Securities Law Prof Blog

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

Saturday, May 19, 2007

Atmel Shareholders Vote to Keep the Directors

Atmel Corp. announced that shareholders voted down fired CEO George Perlegos's proposal to oust the 5-person board of directors that fired him for charging personal travel expenses to the company.  The board promised to add two new independent directors to the board.  See NYTimes, Atmel Shareholders Vote Down Fired Chief’s Plan to Oust Board.

May 19, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Buy Your Stocks at Wal-Mart

Wal-Mart is starting a pilot program where it will partner with discount brokerage Sharebuilder to offer, via a link on its website, discount brokerage services.  It is not clear how (if at all) these services will differ from other discount brokerage accounts.  Wal-Mart recently abandoned a plan to enter banking.  See WSJ, Wal-Mart, ShareBuilder Set Deal to Offer Investing Services.

May 19, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Board Accepts New Terms for Clear Channel LBO

The Clear Channel Communications sale to Bain Capital and Thomas L. Lee Partners has been off and on for months; now it appears on as the Clear Channel board accepted a revised offer (that it previously turned down) for the company.  Several influential shareholders were involved in negotiating the terms.  Shareholders will receive $39.20 per share in cash or equity participation in the new company, up to 30%.  The buyers have agreed to limit their fees and to name two independent directors.  A shareholder vote will take place in the next few months.  See NYTimes, On Third Time Around, Clear Channel Accepts Takeover Bid ; WSJ, Clear Channel's Board Accepts Buyout Proposal.

May 19, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Verizon Shareholders Adopt Say on Pay Proposal

Verizon shareholders adopted a shareholders resolution at the May 3 annual meeting that gives shareholders an advisory vote on executive compensation; 50.18% of votes were in favor of it, the company announced yesterday.  Shareholders were particularly upset by CEO Ivan Seidenberg's $20 million plus pay package, an 11% increase,  when the company's performance was less than stellar.  See NYTimes, Say-on-Pay Gets Support at Verizon; WSJ, Verizon Holders Pass 'Say-on-Pay' Plan.

May 19, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Friday, May 18, 2007

Vo on SOX 404

Recently posted on SSRN: Lifting the Curse of the Sox Through Employee Assessments of the Internal Control Environment, by THUY VO, William Mitchell College of Law.  Here is the abstract:

This article posits that the goal of Section 404 of the Sarbanes-Oxley Act to enhance financial reporting accuracy and improve corporate behavior is not being achieved under the current implementation of the statute. Section 404 requires public companies to assess the companies' internal control system, but both the statute and the ensuing regulations provide little guidance as to the content or scope of the assessment that is required for compliance. Without the necessary clarification and guidance from policy makers, management has been focusing its efforts on assessing the company's multitude of internal accounting activities instead of evaluating the company's overall internal control environment.

In this article, I propose a unique and effective process for assessing and improving financial reporting accuracy and organizational integrity. Instead of requiring management to assess the company's internal accounting activities, the company should be required to evaluate its internal control environment. Such assessment of the internal control environment can be achieved by having employees evaluate senior management's behavior and ethics. Management's reporting of a weakness in the company's accounting activities does not reveal the integrity of the organization, whereas the employees' reporting of a weakness in management's behavior and ethics brings to the forefront the executives' standard of leadership and personal commitment to business integrity. An employee assessment of management's behavior and ethics will be more cost effective and efficient in detecting financial reporting fraud and improving corporate behavior than the current requirement of a management assessment and reporting of internal accounting activities.   

May 18, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Paredes on Hedge Fund Regulation

Recently posted on SSRN: Hedge Funds and the SEC: Observations on the How and Why of Securities Regulation, by TROY A. PAREDES, Washington University School of Law.  Here is the abstract:

This short Essay addresses three topics on one aspect of the hedge fund industry - the SEC's recent efforts to regulate hedge funds. First, this Essay summarizes the regulation of hedge funds under U.S. federal securities laws insofar as protecting hedge funds is concerned. The discussion highlights four basic choices facing the SEC: (1) do nothing; (2) substantively regulate hedge funds directly; (3) regulate hedge fund managers; and (4) regulate hedge fund investors. Second, this Essay addresses the boundary between market discipline and government intervention in hedge fund regulation. To what extent should hedge fund investors be left to fend for themselves? Third, this Essay highlights two factors impacting regulatory decision making that help explain why the SEC pivoted in 2004 to regulate hedge funds when it had abstained from doing so in the past. These two factors are politics and psychology.

