Monthly Archives: April 2007

April 16, 2007

SEC Enforcement Shift May Lead to Lower Penalties

On Friday, this Washington Post article noted: “The SEC is changing how it negotiates settlements with companies in a way that could reduce the number and size of financial penalties that businesses pay, current and former officials said yesterday.

Under the change, which has not been made public, SEC enforcement lawyers must seek approval from the agency’s five commissioners before they begin settlement talks that involve fining corporations, including seeking ranges for possible fines. Currently, staff members have the authority to negotiate with businesses and draft settlements in principle before they take the deals to the agency leaders for final approval.

The shift marks the latest development in a heated debate over whether companies or individual wrongdoers should bear the brunt of blame for legal violations. Penalties reached record proportions after destructive scandals at Enron, WorldCom and Adelphia Communications, creating concern among some commissioners that enforcement staff members are overreaching.

The initiative comes at the behest of SEC Chairman Christopher Cox, a former Republican lawmaker from California who is striving to avoid split votes at the agency. The pilot program will affect a relatively small percentage of cases and will result in more productive and fast-tracked negotiations between business and enforcers, according to spokesman John Nester. The plan, Nester said, “will increase investor protection because it will give our enforcement division a stronger hand in settlement negotiations.”

The enforcement division was criticized by trade groups last month as “adversarial” and “overly punitive.” Republican Commissioner Paul S. Atkins has argued that imposing fines against businesses in many circumstances unduly penalizes their stockholders. Rather, he and allies say, corporate executives who broke the law should pay the price.

Disagreement over the issue has slowed resolution of several cases, including some involving more than 160 companies that engaged in backdating of stock options for officials and employees. For example, staff members are continuing to deliberate whether Brocade Communications Systems, whose former chief executive was charged last year with criminal fraud, must shell out money for backdating offenses.

After months of behind-the scenes negotiations, Cox unveiled a policy statement in January 2006 laying out analytical steps the SEC would follow in deciding whether to levy penalties against businesses. Since then, the commission at times has sent the enforcement unit back to the drawing board in cases against Veritas Software and MBIA, among others, frustrating businesses and defense lawyers who seek quicker resolution of investigations.

The new policy on settlements is designed to prevent disconnects between SEC staff members and the commissioners. But the change is also contributing to lowered morale within the enforcement unit, which swelled in financial resources and prestige after widespread accounting frauds came to light five years ago.

Since that time, the enforcement budget has flattened and the U.S. Chamber of Commerce, the nation’s largest business lobby, has called on SEC leaders to appoint an advisory panel to scrutinize the enforcement division’s fairness.

Some staff members are balking at the change as a show of distrust in their judgment and another layer of red tape that could reduce the frequency and the size of financial penalties. But officials asserted yesterday that Cox and enforcement unit leaders are on the same page. Details of the plan continue to be worked out, agency officials said.”

Milestone: US-Style Litigation Now in Europe?

Last week, members of the US plaintiff’s bar made $47 million in legal fees from the second largest securities fraud settlement in Europe. Here is a press release from the lead plaintiff firm, Grant & Eisenhofer.

And here is more from the “Rule 10b-5 Daily“: Royal Dutch Shell p.l.c. has announced a landmark settlement with non-U.S. shareholders resolving claims related to the company’s recategorizations of certain proved oil and gas reserves. Under the settlement, which was executed pursuant to a new Dutch statute allowing the Amsterdam Court of Appeals to declare binding a collective resolution of a commercial dispute, Shell will pay $352.6 million plus administrative costs to shareholders who bought on non-U.S. exchanges and were resident or domiciled outside the U.S. from April 1999 to March 2004. The parties have also requested that the $120 million Shell paid to the SEC in a related settlement be distributed in a non-discriminatory manner among certain U.S. and non-U.S. shareholders.

Shell also announced that it plans to extend the same proportional settlement offer to shareholders who bought in the U.S. or were resident or domiciled in the U.S. during the same period. According to the press, it is the second-largest settlement of a securities fraud dispute by a European-based company, behind Royal Ahold’s $1.1 billion settlement in late 2005. Media coverage can be found in the Wall Street Journal, Bloomberg, and the New York Times.

Transcript: SEC’s Internal Controls Open Commission Meeting

The SEC has posted a 126-page unofficial transcript of its April 4th open Commission meeting devoted to internal controls.

