June 29, 2007

SEC Commissioners Testify: A Relatively Warm Reception?

There was a lot of talk this week about many key regulatory issues, starting off with Tuesday’s appearance by all five Commissioners before the House Committee on Financial Services. As noted in this Wednesday Washington Post article, questioning was relatively gentle from the Committee, with Rep. Barney Frank (D., Mass.) setting the tone with a statement that the Commission has “hit the right balance.” In prepared testimony, the Commissioners defended the SEC’s recent actions on virtually all fronts, including oversight of the Enforcement Division’s negotiation of penalties, efforts to improve the clarity of mutual fund and 401(k) disclosure (as well as other fund issues such as 12b-1 fees and soft dollars), the adoption of guidance on implementing SOX Section 404, proxy reform and work to realize the overall promise of interactive data.

On this last point, Chairman Cox repeated a presentation that he delivered back in March at the USC Marshall School of Business, demonstrating the much-anticipated XBRL tool that will permit analysis of the S&P 500’s executive compensation data. As he did in March, Cox demonstrated how users can slice and dice the numbers to compute total compensation based on inclusion of the grant date fair value of equity awards (as the rules were originally adopted last summer) rather than the expensed portion of those awards (as the rules were changed by the “December surprise”). The Chairman noted that 62% of the companies in this data set actually reported a higher total compensation number based on the December surprise methodology, as compared to what the would have reported under the grant date fair value method.

In response to questioning about Congressional efforts to establish a means for shareholders to have a “say on pay,” Chairman Cox was noncommittal. He did commit on proxy access, however, telling the Committee that the agency planned to propose changes to the proxy rules by late July so that new rules could be in place before the 2008 proxy season. While Cox said that he did not favor “a national bylaw” approach, he did indicate that it was important to have “one rule for the whole country” in the wake of the Second Circuit’s AFSCME v. AIG decision. Rep. Frank promised hearings on the issue of proxy access once a rule is proposed. On the broader topic of proxy reform, the Chairman pointed to the themes covered at the May roundtables as ripe for consideration, including the prospect for an electronic shareholder forum.

It remains to be seen whether the Commissioners can actually reach any sort of consensus on proxy access by the end of July, given that a vote has been very publicly postponed twice in the past 9 months!

Imagine a World with Understandable Financial Statements

Financial statements have been getting a bad rap for some time now because of their ever-increasing complexity and lack of clarity, yet no one seems to know what to do about it. On Wednesday, the SEC announced that a newly-established SEC Advisory Committee on Improvements to Financial Reporting is on the case. According to the notice establishing the Advisory Committee, it will kick things off with a public meeting on August 2 at the SEC’s Washington offices. Operating under this charter, the Advisory Committee will be comprised of between 14 to 18 members and will have an anticipated life of about 1 year. Robert Pozen, chairman of MFS Investments, has been tapped to chair the Advisory Committee, but it remains to be seen who will fill out the remaining seats.

The SEC has tasked the Advisory Committee with a huge job: figure out what is broken with the current system, and come up with proposals on how to make the process better and the end-product more transparent and “user-friendly.” Not surprisingly, the Advisory Committee is going to focus on how technology can make things better by utilizing XBRL, hyperlinks and other technological advancements.

For more discussion of the Advisory Committee, check out FEI’s “Financial Reporting” Blog.

Paulson’s 10 Cents: “Next Steps” to Global Competitiveness

Earlier this week, Treasury Secretary Paulson announced his six “next steps” toward improving the global competitiveness of US markets. Among the notable items outlined in his action plan are: pursuing a modernized regulatory structure for financial services providers (to be proposed early next year); encouraging best practices among asset managers and hedge funds to deal with investor protection, market discipline and systemic risk; rolling out improved investor education efforts; and working on cross-border mutual recognition.

[Not to be outdone by this week’s discussion of key issues by so many luminaries, those intrepid talking heads at the “Sarbanes-Oxley Report” debate the thorny issue of options backdating in their latest installment.]

- Dave Lynn

June 28, 2007

Update on California's Stock Option Proposal

A tripleshot blog from our California law expert, Keith Bishop: I get many questions regarding the status of the proposed changes to the California Department of Corporations' proposed stock option regulations. These were proposed last September and have been winding their way through the notice and comment process. Recently, this proposal has begun to move.

The proposal was filed with the California Office of Administrative Law (OAL) on May 30th. OAL is the office in California charged with reviewing regulations for compliance with California's Administrative Procedure Act. Thus, OAL review is a technical review - not a policy review. OAL has 30 working days to review the proposed regulations. If OAL approves the regulations, it files the regulations with the Secretary of State.

Although regulations in most cases become effective 30 days after filing with the Secretary of State (Cal. Gov. Code Section 11343.4), I've been told that the Department has requested immediate effectiveness on filing with the Secretary of State. As a caveat, OAL does have the power to disapprove regulations. Although this is rare, it does happen occasionally. If OAL does so, the regulations go back to the department or an appeal is made to the Governor. I would be very surprised if OAL disapproves of these regulations; regardless, I think that many people are anxiously awaiting the effectiveness of these rules.

What is the California's Proposal on Options?

More from Keith: The proposed regulations perform double duty. Originally, they served as guidelines for the exercise of the California Commissioner's discretion in applying the fair, just and equitable standards for qualification purposes. Although they still perform this function, they began serving an additional purpose in 1996 when California enacted Corp. Code Section 25102(o).

That section exempted offers and sale of securities that, among other things, are exempt under Rule 701 and meet the Commissioner's rules for qualification of stock option plans. While it was good to have a new exemption for stock option plans, the Commissioner's rules were out of sync with many plans. In 1999, the Department proposed amendments to the rules.

However, these proposals went nowhere. In 2001, the legislature enacted SB 1837 to extend the statutory exemption to limited liability companies. Consequently, the Department amended its rules but only to account for options granted by limited liability companies. At the time, I had recommended that the amendments proposed by the Department in 1999 be included. However, the Department limited its amendments to the issue of limited liability company options. In 2002, the Department issued an invitation for comment on changing the rules. Although many comments were received, the Department took no action.

Now, at long last, the Department has finally addressed some of the issues that have been bedeviling issuers for the last ten years.

How Might the California Option Proposal Impact Public Companies?

I asked Keith: "If companies that have registered their plan on Form S-8 (which are just about all public companies), do they need to worry about these rules?"

Keith noted: These rules are of concern to many public companies. Smaller public companies with securities listed on a national securities exchange designated by the Commissioner (basically, the Nasdaq Global Market, NYSE, AMEX and Tier I of the Philadelphia Stock Exchange) are exempt because Cal. Corp. Code Section 25100(o) exempts both the listed securities and options to acquire listed securities.

Public companies whose securities are not listed on these exchanges cannot rely on the 25102(o) exemption because the exemption is conditioned on the availability of Rule 701 (for Rule 701 to be available, the company must not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act). Thus, public companies whose securities are quoted in the OTCBB or Pink Sheets are cannot use the exemption. Also, it is not clear to me that companies with securities listed on the Nasdaq Capital Market are exempt because although the SEC has now designated the listed securities as "covered securities" under Section 18 of the Securities Act, their options are not covered securities.

Unless relying on some other exemption, options granted by these companies would be subject to qualification. In that case, the rules would perform their original function - standards for qualification. Sometimes, the stock option qualification issue can be a surprise and a problem for those companies that fall of the exchange. In those cases, the plan was not likely to have been drafted with the Commissioner's standards in mind.

- Broc Romanek

June 27, 2007

Nasdaq Issues Additional Equity Compensation FAQs

Recently, the Nasdaq Staff posted 52 additional FAQs on equity compensation that were mentioned during our "Nasdaq Speaks" webcast. This brings the total number of FAQs related to listings to almost 300; they also have summaries of over 200 interpretive letters that also provide guidance on the corporate governance standards.

FIN 48 Developments

In this podcast, Steve Kunkel and Bill Smith, both from CBIZ Accounting, Tax & Advisory Services and Mayer Hoffman McCann, explain how the IRS may well turn FIN 48 into a roadmap and treasure map for audits, including:

- What are the latest FIN 48 developments?
- What is the most common uncertain tax position that you have seen?
- What is the best approach in addressing staffing needs for initial compliance for FIN 48? What is an "advisory accountant"? What role will our independent auditor play in evaluating tax positions for FIN 48 purposes?
- What do you anticipate the IRS will do with FIN 48 disclosures?
- How will FIN 48 affect tax positions that companies take in the future?
- How does a company determine a "unit of account"?
- What impact can FIN 48 have on a company's banking covenants?

More Serious Thoughts about Avvo

A few weeks ago, I poked a little fun about Avvo in this blog. But what do I really think? I believe Avvo gets it "right" in that some aspects of practicing law are on the verge of being revolutionized. Too many industries are being transformed to think that the legal field will go unscathed. Exhibit A are the web sites we have launched, they are unique - and to be honest, I think they merely scratch the surface of where I think they can evolve to in the not-too-distinct future. With Dave Lynn on board here, there is now room for the creative juices to flow.

I predict that Avvo will listen to what their audience wants - and that the end product could be truly something breathtaking. It might end up being a Facebook for lawyers; who among us would ever think that something like that would happen so fast? If you check the legal blogosphere, Avvo became a household name overnight. That alone would be unthinkable a decade ago.

In today's world, each lawyer should be branding and marketing themselves as much as they can. That probably was always true, but real opportunities weren't there for most of us. Now, someone can make their "name" on the Web even before they graduate from law school. It's truly every man and woman for themselves, as job-hopping is not frowned upon as it was in the not-too-distant past.

And trust me, all these changes are gonna be for the "good" as hopefully the traditional lawyer lifestyle will become more balanced and away from billable hours and tedious meetings.

