Yesterday, after receiving only a handful of comments on its formation, the SEC’s new “Investor Advisory Committee” met for the first time. Run much like an open Commission meeting (a Commissioner even gave a speech), this inaugural meeting was available by webcast (here is the archive). Note the Committee even has its own web page.
In connection with the meeting, the SEC Staff prepared a briefing paper entitled “Possible Refinements to the Disclosure Regime,” which included discussion questions for these topics:
– Disclosure related to investment products & financial intermediaries
– Mutual fund point of sale disclosure
– Mutual fund/broker fee disclosure
– Disclosure to investors in 401(k) plans
– Environmental, climate change and sustainability disclosure
– Climate change and other environmental issues
– Social, governance and other operational matters
As an aside, the SEC adopted amendments to Regulation SHO yesterday to permanently implement more short selling restrictions. The SEC is continuing to consider proposals on a short sale price test and circuit breaker restrictions.
Zacharias v. SEC: DC Circuit Adopts Expansive Meaning of “Underwriter”
In Zacharias v. SEC, the U.S. Court of Appeals for the District of Columbia Circuit affirmed an SEC order finding that two officers and directors of a public company and an unaffiliated third party engaged in a “scheme” to sell securities in violation of the registration requirement of Section 5 of the Securities Act, despite the fact that the only shares sold to the public were freely tradable shares owned by the third party.
The Court’s praise of the SEC decision as “a triumph of substance over form” and the reasoning of the case (as well as the result) stand in contrast to the recent decisions of three U.S. District. Courts that rejected the SEC’s claims of Section 5 violations in the hedging of “PIPEs” securities.
SEC Names Dan Goelzer as PCAOB’s Acting Chair
Yesterday, the SEC announced the appointment of Dan Goelzer to serve as Acting Chair of the PCAOB. A few weeks ago, Mark Olson announced his resignation as Chair which takes effect at the end of this week. Dan has served on the PCAOB’s board since the PCAOB was born. Here is the PCAOB’s press release.
On Friday, Corp Fin posted an updated “Financial Reporting Manual” to include a new section — Topic 4: Independent Accountants’ Involvement — as well as other changes. So it looks like the Staff has finished its overhaul of what used to be called the “Accounting Training Manual,” a process that commenced at the end of ’08.
Yes, the PDF version of the Manual still bears that legend “For Division of Corporation Finance Staff Use Only” and includes a disclaimer about the informal nature as guidance, even though the SEC now makes the Manual publicly available. But the HTML version does not…
Deutsche Bank’s Internal Investigation: Shareholder Engagement, Austin Powers Style
Recently, it has been reported that Deutsche Bank is conducting an internal investigation regarding potential improper surveillance (see the articles in the WSJ and NY Times). What caught my eye was that an activist shareholder appeared on the list of “targets.”
Allegedly, DB hired private investigators to pose as vacationers renting the shareholder’s house in order to spy on him. This raises some important questions: What are the ethical obligations of a company? Is this an isolated or widespread problem? Are corporate-shareholder hostilities on the rise? Did the investigators get their rental deposit back?
In his IR Café, Dick Johnson provides analysis about the ethical implications of this type of investigation. Here is an excerpt:
My point on ethics and personal responsibility is this: In the heat of battle, when the company is under attack and the world looks like “Us vs. Them,” be careful. Go back to your core principles: telling the truth, obeying the law, treating others as you would want to be treated, whatever convictions shape your outlook on life. Seek guidance in places like the NIRI Code of Ethics: Although codes won’t offer a specific rule for something like hiring a private eye, they do provide principles.
And consider how any action you take might appear in the harsh light of public disclosure a year or two later. Your responsibility to decide on your actions isn’t erased because you’re part of a larger corporate staff. Taking a stand just might save the company from serious reputational damage. And, down the road, it might keep you out of a headline that says “… Fires Two in (Whatever) Probe.”
The United Kingdom’s Financial Services Authority: Death Row?
