Securities Regulation Daily

May 20, 2015

Wolters Kluwer

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In the News




TOP STORY—Five major banks to plead guilty to benchmark rate rigging, will pay billions

By Lene Powell, J.D.

In a sweeping series of settlements involving multiple regulatory agencies, a number of global banks have agreed to pay civil and criminal fines in connection with rigging key global benchmark rates. The Justice Department announced that five major banks pleaded guilty to conspiring to manipulate benchmark rates and will pay nearly $3 billion in fines. The resolutions feature parent-level guilty pleas, court-supervised probation, and record criminal fines, including the largest single fine for a violation of the Sherman Act. Four banks pleaded guilty to criminal antitrust violations relating to the rigging of various foreign exchange (FX) benchmarks. One bank, UBS, pleaded guilty to manipulating LIBOR, a different benchmark rate, in breach of a non-prosecution agreement (NPA) it entered into in December 2012.

As part of the settlements, the CFTC fined Barclays $515 million for attempted manipulation and false reporting involving both FX benchmarks and ISDAFIX, a global benchmark for interest rate products. Separately, the New York Department of Financial Services announced that Barclays will pay $2.4 billion and terminate eight employees for conspiring to manipulate the spot FX market. In addition, the Federal Reserve announced $1.8 billion in fines against six banks for “unsafe and unsound practices” in the FX markets. The fines are among the largest ever assessed by the Federal Reserve.

"Today’s historic resolutions are the latest in our ongoing efforts to investigate and prosecute financial crimes, and they serve as a stark reminder that this Department of Justice intends to vigorously prosecute all those who tilt the economic system in their favor; who subvert our marketplaces; and who enrich themselves at the expense of American consumers," said Attorney General Loretta E. Lynch.

FX market rigging. Between 2007 and 2013, euro-dollar traders at Citicorp, JPMorgan Chase & Co., Barclays PLC, and The Royal Bank of Scotland plc used an exclusive, invitation-only chat room to coordinate their trading of U.S. dollars and euros to manipulate certain benchmark rates set at the 1:15 p.m. and 4:00 p.m. fixes, when trade data is collected and published.

According to Assistant Attorney General Bill Baer of the Justice Department’s Antitrust Division, the traders called themselves “The Cartel” and consisted of a senior trader and “a whole bunch of other traders” at each bank. The traders agreed to withhold bids or offers for euros or dollars to avoid moving the exchange rate in a direction unfavorable to open positions held by co-conspirators. By withholding supply of or demand for currency and suppressing competition in the FX market, they protected each other’s trading positions and profits.

NYDFS Superintendent Benjamin Lawsky described the scheme as “heads I win, tails you lose.” Traders used multiple strategies to coordinate their trading for mutual profit. In one strategy, called “building ammo,” a single trader would amass a large position in a currency and then unload the “ammo” just before or during the fix to try to move prices. Traders also agreed to boycott local brokers to drive down competition. In one exchange in 2009 in the USD/Brazilian Real market, an RBC trader wrote, “Everybody is in agreement in not accepting a local player as a broker?”  A Barclays trader responded, “Yes, the less competition the better.”

CFTC actions. The CFTC’s action for attempted manipulation and false reporting in the FX markets was only against Barclays, as the agency imposed almost $1.5 billion in fines against five banks in November 2014 for similar misconduct. The CFTC noted that the $400 million civil monetary penalty reflects that Barclays did not settle at an earlier stage of the investigation. The CFTC action also includes a separate $115 million fine against Barclays for attempting to manipulate USD ISDAFIX, a major benchmark for interest rate swaps and related derivatives, and is the first enforcement action addressing abuses of this benchmark.

UBS breach of NPA regarding LIBOR. As a result of UBS’s deceptive currency trading and sales practices as well as its collusive conduct in certain FX markets, the Justice Department determined that UBS violated its December 2012 non-prosecution agreement resolving the LIBOR investigation.

“If appropriate and proportional to the misconduct and the company’s track record, we will tear up an NPA or a DPA and prosecute the offending company,” said Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division.

Waivers. Asked whether the settlement negotiations had involved discussion of waivers, such as well-known seasoned issuer (WKSI) or “bad actor” waivers granted by the SEC, Attorney General Lynch declined to respond directly, saying that waivers are granted by the various regulatory agencies, not the DOJ.

“They have to deal with their regulators, who are numerous and varied,” said Lynch.

Sanctions. Citicorp, Barclays, JPMorgan and RBS each agreed to plead guilty to a one-count felony charge of conspiring to fix prices and rig bids for U.S. dollars and euros exchanged in the FX spot market. The DOJ fines reflect the varied duration of the misconduct at each bank. Citicorp was involved for the longest period of time and will pay a fine of $925 million. Barclays will pay $650 million, JPMorgan will pay $550 million, and RBS will pay $395 million. In addition, two banks agreed to pay additional fines for breaching 2012 NPAs regarding LIBOR manipulation. Barclays agreed to pay an additional $60 million criminal penalty, and UBS agreed to pay a criminal penalty of $203 million.

The banks also agreed to three-year corporate probation. If approved by the court, the probation will be overseen by the court and require regular reporting to authorities as well as cessation of all criminal activity.

The Federal Reserve imposed fines of $342 million each for UBS AG, Barclays Bank PLC, Citigroup Inc., and JPMorgan Chase & Co.; $274 million for Royal Bank of Scotland PLC (RBS); and $205 million for Bank of America Corporation. The banks must also comply with certain undertakings.

