Monthly Archives: January 2006

January 17, 2006

Executive Compensation Disclosure at the Forefront

Hats off to Joe Nocera of the NY Times for his uplifting column on Saturday, during which he tackles the tough issue of what boards should be doing now to rein in excessive pay. Noting that mere disclosure won’t fix many of the existing problems, Joe becomes the first reporter to identify that internal pay equity is a viable solution to many of today’s ills (quoting Fred Cook repeatedly in the process).

Hopefully, many boards will now take this opportunity to implement many of the practices for which we have provided practical guidance – on – in an effort to get back to responsible pay practices. Otherwise, shareholders are going to have their own “Holy Cow” moment when enhanced disclosures are made this proxy season (or next year, for those companies that don’t have the backbone to follow the SEC’s proposals this season).

Getting responsible isn’t difficult – just use these “four tools” (that we fleshed out in the September-October issue of The Corporate Counsel):

1. Tallying ALL Components
2. Internal Pay Equity
3. Accumulated Gains Table
4. Hold Until Retirement

You will also want to make sure that your CEO and directors have read the recently posted 8-page summary of the important guidance that came out of the “2nd Annual Executive Compensation Conference” – as well as learn from the experts during our three upcoming proxy disclosure webcasts.

SEC Upgrades Enforcement Investigation of IBM’s Option Expensing Disclosures

Last Thursday, IBM issued this brief press release to announce that the SEC has upgraded its probe of IBM’s April 2005 disclosure related to how it is expensing stock options. In June, IBM previously announced that the SEC was informally looking at the matter after questions arose when IBM said on April 5 that it would begin accounting for the expense of stock options before the deadline in a hastily arranged conference call. Here is how a recent NY Times article described what happened:

“During the call, IBM Chief Financial Officer Mark Loughridge told analysts to “update” their models to reflect the new expense for the just-elapsed first quarter. A chart distributed with the call suggested that analysts lower their earnings-per-share estimates to 90 cents from $1.04, a drop of 14 cents. They did just that.

But when IBM put out its first-quarter financials nine days later, it reported earnings of 84 cents a share – and the new options cost contributed only 10 cents of expense. Some analysts complained that IBM had played up the impact of the options expensing in order to lower estimates ahead of a disappointing quarter.”

In his blog, Mike Melbinger has been warning companies that the issues and assumptions relating to a company’s implementation of FAS 123R were very important – and would be scrutinized. Learn more about how to disclose option expensing in press releases and SEC filings in this NASPP webcast – “Drafting the New Option Expensing Disclosures” – on January 25th, which will feature SEC Corp Fin Chief Accountant Carol Stacey, Ron Mueller and Keith Higgins. If you are not yet a member, try a No-Risk Trial to the NASPP today!

Alan Dye on the Latest Section 16 Developments

Don’t forget tomorrow’s popular webcast – “Alan Dye on the Latest Section 16 Developments.” Renew your membership or try a no-risk trial to catch this important program.

January 13, 2006

NYSE Considers Dumping Treasury Stock Exception

Last week, the NYSE published a notice requesting comment regarding whether to retain, modify or eliminate the “treasury stock exception” to 312.03 of the NYSE’s Listed Company Manual, which requires shareholder approval as a prerequisite to listing additional shares in certain situations (e.g., generally if the newly listed shares represent 20% or more of the currently outstanding shares).

As the notice acknowledges, because of the way the rule is drafted, the issuance of shares from treasury (i.e., shares that were previously listed and issued but subsequently reacquired by the issuer) is not typically counted in determining whether the 20% threshold has been crossed triggering application of the shareholder approval requirement of 312.03. Though widely known, this “treasury share exception” has recently received increased attention – and some criticism from activist shareholders – in connection with transactions contemplated by Sovereign Bancorp.

The elimination or modification of the treasury share exception from 312.03 would require approval of the SEC following a public comment period. The NYSE has not yet determined to make any such proposal at this time – but, in a manner reminiscent of the way in which the NASD initially solicited comments on whether to propose new rules regarding fairness opinions, is first seeking comment from listed companies and their stockholders on the topic. Comments are due by January 20th.

By the way, the notice is also interesting for the additional detail it provides regarding the way in which the NYSE has historically interpreted 312.03. Thanks to Kevin Miller of Alston & Bird for providing the analysis above – also see the Davis Polk memo in our “NYSE Guidance” Practice Area!