Note that Avvo isn't alone, it appears that LawDragon.com has a similar goal to allow folks to endorse lawyers, with one feature that I am surprised hasn't created more of a buzz - the site allows evaluators to identify how much per hour the lawyer charged them (not too many lawyers have endorsements that identify rates but I did find a few). In theory, this feature could put downward pressure on billing rates. As expected from a relatively new site (been up little more than a year), this one has bugs too (e.g. Alan Beller listed as Corp Fin Director).

Martindale-Hubbell has long "peer reviewed" lawyers, but conducts that mysterious process off-line.

- Broc Romanek

June 26, 2007

Verizon's Electronic Shareholder Forum: The Start of a Trend?

If you followed the SEC's recent proxy process roundtables, you heard a bit of debate over the electronic shareholder forum idea. This is an idea that has been floated for a while - and even tried a few years back at MCI, as forced upon that company by the Breeden Report and called a "Town Hall." This idea is described in this SEC roundtable briefing paper.

A Verizon shareholder/retiree recently created an electronic shareholder forum for that company to facilitate a discussion of that company's pay-for-performance policies. This development was written up in Sunday's NY Times.

The idea that all-year-round forums can replace the existing Rule 14a-8 shareholder proposal process was criticized by some during the SEC's roundtables, by both management and investor representatives. In my mind, companies shouldn't like the idea because of the expense - and manpower necessary to - maintain and respond to shareholder initiatives all year round. Investors shouldn't like it because many proposals are submitted as part of a broader strategy that involves getting management behind closed doors.

[Another Corp Fin Retirement: Madeline Booker ends decades of service this week as the principal administrative contact in the Division. Thanks for everything Madeline!]

Catching Up to Nasdaq's Changes

Keith Bishop notes: Transitions are always tough, but it seems that the regulators don't want to catch up with the name and other changes at the Nasdaq Stock Stock Market, Inc. In a recent blog, you noted that the SEC has amended Rule 146 to include the Nasdaq Capital Market as a "covered security" for purposes of Section 18 of the Securities Act of 1933. The SEC also said that it was amending Rule 146 to reflect the name change of the National Market System of the Nasdaq Stock Market LLC. Nasdaq renamed the National Market to the Global Market on July 1, 2006. At the same time, Nasdaq created the Global Select Market as a segment within the Global Market. Despite the SEC's stated intent to reflect the name changes at Nasdaq, the rule still refers to the "National Market System of the Nasdaq Stock Market", which it incongruously now defines as the "Nasdaq/NGM".

I am embarrassed to say that the California Department of Corporations still hasn't reacted to the conversion Nasdaq and the renaming of its markets. As Broc blogged way back in August, California has an exemption for listed securities that includes any warrant and other right to purchase the listed security. Corp. Code Section 25100(o). The statute refers to securities listed on a national securities exchange or the "National Market System of the Nasdaq Stock Market" if the exchange or Nasdaq Stock Market (or its successor) has been certified by rule or order of the Commissioner of Corporations. Corporations Code Section 25101(a) contains a similar exemption with respect to nonissuer transactions for listed securities if certified by the Commissioner. Finally, California has a usury exemption in Corporations Code Section 25117 that is dependent upon the Commissioner's certification of the exchange.

It should be noted that the addition of the Nasdaq Capital Market to the list of "covered securities" in Rule 146 doesn't mean that the California exemptions discussed above are now available to Nasdaq Capital Market securities. In particular, the NSMIA did not clearly preempt state qualification requirements for options or warrants to acquire covered securities, as discussed in May-June 2003 issue of The Corporate Counsel. Cal. Corp. Code Section 25100(o) provides an exemption for listed securities but only if the securities are listed on a certified exchange. While the Nasdaq Global Market is the successor to the Nasdaq National Market, the Nasdaq Capital Market is not.

May-June 2007 Issue: The Corporate Counsel

We just mailed the May-June 2007 issue of The Corporate Counsel. Try a no-risk trial for half-price for the rest of the year.

The May-June issue includes analysis of:

- Deep (1933 Act) Thoughts on Google’s TSO Program
- The CDI—The Staff’s New Guidance Format
- The Coming Internal Control Disclosures by Non-Accelerated Filers—Staff Clarifies Scope and Effective Date of 10-Q Temporary Item 4T
- Issuer Private Placement While There is Undisclosed Material Information—Rule 10b-5 Concerns (Waiver?)
- Goldman Sachs Belatedly Adds Shareholder Proposal to Annual Meeting
- Why So Many Forms 4 Cluttering Edgar?
- Internet Proxy Solicitation—State Law Compliance?
- S-K Item 403 Follow-Up—Staff Now Says Deceased NEO May Be Excluded Completely From Beneficial Ownership Table
- Reporting Standalone Stock Appreciation Rights in the Beneficial Ownership Table—What Number of Shares?
- Post-Termination Rule 144 Cutoff for Control Stock—Waiting Period!@#$%
- Staff No Longer Allows Adding Shares to Form 144 by Amendment—Ramifications
- New Backdating Investigation Numbers

- Broc Romanek

June 25, 2007

Last Week for Early Bird Discount!

Expires This Friday! Our Early Bird Discount for the "Member Appreciation Package" to attend our three special Conferences via video webcast expires this Friday. Act now to save $300; the Package includes:

- “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” (10/9)
- “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks” (10/10)
- “4th Annual Executive Compensation Conference” (10/11)

SEC Posts Rule 144/145 Proposing Release

Late Friday, the SEC posted the proposing release regarding changes to Rules 144 and 145. As these rules are some of the "bread and butter" issues that we have been writing about in The Corporate Counsel for over 30 years, rest assured that we will be analyzing these proposals in upcoming issues...

[What's the story with this dramatic chipmunk? Make sure you see the "director's cut" version too...]

Outside Counsel Serving as In-House Counsel

In this podcast, Margaret Rosenfeld of Smith, Anderson explains what’s it’s like for someone at a law firm to serve as in-house counsel, including:

- Is it necessary for a public company to have an in-house lawyer with knowledge of the securities laws?
- If there is no in-house securities lawyer, who do you usually work with at a company?
- What do you do to ensure that a client’s legal or finance staff has sufficient knowledge to be able to interface appropriately on securities law issues?
- What risks does a company face that tries to handle its compliance, disclosure and corporate governance work internally alone (even if they have the internal expertise)?
- Is it cost-effective for a public company to have only outside securities counsel?

Survey Results: Board Evaluations

We have wrapped up our quick survey on board evaluations; below are the results:

1. When is your company’s board evaluation typically conducted:

- During the fiscal year in which board performance is evaluated - 52.5%
- Following the fiscal year, but before the proxy statement is filed - 39.0%
- Between the filing of the proxy statement and the annual meeting of shareholders - 6.8%
- We do not perform annual board evaluations - 1.7%

2. In conducting board evaluations, some boards use written questionnaires and some use oral interviews (or both). At our company, we use:

- Written questionnaires only - 60.0%
- Oral interviews only - 13.3%
- Both written questionnaires and oral interviews - 26.7%

3. If written questionnaires are used in the board evaluation process, are copies retained:

- Yes - 44.4%
- No - 55.6%

4. Who manages the board evaluation process:

- Non-executive board chair or lead director - 11.9%
- Chair of governance/nominating committee - 42.4%
- All members of the governance/nominating committee - 6.8%
- General counsel/other in-house counsel - 25.4%
- Outside counsel/consultant - 6.8%
- CEO - 0.0%
- Other - 6.8%

5. Is a written report produced based upon the results of the board evaluation:

- Yes - 67.8%
- No - 32.2%

6. How do the minutes reflect the board evaluation results:

- Brief summary of results, without including conclusions - 26.3%
- Brief summary of results, including conclusions - 43.9%
- In-depth details of the results - 0.0%
- Minutes do not reflect results - 29.8%

The Art of the Cross-Border Deal

We have posted the transcript from our recent DealLawyers.com webcast: “The Art of the Cross-Border Deal.”

- Broc Romanek

June 22, 2007

Bond Defaults and Late SEC Filings: New Court Decision Contrary to BearingPoint

Last year, I blogged about late SEC filings serving as bond defaults and, more specifically, a New York decision in BearingPoint. Now, a recent decision in Texas - Cyberonics, Inc. v. Wells Fargo - seems to have come to a contrary conclusion. Cyberonics recently filed a Form 8-K about this case - and both of these court opinions are posted in our "Late SEC Filings" Practice Area.

Here is some analysis about Cyberonics from Davis Polk: As a result of the large number of delayed SEC filings in the last several years due to option back-dating and other accounting problems, investors and companies have focused significant attention on whether a failure to file SEC reports will trigger a default under a company’s indenture that will permit acceleration of the Company’s debt. Last year, a New York state court, in a decision regarding BearingPoint, Inc., interpreted standard indenture language to require the timely filing of SEC reports and held that a failure to file was a default. Recently, a U.S. District Court in Texas held, contrary to the New York court, that similar language did not impose such an obligation.

In the BearingPoint case decided by the Supreme Court of New York, New York County, on September 18, 2006, the covenant in the indenture called for reports to be filed with the trustee by the company “15 days after it files such annual and quarterly reports, information, documents and other reports with the SEC.” BearingPoint argued that, so long as the documents were not filed with the SEC, there was no obligation to provide them to the trustee and hence no default. However, the court ruled that the company’s failure to file reports with the trustee when such reports were required to be filed with the SEC constituted an event of default under the indenture.

The court also found that, aside from the language in the indenture itself, the language in Section 314(a) of the Trust Indenture Act “specifically obligates” an issuer of bonds to provide the trustee with “current filings,” meaning filings made in accordance with the time frames prescribed by the SEC. Section 314(a) of the TIA provides that an issuer must “file with the indenture trustee copies of the annual reports and of the information, documents, and other reports (or copies of such portion of any of the foregoing as the Commission may by rules and regulations prescribe), which such obligor is required to file with the Commission pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.”