April 13, 2007

First “Say on Pay” Shareholder Proposals Considered at Annual Meetings

As this Washington Post article notes, the first “say on pay” shareholder proposals were voted on this week: 47.3% of shareholders supported the proposal at the Bank of New York and 37% at Morgan Stanley. These are very high numbers for a first-time-like type of proposal.

This ISS article lists upcoming annual meeting dates for other major companies that will include “say on pay” on their ballots. Overall, over 60 companies will have shareholders vote on this issue sometime this year. Last year, there were 7 of these proposals, averaging a 40% level of support.

The ISS article also recaps the recent ISS webcast about how “say on pay” has worked in other countries that have tried it. You can still listen to the audio archive or access a transcript of that webcast via a free registration.

Internal Pay Equity: Pay “Cap” is a Misnomer

On this recent CNBC “On the Money” segment, I thought Professor Charles Elson does a pretty good job of explaining the difference between internal pay equity and pay “caps.” Remember that internal pay equity is just an alternative benchmark to using traditional peer group surveys. Internal pay equity is no more of a “cap” than those ubiquitous peer group surveys are…

Internal Pay Equity: In Practice

I’ve been reviewing recently filed proxy statements and happy to note that several hundred mention that boards have considered internal pay equity when setting CEO pay levels. However, very few of these companies provide any details about (or if) they really use this methodology as an alternative benchmarking tool.

We are in the process of setting the agenda for our “4th Annual Executive Compensation Conference,” which is being reconfigured this year to ensure we provide as much practical guidance as possible. We are planning to include a panel on internal pay equity that includes a number of panelists from companies that have used internal pay equity so they can explain how they do implement it. If you are from one of those companies, can you please drop me a line, even if you are unwilling to speak? My email address is Thanks!

April 12, 2007

Dealing with Proponents at the Shareholder Meeting

With many companies about to hold their annual shareholder meetings, check out this timely podcast in which Andrew Gerber of Hunton & Williams gives tips on how to interact with shareholder proponents at annual meetings, including:

– What do you do if the proponent doesn’t show up to present their proposal?
– What if the proponent sends someone else to present their proposal?
– If the proponent shows up to present their proposal, but yet stands up and starts talking about another topic – how should you handle it?

A Evelyn Y. Davis Sighting!

A few weeks ago, Evelyn was on CNBC’s “On the Money” – here is an archived video of that appearance. And here is a humorous blog entry from someone who doesn’t appear to be fan of Evelyn’s.

As some of you undoubtedly know firsthand, Evelyn is still very active, meaning this tombstone was created prematurely. Evelyn made this tombstone years ago, which is evident from the photo because her third divorce was inscribed after its initial creation – it now will have to be further updated to list her fourth divorce, as I hear that her most recent marriage didn’t take…

Private Offering Reform

At recent conferences, Corp Fin Director John White has indicated that some reform of the private offering process might be on the Division’s agenda, although he also noted that any action would not involve a comprehensive overhaul of the private offering rules. The ABA’s Subcommittee on Securities Registration recently sent this 40-page letter to the SEC with detailed suggestions about what might be reformed.

[Cheap Gas Prices – I know some people love to get a deal on gas for their car (I’m driving a Prius so I never have to fill the tank, but I have relatives who take great pride in obtaining the cheapest gas available). If this is you, just enter your zip code on this web site – and it will tell you which gas stations have the lowest prices (and the highest) on gas in your area. The site claims that it’s updated every evening. ]

April 11, 2007

They’re Heeeeeere! Final Section 409A Regulations

From Mike Melbinger’s “Compensation Blog“: Apologies to those not old enough to have seen Spielberg’s Poltergeist in 1982 (and, thus, don’t understand this reference), but something really scary happened today. The IRS published its long-awaited final regulations (397 pages) under new Code Section 409A. This is a significant event for every employer in America because employers now have until the December 31, 2007 deadline to take a series of required steps.

In the upcoming days and weeks, I will be highlighting the most significant issues and requirements under the final regulations. However, the first step for most employers and their counsel is to determine the impact of the new rules on their plans, programs and agreements. Remember, these regulations can apply to employment and change in control agreements, severance plans and even equity compensations plans, in addition to deferred compensation plans, which were the original target of Congress.

