Category: Financial Services Law

Let the Light of Day Shine Re: SEC (Securities and Exchange Commission) Insider Trading Case

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We want to spend a moment talking about an old subject—the Securities and Exchange Commission’s insider trading case against Mark Cuban—and Cuban’s new business venture that has resulted from that case. The case, the SEC’s handling of the matter, and Cuban’s reactions (then and now) say a lot about how “the G” does business and may even be revelatory in the future.

As you recall, the SEC charged Cuban with insider trading in 2008. The case was originally dismissed by the trial court. The Fifth Circuit Court of Appeals reinstated the case, concluding that the inquiry into whether Cuban had, in fact, traded on the basis of material, non-public information was simply too fact-intensive for the trial court to have decided without a full factual inquiry.

This, of course, is the problem with fraud-based government enforcement: the question of a person’s intent is difficult to determine without an expensive factual inquiry—and the costs of such an inquiry (combined with the potential consequences) are so high that many people settle with the G rather than seek to exonerate themselves. Historically, the SEC “extorted” settlements (not our view, necessarily, see Al’s Emporium Commentary in the Wall Street Journal Online Edition as of October 19, 2010) in reliance on this heavy burden. At the heart of the SEC’s effort was the “no admit or deny” settlement.

In these settlements, the SEC would recite each allegation of wrongdoing against a defendant as well as the terms under which the defendant had settled the charges. The defendant would neither admit nor deny the SEC’s allegations. Since Mary Jo White took over at the helm of the SEC in April 2013, she purportedly has set a new course, requiring that defendants must admit wrongdoing in more and more settlements—whether or not that changes the seemingly extortive nature of these cases remains to be seen.

But Cuban, with his seemingly unlimited resources and non-retiring personality, would not be extorted. He fought back, all the way through trial, and won. Ultimately, a jury of Cuban’s peers concluded (among other things) that the SEC had not proven that Cuban received confidential information, that he traded on such information, or that he had acted knowingly or recklessly (with “fraudulent intent”) when trading. (See the Associated Press’ “Big Story” on October 16, 2013, which has a digital recreation of the jury verdict form).

When he walked out of the courtroom, Cuban went ballistic on the SEC. See his comments on YouTube – his specific comments about the SEC are found beginning about the 50th second of the clip.

“When you put someone on the stand and accuse them of being a liar, it is personal,” he said, criticizing specific members of the SEC’s staff and, generally, the SEC’s enforcement practices. Since then, Cuban has reinforced his criticism, stating: “There’s such a revolving door, and [the SEC] was run by attorneys with an attorney’s mind-set looking for their next job. It’s a résumé builder,” [Cuban] said. “No wonder they say or do whatever they damn well please. I’m like, ‘OK, I’m going to start calling them out by name.” (WSJ’s Law Blog)

Cuban isn’t stopping with these castigatory remarks. He is putting his money where his mouth is. Cuban’s latest business venture is to publicize SEC trial transcripts (which are not generally publicly available). Cuban hopes that, by publicizing trial tactics and tactics he believes are problematic, he will change the way this agency of the G does business.

Article by:

Vincent P. (Trace) Schmeltz III

Of:

Barnes & Thornburg LLP

To 8-K, or not to 8-K? For Target, that is indeed the question.


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As anyone with a pulse and a computer, television or carrier pigeon knows, Target Corporation (NYSE: TGT) suffered a major data breach in December – the extent of which is still being uncovered – and pegs the latest number of customers that have had their personal information stolen anywhere from 70 to 110 million.  As a public company, a breach of this magnitude should be material enough to warrant a Form 8-K filing, right?  As of this post, Target doesn’t seem to think so.

Form 8-K contains mandatory disclosure requirements when certain enumerated events occur, as in the entry into a material definitive agreement (Item 1.01) or the resignation of a director (Item 5.02).  Reporting an event such as the Target data breach would likely fall under Item 8.01 of Form 8-K, which is used to report “Other Events.”  Item 8.01 permits the registrant, at its option, to disclose any events not otherwise called for by another Form 8-K Item that the registrant “deems of importance to security holders,” and is an entirely voluntary filing.

Although filing under Item 8.01 of Form 8-K is voluntary, other companies that have suffered smaller data breaches have opted to file an 8-K to disclose such breaches, including The TJX Companies, Inc.’s (NYSE: TJX) breach disclosed in an 8-K in January, 2007, and Morningstar, Inc.’s (NASDAQ: MORN) more recent breach disclosed in an 8-K in July, 2013.  Target’s securities lawyers may believe that the breach is not “important to security holders,” or  is not sufficiently material enough to the roughly $38 billion company to warrant the filing of an 8-K, but 70 to 110 million affected customers is hardly immaterial, even for Target.   In a statement released January 10, Target warned that the costs related to the breach “may have a material adverse effect on Target’s results of operations in fourth quarter 2013 and/or future periods.”

Indeed, Target evidently determined when filing its Form 10-K for 2012 that the risk of a data security breach was material enough to warrant disclosure in its risk factors:

“If our efforts to protect the security of personal information about our guests and team members are unsuccessful, we could be subject to costly government enforcement actions and private litigation and our reputation could suffer.”

The nature of our business involves the receipt and storage of personal information about our guests and team members. We have a program in place to detect and respond to data security incidents. To date, all incidents we have experienced have been insignificant.  If we experience a significant data security breach or fail to detect and appropriately respond to a significant data security breach, we could be exposed to government enforcement actions and private litigation. In addition, our guests could lose confidence in our ability to protect their personal information, which could cause them to discontinue usage of REDcards, decline to use our pharmacy services, or stop shopping with us altogether. The loss of confidence from a significant data security breach involving team members could hurt our reputation, cause team member recruiting and retention challenges, increase our labor costs and affect how we operate our business.” (emphasis added)

Of course, there is no time limit for filing under Item 8.01 of Form 8-K due to it being a voluntary filing, so a filing may still be forthcoming from Target.  In any event, one can only imagine that the risk factor language above will look very different in Target’s next Form 10-K filing in two months.

