Tag: SEC

Corporate Governance of Public Web Sites

Jane K. Storero and Yelena Barychev of The Legal Intelligencer and Law.com authored an article that the system of reviewing and monitoring information posted on a company Web site should be part of the disclosure controls included in the enterprise-wide risk management system established by the company: Corporate Governance of Public Web Sites.

This article describes methods of effectively complying with the SEC guidance related to company websites: Commission Guidance on the Use of Company Websites (Release 34-58288, August 7, 2008).

That release gave some guidance as to whether a company’s website is a means of public dissemination of information under Regulation FD.

It also addresses how the anti-fraud provisions of the federal securities laws can be applied to a statements made on the internet.  One issue is whether historical information is considered “republished” each time the material is accessed on the company’s website. If they are considered republished, then the company would have a duty to update the materials.

As a general matter, we believe that the fact that investors can access previously posted materials or statements on a company’s web site does not in itself mean that such previously posted materials or statements have been reissued or republished for purposes of the antifraud provisions of the federal securities laws, that the company has made a new statement, or that the company has created a duty to update the materials or statements.

The release also notes that hyperlinks to third party information could be implicated as part of the anti-fraud provisions. The key is the context of the hyperlink. If explicit approval or endorsement is plainly evident, then the hyperlink to a third party statement can be found to be a implicit approval of the statement in the hyperlinked web page.

The release also endorses the use of blogs:

We acknowledge the utility these interactive web site features afford companies and shareholders alike, and want to promote their growth as important means for companies to maintain a dialogue with their various constituencies. As we noted in the Shareholder Forum Release, companies may find these forums “of use in better gauging shareholder interest with respect to a variety of topics,” and the forums “could be used to provide a means for management to communicate with shareholders by posting press releases, notifying shareholders of record dates, and expressing the views of the company’s management and board of directors.”

Statements made on a blog or forum will not be treated any differently than any other statements made by the company for purposes of anti-fraud provisions.

Counting Clients under the Investment Advisers Act – The Demise of the Hedge Fund Rule

Section 203(b) lays out the exceptions to registration under the Investment Advisers Act. Section 203(b)(3) exempts you if during the previous 12 months (i) you have fewer than 15 clients and (ii) you do not hold yourself out as an investment adviser.

For private investment funds, the general partner is generally considered an investment adviser [See: Abrahamson v. Fleschner, 568 F.2d 862 (2d Cir. 1977) , overruled in part on other grounds by Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11 (1979)]

In the private investment world, as long as you had fewer than 15 funds and did not hold yourself out as an investment adviser you did not have to register.  The question is what was a fund/client for the purposes of the Investment Company Act?

With the demise of Long Term Capital, the SEC was interested in regulating hedge funds. In 2004 the SEC passed the Hedge Fund Rule which tried to expand the scope of the Investment Advisers Act by defining “client” under Section 203(b)(3). The rule specified that for “[f]or purposes of section 203(b)(3) of the [Advisers] Act (15 U.S.C. § 80b-3(b)(3)), you must count as clients the shareholders, limited partners, members, or beneficiaries . . . of [the] fund.” § 275.203(b)(3)-2(a). Effectively, the SEC tried to shift the definition from the fund up to the investors in the fund.

This Hedge Fund Rule was overturned by the United States Court of Appeals for the District of Columbia Circuit in the appelate case of Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006).

“An investor in a private fund may benefit from the adviser’s advice (or he may suffer from it) but he does not receive the advice directly. He invests a portion of his assets in the fund. The fund manager – the adviser – controls the disposition of the pool of capital in the fund. The adviser does not tell the investor how to spend his money; the investor made that decision when he  invested in the fund. Having bought into the fund, the investor fades into the background; his role is completely passive. If the person or entity controlling the fund is not an “investment adviser” to each individual investor, then a fortiori each investor cannot be a “client” of that person or entity.”

FCPA Allegation Against McCain Fundraiser

Republican fundraiser Harry Sargent III is subject to a suit from Supreme Fuels that Sargent’s company International Oil Trading Company made illegal payments to Jordanian officials. IOTC has an exclusinve license to move military fuel through Jordan.

IOTC’s response, according to the NBC News Investigates story:

. . .in an email to NBC News, a spokesman said that there were no bribes and only a legitimate “fee” paid to the government of Jordan. “What Supreme [Fuels] calls a ‘bribe’ was a required fee for importing and transporting military fuel through Jordan,” a spokesman for Sargeant and IOTC said. “The fee was paid to an official agency of the Jordanian state and thoroughly documented. This and any other related charge have been shared with the Department of Defense (and to Congress) as part of our transparent disclosure of any and all costs related to the fuel delivery process.”

Under the Foreign Corrupt Practices Act, payments to agencies of a foreign government are not illegal. The FCPA is only applicable to payments to foreign officials. Foreign governments are free to extort as much money as they can. It is the personal gain by a government official that is a problem.

The other unusual part of the suit is that it is filed by a private party. There is no right for a private party to bring suit under the FCPA. Only the DOJ and SEC have the power to enforce the statue. The party is suing under RICO.

The leading case on private actions under FCPA is Lamb v. Philip Morris, Inc. (6th Cir. 1990) 915 F.2d 1024, cert. den. (1991) 498 U.S. 1086:

Since we find that no private right of action is available under the Foreign Corrupt Practices Act of 1977 (FCPA), 15 U.S.C. Secs. 78dd-1, 78dd-2, we affirm the dismissal of the plaintiffs’ FCPA claim.

SEC Prosecutions under the Foreign Corrupt Practices Act

sec-sealAccording to Linda Chatman Thomsen, director of the SEC’s Division of Enforcement, in a Forbes Article [The SEC in 2008: A Very Good Year?], the SEC filed 15 FCPA cases in 2008. Since January 2006, the SEC has brought 38 FCPA enforcement actions. That number is more than were brought in all prior years combined since 1977 when the FCPA became.