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TheSummer 2017Advocate
F O R I N S T I T U T I O N A L I N V E S T O R S
One Share, No Vote Multi-Class Shares Sideline Investorsas Corporate Insiders Run the Show
How Public-PrivatePartnerships Can Shore
Up the SEC
House Legislation Aims to Gut Class Action
Practice
Update on Standardsfor Prospectus
Liability in Europe
FOR INSTITUTIONAL INVESTORS
2 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
Spring 2017
Features
3 Inside Look
12 Eye on the Issues
28 Contact Us
Departments
One Share, No Vote
A rising tide of multi-class shareserodes crucial shareholder rights
Principally authored by Brandon Marsh
4
As part of BLB&G’s firmwide Going Green Initiative, this publication has been printed on recycled
paper. If you would prefer to receive The Advocate for Institutional Investors as an electronic PDF
file instead of a printed copy, please contact us at [email protected].
ContentsH.R. 985: Raising the Baron Class ActionsHouse of Representatives moves tocurtail victims’ rights
By Jesse Jensen
18
Prospectus Liability in Europe
A survey of recent developments
By Tomas Arons
22Protecting the Shareholder Franchise
Jon Feigelson joins BLB&G as Corporate Governance Director
26GOING GREEN
Partnering for the Public Good
How public-private partnershipscan strengthen the SEC
Principally authored by David Kaplan
8
Justice Gorsuch: Friendor Foe?
How might the new Supreme CourtJustice lean on securities class actions?
By Alla Zayenchik
16
INTERNATIONAL FOCUS
Summer 2017 The Advocate for Institutional Investors 3
FOR INSTITUTIONAL INVESTORS
LookInside
I n the wake of the 2016 presidential election and the inauguration of a new regime in Washington, this
edition of The Advocate examines the power of the vote. What changes will the Trump administration bring
to the nation’s securities laws? How could changing securities standards and enforcement priorities impact
institutional investors’ ongoing work to protect their investments and advocate for honest corporate disclosures?
With these questions in mind, we survey recent developments in each branch of the federal government. We
also look at what some believe is the waning power of the vote in corporate governance, as certain companies
choose dictatorship over democracy by foreclosing investors from having any vote in corporate affairs.
Our cover story, “One Share, No Vote,” focuses on an ominous corporate governance trend: the recent increase
in companies issuing non-voting shares, particularly in the technology sector. The article surveys how such
distorted stock structures create perverse incentives and suppress healthy investor activism.
Also in this issue, BLB&G Partner David Kaplan outlines how the SEC can both improve securities enforcement
and save taxpayer money with one simple solution: enforcement partnerships with experienced private litigators.
The article, “Partnering for the Public Good,” expresses support for the same sort of public-private partnerships
that President Trump has repeatedly praised.
On the legislative front, BLB&G attorney Jesse Jensen examines one of the first acts of America’s new House
of Representatives: passing the dangerous H.R. 985 bill. The article, “Raising the Bar on Class Actions,” explains
how H.R. 985 threatens to stymie individual rights, thwart class actions, and keep institutional investors and
others out of the courtroom. Fortunately, the legislation faces long odds in the Senate.
The new White House has already made a significant impact on the judicial branch. In “Supreme Court Justice
Neil Gorsuch and Securities Litigation — Friend or Foe?,” BLB&G attorney Alla Zayenchik discusses how President
Trump’s first Supreme Court appointee may impact shareholder rights for years to come.
In our continuing coverage of international securities litigation, we are also pleased to share a valuable piece
by Professor Tomas Arons of Utrecht University in the Netherlands, in which he outlines the laws governing
prospectus liability in various European countries.
Finally, our regular “Eye on the Issues” column highlights significant recent developments in domestic and
international securities litigation and regulation affecting institutional investors.
Please note that current and past issues of The Advocate are available on our website at www.blbglaw.com.
The Editors — Brandon Marsh and Julia Tebor
FOR INSTITUTIONAL INVESTORS
4 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
Increasingly, companiesin the technology sector
and elsewhere are issuing two classes oreven three classes ofstock with disparate
voting rights in order togive certain executivesand founders outsized
voting power.
R ecent developments in the secu-
rities markets are drawing insti-
tutional investors’ attention back
to core principles of corporate governance.
As investors strive for yield in this post-
Great Recession, low interest rate envi-
ronment, large technology companies’
valuations climb amid promises of rapid
growth. At the same time, some of these
successful companies are exploiting their
market favor by asking investors to give
up what most regard as a fundamental
right of ownership: the right to vote.
Companies in the technology sector and
elsewhere are increasingly issuing two or
even three classes of stock with disparate
voting rights in order to give certain exec-
utives and founders outsized voting power.
By issuing stock with one tenth the voting
power of the executives’ or founders’ stock,
or with no voting power at all, these com-
panies create a bulwark for managerial
entrenchment. Amid ample evidence that
such skewed voting structures lead to
transfers of value and skewed managerial
incentives, many public pension funds
and other institutional investors are
standing up against this trend. But in the
current environment of permissive ex-
change rules allowing for such dual-class
or multi-class stock, there is still more that
investors can do to protect their funda-
mental voting rights.
A rising tide of multi-class sharessparks a backlash
Historically, companies with dual-class
stock structures have been a distinct minor-
ity of the market. Prominent among such
outliers are large media companies that
perpetuate the managerial oversight of a
particular family or a dynastic editorial
position, such as The New York Times,
CBS, Viacom, and News Corp. Now, corpo-
rate distributions of non-voting shares are
on the rise, particularly among emerging
technology companies. In 2012, Google
— which already protected its founders
through Class B shares that had ten times
the voting power of Class A shares —
moved to dilute further the voting rights
of Class A shareholders by issuing to
them third-tier Class C shares with no vot-
ing rights as “dividends.” Shareholders,
One Share, No Vote
Principally authored by Brandon Marsh
Dual-class capital structures are a recipe for executive entrenchment, fiduciary misconduct, and erosion ofshareholder rights
To forego the ownershipgymnastics of diluting existing shareholders’
voting rights by issuingnon-voting shares as
dividends, the more recent trend is to set up
multi-class structuresfrom the IPO stage.
led by a Massachusetts pension fund, filed
suit, alleging that executives had breached
their fiduciary duty by sticking investors
with less valuable non-voting shares. On
the eve of trial, the parties agreed to set-
tle the case by letting the market decide
the value of lost voting rights. When the
non-voting shares ended up trading at a
material discount to the original Class A
shares, Google was forced to pay over
$560 million to the plaintiff investors for
their lost voting rights.
Facebook followed suit in early 2016 with
a similar post-IPO plan to distribute non-
voting shares and solidify founder and
CEO Mark Zuckerberg’s control. Amid re-
newed investor outcry, the pension fund
Sjunde AP-Fonden and numerous index
funds filed a suit alleging breach of fidu-
ciary duty. Also in 2016, Barry Diller, the
controller of IAC/InterActiveCorp, tried an
even more egregious gambit, creating a
new, non-voting class of stock in order to
insulate his ability to pass control of the
business to his heirs without regard to
the dilution that would come from new
stock compensation and stock acquisitions,
and despite the fact that they owned less
than 8 percent of the company’s stock.
