Monthly Archives: June 2006

June 29, 2006

Majority Vote Standards in Charters

In this podcast, Bob Smith, Associate General Counsel of Progress Energy, discusses how – and why – Progress Energy voluntarily proposed to change its charter to adopt a majority vote standard (a proposal which shareholders recently approved), a standard that ISS now refers to as the new “gold standard” in the majority vote area, including:

– What did Progress Energy’s board do recently that led ISS to call it the “gold standard”?
– Can you describe Progress Energy’s charter amendment?
– What reaction have you received from shareholders?

Prevalance of Majority Vote Reforms

According to this recent Washington Post article, nearly 145 of the companies in the S&P 500 now either have a majority vote standard or a director resignation bylaw or policy.

Growing Support for Majority Vote Proposals

As noted recently in the ISS “Corporate Governance Blog,” shareholder support for proposals seeking majority voting in director elections has averaged 47.3% support at 80 meetings this season. Last year, those proposals averaged 44% at 60 firms. This season, majority vote proposals received an average of 54.5% approval at 33 meetings where companies had not previously announced board election reforms, such as a director resignation policy. Support was lower at firms with director resignation policies such as the one at Pfizer and over 90 other firms, averaging 42.1% at 47 meetings this season.

June 28, 2006

Death Blow to DOJ’s Strongarm Tactics on Legal Fee Advancements?

Yesterday, Judge Kaplan of the US District Court of Southern New York handed down this opinion in U.S. v. Stein (for background on this case, see this blog). Keith Bishop notes: This is a stunning defeat for the Department of Justice. Judge Kaplan found that the government violated the Fifth and Sixth amendments to the U.S. Constitution by causing KPMG to cut off payment of legal fees and other defense costs upon indictment. Now, it seems that KPMG (with the government’s acquiescence) will be under considerable pressure to advance defense costs. Judge Kaplan did not dismiss the indictment, but he left open that possibility if KPMG decides not to advance legal fees.

Judge Kaplan’s lengthy 88-page opinion is thoughtful and scholarly – full of the language of liberty and individual rights. Among other things, the Judge’s opinion states that “[t]he imposition of economic punishment by prosecutors, before anyone has been found guilty of anything, is not a legitimate governmental interest – it is an abuse of power.”

A lot of happy companies out there. For example, the Association of Corporate Counsel had joined in an amicus brief in this case – and now has issued this press release trumpeting the decision. We have posted a copy of the Stein opinion in our “Advancing Legal Fees” Practice Area – and check out the commentary regarding Judge Kaplan’s opinion in WSJ’s “Law Blog.”

On the other hand, the practical consequences could be limited. Here is an excerpt from the “D&O Diary Blog“:

“While Judge Kaplan’s ruling is unquestionably a significant event that will impact pending prosecutions across the country, the specific practical consequences outside the KPMG tax shelters case will remain to be seen. His ruling is based on a detailed record of the particular facts and circumstances of that specific case. In addition, as the opinion of a U.S. District Court Judge, the decision has persuasive but not precedential authority. Nevertheless, Judge Kaplan’s opinion is important and will have ramifications, and raises a host of potentially interesting questions in connection with the indictment of the Milberg Weiss law firm, among many other pending cases.”

As an aside, Keith points out Monday’s U.S. Supreme Court’s decision in U.S. v. Gonzalez-Lopez. That case also involved the Sixth Amendment’s right to counsel. In the Stein case, Judge Kaplan found that the Thompson Memorandum – and the government’s implementation of it – violated the defendants’ right to counsel under the Sixth Amendment. More analysis of this case is available on the SCOTUS Blog.

The Evolving Relationship Between Lawyers and Auditors

We have posted the transcript from the recent webcast: “The Evolving Relationship Between Lawyers and Auditors.”

Executive Compensation in the News

Heading out today to moderate a panel on executive compensation for the Society of Corporate Secretaries’ Annual Conference and thought I would point out these two recent interesting articles:

– NY Times’ “The Winding Road to Grasso’ s Huge Payday” gives a detailed and fascinating account of the behind-the-scenes machinations (including some juicy e-mails) leading up the lawsuit that was filed three years ago – which already has cost the NYSE more than $40 million in legal fees!

