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Press Release: Investor Driven ESG Disclosures Webinar

Ethical Corporation Feeds -

The interest from the investment community in ESG disclosures is growing at a rapid pace, with no sign of slowing down. Its impact is felt across businesses. What do investors expect and how do all stakeholders push ESG disclosure forward?

To help you understand this shift, we’re running a one-hour debate with four senior executives sharing their insight on delivering ESG disclosures fit for investors. Join us on Wednesday, June 26th, at 9am PST [12pm EST] for our free online webinar with:

Image: Channels: Communications & ReportingTags: Responsible Business Summit WestESG disclosures

Are French football teams at risk under Sapin II?

The FCPA Blog -

Since enactment of the French anti-corruption law Sapin II, the Agence Française Anti-Corruption and other French prosecutors have begun to more actively pursue companies for anti-corruption offenses. Will they eventually take a deeper look into the operations of Ligue 1 and the football (soccer) clubs that are part of it?

How Do Monitors Work?

Corporate Compliance Insights -

Jay Rosen continues a weekly series on common questions about and issues with corporate monitorships. Here, he discusses the ins and outs of a monitor’s role. There are variety of tasks and roles a monitor takes on when engaging in an independent monitorship. A monitor should understand the types of approaches they will take to […] The post How Do Monitors Work? appeared first on Corporate Compliance Insights.

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With Redefined Risks, GCs Must Redefine Their Role

Corporate Compliance Insights -

New global research from Morrison & Foerster reveals that GCs want to be evaluated on how effectively they protect their companies from risk and reputational damage. As Paul Friedman explains, they’ll have plenty of opportunity to prove themselves.  As globalization and technological transformation march forward and reshape the business landscape, risks lurk in more places […] The post With Redefined Risks, GCs Must Redefine Their Role appeared first on Corporate Compliance Insights.

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Watching the River Flow: The Evolution and Future of Compliance (Part I of III)

Corruption, Crime & Compliance Blog -

People disagreeing on all just about everything, yeah
Makes you stop and all wonder why
Why only yesterday I saw somebody on the street
Who just couldn’t help but cry
Oh, this ol’ river keeps on rollin’, though
No matter what gets in the way and which way the wind does blow
And as long as it does I’ll just sit here
And watch the river flow

Bob Dylan, Watch the River FlowI have to admit it – I still love to listen to Bob Dylan.  With age, his lyrics resonate more and more.  HERE is a nice version of Watch the River Flow in case you want to listen while reading this posting. Dylan’s words are particularly apt as we watch the latest developments in compliance guidance. 

DOJ and OFAC issued new and important guidance.  As I sit here, watching the river flow, my perspective on the impact and importance of this guidance to the compliance professional compliance programs flows like the river.  Like much of life, there is good and bad.

Let’s take a step back.  In looking over corporate governance for the last thirty years, there is no question that ethics and compliance is one of the most significant — if not the most significant — change. Further, in looking to the future, ethics and compliance has the real potential to reduce corporate malfeasance. And that is a big point.

Over the last thirty years, our economy has suffered from serious corporate scandals, including the savings and loan crisis in the 1980s, the Internet meltdown in the 1990s, coupled with the financial reporting scandals of the early 2000s and enactment of Sarbanes-Oxley, and finally the financial meltdown in 2008. Ethics and compliance is at the point where it can make significant contributions to reducing corporate misconduct.

White collar criminal enforcement has expanded as well. Over the last thirty years, we have seen what was typically a civil enforcement matter transformed into criminal prosecutions. At the same time, we have witnessed a major change in the role and responsibilities of federal prosecutors who have outsourced criminal investigations to defense counsel investigations and embraced deferred prosecutions and regulatory-type settlements aimed at improving corporate compliance and governance controls.

From the government’s perspective, corporate compliance program were formally recognized when the United States Sentencing Commission adopted its Organizational Guidelines included a potential reduction in a company’s base offense level for an effective corporate compliance program.  The factors listed under Section 8C2.5 provided an important framework that helped companies to design and implement compliance programs, notwithstanding the fact that few companies (in the universe) actually fell under the scrutiny of the guidelines (i.e. because they were not prosecuted for cirminal offenses). Even more odd is the fact that few companies among the sentenced population ever earned the credit for having an effective compliance program.

