354 Search Results

September 29, 2008 |
Financial Markets in Crisis: Rescue Bill Fails in House

The Gibson, Dunn & Crutcher Financial Markets Crisis Group is tracking closely government responses to the turmoil that has catalyzed dramatic and rapid reshaping of our capital and credit markets. What follows is our latest in a series of updates on key regulatory and legislative issues. Bipartisan Rejection Lawmakers labored over the weekend to craft a financial package that would be palatable to both Democrats and Republicans, as well as to constituents back home.  Draft legislation was circulated and tinkered with all weekend until the House Rules Committee, at 12:01 a.m. this morning, reported to the House a rule setting the parameters of the debate on the rescue legislation. Bipartisan House and Senate negotiators had reached agreement on what they believed to be a consensus bill.  But when it came time to vote, members from both sides of the aisle jumped ship, defeating the legislation by a 205-228 vote.[1]  The vote reflected strong bipartisan opposition to the rescue plan as 95 Democrats and 133 Republicans opposed the measure. Democrats are blaming Republican leadership for not producing enough votes; Republicans are blaming Democratic House Speaker Nancy Pelosi for stirring dissension in the Republican ranks with a partisan floor speech. Reacting quickly to the news, stocks plummeted and the Dow Jones Industrial Average dropped 780 points. It is not clear what happens next, but it is likely that the House will reconsider the measure – likely with some changes designed to attract more support — again this week.  After the vote, both the Administration and House Democratic leadership expressed their intent to find a way to move forward with the measure. The House has recessed until noon on Thursday for Rosh Hashanah.   [1] For a full listing of House members’ votes, see http://clerk.house.gov/evs/2008/roll674.xml.  Gibson Dunn has assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above.  Please contact Michael Bopp (202-955-8256, mbopp@gibsondunn.com) in the firm’s Washington, D.C. office or any of the following members of the Financial Markets Crisis Group: Public Policy ExpertiseMel Levine – Century City (310-557-8098, mlevine@gibsondunn.com)John F. Olson – Washington, D.C. (202-955-8522, jolson@gibsondunn.com)Amy L. Goodman – Washington, D.C. (202-955-8653, agoodman@gibsondunn.com)Alan Platt – Washington, D.C. (202- 887-3660, aplatt@gibsondunn.com)Michael Bopp – Washington, D.C. (202-955-8256, mbopp@gibsondunn.com) Securities Law and Corporate Governance ExpertiseRonald O. Mueller – Washington, D.C. (202-955-8671, rmueller@gibsondunn.com)K. Susan Grafton – Washington, D.C. (202- 887-3554, sgrafton@gibsondunn.com)Brian Lane – Washington, D.C. (202-887-3646, blane@gibsondunn.com)Lewis Ferguson – Washington, D.C. (202- 955-8249, lferguson@gibsondunn.com)Barry Goldsmith – Washington, D.C. (202- 955-8580, bgoldsmith@gibsondunn.com)John H. Sturc – Washington, D.C. (202-955-8243, jsturc@gibsondunn.com)Alan Bannister – New York (212-351-2310, abannister@gibsondunn.com) Financial Institutions Law ExpertiseChuck Muckenfuss – Washington, D.C. (202- 955-8514, cmuckenfuss@gibsondunn.com)Christopher Bellini – Washington, D.C. (202- 887-3693, cbellini@gibsondunn.com)Amy Rudnick – Washington, D.C. (202-955-8210, arudnick@gibsondunn.com) Corporate ExpertiseHoward Adler – Washington, D.C. (202- 955-8589, hadler@gibsondunn.com)Richard Russo – Denver (303- 298-5715, rrusso@gibsondunn.com)Dennis Friedman – New York (212- 351-3900, dfriedman@gibsondunn.com)Stephanie Tsacoumis – Washington, D.C. (202-955-8277, stsacoumis@gibsondunn.com)Robert Cunningham – New York (212-351-2308, rcunningham@gibsondunn.com)Joerg Esdorn – New York (212-351-3851, jesdorn@gibsondunn.com)Stewart McDowell – San Francisco (415-393-8322, smcdowell@gibsondunn.com)C. William Thomas, Jr. – Washington, D.C. (202-887-3735, wthomas@gibsondunn.com) Real Estate ExpertiseJesse Sharf – Century City (310-552-8512, jsharf@gibsondunn.com)Alan Samson – London (+44 20 7071 4222, asamson@gibsondunn.com)Andrew Levy – New York (212-351-4037, alevy@gibsondunn.com)Dennis Arnold – Los Angeles (213-229-7864, darnold@gibsondunn.com)Andrew Lance – New York (212-351-3871, alance@gibsondunn.com) Crisis Management ExpertiseTheodore J. Boutrous, Jr. – Los Angeles (213-229-7804, tboutrous@gibsondunn.com) Bankruptcy Law ExpertiseMichael Rosenthal – New York (212-351-3969, mrosenthal@gibsondunn.com) Tax Law ExpertiseArthur D. Pasternak – Washington, D.C. (202-955-8582, apasternak@gibsondunn.com)Paul Issler – Los Angeles (213-229-7763, pissler@gibsondunn.com) Executive and Incentive Compensation ExpertiseStephen W. Fackler – Palo Alto (650-849-5385, sfackler@gibsondunn.com)Michael J. Collins – Washington, D.C. (202-887-3551, mcollins@gibsondunn.com)Sean C. Feller – Los Angeles (213-229-7579, sfeller@gibsondunn.com) © 2008 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 26, 2008 |
Financial Markets Crisis: Issues for Hedge Funds and Private Equity Funds

