LexisNexis Corporate & Securities Law Community 2011 Top 50 Blogs

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Thursday
Apr192012

SEC v. Landberg: Court Denies Motion to Dismiss SEC Fraud Claim Against CFO 

On October 26, 2011, the Southern District Court of New York denied Defendant Steven Gould’s motion to dismiss a fraud claim by the Securities and Exchange Commission (“SEC”), finding that the Commission had sufficiently pled a claim against a CFO despite the barrier imposed by the Supreme Court’s decision in Janus. See Janus Capital Group, Inc. v. First Derivative Traders, 131 S.Ct. 2296, 2302 (2011).

The SEC filed a claim for injunctive relief against West End, an unregistered investment adviser that created and managed private funds, and its CFO, Steven Gould. The defendants allegedly committed fraud by misrepresenting the performance of financial investment funds and misusing investor assets. The CFO moved to dismiss; however, the court held the SEC met the pleading standards, adequately alleged the CFO acted with scienter, and showed a reasonable likelihood the CFO would commit future violations of securities laws. SEC v. Landberg, No. 11 Civ. 0404, 2011 WL 5116512, at *1-8 (S.N.D.Y. Oct. 26, 2011).

According to the amended complaint, the defendants had two primary funds, the Franchise Fund and the Hard Money Fund, and an interest reserve account (“IRA”) that defendants held in trust. Because the two primary funds did not generate enough returns, the defendants used assets unrelated to the funds to satisfy their obligations. The complaint contended the defendants fraudulently obtained $8.5 million in loans, withdrew millions of dollars from the IRA for unauthorized use, and misappropriated $1.5 million for personal use. The CFO allegedly not only knew, or was reckless in not knowing, but also participated in and concealed the fraud.  

The SEC asserted violations of Section 17(a) of the Securities Act of 1933 (“’33 Act”), Section 10(b) and Rule10b-5 of the Securities Exchange Act of 1934 (“’34 Act”), and certain sections of the Investment Company Act of 1940 (“’40 Act”).  The SEC claimed the CFO committed primary violations of the ‘33 and ‘34 Acts and aided and abetted violations of the ‘40 Act.      

In order to state a claim under Section 10(b) and Rule 10b-5 of the 1934 Act, a plaintiff must show the defendants “(1) made a material misrepresentation or a material omission as to which he had a duty to speak or used a fraudulent device; (2) with scienter; (3) in connection with the purchase or sale of securities.” The same requirements are necessary to state a claim under section 17(a) of the 1933 Act, except scienter is not necessary.

The CFO sough dismissal on a number of grounds, including under the standard set by Janus v. First Derivative Traders. In that case, the Supreme Court held that liability only attached to persons or entities who have “ultimate authority over the [untrue] statement, including its content and whether and how to communicate it.” The court assumed the reasoning in Janus applied, but decline to dismiss on that basis for two reasons. First, the court explained that statements could be attributed to a speaker from surrounding circumstances and this was “strong evidence” the statement was made by the person to whom it is attributed.

Second, the court found that Rule 10b-5 provides an additional basis for the SEC claim by prohibiting “any device, scheme, or artifice to defraud” or participation in any “act, practice, or course of business” which constitutes fraud or deceit. The court held the SEC adequately alleged facts, that if found to be true, would establish the CFO violated Rule 10b-5 by participating in a fraudulent scheme or act.

The CFO also sought dismissal for failure to plead scienter. In order to plead scienter, a plaintiff must establish a “strong inference” of fraudulent intent by alleging facts to show that the defendant had both motive and opportunity to commit fraud, or by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness. The SEC must show the CFO caused the statements to be made and knew the statements would be distributed to investors or was reckless in not knowing. Recklessness can occur when the CFO shuns a duty to monitor and check information or when he ignores the obvious signs of fraud.

The court found that the SEC had sufficiently alleged facts supporting an inference of fraud.  The CFO, according to the opinion, had implicitly taken the position that he had been “fooled” by the fraud.  The court, however, found that the SEC had identified

facts that would place a reasonable person on notice as to the falsity of the representations being made and that suggest [the CFO] was ignoring obvious signs of fraud. [The CFO’s] factual claim that his role as CFO of a public company was merely that of a "scrivener," can only be resolved at trial or on a full factual record. Moreover, a party cannot ‘escape liability for fraud by closing his eyes to what he saw and could readily understand.’

With respect to claims for aiding and abetting, the CFO argued that the SEC was attempting to apply a provision of Dodd-rank retroactively. Section 929M of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) allowed the Commission to bring actions for aiding and abetting based upon recklessness, and the CFO argued that recklessness should not be applied here because its application would be retroactive. The court rejected the argument, concluding that recklessness was already an existing standard in the jurisdiction. Further, the court found the SEC complaint meet both, the recklessness and actual knowledge standards.

Section 20(b) of the 1933 Act, Section 21(d)(1) of the 1934 Act, and Section 209(d) of the 1940 Act allow federal courts to enjoin a person “who is engaged, or is about to engage, in acts or practices” which establish or will establish a violation. The court must determine if there is a reasonable likelihood of future violations by considering the egregiousness of the past actions,  the degree of scienter, the isolated or repeated nature of the violations, whether the defendant accepted blame for his conduct, and whether the nature of the defendant’s occupation makes it likely he will have the opportunity to commit future violations.

The court held that the alleged circumstances in this case were sufficient for a reasonable fact finder to attribute the false financial statements to the CFO. The complaint alleged that he repeatedly and knowingly engaged in and tried to conceal, conduct that violated the ’33, ’34, and ’40 acts. The court deemed the allegations to be sufficient to plead a reasonable likelihood of recurrence.

The court denied the defendants motion to dismiss because the SEC satisfied the heightened pleading standards, adequately pled scienter, and demonstrated a reasonable likelihood the violations would continue to occur.

The primary materials for this case may be found on the DU Corporate Governance website. 

Wednesday
Apr182012

Citibank and Say on Pay: A Metaphysical Analysis

Shareholders at Citibank rejected the compensation package submitted under the mandatory requirement of say on pay.  Say on pay is an advisory vote by shareholders that was mandated by Dodd-Frank.

The vote gained attention for a number of reasons.  First, it is only the third rejection this year.  Second, it is the first time a major financial institution has experienced a negative vote (the only other bank was Key Bank back in 2010).  Mostly, though, the attention arose because the outcome was essentially unexpected.

