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Monthly Archives: December 2007

December 31, 2007

Your New Year’s Resolution

Opinion Polls & Market Research

Bebchuk v. Lipton

Recently, Directorship ran this interesting article on the debate between Marty Lipton and Lucian Bebchuk on the role of shareholders in corporations.

Marty also recently addressed the “Mergers, Acquisitions, and Split-Ups” course at Harvard Law School regarding “The Future of M&A.” The “Harvard Law School Corporate Governance Blog” has a link to this multiple hour address.

Our January Eminders is Posted!

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

SEC GC’s Brian Cartwright on “Deretailization”

A while back, the SEC’s General Counsel Brian Cartwright delivered this speech on “The Future of Securities Regulation.” The speech provides an interesting look on how we might see the markets and regulation evolve in the future. Below is a speech summary from Robert Jackson of the “Harvard Law School Corporate Governance Blog“:

The speech emphasizes what Brian calls “deretailization,” or the dwindling presence of retail investors in securities markets. Retail investors, who once owned more than 90% of publicly traded equity, now own less than 30%. Moreover, retail investors do not trade some assets at all, including the billions of dollars annually raised in 144A debt offerings. (Some institutions have recently moved to raise equity in 144A offerings as well.) And private equity and hedge funds, which frequently take publicly traded firms private, generally exclude retail investors altogether.

Over the last twenty years, Brian explains, these asset classes have come to dominate capital markets, and retail investing–once the focus of much regulatory behavior–is no longer central to modern securities markets. Instead, individual investors now choose among intermediaries competing for their funds–with the intermediaries, rather than the individual, directly participating in the capital markets.

In light of these trends, the speech argues, regulators should focus their efforts on ensuring that individuals have the necessary tools to choose among intermediaries. That kind of regulation, Brian explains, might ensure that individuals understand that a mutual fund’s past performance may not repeat itself; that additional disclosure allows investors to calculate an actively managed fund’s alpha, or market-adjusted performance; and that investors are able to evaluate a fund’s market-adjusted performance against the fund’s expenses.

- Broc Romanek

December 28, 2007

SEC (Finally) Launches its XBRL Viewer for Executive Pay

After a six-month delay, the SEC launched its online tool that allows comparisons of executive pay among the 500 largest US companies. This project was initially conceived by the SEC as a way of addressing the criticisms of last year’s “December surprise” rulemaking by creating summary compensation tables that use the grant date fair value rather than the expensed amount for equity awards. Given that, it seems only fitting that the viewer was launched just before this Christmas. Here is the related press release.

Take a moment to check out how it works. Technologically, it appears to work just fine – but I worry about investors and analysts looking at numbers without the benefits of footnotes, CD&A and other narrative that puts the numbers in contexts. Please send me your own reactions (they will be kept confidential).

CEO Pay Continues to Rise

Based on proxy data filed this year, the median year-on-year increase in CEO pay was just under 13%, according to the 5th annual survey (paid subscription) of CEO compensation by The Corporate Library. The survey shows a median increase in Total Compensation of 12.64% as compared to an increase of 15.98 percent in last year’s survey. Pay rises in the S&P 500 were far higher than those for their peers in smaller companies, with the median increase topping 23%, and median total pay over $8.8 million. Here is a Chicago Tribune article about the survey.

SEC’s Registration Filing Fees Finally Set for ’07-’08

As noted in this press release/fee rate advisory #6 issued yesterday, President Bush signed the appropriations bill that includes funding for the SEC on December 26th. As a result, effective December 31st, the Section 6(b) fee rate applicable to the registration of securities increases to $39.30 per million dollars from the existing rate of $30.70 per million dollars. Get those registration statements filed today or pay more on Monday!

- Broc Romanek

December 27, 2007

SEC Enforcement (and Corp Fin) Stats for the Past Year

Recently, the SEC released its 2007 Performance and Accountability Report, as well as its 2007 Selected SEC and Market Data. Here is a statement on enforcement statistics from Chairman Cox. All provide a wealth of information about the SEC’s activities during the past fiscal year (which ended on September 30th).

