In my prior comments on the Paulson Committee’s calls for regulatory reform (most recently, here), I have suggested that perhaps the U.S. securities markets may be better off without at least some of the companies that are avoiding the U.S. exchanges’ tougher listing requirements. A recent report by a U.K. accounting firm contains interesting data that may be pertinent to this question.
BDO Stoy Hayward reports (here) that annual reported instances of fraud in the U.K. rose 33% between 2005 and 2006 and the value of the reported fraud rose almost 40%. (According to the firm’s website, the full report will be available in February.) A January 8, 2007 New York Post article reporting on the BDO Stoy Howard study, entitled "Brits Get Bit: Lax British Marts Attract Fraud Along With U.S. Biz" (here), examines whether the increase in London-listed offerings by companies unwilling or unable to meet the U.S. listing requirements explains part of the increase in U.K. fraud. The article notes (as The D & O Diary has previously noted, here) that the London exchanges have "accepted scores of new listings of Chinese and Russian companies that may not have met New York exchanges’ stricter rules." The article quotes the head of the BDO Stoy Hayward firm’s fraud unit as saying that "I have no doubt that some businesses’ plans have been deliberately optimistic, and property, including intellectual property falsely valued."
As Jack Ciesielski notes on the AAO Weblog (here), commenting on the New York Post article linked above, "Investors should be thankful that seedier companies have found the U.S. markets too difficult to easily game because of Section 404." And as I previously have noted (here and here), lowering standards to attract weaker companies is not a sustainable advantage. The valuation premium that companies listing on U.S. exchanges enjoy – because of the stricter regulatory environment – is a real and sustainable advantage.
UPDATE: The With Vigour and Zeal blog (here) adds an important additional perspective on this post. The WVZ blog does concede that the BDO Stoy Hayward study may be relevant to the question whether U.S. exchanges are better off without the companies drawn to London by lighter regulation; however, the WVZ blog also emphasizes that the BDO Stoy Hayward study is concerned with a very wide variety of frauds, not all of which involve listed companies. Among other things, the accountants’ report is concerned with a species of tax fraud that is peculiar to the U.K. So, the WVZ blog concludeds, it is "therefore not wholly representative to discuss the report’s findings in the context of the securities markets" or in connection with the question of the competitiveness of the U.S. securities markets. I don’t disagree with the WVZ blog, but simply note that if the accountants’ study is not entirely relevant, it is not entirely irrelevant either. Nevertheless, I agree that the WVZ adds an important additional gloss to this post, and for that reason, readers should refer to the WVZ blog for a more complete picture of the implications of the BDO Stoy Hayward report.
Speaking of the London markets, Legalweek.com has a recent article (here) discussing the potential liability of the London Stock Exchange’s Alternative Investment Market’s Nominated Advisors (or Nomads) in U.S. courts under U.S. securities laws. Hat tip to the With Vigour and Zeal blog (here) for the link to the Legalweek.com article.
Korea Adopts Securities Class Actions: Another cause the Paulson Committee cited as a reason foreign companies may be shunning U.S. exchanges is the U.S. litigation environment. But as I have previously argued (most recently, here), investors in other countries increasingly are demanding (and getting) the right to hold company management accountable in local courts, and as a result the differences between the U.S litigation environment and those of at least some other countries may be diminishing. The most recent example of another country moving toward a U.S. style class action litigation system is Republic of Korea, better known as South Korea.
According to a January 8, 2007 Korea Herald article entitled "Open Season for Securities-Related Class Actions" (here), South Korea adopted the Securities Related Class Action Act of 2005, subject to a "grace period" during which its enforcement was stayed. The grace period expired on December 31, 2006, meaning that companies listed on the South Korean stock exchanges (including the approximately 730 companies listed on the Korea Exchange), face potential securities class action exposure starting in 2007. At least based on the article, the new Korean class action sounds similar to the U.S.-style securities class action lawsuit, post PSLRA. The article’s author, a Korean attorney, speculates that as many as 30 of Korea’s 1,600 listed companies could face securities class actions annually.
An interesting discussion of the state of corporate governance reform in Korea, including a discussion of the new Act, can be found here.
More on Short Selling in PIPE Financing Transactions: In a recent post (here), I reported on two recent SEC enforcement actions involving short selling by investment banks or broker dealers in connection with PIPE financing transaction. On January 4, 2007, the SEC filed yet another settled enforcement action (here) involving short selling in connection with a PIPE transaction, alleging alleged that a trader and a hedge fund entered into contracts to purchase shares in a PIPE offering and then sold those shares short. The SEC Actions blog has a detailed and interesting discussion (here) of the new enforcement action, as well as of the SEC’s position regaring short selling in connection with PIPE transactions, including current SEC rule making regarding short selling in PIPE transactions.