The SEC’s Push for XBRL Intensifies

It is clear that implementing XBRL is a top priority for Chairman Cox, as this is the topic he has publicly spoken about the most so far. With this press release, the SEC has reached out even more to the corporate community in an effort to entice them to volunteer for the ongoing XBRL pilot program.

For those that volunteer by February 10th, the SEC now promises expedited reviews of registration statements that the Staff has selected for review. And the carrot for WKSIs is that the Staff will inform volunteers whether their 10-Ks have been selected for review within 30 days after filing – and will undertake to provide any comments on that filing within 45-60 days of filing. I would hold out for the cash prizes…

Section 404 and Non-Accelerated Status

Referring to my December 22nd blog, a number of members have been kind enough to tell me that they have confirmed with the SEC Staff that an issuer whose non-affiliate float dropped below $50m can exit – and not file a 404 report in their next 10-K – even though they filed a 404 report last year.

I had neglected to go back and reword that old blog’s soft language on this topic to reflect the Staff’s confirmation, even though we had written about it a few weeks back in the most recent issue of The Corporate Counsel as well as in this site’s Q&A Forum (see #1391).

January 12, 2006

Alan Beller to Leave Corp Fin

Yesterday, Alan Beller, the SEC’s Director of the Division of Corporation Finance, announced that he will be leaving the Staff to rejoin the private sector in February. Alan has had quite a run in his four years, as he has overseen a truly remarkable – and record – amount of rulemaking and other activity during his tenure. I don’t think that many others could have shouldered such a heavy load in such a relatively short period of time (anyone recall when 2-3 rulemakings a year was the norm!).

In fact, Alan isn’t just Corp Fin’s Director; he also serves as Senior Counselor to the Commission and has been integral in shaping policies and rulemakings beyond the Corp Fin rulemaking adopted on his watch. He certainly deserves the glowing praise in this press release.

My First Visit to the SEC’s New HQ

On Tuesday afternoon, I made my first visit inside the SEC’s new headquarters as part of a semi-annual meeting between senior Corp Fin Staffers and the Securities Law Committee of the Society of Corporate Secretaries & Governance Professionals. In fact, we were the last outside group to meet with Alan before his lame duck status was announced.

Some quick thoughts on the new headquarters:

– When you first walk in, you notice right away that the building is much more roomy and bright (and adajcent to Union Station, which has a nice eatery in its basement). I didn’t make it to the visitor’s waiting lounge and the fancy plasma TVs – useful information for those dedicated to watching Oprah.

– When you get your visitor badge, your photo will now be taken and displayed on the badge (so don’t forget to “clean up nice” before you visit).

– The meeting rooms downstairs aren’t the greatest, as they don’t feel as roomy as the old HQ. Low ceilings perhaps? The official Commission meeting room is arranged “auditorium style” with widescreen monitors on the side walls.

– The Staff’s offices are quite nice, as any new building should be. The office walls are too thin – and the hallways disturbingly quiet. Some offices look across a courtyard into other offices, making binoculars the new premium office furniture. Not too many Staffers have to share offices anymore.

– Apparently, it is tougher to meet fellow Staffers, partly since the Staff has grown in size (albeit a hiring freeze continues due to budgetary issues) – and partly because each floor contains a mix of members from the various Divisions. This might sound a little silly to an outsider, but it does make a difference when you can’t assume everyone you pass in the hall is a fellow Division member. Maybe we need a shrink to explain why this is so, but I believe that is true for any organization.

Call me an old softie (or just an old-timer), but I will always miss the building at 450 Fifth St…

Corp Fin Takes a Position on Majority Vote Proposals and “Substantial Implementation”

Keir Gumbs of Covington & Burling notes: “Last week, the SEC staff rejected Hewlett-Packard’s argument that its majority voting policy “substantially implemented” a shareholder proposal seeking to establish a majority vote standard for the election of directors. The proposal at issue was submitted by the United Brotherhood of Carpenters Pension Fund, who requested that the company’s board of directors “initiate the appropriate process” to amend Hewlett-Packard’s governance documents to provide that director nominees be elected by the affirmative vote of the majority of votes cast.