Here are some stats from the reports relating to the Enforcement Division:

- Total of 776 investigations initiated and 656 enforcement actions taken (involving a total of 1449 respondents or defendants; 33% of the actions related to reporting and disclosure); an increase of 14% from prior year (which is the first increase in 4 years, mainly due to 24 backdating cases and 39 cases against unregistered auditors)

- Obtained orders requiring disgorgement of illegal profits of $1.1 billion and another $507 million in penalties; a decrease from the $3 billion collected during each of past few years

- Total of indictments, informations or contempts in 144 cases; number of criminal cases has decreased during past two years after run-up in ’02-’05

- Total of 125 director & officer bars

- 682 referrals to Enforcement from Corp Fin; up over 30% from prior year

Here are a few Corp Fin related stats:

- 25.5 days to issue comments; down from 26.2 days in ’06

- 802 million searches on EDGAR; up from 531 million in ’06

- 77 new foreign private issuers registered with the SEC; 60 did so in ’06

SEC Changes Enforcement Policy on Closed Investigations

Last month, it was reported (eg. Reuters article) that under a new policy adopted by the SEC six months ago, the SEC will notify those under investigation when enforcement staff have decided to close the investigation. Here are some thoughts from Russ Ryan of King & Spalding, who is a former Assistant Director of the SEC’s Division of Enforcement:

1. A GAO report from August talked about this new policy in some context. Russ says he was “quite a bit surprised” to learn that 13% of the SEC’s open investigations – which would mean nearly 500 investigations – are more than 10 years old. He suspects, however that “very few of these investigations are really still active in any way.”

2. Russ thinks this is a “very good development for companies, investment firms, and the securities bar – and investors too. This has been a long standing concern of many defense lawyers and companies under investigation, particularly those that have publicly disclosed an SEC investigation and want to assure their shareholders that it is no longer a concern for the company. It now appears that the SEC staff will promptly notify companies when the investigation has been closed, so companies will no longer have to wait in fear of the unknown when an investigation appears to be over but they dare not call the staff and risk triggering renewed interest.”

3. From what Russ has seen and heard, the new policy is not being applied retroactively (i.e., if the case was already closed a year ago, “you’re not going to get a notice about it now unless you ask for it”). The Staff appears to be applying the policy only on a going-forward basis

Two GAO Reports on SEC Enforcement Matters

Earlier this week, at the request of Senator Charles Grassley, the Government Accountability Office released a report that examines the SEC’s oversight of the financial markets. The request stemned from Sen. Grassley’s concern that the SEC may have given preferential treatment to John Mack, head of Morgan Stanley, when the SEC investigated possible insider trading at Pequot Capital Management. The report is critical about how the SEC handles referrals from the NASD and NYSE.

This report follows another GAO report from September (here is a summary) regarding the SEC’s management of its enforcement caseload. This report concluded that the SEC needs to tighten its enforcement management procedures and increase the speed with which it distributes Fair Funds to investors.

- Broc Romanek

December 26, 2007

SEC Issues Year-End Stock Option Expensing Guidance

On Friday, the SEC issued Staff Accounting Bulletin No. 110 regarding option expensing guidance. As explained in this press release, SAB 110 provides guidance on the use of a “simplified” method (as discussed in SAB No. 107, issued back in March) in developing an estimate of expected term of “plain vanilla” options in accordance with FAS 123(R). In particular, the Staff indicated in SAB 107 that it will accept a company’s election to use the simplified method, regardless of whether the company has sufficient information to make more refined estimates of expected term.

At the time SAB 107 was issued, the Staff believed that more detailed external information about employee exercise behavior (e.g., employee exercise patterns by industry and/or other categories of companies) would, over time, become readily available to companies. Therefore, the Staff stated in SAB 107 that it would not expect a company to use the simplified method for share option grants after December 31, 2007. The Staff understands that such detailed information about employee exercise behavior may not be widely available by December 31, 2007. Accordingly, the Staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007.

A New Section 16 Litigation Strategy

Alan Dye has written about this new-fangled Section 16(b) litigation strategy in a couple of recent issues of Section 16 Updates, but it’s worth noting again as told in this Seatle Times article. The plaintiffs’ bar will continue to be enterprising…

Why Are You Working This Week?