Article by:

Of:

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

FINRA (Financial Industry Regulatory Authority) Issues New Rules on Securities Borrowing, Customer Protection and Callable Securities

Katten Muchin

 

On December 4, 2013 the Securities and Exchange Commission approved rules proposed by the Financial Industry Regulatory Authority regarding securities loans and borrowings, permissible use of customers’ securities, and callable securities. For securities loans and borrowings, Financial Industry Regulatory Authority proposed new Rule 4314, which requires a member firm acting as an agent in a securities lending or borrowing transaction to disclose its capacity as agent. The rule aims to clarify whether parties are acting as principals or agents when entering into security lending or borrowing agreements. When member firms loan securities to or borrow securities from a counterparty acting in an agency capacity, the rule requires the member firm to maintain books and records to reflect the details of the transaction with the agent and each principal on whose behalf the agent is acting as well as the details of the transaction. The rule allows a member firm that is a party to a loan or borrowing agreement with another member firm to liquidate the transaction whenever the other party becomes subject to one of the specified liquidation conditions. Additionally, no member firm can lend or borrow any security to or from any person that is not a member of FINRA, including any customer, except pursuant to a written agreement. Each member firm subject to Securities Exchange Act Rule 15c3-3 that borrows fully paid or excess margin securities from a customer must comply with the Securities Exchange Act Rule 15c3-3 requirements for a written agreement between the borrowing member firm and lending customer.

FINRA also adopted new Rule 4330 regarding the permissible use of customers’ securities. The rule prohibits a member firm from lending securities held on margin for a customer that are eligible to be pledged or loaned unless the member firm first obtains written authorization from the customer permitting the lending arrangement. The rule also requires a member firm that borrows fully paid or excess margin securities carried for a customer account to comply with Securities Exchange Act Rule 15c3-3, provide notices to customers in compliance with Securities Exchange Act Section 15(e), and notify FINRA at least 30 days prior to the borrowing. Before any member firm engages in a securities borrowing transaction with a customer, the rule requires the member firm to have reasonable grounds for believing that the customer’s loan of securities is appropriate for its financial situation and needs and that the member firm provide certain disclosures to the customer in writing. A FINRA member firm is also required to keep books and records evidencing compliance with these rules.

Finally, FINRA adopted new Rule 4340 to clarify requirements applicable to callable securities. The rule requires each member firm with possession or control of a callable security, in the event of a partial redemption or call, to identify such securities and establish an impartial lottery system to allocate the securities among its customers. The member firm must also provide written notice, which may be electronic, to new customers opening an account and to all customers once a year that describes how customers may access the allocation procedures on the member firm’s website or obtain hard copies upon request. The rule prohibits a member firm from allocating securities to its own or an associated person’s account during a redemption until all other customers’ positions have been satisfied. This prohibition applies only when the redemption is offered on terms favorable to the called parties. When on unfavorable terms, a member firm cannot exclude its positions or those of its associated persons from the redemption.

The proposed rules with links to amendments, comments, and the approval order may be accessed here.

 

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Consumer Financial Protection Bureau Issues New Rule Regarding Consumer Mortgage Transaction Forms

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On November 20, 2013 the Consumer Financial Protection Bureau (CFPB) issued a rule that will simplify and improve disclosure forms for consumer mortgage transactions. This rule implements the Dodd-Frank Act’s directive to integrate mortgage loan disclosures required by the Truth In Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). The two new disclosures are the Loan Estimate, which must be given three business days after application, and the Closing Disclosure, which must be given three business days before closing.

The Loan Estimate form replaces two current federal forms, the Good Faith Estimate designed by the U.S. Department of Housing (HUD) under RESPA and the “early” Truth in Lending disclosure required by TILA. The Closing Disclosure form replaces the current form used to close a loan, the HUD-1, which was designed by HUD under RESPA. It also replaces the revised Truth in Lending disclosure designed by the Federal Reserve Board under TILA.

These new rules apply to most closed-end consumer mortgages. They do not apply to home equity lines of credit, reverse mortgages or mortgages secured by mobile homes or by dwellings not attached to real property. To assist lenders, the final rule and official interpretations contain detailed instructions as to how these forms should be completed.

To permit time for lenders to come into compliance, the final rule will be effective on August 1, 2015.

Article by:

Jon G. Furlow

Of:

Michael Best & Friedrich LLP

Letters of Credit Overview and Fundamentals

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Letters of Credit (“L/Cs”) have evolved over nearly three centuries of commerce into an essential tool for banks and their customers in international business transactions, financings and government contracting. This Update provides an overview of some of the key legal and practical concepts that are necessary to use this tool effectively.

The FDIC’s examiner’s handbook defines a letter of credit as “a document issued by a bank on behalf of its customer authorizing a third party to draw drafts on the bank up to a stipulated amount and with specified terms and conditions,” and states that an L/C is a bank’s “conditional commitment…to provide payment on drafts drawn in accordance with the document terms.”

Governing Law

The sources of “law” governing L/Cs are:

  • Statute: UCC Article 5 applies to “letters of credit and to certain rights and obligations arising out of transactions involving letters of credit.” UCC Section 5-108(e) provides that an issuing bank “shall observe standard practice of financial institutions that regularly issue letters of credit.”
  • Practice codes: Derived from two sources: the UCP600 (Uniform Customs and Practice for Documentary Credits 2007 Revision, International Chamber of Commerce Publication No. 600) and the ISP98 (Institute for International Banking Law and Practice Publication 590; International Standby Practices (1998)).
  • Contract law: With some limited exceptions, any provision of Article 5 may be modified by contract. Thus, if the UCP600 or ISP98 is incorporated into an L/C, it supersedes any contrary provision of Article 5. The exceptions include the “Independence Principle” (discussed below) and certain other rights and obligations of the issuing bank.

Terminology

Certain terms are important to an understanding of the parties’ respective rights and obligations, with some of the most basic being:

  • Issuer – the bank that issues the L/C and is required to Honor a Draw by the Beneficiary;
  • Applicant – the customer for whose account the L/C is issued;
  • Beneficiary – the person in whose favor the L/C is issued and who is entitled to Present/Draw and receive payment from the Issuer;
  • Honor – performance of the Issuer’s undertaking (in the L/C) to make payment; and
  • Presentation (also called a Draw) – delivery of document(s) to an Issuer for (or to induce) Honor of the L/C.

The Independence Principle

Central to an understanding of L/C law and practice is that an L/C is a self-contained whole. This is known as the “Independence Principle” based upon language in UCC §5-103, which states that the rights and obligations of an Issuer to a Beneficiary under an L/C are “independent of the existence, performance, or nonperformance of a contract or arrangement out of which the letter of credit arises or which underlies it, including contracts or arrangements between the issuer and the applicant and between the applicant and the beneficiary.”