Under Hewlett-Packard’s majority voting policy, a director who received a greater number of votes withheld from his or her election than votes “for” such election was required to tender his or her resignation to Hewlett-Packard’s Nominating and Corporate Governance Committee. The SEC Staff rejected Hewlett-Packard argument that this policy compared favorably with the proposal.

Although the Staff’s letter does not go into particular detail, a conservative reading of this no-action letter suggests that a company would have to adopt a bylaw amendment – or obtain shareholder approval of a charter amendment – in order to substantially implement a majority vote shareholder proposal under Rule 14a-8(i)(10).”

I think that one upshot of this development may be that companies that are still mulling over whether to adopt a majority vote resignation guideline might now be less likely to do so. But don’t forget ISS – if you adopt a guideline that conforms with ISS’ policy, they will recommend against the shareholder proposal – so there is still that carrot. We continue to list the companies that have adopted such guidelines in our “Chart: Companies w/ Majority Vote Governance Guidelines.”

January 11, 2006

More on the SEC’s Upcoming Executive Compensation Proposals

More details about next Tuesday’s proposals continue to be reported as the SEC held a press briefing yesterday to share more information about the proposals with journalists after the WSJ scooped everyone yesterday. In his “Compensation Disclosure Blog,” Mark Borges does an excellent job analyzing the information that has been gleaned to date.

Today’s WSJ continues to report on this hot topic, including these two articles: “They Say Jump: SEC Plans Tougher Pay Rules” and “Memo to Activists: Mind CEO Pay.”

Bear in mind that the SEC’s proposals will be far-reaching, extending beyond proxy disclosures to 8-Ks, etc. In other words, the SEC intends to address any areas that intersect with executive pay. Alan Dye will spend quite a bit of time specifically on 8-K comp disclosures on the January 31st webcast: “Meeting the SEC’s New Expectations: Real Life Examples (and Explanations).”

More Responsible CEO Actions in the Compensation Area

On, we have just posted this 8-page conference summary, which was recently dropped in the mail to subscribers of The Corporate Counsel. The summary provides a synopsis of the practical implementation guidance provided at the “2nd Annual Executive Compensation Conference” from last Fall.

We also continue to add to our list of “CEOs that Have Set an Example,” including the actions noted in this Sunday NY Times article, which is repeated below:

“Skeptical about claims that soaring executive pay just reflects the value that the market places on talent? Consider this: Marsh Supermarkets, a publicly traded chain in Indianapolis, has terminated its supplemental executive retirement plans and rewritten the employment contracts of top executives to pare generous severance in the event the company is sold.

Don E. Marsh, the chairman and chief executive, said the changes would save Marsh’s shareholders $28 million. The company, in a press release, characterized the cuts as a “show of commitment to the shareholders and employees.”

It also may have been an acknowledgment of reality. Marsh, which lost $3.4 million in the quarter ended Oct. 15 on sales of $549.6 million, is trying to sell itself, and the hefty severance packages were not encouraging bidders. The stock has fallen 25 percent since Marsh announced the loss.

Don’t worry, though. The men covered by the executives-only plan – Mr. Marsh; his brother, William L. Marsh, the president and chief operating officer; P. Lawrence Butt, the corporate counsel; Jack J. Bayt, president of one division; and Douglas W. Dougherty, the finance chief – would still get to split almost $19 million that the company already set aside for them.”

Handling Disclosures of Security Breaches

In this podcast, Tom Smedinghoff of Baker & McKenzie explains the legal duties – and practical implications – of security breaches, including:

– How often do companies have security breaches these days?
– What are a company’s legal obligations regarding information security?
– Are companies required to disclose security breaches? If so, what types of breaches are discloseable?
– If a company has a duty to disclose a breach, what is the best way to do it?
– What should companies do now to enable them to act quickly if sensitive information is disclosed by another party?

January 10, 2006

Get Ready to Rumble: The 2006 Proxy Season

If you plan to take in tomorrow’s webcast – “Forecast for 2006 Proxy Season and Solicitation Strategies to Consider” – please print off these 38 pages of course materials from Pat McGurn of ISS first. Pat will open the webcast by going over what to expect this proxy season, then a panel of proxy solicitors will delve into specific strategies to consider in a variety of hot areas, including:

– What should companies be thinking about in terms of additional or modified disclosure if there is a stock plan on the ballot this year?

