Monthly Archives: August 2007

August 16, 2007

Chicago to Play NASPP Annual Conference

As in past years, the NASPP Annual Conference – this year in San Francisco from October 9 through October 12 – will kick off with a Gala Opening Reception sponsored by Fidelity Investments on October 9. The NASPP and Fidelity are excited to announce that immediately following the opening reception, all Conference session attendees are invited to the San Francisco Concourse Exhibition Center for an exclusive private concert featuring the multi-talented, multi-platinum group, Chicago!

The concert is offered to those registered to attend the full NASPP Annual Conference sessions only. There is no additional charge to attend the concert, but space is limited and you must register in advance.

The NASPP Annual Conference features a full two and a half day program of critical updates and practical guidance – check out the “Top Ten Reasons You Need to Attend.” As a bonus, the Conference includes’s “4th Annual Executive Compensation Conference” at no extra charge, and you definitely don’t want to miss the critical pre-conference programs, “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” and “The Fundamentals of Stock Plan Administration.”

US Solicitor General Files Brief in Stoneridge Case

Despite some last minute lobbying by Senator Christopher Dodd (D-CT), the government filed a brief as amicus curiae in the case of Stoneridge Investment Partners LLC v. Scientific-Atlanta, Inc. As Broc noted in the blog earlier this summer, President Bush and Treasury Secretary Paulson had blocked the SEC’s effort to weigh in on the case with its views, and now the Solicitor General has filed a brief that comes out on the opposite side of the SEC with respect to the core issue of “scheme liability” under Section 10(b) and Rule 10b-5.

On Tuesday, Senator Dodd, Chairman of the Senate Committee on Banking, Housing and Urban Affairs, announced that he had sent a letter to President Bush and a letter to Solicitor General Paul Clement, asking that they not file an amicus brief “advocating views inconsistent with the views of the SEC.” Dodd noted that such a move would “compound the damage” already caused by the government’s decision to not advocate the SEC’s views on the case.

The government’s brief cites significant policy concerns with the promotion of “scheme liability,” a theory of primary liability for third parties that have been involved in a public company’s fraudulent conduct. In stating the government’s interest in the case, the brief notes that “private securities actions can be abused in ways that impose substantial costs on companies that have fully complied with the applicable laws. The United States also has responsibility, through, inter alia, the federal banking agencies, for ensuring that entities providing services to publicly traded companies are not subject to inappropriate secondary liability.”

The brief advocates a position that is generally consistent with the SEC’s views on the point that the lower court erred in holding that Section 10(b) reaches only misstatements, omissions made while under a duty to disclose, or manipulative trading practices, stating “[t]he plain language of Section 10(b) demonstrates that it potentially reaches all conduct that is ‘manipulative’ or ‘deceptive’” and “[t]his Court’s cases provide no support for the conclusion that non-verbal deceptive conduct is somehow beyond the reach of Section 10(b).”

On the more critical point of third party liability, however, the brief argues:

“It would greatly expand the inferred private right of action under Section 10(b) and Rule 10b-5 if ‘secondary actors’ could be held primarily liable whenever they engage in allegedly deceptive conduct, even if investors do not rely on (and are not even aware of) that conduct. Such a rule would expose not only accountants and lawyers who advise issuers of securities, but also vendors (such as respondents) and other firms that simply do business with issuers, to potentially billions of dollars in liability when those issuers make misrepresentations to the market. Such a rule would thereby considerably widen the pool of deep-pocketed defendants that could be sued for the misrepresentations of issuers, increasing the likelihood that the private right of action will be ‘employed abusively to impose substantial costs on companies and individuals whose conduct conforms to the law.’ Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499, 2504 (2007). Moreover, extending liability to vendors could have the effect of substantially expanding liability for foreign companies that trade with publicly listed companies. Likewise, creating new and unpredictable liability for closely regulated entities like banks could create particular problems and greatly complicate the task of regulators. And the expansion of liability would raise difficult questions concerning the apportionment of liability where, as here, the conduct of the secondary actor relates only to a small part of a broader fraudulent scheme. See, e.g., 15 U.S.C. 78u-4(f)(3)(C) (providing that, in apportioning liability, the trier of fact should consider ‘the nature of the conduct of each covered person found to have caused or contributed to the loss incurred by the plaintiff or plaintiffs’ and ‘the nature and extent of the causal relationship between the conduct of each such person and the damages incurred by the plaintiff or plaintiffs’).”

The case is set for oral argument before the Supreme Court on October 9. Check out the many other briefs filed in this case in our “Securities Litigation” Practice Area.

Black Box Revisited: Helpful Interpretive Guidance in the SEC’s Reg. D Proposing Release

Earlier this month, the SEC posted its long awaited proposing release on possible revisions to Regulation D. While the ultimate outcome of these proposals may not be known until later this Fall (Corp Fin Director John White recently said that the SEC’s goal was to approve all of the small business capital-raising proposals this year), the release includes some currently applicable interpretive guidance that is worth taking a look at now.

