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Can you afford the risk of not having a captive insurance company?

By Mark Koogler on

Captive insurance companies have a long history worldwide and in the United States. A majority of states have captive insurance legislation in place and onshore jurisdictions such as Vermont, Utah, Delaware, Tennessee, Arizona and Connecticut promote their captive legislation as an economic engine to attract new businesses.

In general, a captive insurance company is a wholly owned subsidiary that insures or reinsures only the risks of its parent company and its affiliates. Captives can take other forms, such as protected cell, association or group captives — but all offer the owner an opportunity to stabilize premium payments, address policyholder needs and address cost prohibitive or unavailability insurance coverage.

The ownership of captive insurance companies is no longer confined to Fortune 500 companies. In 2013, protected cell captives and small captives, also known as 831(b) captives, experienced strong growth. The expanded use of small captives allowed middle market companies to reap the benefits of a captive arrangement on a cost effective basis.…

FBI increases criminal fraud investigations by 65%, director reports

By Porter Wright on

FBI Director James Comey shared the bureau’s enforcement trends and objectives at the New York City Bar Association’s Third Annual White Collar Crime Institute on May 19.

Comey recognized that although counter-terrorism is still a top priority for the agency, white-collar cases are receiving significant focus and resources. In the mortgage industry, agents are investigating foreclosure rescue companies preying on stressed homeowners and criminals who target senior citizens with the lure of reverse mortgages. In money laundering, enforcement targets are involved in a buying anonymous prepaid credit cards, using of “virtual currency” to transfer money and using smaller institutions to inject money into the banking system. In securities markets, the FBI also is targeting micro-cap market manipulation, insider trading and accounting fraud.

Comey emphasized in his remarks that the FBI has received additional resources from Congress, which allowed the agency to hire 2,000 people this year. In addition, he disclosed that more than 1,300 agents are working more than 10,000 white collar crime cases. These figures represent a 65% increase in the number of criminal fraud cases investigated by the FBI since 2008.…

U.S. Supreme Court says restitution depends on property a lender loses, not collateral the lender receives

By Porter Wright on

In the unanimous ruling Monday, the U.S. Supreme Court resolved a split in circuits regarding the interpretation of the Mandatory Victim’s Restitution Act (MVRA). In Robers v. United States, the high court confirmed that for purposes of calculating restitution, the return to the lender of collateral securing a fraudulent loan is not completed until the victim lender receives money from the sale of the collateral.

In 2010, Robers was convicted in federal court of conspiracy to commit wire fraud relating to two houses that Robers purchased by submitting fraudulent loan applications. When Robers failed to make loan payments, the banks foreclosed on the mortgages and, in 2006, took title to the two houses. The houses were sold in 2007 and 2008 in a falling real estate market. At sentencing, Robers was ordered to pay restitution of approximately $220,000, equal to the loan amount, minus the money that the banks had received from the sale of the two homes.

On appeal, Robers challenged the sentence imposed pursuant to the MVRA and argued that the MVRA required the court to determine the amount of loss based upon fair market value of the homes on the date that the lenders obtained title to the house, as opposed to the fair market value on the date that the properties were sold.…

FINRA invites comment on rules that will govern limited corporate financing brokers

By Mark Koogler on

FINRA (the Financial Industry Regulatory Authority) is soliciting public comment on a proposed rule set (LCFB Rule 14-09) for firms that meet the definition of “limited corporate financing broker” (LCFB). An LCFB is a firm that engages solely in any one or more of the following activities:

  • Advising an issuer, including a private fund, concerning its securities offering or other capital raising activities
  • Advising a company regarding its purchase or sale of a business or assets or regarding its corporate restructuring, including a going-private transaction, divestiture or merger;
  • Advising a company regarding its selection of an investment banker
  • Assisting in the preparation of offering materials on behalf of an issuer
  • Providing fairness opinions
  • Qualifying, identifying or soliciting potential institutional investors

