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April 13, 2018 |
“Crossover” or “Split Collateral” Lien Subordination

New York partner J. Eric Wise and New York of counsel Yair Galil are the authors of “‘Crossover’ or ‘Split Collateral’ Lien Subordination,” [PDF] published by Bloomberg Law on April 13, 2018.

December 1, 2014 |
‘2ab’ FERC Merger Analysis Easy as 1, 2, 3

Washington D.C. Partner William S. Scherman and Washington D.C. and New York Of Counsel Jeffrey M. Jakubiak are authors of "’2ab’ FERC Merger Analysis Easy As 1, 2, 3" [PDF] published in the December 1, 2014 issue of Law360.

December 11, 2009 |
‘Ahead of the Game’ … or … ‘Out of the Game’? — UK Bank Payroll Tax

In his presentation of Pre-Budget Report — Securing the Recovery: Growth & Opportunity (PBR), released on Wednesday, the UK’s Chancellor of the Exchequer, Alistair Darling, unveiled a one-off "bank payroll tax" of 50 per cent on bank bonus payments which takes effect immediately and runs (unless extended!) until 5 April 2010. In the 216 page report[1], HM Treasury proudly notes that the UK has been at the forefront of international financial regulatory reform through its Presidency of the G20. Indeed, in the week immediately following the G20 meeting in Pittsburgh, the UK government rushed out a statement in its bid to become the first member nation to implement the bonus restrictions agreed at the summit, by announcing the agreement of the main banks incorporated in the UK to implement these restrictions. This however does not appear to be enough for the Chancellor and its bid to stay ahead of the game in maintaining its tough line on remuneration reform, the "bonus tax", which had been much trailed in the press prior to 9 December, has been pushed forward by the UK government, to the widely reported infuriation of many bankers. In the immediate aftermath of the announcement, the news has been filled with scare-mongering predictions of a "City brain drain" and "talent blockages" as bankers rush out of London to friendlier global financial centers. With an expectation of raising a modest £550 million (US$895m[2]) as a result of what many  see as domestic political pandering (achieving even opposition party support), at a cost of driving away excellence and driving down property prices, is the UK really staying ahead of the game or is it taking itself out of the game? ………………………….. Who does it affect?  Banks, building societies and financial businesses and holding companies within banking and building society groups, each operating in Britain, whether UK based or not What is the tax levied on?  Discretionary bonuses awarded to such employees during the period 9 December 2009 to 5 April 2010 (inclusive) in excess of £25,000 (US$40,710) comprising money, money’s worth, benefits and loans Who pays the tax?  Affected banks and building societies must pay an additional bank payroll tax of 50% on the amount of the bonus which exceeds £25,000 Exclusions:     (1) Fixed or contractually guaranteed bonuses which are not performance linked (2) Bonuses payable to employees who are not UK domiciled (3) Bonuses awarded after 5 April 2010 provided they are not promised to bankers over the next four months. HM Treasury has already issued a warning shot over the bows for awards made on 6 April 2010! Reason for the tax:  Darling has presented the tax has a tough response to public anger over bankers’ remuneration, the government’s belief that the bank bonus culture of ‘rewards for failure’ were a significant contributor to the financial crisis and more specifically, the tax is a quid-pro-quo for the government financial support given during this period and is a claw-back for the tax payer Impact (official):  The tax is expected to affect about 20,000 bankers and raise approximately £550 million Impact … unintended consequences? (1) With exultation in other financial centers such as New York and Frankfurt that the UK is sending out a message that it is not "bank(er) friendly", it is not surprising that bankers are already lobbying their HR departments to move out of London. (2) Investors and real estate agents in the UK are convinced that this "supertax" on bonuses will push back hopes of recovery in the UK housing market where the market for homes priced in the £3m-£10m (US$4.9m – US$16.3m) range is partly driven by cash bonuses. (3) Whilst some bankers are quietly pleased and are happy to sit on their hands for four months, many others are of the view that the low threshold of £25,000 will have a disproportionate impact on bankers who by no means fall within the category of the super-rich such as senior back-office staff and junior bankers. (4) The trend which had started in the summer to higher fixed/base salaries will continue — ironic really, as this was exactly what remuneration reform was meant to curb!   [1]   http://www.hm-treasury.gov.uk/prebud_pbr09_repindex.htm; Complete Pre-Budget Report 2009 (PDF 3.87MB)   [2]   £1 : US£ 1.6284 (Exchange rate as at 10 December 2009)    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 Selina Sagayam (+44 20 7071 4263, ssagayam@gibsondunn.com) in the firm’s London office. © 2009 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 15, 2011 |
‘Losing Ground’—In Search of a Remedy For The Overemphasis on Loss and Other Culbability Factors in the Sentencing Guidelines for Fraud and Theft

Washington, D.C. partner David Debold and New York associate Matthew Benjamin are authors of the essay "‘Losing Ground’—In Search of a Remedy For The Overemphasis on Loss and Other Culbability Factors in the Sentencing Guidelines for Fraud and Theft" [PDF] published in the December 2011 issue of the University of Pennsylvania Law Review PENNumbra (Vol. 160:141).

June 22, 2010 |
‘Ordinary Course of Business’ In Debt Agreements

New York partner Joerg H. Esdorn, associate Aaron D. Simowitz and summer associate Daniel Freeman are the authors of "’Ordinary Course of Business’ In Debt Agreements" [PDF] published online by Law360 on June 22, 2010 at law360.com.

March 22, 2010 |
‘Quon’ Could Have Consequences for E-Discovery

While it is unusual for the U.S. Supreme Court to address cases involving scandalous facts or potentially impacting electronic discovery, the Court will face both in April when it hears City of Ontario v. Quon, No. 08-1332. At issue is a government employee’s expectation of privacy in personal text messages (some salacious in nature) sent and received via an employer-issued device, but the Court’s ruling potentially could have a broader impact on private-sector workplace practices as well as preservation and production principles for electronic communications beyond text messages. In their article, "‘Quon’ Could Have Consequences for E-Discovery," prepared for The National Law Journal (March 22, 2010), Farrah Pepper and Jeffrey Coren of Gibson Dunn provide an analysis of the case and its possible far-reaching implications. Reprinted with permission from The National Law Journal (March 22, 2010), © 2010 ALM Media Properties, LLC.

September 27, 2017 |
‘Sparton v. O’Neil’: The Effect of Disclaimers on M&A Fraud Claims

​Los Angeles partner Michael Farhang is the author of "‘Sparton v. O’Neil’: The Effect of Disclaimers on M&A Fraud Claims," [PDF] published in Delaware Business Court Insider on September 27, 2017.

October 19, 2015 |
“Adoption Day” Marks Next Step for Iran Nuclear Deal

​ October 18, 2015 marked Adoption Day, the latest milestone in the implementation of the Joint Comprehensive Plan of Action ("JCPOA") between the E3/EU+3 (China, France, Germany, the Russian Federation, the United Kingdom, and the United States) and the Islamic Republic of Iran to ease sanctions on Iran in exchange for limitations on its nuclear program.   Adoption Day signaled the day on which the JCPOA became effective and when participants are to begin the necessary preparations for the eventual implementation of their full commitments under the JCPOA.  As President Obama explained in an official statement, Adoption Day officially starts the clock for Iran to take steps to remove thousands of centrifuges and related infrastructure, reduce its enriched uranium stockpile, and remove the core of the Arak heavy-water reactor.  In exchange for these measures, the other signatories will begin preparations to lift nuclear-related sanctions against Iran in accordance with the terms of the JCPOA.   In a Presidential Memorandum also issued on Adoption Day, President Obama directed the Secretaries of State, the Treasury, Commerce, and Energy "to take all necessary steps to give effect to the U.S. commitments with respect to sanctions" as described in the JCPOA.  Note, however, that Adoption Day itself does not bring any U.S. sanctions relief.  The Department of the Treasury’s Office of Foreign Assets Control (OFAC) was careful to issue a statement and FAQ that emphasized this point, cautioning that "[u]ntil Implementation Day is reached, the only changes to the Iran-related sanctions are those provided for in the Joint Plan of Action (JPOA) of November 24, 2013, as extended."  U.S. nuclear-related sanctions only begin to be lifted upon Implementation Day, which occurs when the International Atomic Energy Agency (IAEA) verifies that Iran has met its initial nuclear-related obligations under the JCPOA.  Most experts do not expect this to happen until sometime in early- to mid-2016. For further background on the JCPOA and a summary of the changes set to occur on Implementation Day, please see our July 14, 2015 client alert, "Landmark Nuclear Agreement with Iran Reached." ————— Adoption Day Statement by President Obama: https://www.whitehouse.gov/the-press-office/2015/10/18/statement-president-adoption-joint-comprehensive-plan-action Adoption Day Presidential Memorandum: https://www.whitehouse.gov/the-press-office/2015/10/18/presidential-memorandum-preparing-for-implementation-of-the-joint-comprehensive-plan-of-action OFAC Adoption Day Statement:  http://www.treasury.gov/resource-center/sanctions/Programs/Pages/iran.aspx OFAC Adoption Day FAQ: http://www.treasury.gov/resource-center/sanctions/Programs/Documents/jcpoa_adoption_faqs_20151018.pdf          Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or the authors in the firm’s Washington, D.C. office: Judith A. Lee (+1 202-887-3591, jalee@gibsondunn.com)Adam M. Smith (+1 202-887-3547, asmith@gibsondunn.com)David A. Wolber (+1 202-887-3727, dwolber@gibsondunn.com)Taylor J. Spragens (+1 202-887-3556, tspragens@gibsondunn.com) Please also feel free to contact any of the following leaders and members of the International Trade Group: United States:Ronald Kirk – Dallas (+1 214-698-3295, rkirk@gibsondunn.com)Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com)Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com)Daniel P. Chung – Washington, D.C. (+1 202-887-3729, dchung@gibsondunn.com)Lindsay M. Paulin – Washington, D.C. (+1 202-887-3701, lpaulin@gibsondunn.com) Europe:Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com)Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com)Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com)Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com)Mark Handley – London (+44 (0)207 071 4277, mhandley@gibsondunn.com) © 2015 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.   

March 7, 2018 |
“All Assets” First-Lien/Second-Lien Intercreditor Agreements

New York partner J. Eric Wise and New York of counsel Yair Galil are the authors of “‘All Assets’ First-Lien/Second-Lien Intercreditor Agreements,” [PDF] published by Bloomberg Law on March 7, 2018.