The Gibson, Dunn & Crutcher Financial Markets Crisis Group is tracking government responses to the turmoil that has reshaped our capital and credit markets.  The following is an update on key regulatory and legislative issues that are of particular interest to and are likely to affect hedge funds and private equity funds. Federal Reserve Board Enhances Passive Investment Framework for Minority Investors in Bank Holding Companies and Banks In connection with its various efforts to increase the capital and liquidity available to the banking industry, on September 22, 2008 the Federal Reserve Board (the "Fed") issued a new policy statement providing additional guidance on making equity investments in a bank or bank holding company ("BHC").  Importantly, the issuance only acts to modify certain elements in the Fed’s existing control framework and does not change any other items, including, for example, the rules relating to aggregation, attribution and acting in concert with respect to investors. On the margin, this enhanced flexibility will benefit investors in BHCs, however, it undoubtedly does not represent the significant changes that were being sought when hedge fund and private equity fund groups petitioned the Fed to liberalize this area.  For a company, including a hedge fund or private equity fund, the policy statement describes the investment amount and certain other relationships, such as board representation, that may exist without the company being considered to control a BHC and thereby become a BHC itself under the Bank Holding Company Act ("BHC Act"). Under the guidance, a fund that is a noncontrolling minority investor ("investor") may now have a “modicum” of influence over a BHC without having a “controlling influence over the management or policies” of a BHC.  In this regard, this policy modifies the following elements in the Fed’s control framework consistent with this position. An investor may have at least one representative on a BHC’s board of directors.  It may also have two representatives when the investor’s aggregate director representation is proportionate to its total interest in the banking organization, the representation does not exceed 25 percent of the voting members of the board and another shareholder of the banking organization is a BHC that controls the banking organization under the BHC Act.[1] An investor may own a combination of voting and nonvoting shares that, when aggregated, represents less than one-third of the total equity of a BHC (and less than one-third of any class of voting securities, assuming conversion of all convertible nonvoting shares held by such investor) and does not allow the investor to own, hold or vote 15 percent or more of any class of voting securities of the BHC.[2] An investor may communicate and advocate with management for changes in a BHC’s policies or operations such as policies related to mergers, management changes, dividends, debt or equity financing, new business lines and subsidiary divestitures.  An investor may not make explicit or implicit threats to dispose of shares in the BHC or to sponsor a proxy solicitation as a condition of action or inaction by the BHC or its management in connection with these policy discussions.[3] Treasury Guaranty Program for Money Market Funds It is estimated that hedge funds hold approximately $600 billion in cash, and of that amount, $100 billion of this is held in money market funds.[4]  The Treasury Department has established a temporary guaranty program for these money market funds.  For a fee, Treasury will insure the holdings of any eligible publicly offered retail or institutional money market mutual fund for the next year.  Eligible funds include all funds that are  regulated under Rule 2a-7 of the Investment Company Act of 1940 and publicly offered and registered with the SEC.  Taxable and tax-exempt funds are eligible, and the guaranty will not affect the tax-exempt treatment of payments by tax-exempt money market funds.  The guaranty will be limited to balances that existed as of the close of business on Friday, September 19, 2008.  Treasury intends for this guaranty to bolster investor confidence and stabilize the global economy by maintaining the standard $1 net asset value of money market mutual funds.  As Treasury has proposed it, the program will be funded out of the Exchange Stabilization Fund, which currently holds approximately $50 billion of assets.[5] Although Treasury’s announced program did not include limits on the guaranty that would apply to a particular eligible money market mutual fund, early House and Senate drafts of broader capital markets rescue legislation would have limited the guaranty to the insurance provided to individual depositors under the Federal Deposit Insurance Act.  A House draft dated September 25, 2008 does not include an insurance limit but does limit the program to four months, which can be extended to one year upon a Treasury Secretary certification to Congress. Challenges Posed by Prime Broker Insolvency Our clients and friends have raised questions recently about how liquidation proceedings of U.S. prime brokers  under the Securities Investor Protection Act of 1979 (“SIPA”) would unfold, the treatment of securities and cash held in customer accounts, as well as a description of how derivative transactions, repurchase transactions and securities contracts would be treated.  Please note that this discussion applies only to accounts maintained with a U.S. office of a prime broker and that protections may differ if the accounts are maintained elsewhere. A prime broker could file its own chapter 7 stockbroker liquidation case under the United States Bankruptcy Code without a SIPA proceeding.  However, it is likely that if an insolvent prime broker were to file for chapter 7 protection, the SIPA-created Securities Investor Protection Corporation (“SIPC”) would initiate a SIPA proceeding that would supersede the chapter 7 proceeding.  As such, we will limit the following commentary to a SIPA proceeding. SIPA Proceeding Under SIPA, the first step in the liquidation process would be for the SIPC to commence a liquidation proceeding in federal district court and obtain a protective order freezing the customer activity of the prime broker.  SIPC would then appoint a SIPA trustee to oversee the liquidation, which would be moved to the bankruptcy court.  The first avenue explored in the liquidation process is an attempt to transfer customer accounts to a more stable brokerage firm.  If no transfer is available, the SIPA trustee will then seek to return the customers’ assets to them.  As part of this liquidation process, with the exception of certain “customer name securities” (non-negotiable securities registered in the name of the customer) that are returned to the particular customer, the assets of the prime brokerage customers are collected into a pool of “customer property” which is used to settle the customer accounts.  Customers would file proofs of claim with the SIPA trustee who would reconcile the claims and make a pro rata distribution of the customer property to all the customers.  Any shortfall in value will be shared pro rata by all the customers.  Under SIPA, customers receive distributions of the pooled customer property with respect to their “net equity claim.” “Customer property” includes all property, including securities and cash, that was, or should have been, set aside for the particular customer in accordance with SEC guidelines, and will include all securities that are held in “street name,” as well as any cash.  The “net equity claim” is the dollar amount of a customer’s account that would have been owed by the debtor if the debtor had hypothetically liquidated the securities positions of the customer on the date the SIPA liquidation was filed (at the then prevailing market values), minus any indebtedness of the customer to the debtor. Thus, although the customer may hold cash and securities in its account, the claim will be a dollar value claim.  We understand that it has been SIPC’s policy to return to customers securities that are held as customer property by having the SIPA trustee purchase securities rather than make cash payments for any shortfall in the number of available shares; however there is no guarantee that customers will have their original securities returned to them. Under SEC rules, a registered broker-dealer is required to maintain physical possession and control of any fully paid securities as well as securities in excess of 140% of the customer’s debit balance.  Such fully paid and excess margin securities are not to be commingled with “house” securities and generally cannot be hypothecated by the broker-dealer absent agreement. These protections, as well as a requirement to maintain certain reserve accounts, are intended to ensure that a failed broker-dealer will be able to satisfy customer net equity claims from available customer property.  In a SIPA proceeding, the SIPA trustee has access to the SIPC fund, which will provide up to $500,000 per account to cover any shortfalls, of which only $100,000 can be used to cover shortfalls of cash held in the account, and the prime broker may also have an insurance policy with the Customer Asset Protection Company (“CAPCO”) to make up any such shortfalls, in excess of the amount covered by the SIPC fund.  The CAPCO insurance would not cover losses due to appreciation in account assets after the filing date, any losses due to a delay in payment or disruption in trading etc., and at this point, given the recent downgrade of CAPCO and without knowing with any precision the magnitude of the claims that could be asserted against CAPCO, it is unclear whether CAPCO would have the financial wherewithal to respond fully to all claims. To the extent customer property, the SIPC fund advances and CAPCO insurance proceeds are not sufficient to pay or satisfy in full the net equity claims of customers, then customers participate in the estate as unsecured creditors.  Any residual claims, where the customer has an unsecured claim against the estate, are likely to be paid out at a discount. Derivatives with the Prime Broker SIPA and the United States Bankruptcy Code will protect the contractual rights to terminate, accelerate and liquidate the swap transactions, securities transactions and repurchase transactions, as well as the contractual rights to close out the transactions, net them and then enforce on any collateral posted in connection with these qualified financial contracts, notwithstanding otherwise applicable restrictions on enforcing rights and exercising remedies against a debtor.  If the customer closes out the contracts while it is “in the money” and would be owed a payment by the counterparty that is not secured by collateral, the customer would be a general unsecured creditor of the counterparty and may only therefore recover a portion of the face value of the claim in a winding up.  If the claim is secured by collateral subject to a valid, perfected security interest, the customer would be a secured creditor and would be able to enforce on its collateral and set off such amounts against the claim without seeking bankruptcy court approval.  Derivatives Between the Customer and a Third Party That Settle Through a Prime Brokerage Account In the event that the transactions are settled through an account with a prime broker that is the subject of a SIPA proceeding, the customer should change the account to which payments or deliveries will be made, as set forth in the contracts governing the transaction.  The standard ISDA Master Agreement provides that either party may change its account for receiving payment or delivery by giving the counterparty notice at least five business days prior to the scheduled date of a payment or delivery.  In addition, some contracts may contain provisions making the bankruptcy of the prime broker an event of default.  Under the ISDA Master Agreement, the prime broker may be a designated Specified Entity, which would give the customer the right, but not the obligation, to terminate the transactions on the bankruptcy of the prime broker, which bankruptcy would be an event of default that would allow the customer to close out and net the transactions.  These transactions would not be part of the prime broker’s estate.  If the customer was “in the money,” the counterparty would be required to make a termination payment to the customer’s account.  Short Selling Prohibition On September 18, 2008, the SEC issued an emergency order pursuant to Section 12(k)(2) of the Securities Exchange Act of 1934 (“Exchange Act”) prohibiting (with certain limited exceptions) any person from effecting a short sale in the publicly traded securities of certain financial firms.[6]  The SEC subsequently delegated to the relevant listing markets responsibility for posting on their respective websites their individual listed companies that are banks, savings associations, broker-dealers, investment advisers and insurance companies, whether domestic or foreign, and the owners of any of these entities  (“Included Firms”).[7]  An issuer may elect to opt-out of being an Included Firm.  This prohibition took effect September 19, 2008 at 11:59 p.m. and is currently scheduled to expire on October 2, 2008, unless further extended by the SEC.  The SEC has authority under the Exchange Act to extend the September 18, 2008 Order until midnight on October 18, 2008. Disclosure of Short Sale Positions As discussed in more detail in our client alert Short Selling Update:  Global Regulators Take Additional Action, pursuant to Section 12(k)(2) of the Exchange Act, on September 18, 2008 the SEC issued an emergency order requiring hedge funds and other institutional investment managers to disclose aggregate gross short sales across all accounts effected in certain publicly traded securities each day covered by the order.[8]  Institutional investment managers who were required to file a report on Form 13F for the calendar quarter ended June 30, 2008 will now be required to file a report on Form SH on the first business day of the calendar week immediately following a week during which the investment manager effected a short sale of a security defined in Exchange Act Rule 13f-1(c) (“Section 13(f) securities”).  Investment managers may rely upon the SEC’s official list of Section 13(f) securities when determining what classes of securities are covered, however, they are not required to report short sales in options. The SEC’s order only applies to short sales effected after 12:01 a.m. EDT on September 22, 2008; short positions taken prior to that date need not be reported.  Unless extended, the SEC’s order will terminate at 11:59 p.m. on October 2, 2008.  If the order is extended, no subsequent filings will be required where no short sales of a Section 13(f) security have been effected by the manager since the manager’s filing of the previous Form SH.  The SEC’s order also contains a de minimis exception: Investment managers do not have to report short positions if such position constitutes less than one quarter of one percent of the class of the issuer’s issued and outstanding Section 13(f) securities and the fair market value of the position is less than $1 million on every day of the reporting period.[9] Investigations into Market Manipulation On September 19, 2008, the SEC announced a sweeping expansion of its ongoing investigation into possible market manipulation in the securities of certain financial institutions, which will include requiring hedge fund managers and other investors with significant trading activity in financial issuers or positions in credit default swaps to disclose those positions under oath.[10]  SEC Chairman Christopher Cox stated that the investigation will look into the activity of investors with significant short positions in equity markets and positions in credit default swaps.  This expansion, according to Chairman Cox, supplements ongoing SEC investigations concerning the origination and securitization of sub prime mortgage loans, the involvement of credit rating agencies and insurers in the securitization process and the sale of mortgage-backed investments to investors. On September 23, many newspapers reported that the Federal Bureau of Investigation has opened preliminary investigations of activity at four major businesses which either received government assistance or filed for bankruptcy protection and was continuing investigations about mortgage related issues at twenty-six other companies nationwide. Coming in the midst of market turmoil, the SEC’s September 19 announcement stated that it had approved a formal order of private investigation authorizing its Division of Enforcement to subpoena documents and require witnesses to testify.  It also announced that FINRA and NYSE Regulation examiners would be onsite at broker-dealers to review short-selling activity.  On September 22, the Commission issued orders under Section 21(a)(1) of the Exchange Act requiring written statements from market participants regarding market positions, compliance with existing short sale rules, and details of all information shared or received about specified financial institutions.  The SEC’s use of this tool—one that has not been broadly used for several years—represents a significant escalation of its enforcement efforts in this area.  Letters requesting these sworn statements have already been issued with relatively short return dates. Separately,  on September 18, 2008, New York Attorney General Andrew Cuomo announced that he was launching a “wide-ranging” investigation into short-selling on Wall Street.  Cuomo will use New York’s Martin Act to prosecute any short sellers engaging in any improper conduct, including, but not limited to, the spreading of false rumors.  One of Mr. Cuomo’s objectives is to stabilize the markets by “root[ing] out short sellers who spread false information.”[11]        [1]   See Federal Reserve Board Policy statement on equity investments in banks and bank holding companies, available at [http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20080922b1.pdf].    [2]   See Federal Reserve Board Policy statement on equity investments in banks and bank holding companies, available at [http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20080922b1.pdf].    [3]   See Federal Reserve Board Policy statement on equity investments in banks and bank holding companies, available at [http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20080922b1.pdf].    [4]   See A. Gangahar, Hedge funds move $100bn into safe havens, Fin. Times (Sept. 24, 2008), available at [http://www.ft.com/cms/s/0/bb6ff882-8a68-11dd-a76a-0000779fd18c.html?nclick_check=1]    [5]   More information about the Fund can be found at [http://www.treas.gov/offices/international-affairs/esf/].    [6]   See Emergency Order, Exchange Act Release No. 58592 (Sept. 18, 2008), available at [http://www.sec.gov/rules/other/2008/34-58592.pdf].    [7]   See Exchange Act Release No. 58611 (Sept. 21, 2008),  available at [http://www.sec.gov/rules/other/2008/34-58611.pdf].    [8]   See Emergency Order, Exchange Act Release No. 58591 (September 18, 2008), available at [http://www.sec.gov/rules/other/2008/34-58591.pdf].    [9]   More information about the Order be found at [http://www.sec.gov/divisions/marketreg/shortsaledisclosurefaq.htm]. [10]   See SEC Expands Sweeping Investigation of Market Manipulation; Measure Will Require Statements Under Oath by Market Participants. 2008-214 (Sept. 19, 2008), available at [http://www.sec.gov/news/press/2008/2008-214.htm]. [11]   A. Lucchetti, A. Efrati, and K. Schannel, Cuomo Plans Short-Selling Probe, Wall St. J. (Sept. 18, 2008), available at available at [http://online.wsj.com/article/SB122176389889653245.html?mod=googlenews_wsj].    Gibson Dunn has assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above.  Please contact Michael Bopp (202-955-8256, mbopp@gibsondunn.com) in the firm’s Washington, D.C. office or any of the following members of the Financial Markets Crisis Group: Public Policy ExpertiseMel Levine – Century City (310-557-8098, mlevine@gibsondunn.com)John F. Olson – Washington, D.C. (202-955-8522, jolson@gibsondunn.com)Amy L. Goodman – Washington, D.C. (202-955-8653, agoodman@gibsondunn.com)Alan Platt – Washington, D.C. (202- 887-3660, aplatt@gibsondunn.com)Michael Bopp – Washington, D.C. (202-955-8256, mbopp@gibsondunn.com) Securities Law and Corporate Governance ExpertiseRonald O. Mueller – Washington, D.C. (202-955-8671, rmueller@gibsondunn.com)K. Susan Grafton – Washington, D.C. (202- 887-3554, sgrafton@gibsondunn.com)Brian Lane – Washington, D.C. (202-887-3646, blane@gibsondunn.com)Lewis Ferguson – Washington, D.C. (202- 955-8249, lferguson@gibsondunn.com)Barry Goldsmith – Washington, D.C. (202- 955-8580, bgoldsmith@gibsondunn.com)John H. Sturc – Washington, D.C. (202-955-8243, jsturc@gibsondunn.com)Alan Bannister – New York (212-351-2310, abannister@gibsondunn.com) Financial Institutions Law ExpertiseChuck Muckenfuss – Washington, D.C. (202- 955-8514, cmuckenfuss@gibsondunn.com)Christopher Bellini – Washington, D.C. (202- 887-3693, cbellini@gibsondunn.com)Amy Rudnick – Washington, D.C. (202-955-8210, arudnick@gibsondunn.com) Corporate ExpertiseHoward Adler – Washington, D.C. (202- 955-8589, hadler@gibsondunn.com)Richard Russo – Denver (303- 298-5715, rrusso@gibsondunn.com)Dennis Friedman – New York (212- 351-3900, dfriedman@gibsondunn.com)Stephanie Tsacoumis – Washington, D.C. (202-955-8277, stsacoumis@gibsondunn.com)Robert Cunningham – New York (212-351-2308, rcunningham@gibsondunn.com)Joerg Esdorn – New York (212-351-3851, jesdorn@gibsondunn.com)Stewart McDowell – San Francisco (415-393-8322, smcdowell@gibsondunn.com)C. William Thomas, Jr. – Washington, D.C. (202-887-3735, wthomas@gibsondunn.com) Real Estate ExpertiseJesse Sharf – Century City (310-552-8512, jsharf@gibsondunn.com)Alan Samson – London (+44 20 7071 4222, asamson@gibsondunn.com)Andrew Levy – New York (212-351-4037, alevy@gibsondunn.com)Dennis Arnold – Los Angeles (213-229-7864, darnold@gibsondunn.com)Andrew Lance – New York (212-351-3871, alance@gibsondunn.com) Crisis Management ExpertiseTheodore J. Boutrous, Jr. – Los Angeles (213-229-7804, tboutrous@gibsondunn.com) Bankruptcy Law ExpertiseMichael Rosenthal – New York (212-351-3969, mrosenthal@gibsondunn.com) Tax Law ExpertiseArthur D. Pasternak – Washington, D.C. (202-955-8582, apasternak@gibsondunn.com)Paul Issler – Los Angeles (213-229-7763, pissler@gibsondunn.com) Executive and Incentive Compensation ExpertiseStephen W. Fackler – Palo Alto (650-849-5385, sfackler@gibsondunn.com)Michael J. Collins – Washington, D.C. (202-887-3551, mcollins@gibsondunn.com)Sean C. Feller – Los Angeles (213-229-7579, sfeller@gibsondunn.com) © 2008 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 26, 2008 |
Financial Markets in Crisis: Silence on the Rescue Deal Is Golden; Banking Giant WMBank Falls but DIF Held Harmless