We’ll be experimenting with these Web Polls over the next few weeks:

Opinion Polls & Market Research


- Broc Romanek

December 21, 2007

Direct Registration: Trap for the Unwary

From Lorelei Cisne of Arnall Golden Gregory: DTC has been telling issuers that in order for their securities to be considered “DRS eligible,” the transfer agent for the issue must send DTC a letter requesting that the securities be added to their list of eligible securities. What has not been so clear perhaps, is that if that is all the transfer agent does, the issue will not only be marked as eligible – but it will be actually enrolled into the program (i.e., from brokers’ point of view, they can use the system to request uncertificated shares). If an issuer wishes to be eligible but not participate – as allowed by the NYSE – the transfer agent must specifically say so in its letter to the DTC.

Now, that’s not the whole story because there still will not be any uncertificated issuances unless the transfer agent actually honors the request and establishes direct registration accounts. However, if the transfer agent bounces the request, my understanding is that the requester is going to incur a charge without receiving their securities. But at least there won’t be any unauthorized issuances.

However, I am aware of at least one instance in which due to confusion over this terminology, a transfer agent enrolled a company in DRS when it was not supposed to. I am still not sure whether any direct registration accounts were established – i.e., whether any uncertificated shares were issued – but I suspect that they were.

It’s hard to believe that a transfer agent would go to such lengths without more formal documentation, etc., from the issuer, but it’s beginning to look like that may have happened, in which case — this is a real trap for the unwary!

What’s Happening in Asia

Thanks to Liza Mark of Dorsey & Whitney, we just posted 20 pages of notes from the recent “Asia Capital Markets Forum 2007″ in our “Conference Notes” Practice Area.

10 Effective Ways to Remember Names

As I get older, its become challenging to remember names, particularly since I don’t get out much these days. AccountingWeb.com has this list of “10 Effective ways to remember names” – but I’m not sure it will do me much good…here’s to good karma over the holidays:

karma-r.jpg

- Broc Romanek

December 20, 2007

Fear & Loathing for Transactional Lawyers?

In a story that we will cover more after the holidays, the SEC charged an outside lawyer for a client’s fraud on Tuesday, as noted in this press release. The following NY Times article fleshes out this story:

“Federal prosecutors charged the former outside counsel for the bankrupt commodities brokerage firm Refco on Tuesday with fraud tied to the eventual collapse of the commodities and futures brokerage. Joseph P. Collins, 57, of the law firm Mayer Brown, faces 11 counts including securities fraud, wire fraud and filing false statements with federal regulators. Separately, the Securities and Exchange Commission filed a civil suit against Mr. Collins on Tuesday.

‘Mr. Collins’s role in this fraud was vital,’ Michael J. Garcia, the United States attorney for the Southern District of New York, said at a news conference. It is rare for outside counsel to be charged for fraud supposedly committed by their clients; not even Enron’s outside lawyers faced criminal charges. ‘Joe Collins is an innocent victim of the Refco fraud,’ Mr. Collins’s lawyer, William Schwartz, said in a statement. ‘This indictment should send a chill down the spine of every transactional lawyer who believes he or she is representing an honest client.’

But Mr. Garcia said that the charges did not signal a new trend of prosecuting outside lawyers. ‘The vast majority of outside counsel is law-abiding,’ he said. The announcement is the latest twist in the two-year-old fraud case, which arose in the wake of Refco’s demise. Once one of the world’s largest commodities brokerage firms, Refco went public in 2005, only to begin crumbling two months later after it disclosed that Philip R. Bennett, then its chief executive, had hidden $430 million in loans owed to the company.

Prosecutors say that Mr. Collins, who oversaw Mayer Brown’s work for Refco from the mid-1990s to 2005, supervised the structuring of transactions in which Refco temporarily shuffled debt to related companies and third parties. Those loans were reversed shortly after Refco’s quarterly periods ended.

