June 4, 2007

How to Recognize an Inadvertant Investment Company

Recently, there have been a few examples of why it’s important to know how to recognize an inadvertent investment company. A few weeks ago, the AFL-CIO wrote this letter to the SEC expressing concerns that if the Blackstone Group conducts its IPO, it should be required to register as an investment company.

Then Judge Easterbrook out of the Seventh Circuit Court of Appeals delivered this opinion in National Presto. The case involves some rather unusual facts (and includes some sharp judicial digs at the SEC) raising the issue of whether the company is an inadvertant investment company. National Presto had been ordered by the District Court to register as an investment company. After registering, the company reorganized its assets so that the amount of its assets was below the 40% trigger under Section 3(a)(1)(C) of the ’40 Act – and the SEC would not give its consent to deregistration. It is on this point that Judge Easterbrook takes the SEC to task, with some notable quotes.

I think the case is important beyond its ’40 Act findings because it reminds us that Staff positions (no-action letters and telephone interps and the like) are just that – courts may not necessarily follow them. Thanks to Sheldon Krause for pointing this case out and Keith Bishop for his ten cents!

Learn more in our “Inadvertent Investment Companies” Practice Area – including this new podcast with Rob Rosenblum of K&L Gates, who provides some insight into the issues involved with inadvertent investment companies, including:

– What is an “inadvertent investment company”?
– What are the findings of the National Presto case?
– How are the facts of that case different than what the AFL-CIO is alleging regarding Blackstone in its letter to the SEC?
– What should companies do if they think they might inadvertently be an investment company?

Course Materials: The Nasdaq Speaks – Latest Developments and Interpretations

Don’t forget tomorrow’s webcast – “The Nasdaq Speaks: Latest Developments and Interpretations” – to hear key Nasdaq Staffers talk about all the latest. You’ll want to print out these course materials in advance…

Confusion Reigns: Has the SEC Decided to Support Investors in “Scheme” Liability Case?

According to this Saturday Washington Post article, the SEC has decided to throw its weight behind investors in a big-money dispute that could resolve whether shareholders can sue bankers who enabled their corporate clients to engage in fraud (today’s WSJ has a similar article, but as noted below, there is uncertainty as to whether this is true – and if so, exactly which case the SEC has decided to weigh in on). Here is an excerpt from the article:

“The Securities and Exchange Commission has asked the U.S. solicitor general to file court papers supporting investors in an upcoming Supreme Court case, an action that has not been made public. The agency’s decision follows intense lobbying by industry groups, unions and plaintiff lawyers, including well-known California attorney William S. Lerach.

The move is a significant victory for Lerach, who won $7.3 billion in settlements with banks and law firms that helped Enron disguise its financial problems. If the Supreme Court adopts the agency’s position, it could breathe new life into a stalled case filed by Enron shareholders against Merrill Lynch and Barclays Bank. But the SEC backing comes at a bittersweet time for Lerach, whose own future is in question because of government scrutiny.”

As points out, the article might be read several different ways (and SEC officials have declined to comment so far). Here is an excerpt from the commentary on that site:

“A reader suggests that the Washington Post article is actually talking about Stoneridge though the article does not mention that case by name. That is a plausible interpretation that would make the Washington Post article make more sense; the reporter may have been limited by the constraints of space and forced to leave out information such as the name of the case the SEC was planning to file a brief in, even as it mentions the larger Enron case. If the Solicitor General does not veto the SEC’s politically-motivated recommendation, the Stoneridge amicus brief would be due June 11.”