As I've mused before, I believe the day will come when more of you will be either a contributor to a blog or otherwise participating in some form of "expressing yourself online" activity. A perfect example is an IRO who gets the word out about a company's investor relations through a blog.

In this podcast, Lynn Tyson, VP-Investor Relations of Dell and a co-blogger of "Dell Shares," provides tips and insights into how investor relations officers can blog for their companies, including:

- What was the genesis for launching the "Dell Shares" blog?
- What types of internal approval did you need to obtain?
- Have there been any surprises from blogging?
- What changes have you made to your blogging style since you started?

Fyi, since I blogged about my pet peeve regarding the use of a click-through disclaimer on the "Dell Shares" blog, it has been removed. Bravo!

More on the SEC's Staffing Levels

Last week, SEC Chair Chris Cox gave this testimony regarding the SEC's '09 budget before the US Senate's Appropriations Subcommittee on Financial Services. On the same day, ten Senators sent this letter to the head of that subcommittee requesting more funding for the SEC - in the amount of $50 million - than the Bush Administration is seeking.

This Bloomberg article from last week - entitled "SEC's Bear Stearns Oversight Points to Fund Shortage" - argues that more money is necessary for the SEC to adequately do its job. Here is an excerpt:

SEC staffing levels peaked in 2005 at 3,851 full-time employees, including 1,232 in its enforcement division, which investigates fraud. The agency had 3,465 full-time employees in the fiscal year ended last September and staffing in the enforcement unit dropped to 1,111.

"Staffing levels haven't kept pace with the urgent work needing to be done,'' Arthur Levitt, a former chairman of the SEC, said today in a Bloomberg Television interview. "We need more people in enforcement and more people at the commission. Those budget cuts have got to be restored.''

Under Cox, who became chairman in August 2005, the SEC has left money on the table. The 2007 budget included $14 million in "available balances from prior years,'' according to the SEC's 2009 funding request. The $906 million Congress granted the SEC in 2008 includes $63.3 million in unspent money from earlier years.

"This is akin to the fire department laying off people as the house burns down,'' said Lynn Turner, a former SEC chief accountant. Nester said more than 90 percent of the money carried over to the 2008 budget from earlier years can't be used for staff salaries. Most of the $63.3 million represents funding intended
for contract work such as technology upgrades that wasn't spent, he said.

In re infoUSA: Special Litigation Committee Stay Granted In Backdating Case

Lots still going on with options backdating. For example, the SEC has settled/brought several actions during the past month, like this action brought against Marvell Technology and its COO last Thursday.

And there is this Delaware development from Travis Laster: In Ryan v.
Gifford, Delaware Chancellor Chandler held that an investigatory board committee (but not a formal SLC) had waived the attorney-client privilege in connection with an investigation into stock option backdating by reporting on its
findings to the full board. That opinion and the Chancellor's subsequent denial of the application for interlocutory appeal have attracted well-deserved practitioner attention. Some have expressed concern that Delaware's traditional deference to the SLC process may have ebbed, particularly in the stock option backdating context.

In this opinion, issued in the option backdating case involving infoUSA, Chancellor Chandler applied traditional Delaware deference to an application by an SLC to stay the derivative litigation to investigate the underlying allegations and claims. The opinion confirms that traditional principles of Delaware law continue to apply to SLCs, even in the sensitive area of stock option backdating.

Here are a few highlights:

1. The Chancellor granted the stay even though the defendants previously had moved to dismiss the complaint under Rule 23.1 and the Court had found demand was futile. The Court rejected the argument that the SLC was formed "too late," noting specifically that under Delaware law, even a conflicted board has the power to appoint an SLC: "The fact that I have already determined demand is excused demonstrates why the board must act by means of a committee; it does not in any way explain why it cannot act through an SLC." (Page 3).

2. The Chancellor granted a stay of 150 days, towards the high end of the traditional 3-6 month range routinely granted by Delaware courts.

3. The Chancellor rejected an argument, based on Ryan, that the Committee was not sufficiently empowered to address the litigation.

4. The Chancellor held that any challenge to the independence of the SLC was premature and would be addressed at the same time the Court considered the bases for the SLC's conclusion.

Note that the infoUSA SLC was comprised of 5 directors, three newly appointed directors and 2 whom the Court previously had deemed disinterested.

- Broc Romanek

Yesterday, the SEC posted a 194-page proposing release related to the amendments of its cross-border rules, the first proposed changes to the rules since they were initially adopted in 1999. A departure from recent practice, these proposals were approved by the Commission seriatim rather than in an open Commission meeting.

The proposing release includes many proposed rule changes that would codify existing Staff interpretive positions and exemptive orders - although there are some areas that are proposed to change - as well as some Staff interpretive guidance that the SEC seeks comment on. The SEC's proposals include:

1. Refinement of the tests for calculating U.S. ownership of the target company for purposes of determining eligibility to rely on the cross-border exemptions in both negotiated and hostile transactions, including changes to:

- Use the date of public announcement of the business combination as the reference point for calculating U.S. ownership;
- Permit the offeror to calculate U.S. ownership as of a date within a 60 day range before announcement;
- Specify when the offeror has reason to know certain information about U.S. ownership that may affect its ability to rely on the presumption of eligibility in non-negotiated tender offers;

2. Expanding relief under Tier I for affiliated transactions subject to Rule 13e-3 for transaction structures not covered under our current cross-border exemptions, such as schemes of arrangement, cash mergers, or compulsory acquisitions for cash;

3. Extending the specific relief afforded under Tier II to tender offers not subject to Sections 13(e) or 14(d) of the Exchange Act;

4. Expanding the relief afforded under Tier II in several ways to eliminate recurring conflicts between U.S. and foreign law and practice, including:

- Allowing more than one offer to be made abroad in conjunction with a U.S. offer;
- Permitting bidders to include foreign security holders in the U.S. offer and U.S. holders in the foreign offer(s);
- Allowing bidders to suspend back-end withdrawal rights while tendered securities are counted;
- Allowing subsequent offering periods to extend beyond 20 U.S. business days;
- Allowing securities tendered during the subsequent offering period to be purchased within 14 business days from the date of tender;
- Allowing bidders to pay interest on securities tendered during a subsequent offering period;
- Allowing separate offset and proration pools for securities tendered during the initial and subsequent offering periods;

5. Codifying existing exemptive orders with respect to the application of Rule 14e-5 for Tier II tender offers;

6. Expanding the availability of early commencement to offers not subject to Section 13(e) or 14(d) of the Exchange Act;

7. Requiring that all Form CBs and the Form F-Xs that accompany them be filed electronically;

8. Modifying the cover pages of certain tender offer schedules and registration statements to list any cross-border exemptions relied upon in conducting the relevant transactions; and

9. Permitting foreign institutions to report on Schedule 13G to the same extent as their U.S. counterparts, without individual no-action relief.

