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

The SEC announced that three private equity fund advisers within The Blackstone Group have agreed to pay nearly $39 million to settle charges that they failed to fully inform investors about benefits that the advisers obtained from accelerated monitoring fees and discounts on legal fees. Blackstone did not admit or deny the findings.

According to the SEC, from at least 2010 through March 2015, upon either the private sale of a portfolio company or an initial public offering (“IPO”), Blackstone terminated certain portfolio company monitoring agreements and accelerated the payment of future monitoring fees as set forth in the agreements. Although Blackstone disclosed that it may receive monitoring fees from portfolio companies held by the funds it advised, and disclosed the amount of monitoring fees that had been accelerated following the acceleration, Blackstone failed to disclose to its funds, and to the funds’ limited partners prior to their commitment of capital, that it may accelerate Future monitoring fees upon termination of the monitoring agreements.

In addition, the SEC alleged in late 2007, Blackstone negotiated a single legal services arrangement with its primary outside Law Firm on behalf of itself and the funds. For the majority of legal services performed by the Law Firm beginning in 2008 and continuing through early 2011, Blackstone received a discount that was substantially greater than the discount received by the funds. The disparate legal fee discounts were not disclosed to the funds or the funds’ limited partners until August 2012.

The SEC believes that because of its conflict of interest as the recipient of the accelerated monitoring fees and the beneficiary of the disparate legal fee discounts, Blackstone could not effectively consent to either of these practices on behalf of the funds it advised. As a result, the SEC believes Blackstone breached its fiduciary duty to the funds in violation of Section 206(2) of the Advisers Act and also violated Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder.

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 U.S. Commodity Futures Trading Commission, or CFTC, announced that it will make an award of approximately $290,000 to a whistleblower for providing valuable information about violations of the Commodity Exchange Act.

This is the second whistleblower award to be issued by the CFTC. The CFTC issued its first whistleblower award of $240,000 on May 20, 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 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.

Both the SEC, the loser in the most recent conflict minerals rehearing decision, and Amnesty International, an intervenor on the losing rehearing side, have asked for an en banc rehearing on the recent rehearing of the conflicts minerals decision.  The SEC’s request is here and Amnesty International’s request is here.

The SEC says among other things a rehearing of the rehearing is necessary because the decision conflicts with prior decisions from the court as well as with Supreme Court precedent.

Amnesty International says among other things rehearing en banc of the rehearing is necessary to ensure that securities disclosures are subject to relaxed First Amendment review, consistent with Zauderer and court precedent.

So we’ll wait to learn if a rehearing of the rehearing is going to happen and in the meantime everyone is left in a lurch.

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.

As previously noted, a Federal court held that the delay in implementing the resource extraction rules violated the Administrative Procedures Act.  The court ordered the SEC to file with the court in 30 days an expedited schedule for promulgating the final rule.

The SEC has now made a filing with the court indicating it will implement a final rule in 270 days.  According to the SEC it will be very hard to do this.  After all, they are busy, they can’t guaranty any Commissioners will vote for the rule and budgetary interruptions may result in a shutdown of operations.

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.

A settled SEC enforcement action describes an alleged interesting social media fraud.  Two defendants that reside in India were alleged to have been behind the fraud.

According to the SEC the scheme was an online high-yield securities offering fraud through which the defendants solicited investments in a so-called pooled investment fund that would purportedly yield guaranteed profits. Profits Paradise offered three investment plans, each with a term of 120 business days. The first purportedly yielded 1.5% daily interest on investments of $10 to $749, the second purportedly yielded 1.75% daily interest on investments of $750 to $3,499, and the third purportedly yielded 2% daily interest on investments of $3,500 and above. The Website and related social media sites described the profits as “huge,” “lucrative,” “handsome,” and “guaranteed,” and they characterized the risk as “minimal.”

The defendants registered a domain name using a false name and U.S. address and phone number.  They then allegedly went about creating content for the fraudulent website and arranged for an on-line payment processor.  They also created related Facebook, YouTube, Twitter and GooglePlus sites.

According to the SEC, the main Website attracted 4,000 visitors a day, with 200 per day being from the U.S., and the Facebook page had more than 3,000 “Likes.”