Responding to concerns expressed by the Advisory Committee on Smaller Public Companies, the SEC revisited the integration safe harbor in Regulation D with a proposal to shorten the timeframe from six months to 90 days. While doing so, the SEC states its views on issues related to private capital-raising transactions occurring around the time of a public offering. In particular, the SEC weighs in on the ability to do concurrent public and private offerings, which to date has largely been a topic for the staff’s consideration in interpretive letters such as Black Box and Squadron Ellenoff and in countless registration statements filed over the years.

In the release, the SEC says that “[w]hile there are many situations in which the filing of a registration statement could serve as a general solicitation or general advertising for a concurrent private offering, the filing of a registration statement does not, per se, eliminate a company’s ability to conduct a concurrent private offering, whether it is commenced before or after the filing of the registration statement. Further, it is our view that the determination as to whether the filing of the registration statement should be considered to be a general solicitation or general advertising that would affect the availability of the Section 4(2) exemption for such a concurrent unregistered offering should be based on a consideration of whether the investors in the private placement were solicited by the registration statement or through some other means that would otherwise not foreclose the availability of the Section 4(2) exemption. This analysis should not focus exclusively on the nature of the investors, such as whether they are ‘qualified institutional buyers’ as defined in Securities Act Rule 144A or institutional accredited investors, or the number of such investors participating in the offering; instead, companies and their counsel should analyze whether the offering is exempt under Section 4(2) on its own, including whether securities were offered and sold to the private placement investors through the means of a general solicitation in the form of the registration statement.”

The SEC goes on to provide some examples of the application of these principles, and notes that this guidance does not foreclose the ability to rely on the Staff interpretive guidance in Black Box and other similar letters.

While this guidance recognizes the practical approach that the Staff has taken to these issues over the years, the interpretive statement in the release should provide more certainty and perhaps a little more flexibility as potential capital raising opportunities come up before and during public offerings.

– Dave Lynn

August 15, 2007

BDO Seidman Faces a $521 Million Jury Verdict

On Tuesday, a Miami jury ordered accounting firm BDO Seidman to pay $351 million in punitive damages, in addition to $170 million in compensation that BDO was previously ordered to pay to Banco Espirito Santo, a Portuguese bank. BDO was found negligent for failing to uncover a massive fraud during the course of its audits of a Miami-based financial services company.

An article appearing in today’s Washington Post notes: “In court filings, BDO Seidman had warned that a loss of $170 million could trigger massive layoffs and cause the company to lose its standing as the fifth-largest accounting firm. The jury was barred from issuing damages that could destroy a company.

In testimony Tuesday, BDO Seidman attorney Adam Cole asked the company’s chief executive, Jack Weisbaum, whether the firm’s financial operations would stay the same if it had to pay punitive damages.

‘Probably not,’ Weisbaum said. ‘It would be very difficult. We certainly wouldn’t look the way we do now.’

The jury decided Monday that BDO Seidman must compensate the bank and provide punitive damages for failing to reveal massive fraud at the bank’s former partner, E.S. Bankest. The same jury found the accounting firm grossly negligent in June.

BDO Seidman said it will appeal the jury’s verdicts, so it will post a $50 million bond as it appeals. This is the second trial in the dispute, with the first ending in a mistrial in March. The fraud also led to prison time for former E.S. Bankest executives.

Cole showed the jury financial statements for fiscal 2006, which showed the firm’s net worth of $171 million. BDO Seidman argued that the punitive damages should be based on net worth, but the bank contended that it should be based on revenue.

For the fiscal year ended June 30, BDO Seidman reported revenue of $589 million, according to a news release on its Web site. Weisbaum said the company has 2,800 employees in 34 offices nationwide.

BDO Seidman attorney Arturo Alvarez laid the blame on ‘thieves’ at E.S. Bankest who defrauded the bank and said the accounting firm did not intentionally bungle the audits. He asked the jury for no punitive damages.

‘We were victims, too,’ Alvarez said. ‘We never knew [the fraud] was happening.’

At least seven people, including E.S. Bankest directors Eduardo and Hector Orlansky, have already been convicted or pleaded guilty to federal criminal charges related to the fraud and sentenced to prison. In criminal trials, E.S. Bankest was accused of inflating the value of the accounts receivable it bought and presenting fake audited financial statements.”

Small Changes to SEC Forms May Prevent Big Headaches

It is good to know that the SEC’s Commissioners can still agree on something without putting out competing proposals (or putting out any proposals for that matter). Amid the flurry of releases published on August 6th, the SEC published final rules making minor but nonetheless important changes to Form 144, Forms 3, 4 and 5, and Schedules 13D, 13G and TO. The SEC has finally deleted all requirements (or in some cases, an option) for filing persons to include an IRS identification number in these filings. With respect to the Section 16 filings, the SEC had already removed provisions allowing reporting persons to include IRS identification numbers, but some clean-up of those forms was still necessary. The IRS identification number of issuers is still required on the cover page of most Securities Act registration statements and Exchange Act reports, but for what purpose it is hard to say. In the adopting release for these most recent amendments, as well as in the 2003 adopting release for the changes to the Section 16 forms, the SEC said that the IRS identification number was not useful to the SEC for tracking or processing purposes.

