Yesterday was the deadline for comments on the two competing shareholder access proposals, and as might be expected they both pulled in lots of comments. If anything was to be decided on the sheer number of comment letters, then the proposing release that would give 5% shareholders the ability to submit binding access bylaw amendments would be the hands down winner, with over 15,000 comment letters so far. Of those over 15,000 letters, a little more than 14,700 were designated by the SEC as “form” letters. The proposing release seeking to codify the SEC Staff’s interpretation of Rule 14a-8(i)(8) only garnered just north of 7,400 comments (of which over 7,370 were designated as “form” letters). True to form, while the investor community and individuals belonging to organizations with an interest in this matter turned out in force, there does not appear to be a whole lot of input from the issuer side on these proposals. While these comment numbers are nothing to sneeze at, they still don’t touch – when viewing the two access releases separately – the well over 20,000 letters commenting on the 2006 executive compensation disclosure proposals.
Now that the SEC Staff has all of these comments to sift through, it remains to be seen which way the SEC will ultimately go and when. In order to have proposals in place for the upcoming proxy season as Chairman Cox told the Senate Banking Committee he would at the end of July, it would seem that an adopting release needs to be on the SEC’s calendar in November, when many of the other Corp Fin proposals from earlier this year are expected to be considered. As noted in the RiskMetrics Risk & Governance Group blog, former Commissioner Campos said at a September CII conference that he doubted a replacement would be named in time to participate in shareholder access deliberations before next proxy season. Campos also indicated that he thought it was unlikely that Chairman Cox would push for a final decision on the issue without a full complement of commissioners.
At a House Committee on Financial Services hearing last week, investor and business representatives squared off on the shareholder access proposals. The SEC did not participate in the hearing. Reminiscent of the debate that ensued when shareholder access was last proposed in 2003, the two sides can seemingly find no middle ground. The investor side would rather see neither proposal move forward, and instead would like to submit access proposals without any restrictions. John Castellani, president of the Business Roundtable, raised the specter of “fractured boards representing special interests or small groups of shareholders” if the SEC adopts some form of shareholder access.
Adding to the uncertainty about the ultimate outcome of shareholder access is the outstanding warning from Senator Christopher Dodd (D-CT), who said that he will consider legislation to resolve the question of proxy access if the SEC doesn’t adopt access rules.
Farewell to Commissioner Nazareth
The SEC announced that Commissioner Annette Nazareth intends to step down. Commissioner Nazareth has indicated to the President that she does not wish to be re-nominated, and her term expired earlier this summer. No departure date has been set.
Commissioner Nazareth has been at the SEC for nine years, first as Director of the Division of Market Regulation and then as a commissioner. It is rare these days to see someone appointed to a commissioner slot from the Staff, and I believe that Nazareth’s experience on the Staff always contributed to her outstanding work as a commissioner. I really enjoyed working with Commissioner Nazareth and her excellent Staff – her departure is a big loss for the SEC.
ACAP Gets Off the Ground
Yesterday, Treasury Secretary Paulson announced the members of the Treasury Advisory Committee on the Auditing Profession. The date of the Committee’s first public meeting is set for October 15th. As Broc noted in this blog from back in May, the Committee – headed by former SEC Chairman Arthur Levitt and former SEC Chief Accountant Donald Nicolaisen – is tasked with examining issues such as audit firm concentration, how to strengthen the accounting industry’s financial soundness and how to enhance the ability to attract and retain qualified personnel. More information is available at the Committee’s website.
Our October Eminders is Posted!
We have posted the October issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
In yesterday’s blog, three out of the top ten recent Enforcement cases that I listed involved allegations of insider trading—clearly a top priority at the SEC. In late August, the SEC sent a 27-page letter to registered hedge fund advisers, seeking information about employees and clients who might be in a position to obtain material non-public information. As noted in this Washington Post article, Mark Schonfeld of the SEC’s New York regional office indicated “[t]his is an effort to look out for potential insider trading at hedge funds and to ensure that hedge-fund advisers are living up to their obligation to detect and prevent insider trading.”
According to published reports, the letter asks for lists of all employees and clients of the fund, as well as any relatives serving as officers or directors of public companies. The letter also requests information about contacts at brokerage firms with which the fund has done business. In addition, the SEC is seeking information about controls in place to prevent insider trading.
