In recognition of the many changes impacting the practice of law, we will be devoting more resources to helping you cope – and keep abreast – of how the changes will impact your career. For example, tune in next month for our webcast: “Looking Out for #1: How to Manage Your Career.” We’ll also be expanding the resources in our “Career Development” Practice Area.
In this podcast, Mike O’Horo, Founder and President of Sales Results, provides some insight into how lawyers can best position themselves to gain clients, including:
– What is your general training philosophy?
– If lawyering skills are sales tools, what can lawyers do to best use them to sell?
– What do you recommend that young lawyers do to sell themselves?
PCAOB Staff Weighs In: Auditor Considerations for Fair Value, Etc.
Yesterday, the PCAOB Staff issued this Staff Audit Practice Alert to inform auditors about the potential implications on reviews of interim financial information and annual audits caused by the FASB’s three recently-issued Staff Positions on fair value measurements and OTTI.
Closings Then and Now
On the DealLawyers.com Blog, John Jenkins of Calfee Halter & Griswold continues to provide some great analysis of recent developments. Below is a more personal anecdote that he recently blogged that rang true to an old-timer like me:
I started practicing law in 1986, but so much has changed since then that I often feel like I’m a complete relic. For instance, it boggles my mind when I think about the fact that there’s an entire generation of lawyers out there who’ve never hand-marked an SEC filing, never dealt with trying to clear Blue Sky merit review, and never hand-delivered a filing package to the SEC reviewer and then raced to the bank of pay phones next to the file room to let the rest of the team know that the deal was effective.
Those events were rites of passage for generations of young deal lawyers, and I think that today’s lawyers have actually missed out on something by not being able to take part in them. Sitting bleary-eyed in the Judiciary Plaza Roy Rogers forcing down another cup of coffee while waiting for the SEC’s file desk to open – along with a bunch of other sleepy junior associates toting overstuffed deal bags – was a shared experience that built a kind of camaraderie among young deal lawyers. Regardless of where you worked, misery loved company, and after a couple of all nighters at the printer, those early mornings at Judiciary Plaza were definitely miserable!
But I think the biggest thing that most young lawyers miss out on today is what an epic event a deal closing used to be. Today, it seems every closing is done by e-mail and overnight delivery. I can’t tell you the last time that I went to a closing or sent someone to physically attend a closing. Closings with actual people signing actual documents are increasingly rare events. Things were sure different back in the day.
Closing a public offering wasn’t a big deal – the closing was over in a couple of hours at most, and was pretty anti-climactic in light of everything that came before it. However, there was nothing anticlimactic about the closing of a big M&A transaction. These closings were elaborate, multi-day, round-the-clock affairs that involved lots of paper, little sleep, all the boredom, stress, caffeine, and nicotine that you could handle, and all the cold pizza and warm deli trays you could eat.
Oh yeah, I almost forgot – this drama usually played itself out across a bunch of dreary conference rooms that featured fluorescent lighting that sometimes looked like it came straight out of the office scene in Joe Versus the Volcano (okay, maybe it just seemed that way at the time). The M&A people were in one room, the Bank people were in another, then there were often war rooms and usually a much nicer room where the client’s executives were ensconced. This last room was definitely for the grownups. Aside from the client’s senior people, nobody who wasn’t a senior investment banker or partner spent much time in this sanctuary. You only went into this room to get signature pages signed, and you rarely spoke above a whisper.
Today, closing a deal still involves a tremendous amount of work, but most of the time is spent writing and responding to e-mails, revising closing documents at your desk and generally staring at a computer screen. Sure, there may be cold pizza and caffeine involved, but there’s definitely no nicotine unless it’s contained in a stick of gum. What’s more, there’s just not the commotion. No conference rooms full of people, nobody rushing around calling back to their office to find out what happened to the tax clearance certificate from Massachusetts, no big shot partners arguing face-to-face over last minute changes to somebody’s legal opinion (or an eleventh hour request for a new opinion).
