Wednesday, April 25, 2007
The public shareholders of the New York Times expressed their displeasure with the stock's poor performance and the dual class structure by withholding 42% of the Class A shares for the four directors they are entitled to elect. This represents more than half of the shares that are not part of the Ochs-Sulzberger family. The newspaper said that the directors would hold their offices. Seventy per cent of the directors are elected by the Class B shares, controlled by the family trust. Arthur Sulzberger has consistently stated that removing the two-class structure is not up for negotiation. See NYTimes, Shareholders of Times Co. Hold Out 42% of Board Vote ; WSJ, New York Times Holder Protest Grows.
Tuesday, April 24, 2007
The Commission today announced the filing of securities fraud charges against the husband of an Amgen vice president for engaging in insider trading in the stock of Abgenix, Inc., a biopharmaceutical company that was acquired by Amgen in April 2006. The Commission's complaint, filed on April 23 in federal district court in Los Angeles, alleges that Gary K. Melton misappropriated confidential information from his wife, Amgen's vice president of strategic sourcing and procurement, regarding Abgenix when he purchased Abgenix stock days before Amgen's acquisition of Abgenix was publicly announced. Melton realized illegal profits of $15,252 from his trades and agreed to pay approximately $31,000 to settle the charges.
The Commission's complaint alleges that in early November 2005, Melton and his wife discussed the publicly announced favorable results of a clinical trial for an antibody jointly developed by Amgen and Abgenix. At the time, Melton commented to his wife that he might purchase some Abgenix stock, to which his wife said nothing. Melton's wife reported directly to Amgen's chief financial officer and attended meetings where mergers and acquisitions were discussed. A month later, according to the complaint, Melton's wife learned through her employment at Amgen that a public announcement of Amgen's acquisition of Abgenix was imminent. Recalling her earlier conversation with her husband, Melton's wife instructed him not to purchase Abgenix stock, the complaint alleges. The complaint further alleges that Melton understood his wife's unexplained instruction to mean that more favorable news about Abgenix was forthcoming, and that Melton knew, or was reckless in not knowing, that his wife's instruction not to purchase Abgenix stock was based on material nonpublic information she had acquired through her employment at Amgen and that he could not lawfully use such information for his personal benefit.
According to the complaint, despite his wife's admonition, Melton nevertheless purchased 2,050 shares of Abgenix stock between December 8 and 13, 2005. After the market closed on December 14, 2005, Amgenand Abgenix issued a joint press release announcing Amgen's acquisition of Abgenix for $22.50 per share, which represented a 54% premium on the closing price of Abgenix stock that day. On December 15, 2005, Melton liquidated his Abgenix stock and realized an illegal profit of $15,252. To settle the Commission's charges, Melton consented, without admitting or denying the allegations in the complaint, to a final judgment permanently enjoining him from future violations of the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and ordering him to pay $15,252 in disgorgement of his illegal trading profits, plus prejudgment interest, and a civil penalty in an amount equal to his trading profits.
The Securities and Exchange Commission announced today that it will host a series of roundtable discussions in May on shareholder rights and the federal proxy rules. The first of three roundtables will take place on May 7, 2007 and will consist of panels addressing:
The federal role in upholding shareholders' state law rights
The purpose and effect of the federal proxy rules
Non-binding proposals under the proxy rules
Binding proposals under the proxy rules
"When Congress charged the SEC with regulating the proxy process for public companies, it created a federal role for the vindication of shareholders' state law rights," said SEC Chairman Christopher Cox. "This roundtable will explore the relationship between the federal proxy rules and state corporation law, and pose questions to the participants about whether this relationship can be improved."
The second and third roundtables on proxy voting will take place on May 24 and 25, 2007, respectively. A final agenda and list of participants and moderators will be published for each roundtable closer to the dates of the roundtables. See SEC Announces Roundtable Discussions Regarding Proxy Voting.
Fred Anderson, the fired Apple CFO who today settled SEC charges in connection with the backdating scandal for $3.5 million, issued a statement through his attorney in which he stated that he warned Steve Jobs that changing the date of the stock option would result in an accounting charge and that Jobs told him the board had approved the change. See WSJ, Statement From Fred Anderson.