The Gibson, Dunn & Crutcher Financial Markets Crisis Group is tracking closely government responses to the turmoil that has catalyzed dramatic and rapid reshaping of our capital and credit markets. What follows is our latest in a series of updates on key regulatory and legislative issues. Debate on the Hill In contrast to yesterday’s public display of political and policy wrangling, today’s activity was largely behind the scenes as designated negotiators worked to hash out the details of a rescue plan.  Though congressional leaders reported yesterday that they had reached a compromise agreement, Republicans announced that they had developed a competing proposal late Thursday night.  House Minority Leader John Boehner wrote Speaker Pelosi today to express concern that the Democrats had not addressed many of the issues Republicans had raised about the proposal before declaring that the two parties had reached a consensus.  He said that he and many other Republican members could not support Secretary Paulson’s plan until more taxpayer protections and free market principles had been incorporated into the legislation.  Members from both sides of the aisle, however, have announced that they are working together to reach an agreement quickly. The Republicans’ alternative proposal purports to place less risk on taxpayers than the Treasury and Democrats’ proposals and to incentivize private companies to finance much of the recovery.  The plan would entail the government insuring mortgage-backed securities, as opposed to purchasing them outright.  Holders of the MBS would be required to pay for the insurance premiums rather than placing that burden on taxpayers, and holders of the troubled assets would pay a higher risk-based premium.  Through tax incentives and regulatory measures, the proposal is designed encourage private companies, instead of taxpayers, to inject capital into the markets.  Like the Democrats’ plan, the Republicans’ proposal calls for more transparency and oversight than did the initial Treasury request.  Participating firms would have to disclose the value of their mortgage assets to Treasury, as well as the value of bids within the last year for those assets and their most recent audit report.  Under the plan, the SEC would audit failed companies and would review the performance of the Credit Rating Agencies.  The Republicans also seek to impose greater restrictions on government sponsored enterprises, forbidding them to securitize any unsound mortgages.  Finally, the Republican plan would create a blue ribbon panel to assess the country’s financial situation and to suggest reforms for the market by January 1, 2009. Republicans also have suggested including a "pay to play" provision, which would require participating firms to pay a set amount of money based on the amount of assets Treasury purchases, as well as creating an independent government corporation to purchase the troubled assets instead of Treasury, which would have congressional accountability and would minimize taxpayer exposure. Key Points in the Latest Draft A new draft of the rescue bill, dated September 25, 2008, includes new provisions and adds texture and detail to provisions of earlier drafts.  Key provisions in this draft include the following: limit participating financial institutions to United States institutions, meaning that they must be organized under United States law and must have significant operations in the States; defines the “troubled assets” eligible for Treasury purchase as those assets based on or related to residential or commercial mortgages which were originated or issued on or before March 14, 2008; creates an Office of Financial Stability within the Office of Domestic Finance of the Department of Treasury, through which the Secretary will implement these programs; requires that the Secretary publish program guidelines either within two days of exercising this authority or within thirty days of enactment of the legislation.  These guidelines will define how the assets will be priced and purchased and how asset managers will be selected; establishes the Financial Stability Oversight Board, which will review the Secretary’s exercise of authority and will be composed of the Federal Reserve chairman, the Federal Deposit Insurance Corporation chairman, and the SEC chairman, as well as two other members who are not governmental employees, one of whom will be appointed by the majority leader of the Senate and Speaker of the House, and one of whom will be appointed by the Senate and House minority leaders; requires the Secretary to report to Congress 60 days after the programs are initiated and every 30 days thereafter, as well as to make public the total amount of assets purchased and sold each week; mandates that the Secretary review the financial markets and submit an improvement plan to Congress by April 30, 2009; requires that at least 20 percent of any profit realized from the program be deposited into federal programs: 65 percent of that amount will be deposited into the Housing Trust Fund, and 35 percent into the Capital Magnet Fund; authorizes the Secretary to contract for services through a streamlined process not subject to the Federal Acquisition Regulation.  Sets out principles for awarding contracts, including contracts to asset managers.  The principles require the Secretary: to solicit proposals from a broad range of vendors; to ensure the inclusion of minority- and women-owned businesses in the contracting process; to consider the FDIC in the selection of asset managers. requires the Secretary to develop conflict of interest standards; charges the Secretary with a duty to assist homeowners and reduce foreclosures and requires the Secretary to alter mortgage terms when such requests are “reasonable”; implements corporate governance and executive compensation standards that would be effective for two years after a corporation enters the program.  These standards leave much to the Secretary’s discretion, placing limits on compensation which will exclude incentives for officers to take risks that the Secretary deems “inappropriate” or “excessive.  The standards also prohibit golden parachute; implements additional corporate governance standards for those institutions from which the Secretary makes a direct purchase, including proxy access for any shareholder or shareholder group representing 3 percent or more of the institution’s equity securities and a mandatory opportunity for shareholders to cast a non-binding vote on the institution’s executive compensation during any annual proxy solicitation and shareholder vote; requires the Secretary to maximize the taxpayer investment by using market mechanisms, such as auctions or reverse auctions, but allows the Secretary to make direct purchases where appropriate; requires the Secretary to obtain a warrant giving the Secretary the right to receive non-voting common stock from any institution from which the Secretary purchases troubled assets, which the Secretary may transfer freely, and which are protected from dilution by stock splits, distributions, dividends, or corporate reorganizations; limits the Secretary’s purchasing authority to $700 billion, which will be granted to the Secretary in tranches.  The initial authority will be limited to $250 billion; after a request to Congress, the authority will be limited to $350 billion; and after a final request and written report to Congress, the authority will be limited to $700 billio; grants the Comptroller General of the United States oversight of the TARP program; establishes the Office of the Special Inspector General for the Troubled Asset Relief Program; raises the public debt limit to $11.315 trillion; authorizes the Secretary to establish a temporary guaranty program for money market mutual funds; and limits tax deductions for participating institutions for executive compensation to no more than $400,000 a year per executive. We note that, it’s not clear who supports this draft as it now stands.  What is clear is that this draft will change – indeed, likely has changed – before it is voted on by the House and Senate. Timing and Procedure There is a desire among bill negotiators and others to reach agreement by the end of the weekend.  One scenario would have the House and Senate voting on a rescue plan – either as a standalone measure or as an amendment to the Continuing Resolution (CR) – this weekend or possibly Monday morning.  Another, perhaps more likely at this point, would have Congress coming back after Rosh Hashanah to finish up on Wednesday. Various sources have reported that Treasury hopes to have the program functioning within 3-4 weeks. On a procedural note, Senator Majority Leader Harry Reid filed cloture on the motion to proceed to the Continuing Resolution (CR) yesterday.  Cloture will ripen tomorrow.  This is significant in terms of timing because that means the CR may well serve as the vehicle to move (or at least vote on) the rescue bill (as will a second "stimulus" package). WMBank Goes Into Receivership:  Assets Sold to JP Morgan Chase After close of business last night, the banking operations of Washington Mutual, Inc — Washington Mutual Bank, Henderson, NV and its subsidiary, Washington Mutual Bank, FSB, Park City, UT (together, WMBank ) — were sold in a supervisory transaction.  WMBank was closed by the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC) was named receiver. Washington Mutual, Inc., the holding company for WMBank, and the interests of equity, debt holders or other creditors of Washington Mutual, Inc., are not included in the closure or receivership of  WMBank. The FDIC announced that all depositors, insured and uninsured, are fully protected and that the closure will result in no cost to the Deposit Insurance Fund. WMBank (including its subsidiary) had combined assets of $307 billion and total deposits of $188 billion. Subsequent to the closure, JPMorgan Chase acquired the assets and most of the liabilities, including covered bonds and other secured debt, of WMBank from the FDIC as Receiver. JPMorgan Chase acquired the assets, assumed the qualified financial contracts and made a payment of $1.9 billion. Claims by equity, subordinated and senior unsecured debt holders of WMBank were not acquired. The holders of equity, subordinated and senior unsecured debt in WMBank are now creditors of the receivership for WMBank.  The FDIC indicates they may file claims in the receivership for recovery of any amounts that may be due to them. However, the FDIC also stated that  under  12 U.S.C. § 1821(d)(11) claims by equity and subordinated debt holders are subordinated to claims by general creditors of the institution, with the result that equity and subordinated debt holders of the bank are expected to receive no recovery on their claims. The FDIC also addressed existing contracts with  WMBank  in its release.  It stated: "By operation of law, parties to agreements by Washington Mutual Bank may not exercise any contractual or other rights to trigger termination, acceleration, default, or other actions based upon the insolvency, the appointment of the FDIC as receiver, or the transfer of such agreements to JPMorgan Chase. The Federal Deposit Insurance Act, 12 U.S.C. §§ 1821(d) and (e)(13), prohibits the exercise of such contractual or other rights in order to promote an orderly resolution of insured depository institutions." This transaction is noteworthy in several respects:  (1) This was by far the largest failure of a U.S. depository institution (almost ten times the size of IndyMac Bank, closed in July). (2) Nevertheless, it was able to be resolved without any cost to the FDIC.  Since WMBank was one of the 10 largest banks in the country and had very extensive mortgage operations, there had been concern that its failure would be very costly to the FDIC. The FDIC estimated the IndyMac failure would cost the FDIC Fund $4 to 8 billion. (3) It has been reported that WMBank experienced a loss of deposits in excess of $15 billion in recent weeks.  The urgency of WMBank’s condition is suggested by the fact that FDIC acted to take it over midweek.  Typically, banks are closed over a weekend. The FDIC did not comment on what factors led it to make this transaction when it did. (4) All uninsured depositors were protected in the transfer to JPMorganChase (because the JPMC paid a premium and there thus was not cost to the FDIC). The FDIC did not announce the amount of uninsured deposits of WMBank; IndyMac Bank had about $1 billion of uninsured deposits, and those depositors are now claimants in that receivership. Gibson Dunn will make available subsequently to its clients and friends an overview of the receivership and conservatorship authority of the Federal Deposit Insurance Corporation. Gibson Dunn has assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above.  Please contact Michael Bopp (202-955-8256, mbopp@gibsondunn.com) in the firm’s Washington, D.C. office or any of the following members of the Financial Markets Crisis Group: Public Policy ExpertiseMel Levine – Century City (310-557-8098, mlevine@gibsondunn.com)John F. Olson – Washington, D.C. (202-955-8522, jolson@gibsondunn.com)Amy L. Goodman – Washington, D.C. (202-955-8653, agoodman@gibsondunn.com)Alan Platt – Washington, D.C. (202- 887-3660, aplatt@gibsondunn.com)Michael Bopp – Washington, D.C. (202-955-8256, mbopp@gibsondunn.com) Securities Law and Corporate Governance ExpertiseRonald O. Mueller – Washington, D.C. (202-955-8671, rmueller@gibsondunn.com)K. Susan Grafton – Washington, D.C. (202- 887-3554, sgrafton@gibsondunn.com)Brian Lane – Washington, D.C. (202-887-3646, blane@gibsondunn.com)Lewis Ferguson – Washington, D.C. (202- 955-8249, lferguson@gibsondunn.com)Barry Goldsmith – Washington, D.C. (202- 955-8580, bgoldsmith@gibsondunn.com)John H. Sturc – Washington, D.C. (202-955-8243, jsturc@gibsondunn.com)Alan Bannister – New York (212-351-2310, abannister@gibsondunn.com) Financial Institutions Law ExpertiseChuck Muckenfuss – Washington, D.C. (202- 955-8514, cmuckenfuss@gibsondunn.com)Christopher Bellini – Washington, D.C. (202- 887-3693, cbellini@gibsondunn.com)Amy Rudnick – Washington, D.C. (202-955-8210, arudnick@gibsondunn.com) Corporate ExpertiseHoward Adler – Washington, D.C. (202- 955-8589, hadler@gibsondunn.com)Richard Russo – Denver (303- 298-5715, rrusso@gibsondunn.com)Dennis Friedman – New York (212- 351-3900, dfriedman@gibsondunn.com)Stephanie Tsacoumis – Washington, D.C. (202-955-8277, stsacoumis@gibsondunn.com)Robert Cunningham – New York (212-351-2308, rcunningham@gibsondunn.com)Joerg Esdorn – New York (212-351-3851, jesdorn@gibsondunn.com)Stewart McDowell – San Francisco (415-393-8322, smcdowell@gibsondunn.com)C. William Thomas, Jr. – Washington, D.C. (202-887-3735, wthomas@gibsondunn.com) Real Estate ExpertiseJesse Sharf – Century City (310-552-8512, jsharf@gibsondunn.com)Alan Samson – London (+44 20 7071 4222, asamson@gibsondunn.com)Andrew Levy – New York (212-351-4037, alevy@gibsondunn.com)Dennis Arnold – Los Angeles (213-229-7864, darnold@gibsondunn.com)Andrew Lance – New York (212-351-3871, alance@gibsondunn.com) Crisis Management ExpertiseTheodore J. Boutrous, Jr. – Los Angeles (213-229-7804, tboutrous@gibsondunn.com) Bankruptcy Law ExpertiseMichael Rosenthal – New York (212-351-3969, mrosenthal@gibsondunn.com) Tax Law ExpertiseArthur D. Pasternak – Washington, D.C. (202-955-8582, apasternak@gibsondunn.com)Paul Issler – Los Angeles (213-229-7763, pissler@gibsondunn.com) Executive and Incentive Compensation ExpertiseStephen W. Fackler – Palo Alto (650-849-5385, sfackler@gibsondunn.com)Michael J. Collins – Washington, D.C. (202-887-3551, mcollins@gibsondunn.com)Sean C. Feller – Los Angeles (213-229-7579, sfeller@gibsondunn.com) © 2008 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice

September 25, 2008 |
Financial Markets in Crisis: Deal on Rescue Bill Appears Likely, but What Will It Contain?

