Yesterday, Korn/Ferry International filed an 8-K reporting that it has been advised that the SEC staff is conducting an informal inquiry into independence issues arising out of payments made by Ernst & Young, the company’s auditors, to a company affiliated with a former director of the company for marketing services.
The Wall Street Journal reports today that Best Buy and TeleTech Holdings also are subject to the same SEC inquiry, as the same consultant sits on their boards and also use E&Y as their auditor (but these two companies have not yet filed a 8-K regarding the investigation). The WSJ points out the major difference between this inquiry and the recent PeopleSoft one (which led to E&Y being barred from obtaining new public clients for 6 months) – this new investigation involves only $377,000 for the director’s marketing consulting; the PeopleSoft matter involved $500 million.
Apparently the provision on auditor independence that the Staff is looking at is Rule 2-01(c)(3) of Regulation S-X. Rule 2-01(c) sets forth a non-exclusive specification of circumstances inconsistent with auditor independence:
“3. Business relationships. An accountant is not independent if, at any point during the audit and professional engagement period, the accounting firm or any covered person in the firm has any direct or material indirect business relationship with an audit client, or with persons associated with the audit client in a decision-making capacity, such as an audit client’s officers, directors, or substantial stockholders. The relationships described in this paragraph do not include a relationship in which the accounting firm or covered person in the firm provides professional services to an audit client or is a consumer in the ordinary course of business.”
According to the 8-K, E&Y conducted an internal review and confirmed its independence to Korn/Ferry – and based on that confirmation and its current knowledge, Korn/Ferry believes that E&Y’s independence was not impaired. Thanks to eagle eye Mike Holliday for helping out on this one!
Disclosure about SalesForce.com’s IPO Cooling Off Period
On May 25th, I blogged about how SalesForce.com’s IPO was delayed due to gun-jumping concerns. The company has filed an amended S-1 with a risk factor related to this potential gun-jumping and we have added it to our laundry list of “Risk Factors Regarding Gun-Jumping” in our “Disclosure Samples & Analysis” Practice Area. So far, the cooling off period appears to be nearly 4 weeks and counting…but some of this period might be attributed to the company’s own timetable for going to market.
No EDGAR on Friday
Out of respect for President Reagan, the SEC will be closed this Friday – and EDGAR will not be accepting filings.
Dan Mahoney of Rogers & Theobald LLP reports that he has had success getting his clients delisted from the Berlin-Bremen Exchange after sending a communcation to Julia Hädicke at Berliner Freiverkehr. Her contact information is: (Aktien) AG – Kurfürstendamm 119 – 10711 Berlin / Phone: +49-30-890 21 143 – / Fax: +49-30-890 21 198 / email – jhaedicke@freiverkehr.de.
To find out if a company has been delisted – go to Yahoo-Finance and enter the company’s ticker symbol and then “.be” after it, the listing on the Berlin-Bremen Exchange will come up. It will show whether they were dropped or not. Some are simply pending, so they display all zeroes.
Dan notes that the Berlin-Bremen Exchange is the same as the so-called “Unofficial Regulated Market”, which is one of the three organized and regulated markets of the German exchanges (the other two are the Official (“Amtlicher Markt”) and the Regulated (“Geregelter Markt”) Markets). The Berlin-Bremen Exchange listing process is simple as an authorized broker merely needs to file an application for a permit with the administration of the exchange for trading the stocks.
For trading on this exchange, there are fewer requirements (egs. there are no annual fees and no publication and, of course, no consent requirement by the company) – because the stocks are already listed on other exchanges that have more extensive review criteria.
Recently, the SEC’s Enforcement Division has signaled a change in philosophy – from a reactive approach (i.e. investigations of individuals or companies were initiated after evidence of a possible violation surfaced) to “seeing around the corner.”
In this interview with Bill Baker on the SEC Staff “Wildcatting” for Fraud, Bill – who recently left as an Associate Director in Enforcement to join Latham & Watkins – explains how Director Stephen Cutler has a desire to foster a cultural change within the enforcement program to encourage more risk taking when pursuing investigations where, at the outset, it is not clear that a securities violation has occurred. This also is known as “wildcatting.”
Hats Off to Cecilia Blye!
Yesterday, Cecilia Blye was promoted to head Corp Fin’s new Office of Global Security Risk. As Cecilia has been a staple in the Office of Chief Counsel for some time, many of you might have dealt with her over the years. She is an absolute sweetheart and I bet many staffers will be applying to serve under her experienced and steady hand.