The Independence Principle protects all parties. The Issuer is protected because, as long as the Presentation requirements in the L/C are strictly complied with, the Issuer must Honor it without looking into the relationship between the Applicant-customer and the Beneficiary making the Draw. The Applicant and Beneficiary are also both protected because the Issuer’s obligations under the L/C are not affected by the relationship between the Applicant-customer and the Issuer itself. Thus, the Applicant may be in default of its obligations to the Issuer, but the Issuer must nevertheless Honor a proper Presentation.

Types of L/Cs

L/Cs fall into two general categories: “commercial/documentary L/Cs” (which are the primary focus of the UCP600) and “everything else,” consisting mainly of what are known as “Standby L/Cs” which, themselves, come in several varieties and are covered by the ISP98.

“Commercial/Documentary L/Cs” are typically issued to facilitate specific transactions and to assure payment in trade or commerce (usually international). Generally, Presentation is made when the underlying transaction is consummated. These are referred to as “documentary L/Cs” because a Draw requires documentary proof that the underlying transaction has occurred.

For example, an exporter and importer might agree that goods will be paid for at the time of shipment. The exporter won’t ship without assurance of getting paid, and the importer won’t pay without assurance that the goods have been shipped. Thus, the importer (Applicant) arranges with its Bank (Issuer) for an L/C that gives the exporter (Beneficiary) the right to Draw when the exporter provides the Issuer with an original Bill of Lading proving shipment. Anecdotally, this is partly why documentary L/Cs were conceived – to avoid having the Issuer bank independently verify shipment, which might have involved the banker making a trip to the dock and watching the goods being loaded and the ship sailing off beyond the horizon.

“Consummation” of the underlying transaction – i.e., the goods being placed on the ship – is defined by the terms of the L/C, as are the documentation requirements, which are either spelled out in the L/C or incorporated from the UCP600.

“Standby L/Cs“. The ISP98 defines eight types of Standby L/Cs, of which the most common are “Financial Standbys.”

A Financial Standby is an irrevocable guarantee by an Issuer of Applicant’s payment or performance in an underlying transaction. The Beneficiary may Draw, and the Issuer must Honor, if its customer (Applicant) does not pay, deliver or perform. Some event, usually a default by Applicant under its contract with Beneficiary, “triggers” the Beneficiary’s right to Draw. Although independent proof of the Beneficiary’s right to Draw is not required, a Financial Standby is still “documentary” in the sense that the Beneficiary must make the Draw in writing and (typically) represent to the Issuer that Applicant has defaulted. Due to the Independence Principle, the Issuer (without verifying the default) must Honor if the Draw complies with the Presentation requirements spelled out or incorporated into the L/C.

Financial Standbys present an Issuer with both a credit benefit and a credit risk. Because Applicant’s default under its contract with the Beneficiary is a condition to the Issuer having to Honor the Beneficiary’s Draw, the Issuer may never have to “fund” (Honor) as long as Applicant doesn’t default; BUT, if the Issuer does have to fund, it will be on account of a customer who has already defaulted on a (probably material) business obligation.

A “Direct Pay L/C” is a type of Financial Standby. While it is also an Issuer’s guarantee of Applicant’s payment of a debt or other obligation, the difference is that Applicant’s default is not a condition to Draw – all payments are made by Draws on the L/C. Direct Pay L/Cs are useful in cases where the “Beneficiary” is a group of unaffiliated debt holders (i.e., holders of publicly-traded bonds) because this payment method provides liquidity and avoids bankruptcy preference claims against debt service payments. Because of the Independence Principle, the Issuer is the primary obligor for payment of debt service; thus, Applicant’s default is of no concern to bondholders and bonds backed by an irrevocable Direct Pay L/C are marketed on the strength of the Issuer’s credit, not the Applicant’s.

Of special note are Standby L/Cs required by governmental entities. Various Wisconsin Statutes and Administrative Rules require or permit a person transacting business with a state agency (obtaining a license or permit, for example) to provide a Standby L/C primarily to demonstrate proof of financial responsibility in cases where the license or permit, for example, creates a potential monetary obligation to the State. Many Wisconsin state agencies’ regulations make reference to such L/Cs, but only the Department of Natural Resources and the Department of Transportation have prescribed forms.

Issuer’s Risks

An Issuer’s most obvious risk is its customer’s default: failure to reimburse the Issuer after a Draw has been Honored. The reimbursement obligation can be a requirement to deposit funds with the Issuer immediately upon a Draw, but can also be part of an ongoing credit relationship where Draws are simply treated as “advances” on a term or revolving credit agreement.

Issuer banks also face other risks, such as fraud (a legitimate Beneficiary makes a fraudulent Draw), forgery (impostor Beneficiary makes a Draw) and sovereign, regulatory and legal risks. Regulatory issues created by L/Cs involving lending limits, contingent liabilities, off-balance sheet treatment and regulatory capital requirements also come into play but are beyond the scope of this overview.

Common Problems

Among the more common L/C problems we have seen with our Issuer bank clients are:

  • Standby L/Cs that incorrectly incorporate provisions of the UCP600 or, less frequently, Commercial/Documentary L/Cs that incorrectly incorporate from the ISP98;
  • not being aware of automatic renewal and reinstatement provisions, and potential post-expiry obligations;
  • failing to insist on strict adherence to the Presentation requirements, especially if they are incorporated from the UCP600 or the ISP98;
  • failing to Honor a proper Draw as an “accommodation” to its customer/Applicant who has informed the bank of a dispute with the Beneficiary; and
  • poorly-drafted L/Cs that make inappropriate reference to non-documentary issues.

Banks issuing L/Cs to assist customers in export-import transactions, or providing proof of financial responsibility or liquidity/credit support, should be aware that their obligations and rights are often not obvious from simply reading the L/C without being familiar with the underlying laws and practice codes that are summarized in this Update. As noted above, a carefully-considered and well-drafted L/C protects all parties, including the Issuer.

Article by:

von Briesen & Roper, S.C.

