses: in the first half of this year, revenue doubled to $254 million but net loss increased by 40% to $69 million. Twitter, which has chosen the ticker symbol TWTR, is still behind the pace set by Facebook. By comparison, Facebook’s IPO sales pitch showcased a $1 billion annual profit in 2011 and 845 million active users (Twitter has 215 million). Twitter’s co-founder and former CEO Evan Williams will expect the largest payout once the liquidity event is completed; he owns 12 percent of the company. Co-founder Jack Dorsey owns 4.9 percent.
The federal government is paralyzed as lawmakers have failed to agree on the nation’s budgetary priorities. Divided government in hyper-partisan Washington, D.C., has proven to be a recipe for stalemate. While most of the coverage has focused on House Republicans’ objection to funding the Affordable Care Act, the debate will likely be viewed as a much broader battle on federal spending. Two storms will soon converge—the current battle over a Continuing Resolution (essentially legislative authorization to write certain checks from the U.S. Treasury) and the imminent necessity to raise the federal government’s $16.7 trillion debt ceiling (to further add to the nation’s debt). Treasury Secretary Jack Lew has estimated that the U.S. government will need to raise the ceiling before October 17th, less than two weeks away. For lawmakers, resolving the current shutdown by passing a “clean CR” will solve little unless the deal also addresses the debt ceiling—thus, the conversation for congressional leaders of both parties appears to have shifted to a grand bargain or large-scale budget deal. For now, Wall Street has remained mostly apathetic, but prolonged brinksmanship is likely to change the market’s attitude in a hurry.
Week in Review: JPMorgan Returns to the Hot Seat
Once again, JPMorgan found itself discussing yet another settlement and facing bad publicity linked to excessive risk-taking. Last week, news broke that the bank had agreed to a $920 million settlement in the “London Whale” derivatives trading case; plus, the Consumer Financial Protection Bureau ordered JPMorgan to refund over $300 million to customers based on alleged wrongdoing in its credit card and debt collection procedures.
Another settlement deal surfaced this week—and its numbers are much larger. The U.S. Department of Justice is seeking $11 billion (with a ‘B’) in compensation for JPMorgan’s actions leading up to the Financial Crisis, including selling mortgage backed securities the bank knew were essentially worthless. According to the Washington Post, it would be “the biggest settlement a single company has ever undertaken.” On Thursday, the bank’s visible CEO Jamie Diamond flew to Washington, D.C., to meet with Attorney General Eric Holder for nearly an hour. Instead of lobbying for looser restrictions on Wall Street, Diamond was seeking an end to federal and state probes (which still represent a large liability to the bank) and, perhaps more importantly, attempting to avoid criminal charges.
All of the rhetoric and press releases notwithstanding, the Administration’s handling of numerous JPMorgan investigations has been properly criticized for missing an opportunity to charge top Executives. The S.E.C., D.O.J., and other regulators have thus far failed to press criminal charges, even when financial disclosures have misrepresented the bank’s business or mortgage-backed products. To be sure, the government has charged front-line traders in the London Whale case, but those tasked with overseeing the bank’s actions have escaped indictment—perhaps for the very reason that Mr. Diamond is willing to personally negotiate with the nation’s top law enforcement official on their behalf.
While the financial penalties being discussed are stiff, they represent only a small fraction of the damage done to the global economy, JPMorgan shareholders, and (ultimately) dinner tables across the country. Columbia Law School professor John C. Coffee Jr. provided some insight to the back-and-forth. He told the Post: “If I was in [Holder’s] position, I would be concerned about my legacy. . . . There’s been a lot of criticism of officials in Justice being much too soft, timid.”
City Council Votes in Richmond, CA, Mortgage Eminent Domain Proposal and UPDATE
After a seven-hour meeting that dragged into early Wednesday morning, the Richmond City Council voted 4-to-3 to continue pursuing its plan to condemn underwater mortgages using the city’s eminent domain power. The development is just the latest in an ongoing and high-stakes dispute over a novel property law argument.
Here is the background: The city of Richmond, California, has long-faced deteriorating property values. Once a shipbuilding powerhouse for the U.S. Navy during World War II, the region’s declining industrial based has hit Richmond particularly hard. City leaders have struggled to attract redevelopment capital, as businesses have largely opted for other booming Bay Area locations. And when the mortgage crisis hit, Richmond’s communities experienced rampant foreclosures.
In response, the City has considered a novel move: mortgage condemnations through the power of eminent domain. That is, the City’s proposl would condemn the underwater mortgage obligations, but not the real estate itself. If implemented, banks would be forced to write down large portions of a borrower’s principal. The Network has previously covered the mortgage eminent domain proposal and Mortgage Resolution Partners, which had backed Richmond’s plan. And last September, the Berkeley Center for Law, Business and the Economy and Berkeley Business Law Journal hosted Adjunct Professor Bill Falik—who is a partner at MRP—to discuss the innovative (though controversial) scheme. The Network covered counterarguments as well.