Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

An SEC registrant recently announced it had delayed its annual meeting from June 12, 2014 to September 11, 2014 because of this lawsuit.

What’s the lawsuit about? Plaintiffs claim the company, a Delaware corporation, did not count abstentions as “no” votes when the most recent increase in the share reserve was put to the shareholders at a special meeting in February 2013, which as an aside nearly tripled the share reserve.

And it makes a difference, because the complaint and SEC filings disclose 77,011,739 shares were voted for the plan amendment, 57,907,345 shares were voted against and there were 36,252,581 abstentions, and no broker non-votes. There were no broker non-votes because it was a special meeting that did not have any routine proposals on the agenda on which brokers could vote.

The complaint alleges the abstention should be counted as a “no” because abstentions result from shares that are entitled to vote, but decided not to, and goes onto to cite three pages of authorities in support of plaintiff’s position.

It doesn’t look like the Company ever filed an S-8 to register the shares, so there is no legal opinion to look at to see if a law firm supported the defendants’ position.

The complaint then goes on to paint a dark picture, alleging that after the defendants realized this defect, they amended their by-laws to support their position.

For the meeting which is delayed, the company has requested another 30 million share increase in the plan reserve. The plaintiff claims the most recent proxy statement is false and misleading because, among other things, it does not disclose the 2013 vote did not properly increase the reserve under the stock plan.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The Dodd-Frank Act permits certain end-users to elect to use an exception to the swap clearing requirements under certain conditions, which is referred to as the end-user exception.  For public companies, the ability to elect the end-user exception requires a committee of the public company to review and approve the decision to use uncleared swaps. When rules related to the end-user exception were adopted, the CFTC stated “The Commission would expect an SEC Filer’s board to set appropriate policies governing the SEC Filer’s use of swaps subject to the end- user exception and to review those policies at least annually and, as appropriate, more often upon a triggering event (e.g., a new hedging strategy is to be implemented that was not contemplated in the original board approval).” We therefore suggest public companies have a procedure for an annual or more frequent board or committee review to permit use of the end-user exception.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Today the CFTC published its proposed rule that would exclude most swaps used by municipal utilities for hedging purposes from counting against the $25 million swap dealer de minimis threshold that currently applies to swaps with “special entities” (including municipal utilities, federal power marketing agencies, and other governmental organizations and pension plans and endowments). This should expand the pool of counterparties willing to enter into swaps with municipal utilities, as many counterparties previously avoided dealing with such utilities to avoid having to register as, and comply with the comprehensive regulatory requirements applicable to, swap dealers.

Under the proposed rule, “utility operations-related swaps” with “utility special entities” will only count against the general $8 billion de minimis threshold applicable to a counterparty’s aggregate gross notional amount of swap-dealing swaps during any 12-month period and not the additional, much lower, $25 million limit applicable to swap dealing with special entities.

The rule defines “utility special entity” as a special entity that:

(i) Owns or operates electric or natural gas facilities, electric or natural gas operations or anticipated electric or natural gas facilities or operations;
(ii) Supplies natural gas or electric energy to other utility special entities;
(iii) Has public service obligations or anticipated public service obligations under Federal, State or local law or regulation to deliver electric energy or natural gas service to utility customers; or
(iv) Is a Federal power marketing agency as defined in Section 3 of the Federal Power Act, 16 U.S.C. 796(19).

The rule defines “utility operations-related swap” as a swap that meets the following conditions:

(i) A party to the swap is a utility special entity;
(ii) A utility special entity is using the swap [to hedge or mitigate commercial risk] in the manner described in § 50.50(c) of this chapter;
(iii) The swap is related to an exempt commodity [e.g., energy or metals commodity], as that term is defined in Section 1a(20) of the Act; and
(iv) The swap is an electric energy or natural gas swap; or the swap is associated with: [t]he generation, production, purchase or sale of natural gas or electric energy, the supply of natural gas or electric energy to a utility special entity, or the delivery of natural gas or electric energy service to customers of a utility special entity; fuel supply for the facilities or operations of a utility special entity; compliance with an electric system reliability obligation; or compliance with an energy, energy efficiency, conservation, or renewable energy or environmental statute, regulation, or government order applicable to a utility special entity.

Any counterparty relying on the utility special entity exclusion to avoid registration as a swap dealer must file notice of such reliance with the National Futures Association.

At present, while the proposed rule is pending, parties may rely on the substantially similar relief provided by CFTC No-Action Letter No. 14-34 (Mar. 21, 2014).