In the US, the Securities & Exchange Commission has been under fire for its role in the financial crisis. I count the SEC Chair as having testified on the Hill four times in just the past two weeks alone. But I don’t think abolishing the SEC is really on the table. Compare that with the potenial fate of the UK’s Financial Services Authority (just as the FSA is pushing harder). Here is some commentary from Neil Macleod of Fried Frank:
On 20 July, the opposition Conservative Party, which is currently viewed as likely to win the next UK election (which must be held by next June), and so likely to form the next government, published its proposals to reform the structure of UK financial regulation.
The most striking proposal is that Conservatives will abolish the Financial Services Authority (the “FSA”) and the current tripartite structure under which regulatory responsibilities are divided between the Treasury, the Bank of England and the FSA. At the same time, they will increase the powers of the Bank of England. The Bank will be responsible for macro-prudential regulation – i.e., monitoring and controlling risks to the financial system as a whole. The regulation of all banks, building societies and other significant institutions, including insurance companies, will also be transferred to the Bank. Many of the remaining functions presently exercised by the FSA will be transferred to a new Consumer Protection Agency.
The reasoning behind these proposals is that the Conservatives view the FSA as having failed to identify or prevent the problems in the UK banking system. They also consider that there was a failure in the coordination between the tripartite authorities, and that there was a lack of effective procedures to deal with failing banks.
The Conservatives therefore propose that any institution whose regulation requires prudential judgment will be regulated by the Bank of England. Those small firms such as insurance and mortgage brokers, stockbrokers and small asset managers whose regulation is not mainly concerned with prudential judgment, but primarily concerned with protecting consumers, will be overseen by the new Consumer Protection Agency.
The Conservatives have said that they will consult on which regulatory authority should take on the FSA’s various other responsibilities, including markets and securities regulation, the registration of individuals and the FSA’s listing authority responsibilities.
The reaction to the proposals has been mixed. Whilst many have welcomed the idea of transferring banking regulation back to the Bank of England, others have pointed out the disruption that these proposals are likely to bring to the industry. There is also concern that the FSA will become a lame duck regulator if it is widely viewed as being likely to be abolished.
Launch of Shareowners.org: Social Media Comes to Retail Holders
Recently, a new social media site – Shareowners.org – was launched with the hopes of binding retail shareholders together. Although this is not the first such site (eg. Broadridge’s “Investor Network“), this one might take off. And just the fact that these attempts to have investors network online bears close watching as it may someday soon dramatically impact activist efforts.
In this podcast, Rich Ferlauto, AFSCME’s Director of Corporate Governance and Pension Investment Policy, describes the new social media site, including:
– What is Shareowners.org?
– What is your goal with the site?
– Any surprises so far?
US Supreme Court Rejects Structure Requirement for RICO Enterprise
Recently, the US Supreme Court – in Boyle v. United States – held that an association-in-fact RICO enterprise must have a “structure” – but it need not be an “ascertainable structure beyond that inherent in the pattern of racketeering activity in which it engages.” More importantly, the Court stated that the jury isn’t required to be told many specifics.
As noted by the “White Collar Crime Prof Blog,” this decision is very helpful for government prosecutions in that it allows RICO cases to be brought with the jury being told a minimal amount of what is required for a RICO enterprise. We are posting memos regarding this decision in our “White Collar Crime” Practice Area.
Moving Forward: Credit Rating Agency Legislation
Earlier this week, as noted in this WSJ article, the Obama Administration proposed legislation to enhance oversight of the credit rating agencies. For the most part, it mirrors legislation introduced earlier by Senator Reed, except it deviates with one major exception: Senator Reed’s bill establishes greater accountability on the part of credit rating agencies by giving investors a private right of action against the credit rating agencies and the Obama administration doesn’t do that. In addition, the Obama Adminstration’s legislation doesn’t give authority to the SEC to levy fines and penalties against the rating agencies for failure to perform.
