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Monthly Archives: May 2005

May 31, 2005

Treasury Issues Guidance on Private Jet Use

On Friday, the Treasury issued the long-awaited guidelines on how companies can (and can’t) take deductions for executives’ private use of company aircraft. The guidelines implement Section 274(e) of the JOBs Act. Get hard-hitting analysis on private jet use in the upcoming May-June issue of The Corporate Counsel.

SEC Has Its Own Material Internal Control Weaknesses

Last Thursday, GAO (i.e. Congress’ Government Accountability Office) released this report that found “material internal-control weaknesses” in the SEC’s internal controls. The weaknesses primarily relate to the recording of fines and restitution to investors that it wins in settlements with companies and individuals, the preparation of the SEC’s financial statements and the security of information. As a result, the report says that the SEC “did not maintain effective internal control over financial reporting as of Sept. 30, 2004.”

In response, the SEC will add new staff to handle financial reporting and establish an internal committee – similar to a boards’ audit committee – to monitor and correct deficiencies. The business media had a field day generating creative titles for articles on the GAO’s report, such as the Washington Post’s “What’s Good for the Goose.”

The Audit Committee Disclaimer

I was fascinated with this article in last Thursday’s Washington Post article because of its extensive discussion of the disclaimer about audit committee activities included in AIG’s 2001 and 2002 proxy statements. The article surmises that the disclaimer should have been a red flag to AIG’s independent auditor, PwC, that something was amiss at the company. According to the article, the disclaimer stated that the audit committee’s oversight did “not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles” and that it couldn’t assure that the audit had been carried out according to normal standards or even that PWC was in fact “independent.”

As the article notes, those types of disclaimers became far less common after Sarbanes-Oxley – but it will be interesting to see if AIG’s disclaimer helps the company’s audit committee avoid liability.

Note that an August 2001 article by Amy Goodman and Mike Scanlon of Gibson Dunn (entitled “Survey of Audit Committee Charters and Audit Committee Reports in 2001 Proxy Statements”) from Insights found that a majority of audit committee charters had disclaimers in them way back in 2001. These disclaimers normally qualified the responsibilities and actions of audit committee members, such as the audit committee members:

– neither performed nor certified the auditing work
– are not responsible for preparing the company’s financial reports and relied on the statements of management
– are not accounting experts and provided no expert or professional assurances
– have no duty to resolve conflicts between management and independent auditors
– are not deemed to have accepted a duty of care greater than the other directors

Let me know if you have conducted (or seen) a more recent study, as it would be helpful to see how far disclaimers have changed.

May 26, 2005

PCAOB Brings First Disciplinary Action

On Tuesday, the PCAOB brought its first enforcement action – and it was a big one, revoking one firm’s registration and disciplining three accountants for their “failure to cooperate.”

As discussed in this press release, the PCAOB “found that the partners, after learning of the imminent inspection, formulated and carried out a plan to create and back-date certain documents and place them in the firm’s audit files. The Board found that Messrs. Morris, Goldberger, and Postelnik took these steps to conceal from the Board the firm’s failure to comply with certain auditing standards.” The Board barred the former managing partner from auditing public company – and also censured two other former partners, finding that they participated in the misconduct but noting that they promptly alerted the PCAOB and cooperated in the Board’s investigation. Lesson learned: don’t interfere with the PCAOB inspection process!

Meanwhile, there are some interesting tidbits in this response from the PCAOB to questions raised by SEC Commissioner Paul Atkins (these questions were raised a few months ago during an open Commission meeting over the PCAOB’s budget).

SEC Facing Budget Shortfall

On Tuesday, a number of media outlets carried the news that the SEC’s budget is tight and, as a result, non-critical travel is restricted and hiring will be limited until the new fiscal year that commences in the fall. Here is an article about this from the Financial Times:

“A US spending watchdog has been asked to investigate budget problems at the Securities and Exchange Commission, the chief financial regulator.

The Government Accountability Office has been urged to look at how the SEC faces a budget shortfall of about Dollars 50m over three years because of problems stemming from the financial management of projects to provide new offices in Washington, New York and Boston.