Total compensation for Pandit, the CEO at Citigroup, was just shy of $15 million.  That was nothing like the eye popping total compensation paid to the CEO of Apple (he received stock worth close to $400 million) or even the $69.9 million paid to the CEO of CBS.  Moreover, the amount paid to Pandit comes after he received only $1 in the prior year.  Moreover, the amount was not out of line with some other financial firms (Goldman, for example, listed the total compensation for its CEO at $16.1 million).  The amount alone, therefore, does not seem to explain the revolt.

What about share prices?  Citigroup is up since January and down since this time last year.  But on the whole, the drop over the last twelve months has been in the vicinity of 10% (although share prices have fluctuated).  Moreover, the price in late November was in the mid 20s and has since climbed back to the mid 30s.  In other words, the change in share prices does not really explain the no vote. 

Another way to look at the rejection by shareholders is to remember that under say on pay, the company submits not the CEO's compensation, but the compensation required to be disclosed under Item 402 of Regulation S-K.  This requires disclosure of the total compensation for the CEO, CFO, and top three highest paid officers.  In other words, shareholders were really voting on a cluster of compensation packages.  In that regard, the company paid out about $20 million in cash bonuses to the five officers.  Moreover, while Pandit had total compensation of about $15 million, three of the other officers received total compensation in excess of $10 million.  Perhaps some of the unexpected opposition, therefore, came from the rich nature of the compensation package to the five officers. 

But still, this does not seem to be the entire explanation.  Instead, the explanation seems to be more metaphysical.  Citigroup, along with the other large financial institutions, is still suffering from its perceived role in the financial crisis.  Recall that Citigroup had to take massive bailouts from the government during the TARP era.  To the extent having contributed to the crisis and having survived in part because of a government bailout, the Bank has a serious image problem with the public and with shareholders.  It is not helped by the actions brought by regulators over its pre-crisis behavior that involve Citigroup

In short, the traditional compensation analysis for Citigroup does not apply.  As long as Citigroup has a serious image problem, particularly at a time when the economy remains weak, compensation decisions are viewed through the filter of a broader notion of fairness.  This is not fairness in the legal sense. Pandit may have worked very hard last year and he certainly was not overpaid the prior year.  It is fairness from a social perspective.  And application of that kind of fairness suggests that the award of more than $14 million in total compensation, given all of the other factors, looks very unfair.  

Wednesday
Apr182012

In re El Paso Corp. Shareholder Litigation: Court Denies Plaintiffs’ Motion to Enjoin Merger Negotiated by CEO

In In re El Paso Corp. S’holder Litig., Consolidated Civil Action No. 6949-CS (Del. Ch. Mar. 6, 2012), El Paso shareholders sought a preliminary injunction to stop a merger between El Paso Corporation (“El Paso”) and Kinder Morgan, Inc. (“KM”). The court sympathized with the plaintiffs but denied their motion, holding that an injunction was inappropriate because the plaintiffs could obtain adequate relief in a monetary damages claim.  

According to the allegations, the El Paso-KM merger discussions began after El Paso’s public announcement that it would spin-off its exploration and production business. After the announcement, KM made an unsolicited offer to acquire the entirety of El Paso’s business at a price of $25.50 per share in cash and stock, which El Paso’s board of directors (“Board”) declined. After KM threatened to go public with its interest, El Paso’s Board sent El Paso’s CEO, Doug Foshee (“Foshee”), to begin negotiations with KM. The Board wanted $28 per share in cash and stock, but on September 18, 2011, Foshee agreed in principle with KM on a price of $27.55 per share in cash and stock. Less than a week later, KM retracted its bid. Rather than holding firm, El Paso accepted a package consisting of $25.91 per share in cash and stock, a warrant with a strike price of $40, and no protection against ordinary dividends. The final merger agreement contained terms that effectively prevented El Paso from soliciting bids from other companies.

The final deal between El Paso and KM came at a premium to El Paso’s then-current stock price, but the El Paso shareholders argued that the El Paso-KM merger was a result of questionable decisions by the Board and by Foshee. Allegedly, the Board failed to solicit other bids; the Board agreed to terms in the merger agreement that prevented solicitation of other bids; the Board appointed Foshee as El Paso’s sole negotiator; the Board failed to take a stronger negotiating position; the Board allowed KM to retract its bid; the Board agreed to the $25.91 price, which was $1.64 less than KM’s retracted bid; Foshee accepted a price lower than the Board had authorized; and Foshee had a secret desire to work with other El Paso managers to buy back El Paso’s exploration and production business from KM after the merger.

Other issues the plaintiffs had with the merger included Goldman Sachs’ (“GS”) role and its alleged conflict of interest. GS acted as a financial advisor to El Paso on the spin-off proposal, but also owned 19% of KM and controlled two seats on KM’s Board. Further, GS’ lead advisor personally owned approximately $340,000 in KM stock. El Paso brought in Morgan Stanley to advise on the merger, but GS “continued its role as primary financial advisor to El Paso for the spin-off, and was asked to continue to provide financial updates to the Board that would enable the El Paso directors to compare the spin-off to the [m]erger.” Goldman also allegedly “refused to concede Morgan Stanley should be paid anything if the spin-off, rather than the [m]erger, was consummated.”

In light of the actions and decisions by Foshee, the Board, and GS, the court found the plaintiffs had demonstrated a reasonable probability of success on the merits under the Revlon standard. Specifically, the court said, “[w]hen there is a reason to conclude that debatable tactical decisions were motivated not by a principled evaluation of the risks and benefits to the company’s stockholders, but by a fiduciary’s consideration of his own financial or other personal self-interests, then the core animating principle of Revlon is implicated.”

The court considered the alternatives to an injunction. While an action for damages was possible, recovery against the board was unlikely. (“On this record, it appears unlikely that the independent directors of El Paso – who are protected by an exculpatory charter provision – could be held liable in monetary damages for their actions.”). And, although Foshee was described as a “wealthy man,” he was “unlikely” to be “good for a verdict of more than half a billion dollars.” As a result, an action for damages would not make investors whole.

Nonetheless, despite the absence of this alternative remedy, the court denied the plaintiffs’ motion for injunctive relief. The court noted that the plaintiffs sought an “odd mixture of mandatory injunctive relief” allowing El Paso to shop itself to other bidders in breach of the merger agreement, to terminate the agreement without paying the stipulated termination fee, and to force KM to proceed with the merger if El Paso failed to find a superior bid. The court refused to extend the principles of equity this far, stating that “reality cannot justify the sort of odd injunction that the plaintiffs desire, which would violate accepted standards for the issuance of affirmative injunctions and attempt to force [KM] to consummate a different deal than it bargained for.”