Of course, all of those things still happen; it’s just that they happen in cyberspace or on conference calls. In many respects, that’s a real benefit. Don’t get me wrong; 99% of everything I’ve just described stunk worse than Battlefield Earth, but the other one percent represents the kind of shared experience that helps lawyers develop a little empathy for one another. Personally, I think we could use more of those kinds of experiences.
You need to register by this Friday, April 24th, to obtain the very reasonable Early Bird rates our popular conferences – “Tackling Your 2010 Compensation Disclosures: The 4th Annual Proxy Disclosure Conference” & “6th Annual Executive Compensation Conference” – that will be held in San Francisco on November 9-10th (and via Live Nationwide Video Webcast). Warning: These reasonable rates will NOT be extended beyond this Friday!
We know that many of you are hurting in ways that we all never dreamed of – and going to a Conference is the last thing on your mind. But with huge changes afoot for executive compensation and the related disclosures, we are doing our part to help you address all these critical changes—and avoid costly pitfalls—by offering a “half-off” early bird discount rate for those that attend in San Francisco and nearly half-off for those that attend via the Web (both of the Conferences are bundled together with a single price). Here is the Conference registration form – and here is the agenda.
The Latest TARP Oversight Report: Concerns Over Fraud
As we all know too well, where there is money – there is bound to be fraud. Yesterday, Neil Barofsky, TARP’s Special Inspector General sent a 247-page quarterly report to Congress detailing a long list of concerns about government efforts, including the lack of safeguards in handing out the money. Unlike the Congressional Oversight Panel led by Harvard Professor Elizabeth Warren, Barofsky’s office is focusing on criminal and civil wrongdoing in addition to more general recommendations and audits.
As this Washington Post article notes, the report states that Treasury Department lawyers have determined that companies participating in a $1 trillion program to relieve banks of toxic assets could be subject to limits on executive compensation (see page 110 of the report), contradicting the Obama Administration’s public position. It will be interesting to see what Treasury Geithner says about the report this morning when he testifies before TARP’s Congressional Oversight Panel (this letter was sent to the Panel ahead of the hearing).
Man, this report was hard to find. Treasury makes a big splash announcing its new “FinancialStability.gov” site – but it doesn’t bother to timely post its own reports. Rather, I found it on the SIGTARP site.
Update: Attorney Liability Under Rule 10b-5
From Keith Bishop: Some may believe that in light of the U.S. Supreme Court’s holding in Central Bank of Denver v. First Interstate Bank of Denver, lawyers may not face liability under Section 10(b) and Rule 10b-5. While the Supreme Court did hold that a private plaintiff may not maintain an aiding and abetting suit under Section 10(b), it also said “Any person, or entity, including a lawyer, accountant, or bank, who employs a manipulative device or makes a material misstatement (or omission) on which a purchaser or seller of securities relies may be liable as a primary violator under 10b-5, assuming all of the requirements for primary liability under Rule 10b-5 are met.” 511 U.S. at 191. In a decision issued recently, the Ninth Circuit Court of Appeals illustrates how lawyers may face liability.
In Thompson v. Paul (9th Cir. No. 06-15515, Oct. 27, 2008), the plaintiff entered into a settlement pursuant to which she received stock of an issuer. The plaintiff alleged that she did so based on the false representation that there was no criminal investigation of the issuer’s CEO. These attorneys jointly represented the issuer and CEO but withdrew before the final settlement agreement was signed. After new attorneys were found, the settlement agreement was signed and three days later the CEO was indicted on 29 counts fraud, conspiracy, money laundering and orchestrating a ponzi scheme.
The Ninth Circuit applied federal law to hold that “An attorney who undertakes to make representations to prospective purchasers of securities is under an obligation, imposed by Section 10(b), to tell the truth about those securities. That he or she may have an attorney-client relationship with the seller of the securities is irrelevant under Section 10(b).” While this case seems to be a straightforward application of the Supreme Court’s statement regarding primary liability, it should serve as a warning that a bar card is not a license to misstate facts to the other side – particularly when securities are being purchased and sold.