Frank Wolf, chairman of the House appropriations subcommittee that monitors the SEC budget, told the GAO in a letter yesterday that he was “troubled” by the problems and asked it to investigate.

“This is very damaging to the SEC,” said Mr Wolf after speaking to William Donaldson, SEC chairman. “The SEC polices other people’s books yet they themselves have huge overruns. I am very disappointed.”

The potential budget shortfall has been put at Dollars 48m by senior SEC officials, and its impact will be felt during 2005, 2006 and 2007.

The costs of the new SEC headquarters in Washington are set to increase by Dollars 19m partly because no provision was made for security measures in the original 2000 estimates.

The Dollars 25m move of the SEC New York office from the Woolworth building to World Financial Center was never included in the regulator’s 2006 budget.

The costs of a new SEC building in Boston are set to increase by up to Dollars 2m. The SEC is to set aside a further Dollars 2m to deal with other potential issues.

Senior SEC officials are confident the regulator can deal with the budget shortfall by finding savings elsewhere. Some posts at the SEC will not be filled, and curbs are to be placed on staff travel. The enforcement division is not expected to be affected by the austerity measures.

The SEC said: “We have been investigating the budget situation and are in regular communication with Congress as to how we will be proceeding.”

The SEC budget was boosted to deal with the spate of corporate scandals led by Enron, but President George W. Bush proposed cutbacks in February.

Yesterday, Mr Wolf’s sub-committee approved the SEC budget of Dollars 888m for 2006, which compares to Dollars 913m for 2005. The SEC had asked for a budget of Dollars 983m for 2006.”

60 Sites in 60 Minutes

The highlight of the ABA’s Techshow is the panel that reviews “60 Sites in 60 Minutes.” Here are a set of links to the sites presented at this year’s program. My favorite site are the oddball ones they present, such as the “World Beard Championships” and “How to Keep an Idiot Busy” [Not quite sure I understood "Googlism."] Who said lawyers are no fun…

May 25, 2005

The PCAOB Speaks in 2005

Thanks to Penny Somer-Greif of Arnold & Porter LLP, here are notes from the PLI’s “PCAOB Speaks” held a few weeks ago – the notes are written from the perspective of how the PCAOB’s activities impact public companies. There were a number of provocative points made during the conference, such as whether independent auditors were using enough skepticism in their evaluation of audit committees.

Personal Plane Perks

Today’s WSJ carries a front-page article on personal plane perks. This topic isn’t going away. The upcoming May-June issue of The Corporate Counsel will deal with this topic in detail, that issue should be out in about two weeks.

Example of Reporting-Up Obligations at Work

From a few weeks back, this press release from Theragenics Corporation describes how the company’s CFO and General Counsel reported up alleged violations caused by the CEO – and how they then resigned after the audit committee determined that there were no violations. I wonder what the back-story is there!

Here is an excerpt from the press release:

“James MacLennan and Tracy Caswell, the Company’s Chief Financial Officer and General Counsel, respectively, recently reported to the Board of Directors allegations regarding actions taken by the Company’s Chief Executive Officer that they viewed as inappropriate. The allegations did not relate to the accuracy of the Company’s financial statements or prior public disclosure by the Company. A subcommittee empanelled by the Company’s Board of Directors consisting solely of independent directors, with the assistance of special legal counsel, has investigated the allegations and presented its report to the Board. Following receipt and evaluation of the subcommittee’s report, the Board of Directors has determined that no violation of law or rule or regulation applicable to the Company or of any duty owed to the Company has occurred.

“Theragenics has been and remains committed to high ethical standards and this was confirmed by our investigation,” said Patrick Flinn, Chairman of Theragenics’ Audit Committee. “We take allegations of misconduct very seriously. The process worked the way it should have and is now complete with no violations found.”

Mr. MacLennan and Ms. Caswell have informed the Company that they will not participate further in the preparation of the Company’s public disclosure. Accordingly, the Board of Directors has accepted their resignations today. Mr. MacLennan, through counsel, has assured the Board in writing that he is not aware of any facts or circumstances that would cause the financial information contained in the Company’s earnings announcement issued April 22, 2005, to be inaccurate.”

