MEMORANDUM. To summarize the enforcement actions taken in March:

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1 MEMORANDUM TO: FROM: Clients who file Schedule 13D s Charles J. Downey III Janine B. Tougas DATE: March 30, 2015 SUBJECT: SEC brings enforcement proceedings against various Schedule 13D filers for failure to update Item 4 disclosure in connection with going private plans SEC Chair Mary Jo White has made clear that the SEC plans to follow a broken windows policy to promote a culture of respect for securities law compliance. The policy is predicated upon the principles that no infraction is too minor to go unenforced, and that the provisions of the securities laws and regulations are not toothless. 1 This enforcement approach has led to a variety of actions and proceedings, including enforcement against over 30 individual and institutional filers in September 2014 for repeated late filings under Section 13(d) and Section 16, with aggregate penalties of $2.6 million. In mid-march 2015, the SEC enforcement staff again trained its sights on Schedule 13D filers and announced enforcement orders against eight Schedule 13D filers, with monetary penalties of $30,000 to $75,000 per filing person. The various enforcement orders (and certain past orders from ) are somewhat fact-intensive, but we have summarized them in a chart at the end of this memorandum to provide concrete examples of the types of material changes and/or conduct that the SEC deems to warrant amendment to Item 4 of Schedule 13D. The proceedings vividly demonstrate to Schedule 13D filers that they must continuously assess their 13D disclosures, especially when facts and circumstances, and their plans and intentions, change (however incrementally). As the SEC s Director of the Division of Enforcement emphasized in announcing the orders, Stale, generic disclosures that simply reserve the right to engage in certain corporate transactions do not suffice when there are material changes to those plans, including actions to take a company private. To summarize the enforcement actions taken in March: The SEC alleged that the filing persons had failed to promptly amend Item 4 of their Schedule 13D filings to reflect material changes in facts and circumstances, including 1 Mary Jo White, Chair, Securities and Exchange Commission ( SEC ), Remarks at the Securities Enforcement Forum (Oct. 9, 2013). References in this alert to Section 13(d) and Section 16 refer to the applicable sections of the Securities Exchange Act of 1934, as amended (the Exchange Act ), and the rules promulgated thereunder by the SEC. { ; 6; }

2 steps taken by the filing persons that demonstrated the adoption of plans or proposals that might result in going private transactions. The filing persons had taken steps such as the following, without amending Item 4: o Providing a concept paper to the issuer, and notifying the issuer of an intention to go private o Assisting with stockholder vote projections o Obtaining waivers from preferred shareholders o Having discussions regarding a consortium with other shareholders Unlike past Item 4 enforcement proceedings, in 2015 the SEC assessed monetary penalties. The recent enforcement proceedings all relate to going private transactions, but the SEC s position on the need to amend Item 4 disclosures is not limited to going private transactions. As reflected in the charts in this memo, past enforcement proceedings have been brought against Schedule 13D filers who failed to disclose substantial steps taken to reduce their securities holdings. Accordingly, the SEC s enforcement posture is a reminder to all Schedule 13D filers to carefully review their Item 4 disclosures, and to consider amendments, when facts, circumstances, plans and intentions change. Basic Section 13(d) Legal Framework Section 13(d)(1) of the Exchange Act and Rule 13d-1(a) require that any person or group who has acquired, directly or indirectly, beneficial ownership of more than five percent of a class of a registered equity security must file a Schedule 13D (or abbreviated Schedule 13G) with the SEC. Beneficial owners who do not qualify for the short-form Schedule 13G must file a Schedule 13D, which requires disclosure of, among other things, the identity of the acquirer, including beneficial owners and any group or other interested persons. Item 4 of Schedule 13D requires filers to disclose the purpose or purposes of the acquisition of securities of the issuer and to specify plans or proposals that a reporting person may have that would trigger an Item 4 reporting obligation, including, without limitation: additional purchases or sales of securities; or a going-private transaction or other extraordinary transaction involving the public company. Of course, Schedule 13D disclosures must be correct. Under Rule 13d-1(k)(ii), each filing person is responsible for the completeness and accuracy of that filing person s information in a Schedule 13D, and for timely filing of amendments. { ; 6; } - 2 -

