Broc Romanek is Editor of CorporateAffairs.tv, TheCorporateCounsel.net, CompensationStandards.com & DealLawyers.com. He also serves as Editor for these print newsletters: Deal Lawyers; Compensation Standards & the Corporate Governance Advisor. He is Commissioner of TheCorporateCounsel.net's "Blue Justice League" & curator of its "Deal Cube Museum."
Yesterday, President Bush nominated Congressman Christopher Cox – a former securities lawyer at Latham & Watkins – to be the new Chairman of the SEC. Senate confirmation is still required. Here is the White House press release with the remarks of President Bush and Representative Cox.
A number of members asked me yesterday if Chairman Donaldson was asked to resign by President Bush, as Donaldson consistently sided with the two Democratic Commissioners in 3-2 Commission votes and there has been widespread criticism by many over the costs of implementing internal controls (plus the recent SEC budget crisis didn’t help). Your guess is as good as mine – but the Commission is supposed to be an independent agency and I would hope the President wouldn’t meddle in the SEC’s affairs.
As far as I can tell, this is the first appointment of a sitting member of Congress to the Commission. Here is a Forbes article painting the incoming Chair as pro-business; here is an article from Bloomberg that provides a number of differing opinions on the appointment. The front pages of the NY Times and WSJ also have detailed profiles of the incoming Chair and much commentary about what others think.
More on the SEC’s New HQ Address
Earlier this week, I blogged about the SEC’s new address – but this was for purposes of sending courtesy copies to the SEC Staff. Pursuant to Item 101(e)(2), it is still a specific disclosure item that companies must include the following in various SEC periodic reports and registration statements:
“That the public may read and copy any materials you file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW., Washington, DC 20549. State that the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. If you are an electronic filer, state that the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC and state the address of that site (http://www.sec.gov).”
Since the rule still refers to the old address and the SEC hasn’t issued an alert or changed the rule formally, I believe issuers should go ahead and keep using the old address for this and other purposes. There are several examples of companies (at least 40 filings) that have included the new address in filings made in the last couple weeks, but a quick and random review of twenty S-3 filings made yesterday showed that only 1 out of 20 used the new address, while 19 still listed the old address (thanks to Amy Seidel for this data!).
Even though Corp Fin has moved to the new building, other offices still haven’t moved – although the move is now being accelerated in an effort to save money in light of the SEC’s budget crisis.
SEC and DOL Jointly Issue “Tips” for Plan Fiduciaries
The Department of Labor and SEC have jointly published tips to assist fiduciaries of employee benefit plans in reviewing conflicts of interest of pension consultants: “Selecting and Monitoring Pension Consultants: Tips for Plan Fiduciaries.” The tips are questions for plan fiduciaries to ask pension consultants, developed by the DOL and SEC “to assist plan fiduciaries in evaluating the objectivity of the recommendations provided, or to be provided, by a pension consultant.” Also, some guidance is provided following each question.
Bob Woodward on “Deep Throat”
Maybe it’s my “inside-the-beltway” outlook on life, but I was fascinated with this four-page article in the Washington Post yesterday by Bob Woodward, in which he explains – in nitty-gritty detail – how he came to know Mark Felt and the events that led to the series of Washington Post articles that brought down President Nixon.
Last October, I blogged about how Chairman Donaldson was showing all the signs of a being a short-timer. But he hung in there until yesterday, when he announced he was resigning effective June 30th. I believe his legacy will hold up quite well as an incredible amount of rulemaking – impacting all facets of the market – was adopted during his two and a half year tenure. Not bad for a man who never really wanted the job.
Of course, now the rumor-mill begins about his successor, who will step into a tenuous situation as the Commission has been divided over numerous crucial rulemakings in recent months? According to numerous media reports, the answer is Congressman Chris Cox (R-Cal.) and that the President will announce the appointment this morning. So much for suspense! This Washington Post article talks about how some of Donaldson’s reforms might be revisited by a Chairman who is more in line with President Bush’s themes.
Analysis of Delaware Court Decision re: Reach of California Law
More podcasts on the way, including this new podcast with Keith Bishop who analyzes – and provides insight into the ramifications of – the recent Delaware Supreme Court VantagePoint Venture Partners decision, including:
– Why is the Delaware Supreme Court interpreting the California Corporations Code?
– In what situations does California Corporations Code Section 2115 purport to apply?