The Gibson, Dunn & Crutcher Financial Markets Crisis Group is tracking closely government responses to the turmoil that has catalyzed dramatic and rapid reshaping of our capital and credit markets. What follows is our latest in a series of updates on key regulatory and legislative issues. Deal or No Deal  Legislation designed to rescue financial markets moved in fits and starts today as Capitol Hill, the Administration, and the two presidential candidates all weighed in on the measure.  As of 8:00 p.m. EST, no deal had been endorsed by all key players but a deal nonetheless appeared likely to emerge.  Last night, President Bush gave a speech designed to rally bipartisan support for quick action, while driving home the enormity of the crisis to the American public.  This afternoon, a bipartisan, bicameral group of lawmakers announced a plan that would grant funding to Treasury to bailout the financial markets.  But were the right Republicans in the room?  Soon after the agreement was announced and later in the afternoon, House Minority Leader John Boehner and Senate Banking Committee Ranking Member Richard Shelby both criticized the deal.  Senator Shelby went a step further to say that a deal would not be reached. Details of the agreement are sketchy.  But a one-page summary indicates that the plan differs from the Treasury Department’s original proposal in significant respects.  Perhaps most notably, it would give Treasury access to $250 billion immediately and another $100 billion via self-certification that the funds are needed.[1]  An additional $350 billion would be subject to a Congressional joint resolution of approval.[2]  While these components sum to the $700 billion requested by the Administration, its request was for the entire sum to be available without strings attached. According to the one-page summary, the agreement requires the Secretary to set standards to prevent excessive executive compensation for participating companies, but does not define what those standards would be.  Responding to concerns about taxpayer protection, the agreement requires than any transaction include equity sharing, and requires that if profits are made from the plan, that most of them be used to reduce the national debt.  The agreement also institutes stronger oversight than originally included in Treasury’s proposal.  The oversight provisions establish an oversight board and an independent Inspector General to monitor the program, as well as regular, specific reports to Congress and GAO audits.  The agreement also includes protections for homeowners but appears to not include a proposal, favored by some Democrats, to empower bankruptcy judges to modify the terms of mortgages.  Timing  Though Congress and the Administration will have to hammer out the details of the package, leaders on both sides of the aisle are optimistic that legislation will be passed before the markets open on Monday.  On a procedural note, Senator Majority Leader Harry Reid filed cloture on the motion to proceed to the Continuing Resolution (CR) today.  Cloture will ripen on Saturday.  This is significant in terms of timing because it is expected that bailout legislation will be offered as an amendment to the CR (as will a second "stimulus" package).  Questions About the Structure of Treasury’s Bailout Program and Asset Manager Selection  Many of our clients have raised two important questions about Treasury’s bailout program.  They want to know exactly how the purchases and sales of these troubled assets will occur and how asset managers and other contractors will be selected.  While these two issues have not been the focus of the legislative debates as of yet, they have received considerable attention in recent hearings and will become critical components of the rescue bill’s implementation.  Below, we have summarized the key points we know about these issues thus far.  As the plan evolves, we will continue to provide timely updates focusing on the specific details of the program and how those details affect our clients.   Mechanics of the Treasury Bailout Program  The mechanics of the Treasury bailout program have not been established either by Treasury in its proposal or Congress in its various bill drafts.  In hearings over the past two days, Federal Reserve Chairman Bernanke and Treasury Secretary Paulson have made it clear that, while the precise pricing mechanisms have not been determined, one mechanism that will be used is some form of reverse auction.  While there are different forms of reverse auctions, the central notion is to determine the market value of the assets by having sellers of the assets bid against each other for the purchaser’s business.  In short, the roles of buyer and seller are reversed.  During his congressional testimony, Secretary Paulson, speaking in generalized terms, emphasized the need for a process designed for "immediate implementation" and that would be "sufficiently large to have maximum impact and restore market confidence."  He explained that the process would involve market mechanisms available to “small banks, credit unions and thrifts, large banks, financial institutions of all size[s] across the country.”  For the market to determine the assets’ value, he stressed the need for participation by “hundreds, even thousands, of institutions” in a variety of different processes.  At one point Committee Chairman Frank directly asked Secretary Paulson if community banks would be allowed to participate.  Secretary Paulson responded, “Absolutely. And S&L’s and credit unions.” [3]   Hiring of Asset Managers  The Treasury proposal would authorize the Secretary broadly to contract for services as needed to carry out the authorities of the legislation.  At a minimum, Treasury is expected to retain private companies to serve as asset managers during the process of buying and selling troubled mortgages and asset-backed securities.  The draft legislation issued by the House on September 22, 2008 also provides the Secretary with broad contracting authority but imposes greater restrictions on the process for awarding contracts to asset managers.  The House legislation would require the Secretary to take "appropriate steps to manage conflicts of interest," including by requiring firms to disclose potential conflicts and to submit mitigation strategies.  The Secretary also would be required to solicit a wide range of proposals and to publish a request for information.  As with most of the mechanics of the troubled asset purchase program, these likely will be left to Treasury’s discretion within certain parameters.  We will provide our clients with updates on key developments as this effort moves forward.                  [1]Damian Paletta, Michael R. Crittenden & Patrick Yoest, Agreement Reached on Bailout Ahead of High-Level Meeting, Wall St. J., Sept. 25, 2008.                 [2] Lori Montgomery, Bailout Money to Be ‘Phased In’, Wash. Post., Sept. 25, 2008 (Business Live Coverage update).                 [3] The Future of Financial Services: Exploring Solutions for the Market Crisis: Hearing Before the H. Comm. on Financial Services, 110th Cong. (2008) (statement of Treasury Secretary Paulson).    Gibson Dunn has assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above.  Please contact Michael Bopp (202-955-8256, mbopp@gibsondunn.com) in the firm’s Washington, D.C. office or any of the following members of the Financial Markets Crisis Group: Public Policy ExpertiseMel Levine – Century City (310-557-8098, mlevine@gibsondunn.com)John F. Olson – Washington, D.C. (202-955-8522, jolson@gibsondunn.com)Amy L. Goodman – Washington, D.C. (202-955-8653, agoodman@gibsondunn.com)Alan Platt – Washington, D.C. (202- 887-3660, aplatt@gibsondunn.com)Michael Bopp – Washington, D.C. (202-955-8256, mbopp@gibsondunn.com) Securities Law and Corporate Governance ExpertiseRonald O. Mueller – Washington, D.C. (202-955-8671, rmueller@gibsondunn.com)K. Susan Grafton – Washington, D.C. (202- 887-3554, sgrafton@gibsondunn.com)Brian Lane – Washington, D.C. (202-887-3646, blane@gibsondunn.com)Lewis Ferguson – Washington, D.C. (202- 955-8249, lferguson@gibsondunn.com)Barry Goldsmith – Washington, D.C. (202- 955-8580, bgoldsmith@gibsondunn.com)John H. Sturc – Washington, D.C. (202-955-8243, jsturc@gibsondunn.com)Alan Bannister – New York (212-351-2310, abannister@gibsondunn.com) Financial Institutions Law ExpertiseChuck Muckenfuss – Washington, D.C. (202- 955-8514, cmuckenfuss@gibsondunn.com)Christopher Bellini – Washington, D.C. (202- 887-3693, cbellini@gibsondunn.com)Amy Rudnick – Washington, D.C. (202-955-8210, arudnick@gibsondunn.com) Corporate ExpertiseHoward Adler – Washington, D.C. (202- 955-8589, hadler@gibsondunn.com)Richard Russo – Denver (303- 298-5715, rrusso@gibsondunn.com)Dennis Friedman – New York (212- 351-3900, dfriedman@gibsondunn.com)Stephanie Tsacoumis – Washington, D.C. (202-955-8277, stsacoumis@gibsondunn.com)Robert Cunningham – New York (212-351-2308, rcunningham@gibsondunn.com)Joerg Esdorn – New York (212-351-3851, jesdorn@gibsondunn.com)Stewart McDowell – San Francisco (415-393-8322, smcdowell@gibsondunn.com)C. William Thomas, Jr. – Washington, D.C. (202-887-3735, wthomas@gibsondunn.com) Real Estate ExpertiseJesse Sharf – Century City (310-552-8512, jsharf@gibsondunn.com)Alan Samson – London (+44 20 7071 4222, asamson@gibsondunn.com)Andrew Levy – New York (212-351-4037, alevy@gibsondunn.com)Dennis Arnold – Los Angeles (213-229-7864, darnold@gibsondunn.com)Andrew Lance – New York (212-351-3871, alance@gibsondunn.com) Crisis Management ExpertiseTheodore J. Boutrous, Jr. – Los Angeles (213-229-7804, tboutrous@gibsondunn.com) Bankruptcy Law ExpertiseMichael Rosenthal – New York (212-351-3969, mrosenthal@gibsondunn.com) Tax Law ExpertiseArthur D. Pasternak – Washington, D.C. (202-955-8582, apasternak@gibsondunn.com)Paul Issler – Los Angeles (213-229-7763, pissler@gibsondunn.com) Executive and Incentive Compensation ExpertiseStephen W. Fackler – Palo Alto (650-849-5385, sfackler@gibsondunn.com)Michael J. Collins – Washington, D.C. (202-887-3551, mcollins@gibsondunn.com)Sean C. Feller – Los Angeles (213-229-7579, sfeller@gibsondunn.com) © 2008 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 24, 2008 |
Financial Markets Crisis: Congress and Administration Lurch Toward a Rescue Plan; Federal Reserve Relaxes Restrictions on Investments in Banks