– WSJ’s “As Workers’ Pensions Wither, Those for Executives Flourish” is a detailed article illustrating how much relative pay in this country has gotten out of whack, as executive officer pensions – covering just a few hundred employees in a large company – can stack up fairly nicely against the pension obligations for a workforce well exceeding 100,000. Includes some interesting stats on how executive pensions is a drag on earnings – and most of us already knew about the lack of disclosure of all this, as pointed out in the article…

CA Decides to Include Mandatory By-Law Amendment Proposal In Its Proxy Statement

Following up on yesterday’s blog regarding VC Lamb’s decision to dismiss Professor Bebchuk’s lawsuit against CA without prejudice – because the issue wasn’t “ripe” – Kaja Whitehouse of Dow Jones wrote an article noting that the company has decided to include Bebchuk’s mandatory shareholder proposal that seeks to change the company’s by-laws.

CA shareholders will now get to vote on this shareholder proposed by-law amendment at the company’s annual meeting in August – and the rest of us will have to wait for another case to “ripen” before we find out what the Delaware courts decide in this important area. The floodgates for mandatory by-law proposals may soon open.

Here is an excerpt from the Dow Jones article:

“The company originally denied a request to add the proposal to its upcoming proxy statement, claiming the proposal was a violation of Delaware law. The rejection resulted in a court challenge by the drafter of the resolution, Harvard professor and shareholder rights activist Lucian Bebchuk.

A ruling by the court would have shed light on the currently murky issue of whether shareholders have the power to decide bylaw issues, which are normally governed by directors. A company’s bylaws are the official rules that govern its management.

Shareholder proposals are typically advisory, meaning management has the option to adopt or ignore the recommended action. As part of a growing effort by shareholders to gain more control over how public companies are governed, more shareholders are looking to submit proposals that would require companies to adopt their plans if approved by a majority of shareholders.

The CA case has broader legal and governance consequences for corporations. For one, companies may be more reluctant to reject proposals that seek to change the bylaws. Companies can reject shareholder proposals for a number of reasons, including concern that a resolution would interfere with internal affairs.

Before definitively rejecting a proposal, however, corporations tend to seek the blessing of the Securities and Exchange Commission in the form of a “no-action” letter.

Before Bebchuk brought the case to court, CA sought a no-action letter from the SEC to test whether its rejection would pass muster. The SEC refused to issue a letter in this case, citing the pending ruling.

Without a clear answer from the Delaware courts on the legality of this issue, the SEC may not feel comfortable issuing no-action letters for similar requests, said Michael Barry, of Grant & Eisenhofer, the Wilmington, Del., law firm that filed the lawsuit on behalf of Bebchuk.

“They’re hesitant to opine on matters of unsettled state law,” said Barry, adding, “It would put then in an awkward position.”

SEC officials declined to comment on the matter, said spokesman John Heine. Agency staff will make its position known when the issue comes up again, said Heine.

A lack of clarity from the court system, which indicates that Delaware judiciaries feel shareholders could have a right to change a company’s bylaws, prompted CA’s change of heart about the proposal.

“The Delaware Court has ruled that it should not decide the legality of the by-law [issue] until our stockholders have first voted on it,” said Jennifer Hallahan, a spokeswoman for the company.”

June 27, 2006

Delaware Court Watch: The Mandatory By-Law Amendment Saga Continues

A few weeks ago, I blogged about big things brewing in the Delaware courts that could shake up shareholder proposals and Rule 14a-8. On Thursday, Vice Chancellor Lamb of the Delaware Court of Chancery issued this opinion and order in Bebchuk v. CA. In his opinion, VC Lamb denied the request for declaratory relief without prejudice because the case isn’t ripe yet. Importantly, the Vice Chancellor notes that Professor Bebchuk’s by-law is not invalid on its face – so VC Lamb has tee’d up the issue about whether bylaws can restrict pill authority under the right circumstances.

Although it looks like CA (“CA” is the company formerly known as “Computer Associates”) has avoided a bullet, it could be just temporary. I guess the next suit from Professor Bebchuk might be in federal court – if he trys to enjoin the mailing once CA files its proxy statement – as VC Lamb won’t act before the vote is in.

