On Tuesday, the Second Circuit in In Re Vitamin C Antitrust Litigation vacated a $147 million award against two Chinese companies for engaging in anti-competitive behavior. At issue was how a federal court should respond when a foreign government’s regulatory scheme conflicts with U.S. laws. Because the Chinese companies could not simultaneously comply with Chinese law and U.S. antitrust laws, the principles of international comity required the district court to abstain from exercising jurisdiction in the case. As a result, the Second Circuit reversed the district court’s denial of the Chinese companies’ motion to dismiss and remanded the case with instructions to dismiss the complaint with prejudice. In re Vitamin C Antitrust Litig., No. 13-4791 (2d Cir. Sept. 20, 2016).
The U.S. Court of Appeals for the Second Circuit yesterday affirmed the fraud conviction of a registered investment adviser and held that proof of intent to harm is not an element of a criminal conviction under section 206 of the Investment Advisers Act of 1940, 15 U.S.C. §80b-6 (“IAA”). The court’s decision in U.S. v. Tagliaferri, No. 15-536 (2d Cir. May 4, 2016), distinguished between willfulness – the defendant’s knowledge that his or her conduct was unlawful – and intent to harm the victim of the crime.
Following the D.C. Circuit’s July 14, 2015 decision in Koch et al. v. Securities and Exchange Commission, No. 14-1134 (D.C. Cir. July 14, 2015), which held that the SEC could not retroactively punish an investment advisor for conduct that occurred prior to the enactment of the statute authorizing the punishment, the SEC announced last week that it would not seek further review of that decision.
Returning to an enforcement priority repeatedly articulated over the years (for example, here, here and here), the SEC recently imposed sanctions on a registered investment advisory firm and two principals arising out of an alleged scheme to inflate the valuations of illiquid mortgage-backed securities held by private investment funds managed by the adviser. The SEC charged that the overvaluations improperly increased the management and performance fees collected by the adviser.
In AlphaBridge Capital Management, LLC, the Order reflecting the parties’ agreement to an aggregate penalty of $5 million, alleged that the firm systematically overstated the value of securities known as interest-only and inverse interest-only floaters. These unlisted, thinly-traded securities are tranches of collateralized mortgage obligations which receive a coupon payment that fluctuates as interest rates change. In the absence of a robust market, these securities are typically valued based on discounted cash flows. The computation of future cash flows and the resulting valuations are heavily dependent on a projection of the percentage of the underlying mortgages that are expected to be prepaid at any given time.
Last week, Delaware Governor Jack Markell signed Senate Bill 75, which amends the Delaware General Corporation Law to prohibit Delaware stock corporations from adopting bylaws that force shareholders to pay legal fees if they do not prevail in lawsuits asserting internal corporate claims against Delaware corporations. The legislation also allows Delaware corporations to designate Delaware – but not any other state – as the exclusive forum for internal corporate claims.
Section 115 defines “internal corporate claims” as “claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.”
Relying on a data-driven statistical analysis conducted by the Division of Economic and Risk Analysis (DERA), the SEC recently commenced administrative proceedings against an investment advisor, Welhouse & Associates, Inc., and its principal, charging them with improperly allocating profitable options trades to the principal’s own accounts while allocating unprofitable trades to the firm’s clients. The SEC’s announcement states that it is the first enforcement proceeding arising from the Commission’s recent initiative to use statistical analyses “to identify potentially fraudulent trade allocations known as ‘cherry-picking.’”
The Order initiating proceedings states that DERA analyzed the firm’s allocation of options trades over 35 months, from February 2010 to January 2013. During this time, the SEC alleges that options trades were typically executed through a master account at the firm’s broker, and allocated later in the day to either the principal’s accounts or client accounts.
Yesterday, the Delaware House of Representatives unanimously passed a bill prohibiting publicly traded corporations from adopting bylaws that force shareholders to pay legal fees if they do not prevail in lawsuits asserting internal corporate claims against Delaware corporations. The bill would also allow Delaware corporations to designate Delaware – but not any other state – as the exclusive forum for internal corporate claims. The Delaware Senate passed the same bill last month, as we reported here. The bill now heads to Governor Jack Markell for signature.
Yesterday, the Delaware Senate passed legislation prohibiting publicly-traded corporations from adopting bylaws that force shareholders to pay legal fees if they bring internal corporate claims against the company in court and do not win. The legislation also allows Delaware corporations to designate Delaware – but not any other state – as the exclusive forum for internal corporate claims. The bill passed on a 16-5 vote and now heads to the Delaware House of Representatives.