3 Amendments to Schedule 13D Rule 13d-2(a) requires a filer to promptly amend Schedule 13D when there are material changes or developments in the information previously reported: (a) If any material change occurs in the facts set forth in the Schedule 13D required by Rule 13d-1(a), including, but not limited to, any material increase or decrease in the percentage of the class beneficially owned, the person or persons who were required to file the statement shall promptly file or cause to be filed with the Commission an amendment disclosing that change. An acquisition or disposition of beneficial ownership of securities in an amount equal to one percent or more of the class of securities shall be deemed material for purposes of this Rule 13d-1; acquisitions or dispositions of less than those amounts may be material, depending upon the facts and circumstances. As always, defining materiality can be challenging. Rule 13d-2(a) does set forth one simple bright line test: that one percent or greater changes in beneficial ownership due to acquisitions or dispositions are deemed material. But, the rule leaves unclear which other changes can also be deemed to be material. In the March 2015 proceedings, the SEC staff emphasized the interaction between Rule 13d-1(k)(ii) and the materiality standard in Rule 13d-2(a). Qualitative disclosures providing narrative in response to the line item requirements of [Schedule 13D] also are subject to material changes. For example, generic disclosure that indicates the beneficial owner is reserving the right to engage in any of the kinds of transactions enumerated in Item 4(a)-(j) of [Schedule 13D] must be amended when a plan with respect to a disclosable matter has been formulated. As the SEC further noted somewhat ominously, quoting Rule 13d-1(k)(ii), Depending on the facts and circumstances...an amendment also may be required before a plan has been formulated because the obligation to revise arises under Section 13(d)(2) and corresponding Rule 13d-2(a) promptly after a material change occurs in the facts set forth in the Schedule 13D. (Emphasis added). Steps That Are Evidence of a Material Change In its enforcement orders over time, the SEC enforcement staff has focused on whether the Schedule 13D filer has taken significant steps that reflect the adoption of a plan or proposal. It seems that, in the SEC s view, these significant steps are evidence that the filer had adopted or modified an intent, plan or proposal. For example, in three past enforcement actions, the following steps were deemed to require Item 4 amendments: { ; 6; } - 3 -

4 Tracinda (2008) Payson (2004) Wilkerson (2003) Failure to disclose intent to sell Tried to sell entire position. Received instead a bid for, and sold, half of the position. Filed 13D amendment disclosing sale of half of the position. Did not disclose intent to sell the remaining half. 4-6 days later, sold remaining shares. Failure to disclose intent to sell Developed a plan involving sale of issuer s stock by affiliated entities which would result in a sale of the stock during the next trading window for corporate insiders. Signed papers transferring membership interest in a family entity to spouse. Resigned as trustee of the family trust and gave family s financial advisor power over the family entity and the trust (Late December). Signed and filed a 13D amendment with respect to ownership changes and general intent to buy and sell from time to time. No disclosure of plans to sell shares during the next trading window (Late December). In February trading window, broker sold shares. Failure to disclose intent to effect a going private transaction Initiated a series of transactions to purchase additional stock in the Issuer, with the intent of gaining control and taking it private (May 2001-September 2001). Filed several 13D amendments containing general language considering multiple alternatives, but no specific reference to going private transaction. In all three cases, the filing person had made Schedule 13D disclosures reflecting the possibility of either acquiring and/or disposing of shares of stock from time to time, but not at any specific time. However, according to the SEC staff, these disclosures contained inaccurate information. In the case of Tracinda and Payson, the filer had formed the intent to sell but not to buy shares of stock in the near future (when the price was right (Tracinda) or during the next trading window for corporate insiders (Payson)). In the Wilkerson case, the filing person had formed an intent to acquire more shares and take the issuer private (much like the March 2015 cases). The SEC viewed the external actions of the filers as manifestations of a change in their plans and/or intent, which rendered their previous Schedule 13D disclosures inaccurate. This was compounded in the case of Payson and Tracinda by the fact that boilerplate disclosure was filed at the same time that the filing person was taking significant steps that demonstrated that specific plans had been adopted. The more current cases listed in the chart at the end of this memorandum reflect the continuation of this approach, with the addition of monetary sanctions for the violations. The SEC s interpretation of Item 4, and Rules 13d-1(k)(ii) and 13d-2(a), could arguably be interpreted to require 13D filers to make amendments earlier than many filers may expect, because, as the SEC staff said in the Payson order, Disclosure is required even if the plan relates to a prospective event and even though the event may not occur. { ; 6; } - 4 -

5 To be as protective as possible, to the extent that you are considering any change in any plans or intentions with respect to investments that are reported on a Schedule 13D, please consult with your regular counsel at FDH to ensure that the facts and circumstances are fully analyzed. Key Take-Aways Review existing generic or boilerplate Item 4 language from time to time. Assess changes in plans and intentions against existing disclosures and Item 4 disclosure requirements. Remember that various changes in investment intent can trigger Item 4 disclosure, such as: o A decision to exit or materially augment the position o A decision to adopt a Rule 10b5-1 plan o Other significant steps in furtherance of an extraordinary transaction Be aware that, in hindsight, steps taken in connection with a plan or transaction can be interpreted as demonstrating that prior disclosure had become stale. The SEC staff will, after the fact, review proxy statement disclosure and a filer s communications (including s) to determine whether the facts demonstrated the need for an earlier Schedule 13D amendment. For your convenience, the following chart describes the conduct of Schedule 13D filers which the SEC has argued should have triggered Schedule 13D amendments. For further information contact: Charles J. Downey III cdowney@fdh.com or Janine Tougas jtougas@fdh.com { ; 6; } - 5 -

