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

On February 2, 2016, the Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) announced a joint enforcement action against indirect auto lender Toyota Motor Credit Corporation (Toyota Motor Credit) for alleged discriminatory lending practices in violation of the Equal Credit Opportunity Act (ECOA).

The CFPB and DOJ allege that Toyota Motor Credit set interest rates, or “buy rates,” that it extended to auto dealers and permitted those dealers, in their discretion, to charge consumers up to an additional 2.5 percent interest over the buy rate, which constitutes a dealer “mark-up.”  The CFPB and DOJ investigation allegedly revealed that Toyota Motor Credit’s pricing policies (i) resulted in minority—African-American, Asian, and Pacific Islander—borrowers paying higher interest rates for their auto loans than non-Hispanic white borrowers as a result of the dealer markups; and (ii) injured thousands of African-American and Asian and Pacific Islander borrowers as a result of them being charged more for their auto loans than non-Hispanic white borrowers.

The CFPB consent order requires Toyota Motor Credit to:

  • reduce auto dealer discretion to mark up interest rates to only 1.25 percent (rather than 2.5 percent) on auto loans with terms of 5 years of less, and 1 percent for auto loans with longer terms;
  • pay $21.9 million into a settlement fund that will go to affected consumers; and
  • pay to hire a settlement administrator who will contact and distribute funds to affected consumers.

The CFPB did not assess penalties against Toyota Motor Credit, because the company took proactive steps “that directly address fair lending risk by substantially reducing or eliminating discretionary pricing and compensation systems.”

CFPB’s Controversial Auto Lending Enforcement History

The CFPB has made no secret about its desire to go after indirect auto lenders for what it calls discriminatory lending practices in violation of ECOA.  In fact, this enforcement action marks the fourth joint CFPB and DOJ public action related to dealer discretion in auto lending.  In 2013, the CFPB and DOJ took action against Ally Financial Inc. and Ally Bank (collectively, Ally), in which Ally was accused of discriminatory lending practices as a result of its use of dealer markups.  That enforcement action resulted in Ally agreeing to pay $80 million in consumer restitution and an additional $18 million in civil money penalties.

On November 24, 2015, in response to the Ally and other indirect auto lending enforcement actions taken by the CFPB, Republican members of the House of Representatives’ Financial Services Committee (the Committee) issued an initial report titled Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending, which blasts the CFPB for knowingly using unsound or weak methodology in order support its claims of discriminatory lending against indirect auto lenders.

Then, on January 20, 2016, the Committee issued a follow-up report titled Unsafe at Any Bureaucracy, Part II: How the Bureau of Consumer Financial Protection Removed Anti-Fraud Safeguards to Achieve Political Goals, which criticizes the CFPB for its actions following the Ally enforcement action.  Specifically, the Committee took the CFPB to task for the approach it used in developing and implementing the settlement process for the allegedly harmed Ally consumers.  Among other things, the Committee accused the CFPB of using unreasonable and unsound methods to identify minority consumers, which actually resulted in identifying not only consumers that were not harmed by Ally, but who were also not even minority.

With this latest enforcement action against Toyota Motor Credit, the CFPB appears to be doubling down on its efforts to extract a pound of flesh from indirect auto dealers.  Time will likely reveal whether the CFPB utilized similarly questionable methods to compel its latest settlement as it employed in the Ally action.  If so, perhaps we will see another report from Congress or perhaps greater intervention.  Stay tuned.

You can view the CFPB’s administrative consent order here:  http://files.consumerfinance.gov/f/201602_cfpb_consent-order-toyota-motor-credit-corporation.pdf.

You can view the DOJ’s complaint that was filed in the United States District Court for the Central District of California here:  http://www.justice.gov/opa/file/818476/download.

You can view more about the Financial Services Committee’s Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending Report here:  https://dodd-frank.com/house-of-representatives-issues-report-blasting-cfpb-on-the-heels-of-house-vote-to-repeal-cfpbs-auto-lending-guidance/.