Last week, the U.S. District Court for the Southern District of Texas, in litigation brought by the trustee for bonds issued by Cyberonics, Inc., took the opposite view of the BearingPoint court. First, the Cyberonics court held that the language of the reporting covenant itself (which was substantially identical to the language in the Bearingpoint indenture) clearly only required Cyberonics to file Exchange Act reports with the Trustee 15 days after actually filing them with the SEC (not 15 days after when they were due).

Second, the court rejected the trustee’s argument that Section 314(a) of the TIA required the reports to be filed with the trustee in accordance with the SEC’s deadlines. The Cyberonics court stated that Section 314(a)(1) is virtually identical to the reporting covenant itself but is “less stringent” because it does not specify a time frame for providing the reports to the Trustee.

The opinion is a significant victory for Cyberonics and for other issuers that are subject to indentures with similar reporting covenants (the opinion is largely irrelevant to issuers with reporting covenants that provide explicit SEC filing deadlines).

By interpreting the Cyberonics reporting covenant to require that Exchange Act reports be filed with the trustee only after being filed with the SEC and stating that Section 314(a) of the TIA does not provide a deadline for filing such reports with the SEC, the Cyberonics opinion provides issuers that are facing restatements or are otherwise delinquent in their SEC filings a bit more leverage against bondholders threatening default or acceleration as a result of such delinquency. The Cyberonics court emphasized, however, that during the period that Cyberonics was delinquent in filing its Form 10-K, Cyberonics kept “the trustee informed of company developments” by filing Form 8-Ks containing information about its operations.

Accordingly, we recommend that delinquent issuers continue to provide as much operating information to bondholders and the trustee as possible. Issuers should also take note that this opinion, like the BearingPoint opinion, is by a single trial court and is not binding on other courts.

[Cowabunga! These big wave videos get me antzy. 100 foot waves!]

Tellabs: Another Blow to Securities Fraud Lawsuits

Yesterday, the US Supreme Court - in Tellabs, Inc. v. Makor Issues & Rights, Ltd. - enforced a strict pleading standard for private securities actions. This case dealt with the issue of what a plaintiff is required to plead under the Private Securities Litigation Reform Act in order to establish a "strong inference" that the defendant acted with the requisite mental state. This issue has long split the lower courts.

In a 8-1 decision (Justice Stevens dissenting), the Court found that to qualify as a strong inference of scienter within the meaning of the PSLRA, the inference must be more than merely plausible or reasonable - it must be "cogent and at least as compelling as any opposing inference one could draw from the facts alleged." The Court found that when determining whether a Rule 10b-5 claim meets that requirement, a court must consider plausible opposing inferences - although the inference of scienter need not be irrefutable.

Yesterday's WSJ's Law Blog included some interesting commentary from participants in the case. This case comes on the heels of another important Supreme Court case dealing with private lawsuits: Credit Suisse Securities (USA) LLC v. Billing. A copy of the opinion - and a bunch of related memos - are posted in our "Securities Litigation" Practice Area.

Opening Up the Shelf: The SEC's Proposals to Benefit Smaller Public Companies

From Dave: On Wednesday, the SEC published its proposed amendments to Forms S-3 and F-3, seeking to open up those forms for primary offerings (on a limited basis) by companies with less than $75 million of public float. Under the proposals, these smaller companies (as well as companies selling below-investment grade debt) could sell securities off the shelf in an amount up to 20% of their public float over any 12 calendar month period. The proposed limited primary offering provisions would be available to companies quoted on the OTCBB and Pink Sheets.

For the purposes of calculating whether an issuer could do a takedown under this proposed new instruction, you would compute 20% of the public float immediately prior to the intended sale, and compare that number to the aggregate amount (gross proceeds) of sales of securities in primary offerings under the S-3 instruction over the past 12 calendar months, including the amount of the intended sale. The SEC’s rationale for limiting sales to 20% of public float is to strike a balance between the issuers’ need to raise capital with the potential effect of primary offerings on the markets in relatively thinly-traded securities.

In the proposals, the SEC specifies that, for convertible securities, the amount that could be sold off the shelf would be based on the aggregate market value of the maximum amount of underlying securities, rather than the market value of the convertible securities themselves. The proposals would specifically prohibit otherwise S-3 eligible shell companies from utilizing the new shelf flexibility - until 12 calendar months after it ceases to be a shell company, the shell company has filed all of the Form 10-like information required and the shell company has been timely reporting for 12 calendar months.

One of the nice features in these proposals is that the 20% threshold is calculated by reference to public float just before the contemplated takedown (rather than, say, at the time of filing the registration statement), so the amount of securities that an issuer is able to sell increases if the issuer’s public float increases. Further, the 20% restriction on sales goes away if an issuer crosses the $75 million public float threshold and reaches the promised land of unlimited shelf offerings. When the Section 10(a)(3) update time next rolls around, the issuer would then have to re-evaluate its public float and, if the float is less than $75 million, the issuer would drop back into the 20%-limited shelf offering instruction.

While these proposals don’t go as far as the Advisory Committee on Smaller Public Companies had hoped, they do go a long way toward improving the capital formation picture for smaller companies. With the prospect of at-the-market direct public offerings done off the shelf, issuers may be less inclined to seek financing through the PIPEs and equity lines markets, where terms may not be as advantageous for the issuers.

Corp Fin No-Action Letter: A New 409A Option Repricing Twist

For those with 409A option repricing exchanges on the brain, I blogged about a new Corp Fin no-action letter yesterday on the DealLawyers.com Blog...

- Broc Romanek

June 21, 2007

SEC Issues Internal Controls Guidance and Rulemakings

Yesterday, the SEC posted its management report guidance regarding Section 404 of Sarbanes-Oxley - as well as its adopting release regarding amended rules. The SEC also posted the proposing release regarding the definition of a "significant deficiency."

The SEC also has posted the proposing release regarding the Smaller Company Capital-Raising Reform, which will be analyzed more in tomorrow's blog.

The SEC "Really" Wants Comments

Last week, the SEC posted an atypical “Notice of Additional Solicitation of Comments” relating to the PCAOB’s AS #5, seeking comment on seven specific questions. This notice seeks “additional” comments in addition to those solicited by the SEC’s notice from the prior week. My guess is that the SEC might not get much in response - how many times have folks had to comment on internal controls over the past five years? There's gotta be some burnout from comment writers...comments are due July 12th.

SEC Adopts Universal E-Proxy

Also at yesterday's open Commission meeting, the SEC adopted "universal" notice-and-access model of proxy distribution (commonly known as "mandatory e-proxy") as well as amendments to Rule 105 of Regulation M to prohibit abusive short selling in the context of public offerings (here is Reg M press release). From Paul Weiss, here are notes from that portion of the open meeting (note the reference to a California conflict, as raised in Monday's blog and teased out in our Q&A Forum further, specifically #2881 and #2889).

Regarding mandatory e-proxy, here is the opening statement from the Corp Fin Staff. For universal e-proxy, the new requirement will be phased in over two years, with large accelerated filers starting in 2008 and smaller companies and mutual funds beginning in 2009.

You may recall the Staff has been avoiding using the term "mandatory" with this rulemaking because that term implies that a company would have to deliver electronically. This is not true, companies can still deliver in paper under universal e-proxy - the only thing mandatory about it really is that companies will have to post their proxy materials on their website. And most companies already do that. The other change wrought by universal e-proxy is that the proxy materials would have to include another half-page worth of content, the "Notice of Internet Availability of Proxy Materials."

SEC Proposes Elimination of Reconciliation of US GAAP for Foreign Issuers

At yesterday's open Commission meeting, the SEC proposed to eliminate the requirement for foreign issuers to reconcile their financial statements with US GAAP if they are prepared in accordance with International Financial Reporting Standards (IFRS). Here are some opening remarks from the Corp Fin Staff.

Under the proposal, a foreign private issuer that presents financial statements in accordance with IFRS as adopted by the International Accounting Standards Board (IASB) will no longer be required to present a reconciliation to US GAAP. Such a reconciliation is currently required for audited financial statements, and in particular in an annual report on Form 20-F. It is also currently required for interim financial statements used in a registered offering of securities when the audited financial statements are more than nine months old.

Here are notes from this portion of the open meeting, courtesy of Cleary Gottlieb:

- The proposal will only apply to IFRS as adopted by the IASB. IFRS have been adopted with variations in particular jurisdictions, and notably in the European Union. The SEC, however, would only eliminate reconciliation if the issuer uses IASB IFRS, and the auditor opines on conformity with IASB IFRS. The technical implications of this approach were the subject of extensive discussion at the meeting and will be a focus for comments, since European issuers are required to prepare financial statements in accordance with IFRS as approved by the European Union.

- The proposal will refer to the English-language version of IFRS. The staff explained that IFRS are published in many languages, but under the proposal an issuer and its auditors will be required to refer to the English-language version.

- The proposal will apply only to foreign private issuers. As previously announced, the SEC staff is working on a concept release concerning whether U.S. domestic issuers should also be permitted to report under IFRS rather than US GAAP. That release was reported to be forthcoming later this summer.

- The proposal would affect Form 20-F and several other SEC forms and rules. The staff announced that the proposal would amend Securities Act Rule 701, which permits companies to issue shares and stock options to employees in the United States without SEC registration. Rule 701 currently requires a company to reconcile its financial statements to U.S. GAAP when it sells more than $5 million of securities per year to employees.

- It is too early to say when the rule changes might be effective, but it would appear that the process is on track for them to apply to calendar 2008 reports. The commissioners mentioned the importance of the European Commission's deadline to decide by January 1, 2009 whether to allow U.S. issuers to file US GAAP financial statements in Europe.

The SEC said that the proposing release will also seek comment on whether to shorten the deadline for a foreign private issuer to file its annual report on Form 20-F, which is currently six months from the end of the fiscal year. The SEC has considered changing this deadline in the past, and the time required for the US GAAP reconciliation has been one reason it has not done so.

