A recent case in a North Dakota district court is a reminder to private equity funds and managers that, under certain conditions, they may be held responsible for actions of a fund’s portfolio companies. Courts allow plaintiffs to pierce the corporate veil as a check against improper abuse of the corporate form. When one corporate entity is under such extensive control by another that the first is merely an alter ego of the second, a court may permit a plaintiff to reach through the corporate structure to gain recovery. This is particularly true if the first entity is undercapitalized. Through this mechanism, limited liability does not mean immunity from liability, and under certain circumstances a plaintiff can hold the ultimate shareholders or owners liable for company obligations. Continue Reading
Recently, a group of Congress members introduced into Congress Senate Bill 2155 named the Stop Wall Street Looting Act of 2019. Although unlikely to be enacted into law as drafted, this proposed legislation would directly and substantially affect a number of fundamental operational aspects of private equity funds and their affiliates. Continue Reading
The Third Circuit recently issued an important decision for private fund advisors who serve on corporate boards. In a precedential decision on a matter of first impression, the Third Circuit distinguished the role of nonvoting board observers from the function of formal corporate directors. And while the decision was issued in the context of liability for alleged violations of the securities laws, the Third Circuit suggested the analysis may apply more broadly to other situations involving board observers.
The case, Obasi Investment Ltd. v. Tibet Pharmaceuticals, Inc. et al, began in New Jersey federal court as a class action lawsuit alleging Tibet Pharmaceuticals failed to disclose certain information about its financial health prior to its IPO. Two of the defendants, Downs and Zou, claimed they were merely observers to Tibet’s board and therefore should not be found liable for any misconduct of the company board. The trial court judge granted summary judgment in the duo’s favor on all counts except a violation of Section 11 of the 1933 Securities Act, stating that the question presented a novel issue ripe for an appellate court.
On appeal, the Third Circuit threw out the last remaining Section 11 claim against the two defendants stating that board observers are not the same as directors. A claim under Section 11 can be brought against any person “named in the registration statement as being or about to become a director, person performing similar functions, or partner.” The issue before the Third Circuit was whether the board observers were “person[s] performing similar functions” to directors. Continue Reading
Today, we are launching a proprietary database tracking all SEC enforcement actions involving private equity advisers. The tracker contains key information from the actions, including summaries of key issues, settlement terms, and relevant statutory provisions. The tracker will be an important resource for us and our clients, providing us with quick access to comparable cases and allowing us to identify important enforcement trends impacting private equity advisers as they develop. We are also making available summary information from the database for all SEC enforcement actions against private equity advisers over the last 6 years.
Contact us for additional information.
On July 3, 2019, SEC Chairman Jay Clayton issued a “Statement Regarding Offers of Settlement” (the “Statement”), announcing important changes to how the SEC will consider future requests for waivers from disqualifications in settlements. The Statement may have been prompted by the Bad Actor Disqualification Act of 2019 recently proposed by Representative Maxine Waters. Regardless of the impetus, the Statement should provide settling parties with greater certainty regarding the waiver process. Importantly, the new policy effectively allows a settling party to condition its offer of settlement on whether the SEC grants a requested waiver – if the waiver is not granted, the respondent now is able to retract its offer of settlement. Continue Reading
A recent action where the SEC focused on the presumably conservative undervaluation of assets suggests that it is more than willing to use valuation as a hook to deter “smoothing” of returns. As we previously noted, while the SEC consistently announces that valuation is a “key area of focus,” it is uncommon for regulators to second guess valuation determinations in the absence of other potential violations. However, failure to adhere to stated valuation policies/procedures is one situation that may lead to heightened regulatory exposure and disputes.
The SEC, in conjunction with the Colorado Bar Association and Colorado Society of Certified Public Accountants, recently sponsored the 51st Annual Rocky Mountain Securities Conference featuring SEC officials and corporate experts from across the nation. Sam Waldon, partner at Proskauer and former Assistant Chief Counsel in the SEC’s Division of Enforcement, moderated a panel of expert practitioners on developments in securities enforcement and white collar defense. The following topics were discussed:
1. Current Commission and Division of Enforcement
The Panel generally agreed that commentators have largely overstated the extent to which the current Enforcement program has changed under the current administration. However, they agreed that the types of cases being brought today, and the current case mix, is somewhat different than the immediately preceding Enforcement program, with a greater emphasis on cases involving retail investor harm. And the Panel agreed that the single biggest factor impacting the Enforcement program today has been the prolonged hiring freeze.
2. Sharing results of internal investigations
The Panel discussed recent experiences with having to decide whether and how to share the results of an internal investigation with staff, highlighting the challenge of balancing the desire to gain meaningful cooperation credit, against the value of preserving privilege. The speakers also discussed how it can often be prudent to share with staff the findings of an investigation generally, but not share memoranda memorializing witness interviews. Such an approach reduces the risk of waiver of the attorney-client privilege and/or attorney work product immunity covering the internal investigation as a result of disclosure to the SEC. Continue Reading