Despite the lack of any direct application, the compliance profession and industry took to the guideline factors. Why? Because the guidelines provided the first real meaningful guidance on compliance programs. It made little sense for companies to invest in compliance programs, given the infancy of the industry, until government prosecutors acknowledged consideration of such programs in any criminal resolution. Notwithstanding their age, the sentencing guidelines provide a useful reference, and I would urge everyone to revisit the factors again and they will seem remarkably familiar. (Here)

Compliance guidance has a rich history. In the healthcare industry, the 1990s was a robust period for development of the compliance profession. HHS pushed for accountability of corporate boards and senior managers, and the separation of the compliance function from the legal department. Healthcare compliance guidance during the 1990s reflected the influence of the US Sentencing Guidelines with the establishment of seven mandated elements.

At the same time, DOJ continued to advance corporate compliance expectations and requirements with the release of formulaic Deputy Attorney General memoranda (e.g. Holder) on corporate charging policies, eventually resulting in the Filip Memo, and the un-named (Rosenstein) FCPA Corporate Enforcement Policy in 2017.

DOJ’s 2012 FCPA Guidance (with the SEC) was a watershed document — it was the first time that prosecutors explained DOJ’s prosecution strategy, corporate compliance expectations, and provided various hypothetical “safe harbors” for corporate actors who could apply the guidance to engage in conduct that might otherwise be questionable. To this day, the FCPA Guidance stands as the most important corporate compliance guidance for corporations.

Against this backdrop, DOJ and now OFAC have entered the arena again to detail how DOJ evaluates corporate compliance programs and how OFAC evaluates sanctions compliance programs for purposes of the enforcement of sanctions laws and regulations. The question then becomes what is the value of DOJ and OFAC guidance and how should companies approach review of their programs in light of this new information?

Let’s clear the field (as they say on Shark Tank) on this issue.

First, companies would be mistaken if they took the guidance and implemented their programs only in strict accordance to the guidelines.

Second, companies should use the guidelines to inform and learn from as they manage their own corporate compliance programs.

Third, DOJ and OFAC guidance provide important safe harbors for corporations — in other words, DOJ and OFAC guidance provides just what it says — “guidance.” Compliance practitioners can use this guidance to cull out safe harbors and apply them in their day-to-day work.

Fourth, corporate compliance officers have to think beyond DOJ and OFAC guidance and design their programs in reference to the state of the compliance industry, which is fast-moving and robust with innovation and technological capabilities. In other words, think beyond the guidance, think big, and set goals that reflect an industry that has eclipsed the requirements of the DOJ and OFAC guidance.

Compliance programs, like the profession, continue to evolve.  Indeed, it is clear that compliance programs with the advent of new thinking, innovative approaches, additional resources and technology are fast eclipsing the basic elements of compliance defined in the guidance.  

The post Watching the River Flow: The Evolution and Future of Compliance (Part I of III) appeared first on Corruption, Crime & Compliance.

NAVEX Global Publishes First Ever Definitive Ethics and Compliance Program Benchmark Report

Corporate Compliance Insights -

Findings show that strategic buy-in from executive leadership is the critical driver for program effectiveness Portland, OR (June 18, 2019) – Leading ethics and compliance software and services company NAVEX Global® today announced the release of its 2019 Definitive Corporate Compliance Benchmark Report. This document is the company’s first to consolidate findings about multiple E&C disciplines […] The post NAVEX Global Publishes First Ever Definitive Ethics and Compliance Program Benchmark Report appeared first on Corporate Compliance Insights.

(This is only a summary. Click on the headline to view the entire article at Corporate Compliance Insights and participate in the discussion.)