It should also be noted that the attorneys have not yet been found liable – the Court of Appeals was considering an appeal from the attorneys’ successful motion to dismiss. It remains to be seen whether the plaintiff can prove her allegations. It is also interesting to consider whether attorneys in this situation could be liable if they had simply failed to disclose, rather than affirmatively misrepresented the facts.
With the effective date of the SEC’s XBRL rules coming up for larger companies fairly soon, it’s time to bone up on their impact. Lawyers are mistaken if they don’t think XBRL will impact their practice. Not only are there new liability standards to learn, but XBRL will change how they conduct due diligence and deal with internal control issues. Even more fundamental – there might be a change in the workflow process of how disclosure documents get drafted.
All lawyers should tune into our webcast on Thursday – “XBRL: What Lawyers Need to Know” – to hear John Huber and Dave Lynn go over these types of issues; this program will not be a re-hash of the SEC’s new rules. In addition, I’ve asked Clarity Systems to give a short demo tailored to lawyers during the webcast, so you can see the potential changes in document production workflow for yourself (ie. it will not be a demo about how to set XBRL up, rather it will cover how it looks when it’s up and operating; course materials for the demo will be posted on Wednesday).
At a minimum, lawyers need to be aware of the new rules because they impact the cover pages of Forms 10-Q and 10-K. Effective April 13th, the SEC added a new box to the cover page of those forms regarding compliance with the XBRL rules (the purpose of the statement is so third parties can determine whether Rule 144 is available). Thanks to Amy Seidel of Faegre & Benson, we have updated the Form 10-Q cover page – which is in a Word file – posted in our “Form 10-Q” Practice Area (as well as the 10-K cover page in our “Form 10-K” Practice Area).
What should you do with the box now since the rules won’t impact filings until June? Tune into the webcast to learn how to deal with this – or read the chain of answers in #4743 of our “Q&A Forum” if you want to learn about how to deal with this issue now…
Recently, the SEC published this “Small Entity Compliance Guide” on XBRL. It’s just a summary of the new rules, akin to a law firm memo – we have plenty of those posted in our “XBRL” Practice Area.
Triskaidekaphobia?
I recently received this note from a member: I’m finding that it is a Sisyphean task to try to keep up with all of the exchange name changes. The most recent change in appellation occurred on April 13th, when the NYSE Alternext US LLC changed its name to the “NYSE Amex LLC.”
You may recall that the NYSE Alternext US LLC was christened only last Fall, when the SEC approved the acquisition of the American Stock Exchange by NYSE Euronext. Apparently, the NYSE has now decided that – for “branding” purposes – it is a good idea to retain the AMEX moniker. Another recent, albeit less drastic name change, was the change last April from “Pink Sheets LLC” to “Pink OTC Markets Inc.” That change reflected the change from a limited liability company to a corporation.
Noisy Withdrawals: Factor in Stanford Bust?
From Linda DeMelis: Although details are still somewhat murky, the SEC’s recent enforcement action against Allen Stanford may have been triggered by the withdrawal from representation of one of Stanford’s attorneys (as noted in this article). In a Memorandum of Law accompanying the complaint, the SEC cited the withdrawal, together with the attorney’s statement that he and his law firm disaffirmed all prior written and oral representations with respect to Stanford, as a basis for emergency action. The SEC did not mention the attorney by name, but he was later identified.
As this article points out, prior to Sarbanes-Oxley, attorneys in this situation often had to deal with a confused, and sometimes contradictory, morass of state laws and bar regulations covering attorney-client confidentiality. As part of its rulemaking after passage of Sarbanes-Oxley, the SEC proposed the option of a “noisy withdrawal,” where the attorney would notify the SEC of a withdrawal from representation. The “noisy withdrawal” proposal generated some controversy when it was proposed – and it was never adopted. But just such a withdrawal might have been the “tipping point” for the SEC’s enforcement action in this case.
