October 26, 2011

The SEC-Citi Settlement: A Cautionary Tale for Corporate Lawyers

Below are some interesting thoughts from Vince Pisano of Troutman Sanders:

Last week, the SEC announced the settlement with Citigroup Capital Markets of an action related to the formation and marketing of a largely synthetic collateralized debt obligation, with the collateral consisting primarily of credit default swaps referencing other collateralized debt obligations, themselves collateralized by subprime residential mortgage backed securities. Similar to the case of the SEC’s earlier action against Goldman Sachs involving the same general allegations, Citi, as the arranging bank, selected many of the assets underlying the CDO with, according to the SEC, misleading disclosure.

Also as in the case of the earlier action against Goldman Sachs, the SEC brought an individual action against the senior banker on the transaction, which has not been settled. Without delving into the intricacies of these transactions, which are very clearly designed for extremely sophisticated investors, all securities and other lawyers should take note of some important points highlighted by these actions.

The first is that we have an obligation to our clients to understand their transactions completely and to assure that the details of which we are aware are disclosed properly. We are the ones who are entrusted with understanding and explaining the details and risks of any securities transaction in which participate. We are advisors to market participants and not just deal execution assistants. It is a principle that applies to everything we do as corporate lawyers.

Second, we need to more actively help our clients engage in risk management, whether we are in house or outside counsel. There are deals that probably should not be done. When a transaction has no obvious connection to any corporate purpose, when it raises no capital or at least serves as an aide to the production of capital, we should at least make sure the proper people at our client appreciate the risks and rewards. We are not simply in place to help minimize risk in any transaction, but to help the institution understand whether any level of risk is acceptable. It is one of the things that separates the great corporate lawyers from the field.

Finally, two individual bankers, one at Goldman and one at Citi, have been charged by the SEC individually for disclosure issues. We as lawyers cannot lose sight of the fact that we must intercede to protect our clients, even over the objections of our clients. We cannot afford not to challenge and question and counsel those with whom we work. It’s what makes us part of a profession.

Chinese Regulators Battle SEC Over Document Production

According to this Reuters article, China’s Ministry of Finance and Securities Regulatory Commission have asked auditors to review their US-listed company work and provide details of any information the China-based offices may have given to foreign regulators in an effort to reminding them of Chinese confidentiality laws in the face of the SEC’s efforts to compel document production by the Shanghai office of Deloitte Touche Tohmatsu concerning a Chinese company audit.

How to Conduct Stock Repurchase Programs

In this podcast, Rachel Smydo of Thorp Reed & Armstrong discusses what to consider when conducting a stock repurchase program, including:

– Which action items should be considered ahead of a stock repurchase program?
– Through whom can a company execute actual repurchases? Does it have to be a third party?
– What type of documentation (eg. SEC filings) is the company required to prepare every time there is an actual repurchase?
– Is any documentation required when repurchases are completed?

Coming early next year is an entire webcast devoted to this topic: “Company Buybacks: Best Practices.”

– Broc Romanek