In addition to those proposed rule changes, the Corp Fin Staff provides interpretive guidance or solicit commenters’ views on the following issues:

1. The ability of bidders to terminate an initial offering period or any voluntary extension of that period before a scheduled expiration date;

2. The ability of bidders in tender offers to waive or reduce the minimum tender condition without providing withdrawal rights;

3. The application of the all-holders provisions of our tender offer rules to foreign target security holders;

4. The ability of bidders to exclude U.S. target security holders in cross-border tender offers; and

5. The ability of bidders to use the vendor placement procedure for exchange offers subject to Section 13(e) or 14(d) of the Exchange Act.

If you're wondering if the lack of an open Commission meeting means that this rulemaking is less important to the SEC, the answer would be "no." Until a few Chairman ago, most rulemakings were approved seriatim and only the ones that the SEC wanted to get the attention of the mass media were approved at an open meeting. "Seriatim" simply means that each Commissioner signs an order indicating whether they vote in favor of a particular proposing or adopting release.

That trend started to change when Harvey Pitt became Chair and it is my hunch that since the open meetings are more "open" now due to the Web, that trend has continued to today. Plus, the SEC likes the publicity. But it's a production to hold an open meeting, so some rulemakings have to go seriatim to keep the rulemaking machine humming.

More on Short Sellers and Rumors

My favorite part about blogging is reactions from members, particularly those that add more value to our experiences here. Here is another excellent addition from Keith Bishop following up on my recent blog about the SEC acting on short selling and rumors: There have been two recent cases involving challenges under California law to short selling:

1. Remember Broc's "Lord Sith" blog about Overstock.com's analyst call from about two years ago? Overstock.com did file suit. Among other things, Overstock alleged that the knowing and intentional dissemination of negative reports on Overstock.com containing false and/or misleading statements concerning Overstock constituted unlawful, unfair, or fraudulent business acts or practices by the defendants . . ., in violation of California Business and Professions Code § 17200. The Court of Appeal found California's unfair competition statutes do not exclude securities claims. Overstock.com also alleged violations of California's Corporate Securities Law. In a victory for Overstock.com, the Court of Appeal affirmed the trial court's denial of the defendants motion to strike the entire complaint under California's anti-SLAPP statute (Strategic Lawsuit Against Public Participation, Cal. Code of Civil Procedure § 425.16). Overstock.com, Inc. v. Gradient, 151 Cal. App. 4th 688 (2007).

2. Remember ZZZZ Best Co. and Barry Minkow (See In re ZZZZ Best Securities Litigation, 864 F. Supp. 960, 963 (C.D. Cal. 1994))? In Usana Health Sciences, Inc. v. Minkow (D. Utah, March 3, 2008), a company sued Barry Minkow and the Fraud Discovery Institute alleging that they engaged in a scheme of illegal market manipulation involving a lengthy and uncomplimentary report about the Company. In contrast to the decision in Overstock.com, the Court dismissed the state claims under California's anti-SLAPP statute.

For years, some issuers have been complaining about the short sellers and rumors. To some extent, Wall Street has dismissed these complaints. See Joe Nocera . "New Crusade for Master of Overstock", The New York Times, (June 10, 2006) (“Except for a few fellow-traveling Web sites, where Mr. Byrne is viewed as a heroic figure, most people who understand the issue or have looked into it think it's pretty bogus.”). Overstock.com teaches that it may be possible to pursue these complaints under California's Unfair Competition Law as well as its securities law. The differing conclusions of the courts in the Overstock and Usana cases make it clear that success in the face of free speech challenges is not assured. Finally, it is important to keep in mind that Overstock.com has not yet won its case - it has only survived a motion to strike. Nonetheless, the SEC's recent settlement and the Overstock.com decision may burnish the credibility of those who are complaining about short selling and rumor mongering and encourage more litigation in this area.

A Personal Note: 20-Year Law School Reunion

I recently missed my twenty-year law school reunion. Yes, I had a bad attitude since I didn't "dig" law school - but I was out-of-town anyways. My primary reason for disliking law school was the style - way too serious and not much in the way of "real life." Isn't that true of most educational platforms? Anyways, I pose the question to you:

- Broc Romanek

As the end of his term nears - and after six years in office - Republican SEC Commissioner Paul Atkins announced that he intends to leave the Commission "once a successor is appointed and takes office." Well that may be soon since President Bush has already nominated Professor Troy Paredes as Atkin's successor (as noted in this article). Given the speed of this nomination, the confirmation hearings may be upon us shortly.

So it looks like the Senate will consider the confirmation of three SEC Commissioners at once - Troy and the two Democratic candidates, Luis Aguilar and Elisse Walter. Three new Commissioners at once is beyond rare; according to this chart, it would be the first time it has happened since the Commission was formed in 1934.

By the way, Peter Schwartz recently wrote a pretty nice piece about Commissioner Atkins in his "Soap Box" (scroll down to April 28th entry).

I think it will be cool to have someone named "Troy" as a Commissioner. You may recall that was Fred Flintstone's nickname in Episode 140 when Fred became a surfer hipster dude and kept saying "Yeah, yeah, I'm hip, I'm hip." My friends made me a "Troy" T-shirt in college...

CorpGov.net: The First Governance Site

I've been a long-time reader of Jim McRitchie, who is Editor of CorpGov.net, a site that has been up over a decade and where Jim essentially has been blogging that entire time on his "News" page (even before there was blogging software available).

In this podcast
, Jim provides insights into what it's like to be a long-standing reporter on corporate governance issues, including:

- What led you to create CorpGov.net a decade ago?
- How has the site evolved over time?
- What have been the biggest surprises in managing the site?

The Future of Corporate Law: Symposium Notes

Below is a great example of the useful types of information that Jim McRitchie provides on CorpGov.net:

In the current issue of The Delaware Lawyer, a variety of practitioners and academics (including Lucian Bebchuk, Robert Thompson, Michael Dooley and Charles Elson) present brief appeals for reform of Delaware’s corporate statutes. Many of them, joined by professors Jennifer Hill, Brett McDonnell, Faith Kahn, Elizabeth Nowicki, and Ann Conaway, discussed their proposals for reform at the Delaware General Corporation Law for the 21st Century Symposium on May 5th at the Widener University School of Law in Wilmington.

Most Americans have become "forced capitalists" as companies have moved from traditional defined benefit pensions to 401(k) plans for employees, said Vice Chancellor Leo Strine Jr., a judge in Delaware's Court of Chancery, at the lunch address. These forced capitalists invest in the market through intermediaries or money managers, Strine said. He calls it "separation of ownership from ownership." (Experts look at corporate law statute, Delawareonline.com, 5/6/08)

Robert Thompson noted that "self-help" measures are important for shareholders. Delaware statutes have gaps with regard to that need. If Delaware doesn't address the need directly, it will likely lead to a patchwork of Federal provisions. Shareholders must be able to check directors when they are conflicted or entrenched. There has to be an effective way to exercise their franchise which cannot be redirected by the board. Delaware should write statutes which make Federal preemption less likely.