The SEC staff announced at the meeting that it plans to create an area on its website where the public can readily locate the reports of foreign private issuers using IFRS and the comment letter correspondence on those reports.

The proposal will be open for comment for 75 days from the date of publication in the Federal Register.

- Broc Romanek

June 20, 2007

"Happy 5th Anniversary SOX! Sweet and Beautiful"

With the five-year anniversary of the Sarbanes-Oxley Act arriving next month, Dave and I thought we would use that memorable event to kick off our weekly vidcast series entitled "The Sarbanes-Oxley Report," featuring "Billy Broc" Oxley and Dave "The Animal" Sarbanes.

The first installment is entitled "Happy 5th Anniversary SOX! Sweet and Beautiful" - and is only 15 seconds long. Future installments will tackle the tough issues of the day - and we eventually hope to interview guests (basically anyone game to wear a wig).

Here is a Quick Survey to consider after you review the video. Feel free to e-mail us your comments or story ideas. I've already heard "it just looks like two guys and a six pack"...

More Thoughts on the SEC's IBM Enforcement Action

A few weeks ago, I blogged about a SEC enforcement settlement regarding IBM's violation of the Form 8-K reporting requirements (and Rule 12b-20’s requirement) to disclose additional material information so as to make required statements not misleading.

One member notes: Do you think this case may have a chilling effect on voluntary 8-K filings? [See this new quick survey on earnings releases and earnings calls.] It seems to me that since IBM's April 5, 2005 call was publicly webcast, it was already Regulation FD compliant - and thus, there was no requirement for IBM to file the transcript and slides on an 8-K. Voluntarily filing the slides on an 8-K when they didn't have to seems to be what got IBM into trouble.

Another member notes: My view is that this was a tenuous case by the SEC; IBM told people the '04 impact of stock comp expense in the call/their filings, told people '05 would be lower, without quantifying, but people got confused and thought a chart was '05 - not '04 - even though reading the 10-K would have made clear these were the same numbers as '04 and IBM had said '05 will be lower! The only thing I'd fault IBM for is not calling analysts to make clear they misunderstood, but I'm not sure that should be the basis for an SEC action.

Kicking the Earnings Guidance Habit?

A few days ago, a coalition issued a set of recommendations in these Aspen Principles, including one that companies cease providing quarterly earnings guidance or projections. And this Associated Press article from a while back describes how fewer companies are providing earnings guidance - and then, CFO.com ran this article describing how CFOs are eagerly awaiting the tipping point that will spell the death of earnings guidance altogether.

In our "Earnings Releases" Practice Area, we have posted a host of resources on earnings guidance, including a template for reporting quarterly earnings and this fine law firm memo.

Quick Survey: Earnings Releases and Earnings Calls

We have posted a quick survey on earnings releases and earnings calls.

There are some interesting questions posed in this survey. For example, the last one asks whether companies are posting their earnings call archives on iTunes or in the form of a "podcast." Some companies are doing this, such as Johnson & Johnson.

- "Billy Broc" Romanek

June 19, 2007

Course Materials: "The Latest Compensation Disclosures: A Proxy Season Post-Mortem"

On CompensationStandards.com, tune in tomorrow for this webcast - "The Latest Compensation Disclosures: A Proxy Season Post-Mortem" - during which Dave Lynn, Mark Borges, Mike Andresino and Mike Kesner will analyze what was disclosed this proxy season. This 90-minute webcast is a "must" to get a handle on what the latest disclosure trends. Please print off these course materials before the webcast.

If you are not a member of CompensationStandards.com, take advantage of our half-price for the rest of 2007 no-risk trial today!

[Recommendation for SEC Staffers: Don't include an opening joke in your published speech; I like the idea of a joke to start a speech, but I don't see the need to include it in your permanent record. Paris Hilton simply doesn't need the publicity. Then again, VC Strine mentioned Paris in his "must-read" Topps decision (a case I blogged about yesterday in the DealLawyers.com Blog. Crikey, now I have given Paris more publicity by mentioning her in this blog...]

Analyzing Mutual Fund Voting on CEO Pay

In this CompensationStandards.com podcast, Beth Young of The Corporate Library and Rich Ferlauto of AFSCME go over a new study – “Failed Fiduciaries: Mutual Fund Proxy Voting on CEO Compensation” – which was jointly conducted by AFSCME, The Corporate Library, Shareowner Education Group, including:

- Why have you done this study for two years?
- What were the major findings of the study?
- What were the biggest surprises of the findings?
- How hard is to find the N-PX filings for this study and decipher them?
- What do you think mutual funds that are “Pay Enablers” should do?

Underwriters Win Supreme Court "IPO Laddering" Antitrust Case

Yesterday, the US Supreme Court held - in Credit Suisse Securities (USA) LLC v. Billing, No. 05-1157 - that the securities laws preclude application of the antitrust laws. It establishes clearer guidelines for the application of the implied antitrust immunity doctrine in the securities field - and clarifies that private antitrust lawsuits should not be allowed to discourage IPO activity. We will be posting memos regarding this case in our "Underwriting Arrangements" Practice Area (and many blogs have already covered the decision, including: Scotus; Legal Pad; D&O Diary).

Below is a case summary from Mayer, Brown, Rowe & Maw (who represented the petitioners): Conduct is impliedly immune from suit under the antitrust laws if application of those laws would conflict with the operation of another statutory scheme. Yesterday the Supreme Court held, in the context of antitrust suits challenging underwriter conduct during IPOs, that there was a conflict between the federal securities laws and antitrust laws that prevented the antitrust suits from going forward.

Credit Suisse involved antitrust class actions in which investors brought suit against ten leading underwriters, alleging that they agreed to engage in anticompetitive tactics involving some 900 technology-related IPOs during the market "bubble" of the late 1990s. Plaintiffs claimed that the underwriters required investors, in order to obtain IPO allocations, to agree to purchase additional shares of the IPO stock in the aftermarket and to pay excessive commissions on other transactions.

The underwriters argued, and the district court held, that the antitrust claims were precluded by the securities laws. The Second Circuit reversed the dismissal of the plaintiffs' complaints. The Court granted the underwriters' petition for certiorari.

In a 7-1 decision authored by Justice Breyer, the Supreme Court reversed. The Court recognized that three "critical" factors for implied immunity were easily satisfied: the existence of SEC authority over the alleged IPO conduct, evidence that the "responsible regulatory entities exercise that authority," and practices at issue that constitute "heartland securities activity." The Court then held that there was a conflict between securities regulation and application of the antitrust laws that rises to the level of "incompatibility."

Private antitrust litigation would require "dozens of different courts with different nonexpert judges and different nonexpert juries" to evaluate conduct in an area of the Nation's economy in which the SEC has drawn fine and nuanced lines between activities that are essential to the operation of the capital markets and activities that are unlawful. The Court pointed out that if that were allowed to occur, courts and juries would inevitably reach decisions inconsistent with SEC regulation.

To avoid the risk of massive liability in a private antitrust treble damages suit, underwriters would have to "act in ways that will avoid not simply conduct that the securities law forbids . . . but also a wide range of joint conduct that the securities law permits or encourages." That would interfere with "the effective functioning of capital markets" and "'disrupt the full range of the [SEC's] ability to exercise its regulatory authority.'" The Court rejected the Solicitor General's suggestion that the case be remanded to determine whether alleged conduct prohibited by the SEC could be separated from conduct permitted by the SEC. The risk of inconsistent and incorrect results by judges and juries making such a determination would undermine the securities regulatory regime.

The holding in Credit Suisse is a resounding victory for the business community. It establishes clearer guidelines for the application of the implied antitrust immunity doctrine in the securities field, and clarifies that private antitrust lawsuits should not be allowed to discourage beneficial IPO activity.

- Broc Romanek

June 18, 2007

A California Conflict: Trouble for E-Proxy?

Following up on last week's 2-hour webcast on the new e-proxy rules (audio archive available now), you should consider a potential state law conflict that may exist for a large number of companies. Keith Bishop explains: "California Corporations Code Section 1501(a) requires that the board send an annual report to shareholders not later than 120 days after the close of the fiscal year.

There is an exception in the case of corporations with less than 100 shareholders of record that have expressly waived the requirement in the bylaws. Section 1501(a) applies not only to California corporations but also foreign corporations that either have their principal executive offices in California or customarily hold meetings of the board in California. The statute was amended in 2004 to permit sending of the report by "electronic transmission by the corporation."

Although this would seem to have solved any problem, the term "electronic transmission by the corporation" is defined quite specifically in Corp. Code Sec. 20. One requirement of that section is that the recipient must provide an unrevoked consent. Moreover, if the communication is to an individual, the transmission must satisfy the requirements applicable to consumer consent under the federal E-SIGN Act.

Of course, California's extension of the requirement to foreign corporations may raise questions about constitutionality ala Vantagepoint v. Examen. Note that the adopting release for the e-proxy rules states that the rules are not intended any applicable state law requirement for the delivery of a document related to a shareholder meeting or proxy solicitation."

Learn more about California's regulation of electronic communications by - and to - companies in Keith Bishop's article posted in our "E-Proxy" Practice Area.

The Battle over the US Supreme Court's Stoneridge (aka Charter) Case

Leading up to the Supreme Court's "scheme" (aiding & abetting) Stoneridge (aka Charter Communications) case - which will be heard next term in the Fall - there have been a number of interesting developments, one of which is that the SEC apparently has "split" with the Republicans and voted to recommend filing an amicus brief in favor of investors. Although the SEC recommended that the Solicitor General file the brief - see this Bloomberg article - it appears that the recommendation was not been acted on by the Solicitor General.

In response, President Bush (and others in the government, like the Treasury Secretary) have interceded with the Department of Justice to prevent the filing of the SEC's amicus brief. Remember that the SEC is an independent agency, whose primary mission is the protection of investors. The President's move has been criticized by Rep. Frank and others, including the AFL-CIO.

