Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Saturday, March 17, 2007

Disney Clears Jobs of Misconduct in Pixar Backdating

The Walt Disney Co. announced that it has completed an internal investigation of backdated options at Pixar and found that no one currently associated with the company engaged in intentional backdating.  Disney acquired Pixar last year.  Steven Jobs was CEO of Pixar and is now a Disney director.  See NYTimes, Disney Inquiry on Pixar Grants Finds No Misconduct by Jobs ; WSJ, Disney Says Pixar Options Were Backdated.

March 17, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Friday, March 16, 2007

SEC Investment Management Initiatives

Excerpts from a March 16 speech before the ABA Section of Business Law by Andrew J. Donohue, Director, Division of Investment Management, SEC, outlining the Division's initiatives:

In previewing the mutual fund simplified disclosure initiative, I have stated that the ultimate goal of the initiative is Giving Investors the Information They Need, in a Form They Can Use... A more long-winded way of describing the goal is facilitating more user-friendly, plain English mutual fund disclosure and streamlining the delivery of mutual fund information through the increased use of the Internet, interactive data, and other electronic means of delivery.

One issue the staff is considering closely is the type of disclosure that 401(k) participants receive about the funds they invest in or are considering investing in.... I believe that 401(k) participants investing in funds would benefit greatly from standardized information about fund investments – if that standardized information is clear and meaningful.

The primary use of 12b-1 fees has shifted from the limited marketing and advertising purposes that were originally envisioned. Instead, it appears that, in many cases, rule 12b-1 fees are used primarily as a substitute for a sales load or for servicing. Against that backdrop, and with a forward-looking perspective, it would seem wise to reconsider rule 12b-1, both the rule itself and the factors that fund boards must consider when considering approval or renewal of a rule 12b-1 plan.

I am committed, in 2007, to undertaking the beginning of a review of fund director responsibilities under the Investment Company Act, Commission rules and Commission exemptive orders. I have begun to engage in a dialogue with fund directors to see whether the Division should consider recommending that the Commission amend its rules to revise requirements that may not make the best use of director time.

In my mind, it is important that U.S. regulators consider effective regulatory techniques from foreign jurisdictions and incorporate them into our regulatory approach where beneficial and appropriate. We can learn a great deal from the regulatory systems in other jurisdictions.

March 16, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Charges Against Radler

The Securities and Exchange Commission announced today that it has settled its enforcement action against F. David Radler, the former Deputy Chairman and COO of Hollinger International, Inc., pending in the U.S. District Court, Northern District of Illinois. Under the terms of the settlement, Radler is ordered to pay approximately $23.7 million in disgorgement and prejudgment interest;
ordered to pay a $5 million civil penalty; barred from serving as an officer or director of a public company; and enjoined from violations of the antifraud, proxy, books and records, reporting, and internal control provisions of the federal securities laws.

The criminal trial against Lord Conrad Black, former Chair of Hollinger Int'l, is underway in Chicago.

March 16, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NASD Announces Structure and Organization for New SRO

With the formal consolidation of NASD and New York Stock Exchange Member Regulation on schedule for the second quarter, NASD Chairman and CEO Mary L. Schapiro today announced a number of important structural and organizational moves for the new SRO, focusing on the core areas of member regulation, enforcement, dispute resolution and technology.

Specifically, the changes announced today are:

Member Regulation

The new SRO's Member Regulation function will be split into two departments. Grace Vogel, who currently heads Member Firm Regulation at NYSE Regulation, will head the new SRO's Department of Risk Oversight and Operational Regulation, building on NYSE Regulation's Financial Operations expertise. Robert Errico, who currently heads Member Regulation at NASD, will lead the Department of Sales Practice Regulation, which will leverage the NASD District Office structure and NYSE Regulation's Sales Practice Review Unit in focusing on the wide range of issues involving the financial industry's relationship with the investing public.


The enforcement departments of both organizations will be fully integrated into a single Enforcement Department. Susan Merrill, who is in charge of Enforcement at NYSE Regulation, will be Chief of the combined operation and will be based in New York. NASD's current Enforcement chief, James Shorris, will serve as Executive Director and will be based in Washington.