MainStory: TopStory Enforcement Derivatives Swaps FraudManipulation

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BROKERS-DEALERS—SEC grants Rule 506 waiver to Macquarie Capital over Puda Coal charges

By Amanda Maine, J.D.

The SEC’s Division of Corporation Finance has granted a waiver of disqualification to Macquarie Capital (USA), allowing it to use the private offering exemption under Rule 506 of Regulation D.  Absent the waiver, the firm would have been disqualified from using the exemption due to its involvement in underwriting and marketing an offering that distributed false and misleading offering documents.

Background. Macquarie Capital (USA), Inc. (MCUSA) is a U.S.-based broker-dealer and wholly-owned subsidiary of Macquarie Group Limited (MGL), an Australian global financial services group. In March 2015, the SEC filed a complaint against MCUSA and two employees. The SEC alleged that the chairman of Puda Coal, Inc. (Puda) transferred ownership of Shanxi Puda Coal Group Co. (Shanxi) from Puda to himself and then sold nearly half his interest to the largest state-owned investment firm in the People’s Republic of China.  MCUSA was the lead underwriter for a 2010 offering of Puda stock.  Despite receiving and reading a report from Kroll Associates showing that Puda did not own any part of Shanxi, two members of the due diligence team at MCUSA assigned to the Puda transaction failed to act on the information in the Kroll report and the offering proceeded. After the true ownership of Shanxi was revealed, Puda’s stock price plunged.

The SEC charged MCUSA and the two individuals with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act. The parties settled on April 1, 2015, agreeing to pay disgorgement, interest, and penalties, as well as agreeing to be enjoined from further violations of Sections 17(a)(2) and 17(a)(3).

Request for waiver. According to MCUSA’s request for no-action relief, the entry of the April 1 judgment disqualifies MCUSA from relying on the private offering exemption under Rule 506 of Regulation D. MCUSA outlined several reasons why the SEC should grant it a waiver from disqualification. MCUSA noted that violations of Sections 17(a)(2) and 17(a)(3) do not require a showing of scienter. MCUSA, while acknowledging that the misconduct did involve the offer and sale of securities, also explained that it was an isolated incident of limited duration. MCUSA pointed out that the two individuals who read the Kroll report but did not act on the information are no longer employed by MCUSA or any of its affiliates.

MCUSA also highlighted a number of remedial steps it has taken to improve its due diligence policies, including: (1) training bankers on how to conduct effective diligence and identify potential red flags; (2) encouraging bankers to follow up and report up the chain when they identify potential red flags; and (3) reinforcing responsibility and accountability by senior bankers for conducting due diligence.

In addition, MCUSA said a denial of the waiver would have a material and disproportionate impact on it, on its affiliates, and on its clients and investors. MCUSA observed that MCUSA has served as the placement agent in two Rule 506 offerings that raised $8 billion from several hundred institutional investors. The disqualification waiver would also jeopardize its relationship with other MGL groups that had no involvement with the misconduct.

MCUSA also stated in its letter that, if granted the waiver, it would provide a written description of the terms of the April 1 judgment to prospective Rule 506 investors for a period of five years.

Waiver granted. The Division of Corporation Finance found that MCUSA had made a showing of good cause that disqualification was not necessary and granted MCUSA’s request for a waiver for a period not to exceed 60 days. The waiver is conditioned on MCUSA’s full compliance with the terms of the final judgment.

Companies: Macquarie Capital (USA), Inc.

RegulatoryActivity: BrokerDealers Enforcement SecuritiesOfferings

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FINANCIAL INTERMEDIARIES—Cyber attacks and yield-reaching pose financial stability concerns

By Andrew A. Turner, J.D.

Despite improvements in some areas, the financial system became more vulnerable to shocks in other areas as cyber attacks heightened concerns and the continued low-rate environment has encouraged some investors to take on more risk by reaching for yield, according to the Financial Stability Oversight Council’s 2015 Annual Report.

Cybersecurity. Malicious cyber activity is likely to continue, and financial sector organizations should be prepared to mitigate the threat posed by cyber attacks that have the potential to destroy critical data and systems and impair operations. The FSOC supports comprehensive legislation on cybersecurity issues, including proposals to enhance cybersecurity information sharing and data breach notifications. In addition, the FSOC recommends additional enhancements to cybersecurity information sharing between the private sector and government.

Risk-taking in low-yield environment. The historically low-yield environment continues to encourage greater risk-taking across the financial system. The FSOC recommends that supervisors, regulators, and firm management continue to closely monitor and assess the heightened risks resulting from continued search-for-yield behaviors, as well as the risks from potential severe interest rate shocks.

Two new topics discussed in this year’s report are changes in financial market structure and central counterparties (CCPs). In particular, the report discusses how changes in financial market structure may impact the provision of liquidity and market functioning. With regard to CCPs, which are designed to enhance financial stability, the report highlights the importance of taking steps so that CCPs have robust frameworks for risk management.

Financial market structure. Financial market structure has evolved substantially over the years, owing to a confluence of factors, including technology, regulation, and competition. As this evolution of market structure plays out across a broader collection of asset classes and markets, market participants and regulators should continue to monitor how it affects the provision of liquidity and market functioning, including operational risks. The FSOC also recommends that regulators continue to enhance their understanding of firms that may act like intermediaries and that may be outside the regulatory perimeter, work to develop enhanced tools, and, as warranted, make recommendations to Congress to close such regulatory gaps.

