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'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. 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 Chancery 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

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, 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

New practice pointers continue to be added to - 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 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 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 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...

May 13, 2005

Accelerated Vesting of Underwater Options

As noted in this article, there is some controversy over companies that have accelerated the vesting of their underwater options in an effort to create higher earnings after they are forced to implement the FASB's 123(R) standard.

On the NASPP site, there is a Bear Stearns report that has a chart of 102 companies - all of which have a market cap over $600 million - that have accelerated vesting of their underwater options. The chart includes numerous details about each company's situation. Bear Stearns predicts more companies will be taking such action - and estimates that over $1 billion of option expense for future periods has been avoided by these companies. The NASPP site has other resources on accelerated option activity as well, including a June 9th webcast - "Q&A on FAS 123(R)" - during which Paula Todd of Towers Perrin and Reginald Oakley of the FASB are bound to answer questions on this technique.

Cisco Exploring Market-Traded Employee Options

Yesterday, both the NY Times and WSJ reported that Cisco Systems is considering the use of market-traded employee options as a possible solution to the huge option expense it will soon incur under the FASB's new 123(R) standard. Here is the NY Times piece:

"Adding a new twist to the continuing fight over the expensing of employee stock options, Cisco Systems is seeking regulatory approval for a novel financial instrument that could allow the company to assign a lower value to the stock options than under current valuation models.

A lower value for the options, which under new accounting rules will have to be recorded as expenses on Cisco's books starting this July, would reduce the impact expensing will have on Cisco's profits and could lead other companies to adopt something similar. The company said that if it employed a traditional valuation standard like the Black-Scholes model for expensing its stock options, its reported profits would fall by roughly 20 percent.

Options give employees the right to buy stock for as long as 10 years at a price set when the option is issued, and thus can become very valuable if the stock rises over that period.

Cisco's proposal is to create a market by selling new securities based on the employee options. By doing so, the company potentially could be changing the terms of the debate on expensing stock options. But details of the securities Cisco decides to sell, and the way it markets them, could prove crucial in determining how the approach works in practice.

The issue is important for Cisco because it grants options to all employees and because it will be one of the first companies to come under the new accounting rule that requires options to be expensed. That rule, adopted by the Financial Accounting Standards Board after a long and bitter debate, goes into effect on June 15 for fiscal years beginning after that date. Cisco's fiscal year begins July 31.

In its last fiscal year, Cisco granted 188 million options to employees. It disclosed that had it been forced to take the value of options as an expense, its net income would have fallen by 28 percent, to $3.2 billion.

The securities would be sold only to institutional investors. Cisco would sell new securities when it issued options to employees, and would then use them to value those options on its books."

A New Twist on the Quiet Period

Apparently, Led Zeppelin guitarist Jimmy Page entertained the NYSE with the band's "Whole Lotta Love" at the opening bell Wednesday to kick off Warner Music Group Corp.'s IPO - but a few weeks earlier, one of the bands under contract to Warner had threatened to disturb Warner's quiet period by trying to get out of its contract.

On May 3rd, the WSJ reported that Linkin Park wanted to end its contract with Warner because it was unhappy with the financial implications of the company's IPO. Since Linkin Park is responsible for 10% of Warner's sales, the mere threat by them to leave could have caused a problem in the quiet period - particularly since management was unable to publicly respond due to the quiet period's restrictions. But it looks like Warner was able to get its IPO off the ground. That's a new one for me, a client trying to get out of its contract - or renegotiate - and using the quiet period for leverage.

May 12, 2005

Linda Chatman Thomsen Becomes Enforcement Director

On the heels of yesterday's farewell party for outgoing SEC Enforcement Director Stephen Cutler, Deputy Director Linda Chatman Thomsen has been promoted to take his place. Linda's roots at the SEC stretch back to 1995, when she joined the Staff as a litigator and she rose through the ranks until becoming Deputy in 2002.

Delaware Supreme Court Limits California's Long Arms

Thanks to John Jenkins of Calfee Halter for this analysis: With its recent decision in VantagePoint Venture Partners v. Examen, the Delaware Supreme Court soundly rejected California's controversial efforts to apply its corporate statute to the internal affairs of foreign corporations with substantial ties to the Golden State. This case involved a claim that Section 2115 of the California Corporations Code governed the question of whether a separate class vote by the holders of preferred shares was required to authorize a merger transaction involving a Delaware corporation.

