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The possibility lurking in Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd,  2017 WL 6375829 (Del. Dec. 14, 2017), has now materialized.

For those of you just joining us, in Dell and DFC Glob. Corp. v. Muirfield Value P’rs, L.P., 172 A.3d 346 (Del. 2017), the Delaware Supreme Court threw some cold water on the practice of appraisal arbitrage.  The two decisions suggest that in an appraisal action, courts should not try to conduct their own valuation of a company except in unusual circumstances; instead, where the deal was negotiated appropriately, the deal price itself represents the best evidence of fair value.

That alone would be enough to discourage would-be appraisers, absent evidence of significant dysfunction in the process by which the deal price was reached, but the decisions went further: both contained extensive endorsements of the efficient markets hypothesis and the accuracy of market pricing.   In the context of the opinions themselves, the market price discussions were puzzling, because they played little role in the Court’s actual analysis.  In both cases, the Court ultimately suggested that the deal prices – which were above market price – were appropriate.  At the same time, however, in neither…

Earlier today, the Enforcement Section of the Massachusetts Securities Division filed an administrative complaint against Scottrade.  The complaint alleges that Scottrade “knowingly violated its own internal policies designed to ensure compliance with the United States Department of Labor (“DOL”) Fiduciary Rule by running a series of sales contests involving retirement accounts.”  It may be the first state enforcement action seeking to force brokerages to comply with the DOL Fiduciary Rule.

More specifically, Massachusetts took issue with Scottrade’s sales contests because the DOL’s Fiduciary Rule requires that “advice to retirement account customers must be based on the best interest of customers, not the best interests of the firm.” On paper, Scottrade had enacted impartial conduct standards for its customers’ retirement accounts.  The brokerage’s compliance manual includes a subsection on incentives, saying:

The firm does not use or rely upon quotas, appraisals, performance, or personnel actions, bonuses, contests, special awards, differential compensation or other actions or incentives that are intended to reasonably expected to cause associates to make recommendations that are not in the best interest of Retirement Account clients or prospective Retirement Account clients.

Despite this provision and the DOL Fiduciary Rule, Scottrade allegedly ran national sales contests and offered rewards…

Recent (overdue) additions to my SSRN page:

A New Social Contract: Corporate Personality Theory and the Death of the Firm, 101 Minnesota Law Review Headnotes 363 (2017). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3123349

Socio-Economics: Challenging Mainstream Economic Models and Policies, 49 Akron Law Review 539 (2016). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3123817

The Role of Corporate Personality Theory in Opting Out of Shareholder Wealth Maximization, 19 Transactions: The Tennessee Journal of Business Law 415 (2017). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3123795

The Inclusive Capitalism Shareholder Proposal, 17 UC Davis Business Law Journal 147 (2017). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3123823

Socially responsible investing is all in the news these days, as several large asset managers and advisors have publicly declared commitments, of one kind or another, to pressuring portfolio companies to act in socially responsible ways.

Commenters debate whether these managers genuinely believe social responsibility will improve value at portfolio companies, or whether they are trying to appeal to the preferences of clients who themselves favor socially responsible investing, either as a mechanism for improving value, or, more probably, as a matter of, essentially, “taste.”  If you’re going to invest an index fund, for example, you may as well invest in the one where you believe your dollars will also be used to push for your preferred agenda – even if little is actually being done in that direction.

The reason it’s so difficult to suss out anyone’s exact motive, of course, is that it’s tough to admit – as an asset manager or any kind of institutional investor – that you’re interested in anything other than financial returns.  Not simply because of the publicity you’ll generate, but because it’s not clear how far fiduciary obligations allow fund managers to go in pursuing social goals. 

(This is…

About a week ago, FINRA released a Special Notice detailing a new portal for stakeholders to signal their willingness to serve on FINRA’s board and other important committees.  The new portal creates a way for FINRA to increase engagement from key stakeholders, specifically including retail investors, consumer groups, and institutional investors.  Persons with an interest in serving on FINRA’s committees, advisory boards, or Board of Governors can use this new portal to get their information to FINRA.

FINRA has drawn criticism in the past for bypassing investor and consumer advocates in favor of appointing persons with deep industry ties to serve as “Public Governors” on its governing Board.  In a recent op-ed, Andrew Stoltmann and I pointed out that credibly signalling commitment to FINRA’s stated investor protection mission means that it should have investor advocates on its board.  In a report issued by the Public Investors Arbitration Bar Association (PIABA), we discussed our governance concerns in more detail and suggested that the FINRA Board consider a number of investor advocates with knowledge of the securities industry for future Public Governor seats.  FINRA has now created a process for bringing a broad array of candidates into its nominating process.

Some…

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I previously blogged about a split among the circuits regarding the definition of loss causation for the purposes of a Section 10(b) claim.

To quote one of my prior posts:

All circuits agree that loss causation can be shown via “corrective disclosures” – some kind of explicit communication to the market that prior statements were false, followed by a drop in stock price.

However … there has been an alternative theory that plaintiffs can use to show loss causation, even without an explicit corrective disclosure.  The theory is usually described as “materialization of the risk.” It requires the plaintiff to show that the fraud concealed some condition or problem that, when revealed to the market, caused the stock price to drop, even if the market was not made aware that the losses were due to fraud.  For example, a company may report a slowdown in sales, causing its stock price to fall, while concealing the fact that the slowdown was due to an earlier period of channel stuffing.  By the time the channel stuffing is revealed, it may communicate no new information about the company’s prospects, so the stock price remains unmoved.  Under a materialization of the risk theory,

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Earlier this week the SEC announced that it had halted another fraudulent initial coin offering (ICO). AriseBank claimed to have raised about $600 million and that it had purchased an FDIC-insured bank.  AriseBank had promised investors that it would allow them to access FDIC-insured bank accounts and other consumer banking products.  The SEC alleges that these representations were false.  It also alleges that AriseBank omitted to disclose the criminal background of key executives.  A gripping American Banker article has more color on the ICO:

The agency said AriseBank’s initial offering of AriseCoin is illegal because there’s no registration filed with the SEC. It also said the offering materials “use many materially false statements and omissions to induce investment in the ICO,” such as AriseBank’s earlier claim that it had bought a commercial bank and could offer FDIC-insured accounts.

The SEC further said in its complaint that AriseBank “omitted to disclose the criminal background of key executives — most notably, Rice, who is currently on probation for felony theft and tampering with government records.”

This particular initial coin offering also obtained celebrity endorsements.  Most notably, Evander Holyfield endorsed AriseBank through social media. 

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