– Is this a problem for all public companies?
– Now that the Delaware Supreme Court has spoken, can counsel safely forget about California’s reach-out statute?
– Should we expect any other fall-out from the Delaware Supreme Court’s decision?
Get Ready to Understand the SEC’s Comment Letter Database (and How to Best Couch Confidential Treatment Requests)
I am excited that a pair of key SEC Staffers, Corp Fin Deputy Director Shelley Parratt and Branch Chief Suzanne Hayes, has joined the panel for the June 16th webcast: “How to Navigate Tricky Confidential Treatment Requests.” Shelley will open the program to discuss the new SEC comment letter database – and Suzanne will join a group of practitioners that specialize in confidential treatment requests to deconstruct how to best prepare CT requests – which is an art more important than ever now that SEC comment letters and responses are posted on the SEC’s website.
This blog is the first evidence I have seen that members of the general public will be picking apart comment letters.
Looking for more water-cooler fodder? From Bob Dow of Arnall Golden, here are a few more interesting 404 disclosures:
– RCN Corp. has a weakness because it has equity investment for which it cannot obtain financial data
– Kelly Services did a restatement (related to lease accounting) but satisfied itself that this was not a material weakness
– Foster Wheeler also had a restatement, decided the restatement was not a material weakness, but had other material weaknesses leading to an adverse opinion (this one has one of the better set of control-related risk factors (2 of them) because they have some specific content; not just the usual boilerplate)
– Brightpoint initially gave a plain vanilla “clean” SOX 404 report; but after it filed its 10-K, it discovered errors and material weaknesses in its overseas operations – and in this 10-K/A it gave an updated, adverse SOX 404 report
Corp Fin’s New Address
For packages and other hard copies going to Corp Fin Staff, they can now be sent to Station Place, located at 100 F St. NE, Washington DC 20549.
June Eminders is Up!
We have posted the June Issue of Eminders, our free email newsletter. Sign up to receive it today by simply inputting your email address!
Arthur Andersen Case Reversed
Yesterday, the US Supreme Court unanimously reversed the conviction of Arthur Andersen and remanded the case, concluding that the jury instructions were flawed in important respects. Here is the Supreme Court list of slip opinions. Click on the Arthur Andersen LLP v. United States case to access the opinion.
On Friday, the Treasury issued the long-awaited guidelines on how companies can (and can’t) take deductions for executives’ private use of company aircraft. The guidelines implement Section 274(e) of the JOBs Act. Get hard-hitting analysis on private jet use in the upcoming May-June issue of The Corporate Counsel.
SEC Has Its Own Material Internal Control Weaknesses
Last Thursday, GAO (i.e. Congress’ Government Accountability Office) released this report that found “material internal-control weaknesses” in the SEC’s internal controls. The weaknesses primarily relate to the recording of fines and restitution to investors that it wins in settlements with companies and individuals, the preparation of the SEC’s financial statements and the security of information. As a result, the report says that the SEC “did not maintain effective internal control over financial reporting as of Sept. 30, 2004.”
In response, the SEC will add new staff to handle financial reporting and establish an internal committee – similar to a boards’ audit committee – to monitor and correct deficiencies. The business media had a field day generating creative titles for articles on the GAO’s report, such as the Washington Post’s “What’s Good for the Goose.”
The Audit Committee Disclaimer
I was fascinated with this article in last Thursday’s Washington Post article because of its extensive discussion of the disclaimer about audit committee activities included in AIG’s 2001 and 2002 proxy statements. The article surmises that the disclaimer should have been a red flag to AIG’s independent auditor, PwC, that something was amiss at the company. According to the article, the disclaimer stated that the audit committee’s oversight did “not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles” and that it couldn’t assure that the audit had been carried out according to normal standards or even that PWC was in fact “independent.”
As the article notes, those types of disclaimers became far less common after Sarbanes-Oxley – but it will be interesting to see if AIG’s disclaimer helps the company’s audit committee avoid liability.
Note that an August 2001 article by Amy Goodman and Mike Scanlon of Gibson Dunn (entitled “Survey of Audit Committee Charters and Audit Committee Reports in 2001 Proxy Statements”) from Insights found that a majority of audit committee charters had disclaimers in them way back in 2001. These disclaimers normally qualified the responsibilities and actions of audit committee members, such as the audit committee members:
– neither performed nor certified the auditing work
– are not responsible for preparing the company’s financial reports and relied on the statements of management
– are not accounting experts and provided no expert or professional assurances
– have no duty to resolve conflicts between management and independent auditors
– are not deemed to have accepted a duty of care greater than the other directors
Let me know if you have conducted (or seen) a more recent study, as it would be helpful to see how far disclaimers have changed.