The California Public Employees’ Retire-
ment System (CalPERS), which manages
the largest public pension fund in the
United States, filed suit in late 2016.
(BLB&G represents CalPERS in this litiga-
tion.) Both suits are currently pending.
To forego the ownership gymnastics of
diluting existing shareholders’ voting
rights by issuing non-voting shares as
dividends, the more recent trend is to set
up multi-class structures from the IPO
stage. Tech companies Alibaba, LinkedIn,
Square, and Zynga each implemented
dual-class structures before going public.
Overall, the number of IPOs with multi-
class structures is increasing. There were
only 6 such IPOs in 2006, but that number
more than quadrupled to 27 in 2015.
Snap pioneers the “No VotingRights Whatsoever” tech IPO
Snap Inc., which earlier this year concluded
the largest tech IPO since Alibaba’s, took
the unprecedented step of offering IPO
purchasers no voting rights at all. This is
a stark break from tradition, as prior dual-
class firms had given new investors at
least some — albeit proportionally weak
— voting rights. As Anne Sheehan, Direc-
tor of Corporate Governance for the Cali-
fornia State Teachers’ Retirement System
(CalSTRS), has concluded, Snap’s recent
IPO “raise[s] the discussion to a new level.”
CalSTRS was not alone in its criticism of
Snap’s IPO. The Council of Institutional
Investors (CII) called for an end to dual-
class IPOs in 2016. After Snap announced
its intended issuance of non-voting stock
earlier this year, CII sent a letter to Snap’s
executives, co-signed by 18 institutional
investors, urging them to abandon their
plan to “deny[] outside shareholders any
voice in the company.” The letter noted
that a single-class voting structure “is
associated with stronger long-term per-
formance, and mechanisms for account-
ability to owners,” and that when CII was
formed over thirty years ago, “the very
first policy adopted was the principle of one
share, one vote.” Anne Simpson, Invest-
ment Director at CalPERS, has also strongly
criticized Snap’s non-voting share model,
stating: “Ceding power without account-
ability is very troubling. I think you have
to relabel this junk equity. Buyer beware.”
FOR INSTITUTIONAL INVESTORS
6 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
FOR INSTITUTIONAL INVESTORS
Summer 2017 The Advocate for Institutional Investors 7
Investors have also called for stock index
providers to bar Snap’s shares from
becoming part of major indices due to its
non-voting shares. By keeping index fund
investors’ cash out of such companies’
stock, these efforts could help provide
concrete penalties for companies seeking
to go to market with non-voting shares. It
remains to be seen how index providers
will respond.
Dual-class structures hamper accountability
There are many compelling reasons why
institutional investors strongly oppose
dual-class stock structures that separate
voting rights from cash-flow rights. Such
structures reduce oversight by, and ac-
countability to, the actual majority own-
ers of the company. They hamper the
ability of boards of directors to execute
their duties to shareholders because cor-
porate managers with outsized voting
power can dictate important company
decisions. And they can incentivize man-
agers to act in their own interests, instead
of acting in the interest of the company’s
owners. Hollinger International, a large
international newspaper publisher now
known as Sun-Times Media Group, is a
striking example. Although former CEO
Conrad Black owned just 30 percent of
the firm’s equity, he controlled all of the
company’s Class B shares, giving him an
overwhelming 73 percent of the voting
power. He filled the board with friends,
then used the company for personal ends,
siphoning off company funds through a
variety of fees and dividends. Restrained
by the dual-class stock structure, Hollinger
stockholders at large were essentially
powerless to rein in such actions. Ulti-
mately, the public also paid the price for
the mismanagement, footing the bill to
incarcerate Black for over three years
after he was convicted of fraud.
Academic studies also reveal that giving
select shareholders control that is far
out of line with their ownership stakes
results in perverse incentives and weaker
corporate governance structures. A 2012
study funded by the Investor Responsi-
bility Research Center Institute (IRRC), and
conducted by Institutional Shareholder
Services Inc., found that controlled firms
with multi-class capital structures have
more material weaknesses in accounting
controls and are riskier in terms of volatility.
A follow-up 2016 study reaffirmed the
findings, noting that multi-class companies
have weaker corporate governance and
higher CEO pay. As IRRC Institute Execu-
Academic studies also reveal that giving selectshareholders control thatis far out of line with theirownership stakes resultsin perverse incentives andleads to weaker corporate governance structures.
Continued on back cover
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FOR INSTITUTIONAL INVESTORS
8 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
The SEC’s EnforcementDivision can be more
effective if we restore itsability to tap the talentsof America’s top private
sector attorneys.
P resident Donald Trump has sharply
criticized Wall Street for the
“tremendous problems” it has
caused our country and promised, “I’m
not going to let Wall Street get away with
murder.”
However, Trump’s pick to lead the US
Securities and Exchange Commission, Jay
Clayton, is a Wall Street deal lawyer with
a career spent representing big banks and
other large companies. Clayton’s nomi-
nation signals that the agency’s focus may
be on capital formation, not enforcement.
Trump can prove his commitment to
policing financial fraud by reversing
Executive Order 13433, which prevents
the SEC and other federal agencies from
partnering with private law firms on a
contingent-fee basis.
Let the free market work
Public-private partnerships are not only
an ideal solution to one of the nation’s
greatest challenges — enforcing our secu-
rities laws against powerful corporations
and executives — but a prime example of
letting the free market do what it does
best: allocate resources efficiently.
The SEC clearly has its problems. As
Columbia Law Professor John Coffee has
emphasized in several books and articles,
the SEC is “overstrained and under-
funded,” and outmatched by the experi-
ence and resources of corporate America’s
top-tier defense counsel, leaving it “par-
ticularly vulnerable” in big cases. Indeed,
the SEC missed Bernie Madoff’s decades-
long investment fraud despite repeated
warnings, and failed to prosecute a single
Principally authored by David Kaplan
Partneringfor thePublic
GoodUsing the private sector to strengthen the SEC
Restoring the SEC’s abilityto enter public-private
partnerships with top-tiersecurities firms would
give the agency a powerful enforcement tool without
requiring a dime of additional government
funding.
case against a top bank executive for
financial crisis-era misconduct.
The SEC’s problems are exacerbated by
Executive Order 13433. President George
W. Bush signed this executive order in
2007 amid complaints by corporate lobby-
ists after private contingent-fee counsel
successfully partnered with state attor-
neys general to recover over $200 billion
from the tobacco industry.
At a time when all sides acknowledge the
SEC’s need for more resources, Executive
Order 13433 represents outdated thinking
and hamstrings the agency’s enforcement
power. In the past few years, Executive
Order 13433 has limited the SEC’s ability
to pursue many challenging and mean-
ingful enforcement actions.
Notably, in circumstances where this ex-
ecutive order did not apply, other govern-
ment agencies have worked with private
counsel to secure massive recoveries in
complex litigation arising from the finan-
cial crisis, which cost the US economy
more than $22 trillion. The Federal Hous-
ing Finance Agency (FHFA) recovered
nearly $19 billion in connection with the
sale of mortgage-backed securities, and
the National Credit Union Administration
(NCUA) recovered more than $4 billion
for creditors of failed financial institu-
tions. In the NCUA chair’s own words:
“Without this fee arrangement, which
shifted most of the risk of these legal
actions to outside counsel, there would
have been no legal investigation of po-
tential claims, no litigation, and no legal
recoveries.”
