Current Events and Commentary

We explain high-frequency trading that likely caused the crash, and the additional regulatory changes that will be seriously considered.

Nevada is running another series of advertisements which attempt to woo California’s businesses to their state. Advertisements released this last week mock California legislators.

This is not a predetermined result based on uncontrollable factors, but is instead caused by leadership and policy issues that are avoidable.

The case has national significance since it prohibits revenue sharing or “taxes” in numerous states that now benefit from Indian gaming.

Last week the Congressional Budget Office issued “updated and expanded” cost estimates that show their prior estimates were entirely incomplete and misleading.

Dubai announced that it would seek a six-month postponement of debt repayments. This situation provides insights regarding Islamic finance with which most in the West are unfamiliar.

This is the first time since the current 1974 rules were created that the House will fail to pass a budget. We explain legal requirements, and why this is happening.

18 USC 1346 prohibits "a scheme or artifice to deprive another of the intangible right of honest services". It has become a broad tool used to prosecute politicians and executives whose conduct did not involve bribes, theft, or other direct financial gain.

Moody’s warned that it might pull the federal government’s triple-A credit rating if President Obama’s recently-released budget is implemented. Last week, Fed Chairman Ben Bernanke gave similar serious warnings about the same budget.

Last week, the Department of Labor proposed requiring investment advisers to (i) disclose their fees and (ii) show that the computer models used to offer advice are objective and unbiased. The new rules will alter the investments commonly held in 401(k) and IRA accounts.

The Obama administration’s financial regulation proposals are significant, although they have been overshadowed by the health care debate. The financial industry proposals will now receive much greater attention, but these “reforms” may also be in doubt.

Without any Congressional approval, the IRS quietly eased net operating loss (NOL) rules for companies that sold stock to the federal government under the TARP program. The new tax rule provides still further subsidies to non-government shareholders, while paying for the increased value entirely with foregone taxes that apply to other corporations.

This month, a settlement occurred which (i) demonstrates that these cases have meaningful value and (ii) will likely provide a model for others. We review the settlement, and the primary employer-friendly case that encourages employers not to settle at all.

We provide a summary of what it contains without the political sound bites that you have already hear (and hopefully dismissed).

Since a 1982 industry-favorable ruling, there has not been a single successful lawsuit against a mutual fund over management fees. The U.S. Supreme Court now is considering this issue. Mutual fund management fees may need to be reworked, or at least rigorously justified through analysis based on the costs of servicing the different classes of investors.

Ironically, sharply increased oil prices could make the U.S. less foreign-oil dependant.

We present graphs and related commentary using the best real estate price index that is available.

The newest phase of “sick house” litigation appears to be here. Drywall imported from China is releasing sulfur compounds that cause corrosion and health hazards.

The very specific recommendations largely affect discovery. These proposals would change the economics of litigation, both for the clients and the litigators serving those clients.

Mary Shapiro is now the first permanent female SEC chairperson. She is almost certain to change numerous positions taken by her predecessor.

The GAO just issued a report that will likely to assist the Obama administration’s changes to the U.S. financial regulatory system. We summarize the GAO’s description of the regulatory problem, and their ideas of what to do about these problems. Although the report is correct on many fronts, the good ideas are lost in other Pollyannaish, obvious, and banal thoughts that are not worth the ink spilled.

Volcker is out-of-line with current government actions which are increasing the money supply dramatically. However, in the long-term, Volcker may be exactly the advisor Obama needs the most.

Because of falling stock market values, lower investment (interest) returns, and changes in pension funding from a 2006 law, most employers with these plans will need to make significant additional contributions.

The rules (i) require additional disclosures regarding costs charged to participants, and (ii) make it easier for plan sponsors to qualify for protection from litigation. Given the shameful undisclosed marketing practices currently at many 401(k) plans, the additional disclosure will likely cause plan sponsors to finally pay much-needed attention to this area.

The SEC signaled its desire to ease trading restrictions of foreign securities on foreign exchanges through “mutual recognition” by each country’s regulatory system. This is part of a larger effort towards an international securities market supported by international accounting standards.

The recently-released “Citizen’s Guide to the 2007 Financial Report of the United States Government” and related press release self-describe our situation as a “fiscal train wreck” and a “fiscal tsunami of spending and debt that threatens to swamp our ship of state”. We congratulate the GAO and Comptroller General on their fine report. Now, someone needs to read it.

The U.S. Government Accountability Office issued a new report on the state of accounting competition. In the large firm segment, everyone acknowledges that insufficient competitive alternatives exist. Although improvements are challenging, the GAO again missed an opportunity to address mandatory auditor rotation as a needed reform to our capital markets.

Small company capital formation just got easier and less expensive. The SEC loosened Rule 144 holding periods and related disclosures. In addition, approximately 1500 additional public companies (those with less than $75 million of public equity float) now qualify for the SEC’s eased small company disclosures.

The non-partisan Tax Foundation released a study comparing each of the fifty states in terms of their tax friendliness. California was bad in earlier studies, and is now getting worse. We provide a summary, make comparisons to other states, and explain the impact that this has on California.

Private companies are not necessarily small. New stock trading opportunities will make staying private even easier. We review these new alternatives, their legal requirements, and why they will likely be successful.

Short selling is the practice of borrowing stock from a broker, then selling it in anticipation that the price will go down. Last week, the SEC changed rules affecting short selling, some of which had been in existence since the 1930s.

Many of the large accounting frauds in the last decade involve phony transactions with third parties. The third parties actively assist in documenting the fraudulent transaction and fooling the outside auditors. Under a 1994 precedent, the Third and Eighth Circuits ruled that these outside parties are immune from class action securities lawsuits, while the Ninth Circuit concluded the opposite. In late March, the Third Circuit derailed Enron’s $40 billion class-action suit, prompting the U.S. Supreme Court to immediately accept an Eighth Circuit case with identical issues. If it allows penalties to the aiders and abettors of fraudulent transactions, the Supreme Court will remove an important means used to defraud the investing public.