With this level of scrutiny, now more than ever companies need to focus on their insider trading policies and the activities of their officers and directors (including the use of Rule 10b5-1 plans). Even though we are only a week away, it is still not too late to sign up for our three critical conferences. In addition to Linda Chatman Thomsen’s keynote address at our Hot Topics conference, you can also hear the latest on Rule 10b5-1 plans and everything you need to know—in a nutshell—to prevent inadvertent, costly insider trading, Section 16 and Rule 144 violations. Register now for:
– “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” (10/9)
– “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks” (10/10)
– “4th Annual Executive Compensation Conference” (10/11)
Register for the “Member Appreciation Package” online—or use this Order Form.
If you have any questions, contact our HQ at info@compensationstandards.com or 925.685.5111.
– match the corporate tax deduction for stock option compensation to the book expense reflected in a company’s financial statements;
– permit companies to deduct stock option compensation in the same year that it is recorded on their books, rather than when the options are exercised;
– provide that research tax credits use the same stock option deduction when computing the “wages” eligible for those particular tax credits;
– establish a transition provision that would apply the new tax deduction to stock option exercises occurring after enactment, permit the old tax deduction rule to apply to options vested prior to adoption of FAS 123R, and allow a catch-up deduction in the first year after enactment for options that vested after adoption of FAS 123R but before the date of enactment; and
– make stock option compensation part of the same $1 million cap on the tax deductions that can now be claimed by public companies for other forms of executive compensation under Section 162(m).
In Senator Levin’s statement introducing the bill, he noted the significant disparity in pay between the CEO of a large corporation and the average worker. As for the influence of the tax code on executive compensation decisions, Levin noted: “When a company’s compensation committee learns that stock options can produce a low compensation expense on the books, while generating a generous tax deduction that is multiple times larger, it’s a pretty tempting proposition for the company to pay its executives with stock options instead of cash or stock. It’s a classic case of U.S. tax policy creating an unintended incentive for corporations to act.” This legislation stems from the Senate’s Permanent Subcommittee on Investigations hearing entitled “Executive Stock Options: Should the IRS and Stockholders be Given Different Information” from back in June. The bill would not affect the stock option compensation tax rules applicable to individuals.
Test Your M&A Knowledge: Are You a Pro or Troll?
We have posted one of our popular quizzes – “Pro” or “Troll”? Test Your Knowledge – on DealLawyers.com. It will score your answers as you go—and let you know how you compare against your peers.
Simply read each statement and decide whether you agree with it (by clicking “Ah Yes”) or disagree (by clicking “That’s Ridiculous”). Then, you will be told whether you were correct—and we also provide some analysis if you wish to learn more about each answer.
Today is the start of fiscal 2008 at the SEC. As is typically the case, the end of the last fiscal year saw lots of Enforcement activity, as the Division sought to make or beat its budget numbers. The number of Enforcement cases and Corp Fin filing reviews are always very important for supporting the SEC’s annual budget request. The stepped-up Enforcement activity at year-end is demonstrated by the crush of 52 litigation releases issued in September, as compared to an average of around 36 litigation releases per month during the other 11 months of fiscal 2007. Here is my top 10 list of cases from the end-of-year blowout:
1. Daniel McKay – McKay was charged with trading on material non-public information that he misappropriated from his spouse, who was an executive vice president at Triangle Pharmaceuticals. As noted in this NY Times article from August, there has been a notable increase in insider trading cases involving husbands and wives.
2. Salvador Chavarria, et al. – Continuing the insider trading theme, three Dell accountants were charged with trading in options on Dell stock while in possession of material nonpublic information about the company’s disappointing results for the second quarter of 2006. This case should be a reminder that all employees in an organization (and particularly those with access to sensitive financial information) need to have the company’s insider trading policy drilled into their heads, as well as the potential consequences for not adhering to that policy.
3. Buca, Inc. – Buca, which operates the Buca di Beppo restaurant chain, was charged with, among other things, failing to report compensation to the company’s former CEO and CFO arising from reimbursed personal expenses. The personal expenses included ATM cash withdrawals, duplicate airline tickets, family wedding expenses, dog kenneling, home remodeling costs, vacations, and visits to strip clubs. The company is also charged with failing to report various related party transactions, including the former CEO’s purchase of an Italian villa with company funds and the former CFO’s ownership interest in a vendor. While the unreported compensation and related party transactions predate the SEC’s new rules, the case demonstrates that the SEC is more than ever willing to pursue these types of cases, even when the amounts involved are not large. Be sure to sign up now for next week’s conferences, including Linda Chatman Thomsen’s keynote speech at the “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks,” to hear more.