Tomorrow! NASPP Webcast: The IRS and Treasury Speak about the New 409A Regulations

Talk about good timing! Catch the NASPP webcast tomorrow – “The IRS and Treasury Speak: Mid-Year Tax Update” – to hear representatives from the IRS and the US Department of Treasury, along with two former Treasury employees, talk about the new 409A regulations. The panel includes:

– Stephen Tackney, Senior Attorney, IRS, Office of Chief Counsel
– Daniel Hogans, Attorney Advisor, US Department of the Treasury
– Elizabeth Drigotas, Partner, Deloitte
– Deborah Walker, Partner, Deloitte

Try a no-risk trial membership to the NASPP to catch this webcast!

Farewell to Two Former SEC Commissioners

We are saddened to have learned of the recent deaths of two former SEC Commissioners – J. Carter Beese, Jr., who served from 1992 to 1994 and more recently was a venture capitalist; and James Needham, who served from 1969 to 1972 and became the first full-time, salaried chairman of the New York Stock Exchange.

I had the pleasure of meeting Carter several times and the guy was quite a character with a very sharp wit. He was among the youngest Commissioners to ever serve; he was only in his mid-30s when he sat on the Commission.

April 10, 2007

The Media and the Executive Compensation Disclosure Rules

It’s that time of the year: CEO pay in the news. Yesterday’s WSJ included its annual executive pay report, with multiple pay-oriented articles – and this Sunday’s NY Times included a number of articles on executive pay, including this special report that analyzes the recent trends – and this article that focuses more on the lack of clarity in recent disclosures. Another article analyzed the independence of compensation consultants – and there was an article on severance pay.

The NY Times even included an article about how to calculate the pay figures, which is no easy task. Bob Hayward of Kirkland & Ellis recently put together the following memo, which does a great job of describing how AP is calculating numbers for its media articles:

As more and more companies have been filing their proxy statements under the new SEC executive compensation disclosure rules, it has been interesting to observe how the media interpret and report the disclosures. For example, the Associated Press – a wire service that is often relied upon not just by local and regional newspapers but also by the Wall Street Journal, other national newspapers and Internet websites (such as Yahoo! and MSN) – is not simply copying the “total compensation” number out of proxy statements, but is trying to take a more reasoned approach to what it discloses in news reports about executive pay.

The AP calculation of “total pay” is not the same as the SEC’s calculation of “total compensation.” Total compensation under the SEC’s rules is the sum of the following categories in the Summary Compensation Table: Salary; Bonus; Stock Awards; Option Awards; Non-Equity Incentive Plan Compensation; Change in Pension Value and Nonqualified Deferred Compensation Earnings; and All Other Compensation.

However, the AP’s calculation only includes “Salary,” “Bonus,” “Non-Equity Incentive Plan Compensation,” “All Other Compensation,” above-market returns on deferred compensation (but not actuarial change in pension value) and the “estimated value” of stock and option awards. AP uses the FAS 123R grant date fair value of the stock and option awards (which is found in the last column of the Grant of Plan-Based Awards Table) and not the financial accounting compensation expense shown in the SCT under the Stock Awards and Option Awards columns.

The AP has indicated that it is trying to show a more realistic picture of what an executive was offered during a given fiscal year and to create parameters that permit better comparability between peer companies. Although using the grant date fair value as the “estimated value” of stock and option awards still overstates the amount of compensation (because such awards are likely subject to time- and/or performance-based vesting), the AP reported amount is a closer indicator of how much an executive was offered in a given fiscal year than is the SEC’s total compensation amount. Some (but not all) local and regional newspapers are following the AP or a similar formulation. Because it is the local papers that usually focus most intensively on hometown executives, it is important that the PR staff at the company understand the AP formulation and why in many cases they may want to encourage the local or regional newspaper to follow it.

Investors, the SEC, the public, employees and activists often obtain their initial information about executive compensation from “sound bites” in news stories. Although companies can make CD&A and the narrative disclosure accompanying the tables as clear as crystal, the key talking points may still get lost in the reporters’ rush to get the story out. Because all reporters have deadlines, it is critical that companies be proactive with the media on the day the proxy statement is filed. It appears that most of the AP and local reporters have been generating their stories on the very day proxy statements have been filed with the SEC.

Below are five points to consider as part of your proxy PR planning process:

1. Brief the PR staff – Prior to releasing the proxy statement to the public, brief the company’s PR staff on the key talking points and educate them about the numbers disclosed in the various compensation tables. The PR staff should develop a well-informed talking points agenda that is consistent with the information disclosed in the proxy statement.