One of the problems that references to IRS identification numbers has caused over the years is that sometimes natural persons thought that they had to provide a Social Security number in lieu of an IRS identification number. Filing anything on EDGAR that includes a Social Security number obviously puts people at risk for identity theft, and it remains virtually impossible to get anything pulled down or changed once it gets filed on EDGAR.

A good practice tip is to always have someone check filings, and in particular exhibits, for Social Security numbers and other personal information. This also goes for no-action letters and other correspondence. A little bit of diligence on the front end can prevent some big headaches down the road.

Recent IPO Trends

In this podcast, John Partigan of Nixon Peabody provides some insight into how the IPO market is changing (and provides some gloss on this recent “IPO Trends Study”), including:

– Why did Nixon Peabody and Mergermarket conduct a study of IPO trends?
– What companies did you survey?
– Did your evaluation find any big surprises?
– Any insights into IPO market conditions for the rest of 2007?

– Dave Lynn

August 14, 2007

Releasing Information on Company Websites: Sun Breaks New Ground

Last Fall, Sun Microsystems CEO Jonathan Schwartz asked the SEC to consider allowing companies to use their websites, including blogs on their websites, as a means for satisfying public disclosure obligations under Regulation FD. In what had to have been an SEC first, Chairman Cox responded to the request by posting his letter as a comment to Jonathan Schwartz’s Blog. While by no means definitive, the Chairman’s response certainly opened the door to a dialogue about whether the public disclosure requirement of Regulation FD could be satisfied through a company’s website.

The Chairman’s openness on this issue echoed the SEC’s reaction to the same question way back in 2000, when Regulation FD was originally adopted. In the adopting release for Regulation FD, the SEC indicated that “[a]s technology evolves and as more investors have access to and use the Internet, however, we believe that some issuers, whose websites are widely followed by the investment community, could use such a method. Moreover, while the posting of information on an issuer’s website may not now, by itself, be a sufficient means of public disclosure, we agree with commenters that issuer websites can be an important component of an effective disclosure process. Thus, in some circumstances an issuer may be able to demonstrate that disclosure made on its website could be part of a combination of methods, ‘reasonably designed to provide broad, non-exclusionary distribution’ of information to the public.”

It now looks like Sun is going forward with a website-based approach to disseminating its earnings release, although it will not use the company’s website as the exclusive means for disseminating this information. As described in Jonathan Schwartz’s blog, Sun simultaneously posted its July 30th earnings release on the company’s website, disseminated that information to subscribers through RSS feeds, and filed a Form 8-K with the SEC. Ten minutes after the internet publication and SEC filing, Sun distributed the information through the traditional news wires. Schwartz argues that this approach “will place, for the first time, the general investing public – those with a web browser or a cell phone – on the same footing as those with access to private subscription services.”

Sun’s approach does not really seem to be a “sea change” as Jonathan Schwartz describes it, but perhaps it represents a healthy step in the right direction on public dissemination of important company information. Sun’s new earnings release procedure notably does not cut out the third party news dissemination services, it just gives the RSS subscribers and followers of the Sun website (or the SEC website, for that matter) a little jump on the news. The extra step that Sun is taking can only mean more widespread availability of the information, but it is still hard to say at this point whether web-based disclosure without a news release will ultimately meet the test of being reasonably designed to provide broad, non-exclusionary distribution of the information to the public.

Increasingly, the SEC has been willing to permit website posting of information as a means of making the information publicly available, including: director independence standards in the recently adopted executive compensation rules; committee charters; processes for security holder communications with the board of directors; and code of ethics waivers reportable under Item 5.05 of Form 8-K. Perhaps at some point in the not too distant future, the SEC or its Staff will provide some follow-up on the statements made in the Regulation FD adopting release and recognize how far we have come since 2000 on the use of corporate websites for widespread information dissemination.

Impact of FCPA Investigations on Deals

In this podcast, Homer Moyer of Miller & Chevalier describes the latest trends in Foreign Corrupt Practices Act investigations, including:

– Why has there been a rise in FCPA investigations?
– How can these investigations impact a merger or acquisition?
– What can a company considering a deal do to minimize the risk from a potential FCPA investigation?

Early Bird Expires Tomorrow: 3rd Edition of Romeo & Dye Section 16 Treatise

Peter Romeo and Alan Dye are hard at work updating their two-volume Section 16 Treatise. The Treatise is the definitive work in this area with thousands of pages of reference material.

Order your set by tomorrow, August 15th, to receive a pre-publication discount – you can order online or by fax/mail with this order form. The Treatise will be completed and delivered to you in the Fall.

