NY Court of Appeals Dismisses Attorney General’s Challenge against NYSE Chief’s Pay

New York v. Richard A. Grasso, et al.
04-401620,
State Court of Appeals of New York, 06/25/2008

Holding: The State Court of Appeals of New York upheld the dismissal of the Attorney General’s claims that challenged the legality of the $187.5 million compensation of a former head of the New York Stock Exchange (NYSE). The Attorney General filed an action to invalidate the compensation awarded by the NYSE to its then Chairman and Chief Executive Officer Richard Grasso for being excessive, and an indication of a breakdown of corporate governance. The State Court of Appeals however rejected such causes of action since the Attorney General did not have the authority to institute actions of this type under the state’s Not For-Profit Corporation Law (N-PCL). According to the Court of Appeals, the Attorney General crafted such claims with a lower burden of proof than that required by the statute, thus disregarding the fault-based scheme specified by the law. The Attorney General merely sought to ascribe liability on the basis merely of the size of Grasso’s compensation package, contrary to the higher burden of proof called for by the legislature. The Court of Appeals however sustained the authority of the Attorney General to bring two claims, namely, unlawful transfer of properties and breach of fiduciary duty. In this connection, the Court of Appeals held that the legislature specifically provided for the Attorney General's role as an overseer of not-for-profit corporations, and requires that he prove an officer's fault to sustain these claims. More...

Circuit Court Turns Down Appeal against Harris Associates, Refusing to Put a Cap on Mutual Fund Advisory Fees

Jerry N. Jones, et al. v. Harris Associates, L.P.
No. 07-1624,
U.S. Court of Appeals for the Seventh Circuit, 05/19/2008

Holding: The U.S. District Court for the Seventh Circuit affirmed a district court’s ruling that mutual fund adviser fees should not be determined by the judiciary. In refusing to put a limit on adviser’s fees, the Seventh Circuit declared that Section 36(b) of the Investment Company Act does not say that fees must be “reasonable” in relation to a judicially created standard. Federal securities laws, such as the Investment Company Act, work largely by requiring disclosure and then allowing price to be set by competition in which investors make their own choices. In this case, the fees were not hidden from investors—and the mutual fund's net return has attracted new investments rather than drive investors away. Section 36(b) does not make the federal judiciary a rate regulator, similar to that performed by the Federal Energy Regulatory Commission. Regulating advisory fees through litigation is unlikely to do more good than harm. More...

See also related commentary by Joel B. Ginsberg, Esq..

See also related commentary by Joel B. Ginsberg, Esq..

11th Cir. Clarifies Parent Cos.’ Liability under the PSLRA in Vesta Insurance Case

Kittie Laperriere, et al. v. Vesta Insurance Group, Inc., et al.
No. 06-14524,
Court of Appeals for the Eleventh Circuit, 04/30/2008

Holding: In this appeal arising from a securities class action, the U.S. Court of Appeals for the Eleventh Circuit affirmed a district court’s denial of plaintiff-appellant investors’ motion to strike affirmative defenses. In its motion, plaintiffs-appellants argued that such defenses of parent company Torchmark Corporation sought to improperly apply the “proportionate liability” rule under the Private Securities Litigation Reform Act (PSLRA) of 1995 because as a parent company, Torchmark should be jointly and severally liable with and to the same extent as the principal violator. In rejecting this argument, the Eleventh Circuit held that under Section 21(D)(f), a controlling person, like a parent company, shall be jointly and severally liable for all the damages only if a court specifically determines that such controlling person knowingly committed the violation. In this regard, if the controlling person fails to affirmatively demonstrate good faith and lack of inducement under section 20(a) but the court is not able to find a knowing violation, the controlling person’s liability is only proportionate, not joint and several. More...

See also related commentary by Joel B. Ginsberg, Esq..

CA Appellate Court Rules Against Consolidated, Upholds Desist Order

Consolidated Management Group, LLC, et al. v. Department of Corporations
No. A117513, 2008 WL 1850310,
Court of Appeal, First Apellate District, Division One, California, 04/28/2008

Holding: The Court of Appeal of the 1st District of California affirmed the defendant-respondent California Department of Corporation’s ("DOC) desist and refrain order against petitioners relating to their offer and sale of interests in two partnerships. Petitioner Consolidated Management Group, LLC (“Consolidated”) had formed two general partnerships engaged in the purchase and lease of oil and gas exploration and drilling equipment. In response, the DOC issued the questioned order, which was upheld by the Superior Court of San Francisco County. According to the Court of Appeal, securities offerings must actually qualify for a valid federal securities registration exemption, rather than only being sold pursuant to a putative exemption, in order to enjoy preemption from state regulation under the National Securities Markets Improvement Act of 1996 (NSMIA) and state statute. Here, the Court of Appeal found that substantial evidence established that the venture interests were covered securities subject to registration. Specifically, the partnership agreements presented to potential investors did not confer management powers, and that investors were essentially dependent on the managerial ability of petitioners. More...

See also related commentary by Joel B. Ginsberg, Esq..