Yesterday. the SEC charged Tyson Foods with inadequate proxy disclosures as well as with failing to maintain adequate internal controls in connection with its former Chair’s perks. The company settled by paying a $1.5 million civil fine – and the former Chair, Don Tyson, will pay an additional $700k since he caused and aided the company’s violations of disclosure rules for benefits that he, his friends and family members received while he was Chair and after his retirement in October 2001. Mr. Tyson is still a consultant to the company and sits on its board.
Reading through the list of perks that Mr. Tyson received, you can understand why companies might be loathe to disclose the perks that their senior managers receive. There is some incredible stuff disclosed in this press release: from $80,000 in lawn maintenance fees and $200,000 in housekeeping fees – to $1 million to cover the personal income tax liability associated with his receipt of the numerous benefits!
One aspect of the SEC’s order that Mark Borges blogged about yesterday was that the SEC found that the company’s use of the phrase “travel and entertainment” misleading to describe the continuation of Mr. Tyson’s perquisites under his retirement agreement. To Mark and me, this really underscores one of the conclusions from the earlier GE enforcement proceeding: executive perks have to be described with sufficient specificity so that shareholders can understand the nature and scope of these benefits.
In the May/June issue of The Corporate Counsel – which will be mailed in early June – there will extensive analysis of perk use and disclosures.
FASB Proposes New GAAP Hierarchy
Good for both accountants and us lawyers alike – in connection with its effort to improve the quality of financial accounting standards and the standard-setting process – the FASB yesterday published an exposure draft on “The Hierarchy of Generally Accepted Accounting Principles.”
The GAAP hierarchy, which currently resides in the AICPA’s Standard No. 69, ranks the relative authority of accounting principles issued from multiple standard-setters. The FASB’s codification and retrieval project will integrate existing US GAAP into a single authoritative retrievable source, thereby creating a single authoritative codification of GAAP.
Remember that we have a set of FAQs that explains all the basics of accounting and auditing in our “Accounting Overview” Practice Area.
My Beef with the DC Bar
Just finished reading an article in the Legal Times about how eight former DC Bar Presidents – including former Deputy Attorney General Jamie Gorelick – filed an amicus brief supporting a DC Bar member (who is a senior DOJ staffer) that was suspended from the Bar for not paying his dues. The brief was filed because the DC Bar is essentially saying he can’t rejoin the bar – even though he wants to pay what he retroactively owes – due to an arcane DC Bar rule.
The DC Bar’s GC doesn’t sound responsive as he is quoted is saying, “It is a mandatory bar, not a club” and explains how the rules limit retroactive reinstatement only where the DC bar makes a mistake. Got news for the GC – his staff made a mistake with my membership last year and they still refuse to acknowledge it despite multiple appeals. It is the most rigid organization I have ever dealt with – so I am glad to see this article and know I ain’t crazy. Trust me, the members don’t come first with the DC Bar!
Note that the senior DOJ staffer has a more complex situation, as he is being sued for malpractice as he has been trying cases for two years without a license in DC. Me? I just sit in my home office in pajamas and post stuff on websites all day – so I really don’t need to give my money to the DC Bar anyways. As you probably can tell, I had to get that off my chest…
I’m excited about my first podcast – and it’s a timely one as Lou Rorimer and Lisa Kunkle explain “What’s Next after the Annual Meeting.” Let me know if you have trouble getting it to play.
For those expecting podcasts captured at the ABA Spring Meeting in Nashville, I confess I didn’t have the nerve to whip out the microphone and start asking questions – still making the conversion from lawyer to journalist after all these years. But now that I got my feet wet, I think I will be podcast-happy. Let me know if you have a topic you want addressed – or want to be interviewed yerself! This one was done over the phone and the audio quality seems fine.