In our "Securities Litigation" Practice Area, we have been posting a number of amicus curiae briefs and other filings from this important case. [Side note: Why does it bother me that our President wears "crocs"?]

The Nasdaq Speaks: Latest Developments and Interpretations

We have posted the transcript from the popular webcast: "The Nasdaq Speaks: Latest Developments and Interpretations."

Early Bird Discount: Upcoming 3rd Edition of Romeo & Dye Section 16 Treatise

Peter Romeo and Alan Dye are hard at work updating their two-volume Section 16 Treatise. Order your set by July 15th to receive a pre-publication discount now - you can order online or by fax/mail with this order form. The Treatise will be completed and delivered to you in the Fall.

- Broc Romanek

June 15, 2007

A Coupla Executive Compensation Notables

Earlier this week, SEC Chairman Cox gave an interview for this article where he talked briefly about the Staff's executive compensation rules and more.

And on Monday's "Nightline," AFLAC's CEO Dan Amos talked about why the company is the first one to adopt "say on pay" in the US, allowing his company's shareholders to have a non-binding vote on the CEO's pay package starting in 2009.

Finally, no surprise that a majority of Americans believe that CEOs are unethical and overpaid, as noted in a new survey discussed in this Bloomberg article. Here is an excerpt:

"More than six in 10 people surveyed say CEOs are 'not too ethical' or 'not ethical at all,' versus 33 percent who call them 'mostly ethical.' An overwhelming majority, more than eight in 10, say executives are paid too much. At the same time, Americans remain upbeat about the state of the
economy."

By the way, the SEC will hold an open Commission meeting next Wednesday to consider adopting universal e-Proxy and propose rules that would permit foreign private issuers to file in the US using IFRS without having to provide a reconciliation to US GAAP.

[Congrats to Herb Scholl: Herb celebrated his retirement yesterday at the SEC after four decades of public service. Herb started working at the SEC in 1967. If you have ever had Edgar problems, you likely spoke to Herb - whose "claim to fame" is picking the name of "Edgar." We will miss ya Herb!]

SEC Acts on Short Selling; Coming Soon? Demystifying Vote Lending Practices

This week, the SEC voted to adopt changes that will rein in naked short selling, which in turn should help prevent inappropriate vote lending. These changes are important; remember that one of the arguments made to slow down the SEC on a possible path towards shareholder access is that the entire voting system needs to be better understood - these changes should simplify the system (albeit this issue is just one of many issues that need demystifying). I tend to agree with this argument - the voting system is complex, with numerous moving parts and layers of intermediaries.

We may soon know more about the world of stock lending. Here is an excerpt from a recent Business Week article:

"Sources say authorities from the U.S. Attorney's office are looking into allegations that some employees on the stock loan desks received kickbacks or other improper cash payments from so-called stock-loan finders, independent middlemen who sometimes track down shares for Wall Street firms to lend to investors. It is anticipated that the prosecutors will likely claim that some employees on the stock loan desk unnecessarily referred work to the finders, who did little to justify their fees and only added to the cost of arranging a stock loan."

From Clearly Gottlieb, below are notes about what the SEC acted on during Wednesday's open Commission meeting:

- Remove Rule 10a-1 under the Securities Exchange Act of 1934 (the "Exchange Act") and amend Regulation SHO to provide that no tick test or other price test, including any price tests of any self-regulatory organization ("SRO"), shall apply to short sales of any securities;

- Amend Regulation SHO to eliminate the "grandfather provision" so that fail to deliver positions existing at the time a security became a "threshold security" would no longer be exempted from Regulation SHO's close-out requirement;

- Amend Regulation SHO to extend the grace period before a broker-dealer is required to close out fail to deliver positions resulting from sales of threshold securities pursuant to Rule 144 under the Securities Act of 1933 (the "Securities Act") to 35 settlement days (from the otherwise applicable settlement grace period of 13 days);

- Re-propose for comment the elimination of the options market maker exception to Regulation SHO's close-out requirement, along with two alternatives providing for the close-out of options market makers' fail to deliver positions in threshold securities within specified time frames; and

- Propose for comment amendments to Regulation SHO to require that broker-dealers marking a sale as "long" document the present location of the securities being sold.

Although the agenda for the Open Meeting also listed consideration of a pending proposal to amend Rule 105 of Regulation M (which applies to short sales in connection with public offerings), that topic was not addressed at the meeting and, we understand, will instead be discussed at the Commission's next open meeting scheduled for June 20, 2007.

- Broc Romanek

June 14, 2007

Sample Time & Responsibility Schedule for Proxy Season: Post E-Proxy

In time for today's webcast - "How to Implement E-Proxy: Avoiding the Surprises and Making the Calculations" - we have posted this "Sample Time & Responsibility Schedule for Proxy Season," courtesy of John Newell of Goodwin & Procter. John notes this is a draft and welcomes any thoughts you have (which you can send to John and/or me). This sample is comprehensive, covering time periods/due dates for NAFs, AFs and LAFs.

What's Your Rating?

A new service from Avvo is creating a stir, a new site that rates and profiles lawyers. The site's purpose is to allow consumers to easily obtain information about lawyers. The ratings are "unbiased," culled from publicly available data. Here is the ratings formula (don't look too hard as not much is revealed). As noted in this article, lawyers are not happy about their ratings or the process - and an examination of other reviews show that the primary beefs with Avvo are: numeric scoring, incorrect/missing data and poor functionality.

At first, I was miffed by my rating of 6.3 out of 10; after all, I graduated in '88 and have learned a thing or two since then. But then I saw that some of my favorite lawyers got similar ratings - folks that I know are among the smartest securities lawyers out there. For example, Ron Mueller is only a 6.4 - and Amy Goodman a 6.0. Alan Dye and Mark Borges topped them with a 6.5. Hey, I'm proud of my 6.3! [Note the Avvo rating default falls somewhere between 6.1-6.5, until you input your credit card information to update your "profile" on the site.]

Full disclosure: Avvo's founder, Mark Britton, is a dear friend of mine (but I have not discussed his site with him, it was in stealth mode until this week's launch). Personally, I've gotten away from benchmarking against peers; I hear it's a bad practice...

Some (Silly) Thoughts about Avvo's Rating Service

Maybe my rating was so low because I got into a flap with the DC Bar and I'm "suspended" because I now refuse to pay dues to them? [My rating is higher now because I updated my profile yesterday.] Or maybe Avvo got wind of my intention to assume a new fabulous alter ego: "Captain XBRL." Based on my distinguished awards (click "Recognition" tab), I feel entitled to an alter ego. Feel free to give me a whacky peer endorsement on my profile if you wish; the whackier, the better.

The funny thing about my Avvo profile is that I didn't manipulate it to list me as a DUI lawyer in Seattle, it did that by itself. Genius! On the other hand, my parents tagged me at birth with the legal name of "Barak," a story for another day.

Below are two of many comments posted on a WSJ Blog (these commentors appear to be imposters):

- "I only got a 6.5! I invented the poison pill!" - Comment by Marty Lipton - June 12, 2007 at 8:17 pm

- "Tell me about it Marty! I represented the VO of the United States, who shoulda been president, and all I got was a lousy 6.5!" - Comment by David Boies - June 12, 2007 at 8:19 pm

And here are some other thoughts I've heard:

- I think that a more fair way to rate us is by height (wasn't that Chevy Chase's methodology for measuring himself against other golfers?)

- Maybe ISS will develop a service to help lawyers increase their rating scores

- I guess I'll continue to use Martindale, since they are kinder and gentler to me

- Abe Lincoln is rated! See this article.

[Note to Avvo Censors: Please don't kill my profile; there's no risk of me being hired because I won a "Tiny" Dancer award. My Avvo profile is the closest thing I will get to Facebook at my age.]

- Broc "6.3/10" Romanek

June 13, 2007

This Year's Sleeper: E-Proxy

Even though it's voluntary, many of you will soon be evaluating whether the costs savings promised by e-Proxy truly exist. In my opinion, that issue actually is a drop in the bucket compared to some of the other issues that you need to learn about when it comes to e-Proxy. For example, even if your company doesn't use e-Proxy, dissidents can use it if they contest a director election or another matter on the annual meeting ballot.

To learn more, tune in to tomorrow's webcast - "How to Implement E-Proxy: Avoiding the Surprises and Making the Calculations" - which has just been bumped up to 90 minutes since there is so much material to cover. With e-Proxy effective at the end of this month, this will be a very timely - and practical - webcast. Join these experts:

- Tom Ball, Senior Managing Director, Morrow & Co.
- Joe Frumkin, Partner, Sullivan & Cromwell
- Carl Hagberg, Independent Inspector of Elections and Editor of The Shareholder Service Optimizer
- Dominic Jones, Editor, IR Web Report
- Alan Singer, Partner, Morgan Lewis & Bockius
- Sid Rodrigue, Vice President, Broadridge (formerly known as ADP)

Among the topics to be discussed are:

- What does voluntary e-Proxy involve? Will voting patterns change?
- What should be considered in determining whether to forego paper next proxy season?
- How third-parties might use e-Proxy to wage proxy campaigns?
- What are the latest drafting tips to design “usable” proxy materials for the Web?
- How should your proxy solicitation and IR strategies change in the wake of e-Proxy?

E-Proxy Webcast: Important Course Materials to Print

For tomorrow's e-Proxy webcast, please print these two sets of course materials:

- Alan Singer's Presentation

- Morrow & Co.'s Sample Calculation of Potential E-Proxy Costs

- Broadridge on Issuer Options and Concerns

You can print all of these off from here.

NYSE Finally Revises Its Corporate Governance Proposal

Last Friday, the NYSE filed Amendment No. 1 to its proposal to modify the corporate governance listing standards set forth in Section 303A of the Listed Company Manual with the SEC. The original proposal, filed way back in late 2005, provided clarifications to the current standards and codified certain NYSE and SEC interpretations.