SIX Partners with SimCorp for Sanctioned Securities Monitoring Service

Corporate Compliance Insights -

Swiss financial data expert SIX has announced a partnership with SimCorp, centered on its Sanctioned Securities Monitoring Service, to give financial institutions greater global sanctions data coverage. In an increasingly complex geopolitical world, staying on top of the myriad of continually evolving sanctions has proved a challenge for  compliance officers globally.  The partnership between SIX and SimCorp, […] The post SIX Partners with SimCorp for Sanctioned Securities Monitoring Service appeared first on Corporate Compliance Insights.

(This is only a summary. Click on the headline to view the entire article at Corporate Compliance Insights and participate in the discussion.)

RIMS NeXt Gen Forum Offers Insights for Rising Risk Professionals

Risk Management Monitor -

“We’re becoming numb to the news,” said risk management veteran and author Joseph Mayo. “We’ve seen a 1,200% increase in daily record loss in the last five years. Globalization has created faster-moving and infinitely more complex risks and that’s what we have to adapt to.”

In his keynote, “Don’t Tell Me What I Know, Tell Me What I Don’t Know,” at last week’s RIMS NeXt Gen Forum 2019 for rising risk professionals, Mayo discussed environmental, social and governance (ESG) risk events and how they will continue to impact the risk management community, noting that a 1,000% increase in ESG events has occurred from 2010 to 2018 compared to each of the three prior decades. 

(Hear a preview from his RIMScast interview.)

Despite flaws in actuarial approaches and the challenges surrounding artificial intelligence such as bias and adversarial machine learning, Mayo said that the profession’s outlook is “not all doom and gloom.”

“The future of risk management is to make decisions with incomplete, inaccurate and obfuscated information,” he said. “We will have to embrace fuzzy logic because decisions need to be made quicker. We no longer have decades to develop actuarial models.”

Shortly afterward, Robin Joines of Sedgwick and Kristy Coleman of Turner Broadcasting System hosted risk management “Jeopardy!” While not quite as fast-paced nor as well-funded as the long-running game show, the hosts provided a forum for discussion and debate on explored topics from business travel etiquette and travel risk to communication and corporate politics. Discussing the images people project when they cross their arms, for example, while many agreed that it projects rigidity, one audience member cited a recent Wired video that reported it could also be considered a method of self-soothing rather than hostility or reservation.

Joines and Coleman were open-minded in their scoring and even led a quick tongue twister that kept the atmosphere light and fun. “Final Jeopardy” focused on public speaking, offering some practical speech delivery tips that would benefit any professional. For example, Joines said, “Talk from your knowledge base, and not from your note cards, and you’ll come across as confident.”

The forum closed with “You are Your Brand – How to Distinguish Yourself in Your Career,” presented by Kathleen Crowe, chair of the RIMS Rising Risk Professionals Advisory Group, and Steve Pottle, RIMS vice president.

Despite their differences in age and experience, the duo explained how their careers followed similar patterns. Neither presenter had begun on a risk management track, with Pottle starting out as a budding Canadian radio personality and Crowe initially expecting to work for an incumbent U.S. senator. Taking career risks brought them into risk management, and they shared lessons from their respective journeys that ultimately influenced them to be active leaders in their organizations and the industry at large.

One key tip of theirs was planning a personal goal that aligns with a long-term strategy of an organization, which can be an early indicator of a transition to a leadership role. From there, they said, you can build your personal brand regardless of your industry.

“Your personal brand lies somewhere in between how you see yourself and how others see you,” Pottle said. 

Click here for more NeXt Gen Forum coverage on the “Legal Checklist for AI Risk.”

