Monthly Archives: December 2006

December 12, 2006

Our “What is a Perk” Survey Results

After a little more than a month, we have wrapped up our popular “What is a Perk” survey, with many members providing their input. The survey results are quite lengthy and come with a big fat disclaimer that they do not necessarily reflect what the actual law is (and don’t forget to take our new survey on related-party transaction procedures and policies):

A. Company Airplane Use

1. Spousal/family member tag-along on corporate plane where executive is flying for business reasons (assume no incremental cost of tag-along):

– Definitely a perk – 42.3%
– Leaning toward a perk – 26.2%
– Leaning toward not a perk -17.2%
– Definitely not a perk – 14.3%

2. Spousal/family member tag-along on corporate plane where executive is flying for personal reasons (assume no incremental cost of tag-along):

– Definitely a perk – 76.6%
– Leaning toward a perk – 8.6%
– Leaning toward not a perk – 5.0%
– Definitely not a perk – 9.7%

3. Executive use of corporate plane for outside board meetings (i.e., director of another company):

– Definitely a perk – 60.5%
– Leaning toward a perk – 22.1%
– Leaning toward not a perk – 9.4%
– Definitely not a perk – 8.0%

4. Outside director’s use of corporate plane to attend company’s board meeting (i.e., picking up directors for meetings):

– Definitely a perk – 9.1%
– Leaning toward a perk – 11.6%
– Leaning toward not a perk – 18.8%
– Definitely not a perk – 60.5%

5. Executive use of corporate plane to attend a meeting of the board/trustees of a charitable organization:

– Definitely a perk – 50.7%
– Leaning toward a perk – 29.0%
– Leaning toward not a perk – 13.8%
– Definitely not a perk – 6.5%

B. Other Spousal/Family Member Issues

1. Travel costs associated with spouse attendance with directors at annual board retreat/meeting where all spouses are invited:

– Definitely a perk – 37.4%
– Leaning toward a perk – 28.2%
– Leaning toward not a perk – 18.7%
– Definitely not a perk – 15.8%

2. Travel costs associated with spouse attendance with directors at a board meeting where spouses are welcome, but not formally invited, and only a few spouses attend:

– Definitely a perk – 65.9%
– Leaning toward a perk – 25.6%
– Leaning toward not a perk – 6.3%
– Definitely not a perk – 2.2%

3. Spousal golf and other extra services, such as day travel or spa services, for when the board is in a formal meeting:

– Definitely a perk – 78.8%
– Leaning toward a perk – 13.6%
– Leaning toward not a perk – 4.4%
– Definitely not a perk – 3.3%

C. Mixed Business and Personal Use

1. Country club membership paid by company that is not used exclusively for business purposes, if the membership is used a few times by the executive or a family member for personal reasons:

– Entire amount of country club expenses is a perk – 26.6%
– Allocate incremental cost of those few personal uses as a perk – 47.6%
– Allocate all expenses, including a portion of the membership cost on some basis, as a perk – 22.5%
– Not a perk – 3.3%

2. Luxury box paid by company that is not used exclusively for business purposes, if the box is used a few times by the executive or a family member for personal reasons:

– Entire amount of ownership expenses is a perk – 11.7%
– Allocate incremental cost as a perk (eg. cost of refreshments) – 43.8%
– Allocate all expenses, including a portion of the membership cost on some basis, as a perk (eg. by dividing number of events box is paid for in order to allocate the cost on a per event basis) – 36.4%
– Not a perk – 8.1%

3. Membership in airline club paid by company that provide facilities at airports, if the club is also used by executive during personal travel:

– Entire amount of club expenses is a perk – 14.0%
– Allocate incremental cost as a perk (eg. cost of refreshments) – 34.7%
– Allocate all expenses, including a portion of the membership cost on some basis, as a perk (eg. valuation based on percentage of personal use) – 19.9%
– Not a perk – 31.4%

4. Relocation expenses for existing executive that the company has required to relocate:

– Definitely a perk – 17.7%
– Leaning toward a perk – 7.8%
– Leaning toward not a perk – 13.3%
– Definitely not a perk – 61.3%

