November 29, 2004

PCAOB to Meet on Internal Controls

In a vaguely worded announcement, the PCAOB will meet tomorrow morning on internal controls. My guess is they will vote on delaying implementation for smaller companies – a topic covered in a feature article in Saturday’s Washington Post.

8-K Trends: Part I

With last Tuesday’s release of FAQs by the SEC Staff, it might be a good time to take stock in how many 8-Ks are being filed. The SEC predicted each company would, on average, file an additional five 8-Ks per year – resulting in 59,000 additional 8-K filings from the nearly 12,000 companies that file them, which prediction is about double the rate of filings before the new rules were adopted. Notably, the SEC originally estimated that the new rules would cause two new 8-Ks per year in the proposing release – but bumped this number up substantially in the adopting release.

But the SEC probably didn’t bump up their estimate enough. I don’t have actual statistics – but I have looked at quite a few companies that appear to be averaging the filing of an 8-K per week. And it doesn’t appear to depend on the size of the company – plenty of smaller companies are filing 8-Ks at this clip. For example, look at this filing stream for the Williams Companies – I count 14 8-Ks filed since August 23rd. Of course, many companies are not filing at this rate and actual stats might prove closer to the SEC’s final estimate.

The New Obstruction of Justice

Here is a rehash of an interesting blog from Bruce Carton of the Securities Litigation Watch: Prosecutors requested a fall 2005 trial date yesterday for Sanjay Kumar, former CEO of Computer Associates International, who is charged with obstruction of justice, conspiracy and lying to law enforcement officers in a multibillion-dollar financial fraud. The obstruction of justice charge is particularly notable, and perhaps novel, because it relates to statements Kumar made not to any government official but rather to the company’s outside counsel (Wachtell Lipton), which was conducting an internal investigation of the matter.

According to paragraph 53 of the indictment filed against Kumar:

“Shortly after being retained in February 2002, the Company’s Law Firm met with the defendant SANJAY KUMAR and other CA executives in order to inquire into their knowledge of the practices that were the subject of the Government Investigations. During these meetings, KUMAR and others did not disclose, falsely denied and otherwise concealed the existence of the 35-day month practice. Moreover, KUMAR and others concocted and presented to the Company’s Law Firm an assortment of false justifications, the purpose of which was to support their false denials of the 35-day month practice. KUMAR and others knew, and in fact intended, that the Company’s Law Firm would present these false justifications to the United States Attorney’s Office, the SEC and the FBI so as to obstruct and impeded the Government Investigations.”

Four former executives of the company, including its chief financial officer and general counsel, have reportedly already pleaded guilty to the charge of obstructing justice by lying to the lawyers from Wachtell. According to this article in the National Post, this new form of obstruction was the subject of discussion recently by defense attorneys John Keker and Theodore Wells, Jr. at PLI’s Securities Institute conference:

“You better understand how broad these obstruction statutes are — and how risky for both you and your clients,” Mr. Keker told the audience of securities lawyers.

He pointed to the case against Computer Associates International, in which the three executives — including the general counsel — pleaded guilty to obstruction of justice for lying to their own lawyers at Wachtell Lipton Rosen & Katz, who were conducting an internal investigation.

Government prosecutors said the general counsel hid some information and gave incorrect information to Wachtell, even though he knew the findings were being passed along to the government.

“What’s really scary here is some prosecutors are now taking the position that if an employee makes a false statement to the outside lawyer doing the internal investigation, that can constitute obstruction based on the theory that the outside lawyer is doing the investigation with the purpose of giving that information to the government,” said Mr. Wells, who, like Mr. Keker, is consistently ranked as one of America’s leading white-collar defence lawyers.

“So now we’ve moved from a situation where you’re not supposed to make false statements to government agents, which at least people understand, to a world where if you make a false statement to the lawyer from Skadden Arps or Cravath, that in and of itself may constitute an act of obstruction.”