Quite a few law firms have been sending memos to clients in recent days warning of the pitfalls of the upcoming 409A deadlines, which will require many companies to make changes to their deferred compensation arrangements. A few days ago, 92 of America’s most prominent law firms sent a letter to the IRS and Treasury asking that the 409A deadline get pushed back to the end of 2008. We have posted this letter in the “Deferred Compensation Arrangements” Practice Area on CompensationStandards.com.
The New “Billable Hour” Gold Standard: $1,000 Per
Yesterday, the WSJ ran this article about the growing number of attorneys that now charge $1,000 per hour. Certainly makes our humble websites seem like a bargain…
A Second Night of Music
The NASPP is excited to announce a second night of music and dancing at the 2007 NASPP Annual Conference. On Thursday, October 11th, Merrill Lynch is sponsoring a gala reception featuring the band “Café R&B.” We hope you will join the NASPP for this high-energy rhythm and blues band, which promises to be an exciting evening of entertainment. Note that the concert is offered to NASPP Conference session attendees only; advance registration is not required.
Register Now for the 2007 NASPP Annual Conference: Don’t miss this year’s keynote presentation by the SEC’s Division of Enforcement Director Linda Chatman Thomsen, catch the latest on Section 409A from current and former IRS and Treasury staff, and learn about best practices and developments in 123(R) and stock plan accounting. The NASPP Conference features a full two and a half day program of critical updates and practical guidance; read the “Top Ten Reasons You Need to Attend.” As a bonus, the Conference includes CompensationStandards.com’s “4th Annual Executive Compensation Conference.”
It appears that the SEC Staff has begun sending its first wave of comment letters on proxy statements, as part of Phase One of its compensation disclosure review project (Phase Two will involve a Staff report that summarizes what the Staff has seen overall – and more importantly, what the Staff expects next year). Often, Corp Fin Staffers are calling in advance to warn of a comment letter being faxed. A few members have already forwarded a few of these letters to me – and I hear that the flood gates are about to open.
If you receive a comment letter, please share it with us. I promise we will not post it nor forward it (nor publicize it or the company in any way); we just want to observe the comment letter trends since we will be providing guidance regarding how you should be drafting executive compensation disclosures going forward in the upcoming Sept-Oct issues of The Corporate Executive and The Corporate Counsel. Both of these special issues will be mailed sometime after Labor Day. To receive these issues, try a “No-Risk Trial” at 1/2 price for the rest of the year.
Now Available: SEC’s Comment Letters on Blackstone’s IPO
Speaking of comment letters, I note that the Staff has posted its comments on the Blackstone IPO prospectus. The SEC’s database can be a bit hard to navigate, so here are direct links to the comment letters:
The responses are embedded in the cover letter of the amended filings (we wrote about the practice of burying responses within filings on page 6 of our Nov-Dec 2005 issue of The Corporate Counsel) as follows:
If you’re wondering when comments are typically made public, you might recall that the Staff’s informal policy is that comments and responses will be posted “no earlier than 45 days from when comments are cleared.”
Improving the Public Comment Process
Here’s an entry from Professor Bainbridge’s Blog that I have been meaning to share for quite some time: “The US PTO has come up with a very interesting idea: The Patent and Trademark Office is starting a pilot project that will not only post patent applications on the Web and invite comments but also use a community rating system designed to push the most respected comments to the top of the file, for serious consideration by the agency’s examiners.
Why not do the same thing for other administrative actions? For example, like all other federal agencies, the SEC currently invites public comments on rulemaking prceedings, but lacks the community rating system. Given the widely available technology for creating such a system, however, there’s no reason why the SEC couldn’t follow in the PTO’s footsteps. Comments by respected securities law academics (ahem) presumably would get pushed up, while duplicate astroturf comments presumably get pushed down. Or maybe not, as we might see astroturf campaigns to affect the ratings. Yet, it seems a worthwhile experiment.
If adopted, an area of particular interest will be the possible intersection with judicial review. Suppose the most respected commenters propose A, but the agency adopts B. Should a reviewing court give less deference to the agency in such cases?”
Recently, the California Public Employees’ Retirement System announced that it had doubled the number of shareholder proposals submitted to companies in fiscal 2007, bringing the number of proposals to 33. CalPERS reports that only six out of the 33 proposals actually appeared in proxy materials, with several proposals withdrawn “mostly in response to companies’ agreement to adopt the proposed corporate governance practices.” CalPERS also noted that all six of its proposals appearing in proxy ballots received investor votes averaging over 60 percent.
CalPERS increased its proxy solicitor pool from one to three in order to campaign for more votes. Further, CalPERS reports that it stepped up “policy reform engagements” with the SEC, the NYSE, the European Union and the Tokyo Stock Exchange.
One interesting trend is that while activism by organizations such as CalPERs has certainly increased, the workload for the SEC on shareholder proposals has steadily declined over the past few years. In a speech last week, John White indicated that the Staff has received and responded to 356 no-action letter requests seeking to exclude shareholder proposals this fiscal year, compared to 370 for the same period last year. These numbers are down sharply from roughly 450 no-action requests in 2005 and 2004. Less no-action requests at the SEC no doubt signals more success on the negotiation front, and perhaps more instances of companies running shareholder proposals rather than going through the process of seeking to exclude them.