Central counterparties. The FSOC believes that it is important to evaluate whether existing rules and standards are sufficiently robust to mitigate the risk that CCPs could transmit credit and liquidity problems among financial institutions and markets during periods of market stress. The FSOC recommends that federal regulators continue to evaluate whether certain CCP-related risk areas are being addressed adequately, in particular: (1) CCP credit, default, and liquidity risk management; (2) bank-CCP interactions and risk management, including how banks and other clearing members manage and account for their potential exposures to the full range of CCPs, both foreign and domestic, in which they participate; and (3) CCP recovery and resolution planning.

Other findings and recommendations. The FSOC also identified other potential threats and provided recommended reforms. Offering a roadmap of the FSOC’s priorities for the upcoming year, Treasury Secretary Jacob J. Lew said that the annual report highlights key issues to address vulnerabilities and promote resiliency in the financial system.

  • Global risks. Market participants and regulators should be vigilant to potential foreign shocks that could disrupt financial stability in the United States.

  • Financial innovation. Regulators and supervisors must remain vigilant to the potential risks that could arise from the development of new financial products or services and the migration of activities to less-regulated or unregulated sectors.

  • Repo markets. While domestic banking firms’ reliance on repo and intraday credit exposures borne by agent banks has decreased substantially since the financial crisis, the risk of fire sales of collateral deployed in repo transactions remains.

  • Large financial institutions. The full implementation of the orderly liquidation authority and the phasing-in of enhanced prudential standards in the coming years should help reduce remaining perceptions of government support for large, complex, interconnected financial institutions.

  • Reference rates. Substantial progress has been made toward reform of benchmark interest rates such as LIBOR. U.S. regulators continue to work with foreign regulators and official-sector bodies in their assessment of market practices for these and other financial benchmarks, including swap rates and foreign exchange rates.

  • Housing finance. Core challenges to housing finance reform persist. Legislation addressing the conservatorship of Fannie Mae and Freddie Mac and clarifying the future role of the federal and state governments in mortgage markets would help reduce uncertainty in the mortgage market and better enable market participants to make long-term investment decisions.

  • Data collection. Although regulators now collect significantly more data on financial markets and institutions, critical gaps remain in the scope and quality of available data. Additionally, challenges remain among regulators in the sharing of data that may enhance risk identification and monitoring efforts.

Charts with supporting data accompany the report.

RegulatoryActivity: Derivatives DoddFrankAct FinancialIntermediaries RiskManagement

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INVESTMENT COMPANIES—SEC proposes new disclosure by investment companies and investment advisers

By Jacquelyn Lumb

The SEC commissioners today unanimously approved proposals to increase the transparency and modernize the reporting requirements for investment companies and investment advisers. In opening remarks, Chair Mary Jo White noted that the SEC oversees more than 28,000 funds and investment advisers, with assets of registered funds exceeding $18 trillion and assets managed by registered investment advisers exceeding $62 trillion. Given the advancement of new product structures and investment strategies, White last December outlined a number of initiatives to address the risks that may arise from evolving portfolio compositions and fund operations. The proposed reforms will help the SEC identify and monitor evolving risks that could threaten the stability of the U.S. financial system, according to White, and will complement the efforts of the Financial Stability Oversight Council with respect to systemic risks.

New forms, enhanced disclosure. The Investment Company Act reforms would include a new Form N-PORT, which registered funds other than money market funds would file monthly to report portfolio-wide and position-level holdings. The disclosure would include data relating to the pricing of securities and the terms of derivatives contracts. Funds also would be required to disclose information about repurchase agreements, securities lending activities, and counterparty exposures. New disclosure about discrete portfolio-level and position-level risk measures would provide transparency about funds’ exposure to changes in market conditions.

Form N-PORT would be available to the public, so the SEC will consider rescinding Form N-Q on which funds currently report their portfolio holdings for their first and third quarters.

Registered funds would report annually on a new Form N-CEN which would replace current Form N-SAR. The disclosure requirements would be updated and streamlined to include more information about exchange-traded funds and securities lending. The reports would be filed within 60 days of the end of the funds’ fiscal years rather than semi-annually as currently required for most funds.

The portfolio and census information would be disclosed in a structured data format to make it more efficient to aggregate and analyze. The proposal would also standardize the disclosure in the financial statements included in fund registration statements and shareholder reports.

Website posting of reports. Under the proposal, mutual funds and other registered investment companies would have the option of providing shareholder reports and the past year’s quarterly portfolio holdings on their websites. Shareholders would continue to have the option to receive paper copies of the shareholder reports. Aguilar suggested that the SEC should proceed with this option with caution, given its experience with the e-proxy rules and based on investor research, which has shown a decline in retail investor participation in the proxy voting process after the adoption of the electronic filing rules.

Investment adviser amendments. The proposed investment adviser amendments would include changes to Form ADV to require additional information about advisers’ risk profiles. The new disclosure requirements reflect issues the staff has identified since the last changes to Form ADV in 2011. In particular, the SEC would require aggregate information about assets held and the use of borrowings and derivatives in separately managed accounts. White noted that 73 percent of registered investment advisers manage a wide variety of client assets in separately managed accounts, through which they provide individualized investment advice and direct ownership of the securities and other assets in the accounts. She said the SEC must have the ability to assess the potential risks in these arrangements.

Umbrella arrangements. The SEC also proposes to codify staff guidance that permits certain umbrella registration filing arrangements. The guidance has allowed advisers to private funds that are separate legal entities to organize as a group of related advisers under a single umbrella and operate as a single advisory business. They may file a single Form ADV as long as certain conditions are met.