The Securities and Exchange Commission today filed charges against two former senior executives of Apple, Inc. in a matter involving improper stock option backdating. The Commission accused former General Counsel Nancy R. Heinen of participating in the fraudulent backdating of options granted to Apple's top officers that caused the company to underreport its expenses by nearly $40 million. The Commission's complaint alleges that Heinen, of Portola Valley, Calif., caused Apple to backdate two large options grants to senior executives of Apple — a February 2001 grant of 4.8 million options to Apple's Executive Team and a December 2001 grant of 7.5 million options to Apple Chief Executive Officer Steve Jobs — and altered company records to conceal the fraud.
The Commission also filed, and simultaneously settled, charges against former Apple Chief Financial Officer Fred D. Anderson, of Atherton, Calif., alleging that Anderson should have noticed Heinen's efforts to backdate the Executive Team grant but failed to take steps to ensure that Apple's financial statements were correct. As part of the settlement, Anderson agreed (without admitting or denying the allegations) to pay approximately $3.5 million in disgorgement and penalties.
Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, stated, "The Apple case demonstrates the Commission's ongoing commitment to take action against stock options backdating and other executive compensation abuses. When corporate officers enrich themselves at the expense of a company's shareholders, the Commission will hold the responsible individuals accountable, particularly where, as here, the responsible individuals are among those obligated to ensure that the company complies with all applicable securities laws and that its financial statements are accurate."
Marc J. Fagel, Associate Regional Director of the SEC's San Francisco Regional Office, stated, "Apple's shareholders relied on Heinen and Anderson, as respected legal and accounting professionals, to ensure the accurate reporting of the company's executive compensation. Instead, they failed in their duties as gatekeepers and caused Apple to conceal millions of dollars in stock option expenses."
SEC staff economists studied 295 IPOs over a sixteen month period beginning January 2005 and finds no evidence that failures to deliver share resulted from manipulation or naked short-selling. Instead, it found that failures to deliver were common and may be caused by underwriters' price support. See WSJ, SEC Finds No 'Naked Short'-IPO Issue.
Two former Apple officers are expected to be named as defendants in SEC actions involving backdating of stock options at that company. Nancy R. Heinan, the former general counsel, allegedly selected the dates for two backdated stock option grants, one that included options to her ; her attorney stated that she would contest the charges. Fred D. Anderson, the former chief financial officer, is expected to settle charges against him. Apple previously concluded an internal investigation that found no improper conduct on the part of Steve Jobs. See NYTimes, Ex-Officers of Apple Await Suit; WSJ, Apple Ex-Finance Chief Settles With SEC.
Monday, April 23, 2007
Excerpts from Remarks Before the Security Traders Association of New York 71st Annual Conference by Commissioner Paul S. Atkins, April 19, 2007:
[Discussing the three recent studies on U.S. Capital Markets' Loss of Competitive Edge] Although the perspectives and findings of each group were unique, there is a common thread of very important SEC-related issues among them. Among other things, each report recommended: (1) quick and substantial changes to the rules and guidance implementing section 404 of the Sarbanes-Oxley Act, (2) streamlined and coordinated regulatory processes that require meaningful cost benefit analyses, and (3) involvement jointly by the President's Working Group (which is made up of the Secretary of the Treasury and the chairmen of the Board of Governors of the Federal Reserve System, the SEC, and the Commodity Futures Trading Commission) to provide transparency and predictability in the enforcement process.
We at the SEC cannot and should not ignore these findings and recommendations. We must recognize and understand how the markets have evolved when we consider whether our weighty regulatory precedent still makes sense. We need to ask ourselves a question that Secretary Paulson has recently posed: "Have we struck the right balance between investor protection and market competitiveness - a balance that assures investors the system is sound and trustworthy, and also gives companies the flexibility to compete, innovate, and respond to changes in the global economy?" The reports can help us answer this question.
I believe that the Commission is duty-bound to analyze, understand, and -- if warranted -- respond to each recommendation that pertains to us. Unfortunately, a coalition of contrarians -- we can call it the "What-me-worry?" Crowd -- has recently begun a campaign to mute the calls for action in the three reports. As I understand it, they contend that the U.S. capital markets are perfectly fine and that there is little haste needed to examine the calibration of our regulations and how we implement them.
The Securities and Exchange Commission today announced a $125 million Fair Fund distribution to more than 254,000 investors who were harmed by fraudulent market timing in the PBHG Funds between June 1998 and December 2001. Today’s distribution is the first in a series of three disbursements from the Fair Fund that will distribute a total of approximately $267 million to more than 384,000 affected PBHG Funds’ account holders. The Fair Fund resulted from Commission enforcement actions charging unlawful market timing in the PBHG Funds by Pilgrim Baxter & Associates, Ltd. (PBA), Gary L. Pilgrim, and Harold J. Baxter.
