November 16, 2006

Tales from the Hertz IPO

With the Hertz Global Holdings’ IPO priced last night (and panned by some), it reminded me to circle back to when Hertz dropped Deutsche Bank from its IPO underwriting team a few weeks ago due to unauthorized email messages sent by an employee of the investment bank when the IPO was still “in registration.”

As noted in this Bloomberg article, Hertz had no knowledge of the emails until after they were sent and asked Deutsche Bank to notify the institutional accounts who received them to disregard them. It’s unknown what the email messages said; my guess is negative information – because if it was positive information (and accurate), there would be more pressure on the company to include that information in the prospectus.

In the “Risk Factor” below, excerpted from Amendment No. 7 to Hertz’ Form S-1, the company disclosed it doesn’t believe the e-mail messages constitute a violation of securities law on its part, but noted that it could possibly be held liable by anyone who received the messages and purchased shares (but that it would “contest the matter vigorously”):

Risks Relating to Our Common Stock and This Offering

We may have a contingent liability arising out of electronic communications sent to institutional investors by a previously named underwriter that will not participate as an underwriter in this offering.

We understand that, during the week of October 23, 2006, several e-mails authored by an employee of a previously named underwriter for this offering were ultimately forwarded by employees of that underwriter to approximately 175 institutional accounts. We were not involved in any way in the preparation or distribution of the e-mail messages by the employees of this previously named underwriter, and we had no knowledge of them until after they were sent. We have requested that the previously named underwriter notify the institutional accounts who received these e-mail messages from its employees that the e-mail messages were distributed in error and should be disregarded. In addition, this previously named underwriter will not participate as an underwriter in this offering.

The e-mail messages may constitute a prospectus or prospectuses not meeting the requirements of the Securities Act of 1933, as amended, or the “Securities Act.” We, the selling stockholders and the other underwriters participating in this offering disclaim all responsibility for the contents of these e-mail messages. We strongly caution you not to place any reliance on the contents of the e-mail messages. The contents of the e-mail messages should be totally disregarded and should not be relied upon when making any investment decision regarding our common stock. All potential investors should base their investment decisions solely on information contained in this prospectus.

We do not believe that the e-mail messages constitute a violation by us of the Securities Act. However, if any or all of these communications were to be held by a court to be a violation by us of the Securities Act, the recipients of the e-mails, if any, who purchase shares of our common stock in this offering might have the right, under certain circumstances, to require us to repurchase those shares. Consequently, we could have a contingent liability arising out of these possible violations of the Securities Act. The magnitude of this liability, if any, is presently impossible to quantify, and would depend, in part, upon the number of shares purchased by the recipients of the e-mails and the trading price of our common stock. If any liability is asserted, we intend to contest the matter vigorously.”

Crisis Planning and Crisis Response

In this podcast, Mike Tankersley of Bracewell & Giuliani provides some insight into crisis management, including:

– You recently authored a 120-page handbook, “Board Leadership for the Company in Crisis” that was published by the National Association of Corporate Directors. What led you to take on this subject, and what has the response been?
– It would seem like crisis planning would be something every company would do. Is that the case?
– What role do preparation and practice play?
– Why don’t companies engage in systematic, thorough crisis planning, preparation and practice?
– What are some examples of a failure to plan, prepare and practice crisis response and the problems that created for the affected company?
– What are some examples of crisis response planning paying off for companies?
– What is your best argument to a board or management team that they should invest time and money in advance planning?
– What role can counsel play in encouraging companies to take up crisis response planning, and in putting together effective plans?

Incorporation Rules Enable Fraud, Officials Warn Panel

Here is an article from yesterday’s Washington Post: Lax state standards allow millions of companies to incorporate every year without their owners being identified, a practice that lets tax evasion, money laundering and securities fraud go undetected, federal officials told a Senate panel yesterday.

Leaders of the Senate Government Affairs Committee’s permanent subcommittee on investigations sounded alarms about lenient rules that apply to about 2 million new businesses that incorporate in the United States every year. In most cases, states fail to seek basic ownership information from companies and often do not check what little data is provided in follow-up reports against criminal justice databases. Lack of transparency over who controls the companies amounts to “an unacceptable risk to our national security and our treasury,” said Sen. Carl M. Levin (D-Mich.), whose staff initiated the investigation.

Justice Department and Internal Revenue Service officials who investigate financial wrongdoing testified that they are frequently stymied by the problem. “We have important investigations that are hitting brick walls because no one has the ownership information,” said Stuart D. Nash, associate deputy attorney general.

Immigration and Customs Enforcement investigators pointed authorities to a Nevada company that received nearly 3,800 suspect wire transfers totaling $81 million over two years. But the case did not move forward because authorities could not identify who owned the business, lawmakers said. The FBI has opened 103 investigations into stock market manipulation, most of them involving shell companies whose owners are unknown to authorities. The bureau said shell businesses have been used to launder as much as $36 billion from countries in the former Soviet Union. A previous report by the Justice Department disclosed that Russian officials used shell companies in Delaware and Pennsylvania to siphon $15 million that was supposed to pay for safety upgrades for former nuclear power plants.

In many cases, states do not have an incentive to seek detailed information about business owners because the lure of incorporation fees and related funds is too great. In Delaware alone, nearly one-quarter of the state’s revenue comes from such fees, according to a Government Accountability Office report on the issue released in April.

Technology that allows companies to incorporate online without requiring the owners to appear in person in a state office is also raising concerns. In some states, including Delaware and Nevada, corporations can pay an extra fee to complete the incorporation process in an hour, lawmakers said. “What is needed is a level playing field, a system that avoids a race to the bottom,” said Sen. Norm Coleman (R-Minn.).

Fixing the problem could be difficult. States and the federal government have clashed over who has the authority to regulate business. At the hearing, senators asked law enforcement officials to look more closely at the problem and to recommend a solution. Some state regulators argue that seeking more information could raise privacy considerations. And Yvonne Jones, director of the financial markets team at the GAO, said that state officials interviewed by her staff expressed concern that widespread change could require action by state legislatures and could increase fees.