On Tuesday, the PCAOB brought its first enforcement action – and it was a big one, revoking one firm’s registration and disciplining three accountants for their “failure to cooperate.”
As discussed in this press release, the PCAOB “found that the partners, after learning of the imminent inspection, formulated and carried out a plan to create and back-date certain documents and place them in the firm’s audit files. The Board found that Messrs. Morris, Goldberger, and Postelnik took these steps to conceal from the Board the firm’s failure to comply with certain auditing standards.” The Board barred the former managing partner from auditing public company – and also censured two other former partners, finding that they participated in the misconduct but noting that they promptly alerted the PCAOB and cooperated in the Board’s investigation. Lesson learned: don’t interfere with the PCAOB inspection process!
Meanwhile, there are some interesting tidbits in this response from the PCAOB to questions raised by SEC Commissioner Paul Atkins (these questions were raised a few months ago during an open Commission meeting over the PCAOB’s budget).
SEC Facing Budget Shortfall
On Tuesday, a number of media outlets carried the news that the SEC’s budget is tight and, as a result, non-critical travel is restricted and hiring will be limited until the new fiscal year that commences in the fall. Here is an article about this from the Financial Times:
“A US spending watchdog has been asked to investigate budget problems at the Securities and Exchange Commission, the chief financial regulator.
The Government Accountability Office has been urged to look at how the SEC faces a budget shortfall of about Dollars 50m over three years because of problems stemming from the financial management of projects to provide new offices in Washington, New York and Boston.
Frank Wolf, chairman of the House appropriations subcommittee that monitors the SEC budget, told the GAO in a letter yesterday that he was “troubled” by the problems and asked it to investigate.
“This is very damaging to the SEC,” said Mr Wolf after speaking to William Donaldson, SEC chairman. “The SEC polices other people’s books yet they themselves have huge overruns. I am very disappointed.”
The potential budget shortfall has been put at Dollars 48m by senior SEC officials, and its impact will be felt during 2005, 2006 and 2007.
The costs of the new SEC headquarters in Washington are set to increase by Dollars 19m partly because no provision was made for security measures in the original 2000 estimates.
The Dollars 25m move of the SEC New York office from the Woolworth building to World Financial Center was never included in the regulator’s 2006 budget.
The costs of a new SEC building in Boston are set to increase by up to Dollars 2m. The SEC is to set aside a further Dollars 2m to deal with other potential issues.
Senior SEC officials are confident the regulator can deal with the budget shortfall by finding savings elsewhere. Some posts at the SEC will not be filled, and curbs are to be placed on staff travel. The enforcement division is not expected to be affected by the austerity measures.
The SEC said: “We have been investigating the budget situation and are in regular communication with Congress as to how we will be proceeding.”
The SEC budget was boosted to deal with the spate of corporate scandals led by Enron, but President George W. Bush proposed cutbacks in February.
Yesterday, Mr Wolf’s sub-committee approved the SEC budget of Dollars 888m for 2006, which compares to Dollars 913m for 2005. The SEC had asked for a budget of Dollars 983m for 2006.”
60 Sites in 60 Minutes
The highlight of the ABA’s Techshow is the panel that reviews “60 Sites in 60 Minutes.” Here are a set of links to the sites presented at this year’s program. My favorite site are the oddball ones they present, such as the “World Beard Championships” and “How to Keep an Idiot Busy” [Not quite sure I understood “Googlism.”] Who said lawyers are no fun…
Thanks to Penny Somer-Greif of Arnold & Porter LLP, here are notes from the PLI’s “PCAOB Speaks” held a few weeks ago – the notes are written from the perspective of how the PCAOB’s activities impact public companies. There were a number of provocative points made during the conference, such as whether independent auditors were using enough skepticism in their evaluation of audit committees.
Personal Plane Perks
Today’s WSJ carries a front-page article on personal plane perks. This topic isn’t going away. The upcoming May-June issue of The Corporate Counsel will deal with this topic in detail, that issue should be out in about two weeks.
