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The Internet is the Wild West of securities law. I often see things and wonder, “How can they get away with that?”

Sometimes, the answer is that they can’t. A couple of years ago, I stumbled across ProFounder, a crowdfunding platform offering equity interests in startups. I couldn’t understand how ProFounder could do what they were doing without running afoul of securities laws. Sure enough, a few months later, the California Department of Corporations issued a consent order barring ProFounder from selling securities on its web site unless it registered as a broker-dealer.

My latest securities law puzzle comes via the Wall Street Journal. A recent article reports that a new crowdfunding platform, CrowdFranchise, will allow investors to buy equity stakes in business franchises.

If those franchise interests were being sold only to accredited investors, the new Rule 506(c) exemption might apply. It allows public solicitations through a web site like this. But according to the Journal, “CrowdFranchise investors don’t need to be accredited, because the franchises themselves are offering the deals, and franchises are allowed to award multiple pieces of an outlet.” This doesn’t make a lot of sense to anyone familiar with securities law. Depending on…

We here at the BLPB are very excited to be able to welcome back Prof. Tamara Belinfanti for a second month of guest blogging. You can find a couple of her prior posts here and here. The following bio comes from her New York Law School profile page, which you can find here. Welcome back, Tamara!

Professor Belinfanti joined the faculty in fall 2009 and teaches Corporations, Contracts, and a corporate transactional skills seminar. Professor Belinfanti’s scholarly interests include general corporate governance matters, executive compensation, the proxy advisory industry, shareholder activism, and law, culture and identity. Prior to joining academia, Professor Belinfanti was a corporate attorney at Cleary Gottlieb Steen & Hamilton LLP, where she counseled domestic and international clients on general corporate and U.S. securities regulation matters, and was co-editor of the securities law treatise, U.S. Regulation of the International Securities and Derivatives Market (Aspen, 2003). Professor Belinfanti received her Juris Doctor, cum laude, from Harvard Law School in 2000.

Via the 10-5 Daily, I learned of the case In re Maxwell Technologies, Inc. Sec. Litig., 2014 WL 1796694 (S.D. Cal. May 5, 2014), which dismissed the plaintiffs’ securities fraud claims for failure to plead scienter.  The case interests me, because I have actually just written a paper on this very subject, forthcoming in the Washington University Law Review (in April 2015 – it’ll be a while!)

[More under the cut]

On May 28, 2014, the company owning The Inquirer (Philadelphia), the Daily News and other properties, was sold for $88M in a court-ordered, private, English-style auction.  On petition for dissolution of the company, Vice Chancellor Parson (Delaware) ordered judicial dissolution and the private auction in an opinion issued on April 24, 2014.  

This case presents a fascinating set of facts, unique legal analysis and discussion of LLC management, and the pitfalls of deadlock.  The opinion also discusses the consequence of judicial dissolution versus private agreements (buy outs and dissolution procedures).  It would make a great case for class room discussion, exam fact patterns and casebook inclusions.

Facts. The facts can be quickly summarized as follow:  Interstate General Media LLC (IGM), a Delaware limited liability company, acquired the company (PMN) that owned The Inquirer, Daily News and other properties in 2012 for $55M.  General American Holdings, Inc., a company controlled by George E. Norcross, III held a 54% interest in IGM.  Intertrust GCN LP, a company controlled by Lewis Katz held a 26% interest.  Both Norcross and Katz, as representatives of their respective companies which were joint Managing Members, served on IGM’s 2- member Management Committee.  The Management Committee…

Many of you have undoubtedly followed the ongoing saga of Donald Sterling and the Los Angeles Clippers. (If you live in the U.S. and you’re unaware of the story, you have undoubtedly been backpacking in some remote mountain region for the last few weeks.) The NBA ordered the Clippers sold. Donald said no. Rochelle Sterling, Donald’s wife, acting on behalf of the trust that actually controls the Clippers, has agreed to sell the team to Steve Ballmer, the former CEO of Microsoft for $2 billion. Depending on the hour, Donald either approves or is contesting that sale.

A New York Times story today adds an interesting angle. The Times reports that the deal with Ballmer grants Ms. Sterling “owner emeritus” status, entitling her to two floor seats for each home game, five stadium parking spaces, and three championship rings if the Clippers ever win an NBA title.

I know nothing about the Sterling trust other than what’s been reported in the media, but that seems to raise an obvious fiduciary duty issue. In negotiating the sale, Ms. Sterling is acting as trustee of the trust and owes a duty of loyalty to the trust. Her duty is to…

On Thursday, the First Circuit handed down its opinion in In re Genzyme Corp. Securities Litigation(.pdf), affirming the dismissal of the complaint.  The decision highlights an issue that’s particularly important in securities cases – although, full disclosure, I was very involved with the Genzyme case on the plaintiffs’ side before I left practice to teach, so I’m not an unbiased observer.  Take that as you will.

[More after the jump]

Readers, I was contacted by a securities attorney whom I know from practice regarding a potential pro bono appeal. 

The substantive issue involves securities disclosure violations by an Investment Advisor.  The Investment Advisor didn’t tell clients that he received compensation from a fund in which clients invested resulting in violations of the Investment Advisors Act Sections 206(1) and (2) for material misstatements, Section 207 (false and misleading Form ADP statements), and Section 204 (failure to amend Form ADP). 

The heart of the appeal, however goes to a 180 time period established by Section 929U of Dodd Frank, codified as Section 4E(a) of the Exchange Act ( Download Section 4E(a) Exchange Act), for the SEC to initiate a proceeding after sending a written warning.  The SEC filed the action 7 days late.  The SEC took steps to obtain an internal extension, but did not make a separate complexity determination (statutory extensions are authorized for “complex” cases).  The respondent has unsuccessfully challenged the SEC’s authority to bring the action outside of the 180 window ( Download SEC-Opinion).  At issue is whether the180 day time window is jurisdictionally determinative (meaning outside of it the SEC has no authority to bring…

Midwest Law and Economic Association Conference Call for Papers

Conference Dates: 10/10-11/14

Call for Papers:  Closes June 30.  Submit to  to ngeorgak@iu.edu (Nicholas Georgakopoulos) with “MLEA Submission” in the subject line.  

From the organizers:  “Priority will be given to newer scholars at Midwestern institutions, then newer scholars at any North American institution, then the usual suspects. As in the past, we welcome early drafts.”

I attended this conference several years ago and found it be a great and welcoming group of scholars. I got excellent feedback on an early piece and learned a tremendous amount in 2 short days– you really can’t ask for a better endorsement for a conference, especially as a junior scholar.

-AT

About a month ago, I noted several books that looked interesting. One of them was More than You Wanted to Know: The Failure of Mandated Disclosure, by Omri Ben-Shahar and Carl E. Schneider. I have now had an opportunity to read it, and it is a must-read for anyone interested in disclosure requirements of any kind—consumer disclosure, securities disclosure, or whatever.

Ben-Shahar and Schneider focus primarily on consumer disclosure—the dozens of pages we must sign when we buy a house; all the warning labels on products (Do not dry your hair while sitting in water); the click-through licenses we all ignore on the Internet. For many reasons, they argue, that mandatory disclosure is unlikely to provide much protection to consumers. It is “a failed regulatory method,” typically used, not because it works, but because it allows legislatures to respond to calls for action at little cost to government.

They don’t discuss securities regulation in any detail, although they do refer to it from time to time. But the book is obviously relevant to securities law. Ben-Shahar’s and Schneider’s discussion goes far beyond the well-known Easterbrook and Fischel argument against mandatory disclosure. [Frank H. Easterbrook and Daniel R. Fischel, Mandatory…