And Another Rule 14a-8 Development for CA…

And there developments related to another CA shareholder proposal: this proposal relates to the removal of directors from the board. Last week, an investment fund submitted this reconsideration request asking the Commission to review a no-action response from Corp Fin. In that response, Corp Fin allowed the exclusion of a shareholder proposal under Rule 14a-8(i)(8) because the proposal seeks to give shareholders the power to remove directors outside the director election context. We have posted this reconsideration request and the VC Lamb opinion in our “Shareholder Proposals” Practice Area.

Although some commentators (such as this Sunday NY Times column) have raised the profile of this issue (ie. whether there should be democracy in the boardroom), I don’t believe appeals regarding the SEC’s (i)(8) position will work since the rule is pretty clear and the Commission already has considered this issue a number of times. Of course, the Commission sometimes does change it’s position – so I guess it can’t hurt to try…

NASPP’s 14th Annual Conference: Las Vegas Baby!

With this year’s NASPP Annual Conference including the entirety of the “3rd Annual Executive Compensation Conference” at no extra charge, an overwhelming number of attendees have already registered for this three-day event to be held October 10-13 in Las Vegas. Here is a detailed conference brochure providing descriptions of the 40+ breakout panels for the NASPP’s Annual Conference.

Whether you attend just on October 12th for the “3rd Annual Executive Compensation Conference” or the entire three-day NASPP Annual Conference, you will want to reserve your room at the conference hotel soon as it’s filling up fast…

June 26, 2006

The SEC’s Bad Day: Part I

Unfortunately, I couldn’t get that American Idol song out of my head on Friday – you know, the one that is now omnipresent on the radio: “so you had a bad day…” (not that I ever would admit to watching American Idol). Anyways, some SEC Staffers were probably humming that tune Friday after the US Court of Appeals for the District of Columbia Circuit vacated the SEC’s controversial rule – in Goldstein v. SEC – that had required most hedge fund advisers to register with the SEC. We have posted a copy of the court opinion under “Latest Developments” of our home page.

Based on this ambiguous statement from SEC Chairman Cox, it looks like the SEC will take some time to mull over its choices about how to best regulate hedge funds going forward: either appeal to the full Court of Appeals or the US Supreme Court; come back with a new proposal to regulate hedge funds that would satisfy the Court’s concerns (or lobby Congress to amend the Advisers Act); or do nothing.

Interesting, the Court’s decision hinged on fairly technical grounds, as it found that the SEC rules – which just became effective in February – treated investors in hedge funds as “clients” of the advisor, instead of treating each hedge fund as a single “client” for purposes of the statutory exemption from registration for advisors which advise fewer than 15 clients and meet certain other conditions. The last sentence of the decision is telling for the SEC: “This is an arbitrary rule.”

The SEC’s rulemaking process has been taking it on the chin lately, with the SEC recently submitting a status report to the same court regarding its mutual funds/director independence rules after the court forced the SEC to partially re-do that rulemaking. And other challenges impacting the SEC are looming, such as the challenge to the constitutionality of the PCAOB.

The SEC’s Bad Day: Part II

On Friday, the SEC also had to stare down this NY Times article, which alleges that a SEC lawyer involved in an investigation of insider trading allegations at a prominent hedge fund was fired because he wanted to subpoena a bigwig at one of Wall Street’s firms. This article was at the top of the NY Time’s front page – page A1 – even though the SEC’s inspector general said in an April report to Congress that his office had reviewed the SEC lawyer’s claims and “failed to substantiate the allegations”! See this Washington Post article for that seemingly important IG tidbit.

So until we know the full story here, I will take the NY Times article with more than a grain of salt. Let me explain: it is very hard to get fired from the government. That’s why people go work for the government; it has great job security. Once you are past the one-year probationary period, you have to get caught doing drugs at your desk or having inappropriate relations in the stairwell to get fired (other than high level Staffers who work much more “at will”).

In fact, in my combined 5+ years at the SEC, I can only think of two Staffers who were fired – and both of them were fired right before the end of their probationary period – same as the guy who served as the basis for the NY Times article. So that is traditionally how the SEC’s probationary period works: someone who performs poorly or who doesn’t fit in is shown the door right before they essentially become eligible to be a “lifer.”

