Monthly Archives: March 2005

March 31, 2005

CEOs of the Dow 30 Agree to Cut Salaries By 20%!

Okay, that title is my (lame) idea of an early April Fool’s joke – but here is a real NY Times article on inflation of salaries due to benchmarking. From the Museum of Hoaxes, here are the Top 100 April Fool’s Day Hoaxes of All Time. I like #4, when Taco Bell bought the Liberty Bell.

Jack Welch Defends His Retirement Perks

Last night, in an interview with Dan Rather on “60 Minutes Wednesday,” Jack Welch defended the retirement perks that he eventually gave up and became the basis for last year’s settlement with the SEC. Jack explained how he rejected $300 million worth of restricted stock near the end of his term as CEO, opting instead for the lifetime continuance of perks that became controversial when the scope of them were fully disclosed in his divorce proceedings. A video archive of the interview is available, including footage with Jack’s new wife.

Fairchild Executives Cut Pay to Settle Compensation Lawsuit

A few months ago, on, we posted a complaint filed in Delaware that alleged breaches of fiduciary duty and disclosure regarding the way the CEO and other executives were being compensated. According to this article in the Washington Post, the company and defendant officers have settled the lawsuit by cutting their pay and discontinuing some questionable practices.

Bloomberg Entering the Legal Database Market?

According to the Maryland Daily Record, Bloomberg intends to challenge Lexis and Westlaw by entering the legal database market. I can’t find anything on Bloomberg’s site to confirm this March 25th article.

March 30, 2005

SEC Issues Option Expensing Guidance

Yesterday, the SEC’s Office of Chief Accountant issued SAB 107 regarding the FASB’s option expensing standard. SAB 107 adds a new Topic 14 to the SAB series regarding Statement 123(R) and amends portions of some existing topics – as well as addresses a range of disclosure issues, from MD&A to non-GAAP measures.

As noted in the SEC’s press release, “Among other things, SAB 107 provides interpretive guidance related to the interaction between Statement 123R and certain SEC rules and regulations, as well as provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB 107 also reminds public companies of the importance of including disclosures within filings made with the SEC relating to the accounting for share-based payment transactions, particularly during the transition to Statement 123R.”

In addition, the SEC’s Office of Economic Analysis posted this interesting memo regarding valuation and the economic impact of option expensing.

Don’t forget next week’s timely NASPP webcast – “What You Need To Know About Option Valuation” – which is the 3rd webcast from the NASPP on this important topic during the past few months (archives of the other webcasts are still available, including practical remarks from FASB staffers).

GAO Criticizes Security Measures at the SEC

According to a 29-page report released last week by the Government Accountability Office, computer security at the SEC is lax enough to put financial – and personnel – information at risk. The problems cited in the report run the gamut, from not implementing effective electronic access controls to weaknesses in other information system controls (including physical security, segregation of computer functions, and application change controls).

According to a Washington Post article on Friday, the SEC responded by pledging to address the issues by June 2006. A spokesman said the SEC already has installed “intrusion detection systems” and replaced firewalls.

Personally, I am always amazed that there have not been any reported hacks of the EDGAR system – as that has to be one of the most popular targets of the hacking community, even for the youngsters for whom it’s just a sport. It is easy to imagine the harm that could be caused by someone that hacked EDGAR (e.g. post a fake 8-K with some drastic news that is a market-mover).

April E-Minders is Up!

We have posted our April issue of E-Minders – as well as this interview with Denise Annunciata on State Law Research.

March 29, 2005

Severance Arrangements Under Fire after 9th Circuit Decision

Last week, in SEC v. Gemstar-TV Guide International, the 9th Circuit ruled en banc that severance payments – at least those in the 5x base salary range – are “extraordinary payments” under the meaning of Section 1103 of Sarbanes-Oxley. Notably, the concurring opinion proposes that it should be interpreted even more expansive.

The impact of this important decision on executive compensation practices should be felt soon, as compensation committees will want to consider this decision – together with the Section 304 clawback provision – to determine whether they have met their fiduciary obligations. For example, Art Meyers of Palmer & Dodge raises these questions that all compensation committees should now consider:

– Should companies avoid entering into severance arrangements after a restatement?