Traditionally, the so-called "internal affairs doctrine" has held that relationships between a corporation and its stockholders are governed by the laws of the state of its incorporation. Section 2115 of the California Corporations Code represents a departure from that traditional approach. That statute purports to apply to corporations that, although they may be incorporated elsewhere, have substantial business activities in California and substantial ownership by California residents.

Section 2115 is sweeping in its scope. As the Delaware Supreme Court noted: "if Section 2115 applies, California law is deemed to control the following: the annual election of directors; removal of directors without cause; removal of directors by court proceedings; the filing of director vacancies where less than a majority in office are elected by shareholders; the director’s standard of care; the liability of directors for unlawful distributions; indemnification of directors, officers, and others; limitations on corporate distributions in cash or property; the liability of shareholders who receive unlawful distributions; the requirement for annual shareholders’ meetings and remedies for the same if not timely held; shareholder’s entitlement to cumulative voting; the conditions when a supermajority vote is required; limitations on the sale of assets; limitations on mergers; limitations on conversions; requirements on conversions; the limitations and conditions for reorganization (including the requirement for class voting); dissenter’s rights; records and reports; actions by the Attorney General and inspection rights."

Section 2115 would have subjected the merger at issue in this case to a separate class vote by the holders of the company's preferred stock, notwithstanding the fact that the certificate of designation called for the preferred to vote on an as-converted basis with the common as a single class.

The Delaware Supreme Court rejected the plaintiff's efforts to invoke Section 2115, holding instead that the internal affairs of a Delaware corporation remain a matter of Delaware law. In so doing, the court reviewed a wide variety of federal, Delaware and California decisions involving the internal affairs doctrine - and concluded that it had no doubt that the California courts would also apply Delaware law under the circumstances of this case. The court opinion and several law firm memos on this case is up in our "California Corporations" Practice Area.

Transcript of Reg FD Webcast is Up!

We have posted the transcript of our popular webcast: "The Latest Regulation FD Practices."

For Photo Lovers Only

This Flickr Blog contains some very cool photos - new ones added daily. And this Mars Rover Blog has nice photos of Mars - ever wonder what Mars looks like?

May 11, 2005

Nasdaq to Delist Companies with Disclaimed 404 Opinions?

Several members recently have inquired as to whether Nasdaq was seeking to delist companies that had filed disclaimed internal control opinions. [A "disclaimed opinion" is an attestation that essentially provides no opinion; compared to an adverse attestation which lists one or more material weaknesses.]

Although I am uncertain as to whether Nasdaq is taking this position across the board, it does appear that it is sending delisting letters to some companies on the basis that their 10-Ks are incomplete due to disclaimed 404 opinions. In fact, one of these companies, Advanced Energy, has put out a press release indicating that it intends to fight Nasdaq over this issue through the Nasdaq's hearing process.

Disney Dissidents Sue the Company and the Board

Roy Disney and Stanley Gold are at it again. The dissidents of Walt Disney sued the company Monday in Delaware Chancery court, alleging that the directors made false statements to shareholders about the search for a successor to CEO Michael Eisner. In light of this allegedly bad disclosure, they seek to void the election of the Disney directors, force another election and disclose the board to disclose all the details regarding how they selected a new chief executive.

As you might recall, Disney and Gold withheld their support from Disney's board at the company's shareholder meeting earlier this year. The lawsuit asserts they would have run an alternate slate of directors if they had known that the company and a majority of the board members "did not intend to stand by their public statements about engaging in a bona fide CEO selection process." And the complaint outlines a pattern of action taken by the Disney board during its CEO selection process that Gold and Disney claim shows the company never seriously considered anyone but the insider that was tapped as the successor, Robert Iger. Here are the letters that Gold and Disney have written to the board over the years.

Setting aside the fact that I have never seen extensive disclosure about CEO succession - as this process is often conducted in the dark - this lawsuit is consider a longshot by experts as explained in this article for more "legal" reasons.

Learn more about CEO succession in our upcoming June 8th webcast - "Managing D&O Departures and Arrivals" - which I just lengthed by 15 minutes because it became obvious that the expert panel has so much interesting ground to cover during a prep call we held yesterday. I also recently added an expert on D&O background verification to the panel. In addition, I just posted a new survey on director recruitment and background verification - check it out!