5. Relocation expenses for newly hired executive, extended to induce the executive to accept an employment offer:

– Definitely a perk – 23.3%
– Leaning toward a perk – 11.8%
– Leaning toward not a perk – 11.4%
– Definitely not a perk – 53.5%

6. CEO’s assistant (whose compensation is paid for entirely by company) who spends 60% of his time taking care of personal tasks (such as maintaining the CEO’s personal calendar, paying personal bills, etc.) and the other 40% is work-related:

– Definitely a perk – 35.1%
– Leaning toward a perk – 39.1%
– Leaning toward not a perk – 16.2%
– Definitely not a perk – 9.6%

D. New Questions Added After Initial Survey Posting

1. Would your answers change to the above questions if the executive paid the full incremental cost to the company?

– Yes to most – 44.2%
– Yes to a few – 27.9%
– Maybe for a few – 11.1%
– No – 16.8%

What is an Abusive Perk?

A while back, a USA Today reporter wrote an article illustrating how country club memberships are a common perk for CEOs (note the survey results above regarding whether country club memberships are perks). Below is a list of perks that also are common that I would view as more abusive than country club memberships:

Financial planning – We’ve paid them so much that they cannot even manage it and now we have to pay for the manager and tax planning? I just don’t see any basis for it and the amounts generally are insignificant.

Commuting costs – If an executive has elected not to live near the company, that’s a lifestyle or family choice and not a company expense (although executives more and more commute from the East Coast across country on a regular basis).

Tax payments, including gross-ups – This is the one (although not technically disclosable as a perk) that is really radioactive with investors.

Cell phones – Small amounts, but are you saying they would not have one if not for the company needing to be able to reach them? Of course, this one hits home for many of us since lawyers often get reimbursed for their cell phones.

On, Michelle Leder regularly analyzes perk disclosures and has found some pretty wild ones over the years. I found this recent one on Oracle’s Larry Ellison to be provocative – $1.8 million on home security?

Wanna Be A Frillionaire?


December 11, 2006

The “Scott” Report: The Aftermath So Far

In the wake of the issuance of an Interim Report from the Committee on Capital Markets Regulation on November 30th, there has been quite a bit of commentary and follow-up. Here is a list:

– Incoming House Financial Services Committee Chairman, Congressman Barney Frank (D-Mass.) intends to hold hearings on the Interim Report early next year – see this Washington Post article.

– Last week, the Committee issued a statement to clarify its position on the NYSE’s recently proposed elimination of broker non-votes, from urging the NYSE to reconsider its proposal to supporting it (except asking the NYSE to reconsider how proposal applies to mutual funds). I hear that the language on this issue was slipped into the report after two of the more investor friendly Committee members had reviewed the final draft; hence the change. The Interim Report was amended for this change.

– Some have dubbed the Interim Report as the “Greenberg” report after noting the Committee’s ties to ousted AIG Chair Hank Greenberg and acceptance of financing from two Committee members. See this related Washington Post article.

– A search of articles on the Interim Report show that those who have been critical include former Treasury Secretary Larry Summers, former SEC Chairmen Richard Breeden and Arthur Levitt, former SEC Commissioner Harvey Goldschmid, NY Attorney General – NY Governor Elect Elliot Spitzer, the Council for Institutional Investors, and current SEC Commissioner Roel Campos. In addition, Senator Dodd and former SEC Chief Accountant Donald Nicholiasen have expressed concerns over the approach to regulation advocated by the Committee.

– Quite a few members responded to my blog on principles-based regulation – here is one response: Materiality is gauged using a principled approach set forth by the US Supreme Court years ago, as supplemented by additional SEC guidance; the Committee asks for a more principled approach to regulation, but then turns around and asks for more rules on materiality. It makes one wonder if what they are really saying is that they favor rules when it favors their special interests, and principles when they might not.

– Here are other thoughts from various members: Even though its an “interim” report, I thought it needed more empirical data and legal/financial analyses in certain areas to support the recommendations; it was sort of a stab at SEC Chairman Cox who already put these things on the Commission’s agenda for ’07; seemed a bit like a “get your act together SEC and do something pronto” message in some spots; certain recommendations could create bureaucratic burdens for the SEC which probably are counterproductive; we certainly do need to attract FPI listings and foreign capital lost post-SOX and we should harmonize our regime a bit more with Western EU on accounting, principles-based rules and corporate governance, but we have to make sure not to erode investor protections at the same time; the interplay of SROs, SEC, state AGs, Delaware vs. the less common law-oriented states, etc. makes all of this complex and time consuming stuff.