4. Exo-Brain – The SEC announced a final judgment against this company and its principal for the usual unregistered offering and fraudulent misrepresentations and omissions violations. I just thought the name “Exo-Brain” was cool.
5. Federal Home Loan Mortgage Corporation, et al. – Freddie Mac and four of its former executives settled charges stemming from the company’s alleged fraudulent scheme to deceive investors about its true performance, profitability, and growth trends. Much of the conduct centered around Freddie Mac’s accounting for derivatives. The company agreed to pay a $50 million civil penalty, which is expected to be distributed to injured investors through a Fair Fund.
6. Joseph Keeney – Keeney, who was acting a business consultant to Frederick’s of Hollywood, was charged with trading on the basis of material non-public information obtained about the possible merger of privately-held Frederick’s and publicly-held Movie Star, Inc. Keeney was directly involved in the merger negotiations and was in charge of maintaining communications between the Special Committees of the two boards.
7. FCPA Actions – The recent trend toward stepped-up Foreign Corrupt Practices Act enforcement continued last week with a case against a former EDS official named Chandramowli Srinivasan, who was charged with bribing senior employees of Indian state-owned enterprises. EDS was also charged with related reporting, books-and-records, and FD violations. In another case, the SEC announced a settlement with Bristow Group for FCPA violations arising from improper payments made to Nigerian state government officials.
8. Stock Loan Crackdown – In Darin DeMizio, et al. and Joseph Simone, et al., the SEC charged 38 defendants with involvement in schemes where stock loan traders paid improper finders fees and illegal kickbacks. The defendants include current and former stock loan traders at Morgan Stanley, Van der Moolen, Janney Montgomery, A.G. Edwards, Oppenheimer, and Nomura Securities. Clearly there are some real problems in the stock loan industry that the SEC is seeking to ferret out.
9. Dwight Sean Jones – Jones – who was a defensive end for the LA Raiders, Houston Oilers, and Green Bay Packers – was charged with failing to allow the SEC Staff to examine his business records. Jones had been a registered investment advisor. The SEC may be the least of his worries – he was arrested in June on charges of mortgage fraud.
10. Robert Berlacher, et al. – The SEC’s efforts to crack down on illegal insider trading by hedge funds in the PIPEs market continues with a case against Berlacher, his Lancaster Investment Partners fund and related funds. According to the SEC’s complaint, the defendants generated $1.7 million in gains by shorting stock based on information about upcoming PIPEs offering and then covering those shorts with PIPE shares.
SEC Filing Fees: No Changes For Now
Another sign of the new fiscal year is the SEC’s Fee Rate Advisory from Friday. As is typically the case, the SEC starts fiscal 2008 off under a continuing resolution, because Congress has not yet passed the agency’s regular appropriation. As Broc noted in this blog, the SEC sets the filing fees annually under the “Investor and Capital Markets Fee Relief Act of 2002,” and the fiscal 2008 fees were set in this April order. The new fees will not go into effect, however, until five days after the date of enactment of the SEC’s appropriation.
For now, the filing fee rate for Securities Act registration statements remains at the current rate of $30.70 million. The same rate applies under Exchange Act Sections 13(e) and 14(g). Once the appropriation is enacted, this rate will rise to $39.30 per million.
Webcast Crush: Test Your Access Now
We are receiving so many last minute registrations for our three critical Conferences coming up next week – particularly the Video Webcast sign-ups – that we are concerned that many more of you are waiting until the very last minute to register.
Those that wait any longer may not have sufficient time to sign up and adequately test your ability to access streaming video, which is the format by which the webcasts will be displayed.
Those that have not yet registered for these essential Conferences – particularly in view of the latest executive compensation proxy disclosure guidance that will be provided by senior SEC Staffers John White and Paula Dubberly – are encouraged to do so now by clicking any of the links below:
– “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” (10/9)
– “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks” (10/10)
– “4th Annual Executive Compensation Conference” (10/11)
Over the last day or so, Corp Fin started faxing out a second wave of comment letters as part of Phase One of its compensation disclosure review project. These are new comment letters to companies who had not yet received a letter – this is not a second round of comments to those companies who originally received letters in August.