Books and records. The proposal also would amend Rule 204-2 to require advisers to maintain records on their calculations of performance. Advisers currently must maintain this information if it is distributed to 10 or more persons, but under the proposal it would require the information to be kept if it is distributed to anyone. Advisers also would be required to maintain communications with respect to the performance or rate of return of accounts and securities recommendations.

Commissioners’ remarks. Commissioner Daniel Gallagher said he particularly appreciated the inclusion of a scaled compliance period to give smaller funds more time to comply with the rules, if adopted.

Commissioner Michael Piwowar, while supporting both proposals, raised two concerns. First, funds would have to include in Form N-PORT and N-CEN the legal identifier assigned or recognized by the Global LEI Regulatory Oversight Committee, he explained, which could result in the SEC helping to establish a monopoly for the provision of legal identifiers.

Second, he was concerned about the requirement to disclose in Form N-PORT, in connection with derivative instruments, the components of an underlying reference index if it is not already publicly disclosed on a website. Some index providers may not be willing to make this disclosure public, he explained, which could negatively impact funds that make these investments and the index providers.

The comment period on both proposals will be open for 60 days.

Additional initiatives. White noted that the staff is also developing recommendations to enhance the management and disclosure of liquidity risk by mutual funds and ETFs, and to update their liquidity standards. In addition, the staff is considering requirements for the use of derivatives by funds which may include limits to the leverage the derivatives may create. The staff also may recommend new requirements for stress testing by large investment advisers and large funds, and provisions for transition plans in the event of a major disruption of an adviser’s operations.

RegulatoryActivity: InvestmentCompanies Derivatives FormsFilings InvestmentAdvisers SECNewsSpeeches

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EXCHANGES AND MARKET REGULATION—Ex-Im Bank dominates mark-up of securities, swaps bills

By Mark S. Nelson, J.D.

The House Financial Services Committee set out to mark-up a baker’s dozen of bills that would tweak the securities laws and swaps data provisions in a renewed effort to further enhance capital formation. That at least was the plan. The morning session often devolved into another proxy hearing on the renewal of the Export-Import Bank’s legal authority, but the committee finally got down to its scheduled business in the afternoon session. The committee was scheduled to take the many requested recorded votes late this evening.

Small companies. Under the Improving Access to Capital for Emerging Growth Companies Act (H.R. 2064), legislators would extend the time during which an emerging growth company (EGC) retains this status. The bill also would amend the JOBS Act to require the SEC to revise the instructions to Form S-1 to let EGCs omit historical period financial information that must otherwise be disclosed under Regulation S-X. Likewise, the Small Company Simple Registration Act of 2015 (H.R. 1723) would let smaller reporting companies incorporate by reference certain information in a Form S-1.

Derivatives, brokers, advisers. The Swap Data Repository and Clearinghouse Indemnification Correction Act of 2015 (H.R. 1847) would amend the Commodity Exchange Act to clarify that the CFTC must get a written confidentiality agreement from certain entities before sharing swaps data with them. The bill also would amend both the Commodity Exchange Act and the Securities Exchange Act to ensure the confidentiality of data shared by swap data repositories and security-based swap data repositories with other entities.

Under the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2015 (H.R. 686), M&A brokers, subject to certain exceptions, would be exempt from registration as broker-dealers under Exchange Act Sec. 15(b). The bill defines “M&A broker” to mean any person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an eligible privately held company.

But M&A broker status is limited. Specifically, an M&A broker must reasonably believe any person who acquires securities in a deal will actively manage the company and that any person offered securities will get access to relevant financial statements. An “eligible privately held company” is a company that does not have a class of securities registered under Exchange Act Sec. 12 and that has EBITDA under $25 million and /or gross revenues under $250 million.

Still other bills aim to improve regulatory transparency or to make conforming amendments that help to implement related statutory revisions. The Disclosure Modernization and Simplification Act of 2015 (H.R. 1525) would direct the SEC to update Regulation S-K within a fixed period of time. H.R. 1975 would mandate refunds or credits of overpayments to the SEC made under Exchange Act Section 31.

Moreover, the SBIC Advisers Relief Act of 2015 (H.R. 432) clarifies an exclusion for advisers of small business investment companies (SBICs) under Investment Advisers Act Section 203. The Holding Company Registration Threshold Equalization Act of 2015 (H.R. 1334) would make conforming amendments to the Exchange Act for savings and loan holding companies. H.R. 1675, the Encouraging Employee Ownership Act of 2015, would direct the SEC to amend its regulations to increase the thresholds for certain compensatory benefit plans.

XBRL tagging. The Small Company Disclosure Simplification Act (H.R. 1965) would exempt EGCs and other smaller companies from using eXtensible Business Reporting Language (XBRL) in financial statements and other periodic reports filed with the SEC. But EGCs can still choose to use XBRL. The exemptions for non-EGCs would last for up to five years, or two years following the SEC’s determination (via an order) that the benefits of these companies using XBRL outweigh the costs of compliance.

LegislativeActivity: ExchangesMarketRegulation CommodityFutures Derivatives DoddFrankAct FinancialIntermediaries FormsFilings InvestmentAdvisers JOBSAct RiskManagement Swaps

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CORPORATE GOVERNANCE—Del. Ch.: Attempt to rehash acquiescence arguments decided against other shareholders quashed

By Amy Leisinger, J.D.

The Delaware Court of Chancery has dismissed several counts of a shareholder action alleging contractual violations by Spanish Broadcasting System, Inc. (SBS). According to the court, the shareholders may not relitigate the court’s previous determination that the other similarly situated SBS shareholders acquiesced in the company’s alleged improper incurrence of debt. Like the shareholders in the earlier action, the plaintiff was of aware of, and had the opportunity to object to, debt purportedly incurred by SBS in violation of a contract (Brevan Howard Credit Catalyst Master Fund Ltd. v. Spanish Broadcasting System, Inc., May 19, 2015, Glasscock, S.).