In the lead-off piece of our “Spring ’09 Issue” of InvestorRelationships.com entitled “Facing an Unpredictable World: How to Change Earnings Guidance Practices,” I mention how the NYSE recently filed a proposed rule change that would amend Section 202.05 and 202.06 of the Listed Company Manual to allow listed companies to comply with its “immediate release policy” by disseminating the information “by any Regulation FD compliant method.” This follows a similar change that the Nasdaq made back in ’02 (as discussed in #4777 of our “Q&A Forum” yesterday). The NYSE’s rule change is immediately effective subject to a 30-day operative delay – since it was filed on April 8, I suppose the operative delay will elapse on May 7.
In his IR WebReport Blog yesterday, Dominic Jones picked up the ball on this story and ran. Check it out.
More Sample Documents Posted
We’re constantly post new sample documents in our various Practice Areas, we well as in our “Sample Documents” Portal. For example, we recently posted a sample memo to companies considering repurchasing their own stock in our “Stock Repurchases” Practice Area. And in our “IPOs” Practice Area, we’ve posted a bunch of documents, including a sample lock-up agreement and a sample confidential treatment request. As always, our sample documents (and everything else on our site) come with a disclaimer that you need to make your own legal analysis.
Feeling Glum About Life?
At least you don’t have over 1000 rejection letters from the past few months, this poor – and motivated – third-year is having troubles. If you have some free time, check out this blog’s list of 25 free tools to find out “who knows what about you.”
I’m thinking of doing a webcast on how lawyers can use technology in their practice, including using it to network and find a job. Here is a poll to see if there is any interest:
We just posted the “Spring ’09 Issue” of InvestorRelationships.com (we are maintaining this publication as complimentary thru ’09 as a “Thank You” to our loyal members in a down economy). The “Spring ’09” issue includes articles on:
– Facing an Unpredictable World: How to Change Earnings Guidance Practices
– The Box: Updating Guidance Mid-Quarter—and the Duty to Update
– Implementing Mandatory Retirement Ages for Directors: Practice Pointers
– Web Archival Practices: Answering “How Long?”
– Chair Schapiro Announces the SEC’s New Corporate Governance Agenda
– Draft E-Proxy Standards: NIRI Seeks Comment
If you’re not yet a member of InvestorRelationships.com, simply provide your contact information in this sign-up form and gain free and immediate access to the issue. If you signed up last year, your ID/password will continue to work – if you forgot what those are, you can get a reminder.
It’s Only a Matter of Degree
From Keith Bishop of Allen Matkins: Although Item 401 of Regulation S-K doesn’t specifically require disclosure of whether or not an executive as received a college or graduate degree, many companies do include this information with respect to directors and officers. In the past few months, the press has reported allegations of misstatements of educational background at four different companies (Broadcom Corporation, Microsemi Corporation, Intrepid Potash and MGM Mirage). Here is a press release filed by Microsemi Corporation last month and here is the press release filed by Intrepid Potash.
Note that the while Microsemi did not terminate the executive, it required him to pay $100,000 and forgo his annual bonus. Microsemi also extended by one year the vesting on the executive’s restricted stock award. The company also announced that it would also be taking the following remedial actions:
– Background checks on all current and future Section 16 officers and directors;
– Board confirmation that the HR Department is continuing to verify credential prior to making employment offers in connection with acquisitions;
– Amending the Code of Ethics to specify that misrepresentation of credentials is a breach of the Code; and
– Review and verification of press releases.
From what I can tell, Barry Minkow (from ZZZZ Best fame) has been doing background checks. Whatever the source, companies should be aware that someone may be checking up on them.
More Proxy Season Developments
If you haven’t signed up to get our new “Proxy Season Blog” pushed out to you, here are a few of the items you’ve missed during the past week:
– Tracking Voting Results: FundVotes.com
– Examples: The Latest Efforts by Activists to “Just Vote No”
– Five Cool Web Sites: UK-Style
– E-Proxy Questions: Meeting Directions on Notice
– More Governance Proposals Survive No-Action Challenges
– Amgen’s Compensation Survey for Investors
– “Books & Records” Being Used to Check Compensation Committees
Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog (just like you can accomplish that functionality for this blog).