“Member Appreciation Package”: With just over a week left, the mad dash to register at the last minute has begun as our HQ is overwhelmed. Most waiting this long are watching our popular Conferences by video webcast and are taking advantage of our “Member Appreciation Package,” which enables you to catch all three of these Conferences at a much reduced rate:
If you have any questions, contact our HQ at info@compensationstandards.com or 925.685.5111.
The SEC’s (and Fed’s) New Regulation R
At last week’s open Commission meeting, the SEC adopted Regulation R. This is a joint project with the Federal Reserve Board. The Federal Reserve Board adopted this Regulation at an open meeting on Monday. Regulation R replaces the SEC’s prior efforts in the area of bank broker activities — including the previously proposed Regulation B – as it creates some exceptions for banks from the definition of the term “broker” under Section 3(a)(4) of the ’34 Act, as amended by the Gramm-Leach-Bliley Act. The SEC also amended existing bank dealer rules that were originally adopted by the SEC in 2003.
Here are opening remarks from Market Reg Director Erik Sirri. Here is the SEC’s adopting release regarding exemptions for banks under Section 3(a)(5) of the ’34 Act – and here is the adopting release regarding definitions of terms and exemptions relating to “broker” exceptions for banks.
Next, the federal banking agencies will issue, after consulting with the SEC, recordkeeping rules and guidelines for bank securities activities. And any future regulatory actions regarding bank securities activities will apparently be jointly issued by the SEC and the bank agencies.
How to Value Illiquid Assets
In this podcast, Espen Robak, President of Pluris Valuation Advisors, provides some insight into how to value illiquid assets, including:
– Given the sub-prime market meltdown, valuation of illiquid assets is big news these days. What areas are implicated in valuing illiquid assets?
– Can you talk a little more about last year’s FAS 157, which requires “fair value” methodologies for valuing assets?
– What different approaches are companies taking to valuing their illiquid assets?
Even though the IRS and Treasury recently pushed back the deadline for some of the 409A provisions, many believe that they didn’t go far enough. Recently, 96 law firms joined together to send this letter requesting a broader extension of the deadline for amendment of deferred compensation plans to comply with Section 409A to the IRS and Department of Treasury.
Corp Fin Guidance: Filing Date Adjustments, Filing Deletions/Withdrawals, Etc.
Given the number of questions we get on the topic, I was pretty excited to see Corp Fin issue written guidance about how they handle EDGAR filing date adjustments, post-acceptance corrections, filing deletions and withdrawals, and continuing hardship exemptions.
I imagine that if the Office of Disclosure Support continues to issue this type of guidance on relatively common situations like this, it will diminish the number of phone calls they receive…
Clawbacks and Careful Drafting
From Mike Melbinger’s blog: A case decided earlier this month caught my attention, as it illustrates three important points. In JPMorgan Chase & Co. v Pierce, JPMorgan sued its former Senior Vice President Sandra Pierce to recover $376,000 in compensation Ms. Pierce received from 1999 through 2003 under certain Stock Award Agreements. Pierce left JPMorgan in December 2004 to accept a position with another Bank. The Stock Award Agreements authorized JPMorgan to “claw back” stock award compensation Pierce received if she became employed by a JPMorgan competitor and “perform[ed] the same or substantially similar functions to those which [she] performed while employed by [JPMorgan].” [ed. note: we have posted the opinion in the “Clawback Provisions” Practice Area on CompensationStandards.com.]
The court faced three interesting and relevant issues: (1) whether the claw back provisions of the award agreements was enforceable, (2) whether JPMorgan Chase had properly delegated the authority to make the decision on competitive employment to is Human Resources Director, and (3) whether the court should apply a deferential standard of review to the decision of the Human Resources Director.
The court dispose of the first issue easily, finding that the claw back provision was clearly enforceable as a matter of Delaware contract law.
The second issue was a bit closer, since JPMorgan’s documentation of its delegation of authority to the Human Resources Director was less than thorough. (Make a note: be sure to document all delegations of authority carefully and fully.)
