December 8, 2005

The Skinny: The First Automatic Shelf Ever Filed

If you are a deal junkie, here is one you gotta check out! In this podcast, Rusty McGranahan of Skadden Arps provides some insight into what it’s like to do a deal under the new ’33 Act reform rules as he participated in the first Form S-3ASR ever filed (ie. for Temple-Inland), including:

– What was done differently in drafting the base prospectus?
– What was done differently during the offering process? Were any free writing prospectuses used?
– Did any issues arise on filing day?
– Did any issues arise in drafting the underwriting agreement? How about when delivering the legal opinions?

The SEC and Avian Flu

My wife sometimes thinks I’m a bit of the hypochondriac. I don’t think so – at least not any more than any other married man – but it is true that I have been worried about widespread outbreak of the avian flu long before the media started to carry daily articles about it. So I was relieved to see the SEC issue this interpretive release that will allow drug companies to immediately record sales of life-saving vaccines stockpiled by the federal government for future pandemics.

As noted by the US Senators pushing this move, current rules prohibit companies from recognizing revenue until the products were withdrawn from inventory – and that offered no incentives to fill orders (although that ain’t the reason that most drug companies gave up on vaccines as a primary source of business). The SEC’s interpretation may not be extended by analogy to other circumstances – drug companies may make the accounting change in the first quarter of their next fiscal year.

Court Rejects SEC’s Imposition of Civil Penalties against Directors in Early SOX Test

A week ago, Bruce Carton ran the guest post below from Nicolas Morgan of DLA Piper Rudnick Gray Cary:

If the SEC thought it would gain home court advantage by asking Congress to allow monetary penalties to be awarded in administrative proceedings under Sarbanes-Oxley, the DC Circuit has set the record straight. On November 15, 2005, in The Rockies Fund v. SEC, the DC Circuit scolded the SEC for arbitrarily and capriciously awarding “the harshest available penalties” against the Funds’ directors without any showing that their conduct “created a significant risk of substantial loss to others.”

The SEC accused the Fund of mischaracterizing and overvaluing certain holdings on its SEC filings, but the SEC failed to demonstrate in the administrative proceeding that such conduct put any investors at risk of loss. Sarbanes-Oxley permitted the SEC to seek civil penalties in an administrative proceeding presided over by an SEC administrative law judge rather than in a federal court action. However, the DC Circuit confirmed that the SEC must make the same evidentiary showing to obtain civil penalties no matter which forum the SEC brings its enforcement action in.