2. Don’t be naive; be proactive – Expect the AP (and most likely the local paper) to report on the compensation disclosed in the company’s proxy statement. If you want the story told right, open the lines of communication with the media. Most reporters welcome a phone call from a well-informed PR executive who can explain the numbers and any nuances. For example, one company was recently required to report a “super-charged” level of equity compensation in the SCT for a retirement-eligible executive solely as a result of accounting rules.

Although the CD&A and narrative disclosure discussed the accounting rules were causing the anomaly, it was the PR executive’s conversation with the reporter — focusing him on the key messages in the proxy statement — that convinced the reporter to indicate in the article that the new SEC rules forced the company to disclose the “super-charged” amount and that such amount was not actually received. Making sure the key messages are adequately described in the proxy statement will assist the PR staff in focusing reporters on the overarching messages.

3. Don’t neglect the footnotes – Clear disclosure in the CD&A and the narrative disclosure accompanying the tables is important, but reporters only have time to skim the tables and footnotes (especially since many proxy statements are much longer this year). If you want to make an important point, make it in CD&A and the narrative disclosure but also add a footnote next to the likely headline-generating number in the table. This will flag the key point for the reporter and direct him or her to the more descriptive disclosure found elsewhere in the proxy statement.

4. Sensitize the compensation committee and board on what the media may report and why – Many compensation committees have expressed frustration that the new SEC rules obscure how the compensation committee (and its consultant) look at compensation for a given year. Being proactive with the media on the day the proxy statement is filed will go a long way to address this frustration.

5. Compile, study and learn – Once the company’s proxy statement is on file with the SEC, collect every news story written about the proxy statement and the information disclosed therein. Determine what key messages were missed or distorted by the media and formulate a game plan on how to address those deficiencies next year.

AFL-CIO’s 2007 “Paywatch” Website

For over a decade, the AFL-CIO has maintained a “Paywatch” website that included a calculator that would allow workers to compare their pay to the CEO’s pay at their company. Recently, the AFL-CIO updated the Paywatch site for 2007, including new case studies regarding severance packages, options backdating, etc.

Houses of Glory, Mansions of Shame: CEOs’ Homes and Corporate Performance

On the “D&O Diary” Blog, Kevin LaCroix does a nice job of waxing about a recent study from Crocker Liu of the Arizona State University Business School and David Yermack of the NYU Business School entitled “Where Are The Shareholders’ Mansions? CEOs’ Home Purchases, Stock Sales, and Company Performance.”

April 9, 2007

Our CD&A Quick Survey

With CD&As rolling in and being a focal point for SEC Chairman Cox (see Mark Borges’ take on the Chairman’s speech), we have posted a survey to gauge who drafted the first draft of the CD&A – as well as how many hours were spent preparing and reviewing the CD&A by different categories of personnel.

Please take a moment to fill out the survey – I promise it will take less than a minute! So far, over 375 people have responded…

Survey Results: Director Resignations

Under at least two scenarios these days, a director may be required to submit a resignation letter – either when the company’s corporate governance guidelines require it when a director has a change in his/her job responsibility or as part of a majority vote provision. Below are survey results from the questions recently posed in this area:

1. If a director resignation scenario arises, the process our company uses to obtain the letter involves:

– Corporate secretary or general counsel reminds the director of the need to submit the resignation letter – 68.4%
– Board chair or governance committee chair reminds the director of the need to submit the resignation letter – 15.8%
– Full Board reminds the director of the need to submit the resignation letter at a board meeting – 0%
– Nobody reminds the director of the need to submit the resignation letter – 10.5% [ed. note: yikes!]
– Other – 5.3%

2. After a director resigns, the process our company uses as part of an “exit” interview – and to ensure that a Form 8-K under Item 5.02(a) is not required – involves:

– Board meets in executive session without the “resigning” director – 5.3%
– Board chair meets with the resigning director – 21.1%
– Nominating/governance chair meets with the resigning director – 15.8%
– CEO meets with the resigning director – 15.8%
– General counsel meets with the resigning director – 31.6%
– Corporate secretary meets with the resigning director – 0%
– Other – 15.8% [ed. note: I wonder what constitutes “other” here; please shoot me an email if you know.]

“The Dog Ate It” Excuse: Ain’t Got Nothing on Amnesia!

