With the elimination of the S-B Forms (and Regulation S-B) probable in the near future, Corp Fin has reorganized the operations group headed by Assistant Director John Reynolds so that it’s now the “Office of Beverages, Apparel and Health Care Services.” John’s group used to handle all the small business filings and was called the “Office of Emerging Growth Companies.” Going forward, small business filings (including SPACs) will be processed in the operations group based on the industry they are in – just like any other company.
Note that Gerry LaPorte’s Office of Small Business Policy continues to exist and serves as the advocate and policy-maker for smaller companies. Our organization chart – as well as Corp Fin’s chart – has been updated.
Corp Fin: Who to Contact with EDGAR, CTRs, FOIA, Etc. Queries
A few months ago, I blogged that Patti Dennis took over Herb Scholl’s old job as Chief of Corp Fin’s Office of Disclosure Support and that Herb’s old office was formerly known as the “Office of EDGAR and Information Analysis.” What I neglected to clarify is that Herb’s old office has been split into two as follows:
– Office of Disclosure Support, which is responsible for EDGAR posting/dissemination of comment letters, confidential treatment and FOIA requests
– Office of Information Technology, whose Chief is Cecile Peters and which answers general EDGAR questions about ’33 Act and ’34 Act filings the Division processes (so this is the office that handles many of the functions that Herb’s OFIS used to do)
SEC Staff Issues SAB 109 on Fair Value Accounting for Written Loan Commitments
Yesterday, Corp Fin and the Chief Accountant jointly issued Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings.” SAB 109 provides the Staff’s views on the accounting for written loan commitments recorded at fair value under GAAP – and the SAB revises and rescinds portions of SAB 105.
As noted in this press release, the SAB revised the Staff’s views on incorporating expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. The SAB retains the Staff’s views on incorporating expected net future cash flows related to internally-developed intangible assets in the fair value measurement of a written loan commitment.
Feeling the heat of a majority vote on a “say-on-pay” proposal, Verizon Communications became the second company to adopt a policy to put its compensation plans to an annual vote by shareholders in 2009. AFLAC became the first company to adopt such a policy earlier this year. Notably Verizon’s “say-on-pay” proposal barely received majority support with 50.18% votes cast supporting it. RiskMetrics reports that a majority vote has been achieved at 7 companies so far this year for “say-on-pay” proposals (e.g. 69% at Activision).
So why is Verizon the first of these 7 companies to adopt a “say-on-pay” policy? I have no inside scoop, but one reason might be that they want to abide by the will of the majority, even if it’s barely a majority. Another reason might be that the company’s executive pay practices have been widely criticized – and publicly so, ranging from being on The Corporate Library’s short “pay-for-failure” list to this Union press release (also see this letter from a group of institutional investors).
And of course, you shouldn’t forget the novel Electronic Shareholder Forum that I blogged about a few months ago. The Forum’s Verizon program was organized with the support of the Association of BellTel Retirees, the source of the Verizon shareholder proposal – and clearly, this Forum had some role in obtaining the majority vote given how close the vote was. Gary Lutin, who is responsible for conducting the Forum (with rigorous standards of independence), speculates that the higher vote may have been attributable to the broader range of investors involved in an open program – that had previously established principles based on shared management and shareholder interests – rather than the confrontational approach of the “say on pay” campaigns currently being waged by others.
So the lesson learned is that companies are really gonna need to learn to leverage – and monitor – the Web better, which ties into the subject of our upcoming November 15th webcast, “Annual Reports: How to Create Them for an Online World.”
[By the way, Verizon also approved a revised policy that more specifically defines the types of payments that will be included in the calculation of a severance payment – and adopted a policy that addresses the independence of its compensation consultant.]
The “Pink Sheets” Speak
Over the past few years, there have been a lot of changes in the pink sheets. In this lengthy podcast, Cromwell Coulson, CEO of the Pink Sheets, describes the latest upgrades to his market, including:
– How have the Pink Sheets gone electronic?
– What are your OTCQX market tiers?
– What are the new Pink Sheets disclosure categories?
– What is the role of securities counsel in the OTCQX market tiers and Pink Sheets disclosure categories?
– What are your thoughts on the SEC’s Rule 144 proposals?
Cromwell is always colorful – and we have more information about what is happening with the Pink Sheets in our “Pink Sheets” Practice Area.
