Monthly Archives: July 2004

July 13, 2004

Disclosure of Voting Results in

At last week’s ASCS conference, Marty Dunn, Deputy Director of Corp Fin, indicated that some companies didn’t appear to be properly disclosing their voting results as required under Item 4 of Form 10-Q. Item 4 doesn’t prescribe a specific format for disclosure of voting results.

Here are a few examples of companies that we thought appeared to get it right. Last year, Eastman Kodak’s 2nd quarter 10-Q disclosed how votes were cast for a staggered board. This year, Walt Disney’s 2nd quarter 10-Q has a nice chart to reveal the voting at its controversial annual meeting. Pfizer also has a nice chart in its 2nd quarter 10-Q.

New “Income Deposit Securities” Practice Area

We have created a new “Income Deposit Securities” Practice Area, including links to the 19 registration statements that have been filed registering Income Deposit Securities, Enhanced Income Securities and Enhanced Yield Securities. I believe only one of these registration statements have been declared effective by the SEC Staff so far.

Consider Whether Definition of “Cause” Should Include Failure to Cooperate With Governmental Investigation

We received ten new practice pointers yesterday from our task force to post on, including this anonymous one on “Consider Whether Definition of “Cause” Should Include Failure to Cooperate With Governmental Investigation.”

July 12, 2004

Novel Regulation S No-Action Letter

On April 28th, Corp Fin issued a novel no-action response to limited on some Regulation S issues. This company intends to make available onine prospectuses and related documents for international securities offerings to subscribers.

According to the letter, the company will run a web-based database service that will post prospectuses before distribution is complete for Reg S/144A offerings by non-US issuers. One of the issues addressed is whether the posting will be deemed a “directed selling effort” under Reg S by the issuer of the security.

The database site is password-protected, has legends and you need to be a member to use it but here’s the rub – unlike prior letters like, to get a password you don’t need to be a QIB or an IAI. Rather, you only need to be a customer (apparently, there is a high membership fee but still no need to be a QIB or IAI, etc.).

My good friend Walter van Dorn of Thatcher Proffitt explains to me that the over-all utility of this response is likely to be limited since the overwhelming majority of international offerings are combined Reg S and Rule 144A offerings – and because the site here does not need to be password-protected to nonQIBs/IAIs (even though no-action was granted based on the interpretation of some pretty arcane Reg S provisions).

Most issuers still will have problems with the necessary ’33 Act exemption for the 144A/4(2) component of their offering. So for the vast majority of deals that are combined Reg S/144A offerings, this letter may not be of much practical value.

23 Lessons Learned from Disney

I love “lessons learned” articles because they tend to be so practical – that’s why one of my favorite practice pointers on is “23 Lessons Learned from Disney: Director Liability for Excessive Executive Compensation” by Mike Melbinger.

July 8, 2004

Are Companies Required to Disclose

The Wall Street Journal reported last week that the SEC has filed an amicus brief in a Second Circuit Court of Appeals case, arguing that companies and mutual funds are not permitted to omit information not specifically required from disclosure documents and public statements simply because that information is available elsewhere.

In In re Merrill Lynch & Co., Inc. Research Reports Securities Litigation, the plaintiff is a shareholder of Merrill’s Global Technology Fund. Suing under Securities Act Sections 11 and 12(a)(2), the plaintiff contends that Merrill should have disclosed the fact that it performed investment banking services for some of the stocks in the fund and that Merrill’s analysts had written research on certain of the fund’s stocks.

The U.S. District Court for the Southern District of New York dismissed the action in July 2003, holding that Merrill had no obligation to tell investors that its fund owned stocks of companies that had relationships with Merrill because “that information was already public” on the Internet, in the news media and elsewhere.

In its brief, the SEC argued that “[t]he fact that information could be discovered somewhere in the public domain does not mean it can never be materially misleading to omit that information from a disclosure document or other statement.”

Stay tuned for the decision.

Chairman Donaldson Recuses Himself

Last week, a company that Chairman Donaldson had served as a director, EasyLink Services Corporation, disclosed in an 8-K filing that it was being investigated by the SEC Staff. According to the filing, the Staff is “reviewing certain transactions accounting for approximately $3 million of revenue generated by its former advertising network business in 2000, a year in which the Company reported $61.2 million in total revenue.” Chairman Donaldson served on the audit committee in 2000.

The next day, the Commission issued a press release announcing that “Chairman Donaldson has not participated and will not participate in any matter before the Commission involving EasyLink.” Further, the SEC announced that a former Assistant Director of the Division of Enforcement was acting as “Special Advisor” to the four Commissioners.

-Posted by Julie Hoffman

July 7, 2004

More Rumors on Shareholder Access

On May 11 and May 13, Broc blogged about rumors in the mainstream media about where the SEC was heading with its shareholder access proposal. The rumor mill is still working.