Here is a pretty interesting interview with Chris Ford and Scott Stevenson on Impact of Internal Controls on Outsourcing. Not only is the topic timely, but the impact of 404 on outsourcing can be significant, particularly for more mature companies that have outsourced functions or processes that affect controls over financial reporting.
What is the Berlin-Bremen Stock Exchange? And Why is Your Company Listed There (Without Your Knowledge)?
Here is a question I answered yesterday on our Q&A Forum: “One of our smaller publicly held clients received notice that its shares have been listed for trading on the Berlin-Bremen stock exchange, without the company’s prior knowledge, consent or authorization. From a quick search on the internet, it looks like this has happened to a number of other smaller publicly held companies and that the concern in that due to the unregulated nature of this exchange, a company’s stock could be targeted for naked shorting. Has anyone had any experience with this issue and procedures with the de-listing process?”
For the answer, check out our Q&A Forum, which is available from a button at the top of the home page on TheCorporateCounsel.net (hint – this development is affecting hundreds, and perhaps, thousands of companies!)
On Thursday, the SEC celebrates its 70th birthday with a small party for members of the SEC Historical Society and current SEC staffers – join the Society now by making a small donation. As part of its 5th Annual Meeting on Thursday, the Society is offering this free webcast with Doris Kearns Goodwin, Pulitzer Prize-winning author, who will discuss Joseph P. Kennedy as the first SEC Chairman.
Some of you might have been at the SEC’s 60th celebration at the National Building Mueseum a decade ago. Boy, that was some bash!
SEC Staffers in Need of a Shrink?
Thanks to Bruce Carton for digging out this gem – I gotta repeat his blog verbatim:
“Attention psychologists! You have just 9 more days to respond to the SEC’s job posting seeking an in-house psychologist to help “improve employee attitudes and satisfaction related to employee retention, job satisfaction, burnout, conflict and stress.”
The SEC’s decision to hire a psychologist for its employees, discussed in this article by Judith Burns of the AP, was reportedly met with a steady stream of one-liners from former SEC officials, including:
Bill McLucas (former Director of the SEC’s Division of Enforcement): “Just one? They should get a couple.” McLucas also figured “it’s going to take more than two years” to buck up morale at the federal securities agency. “This is a long-term job.” McLucas also was quoted as saying said he’d like current Enforcement director Stephen Cutler to get the first appointment once the psychologist is on board so that “he can take out his hostilities with that person instead of my clients.”
David Becker (former SEC General Counsel): “Working for the SEC in the current media climate is enough to drive anybody nuts.” Becker also wondered if the SEC is “about to introduce the group hug as a regulatory technique.”
Harvey Pitt (former SEC Chairman): “The SEC is a great place to work, but it is not for the faint of heart.” Asked if the SEC is a very stressful place to work, he joked: “Certainly, if you’re chairman.”
Laura Unger (former acting SEC Chairman): Asked whether SEC employees would line up to talk to a psychologist, Unger said “I have this picture of Charlie Brown sitting at his window with a ‘doctor is in’ sign and nobody showing up.”
Personally, I don’t know what to make of this other than I predict that a lot of heated discussions with SEC staff are going to end with the following salvo by defense counsel: “I think you need to see the SEC shrink!”
These updated forms make clear that companies that list only preferred or debt securities don’t have to file the annual CEO certification and that Exhibit G need not be filed by companies that have indicated on Exhibit D that they are exempt from Rule 10A-3 (regarding audit committees). Preferred and debt-only companies still have to file the annual company certification and must either comply with Item E on audit committees or explain their exemption on Exhibit D.
The updated affirmation form also adds business development companies and open-end management investment companies to the types of listed companies and changed the affirmation to apply to such companies. There may be other changes that I didn’t notice.
The Latest on Evolving 10b5-1 Plan Practices
Join us tomorrow for an exciting webcast – The Latest on Evolving 10b5-1 Plan Practices – in which a growing number of panelists will explain how the 10b5-1 market has changed recently – and what you should do now to keep up with the market. Take a look at this all-star panel, including key representatives from three Wall Street firms:
– Sue Morgan, Partner, Perkins Coie LLP
– Sharon Hendricks, Shareholder, Heller Ehrman LLP
– Lou Rorimer, Partner, Jones Day
– Michael David, Executive Director, Executive Services Group, Morgan Stanley
– John Berton, Vice President and Associate General Counsel, Goldman Sachs
– Keith Schnaars, Director, Private Banking & Investments, Merrill Lynch
– Georgia Bullitt, Executive Director and Counsel, Morgan Stanley
– Jeff Mullen, Vice President, Structured Equity Solutions Group, Goldman Sachs
Try a no-risk trial now to TheCorporateCounsel.net to listen to this practical and timely program.