Yesterday, the SEC announced an action to clawback bonuses and stock profits from a former CEO under Section 304 of Sarbanes-Oxley. The SEC asked the U.S. District Court for the District of Arizona to order the former CEO of CSK Auto Corporation, Maynard Jenkins, to reimburse the company for more than $4 million that he received in bonuses and stock sale profits while the company was committing accounting fraud. This is the third Enforcement action that the SEC has brought regarding CSK’s alleged accounting shenanigans, which resulted in two restatements – one of them charges four of the company’s executives with wrongdoing (but not the former CEO).
Although this is not the first Section 304 action from the SEC, it’s the first one where the “clawee” isn’t alleged to have violated the securities laws. The SEC has brought very few 304 actions since the provision was enacted seven years ago, mainly because of the uncertainty over what constitutes the “misconduct” required by the provision. Here is how Section 304 opens:
If an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall reimburse the issuer…
As noted in the “D&O Diary” Blog, “there is no requirement in Section 304 that the CEO or the CFO from whom the reimbursement is sought have any involvement in the events that necessitated the restatement. Indeed, the statute doesn’t require any showing of wrongdoing or fault at all.” And remember there is no private right-of-action under 304 – only the SEC can enforce it.
Okay, so what type of “misconduct” did the SEC find here? For openers, the SEC’s press release refers to the CEO as the “captain of the ship.” Did the SEC decide that the captain is responsible for the ship and that alone is enough to find “misconduct”? I don’t think so.
Based on a cursory reading of the SEC’s complaint, I believe the SEC found that the captain engaged in some “misconduct” – but that misconduct didn’t amount to a violation of the securities laws. I get to this conclusion by noting that a number of the allegations (i.e. #43-47) in the SEC’s complaint explain the “conduct” and “misconduct” by the company that led to this action and then #48 states: “By engaging in the conduct described above, Jenkins violated, and unless ordered to comply will continue to violate, Section 304(a) of the Act, 15 U.S.C. § 7243(a).”
There’s not a lot of meat in the SEC’s allegations to explain what role the former CEO actually had in the accounting fraud, leaving the SEC open to criticism (such as this Ideoblog commentary). But maybe that’s the SEC’s point – that merely being captain of the ship while rampant fraud occurs on your watch is “misconduct” enough. We’ll be posting memos analyzing this case in CompensationStandards.com’s “Clawback Policies” Practice Area.
At a minimum, the SEC’s action seems like a wake-up call to CEOs and CFOs of companies that have had restatements due to some accounting misconduct: you are not safe – the SEC may come after you. And hopefully, this action will spur companies to attempt to enforce their own clawback policies (Equilar reports more than 64% of the Fortune 100 now have them; compared to just 17% in ’06). I’m not aware of any company that ever has (although it’s possible it has happened behind closed doors). I imagine companies sometimes deal with situations where it’s not clear if their own clawback policy – or Section 304 – applies. Or if it does apply, whether it’s prudent to seek recapture from the executive (weighing cost/time of litigation; indemnification issues, etc.).
The SEC’s B-Day Party: Rum Baba with Tropical Fruits & Berry Coulis
As I blogged recently, the SEC Historical Society held a pricey dinner to celebrate the 75th anniversary of the birth of the Commission (too expensive for a home gamer like me). Given the heat that the agency is feeling, the timing was not good – as portrayed in this Politico article. From what I hear, Chair Schapiro’s speech perhaps reflected the mood among the Staff these days as it was quite short. Here is a more playful review of the event.
How Do You Look Up a SEC Rule?
A member recently emailed about how fast the Government Printing Office responded when he emailed them that one of the SEC’s rules was unreadable online (eCFR is what the SEC’s site links to for the SEC’s rules). It seems that the GPO gets right on these things as the correction was quickly made. It led me to wonder how folks typically look up a SEC rule these days – and hence this anonymous poll:
On CompensationDisclosure.com, we have just posted a complimentary copy of the Summer 2009
issue of the “Proxy Disclosure Updates” which analyzes how
the latest proxy disclosures looked, particularly noteworthy in the wake
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Compensation Annual Service.” The other part is the 1000-plus page Treatise…
Coming Soon: 2010 Executive Compensation
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your executive compensation disclosures and practices before next proxy season
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Will Facebook Sidestep Google’s Pre-IPO Problems?