Mr. Collins also drafted documents that misrepresented that debt to Thomas H. Lee Partners, the private equity firm that bought a stake in the company in 2004, and to the S.E.C. before Refco went public, according to the complaint. Mr. Bennett, who has pleaded not guilty to fraud charges, is scheduled to go on trial next year. Others facing criminal charges include Robert C. Trosten, Refco’s former chief financial officer, and Tone N. Grant, the firm’s former president.

Mayer Brown, based in Chicago and formerly known as Mayer, Brown, Rowe & Maw, said in a statement that Mr. Collins was on leave and that the firm was cooperating with federal authorities. It is facing lawsuits by trusts representing Refco’s creditors. ‘Our review of the evidence available to us shows that the firm acted in a professional, competent and ethical manner in its work on behalf of Refco,’ Mayer Brown said in its statement.”

Section 409A: Still Busy Despite Postponement

December is no doubt turning out much better than it might have been had the IRS not decided to postpone the deadlines for adopting Section 409A changes until the end of ’08. But even with postponement of the deadlines, there is still much that needs to be done with compensation plans now – and in the coming months – under Section 409A.

In this CompensationStandards.com podcast, Mike Melbinger of Winston & Strawn discusses the postponement of the deadlines for adopting Section 409A changes until December 31, 2008, as well as the latest developments with 409A implementation, including:

- How has the IRS’s 409A delay impacted the timing of plan changes?
- What is the most helpful aspect of the postponement?
- Given the postponement of the deadline for making 409A changes, what do employers need to look out for now and into 2008?
- Are companies making other plan changes unrelated to 409A as long as they are revisiting their plans, and what types of plan changes do see the most?

Posted: Form S-3 and Simplified Reporting Adopting Releases

Yesterday, the SEC posted the adopting release for its Form S-3 reform – and the adopting release for smaller business reporting relief.

- Broc Romanek

December 19, 2007

The SEC’s “Non-Working” Day: Monday

We’ve received questions from a number of members related to the SEC’s declaration of Monday (Christmas Eve) as a “non-working day,” during which the EDGAR system will not be operational. Under the SEC’s rules, Form 8-Ks and other filings otherwise due on Monday are not due until the next business day, which is Wednesday.

The other common query is whether December 24 will be considered a “business day” for purposes of the 4-business day deadline? Since it’s a government-wide non working day, than I don’t think the SEC can treat it as a business day for 8-K purposes, similar to the mourning day for Gerald Ford earlier this year.

Proposed: A Major FASB Reorg

Yesterday, the Financial Accounting Foundation (the body that decides who will set accounting rules in the US) proposed an overhaul aimed at enabling the FASB to act faster while increasing the power of its chairman, Bob Herz. The proposals would reduce the size of the FASB to five members from seven (three members are stepping down soon) – and give the chairman the power to decide whether to place issues on the board’s agenda (it now takes a board vote to place an item on the agenda). The proposals would also involve changes in how the foundation’s trustees were chosen and would strengthen it to provide more oversight to the two accounting boards it oversees.

I am told that this is a precursor to ultimately merging the FASB and the IASB, shifting the US funding from the FASB to the IASB, and raising the question then as to who would be the next chairman of the IASB…

The SEC’s Squabble over PCAOB’s Board Member Salaries

Yesterday, during an open Commission meeting to approve the PCAOB’s budget, Commissioner Paul Atkins objected to the salaries of the five PCAOB Board Members and dissented (here is the meeting archive and the order approving the budget; here is a statement from Commissioner Atkins). Below is an excerpt from FEI’s “Financial Reporting Blog” (which recently was nicely restyled):

“As a matter of policy, the board salaries are disproportionately high,’ said Atkins, adding the rate of increase is higher than comparable rates. Although agreeing with PCAOB’s decision to de-couple use of FASB board salaries as a ‘benchmark’ rate, Atkins showed some slides at the meeting demonstrating why he thought PCAOB board salaries were still too high.

Atkins’ slides compared the $515,000 PCAOB board member’s salary (other than the chair) to that of the President of the United States, the Supreme Court Chief Justice, and CEO level salaries, showing it was higher than most all of those (if not all). He also stated the salary of the Chairman of the PCAOB exceeded that of the SEC commissioners, combined.