The rationale behind LCFB Rule 14-09 is that while LCFB firms may receive transaction-based compensation as part of their services, they do not engage in many of the types of activities typically associated with traditional broker-dealers. An LCFB firm would be prohibited from maintaining customer accounts, handling customer funds or securities, exercising investment discretion on behalf of a customer, or engaging in proprietary trading of securities or market-making activities.…

Affordable Care Act update: agencies extend reprieve for employer pay-or-play mandate

By Seth Hanft on

Hot off the press are the final regulations for the employer shared responsibility provisions of the Affordable Care Act (more commonly referred to as the “pay-or-play mandate”). In fact, the regulations are so new that they will not actually be published in the Federal Register until tomorrow, February 12. For those of you who are dying to get a first glimpse, a pre-publication version can be found here.

While the regulations are extensive (227 pages), many of the provisions of the proposed regulations have been retained. However, there are a couple important transition rules buried in the final regulations that provide a welcomed reprieve from the pay-or-play mandate for certain employers.…

FTC Revises HSR and Interlocking Directorate Thresholds

By Jay Levine on

HSR Revisions

The Federal Trade Commission (FTC) recently announced the annual changes to the notification thresholds for filings under the Hart-Scott-Rodino Antitrust Improvements Act (HSR) as well as certain other values under the HSR rules.

As background, the HSR Act requires that acquisitions of voting securities or assets that exceed certain thresholds be disclosed to U.S. antitrust authorities for review before they can be completed. The “size-of-transaction threshold” requires that the transaction exceeds a certain value. Under certain circumstances, the parties involved also have to exceed “size-of-person thresholds.” This year’s values, which are adjusted annually based on changes in the GNP, take effect in mid-to-late February 2014. The FTC also adjusted the safe harbor thresholds that govern interlocking directorates in competing companies.

The most important change is that the minimum size-of-transaction threshold will increase from the current $70.9 million to $75.9 million. The size-of-person thresholds will also increase as follows.

  • For transactions valued between $75.9 million and $303.4 million, one party to the transaction must have $15.2 million in sales or assets and the other party must have $151.7 million in sales or assets, as reported on the last regularly prepared balance sheet or income statement.
  • For transactions valued at greater than $303.4 million, no size-of-person threshold must be met to require an HSR filing.

The filing fee thresholds have similarly increased as follows.

Interlocking Directorates

Section 8 of the Clayton Act generally prohibits one person from serving as a director or officer of two competing corporations if two thresholds …

The Timken Board: Between a Rock and a Hard Place

By Bob Tannous on

On May 7, 2013, Timken Co. announced that its shareholders approved a nonbinding proposal from activist shareholders (Relational Investors and Calstrs—California State Teachers’ Retirement System, who together own 7.28% of the Company) to spin-off the Company’s steel business into a separate entity. The Company’s Board had opposed the proposal.

The Company said that 47% of outstanding shares (53% of the shares voted) were voted in favor of the plan to create a separate company, while 41% of outstanding shares (47% of the shares voted) voted against the proposal.

In a joint statement released on May 7, 2013, Relational and Calstrs stated that Timken’s Board "must now acquiesce to the will of the shareholders consistent with their fiduciary duties."  On the same date, Chairman Tim Timken Jr. stated, "We appreciate the thoughtful feedback we’ve received from our shareholders on the spin-off proposal as well as their broader input on corporate governance and capital allocation. The board will carefully evaluate the views of our shareholders and announce next steps within 45 days."