We just announced that our popular conferences – “Tackling Your 2010 Compensation Disclosures: The 4th Annual Proxy Disclosure Conference” & “6th Annual Executive Compensation Conference” – will take place at the Hilton San Francisco on November 9-10th (and via Live Nationwide Video Webcast). Here is the Conference registration form – and here is the agenda.
To make your reservations at the Hilton, register for the hotel online or call 800.445.8667. When you register for the hotel, it is important to mention the National Association of Stock Plan Professionals Conference, Executive Compensation Conference or the Proxy Disclosure Conference (or just mention the Group Code of “SPP”) to receive the discounted rate.
Special Early Bird Rates: Only One Week Left – Act by April 24th: We know that many of you are hurting in ways that we all never dreamed of – and going to a Conference is the last thing on your mind. But with huge changes afoot for executive compensation and the related disclosures, we are doing our part to help you address all these critical changes—and avoid costly pitfalls—by offering a “half-off” early bird discount rate for those that attend in San Francisco and nearly half-off for those that attend via the Web (both of the Conferences are bundled together with a single price).
You need to register by next Friday, April 24th, to obtain these reasonable rates.
SEC Staff Issues SAB 111 re: Temporary Impairment
Yesterday, Corp Fin and the Office of Chief Accountant jointly issued SAB 111 regarding impairments of equity and debt securities (i.e. OTTI). Here is the related press release.
Meanwhile, the PCAOB voted yesterday to issue a concept release regarding possible revisions to the board’s standard on audit confirmations. Learn more from FEI’s “Financial Reporting Blog.”
Survey Results: Advance Notice Bylaws
We recently wrapped up our Quick Survey on advance notice bylaw practices. Below are our results:
1. Has your company revised its advanced notice bylaw provisions this year?
– We reviewed them and decided no revisions were necessary – 11.9%
– We reviewed them and made revisions – 66.7%
– Our bylaws don’t contain advance notice provisions – 3.6%
– We haven’t reviewed our bylaws, but we plan to do so in the near term – 15.5%
– We haven’t reviewed our bylaws and have no plans to do so at this time – 2.4%
2. If your company revised its advance notice bylaw provisions, what changes did it make?
– We changed the deadlines for receipt of shareholder proposals – 40.7%
– We created separate provisions for shareholder proposals for director nominations and shareholder proposals for other business – 49.2%
– We added specific advance notice provisions for special meetings – 42.4%
– We added disclosure requirements for shareholder proponents to address derivative securities – 81.4%
– We made other changes to the advance notice provisions – 50.9%
3. Have (or will) your company submit the amended bylaws for shareholder approval?
– Yes – 6.9%
– No – 93.2%
4. How did (or will) your company disclose its amended bylaws?
– Form 8-K – 88.7%
– Form 10-Q – 5.6%
– Form 10-K – 1.4%
– Press Release – 2.8%
– We don’t intend to disclose the changes – 1.4%
Please take a moment to participate in our new “Quick Survey on Compliance Committees.”
Yesterday, Meredith Cross was named the new Director of the SEC’s Division of Corporation Finance. She had served in Corp Fin as Deputy Director, Chief Counsel and a few other capacities back in the ’90s – and has been working at WilmerHale since then. Having personally worked under Meredith at the SEC, I know she will be a great asset to help Chair Schapiro accomplish her vast regulatory agenda as she is quite able and really knows her stuff.
DGCL Amendments Become Law: Proxy Access, Reimbursement Bylaws, Etc.
After having been approved by the Delaware House last month and by the Senate last Wednesday, I understand that House Bill #19 was signed into law by the Delaware Governor on Friday. As stated in the legislation (assuming no changes), the amendments to the Delaware General Corporation Law will be effective August 1st.
From a prior blog (and this podcast), you will recall that these amendments deal with, among other items, new statutes on proxy access and reimbursement bylaws, indemnification matters, judicial removal of directors and authorization to separate record dates for notice and voting at shareholder meetings. More to come…
Compensation Arrangements in a Down Market
We have posted the transcript from our recent CompensationStandards.com webcast: “Compensation Arrangements in a Down Market.”
