Just in time for tweaking your D&O Questionnaires, the NYSE and the Nasdaq have revised their bright-line director independence tests. As noted in this Sullivan & Cromwell memo, the NYSE is changing the direct compensation test in Section 303A.02(b)(ii) of the NYSE Listed Company Manual from $100,000 to $120,000, consistent with the SEC’s 2006 increase of the disclosure threshold in Item 404(a) of Regulation S-K. In addition, the NYSE’s standards for determining if a majority of the board is independent will now permit a director to have an immediate family member serving as an employee (not a partner) of the company’s auditor, provided that the immediate family member does not personally work on the company’s audit (see Section 303A.02(b)(iii)). This auditor affiliation tweak brings the NYSE’s standards closer to the standards of the AMEX and Nasdaq on this point. Both of these changes apply to NYSE-listed companies beginning September 11, 2008.
As noted on our “Nasdaq Speaks ‘08” webcast earlier this summer, the Nasdaq has also been seeking to revise its corporate governance listing standards so that a director may receive compensation from the company of up to $120,000 per year (rather than $100,000) and still be deemed independent for the majority of independent directors standard (of course audit committee independence is subject to a different standard). The SEC approved the Nasdaq’s change to Rule 4200(a)(15)(B) on August 8. In approving the rule change, the SEC noted that “even if a director (or a family member) received less than $120,000 in compensation from the listed company, the company’s board still would have to make an affirmative determination that the director has no relationship with the listed company that, in the board’s opinion, would interfere with the exercise of his or her independent judgment in carrying out the responsibilities of a director.”
As noted recently in our Q&A Forum, one important difference that remains between the NYSE and Nasdaq listing standards mandating a majority of independent directors is that the NYSE — unlike Nasdaq — does not provide for a cure period. As a result, when an independent director resigns and causes the company to no longer meet the standard specified in Section 303A.01 of the NYSE Listed Company Manual, the company must file a Section 303A Interim Written Affirmation notifying the NYSE that it fails to meet the continued listing standard. In addition, the company must file an Item 3.01 Form 8-K disclosing the failure to satisfy a continued listing standard. An example of this is the Form 8-K filed by CBS Corp. on December 15, 2006.
Options Backdating: Uptick in Rule 102(e) Proceedings Against Lawyers
When I started working on Rule 102(e) proceedings at the SEC in the mid-‘90s, cases seeking to bar lawyers from practicing before the Commission were almost unheard of. The focus was almost exclusively on proceedings involving accountants. Since at least the Carter & Johnson case of the early 1980s, there has been a healthy debate about the extent to which the SEC should seek to censure, suspend or bar lawyers from practicing before it. The SEC has generally taken the position that Rule 102(e) is not meant to be an enforcement tool in and of itself, but rather a means to protect the process of SEC practice, particularly once a lawyer or accountant is found to be responsible for a violation of the federal securities laws.
Now with the advent of options backdating cases, a disproportionate number of lawyers are settling to primary and secondary anti-fraud, reporting and other violations, and Rule 102(e) proceedings are showing up with increasing frequency as one of the “collateral consequences” of settling to those other violations. Typically, attorneys are barred from appearing or practicing before the SEC as an attorney, with a right to reapply after a specified number of years, or suspended altogether. Some examples of recent settled Rule 102(e) proceedings in options backdating cases are:
– Christopher Martin (HCC Insurance) – barred with a right to reapply in five years;
– Frances Jewels (Sycamore Networks) – barred as both an attorney and accountant with a right to reapply in five years;
– Robin Friedman (Sycamore Networks) – barred with a right to reapply in five years;
– William Sorin (Comverse Technology) – suspended from appearing before the SEC; and
– Leonard Goldner (Symbol Technology) – suspended from appearing before the SEC
It Must be Tough to Find Attentive Plaintiffs These Days
A court recently rejected a plaintiff seeking to serve as a class representative based on the plaintiff’s lack of familiarity with or concern for the case. Apparently, it is not good enough to just have your name listed on the complaint to serve as a class representative – you actually have to know who you are suing and have a passing knowledge of the matters involved in the litigation.
From the Alston & Bird Securities Litigation Blog:
The court in In re Monster Worldwide, Inc. Securities Litigation, No. 07 Civ. 2237, 2008 WL 2721806 (S.D.N.Y. July 14, 2008), rejected as insufficient a proposed class representative due to “inadequate familiarity with, and concern for, the litigation.” Id. at *3. Plaintiffs had filed a putative securities fraud class action against Monster Worldwide based on alleged stock option backdating practices and related accounting issues. In the course of ruling on plaintiffs’ motion to certify a class of investors for this case, the District Court for the Southern District of New York examined whether the two named plaintiffs satisfied the basic requirements of Rule 23 of the Federal Rules of Civil Procedure, including whether they would be adequate representatives for the class. Id. at *2.
The defendants had deposed the co-chairman of the Steamship Trade Association-International Longshoremen’s Association Pension Fund (the “Fund”), one of the named plaintiffs in the case. During that deposition, the witness testified that he was the person at the Fund with the most knowledge about the lawsuit. Upon reviewing the deposition transcript, the court found that the witness “did not know the name of the stock at issue in this case, did not know the name of either individual defendant, did not know whether [the Fund] ever owned Monster stock, . . . did not know whether he had ever seen any complaint in the action,” and was ignorant of various other matters pertinent to the litigation. Id. at *4. Even the second witness designated by the Fund supposedly to ‘mitigate the damage’ of the first witness’s “appalling testimony” admitted that he had only learned about the litigation a week before his deposition. Id.
In a strongly worded opinion, the court rejected the Fund as a class representative, declaring that it refused to be “a party to this sham.” Id. It was clear to the court that this plaintiff had “no interest in, genuine knowledge of, and/or meaningful involvement in [the] case” and was in effect a “willing pawn of counsel.” Id. Ultimately, the court concluded that the other proposed representative did not suffer from these same deficiencies and certified the class. Id. at*4, *8.
– Dave Lynn