How Not to Conduct An Annual Meeting
Speaking of annual meetings, in this Sunday’s NY Times, this article points out how some companies still don’t quite get “it” about corporate governance in the meeting context. Look at what the article says Weyerhaeuser did:
“At its annual meeting last Thursday, the company’s board and management broke with their longstanding tradition of taking shareholder questions from an open microphone on the floor. Instead, they required that shareholder questions be submitted in writing, either before or during the meeting. And Steven R. Rogel, the company’s chief executive, announced that his directors and managers would devote just 15 minutes to answering the written questions.
It’s a disturbing precedent to abolish the single spontaneous interaction that executives — who, after all, are hired help — have with their owners every year. But Weyerhaeuser went even further, according to an investment manager who attended the meeting, by gaveling down several shareholders who tried to ask questions from the floor. And when management cut short the answer period and a proxy holder stood up to make a point of order and ask why, a beefy security guard removed him from the meeting.”
And in the article, here was the response from Weyerhaeuser:
“Frank Mendizabal, a spokesman for Weyerhaeuser, said: ”What we were trying to do was ensure the meeting was orderly and that as many questions as possible were answered. It’s a business meeting, not a forum for special interest groups.”
He said the company answered 12 of about 30 questions that were submitted and that it planned to communicate its responses to the remaining queries, though he said he did not know how it would do this. He added that Weyerhaeuser had not decided whether it would stick to the written-question format at next year’s meeting, but that more questions were answered this year than in previous years when they came from the floor.”
Anyone surprised that Weyerhaeuser recently made the focus list of CalPERS (and that was even before the annual meeting was held!) of corporate laggards? Apparently the Weyerhaeuser spokesperson was surprised – here is another quote: ”We were certainly surprised and disappointed that Calpers took that action,” he added. ”We pride ourselves on our ethics and corporate governance.” Lots of other gems in the article…
May Issue of Eminders is Available
We have posted our May issue of our monthly email newsletter – sign up for this free newsletter today!
Last week, someone posted the overvoting question below in our “Q&A Forum” – note that overvoting reportedly occurs at 95% of shareholder meetings – and I couldn’t help but have Julie conduct this interview with me to delve deeper into this unexplored topic. For the answer to the question below, see #879 in our Q&A Forum:
“Apparently it is relatively common that at proxy time, ADP and the broker community don’t properly reconcile votes. Very often brokers transmit voting instructions through DTC for more shares than they really have, in some cases substantially more. The transfer agent and ADP both wash their hands of the problem, and all point fingers at the brokers having multiple account numbers at DTC returning votes with the wrong account flagged. In years past, we haven’t heard about this problem. This year, the transfer agent explained the problem and wants us (the issuer) to tell them how to tabulate the overvotes. The transfer agent will either (a) not tabulate the vote of a broker’s shares unless the votes correspond to the broker’s DTC position or (b) tabulate the shares in such a manner as to “subtract” the over votes from management’s recommendations. Unbeknownst to us, option (b) has been used in years past. Any reaction on the choices, other alternatives and what others are doing? Have others heard of this problem?”
D&O Insurance Transcript is Posted!
We have posted the transcript from the webcast: “D&O Insurance Today.”
SEC Approves Prohibition of Analysts from Participating in Road Shows
Last week, the SEC approved a NYSE and NASD rule that prohibits analysts from participating in road shows. The 10 largest investment banks have already been subject to such a ban since a 2003 settlement with Eliot Spitzer.
Besides barring analysts from appearing at road shows, the new rules preclude analysts from any communication with current/prospective banking customers while bankers are present. Similarly, the rules forbid bankers from directing analysts to take part in sales or marketing efforts related to investment banking deals.
Under the new rules, analysts will be allowed to “educate” investors about investment banking deals, provided their presentations are fair, balanced and not misleading. Analysts may communicate in writing or make oral presentations – but only if investment banking personnel and company managers aren’t present.
Those of you following ISS policy changes know that ISS will now recommended withholding votes for “over-boarded” directors. Current ISS policy is that overboarded directors are defined as those directors that serve on more than 6 boards (or for CEOs, those that sit on more than 3 boards, including the CEO’s own board).