May 18, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

NASAA's Borg Testifies on NYSE-NASD Merger

North American Securities Administrators Association (NASAA) President Joseph P. Borg testified on May 17 before a Senate panel holding a hearing on the consolidation of the NYSE and NASD regulatory arms.  He said that improved investor protection, rather than regulatory streamlining, should be the primary objective of the upcoming merger of two securities industry self-regulatory organizations (SRO).

May 18, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Obtains Emergency Relief in Bogus Real Estate Development Fraud

On May 18, 2007 the Securities and Exchange Commission filed an emergency action against Felix Strashnov, a/k/a Felix Straton, and Michael Ayngorn, and three entities they controlled to halt an ongoing fraud in which the defendants claim to have raised nearly $2 million. The defendants used high pressure sales tactics and cold-calling to sell unregistered securities of bogus real estate development companies, to unsuspecting investors, including elderly people with limited means.

The Commission's complaint, filed in the Southern District of New York, charges the defendants with making fraudulent solicitations, conducting an unregistered offering, and misappropriating investor funds. The complaint also alleges that the defendants made numerous misrepresentations about the assets, operations and future prospects of the companies.  Rather than using funds raised from investors to purchase and develop investment properties for resale, Straton and Ayngorn purchased personal residences, held in their own names rather than in Empire's name. Empire appears to have no properties, assets, or revenue other than funds raised from investors. Empire has taken no steps to conduct an initial registered public offering of its securities.

May 18, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Fired Amtel CEO Seeks to Remove the Board That Fired Him

Floyd Norris's column in the New York Times asks a provocative question: should a fired CEO be able to replace the board of directors that fired him?  Of course, corporate law answers that question, yes, if the CEO has the shareholder votes.  George Perlegos, the co-founder and owner of 5% of the shares of Amtel Corp., was fired by the board because he collected personal travel expenses from the corporation.  (The board subsequently learned he was also involved in stock options backdating.)  Perlegos called for a special shareholders meeting to remove the board while he was still Chair.  The Delaware Chancery held that he had the authority to call the meeting and that the board's attempt to cancell the meeting was not done for good reasons.  See Perlegos v. Amtel Corp., 2007 WL 475453 (Feb. 8, 2007).  Perlegos has spent about $6 million in his campaign, and ISS supports one of his nominees.  After all, the directors demonstrated their poor oversight by allowing the CEO to commit fraud.  See NYTimes, A Fired Boss Seeks His Revenge.   

May 18, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Did Broker Votes Make the Difference in CVS Caremark Directors' Election?

A shareholder group that led the effort to withhold votes from two CVS Caremark directors called for a recount as to Roger L. Headrick, saying that broker votes should be disregarded.  The company announced that less than a majority of shares withheld their votes from Headrick, but GW
Investment Group (the investment arm of the labor federation Change to Win) estimated that if broker votes were excluded 57% may have voted against him.  The group believed that the former Caremark directors failed to achieve the best price for the Caremark shareholders in the merger.  NYTimes, Calls to Remove CVS/Caremark Director.

May 18, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Paulson Sets Up New Study on Financial Restatements

Treasury Secretary Paulson is concerned about the large number of restated financial statements -- 1.876 in 2006 -- and has set up a group to study the matter. "When you have 1,500 or so restatements in the course of a year, this is confusing to investors and tells us that the system isn't working the way it needs to be," he said.  Certainly, no one would disagree with that statement; the problem is that Paulson's solution is to relax accounting rules and limit the liability of accounting firms.  The group he appointed does have strong leadership; it is headed by former SEC Chair Arthur Levitt (who has previously written about the intense lobbying efforts from the accounting industry he experienced at the SEC) and former SEC chief accountant Donald Nicolaisen.  WSJ, Treasury Targets Financial Fixes.

May 18, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Collins & Aikman Sues Former CEO Stockman

Collins & Aikman, the failed auto parts company, has sued its former CEO David Stockman and Heartland Industrial Partners, the private equity firm that took control of the company in 2001, saying they enriched themselves by inflating earnings and collecting fees from a series of acquisitions that proved disastrous for the company.  It also alleged that the auditors turned a blind eye to accounting irregularities.  The charges mirror those contained in a criminal indictment against Stockman.  See WSJ, Collins & Aikman Sues Former CEO.