Brian Beeghly on Conflicts of Interest [Podcast]

The Compliance & Ethics Blog -

By Adam Turteltaub adam.turteltaub@corporatecompliance.org Conflicts of interests have likely been around as long as there have been people.  When mankind learned to use fire, there was probably a guy who made blankets who criticized fire as too dangerous as a source of warmth, not realizing he was conflicted, or hoping others wouldn’t figure it out. […]

Walkbase Analytics Platform Provides Insights into In-store Shopper and Employee Behavior

Loss Prevention Media -

Retailers can gain a comprehensive understanding of shopper and employee behavior in their physical locations using Walkbase, STRATCACHE’s location-based marketing and analytics platform. The rich data provides insights that can be used for asset management, loss prevention, and to improve overall store performance. Loss Prevention The Walkbase platform uses in-store sensors to understand shopper behavior […]

Fraud, Trust at Risk in Emerging Fast-Payment Landscape

Loss Prevention Media -

The growing move to faster payment options for retailers may improve merchants’ cash flow, but increased transaction speed brings along with it the increased potential for fraud according to Chargebacks911, a leading dispute mitigation and loss prevention firm. In a recent survey of business owners by Aite Group, 80% of respondents indicated that they would […]

More Than 30 Arrested In Shoplifting Sting

Loss Prevention Media -

A coordinated law enforcement-retail focused effort to crack down on shoplifting in Lexington, Kentucky, has resulted in more than 30 arrests. A Lexington police spokesman hopes the high number of arrests will help deter theft. The three-day operation focused on retail businesses in the Hamburg shopping area and along Richmond Road. Lexington Police Sgt. Donnell […]

Police Seek IDs of These People from Crowd of Shoplifting Youth [Video]

Loss Prevention Media -

Police are asking for the public’s help in identifying several shoplifting suspects after they were caught on video camera rushing convenience stores in Alabama, overwhelming employees and fleeing with beer and snack food. At least three convenience stores — a Raceway on Troy Highway, a Chevron on West South Boulevard and a Raceway on Eastern […]

Blockchain and the New Regulatory Havens

Program on Compliance and Enforcement, New York University School of Law -

by Omri Marian

Over the past few years, small jurisdictions that are known as “tax havens” have been engaged in a race to become leading hubs for blockchain technology. In a recent article, I explore the extent of this phenomenon, its drivers, and its regulatory ramifications. In short, I argue that the traditional tax havens model is in decline due to recent coordinated international efforts to shut down abusive tax havens practices. Blockchain technology, however, offers similar commodities as offered by tax havens jurisdictions. Blockchain technology is not (yet) subject to coordinated international regulatory efforts. Tax havens seem to have identified the opportunity to offer their traditional regulatory commodities’ via the medium of the blockchain technology. I argue that the rise of so-called “Blockchain Havens” presents significant regulatory challenges that can only be addressed via coordinated global efforts.

The Decline of the Traditional Tax Havens Model and the Blockchain Alternative

There is no clear definition of what constitutes a “tax haven.” Generally speaking, however, jurisdictions that are traditionally referred to as “tax havens” possess the same key characteristics: very low (or no) taxes on foreign residents, and robust financial secrecy laws. Moreover, the regulatory environment is very lenient. Tax havens’ business model is essentially to sell access to these commodities in exchange for fees, such as incorporation fees.  The key draw of tax havens is that they enable taxpayers to avoid taxes and regulation in other jurisdictions.

In recent years, developed economies have instituted a multitude of laws, and engaged in multiple international initiatives, to undo the perceived damages caused by tax havens. For example, in 2010, the United States adopted the Foreign Accounts Tax Compliance Act (“FATCA”), forcing certain financial institutions to deliver information about their account holders to the IRS, or face debilitating financial consequences in the United Sates. The FATCA framework was adopted by the Organization of Economic Cooperation and Development (“OECD”) to develop the “Common Reporting Standards” (“CRS”), which include an international standard for automatic exchange of taxpayer information between governments. The European Union has also adopted several measures over the past few years to facilitate automatic exchange of taxpayer information between member states. These international and national actions undermine the main value the tax havens offer to tax evaders: no taxes and financial secrecy. 

It is meaningful that these anti-tax-haven actions are not targeting—at least not directly—tax evaders or avoiders themselves. Rather, these measures target intermediaries that are in a position to collect information about tax evaders: tax havens’ governments and financial institutions.

In this environment, the rise of blockchain technology is a godsend for tax cheats and tax havens. Blockchain, in its very essence, is a decentralized ledger that documents ownership and transfers, but does not require transacting parties to identify themselves to one another. Secrecy is back in play, but this time with no need for intermediaries. The blockchain financial ecosystem may thus offer similar advantages to the ones traditionally offered by tax havens.