You can view more about the Financial Services Committee’s Unsafe at Any Bureaucracy, Part II: How the Bureau of Consumer Financial Protection Removed Anti-Fraud Safeguards to Achieve Political Goals Report here:  https://dodd-frank.com/house-of-representatives-issues-part-ii-of-report-criticizing-cfpbs-auto-lending-enforcement-efforts/.

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 100 largest firms in the U.S., Stinson Leonard Street has 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.

Zane Gilmer is a member of the firm’s litigation practice group.  His practice focuses on business litigation and compliance and he is a member of the firm’s CFPB taskforce.  Zane works out of the firm’s Denver office and he can be reached at zane.gilmer@stinson.com or 303.376.8416.

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

 

 

 

On January 20, 2016, Republican members of the House of Representatives’ Financial Services Committee issued a report titled Unsafe at Any Bureaucracy, Part II: How the Bureau of Consumer Financial Protection Removed Anti-Fraud Safeguards to Achieve Political Goals, which criticizes the Consumer Financial Protection Bureau (CFPB) for its actions following its 2013 enforcement action against auto finance company Ally Financial Inc. and Ally Bank (collectively, Ally).

The Committee’s report focuses on the CFPB’s approach in designing and implementing the settlement process for the allegedly harmed minority consumers.  According to the report, the CFPB employed unreasonable processes to identify affect consumers that the CFPB knew were flawed.  The report alleges that “political exigency required the Bureau to design a process that would ensure that a sufficient number of alleged victims would be identified as eligible claimants,” because at the outset of the Ally enforcement action Director Cordray publicly announced that at least 235,000 consumers harmed by Ally would be paid $80 million, even though he “did not know the race of a single borrower in any vehicle finance contract purchased by Ally.”

In order to identify at least 235,000 allegedly affected consumers, the CFPB utilized statistics generated by using disparate impact methodology, known as Bayesian Improved Surname Geocoding (BISG), which the Committee blasted in an earlier November 24, 2015 report, discussed below.  The CFPB then sent notices to two groups of consumers that it identified as potentially affected.  As to the first group of consumers, the CFPB sent them a mailing that simply notified them that they would receive remuneration unless they expressly opted out.  The claims administrator sent out 201,212 notices to those consumers and only 0.46% of those consumers opted out.  As to the second group of consumers, the CFPB sent them a notice that indicated that they may be eligible for a payment, but to be eligible the consumer must be African American, Black, Hispanic, Latino, of Spanish origin, Asian, Native Hawaiian, or other Pacific Islander.  The second group of consumers were required to sign a participation form and send it to the claims administrator.  The claims administrator mailed 218,457 notices to the second group of consumers and 47.92% of consumers returned opt-in forms.

The Committee’s report criticized the CFPB’s failure to require any consumer from any group to (i) identify which minority group they associate with; (ii) affirm under oath that they were part of an affected minority group and otherwise entitled to payment.  The report further pointed out that by permitting the first group of consumers to passively participate in the settlement without requiring them to expressly opt-in, the number of participating consumers were artificially high.  As a result of CFPB’s settlement process, not only was the CFPB able to reach its initial estimates that at least 235,000 consumers would receive at least $80 million, but it also all but guarantees that non-minorities will also receive compensation.  In other words, the CFPB’s approach results in White, unharmed, consumers being compensated at the expense of Ally, simply to ensure that enough consumers were compensated to support Director Cordray’s initial remarks about the magnitude of the enforcement action.

November 2015 Report

This report follows the Committee’s November 24, 2015 release of its initial report titled Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending, which blasted the CFPB for knowingly using unsound or weak methodology in challenging auto lending practices based on allegations of discrimination.

Among other things, the initial report calls into question the statistical methods the CFPB used to allege racial discrimination in the auto lending industry.  In addition, the report challenges the CFPB’s reliance on the legal theory known as “disparate impact” to take action against auto lending companies for alleged discriminatory lending practices.  In a bit of irony, the report also accuses the CFPB of pursuing “its radical enforcement strategy using ‘unfair, abusive, and deceptive,’ tactics,” which is the very standard the CFPB is charged with enforcing against financial industry participants.

