The Practical Corporate & Securities Law Blog

By Broc Romanek

Go to TheCorporateCounsel.net

 
SEC Files Unusual Amicus Brief in WorldCom Litigation

Last Friday, the SEC filed an amicus brief in a 2nd Circuit court appeal from a district court decision certifying a class of investors who alleged that they were defrauded in purchasing WorldCom, Inc.'s securities based in large part upon misrepresentations contained in defendants' analyst reports.

As the NY Times noted in an article earlier in the week, the SEC's brief supports the lead plaintiff - New York State Retirement Fund - by arging that analysts like Jack Grubman affect the price of a company's stock and bonds and may be held accountable for misrepresentations they may make. Citigroup, the parent of Grubman's employer, is contending that his unrelenting enthusiasm for WorldCom securities had no impact - and therefore investors were not harmed when they relied on his reports. Here is more from the NY Times' article:

"At issue is a bedrock concept in securities law known as the fraud-on-the-market theory, used in many securities fraud cases. Under this concept, all widely disseminated information about a publicly traded security is reflected in its market price, and investors rely on the integrity of this price when deciding whether to buy or sell a security. Therefore, any information about the company that is false or misleading is reflected in the market price and can harm investors who buy or sell relying on that market price.

Lawyers at Paul, Weiss, Rifkind, Wharton & Garrison in New York, representing Citigroup in the class action, argue in their brief that this legal theory should apply neither to analysts in general nor to Mr. Grubman in particular. Their brief states that institutional investors ignore analysts' reports and that analysts' opinions - including that of Mr. Grubman - are simply part of a conglomeration of information and do not have a distinct effect on securities prices.

There is no reason to believe that Mr. Grubman's opinions, which relied on WorldCom's disclosures, had any distinct price impact "over and above the price consequences of WorldCom's massive ongoing fraud," Citigroup's lawyers said in their brief. As such, each investor should have to prove that he was harmed by Mr. Grubman and Salomon in individual cases, not as a class action.

But lawyers at the S.E.C. countered that economic studies showed that analysts' reports affect securities prices and that their very purpose was to provide information upon which investors base their decisions.

In arguing that Mr. Grubman's opinions did have an impact on WorldCom's stock and bond prices, lawyers for the New York State fund noted in their brief the "unusually close relationship" between Mr. Grubman and WorldCom, citing the analyst's attendance at board meetings where acquisitions were discussed.

Mr. Grubman's influence was so pervasive that Salomon specifically solicited prospective investment banking clients by promising them that Mr. Grubman would "support" the stock with favorable research reports if they retained Salomon as their investment banker, the brief stated.

The brief also noted that the New York fund has uncovered new evidence showing that Mr. Grubman "fraudulently manipulated the underlying financial analyses he used to value WorldCom stock to maintain falsely inflated target prices for the stock and justify a buy rating, even though WorldCom's performance did not satisfy Salomon's own criteria to earn such a rating."

It is unclear what prompted the WorldCom filing. But the brief seems to be evidence of continued vigilance by the S.E.C. on issues related to brokerage firm research even after its historic settlement with Citigroup and other Wall Street firms over analyst conflicts more than a year ago."
posted by broc at 7:37 AM

 
Samples Reflecting Top Disclosure Trends

In our "Proxy Season Resource Center," we have pulled disclosures from recent filings to give a window into what companies tend to be disclosing in five hot areas in "Top Disclosure Trends From This Proxy Season." These hot areas include:

- Shareholder Communications with Directors
- Audit Committee Financial Experts
- MD&A Overview
- Executive Perks
- Qualified Legal Compliance Committees

By the way, all 20 of the most widely-held companies have now filed their latest 10-Ks and proxy statements as reflected in our list of links to the proxy statements and 10-Ks for the 20 most widely held companies.

SEC to Propose New Asset-Backed Registration & Reporting Framework

The SEC will consider proposing an overhaul of registration, disclosure and reporting requirements for asset-backed securities at an open Commission meeting on April 28th. The proposals will relate to four primary regulatory areas: '33 Act registration; disclosure requirements; communications during the offering process; and ongoing reporting under the '34 Act.

This has been in the works in Corp Fin for about a decade as the ABS market has grown enormously and is quite a complicated project as ABS issuers have been putting a "square peg through a round hole" for quite some time. Hats off to the staffers who slugged this one! If all the staffers who had ever worked on the project were named, I would imagine they would number about 2 dozen. I even worked on the project as a staffer briefly back in '97, didn't I Knute?

Yes, Private Companies Also Getting the "Treatment" from Auditors

One member - who is at a law firm - forwarded a legal opinion request from one of the Big 4 in connection with a new audit of a privately held company. Even though the private company was seeking just a routine audit - there was no registration statement or offering involved - E&Y asked the CFO to obtain a legal opinion from outside counsel that the company is duly organized, what the capitalization is, etc. Any other interesting stories to share?
posted by broc at 6:27 AM

 
Alan Dye's New Section16.net Blog!