In contrast to the $23 billion recovered
by these agencies through public-private
partnerships, the SEC — laboring without
a deep and talented pool of private litiga-
tors — has levied less than $4 billion in
penalties, disgorgement, and monetary
relief in all of its financial crisis-era cases.
A powerful tool
Restoring the SEC’s ability to enter public-
private partnerships with top-tier securi-
ties firms would give the SEC a powerful
enforcement tool without requiring a
dime of additional government funding.
It would also allow the SEC to focus its
scarce resources on other objectives,
such as capital formation, reducing un-
necessary regulations, and improving
corporate transparency.
As for enforcement, to quote Coffee, the
SEC would be able to “focus on what
they are best at: insider trading, Ponzi
schemes, and smaller frauds not involv-
ing a complex institutional structure and
multiple actors.” Sophisticated private-
sector counsel would be available to
assist the SEC in the largest and most
complex cases, where it most needs help.
Both Trump and the Republican Party
strongly support the efficiencies and
advantages offered by public-private
partnerships. Trump “the Developer” has
partnered with government entities to
build hotels, convention centers and ice
rinks. Trump “the Candidate” and the
2016 Republican Party platform both
emphasized public-private partnership as
essential to “save the taxpayers’ money”
by controlling the costs of infrastructure
and government spending.
The same policy thinking supports allow-
ing the SEC to utilize private-sector law
firms to aid the agency in effectively en-
forcing securities laws.
FOR INSTITUTIONAL INVESTORS
10 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
FOR INSTITUTIONAL INVESTORS
Summer 2017 The Advocate for Institutional Investors 11
Trump promised to “police markets for
force and fraud” and hold “both Wall
Street and Washington accountable.”
Trump can take a significant step toward
fulfilling these promises by rescinding
Executive Order 13433 and restoring the
SEC’s ability to obtain private-sector legal
services at no cost or risk to the American
taxpayer. With a pen stroke, he can make
the SEC a better financial cop and trans-
fer risk to the private sector, while silenc-
ing those who would criticize the Clayton
nomination as signaling a laissez-faire
attitude toward enforcement.
David Kaplan is a Partner in BLB&G’s
California office. He can be reached at
BLB&G is proud to host the Real-Time Speaker Series, featuring candid
conversations with academics, policy makers, commentators and other experts
about the financial markets and issues of importance to the institutional
investor community. Past installments include:
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A conversation with Professor Bill
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Supreme Court Vacancy, Its ImpactNow and in the Future
A conversation with the nation’s
leading Supreme Court expert, Erwin
Chemerinsky
Institutional Investor Focus on Corporate Disclosure of Climate Changeand Sustainability Risks and Practices
A conversation with Jim Coburn,
Senior Manager of Ceres, and Andrew
Collins, Director of the Sustainability
Accounting Standards Board
Corporate Heroism: The Whistleblower
A c onversation with Dr. Eric Ben-Artzi
and Dana Gold of The Government
Accountability Project
Trump “the Candidate”and the 2016 RepublicanParty platform both emphasized public-privatepartnership as essentialto “save the taxpayers’money” by controlling thecosts of infrastructure andgovernment spending.
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EyeBy Alla Zayenchik
on the Issues
SEC reconsiders CEO-to-Worker PayRatio Rule
On February 6, 2017, Acting SEC Chairman
Michael S. Piwowar announced that the
Commission is reconsidering the imple-
mentation of the CEO-to-Worker Pay Ratio
Rule. The rule requires a public company
to disclose the ratio of its median total an-
nual compensation across all employees
to the total annual compensation of its
chief executive officer. Although the Dodd-
Frank Wall Street Reform and Consumer
Protection Act required the rule, the SEC
adopted the rule in August 2015, and com-
panies were told to provide the disclosure
for their first fiscal year beginning on or
after January 1, 2017, Piwowar unexpect-
edly announced that the SEC was seeking
further public input on the merits of the
rule before any potential implementation.
Investors and legislators have strongly
denounced the delay. On March 22,
2017, a group of 100-plus institutional in-
vestors holding a combined $3 trillion in
assets under management sent a letter to
Piwowar, urging the SEC not to delay
implementation of the rule. The letter,
signed by representatives of unions, pen-
sion plans, asset managers, faith-based
funds, advocacy investment organiza-
tions, and state treasurers, stated that
any delay imposes “significant costs” on
investors and noted that “pay ratio dis-
closure will provide material information
to investors who are concerned about
CEO and employee compensation and
its impact on shareholder value.” The
investors noted that pay ratio information
is material because, among other things,
it “enables investors to make more in-
formed decisions on executive compensa-
tion, sheds light on the impact of high
Citigroup, Barclays, JP Morgan, and RBS have been sentenced in connection with
the massive rigging of currency exchange rates that rocked the markets in 2015.
Earlier this year, Judge Stefan R. Underhill of the United States District Court for
the District of Connecticut approved over $2.5 billion in criminal fines imposed
by the Department of Justice, which were part of an overall $5.8 billion settlement
between the companies and the regulators. Citigroup led the pack with a $925
million criminal fine, followed by a $650 million fine against Barclays, a $550 million
fine against JP Morgan and a $395 million fine against RBS. Judge Underhill
noted that he would “encourage the US government to consider prosecution of
individuals” in connection with the FX rate rigging, noting that the most effective
way to deter illegal anticompetitive behavior is to take action against the people
responsible, including by clawing back or requiring disgorgement of incentive
compensation that was triggered by the wrongful conduct. Judge Underhill noted
that “when the market is rigged, folks who play by the rules are suckers.”
CEO-to-employee pay ratios on employee
morale,” and indicates a company’s ap-
proach to balancing internal equity and
external competitiveness when setting
CEO pay targets.
A group of US Senators also sent a letter
to Piwowar opposing any delay in the
rule’s implementation and highlighting the
rule’s history: “For nearly seven years,
investors have been waiting for this dis-
closure, and now as the first reporting pe-
riod has just begun, you have inexplicably
halted this important investor tool.”
Rigged markets: Big banks sentenced after pleading guilty to FX rate fixing
13
FOR INSTITUTIONAL INVESTORS
DFC Global has appealed a ruling by the Delaware Chancery
Court that Lone Star Fund VIII underpaid for DFC Global by
more than $100 million in a $1.3 billion transaction whereby
Lone Star Fund VIII acquired the payday lender. In 2016, Chan-
cellor Bouchard ruled in an appraisal proceeding (an action
brought by an investor who believes that she was not adequately
compensated in a corporate buyout) that shareholders in DFC
Global had been significantly underpaid when selling their
shares in the buyout. The Court found that the fair market
value of DFC Global shares was materially higher than the
buyout price. In its appellate brief, DFC Global argues that the
deal price should be deemed the best indicator of fair value
because there was a sales process that resulted in an arm’s-
length transaction. As a result, DFC Global argues that the
Chancery Court should not have the ability to independently
evaluate the transaction price. The trial court disagreed, re-
fusing to defer to the deal price in light of the “uncertain reg-
ulatory environment” that served as the backdrop for this
transaction. As the Court explained, the transaction was ne-
gotiated and consummated during a period of significant
company turmoil and regulatory uncertainty, calling into
question the reliability of the transaction price as well as man-
agement’s financial projections.
