By Thomas Hanusik and Rebecca Baden, Crowell & Moring

The Supreme Court’s 2005 decision in Dura Pharmaceuticals, Inc. v. Broudo is the seminal authority on the appropriate measure of loss caused by a defendant’s fraudulent conduct in a civil securities fraud action. Under the Dura standard, a plaintiff must provide actual evidence that the defendant’s conduct proximately caused the plaintiff’s losses. The Dura standard thus requires “loss causation.” Less clear is whether this same standard should drive a federal sentencing court’s determination of actual losses when calculating a defendant’s sentence under the federal guidelines. The Fifth and Second Circuits have held that Dura’s “loss causation” standard applies to federal sentencing for securities fraud cases, but the Ninth Circuit has refused to adopt this same approach and a circuit split has developed as a result.

Loss Causation under Dura Pharmaceuticals

In 2005, a unanimous Supreme Court decided Dura Pharmaceuticals, Inc. v. Broudo, an important decision with significant ramifications for “fraud-on-the-market” private securities litigations.  The Dura Court held that a private plaintiff claiming to be the victim of a “fraud-on-the-market” scheme must both plead and prove that the defendant’s fraud proximately caused her to suffer economic loss.  In so holding, the Dura Court overruled the Ninth Circuit, which had found that a stock’s inflated purchase price sufficiently proved the plaintiff’s economic loss.  In rejecting the Ninth Circuit’s analysis, the Dura Court emphasized that any plaintiff alleging securities fraud must establish traditional notions of proximate causation, and that an inflated purchase price alone is not enough to make that showing.

The Dura Court identified three distinct rationales for rejecting the notion that an inflated purchase price alone could establish the requisite proximate loss causation. First, the Court relied on what it referred to as “pure logic.”  Second, the Court considered the similarities between securities litigation and common law misrepresentation claims, and analogized their respective proximate cause analyses.  Third, the Court found that Congress’ intent in enacting the Private Securities Litigation Reform Act of 1995 militated against the Ninth Circuit’s interpretation of loss.

Second, according to the Dura Court, securities fraud actions have common law roots. And, at common law, a successful plaintiff in a misrepresentation action must prove that a defendant’s conduct caused her to suffer actual loss.  Because an inflated purchase price neither demonstrates that a plaintiff has suffered actual loss, nor that any potential loss was caused by the defendant’s conduct, it is insufficient to support an action for fraud.  To allow a “fraud-on-the-market” claim to proceed based on allegations that do nothing more than identify an inflated purchase price would violate this basic tenet of common law.

Third, the statute enabling plaintiffs to bring claims based on a “fraud-on-the-market” theory evidences Congress’ intent to provide for a recovery only where a plaintiff demonstrates that the defendant’s conduct proximately caused her to suffer an actual loss.  When enacting the Private Securities Litigation Reform Act of 1995, the Court found that Congress “expressly impose[d] on plaintiffs the burden of proving that the defendant’s misrepresentations caused the loss for which the plaintiff seeks to recover.”  “By way of contrast, the Ninth Circuit’s approach would allow recovery where a misrepresentation leads to an inflated purchase price but nonetheless does not proximately cause any economic loss.”  Having found that proximate cause was a requirement, the Court rejected the Ninth Circuit’s approach…

cforms contact form by delicious:days

By Nancy J. Moore

A federal grand jury in New York Jan. 3 indicted three Swiss men working as client advisers to a Swiss bank for helping U.S. taxpayers hide more than $1.2 billion in assets (United States v. Berlinka, S.D.N.Y., No. 12-CR-002,indictment 1/3/12).

Michael Berlinka, Urs Frei, and Roger Keller, along with others not named in the indictment, were charged with conspiracy to defraud the United States, impede the Internal Revenue Service, and evade income taxes.

The case was filed in the U.S. District Court for the Southern District of New York and assigned to Judge Jed Rakoff.

According to the pleadings, the three advisers worked for the Zurich branch of “Swiss Bank A,” which began actively recruiting U.S. customers in 2008 after another bank, UBS AG, lost U.S. accounts due to an IRS investigation and eventual litigation.

Swiss Bank A does not have an office in the United States, and the advisers represented that it would be able to keep account information private under Swiss banking law and would not be subject to the same actions as were taken against UBS, which has U.S. offices.