BRIBEline
You may want to check out BRIBEline, which is a secure, multi-lingual site through which companies and individuals can anonymously report bribe demands by answering 9 multiple-choice questions. The site is operated by TRACE, a non-profit membership association of multinationals.
Here is some info from the BRIBEline website: No names are requested or collected, and reports made to BRIBEline are not used for investigations or prosecutions. Instead, the information is aggregated and publicly reported by country and by sector (the customs service, the judiciary, etc.), shining a spotlight on the worst offenders, providing companies with an additional risk mitigation tool, encouraging governments to reduce corruption in their ranks and helping those working to increase transparency and reduce bribery more effectively target their efforts.
From Kevin Miller of Alston & Bird: In a recent decision – Louisiana Muncipal Police Employee’s Retirement System v. Countrywide Financial Corp. – Vice Chancellor Noble of the Delaware Chancery Court addressed “what would appear to be the outer limits of the minimal quantum of evidence a shareholder must adduce in order to demonstrate a credible basis to suspect corporate wrongdoing that would constitute a proper purpose to inspect corporate books and records under 8 Del. C. § 220.”
The only evidence presented to support LAMPERS allegation of corporate misconduct was a statistical correlation suggesting the possibility of backdating or springloading of certain stock options granted to executive officers of Countrywide Financial. The question before the Court was not whether the backdating or springloading of stock options had occurred, but whether LAMPERS had established a credible basis, by “presenting “some evidence,” from which the court could infer possible issues of corporate misconduct warranting further inquiry through a limited inspection of corporate books and records.”
The court expressed concern that by finding in favor of the plaintiff solely on the basis of a mere statistical correlation that it risked “opening a floodgate of demands from shareholders seeking to inspect the books and records of Delaware corporations on the basis of spurious or contrived statistical correlations purporting to suggest the possibility of corporate wrongdoing.” The court emphasized that indiscriminate “fishing expeditions” cannot be tolerated in Section 220 actions, that each case is fact specific and must be individually analyzed to avoid abuse of the Section 220 process.
Ultimately the court concluded that “although statistics alone must not be enough to establish the ultimate issues underlying these cases, i.e., that corporate wrongdoing in fact occurred, the Court discerns no compelling reason why a statistical correlation, if adequately supported by a sound, logical methodology and competent expert testimony, cannot constitute “some evidence” of possible corporate wrongdoing sufficient to permit a shareholder limited access to a narrowly circumscribed set of corporate books and records.”
Nevertheless, the court found that the statistical evidence presented by LAMPERS was just barely sufficient to carry the minimal burden imposed by Delaware law and only permitted a limited inspection of Countrywide Financial’s books and records. We have posted a copy of the opinion in our “Books & Records” Practice Area.
Europe’s “Big Bang”
As described in this article from the Economist, the “Markets in Financial Instruments Directive” took effect yesterday and effectively creates a common market for share, commodities and derivatives trading across 30 countries in Europe. The new rules should have a big impact as it reduces the hold of national stock exchanges over share trading and throws open the field to newer electronic exchanges and even big investment banks.
Required Reading? Nah…
A member found this old memo among his papers and sent it along – it’s scary to see a sampling of your writing from your youth, particularly when its dated before there was widespread use of personal computers. I wonder if the SEC Historical Society has this among it’s gems…
Thanks to Kris Veaco of the Veaco Group, we have posted a second “Pro or Troll?” quiz that will test your knowledge about board agendas. Give it a try (and let me know if you want to compile your own quiz for our amusement)!
Survey: CFOs and Controllers on Governance Issues
Grant Thornton recently conducted a national survey of CFOs and senior comptrollers on some governance issues. Here are the results:
1. Do you believe the roles of CEO and chairman of the board should be independent of each other? Yes – 79%; No – 21 %
2. Should the SEC revise 8-K rules to require reasons for all company dismissals of auditors, for all auditor resignations and for all instances in which the auditor chooses not to stand for reappointment? Yes – 76%; No – 21%
3. Do you believe shareholders in public companies should have greater access to the proxy? Yes – 66%; No – 30%
4. Do you believe that small cap companies who test internal controls (according to Sarbanes-Oxley) will be looked upon more favorably by investors than those who do not test internal controls? Yes – 69%; No – 30%
5. Do you consider the newly issued guidance (AS 5) from the SEC on internal controls and the new audit standard for auditing internal controls to be a significant improvement over previous rules? Yes – 44%; No – 48%
Our November Eminders is Posted!