As can be expected under this new policy, a number of members have told me that ISS has indicated that one of their directors is over-boarded this year – and the choice the company then faces is either having the director roll off boards to reach the ISS policy limit or bear the burden of a recommendation that votes be withheld from the director.
If a director decides to roll off, ISS requires that this corrective action be made public somehow, as this public disclosure serves as notice to all interested parties and covers the promise to ISS with the anti-fraud protection of the federal securities laws. This can be done either through a SEC filing or press release; although here ISS prefers for the disclosure to appear in each relevant proxy statement(s) where the director is listed as a nominee (which can be accomplished by adding a tag line to the bottom of the director’s bio, similar to the language noted in the example below). ISS prefers disclosure in these proxy statements as a way to ensure that shareholders of each company have access to the information.
As an example of what this disclosure might look like, check out this Form 8-K filed by Cousins Properties filed on April 15th that states:
“Thomas D. Bell, Jr., President and Chief Executive Officer of Cousins Properties Incorporated (the “Company”), currently serves on the boards of directors of more than three publicly traded companies. He has announced that by the spring of 2006, and for so long as he is the Chief Executive Officer of the Company, he intends to serve on the boards of directors of no more than three publicly traded companies (including the Company).”
Calling All Reg FD Questions!
In connection with our webcast next Monday – “The Latest Regulation FD Practices” – please send any questions in advance to me via email at email@example.com and we will try to address them during the program (you can simply hit the “Email Broc” link on the left side of this blog).
And don’t forget to cast your vote in our survey on Reg FD practices on the home page of TheCorporateCounsel.net.
Looking for Venture Capital Content
According to Inc.com, venture capital in the US doubled in 2004. We have created a new “Venture Capital” Practice Area. Check it out and let me know if you have any content or further ideas to bolster it! Any potential bloggers out there?
On Saturday, the NY Times ran this article about a “road map” from SEC Chief Accountant Donald Nicolaisen which would allow European companies to sell securities in the U.S. without having to revise their financial statements.
Outlined in this recent speech by the Chief Accountant, the road map envisions that by 2009 (and perhaps as early as 2007) companies that follow International Accounting Standards might be able to file financial reports with the SEC without reconciling the reports with US GAAP. Here is a Paul Weiss memo that discusses the road map.
The article has quotes from European regulators and this one from SEC Chairman Donaldson: “achieving the goal would depend in part on a detailed analysis of the faithfulness and consistency of the application and interpretation of international accounting standards in financial statements across companies and jurisdictions.” This jibes with what the Chairman noted in his meeting last week with EU Market Commissioner Charles McCreevy.
The article also says the SEC expects about 300 companies, primarily European, to file annual reports next year that use international standards, which are now required in Australia and in the European Union. While Australian companies must follow all of these international rules, the European Commission gave European companies permission to opt out of complying with major parts of a rule concerning derivative securities.
30 Nuggets Transcript is Up!
On DealLawyers.com, the much-sought-after transcript from “30 M&A Nuggets in 60 Minutes” is posted.
My Last Word on Lease Restatements
I’ve blogged a bit about the “biggest category of restatements we’ve ever seen” after the SEC’s Office of Chief Accountant posted a letter regarding lease accounting in February. In last Wednesday’s WSJ, I saw the most accurate description of why the SEC released that letter, indicating that the SEC Chief Accountant was merely reacting to what the Big 4 had suddenly realized regarding past lease accounting practices. Here is an excerpt from that article:
“It all started in November, when KPMG LLP told fast-food chain CKE Restaurants Inc. that it had problems with the way CKE recognized rent expenses and depreciated buildings. That led CKE to restate its financials for 2002 as well as some prior years. CKE will also take a charge in its upcoming annual filing for 2003 through its just-ended 2005 fiscal year.
By winter, the Big Four accounting firms had banded together to ask the Securities and Exchange Commission’s chief accountant to clarify rules on lease accounting. Retail and restaurant trade groups began battling rule makers about the merits of issuing such guidance.