The Gibson, Dunn & Crutcher Financial Markets Crisis Group is tracking closely government responses to the turmoil that has catalyzed dramatic and rapid reshaping of our capital and credit markets. What follows is our latest in a series of updates on key regulatory and legislative issues. Congressional Hearings Today, Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke testified before the House Financial Services Committee.  Both Secretary Paulson and Chairman Bernanke reiterated the message they conveyed to the Senate Banking Committee yesterday, urging Congress to pass legislation quickly and warning of dire economic consequences if the federal government does not intervene soon.  Tomorrow, the House Financial Services Committee will hear testimony from Federal Housing Finance Agency Director James Lockhart, Fannie Mae President and CEO Herbert Allison, and Freddie Mac CEO David Moffett regarding the conservatorship of Fannie Mae and Freddie Mac. Debate on the Hill Members of Congress remain divided over the financial plan despite President Bush and Vice President Dick Cheney’s efforts to encourage a swift resolution.[1]  Nevertheless, Senate Democrats and the Administration appear to have made progress toward reaching compromises on key issues such as the plan’s oversight provisions, assistance for homeowners, and executive compensation limits.  Several senators joined Senator Schumer’s call for $700 billion in purchase authority to be granted in tranches, and, in particular, requesting that much of the funding be withheld until the new administration and Congress is in place.  This idea appears to be picking up steam, at least among Democrats.   After the House Financial Services hearing this afternoon, President Bush conceded to including executive compensation caps in the legislation, though Democrats dismissed the development as "irrelevant."[2] The House Democrats have produced a new working draft of their version of the Treasury legislation.  The draft would: Allow extensive oversight of the program by the U.S. Government Accountability Office (GAO), including comprehensive audits and regular reports to Congress starting 60 days after Treasury’s initial use of the purchasing authority and every quarter thereafter; Permit judicial review of Treasury’s actions, which Treasury’s version specifically denied.  The House Democrats’ version would not allow courts to grant injunctive or equitable relief, which could hamstring Treasury’s efforts; Establish contracting procedures requiring the Secretary to solicit proposals broadly when selecting asset managers and instituting more specific conflict of interest provisions; Provide greater assistance to troubled homeowners; Limit the program to United States financial institutions only and specifically exclude foreign government owned institutions; and Impose stricter regulations on corporate governance and executive compensation for all participants in the Treasury program. Timing Senate Majority Leader Harry Reid has stated that he is committed to staying in session past this Friday (the target adjournment date), if need be, to complete action on rescue legislation and other items.  Senator Schumer has predicted that the Senate will vote on the bill this weekend.[3]  Republican leadership predicts a resolution before Rosh Hashanah begins at sundown on Monday.  If a rescue passage is not passed by then, some say it could be shelved until after the election. Cost In prepared testimony, Congressional Budget Office ("CBO") Director Peter Orszag indicated that the plan does not have include enough details to be scored but predicted that the net cost of the plan would be "substantially less than $700 billion."[4]  He also noted, however, that significant short term increases in revenue will be necessary to fund the program.[5] It appears that the proposal will be scored by CBO and likely the Administration not on an outlay basis, but on a credit subsidy basis.  That is the way government loans and loan guarantees are scored.  In this case, CBO and the Office of Management and Budget are likely to view the purchase authority in the bill as a credit instrument in that the government would be buying loans or securities made up of loans.  The actual "score", then, of the legislation, will not be determined by how much Treasury outlays to purchase loans but by how much OMB and CBO estimate the government will lose or gain, over time, in buying and selling assets under the bill. Treasury Guaranty Program Last week, the Treasury Department announced a program to insure money market funds.  We discussed this program in our September 22, 2008 publication, Capital Markets in Crisis: The Government Formulates a Response.  While Treasury’s announced program did not include limits on the guaranty that would apply to a particular eligible money market mutual fund, both House and Senate drafts of broader financial markets rescue legislation would limit the guaranty to the insurance provided to individual depositors under the Federal Deposit Insurance Act.  We understand, however, that new draft legislation will remove the cap placed on the amount of funds insured under the program. Federal Reserve Board Enhances Passive Investment Framework for Minority Investors in Bank Holding Companies and Banks. In connection with its various efforts to increase the capital and liquidity available to the banking industry, the Federal Reserve Board (“Fed”) has issued a new policy statement providing additional guidance on making equity investments in a bank or bank holding company (“BHC”).  Importantly, the issuance only acts to modify certain elements in the Fed’s existing control framework and does not change any other items, for example, the rules relating to aggregation, attribution and acting in concert with respect to investors. On the margin, this enhanced flexibility will benefit investors in BHCs, however, it undoubtedly does not represent the significant changes that were being sought when fund groups petition the Fed to liberalize this area.  For a company, including a hedge fund or private equity fund, the policy statement describes the investment amount and certain other relationships, such as board representation, that may exist without the company being considered to control a BHC and thereby become a BHC itself under the Bank Holding Company Act (“BHC Act”). Under the guidance, a company or fund that is a noncontrolling minority investor (“investor”) may now have a “modicum” of influence over a BHC without it constituting having a “controlling influence over the management or policies” of a BHC.  In this regard, this policy modifies the following elements in the Fed’s control framework consistent with this position. 1.  Director Representation.  An investor may have at least one representative on a BHC’s board of directors.  It may also have two representatives “when the investor’s aggregate director representation is proportionate to its total interest in the banking organization [that is, the greater of the investor’s voting interest or total equity in the organization], but does not exceed 25 percent of the voting members of the board, and another shareholder of the banking organization is a [BHC] that controls the banking organization under the BHC Act.” (footnotes omitted). 2.  Increased Maximum Investment.  An investor may own “a combination of voting and nonvoting shares that, when aggregated, represents less than one-third [33%] of the total equity of the organization (and less than one-third of any class of voting securities, assuming conversion of all convertible nonvoting shares held by the investor) and does not allow the investor to own, hold or vote 15 percent or more of any class of voting securities of the organization.” 3.  Enhanced Consultations with Management.  An investor may communicate and advocate with management for changes in a BHC’s policies or operations such as policies related to mergers, management changes, dividends, debt or equity financing, new business lines, and subsidiary divestitures.  An investor may not make explicit or implicit threats to dispose of shares in the BHC or to sponsor a proxy solicitation as a condition of action or non-action by the BHC or its management in connection with these policy discussions. ____________________    [1]   Steven T. Dennis & Emily Pierce, Bush Push Lacks Traction: Bailout Pitch Lands with a Thud, Roll Call, Sept. 24, 2008.   [2]   Jennifer Bendery, Frank Dismisses Bush Concession on Executive Pay, Roll Call, Sept. 24, 2008.   [3]   Schumer: Senate Has ‘Consensus’ on Need for Bailout Bill, Wall St. J., Sept. 24, 2008.   [4]   Budget Impact of Financial Bailout Remains Murky, Congressional Quarterly, Midday Update, Sept. 24, 2008.   [5]   Jared Allen, CBO Director Says Market Depends on Bailout, The Hill, Sept. 24, 2008.   Gibson Dunn has assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above.  Please contact Michael Bopp (202-955-8256, mbopp@gibsondunn.com) in the firm’s Washington, D.C. office or any of the following members of the Financial Markets Crisis Group: Public Policy ExpertiseMel Levine (310-557-8098, mlevine@gibsondunn.com)John F. Olson (202-955-8522, jolson@gibsondunn.com)Amy L. Goodman (202-955-8653, agoodman@gibsondunn.com)Alan Platt (202- 887-3660, aplatt@gibsondunn.com)Michael Bopp (202-955-8256, mbopp@gibsondunn.com) Securities Law and Corporate Governance ExpertiseRonald O. Mueller (202-955-8671, rmueller@gibsondunn.com)K. Susan Grafton (202- 887-3554, sgrafton@gibsondunn.com)Brian Lane (202-887-3646, blane@gibsondunn.com)Lewis Ferguson (202- 955-8249, lferguson@gibsondunn.com)Barry Goldsmith (202- 955-8580, bgoldsmith@gibsondunn.com)John H. Sturc (202-955-8243, jsturc@gibsondunn.com)Alan Bannister (212-351-2310, abannister@gibsondunn.com) Financial Institutions Law ExpertiseChuck Muckenfuss (202- 955-8514, cmuckenfuss@gibsondunn.com)Christopher Bellini (202- 887-3693, cbellini@gibsondunn.com)Amy Rudnick (202-955-8210, arudnick@gibsondunn.com) Corporate ExpertiseHoward Adler (202- 955-8589, hadler@gibsondunn.com)Richard Russo (303- 298-5715, rrusso@gibsondunn.com)Dennis Friedman (212- 351-3900, dfriedman@gibsondunn.com)Stephanie Tsacoumis (202-955-8277, stsacoumis@gibsondunn.com)Robert Cunningham (212-351-2308, rcunningham@gibsondunn.com)Joerg Esdorn (212-351-3851, jesdorn@gibsondunn.com)Stewart McDowell (415-393-8322, smcdowell@gibsondunn.com)C. William Thomas, Jr. (202-887-3735, wthomas@gibsondunn.com) Real Estate ExpertiseJesse Sharf (310-552-8512, jsharf@gibsondunn.com)Alan Samson (+44 20 7071 4222, asamson@gibsondunn.com)Andrew Levy (212-351-4037, alevy@gibsondunn.com)Dennis Arnold (213-229-7864, darnold@gibsondunn.com)Andrew Lance (212-351-3871, alance@gibsondunn.com) Crisis Management ExpertiseTheodore J. Boutrous, Jr. (213-229-7804, tboutrous@gibsondunn.com)  Bankruptcy Law ExpertiseMichael Rosenthal (212-351-3969, mrosenthal@gibsondunn.com) Tax Law Expertise Arthur D. Pasternak (202-955-8582, apasternak@gibsondunn.com)Paul Issler (213-229-7763, pissler@gibsondunn.com)   © 2008 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 23, 2008 |
Congressional and Administrative Status Update Regarding Economic Bailout

The Gibson, Dunn & Crutcher Financial Markets Crisis Group is tracking closely government responses to the turmoil that has catalyzed dramatic and rapid reshaping of our capital and credit markets. What follows is our latest in a series of updates on key regulatory and legislative issues. Senate Banking Committee Hearing The Senate Banking Committee met today to hear testimony from Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chair Chris Cox, and Federal Housing Finance Agency Director James Lockhart. Treasury Secretary Paulson continued to advocate for a narrowly tailored bill without additional corporate governance provisions which could slow down approval of the legislation.  Though he maintained that approval of the legislation needed to be quick and administration of the program efficient, he seemingly relented slightly to congressional demands for stronger oversight of the program.  He stated that Treasury is considering auctioning one asset class at a time.[1]  Finally, he called for economic structural reform to come after the country weathers this initial crisis.[2] Federal Reserve Chairman Bernanke said the $700 billion dollar plan to purchase troubled mortgage backed assets would stabilize the financial markets, and offered a grim picture of the economy if Congress does not act on the legislation.  Bernanke urged that Treasury not buy the assets at "fire-sale" prices, but purchase them at "hold-to-maturity" prices.  Though the lower fire-sale prices would benefit taxpayers when the assets rose again, a massive government purchase of the assets at those prices would depress the market even further. He suggested that an auction mechanism would be the most appropriate way to determine the hold-to-maturity values.[3] SEC Chair Chris Cox focused his testimony on the SEC’s role as a law enforcement agency and discussed the various investigations the SEC has undertaken in the subprime market.  He also urged Congress to give the SEC greater authority to regulate the national market in credit default swaps.[4] FHFA Director James Lockhart discussed the market conditions that he believes led to Fannie Mae and Freddie Mac’s deterioration and the FHFA’s decision to place the government sponsored enterprises into conservatorship.[5] Debate on the Hill Reportedly, the Democrats are pushing for issues such as executive compensation and bankruptcy laws to be addressed in the bailout legislation, while Treasury is focused on producing a more narrowly tailored bill.  Secretary Paulson argues that such provisions could discourage small banks and credit unions, among other institutions, from participating in the program.[6]  At least one compromise option has been suggested, which would apply executive compensation limits only on those firms to which Treasury provides a significant amount of capital.[7]  Republicans primarily are concerned with protecting taxpayers and many have expressed doubts about writing the federal government an enormous blank check to bail out private companies.[8]  Former Speaker of the House Newt Gingrich urged congressional members to vote against Treasury’s bailout plan and predicted that no plan would be passed if one has not been passed by Friday night.[9] During the Banking Committee Hearing, Senator Schumer called for the $700 billion in purchasing authority to be given to Treasury in tranches to better protect taxpayer interests. Congressional members from both parties have proposed postponing their election year recess to stay in Washington and devote more time to the legislation.[10] Other Developments Treasury has agreed to include stricter oversight of the bailout plan and assistance to homeowners facing foreclosure in the bailout plan, which have been two of the Democrat legislators’ main priorities.[11]  The draft tax title of the financial package, released today, would reduce executive compensation deductibility from $1 million to $400,000 for the top five executives of participating corporations and would impose a 20 percent excise tax on golden parachute outlays above a limit set by Treasury.  The tax title would permit many banks to treat their losses from their preferred stock holdings in Fannie Mae and Freddie Mac as ordinary losses which reduce the banks’ need to raise more capital.  The tax provisions also would prevent sales of bad mortgages to Treasury from Real Estate Mortgage Investment Conduits from triggering a 100 percent tax penalty, and would extend a provision from the July housing relief bill that allows homeowners to avoid paying taxes on forgiven mortgage debts.[12] Both Republicans and Democrats have agreed to allow Treasury to take an equity stake in financial institutions that sell assets to the government, though the details of that plan have not been resolved.[13] Yesterday, September 22, the IRS announced that Treasury and the IRS will not assert that the Treasury-initiated program to insure the holdings of money market funds violates any restrictions placed on tax-exempt money market funds.  Thus, eligible money market funds may participate in the Treasury program and still claim their regular benefits from tax exemption. Yesterday, the FHFA announced new chairmen of Fannie Mae and Freddie Mac.  Former Chairman of Ernst & Young, Philip Laskawy, has taken over as the new chair of Fannie Mae, and John Koskinen, former President and CEO of Palmieri Company and former Deputy Director for Management at the OMB has taken over as chair of Freddie Mac.[14] _____________________                  [1]  Bernanke Goes Off Script to Address Fire Sale Risks, Wall St. J., Sept. 23, 2008 at http://online.wsj.com/page/lexis.html ("Real Time Economics" Blog).                 [2]  Testimony of Treasury Secretary Paulson to the Senate Committee on Banking, Housing, and Urban Affairs, Sept. 23, 2008 [http://banking.senate.gov/public/_files/PAULSONTestimony92308.pdf]                 [3]  Bernanke Goes Off Script to Address Fire Sale Risks, Wall St. J., Sept. 23, 2008 at http://online.wsj.com/page/lexis.html (“Real Time Economics” Blog).                 [4]  Transcript of SEC Chairman Chris Cox’s testimony to the Senate Committee on Banking, Housing, and Urban Affairs, Sept. 23, 2008 [http://www.sec.gov/news/testimony/2008/ts092308cc.htm]                 [5]  Testimony of FHFA Director James Lockhart to the Senate Committee on Banking, Housing, and Urban Affairs, Sept. 23, 2008 [http://banking.senate.gov/public/_files/LOCKHARTStmt92308.pdf]                 [6]  Greg Hitt, Deborah Solomon, & Michael M. Phipps, Treasury Relents on Key Points, Wall St. J., Sept. 23, 2008                        [7]  Id.                 [8]  Jackie Kucinich and J. Taylor Rushing, Republicans express more skepticism on bailout plan, The Hill, Sept. 23, 2008;                 [9]  Sam Youngman, Gingrich urges vote against ‘stupid’ Paulson Plan, The Hill, Sept. 23, 2008.                    [10]  Emily Pierce, Senators Wary of Bailout Bill, Roll Call, Sept. 23, 2008.                 [11]  Greg Hitt, Deborah Solomon, & Michael M. Phipps, Treasury Relents on Key Points, Wall St. J., Sept. 23, 2008.                 [12]  CQ Staff, Tax Title to Bailout Bill Targets Executive Pay, CQ Today Online News – Taxes, Sept. 23, 2008.                 [13]  Id.                 [14]  Testimony of FHFA Director James Lockhart to the Senate Committee on Banking, Housing, and Urban Affairs, Sept. 23, 2008 [http://banking.senate.gov/public/_files/LOCKHARTStmt92308.pdf] Gibson, Dunn & Crutcher has assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above.  Please contact the attorney with whom you work, Michael Bopp (202-955-8256, mbopp@gibsondunn.com) in the firm’s Washington, D.C. office, or any of the following members of the Financial Markets Crisis Group: Public Policy Expertise Mel Levine (310-557-8098, mlevine@gibsondunn.com)John F. Olson (202-955-8522, jolson@gibsondunn.com)Ronald O. Mueller (202-955-8671, rmueller@gibsondunn.com)Alan Platt (202- 887-3660, aplatt@gibsondunn.com)Michael Bopp (202-955-8256, mbopp@gibsondunn.com) Securities Law and Corporate Governance Expertise Amy L. Goodman (202-955-8653, agoodman@gibsondunn.com)K. Susan Grafton (202- 887-3554, sgrafton@gibsondunn.com)Brian Lane (202-887-3646, blane@gibsondunn.com)Lewis Ferguson (202- 955-8249, lferguson@gibsondunn.com)Barry Goldsmith (202- 955-8580, bgoldsmith@gibsondunn.com) Banking Law Expertise Chuck Muckenfuss (202- 955-8514, cmuckenfuss@gibsondunn.com)Christopher Bellini (202- 887-3693, cbellini@gibsondunn.com)Amy Rudnick (202-955-8210, arudnick@gibsondunn.com) Corporate Expertise Howard Adler (202- 955-8589, hadler@gibsondunn.com)Richard Russo (303- 298-5715, rrusso@gibsondunn.com)Dennis Friedman (212- 351-3900, dfriedman@gibsondunn.com)Stephanie Tsacoumis (202-955-8277, stsacoumis@gibsondunn.com)Robert Cunningham (212-351-2308, rcunningham@gibsondunn.com)Joerg Esdorn (212-351-3851, jesdorn@gibsondunn.com) Real Estate Expertise Jesse Sharf (310-552-8512, jsharf@gibsondunn.com)Alan Samson (+44 20 7071 4222, asamson@gibsondunn.com)Dennis Arnold (213-229-7864, darnold@gibsondunn.com) Bankruptcy Law Expertise Michael Rosenthal (212-351-3969, mrosenthal@gibsondunn.com)   Tax Law Expertise    Arthur D. Pasternak (202-955-8582, apasternak@gibsondunn.com)   © 2008 Gibson, Dunn & Crutcher LLP   Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 22, 2008 |
Capital Markets in Crisis: The Government Formulates a Response