– Dave Lynn

August 13, 2007

Corp Fin Updates Executive Compensation and Related Person Transaction Interps

When the new Corp Fin “Compliance and Disclosure Interpretations” were launched back at the beginning of the year, the Staff promised more frequent updates to the Division’s interpretive material. The Staff delivered on that promise last week with some new and revised interpretations on Item 402 of Regulation S-K and Item 404 of Regulation S-K.

For the most part, these new and updated interpretations cover positions that are already pretty well known at this point, including some of the interpretations reflected in the notes that we posted from the 2007 JCEB meeting. As such, it does not appear that this update represents the more comprehensive guidance that everyone has been expecting in advance of the proxy season.

On the Item 404 front, the Staff indicated in new Interpretation 2.12 that, with respect to employment arrangements, the “amount involved in the transaction” would include all compensation paid to the employee, not just salary. This interpretation is consistent with the way the Staff had restated old Telephone Interpretation I.35 in Compliance and Disclosure Interpretation 2.07, where it changed a reference to a child’s “salary” to “compensation.” New Interpretation 2.13 deals with a relatively straightforward application of the rule to a situation where an executive officer’s compensation is not disclosed under Item 404 by operation of Instruction 5.a. to Item 404(a), yet the compensation paid to that executive officer’s immediate family member who works for the company must be disclosed, because the immediate family member does not have the benefit of Instruction 5.a. given that person’s non-executive officer status.

Mark Borges has already posted his analysis of some of the new and revised executive compensation interpretations on his blog, with more to come. One of the notable new executive compensation interpretations is a definitive Staff position on the disclosure of negative numbers arising from amounts recognized for compensation from equity-based awards. For this significant interpretation, Mark notes:

“As you know, given the reporting requirements for equity awards in the Summary Compensation Table, it is possible that, in any given fiscal year, the amount reportable for an award may be a negative number (because the previously reported compensation expense has been reversed under SFAS 123(R), because the award was forfeited during the fiscal year, achievement of a performance-based condition has been determined to be no longer probable, or, in the case of an award accounted for as a liability accounting, the stock price has declined during the year. New Q&A 4.11 asks what portion of an award that was previously expensed and has been reversed under SFAS 123(R) may be deducted from the amount reported in, or shown as a negative number in, the Stock Awards or Option Awards column?

As expected the Staff has taken the position that only the previously expensed portions of awards that were previously reported in the Summary Compensation Table may be reversed in the Summary Compensation Table. As a result, an expensed amount relating to a period or periods before the new rules became effective or, perhaps more importantly, before a person became a named executive officer should not be deducted from the amount reported in, or shown as a negative number in, the Stock Awards or Option Awards column.

While everyone will not agree, this answer seems sensible to me, as it minimizes the distortive effect of negative numbers on the Total Compensation column in the table. In other words, a company gets to reverse an expense amount in the Stock Awards or Option Awards column (and, thus, affect an NEO’s total compensation for the fiscal year) only to the extent that the amount being reversed was previously reported in the SCT (and in total compensation) under the new rules.”

Farewell to Commissioner Campos

This has been a summer of many farewells at the SEC (including my own), and now the greener pastures fever has spread to the tenth floor of SEC headquarters. Last week, Commissioner Roel Campos announced that he will be leaving the Commission. I’ve got to say that Commissioner Campos is truly a class act – it was always a great pleasure to work with him and his very talented staff. His broad range of experience, including work as both a prosecutor and a business executive, was evident whenever he judiciously weighed the pros and cons of matters before the SEC. Investors will be losing a true friend on the Commission when Campos leaves for the private sector.

The departure of Commissioner Campos explains (in part?) a cryptic statement that Chairman Cox made while testifying last month before the Senate Committee on Banking, Housing and Urban Affairs. When pressed about his vote for two opposing approaches to shareholder access issue, Cox stated: “In order to put a rule in place, I’ve got to have a clear idea of what the Commissioners want to do and which Commissioners I’m voting with – which Commissioners by the way are members of the SEC – all of these things somewhat up in the air right now.” If you also consider Commissioner Nazareth’s continued service following an already expired term, there is no doubt that we will see a significant change in SEC dynamics as important rule changes come up for adoption this autumn and into next year.

Access Proposals: Should They Stay or Should They Go?

The Council of Institutional Investors is seeking a straight answer on whether or not the SEC Staff will agree that access proposals may be excluded from company proxy materials under Rule 14a-8(i)(8) (the director election basis for exclusion). In this letter to Chairman Cox, the CII requests clarification on what the Staff intends to do with access proposals now that the SEC has published its release containing both an interpretation of Rule 14a-8(i)(8) and proposed changes to the text of the rule designed to implement that interpretation.

At the open meeting for the rule proposals, Commissioner Campos asked Corp Fin to explain how the Staff would respond to a no-action request seeking to exclude a shareholder access proposal. John White indicated that, based on their current thinking, the Staff would approach any such proposal the same was as they did last season, which apparently was a reference to the Staff’s “no view” response to HP. In his recent Senate testimony, Chairman Cox completely avoided the issue when asked about it by Senator Dodd. Then, in a speech a couple of weeks ago at the Federal Reserve Bank of Chicago, Commissioner Atkins indicated that the interpretive portion of the release “governs our administration of that provision, [and] will provide the necessary clarity and uniformity for both investors and companies alike until an amendment is adopted in the future.”

