Banks Review Foreclosure Affidavit Procedures in Wake of Investigation

On October 13, attorneys general in 50 states and the District of Columbia announced a joint investigation of the procedures followed by banks and mortgage companies in connection with completing affidavits relating to home foreclosures.  In addition, a number of major companies that service mortgages suspended home foreclosures in those states that handle foreclosures through the court system to address allegations of irregularities in foreclosure documents.

Wells Fargo & Co. outlined its process for the generation of foreclosure affidavits in a press release filed with the Form 8-K on 10/28/10 (SEC file no. 1-2979).  As part of its review of these procedures, the company identified instances where a final step in its processes relating to the execution of the foreclosure affidavits did not strictly adhere to the required procedures.  "Out of an abundance of caution and to provide an additional level of assurance regarding its processes," Wells Fargo has elected to submit supplemental affidavits for approximately 55,000 foreclosures which are pending before courts in 23 judicial foreclosure states.  The company does not believe that any of these instances led to foreclosures which should not have otherwise occurred, and it reaffirms that it does not plan to institute a moratorium on foreclosure sales.

Bank of America Corp. is also conducting a voluntary internal review of foreclosure process, with a particular focus on controls in place for competing affidavits and notarizations.  The company is amending and re-filing 102,000 foreclosure affidavits in the 23 judicial states and has suspended foreclosure sales until its assessment in complete, anticipating that less than 30,000 foreclosure sales will be delayed as a result.  This information was provided in select earnings related slides for use in connection with Q3 financial results, filed as an exhibit to the Bank of America Form 8-K on 10/19/10 (file no. 1-6523). 

JPMorgan Chase & Co. notes a risk that it "may incur additional costs and expenses in remediating deficient home foreclosure procedures."  That risk factor is included with a prospectus supplement for an underwritten notes offering (Form 424B2 dated 10/18/10, file no. 333-169900).  The company disclosed it has suspended the foreclosure process with respect to approximately 115,000 delinquent mortgage loans, is developing new processes to satisfy all procedural requirements, and is cooperating with information requests from several state attorneys general. 

DJSP Enterprises, Inc., the largest provider of processing services for the mortgage and real estate industries in Florida, announced on October 15 that the audit committee of its board of directors has commenced an internal investigation with respect to compliance with applicable legal requirements of the company’s mortgage foreclosure processing procedures.  The audit committee has retained Greenberg Traurig, P.A. as independent counsel to assist in the conduct of the investigation.  DJSP also announced that it has instituted 10% staff reductions as a result of reduced file volumes.  DJSP notes that file referrals from the company’s principal client, The Law Offices of David J. Stern, P.A. have declined dramatically, and that the law firm is the subject of an investigation announced by the Attorney General of the State of Florida in August 2010.  DJSP made these disclosures in Form 6-K (file no. 1-34149) Form 424B3 prospectus supplement (333-164907) each filed 10/18/10.

Supplemental Proxy Materials Noting Addition of Third Party Solicitor

SonicWALL, Inc. Form DEFA14A filed on 6/30/10 (SEC file no. 0-37723):
Security products manufacturer SonicWALL filed a special meeting proxy on June 22 pertaining to a negotiated cash merger transaction, naming The Proxy Advisory Group, LLC as proxy solicitor.  The supplemental proxy filing discloses that the company had engaged MacKenzie Partners, Inc. to assist as an additional proxy solicitor.

United Online, Inc. DEFA14A filed on 5/24/10 (file no. 0-33367):
Subsequent to filing and mailing the proxy statement for its 2010 annual meeting of shareholders, Nasdaq-listed United Online retained MacKenzie Partners, Inc. to act as proxy solicitor and advisor.  The one paragraph disclosure notes the fee amount (up to $12,500) and reports that United agreed to indemnify MacKenzie against certain liabilities.

USA Technologies, Inc. DEFA14A filed on 11/20/09 (file no. 1-33365):
After USA Technologies had filed and mailed its annual meeting proxy statement, two dissident shareholders launched a proxy contest seeking to elect three candidates to the board over the company's three independent director nominees.  The first supplemental proxy filing by the company is comprised of a press release which provides the complete text of an open letter to shareholders.  The letter concludes with news that the company had retained a third party as proxy solicitors for the annual meeting.