Throw Your Name in the Hat: PCAOB's Standing Advisory Board

It's that time of year when the PCAOB is soliciting names for their standing advisory board. The advisory board consists of 30 members with expertise in a variety of fields, including accounting, auditing, corporate finance, corporate governance, and investing in public companies. Two years ago, the first members were selected to serve staggered two- and three-year terms (but going forward, all terms will be two-years) - the PCAOB is seeking nominations to fill the 14 slots that are now open. Self-nominations are welcome!

May 10, 2005

SEC to Commence Posting Comment Letters and Responses

According to this press release, it looks like the SEC is ready to start posting their comment letters - as well as responses - commencing this Thursday, May 12th.

Starting that date, Corp Fin and IM will begin the process of publicly releasing letters relating to disclosure filings made after August 1, 2004, with some of the oldest eligible filings going up first - and as it continues, letters will be released no earlier than 45 days after the review of the disclosure filing is complete.

The comment letters and filer responses will be on EDGAR. As I understand it, you would go to a specific company's information on EDGAR, and there will be a notation to access the Staff comment letter and one to access the company's response.

Cooking up a webcast on confidential treatment requests now; but lots of information is available now in our "Confidential Treatment Requests" and "SEC Comment Letter & Analysis" Practice Areas.

Jack Welch on the Role of Directors Today

In this Sunday NY Times interview, Jack Welch waxes poetic on serving as a CEO in today's environment. Here is a question he fielded on serving as a director today:

"Q. These days, directors are personally liable if they make the wrong decision. Has that changed the dynamics of the boardroom?

A. I'm not in boardrooms, but I think it has to have. What we ask is, "What is the role of a director?" We're picking them for their judgment, their character, their ability to see around corners, to sense whether the strategy is right. But they can't do that by looking at the books. They can only do that by walking the company. They have to get out and meet people at all levels, and get a feel for what it feels like out there. Are they hearing the same things out there that they're hearing in the boardroom? Then they have to support the C.E.O. The company has to win. If they don't have confidence in the C.E.O., they've got to make the change. But being timid and being afraid is not what we're looking for in directors."

Corporate governance is such a tricky thing. I believe outside directors should conduct plant tours and walk the floors when they can in an effort to boost morale and get a feel for the company.

But realistically they don't have the time to do this sufficiently to get a complete picture (unless it's a real small business) - and more importantly, you don't want outside directors to be interacting with employees and confusing them by giving them directives that are contrary to what their managers instruct. Leave the managing to the managers; it's not the board's job to get involved with daily operations.

What I think Mr. Welch is referring to is for boards to gauge employee morale as part of a CEO's evaluation - which could also include feedback from customers and suppliers (ie. a 360 degree evaluation). Related information can be found in our "Board Access" Practice Area.

The Need for Broad Employee Equity Ownership

There is a lot of concern about the future of ESPPs and other broad-based plans in the wake of option expensing. Learn more in this interview with Corey Rosen on the Need for Broad Employee Equity Ownership. There is more information on the NASPP website - and this topic will be covered during the NASPP's 13th Annual Conference.

Stars Come Out to Blog

As noted in this Washington Post article, Arianna Huffington has gathered a few hundred of her closest acquaintances to start their own blog city, It will be interesting to see where this all goes; my favorite blogs so far are from John Cusack who went to Hunter Thompson's memorial service and Mark Cuban on the new Enron movie which has gotten rave reviews (need to scroll down a few days in Mark's blog). I have high hopes for Larry David's blog, but his initial entry is not so good - even Larry's wife has a blog...

May 9, 2005

Being Paid to Stay at Home

I agree with everything Mark Borges noted in his "The Compensation Disclosure Blog" about this WSJ article from last Friday:

"I'm sure you saw the latest example of executive excess highlighted in today's Wall Street Journal . In her article, "Some Visiting CEOs Get Paid to Stay in Residences They Own," Joann Lublin identifies several chief executives who are reimbursed for staying in their own second homes when traveling on company business.

While this practice doesn't knock the personal use of corporate aircraft off its perch as the most notorious executive perk, it comes pretty close. Although I can understand the rationale for the payments (the company would incur a hotel expense anyway when the executive was in town), the optics make it an investor relations nightmare.

The article goes on to point out that, until this year, most companies had not previously disclosed these arrangements. [You can see representative proxy disclosures for Time Warner, Disney and Viacom linked from Mark's blog.]

Apparently, the SEC's recent admonishments about full disclosure and "best practices" led the companies to include the information as part of their perquisites disclosure. Interestingly, while Time Warner and Disney describe the arrangements, they both go on to expressly state that the amounts are not included in the "Other Annual Compensation" column of the Summary Compensation Table (Viacom included reimbursed amounts in the column).