The Blockchain-Tax Havens Synergy and the Rise of the Blockchain Haven

Blockchain technology, however, cannot simply replace tax havens. Any application, even if it is decentralized, needs to start somehow, somewhere, by someone. There needs to be an initial entrepreneur, some sort of initial infrastructure (computers, servers, programmers), and most importantly, there is a need to raise initial capital. Even if blockchain itself is “immune” from regulation, the creation of a blockchain venture and the process of fundraising may themselves be regulated. This is where blockchain havens come into this new financial ecosystem.

Instead of offering regulatory refuge themselves (because they no longer can), traditional haven jurisdiction offer regulatory refuge to blockchain startups. Stated differently, the new havens offer regulatory refuge to the technology that offers regulatory refuge. In a sense, blockchain havens are “meta tax-havens” or “meta offshore financial centers.” As developed economies act against haven governments, it seems that haven jurisdictions are responding by becoming hosts to technologies that offer traditional haven-like benefits.

Indeed, recent statistics on Initial Coin Offering (“ICO”) clearly demonstrate the disproportionally large role played by tax havens in the ICO market. ICOs are blockchain-based crowdfunding platforms. In an ICO, a promoter issues a blockchain-based digital token in exchange for value. A recent survey of geographical distribution of ICOs[1] finds that that the top 25 jurisdictions in the ICO world (both in terms of funds raised an in terms of number of ICOs), include known tax havens such as Switzerland, Singapore, Gibraltar, Lichtenstein, Luxembourg, and Myanmar, far outpacing many developed high-tax economies.   Another Survey[2] finds that, by number of ICOs, the 10 leading jurisdictions for ICOs include Singapore (#2), Switzerland (#4), Hong Kong (#5), and Gibraltar (#8), with a share of global ICOs that completely outweighs the proportional size of these jurisdictions in world economy. A third survey[3] reports that Singapore, Switzerland, Hong Kong, Netherlands, and the British Territories, account—in the aggregate—for 36.7% of all global ICOs in 2017-2018 in nominal terms, again, far outweighing the size of these jurisdictions in the world economy.

Tax havens, so it seems, are gradually transforming into blockchain havens.

Regulatory Ramifications

One might ask, is this necessarily a bad thing? The answer is absolutely not. Blockchain technology offers many potential benefits. However, it also possesses unique risks. Blockchain transactions are not only intermediate-less and rather anonymous. By the nature of the technology, they are also temper-resistant. They cannot be undone. Moreover, blockchain can serve as a platform for automated execution of code. Thus, when haven governments offer very light regulatory touch, they may attract bad actors who may utilize the regulatory leniency to misuse blockchain technology. In such a case, even if the illicit act is identified, there is little that can be done. The bad actor can get the illicit gain and disappear thanks to anonymity features embedded in the technology, and the victim has no recourse given the permanent nature of blockchain transactions. Even if participants become aware that an illicit action may take place using blockchain, there is nothing that can be done (short of, maybe, shutting down the internet). Execution of blockchain application is decentralized, and no one actor can just “shut down” the network. Inherent to the stricture of blockchain technology is that the majority of network participants must agree to change the network design and operation. This task is nearly impossible with millions of anonymous participants are scattered around the world.

To summarize, by allowing blockchain entrepreneurs practically unregulated entry point into the system, tax havens are effectively creating regulatory loopholes that cannot be amended in retrospect.