– November was the best month for IPOs in the US in years – see this related article.

– Of course, the highlight of the Interim Report is footnote 105, where yours truly is cited…

The “Scott” Report: The Bloggers Speak

As predicted, the legal blogging community has plenty to say about the Scott Interim Report. Here are some of those musings:

10b-5 Daily – “The Public Value of Securities Class Actions

FEI’s Section 404 Blog – “Reactions to Comm on Cap Mkts Reg Report; U.S. Chamber Outlines Its Own Action Plan

AAO Weblog – “Report: The Committee on Capital Markets Regulation

The D&O Diary – “Looking at The Paulson Committee’s Proposed Litigation Reforms

Business Associations Blog – “Interim Report of the Paulson Committee

SEC Actions Blog – “Paulson Committee Report Addresses SEC Enforcement and Corporate Criminal Liability

Shareholder Access and By-Law Amendments: What to Expect Now

We have posted the transcript from our recent webcast: “Shareholder Access and By-Law Amendments: What to Expect Now.”

December 8, 2006

Option Backdating: Corp Fin’s Upcoming Guidance

Following up on my Monday blog, a number of members have asked for more information about what Corp Fin Chief Accountant Carol Stacey said at the ABA Fall Meeting Saturday regarding forthcoming option backdating guidance. In essence, Corp Fin hopes to issue guidance to clarify what filings will be required under various circumstances, with the likely result that the burden of needing to amend all prior filings being reduced – and alleviate the need to seek Staff approval before deciding not to amend the filings for all prior years (you still would have to restate for those prior years, but you may not have to file amended reports for those years). In other words, the expected relief relates both to not having to file amended reports for a large number of years and the detail required in the financial statement footnotes in order to minimize what needs to be reaudited.

Option Backdating: Nasdaq Issues FAQs on Appeals Process for Deliquent Companies

Since a significant number of companies have become delinquent in their SEC filings due to issues related to stock option backdating, the Nasdaq has updated some existing and added a few new FAQs regarding delisting and the appeals process in the backdating context.

In the FAQs, the appeals process is explained as follows: Nasdaq’s Hearing Panel has the discretion to grant a delinquent company additional time to remain listed, provided the company has a specific plan to regain compliance and is taking appropriate steps to deal with the circumstances which caused the delinquency. The Panel may not, however, grant an extension which would exceed the earlier of 90 days from the date of its decision or 180 days from the date of the Nasdaq Staff’s initial delisting notification. Generally, it is the 90-day limitation that restricts the time available to a company to cure its SEC filing deficiency.

When a Nasdaq company cannot cure its SEC filing deficiency within the extension of time provided by the Hearing Panel, it may appeal the Panel’s determination to the Nasdaq Listing Council. An appeal to the Listing Council does not stay the Panel’s decision to deny continued listing to the company. Further, the time for appeal, which must be made within 15 days of the date of the Hearing Panel decision, may have expired at the point when the company determines that it will not file within the extension period granted by the Hearing Panel.

However, all Panel decisions are also subject to being “called for review” by the Listing Council. In connection with a call for review, the Listing Council has the discretion to stay the Panel’s decision. Should the Listing Council grant a stay, then the company would remain listed during the pendency of the Listing Council’s review. If the Listing Council determines it is appropriate, it may grant the company additional time to regain compliance while listed, until the earlier of 60 days from the date of its decision or 180 days from the Hearing Panel’s decision.

In a new FAQ, Nasdaq states that it is using the “call for review” process in certain cases in order to stay the delisting of companies that are SEC filing delinquent due to stock option issues while the company remains in the appeals process. This new FAQ is repeated below:

“Generally, the Listing Council will not exercise its discretion to stay a Panel delisting determination. However, with respect to companies that have become filing delinquent due to issues related to accounting for stock options, the Listing Council has determined that it may be appropriate to grant a stay. In that regard, the Listing Council recognizes that there are unique circumstances surrounding these issues: most issuers and their accounting firms were taken by surprise; the necessary investigation may require the thorough review of documents and processes surrounding hundreds or thousands of option grants over a period of time typically years ago; and these issues could have enormous effect on the company and the individuals involved.

