Mark P. Kaiser, once the marketing chief for U.S. Foodservice, received a seven year sentence in 2007 for his role in a securities fraud that, according to the prosecution, overstated earnings by $800 million between 2000 and 2003.
Here's an AP report on the sentence at the time.
Kaiser appealed his conviction on several grounds, one of which was that under 32(a) of the 1934 Exchange Act, contrary to the usual bromide, ignorance of the law is an excuse. Section 32(a) of the Act criminalizes only "willful" violations of most of that Act's provisions. See p. 264 of that PDF.
The good news for Kaiser is that he won his appeal and his conviction has been vacated.
But he did not win on the willfulness theory. He won because the trial judge failed to give a crucial instruction on another issue.
The court -- a panel of the 2d circuit Court of Appeals -- was unimpressed with the defendant's contentions on the statutory meaning of willfulness -- and indeed apparently unimpressed with its own precedents on this point. Solomon Wisenberg at the White Collar Crime blog explains it well, here.
Showing posts with label Second Circuit Court of Appeals. Show all posts
Showing posts with label Second Circuit Court of Appeals. Show all posts
Sunday, July 18, 2010
Wednesday, November 4, 2009
Mutual fund fees before SCOTUS
The Supreme Court of the United States considered mutual fund fees in oral arguments in the case of Jones v. Harris Associates, on Monday.
The plaintiffs in this litigation contend that retail shareholders are paying higher fees that institutional shareholders and that this is unfair. Harris Associates runs the Oakmark Fund, which apparently charges less than one-half of one percent to an unnamed institutional investor for managing assets of $160 million, or $720,000. But individual investors pay 0.88% on the same portfolio. Is that fair? More to the point, is it a violation of fiduciary duties?
The established precedent is the Gartenberg decision of 27 years ago. In that decision, the Second Circuit said that breach of fiduciary duty will be found only if the fee charged by an investment advisor is "so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining." Subsequently, the Second Circuit enumerated five factors that may be used to inform this test, and other Circuits have until quite recently followed its lead. Those factors are:
•The nature and quality of services provided to fund shareholders by the adviser;
•The profitability of the fund to the adviser;
•The fall-out benefits enjoyed by the adviser;
•The existence of economies of scale; and
•The independence and conscientiousness of the trustees.
It is this test that the plaintiffs said the Harris Associates' tiered structure of fees, at the expense of the retail investors, violates. And it is the seventh circuit thathas rocked this doctrinal boat, rejecting Gartenberg in the Jones v. Harris Associates matter. The Secenth Circuit Court said that investors do not need judicial protection so long as the advisors make full disclosure concerning their fees. Investors are then free to avoid or sell high-cost funds, in effect voting with their feet.
This was the issue before SCOTUS. For more, go here.
The plaintiffs in this litigation contend that retail shareholders are paying higher fees that institutional shareholders and that this is unfair. Harris Associates runs the Oakmark Fund, which apparently charges less than one-half of one percent to an unnamed institutional investor for managing assets of $160 million, or $720,000. But individual investors pay 0.88% on the same portfolio. Is that fair? More to the point, is it a violation of fiduciary duties?
The established precedent is the Gartenberg decision of 27 years ago. In that decision, the Second Circuit said that breach of fiduciary duty will be found only if the fee charged by an investment advisor is "so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining." Subsequently, the Second Circuit enumerated five factors that may be used to inform this test, and other Circuits have until quite recently followed its lead. Those factors are:
•The nature and quality of services provided to fund shareholders by the adviser;
•The profitability of the fund to the adviser;
•The fall-out benefits enjoyed by the adviser;
•The existence of economies of scale; and
•The independence and conscientiousness of the trustees.
It is this test that the plaintiffs said the Harris Associates' tiered structure of fees, at the expense of the retail investors, violates. And it is the seventh circuit thathas rocked this doctrinal boat, rejecting Gartenberg in the Jones v. Harris Associates matter. The Secenth Circuit Court said that investors do not need judicial protection so long as the advisors make full disclosure concerning their fees. Investors are then free to avoid or sell high-cost funds, in effect voting with their feet.
This was the issue before SCOTUS. For more, go here.
Wednesday, September 3, 2008
Latest Re: The New York Times
The two hedge funds that pressed (successfully) for representation on the board of The New York Times Co. earlier this year are again adding to the size of their stake in that company.