Now, this guy’s beef really might be legitimate – and it’s clearly odd that he got a merit pay increase before he was let go – but my gut told me there might be other circumstances at play when I got to the end of the NY Times’ lengthy article, which states:

“Before joining the S.E.C., Mr. Aguirre had a reputation as an innovative plaintiffs’ lawyer in Southern California, representing victims of shoddy home construction. A 1992 article in California Lawyer magazine said he used “aggressive — some say temperamental” courtroom tactics to win several big cases.”

Of course, that blurb sounds like the SEC should have known that it hired itself some trouble, as “aggresive” tactics don’t mix well within the mold of a government agency. Then again, the SEC might have known that – as it looks like it dragged its feet hiring this guy, as the end of the article notes:

“Mr. Aguirre had been at odds from time to time with the S.E.C. When there was a delay in his hiring, he suspected that his age — he was then in his 60’s — was the reason and he filed an administrative complaint with the Equal Employment Opportunity Commission.”

Cross-Border Acquisitions: A Buyer’s Perspective

The second installment of’s M&A Boot Camp for this summer is now available: “Cross-Border Acquisitions: A Buyer’s Perspective.” Join Elizabeth (“Libby”) Kitslaar and Phil Stamatakos of Jones Day as they walk us through the special issues that you will face in a cross-border deal.

If you are not a member, try a no-risk trial as we just launched our half-price “Rest of 2006” rate – believe it or not, a license for a single user is only $100 and there are similar reduced rates for offices with more than one user!

June 23, 2006

Another Contender: State Street for Governance Poster Child of the Year?

Way back on April 20th, the Boston Globe ran an article about a shareholder activist who was arrested at State Street’s annual meeting because of the questions he was asking. Not much attention was paid to it at the time, because in the few instances where a shareholder has been arrested at a shareholders’ meeting, the company doesn’t normally doesn’t press charges in the end.

Incredulously, I am told that State Street is pressing charges here – a clear message that shareholder input is not welcome. Although the excerpt from the Boston Globe article below highlights the fact that David Smith might have an axe to grind with State Street, it is absurd that a company would bring criminal charges for “trespass” against a shareholder who had a legitimate right to attend a meeting:

“David Smith has been many things at State Street over the past decade. He has been an employee, a corporate critic, and a shareholder activist. Yesterday, he was under arrest.

Smith’s beefs with State Street go back to 1998, when he was fired. Smith said he was canned after complaining that a colleague revealed he was gay. He launched a public relations war that featured a website posting documents embarrassing to State Street and has dogged the company ever since.

Smith and his partner, Patrick Jorgstad, took front-row seats at the company’s annual meeting yesterday. They rose to ask more than a dozen pointed questions, most of which seemed designed to bait the chief executive.

As the questions went on, comments from both sides grew increasingly snarky. Eventually, Smith dared Logue: ”Arrest me!” He complied.

Officers in the audience arrested Smith without incident and charged him with trespassing, a Boston police spokeswoman said. Stockholders applauded as he was led out.

Smith and Jorgstad have used many bombastic tactics with State Street; they also have advanced important shareholder interests. Jorgstad’s proposal recommending the elimination of State Street’s poison-pill defense was overwhelmingly approved by shareholders yesterday.”

Meeting Notes: The SEC’s Chief of M&A Speaks

Here is a recent blog from the “ Blog”: Last Friday, Brian Breheny, Chief of Corp Fin’s Office of Mergers and Acquisitions was the guest speaker at a meeting of the Association of the Bar of the City of New York Special Committee on Mergers, Acquisitions and Corporate Control Contests. Brian discussed a number of topics of interest; following is a brief summary of those issues (as is always the case, Brian noted that his views were his own views and not the views of the Commission or his fellow staff members):

1. SEC proposed amendments to the tender offer best-price rule:

– the amendments to the tender offer best-price rule remain the office’s top priority;
– it is unclear as to when the Commission may adopt the final rule amendments, although Brian thought it was possible that the amendments might be adopted this year;
– the staff is in the process of considering the comments received to the proposed amendments;
– Brian noted that it is likely that changes will be made before adoption to address some of the comments;
– he noted that expanding the proposed compensation exemption and compensation committee safe harbor to issuer tender offers was uniformly recommended and that he thought those changes would be consistent with the Commission’s intention for proposing the amendments;
– he also noted, however, that certain of the other proposed changes, such as providing a carve out from the best-price rule for commercial arrangements or a de minimus ownership exemption, were given serious consideration during the proposing stage; and
– finally, Brian noted that he was keenly aware of the concerns raised by commentators about the need for the changes to result in an effective exemption and safe harbor.