U.S. taxpayers are required to provide information on any foreign bank account with a value of more than $10,000. They are also required to report all income earned worldwide…

cforms contact form by delicious:days

By Joe Lustig

Magyar Telekom, Hungary’s largest telecommunications provider, and majority owner Deutsche Telekom agreed to pay over $95 million to settle charges that they bribed government and political party officials in Macedonia and Montenegro, the Department of Justice and Securities and Exchange Commission announced Dec. 29 (United States v. Magyar Telekom, E.D. Va., No. 1:11-cr-00597-CMH, 12/29/11; SEC v. Straub, S.D.N.Y., 11 Civ. 9645, 12/29/11; SEC v. Magyar Telekom Plc,S.D.N.Y., 11 Civ. 9646, 12/29/11).

The DOJ filed its charges under the Foreign Corrupt Practices Act against Magyar and Deutsche Telekom, Magyar’s majority owner, in the U.S. District Court for the Eastern District of Virginia. In a release, prosecutors said that the companies agreed to pay nearly $64 million in combined criminal penalties as part of a nonprosecution agreement.

Separately, the SEC said that Magyar agreed to settle FCPA chargesagainst it in the U.S. District Court for the Southern District of New York by paying more than $31.2 million in disgorgement and prejudgment interest.

Deutshe Telekom also settled SEC charges of books and records and internal control violations under the FCPA, the commission announced. At the time of the alleged violations, the SEC’s complaint said, the companies’ securities were traded through American Depository Receipts listed on the New York Stock Exchange and registered with the commission under 1934 Securities Exchange Act Section 12(b).

Meanwhile, SEC charges are pending in the Southern District of New York against three former Magyar executives whom the commission accused of orchestrating, executing, and approving the bribery scheme. They are Elek Straub, former chairman and chief executive officer, and Andras Balogh and Tamas Morvai, two former senior executives in the company’s strategy department.

The agency said it is seeking disgorgement, penalties, and permanent injunctions against them…

cforms contact form by delicious:days

By R. Christian Bruce

The Federal Reserve Board Dec. 20 asked for comment by March 31 on a tougher set of regulatory standards for financial firms critical to the well-being of the financial system, leaving some specific items, such as a special risk-based surcharge, to be addressed in follow-up proposals.

The 173-page proposal, which implements Sections 165 and 166 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, mandates new capital, liquidity, stress testing, risk management, and other requirements for banking firms with $50 billion or more in assets.

It also sets the basic ground rules for a class of nonbank financial firms that the Financial Stability Oversight Council (FSOC) may later determine to be, in the words of the proposal, “a grave threat to financial stability.”

Broad Impact Certain

Experts said the importance of the Dec. 20 proposal is almost impossible to exaggerate. Joseph Engelhard, senior vice president of Capital Alpha Partners, a Washington, D.C., area firm that provides research and analysis for institutional investors, called Section 165 “the single most important section of Dodd-Frank” for banks.

Michael E. Bleier, a partner in the Pittsburgh offices of Reed Smith, Dec. 20 called the Fed’s rules the most significant since 1971, when the Fed reshaped bank holding company regulation with the release of Regulation Y.

“They will likely have a major impact on investors and how these companies’ share price is impacted, and what steps they must take to meet the higher capital requirements that will surely be an outcome of the rulemaking process,” Bleier told BNA…

cforms contact form by delicious:days

By Paul M. Architzel and Bruce B. Fekrat, WilmerHale, Washington.

The U.S. Commodity Futures Trading Commission (“CFTC”) recently promulgated rules requiring the registration of foreign boards of trade (“FBOTs”) that provide U.S. members and participants with direct access to the FBOTs’ electronic trading and order matching systems (see WSLR, December 2011, page 8). The registration requirement will replace the current no-action process for permitting such direct market access.

The CFTC explained that the new registration rules will provide greater standardization of treatment and transparency than the current no-action process, and thereby will provide greater legal certainty and promote fair and consistent treatment to all FBOT applicants.

The rules will become effective on February 21, 2012.

Statutory Origins

In a last-minute addition, the final version of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) provides that the CFTC may adopt regulations requiring FBOTs that enable members located in the United States to directly access their electronic trading and order matching systems to register with the CFTC. The registration provision of the Dodd-Frank Act leaves the registration requirements to the discretion of the CFTC, requiring only that the CFTC take into consideration…

cforms contact form by delicious:days

By Gregory F. Parisi, Hogan Lovells

The new United States whistleblower program is global in scope and provides incentives to a broad array of individuals. The new rules incentivize a much wider array of individuals than merely corporate insiders to become watchguards of corporate compliance with federal securities laws – including customers, stockholders and academics, market watchers and citizen activists, and third-party service providers. Of these groups, individuals working for third-party service providers are the most likely outside candidates to act on the financial incentives contemplated by the Dodd-Frank Act. They often have access to and work with sensitive corporate information.