Representative Jeb Hensarling, Chairman of the Financial Services Committee, blasted the CFPB in a statement accompanying the release of House report, stating that the CFPB “is irresponsibly branding companies with the stigma of racial discrimination based on nothing more than junk science that even CFPB senior officials acknowledged is gravely flawed.  Why?  To cudgel those companies into enormous monetary settlements without ever having to go to court.  If it sounds like a shake down, that’s because it is.”

You can view the Financial Services Committee’s Unsafe at Any Bureaucracy, Part II: How the Bureau of Consumer Financial Protection Removed Anti-Fraud Safeguards to Achieve Political Goals Report here: http://financialservices.house.gov/uploadedfiles/cfpb_indirect_auto_part_ii.pdf.

You can view the Financial Services Committee’s Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending Report here:  http://financialservices.house.gov/uploadedfiles/11-24-15_cfpb_indirect_auto_staff_report.pdf.

You can view Chairman Jeb Hensarling’s press release here:  http://financialservices.house.gov/news/documentsingle.aspx?DocumentID=399984.

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 100 largest firms in the U.S., Stinson Leonard Street has 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.

Zane Gilmer is a member of the firm’s litigation practice group.  His practice focuses on business litigation and compliance and he is a member of the firm’s CFPB taskforce.  Zane works out of the firm’s Denver office and he can be reached at zane.gilmer@stinson.com or 303.376.8416.

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

A bill that would provide a federal statutory exemption from the broker-dealer registration requirements under Section 15(a) of the Exchange Act for certain so called “M&A brokers” has been placed on the calendar for consideration by the U.S. House of Representatives. M&A brokers are generally defined as persons who are subject to Section 15(a) only by reason of brokering M&A transactions that involve the sale of securities.  The bill, titled the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2015, is the latest form of proposed legislation that was first introduced back in June of 2013, in the 113th Congress.  The prior bill (identical in substance to the current bill) unanimously passed a house vote on January 14, 2014, but stalled in the Senate.  It is now being reintroduced to the House of Representatives of the 114th Congress.  However, this time around it may not receive unanimous support in the House, as democrats on the Committee on Financial Services appear to be opposing the legislation.

The sticking point is the omission of certain investor protections that Democrats now say are appropriate. Democrats claim that the original purpose of the bill was to spur the SEC to take action by granting exemptive relief to M&A brokers, which the SEC did on January 31, 2014 in its no-action letter providing that M&A brokers could receive transaction based compensation without running afoul of Section 15(a), provided that a number of requirements were met (you can find our explainer on the no-action letter here).   Since the SEC has now taken action, Democrats argue that the bill should be amended to include certain investor protections outlined by the SEC as conditions to relief in the no-action letter. From the committee report on the bill:

“To address this concern, Democrats offered an amendment that would amend the bill to include the several additional conditions that the SEC felt necessary to impose when providing the exemption. Those protections: exclude shell companies from eligible M&A transactions; exclude bad actors from being M&A brokers; prohibit M&A brokers from providing financing for the M&A transaction; require M&A brokers who represent both the buyer and the seller to obtain written consent from both parties to the transaction; prohibit passive buyers in the M&A transaction; prohibit M&A brokers from binding a party to a transfer of ownership of an eligible private company; and provide that any securities provided to the buyer or M&A broker in the transaction would be restricted securities. There has been no evidence that these conditions are inappropriate or onerous.”

Several of these investor protections were actually part of the bill as originally introduced, but were removed via amendment by the House Financial Services Committee in November of 2013. That action, along with the lack of a bad-actor disqualification in the bill, led the North American Securities Administrators Association to officially oppose the bill.