Member Regulation, Enforcement and NASD's existing Market Regulation Department will report to Luparello.

Emerging Issues

NYSE Regulation's Office of Risk Assessment and the NASD Office of Emerging Issues will be combined into a single group, which will report to Elisse Walter, who currently oversees regulatory policy and programs at NASD. Investment Company Regulation, Investor Education, Corporate Finance, Advertising and Member Education will also report to Walter.

Dispute Resolution

Linda Fienberg, who runs NASD Dispute Resolution, will head the new SRO's Office of Dispute Resolution, which will combine NYSE Regulation's arbitration program with NASD's arbitration and mediation programs.


The integration of the two organizations' technology portfolios will be led by NASD's Chief Technology Officer, Marty Colburn, supported by NYSE's Angela Posillico.

Technology, as well as Strategy, Registration and Disclosure, Testing and Continuing Education, Member Relations, Transparency Services and International will continue to report to NASD's Doug Shulman.

March 16, 2007 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

Caremark-CVS Merger is a Go

Caremark shareholders approved the merger with CVS, despite the continued efforts of ExpressScripts to acquire Caremark and the many criticisms about the way Caremark management negotiated the deal and the adequacy of the price.  See WSJ, Caremark Shareholders Approve CVS's $27 Billion Takeover Bid.

March 16, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Blackstone Plans IPO

The Blackstone Group, the private equity firm that made news by winning the competition for Equity Office Properties Trust a few weeks ago, plans an IPO to sell 10% equity for approximately $4 billion.  This follows the recent successful IPO of hedge fund Fortress Investments.  See WSJ, Private-Equity Firm Blackstone Plans to Sell Stake to Public.

March 16, 2007 in News Stories | Permalink | Comments (1) | TrackBack (0)

GM Says Ineffective Controls Threaten Performance

GM's Annual 10-K Report, filed 6 weeks late, disclosed that "ineffective" controls over financial reporting threatened its performance.  Yesterday it released five years of restated financial statements and reported a $2 billion loss for 2006.  See NYTimes, G.M. Says It Has Found Serious Flaws in Acounting ; WSJ, GM Takes Steps to Improve Its Financial Reporting.

March 16, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Cadbury Schweppes Announces Spin Off

Cadbury Schweppes, the British manufacturer of candy and soft drinks, announced it will spin off its American beverage unit in order to focus on its candy unit.  The announcement was in response to pressure from shareholders, including Nelson Peltz.   Speculation is that both companies would be vulnerable to takeover after the spin-off.  See NYTimes, Cadbury to Separate Drinks and Candy Businesses ; WSJ, In Breakup, CEO Of Cadbury Faces His Biggest Deal.

March 16, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Nacchio Inside Trading Trial Starts Next Week with Novel Defense

The WSJ's front page highlights the inside trading trial of Joseph Nacchio, formerly of Qwest Communications, set to begin next week in Denver.  The government charges him with selling over $100 million worth of Qwest stock before the company's financial troubles were publicly known.  Nacchio's defense is that he had classified information that Qwest would likely get big national security-related contracts and had no reason to think the corporation would do poorly.  See WSJ, Ex-Telecom CEO Fields 'Black Box' Trial Defense.

March 16, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Oxley Joins Nasdaq

Michael Oxley has joined Nasdaq Stock Market as a nonexecutive vice chair, focusing on public policy matters.  See NYTimes, Nasdaq Hires Former Ohio Congressman.

March 16, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, March 15, 2007

ICE Makes Bid for CBOT

Intercontinental Exchange made a $9.9 billion offer for CBOT Holdings, seeking to upset its merger plans with the Chicago Mercantile Exchange.  The WSJ described it thus:

"ICE's decision to make an unsolicited offer for the Chicago Board of Trade, which trades bond futures and agricultural contracts, represents a new competitive phase in the frenzied race to consolidate among global exchanges."

See WSJ, IntercontinentalExchange Makes $9.9 Billion Rival Bid for CBOT.