8-K Filings Reporting Intent to Restate Financial Statements

WikiLoan Inc. Form 8-K filed 10/22/10 (SEC file no. 033-26828):
In Item 4.02, WikiLoan reports that it has concluded that the financial statements included in its most recent Form 10-K and the two subsequent Form 10-Q filings should not be relied upon because those financial statements did not adequately account for beneficial conversion features in certain convertible debt agreements, as required by GAAP.  As the result of the error, the company will be restating the financial statements for the subject periods.  An agreement letter from WikiLoan's independent audit firm is included as an exhibit.

Doral Energy Corp. Form 8-K filed 10/21/10 (file no. 000-52738):
Doral has determined that the accounting treatment of the “assets held for sale” reported in the Company’s unaudited financial statements for the interim period ended April 30, 2010 to be the incorrect accounting treatment. Management has determined that under Full Cost accounting, the sale of the properties reported for the period ended April 30, 2010 does not meet the criteria for “assets held for sale” or “discontinued operations”.  In the press release exhibit, Doral states it will restate the financials for the reporting period as soon as practicable. 

Green Energy Live, Inc. Form 8-K filed 10/6/10 (file no. 000-53216):
Due to misstatements regarding the classification of convertible promissory notes as derivative liabilities, classification of cash/accrued expenses, and common stock subscriptions, Green Energy's auditor of record advised the management and board of directors that the financial statements filed the year ended 12/31/09 and the quarter ended 3/31/10 should no longer be relied upon as presented.  The errors resulted in an understatement of liabilities, an overstatement of additional paid in capital account, and an overstatement of the company’s net loss.  Green Energy intends to file amended periodic reports with the SEC by November 5.

Equity Resale by Former Shell Companies Following Change in Control

One way for issuers to attain SEC-reporting status is to engage in a share exchange agreement with an already registered "shell company" as defined in Rule 12b-2 under the Exchange Act of 1934.  In such reverse merger or reverse acquisition transactions, it is common for the shell to continue only as the legal entity and for the target to be treated as the accounting acquirer.  

China Electronics Holdings, Inc. Form S-1 dated 10/15/10 (SEC file no. 333-169968): 

The selling stockholders of this shelf offering acquired the issuer common stock pursuant to share exchange and subscription agreements dated July 9.  The share exchange agreement between the former shell Buyonate, Inc. and the Delaware corporation China Electronic Holdings, Inc. (now a subsidiary of the Nevada-incorporated Registrant), as well as the subscription agreement between Buyonate and certain of the selling stockholders are exhibits to the Form 8-K dated 7/22/10 (file no. 333-152535). 

Compass Acquisition Corp. Form S-1 dated 10/12/10 (SEC file no. 333-169877): 

This reoffer of ordinary shares is the first public offering of the former blank check company, which is organized in the Cayman Islands.  On May 24, Compass acquired Tsing Da Century Education Technology Co. Ltd., a provider of on-line and off-line educational services in China.  The transaction was treated for accounting purposes as a capital transaction and recapitalization by Tsingda, the accounting acquirer, and as a re-organization by Compass, the accounting acquiree. 

Linda Illumination, Inc. Form S-1 dated 9/16/10 (SEC file no. 333-169431): 

The former China Real Estate Acquisition Corp. registers common shares for resale that had been initially sold in a July private placement.  On April 28, the company acquired Linda International Lighting Co., Ltd by way of a share exchange agreement that is reported in Form 8-K filed on 4/30/10 (file no. 0-53842).  Pursuant to the requirements of Item 2.01(a)(f) of Form 8-K, the company sets forth therein the information that would be required if it were filing a general form for registration of securities on Form 10 under the Exchange Act giving effect to the transaction.

Successor Issuer Granted Accelerated Filer Status

At a November 4 special meeting, Sun Healthcare Group, Inc. ("Old Sun") will seek shareholder approval to restructure its business by splitting into two separate publicly-traded companies.  Sabra Health Care REIT, Inc. would control real property assets following a REIT conversion merger and SHG Services, Inc. ("New Sun") will control operating assets.  SHG Services, which would continue to conduct the historical operations and business of Old Sun, would be renamed Sun Healthcare Group, Inc. and begin trading under Old Sun's ticker symbol (SUNH).  The separation/spin-off of New Sun was detailed in a Form S-1 filed by SHG Services (SEC File No. 333-167041) and shares for the REIT conversion were registered on a Form S-4 filed by Sabra Health Care REIT (333-167044).  The definitive proxy statement was filed on 9/29/10 (File No. 001-12040). 