While I was on holiday last week, the President and his economic advisor, Lawrence Summers, made a splash by announcing the economy had a “glimmer of hope.” The stock market has been behaving like it sees more than a glimmer. Here are five things gleaned from my very full inbox that give me pause:
1. According to this story, there will be $4 trillion in losses in the financial institutions. It notes $1.29 trillion in losses have been already booked, meaning $2.71 trillion in losses have not yet been recorded – more than twice the amount already recorded.
When I read articles like these, I still worry that banks aren’t giving us the full story in their disclosure (see this article) – although part of the problem is that the government is now in cahoots with banks in obscuring transparency. Banks aren’t allowed to disclose how they fare in the soon-to-be-completed stress tests until later this month. I imagine this will result in a spot of insider trading.
2. Some academics say that there is “little evidence that suggests these markets are experiencing fire sales” when it comes to whether the government needs to be tinkering with the pricing of toxic assets. This article concludes: “The problem is that highly leveraged financial firms own assets that are worth far less than they thought they would be, and the firms are insolvent as a result. This is why the latest bailout plans secretly give huge subsidies to banks – because the only way to keep the insolvent zombies afloat is to transfer billions of dollars to banks, bank stockholders, and bank creditors.”
3. Read this interview with a former S&L regulator, William Black, who criticizes the recovery efforts. This quote gives me chills: “We have failed bankers giving advice to failed regulators on how to deal with failed assets. How can it result in anything but failure?”
4. Politics continue to get in the way of serious reform efforts. There is ample evidence that our “independent” regulators aren’t given the freedom to do their job (or cave too quickly; Canada’s regulator just said “no” to loosening mark-to-market). Exhibit A is Congress bullying the FASB into changing accounting standards. But that is only the start. While I was gone, Rep. Barney Frank criticized Moody’s for being too negative? [Although Frank was not criticizing Moody’s for doing its job, so-to-speak, when rating municipal borrowers, but for applying a double standard that favored corporate borrowers.]
In addition, according to this article, the Administration seems to be willing to skirt the bailout restrictions that were just implemented. With these types of games going on, it feels like any rule can be avoided if you know the right people.
By the way, this is a worldwide problem. As noted in this article, the EU Commissioner stated recently at a IASB monitoring group meeting that he had indeed let Spanish banks break the law and fail to comply with IASB accounting standards. An amazing instance of a European government official condoning breaking of the law and securities fraud.
5. It still appears that boards are paying big pay packages (including bonuses) to CEOs despite poor performance. Read this new commentary by Bud Crystal about the pay lavished on the homebuilders. Until this vital governance area truly gets reformed, senior managers will be incentivized to play fast and loose – and boards will continue to show a lack of backbone, resulting in poor oversight.
There are plenty more of these types of stories filed every day (eg. this Rolling Stone story), leaving me with a lack of confidence that we will come out of this mess any better than before we went into it. Maybe I need a vacation from my vacation…
As an aside, Nasdaq’s new Listing Rulebook goes into effect today.
FASB Issues Three Fair Value Staff Positions
On Thursday, the FASB issued three final Staff Positions that provide application guidance and enhance disclosures regarding fair value measurements and impairments of securities (here is the related press release):
Note that the last one contains the dissent registered by the two FASB Board members (Linsmeier and Siegel) who voted against the recent rule change by the FASB regarding fair value accounting.
Madoff Spotted in London?
One of the more peculiar things I saw during my vacation in London? I swear I spotted Bernie Madoff in Trafalgar Square. He’s supposed to be in a Manhattan jail pending a June sentencing hearing. Here is the video where I captured a glimpse of the slightly younger look-alike (compare to this photo of the real deal):
Reminiscent of the competing proposal approach that the Commission took a couple of years ago on shareholder access, yesterday the SEC voted to propose several alternative ways of addressing the widespread public nostalgia for the only recently abandoned uptick rule. As noted in the press release announcing the proposals, the SEC proposed either: (1) a market-wide permanent return of the uptick rule or a modified version of the uptick rule; or (2) a security specific circuit breaker approach, which could come in the form of: (i) an outright ban for the rest of the trading day when the price of a security drops precipitously; (ii) imposition of a modified uptick rule on the trading in a security for the rest of the day when there is a significant price decline; or (iii) imposition of an uptick rule on the trading in a security for the rest of the day following a big price drop. Got that? Commissioner Aguilar, Commissioner Parades and Chairman Schapiro each released their opening statements, providing more details.
