Below are news stories from the week that were easy to miss, but may have some lasting impact.
Court Finds it Doesn’t Take Much to be Certifiable (As a Class for Litigation)
This week the Supreme Court considered when shareholders can have a group declared a “class” for purposes of a class-action lawsuit. The decision reaffirmed that plaintiffs in securities fraud cases are not required to prove that the defendant had made a material misstatement to investors before a class action may be certified. The Court declared that material information in this instance is any information that a reasonable investor would believe significantly alters the total mix of available information.
The important bit is that materiality may be presumed when a company makes public statements in a transparent market. This presumption is known as the “fraud on the market” theory. From a practical perspective this means that any public false statement issued by a company might now provide a basis for a class action certification unless shown to be non-material.
We are pretty much all certifiable.
SEC’s Adventures in Supreme Court Land: “Oh dear! Oh dear! I Shall be too Late!”
When does the statute of limitation clock start to run in fraud cases? It’s an important question. The SEC argued that the clock started when the misconduct was detected. The Supreme Court, however, held this week that the clock “starts” when the transgression is committed. This holding means that, unless the crime in question has a specific provision declaring that the statute of limitations starts at detection, the clock starts at the time of the misconduct. Given that many applicable statutes of limitations are limited to 5 or 7 years and that most questionable activity surrounding the credit crisis occurred in the early to mid-2000’s, the clock is ticking. This week’s decision will essentially force regulators to file actions in the next few months for any credit crisis-related activity, or forgo the claim. 2013 could be “a very important date” indeed.
Private Equity Firms Come Up With a Capital Idea
Private equity firms are stepping into the bank capital breech. They are hoping to help banks meet the tougher capital requirements without selling assets or raising equity. By guaranteeing a set percentage of the first losses on a portfolio of loans, the private equity firms essentially allow the bank to retain the loans while allowing the institution to drastically reduce the amount of capital it is required to hold against the portfolio. The details of the transaction structure have not been disclosed but, if successful, we expect to see such transactions proliferate.
Weighty Regs Wreck: Small Banks Take the Brunt
Smaller banks have been complaining for some time that the regulatory environment is making it harder and harder for them to remain competitive. This week they got some support for that argument from some interesting sources—their competition and the investor market.
One investment manager, Joshua Siegel, whose fund has more than $5 billion in assets, anticipates that over the next decade up to half of the banks in the U.S. could be “swallowed up.” Jamie Dimon, CEO of JPMorgan, recently told analysts that the new rules are helping banks such as his win market share from smaller institutions. He added that the new regulatory regime will “make it more expensive and tend to make it tougher for smaller players to enter the market.” He appears to be right on that count. 2011 was the first year in decades with no new banks being established. None. To quote Siegel, “one major overriding theme of the industry in the next three, five, seven, 10 years: massive consolidation.”
Secretary of Who?
Then shall our names,
Familiar in his mouth as household words-
Harry the King, Bedford and Exeter,
Warwick and Talbot, Salisbury and Gloucester-
Be in their flowing cups freshly rememb’red
The last five years our financial markets have been a bit of a battleground. Many of our financial leaders have had their names writ large in history. It appears those times are on the wane. On February 27th Jacob Lew was confirmed as our 76th Secretary of the Treasury, replacing Timothy Geithner. The changing of the guard is nearly complete. Luminaries like Mary Shapiro of the SEC, Sheila Bair at FDIC, John Dugan at OCC all gone, replaced by Mary Jo White, Martin Gruenberg, and Thomas Curry.
I guess it’s just a return to usual that the average person doesn’t know the President of the New York Fed. (That would be William Dudley). It appears that Fed Chairman Bernanke is the last man standing from the financial crisis, but only history will determine if any deserves to have sonnets written in their honor.