We have posted the November issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
A few weeks back, I blogged about an executive compensation comment letter that the SEC Staff might have accidentally uploaded. I say “accidentally” because it was pulled off the EDGAR database a few hours after my blog was posted (but note that the comment letter continues to “live on” within the paid databases like Securities Mosaic and 10-K Wizard).
This episode serves as a lesson for companies to monitor their “filings” on the SEC’s website. Here I use the term “filings” pretty broadly, as it now includes content that the SEC Staff might upload (like comment letters) as well as third-party content (like third party tender offers).
[Keith Bishop notes: To someone who grew up in Nevada, October 31 is not Halloween but Nevada Day. We used to get the day off (which worked well with it also being Halloween). The story behind Nevada Day is actually somewhat interesting. Back in 1864, President Lincoln needed support for the 13th Amendment (abolishing slavery). Three more votes from Nevada would help ensure victory. The perceived need for prompt admission was so great that the entire Nevada Constitution (over 18,000 words) was sent by telegraph to Washington D.C. That’s a lot of dots and dashes.
President Lincoln proclaimed Nevada the 36th state on October 31, 1864. Nevada’s new Congressional delegation obliged by voting for the 13th Amendment. Alas, the Nevada Legislature has sacrificed tradition on the alter of convenience and moved observance to Nevada Day to the last Friday in October. NRS 236.015(1). Keith wrote a treatise on Nevada Law of Corporations & Business Organizations (now out of print).]
Compensation Arrangements for Private Equity Deals
Tune in tomorrow for this DealLawyers.com webcast – “Compensation Arrangements for Private Equity Deals” – to hear Jeremy Goldstein of Wachtell Lipton and Shawn Hamilton and Craig Rowley of the Hay Group discuss:
– What are the latest compensation trends and developments when companies are purchased by private equity funds?
– What compensation issues should a target board consider when it’s approached by a private equity fund?
– What type of due diligence should be conducted into a target’s compensation plans by a potential acquiror?
– How should elements of pay be re-balanced and re-mixed when going private?
Please print out these course materials before catching the program.
“We are Overpaid,” Say US Executives
Here is a recent article from the Financial Times about internal pay equity, etc.:
“Most US corporate leaders believe chief executives are overpaid and do not provide value for money for their companies, according to a study that will embolden critics of excessive compensation. The findings – to be published today by the National Association of Corporate Directors – are likely to strengthen calls by investors and politicians, including George W. Bush, US president, for restraint on executive pay at a time of growing income inequality in the US.
Top executives’ criticism of their peers’ compensation levels could also encourage activist investors and hedge funds to target underperforming companies with highly-paid leaders at shareholder meetings. Four out of six chief executives or company presidents polled by the NACD in July and August said the compensation of top executives was high relative to their performance.
Only 2.2 per cent of the nearly 70 chief executives and presidents involved in the survey said compensation was too low, while a third deemed it “just right”. Their views were backed up by outside directors, with more than 80 per cent of them saying chief executives were overpaid.
“There is an overall realisation that executive compensation is an area that boards and management are struggling with,” said Peter Gleason, chief operating officer of the NACD. The issue is particularly sensitive because the gap between rich and poor in America has reached its widest point in more than 60 years.
Figures released last week showed the share of national income claimed by the wealthiest 1 per cent of Americans had reached 21.2 per cent – a postwar record – partly because of booming company profits. Mr Bush last week told The Wall Street Journal that he thought some executive compensation was excessive and that some boards needed to improve their oversight of this.
Nearly 60 per cent of the directors polled by the NACD said the reason for excessive pay packages was the absence of objective ways to measure an executive’s performance. Nearly half criticised the use of options and equity awards that reward executives when the company’s share price goes up, rather than when its operations improve. Investors have become more vocal in attacking what they often call “pay for failure” – large severance packages awarded to ousted chief executives.”