I think that the competing proposal approach largely reflects the level of complexity and concern about unintended consequences arising with short sale regulation. The Commission has to walk a fine line here when seeking to perhaps reinstate a rule that was abandoned only a few years ago, and at the time based on extensive study and public comment. Much is often made of how different the market is today compared to when the tick test pilot was conducted, but it really seems that the principal differences are between a market trending up and a market trending down and the relatively obvious effects of government-induced panic, plus the attention of the public and Congress to an issue that was once largely relegated to the darker corners of the regulatory landscape.
With all of the pressure for SEC action, it is going to be a difficult task ahead for the Staff to weigh the responses to the over 200 questions included in the proposing release and narrow the field of potential rules down to just one approach. Further, they will have to do so under a new Director of the Division of Trading Markets, as yesterday’s Open Meeting marked Eric Sirri’s last as Director of the Division.
Comments will be due within 60 days of publication in the Federal Register. The roundtable on short selling is tentatively scheduled for May 5.
The “R” Word and Venture Capital Funds
An interesting opinion piece in today’s Wall Street Journal discusses the outrage that has erupted over the notion of having venture capital funds register with the SEC so that information about the funds can be passed on to the Great Systemic Regulator envisioned in the Administration’s recent regulatory reform proposals. As we tend to see time and time again, over-reaction to crises tends to sweep in things that probably don’t need the benefit of regulation or are in fact not systemically dangerous. I think that James Freeman makes a good case for why venture capital, which is vital to our capital-raising system, does not actually pose the sorts of systemic risks that we should all be concerned about.
Now that the “R” word – risk – is thrown around as being something that needs the closest attention from regulators, it is perhaps a good idea to step back and note that it was really the mispricing and mismanagement of risk (in particular with respect to financial instruments and trading strategies), as opposed to the taking of risk itself, which got us into this mess. For technology companies, for instance, who have benefited greatly from the risk tolerance of venture capital investors, every day in business is the riskiest of endeavors, which is typically reflected in their public or private valuations. But we wouldn’t want them – as a result of regulation arising from a financial crisis – to stop taking risk, or to discourage their management from pursuing risky new ideas, or discourage their venture capital backers from taking a flyer on their risky prospects, so long as those risks are all fully disclosed and properly reflected in the price of their securities.
A Bernanke Green Shoot?
For the first time in more than a year, confidence among venture capitalists has inched upward, according to a recent survey of 30 San Francisco Bay Area VC’s. The latest results show a confidence level of 3.03 on a 5-point scale during the first quarter of 2009, up from a 5-year low of 2.77 last quarter. Might a more positive outlook by traditionally optimistic VC’s be one of Ben Bernanke’s “green shoots” of economic recovery? There’s a long way to go yet – there were only 50 IPOs worldwide during the first quarter of 2009, down 80% from the first quarter of 2008. More significantly for venture capital, the first quarter of 2009 marked the second consecutive quarter with no venture-backed IPOs. As Broc noted in the blog towards the end of last year, IPOs are a traditional exit strategy for VCs – until the IPO market opens up, VC’s can’t deliver returns to their investors. So if the uptick in VC confidence is a green shoot, it’s an exceedingly small one – but at least it’s pointing up. Thanks go out to Linda DeMelis for these thoughts.