‘We have not found difficulty finding and retaining board candidates,’ Atkins said of the PCAOB board. He added “The level of [PCAOB] board salaries is out of synch with other prominent indviduals of integrity,’ who serve in prestigous government and private sector positions.

Commissioner Kathleen Casey also took the PCAOB to task over the level and rate of its salary increases, but she voted in favor of the budget.”

This is not a new bone of contention for the SEC. Board member salaries outsize the SEC’s Commissioner salaries by a magnitude of roughly 3x because when Congress adopted Section 101 of Sarbanes-Oxley – which established the PCAOB – it specified that the Board Member salaries should be set based on what was being paid in the private sector (and placed the SEC in the role of pay-setter; probably not a good idea in hindsight). This provision was designed to ensure that the PCAOB could attract and retain qualified people – and the most plausible benchmark is the level of a salary for an ‘above average’ partner from one of the Big 4.

- Broc Romanek

December 18, 2007

Disclosing Your Airplane Perks: “Incremental Cost”

There is still much confusion over what to include when computing the aggregate incremental cost for personal use of corporate aircraft. Proxy disclosures from this past season revealed that many issuers are significantly understating the incremental cost of the use of corporate aircraft, for example by failing to include dead-head costs and the loss of corporate tax deductions.

In the Advance Copy of our January-February 2008 Issue of The Corporate Executive, we provide a model disclosure that shows everything that needs to be included – and disclosed – regarding the aggregate incremental cost of airplane perks. We think many companies will be using this disclosure in the coming year – which will hopefully help provide consistency and help issuers avoid charges of “hiding the ball” on this sensitive issue.

Here is where you can access this Advance Copy now (you will need to renew for ’08 to receive it). Note that we will be mailing this issue to ’08 subscribers early in January. Feel free to let me or Dave know if you have any thoughts on the model disclosures in the Advance Copy. If you are not yet a subscriber, we encourage you to take advantage of a no-risk trial, which will give you immediate access to this important issue.

An Evelyn Y. Davis Sighting

Yesterday’s Washington Post ran this pretty humorous article about Evelyn Y. Davis at the Fannie Mae annual meeting (first meeting for the company in three years). It’s good to hear that Fannie Mae’s CEO gave Evelyn her normal deference to avoid (more of) a scene. Here is an excerpt from the article:

“She lectured the gathering on the price of her clothes (she never pays retail) and her marital history. That’s ‘Mrs. Davis,’ she said, correcting chairman Stephen B. Ashley when he addressed her as ‘Miss Davis.’ ‘I’ve had four husbands,’ she said. ‘Some women, particularly those who are jealous of me, can’t even get one.’

With the velvet fist of a boss dismissing an underling, Davis urged Mudd to take a walk. ‘I’m sorry, Dan. I know you tried, but you’re just not working out.’ In fact, Davis urged all the directors to resign — all except for former FBI director Louis Freeh, whom she praised lavishly and championed for the job of chief executive. ‘If anybody can do it, Louis can do it,’ she said.”

Federal Judge Tells SEC Lawyer “Sit Down, Shut Up”

Tis the end of the year and I’m doing some clean up to showcase gems that I had meant to blog about long ago. Here is one from October posted by Peter Lattman in his WSJ Blog (Dave blogged about this PIPEs case back then too):

“Judge Graham Mullen dismissed part of an SEC civil lawsuit alleging that a former executive at Friedman Billings Ramsey engaged in illegal conduct related to a securities offering. The claim alleged that John Mangan Jr. committed a so-called Section 5 violation involving a Pipe, or private investment in public equity. Representing Mangan: George Covington of King & Spalding in Charlotte and James Wyatt at Wyatt & Blake. Said Wyatt to the Observer: “We firmly believe (the case) will be resolved in his favor because we believe he has done absolutely nothing wrong.”

While the case is interesting — especially for those of you obsessed with the controversy surrounding Pipes and naked short selling — what’s interesting to us is this excerpt from the transcript of the oral argument on Mangan’s motion to dismiss.

