Monthly Archives: March 2005

March 16, 2005

They Finally Got Their Man!

Former WorldCom CEO Bernie Ebbers was finally found guilty for his role in the massive fraud on his watch, as a slow-moving jury found him guilty yesterday on all counts. The verdict was a major victory for Justice Department prosecutors who spent nearly three years investigating the $11 billion fraud. Here is a Reuters article that includes my over-the-top quote on this important conviction.

Many of you will remember that the desire for reform legislation had all but died in Congress in mid-summer ’02 until WorldCom collapsed. Then, within a few short weeks Sarbanes-Oxley was enacted, capped by an unanimous vote in the Senate. All of us can thank Bernie for the job security and late nights in the office…

CalPERS Changes Its Voting Policies

As they indicated they would do late last year, CalPERS modifed its proxy voting guidelines regarding non-audit services. Under last year’s controversial guidelines, CalPERS automatically withheld its proxy votes from all members of audit committees that hired outside auditors to perform non-audit services.

Under the new guidelines, effective for this proxy season, CalPERS intends to withhold support for audit firms, rather than individual directors. However, CalPERS would retain power to seek the removal of a director in cases where “egregious” conflicts of interest have occurred.

This LA Times article states, “Switching to the new criteria should lead CalPERS to withhold votes against auditors at only about 5% of the companies in which it owns stock, CalPERS staff estimated. Auditors would be opposed by CalPERS if they were found to violate protocols outlined in proposed audit independence rules being drafted by the Public Company Accounting Oversight Board set up by the Sarbanes-Oxley Act of 2002.”

Job Choice & Changes

With my unique background (trifecta experience of law firm, inhouse and government), I often get asked for my advice about job changes and opportunities. To help those mulling their prospects – either within their present organization or outside – I have compiled some materials in our new “Job Choices/Changes” Practice Area.

March 15, 2005

Last Batch of Internal Control Disclosure Samples

With the 10-K deadline looming, here is the last batch of samples:

1. Material weaknesses leading to ineffective internal control:


2. Using 45-day extension:

Insurance Auto Auctions
Citizens & Northern Corp.
ATS Medical (warning that they will report a material weakness)

3. Using the special exclusion for Variable Interest Entity (VIE) under FIN 46:

Brandywine Realty Trust

Thanks to Bob Dow, who has been indispensable during these trying internal control times!

The Recapture of Bonuses

The article in Sunday’s NY Times did a great job questioning the wisdom of so many companies not having clawbacks in their employment arrangements so that companies (and their shareholders to whom managers and boards owe fiduciary duties!) can reclaim any incentive awards paid out to managers who inflated the company’s results so that targets were met.

It is refreshing that at least one company – see this 8-K from International Paper – recently has revisited its long term incentive compensation plan to make it clear that the company can “recover compensation paid to a participant in cases of a restatement of the company’s financial statements due to errors, omissions or fraud.” I would love to hear of more examples if you see them!

Tears Shed for John Chevedden

On the other hand, I wasn’t enthusiastic about this article in Sunday’s NY Times that was sympathetic to frequent proponent John Chevedden because his holdings at some companies dipped below the requisite $2000 eligibility level found in Rule 14a-8 (so those companies were able to successfully exclude his shareholder proposals because he was not eligible to submit proposals).

The $2,000 floor is meant to relieve companies from bearing the burden of time and expense of dealing with shareholders with nominal holdings; many that have dealt with Mr. Chevedden know that their shareholders would not be happy if they knew how much of a burden he can be (despite the fact that he selects proposal topics that often receive majority votes).

Analysis of SEC’s Section 21(a) Report in Titan

I am excited to see how others fare in the “Nuggets” format, as Rick Climan of Cooley Godward, Joel Greenberg of Kaye Scholer, and Wilson Chu of Haynes and Boone work their magic during tomorrow’s webcast: “30 M&A Nuggets in 60 Minutes.”

And I have received a number of questions for Brian Breheny, Chief of the SEC’s Office of Merger & Acquisitions, who will open this webcast by explaining the SEC’s Section 21(a) Report regarding Titan, which asserts that potential liability exists under the Exchange Act for publication of false or misleading material disclosures regarding material contractual provisions such as representations.

