Regulators focus on High-Frequency Trading and Wash Trades

By Andrew Sioson, J.D. Candidate 2013 | Posted on

High-frequency trading firms, who may be distorting financial market prices by conducting transactions with themselves, are drawing scrutiny from U.S. regulators.  Investigations of so-called wash trades by the Securities Exchange Commission (“SEC”), Commodity Futures Trading Commission (“CFTC”), and Financial Industry Regulatory Authority (“FINRA”) represent another episode in the struggle to understand and properly regulate high-frequency trading activity.

Wash trades are a form of self-dealing that occurs when one party places bid and ask requests for the same security.  This causes an appearance of increased activity in the security that can prompt other participants to enter the market.  The lured-in traders drive activity that affects the price of the security.  More importantly, the surge in volume creates profitable opportunities for high-frequency firms, who often act as market makers.

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Are All MOEs Created Equal?

By Kirkland & Ellis LLP | Posted on

[Editor’s Note:  The following post is a Kirkland & Ellis M&A Update, authored by Daniel E.Wolf, Sarkis Jebejian, Joshua M. Zachariah, and David B. Feirstein.]

With valuations stabilizing and the M&A market heating up, a rebirth of stock-for-stock deals, after a long period of dominance for all-cash transactions, may bein the offing.

If this happens, we expect to see renewed use of the term “merger of equals” (MOE) to describe some of these all-equity combinations.  As a starting point, it may be helpful to define what an MOE is and, equally important, what it isn’t.  The term itself lacks legal significance or definition, with no requirements to qualify as an MOE and no specific rules and doctrines applicable as a result of the label.  Rather, the designation is mostly about market perception (and attempts to shape that perception), with the intent of presenting the deal as a combination of two relatively equal enterprises rather than a takeover of one by the other.  That said, MOEs generally share certain common characteristics.  First, a significant percentage of the equity of the surviving company will be received by each party’s shareholders.  Second, a low or no premium to the pre-announcement priceis paid to shareholders of the parties. Finally, there is some meaningful sharing or participation by both parties in “social” aspects of the surviving company.

While each of the aspects of an MOE deal will fall along a continuum of “equality” for the shareholders of each party, there are a handful of key issues that require special attention in an MOE transaction.  

Click here to read the entire Kirkland & Ellis LLP publication, discussing Social Issues, Change of Control, Shareholder Vote/Fiduciary Issues, Consideration, and Agreements.

Social Entrepreneurship Panel: A Recap

By Libby Hadzima, J.D./M.B.A. Candidate 2015 | Posted on

On April 3, 2013, the Berkeley Center for Law, Business and the Economy (BCLBE) hosted a Social Entrepreneurship: Legal, Financial and Public Policy Dimensions panel moderated by Professor Eric Talley.  Panelists included legal experts R. Todd Johnson (Partner, Jones Days), Jonathan Storper (Partner, Hanson Bridgett), Kyle Westaway (Founder of Westaway Law) and Jordan Breslow (General Counsel at New Island Capital) as well as Vince Siciliano (CEO and President of the New Resources Bank).

Talley began by asking for a definition of social entrepreneurship.  Johnson offered “any organization that makes money and does social good” and Siciliano added “maximizing distribution [for a given product] while being profitable” as social enterprises attempt to maximize social impact for a given product or service.  Breslow, who works for an impact investment advisor, talked about how one of the downsides of a nonprofit, as compared to a social enterprise, is that “in giving money away [investors] lose control.”

Measuring profits is straightforward but measuring social impact is not always so easy.  However, as Johnson notes, “we need to get past the head-scratching period of asking ‘how do we measure impact’ that comes from looking at social entrepreneurship as a sector. It’s not a sector. It’s a way of doing business.”  Social impact can be applied to any business sector — health care, education, technology, etc. For some sectors, the impact equation is simple. For example, d.light solar sells solar light and power products so it is “relatively easy to calculate how much kerosene and therefore CO2 is avoided by its products.”  It is harder for other sectors, such as services, or where impact is based upon human transformation or long-term goals. “Sometimes the outcome should be obvious, but is simply hard (or expensive to capture) such as greening of supply chains.”  Westaway agreed noting that he “applauds the idea of standardization but it is hard to do.”

