Securities Law Prof Blog

Occidental Pretroleum CEO Got $416.3 Million Last Year

Occidental Pretroleum reported that its CEO Ray R. Irani received $416.3 million in compensation last year, most of it in stock options or from the deferred shares program.  See WSJ, Occidental's $416.3 Million CEO: Pay Package Puts Irani in Lofty Air.

Starwood CEO Forced Out Because of Improper Conduct

Steven J. Heyer was forced out as CEO of Starwood Hotels last week and forfeited $35 million in severance pay.  The WSJ reports that the board forced him out after an anonymous letter accused him of inappropriate conduct.  Heyer came to Starwoods from Coke with a reputation for a difficulty personality.  See WSJ, Starwood CEO's Ouster Followed Battle with Board Over His Conduct.

Professor's Amnesia Defense to Investment Fund Fraud

An economics professor Albert E. Parish Jr. (Charleston Southern U.) and manager of several mutual funds claimed amnesia after a SEC investigation found that $134 million of funds were missing.  The SEC charges Parish with misleading investors about the funds' profitability.  See WPost, Fund Manager Offers Memorable Response to SEC's Fraud Charges.

SEC Rule 102(e) Proceeding Against Former GC at Monster

The SEC issued  an  Order   Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, and  Imposing  Remedial  Sanctions Order) against Myron F.  Olesnyckyj.  Olesnyckyj  served  as  General Counsel of Monster Worldwide, Inc. from 1994 until Nov. 21, 2006.  The Order finds that a final judgment was entered  against  Olesnyckyj permanently enjoining him from violating  the federal securities law and from acting as an officer or director of  a public company, stemming from his involvement in backdating stock options at Monster. Based on the Court's entry of an injunction  against  Olesnyckyj,  the Order suspends Olesnyckyj from  appearing  or  practicing  before  the Commission as an attorney. Olesnyckyj consented to the issuance of the Order without admitting or denying any of the findings.  (Rel.  34-55587;  AAE  Rel.  2593;File No. 3-12609)

Big Bucks for Ford Motor Execs

Executive compensation at the struggling U.S. auto manufacturers continues to draw attention.  Ford Motor's SEC filing disclosed that it paid a total of $62 million to its senior management after losing $1.5 billion last year.  This includes $28.2 million paid to new CEO Alan Mulally for four months' work (including a signing bonus of $18.5 million for leaving Boeing).  See WSJ, Ford Leaders' Pay Packages
May Heighten Labor Tension; NYTimes, Ford Pays Chief $28 Million for 4 Months’ Work.

Training for Would-Be Women Directors

Only 14.6% of Fortune 500 companies have a woman on their board of directors.  The DirectWomen Institute, sponsored by the ABA and Catalyst (a research group focused on women in the workplace) seeks to change that.  The New York Times reports on its efforts to groom women lawyers who are "of a certain age" and nearing retirement to serve on boards.  See NYTimes, Female Lawyers Set Sights on Yet One More Goal: A Seat on a Board. 

Union Goes After Verizon Directors

The AFL-CIO is campaigning against the reelection of the Verizon directors who authorized CEO Ivan Seidenberg's compensation, saying that he received $110 million over a five-year period while the stock price dropped and calling Verizon "the poster child for pay for pulse."  Previously, the union took on Home Depot and Pfizer, both of whose CEOs were forced out.  See WSJ, AFL-CIO Seeks to Oust
Verizon Compensation Committee.

ISS Recommends No to New York Times Directors

ISS recommends that shareholders of the New York Times withhold their votes for the directors to express their dissatisfaction with the company's dual-stock structure, which places control of the newspaper in the hands of Chairman Arthur Sulzberger Jr. and his family.  ISS says that the company has been too slow in addressing shareholders' concerns.   See WSJ, Proxy Adviser ISS Levels Criticism at New York Times.

Kerkorian Prepared to Offer $4.5 Billion for Chrysler

Kirk Kerkorian's Tracinda Corp. sent a letter to DaimlerChrysler stating it was prepared to offer $4.5 billion in cash for Chrysler, subject to completing its due diligence, becoming the first to announce publicly an interest in the company.  Kerkorian was a Chrysler shareholder and attempted a takeover prior to Chrysler's 1998 merger with Daimler.  See WSJ, Tracinda Is Prepared to Offer $4.5 Billion to Acquire Chrysler.