– More than 90 proposals to adopt majority voting are expected this season. How do you expect target companies to respond?

– Hedge fund activism is increasing and expected to do so. What should companies do or not do when approached?

– Looking forward, how might the SEC’s proposal for paperless proxy solicitation affect the landscape for activism?

Sneak Preview of the SEC’s Executive Compensation Proposals?

As I blogged yesterday, the SEC has calendared next Tuesday as the date on which the Commission will formally vote to propose new comp disclosure requirements. Apparently, someone is talking from the SEC because the WSJ ran this front-page article today providing specific details about what to expect.

According to the article, these elements might be included in the SEC’s proposals:


Judge Orders Scrushy to Repay Bonuses

Last week, an Alabama Judge ruled that former HealthSouth CEO Richard Scrushy must repay $48 million in bonuses to the company. Scrushy received the bonuses over the years 1997 to 2002.

Jefferson County Circuit Judge Allwin E. Horn III said the bonuses were undeserved because they were based on erroneous financial reports. Specifically, the Judge’s order states: “Scrushy was unjustly enriched by these payments to the detriment of HealthSouth and to allow Scrushy to retain the benefit of these payments would be unconscionable.” Scrushy reportedly intends to appeal the decision. Here is a related article.

Over the past six months there have been calls for CIBC to recapture bonuses paid to senior executives in the several years prior to the bank’s massive settlement of its Enron litigation. Repaying what history determines to have been unearned and unwarranted comp is emerging as a common theme in the compensation arena, including Sarbanes-Oxley’s Section 304 (more information on Section 304 in our “Securities Litigation” Practice Area).

January 9, 2006

SEC Ready to Propose New Executive Compensation Disclosures

The SEC has set Tuesday, January 17th as the date on which the Commission will consider proposing new executive compensation and related-party transaction disclosures for proxy statements. The Commission also will consider whether to propose requiring that most of the disclosure in proxy and information statements be provided in plain English. Here is the SEC’s announcement.

As a result, we have pushed back the dates of our first two webcasts in the proxy disclosure webcast series so that they will include guidance based on the SEC’s upcoming proposing release. The dates of the webcasts are now:

– “Your Upcoming Proxy Disclosures: What You Need to Do Now!” (January 26th)
– “Meeting the SEC’s New Expectations: Real Life Examples (and Explanations)” (January 31st)
– “Related Party Transactions: What Disclosures You Need to Make Now!” (February 1st)

Come join SEC Staffer Paula Dubberly; Ron Mueller; Mark Borges; Alan Dye and more on these webcasts, which will be critical for the disclosures you prepare this proxy season! Try a no-risk trial or renew your membership to to catch these programs.

Extension of Grace Period

As I blogged last week, memberships to our publications expired on December 31st. In response to an email to non-renewers – indicating that the grace periods on our sites ended today – our HQ has been crushed by folks who waited until the last minute to renew.

As a result, we have extended the grace periods for a few days – so renew today in order to access Wednesday’s webcast on “Forecast for 2006 Proxy Season and Solicitation Strategies to Consider.”

Who’s Too Busy For The Annual Meeting?

Last week’s article in the NY Times about Sovereign Bancorp pushing back its annual meeting – because management and the board were “too busy” – further solidified its hold on the title of governance posterchild of the year.

The company said the meeting could be pushed back at least four months so management could ”focus its full attention” on a complex three-way deal in which it will sell a roughly 20% stake to Banco Santander Central Hispano of Spain and then use the proceeds to help buy Independence Community Bank. That deal is the subject of a heated battle, partly due to its own governance issues, as I have blogged about before on

Here is an excerpt from the NY Times article: ”There is no valid excuse for manipulating the timing of the annual meeting,” Franklin Mutual Advisers, Sovereign’s second-largest shareholder, said in a statement. ”What kind of rationale is it to say that the board is essentially ‘too busy’ to convene an annual meeting? And what ‘potential confusion’ can be so debilitating as to justify taking away shareholders’ right to vote?”

Even investors who say they support management said they disagreed with the company’s tactics. ”If they are confident in what they are doing and confident in their ability to sell the story, they should let the vote happen,” said David Watson, a vice president at Anchor Capital Advisors, a money management firm based in Boston. ”They are getting into games I don’t think they should be getting into.”

