Summary Judgment is American Lawyer senior writer Susan Beck's regular opinion column for the Litigation Daily.
On Tuesday Securities and Exchange Commission chairman Mary Jo White announced that her agency was going to try to extract admissions of wrongdoing from defendants in some settlements. I'm all for that, but actions speak louder than words. And judging by the agency's recent settlement with Revlon Inc., it appears the SEC is intent on making life easier, not harder, for those who violate our securities laws.
That's the only conclusion I can reach after reviewing the Revlon deal. For a paltry $850,000, and no admission of wrongdoing, Revlon resolved claims that the company shortchanged minority shareholders by withholding "critical information" about its 2009 going-private transaction. The case was brought as a negligence, not a fraud, violation. But the facts–as laid out in the agency's June 13 press release and the administrative order resolving the matter–reveal a calculated effort by Revlon to mislead its minority investors.
Here's what happened: In 2009 Revlon needed to retire a burdensome $107 million loan from its majority shareholder, MacAndrews & Forbes Holdings Inc., which is controlled by billionaire Ronald Perelman. At first, the company and M&F devised a merger plan, but that was scrapped after Barclays Capital Inc. deemed it unfair to minority shareholders.
At the suggestion of M&F, Revlon then decided to offer minority shareholders the option of voluntarily exchanging their common stock for preferred shares under terms very similar to those in the rejected merger. This time Revlon didn't get a fairness opinion from an outside adviser, citing the fact that the exchange was voluntary.
Revlon, represented by Skadden, Arps, Slate, Meagher & Flom, and M&F, represented by Wachtell, Lipton, Rosen & Katz, knew they faced a potential problem. A small portion of Revlon's stock was held by current and former employees in a 401(k) plan that was administered by a trustee. That trustee had hired a financial adviser to opine on whether this was a fair deal. (The SEC doesn't identify the trustee or its adviser.) Revlon apparently was worried about what the adviser would say, so it engaged in an elaborate plan called "ring fencing" to make sure the opinion was kept under wraps. For one thing, Revlon amended the trust agreement to prohibit the trustee from telling Revlon about the fairness opinion. This allowed Revlon's independent directors, who had to evaluate the deal's fairness, to be left in the dark.
As a second element to this ring fencing, Revlon had to keep the 401(k) participants from spilling the beans about the adviser's opinion. So it convinced the trustee to alter a letter to participants explaining this exchange offer and delete the fact that it had hired a financial adviser to review the fairness of the deal.
And what did that adviser's opinion ultimately say? It concluded that the exchange deal was unfair to minority shareholders.
Meanwhile the independent directors concluded that the deal was fair to the minority, and this was highlighted in shareholder materials. In its defense, the company did eventually disclose that it didn't get a fairness opinion, and also disclosed that it didn't believe it could get one. But these latter two facts were disclosed in amended filings only after the SEC pressured Revlon to revise its filings to include this information.
The trustee protected plan members by not exchanging the plan's common stock for preferred shares. But 46 percent of the minority shareholders, unaware of the unfairness opinion, did exchange their shares. By the end of that year, Revlon's common stock had tripled in price, leaving those who had tendered their common stock for preferred, which did not appreciate, feeling unhappy indeed.
It's not clear from the SEC's filing what role Skadden or Wachtell played in the ring-fencing scheme. The agency is clear, however, that these techniques crossed the line.
"This ring-fencing operated as a fraud or deceit and made the disclosure to shareholders materially misleading," the SEC stated.
And for this, the SEC has exacted all of $850,000. If you feel a gush of wind from a revolving door, that's because Revlon was represented by Skadden's Colleen Mahoney, a former SEC deputy director of enforcement.
Most likely anticipating a bit of squawking over this pittance, the SEC explains in a footnote that it took into account the fact that shareholders have recovered "substantial" sums in private settlements stemming from this deal. (They've recovered more than $30 million.) So what? Does that make Revlon's action less objectionable? Furthermore, as the SEC acknowledged to me, they were the ones who uncovered the ring-fencing scheme, which hadn't been discovered by the private plaintiffs. So the ring fencing allegations couldn't have factored into the private settlements.
Will some feisty federal judge bristle at this settlement? No chance. The SEC filed its case as an administrative action, which means it won't be reviewed by a federal judge. In an email, the SEC explained: "We have both forums (federal court or administrative law judge) available to us and use each consistently," noting that cases are split fairly evenly between the two. The SEC declined to comment on the size of the settlement, other than to reiterate that it considered the amount recovered by private plaintiffs.
Wachtell and its client M&F declined to comment. I also reached out to Skadden and Revlon but did not hear back.
A $850,000 settlement for this elaborately-plotted scheme is not even a slap on the wrist. It's more like a chuckle and shrug.