– Should compensation agreements provide for an automatic freeze if there is a

– Is this yet another reason why comp committees should hire consultants to determine in advance what similar performing peer group companies are doing?

– If a company agrees to limit its severance to 2.99x base salary plus bonus unless shareholder approval is obtained – as many institutional investors are now demanding – does that create a de facto “safe harbor” for purposes of 1103?

We will continue to post practice pointers on these questions on in our “Severance Arrangements” and “Clawback Provisions” Practice Areas. The 9th Circuit decision is available in the “Comp Litigation” Portal.

ISS Issues 52 FAQs on its Compensation Policies

To further help companies – and investors – understand how it intends to recommend votes on compensation issues, ISS issued these 52 FAQs last week.

Audit Fees Continue Their Upward Trend

According to an article in Friday’s WSJ, a survey comprising of most of the Dow 30 revealed a 40% increase in audit fees disclosed compared to the prior year. Part of that increase is because internal control costs are now included in the “audit fee” bucket rather than “audit-related,” but the overall trend of rising audit fees should come as no surprise.

My Podcasting Experiment

Probably because I love the microphone so much, I am dying to get in on the ground floor of “podcasting.” Heavily covered in the NY Times during the past month, podcasting is merely the posting of a series of audio files. Probably to make it seem more glamorous, the media likens podcasts to radio broadcasting.

Not anything of substance, here is my inaugural podcast. The ones to follow will be in the form of audio interviews with experts on hot and interesting topics – perhaps with occasional dalliances off-the-beaten path – wonder what Johnny Depp is doing?

March 28, 2005

SEC Brings 1st Reg FD Case for Reaffirmation of Expectations

In the first case involving a company reaffirming its previous expectations for earnings, the SEC announced Thursday that it had settled Reg FD charges against Flowserve Corporation, its CEO and its Director of Investor Relations. In the face of this complaint, the company and the CEO consented to pay civil penalties of $350k and $50k, respectively, and the Company, CEO and IR Director consented to a cease-and-desist order. This also is the first time an IR officer was part of an SEC action regarding a Reg FD violation.

The Facts and Allegations: In late September ’02, the company lowered it ’02 calendar-year annual earnings forecast – which it then confirmed in its 10-Q filed on October 22. The SEC alleged that at a private meeting of the CEO and IR Director with analysts on November 19, the CEO reaffirmed this earnings guidance in response to a question (during which the IR Director was silent).

On November 20, one of the analysts issued a report distributed to First Call subscribers stating that the company had reaffirmed earnings guidance, and on the following day, the stock went up about 6% on increased trading volume. After the close of that day, November 21, the company filed an 8-K reporting that it had reaffirmed its guidance in a conversation with analysts.

The company had a disclosure policy to respond to questions about “comfort” with guidance as follows: “Although business conditions are subject to change, in accordance with Flowserve’s policy, the current earnings guidance was effective at the date given and is not being updated until the company publicly announces updated guidance.”

The SEC found that the IR Director did not caution analysts prior to the meeting as to what topics were off-limits for their discussion with the CEO – and did not reiterate the company policy at the meeting.

What The Case Means: This case should help resolve the ongoing debate about how much time is acceptable since the company last gave public guidance to make a private reaffirmation. I believe someone from the SEC Staff said a while ago that confirming a month later clearly would be a problem and this case proves that point.

Some law firms had been suggesting one week is the rule of thumb to use, but I am not sure that many companies followed that guidance. Factors to consider include where is the company in its earnings cycles (ie. it’s safer to confirm guidance in the first half of a quarter than in the second) and whether there have been any intervening circumstances since the company’s last public guidance or reaffirmation (ie. would these intervening circumstances likely cause a reasonable investor to question the continued accuracy of the last estimate).

Until we hear more from the SEC Staff, a safe rule of thumb might now be that a week is okay, but longer can be risky (depending on the circumstances, of course) – any confirm creates risk and the longer the time lapse, the greater the risk. This area is ripe for a webcast now and I am “on it.”