The case has garnered significant interest in the business and
legal communities. Nine law and corporate finance professors
filed an amicus brief in support of DFC Global, urging the
Delaware Supreme Court to rule that the Chancery Court must
defer to the transaction price when a deal results from arm’s-
length negotiations. On the other hand, BLB&G represented
twenty-one leading law, economics, and corporate finance
professors, including a Nobel prize winner, who filed an amicus
brief supporting the Chancery Court’s ability to independently
determine the value of a company. This amicus brief points
out that a hard-line rule is unnecessary because, among other
things, the Chancery Court’s opinion can be appealed. The ac-
ademics who favor affirming the Chancery Court’s opinion
argue that adopting a rule that presumptively requires the
Court of Chancery to defer exclusively to the transaction price
unless that process does not result from an arm’s-length
process would be “a trifecta of bad law, bad economics, and
bad policy.” These professors point out that deference to the
deal price in appraisal actions is the functional equivalent of
eliminating the appraisal remedy altogether.
The Supreme Court has agreed to decide
a common issue in securities litigation
that has split courts nationwide: whether
shareholders can sue a public company
that fails to “[d]escribe any known trends
or uncertainties that have had or that the
[company] reasonably expects will have
a materially favorable or unfavorable im-
pact” on the company. The quoted lan-
guage is from Item 303 of SEC Regulation
S-K, which requires the disclosure of
such information in public companies’
periodic reports. The issue is whether a
company’s failure to abide by Item 303
can qualify as an “actionable omission”
and thus be sufficient grounds for a
shareholder lawsuit under potent provi-
sions supporting shareholder lawsuits:
Section 10(b) of the Securities Exchange
Act and SEC Rule 10b-5 promulgated
thereunder. While proponents of trans-
parency support shareholders’ rights to
enforce such disclosure provisions, op-
ponents argue that Item 303’s language
is too broad and would make it difficult
to determine when management is obli-
gated to make a disclosure. The Supreme
Court is expected to issue an opinion by
June 2018.
Summer 2017 The Advocate for Institutional Investors
What’s deal price got to do with it?
High Court to rule on liability for failing to disclose known trends
Corzine sidelined
The US Commodity Futures Trading Com-
mission’s years-long litigation against the
former CEO of MF Global Holdings Ltd.
has concluded with a settlement. After the
brokerage firm MF Global went bankrupt
in a 2011 liquidity crisis, the CFTC sued
CEO Jon Corzine for dipping into nearly $1
billion of segregated client funds in an ef-
fort to obtain badly needed liquidity. The
settlement requires Corzine to pay a $5
million fine out of his own pocket, rather
than from insurance. The CFTC had pre-
viously forced MF Global to pay over $1.2
billion in restitution to its customers,
along with a penalty of $100 million, due
to actions the company took under
Corzine’s leadership. The Corzine settle-
ment also imposes a lifetime ban on
Corzine from CFTC markets, preventing
him from personally trading clients’
money in the commodity futures industry.
The ban on Corzine, also a former CEO of
Goldman Sachs, is a significant measure
against one of Wall Street’s top traders
and leaders.
14 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
In the Summer 2016 edition of The Advocate, we discussed the Supreme Court’s
agreement to hear the Salman v. United States case and to clarify standards for
insider trading liability. Late last year, the Court’s unanimous decision in the case
was welcome news to those opposed to insider trading. The decision confirms that
a tipper — i.e., someone who divulges non-public company information —
breaches a fiduciary duty by giving a tip to a trading relative or friend. This clarifies
that in order for the tipper to be liable for insider trading, a tipper need not receive
something of “a pecuniary or similarly valuable nature” in exchange for the tip.
This less restrictive view of insider trading liability affirmed the Ninth Circuit’s hold-
ing and rejected a prior, contrary ruling by the Second Circuit in US v. Newman.
Judge Jed S. Rakoff of the United States District Court for the Southern District of
New York played an active role in both the Salman and Newman cases. He was the
author of the 2013 Newman district court decision that the Second Circuit reversed.
He was also the author of the Ninth Circuit’s now-affirmed Salman opinion while
sitting by designation on the Ninth Circuit.
Following the Supreme Court’s anti-insider-trading Salman ruling, Judge Rakoff is
now calling for a more straightforward insider trading statute to replace the existing
framework, which consists largely of judge-made rules. Speaking at the Securities
Litigation & Enforcement Institute at the New York City Bar on March 1, 2017, Judge
Rakoff called for Congressional action to simplify and expand the definition of
insider trading by adopting an approach similar to that taken by the European
Union. Judge Rakoff noted that the EU’s Market Abuse Regulation (MAR) bars in-
sider dealing through a prohibition on the unlawful disclosure of inside
information. The MAR’s basic goal is to promote and maintain fair markets by making
it unlawful to disclose inside information that may have a significant effect on the
price of a financial instrument. Judge Rakoff praised the MAR for its flexibility, not-
ing that “[b]ecause the EU approach focuses not on fraud but on equality of access,
it has virtually none of the difficulties that plague US law.” Specifically, Judge
Rakoff noted that the MAR allows for punishment of individuals who “ought” to
know that their trading is wrongful. Time will tell whether Judge Rakoff’s call for a
statutory solution to the shifting landscape of insider trading liability will resonate
with Congress.
EyeBy Alla Zayenchik
on the Issues
Judge Rakoff calls for insider trading overhaul
Former MF Global CEO Jon Corzine
Summer 2017 The Advocate for Institutional Investors 15
FOR INSTITUTIONAL INVESTORS
Supreme Court to rule on statutes ofrepose in securities action
How quickly must class action
plaintiffs act in order to preserve
individual claims?
The Supreme Court is set to rule on a
case that has significant implications for
investors considering pursuing individual
actions under the securities laws.
On April 17, 2017, the Supreme Court
heard oral argument in the case of
California Public Employees’ Retirement
System v. ANZ Securities Inc. The case
relates to whether and how quickly individ-
ual investors must act to preserve individ-
ual claims when their claims are already
asserted as part of a pending securities
class action.
In ANZ Securities, the Second Circuit
ruled that the filing of a securities class
action lawsuit under the Securities Act of
1933 does not toll or otherwise satisfy the
“statute of repose” (a time limitation) for
individual claims asserted separately, after
the filing of the class action. This means
that if an investor who is an unnamed
plaintiff in a Securities Act class action is
considering pursuing its claims separately,
the investor must act to preserve those
claims (for instance, by filing a separate
individual suit) even while the class action
asserting its claims in the aggregate is
pending. This holding is notable because,
depending on the particular case, investors
may be forced to file such additional pro-
tective lawsuits even before the class action
case reaches any significant milestones.
Other courts disagree with this reading of
the Securities Act and the relevant proce-
dural rules. The Tenth Circuit, for instance,
holds that the filing of the class action
effectively preserves the individual suits
while the class action is pending, so there
is no need for investors to file individual
suits so early. The Tenth Circuit and other
courts take this view based in large part
on the Supreme Court’s 1974 American
Pipe ruling, which held that the statute of
limitations is tolled for individual plain-
tiffs during the pendency of such a class
action. In late May 2017, the Ninth Circuit
also reaffirmed American Pipe tolling,
holding that it tolls the Securities Exchange
Act statute of limitations to permit suc-
cessive class action filings.