March 14, 2005

More Internal Controls Sample Disclosures…

As the appetite for internal control disclosure samples seems insatiable, here we go:

Glenayre Technologies’ 10-K – uses the 45-day extension, hints that it may not be able to meet the extended date, and gives an extensive risk factor.

Calvary Bancorp’s 10-K – uses the 45-day extension indicating that management is not aware of a problem

Gorman Rupp’s 10-K – gave itself a “not effective” opinion based on a material weakness related to one of its subsidiaries

Maxtor Corporation’s 10-K – has ineffective internal controls and as a result, ineffective disclosure controls (also has a risk factor re: the control problems)

Bassett Furniture’s 10-K – Here’s a good sample using the 45-day extension for non-accelerated filers (there are a few bad ones out there, with no conclusions. Be careful!)

“Steps to Take” Transcript is Up!

On, we have posted the transcript from the popular webcast: “Steps to Take: How to Avoid Director Liability After WorldCom, Enron and Disney.”

ISS Announces Position on Shareholder Proposals Re: Majority Vote Requirements

Late last week, ISS issued a new voting policy outlining how they intend to generally support non-binding proposals seeking majority vote requirements in boardroom elections. The overarching rationale for the change was that “implications of ‘Majority Vote’ proposals are potentially far-reaching, as they could recast the way in which directors are elected.”

ISS has created a resource center on majority-vote proposals, that contains its new policy on this issue and a transcript from a roundtable on the topic from last month.

It is notable that the Carpenter’s union recently withdraw its majority-vote proposal at ten companies because they all agreed to sit down with union representatives in a work group to study the feasibility of majority elections for corporate directors. This development follows the formation of the related ABA Majority/Plurality Voting Task Force that I blogged about on February 25th. In addition, we have just posted Marty Lipton’s memo on majority vote provisions in our “Shareholder Access” Practice Area.

Disney’s Succession

Although CEO succession is one of the board’s primary tasks, I would argue that its the least understood – and most challenging – of the board’s duties. This is reflected during the recent controversy over Eisner’s successor at Disney, who was selected over the weekend to be inhouse candidate Robert Iger. Now, dissidents Stanley Gold and Roy Disney believe that Eisner railroaded the succession process and have released this statement calling for removal of the entire board and saying “Mr. Mitchell’s approach to good governance is no better than a carny at the fair, enticing words but in the end the game is rigged.”

The lack of understanding is also reflected in the fact that I have only seen one article written about CEO succession in my five years as editor of the Corporate Governance Advisor and managing all these websites. Learn more about CEO succession in our “CEO Sucession” Practice Area.

March 11, 2005

And Even More on Lease Accounting!

I’ve heard that the Big 4 may be split on the issue of whether restatements caused by lease accounting are an indication of a material weakness, with two firms saying that they were going to look at this on a case by case basis applying a SAB 99 type materiality analysis to the impact of the restatement on the periods restated (apparently taking the view that while it would be material if taken all in one period, it was not material to any restated period and therefore not a material weakness) and the other two firms seem like they are inclined to take the view that essentially any lease accounting restatement results in a determination of a material weakness.

Here are two companies that just filed their 10-Ks with lease accounting restatements and clean 404 opinions: Office Depot and J Jill.

The restaurant industry is one of the industries impacted by issues raised in the SEC Chief Accountant’s letter on lease accounting (see my “SEC Speaks” notes regarding how OCA views its letter), as reflected by a recent letter from the National Restaurant Association to the SEC that I have heard about through the grapevine.

To see what two restaurant companies recently disclosed about their internal controls in their 10-Ks, see the two new additions to our “Internal Controls – Deficiencies and Weaknesses Identified” page.

Exhibits to 10-K Regarding Executive Compensation

I have been getting quite a few questions on what to do about exhibits to the 10-K relating to compensation events/data – such as director compensation, setting of NEOs salary (both for those NEOs with and without employment agreements), bonus related items, etc. So I have pulled some examples from 10-Ks filed recently and put them in a new “Form 10-K Disclosure” Practice Area on

’33 Act Reform

At last week’s “SEC Speaks,” the Staff indicated that the vast majority of the comments received on the ’33 Act reform were supportive. Here are the comment letters, including the one from the ABA submitted last week. The biggest areas of comment fall into three categories: (1) liabilities; (2) electronic road shows; and (3) disclosure of outstanding comments in ’34 Act reports.