PCAOB to Consider Standard Regarding Corrections of Internal Control Material Weaknesses

On Thursday, the PCAOB will hold an open meeting at 10 am to consider proposing a standard that would permit, but not require, auditors to report on a company’s assertion that it had eliminated a previously reported material weakness in its internal control over financial reporting.

Wal-Mart’s Vice Chair Resignation and the Federal Sentencing Guidelines

On Friday, as disclosed in a Form 8-K under Item 5.02, Wal-Mart’s Vice Chair resigned – and 3 employees were fired – following an internal probe of misappropriated funds; somewhere between $100k-$500k of personal reimbursements, payment of third-party invoices and the use of company gift cards falsified by the Vice Chair (who was the 2nd highest executive officer until he retired in January).

Keith Bishop notes that the interesting aspect of this development is that it appears that Wal-Mart has taken to heart the November 2004 amendments to the federal sentencing guidelines. By conducting an investigation and terminating the Vice Chair, it appears that the company is meeting the sentencing guideline requirement that its compliance program is enforced through “appropriate disciplinary measures for engaging in criminal conduct.”

March 24, 2005

Latest Analysis of Post-Omnicare Cases

For M&A practitioners, Omnicare – and what it really means – continues to be a heated topic. Learn more in this interview with Dan Sternberg on Delaware Applying Narrow Interpretation of Omnicare.

Easier Company Searches on EDGAR

Good news! There is a handy new feature on the SEC’s EDGAR company search page that allows you to search by ticker for the largest 1500 publicly traded companies.

Martha and Her D&O Insurance

From page F-34 of the Martha Stewart Living Omnimedia 10-K under “Related Party Transactions”:

“Martha Stewart has submitted a claim, pursuant to the Corporation’s By-laws, for approximately $3.7 million, for reimbursement of certain expenses relating to her defense of the count of the federal criminal complaint against her alleging she made false and misleading statements intended to influence the price of the Corporation’s stock. Ms. Stewart’s defense of this count was successful and a judgment of acquittal was entered in her favor. The Corporation and Ms. Stewart submitted the question of whether or not she is entitled to indemnification to an independent expert on Delaware law. On March 15, 2005 the independent expert determined that Ms. Stewart is entitled to indemnification. The Corporation believes that any amount to be reimbursed to Ms. Stewart will be reimbursable to the Corporation under its Directors & Officers insurance policy and, accordingly, does not believe that the payment will result in an expense to the Corporation.”

Tune in for our webcast – “D&O Insurance Today” – on April 13th to learn how D&O insurance practices are changing and what you should do about it!

March 23, 2005

Where is the Pay-for-Peformance?

Yesterday, the lead article in the Washington Post Business section heavily criticized the increasing gap between pay and performance for CEO pay.

Quoted in the article, Harvard Professor Lucian Bebchuk continues to get high marks for his “Pay for Performance” book, which we recommend as “must” reading for directors to understand the lay of the land today in this critical area. Professor Bebchuk has contributed a number of items to, including these practice pointers on retirement benefits and study on growth of executive pay.

More on Recapture of Incentive Pay

Looks like another reader of the NY Times had a similar reaction to mine after reading last Sunday’s article on the recapture of bonuses (see my blog of 3/15) – below is his letter to the editor:

To the Editor:

The explanations offered by the corporations featured in your article (“Sorry, I’m Keeping the Bonus Anyway,” March 13) for not pursuing the recovery of bonuses paid to executives that turn out to have been improperly paid ring hollow to any experienced commercial litigator. If a contract says that you get a bonus if certain numbers are reached, and they aren’t, you aren’t entitled to the bonus. It makes no difference if it is paid as a result of either mistake or fraud – it has not been earned. And recovering it cannot be noncost effective, unless the lawyers choose to make it so; these are not hard cases, and boards owe it to shareholders to pursue them.

Patrick T. Collins
Short Hills N.J., March 14

Also noteworthy is that Monday, in an interview carried in the USA Today, the Staples’ CEO stated this:

Q: Should boards insist on “clawing back” incentive pay when it turns out a company’s results were overstated?

