SEC and CFTC Establish Capital and Margin Requirements for Security-Based Swap Market Participants

By Luke Burton, J.D. Candidate 2015 | Posted on

The Dodd-Frank Wall Street Reform Act tasked the Commodity Futures Trading Commission and the Securities and Exchange Commission with creating a regulatory structure to better maintain the $600 trillion derivatives market. As part of this effort, on October 17th, the SEC released for comment proposed rules on margin and capital requirements for securities-based swap dealers designed “to help ensure the safety and soundness of security-based swap dealers and major security-based swap participants.”

The rule includes minimum capital, margin, and segregation requirements for security-based swap dealers and major security-based swap participants.  (more…)

Are Emerging Growth Companies Using the JOBS Act’s Reduced IPO Filing Requirements?

By Jared Mayberry, J.D. Candidate 2015 | Posted on

President Obama signed the Jumpstart Our Business Startups Act (the “JOBS Act”) into law on April 5, 2012.  We presented an update on the regulatory implementation of the act here and here, as well as a discussion of the Act’s internal contradictions here.  While much of the Act left to the SEC the responsibility of designing regulations to implement the Act, it specifically set out provisions designed to ease IPO filing requirements for “emerging growth companies.” This week we have an update on how many companies are utilizing these already implemented provisions.

The JOBS Act defines an “emerging growth company” as a business with less than $1 billion dollars in revenue during the previous fiscal year. The JOBS Act has seven provisions designed to make IPO filing easier for an emerging growth company. These include the requirement to present only two years (rather than five years) of financial statements and an exemption from complying with new or revised accounting standards. The law also allows emerging growth companies to provide reduced disclosure about its executive compensation system, and provides an exemption from certain auditing requirements.

Last month, Morningstar published a study on the effects of this legislation on companies that have filed publicly since the Act’s enactment.  According to Morningstar, 56 companies have publicly filed since the President signed the legislation into law.  Thirty-Eight of those companies have qualified as “emerging growth companies,” and all but one of those qualifying companies have taken advantage of at least one provision of the Act.

Companies that are filing have adopted most of the provisions, with majority of companies taking advantage of or plan to take advantage of five of the seven provisions.  Two of the provisions, however, have not been as widely utilized.  Only fifty percent of the qualifying companies provided less than five years of financial data, and only six of the qualifying companies opted out of the new or revised financial accounting standards.

Berkeley Law Adjunct Professor Donna Petkanics, a Partner at Wilson, Sonsini, Goodrich & Rosati in Silicon Valley, believes these results are driven by a combination of factors.  She believes that many of the companies were preparing to go public before the Act was signed. Thus, they likely were prepared to provide five years of financial data and comply with previous accounting standard.

Petkanics also thinks use will vary by industry. For instance, in industries where it “is important for the company to show strong growth for investors, they will show the full five years required by the previous regulation,” says Petkanics.  “However, if the company is in biotech or cleantech, which are primarily R&D companies, the full five years will be less important to investors.” Thus, in these industries, companies more likely will take advantage of the reduced filing requirements.

Underwriter preference also could be driving these results, says Petkanics. “The company underwriting the IPO may prefer the old standard and may suggest the old standard to their clients,” she says.  We will have to wait for a larger sample size, but Professor Petkanics believes that what happens in the next twelve months will be telling.

Firm Advice: Your Weekly Update

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

Last Year, Wilson Sonsini Goodrich & Rosati surveyed the 45 venture-backed companies involved in the largest IPOs regarding their corporate governance and disclosure practices.  The firm recently published the results. The survey covers director selection, composition, and independence, as well as law firm and underwriter choice. Wilson Sonsini represented the most issuers, while Davis Polk represented the most underwriters. Morgan Stanley and J.P. Morgan were the most frequently chosen lead underwriters.