If adopted, the legislation would create new Section 15(b)(13) of the Exchange Act, which would exempt M&A brokers from registration under Section 15(a) as long as:

  • The sale of securities at issue relates to the transfer of ownership of an “eligible privately held company,” defined as a company (i) without any class of securities required to be registered or with respect to which the company is required to file periodic reports, and (ii) which, in the immediately preceding fiscal year, had EBITDA of $25 million or less or gross revenue of $250 million or less (subject to adjustment every five years)
  • The broker reasonably believes that after the transaction, the buyer or buyers (alone or with others) will control the eligible privately held company and will, directly or indirectly, be active in its management or the conduct of its business
  • If the seller will receive securities in the transaction, the seller is provided with certain financial disclosures of the issuer of the securities
  • The broker does not receive, hold, transmit, or have custody, directly or indirectly, of the funds or securities that are the subject of the transaction
  • The broker does not engage in a public offering on behalf of an issuer of a class of securities required to be registered or with respect to which the issuer is required to file periodic reports

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 100 largest firms in the U.S., Stinson Leonard Street has 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 January 28, 2016, the Consumer Financial Protection Bureau (CFPB) released its latest Monthly Complaint Report for December 2015, which provides an overview of three-month trends in consumer complaints.  This Monthly Report highlights consumer complaints related to “other financial service,” such as debt settlement, check cashing, money orders, and credit repair, as well as consumer complaints from the New York metro area.

Other Financial Service Spotlight

The CFPB tracks “other financial service” complaints, which are those complaints submitted by consumers that relate to financial services or products that fall outside of one of the CFPB’s major compliant categories.  Examples of the complaints that fall into this category include debt settlement, check cashing, credit repair, and money orders.  As of January 1, 2016, the CFPB has handled approximately 2,700 “other financial service” complaints.  Among other things, the data concerning the “other financial service” category reveal the following:

  • 60 percent of the complaints relate to debt settlement and credit repair companies, with many concerning companies charging up-front fees for those services; and
  • complaints related to money orders frequently concern error resolution processes that consumers had to deal with, as well as issues of suspected fraud or scams involving the requirement of advance payment for promised goods that are ultimately never delivered.

National Complaint Overview

As of January 1, 2016, the CFPB has handled 790,000 complaints across all consumer financial products and services regulated by the CFPB.  The Monthly Complaint Report includes the following statistics through December 2015:

  • the three most complained about financial products were credit reporting, debt collection, and mortgages, which together represented slightly more than two-thirds—or 68%—of all complaints submitted;
  • there was a 1% decrease in consumer complaints submitted between November and December 2015;
  • complaints related to prepaid products rose 233 percent in a year-to-year comparison for the months October through December;
  • of the five most populous states, Illinois displayed the sharpest rise—23%—in consumer complaints, in a year-to-year comparison between 2014 and 2015, for the time period of October through December; and
  • the most complained about companies between August and October 2015 were Equifax, TransUnion, and Experian.

New York Complaints

In addition to providing national consumer financial complaint trends, the Monthly Complaint Report also highlights complaints originating from the New York metro area.  Of the 790,000 complaints that have been submitted to the CFPB, 57,700 originated from the New York metro area (comprising parts of New York, New Jersey, Pennsylvania, and Connecticut).  Consumer complaints submitted by New York metro area consumers revealed the following:

  • mortgages are the most complained-about product, comprising 27 percent of all consumer complaints;
  • New York metro area consumer complaints largely mirror national trends; and
  • New York metro area consumers complained most about JPMorgan Chase, Experian, and Equifax.

CFPB’s Consumer Complaint Database

In June 2012, the CFPB launched its Consumer Complaint Database, which permits consumers to submit complaints about consumer financial products and services.  Once the CFPB receives a complaint it forwards the complaint to the relevant company for a response.  Companies generally have 15 days to respond to the complaint, unless an extension is secured in the meantime.  The consumer complaint and company’s response, if one is provided, is published on the public facing Consumer Complaint Database, which can be accessed and viewed by the public.  The information provided on the database can be valuable to not only consumers, but also to companies.  For example, it provides a valuable tool for companies to understand how consumers view the quality of the company’s products and services.  It also provides companies with an opportunity to evaluate whether complaint trends suggest that problems exist with certain products and services that need to be addressed to avoid or minimize regulatory action.  As such, although the Consumer Complaint Database is not generally viewed favorably by financial industry companies, it can provide valuable information.