Swiss National and Former Energy Executive Criminally Charged Under Foreign Corrupt Practices Act (FCPA)

Katten Muchin

In an illustration of the extraterritorial reach of the Foreign Corrupt Practices Act (FCPA), Alain Riedo, a Swiss citizen and the general manager of Maxwell Technologies S.A. (Maxwell), a Swiss subsidiary of a US public company, was criminally charged with violating anti-bribery, book and records, and internal control provisions of the FCPA. According to the indictment filed in the Southern District of California, Riedo, along with unidentified co-conspirators and agents, allegedly conspired to, and made, corrupt payments to Chinese government officials and falsely recorded those payments on Maxwell books and records in an effort to retain business, prestige and increased compensation. Riedo worked for Maxwell, which manufactured and sold high-voltage/high-tension capacitors (HV/HT) in several countries, including China. From October 2002 through May 2009, Riedo allegedly conspired with a senior officer of the US parent company, a manager of the Swiss subsidiary and a Chinese national acting as Maxwell’s agent, and caused up to $2 million in bribes to be paid to Chinese government officials in order to obtain HV/HT sales contracts. According to the indictment, the bribery scheme entailed giving prospective customers quotes for HV/HT sales at prices that included a “secret mark-up” of approximately 20 percent. Invoices were prepared reflecting the marked-up prices and the agent in China kicked back the marked-up portion to employees at Chinese state-owned electric utility manufacturers. The indictment alleges that Riedo falsely recorded the inflated payments in Maxwell books, records and accounts as “commissions, sales expenses, or consulting fees.” Thereafter, Riedo allegedly electronically transmitted this erroneous financial information to Maxwell’s parent company in California, which resulted in errors in the parent’s publicly filed consolidated financial statements and other Securities and Exchange Commission filings, including false sub-certifications of the financials.

Riedo—who, according to the indictment, was separated from the company shortly after the alleged conspiracy ended—faces nine counts. No charges were filed against the companies. In fact, the indictment alleges that Riedo and the Chinese agent subverted the corporate compliance program by falsely representing in an internal FCPA questionnaire that they were not aware of any FCPA violations.

United States v. Alain Riedo, No. 13-cr-3789 JM (S.D. Cal. October 15, 2013).

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Business and Economic Incentives Primer

Womble Carlyle

Competition among jurisdictions to recruit and retain companies is intense. To attract business to their communities, both state and local governmental authorities will often offer discretionary economic incentives for projects that generate substantial tax revenues or create significant employment opportunities. Companies requiring new or larger facilities or facing lease expirations for their existing operations should assess whether they might qualify for an “incentives package” from the various jurisdictions they are considering for their projects. The potential benefits will typically vary depending upon the project’s key capital expenditures, job creation potential and the company’s corresponding wage parameters and associated commitments. Companies with potentially qualifying projects should evaluate how to best leverage their unique strengths to negotiate all available incentive benefits and to maximize those benefits once they are secured.

Business and economic incentives are the tax, cash and in-kind benefits offered by state and local governments to induce a company to relocate to a new community or remain in its existing jurisdiction primarily to create or retain jobs and increase tax revenue. Incentives help businesses mitigate upfront capital and ongoing operating costs for its required projects. Tax incentives include a variety of income and sales/use tax credits, exemptions, reductions and abatements. These can also include other tax-related investment incentives, such as investment and tax credits, research and development tax incentives, and accelerated depreciation of industrial equipment. The Enterprise Zone (EZ), a special kind of tax incentive program (also known as Empowerment Zones and Empowerment Communities), has been used by the federal government and even more widely by many states.

Cash incentives include monetary grants, reimbursements of transportation or infrastructure costs and other financial incentives including alternative financing subsidies. One of the most common benefits in this category is the Industrial Development Bond (IDB) that is used by jurisdictions to offer low-interest loans to firms. A variation on the IDB is the Tax Increment Financing (TIF) districts that are used by many states. A TIF allows governments to float bonds to help companies based on their anticipated future tax impact. In-kind incentives include expedited permitting by the state, county and local municipality and customized worker training programs. Some jurisdictions also offer other in-kind benefits such as watered-down environmental regulations and “right to work” laws that inhibit union organizing. Some states also have federal grant monies they are empowered to allocate towards different programs and projects depending on a project’s possible “public” infrastructure needs and other specific criteria.

In offering incentives, cities and counties are typically driven more by investments that increase the tax base while states focus more on jobs that pay above average wages. Some jurisdictions will provide incentives only for manufacturing projects or for specific statutory lists of facilities such as manufacturing, distribution facilities, air cargo hubs, multimodal facilities, headquarters facilities and data centers. Other states will not provide incentives for retail or hospitality facilities. In general, cities and counties have more flexibility than states in the kinds of projects for which they will provide incentives. Some states have wage tests and require that health care insurance and benefits be provided at the employer’s cost or that at least a portion of the cost be subsidized.

Whether for a corporate expansion or relocation, it is critical for a company to initiate its incentive identification and negotiation efforts early in the site-selection process for its project. Specifically, to achieve the greatest negotiating leverage, a company should begin the pursuit of economic incentives at the same time it is are undertaking its site selection efforts, since it is at this point in the process that competition readily exists between the cities, counties and/or states interested in enticing the company to relocate or remain in their jurisdictions. Since the success of this process is, in part, dependent upon “competing” the relevant state and local jurisdictions, it is important for a company to make it clear to all who are acting for the company that no decision or no public announcement may be made about the company’s plans until the company has evaluated all relevant factors.

To begin the process, a company should form a project team that will work with various economic development representatives from the relevant jurisdictions to achieve the optimal incentives package. The project team should develop a formal incentives negotiation strategy that would include some if not all of the following components:

  • Identifying and analyzing all incentive opportunities available for the project.
  • Determining the company’s short and long term capital and operating costs as well as job creation estimates.
  • Preparing a preliminary “incentives” pro forma.
  • Outlining the plan for securing the incentives and evaluating the related commitments that will be necessary from the company.
  • Identifying and integrating important components of the company’s corporate culture into the negotiation requests and strategy.
  • Determining the essential needs of the project to be included as the non-negotiable points of the company’s business case.
  • Defining the “business case” for why a jurisdiction would benefit from the company’s relocation to that state/county, such as tax (income and sales) revenues to be generated and the jobs to be created by the company.
  • Identifying how to formulate the most productive partnership between the company and the community.
  • Determining how to work creatively within the state and local framework.
  • Considering the use of a third party economic impact study to create an effective business case showing the jurisdiction how to fund the incentives.

A company that is well positioned to benefit from business and economic incentives should engage a seasoned professional who has a successful track record in achieving incentive benefits from the jurisdictions relevant to its business. Working in coordination with the governmental authorities, the right advisor can assist the company in establishing timelines for critical dates, administering applications to secure the incentives, and obtaining formal jurisdictional approvals to ensure compliance is implemented and negotiated incentives are realized. The advisor will also participate, as requested, in presentations for internal and governmental board approval and provide ongoing information and updates to the company during key phases of the incentive pursuit process.