“Of the Commission’s many responsibilities under the federal securities laws, one of the most important and indeed most gratifying is providing tangible relief to injured investors,” said Linda Chatman Thomsen, Director of the Division of Enforcement. “Today’s distribution is a significant milestone in remedying harm that investors in the PBHG Funds suffered.”
The Fair Fund provision of the Sarbanes-Oxley Act of 2002 enabled the SEC to increase the amount of money returned to harmed investors by allowing financial penalties paid by wrongdoers to be included in the distributions. Prior to the enactment of Sarbanes-Oxley, only disgorgement could be returned to affected investors. To date, the SEC has distributed more than $1 billion in Fair Fund monies.
The Securities and Exchange Commission announced today that the United States District Court for the Northern District of Alabama has entered a Final Judgment against defendant Richard M. Scrushy that permanently bars Scrushy from serving as an officer or director of a public company, permanently enjoins Scrushy from committing future violations of the antifraud and other provisions of the federal securities laws, and requires Scrushy to pay $81 million in disgorgement and civil penalties.
The Commission's complaint in this action charges Scrushy with directing a $2.6 billion financial fraud at the HealthSouth Corporation during the years 1996 through 2002. Scrushy was one of HealthSouth's founders, and was chairman of its Board of Directors and its chief executive officer during the relevant period of the fraud.
The Complaint alleges that, at Scrushy's direction, HealthSouth's overstated its revenue by more than $2.6 billion from the second quarter of 1996 through the third quarter of 2002. This overstatement led directly to quarterly and annual overstatements of net income and retained earnings. The Commission's complaint charges that, by the end of 2002, HealthSouth was claiming to have over $1.5 billion in accumulated retained earnings, when in fact the Company had operated at a significant loss over its entire corporate history. The HealthSouth fraud resulted in one of the largest accounting restatements in American corporate history.
The Final Judgment orders Scrushy to pay $81,000,000, comprised of $3,500,000 in civil penalties and $77,500,000 in disgorgement, with the disgorgement amount subject to an offset for any amounts paid in judgments or settlements in certain derivative, corporate, and class action lawsuits seeking recovery of the same money as the Commission. The Final Judgment provides that, upon a motion to the Court, the civil penalties paid by Scrushy may be distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002, in this case by asking the Court to add these sums to the Fair Fund already established as a result of the Company's settlement. The Final Judgment permanently prohibits Scrushy from acting as an officer or director of a public company, and Scrushy has consented to refrain from seeking modification or removal of this prohibition for at least five years from the entry of the Final Judgment. The Final Judgment permanently restrains and enjoins Scrushy from violating or aiding and abetting violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 13b2-1 promulgated thereunder.
Scrushy consented to the entry of the Final Judgment without admitting or denying any of the allegations in the Commission's complaint. In his Consent to this settlement, which is incorporated into the Final Judgment, Scrushy has agreed to refrain from seeking indemnification or reimbursement from any third-party for any part of the $81 million required by the Final Judgment, whether that sum is paid directly to the Commission or paid to satisfy judgments or settlements in the lawsuits for which Scrushy claims an offset against the $77.5 million disgorgement amount.
NASD is warning investors to be wary of faxes, emails and even cell phone text messages touting low-priced "China" stocks of companies that often have no affiliation with China or its stock markets. A new NASD Investor Alert - "China" Stocks-Look Beyond the Name Before You Invest - explains how fraudsters entice investors to purchase bogus stocks that promise exponential price growth. One fax promoted a purported China stock with the headline, "Grabbing massive profits in China has never been easier than right now!" It went on to promote a company whose shares were "ripe to pop" for "a low price that's unheard of, and quite temporary." The fax urged investors to "load up on the stock now!" Fraudsters use these efforts to pump up the stock's price, then sell off their shares, usually leaving investors with a stock valued at much less than when they purchased it.
Blank check companies, also known as Special Purpose Acquisition Companies (SPACs), are in the news today. Twenty of them have done IPOs so far in 2007, raising $2.1 billion. They generally require the company to make an acquisition within two years, and the acquisition is subject to shareholders' approval. Former executives of media companies are principals in a number of these SPACs. See WSJ, 'Blank-Check' Firms Gain Favor; NYTimes, Former Media Executives Give New Life to ‘Blank Check’ Corporations.