The real work for the Timken Board now begins.  The Board will need to work through their fiduciary duties to act in the best interests of all their shareholders and determine an appropriate course of action.  Merely acquiescing to shareholders’ favoring the nonbinding proposal will not necessarily fulfill their fiduciary obligations.  Prior to the vote, as part of their fiduciary obligations, the Board determined that the proposal and subsequent spin-off were not in the best interests of the shareholders.  The real question for them …

SEC’s New Investor Advisory Committee Holds First Meeting and Commission Aguilar Asks Members To Put Individual Retail Investors Foremost In Their Considerations

By Porter Wright on

On June 12, 2012, the newly-formed Investor Advisory Committee of the SEC held its first meeting. SEC Chairman Mary Schapiro told the committee members that “you have made a commitment to ensuring that the voice of the investor remains front and center at the SEC,” while Commissioner Luis Aguilar, an ardent backer of the Committee, told members that their “work will be vital to the SEC and the American public,” asking them to focus on the needs of individual investors while noting that “only 15% of Americans trust the stock market.”…

SEC Announces the Formation of a New Investor Advisory Committee

By Porter Wright on

On Monday, April 9, 2012, the SEC announced that it had formed the new Investor Advisory Committee and identified the 21 members who will serve on that Committee. The new Committee, mandated by Section 911 of the Dodd-Frank Act, replaces a prior Investor Advisory Committee. The Commission described the Committee as being "made up of individuals with a broad range of backgrounds and experiences."…

The JOBS Act – Creation of the “Emerging Growth Company”

By Porter Wright on

On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act of 2012, the JOBS Act. The Act implements measures relating to the IPO process and reporting requirements for a new category of issuer known as the “emerging growth company,” or EGC. The Act defines an EGC as a company with annual gross revenues of less than $1 billion during its most recent fiscal year. A company will retain its EGC status until the earliest of:

·         The first fiscal year after its annual revenues exceed $1 billion.

·         The first fiscal year following the fifth anniversary of its IPO.

·         The date on which the company had, during the previous three-year period, issued more than $1 billion in non-convertible debt.

·         The date on which the company qualifies as a large accelerated filer.

IPO Process

 

The Act amends applicable federal securities laws to exempt EGCs from:

·         The requirement to publicly file an IPO registration statement. An EGC may confidentially submit its registration statement and any amendments to the SEC.

·         The requirement to include three years of audited financial statements in an IPO registration statement. EGCs only need to include two years of audited financial statements. Likewise, the MD&A need only include two years of discussion and analysis.

·         Restrictions on communications ahead of public offerings, provided the EGC communicates only with qualified institutional buyers or accredited investors. This allows EGCs to “test the waters” before a contemplated offering.

The Act also eases the rules on research relating to …

JOBS Act Update: $50 Million Public Offering Exemption (“Super” Regulation A)

By Jack Gravelle on

Section 401 of the Jumpstart Our Business Startups Act, or JOBS Act (expected to be signed into law by President Obama on April 5, 2012) permits securities offerings of up to $50 million in any 12-month period under a new exemption to be established by the SEC under Section 3(b) of the Securities Act of 1933.  Regulation A (the small public offering exemption) provides the current exemption under Section 3(b), which is capped at $5 million and is not available to Exchange Act reporting companies.  The $5 million cap is arguably one of the biggest disadvantages of a Regulation A offering.

Securities issued under the new $50 million exemption may be sold publicly and will not be considered restricted securities.  The new exemption requires the SEC to issue implementing rules regarding delivery of the offering statement and other information about the issuer to investors.  Issuers must file audited financial statements annually and may solicit interest in the offering before filing an offering statement, subject to additional rules to be set by the SEC.  The JOBS Act does not set a deadline for this rulemaking.  …

JOBS Act Update: Threshold for Exchange Act Registration Will Increase

By Jeremy Siegfried on

Currently, under Section 12(g) of the Securities Exchange Act of 1934, companies with more than $10 million in assets whose equity securities are held of record by more than 500 holders must file periodic reports with the SEC. While the $10 million threshold had been raised from time to time over the years from an original $1 million level, the 500 holders of record requirement has never been changed.