Back in August, a federal district court ordered Merck & Co. to produce thousands of internal electronic documents which the company had vigorously argued were protected by the attorney-client privilege, and held that communications by a lawyer acting in a business capacity are not privileged. This ruling may foreshadow a trend that threatens electronic communications between corporate and in-house counsel, as well as the modern role of corporate counsel in heavily regulated industries. For more info, see this memo from our “Attorney-Client Privilege” Practice Area.
Associate Salary Survey Shows Many Top $200K
Typically, we don’t cover this type of topic in this blog (as it’s well-covered in many others) – but this American Lawyer survey is a jaw dropper…
Over the past five years, the governance movement surely has grown beyond anyone’s imagination. In fact, it has grown so much that the predictable backlash against Sarbanes-Oxley has gained traction on Capitol Hill. However, governance has grown far beyond the dicates of Sarbanes-Oxley.
“Governance” is now applied to areas far beyond the boardroom. For example, here are a number of Capability Maturity Models that are supposed to represent governance models of various business processes. There even is a reference to broccoli!
This is what has happened to governance. It has become a buzzword – many use the term indiscriminately, attaching adjectives to it (such as IT Governance, Project Governance, etc.). Quite a few governance definitions have started to take on a life of their own, without any connection to the original meaning and usage – so that it gets to the point where one can’t assume that everyone is talking about the same thing, even when using the same term.
This is not happening so much for those of us dealing with corporate board governance; rather, it’s happening in those areas where “governance” really doesn’t exist, yet has become a part of the daily vernacular. I’m not sure this really is all that bad, I just worry about those processing my broccoli are fussing too much over it…
Much thanks to independent election inspector Carl Hagberg, who created a Sample Affidavit of Distribution in Word (that we have posted in our “E-Proxy” Practice Area). This Affidavit can serve as a quasi-checklist of all the things that need to be done to ensure that all classes of shareholders will be covered for those using voluntary e-proxy. It’s a draft sample – any comments are welcome by Carl or myself!
The Latest E-Proxy Examples
I’ve got e-proxy on the mind as I prepare to talk about the topic during the Association of Corporate Counsel’s annual conference in Chicago. With nearly 30 companies trying voluntary e-proxy so far, certain trends are becoming evident – some of these will be discussed during our upcoming November 15th webcast: “Annual Reports: How to Create Them for an Online World.”
Taking a quick swing through the IR web pages of some of those companies doing e-proxy reveals that many of them explain very little to shareholders about what they are doing. Not only is that not fair to shareholders in my opinion, that will not help the company reach quorum.
Here are examples of what some larger companies are doing online to explain e-proxy to shareholders:
– Sun Microsystems issued a press release announcing it is using voluntary e-proxy. Sun’s page about it’s annual reports also explains that it is using e-proxy. So far, this is the best online communication to shareholders I’ve seen.
– Nike posted this page that explains e-proxy – the link to this page is called “Electronic Delivery of Shareholder Materials,” in contrast to SaraLee’s “Order Hardcopy.”
– Microsoft does something similar to Nike if you scroll down a little on this page (except I can’t seem to get into that page as the link goes to a .docx file, which is the latest Word format that not many folks have yet – fyi, Microsoft has posted a compatibility pack for XP and 2003 versions of Word, Excel and PowerPoint that allows them to open and read the newest file formats).
Some other companies really confused me – their IR web pages said they are collecting consents for e-delivery; yet their proxy materials indicate they are using e-proxy. Of course, they could be doing both – but if so, they should explain that when they solicit consents.
As many more voluntary e-proxy’ers are expected as we near the calendar year-end, we hopefully will see some more descriptive explanations of what companies are doing – shoot me an email if you see something innovative. I’ll continue to post examples of what companies are doing in our “E-Proxy” Practice Area.
Twenty Years: The ’87 Market Break
This recent NY Times column gave me a chuckle. Joe Nocera recounts where he was when the market sliced 23% off the S&P 500 in a day (do the math to figure out what that means in today’s terms – the Dow dropping 3500 points in a day! About 10x the drop that happened on October 19th this year).
I had a similar flashback because I was on a law school field trip that day, visiting the Philadelphia Stock Exchange. The President of the Exchange was showing us around and began to cry because of the millions he was losing as he talked. Given that I worked at a sandwich shop in addition to a clerkship to make ends meet, I wasn’t moved much – but it still was quite a sight (and I’m sure he made it all back within a few weeks).