In view of this, the Listing Council has determined that it may be appropriate to exercise its discretion on a case by case basis, balancing the need for timely financial reporting with the interests of shareholders and issuers in maintaining a listing on a more transparent, liquid market. In determining whether to grant a stay, the Council will, among other things, consider whether the issuer acted promptly and appropriately to address the problems that occasioned the filing delinquency, including whether the issuer commenced an independent investigation and took steps to deal directly with individuals who it determined engaged in misconduct; whether the issuer has adopted appropriate remedial measures to avoid a recurrence of these problems; and whether the issuer will be able to regain compliance within the maximum time afforded by NASDAQ’s rules.”

A Sad Farewell to John “The Duke” Jones

It is with deep sadness that I remember one of the nicest guys I have ever met, John Jones. John was the strong silent type, a former Captain in the Marines who enjoyed boxing (a three time All-American on the NCAA boxing team) – he always struck me that he could have been a movie star if he wanted. John spent a few years in Corp Fin starting in the late ’90s and was General Counsel of Radio One when he suddenly passed away last Sunday of an apparent heart attack at the young age of 38. Our thoughts and prayers are with his family. If you knew John, please take a moment to sign this guest book on

john jones.gif

December 7, 2006

Third Time’s a Charm?

Late yesterday, the SEC postponed – for a second time – a scheduled vote on whether to allow shareholders to nominate directors. Not surprisingly given the press reports leading up to next Wednesday’s open Commission, it appears that the five commissioners have not reached the consensus that Chairman Cox is striving for. The SEC had originally planned to propose new rules on October 18th.

Until it proposes new rules, the SEC has said that the 2nd Circuit court’s AFSCME decision will stand, giving shareholders more power to nominate directors. The SEC is being aggressively lobbied by both sides in the debate. In fact, the Business Roundtable threatened yesterday to sue the SEC if it acted, following the US Chamber of Commerce’s lead who last month warned the SEC that it may not have the authority to act.

I wish I had a bookie that handled bets for this sort of thing, because it was easy money that the SEC would postpone this proposal given the magnitude and controversial nature of what it is considering. Here is the Sunshine Act notice for the December 13th Commission meeting with the neutered agenda (the big Corp Fin items left on the agenda are adopting e-Proxy and providing internal controls guidance).

Foreign Private Issuer Deregistration: Reproposal and Liberalization

The SEC also announced yesterday that it intends to re-propose the foreign private issuer deregistration rule at next week’s December 13th meeting. This rulemaking also is controversial and resulted in the SEC receiving lots of comments and lots of visits from those that would be impacted overseas. Floyd Norris wrote his NY Times column today on this development.

Here is a summary of what is happening from Cleary Gottlieb:

“The new proposal would allow foreign private issuers to terminate SEC registration when their U.S. trading volume is below a threshold that will be specified in the rule proposal. Press reports have indicated that the threshold may be 5%. If so, the revised rule would be consistent with a proposal made by a group of European organizations, with the support of Cleary Gottlieb, in February 2004.

The SEC’s initial rule proposal, made in December 2005, would have allowed foreign private issuers to deregister using a test based in part on the percentage of their shares held in the United States, and in part on trading volume (for the largest companies). The European organizations and Cleary Gottlieb supported this proposal, but suggested that the SEC revise the tests, which would have allowed only a few European companies to deregister (fewer than one in ten large companies included in a February 2006 study). The new SEC proposal, if it is in fact based on a 5% U.S. trading volume test, would appear to address this concern.

The SEC announced that the modified rule will be re-proposed for further comment, rather than adopted, because the SEC had previously stated that it was not in favor of a trading volume test when it released the December 2005 proposal. At the same time, the SEC appears to be committed to moving quickly, as it announced its intention to limit the comment period to 30 days, and that it hopes to adopt a final rule in the first quarter of 2007.

Whether the SEC’s new rule will in fact provide a practical mechanism for companies to exit the U.S. market when they find that the costs of U.S. registration outweigh the benefits will depend on the details of the new proposal, which should be available shortly after the December 13 meeting.”