Google certainly has had a nice run since its novel Dutch-auction IPO. But for those with good memories, you might recall that Google had to make a rescission offer about the time of its IPO because Google apparently crossed the Section 12(g) threshold well before its IPO and should have registered its common stock under the ’34 Act at that time (companies that have more than 500 shareholders and $10 million in assets at calendar year end must register under Section 12(g)).
In reading this WSJ article last week about how Digital Sky Technologies is taking a stake in Facebook by purchasing shares from current and former Facebook employees, I saw the disclosure that the number of current Facebook employees is now 850. I hope the company doesn’t encounter the same issue that Google confronted, where it should have registered its shares sooner given the number of holders and that that Facebook is being valued at $6.5 billion based on Digital’s purchase campaign.
SEC Charges Investment Advisor for Buying Votes with Section 13(d) Violations
Yesterday, as noted in this press release, the SEC charged – and settled – Section 13(d) violations with an investment adviser – Perry Corp. – for failing to disclose that it had purchased substantial stock in a M&A target, King Pharma. Perry purchased the shares in order to vote them in favor of a merger from which Perry stood to profit. Here’s the cease-and-desist order, under which Perry agreed to pay $150,000.
The SEC was able to bring charges because the Mylan shares were not acquired by Perry in the “ordinary course of its
business,” which is one of the requirements of Rule 13d-1(b)(1). However, I was a little surprised that the SEC didn’t shoot Perry down by
finding that it either (i) did not acquire the shares in the ordinary course or (ii) was not “passive” (since “passive” is also a requirement of the rule). Instead, the SEC focused exclusively on the “ordinary course” requirement of the rule.
So I wonder why the SEC didn’t use “not passive” as the hook and avoided the seemingly circuitous path
to “not in the ordinary course”? I would think the SEC could have made its case by stating that Perry was not passive –
and therefore could not be acting in the ordinary course. Let me know what you think.
By the way, the SEC’s charges unfortunately didn’t address concerns regarding Perry’s strategy. In an effort to lock in the merger premium it would receive on its holdings of King Pharma shares, Perry purchased a substantial block of the acquiror’s shares (Mylan) that it intended to vote in favor of the merger while contemporaneously entering into hedging transactions that minimized its economic exposure to a decline in the value of those Mylan shares.
In essence, Perry intended to vote its Mylan shares in favor of a transaction that was not in the economic interests of other Mylan shareholders because it had a more substantial economic interest in the merger being consummated as a result of its holdings in King Pharma. Similar issues arose in connection with AXA’s acquisition of MONY.
Although this issue has received considerable attention in the US and the UK, no clear solution has been found. Rather, the focus has been on enhanced disclosure obligations. The SEC’s charges solely relate to Perry’s failure to file a Schedule 13D with respect to its acquisition of more than 5% of Mylan’s shares with the intent of influencing the direction or management of Mylan. Hopefully, manipulation of the voting process will be examined as part of the SEC’s plan to rethink the proxy plumbing this Fall. We have resources on share lending, overvoting, empty voting, etc. in our “Share Lending/Overvoting” Practice Area.
Recently, the PCAOB issued a press release noting that it had proposed rules way back in June ’08 that would require the auditors registered with the PCAOB to submit an annual report by June 30th of each year. Since the SEC hadn’t yet acted to approve the PCAOB’s proposal, auditors were able to avoid filing an annual report this year, as well as avoid paying an annual fee for ’09.