Learn more about the reform in this interview with Valerie Ford Jacob on Securities Act Reform.

March 10, 2005

Audit Committee Reports Addressing Internal Controls

In the Nov-Dec issue of The Corporate Counsel (p.8), Mike Gettelman suggested that companies use their Audit Committee Report to discuss their internal controls’ process and costs. Below are some companies that have made such disclosure in their Audit Committee Reports, but none of these go as far as Mike recommends (i.e. none of these examples disclose the level of time and money spent):

Morgan Stanley

I am surprised that not more companies are making this disclosure so far, particularly given Linda Griggs observations on this topic made at the end of her interview with me conducted a few weeks back.

More Sample Internal Control Disclosures

We continue to update the laundry list of companies that have disclosed material weaknesses in our “Internal Controls – Deficiencies and Weaknesses Identified” page (which is available in our “Internal Controls” Practice Area).

Here are a sampling of this samples: In its Form 10-K, Informatica voluntarily discloses a signficant deficiency in its report, but its controls are still effective. And Mim Corporation discloses in its Form 10-K that it has an adverse opinion because its internal controls aren’t effective due to material weaknesses, including an ineffective audit committee!

Trust Preferred Developments

Last week, the Federal Reserve Board released its final rules on the capital treatment of trust preferred securities and other capital instruments. The rule largely reflects the Fed’s May 2004 rule proposal and comprehensively integrates prior Fed guidance on capital instruments, particularly those issued by bank holding company subsidiaries.

We have created a new “Trust Preferred Securities” Practice Area that include law firm memos on the Fed’s new rules as well as a host of other resources.

March 9, 2005

Notes from “SEC Speaks” Are Up!

In our “Conference Notes” Practice Area, we have posted extensive notes from PLI’s “SEC Speaks in 2005.” Thanks to Julie Hoffman for her continued hard work!

The Evolution of Due Diligence Practices (and Securities Act Liability)

Don’t forget tomorrow’s webcast – “The Evolution of Due Diligence Practices (and Securities Act Liability)” – during which Bob Buckholz of Sullivan & Cromwell; Joe McLaughlin of Sidley Austin; and Michael Kaplan of Davis Polk will analyze how diligence practices are evolving in the wake of the WorldCom, the first major court opinion to affect diligence practices in decades.

The 2005 GE Proxy Statement

On Friday, General Electric filed its proxy statement and here is what Mark Borges of Mercer blogged about in his “The Compensation Disclosure Blog” on

Each year, this proxy is chock full of interesting and innovative disclosures, and this year is no exception. Some of the highlights from my initial pass through the report:

– A thorough description of the compensation and benefits for non-employee directors, including charitable gifts and the use of GE appliances under the company’s Executive Products Program. (The proxy statement also describes the company’s liability insurance coverage for directors, which is rarely, if ever, mentioned by companies in their director compensation disclosure.)

– Comprehensive disclosure of all related-party transactions, including a statement by the company that it believes the disclosed transactions were reasonable and in the best interests of the company.

– A description in the Board Compensation Committee Report of all of the components of executive compensation considered in reaching decisions about the specific compensation elements and total compensation paid or awarded to GE’s senior executive officers.

– A discussion of each element of the company’s executive compensation program, broken out by compensation type – base salary, annual bonus, stock options/restricted stock units, career retention RSUs, performance share units, contingent long-term performance awards, and perquisites.

– Extensive disclosure of the various perquisites and other personal benefits for executive officers. The discussion includes the following statement on the company’s executive security program:

“We believe the security costs described in this paragraph are legitimate business expenses, but we also recognize that all of these costs can be viewed as personal benefits. In the interests of full disclosure, we are treating all of these costs as personal benefits for these executives and have reported them as such in the “Other Annual Compensation” column in the {Summary Compensation] table . . . .”

I like the way GE handles this issue. While the company’s stance is at odds with the SEC staff’s position, it avoids a dispute by providing the disclosure anyway (which conforms with its past treatment of security-related benefits). I suspect that some companies that consider security-related travel to be a business expense opt not to provide the disclosure.

