Wachtell Discusses the Supreme Court’s Decision in Amgen

A divided Supreme Court ruled on February 27th that proof of materiality is not a prerequisite to certification of a Rule 10b-5 securities fraud class action. Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085 (Feb. 27, 2013).

The elements of a Rule 10b-5 claim include proof of a material misrepresentation or omission and reliance upon such misrepresentation or omission. Plaintiffs in securities fraud class actions typically seek to invoke the “fraud-on-the-market” presumption set out in Basic Inc. v. Levinson, 485 U.S. 224 (1988) to establish reliance. In Basic, a case in which only a … Read more

Should Angel-Backed Start-ups Reject Venture Capital?

My new Essay Should Angel-Backed Start-ups Reject Venture Capital? challenges the conventional wisdom that venture capital is a necessary – and even desirable – source of financing for all start-ups.  In particular, this Essay argues that some start-ups that attract angel investors should stop there, rejecting proffers of venture capital that may follow. The Essay challenges the notion that venture capital is a necessary condition for start-up success, and argues the counterintuitive proposition that venture capital may actually be harmful to entrepreneurs and angel investors in some situations.

At the outset, I observe that angels are now able to fund … Read more

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Editor's Tweet: Professor Darian Ibrahim of Wisconsin Law discusses whether angel-backed start-ups should reject venture capital.

Harnessing Tomorrow’s Technology for Today’s Investors and Markets

The following post is based on a speech Chairman Walter gave at the American University School of Law in Washington D.C. on February 19, 2013

Thank you Dean Grossman. And thank you to the Washington College of Law for hosting me here today.

As many of you are students, you already understand the importance of investing. You or your parents likely invested hard-earned dollars to pay for your tuition. At the SEC, our job is to see that when you begin investing on your own, that you have a fair chance of having something to show for it at the … Read more

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Editor's Tweet: SEC Chairman Elisse Walter discusses how the SEC is harnessing tomorrow's technology for today's investors and markets.

The Irrepressible Myths of BarChris

The year 2013 marks the forty-fifth anniversary of Escott v. BarChris Construction Corp., the seminal decision on the due diligence defense under Section 11 of the Securities Act of 1933.  Nearly a half century after it was decided, BarChris remains the landmark case on the rarely-litigated due diligence defense.

Under Section 11 of the Securities Act, an underwriter of securities is strictly liable for material inaccuracies in the registration statement filed with the SEC unless the underwriter successfully raises an affirmative defense.  The most notable such defense is the so-called “due diligence defense,” which requires that an underwriter perform … Read more

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Editor's Tweet: Professor Joseph K. Leahy of South Texas College of Law discusses two myths of the famous BarChris due diligence case

Money Market Fund Reform: Endorsement of the Minimum Balance at Risk Proposal

On February 28, I submitted a letter on Money Market Fund Reform to the Financial Stability Oversight Council in response to their November 2012 request for comments on a number of alternative proposals.  I endorse the so-called “Minimum Balance at Risk Proposal,” in which fund sponsors would create a capital buffer by contributing or raising capital of one percent of a money market fund’s assets while fund investors would be subject to delayed redemption of three percent of their account over $100,000.  This approach could cause sponsors to internalize the costs of portfolio security selection while forcing large fund investors … Read more

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Editor's Tweet: Professor Jeffrey N. Gordon of Columbia Law School discusses Money Market Fund Reform

Insider Trading Rules Need Rationalization

The current scope of the insider trading prohibition is arbitrary and unrationalized. Both sides in the debate should be able to agree on this, as the current scope is at the same time both underinclusive and overinclusive. On the one hand, if a thief breaks into your office, opens your files, learns material, nonpublic information, and trades on that information, he has neither breached a fiduciary duty nor “feigned fidelity” to the source and is presumably immune from insider trading liability under current law. On the other hand, if an employee of an acquiring firm seeks to test out information about a potential target with a friend at a major investor in the target and that investor later acquires more stock in the target based on that conversation, it is possible under SEC v. Obus that the employee will be deemed to have violated Rule 10b-5 on theory that he made a gift of the information, even though no payment or economic benefit is paid to the alleged tipper. This is considerably grayer behavior than that of the thief. Thus, drawing lines so that the thief escapes liability, while the inquiring employee does not, seems morally incoherent. Nor are such lines doctrinally necessary. Read more

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Editor's Tweet: Professor John C. Coffee, Jr. discusses the current scope of the insider trading prohibition and how it can be rationalized

Skadden on Swap Regulation: The CFTC and SEC Chart the Road Ahead

The Dodd-Frank Act authorized the CFTC and the SEC to develop comprehensive regulations for swap transactions and security-based swaps, respectively. Considering swaps generally were unregulated before Dodd-Frank, the CFTC and the SEC have been writing for two years on a blank slate. In 2012, the agencies began to fill in many of the blanks, but much work remains for 2013 and beyond.