Gibson, Dunn & Crutcher Deploys a Team of Experts Many of our clients are facing new challenges because of the dramatic economic events that have occurred over the last two weeks and as a result of changes that in their scope and reach we have not seen since the Depression.  Financial markets are literally being reshaped in Washington on a real-time basis.  As the Administration and Congress move forward to address the liquidity crisis and related problems, we are positioned to keep our clients apprised of key developments and to ensure that their voices are heard in the debate about how to repair our financial infrastructure. To that end, Gibson, Dunn has assembled a team of attorneys with a broad range of experience in the securities, financial, corporate, real estate, tax, bankruptcy, and public policy fields to shape, monitor, understand, analyze, and respond to developments.  The team roster can be found at the conclusion of this client alert. The Administration recently has taken a number of important steps to help the economy recover.  Among the most critical steps are the following: The Treasury Department has proposed legislation to enable it to support the failing mortgage markets and resume the free flow of credit into the economy; The Federal Reserve has instituted a program to lend money to depository institutions to purchase asset-backed securities; Treasury has initiated a guaranty program for money market funds; and The U.S. Securities and Exchange Commission (the “SEC”) has taken emergency actions to restore fair and orderly markets, including banning naked short selling, prohibiting most short sales in the public-traded securities of certain financial institutions, requiring institutional investment managers to report daily short positions, and lifting restrictions on issuer repurchases. Proposed Treasury Legislation On Friday, September 19th, the Treasury Department circulated  groundbreaking legislation to Congress.  The legislation would grant the Treasury Secretary broad authority to purchase asset-backed securities from financial institutions.  Significantly, the Treasury plan: grants Treasury authority to issue up to $700 billion of Treasury securities to purchase mortgage-related assets and other assets the Secretary deems necessary to stabilize the financial markets.  Though the process for purchasing the securities has not been determined, Treasury is considering auction and reverse auction options; gives Treasury authority to purchase assets originated or issued on or before September 17, 2008.  Treasury’s authority to continue purchasing these assets sunsets after two years;  allows Treasury to purchase asset-backed securities primarily from American institutions, but also from international institutions that have significant operations in America, as well as other institutions the Secretary identifies as necessary to stabilizing the economy;  authorizes Treasury to choose private asset managers who will act as government agents to manage the assets. Treasury will have full discretion over the management; raises the federal debt limit by $700 billion, to $11.315 trillion, to fund this Treasury program.  While members of Congress have expressed a willingness to grant Treasury substantial leeway to conduct this program, the most recent discussions between Congress and the Administration have focused on, among other things, the following: How the program will be overseen; The categories of assets Treasury will be authorized to purchase; Whether the bill should include taxpayer and homeowner mortgage assistance; Executive compensation limits and other corporate governance provisions; and Taxpayer protections. Depository Institution Lending On Friday, September 19, the Federal Reserve announced that it would establish a lending program to assist depository institutions and bank holding companies to purchase asset-backed securities, which will provide liquidity to the asset-backed commercial paper markets.[1]  Eligible borrowers include United States depository institutions, bank holding companies, and United States branches and agencies of foreign banks.  The borrowers may borrow funds to purchase asset-backed commercial paper from funds that qualify as money market mutual funds under Securities and Exchange Commission Rule 2a-7, issued pursuant to the Investment Company Act of 1940.  Eligible issues of asset backed commercial paper are limited to U.S. dollar denominated issues from U.S. issuers which have been rated First-Tier Securities under Rule 2a-7.[2]  The Federal Reserve Bank of Boston will administer the program, but eligible borrowers may settle their loans through their accounts with any Federal Reserve Bank.  Loans made under the program will be made at a rate equal to the primary credit rate in effect on the date the loan is initiated.  Because advances under the program are non-recourse to the Federal Reserve Bank of Boston, borrowers are at no risk of loss unless the asset backed commercial paper is found to be non-conforming.[3]  The program began on September 19, 2008, and will continue until January 30, 2009, unless the Federal Reserve Board extends the program to a later date.[4]  Treasury Guaranty Program for Money Market Funds The Treasury Department has established a temporary guaranty program for money market mutual funds.  For a fee, Treasury will insure the holdings of any eligible publicly offered retail or institutional money market mutual fund for the next year.  Eligible funds include all funds regulated under Rule 2a-7 of the Investment Company Act of 1940 and that are publicly offered and registered with the SEC.  Taxable and tax-exempt funds are eligible, and the guaranty will not affect the tax-exempt treatment of payments by tax-exempt money market funds.  The guaranty will be limited to balances that existed as of the close of business on Friday, September 19, 2008.  Treasury intends for this guaranty to bolster investor confidence and stabilize the global economy by maintaining the standard $1 net asset value of money market mutual funds.  The program will be funded out of the Exchange Stabilization Fund, which currently holds approximately $50 billion of assets.[5]  While Treasury’s announced program did not include limits on the guaranty that would apply to a particular eligible money market mutual fund, both House and Senate drafts of broader capital markets rescue legislation would limit the guaranty to the insurance provided to individual depositors under the Federal Deposit Insurance Act.  SEC Emergency Orders The SEC has issued emergency orders that, among other things: Ban short selling, subject to certain exceptions, in the securities of certain financial institutions selected by the listing markets;[6] Adopt a new antifraud rule, Rule 10b-21, which prohibits naked short selling;[7] Require institutional investment managers (i.e., persons required to file Form 13F), to report daily net short positions beginning September 29, 2008 for trading during the week of September 22, 2008;[8] and Adopt temporary Rule 204T, which imposes hard close out requirements on failures to deliver and mandatory pre-borrow requirements on all equity sales transactions.[9] The emergency orders expire October 2, 2008 unless further extended by the SEC, which has authority to extend the orders until October 18, 2008.  Although Rule 204T was adopted on an interim final basis, the SEC is accepting comments for 30 days. Finally, the SEC issued an emergency order on September 19 which suspended the timing and volume restrictions of Rule 10b-18.  Rule 10b-18 states that repurchases by a company will not be viewed as manipulative if they are effected in accordance with the rule.  The SEC emergency order allows repurchases to be made at any time during the day and raises the volume of permissible repurchases to 100% of the average daily trading volume.  The emergency order does not, however, alleviate potential insider trading concerns, so companies should continue to assess whether they possess any material nonpublic information before they effect discretionary transactions in the open market.  This order will expire on October 2, 2008 unless further extended by the SEC.[10] ____________________    [1]   Press Release, The Board of Governors of the Federal Reserve System, (September 19, 2008), http://www.federalreserve.gov/newsevents/press/monetary/20080919a.htm.   [2]   Federal Reserve Frequently Asked Questions about ABCP MMMF Liquidity Facility (AMLF or "the Facility"), http://www.frbdiscountwindow.org/mmmf.cfm?hdrID=14.   [3]   Id.   [4]   Id.   [5]   More information about the Fund can be found at: http://www.treas.gov/offices/international-affairs/esf/.    [6]   See Exchange Act Release No. 58592 [http://www.sec.gov/rules/other/2008/34-58592.pdf.] and Exchange Act Release No. 58622 [http://www.sec.gov/rules/other/2008/34-58611.pdf.]   [7]   See Exchange Act Release No. 58572 [http://www.sec.gov/rules/other/2008/34-58572.pdf.]   [8]   See Exchange Act Release No. 58591 [http://www.sec.gov/rules/other/2008/34-58591.pdf.]  and Exchange Act Release No. 58591A [http://www.sec.gov/rules/other/2008/34-58591a.pdf.]   [9]   See Exchange Act Release No. 58572 [http://www.sec.gov/rules/other/2008/34-58572.pdf.] [10]   See Exchange Act Release No. 58588 [http://www.sec.gov/rules/other/2008/34-58588.pdf.] Gibson, Dunn has assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above.  Please contact Michael Bopp (202-955-8256, mbopp@gibsondunn.com) in the firm’s Washington, D.C. office or any of the following team members. Public Policy Expertise Mel Levine (310-557-8098, mlevine@gibsondunn.com):  Chairs firm’s Public Policy practice group. He previously served for ten years as a Democratic member of Congress from California. He retains close ties with the leadership of the US Senate and House of Representatives and senior members of the key Committees of the Congress. John F. Olson (202-955-8522, jolson@gibsondunn.com):  Extensive experience in general representation of business organizations as to corporate governance, corporate securities, corporate finance and merger and acquisition matters.  He has counseled many boards of directors and board committees on governance issues and in assessing shareholder litigation, responding to business combination proposals and conducting internal investigations. Ronald O. Mueller (202-955-8671, rmueller@gibsondunn.com):  Strong policy background and extensive experience in areas of securities law and corporate governance. His practice focuses on proxy and disclosure issues, corporate governance, executive compensation and corporate transactions. Alan Platt (202-887-3660, aplatt@gibsondunn.com):  Key member of the firm’s Public Policy Group for the past fifteen years where he has focused on economic issues. Prior to joining the firm, he held senior positions in the US Department of State and the US Senate. He is the author of three books and more than thirty articles on a wide range of international policy issues. Michael Bopp (202-955-8256, mbopp@gibsondunn.com):  Served for more than two years as Associate Director of the White House Office of Management and Budget where he set budgets and coordinated policy for multiple agencies including the Treasury Department, the Department of Housing and Urban Development, the new Federal Housing Financing Agency, and the financial services regulatory agencies.  He also served for eleven years on Capitol Hill running investigations and as a Legislative Director and as Staff Director and Chief Counsel of the Senate Homeland Security and Governmental Affairs Committee.   Michael has extensive high level contacts within the Administration and on Capitol Hill. Securities Law and Corporate Governance Expertise Amy L. Goodman (202-955-8653, agoodman@gibsondunn.com):  Served eleven years on the SEC staff in the Divisions of Corporation Finance and Investment Management and in the Chairman’s office.  In addition to advising clients on securities regulation and disclosure matters, she is a nationally recognized corporate governance expert, advising companies and their boards of directors and board committees on regulatory matters, best practices and D&O insurance and indemnification. K. Susan Grafton (202-887-3554, sgrafton@gibsondunn.com):  Chair of the American Bar Association’s’ Subcommittee on Market Regulation.  Advises broker-dealers, hedge funds and other market participants on a wide variety of sales, trading, financial and operational issues, including Regulation SHO.  Joined the firm after nearly 7 years at Goldman, Sachs & Co., where she advised the Securities Division on sales and trading issues. Brian Lane (202-887-3646, blane@gibsondunn.com):  Extensive expertise in a wide range of SEC issues.  He counsels companies on the most sophisticated corporate governance and regulatory issues under the federal securities laws.  He is a nationally recognized expert in his field as an author, media commentator, and conference speaker. Lewis Ferguson (202-955-8249, lferguson@gibsondunn.com):  Served for more than three yeas as the first General Counsel of the Public Company Accounting Oversight Board where he was in charge of all legal affairs and was involved in drafting the PCAOB’s rules and regulations and auditing standards.  His practice focuses on the representation of accounting and auditing firms and their employees, securities regulation and disclosure issues and corporate governance matters. Barry Goldsmith (202-955-8580, bgoldsmith@gibsondunn.com):  Served as Executive Vice President for Enforcement of the National Association of Securities Dealers (now the Financial Industry Regulatory Authority), the primary private-sector regulator of the country’s securities industry, during a period of major change and enforcement activity on Wall Street.  His practice focuses on the representation of securities firms, broker-dealers, investment companies and investment advisers and other financial institutions and their employees.  He has been recognized as one of the top securities regulatory and enforcement attorneys in the District of Columbia. Banking Law Expertise Chuck Muckenfuss (202-955-8514, cmuckenfuss@gibsondunn.com):  For more than twenty-five years has represented financial institutions in a broad spectrum of regulatory and policy matters.  Before joining the firm in 1981, Mr. Muckenfuss was Senior Deputy Comptroller for policy at the Office of the Comptroller of the Currency (1978-81) and Special Assistant to the Director (1974-77) and Counsel to the Chairman (1977-78) of the Federal Deposit Insurance Corporation. Christopher Bellini (202-887-3693, cbellini@gibsondunn.com):  Co-chairs firm’s financial institutions group.  Advises clients in financial services industry concerning mergers and acquisitions, strategic investments, legislation, regulatory matters and government investigations and enforcement actions.  As counsel to the mutual fund industry, negotiated the compromise with the Federal Reserve Board and other banking agencies on the financial holding company functional regulation provisions of the Gramm-Leach-Bliley Act. Served for five years in the Office of the General Counsel at the Federal Reserve Board and for three years as a senior auditor at Arthur Andersen. Amy Rudnick (202-955-8210, arudnick@gibsondunn.com):  Specializes in representing clients in criminal and regulatory enforcement actions, internal investigations, and compliance and due diligence reviews involving anti-money laundering laws and regulations, including the Bank Secrecy Act, as amended by the USA PATRIOT Act. She counsels financial institution holding companies, domestic and foreign banks, securities broker-dealers, investment companies, insurance companies, hedge funds, finance companies, money services businesses, other financial services businesses, and multinational corporations with respect to risk-based anti-money laundering compliance programs, customer identification and enhanced due diligence procedures, currency transaction and suspicious activity reporting, and other USA PATRIOT Act requirements. Corporate Expertise Howard Adler (202-955-8589, hadler@gibsondunn.com):  Co-chairs the firm’s corporate transactions practice group.  He represents major corporations, investment banks, merchant banks and financial institutions in securities offerings, mergers and acquisitions, joint ventures, venture capital investments, and other matters.  He is regularly listed in legal publications as one of the country’s top corporate lawyers. Richard Russo (303-298-5715, rrusso@gibsondunn.com):  Co-chairs firm’s corporate transactions practice group and is senior corporate partner in firm’s Denver office.  He focuses on the representation of business entities, with emphasis on securities and disclosure matters, mergers and acquisitions, restructurings and corporate governance.  He is regularly listed in legal publications as one of the country’s top corporate lawyers. Dennis Friedman (212-351-3900, dfriedman@gibsondunn.com):  Co-chairs the firm’s mergers and acquisitions practice group.  He has extensive experience, over a legal career of more than thirty years, in mergers and acquisitions, corporate governance, and capital markets.  He served for several years as a an investment banker at major Wall Street firms and as the head of a merchant banking group.  He is regularly listed in legal publications as one of the country’s top corporate lawyers. Stephanie Tsacoumis (202-955-8277, stsacoumis@gibsondunn.com): More than twenty five years’ of experience representing clients in the financial services industry in a broad range of sophisticated transactional and advisory matters.  From her involvement in one of the earliest credit card securitizations to her representation of debtholders in major recapitalizations to handling acquisitions from the Resolution Trust Corporation to representing clients in loan and servicing portfolio transactions to representing underwriters in finance company securities offerings, she has experience in a wide variety of financial services-related matters.  Following the savings and loan crisis in the late 1980’s, Ms. Tsacoumis handled dozens of acquisitions of failed thrifts and thrift assets.  She also was instrumental in assisting the FDIC and RTC revise their forms of asset purchase agreement.  She is regularly listed in legal publications as one of the country’s top corporate lawyers. Robert Cunningham (212-351-2308, rcunningham@gibsondunn.com):  Co-chairs firm’ s global finance practice group.  He has extensive experience in a wide range of financing arrangements, including secured and unsecured, multi-borrower, multi-currency revolving credit, term loan, letter of credit and BA facilities, first lien/second lien financings, acquisition and bridge financings, project financings, restructurings and DIP facilities, bankruptcy exit financings, complex structured financings, asset monetizations and securitizations, leveraged lease financings, and private placements.  He was recently named Vice Chair of the American Bar Association First Lien/Second Lien Model Intercreditor Agreement Task Force. Joerg Esdorn (212-351-3851, jesdorn@gibsondunn.com): Co-Chair of the firm’s Global Finance Group. He focuses on the representation of providers of capital and issuers/borrowers in a wide variety of financing transactions and in workouts and restructurings, including those involving real estate assets. He is regularly listed in legal publications as one of the country’s top finance lawyers.  Real Estate Expertise Jesse Sharf (310-552-8512, jsharf@gibsondunn.com):  Co-chairs firm’s real estate group where he represents financial institutions, investors and developers in all manner of real estate transactions, including acquiring and disposing of portfolios of loans and REO, forming entities to acquire these and other real estate and real estate debt instruments, creating and unwinding complex syndication, participation and other structures used to own real estate and real estate related debt, and workouts and restructurings of real estate transactions.  Alan Samson (+44 20 7071 4222, asamson@gibsondunn.com):  Co-chairs firm’s real estate group.  Based in London and dual UK/US qualified, he represents real estate opportunity funds, financial institutions and private equity investors in the full range of real estate transactions, including acquiring and disposing of portfolios of loans (whole loans, structured pieces and CMBS) and other real estate debt instruments and participations, and workouts and restructurings of real estate transactions. Dennis Arnold (213-229-7864, darnold@gibsondunn.com): Extensive experience in all aspects of commercial and residential real estate and finance, as well as workouts, bankruptcy and debt restructure. He is a nationally recognized expert in real estate, finance, insolvency and commercial law, including significant expertise in UCC remedies and mezzanine loan foreclosures. His primary areas of concentration include real estate, banking and finance, commercial law (including Articles 3, 5 and 9 of the Uniform Commercial Code), workouts, bankruptcy and debt restructure. Bankruptcy Law Expertise Michael Rosenthal (212-351-3969, mrosenthal@gibsondunn.com):  Co-chairs the firm’s business restructuring and reorganization practice group. Focuses on insolvency, corporate reorganization, workouts and debt restructuring matters and has a particular expertise in the representation of debtors, creditors and acquirors of distressed businesses. Among other matters in the financial services sector, he has been heavily involved in the recent failure of a large financial services firm. Tax Law Expertise  Arthur D. Pasternak (202-955-8582, apasternak@gibsondunn.com):  Chairs the firm’s tax practice group.  Areas of expertise include tax advice to domestic corporations and partnerships on U.S. tax issues generally.  Strong background in mergers and acquisitions and in transactions involving major financial institutions.  © 2008 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 22, 2008 |
Recent Senate Hearing Targets Dividend Tax Avoidance by Large Financial Firms with Offshore Entities