The ANZ Securities case has garnered
significant interest in the legal commu-
nity. Assisted by BLB&G, seventy-five
prominent institutional investors with
over $4 trillion under management filed
an amicus brief in the matter. The amicus
brief highlights not only the harmful bur-
dens that the Second Circuit’s holding
imposes on investors, but also how it im-
poses unnecessary litigation costs on
both plaintiffs and defendants.
A separate amicus brief filed by retired
federal judges similarly notes how the
Second Circuit’s holding results in the
filing of protective lawsuits to preserve
investors’ rights and fails to guard
against the possibility that class certifica-
tion will be unreasonably denied under
the Second Circuit’s ruling due to expira-
tion of the statute of repose. Indeed, pro-
tective suits are on the rise. In the
Petrobras securities litigation, for in-
stance, nearly 500 individual plaintiffs
opted out of the class case and are sched-
uled to have their damages claims heard
individually. Yet another amicus brief in
the ANZ Securities case — by ten securi-
ties law professors at schools including
Stanford, Cornell, Duke, and the Univer-
sity of Virginia — concludes that against
such costly protective suits, the Second
Circuit’s ruling does “not yield any coun-
tervailing benefit.”
The Supreme Court heard argument on
April 17 and a decision is expected by the
end of the term.
Alla Zayenchik is an Associate in BLB&G’s New York office. She can be reached at [email protected].
While the dispute concerning who wouldoccupy the vacant seat
has come to a close,many questions remainconcerning the impact
of Justice Gorsuch’sconfirmation on the
nation’s securities laws.
A fter a hotly contested, year-long
battle for Justice Scalia’s seat,
Neil Gorsuch has been sworn in
as the 113th Supreme Court Justice over
Democrats’ filibuster. While the dispute
concerning who would occupy the vacant
seat has come to a close, many questions
remain concerning the impact of Justice
Gorsuch’s confirmation on the nation’s
securities laws.
Early in his career, Gorsuch was critical of
securities enforcement actions. Advocat-
ing for more limited damages in securities
fraud class actions, Gorsuch authored an
amicus brief on behalf of the United
States Chamber of Commerce in the 2005
Dura Pharmaceuticals v. Broudo case.
Also in 2005, he co-wrote a decidedly
anti-enforcement article in his personal
capacity for The Legal Times, stating:
“The problem is that securities fraud liti-
gation imposes an enormous toll on the
economy, affecting virtually every public
corporation in America at one time or an-
other and costing businesses billions of
dollars in settlements every year.”
As a judge on the Tenth Circuit Court of
Appeals starting in 2006, Gorsuch rarely
had the opportunity to rule on class ac-
tion securities cases. One of his notable
securities laws decisions was MHC Mutual
Conversion v. Sandler O’Neill & Partners,
in which Gorsuch, writing for the court,
addressed Section 11 liability for issuers
making false or misleading statements.
In that case, the court declined to impose
Section 11 liability against officers of Ban-
corp predicated on their 2009 statements
concerning mortgage-backed securities
in the bank’s portfolio in connection with
a secondary stock offering to raise $90 mil-
lion. Bancorp announced that it expected
the market for its securities to rebound
soon. However, fifteen months after the
offering, the company had to recognize
$69 million in losses. In rejecting plaintiffs’
claims, Judge Gorsuch largely focused
on a limited view of liability that would
make damages available only “when the
speaker doesn’t sincerely hold the opin-
ion he expresses at the time he expresses
it.” He explained that “[i]n 2008, no doubt
FOR INSTITUTIONAL INVESTORS
16 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
orFriendFoe?
Supreme Court Justice Neil Gorsuch and securities litigation
By Alla Zayenchik
An early test for Justice Gorsuch will be
the ANZ Securities case discussed in this
issue of The Advocate (see page 15), which
involves the textual interpretation of the
Securities Act’s statute of repose. The
Supreme Court heard argument in ANZ
Securities on April 17, Justice Gorsuch’s
first day on the Court’s bench. Justice
Gorsuch appeared inclined to side with
the defendants’ position in the case and
to hold that even when the claims of an
aggrieved investor are already being
prosecuted by a class representative in a
pending class action, investors must take
action to preserve their individual claims
if they might want to pursue them out-
side of the class action context. Echoing
the judicial reasoning of the late Justice
Scalia, Justice Gorsuch noted that he
does not “like the policy consequences”
of such a holding, but that it might be re-
quired under the relevant statute’s “plain
language.”
Alla Zayenchik is an Associate in BLB&G’s
New York office. She can be reached at
An early test for JusticeGorsuch will be the ANZ Securities case discussed in this issue of The Advocate.
FOR INSTITUTIONAL INVESTORS
Summer 2017 The Advocate for Institutional Investors 17
there were those who genuinely thought
the market for mortgage-backed securi-
ties would soon rebound. Events have
disproved…these opinions, but that hardly
means the opinions were anything other
than honestly offered—true opinions at
the time made.”
However, Judge Gorsuch’s ruling was
not so constrained as to limit liability to
opinions that are not sincerely held.
Judge Gorsuch wrote that liability may lie
for opinions that are given without a rea-
sonable basis — i.e., not just opinions
that the speaker does not believe — but
that the plaintiffs in the MHC Mutual
Conversion case had not alleged enough
to win under that theory either. Judge
Gorsuch also supported investors’ rights
by adding that securities issuers cannot
insulate themselves from liability by
adding “we believe” or “it is our opinion”
before statements of fact, as “issuers can-
not avoid liability by liberally sprinkling
prefatory labels throughout a prospectus
or simply tacking them onto everything
they say.” One year later, in the 2015
Omnicare decision, the Supreme Court
endorsed the broader scope of liability
and agreed that not all statements pre-
ceded by prefatory labels like “we believe”
are “opinions.”
While Justice Gorsuch has expressed
skepticism about private enforcement of
the securities laws in the past, it is not
entirely clear how he will approach secu-
rities matters on the high court. During
his Senate confirmation hearings, he
vowed that personal views and policy
preferences would not impact his deci-
sions, as his primary goal would be to re-
main faithful to the text of the law. As he
told Congress, a judge “who likes every
outcome he reaches is very likely a bad
judge.”
Justice Neil Gorsuch
FOR INSTITUTIONAL INVESTORS
18 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
As one of its first actsthis year, the House
passed a bill that deliberately attempts to
curtail class action litigation through the
imposition of significantnew restrictions.
A s recognized by the Supreme
Court, class action lawsuits play
an invaluable role in protecting
investors, consumers, and employees by
“overcom[ing] the problem that small re-
coveries do not provide the incentive for
any individual to bring a solo action pros-
ecuting his or her rights.” Amgen Inc. v.
Conn. Ret. Plans & Tr. Funds, 133 S. Ct.