Before I left on vacation, I blogged about a company that made plenty of excuses for a late filing. Now that I am back in the saddle, I see that I missed an SEC enforcement action on Thursday regarding an investment advisor who can’t account for $134 million – due to his alleged amnesia! Genius!

As this Washington Post article notes, the implicated South Carolina professor is known for his flamboyant suits and million-dollar pen collection…

April 5, 2007

SEC Open Commission Meeting: Internal Control Doings

Here are items related to yesterday’s SEC open Commission meeting on internal controls:

SEC’s press release

SEC Chair Cox’s statement

PCAOB Chair Olson’s statement

FEI’s “Financial Reporting” Blog’s summary of meeting

Warfare’s Capital Casualty

This week, there has been two articles on the topic of foreign policy interfering with capital market regulation, one in the Wall Street Journal and the other in the Financial Times; the latter, which blames Chairman Cox before he joined the SEC, is discussed in Werner Kranenburg’s blog.

TV Special: “Sarbanes-Oxley: Five Years Later”

Tune in tomorrow night on PBS stations for a Nightly Business Report “holiday” program: “Sarbanes-Oxley: Five Years Later.” A little odd I confess, a special holiday program about Sarbanes-Oxley…but I’m definitely stoked that the “Special Features” for this program includes a link to this blog!

April 4, 2007

PCAOB Proposes New Hierarchy of GAAP Auditing Standard and More Tax Services and Independence Guidance

Yesterday, the PCAOB proposed an auditing standard, Evaluating Consistency of Financial Statements, and a concept release concerning Rule 3523, Tax Services for Persons in Financial Reporting Oversight Roles. In addition, the Board provided guidance, in the form of questions and answers, on Rule 3522, Tax Transactions, and Rule 3523, Tax Services for Persons in Financial Reporting Oversight Roles.

Food for Thought: Minute-Taking Practices

Marty Lipton and Paul Rowe recently wrote the following in a Wachtell Lipton memo on the Netsmart Technologies case’s implications for minute-taking: “In a recent Delaware decision Vice Chancellor Leo Strine condemned the common practice of providing drafts of board and committee meeting minutes to directors for approval a substantial (several months in the case in question) period of time after the meeting. He said thus practice is “to state the obvious, not confidence-inspiring.” It bears emphasis that not only Delaware courts, but even more so courts in other jurisdictions, frequently regard minutes as the best record of what happened at the meeting. So too the SEC and other regulatory agencies. Courts and regulators will consider the minutes more reliable than the description in a proxy statement or the directors testimony, which is frequently (and understandably) characterized by lapses of memory and lack of precision

Minutes should be reasonably detailed, reflect the substance of the discussions at the meeting and make clear reference to the documents that were furnished to the directors before and at the meeting. If there were significant discussion with or among directors prior to the meeting consideration should be given to making appropriate reference to them in the minutes. Drafts of minutes should be prepared promptly after the meeting and circulated promptly to the directors and other; persons involved in the meeting.”

Lessons Learned in Auction Process: Netsmart Technologies

Below is what I blogged about Netsmart Technologies on a while back:

From Travis Laster: A few weeks ago, Vice Chancellor Strine of the Delaware Court of Chancery issued an opinion – In re: Netsmart Technologies – enjoining the cash sale of a small public corporation to a private equity firm until the directors (i) supplemented the disclosures regarding the sale process and (ii) disclosed their investment bankers’ projections. Vice Chancellor Strine was quite critical of the sale process used in the case, which he described as “a microcosm of a current dynamic in the mergers and acquisitions market.” Here are some high points from the 75-page opinion (ed. note: we have posted memos analyzing the opinion in the “Auctions” Practice Area):

1. VC Strine found that the Board and Special Committee did not act reasonably in failing to contact strategic buyers. The defendants attempted to justify this refusal based on sporadic contacts with strategic buyers over the half-decade preceding the deal. VC Strine held that “[t]he record, as it currently stands, manifests no reasonable, factual basis for the board’s conclusion that strategic buyers in 2006 would not have been interested in Netsmart as it existed at that time.” In later discussion, he carefully distinguished such informal contacts from a targeted, private sales effort in which authorized representatives seek out a buyer. He viewed the record evidence regarding prior contacts as “more indicative of an after-the-fact justification for a decision already made, than of a genuine and reasonably-informed evaluation of whether a targeted search might bear fruit.”