An E-mail Retention Scare

A few days back, Reuters ran this disturbing article about the Morgan Stanley case and related e-mail perils. The disturbing part was the second sentence of this excerpt:

“Banks and broker-dealers are obliged to retain e-mail and instant messaging documents for three years under U.S. Securities and Exchange Commission rules. But similar requirements will apply to all public companies from July 2006 under the Sarbanes-Oxley corporate reform measures.”

Chuck Ragan of Pillsbury Winthrop Shaw Pittman confirms that he is unaware of any measures likely to be enacted that would extend the broker-dealer retention mandates of SEC Rules 17a-3 and 17a-4 to all records of all public companies.

Chuck notes that Sarbanes-Oxley imposes liability for failure to preserve records in the face of pending or reasonably anticipated litigation, but not all records at all times, as this sentence would suggest – and in the absence of a duty to preserve for litigation, there is no generally applicable obligation to retain all documents, e-mail and instant messaging, and organizations may still adopt policies to manage their information and records in accordance with sound business practices and other legal rules.

May 24, 2005

Clawback Provisions for Legal Fees of Convicted Officers

A week or so ago, the WSJ carried an article about Merrill Lynch’s decision about paying millions of dollars in legal fees for former officers that had been convicted of wrongdoing. This is a controversial topic and I will be blogging some thoughts from TheCorporateCounsel.net’s advisory board in the coming days. Here is an excerpt from the article:

“Merrill Lynch’s onetime investment-banking chief, Daniel Bayly, and three others were convicted of fraud in a federal court in Houston last fall in connection with the so-called Nigerian barge transaction. Merrill bought a stake in some Enron electricity-producing barges off the Nigerian coast in 1999, allowing the energy company to book a $12 million profit. The jury agreed with prosecutors’ arguments that the transaction was fraudulent because Enron had secretly guaranteed Merrill against any loss.

Mr. Bayly was sentenced to 30 months in prison in April; another former Merrill official, James Brown, got 46 months. The other two, Robert Furst and William Fuhs, face sentencing tomorrow. All four are appealing.

Merrill has been paying the four men’s legal bills — $17 million as of Dec. 31, court records show. Corporations routinely pay the legal bills of directors and employees in civil or criminal proceedings arising out of their employment. Companies have the right to recover the money if the individuals are found to have violated their employment duties.

“If you are convicted of crime and it damaged the company, the company shouldn’t pay your legal expenses,” says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
[Daniel Bayly]

Merrill’s bylaws say it pays an employee’s legal bills until a “final disposition” of their cases, but they don’t say what constitutes final disposition. Some corporate-law specialists say a case isn’t final until appeals are exhausted. Others argue that Merrill could ask for its money back now that the employees’ presumption of innocence has ended.

“Once convicted, you no longer meet the standard” for financial aid, says Lawrence Hamermesh, a professor at Widener School of Law in Delaware.

When U.S. District Judge Ewing Werlein Jr. sentenced Messrs. Bayly and Brown, he refused their requests to remain free pending their appeals, suggesting he doesn’t think much of their chances. The two are expected to report to prison within weeks.

In an April 8 letter to Judge Werlein, federal prosecutors said Merrill had informed them it planned to pay the defendants’ legal fees through their appeals. A person close to the issue says Merrill is considering a cap on appeals costs. A Merrill spokesman says the question of whether Merrill will try to recoup the money “is premature in light of the pending appeals.”

The prosecutors complained about how much Merrill had spent to defend the men.

“Mr. Bayly alone now has four separate law firms representing him,” the letter said. In a hearing, prosecutors estimated Mr. Bayly’s wealth at upward of $60 million. Lawrence Robbins, a Bayly attorney, said he didn’t know his client’s wealth. “If I did I would keep it private and I would find it appalling for the government to make that information public,” he said. He added that Mr. Bayly’s team is down to three firms.