Underwriter Compensation Developments

In this podcast, LizAnn Eisen of Cravath, Swaine & Moore discusses the latest issues relating to underwriter compensation, including:

– What are the latest developments regarding the NASD’s rule regarding underwriter compensation?
– What are the latest market trends regarding underwriter compensation?
– For those representing underwriters, what should they be looking out for in this area?

December 6, 2006

PCAOB to Propose Revising Internal Control Standard

On December 19th, the PCAOB will hold an open meeting to consider proposing a “new” internal control auditing standard which would supercede Auditing Standard #2. This meeting will be held roughly a week after the SEC proposes changes to management’s Section 404 report (as well as take other internal controls-related actions; according to a Bloomberg report yesterday, the SEC may propose giving smaller companies an additional one-year delay).

The PCAOB’s press release lays out a framework for the new standard that is consistent with what PCAOB Chairman Mark Olson and Chief Auditor Tom Ray have laid out in recent speeches: five goals and a series of sub-points, including the following listed in FEI’s “Section 404” Blog:

1. Focus the internal control audit on most important matters [note: the press release used the term “important” in number 1, not “material” (although “material is used elsewhere) – it will be interesting to see if “important” is the term d’art used in the proposed standard]

2. Eliminate procedures that are unnecessary to achieve the intended benefits (including: permit [i.e., eliminate prohibition on] use of prior years work by auditors, and “require auditors to consider whether and how to use the work of others, instead of doing certain procedures themselves)

3. Incorporate guidance on efficiency – e.g. PCAOB’s May 2005 “guidance,” other guidance issued by the PCAOB to make implementation of the internal control audit standard (originally issued as AS2) more efficient and effective – directly into the new audit standard itself

4. Provide explicit and practical guidance on scaling the audit to fit the size and complexity of the company

5. A simplified standard – propose a “simplified” standard (vs. AS2) that is shorter, easier to understand, and more clearly scalable to audits of companies of all sizes and complexity, by:

– Reducing granularity

– Redefining key terms

– Clarifying that the auditor’s evaluation of materiality for purposes of an internal control audit is based on the same long-standing principles applicable to financial statement audits

– Consolidating the Board’s standards on using the work of others in internal control audits and in financial statement audits into one new standard, so as to better facilitate integration of the two audits.

Accounting Reform: How the Latest Developments Impact You

Tomorrow, join us for our webcast – “Accounting Reform: How the Latest Developments Impact You” – to hear Linda Griggs of Morgan Lewis and Teresa Iannaconi of KPMG discuss the latest developments in accounting standards, such as tax uncertainties, fair value measurements, pension plan and post-retirement standards and lease accounting – and how even the philosophy of regulation is changing as the FASB moves to a more principles-based framework.

One Stop Shopping?

Anyone out there figure out the best way (or web sites) that allow you to input what you seek and you get an email sent to you when it becomes available? I have found this discussion about how you can set RSS feeds so that you will be notified if a desired item shows up on Craigslist or similar sites, but I swear I have heard about others. Let me know and I will share – me no like going to the stores during the holiday season…

The Latest Private Equity Borrower Developments

In this podcast, Patrick Lawler of Chapman & Cutler delves into how private equity funds are borrowing to support their M&A habits, including:

– Has increased borrowing from private equity funds helped fuel the trend of these funds doing M&A?
– What are the latest private equity trends regarding when they borrow?
– What are some of the key issues that private equity borrowers consider in securing financing for their transactions?

December 5, 2006

Be Mindful of Your SEC Staff Correspondence!

A few weeks ago, this Associated Press article about Ford Motor’s business in Syria and Sudan was spurred by a comment letter dated July 26th from Corp Fin – providing a nice reminder to all of us about being careful what we say in our response letters, given that they will be much more readily available to the public (and the media) than they were in the past. As I blogged about yesterday, the SEC has nearly caught up in its long-standing project to upload comment letters and related correspondence on EDGAR.

Recently, the Corp Fin Staff has begun issuing “no further comment” letters to companies once their comments have been cleared (here is a sample). However, since this practice is new, it might not happen in all instances and senior Staffers have publicly mentioned that you may need to call the Staff to ask for such a letter if you don’t get one and want one (I would think you would always want one; it’s suitable for framing even if you don’t want it for your file).