Example of Reporting-Up Obligations at Work
From a few weeks back, this press release from Theragenics Corporation describes how the company’s CFO and General Counsel reported up alleged violations caused by the CEO – and how they then resigned after the audit committee determined that there were no violations. I wonder what the back-story is there!
Here is an excerpt from the press release:
“James MacLennan and Tracy Caswell, the Company’s Chief Financial Officer and General Counsel, respectively, recently reported to the Board of Directors allegations regarding actions taken by the Company’s Chief Executive Officer that they viewed as inappropriate. The allegations did not relate to the accuracy of the Company’s financial statements or prior public disclosure by the Company. A subcommittee empanelled by the Company’s Board of Directors consisting solely of independent directors, with the assistance of special legal counsel, has investigated the allegations and presented its report to the Board. Following receipt and evaluation of the subcommittee’s report, the Board of Directors has determined that no violation of law or rule or regulation applicable to the Company or of any duty owed to the Company has occurred.
“Theragenics has been and remains committed to high ethical standards and this was confirmed by our investigation,” said Patrick Flinn, Chairman of Theragenics’ Audit Committee. “We take allegations of misconduct very seriously. The process worked the way it should have and is now complete with no violations found.”
Mr. MacLennan and Ms. Caswell have informed the Company that they will not participate further in the preparation of the Company’s public disclosure. Accordingly, the Board of Directors has accepted their resignations today. Mr. MacLennan, through counsel, has assured the Board in writing that he is not aware of any facts or circumstances that would cause the financial information contained in the Company’s earnings announcement issued April 22, 2005, to be inaccurate.”
An E-mail Retention Scare
A few days back, Reuters ran this disturbing article about the Morgan Stanley case and related e-mail perils. The disturbing part was the second sentence of this excerpt:
“Banks and broker-dealers are obliged to retain e-mail and instant messaging documents for three years under U.S. Securities and Exchange Commission rules. But similar requirements will apply to all public companies from July 2006 under the Sarbanes-Oxley corporate reform measures.”
Chuck Ragan of Pillsbury Winthrop Shaw Pittman confirms that he is unaware of any measures likely to be enacted that would extend the broker-dealer retention mandates of SEC Rules 17a-3 and 17a-4 to all records of all public companies.
Chuck notes that Sarbanes-Oxley imposes liability for failure to preserve records in the face of pending or reasonably anticipated litigation, but not all records at all times, as this sentence would suggest – and in the absence of a duty to preserve for litigation, there is no generally applicable obligation to retain all documents, e-mail and instant messaging, and organizations may still adopt policies to manage their information and records in accordance with sound business practices and other legal rules.
A week or so ago, the WSJ carried an article about Merrill Lynch’s decision about paying millions of dollars in legal fees for former officers that had been convicted of wrongdoing. This is a controversial topic and I will be blogging some thoughts from TheCorporateCounsel.net’s advisory board in the coming days. Here is an excerpt from the article:
“Merrill Lynch’s onetime investment-banking chief, Daniel Bayly, and three others were convicted of fraud in a federal court in Houston last fall in connection with the so-called Nigerian barge transaction. Merrill bought a stake in some Enron electricity-producing barges off the Nigerian coast in 1999, allowing the energy company to book a $12 million profit. The jury agreed with prosecutors’ arguments that the transaction was fraudulent because Enron had secretly guaranteed Merrill against any loss.
Mr. Bayly was sentenced to 30 months in prison in April; another former Merrill official, James Brown, got 46 months. The other two, Robert Furst and William Fuhs, face sentencing tomorrow. All four are appealing.
Merrill has been paying the four men’s legal bills — $17 million as of Dec. 31, court records show. Corporations routinely pay the legal bills of directors and employees in civil or criminal proceedings arising out of their employment. Companies have the right to recover the money if the individuals are found to have violated their employment duties.
“If you are convicted of crime and it damaged the company, the company shouldn’t pay your legal expenses,” says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.
[Daniel Bayly]
Merrill’s bylaws say it pays an employee’s legal bills until a “final disposition” of their cases, but they don’t say what constitutes final disposition. Some corporate-law specialists say a case isn’t final until appeals are exhausted. Others argue that Merrill could ask for its money back now that the employees’ presumption of innocence has ended.
“Once convicted, you no longer meet the standard” for financial aid, says Lawrence Hamermesh, a professor at Widener School of Law in Delaware.