Charles Elson said that times change. As great as the Delaware corporate law scheme is, we need changes to better protect investors. Forty years ago, we were in a different era. Now, stock is aggregated and held by largely by institutional investors who are more sophisticated. They don't need protected by management. Shareholders need a way to replace directors, not just vote them down. Shareholders don't have the right to direct day to day operations and shouldn't. However, for directors to be accountable to shareholders, we need the threat of a real election. Make the election a vibrant process by allowing reimbursement for short slate contests instead of the current asymmetry where corporations only pay for one side. I get nervous when managers view themselves as the corporation. Elson has proposed a statute that would reimburse shareholders for the cost of putting forth a competing slate of directors if they are successful or nearly successful in getting people on the board.

Rick Alexander argued that five mergers were shot down by shareholders recently. The market is doing its job. Directors have a lot of information that isn't publicly available. There are legitimate differences. We're not going to maximize the economy by going with what 51% of stockholders think. What about the rights of the other 49%? Directors take their jobs very seriously. They know that failure to adopt resolutions that get a majority may cost them their jobs because ISS will recommend voting against them.

Jennifer Hill said the US hasn't looked much to developments in other countries. The federalist system provides competition for corporate charters in the US. Common law may be better than civil law. However, the idea that the US operates similarly to other common law countries is a misconception. In the UK and Australia changes happens much more frequently. SOX didn't give shareholders participatory rights, only some additional protection of their rights through disclosure and liability. In Australia and the UK a raft of recent laws have strengthened rights with provisions such as "say on pay." Bainbridge and Stout argue shareholders don't want rights. However, for Hill, News Corporation's move from Adelaide was instructive. Institutional investors wanted charter provisions to render inapplicable certain Delaware laws in order to maintain Australian rights where corporate constitutions can be changed by shareholders, meetings can be convened by 100 members, and no poison pills are allowed.

- Broc Romanek

With Aflac's annual meeting results now in, "say on pay" is in the news. Here are five items to consider:

1. Aflac's Pay Package Gets 93% Support - As noted in this NY Times article, Aflac's meeting on Monday was uneventful with the company's executive pay package getting overwhelming support.

2. RiskMetrics' Aflac Report - ISS kindly has given us permission to post its analysis of Aflac's "say on proposal." It is interesting comparing that to the PIRC report that I posted last week.

3. Shareholders Not Supporting "Say on Pay" As Much This Year - As noted in this Washington Post article, the level of support for "say on pay" proposals is down this year compared to last year (bearing in mind that last year's levels were remarkable for a "first year" type of proposal). So far, only proposals at Apple and Lexmark have garnered majority support.

Compare the Washington Post's conclusions with those of ISS from this article. Here is an excerpt: "This year, pay vote proposals have averaged 42.1 percent support at 21 companies so far. That is in line with results for calendar 2007, when 52 such proposals received 42.5 percent average support. Surprisingly, however, the measure received less support at a number of financial companies this season, including Citigroup, Morgan Stanley, Wachovia and Merrill Lynch, where many observers expected the measure would fare better than last year given investor anger over subprime-related losses."

As noted in the ISS piece, I'm also hearing that levels of support for proposals generally are down. I'm not sure of the reason, although some claim it's partly due to the lower level of retail holders voting under e-proxy (I'm not sure I buy that given that relatively few companies are doing e-proxy).

4. Two More Companies Agree to "Say on Pay" - Littlefield and MBIA have joined the group of companies that have agreed to allow their shareholders to vote on executive pay, bringing the total number to seven. MBIA's vote will occur in 2009 and Littlefield's vote is in a few weeks, where its shareholders will vote on two management resolutions that ask shareholders whether the total compensation received by the CEO, president, and directors in 2007 “is within 20 percent of an acceptable amount,” according to its proxy statement. Hat tip to this ISS article for uncovering these two!

5. RiskMetrics' Own "Say on Pay" Proposals - A few weeks ago, RiskMetrics Group filed its first proxy statement and it includes three separate resolutions for shareholder approval, which may become the model for future "say on pay" proposals. These three proposals are: (1) the company’s overall executive compensation philosophy; (2) whether the board executed these principles appropriately in making its 2007 compensation decisions; and (3) the board’s application of its compensation philosophy and policies to the company’s 2008 performance objectives.

Canada Revises Its Executive Compensation Proposals

Recently, the Canadian Securities Adminstrators re-published their executive compensation disclosure proposals. The original proposals were made a year ago - and interestingly, many Canadian companies have already voluntarily changed their disclosures to match the proposals. Here is a memo explaining how the proposals have changed.

The PCAOB Speaks: Latest Developments and Interpretations

We have posted the transcript from our recent webcast: "The PCAOB Speaks: Latest Developments and Interpretations."

- Broc Romanek

In the wake of the two recent Delaware Chancery Court cases (Levitt Corp. v Office Depot; JANA Partners v. CNET) regarding advance by-laws, some companies are taking the memos posted in our "Advance By-Laws" Practice Area to heart. Essentially, the memos urge companies to specify in their Notice that the agenda item on director elections applies only to the election of director candidates described in the company's proxy statement; not to nominations generally. For example, when Wal-Mart filed its proxy statement recently, it limited its state law notice to only those nominees “named in the attached proxy statement.” Compare Wal-Mart's notice from last year.

Another example is the proxy statement filed by the Canadian company, Storm Cat Energy Corp. Interestingly, Storm Cat is incorporated in British Columbia, so it's not directly impacted by the recent Delaware decisions. (By the way, it's a cool name for a company, although I have a beef with them - when you click on "Annual Reports" on their IR web page, the 2005 glossy is the latest!)

J-SOX is On!

A few years in the making, Japan now has it's own version of the Sarbanes-Oxley Act. The J-SOX rules became effective on April 1st and they apply to about 3,800 Japanese listed firms, their large subsidiaries and affiliates. The new rules are bound to have their own challenges. Learn more in our "J-SOX" Practice Area.

2008: The Year of the Hedge Fund Activist

Join DealLawyers.com tomorrow for the webcast - "2008: The Year of the Hedge Fund Activist" - to learn about the latest strategies and tactics used by hedge fund activists, as well as latest planning tips employed by those that seek to stave off these attacks. The panel includes:

- David Katz, Partner, Wachtell Lipton Rosen & Katz
- Ron Orol, Senior Writer, The Deal and The Daily Deal
- Damien Park, President & CEO, Hedge Fund Solutions, LLC
- Veronica Rendon, Partner, Arnold & Porter LLP
- Professor Randall Thomas, Vanderbilt University Law School
- Christopher Young, Director of M&A Research, RiskMetrics Group

The Williams Act - 40 Years Later!

