Business Law Prof Blog

Goldman Sachs: Playing Both Sides?

There is scuttlebutt in the markets that Goldman Sachs, while creating the SIV vehicles based by mortgage loans that issued the CDOs that had caused such massive write downs, was, at the same time shorting the sub prime market.  It took fees for creating the SIVs and investment gains on the short positions.  If true, this should attract the attention of the class action plaintiff lawyers.

SEC Acts on Shareholder Nomination Rights

The SEC voted 3-1 to refuse shareholders the right to use 14a-8 resolutions to ask companies to amend their bylaws in order to enable large shareholders to place director nominees on the firm's proxy.  The vote ends a shameful period of equivocation on the issue with the wrong resolution.

Citigroup Accepts $7.5 M from Abu Dhabi Sovereign-Wealth Fund

In the wake of massive losses stemming from the sub prime mortgage meltdown, several of the United States’ leading financial institutions are in need of fresh capital. This need reflects a new reality for many of these institutions who are used to financing themselves. One such institution is Citigroup, who recently accepted a $7.5 billion dollar capital infusion from an investment arm of the oil-rich Abu-Dhabi government. In return, Citigroup conveyed a 4.9% stake in the company in the form of convertible stock.   The investment authority, known as ADIA, will become one of Citigroup's largest shareholders, surpassing the stake held by a Saudi Prince, Alwalweed bin Talal. 

The investment in needed and welcome.  I do not, however, find comfort in the rumored agreement of ADIA to refrain from exercising any control through its stock block.  ADIA, with pure investment intentions, ought to monitor its investment just like any good large block shareholder should and exercise control if necessary to protects its return.  Other shareholders would be better off if ADIA would do so.  Sterilizing ADIA stock is not a good idea and serves to insulate management from accountability and oversight.  The agreement is an aftermath of the Dubai Ports World controversy. 

The more important problem is how this country to view sovereign-wealth fund investments in general.  When such funds invest with normal expectations of an investment return there is no problem. Indeed, we benefit with having their funds.  When a crisis manifests, however, the sovereign-wealth funds could become an foreign policy arm of their governments, lose their investment return objectives, and use their positions for other goals.  The ADIA agreement is not a solution because ADIA could just dump the stock to drive down the price; ADIA does not have to vote the stock to affect Citigroup's health.  This issue puts into play CIFIUS (Committee on Foreign Investment in the United States) once again and Congress's new amendments to CIFIUS.  A sovereign-wealth fund is an extension of a foreign government and any attempt by the fund to "control" a United States company with "critical" value to the United States merits mandatory review. Until the new regulations come out, we have only vague notions of what control may mean and what "critical" may mean.  Investments by UAE governments will be much less troublesome under the review than investment by the huge Chinese national fund (which mostly invests inside China at the moment).  China has demonstrated that it is much more likely to invest the money of its funds for political reasons than for pure investment returns.  This is a problem that is going to get increasing more important with time and we should start now to formulate our national response.

Some Hedge Funds Short SubPrime Debt

While many financial institutions and hedge funds are absorbing huge losses from the subprime crisis, others are reaping the rewards. One such man is John Paulson, a hedge fund manager controlling $7 billion in hedge fund money. While the majority of investors were content to ride the housing frenzy, Paulson believed the bubble was set to burst and keyed his investments in mortgage credit. In return, his Credit Opportunities funds rose an average of 340%, and he earned $1.14 billion in performance based fees during the first nine months of 2007. Other hedge fund managers had similar vision, and also invested against the housing boom. Philip Falcone of Harbinger Capital Partners collected $1.3 billion in performance fees over the same period.  One fund, Lahde Capital, made 1,000 percent, after fees.  He is returning money to investors rather than continue to invest it. 

Apple Wins Again

Judge Fogel, after dismissing the securities class action against Apple for back dating options and telling plaintiffs that their remedy was a derivative action, has dismissed the derivation action against Apple for violating the statute of limitations.  So, one of the most high profile cases of compensatory stock option back dating will go unaddressed by federal courts in private actions.

Backdating Suits

With the dismissal of the Apple lawsuit, lawyers have discovered that stock backdating suits are better presented as derivative actions that securities class actions.  In securities class actions, the plaintiffs cannot relate the offense to declining stock prices.  In derivative suits, on the other hand, plaintiffs can claim that all back dated stock options should be canceled and any profits off such options be returned to the firm. 

Cutting Through the "Interpersonnal Skills" Myths

The Wall Street Journal reports that CEOs that have certain traits (persistence, attention to detail, efficiency, analytical skills, and setting high standards) do much better than those that feature the common traits pushed by many academics in business and law schools (strong oral communication ability, teamwork, flexibility/adaptability, enthusiasm, and listening skills).  Some academics even claim the later skills as gender related.  Once again the world has intruded on wishful theory. 

Busted Buyouts

The efforts of Cerberus Capital Management and others to walk away from buyout agreements reproves a truism.  Clients under appreciate legal language until times get tough.  Legal language is usually the most important when risk manifest and once stellar deals go south in value.  Unfortunately, lawyers often also take the language for granted, relying on old stock forms.  With the busted buyouts look for radical, and overdue, redrafting of MAC (Material Adverse Change) and breakup fee clause in all future deals.  The stock forms will change -- for the better.

SEC and International Accounting Standards

In a very important vote, the Securities and Exchange Commission dropped a requirement that foreign companies with United States trading exchange listings that comply with rules set by the International Accounting Standards Board (ISAB) still must reconcile their accounting records to comply with United States accounting rules.  The international accounting rules are less detailed than the United States rules and cost less to implement.  The SEC agreed with our major exchanges that have lobbied for the change so as to better attract foreign issuers.  Some United States issuers have objected, arguing that one set of rules should apply to all listed companies.  All have to agree, however, that the vote is an expression of qualification on the quality or rationality of United States accounting rules.    

NYSE: Traditional Specialists On the Ropes

Two of the seven NYSE specialist operations are quitting, signaling an eventual end to the dominate position of floor trading in NYSE listed stocks.  Electronic trading is steaming ahead, dominating trading in listed stocks.  Specialists operations will survive, in electronic form; floor trading will not.  The new head of the NYSE is an electronic trading advocate.  He once said something to the effect of "I do not want my trades executed by several folks all named "Vinnie" on the floor."  It took a long time for this to happen -- too long.  [I wrote an article in 1991 suggesting that specialists should innovate and was savaged by NYSE flunkies for it.]  Vested interests delayed the move, all the the detriment of the US trading markets, which were slow to embrace electronic trading and lost their competitive edge, and US traders, who paid higher trading costs.