Author Archives: Andrew Ogletree

The Law of Non-Existent Markets

Written by: Todd Stevens

International borders are increasingly blending together in the corporate world, so it would seem natural that this would also be the case in corporate law. However, this is frequently far from reality, as securities regulations across the world often reveal themselves to be a patchwork quilt of individual legal systems struggling to interact. Such was the picture painted by Michael Mann, former first director for the Office of International Affairs at the SEC and current partner in the Washington, D.C. office of Richards Kibbe & Orbe, who spoke on the global regulation of financial markets at Chicago-Kent this past Thursday.

“One of the interesting things about international securities markets is that there is no such thing,” Mann said, introducing his presentation. “(The markets) are run by domestic bodies administering domestic laws.”

Having framed the international securities world in this light, Mann went on to emphasize the importance of individual relationships in international securities law. As securities markets differ from country to country, businesses are forced to work with different legal structures in each individual market. Thus, it is incredibly important to remember one’s position in any international business arrangement. An expert in the United States market is not necessarily an expert in the Chinese market, and being successful in the field of securities requires strong, mutually beneficial relationships with legal partners across the globe.

Mann went on to set up an outlook for the future. In the wake of the Supreme Court’s Morrison v. National Australia Bank decision, it is much harder to gain jurisdiction in the United States, even when presented with a company that has significant US contacts. This situation makes it all the more important for firms and their legal departments to focus on how they develop their own internal rules, making sure that they are prepared to deal with foreign legal systems as needed.
More importantly, attorneys working in securities markets need to communicate with utmost clarity the issues confronting clients who want to operate internationally so they can shield themselves against potentially hazardous foreign regulations.

“We need to make sure there’s an understanding in our customer of the rules of the marketplace,” Mann said.

On a grander scale, Mann said that the Morrison decision may offer an opportunity to take a new look at the international securities arena and retool it into something friendlier and more efficient, citing past compromises on insider trading law made by the United States and Switzerland as a possible example.
Similar concessions worldwide would be necessary to create an improved setting. As Mann stated, “If the marketplace is ever going to become internationalized, we need to redraw the jurisdictional boundaries… so that people can protect themselves as they so desire.


Is it time we allowed non-lawyer equity investment in law firms in the United States?

The American Bar Association (ABA) toyed with a contentious idea earlier this year: non-lawyer equity investment in law firms.  As it stands today in the U.S., ethics rules prevent lawyers from sharing their profits with non-lawyers, ostensibly because these people are not subject to the same professional rules of conduct.  The ABA’s latest proposal was to allow non-lawyers who already work at law firms to own up to a 25% stake in the firm.  Unfortunately, the idea appears to have stalled (again), but it is still worth discussing.

This is not the first time this issue has come up.  In fact, the ABA put together a proposal as long ago as 2000.   Not only that, it isn’t even illegal everywhere in the country: Washington, D.C. voted to allow non-lawyer investment all the way back in 1980.  And it isn’t just being played out in ABA meetings and in business journals, it has reached the courts.  In March, New York law firm Jacoby & Myers brought suit challenging the constitutionality of the state’s ethics rule barring this practice.  Sadly for the firm, the court dismissed the action because Jacoby did not have the required locus standi to bring the suit.

And it isn’t that radical of an idea either.  Countries like the United Kingdom and Australia already allow this, albeit only recently.  The UK started the program on the idea that the capital raised would be used to invest in technology and other systems to bring down costs, with the goal of lowering the legal costs of consumers.  The downside to this is legal services may become commoditized, which would make them less attractive investments. 

Opponents of the idea worry that these outside investors would influence lawyers’ judgments and convince them to make unethical decisions, all in the name of maximizing profits.  The practice would affect the “core values,” such as confidentiality and loyalty to our clients, that we as a profession so value.  If non-lawyers are partners and are thus privy to confidential information, who will police what they do with that information?

There is also the issue of practicality.  Who is going to invest in these firms?  Individuals?  Maybe.  But for this to make any sort of meaningful impact, large dollars will have to be at play.  Private equity is an option, but there is one big problem: an ethics rule that prohibits lawyers from entering into agreements that limit their ability to practice law.  This underscores law firms’ biggest problem: their only assets can walk out the door at any time, never to return again.  That isn’t exactly a trait of the textbook private equity investment.

