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

The SEC has announced a new cooperation initiative out of its Enforcement Division to encourage issuers and underwriters of municipal securities to self-report certain violations of the federal securities laws rather than wait for their violations to be detected.

Under the Municipalities Continuing Disclosure Cooperation, or  MCDC, Initiative, the Enforcement Division will recommend standardized, favorable settlement terms to municipal issuers and underwriters who self-report that they have made inaccurate statements in bond offerings about their prior compliance with continuing disclosure obligations specified in Rule 15c2-12 under the Securities Exchange Act of 1934.

Rule 15c2-12 generally prohibits underwriters from purchasing or selling municipal securities unless the issuer has committed to providing continuing disclosure regarding the security and issuer, including information about its financial condition and operating data.  The rule also generally requires that municipal bond offering documents contain a description of any instances in the previous five years in which the issuer failed to comply, in all material respects, with any previous commitment to provide such continuing disclosure.

The SEC also published a form which you can use to turn yourself in.

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.

A recent study by Crowdnetic indicates Regulation D offerings under Rule 506(b) without general solicitation continue to dominate over Rule 506(c) offerings with general solicitation.  The charts beginning on page nine of the report make this apparent.  Other interesting data includes:

  • The total offering amount in 506(c) offerings, according to the Form D filings, is $38.7 billion for the period from September 23, 2013 to February 28, 2014.  This apparently includes outlier 506(c) issuers in the Form D filings, including five issuers that have collectively reported $24.5 billion as the total offering amount on their respective Form D filings.
  • The average total offering amount across all industry groups was $72.1 million for 506(b) filings and $52.8 million for 506(c) filings.
  • According to the Form D filings data, there are 963 506(c) Form D filings through February 28, 2014. Of these, 682 have successfully raised capital (i.e., total amount sold under Form D, line 13, is greater than $0).

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.

On March 6, 2014, the SEC brought charges of securities fraud against a handful of executives and finance professionals from the now-defunct global mega-firm Dewey & LeBoeuf.  The SEC alleges that the firm’s co-chairmen (Steve Davis and Steve DiCarmine, known as “the two Steves”) and finance team cooked the books upon which a $150 million bond offering was based.  This was apparently the endpoint of accounting fraud that is alleged to have begun in 2008, when Dewey & LeBoeuf was reeling from the financial crisis and was in risk of defaulting on their financing covenants.   This story has been widely covered in a number of sources, including the New Yorker’s blog, the Economist, and most major news sources.  Rather than attempt to recreate all of that reporting, this blog post provides a few points of interest gleaned from these various sources.

  • When the fraud allegedly began, back in 2008, the firm fabricated $36 million in order to comply with its financing covenants.  The methods by which this alchemy was accomplished include reclassifying compensation of certain personnel as equity distributions in the amount of $13.8 million (even though the personnel had no equity in the firm), reinstating as receivables millions of dollars it had previously written off as uncollectible, reclassifying millions in credit card debt as “client disbursements,” and improperly accounting for the firm’s lease obligations. Other tricks the firm used over the years were counting partner capital contributions and loan payments as fee income, backdating checks, and double-counting revenues.
  • Part of the story is the carelessness with which the attorneys communicated via email about the accounting shenanigans.  An email proposing potential budget savings for the firm contains a $7.5 million line item labeled “Accounting Tricks.”  At least one finance professional wrote that he “didn’t want to cook the books anymore.”  At year-end 2008, after the various accounting tricks were settled upon, the firm’s chairpersons and finance professionals celebrated their cleverness via email.  For other noteworthy email nuggets, check out this Bloomberg article.
  • The firm’s auditors were Ernst & Young.  Internal Dewey & LeBoeuf emails refer to at least one auditor as “clueless,” and E&Y has apparently issued a statement (although I was unable to easily locate it) indicating that Dewey & LeBoeuf deceived them by withholding information and making misrepresentations.
  • Four persons – the two Steves, CFO Joel Sanders, and paralegal Zachary Warren — are facing criminal charges.  The New Yorker blog includes some discussion of the differences in burdens of proof in the criminal matter versus the civil matter, and indicates that there may be difficulty actually implicating the two Steves in the fraud.  If you are registered with Scribd, you can download the 106 count indictment here.
  • Steve DiCarmine seems to be a true caricature.  His cousin Vinny (yes, he has probably earnestly referred to “my cousin Vinny” in conversation  before), who lived with him growing up and is as close as a brother, is the former head of the Basciano crime family and is currently serving a life sentence.  Steve DiCarmine testified in defense of his cousin at his trial, where the death penalty was avoided in favor of the life sentence.  Mafia members reportedly considered Steve DiCarmine to be the family’s Michael Corleone.
  • DiCarmine received a rich salary at Dewey & LeBoeuf, despite reports that he had no clients and generated no fees.  He kept a suite at the high-end One Aldwych hotel in London.  The suite allegedly remained stocked with his expensive suits when he wasn’t there.  DiCarmine also kept a house in the Hamptons and a Miami Beach apartment.  He was reported to have taken his staff to a restaurant in East Harlem popular with mob bosses, and to have been greeted there like a family member.
  • James B. Stewart published a long piece in the New Yorker back in October 2013 detailing the collapse of Dewey & LeBoeuf.  It’s worth reading (or re-reading) with the securities fraud allegations in mind.