The prosecutors’ also questioned whether Merrill failed to abide by state law governing such matters in Delaware, where Merrill is incorporated. The state’s code says that before paying an employee’s legal bills, the company must first secure an agreement from the individual “to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified.” The prosecutors said Merrill hasn’t obtained such a commitment. The Merrill spokesman said the firm doesn’t believe that it is in violation of Delaware law, but declined further comment.

Under Delaware law, a conviction doesn’t automatically require the company to seek reimbursement because that doesn’t necessarily create the presumption that a “person did not act in good faith and in a manner in which the person reasonably believed” to be in the company’s best interest. Several former top Merrill executives signaled that they think that the past record of Mr. Bayly, for one, is worthy of support by asking Judge Werlein to show leniency.

Merrill might have difficulty arguing that the barge deal didn’t harm shareholders. The company in 2003 paid $80 million to settle a Securities and Exchange Commission complaint that it helped Enron commit fraud through that deal and others. It also settled with the Justice Department to avoid indictment.

The SEC lately has taken a harder line on companies paying employee legal fees. Last May, it fined Lucent Technologies $25 million for not cooperating in an investigation, partly citing the company’s legal-fee payments for employees. Lucent didn’t admit or deny wrongdoing.

In a recent speech, the SEC’s outgoing enforcement chief Stephen Cutler — his last day is today — said paying employees’ legal fees insulates them from the consequences of wrongdoing. “If an individual can look to his/her employer to pay the freight,” said Mr. Cutler, “what good have we done?”

Is Reimbursement of Legal Fees Spent on Contract Negotiations a Perk?

On a somewhat related point to the story above, I recently debated a member about whether reimbursement of legal fees for contract negotiations should be considered a perk. I think it should be – and this article supports that view, noting that a large union. AFSCME, is withholding its support for the head of the Cendant’s compensation committee citing the CEO high pay and perks, including a $165,000 reimbursement for legal fees in connection with his contract negotiations.

The reasoning behind considering reimbursement of legal fees as a perk is that it is not directly related to job performance. As a result, it arguably must be disclosed under Item 402 of Reg. S-K as “other annual compensation,” subject only to the minimum threshold requirements.

Another issue is whether there is a difference between reimbursement and simply paying the fees directly to the law firm. I think there is an argument that if the company pays the firm directly, the counsel works for the company and not the executive – a conflicts issue; but then again I am reminded that the rules regarding the existence of an attorney/client relationship is not a function of who pays the bills.

From a disclosure standpoint, I don’t think that it makes any difference as to whether the company pays the law firm directly or reimburses the executive – if the law firm is representing the executive, and the company ultimately pays the bill – then I think it gets picked up and must be disclosed. Let me know if you have different thoughts on any of these points.

Deceased Woman Deemed “Qualified Purchaser” By SEC Staff

Got your attention, huh. Same way Jay Gould of White & Case got my attention with his law firm memo about a recent no-action response from the SEC’s Division of Investment Management that addresses whether a settlor of a trust – who had been deceased for over 45 years – should be considered a qualified purchaser under the ’40 Act.

According to the law firm memo, this no-action response “appears to have expanded the universe of what the SEC considers to be a qualified purchaser. This is good news for hedge funds and those who market on behalf of hedge funds, as the letter, Trusts Under the Will of Marion Searle (pub. avail. March 29, 2005) should allow more individuals, dead or alive, to satisfy the qualified purchaser standard who did not meet the $5 million threshold at the time of contribution.”

May 23, 2005

All Corp Fin Staff Now Nestled in Station Place

On Friday, the last of the Corp Fin staff moved to the new DC headquarters – and our “SEC Staff Organization Chart” has been updated with all the new phone numbers.

Other staffers will be continuing to make the move over the next few months. As of now, all hard copy submissions continue to get sent to the old HQ address, 450 5th St.

Six Messages from Last Week’s Internal Controls Guidance

Finally got a chance to focus on last week’s batch of internal controls guidance from the SEC and PCAOB. Here are the top six messages I gleaned from them:

1. Its okay to talk again! – Management and outside auditors can resume their dialogue concerning accounting and internal control questions. For example, the sharing of draft financial statements that may be incomplete or contain errors do not contravene the applicable independence or auditing rules and standards. As I am sure outside auditors will be quick to remind you, management must always make the final call on reporting decisions.

