FINRA Issues Guidance Notice on Confidentiality Provisions in Settlement Agreements and the Arbitration Discovery Process

In Regulatory Notice 14-40, FINRA reminds members that it is a violation of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) to incorporate into a settlement agreement a confidentiality provision restricting or prohibiting a customer or other person from communicating with the Securities and Exchange Commission (SEC), FINRA, or any federal or state regulatory authority regarding a possible securities law violation.

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Delaware Court of Chancery Rejects Contemporaneous Ownership Requirement For Creditors Asserting Derivative Claims

In Quadrant Structured Products Co. v. Vertin, C.A. No. 6990-VCL, 2014 Del. Ch. LEXIS 193 (Del. Ch. Oct. 1, 2014), the Delaware Court of Chancery held that when creditors of insolvent firms assert derivative claims, they need not meet the contemporaneous ownership requirement applied to stockholder-plaintiffs.  Section 327 of the Delaware General Corporation Law requires that in any derivative suit brought by a stockholder of a corporation, the plaintiff must be a stockholder at the time that the fiduciary wrong allegedly occurred.  The Court held that Section 327 refers only to stockholder-plaintiffs, thus the contemporaneous ownership requirement does not apply to creditor-plaintiffs bringing derivative suits.  However, the Court stated that its reasoning did not necessarily excuse creditor-plaintiffs from complying with other substantive doctrines of shareholder derivative suits.  In dicta, the Court declined to address whether creditors must satisfy the pre-lawsuit demand requirement, but the Court’s emphasis on the requirement’s importance leaves the door open for applying it to creditors in a future decision.

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Sixth Circuit Narrows Scope of Liability Under ICA Sections 36(a) and (b)

In Laborers’ Local 265 Pension Fund v. iShares Trust, No. 13-6486, 2014 U.S. App. LEXIS 18627 (6th Cir. Sept. 30, 2014), the United States Court of Appeals for the Sixth Circuit affirmed the dismissal of claims alleging violations of the fiduciary duties imposed by Sections 36(a) and 36(b) of the Investment Company Act of 1940 (ICA), 15 U.S.C. § 80a-35(a), (b).  The Court held that (1) a plaintiff may not aggregate a lending agent’s fees with an affiliate’s fees in order to find the affiliate breached Section 36(b), and (2) that there is no implied private right of action in Section 36(a).  The Court’s holding effectively limits the ability of plaintiffs to bring Section 36 claims.

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Second Circuit Holds Forum Selection Clause Supersedes FINRA’s Mandatory Arbitration Rule

In Goldman, Sachs & Co. v. Golden Empire Schools Financing Authority, No. 13-797-cv, 2014 WL 4099289 (2d Cir. Aug. 21, 2014), the United States Court of Appeals for the Second Circuit held that a forum selection clause in a broker-dealer agreement superseded FINRA’s mandatory arbitration rule.  FINRA Rule 12200 compels members to arbitrate disputes if (1) the customer requests arbitration and (2) the dispute arises in connection with the member’s business activities.  In Golden Empire, the Second Circuit ruled that a broad forum selection clause, requiring “all actions and proceedings” related to the parties’ transactions to be brought in court, trumped Rule 12200.  As discussed more fully below, Golden Empire marks a growing circuit split over the availability of mandatory FINRA arbitration in light of such a broad, all-inclusive forum selection clause.  It also raises several important issues for future litigation.

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NASDAQ Proposes The Adoption Of A New All-Inclusive Annual Listing Fee

On August 26, 2014, The NASDAQ Stock Market LLC (“NASDAQ”) filed with the Securities and Exchange Commission (the “SEC”) certain proposed amendments to the NASDAQ Stock Market Rules (the “Amendments”) to provide for, among other things, a new all-inclusive annual listing fee (the “All-Inclusive Annual Fee”).  The Amendments were effective upon the filing with the SEC; however, NASDAQ has designated that the Amendments will become operative on January 1, 2015.  Companies that become subject to the All-Inclusive Annual Fee will pay a single annual listing fee to cover various matters which had previously been subject to an annual fee and several other separate fees.  NASDAQ’s incorporation of the All-Inclusive Annual Fee into its fee structure is expected to simplify NASDAQ’s payment process as well as promote visibility into the costs associated with listing on NASDAQ.  NASDAQ also indicated that the All-Inclusive Annual Fee program will give NASDAQ greater visibility into its revenue and allow it to continue to invest in technology and other resources available to NASDAQ-listed companies.  As part of the Amendments, NASDAQ also modified certain listing fees and clarified certain provisions of the NASDAQ Stock Market Rules.