Due to popular demand, we have posted a copy of the complaint filed by Spitzer against Grasso, Ken Langone and the NYSE in NY’s Supreme Court as an “Alert” on our home page.
Real-Time Disclosure Transcript is Up!
We have posted the transcript from last week’s timely – and wildly popular – webcast on “Overcoming the Challenges of Real-Time Disclosure.”
We have posted the June E-Minders a little early due to Memorial Day. Check it out!
Compensation Committee Chairs, Watch Out!
The upcoming legal battle over Dick Grasso’s pay package highlights the risks now faced by comp committee members as the NYSE comp committee chair was also named as a defendant in Spitzer’s lawsuit.
Unlike audit committees, comp committees do not have many prescribed rules and regulations about how to perform their jobs. The upcoming May-June issue of The Corporate Counsel, due out in a few weeks, will provide a 12 Step program for responsible compensation practices which might help comp committee members avoid liability. Try a no-risk trial to The Corporate Counsel now to obtain this valuable issue.
A few weeks ago the IPO of Salesforce.com was delayed based on a mutual agreement with Corp Fin. The company pushed back the offering after its Chairman and CEO was interviewed for a story that appeared in the New York Times on May 9th. In this interview, the CEO said that “the SEC prohibits me from making any statements that would hype my IPO,” but then proceeded to discuss the software business and his competitors.
Those who practiced during the Internet boom might recall the delay of Webvan’s IPO. It is clear that Corp Fin will take action if statements are made during the quiet period that are viewed as conditioning the market. Even after waiting it out, the staff often requires that a risk factor be included in the IPO prospectus regarding the potential gun-jumping violation. We have put together examples of these risk factors in our Disclosure Analysis and Samples Practice Area.
SEC Issues 10b-18 FAQs
Last week, Market Reg issued these 10b-18 FAQs. I was waiting to blog about it until I uncovered why it states “modified on May 18th” on the bottom – but I found out that is meaningless. That date is the original issuance date.
Continuing my train of thought from Friday’s blog, look at this 8-K filed by PepsiCo on April 30th under Item 5 that contains a press release announcing that its Frito-Lay subsidiary had received a Wells letter from the SEC alleging involvement by a non-executive employee with documents supposedly used by Kmart in allegedly improper accounting. The SEC claims that a non-executive employee at Pepsi and another at Frito-Lay signed documents in early 2001 prepared by Kmart acknowledging payments in the amount of $3.0 million from Pepsi and $2.8 million from Frito-Lay. Kmart allegedly used these documents to improperly record the timing of revenue from these businesses. There is no claim that Pepsi’s management was involved nor that Pepsi engaged in any improper accounting.
This development lends more credence to the view that third-party liability is an increasingly important topic for the SEC’s enforcement staff, particularly in the food and grocery industries.
Other companies have filed 8-Ks regarding Wells notices and third-parties. For example, back on January 8th, IBM filed a 8-K regarding a Wells notice it received regarding Dollar General Corporation, a customer of IBM’s point-of-sale products. The SEC believes IBM may have aided and abetted Dollar General when it misstated financial results in the fourth fiscal quarter of 2000. The questionable ransaction concerned IBM’s payment of $11 million to Dollar General for used equipment as part of a sale of IBM replacement equipment. IBM disclosed that one of its employees also received a Wells notice.
For those that are not steeped in enforcement matters, the SEC sends a Wells notice to a company or an individual after its staff has completed an investigation and determined that sufficient wrongdoing has occurred to warrant charges to be filed. Under the SEC’s procedures, the recipient then has the opportunity to respond to the staff before it makes a recommendation to the Commissioners regarding whether any formal action should be brought against the recipient.
Learn more about the enforcement process – including when disclosure about an investigation is necessary – in our FAQs posted in the SEC Enforcement Practice Area.
Carl Speaks on Shareholders Agreements
Don’t forget to check out the May installment of Carl’s Corner, where Carl Schneider discusses shareholder agreements.