Five former outside directors of bankrupt Just for Feet Inc. paid $41.5 million to settle a lawsuit brought by the bankruptcy trustee charging them with misrepresentations, conflict of interests, breach of fiduciary duty and bad faith. The company failed in 1999 as a result of an accounting fraud. The settlement is believed to be the largest paid by outside directors. See WSJ, Settlement in Just for Feet Case May Fan Board Fears.
A group of union pension plans announced that it will withhold their votes for the re-election of two directors at CVS/Caremark at its May 8 annual meeting, to protest the CVS/Caremark merger and draw attention to the backdating stock options investigation at the company. The two nominees, Roger L. Headrck and C.A. Lance Piccolo, were directors when Caremark selected CVS as a merger partner instead of a more lucrative offer from Express Scripts. See WSJ, Funds to Oppose CVS Board Choices.
Sunday, April 22, 2007
Of Breaches of the Peace, Home Invasions and Securities Fraud, by CHRISTINE HURT, University of Illinois College of Law, was recently posted on SSRN. Here is the abstract:
In some quarters of academia, commentators have criticized the lengthy prison sentences meted out to corporate officers convicted of violating federal laws pertaining to white collar crimes. These sentences, made more harsh by amendments to the Federal Sentencing Guidelines pursuant to the Sarbanes-Oxley Act of 2002, are seen as disproportionate to the harms created by the acts and inconsistent with the punishments given for violent crimes under state law. For example, the former President of Enron, Inc., Jeffrey Skilling, was sentenced to over twenty-four years in federal prison, just over the minimum sentence calculated by the Guidelines, for violating securities laws; however, in his home state of Texas, to face a mimimum of twenty-four years in prison, a murderer would have to kill five individuals without provocation or passion. This disparity, although not unique in comparing state crimes to other federal crimes, such as drug possession and distribution, poses the question: Is Jeff Skilling worse than a serial killer?
This Essay comes to the unsettling conclusion that the harsher punishments now available for corporate crime, particularly securities crime, are neither disproportionate or inconsistent with state law crimes after examining the values that society places on the interests protected by such punishments. This Essay presumes that prohibitions and punishments of certain acts reflect the relative values that society places on an interest that is threatened by the targeted activity. For example, larceny historically was criminalized to protect the public peace from breaches arising from the wresting of possession of an object from another. In addition, enhanced penalties for robbery and burglary reflect society's interest not in property but in living free from fear of bodily injury, particular in the safety of one's own home or "castle." Today, however, society's greatest fear in most parts of the U.S. is not of random violence or home intrusion but of financial insecurity in the future. This Essay presents the argument that in our modern society, maintaining the integrity of the capital markets is the new “keeping of the peace” and that to today's modern worker, a retirement account is the “castle” that needs protection from invasion.
The proposed LBO of Sallie Mae by two investment banks and two private equity firms was the big news story, with a number of interesting angles. The LBO illustrates the big money that can be made from students who need to finance their education, something that many find unseemly particularly as the conflicts of interest between the industry and universities continue to be investigated. The LBO also shows that private money is moving into regulated industries.
Another LBO was in the news: institutional shareholders of Clear Channel Communications have expressed displeasure at the offered price, and in response, this week the bidders raised the price to $39 and said this was their final offer. The shareholders want $40 per share. The vote has been postponed to allow shareholders time to vote.
Finally, Joseph Nacchio, former CEO at Qwest Communications, was convicted on nineteen counts of inside trading.
Carrots for Vetogates: Incentive Systems to Promote Capital Market Gatekeeper Effectiveness , by LAWRENCE A. CUNNINGHAM, Boston College Law School, was recently posted on SSRN. Here is the abstract:
This Article contributes a novel idea to the literature on capital market gatekeepers: positive incentive systems for gatekeepers to perform functions not required of them in exchange for rewards if they perform the functions successfully. Capital market gatekeeping theory relies upon the reputations that gatekeepers are assumed to command and protect backstopped by negative threats of legal liability for failure to perform legally mandated functions. The ineffectiveness of many gatekeepers during the late 1990s and early 2000s revealed practical limitations of the reputational constraint and the reforms that responded to the failures continue to emphasize the legal duties and legal liability that gatekeepers face. Adversely, that emphasis discourages gatekeepers from willingness to perform desired functions - such as to detect for fraud - whereas the positive approach induces performance of such functions. Without necessarily displacing existing reputation constraints and liability strategies, adding an incentive system as a public policy lever could promote gatekeeper effectiveness and poses little downside risk.