In 2012, the CFTC and the SEC finished the specific joint Dodd-Frank Act assignments Congress gave them: The agencies finalized the product definitions (rules defining “swaps” and “security-based swaps”) and the entity definitions (rules defining “swap dealer” and … Read more

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Editor's Tweet: Skadden discusses the road ahead for swap regulation

Market Structure Reform: A Suggested Agenda for Mary Jo White

A series of rule changes begun under former SEC Chairman Arthur Levitt are largely responsible for turning deep, centralized, and diverse pools of liquidity for trading stocks into our current fragmented market structure.

Today’s market now includes thirteen stock exchanges and dozens of dark pools.  Dark pools are private trading venues that allow buyers and sellers to post orders that are hidden from the rest of the market.  They are shallow and non-diverse in their participation, have non-uniform matching rules, and, in many cases, are extremely non-transparent.

The bigger problem, however, is that in times of market stress, the current … Read more

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Editor's Tweet: Joe Saluzzi and Sal Arnuk, authors of the recent book, Broken Markets, suggest an SEC agenda for market structure reform.

The Risk of Information Overload

Commissioner Paredes gave the following remarks at the SEC Speaks in 2013 in Washington D.C. on February 22, 2013.  The views expressed are his own and do not necessarily reflect those of the Securities and Exchange Commission or his fellow Commissioners.

Disclosure is the cornerstone of the federal securities laws. For nearly 80 years, the SEC’s signature mandate has been to use disclosure to promote transparency. In his March 29, 1933, message to Congress, President Roosevelt said about the mandatory disclosure regime that would come to characterize federal securities regulation:

Of course, the Federal Government cannot and should not take … Read more

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Editor's Tweet: SEC Commissioner Troy Paredes discusses better the need for better disclosure and the risk of information overload.

Mutual Fund Sales Notice Fees: Are a Handful of States Unconstitutionally Exacting $200 Million Each Year?

My recent article, Mutual Fund Sales Notice Fees: Are a Handful of States Unconstitutionally Exacting $200 Million Each Year? appearing in the current issue of the Hastings Constitutional Law Quarterly, examines the constitutional validity of the notice filing fees paid by mutual funds to six “Premium Fee States,” – Texas, Washington, Minnesota, Wisconsin, Nebraska and West Virginia.  While these six states account for only 15% of the U.S. population, each year, these six states are paid approximately 50%, or approximately $200 million, of the total notice filing fees paid by mutual funds to all states.

As background, the article describes … Read more

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Editor's Tweet: Dechert's David M. Geffen discusses his recent article on the constitutionality of mutual fund sales notice fees.

Shareholders Need Robust Disclosure to Exercise Their Voting Rights as Investors and Owners

In the next few months, thousands of public companies will hold their annual shareholder meetings. I would like to take this opportunity to emphasize the importance of robust proxy disclosure to shareholders and to highlight areas in which the disclosure can be substantially improved. I share the desire expressed by many investors for additional information that would enhance their ability to make informed voting and investment decisions.1

The annual meeting is an opportunity for shareholders, who are the true owners of public companies, to exercise the right to vote, in person or by proxy,2 for the election of … Read more

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Editor's Tweet: SEC Commissioner Aguilar discusses why shareholders need robust disclosure to exercise their voting rights

Regulatory Competition and Anticorruption Law

My paper, Regulatory Competition and Anticorruption Law, which was recently published in the Virginia Journal of International Law, responds to arguments that the recent increase in European enforcement of anti-bribery laws has created a risk of overenforcement. Critics of the current international regime, including the U.S. Chamber of Commerce and several academics, have argued that cracking down on bribery of government officials by rich-world firms will leave the field open to multinationals whose home countries do not care about corruption (China and India typically are mentioned). These critics would have the United States relax its international bribery rules by … Read more

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Editor's Tweet: Professor Paul Stephan of UVA law discusses international bribery rules and the dynamics of regulatory competition.

Facebook IPO derivative ruling: a cure for multiforum madness?

Every company considering an IPO owes a hearty thanks to U.S. District Judge Robert Sweet of Manhattan for his decision Wednesday to dismiss four shareholder derivative suits against Facebook board members. Sweet’s painstaking 70-page opinion includes holdings that are great for Facebook’s defense of a parallel securities class action over its disclosures to IPO investors, but the judge also reached precedent-setting conclusions on standing and ripeness that will help other derivative defendants ward off IPO-based claims in state court. Facebook’s lead lawyers, Andrew Clubok of Kirkland & Ellis and Richard Bernstein of Willkie Farr & Gallagher, certainly deserve credit … Read more

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Editor's Tweet: Alison Frankel discusses the SDNY's Feb. 13th opinion regarding Facebook's IPO.