Privity. The court agreed with SBS’s assertion that the plaintiffs could not litigate issues decided against other plaintiffs in privity with them in other actions, noting that the allegations concerning a voting rights triggering event and debt were “precisely” the same as those determined to fail in a preceding action by other SBS shareholders. According to the court, just as with the shareholders in the previous action, the shareholders in the present action knew or should have known that SBS was incurring new debt and that this was occurring while a voting rights triggering event could be in effect as a result of unpaid dividends. The two sets of shareholders are sufficiently similar so as to demonstrate privity, and “principles of issue preclusion—res judicata or collateral estoppel—prevent the Plaintiffs from relitigating these issues,” the court concluded.

The case is Civil Action No. 9209-VCG.

Attorneys: Stephen E. Jenkins (Ashby & Geddes, P.A.) for Brevan Howard Credit Catalyst Master Fund Ltd. Robert S. Saunders (Skadden, Arps, Slate, Meagher & Flom LLP) for Spanish Broadcasting System, Inc.

Companies: Brevan Howard Credit Catalyst Master Fund Ltd.; Spanish Broadcasting System, Inc.

LitigationEnforcement: CorporateGovernance DelawareNews

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CORPORATE GOVERNANCE—Del. Ch.: Spurned lead plaintiff battles Activision settlement, runs out of lives

By Anne Sherry, J.D.

A court approved the settlement of a class action concerning Vivendi S.A.’s restructuring of gaming company Activision over the objections of a shareholder who was passed over as lead plaintiff. Lead counsel was awarded $72.5 million for securing the settlement, which entitles Activision to $275 million—the record for a cash recovery on derivative claims—and will reduce the influence of its senior officers (In re Activision Blizzard, Inc. Stockholder Litigation, May 20, 2015, Laster, J.).

Background. In 2013 Vivendi S.A. divested its controlling equity position in Activision Blizzard, Inc. in a transaction that restructured Activision’s governance profile and stockholder base. Before the restructuring closed, Activision’s president and CEO Robert Kotick and chairman Brian Kelly expanded the number of post-restructuring director seats from five to seven and installed two close friends in the new positions, giving themselves effective control of the board. The transaction also permitted Kotick and Kelly to directly exercise 24.9 percent of Activision’s voting power and gave them enhanced upside potential with a protected downside based on the performance of an entity that they created to participate in the restructuring.

Dueling plaintiffs. Two stockholders came forward to challenge the restructuring. Anthony Pacchia filed a derivative action under seal, alleging breach of fiduciary duty, waste, and unjust enrichment. On the same day, Douglas Hayes filed a derivative action and class action including claims similar to Pacchia’s, but with the additional theory that the restructuring required a shareholder vote. Hayes sought and obtained a temporary restraining order, which the court certified for interlocutory appeal.

While the parties were briefing that appeal, they came to a memorandum of understanding, which Hayes begged Pacchia to sign, pointing out that both possible results of the appeal were uncertain: either the TRO is upheld and the issue is left to a shareholder vote, which may favor the transaction, or the TRO is overturned and litigation moves forward. Pacchia declined to sign and the Delaware Supreme Court reversed the Chancery Court’s judgment, holding that there was no possibility of success on the merits. To break the tie between Pacchia and Hayes, the court turned to this decision to appoint Pacchia lead plaintiff.

Settlement. After a mediation, the parties came to a settlement. In exchange for a global release of claims relating to the restructuring, the defendants agreed to pay $275 million to Activision, reduce a cap on the voting power held by Kotick and Kelly, and expand the Activision board to include two independent directors unaffiliated with Kotick and Kelly. Hayes objected to the settlement on numerous bases, all depending on the common premise that the settlement releases, for no consideration, damages claims belonging personally to those who held stock during the pendency of the restructuring.

Approval. While the settlement would release theoretical causes of action, no one was able to articulate any such personal claims or show them to have any value, and Delaware law permits a settlement to release claims of negligible value if it otherwise provides reasonable consideration for meaningful claims. The contemporaneous ownership requirement of Section 327 of the Delaware General Corporation Law does not transmute the loss of a selling stockholder’s right to bring a derivative claim into a personal claim. Similarly, the direct claims, along with the right to benefit from any remedy, belong to the current holders of the shares, not to the class of sellers of the shares. While this does not preclude the possibility that an individual shareholder could have personal claims, there were no such claims advanced or litigated in this case, the court wrote.

The court also overruled Hayes’ procedural objections to the settlement. The settlement “easily warrants approval” in light of the record-setting $275 million consideration, especially weighed against the risks of litigation. The court noted that the consideration also exceeded what Hayes had bargained for, which would have been comparable to a $70 million payment. The non-monetary payment also had significant value, the court wrote.

The court also determined that it was reasonable for the settlement to allocate all of the monetary consideration to Activision, rather than allocating some of the consideration to the stockholders directly. The claims that led to the monetary recovery were the dual-attribute direct/derivative claims relating to the restructuring; the only purely direct claim in the case was rejected. When granting a remedy for claims that have attributes of both a direct and a derivative claim, a court can impose a remedy at either the corporate or the stockholder level, and the same flexibility should apply to settlements of dual-attribute claims. Furthermore, the holders of the direct claims and the indirect beneficiaries of the derivative claims are the same group—Activision’s current stockholders—so there is little if any practical difference between the two forms of settlement given that the claims asserted and the resulting damages theories were the same.

