Mar. 11, 2008

SEC, at open meeting, votes unanimously to propose new rules restricting naked short sales and streamlining the ETF approval process, and to amend the rules relating to privacy of investor data

  • At an open meeting on March 4, 2008, the SEC voted unanimously to: (1) propose a rule cracking down on short selling, (2) propose two rules to streamline the ETF approval process and (3) amend Regulation S-P, dealing with the privacy of investor data.
  • Our reporter, Jonathan Pollard, attended the open meeting and spoke to lawyers and regulators in attendance, and others.

Third Circuit upholds Treasury Regulation providing that a foreign corporation, to be eligible to claim tax deductions in connection with real property activities in the United States, must file its tax return within 18 months of the filing deadline set forth in Internal Revenue Code Section 6072

  • In a recent decision, the Third Circuit Court of Appeals held that for a non-US corporation to claim tax deductions in connection with its US real property activities, it must file its tax return within 18 months of the year in which income was earned.
  • In so holding, the Circuit Court upheld the validity of Treasury Regulation 1.882-4(a)(3)(i).
  • Court analyzed the IRS regulation under Chevron, and found that it was within the scope of Congress’s delegation of rulemaking authority to the IRS.
  • Case suggests that Courts will give heightened deference to IRS rulemaking, because tax is “complex and highly technical.”

One hedge fund manager sues another for alleged theft of intellectual property

  • Elliott Management Corporation, a major structured credit manager, developed proprietary software and alleges that Cedar Hill Capital Partners hired an employee and contractor of Elliott to steal the underlying source code and executable code.
  • TRO issued in state action based on same allegations.

Hedge fund sues Wachovia and Citibank alleging the banks demanded excessive collateral in connection with credit default swaps based on collateralized debt obligations

  • A $50 million hedge fund sued (separately) Wachovia and Citibank, alleging that the banks demanded excessive collateral in connection with credit default swaps based on collateralized debt obligations.
  • In the Wachovia matter, the fund relied on the confirmation letter for its claim that the bank did not have the right to demand as much collateral as it did, while Wachovia relied on the ISDA Credit Support Annex in support of its right to demand the collateral.

Manager of purported hedge fund makes unsuccessful motion to dismiss SEC charges of violations of federal securities laws based on “empty pockets” defense

  • A manager of a purported hedge fund made a motion to dismiss the SEC’s claims of violations of the federal securities laws, arguing that even if the SEC won on the merits, it would not be able to collect anything from him, since British authorities had already seized his assets.
  • The SEC countered that the absence of assets would not bar enforcement of its equitable claims.
  • The court reluctantly (because the defendant offered to settle for an injunction and industry bar) refused to dismiss the SEC’s claims.

SEC Warns Public Pension Funds About Inadequate Compliance Policies and Procedures Following Report of Investigation Into Insider Trading By Employees of the Retirement System of Alabama

  • The Retirement System of Alabama purchased stock in The Liberty Corporation based on information obtained in the course of providing debt financing to Liberty in connection with the acquisition of Liberty by a company controlled by the RIA.
  • The RIA had no compliance policies or procedures in place at the time of the insider trading, but agreed to institute such policies following the investigation.
  • The SEC wrote a Report of Investigation describing the matter, and used the occasion of the Report to remind pension funds that although they are generally exempt from the Investment Company Act and the Investment Advisers Act, they remain subject to the anti-fraud provisions of the federal securities laws and rules.