2. “Reasonable Assurance” does not mean absolute assurance – SEC reiterates a sentence from the Staff statement when it notes that “[r]egistered public accounting firms should recognize that there is a zone of reasonable conduct by companies that should be recognized as acceptable in the implementation of Section 404.”

3. Its top down; not bottom-up - The agencies clarified that a top-down approach should be used, by beginning with company-level controls.

4. No need to control everything – After starting with the top, companies should then drill down to identify and test other accounts and processes that are relevant to internal control over financial reporting. No more controls to count paper clips – and this is particularly help for IT systems as only IT processes that impact financial data need to be covered by internal controls. The bottom line is that there is no need to use a checklist.

5. No need to test everything every year – The agencies want companies to focus on the areas of greatest risk to the integrity of their financial reporting. The testing and assessment of controls related to these areas of greatest risk may, and in most cases preferably would, take place throughout a fiscal year rather than just the period surrounding the year end close, and everything doesn’t have to be kicked each year.

6. Restatements are not necessarily material weaknesses – Of course, in most cases restatements will be material weaknesses, but I have heard of quite a few instances in which there were strong arguments that a restatement did not rise to the material weakness level.

Material Weakness Disclosures Exceed 14%!

As I heard last week at a conference – and the reinforced in this article – a total of more than 14% of large public companies will have disclosed material weaknesses in this proxy season’s batch of 10-Ks when all is said and done.

AuditAnalytics.com states that among 2,963 accelerated filers that disclosed their Section 404 opinions as of May 15th, 12%, or 363, disclosed material weakness – and then taking into account expected material weakness disclosures from non-timely filers and those that relied on the SEC’s exemptive order – that percentage is predicted to exceed 14%. In comparison, at the SEC’s 404 Roundtable last month, speakers were saying they expected 8% of companies to disclose material weaknesses, just about half of what actually transpired.

May 20, 2005

The Role of the SEC Staff’s Informal Guidance

Just read the newsletter for the ABA’s Committee on Federal Regulation of Securities – and kudos to Stan Keller for addressing SEC Commissioner Paul Atkin’s recent comments regarding the value of the SEC Staff’s informal guidance. In two recent speeches – one on April 4th and the other on April 27th – Commissioner Atkins expressed concern over the Commission continuing to allow the SEC Staff to set policy and effectively engage in rulemaking through interpretations, particularly focusing in areas other than Corp Fin.

In the Corp Fin context, Stan states the bottom line more artfully than I ever could: “The system of staff interpretation has worked well for many years and contributed to the SEC’s stature as a preeminent regulatory agency. We would all lose, and the quality of securities regulation would suffer, if this process were impeded or diminished.”

More than ever before, the community needs guidance from the SEC as we all try to deal with a lifetime of change condensed into a scant few years. The Commission is dealing with major changes on all fronts – not just Corp Fin matters – and there is no way that five Commissioners (with their miniscule staff) could keep up with the workflow that a thousand plus staffers struggle with today!

Imagine that the SEC used Commissioner Atkin’s model and the Administration failed to fill Commissioner slots as they open up; a not uncommon occurrence. It wasn’t that long ago that going to a Commission meeting meant watching Arthur Levitt and Steve Wallman in a two-man debate – as they comprised the entire Commission for a period of six months (for trivia buffs, see this timeline of Commissioners). Keep those telephone interps coming!

Trends in Securities Litigation

A member recently asked where to find studies regarding securities litigation trends. There are several of these every year, here are two of the latest that are in our “Securities Litigation” Practice Area:

PricewaterhouseCoopers’ “2004 Securities Litigation Study”

Cornerstone Research’s “2004 Class Action Securities Case Filings: A Year in Review”

Chairman Donaldson Testifies on Commission Disagreements

Yesterday, Chairman Donaldson testified before the Senate Banking Committee on market structure. During his testimony, he was asked quite a few questions about how the five Commissioners were getting along. Here is an excerpt from a Financial Times article:

“William Donaldson was yesterday forced to defend his leadership of the Securities and Exchange Commission after US lawmakers raised concerns about divisions inside the regulator.