The postponement of an annual meeting is uncommon, corporate governance specialists say. When it does happen, it is typically because of an inability to produce timely financial statements or as a way of avoiding a nasty takeover fight. It is highly unusual for a board to justify a delay by saying it is too busy with an acquisition.

”Companies that postpone meetings are ones that fear the outcome,” said Gregory P. Taxin, chief executive of Glass, Lewis & Company, a proxy advisory firm. ”If we allowed political officials to do this, we would live in a banana republic with a bunch of dictators.”

January 6, 2006

SEC Clashes With DOJ Over Plea Deal

After so many recent blogs about regulators battling each other, I couldn’t resist blogging on the SEC’s rare disagreement with the Department of Justice over whether the former CEO of Gemstar-TV Guide International is getting too much of a sweetheart deal from the DOJ.

The SEC’s complaints helped persuade U.S. District Judge John Walter to withhold approval of the plea deal in December. The agreement with the U.S. attorney in Los Angeles calls for the former CEO to spend six months in home detention for obstructing the SEC’s probe of a $248 million accounting fraud at Gemstar. The case is U.S. v. Yuen, U.S. District Court for the Central District of California, 05-918.

Here is a related article – and I have posted the transcript of the court hearing in which the judge challenges the DOJ’s plea bargain in our new “White Collar Crime” Practice Area.

Confusion Reigns Over 10-K and 10-Q Cover Pages

Some astute members noticed that the 10-K and 10-Q cover pages that I blogged about yesterday didn’t include all the changes that were supposed to be included on the covers effective December 27th. I should have explained that I believed that EDGAR doesn’t yet have the ability to receive submission headers that reflect LAF/AF/NAF status. The same type of filing snafus occurred on December 1st when EDGAR wasn’t reprogrammed timely to accept the changed forms required by the ’33 Act reform.

However, I will post updated forms later today with all the new checkboxes – because, from what I can tell, it seems that:

1. some financial printers are relatively unaware of this, but they can generally accommodate the change on the cover page;

2. the EDGAR submission fields have not yet been revised, so filings still need to indicate “yes” or “no” as to whether the filers are accelerated filers (note – this can cause confusion because most printers usually load the information off the cover page, so if the cover page doesn’t have the same check boxes as the EDGAR submission header, the printer might not know how to fill out the EDGAR submission header); and

3. the forms on the SEC webpage and the CCH network have not yet been updated for this change.

Given all this, I don’t feel like I led folks too far astray – but I certainly should have explained myself. Twenty lashes rain down on me!

The Latest on PIPEs

We have posted the transcript from our recent webcast: “The Latest on PIPEs.”

New Rules for Special Committees and Fairness Opinions?

Trying to minimize repeating my blogs from the Blog this year, but I think it’s important to point out the recent Delaware opinion – In re: Tele-communications, Inc. Shareholders Litigation, – that has raised significant concerns regarding whether contingent fees for advising a special committee are appropriate – and the need for a relative fairness opinion when the transaction consideration is allocated amongst classes of capital stock, among other issues raised. Read more about this case – including a copy of the opinion.

As for the concept of me blogging on two different sites – my wife looks at me now and says “you are now blogging for two?”

January 5, 2006

SEC Issues Statement on Financial Penalties

Yesterday, the SEC issued a statement on how the SEC intends to penalize companies with monetary fines going forward. This is a topic that generated much internal debate among the SEC’s Commissioners during Chairman Donaldson’s tenure.

During that time, Republican Commissioners Paul Atkins and Cynthia Glassman disagreed with their Democratic counterparts over whether such penalties deter wrongdoing and whether they unfairly punish shareholders who were
already harmed by the misconduct that led to the penalty. They argued that the SEC should focus on punishing the individuals who broke laws, since shareholders bear the burden of corporate penalties. According to news reports, the Commissioners met for over 40 hours to agree on these new guidelines.

As Chairman Cox noted in his remarks, the SEC’s new statement is intended to create objective standards to make enforcement penalties more predictable and consistent. Enforcement Director Linda Chatman Thomsen also gave some remarks.