The most significant change in the original proposal related to the Section 303A.02(a) independent director disclosure requirements. However, last August, the SEC adopted amendments to Item 407 of Regulation S-K that consolidated director independence and related corporate governance requirements under a single disclosure item. Since the SEC’s new rules sometimes duplicate (or require more detailed disclosures) than the NYSE's governance standards, the amended proposal seeks to eliminate those disclosure requirements currently set forth in Section 303A that are also required by Item 407. Here are some of the highlights of the amended proposal:

1. Eliminate the controlled company exemption disclosure requirement to avoid duplication with Item 407.

2. Add a new component to Section 303A.00 regarding disclosure requirements to give a listed company the option of providing the required disclosures in its annual proxy statement or, if it does not file a proxy, in its annual report filed with the SEC; or on or through its website.

3. Eliminate the original proposal that required disclosures may not be summarized or incorporated by reference.

4. Eliminate the NYSE requirement that a company disclose in its proxy (or Form 10-K) that its audit, nominating and compensation committee charters, code of business conduct and ethics and corporate governance guidelines are available on its website and in print to any shareholder who requests them to avoid duplication with Item 407.

5. Eliminate the Section 303A.02(a) independent director disclosure requirements to avoid duplication with Item 407.

6. Increase the Section 303A.02(b)(ii) direct compensation bright line test dollar threshold from $100,000 to $120,000 to bring the standard in line with Item 404 of Regulation S-K.

7. Amend the Section 303A.02(b)(iii) external and internal auditor bright line test as it applies to a director with an immediate family member so that it applies only to an immediate family member who:
- is a current partner of such a firm;
- is a current employee of such a firm and personally works on the listed company's audit; or
- was within the last three years a partner or employee of such a firm and personally worked on the listed company's audit within that time.

8. Clarify that all interested parties, not only shareholders, must be able to communicate their concerns regarding the listed company to the presiding director or the non-management/independent directors as a group.

9. Eliminate the Section 303A.05(b)(i)(C) requirement relating to the preparation of the compensation committee report to avoid duplication with Item 407.

10. Eliminate the Section 303A.07(c)(i)(B) requirement relating to the preparation of the audit committee report to avoid duplication with Item 407.

11. Redesignate the Section 303A.14 website requirement, adopted in August 2006, as Section 307.00 of the Listed Company Manual and eliminate the current Sections 307.00 and 314.00 regarding related party transactions.

In the amended proposal, the NYSE is also proposed changes to Section 203.01 - the annual financial statement requirement - to provide that a listed company that is subject to the SEC's proxy rules, or is a foreign private issuer that provides its audited financial statements (as included on Forms 10-K, 20-F and 40-F) to beneficial shareholders in a manner that is consistent with the physical or electronic delivery requirements applicable to annual reports set forth in the SEC's proxy rules, is not required to issue the press release or post the undertaking required by Section 203.01.

- Broc Romanek

June 12, 2007

How Climate Change Impacts Director Duties & Liabilities

Today, catch the complimentary full-day online audio conference on TacklingGlobalWarming.com: "Tackling Global Warming: Challenges for Boards and their Advisors." There is no need to register or pay; just click and learn.

We are providing this webconference as a “thank you” to our community – and due to the seriousness of the issues related to climate change. All of the panels will be archived if you can’t catch it today. Below is the agenda:

1. What the Studies Show: A Tutorial: Margaret Leinen, Chief Scientific Officer, Climos

2. The Business Case for Tackling Global Warming :
- John Stowell, Vice President, Environmental Health & Safety Policy, Duke Energy
- Bill Ellis, Visiting Fellow, Yale School of Forestry and Environmental Studies

3. The Board’s Perspective: Strategic Opportunities and Fiduciary Duties:
- Michael Gerrard, Partner, Arnold & Porter
- Stephen Jones, Shareholder, Greenberg Traurig

4. The Investor’s Perspective: What They Seek and Their Own Duties:
- Janice Hester Amey, Director of Corporate Governance, CalSTRS
- Doug Cogan, Deputy Director of Social Issues Services, Institutional Shareholder Services
- David Gardiner, Founder, David Gardiner & Associates
- Mindy Lubber, President, Ceres

5. Why You Need to Re-Examine Your D&O Insurance Policy:
- Wylie Donald, Partner, McCarter & English
- Peter Gillon, Shareholder, Greenberg Traurig

6. Disclosure Obligations under SEC and Other Regulatory Frameworks:
- Miranda Anderson, VP, Investor Analysis, David Gardiner & Associates, LLC
- Maureen Crough, Partner, Sidley & Austin
- Jeff Smith, Partner, Cravath Swaine & Moore

7. How (and Why) to Modify Your Contracts: Force Majeure and Much More:
- Wylie Donald, Partner, McCarter & English
- Michael Gerrard, Partner, Arnold & Porter

8. Due Diligence Considerations When Doing Deals:
- Maureen Crough, Partner, Sidley & Austin
- Jeff Smith, Partner, Cravath Swaine & Moore

In addition to the webconference, there are plenty of other complimentary resources related to boards and climate change.

ESG = Environmental, Social and Governance

If you aren't familiar with the acronym "ESG," you will be soon as investors have reached a broad consensus that non-financial factors have a significant impact on investment performance. Just listening to Mindy Lubber, President of Ceres, during today's webconference - "Tackling Global Warming: Challenges for Boards and their Advisors" - brings this point home. Ceres leads the Investor Network on Climate Risk, a group of leading institutional investors with collective assets of over $4 trillion.

To learn how some of the largest pension funds deal with ESG, see this new report (which gives a comprehensive overview of the different approaches taken by funds in various parts of the world). Also, ISS recently blogged about how ESG is playing a role in the investment process.

Bellwether Analysis: Delaware Chancery Court Dismisses Backdated Options Derivative Case

From Travis Laster: On June 7th, Vice Chancellor Strine of the Delaware Court of Chancery issued his opinion in Desimone v. Barrows, thereby providing a third major Delaware decision on stock option practices. There is much to digest in this 75-page opinion (which is posted in the CompensationStandards.com "Backdated Options" Practice Area). Here are some highlights:

1. On pages 38-43, VC Strine charts two scenarios involving backdating, one which he states would not give rise to any claim against directors and another which would. The core difference in the scenarios is whether the directors had reason to know that their actions were contrary to law. VC Strine's paradigms will provide significant guidance to practitioners addressing option situations.

2. VC Strine rejects the idea that a "continuing wrong" exists when there have been a series of backdated options. Consistent with Ryan v. Gifford, VC Strine views each grant as a separate event. In Desimone, that meant that the plaintiff could not challenge grants pre-dating his stock ownership under Delaware's continuous ownership rule.

3. As many commentators predicted, VC Strine holds that a board comprised of a majority of disinterested and independent directors can obtain a Rule 23.1 dismissal of stock option backdating claims. The Vice Chancellor distinguishes Ryan as a case in which half the board was conflicted and Tyson as a case in which there were detailed allegations of domination and control. VC Strine reaches this conclusion despite the fact that "Sycamore has essentially admitted in public filings that many [grants] were backdated." The key issue under Rule 23.1, however, is not whether misconduct occurred, but rather "whether the ... Board should be divested of its authority to address that misconduct."

4. VC Strine notes at several points that he doubts whether any recognizable claim, other than a theoretical claim of waste based on overcompensation, could be asserted based on "bullet-dodging." At that point, negative information has been disclosed to the markets and a grant at fair market value should not be problematic. Indeed, he observes that a contrary rule would incentivize option grants before the release of negative information, creating a counter-intuitive compensation strategy.

5. Desimone challenged various officer grants made under a plan that did not require fair-market-value grants, expressly permitted below-market-value grants, and under which virtually all employee grants were handled by a single executive officer without direct board oversight or involvement. VC Strine concludes that a challenge to these grants at most implicates a Caremark theory. He finds that Desimone failed to plead sufficient red flags to support any type of Caremark claim.

6. VC Strine holds that large grants of options to executive officers permit a pleading-stage inference of director knowledge of the terms of the grants. At the same time, however, VC Strine explicitly rejects the argument that the knowledge of any one director can be imputed to the others for purposes of demand excusal. Prior to this decision, Delaware courts had not meaningfully addressed imputation of knowledge among directors. VC Strine concludes that the complaint at most called into question the two members of the Compensation Committee and did not impugn the independence or disinterestedness of a majority of the board.

7. With respect to grants made to the outside directors, VC Strine considered the board to be interested without conducting any type of materiality analysis. He then held that the complaint did not state a claim as to these grants because the stockholder-approved plan provided for an automatic grant of 30,000 market priced options each year, as of the date of the annual meeting. Because the directors "took the good with the bad" in accordance to what the stockholders approved, no breach of fiduciary duty claim was stated.

Because of its overarching treatment of a variety of stock option scenarios, Desimone is likely to become the bellwether case for backdating analysis. The holding on director imputation of knowledge is also quite significant and potentially has far reaching implications, particularly because the questions of directors knew and when they knew it frequently create the dividing line between a care and loyalty claim.

- Broc Romanek

June 11, 2007

Jail Bait? Failure to File Schedule 13Ds and Forms 3

A couple of recent cases have highlighted situations where beneficial ownership reporting by hedge funds is called into question, in one instance with a particularly draconian result – potential imprisonment.

The U.S. Attorney for the Southern District of New York announced that the founder and manager of two hedge funds pleaded guilty to three counts of violating federal securities laws arising from the activities of his funds in acquiring substantial positions in the securities of two public companies. In addition to defrauding the funds’ investors about transactions that resulted in losses of $88 million, the manager was charged with failing to file on Schedule 13D to report an interest of 5% or more of one company’s stock (he and his funds controlled over 80 percent of the stock), and failing to file a Form 3 to report his beneficial interest of more than 10% in another company (while falsely reporting ownership of under 10% in a Schedule 13D).