The SEC has filed documentation with the District of Columbia Court of Appeals seeking an en banc rehearing of the conflict minerals decision. The original decision found that one piece of the disclosure required by the rule—the requirement that issuers report to the Securities and Exchange Commission and state on their website “that any of their products have not been found to be ‘DRC conflict free’”—compelled speech in violation of the First Amendment.  The SEC is seeking a rehearing because the same court granted en banc rehearing in American Meat Institute v. United States Department of Agriculture, to consider whether rational basis review can apply to compelled disclosures even if they serve interests other than preventing deception.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

 

The holy grail (at least so far) of conflict minerals precedents was filed with the SEC albeit perhaps too late for many issuers to wholesale change course.  But still excellent for a final form check.  Intel’s Form SD can be found here and its conflict minerals report can be found here.

Perhaps somewhat surprisingly Intel makes the “DRC Conflict Undeterminable” unconstitutional confession. As I said before, only a First Amendment lawyer could find real downside here. I suspect Intel wanted the stakeholder goodwill for describing some products as DRC Conflict Free and it may have been untoward not to point out some were not.  And there is the clear communications aspect, not talking about a bunch of stuff without a conclusion.  Which of course was NAM’s point.

Why did Intel file early?  Maybe they couldn’t bear to read anymore butchered filings like most of those that preceded it and wanted to show the world someone could do it right. A fifth filing was also been made on May 22.

The word is the SEC has been giving specific advice to those that call, as they should, but doesn’t want to do any more CDIs. The SEC supposedly wants issuers to share the SEC advice informally.  I guess it is regulation by hearsay, which will probably show up in the next NAM brief.  In any event, both Broc Romanek’s TheCorporateCounsel.net and The Elm Consulting Group will be acting as information brokers, so keep your eyes on those sites.

Speaking of regulation by hearsay, reputable sources indicate the SEC has stated that filers that are classified as “undeterminable” and don’t use the specific wording “DRC Conflict Undeterminable” in the text of the conflicts minerals report, need not make the disclosure concerning improvements to due diligence measures is the 2013 filing.  I am not sure of the rationale behind this position however.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

In a couple of speeches at Compliance Week 2014, SEC officials spoke of when it would be appropriate to bring an enforcement action against a Chief Compliance officer, or CCO.

SEC Commissioner Kara M. Stein said “If you read the facts in the cases we bring, you will see that they are not cases against CCOs that were promoting compliance.  Instead, they are cases against CCOs that were assisting fraud, ignoring red flags, not asking the tough questions, and not demanding answers.”

In another speech, Andrew Ceresney, Director of the SEC Division of Enforcement, noted:

  • I have found that you can predict a lot about the likelihood of an enforcement action by asking a few simple questions about the role of the company’s legal and compliance departments in the firm.  Are legal and compliance personnel included in critical meetings?  Are their views typically sought and followed?  Do legal and compliance officers report to the CEO and have significant visibility with the board?  Are the legal and compliance departments viewed as an important partner in the business and not simply as support functions or a cost center?  Far too often, the answer to these questions is no, and the absence of real legal and compliance involvement in company deliberations can lead to compliance lapses, which, in turn, result in enforcement issues.
  • But at the same time, I need to be clear that we have brought – and will continue to bring – actions against legal and compliance officers when appropriate.  This typically will occur when the Division believes legal or compliance personnel have affirmatively participated in the misconduct, when they have helped mislead regulators, or when they have clear responsibility to implement compliance programs or policies and wholly failed to carry out that responsibility.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The CFTC has a whistleblower award program that is separate from, but somewhat similar to, the SEC’s whistleblower award program. Both are mandated by the Dodd-Frank Act.

The CFTC has announced that the agency will make its first award to a whistleblower as part of its whistleblower program. According to the CFTC, the person will receive approximately $240,000 for providing valuable information about violations of the Commodity Exchange Act.

The CFTC announcement gives no details as to why the amount is being awarded.  While these awards are supposed to be confidential the enforcement action giving rise to the award is not named.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

We have reviewed prior SEC guidance on the municipal advisor rules, from a view point of structuring a business to avoid a municipal advisory role, here and here.  The SEC has now issued additional FAQs, including on the engineering exclusion.