The two funds, Harbinger and Firebrand, indicated in January that they planned to shake up the board by or at the annual meeting in April. This decision put them on a famously glassy uphill slope, though, because nine of the directors of TNYT are elected only through restricted Class B stock. And 89% of the Class B stock is in the possession of the dynastic Ochs-Sulzberger family. Only four directors are on the board as a result of the vote of Class A stockholders, so even if dissidents elected all of those four, the controlling family would remain ... the controlling family.
Nonetheless, beginning in January and iunto March, the Harbinger/Firebrand forces increased their holding of that Class A stock from 5% to nearly 20%. Their operational case was that the Times needed to improve its digital strategy and sell some noncore assets.
They made their point, at least to the extent of getting half the representation available to them -- two of those four seats. They reached this accord in March, and the stockholders' meeting itself was a peaceful one.
Now, though, the truce may be at an end. Harbinger/Firebrand are buying again.
Meanwhile, what's been happening to the stock price (NYSE: NYT)?
I've included the one-year chart above. The Harbinger challenge was presumably inspired (or at least rendered affordable!) in the first place by the long slide in stock prive at the end of 2007 and through the opening days of 2008 -- from above $21 last September to close to $14.
Once the hedgers made their intentions known, and of course once they started their own buying, the price rose, so that it was back above $20 at the time of the settlement announcement.
Zig-zags notwithstanding, it stayed in that area until early May, they returned to its downward course. The price is now below where it was in January. It closed yesterday at $13.12.
How does that stack up with the market indexes? Not well. The Dow Jones has lost 13% of its value over the last year, but NYT has lost 40% of its.
Anyone who still owns Class A stock is a hardy soul. Or, perhaps, (remembering yesterday's analysis) an institution obeying a mandate or instituting a hedge.
Therein lies another part of this tale. Perhaps some significant portion of the 80% of Class A stock that the two hedge funds don't owned is now owned by counter-parties of theirs, hedging swaps agreements. For in addition to their outright purchases, a recent story in the Wall Street Journal tells me that the funds have "effectively gained economic exposure to an additional 1.7 million Class A shares."
Simple arithmetic tells me that it costs more than 22 million to buy 1.7 million shares at $13.12 each. The "unnamed counterparty" in the story is by definition betting on a decline in price, but it would presumably have bought some shares itself to hedge that risk, and it would have that much voting power.
This is of course the TCI/CSX issue again. Wonder when the 2d circuit will weigh in?
And the world goes round and round.
Tuesday, August 26, 2008
CSX/TCI Arguments
Yesterday, the second circuit court of appeals heard arguments from lawyers on both sides of the CSX/TCI case.
There are several issues at stake. I am especially interested inone: the relevance (or otherwise) of an investor's position in total return swaps to the disclosures required by 13D.
Why is that important? Because it is part of the much broader question of whether ownership is a single fact or an arbitrary bundle. When I went to law school, the basic property law course began with an effort to disabuse students of the naive idea that ownership is a simple solid sort of fact. The ownership of land, for example, consists of the right to exclude others from it, the right to reside there and enjoy it, the right to sell it in whole or in part, the right to lease it out, etc.
When can contracting parties break up the bundle and redistribute elements of ownership to their hearts content? when are they stuck with a stick simply becauise they're holding another stick thereof?
The trial court judge in this case rendered a decision that strongly implies that the bundle isn't arbitrary, and thus isn't infinitely malleable. Not, at any rate, in the matter of the ownership of shares of stock. Now we'll see how well that inference does at the next level up the judicial hierarchy.
That's an amateur historian/philosopher's view of the case, not the way the lawyers will describe the issues. What lawyers will tell you is that the fund is obligated to report beneficial ownership of equity securities, AND the refrain from engaging in any "scheme to evade" that requirement. The railroad pitched two different theories to the trial court: that the cash-settled derivatives that TCI owned are in effect equity securities, or that for quite specific reasons that may not apply in a lot of other cases the fund was employing those derivatives as part of a scheme to evade. There is, in short, both a broad and a narrow theory at stake.
The trial court judge indicated that if he feels sympathetic toward the broader theory. But that was as lawyers say "dicta." He actually ruled against TCI, to the extent that he did, only on the narrower theory.
The appeals court could, for all I know to the contrary, reject both theories and find that TCI's actions were as pure as the driven snow. Or it could accept the broad theory.
The betting line at the moment, though, is that the appellate court like the trial court will "split the difference" and go with the narrower theory. Although even within the narrower theory there's a lot of room for differences between the two courts and there will certainly be some. A simple "judgment affirmed" isn't in the cards. That is the one point on which I am bold enough to make a prediction.
We'll see how things shake themselves out.