Not surprisingly, investor group representatives are outraged, with one calling the practice "ridiculous." I suspect that we haven't heard the last of this issue."

The Latest on the SEC's XBRL Pilot Project

As noted in this recent press release, the SEC continues to encourage participation in its XBRL pilot program. Here are some related remarks by Peter Derby, Chairman Donaldson's Managing Executive for Operations & Management, before the 11th XBRL International Conference on the topic.

The SEC's XBRL voluntary filing program received a little help from the US members of XBRL International with this special web page; among the available resources are FAQs, tutorials, an email discussion group, guidelines, and a list of the companies that are voluntarily submitting XBRL documents to EDGAR (five so far). The site also includes links to US GAAP taxonomies, sample XBRL instance documents, and technical background information. Thanks to Allyson Weaver of Electronic Filing Services for pointing this out!

Bullet's Fever - Happens to Me Every Year!

Moved to the DC area in the late '70s and became a lifelong Washington Bullets fan after they won a world championship on the backs of Wes Unseld, Elvin Hayes and the gang. Little did I know they wouldn't win another playoff series for a quarter century - until this weekend! Now I got Bullet's Fever! DC residents will know this Nils Lofgren song from 1977:


For those of you not interested in b-ball, you can read about "Lawyerpalooza" instead...

May 6, 2005

Commissioner Goldschmid's Swan Song

The SEC just posted this speech by SEC Commissioner Harvey Goldschmid that was given a few weeks back before the Council of Institutional Investors. A short-timer, due to depart the SEC soon and return to teaching at Columbia University, Commissioner Goldschmid outlines critical issues that he views the SEC as facing over the next year. In his speech, the Commissioner pleads to keep the shareholder access concept alive, which is likely to come in the form of the majority vote movement afoot at the state level. He also pleads that the SEC remain an independent institution, immune from the pressures of partisan politics.

SEC's Section 16 Amicus Brief

In the ongoing Dreiling v. American Express Travel Related Services case, the SEC has filed this amicus brief in which the SEC urged that it acted within its authority in adopting Rule 16b-3(d) (which exempts certain grants, awards, and other acquisitions of an issuer's securities by its officers and directors from the short-swing recovery provision in Section 16(b)) - and that, to the extent a person is a director by having "deputized" someone to be a director on its behalf (and is thereby subject to Section 16) exemptive Rule 16b-3(d) also applies to that person - but for that rule to apply, the board approving the transaction must be aware that the deputizing person is a director. Overall, it is important that the SEC acknowledges the possible availability of Rule 16b-3 in deputization situations.

Alan Dye and Peter Romeo make sense of this case in upcoming and recent issues of "Romeo & Dye's Section 16 Updates."

More Corp Fin Phone Numbers

Here are the new phone numbers for Corp Fin's Front Office, Office of Chief Accountant, and Office of EDGAR & Information Analysis.

May 5, 2005

6th Floor Squabbles Continue at the SEC

As reflected in this letter from SEC Commissioners Atkins and Glassman to the US Senate Committee Chair on Appropriations, tense relations among the Commissioners continue to fester. The letter starts by stating:

"In voting on whether to send the attached Staff Report on the Exemptive Rule Amendments of 2004: The Independent Chair Condition as required by Consolidated Appropriations Act, 2005, we dissented. We do not believe that the staff report adequately responds to the questions directly posed in the Act. Unfortunately, we were not given at any point in the process an opportunity to provide constructive input on what we would consider a responsive report."

In my many years following the SEC, I have never seen such disharmony at the SEC's highest level; if anything, relations among the Commissioners typically were so good that Commission meetings were quite routine and bordered on monotonous. I can't imagine what closed Commission meetings are like these days! By the way, the Commissioners have not moved to Station Place yet - which is what the new HQ is being called - so they are still on the 6th floor of 450 5th St.

Conflicts of Interest and Dicey Engagements

We have posted the transcript for the webcast: "Conflicts of Interest and Dicey Engagements." I found this to be a fascinating program and some members have pointed out the timeliness of the program in light of the Goldman Sachs conflicts controversy surrounding the NYSE/Archipelago transaction. It was interesting to note this piece in the New York Times last Sunday that even challenged the "back-up" fairness opinions given by others because of ties they had to Goldman.