SEC Considers Proposals on Securities Symbols

The Securities and Exchange Commission has received two proposed national market system plans from separate groups of stock exchanges relating generally to securities symbols. In addition, Nasdaq has filed with the Commission a separate proposal to permit a company in certain circumstances to retain its symbol when transferring its listing to Nasdaq from another stock exchange. After publishing these plans and proposal for comment the Commission will resolve the conflicts over the allocation of stock symbols as fairly and expeditiously as possible.  See SEC Announces Process for Proposals on Securities 'Ticker' Symbols, Release 2007-63.

Class Action Against Teachers' Retirement Plan

A class action on behalf of participants in the New York State United Teachers Member Benefits Trust charges that the Trust accepted payments from insurer ING  to endorse its high-fee annuity product to its plan participants.  The law suit follows last year's investigation and settlement with the New York Attorney General's office, when the Trust paid $30 million to settle related charges.  See NYTimes, Trust Sued Over Backing Retiree Plan.

Wal-Mart Apologizes to Shareholders

Wal-Mart apologized to several activist shareholders for calling them "threats" after they submitted shareholders' proposals critical of the company's policies.  See WSJ, Wal-Mart Apologizes to Groups
That Were Focus of Surveillance.

Barnes and Noble Says it Thought Backdating Options was Proper

Barnes and Noble joins the list of companies admitting to backdating stock options.  It says senior management thought the practices, which extended from 1996-2006, were proper and acted on the advice of outside counsel.  It also stated its internal investigation found no evidence of fraud and that restatements of financials were not necessary.  See NYTimes, Online Bookseller to Take Option Charge;  WSJ, Backdating Was Pervasive At Bookseller.

Borders Changes Plans on Sale of Debt

A day after announcing it would sell $250 million of convertible bonds, Borders said it changed its mind, "based on shareholder feedback."  Some investors want a merger with Barnes & Noble; there is also talk of a buyout with a private equity firm.  Either plan might be derailed by the new issuance of debt.  See WSJ, Borders Halts Debt Sale Plan As Its Shareholders Squawk.

It Looks Like Apollo Will Stay Private

Apollo Management, the private equity firm headed by Leon D. Black, is reportedly looking for a private investor to buy a minority stake in the firm.  Apollo has been the target of speculation that it would soon go public, following the lead of the Blackstone Group.   Both moves reflect a desire on the part of the firms to cash in on some of their wealth.  See NYTimes, Equity Firm Is Seen Ready to Sell a Stake to Investors ; WSJ, Apollo Explores Sale of 10% Stake In a Private Deal.

SEC Endorses Recommendations to Ease 404 Controls

At an open meeting today, the SEC's Commissioners today endorsed the recommendations of the agency's professional staff to eliminate waste and duplication in the Sarbanes-Oxley compliance exercise, in a move that will particularly benefit smaller companies. The Commissioners urged the SEC staff to continue to work closely with the Public Company Accounting Oversight Board (PCAOB) to make the internal controls provisions of Section 404 of the Sarbanes-Oxley Act of 2002 more efficient and cost effective. The Commission expects the new PCAOB standard will be submitted for SEC review by the end of May or early June, in time for the 2007 financial statement audits.

"These needed improvements in the Sarbanes-Oxley process are especially urgent for smaller companies, who will begin complying with Section 404 this year," said SEC Chairman Christopher Cox. "The result of the new auditing standard for 404, together with the SEC's new guidance to management, should make the internal control review and audit more efficient by focusing the effort on what truly matters to the integrity of the financial statements," he added.  See SEC Commissioners Endorse Improved Sarbanes-Oxley Implementation To Ease Smaller Company Burdens, Focusing Effort On 'What Truly Matters' release 2007-62.

NYSE Euronext Begins Trading

The NYSE announced that the shares of NYSE Euronext (NYSE Euronext: NYX) began trading today, first on Euronext in Paris at 9:00 a.m. (CET) and soon to follow in New York on the NYSE at 9:30 a.m. (EST).  The opening share price on Euronext Paris for the newly merged company was €75.  A total of 257,598,971 NYSE Euronext shares were admitted to listing. On the basis of the first price traded on Euronext, the market capitalization of NYSE Euronext stands at €19.32 billion/$25.81 billion, making the company the world's largest listed exchange group.

GAO Report on SEC Internal Controls

The Overnment Accountability Office issued a report on April 3 to discuss issues identified during its fiscal year 2006 audit of the SEC concerning internal controls and accounting/operational procedures that could be improved.  The report contains six recommendations to improve internal controls and procedures in addition to those previously provided to the SEC.  See Internal Control:  Improvements Needed in SEC's Accounting and Operational Procedures.  GAO-07-482R, April 3.

