Business Law 11th Edition by Kenneth Clarkson,Roger LeRoy Miller,Gaylord Jentz,Frank Cross

تمرين 5

Fog Cutter Capital Group, Inc. v. Securities and Exchange Commission
United States Court of Appeals, District of Columbia Circuit, 2007. 474 F.3d 822.
• Background and Facts The National Association of Securities Dealers (NASD) operates the Nasdaq, an electronic securities exchange, on which Fog Cutter Capital Group was listed. a. Andrew Wiederhorn had founded Fog Cutter in 1997 to manage a restaurant chain and make other investments. With family members, Wiederhorn controlled more than 50 percent of Fog Cutter's stock. The firm agreed that if Wiederhorn was terminated "for cause," he was entitled only to his salary through the date of termination. If terminated "without cause," he would be owed three times his $350,000 annual salary, three times his largest annual bonus from the previous three years, and any unpaid salary and bonus. "Cause" included the conviction of a felony. In 2001, Wiederhorn became the target of an investigation into the collapse of Capital Consultants, LLC. Fog Cutter then redefined "cause" in his termination agreement to cover only a felony involving Fog Cutter. In June 2004, Wiederhorn agreed to plead guilty to two felonies, serve eighteen months in prison, pay a $25,000 fine, and pay $2 million to Capital Consultants. The day before he entered his plea, Fog Cutter agreed that while he was in prison, he would keep his title, responsibilities, salary, bonuses, and other benefits. It also agreed to a $2 million "leave of absence payment." In July, the NASD delisted Fog Cutter from the Nasdaq. Fog Cutter appealed this decision to the Securities and Exchange Commission (SEC), which dismissed the appeal. Fog Cutter petitioned the U.S. Court of Appeals for the District of Columbia Circuit for review.
a. Securities (stocks and bonds) can be bought and sold through national exchanges. Whether a security is listed on an exchange is subject to the discretion of the organization that operates it. The Securities and Exchange Commission oversees the securities exchanges.
RANDOLPH, Circuit Judge.
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Fog Cutter's main complaint is that the Commission failed to take into account the company's sound business reasons for acting as it did. The decision to enter into the leave-ofabsence agreement was, Fog Cutter argues, in the best interest of its shareholders. The company tells us that Wiederhorn's continuing commitment to the company and his return to an active role in the company after his incarceration were essential to preserving Fog Cutter's core business units.
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* * * Fog Cutter made a deal with Wiederhorn that cost the company $4.75 million in a year in which it reported a $3.93 million net loss. We know as well that Fog Cutter handed Wiederhorn a $2 million bonus right before he went off to prison, a bonus stemming directly from the consequences of Wiederhorn's criminal activity.
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Here there was ample evidence supporting the NASD's grounds for taking action against Fog Cutter:Wiederhorn's guilty plea, the leave-of-absence deal and its cost to the company, the Board's determination that Wiederhorn should retain his positions with Fog Cutter, and the concern that Wiederhorn would continue to exert influence on company affairs even while he was in prison. The decision was in accordance with NASD rules giving the organization broad discretion to determine whether the public interest requires delisting securities in light of events at a company. That rule is obviously consistent with the [law], and NASD's decision did not burden competition. [Emphasis added.]
Fog Cutter claims that it had to pay Wiederhorn and retain him because if it fired him in light of his guilty plea, it would have owed him $6 million. This scarcely speaks well for the company's case. The potential obligation is a result of an amendment the Board granted Wiederhorn in 2003 while he was under investigation. * * * Before the amendment to Wiederhorn's employment agreement in 2003, termination "for cause" included the conviction of any felony other than a traffic offense. In the 2003 amendment, the relevant provision allowed the Board to terminate Wiederhorn "for cause" upon conviction of a felony involving Fog Cutter. The Board had known about the investigation of Wiederhorn in connection with Capital Consultants for more than two years when it agreed to this amendment.
Fog Cutter thinks NASD's action was "unfair." But it was the company that bowed to Wiederhorn's demand for an amendment to his employment agreement, knowing full well that it was dramatically increasing the cost of firing him. Now it argues that terminating Wiederhorn would have been too expensive. One is reminded of the old saw about the child who murders his parents and then asks for mercy because he is an orphan. The makeup of Fog Cutter's Board was virtually unchanged between the time it amended the employment agreement and entered into the leaveof- absence agreement. It was, to say the least, not arbitrary or capricious for the Commission to find that Wiederhorn exercised thorough control over the Board, and to find this troubling. We agree that the Board provided little or no check on Wiederhorn's conduct, and that the Board's actions only aggravated the concerns Wiederhorn's conviction and imprisonment raised.
That Fog Cutter did not itself violate the [law] and that it disclosed the relevant events does not demonstrate any error in the delisting decision. The NASD's rules state that it may apply criteria more stringent than the minimum [legal] standards for listing. Fog Cutter's disclosure of its arrangements with Wiederhorn did not change the nature of those arrangements, which is what led the NASD to find that the company's actions were contrary to the public interest and a threat to public confidence in the Nasdaq exchange.
• Decision and Remedy The U.S. Court of Appeals for the District of Columbia Circuit denied Fog Cutter's petition for review of the SEC's decision. The NASD was concerned with "the integrity and the public's perception of the Nasdaq exchange" in light of Wiederhorn's legal troubles and the Fog Cutter board's acquiescence to his demands. The SEC "amply supported these concerns and was well within its authority to dismiss Fog Cutter's" appeal.
• The Ethical Dimension Should more consideration have been given to the fact that Fog Cutter was not convicted of a violation of the law Why or why not
• The Global Dimension What does the decision in this case suggest to foreign investors who may be considering investments in securities listed on U.S. exchanges