The new whistleblower program is causing many companies to take a close look at, and in some cases revise, their internal policies, procedures, communications and culture in connection with reporting and compliance. In doing so, companies should not ignore the implications of the whistleblower program with respect to third-party service providers. Because any report by a whistleblower, however frivolous, can result in substantial costs and distractions, companies should select, engage and manage third-party service providers in light of the new whistleblower rules.

This article provides a brief summary of the new whistleblower program in the United States as it relates to third-party service providers, and discusses some of the particular implications and actions companies should consider going forward.

I. The New Whistleblower Program

Section 922 of the Dodd-Frank Wall Street Reform and Consumer Protection Act added new Section 21F to the Securities and Exchange Act of 1934, directing the SEC to pay awards of between 10% and 30% of the amount recovered to individuals who voluntarily provide the SEC with original information about a possible violation of the federal securities laws leading to an enforcement action resulting in monetary sanctions exceeding $1,000,000. The SEC’s final rules implementing Section 21F became effective on August 12, 2011.

According to the SEC staff’s recently released Annual Report on the Dodd-Frank Whistleblower Program for Fiscal Year 2011, the SEC received 334 whistleblower tips in the first seven weeks of the new whistleblower program. The tips cited by the SEC covered a broad range of alleged infractions, including, among others, market manipulation, offering fraud, insider trading, non-compliant corporate and financial disclosure, and FCPA violations…

cforms contact form by delicious:days

By David N. Anthony, Alan D. Wingfield, and Virginia Bell Flynn, Troutman Sanders, Richmond

Background

In 2007 and 2008, the United States experienced a near collapse of its financial markets. While pundits continue to debate the reasons for the financial crisis, likely contributors have been identified as including poorly-underwritten subprime residential mortgages and the meltdown of “CDOs” and credit default swaps based on those mortgages, the high level of leverage employed by banks and other financial institutions and other “risky or exotic” consumer financial products taxing consumer’s buying power. The immediate response of Congress, the Department of Treasury and the Federal Reserve were dramatic emergency steps to shore up the financial system, including creating the Troubled Asset Relief Program (TARP), cutting interest rates, and lending billions of dollars to and taking a majority stake in companies such as American International Group, Inc.

Given that the immediate response to the crisis was perceived as a bailout of the financial institutions deemed “too big to fail,” many self-described consumer advocates focused on the tangible impact that the financial meltdown had on consumers. Many Americans experienced the decline in the value of their homes, lost their jobs, suffered income declines, defaulted on residential mortgage loans, took on unprecedented amounts of debt, suffered from questionable lending practices and accepted risky consumer financial products – all while funding the bailout as American taxpayers.

Passage of Dodd-Frank and Creation of the CFPB

In an attempt to address the perceived causes of the crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which President Obama signed into law on July 21, 2010. Dodd-Frank represented the most comprehensive legislative overhaul of federal financial regulation since the Glass-Steagall Act passed during the Great Depression. Dodd-Frank’s sixteen titles address many perceived problems with the United States financial market, including the stability and accounting of financial institutions, transparency in financial products, needed regulatory reform and oversight, investor safety and consumer protection…

cforms contact form by delicious:days

By Yin Wilczek

The Department of Justice and the Securities and Exchange Commission Dec. 13 announced parallel charges under the Foreign Corrupt Practices Act against former senior Siemens AG executives over an alleged decades-long bribery scheme to retain a $1 billion contract to produce national identity cards for Argentine citizens (United States v. Sharef, S.D.N.Y., No. 1;11-cr-01056-DLC-1, 12/12/11; SEC v. Sharef, S.D.N.Y., No. 11 Civ. 9073, 12/13/11).

According to DOJ and the SEC, the executives and their co-conspirators engaged in an elaborate scheme between 1996 to early 2007 that caused Siemens to commit nearly $100 million in bribes to Argentine officials, members of the opposition party, political candidates, and others.

At a press conference, SEC and DOJ officials said the cases against the Siemens executives are noteworthy in many respects: this is the first time that a former board member of a Fortune Global 50 company has been charged with FCPA violations. In addition, the SEC sued more individual defendants in its suit than ever before in an FCPA action. Moreover, this is largest number of foreign defendants that the SEC and DOJ have seen in a single case.