On October 11, the CFTC issued two interpretive letters offering guidance on which securitization vehicles and real estate investment trusts may enter swaps and still not register as a “commodity pool” subject to regulation and registration requirements of the CFTC. In general, the CFTC is “less likely to find that an entity is a commodity pool” if 1) the entity enters swaps only to hedge or mitigate risks from its primary business, and 2)the swaps are not expected to contribute materially to the profits of the entity.  In a recent News Bulletin, Morrison & Foerster explains the requirements and places them in the context of the Dodd-Frank Act.

Manhattan U.S. Attorney Files Billion Dollar Lawsuit Against Bank of America, Citing “Brazen” Mortgage Fraud

By Mark Rutter, J.D. Candidate 2015 | Posted on

On October 24th, the United States Attorney for the Southern District of New York, Preet Bharara, along with the Inspector General of the Federal Housing Finance Agency and the Special Inspector General for the Troubled Asset Relief Program (TARP), announced a civil mortgage fraud lawsuit against Bank of America Corporation and Countrywide Home Loans, Inc., seeking punitive and treble damages under the False Claims Act, 31 U.S.C. §3729.

The complaint alleges a systematic lack of oversight in the loan origination process, known as the High Speed Swim Lane, which led to defaults and foreclosures resulting in over a billion dollars in losses for the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. The High Speed Swim Lane (“the Hustle”) process originated at Countrywide in 2007 in the face of tightening loan purchase requirements by the GSEs, and was continued under Bank of America after its acquisition of Countrywide a year later. (more…)

New Berkeley Law Skills Course Opens Portal to the ‘Human Dimension’ of Lawyering

By Michael S. Young, J.D. Berkeley Law 2012, Associate, Perkins Coie LLP | Posted on

Since even before Dale Carnegie’s day, it has been common knowledge among climbers in the business world that aptitude will only get you so far — the key to success is in managing relationships.  For a long time, the self-help industry appeared to have the market cornered on offering tools for cultivating better interpersonal relations.  But modern neuroscience indicates that mastery of interpersonal dynamics (sometimes called ‘emotional’ or ‘social’ intelligence’) is actually a teachable skill set.  “Skills of Exceptional Lawyers–Social Intelligence and the Human Dimension” a relatively new addition to Berkeley Law’s course catalog, seeks to help law students harness these powerful skills.

The course, now in its third year at Boalt, covers a wide range of interpersonal skills including body language and facial expression recognition, the art of “difficult conversations,” rapport-building, conflict resolution, decision-making, and cultivating meaningful self-awareness. (more…)

Wage Garnishment and Household Debt in CA

By Prasad Krishnamurthy, Assistant Professor, Berkeley Law | Posted on

California leads the nation in household debt.  According to the Federal Reserve’s most recent Quarterly Report, the average level of debt in California for an individual with a credit history is over $70,000.  Most of this debt consists of home mortgage loans, but about $10,000 per person consists of unsecured loans such as credit card debt and student loans.

Individuals and families who are struggling to make ends meet prioritize their mortgage and rent payments in order to avoid foreclosure and eviction.  As a result, the amount of delinquent debt—for which payments are 30 days or more late—is closely related to the amount of unsecured debt.  When workers fall behind on their unsecured debt, creditors can obtain a court order to deduct loan payments directly from a worker’s paycheck.  In this weak economy, thousands of workers face such wage garnishments. (more…)

News from the Bench: Kertesz v. GVC (2nd Circuit)

By Will Schildknecht, J.D. Candidate 2015 | Posted on

On October 17, 2012 the Second Circuit Court of Appeals ruled that Emory Kertesz, who had previously defended himself against a lawsuit brought by General Video Corporation (“GVC”) can pursue both an indemnification claim against GVC and an alter-ego corporate veil-piercing claim against the only other shareholder of the now defunct company. (more…)

Firm Advice: Your Weekly Update

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

As we mentioned earlier this week, Professor Bartlett soon will be presenting his paper on the value of the 10b-5 action to institutional investors. The paper uses evidence of trading behavior following the Supreme Court case Morrison v. National Australia Bank (2010)—a case that dealt with bringing securities fraud claims based on securities traded on foreign exchanges.  This week, Latham & Watkins presents the challenges of litigating securities fraud actions against foreign-based issuers of securities traded on domestic exchanges. These actions present special challenges in the areas of jurisdiction, service, and discovery. The paper, published as part of Bloomberg’s Securities Regulation & Law Report, is available for download here.