March 15, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Settles Accounting Fraud Charges Against Former Metropolitan Mortgage Execs

The Securities and Exchange Commission ("Commission") today announced that it has reached settlements in pending litigation against two former executives of Metropolitan Mortgage & Securities Co., Inc. ("Metropolitan"), former Controller Robert A. Ness, Jr., and former Vice President Thomas R. Masters, and a former Metropolitan business associate, Dan W. Sandy, relating to an alleged financial reporting fraud at the company. Final judgments by consent were entered for each defendant by the Honorable John C. Coughenour in the case SEC v. C. Paul Sandifur, Jr., et al., Case No. CV-05-1631 JCC, in the United States District Court for the Western District of Washington.

Metropolitan was a long-standing Spokane, Washington finance and real estate company that collapsed in 2004. Metropolitan filed for bankruptcy in February 2004, devastating nearly 10,000 investors throughout the Pacific Northwest who had invested approximately $450 million in debt securities and preferred stock offered by the company. As alleged in the Commission's amended complaint, Metropolitan's management falsified the company's 2002 financial results by reporting profits from circular real estate sales where Metropolitan purported to sell property to buyers who, in fact, received all or nearly all of the money to pay for the purchases from Metropolitan or its affiliates. In addition to Masters and Ness, the Commission sued former Metropolitan Chief Executive Officer C. Paul Sandifur, Jr., and former executive officer Thomas G. Turner for their participation in the fraud.

March 15, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Accounting Fraud Charges against Former Raytheon Execs

The Securities and Exchange Commission announced today that it has instituted settled enforcement proceedings against three former financial officers of Raytheon Company and one of its subsidiaries. The SEC charged that they were each involved in or aware of certain improper accounting practices that operated as a fraud by failing to adequately and accurately disclose the deteriorating financial results and business of Raytheon's commercial aircraft manufacturing subsidiary. The SEC also charged that each officer was involved in or aware of certain false and misleading disclosures in Raytheon's periodic reports.
According to the allegations in SEC's complaints filed today in the U.S. District Court for the District of Columbia:

Between 1997 and 1999, Raytheon improperly recognized revenue on RAC's sale of unfinished aircraft through "bill and hold" sales transactions that did not comply with Generally Accepted Accounting Principles. These practices resulted in material overstatements of RAC's reported annual net sales revenue and operating income in 1997 and 1998, enabling both RAC and Raytheon to meet certain internal and external earnings targets. According to the SEC, Gray was personally involved in these premature revenue recognition practices, and Pliner was aware of them as the company's lead outside auditor.
Between 1997 and 2001, there were certain improper disclosure and accounting practices at Raytheon related to RAC's commuter aircraft business, including the failure to adequately disclose in the company's periodic reports material risks, trends, and uncertainties associated with the deterioration of that business line. These practices resulted in the failure to recognize between $67 million and $240 million in losses that were inherent in a planned "soft landing" of the commuter aircraft line at year-end 2000, which would have reduced Raytheon's 2000 profit before taxes by 8 to 27 percent. These losses were instead improperly taken during the third quarter of 2001, when Raytheon recorded a $693 million charge related to its commuter assets after September 11, 2001. Given the charge that should have been taken at year-end 2000, Raytheon's third quarter 2001 commuter loss provision was overstated by 10 to 53 percent. According to the SEC, as the company's CFO, Caine was personally involved in and aware of these practices throughout 2000 and 2001. In addition, as Raytheon's lead auditor between 1997 and 1999, and as the company's Controller in 2000 and 2001, Pliner was aware of and later personally involved in these improper practices.

March 15, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Citigroup Tender Offer for Nikko Cordial Goes Forward

Citigroup is going forward with its tender offer for all shares of the Japanese brokerage firm Nikko Cordial and will not raise the offered price of 1700 yen, although some shareholders complain it is too low.  See WSJ, Citigroup Won't Lift Its Nikko Bid Further.