Not too long after the PCAOB’s press release, the SEC acted by posting this notice to finally solicit comments on the PCAOB’s proposal. Assuming no comments sway the SEC otherwise, I imagine the SEC will approve the PCAOB’s proposal in a few months – and then registered auditors will be required to submit their first annual report on Form 2 to the PCAOB by June 30, 2010 (and the first annual fee, in an amount to be announced by the PCAOB, will be due in that same year). A separate obligation to file any required special reports on Form 3 will commence as soon as the SEC approves the PCAOB’s proposal.
Note that the Nasdaq is holding a webcast tomorrow (with a repeat performance the following Wednesday) for those that want to learn how to navigate their new “Application Center.” Among many other topics, the new application process was discussed during our recent webcast with senior Nasdaq Staff, but these Nasdaq webcasts will drill down more deeply into the application topic.
RiskMetrics’ Governance Exchange
In this podcast, Jill Lyons and Stephen Deane of RiskMetrics describe their new social media tool called the “Governance Exchange,” including:
– What is the “Governance Exchange”?
– Who can belong to it?
– Why are members joining?
– Any surprises so far?
Sleepers in the SEC’s Proposals?
When the SEC puts out a big proposal, there inevitably are some sleepers because that’s the way of the world. I recently received this note from a member about the SEC’s recent proxy solicitation proposals:
There are some potent changes in the proposed proxy amendments that will generally make contests easier to conduct. One amendment codifies a recent no-action letter to Carl Icahn that allows insurgents to include nominees of other insurgents on their proxy cards.
And the amendments also overrule a 2004 case (i.e. Mony Group v. Highfields Capital Management) where a court ruled that a shareholder conducting an exempt solicitation can’t send shareholders management’s proxy card and encourage them to vote as suggested by the insurgent.
Things are moving fast on the legislative front as Rep. Barney Frank circulated a “discussion draft” on Friday of his “Corporate and Financial Institution Compensation Fairness Act of 2009” to the House Financial Services Committee. This bill is the House version of what Treasury sent to the Hill last Thursday.
– Dave Lynn, Partner, Morrison & Foerster and Editor, CompensationStandards.com
– Mark Borges, Principal, Compensia
– Jeremy Goldstein, Partner, Wachtell Lipton Rosen & Katz
– Jannice Koors, Managing Director, Pearl Meyer & Ptrs
– Mark Trevino, Partner, Sullivan & Cromwell LLP
Our “6th Annual Executive Compensation Conference“: Now that we have a sense of what Congress will likely pass before next year kicks off, you need to register now to attend our popular conferences and get prepared for a wild proxy season:
“4th Annual Proxy Disclosure Conference” & “6th Annual Executive Compensation Conference.” You automatically get to attend both Conferences for the price of one; they will be held November 9-10th in San Francisco and via Live Nationwide Video Webcast. Here is the agenda for the Proxy Disclosure Conference. Register now.
Executive Pay Surveys
In this CompensationStandards.com podcast, Susan Wolf of Schering-Plough describes her company’s experience with using a survey to canvas shareholders about their executive pay practices, including:
– Why did the company decide to try a survey?
– What was the reaction of shareholders?
– Were there any surprises? What would you change if you did it again?
Consultant Market Shares: An Analysis of Fortune 1000 Companies
For those that may not be aware of it, “The Advisors’ Blog” on CompensationStandards.com is populated with new thoughts from compensation experts daily. For example, below is a blog from Equilar that was posted last week:
With executive compensation issues firmly in the public spotlight, the SEC is once again considering expanded CD&A disclosure requirements. The SEC’s most recent proposals include improved disclosure on the connection between compensation and risk, greater detail on overall compensation philosophy and design, and further insight into potential conflicts of interests between compensation consultants and the companies they advise.
With these developments in mind, Equilar recently used its “Compensation Consultant League Table” database to complete an analysis of executive compensation consultant market share at Fortune 1000 companies. In 2008, boards at 90.7% of Fortune 1000 companies retained the services of at least one compensation consulting firm.