The SEC stated U.S. jurisdiction existed because use of the false U.S. address, “$” sign, American English and American spelling content were aimed at drawing U.S. investors.

There were no allegations any U.S. investor invested money.

No civil penalties were levied against the defendants because of their financial condition.  The defendants did not admit or deny the SEC’s findings.

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.

AgFeed Industries, Inc.’s accounting irregularities culminated in a March 2014 enforcement action brought against AgFeed by the SEC.  The enforcement action yielded an $18 million disgorgement penalty, referred to as the AgFeed Sanction. After AgFeed sought protection in the Bankruptcy Court, the AgFeed Sanction was disbursed through the company’s court-approved reorganization plan.

Plaintiff James Regnante claimed that pursuant to the Dodd-Frank Act, the AgFeed Sanction should have been deposited into the SEC Investor Protection Fund (the “Fund”), rather than distributed in connection with the bankruptcy proceeding. More importantly, the plaintiff claimed that because of information that he provided to the SEC regarding AgFeed, he was entitled to an award under the whistleblower program established by Dodd-Frank.  Plaintiff then brought an action against the SEC.

The United States District Court for the Southern District of New York dismissed the plaintiff’s claim.  One reason is the statute which creates the Fund does not create a private cause of action related to administering the Fund.  There is no specific language creating a private cause of action and no intent to create a private cause of action in the absence of specific language.

The case was also dismissed because the court lacked subject matter jurisdiction over plaintiff’s claim of an entitlement to a whistleblower award.  Whether to grant an award is within the discretion of the SEC.  Dodd-Frank generally vests the relevant United States Court of Appeals with exclusive jurisdiction to review any claim related to a whistleblower award.

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.

 

Investment advisers to venture capital funds are exempt from registration under the Investment Advisors Act if certain requirements are met.  Amongst those requirements is that certain investments be made in qualifying portfolio companies.  One prong of the definition of “qualifying portfolio company” requires that at the time of investment, the portfolio company is not reporting or foreign traded and does not control, is not controlled by or under common control with another company, directly or indirectly, that is reporting or foreign traded.  “Reporting” means a company that is subject to the SEC’s reporting requirements under Sections 13 or 15(d) of the Securities Exchange Act.  A qualifying portfolio company can later go public without destroying the exemption, because the test is made at the time of investment.

The SEC issued a no-action letter meant to provide relief from certain unintended consequences of the venture capital fund advisers exemption.  The no-action relief is premised on some specific examples that have to be reviewed in detail for a full understanding of the relief.  However, a common thread is this:  There are two portfolio companies under common control by a fund manager, one of which has become a reporting company.  The reporting company status of the public portfolio company is not problematic, because that is addressed by the rules.  However, issues arise with respect to the non-reporting company, because it has come under common control with the reporting company, and a literal interpretation of the rule means that it is no longer a qualifying reporting company.

The SEC agreed that application of the literal wording of the rule has unintended consequences. It therefore granted no-action relief if a company fails to meet the definition of “qualifying portfolio company” solely by reason of the circumstances set forth in the examples in the no-action request

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.

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Two new Volcker Rule FAQs have been issued.

One FAQ addresses a bank’s market making activities.  Amongst other things, the FAQ affirms that for purposes of meeting the final rule’s exemption for market-making, a reasonably designed compliance program for a trading desk engaged in market making-related activity may include objective factors on which the trading desk may reasonably rely to determine whether a security is issued by a covered fund.  Objective factors are factual criteria that can be used to reliably identify whether an issuer or a particular type of issuer is a covered fund.  As an example, an objective factor would include whether the securities of the issuer were offered in transactions registered under the Securities Act.  Objective factors would not be considered part of a reasonably designed compliance program if the banking entity designed or used such objective factors to evade section 13 and the final rule.

The other FAQ addresses the timing of the CEO certification required by Section 255.14(a)(2)(ii)(B) of the final rule.  Staffs of the agencies which administer the Volcker Rule believe that banking entities that are required to provide the annual CEO certification for prime brokerage transactions as of the end of the conformance period should submit the first CEO certification required under § 255.14 after the end of the conformance period but no later than March 31, 2016.  In any case, a banking entity should provide the CEO certification annually within one year of its prior certification.  Moreover, the FAQ states that under the final rule, the CEO has a duty to update the certification if the information in the certification materially changes at any time during the year when he or she becomes aware of the material change.