2. Study of the cross-border tender offer rules:

– the office of mergers and acquisition continues to study whether recommendations should be made to the Commission to change certain of the cross-border tender offer rules;
– the data provided by bidders to date is that certain of the rules, such as the 30-day look back to determine share ownership levels, are difficult to comply with; and
– the office and, for purposes of Rule 14e-5, the staff of the Division of Market Regulation, is considering whether certain consistent relief granted since the adoption of the cross-border rules could be handled in a global exemptive order.

3. NASD proposed fairness opinion disclosure and policy/procedure rules:

– the staff of the office of mergers and acquisitions and the Division of Market Regulation is considering the comments received by the Commission to the NASD’s proposed Rule 2290;
– the comment period closed in May 2006;
– 7 comments were received;
– certain language changes to the proposed rules may be necessary to address potential inconsistencies in the proposed language of the rule; and
– the ABCNY Committee reiterated concerns regarding requirement for policy/procedure re: differential compensation to officers, directors and other employees.

4. Section 13(d)/ beneficial ownership reporting compliance:

– the staff continues to view compliance with the beneficial ownership reporting rules as a high priority;
– the staff has heard concerns that hedge funds and/or others may knowingly be crossing the line and acting in concert pursuant to an agreement or arrangement without filing a Schedule 13D to reflect the Group’s beneficial ownership and plans, etc.; and
– the staff will aggressively pursue willful violations of Section 13(d) if it becomes a aware of such conduct.

5. Fairness opinion disclosure:

– there may be a need to revisit the disclosure practices related to fairness opinions;
– the ABCNY Committee questioned the staff policy related to including a risk factor regarding contingent financial advisory fees and requesting (in a non Rule 13e-3 transaction) that filers provide the staff on a supplemental basis, copies of board materials not referenced in background section of the proxy/registration statement so that the staff could consider the need to refer to just board materials; and
– Brian and the Committee agreed to maintain a dialogue about these issues.

June 22, 2006

More, More, More on Option Misdating

The articles just keep coming as the media is loving this backdating scandal. And it looks like the plaintiff’s bar is gonna love it too according to this Red Herring article, which quotes a lawyer from Lerach’s firm observing: “He sees the damages to investors reaching billions of dollars and plans to press for the replacement of board directors who allowed the backdating of options to go on.” The D&O Diary Blog contains some good “food for thought” on possible statutes of limitations defenses.

And according to this article and this article (and this WSJ article from Tuesday), D&O insurers might refuse to renew policies with implicated companies.

In addition, members of Congress are calling for the SEC and the DOJ to step up with their enforcement actions on this issue – see this article – which is now approaching 50 companies under investigation. As the accounting industry begins to come under fire, the SEC’s acting Chief Accountant, Scott Taub stated last week that the PCAOB needs to give guidance to auditors on when a grant of options may be considered suspicious.

And the Council of Institutional Investors has sent this letter to 1500 companies, asking them to disclose whether they are under investigation (and the AFL-CIO and CalPERS are doing something similar – here is a copy of CalPERS’ letter, which was sent to 24 companies).

Coming soon! We provide more guidance on the issues implicated by options misdating in the May-June issue of The Corporate Counsel, which just went to the printers (this nicely complements what we wrote in the March-April issue) – and we continue to upload articles and research reports about option timing unto our “Timing of Stock Option Grants” Practice Area on

A Different Kind of Backdating Witch Hunt

In his op-ed yesterday, the WSJ’s Holman Jenkins joins me in using the term “witch hunt” to describe some of the attention being paid to the options backdating scandal. The source of this op-ed is curious given that the WSJ has been running at least one article per day on the topic (e.g. yesterday’s article was about Microsoft).

But Holman’s rationale for using the term is a far cry from my rationale. I am just worried that innocent companies might be caught up in the sweep to find out who the next culprit might be. Holman thinks that backdating in itself is no big deal. He thinks that folks are caught up in bunches because of “ever-shifting accounting, regulatory and tax standards.” In other words, I think he is saying that those standards shouldn’t really matter – instead, he believe that “overseeing CEO incentives is among the most important board responsibilities, and boards should keep control of it and do it clearheadedly.”