The court also considered that El Paso’s shareholders still wielded veto power because they retained the right to vote against the potential merger.

More of The Race to the Bottom's coverage of In re El Paso Corp. can be found here, here, here, here, here, and here.

The primary materials for this case may be found at the DU Corporate Governance website.

Tuesday
Apr172012

Blair on Corporate Law and the Team Production Problem

Margaret Blair has posted her paper, "Corporate Law and the Team Production Problem," on SSRN (here).  Here is the abstract:

For much of the last three decades, the dominant perspective in corporate law scholarship and policy debates about corporate governance has adopted the view that the sole purpose of maximizing share value for corporate shareholders. But the corporate scandals of 2001 and 2002, followed by the disastrous performance of financial markets in 2007-2009, have left many observers uneasy about this prescription. Prominent advocates of shareholder primacy such as Michael Jensen, Jack Welch, and Harvard’s Lucian Bebchuk have backed away from the idea that maximizing share value has the effect of maximizing the total social value of the firm, noting that shareholders may often have incentives to take on too much risk, thereby increasing the value they capture by imposing costs on creditors, employees, taxpayers, and the economy as a whole.

In response to the dramatic demonstration of the problems with shareholder primacy, some scholars and practitioners have considered the “team production” framework for understanding the social and economic role of corporations and corporate law (Blair & Stout, 1999) as a viable alternative. Whereas the principal-agent framework provided a strong justification for the focus on share value, the team production framework can be seen as a generalization of the principal-agent problem that is symmetric: all of the participants in a common enterprise have reason to want all of the other participants to cooperate fully. A team production analysis thus starts with a broader assumption that all of the participants hope to benefit from their involvement in the corporate enterprise, and that all have an interest in finding a governance arrangement that is effective at eliciting support and cooperation from all of the participants whose contributions are important to the success of the joint enterprise. Insights from a team production analysis provide a rationale for a number of features of corporate law that are problematic under a principal-agent framework.

Tuesday
Apr172012

Huppe v. WPCS International Inc.: Court Finds Beneficial Ownership Under Section 16(b)

In Huppe v. WPCS International Inc., No. 08-4463-CV, 2012 WL 164072 (2d Cir. Jan. 20, 2012), the court affirmed the district court’s decision to grant summary judgment against the defendants Special Situations Fund II, QP, L.P. and Special Situations Private Equity Fund, L.P. (collectively, the “Funds”). Both were found liable under Section 16(b) of the Securities Exchange Act of 1934 for the short-swing profits earned from the purchase and sale of WPCS International Incorporated (“WPCS”) shares.

Maureen A. Huppe (“Huppe”), a WPCS shareholder, filed a derivative action seeking disgorgement of $486,000 in profits from the Funds’ sale and purchase of WPCS shares. The Funds each held over ten percent of WPCS shares at all times relevant to the plaintiff’s complaint. Under the Funds’ limited partnership agreement, two general partners were given “the exclusive power to make all investment and voting decisions . . . on behalf of the Funds.” Between December 2005 and January 2006, the general partners sold WPCS “on the open market at prices between $9.193 and $12.62 per share.” The general partners bought an additional 876,931 shares of WPCS at $7.00 per share, a 7% discount from the market price, as part of a WPCS board-approved transaction to raise capital.

Huppe alleged that as undisputed ten percent holders, the Funds were liable for their short-swing profits under Section 16(b). The Funds argued that they were not “beneficial owners” under Section 16(b) because the transaction was solicited and approved by the WPCS board of directors.

Section 16(b) states that “officers, directors, and principal shareholders [owning over 10% of the shares] of a company are liable for profits realized from the purchase and sale (or sale and purchase) of its shares within a six-month period,” and its coverage applies to routine purchases and sales, as well as transactions involving “conversions, options, stock warrants, and reclassifications.” Huppe (citing 15 U.S.C. § 78p(b). The provision strictly applied; “no showing of actual misuse of inside information or of unlawful intent is necessary to compel disgorgement.” Huppe. Accordingly, the stock purchase in April 2006 fell within the parameters of Section 16(b).

Under Section 16(b), “a ‘beneficial owner’ is any ‘person’ who, directly or indirectly, has or shares (1) voting or investment power over, and (2) a pecuniary interest in a security.” 17 C.F.R. § 240.16a–1(a)(1)–(2). The Funds argued that they did not meet this definition because they had delegated “exclusive power” to vote and dispose of the shares to the Funds’ general partners.

The court disagreed and determined that the general partners were agents of the Funds and “their actions bound the partnerships.” The Funds, therefore, qualified as beneficial owners for the purpose of Section 16(b), and they were liable for short-swing profits derived from the April 2006 purchase of WPCS stock.

Furthermore, the Funds argued that the sale of shares directly from the company should not be subject to the short-swing profit prohibition in Section 16(b). They pointed to the provisions of Rule 16b-3(d) that exempted from the short-swing profits provision, board-approved transactions between officers and directors and the company. Although the Rule did not apply to ten percent shareholders, the Funds asserted that their acquisition of stock directly from WPCS “was similarly ‘not comprehended within the purpose’ of Section 16(b).’” The court rejected this reasoning, finding that the Rule did not apply because the Funds were not directors or officers of the WPCS. In addition, the Rule’s exemption does not cover ten percent holders because they do not owe a fiduciary to the company.

The primary materials for this case may be found at the DU Corporate Governance website

Monday
Apr162012

Tyco v Walsh: Only Shareholders May Ratify a Breach of Fiduciary Duty by a Director

In Tyco International Ltd. v. Walsh, the United States Court of Appeals for the Second Circuit reversed a district court judgment for Walsh on the claim that he had breached his fiduciary duty of loyalty and failed to disclose his financial interest in an acquisition.  Tyco Int’l Ltd. v. Walsh, No. 10-4526-cv, 2012 WL 75365 (2d Cir. January 11, 2012).  

Tyco incorporated in Bermuda in 1997 and Walsh served as a director on Tyco’s board from 1992 until 2002.  In late 2000, Walsh held a meeting introducing the CEO of Tyco, Dennis Kozlowski, to the CEO of CIT Group Inc. (CIT), Albert Gamper Jr.  After the meeting, Walsh and Kozlowski discussed a finder’s fee which was realized in June 2001 in the form of a $10 million payment to Walsh and another $10 million to a charity picked by Walsh.  