A year later, I started my first attorney job as a novice examiner in Corp Fin – and within two weeks of my start date, the SEC held a huge keg party at a local bar to celebrate the anniversary of the market break. That sure don’t happen anymore..
Over the past few years, the SEC has brought actions against several individuals and hedge funds for federal securities law violations arising from short selling in connection with PIPE (private investment in public equity) offerings. Recently, the SEC Staff has been sending inquiries to hedge funds that invest in PIPEs, requesting the records of client accounts and PIPE transactions – so more actions are no doubt likely. Most of the SEC actions to date have settled, but a few are winding their way through the courts.
As noted in this Bloomberg article and this over-the-top press release issued yesterday by the defendant, one PIPEs case has met with some resistance in the US District Court for the Western District of North Carolina. In the case of SEC v. John F. Mangan, Jr. and Hugh L. McColl, III, the SEC charged Mangan, a former Friedman, Billings, Ramsey & Co. broker, with unlawful insider trading by short selling CompuDyne Corp. securities prior to the public announcement of a PIPE offering, and with engaging in the unregistered sale of securities in violation of Securities Act Section 5. The district court judge dismissed the Section 5 claim, but is allowing the case to proceed on the insider trading allegations.
Mangan was alleged to have shorted some CompuDyne securities after public announcement of the PIPE and prior to the filing or effectiveness of a resale registration statement for the PIPE shares. Mangan did not borrow or otherwise obtain stock to cover at the time of the short sales. Mangan then covered the short sales with shares purchased in the PIPE, after the registration statement was declared effective. The SEC has for many years taken the position Section 5 can be violated in a situation where short sales are made prior to the effective date of a registration statement of securities of the same class as those sold short, and then those short sales are covered (as planned at the time of sale) with shares obtained in the registered offering. [See Release No. 33-5323 (Oct. 16, 1972) and Release No. 34-10636 (Feb. 11, 1974).] In the SEC’s view, the two-step process that Mangan is alleged to have conducted is one unregistered public distribution where the PIPE shares are sold for Section 5 purposes at the time of the short sales.
The SEC Enforcement Staff has indicated that it may appeal the ruling in the Mangan case and that it will definitely proceed with the insider trading portion of the case. This “win” for the defendant on the Section 5 theory may, however, make it harder for the SEC to reach settlements in any other similar cases that are out there.
Shareholder Proposals: Some Helpful Tips for the Upcoming Season
It is hard for me to believe that the shareholder proposal season is rapidly approaching and, for many, is already well under way. This will be the first shareholder proposal season in quite some time where Marty Dunn will not be calling the shots on the Corp Fin no-action letters, and it remains to be seen whether the changing of the guard at the SEC will impact the process and results.
Marty and some of his colleagues at O’Melveny & Myers recently offered up some useful guidance on the “don’ts” you want to keep in mind when dealing with proponents and the Staff. These are the types of substantive and procedural things that the Staff sees over and over again each proxy season. Some of the procedural missteps to avoid are:
1. If you are going to argue that the proponent did not satisfy a procedural requirement of Rule 14a-8, don’t send the proponent a notice that will not stand up to Staff scrutiny – there is lots of guidance out there on what serves as adequate notice.
2. If a proponent does not meet the procedural requirements of the rule, but you failed to send a deficiency notice as required by Rule 14a-8(f), don’t argue that Rule 14a-8(i)(3) permits exclusion of the proposal because the failure to meet the procedural requirements of Rule 14a-8 is a violation of the proxy rules.
3. If you have several no-action requests to submit, don’t wait to submit them all at the same time – submitting them collectively will inevitably result in unnecessary delays.
4. If you receive correspondence from a proponent, don’t hold it back from the Staff.
5. If you think that Staff is not going to agree with your request, don’t include language indicating that the request constitutes an automatic right to appeal or that the Staff should contact the company if it does not agree with the argument for exclusion.
6. If you receive a request from the proponent to withdraw the proposal, don’t delay in forwarding that letter to the Staff, along with a letter withdrawing the no-action request.
I think it is funny that we are starting to see some crazy company names emerging from Silicon Valley these days, as start-ups proliferate and venture capital funding is again flowing freely. This LA Times article notes that, in an effort to get noticed in the Web 2.0 world, entrepreneurs are rolling out names like Abazab, Wakoopa, Squidoo and Xobni. I’m not even sure how to pronounce that last one, but it is “inbox” spelled backwards. In short, everyone wants to be the next Google.