Fee award. Lead counsel was entitled to a fee award under the “common benefit” exception to the American rule. After assessing the benefits conferred, the complexity of the litigation, the contingent nature of the engagement, the time and effort expended, and the standing and ability of counsel, the court deferred to the settlement agreement, which contemplated a fee award of up to $72.5 million. This amounted to between 22.7 percent and 24.5 percent of the monetary benefit of the settlement, which was within the range of reasonableness for the stage at which the matter settled. The court also approved a special award of $50,000 to Pacchia to be paid out of the attorney fee award.

The case is No. 8885-VCL.

Attorneys: Joel Friedlander (Friedlander & Gorris, P.A.), Jessica Zeldin (Rosenthal, Monhait & Goddess, P.A.) and Lawrence P. Eagel (Bragar Wexler Eagel & Squire, PC) for Anthony Pacchia. Raymond J. DiCamillo (Richards, Layton & Finger, P.A.) and Joel A. Feuer (Gibson Dunn & Crutcher LLP) for Vivendi S.A., Philippe Capron, Frédéric Crépin, Régis Turrini, Lucian Grainge, Jean-Yves Charlier, and Jean-François Dubos. R. Judson Scaggs, Jr. (Morris, Nichols, Arsht & Tunnell LLP) and William H. Wagener (Sullivan & Cromwell LLP) for Robert A. Kotick, Brian G. Kelly, ASAC II LP, and ASAC II LLC. Garrett B. Moritz (Ross Aronstam & Moritz LLP) and William Savitt (Wachtell, Lipton, Rosen & Katz) for Robert J. Corti, Robert J. Morgado and Richard Sarnoff. Edward P. Welch (Skadden, Arps, Slate, Meagher & Flom LLP) for Activision Blizzard, Inc.

Companies: ASAC II LP; ASAC II LLC; Activision Blizzard, Inc.

LitigationEnforcement: CorporateGovernance DirectorsOfficers MergersAcquisitions DelawareNews

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ENFORCEMENT—Olympic sponsor charged with FCPA violations

By Rodney F. Tonkovic, J.D.

Two linked companies have been sanctioned by the SEC over internal control deficiencies in connection with inviting government officials to attend the Olympics. The companies sponsored the 2008 Summer Olympic Games and invited government officials to attend the games it the companies' expense. Due to insufficient internal controls, officials attended who were involved in, or able to influence, the companies' business in multiple countries. The companies' books and records also failed to reflect the companies' negotiations or dealings with the officials. The Commission found that this conduct violated the FCPA's the internal controls and books and records provisions and issued a cease and desist order and imposed the payment of civil penalties (In the Matter of BHP Billiton Ltd. and BHP and BHP Billiton Plc, Release No. 34-74998, May 20, 2015).

Summary. BHP Billiton BHPB is a combination of two companies – BHP Billiton Limited and BHP Billiton Plc – that operate as a single economic entity under a Dual Listed Company Structure. In 2005, BHPB became an official sponsor of the 2008 Olympic Games in Beijing, China. One of BHPB's goals for its sponsorship was to develop relationships with stakeholders in China and enhance its business opportunities there.

Among BHPB's sponsorship-related initiatives was a global hospitality program under which BHPB invited guests, including foreign government officials and representatives of state-owned enterprises, to attend the Olympics. The hospitality packages included luxury accommodations, meals, event tickets, sightseeing, and round-trip airfare. The trips had no business purpose other than to strengthen BHPB's relationships with its guests. Of the 650 people BHPB invited, 60 government officials, mostly from African and Asian countries, attended.

According to the Commission, BHPB knew that inviting government officials could potentially violate anti-corruption laws, as well as BHPB's own internal conduct rules. The internal controls BHPB developed to address this risk, however, were insufficient. BHPB required its business managers to fill out an application form for every official they wished to invite. Due to a lack of training and communication, among other failings, the forms did not accurately and fairly reflect BHPB’s pending negotiations or business dealings with the government officials. As a result, government officials attended who were directly involved in, or in a position to influence, pending contract negotiations, efforts to obtain access rights, regulatory actions, or business dealings affecting BHPB in multiple countries.

Andrew Ceresney, Director of the SEC’s Division of Enforcement said: "BHP Billiton footed the bill for foreign government officials to attend the Olympics while they were in a position to help the company with its business or regulatory endeavors." Antonia Chion, Associate Director of the SEC’s Division of Enforcement characterized BHPB's application process as a "check the box" approach that was not enough to comply with the FCPA. "Although BHP Billiton put some internal controls in place around its Olympic hospitality program, the company failed to provide adequate training to its employees and did not implement procedures to ensure meaningful preparation, review, and approval of the invitations," Chion added.

Violations. The Commission found that BHPB's conduct violated the internal controls and books and records provisions of the FCPA. BHPB was ordered to cease and desist from its violations of

Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B) and to pay a civil penalty of $25 million. In addition, BHPB is required to report to the Commission on the operation of its FCPA and anti-corruption compliance program for one year. The Commission took into account BHPB's cooperation with the investigation as well as its remedial actions, including the creation of an independent compliance group.

The release is No. 34-74998.

Companies: BHP Billiton Limited; BHP Billiton Plc.

LitigationEnforcement: AccountingAuditing Enforcement

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FRAUD AND MANIPULATION—2d Cir.: Wife attacks FBI’s monitoring of private calls with her husband

By Matthew Garza, J.D.

