Compliance Hotline

The District Court for the Southern District of New York has dismissed two class actions that accused Merrill Lynch of inflating stock prices with fabricated research reports, finding that investors who lost money when the Internet stock bubble burst had simply gambled and lost. In Re Merrill Lynch & Co. Inc., 02 Civ. 3210 (June 30).

In an opinion that demonstrated a clear lack of sympathy for the plaintiffs, the court noted that the plaintiffs were “high-risk speculators” who lost their money “fair and square” during a game of “high-stakes wheel of fortune” and now “hope to twist the federal securities laws into a scheme of cost-free speculators' insurance.” The court stated that the plaintiffs sought a judicial determination “that the federal securities laws were meant to underwrite, subsidize, and encourage their rash speculation in joining a freewheeling casino that lured thousands obsessed with the fantasy of Olympian riches, but which delivered such riches to only a scant handful of lucky winners.” The court further observed that had the plaintiffs prevailed in this “game” they would not have “owed not a single penny of their winnings to those they left to hold the bag (or to defendants).”

New Web Portal

Bowne & Co., Inc., New York, has launched a new securities Web portal, Bowne SecuritiesConnect (www.SecuritiesConnect.com), a resource for securities regulation that is available to all visitors without charge or registration. The site features a 24-hour, 7-days-a-week, hand-selected news feed with securities-related stories from news organizations, such as the Associated Press, Global Finance and Strategic Finance magazines, and international resources such as The Observer (London), and Japan's Jiji Press news service. In addition, the site also offers regulatory analysis from industry experts, a securities library that links to outside resources and a current calendar of important securities and compliance seminars and events.

SEC Issues Report

The Securities and Exchange Commission has published a report by its Division of Corporation Finance following a review of the Commission's rules and regulations regarding the nomination and election of directors. Noting a need to improve the existing proxy process the report recommends improved disclosure and improved shareholder access to the director nomination process. To this end, the report recommends requiring a more thorough disclosure of the nominating committee processes of public companies, including the consideration of candidates recommended by shareholders. The report also recommends a requirement of specific disclosure of the processes by which shareholders may communicate with the directors of the companies in which they invest. The report further recommends that companies be required to provide to major, long-term shareholders (or groups of long-term shareholders), access to company proxy materials to nominate directors, where there are objective criteria that indicate that shareholders may not have had adequate access to an effective proxy process. Examples of events that would trigger this access could include situations where the results of the proxy process are not acted on by companies or where there is substantial shareholder dissatisfaction with the operation of the proxy process. The full staff report may be found on the Commission's Web site at www.sec.gov.

ABA Changes Rules

The American Bar Association's House of Delegates has changed its model rules governing the attorney-client privilege in an effort to reduce corporate fraud. By a slight 17-vote margin, the ABA's proposal allows lawyers to breach the duty of confidentiality if a client uses counsel's advice to commit a crime or fraud. Opponents of the controversial rules change contend that this could lead to the exclusion of lawyers from corporate boardrooms when questionable conduct is being considered. Supporters argue that 42 states already have some variation of the rule on the books, with no evidence of such consequences. It should be noted that the ABA's model rules of professional conduct merely provide guidance and no force unless adopted by individual state bar associations.

General Counsel First to Be Indicted for Fraud

The Justice Department has issued its first-ever securities fraud indictment of a corporate general counsel. The U.S. Attorney's Office in San Francisco alleges that Jay Lapine, the former HBO & Co. General Counsel, actively participated in a fraud to deceive investors by assisting health care company, McKesson Corp., in designing and executing an elaborate plan to artificially increase revenues (sometimes by as much as 500%) prior to a merger. When the scheme was revealed, the combined company's market value plunged $9 billion in a single day.

Securities Class Actions Dismissed

The District Court for the Southern District of New York has dismissed two class actions that accused Merrill Lynch of inflating stock prices with fabricated research reports, finding that investors who lost money when the Internet stock bubble burst had simply gambled and lost. In Re Merrill Lynch & Co. Inc., 02 Civ. 3210 (June 30).

In an opinion that demonstrated a clear lack of sympathy for the plaintiffs, the court noted that the plaintiffs were “high-risk speculators” who lost their money “fair and square” during a game of “high-stakes wheel of fortune” and now “hope to twist the federal securities laws into a scheme of cost-free speculators' insurance.” The court stated that the plaintiffs sought a judicial determination “that the federal securities laws were meant to underwrite, subsidize, and encourage their rash speculation in joining a freewheeling casino that lured thousands obsessed with the fantasy of Olympian riches, but which delivered such riches to only a scant handful of lucky winners.” The court further observed that had the plaintiffs prevailed in this “game” they would not have “owed not a single penny of their winnings to those they left to hold the bag (or to defendants).”

New Web Portal

Bowne & Co., Inc., New York, has launched a new securities Web portal, Bowne SecuritiesConnect (www.SecuritiesConnect.com), a resource for securities regulation that is available to all visitors without charge or registration. The site features a 24-hour, 7-days-a-week, hand-selected news feed with securities-related stories from news organizations, such as the Associated Press, Global Finance and Strategic Finance magazines, and international resources such as The Observer (London), and Japan's Jiji Press news service. In addition, the site also offers regulatory analysis from industry experts, a securities library that links to outside resources and a current calendar of important securities and compliance seminars and events.

SEC Issues Report

The Securities and Exchange Commission has published a report by its Division of Corporation Finance following a review of the Commission's rules and regulations regarding the nomination and election of directors. Noting a need to improve the existing proxy process the report recommends improved disclosure and improved shareholder access to the director nomination process. To this end, the report recommends requiring a more thorough disclosure of the nominating committee processes of public companies, including the consideration of candidates recommended by shareholders. The report also recommends a requirement of specific disclosure of the processes by which shareholders may communicate with the directors of the companies in which they invest. The report further recommends that companies be required to provide to major, long-term shareholders (or groups of long-term shareholders), access to company proxy materials to nominate directors, where there are objective criteria that indicate that shareholders may not have had adequate access to an effective proxy process. Examples of events that would trigger this access could include situations where the results of the proxy process are not acted on by companies or where there is substantial shareholder dissatisfaction with the operation of the proxy process. The full staff report may be found on the Commission's Web site at www.sec.gov.

ABA Changes Rules

The American Bar Association's House of Delegates has changed its model rules governing the attorney-client privilege in an effort to reduce corporate fraud. By a slight 17-vote margin, the ABA's proposal allows lawyers to breach the duty of confidentiality if a client uses counsel's advice to commit a crime or fraud. Opponents of the controversial rules change contend that this could lead to the exclusion of lawyers from corporate boardrooms when questionable conduct is being considered. Supporters argue that 42 states already have some variation of the rule on the books, with no evidence of such consequences. It should be noted that the ABA's model rules of professional conduct merely provide guidance and no force unless adopted by individual state bar associations.