The date of this “no further comment” letter should be the date that kicks off the 45-day waiting period before all the comment letters and responses are uploaded on EDGAR. As you might recall when the SEC’s uploading project was announced a few years ago, the Staff adopted a policy that comment letters and responses would not be posted “no earlier than 45 days from when comments are cleared.”

The Evolving ‘Best Price’ Rule

Tomorrow, catch the head of the SEC’s Office of Mergers & Acquisitions (as well as two former SEC Staffers) in the webcast: “The Evolving ‘Best Price’ Rule.” Spurred by conflicting court decisions, the SEC recently adopted amendments to its “best price” rule. Join these experts as they explore the impact of this rulemaking on M&A activity:

– Brian Breheny, Chief, Office of Mergers & Acquisitions, SEC’s Division of Corporation Finance
– Dennis Garris, Partner, Alston & Bird LLP
– Jim Moloney, Partner, Gibson Dunn & Crutcher LLP

What this program will cover:

– What changes did the SEC make to the best price rule?
– What issues might still arise in the wake of the SEC’s changed rule?
– How might the SEC’s changes impact deal structures?
– How might the SEC’s changes impact compensation arrangements in transactions?

6.5 Degrees of Separation: Boards More Independent

A few months back, The Corporate Library conducted a study of board members and their interrelationships, suggesting that “Sarbanes-Oxley has had a lasting and far-reaching impact on the corporate board network in the US.” Key findings of the study, include:

– Among the 4,288 people who sat last year on S&P 500 boards, 261 sat on at least three boards, down 13 percent from 301 in 2002

– Among CEOs, 195 held outside directorships, the same as in 2002 – but only 57 held more than one outside directorship, down from 72

– 8% of S&P 500 companies’ boards are chaired by truly independent outsiders; up from 4% in 2002

– There has been a reduction in the average number of other S&P 500 boards that each board is linked to via shared directors, to 6.5 from 7.8

– 12 people held at least five S&P 500 directorships in 2005, down from 33 in 2002

– However, one finding deemed “surprising” was that the number of S&P 500 boards with no links at all to other S&P 500 boards declined to 40 from 51

December 4, 2006

Corp Fin: What’s Doing

At the ABA Fall Meeting held in Washington DC over the weekend, Corp Fin Director John White, Corp Fin Chief Accountant Carol Stacey and other senior Staffers spoke on various panels and provided these tidbits, among others:

– for the December 13th open Commission meeting, the e-Proxy initiative may (or may not) apply to the ’07 proxy season

– as the Commission has a draft final rule to review right now, it is possible that the “Katie Couric” rule could be added to the agenda and adopted at the December 13th meeting (and if adopted, could even apply to ’07 proxy season)

– we will know precisely what will be on the agenda of the December 13th meeting no later than this Wednesday, as that is when the Sunshine Act requires that the SEC post a notice

– the “Current Accounting and Disclosure Issues” will be updated within the next few weeks; it was last updated in late ’05

– a Corp Fin strategic plan for the near future is being worked on; new rulemaking and other projects to be identified

– some option backdating guidance will be forthcoming within a few weeks

– some executive compensation guidance might be forthcoming; estimated time unknown and “in what form” undecided

– a systematic review of executive compensation disclosures is expected to take place after the proxy season and a Staff report (and possible further rulemaking if deemed necessary) should result

– hiring freeze is finally off as Corp Fin has lost members through attrition (see the latest Staffers to leave in our December issue of Eminders)

– comment letters and related correspondence continues to be uploaded to the SEC’s website at a rapid clip; nearly up-to-date now

Note that today’s open Commission meeting has a revised agenda, which will not include the two hedge fund rulemakings: changing the definition of “accredited investors” and prohibiting advisers from making false or misleading statements to investors in certain pooled investment vehicles they manage, including hedge funds. According to this NY Times article, the SEC delayed considerations of these proposals to work out technical language; the proposals might be calendared for the already jam-packed December 13th open Commission meeting.

What’s the Word on Shareholder Access?

Yes, this is the question that everyone is asking. Alas, there still is no word on what we can expect regarding shareholder access on December 13th – as reflected in this recent article, the Commissioners are still debating what to do and Chairman Cox is striving for a consensus. Thanks to Jim McRitchie’s for pointing out this interesting set of Directorship articles about where the Commission might be headed on this hotly contested issue.