Skadden presents “The 2012 U.S. Supreme Court Term: Business Cases to Watch.” The upcoming term has several important business-related cases, including three class action cases: Amgen, Comcast, and The Standard Fire Insurance Co.  The court will also be considering in Royal Dutch Patroleum whether actions may be brought against companies for human rights abuses committed in other countries.  Skadden’s update provides brief summaries of these and other business-related cases facing the Court this term.

On November 1, EU Regulation 236/2012, which regulates the short selling of stock and sovereign debt in the European Economic Area, will come into effect. The regulation also places restrictions on taking uncovered short positions.  In a recent client alert, Ropes & Gray explains the specifics of whom and what types of securities are covered, as well as the sanctions for failure to comply.

Judge Orders Emails Published in Private Equity Antitrust Case

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

Following a request from the New York Times, a Federal Judge in the District of Massachusetts recently unsealed the complaint in a lawsuit against 11 private equity firms alleging a market allocation and bid-rigging conspiracy in violation of Section 1 of the Sherman Act. The complaint concerns 27 private equity company purchases from 2003-2007, and alleges that the private equity firms “agreed to work together to allocate deal outcomes and purchase the target companies at artificially suppressed prices.” The class-action complaint was brought on behalf of shareholders of the target companies.

The firms named as defendants in the lawsuit include Blackstone Group, Kohlberg Kravis Roberts, Bain Capital, and Carlyle Group.  The alleged conspiratorial transactions include the purchases of some of the most well known names in American commerce, including Toys R Us, Warner Music, Neiman Marcus, and Clear Chanel. (more…)

Professor Robert Bartlett to Present: “Do Institutional Investors Value the 10b-5 Private Right of Action?”

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

On November 1, 2012, Robert Bartlett will present at The Ohio State University “Do Institutional Investors Value the 10b-5 Private Right of Action?  Evidence from Investor Trading Behavior Following Morrison v. National Australia Bank Ltd. (2010).” Using an abrupt change in U.S. securities law, this paper examines the value institutional investors place on the private right of action under Rule 10b-5 of the Securities Exchange Act of 1934.  In June 2010, a combination of the U.S. Supreme Court’s decision in Morrison v. National Australia Bank Ltd. and Congress’ prompt response to it ensured that U.S. institutional investors would henceforth no longer be permitted to pursue private 10b-5 actions against many of the non-U.S. issuers in their international equity portfolios.  Rather, the U.S. antifraud regime that had increasingly been used by institutional investors to police foreign issuers would thereafter be limited to the domain of the SEC.  With this new regime of 10b-5 enforcement, however, came one critical exception for U.S. investors seeking to maintain their power to bring private 10b-5 actions: Investors purchasing securities traded on a U.S. stock exchange could continue to bring 10b-5 actions against the issuing company regardless of its domicile. In effect, the combination of this new bright-line rule and the fact that so many non-U.S. firms trade on both foreign and U.S. exchanges provided investors with something that had historically been difficult to achieve—the power to choose whether a security comes with the right to sue under Rule 10b-5.

By analyzing a proprietary data set of equity trades made by 356 institutional investors during the thirty month period surrounding Morrison, this paper examines whether investors reallocated their international buy-orders in cross-listed issuers from foreign markets to U.S. exchanges to exercise this newfound power.  Notwithstanding the oft-voiced concerns among institutional investors that Morrison would encourage such a reallocation, the results of this study reveal a remarkable persistence in the allocation of investors’ purchase orders following the decision.  Indeed, the overall trend in the fifteen months following Morrison was a modest decrease in U.S.-exchanged based purchases even after controlling for ADR trading costs.  Overall, the absence of any significant change in trading behavior among this large sample of investors suggests that whatever concerns animate institutional investors’ public policy positions when it comes to Rule 10b-5 are not necessarily shared by their trading desks.