Over the past few years, the SEC has brought actions against several individuals and hedge funds for federal securities law violations arising from short selling in connection with PIPE (private investment in public equity) offerings. Recently, the SEC Staff has been sending inquiries to hedge funds that invest in PIPEs, requesting the records of client accounts and PIPE transactions – so more actions are no doubt likely. Most of the SEC actions to date have settled, but a few are winding their way through the courts.
As noted in this Bloomberg article and this over-the-top press release issued yesterday by the defendant, one PIPEs case has met with some resistance in the US District Court for the Western District of North Carolina. In the case of SEC v. John F. Mangan, Jr. and Hugh L. McColl, III, the SEC charged Mangan, a former Friedman, Billings, Ramsey & Co. broker, with unlawful insider trading by short selling CompuDyne Corp. securities prior to the public announcement of a PIPE offering, and with engaging in the unregistered sale of securities in violation of Securities Act Section 5. The district court judge dismissed the Section 5 claim, but is allowing the case to proceed on the insider trading allegations.
Mangan was alleged to have shorted some CompuDyne securities after public announcement of the PIPE and prior to the filing or effectiveness of a resale registration statement for the PIPE shares. Mangan did not borrow or otherwise obtain stock to cover at the time of the short sales. Mangan then covered the short sales with shares purchased in the PIPE, after the registration statement was declared effective. The SEC has for many years taken the position Section 5 can be violated in a situation where short sales are made prior to the effective date of a registration statement of securities of the same class as those sold short, and then those short sales are covered (as planned at the time of sale) with shares obtained in the registered offering. [See Release No. 33-5323 (Oct. 16, 1972) and Release No. 34-10636 (Feb. 11, 1974).] In the SEC’s view, the two-step process that Mangan is alleged to have conducted is one unregistered public distribution where the PIPE shares are sold for Section 5 purposes at the time of the short sales.
The SEC Enforcement Staff has indicated that it may appeal the ruling in the Mangan case and that it will definitely proceed with the insider trading portion of the case. This “win” for the defendant on the Section 5 theory may, however, make it harder for the SEC to reach settlements in any other similar cases that are out there.
Shareholder Proposals: Some Helpful Tips for the Upcoming Season
It is hard for me to believe that the shareholder proposal season is rapidly approaching and, for many, is already well under way. This will be the first shareholder proposal season in quite some time where Marty Dunn will not be calling the shots on the Corp Fin no-action letters, and it remains to be seen whether the changing of the guard at the SEC will impact the process and results.
Marty and some of his colleagues at O’Melveny & Myers recently offered up some useful guidance on the “don’ts” you want to keep in mind when dealing with proponents and the Staff. These are the types of substantive and procedural things that the Staff sees over and over again each proxy season. Some of the procedural missteps to avoid are:
1. If you are going to argue that the proponent did not satisfy a procedural requirement of Rule 14a-8, don’t send the proponent a notice that will not stand up to Staff scrutiny – there is lots of guidance out there on what serves as adequate notice.
2. If a proponent does not meet the procedural requirements of the rule, but you failed to send a deficiency notice as required by Rule 14a-8(f), don’t argue that Rule 14a-8(i)(3) permits exclusion of the proposal because the failure to meet the procedural requirements of Rule 14a-8 is a violation of the proxy rules.
3. If you have several no-action requests to submit, don’t wait to submit them all at the same time – submitting them collectively will inevitably result in unnecessary delays.
4. If you receive correspondence from a proponent, don’t hold it back from the Staff.
5. If you think that Staff is not going to agree with your request, don’t include language indicating that the request constitutes an automatic right to appeal or that the Staff should contact the company if it does not agree with the argument for exclusion.
6. If you receive a request from the proponent to withdraw the proposal, don’t delay in forwarding that letter to the Staff, along with a letter withdrawing the no-action request.
For more practical guidance, take a look at our “Shareholder Proposals” Practice Area.
What’s in a Name?
I think it is funny that we are starting to see some crazy company names emerging from Silicon Valley these days, as start-ups proliferate and venture capital funding is again flowing freely. This LA Times article notes that, in an effort to get noticed in the Web 2.0 world, entrepreneurs are rolling out names like Abazab, Wakoopa, Squidoo and Xobni. I’m not even sure how to pronounce that last one, but it is “inbox” spelled backwards. In short, everyone wants to be the next Google.
Of course the federal securities laws have to throw cold water on the naming game fun. The instruction to Item 501(b)(1) of Regulation S-K indicates that if you have a name that is similar to a well-known company, or if your name indicates a line of business in which you are not engaged or only engaged to a limited extent, then you have to include disclosure necessary to avoid any misleading inference or, in the worst case, change your name. When I was reviewing filings in Corp Fin, particularly in the late ‘90s, we would raise a comment based on that Instruction more often than you might expect. Fortunately, I don’t think anyone ever had to actually change their name.
– Dave Lynn