The third issue was the unusual feature of this case/decision – its discussion of the judicial standard of review applicable to ERISA cases. Many of us have – for years – drafted our equity compensation plans (and other non-ERISA plans) to include language we developed for ERISA plans following the US Supreme Court’s decision in Firestone v. Bruch (1989). Firestone held that if the plan document reserved to the plan administrator the power and authority to apply and interpret the plan’s (ambiguous) terms in its sole discretion, and the plan administrator made such a decision, then the court would only overturn that decision if it found the administrator’s decision to be “arbitrary and capricious” – a high standard. We add this language in the hope that a court seeing this interpretive language will look to ERISA, by analogy, for guidance and apply the arbitrary and capricious standard. In this case, the court did not rely solely on the arbitrary and capricious standard, but seemed to apply a similar analysis in finding in favor of JPMorgan and its Human Resources Director.
Act Now: Join Mike – as well as in-house practitioners from McDonalds and Intel – to learn more about protective/proactive plan drafting and claw backs for their panel at the “4th Annual Executive Compensation Conference.” You can catch this Conference in two weeks either in San Fran or by video webcast. And you can watch this Conference online – along with our “2nd Annual Exec Comp Disclosure Conference” and “Hot Topics Conference” as part of a “Member Appreciation Package.”
Yesterday, the SEC pulled out all the stops in marketing its “landmark” announcement that the XBRL taxonomy for US GAAP is ready to be tested by third parties (but not the general public quite yet), with an intended completion date of December 5th. It certainly is quite an achievement for the team that has worked closely with the SEC Staff to get this project moving faster than imaginable. This development follows last week’s announcement that the SEC has made the source code for its Interactive Financial Report Viewer available for free use by the market.
This is all to the good. However, I get a little worried about the Chairman’s remarks that rules could be proposed in the Spring and adopted as early as next Fall – and that these final rules could have include a schedule mandating XBRL. Something this big – and this technical – takes time based on historical experience with Edgar, etc. [Perhaps an omen was the fact that the SEC’s press conference yesterday was delayed half an hour due to technical glitches. They were breaking out the duct tape!]
It is comforting to know that – for the last year – 8,300 U.S. financial institutions have been using XBRL to submit their quarterly Call Reports to the banking regulators. But my faint memory of Call Reports is that they are fairly simplistic compared to US GAAP – but it’s still comforting to know that there is some XBRL experience out there beyond the several dozen pilot volunteers.
During his remarks, Chairman Cox waxed about a mythical Sally Q spending more time with her kids because XBRL saved her research time. I understand the point, but I don’t really view XBRL as a substitute for reviewing SEC filings. We all know that two companies with identical situations might well report completely different numbers for a particular line item because each selected a different accounting treatment. Reading the financials in their full context will continue to remain important. [Here is an old article about putting together a form on the fly; I’m not sure how this could work and keep numbers in context – maybe someone could explain that to me?]
In the end, I think the bigger impact of XBRL will be on the ability for companies to internally put together their financials. Yes, there might be cost savings – but there also will be implementation costs. But the real change here might be a streamlined and quicker process for gathering the data that makes up a company’s financials. It’s gonna be an interesting ride for Captain XBRL…
Misreporting Results: More Than One Way to Do It
From Lynn Turner: People often wonder ask why there are restatements – corrections of errors – in financial statements. Of course, fraud – such as the multitude of companies in a list as long as your arm such as Enron, Worldcom, Parmalot, Adelphia, Lernout and Hauspie, Tyco, etc. – has been one reason for restatements have wrecked havoc on shareholder portfolios.
But the fact that financial statements were just flat out done wrong the first time can also be a key reason. As noted in this 1998 CFO.com article citing two surveys, a very high percentage of financial executives acknowledge themselves that they had done their financial statements wrong. And many more were using flexibility in accounting rules to present a less balanced, but more favorable view, of the company.
No wonder since the corporate scandals began to break in 2001 and 2002, and new reforms have subsequently been implemented, that there has been plenty of restatements necessary. If people in a survey were willing to say the books were cooked, one can only imagine how much cooking was actually going on. You can’t have the high percentage of books being cooked that are cited in these surveys and avoid a wave of restatements. In the culture evidenced by the surveys, getting it done right the first time was not rewarded. As a result, a lot of companies are getting a chance to get it right the second time.
Ten Compensation Disclosure Fixes
The Sept-Oct 2007 issue of The Corporate Counsel – which has just been sent to the printer – includes important analysis and guidance regarding fixes companies will need to make to their proxy disclosures next year given the SEC’s recent wave of comment letters – and much more.