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.

Certain companies subject to the conflict minerals rules requirement must commission an independent private sector audit, or IPSA, of certain sections of the conflict minerals report.  The IPSA must be conducted using either the Attestation Engagement or Performance Audit standards of the US Government Accountability Office Government Auditing Standards (referred to as “GAGAS” or the “Yellow Book”).  The GAGAS includes standards for Attestation Engagements and Performance Audits.

Attestation Engagements can only be performed by CPAs (or those working directly under the supervision/direction of a CPA).  The American Institute of Certified Public Accountants (AICPA) and GAGAS both govern Attestation engagements, including those covering CMRs.

Performance Audits must be conducted by appropriately-qualified auditors and are not governed by AICPA.

The Auditing Roundtable, through the Conflict Minerals Interest Group, undertook an initiative to develop auditor guidance for those conducting IPSA Performance Audits, especially auditors in the environmental, health, safety, sustainability and social responsibility auditing (EHSSS) practice area.  The guidance is intended to provide a basis for consistency and substantive interpretations and was developed to be consistent with the CPA auditor guidance published by AICPA.

In this regard, it is critical that the IPSA auditor understand key limitations in the audit scope under this objective. In the preamble to the final rule, SEC recognized that this objective “is not as comprehensive as an audit objective requiring an auditor to express an opinion or conclusion as to whether the due diligence measures were effective, or to express an opinion or conclusion as to whether or not the issuer’s necessary conflict minerals are “DRC conflict free.”

Some of the specific limitations are as follows:

  • The audit scope/objective does not require that the audit confirm the conflict status or source determinations, such as whether the issuer’s products are “DRC conflict free” as that term is defined.
  • The audit scope/objective does not require that the audit confirm or assess the effectiveness of the issuer’s due diligence measures.
  • The final release does not require an audit of the entire CMR. The audit is limited only to the sections of the CMR that discuss the design of the issuer’s due diligence framework and the due diligence measures the issuer performed.
  • The financial accounting of money to armed groups is not within the scope of the IPSA audit objective.

We’re not saying whether the guidance is good or bad or fulfills everyone’s dreams, just that it exists.

Hat tip to The Elm Consulting Group International LLC for pointing out this development.

And yes, this is blog post  number 1,000 on Dodd-Frank.com.  We thank our loyal readers for their interest.

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 will hold a public conference on Thursday April 3, 2014, to discuss end-user issues with the Dodd-Frank Act, including the appropriate regulatory treatment of forward contracts with embedded volumetric optionality. Identifying such contracts has generated considerable confusion and numerous requests from the energy industry for the CFTC to clarify. The agenda for the conference will be published later.

 

A new paper suggests that Dodd-Frank significantly affects small banks and their customers. A large majority of respondents viewed Dodd-Frank as more burdensome than the Bank Secrecy Act, and the participating banks reported substantially increased compliance costs in the wake of new regulations. These costs include hiring new compliance personnel, increased reliance on outside compliance experts, additional resources allocated to compliance, and more time spent by noncompliance employees on compliance. The increased regulatory burdens have led small banks to reconsider their product and service offerings, including considering whether to stop providing residential mortgages and overdraft protection. The authors believe many small bank customers, who will have difficulty locating convenient alternatives, will feel the indirect effects of Dodd-Frank.

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 and FERC announced the initial transmission of market data under the recently adopted CFTC-FERC Memorandum of Understanding (MOU) for use in analyzing market activities and protecting market integrity. The two agencies also announced the creation of a staff-level Interagency Surveillance and Data Analytics Working Group to coordinate information sharing between the agencies and focus on data security, data sharing infrastructure, and the use of analytical tools for regulatory purposes. The Acting Chairpersons for the agencies stated that these steps will strengthen oversight, and better ensure the integrity, of energy markets.