However, the benefits to law firms of outside investment are numerous.  It allows small firms easier access to capital.  Large law firms are able to use banks much easier, giving them yet another advantage.  Outside investment gives law firms a way to recruit and retain their top non-lawyers talent.  This is also especially helpful to smaller firms, which could bring on certain experts as partners rather than hire them on a one-off basis.  It especially makes sense given the rise of entrepreneurs (who need capital) in the law firm sector.  One could also argue financial investors could help firms maximize their profits by making operational changes that do not affect their representation of clients.

It is tough to say who is right in this debate.  Each side makes valid points.  But in a time when giant firms are going under because of crushing amounts of debt (see Dewey & LeBoeuf) and investors are constantly looking for new ways to put their money to use, maybe it’s time for the ABA to make a change.  After all, our country’s legal system developed largely out of British common law; we might as well import one of their newer ideas.

Written by: Jeffrey McIntosh


Attention to Detail: The Rise and Fall of Corporate Attorneys

Jakub A. Wronski and Joseph J. Basile, both corporate attorneys at the Boston office of Weil, Gotshal and Manges, recently published an article expounding the importance of minding the details in corporate law transactions. The article uses Besinger v. Denbury Res. Inc. (E.D.N.Y. Aug. 17, 2011) to illustrate their point. 

In Besinger, a merger between Denbury Resources Inc. and Encore Acquisition Company went afoul when Encore shareholders were falsely informed on multiple occasions that the formula for calculating the number of Denbury shares to be distributed to Encore shareholders as consideration for the merger was pegged to a weighted average share price of Denbury stock as of the date two days prior to the closing of the merger, which turned out to be Friday, March 5, 2010. In fact, the merger agreement pegged the calculation to the date of the second full trading day prior to the “effective time” of the merger, which, as that term was defined, turned out to be Monday, March 8, 2010. By using the March 8 date instead of March 5, Denbury paid less to the Encore shareholders (800,000 fewer shares to be exact), which resulted in the lawsuit.

In this case, Denbury’s attorneys’ failure to pay close attention to the details in the Proxy and Registration Statements was the root cause of the error. Denbury misstated the merger calculation in both the Proxy and Registration Statements, and those misstatements are directly related to shareholder compensation. The Proxy and Registration Statements were materially misleading in violation of Section 11 of the Securities Act of 1933 and Section 14 of the Securities Exchange Act of 1934. Section 11 imposes liability for registration statements that, upon becoming effective, contain “an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading.”

The court denied Denbury’s motion to dismiss for failure to state a claim upon which relief may be granted, finding that Denbury misstated in several instances the precise formula that would be used to calculate the merger consideration and that such misstatements are not immaterial as a matter of law. In other words, failure to exercise greater care in drafting the press releases and Securities and Exchange Commission filings that publicly disclosed the merger gave Encore stockholders grounds for a viable, multi-million dollar claim against Denbury.

Wronski and Basile point out two key takeaways from this case. First, all public statements should follow the language of the underlying purchase agreement to the fullest extent possible; and second, lawyers should carefully review such disclosures to ensure that they comply with the truthful disclosure requirements of SEC rules.

“The Denbury transaction exemplifies how seemingly minor omissions or inconsistencies in drafting documents can significantly alter the economic expectations of the parties involved. Deal documentation—whether contracts, press releases, or regulatory filings—should always be carefully prepared and reviewed by legal advisers.” 

Whichever firm, corporation, or industry you find yourself practicing in post-graduation, it is imperative that you routinely remind yourself that attention to detail is arguably the most important responsibility of a corporate attorney. “When lawyers do not meet this standard, what follows are costly litigation, unhappy clients, and perhaps fewer invitations to weigh in on those ‘bet-the-company’ issues.”

As Four-star Navy Admiral Hyman G. Rickover once said, “the Devil is in the details, but so is salvation.”

For more information, visit

Financial Regulators and Advancing Technology: The Social Media Paradox

Under Rule 206(4) of the Investment Advisors Act of 1940 (“the Act”), the SEC states that a Registered Investment Advisor (“RIA”) is prohibited from engaging “in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4) by rules and regulations define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative.” Registered Investment Advisors consist of individuals or firms that are in the business of giving advice about securities, and thus must be registered with the Securities and Exchange Commission or a state’s securities agency. Rule 206(4) was designed to protect the public from deceptive advertising tactics by investment advisors across the nation. Sounds simple enough, right?