The payments were described as “investment banking services” in connection with the CIT acquisition.  The board was not aware of the payments until Walsh disclosed them in Tyco’s proxy statement.  Walsh then returned the $20 million dollars to Tyco.  Tyco sued to recover interest on the $20 million dollars as well as consequential and punitive damages.  

Walsh argued that the board had “ratified” his actions, curing any breach of fiduciary duties.  Tyco’s bylaws permitted the board to approve remuneration policy for directors, but stated that any conflicts of interest had to be disclosed.  The bench trial found the board had implicitly ratified the payment to Walsh in accordance with the bylaws and dismissed the claim.  Tyco Int’l Ltd. v. Walsh, 751 F. Supp. 2d 606 (S.D.N.Y. October 10, 2010). 

The Second Circuit reversed, concluding that the trial court had apparently “conflated the issue of whether the board could ratify the CEO's decision to pay Walsh without first securing board approval with that of whether the board could ratify Walsh's failure to disclose his interest in the acquisition.”  With respect to ratification of the failure to disclose the receipt of the $20 million, the court noted that under Bermuda law some question existed as to whether boards could ever ratify a breach of fiduciary duty.   Even if it was possible, the court found that ratification had not occurred.  The duty to disclose the payment was owed not simply to the board but also to shareholders of the company.  As a result, the shareholders had to ratify the breach. No such ratification, however, occurred.     

The district court had decided the damages in the event the decision was reversed and the parties did not contest the amount.  They did contest whether the Company was entitled to consequential damages by Tyco related to the retention of a law firm.  The court sent the issue back to the trial court for resolution. 

The primary materials for this case may be found on the DU Corporate Governance website.

Monday
Apr162012

RMSC: Corporate Governance

The final large session of the afternoon covered a broad range of Corporate Governance topics. The panel consisted of John Olsen, Partner, Gibson, Dunn & Crutcher; Cathy Krendl, Partner, Krendl, Krendl, Sachnoff & Way; Josiah Hatch, Partner, Ducker, Montgomery, Lewis & Bess; and Richard Mattera, Senior Deputy General Counsel, United Health Care. The discussion covered many topics, including relevant issues affecting this proxy season, the impact of the duty of loyalty on the business judgment rule, the implications of the Foreign Corrupt Practice Act, and United Health Care’s approach to Risk Management.

John Olsen began the symposium with an overview of some of the issues applicable to the current proxy season. He noted there have been many shareholder proposals for declassification of board structure and a large number of companies are either negotiating over these proposals or adopting them outright. Mr. Olsen also discussed the prevalence of shareholder initiatives aimed at separating the positions of Chairman of the Board and CEO where they are combined. Finally, Mr. Olsen commented on the increase of shareholder demands for disclosure of CEO succession plans in the wake of Steve Jobs’s passing.

Cathy Krendl followed Mr. Olsen with a discussion on the impact of the duty of loyalty on the business judgment rule. Ms. Krendl emphasized that Colorado, like Delaware, has not codified the business judgment rule, but instead allows for exculpatory clauses, and that such clauses do not provide for automatic dismissal in actions involving the duty of loyalty. While noting the great importance of appointing a committee of independent directors to review all potentially conflicted transactions, Ms. Krendl cautioned that, in Colorado, establishing the independence of a director is not a simple task.  Ms. Krendl concluded her presentation with the recommendation that to enjoy the protection of the business judgment rule, a board of directors must ensure that the majority of the minority shareholders approves of any potential conflict.

The next panelist, Josiah Hatch, addressed the impact of the Foreign Corrupt Practices Act (“FCPA”) on the actions of US corporations. Mr. Hatch noted that the FCPA tends to “terrify” boards and management due to the broadness of its scope. He emphasized the importance of codes of conduct and third party certifications, but cautioned that even the most observant of corporations are still at risk under the FCPA. Mr. Hatch finished his presentation by highlighting the inherent difficulty facing corporations that do business internationally: These companies are generally forced to operate through third parties who are not under the direct control of the corporation, but whose acts are still its responsibility. 

Finally, the afternoon culminated in a presentation by Richard Mattera, who discussed risk management at the director level. Mr. Mattera posited that, at United Health Care and other large public companies, systemic risk is the number one focus of the board’s risk management efforts, while most other risk management foci are handled at the individual business unit level. He also urged practitioners to refrain from relying solely on stress test models.

As support for this advice, Mr. Mattera discussed the failure of risk management models to allow for “black swan” type outliers at the executive level, using Tony Hayward’s inability to speak to the press after the Deepwater Horizon disaster as a perfect example.

Saturday
Apr142012

RMSC: Small Cap Finance 

One of the breakout sessions of the afternoon entitled “Small Cap Financing” turned into an important session and acted as an Introduction to the JOBS Act.  The session was moderated by Reid Godbolt, Shareholder, Jones & Keller.  The panel included Frank Birgfeld, The St. Croix Group LLC; Daniel Jablonsky, Shareholder, Brownstein Hyatt Farber Schreck LLP; Gerald J. Laporte, Chief, Office of Small Business Policy, Division of Corporate Finance, Securities and Exchange Commission (“SEC”); and Shelly Parratt, Deputy Director, Division of Corporate Finance, SEC.

Moderator Reid Godbolt gave a quick overview of the recent history of the IPO market and its ups and downs.  Talk quickly turned to the newly signed JOBS Act and whether the regulation can keep up with the potential for fraud in this uncharted territory.  The panel outlined certain investor protection provisions such as a one-year transfer restriction and a one-year maximum investment amount.  More regulations are needed regarding the JOBS Act, and crowdfunding in particular, leading Mr. Laporte to comment that the SEC was “anxious” to get input from the public though pre-rulemaking public comments.  Public comments can be made here.  The SEC has a 270-day window for rulemaking regarding the crowdfunding provision of the JOBS Act.

Ms. Parratt spoke on the creation of a system for submitting Confidential Draft Registration Statements (“CDRS”) to the SEC.  Currently submissions are in paper form and the SEC hopes to have an electronic submission system soon.  The physical process is new but the SEC hopes to have the submissions reviewed and returned with comments within 30 days.  The panel commented that CDRS are not public filings and do not require a fee to submit.  The panel also outlined the ability of submissions already under review as entitled to the protections described in the JOBS Act as long as they met its criteria.  The panel also stressed the need for completeness of the CDRS, including signed audit reports, so that they are not deferred.