A good example can be found in a recent paper by Cohsey et. al., which explored whether ICO code actually delivers on promises made in the ICOs’ white papers (white papers function as an unregulated prospectus of sort)[4]. Cohesy et. al. find that “ICO code and ICO disclosures do not match.”[5] For example, they find that almost all ICO white papers promise restrictions on token supply, but only about 2/3 of the ICOs that made such promise actually coded the promise into the ICO code. Another promise frequently made by ICO issuers, is that the issuers’ own holding will vest over time, to prevent a pump and dump schemes. The researchers have found that the majority of ICOs that promised vesting had no vesting coded into the program. In addition, Cohesy et. al. find that some ICO issuers had the ability to change the code, even though such fact was not disclosed in the white paper.  Another recent study finds that as much as 80% of all ICOs in 2017 where fraudulent schemes.[6] These shortcomings cannot be corrected with a commanding rule from any government. The software of these offering will contribute to operate as executed, unless the majority of (anonymous) network participants agree to make corrections.   

What Can be Done?            

Given the unique nature of blockchain technology, it seems prudent to regulate blockchain applications before they are released. Only at that point in time, there are still intermediaries susceptible to regulation: The entrepreneurs, and the jurisdictions in which they operate.

But in order for such regulation to be successful, an internationally coordinated approach must be taken. As in the case of tax havens, any one jurisdiction that breaks ranks can serve as an entry-point of unregulated blockchain software to the World Wide Web, in which case damage control efforts may prove futile.

But what might such a coordinated approach include? A compressive plan for international regulation of blockchain based applications is well beyond this blog post, but some key points to consider follow.      

The problem of inability to regulate decentralized networks is addressed by the very meta-framework offered here: ex-ante regulation. This means regulating the issuers of ICOs, the programmers and the venture capitalist financing such ventures at the early stages of the project. In any case, before the application is turned on.

The problem of pseudonymity can be addressed by subjected jurisdictions or financial institutions that host blockchain ventures, to certain “know your costumer rules”. Such rules must enable the jurisdictions in which blockchain ventures operate to identify the individuals involved with the venture, and to report their identities to interested authorities in other jurisdictions.

The problem of irreversibility of transactions is partly remedied by disclosure and identification rules, as it may enable victims of fraud to identify the wrongdoers. Another way to address such issues is to require blockchain ventures to underwrite the risk of their venture. This can be achieved by insurance requirements, or by writing some sort of an escrow into the code. Such escrow would be automatically activated to compensate victims under certain circumstances.

In the case of ICOs, it is prudent to come up with a standard disclosure requirement, and a requirement for a regulator to compare the disclosure with the actual code.

What the best forum is for such a coordination remains to be seen. In the global battle against tax havens, the best was, for the most part, the OECD. The OECD has recently launched the blockchain policy forum, and this may be a proper venue to initiate such a project.  But wherever it happens, it needs to happen sooner rather than later, before multiple malicious blockchain applications take hold. Any delay is likely to bring about the worst in blockchain, and prevent the best in it from ever materializing.

Footnotes

[1] Wulf Kaal, Initial Coin Offerings: The Top 25 Jurisdictions and their Comparative Regulatory Responses (as of May 2018), 1 Stan. J. of Blockchain L. and Pol’y 1,1 (2018).

[2] Dirk Zetzsche et. al., The ICO Gold Rush: It’s a Scam, It’s a Bubble, It’s a Super Challenge for Regulators, (Univ. of Lux. Law, Working Paper No. 11, 2017).

[3] Winifred Huang, Michele Meoli & Silvio Vismara, The Geography of Initial Coin Offerings, Univ. of Bath (forthcoming 2019).

[4] Shanaan Cohney et al., Coin-Operated Capitalism, Colum. L. Rev. (forthcoming, 2019).

[5] Id. at 6.

[6] Ana Alexandre, New Study Says 80 Percent of ICOs Conducted in 2017 Were Scams, Cointelegraph (July 13, 2018).

Omri Marian is a Professor of Law, and the Academic Director of the Graduate Tax Program at the University of California, Irvine School of Law.

Disclaimer

The views, opinions and positions expressed within all posts are those of the author alone and do not represent those of the Program on Corporate Compliance and Enforcement (PCCE) or of New York University School of Law.  PCCE makes no representations as to the accuracy, completeness and validity of any statements made on this site and will not be liable for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with the author.