I'm excited to report that Alan Dye has started blogging on Section16.net regarding Section 16 matters in "Alan Dye's Section16.net Blog." With larger and larger Section 16 lawsuits making their way through the courts - including one seeking over $600 million - this blog should quickly become a morning ritual for Alan's many fans.

Don't Forget to Obtain New EDGAR Passphrases Starting Monday

Reminder that beginning Monday April 26th, the SEC will start requiring companies to obtain a new passphrase before they can make any filings on a newly updated EDGAR. Here is information from the SEC on how to create a passphrase. For more information, see Alan Dye's blog from Tuesday.

Note that the Romeo & Dye Section 16 Filer has been updated for EDGAR's new changes - but users of this Filer will not be able to use the Filing Wizard until they create a passphrase. For more information about updated EDGAR, see yesterday's SEC Digest.

PCAOB Names Its Advisory Board

The PCAOB has established its 30-member advisory board, which includes 3 lawyers that represent companies (one of whom is a former SEC Commissioner). It is intended that this board will provide input into the PCAOB's standard-setting.

Who is the Most Frequently Noted Governance Pundit?

Someone once did a Nexis search to ascertain who is the most popular source of quotes on governance for the mainstream media. Far and away, the top three - in this order - were Professor Charles Elson, Nell Minow and Pat McGurn. Not that I am in their league, but I was delighted to be quoted in this recent CNN Money article regarding Grasso's pay along with Nell and Pat. Gotta toot my horn once in a while...


posted by broc at 6:59 AM

 
The Many Faces of Director Independence

During tomorrow's webcast - "The Many Faces of Director Independence" - our panel will be analyzing over three dozen fact patterns in six different topic areas. In addition to analyzing these fact patterns, the panel will discuss a number of other important issues related to independence determinations, such as how frequently should the assessments take place!

These sample fact patterns are now available - you should print these off before the webcast to facilitate your understanding of the analysis.

Shareholder Access Framework to be Revised?

Yesterday's WSJ contained an article with rumors that the SEC might narrow the eligibility standards to submit a triggering proposal to reduce the likelihood that "narrow interests" could dominate use of the triggers. In addition, the article intimated that the SEC might increase the 35% withheld threshold to 50%.

An Interesting Way to Go Private

Yesterday's Washington Post carried an article about how IBW Financial Corp. had filed a preliminary proxy statement to conduct a 1-for-101 reverse stock-split, which would be followed by 101-for-1 stock-split - which would restore the stock to where it was to begin with. [I believe the company has given up on these transactions for now because its definitive proxy materials deleted these transactions - the Post reporter appears to have missed that...]

The purpose of the transactions was to eliminate 280 shareholders that hold less than 100 shares - enabling the company to have less than the requisite 300 shareholders for deregistration from the company's '34 Act obligations. The article notes that the company currently spends $150 per shareholder to makes its SEC filings (and pays dividends of 45 cents per share).
posted by broc at 7:15 AM

 
What to Consider for Your Next 10-Q!

I would call this interview with Jonathan Wolfman on Important Changes for Your Next 10-Q a "must" read. Not just because it includes a link to a 18-page checklist of matters to consider, but because there are some new issues to consider that were not applicable for the recently filed 10-Ks.

One big change is the new Item 703 stock repurchase tables that I blogged about a few weeks back, when I noted our compliation of sample tables that had already been voluntarily filed. We also have two dozen law firm memos in Section B.23 of our Sarbanes-Oxley Law Firm Memos on this topic.

At the ABA Spring Meeting a few weeks ago, Alan Beller fielded a few questions in the Item 703 area and indicated that, for purposes of this table, "repurchases" would not include common stock surrendered to a company in connection with a cashless exercise. Alan noted that this was his own opinion and referred the audience to check with the SEC staff (but I have spoken to some people that have checked in with the Chief Counsel's office and gotten confirmation of this position - let me know if you hear differently).

E&Y Banned from Obtaining New Public Clients for 6 Months

On Friday, SEC Chief Admin Law Judge Brenda Murry - in this 69-page initial decision - barred E&Y from obtaining new public company clients for a 6-month period.

The initial decision found that E&Y violated the SEC's rules on auditor independence during E&Y's audit of PeopleSoft, which caused PeopleSoft to violate the securities laws by filing financial statements that were not audited by an independent accountant. Interestingly, the 6-month bar is not unprecedented as three of them were levied by the SEC back in the '70s - but each of these prior instances involved fraudulent audits. In this case, the SEC didn't allege that PeopleSoft had incorrect financials.

In addition to the 6-month bar, E&Y was hit with a cease and desist order and must disgorge $1.7 million (equal to the fees for auditing PeopleSoft) - as well is required to retain an independent counsultant acceptable to the SEC to help implement better controls. E&Y reportedly will not appeal this decision to the Commissioners.
posted by broc at 8:59 AM