On May 21st and 22nd, Georgetown University Law Center will be hosting a conference to commemorate the 40th anniversary of the adoption of the Williams Act takeover regulations. The speakers and panelists will include members of the SEC staff, academics, financial journalists, international takeover regulators, practitioners, bankers, and Delaware judges. It's free - but you still need to register (here is the agenda). If you have questions, contact Larry Center at center@law.georgetown.edu.

Earlier that week, Corp Fin will be hosting a meeting of international takeover regulators at the Commission’s headquarters - so representatives from the UK, Germany, France, Hong Kong, Australia and Japan will likely be at the Georgetown conference, lunch and reception if you want to rub elbows with a group of regulators.

- Broc Romanek

- Obtaining Staff Guidance Today
- Staff Response Process
- What Staff Relief Means
- The New 8-K Item 5.02 CDIs
- Current Disclosure of Cash Bonus, Etc. Plans (Item 5.02(e))
- Officer and Director Appointments, Resignations, etc. (5.02(b)–(d))
- Bebchuk's Shareholder Proposal—Follow-Up
- Expect More Full 1934 Act Reviews
- Non-AFs—Failure to Include the SOX 404(a) Report in the 10-K
- SEC–0; Short Sellers–3—More Thoughts on Mangan, Etc.

Happy 6th Anniversary to Me!

Today marks six full years of blogging for me. It's definitely personally and professionally rewarding, but it can tend to rule your life (but doesn't cause death like this NY Times' article intimates). That's why I'm so glad Dave joined me on this blog last year.

And I'm excited that Steve Haas of Hunton & Williams has joined me on the DealLawyers.com blog. On Friday, Steve posted his first entry. Any other M&A practitioners out there interested in blogging? I'm hoping to add a half-dozen others willing to post something once or twice per month. If interested, give me a buzz or email me. You too can "be somebody"!

Nasdaq: Housekeeping the Rules

Recently, Nasdaq submitted a proposal to the SEC that would reorganize the rules applicable Nasdaq-listed companies. These rules would be moved from the Rule 4000 Series of the Nasdaq manual to the Rule 5000 Series - and would not change the substance of any rule. According to Nasdaq, the reorganization is necessary because the rules have become complex over time and difficult to navigate.

I applaud the Nasdaq for recognizing the need to clean up its "house." We are in the process of doing the same for our sites, which have grown heavy with content over the years and are in need of some reorganization. Recently, Section16.net and CompensationStandards.com have undergone a "tune up." Let us know if you have suggestions about how improve our sites.

- Broc Romanek

The interest in our inaugural issue of InvestorRelationships.com has been overwhelming. As Yoda would say, investor relationships are very strong in this one.

No doubt that one reason for the interest is the lead article entitled "The E-Proxy Experience: Practice Pointers and Pitfalls to Avoid." Sign-up for free copies of this new quarterly newsletter and see what you think of the pointers.

Broadridge's Latest E-Proxy Stats

In our "E-Proxy" Practice Area, we have posted the latest e-proxy statistics from Broadridge. As of March 31st:

- 283 companies have used voluntary e-proxy so far (a big leap from 103 at the end of February - understandable since proxy season is in full swing)

- Size range of companies using e-proxy varies considerably; all shapes and sizes (eg. 25% had less than 10,000 shareholders)

- Bifurcation is being used more as the proxy season progresses (but still not all that much); of all shareholders for the companies using e-proxy, now over 10% received paper initially instead of the "notice only" (up from 5% last month)

- 0.45% of shareholders requested paper after receiving a notice; this average is down from 0.70% at the end of February

- 55% of companies using e-proxy had routine matters on their meeting agenda; another 30% had non-routine matters proposed by management; and 14% had non-routine matters proposed by shareholders. None were contested elections.

- Retail vote goes down dramatically using e-proxy (based on 92 meeting results); number of retail accounts voting drops from 19.0% to 4.5% (over a 75% drop) and number of retail shares voting drops from 31.4% to 13.9% (a 56% drop)

This recent WSJ article entitled "Shareholder Voting Declines as Companies Adopt Web Ballots" muses on various reasons why retail voting has declined when e-proxy is used. I doubt it's a "temporary phenomenon as shareholders make the adjustment."

Our May Eminders is Posted!

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

"Witches Brew": SEC Accuses Trader of Rumormongering on Deal

As noted in this NY Times article on Friday (and this Wilson Sonsini memo), the SEC settled a case with a former securities who allegedly spread false rumors to profit from a pending buyout of Alliance Data Systems by the Blackstone Group (the deal tanked later due to other reasons). The SEC said this was its first "rumormongering" case.

According to the NY Times article, the trader allegedly "fabricated a rumor that Alliance Data’s takeover was being renegotiated to $70 a share from $81.75 a share. The trader said that Alliance Data’s board was meeting to discuss the revised proposal. At the time, Alliance Data’s board members were on a plane and could not be reached for comment." Trading in Alliance Data's stock was suspended due to heavy volume caused by the rumor, which the trader had sent via instant messages to 31 other traders and other market participants. He was short selling the stock at the time.

Reading the SEC's complaint, it's not clear if the trader knew that the board was on a plane and unavailable - my guess is that he didn't know (and thus was unlucky because if they had been reached and quashed the rumor more quickly, the damages would have been reduced and perhaps this case wouldn't have been brought or the penalty would be been less than the $130,000 he ended up paying).

In the SEC's press release, SEC Chairman Cox noted "“The commission will vigorously investigate and prosecute those who manipulate markets with this witch’s brew of damaging rumors and short sales.” It will be interesting to see if the SEC's Enforcement Division will be bringing more of these cases, particularly due to the heightened interest in hedge funds and their failures to adopt adequate insider trading compliance programs (see Dave's recent blog on the SEC's Section 21(a) Report involving the investigation of the Retirement Systems of Alabama).

- Broc Romanek

On the one hand, SEC Chairman Chris Cox has been under fire, mostly due to his comments just before the Bear Stearns deal was announced (and more generally due to the crisis on Wall Street). On the other, he is being mentioned as a possible running mate for John McCain, as noted in this ABC poll. This is the world of "inside the Beltway" in a nutshell.

In the face of the market crisis, Chairman Cox recently gave testimony before the House Subcommittee on Financial Services/Appropriations regarding the President's proposed SEC budget for fiscal year 2009. Noting that the agency's budget has not been increased for three years, Cox is seeking a 4% increase over two years. Trust me, this ain't much because after taking inflation into account and the impact of pay raises, the head count for the Staff would remain basically the same.

It's hard to imagine how the SEC will be able to regulate new markets (eg. rating agencies), delve into the complicated derivatives and securitization morass and chase the seemingly ever-increasing number of wrong-doers with its current level of staffing (this op-ed from yesterday's NY Times by three former SEC Chairs agrees). Not to mention the challenges of integrating a global regulatory framework. If that's not enough, maybe this will get your attention - there is a total of one person in the SEC's Office of Risk Assessment today.