The SEC used two cases to illustrate its approach – one resulting in a $50 million penalty and the other requiring the company only to hire an independent consultant to review the company’s financial accounting policy. The SEC slapped McAfee with a $50 million penalty for a nearly two-year fraud that pumped up revenue by $622 million. On the other hand, the SEC did not not lodge financial penalties against Applix because its conduct was confined to two discrete transactions that under-reported losses in 2001. The SEC moved against individual executives at both companies. More on this topic coming soon!

New 10-K and 10-Q Cover Pages Posted!

We have posted Word files of an updated 10-K cover page and a 10-Q cover page in the “Hot Topics Box” on home page. Lots of new checkboxes to add this time around…

Aiding and Abetting by Doing Nothing

Keith Bishop alerts us to an interesting California decision from November that addresses the issues of whether mere inaction can constitute aiding and abetting and the obligations of auditors to report up, Frame v. PricewaterhouseCoopers. The Frame opinion is another twist in the Grafton Partners saga – earlier this year, the California Supreme Court held that predispute jury trial waivers contained in the auditor’s engagement letter were unenforceable in Grafton Partners v. Superior Court, 36 Cal. 4th 944 (2005).

Below is some analysis from Keith: This case involves an appeal of the dismissal of claims against PwC for aiding and abetting fraud and conspiracy to commit fraud. The facts are rather complicated – but the argument on appeal was that PwC committed fraud by (1) returning documents reflecting the fraud; (2) destroying workpapers; (3) writing an internal e-mail that did not discuss the details of the fraud; (4) a PwC partner allegedly committing perjury in an SEC hearing; and (5) agreeing not to write and not writing an audit report that would have disclosed the fraud.

The Court of Appeal found that the first four items when viewed independently were insufficient to demonstrate a triable issue of material fact. However, the Court of Appeal found that when combined with the fifth item (absence of audit reports), a reasonable trier of fact could conclude that PwC provided substantial assistance to the fraud.

Note that this case deals with mere inaction (as opposed to omission in a communication) – the trial court had ruled that there was no evidence of an affirmative misrepresentation or misleading disclosure by PwC. On appeal, PwC argued that it had no duty to disclose. However, the Court of Appeal found that an independent duty is not required for aiding and abetting liability. PwC also contended that it had the option of not preparing an audit report under Generally Accepted Auditing Standards (GAAS) and its engagement letter (which expressly stated that PWC could decline to issue a report). The appellate court, however, found that neither GAAS nor the engagement letter prohibited disclosing the fraud to others.

The Court of Appeal found that the GAAS provisions were not necessarily controlling since they did not refer to limited partnerships. It also cited the inspection rights of limited partners under California law. In upholding the dismissal of the plaintiffs’ conspiracy claims against PwC, the Court of Appeal found that PwC had no independent legal to inform the limited partners.

This appears to be inconsistent with the Court’s statements with respect to aiding and abetting. However, the Court stated that in the context of aiding and abetting, the failure to disclose was relevant to the issue of whether PwC fulfilled its duty to its clients. This is not the same as whether PwC had and independent duty to the limited partners. Thus, the aiding and abetting claim survived dismissal while the conspiracy claim did not.

We have posted a copy of the opinion – as well as a correction of the original opinion – in our “Securities Litigation” Practice Area. And “Court of Appeal” is not a typo – for some reason, the California court likes it singular…

January 4, 2006

Chairman Cox Names New General Counsel

Not surprising if you read the LA newspapers (which have rumored this pick for some time), SEC Chairman Cox named a partner from his former law firm yesterday as the SEC’s new general counsel. Brian Cartwright, a partner at Latham & Watkins, will start his new job on January 23rd – and his tenure will slightly overlap with the outgoing general counsel, Giovanni Prezioso, who will leave in the next month or so.

Here is the SEC’s related press release, which touts Brian’s managerial experience at Latham as well as notes that he is a former astrophysicist. Note that Brian has a corp fin/transactional background – most of the SEC’s general counsels have a litigator’s background.

Following on the astrophysicist theme, you gotta love the WSJ’s Law Blog’s headline of “Brian Cartwright’s Really Smart.” Hmm, now that I think about it – does that mean that the SEC needs more scientists? Maybe a biologist to head the Division of Investment Management and a physicist for Market Reg? An astrologer for Chief Accountant?

