Securities Law Prof Blog

Former Enron Treasurer's Out of Prison

Ben Glisan, former Enron treasurer, has completed his three-year prison term, and WSJ describes his experience there and publishes excerpts from his interview.  See WSJ, 'Benron' Behind Bars.

Plenty of Blame to Go Around

Last December Fannie Mae sued its former auditor KPMG for malpractice, seeking to recover the millions it paid in auditing fees during the period when Fannie Mae's financial statements misstated its financial position.  This week KPMG sued the company in D.C. district court, accusing Fannie Mae of lying to it for years.  See WPost, Fannie Mae Accused Of Deceiving KPMG, Its Former Auditor.

House Passes Bill on Exec Compensation

The House of Representatives voted Friday to give shareholders of public corporations a nonbinding vote on executive compensation packages.  However, a similar bill has not yet been introduced in the Senate, and President Bush has said he will veto any such legislation.  See WSJ, House Votes to Give Shareholders Nonbinding Vote on Executive Pay.

AFL-CIO Leads Shareholder Campaign at Verizon

The AFL-CIO is campaigning against the re-election of the six Verizon directors who sit on the compensation committee, to protest what it says is the too-generous pay package of CEO Ivan Seidenberg.  The annual meeting is scheduled for May 3, the first one held under the company's majority vote rule.  Activist shareholders waged a similar campaign at Toll Brothers (vote not yet disclosed) and are expected to launch one at CVS/Caremark.  See WPost, AFL-CIO Goes After 6 Verizon Directors.

Is Cox Too Much a Consensus Builder?

Under previous SEC Chair Donaldson, the SEC at the top was a contentious place, often deciding key matters on a 3-2 vote.  In contrast, Chair Cox's style is to build a consensus, and the SEC has become a calmer place.  However, critics say that he is just moving too slow on important matters.   A case in point is what the SEC will decide to do about shareholder access to the proxy for directors' elections.  Cox says the SEC is on track to decide by the year's end.  See WSJ, The SEC's Mr. Consensus.

Nacchio Convicted of Insider Trading

After six days of deliberations, the jury convicted Joseph Nacchio, former Qwest Communications CEO, of 19 counts of insider trading for selling $50 million worth of stock in 2001.  He was acquitted of 23 counts.  His attorney said he would appeal.  Prior to trial, Nacchio's defense was expected to revolve around classified information about forthcoming profitable government contracts; however, the judge did not allow most of this evidence.  See WPost, Nacchio Guilty of Insider Trading;  NYTimes, Ex-Chief at Qwest Found Guilty of Insider Trading;  WSJ, Qwest's NacchioIs Found Guilty  In Trading Case.

Corporate Lawyers Get Even Richer

Boom times for corporate lawyers as shareholder activists, private equity deals and hedge funds generate business for the lawyers who advise them.  See NYTimes, Hedge Funds’ Activism Creates New Wealth for Law Firms.

SEC Chair Cox on SOX 404

Excerpts from Testimony Concerning Reporting on the Internal Controls of Small Businesses Under Section 404 of the Sarbanes-Oxley Act of 2002, by Chairman Christopher Cox, Before the Committee on Small Business & Entrepreneurship, United States Senate April 18, 2007:

The focus of this hearing is on the proper implementation of section 404. Focusing on the implementation of 404, rather than changing the law, is consistent with the SEC's view that the problems we've seen with 404 to date can be remedied without amending the Sarbanes-Oxley Act. And despite the unduly high costs of implementing section 404 of the Act, I believe that the Act overall - including section 404 - may be fairly credited with correcting the most serious problems that beset our securities markets just a few years ago, and with restoring investor confidence in our markets.

The Commission is determined to see to it that all waste of investors' money is eliminated from reporting under section 404. We and the PCAOB are working to re-focus 404 on the statutory purpose of informing investors about weaknesses in a company's internal controls that are truly material and really matter. The information conveyed to investors about the nature of those weaknesses has to be helpful to them in making investment decisions
It is our intention that the proposed auditing standard and our proposed guidance for management will work together to clearly delineate the auditor's responsibility for opining on management's assessment, on the one hand, and the company's responsibility for the methods and procedures it uses in its internal controls evaluation process, on the other hand. In combination, the Commission's proposed guidance and the PCAOB's proposed auditing standard should result in management using a top-down, risked-based approach to its evaluation of internal controls. And they should shift discussions between managers and auditors away from management's evaluation process to what matters most to investors - the risk that material misstatements in the company's financials won't be prevented or detected in a timely manner.