Mr Donaldson, Republican chairman of the SEC, insisted he always strove for consensus at the regulator during its policy making. Republican lawmakers highlighted how Mr Donaldson had relied on the support of the two Democratic commissioners at the SEC to get controversial reforms approved.

The latest example came in April when Paul Atkins and Cynthia Glassman – the other two Republican commissioners at the SEC – voted against changes to stock trading rules.

Richard Shelby, Republican chairman of the Senate banking committee, said some people were “troubled” by how the changes were pushed through by three votes to two, because of concerns that the lack of consensus undermined the regulator’s credibility.

Senator Mike Crapo, another Republican member of the committee, said he found the divisions inside the SEC on contentious policy making “disturbing”.

Regulations to supervise hedge funds and improve governance at mutual funds have also been pushed through by Mr Donaldson and the two Democratic commissioners.

Mr Donaldson said almost 3,000 votes had taken place at the SEC under his leadership and 98 per cent were unanimous. He compared his record favourably to Harvey Pitt, his predecessor as SEC chairman, when he said 99 per cent of votes were unanimous.”

May 19, 2005

Delaware Chauncery Court Rejects Fairchild’s Exec Comp Settlement!

Think the courts are not getting serious about executive compensation? Today’s Washington Post has this article about how Vice Chancellor Leo Strine rejected a recent settlement between Fairchild Corp. and investors over allegations that the CEO and other senior managers received excessive and improper pay.

The Vice Chancellor stated that the settlement was inadequate – or more aptly put in this quote from the article: If the allegations in the lawsuit are true, the judge said from the bench, the proposed settlement amounted to a “cosmetic whimper.” This is remarkable as Delaware courts typically reduce legal fees as a cure for an inadequate settlement; they don’t reject the settlements outright as has been done in this case.

Among other things, the rejected terms of the settlement included:

– CEO would have cut his $2.5 million salary by 20%, another executive (who is the CEO’s son) would have taken a 15% salary cut – and there would have been shorter terms under amended employment agreements for these two executives

– CEO would have paid $1.5 million through an advance from a retirement plan

– two executive would have had to pay back millions of dollars of golden parachute or “change of control” payments that were paid due to a prior subsidiary sale

Also challenged were interest-free loans, advances on retirement payments, payments for an apartment in Paris and Steiner-affiliated aircraft, and legal costs paid for senior manager’s defense of a lawsuit in France.

If you wish to see the original complaint that alleges breaches of fiduciary duty and disclosure regarding the way the CEO and other executives were being compensated, it is still posted in the “Compensation Litigation” Portal on CompensationStandards.com.

Annette Nazareth: Next Commissioner?

Not for several decades has there been a SEC Staffer who was promoted to SEC Commissioner to work alongside his or her former bosses. But that is what will happen if Market Reg Director Annette Nazareth replaces outgoing Commissioner Harvey Goldschmid, as was rumored in the WSJ and NY Times yesterday.

The WSJ reported that “Senate Minority Leader Harry Reid (D., Nev.) is expected to write Mr. Bush today recommending Annette Nazareth for the opening on the five-member SEC. He deferred to Sen. Charles Schumer, a Democrat who represents New York, home to much of the U.S. securities industry, to make the recommendation. Ms. Nazareth “is just the person the SEC needs,” Mr. Schumer said through a spokesman.”

Back in the ’50s, ’60s and ’70s, it was not uncommon for Staffers to become Commissioners. In fact, some of the best Commissioners came directly from the Staff, including Irving Pollack (Enforcement Director), Byron Woodside (Corp Fin Director), Manny Cohen (Corp Fin Director) and Phil Loomis (General Counsel).

Harvey Goldschmid was the SEC’s General Counsel in the late 1990s – but the Commission composition turned over by the time he became Commissioner in 2002.

