As the market changes, so do the major topics affecting shareholders’ rights. Below are a few of the topics currently dominating the corporate law field and an explanation of how these developments affect your rights as a shareholder.
Collar and Swap Transactions
Given the market’s volatility, investors are reasonably looking for ways to protect their assets all while enjoying reasonable, modest growth. As part of a continued effort to protect investors and their hard earned money, Hutton Law Group has been focusing on derivative financial transactions such as collars, swaps and other hedging tactics touted as safe yet subject to significant price disparities favoring financial institutions.
Collars and swaps may appear to be a sensible hedge to the volatile market risk present in today’s economy. However, investment firms may be offering these products with structures that heavily favor the firms themselves. Often, the firm acts as counterparty to the transaction, so any losses an investor experiences go straight to the firm itself. Firms also structure the transaction where normal market fluctuations heavily favor the firm instead of protecting the investor.
Firms are in a unique position to value the transactions’ costs and benefits. By relying upon historical data or pricing future performance, firms can predict a transaction’s benefit to the investor and assign a cost commensurate with that benefit. However, firms have been known to withhold this information, oftentimes because such data shows that the costs of a hedging transaction far outweigh any benefits. Recently, a German high court rebuked Deutsche Bank for this very reason. This tactic leads investors to a transaction which costs millions of dollars, but will only return pennies on the dollar.
If you have invested in a collar or swap transaction and have faced significant losses, we encourage you to contact us for a free consultation. Investment firms should be helping their clients save for retirement or protect their wealth, not risking it to the firm’s advantage.
Dodd-Frank Reform Act
In July 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, 124 Stat. 1376), commonly shortened to the Dodd-Frank Reform Act. The Dodd-Frank Reform Act made several sweeping changes to existing federal law and was one of the largest pieces of legislation on the financial markets since the Great Depression. Covering topics from the SEC to the Federal Reserve System and from the individual mortgage to the larger market-wide collateralization of mortgages, the Dodd-Frank Reform Act enacted many new regulations aimed at preventing another systemic market decline in the future.
Among the many new provisions, the law requires the SEC to issue regulations regarding executive compensation and corporate governance. These regulations include shareholder approval of executive compensation—so-called “say for pay”—and governance matters, including director nominations.
As the market adjusts to the new requirements from the Dodd-Frank Reform Act, the Hutton Law Group will continue to monitor companies and how they respond to these new accountability and governance requirements. If you have questions about how the Dodd-Frank Reform Act may affect a company in which you invest, or if you know of a concern regarding such a company, we encourage you to contact us for a free consultation.
The Troubled Assets Relief Program (TARP)
In the fall of 2008, the Treasury Department began a program aimed at increasing activity in the lending market. With the economy contracting, banks and financial institutions experienced lower than normal revenues due to defaulting loans; these loans are dubbed the “troubled assets.” Under the Emergency Economic Stabilization Act of 2008 (Pub.L. 110-343, 122 Stat. 3765) or the EESA, the government offered up to $700 billion in funding to help capitalize banks and financial institutions and to encourage these lenders to rekindle the lending market, thus expanding the economy.
Although the TARP funds helped these banks and financial institutions weather the storm caused by the troubled assets, the funding came with certain requirements including mandated risk assessments, “clawback” of ill-gotten bonuses and prohibitions on golden parachutes. With the passage of the American Recovery and Reinvestment Act of 2009 in February 2009 (Pub.L. 111-5, 123 Stat. 115) or the ARRA, additional strings attached. In addition to the initial requirements under the EESA, TARP recipients have to enforce prohibitions on most forms of bonuses, have to allow “say for pay” votes by shareholders and have to adopt corporate governance rules covering excessive expenses and certain disclosures. These requirements make banks and financial institutions more transparent, following a “sunshine is the best disinfectant” policy.
As the market adjusts to these requirements, investors are beginning to see exactly why banks needed the TARP funds to stay afloat. Oftentimes, banks required the TARP funds because of the cyclical nature of the market; borrowers faced difficulties paying back mortgages and other loans due to the market decline, jeopardizing the banks’ liquidity. With major financial institutions facing failure, the government responded with the TARP funds as temporary support.
However, several banks took part in dubious financial plans that jeopardized their short and long term health. By taking part in tactics such as sub-prime and predatory lending, officers and directors subjected their companies to long-term risks by favoring these questionable short-term gains. As the housing market bubble burst, so did the financial hopes of these tactics. Some banks took part in even more questionable tactics, including illegal tax shelters and filing of financial statements with overstated revenues. As these banks had to turn to TARP to stay afloat, the real reasons behind their declines came to light.
As the market continues to learn more about these banks and financial institutions, the Hutton Law Group will continue to monitor the financial services landscape. If you have questions about your rights as an investor, or have concerns regarding your investment, please contact us for a free consultation.
From their origins in the Civil War to its increased relevance following the accounting scandals of WorldCom and Enron, whistleblower protections provide individuals with an effective way to uncover government fraud and corporate theft, all the benefit of shareholders and taxpayers. Recent expansions to whistleblower laws make this topic ever more important entering this new phase in the market.
The concept of a whistleblower has its roots in the Civil War, when the government allowed private citizens to sue a defrauder in the name of the government. The government would realize the benefit of the suit, with a portion going to that private citizen. Since these early days, Congress has expanded these whistleblower laws to include federal contractors. Outside these monetary incentives, federal law also provides protections to private citizens who disclose accounting fraud; such retaliation is now criminal under the Sarbanes-Oxley Act.
As mentioned above, the Dodd-Frank Reform Act expanded whistleblower incentives to include security law violations. This new program provides investors and insiders with powerful means to force companies to comply with federal securities laws, including truthful offerings and accurate filings. As the market comes out from the Great Recession, this program will be an important way to ensure public companies are fair, honest and responsible.
For more information about what the Hutton Law Group can do for your whistleblower case, please visit our specialized page. Also feel free to contact us if you have questions about how whistleblower protections might apply to you.