1184, 1202 (2013). Yet even after the waves
of populist outcry that dominated the
2016 election, the newly-elected majority
in the US House of Representatives passed
as one of its first acts this year a bill strik-
ing at the heart of people’s rights to class
action litigation. The bill — the so-called
“Fairness in Class Action Litigation Act of
2017” (H.R. 985) — seeks to frustrate
class actions brought by consumers, em-
ployees, and investors while tipping the
scales in favor of corporate defendants.
A remarkable coalition of consumer
rights groups, civil rights advocates, and
members of the legal community have
united in opposition to H.R. 985. Nonethe-
less, the House majority passed H.R. 985
without permitting even a single hearing
on its merits, and this dangerous and
much-criticized legislation now resides
with the Senate.
H.R. 985’s radical effects on investor rights
Close examination of H.R. 985 reveals
that, far from promoting “fairness,” the
bill relies on creative methods to delay,
and ultimately dismantle, class action
lawsuits.
For example, courts currently permit law-
suits to proceed as class actions only
if (among other requirements) the pro-
Raise the BarClass on
ActionsBy Jesse Jensen
House of Representatives movesquickly to curtail victims’ rights
First on the House agenda:
H.R. 985, the so-called“Fairness in Class Action
Litigation Act of 2017,”seeks to frustrate class
actions brought by consumers, employees,
and investors while tippingthe scales in favor of well-heeled defendants. Close
examination of the bill reveals that, far from
promoting “fairness,” thebill relies on creative
methods to delay, and ultimately dismantle,class action lawsuits.
posed class representative shows that its
claims, including its injury, are “typical”
of the class’s claims. H.R. 985, however,
would prohibit class actions unless the
plaintiff demonstrates that each pro-
posed class member suffered “the same
type and scope of injury.” In many types
of class actions, this provision could rad-
ically pare down what a “class” could be,
because the same wrongdoing may injure
large groups of consumers or workers to
different degrees. For instance, the same
dangerous prescription medication may
manifest side effects that differ in scope.
While one patient may suffer a lethal heart
attack, another may suffer a debilitating
stroke. This provision of H.R. 985, how-
ever, could be interpreted to rob from the
victims of that defect their ability to band
together against the pharmaceutical com-
pany, even though all suffered from the
same faulty medication.
Moreover, H.R. 985 does not explain how
precisely a class representative could
demonstrate that all of the class mem-
bers suffered “the same type and scope
of injury.” Ultimately, courts could spend
years of litigation attempting to settle on
an accepted meaning of this restrictive re-
quirement — preventing adjudication of
the merits, and any relief to pending
classes, in the meantime.
Other provisions of the bill also transpar-
ently seek to manufacture delay. For in-
stance, while appellate courts currently
have discretion as to when they will hear
appeals of class certification decisions,
H.R. 985 would require appellate courts
to hear all appeals of class certification
decisions, no matter how frivolous. This
element of H.R. 985 caught experienced
legal scholars and practitioners by surprise,
as little-to-no commentary had suggested
that appellate courts have failed to over-
see appropriately district court rulings on
class certification. By unnecessarily bur-
dening appellate courts, this provision
of H.R. 985 would add further time and
expense to the class certification process.
Despite near-universal criticism, the bill advances to the Senate
Other than the US Chamber of Commerce
— the highest-spending lobbying group
in the United States — H.R. 985 has re-
ceived no notable endorsement. Instead,
the bill has faced widespread denuncia-
tion, including by dozens of consumer,
labor, environmental, disability, investor
and civil rights advocacy groups, all of
whom expressed concern with how the
bill would stymie the enforcement of indi-
vidual legal rights. This disparate alliance
includes such prominent organizations as
the AFL-CIO, National Disability Rights Net-
work, and Southern Poverty Law Center.
Even beyond this pervasive concern over
the bill’s impact, several legal commen-
tators have criticized the bill for funda-
mentally disregarding Congress’s own
acknowledgment that federal courts them-
selves are best positioned to make rules
governing their procedures. For example,
on March 8, 2017, the American Bar
Association — a prominent nonpartisan
professional association of legal profes-
sionals — noted in a public letter to mem-
bers of the House that H.R. 985 would
interfere with the efforts to improve class
action procedures already in progress by
the policy-making body for the federal
courts, the Judicial Conference of the
FOR INSTITUTIONAL INVESTORS
20 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
FOR INSTITUTIONAL INVESTORS
Summer 2017 The Advocate for Institutional Investors 21
United States, all while wasting judicial
resources and unnecessarily delaying
and denying claims.
Fortunately for institutional investors, public
outcry forced the elimination of one of the
bill’s most onerous (and arguably uncon-
stitutional) provisions. The bill’s sponsor,
House Judiciary Committee Chairman Bob
Goodlatte (R-VA), voluntarily removed
from the legislation a provision that
would have forbidden any class repre-
sentative from being represented by any
counsel who had previously served as
counsel for the class representative in a
different class action.
Nonetheless, even this pared-back ver-
sion of the bill could not garner a single
Democratic vote in the House, and even
failed to capture over a dozen Republican
votes. Ultimately, however, the substan-
tial GOP House majority advanced the bill
to the Senate in March 2017, where it has
since been referred to the Senate Com-
mittee on the Judiciary.
Since that time, the Senate has appar-
ently shown no urgency with respect to
the legislation, leaving unclear H.R. 985’s
fate. Last year, the Senate Judiciary Com-
mittee refrained from acting on similar
anti-class action legislation, also intro-
duced by Rep. Goodlatte. Many commen-
tators believe that, even if H.R. 985 moves
forward to the Senate floor, it will face
greater scrutiny — and likely revision —
than it did in the House. Ultimately, per-
haps the biggest wildcard facing H.R. 985
is whether the new President will attempt
to play any role in its future, and what
that role would be.
Conclusion
H.R. 985 threatens to erect unnecessary,
costly, and time-consuming barriers to
class actions nationwide, and the House of
Representatives disappointed the country
in making its passage one of its first
priorities this year. With the bill now in the
Senate’s control, legal experts, advocacy
groups, institutional investors, and others
should remain vigilant regarding this anti-
investor and anti-consumer legislation.
Jesse Jensen is an Associate in BLB&G’s
New York office. He can be reached at
Other than the US Chamberof Commerce—the high-est-spending lobbyinggroup in the UnitedStates—H.R. 985 has received no notable endorsement. Instead, thebill has faced widespreaddenunciation, including by dozens of consumer,labor, environmental, disability, investor andcivil rights advocacygroups.
QuotableH.R. 985 is a “thinly veiled attempt to skew the
current standards decisively in favor of corporate
defendants.”
Rep. John Conyers (D-MI) asserting that the Fairness in Class Action
Litigation Act of 2017 is the wrong way to improve the justice process.
22
23
R ecent developments in the international enforcement of investors’ rights
are drawing attention back to the burgeoning field of securities litigation
outside the United States, particularly in Europe.
By way of background, securities litigation in Europe is largely adjudicated on a
national basis, grounded in part in the substantive law of the European Union.