2. VC Strine rejected a post-agreement market check involving a standard window-shop and 3% termination fee as a viable method for maximizing value for a micro-cap company. He noted that such an approach has “little basis in an actual consideration of the M&A market dynamics relevant to the situation Netsmart faced” and would not have attracted topping bids “in the same manner it has worked … in large-cap strategic deals.”

3. VC Strine was quite critical of the lack of minutes for key board and Special Committee meetings, as well as the fact that most of the minutes were prepared in omnibus fashion after the litigation was filed.

4. VC Strine criticized the Special Committee for permitting management to conduct the due diligence process without supervision. “In easily imagined circumstances, this approach to due diligence could be highly problematic. If management had an incentive to favor a particular bidder (or type of bidder), it could use the due diligence process to its advantage, by using different body language and different verbal emphasis with different bidders. ‘She’s fine’ can mean different things depending on how it is said.” The Vice Chancellor ultimately found no harm, no foul on this issue because management did not have a favored PE backer and there was no evidence that they tilted the process in favor of any participant.

5. VC Strine found that the proxy’s disclosures regarding the company’s process and its reasons for not pursuing strategic buyers had no basis in fact. Adhering to his opinion in Pure Resources, he also found that the latest management projections relied on by the Special Committee and their financial advisor in its fairness opinion needed to be disclosed.

Each of these issues underscores the benefits of bringing Delaware counsel into the transactional process early, both for purposes of structuring the exploration of alternatives and reviewing the proxy statement. The issues that VC Strine addresses in his opinion are frequent subjects of counseling by Delaware practitioners. Although this is the first opinion to bring many of them to judicial light, all have been on the radar screen for some time. There are many other nuggets to be gleaned from this important decision, particularly for those of us currently involved in processes with PE players (and in this market, who isn’t?).

April 3, 2007

Corp Fin Updates Rule 144 Interps

Yesterday, Corp Fin updated its Rule 144 telephone interps…gonna be tougher than I thought blogging on vaca…

Tellabs Oral Argument

Below is an excerpt from the notes of the oral argument in the important US Supreme Court case – Tellabs v. Makor Issues & Rights – prepared by Lyle Roberts of the “The 10b-5 Daily”:

Predicting how the Supreme Court will rule based on oral argument, especially where there are multiple possible approaches to the issue, is difficult. That said, the Court appeared likely to reject the Seventh Circuit’s “reasonable person” standard as incompatible with the “strong inference” scienter pleading requirement. As noted by Justice Roberts and Justice Breyer, the “reasonable person” standard appears to allow for the possibility that the case will go forward even if the plaintiffs are only able to allege facts establishing a weak inference of scienter. There also appeared to be considerable support for the need to weigh competing inferences.

A few notes on the main issues discussed:

Is There A Seventh Amendment Violation? – Perhaps to the surprise of Tellabs’ counsel, who had argued in his briefs that the Court did not have to reach this issue, the justices spent a fair amount of time discussing whether there needed to be uniformity between the pleading and proof standards for scienter. In their brief, the shareholders had argued that the heightened pleading standard for scienter improperly required a court to act as a fact-finder on the merits of the suit. Justice Scalia and Justice Breyer expressed skepticism over the idea that Congress could not create a heightened pleading standard, noting that there are lots of barriers to entry to federal courts (including diversity and amount in controversy requirements). Justice Breyer wondered whether there was really any difference between saying a plaintiff’s case has to be “really strong” and saying that a plaintiff has to be “really suffering.” That said, a number of justices (Justice Breyer most of all) seemed concerned that the “strong inference” pleading standard was higher than the “preponderance of the evidence” proof standard. Tellabs’ counsel and government counsel both argued that if the Court wanted to address this question, it would need to reconsider the standard of proof, as opposed to watering down the PSLRA.

Can You Infer A CEO’s Knowledge About Financial Issues Based On His Position? – Justice Kennedy appeared anxious to get an answer to this question, asking it of both parties. Tellabs’ counsel responded that the CEO’s title was insufficient; plaintiffs needed to provide particularized facts regarding the CEO’s scienter. Shareholders’ counsel, however, suggested that it was unlikely that a CEO would not know about important financial issues. Moreover, the confidential witnesses cited in the complaint confirmed the existence of scienter for Tellabs’ CEO.

