May 11, 2006
Another Crack in the Government Regulation of Beer and Wine Sales
Anyone in the securities business should note the disastrous effects of the public regulation of the distribution of beer and wine sales. The muli-tiered state government regulation of beer and wine sales came in 1933, after the repeal of Prohibition, and has limited competition ever since -- to the benefit of distributors (who have huge price markups) and to the disadvantage of consumers. A Supreme Court decision based on the Commerce Clause and a new federal district court decision in Washington based on the Supremacy Clause of the federal constitution have declared parts of the traditional state regulation illegal. The federal district court decision is, in some ways, more powerful, as it imposed federal anti-trust rules on the states. If the district court decision survives the appeal process, it could pave the way for broad attacks on most state's regulations. The decision is admittedly on shaky grounds. The real education, however, is in the effect of large scale public regulation of a sales market -- it protects those who sell, not those who buy. The SEC should take note.
The Chairman of the Securities and Exchange Commission, Christopher Cox, said at a Washington conference yesterday that Section 404 of Sarbanes-Oxley has not worked as anticipated and the SEC was working to get the "law right...sooner rather than later." The acting chair of the PCAOB, Bill Gradison, noted that his board is attempting to make the Section "scalable" to the size of a publicly traded business.
The modification is inevitable as the Section has imposed much larger than anticipated auditing costs on publicly traded companies in the United States. Any delay just allows the excessive costs to accumulate.
May 10, 2006
Two Republican Congressmen, Jim Demint and Tom Feeney, have introduced a bill to modify SOX permitting companies to "opt out" of Section 404. The bill directs the SEC to generate alternataive internal control requirements for such companies.
Jury Instructions in the Enron Case
The judge in the Lay and Skilling cases< Judge Sim Lake, has tentatively agreed to issue a jury instruction on the "ostrich defense." Juror can convict if a defendant was "deliberately ignorant" or "willfully blind" to criminal activity by subordinates. The defense is attempting to block the instruction, recognizing that it could make is easier for a jury to convict.
Personal Trips on the Corporate Jet
The New York Times has been focusing on executive compensation for the past several years and one of the paper's pet peeves is a perk, using the corporate jet for personal matters. It is today's page one story by Geraldine Fabrikant. The lesson of the story is not excessive pay but how the true value of the perk is hidden from shareholders. A flight from New York City to West Palm Beach costs a company around $46,500 but the company need only disclose a cost of $16,500. Moreover, corporations have lost the tax deduction on the expense. The tax deduction on the same flight has dropped from $11,625 to $220, shifting more of the burden on the shareholders. The problem is not in the granting of the perk, as is suggested by Ms. Fabrikant, it is in the hiding of the true cost of the perk from the shareholders that must pay it. Disclose the true value of the perk to shareholders and then see if they will continue to pay for it. This is an illustration of the basic problem with excessive pay -- the accuracy of the public disclose of the true value and amount -- that the new SEC disclosure rules attempt to redress. Executive compensation package have grown very complex in part to hide the true value from shareholders.
May 8, 2006
Internal Control Reports Reflected in Stock Price
Research by Lord & Benoit LLC shows a correlation between stock price and clean internal controls reports. Companies that reported clean internal controls (no "weaknesses") beat the Russell 3000 share index by an average of ten percentage points over a two year period beginning in March 31, of 2004.. Those that showed weaknesses in both 04 and 05 showed stock prices losses of close to 6 percent over the same period. Section 404 (SOX) compliance is therefore giving the stock market more information on which to price stock.