The CII wants some certainty on how things are going to proceed, which may be all the more important now as the departure of Commissioner Campos raises questions about where things are headed on the shareholder access front.

– Dave Lynn

August 10, 2007

Brocade CEO’s Backdating Verdict: A Wake-Up Lesson For All of Us

By the time you read this, this old dude will be off on vacation – so I can afford to be “preachy” and run. To me, the lesson for all of us in the Brocade CEO’s guilty verdict involving option backdating is to not always “go along with the crowd.” Just because “we’ve always done it this way” doesn’t mean it’s right.

I know this sounds obvious – but if you are lucky to live long enough, my bet is that you have at least a 50% shot at coming across circumstances in your professional life where you stop and think about whether you are in a grey area that feels a “little too grey.” It’s not worth your career – not to mention your personal life if it goes too far astray – to take big chances. I have a friend who has more integrity than most – yet, he fell into exactly this type of trap and just emerged from a year in prison (he didn’t concoct nor benefit from the scheme; rather, he found out about it and continued to sign sub-certifications). Sure, he’s happy to now be out, but his career is in tatters and his personal life has changed dramatically.

I think it’s just a matter of time before the next widespread scandal breaks. Will it be Rule 10b5-1 plans? I don’t know – but come hear SEC Enforcement Chief Linda Chatman Thomsen discuss how the SEC Staff is looking at these plans during the “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks.” You can catch this Conference in San Francisco on October 10th – or watch it by video webcast on that date (or anytime thereafter). Or take advantage of the “Member Appreciation Package” discount to watch all three of our critical October Conferences online.

“Pretty” Disclosure: Internal Controls Remediation

In our “Internal Controls” Practice Area, we have a list of filings reporting remediation of material weaknesses. Here is an interesting one that Bob Dow recently brought to my attention: 3d Systems Corp (Form 10-K/A filed 8/2/07). I have seen a couple of other long remediation disclosures, but this one is a lot more organized and includes more details about the company’s remediation plans.

Future of the Legal Profession

Our members asked for it. “Billy Broc” and Dave “The Animal” weigh in on the “Future of the Legal Profession.” The music at the end is appropriate for the mood…

– Broc Romanek

August 9, 2007

The Big 3000!

In our “Q&A Forum,” we have reached query #3000 (which is really a higher number since many of these have follow-ups queries). I’m so happy Dave is on board; answering those sure can be stressful. You are reminded that we welcome your own input into any query you see. And remember there is no need to identify yourself if you are inclined to remain anonymous when you post a reply…

Posted: SEC’s IFRS Concept Release

Yesterday, the SEC posted a 42-page concept release relating to allowing US issuers to prepare their financials according to IFRS rather than US GAAP. This is a “biggie”…

Becoming a Blogger

The benefits of blogging yourself are many. Do you have what it takes? I’m always happy to discuss this with you if you are interested in trying. In this podcast, Kevin O’Keefe of LexBlog provides some insight into what you should consider if you decide to become a blogger, including:

– Why should corporate lawyers blog?
– How can a lawyer determine whether they have what it takes to blog?
– What are elements of a blog that will attract an audience?
– What are your favorite blogs – and why?

Payments to Terrorists: Chiquita Brands and the Role of the Board of Directors

In his “The Race to the Bottom” Blog, Professor J. Robert Brown recently posted this interesting analysis regarding a troublesome situation involving a former SEC Chairman:

“There was an interesting article in the WSJ last week about Chiquita Brands International Inc. and payments made to a violent group in Colombia designated by the Department of State as terrorists. According to the article, Roderick M. Hills, the former Chairman of the SEC, went to the Justice Department in his capacity as chair of the audit committee to disclose the payments. Despite having self reported, a criminal prosecution resulted with Chiquita ultimately agreeing to a plea of one count of engaging in transactions with a specially-designated global terrorist and topay a fine of $25 million. A grand jury is now apparently weighing a possible indictment of Hills.

The implication of the article was that companies confront heightened risk if they self report their own misdeeds. As the article noted: “The investigation illustrates the recent posture taken by U.S. authorities to prosecute aggressively even when companies turn themselves in for breaking the law.”

But in fact it illustrates no such thing. This is not the usual case of a company discovering improper behavior, putting a stop to it, and self reporting to the government. This is a case that involves a fundamental breakdown in the system of corporate governance.

First, this was not the only payment problem incurred by Chiquita’s Colombian subsidiary. It had already been found to have made improper payments to government officials by the SEC, with Chiquita subjected to a $100,000 fine. See SEC v. Chiquita Brands International, Inc., Litigation Release No. 17169 (D DC Oct. 2. 2001). In other words, the board and management was on notice that there were problems with this particular subsidiary, specifically in connection with the making of improper payments.