Carol Stacey Speaks on Interaction with the SEC Staff and Current Accounting Issues
Former Corp Fin Chief Accountant Carol Stacey has been on the interview circuit these days in her new role as a Vice President at the SEC Institute. In this interview with CFO.com, Carol talks about such things as her perspective on communications with the SEC Staff, complexity, and the future of IFRS and convergence.
On the topic of further SEC guidance on materiality, Carol notes: “I think the staff of the SEC and potentially the commission itself will look at some other areas of materiality, as the staff has already talked publicly about doing. There are some areas that people struggle with all the time, like if you find an error in a quarter, what’s material to a quarter versus a year? That’s one area the staff is looking seriously at and they’re talking to some groups from the outside to get their views. I wouldn’t be surprised to see the staff come out with something along those lines. So far it’s been staff-level guidance in the form of staff accounting bulletins, and I wonder if the commissioners are thinking at some point about whether they need to provide guidance themselves. There have been so many calls for them to do something.”
In terms of what this sort of SEC materiality guidance might look like, Carol states: “The qualitative factors in, for instance, SAB 99, suggest to investors that if you somehow trip one of these qualitative factors, it’s material. A lot of people have struggled with that because the qualitative factors are mainly geared toward a small error being qualitatively material. And there are other situations where you could have a quantitatively larger error that’s immaterial and it could be for various reasons, such as it’s a break-even year. But there are no good quantitative factors that address that in SAB 99, so the SEC could step back and say they need more robust materiality guidance that really covers a lot more fact patterns that the one that SAB 99 covers. Maybe they won’t issue a new definition per se but more helpful guidance to help people in different situations.”
FCPA Legislation Introduced
Two members of the House of Representatives are interested in significantly raising the stakes for violations of the Foreign Corrupt Practices Act. Earlier this month, Congressman Gene Green (D-TX) and Congressman Tim Ryan (D-OH) introduced a bill that would require persons and entities to certify that they have not violated foreign corrupt practices statutes before being awarded government contracts. The bill has been referred to the House Committee on Oversight and Government Reform. The recent high profile of FCPA cases has no doubt attracted this Congressional interest, and the business implications of this legislation would be severe for the multinational companies that you typically see as the subjects of FCPA investigations.
Reputation and Communications Implications of the Whole Foods Message Board Fiasco
While the Whole Foods Markets takeover of Wild Oats Markets was put on ice yesterday by the U.S. Court of Appeals for the DC Circuit, perhaps the most notable thing to date arising from that transaction has been the revelation last month that Whole Foods CEO John Mackey had been posting anonymous messages about his company and Wild Oats Markets on a Yahoo message board.
In this podcast, Rhoda Weiss, the National Chair and CEO of the Public Relations Society of America (PRSA), provides insight on the corporate reputation and communications issues arising in the Whole Foods situation, including:
– What is the PRSA?
– How important are ethical considerations to public relations professionals in their day-to-day work and in the way they advise clients and senior management?
– What does PRSA’s Code of Ethics basically say, and how does it apply to an executive’s misuse of Internet-drive communications and social media?
– From PRSA’s standpoint, what are the ethical implications of corporate executives engaging in online discussion forums under an assumed name – particularly in discussing anything of material significance about their own companies?
– What should the recent Whole Foods situation in general tell CEOs and other corporate executives about the do’s and don’ts of using social media?
– What about the trust factor – what is the impact on the level of trust that people have in a company when a key executive is accused of wrongdoing?
– How might a company best respond when faced with “white-collar” crises that are management driven?
Broc recently blogged about efforts to move away from the quarterly earnings guidance grind, including the desire by many CFOs to see the practice of quarterly earnings guidance go the way of the dinosaur. A recent NIRI survey suggests that while there are some encouraging developments on the earning guidance front, radical change in this practice is certainly not going to happen overnight.
Of the companies responding to the NIRI survey, 34% indicated that they had discontinued guidance within the past 5 years. Those who discontinued guidance reported a relatively indifferent reaction from the investor community (62% reported indifference from the sell side while 47% reported indifference from the buy side), along with a generally positive reaction from senior management (88% reported a positive management reaction). For those survey respondents discontinuing guidance, most reported either a neutral impact on the company’s stock valuation (45%), or no opinion about the impact on stock valuation (42%).
Among those companies that continue to provide guidance, the vast majority reported providing guidance on earnings per share and revenue. Of the survey respondents providing guidance, 82% cited the need to ensure sell-side consensus and that market expectations are reasonable as the reasons for continuing to provide guidance on quantifiable financial measurements. Only 27% of the companies reported providing guidance for quarterly estimates, with 58% reporting that they provide annual estimates. 82% of the companies providing guidance indicate that they were not considering changing the frequency with which they provide that guidance. Unfortunately for all of those CFOs out there who would like to see an end to earnings guidance, a surprising 90% of the survey respondents indicated that their company was not considering any change to the policy of providing earnings guidance.