Most Recent Monthly Columns

The May column for Carl’s Corner is entitled: Shareholder Rights’ Agreements: Voting Rights, Board Structure and Assuring Distributions.

And on DealLawyers.com, Steve Glover’s May column is “Spin-Off Basics – Part 2.”

May 18, 2005

NYSE’s Financial Distress Exception Regarding Shareholder Approval for Plans

According to footnote disclosure in the equity plan compensation table of its proxy statement, Delta Airlines has relied on the financial distress exception to the NYSE’s shareholder approval rules – and the NYSE staff has accepted the company’s application of the exception. [Here is how the process works: the NYSE's rule allows for exceptions in the case of financial distress - the NYSE staff reviews each fact pattern to be sure that the company is properly applying the rule. The NYSE doesn't technically grant the exception.]

Delta adopted two broad-based plans at the end of 2004, with a total of 62 million shares reserved – and these plans create potential dilution of 44% (and now the total potential dilution of all Delta’s plans are over 80%! Note that Delta has three shareholder proposals related to compensation on their ballot).

According to a report from IRRC, the use of the financial distress exception is rare and must be based on audit committee documentation and other factors. Here is the disclosure in footnote 2 of Delta’s table:

“During the December 2004 quarter, we adopted, as part of the Shared Reward program, broad-based pilot and non-pilot stock option plans due to the substantial contributions made by employees to our out-of-court restructuring efforts. We did not seek shareowner approval to adopt these plans because the Audit Committee of our Board of Directors determined that the delay necessary in obtaining such approval would seriously jeopardize our financial viability. The NYSE accepted our reliance on this exception to its shareowner approval policy. A total of 62,340,000 shares of Common Stock may be issued under these plans.”

More Practice Pointers on CompensationStandards.com

New practice pointers continue to be added to CompensationStandards.com – yesterday, I added nearly ten from Towers Perrin and Mercer Consulting, among others. I also added Professor David Yermack’s latest version of his much-talked about airplane perks paper – this one includes a section indicating that a company’s decision to begin disclosing the aircraft perk is highly correlated with shareholder lawsuits for securities fraud. See the updated paper in the “Airplane Use” Practice Area.

We have a lot of momentum for our October 31st “2nd Annual Executive Compensation Conference,” with Stanford Directors’ College and Harvard Law School’s Program on Corporate Governance colloborating with us – and John Reed and other current/former CEOs joining us to speak on responsible compensation practices. More details to come in the next few weeks – but you might want to get a jump on reserving a room at the Chicago Hyatt Regency since last year’s hotel was sold out early (don’t forget to mention the NASPP when you book a room to get the group rate).

What Happens If You Flunk Your 404 Exam?

There are so many good law firm memos on TheCorporateCounsel.net that I am always trying to figure out a better way to highlight them. One idea is to occasionally include them in my blog. Here is a Foley Lardner memo that emanated from a panel discussion – which included NYSE and Nasdaq representatives – that addressed what companies should do if they have internal control problems. It is “short but sweet” and in our “Internal Controls” Practice Area. Law firm memos on the new SEC and PCAOB internal controls guidance also are now posted there (scroll to bottom).

May 17, 2005

Commission and Corp Fin Both Provide Internal Controls Guidance

Early yesterday, I updated my blog about the PCAOB’s guidance on their internal-controls requirements – see both the PCAOB’s new FAQs 38-55 and the Board’s policy statement.

Meanwhile at the SEC, the Commission itself issued a statement – plus the Corp Fin staff also issued its own statement on management’s 404 report.

How Is Your Board Deciding to Implement Option Expensing?

As should be evident by now, under the FASB’s 123(R) standard, each company has some flexibility about how to implement option expensing – and the decision about how to do so should have quite an impact on the company’s bottom line. As the numerous NASPP webcasts on this topic – as well as the other resources on the NASPP’s site – make clear, this decision is one that requires some board attention. Learn more in this interview with Mike Melbinger on the Board’s Decisions for Stock Expensing.

SEC Filings Don’t Tell the Whole Pension Story

Today’s Washington Post carries an interesting column by Allan Sloan about the discrepancies between pension valuations disclosed in SEC filings by distressed companies compared to the amounts that the Pension Benefit Guaranty Corporation derives when it terminates the plans of those companies.