July 9, 2008 |
“Clawbacks” of Executive Compensation

With the continued spotlight on executive compensation, and with companies in the mortgage and finance industries facing ongoing challenges in the months ahead, the subject of recouping, or "clawing back," executive compensation in the event of financial statement errors is likely to remain a focal point for boards of directors.  Moreover, in the past several years, institutional shareholders and governance activists have focused on clawback provisions as a significant corporate governance and executive compensation issue. The specifics of clawback provisions vary by company, but they share a common goal of enabling companies to recover performance-based compensation to the extent they later determine that performance goals were not actually achieved, whether due to a restatement of financial results or for other reasons.  This client alert provides some background on clawbacks and concludes with a list of issues for companies to consider. Background Following the Enron- and WorldCom-era corporate scandals and enactment of the Sarbanes-Oxley Act of 2002, attention increased on the extent to which companies had the ability to recoup — or “clawback” – incentive compensation awarded to senior executives if it was later determined that their activities significantly contributed to a financial statement restatement, which resulted in a determination that the executives had received unearned incentive compensation as a direct result of their own misconduct. The Sarbanes-Oxley Act of 2002 includes a clawback provision, Section 304, which generally requires public company chief executive officers (CEOs) and chief financial officers (CFOs) to disgorge bonuses, other incentive- or equity-based compensation, and profits on sales of company stock that they receive within the 12-month period following the public release of financial information if there is a restatement because of material noncompliance, due to misconduct, with financial reporting requirements under the federal securities laws.  However, Section 304 has a number of limitations.  Specifically: it governs recoupment of compensation paid only to the CEO and CFO and does not extend to other senior officers; it does not define “misconduct,” creating an ambiguity about whether the CEO or CFO had to have participated in the misconduct in order to be subject to liability, and it does not otherwise specify whose misconduct is sufficient to trigger recoupment; and to date, courts have held that Section 304 is enforceable only by the SEC and does not provide private plaintiffs (such as a company or its shareholders) standing to bring a claim against a CEO or CFO.[1] In December 2007, the SEC reached its first settlement with an individual under Section 304.  In a settled enforcement action, the former Chairman and CEO of UnitedHealth Group Inc. agreed to reimburse the company for all incentive- and equity-based compensation that he received from 2003 through 2006, totaling approximately $448 million in cash bonuses, profits from the exercise and sale of UnitedHealth stock, and unexercised options.[2] Clawback provisions can be implemented in a number of ways: through policies, compensation plans, award agreements and employment agreements.  Some of these approaches provide a contractual basis for enforcing the provisions, while others do not.  In the absence of a contractual right, there nevertheless is some ability to pursue recoupment of unjustly paid compensation through state-law claims, as shown by the 2006 Alabama Supreme Court ruling that former HealthSouth Corporation CEO Richard Scrushy was obligated to repay $47.8 million in bonuses that he received improperly.[3] Company and Shareholder Initiatives There is no requirement under the Sarbanes-Oxley Act, other SEC rules or securities market listing standards that companies take steps to provide for the clawback of executive compensation.  However, the SEC’s executive compensation disclosure rules adopted in 2006 provide that it may be appropriate for the Compensation Discussion & Analysis in a company’s proxy statement to discuss any company “policies and decisions regarding the adjustment or recovery of awards or payments if the relevant registrant performance measures upon which they are based are restated or otherwise adjusted in a manner that would reduce the size of an award or payment.”[4]  In the wake of the SEC’s rule changes, there is now more information available about which companies have adopted clawback provisions and the substance of these provisions.  A fall 2007 survey by Equilar, Inc. indicates that among Fortune 100 companies, the prevalence of disclosed clawback policies increased from 17.6% in 2005 to 42.1% in 2006.  A survey of approximately 2,100 companies released in June 2008 by The Corporate Library found that 300 companies had clawback provisions, compared to only 14 companies that had disclosed the existence of these provisions four years ago.  As of March 2008, 28 of the Dow 30 companies had implemented clawback provisions, including 23 companies that had adopted formal clawback policies aimed at recouping the incentive compensation paid or granted to executive officers and certain other employees.  These policies most often provide for recoupment in the event of a restatement or a significant/material restatement of financial results due to misconduct on the part of the executive officer or other employee.  The remaining five companies had incentive compensation plans that contain clawback provisions.  Clawback provisions also have been a focus of shareholder proposals in recent years.  Between January 2004 and June 2008, shareholders submitted a total of 32 proposals requesting that companies adopt clawback provisions, including six proposals submitted for the 2008 proxy season.  The 32 shareholder proposals were submitted to 22 different companies, with some companies receiving the proposal in more than one year.  Of these 22 companies, nine previously had restated their financial results in the one to five years before receiving the proposal.  The popularity of clawback shareholder proposals peaked in 2006 and 2007, when shareholders submitted ten and 11 proposals, respectively.  In 2008, the proposals have averaged 10.7% of votes cast at five meetings, according to preliminary results compiled by RiskMetrics Group, Inc./ISS Governance Services (ISS), compared to 23.7% of votes cast in 2006 and 28.4% of votes cast in 2007. Some companies have taken steps to address clawbacks in response to a shareholder proposal, and some have done so as a general governance reform or following a high-profile restatement of financial results.  Other companies have argued in response to shareholder proposals that formal clawback policies unnecessarily restrict a board’s discretion to determine how best to respond to accounting improprieties.  A number of companies have sought to exclude clawback shareholder proposals from their proxy statements by pointing to existing clawback provisions and arguing that these provisions “substantially implemented” a shareholder proposal under Rule 14a-8(i)(10).  The SEC staff generally has taken a narrow view of the actions that are sufficient to “substantially implement” a clawback proposal and has permitted companies to exclude a proposal only in circumstances where the form and substance of a company’s clawback provisions correspond closely to those sought in the proposal.[5]  ISS takes a case-by-case approach in formulating voting recommendations on shareholder proposals seeking the adoption of clawback policies.  It considers whether a company has adopted a “formal” clawback policy, and whether there is an absence of chronic restatement history or material financial problems.  In applying these criteria, ISS generally has been supportive of companies that adopt clawback policies, and has recommended votes “against” shareholder proposals at these companies, as long as the clawback policies do not afford too much discretion to the board.  As an example, during the 2008 proxy season, the SEC staff took the position that Exxon Mobil Corp.[6] could not omit a clawback shareholder proposal as substantially implemented, but ISS recommended votes “against” the proposal.  Issues for Companies to Consider in Addressing Clawbacks There are a number of issues for boards to consider with respect to clawbacks.  The primary question is whether to address clawbacks in the first place.  Doing so sends a message to shareholders that the board is committed to sound executive compensation practices and effective corporate governance, and voluntary implementation of clawback provisions will reduce the likelihood that a company will receive a shareholder proposal.  On the other hand, companies need to consider whether the adoption of a clawback will adversely affect their ability to attract and retain executives.  Once a board decides to adopt a clawback provision, there are a number of issues that need to be addressed in formulating the provision.  1.      To whom should the clawback provisions apply? Clawback provisions can cover the CEO and CFO, or they can apply more broadly to all executive officers or even all employees.  Covering the CEO and CFO is consistent with the approach taken in Section 304 of the Sarbanes-Oxley Act.  However, a clawback provision that is limited in this respect does not reach other executive officers whose compensation may be performance-based or whose job functions may impact a company’s financial reporting.  Proxy voting advisors ISS and Glass, Lewis & Co. generally favor clawback shareholder proposals covering executive officers and recommend that shareholders vote “for” proposals seeking recoupment both from senior executives and from employees who are potentially responsible for accounting improprieties.  2.      To which awards should clawback provisions apply?   Base salary is not generally linked to specific performance targets and, therefore, is not typically covered by clawback provisions.  With respect to performance-based awards, the single most popular approach that companies have taken is to adopt clawback provisions that include all performance-based awards, both short-term (i.e., with a performance period of one year or less) and long-term (i.e., with a performance period of more than one year, and typically two to four years).  Covering only long-term incentives may be viewed as too narrow to serve as a deterrent for misconduct if executives are continuing to receive short-term incentives (usually in the form of annual cash bonuses) based on specific performance targets that were not actually achieved.  Consistent with Section 304 of the Sarbanes-Oxley Act, some companies also have adopted provisions that apply to the recoupment of gains derived from selling stock when the price of the stock was affected by improper accounting, although these provisions are relatively rare.  3.      What circumstances should trigger clawback provisions?  Companies with clawback provisions take a variety of approaches to the standards for determining the circumstances that trigger these provisions.  Clawback provisions can apply in the event of a “significant” or “material” restatement, in the event of all restatements (other than those due to changes in accounting policy) or in the event that financial data turns out to be incorrect.  Many companies have limited the application of their clawback provisions to “significant” or “material” restatements.  It should be noted, however, that under applicable accounting standards, a materiality standard applies when a company determines whether accounting errors require a restatement of financial statements.  A clawback provision that applies in the event of all restatements, other than those due to changes in accounting policy, addresses the argument that it is unfair to shareholders if executives are permitted to retain incentive compensation based upon performance targets that were not actually achieved.  However, such a provision also would apply in circumstances where a restatement is required due to an error that was not the result of fraud or misconduct or where a restatement does not result in a significant change to a company’s overall financial results.  For this reason, such a provision may impact a company’s ability to attract or retain executives.  Finally, a “no-fault” clawback provision would require recoupment following a determination that the prior achievement of performance goals was based on incorrect data.  Like clawback provisions triggered by any restatement, a “no-fault” provision addresses the argument about the unfairness to shareholders that results from allowing executives to keep compensation awarded on the basis of performance targets that were not actually met.  However, a “no-fault” provision would require recoupment in circumstances where incorrect data result from an innocent mistake, not fraud or misconduct or where applicable accounting standards would not require a restatement of financial statements.  Accordingly, this type of provision could have negative ramifications for a company’s ability to attract and retain executives.  4.      To what type of conduct should the clawback provisions apply? Related to the issue of when clawback provisions should apply (question 3 above) is the type of conduct that triggers application of the provisions.  Alternatives include requiring recoupment in the event of misconduct by the executive officer from whom recoupment is sought, in the event of misconduct by any employee, or in the event of any conduct that results in incorrect financial data.  Limiting clawback provisions to misconduct by the individual executive officers from whom a company seeks recoupment is the most common alternative and provides a targeted approach that incorporates a deterrent effect.  Broader provisions that rely on misconduct by any employee could be viewed as consistent with the oversight function performed by senior executives.  Finally, a “no-fault” clawback provision would not require any misconduct; instead, it would mandate recoupment simply upon a restatement of financial statements or the discovery of incorrect financial data.  As discussed above, a “no-fault” provision addresses the argument about the unfairness to shareholders that results from allowing executives to keep compensation awarded on the basis of performance targets that were not actually achieved.  However, a clawback provision with no reference to misconduct would apply in circumstances where the incorrect data resulted from an innocent mistake, and thus may impact a company’s ability to attract and retain executive officers.   5.      Should the clawback provisions grant discretion to the board? Clawback provisions may grant discretion to the board of directors to determine whether misconduct occurred and whether to recoup compensation.  Provisions that grant discretion to the board offer the advantage of flexibility because the board can decide whether, and to what extent, recoupment is appropriate based on the specific facts and circumstances involved.  However, if the board has too much discretion, the SEC staff is unlikely to concur that a company may exclude a clawback shareholder proposal on “substantial implementation” grounds.  In addition, ISS may recommend a vote in favor of a clawback shareholder proposal where a company’s clawback provisions grant what ISS views as too much discretion to the board.  6.      To what extent should the clawback provisions modify employment agreements,  compensation plans and award agreements? Companies that intend to adopt clawback provisions can do so by adopting a clawback policy.  However, the adoption of a policy, without more, may raise questions as to the policy’s enforceability and could lead to criticism for failing to implement the provisions fully.  Accordingly, companies should consider the additional step of amending existing employment agreements, compensation plans and/or award agreements to include specific reference to clawback provisions, either by adding language that provides for recoupment in specified circumstances or by incorporating an external clawback policy by reference.  Unlike with a stand-alone clawback policy, this would provide a contractual basis for enforcing the clawback provisions.  In cases where a company enters into individual award agreements pursuant to an incentive compensation plan, clawback provisions can be implemented by amending or revising the form of award agreement used for executives covered by the provisions; changing the plan itself may not be necessary.  As a legal matter, it may not be possible to apply clawback provisions retroactively to outstanding or previously paid awards without the consent of the covered executives.  Retroactive application may contravene existing employment agreements and award agreements, which generally contain language prohibiting changes that are adverse to an executive without the executive’s consent.  These provisions also may not be enforceable because the executive is not receiving any reciprocal rights or benefits.  In addition, retroactive implementation may have a negative effect on employee morale.  7.      How far back should the clawback provisions reach?  Section 304 of the Sarbanes-Oxley Act provides for recoupment of compensation received within the 12-month period following the public release of financial information that subsequently has to be restated.  Consistent with this, some companies have adopted clawback provisions that reach back 12 months prior to the filing of restated financial results.  However, more companies have adopted provisions that reach back for longer periods.  In some cases, the relevant period covers 36 months, representing the period of time for which companies must include financial statements in their SEC filings, while other companies’ provisions reach back for longer periods, such as five years, or correspond to the length of performance cycles (often three years) under compensation plans.  Another, less common approach is for the policy to have unlimited reach, although executives are likely to view this as inequitable and it may impact the company’s ability to attract and retain executives. _____________________   [1]   See, e.g., Neer v. Pelino, 389 F. Supp.2d 648 (E.D. Pa. 2005), In re BISYS Group Inc., 396 F. Supp. 2d 463 (S.D.N.Y. 2005), Kogan v. Robinson, 432 F. Supp. 2d 1075 (S.D. Calif. 2006).   [2]   See Securities and Exchange Commission v. William W. McGuire, M.D., Litigation Release No. 20387 (Dec. 6, 2007).   [3]   See Scrushy v. Tucker, 955 So. 2d 988 (Ala. 2006) (involving state law claim for unjust enrichment).   [4]   See Item 402(b)(2)(viii) of Regulation S-K.   [5]   See, e.g., Exxon Mobil Corp. (avail. Mar. 24, 2008, recon. denied).    [6]   See id. Gibson, Dunn & Crutcher’s Securities Regulation and Corporate Governance Practice Group and its Executive Compensation and Employee Benefits Practice Group 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 any of the following:  Ronald O. Mueller – Washington, D.C. (202-955-8671, rmueller@gibsondunn.com) Amy L. Goodman – Washington, D.C. (202-955-8653, agoodman@gibsondunn.com) Stephen W. Fackler – Palo Alto (650-849-5385, sfackler@gibsondunn.com)Charles F. Feldman – New York (212-351-3908, cfeldman@gibsondunn.com) David I. Schiller – Dallas (214-698-3205, dschiller@gibsondunn.com)Michael J. Collins – Washington, D.C. (202-887-3551, mcollins@gibsondunn.com)Gillian McPhee – Washington, D.C. (202-955-8230, gmcphee@gibsondunn.com) Sean Feller – Los Angeles (213-229-7579, sfeller@gibsondunn.com)Elizabeth A. Ising – Washington, D.C. (202-955-8287, eising@gibsondunn.com)Amber Busuttil Mullen – Los Angeles (213-229-7023, amullen@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.