Even some in the government are skeptical that the President's budget for the SEC makes sense. According to this article in the FT.com, the GAO will examine the SEC's Enforcement Division to ensure it has adequate recources; looking at the SEC's budget justification (page 13), you can see that the percentage of enforcement cases filed within two years of an inquiry first being made has markedly declined over the past few years. And in this speech, Senator Reed discusses his views on the topic.

SEC Filing Fees: Going Way Up

In yesterday's fee rate advisory, the SEC announced that filing fees will be going up after October 1st (or whenever Congress approves the SEC's budget, which historically is significantly later than October 1st) to $55.80 per million from $39.30 per million of securities registered with the SEC.

This is a 42% hike, after a 28% hike last year. Before this period, there had not been a hike for quite some time. Note that there is no mention in the SEC's press release of a reason for the hike. Actually, the press release doesn't even mention that this is a hike from last year (but we still remember how Chairman Cox was quite proud of the steep drop in '06, with a lot of fanfare in that press release). You may recall that the SEC's fee rates aren't related to the amount of funding available to the SEC; instead, the money goes to the US Treasury.

The Leap Year Curse

In typical leap year fashion, word on the street is that many companies missed the 120-day proxy filing deadline on Tuesday. Apparently, some service providers had the due date as Wednesday on their "filing calendar." Yikes, a "failure to communicate"?

- Broc Romanek

Warning, today's blog is cranky. If you're not in the mood for moping, turn this channel off. For starters, I am bummed the "new" Wall Street Journal is less business and more politics/world affairs. In my opinion, Rupert Murdoch is killing the brand and the unique WSJ experience. In Monday's edition, it seemed like only one article in Section A was devoted to business and the other two sections were limited to two pages in length. Looks like a fast - rather than a slow - death for those that read the WSJ for their business updates.

Moving on, I got a chuckle reading Prof. Steven Davidoff's observation that most of the mainstream media mistook a registration rights offering registered with the SEC by employees of Apollo Global Management as a filing by the fund to go public. As the Professor noted, "it's nothing of the sort."

I definitely can relate since I deal with journalists on a daily basis in this job. Understandably, many of them don't know the intricacies of SEC filings compared to those of us that have lived with them for our entire careers. Nor should they; their jobs force them to become generalists on dozens - if not hundreds - of topics.

The ability of bloggers to provide analysis of developments in their narrow niches is what makes the Web so great - and threatens the viability of mass media. Wearing my journalist's hat a few months ago, I sat on a panel with major business reporters in New York and had some mild disagreements about whether bloggers could provide real value since they typically aren't trained as journalists. Clearly some can (and of course, some can't since there is no barrier to entry to become a blogger). Perhaps proving the point that some can, Professor Davidoff's blog has recently become part of the NY Times' DealBook empire. I imagine we will see more of the melding of non-traditional and "real" journalists in the near term...

As one member recently emailed me, we can file this under "Things That Make You Go Hmmm."

And One More Thing...

Another thing I've noticed with old media: As all the traditional newspapers have undergone severe cuts in staffing over the past few years, the number of errors - both large and small - seem to have tripled. Check out this recent - and novel - press release from the SEC. It's purpose is to point out an error in a NY Times article. It's a rare type of press release and thankfully so, because if the SEC issued a press release for every error committed by a journalist covering this "space," I imagine there would be more than a handful of folks in the SEC's Office of Public Affairs.

Speaking of the NY Times, SEC Enforcement Director Linda Thomsen responded to a recent NY Times article that was critical of the Division's efforts by delivering this public statement. Given that the SEC likely disagrees with all sorts of things written in the media, I imagine that this response is directed more broadly to the various quarters (including some members of Congress) that have been critical of Enforcement lately.

And speaking of the SEC's Office of Public Affairs, I wonder who put them up to issuing this odd press release yesterday to announce that Corp Fin has made its recommendations to the Commission regarding proposals on the cross-border tender, exchange offer and business combination rules? That's a new one - and I doubt we shall see a press release each time a rulemaking is sent to the 10th floor for consideration. Maybe OPA did add some bodies...

Survey: Auditors Asking to Review Board Minutes

Recently, in our "Q&A Forum," a member asked what is the common practice when an independent auditor asks a client to review their board minutes. I provided my own thoughts on what that practice might be - but I pose the question to you to see if we can build a consensus:

- Broc Romanek

Hat tip to Jim McRitchie's CorpGov.net for pointing out that PIRC - one of the proxy advisors in the United Kingdom - has issued a research report that recommends that shareholders vote against Aflac on its say-on-pay proposal at the company's annual meeting. Given that the UK is one of those countries with experience regarding say-on-pay, I believe this is noteworthy for all of us. We have posted a copy of the PIRC report in the "Say on Pay" Practice Area on CompensationStandards.com.

So why is this development noteworthy? It probably won't impact Aflac's ability to garner majority support at next week's meeting since it's reported that RiskMetrics has recommended a vote in favor of Aflac's pay package - but it might cause some companies that were contemplating allowing this type of non-binding resolution on their ballot to reconsider. And maybe the publicity of the PIRC report will cause Aflac to adjust its pay practices for next year (but I doubt it unless Aflac's proposal doesn't get majority support given what the CEO Dan Amos has said in his flurry of recent interviews where he is asked about his executive pay views). Both the RiskMetrics and Glass Lewis policies regarding "say on pay" are posted in the "Say on Pay" Practice Area.

Recently, I blogged my thoughts about "say on pay" - this WSJ article from yesterday quoted a number of governance experts that have similar concerns about unintended consequences from say on pay.

Say on Pay in Europe: Heating Up?

As noted in this RiskMetrics article, shareholders in the United Kingdom are challenging executive pay practices more than ever before during this proxy season. BP had 9% voted "against" and another 27% "withheld" - which is a high level compared to what has been happening in the UK during the past few years.

And in March, shareholders of Philips, a Dutch electronics company, rejected an amended executive pay plan; which was the first time that has happened. But it wasn't a "first" for long as VastNed lost a vote a few weeks later and Corporate Express pulled its plan from the meeting agenda after pressure from shareholders, as noted in this IR Magazine article.

AFL-CIO's "Executive PayWatch"

In this CompensationStandards.com podcast, Vineeta Anand, Chief Research Analyst for AFL-CIO Office of Investment, talks about the AFL-CIO’s popular online tool "Executive PayWatch," including:

- What is Executive PayWatch?
- What is the theme this year and what do you hope to accomplish?
- How do people typically use it?

- Broc Romanek

Recently, I blogged about a case brought in the US District Court, Southern District of Texas, by Apache Corporation, who sought a declaratory judgment supporting its exclusion of a shareholder proposal submitted by the New York City Employees' Retirement System. The case sought to enjoin a lawsuit brought by NYCERS in the Southern District of New York over the exclusion of a employment-related proposal by the Corp Fin Staff under the "ordinary business" basis of the SEC's shareholder proposal rule (ie. 14a-8(i)(7)).