You can view the CFPB’s Monthly Complaint Report here:  http://files.consumerfinance.gov/f/201601_cfpb_monthly-complaint-report-vol-7.pdf.

For more information on the CFPB’s consumer complaint process go here: https://www.stinson.com/Resources/PDF_Files/Navigating_CFPBs_Consumer_Complaint_Process.aspx.

You can view the CFPB’s Consumer Complaint Database here: http://www.consumerfinance.gov/complaintdatabase/.

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 100 largest firms in the U.S., Stinson Leonard Street has 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.

Zane Gilmer is a member of the firm’s litigation practice group.  His practice focuses on business litigation and compliance and he is a member of the firm’s CFPB taskforce.  Zane works out of the firm’s Denver office and he can be reached at zane.gilmer@stinson.com or 303.376.8416.

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

 

 

The Depository Trust & Clearing Corporation, or DTCC, is integrally involved with settlement of trades in public company stocks. It has issued a white paper examining the use of blockchain technology to settle securities trades.

As we noted in the Minneapolis Star Tribune, blockchain technology underpins bitcoin transactions in the form of an algorithm that allows bitcoin to be traded without a centralized ledger. The potentially disruptive nature of the technology is that it can also track the exchange of stocks, bonds and other financial securities, and almost anything else of value. Currently, securities are settled using a “closed ledger.” Blockchain technology is based on a distributed “open ledger.” Distributed ledgers use open, decentralized, consensus-based authentication methods unlike the current settlement process. The technology allows parties who do not know one another to work together to facilitate nearly instantaneous settlement, which eliminates costs, errors and systematic risk.

DTCC believes that distributed ledger technologies have the potential to address certain limitations of the current post-trade process by modernizing, streamlining and simplifying the siloed design of the financial industry infrastructure with a shared fabric of common information. The white paper notes that while distributed ledger technology has captured the imagination of the industry, key challenges with the platform will need to be overcome before it can be widely adopted or considered enterprise-ready. In addition, the industry itself needs to determine whether using the platform is more cost effective than improving existing technology and whether it can overcome its inherent scale and performance challenges.

The white paper states the industry hype and research into this new platform has been unprecedented but also generally uncoordinated up to this point. As a result, DTCC believes the industry is at risk of repeating the past and creating countless new siloed solutions based on different standards and with significant reconciliation challenges – essentially a new system with the same challenges we face today. DTCC advocates that the industry should engage in a collaborative rearchitecture of core processes and practices to ensure standardization. DTCC believes it is best positioned to support and coordinate the evaluation and standardization of the distributed ledger platform, help address industry challenges and determine whether it is a better solution than existing technology.

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 100 largest firms in the U.S., Stinson Leonard Street has 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 January 28, 2016, the House Committee on Financial Services reported favorably on the Small Company Disclosure Simplification Act.  The bill has been scheduled for consideration by the full U.S. House of Representatives.  Some commentators estimate this bill would affect roughly sixty percent of all reporting companies.

The bill proposes to exempt emerging growth companies (as defined in Section 3 of the Securities Exchange Act of 1934) and other issuers with total annual gross revenues of less than $250 million from the requirement to use eXtensible Business Reporting Language (“XBRL”) for financial statements and other periodic reports filed with the SEC. The exemption for issuers with less than $250 million in annual revenue, however, does include a three-to-five year sunset provision.  Under this provision, the exemption for such issuers will expire upon the earlier of: (i) five years after enactment or (ii) two years after a determination by the SEC (as required by the bill) that the benefits of requiring XBRL-formatted disclosures outweigh its costs to issuers, but in no event less than three years after enactment.

Data formatted in XBRL presents selected information included in periodic reports in an interactive fashion, allowing readers to jump to specific sections with the click of a button.  Filing financial and other data in XBRL usually requires issuers to contract with third-party services providers to ensure technical compliance with the SEC mandate.  Financial statements are the most typical type of information required to be presented in XBRL.

You can read the full text of the bill here.

