August 13, 2012

What Happens to Whistleblower Tips at the SEC

On Friday, the SEC’s Office of the Whistleblower posted this friendly video (along with this transcript) featuring Chief Sean McKessy that goes through the steps it takes when it receives a whistleblower tip. Sort of an evaluation checklist. For the most part, it provides comfort to the potential whistleblower – until you get to this phrase near the end of the video: “SEC enforcement actions can take years to be finalized.” That is a true statement that may scare off a few folks…

The SEC’s Consolidated Audit Trail: Too Little & Too Late

Last month, the SEC approved a new rule that requires the securities exchanges and FINRA to establish a market-wide consolidated audit trail that will significantly enhance regulators’ ability to monitor and analyze trading activity. Here’s some commentary from Lynn Turner about this rulemaking:

Here are statements from two SEC Commissioners who opposed the recent SEC rulemaking as being too little (Aguilar and Walter) and it certainly has occurred too late. The third statement is from the SEC Chairman who supported the rule. It was the first time I recall one of the Democratic Commissioners voting against the Chair.

Some things worth noting in these statements includes:

1. In 1980, over three decades ago, the SEC itself issued a report saying it needed a comprehensive market surveillance system. Yet today, absolutely no such system exists and trading blow ups are becoming a regular event.

2. One of the Commissioners aptly states: “…it will likely take several more years before any consolidated audit trail system is finally in place..” The Commissioner goes on to point out that the system is years away, but will be based on the rule just adopted which the Commissioner comments: “…the rule we consider today is disappointingly weak…” The Commissioner goes on to state somewhat shockingly:

“the adopting release eliminates the requirement to report orders with a unique order identifier throughout the order’s entire life cycle with a more general requirement that the repository be able to link together all life cycle events for the same order. Further, the rule replaces the use of unique customer identifiers, which could enhance the ability of regulators to reliably and efficiently identify the beneficial owner of the account originating an order, with a less effective identification of the account holder–which, in some cases, would only reveal the entity named on the account rather than the actual individuals controlling it. In short, the rule’s flexibility may well result in less timely, complete and accurate information and therefore less effective market oversight.”

3. The data to be provided is not due to the SEC until 8 am the next morning. By that time the trades will all be over with, and in the instances of the Flash Crash, the Facebook IPO, and now the Knightmare on Wall Street, will have been old history. The SEC will be waiting overnight, losing sleep, while the data comes in so they can figure out what went wrong the day before, and why people lost money. So while the trading firms can develop extremely complex algorithms (some of which obviously do not work as intended), and do thousands of trades in a nano second, it was felt the SEC needed to give them until the next (years, years from now) to report their trade data.

As a result, it is likely there will be more, maybe even many more trading losses to be sustained by investors, before a proactive SEC steps in to ensure orderly, fair markets. In the meantime, the US capital markets are beginning to look and feel a little like the “casino” a former SEC Commissioner used to describe the London AIM markets.

Failure to Seek Shareholder Approval Lawsuit: Simon Property Group Sued by Pension Fund

I just blogged this on’s “The Advisors’ Blog“:

Here’s a recent article from Bloomberg:

Simon Property Group Inc. (SPG) directors were accused in a lawsuit by an investor of improperly increasing Chief Executive Officer David Simon’s compensation last year without seeking shareholder approval. The board of the largest U.S. shopping-mall owner wrongfully authorized a compensation package for Simon that provided $1.25 million annual salary, a cash bonus of double his salary, and $120 million in special stock awards as an incentive to stay with the company through 2019, a Louisiana pension fund claimed in the suit, filed yesterday in Delaware Chancery Court.

The $120 million retention award “is not tied to the company’s performance and instead guarantees enormous payments to Simon simply if he stays employed by the company” for seven more years, the fund alleged. Simon, based in Indianapolis, raised its dividend and increased its full-year forecast for funds from operations last month, citing increased demand for space from retailers at regional malls and outlet centers. Earlier this year, Simon bought a 29 percent stake in European shopping-center operator Klepierre SA and formed a venture with Rio de Janeiro-based BR Malls Participacoes SA (BRML3) to develop outlet centers in Brazil. Les Morris, a spokesman for Simon Property Group, said by e-mail that the suit is “meritless” and the company will defend itself against its claims.

The suit comes more than two months after Simon officials disclosed that 73 percent of the Simon shares voted at the company’s annual meeting opposed the granting of the retention award to the company’s chief executive.

Say-On-Pay Vote

Simon officials sought to defend the CEO’s compensation plan prior to the so-called “say-on-pay” vote, noting that total stockholder returns for the past 10 years were 597 percent compared with 58 percent for the S&P 500. Simon had been one of the company’s top executives during that period. Simon, son of the company’s co-founder, has been CEO since 1995 and chairman since 2007. The Louisiana Municipal Police Employees Retirement System, a Simon shareholder, accused the company’s directors of exceeding their authority by amending the company’s stock- incentive plan, created in 1998, without seeking shareholders’ approval.

The plan allowed the board to change its terms unilaterally unless shareholder approval was “required by law, regulation of listing requirement,” the pension fund said.

Tax Implications

Since changes to executives’ performance goals under the plan implicate tax laws, the board was required to have investors vote of them, the pension fund said. The investors filed a so-called derivative suit against Simon’s board, which would return any recovery from insurance covering the company’s officers and directors to the company’s coffers. The case is Louisiana Municipal Police Employees Retirement System v. Bergstein, CA No. 7764, Delaware Chancery Court (Wilmington).

– Broc Romanek