Title V of the Jumpstart Our Business Startups Act, or JOBS Act (expected to be singed into law soon by President Obama), amends Section 12(g)(1) of the Exchange Act to increase the holders of record threshold for most issues to either (i) 2,000 persons, or (ii) 500 persons who are not accredited investors. For banks and bank holding companies, the threshold number of record holders will be increased to 2,000 persons.

Title V of the JOBS Act also provides that persons holding securities received pursuant to an employee compensation plan in transactions exempted from the registration requirements of Section 5 of the Securities Act of 1933 (e.g., because they were issued under Rule 701 of the Securities Act) will be excluded from being counted as holders of record for purposes of the Section 12(g) calculation. The JOBS Act notably did not otherwise alter how holders of record are determined and beneficial owners of securities who hold shares in “street name” will generally not be counted as holders of record. Shares held in “street name” by the Depository Trust Company will continue …

JOBS Act Update: Rule 506 Private Placements Could be a Little Less “Private”

By Jack Gravelle on

Section 201 of the Jumpstart Our Business Startups Act, or JOBS Act (expected to be signed into law soon by President Obama), requires the SEC to change the rules of a Rule 506 private placement to allow for general solicitation or general advertising so long as all purchasers are accredited investors.

Currently, Rule 502(c) prohibits an issuer in a private placement, or any person on its behalf, from offering or selling securities by any form of general advertising, including any ad, article, or notice published in any newspaper or magazine, on TV, or over the radio.

Depending on how the Commission revises its rules (they have 90 days from enactment), this change could significantly expand the way companies seek investors for private offerings. Imagine cold calls, Internet pop-ups, billboards, and hedge fund ads on TV. Of course the issuer will have to take reasonable steps to verify that purchasers are accredited investors, which is something responsible issuers do anyway.

Proponents argue lifting the ban on advertising promotes transparency, while critics (including key members of the Commission) argue the ban is an important protection against general solicitations reaching unsophisticated investors who may be duped by unscrupulous offers.

The JOBS Act further provides that any person who maintains a platform or mechanism for such advertisements does not have to register as a broker-dealer as long as they receive no compensation in connection with the purchase or sale of a security and do not have possession of customer funds or securities, among other …

JOBS Act Update: Crowdfunding

By Jack Gravelle on

The U.S. House of Representatives, by a vote of 380 to 41, has passed the Jumpstart Our Business Startups Act, or JOBS Act in the form previously approved by the Senate last week. The bill now goes to President Obama, who is expected to sign it into law. The JOBS Act significantly impacts the securities laws, including through a new way to raise money known as “crowdfunding.”

The JOBS Act creates a new securities registration exemption known as “crowdfunding” that issuers can rely on to sell up to $1 million worth of securities to non-accredited investors as long as no individual investor invests more than: (a) $2,000 or 5% of the investor’s annual income in any 12-month period (for investors with annual income or net worth less than $100,000); or (b) 10% of the investor’s annual income or net worth up to $100,000 in any 12-month period (for investors with annual income or net worth in excess of $100,000). And, these “crowdfunders” do not count toward the newly-increased shareholders of record threshold that triggers Exchange Act registration under Section 12(g).

The securities may only be issued through a registered broker-dealer or “funding portal” over the internet that complies with additional requirements. The issuer has certain disclosure requirements during the offering process and following the offering.

Crowdfunding is a popular concept among those who see it as a way to empower smaller investors and smaller companies without access to traditional angel investors. However, regulators, including SEC Chairman Schapiro, have raised concerns …

Accredited Investors and Crowdfunding

By Jack Gravelle on

In February the SEC issued a Small Entity Compliance Guide that provides a summary of the relatively new net worth standard in the definition of “accredited investor” under the Securities Act, as required by the Dodd-Frank Act.  Section 413(a) of the Dodd-Frank Act requires that the value of a person’s primary residence be excluded when determining whether the person has net worth in excess of $1 million in order to qualify as an “accredited investor.”