After the final incentives package has been negotiated, the company and the jurisdiction will prepare and negotiate the required incentives agreements and then pursue the formal final governmental approvals. Public relations personnel for the company and the governmental authority are typically involved at this stage to prepare supporting media releases and project announcements. Once all necessary approvals are obtained, the company must establish internal documentation and processes to satisfy the compliance requirements to realize the negotiated incentives, which typically takes the form of a compliance manual.

Business and economic incentives can be valuable tools for a company to reduce costs, increase savings and manage risks as they pursue a signature lease transaction, building acquisition or facility development. To achieve the optimal result, the incentives process must be carefully managed from inception to completion, toward the ultimate goal of creating a meaningful partnership between the company and the community in which the company will conduct its business.

This article originally was published in the August 2013 edition of “Focus on WMACCA,” the newsletter of the Washington Metropolitan Area Corporate Counsel Association. 

This article was written with Scott R. Hoffman with Cushman & Wakefield.

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Investment Management Legal and Regulatory Update – October 2013

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SEC Issues Guidance Update for Investment Companies that Invest in Commodity Interests and Announces New Risk and Examinations Office

The staff of the Division of Investment Management has issued a Guidance Update that summarizes the views of the Division regarding disclosure and compliance matters relevant to funds that invest in commodity interests. The staff also announced the creation of a Risk and Examinations Office within the Division of Investment Management that will accompany the SEC’s Office of Compliance Inspections and Examinations (OCIE) on exam visits.

Disclosure of Derivatives and Associated Risks. Any principal investment strategies disclosure related to derivatives should be tailored specifically to how a fund expects to be managed and should address those strategies that the fund expects to be the most important means of achieving its objectives and that it also anticipates will have a significant effect on its performance. In determining the appropriate disclosure, a fund should consider the degree of economic exposure the derivatives create, in addition to the amount invested in the derivatives strategy. This disclosure also should describe the purpose that the derivatives are intended to serve in the portfolio (e.g., hedging, speculation, or as a substitute for investing in conventional securities), and the extent to which derivatives are expected to be used. Additionally, the disclosure concerning the principal risks of the fund should similarly be tailored to the types of derivatives used by the fund, the extent of their use, and the purpose for using derivatives transactions.

Prior Performance Presentation. A newly registered fund that invests in commodity interests and that includes in its registration statement information concerning the performance of private accounts or other funds managed by the fund’s adviser is responsible for ensuring that such information is not materially misleading. Specifically, a fund that includes the performance of other funds or private accounts should generally include the performance of all other funds and private accounts that have investment objectives, policies, and strategies substantially similar to those of the fund.

Legend Requirement. Rule 481 under the Securities Act requires a fund to provide a legend on the outside front cover page that indicates that the SEC has not approved or disapproved of the securities or passed upon the accuracy or adequacy of the disclosure in the prospectus and that any contrary representation is a criminal offense. The staff will not object if a fund that invests in commodity interests includes in the legend language that also indicates that the CFTC has not approved or disapproved of the securities or passed upon the accuracy or adequacy of the disclosure in the prospectus.

Compliance and Risk Management. Day-to-day responsibility for managing a fund’s portfolio, including any commodity interests and their associated risks, rests with the fund’s investment adviser. In addition, the fund’s board generally oversees the adviser’s risk management activities as part of the board’s oversight of the adviser’s management of the fund. The staff expects that funds and their advisers would adopt policies and procedures that address, among other things, consistency of fund portfolio management with disclosed investment objectives and policies, strategies, and risks.

Each fund should have in place policies and procedures that are sufficient to address the accuracy of disclosures made about the fund’s use of derivatives, including commodity interests, and associated risks, as well as consistency of the fund’s investments in these derivatives with the fund’s investment objectives. For example, these policies and procedures should be reasonably designed to prevent material misstatements about a fund’s use of derivatives, including commodity interests, and the associated risks.

New Risk and Examinations Office. The update notes that a Risk and Examinations Office has recently been created within the Division of Investment Management to analyze and monitor the risk management activities of investment advisers, investment companies, the investment management industry and new products. The group will work closely with OCIE to make onsite visits to investment management firms.

Source: SEC Division of Investment Management Guidance, August 2013, 2013-05.

SEC Approves Registration Rules for Municipal Advisors

State and local governments that issue municipal bonds frequently rely on advisors to help them decide how and when to issue the securities and how to invest proceeds from the sales. Prior to passage of the Dodd-Frank Act in 2010, municipal advisors were not required to register with the SEC. This left many municipalities relying on advice from unregulated advisors. After the Dodd-Frank Act became law, the SEC established a temporary registration regime for municipal advisors that prohibited any municipal advisor from providing advice to, or soliciting, municipal entities or other covered persons without being registered. More than 1,100 municipal advisors have since registered with the SEC. The SEC recently adopted final rules that establish a permanent registration regime for municipal advisors.

Registered municipal advisors will also likely be subject to additional new regulation from the Municipal Securities Rulemaking Board (MSRB). In September 2011, the MSRB withdrew several rule proposals pertaining to municipal advisors pending adoption by the SEC of a permanent registration regime for municipal advisors. Among the proposals was a rule regulating political contributions by municipal advisors. The MSRB had previously indicated that it would resubmit the withdrawn rule proposals once a final definition of the term “municipal advisor” was adopted by the SEC.

Proposed Rule

In 2010, the SEC proposed a rule governing the permanent registration process. The proposal defined “municipal advisor” broadly and would have required municipal advisor registration of appointed board members of municipalities and people providing investment advice on all public funds. The SEC received more than 1,000 comment letters on the proposal, most of which raised concerns about the broad reach of the proposal.

Final Rule

The final rule requires a municipal advisor to register with the SEC if it:

  • provides advice on the issuance of municipal securities or about certain “investment strategies” or municipal derivatives; or
  • undertakes a solicitation of a municipal entity or obligated person.

The rule clarifies who is and is not a “municipal advisor” and offers guidance on when a person is providing “advice” for purposes of the municipal advisor definition. The rule exempts employees and appointed officials of municipal entities from registration and limits the type of “investment strategies” that will result in municipal advisor status. Additionally, instead of the proposed approach that would have required individuals associated with registered municipal advisory firms to register separately, the final rule requires firms to furnish information about these individuals.