I obviously agree with Holman’s point – who doesn’t? – but I would argue that Holman contradicts himself somewhat because if a board doesn’t realize that options were backdated (or that proxy statements were misleading because they erroneously disclosed that boards granted options with exercise prices set on the grant date), that might illustrate that the board wasn’t in control and was lacking that whole “tone at the top” thing that is so easy to say, but so tough to do…

The Shrinking SEC

While Congress is asking the SEC to do more investigating about options backdating, Congress also is cutting the SEC’s budget from total program costs of $917.7 million (for the year ending September 30, 2005) to $888.1 for this year – with a budget request of $904.8 for the next fiscal year. The SEC staffing levels for the Division of Enforcement are down to 1216 this year from 1232, with a budget request of 1187 for fiscal 2007 (see page 53 of the SEC’s 2005 Annual Report – and pages 1-3 of the 2007 budget request).

As has been happening in Corp Fin for nearly two years, I understand that quite a few enforcement positions are not being filled as staffers leave. Given Chairman Cox’s connections on the Hill, I imagine that trend could be reversed if he pushed hard for more money…

Mavs Owner Invests in Stock Fraud News Website

Given that the Dallas Mavs just tanked, I thought it was appropriate to blog about their owner’s – Mark Cuban – latest adventure: (not yet launched) that will employ investigative journalists to ferret out and blow the whistle on corporate fraud. For those that don’t follow sports, Mark is the most zany sports owner since Bill Veeck, who hired a midget to play baseball as a gag in the ’50s. And Mark maintains his own blog – “blog maverick” – and even allows fans to e-mail him. Clearly a New Age sports team owner, who has already accrued over $1.5 million in fines from the NBA for his conduct. Bruce Carton blogged at length about this new development recently in his “Securities Litigation Watch.”

June 21, 2006

Majority Voting: ABA Finalizes Amendments to the Model Business Corporation Act

Yesterday, the ABA issued a press release containing final amendments to the Model Business Corporation Act adopted by the ABA’s Committee on Corporate Laws relating to Voting by Shareholders for the Election of Directors. We have posted these amendments in our “Majority Vote Movement” Practice Area.

3rd Annual Executive Compensation Conference: Early Bird Expiration

Yesterday, I got many frantic e-mails and calls from members rushing to get a check cut for the Early Bird Discount rate available for the “3rd Annual Executive Compensation Conference.”

Even though the deadline ended last night, we will still process any last minute takers of our “firmwide for $995” offer for qualifying members of Just call our HQ at 925.685.5111 – or email (or use the online registration mechanism as the old pricing will still be up there for the next day or two).

Audit Committees in Action: The Latest Developments

Check out tomorrow’s webcast entitled “Audit Committees in Action: The Latest Developments” featuring Amy Goodman of Gibson Dunn; Lydia Beebe of Chevron; Susan Wolf and Steve Koehler of Schering Plough; Jennifer McCarey of MCI; Amy Corn of Pitney Bowes; and Linda Wackwitz of Quovadx. Among the topics of this program are:

– What are the latest developments for audit committee charters, agendas and meetings
– How should the audit committee manage its relationship with the independent auditor, including conducting an evaluation of the auditor
– What issues should be considered when changing independent auditors, reporting a material weakness in internal controls and restating financials
– When should audit committees hire their own experts – and what should be considered before hiring those experts
– How should an audit committee interact with the internal auditor – and ensure management cooperates with the internal auditor

Tune in on July 18th for the third installment of our webcast series dealing with audit committees and their advisors: “How to Develop a Whistleblower Compliance Program Today” – we just posted our half-price no-risk trial for the rest of 2006, so try us out if you haven’t before…

Understanding Whistleblower Hotlines

In this podcast, Alice Peterson, President of Syrus Global, provides some insight how whistleblower hotlines work, including:

– How does your hotline work?
– What are the most common queries asked by potential clients?
– What characteristics should a company look for from a third-party hotline provider?

June 20, 2006

The PCAOB Gets a New Chair: Mark Olson

Yesterday, SEC Chairman Cox named Mark Olson as the new Chair of the PCAOB, replacing Acting Chair Bill Gradison (who continues on as a Board Member). In addition, Kayla Gillan got her wish and was reappointed for a second term as a Board Member (after waiting more than six months for the news!).

