Recently, the Article 29 Working Party of the European Commission adopted a pan-European approach to Sarbanes-Oxley whistleblowing. It is similar to the French model, but with a broader reach – now U.S. companies operating throughout the EU will now have to comply in other countries beyond France and Germany.
In this podcast, Mark Schreiber of Edwards Angell Palmer & Dodge and Robert Bond of Faegre & Benson discuss these latest developments in the European Union. We have posted a copy of the EU Opinion in our “Whistleblowers” Practice Area.
Record Individual Auditor Penalties Levied by SEC in Xerox Enforcement Action
On Wednesday, the SEC settled an action, related to audits of Xerox, against four former and current KPMG partners, including a former leading partner in the accounting profession. Two auditors each agreed to pay a civil penalty of $150,000 and one agreed to pay $100,000 (and a sanction against a concurring or review partner). These are record payments from an auditor’s own pocket. According to this NY Times article, the SEC previously has obtained fines against seven individual auditors in four cases, none more than $85,000.
These fines are insignificant compared to the penalties already collected related to the Xerox audits. As you might recall, six former Xerox executives agreed in mid-2003 to pay more than $22 million – and Xerox agreed to pay $10 million in April 2002. However, the amounts in this new settlement are notable since they come from someone’s own pocketbook rather than “deep pockets.”
Fannie Mae Report: Over 2600 Pages!
Good grief! Not to be outdone by Richard Breeden’s tomes on WorldCom and Hollinger, the Fannie Mae report released yesterday by former U.S. Senator Warren Rudman and Paul Weiss totals nearly 700 pages – and over 2600 pages when you include the appendices. That’s a whole lot of billables! This 34-page executive summary is even barely manageable for someone with such a short attention span like me. [When I was a kid, I preferred the Classics Comics over the classics themselves. They were easier than Cliffnotes. Still have a few laying around.]
This article from the Washington Post today paints an interesting picture of the former Fannie Mae CFO going ballistic when the company’s audit committee chair had the nerve to call the Fannie Mae internal auditor in ’04 (ie. post-SOX). Sounds like a domineering CFO….
Lynn Turner of Glass Lewis gives us a history lesson: “Often one reads that SOX was hastily created by Congress without much thought. However, that position is usually espoused by people who had – or have – no knowledge of the legislative history, or quite frankly oppose the regulation.
The intial “roots” of Sarbanes-Oxley go back to the ’72-’73 Bear market and scandals such as Penn Central, Equity Funding, National Student Marketing – as well as the corporate corrupt payments and bribes that came to light during the Watergate investigations and other such shenanagins. During that time, Congress held many hearings into corporate governance practices and the accounting profession in general. The Congressional Staff also undertook an investigation and created a Staff Report on the accounting profession.
As a result of these deliberations, legislation was introduced in 1978 on these problems and further hearings were held. However, after the death of one key Congressional backer and another backer decided not to stand for re-election, this legislation stalled. This legislation would have created an oversight body for the accounting profession – similar to today’s PCAOB – and would have strengthened audit committees.
Similar legislation was considered once again by members of Congress, regulators and the profession during the debate over the ’95 tort reform legislation known as PSLRA. However, no legislation was enacted.
In 2002, after 42 further witnesses presented during 10 days of public hearings, the Senate passed a precursor to Sarbanes-Oxley. Then, the House conducted numerous hearings and heard from many witnesses. After the WorldCom scandal came to light, both the Senate and House overwhelmingly adopted Sarbanes-Oxley – which included many similarities to the ’78 legislation (in some places, it is nearly word for word). Not exactly what one might call a ‘rush to judgment.'”
Lynn’s history lesson above is clearly directed towards beating back the recent lawsuit that questions the constitutionality of Sarbanes-Oxley. Many commentators have expressed similar sentiments that this would be a mistake, such as this editorial.
As an aside, it is interesting that the co-plaintiff CPA firm – Beckstead & Watts – that brought this lawsuit (which would disband the PCAOB if successful) was recently the subject of a highly critical PCAOB inspection report. According to the September 2005 report, this small firm was auditing 61 public companies, despite having only one partner and two staffers! And that my friend is not a typo…
[Side note: In relation to my comment yesterday that the mainstream press wouldn’t necessarily be familiar with the plurality voting concept, a member reminded me that no candidate in the 2000, 1996 and 1992 Presidential elections reached a majority. Not quite on point, but a pretty interesting fact. Check out the Presidential voting results from the past 150 years on this cool site.]
Thoughts on CEO Succession Planning
In this podcast, Jo Bennett of Battalia Winston International (an executive search firm) provides some pointers regarding CEO succession planning, including:
– How should boards plan for orderly succession planning?
– How about emergency succession planning?
– Are there any developments recently changing how boards plan?
– Should boards have any written policies regarding planning – or is it more of an informal process?
Add SuperValu and Gannett to the list of companies that have adopted a pure majority voting standard for director elections. They follow in the footsteps of Intel and Dell in recent weeks. Here is SuperValu’s Form 8-K that describes this change; Gannett hasn’t yet filed this change with the SEC, but here is a copy of the company’s restated bylaws (see Article II, Section 6). Interestingly, Gannett adopted a director resignation guideline a few months ago and has now taken this additional step.
As promised, we have announced a new webcast – “Practical Considerations: Implementing a Majority Vote Standard” – during which a panel with “real life” experience will educate us on how to implement a majority vote (and related) standard. You know, the practical stuff – we will leave the debating over whether the majority vote standard is a good idea or not for the academics (although former Chief Justice Veasey will provide an overview of that debate when he discusses the ABA’s report). Representatives from Intel and Dell will tell their stories; as well as Pfizer and Paychex. I am pretty excited about this one!
As an aside, it’s not surprising how much confusion exists over precisely what is a majority vote standard. For example, this article claims that Nike has changed its plurality standard – but I believe Nike merely has adopted a director resignation policy that overlays a plurality standard. Hard to tell since Nike has not made any related SEC filing nor provided any other information on its website – but many of the articles on this subject tell conflicting stories. I don’t blame the reporters as the concept of plurality voting doesn’t exist in our political framework.
Draft of Final Report from SEC’s Small Business Advisory Committee
Yesterday, the SEC’s Advisory Committee on Smaller Public Companies held one of its last meetings to consider a 165-page draft of its final report. Here are the audio archive and written statements related to yesterday’s meeting – and here are comments submitted in response to the original questions posed by the Committee.
Getting Fired? Not a Bad Deal if You’re a CEO
Ethics matter. That supposedly is the gist of the story of the RadioShack CEO being forced to resign. But Floyd Norris of the NY Times provides the gory details in this article about how the board arguably hasn’t done its job to protect the company and shareholders. This Form 8-K includes a copy of the CEO’s resignation agreement.
The departing CEO not only will receive $1 million in quarterly payments – but he has one year to exercise his 1.63 million options (which are underwater today); all in exchange for a 18-month noncompete. This from a company that may very well cease to exist before the 18-month period expires. And you wonder why the company desperately seeks a turnaround? If you or I got fired, I guarantee you that we wouldn’t even get that nice watch.
[My Olympic beef – If I never see Bob Costas again, I will survive. What is with NBC trying to break down our athletes so that they go negative. Enough with trying to create a Shani/Chad war, prodding Apolo Anton Ohno to whine that he “only” got bronze, or condemning Lindsey Jacobellis for “settling” for a silver? Lord knows what they will do to Sasha if she falls tomorrow. These people don’t even get paid – they truly love their sport! I would like to strap all those NBC suits who think that this negative attitude is what the American public wants to hear into a luge and let her rip…]
In Sunday’s NY Times, Gretchen Morgenson’s column delves into the disclosures made in Analog Device’s recent proxy statement that the CEO received $145 million in deferred compensation last year – as Gretchen notes, “a money mountain that is remarkable not only for its size but also for what it included.” The CEO earned interest at a level about 50% above the market rate – and was allowed to defer amounts earned from exercised options in addition to salary and bonus.
Analog Devices is to be commended for voluntarily making this type of disclosure (as we hope all companies will, since the SEC’s proposal likely will be adopted in time to require it next year anyways). But it likely won’t be lost on investors that Analog Devices is in the midst of settling a SEC enforcement action initiated in late 2004 that relates to its compensation practices (i.e. timing of the option grants) – and now they have to consider this disclosure piled on top of that when considering the effectiveness of the company’s compensation committee and board.
Related Party Transactions: What Disclosures You Need to Make Now!
We have posted the transcript from the popular CompensationStandards.com webcast: “Related Party Transactions: What Disclosures You Need to Make Now!”
Cracking 1500!
In our “Q&A Forum,” the rapid pace of questions continues unabated to the point that I am unsure if I can keep up so diligently. We shot past the threshold of 1500 questions last week (with another 275 in the “Rule 144 Q&A Forum“).
Remember! Please feel free to answer any questions in any of the Forums – even if just want to kibitz about (or correct) an answer that is already posted! Your reply can be anonymous or with attribution…
On all of these Forums, the vast majority of questions posed are answered – and the number of questions listed above actually underestimate the real totals as the numerous follow-ups aren’t counted as new questions with our software. And don’t forget that all answers are completely disclaimed!
As noted in this press release, Nasdaq’s application to become a national securities exchange has been approved by the SEC. For those of you listed on Nasdaq, you might wonder if you need to check the “12(b)” box for this year’s 10-K.
As you might recall, companies listed on a national securities exchange must register their securities under Section 12(b) of the ’34 Act – all others register under Section 12(g). So Nasdaq companies historically have been required to register under Section 12(g) because Nasdaq was not an exchange – and these companies received a ’34 Act filing number that begins with a “0-.” In comparison, companies filing under Section 12(b) get a ’34 Act filing number that begins with a “1-.”
The answer depends on when you file and when the Nasdaq’s transition to a national securities exchange becomes final. As noted in the SEC’s approval order, this transition is expected to occur in April – meaning that any companies filing 10-Ks before then don’t have to worry about checking the 12(b) box.
Your next question might be: Do I have to file a Form 8-A to get my new ’34 Act filing number when Nasdaq officially becomes an exchange? This query is addressed in footnote 207 of the SEC’s approval order, which intimates that the Nasdaq is working with the SEC so that when that magical day happens in April, the thousands of Nasdaq companies out there won’t all have to file an 8-A (as an exemptive relief request from Nasdaq to the SEC is expected to do the trick for them). Then, I believe Nasdaq intends to send a new 1934 Act # – as assigned by the SEC – to each of its listed companies.
This topic – and other ones related to the Nasdaq’s transition to an exchange – will be addressed in either the upcoming issue of The Corporate Counsel (expected to be mailed in about 10 days) or the subsequent issue (which is expected to be mailed near the end of March).
Beware: 10-K Trap for the Unwary
I continue to hear from members troubled by the new requirement imposed by the JOBS Act – now embedded in the Internal Revenue Code (and in Revenue Procedure 2005-51) – that requires companies to disclose certain tax penalties in Item 3 (Legal Proceedings) of Form 10-K, regardless of materiality.
The concern comes from the process typically used to prepare a 10-K: to determine whether there have been any regulatory changes since the prior year, one conducts a “form check” on the 10-K by referring to the form itself and Reg S-K and Reg S-X. This new disclosure requirement is nowhere to be found in the form or the SEC’s rules and regulations.
The heightened risk in this area is that companies that forget to add this new required disclosure can be hit with additional penalties! This new requirement is fleshed out in our “Proxy Season Resource Center,” including the numerous checklists from law firms.
New PCAOB/SEC Internal Controls Roundtable
The SEC and PCAOB have announced that they will hold another joint roundtable on internal controls issues on May 10th at the SEC’s HQ in Washington DC. They hope to receive feedback to be addressed during the roundtable – they are seeking written comments on 404 issues by May 1st. They hosted a similar roundtable last spring.
Gotta give some love to SEC Commissioner Paul Atkins for citing one of my podcasts in footnote 3 of his speech in San Diego. Thanks!
Nasdaq to Create A New Tier of Listings
Yesterday, Nasdaq unveiled plans to create a third market “with the highest listing standards in the world.” Nasdaq plans to launch its new “Global Select Market” on July 1st with the top companies already listed on the Nasdaq – apparently, over 1,000 Nasdaq companies qualify for the new Global Select tier (and reportedly 250 of the existing NYSE companies wouldn’t qualify). Details of the listing standards were not released – although the press release states: “The continued listing standards will be the same for the Global Select and the Global Markets.”
In addition, the Nasdaq National Market has been renamed the “NASDAQ Global Market” and the Nasdaq Capital Market (the former Nasdaq Small Cap Market) retains its current name.
Understanding Board Extranets
In this podcast, Greg Radner, Executive Vice President of Thomson Financial’s Corporate Executive Services and Product Manager of BoardLink, provides some insight into the latest technologies that facilitate board communications, including:
– What are you seeing companies do in the area of board communications? What are the major trends?
– What concerns do directors have about going online for board communications?
– What is driving directors and companies to look to this type of solution? Are there legal and compliance issues that online services like this can address?
A month back, I blogged about the case filed against some auditors for allegedly aiding and abetting by doing nothing. Now comes an aspect of that same case that involves lawyers. Keith Bishop reports:
“Although it turned out better for the lawyers this time around, it is still somewhat frightening. I found two aspects of the case to be interesting. First, this is the only case that I can remember that involves claims based on allegedly incorrect Investment Company Act and Investment Adviser Act opinions. The plaintiffs claimed that these incorrect opinions allowed evasion of registration, which presumably would have allowed the SEC to detect the illegal activities of the clients.
Second, the plaintiffs also tried to pin liability on the lawyers for blocking an SEC investigation and delaying provisional relief. The disposition of the case does not involve resolution of the plaintiffs’ factual allegations as the Court of Appeal applied a California statute (ie. SLAPP -Strategic Lawsuit Against Public Participation) that provides for the early dismissal of certain unmeritorious claims concerning a defendant’s constitutionally protected speech or petitioning activity.
An important – but unresolved – question raised by this case is when does advocacy on behalf of a client in an SEC investigation turn into liability to the investors?” We have posted a copy of this court opinion in our “Attorney Responsibility” Practice Area.
A Philosophy for Drafting Agreements
In the latest installment of “Carl’s Corner,” learn from the master, Carl Schneider, about the philosophy you should consider when drafting agreements.
Romeo & Dye Section 16 Deskbook Now Available!
Peter and Alan have just finished their new 2006 Edition of the “Section 16 Deskbook,” which is more comprehensive (and functional) than the annual Section 16 Outline. The Deskbook now takes the Outline’s place as part of the Romeo & Dye Section 16 Annual Service. So if you have renewed your Annual Service, you should receive your copy soon – if not, try a no-risk trial today to receive it pronto!
Happy Valentine’s Day to my Nephew Smitmie. He’ll be 12 ½ on thursday. When I take him shopping, he just wants to buy-out everything in the store. He’s so cute and much smarter than most.
Love,
Aunt Betty”
You’d never guess it from its face, but the bizarre message above actually was the basis for the SEC”s insider trading case filed and settled recently against one William A. Day, a.k.a. “auntbetty1234.”
The SEC’s litigation release explains that on February 14, 2002, London, England-based Smith & Nephew, plc. and Oratec Interventions, Inc. publicly announced that they had entered into an agreement for Smith & Nephew to acquire all outstanding shares of Oratec through a tender offer of $12.50 per share. The SEC says that on February 13, 2002, approximately twenty-four hours before the acquisition was publicly announced, Day made the anonymous posting above using the online alias “auntbetty1234” on an internet message board dedicated to Oratec, the contents of which revealed that he possessed material, nonpublic information regarding the tender offer, including:
– the name of the acquiring company (“Nephew Smitmie”);
– the price per share (“He’ll be 12 ½”);
– the tender offer structure (“buy-out “);
– and the offer announcement date (“Happy Valentine’s Day”).
“Much smarter than most?” I don’t think so.
[Personal note: If you loved “Say Anything” by Cameron Crowe like I did, there is a nice article about Lloyd Dobler in today’s Washington Post. I even went so far as marrying a Diane – and I met her at a “kegger.” Remember the classic line from the movie, “You don’t meet someone like Diane Court at a kegger.” Well, I did!]
Your Upcoming Proxy Disclosures—What You Need to Do Now!
We have posted the transcript from the popular CompensationStandards.com webcast: “Your Upcoming Proxy Disclosures—What You Need to Do Now!”
Web-Based Governance Tools
In this podcast, Diane Brown, Executive Vice President and General Manager of CT and Wolters Kluwer Corporate Legal Services, provides some insight into the latest technologies that facilitate corporate governance, including:
– As technology evolves, what do you see to be corporate secretaries’ top governance and compliance concerns?
– What’s new about the latest version of hCue?
– Why did you decide to add document management capabilities?
– Where do you see hCue going in the future?
On Thursday, a final interagency advisory was collectively issued – by the Treasury Department, Fed Reserve, FDIC, OTS, OCC and NCUA – to inform financial institutions’ boards and senior managers that they should not execute agreements that incorporate unsafe and unsound limitation of liability provisions in their engagements with independent auditors, including:
– The final advisory applies to all audits of financial institutions, regardless of their size, whether they are public or not, and whether the audits are required or voluntary.
– Limitation of liability provisions may weaken an external auditor’s objectivity, impartiality and performance and, thus, reduce the regulatory agencies’ ability to rely on the external audit.
– Limitation of liability provisions may not be consistent with the auditor independence standards of the SEC, PCAOB, and AICPA.
– The inclusion of limitation of liability provisions in external audit engagement letters and other agreements that are inconsistent with the final advisory will generally be considered an unsafe and unsound practice.
Coincidentally, this advisory came out on the same day that the PCAOB Standing Advisory Group debated this topic. I missed the PCAOB’s meeting (and just don’t have the stamina to listen to the meeting’s audio archive after hosting so many webcasts myself over the past few weeks). If you listened, can you let me know if any interesting tidbits came out of it?
Perhaps Exxon Really Needs Stock Options
For a relatively unique view on the state of stock options – at least unique at this point in time – check out Floyd Norris’ column in Friday’s NY Times. Floyd does a great job of making his point that moving away from options and blindly granting restricted stock for well-established companies might be a mistake.
I also liked this quote: “The lesson here may be that while it is a good idea to keep executives from taking the money and running, it is also a good idea to assure they really care whether the stock rises.” The bottom line is that each company has its own circumstances to consider and all companies should not seek to move as a herd. Performance-based options are one of the many choices to go forward with, and given that most of Western Europe would rarely think of using anything else, it is probably time that US practices caught up.
Want to Know What Your House is Worth?
If you are sitting in a pile of snow like me and looking for a lighter moment, go to Zillow.com to review a scary amount of data about your home. It was freaky to see an aerial view of my house pop up instantly on the site – but this beta site also produced an error of over 400% regarding my property taxes. All in all, a solid reminder of just how little privacy we have left…
From Saturday’s NY Times comes this blurb below illustrating why care should be taken to disclose all executive compensation in your proxy disclosures (as the SEC Staff has been urging since Corp Fin Director Alan Beller’s speech at our 1st Annual Executive Compensation Conference). The point being – what will be your board’s reaction to your disclosure being criticized in the media?
“In a federal filing last week, Wachovia disclosed what Wallace D. Malone Jr., the former chief executive of SouthTrust Bank — which Wachovia bought in November 2004 — would receive now that he is retired. At first glance, the payout appeared to be worth some $135 million.
Omitted from the filing were two figures that bring that number up considerably. The first is about $54 million worth of Wachovia shares held in a 401(k) for Mr. Malone; the company put them in a paragraph headed ‘miscellaneous.’ And $8.5 million in accelerated stock options granted in 2005 were disclosed in similarly vague terms.
Mary Eshet, a spokeswoman, said the 401(k) benefit, which the company contributed to, was ‘personal retirement savings — the same benefit available to all employees — and it is not customary to disclose that type of benefit in a filing.’ She said the $8.5 million was not disclosed because it was immaterial.
Brian Foley, a compensation specialist in White Plains who uncovered these omissions, found them intriguing. ‘In whose world,’ he asked, ‘are an ex-executive’s $54 million 401(k) benefit and $8.5 million in options not worth quantifying?'”
If the SEC’s proposals are adopted, we can assume that Mr. Malone will show up next year as one of the departed NEOs for whom disclosure will be required – because his severance will go into the “All Other Compensation Column” and on a total compensation comparison, would put him in the top five. If adopted as proposed, the new rules nearly guarantee that any executive – not just the CEO – who leaves during the year with a large severance package is going to wind up in the following year’s “Summary Compensation Table.”
Transcript Posted: Underwriting Agreements/Opinions After the ’33 Act Reform
We have posted the transcript for last week’s popular webcast: “Underwriting Agreements and Legal Opinions After the ’33 Act Reform.”