The panel also discussed the role of the broker-dealer under the JOBS Act.  Mr. Birgfeld commented that the old broker-dealer model cannot work, which will create plenty of opportunity for someone to come up with a new model.  The panel highlighted challenges facing the SEC and investors, including the liquidity, or potential lack thereof, of the crowdfunding securities because of the one-year holding requirement.

Again, The Race to the Bottom’s complete coverage regarding the JOBS Act can be found here, here, and here

Friday
Apr132012

RMSC: Corporate Finance 

The final session of the morning covered developing issues in Corporate Finance.  The panel included Shelly Parratt, Deputy Director, Division of Corporate Finance, Securities & Exchange Commission; Jason Day, Partner, Perkins Coie; and Jeffrey Sherman, Special Counsel, Faegre Baker Daniels.   The panel discussed the continued areas of focus for the SEC’s Corporate Finance Division, staff observations and guidelines for certain disclosure requirements, and the new initiatives for capital formation included in the JOBS Act. 

The panel provided an overview of the areas of focus in the SEC’s Corporate Finance Division.  The focus areas include ensuring large financial institutions are as transparent as possible with their disclosure, disclosures by community banks, ensuring non-GAAP financial metrics comply with the SEC Rules, reverse merger disclosures, and shareholder rights disclosures.  

Staff observations and guidelines for disclosure included ensuring Form 8-K filings regarding major acquisitions and reverse mergers have all the required disclosures, including financial statements.  Another focus was on cyber security disclosures, including any significant risk factors assessed therewith and disclosure of any material incidents or breaches.  The panel suggested that disclosure may be required under Management’s Discussion & Analysis (“MD&A”) section, legal proceedings section, or, if necessary, under a loss contingency disclosure.  

Finally, the JOBS Act created new initiatives for capital formation.  The panel highlighted the confidential review provisions allowing a company to keep filings private up until 21 days prior to the beginning of a road show.  Next, the panel discussed the changes regarding the threshold number of shareholders before private companies are forced to go public.  Previously, the number of shareholders that triggered public filings was 500, but is now 2,000.  The JOBS Act exempts shares issued through equity compensation plans and any shares issued under the crowdfunding provisions.  

 Another new development is the elimination of the general solicitation provisions under Rule 506; however, this provision will not be effective until the SEC adopts the Rules implementing this provision.  The SEC is seeking pre-rulemaking public comments regarding its directives under the JOBS Act.

Our previous discussion of the JOBS Act can be found here, here, and here

Friday
Apr132012

RMSC: The Perspective from the Defense

The next panel focused on Enforcement issues from the perspective of the defense.  The panel was moderated by Dan Shea, Partner, Hogan Lovells.  The panel featured Randall Fons, Partner, Morrison Foerster; Joan McKown, Partner, Jones Day; Holly Sollod, Partner, Holland & Hart LLP; and David Zisser, Of Counsel, Davis, Graham & Stubbs LLP.  The panel discussed the process and utility of writing a Wells submission, the SEC’s new cooperation initiatives, and recent developments regarding the Janus decision.

The panel had conflicting views on the utility of a Wells submission but agreed it was useful for policy considerations that may be beyond the scope of the SEC’s initial investigation.  The panel expressed caution in using the new cooperation initiatives used by the SEC because of the lack of certainty due to a shortage of case law. 

Finally, the panel discussed recent developments regarding Janus and its effect upon SEC enforcement actions.  The following two decisions from the Southern District of New York are in conflict: S.E.C. v. Kelly, 2011 WL 4431161 (S.D.N.Y. September 22, 2011) and S.E.C. v. Pentagon Capital Management PLC, 2012 WL 479576 (S.D.N.Y. Feb. 14, 2012).  Two issues were raised in both cases: first, whether Janus was applicable to actions brought under Section 17(a); and second, whether Janus affects the SEC’s ability to plead scheme liability under subsections (a) and (c) of Rule 10b-5.  The court in Kelly held that Janus applies to these actions, whereas the court in Pentagon Capital Management held that these actions were outside the scope of Janus.  Furthermore, In re Flannery, an SEC administrative proceeding, extended the Janus standard to SEC enforcement actions such as those brought in Kelly and Pentagon Capital. That case is currently on appeal.  

Friday
Apr132012

RMSC: Views on Enforcement and Investigations

The first full panel of the conference was entitled “Enforcement Views,” but the panel quickly pointed out a more appropriate title might have been “The Interplay between Enforcement, Investigation, and Examinations.”  The panel also discussed the SEC’s renewed focus on offering non-prosecution agreements, cooperation agreements, and the utilization of the Dodd-Frank provisions that permit awards to whistleblowers.  Members of the panel included Carlo DiFlorio, Director, Office of Compliance, Inspections, and Examinations, SEC; Robert Khuzami, Director, Division of Enforcement, SEC; and John Walsh, United States Attorney, District of Colorado.   

The panel focused on the regulation of residential mortgage backed securities, the cooperative efforts between the SEC and U.S. Attorney’s offices across the nation, and the whistleblower provisions of Dodd-Frank.  Specifically, the panel highlighted the creation of a working group focused on combining the resources of the SEC and DOJ to promote efficiency and reduce duplicative enforcement between the two.  Also, Mr. Khuzami highlighted the SEC’s more proactive role in enforcement by focusing on early detection of violations of the securities laws.  The panel also discussed the SEC’s renewed focus on offering non-prosecution agreements, cooperation agreement, as well as the utilization of the Dodd-Frank provisions that permit awards to whistleblowers.  Finally, the panel spoke of the future enforcement goals of the SEC and DOJ including insider trading, Ponzi schemes, and structured products such as credit default swaps and residential mortgage backed securities.

Friday
Apr132012

RMSC: Introductory Remarks by SEC Commissioner Gallagher

The opening session of the Conference was the keynote address by Commissioner Daniel Gallagher of the Securities & Exchange Commission ("SEC"). Commissioner Gallagher's bio can be found here.  Commissioner Gallagher's remarks were his own personal views and not necessarily those of the Commission.  Generally, but very candidly, the Commissioner discussed important issues currently facing the SEC and fielded a few questions about the recently enacted JOBS Act. 