Defined Terms

Advice. A person is providing “advice” to a municipal entity or an “obligated person” based on all of the relevant facts and circumstances, including whether the advice:

  • involves a recommendation to a municipal entity;
  • is particularized to the specific needs of a municipal entity; or
  • relates to municipal financial products or the issuance of municipal securities.

Advice, however, does not include providing certain general information.

An “obligated person” is an entity such as a non-profit university or non-profit hospital that borrows the proceeds from a municipal securities offering and is obligated by contract or other arrangement to repay all or some portion of the amount borrowed.

Investment Strategies. A person providing advice to a municipal entity or an “obligated person” with respect to “investment strategies” only has to register if such advice relates to:

  • the investment of proceeds of municipal securities;
  • the investment of municipal escrow funds; or
  • municipal derivatives.

Exemptions from the Municipal Advisor Definition

The following persons conducting the specified activities would not be required to register as a municipal advisor:

Registered Investment Advisers. Registered investment advisers and associated persons do not have to register if they provide investment advice in their capacities as registered investment advisers, such as providing advice regarding the investment of the proceeds of municipal securities or municipal escrow investments.

This exemption does not apply to advice on the structure, timing, and terms of issues of municipal securities or municipal derivatives. The SEC considers advice in these areas as outside the focus of investment adviser regulation.

Independent Registered Municipal Advisor. Persons who provide advice in circumstances in which a municipal entity has an independent registered municipal advisor with respect to the same aspects of a municipal financial product or issuance of municipal securities do not have to register, provided that certain requirements are met and certain disclosures are made.

Banks. Banks do not have to register to the extent they provide advice on certain identified banking products and services, such as investments held in deposit accounts, extensions of credit, funds held in a sweep account or investments made by a bank acting in the capacity of bond indenture trustee or similar capacity.

This exemption does not apply to banks that engage in other municipal advisory activities, such as providing advice on the issuance of municipal securities or municipal derivatives, in part because municipal derivatives were a source of significant losses by municipalities in the financial crisis.

Underwriters. Brokers, dealers and municipal securities dealers serving as underwriters do not have to register if their advisory activities involve the structure, timing and terms of a particular issue of municipal securities.

Registered Commodity Trading Advisor. Registered commodity trading advisors and their associated persons do not have to register if the advice they provide relates to swaps.

Swap Dealers. Registered swap dealers do not have to register as municipal advisors if they provide advice with respect to swaps in circumstances in which a municipal entity is represented by an independent advisor.

Public Officials and Employees. Public officials do not have to register to the extent that they are acting within the scope of their official capacity. This exemption addresses an unintended consequence of the proposed rule that generated significant public comment and created the impression that public officials and municipal employees would be covered if they provided “internal” advice.

This exemption covers persons serving as members of a governing body, an advisory board, a committee, or acting in a similar official capacity as an official of a municipal entity or an obligated person. For instance, it covers:

  • members of a city council, whether elected or appointed, who act in their official capacity; and
  • members of a board of trustees of a public or private non-profit university acting in their official capacity, where the university is an obligated person by virtue of borrowing proceeds of municipal bonds issued by a state governmental educational authority.

Similarly, this exemption covers employees of a municipal entity or an obligated person to the extent that they act within the scope of their employment.

Attorneys. Attorneys do not have to register if they are providing legal advice or traditional legal services with respect to the issuance of municipal securities or municipal financial products.

This exemption does not apply to advice that is primarily financial in nature or to an attorney representing himself or herself as a financial advisor or financial expert on municipal advisory activities.

Accountants. Accountants do not have to register if they are providing accounting services that include audit or other attest services, preparation of financial statements, or issuance of letters for underwriters.

Registration Forms

The final rule requires municipal advisory firms to file the following through EDGAR:

  • Form MA to register as a municipal advisor; and
  • Form MA-I for each individual associated with the firm who engages in municipal advisory activities.

The temporary registration regime will remain in place until December 31, 2014. The new rule requires municipal advisors to register on a staggered basis beginning July 1, 2014. The expiration date of the temporary rules will be extended in order to allow municipal advisors to continue to remain temporarily registered during the staggered compliance period.

Sources: SEC Approves Registration Rules for Municipal Advisors, SEC Press Release 2013-185 (September 18, 2013); Registration of Municipal Advisors, SEC Release No. 34-70462 (September 18, 2013).

SEC Eliminates the Prohibition on General Solicitation and General Advertising in Certain Private Offerings to Accredited Investors

As we reported in our July Client Alert, the SEC amended Regulation D to implement a Jumpstart Our Business Startups Act (JOBS Act) requirement to lift the ban on general solicitation and general advertising for certain private offerings.

JOBS Act

Congress passed the JOBS Act in 2012, which directed the SEC to remove the prohibition against general solicitation and general advertising for securities offerings relying on Rule 506, provided that sales are limited to accredited investors and an issuer takes reasonable steps to verify that all purchasers are accredited investors.

While issuers will be able to widely solicit and advertise for potential investors, the JOBS Act required the SEC to adopt rules that “require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission.” In other words, there is no restriction on who an issuer can solicit, but an issuer faces restrictions on who is permitted to purchase its securities.

Rule 506(c)

The addition of 506(c) to the existing Rule 506 permits issuers, including hedge funds and other private funds, to use general solicitation and general advertising to offer their securities provided that:

  • all purchasers of the securities are accredited investors (as defined in Rule 501);
  • the issuer takes reasonable steps to verify that the investors are accredited investors;
  • all other conditions of the Rule 506 exemption are met; and
  • Form D is completed and the box is checked indicating that Rule 506(c) is being relied upon.

Verification of Accredited Investor Status

Under the new rules, the issuer will need to take reasonable steps to verify that each investor is accredited. Whether the steps taken are “reasonable” will be a principles-based determination by the issuer, in the context of the particular facts and circumstances of each purchaser and transaction. The SEC noted that the issuer should consider the nature of the purchaser and the amount and type of information that the issuer has about the purchaser; the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering; and the terms of the offering, such as a minimum investment amount.