Wachtell Lipton Discusses Rulemaking Petition for Modernization of Section 13 Beneficial Ownership Reporting Rules

NYSE Euronext, the Society of Corporate Secretaries and Governance Professionals and the National Investor Relations Institute have jointly filed a rulemaking petition with the SEC, seeking prompt updating to the reporting rules under Section 13(f) of the Securities Exchange Act of 1934, as well as supporting a more comprehensive study of the beneficial ownership reporting rules under Section 13. The petitioners urge the SEC to shorten the reporting deadline under Rule 13f-1 from 45 days to two business days after the relevant calendar quarter, and also suggests amending Section 13(f) itself to provide for reporting on at least a monthly, … Read more

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Editor's Tweet: Wachtell Discusses a Rulemaking Petition Calling for Modernization of Section 13 Beneficial Ownership Reporting Rules

The ICE Acquisition of NYSE Is a Failure for Europe

In 2011, the Deutsche Boerse Group launched an offer on the New York Stock Exchange. Everybody expected that the U.S. authorities would object to this foreign acquisition of the most iconic Stock Exchange in the United States, and arguably in the world. Not only did it not happen, but very quickly the U.S. Department of Justice, quite naturally, concluded that there was no antitrust issue. Incidentally, NASDAQ made a desperate attempt to purchase the NYSE for $11.8 billion and the merger of the two largest cash equity exchanges of the United States was stiffly rejected by the U.S. authorities. Even … Read more

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Editor's Tweet: Georges Ugeux, CEO of Galileo Global Advisors, opines on the ICE acquisition of NYSE

The United States Supreme Court Will Review the Scope of Federal Preclusion of State Securities Claims

On January 18, 2013, the United States Supreme Court granted certiorari to resolve a circuit split concerning the extent to which the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”) preempts state law claims that indirectly arise out of securities claims. The case could have important implications for investor suits against hedge funds and other investment funds that are not themselves covered by SLUSA, but that are set up for the purpose of investing in equities, options, and other covered securities.1

The Supreme Court granted review in three consolidated cases that arose from the $7 billion dollar Ponzi scheme … Read more

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Editor's Tweet: Dechert's Engel, Steiner, and Wald discuss the Supreme Court's grant of cert regarding SLUSA preemption of state law securities claims.

Gone With the Wind: Small IPOs, the JOBS Act, and Reality

A dramatic reversal occurred in the capital markets, beginning around 2000, and its causes and implications appear to have been widely misunderstood. From 1980 to 2000, an average of 310 operating companies did initial public offerings (IPOs) each year, but from 2001 to 2011, this number fell by over two-thirds to only 99 operating companies per year.This decline cannot be explained by macro-economic conditions as Gross Domestic Product more than doubled over this period.

Moreover, this decline has been even more precipitous in the case of smaller IPOs (hereinafter defined to mean IPOs of companies with pre-issuance annual … Read more

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Editor's Tweet: Professor Coffee discusses small IPOs, the JOBS Act, and reality. He suggests some alternative explanations for the decline of the IPO.

The Proper Role of the Federal Government in Corporate Governance

Commissioner Daniel M. Gallagher delivered the below remarks before the Corporate Directors Forum at the University of San Diego, San Diego, California, on January 29, 2013:

Thank you Anne [Sheehan] for your very kind introduction.  I am honored to be here today.  Conferences like this are critically important, and all too rare, opportunities for directors, executives, shareholders, and regulators to interact.

Before I go any further, I need to provide the standard disclaimer that my remarks today are my own and do not necessarily reflect the views of the Commission or my fellow Commissioners.

Today I would like to talk … Read more

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Editor's Tweet: SEC Commissioner Daniel M. Gallagher discusses the proper role of the federal government in corporate governance

The Case for Transparency in Corporate Political Spending

A committee of law professors that I co-chair with Lucian Bebchuk has petitioned the SEC  to develop rules requiring public companies to disclose the use of shareholder money on politics. The petition has received unprecedented support, including comments from more than 300,000 individuals, institutional investors, and members of the U.S. Senate and House of Representatives. The SEC’s Division of Corporation Finance recently confirmed that the SEC is actively considering the petition, and the SEC’s entry in the Administration’s Unified Regulatory Agenda indicates that the SEC plans to propose rules by April.

In response, opponents of such rules are … Read more

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Editor's Tweet: Professor Robert Jackson of Columbia Law School responds to recent opposition to disclosure of corporate spending on politics

Congressional Use of the Federal Securities Laws To Achieve Social and/or Foreign Policy Goals: Trend or Aberration?

Many domestic and foreign companies that file periodic reports with the US Securities and Exchange Commission (“SEC” or “Commission”) are now coming to grips with three novel and highly prescriptive disclosure requirements dictated by Congress. What distinguishes these new requirements from most, if not all, existing securities disclosure standards is their unique focus on achieving humanitarian and/or foreign policy objectives that are largely unrelated to the central purposes of the federal securities laws – the protection of investors and the facilitation of efficient capital formation and secondary market trading through full and fair disclosure. Two “miscellaneous” provisions of the Dodd-Frank … Read more

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Editor's Tweet: Cathy Dixon of Weil Gotshal discusses the new social benefit disclosure requirements: conflict minerals, resource extraction, Iran