When U.S. District Judge Ewing Werlein Jr. sentenced Messrs. Bayly and Brown, he refused their requests to remain free pending their appeals, suggesting he doesn’t think much of their chances. The two are expected to report to prison within weeks.
In an April 8 letter to Judge Werlein, federal prosecutors said Merrill had informed them it planned to pay the defendants’ legal fees through their appeals. A person close to the issue says Merrill is considering a cap on appeals costs. A Merrill spokesman says the question of whether Merrill will try to recoup the money “is premature in light of the pending appeals.”
The prosecutors complained about how much Merrill had spent to defend the men.
“Mr. Bayly alone now has four separate law firms representing him,” the letter said. In a hearing, prosecutors estimated Mr. Bayly’s wealth at upward of $60 million. Lawrence Robbins, a Bayly attorney, said he didn’t know his client’s wealth. “If I did I would keep it private and I would find it appalling for the government to make that information public,” he said. He added that Mr. Bayly’s team is down to three firms.
The prosecutors’ also questioned whether Merrill failed to abide by state law governing such matters in Delaware, where Merrill is incorporated. The state’s code says that before paying an employee’s legal bills, the company must first secure an agreement from the individual “to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified.” The prosecutors said Merrill hasn’t obtained such a commitment. The Merrill spokesman said the firm doesn’t believe that it is in violation of Delaware law, but declined further comment.
Under Delaware law, a conviction doesn’t automatically require the company to seek reimbursement because that doesn’t necessarily create the presumption that a “person did not act in good faith and in a manner in which the person reasonably believed” to be in the company’s best interest. Several former top Merrill executives signaled that they think that the past record of Mr. Bayly, for one, is worthy of support by asking Judge Werlein to show leniency.
Merrill might have difficulty arguing that the barge deal didn’t harm shareholders. The company in 2003 paid $80 million to settle a Securities and Exchange Commission complaint that it helped Enron commit fraud through that deal and others. It also settled with the Justice Department to avoid indictment.
The SEC lately has taken a harder line on companies paying employee legal fees. Last May, it fined Lucent Technologies $25 million for not cooperating in an investigation, partly citing the company’s legal-fee payments for employees. Lucent didn’t admit or deny wrongdoing.
In a recent speech, the SEC’s outgoing enforcement chief Stephen Cutler — his last day is today — said paying employees’ legal fees insulates them from the consequences of wrongdoing. “If an individual can look to his/her employer to pay the freight,” said Mr. Cutler, “what good have we done?”
Is Reimbursement of Legal Fees Spent on Contract Negotiations a Perk?
On a somewhat related point to the story above, I recently debated a member about whether reimbursement of legal fees for contract negotiations should be considered a perk. I think it should be – and this article supports that view, noting that a large union. AFSCME, is withholding its support for the head of the Cendant’s compensation committee citing the CEO high pay and perks, including a $165,000 reimbursement for legal fees in connection with his contract negotiations.
The reasoning behind considering reimbursement of legal fees as a perk is that it is not directly related to job performance. As a result, it arguably must be disclosed under Item 402 of Reg. S-K as “other annual compensation,” subject only to the minimum threshold requirements.
Another issue is whether there is a difference between reimbursement and simply paying the fees directly to the law firm. I think there is an argument that if the company pays the firm directly, the counsel works for the company and not the executive – a conflicts issue; but then again I am reminded that the rules regarding the existence of an attorney/client relationship is not a function of who pays the bills.
From a disclosure standpoint, I don’t think that it makes any difference as to whether the company pays the law firm directly or reimburses the executive – if the law firm is representing the executive, and the company ultimately pays the bill – then I think it gets picked up and must be disclosed. Let me know if you have different thoughts on any of these points.
Deceased Woman Deemed “Qualified Purchaser” By SEC Staff
Got your attention, huh. Same way Jay Gould of White & Case got my attention with his law firm memo about a recent no-action response from the SEC’s Division of Investment Management that addresses whether a settlor of a trust – who had been deceased for over 45 years – should be considered a qualified purchaser under the ’40 Act.
According to the law firm memo, this no-action response “appears to have expanded the universe of what the SEC considers to be a qualified purchaser. This is good news for hedge funds and those who market on behalf of hedge funds, as the letter, Trusts Under the Will of Marion Searle (pub. avail. March 29, 2005) should allow more individuals, dead or alive, to satisfy the qualified purchaser standard who did not meet the $5 million threshold at the time of contribution.”