A few days ago, Judge Miller of the US District Court, Southern District of Texas ruled from the bench for Apache, granting Apache's declaratory judgment. We have posted the Order and related Memo - even the trial transcript! - from the court in our "Shareholder Proposals" Practice Area.

Interestingly, Judge Miller's opinion appears to stake out new territory from a judicial point of view. For the first time, a court has endorsed Corp Fin's view that a proposal that involves some significant policy matters can nonetheless be excluded under Rule 14a-8(i)(7) to the extent that the proposal also deals with core ordinary business matters; here for example, advertising, marketing, sales and charitable giving. We'll see if the Second Circuit ultimately follows suit (I believe the Texas case isn't binding on the SDNY one, but under a res judicata theory, it's likely the Second Circuit would recognize the SDTX's decision and rule in favor of Apache).

Also interestingly, the Texas court didn't take the bait offered by Apache with respect to the appropriate standard of review for SEC Staff no-action: Apache asked the court to find that a company that excludes a shareholder proposal in reliance on a no-action letter is entitled to a rebuttable presumption that such exclusion was proper. The court declined to adopt such an approach, however, concluding that Staff no-action letters are only persuasive - but not binding - authority.

Shareholder Proposals: Debunking a Conspiracy Theory

Recently, RiskMetrics ran a piece entitled "Spike in No-Action Requests Worries Investors." In the article, Subodh Mishra notes that "issuers had challenged 33% of all governance-related proposals filed this year, compared with just 20% in calendar 2007. Challenges by issuers also are more likely to be successful this year than last. For example, 48% of last year’s requests for no action were granted, while this year’s figure so far stands at 69%, according to RMG’s analysis."

It is interesting to look at the rate of success for exclusion requests - and I don't remember seeing this type of analysis conducted for other proxy seasons. It's good stuff. I do think companies were more willing to fight proposals this year. Anecdotal evidence indicates that more exclusion requests under Rule 14a-8(b) regarding proof of ownership were made compared to year's past. In other words, companies used to be more willing to overlook the "technicalities" of whether a proponent was eligible to submit a proposal (eg. amount of securities held; length of holding period; proof of ownership). Not this year.

But I don't buy into the notion that there was some sort of conscious SEC Staff decision to be more pro-management this year, even though that's where the numbers could lead you. Rather, I would argue that the exclusion rate is a direct product of the types of proposals submitted this year and the types of arguments made. So I would not rush to judgment using a conspiracy theory (which other bloggers and journalists have done).

For example, one reason for the increase of exclusion requests granted likely relates to the fact that more companies implemented shareholder proposals when they were received - thus, quite a few proposals were allowed to be excluded as "moot" under Rule 14a-8(i)(10). So ironically, the number of exclusions may have risen because more companies did what shareholders wanted. Another likely factor for the higher exclusion rate is that Corp Fin granted more exclusions under Rule 14a-8(b) this year because companies were more picky about whether the proponent was eligible as noted above.

Perhaps all of this stuff would make for a fine academic paper that delves beyond the numbers into the specifics...

JPMorgan Chase/Bear Stearns: Splicing the Delaware Issues

Tune in tomorrow for our DealLawyers.com webcast - "JPMorgan Chase/Bear Stearns: Splicing the Delaware Issues" - during which Professors Elson, Cunningham and Davidoff will analyze the novel Delaware issues presented by the Bear Stearns transaction, including:

- What significant anti-takeover provisions are in the amended merger agreement?
- How does the provision work that calls for the parties to work in good faith to restructure the deal if Bear Stearn's shareholders turn it down?
- What is the JPMorgan Chase guarantee – and how does it work? How about the NYC building option and the Section 203 provision?
- How valid are the attacks against the fairness opinions delivered in the deal?
- Why was there a discussion of a 39.5% share exchange and what would be the Delaware law on it?
- How about the abandoned, uncapped 19.9% option - was that valid under Delaware law?

To warm up for the program, check out Professor Davidoff's analysis of the Form S-4 filed for the deal (which the SEC declared effective on Friday) as well as this WSJ article indicating that post-deal details will be announced soon.

- Broc Romanek

It is a fact of life today that securities law violations are often investigated through parallel proceedings – in other words, independent investigations conducted by civil authorities and federal prosecutors relating to the same facts and circumstances. I can remember the days in the not too distant past (at least it seems not too distant) when it was nearly impossible to get the Justice Department interested in a federal securities law case, but Enron pretty much changed all of that.

Parallel proceedings present significant challenges, because the cooperation that is often so critical to a successful resolution of a civil proceeding brought by the SEC may very well increase a company's (and its officers' and directors') exposure to criminal liability. While it is well settled that the government can conduct parallel proceedings, the latitude with which this can be done and the extent to which the SEC or another civil authority could "covertly" funnel evidence to a prosecutor was called into question a few years ago by the Federal District Court decision in U.S. v. Stringer, (408 F.Supp.2d 1083 (D. Or. Jan. 9, 2006). In that decision, the court found that prosecutors had engaged in misconduct by cloaking an ongoing criminal investigation with an SEC investigation, warranting dismissal of the indictment or suppression of the SEC-gathered evidence.

Recently, the Ninth Circuit reversed the District Court's decision in U.S. v. Stringer, No. 06-30100 (9th Cir., April 4, 2008). The Court of Appeals found that no affirmative deception was involved, principally because the SEC had given each of the defendants a Form 1662 along with the request for evidence. Form 1662 (not to be confused with Form Catch-22) notes that the “Routine Uses of Information” gathered in an investigation include providing the information to state and federal law enforcement, self-regulating entities, foreign authorities, tax authorities, consumer reporting agencies, trustees and receivers, bar associations, and Congress. The form also provides a Fifth Amendment warning.

The Ninth Circuit relied heavily on the language of Form 1662 in finding that the defendants were adequately put on notice as to the potential parallel proceeding. Further, because the Form 1662 included a Fifth Amendment warning, the Court found a waiver of the defendants' right against self-incrimination in the criminal case – given that the Fifth Amendment was not invoked in response to the SEC’s initial investigative request.

The Stringer decision reinforces the wide latitude that the SEC and prosecutors have in conducting their investigations – and highlights the perils of cooperation with the SEC. For more detailed analysis of the decision, take a look at the memos we recently posted in our "White Collar Crime" Practice Area.

Behind the scenes at the SEC, cooperation can also be a consideration when dealing with Corp Fin while an Enforcement investigation of a company is ongoing or contemplated. While Corp Fin is always sensitive to not being considered a "tool" for Enforcement to access information about the company and the conduct in question, it is still possible that information derived from the comment process, things said on conference calls, etc. could ultimately be shared with the Enforcement Division.

IFRS for U.S. Companies: On the Fast Track for Implementation?