Compensating Power: An Analysis of Rents and Rewards in the Mutual Fund Industry, by WILLIAM A. BIRDTHISTLE, Chicago-Kent College of Law, was recently posted on SSRN. Here is the abstract:
The allegations of malfeasance in the investment management industry - market timing, late trading, revenue sharing, and several others - involve a broad range of mutual fund operations. This Article seeks to explain the common source of these irregularities by focusing upon a trait they share: the practice of investment advisers' capitalizing upon their managerial influence to increase assets under management in order to generate greater fees from those assets.
This Article extends theories of executive compensation into the context of investment management to understand the extraction of rents by mutual fund advisers. Investment advisers, as collective groups of portfolio managers, interact with the boards of trustees of mutual funds in ways analogous to the dealings of business executives with corporate boards of directors. In this setting, the managerial power hypothesis of executive compensation provides a useful paradigm for understanding distortions in arm's-length bargaining between investment advisers and fund boards, as well as limitations of the market's ability to ensure optimal contracting between those parties.
Sex, Trust, and Corporate Boards , by JOAN MACLEOD HEMINWAY , University of Tennessee, Knoxville - College of Law , was recently posted on SSRN. Here is the abstract:
This article collects and interprets social science research on sex and trust and uses this work to shed new light on the emerging case for gender diversity on corporate boards. Specifically, the article describes social science research findings indicating (1) that men and women trust and are trustworthy on different bases and (2) that there is a bias against women in chief executive officer (and potentially other corporate leadership)positions. Based on this research, the nature of corporate management and control, and current legal scholarship on corporate governance, the article asserts that gender diversity on corporate boards may be desirable but difficult to attain. Ultimately, the article calls for more targeted research on the links among sex, trusting behavior, trustworthiness, and corporate board membership and also recommends that boards of directors pursue gender diversification in filling vacancies and new board slots as a means of diversifying trust in the corporation.
The Missing Link in Sarbanes-Oxley: Enactment of the 'Change of Control Board' Concept, or Extension of the Audit Committee Provisions to Mergers and Acquisitions, SAMUEL C. THOMPSON, JR. , UCLA School of Law was recently posted on SSRN. Here is the abstract:
This paper builds upon on my 2000 article, Change of Control Board: Federal Preemption of the Law Governing a Target's Directors ("2000 COCB Article"). In that article I propose that Congress address the conflicts of interest that can arise in the acquisition of a publicly held target corporation in various types of hostile and consensual merger and acquisition ("M&A") transactions by requiring the independent appointment of a disinterested Change of Control Board. Under this proposal, unless the shareholders elect-out, once a public corporation becomes a target of a bona fide M&A offer, a federal Change of Control Official would appoint for the target a three-person Change of Control Board, which would have complete authority over the acquisition process. This concept would override all state takeover laws, and because of the obvious independence of the Change of Control Board, a Federal uniform standard of review, the business judgment rule, would apply in determining if the board acted properly. Thus, this concept would eliminate the several confusing standards of review applicable to the actions of a target's directors in M&A transactions under Delaware law.
Many features of the Change of Control Board concept are similar to those provided for audit committees in the Sarbanes-Oxley Act of 2002 (“SOX”). The audit committee is directly responsible for dealing with the firm's CPA, each member of the audit committee must be "independent," and the audit committee has the authority to hire its own advisors. Also, the U.S. stock exchanges have promulgated rules requiring that the boards of directors of each listed company consist of a majority of independent directors.
Although these independence requirements move in the right direction, they do not properly address issues that can arise when a publicly held corporation engages in a M&A transaction. The continuing problem with the acquisition of publicly held targets is illustrated most recently in two 2007 cases in the Delaware Chancery Court: Caremark and Netsmart, and the problem with acquirors is illustrated in the 2006 decision of this Court in J.P. Morgan Chase.
This article first explains how the audit committee provisions of SOX and the independent director requirement of the exchanges build upon a previous proposal for federalization of certain aspects of corporate law. The article then discusses (1) the manner in which current state law deals inadequately with various types of conflicts of interest that can arise in mergers and acquisitions, and (2) the bizarre structure of state anti-takeover law under which some states provide boards with virtually unlimited power to block a hostile acquisition. After explaining why the Change of Control Board concept should also apply to major acquisitions made by acquiring corporations, the article then elaborates on the essential features of the concept. Finally, the article discusses how many of the principles could be implemented by the SEC through its rulemaking authority under the audit committee provisions of SOX.