Competing Inferences – Justice Alito took center stage on the issue of how to evaluate competing inferences with the following analogy: if you see a person walking down the street toward the Supreme Court, this fact would create a strong inference that the person is going to the Supreme Court if it is the only building around. If there are a lot of other buildings, however, doesn’t a court have to consider the inference that the person is going to another location? In response to this analogy and further prodding from Justice Ginsburg and Justice Souter, shareholders’ counsel conceded that the court could consider other facts that were subject to judicial notice, but stopped short of agreeing that this constituted an evaluation of competing inferences.

How To Decide This Case – Justice Ginsburg noted that the phrase “strong inference” is not “self-defining” and other justices also appeared to struggle with its meaning. As to how to decide the case in front of them, Justice Scalia expressed a desire to provide lower courts with guidance on what is a “strong inference” of scienter and, during his rebuttal time, Tellabs’ counsel urged the same course.

Prof. Miller v. Justice Scalia – By his own admission, Prof. Miller has a more “colloquial” argument style. That got him into some hot water with Justice Scalia, with whom he traded barbs. Justice Stevens asked Prof. Miller if he could translate the “strong inference” standard into a probability percentage. Justice Scalia quipped that he thought it was 66 2/3%, in response to which Prof. Miller asked if that was “because you never met a plaintiff you really liked?” Justice Scalia got his revenge a few minutes later when Prof. Miller stated “don’t take me literally” on a certain comment and Justice Scalia replied that he would write that down. At that point, Justice Roberts called it a draw.

After McNulty: Changes in the Attorney-Client Privilege and Investigations

We have posted the transcript from the recent webcast: “After McNulty: Changes in the Attorney-Client Privilege and Investigations.”

The SEC’s April Fuhrst Prank

As a big believer in April Fool’s jokes (my poor wife), kudos to the SEC for their fake press release announcing “plans” to require publicly-listed companies to reveal the pay and perks of the “top 100 people who make more than the CEO.”

April 2, 2007

Corp Fin Updates Trust Indenture Act Interps

On Friday, Corp Fin updated another set of its phone interps, this set relating to the Trust Indenture Act.

Another SEC Rule Vacated

On Friday, the SEC continued its losing streak in the courts when the DC Circuit Court of Appeals – in Financial Planning Association v. SEC – vacated Rule 202(a)(11), a rule adopted in 2005 which deems certain broker-dealers not to be investment advisers. The Court held that the ’40 Act does not authorize the SEC to except from the ’40 Act any group that is already covered by another exception.

“Say on Pay” Bill Moves Forward

From Mark Borges’ “Proxy Disclosure Blog” on On Wednesday, H.R. 1257 (the “Shareholder Vote on Executive Compensation Act“) was approved by the House Financial Services Committee on a vote of 37-29. The bill, which would give shareholders an annual non-binding advisory vote on executive pay, now moves to the House floor for consideration. According to media reports, no date has been set for a vote by the full House.

One of the more interesting aspects of the bill is exactly what shareholders would be voting on. The approved bill text indicates that the vote would be based on the compensation discussion and analysis and the compensation tables. This approach could be problematic, however, given the length and complexity of these disclosures.

To address potential liability concerns, the bill was amended to make it clear that private rights of action are prohibited if the board of directors fails or refuses to comply with the shareholder vote. Again, this is fairly ambiguous language. I’m not sure how one responds when shareholders indicate that they don’t agree with a company’s compensation program as reflected in its proxy disclosure. Presumably, it means that the board (or compensation committee) needs to talk with shareholders. That’s what the bill is trying to encourage.

And from yesterday’s WSJ article: Even if the bill passes the House (which seems likely), its prospects in the Senate are uncertain. It could wind up sitting for a while, although I expect that Representative Frank, the bill’s sponsor, will continue to push this initiative forward over the next several months.

The next step is a vote in the full House, and Rep. Barney Frank (D., Mass.), chairman of the committee and sponsor of the bill, says that the House leadership has promised that they will make time available on the floor for a vote, although a date hasn’t been set. The prospects of the advisory-vote bill are uncertain, especially since the Senate Banking Committee’s chairman, Christopher Dodd (D., Conn.), hasn’t indicated plans to push a similar measure through his panel.

And lastly, some information from ISS’ “Corporate Governance Blog.”

Our April Eminders is Posted!

We have posted the April issue of our complimentary monthly email newsletter. Sign up to receive it today by simply inputting your email address!