In response to comments received with respect to the SEC’s original rule proposal, the amendment to Rule 506 also includes a non-exclusive list of methods that issuers may use to verify that purchasers are accredited investors. The methods described in the final rule include the following:

  • Verification of Income. Review IRS forms filed for last two years and obtain a written representation of expected income for the current year.
  • Verification of Net Worth. Review documentation related to assets (bank and brokerage statements, CDs and independent appraisal reports) and liabilities (credit reports).
  • Third Party Verification. Obtain a written confirmation that a person is an accredited investor from a broker-dealer, investment adviser, attorney or CPA.
  • Existing Accredited Security Holder. For any investor who invested in an issuer’s prior Rule 506 offering as an accredited investor and remains an investor, obtain a written certification (at the time of a Rule 506(c) sale) that he or she still qualifies as an accredited investor.

Preservation of Existing Rule

The existing provisions of Rule 506 as a separate exemption are not affected by the final rule. Issuers conducting Rule 506 offerings without the use of general solicitation or general advertising can continue to conduct securities offerings in the same manner and aren’t subject to the new verification rule.

Form D

In connection with these changes, Form D has been amended to require issuers to indicate whether they are relying on 506(c), which permits general solicitation and advertising in a Rule 506 offering.

The rule amendments became effective September 23, 2013.

Sources: SEC Approves JOBS Act Requirement to Lift General Solicitation Ban, Commission Also Adopts Rule to Disqualify Bad Actors from Certain Offerings and Proposes Rules to Enable SEC to Monitor New Market and Bolster Investor Protections, SEC Press Release 2013-124 (July 10, 2013); Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, SEC Release No. IA-3624 (July 10, 2013).

SEC Adopts Rule to Disqualify “Bad Actors” from Rule 506 Offerings

The SEC recently approved amendments to Rule 506 to set forth the “bad actor” (commonly known as “bad boy”) provisions that could disqualify issuers from relying on the rule. The Dodd-Frank Act directed the SEC to adopt the amendments in order to prevent issuers from relying on the Rule 506 safe harbor if certain “bad actors” were involved in the offering.

As required by the Dodd-Frank Act, the SEC approved disqualifications under Rule 506 that are substantially similar to the disqualifications found in other securities regulations. Persons covered by the bad boy provisions include: issuers; directors, executive officers, other officers participating in the offering, general partners or managing members of issuers; beneficial owners of 20% or more of the issuer’s voting equity securities; investment managers to an issuer that is a pooled investment fund and directors, executive officers, other officers participating in the offering, general partners or managing members of the investment manager; promoters connected with the issuer; persons compensated for soliciting investors as well as the directors, officers, general partners or managing members of any compensated solicitor. The disqualifying events include:

  • securities-related criminal convictions;
  • securities-related court injunctions and restraining orders;
  • final orders of a state securities commission, state insurance commission, state or federal bank, savings association or credit union regulator or the CFTC barring an individual from association with regulated entities or from engaging in securities, insurance or banking business or finding a violation of any law pertaining to fraudulent, manipulative or deceptive conduct;
  • SEC disciplinary orders relating to brokers, dealers, municipal securities dealers, investment advisers and investment companies and their associated persons;
  • SEC cease-and-desist orders related to violations of certain anti-fraud provisions and registration requirements of the federal securities laws;
  • suspension or expulsion from membership in, or suspension or bar from associating with a member of, a securities self-regulatory organization; and
  • SEC stop orders pertaining to the filing of a registration statement or the suspension of an exemption.

Reasonable Care Exception. Under this exception, an issuer would not lose the benefit of the Rule 506 safe harbor if it can show that it did not know and, in the exercise of reasonable care, could not have known that a covered person with a disqualifying event participated in the offering.

Disclosure of Pre-Existing Disqualifying Events. Disqualification applies only for disqualifying events that occur after September 23, 2013, the effective date of this rule. Matters that existed before the effective date of the rule and would otherwise be disqualifying are subject to a mandatory disclosure requirement to investors.

Sources: SEC Approves JOBS Act Requirement to Lift General Solicitation Ban, Commission Also Adopts Rule to Disqualify Bad Actors from Certain Offerings and Proposes Rules to Enable SEC to Monitor New Market and Bolster Investor Protections, SEC Press Release 2013-124 (July 10, 2013); Disqualification of Felons and Other Bad Actors from Rule 506 Offerings, SEC Release No. 33-9414 (July 10, 2013).

SEC Proposes Amendments to Private Offering Rules (Regulation D and Form D)

In partial response to the many comments that the SEC received with respect to its proposed JOBS Act amendments to Rule 506, the SEC recently proposed the following amendments to the private offering rules.

Advance Notice of Sale. Under the proposal, issuers that intend to engage in general solicitation as part of a Rule 506 offering would be required to file the Form D at least 15 calendar days before engaging in general solicitation for the offering. Also, within 30 days of completing an offering, issuers would be required to update the information contained in the Form D and indicate that the offering has ended.

Additional Information about the Issuer and the Offering. Under the proposal, issuers would be required to provide additional information such as:

  • types of general solicitation used;
  • methods used to verify accredited investor status;
  • publicly available website;
  • controlling persons;
  • industry group;
  • asset size;
  • breakdown of investor types (accredited/non-accredited and natural person/entity) and amounts invested; and
  • breakdown of use of proceeds.

Disqualification. Under the proposal, an issuer would be disqualified from using the Rule 506 exemption in any new offering if the issuer or its affiliates did not comply with the Form D filing requirements in a Rule 506 offering.

Legends and Disclosures. Under the proposal, issuers would be required to include certain legends or cautionary statements in any written general solicitation materials used in a Rule 506 offering. The legends would be intended to inform potential investors that the offering is limited to accredited investors and that certain potential risks may be associated with such offerings.

In addition, if the issuer is a private fund and includes information about past performance in its written general solicitation materials, it would be required to provide additional information in the materials to highlight the limitations on the usefulness of this type of information. The issuer also would need to highlight the difficulty of comparing this information with past performance information of other funds. The proposal also requests public comment on whether other manner and content restrictions should apply to written general solicitation materials used by private funds.

Submission of Written General Solicitation Materials to the SEC. Under the proposal, issuers would be required to submit written general solicitation materials to the SEC through an intake page on the SEC website. Materials submitted in this manner would not be available to the general public. As proposed, this requirement would be temporary, expiring after two years.

Guidance to Private Funds about Misleading Statements. In its current form, Rule 156 under the Securities Act provides guidance on when information in mutual fund sales literature could be fraudulent or misleading for purposes of the federal securities laws. Under the proposal, the rule would be amended to apply to the sales literature of private funds.