Options Backdating: Former Brocade CFO Charged With Turning a Blind Eye to Misconduct
On Friday, the SEC announced charges against the former CFO and COO of Brocade Communications Systems for his involvement in the company’s options backdating efforts. These charges come shortly after the criminal conviction of former Brocade CEO Gregory Reyes, which Broc blogged about earlier this month.
According to the SEC’s complaint, Michael J. Byrd was allegedly involved in the backdating practices in his role as CFO and later as COO of Brocade. The allegations point out Byrd’s involvement with backdated grants to new employees through the company’s so-called “part-time” program, where, in order to establish a tortured basis for meeting an accounting interpretation of the definition of an “employee,” new hires were to be paid for “four hours a week until they start.” It is alleged that option grants were made through offer letters dated well in advance of the actual hiring decision, along with directives to treat the employees as part-time from the date the options were granted. Byrd is also alleged to have been involved with interviewing and hiring candidates – thus fully aware of the timing of these events – while at the same time signing minutes of purported Committee meetings designating earlier (and advantageous) hiring dates. The complaint alleges that Byrd received one backdated grant, and he is charged with filing a false Form 5 reporting that grant.
As noted in this CFO.com article, Byrd was originally expected to testify at the criminal trial for Reyes, but for unknown reasons the prosecution never called him as a witness. The article states: “In a follow-up interview with CFO.com, Potter [Byrd’s attorney] said he did not know why Byrd was never called, but said his client had cooperated fully with both the SEC and the DoJ as a witness, and that at no point in the investigation had his client assumed status as a target of federal prosecutors. ‘He never entered into a cooperation agreement,’ Potter told CFO.com. ‘He volunteered his cooperation as a witness.’”
Interestingly, despite Linda Chatman Thomsen’s statement in the press release that “[t]his case confirms the Commission’s commitment to pursuing not just those who perpetrate financial fraud, but the corporate gatekeepers who allow it to happen on their watch,” no officer and director bar is sought for Byrd. The SEC is seeking only disgorgement and civil money penalties in this particular case, raising the question: “what does it take to get an O&D bar these days?”
Hewlett-Packard Sued by CNET Reporters over Spying Fiasco
Nearly a year has gone by since the details of Hewlett-Packard’s investigation into a boardroom leak began to surface, and there is no doubt that at this point H-P would like to move on from this scandal. Now, as reported last week in this CNET article, three reporters at CNET News.com and members of two of the reporters’ families have decided to sue H-P in California state court. The plaintiffs seek unspecified damages for invasion of privacy, intentional infliction of emotional distress and violations of a state law prohibition against “unfair, fraudulent and deceptive practices.” Former H-P board of directors chair Patricia Dunn and former H-P attorney Kevin Hunsaker are also named as defendants in the lawsuit suit.
Prior to this lawsuit, justice had been relatively swift for H-P. The company had settled civil charges with California’s Attorney General, and also settled SEC disclosure charges earlier this year. Criminal charges against Dunn, Hunsaker and two others were dismissed. The practice of “pretexting” was also addressed in a surprisingly quick manner by Congress with the enactment of the Telephone Records and Privacy Protection Act of 2006, which was signed into law by the President back in January of this year.
At the American Bar Association meeting earlier this week, John White delivered this speech entitled “Corporation Finance in 2007 – An Interim Report.” The speech provides an update on the status of a number of projects that are happening in Corp Fin. Here are some highlights:
1. There are no plans for any further extensions for Section 404 compliance by non-accelerated filers.
2. The Staff is interested in hearing about experiences with implementing E-proxy so that they can make any changes necessary to maximize benefits while minimizing problems associated with the process.
3. On the executive compensation front, no rule changes are anticipated for this year. The Staff is getting ready to issue the first round of comment letters coming out of its exec comp review program. No letters have yet been issued, as the Staff has been holding on to them in order to ensure consistency. The Staff’s report on the first year of disclosures under the new rules will be out in time for next year’s proxy season. The big things that the Staff has been looking at in the course of its reviews are:
– analysis of the different components of compensation and change of control and termination payments;
– the adequacy of disclosure about performance targets;
– the justification for not disclosing performance targets, and the adequacy of the “degree of difficulty” disclosure provided instead;
– disclosure about benchmarking; and
– who makes the compensation decisions, including the role of the CEO and others in the process.
4. The Staff is committed to putting together a rule this fall from the two competing shareholder access proposals. The Staff is continuing to consider what to do about other issues that came up during the May proxy roundtables, including NYSE Rule 452, empty voting, over-voting, and shareholder communications.
5. With regard to interactive data, the Staff is working on a second prototype XBRL tool, which it hopes to release soon. This prototype will feature enhanced graphics and an easy search function. Expanded taxonomies are expected to be released for public testing and comment this fall. The much anticipated “Executive Compensation Disclosure Viewer” (it has a catchy name now) is still anticipated, and will be available some time this year. More progress on implementation of interactive data is expected in the near future.
6. On the PIPEs front, the Staff hopes that the pending proposal for opening up primary offerings on Form S-3 to smaller issuers and the proposal to shorten the holding period for Rule 144 will help give smaller issuers some alternatives to PIPEs financing.