A key Senate investigative body has issued its latest findings in its investigation of alleged abusive tax practices, which is now in its seventh year.  The investigation has examined alleged offshore tax havens, the way tax shelters are promoted, how assets are "hidden" offshore, and, most recently, dividend tax abuse.  While it is not clear where the investigation will focus next, it is highly likely that it will continue.   On September 11, 2008, the Senate Permanent Subcommittee on Investigations issued a report alleging that large financial firms have facilitated the avoidance of U.S. taxes by offshore entities on dividends paid by U.S. corporations.  The subcommittee, which is chaired by Carl M. Levin (D-Mich.), issued its report in connection with a hearing held September 11, 2008.  Representatives of several Wall Street firms testified at the hearing, during which the subcommittee discussed six case studies of alleged abuse of the tax system.  The subcommittee focused on two forms of transactions–equity swaps and stock loans–that allow non-U.S. entities to avoid withholding taxes on dividends paid from U.S. companies.  This most recent hearing is the latest in a series of subcommittee investigations into large U.S. financial firms that offer tax savings to their offshore clients.   Recent Inquiries Conducted by the Permanent Subcommittee on Investigations   The Senate Permanent Subcommittee on Investigations, which has the broadest investigative mission in the Senate, has a history of investigating offshore tax abuses that dates back twenty-five years.  Since 2001, the subcommittee has conducted six separate investigations into offshore tax havens.  The subcommittee typically uses case studies to illustrate different types of alleged tax abuses and customarily calls upon its corporate and individual investigative targets to testify.  The subcommittee has focused both on entities that engage in alleged tax abuses and those who promote them.  Earlier this year, the subcommittee’s staff issued a report criticizing firms for "using an armada of tax attorneys, accountants, bankers, brokers, corporate service providers, trust administrators, and others" to promote "tax havens to U.S. citizens as a means to avoid U.S. taxes."[1] Dividend Tax Abuse Investigation The subcommittee’s most recent report singled out for criticism two types of transactions that allow foreign investors to avoid a withholding tax on U.S.-issued dividends that can be as much as 30% of the amount of the dividend.[2]  The subcommittee asserted that it has found "substantial evidence that U.S. financial institutions knowingly developed, marketed, and implemented a wide range of transactions" aimed at avoiding withholding taxes on dividends paid by U.S. corporations. The first type of transaction is known as an "equity swap," whereby an offshore fund enters into a swap contract with a financial institution.  The financial institution is obligated to pay the total return on the swapped stock, including any gains and dividends paid.  But under a current IRS regulation, the total return swap payments are not subject to the withholding tax that would be due on dividend payments to foreign investors.  The second type of transaction highlighted by the subcommittee is a combination stock loan and swap arrangement between an offshore fund, an offshore subsidiary of a U.S. financial institution and the U.S. financial institution.  Under this transaction, the U.S. corporation makes a total return swap payment to its offshore subsidiary which in turn makes  a "substitute dividend" payment to the offshore fund.  The parties to the arrangement take the position that the substitute dividend payment is not subject to withholding. As Forbes noted after the hearing, the subcommittee’s main targets were the "investment banks that designed and marketed" these products, and "not the offshore investment vehicles that profited from them."[3]  Chairman Levin pointed to the companies’ internal emails, marketing documents, and promotional literature in alleging that the primary motivation behind these two products was purely tax avoidance.  Firm representatives testifying at the hearing were asked to defend their marketing literature that promoted tax savings and to explain the non-tax benefits of equity swaps and stock loans.  What Firms Should Know 1.  The Senate Permanent Subcommittee on Investigations is continuing its investigation of tax abuses that began seven years ago.  The subcommittee is extremely aggressive in conducting its investigations and is not afraid to use its unusually broad subpoena authority. 2.  This most recent phase of the subcommittee’s investigation was the end product of more than a dozen subpoenas and numerous interviews of bank executives, tax lawyers, and hedge fund managers.  In all, the subcommittee compiled its report after reviewing hundreds of thousands of documents gleaned from the financial firms being investigated.  3.  The subcommittee is pressuring the IRS and the Treasury Department to increase their enforcement actions and to revise notices and interpretations of the tax code in order to eliminate offshore dividend tax avoidance.  4.  Firms subject to the subcommittee’s investigative power can be expected to account for marketing literature, internal communications, and other documents that promote tax savings, as well as to explain the non-tax benefits of financial products offered to clients.  They also should anticipate being called as witnesses at a subcommittee hearing. 5.  Firms under investigation should have a clear understanding of the differences between Congressional and other government investigations and should adjust their defense strategies accordingly. One key difference involves the mechanisms used to enforce requests for documents, other information, and testimony. These must be understood in order to make informed decisions on how to respond to Congressional committees. _______________________   [1]   Senate Permanent Subcommittee on Investigations, Staff Report, "Tax Haven Banks and U.S. Tax Compliance," July 17, 2008, p. 17, available at http://hsgac.senate.gov/public/_files/071708PSIReport.pdf.   [2]   The September 11 report issued by the Subcommittee on Permanent Investigations, "Dividend Tax Abuse: How Offshore Entities Dodges Taxes on U.S. Stock Dividends," is available online at http://levin.senate.gov/newsroom/supporting/2008/091108DividendTaxAbuse.pdf.   [3]   Anita Raghavan, "The Tax-Dodge Derivative," Forbes.com, Sept. 11, 2008, available at http://www.forbes.com/businessinthebeltway/2008/09/11/senate-dividends-tax-biz-beltway-cx_ar_0911divtax.html.  Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have about these developments.  Please contact the Gibson Dunn attorney with whom you work, or any of the following:   Michael Bopp (202-955-8256, mbopp@gibsondunn.com) Mel Levine (310-557-8098, mlevine@gibsondunn.com) Arthur D. Pasternak (202-955-8582, apasternak@gibsondunn.com) John H. Sturc (202-955-8243, jsturc@gibsondunn.com)F. Joseph Warin (202-887-3609, fwarin@gibsondunn.com) © 2008 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

December 17, 2007 |
Internet Gambling Rules Would Enlist Banks to Fight Uphill Battle

Washington, D.C. Partner Amy Rudnick and New York Associate Anthony Mahajan are authors of “Internet Gambling Rules Would Enlist Banks to Fight Uphill Battle” [PDF] published in BNA’s Banking Report.