In connection with the restructuring, Old Sun sought a No Action letter from the SEC on September 28 (WSB No.: 1004201001).  The letter asked the SEC to not take enforcement actions on several key issues regarding the restructuring.  First, the company asked that New Sun, as a successor, be deemed an accelerated filer immediately.  Second, that filers of Schedules 13D and 13G will not be required to make any additional filings.  Third, that New Sun can use the reporting history of Old Sun to determine 1933 Act eligibility.  Fourth, exemption from Section 4(3) and Rule 174 regarding prospectus delivery requirements.  Fifth, to use Old Sun's periodic report history to determine New Sun's compliance with Rule 144(c)(1).  Sixth, to allow New Sun to file post-effective amendments as a successor issuer to registrations filed by Old Sun.  Seventh, that New Sun will continue to use the 1934 file number (001-12040) and EDGAR access codes of Old Sun. 

In making its case to the SEC, the company referenced several No-Action letters where SEC Staff has taken similar positions with respect to successors in similar restructurings.  Such examples include: GulfMark Offshore, Inc. (available 1/11/10), Tim Hortons Inc. (available 9/9/09), Willbros Group, Inc. (available 2/27/09), Hungarian Telephone and Cable Corp. (available 2/27/09), and Weatherford International Ltd. (available 1/14/09).  In a brief reply, the SEC staff agreed to all of the requests for non-enforcement that had been laid out by the company.  The S-1 and S-3 Registrations Statements were each declared effective on 9/28/10.

Market Makers Shifting Orders from OTCBB to OTCQB Electronic Platform

OTC Bulletin Board market markers are billed participation fees by The Financial Industry Regulatory Authority (FINRA) based on the number of positions during a given month.  Because such fees have made it challenging for market maker firms to maintain markets in stocks that are not active, such firms are increasingly moving market making in OTCBB stocks from the OTCBB, which is a telephonic only market, to a new electronic interdealer quotation system created by Pink OTC Markets, Inc. that lacks any participation fees. 

In Forms 8-K filed on 10/13/10 and 10/8/10, respectively, National Asset Recovery Corp. (SEC file no. 333-150135) and Infinity Capital Group, Inc. (000-30999) each report that its stock quotation symbol had been deleted from the OTCBB as a result of not having a sufficient number of market makers providing quotes on the company's common stock for four consecutive days, thereby being deemed to be deficient in maintaining a listing standard at the OTCBB pursuant to Rule 15c2-11.  Both issuers now trade on the OTCQB, a new market for OTC-traded companies that are registered and current in their reporting obligations to the SEC or a U.S. banking or insurance regulator. 

Pink OTC Markets segments OTC securities into three tiers: the quality-controlled OTCQX platform that requires a minimum bid price and other listing standards, the mid-tier OTCQB, and the Pink Sheets speculative trading marketplace that has no financial standards or reporting requirements.  The firm quotes nearly 10,000 stocks, making it the largest marketplace in shares of companies that don't list on exchanges.

Other SEC filers that report they now trade on OTCQB due to failure to meet minimum bid requirements of an exchange or NASDAQ include Allied Defense Group (as of 9/21), Pinnacle Gas Resources, Inc. (9/16), MACC Private Equities Inc. (9/14), Nextwave Wireless Inc (7/22) and PC Group, Inc. (7/21).

Going Private Merger Transactions

Rubios Restaurant Inc. Schedule 14A dated 7/22/10 (SEC file no. 005-57387):
Rubios entered into an agreement with affiliates of private equity firm Mill Road Capital on May 9 which provides for the merger of a Mill Road subsidiary into the company for cash consideration of approximately $100 million. The source of funds for the transaction consisted of the issuance of preferred shares of a Mill Road subsidiary to Mill Road, Ralph Rubio and other co-investors; credit facilities arranged by GCI Capital Markets, LLC, and issuer cash on hand.
 
Life Quotes, Inc. Schedule 13E-3 dated 6/28/10 (SEC file no. 005-56673):
A company owned and controlled by the president and CEO launched a tender offer that expired on August 12 to acquire all outstanding common shares of Life Quotes at $4 per share, an aggregate of approximately $19 million. LQ Acquisition Corp. obtained the use of the issuer's cash on hand to fund the offer through the execution of the promissory note that is Exhibit (b)(1) of the Schedule TO filed on 6/10/10. Following the tender offer, a short-form merger was consummated under Delaware law whereby any remaining shares were cancelled for the same tender offer price.
 