Commissioner Gallagher highlighted the importance of maintaining a regional SEC presence for facilitating enforcement and the protection of investors.  Another issue the Commissioner discussed was the restructuring of the Commission's Division of Enforcement and the benefits gained therefrom.  He stated the restructuring provides a more effective and efficient use of the monetary and personnel limits placed on the Commission's scarce resources.  Two related topics included the SEC's new electronic Tip, Complaint, and Referral ("TCR") system and the Commission's commitment to full and fair procedural due process for those individuals and companies under investigation.  The Commissioner highlighted the increased expertise and efficiencies gained from such initiatives. 

The next session focuses on current issues regarding enforcement, including the perspective from the defense.

Friday
Apr132012

RTTB & The Rocky Mountain Securities Conference

The Race to the Bottom is proud to attend and cover the 44th Annual Rocky Mountain Securities Conference in Denver. The conference is arranged by the Securities & Exchange Commission with the help of the Colorado Bar Association. Today's agenda and topics may be found here. Check back throughout the day for our continuing coverage.

Friday
Apr132012

Miller v. MSX-IBS Holding, Inc.: Preferred Stock Redemption Unavailable When a Corporation Lacks a Surplus of Assets

In Miller v. MSX-IBS Holding Inc., No. 09-CV-15046, 2012 WL 458486 (E.D. Mich. Feb. 13, 2012), the United States District Court for the Eastern District of Michigan granted the defendants’ motion for summary judgment.  Specifically, it held that when a corporation has no surplus of assets, it cannot redeem a shareholder’s preferred stock. 

This was the third lawsuit filed by Trustees of the Kyung Ae Bae Trust (“Trust”) seeking to compel defendants MSX International (“International”) and/or MSX-IBS Holding, Inc. (“IBS”) to redeem preferred stock owned by the Trust.  Trustee Ralph Miller (“Miller”) originally received the stock from International during his employment there and, after being terminated, he transferred it to the Trust.  Pursuant to a settlement agreement from the first lawsuit, International was required to redeem the Trust’s stock by December 31, 2008, if it was legally able to do so.  Subsequently, International had to restructure due to crippling debt, and lenders required that International transfer its stock to a holding company.  IBS is a Delaware holding company with International as its subsidiary; its only asset is International’s stock.  On December 19, 2008, the IBS Board (“Board”) determined that the Trust’s shares could not be redeemed before the end of the fiscal year because International owed millions of dollars in debt. 

Delaware law prohibits corporations from redeeming stock “when the capital of the corporation is impaired or when such purchase or redemption would cause any impairment of the capital of the corporation.”  Capital impairment exists “if the funds used in the repurchase exceed the amount of the corporation’s ‘surplus,’ defined by 8 Del. C. § 154 to mean the excess of net assets over the par value of the corporation’s issued stock.”  When assessing whether to redeem stock, a plaintiff has the burden of proving that a board of directors “acted in bad faith, relied on unreliable methods and data, or made determinations so far off the mark as to constitute actual or constructive fraud.”

The Trust argued that the Board should have considered only IBS’s financial status rather than the consolidated financial statements of both International and IBS.  It further argued that IBS itself was able to redeem the shares because its balance sheets showed assets exceeding liabilities.  The court, however, held that the Board must consider the liabilities of both IBS and International, especially considering that IBS’s sole asset was International stock.  It also held that the plaintiffs did not provide sufficient legal authority to show that the Board acted improperly.  Rather, whether the Board had considered the consolidated financial information of International and IBS was “key to the analysis,” and the Board meeting minutes indicated that it had considered all of the factors required by law.  As a result, the court granted the Board’s motion for summary judgment. 

The primary materials for this case may be found on the DU Corporate Governance website.

 

Thursday
Apr122012

Mathis v. SEC: Court Upholds Sanctions for Willful Non-Disclosure 

In Mathis v. SEC, WL 447378 (2d Cir. Feb. 14, 2012), the Second Circuit upheld a final order from the Securities and Exchange Commission (“SEC”) against Scott Mathis.

The court characterized the facts in the case as "either undisputed or . . . supported by substantial evidence in the record."  As the opinion described, Mathis was a registered representative and principal under the Financial Industry Regulatory Authority, Inc. (“FINRA”).  FINRA fined Mathis $10,000 and imposed a three-month suspension after it found that Mathis willfully failed to disclose tax liens in his FINRA membership forms.  Mathis appealed the SEC’s final order, which held that Mathis was subject to statutory disqualification from associating with any FINRA member. 

In September 1995, Mathis started working as a broker and filed his first Form U-4 with FINRA.  FINRA rules require that any person working for a member firm in the securities or investment banking division must register.  Applicants register by filing a Form U-4 with FINRA.  FINRA rules also require that an applicant file an amended Form U-4 whenever any of the applicant’s answers change from a previously filed Form U-4.  One of the questions on Form U-4 asks the applicant if he has any liens or judgments against him.  Mathis answered “no” to this question.  Mathis also answered that all of his income taxes were paid in full. 

Between August 1996, and September 2002, Mathis received several written notices from the IRS stating that he had unpaid personal income taxes totaling $634,436.28 for tax years 1993 – 2000.  Additionally, the IRS sent a notice stating that it had filed five tax liens against Mathis’ property.  In November 1999, Mathis filed a second Form U-4 after he founded his own broker dealer firm.  In August 2000, Mathis filed a third Form U-4 with FINRA after starting another business.  Mathis did not disclose the tax liens on either form. 

In 2003, FINRA inquired about the tax liens.  At this point, Mathis filed an amended Form U-4 and disclosed the tax liens for the first time.  Mathis initially claimed he was unaware of the tax liens and his obligation to report them to FINRA.  FINRA rejected this argument after Mathis admitted he received the lien notices from the IRS.  The court also noted that a web designer Mathis hired brought the tax liens to Mathis’ attention after performing a credit check.  Mathis then asserted that he had relied on the advice of a former colleague who opined that “if the matters were not directly related to the securities industry, they need not be reported on the Form U-4.”  Finding that Mathis was aware of the tax liens and that he “made a conscious effort to conceal his tax liabilities,” FINRA imposed a $10,000 fine and a three-month suspension in December 2007.  FINRA’s decision noted that because Mathis relied on the advice of a former colleague, he had not acted willfully. 

Mathis appealed the FINRA decision to FINRA’s National Adjudicatory Council (“NAC”).   In December 2008, NAC affirmed FINRA’s decision "but disagreed" that Mathis had "reasonably relied" on the colleague's advice and instead found that he had acted willfully by failing to disclose the tax liens.  NAC held that Mathis’ former colleague had only offered his opinion about what matters had to be disclosed and that Mathis should have checked with the company’s compliance department to determine if the liens had to be disclosed.  NAC upheld FINRA’s decision noting the sanctions were appropriate for “Mathis' willful failure to amend his Form U4 to disclose the five tax liens at issue and his willful failure to disclose the tax liens pending against him at the time he filed two initial Forms U4."