The following table lists the Top 10 consulting firms, by executive compensation consulting market share during ’08, at Fortune 1000 companies:
1. Towers Perrin – 19.3%
2. Frederic W. Cook & Co. – 17.5%
3. Hewitt Associates – 14.5%
4. Mercer Human Resources Consulting – 11.4%
5. Watson Wyatt Worldwide – 7.5%
6. Pearl Meyer & Partners – 5.4%
7. Semler Brossy Consulting Group – 3.8%
8. Hay Group – 2.3%
T-9. Exequity – 1.6%
T-9. Deloitte Consulting – 1.6%
Note: FY 2008 market share percentages are based on a total of 867 engagements with boards of directors at 824 of 908 Fortune 1000 companies studied. See methodology statement below for more information. Also note that Towers Perrin and Watson Wyatt announced plans to merge into a new firm called Towers Watson on June 29, 2009. The combined firm would have a market share of 26.8 percent.
Additional Key Findings:
– Top 10 Firms Lose Overall Market Share as Smaller Firms Proliferate – In 2008, Fortune 1000 companies listed a total of 53 executive compensation consulting firms as advisors to their boards of directors. Among these firms, the Top 10 consulting firms held a combined market share of 84.9 percent. In contrast, Fortune 1000 companies listed only 42 executive compensation consulting firms as advisors in 2006, when the Top 10 consulting firms held a combined market share of 93.8 percent.
– Independent Firms Gain Market Share – In 2008, independent executive compensation consultants held 39.3 percent of engagements with boards of directors at Fortune 1000 firms, up from 37.4 percent of engagements in 2007. Market share for independent firms had increased from 35.0 percent to 37.4 percent between 2006 and 2007. Independent firms are defined by Equilar as companies that focus primarily on executive compensation consulting.
– Full-Service Firms Maintain Market Share Above 60% – Full-service firms, which are defined by Equilar as companies that offer accounting, broad-based HR, retirement and/or benefits consulting in addition to executive compensation services (though not necessarily to the same client), held 60.7 percent of engagements with boards of directors at Fortune 1000 firms in 2008.
Readers of this analysis should take the following methodology notes into consideration:
– To study trends on the use of executive compensation consulting firms at public companies, Equilar reviewed disclosures at 908 firms listed in the Fortune 1000 index. Each firm covered by the study has an updated CD&A statement for fiscal year 2008.
– Among the companies included in this analysis, 824 firms (or 90.7 percent) retained an executive compensation consultant to advise their board of directors on executive pay. The remaining firms either have no consultant or a consultant retained by management. For the purposes of tracking market share at Fortune 1000 companies, Equilar only considers direct engagements between a board of directors and a consulting firm.
– In some cases, a board of directors may engage multiple executive compensation consulting firms during the course of a single year. Equilar counts these cases as a full engagement for all consulting firms involved. As such, the 824 companies with an executive compensation consultant for their board of directors produced a total of 867 engagements in fiscal year 2008.
Here is an extended version of Equilar’s compensation consultant market share analysis, including data on year-over-year changes in market share. Equilar is an information services firm specializing in executive compensation research.
Yesterday, Treasury announced that it has drafted two different pieces of executive compensation legislation – one related to say-on-pay and the other regarding compensation committee independence – that they’ve sent to
Congress as part of the “Investor Protection Act of 2009.” Last week, Treasury began issuing other parts of “The Investor Protection Act of 2009” and more sections are forthcoming. These draft bills are consistent with the Obama Administration’s White Paper that was released last month. Here is the say-on-pay press release and bill language – and here is the committee independence press release and bill language.
Rep. Barney Frank issued a statement yesterday promising quick action in the House, specifically that the “Financial Services Committee will be marking up legislation next week.” It’s unknown what the timetable for consideration in the US Senate will be.
Below is a summary of the two pieces of proposed
legislation, both of which would be implemented through SEC rulemaking:
1. Say-on-pay vote on executive compensation disclosures:
– Annual meetings after 12/15/09 will be required to
include a non-binding shareholder vote on the compensation disclosed in proxy
statements.