6 International Lottery & Totalizator Systems, Inc. (2015) Significant 13D Disclosure Proceedings Issuer Stockholder(s) Material Facts Penalty Berjaya Lottery Management (H.K.) Limited First Physicians Capital Group, Inc. (2015) Exceed Company Ltd. (2015) Ciabattoni Living Trust Anthony J. Ciabattoni Jane G. Ciabattoni SMP Investments I, LLC Brian Potiker William A. Houlihan Submitted a concept paper to the Issuer regarding a going private transaction (July 2013) Disclosed its intent regarding the transaction to the Issuer (July 2013) Decided on a reincorporation merger, followed by a reverse stock split (between July 2013 and March 2014) Approved these transactions by written consent (between July 2013 and March 2014) Informed Issuer of support for goingprivate transaction (January 2014) Assisted Issuer with transaction by securing waivers from stockholders to remove the registration requirement on preferred stock (January 2014) Failed to amend 13D filing to reflect changes in stock ownership from 12 different transactions between 2009 and 2014 until June 2014 Failed to amend 13D filing to reflect specific intention to effect going private transaction rather than general statement regarding the possibility of such a transaction Shuipan Lin Failed to file initial 13D until May 2011, although requirement to file triggered in October 2009 Failed to amend 13D filing to reflect Failed to amend 13D filing to reflect specific intention to effect going private transaction rather than general statement regarding the possibility of such a transaction until March 2014 Discussed fractional share repurchase, reverse stock split, and third party proposal to conduct valuation of the Issuer with Issuer s officers and directors (between February 2014 and June 2014) Received information about board meetings discussing valuation issues, ratio stock split analyses, public company cost estimates, and preliminary proxy statement (March 2014) Assisted Issuer with shareholder vote projects regarding reverse stock split and going private transaction (May 2014) Proxy statement disclosed that the Issuer began considering a going private transaction in early 2011 Proxy statement disclosed that the Stockholder began to consider and evaluate going private transaction (October 2012) $75,000 civil money penalty $75,000 civil money penalty between the 6 Stockholders $30,000 civil money penalty { ; 6; } 6

7 Issuer Stockholder(s) Material Facts Penalty specific intention to effect going Discussed going private private transaction rather than transaction with attorneys and general statement regarding the possibility of such a transaction until August 2013 other stockholders about working together to submit a proposal for the transaction (July 2013) Studied the feasibility of a going Submitted a preliminary nonbinding private transaction and reviewed letter to board of directors other similar transactions by Chinese regarding going private issuers (November 2012) transaction (August 2013) Discussed going private transaction with two other significant stockholders, who became part of the consortium effecting the transaction (November 2012) General Motors Corporation (2008) Oxford Plans, Inc. (2004) Health Tracinda Corporation Met with advisors to discuss existing investment in the Issuer and the recommendation to sell the position (November 16, 2006) Planned to sell entire position (November 20, 2006) Contacted broker-dealer and offered to sell entire position, but price was unacceptable (November 20, 2006) Norman C. Payson Filed a 13D almost 10 months after acquiring the requisite 5% ownership Arranged sale of the Issuer s stock held by affiliated family entities and took steps toward reducing his family s ownership in Issuer (August 2000) Developed a plan involving sale of Issuer s stock by the affiliated entities which would result in a sale of the stock during the next trading window for corporate insiders Asked for bid for half of the position, received a higher, acceptable price, and executed the sale (November 20, 2006) Filed 13D amendment disclosing the sale of half of the position, but did not disclose intent to sell the remaining shares (November 22, 2006) Sold remaining shares (November 28-30, 2006) Resigned as trustee of a family trust and gave authority to family s financial advisor with respect to the family entity and the trust (December 28, 2000) Signed and filed a 13D amendment with respect to these changes and disclosed general intent to buy and sell from time to time, but did not disclose plans to sell shares during the next trading window (December 29, 2000) { ; 6; } 7

8 Issuer Stockholder(s) Material Facts Penalty (December 2000) Financial advisor sold various Transferred membership interest in shares in next trading window a family entity to spouse (February 8-14, 2001) (December 28, 2000) BCT International, Inc. (2003) William A. Wilkerson and the Phoenix Group of Florida, Inc. Initiated a series of transactions to purchase additional stock in the Issuer, with the intent of gaining control and taking it private (May 2001-September 2001) Disclosed to Issuer s board of directors his acquisition of an option to purchase more stock and expressed an interest in exploring the possibility of purchasing all of the shares he did not then own (May 2001) Sought financing for purchase of stock and received a loan proposal to reflect the purpose of the financing as the going private transaction (June 2001) Informed the board that he was preparing a proposal to take the Issuer private (June 25, 2001) Formed an entity for the sole purpose of acquiring shares to take the Issuer private (June 25, 2001) Filed several 13D amendments containing general language considering multiple alternatives Issuer approved an offer from Stockholders to purchase all of the outstanding stock (November 2001) Filed a proxy statement and a Schedule 13E-3 regarding the going private transaction (November 2001) SEC rejected the proxy filing and Schedule 13E-3, and the Stockholders terminated their offer (April 2002) Discussed a going private transaction again with a special committee of the Issuer s directors, negotiated various proposals (March 2003) The special committee approved the proposal and filed a new Schedule 13E-3 with the SEC Vote in the same proportions to the nonmajority stockholders, requiring an affirmative majority of the shares held by others Ensure that the special committee has the right to solicit and entertain alternatives to the proposal, and to accept the proposal if it is in the best interest of the stockholders as a whole { ; 6; } 8