Edith Orenstein noted yesterday in the FEI Financial Reporting Blog that an IFRS implementation plan for U.S. companies is moving along much faster than I would have ever expected. The blog notes: "In announcing the formation of the KPMG IFRS Institute, KPMG Chairman & CEO Tim Flynn stated: 'The question about whether the world is going to global standards is no longer ‘if,’ but ‘when.’' Flynn added, 'The Securities and Exchange Commission (SEC) is expected to issue a rule proposal in the next few weeks outlining the manner, timing, and eligibility for some U.S. public companies to transition from U.S. Generally Accepted Accounting Principles (GAAP) to IFRS.'"

Given that the SEC already put out a concept release last Fall, it is likely that the rule proposals will be pretty well developed and there is probably a good chance that final rules will be adopted by this Fall. Perhaps this will give some larger US companies the joy of implementing IFRS and XBRL at the same time!

Farewell to Carol McGee

I want to send a "shout out" to my former Deputy Chief Counsel Carol McGee, who just left the SEC after 10 years in Corp Fin to become a Partner at Alston & Bird LLP. In my time at the SEC, Carol always provided me with truly wise counsel on every imaginable issue. I first met Carol when she was interviewing for a job in Corp Fin, and during the interview we began debating the relative merits of certain twentieth century philosophers – her preference being for Wittgenstein and mine for Sartre. Well, you can just imagine where that went…

- Dave Lynn

Alan's blog has a new functionality: you can now input your email address (it's the second box on the left side of the blog) so that you will be notified as soon as Alan has posted something new. Members of Section16.net should sign up for this nifty service.

And yes, this notification service is available for this blog too. We've had this functionality for quite some time and thousands get this blog pushed out to them every day. Simply input your email address in the box to the left of this very text...

Time to Tune-up Your Insider Trading Policy: The RSA 21(a) Report

Last month, the SEC issued an Exchange Act Section 21(a) Report regarding Enforcement's investigation of the Retirement Systems of Alabama (RSA). The "message" of the Report is one that likely seems obvious to all of us: have the policies, procedures, training and personnel in place to ensure compliance with the federal securities laws, including insider trading prohibitions. This is apparently a message that the SEC thinks warrants repeating through the unusual venue of a Section 21(a) report, which is probably enough to prompt most responsible companies to take a hard at their insider trading policies and procedures – and more importantly the actual understanding of those policies and procedures by employees, directors, etc. – in order to make sure that everything is operating effectively.

The situation described in the 21(a) Report is somewhat astonishing. The RSA, with more than $30 billion in assets under management, had no policies, procedures, training or compliance officer in place to make sure that it was complying with the federal securities laws in general or insider trading prohibitions in particular. The activities of the RSA's employees, including its CEO (who has held that position for 30 years), showed a profound lack of knowledge – or judgment for that matter – when purchasing the shares of an acquisition target of one of their portfolio companies while confidential negotiations regarding the acquisition were ongoing. These trades were unusual in that the CEO directed them even though he was rarely involved in equity trading decisions and the target's market capitalization was well below the RSA's investment guidelines.

I think this Report points out something that it is often easy to forget for securities law practitioners – issues that seem completely obvious to us like the potential for insider trading violations may never even occur to others, including experienced business people. This is why policies and procedures are important, but perhaps more important is the process of educating employees about the law, the policies and procedures – and the serious implications arising from insider trading and other securities law violations.

This Report should give everyone responsible for compliance – no matter how big or small a company – an excuse to dust off that insider trading policy manual (or create on if you don't have one) and figure out a way to refresh everyone's memory about insider trading issues. An annual training exercise and reminder memoranda are always a good baseline, but you may need to do more to really reach people within the organization and leave a lasting impression.

For more information, check out our "Insider Trading Policies" Practice Area.

Why a Section 21(a) Report?

Section 21(a) Reports like the RSA report are a funny thing. It seems odd for the SEC to use a specific fact pattern – particularly where it did not feel it was appropriate to impose penalties – to communicate some broad policy statements, but that is usually what these reports are all about. In some instances, the purpose of the 21(a) Report is to put everyone on notice that the SEC is interested in pursuing Enforcement actions in a particular area in the future. There have only been a handful of 21(a) Reports over the past few years – you can see them all on this page at sec.gov.

In the RSA case, the SEC decided to not impose penalties because (1) RSA essentially sought to rescind the transactions with the sellers who sold RSA the stock while it was in possession of material nonpublic information; (2) any penalty would be paid out of the retirement system assets to the detriment of state and local employees; (3) a compliance program was established; (4) RSA and the CEO cooperated in the investigation; and (5) no individual profited from the conduct.

Instead, the 21(a) Report says that it seeks to "remind investment managers, public and private, of their obligation to comply with the federal securities laws and the risks they undertake by operating without an adequate compliance program." But the lessons of the report should not be limited to investment managers, because just like RSA (which is not subject to SEC regulation as a broker-dealer or investment advisor), all public companies face the same risks – and potential liability under Exchange Act Section 21A – as a controlling person who fails to prevent insider trading. For this reason, I think that it is best to read the report broadly and use it as a catalyst for revisiting the effectiveness of insider trading compliance programs.

- Dave Lynn

At yesterday's hearing of the Senate Committee on Banking, Housing and Urban Affairs entitled "Turmoil in U.S. Credit Markets: The Role of the Credit Rating Agencies," Chairman Cox defended the SEC's implementation of the Credit Rating Agency Reform Act of 2006 and spelled out some possible new rulemaking efforts on the credit rating front.

In his testimony, Chairman Cox outlined the SEC Staff's efforts in conducting ongoing examinations of the nationally recognized statistical rating organizations (NRSROs). Those efforts have included the review of thousands of pages of internal records and emails, public disclosures and rating histories by around 40 Staff members. While the examinations are not yet complete (a report is expected by early summer), Cox noted that the Staff has found so far that there was a substantial surge in ratings for structured finance deals from 2004 – 2006, with those deals involving increasingly complex products. The examination Staff's preliminary observations have been that the "ratings process used to rate these products may have been less quantitatively developed, particularly as the products became more complicated and involved different types of loans, than was generally believed." While the SEC is trying to avoid engaging in substantive regulation of the ratings process, it is interested in the adequacy of the NRSRO's disclosure about their procedures and methodologies, and whether such factors as a desire to maintain or increase market share may have caused the NRSROs to be "less conservative" than their disclosed methodologies.

Now that the SEC's NRSRO registration system is in place and other rules implementing the 2006 legislation are effective, the SEC is looking at other areas of rulemaking within its authority. Chairman Cox outlined the following possibilities:

1. Enhanced disclosure about ratings performance – this would include disclosures that allow market participants to better compare the ratings of one NRSRO with another.

2. Accountability for managing conflicts of interest – new rules might prohibit certain practices, as well as establish requirements that address potential conflicts that could impair the process for rating structured products (e.g., consulting services provided by NRSROs to issuers).