On Friday, the last of the Corp Fin staff moved to the new DC headquarters – and our “SEC Staff Organization Chart” has been updated with all the new phone numbers.
Other staffers will be continuing to make the move over the next few months. As of now, all hard copy submissions continue to get sent to the old HQ address, 450 5th St.
Six Messages from Last Week’s Internal Controls Guidance
Finally got a chance to focus on last week’s batch of internal controls guidance from the SEC and PCAOB. Here are the top six messages I gleaned from them:
1. Its okay to talk again! – Management and outside auditors can resume their dialogue concerning accounting and internal control questions. For example, the sharing of draft financial statements that may be incomplete or contain errors do not contravene the applicable independence or auditing rules and standards. As I am sure outside auditors will be quick to remind you, management must always make the final call on reporting decisions.
2. “Reasonable Assurance” does not mean absolute assurance – SEC reiterates a sentence from the Staff statement when it notes that “[r]egistered public accounting firms should recognize that there is a zone of reasonable conduct by companies that should be recognized as acceptable in the implementation of Section 404.”
3. Its top down; not bottom-up – The agencies clarified that a top-down approach should be used, by beginning with company-level controls.
4. No need to control everything – After starting with the top, companies should then drill down to identify and test other accounts and processes that are relevant to internal control over financial reporting. No more controls to count paper clips – and this is particularly help for IT systems as only IT processes that impact financial data need to be covered by internal controls. The bottom line is that there is no need to use a checklist.
5. No need to test everything every year – The agencies want companies to focus on the areas of greatest risk to the integrity of their financial reporting. The testing and assessment of controls related to these areas of greatest risk may, and in most cases preferably would, take place throughout a fiscal year rather than just the period surrounding the year end close, and everything doesn’t have to be kicked each year.
6. Restatements are not necessarily material weaknesses – Of course, in most cases restatements will be material weaknesses, but I have heard of quite a few instances in which there were strong arguments that a restatement did not rise to the material weakness level.
Material Weakness Disclosures Exceed 14%!
As I heard last week at a conference – and the reinforced in this article – a total of more than 14% of large public companies will have disclosed material weaknesses in this proxy season’s batch of 10-Ks when all is said and done.
AuditAnalytics.com states that among 2,963 accelerated filers that disclosed their Section 404 opinions as of May 15th, 12%, or 363, disclosed material weakness – and then taking into account expected material weakness disclosures from non-timely filers and those that relied on the SEC’s exemptive order – that percentage is predicted to exceed 14%. In comparison, at the SEC’s 404 Roundtable last month, speakers were saying they expected 8% of companies to disclose material weaknesses, just about half of what actually transpired.
Just read the newsletter for the ABA’s Committee on Federal Regulation of Securities – and kudos to Stan Keller for addressing SEC Commissioner Paul Atkin’s recent comments regarding the value of the SEC Staff’s informal guidance. In two recent speeches – one on April 4th and the other on April 27th – Commissioner Atkins expressed concern over the Commission continuing to allow the SEC Staff to set policy and effectively engage in rulemaking through interpretations, particularly focusing in areas other than Corp Fin.
In the Corp Fin context, Stan states the bottom line more artfully than I ever could: “The system of staff interpretation has worked well for many years and contributed to the SEC’s stature as a preeminent regulatory agency. We would all lose, and the quality of securities regulation would suffer, if this process were impeded or diminished.”
More than ever before, the community needs guidance from the SEC as we all try to deal with a lifetime of change condensed into a scant few years. The Commission is dealing with major changes on all fronts – not just Corp Fin matters – and there is no way that five Commissioners (with their miniscule staff) could keep up with the workflow that a thousand plus staffers struggle with today!
Imagine that the SEC used Commissioner Atkin’s model and the Administration failed to fill Commissioner slots as they open up; a not uncommon occurrence. It wasn’t that long ago that going to a Commission meeting meant watching Arthur Levitt and Steve Wallman in a two-man debate – as they comprised the entire Commission for a period of six months (for trivia buffs, see this timeline of Commissioners). Keep those telephone interps coming!