– The BCCR also contains specific discussions of (i) the company’s stock ownership requirements for senior executives, (ii) the company’s stock holding period requirements, (iii) the company’s position on stock option expensing (it has expensed options since 2002), (iv) the company’s policy prohibiting stock option repricing, (v) the disposition of outstanding stock appreciation rights in anticipation of the American Jobs Creation Act and new Section 409A, (vi) the company’s policy on the use of employment and severance agreements, (vii) the company’s policy to seek shareholder approval of severance arrangements for any of the Named Executive Officers under certain circumstances, and (viii) the company’s Section 162(m) policy.

– The Summary Compensation Table is very easy to read, extending over two full pages and includes several features seen in prior years’ proxy statements, including a “Total Annual Compensation” column and a break out of the “All Other Compensation” amounts in the table itself (rather than in a footnote).

– A statement in the footnote on executive perquisites indicating that the amounts reported for personal use of corporate aircraft for 2002 and 2003 differ from the amounts reported in prior proxy statements because the company has changed the way it calculates the incremental cost for personal use of the aircraft. Starting in 2004, the company now includes only those variable costs incurred as a result of personal flight activity in the calculation, and excludes non-variable costs, such as exterior paint and interior refurbishment, which would have been incurred regardless of whether there was any such personal use.

– Disclosure of the range of above-market interest rates contingently credited on salary deferred by the NEOs.

While some of the items listed above were first introduced in last year’s proxy statement, GE continues to refine and improve its disclosure each year. They really do a good job of taking the compensation program of a truly complex company and making it readable and informative.

March 8, 2005

For 404 Delay, When Do You Determine Accelerated Filer Status?

When the SEC granted the extension to non-accelerated filers and foreign private issuers last week – delaying the implementation of Section 404 by one year per my blog of March 3rd – the SEC Staff received several calls on the status of issuers that are not currently accelerated filers, but who become accelerated filers at some point before the implementation date of July 15, 2006.

At PLI’s “SEC Speaks” on Friday, the Staff confirmed that those filers must be in compliance with 404 at the time they become an accelerated filer. In other words, they do not get to take advantage of the delayed implementation date.

Disclosure of Corporate Political Contributions

Over the past few years, a number of bills have been floated on the Hill to require disclosure regarding corporate political contributions – but none of them have gotten the requisite support. The Center for Political Accountability has been fighting for this cause for two years and recently released a report entitled “The Green Canary: Alerting Shareholders and Protecting Their Investments.” Read more in this interview with the Co-Directors of the Center.

For Warren Buffett Fans Only!

Berkshire Hathaway has posted a copy of its 2004 Annual Report, including Warren’s famous letter to shareholders. One oddity is the fact that Warren personally has copyrighted his letter to shareholders – can he do that? If he writes the letter in his capacity as chair of the board, doesn’t his work inure to the benefit of the company?

In his letter, Warren’s sage advice about evaluating a company’s prospects includes asking this question about the CEO: “Is he/she overreaching in terms of compensation?”

Am I a Journalist?

Yesterday’s NY Times carried two interesting items on blogging. One article regarding whether bloggers can be protected under state law to protect their confidential sources. The other article noting that a 23-year old blogger had obtained permission to attend White House press briefings (after extensive attempts to procure the press pass – read about the saga on his blog).

For the first few years of blogging, I didn’t consider myself a journalist in the least. I still don’t think I qualify in the traditional sense – but I sometimes refer to myself as a journalist when I try to explain to relatives what I do or try to distinguish myself in this town chock full of lawyers…

March 7, 2005

Corp Fin “Staff Alert” on Annual Reports

On Friday, Corp Fin posted a Staff Alert regarding Annual Report Reminders. The Staff Alert deals with:

– Disclosure of Previously Unreported Form 8-K Events

– Correct Version of the Certifications Required by Rules 13a-14(a) and 15d-14(a)

– Placement of the Internal Control Reports

– Auditor Consents

So it looks like we can now add “Staff Alerts” to the forms of written informal SEC Staff guidance that are available (joining Staff Legal Bulletins, FAQs, no-action letters, Current Issues Outline, telephone interps, etc.).

SEC Chair Speaks About Executive Compensation

On Friday, SEC Chair Donaldson gave a speech at SEC Speaks and he said this about executive compensation: “Some conflicts are best managed by focusing on how they are disclosed to investors. For example, the executive compensation process presents clear potential conflicts and clear potential for abuse. Yet, as I have said on many occasions, the solution is not to have the SEC or any regulator set compensation. Good disclosure can do a lot to address this conflict. One problem is that there has not been good enough disclosure under current rules.