Talley asked the panelist to assess whether these types of enterprises are more risky than others, that perhaps, do not consider their social impact. Siciliano suggested that some social enterprises may be considered risky by traditional investors because they are not well understood.  “As a commercial bank, one of the New Resource Bank’s competitive advantages” he explained “is its sector expertise.” He offers that it is not about the risk of the underlying business model as much as that traditional commercial banks assess high risk to these enterprises because of their limited exposure to some of the new sectors these enterprises are operating in. “We don’t view these companies as risky because we better understand their markets and stage of growth.” Specific industry examples include organic products, alternative energy, energy efficiency retrofits, green real estate, and nonprofits.

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Using the Web to Match Private Companies and Potential Investors: SEC No Action Letters Open a Door, but Questions Remain

By Goodwin Proctor LLP | Posted on

[Editor’s Note:  The following post is a Goodwin Proctor Alert, which relays regulatory and legislative developments.]

In a no action letter dated March 26, 2013 (the “FC Letter”), the staff of the U.S. Securities and Exchange Commission (the “SEC”) indicated that they would not recommend action against the operators of the FundersClub website (“FundersClub”) for failing to register as a broker/dealer under the U.S. Securities Exchange Act of 1934 (the “Exchange Act). Two days later, a similar letter (the “AL Letter”) was issued to the operators of the AngelList website (“AngelList”)

The Letters may remove one of the most significant obstacles to the development of a broad-scale, online business in which accredited investors are able to select and invest in private companies. However, the Letters are based upon a number of representations made by FundersClub and AngelList that may be difficult to defend or apply in practice. They also leave unaddressed a number of related legal issues. Thus, the Letters may represent only the beginning of a process in which entrepreneurs, investment managers, private companies, the Staff, the SEC and others explore and develop the rules and practices under which such a business may be operated.

This Client Alert briefly describes certain key issues and conclusions associated with the Letters and highlights some of the issues and risks that remain.

Click here to read the entire article.

[The Alert concludes that t]he Letters may be a key milestone in the development of a broad-based marketplace in which Web-based efficiencies are applied to matching (i) private companies seeking capital with (ii) accredited investors willing to provide it. Nevertheless, important open issues remain. In particular, the representations made by FundersClub and AngelList in obtaining the Letters may prove difficult to defend or apply in practice. Moreover, key questions (e.g., regarding general solicitation and the procedures by which investors may be verified as “accredited”) await further guidance from the SEC. Finally, other parties such as state regulators and various self-regulatory organizations have not yet weighed-in and may have a material impact.

Upcoming Events from the Berkeley Center for Law, Business and the Economy

By Berkeley Center for Law, Business and the Economy | Posted on

Smart Course Planning: What to Take in Business Law and Why

Today, April 8th at 12:45 in Boalt Hall, Room 100, join BCLBE for an information session about next semester’s business law courses at Berkeley Law. Executive Director of BCLBE, Ken Taymor, along with several other Boalt faculty will preview Fall 2013 classes and highlight new course offerings. This is an opportunity for students to learn how the various business course offerings can help prepare them for professional practice. Miranda-Lin Bailey (Boalt ’04) from Aera Energy also will participate in the discussion and share her perspective on what coursework to pursue before graduation and why.

Registration is available here.

Corporate v. Litigation Practices, Presented by Paul Hastings

On Thursday, April 11th at 12:45 in Boalt Hall, Room 110, attorneys from Paul Hastings will present the differences between litigation and transactional work. Moderator Samantha Eldredge will discuss with the panel of Paul Hastings attorneys the differences in work, style, and necessary skills. The event is cosponsored by the Career Development Office and BCLBE.

To RSVP, please contact Sarah Cunniff. For questions, email Phyliss Martinez or Sarah Cunniff.

The First Five Years of China’s Antimonopoly Law

On Monday, April 15th at 12:45 in Boalt Hall, Room 110, Nathan Bush, a Partner in the Beijing and Singapore office of O’Melveny & Myers, will present on the first five years of Chinese antitrust enforcement under the Antimonopoly law and the future of Chinese competition policy under the new Xi Jinping government. The law is China’s first comprehensive competition statute. Since it took effect on August 1, 2008, China has emerged as a significant antitrust jurisdiction as its competition authorities have blocked or imposed conditions on worldwide mergers, fined foreign cartels, and even challenged the commercial practices of some state-owned enterprises.

CLE credit is available. Registration is available here.

Week in Review: The Administration on Wall Street

By Christopher Hammond, J.D. Candidate 2015 | Posted on

The Obama Administration has continued its aggressive prosecution of suspect players in the financial meltdown that shaped most of the President’s first term.