Of course the federal securities laws have to throw cold water on the naming game fun. The instruction to Item 501(b)(1) of Regulation S-K indicates that if you have a name that is similar to a well-known company, or if your name indicates a line of business in which you are not engaged or only engaged to a limited extent, then you have to include disclosure necessary to avoid any misleading inference or, in the worst case, change your name. When I was reviewing filings in Corp Fin, particularly in the late ‘90s, we would raise a comment based on that Instruction more often than you might expect. Fortunately, I don’t think anyone ever had to actually change their name.
As part of the continuing efforts to address the competitiveness of the US financial markets, the Treasury Department announced that it is seeking public comment on improving the regulatory structure for the financial system. While a large portion of the request for comments is oriented toward regulation of financial institutions such as banks and insurance companies, some of the questions particularly target the split jurisdiction of the SEC and CFTC, as well as the role of the states in the securities and futures regulatory framework. The specific questions raised on these topics are:
– Is there a continued rationale for distinguishing between securities and futures products and their respective intermediaries?
– Is there a continued rationale for having separate regulators for these types of financial products and institutions?
– What type of regulation would be optimal for firms that provide financial services related to securities and futures products? Should this regulation be driven by the need to protect customers or by the broader issues of market integrity and financial system stability?
– What is the optimal role for the states in securities and futures regulation?
– What are the key consumer/investor protection elements associated with products offered by securities and futures firms? Should there be a regulatory distinction among retail, institutional, wholesale, commercial, and hedging customers?
– Would it be useful to apply some of the principles of the Commodity Futures Modernization Act of 2000 to the securities regulatory regime? Is a tiered system of regulation appropriate? Is it appropriate to make distinctions based on the relative sophistication of the market participants and/or the integrity of the market?
Comments on these and the other broad questions included in the release are due to the Treasury by November 21.
This is obviously not the first time that the jurisdictional divide between securities and futures has been raised as an issue, but I think now more than ever the debate is worth having – and settling. Based on my own experience at the SEC, I know that the uncontrollable march of financial innovation is constantly testing this artificial regulatory divide, making life difficult for those who seek to make real strides in developing potentially beneficial financial products for institutions and consumers.
Unfortunately, as noted in this Wall Street Journal opinion piece authored by William Brodsky of the CBOE, combining the SEC and the CFTC (or creating a new regulator of financial products) has been hampered by Congressional turf battles, given that different committees oversee these agencies. Brodsky notes that the problems with the split jurisdiction are highlighted by a proposal that the CBOE filed with the SEC in June 2005 to trade options on funds that invest in gold, which has gone nowhere as the SEC and CFTC are still trying to decide who should regulate the product.
There is no doubt that Treasury is taking on some big issues with its competitiveness improvement efforts. As the clock ticks down on this Administration, it will be interesting to see if any progress can be made on some of these critically important issues.
Rule 10b5-1 Plans: Countrywide CEO’s Sales in the Spotlight
At our conference entitled “Hot Topics and Practical Guidance: The Corporate Counsel Speaks,” SEC Enforcement Director Linda Chatman Thomsen spoke about, among other things, the SEC Staff’s interest in the use of Rule 10b5-1 trading plans for illegitimate purposes. Her speech was followed by an excellent panel consisting of Linda, Alan Dye and Ron Mueller, who discussed the ins and outs of using Rule 10b5-1 plans. If you missed the conference, it is not too late – you can still register to access the archived video.
At the time of Linda Thomsen’s remarks earlier this month, there was no evidence that the Staff’s interest in Rule 10b5-1 plans had resulted in any active SEC investigations of insider sales through these plans. That has now changed, with reports surfacing of an informal inquiry looking into stock sales by Countrywide CEO Angelo Mozilo. As noted in this NY Times article, an anonymous source confirmed the existence of the inquiry and its focus on Mozilo’s trades. The article notes: “Since October 2006, Mr. Mozilo has twice raised the number of shares that could be sold under his plans. In December 2006, when Countrywide shares were trading at $40.50, he increased the number of shares to be sold each month to 465,000 from 350,000. Then in February, when shares hit a high of $45.03, he increased the number of shares sold each month to 580,000. Shares closed down 74 cents yesterday, to $17.35. This month, the state treasurer of North Carolina, Richard Moore, wrote to the S.E.C. chairman, Christopher Cox, and questioned the changes Mr. Mozilo made to his selling program. ‘The timing of these sales and the changes to the trading plans raise serious questions about whether this is a mere coincidence,’ Mr. Moore wrote.”