The Division of Corporation Finance has been looking at this, and the Commission has brought cases in this area. This is an area where I have been disappointed by the contribution of some lawyers, who appear in at least some cases to devise their own narrow interpretations of the rules while disclosing as little as possible, rather than to seek helpful disclosure for investors. A second issue in this area is that our rules may need to be refocused, and the Division of Corporation Finance is exploring how they can be enhanced and clarified.”

In his comments, the Chairman also focused on other areas of attorney responsibilities as borne out in this article in the Washington Post.

NYSE Tweaks 303A FAQs

On Friday, the NYSE changed one of the FAQs that it had released late last week (ie. ones that I blogged about on Friday). In footnote 1 to the FAQs, the NYSE explains how the CEO/CFO cert. disclosure requirement in 303A.12(a) refers to the most recently filed 10-K; not the prior year’s 10-K.

March 4, 2005

Implications of SEC’s Action Against Titan on Mergers

On Wednesday, the SEC announced a settled enforcement action against Titan Corporation alleging Foreign Corrupt Practices Act violations for funneling approximately $2 million towards the election campaign of Benin’s then-incumbent President. The amount of this settlement – $15.5 million in disgorgement and prejudgment interest and a $13 million penalty – is the highest ever paid for FCPA violations.

However, the most significant aspect of this proceeding is a Section 21(a) Report of Investigation that asserts that representations in an agreement filed as an exhibit can be actionable by the SEC if they are materially false. This assertion relates to a FCPA representation made by Titan in a Merger Agreement with Lockheed Martin (my alma mater!), which was also publicly disclosed in Titan’s proxy statement (since the Merger Agreement was in the proxy statement). It is noteworthy that the Report does not allege a violation by Titan of Sections 10(b) or 14(a) – or Rules 10b-5 and 14a-9 – and that the SEC has not charged Titan with such violations.

The Report recognizes that Titan shareholders were not beneficiaries of the FCPA Representation in the Merger Agreement, but states that the inclusion of the Representation in a disclosure document filed with the SEC, “whether by incorporation by reference or other inclusion, constitutes a disclosure to investors.” The Report goes on to say that disclosures regarding material contractual terms such as representations may be actionable by the Commission. The Commission will consider bringing an enforcement action if it determines that “the subject matter of representations or other contractual provisions is materially misleading to shareholders because material facts necessary to make that disclosure not misleading are omitted.”

NYSE Speaks on 303A Requirements

In response to a number of inquiries regarding the 2005 disclosure requirements in Section 303A of the NYSE Listed Company Manual, the NYSE has posted some FAQs, including:

– All disclosures required by Section 303A and/or Rule 10A-3 must be included in any specified document distributed in 2005.

– Incorporation by reference of any required disclosure is not permitted.

– Failure to include any Section 303A required disclosure in the specified document or inappropriately incorporating a disclosure by reference is considered material non-compliance and as such is a Section 303A.12(b) reportable event of non-compliance. Companies that have inadvertently failed to make the required Section 303A.12(a) disclosure in this year’s annual report should consult their Exchange Corporate Governance specialist regarding necessary action.

– Companies must identify which directors are deemed independent and disclose the basis for that determination.

– Categorical standards of independence, if adopted, must be disclosed, not incorporated by reference.

– The proxy must also include a discussion of any relationships considered by the board in determining a director’s independence, unless the company had adopted categorical standards, in which case, the relationship need only be disclosed if it falls outside of the categorical standards.

– This year’s annual report to shareholders must disclose that the company submitted a Section 12(a) CEO Certification to the NYSE last year. Companies need only reference that the previous year’s CEO Certification was submitted to the NYSE. The text of the certification need not be included in the annual report.

– If the previous year’s CEO Certification was qualified in any way, the company must disclose that qualification.

– Section 303A.12(a) also requires that companies disclose in this year’s annual report whether or not they filed with the SEC the CEO/CFO certification required under Section 302 of Sarbanes-Oxley in the prior year as an exhibit to their Form 10-K. The text of the certification need not be included in the annual report.