SEC Guidance May Change How Companies Gauge Accounting Errors

As reflected in my notes from PLI's "SEC Speaks," SEC Deputy Chief Accountant Scott Taub talked about a potential summer project that could change how companies determine when accounting errors are large enough to warrant adjusting the company's books. This project is interesting because it bears on the ongoing "materiality" debate.

Yesterday, the WSJ ran this article on the topic - below is an excerpt:

"Companies currently may choose between two different methods, a process the SEC accountants hope to standardize by calling for companies to use both methods, booking an error if either method shows it to be substantial. The idea was recommended in an academic paper to be published this summer.

Although the shift would require companies to revisit previously issued financial results, SEC accountants are expected to allow companies to use a one-time "catch-up" for past errors rather than roil markets with restatements.

The shift could be difficult and even "ugly," cautioned Scott Taub, SEC deputy chief accountant, but SEC accountants won't recommend"grandfather" treatment for companies that would protect them from having to correct prior problems found to be material under a two-pronged approach. Taub's comments were made at an "SEC Speaks" conference last month at which he gave the usual disclaimer that he was speaking for himself, not the SEC.

Companies can't ignore "material" errors large enough to matter to investors, typically those exceeding 5% of net income. While companies must consider quantitative and qualitative factors, they have a choice of two methods to quantify if errors are big enough to be material.

Since results can vary depending on which method is used, companies are supposed to pick one approach and stick with it. Companies rarely - if ever - divulge which method they use, which critics say gives executives too much leeway to engineer results.

A 2000 panel on audit effectiveness recommended regulators settle on one method to avoid confusion. Yet the choice isn't clear-cut since there are instances where one method would indicate an error is material while the other method wouldn't.

The cumulative or "iron curtain" approach compares the total amount of a misstatement at the end of the current period to net income, while the current-period or "rollover" approach compares the amount of misstatement added in the current period to net income. The "rollover" method, thought to be more prevalent, recognizes that prior errors may be offset or reversed in the current quarter or year while the "iron curtain" approach doesn't allow that.

Under the "iron curtain" method, a company that overstated inventory by $100 million in 2003 and by $150 million in 2004 would tally a $150 million error in 2004. Under the rollover method, the company would calculate it at $50 million. The $100 million difference could make the mistake material under one method but not the other.

Auditors may be influenced by which method is used. Academic researchers questioned hundreds of accountants at Big Four firms and found just 23% would ignore an error that is relatively large under the iron curtain method while 70% would do so when the rollover method showed the effect was near zero."

May 4, 2005

Stock Option Problems in M&A Transactions

With M&A activity heating up, many problems continue to exist with how to deal with stock options. On, I have posted this interview with Mike Melbinger - of blogging fame - on Stock Option Problems in M&A Transactions.

More on the Niagara 10-K Blog

A number of members responded to my blog yesterday regarding Niagara's 10-K reference. Some pointed out that the only time that the words "Form 10-K" appear is in the Cautionary Statement re Forward Looking Statements on page 15 of their annual report, likely an oversight when they copied the statement from the prior year's Form 10-K.

Sage Keith Bishop noted that even though Niagara is a Delaware corporation, California corporations and foreign corporations having their principal business office in California (or that are governed by Corp. Code Section 2115) are required to send an annual report to shareholders within 120 days after the close of the fiscal year (fyi, corporations with less than 100 shareholders may waive this requirement in the bylaws). The annual report must contain financial statements.

If the company is not subject to the Exchange Act's reporting requirements - or exempted pursuant to Section 12(g)(2) - under Cal. Corp. Code Section 1501, the report must also contain information concerning transactions between the corporation and its officers and directors involving more than $40,000 and indemnification of officers and directors in the amount of $10,000 or more. Therefore, companies that "go dark" may still have an annual report requirement under California law.

Paul Roye Lands at Capital Research & Management

Paul Roye, who left as Director of the SEC's Division of Investment Management in March, has been hired by the manager of the American Funds, the 2nd largest mutual fund with $670 billion in assets. Paul will start May 9th as a Senior Vice President at Capital Research doing compliance and legal work.

Paul will not be involved with an SEC investigation that reportedly surrounds portfolio trades at the firm. Federal ethics rules ban former SEC employees from representing private clients in SEC matters for two years after leaving the agency if the employee had direct involvement in the matters.

May 3, 2005

John Reed to Speak!

We are excited to announce that John Reed will be kicking off our major “2nd Annual Executive Compensation Conference.” In addition to serving as the Chairman of the NYSE until recently, John Reed served as the distinguished CEO of Citigroup for many years.