Judge Mullen: Naked shorts are not legal, are they?

SEC lawyer Amy Greer: No. No, they’re just very risky, Your Honor.

SEC lawyer Catherine Pappas: And Your Honor –

Judge Mullen: They’re not illegal; they’re just risky.

Greer: Correct. Naked short sales are not illegal; they’re just risky, Your Honor.

Judge Mullen: Why in the world don’t you all make them illegal? Don’t you understand what happens in the market when you allow naked short selling to attack companies? I mean, do you understand that?

Greer: Your Honor, I think that that’s an issue for the United States Congress. I appreciate your concern –

Judge Mullen: Well –

Greer: — and I –

Judge Mullen: — the answer to my question is, yeah, I understand it or, no, I don’t.

Greer: I do understand your –

Judge Mullen: Do not try — okay.

Greer: I do understand, Your Honor.

Judge Mullen: Thank you for understanding it.

Covington: Your Honor, one thing –

Judge Mullen: Excuse the interruption.

Covington: No, sir.

Judge Mullen: Sit down, shut up, let the man talk. I’m not going to let him introduce (sic) you. Last warning.

Pappas: I’m sorry?

Judge Mullen: Sit down –

Pappas: Yeah, I got that.

Judge Mullen: — shut up, let the man talk. Last warning.

Pappas: Okay.

Judge Mullen: Understood?

Pappas: Okay.

Judge Mullen: Excellent.

Covington: With all due respect, Your Honor –

Judge: And you don’t interrupt her when she’s talking.

Covington: Yes, sir.

Judge: Proceed.

- Broc Romanek

December 17, 2007

Better Late Than Never: Corp Fin Wrapping Up ’33 Act Reform

On Friday, the SEC issued a proposing release to amend Form S-11 – a relatively unknown registration statement outside of the real estate industry – to facilitate the ability of those registrants to incorporate by reference.

One of the shortest proposals I have ever seen, this proposal is identical to amendments to Forms S-1 (and F-1) adopted by the SEC several years ago in the ’33 Act reform. I would imagine that no one will bother to comment other than perhaps “what took you so long.”

Enforcement Director Linda Thomsen on Rule 10b5-1 Plans

Back in October, the SEC’s Enforcement Director Linda Chatman Thomsen opened up the NASPP conference with an important speech on Rule 10b5-1 plans. The SEC posted the text of her speech on Friday (a video archive of the speech is still available as part of our “Hot Topics/The Corporate Counsel Speaks” Conference, as well as a follow-up panel on 10b5-1 plans featuring Linda, Alan Dye and Ron Mueller). In our “Rule 10b5-1 Plans” Practice Area, we have a number of memos on enforcement interest in these plans.

Aflac Pushes Up First “Say on Pay” Vote to 2008

Aflac has bumped its advisory vote on executive pay to next year, instead of 2009. Aflac originally planned to wait until shareholders had 3 years of compensation disclosure under the SEC’s new rules, but the company has concluded that two years of disclosure would be sufficient according to this press release. The company’s next annual meeting will be held in May 2008.

So far, Verizon Communications is the only other US company that has agreed to hold an advisory vote on pay, which will be held in 2009. Verizon took this step after a “say on pay” shareholder proposal won majority support at the company’s annual meeting in May – according to this RiskMetrics report, seven other companies have received a majority vote, so we might see more “volunteers” soon.

Rightsizing Compliance Programs for Smaller Companies

We have posted the transcript for the webcast: “Rightsizing Compliance Programs for Smaller Companies.”

- Broc Romanek

December 14, 2007

Corp Fin Sends Letters to Issuers Regarding Off-Balance Sheet Entities

In light of the meltdown in mortgage markets and the resulting liquidity issues, the Corp Fin Staff has recently sent letters to those public companies that have identified investments in structured investment vehicles, conduits and collateralized debt obligations. The Staff has now posted an illustrative letter, suggesting possible disclosure for upcoming annual reports. The letter focuses on the Management’s Discussion & Analysis disclosure required under Item 303(a)(4) of Regulation S-K regarding off-balance sheet arrangements, disclosure that may be necessary under Item 303 regarding critical accounting policies for consolidation and variable interest entities, and the MD&A requirement to discuss trends or uncertainties that may be reasonably expected to have a material favorable or unfavorable impact on income from operations, liquidity and capital resources.