To review law firm memos on the NYSE’s latest changes to its standards, go to the “NYSE Guidance” Practice Area.

SEC Commissioners Continue Internal Dissension

Yesterday, the SEC approved the PCAOB’s 2005 budget, but the WSJ reported that over the objections of SEC Chair Donaldson, the two Republican Commissioners, Glassman and Atkins, extended a written invitation to PCAOB Chair McDonough and FASB Chair Herz, to take part in yesterday’s open Commission meeting. Both did not attend.

I agree with the comments of Commissioner Campos – as reported in the WSJ – that having a Q&A with these two chairs doesn’t serve any real purpose. Commissioner Atkins spent quite a bit of time – nearly 45 minutes – going through each item in the proposed budgets, I guess to create a record. And there is no requirement for the SEC to consider the PCAOB and FASB budgets at an open Commission meeting – they can do it seriatim. Probably better done that way…

March 3, 2005

Internal Controls and Lease Accounting

Following up on my blog of February 24th, I have been hearing from various members that the SEC, PCAOB and Big 4 are still kicking around how to treat the restatements caused recently by the SEC Chief Accountant’s letter on lease accounting for purposes of internal controls (i.e. whether it should be deemed to be a “material weakness” or simply a “significant deficiency.”) The magnitude of the impact of this letter was explored in yesterday’s article in the WSJ regarding the high number of restatements (carried on page B2A in the East Coast edition, but not available online for some reason).

With only a few weeks to go until 10-Ks are due for calendar-year companies, the stakes are high and time is short. Here are examples of the arguments being made by companies as to why their restatements for lease accounting shouldn’t be considered material weaknesses:

– There is no change in net cash flow. Although the balance sheet/income statement impacts of the correction of the “error” frequently aren’t material, auditors have told companies that they should consider the impact on their cash flow statements of the correction of the errors – as cash flow is shifted from one category to another – to be material if it would exceed the imaginary 5% threshold for material (which for a lease-intensive company it readily could).

– This is precisely the type of situation that PCAOB had in mind when it drafted PCAOB Auditing Std. No.2, ¶ 140 to provide that a restatement is only a “strong indicator” of a material weakness rather than an irrefutable presumption. The commentary allows some judgment here – see ¶¶ E95-E98 – but auditors are so intensely risk adverse that they are not exercising their judgments in this (or similar) situations.

– Companies do not think certain aspects of the SEC Chief Accountant’s letter have clear support in SFAS 13 and its progeny, particularly the concept that pre-occupancy leasehold build-outs always constitute “rent.” A number of companies also were not thrilled with the tone of the WSJ article or the quotes from the SEC. There were so many companies that were accounting for leases inconsistently with the SEC’s interpretation – and all of the Big Four were signing off on that accounting – that clearly they were not doing it intentionally wrong.

Some companies are preparing their draft 404 disclosure both ways in the hope that the SEC/PCAOB will say before the 10-K due date that it is okay for the Big Four to take the position that a “miss” on this issue is not a material weakness.

New 404 Deadline for Non-Accelerated and Non-US Filers

Yesterday, the SEC announced that it is extending the deadline for non- US and non-accelerated filers regarding 404 reports and auditor attestations. The SEC pushed out the deadline by one year, so that these filers now will have to include these documents in their first annual reports filed on – or after – July 15, 2006. For these types of companies, the year-long extension also applies to the rules requiring maintainance of internal control over financial reporting, periodic evaluation of changes in internal controls, and related changes to 302 certifications.

FYI, nearly 200 members have responded to our survey on the location, format and content of 404 reports – see the running results.

Analysis of Latest Compensation Proxy Disclosures

With so many of our members in the thick of drafting and reviewing proxy statement compensation disclosures – particularly compensation committee reports – we have posted this “Special Proxy Disclosures Supplement” on As can be seen from the table of contents of the special supplement below, members should not miss Mark Borge’s daily commentaries and pointers on good/bad disclosures and practices in “The Compensation Disclosure Blog.”

· The Morgan Stanley Compensation Committee Report – A Reprise
· Goldman Sach’s Aircraft Policy
· Intel’s 10-K Equity Disclosure
· A Model SERP Disclosure
· Do You 162(m)?
· American Express’ Fulsome Disclosure
· Tally Sheets Makes an Appearance
· Disclosing Option Grant Values