July 21, 2016 |
“Commonsense Principles of Corporate Governance” Released

Today a group of 13 executives at leading companies and institutional investors released "Commonsense Principles of Corporate Governance" for public companies, their boards of directors and their shareholders.  The Principles are described as being intended "to provide a basic framework for sound, long-term-oriented governance" and to "promote further conversation on corporate governance."  An open letter accompanying the Principles describes them as "conducive to good corporate governance, healthy public companies and the continued strength of our public markets."  Full-page ads summarizing key parts of the Principles were published in national and international newspapers. The Principles, which are the product of meetings that have been reported on for several months, acknowledge that not every Principle will work for every company or be applied in the same manner given the many differences among public companies.  Institutional investor signatories include representatives of Berkshire Hathaway, BlackRock, Capital Group, J.P. Morgan Asset Management, State Street, T. Rowe Price and Vanguard.  The signatories also include the chief executive officers at General Electric, General Motors Co., JPMorgan Chase and Verizon.  The chief executive officers of hedge fund ValueAct Capital and the Canada Pension Plan Investment Board, a public pension fund, also are signatories.  The Principles are organized into eight areas:  (1) Board of Directors – Composition and Internal Governance; (2) Board of Directors’ Responsibilities; (3) Shareholder Rights; (4) Public Reporting; (5) Board Leadership (including the lead independent director’s role); (6) Management Succession Planning; (7) Compensation of Management; and (8) Asset Managers’ Role in Corporate Governance.  Some of the Principles address matters that are already required by state law, the corporate governance requirements in listing standards or the Securities Exchange Commission rules.  Recent high-profile public company governance issues and other matters that are addressed include: Proxy access:  The Principles report on the terms generally adopted by most companies, but do not advocate the adoption of proxy access or the adoption of specific terms. Board leadership:  "The board’s independent directors should decide, based upon the circumstances at the time, whether it is appropriate for the company to have separate or combined chair and CEO roles."  When the CEO/chair roles are combined, the board should have a "strong designated lead independent director and governance structure."  The Principles also include a list of possible duties for the lead independent director.  Non-GAAP numbers:  The Principles state that non-GAAP numbers "should be sensible and should not be used to obscure GAAP results."  The Principles also note "that all compensation, including equity compensation, is plainly a cost of doing business and should be reflected in any non-GAAP measurement of earnings in precisely the same manner it is reflected in GAAP earnings." Earnings guidance:  The Principles state that companies "should not feel obligated to provide earnings guidance – and should determine whether providing earnings guidance for the company’s shareholders does more harm than good." Board diversity:  The Principles state that "[d]irectors should have complementary and diverse skill sets, backgrounds and experiences.  Diversity along multiple dimensions is critical to a high-functioning board.  Director candidates should be drawn from a rigorously diverse pool." Director election voting standard:  The Principles state that directors should be elected using majority voting.  They do not mention specifics such as whether majority voting should only be used in uncontested elections or advocate the adoption of companion director resignation policies.  Board tenure:  Instead of adopting a bright-line view on board tenure, the Principles emphasize the need for considering board refreshment and tempering "fresh thinking and new perspectives" with "age and experience" on the board.  Term limits/retirement ages:  Consistent with the approach on board tenure, the Principles do not recommend the adoption of retirement ages or term limits but instead state that, to the extent a board permits an exception to any such policy, the board explain the reasons for the exception.  Director effectiveness:  The Principles state that boards "should have a robust process to evaluate themselves on a regular basis" and "the fortitude to replace ineffective directors." Industry experience:  The Principles state that a "subset" of directors should "have professional experiences directly related to the company’s business" and that the board should be "continually educated" on the company’s industry. Ability of shareholders to act by written consent and call special meetings:  The Principles state that the ability of shareholders to act by written consent and call special meetings "can be important mechanisms for shareholder action" but, when adopted, should require "a reasonable minimum amount of outstanding shares . . . [to act] in order to prevent a small minority of shareholders from being able to abuse the rights or waste corporate time and resources." Director engagement with shareholders:  The Principles encourage boards to engage in robust communication of the board’s thinking to shareholders.  They note that there are many ways to do so, including designating certain directors "in coordination with management" to "communicate directly with shareholders on governance and key shareholder issues." Audit committee review of financial statements:  The Principles state that audit committees "should focus on whether the company’s financial statements would be prepared or disclosed in a materially different manner if the external auditor itself were solely responsible for their preparation."  This Principle was recommended during a 2002 Securities and Exchange Commission roundtable by Warren Buffett, a signatory to the Principles and at the time a member of the Coca-Cola Audit Committee, as one of several questions audit committees should be asking auditors.   Access to management:  The Principles state that "directors should have unfettered access to management, including those below the CEO’s direct reports." Director compensation:  The Principles recommend that companies consider both paying "a substantial portion" of director compensation in equity and requiring directors "to retain a significant portion of their equity compensation during their tenure" on the board. Executive compensation:  Executive compensation plans should "ensure alignment with long-term performance" and "have both a current component and a long-term component."  "Benchmarks and performance measurements ordinarily should be disclosed to enable shareholders to evaluate the rigor of the company’s goals and the goal-setting process." "Companies should consider paying a substantial portion (e.g., for some companies, as much as 50% or more) of compensation for senior management in the form of stock, performance stock units or similar equity-like instruments." The Principles do not explicitly mention some prominent governance issues, such as classified boards, supermajority voting requirements, poison pills or sustainability. The Principles also address the role of asset managers in corporate governance.  The Principles state that "[a]sset managers should exercise their voting rights thoughtfully and act in what they believe to be the long-term economic interests of their clients."  They also note that when voting on matters, asset managers "should give due consideration to the company’s rationale for its positions" on those matters and vote based on "independent application of their own voting guidelines and policies."  The Principles also encourage asset managers to evaluate the performance of the boards at the companies in which they invest.  Public companies – especially those whose institutional investor base includes significant holdings by the institutional investors who signed the Principles – should consider promptly distributing the Principles to their boards and/or governance committees.  Public companies also should consider ways to enhance their shareholder communications – including proxy materials – to emphasize the Principles that the companies follow.  Finally, directors may find it useful to review a summary of or discuss how the company’s governance practices compare to the Principles and, where they are different, the reasons why.  The Principles (click on link) and theopen letter (click on link) from the signatories are available at http://www.governanceprinciples.org/.  Gibson Dunn’s lawyers are available to assist in addressing any questions you may have about these developments.  To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any lawyer in the firm’s Securities Regulation and Corporate Governance practice group, or any of the following: John F. Olson - Washington, D.C. (202-955-8522, jolson@gibsondunn.com)Ronald O. Mueller – Washington, D.C. (202-955-8671, rmueller@gibsondunn.com)Elizabeth Ising – Washington, D.C. (202-955-8287, eising@gibsondunn.com)Lori Zyskowski – New York (212-351-2309, lzyskowski@gibsondunn.com)Gillian McPhee – Washington, D.C. (202-955-8201, gmcphee@gibsondunn.com) © 2016 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 14, 2007 |
“Employee Free Choice Act” Would Implement Most Sweeping Labor Law Changes in Decades, Strengthening Unions’ Hand in Both Organizing and Negotiations

On March 1, 2007 by a vote of 241 - 185, the House passed the proposed "Employee Free Choice Act" (H.R. 800). H.R. 800 has been put forward by the unions who express frustration with strong management campaigns against unionization and lengthy delays in obtaining first union contracts after union recognition. Under the bill — which is still pending in the Senate — employees would lose the protection of a secret ballot election in which they can freely decide whether they want a union or not. With the current secret ballot election process, neither the union nor the employer knows how any individual employee voted, which frees employees from pressure or coercion. H.R. 800 would replace the secret ballot election with a union authorization "card check" procedure, under which a union would be able to gain bargaining rights simply by obtaining union authorization cards from a majority of employees. Without a secret ballot booth to exercise their right to vote and decide privately, employees often would feel pressured or coerced into signing authorization cards for a union they did not actually support. Additionally, without the advance notice necessary for a secret ballot election, a union would often be able to solicit authorization cards without the employer even knowing the union was doing so. As a result, employees would only hear the union’s view on whether unionization would be in their interest. Others, including the employer, would not have an opportunity to present to the employee the negatives to having a union. The result would be that unions would be able to get recognition rights much more easily through pressuring employees and through a one sided presentation of the issues. Another important change under H.R. 800 would occur after a union got recognition rights through the new card check procedures, when it began bargaining with the employer regarding the terms for a first contract. Under the present law, those terms are left to the employer and the union to negotiate by free collective bargaining. Under H.R. 800, if the employer and union did not agree on contract terms relatively quickly, the dispute would be decided by an arbitration panel that would set the wages, benefits and other terms and conditions of employment for the next two years. An unknown panel of arbitrators, who do not have to live and survive under the contract, would thus decide what the wages, benefits and other terms would be. That could be disastrous for an employer and employees, threatening the financial health and even the survival of the company, and is fundamentally at odds with the free collective bargaining system that the National Labor Relations Act has established for over 70 years. H.R. 800 would also change current law by imposing treble damages and other penalties for unfair labor practices on employers. (Similar penalties would not be imposed on union organizers who illegally intimidate workers.) Gibson, Dunn & Crutcher lawyers are available to assist in addressing questions you may have regarding H.R. 800. Please contact the Gibson Dunn attorney with whom you work, or Scott A. Kruse (213-229-7970, skruse@gibsondunn.com) in the Los Angeles office, William J. Kilberg (202-955-8573, wkilberg@gibsondunn.com) in the Washington, D.C. office, or Labor and Employment Practice Group Co-Chairs Deborah J. Clarke (213-229-7903, dclarke@gibsondunn.com) in Los Angeles or Eugene Scalia (202-955-8206, escalia@gibsondunn.com) in Washington, D.C.   © 2007 Gibson, Dunn & Crutcher LLP The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 17, 2015 |
“High Volatility Commercial Real Estate”: U.S. Federal Banking Agencies Release Answers to Frequently Asked Questions