Earlier this month, Countrywide put out this unusual press release defending Mozilo’s Rule 10b5-1 trades. The controversy over Mozilo’s stock sales under his 10b5-1 plan is not new – in an earnings call back in July, an analyst questioned Mozilo’s sales under his 10b5-1 plan while Countrywide was buying back its stock at the same time.
Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing
We have posted the transcript from our recent DealLawyers.com webcast: “Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing.”
Disagreement among the SEC’s Commissioners on the topic of corporate penalties appears to continue, despite the recent efforts directed at improving the situation. As Broc noted in the blog earlier this year, the SEC has changed its internal policies so that Enforcement lawyers must seek approval from the Commissioners before they begin settlement talks that involve fining corporations. That shift followed on the heels of a January 2006 policy statement outlining the analytical steps that the SEC follows in deciding whether to levy penalties against companies.
Despite these efforts, the much hoped for unanimity on penalties appears elusive. Along with last week’s announcement of the $35 million penalty obtained in the settlement of proceedings against Nortel Networks came a relatively unusual “real time” dissent from Commission Paul Atkins. As noted in this Bloomberg article, Commissioner Atkins issued a statement calling the $35 million penalty a “public relations gesture” and noting that the settlement “does nothing to further the SEC’s objectives” of protecting investors and maintaining far, orderly and efficient markets. The Commissioner also noted that the penalty “will be paid by Nortel shareholders, many of whom were victims of the financial fraud.”
While it is not surprising that Commissioner Atkins would oppose the terms of this settlement, it is certainly unusual to see this level of public dissent around the time of announcing the Commission-approved deal.
PCAOB Reports on Inspections of Smaller Audit Firms
Earlier this week, the PCAOB released a report on common issues identified in inspections of US audit firms that audited 100 or fewer public companies. The report is based on inspections conducted from 2004 through 2006, and it does not identify any particular firms. In the report, the PCAOB outlines significant areas where it believes firms should seek to ensure compliance with applicable standards and requirements.
The specific areas addressed in the report are:
– Revenue
– Related-Party Transactions
– Equity Transactions
– Business Combinations and Impairment of Assets
– Going-Concern Considerations
– Loans and Accounts Receivable (including allowance accounts)
– Service Organizations
– Use of Other Auditors
– Use of the Work of Specialists
– Independence
– Concurring Partner Review
The PCAOB notes that many of the smaller firms that were the subject of inspections had taken steps to address quality control deficiencies, including improving their methodologies through the use of audit programs and practice aids, arranging for annual technical training, improving the availability of appropriate technical resources, encouraging personnel to make appropriate use of external resources and enhancing their own internal monitoring of audit performance. For more analysis of the PCAOB’s report, check out Kevin LaCroix’s “D&O Diary” Blog.
Separately, the PCAOB announced that it had approved two amendments to PCAOB Rule 4003, which addresses the minimum frequency with which the PCAOB conducts inspections of different categories of registered public accounting firms. Specifically, the amendments would eliminate a requirement that the PCAOB regularly inspect each registered public accounting firm that plays a “substantial role” in audits but does not issue audit reports. Further, the amendments would eliminate the requirement to inspect each registered public accounting firm that issues an audit report, even if the firm does not regularly issue audit reports. These amendments to Rule 4003 will decrease the PCAOB’s inspection burden in low-risk areas, while maintaining the discretion to inspect any firms in these categories if necessary.
Test Your Section 16 Knowledge: Are You a Pro or Troll?
We have posted one of our popular quizzes – “Pro” or “Troll”? Test Your Knowledge – on Section16.net. 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”), except one of the questions offers answers of “Tuesday” or “Wednesday.” Then, you will be told whether you were correct—and we also provide some analysis if you wish to learn more about each answer.
For a Section 16 geek like myself, this one is great fun!
