Eyes On Wall Street : Executive Compensation Lawyers & Attorneys : Labaton Sucharow Law Firm : Class Action Litigation, Shareholder Rights

On June 9, the U.S. Securities and Exchange Commission issued a bulletin warning investors about companies that enter U.S. markets through so-called “reverse mergers”—and explaining how they can be detected.

In a reverse merger, a private company merges with an existing public shell company to become listed on a U.S. exchange and gain access to capital markets—a process that avoids the regulatory scrutiny given to IPOs.

The bulletin points out that the lack of transparency in reverse merger companies poses grave risks to investors.  However, it can be very difficult to determine whether a public company has undergone this process.

To assist investors, the SEC identifies risk factor disclosures in SEC filings that may serve as red flags signaling a reverse merger.  For example, the SEC urges that investors look out for words or phrases such as “lack of public company experience,” “lack of history of compliance with U.S. securities laws and accounting rules,” “inability to comply with federal securities laws” or “inability to attract the attention of major brokerage firms.”   

The risks involved in reverse mergers are more than theoretical.  The SEC and U.S. exchanges have recently cracked down on many companies that became public through this process.  Trading in more than a dozen such companies has been suspended due to a lack of current, accurate information about these firms and their finances.  In addition, several reverse merger companies have recently seen their securities registrations revoked because of failures to make required periodic filings.

Submitted by Yoko Goto

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In the wake of the mortgage meltdown of 2007-2008, regulators have sought to substantially stiffen lending requirements for lower-income homeowners. This regulatory activity, spurred by the suggestion that overly generous lending to consumers with little ability to pay played a key role in the credit crisis, may make have the unintended consequence of discouraging some well-qualified minority applicants from entering the housing market.

 This potential downside to overly-stringent new rules has resulted in an unusual alliance.

Mortgage lenders and some non-profit organizations, including the N.A.A.C.P. and La Raza, are cooperating in an effort to protect working class and minority communities from stricter regulations on mortgage packaging that may ultimately discourage some applicants from minority groups from obtaining home loans. Among their targets: a proposal that would exempt mortgage packagers from bearing part of the risk in the loans they package if loan recipients provided a 20 percent down payment. 

Submitted by Melanie Boyce

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Maybe not, at least according to a new white paper released by the Council of Institutional Investors. 

The furor relates to the SEC’s proposal that Generally Accepted Accounting Principles (“GAAP”) issued by the U.S. Financial Accounting Standards Board be replaced with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board—a process called convergence. 

In a paper titled “Criteria for an Independent Accounting Standard Setter,” Professor Donna L. Street of the University of Dayton expresses concern that the international standards suffer from   “significant pressures from governmental officials and bodies, particularly those representing the European Union.” In addition, she notes that the IASB has historically subsisted on voluntary contributions—raising serious questions about the its independence. The white paper further points out that only five of the present 20 seats on the IFRS Foundation are held by individuals from the investor community.

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