7. The Staff still has the topic of “stealth restatements” and disclosure under Item 4.02 of Form 8-K on its agenda, although no proposals are ready on these issues.
8. The Staff is still considering possible rule proposals or guidance dealing with voluntary filers.
The Rise of Alternative Trading Platforms
This seems to be the summer of alternative trading platforms for unregistered securities. As Broc noted in the blog back in May, Goldman Sachs launched its new system called GS TRuE – short for Goldman Sachs Tradable Unregistered Equity. Earlier this week, Nasdaq rolled out its new and improved PORTAL trading platform, which is described as a centralized trading and negotiation system for Rule 144A securities. Now Citigroup, Lehman Brothers Holdings, Merrill Lynch, Morgan Stanley and Bank of New York Mellon announced that they are pulling together their considerable resources to launch OPUS-5, which is short for Open Platform for Unregistered Securities (I love the name on this one). OPUS-5 is expected to begin operations next month.
These trading platforms are popping up in an environment where there is an unprecedented amount of private money sloshing around the financial system. As noted in this Washington Post article on the PORTAL Market “[f]or the first time last year, corporate America raised more money – $162 billion – from private investors than from initial public offerings, which raised $154 billion from the three major U.S. stock markets – Nasdaq, the New York Stock Exchange and the American Stock Exchange.”
The SEC Staff recently issued an interpretive letter facilitating trading of the securities of foreign private issuers on the Nasdaq PORTAL Market. In the letter, the Staff indicated its view that a foreign private issuer would continue to be eligible to claim the exemption from SEC registration under Exchange Act Rule 12g3-2(b), notwithstanding the fact that the securities would be traded through the PORTAL market, because PORTAL would not be deemed an “automated inter-dealer quotation system” under Rule 12g3-2(d)(3).
There is no doubt that one thing we need right now is more liquidity in the markets, and that seems to be what these new trading platforms are all about.
Credit Rating Agencies Face Scrutiny
It has been a wild ride in the markets over the last few weeks, and that has got to mean somebody, somewhere is at fault. It is time once again to look for some gatekeepers who were not manning their gates, and it looks like the credit rating agencies are one of the prime targets this time around. A page one article in Wednesday’s WSJ noted:
“It was lenders that made the lenient loans, it was home buyers who sought out easy mortgages, and it was Wall Street underwriters that turned them into securities. But credit-rating firms also played a role in the subprime-mortgage boom that is now troubling financial markets. S&P, Moody’s Investors Service and Fitch Ratings gave top ratings to many securities built on the questionable loans, making the securities seem as safe as a Treasury bond.
Also helping spur the boom was a less-recognized role of the rating companies: their collaboration, behind the scenes, with the underwriters that were putting those securities together. Underwriters don’t just assemble a security out of home loans and ship it off to the credit raters to see what grade it gets. Instead, they work with rating companies while designing a mortgage bond or other security, making sure it gets high-enough ratings to be marketable.
The result of the rating firms’ collaboration and generally benign ratings of securities based on subprime mortgages was that more got marketed. And that meant additional leeway for lenient lenders making these loans to offer more of them.”
This is by no means the first time that the credit rating agencies have to take the heat for market troubles. This time around, however, they will be facing scrutiny as SEC-regulated entities. Back in June, final rules implementing the Credit Rating Agency Reform Act of 2006 and certain provisions of that Act went into effect, and the rating agencies filed their registrations with the SEC. The SEC’s new rules regarding rating agencies are outlined in this press release and in this adopting release. Check out our “Rating Agencies” Practice Area for more information.
While on the topic of the choppy markets, check out this timely music video from “Merle Hazard.” Thanks to Jack Ciesielski’s AAO Weblog for pointing out this gem. With this kind of competition, Billy Broc and Dave “the Animal” are going to have to tune up their crooning voices!
As in past years, the NASPP Annual Conference – this year in San Francisco from October 9 through October 12 – will kick off with a Gala Opening Reception sponsored by Fidelity Investments on October 9. The NASPP and Fidelity are excited to announce that immediately following the opening reception, all Conference session attendees are invited to the San Francisco Concourse Exhibition Center for an exclusive private concert featuring the multi-talented, multi-platinum group, Chicago!
The concert is offered to those registered to attend the full NASPP Annual Conference sessions only. There is no additional charge to attend the concert, but space is limited and you must register in advance.
The NASPP Annual Conference features a full two and a half day program of critical updates and practical guidance – check out the “Top Ten Reasons You Need to Attend.” As a bonus, the Conference includes CompensationStandards.com’s “4th Annual Executive Compensation Conference” at no extra charge, and you definitely don’t want to miss the critical pre-conference programs, “Tackling Your 2008 Compensation Disclosures: The 2nd Annual Proxy Disclosure Conference” and “The Fundamentals of Stock Plan Administration.”
US Solicitor General Files Brief in Stoneridge Case
Despite some last minute lobbying by Senator Christopher Dodd (D-CT), the government filed a brief as amicus curiae in the case of Stoneridge Investment Partners LLC v. Scientific-Atlanta, Inc. As Broc noted in the blog earlier this summer, President Bush and Treasury Secretary Paulson had blocked the SEC’s effort to weigh in on the case with its views, and now the Solicitor General has filed a brief that comes out on the opposite side of the SEC with respect to the core issue of “scheme liability” under Section 10(b) and Rule 10b-5.