Check dodd-frank.com frequently for updated information on the the Dodd-Frank Act, the JOBS Act and other important derivatives and securities law matters.

Section 806 of the Sarbanes-Oxley Act, codified at 18 U.SC. §1514A provides in part that:

“No [public] company . . . , or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of [whistleblowing or other protected activity].”

The US Supreme Court recently held that the foregoing provision shelters employees of private contractors and subcontractors working for a public company, just as it shelters employees of the public company served by the contractors and subcontractors.

The obvious questions is “where might this end?” The dissent states:

“As interpreted today, the Sarbanes-Oxley Act authorizes a babysitter to bring a federal case against his employer—a parent who happens to work at the local Walmart (a public company)—if the parent stops employing the babysitter after he expresses concern that the parent’s teenage son may have participated in an Internet purchase fraud. And it opens the door to a cause of action against a small business that contracts to clean the local Starbucks (a public company) if an employee is demoted after reporting that another nonpublic company client has mailed the cleaning company a fraudulent invoice.”

As usual, the majority does not really believe the dissent, but does not draw concrete limiting principles, and bandies about ideas in briefs and statements in oral arguments:

“Plaintiffs and the Solicitor General observe that overbreadth problems may be resolved by various limiting principles. They point specifically to the word “contractor.” Plaintiffs note that in “common parlance,” “contractor” does not extend to every fleeting business relationship. Instead, the word “refers to a party whose performance of a contract will take place over a significant period of time.” . . . (“Nothing in §1514A implies that, if [a privately held business] buys a box of rubber bands from Wal-Mart, acompany with traded securities, the [business] becomes covered by §1514A.”).

and

“The Solicitor General further maintains that §1514A protects contractor employees only to the extent that their whistleblowing relates to “the contractor . . . fulfilling it srole as a contractor for the public company, not the contractor in some other capacity.” . . . (“[I]t has to be a person who is in a position to detect and report the types of fraud and securities violations that are included in the statute. . . . [W]e think that ‘the contractor of such company’ refers to the contractor in that role, working for the public company.’”).”

In the end, the court leaves the question for another day.  The Court stated “Finally, the Solicitor General suggests that we need not determine the bounds of §1514A today, because plaintiffs seek only a “mainstream application” of the provision’s protections. . . .We agree.”

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 Board of Governors of the Federal Reserve System (Board) has extended the date – until April 16, 2014 – to comment on whether additional restrictions should be imposed on the physical commodities activities of financial holding companies.

On January 16, 2014, the Board issued for comment an advanced notice of proposed rulemaking, a precursor to a more formal rulemaking process, on whether to impose such additional restrictions to ensure “that physical commodities activities of financial holding companies are conducted in a safe and sound manner and do not pose a threat to financial stability” (read Board’s news release). Because additional restrictions on financial holding companies could reduce liquidity in FERC wholesale gas and electric markets, energy market participants have urged caution in making such changes. For example, the Electric Power Supply Association, representing competitive wholesale generators, recently recommended, “carefully analyz[ing] the impact of any potential changes as to bank activities in commodities markets on sectors such as competitive wholesale power. Competitive power suppliers rely on hedging strategies to manage and mitigate the price risk and volatility associated with fuel procurement and power output. Competitive suppliers require robust commodity markets that provide access to a variety of credit-worthy counterparties, including banks, that can reliably make markets, provide risk-management services, extend credit, and engage in other activities that support commodity trading.” EPSA on Bank Role in Commodity Markets for Energy End-Users, January 14, 2014, available at www.epsa.org

The original comment date was March 15, 2014. But the Board extended the comment period for 30 days, until April 16, saying, “[d]ue to the range and complexity of the issues addressed in the advance notice of proposed rulemaking, the Board has determined that an extension of the public comment period until April 16, 2014, is appropriate. This action will allow interested persons additional time to analyze the notice and prepare their comments.”

The Municipal Securities Rulemaking Board, or MSRB, has received approval from the SEC to consolidate its multiple registration requirements and forms for municipal securities dealers and municipal advisors.

The MSRB’s consolidated registration rule becomes effective on May 12, 2014 for all municipal securities dealers and municipal advisors seeking to register with the MSRB. New registrants will access electronic Form A-12 through MSRB Gateway.

Also beginning May 12, firms that are currently registered with the MSRB under the previous requirements will have 90 days to verify, update and complete their registration information, which will be transferred to the new form automatically by the MSRB. The MSRB will provide these firms with additional information and resources to assist them in transitioning their registration information to the new form by the compliance deadline of August 10, 2014.

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.