As this press release indicates, Mark has served as a Federal Reserve Governor since 2001 – before that he served as the Staff Director of the US Senate Securities Subcommittee of the Banking, Housing, and Urban Affairs Committee for two years, was a Partner at E&Y for 11 years and a CEO of a state bank for over a decade. It must feel peculiar for the SEC Chairman to appoint someone to a position that pays over 3x what he makes…

PCAOB’s Chief Auditor Weighs In: Evaluating Internal Controls

A few weeks back, the PCAOB’s Chief Auditor, Tom Ray, delivered this speech with a notable message: hop onto that learning curve, auditors. His speech directly addressed the “over-documentation” complaints making the rounds. Learn more about the speech from the AAO Weblog.

More on Harmonization (Or Lack Thereof) of Global Regulations

Not soon after I blogged on Friday, the SEC issued this warm and fuzzy fact sheet that globalization and merger of exchanges would not ultimately lead to mandatory registration of non-US exchanges (here is a related WSJ article from yesterday). Not surprising given SEC Commissioner Nazareth’s recent comments on this topic.

What is curious about this development is that the SEC put out its message via a “fact sheet.” This “fact sheet” is posted on the SEC’s website under “Press Releases” rather than the seemingly more appropriate “Other Commission Orders, Notices, and Information.” The question remains: do we now add “fact sheets” to the dozen or so other vehicles by which the SEC provides guidance to market participants?

DOL Panel Backs Order of Whistleblower Reinstatement

As noted in this Washington Post article, the Cardinal Bankshares whistleblower saga continues as the Department of Labor’s Administrative Review Board ruled that the company must reinstate its former CFO. The DOL panel denied a request by the company to stay a Labor Department judge’s earlier order that it take the CFO back – and afterwards, the company said it would not bring the CFO back until it is compelled to do so by the US District Court for the Eastern District of Virginia (ie. Welch v. Cardinal Bankshares Corp, as I first blogged about well over a year ago; see these law firm memos to follow the saga to date). So this is not over until it’s over.

In my mind, a reinstatement remedy is simply unworkable; there has got to be some other way. Can you imagine firing your CFO and then being forced to rehire him? That wouldn’t seem to bode well for overall company morale, not to mention collegiality among senior officers…

[Will you still read me…when I’m 64? So much craziness over Paul McCartney’s 64th birthday. That’s twenty years away for me – God willing – and if I’m still blogging at 64, I vow to do something spectacular for those of you still reading this dribble…not sure what, but I promise it will be glorious and you will be thankful for having patiently waited. Maybe something that Nacho would do…]

June 19, 2006

Nasdaq Proposes to Modify Director Independence Cure Period

Last week, the SEC issued a Nasdaq proposal that would lengthen – in certain circumstances – the cure periods available to listed companies that lose an independent director or an audit committee member that causes the company to fall out of compliance with Nasdaq’s director independence rules (ie. a majority of the board must be independent and there must be at least three independent directors on the audit committee).

Under current rules, a company must cure any deficiency by the earlier of the next annual shareholders meeting or within one year of the event that caused the deficiency. The Nasdaq proposal would change the cure periods so that a company would have at least have 180 days from the date of a deficiency event to cure the deficiency.

Companies can’t rely yet on this proposed rule change, but the Nasdaq proposal states that, upon SEC approval of the rule change, Nasdaq will allow any company still within the prior cure period to use the new minimum 180-day cure period from the date of the deficiency, even if the deficiency occurred before the date of SEC approval.

Conducting Due Diligence: Through the Eyes of the Associate

The first installment of’s M&A Boot Camp for this summer is now available: “Conducting Due Diligence: Through the Eyes of the Associate.” Join Deborah Bentley Herzog and Mike Woodard of McGuire Woods for an entertaining session that teaches the basics of what you need to know about conducting due diligence, with an emphasis on what issues and traps associates should seek to spot and resolve.

If you are not a member, try a no-risk trial as we just launched our half-price “Rest of 2006” rate – believe it or not, a license for a single user is only $100 and there are similar reduced rates for offices with more than one user!