One of the lesser noticed changes in the new Basel III capital regime for U.S. banks is the super-capital charge for so-called "High Volatility Commercial Real Estate" (HVCRE) loans.  Effective January 1, 2015, HVCRE loans carry a capital charge that is 50 percent higher than the capital charge for other commercial real estate loans.  Because the final Basel III capital rule and accompanying preamble did not contain much gloss on how to apply the HVCRE test to particular transaction structures, the U.S. federal banking agencies[1] have released answers to 17 "frequently asked questions" (FAQs) about the HVCRE test.[2]  Although a start, the FAQs unfortunately leave unanswered many questions that are relevant to particular transaction structures.  Given the super-capital charge, banks and developers will wish to consider HVCRE issues carefully until the U.S. regulators provide substantially more clarity on them.  I.          U.S. Basel III Capital Rules  Responding to views that, in the Financial Crisis, banks globally were not sufficiently well capitalized to withstand shocks to the financial system, bank regulators worldwide have sought to increase the quality and quantity of bank capital.  In July 2013, the U.S. bank regulators issued final rules implementing this new "Basel III" capital regime.    As implemented, Basel III contains two approaches:  the Standardized Approach and the Advanced Approaches.  The first is a rules-based approach under which categories of bank assets are assigned particular risk-weights.  The second allows certain banks to use internal models to calculate the amount of capital to be assigned to particular assets.  Under the "Collins Amendment" to the Dodd-Frank Act, however, banks that are permitted to use the Advanced Approaches must calculate their capital under the Standardized Approach as well, and they must use the Standardized Approach if the Advanced Approaches would result in less capital being maintained.  As a result, the Basel III Standardized Approach is relevant to all banks.  Under the Standardized Approach, HVCRE loans carry a heightened capital charge.  For a non-HVCRE commercial real estate loan, the loan is assigned a risk weight of 100 percent – the same amount as for an unsecured loan to a corporate entity.  A HVCRE loan, by contrast, is assigned a risk weight of 150 percent.  As a result, a banking entity must maintain 50 percent more capital against such HVCRE exposures.  At a time when banks are struggling to achieve desired returns-on-equity due to the new heightened capital requirements, this additional 50 percent requirement is significant.  The HVCRE rule does not apply to nonbank lenders, and so is another example of the advantages in the post-Dodd Frank era of lending by companies that are not affiliated with depository institutions.  II.        Definition of HVCRE Loans  With respect to commercial real estate, the final rule defines an HVCRE loan as "a credit facility that, prior to conversion to permanent financing, finances or has financed the acquisition, development, or construction (ADC) of real property," subject to certain exclusions.    An ADC loan can avoid being classified as an HVCRE loan if it satisfies each of the following three conditions:  The loan-to-value (LTV) ratio must be less than or equal to the applicable maximum loan-to-value ratio mandated by the bank regulators for particular types of loans, which are:  Raw land – 65%  Land development – 75%  Construction – commercial, multifamily (co-op/condo), and other nonresidential – 80%  Construction – 1-4 family residential – 85%  Construction – improved property – 85%   The borrower has contributed capital to the project in the form of cash or unencumbered readily marketable assets (or has paid development expenses out-of-pocket) of at least 15 percent of the real estate’s appraised "as completed" value; and  The borrower contributes the amount of capital required by the preceding paragraph before the bank advances funds under the credit facility, and the capital contributed by the borrower, or internally generated by the project, is contractually required to remain in the project throughout the life of the project in a manner sufficient to continue to satisfy the 15% requirement.  With respect to the third condition, the capital rule states that "[t]he life of a project concludes only when the credit facility is converted to permanent financing or is sold or paid in full."  The same bank providing the ADC financing may provide the permanent financing as long as such permanent financing facility "is subject to the bank’s underwriting criteria for long-term mortgage loans."  III.       U.S. Federal Banking Agency FAQs  The preamble to the final U.S. Basel III capital rules did not provide much guidance on how to apply the HVCRE test.  In January 2015, the U.S. Mortgage Bankers Association submitted a letter raising a series of questions about the test.[3]  On April 6th, the U.S. federal banking agencies released answers to 17 FAQs, as part of a series of FAQs on the Basel III capital rules as a whole.  The most important answers to the FAQs are described below.  First, loans that were in existence before January 1, 2015 are not grandfathered.[4]  As a result, such loans must be analyzed as to whether they pass the HVCRE test.  It is to be remembered that certain loan documentation may contain provisions permitting banks to pass on "increased costs" (or similar language) arising out of the Dodd-Frank Act and regulatory reform.  Such provisions will need to be analyzed to determine whether they cover the HVCRE super-capital charge in the event an existing loan is determined to be a HVCRE exposure.  Second, the federal banking agencies re-iterated that the value to be considered for purposes of the 15 percent capital test is "as-completed" value, not "as-stabilized" value.  "As-completed" value "reflects the property’s market value as of the time that development is expected to be completed."[5]  This is a material distinction, and one that may cut differently for different asset classes.  Third, it is clear that proceeds constituting liabilities on the balance sheet of the borrowing development company cannot count as capital for purposes of the 15 percent test.  Two FAQs address this point:  the federal banking agencies stated that a second bank’s loan in the form of a second mortgage on a property does not count as capital contributed by the borrower;[6] and an unrelated loan from the bank that is originating the ADC loan to a borrower cannot be counted as capital contributed by the borrower.[7]    Fourth, land value may count toward the 15 percent test, but the FAQs address only two situations.  When land is paid for with cash and then contributed to the project by the development company, the cash used to purchase the land is a form of borrower contributed capital.[8]  Pledging unencumbered but unrelated land as collateral, however, does not count as borrower contributed capital, because the land is not considered "contributed."[9]  There are, however, many other means short of direct borrowing by which a development company may obtain land, and the FAQs address only the cash purchase and pledge of unrelated land fact patterns.  Fifth, "soft costs" that a developer pays that contribute to the "completion and value of the project" can count as "development expenses" that count for purposes of the 15 percent test.[10]  These would include interest and other development costs such as fees and pre-development expenses, and also may include costs paid to related parties provided that the costs are reasonable in comparison to third-party costs.  Sixth, a grant from a state or federal agency or municipality is not considered as capital contributed by the developer because "it does not come from the borrower, [and] it does not affect the borrower’s level of investment and therefore does not ensure that the borrower maintains a sufficient economic interest in the project."[11]  Seventh, an appraisal received after origination that shows that the LTV ratio no longer exceeds the maximum LTV ratio will not suffice to remove the loan from HVCRE status – it is only the LTV ratio at origination that counts.[12]  Finally, the federal banking agencies are attaching particular significance to the requirement that 15 percent of development company capital must remain in the project throughout the project’s life.  For purposes of the 15 percent test, "the loan documentation must include terms requiring that all contributed or internally generated capital remain in the project throughout the life of the project;" the borrower "must not have the ability to withdraw either the capital contribution or the capital generated internally by the project prior to obtaining permanent financing, selling the project, or paying the loan in full."[13]  *          *          *          *          *  Although certain of the FAQ answers are helpful, considered as a whole, they seem to be focused on low hanging fruit.  If one compares the FAQs to the questions posed by the Mortgage Bankers Association, it is clear that the federal banking agencies left significant HVCRE questions unresolved.  No statements were made as to the following issues, which indeed are only a portion of the questions raised:  Whether a bank can recognize appreciated land value as part of the 15 percent equity requirement, given that any appreciated land value will be counted in the denominator as part of the "as completed" value of the project. Whether preferred equity or mezzanine or subordinated debt financing provided by a third party can count toward the 15 percent requirement.  It is hoped that the federal banking agencies return to these questions, and other questions that have been raised, promptly.  In view of the punitive capital treatment for a HVCRE loan, it is further hoped that the federal banking agencies characterize as HVCRE exposures only those structures where it is clear that the borrowing entity has an insufficient economic interest in the property in question such that the risks of the transaction to the borrowing entity justify the super-capital charge.    [1]   The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation administer the Basel III capital rules for national banks and federal thrifts, state member banks, and state non-member banks and state-chartered thrifts respectively.    [2]   https://fdic.gov/regulations/capital/capital/faq-hvcre.html.    [3]https://www.mba.org/Documents/Comment%20Letters/MBA%20HVCRE%20Supplimental%20Letter%20%281-26-15%29.pdf.    [4]   FAQ 2.    [5]   FAQ 6.  By contrast, "as stabilized" value reflects the value of the property "as of the time the property is projected to achieve stabilized occupancy."    [6]   FAQ 5.    [7]   FAQ 16.    [8]   FAQ 7.    [9]   FAQ 3.   [10]   FAQ 8.   [11]   FAQ 11.   [12]   FAQ 14.   [13]   FAQ 15.       Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work in the firm’s Financial Institutions or Real Estate practice groups, or the authors in the firm’s New York office: Arthur S. Long (212-351-2426, along@gibsondunn.com)Noam I. Haberman (212-351-2318, nhaberman@gibsondunn.com) Please also feel free to contact the following practice group leaders and members: Real Estate Practice Group:Jesse Sharf – Los Angeles (+1 310-552-8512, jsharf@gibsondunn.com)Fred L. Pillon – San Francisco (+1 415-393-8241, fpillon@gibsondunn.com)Alan Samson – London (+ 44 (0)20 7071 4222, asamson@gibsondunn.com)Eric M. Feuerstein – New York (+1 212-351-2323, efeuerstein@gibsondunn.com)Drew C. Flowers – Los Angeles (+1 213-229-7885, dflowers@gibsondunn.com)Andrew A. Lance – New York (+1 212-351-3871, alance@gibsondunn.com)Erin L. Rothfuss – San Francisco (+1 415-393-8218, erothfuss@gibsondunn.com) © 2015 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice. 

January 18, 2016 |
“Implementation Day” Arrives: Substantial Easing of Iran Sanctions alongside Continued Limitations and Risks