A: Absolutely. There’s an obligation to claw back ill-gotten gains.

SEC Issues FAQs on XBRL Filing

Yesterday, the SEC issued these FAQs on filing in XBRL in the EDGAR voluntary filing program. It’s unknown which companies are participating in this voluntary program at this time.

March 22, 2005

Conflicts of Interest in M&A

On Sunday, the NY Times ran this article about conflicts of interest in M&A transactions, with a particular focus on fairness opinions as the NASD is in the process of reviewing comments on its proposed reform. Author Andrew Sorkin concludes, “Wall Street may initially blanch at these reforms, but they could turn out to be a boon for business: companies are more likely to ask for second and third opinions from different banks just to cover themselves – and that could produce fairness opinions that are really fair.”

Don’t forget that on April 20th, our star-studded panel will cover fairness opinions and much more in this webcast – “Conflicts of Interest and Dicey Engagements” – featuring Peter Douglas of Davis Polk; Brian McCarthy of Skadden, Arps; Kevin Miller of Credit Suisse First Boston; and Morton Pierce of Dewey Ballantine.

Confidential Treatment Requests for Material Contracts

Members tell me that the SEC Staff continues to take a proactive approach in its review of confidential treatment requests for information contained in material contracts and arguably has recently enhanced its scrutiny in determining what may be kept confidential. Learn more in this interview with Jim Ball and Ellie Kwack on CT Requests for Material Contracts.

Time Warner Pays $300 Million to Settle SEC Fraud Action

Yesterday, the SEC charged Time Warner with materially overstating online advertising revenue and the number of its Internet subscribers, and with aiding and abetting three other securities frauds. The SEC also charged that the company violated a Commission cease-and-desist order issued against AOL in 2000. In a separate administrative proceeding, the SEC charged Time Warner’s CFO, Controller, and Deputy Controller with causing violations of the reporting provisions of the federal securities laws.

Time Warner settled its charges for a whopping $300 million (which is in addition to a separate $210 million settlement reached in December with the Justice Department) and the 3 officers entered into cease & desist orders, while the investigation continues into other entities and persons. The company also agreed to restate its financials and engage an independent examiner to determine whether the company’s historical accounting for certain transactions was in conformity with GAAP.

March 21, 2005

Magnitude of Form 12b-25 Filings

As predicted, the number of companies filing Form 12b-25s in order to delay their 10-Ks past the March 16th due date reached a record level this proxy season. Here are some stats derived by Brink Dickerson and his team over at Troutman Sanders:

– Form 12b-25s filed between 3/1 and 3/17: 395 this year; 116 last year
– Form 10-Ks filed between 3/1 and 3/17: 2469 this year; 2607 last year
– Percentage of late filers: 16.0% this year; 4.4% last year

These stats do not reflect companies who were able to complete their traditional audit work and therefore file on time – but are taking advantage of the extension for their 404 work. As a result, the 395 number probably slightly understates the magnitude of the problem, which is amazing as the numbers above already indicate a 250% increase!

Deja Vu – WorldCom Directors Settle Again

On Friday, a new $55.25 million settlement with 11 former directors (including one estate) in the WorldCom class action lawsuit was announced, following settlements entered into with the underwriter defendants. If approved, the settlement calls for settling directors to pay $20.25 million of their own money and insurers to pay $35 million.

The prior proposed settlement with directors included a so-called “ability-to-pay” provision that would have limited the amount by which any verdict or judgment against a non-settling defendant would be reduced with respect to the responsibility of settling defendants had there been no settlement, by the financial capability of settling directors to pay. The lead plaintiff terminated the proposed settlement because the Court rejected that provision as being inconsistent with the PSLRA. The new proposed settlement does not have such a provision, reflecting the fact that the lead plaintiff has now reached settlement with all of the underwriter defendants.

The settlement provides that the payment made by each settling director will equal or exceed the compensation received for service as a board member since January 1, 1999, unless the parties otherwise agree based upon unique circumstances. Here is a related NY Times article.