– The proxy or consent solicitation for any meeting after
12/15/09 involving an M&A transaction or sale of assets must include tabular
disclosure of golden parachute payments, and provide for a non-binding
shareholder vote to approve these payments.
2. Compensation committee independence:
– Compensation committee members would be subject to the
same additional independence standards as audit committees members under Rule
10A-3 (no consulting or advisory fees and cannot be an
affiliate).
– Compensation consultants, legal counsel and other
advisors to the committee shall meet independence standards to be promulgated by
the SEC.
– The compensation committee has the authority to retain
independent consultants and is directly responsible for their appointment,
compensation and oversight (copied from the audit committee oversight of
auditors).
– Proxy statements must disclose whether the compensation
committee has retained an independent consultant, and if not, why
not.
– The compensation committee has the authority to retain
legal counsel and is directly responsible for their appointment, compensation
and oversight (copied from the audit committee oversight of auditors). There is
no requirement that proxy disclosure be made as to whether the committee
retained such legal counsel.
– Companies must provide funding for the hiring of
independent consultants and legal counsel by the committee.
– The SEC is required to study the use of compensation
consultants and report to Congress in two years.
The SEC’s “Wish List”: 42 More Changes!?!
For those that don’t think that there have been enough regulatory changes proposed so far this year – or this decade for that matter – you’ll be happy to see this list of 42 desired changes that are reported to have been sent by the SEC to Congress. The 42 changes would impact quite a few areas of the federal securities laws – and are unlikely to be grouped together into a single bill. Rather, parts may be embedded into other legislation, etc. July-August Issue: Deal Lawyers Print Newsletter
This July-August issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Threshold Issues in Cross-Border Merger-of-Equals Transactions – The Role of the Board in Turbulent Times: How to Avoid Shareholder Activism – Private Equity in 2009: “Back to Basics” Practice Tips: Part II – A “Sleeper”: Delaware Court Stresses Importance of Employment/Non-Competition Agreements with Target Employees
br /> As noted in this WSJ article and NY Times article yesterday, the big California public pension plan – CalPERS – sued the S&P, Moody’s and Fitch rating agencies
for “wildly inaccurate and unreasonably high” ratings on structured investment
products.
While the ratings agencies face
other lawsuits for losses, the CalPERS’ complaint attacks the way in which the ratings
agencies do business. In particular, it alleges that the agencies went beyond
being passive “raters” of structured investment products, and became an integral
part of the issuance of these products (Item 47 of the complaint, at page
11).
Even though the SEC seems likely to propose more regulation of the credit rating agencies right now – see this Directorship blog – although it already has done quite a bit over the past six months (this and this), it
may be that lawsuits like this one become an additional driver for more changes to
the rating industry.
Gearing Up for the Fall: Financial Crisis Inquiry Commission
Yesterday, as noted in this Bloomberg article, Congress appointed the Commissioners for its Financial Crisis Inquiry Commission and the Commission is expected to start its investigations in September regarding 22 enumerated possible causes of the financial crisis (as well as the causes of the failure of major financial institutions). It’s a pretty broad dictate – so the witch hunt begins!
Here are the appointments (as excerpted from this Gibson Dunn memo):
Phil Angelides, jointly appointed by House Speaker Pelosi and Senate
Majority Leader Harry Reid, will chair the Commission. Mr. Angelides served
formerly as California’s State Treasurer from 1999 to 2007.
Bill Thomas, jointly appointed by House Minority Leader John Boehner
and Senate Minority Leader Mitch McConnell will serve as the Commission’s
vice-chair. Mr. Thomas is a former House Ways & Means Committee
Chairman.
Importantly, the Chairperson and Vice Chairperson will jointly select the
staff director and other staff of the Commission.
House and Senate Democratic Leaders also appointed the following
individuals:
Brooksley Born, former Chair of the Commodities Futures Trading
Commission during the Clinton administration.
Byron Georgiou, Las Vegas-based businessman and attorney who serves
on the advisory board of the Harvard Law School Program on Corporate Governance.