The Dodd-Frank Act has made it a bit harder to be an accredited investor, and yet the Senate is currently considering a version of the Jumpstart Our Business Startups Act or JOBS Act passed by the House earlier this month that would make it easier for non-accredited investors to participate in “crowdfunding.”  The JOBS Act would create a new registration exemption that issuers could rely on to sell up to $1-2 million worth of securities to non-accredited investors as long as no individual investor invests more than the lesser of $10,000 or 10% of the investor’s annual income in any 12-month period.  And, these “crowdfunders” would not count toward the 500 shareholders of record threshold that triggers Exchange Act registration under Section 12(g).

Furthermore, for those issuers that want to continue to sell to accredited investors, the JOBS Act would require the SEC to amend Regulation D to permit general solicitation and advertising in Rule 506 offerings sold only to accredited investors.

Both provisions blur the line between public and private offerings and potentially pit …

Financial Times Reports That SEC Has Written At Least Dozen Companies About Their Business Dealings in Countries Deemed “State Sponsors” of Terror

By Porter Wright on

An article from Lina Saigol and Kara Scannell in the Financial Times this morning (December 12, 2011) reports that the SEC’s Division of Corporate Finance has sent letters to at least a dozen companies instructing them to "disclose business activity in and with Syria, Iran and others deemed ‘state sponsors’ of terror by the State Department." The article is available on-line here (registration required).…

Eleventh Circuit Rules That Insurance Policy Does Not Cover Legal Fees Incurred During SEC Investigation

By Porter Wright on

In an October 13, 2011 Opinion that carefully considers the language of two insurance policies, the Eleventh Circuit Court of Appeals ruled that Office Depot, Inc. was not entitled to coverage for most of the legal fees incurred by the company while responding to inquiries from the SEC. In-house counsel would be wise to review their respective policies to determine if company would face a similar issue or would be covered if an SEC investigation occurs.…

Bloomberg Markets Magazine Details Illicit Payments By Koch Industries, Inc., Who May Become Focus of Occupy Wall Street and Occupy DC Protests

By Porter Wright on

A report on Monday, October 3 from Bloomberg Markets Magazine detailed a years-long scheme by Koch Industries, Inc. to make improper payments to win contracts in six countries – payments which the company admitted "constitute violations of criminal law." The article states that the Justice Department would not confirm or deny the existence of any investigation into the activities, but such an investigation seems likely given the articles description of events that may violate the FCPA or the laws regarding the Iran Trade Embargo.…

Federal Housing Finance Agency Sues 17 Financial Institutions For Securities Fraud

By Porter Wright on

On Friday September 2, the Federal Housing Finance Agency, as conservator for Fannie Mae and Freddie Mac, filed lawsuits in state and federal court in New York and Connecticut against 17 different financial institutions (including Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Morgan Stanley and JP Morgan), certain of their officers and various underwriters, alleging violations of the federal securities laws and common law relating to the sale of mortgage-backed securities. In its news release, the FHFA claimed alleged that "the loans had different and more risky characteristics than the descriptions contained in the marketing and sales materials provided to" Fannie Mae and Freddie Mac.…

Results of Two-Year Senate Study Regarding Wall Street and the Financial Crisis Is Released

By Porter Wright on

On Wednesday, April 13, 2011, the Senate’s Permanent Subcommittee On Investigations issued its Report entitled: "Wall Street and the Financial Crisis: Anatomy of a Financial Crisis."  " The 639-page Report is "the product of a two-year, bipartisan investigation … into the origins of the 2008 financial crisis." The Subcommittee conducted over 150 interviews and depositions, and accumulated and reviewed tens of millions of pages of documents. The Subcommittee concluded that the financial crisis was "the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street."…

New Study Shows Number of Securities Class Action Settlements Decreased in 2010, While The Median Settlement Amount Increased

By Porter Wright on

On March 10, 2011, Cornerstone Research announced the results of its latest study: "Securities Class Action Settlements – 2010 Review and Analysis." The Annual Report, which provides detail on settlement summary statistics and an analysis of case characteristics, reviewed the 86 court-approved settlements in 2010, finding that the number of settlements fell to its lowest in ten years and that the total dollar value of settlements fell 17%. However, the median settlement amount increased over 40% in 2010.