U.S. Board Diversity Trends in 2019

The Harvard Law School Forum on Corporate Governance and Financial Regulation -

Posted by Subodh Mishra, Institutional Investor Services, Inc., on Tuesday, June 18, 2019 Editor's Note: Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on an ISS Analytics publication by Kosmas Papadopoulos, Managing Editor at ISS Analytics.

As the U.S. annual shareholder meeting season is coming to an end, we review the characteristics of newly appointed directors to reveal trends director in nominations. As of May 30, 2019, ISS has profiled the boards of 2,175 Russell 3000 companies (including the boards of 401 members of the S&P 500) with a general meeting of shareholders in 2019. These figures represent approximately 75 percent of Russell 3000 companies that are expected to have a general meeting during the year. (A small portion of index constituents may not have a general meeting during a given calendar year due to mergers and acquisitions, new listings, or other extraordinary circumstances).

Based on our review of 19,791 directorships in the Russell 3000, we observe five major trends in new director appointments for 2019, as outlined below.

(more…)

Do Firms Issue More Equity When Markets Become More Liquid?

The Harvard Law School Forum on Corporate Governance and Financial Regulation -

Posted by Rogier Hanselaar (Erasmus University Rotterdam), René M. Stulz (Ohio State University), and Mathijs A. van Dijk (Erasmus University), on Tuesday, June 18, 2019 Editor's Note: Rogier Hanselaar is a PhD student in Finance at the Rotterdam School of Management at the Erasmus University Rotterdam; René M. Stulz is the Everett D. Reese Chair of Banking and Monetary Economics at the Fisher College of Business at The Ohio State University; and Mathijs A. van Dijk is Professor of Finance at the Rotterdam School of Management at Erasmus University Rotterdam. This post is based on their recent article, forthcoming in the Journal of Financial Economics.

In our paper Do firms issue more equity when markets become more liquid?, we investigate whether variation in stock market liquidity helps to explain variation in corporate equity issuance over time.

It is well-known that the volume of both initial public offerings (IPOs) and seasoned equity offerings (SEOs) fluctuates considerably over time, but the underlying causes of these fluctuations are not well understood. Prior research has pointed at economic conditions (such as GDP growth) as well as capital market conditions (such as volatility) as potential determinants. It has also been documented that equity issuance tends to be high after the stock market has gone up and when aggregate stock market valuation (as measured by, for example, the aggregate price-earnings ratio) is high, which is often interpreted as evidence that firms successfully “time” the market when raising new equity.

(more…)

Debt Default Activism: After Windstream, the Winds of Change

The Harvard Law School Forum on Corporate Governance and Financial Regulation -

Posted by Joshua A. Feltman, Emil A. Kleinhaus, and John R. Sobolewski, Wachtell, Lipton, Rosen & Katz, on Tuesday, June 18, 2019 Editor's Note: Joshua A. Feltman, Emil A. Kleinhaus, and John R. Sobolewski are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Feltman, Mr. Kleinhaus, Mr. Sobolewski, and Steven A. Cohen.

In our prior memos The Rise of the Net-Short Debt Activist and Default Activism in the Debt Markets, we discussed the phenomenon of “Debt Default Activism,” in which investors purchase debt on the thesis that a borrower may already be in default, and then seek to profit from the alleged default, by, for example, triggering a credit default swap (or “CDS”) payout or trading various interests around the negative news generated by the default allegation.

In February, the most prominent example of Debt Default Activism came to a conclusion. Aurelius, a bondholder of telecom services provider Windstream that was reported to be economically “net-short” Windstream through CDS, prevailed in litigation with Windstream over a complicated debt covenant issue.

Windstream’s “long-only” debtholders, whose rights were nominally vindicated by the decision, were not happy. They had voted overwhelmingly to waive the alleged covenant default (the court concluded that those consents were not valid) in order to avoid exactly the result that ensued: Windstream’s bankruptcy. The long-only creditors had good reason to aid Windstream’s attempt to stave off Aurelius’ challenge. With Windstream’s bankruptcy, the value of their positions plummeted, illustrating that Debt Default Activism can harm not only corporate borrowers but also their creditors.

(more…)

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