The SEC also commenced a civil action in this case back in 2005 that is still pending. Actions such as this one should come as no surprise to those who have heard the SEC Staff publicly express the point that compliance with the beneficial ownership reporting requirements has been - and will remain - a high priority.

While the failure to file accurate beneficial ownership reports was obviously important for the markets in the common stock of the companies involved, the lack of accurate beneficial ownership information was also crucial for the manager to carry out his fraudulent scheme, as any reporting of his interests would have informed his investors that he was not acting in accordance with the funds’ investment policies. Alan Dye has blogged more about this case on his Section16.net Blog.

And Another Schedule 13D/G Action...

Recently, the Delaware Chancery Court addressed the situation of a hedge fund that reported its "investment only" intent on Schedule 13G when it was potentially considering the nomination of a short slate of directors to the company’s board. While the case of Openwave Systems Inc v. Harbinger Capital Partners principally involved the hedge fund’s failure to timely nominate its director candidates under Openwave’s advance notice bylaw provisions, the court took particular note of the fund’s status as a Schedule 13G filer in assessing whether it was really in a position to nominate its own directors within the required timeframes of the advance notice bylaw provisions, as well as in rejecting the fund’s allegation that the board of Openwave reduced the number of directors in response to Harbinger’s potential “threat.”

On DealLawyers.com, we have posted a copy of the opinion in our "Schedule 13Ds" Practice Area.

NASPP's "15th Annual Conference": Program Announced!

The full program - with over 40 panels! - for the NASPP Annual Conference was just announced. This conference brochure lists all the panels. Register today.

This year's conference will be held at the San Francisco Marriott from October 10-12 - and already is on track to have well over 2000 attendees. Make your hotel reservations now before the hotel is sold out. With the October 9th pre-conference - “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” - being so popular, this will happen very soon...

- Dave Lynn

June 8, 2007

Foreign Private Issuers: Checking Out of the SEC’s "Hotel California"

Starting this past Monday, non-US issuers were able to deregister from their '34 reporting obligations if they met the requirements of the SEC's new rules. As noted in this article on Dominic Jones' IR Web Report, some foreign private issuers already have taken advantage of the new rules and headed out of the SEC's door. In our "Foreign Private Issuers" Practice Area, we have posted plenty of memos on the SEC's new rules.

A Wild Proxy Season: A Worst Case Scenario

As many of us weathered what amounted to another wild proxy season, have you ever thought about the worst case scenario? How about dissidents storming your headquarters! This happened back in January during a proxy "fight" for Competitive Technologies. As noted in this press release from the company, an ex-CEO and three of his associates arrived at the company's headquarters and demanded entry because they believed they won the proxy fight. A few weeks later, the ex-CEO became the new CEO after the annual meeting was reconvened (and held at the AMEX) and the dissidents won the election.

Interestingly, one of the additional solicitation material filings filed by the dissident group - when the battle was raging - included a complaint letter sent to the SEC. While it's common for opposing parties in proxy contests to privately send complaint letters to the SEC Staff, it's not common to publicly file a complaint letter. So cheer up, your situation couldn't have been as bad as this one...

Management Always Wins the Close Votes?

Some academic food for thought over at the Prawfs Blawg with this entry from Yair Listokin of Yale Law School. Yair's work in progress investigates the theory that management wins “close” votes on proxy statement proposals more often then would be expected.

[Letters about "Scooter" Libby: As you may have read in the press, the Judge from the Scooter Libby sentencing hearing allowed the letters submitted to the court to be made publicly available; in this batch of the letters, the one on page 41 is from Jonathan Burks, the head of the SEC’s Office of Legislative Affairs - and the letter on page 57 is from SEC Chairman Cox.]

- Broc Romanek

June 7, 2007

Lost Corporate Tax Deductions: Personal Use of Corporate Aircraft

Not many companies have disclosed the lost corporate tax deductions caused by an executive's personal use of aircraft, which often can result in some pretty sizable numbers. In this 30-minute podcast, Terry Kelley, Chairman & CEO of Gold Jets, provides some insight into issues related to personal use of corporate aircraft (see this 91Plus brochure and this letter that notes there may be disclosure issues relating to lost tax deductions), including:

- Can you provide a brief overview of the tax issues facing companies when they allow executives to use the corporate aircraft for personal use?
- The new disclosure rules say that you have to present the "incremental cost" of providing a benefit to the executive. I know that you have reviewed numerous proxies - what have you seen?
- What is 91Plus and how does it help companies and their executives?

Climate Change: The Time to Learn How It Impacts Your Practice is Now!

I really encourage you to catch at least one panel from next Tuesday's complimentary webconference on TacklingGlobalWarming.com entitled: "Tackling Global Warming: Challenges for Boards and their Advisors." There are quite a few disclosure, due diligence and other fiduciary duty issues raised by climate change - and not many corporate & securities practitioners are very familiar with them. If you can't catch this program next Tuesday, each panel will be archived indefinitely (and still available for free).

To get a sense of the issues raised by climate change, check out a snapshot of how D&O insurance comes into play, as written up in the The D&O Diary Blog (and here is a follow-on blog). Note that next Tuesday's Conference includes a panel on "Why You Need to Re-Examine Your D&O Insurance Policy."

Another View: Why Have Audit Fees Risen So Much?

One of the primary reasons there is a battle over how much to reform the SEC's and PCAOB's internal controls rules is the rapid rise in audit fees. I was taken with last Friday's opinion column by the President and CEO of SVB Financial Group, Kenneth Wilcox, in last Friday's WSJ.

In his op-ed, Mr. Wilcox wondered: “My company is paying accountants five times more than it did three years ago. Why?” His response: “It turns out that only a diminishing portion of this increase is due to Sarbox.” Other factors driving the cost increase, he said, included “the significantly increased amount of time that audits are taking, and the much larger number of people that they involve.” FEI's "Financial Reporting" Blog has commented on this op-ed recently.

On Tuesday, SEC Chair Cox testified that AS #5 will reduce internal controls compliance costs for smaller companies; PCAOB Chair Olson testified similarly. I haven't yet been convinced that costs will drop significantly, as it seems to me that one cause of the high cost results from the dictates of Auditing Standard No. 3 regarding documentation and work papers, which has not been revised. I'm not sure why this standard wasn't tweaked when AS #2 was replaced with AS #5 as they seem to go hand-in-hand. Then again, I'm not an accountant, so what do I know...

Learn more about what questions that you - and your audit committee - should be asking about the SEC's and PCAOB's new internal controls guidance in this upcoming webcast: "Internal Controls Update: AS #5, Management Reports and All that Jazz," featuring John Huber, Linda Griggs and an expert from a Big Four firm.

- Broc Romanek

June 6, 2007

Rethinking Analyst Presentations: IBM Settles SEC Enforcement Action

Yesterday, IBM settled an enforcement action in which the SEC found that IBM had violated the Form 8-K reporting requirements and Rule 12b-20’s requirement to disclose additional material information so as to make required statements not misleading. Here is the SEC's press release.

The case focused on a Form 8-K filed under Item 7.01 - regarding Regulation FD disclosure - that included as one of its exhibits some presentation materials used for an analyst conference call and webcast. The SEC found that IBM made materially misleading statements in a chart - included as part of those materials - concerning the impact of IBM's decision to expense employee stock options in its quarterly and fiscal year results.

According to the SEC’s Order, while the company's management did not specifically mention the expected quantitative impact of stock option expensing during the course of the conference call, they did encourage analysts to update their models to reflect the accounting change. At the same time, the chart included information suggesting stock option expense numbers that were higher than management's expectations. Management rejected the idea of providing more specific guidance about the stock option expense numbers during the call, partly due to concerns about how the analysts would factor that information into their forecasts and the potential effect on the company’s projected growth rate.

This settlement highlights the importance of ensuring that the total mix of information presented in conference calls and webcasts is complete and accurate - and should no doubt cause folks to take a second look at their powerpoint slides and how they compare to the related script and Q&A responses.

CFOs Catch a Break: IRS Updates Guidance on Section 162(m) Covered Employees

Earlier this week, the IRS issued Notice 2007-49, which provides some much needed guidance on identifying "covered employees" under Section 162(m) in the wake of last summer’s amendments to the executive compensation disclosure rules. It won't be published until June 18th. Mark Borges has blogged several times about the circumstances under which a chief financial officer may now be considered a "covered employee."

Below is what Mike Melbinger had to say about this guidance in “Melbinger's Compensation Blog” on CompensationStandards.com:

Section 162(m)(3) defines a "covered employee" as any employee of the company if, (A) as of the close of the taxable year, such employee is the chief executive officer of the company or is an individual acting in such a capacity, or (B) the total compensation of such employee for the taxable year is required to be reported to shareholders under the Securities Exchange Act of 1934 by reason of such employee being among the 4 highest compensated officers for the taxable year (other than the chief executive officer). Regulations Section 1.162-27(c)(2)(ii) provides that whether an individual is the chief executive officer or among the four highest compensated officers (other than the chief executive officer) is determined pursuant to the executive compensation disclosure rules under the Exchange Act.

When the SEC issued its new rules relating to executive compensation disclosure last year, it altered the composition of the group of executives that are covered by the disclosure rules ("named executive officers") The definition of covered employee in 162(m)(3) mirrored the definition of named executive officers under the old disclosure rules, but it is not the same as that definition under the amended disclosure rules. The amended disclosure rules increase the number of executives who are named executive officers by virtue of their position from one to two, and reduce the number of executives who are named executive officers based on their compensation level from four to three.