Next, Mathis filed a petition with the SEC, challenging NAC’s finding that he had acted willfully.  The SEC sustained NAC’s holding and held that Mathis would be subject to statutory disqualification under the Exchange Act.  The SEC found “willful” to mean intentionally committing an act that resulted in the violation. The SEC also found that a person does not need to be aware that he is violating a rule to act willfully.  Finally, Mathis petitioned the Second Circuit to review the SEC’s decision. 

In his argument to the Second Circuit, Mathis asserted that a “broker who justifiably relies on advice from a person of suitable experience, position, and knowledge has not engaged in willful conduct.”  The court upheld the SEC’s finding that Mathis had not relied on his former colleague’s advice and also noted there was no record of Mathis checking with the company’s compliance department about disclosing the liens on Form U-4. 

The Second Circuit found there was substantial evidence to sustain the SEC’s holding.  The court also held that Mathis acted willfully under § 3(a)(39) of the Exchange Act when he failed to disclose the liens and when he submitted the 1999 and 2000 Form U-4s, which he knew contained incorrect statements. 

The primary materials for this case may be found on the DU Corporate Governance website. 

 

Wednesday
Apr112012

Congratulations to the 2012-2013 Race to the Bottom Executive Board!

Editor-in-Chief: Erica Siepman
Managing Editor: Sam Hagreen
Senior Editor: Susan Beblavi
Senior Editor: Will McAllister
Articles Editor: David Rodman
Case Editor: Kirstin Dvorchak
Technology Editor: Michael Burleigh

Wednesday
Apr112012

SEC v. Gendarme Capital Corporation: California District Court Denies Defendants’ Motions to Strike or Dismiss SEC’s Complaint 

In SEC v. Gendarme Cap. Corp., No. CIV S-11-0053 KJM-KJN (D. Cal. 2011), the District Court for the Eastern District of California denied the defendants’ motion to strike portions of the complaint and motion to dismiss under Federal Rule of Civil Procedure (“FRCP”) 12(b)(6). The Securities and Exchange Commission (“SEC”) filed the complaint on January 6, 2011, alleging that the defendants violated §§ 5(a) and (c) of the Securities Act of 1933 and 12 U.S.C. §§ 77e(a) and (c).

According to the SEC’s complaint, defendant Gendarme Capital Corporation (“Gendarme”) is a Minnesota corporation. The individual defendants are Ian Lamphere, Gendarme’s Vice President and Secretary; Ezat Rahimi, Gendarme’s President and Chief Executive Officer; and Cassandra Armento, Gendarme’s attorney in its acquisition of stock.  Gendarme allegedly purchased stock from companies under  Rule 504 of Regulation D of the Securities Act.  The company acquired  the stock in unregistered transactions with small publicly traded companies that could not directly issue the stock to the public.  Once it purchased the stock, Gendarme was alleged to have quickly sold the shares to the public.

Defendants moved  to strike portions of the complaint.  as “redundant, immaterial, impertinent or scandalous.”  Allegations are redundant when they are foreign to the issue at hand; allegations are immaterial when they have no relationship to the claim; impertinent statements are statements that do not relate to the claim; and scandalous allegations cast a negative light on a party. A motion is stricken only when it has “no possible bearing on the subject matter of the litigation.”

The defendants specifically sought to strike the allegations of scienter.  The court conceded that  the plaintiff was not required to plead scienter under § 5 of the Securities Act.  Nonetheless, the allegations were permissible.  The SEC argued that the scienter allegations were relevant to establish that Gendarme was an underwriter.  The court agreed that the allegations were not “scandalous” because they established “relevant, material and pertinent factual assertions against” Armento.

Second, the court analyzed the defendants’ motion to dismiss under FRCP 12(b)(6).  Under FRCP 12(b)(6), a motion to dismiss is granted only when a complaint “lacks a cognizable legal theory [or lacks] sufficient facts alleged under a cognizable legal theory.”  The defendants argued that all claims against Armento, the company’s counsel, should be dismissed because she did not purchase or distribute the underlying securities.

Liability under § 5 of the Securities Act extends to anyone who is a “necessary participant” and a “substantial factor” in the sales transaction.  “Necessary” requires a showing that the  the transaction would not have taken place without the defendant’s participation.

The SEC’s complaint alleged that Armento wrote over fifty opinion letters in which she claimed that Gendarme was not an underwriter.  Additionally, the SEC alleged that Armento completed over thirty-five warrant agreements that gave  Gendarme the right to purchase the shares.  Finally, the Commission alleged, according to the court, that "Armento engaged in these activities without first determining whether the information in the letters and warrants was true, and continued to do so after finding out that the information likely was false and that Gendarme was likely selling the shares" and that "without Armento's actions, Gendarme would not have been able to obtain the stock without restrictions and thus would not have had shares to sell." (citations to the record omitted)

The court denied the defendants’ motion to dismiss and ordered that they answer the complaint within twenty-one days.

The primary materials for this case may be found on the DU Corporate Governance website. 

Tuesday
Apr102012

U.S. v. Motz: Second Circuit Upholds Eight Year Sentence for Cherry Picking

In United States v. Motz., 2012 WL 147884 (2d Cir. Jan. 19, 2012), the Second Circuit Court of Appeals affirmed an eight year prison sentence for George Motz (“Motz”) but vacated a district court order requiring him to pay restitution of approximately $865,000 in connection with a fraudulent “cherry picking” scheme.  The court remanded the restitution issue back to the district court.

Motz was the mayor of Quogue, a small Long Island village, and President and CEO of Melhado, Flynn & Associates, Inc. (“MFA”), a Manhattan based broker-dealer and investment advisor firm.  Motz and MFA were indicted on August 27, 2008 and accused of operating a cherry picking scheme in violation of 18 U.S.C. § 1348(1), as enacted by § 807 of Sarbanes-Oxley (“SOX”).  According to the indictment, Motz engaged in cherry picking by placing trades in the morning, waiting until later in the day to determine the profitability of the trades and then allocating them to different accounts depending on their profitability.  In order to prove a § 1348 violation, the government must show “(1) fraudulent intent, (2) a scheme or artifice to defraud, and (3) a nexus with a security.”