_______________________________

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 100 largest firms in the U.S., Stinson Leonard Street has 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 registration process for Title III crowdfunding portals was recently commenced. So far we are aware of one Form Funding Portal that has been filed to begin the registration process. So that is good news.

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 100 largest firms in the U.S., Stinson Leonard Street has 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.

Chancellor Bouchard of the Delaware Court of Chancery rejected a disclosure settlement in In Re Trulia, Inc. Stockholder Litigation.  The Chancellor concluded the terms of the proposed settlement were not fair or reasonable because none of the supplemental disclosures were material or even helpful to Trulia’s stockholders, and thus the proposed settlement did not afford them any meaningful consideration to warrant providing a release of claims to the defendants.

These supplemental disclosures provided additional details concerning:

  • Certain synergy numbers in J.P. Morgan’s value creation analysis.
  • Selected comparable transaction multiples.
  • Selected public trading multiples.
  • Implied terminal EBITDA multiples for a relative discounted cash flow analysis.

Perhaps more importantly, the Chancellor offered his views on how plaintiffs and defendants can deal with these types of claims. According to the Chancellor, one way is the case could proceed to a preliminary injunction motion, in which case the adversarial process would remain intact and plaintiffs would have the burden to demonstrate on the merits a reasonable likelihood of proving that “the alleged omission or misrepresentation is material.”  In other words, plaintiffs would bear the burden of showing “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.

The Chancellor said another way is for plaintiffs’ counsel to apply to the Court for an award of attorneys’ fees after defendants voluntarily decide to supplement their proxy materials by making one or more of the disclosures sought by plaintiffs, thereby mooting some or all of their claims. In that scenario, where securing a release is not at issue, defendants are incentivized to oppose fee requests they view as excessive. Hence, the adversarial process would remain in place and assist the Court in its evaluation of the nature of the benefit conferred (i.e., the value of the supplemental disclosures) for purposes of determining the reasonableness of the requested fee.

According to the Chancellor, the preferred scenario of a mootness dismissal appears to be catching on. According to the Chancellor, the Court has observed an increase in the filing of stipulations in which, after disclosure claims have been mooted by defendants electing to supplement their proxy materials, plaintiffs dismiss their actions without prejudice to the other members of the putative class (which has not yet been certified) and the Court reserves jurisdiction solely to hear a mootness fee application. The Chancellor stated from the Court’s perspective, this arrangement provides a logical and sensible framework for concluding the litigation. After being afforded some discovery to probe the merits of a fiduciary challenge to the substance of the board’s decision to approve the transaction in question, plaintiffs can exit the litigation without needing to expend additional resources (or causing the Court and other parties to expend further resources) on dismissal motion practice after the transaction has closed. The Chancellor believes that although defendants will not have obtained a formal release, the filing of a stipulation of dismissal likely represents the end of fiduciary challenges over the transaction as a practical matter.

The Chancellor also observed that the parties also have the option to resolve the fee application privately without obtaining Court approval in the mootness scenario. A corporation’s directors have the right to exercise business judgment to expend corporate funds (typically funds of the acquirer, who assumes the expense of defending the litigation after the transaction closes) to resolve an application for attorneys’ fees when the litigation has become moot, with the caveat that notice must be provided to the stockholders to protect against “the risk of buy off” of plaintiffs’ counsel.   The Court has stated, “notice is appropriate because it provides the information necessary for an interested person to object to the use of corporate funds, such as by ‘challeng[ing] the fee payment as waste in a separate litigation,’ if the circumstances warrant.”  In other words, notice to stockholders is designed to guard against potential abuses in the private resolution of fee demands for mooted representative actions. With that protection in place, the Chancellor stated the Court has accommodated the use of the private resolution procedure on several recent occasions and reiterated the propriety of proceeding in that fashion.

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 100 largest firms in the U.S., Stinson Leonard Street has 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, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued an advisory to indicate their support for the principles and expectations set forth in Parts 1 and 2, respectively, of the Basel Committee on Banking Supervision’s March 2014 guidance on “External audits of banks” referred to as the BCBS external audit guidance.