On an unrelated note, the SEC Staff released a scathing report yesterday on pension consultants and conflicts of interest.

Is Cisco Kidding?

Last week, I blogged about Cisco’s attempt to create employee stock options that are market traded. Here is some commentary on this idea from Ron Fink’s CFO Blog (not that I agree with Ron, just noting other’s views):

“Cisco’s latest idea for reducing the reported cost of employee stock option grants sounds as if it depends on a poorly performing derivative instrument (see B5 of the WSJ for a better description). How else describe a security that institutional investors could buy but not sell, making them wait as long as five years to convert it to common stock?

Yes, the price of the derivative may suffer as a result of these limitations. And in doing so, that could conceivably establish a market value for the underlying securities—the option grants—that is lower than what might be recorded under the option pricing models that are acceptable to the FASB.

But if the security is such a lousy deal, why would anyone buy it? And if it’s not so lousy, wouldn’t the resulting dilution to EPS offset the benefits?

It seems to me that Silicon Valley’s time and efforts would be better spent on producing new technology instead of methods of limiting the impact of an accounting rule. After all, investors may simply ignore the hit to earnings and focus on cash flow instead. Or is that what really concerns the tech lobby?”

May 16, 2005

Looking for the New SEC Comment Letter Database?

Lot of members asking how to find the SEC Staff’s comment letters on the SEC’s site. Here is some insight from Brink Dickerson: Comment letters are starting to appear in the SEC’s EDGAR database. They are assigned one of two form types, “upload” for letters generated by the SEC staff, and “corresp” for letters generated by filers. As with other filings, they are indexed by filer name, so the primary way to access the letters is to search for the filer and then look for the form type. To search across filers, go to the EDGAR archives – which is within the “Search for Company Filings” area on the main EDGAR page – and search for “form-type=” either “upload” or “corresp.”

So far the selection is not that large, with twenty-four examples – but it should grow at the rate of roughly 300 letters per month. Further, except in a few cases, the letters available so far are either just the correspondence or just from the SEC – but not both.

And here is some further insight from Howard Dicker: Here is a list of all SEC comment letters and responses that the SEC has posted on EDGAR so far.

Note that SEC staff comments have a “Form Type” of “UPLOAD” – and company responses have a “Form Type” of “CORRESP.” Most comment letters posted so far (at least those that do not relate to ’40 Act or asset-backed issuers) appear to pertain to comments on changes in accountants disclosed on Form 8-K (Item 4.01). My cursory review also indicates that the Staff issued the comment letters regarding this item within a few days of the company filing a Form 8-K.

From the most recent draft of the SEC’s EDGAR filer manual, cover letters that include responses will also be posted on the SEC’s site – but no cover letters are uploaded yet (perhaps because when the SEC staff asks a company to respond to comments, they ask that the company respond as “correspondence”).

The Art of the Private Equity Deal

Lately, there are articles written almost daily about how private equity funds are primary players in today’s M&A – such as this article from Thursday’s WSJ about how “Private-Equity Players Turn to Bigger Prey.”

Stay tuned for the DealLawyers.com webcast – “The Art of the Private Equity Deal” – set for June 14th, during which three of the top outside counsel doing private equity deals and the general counsel at a large private equity fund will discuss the latest strategies (as well as the fundamentals) implicated in doing deals with funds. Try a no-risk trial to DealLawyers.com today – get access to this webcast and many more resources on the site for only $195 per year.

PCAOB Releases Internal Controls Guidance

Today, the PCAOB released guidance to help companies and their auditors comply with internal-controls requirements. The staff guidance, in question-and-answer form, is accompanied by a policy statement that may have more of an impact. The guidance addresses some stumbling blocks for companies, including the scope of internal-controls reviews – and the policy statement aims to put technical guidance in context and reiterate the need for auditors to use a flexible, risk-based approach, avoiding a one-size-fits-all model.

In addition, the SEC Staff released this statement on internal controls. More on all this manana…