The Staff is calling for very detailed disclosure about the assets held by off-balance sheet entities, including ratings, material write-downs or downgrades, maximum limits on losses for first-loss noteholders, and any variable interests held in off-balance sheet entities. Further, the Staff’s comments focus on funding issues – in particular the forms of funding, difficulties faced in financing and obligations under liquidity facilities – as well as efforts on the part of issuers to bail out their off-balance sheet entities. The letter also seeks disclosure of the risks that off-balance sheet entities could be consolidated and the amount of any material loss that the issuer would expect to realize as a result of material off-balance sheet entities.

These risks are all too real for many firms – as noted in an article from this morning’s Wall Street Journal, Citigroup is bailing out seven struggling structured investment vehicles, bringing $49 billion onto its balance sheet and further depleting the bank’s capital. Scary stuff.

One obvious question is: will disclosure in the 10-K or 20-F about these issues be too late? Current disclosure may be necessary as developments unfold, based on the various items of Section 2 of Form 8-K, and, beyond that, issuers facing these problems really need to keep the markets informed so the problems don’t get any worse.

FCPA Enforcement Going Strong in 2007

Yesterday, the SEC announced yet another Foreign Corrupt Practices Act case, in which Robert W. Philip – the former Chairman and CEO of Schnitzer Steel – was charged with approving illegal cash payments and other gifts to officials at steel mills owned by the Chinese government. Phillip agreed to pay $250,000 to settle these latest SEC charges. Schnitzer Steel had previously paid $7.7 million in disgorgement to settle related SEC charges and $7.5 million in penalties to settle related criminal charges brought by the DOJ.

As noted in this recent memo from Dechert LLP, 2007 has been the most active year in the history of FCPA enforcement. Along with the increased number of cases have come enhanced penalties, with two of the largest penalties ever levied in FCPA cases announced earlier this year. The memo notes that at the American Conference Institute’s 18th National Conference on the Foreign Corrupt Practices Act in November, officials from the SEC and the DOJ indicated that FCPA enforcement activity will continue to intensify. Another notable trend is that the government is increasing its emphasis on charging individuals, with more such cases expected before the end of this year. Further, the SEC is increasingly seeking disgorgement in these matters, which can potentially include the entire gross revenue from a contract obtained through corrupt practices.

The Dechert memo also notes that more resources are being directed toward FCPA matters, with the DOJ recently assigning several FBI agents to work exclusively on FCPA cases – while at the same time ramping up training for field agents. According to the DOJ and SEC officials, industry-wide investigations are also likely if corrupt practices are found to be common in certain industries.

The government’s FCPA enforcement efforts also got a boost from a recent Fifth Circuit decision in the case of United States v. Kay, where the court upheld FCPA convictions even though the defendants argued that the statute was so vague that the defendants could not have been reasonably aware of the potential for engaging in illegal conduct when they were acting in accordance with prevailing business practices, and the payments were made for the purpose of retaining business in the particular country.

For more on the latest FCPA developments and to see some sample FCPA policies, check out our “Foreign Corrupt Practices Act” Practice Area.

What’s The Hub?

The SEC’s FCPA enforcement efforts may now be aided by access to the “Hub.” At a recent SEC Enforcement Division roundtable, Chairman Cox announced the launch of the Hub, a new electronic platform that is supposed to facilitate collaboration among the Enforcement Staff. The Hub is supposed to help the Staff manage their caseloads and provide access to other existing systems for tracking inquiries, investigations and testimony. The system was rolled out in all of the regional offices, with SEC headquarters being the last to implement it.

While collaboration can certainly be an issue among the 11 regional offices spread across the country, it can even be a problem within the SEC’s headquarters – upon moving to their new building, Staff members in the Divisions (including Enforcement) were dispersed throughout the building under an ill-conceived “stacking” approach.

- Dave Lynn