The wife of a man targeted by the FBI in a securities fraud investigation suffered a defeat in her suit against the Bureau for listening in on conversations with her husband, but will get a chance to replead her case. A Second Circuit panel found that the lower court improperly denied the Bureau’s motion to dismiss the suit because it did not sufficiently consider the agents’ efforts to minimize interception of conversations that were unrelated to the fraud investigation (Drimal v. Makol, May 15, 2015, Walker, J.).

Background. Arelene Villamia Drimal sued 16 FBI agents for violations of the Omnibus Crime Control and Safe Streets Act of 1968 after Mrs. Drimal’s husband’s cell phone was tapped during a large securities fraud investigation in 2007-2008. The investigation took place prior to the U.S. v. Goffer trial in the federal district court in Manhattan.

Title III of the Act makes it a violation to fail to “minimize the interception of communications not otherwise subject to interception” and gives any person whose communication is intercepted in violation of the provision the right to recover damages.

Minimization efforts. The court order authorizing the tap required agents to minimize interceptions by immediately terminating the monitoring of conversations determined to be unrelated to the investigation. Thereafter the conversation would be spot checked “to ensure that the conversation has not turned to criminal matters.”

The Assistant U.S. Attorney supervising the investigation also gave detailed instructions to agents on the minimization requirement, advising that only the first few minutes of a conversation should be monitored to determine relevance. Also, if the monitoring of the parties showed only “innocent, non-crime related matters,” over several days or weeks, monitoring should be discontinued, and conversations solely between husband and wife should not be monitored unless they were discussing “ongoing as opposed to past violations of law.” Over 1,000 phone conversations involving Mr. Drimal were monitored, including 180 with his wife that were not pertinent to the investigation.

During the criminal case, Mr. Drimal challenged the agent’s minimization efforts to no avail, but Mrs. Drimal followed up with a suit of her own after her husband’s case concluded. The District Court for the District of Connecticut denied the FBI’s motion to dismiss Mrs. Drimal’s case for failure to state a claim and on qualified immunity grounds, but the Second Circuit reversed after finding that her complaint did not plausibly state a claim because it recited only legal conclusions.

The lower court accepted Mrs. Drimal’s allegations that the FBI “unlawfully” listened to her calls without requiring specific factual detail — “precisely the type of legal conclusion that a court is not bound to accept as true on a motion to dismiss, and the district court erred in doing so here,” wrote the Second Circuit panel. The court reversed the denial of the motion to dismiss and the case was remanded to allow Mrs. Drimal to replead.

The case is No. 13-2963-cv(L).

Attorneys: John R. Williams (Law Office of John R. Williams) for Arlene Villamia Drimal. Catherine H. Dorsey, United States Department of Justice, for Pauline Tai.

LitigationEnforcement: FraudManipulation Enforcement ConnecticutNews NewYorkNews VermontNews

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FRAUD AND MANIPULATION—S.D.N.Y.: Manhattan brokerage firm co-owners caught in scheme to defraud

By R. Jason Howard, J.D.

The SEC has filed a complaint in the Southern District of New York against co-owners of a Manhattan-based brokerage firm based on allegations that the co-owners perpetrated a scheme to defraud investors through the offer and sale of over $6 million in securities of a holding company that held itself out as holding indirect interests in U.S. and UK-based broker dealers (SEC v. DePalo, May 20, 2015).

Background. According to the SEC’s press release, the CEO of Arjent LLC and its UK-based affiliate Arjent Limited, Robert P. DePalo, along with the co-owner and managing director Joshua B. Gladtke, knew that the two firms were facing insolvency so they sold shares in a holding company called Pangaea Trading Partners to keep the firms afloat and maintain extravagant lifestyles.

The two allegedly misrepresented the value of Pangaea’s assets to investors and how their money would be used, with DePalo ultimately transferring the first $2.3 million raised in the offering directly to his own bank accounts and using it for his personal benefit. DePalo also allegedly transferred investor funds to Gladtke and sought to cover up their fraud by making misrepresentations to SEC examiners.

Andrew M. Calamari, Director of the SEC’s New York Regional Office, said “We allege that DePalo and Gladtke sold overvalued interests in Pangaea and then raided investor funds for their own personal benefit,” and “They later allegedly falsified records in an effort to cover up their scheme.”

Charges. The SEC’s complaint charges DePalo and Gladtke with violating the antifraud and books-and-records provisions of the federal securities laws. Also charged are Pangaea, the Arjent entities, and another entity owned and controlled by DePalo called Excalibur Asset Management.  In addition, the complaint charged another principal at Arjent LLC named Gregg A. Lerman, who agreed to settle the charges. Subject to court approval, Lerman is enjoined from future violations, with any disgorgement and financial penalty amounts to be determined by the court at a later date.

Penalties. The complaint seeks to permanently enjoin and restrain the defendants, an order for the disgorgement of ill-gotten gains including pre-judgment interest, and civil monetary penalties in addition to the issuance of an officer and director bar against DePalo.

In a parallel action, the New York County District Attorney’s Office has announced criminal charges against DePalo and Gladtke.

Attorneys: Andrew M. Calamari for SEC.

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FINANCIAL INTERMEDIARIES—NYDFS Superintendent Lawsky to step down

By John M. Pachkowski, J.D.