Kidding aside, as Chairman Cox selects personnel for the remaining vacant top spots, the “Alan Beller Watch” is sure to intensify…

Securities Lawsuits Drop During 2005

As noted in this Tuesday WSJ article, Stanford University Law School and Cornerstone Research just released their 2005 Securities Class Action Filings Report. The Report tracks securities class action lawsuit activity and presents an overview of the trends in litigation for the year. A full copy of the report is available on Stanford’s Clearinghouse site as well as with other litigation trend studies posted in our “Securities Litigation” Practice Area.

The following highlights some of the key findings of the Report:

1. The overall number of class actions filed in 2005 decreased more than 17%, falling from 213 filings to 176. This year’s number is also 10% below the average from 1996-2004.

2. The “Disclosure Dollar Loss,” which is the amount of market capitalization companies lost upon announcement of a lawsuit, decreased 33%, from $147 billion in 2004 to $99 billion in 2005.

3. There was a substantial increase in the number of lawsuits alleging misrepresentations in financial reporting, increasing from 78% in 2004 to 89% in 2005, and false forward-looking statements, from 67% in 2004 to 82% in 2005.

Stanford Professor Joe Grundfest and Dr. John Gould of Cornerstone suggest that the end of the boom and bust cycles of the US equities market – and the improved governance in the wake of the Enron and WorldCom frauds may be two of the primary reasons for the marked declines in filings. Bill Lerach is quoted in the WSJ article as noting the increase in financial fraud filings was because cases alleging financial misstatements have a better chance of surviving in court.

January Eminders is Up!

The January issue of our monthly newsletter is posted. Enjoy!

Some New Year Commentary on the Accounting Profession

In our “Accounting Overview” Practice Area, we have posted an interesting speech from the current chairman of Ernst & Young, Jame Turley, given a month ago. Lynn Turner notes “Mr. Turley highlights the benefits that SOX has provided and urges against watering down the legislation. He notes the shortcomings in the past of the profession and need for humility in light of that. He then goes on to say the firms are too big to fail and should be protected against a catastrophic loss by the government.

Mr. Turley also notes the Chamber of Commerce has formed a Commission on the Regulation of the U.S. Capital Markets in the 21st Centruy for the purpose of examing the legal and regulatory framework so as to “modernize” the capital markets. Its report is due in 2007. He also raises the issue of the need for more forward looking and non-financial disclosure, what I call “Key Performance Indicators” or KPIs.

The speech does a very good job of teeing up some of the more important discussions that will no doubt take place in the next couple of years regarding the accounting profession. It is also interesting to note that the very same accounting firms – who argued before Justice and the FTC that they out to be permitted to consolidate, merge and become more concentrated – are now arguing that having done so, they should be given protection from events that might cause the few of them left to fail.”

January 3, 2006

What Was Hot; What Was Not in 2005

Happy New Year! Here is my 2nd annual creation of an “In/Out” List:

– Hedge Fund Activists/Union Activists
– Free Writing Prospectuses/Gun-Jumping
– Auditor Liability Caps/Internal Controls
– “Really Vote No” Campaigns/”Just Vote No” Campaigns
– More Exec Comp Disclosure/Complaining about Comp Disclosure
– Going Dark and Private/Going Public
– Access Equals Delivery/Electronic Delivery
– Internal Pay Equity/Peer Benchmarking
– Podcasts/Text Interviews

If you have any further suggestions, please email them to me and I will add them to this list. For comparison, here is last year’s list.

Time to Renew!

As all our memberships and subscriptions are based on a calendar year, some of yours may have expired over the weekend. You can renew online below for any of these fine print or online publications:
The Corporate Counsel print newsletter
The Corporate Executive print newsletter
Section 16 Annual Service
Romeo & Dye’s Section 16 Filer

Number of Restatements During 2005 Break Record

Last Thursday, the USA Today ran this article noting that there were a record number of restatements during 2005. The good news is that many of these restatements were announced as companies were completing their 404 work (499 in the March-May time frame; another 114 in August) and most of these companies have identified and corrected their problems.

With larger companies done with their initial year of internal controls testing, the number of restatements appeared to be trending down by the end of ’05 – and ’06 could be the first year in which there are significantly fewer restatements compared to the prior year since the numbers began to be tracked in ’97. Of course, as smaller companies are required to complete their 404 work, this number likely will shoot up again…