Now, about 250 companies have announced restatements for lease-accounting issues similar to CKE’s, and the number continues to rise daily.”
“Gripe Sites” Protected in 9th Circuit
Many companies have had to deal with so-called “gripe sites” — unauthorized websites that not only criticize the company or its products, but also use the company’s own trademark as part of the website’s domain name. Here is an article that explains what gripe sites are and here is a website that comments upon – and keeps track – of gripe sites.
As noted in this Skadden Arps’ memo, earlier this month, the U.S. Court of Appeals for the Ninth Circuit found that the noncommercial use of a trademark as the domain name of a gripe site does not constitute infringement of a trademark. The court’s decision removed an important argument on which plaintiffs rely in such cases and split from an earlier Fourth Circuit decision.
Long-awaited, the notes from the 2004 meeting between the SEC Staff and the ABA’s Joint Committee on Employee Benefits were just released and reflect discussions with Staffers held after last May’s meeting. A lot of tough questions were dealt with in the JCEB meeting as the new 8-K rules were adopted during that period and the Staff’s 8-K FAQs released last Fall reflect some of those discussions. The 2005 JCEB/Staff meeting is being held in a few weeks.
In response to my blog yesterday about parts of Corp Fin moving today, several members asked where they should mail confidential treatment requests and other materials that get sent in hard copy to the SEC. The answer is that they don’t go to a new address yet; they still go to 450 Fifth Street until the SEC makes an announcement to the contrary. This might take a few months as the Staff will be spread out over the two buildings until sometime this Summer. Will keep you posted.
My favorite interviews are those during which I learn a lot; I knew little about sharing pleadings with the media until I conducted this interview with Chris Ohly on Risks of Sharing Pleadings with the Media.
This Friday, the first wave of the SEC gets moved – one floor at a time – starting with Corp Fin. It’s important to note that Staffer phone numbers will change – you will be able to call any old phone number to listen to a message detailing the new number. But Staffers will not be able to access voicemail on their old phones once they move – so don’t leave any messages if a recording says the Staffer has a new number.
For the Chief Counsel’s well-known number – 202.942.2900 – the recording now says that on Monday, April 25th, the number will change to 202.551.3500. Here are the other new phone numbers for Corp Fin announced so far.
[As an aside, some Staffers had some of my old oil paintings in their offices – and they didn’t want them anymore – so I picked them up and you might see them soon on Ebay.].
Yesterday, KPMG settled with the SEC over the financial fraud at Xerox, for which Xerox paid a record fine of $10 million in 2002. KPMG will pay $10 million in penalities itself, in addition to disgorging nearly $10 million in audit fees and another $2.7 million in interest. Another gatekeeper case; KPMG’s spokesperson stated that the settlement did not involve findings that KPMG’s conduct was fraudulent or reckless.
The SEC’s Order requires KPMG to undertake a series of reforms designed to prevent future violations of the securities laws, after finding that KPMG caused and willfully aided and abetted Xerox’s violations of the anti-fraud, reporting, recordkeeping and internal controls provisions of the federal securities laws. The Order also finds that KPMG violated its obligations to disclose to Xerox’s illegal acts that came to its attention during the Xerox audits. The SEC’s civil fraud injunctive action against the five KPMG partners involved in the Xerox audits during the period of fraud is ongoing.
US Supreme Court Reverses 9th Circuit Decision in Dura Pharmaceuticals
Yesterday, the US Supreme Court issued this opinion in Dura Pharmaceuticals v. Broudo and overturned the 9th Circuit’s findings about loss causation. It is a unanimous decision authored by Justice Breyer.
Here is the analysis from Lyle Roberts, who blogs in “The10b-5 Daily“: As predicted, the court rejected the Ninth Circuit’s price inflation theory of loss causation. Instead, the court held that a plaintiff must prove that there was a causal connection between the alleged misrepresentations and the subsequent decline in the stock price.