On January 16, 2016, the comprehensive international sanctions restricting dealings with Iran and Iranian entities were substantially eased.  Financial institutions and businesses hoping to access the Iranian market have new, immediate and substantial opportunities to do so; but this potential comes with continued complexities, ambiguities, and risks, particularly for U.S. companies.     The relief was triggered by the arrival of "Implementation Day," a major milestone set out in the Joint Comprehensive Plan of Action ("JCPOA") — the Iran nuclear deal that was finalized in July 2015 (discussed in detail in our Client Alerts of July 14, 2015 and October 19, 2015).    In accordance with the JCPOA, Implementation Day was announced following the International Atomic Energy Agency’s confirmation that Iran had successfully completed its initial agreed-upon JCPOA obligations with respect to dismantling and repurposing aspects of its nuclear program.  Implementation Day brings significant — and in parts comprehensive — sanctions relief by the international community and especially the European Union ("E.U.") and the United States.    Following Implementation Day, E.U. and United Nations ("UN") sanctions have all broadly been eased; U.S. sanctions have not been.  Consequently, U.S. companies will be at a significant disadvantage with respect to dealings with Iran compared to their global competitors.   However, the continuation of the bulk of U.S. sanctions — especially with respect to restricted dealings with the U.S. financial system and the provision of U.S. goods and services to Iran — means that international companies will still face daunting challenges and uncertainties with respect to Iranian business they may wish to pursue.  Indeed, given this continuing exposure under U.S. law, which in practice is more actively enforced than the sanctions laws of the E.U. and its member states, for companies with potential obligations under both U.S. and E.U. laws the most pressing priority in the short term may be to continue to ensure compliance with U.S. obligations, notwithstanding the apparent opportunities for European firms.   UN Sanctions Relief   Implementation Day has seen the termination of all existing UN Security Council resolutions that imposed sanctions on Iran, other than UN Security Council Resolution 2231 which implemented the JCPOA.  This resolution is subject only to snap-back (that is to say, expeditious re-institution) in the event of significant non-performance of Iran’s undertakings under the JCPOA commitments.  However, the United Nations arms embargo on Iran continues to be in force for another five years, though countries may petition the UN Security Council for authorization to sell certain weapons systems.  And UN sanctions on individuals previously designated for participating in Iran nuclear and ballistic missile programs will remain in place unless such persons are explicitly removed from the list by the UN Security Council.   From the perspective of financial institutions and businesses, the termination of UN Security Council Resolution 1929 is a critical development.  Under Resolution 1929, core elements of the Iranian economy were subject to significant restrictions including intrusive inspections of Iran Air and Iran’s state-owned shipping line ("IRISL"), as well as substantial limitations on the provision of insurance and reinsurance to Iranian parties, and the prohibition of the opening of new Iranian bank branches or subsidiaries outside Iran, and limiting UN member states from doing the same inside Iran.  These restrictions have all been terminated.    U.S. Sanctions Relief   U.S. sanctions on Iran have included the "blacklisting" of more than 700 individuals and entities on the U.S. Treasury Department’s Office of Foreign Assets Control’s ("OFAC’s") list of Specially Designated and Blocked Nationals ("SDN List"), as well as economic restrictions imposed on entities under U.S. jurisdiction ("primary sanctions") and restrictions on entities outside U.S. jurisdiction ("secondary sanctions").  While the sanctions relief that came into effect on Implementation Day includes relief to each of these three aspects of U.S. sanctions, the majority of the relief provided by the United States under the JCPOA concerns secondary sanctions.  OFAC has helpfully published a Frequently Asked Questions on its website.     In short, the U.S. domestic trade embargo on Iran remains in place with changes only at the margins.    On Implementation Day OFAC released several documents including: Guidance Relating to the Lifting of Certain Sanctions Pursuant to the Joint Comprehensive Plan of Action on Implementation Day; Frequently Asked Questions Relating to the Lifting of Certain U.S. Sanctions Under the JCPOA on Implementation Day; General License H: Authorizing Certain Transactions relating to Foreign Entities Owned or Controlled by a United States Person; and a Statement of Licensing Policy for Activities Related to the Export or Re-Export to Iran of Commercial Passenger Aircraft and Related Parts and Services.     These documents detail the specific elements of U.S. sanctions relief which include:   A.   Secondary Sanctions — Prohibitions on non-U.S. Entities Engaging with Iran   Until Implementation Day, non-U.S. financial institutions, corporations and individuals faced U.S. sanctions exposure if they engaged with certain Iranian persons or in transactions with specified Iranian sectors — even if the transactions had no connection to the United States, U.S. persons, or the U.S. Dollar.  The U.S. has now lifted secondary sanctions with respect to non-U.S. parties’ engaging with or providing associated services to:   certain Iranian financial and banking institutions — including the provision of U.S. bank notes to the Government of Iran; the purchase, subscription or facilitation or the issuance of Iranian sovereign debt, including government bonds; the provision of correspondent banking services; and the provision of financial messaging services (such as SWIFT);   the provision of insurance, reinsurance and underwriting services to Iran;   Iran’s energy and petrochemical sectors — including dealings with the National Iranian Oil Company ("NIOC"), the Naftiran Intertrade Company ("NICO"), and the National Iranian Tanker Company ("NITC");   Iran’s shipping, shipbuilding sectors and port operators — including calls at key Iranian trading facilities such as the Port of Bandar Abbas;   Iran’s trade in gold and other precious metals and software;    Iran’s trade in graphite, raw or semi-finished metals; and   Iran’s automotive sector.   In order to implement this relief, the United States revoked several sanctions-focused Executive Orders, waived portions of numerous pieces of sanctions legislation, and removed over 400 individuals and entities from the SDN List including most of Iran’s major financial institutions and oil and energy firms.    Limits to Secondary Sanctions Relief   Non-U.S. banks, companies and persons must be aware of two key limitations to the removal of secondary sanctions:   The risk of secondary sanctions continue to attach to significant transactions by non-U.S. parties with: Iranian persons who continue to be on the SDN List; the Islamic Revolutionary Guard Corps ("IRGC") and its designated agents or affiliates; and any other persons on the SDN List designated due to their association with Iran’s proliferation of weapons of mass destruction or Iran’s support for international terrorism.   The removal of secondary sanctions does not mean that parties can use or leverage U.S. services or institutions to engage with Iran.  With the exceptions described below, U.S. persons continue to be generally barred from exporting goods, services or technology directly or indirectly to Iran, or processing Iranian-related transactions in the U.S.  For example:   While dealings with certain Iranian financial institutions may be free of secondary sanctions risks, any newly-permitted transactions cannot be cleared by institutions under U.S. jurisdiction unless otherwise licensed to do so.  Transactions with Iran can use the U.S. dollar, but will not be able to leverage U.S. correspondent banks for clearing or settling of U.S. dollar dealings.    Though the provision of insurance, reinsurance and underwriting services to Iran is now possible by non-U.S. parties, U.S. primary sanctions continue to generally prohibit U.S. persons from participating in the provision of such services to Iran, including providing insurance coverage to, participating in reinsurance syndicates concerning, or paying claims involving Iranian entities; and,   While non-U.S. parties can now invest in and provide services to Iran’s automotive sector, neither U.S. car manufacturers nor non-U.S. parties can export or re-export U.S.-origin finished vehicles or U.S.-origin auto parts to Iran.   B.   Primary Sanctions — Prohibitions on U.S. Persons and those under U.S. Jurisdiction Engaging with Iran   The United States is only providing primary sanctions relief with respect to three defined categories of transactions involving (1) foreign subsidiaries of U.S. corporate parents; (2) commercial passenger aviation; and (3) the importation of Iranian foodstuffs and carpets.  Each category of relief is provided differently and has distinct limitations.   1)  Foreign Subsidiaries of U.S. Companies   On Implementation Day OFAC issued a regulatory exemption ("General License" or "GL") to foreign companies "owned or controlled" by U.S. persons to engage in activities with Iran "consistent with the JCPOA."  This General License, "GL ‘H’," allows such companies to transact in and with Iran.  However, GL H imposes several significant constraints on such transactions due to OFAC’s interpretation of what sort of dealings would be inconsistent with the JCPOA and/or contrary to other U.S. laws.    GL H does not, inter alia, permit foreign subsidiaries of U.S. parents to engage in Iran-related dealings involving:   the direct or indirect exportation or goods, technology, or services from the United States to Iran; the transfer of funds to, from, or through the U.S. financial system; or any entity on the SDN List.    Transactions undertaken by foreign subsidiaries that fall afoul of these prohibitions would not receive the benefit of the General License and could lead to U.S. sanctions liability for both the U.S. parent and its subsidiary.     A Firewall is Required between U.S. Parent and Subsidiaries   As a consequence, GL H implies that a significant firewall must be built between the U.S. parent and its foreign subsidiary with respect to the subsidiary’s Iran dealings.  OFAC, however, has provided two dispensations that allow some contact between the parent and subsidiary — these dispensations, amongst others, were lobbied for by major industry in the lead up to Implementation Day:   The U.S. parent — and U.S. persons at the parent company or U.S. persons outside the company retained by the parent — can establish or alter the parent’s operating policies and procedures to the extent necessary to allow the foreign subsidiary to engage in Iran activities without involving the parent or other U.S. persons; and   The U.S. parent can continue to make available to its foreign subsidiary any "automated and globally integrated computer, accounting, email, telecommunications, or other business support system, platform, database, application or server necessary to store, collect, transmit, generate or otherwise process documents or information related" to the foreign subsidiaries transactions with Iran.   We emphasize that both of these dispensations are drafted very broadly and OFAC does not clarify what sorts of policies or procedures are included, nor the full scope of the "automated" systems that a parent can share with its subsidiary.  We urge clients to carefully consider operations and strategies to ensure compliance.   While the exact contours of GL H remain unclear in the initial guidance, OFAC has noted that the goal of the license and the two dispensations are to allow U.S. persons, including senior management of U.S. corporate parents, to be involved in the initial determination to engage in activities with Iran, but not to be involved in the Iran-related day-to-day operations of their foreign subsidiaries.      2)  Commercial Passenger Aviation   Under the JCPOA, the United States pledged to allow the provision of commercial passenger aircraft and related parts and services to Iran, including goods with substantial U.S. content.  To implement this commitment, OFAC will consider granting individual exemptions ("Specific Licenses") to companies in the aviation sector.  Companies will need to apply to OFAC for such a license and, if granted, the license will also cover U.S. persons providing services "ordinarily incident and necessary" to transactions associated with the conveyance of civil aircraft to Iran.  Companies that receive an OFAC license will not need to apply for a second export license from the U.S. Department of Commerce’s Bureau of Industry and Security ("BIS").      The OFAC Specific Licenses will be broad with respect to the types of activities covered but limited in important ways.    In addition to airframes, engines and avionics, the licenses may also allow the provision of warranty, maintenance, repair services, safety-related inspections, spare parts, and training.  "Ordinarily incident and necessary" services could include transportation, legal, insurance, shipping, delivery and financial payment services, including the use of U.S. financial institutions for some of these services.  However, it is not yet clear if U.S. financial institutions will be able to deal directly with Iranian counterparts even in the context of Specifically Licensed transactions.     Further, there are two key limitations companies must keep in mind:   The "ordinarily incident and necessary" services are time- and transaction-limited and will only be licensed for specific conveyances.  For instance, a U.S. person’s provision of insurance to cover an aircraft or component during its transit to Iran would be covered; such insurance that covers the aircraft or the component for several years after its export would not be covered.  Similarly, OFAC will consider license requests from U.S. banks to finance the sale of particular aircraft to Iran, but not to provide aircraft financing in general for Iranian buyers.   Holders of these Specific Licenses must insist on strong end-use certifications, limitations, and perhaps even audits.  If the United States determines that any goods provided to Iran under these Specific Licenses are used for non-civil aviation purposes — or transferred to persons on the SDN List (which presently includes the largest Iranian airline, Mahan Air, which was not delisted) — the United States would view this as grounds to revoke these licenses.  In so doing there could be contractual and legal challenges for holders of the licenses both with respect to Iran and liability in the United States.       3)  Importation of Iranian Foodstuffs and Carpets   The United States’ ban on the importation of Iranian-origin foodstuffs and carpets was one of the last measures imposed by the United States on Iran as sanctions escalated prior to the start of the nuclear negotiations.  Though of comparatively limited economic weight compared with the other sanctions relief on offer, it was an important aspect of relief for the Iranian government to obtain and if successfully implemented could provide direct benefits to some of Iran’s most economically-vulnerable populations.    In order to implement this relief, OFAC will issue a General License to cover U.S. persons’ purchases of Iranian-origin food and carpets and services ordinarily incident and necessary to such transactions.  U.S. financial institutions will be able to be involved in these transactions, but OFAC will continue its restrictions on almost all direct connections between U.S. banks and Iranian counterparties which will usually mean that transactions between the U.S. and Iran for Iranian food or carpets will require intermediation by a third-country financial institution.  It remains to be seen how many third-country banks will be willing to serve in such a capacity.       E.U. Sanctions Relief   A.   Legislative Amendments Relevant to the E.U. Regime   Following the termination of all prior UN Security Council resolutions imposing sanctions of Iran, the restrictive measures imposed pursuant to those now-defunct U.N. Security Council resolutions were lifted on Implementation Day.   In particular, Council Decision (CFSP) 2015/1863 of 18 October 2015 amending Council Decision 2010/413/CFSP concerning restrictive measures against Iran:   suspends the provisions of Council Decision 2010/413/CFSP dealing with economic and financial sanctions consequent upon and simultaneously with Iran’s implementation of its JCPOA commitments, as verified by the IAEA;     suspends the related asset freeze (including the ban on making funds and economic resources available to listed persons) and visa ban applicable to individuals and legal entities; and   establishes an authorization regime regarding certain transfers of metals, software and nuclear-related matters.   