One of the co-authors of the report, Professor Laura Simmons of the College of William & Mary, stated in the Press Release: "I don’t expect the sharp drop in the number of settlements to reoccur in the near future; however, the broad-based shift toward higher settlement amounts may persist in upcoming years."

Additional findings announced by Cornerstone include:

• settled cases where there was a corresponding SEC action prior to the class action settlement increased to 30% in 2010 (compared to 20% in 2009), and those cases tend to result in higher settlement amounts;

• the number of class actions involving companion derivative actions fell slightly in 2010 when compared to 2009, but still remain higher than the average number of cases since the passage of the Private Securities Litigation Reform Act; and

• approximately 70% of the settlements announced in 2010 were related to violations of generally accepted accounting principals (a 5% increase over 2009) and those cases "continued to be resolved with statistically significant larger settlement amounts" than cases that …

Big Lots Suit Raises Insider Trading and Fair Disclosure Issues

By Jack Gravelle on

Earlier this week, Columbus retailer Big Lots Inc. filed suit in Florida against a stock research company that Big Lots claims obtained nonpublic information about inventory, payroll, and margins.  Big Lots claims that research firm Retail Intelligence Group stole trade secrets and aided employees’ breach of fiduciary duties by inducing 72 Big Lots managers to disclose the confidential information.  Retail Intelligence Group allegedly sold the information to investors in the form of a research report, which correctly predicted decreased performance for the third quarter.

The lawsuit touches on the difficulty of defining what types of behavior should be considered illegal insider trading.  Federal securities laws (and case law) generally prohibit trading securities in breach of a duty to the issuer (or otherwise) while in the possession of material, nonpublic information.  Research firms are known to estimate inventory, converse with suppliers and customers, and engage experts on specific companies or industries, among other things, in order to predict performance.  There is a serious question as to when simply having detailed insight into the health of a corporation morphs into obtaining nonpublic information.  Federal courts have historically interpreted the term “nonpublic” to mean information that companies have not widely disseminated.

Of further concern are the implications for Regulation FD raised by this lawsuit.  Regulation FD prohibits selective disclosure to market professionals and securityholders of material, nonpublic information unless the information is simultaneously disclosed to the public.  Employees certainly cannot tip others with confidential corporate information.  But it is possible to conceive of …

How Public Companies Should Respond to the Dodd-Frank Act

By Jack Gravelle on

Even though the Dodd-Frank Act is already in effect, the full scope of the law will not be known until numerous regulations are finalized. Public companies faced with complying with these future regulations should consider taking the following actions now to be ready for the new rules:

  • Decide how often to recommend say on pay votes. Companies must offer a shareholder advisory “say on pay” vote in the 2011 proxy season. Following 2011, a similar vote must occur at least once every three years. The compensation committee should recommend how often this vote should occur. A vote every three years may be preferable where elements of compensation extend over a two- or three-year period.
  • Review compensation committee independence. New independence rules for the compensation committee are planned. To prepare, boards should evaluate compensation committee members based on the independence requirements of the audit committee and consider potential conflicts of interest arising from connections with advisors, compensation consultants, and affiliates. The new rules may require updating the director and officer questionnaires and the compensation committee charter.
  • Adopt a policy on hedging. Companies must disclose in the proxy statement if employees and directors are allowed to hedge against losses on their company stock. If no policy exists, the board should adopt one.
  • Review compensation arrangements in anticipation of clawback rules. The Dodd-Frank Act directs the SEC to issue rules regarding companies adopting a policy to recoup executive incentive compensation if an accounting restatement is needed due to material noncompliance with a financial
…
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