March 15, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Frank Says Banks Could Get Relief from SOX 404

Barney Frank, Chair of the House Financial Services Committee, told the U.S. Chamber of Commerce yesterday that it would be "acceptable" to exempt banks from Sarbanes Oxley 404 if they complied with similar banking regulations.  WSJ, Bank Rules May Be Eased To Avoid Duplication.

March 15, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 14, 2007

Cox Before the Chamber of Commerce

SEC Chair Cox spoke before the Chamber of Commerce today and addressed many of the  issues raised by the Chamber in its Report released on Monday.  Here are some excerpts:

Just a recap of our most recent enforcement actions includes cases alleging secret slush funds; forgery; stock option grants to fictitious employees; falsified corporate documents; self-dealing; self-enrichment; attempted cover-ups; and lying to auditors. Earlier this month we filed the largest insider trading case against Wall Street professionals since the days of Ivan Boesky and Dennis Levine, involving major Wall Street firms as well as hedge funds.

And so, as this Conference focuses on how to improve the competitiveness of America's capital markets — a goal I not only share, but which Congress has charged the SEC to work to achieve — it must be remembered that aggressive law enforcement by the SEC is critical to the continued success of our markets.

Yours is not the first, nor will it be the last, outside group to tell us that there are significant direct and indirect costs that come along with the benefits of Sarbanes-Oxley. The SEC's own analyses of Section 404 of Sarbanes-Oxley are in general agreement with what the Government Accountability Office, the Schumer-Bloomberg report, the Hubbard-Thornton report from the Committee on Capital Markets Regulation, and your own Commission have found: that while a portion of the first-year compliance experience of Sarbanes-Oxley undoubtedly reflected start-up costs — and, in many cases, long-neglected maintenance by companies of their internal control systems and procedures — it is undeniable that much of the cost was attributable to excessive, duplicative, or misdirected efforts.

A good deal of the current focus on capital markets competitiveness is premised on thenotion that foreign jurisdictions have looser regulations. And it's certainly true that Sarbanes-Oxley is being used in marketing campaigns abroad as a reason for foreign companies to list elsewhere. But the truth is that many countries, including the United Kingdom, offer stockholders a very broad set of rights. And many of those same countries are adopting provisions of the Sarbanes-Oxley Act as part of their own regulatory regimes

One of the hallmark accomplishments of Sarbanes-Oxley is that it has implemented the corporate equivalent of President Truman's oft-cited aphorism: "The buck stops here." Thanks to Sarbanes-Oxley, the responsibility for the truthfulness of public company reports and disclosures stop on the desks of our corporate leaders.

Despite the recommendation in your report, and in the Schumer-Bloomberg study, that Congress amend the Sarbanes-Oxley Act, I want to state clearly this morning that I disagree. While of course it's up to the Congress to determine its legislative priorities, both the House and the Senate have formally asked my advice on this point, in hearings on the subject of Sarbanes-Oxley, and I have repeatedly given it. We don't need to change the law, we need to change the way the law is implemented. It is the implementation of the law that has caused the excessive burden, not the law itself. That's an important distinction. I don't believe these important investor protections, which are even now only a few years old, should be opened up for amendment, or that they need to be.

The SEC has the power and the necessary flexibility to implement the law in a way that makes sense for investors and markets. And your input is a valuable tool in helping us make those changes so that Section 404 operates as intended. In particular, we've been able to phase in the application of the internal controls requirements of Section 404, with appropriate deferrals for public companies of different sizes — so that even today, nearly five years after the Act, smaller public companies are not yet required to comply with this provision.

March 14, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Settles Fraudulent Research Case Against Banc of America Securities

The Securities and Exchange Commission announced today a settled enforcement action against Banc of America Securities LLC (BAS) for failing to safeguard its forthcoming research reports, including analyst upgrades and downgrades, and for issuing fraudulent research. As part of the settlement, BAS agreed to a censure, a cease-and-desist order, and payment of $26 million in disgorgement and penalties.
The Commission's Order finds that, from January 1999 through December 2001, BAS experienced a breakdown in its internal controls designed to detect and prevent the misuse of forthcoming research reports by the firm or its employees. BAS sales and trading employees learned of forthcoming research changes, including upgrades and downgrades, on multiple occasions during the period. At the same time, BAS did not provide clear or effective policies and procedures regarding the handling or control of such information. As a result, in at least two instances, BAS traded before research reports were issued. The Commission's Order also finds that BAS failed to address conflicts of interest that compromised the independence and integrity of its analysts. These conflicts resulted in the publication of materially false and misleading research reports on Intel Corporation, TelCom Semiconductor, Inc., and E-Stamp Corp.