According to the new FAQs, the SEC staff believes an engineer could rely on the engineering exclusion when providing advice on the engineering aspects of a new project that will be financed, in whole or in part, by an issuance of municipal securities; provided that such advice does not include advice with respect to structure, timing, terms, or other similar matters concerning such issuance of municipal securities. For example, an engineer could provide a municipal entity or obligated person with advice on:

  •  a new project’s specifications,
  • overall cost,
  • a projected construction schedule,
  • anticipated funding requirements, and
  • a projected in-service date.

The municipal entity, obligated person, or other financing transaction participant, in turn, could use such information to structure the related issuance of municipal securities, including determining the length of any capitalized interest period and the amount of capitalized interest to be financed from bond proceeds. The staff believes, however, that an engineer providing advice on how to structure the related issuance of municipal securities, including the length of any capitalized interest period and the amount of capitalized interest to be financed, would constitute municipal advisory activities outside the scope of the engineering exclusion.

Similarly, as part of providing advice on the engineering aspects of a new project, the staff believes an engineer could provide a municipal entity or obligated person with projected gross revenues that are derived from the physical connections to the project (e.g., water and sewer system), as well as projected operating and maintenance expenses and net revenues for such project. The municipal entity, obligated person, or other financing transaction participant, in turn, could use such information to structure the timing and terms of debt service payments on the related issuance of municipal securities and, based on such debt service structure and projected net revenues, provide a projected debt service coverage table for inclusion in the offering document for the issuance of municipal securities. The staff believes, however, that an engineer providing advice on how to structure the related issuance of municipal securities, including the timing and terms of debt service payments, would constitute municipal advisory activities outside the scope of the engineering exclusion.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Mary Jo White, Chair of the SEC, recently explained decisions in enforcement actions to a group of white collar crime lawyers.

Ever wonder why some cases draw both criminal and civil charges but others do not? Chair White talks through the progressive analysis but in the end notes “The bottom line is that the decision of whether a case will go criminal will typically turn on the strength of the evidence and the type of offense under investigation – which are the appropriate factors to consider in making such a determination.”

It’s news to me that many think the SEC doesn’t charge individuals often enough.  But apparently it is a common enough misperception that Ms. White sought to dispel the notion.   “The simple fact is that the SEC charges individuals in most of our cases, which is as it should be.  A recent Harvard survey shows that since 2000, the SEC has charged individuals in 93% of our actions involving nationally listed firms in which we charged fraud or violations of books and records and internal control rules.”

And you can’t set about indirectly inducing someone else to violate the law and avoid being charged by the SEC (another non-surprise).  Ms. White noted Section 20(b) imposes primary liability on a person who, directly or indirectly, does anything “by means of any other person” that would be unlawful for that person to do on his or her own. According to Chair White, the SEC is focusing on Section 20(b) charges where – as is frequently the case in microcap and other frauds – individuals have engaged in unlawful activity but attempted to insulate themselves from liability by avoiding direct communication with the defrauded investors.

In Ms. White’s view, negligence based charges are appropriate when an entity makes a material misstatement or omission in the offer or sale of securities and the evidence will not support holding any individual responsible.  According to Ms. White holding the entity responsible for the misstatements is the right thing to do if the evidence demonstrates that the entity’s conduct fell below the standard of reasonable care – for example, because it failed to have appropriate policies or procedures, failed to properly train its employees, or failed to structure its operations so that people making disclosure decisions are provided with the necessary information to make those decisions on an informed basis.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The SEC recently settled an enforcement action against an individual alleged to have sold millions of dollars in securities on behalf of oil and gas companies without being associated with a registered broker dealer, as required by Section 15(a) of the Securities Exchange Act of 1934. Under the terms of the settlement, Behrooz Sarafraz has agreed to pay more than $22 million in penalties, interest, and disgorged commissions. According to the SEC: “Sarafraz worked full-time locating investors for the Opus and Tri-Valley oil-and-gas ventures [two California-based companies]. He described the investment program to investors and recommended they purchase Opus partnership interests or securities of Tri-Valley and its affiliated entities. In return, Sarafraz received commissions that ranged from seven to 17 percent of the sales proceeds that he and members of a sales network generated.”

One common exemption from the requirement that a person engaged in selling securities must be associated with a registered broker-dealer applies to persons who are employed by the issuer; however, that exemption is only operative when the person has legitimate, non-securities-solicitation position with the issuer and the solicitation activities are incidental.

It appears that the SEC has been paying extra attention to oil and gas related offerings in the last few years (see SEC investor alerts relating to oil and gas offerings here and here). This settlement is a good reminder that the cost of non-compliance with the securities laws can be severe.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.