On Tuesday, Senator Dodd, Chairman of the Senate Committee on Banking, Housing and Urban Affairs, announced that he had sent a letter to President Bush and a letter to Solicitor General Paul Clement, asking that they not file an amicus brief “advocating views inconsistent with the views of the SEC.” Dodd noted that such a move would “compound the damage” already caused by the government’s decision to not advocate the SEC’s views on the case.
The government’s brief cites significant policy concerns with the promotion of “scheme liability,” a theory of primary liability for third parties that have been involved in a public company’s fraudulent conduct. In stating the government’s interest in the case, the brief notes that “private securities actions can be abused in ways that impose substantial costs on companies that have fully complied with the applicable laws. The United States also has responsibility, through, inter alia, the federal banking agencies, for ensuring that entities providing services to publicly traded companies are not subject to inappropriate secondary liability.”
The brief advocates a position that is generally consistent with the SEC’s views on the point that the lower court erred in holding that Section 10(b) reaches only misstatements, omissions made while under a duty to disclose, or manipulative trading practices, stating “[t]he plain language of Section 10(b) demonstrates that it potentially reaches all conduct that is ‘manipulative’ or ‘deceptive’” and “[t]his Court’s cases provide no support for the conclusion that non-verbal deceptive conduct is somehow beyond the reach of Section 10(b).”
On the more critical point of third party liability, however, the brief argues:
“It would greatly expand the inferred private right of action under Section 10(b) and Rule 10b-5 if ‘secondary actors’ could be held primarily liable whenever they engage in allegedly deceptive conduct, even if investors do not rely on (and are not even aware of) that conduct. Such a rule would expose not only accountants and lawyers who advise issuers of securities, but also vendors (such as respondents) and other firms that simply do business with issuers, to potentially billions of dollars in liability when those issuers make misrepresentations to the market. Such a rule would thereby considerably widen the pool of deep-pocketed defendants that could be sued for the misrepresentations of issuers, increasing the likelihood that the private right of action will be ‘employed abusively to impose substantial costs on companies and individuals whose conduct conforms to the law.’ Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499, 2504 (2007). Moreover, extending liability to vendors could have the effect of substantially expanding liability for foreign companies that trade with publicly listed companies. Likewise, creating new and unpredictable liability for closely regulated entities like banks could create particular problems and greatly complicate the task of regulators. And the expansion of liability would raise difficult questions concerning the apportionment of liability where, as here, the conduct of the secondary actor relates only to a small part of a broader fraudulent scheme. See, e.g., 15 U.S.C. 78u-4(f)(3)(C) (providing that, in apportioning liability, the trier of fact should consider ‘the nature of the conduct of each covered person found to have caused or contributed to the loss incurred by the plaintiff or plaintiffs’ and ‘the nature and extent of the causal relationship between the conduct of each such person and the damages incurred by the plaintiff or plaintiffs’).”
The case is set for oral argument before the Supreme Court on October 9. Check out the many other briefs filed in this case in our “Securities Litigation” Practice Area.
Black Box Revisited: Helpful Interpretive Guidance in the SEC’s Reg. D Proposing Release
Earlier this month, the SEC posted its long awaited proposing release on possible revisions to Regulation D. While the ultimate outcome of these proposals may not be known until later this Fall (Corp Fin Director John White recently said that the SEC’s goal was to approve all of the small business capital-raising proposals this year), the release includes some currently applicable interpretive guidance that is worth taking a look at now.
Responding to concerns expressed by the Advisory Committee on Smaller Public Companies, the SEC revisited the integration safe harbor in Regulation D with a proposal to shorten the timeframe from six months to 90 days. While doing so, the SEC states its views on issues related to private capital-raising transactions occurring around the time of a public offering. In particular, the SEC weighs in on the ability to do concurrent public and private offerings, which to date has largely been a topic for the staff’s consideration in interpretive letters such as Black Box and Squadron Ellenoff and in countless registration statements filed over the years.
In the release, the SEC says that “[w]hile there are many situations in which the filing of a registration statement could serve as a general solicitation or general advertising for a concurrent private offering, the filing of a registration statement does not, per se, eliminate a company’s ability to conduct a concurrent private offering, whether it is commenced before or after the filing of the registration statement. Further, it is our view that the determination as to whether the filing of the registration statement should be considered to be a general solicitation or general advertising that would affect the availability of the Section 4(2) exemption for such a concurrent unregistered offering should be based on a consideration of whether the investors in the private placement were solicited by the registration statement or through some other means that would otherwise not foreclose the availability of the Section 4(2) exemption. This analysis should not focus exclusively on the nature of the investors, such as whether they are ‘qualified institutional buyers’ as defined in Securities Act Rule 144A or institutional accredited investors, or the number of such investors participating in the offering; instead, companies and their counsel should analyze whether the offering is exempt under Section 4(2) on its own, including whether securities were offered and sold to the private placement investors through the means of a general solicitation in the form of the registration statement.”