There are several issues at stake. I am especially interested inone: the relevance (or otherwise) of an investor's position in total return swaps to the disclosures required by 13D.
Why is that important? Because it is part of the much broader question of whether ownership is a single fact or an arbitrary bundle. When I went to law school, the basic property law course began with an effort to disabuse students of the naive idea that ownership is a simple solid sort of fact. The ownership of land, for example, consists of the right to exclude others from it, the right to reside there and enjoy it, the right to sell it in whole or in part, the right to lease it out, etc.
When can contracting parties break up the bundle and redistribute elements of ownership to their hearts content? when are they stuck with a stick simply becauise they're holding another stick thereof?
The trial court judge in this case rendered a decision that strongly implies that the bundle isn't arbitrary, and thus isn't infinitely malleable. Not, at any rate, in the matter of the ownership of shares of stock. Now we'll see how well that inference does at the next level up the judicial hierarchy.
That's an amateur historian/philosopher's view of the case, not the way the lawyers will describe the issues. What lawyers will tell you is that the fund is obligated to report beneficial ownership of equity securities, AND the refrain from engaging in any "scheme to evade" that requirement. The railroad pitched two different theories to the trial court: that the cash-settled derivatives that TCI owned are in effect equity securities, or that for quite specific reasons that may not apply in a lot of other cases the fund was employing those derivatives as part of a scheme to evade. There is, in short, both a broad and a narrow theory at stake.
The trial court judge indicated that if he feels sympathetic toward the broader theory. But that was as lawyers say "dicta." He actually ruled against TCI, to the extent that he did, only on the narrower theory.
The appeals court could, for all I know to the contrary, reject both theories and find that TCI's actions were as pure as the driven snow. Or it could accept the broad theory.
The betting line at the moment, though, is that the appellate court like the trial court will "split the difference" and go with the narrower theory. Although even within the narrower theory there's a lot of room for differences between the two courts and there will certainly be some. A simple "judgment affirmed" isn't in the cards. That is the one point on which I am bold enough to make a prediction.
We'll see how things shake themselves out.
Monday, June 30, 2008
CSX
The activist hedge funds are claiming that they won four of the five seats at issue (at a 12-seat board of directors) at last week's CSX shareholder's meeting.
The company says the vote is too close to call.
The official results are due in late July, and oral arguments about some of the legal issues this proxy fight has stirred up will take place before the appellate court in early August.
The legal issue that fascinates me is the relevance (or otherwise) of an investor's position in total return swaps to the disclosures required by 13D.
Why is that important? Because it is part of the much broader question of whether ownership is a single fact or an arbitrary bundle. When I went to law school, the basic property law course began with an effort to disabuse students of the naive idea that ownership is a simple solid sort of fact. The ownership of land, for example, consists of the right to exclude others from it, the right to reside there and enjoy it, the right to sell it in whole or in part, the right to lease it out, etc. These rights can be severed from one another by statute or precedent.
Well, okay ... point taken. Still, there's something to be said for the naive view. The bundle is not arbitrary, the acts of severance that have historically made it look more like a fascis than like a single stout branch -- that has been arbitrary.
With the ownership of stock in particular, I submit that we need to stick with the single stout branch, and that the position of CSX in that respect is the more sound.
The hedge funds are trying to 'own' stock through "total return swaps" in a way that remains largely opaque to the market and their fellow shareholders.
Though they might be right about much, they are wrong about this.
The company says the vote is too close to call.
The official results are due in late July, and oral arguments about some of the legal issues this proxy fight has stirred up will take place before the appellate court in early August.
The legal issue that fascinates me is the relevance (or otherwise) of an investor's position in total return swaps to the disclosures required by 13D.
Why is that important? Because it is part of the much broader question of whether ownership is a single fact or an arbitrary bundle. When I went to law school, the basic property law course began with an effort to disabuse students of the naive idea that ownership is a simple solid sort of fact. The ownership of land, for example, consists of the right to exclude others from it, the right to reside there and enjoy it, the right to sell it in whole or in part, the right to lease it out, etc. These rights can be severed from one another by statute or precedent.
Well, okay ... point taken. Still, there's something to be said for the naive view. The bundle is not arbitrary, the acts of severance that have historically made it look more like a fascis than like a single stout branch -- that has been arbitrary.
With the ownership of stock in particular, I submit that we need to stick with the single stout branch, and that the position of CSX in that respect is the more sound.
The hedge funds are trying to 'own' stock through "total return swaps" in a way that remains largely opaque to the market and their fellow shareholders.
Though they might be right about much, they are wrong about this.
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