November 26, 2007 |
Treasury Issues New Bank Secrecy Act Guidance for Casinos and Card Clubs

On November 14, 2007, for the first time in several years, the Department of the Treasury, Financial Crimes Enforcement Network ("FinCEN"), issued Bank Secrecy Act ("BSA") compliance guidance for casinos and card clubs, Frequently Asked Questions:  Casino Recordkeeping, Reporting, and Compliance Program Requirements (FIN-2007-G005).  The guidance, which is in the form of twenty-three questions and answers, addresses questions about what types of gaming establishments are subject to the BSA requirements and questions about compliance with the BSA requirements by casinos and card clubs, including currency transaction reporting (31 C.F.R. § 103.22), recordkeeping (31 C.F.R. §§ 103.33 and 103.36), suspicious activity reporting (31 C.F.R. § 103.21), and maintenance of a BSA compliance program (31 C.F.R. § 103.64). Among the highlights of the guidance, FinCEN concludes that: If state (or tribal) law defines a slot machine or video lottery operation at a racetrack or "racino" as a "casino, gambling casino, or gaming establishment," and the gross annual gaming revenues of the slot machines and video lottery operation exceed $1 million, the operation would be a casino under the BSA subject to all of the BSA requirements for casinos. Establishments in Nevada and tribal jurisdictions that offer only off track betting are casinos under the BSA if the establishments offer "account wagering" and the gross annual gaming revenue exceeds $1 million. However, a horse racetrack that offers pari-mutuel or other wagering only on races at the track would not be considered a casino under the BSA. Unlike coin transactions, paper money transactions for slot club accountholders identified through slot monitoring systems must be aggregated with other "cash-in" transactions for currency transaction reporting ("CTR-C") purposes. If a casino were to "turn off the dollar counter" slot machine feature, it could be subject to an enforcement action under the BSA. Casinos are no longer required to file a CTR-C (FinCEN Form 103) to report slot jackpot wins paid in currency in excess of $10,000. In order to comply with the suspicious activity reporting requirement, as part of its internal controls, a casino or card club must develop procedures for using all available information, including information in its automated systems, surveillance system, and surveillance logs to identify transactions or patterns of suspicious activity. While not required, a casino should develop an internal control to document the basis for its determination that a transaction was determined not to be suspicious after investigation, i.e., a decision not to file a suspicious activity report.  The guidance can be accessed at FinCEN Casino FAQs Final.pdf. Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or Amy Rudnick (202-955-8210, arudnick@gibsondunn.com), Linda Noonan (202-887-3595, lnoonan@gibsondunn.com), in the firm’s Washington, D.C. office or Nicola T. Hanna (949-451-4270, nhanna@gibsondunn.com), in the firm’s Orange County office.  © 2007 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

November 1, 2007 |
The Mixing of Banking and Commerce: A conference summary

Washington, D.C. partner C.F. Muckenfuss III was quoted in the article, "The Mixing of Banking and Commerce: A conference summary" [PDF] published in the November 2007 issue of The Federal Reserve Bank of Chicago’s Chicago Fed Letter.

March 15, 2007 |
U.S. Treasury Department Formally Severs Ties Between U.S. Financial Institutions and Banco Delta Asia

On March 14, 2007, Stuart Levey, the Undersecretary for Terrorism and Financial Intelligence at the U.S. Treasury Department, announced the issuance of a final rule under Section 311 of the USA PATRIOT Act that, in 30 days, will bar U.S. banks and certain other financial institutions from opening, maintaining, or managing correspondent accounts for Macau-based Banco Delta Asia and its subsidiaries (collectively, "BDA"). BDA also will be prohibited from directly or indirectly accessing the U.S. financial system. These measures are identical to the measures imposed against the Commercial Bank of Syria (Syria) and the Syrian Lebanese Commercial Bank (Lebanon) last April.  The announcement follows an 18-month investigation that began when the Treasury Department designated BDA as a financial institution of "primary money laundering concern" in 2005 because of some of its dealings with North Korean clients. Additionally, press reports indicate that the results of this investigation may enable overseas regulators to release some of the approximately $24 million that was frozen following the 2005 designation. Those frozen funds have recently become a major stumbling block in the United States’ negotiations with North Korea regarding its nuclear program.  In September 2005, the Treasury Department designated BDA as a financial institution of "primary money laundering concern" based on its determination that BDA is used to facilitate and promote money laundering and other financial crimes, particularly in connection with alleged North Korean counterfeiting, smuggling, and drug trafficking. At the same time, the Treasury Department issued a Notice of Proposed Rulemaking proposing that U.S. banks and other financial institutions prohibit BDA from directly or indirectly opening or maintaining correspondent accounts in the United States. Following the Treasury Department’s action, many U.S. and foreign banks began voluntarily terminating their relationships with BDA, and the Macanese government intervened, froze all funds held by the bank in accounts relating to North Korea, and cooperated with the Treasury Department’s investigation. The Macanese authorities also took substantial steps to strengthen Macau’s anti-money laundering and anti-terrorist regime.  This issue resurfaced recently when North Korea reportedly linked the release of the frozen funds to its willingness to enter into and abide by an agreement to halt development of its nuclear weapons program.  Undersecretary Levey said that the Treasury Department decided to isolate BDA from the entire U.S. financial system because the investigation confirmed that BDA was willing to turn a blind eye to the illegal activities of some of its clients and that its client due diligence practices were grossly inadequate. The final rule does not target Macau as a jurisdiction of primary money laundering concern; it only targets BDA as a financial institution. The rule applies to U.S. banks, securities broker-dealers, futures commission merchants and introducing brokers, and mutual funds. Because nearly all U.S. financial institutions have already voluntarily terminated their relationships with BDA, the Treasury Department’s action merely should formalize the current situation. However, the covered U.S. financial institutions now also will have to take reasonable due diligence measures, consistent with the regulations, to ensure that the correspondent accounts of other foreign financial institution clients are not being used to conduct transactions on behalf of BDA. In addition, press reports indicate that the conclusion of the investigation and the Treasury Department’s action may pave the way for the Macanese government to release between $8 million and $12 million of the frozen funds because the information gathered during the investigation may assist Macanese authorities in identifying some of the frozen accounts as unlikely to have a connection to illicit activities. This action, in turn, should remove one of the stumbling blocks to reaching an agreement to halt development of North Korea’s nuclear program. Undersecretary Levey did leave open the possibility that the rule could be rescinded in the future if BDA were to address the concerns of the Department and demonstrate responsible management and business practices. * * * * * Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further information, please contact the Gibson Dunn attorney with whom you work or  Judith A. Lee (202-887-3591, jalee@gibsondunn.com) Daniel J. Plaine (202-955-8286, dplaine@gibsondunn.com)Amy G. Rudnick (202-955-8210, arudnick@gibsondunn.com)Linda Noonan (202-887-3595, lnoonan@gibsondunn.com)Jill S. Henderson (202-955-8220, jhenderson@gibsondunn.com)Patrick Speice (202-887-3776, pspeiceJr@gibsondunn.com) © 2007 Gibson, Dunn & Crutcher LLP The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

October 3, 2006 |
World Bank Announces New Voluntary Disclosure Program: Entities That Voluntarily Report Wrongdoing Will Not Face Sanctions

The World Bank has announced that its Board of Executive Directors has approved a new Voluntary Disclosure Program intended to encourage entities to report fraudulent and corrupt practices involving projects financed or supported by the World Bank. Administered by the World Bank’s Department of Institutional Integrity, the Voluntary Disclosure Program allows entities that have engaged in fraud, bribery, corruption, and other wrongdoing in connection with World Bank-financed or supported projects to avoid sanctions if they self-report their wrongdoing and comply with non-negotiable, standardized terms and conditions. The benefits afforded to entities entering the Program are significant. Such participants  Avoid debarment from World Bank programs for disclosed misconduct; Avoid having their identities disclosed to the public or to third parties such as government authorities in connection with self-reported information;  Avoid the payment of any monetary fines or other sanctions; Avoid being placed on the World Bank’s public “black list” of entities found to have engaged in fraud or corruption; and Maintain their eligibility to compete for World Bank-supported projects. The new rules governing self-reporting under the Voluntary Disclosure Program mark a significant shift in World Bank policy, representing an emphasis on compliance and internal controls as opposed to punishment. In announcing the Program, World Bank President Paul Wolfowitz said that the Voluntary Disclosure Program is “[d]esigned to prevent and deter corruption in [World Bank] projects and contracts,” and “encourage[] companies to adopt business practices that will contribute to a more competitive and healthy private sector.” Prior to the implementation of the Program, the World Bank had publicly debarred more than 330 firms and individuals. Under the Voluntary Disclosure Program, entities should now undertake a new calculus in determining whether to voluntarily report wrongdoing uncovered in connection with World Bank-financed or supported projects. This analysis may often be implicated in transactions where companies have paid bribes internationally and face liability under the Foreign Corrupt Practices Act. Eligibility  Any individual or entity, other than World Bank employees, that has received World Bank financing or support in connection with a project is eligible to enter the Voluntary Disclosure Program, except that the Program is not available to individuals or entities that are under active investigation by the World Bank. Entities that are under criminal investigation by a government authority may be eligible for the Program so long as the criminal investigation does not relate to an activity financed or supported by the World Bank. If a criminal investigation by a government authority relates to a World Bank-financed or supported activity, the Voluntary Disclosure Program may not be available in those cases where the World Bank is aware of the investigation. Under such circumstances, the Department of Institutional Integrity will open its own investigation into the case. The Voluntary Disclosure Program is not available to entities providing goods or services directly to the World Bank through its General Services Department.  Rules Governing The Program To enter the Voluntary Disclosure Program, a participant must complete an Entry Request Form and Background Data Sheet and accept the Program Terms and Conditions. Upon entering the Program, a participant must agree not to commit any misconduct in any World Bank-financed or supported project and must disclose known misconduct that has already been committed. Next, the participant must conduct an internal investigation and submit a report detailing its findings. The Voluntary Disclosure Program may not alter the Bank’s obligation to comply with a validly issued subpoena by a government authority.  Within one year of submitting an investigative report, the World Bank will conduct an audit – at the expense of the entity – of up to 30% of the contracts discussed in the entity’s report. The participant must then implement a robust internal compliance program and hire an independent compliance monitor, who must be approved by the World Bank. The World Bank will conduct three annual reviews of the monitor’s reports – once again, at the expense of the entity – and suggest additional ethics measures, as it deems necessary. Participants should therefore expect to remain in the Voluntary Disclosure Program for 4 or 5 years, until the Program runs its full course. At the conclusion of the compliance phase, the World Bank will prepare a report containing a summary of all the participant’s disclosures. This report will be shared with the Offices of the Bank President and General Counsel. A redacted version of the report – intended to preserve the anonymity of the participant – may be shared with World Bank member countries and other designated audiences such as anti-corruption non-governmental organizations. Upon entering the Program, participants face a mandatory 10-year public debarment in accordance with applicable World Bank procedures should they: (1) fail to voluntarily, fully, and truthfully disclose all misconduct; (2) continue to engage in misconduct during the term of the Program; or (3) commit a material breach of the Program’s terms and conditions.  Although this Program has substantial hurdles for entities and many ongoing commitments, the total amnesty afforded to self-disclosing entities may be quite attractive to organizations that discover fraud or improper payments and are concerned about the ramifications of voluntary disclosure. The only equivalent amnesty program offered by the U.S. Department of Justice is the Antitrust Division program, which allows the first entity to report an antitrust violation to completely avoid prosecution. See http://www.usdoj.gov/atr/public/guidelines/0091.htm.  Gibson, Dunn & Crutcher’s Business Crimes and Investigations Group is available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn attorney with whom you work or F. Joseph Warin (202-887-3609), fwarin@gibsondunn.com; or Andrew S. Boutros (202-887-3727), aboutros@gibsondunn.com in the firm’s Washington, D.C. office.  © 2006 Gibson, Dunn & Crutcher LLP The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 11, 2006 |
2006 Bank Secrecy Act/Anti-Money Laundering Examination Manual Clarifies Elements of Effective OFAC Compliance Program for ACH Transactions

On July 28, 2006, the Federal Financial Institutions Examination Council (FFIEC) released the 2006 Bank Secrecy Act/Anti-Money Laundering Manual ("BSA/AML Manual"). The section addressing compliance with economic and trade sanctions programs administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (OFAC) has been revised to provide expanded guidance regarding automated clearing house (ACH) transactions. Additional guidance is found in the section of the BSA/AML Manual dedicated to ACH transactions. A critical component of an OFAC compliance program is a procedure for screening ACH transactions to identify blocked parties. When developing that procedure, it is helpful to know which financial institution involved in a transaction is responsible for verifying that a party is not blocked. In screening domestic ACH transactions, the Originating Depository Financial Institution (ODFI) is responsible for confirming that the Originator is not a blocked party, and must make a good faith effort to ensure that the Originator is not sending blocked funds. Similarly, the Receiving Depository Financial Institution (RDFI) is responsible for verifying that the Receiver is not a blocked party. FFIEC has stated that, in the context of a domestic ACH transaction, the ODFI and RDFI may, in effect, rely on each other to ensure OFAC compliance. However, the ODFI and RDFI may not rely on each other in the context of cross-border ACH transactions. For outbound transactions, the ODFI may not rely on the RDFI outside the United States. The ODFI is responsible for verifying that none of the parties to the transaction is blocked, and that the underlying purpose of the transaction does not violate OFAC regulations. The RDFI similarly is responsible for ensuring that transactions in-bound to the United States comply with OFAC regulations. The OFAC section of the BSA/AML Manual describes the understanding of federal agencies regarding screening obligations. Incorporating that insight into an OFAC compliance program could result in a more effective program. Moreover, the level of care demonstrated by such an action could serve to mitigate penalties in the event of a violation..  Gibson, Dunn & Crutcher’s International Trade Regulation and Compliance Practice Group is available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn attorney with whom you work or Judith A. Lee (202-887-3591, jalee@gibsondunn.com), Amy G. Rudnick (202-955-8210, arudnick@gibsondunn.com) or Andrea Farr (202-955-8680, afarr@gibsondunn.com) in the firm’s Washington, D.C. office. © 2006 Gibson, Dunn & Crutcher LLP The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.