Second, the payments in Colombia were made to Autodefensas Unidas de Colombia (AUC), an organization described in the factual proffer as “a violent, right-wing organization” (a copy of the Proffer is posted on the DU Corporate Governance web site). As one US Attorney described in the WSJ article:

“I regarded this as a murder investigation,” from the start, says Roscoe Howard Jr., former U.S. Attorney for Washington, D.C., who helped lead the Chiquita prosecution before he left his position in 2004. “Even though Chiquita didn’t murder anyone, that’s what the money was used for — to buy weapons.”
Moreover, the role of the AUC was not lost on the US Government. It was designated as a foreign terrorist organization in September 2001.

Third, the payments had been discussed and apparently approved by persons in the highest echelons of management. Again, according to the Proffer:

“Defendant CHIQUITA’S payments ot the AUC were reviewed and approved by senior executives of the corporation, to include high-ranking officers, directors, and employees. . . An in-house attorney for CHIQUITA conducted an internal investigation into the payments and provided Individual C [listed only as a high ranking official] with a memorandum detailing that investigation. The results of the internal investigation were discussed at a meeting of the then-Audit Committee of the then-Board of Directors in defendant CHIQUITA’S Cincinnati headquarters in or about September 2000.”
In other words, this was not a case where a company’s management discovered improper behavior and went right to the authorities. This behavior was apparently widely known among top management and allowed to continue.

Fourth, as the WSJ Article indicated, Hills joined the board in 2002 and almost immediately learned about the payments. Nonetheless, it took a year before he reported them to the Justice Department. Moreover, the decision to self report only occurred after the matter was brought to the attention of outside counsel and the entire board. Outside counsel (apparently Kirkland & Ellis), according to the Proffer, indicated that the company “must stop [the] payments.” A report was made to the full board and at least one member “objected to the payments.” It was after that meeting that officials met with officilas at the Department of Justice.

Fifth, Justice Department officials, according to the Proffer, informed Chiquita officials (including, apparently, Hills) that the payments to the AUC “were illegal and could not continue.” Moreover, several months later, officials at Chiquita were told by outside counsel that DOJ officials “have been unwilling to give assurances or guarantees of non-persecution; in fact, officials have repeatedly that they view the circumstances presented as a technical violation and cannot endorse current or future payments.” Nonetheless, the payments continued until February 2004.

Finally, the WSJ left the impression that Chiquita and Hills were being treated harshly. Compare that to an article in the LA Times which suggested that some in the US Attorneys Office wanted more rigorous prosecution at an earlier date and were possibly stymied by higher ups in the Justice Department. That Article indicated that Congress was conducting an investigation. Id. (“As part of an inquiry into corporate payments to violent groups in Colombia, a group of congressmen wants more details about the Justice Department’s handling of the Chiquita Brands International Inc. case, including whether the department was too lenient and why it took four years to file criminal charges after the banana company admitted making payoffs.”).

This is not, therefore, a case where a company learns about a bad practice and immediately coming clean. It is the story of illegal payments that were known at the top levels of management, continued for seven years, went to a violent terrorist group, and were self reported only when the entire board and outside counsel learned about them. Indeed, the history of payments apparently went back beyond 1997. As the WSJ article noted, “Chiquita had previously paid another violent group until it was declared a terrorist organization in 1997.”

There were no doubt moments when Chiquita was truly in a difficult spot. The articles indicate that the payments were made to ensure the security of employees in Columbia. But that might explain the payments for the time it took to either provide adequate security or exit the country. In fact, the payments to AUC continued for seven years, from 1997 to 2004.

Whatever happens to Hills, as a director with fiduciary obligations to shareholders, he (and the entire board) should, once they knew, have put an end to these payments. That they did not is a remarkable failure of governance.”

– Broc Romanek

August 8, 2007

Survey Results: Earnings Releases and Earnings Calls

Here are the results from a recent survey on earnings releases and earnings calls:

1. Regarding the archiving of earnings calls on our corporate web site:

– We archive them for one quarter – 30.8%
– We archive them for six months – 1.5%
– We archive them for between 6 and 12 months – 6.2%
– We archive them for 12 months – 41.5%
– We archive them for over one year – 7.7%
– We don’t archive our earnings calls – 12.3%

2. When we make/provide our earnings calls and related materials timely by a broadly available webcast and/or teleconference:

– We always file (or “furnish”) the transcript and related materials on a Form 8-K – 5.8%
– We sometimes file (or “furnish”) the transcript and related materials on a Form 8-K – 4.4%
– We never file (or “furnish”) a transcript and related materials on a Form 8-K (unless material information was disclosed during the earnings call that was not disclosed in the earnings release) – 89.9%

3. During the past few years:

– We have changed our earnings release practices, so that such releases coincide with our 10-Q filings – 12.9%
– We have kept our earnings release practices the same, and they get released a few weeks before our 10-Q filings – 40.0%
– We have kept our earnings release practices the same, and they get released a few days before our 10-Q filings – 24.3%
– We have changed our earnings release practices, so that they get released closer to the time of our 10-Q filings – 14.3%
– Our earnings releases have always been released at the same time as the 10-Q filings – 8.6%
– We decided to no longer provide earnings releases at all – 0.0%