The advisory notes bank examiners should evaluate any actions taken by institutions within the scope of the advisory and their audit committees to ensure such actions are consistent with the objectives of the advisory and the BCBS external audit guidance. Where there are differences between the BCBS external audit guidance and U.S. standards, examiners should encourage institutions’ audit committees to follow the practices identified in the advisory.

Matt Kelly contemplates the reasons why the regulators issued the advisory here, and outlines some of the looming practical aspects here, which he refers to as a “winter of turmoil.” According to Matt, “The immediate question for external auditors, internal auditors, and audit committees is whether the external auditor will adjust its definition of what’s material to the audit, given all the turmoil in financial markets. I hear anecdotal evidence that this is happening, although I don’t know to what extent. But remember that audit firms are under pressure from the Public Company Accounting Oversight Board to do better at assessing risk, and the PCAOB has already addressed this point.”

Matt also notes “Last week’s guidance from the banking regulators specifically mentions regulatory capital ratios as important to a successful external audit of a large bank. The Fed, FDIC, and OCC have no authority to compel audit firms to consider capital reserves and other liquidity ratios—but they do have the power to make audit committees uncomfortable until the committees do that dirty work for them. Their guidance even says: “The agencies expect audit committees will ensure that their external auditors consider regulatory capital ratios in planning and performing the audit.” That does not sound like a whimsical and benign request to me.”

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 100 largest firms in the U.S., Stinson Leonard Street has 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 January 21, 2016, the Consumer Financial Protection Bureau (CFPB) announced an administrative enforcement action against Y King S Corp., d/b/a Herbies Auto Sales (Herbies), a buy-here pay-here used car dealer located in Greeley, Colorado.

Herbies is a car dealer that sells cars and originates the related auto loan, without later selling or assigning the loan to a third-party. The CFPB alleges that Herbies engaged in abusive financing schemes by advertising a misleadingly low 9.99% annual percentage rate (APR), without disclosing a required warranty, a payment reminder device, and other credit costs as finance charges.  Specifically, the CFPB alleges that Herbies violated the Truth in Lending Act and the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act by:

  • Hiding finance charges and advertising a lower APR than consumers actually received;
  • Hiding finances charges that related to a refusal to negotiate car prices for credit customers (even though Herbies would negotiate with cash purchasing customers); and
  • Engaging in “abusive” practices by using a financing scheme consisting of false and misleading advertising to lure customers in and then keeping them in the dark about the true cost of financing the cars, which “took advantage of consumers’ ability to protect their interests in selecting or using Herbies’ financing.”

The CFPB and Herbies have entered into a consent order to resolve the allegations.  Pursuant to the consent order, Herbies is required to:

  • Provide $700,000 in restitution to consumers who financed cars with Herbies after January 1, 2012, except those which were charged off due to default;
  • Pay $100,000 civil penalty, which is suspended as long as Herbies pays restitution to consumers;
  • Prominently post the purchase price of all vehicles; and
  • Provide consumers with certain information about financing offers, including the actual APR, price of the car, and all finance charges, and obtain a signed acknowledgment from consumers before or at the time financing is offered.

This marks the CFPB’s first public enforcement action of 2016.  This action is also significant because it highlights the CFPB’s continued desire to target the auto industry, despite Congressional criticism of the CFPB’s past auto lending enforcement related practices.  For example, on November 24, 2015, Republican members of the House of Representatives’ Financial Services Committee issued a report titled Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending, which blasts the CFPB for knowingly using unsound or weak methodology in challenging auto lending practices based on allegations of discrimination.  That Congressional report came on the heels of a November 18, 2015, House of Representatives vote to nullify CFPB Bulletin 2013-02, related to indirect auto lending.  You can view our previous update related to this issue on Dodd-Frank.com by clicking here.

You can view the CFPB and Herbies consent order here: http://files.consumerfinance.gov/f/201601_cfpb_consent-order_y-kings-corp-also-doing-business-as-herbies-auto-sales.pdf.