Senator Bob Graham, former U.S. Senator and Chair of the Senate
Intelligence Committee and former Governor of Florida.
Heather Murren, retired Managing Director for Global Securities
Research and Economics at Merrill Lynch.
John Thompson, Chairman of the Board of Directors of Symantec
Corporation.
House and Senate Republican Leaders also appointed the following
individuals:
Doug Holtz-Eakin, former Director of the Congressional Budget Office
and former Chief Economist of the President’s Council of Economic Advisers.
Keith Hennessey, former Director of the National Economic Council
during the George W. Bush administration.
Peter Wallison, Co-Director for Financial Policy Studies at the
American Enterprise Institute and former Counsel to President Ronald Reagan.
How to Plan for CEO (and Other Senior Manager) Succession
We have posted the transcript for our recent webcast: “How to Plan for CEO (and Other Senior Manager) Succession.”
Recently, I noted a blockbuster front-page article in the Washington Post which delved pretty deeply into the SEC’s investigation of Bernie Madoff and how some earlier warning signs may have possibly been ignored – including the possibility of interference by a SEC official who would soon become related to Madoff. Amazingly, the other mass media outlets don’t seem to have caught up to the WaPo reporter’s research into this story despite its obvious public appeal.
In this podcast, I caught up with the reporter who wrote the story – Zach Goldfarb – to ask a few questions about this story, including:
– What is the essence of your article?
– How long did it take for you to research it?
– When did you find out it would be on the front page?
– What type of reactions have you heard since it ran?
Beware the “Dark Pools”: SEC Chair Speaks Out
During her testimony before the House’s Capital Markets Subcommittee of yesterday regarding oversight of her agency, SEC Chair Schapiro raised concerns over “dark pools,” an area where I predict the *#i% will hit the fan one day. Here is an excerpt from her testimony:
In addition, our staff has begun exploring transparency issues related to markets known as dark pools. Dark pools are defined in various ways, but generally refer to automated trading systems that do not display quotes in the public quote stream.
We have heard concerns that dark pools may lead to a lack of transparency, may result in the development of significant private markets that exclude public investors (through the use of “indications-of-interest” that function similar to public quotes except with implicit pricing), and may potentially impair the public price discovery function if they divert a significant amount of marketable order flow away from the more traditional and transparent markets.
Given the potential risks posed by dark pools, the Commission will take a serious look at what regulatory actions may be warranted to respond to the potential investor protection and market integrity concerns that dark pools may raise.
Great Sleuthing and Drafting: “On Dead Frogs in SEC Filings…”
Congrats to Michelle Leder of footnoted.org for uncovering (in this blog entry) this Form 8-K filed by Expeditors International, in which the company hilariously addresses some legal expenses related to a DOJ investigation first disclosed nearly two years ago. Both Michelle and the drafters of the following disclosure should win some type of award:
When you come from a frame of reference, as we do, where $0 spent on legal expense would be the most preferred alternative, having to predict anything beyond that, by its nature, would become inherently and incredibly biased towards our own wants, desires and expectations. To us, this is somewhat akin to being asked to predict how many minutes after being force fed a dead frog we would throw-up…and the operative word is “force,” as we’d never elect to do either on our own. In both cases (the legal fees or swallowing the dead frog) we’re certain we would eventually throw up.
In neither case do we know exactly how much money or how much time would pass before we did. In both cases, however, our gut check, no pun intended, is not very much and not very long! It should go without saying that given our druthers, we’d rather not spend the legal fees or eat the dead frog in the first place. Sometimes you don’t get the luxury of deciding what you have to eat. When you do, and it’s unpalatable, it should be obvious that you would eat as little as possible. What we are certain of is that if we were talking about being force fed dead frogs and not incurring excessive legal fees, people would be content accepting at face value that it would be as little as possible.
This stuff is right up there with the recent theories thrown out there about finger size and traders’ earning power, as noted by this article.