We have posted this blurred issue so that non-subscribers can get a sense of it before trying a 2008 no-risk trial, under which you can get this issue and the rest of 2007 for free. The issue includes pieces on:
– Ten Compensation Disclosure Fixes
– Disclose Performance Target Levels Whenever Possible
– Make Benchmarking Disclosure Meaningful
– Provide the Whole Termination and Change-in-Control Picture
– Maximize the Utility of the Compensation Tables
– Staff Affirms “No-Sale” for Restricted Stock
– Use of S-3ASR instead of S-8 to Register Stock Plan?
– Rule 14a-8 Proof of “Record” Ownership—Staff Says No to Investment Advisor Affirmation
– Filing Form T-1 After S-3 Effectiveness—Don’t Use Form 8-K
– Updating the Exhibit 5 Legality Opinion at Each Shelf Takedown
– California’s Listed Issuers/Securities Exemptions Updated
– Rule 144—Acting in Concert Under a 401(k) Plan
Yesterday, the NYSE sent an email to listed companies informing them that Rule 452 won’t be revised to eliminate broker discretionary voting in director elections for next proxy season. Previously, it was the NYSE’s stated intention to have the rule change in place and effective by January 1, 2008. As could be expected, the NYSE’s proposal is being considered by the SEC as part of the broader range of issues relating to the SEC’s own shareholder communications and proxy access proposals.
Also, Paula Dubberly – an SEC Associate Director and one of the primary authors of the SEC’s executive compensation rules – will be sitting on five panels during this critical Conference.
Act Now: You can catch this critical Conference either live in San Francisco or via video webcast. Remember how practical last year’s Conference was – this year will be no different: Register today.
“Member Appreciation Package”: Most folks watching this popular Conference by video webcast are taking advantage of our “Member Appreciation Package,” which enables you to catch all three of these Conferences at a much reduced rate:
If you have any questions, contact us at info@compensationstandards.com or 925.685.5111.
Latest Developments in Capital Market Deals
Tune in tomorrow, Wednesday, September 26th for this webcast – “Latest Developments in Capital Market Deals” – to learn about all the latest deal trends and developments featuring these experts:
– Jon Abram, Partner, Dorsey & Whitney
– Robert Hayward, Partner, Kirkland & Ellis
– Michael Kaplan, Partner, Davis Polk & Wardwell
– Erika Robinson, Partner, WilmerHale
– Robert Santangelo, Managing Director, Credit Suisse
Despite the Fed’s reduction in interest rates last week, a number of deals are in trouble and have produced some interesting developments and disclosures. As a result, caselaw regarding MAC clauses and other merger provisions will likely be fleshed out over the next year (remember the September-October issue of the Deal Lawyers print newsletter opens with a related piece: “The ‘Downturn’ Roadmap: Parsing the Shift in Deal Terms”).
Here are some of the notable developments and disclosures:
1. Harman International’s Form 8-K – According to this article, late Friday, Goldman Sachs and Kohlberg Kravis Roberts scuttled their pending $8 billion buyout of Harman International after discovering details about Harman that raised concerns about its business. You may recall that this deal was one of the first to introduce “stub equity.”
2. Genesco’s Form 8-K (filed 9/20/07) – As noted in this article, Genesco is suing to force Finish Line and UBS to complete the deal it made to buy Genesco (here is the Form 8-K regarding the lawsuit filed Friday).
3. Reddy Ice Holding’s Proxy Statement (filed 9/12/07) – As noted in this article, Morgan Stanley, the deal’s solo underwriting bank, claimed in late August that the financing agreements had been breached and said that it was “reserving its rights.” According to the proxy, Morgan Stanley argued that GSO Capital Partners, the buyout’s equity sponsor, and a special committee altered some dates in the original deal agreement and, specifically, stretched out the debt marketing period without Morgan Stanley’s consent. Morgan Stanley insisted that GSO had breached the debt financing contract by doing that.
5. SLM Corp.’s Additional Soliciting Material (filed 8/7/07) – As noted in this article, Sallie Mae’s purchase by a consortium led by JC Flowers & Co. might tank as the buyers are having second thoughts.
Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing
Join DealLawyers.com tomorrow for a webcast – “Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing” – to hear Tim O’Connor of Imperial Capital, and Mark Palmer and Jonathan Gill of Bracewell Giuliani discuss the latest trends and developments regarding the opportunities and strategies available in distressed situations. Given what’s happening in the credit markets – this program is particularly timely!