December Eminders is Up!

The latest issue of our monthly email newsletter is now posted. And yes, we wuz robbed!

December 1, 2006

Parsing the Reasons for Auditor Resignations

A while back, Floyd Norris of the NY Times wrote this article urging the SEC to tweak its rules to require companies to provide reasons why an audit firm resigned in all cases, rather than the limited circumstances currently triggered under Item 4.01 of Form 8-K. Here is an excerpt from the article:

“A new study by Glass Lewis & Co., a consulting firm, finds that 1,430 public companies in the United States changed auditors in 2005, a turnover rate of 11.3 percent. The turnover is biggest at small companies, and about 60 percent of the departures are characterized by the companies as firings, with the rest resignations.

Why the changes? In 72 percent of the cases, the companies chose not to give any reason when they notified the Securities and Exchange Commission of the departure. That was up from 58 percent in 2004, when 1,451 companies changed auditors. Companies audited by the Big Four accounting firms, generally the larger companies, are even less likely to give reasons, with 82 percent choosing to remain quiet.”

Director Resignations Intersecting with Auditor Resignations

Some companies have changed auditors after (1) in their 302 certifications, CEOs and CFOs said their company’s internal controls were effective, (2) the auditors came in, conducted their audit and said “no, they weren’t” and (3) restatements were made. Obviously, this type of situation can call management’s certifications into question.

Even worse are situations like Take Two’s, where this Form 8-K was filed in January 2006 to reflect the resignation of the audit committee chair – and then there is this Form 8-K filed in April where the auditor resigns and states they had no disagreements. The letter from the resigning audit committee chair’s lawyer below is fascinating – and certainly raises eyebrows about the auditor who claimed there were no disagreements.

“As you know, we have just been retained to represent Barbara Kaczynski. I write in response to your email of Friday, January 20, 2006, to Ms. Kaczynski, regarding her resignation from the board of directors of Take-Two Interactive Software, Inc. (“Take-Two”).

Your email seeks confirmation from Ms. Kaczynski that her resignation from Take-Two’s board was not due to a disagreement with management of the type requiring disclosure under Item 5.02(a) of S.E.C. Form 8-K. Your email further asks Ms. Kaczynski to approve draft language describing the circumstances surrounding her resignation, which language the company intends to include in its upcoming Form 8-K disclosure.

Ms. Kaczynski does not know whether her resignation is of a type requiring disclosure under SEC rules and she does not feel able to express a view with respect to the language the Company intends to include in its Form 8-K disclosure about the resignation.

However, she is able to express to you directly the reasons why she resigned. During Ms. Kaczynski’s tenure as a board member and chair of the audit committee, several matters requiring the board’s attention caused Ms. Kaczynski concern. These matters included Take Two’s discovery of illicit images depicted in its “Grand Theft Auto” videogame, the Federal Trade Commission’s investigation of Take-Two following that discovery, and various SEC inquiries directed at Take-Two and its employees.

More recently, in connection with preparation of the 10-K and its late filing, Ms. Kaczynski’s concerns have risen significantly because of what she views as an increasingly unhealthy relationship between senior management and the board of directors. In her experience, management’s interactions with the board were characterized by a lack of cooperation and respect. Moreover, Ms. Kaczynski felt that management failed to keep the board informed of important issues facing the company or failed to do so in a timely fashion. In these circumstances, Ms. Kaczynski decided to resign her position as a member of the board.”

Cell Phones Could Betray Former Users

Recently, Fox News ran this article about how sensitive information accumulated in your cell phone could be accessed by new users, even though you thought you had deleted the data. Resetting the phone may make it appear that confidential information was erased, but it actually can be recovered using inexpensive software that is readily available online.

The article made me wonder what kind of confidential information would be left on a Blackberry – or a computer hard drive for that matter – when it gets replaced on an upgrade. Lawyers have an ethical duty to protect client confidentiality, so lawyers disposing of smart phones, computers, PDAs, etc. should ensure that the data really gets deleted so that it cannot be recovered. That would also be a good practice for anyone seeking to protect their own personal data or to guard other confidential information.