On July 1, a New York Times article by Stephen Labaton reported that Chairman Donaldson said that he has been unable to forge an agreement among his deeply divided colleagues. “Right now there is no consensus,” he said. “I’m not sure I agree with what anyone else thinks or anyone agrees with what I think.” The Times article reported that the deadlock “all but dooms” the possibility that new rules would be implemented prior to the next proxy season.

The Chairman’s June 20 speech at the Directors College at Standford lends credence to this report, where the Chairman stated that he remains “committed to responsible and constructive change in this area, and will proceed thoughtfully and carefully. [The SEC’s] goal is the right course, rather than a hasty, less thoughtful course. We will not be forced to act in the face of an artificial deadline.”

Buffett Sounds Off on Options Expensing Bill

In an Op-Ed piece in yesterday’s Washington Post, Berkshire Hathaway CEO Warren Buffett warned that the prize for “mathematical lunacy by a legislative body” may be awarded to the U.S. House of Representatives if it passes the Stock Option Accounting Reform Act of 2003 (H.R. 3574). (The current prize for “mathematical lunacy” is apparently held by the Indiana House of Representatives for declaring, in 1897, that pi would equal 3.2 instead of 3.14159).

The Stock Option Accounting Reform bill, which passed the House Financial Services Committee on June 15, mandates that stock options be counted as an expense on company balance sheets when they are issued to the CEO and the other four highest paid company officers, but not counted as an expense when they are issued to other employees. The bill also says that when a company is calculating the expense of the options issued to the top five, it shall assume that stock prices do not fluctuate. The bill would exempt small business issuers.

Buffett urged the House members to kill the bill.

– Posted by Julie Hoffman

July 6, 2004

July E-Minders is Up! We

We have posted the July E-Minders. Check it out!

SEC Names Director of Office of Risk Assessment

The SEC has announced the selection of Charles A. Fishkin as the Director of the new Office of Risk Assessment. Mr. Fishkin worked most recently for Fidelity Investments in Boston, where he served as vice president of Firmwide Risk.

Chairman Donaldson announced the creation of the Office of Risk Assessment during Congressional testimony last November to better enable the SEC to anticipate, identify and manage emerging risks and market trends. The new office will analyze risks across the SEC’s divisional boundaries, focusing on early identification of new or resurgent forms of fraudulent, illegal or questionable behavior or products.

Not-So-Quiet “Quiet Period”

Goldman Sachs agreed to pay $2 million to settle administrative proceedings for violations of, among other things, Securities Act Sections 5(b) and 5(c), arising from its work as underwriter in four international public offerings.

According to the Order, certain Goldman traders sent illegal written offers to numerous institutional customers during the “waiting period” (in the form of emails describing the public offerings with headings such as “Why You Should Take A GOOOOOOOD Look at PetroChina”). In connection with one of these four public offerings, a Goldman representative made an additional illegal offer when he spoke to the press before the registration statement was filed with the SEC (during the “pre-filing” period) to explain where the proceeds of the offering would be used.

Goldman voluntarily reported one incident of illegal written offers by the traders to the SEC staff when it discovered that the traders had sent emails to 77 hedge fund and institutional clients in the United States. The SEC’s subsequent investigation into this incident revealed that the same traders had engaged in similar conduct in connection with three previous offerings.

-Posted by Julie Hoffman

July 1, 2004

How Does a Reg FD

This is a good question posed by a number of members yesterday in the wake of the SEC’s action against Siebel. The issue is that disclosure controls are supposed to be designed so that “information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.”

As Ron Mueller points out, before this action, it could have been argued perhaps that Reg FD does not require an Exchange Act filing in order to comply; but that an 8-K is only a safe harbor and the rule can be satisfied by other methods.

But in Paragraph 22 of the complaint against Siebel, the SEC sets forth its theory – that an 8-K is required under FD, and the rule says it’s only not required if disclosure is made through another channel. So the SEC essentially argues that a company needs to have the disclosure controls in place to determine whether there is an FD event that requires disclosure, and determining whether to satisfy the obligation by an 8-K or press release is then only a matter of disclosure implementation.

It seems like a odd first case for disclosure controls, particularly when the SEC is alleging that the FD disclosure was an intentional disclosure. The upshot is that you should ensure that your disclosure controls deal with Reg FD and the fact that you may need to make a disclosure as well as a determination as to the method of dissemination.

FASB May Delay Options Expensing

Yesterday, it was widely reported that FASB Chair Bob Herz was acknowledging that option expensing might be delayed from the beginning of 2005 to 2006 (and the SEC’s Chief Accountant was urging the delay). The rationale was that companies had their hands full this year with implementing more stringent internal controls.

Announcing the Arrival of Julie Hoffman!

I’m excited about our latest hire, Julie Hoffman who worked on the aircraft carrier when she was in Corp Fin back in the day – then worked at Latham & Watkins and Squire Sanders.

Julie will be blogging for me next week, when I am mired in Boston at the annual conference for the American Society of Corporate Secretaries. Julie can be reached at