Under European Union law, an issuer must publish and distribute a prospectus
before the issuer lists or makes an offer of securities. Under Article 6(1) of the
Prospectus Directive 2003/71 of the European Parliament and of the European
Council, liability for misstatements in a prospectus will attach at a minimum to
the “issuer or its administrative, management or supervisory bodies, the offeror,
the person asking for the admission to trading on a regulated market or the guarantor,
as the case may be.” Those responsible for the content of a prospectus must include
in the prospectus “declarations by them that, to the best of their knowledge, the
information contained in the prospectus is in accordance with the facts and that
the prospectus makes no omission likely to affect its import.” Article 6(2) of the
same directive imposes an obligation on the member states of the European
Union to ensure that their laws, regulations and administrative provisions on
prospectus liability apply to those persons responsible for the information provided
in a prospectus.
ProspectusLiability in
EuropeWithin the EU, the burden of
proof for misleading statementsvaries significantly
INTERNATIONAL FOCUS
By Tomas Arons
Each EU member statehas the ability to enactlaws imposing liability
in the way it sees fit, provided that such laws
maintain the effectivenessof European Union law.
This has led to the creationof various national laws
regarding prospectus liability throughout theEuropean Union. While
the laws are largely similar, they also vary in
significant ways.
Each EU member state, however, has the
ability to enact laws imposing liability in
the way it sees fit, provided that such
laws maintain the effectiveness of the
aforementioned provisions of European
Union law. This has led to the creation of
various national laws regarding prospec-
tus liability throughout the European
Union. While the laws are largely similar,
they also vary in significant ways. For ex-
ample, the United Kingdom’s Financial
Services and Markets Act of 2000 estab-
lishes liability for misrepresentations
made by securities issuers. In order to re-
cover under the statute, investors must
prove that they relied on the alleged mis-
representations in purchasing their shares.
By contrast, under Dutch law the situa-
tion is just the opposite, with a far more
permissive standard for showing an in-
vestor’s reliance. Under Dutch law, in-
vestors can bring claims alleging
misleading statements in a prospectus
under the Unfair Commercial Practices
Act of 2008. Applying a doctrine reminis-
cent of the US-style “fraud-on-the-
market” presumption of reliance, the
Dutch Supreme Court has held that in
many cases the burden of proof is on the
securities issuer and the lead managers
(i.e., the defendants) to prove that the
misleading statements were not in any
way connected to the investors’ decision
to purchase the shares. The Dutch Supreme
Court noted that defendants may be able
to make this showing where, for instance,
the shares were purchased prior to dis-
semination of the prospectus. Moreover,
the burden of proof is also on the issuers
to prove the completeness and correct-
ness of the prospectus. The burdens were
shifted to issuers and managers with
respect to non-institutional investors
because, as noted by the Dutch Supreme
Court, a misleading prospectus can reason-
ably affect the economic behavior of an
average investor who lacks knowledge and
experience. Because of their knowledge
and experience, however, institutional or
professional investor plaintiffs still bear
the burden of proving reliance and the
fact that the alleged statements were mis-
representations.
While UK law may be stricter than in some
neighboring countries in this respect, in-
vestors have still been able to recover
some significant losses in UK courts. As
noted in prior editions of The Advocate,
a large securities class action against the
Royal Bank of Scotland (“RBS”) has been
pending in UK courts since 2009. Investors
seeking over $5 billion in damages related
to misstatements that RBS made in a
stock offering at the height of the 2008
financial crisis recently settled the action
for approximately £800 million (approxi-
mately $1 billion). This significant settle-
ment in the relatively nascent field of UK
securities litigation is a welcome sign that
while foreign securities litigation often
comes with numerous inherent risks, av-
enues for meaningful vindication of in-
vestors’ rights are taking shape.
Nearby Denmark is also home to an in-
creasing number of shareholder suits. In
the spring of 2016, twenty-five institutional
investors, including Denmark’s largest
pension fund, filed a legal action against
OW Bunker, a now-defunct marine fuel
trader, in the City Court of Copenhagen.
The suit claims that misstatements in OW
Bunker’s prospectus in connection with
its 2014 IPO led to investor losses of
FOR INSTITUTIONAL INVESTORS
24 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
FOR INSTITUTIONAL INVESTORS
Summer 2017 The Advocate for Institutional Investors 25
approximately $103 million (800 million
Danish crowns). The institutional investor
plaintiffs claim that the OW Bunker IPO
prospectus omitted material information
concerning oil-price speculation and trad-
ing with one very large customer — the
Singapore company Dynamic Oil Trading.
Indeed, a report drafted by administrators
of OW Bunker’s bankruptcy estate alleged
that a draft OW Bunker prospectus con-
tained detailed information on both the
oil-price speculation and the relationship
with Dynamic Oil Trading, but that this in-
formation was subsequently removed
from the final prospectus.
OW Bunker, like other securities cases,
was brought under the Danish Class
Action Act, which became effective in
January 2008 and provides for both opt-
in and opt-out transactions. Danish laws
pertaining to prospectus liability include
but are not limited to: 1) the Danish Secu-
rities Trading Act; 2) the Danish Financial
Businesses Act; 3) the Rules Governing
Securities Listing on the Nasdaq OMX
Copenhagen; 4) and other various deriv-
ative regulations and executive orders.
The Danish Supreme Court ruled in 2002
in the important Hafnia case that liability
for misleading prospectuses follows the
general principles of Danish tort law. As
a consequence, investors in such cases
do not enjoy the Dutch-style burden shift-
ing discussed above.
The recent RBS settlement and the filing
of the OW Bunker case illustrate the de-
velopment of viable avenues for recovery
in securities litigation venues outside the
US. As investors work to evaluate the
costs and benefits to participating in such
actions, it is important that they consider
the similarities and differences in
prospectus liability laws of the European
Union member states, including signifi-
cant differences regarding the applicable
burdens of proof. These shifting burdens
are sure to continue to have a significant
effect on the outcome of foreign securi-
ties litigation.
Tomas Arons is an expert in European
securities law, a senior legal advisor at
Dutch shareholder association VEB, and a
Professor of Law at Utrecht University in
the Netherlands. His fields of expertise
include securities liability law and class
actions. Professor Arons obtained bachelor’s
degrees in Economics and Law at Maastricht
University, two master’s degrees in Com-
pany Law and in Financial Law at Erasmus
University Rotterdam, and a master’s degree
in Economics at the University of Amsterdam.
He can be reached at [email protected] or
In the UK, securities issuers can be liable formisrepresentations, butinvestors must prove thatthey relied on the allegedmisrepresentations inpurchasing their shares.By contrast, Dutch law isjust the opposite. There,the burden of proof is on the issuers to provethe completeness andcorrectness of theprospectus.
Jonathan Feigelsonjoins BLB&G as
Director of CorporateGovernance.
FOR INSTITUTIONAL INVESTORS
26 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
F ormer TIAA General Counsel
Jonathan Feigelson has joined
the firm as Director of Corporate
Governance.
Bringing nearly a quarter century of legal,
financial, and corporate leadership expe-
rience to BLB&G, Jon works with and
guides the firm's institutional investor
clients in significant efforts to address is-
sues of governance and management
practices, board independence, manage-
ment accountability, executive compen-
sation, and the protection of the US
shareholder franchise.
Prior to serving as TIAA’s General Coun-
sel, Director of Corporate Governance,
head of Regulatory Affairs and Senior
Managing Director, he was the Managing
Director and General Counsel for ABN
AMRO's North American Investment Bank,
and a Vice President and Global Director
of Equity Derivatives Compliance for
Goldman Sachs. Jon began his career as
an Assistant District Attorney in the Man-
hattan District Attorney's office in the
Financial Frauds Bureau specializing in
securities and bank fraud cases.