Loss causation (i.e., a causal connection between the material misrepresentation and the loss) is an element of a securities fraud claim. In the Dura case, the Ninth Circuit had held that to satisfy this element a plaintiff only need prove that “the price at the time of purchase was inflated because of the misrepresentation.” (See this post for a full summary of the Ninth Circuit’s decision.)
On appeal, the Supreme Court made three key findings in rejecting the price inflation theory of loss causation. First, the court dismissed the idea that price inflation is the equivalent of an economic loss. The court noted that “as a matter of pure logic, at the moment the transaction takes place, the plaintiff has suffered no loss; the inflated purchase payment is offset by ownership of a share that at that instant possesses equivalent value.” Moreover, it is not inevitable that an initially inflated purchase price will lead to a later loss. A subsequent resale of the stock at a lower price may result from “changed economic circumstances, changed investor expectations, new industry-specific or firm-specific facts, conditions, or other events, which taken separately or together account for some or all of that lower price.”
Second, the court found that the price inflation theory of loss causation has no support in the common law. The common law has “long insisted” that a plaintiff in a deceit or misrepresentation action “show not only that if had he known the truth he would not have acted but also that he suffered actual economic loss.” Accordingly, it was “not surprising that other courts of appeals have rejected the Ninth Circuit’s ‘inflated purchase price’ approach.”
Finally, the court noted that the price inflation theory of loss causation was arguably at odds with the objectives of the securities statutes, including the PSLRA. The statutes make private securities fraud actions available “not to provide investors with broad insurance against market losses, but to protect them against those economic losses that misrepresentations actually cause.” In particular, the PSLRA “makes clear Congress’ intent to permit private securities fraud actions for recovery where, but only where, plaintiffs adequately allege and prove the traditional elements of causation and loss.”
As clear as the opinion is on the issue of the price inflation theory, it fails to provide much guidance on what a plaintiff must allege on loss causation to survive a motion to dismiss. The court assumed, without deciding, “that neither the [Federal Rules of Civil Procedure] nor the securities statutes impose any special further requirements in respect to the pleading of proximate causation or economic loss.” Even under the notice pleading requirements, however, the complaint’s bare allegation of price inflation was deemed insufficient. As stated by the court, “it should not prove burdensome for a plaintiff who has suffered an economic loss to provide a defendant with some indication of the loss and the causal connection that the plaintiff has in mind.”
Holding: Reversed and remanded for proceedings consistent with opinion.
Addition: A few initial thoughts on the Dura opinion from Lyle:
(1) The case is a significant victory for defendants in the Eighth and Ninth Circuits, which were the only two courts to adopt the price inflation theory of loss causation.
(2) Although the Supreme Court has put the price inflation theory to rest, its opinion raises some complicated questions about recoverable loss. For example, the Supreme Court notes that many factors other than misrepresentations can cause a stock price decline, but does not provide any guidance on how plaintiffs can meet their burden of proof for loss causation in cases where some or all of these other factors are present.
(3) The opinion is unclear on an issue that was expressly raised on appeal: does the stock price decline need to be the result of a corrective disclosure that reveals the “truth” to the market? The Supreme Court makes some opaque references to when “the relevant truth begins to leak out” and “when the truth makes its way into the market place,” but does not squarely address whether there is any need for plaintiffs to establish the existence of a corrective disclosure.
(4) Finally, as noted above, the Supreme Court expressly leaves open the question of whether F.R.C.P. 9(b) or the PSLRA requires plaintiffs to plead loss causation with particularity. The lower courts will need to decide whether these statutes are applicable.
Yesterday, the SEC announced that Coke has settled an enforcement action relating to the company’s failure to disclose certain end-of-quarter sales practices used to meet earnings expectations. In reaction to the SEC’s action, Coke has already voluntarily taken steps to strengthen its internal disclosure review process.