3. Annual reporting – new rules could required the NRSROs to furnish the SEC with annual reports describing internal reviews and how well the firms adhere to ratings procedures, manage conflicts of interest and comply with securities laws.

4. Enhanced disclosure of underlying assets – new rules may require disclosure of information about the assets underlying MBS, CDOs and other structured products so market participants could better analyze creditworthiness without the benefit of ratings (and to enhance the availability of data - and thus level the playing field - for subscriber-based NRSROs as compared to the "issuer pays" NRSROs).

5. Enhanced disclosure about ratings – new rules could also mandate enhanced disclosures about how the NRSROs determine their ratings for structured products, as well as ratings information that will make it possible for investors to distinguish between ratings for different types of securities.

6. Access to information – potential rules may seek to eliminate advantages (including access to information) that NRSROs following the "issuer pays" model may have over subscriber-based NRSROs.

7. SEC reliance on ratings – The SEC is revisiting its own reliance on ratings throughout its rules. This could be a big shift in the SEC's rules, including those related to corporation finance.

These new rules could substantially change the ratings landscape, and most likely for the better. It certainly can’t get much worse.

For a great breakdown of the history behind securities ratings and what went wrong with the ratings on mortgage backed securities, check out Roger Lowenstein's piece entitled "Triple-A Failure" which will be published in this Sunday's New York Times Magazine.

PCAOB Adopts Audit Committee Communications and Tax Services Rule

Yesterday, the PCAOB announced that it had adopted new Rule 3526, Communication with Audit Committees Concerning Independence, and an amendment to Rule 3253, Tax Services for Persons in Financial Oversight Roles. The adopting release for these rules was posted shortly after the PCAOB's open meeting. The rules changes are now off to the SEC for final action.

Rule 3526 will – if adopted by the SEC – supersede Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, and two related interpretations. The new rule will require registered audit firms – at the time of the initial engagement – to provide a detailed written description of all relationships between the firm and its affiliates and the issuer or persons in a financial reporting oversight role that may reasonably be thought to bear on independence. Registered audit firms will also be required to discuss the potential effects of these relationships with the audit committee. Similar communications will then be required annually.

The amendment to Rule 3523 will – if adopted by the SEC – exclude from the scope of that rule any tax services that are provided during the portion of the audit period that precedes the beginning of the professional engagement period. Under this change, tax services provided to persons in a financial reporting oversight role prior to the beginning of the professional engagement period would not necessarily impair a firm's independence.

In other PCAOB news, earlier this week it was announced that Sharon Virag, Director of Technical Policy Implementation, will be leaving the PCAOB at the end of the month. Sharon was the project leader for the development of AS No. 5 and she recently participated in our webcast "The PCAOB Speaks: Latest Developments and Interpretations." Best wishes for Sharon in her new position.

Options Backdating: Broadcom Settles

Last month the SEC settled an Enforcement action against Nancy Tullos, the former Vice President of Human Resources of Broadcom, for her involvement in the company's five-year-long options backdating scheme - which resulted in Broadcom's January 2007 restatement to include a whopping $2.22 billion of unreported compensation expense in its financials. I believe that was the largest restatement in the short and sordid history of options backdating.

Now the SEC has settled with Broadcom itself, and interestingly enough the SEC extracted only a $12 million civil penalty in addition to a permanent injunction. While this penalty is higher than the $7 million civil penalty paid by Brocade Communciations in its settlement of backdating charges, it is significantly lower than the $28 million civil penalty paid by Mercury Interactive. A number of the other companies charged with backdating-related violations paid no penalty whatsoever. It is still hard to say how the Commission arrives at these penalty amounts (even with the added transparency about the process issued a couple of years back), but certainly I think the Commissioners have not historically been big fans of imposing monetary penalties on corporations.

As noted in this CFO.com article, the former CFO of Mercury Interactive Corp., Sharlene Abrams, was indicted on charges related to Mercury's options backdating scheme. Abrams was charged with one count of income tax evasion and two counts of aiding and assisting in the preparation of false tax returns for two other Mercury executives. This is the third time an executive has been charged with tax evasion arising from options backdating.

- Dave Lynn

A persistent issue for auditors, public companies and their regulators in the wake of the 2002 collapse of Arthur Andersen is how do we prevent the Big 4 from becoming the Big 3 due to a catastrophic liability event? For some time now, auditors have called for the imposition of liability caps, and that approach has been debated by policymakers examining the issue. For instance, in 2006, the Treasury Department's Committee on Capital Markets Regulation considered whether Congress should look into the possibility of protecting audit firms from catastrophic loss, either by creating a safe harbor for specified auditing practices or by setting a cap on auditor liability in some circumstances. Currently, the Treasury Department's Advisory Committee on the Auditing Profession is considering the impact of auditor liability on the profession and whether any potential changes should be made to auditor liability regimes, with recommendations expected this summer. The European Union has also been studying the issue of auditor liability, and practices vary considerably among EU member states.

While the question of auditory liability protection is debated in the US and the EU, the UK has recently moved forward with changes to the Companies Act that permit auditor liability limitation agreements. As noted in this memo from Edwards Angell Palmer & Dodge, provisions effective earlier this month now permit auditors to enter into agreements with their clients that cap the auditor's liability exposure to the company, so long as (1) the agreement does not limit the auditor's liability to less than a "fair and reasonable" amount, and (2) the agreement is approved by the company's shareholders. Under proposed guidance from the UK's audit oversight body – the Financial Reporting Council – these types of agreements could be for a fixed limit based on a specified amount or formula, a proportionate share based on the auditor's responsibility for a loss, or a mix of fixed and proportionate caps. The agreements may only cover one fiscal year, so they would be subject to shareholder approval on an annual basis.

While the UK approach is certainly interesting, I don't think that it is likely to change the direction of the debate in the US. The first quarter of 2008 has come and gone without the roundtable on securities litigation reform that the SEC promised last summer, and it seems unlikely in the near term – particularly considering the ongoing sub-prime crisis and election year politics – that the issue will be taken up by Congress or the SEC.

Halloran to Leave the SEC

Yesterday, the SEC announced that Chairman Cox's Deputy Chief of Staff and Counselor Mike Halloran will be leaving the SEC in May to return to private practice. Mike has had quite a bit of influence on the regulatory agenda at the SEC over the last one and a half years, perhaps most notably on the Commission's and the PCAOB's efforts to revisit the implementation of Section 404 of the Sarbanes-Oxley Act.

New 3rd Edition: Romeo & Dye Treatise

Peter Romeo and Alan Dye just wrapped up the 3rd Edition of their "Section 16 Treatise" and we have been mailing this two-volume set with thousands of pages to the many of you that ordered it. For me, it felt kind of like Christmas in April when a copy of the Treatise arrived at my door yesterday!

If you didn't order this essential body of work, you can still have it rushed to you - try a no-risk trial to the Treatise today.

- Dave Lynn