CFSP 2015/1863 itself is implemented by two Regulations (see below), which are directly applicable in all Member States — that is to say, they can be relied on directly in the domestic legal order, without need for domestic implementing legislation; namely Council Regulation (EU) 2015/1861 of 18 October 2015 amending Regulation (EU) No 267/2012 concerning restrictive measures against Iran, and Council Implementing Regulation (EU) 2015/1862 of 18 October 2015, implementing Regulation (EU) No 267/2012 concerning restrictive measures against Iran.   The Council of the E.U. has also issued a Statement (Council Declaration 2015/C 345/01) specifying that the commitment to lift all nuclear-related sanctions is without prejudice, inter alia, to the reintroduction of E.U. sanctions in the case of significant non-performance by Iran of its JCPOA commitments.  The E.U. has also published a helpful Information Note on the lifting of the Iran sanctions.      B.   The Lifting of the E.U.’s Sectoral Sanctions   The E.U.’s sectoral sanctions against Iran, subject only to the few remaining prohibitions set out below, have been removed.   The E.U. sanctions related to all activities:   within the territories of the E.U.’s Member States including their airspace; anywhere in the world conducted by E.U. nationals and companies and other entities formed in E.U. Member States; on board E.U.-registered ships or aircraft.   The E.U.’s sanctions did not extend to foreign subsidiaries of E.U. companies, but there were broadly-phrased anti-circumvention provisions that went some way towards having this effect.   Lifting of Oil and Gas Restrictions   Critically, the terminated sanctions mean that the Iranian oil and gas sector is now sanctions-free from the perspective of the E.U. and its members.  All imports of Iranian oil, and all other hydrocarbon products, are now permitted — from any supplier.  Equally, exports of equipment, technology and services are now permitted to Iranian oil and gas producers, refiners and those involved in exploration and development.  (As discussed above, U.S. origin equipment, technology and services remain restricted, however, from export to Iran).   The country with the world’s fourth largest proven oil reserves has just re-entered the E.U. energy market.  While currently low oil prices reflect, in part, the expected rise in supply from Iran, the long-term prospect of capital expenditure, investment and modernization of Iran’s energy sector should remain the focus for participants in this space.   During the years of the E.U.’s Iran sanctions even non-E.U. customers for Iranian oil were limited in the extent to which they could receive oil because of the prohibitions on E.U. companies providing insurance for such shipments.  The exclusion of Iranian fuel shipments from the important insurance markets of London and elsewhere in Europe had the effect of extending the impact of the E.U.’s sanctions.   All restrictions of insurance related to Iran’s oil and gas market have also now been removed. This is also the case in relation to the other sectors benefitting from the removal of sanctions as part of Implementation Day.   Many of the Iranian companies that were listed under the E.U. sanctions were part of Iran’s shipping industry.  These had been sanctioned because of their role in exporting Iranian petroleum products.  The delisting of these companies, and the removal of broader sectoral sanctions against the Iranian shipping, ship building, and transport sectors again releases this whole industry from the constraints previously imposed upon it and those wishing to deal with it.   Lifting of Financial Restrictions   Public Financing The removal of all E.U. restrictions on the Iranian state and Iranian entities from entering the bond market is another of the more important developments as part of Implementation Day. The Iranian government appears to anticipate that this will enable large-scale financing to support investment and modernization across multiple sectors of the Iranian economy, as well as providing funding for government and state-owned enterprises, although the extent to which this is true will depend in large measure to the reaction of the global financial sector. Unfreezing of Assets In addition to these sectoral sanctions, the hundreds of individuals and companies named on the SDN on the basis of being involved in, or supporting, Iran’s nuclear program have been de-listed.  Billions of dollars held in E.U. accounts by these entities will now be unfrozen.  Transfers to and from these individuals and entities will now be unrestricted as a matter of E.U. law.  Debts long outstanding to listed entities can now lawfully be paid. The combined consequence of unfreezing accounts and allowing payments may have the effect of transforming the liquidity of many of the Iranian companies previously sanctioned.      Financial Transfers and Banking The provisions of perhaps broadest effect in preventing business with Iran were the prohibitions on financial transfers to and from all "Iranian Persons" (broadly defined) without either pre-notification to the relevant authority in each Member State or, where the transfer was above a certain threshold, pre-authorization from the relevant authority.  There were limited exceptions for humanitarian purposes, medical products, and foodstuffs, but even those could be restricted if an Iranian bank was involved.    In practice, while the E.U.’s Iran sanctions regime did nothing to prohibit trade with Iranian counterparties in many types of goods and services, but E.U. company could, in practice, neither pay, nor be paid.   The liabilities created by these prohibitions applied to both trading companies, and  E.U. financial institutions that facilitated the money transfers.  The practical effect of these rules was that many E.U. banks were reluctant to be involved in any way with handling money related to Iran, even if the authorization or notification process was potentially available.   The restrictions on financial transfers to/from Iranian persons have now been entirely removed.   The E.U. Regulation that had removed many Iranian banks from the SWIFT system has now also been repealed.  Alongside the lifting of prohibitions on E.U. banks establishing correspondent relationships with Iranian banks, and establishing offices in Iran, the result is to remove a whole series of E.U restrictions on the Iranian banking sector.   The sanctions had extended to cover a number of possible substitutes for cash.  These had been designed to prevent the ready circumvention of the prohibitions.  For instance the export of Iranian banknotes had been prevented, as were the exports of gold, other precious metals and precious stones.  The export and transfer of these proxies for cash are now also unrestricted by E.U. law.       C.    E.U.-Iran sanctions remaining in force after Implementation Day Even in the E.U., the sanctions relief triggered by Implementation day will not create a wholly sanctions-free zone in connection with Iran.  Certain E.U. sanctions regimes relating to Iran but unrelated to the sanctions aimed at nuclear proliferation will remain in full vigor and effect after Implementation Day.  These include the E.U. sanctions legislation relating to human rights violations and certain sanctions relating to terrorism (Council Decision 2011/235/CFSP (Apr. 12, 2011)), as well as the arms embargo, and certain limited restrictions on software and rare metals related to nuclear proliferation.     D.    Looking Forward in the E.U. — Continuing Risks   Businesses in the E.U. should be aware that a number of risks remain with respect to Iran sanctions, including the potential for liabilities for past violations of the EU’s Iran sanctions and the possibility of sanctions snap-back.   While contractual provisions can and should  be devised to protect businesses’ interests with respect to snap-back, addressing past violations is more challenging.    Sanctions relief will not absolve persons of violations of the E.U.’s Iran sanctions (or indeed the UK’s rules in relation to financial transfers to and from Iranian persons, which pre-dated the E.U.’s introduction of similar restrictions and were in force for around a year in late 2011 and 2012).  Those companies and individuals will, depending on the E.U. member state concerned, remain potentially subject to prosecution in connection with those violations.   Moreover, the anticipated wave of transactions with Iran would seem highly likely to lead to such past violations increasingly coming to the attention of the authorities.  This is because of reporting obligations and/or incentives for entities to make notifications to the authorities in connection with criminal offences they discover in connection with their business, for example under money laundering legislation such as the UK’s Proceeds of Crime Act 2002.     Consequently, businesses considering investment in Iran, or businesses which have carried out activities in Iran, must continue to give careful consideration to the question of whether there may be legacy liabilities, and whether there are grounds for suspicion that the investments contemplated may reveal the handling of the proceeds of such historic violations, or may risk facilitating the handling of such proceeds.   An additional risk for E.U. businesses arises from the facts that, first, while in some E.U. member states, E.U. sanctions laws automatically give rise to offences under existing domestic laws, in other member states, E.U. sanctions regimes only take effect upon separate implementation by means of national laws; and second, some member states are slow to respond to legislative changes at E.U. level.  As a result, some domestic criminal offences may remain in place notwithstanding the relief from sanctions at the E.U. level.  While enforcement of such offenses may be unlikely, or even illegal, in the circumstances, businesses should take care to ensure that full account is taken of any applicable transitional provisions in the E.U. member states.       Next Steps and the Way Ahead   Implementation Day does not mark the conclusion of the Iran sanctions story, but it is the end of an important chapter in economic restrictions on Iran.  It is unlikely that the globally comprehensive nature of sanctions on Iran will return even in the case of a "snap-back" of sanctions in the event of non-compliance.  While the United States could re-impose the full suite of its unilateral sanctions on Iran — and unlike the E.U. has made it clear that there will be no grandfathering of contracts signed before a snap-back — it is not certain that other members of the P5+1, including the E.U. (let alone states in Asia, Africa and Latin America) would be willing to return to a pre-JCPOA world.   In the coming weeks and months we expect to see five factors come into play which together will determine the success of the JCPOA’s sanctions relief.  While most of these elements focus on the United States they have potentially global implications for the ability and willingness of companies to take advantage of new Iranian opportunities.   First, we expect many companies in the U.S. and outside it — not just those in the civil aviation sector — to consider and apply for specific licenses from the U.S. government.  In an unprecedented move, OFAC has said that it will consider license requests from non-U.S. parties in certain cases.  Further the U.S. administration has made it clear that specific licenses covering activities outside the confines of the defined JCPOA relief — but in line with U.S. foreign policy interests — may be considered in light of the broader U.S. interest in effectuating real sanctions relief and further solidifying the deal.   Second, Implementation Day leaves untouched existing General Licenses available under U.S. Iran sanctions.  These include allowances for the exportation of agricultural goods, pharmaceuticals, medical devices, and certain services, software and hardware incident to personal communications (such as smart phones).  Before Implementation Day these licenses remained largely unused as potential exporters could not find insurers, financiers or others willing to engage in transactions with Iran.  With Implementation Day we expect more of these trade intermediaries to become willing to serve in such roles which will allow exporters to take greater advantage of existing permissions.    Third, a significant unknown that will be worked out in the months ahead concerns how and if non-U.S. international financial institutions will acclimate to eased sanctions.  It remains to be seen how major banks, many of which that have suffered significant fines and reputational damage over the past several years for violating U.S. sanctions — and in some cases remain under consent orders or other restrictions from state (rather than federal) authorities in the United States — will adjust to a new reality in which the federal legal prohibitions may have changed but state restrictions and potential reputational exposure remain.  Of note, OFAC makes clear in its guidance that even after Implementation Day, Iran remains a "Jurisdiction of Primary Money Laundering Concern" under section 311 of the USA PATRIOT Act — under which the U.S. Treasury has the authority to require U.S. financial institutions to take "special measures" with respect to such jurisdictions, financial institutions and/or international transactions related to such jurisdictions.        Fourth, OFAC and other sanctions authorities in the United States and in Europe will continue to maintain and enforce remaining sanctions.  The aggressiveness of such enforcement will be a factor in companies’ investment appetite for Iran.  For instance, in the U.S., Implementation Day also saw the addition of nearly a dozen new ballistic missile program-related sanctions to the SDN List.  In the E.U., the UK is launching its own OFAC-style body in April 2016 — the Office of Financial Sanctions Implementation which is forecast to have an enforcement focus.  Additionally, in mid-December 2015, the General Court of the E.U. (the E.U.’s lower court) dismissed the first challenges to sanctions listings brought by persons listed under the E.U.’s sanctions on Iran targeting violations of human rights — sanctions which remain even after Implementation Day.  This occurred in the Sarafraz and Emadi cases (Sarafraz v Council (Case T-273/13) [2015] (Dec. 4, 2015) and Emadi v Council (Case T-274/13) [2015] (Dec. 4, 2015)).   Continued and potentially increased enforcement and maintenance of remaining measures means that companies who wish to take advantage of any opening must make sure they stay compliant with continuing restrictions.     Fifth, prior to its issuance of JCPOA sanctions relief, OFAC conceded that the relief process will likely be iterative — that is, there was a realization that this first tranche of licenses and interpretative guidance may not be sufficient to fully implement the relief that the United States agreed to provide.  As such, we expect continued reassessments and potentially issuances of new licenses and interpretative guidance in the time ahead as the administration attempts to calibrate its relief in order to effectuate it as much as possible within the continuing constraints set by unchanging sanctions statutes passed by Congress.  On Congress’ part, the disquiet on behalf of Republicans with respect to the Iran deal and any sanctions relief remains and especially in an election year there continues to be a risk of additional Congressional action.  Though the President has underscored that he will veto any legislation that undercuts the JCPOA, Congressional creativity — and the potential of obtaining a veto-proof majority if Iranian behavior deteriorates — makes flux from the Congressional side as important to watch as that coming from the administration.  The following Gibson Dunn lawyers assisted in preparing this client alert: Judith Alison Lee, Adam Smith, Jose Fernandez, Patrick Doris, Mark Handley, David Wolber and Mehrnoosh Aryanpour.   Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following members of the firm’s International Trade Group: United States:Judith A. Lee – Co-Chair, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com)Ronald Kirk – Co-Chair, Dallas (+1 214-698-3295, rkirk@gibsondunn.com)Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com)Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com)Daniel P. Chung – Washington, D.C. (+1 202-887-3729, dchung@gibsondunn.com)Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com)David A. Wolber – Washington, D.C. (+1 202-887-3727, dwolber@gibsondunn.com) Mehrnoosh Aryanpour* – Washington, D.C. (+1 202-955-8619, maryanpour@gibsondunn.com)Lindsay M. Paulin – Washington, D.C. (+1 202-887-3701, lpaulin@gibsondunn.com) Europe and Asia:Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com)Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com)Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com)Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com)Mark Handley – London (+44 (0)207 071 4277, mhandley@gibsondunn.com) Robert S. Pé – Hong Kong (+852 2214 3768, rpe@gibsondunn.com) ** Ms. Aryanpour is not yet admitted to practice in the District of Columbia and currently practices under the supervision of the Principals of the Firm. © 2016 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 31, 2011 |
“Made in the U.S.A.” Decision Threatens Return to the “Wild West” for California Unfair Competition Law Class Actions