The reforms we're making to the SOX 404 process are intended to be of direct benefit to America's small businesses - and the millions of Americans who work for them, invest in them, and benefit from all that they provide to our economy. We're re-orienting 404 to focus on what truly matters to investors - and away from expensive and unproductive make-work procedures that waste investors' money and distract attention from what's genuinely material. No longer will the 404 process tolerate procedures performed solely so someone can claim they considered every conceivable possibility

Speech by SEC Commissioner Casey

Speech by SEC Commissioner: The Euro and the Dollar: Pillars in Global Finance by Commissioner Kathleen L. Casey, at Conference organized by the Federal Reserve Bank of New York and the European Commission, New York, New York.  Ms. Casey addressed corporate governance, international accounting standards, and supervision.

House Debates Executive Compensation Bill

Debate in the House on a Barney Frank-sponsored bill that would give shareholders a nonbinding vote on senior management's compensation as well as golden parachutes followed party lines and made the predictable arguments.  While the bill is expected to pass the House, no comparable bill has been introduced in the Senate.  The White House also issued a statement opposing it.  See NYTimes, Democrats Seek Shareholder Voting on Executive Pay.

Clear Channel Accepts Higher Bid

Clear Channel Communications accepted a revised offer of $39 per share ($19.4 billion) from the two private equity firms seeking to buy the company, still lower than the $40 that some institutional shareholders say they want. The WSJ says this marks a turning point more generally in private euity deals, as shareholders now will have the expectation that they can hold out for better deals. The Clear Channel bidders say it's their final offer, and shareholders have until May 8 to vote.  See NYTimes, Radio Giant Accepts Offer;  WSJ, Clear Channel Accepts Raised Bid.

CBOT Ponders Its Future

The parent of the Chicago Board of Trade is mulling over the competing bids from Chicago Mercantile Exchange (valued at $8.9 billion) and the IntercontinentalExchange (valued at $9.8 billion) and says that price will not be the only factor.  Both bidders may sweeten their offers.  See WSJ, Commodity Bet: Decision on CBOT Winner Might Not Come Down to Just the Price.

Interview with Sallie Mae's Chair Lord

In an interview in the Washington Post, Sallie Mae's Chair Albert L. Lord says selling the company to a private equity firm was the best way to protect the shareholders from the whims of Congress.  He said he first considered the idea in late 2005, but the high stock price made it infeasible at that time.  The idea took off after the Democrats took control of Congress last November, and the bidding process quickly came down to two rivals -- J.C. Flowers & Co. and The Blackstone Group.  J.C. Flowers has agreed to buy the company for $25 billion.  See WPost, Aiming to Free Sallie Mae From Red Tape.

Cox Testifies on 404 Internal Controls

Excerpts from Testimony Concerning Reporting on the Internal Controls of Small Businesses Under 404 of the Sarbanes-Oxley Act of 2002 by Chairman Christopher Cox Before the Committee on Small Business & Entrepreneurship, United States Senate April 18, 2007:

The focus of this hearing is on the proper implementation of section 404. Focusing on the implementation of 404, rather than changing the law, is consistent with the SEC's view that the problems we've seen with 404 to date can be remedied without amending the Sarbanes-Oxley Act. And despite the unduly high costs of implementing section 404 of the Act, I believe that the Act overall - including section 404 - may be fairly credited with correcting the most serious problems that beset our securities markets just a few years ago, and with restoring investor confidence in our markets.

The Commission is determined to see to it that all waste of investors' money is eliminated from reporting under section 404. We and the PCAOB are working to re-focus 404 on the statutory purpose of informing investors about weaknesses in a company's internal controls that are truly material and really matter. The information conveyed to investors about the nature of those weaknesses has to be helpful to them in making investment decisions.

The reforms we're making to the SOX 404 process are intended to be of direct benefit to America's small businesses - and the millions of Americans who work for them, invest in them, and benefit from all that they provide to our economy. We're re-orienting 404 to focus on what truly matters to investors - and away from expensive and unproductive make-work procedures that waste investors' money and distract attention from what's genuinely material. No longer will the 404 process tolerate procedures performed solely so someone can claim they considered every conceivable possibility.