News Corp. Shareholders Approve Liberty Deal

News Corp. shareholders approved a deal where News Corp. would buy back Liberty Media's 16.3% interest in the company and transfer its controlling interest in DirecTV Group to Liberty.  The deal would increase Rupert Murdoch's interest in News Corp. from 31% to 38%.  See NYTimes, News Corp. Shareholders Accept Liberty Deal ; WSJ, Liberty Media Swap Is Approved.

Rule 10b5-1 Plans and Nacchio Trial

Rule 10b5-1 plans may replace backdating stock options as the next big scandal.  The insider trading trial of Joseph Nacchio, former Qwest CEO, may focus on allegations that he had inside information when he made advance plans to sell his shares in 2005.  An academic study provides evidence that some insiders entered Rule 10b5-1 plans before a drop in the market prices of theier company's shares.  Rule 10b5-1 plans are common among executives and allow them to trade in their shares provided they are done under a prearranged plan made when they had no inside information.  Linda Chatman Thomsen, head of SEC Enforcement, recently announced that the agency was looking hard at these plans.  See WSJ, SEC Now Takes a Hard Look At Insiders' 'Regular' Sales.  For other news on the Nacchio trial, see NYTimes, Qwest’s Ex-President Can’t Recall Remarks on Finances.

DaimlerChrysler in Talks to Sell Chrysler

DaimlerChrysler confirmed it was in talks to sell Chrysler with unidentified potential buyers.  It will be unlikely to realize anything close to its 1998 purchase price of $36 billion. Chrysler lost $1.5 billion in 2006 and has a $19 billion liability for health care costs.  See NYTimes, DaimlerChrysler in Talks on Chrysler; WSJ, DaimlerChrysler Confirms Talks Over Future of Chrysler Division.

SEC Begins Cease and Desist Proceedings against former UCAP CEO

On April 3, the SEC issued  an  Order  Instituting  Cease-and- Desist Proceedings, Making Findings, and Imposing  a  Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act  of  1934(Order) against Danny Edward Moudy. The Order finds that Moudy, during his tenure as the Chief Executive  Officer  of  UCAP,  Inc.,  knew  or should have known that UCAP overstated mortgage revenue during  fiscal year ended Sept. 30, 2002. Specifically, Moudy caused UCAP  to  record only half of an adjustment necessary to make the  company's  financial statements comply with generally accepted accounted principles (GAAP).  Moudy knew or should have  known  that  failing  to  record  the full mortgage revenue adjustment enabled UCAP  to  meet  improperly  a  key financial covenant required to save the company's sole line of credit.  As a result, UCAP's 2002 Form 10-KSB understated the company's pre-tax loss by $378,000 or seven percent. Further, on Jan.  15,  2003,  Moudy caused UCAP to issue an earnings release for fiscal 2002. Moudy should have known that the release incorrectly reported $730,000  in  pre-tax income, excluding non-recurring restructuring charges, resulting in an    overstatement of 107 percent. UCAP  should  have  reported  a  pre-tax income, excluding non-recurring restructuring charges, of $353,000.  The SEC settled related fraud charges against UCAP's former CFO and the former engagement partner of its outside auditor.

Tenet Settles SEC Charges

Tenet Healthcare, its former CFO, and former chief accounting officer settled SEC charges for failing to disclose that Tenet's revenues were inflated for a three-year period because of a loophole in the Medicare reimbursement system.  The former general counsel did not settle.  See WSJ, Tenet to Pay $10 Million to Settle SEC Charges Over Profit Disclosure.

New Century Financial Files for Bankruptcy

New Century Financial, the poster child for the subprime mortgage industry, filed for bankruptcy protection yesterday.  Last year, it issued about $51.6 billion of subprime mortgages.  In recent weeks, the NYSE delisted its stock; lenders took back the mortgages that secured the company's financing, and some state regulators barred it from doing business in their states.  See WPost, Huge Mortgage Lender Files for Bankruptcy; WSJ, New Century Buys Time With Bankruptcy Filing; NYTimes, Home Lender Is Seeking Bankruptcy.

KKR and First Data Make LBO Deal

First Data, the credit card processor, accepted KKR's offer to buy the company for $26 billion, the second largest LBO.  Shareholders will receive $34 per share.  See NYTimes, K.K.R. Offer of $26 Billion Is Accepted by First Data.  The WSJ reports high trading volume in First Data call options and credit-default swap contracts before the public announcement, suggesting a leak of inside information.  See WSJ, First Data Trades Suggest Leak. 