4. In the near future:

– We definitely intend to revise the timing of our earnings releases so that they coincide with our 10-Q filings (or no longer provide earnings releases at all) – 3.2%
– We might revise the timing of our earnings releases so that they coincide with our 10-Q filings (or no longer provide earnings releases at all) – 11.1%
– We don’t need to change our earnings release practices because we recently did so – 23.8%
– We are comfortable with our earnings releases being issued before our 10-Q filings and don’t need to review those practices – 61.9%
– We already no longer provide earnings releases at all – 0.0%

5. We issue our earnings releases:

– Immediately before the start of the earnings calls – 23.2%
– Two hours before start of the earnings calls – 37.7%
– More than two hours before the start of the earnings calls – 37.7%
– During or immediately after earnings calls – 1.5%
– After, but within four business days of the earnings calls – 0.0%

6. We disclose earnings guidance:

– In the text of the earnings release – 16.9%
– During the earnings call, but not in the text of the earnings release – 8.5%
– On a Form 8-K filing, but not in the text of the earnings release – 4.2%
– In the text of the earnings release as well as during the earnings call – 31.0%
– On a Form 8-K filing and in the text of the earnings release – 2.8%
– During the earnings call, on a Form 8-K filing and in the text of the earnings release – 14.1%
– We do not give earnings guidance – 22.5%

7. We provide archives of our earnings calls (eg. calling them “podcasts”; here is an example):

– On our website only – 85.3%
– On iTunes only – 0.0%
– On both our website and iTunes – 1.5%
– We do not provide audio archives of our earnings calls – 13.2%

New Survey: Lead/Presiding Directors

Please take a moment to take part in our new Quick Survey on Lead/Presiding Directors, which asks these queries:

– Does your board have a lead or presiding director?
– What is the term of the lead/presiding director?
– Are there “term limits” for the lead/presiding director?
– What are the responsibilities of the lead/presiding director?
– Does the lead/presiding director receive extra compensation for these additional responsibilities?

SEC Staff Adds a Few More Auditor Independence FAQs

The SEC’s Office of the Chief Accountant has added a few more auditor independence FAQs (look for the ones marked with a “2007” date). The last update of these FAQs was in 2004.

Early Bird Extended One More Week: 3rd Edition of Romeo & Dye Section 16 Treatise

Peter Romeo and Alan Dye are hard at work updating their two-volume Section 16 Treatise. The Treatise is the definitive work in this area with thousands of pages of reference material.

Order your set by August 15th to receive a pre-publication discount now – you can order online or by fax/mail with this order form. The Treatise will be completed and delivered to you in the Fall.

– Broc Romanek

August 7, 2007

Marty Dunn: Short-Timer Extraordinaire

After two decades of service, Corp Fin Deputy Director Marty Dunn is leaving the SEC at the end of August and will join the DC office of O’Melveny & Myers. During his tenure, Marty probably has worked on every standing Corp Fin-related rule in the book. Not only is Marty a superb securities lawyer, he is a great guy and I’m sure he will be sorely missed in the Division. Here is the related press release.

With the Chief Accountant and Chief Counsel jobs still vacant, Corp Fin now has its hands full with all of these empty big shoes…

Today’s Webcast: Broadridge Speaks – Demystifying E-Proxy’s Implementation

Today is our webcast – “Broadridge Speaks: Demystifying E-Proxy’s Implementation” – where senior Broadridge executives explain the nitty gritty about how they will help implement e-proxy. I ended up pre-recording this webcast – so you can listen to it at your leisure and not necessarily wait until 2 pm eastern. Note that there won’t be a transcript for this particular webcast.

Broadridge (formerly known as ADP) is driving the e-proxy process and has addressed all the items on this detailed agenda during the webcast. This is a great companion program for our popular June 2-hour webcast on e-proxy (audio archive and transcript now available).

Twist on California E-Proxy Conflict? Delaware Slant

Here is a recent question posted in our Q&A Forum: “Following up on Broc’s recent blog on a California conflict of e-proxy, has the issue of how the “notice only option” under the final e-proxy rules will jive with Delaware General Corporation law section 232, Notice by Electronic Transmission? Specifically, DGCL 232 permits notice by “electronic transmission consented to by the stockholder to whom to whom notice is given.” Query whether such consent may be implied by receipt of the prescribed form of notice under the “notice only option” or whether consent must be obtained in some other way prior to that?”

John Grossbauer of Potter Anderson helped me craft an answer here (as he often does on Delaware law issues): “Our understanding of the rules is that you need to send out a 1 page document – in hard copy – that notifies shareholders that the proxy statement is available on the Web. Our thinking is that 1 page notice could be drafted (which might be postcard-sized) to satisfy the Delaware notice of meeting requirements, which are very minimal: time, place, date, and, if a special meeting or if required by the bylaws, notice of what’s to be voted upon.”