As Jon has explained, his significant
experience has impressed upon him the
importance of protecting shareholder
rights through corporate governance
reform: "Good corporate governance is
critical to minimizing misconduct and in-
creasing transparency. I am gratified to
continue to be able to help the institu-
tional investor community use its voice
to encourage strong governance prac-
tices and deter destructive behavior in
our capital markets."
BLB&G is excited to have Jon on board.
His wealth of knowledge and experience
will be a great advantage to all of our
clients.
Jon can be reached at
ShareholdertheProtecting
Franchise
Committed to
FOR INSTITUTIONAL INVESTORS
Summer 2017 The Advocate for Institutional Investors 27
On the new administration Jon shared his thoughts that we should “expect a more busi-
ness-friendly Administration on jobs and deregulation, with
less focus on protection of investor rights and more protection
of the prerogatives of boards and management.” Jon also ex-
plained that we are likely to see “slower implementation and
perhaps reversal of the remaining Dodd-Frank rules on envi-
ronmental, social and governance matters.”
On dual-class stock structuresJon also discussed the hot topic of dual-class stock structures,
which is the subject of an article in this issue of The Advocate.
Jon called such inferior share issuances “blatantly manage-
ment-protective,” noting that “they discourage good corporate
governance while undermining voting and other key owner-
ship rights. Unfortunately as long as companies like Snap are
going to make money in their IPOs, people are going to buy
them. But some day, we are going to see another WorldCom-
type situation with the dual-class share-owned company. When
that happens, the investor community will hopefully prevail in
their efforts to prevent this from continuing to occur. I think
there is likely nothing more anti-ownership.”
BLB&G hosts the Real-Time Speaker Series — webcasts featuring candid conversations with academics, policy makers, commentators
and other experts about the financial markets and topics of importance to the institutional investor community. At the forefront
of the corporate governance issues most critical to preserving investor rights, Jon shared his views on emerging trends and the
current corporate governance landscape in a recent installment of the Speaker Series.
Jonathan Feigelson explores issues facing shareholders atBLB&G’s Real-Time Speaker Series
Subscribe to BLB&G’s ongoing Real-Time Speaker Series: www.blbglaw.com/realtime
On diversity in the boardroomTouching on diversity in the boardroom, Jon shared his opinion
that while there has been some progress, companies should
strive to do more. “In terms of what boards should and could
be doing…there needs to be a continued focus and effort to put
qualified women and not just women but minorities of all kinds
also on boards, not solely for the purpose of, but partly for the
purpose of, promoting social justice. Further, assuming candi-
dates have the right skill set for a given board position, the
more diversity of professional and personal experience a board
possesses, the more successful and effective the board is going
to be. It’s no different than the team of rivals that Lincoln had
established for his cabinet when he assumed the presidency
way back when. Different points of view and debates produce
better outcomes.”
On proxy access adoptionJon stated that “large companies will continue to make conces-
sions and allow for increased proxy access.” This is because
“throughout 2015-2016, so many major corporations in the S&P
500 have increased the number of proxy proposals allowed that
I think it makes it harder and harder for any large corporation
to hold out.…this trend is directly related to the coordinated ef-
forts of the institutional investor community.”
www.blbglaw.com/realtime
FOR INSTITUTIONAL INVESTORS
28 Bernstein Litowitz Berger & Grossmann LLP www.blbglaw.com
800-380-8496
E-mail: [email protected]
Editors: Brandon Marsh and Julia TeborEditorial Director: Alexander Coxe“Eye” Editor: Alla ZayenchikContributors: Tomas Arons, Jesse Jensen,David Kaplan, Brandon Marsh, David Wales,and Alla Zayenchik
The Advocate for Institutional Investors ispublished by Bernstein Litowitz Berger &Grossmann LLP (“BLB&G”), 1251 Avenueof the Americas, New York, NY 10020, 212-554-1400 or 800-380-8496. BLB&Gprosecutes class and private securities andcorporate governance actions nationwideon behalf of institutions and individuals.Founded in 1983, the firm’s practice alsoconcentrates in general commercial litigation, alternative dispute resolution,distressed debt and bankruptcy creditorrepresentation, civil rights and employ-ment discrimination, consumer protection,and antitrust actions.
The materials in The Advocate have been preparedfor informational purposes only and are not intendedto be, and should not be taken as, legal advice.The thoughts expressed are those of the authors.
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tive Director Jon Lukomnik summarized,
multi-class companies are “built for com-
fort, not performance.” Earlier this year,
Harvard Law School Professor Lucian
Bebchuk also published an analysis of
dual-class structures, finding that they
result in “perverse incentives” and that
“the potential advantages of dual-class
structures (such as those resulting from
founders’ superior leadership skills) tend
to recede, and the potential costs tend to
rise, as time passes from the IPO.” Based
on his findings, Professor Bebchuk con-
cludes that “the debate should focus on
the permissibility of finite-term dual-class
structures — that is, structures that sunset
after a fixed period of time (such as ten
or fifteen years).”
The typical retort from proponents of
dual-class structures is that depriving most
investors of equal voting rights allows
managers the leeway to make forward-
thinking decisions that cause short-term
pain for overall long-term gain. This
assertion, however, ignores that many
investors — and in particular public pen-
sion funds and other long-term institu-
tional investors — are themselves focused
on long-term gains. If managers have
good ideas for long-term investments,
such prominent investors will likely sup-
port them. Moreover, any argument that
managers should be blindly trusted to
make decisions for long-term gain must
take into account the significant waves of
managerial scandals and securities fraud
in recent decades. Such conduct has re-
sulted in record fines, countless viola-
tions of the securities laws, reduced
shareholder returns, and the imposition
of significant externalities on the court
system and regulators.
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Institutional investors can help curbdual-class shares
As the trend of issuing dual-class or
multi-class stock continues, institutional
investors should remain vigilant to pro-
tect shareholders’ voting rights. Pre-IPO
investors can oppose the issuance of
non-voting shares during IPOs. Investors
in publicly traded companies can speak
out against proposed changes to share
structures or resort to litigation when
necessary, such as in the Google, Face-
book, and IAC cases.
Institutional investors may also lobby
Congress, regulators, and the national
exchanges to ban non-voting shares or
make it harder to issue no-vote shares.
For instance, in the wake of the Snap IPO,
CII Executive Director Ken Bertsch and
other investors met with the SEC Investor
Advisory Committee. They encouraged
the SEC to work with US-based exchanges
to (1) bar future no-vote share classes; (2)
require sunset provisions for differential
common stock voting rights; and (3) con-
sider enhanced board requirements for
dual-class companies in order to discour-
age rubber-stamp boards. Whether by
working with regulators, securities ex-
changes, index providers, or corporate
boards, institutional investors that con-
tinue to fight for shareholder voting rights
will be working to promote open and re-
sponsive capital markets, and the long-
term value creation that comes with them.
Brandon Marsh is Senior Counsel in the
firm’s California office. He can be reached
One Share, No VoteContinued from page 7