Act Now: To catch these programs, try a 2008 no-risk trial to DealLawyers.com today – and get the “Rest of 2007” at no charge.
Delaware Supreme Court: Rejects Deepening Insolvency Cause of Action
A few weeks ago, the Delaware Supreme Court decided – in Trenwick America Litigation Trust v. Billet, No. 495, 2006 (Del. Aug. 14, 2007) – that no cause of action asserting deepening insolvency exists under Delaware law. Sitting en banc, the court didn’t issue its own decision – rather, it relied on the lengthy opinion of Vice Chancellor Strine issued in August of last year, where he looked carefully at the underlying theory (and other available causes of action) and concluded that the deepening insolvency theory was incoherent. We have posted memos regarding this decision in our “Bankruptcy & Reorganization” Practice Area.
On Tuesday, the Senate Judiciary Committee held a hearing about approaches to corporate fraud prosecutions, and in particular the state of attorney-client privilege under the McNulty Memorandum. The Senate is still considering the Attorney-Client Privilege Protection Act of 2007 (S. 196), which was introduced by Senator Arlen Specter (R-PA) earlier this year. The bill would prohibit the government from demanding, requesting, or conditioning treatment on the disclosure of any communication protected by the attorney-client privilege or any attorney work product. In addition, the bill would prohibit the government from making charging decisions or determining the level of cooperation based on such things as a valid assertion of attorney-client privilege or attorney work product, the provision of counsel or legal fees to employees, the entry of joint defense and other agreements with employees, information sharing or the failure to terminate or sanction an employee. The bill would also prohibit the government from demanding that an organization not take any of these sorts of actions.
Among the witnesses at Tuesday’s hearing was Andrew Weissmann, former Director of the Justice Department’s Enron Task Force and now a partner at Jenner & Block. In his written testimony, Weissmann summed up the concerns of many with the statement: “In light of the Draconian consequences of an indictment and the fact that the federal common law criminal standard can be so easily triggered – despite a company’s best efforts to thwart criminal conduct – prosecutors have enormous leverage. To avoid indictment, corporations will go to great lengths to be deemed “cooperative” with a government investigation. KPMG is a prime example, and one that has been spotlighted in the decisions by Judge Kaplan in the United States v. Stein case. In those decisions, the Court essentially equated the actions of the firm to those of the government, because the disproportionate power of the government was deemed to have turned the company into a mere amanuensis of the prosecution. The Bristol Myers prosecution is another notable example illustrating the effects of such disproportionate power: the company there acceded to a request by the lead prosecutor to endow a chair at the prosecutor’s alma mater in order to resolve the investigation short of indictment.” Weissmann went on to note that lack of oversight of corporate charging decisions at DOJ, the problems with penalizing assertions of an employee’s Fifth Amendment rights and the McNulty Memorandum’s continued infringement of the attorney-client privilege all support passage of the Attorney-Client Privilege Protection Act of 2007.
As discussed in Edith Orenstein’s FEI Financial Reporting Blog, former Chief Justice of the Delaware Supreme Court E. Norman Veasey submitted a report to the Committee outlining anecdotal evidence of prosecutorial abuses occurring both before and after publication of the McNulty Memorandum. Based on information obtained from members of the Association of Corporate Counsel and the National Association of Criminal Defense Lawyers, Veasey reported (as a “neutral”) on twelve instances of “inappropriately coercive behavior” on the part of the government. These accounts include prosecutors requesting that a company turn over all privileged material in a corporate fraud case after the release of the McNulty Memorandum, requests from the government for information as to whether the company was paying for lawyers to represent fact witnesses in an FCPA case, and – in a pre-McNulty environmental case – pressure from the government to fire employees who received target letters.
With the upcoming confirmation hearings for Attorney-General, there is no doubt that this issue will remain hot. For more information, check out our “Attorney-Client Privilege” Practice Area.
Over Two Trillion Served!
An SEC press release issued yesterday about XBRL reminded me of those signs outside of McDonald’s restaurants touting the number of customers served. When Woody Allen woke up in the year 2173 in the movie Sleeper, the McDonald’s sign said that over 795 sexdecillion (that’s 51 zeros) had been served.
The SEC said that the combined market capitalization of companies submitting interactive data financial reports has surpassed $2 trillion. That $2 trillion in market cap is made up of over 40 large companies participating in the SEC’s voluntary XBRL program.