Printable PDF California’s Unfair Competition Law (Cal. Bus. & Prof. Code § 17200 et seq., the "UCL") is an expansive statute that historically has been popular among plaintiffs’ lawyers.  Until recently, private parties could bring "representative," non-class UCL lawsuits even though they had no business dealings with the defendant and despite any showing of actual injury.  But in 2004, California voters responded to high-profile abuses of the UCL by adopting Proposition 64.  This initiative required private plaintiffs to comply with class certification requirements and to demonstrate actual "injury in fact" and "lost money or property as a result of" the alleged unfair competition.  On January 27, 2011, the Supreme Court of California interpreted these amendments in a way the dissenting justices criticized as "effectively making it easier for a plaintiff to establish standing," despite the electorate’s intent to strictly limit a private plaintiff’s ability to sue.  Kwikset Corp. v. Superior Court, No. S171845, 2011 Cal. LEXIS 532, at *68 (Chin, J., dissenting) (emphasis in original).  The 5-2 Kwikset opinion establishes a test for standing that is important to anyone litigating UCL claims, especially in cases predicated on product mislabeling.  Now, "plaintiffs who can truthfully allege that they were deceived by a product’s label into spending money to purchase the product, and would not have purchased it otherwise, have ‘lost money or property’ within the meaning of Proposition 64 and have standing to sue."  Id. at *4.  According to the majority, the consumer has "lost money" by paying more for the mislabeled product than he or she subjectively believed it was worth–even if the mislabeled product functioned perfectly and it was no more expensive than functionally equivalent products with accurate labels.  This alert reviews Kwikset, discusses the potential impact of the decision, and identifies ways defendants may resist plaintiffs’ attempts to use this opinion to undo gains achieved after Proposition 64. I.  Proposition 64 and Prior Litigation in Kwikset Voters approved Proposition 64 in the November 2004 general election by an impressive margin.  The initiative revised the UCL, and the companion False Advertising Law (Cal. Bus. & Prof. Code § 17500 et seq.), to bring these statutes in line with other states’ consumer protection laws and to require actual injury and class certification for representative actions.  As amended, the new standing provisions require private plaintiffs to show an "injury in fact" and "lost money or property as a result" of the alleged unfair competition or false advertising. Following the passage of Proposition 64, courts grappled with the meaning and impact of the amendments.  In Californians for Disability Rights v. Mervyn’s LLC, 39 Cal. 4th 223 (2006), the Supreme Court of California ruled that these amendments applied to pending cases.  Next, the Court determined that Proposition 64 eliminated "representative" actions and required private plaintiffs to satisfy class certification requirements.  Arias v. Superior Court, 46 Cal. 4th 969, 975 (2009); Amalgamated Transit Union v. Superior Court, 46 Cal. 4th 993, 998 (2009).  Shortly thereafter, the Court held that in cases alleging a misrepresentation theory, Proposition 64 required private plaintiffs to establish actual reliance on the allegedly misleading statements but did not require that absent class members also establish standing.  In re Tobacco II Cases, 46 Cal. 4th 298 (2009). In Kwikset, the primary issue was whether plaintiffs could show that they "lost money or property" due to Kwikset Corporation’s alleged misrepresentation that its locksets were "Made in the U.S.A."  Plaintiffs claimed that this statement violated the UCL because the locksets contained some foreign-made pins and screws.  The case had been pending when voters passed Proposition 64, and the trial court had entered judgment in favor of plaintiffs following a bench trial.  Proponents of the initiative cited this case as a "shakedown" lawsuit that the initiative was designed to curb.  An appellate judge in an earlier appeal also warned that sanctioning plaintiffs’ claims would create a hostile business environment in which "a single spool of foreign thread is enough to sustain a lawsuit."  Benson v. Kwikset Corp., 126 Cal. App. 4th 887, 933 (2005) (Sills, J., dissenting). After voters approved Proposition 64, plaintiffs limited their claims to injunctive relief, and added new class representatives who could meet the initiative’s standing requirements.  The trial court refused to dismiss the case, but Kwikset sought writ relief.  In a lengthy opinion, the appellate court concluded that while plaintiffs demonstrated adequate injury in fact because they were induced into purchasing a product that was mislabeled in violation of a statute, they could not show "lost money or property."  Despite their frustrated "patriotic desire to buy fully American-made products," plaintiffs received a fully functioning lockset (the "benefit of their bargain"), they did not claim that they paid a premium based on the "Made in the U.S.A." label, and they did not assert that the lockset was defective or inferior to a product containing all-American components. The Supreme Court of California granted review in June 2009, to address whether plaintiffs’ claim that they bought the products in reliance on alleged misrepresentations made on the product’s label sufficed to show that they "lost money" and had standing to sue under the UCL. II.  The Kwikset Majority Eases Private Plaintiffs’ Burden To Establish Standing The Supreme Court of California reversed and held that plaintiffs lost money because they "bargained for locksets that were made in the United States" and "got ones that were not."  The five-justice majority ruled that the "plain language" of Proposition 64 requires that private parties "(1) establish a loss or deprivation of money or property sufficient to qualify as injury in fact, i.e., economic injury, and (2) show that the economic injury was the result of, i.e., caused by, the unfair practice or false advertising that is the gravamen of the claim."  2011 Cal. LEXIS 532 at *16.  The Court addressed each of the three principal elements of the UCL’s amended standing requirements as follows: "Injury in Fact":  The Court concluded that this term has a "well-settled meaning" under federal law:  "an invasion of a legally protected interest which is (a) concrete and particularized; and (b) actual or imminent, not conjectural or hypothetical."  Id. at *16-17.  "Lost Money or Property":  The majority then concluded that "lost money or property–economic injury–is itself a classic form of injury in fact" and "[i]f a party has alleged or proven a personal, individualized loss of money or property in any nontrivial amount, he or she has also alleged or proven injury in fact."  Id. at *20.  Reliance/Causation:  Reaffirming Tobacco II, the majority held that "a plaintiff must show that the misrepresentation was an immediate cause of the injury producing conduct," but the plaintiff "is not required to allege that the challenged misrepresentations were the sole or even the decisive cause of the injury-producing conduct."  Id. at *27; see also In re Tobacco II Cases, 46 Cal. 4th at 326-28. The majority concluded that it is irrelevant whether or not a plaintiff received a properly functioning product or paid a premium because of a purported error in a product label.  Instead, a plaintiff who relied on a label when making a purchase will have suffered economic harm by having "paid more for [a product] than he or she otherwise might have been willing to pay if the product had been labeled accurately."  2011 Cal. LEXIS 532 at *35-36.  The majority concluded that any other result "would bring an end to private consumer enforcement of bans on many label misrepresentations, contrary to the apparent intent of Proposition 64."  Id. at *38.  "Simply stated," Associate Justice Kathryn M. Werdegar wrote, "labels matter," and consumers who purchase a mislabeled product satisfy the Proposition 64 standing requirements.  Id. at *31-32.  A "consumer who relies on a product label and challenges a misrepresentation contained therein can satisfy the standing requirement of [Proposition 64] by alleging, as plaintiffs have here, that he or she would not have bought the product but for the misrepresentation."  Id. at *36-37.  The economic injury may be measured as the difference between what the consumer would have spent had he/she known the truth about the product, and the amount actually spent.  As has been its practice in other significant UCL decisions, the Court was careful to limit its ruling to the particular case presented–here, the sufficiency of standing allegations as a matter of pleading in a misrepresentation action.  Id. at *27 n.9.  As the majority explained, courts must accept the allegations as true at the demurrer stage, and "[a]t the succeeding stages, it will be plaintiffs’ obligation to produce evidence to support, and eventually to prove, their bare standing allegations. . . .  If they cannot, their action will be dismissed."  Id. at *45 n.18.  Acting Chief Justice Joyce L. Kennard and Associate Justices Marvin R. Baxter, Carlos R. Moreno, and former Chief Justice Ronald M. George (sitting by designation) joined Associate Justice Werdegar’s majority opinion. III.  The Dissenting Opinion Criticizes the Majority’s Holding as Dismantling Proposition 64 and Undermining Voter Intent Associate Justice Ming W. Chin wrote a dissenting opinion (joined by Associate Justice Carol A. Corrigan) that sharply criticized the majority’s holding as standing "[i]n direct contravention of the electorate’s intent," because it "effectively mak[es] it easier for a plaintiff to establish standing" after Proposition 64.  Id. at *56 (emphasis added).  Justice Chin explained that the majority effectively collapsed the "injury in fact" and "loss of money or property" requirements into a combined "economic injury" element that requires only a showing that private plaintiffs "lost" the "price the consumer paid for the product," and an allegation that plaintiffs "would not have bought the mislabeled product."  Id. at *73.  The dissenting opinion also criticized the majority for using extreme examples such as a counterfeit Rolex watch and food products mislabeled as "kosher," "halal," or "organic."  Id. at *64. IV.  Potential Impact on Future UCL Litigation If Justice Chin’s warnings are accurate, the Court’s ruling may spark a return to the pre-Proposition 64 world of questionable and even frivolous lawsuits that turned California into the "Wild West" of consumer class action litigation.  However, just as the "sky is falling" predictions immediately after Tobacco II proved unwarranted (for the reasons discussed below), the same may very well be true of any initial overreaction to Kwikset.  Looking ahead, businesses facing UCL claims still have strong defenses to liability, and the breadth of Kwikset‘s impact will ultimately be resolved through litigation in the Courts of Appeal. 1.  Potential Limits On Kwikset Holding.  Despite some broad language in the majority’s opinion, Kwikset may be limited to specific types of misrepresentations.  In particular, the "Made in the U.S.A." claim violated specific regulations that restricted the use of this label.  2011 Cal. LEXIS 532 at *5.  As the decision followed a trial, the majority also cited evidence showing many consumers (including the United States Government) have a strong preference for American-made products.  Id. at *44 & n.17.  For other types of claims, it might not be so easy for private plaintiffs to establish that their personal predilections about the importance of intangible and aesthetic values are material and therefore actionable.  2.  Extension Beyond Misrepresentation Context?  The applicability of Kwikset‘s holding to other contexts may be more limited.  For example, many courts have held that plaintiffs cannot rely on certain statements about a product, such as "puffery" that a product is "great," "improved," or "better than ever."  Moreover, in cases predicated on an omission (rather than an affirmative misrepresentation), courts have dismissed cases on the ground that a defendant was not obliged to disclose the allegedly concealed fact.  See, e.g., Daugherty v. Am. Honda Motor Co., 144 Cal. App. 4th 824, 835 (2006); Buller v. Sutter Health, 160 Cal. App. 4th 981, 988 n.3 (2008).  3.  The Increasing Importance Of Reliance.  Post-Kwikset, the focus also may shift from "injury in fact" to reliance ("as a result of . . .").  See, e.g., Durrell v. Sharp Healthcare, 183 Cal. App. 4th 1350, 1364 (2010) (dismissing complaint for failing to claim actual reliance on alleged misrepresentation).  Tobacco II establishes that in misrepresentation cases, plaintiffs must plead and prove "actual reliance . . . in accordance with well-settled principles regarding the element of reliance in ordinary fraud actions."  In re Tobacco II Cases, 46 Cal. 4th at 306.  4.  Deferred Attacks On Standing At Summary Judgment.  The majority in Kwikset also makes clear that plaintiffs will have to establish the pleaded facts in discovery.  2011 Cal. LEXIS 532 at *45 n.18.  Defendants may respond by shifting their focus to later stages of the litigation.  A thorough investigation and targeted deposition may reveal that the named plaintiff never saw the labeling at issue, that the label was not "material" to the purchase decision, that the plaintiff would have purchased the product despite the alleged labeling error, or that the plaintiff continued to purchase the product after discovering the truth about the alleged misrepresentation.  5.  Class Certification.  In addition, because much of the Kwikset opinion rests on a plaintiff’s subjective valuations, there likely will be many opportunities to challenge class certification on the grounds that the named plaintiffs are not typical of the class (because they have an unusual attachment to the importance of the label), or that the class itself is not reasonably ascertainable.  In particular, the majority opinion in Kwikset acknowledges that while "labels matter," only some consumers are concerned about whether a product is "organic," "kosher," or "Made in the U.S.A."  In such cases, is the proper class all purchasers, or only those for whom the label matters?  And if it is the latter, can that class be appropriately defined and identified?  For a class of label-conscious purchasers, would common issues predominate over their individualized and subjective motivations for wanting to purchase a product based on its particular label, and over the variations in subjective value attached to a product that is, for example, "Made in the U.S.A."?  While it is true that Tobacco II concluded that only named class representatives, and not absent class members, must satisfy the Proposition 64 standing requirements (In re Tobacco II Cases, 46 Cal. 4th at 324), that majority also held that even if the named plaintiffs establish standing, a trial court still must determine if a proposed class meets California’s other requirements for class certification, including ascertainability, typicality, predominance.  Id. at 313.  Consequently, many of the same arguments and much of the same evidence that defendants would use to attack the standing of absent class members may be relevant to the later certification inquiry.  Since the Tobacco II decision, several courts have denied certification on these grounds, which appear to be very strong "class busters" in cases pleaded on a Kwikset theory.  See, e.g., Cohen v. DirecTV, Inc., 178 Cal. App. 4th 966, 981 (2009), rev. denied 2010 Cal. LEXIS 954 (Feb. 10, 2010); Pfizer v. Superior Court, 182 Cal. App. 4th 622, 633 (2010), rev. denied 2010 Cal. LEXIS 6162 (June 17, 2010). 6.  Applicability In Federal Cases.  The Class Actions Fairness Act has moved a significant portion of UCL litigation to federal court.  In addition to the standing provisions as modified by Proposition 64, a federal court also must apply the requirements of Article III.  While the majority concluded that the Proposition 64 standing requirements are more stringent than Article III, 2011 Cal. LEXIS 532 at *20, in practice federal "injury in fact" precedent may provide more ammunition to defendants than Kwikset.  See, e.g., Waste Mgmt. of N. Am., Inc. v. Weinberger, 862 F.2d 1393, 1397-98 (9th Cir. 1988) ("[I]t is not enough that a litigant alleges that a violation of federal law has occurred . . . .  Absent injury, a violation of a statute gives rise merely to a generalized grievance but not to standing."); Cronson v. Clark, 810 F.2d 662, 664 (7th Cir. 1987) ("A plaintiff, in order to have standing in a federal court, must show more than a violation of law . . . ."). 7.  Remedies.  It is one thing for a plaintiff to allege "lost money," but it is another thing entirely for that plaintiff to obtain a monetary recovery under the UCL.  Accordingly, whether a plaintiff may prove and recover restitution will likely be a key focus of post-Kwikset litigation.  Because it rests on standing grounds, the majority’s opinion provides no guidance for how trial courts should assess the difference between what a consumer paid for a mislabeled product, and what the consumer would have been willing to pay for the product had it been labeled accurately.  2011 Cal. LEXIS 532 at *37-38 n.15.  In another "Made in the U.S.A." case, the Court of Appeal held that an award of restitution must be "based on a specific amount found owing," and must be "supported by substantial evidence."  Colgan v. Leatherman Tool Grp., 135 Cal. App. 4th 663, 699 (2006).  If future plaintiffs offer nothing more than subjective beliefs and generalized valuations, courts may reject claims for restitution.    Gibson, Dunn & Crutcher’s Class Actions Practice Group is available to assist in addressing any questions you may have regarding this decision, or any other related issues.  Please contact the Gibson Dunn attorney with whom you work or any of the following members of the Class Actions Practice Group: Gail E. Lees – Chair, Los Angeles (213-229-7163, glees@gibsondunn.com)Andrew S. Tulumello – Vice-Chair, Washington, D.C. (202-955-8657, atulumello@gibsondunn.com)G. Charles Nierlich – Vice-Chair, San Francisco (415-393-8239, gnierlich@gibsondunn.com)Christopher Chorba – Los Angeles (213-229-7396, cchorba@gibsondunn.com)Timothy W. Loose – Los Angeles (213-229-7746, tloose@gibsondunn.com)   © 2011 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 28, 2006 |
“Principles-Based” Accounting Standards – An Accident Waiting to Happen?