Trends in Securities Litigation
A member recently asked where to find studies regarding securities litigation trends. There are several of these every year, here are two of the latest that are in our “Securities Litigation” Practice Area:
Chairman Donaldson Testifies on Commission Disagreements
Yesterday, Chairman Donaldson testified before the Senate Banking Committee on market structure. During his testimony, he was asked quite a few questions about how the five Commissioners were getting along. Here is an excerpt from a Financial Times article:
“William Donaldson was yesterday forced to defend his leadership of the Securities and Exchange Commission after US lawmakers raised concerns about divisions inside the regulator.
Mr Donaldson, Republican chairman of the SEC, insisted he always strove for consensus at the regulator during its policy making. Republican lawmakers highlighted how Mr Donaldson had relied on the support of the two Democratic commissioners at the SEC to get controversial reforms approved.
The latest example came in April when Paul Atkins and Cynthia Glassman – the other two Republican commissioners at the SEC – voted against changes to stock trading rules.
Richard Shelby, Republican chairman of the Senate banking committee, said some people were “troubled” by how the changes were pushed through by three votes to two, because of concerns that the lack of consensus undermined the regulator’s credibility.
Senator Mike Crapo, another Republican member of the committee, said he found the divisions inside the SEC on contentious policy making “disturbing”.
Regulations to supervise hedge funds and improve governance at mutual funds have also been pushed through by Mr Donaldson and the two Democratic commissioners.
Mr Donaldson said almost 3,000 votes had taken place at the SEC under his leadership and 98 per cent were unanimous. He compared his record favourably to Harvey Pitt, his predecessor as SEC chairman, when he said 99 per cent of votes were unanimous.”
Think the courts are not getting serious about executive compensation? Today’s Washington Post has this article about how Vice Chancellor Leo Strine rejected a recent settlement between Fairchild Corp. and investors over allegations that the CEO and other senior managers received excessive and improper pay.
The Vice Chancellor stated that the settlement was inadequate – or more aptly put in this quote from the article: If the allegations in the lawsuit are true, the judge said from the bench, the proposed settlement amounted to a “cosmetic whimper.” This is remarkable as Delaware courts typically reduce legal fees as a cure for an inadequate settlement; they don’t reject the settlements outright as has been done in this case.
Among other things, the rejected terms of the settlement included:
– CEO would have cut his $2.5 million salary by 20%, another executive (who is the CEO’s son) would have taken a 15% salary cut – and there would have been shorter terms under amended employment agreements for these two executives
– CEO would have paid $1.5 million through an advance from a retirement plan
– two executive would have had to pay back millions of dollars of golden parachute or “change of control” payments that were paid due to a prior subsidiary sale
Also challenged were interest-free loans, advances on retirement payments, payments for an apartment in Paris and Steiner-affiliated aircraft, and legal costs paid for senior manager’s defense of a lawsuit in France.
If you wish to see the original complaint that alleges breaches of fiduciary duty and disclosure regarding the way the CEO and other executives were being compensated, it is still posted in the “Compensation Litigation” Portal on CompensationStandards.com.
Annette Nazareth: Next Commissioner?
Not for several decades has there been a SEC Staffer who was promoted to SEC Commissioner to work alongside his or her former bosses. But that is what will happen if Market Reg Director Annette Nazareth replaces outgoing Commissioner Harvey Goldschmid, as was rumored in the WSJ and NY Times yesterday.
The WSJ reported that “Senate Minority Leader Harry Reid (D., Nev.) is expected to write Mr. Bush today recommending Annette Nazareth for the opening on the five-member SEC. He deferred to Sen. Charles Schumer, a Democrat who represents New York, home to much of the U.S. securities industry, to make the recommendation. Ms. Nazareth “is just the person the SEC needs,” Mr. Schumer said through a spokesman.”
Back in the ’50s, ’60s and ’70s, it was not uncommon for Staffers to become Commissioners. In fact, some of the best Commissioners came directly from the Staff, including Irving Pollack (Enforcement Director), Byron Woodside (Corp Fin Director), Manny Cohen (Corp Fin Director) and Phil Loomis (General Counsel).
Harvey Goldschmid was the SEC’s General Counsel in the late 1990s – but the Commission composition turned over by the time he became Commissioner in 2002.
Most Recent Monthly Columns
The May column for Carl’s Corner is entitled: Shareholder Rights’ Agreements: Voting Rights, Board Structure and Assuring Distributions.
And on DealLawyers.com, Steve Glover’s May column is “Spin-Off Basics – Part 2.”