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.

In the space of just seven days, the CFTC has brought two enforcement actions regarding Bitcoin transactions.

Coinflip, Inc.

In the first action, the CFTC issued an order filing and simultaneously settling charges against Coinflip, Inc. d/b/a Derivabit and its chief executive officer for conducting activity related to commodity options transactions without complying with the Commodity Exchange Act, or CEA, and CFTC regulations.  The CFTC alleged that the defendants operated a facility for the trading or processing of commodity options without complying with the CEA or CFTC regulations otherwise applicable to swaps or conducting the activity pursuant to the CFTC’s exemption for trade options.

The CFTC order finds that Coinflip designated put and call options for the delivery of Bitcoins as eligible for trading on the Derivabit platform. In the order, the CFTC for the first time finds that Bitcoin and other virtual currencies are properly defined as commodities.

TeraExchange LLC

In the second action, the CFTC issued an order filing and simultaneously settling charges against TeraExchange LLC, a provisionally registered Swap Execution Facility, or SEF, for failing to enforce its prohibition on wash trading and prearranged trading on the SEF platform.

According to the CFTC Tera offered for trading on its SEF a non-deliverable forward contract based on the relative value of the U.S. Dollar and Bitcoin, a virtual currency (the “Bitcoin Swap”).  On October 8, 2014, the only two market participants authorized at that time to trade on Tera’s SEF entered into two transactions in the Bitcoin Swap.  The transactions were for the same notional amount, price, and tenor, and had the effect of completely offsetting each other.  At the time, these were the only transactions on Tera’s SEF.

The CFTC stated Tera arranged for the two market participants to enter into the transactions.  Tera brought together the market participants, telling one that the trade would be “to test the pipes by doing a round-trip trade with the same price in, same price out, (i.e. no P/L [profit/loss] consequences) no custodian required,” according to the CFC order.

The CFTC alleged that subsequent to the transactions, Tera issued a press release and made statements at a meeting of the CFTC’s Global Markets Advisory Committee announcing the transactions, creating the impression of actual trading interest in the Bitcoin swap.  Neither Tera’s press release nor the statements at the GMAC meeting indicated that the October 8 transactions were pre-arranged wash sales executed for the purpose of testing Tera’s systems.

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.

A recent study by Urska Velikonja, Emory University School of Law; University of Chicago – Law School, analyzes the enforcement statistics the SEC publishes.  The abstract to the study reads as follows:  “Every October, after the end of its fiscal year, the Securities and Exchange Commission releases its annual enforcement report, detailing its activity for the year. The report boasts record enforcement activity, often showing significant increases over the prior fiscal year in the number of enforcement actions brought and monetary penalties ordered. The numbers suggest that the SEC is ever tougher on securities violators. The SEC includes these statistics in its budget requests; the figures are repeated in congressional testimony, scholarship, policy proposals, and the business press.

Yet the SEC’s metrics are deeply flawed. The Article reviews fifteen years of enforcement actions and demonstrates that the widely-circulated statistics are invalid because they do not measure what they purport to measure, and unreliable because they can be manipulated all too easily. The SEC double and triple counts many of its cases and overstates the fines it orders. This Article constructs better measures. These measures reveal that the SEC’s statistics mask the fact that core enforcement has remained steady since 2002, and obscure a shift in enforcement towards easier-to-prosecute strict-liability violations.

The SEC is not alone in using misleading statistics to report its performance. Multiple reporting statutes authorize Congress to cut agencies’ budgets for failing to meet performance targets. In response, agencies report flawed metrics to protect their ability to continue enforcing the law. The Article suggests that Congress should not threaten to reduce an agency’s budget because of year-to-year fluctuations in enforcement. In addition, to make reported numbers more reliable, non-financial performance measures should not be developed by the agency. Instead, the selection and development of performance indicators should be standardized across agencies, much like financial reporting has already been standardized. Doing so would depoliticize reporting, as well as enable comparisons among agencies, both domestically and internationally.”

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.