As many of us may be aware, John Reed and a distinguished group of leaders are spearheading an effort to "Restore Trust in American Business." With executive compensation in everyone's crosshairs - from regulators to plaintiffs' lawyers to shareholders and the American public - we could not think of a more respected and responsible person to kick off this responsible-minded conference. This year's conference will have an even greater emphasis on the practical guidance that directors (and their advisors) now need to implement in order to meet the new standards - and avoid personal liability - and to restore trust in our system.

A number of other former CEOs and respected directors will be participating in the conference - including Ken West, Sam Skinner, Warren Batts, Ed Brennan, Michele Hooper and Jim Crown - with more to be announced shortly.

We urge our members to sign up - and schedule your directors' calendars - NOW for this critical conference. As you might recall, SEC Corp Fin Director, Alan Beller, gave his major address on compensation proxy disclosures at last year's Conference. Learn more in this "Ten Good Reasons To Register for the Conference Now!"

Advance Notification Bylaws

With annual shareholder meetings being held in droves, it felt like a good time to conduct this interview with Marc Weingarten on Advance Notification Bylaws.

By the way, the PricewaterhouseCoopers has this nice 61-pager regarding "Questions that Shareholders Might Ask During the 2005 Annual Meeting" that I have added to our "2005 Proxy Season Center."

When is a 10-K Really a 10-K?

I have been following an interesting flap between Niagara Corporation and one of its large shareholders over Niagara's deregistration from the '34 Act. In a press release, the shareholder claims that the company recently circulated an "annual report" that indicated it was a 10-K, yet the company had deregistered its securities in April 2004. The company responded to these allegations in its own press release later that day.

I haven't investigated the circumstances behind the flap to determine their veracity, but if the company erroneously identified its annual report as a 10-K - that seems misleading because it represents that the filing contains all the information required by a 10-K, even if the report was not filed with the SEC. On the other hand, I think there would have to be 10b-5 scienter for the statement that it's a 10-K to have much consequence though. Just musing...

May 2, 2005

Results from Reg FD Survey

In anticipation of today's webcast - "The Latest Regulation FD Practices" - take a gander at the running results from our Reg FD survey below:

1. Our company has a written policy addressing Reg FD practices:

- 9%: Yes, and it is publicly available on our website
- 64%: Yes, but it is not publicly available on our website
- 11%: No, but we are in the process of drafting such a policy
- 16%: No, and we do not intend to adopt such a policy in the near future

2. Regarding reaffirmation of earning announcements, our company uses one of the following rules of thumb regarding private reaffirmations:

- 70%: We do not allow private reaffirmations
- 6%: Rule of thumb allowing for private reaffirmations of one week or less
- 5%: Rule of thumb allowing for private reaffirmations of one to two weeks
- 6%: Rule of thumb allowing for private reaffirmations of two weeks or longer
- 13%: We permit private reaffirmations - but never use a rule of thumb, instead we require confirmation of no material change with CEO, GC, etc.

3. At our company, our CEO and other senior managers (note more than one answer permitted):

- 6%: Are not permitted to meet privately with analysts
- 41%: Are only permitted to meet privately with analysts so long as someone else accompanies them (such as general counsel or IR officer)
- 50%: Are permitted to meet privately with analysts after briefing by IR officer, general counsel, etc.
- 33%: Are only permitted to meet privately with analysts during certain designated times

Please note that we have had a last minute substitution on the panel of today's webcast as John Huber unfortunately can't make it - but we gain the inhouse perspective of Michael Cahn of Textron and Stacey Geer of BellSouth.

Update on the Berlin-Bremen Stock Exchange

Last June, I blogged about how some members had success getting their clients delisted from the Berlin-Bremen Exchange. Now, I am hearing that this exchange has taken a more harsh position and is not willing to delist companies (remember that the Exchange lists companies without their knowledge or consent).

I would be interested in hearing from anyone that has had dealings with this Exchange recently, as this problem appears to be worse than ever. Then, I will update our "Berlin-Bremen Exchange" Practice Area.

SEC Fees Going Down Again for 2006

On Friday, the SEC issued this fee rate advisory indicating that - effective October 1, 2005 (or 5 days after the date on which the SEC receives its fiscal year 2006 regular appropriation, whichever date comes later, and it always comes later!) - the Section 6(b) fee rate applicable to registration of securities will decrease to $107.00 per million from the current rate of $117.70 per million, which is about a 9% reduction! Over the past few years, this rate has been steadily dropping.