In 2004, in connection with this investigation, the Commission censured BAS and ordered the firm to pay $10 million for failing to produce documents and engaging in dilatory tactics. Today's action ends the Commission's investigation

March 14, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NYSE and SEC Action Against Goldman Sachs

The Securities and Exchange Commission and NYSE Regulation, Inc. today settled separate enforcement proceedings against a prime broker and clearing affiliate of The Goldman Sachs Group, Inc. for its violations arising from an illegal trading scheme carried out by customers through their accounts at the firm.  Both proceedings find that firm customers traded and profited by illegally selling securities short just prior to public offerings of the companies’ securities. In connection with the illegal short sales, the SEC and the NYSE found that the affiliate, Goldman Sachs Execution and Clearing L.P. (Goldman), violated the regulations requiring brokers to accurately mark sales long or short and restricting stock loans on long sales. The SEC and the NYSE further found that, if Goldman had instituted and maintained appropriate procedures, it could have discovered through its own records the customers’ illegal activity.

The SEC’s Order and the NYSE Decision against Goldman find that for more than two years, beginning in March 2000, the customers’ pattern of trading and Goldman’s own records reflected that they were selling the securities short in violation of Rule 105 and Rule 10a-1(a). The customers did not deliver to Goldman in time for settlement the securities they purported to sell long, but rather, had to borrow the securities from Goldman to settle all of their sales.  Goldman’s records also reflected that its customers covered their short positions with securities purchased in follow-on and secondary offerings after executing their sales.  Had Goldman instituted and maintained procedures reasonably designed to detect these significant trading disparities, it could have discovered the pattern of unlawful trades by its customers.

The SEC Order and the NYSE Decision censure Goldman for its conduct and compel the firm to pay $2 million in civil penalties and fines. In determining to accept Goldman’s offers of settlement, the SEC the NYSE considered remedial measures taken by Goldman.

The SEC previously brought a settled civil injunctive action against two of Goldman’s customers who had engaged in the illegal short sales and who, pursuant to the settlement, paid over $1 million in disgorgement and civil penalties.

March 14, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Schapiro before the Chamber of Commerce Conference

In a speech prepared for delivery before the Chamber of Commerce Capital Markets Conference, NASD Chair and CEO Mary Schapiro emphasized three points:  (1) the importance of avoiding regulatory overlap -- see the consolidation of the regulatory arms of NASD and NYSE; (2) the need to modernize the examinations process; and (3) cost-benefit analysis of existing regulations.  She also emphasized the NASD's efforts to enhance investor education and promote greater participation in retirement savings programs. 

March 14, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Cunningham on Principles-Based Regulation

As we ponder Secretary Paulson's call for "principles-based" regulation and what that means, Larry Cunningham (Boston College) provides us with scholarly insight.  He has just posted his article, A Prescription to Retire the Rhetoric of "Principles-Based Systems" in Corporate Law, Securities Regulation and Accounting, on SSRN.  Here is the abstract:

This Article corrects widespread misconception about whether complex regulatory systems can be fairly described as either “rules-based” or “principles-based” (also called “standards-based”). Promiscuous use of these labels has proliferated in the years since the implosion of Enron Corp. While the concepts of rules and principles (or standards) are useful to classify individual provisions, they are not scalable to the level of complex regulatory systems. The Article uses examples from corporate law, securities regulation and accounting to illustrate this problematic phenomenon before turning to a series of possible explanations for the widespread use of these misleading labels. The piece contributes to the substantive fields it uses to animate the inquiry and to more general jurisprudential literature on the rules-standards question.

March 14, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (1)