The SEC goes on to provide some examples of the application of these principles, and notes that this guidance does not foreclose the ability to rely on the Staff interpretive guidance in Black Box and other similar letters.
While this guidance recognizes the practical approach that the Staff has taken to these issues over the years, the interpretive statement in the release should provide more certainty and perhaps a little more flexibility as potential capital raising opportunities come up before and during public offerings.
On Tuesday, a Miami jury ordered accounting firm BDO Seidman to pay $351 million in punitive damages, in addition to $170 million in compensation that BDO was previously ordered to pay to Banco Espirito Santo, a Portuguese bank. BDO was found negligent for failing to uncover a massive fraud during the course of its audits of a Miami-based financial services company.
An article appearing in today’s Washington Post notes: “In court filings, BDO Seidman had warned that a loss of $170 million could trigger massive layoffs and cause the company to lose its standing as the fifth-largest accounting firm. The jury was barred from issuing damages that could destroy a company.
In testimony Tuesday, BDO Seidman attorney Adam Cole asked the company’s chief executive, Jack Weisbaum, whether the firm’s financial operations would stay the same if it had to pay punitive damages.
‘Probably not,’ Weisbaum said. ‘It would be very difficult. We certainly wouldn’t look the way we do now.’
The jury decided Monday that BDO Seidman must compensate the bank and provide punitive damages for failing to reveal massive fraud at the bank’s former partner, E.S. Bankest. The same jury found the accounting firm grossly negligent in June.
BDO Seidman said it will appeal the jury’s verdicts, so it will post a $50 million bond as it appeals. This is the second trial in the dispute, with the first ending in a mistrial in March. The fraud also led to prison time for former E.S. Bankest executives.
Cole showed the jury financial statements for fiscal 2006, which showed the firm’s net worth of $171 million. BDO Seidman argued that the punitive damages should be based on net worth, but the bank contended that it should be based on revenue.
For the fiscal year ended June 30, BDO Seidman reported revenue of $589 million, according to a news release on its Web site. Weisbaum said the company has 2,800 employees in 34 offices nationwide.
BDO Seidman attorney Arturo Alvarez laid the blame on ‘thieves’ at E.S. Bankest who defrauded the bank and said the accounting firm did not intentionally bungle the audits. He asked the jury for no punitive damages.
‘We were victims, too,’ Alvarez said. ‘We never knew [the fraud] was happening.’
At least seven people, including E.S. Bankest directors Eduardo and Hector Orlansky, have already been convicted or pleaded guilty to federal criminal charges related to the fraud and sentenced to prison. In criminal trials, E.S. Bankest was accused of inflating the value of the accounts receivable it bought and presenting fake audited financial statements.”
Small Changes to SEC Forms May Prevent Big Headaches
It is good to know that the SEC’s Commissioners can still agree on something without putting out competing proposals (or putting out any proposals for that matter). Amid the flurry of releases published on August 6th, the SEC published final rules making minor but nonetheless important changes to Form 144, Forms 3, 4 and 5, and Schedules 13D, 13G and TO. The SEC has finally deleted all requirements (or in some cases, an option) for filing persons to include an IRS identification number in these filings. With respect to the Section 16 filings, the SEC had already removed provisions allowing reporting persons to include IRS identification numbers, but some clean-up of those forms was still necessary. The IRS identification number of issuers is still required on the cover page of most Securities Act registration statements and Exchange Act reports, but for what purpose it is hard to say. In the adopting release for these most recent amendments, as well as in the 2003 adopting release for the changes to the Section 16 forms, the SEC said that the IRS identification number was not useful to the SEC for tracking or processing purposes.
One of the problems that references to IRS identification numbers has caused over the years is that sometimes natural persons thought that they had to provide a Social Security number in lieu of an IRS identification number. Filing anything on EDGAR that includes a Social Security number obviously puts people at risk for identity theft, and it remains virtually impossible to get anything pulled down or changed once it gets filed on EDGAR.
A good practice tip is to always have someone check filings, and in particular exhibits, for Social Security numbers and other personal information. This also goes for no-action letters and other correspondence. A little bit of diligence on the front end can prevent some big headaches down the road.
Recent IPO Trends
In this podcast, John Partigan of Nixon Peabody provides some insight into how the IPO market is changing (and provides some gloss on this recent “IPO Trends Study”), including:
– Why did Nixon Peabody and Mergermarket conduct a study of IPO trends?
– What companies did you survey?
– Did your evaluation find any big surprises?
– Any insights into IPO market conditions for the rest of 2007?
Last Fall, Sun Microsystems CEO Jonathan Schwartz asked the SEC to consider allowing companies to use their websites, including blogs on their websites, as a means for satisfying public disclosure obligations under Regulation FD. In what had to have been an SEC first, Chairman Cox responded to the request by posting his letter as a comment to Jonathan Schwartz’s Blog. While by no means definitive, the Chairman’s response certainly opened the door to a dialogue about whether the public disclosure requirement of Regulation FD could be satisfied through a company’s website.