AFL-CIO “Key Votes” Scorecard

Last week, the AFL-CIO released this key votes scorecard. The 28 shareholder proposals on the scorecard from 28 different annual meetings will be used to grade the voting performances of mutual fund managers. See how the AFL-CIO graded managers last year in this report, as well as this special report grading how the 10 largest managers voted on compensation-related shareholder proposals.

The “Bloggies”

Last week, the 5th Annual “Bloggies” were held, with winners in 30 different categories. Here is the site where the principal winners are noted. Here is a Washington Post article about the awards.

Speaking of blogging, lots of press recently about CEOs and directors blogging, such as this Washington Post article from Saturday. As I mentioned in this article from Corporate Board Member, what a nightmare for in-house counsel to ensure that these corporate bloggers are not violating Reg FD, etc. Leave the blogging for the unattached…

March 18, 2005

Research Analyst Participation in Road Shows

Last week, the SEC proposed amendments from the NASD and NYSE that would revise their research analyst conflict-of-interest rules (NASD Rule 2711 and NYSE Rule 472) that would go further than the terms of the ’03 Wall Street Global Settlement. Specifically, the proposed rules would:

– prohibit a research analyst from participating in road shows and communicating with a customer in the presence of investment banking department personnel or company management about an investment banking
services transaction;

– prohibit investment banking personnel from directing a research analyst to engage in sales or marketing of an investment banking transaction or to engage in communicating with a customer about an investment banking services transaction; and

– require that any written or oral communication by a research analyst with a customer or internal personnel related to an investment banking transaction must be fair, balanced and not misleading.

Transcript for “The Evolution of Due Diligence Practices”

We have posted the transcript for the webcast: “The Evolution of Due Diligence Practices (and Securities Act Liability).”

More Cowbell!

With the 10-K deadline behind us, I couldn’t resist a little humor. I am not a big Saturday Night Live fan, but the old SNL skit with Will Ferrell and Christopher Walken is one of the funniest I have ever seen! “I got a fever… and the only prescription is more cowbell.”

Here is a transcript – but you want to view this free video if you can. Of course, you can now buy a “More Cowbell” T-shirt, mug, bib, etc.

March 17, 2005

Thinking About Trying XBRL?

If your company is considering participating in the SEC’s XBRL pilot program – or you want to just learn more about XBRL – check out this interview with Michael Ohata, who is Director, Business Reporting of Microsoft Corporation.

Microsoft is one of the few companies that has been making filings with the SEC using quasi-XBRL; “quasi” since EDGAR doesn’t accept XBRL until April 4th (which is the new start-date that was recently pushed back) but Microsoft and a few others were able to manevuer to accomplish this feat. Recently, the SEC posted this announcement regarding support for XBRL filers.

Survey on Pre-Approval of Non-Audit Services

To help answer some member questions regarding the level of detail provided to audit committees to support non-audit service decisions, we have posted a new survey on pre-approval of non-audit services. Please weigh in by going to home page and clicking on the survey in the middle column.

Are Gross-Ups Appropriate?

Yesterday, the WSJ ran this article analyzing existing gross-up practices related to executive severance payouts. I respect former SEC Commissioner Wallman as much as I respect anyone – but have to politely disagree with the sentiment attributed to him that “gross-ups are a necessary means of attracting top executives and have become a common feature of compensation agreements at Fortune 500 companies.”

Isn’t that the type of “herd” mentality that got the accounting and investment banking industries into all the hot water (i.e. billions paid in settlements) they can bear? Aren’t phenomenal severance payouts a questionable enticement for CEOs to do bad deals? What valid purpose do gross-ups serve?

I agree with a lot of the investor guidelines that urge compensation committees to limit severance payouts to one-times salary – NOT including all the other components of compensation that often make these gross-ups “necessary.” And investors typically feel the same way that the Council of Institutional Investors do about gross-ups – here is what CII’s comp policy states: “Companies should not compensate executives for any excise or additional taxes payable upon the receipt of severance, change-in-control or similar payments.”