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Second Circuit Defines “Customer” for Mandatory FINRA Arbitration

In a case of first impression, the United States Court of Appeals for the Second Circuit in Citigroup Global Markets, Inc. v. Abbar, No. 13-2172, 2014 WL 3765867 (2d Cir. Aug. 1, 2014), established a bright-line definition of “customer” under FINRA’s mandatory arbitration provision.  Absent a written agreement to arbitrate, FINRA Rule 12200 compels FINRA members to arbitrate disputes with “customers,” but the rule does not define “customer.”  It states only that a “customer shall not include a broker or dealer.”  In Abbar, the Second Circuit held that a “customer” is “one who, while not a broker or dealer, either (1) purchases a good or service from a FINRA member, or (2) has an account with a FINRA member.”  Whether an investor is a “customer” is a threshold arbitrability question, the resolution of which can entail protracted and costly litigation.  But in establishing a clear definition of “customer,” Abbar provides a reliable framework for making this determination, which should promote the efficient resolution of FINRA-related disputes.

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Fiduciary Duties in the Context of Dent v. Ramtron Int’l Corp.

The Delaware Court of Chancery recently addressed a number of claims commonly made in the “ubiquitous” stockholder litigation that follows announcement of a public merger or acquisition transaction.  In Dent v. Ramtron Int’l Corp., C.A. No. 7950-VCP (Del. Ch. June 30, 2014), a stockholder of Ramtron International Corp. filed suit after Ramtron was acquired by Cypress Semiconductor Corporation pursuant to an all-cash tender offer.  The plaintiff alleged that Ramtron’s directors breached their fiduciary duties by failing to maximize the value of the company, adopting several “preclusive” and “draconian” deal protection devices, and failing to fully disclose material information in the company’s proxy statement, and that Cypress aided and abetted those breaches.  The Court granted the defendants’ motion to dismiss, finding that the plaintiff failed, in each count, to state a claim upon which relief could be granted.  In doing so, the Court essentially set forth a roadmap for stockholders considering so-called “strike suits” and for corporations in preempting such suits.

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Delaware Court of Chancery Rejects Indemnification Sleight of Hand

In Branin v. Stein Roe Inv. Counsel, LLC, C.A. 8481-VCN, 2014 WL 2961084 (Del. Ch. June 30, 2014), the Delaware Court of Chancery held that a vested right to indemnification may not be rescinded by a subsequent amendment to the governing corporate document.

Francis S. Branin Jr. (“Branin”) owned and managed the investment management firm Brundage, Story & Rose, which was sold to Bessemer Trust, N.A. (“Bessemer”) in 2000. Nearly two years later, Branin left Bessemer and was hired by Stein Roe Investment Counsel LLC (“SRIC”), taking former clients with him.  Bessemer proceeded to sue Branin under New York’s Mohawk Doctrine, which refers to an implied covenant imposed on the seller of a business that prevents the seller from approaching former customers and attempting to regain their patronage after the seller has purported to transfer the sold business’ goodwill to the purchaser.  As a result of the legal claim by Bessemer, Branin sought indemnification under the directors and officers indemnification provisions of the operating agreement of SRIC (the “Operating Agreement”).

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Is Your Out-of-State LLC “Doing Business” in California?

Individuals and entities, including those from outside California, who invest in or do business through an out-of-state limited liability company (“LLC”) may be surprised to find out that they have filing obligations and tax liabilities in California as a result of California’s far-reaching rules and interpretations related to when an LLC is treated as “doing business” in California.

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Second Circuit Overturns District Court’s Rejection of SEC-Citigroup Fraud Settlement

In a closely-watched decision involving judicial review of agency settlements, the Unites States Court of Appeals for the Second Circuit vacated United States District Court Judge Jed Rakoff’s 2011 order rejecting a proposed $285 million settlement between the Securities and Exchange Commission (“SEC”) and Citigroup Global Markets Inc., finding that the judge applied an incorrect legal standard in his review of the proposed accord.  S.E.C. v. Citigroup Global Mkts., Inc., No. 11-5227-CV L, 2014 WL 2486793 (2d Cir. June 4, 2014).  The Second Circuit held that, under the proper standard, the district court is required to determine whether the consent decree is fair and reasonable, and, if it includes injunctive relief, whether the public interest “would not be disserved.”  Absent a substantial basis in the record to the contrary, the appeals court held, the district court is required to enter the order.

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