On October 13, 2009, Motz pled guilty to one count of securities fraud under 18 U.S.C. § 1348 in connection to the cherry picking scheme.  His guilty plea was not part of any plea bargain.  He was subsequently sentenced to eight years in prison and ordered to pay approximately $865,000 in restitution to his victims.  Motz appealed both the length of the sentence and the restitution order. 

Motz attacked two sentencing enhancements applied by the district court under federal sentencing guidelines.  The first enhancement called for additional prison time when the aggregate loss is between $1 million and $2.5 million.  Motz argued that there was no loss sustained by his clients because although his clients overpaid for the securities that Motz allocated to them, most still realized a profit in the long term.  The Second Circuit disagreed and adopted the government’s method of calculating loss based on the difference between the price clients were charged for the security and its value at the time of allocation.  

The second enhancement called for additional prison time when the criminal activity harmed at least 50 victims.  Motz argued that the victim list was too broad because it contained individuals who were not harmed by the scheme and individuals harmed before the passage of SOX.  The court dismissed Motz’s arguments by noting that on several occasions after the passage of SOX, Motz had allocated losses to sixty or seventy distinct accounts.

Motz also appealed the order to pay approximately $865,000 in restitution because it failed to specifically identify the amount of each victim’s loss.  The Second Circuit agreed, vacated the order, and directed the district court to determine the amount of each victim’s loss. 

The primary materials for this case may be found on the DU Corporate Governance website.

Tuesday
Apr102012

The Investor Advisory Committee Announced

The Commission just announced the formation of the Investor Advisory Committee.  The Committee was mandated in Dodd-Frank.  Section 911 of the Law provides that the Committee shall:

advise and consult with the Commission on—(i) regulatory priorities of the Commission; (ii) issues relating to the regulation of securities products, trading strategies, and fee structures, and the effectiveness of disclosure; (iii) initiatives to protect investor interest; and (iv) initiatives to promote investor confidence and the integrity of the securities marketplace; and (B) submit to the Commission such findings and recommendations as the Committee determines are appropriate, including recommendations for proposed legislative changes.

The Committee is to have no less than 10 and no more than 20 members, each appointed to a four year term.

In addition to representing the interests of senior citizens, the Act requires that there be representatives of State securities commissions.  Members must include those who represent individual equity and debt holders (including mutual funds) and institutional investors (including pension funds and registered investment companies).  Members must be "knowledgeable about investment issues and decisions" and "have reputations of integrity."

The members to the Committee include:

  • Darcy Bradbury, Managing Director and Director of External Affairs, D.E. Shaw & Co., L.P.
  • J. Robert Brown, Jr., Law Professor, University of Denver
  • Joseph Dear, Chief Investment Officer, California Public Employees’ Retirement System
  • Eugene Duffy, Senior Executive Vice President, Paradigm Asset Management Co., LLC
  • Roger Ganser, Chairman of the Board of Directors of BetterInvesting
  • James Glassman, Executive Director, George W. Bush Institute
  • Craig Goettsch, Director of Investor Education and Consumer Outreach, Iowa Insurance Division
  • Joseph Grundfest, William A. Franke Professor of Law and Business, Stanford Law School
  • Mellody Hobson, President and Director of Ariel Investments, LLC
  • Stephen Holmes, General Partner and Chief Operating Officer, InterWest Partners
  • Adam Kanzer, Managing Director and General Counsel of Domini Social Investments and Chief Legal Officer of the Domini Funds
  • Roy Katzovicz, Partner, Investment Team Member and Chief Legal Officer, Pershing Square Capital Management, L.P.
  • Barbara Roper, Director of Investor Protection, Consumer Federation of America
  • Kurt Schacht, Managing Director, CFA Institute
  • Alan Schnitzer, Vice Chairman and Chief Legal Officer, The Travelers Companies, Inc.
  • Jean Setzfand, Director of Financial Security for the AARP
  • Anne Sheehan, Director of Corporate Governance, California State Teachers’ Retirement System
  • Damon Silvers, Associate General Counsel for the AFL-CIO
  • Mark Tresnowski, Managing Director and General Counsel, Madison Dearborn Partners, LLC
  • Steven Wallman, Founder and Chief Executive Officer, Foliofn, Inc.
  • Ann Yerger, Executive Director, Council of Institutional Investors
Monday
Apr092012

Compensation and the Consequences of Preemption

Executive compensation has typically fallen within the realm of fiduciary duties; matters typically determined under state (read Delaware) law.  But state law has not proved up to the task.  As a result, both SOX and Dodd-Frank have increasingly federalized the compensation process.  Say-on-pay is the most obvious recent example.  The trend is likely to continue. 

Moving matters to the federal level has a number of significant consequences.  One of them is that policy is determined by Congress or the Executive Branch, both of which must contend with interest groups that go beyond shareholders and managers.  An example occurred in connection with GM, Ally and AIG, three companies where the government still has a sizeable investment.

According to the WSJ, Treasury reported that "[o]verall pay" at these three companies will remain "frozen."  Moreover, the CEOs of the three companies "didn't request pay increases."  As Acting Special Master for Treasury put it:

The overall CEO compensation packages payable by AIG, Ally Financial and GM have not increased.  Although there has been some modification in the mix of stock salary and long-term restricted stock for the CEO group, the overall amount of CEO compensation is frozen at 2011 levels. 

The approach likely forestalls public criticism of the government.  But is it the right decision?  GM, for example, had a good (great) year.  As the WSJ reported:

The Detroit auto maker earned $7.59 billion in 2011, a 62% increase from the prior year, and the biggest profit in its 103-year history on the strength of its once-unprofitable North American business. Sales in its two biggest markets, China and the U.S., continue to expand. Chinese volume rose 12% and the U.S. 11%, both in March.

Indeed, GM has argued the pay restrictions may cause competitive disadvantage.  "The pay restrictions make our jobs a lot harder when it comes to recruiting and retaining the best talent in the business," GM spokesman Jim Cain said on Friday.

The point is not to criticize Treasury.  Given the political constraints, the matter looked well handled.  But it is a consequence of pushing compensation matters to the federal level and may be a harbinger of things to come. 

What would prevent this from continuing?  A tougher standard applied to compensation decisions at state law, as one Vice Chancellor mentioned.  If states were tougher on the issue, there would be less pressure to federalize the matter.  But this long term view is unlikely to be adopted.  Federalization will, as a result, continue.