To reconcile this difference, Notice 2007-49 indicates that the IRS will interpret the term "covered employee" for purposes of Section 162(m) to mean any employee of the company if, as of the close of the taxable year, such employee is the chief executive officer (within the meaning of the amended disclosure rules) of the company or an individual acting in such a capacity, or if the total compensation of such employee for that taxable year is required to be reported to shareholders under the Exchange Act by reason of such employee being among the 3 highest compensated officers for the taxable year (other than the chief executive officer or the chief financial officer). Accordingly, the term covered employee for purposes of 162(m) does not include those individuals for whom disclosure is required under the Exchange Act on account of the individual being the company's chief financial officer (within the meaning of the amended disclosure rules) or an individual acting in such a capacity.

The Art of the Cross-Border Deal

Join us tomorrow for a DealLawyers.com webcast – "The Art of the Cross-Border Deal" – to hear Tina Chalk of the SEC, Frank Acquila of Sullivan & Cromwell, Greg Wolski of E&Y and Peter King of Shearman & Sterling analyze the latest M&A tactics in cross-border deals.

[Broc's Ten Cents: Tune into today's free webcast from the SEC Historical Society: "Beyond Borders: A New Approach to the Regulation of Global Securities Offerings."]

- Dave Lynn

June 5, 2007

Options Backdating: Another Milestone

Last week, the SEC announced the settlement of options backdating actions against Mercury Interactive (now a subsidiary of Hewlett-Packard) and Brocade Communications Systems. In these enforcement actions, the SEC reached settlements with the companies themselves for the payment of civil penalties and the entry of permanent injunctions against future violations. In the settlements, Mercury agreed to pay a whopping $28 million penalty, while Brocade agreed to pay a $7 million penalty. Up until now, options backdating settlements have focused on the individuals involved, while the SEC’s Commissioners pondered what sort of penalties should be imposed on the companies where backdating occurred.

Back in January 2006, the SEC published a framework for how it would assess whether and to what extent civil penalties should be imposed on companies. This document resulted from some discomfort among the SEC Commissioners on when to penalize a company (and in turn its shareholders) for wrongdoing. The options backdating cases have proven to be difficult to evaluate from a penalties perspective, as evidenced by this Bloomberg article from January 2007 discussing the delay in consideration of Brocade’s settlement.

With the announcement of last week’s settlements, perhaps the logjam will be broken and more backdating settlements will come closer to resolution in the coming weeks. [Broc's Ten Cents: "The D&O Diary" Blog has some interesting analysis about these new settlements - such as all 45 of Mercury's option grants during the period 1997 to April 2002 were backdated; Kevin also has blogged about the emerging backdating case theme of blame the gatekeeper.]

Options: More Congressional Interest

This morning, the Senate’s Permanent Subcommittee on Investigations (which is a subcommittee of the Committee on Homeland Security and Governmental Affairs) will hold a hearing entitled “Executive Stock Options: Should the IRS and Stockholders be Given Different Information.”

Among the things the Subcommittee plans to look into are: the role of stock options in executive compensation, the incidence of stock option abuses, and the difference between GAAP and federal tax reporting of compensation from stock options. Panelists will include, among others, Acting IRS Commissioner Kevin Brown and Corp Fin Director John White. In his testimony to the Subcommittee, John White provides an overview of option compensation trends, a discussion of past abuses and a description of the disclosure, accounting and tax requirements applicable to options.

The Permanent Subcommittee on Investigations has wide-ranging interests that sometimes touch on SEC and IRS regulations. Last summer, the Committee’s Staff put out a report on the abusive use of off-shore tax havens, citing as one of its case studies the activities of the Wyly family in using 58 offshore trusts and corporations to transfer stock option compensation offshore.

Earlier this year, Senator Carl Levin - who serves as Chairman of the Subcommittee - introduced a still pending bill entitled the Stop Tax Haven Abuse Act that would, among other things, create a rebuttable presumption of control for any offshore entities operating in secrecy jurisdictions, and impose a penalty of up to $1 million per violation of U.S. securities law on public companies or their officers, directors, or major shareholders who knowingly fail to disclose offshore holdings that should have been reported to the SEC.

Our June Eminders is Posted!

We have posted the June issue of our complimentary monthly email newsletter. Sign up to receive it today by simply inputting your email address!

- Dave Lynn

June 4, 2007

How to Recognize an Inadvertent Investment Company

Recently, there have been a few examples of why it's important to know how to recognize an inadvertent investment company. A few weeks ago, the AFL-CIO wrote this letter to the SEC expressing concerns that if the Blackstone Group conducts its IPO, it should be required to register as an investment company.

Then Judge Easterbrook out of the Seventh Circuit Court of Appeals delivered this opinion in National Presto. The case involves some rather unusual facts (and includes some sharp judicial digs at the SEC) raising the issue of whether the company is an inadvertant investment company. National Presto had been ordered by the District Court to register as an investment company. After registering, the company reorganized its assets so that the amount of its assets was below the 40% trigger under Section 3(a)(1)(C) of the '40 Act - and the SEC would not give its consent to deregistration. It is on this point that Judge Easterbrook takes the SEC to task, with some notable quotes.

I think the case is important beyond its '40 Act findings because it reminds us that Staff positions (no-action letters and telephone interps and the like) are just that - courts may not necessarily follow them. Thanks to Sheldon Krause for pointing this case out and Keith Bishop for his ten cents!

Learn more in our "Inadvertent Investment Companies" Practice Area - including this new podcast with Rob Rosenblum of K&L Gates, who provides some insight into the issues involved with inadvertent investment companies, including:

- What is an "inadvertent investment company"?
- What are the findings of the National Presto case?
- How are the facts of that case different than what the AFL-CIO is alleging regarding Blackstone in its letter to the SEC?
- What should companies do if they think they might inadvertently be an investment company?

Course Materials: The Nasdaq Speaks - Latest Developments and Interpretations

Don't forget tomorrow's webcast - "The Nasdaq Speaks: Latest Developments and Interpretations" - to hear key Nasdaq Staffers talk about all the latest. You'll want to print out these course materials in advance...

Confusion Reigns: Has the SEC Decided to Support Investors in "Scheme" Liability Case?

According to this Saturday Washington Post article, the SEC has decided to throw its weight behind investors in a big-money dispute that could resolve whether shareholders can sue bankers who enabled their corporate clients to engage in fraud (today's WSJ has a similar article, but as noted below, there is uncertainty as to whether this is true - and if so, exactly which case the SEC has decided to weigh in on). Here is an excerpt from the article:

"The Securities and Exchange Commission has asked the U.S. solicitor general to file court papers supporting investors in an upcoming Supreme Court case, an action that has not been made public. The agency's decision follows intense lobbying by industry groups, unions and plaintiff lawyers, including well-known California attorney William S. Lerach.

The move is a significant victory for Lerach, who won $7.3 billion in settlements with banks and law firms that helped Enron disguise its financial problems. If the Supreme Court adopts the agency's position, it could breathe new life into a stalled case filed by Enron shareholders against Merrill Lynch and Barclays Bank. But the SEC backing comes at a bittersweet time for Lerach, whose own future is in question because of government scrutiny."

As PointofLaw.com points out, the article might be read several different ways (and SEC officials have declined to comment so far). Here is an excerpt from the commentary on that site:

"A reader suggests that the Washington Post article is actually talking about Stoneridge though the article does not mention that case by name. That is a plausible interpretation that would make the Washington Post article make more sense; the reporter may have been limited by the constraints of space and forced to leave out information such as the name of the case the SEC was planning to file a brief in, even as it mentions the larger Enron case. If the Solicitor General does not veto the SEC's politically-motivated recommendation, the Stoneridge amicus brief would be due June 11."

June 1, 2007

More Developments on Legal Fee Advancements

Last Tuesday, the US Court of Appeals for the Second Circuit - in Stein v. KPMG, No. 06-4358 (2nd Cir. 2007) - vacated Judge Kaplan's (ie. the trial court's) assertion of ancillary jurisdiction over contract claims for attorney fees brought in a criminal tax case against KPMG, a non-party (see my blog on Judge Kaplan's opinion). If it is found that DOJ violated the appellees' due process rights by coercing the defendants, it is possible that the indictments will be dismissed. We have posted a copy of the Stein opinion in our "Advancement of Legal Fees" Practice Area.

Here is some analysis from Keith Bishop: The Court of Appeals didn't reject Judge Kaplan's Fifth and Sixth Amendment conclusions - but it did not agree with his pro-active attempt to exercise ancillary jurisdiction. Basically, the Second Circuit rejected Judge Kaplan's exercise of ancillary jurisdiction over the criminal defendant's implied (and in one case) express claims for payment of legal expenses. The Court of Appeals left open the possibility of dismissal of the claims, stating "Dismissal of an indictment for Fifth and Sixth Amendment violations is always an available remedy." However, it also suggested other action such as ordering "cessation of such conduct" was possible. The Second Circuit also noted the apparent inconsistency between the Thompson Memorandum's focus on voluntary payment of legal fees and Judge Kaplan's assertion of ancillary jurisdiction over claims by the defendants to payment.

By the way, this case emanates from the same type of fishy tax shelters that have now landed Ernst & Young in trouble - see this related article and here is the indictment.

[Friday Funnies - Check out Will Ferrell's short takes on FunnyorDie.com.]

Failure to Provide Evidence of Loss Causation Precludes Class Certification

Recently, the U.S. Court of Appeals for the Fifth Circuit - in Oscar Private Equity Investments v. Holland - raised the bar in federal securities fraud litigation by requiring plaintiffs to come forward with evidence of loss causation in order to obtain class certification, particularly where investor losses could be attributed to multiple factors unrelated to the alleged fraud. We have posted memos regarding this decision in our "Securities Litigation" Practice Area.

FASB Plans Project to Simplify Hedge Accounting

Recently, the FASB voted to simplify FAS 133, "Accounting for Derivative Instruments and Hedging Activities." According to this CFO.com article, FASB will replace current assessment and testing mandates with a fair-value approach.