Tribune Accepts Zell's Bid

As expected, the Tribune Co. accepted Sam Zell's offer to buy the company (excluding the Cubs baseball team), ending a long drawn out auction process.  Shareholders will receive $34 per share, in a deal valued at about $13.2 billion (including assumption of debt).  The buyout will be highly leveraged, leaving the company with about ten times its cash flow in debt, and will be accomplished through the vehicle of an ESOP. Newspapers noted the low break-up fee of $25 million, which suggests the possibility of further bidding.See WPost, Chicago Magnate To Control Tribune; NYTimes, Chicagoan Puts Up $315 Million to Win $8.2 Billion Tribune Co.; WSJ, Zell Wins Tribune In Bid to Revive A Media Empire.

SEC Report on Periodic Payment Plans

The SEC released, on March 29, its Report on Refunds, Sales Practices and Revenues from Periodic Payment Plans that was required by section 4(c) of the Military Personnel Financial Services Protection Act.  As you will recall, newspapers had publicized the fact that servicemen were talked into purchasing mutual funds that were so expensive that they hadn't been sold to the general public for years.

SEC Gets Judgment Against More Prime Bank Fraud Defendants

The SEC announced that on Feb. 28, 2007, the  U.S. District Court for the Southern District of Ohio entered  Final  Judgments  against  defendants  Steven  E.  Thorn (Thorn), Derrick McKinney (McKinney), Rick Malizia (Malizia)  and  his company, RMAZ, LLC (RMAZ), and Craig Morgan (Morgan) for  their  roles in raising approximately $75 million from investors  in  a  series  of fraudulent prime bank schemes and using investor funds  to  conduct  a massive Ponzi scheme. The Court also entered a Final Judgment  against Edgar Mojica (Mojica) in connection with  his  receipt  of  ill-gotten gains from the defendants during the fraudulent scheme.  In a related criminal proceeding, Thorn was sentenced to 97 months in prison.  The SEC alleged  that  from February 1998 through April 2001, the  defendants  and  others  raised approximately $75 million through the offer and sale of investments in a series of purported European bank trading programs.  The  defendants  told  investors that the programs involved the trading of bank instruments  issued  by foreign banks; they promised investors returns ranging as high as  200 percent per month; they assured investors that  the  investments  were risk free; and they warned investors that participation in the trading programs required total secrecy and confidentiality. In  reality,  the defendants dissipated much of the investors' funds to pay personal and business expenses, purported returns to earlier investors, payments to the  relief  defendants,  and  undisclosed  salaries  and   fees   for themselves.

KKR Agrees to Buy First Data

KKR has struck a deal to acquire First Data, the credit card processing company, for a price in the range of $24-$27 billion, the latest in a series of LBOs by private equity firms of large public companies with steady cash flows.  Unlike many of the other recent deals ("club deals"), KKR has no partners in this LBO.  See WSJ, KKR to Acquire First Data; NYTimes, Kohlberg Kravis Near Deal to Buy First Data.

Corporations Disclose Additional Information about Compensation

Many corporations are providing their shareholders even more information about executive compensation than the SEC rules require, in the name of transparency.  However, the additional compensation does not necessarily meet with the approval of activist shareholders, and it could be misleading.  For example, Lucian Bebchuk criticizes profiles of El Paso executives, which include summaries of stock option grants and other information.  See WSJ, Does It Pay to Tell Investors
Extra Compensation Details?

Tribune Board Gives Nod to Zell

The Tribune board of directors met over the weekend to consider the competing bids of Sam Zell (at $33 per share) and Burkle/Broad (at $34 per share).  It is reported that it has agreed to sell the company to Zell if he increases his bid again.  See WSJ, Tribune Appears To Be Nearing A Deal With Zell; NYTimes, Real Estate Tycoon Increases Bid for Tribune; WPost, Suitor for Tribune Co. Raises Bid at 11th Hour.

Perspectives on the Past Week's News

At least for securities regulation professors, the news this week was in the courtroom.  The U.S. Supreme Court heard oral arguments in two important cases: Credit Suisse (does the 33 Act preempt the antitrust laws in the regulation of IPO practices) and Tellabs (what is the standard for pleading scienter under PSLRA).  In addition, the Supreme Court has accepted certiorari in another securities case addressing again the aiding and abetting issue.  In the lower courts, two trials got a great deal of attention -- Lord Conrad Black, on allegations that he treated Hollinger Int'l like his personal piggy bank, and Joseph Nacchio, on insider trading charges for selling Qwest Communications stock.

