 explore alternative transactions. In a bench ruling in the case, City of Miami General Employees’ & Sanitation Employees’ Retirement Trust v. C&J Energy Services, Inc., Vice Chancellor Noble concluded that “it is not so clear that the [C&J] board approached this transaction as a sale,” with the attendant “engagement that one would expect from a board in the sales process.” Interestingly, the Court called the issue a “very close call,” and indicated it would certify the question to the Delaware Supreme Court at the request of either of the parties (at this time it does not appear either party has made a request). The decision provides guidance regarding appropriate board decision-making in merger transactions, particularly where one merger party is assuming minority status in the combined entity yet also acquiring management and board control.
Posts by Christine Louie. 
“Something More” Than “But For” Required in the Ninth Circuit
The Ninth Circuit recently reversed a ruling by the U.S. District Court of Nevada granting summary judgment in favor of the SEC in a case alleging violations of Section 5 of the Securities Act of 1933 in connection with the sale of unregistered securities. The SEC’s complaint alleged that 1st Global Stock Transfer LLC (“Global”), a transfer agent, and Global’s owner, Helen Bagley (collectively “Defendants”), assisted in the sale of unregistered securities for CMKM Diamonds, Inc. (“CMKM”), a purported diamond and gold mining company. The SEC’s complaint further alleged that CMKM had no legitimate business operations but instead the Company concocted false press releases and distributed fake maps and videos of mineral operations to its investors. While CMKM was one of several defendants in the action, the SEC only moved for summary judgment against Global, Bagley, and CMKM’s attorney. The District Court granted the SEC’s motion for summary judgment against the three defendants, but only Global and Bagley appealed that ruling.
In perpetrating the scheme, CMKM’s attorney was alleged to have provided hundreds of false opinion letters supporting the issuance of unregistered stock without restrictive legends to indicate that the stock was unregistered. Relying on these opinion letters, Global and Bagley issued additional CMKM stock without restrictive legends, believing that the issuance was legal. After a year and a half of this practice, Bagley became suspicious and asked a second law firm to confirm the opinion letters. The second law firm, however, relied on the first attorney’s opinion letters and also issued an opinion letter stating that the issuance of additional CMKM stock was valid. Based on the additional opinion letter, Global and Bagley continued to issue CMKM shares without restrictive legends. 
In the SDNY, Hindsight Is No Substitute for Red Flags When Alleging Scienter. 
Texas Court Rules that Regardless of Fault, CEOs and CFOs Will Have to Pay Up Under Sarbanes-Oxley Section 304 requires CEOs and CFOs to reimburse their company for any bonus or similar compensations, or any profits realized from the sale of company stock, for the 12-month period following a financial report, if the company is required to prepare an accounting restatement due to material noncompliance committed as a result of misconduct.
Baker and Gluk, who were not alleged to have participated in the misconduct that led to ArthoCare’s restatement, challenged Section 304 as unconstitutional, arguing that the SEC could not require them to repay bonus compensation and profits from stock sales for merely holding CEO and CFO positions during the time of the alleged misconduct. In particular, they argued that Section 304 is vague and is unconstitutional because it does not require a reasonable relationship between the triggering conduct and the penalty as is required by the Due Process Clause.
Judge Sam Sparks of the Western District of Texas rejected the Officer-Defendants’ constitutional arguments. Judge Sparks first held that Section 304 was not vague because it clearly referred to misconduct on behalf of the issuer of the allegedly false financial statement. Judge Sparks noted that Defendants “should have been monitoring the various internal controls to guard against such misconduct; they signed the SEC filings in question, and represented they in fact were actively guarding against noncompliance. As such, they shouldered the risk of Section 304 reimbursement when noncompliance nevertheless occurred.” 
New SEC Rule Requires Securities Exchanges and FINRA to Work Together to Improve Monitoring of Trading Activity in the U.S.
On July 11, 2012, the Securities and Exchange Commission (SEC) approved a new rule, which will require the national securities exchanges and self-regulatory organizations like the Financial Industry Regulatory Authority (FINRA) to establish a market-wide consolidated audit trail. The new consolidated audit trail will improve regulators’ ability to monitor and analyze trading activity. With the approval of Rule 613, the exchanges and FINRA must jointly submit to the SEC a comprehensive plan of how they plan to develop, implement, and maintain the consolidated audit trail. Rule 613 also requires that the consolidated audit trail collect and identify every order, cancellation, modification, and trade execution for all exchange-listed equities and equity options in all U.S. markets. 