[Congrats to my boss, Jesse Brill, for being named one of the “100 Most Influential People in Finance” in this Treasury & Risk Management article for his executive pay reform efforts! I don’t think many lawyers would ever imagine landing on a finance list…]

“Passive Voice Press Releases” and the “Vigorous Defense”

Last month, I blogged about “passive voice press releases” by noting an entry from Adam Savett, a plaintiff’s lawyer. The following is some of his latest work: You’ve seen them discussed separately, but now we have them together. A complaint about a so-called “passive voice press release” and a vigorous defense proclamation by a defendant.

Passive voice press releases are those issued by law firms that have not yet filed a complaint. They typically announce that a securities class action “has been filed.” This is distinguished from the active voice releases, which state things such as “[the firm] filed a complaint” or “[the firm] has filed a complaint.”

The practice is most often pointed out by one of the firms that filed a complaint, not by the defendant corporation, as we have here. Earlier this week, InfoSonics Corporation issued a press release, stating:

“While at least seven law firms have publicly disseminated press releases over the past few days implying that they have filed lawsuits against InfoSonics Corporation, the Company’s preliminary investigation has revealed that two lawsuits seeking class action status have been filed (by three of the firms that issued press releases this week). The remaining four law firms that implied in their press releases that they also filed lawsuits had not done so at the time of their releases and the Company has no knowledge that they have since filed actual lawsuits.”

This is the classic passive voice press release issue, discussed by The 10b-5 Daily here and here and by Securities Litigation Watch here and here.

InfoSonics couldn’t resist the lure of the vigorous defense language having read in these pages earlier in the week about a recent successful use of that phrase, and went on to state:

“The Company believes its actions raised in the lawsuits were appropriate and intends to vigorously defend them.”

Now if only we could find a passive voice press release that indicated the law firm intended to “vigorously pursue” the claims that they have not yet alleged.

June 16, 2006

Protection of Audit Documents in Internal Investigations

As so well illustrated during yesterday’s popular webcast (audio archive now available) – “The Evolving Relationship Between Lawyers and Auditors” – the tension between lawyers and accountants has never been greater and there has been a lot of understandable confusion as old relationships have suddenly evolved.

In this podcast, Todd David and Jessica Corley of Alston & Bird provide some insight into this court order from the recent case – Polymedica Securities Litigation – dealing with the protection of audit documents in internal investigations, including:

– What did Judge Young find in the Polymedica case?
– What were the facts of that case?
– In the wake of the decision, what guidance would you provide you companies regarding their audit documents?

DOJ Seeks Dismissal of Sarbanes-Oxley Lawsuit

A few weeks back – even though the US was not a party to the case brought by the Free Enterprise Fund – the DOJ weighed in on the lawsuit seeking to overturn Sarbanes-Oxley by seeking of dismissal of the case on procedural grounds. The DOJ said the challenge was “brought at the wrong time, in the wrong court” as part of its statement of interest in support of the PCAOB. Arguments are scheduled to be heard soon. We have posted all the pleadings filed in this case – Free Enterprise Fund and and Beckstead & Watts vs. Public Company Accounting Oversight Board – in our “Sarbanes-Oxley” Practice Area under “5. Debate of Legal Authority of SOX”.

Debate over the Impact of Sarbanes-Oxley on World Markets Intensifies

Speaking of Sarbanes-Oxley, the House Subcommittee on Regulatory Affairs will hold a hearing on Monday, June 19th in New York City to examine the impact that the SEC’s implementation of Sarbanes-Oxley has had on US markets. The hearing is entitled: “A Balancing Act: Cost, Compliance, and Competitiveness After Sarbanes Oxley” and will be held at the U.S. Customs House at 10 am (oddly, I can’t find any information about this hearing on the Web).

This topic is likely to continue to gather momentum. The pending merger of the NYSE and Euronext has raised the profile of the impact of SOX to high levels all over the world. Yesterday’s NY Times listed all the European market leaders that have expressed concerns that the merger could result in applying Sarbanes-Oxley to foreign issues. In the same article, SEC Commissioner Nazareth countered that “the notion that this is a backdoor means of exporting Sarbanes-Oxley requirements internationally is completely misguided.”

The topic of the impact of Sarbanes-Oxley on listing on US exchanges even took up a big chunk of time during this week’s “Past Enforcement Directors’ Roundtable” at the SEC, as noted in FEI’s “Section 404″ Blog. I’m sure we haven’t heard the last word on this topic – globalization ain’t easy…