Benjamin M. Lawsky, Superintendent of Financial Services, announced that he will depart the New York State Department of Financial Services (NYDFS) in late-June. Lawsky was the NYDFS’s first superintendent. He was nominated by Governor Andrew Cuomo and unanimously confirmed to his position by the New York State Senate in May 2011. Prior to becoming NYDFS Superintendent, Lawsky served as Governor Cuomo’s Chief of Staff, and he previously served as the Deputy Counselor and Special Assistant throughout the administration of then-Attorney General Cuomo.

In a statement, Lawsky said: “I am deeply proud of the work our team has done building this new agency and helping strengthen oversight of the financial markets. We have assembled a great team at NYDFS and I have full confidence that the critical work of this agency will continue seamlessly moving forward. I also want to thank Governor Cuomo for the trust he showed in appointing me to this position and for providing us with the opportunity to serve the people of New York. On a personal level, I am deeply grateful to the Governor, who has been an incredible mentor and amazing friend to me over the past eight years.”

At the time of Lawsky’s confirmation, Governor Cuomo stated, “There is no one better suited to take on the task of leading this new department than Ben Lawsky. Ben’s deep understanding of complex markets, evolving financial products, and consumer protection uniquely enables him to safeguard investors while maintaining a vibrant marketplace in New York. Ben has been devoted to public service for his entire career and I am glad that he will continue to serve New Yorkers in this capacity.”

IndustryNews: FinancialIntermediaries NewYorkNews

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LAW FIRM NEWS—Kelly Tubman Hardy joins Hogan Lovells

Hogan Lovells announced that Kelly Tubman Hardy has joined its Corporate Practice in the firm’s Baltimore office, focusing on corporate and securities law, including mergers and acquisitions, joint ventures and strategic alliances, corporate governance, securities compliance and general business law.

Ms. Hardy advises clients on cross-border transactions, including M&A and joint ventures, in established and emerging markets throughout the world.

In addition to awards for her legal prowess, including recognitions by Chambers USA, Baltimore SmartCEO and Legal 500 Latin America, Ms. Hardy has been recognized by a number of regional organizations for her activities as a Baltimore community leader. The Daily Record named her one of Maryland’s Top 100 Women and the Baltimore Mayor’s Hispanic Affairs Liaison recognized her work at Education-Based Latino Outreach in Baltimore City.

Ms. Hardy joins Hogan Lovells from DLA Piper where she was Regional Office Head for Corporate and Securities.

Attorneys: Kelly Tubman Hardy (Hogan Lovells).

IndustryNews: LawFirmNews MarylandNews

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LAW FIRM NEWS—Newt Gingrich to advise Dentons on public policy, regulation

Dentons announced that Newt Gingrich will join the public policy and regulation practice at the firm. Joe Andrew, Global Chairman of Dentons, said that Gingrich arrives as the firm seeks to advise an expanded global clientele on matters that span business and government regulation. Recent domestic and international mergers by Dentons with other firms also have grown its roster of former government officials who provide regulatory advise to its clients, said a press release.

“The Firm is committed to doing something unique, challenging the traditional and innovating in the legal profession with an emphasis on knowing and understanding communities around the world for the benefit of clients,” said Gingrich. In addition to being a former Speaker of the U.S. House of Representatives, Gingrich once sought the Republican nomination for U.S. president, and he is a frequent author and commentator.

Attorneys: (Dentons).

IndustryNews: LawFirmNews DistrictofColumbiaNews

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SEC NEWS AND SPEECHES—Jessica Kane and Rebecca J. Olsen named Director and Deputy Director of the Office of Municipal Securities

The SEC announced that Jessica Kane has been named the director of the agency’s Office of Municipal Securities, replacing former director John Cross. Rebecca J. Olsen has been named deputy director.  

As former deputy director, Ms. Kane oversaw all aspects of the office.  She played a leading role in the implementation and operation of the municipal advisor registration regime, including the issuance of staff interpretive guidance on certain aspects of the SEC’s final rules for municipal advisor registration.  Ms. Kane also led efforts in the oversight of MSRB rulemaking, including the SEC’s approval of the MSRB’s best execution rule for the municipal securities market. She previously served as senior special counsel to the director.

Previously, as chief counsel, Ms. Olsen was responsible for reviewing MSRB rulemaking and analysis of disclosure policy issues.  She also served as the office’s liaison to the Division of Enforcement’s Municipal Securities and Public Pensions Unit.

Under the Dodd-Frank Act, the SEC established a stand-alone Office of Municipal Securities to administer the SEC’s rules on practices of broker-dealers, municipal advisors, investors, and issuers in the municipal securities area and to coordinate with the MSRB on rulemaking and enforcement actions.  The Office of Municipal Securities advises the Commission and other SEC offices on policy matters, enforcement, and other issues affecting the municipal securities market and oversees MSRB rulemaking and the SEC’s municipal advisor registration program.

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In the News


Ashby & Geddes, P.A. |Bragar Wexler Eagel & Squire, PC |Dentons |Friedlander & Gorris, P.A. |Gibson Dunn & Crutcher LLP |Hogan Lovells |Law Office of John R. Williams |Morris, Nichols, Arsht & Tunnell LLP |Richards, Layton & Finger, P.A. |Rosenthal, Monhait & Goddess, P.A. |Ross Aronstam & Moritz LLP |Skadden, Arps, Slate, Meagher & Flom LLP [1, 2] |Sullivan & Cromwell LLP |Wachtell, Lipton, Rosen & Katz


Activision Blizzard, Inc. | ASAC II LLC | ASAC II LP | BHP Billiton Limited | BHP Billiton Plc. | Brevan Howard Credit Catalyst Master Fund Ltd. | Macquarie Capital (USA), Inc. | Spanish Broadcasting System, Inc.

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