Four mortgage insurers, including an AIG subsidiary, have agreed to a $15 million settlement over allegations of improper ‘kickbacks’ paid to lenders for more than a decade.  The Consumer Financial Protection Bureau made the announcement today.  Its director, Richard Cordray, charged, “We believe these mortgage insurance companies funneled millions of dollars to mortgage lenders for well over a decade.”  For more, see the NYTimesand WSJ.

Also today, the U.S. Department of Justice filed a fraud suit against Golden First Mortgage Corp, alleging the company and its CEO “repeatedly lied” to the government.  The complaint claims that Golden First rushed paperwork through internally, although the company certified (to HUD and the FHA) that proper due diligence had been conducted.  According to the government, Golden First used three employees to process 100-200 loans per month—predictably leading to “extraordinarily high” default rates as high as 60% in 2007.  For more, see Thomson Reuters.

On a related note, district court Judge Victor Marrero (S.D.N.Y.) indicated that he may not accept a “neither admit nor deny” provision in SAC Capital Advisor’s insider trading settlement.  At a hearing last week, he made a point unlikely to encounter much resistance:  “There is something counterintuitive and incongruous in a party agreeing to settle a case for $600 million that might cost $1 million to defend and litigate if it truly did nothing wrong.”  Judge Marrero is not the first to question these clauses – commonly demanded by corporate litigants – but his remarks demonstrate a growing judicial skepticism with the practice.  For more, see Businessweek, Reuters, and The New Yorker.

Social Media and the SEC’s Disclosure Regulations: Netflix

By Ann Koppuzha, J.D. Candidate 2015 | Posted on

According to Netflix CEO Reed Hastings’ Facebook post in July 2012, “Netflix[‘s] monthly viewing exceeded 1 billion hours for the first time ever in June.”  This 15-word sentence might involve Netflix in a lengthy dispute with the SEC, which believes that the posting may be in violation of the SEC’s Regulation FD.  The regulation requires public entities to make full and fair public disclosure of material non-public information.  Though it is unclear whether disclosing company information through social media is a violation of SEC regulations, Hastings has implied that the SEC intended such announcements to be made through a press release or a regulatory filing.

The SEC notified Hastings and Netflix of the violation through a Wells Notice.  A Wells Notice indicates that a securities regulator has concluded an investigation, found infractions, and will recommend enforcement action of either a cease-and-desist action and/or a civil injunction against Netflix and Hastings.  The notice gives the respondent the opportunity to explain why such an action is not needed.

Hastings has responded that he does not believe the post revealed material information.  However, analysts have pointed out that Netflix’s share price increased 13 percent after the posting.  Hastings also wrote that posting to his Facebook page, where many of his 200,000+ friends who are reporters can see the posting, is public disclosure.

The broader question, however, is to what extent can public companies release information through social networks without violating SEC regulations?  There is no clear answer, but the SEC’s response to Netflix may give an indication of how the agency will regulate social media.

Supreme Court Issues Significant Class Certification Decision in Antitrust Case

By Davis Polk & Wardwell, LLP | Posted on

[Editor’s Note:  The following post is from Davis Polk’s recent Client Newsflash. This and other updates from Davis Polk are available here.]

Supreme Court confirms that courts must evaluate merits issues in connection with class certification

On March 27, 2013, the Supreme Court, in an opinion by Justice Scalia, held that putative antitrust class plaintiffs must affirmatively establish that damages are capable of measurement on a class-wide basis to satisfy Rule 23(b)(3)’s predominance requirement.  In the case before it, Comcast Corp. v. Behrend, the Court found that the putative antitrust class had failed to satisfy this burden and that the Third Circuit had erred by refusing to scrutinize plaintiffs’ proffered damages methodology at the class certification stage.  Justices Ginsburg and Breyer issued a joint dissent in which Justices Sotomayor and Kagan joined.

This case is consistent with a line of recent Supreme Court decisions setting strict evidentiary standards for class certification.

Please click here to read the rest of the story.

SEC Charges Craig Berkman and His Lawyer over Pre-IPO Facebook Con

By Valerie Ramos, J.D. Candidate 2015 | Posted on

The SEC has charged former Oregon gubernatorial candidate, Craig Berkman, with a violation of the antifraud provisions of federal securities laws. Berkman’s fraud has been referred to as a Ponzi-like scheme where investors were promised access to pre-IPO shares in Facebook, Groupon, Zynga, and LinkedIn. The SEC alleges that John B. Kern, and Berkman’s lawyer, aided and abetted this violation.

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