SEC Charges Former GC with Inside Trading

The SEC today filed a civil injunctive action against Kevin  J. Heron of  Phoenixville,  Pennsylvania, the  former  general  counsel, corporate secretary, and chief insider trading compliance  officer  of Amkor Technology, Inc. The Commission's complaint  alleges  that  from October 2003 through June 2004, Heron engaged in a pattern of  insider trading by trading in Amkor securities  prior  to  five  Amkor  public announcements relating  to  financial  results  and  company  business transactions. During this  period,  Heron  executed  more  than  fifty illegal trades in Amkor stock and options on the  basis  of  material, nonpublic information that Heron  had  learned  as  a  result  of  his position as general  counsel.  Heron  executed  nearly  all  of  these illegal trades while he and other company employees  were  subject  to company blackout periods that prohibited them from  trading  in  Amkor stock. Even though Heron was the person at Amkor who  was  responsible for administering these blackout  periods,  Heron  routinely  violated Amkor's blackout periods by trading  on  inside  information.  Heron's trading yielded profits, and losses  avoided,  totaling  approximately $290,000.  Heron  was  terminated  from  his  positions  at  Amkor  in September 2005.

Second Circuit's Clarifying Opinion in Denial of IPO Class Action Certification

The Second Circuit recently issued a "clarification" in denying a rehearing of the In re IPO Sec. Litig. case, where it reversed the district court's certificaton of the class because it found that individual issues of reliance and knowledge precluded a finding that common issues predominated.  In the petition for rehearing, plaintiffs argued that the purchasers in the aftermarket could establish reliance based on fraud on the market and would have no knowledge of the alleged fraud.  Yes, but, "whatever [this argument's] merit," said the Second Circuit in response, the broad class certified by the district court included both initial purchasers in the IPO as well as purchasers in the after market.  In addition, in a footnote, it clarified its reference to the section 11 claims to make clear that section 11 does not require the plaintiff to allege reliance.  (Thanks to Maggie Sachs for calling this to my attention.)

Clear Channel's Bid May Be Raised

The equity firms that want to buy Clear Channel Communications are expected to announce today that they have increased their bid by about $1.5 billion to $27.6 billion.  Some institutional shareholders have previously expressed dissatisfaction with the price, and Glass Lewis recommended rejection of the offer.  The shareholder vote is scheduled for tomorrow, but may be postponed in light of the price increase.  See NYTimes, Clear Channel Is Said to Get Raised Bid

Profile of J. Christopher Flowers

The New York Times profiles J. Christopher Flowers, whose private equity firm is buying the biggest percent of Sallie Mae in the $25 billion LBO.  Flowers, previously at Goldman Sachs before starting J.C. Flowers & Co., has specialized in investing in distressed financial services firms.  Flowers' firm will own 49.2% in Sallie Mae, the two banks take 24.9% each, and the other private equity firm buys 1%.  See NYTimes, Builder of Sallie Mae Deal Has a Daring History

Blackstone IPO Tests New Fair Value Accounting Rule

The Blackstone Group IPO will test FASB's new fair-value accounting rule that allows management to estimate the current fair value of its investments even if not traded in public markets.  Critics say it gives management too much discretion and can lead to Enron-type abuses.  Further, it is difficult for public investors to assess the reasonableness of management's assumptions based on the information in the prospectus.  See WSJ, Blackstone Tests Fairness of Using 'Fair Value' Rule.

7th Circuit on Loss Causation

The Seventh Circuit provides further clarification on the distinction between transaction and loss causation and upholds summary judgement against plaintiff in this securities fraud class action because plaintiff introduced no evidence of loss causation.  Ray v. Citigroup Global Markets, Inc., 2007 WL 1080426 (4/12/07).  Plaintiffs represented a class of retail investors who purchased shares in a wireless data services company allegedly based on stockbrokers' misrepresentations and the stock price dropped along with the rest of the market in similar companies. The appellate court agreed with the district court that plaintiffs had no evidence that would show that any particular misrepresentation had a causal connection with the loss in value of the shares.  The Seventh Circuit identified three approaches to establishing loss causation:  the "materialization of risk" standard ("it was the very facts about which the defendant lied which caused its injuries"); the "fraud on the market" scenario (the Dura situation, where plaintiff has to show that the alleged misrepresentations inflated the value of the stock and that the value of the stock declined once the market learned of the deception), and a third situation where loss causation "might be shown" if a broker falsely assures the plaintiff that the investment is "risk-free."   The latter approach (if tenable at all after Dura) requires that the plaintiff to show that the broker used very explicit language to misrepresent that the investment was risk-free.