Earlier this month, PWC published is 13th annual evaluation of private securities class action lawsuits. PWC’s analysis found that federal securities class actions increased for a second year in a row, with the financial services industry unseating high-technology companies for the dubious distinction of most frequently sued. PWC also noted that, perhaps not surprisingly, accounting-related lawsuits declined as a percentage of total filings, while the number of settlements recorded declined to the lowest number this decade. The study also notes that CEOs and CFOs are most frequently named in lawsuits, and that plaintiffs are increasingly targeting Fortune 500 companies (also due to the financial services effect). Given these trends, 2009 could be shaping up to be a high water mark for private securities litigation.
Executive Compensation Litigation Heating Up Too
Kevin LaCroix provides an excellent overview of the latest developments in executive compensation litigation today in The D & O Diary blog. Kevin notes:
“Drawing on popular anger evidenced most recently in the outrage surrounding the AIG bonuses, these most recent compensation-related cases could represent an even more pronounced litigation threat than prior lawsuits over pay. The same forces driving the litigation have also produced a variety of other corporate and social responses, some of which may or may not fully serve the purposes of overall social utility.
Among other recently filed lawsuits involving executive compensation is the derivative complaint filed on April 1, 2009 in California (Los Angeles County) Superior Court against the current AIG CEO Edward Liddy and several other AIG directors and officers. The complaint (copy here) among other things alleges that ‘there was no rational business purpose or justification for these lucrative additional payments, particularly given AIG’s deteriorating financial condition and dismal financial performance,’ and described Liddy’s explanation of the bonus payments as ‘outrageous on its face’ and ‘absurd.’ The complaint seeks to recover damages for corporate waste, breach of fiduciary duty, abuse of control and unjust enrichment.
The bonuses paid to Merrill Lynch employees at year end just prior to the consummation of the company’s merger with Bank of America also features prominently in the shareholders’ litigation filed against Bank of America earlier this year, following the revelation of Merrill’s massive and previously unreported losses.”
The D&O Diary blog also notes the outcome in the recent Citigroup case in Delaware involving Charles O. Prince’s $68 million exit package, discussed in Broc’s blog on the topic from last month.
While shareholder-initiated litigation is taking off in the current anger-fueled environment, it seems that now may be the time when we will also see more SEC Enforcement focus on executive compensation. The “honeymoon” with the 2006 compensation rules is long over, and thus now may be the time when we will start to see Enforcement bring some high profile cases to demonstrate attention to the issue. A couple of roadblocks that could stand in the Enforcement Division’s way in bringing these sorts of cases is that the principles-based aspects of the rules might make it more difficult, in some circumstances, to bring fraud or reporting violation cases, given that the lack of bright lines gives companies a significant degree of latitude in deciding what is and is not material. Further, the heightened sensitivity to compensation issues, more engagement by compensation committees, and the voluminous disclosure that is now required may reduce the ability to hide or mischaracterize compensation that could give rise to Enforcement’s interest. Unlike shareholders, the SEC is limited to disclosure violations and can’t pursue claims such as corporate waste.
Goldman CEO’s Remarks on Wall Street Pay Reform
Earlier this week, at the same Council of Institutional Investors meeting where Chairman Schapiro laid out the SEC’s regulatory agenda, Goldman Sachs CEO Lloyd Blankfein called for changes to the compensation model on Wall Street. As noted in this story appearing in the LA Times, Blankfein faced some angry protestors while delivering his address – certainly a sign of these times of extraordinary public anger.
Blankfein noted that compensation decisions must be made in the context a multi-year evaluation of risk to get a full picture of an individual’s decisions, and that performance should not be judged in isolation. Among the specific guidelines that he suggested are:
1. Compensation should include salary and deferred compensation, which is “appropriately discretionary” because it is based on performance over the year.
2. The proportion of equity comprising and individual’s compensation should increase significantly as total compensation increases.
3. Senior employees should get most of their compensation in deferred equity, while junior people should get most of their compensation in cash.
4. Individual performance should be evaluated over time to avoid excessive risk taking and to allow for a clawback effect.
5. Equity awards should be subject to future delivery and/or deferred exercise over at least a three-year period.
6. Senior executive officers should retain the bulk of their equity until they retire, and equity should not be accelerated once someone leaves the firm.