The Chairman’s openness on this issue echoed the SEC’s reaction to the same question way back in 2000, when Regulation FD was originally adopted. In the adopting release for Regulation FD, the SEC indicated that “[a]s technology evolves and as more investors have access to and use the Internet, however, we believe that some issuers, whose websites are widely followed by the investment community, could use such a method. Moreover, while the posting of information on an issuer’s website may not now, by itself, be a sufficient means of public disclosure, we agree with commenters that issuer websites can be an important component of an effective disclosure process. Thus, in some circumstances an issuer may be able to demonstrate that disclosure made on its website could be part of a combination of methods, ‘reasonably designed to provide broad, non-exclusionary distribution’ of information to the public.”
It now looks like Sun is going forward with a website-based approach to disseminating its earnings release, although it will not use the company’s website as the exclusive means for disseminating this information. As described in Jonathan Schwartz’s blog, Sun simultaneously posted its July 30th earnings release on the company’s website, disseminated that information to subscribers through RSS feeds, and filed a Form 8-K with the SEC. Ten minutes after the internet publication and SEC filing, Sun distributed the information through the traditional news wires. Schwartz argues that this approach “will place, for the first time, the general investing public – those with a web browser or a cell phone – on the same footing as those with access to private subscription services.”
Sun’s approach does not really seem to be a “sea change” as Jonathan Schwartz describes it, but perhaps it represents a healthy step in the right direction on public dissemination of important company information. Sun’s new earnings release procedure notably does not cut out the third party news dissemination services, it just gives the RSS subscribers and followers of the Sun website (or the SEC website, for that matter) a little jump on the news. The extra step that Sun is taking can only mean more widespread availability of the information, but it is still hard to say at this point whether web-based disclosure without a news release will ultimately meet the test of being reasonably designed to provide broad, non-exclusionary distribution of the information to the public.
Increasingly, the SEC has been willing to permit website posting of information as a means of making the information publicly available, including: director independence standards in the recently adopted executive compensation rules; committee charters; processes for security holder communications with the board of directors; and code of ethics waivers reportable under Item 5.05 of Form 8-K. Perhaps at some point in the not too distant future, the SEC or its Staff will provide some follow-up on the statements made in the Regulation FD adopting release and recognize how far we have come since 2000 on the use of corporate websites for widespread information dissemination.
Impact of FCPA Investigations on Deals
In this DealLawyers.com podcast, Homer Moyer of Miller & Chevalier describes the latest trends in Foreign Corrupt Practices Act investigations, including:
– Why has there been a rise in FCPA investigations?
– How can these investigations impact a merger or acquisition?
– What can a company considering a deal do to minimize the risk from a potential FCPA investigation?
Early Bird Expires Tomorrow: 3rd Edition of Romeo & Dye Section 16 Treatise
Peter Romeo and Alan Dye are hard at work updating their two-volume Section 16 Treatise. The Treatise is the definitive work in this area with thousands of pages of reference material.
Order your set by tomorrow, August 15th, to receive a pre-publication discount – you can order online or by fax/mail with this order form. The Treatise will be completed and delivered to you in the Fall.
When the new Corp Fin “Compliance and Disclosure Interpretations” were launched back at the beginning of the year, the Staff promised more frequent updates to the Division’s interpretive material. The Staff delivered on that promise last week with some new and revised interpretations on Item 402 of Regulation S-K and Item 404 of Regulation S-K.
For the most part, these new and updated interpretations cover positions that are already pretty well known at this point, including some of the interpretations reflected in the notes that we posted from the 2007 JCEB meeting. As such, it does not appear that this update represents the more comprehensive guidance that everyone has been expecting in advance of the proxy season.
On the Item 404 front, the Staff indicated in new Interpretation 2.12 that, with respect to employment arrangements, the “amount involved in the transaction” would include all compensation paid to the employee, not just salary. This interpretation is consistent with the way the Staff had restated old Telephone Interpretation I.35 in Compliance and Disclosure Interpretation 2.07, where it changed a reference to a child’s “salary” to “compensation.” New Interpretation 2.13 deals with a relatively straightforward application of the rule to a situation where an executive officer’s compensation is not disclosed under Item 404 by operation of Instruction 5.a. to Item 404(a), yet the compensation paid to that executive officer’s immediate family member who works for the company must be disclosed, because the immediate family member does not have the benefit of Instruction 5.a. given that person’s non-executive officer status.
Mark Borges has already posted his analysis of some of the new and revised executive compensation interpretations on his CompensationStandards.com blog, with more to come. One of the notable new executive compensation interpretations is a definitive Staff position on the disclosure of negative numbers arising from amounts recognized for compensation from equity-based awards. For this significant interpretation, Mark notes:
“As you know, given the reporting requirements for equity awards in the Summary Compensation Table, it is possible that, in any given fiscal year, the amount reportable for an award may be a negative number (because the previously reported compensation expense has been reversed under SFAS 123(R), because the award was forfeited during the fiscal year, achievement of a performance-based condition has been determined to be no longer probable, or, in the case of an award accounted for as a liability accounting, the stock price has declined during the year. New Q&A 4.11 asks what portion of an award that was previously expensed and has been reversed under SFAS 123(R) may be deducted from the amount reported in, or shown as a negative number in, the Stock Awards or Option Awards column?