“Today’s charges exemplify our FCPA enforcement strategy of holding both companies and individuals accountable,” said Lanny Breuer, Assistant Attorney General of DOJ’s Criminal Division…

cforms contact form by delicious:days

By David J. Levine, Raymond Paretzky and Adam M. Taylor, McDermott Will & Emery LLP, Washington, D.C.

I. Introduction

Even as global supply chains become ever more byzantine, a new US law and proposed implementing rule of the US Securities and Exchange Commission (“SEC”) will add another wrinkle. Companies whose products use “Conflict Minerals” must understand – and control – their supply chains to an unprecedented degree and will be required to comply with extensive new reporting requirements. Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted last July (“Dodd-Frank” or “Act”) imposes these requirements in an effort to undercut funding of militias that have devastated the Democratic Republic of Congo (“DRC”) for the past several years. As with other provisions of Dodd-Frank, Congress assigned implementing responsibility for section 1502 to the SEC, which regulates public companies but has little expertise in international affairs. Therein lies a source of confusion for companies trying to plan for the impending requirements: the SEC final rulemaking has been delayed while the agency figures out how to implement the law faithfully without binding companies to unworkable measures.

Section 1502 of the Act specifically targets four mineral resources that provide the region’s militias with significant revenues: tungsten, tantalum, tin and gold (“three Ts and G” or “3T+G” – the “Conflict Minerals”) as well as the ores from which they are derived. Through section 1502, Congress sought to bring transparency to, and thereby to curtail, the Conflict Minerals trade by requiring companies to report on their use. Last December, the SEC published and sought comments on a proposed implementing rule, which hewed closely to the legislative language. The proposal would require companies who use any of the 3T+G in their products to file an audited “Conflict Minerals Report” with the SEC each year to demonstrate that no Conflict Minerals they used were from sources that benefited the militias in the DRC region. The SEC’s statutorily-imposed deadline to finalize the rule passed in the spring, but the final rule still remains unpublished. The SEC and interested companies and industries have demonstrated continued uncertainty about the final rule, as highlighted in a day-long public Roundtable hosted by the SEC on October 18, 2011, at which SEC commissioners, staff, and numerous industry representatives exchanged ideas and concerns. The SEC is working to adopt the new rule as soon as practicable. This article alerts companies to the key requirements and likely regulations so that they can prepare adequately by answering the critical questions: who, what, and when.

II. Who is Affected?

Section 1502 applies to “issuers” for whom Conflict Minerals are “necessary to the functionality or production of a product” “manufactured or contracted to be manufactured by” the issuer.

Issuer. The regulations will apply to any public company required to file annual reports with the SEC under sections 13(a) or 15(d) of the Exchange Act, 15 USC §§78m(a), 78o(d). Companies not subject to these provisions will not be subject to the Conflict Minerals regulations…

cforms contact form by delicious:days

By Kevin L. Petrasic, Paul, Hastings, Janofsky & Walker LLP.

The interagency Volcker Rule proposal issued last month by the Securities and Exchange Commission (SEC), Federal Reserve Board (FRB), Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) (collectively, the Agencies) solicits comment on a wide array of questions, issues and complexities, the totality of which highlight the significant regulatory challenges confronting the Agencies in implementing a final rule. The almost 400 questions raised in the proposed rule to implement Section 619 of the Dodd-Frank Act address the Volcker Rule’s restrictions on the ability of a bank to engage in proprietary trading and to sponsor or invest in hedge funds and private equity funds. The proposal also seeks comment on a number of complicated and controversial recordkeeping, reporting and related compliance questions. In the aggregate, it appears clear that the Agencies, along with the Commodities Future Trading Commission (CFTC) which abstained from signing onto the proposal, face substantial hurdles in implementing a final rule by the Volcker Rule’s July 21, 2012, statutory effective date.

The most challenging regulatory aspects of the proposal are contained in Subparts B and C of the proposed rule. Subpart B, which addresses proprietary trading restrictions, accounts for over 200 questions, and Subpart C, which discusses covered fund activities and investments, accounts for another 100+ questions. Subpart D, which accounts for approximately 30 questions, sets forth the proposal’s compliance program requirement, also highlighting significant potential compliance burdens and challenges for the industry to implement and the Agencies to manage. Finally, there are numerous themes and issues highlighted throughout the proposal that have significant implications for banks, and that will require careful planning and execution to model a program to assure and maintain compliance…

cforms contact form by delicious:days