On the regulatory front, the SEC adopted a rule that will make it easier for foreign private issuers to deregister their shares.

Choi, Nelson & Pritchard on PSLRA

New on SSRN:  The Screening Effect of the Private Securities Litigation Reform Act, by STEPHEN J. CHOI, New York University - School of Law, KAREN K. NELSON, Rice University - Jesse H. Jones Graduate School of Management, and ADAM C. PRITCHARD, University of Michigan Law School.  Here is the abstract:

Abstract:      

Prior research shows that the PSLRA increased the significance of merit-related factors, such as the presence of an accounting restatement or insider selling, in determining the incidence and outcomes of securities fraud class actions. (Johnson, Nelson, and Pritchard, 2007). This result, however, is consistent with two possible hypotheses. First, the PSLRA may have reduced solely the incidence of non-meritorious litigation. Second, the PSLRA may have changed the definition of merit, effectively precluding claims that would have survived and produced a settlement pre-PSLRA. This paper tests these alternative hypotheses. We find that pre-PSLRA claims that settled for nuisance value would be less likely to be filed under the PSLRA regime. We also find, however, that pre-PSLRA non-nuisance claims would be less likely to be filed post-PSLRA period. The latter result, which we refer to as the screening effect, is particularly pronounced for claims lacking obvious hard evidence indicia of fraud (an accounting restatement or an SEC investigation). This screening effect is stronger if the claims also lacked evidence of abnormal insider trading. By contrast, we find that pre-PSLRA claims with hard evidence or abnormal insider trading would be no less likely to be filed in the post-PSLRA period. We also examine the likelihood of settlement for pre-PSRLA claims if they had been filed in the post-PSLRA period, and find a similar screening effect for case outcomes. We conclude that Congress effectively changed the definition of merit in adopting the PSLRA, discouraging suits that would have produced a non-nuisance outcome prior to the law's enactment.

Buell on Financial Reporting Fraud Punishment

New on SSRN: Reforming Punishment of Financial Reporting Fraud, by SAMUEL W. BUELL, Washington University School of Law .  Here is the abstract:

Abstract:      
Present sentencing law in criminal cases of financial reporting fraud is embarrassingly flawed. The problem is urgent given that courts are now regularly sentencing corporate offenders, sometimes (but sometimes not) to extremely punitive terms of imprisonment. Policing of fraud by multiple jurisdictions in a federal system means that principled sentencing law is necessary not only for first-order policy reasons but also for coordination of sanctioning efforts. Proportionality and rationality demand that sentencing law have an agreed scale for measuring cases of financial reporting fraud in relation to each other, a sound methodology for fixing a given case on that scale, and a reasoned calibration of that scale. Current federal law, which controls most such cases and is a focal point for non-federal cases and public debate, is close to sensible on the first score but far off the mark on the other two. In this contribution to a symposium on “Fraud and Federalism,” I describe problems in present law and offer relatively uncontroversial reform measures that could substantially improve the law governing sentencing of financial reporting fraud.

Bethel on Disclosure Regulation

New on SSRN:  Recent Changes in Disclosure Regulation: Description and Evidence, by JENNIFER E. BETHEL, Babson College.  Here is the abstract:

Abstract:      
Technology has dramatically reduced the cost of disclosing information to investors and created new conduits for securities' sales. The result is stock ownership, both direct and indirect, has never been more widely distributed. Equally important, changes have occurred in the institutional market for new offerings. Bought deals, Internet road shows, the preeminence of mutual funds and pension funds, and foreign investors and issuers have changed the market. In the wake of these changes, the SEC's disclosure policy has evolved. The evidence suggests we have moved from a world where information was released relatively infrequently and with significant lags to a world where information is released relatively rapidly on a continuous basis to as many investors as possible.

Davidoff on Securities Regulation Treasure Hunt

STEVEN M. DAVIDOFF, Wayne State University School of Law , has posted Securities Regulation Treasure Hunt  on SSRN that should prove helpful to all teachers of securities regulation.  Here is his abstract:

Abstract:      
This is a treasure hunt I assigned my Spring 2007 securities regulation class. It was a successful pedagogical exercise. It not only provided hands-on practice locating SEC and other governmental sources, but the items required and questions asked (hopefully) forced them to think practically about the securities law issues previously covered. Not to mention that everyone had a fun time while learning.

I welcome comments or additional items. I will keep a database of them and update this post periodically for any colleagues who wish to use these materials.