Trading Claims by Creditors’ Committee Members Without a Trading Order
Jonathan L. Flaxer and Douglas L. Furth, Golenbock Eiseman Assor Bell & Peskoe LLP
For obvious reasons, attorneys required to advise clients about when and whether they can purchase or sell securities while serving on a creditors’ committee like bright line rules. Hence the growth of trading orders in major chapter 11 cases and generalized unease about the bankruptcy court’s decision in In re Spiegel. In that decision, one bankruptcy judge in the Southern District of New York declined to approve a trading order because he concluded that he lacked an adequate record to consider significant implications of the order.
This article explores whether the absence of a trading order means that there is no circumstance under which a member of a creditors’ committee can trade a security of the debtor. While the absence of a trading order certainly eliminates the possibility of programmatic trading, we submit that in theory there are nonetheless time periods during which committee members can trade without running afoul of the securities laws or the committee member’s fiduciary duty. We are unaware of any statute, rule or case which creates a per se prohibition against trading by committee members. Indeed Fed. R. Bankr. P. 2019(a) appears to recognize that members of an informal creditors’ committee may trade claims. It is also noteworthy that Congress has created special rules to address certain trading by officers, directors and 10 percent of shareholders of a company, certainly suggesting that there are not special rules concerning trading by committee members.
Provisions in the New Bankruptcy Law Relevant to Public Companies and Claims Traders
by Glenn E. Siegel, Dechert LLP and Andrea Pincus, Anderson Kill & Olick PC
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S. 256) (the “New Bankruptcy Law”), was signed into law by President George W. Bush on Thursday, April 20, 2005, significantly modifying and amending the United States Bankruptcy Code, 11 U.S.C. §101, et seq (the “Code”). While the New Bankruptcy Law focuses primarily on the procedures and practices for consumer bankruptcies, it also contains several provisions that effect business bankruptcies and may be of particular interest to committee members. Highlights include the following provisions that apply in business bankruptcies.
Annual Spring Meeting Summary
As part of ABI’s 23rd Annual Spring Meeting the Committee on Public Companies and Claims Trading discussed certain issues relating to the flow of financial information in chapter 11 cases and its effect on claims trading and claims traders. The discussion was led by a panel consisting of Mark Broude of Latham & Watkins LLP, as moderator, Joel Levitin of Dechert LLP, Alistaire Bambach from the SEC and Roberta DeAngelis from the Office of the United States Trustee. The discussion primarily addressed the following three topics:
- First, what happens when reporting companies file for bankruptcy, and what effect does the filing have on the companies’ reporting obligations under federal securities laws? Many companies have in the past sought “no action” letters from the SEC that permit the company either to cease all reporting or to limit their reporting to filing 8-Ks attaching the monthly operating reports required by the U.S. Trustee’s office. In addition to exploring the SEC’s formal position on this issue, the panel considered practical action a debtor may take and whether a company with both public equity and public debt can avoid reporting requirements if the volume of trading in the company’s equity declines sufficiently, regardless of the volume of trading in its debt.
- The panel then turned to provisions in the recently enacted bankruptcy legislation, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (S. 256), that could affect information flow in chapter 11 bankruptcy cases. In particular, the new legislation requires creditors’ committees to make information available to creditors that are not on the committee, upon request. The panel discussed ways in which this provision could increase the flow of information to the creditor body as a whole, or could have the reverse effect of decreasing information flow from debtors to a committee absent enforceable confidentiality provisions. In addition, the panel discussed the possibility that this provision could create unequal access to material non-public information among certain creditors not serving on the committee, since the provision as drafted essentially triggers disclosure to a creditor upon request of that creditor.
- Finally, the panel examined the lawsuit that R Squared filed against Salomon Bros. and Jefferies in which the plaintiff, who purchased securities directly or indirectly from the defendants after signing a “big boy” letter, sued the defendants for damages under securities fraud theories. The basis for the lawsuit revolves around inside information that the defendants are alleged to have had at the time that the plaintiff purchased the securities. The panel considered the implications that this lawsuit may have for the market in distressed debt.