The SEC also put out an XBRL “teaser,” with a statement that Chairman Cox expects to make a separate announcement next week about another major milestone on the interactive financial reporting front.
XBRL is clearly on an expedited path to realization at the SEC. At last month’s inaugural meeting of the Advisory Committee to Improve Financial Reporting (CIFR), Corp Fin Director John White said that the SEC is moving forward with future XBRL rulemaking, and will be doing stuff before next August when CIFR is supposed to deliver its report. Pretty soon those XBRL market cap numbers could be a lot higher…
Back in the Saddle – The Sarbanes-Oxley Report
Just when you thought (or hoped) it was over, Billy Broc and Dave “the Animal” are back in this latest edition of The Sarbanes-Oxley Report. Billy Broc talks about what he is looking forward to at the “15th Annual NASPP Conference” in just two weeks.
Don’t forget to take advantage of the free “Chicago” concert on Tuesday, October 9th. You must register in advance to attend this event – and space is limited. Register now to ensure that you get your tickets – don’t wait until the last minute for this one. Keep in mind that the concert is offered to NASPP Conference session attendees only (also the NASPP cannot accommodate guests for the concert). Thanks again to Fidelity Investments for co-sponsoring this event with the NASPP!
Last week, the SEC announced charges against 69 audit firms and partners for issuing audit opinions while not registered with the Public Company Accounting Oversight Board. Most of these cases were settled, however the SEC did issue ten contested orders.
All of these cases were brought under Section 102(a) of the Sarbanes-Oxley Act, which provides that “it shall be unlawful for any person that is not a registered public accounting firm to prepare or issue, or to participate in the preparation or issuance of, any audit report with respect to any issuer.” Section 102(a) became effective on October 22, 2003, and to date 1806 accounting firms have registered with the PCAOB.
The SEC’s settled cases largely targeted firms that performed audits for fiscal years ending in 2003 and 2004. The audits were conducted for companies that were all issuers under Sarbanes-Oxley, including companies that were not traded, companies that were trading on the OTCBB or Pink Sheets, and in one case a company that was trading on the AMEX. The audit fees collected by these unregistered firms ranged from $32,000 to nothing, with the firm of Preferred Accounting Services, Inc. charging a whopping $100 for its audit while not registered. (Who says you can’t get anything for $100 these days?) For those firms that did collect audit fees, most returned the fees. Two firms that did not return fees were ordered to disgorge the fees they collected. The firms that collected no fees for their audits provided the SEC with an undertaking that they would not seek to collect the fees from the issuers. The other penalties faced by the audit firms and their partners included censures and cease-and-desist orders.
Among those settling charges were a number of sole proprietors, including an 81-year old auditor located in Bellmore, New York. In a few of the cases, the auditors continued to issue audit opinions even after the PCAOB had disapproved their registration applications because they had already conducted audits while unregistered. No issuers were charged in these actions with having filed non-compliant audit opinions.
You can easily check on the PCAOB’s website to see if an accounting firm is registered with the Board. The list of registered public accounting firms is updated regularly and includes the name of the firm and its headquarters office location.
PCAOB Board Member to Step Down
While on the topic of the PCAOB, founding Board Member Kayla Gillan announced on Tuesday that she will be stepping down from the Board by the end of January 2008. During her time at the PCAOB, Gillan has spearheaded efforts geared toward small businesses, known as the Forum on Auditing in the Small Business Environment. When the SEC re-upped Kayla, they gave her the unexpired term of departed Chair McDonough (whose term expires in January) rather than a full term – and PCAOB Board members are limited to only two terms under Section 101(e)(5)(B) of the Sarbanes-Oxley Act.
For example, catch Alan Dye, Amy Goodman and Keith Higgins during their panel – “How to Handle Related Party Transaction Disclosures and Director Independence” – to learn about:
– Challenging determinations of “materiality” for related persons
– Updating your D&O questionnaires
– The latest on related person transaction policy disclosures
– Parsing director independence disclosures
Act Now: You can catch this critical Conference either live in San Francisco or via video webcast. Remember how practical last year’s Conference was – this year will be no different: Register today.
“Member Appreciation Package”: Most folks watching this popular Conference by video webcast are taking advantage of our “Member Appreciation Package,” which enables you to catch all three of these Conferences at a much reduced rate:
