Yesterday, the plaintiffs pulled out of the proposed settlement under which 10 former WorldCom directors would personally pay $18 million of a $54 million settlement. New York State Comptroller Alan Hevesi, the lead plaintiff, announced that the plaintiffs were pulling out of the deal after U.S. District Judge Cote struck down a key component of the agreement yesterday.
Judge Cote ruled in this order that any jury award resulting from the February 28 trial could not be reduced using a formula that would have taken into account the limited finances of the directors who settled. Some investment banks that were defendants in the case had objected to the settlement, telling the Judge that they would be unfairly prejudiced unless all the defendants stood trial together.
Here is a more technical explanation from Mike Holliday: The Stipulation of Settlement has a condition that the amount of the reduction of any verdict or judgment against a non-settling defendant in the action be limited to the greater of the “Settlement Credit” or the “Contribution Credit.” The “Settlement Credit” is simply the total settlement amount of $54 million to be paid by the settling directors ($18 million) and the insurers ($36 million) plus any interest. The other prong of the maximum reduction is more complicated. It would be the contribution claim non-settling defendants would be entitled to assert against settling directors equal to the aggregate proportionate shares of liability of settling directors (determined by the Court), BUT ADJUSTED to reflect any limitation on the financial capability of settling directors to pay their proportionate shares of liability. Absent Court approval of this provision relating to the Settling Director’s ability to pay, the Lead Plaintiff is entitled to terminate the Settlement.
Judge Cote’s order denied the application to approve the judgment reduction formula insofar as the “Contribution Credit” is “adjusted to reflect any limitation on the financial capability of the Settling Director Defendants, ” as a violation of 15 U.S.C. Sec. 78u-4(f)(7)(B)(i). There will be an opinion to follow that will explain the reasons.
Under Subsection (f)(7)(B), which is part of the Private Securities Litigation Reform Act, where a defendant (covered by the Subsection) enters into a settlement prior to final verdict or judgment, the verdict or judgment is to be reduced by the greater of (i) “an amount that corresponds to the percentage of responsibility of” that settling defendant; or (ii) “the amount paid to the plaintiff by” that settling defendant. In this case, the provision in question in the Settlement could have reduced the amount in (i). That could decrease the amount by which any final verdict or judgment is reduced, which would have the effect of increasing the amount of any final verdict or judgement required to be paid by non-settling defendants.
Yesterday, the NYSE released the 142-page Webb Report that details how Dick Grasso was paid when he ran the NYSE. Here is Grasso’s response.
The NYSE released the Webb report – named for attorney Daniel Webb who compiled it – after a judge overseeing New York Attorney General Eliot Spitzer’s suit against Grasso ruled last week that it was not subject to attorney-client privilege. Here are some comments on the report culled from a longer article in the Washington Post:
– The report in many ways tracks Spitzer’s complaint, although it offers no legal conclusions or analysis. The report generally concludes that Grasso’s pay was unreasonable and that Grasso had undue influence over his own compensation, chiefly by controlling appointments to the board and the compensation committee.
– The report concludes that Grasso’s pay was incorrectly based on compensation for chief executives at much larger, publicly traded companies. And it says the composition of the board and the compensation committee changed too often for directors to attain full understanding of the nature of Grasso’s complex pay arrangements.
– The report says Grasso’s executive assistant was paid $240,000 per year for the last three years of Grasso’s tenure and that Grasso used the services of two drivers on the NYSE payroll, each of whom earned about $130,000 per year.
I will blog further after I analyze the report myself. It will be interesting to see what Michael Melbinger blogs on CompensationStandards.com, since he is with the law firm, Winston & Strawn, that prepared the report.
Musical Lawyers and Accountants for Scrushy
Yesterday’s WSJ article about how the Scrushy defense team has rotated extensively over the past 20 months is one of the more fascinating “reveals” I have read lately.
My favorite quote from the article is from my pal Mike Mulligan, who served as a foresenic accountant for a period of time for the defense team: “I’ve never seen a case of this profile involve a shift from law firm to law firm and accounting firm to accounting firm,” said accountant Michael Mulligan, the executive director of FCL Advisors International LLC, Great Falls, Va., who was replaced as a forensic accountant on Mr. Scrushy’s team. The turnover, he added, “in some ways is even bizarre.”
On CompensationStandards.com, the transcript is available for the popular webcast: “What NOW Needs to Be Disclosed in the Proxy Statement.” Since the webcast lasted well over 2 hours, it is quite a sizable transcript.
Summary Sheets for NEO Compensation
On CompensationStandards.com, I answered a question yesterday in the Q&A Forum that has been asked more than once. The question was: In view of recent SEC guidance, we’re considering filing as exhibits to our next periodic report a summary sheet for comp arrangements for each NEO. Are others considering this as well? Has anyone seen examples filed for other companies? What categories need covered and at what level of detail?
After reading Alan Dye’s remarks from the transcript noted above, I answered that FAQ 5 is pretty clear regarding directors – and directors and NEOs are treated the same under both 8-K and Item 601, so I don’t know how you escape the conclusion (unless you just disagree with the Staff, as we hear some people do).
I like what American Express filed on a Form 8-K on January 28th. It includes details about salary levels and option and restricted stock awards for both 2005 and 2004; bonus levels for 2004 and 2003; LTIP payouts for recent performance periods – as well as what the directors fees will be for 2005. I imagine this is what some of the summary sheets might look like.
The Final Standard: Option Expensing is Here – Are You Ready?
Tomorrow, the NASPP will host a webcast – “The Final Standard: Option Expensing is Here – Are You Ready?” – featuring Mike Crooch, Board Member, FASB; Mike Tovey, Project Manager, FASB; Carlo Pippolo, Partner, Ernst & Young; and Ellie Kehmeier, Tax Director, Deloitte & Touche.
And the NASPP is nearly ready to announce two subsequent webcasts regarding equity planning in the wake of option expensing to be held during March and April.
The Oakland Tribune reports that a former E&Y partner – among the first charged with document destruction under SOX – has been sentenced to a year in federal prison for his role in falsifying or destroying documents to impede a SEC probe.
In pleading guilty in October, the partner acknowledged that in April 2003 he testified under oath to the SEC regarding audit work his team had performed on NextCard (a company whose collapse the SEC was investigating) and he didn’t bother to mention that documents related to NextCard’s audit and quarterly working papers had been altered, with considerable parts deleted in November 2001. The partner later admitted this was a cover-up meant to impede the SEC’s probe.
The comment period for the Securities Act Reform Project was originally scheduled to close today. There are reports that the comment period will be extended to February 15 – although no extension has been posted on the SEC website yet.
Also, The Financial Times is reporting that there has been opposition by some commenters to the proposal to open up internet roadshows to retail investors. Several fund managers have told the SEC that the proposal could damage the funds’ businesses – they appear to be concerned that either the companies will stop doing the roadshows or that the companies will put less informative roadshows together if they will have to file the information with the SEC. NetRoadShow, a provider of online roadroads to financial firms, has solicited comments in opposition to this proposal on its website.
Former Auditor Sentenced to One Year
One of the first auditing professionals charged with destroying documents in violation of the Sarbanes-Oxley Act has been sentenced to a year in federal prison and ordered to pay a $5,000 fine. A former partner in the San Francisco office of Ernst & Young, Thomas Trauger, plead guilty last October to tampering with the financial documents of online credit card issuer NextCard Inc. He admitted to altering audit records after the SEC raised doubts about the company’s accounting practices.
NASDAQ Non-Compliant Companies
Each trading day, NASDAQ publishes a list of companies that are non-compliant with its continued listing standards. The list can be found here. A company is added to the list five business days after NASDAQ notifies it of the deficiency and is removed from the list one business day after NASDAQ determines that it has regained compliance, or the company no longer trades on NASDAQ.
NASDAQ’s continued listing standards can be found here.
Yesterday, Rep. John D. Dingell, Ranking Member of the House Committee on Energy and Commerce, released a “commitment letter” from the GAO agreeing to perform a study and submit a report by June 17, 2005 on the SEC’s administration and enforcement of PUCHA. The work was requested by Reps. Dingell and Edward J. Markey in letters dated April 21, 2004 and August 18, 2004, partly in response to Enron’s collapse. In particular, the SEC’s December 2003 opinion denying Enron’s application for an exemption (two years after Enron filed for bankruptcy) appears to have troubled the Congressmen.
The GAO study will assess:
(1) the extent to which the SEC’s Office of Public Utility Regulation (OPUR) reviews registered holding companies and the results of the reviews;
(2) the extent to which OPUR reviews claims of exemption–filed as either self-certifications or applications for SEC order and the results of the reviews;
(3) OPUR’s process for issuing no-action letters; and
(4) how OPUR determines whether companies have a controlling influence in public utilities or public utility holding companies.
February Eminders Are Up!
Check out our latest edition of the monthly Eminders newsletter. If you wish to receive it via email, simply place your email address into this form.
The announcement on January 21 that Gemstar’s former General Counsel, Jonathan Orlick, will pay a fine of $306,000 and be barred from being a director or officer of a public company for 10 years is just the latest in a growing trend of SEC Enforcement actions that end with general counsels agreeing to fines and disgorgements.
In September 2004, Electro Scientific Industries, Inc.’s former General Counsel, John E. Isselmann, Jr., agreed to pay $50,000 to settle the SEC action against him. And in May 2004, former General Counsel for Warnaco, Stanley Silverstein, agreed to pay $165,000 to settle the SEC action against him.
As we blogged on January 14, SEC Enforcement Director Stephen Cutler addressed the increased interest in lawyers in a September 2004 speech by referring to the Enforcement Division’s “access theory” from the 1970s: if you ensure good behavior by those who control “access” to the capital markets, then you can achieve more than you would by going after every bad actor. At that time, Cutler noted that the Staff had named lawyers as respondents or defendants in more than 30 of the enforcement actions in the past two years, which were evenly split between in-house and outside counsel.
Cutler confirmed the Staff’s continuing interest in the behavior of lawyers in a December 2004 speech by noting that the Staff is looking for intentional, knowing misconduct on the part of lawyers. Additionally, he said that the Staff was “also looking hard at situations in which lawyer misconduct meets statutory scienter requirements that are short of actual knowledge.”
Director Compensation Info
Be sure to check out our most recent “Inside Track with Broc” – an interview with Paul Hodgson, Senior Research Associate of The Corporate Library. The interview provides helpful information on The Corporate Library’s Director Compensation Database.
Today, Alan Dye, Editor of Section16.net and Partner at Hogan & Hartson, will host his Annual Q&A on Section 16, starting at 4:00 eastern. Join Alan as he discusses:
– What are the latest issues that have arisen and how to resolve them
– What novel disclosure considerations exist for this proxy season
– How to tweak your compliance program
– Answers to the many questions you posed to Alan in advance of the program
Also on Section16.net, take a look at Alan’s updated popular year-end tools.
Foreign Filers’ Concerns to Be Addressed
The SEC is seeking ways to ease the burden on foreign companies of the (relatively) new U.S. corporate governance rules. Yesterday, in a speech at the London School of Economics, Chairman Donaldson said that:
– He has asked the Staff to consider whether to recommend that the Commission delay the effective date for internal controls for non-U.S. companies. International companies with U.S. listings are currently required to meet the requirements from July 15 onwards.
– He expects that the Commission will consider whether there should be a new approach to the deregistration process for foreign private issuers, as many do not feel prepared to meet the U.S. requirements.
– He expects that the Commission will consider adopting the proposed amendments to the reporting requirements that would facilitate foreign private issuers’ conversion to IFRS.
NYSE Year-End Reminders
Last week, the NYSE sent a letter to listed companies, reminding them of their obligations regarding notifications to the Exchange, as well as other filing requirements.
Thanks to Amy Seidel of Faegre & Benson, we have posted notes from Northwestern’s San Diego conference held late last week.
Among the many interesting points made, SEC Chief Accountant Don Nicholaisen stated that on the FASB’s option expensing standard – FAS 123r – the SEC has been asked to provide implementation guidance.
And on DealLawyers.com, we have posted notes from the M&A panel at the San Diego conference.
The Latest on Director Compensation
On TheCorporateCounsel.net, we have been trying to keep the “Director Compensation” Practice Area up-to-date with survey data. And this interesting interview with Paul Hodgson on Director Compensation Database should help those grappling with director pay levels too.
Also, on CompensationStandards.com, we have a “Director Compensation” Practice Area devoted to disclosure about director pay.
A Tribute to My Grandma
I will be working remotely the remainder of the week, as I attend the funeral of my 96 year-old grandma in Jacksonville. A woman with boundless energy – sneaking into Cuba purely to go dancing when she was in her 70s – Grandma’s passion was family, with 11 children of her own. She loved to recite the number of great-grandchildren and great-great-grandchildren she had; both numbering over 100. Now that is “old school” living and a full life!
From there, I am off to Orlando to speak at the ASCS’ Annual Essentials conference. By the way, the ASCS has officially changed its name to the “Society of Corporate Secretaries & Governance Professionals,” also known as the “Society.”
A number of members have been sending me their complaints about the internal controls process. Here are a handful:
– There appears to be a lot of fuzziness on the part of independent auditors regarding the lines between what is a material weakness versus significant deficiency.
– We’ve had a number of clients try to get us involved in their disputes with the independent auditors – for example, asking us to call the SEC, PCAOB and other accounting firms to try to check the positions being taken by their current auditors.
– When we ask the independent auditors about the specific basis for a determination of specific significant deficiencies or material weaknesses, they reply that it is part of “best practices.” It gives us pause that a failure to follow someone’s notion of best practices might be tantamount to a significant deficiency or material weakness.
– We just had a client tell us that their auditor told them that using the company’s in-house legal department/counsel as the recipient of “whistleblower” complaints is a significant deficiency. This doesn’t make sense (and it would cause a large percentage of companies to have a significant deficiency, since many companies use their GC or other in house counsel as the clearinghouse for whistleblower complaints).
– Our independent auditor just told us that we have significant deficiencies for failing to run a background investigation (covering education, employment
history and criminal records) for all senior management as well as all
employees who will be involved in accounting or financial reporting
oversight. In addition, they cited us for failing to have an internal audit function.
I think companies are going to feel sandbagged by these and other positions the accounting firms take and that they will be particularly upset if there isn’t some measure of consistency among the firms about what constitutes a significant deficiency.
– Regarding audit committee evaluations, one of our clients has been asked by their auditor to review any notes made during the board meeting during which the evaluation was discussed as well as the responses to the questionnaires. The auditors seemed more focused on the thoroughness of the process than on the substantive results.
On Friday, the SEC posted 10 FAQs regarding its November 30th exemptive order that provided a 404 delay for certain smaller companies. At the same time, the PCAOB issued one related FAQ.
In particular, note FAQs 4-6, which discuss the effect of reliance on the SEC exemption on a company’s eligibility to register securities on Forms S-2 and S-3 – and FAQ 7 discusses Form S-8 eligibility.
Quick Survey: Internal Control Delays and Auditor’s Evaluation of Audit Committees
In response to members asking me whether I have heard much talk about companies delaying the schedule for their Q4 earning announcements because of 404 uncertainty, I have posted this quick survey. It also addresses filing 10-Ks belatedly and the process of independent auditors evaluating audit committees.
And here are the results from the just completed survey on timing of option grants.
In this speech that was just posted yesterday, Corp Fin Director Alan Beller weighs in on internal control disclosures. Here are is an excerpt from the speech:
“For their part, investors should remember that the internal control reporting provisions under Section 404 are disclosure provisions. Companies that complete their assessments and find material weaknesses and disclose them, and whose auditors complete the internal control audit and include the required report on internal controls, will be compliant with the reporting requirements of Section 404. Companies with internal control material weaknesses can also have financial statements and unqualified financial statement audit reports that meet our requirements, where the auditors are able to do substantive audit work that in effect overcomes those material weaknesses. Indeed, auditors have been doing that for a long time. Now investors will know and thus be better informed. And, importantly, material weaknesses in internal controls do not necessarily equate to deficient financial statements or financial statement audit reports.
Moreover, while we are and will be seeking appropriate disclosure through our rules and review and comment process, it is also incumbent on investors to demand from companies the disclosure they need to evaluate particular material weaknesses and to review and analyze that disclosure with particular care, in order to evaluate the implications of given material weaknesses for reliability of financial reporting and financial statements, and also to consider what remedial steps companies are taking. Any disclosure that a company has a material weakness is a serious matter for investors, but that disclosure should be the starting point rather than ending point for investors’ analysis. Further, understanding companies’ plans for remediation and their implications is particularly important in light of the fact that this is the first year that companies will be reporting under Section 404.
Also regarding remediation, where a company’s internal control report discloses that management identified a material weakness at the end of the company’s fiscal year (the time as of which the report must speak), but the company has remediated that material weakness by the time it files (or by the time of a subsequent filing), the report as of the end of the fiscal year must report the material weakness and the company must still include the necessary disclosures regarding the material weakness. The company may also further disclose (and may be required to disclose) that the material weakness subsequently was remediated. Indeed, some members of the advisory group established by the PCAOB have requested that the Board develop a standard for reviewing remediation, and the PCAOB staff has the matter under consideration.”
Grace Period Ends for Section16.net and TheCorporateCounsel.net
If you have not renewed your membership to Section16.net or TheCorporateCounsel.net (or the Romeo & Dye Section 16 Filer), today is the last day of the grace period. Starting Monday, you will no longer have access – so renew today!
Don’t forget Wednesday is the annual webcast on Section16.net – “Alan Dye on the Latest Section 16 Developments.” NASPP members also get access to this popular event! If you have renewal questions, call our HQ at 925.685.5111 or send them an email at info@thecorporatecounsel.net.
Ann Yerger to Head CII
Last week, Ann Yerger was named Executive Director of the Council of Institutional Investors. Yerger joined CII in early 1996 as the Director of the Council’s Research Service and was named Deputy Director in 2002. Before joining CII, Yerger was deputy director of the Corporate Governance Service of the Investor Responsibility Research Center. Ann is a great choice and I wish her well!