If only that were so…

The imprecision of this rule has created confusion and uncertainty for RIAs for decades following its enactment. Fortunately for RIAs, the SEC released “SEC No-Action Letter, Clover Capital Management, Inc.” in 1983, which outlines certain circumstances the Commission deems to be prohibited under Rule 206(4). The Clover no-action letter prohibits certain activities including, but not limited to:

  • Failing to disclose the effect of material market or economic conditions on the results portrayed (e.g., an advertisement stating that the accounts of the adviser’s clients appreciated in the value 25% without disclosing that the market generally appreciated 40% during the same period);
  • Including models or actual results in an advertisement that do not reflect the deduction of advisory fees, brokerage or other commissions, and any other expenses that a client would have paid or actually paid;
  • Failing to disclose whether and to what extent the results portrayed reflect the reinvestment of dividends and other earnings;
  • Using advertisements that include testimonials or that refer to past specific recommendations unless certain information is provided

While Clover created greater confidence for RIAs at the time of its release, it has failed to evolve with advancing technology and changes in advertising practices. For instance, the surge in social media has convoluted RIA efforts to comply with SEC regulations considerably. According to the seventh annual Investment Management Compliance Testing Survey, released in July of 2012, social media use among RIAs increased over the past year, with 80% of RIAs stating they have adopted formal written policies concerning social networking, up from 64% in 2011 and 43% in 2010.

For instance, many firms have adopted social media policies and procedures stipulating who is permitted to use social networking for business purposes. All of those posts should be pre-approved by the firm’s chief compliance officer or a designee. This process helps to avoid situations in which a member of the firm distributes inconsistent or noncompliant information using social media.

However, how should RIAs with several thousand employees monitor the use of each employee’s personal social media profiles? If a sales representative of an RIA endorses a specific portfolio on his personal Facebook page, what ramifications could the RIA face? If client testimonials are subject to SEC regulations, what effect does that have on client postings on an investment advisor’s Linkedin profile? For instance, recent cases have indicated that “Liking a Page” on Facebook is allowed and encouraged since it is not considered a type of testimonial, but “Liking a Status Update” is an “endorsement” of another user’s post and is a violation of SEC standards.

To address these ambiguities, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) released a National Examination Risk Alert in January of 2012 entitled “Investment Adviser Use of Social Media.” The alert recommends various precautionary measures RIAs can implement in order to better prevent potential social media violations by their employees. However, the list is by no means exhaustive and explicitly states that adhering to all suggested procedures will not create a “safe harbor” for an RIA in the event of a violation.

As technological advancements continue to transform marketing strategies across the financial industry, RIAs must work diligently to devise compliance and corporate governance procedures which help overcome the uncertainty surrounding the outdated, ambiguous regulations set forth by both the SEC and FINRA.

Federally Appointed Trustees: Helping or Hindering?

Tensions between failing companies and federally appointed Trustees in Bankruptcy have created challenges for federal bankruptcy courts across the nation. While companies that file for Chapter 11 bankruptcy tend to choose a venue that will be more favorable to their restructuring objectives, federally appointed Trustees are increasingly resistant to grant such accommodations.

The most common form of bankruptcy is Chapter 7, which serves to provide immediate relief of outstanding debts to creditors by halting company operations and liquidating existing assets in their entirety. Chapter 7 bankruptcies are supervised by federally appointed Trustees who are responsible for gathering debtors’ non-exempt assets, managing the sale of those assets, and distributing the proceeds to outstanding creditors. In contrast, Chapter 11 governs the process of reorganization of a debtor in bankruptcy proceedings. Chapter 11 enables businesses to undergo a financial reorganization, also supervised by a court appointed Trustee in Bankruptcy. Chapter 11 typically empowers the Trustee with the ability to operate the debtor’s business, and affords the debtor various mechanisms to restructure its business with the goal of eventually emerging from debt. Recent notable Chapter 11 bankruptcies include both Lehman Brothers Holdings Inc. and Washington Mutual during the heart of the financial crisis of 2008.

Failing businesses argue that the U.S. Trustees’ lack of leniency regarding choice of venue will leave them with potentially no way out of bankruptcy. The Trustees counter that their responsibility is “to preserve the integrity of the bankruptcy system, [and that sometimes] in doing so, it will not be in the best interest of a particular company.” As the debate continues, it will be interesting to see whether a trend begins to develop in favor or against the U.S. Trustees’ devotion to uphold stringent standards for American companies filing Chapter 11.

For more information on this issue see:

Wall Street JournalTesting Chapter 11’s Limits – U.S. Watchdogs Square Off With Companies over Venue, Executive Bonuses. By: Rachel Feintzeig and Jacqueline Palank