Jonathan C. Dickey and Michael J. Scanlon are authors of "‘Principles-Based’ Accounting Standards – An Accident Waiting to Happen?" published by Insights in February 2006. Reprinted with permission, copyright 2006, Insights

November 18, 2008 |
“Whistleblower” Who Fails to Cooperate in Internal Investigation May Be Terminated, Labor Department Rules

The Department of Labor’s Administrative Review Board (“ARB”)—which hears cases under Sarbanes-Oxley and other whistleblower laws—has affirmed dismissal of a complaint brought under the whistleblower provisions of several environmental statutes, in part because the complainant did not engage in protected activity by participating in an internal investigation when he hindered the investigation’s progress.  Caldwell v. EG&G Defense Materials, Inc., ARB No. 05-101 (October 31, 2008). The case may be an important precedent in other cases where whistleblowers fail to cooperate with company attempts to investigate their allegations. Gregory Caldwell was charged with designing a system to transport hazardous chemicals in a chemical disposal facility.  The Company experienced several releases of toxic chemicals during 2002 and 2003, and Caldwell was interviewed multiple times by the Company’s internal investigation team.  During these interviews, Caldwell was not forthcoming in explaining potential causes for the release of chemicals, denying that his system could have been the source and providing unsupported information regarding equipment compatibility.  Another release of toxic chemicals followed shortly after Caldwell’s interviews.  After it was determined that his actions hindered the investigative team’s ability to prevent further incidents, Caldwell was placed on leave, and he filed a whistleblower complaint with OSHA.  The Company continued to investigate his performance, and Caldwell was terminated after his suspension was completed. The ARB found that although Caldwell was involved in the internal investigation of the hazardous waste incident, his actions only “constituted protected activity to the extent that they advanced the purpose of the [environmental whistleblower] acts” “to protect the public health and the environment.”  Thus, Caldwell’s initial participation in the internal investigations was protected, but his participation lost protected status when he “made ‘unwarranted assurances’” and “failed to fully disclose information critical to the investigation” because, the ARB explained, Caldwell’s participation “did not further the purpose of the acts.”  Indeed, “[i]nstead of furthering the purpose of the environmental acts, his participation in the investigation actually endangered the public health and the environment.”  This sensible limitation on the scope of protected activity prevents employees from “under the guise of protected activity . . . interfer[ing] with internal investigations while also avoiding disciplinary action and successfully maintaining a claim against their employers if the employers take adverse action for their misconduct,” the ARB explained.  Additionally, the ARB determined that interference with the investigation was a legitimate business reason to suspend and terminate Caldwell—the Company “fired him because it could have avoided [an additional release of toxic chemicals] if Caldwell had provided accurate information in the first place.”  Similar investigation interference was recently recognized by a Labor Department Administrative Law Judge to be a legitimate basis for discipline.  In Bucalo v. United Parcel Service, No. 2006-TSC-2 (ALJ May 8, 2008), Gibson Dunn successfully argued that the complainant’s improper insertion of himself into the Company’s investigation of a hazardous material spill created a risk of harm and was a legitimate basis for discipline.    Gibson, Dunn & Crutcher’s  Labor and Employment Practice Group has extensive experience with whistleblower investigations and litigation, including claims under the Sarbanes-Oxley Act and state law claims. For more information, please contact the Gibson Dunn attorney with whom you work or any of the following:  Eugene Scalia – Practice Chair, Washington, D.C. (202-955-8206, escalia@gibsondunn.com)Jason C. Schwartz – Washington, D.C. (202-955-8242, jschwartz@gibsondunn.com)Jennifer J. Schulp – Washington, D.C. (202-955-8244, jschulp@gibsondunn.com) Karl G. Nelson – Dallas (214-698-3203, knelson@gibsondunn.com)Jessica Brown – Denver (303-298-5944, jbrown@gibsondunn.com)William D. Claster – Orange County (949-451-3804, wclaster@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.  

October 30, 2009 |
“You win some, you lose some” — Recent Appeals and Decisions Involving the UK Financial Services Authority

Two high-profile decisions have been published in the last two weeks regarding actions brought by UK Financial Services Authority ("FSA") against members of the financial services industry.  Both cases show signs of an increased willingness on the part of those subject to FSA enforcement action to challenge the enforcement wing of the FSA but with variable levels of success.  FSA Regulatory Decisions Committee overturns sanctions in FSA enforcement notice in market abuse case:  In the first case, the FSA issued a decision on 7 October 2009, found two former Dresdner bankers had committed market abuse in March 2007 (by engaging in what was commonly known as "front running"), but following an appeal by the bankers (Christopher Parry and Darren Morton) to the FSA’s Regulatory Decisions Committee ("RDC") they escaped a fine and ban from working in controlled functions in the financial services sector.  The two successfully appealed the financial and disciplinary sanctions the FSA proposed to impose with the RDC finding that public censure was sufficient punishment.   Court of Appeal Ruling on FSA powers to prosecute for offences not specifically part of the law governing financial markets:  In the second case by contrast, the Court of Appeal issued a judgment (delivered on 9 October 2009) ruling that the FSA could bring prosecutions for offences that were not specifically part of the law that governs financial markets.  This judgment upholds an expansive view of the regulator’s criminal enforcement powers.  The Court found that the FSA had the power to charge Neil Rollins and Michael McInerney for money laundering in addition to offences specifically governed by the UK Financial Services and Markets Act.  FSA Market Abuse Enforcement Action against former Dresdner bankers: Background Darren Morton and Christopher Parry worked in the Structured Investment Unit ("SCI") of Dresdner Bank AG managing the bank’s Structured Investment Vehicle ("K2").  Morton (a director and co-head of the Portfolio Management Team) and Parry (a Vice President in the SCI), were FSA approved to conduct controlled functions. On the morning of 15 March 2007, Morton received a call from Barclays to see what certain key investors’ appetite was for a proposed new issue.  K2 was one of Barclays’ top three accounts for lower tier floating rate notes (FRNs) already issued by Barclays and regarded as essential to the successful launch of a new issue.  Morton was told that this was "a very early heads up", that it was before the issue was public, that the information should be kept to himself and that the new issue would be "a Barclays lower tier two transaction" in "US dollars" with "10 year non call five or thereabouts" structure with a deal size of "about a billion dollars" and given information on the discount margin. Morton passed the information regarding the new issue to Parry.  Parry then sold $30 million in Barclays current FRNs within two hours of Morton’s call with Barclays.  Having initially told Morton that the new issue would not be announced for a few days, Barclays called Morton shortly after Parry’s first trade to say that the issue might be announced that very day.  Approximately three minutes after this second call, Parry executed a second trade, selling a further $35 million in Barclays current FRNs.  The new issue was announced by Barclays about an hour and a half after the second call to Morton. Morton authorised both trades executed by Parry.  The two trades resulted in a loss of $66,000 to the counterparties who were clearly unaware of the pending new issue at the time of acquisition. Parry and Morton challenged the FSA’s allegation of market abuse on a number of fronts including that there was insufficient evidence that Morton had received "inside information" in relation to the new issue of Barclays FRNs and therefore Parry did not act "on the basis of" the inside information.  Parry also argued that the allegations were based on circumstantial evidence, that the information was not precise and both bankers argued that FSA had a high burden of proof given that this was a case of alleged serious market abuse.  Morton further argued that the behaviour was not reckless, deliberate or dishonest — such book building was standard practice and the OTC credit markets operated differently to the equity markets! Underlying the FSA’s acceptance that Parry did not believe he was committing market abuse was an acknowledgement that at the time "front running" was indeed market practice.  The FSA has since corrected this serious misunderstanding in the market and the in various guidance.  The FSA stated that "in these circumstances it is noted that Parry was working in an environment where until a deal had closed, the accepted view was that, in the absence of information generally regarded as inside information, that information was not regarded as specific or price sensitive and therefore any activity related to such information could not be abusive". Nonetheless, the RDC found the pair guilty of market abuse.  While the two bankers were censured publicly for committing market abuse, they were not fined and no ban or suspension was placed on their approvals as persons approved to undertake controlled functions following their appeal to the RDC.  Indeed, one of the bankers works within the same division which is now part of Commerzbank.   In applying the same reduced censure to both Parry and Morton, the RDC had regard to the following mitigating factors: They did not make any personal profit; They had subsequently undertaken further training in market abuse; No clear guidance was available to them or the OTC credit markets at the time of the offence; and They had no adverse previous disciplinary record or compliance history. Conclusion The bankers’ successful appeal is seen by some commentators as a significant step which may result in more appeals against FSA warning notices, to the RDC.  Whilst it may be a good example of push back against the war which Margaret Cole has been waging against "cheating" in the City, we are less convinced that this fairly specific case will open the floodgate to challenges. Court of Appeal Ruling on FSA’s right to proceed with private prosecutions for offences outside the financial services regulatory regime: Background Neil Rollins faces charges for offences of insider dealing under the Criminal Justice Act 1993 and offences of money laundering contrary to the Proceeds of Crime Act 2002.  The former offence relates to the sale of shares in a company by which he was employed and the latter relate to the transfer of part of the proceeds of this sale from his bank account to a bank account in his father’s name. Michael McInerney faces charges alleging that he and his company committed offences contravening the general prohibition under the Financial Services and Markets Act ("FSMA") against carrying on a regulated activity in the UK without being authorised to do so by the FSA or ensuring that there was a relevant exemption.  Those offences allegedly include involvement with various illegal "boiler room" activities, in particular processing the proceeds of sales of shares.  He also faces similar same money laundering offences charges as Rollins under the Proceeds of Crime Act 2002. Both men challenged their respective charges for money laundering offences and their appeals to the Court of Appeal to stop the FSA’s prosecution of the money laundering charges were heard together.  The case of both defendants against the FSA  was that the FSA’s powers were defined and limited by the Financial Services and Markets Act and that since that legislation did not confer the power to prosecute offences under the Proceeds of Crime Act the FSA did not have such a power.  The defendants’ case was that the FSMA laid down a complete code within which the FSA had to operate, precluding the FSA bringing prosecutions for offences outside the regulatory functions conferred on the FSA by the FSMA. Conclusion The Court of Appeal, in a strong affirmation of the regulatory remit of the FSA, concluded that the FSA has the power to prosecute offences beyond those referred to in sections 401 and 402 of the Financial Services and Markets Act and, in particular, that the FSA had the power to prosecute for offences contrary to sections 327 and 328 of the Proceeds of Crime Act (the money laundering offences faced by Rollins and McInerney).  The Court rejected the defendants’ submissions, stating that the relevant statutory provisions should be given a more expansive interpretation and should be read as permissive and not limiting upon the powers of the FSA.  These prosecutions will therefore go forward and this judgment therefore paves the way for further private prosecutions by the FSA of offences before the financial services regulatory regime. The bigger picture — … "When the walls are crumbling around you …" As these wars and battles with and involving market participants and the FSA continue, UK politicians have been occupied by a different battle — the very future of the FSA.  The opposition party are keen to dismantle the FSA in its entirety.  The incumbent are convinced there is life yet in this once hailed ‘super supra-regulator’. Whilst this debate on exemplar supervision and regulation continues in full force, Margaret Cole (the superlative Director of the FSA’s Enforcement Division) has heroically vowed to continue the fight against insider dealing … this is the firm hand that the City needs.     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 Selina Sagayam (+44 20 7071 4263, ssagayam@gibsondunn.com) or Eleanor Shanks (+44 20 7071 4279, eshanks@gibsondunn.com) in the firm’s London office. © 2009 Gibson, Dunn & Crutcher LLP Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 5, 2017 |
’Consent’ is the Next Big Battle Over Personal Jurisdiction

​Washington, D.C. associates Michael Huston, Sean Cooksey and David Casazza are the authors of “‘Consent’ is the Next Big Battle Over Personal Jurisdiction,” [PDF] published in the Daily Journal on July 5, 2017.

June 29, 2015 |
’Equalizing’ the Negotiation Process with a Trial-Ready SEC

San Francisco partner Thad Davis and associate Nicola Paterson are the authors of “’Equalizing’ the Negotiation Process with a Trial-Ready SEC” [PDF] published in the Summer 2015 issue of American Bar Association’s Criminal Litigation.