One aspect of this settlement to highlight was that even though Coke’s accounting treatment for sales made in connection with “gallon pushing” (i.e. a form of “channel stuffing” in the beverage industry) was found to be without issue, the SEC still found that the company’s failure to disclose the impact of gallon pushing on current and future earnings in MD&A, as well as the false statements and omissions in a subsequent Form 8-K, violated the antifraud and periodic reporting requirements. In other words, this is not a financial fraud case; it’s a disclosure one.
Notes from the SEC’s Internal Controls Roundtable
If you were not among the standing-room only at last week’s 404 Roundtable – from what I hear, a record crowd! – check out these comprehensive notes from the Roundtable, courtesy of Shearman & Sterling and Alston & Bird. We have posted the notes in both the “Conference Notes” and “Internal Controls” Practice Areas.
Conflicts of Interest and Dicey Engagements
On DealLawyers.com, don’t forget tomorrow’s, Wednesday, April 20th 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. Among other topics, this program will cover:
• How to determine what conflicts you may face? And what factors you should consider when facing a conflict?
• What issues should you consider to resolve a conflict? What steps are sufficient, such as disclosure and consent, implementing ethical walls, eliminating the conflict or having an advisor withdraw?
• What are the consequences of having a conflict, including how to assess the level of risk and potential liability? How should you deal with insolvent or unsophisticated clients, or unorthodox arrangements?
• What is required disclosure in SEC filings regarding fairness opinions, including permissible disclaimer language? What about disclosure of other potential conflicts? What is the impact of the NASD’s fairness opinion proposal?
Last week, the SEC’s Advisory Committee on Smaller Public Companies met for the first time. The members were sworn in and other administrative and organizational matters were taken care of, such as the approval of by-laws and a determination of a master schedule for the Advisory Committee. Unlike past SEC Advisory Committees (ie. pre-Information Age), it appears that we will be able to closely follow the developments of this Advisory Committee and that they will be moving quickly to fulfill their mandate.
The Council of Institutional Investors (CII) unanimously approved a new policy at its annual Spring Meeting last week in favor of majority voting for director elections. The new policy reads:
“Director Elections: When permissible under state law, companies’ charters and by-laws should provide that directors are to be elected by a majority of the votes cast. If state law requires plurality voting (or prohibits majority voting) for directors, boards should adopt policies asking that directors tender their resignations if the number of votes withheld from the candidate exceeds the votes for the candidate, and providing that such directors will not be re-nominated after expiration of their current term in the event they fail to tender such resignation.”
Also last week, shareholders of Gannett Co. and Caterpillar Inc. rejected majority voting proposals at their annual meetings; however, the proposals did receive 48% and 38% of the votes cast, respectively – a huge level of support considering past levels! For more on the Majority Vote Movement, see Broc’s April 14th blog and the new “Majority Vote Movement” Practice Area.
Broker-Dealers vs. Investment Advisers
Last week, the SEC decided that brokers do not have to register as advisers, upholding an exemption Congress originally included in the Investment Advisers Act. While the SEC didn’t change the existing law, it adopted a rule that addresses the application of the Advisers Act to broker-dealers offering certain types of brokerage programs. Under the rule, a broker-dealer providing nondiscretionary advice that is solely incidental to its brokerage services is excepted from the Advisers Act regardless of whether it charges an asset-based or fixed fee (rather than commissions, mark-ups, or mark-downs) for its services.
The new rule also provides that broker-dealers are not subject to the Advisers Act solely because they offer full-service brokerage and discount brokerage services, including execution-only brokerage, for reduced commission rates. The rule addresses the question of when a broker-dealer’s advisory activities are subject to the Advisers Act because they are not “solely incidental to” the broker’s business. The rule identifies three circumstances when a broker-dealer’s advice would not be solely incidental.
In the adopting release, the Commission stated its concern about the difficulty, on the part of investors, of differentiating between a broker and an investment adviser. The Commission said that it believes that those concerns may more appropriately fall under broker-dealer/Exchange Act regulation, and will receive a report from the Staff within 90 days addressing the options for most effectively responding to these issues and recommending a course of action.