Emmis Communications Corp. Schedule 13E-3 dated 6/2/2010 (File no. 005-43521):
Seeking the flexibility of being privately-held and to escape the burdens associated with being a public company, Emmis entered into an agreement and plan of merger on May 25 with two entities formed by the chairman and CEO. The merger agreement, which was filed as Appendix IV to the Proxy Statement on Schedule 14A dated 7/6/10, provides for a first-step cash tender offer for common shares and an exchange offer of notes for preferred shares held by Jersey-based private asset management company Alden Global Capital Limited.

Alden announced on September 9 that the proposed revised terms of the deal to take Emmis private were not acceptable. The revised terms were proposed by Emmis and a group of holders of Emmis preferred shares who had objected to the terms agreed between Alden and JS Acquisition, Inc. The tender offer and exchange offer each terminated on September 9 with no common shares purchased and no preferred shares exchanged. Alden filed the notice of termination of the securities purchase agreement as Exhibit 17 to the Schedule 13D dated 9/29/10. The notice of termination of the merger agreement is Exhibit 2.1 to the Emmis Form 8-K dated 9/29/10.

Treasury Department to Sell $2.2 Billion of Citigroup Trust Preferred

Citigroup filed a Form 424B2 Prospectus on 10/4/10 in connection with the underwritten offer of 7.875% Fixed Rate/Floating Rate Trust Preferred Securities (TruPS®) held by the government (SEC file no. 333-157459).  The United States Department of the Treasury acquired the capital securities from Citigroup in connection with Citigroup’s participation in the Troubled Asset Relief Program (TARP). 

On January 15, 2009, Citigroup entered into a loss-sharing arrangement with Treasury, the FDIC and the Federal Reserve related to a pool of $301 billion of assets (see Exhibit 10.1 of the Citigroup Form 8-K filed 1/16/09, file no. 1-9924).   Citigroup paid the Treasury and the FDIC a premium in the form of securities for their willingness to share potential losses over a five to ten year period.  The loss-sharing arrangement was terminated on December 23, 2009 at the request of Citigroup (see Exhibit 10.1 of the Form 8-K filed 12/24/09).  Treasury kept $2.2 billion of the premium, which was originally $4 billion in securities.

The underwriting agreement pertaining to the trust preferred shares was filed with the Citigroup Form 8-K filed October 5, 2010.  Each share represents an undivided beneficial interest in the assets of Citigroup Capital XIII, which consist of junior subordinated debt securities of Citigroup.  In the tax opinion filed with the 8-K, Skadden, Arps, Slate, Meagher & Flom LLP states that "while there is no authority directly on point and the issue is not free from doubt, the Junior Subordinated Debt Securities held by the Trust will be classified for United States federal income tax purposes as indebtedness of (Citigroup Inc.)".

SEC Commissioner Remarks on Diversity Policy Disclosure

By Final Rule that became effective on February 28, 2010, the SEC adopted amendments to Item 407(c) of Regulation S-K to require disclosure of whether, and if so how, a nominating committee considers diversity in identifying nominees for director.  In addition, if the nominating committee (or the board) has a policy with regard to the consideration of diversity in identifying director nominees, disclosure would be required of how this policy is implemented, as well as how the company assesses the effectiveness of its policy.

In a speech at the SAIS Center for Transatlantic Relations on September 16, Commissioner Luis A. Aguilar reported that some companies have done a good job with the new disclosure while others have a great deal of room for improvement.  Aguilar applauds disclosure that not only talks about the company's diversity policy and how it is implemented, but also gives investors actual facts that show the results of the company's efforts with a break down of board composition by race, sex and citizenship.  Though not identified in the speech, examples of Proxy Statements with such disclosure include the following:

Alcoa Inc. DEF14A filed on 3/2/10 (SEC file no. 001-03610)
Century Aluminum Co. DEF14A on 4/21/10 (file no. 001-34474)
Ingersoll-Rand plc DEF14A on 4/20/10 (file no. 001-34400)
Procter & Gamble Co. DEF14A on 8/27/10 (file no. 001-00434)