Posted: Adopting Release for Regulation M Amendments

Yesterday, the SEC posted this adopting release relating to short selling in connection with a public offering by amending Rule 105 of Regulation M, etc.

– Broc Romanek

August 6, 2007

FASB Proposals: Separate Accounting for Conversion of Convertible Bonds and Applying “Shortcut Method” of Hedge Accounting

Companies with converts beware! A soon-to-be released proposed FASB Staff Position would require companies with convertible debt that may be settled in cash to account for the debt and equity components separately. The proposal would require separate accounting to be applied retrospectively to both new and existing convertible instruments – and would thereby affect net income and earnings per share reported by many issuers of these convertible instruments. Learn more in our “Convertible Debt Offerings” Practice Area.

Also, the FASB has proposed guidance that would require companies to evaluate previous and new hedges of interest rate risk, with fewer of them qualifying to use the simplified “shortcut method” of hedge accounting under Statement 133’s requirements. More companies may therefore need additional systems to track the data and the evaluations for far more demanding hedge accounting. Learn more in our “Derivates” Practice Area.

Congressional Report Released: Aguirre Firing and Hedge Fund Investigation

On Friday, the Senate Finance and Judiciary Committees issued a joint report (108 pages, 711 pages with exhibits) regarding the investigation into the SEC’s firing of former Enforcement Staffer Gary Aguirre, who had been investigating suspicious trading at Pequot Capital Management, a hedge fund. Among other criticisms of the SEC, the report notes that the SEC had unnecessary delays in the Pequot investigation, high-level Staffers disclosed sensitive case information to lawyers that represented those under scrutiny and the appearance of “undue deference” to a prominent Wall Street executive that resulted in the postponement of his interview until after the case’s statute of limitations had expired. This is all not too far from the findings of the interim report issued six months ago.

Saturday’s NY Times included this lengthy article on the final joint report.

SEC Posts Trio of Releases

On Friday, the SEC posted these three releases:

proposing release for revision of Regulation D limited offering exemptions

adopting release for definition of “significant deficiency”

adopting release for prohibition of fraud by advisers and accredited investors

– Broc Romanek

August 3, 2007

Congressional Interest in Shareholder Access

At a Senate Banking Committee hearing on Tuesday, Committee Chair Christopher Dodd (D-Ct.) warned SEC Chairman Cox that he will consider legislation to resolve the question of proxy access if the SEC doesn’t adopt access rules. Here is Chairman Cox’s statement from the hearing.

ISS’ “Corporate Governance Blog” notes: “Cox, a former Republican Congressman from southern California, was questioned by Dodd on the likelihood that investors would be able to file a proposal calling for access, given the threshold of 5 percent could keep ‘even large institutional investors such as Calpers’ from filing.

Cox defended the threshold, noting it aligns with the commission’s existing 13D/G regime, which requires investors to disclose holdings above the 5 percent level and whether or not they intend to exert control. Cox also noted that groups could pool holdings to meet the threshold and questioned whether a group unable to meet the 5 percent requirement could muster 50% support to pass an access bylaw.

Echoing past assurances, Cox told committee members that the issue of access would be resolved, one way or another, within months. ‘There will be a rule in place this fall … so [investors filing proposals for the 2008 proxy season] will know how to conform their conduct to the law,’ Cox said.”

Also, there are two entries about this hearing on

The Changing Pink Sheet Market

Last Sunday, the Washington Post ran this article that nicely describes how the Pink Sheets have evolved over the past decade – including the new categorization system to alert investors about the ability and willingness of individual issuers to provide adequate public disclosure in a timely manner. Beware the skulls and cross-bones!

A few months ago in our Q&A Forum, we received a question regarding the attorney letter requirement for the new Pink Sheets tiers. The Attorney Letter Agreement is now available. Learn more in our “Pink Sheets” Practice Area.

Mailed: July-August Issue of The Corporate Counsel

We just mailed the July-August 2007 issue of The Corporate Counsel. Try a no-risk trial for half-price for the rest of the year.

The July-August issue includes analysis of:

– Fixing The Rule 144 Proposals
– Majority Voting—Uncontested Elections Only?
– Section 13 Reporting of Short Positions
– Revised 8-K Items 5.02 (and 1.01)
– Accessing on Edgar Exhibits That are Incorporated by Reference—No Hyperlinking!
– Non-Voting Shares—Proxy/Information Statement Required?
– S-K Item 404—Is the Spouse of a Stepchild a Related Person?
– More Item 404—Calculating the “Amount Involved” When a Family Member is an Employee of the Issuer
– S-K Item 402—Options Assumed In Merger—Which Compensation Tables Do They Go In?
– When to Include Post-FYE Deferred Bonus in Non-Qualified Deferred Compensation Table
– Not Filing the Proxy Statement Within 120 Days After Yearend—Follow-Up on Delinquent 1934 Act Reports and S-3 Use/Eligibility

– Broc Romanek