Comments on the proposal originally were due on September 23, 2013. However, “in light of the public interest,” the SEC re-opened the comment period until October 30, 2013.

Sources: SEC Approves JOBS Act Requirement to Lift General Solicitation Ban, Commission Also Adopts Rule to Disqualify Bad Actors from Certain Offerings and Proposes Rules to Enable SEC to Monitor New Market and Bolster Investor Protections, SEC Press Release 2013-124 (July 10, 2013); Amendments to Regulation D, Form D and Rule 156, SEC Release No. IC-30595 (July 10, 2013).

SEC Charges Investment Adviser for Misleading Fund Board About Algorithmic Trading Ability

The SEC charged an investment adviser and its former owner for misleading a mutual fund’s board of directors about the firm’s ability to conduct algorithmic currency trading so the board would approve the adviser’s contract to manage the fund.

The case arises out of an initiative by the SEC Enforcement Division’s Asset Management Unit to focus on the “15(c) process” – a reference to Section 15(c) of the Investment Company Act that requires a fund’s board to annually evaluate the fund’s advisory agreements. Advisers must provide the board with truthful information necessary to make that evaluation.

“It is critical that investment advisers provide truthful information to the directors of the registered funds they advise,” said Julie M. Riewe, Co-Chief of SEC Enforcement Division’s Asset Management Unit. “Both boards and advisers have fiduciary duties that must be fulfilled to ensure that a fund’s investors are not harmed.”

The SEC’s Enforcement Division alleged that Chariot Advisors LLC and Elliott L. Shifman misled the fund’s board about the nature, extent, and quality of services that the firm could provide. In two presentations before the board, Shifman misrepresented that his firm would implement the fund’s investment strategy by using a portion of the fund’s assets to engage in algorithmic currency trading. Chariot fund’s initial investment objective was to achieve absolute positive returns in all market cycles by investing approximately 80% of the fund’s assets under management in short-term fixed income securities, and using the remaining 20% to engage in algorithmic currency trading.

According to the SEC’s order instituting administrative proceedings, Chariot Advisors did not have an algorithm capable of conducting such currency trading. This was particularly significant because in the absence of an operating history the directors focused instead on Chariot Advisors’ reliance on models when the board evaluated the advisory contract. Even though Shifman believed that the fund’s currency trading needed to achieve a 25 to 30% return to succeed, Shifman allegedly did not disclose to the board that Chariot Advisors had no algorithm or model capable of achieving such a return.

The SEC alleges that for at least the first two months after the fund was launched, Chariot Advisors did not use an algorithm model to perform the fund’s currency trading as represented to the board, but instead hired an individual trader who was allowed to use discretion on trade selection and execution. According to the order, the trader used a technical analysis, rules-based approach for trading that combined market indicators with her own intuition.

The SEC further alleges that the misconduct by Shifman and Chariot Advisors caused misrepresentations and omissions in the Chariot fund’s registration statement and prospectus filed with the SEC and viewed by investors.

A hearing will be scheduled before an administrative law judge to determine whether the allegations contained in the order are true and whether any remedial sanctions are appropriate.

Sources: SEC Charges North Carolina-Based Investment Adviser for Misleading Fund Board About Algorithmic Trading Ability, SEC Press Release 2013-162 (August 21, 2013); In the Matter of Chariot Advisors, LLC and Elliott L. Shifman, Investment Company Act Release No. 30655 (August 21, 2013).

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Government Shutdown Now Over – But What About Sequestration?

DrinkerBiddle

The government may be back up and running and funded under a short-term continuing resolution (CR), but the battle is far from over as Congress heads toward new deadlines to address budgetary matters.  There has been some confusion about what the current budget agreement means in terms of sequestration’s annual cuts to discretionary and mandatory programs instituted in 2012.  The law signed by the President to address the short-term continuing resolution and temporarily raise the debt ceiling does not provide federal agencies flexibility to administer new sequestration cuts at this time.  With the government spending levels remaining at FY 2013 levels for the duration of the CR, a new round of sequester cuts are not set to kick in until January 2014.

The law established a short-term budget conference committee, with a set deadline of Dec. 13, 2013 to outline recommended spending levels and program cuts.  Of note is that the committee deadline is set in advance of when the second year of the sequester will begin.  The deadline provides a window of opportunity for the new budget conferees to address how the sequester cuts are applied in FY 2014.   The conferees may contemplate making other adjustments to entitlement programs (Medicare and Medicaid) to address health care spending issues that will be negotiated during their deliberations.  In addition, Medicare payments to physicians are set to be cut by approximately 25 percent if Congress does not address the cut by December 31, 2013 and offset the cut with a payfor that would likely include cuts to other health care entities. Any of these negotiations and decisions, if ultimately accepted by Congress, could impact the size of the Medicare sequester cuts in January FY 2014.

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SEC Scores in Accounting Fraud Suit Against BankAtlantic Corp. and Former CEO

Katten Muchin

On October 10, a Florida federal judge granted the Securities and Exchange Commission’s motions for partial summary judgment against BankAtlantic (now BBX Capital Corp.) and its former CEO and chairman Alan Levan, finding that the defendants’ public disclosures about their commercial real estate portfolio and their accounting treatment of certain portfolio loans violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The accounting fraud claim stems from BankAtlantic’s October 2007 attempt to sell many of the troubled loans. The company improperly recorded the loans on its books as “held-for-investment” instead of held-for-sale,” and failed to write them down. Management’s concern about the credit quality of the company’s commercial real estate land acquisition and development portfolio had been memorialized in a March 2007 email sent by the CEO in response to a cascade of borrowers requesting extensions, in which he stated, “[i]t’s pretty obvious that the music has stopped…I believe we are in for a long sustained problem in this sector.” The court found that the CEO made false statements in July 2007 during a second quarter earnings call, in which he acknowledged concerns about a subset of the portfolio but stated that, “there are no asset classes that we are concerned about in the portfolio as an asset class” and “the portfolio has always performed extremely well, continues to perform extremely well.” The company’s Forms 10-Q for the first and second quarters of 2007 did not acknowledge the trend of extensions granted and loans downgraded to non-passing status. The court also struck defendant’s affirmative defense that it relied on the professional advice of accountants, agreeing with the SEC’s assertion that the company did not completely disclose the problem to its accountants.

Securities and Exchange Commission v. BankAtlantic Bancorp Inc. et al., No. 0:12-cv-60082 (S.D.Fla. October 10, 2013).