As expected the Staff has taken the position that only the previously expensed portions of awards that were previously reported in the Summary Compensation Table may be reversed in the Summary Compensation Table. As a result, an expensed amount relating to a period or periods before the new rules became effective or, perhaps more importantly, before a person became a named executive officer should not be deducted from the amount reported in, or shown as a negative number in, the Stock Awards or Option Awards column.
While everyone will not agree, this answer seems sensible to me, as it minimizes the distortive effect of negative numbers on the Total Compensation column in the table. In other words, a company gets to reverse an expense amount in the Stock Awards or Option Awards column (and, thus, affect an NEO’s total compensation for the fiscal year) only to the extent that the amount being reversed was previously reported in the SCT (and in total compensation) under the new rules.”
Farewell to Commissioner Campos
This has been a summer of many farewells at the SEC (including my own), and now the greener pastures fever has spread to the tenth floor of SEC headquarters. Last week, Commissioner Roel Campos announced that he will be leaving the Commission. I’ve got to say that Commissioner Campos is truly a class act – it was always a great pleasure to work with him and his very talented staff. His broad range of experience, including work as both a prosecutor and a business executive, was evident whenever he judiciously weighed the pros and cons of matters before the SEC. Investors will be losing a true friend on the Commission when Campos leaves for the private sector.
The departure of Commissioner Campos explains (in part?) a cryptic statement that Chairman Cox made while testifying last month before the Senate Committee on Banking, Housing and Urban Affairs. When pressed about his vote for two opposing approaches to shareholder access issue, Cox stated: “In order to put a rule in place, I’ve got to have a clear idea of what the Commissioners want to do and which Commissioners I’m voting with – which Commissioners by the way are members of the SEC – all of these things somewhat up in the air right now.” If you also consider Commissioner Nazareth’s continued service following an already expired term, there is no doubt that we will see a significant change in SEC dynamics as important rule changes come up for adoption this autumn and into next year.
Access Proposals: Should They Stay or Should They Go?
The Council of Institutional Investors is seeking a straight answer on whether or not the SEC Staff will agree that access proposals may be excluded from company proxy materials under Rule 14a-8(i)(8) (the director election basis for exclusion). In this letter to Chairman Cox, the CII requests clarification on what the Staff intends to do with access proposals now that the SEC has published its release containing both an interpretation of Rule 14a-8(i)(8) and proposed changes to the text of the rule designed to implement that interpretation.
At the open meeting for the rule proposals, Commissioner Campos asked Corp Fin to explain how the Staff would respond to a no-action request seeking to exclude a shareholder access proposal. John White indicated that, based on their current thinking, the Staff would approach any such proposal the same was as they did last season, which apparently was a reference to the Staff’s “no view” response to HP. In his recent Senate testimony, Chairman Cox completely avoided the issue when asked about it by Senator Dodd. Then, in a speech a couple of weeks ago at the Federal Reserve Bank of Chicago, Commissioner Atkins indicated that the interpretive portion of the release “governs our administration of that provision, [and] will provide the necessary clarity and uniformity for both investors and companies alike until an amendment is adopted in the future.”
The CII wants some certainty on how things are going to proceed, which may be all the more important now as the departure of Commissioner Campos raises questions about where things are headed on the shareholder access front.
By the time you read this, this old dude will be off on vacation – so I can afford to be “preachy” and run. To me, the lesson for all of us in the Brocade CEO’s guilty verdict involving option backdating is to not always “go along with the crowd.” Just because “we’ve always done it this way” doesn’t mean it’s right.
I know this sounds obvious – but if you are lucky to live long enough, my bet is that you have at least a 50% shot at coming across circumstances in your professional life where you stop and think about whether you are in a grey area that feels a “little too grey.” It’s not worth your career – not to mention your personal life if it goes too far astray – to take big chances. I have a friend who has more integrity than most – yet, he fell into exactly this type of trap and just emerged from a year in prison (he didn’t concoct nor benefit from the scheme; rather, he found out about it and continued to sign sub-certifications). Sure, he’s happy to now be out, but his career is in tatters and his personal life has changed dramatically.
I think it’s just a matter of time before the next widespread scandal breaks. Will it be Rule 10b5-1 plans? I don’t know – but come hear SEC Enforcement Chief Linda Chatman Thomsen discuss how the SEC Staff is looking at these plans during the “Hot Topics and Practical Guidance Conference: The Corporate Counsel Speaks.” You can catch this Conference in San Francisco on October 10th – or watch it by video webcast on that date (or anytime thereafter). Or take advantage of the “Member Appreciation Package” discount to watch all three of our critical October Conferences online.
In our “Internal Controls” Practice Area, we have a list of filings reporting remediation of material weaknesses. Here is an interesting one that Bob Dow recently brought to my attention: 3d Systems Corp (Form 10-K/A filed 8/2/07). I have seen a couple of other long remediation disclosures, but this one is a lot more organized and includes more details about the company’s remediation plans.
Future of the Legal Profession
Our members asked for it. “Billy Broc” and Dave “The Animal” weigh in on the “Future of the Legal Profession.” The music at the end is appropriate for the mood…