May 18, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, May 17, 2007

Senate Hearing on NYSE-NASD Consolidation

The Senate Banking, Housing and Urban Affairs Subcommittee of the Securities, Insurance, and Investments Committee held a hearing today on the consolidation of the regulatory arms of the NYSE and NASD.  Among those testifying in favor of the merger were Eric R. Sirri, Director of Market Regulation, SEC; Mary Schapiro, Chair and CEO of NASD; and Marc Lackritz, CEO of SIFMA.

May 17, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SIFMA CEO Testifies on NYSE-NASD Regulatory Consolidation

Marc Lackritz, CEO of SIGFMA, testified before the Senate Banking, Housing and Urban Affairs Subcommittee of the Securities, Insurance and Investments Committee on the merger of the regulatory arms of NASD and NYSE.  He also spoke in favor of principles-based regulation.  See InvNews, Lackritz backs principles-based regs.

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

Executive Compensation Shareholder Proposals Defeated at AMR

At the annual shareholders' meeting of AMR, the parent of American Airlines, two shareholder proposals relating to executive compensation were defeated.  One called for an advisory vote on executive compensation; the other would have required that 75% of stock options and restricted stock awards to executives be performance-based.  A shareholder proposal establishing a procedure for 10% owners to call a special shareholders meeting was passed.  Union representatives were critical of recent bonuses to executives amounting to $21 million, while some shareholders praised the company's recent profitable results.  See NYTimes, Executive Pay Proposals Rejected at AMR

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

Bausch & Lomb Accepts $4.5 Billion Bid

Bausch & Lomb, which has not filed financial statements as it seeks to correct accounting irregularities, announced that it would be acquired by private equity firm Warburg Pincus.  The deal is for $4.5 billion or $65 per share, a 23% market premium.  The $40 milllion breakup fee, described as "relatively modest," and Bausch's statement that it has 50 days to seek better offers, suggests that it is expecting other bidders.  See NYTimes, Bausch & Lomb Accepts $4.5 Billion Takeover Bid; WSJ, Bausch & Lomb
Aims to Play Field

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

Dow Jones Board Sits Tight

The Wall St. Journal describes board deliberations at yesterday's regularly scheduled board meeting of Dow Jones & Co., where, it reports, the board decided to take no action on the Murdoch bid so long as a  majority of the voting power (the Bancroft family) opposes the deal.  The board heard other presentations and also considered adopting "change of control" packages for executives in the event of continuing uncertainty over the company's future.  What I find interesting is the level of detail about the board meeting and the article's identifying its sources as "two people familiar with the board's thinkging."  Is this another example of a leaky board?  See WSJ, Dow Jones Board Won't Act As Bancrofts Deliberate.

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

The Securities Industry's Political Power

Interesting numbers about the political power of the securities industry:

[The Securities Industry and Financial Market Association]is Wall Street's main mouthpiece as well as its heftiest political benefactor. When added together, SIFMA's political action committees gave more than $1 million during the 2006 election season, putting the organization in the top 25 of all PACs. Its combined $8.5 million in spending on federal lobbying last year placed it in the top 30.

The financial-services industry is the biggest corporate player in national politics. Only organized labor donates more money to candidates for federal offices.

WPost, Lobby's Co-CEO Quit After Probe

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

Wednesday, May 16, 2007

SEC Sets Agenda for May 23 Meeting

The SEC has released the agenda for its Open Meeting on May 23, which has a number of important items:

The Commission will consider whether to adopt interpretive guidance for management regarding its evaluation and assessment of internal control over financial reporting. The Commission will also consider whether to adopt amendments to Exchange Act Rules 13a-15(c) and 15d-15(c) that would make it clear that an evaluation that complies with the Commission's interpretive guidance would satisfy the annual management evaluation required by those rules. In addition, the Commission will consider whether to adopt amendments to Rules 1-02(a)(2) and 2-02(f) of Regulation S-X to require the expression of a single opinion directly on the effectiveness of internal control over financial reporting by the auditor in its attestation report. Finally, the Commission will consider whether to adopt amendments to Exchange Act Rule 12b-2 and Rule 1-02 of Regulation S-X to define certain terms.
The Commission will consider a number of rule proposals addressing the registration and disclosure requirements for smaller companies, as well as private offerings of securities, including whether:
to propose amendments to increase the number of companies eligible for the scaled disclosure and reporting requirements for smaller reporting companies;
to propose amendments to expand the eligibility requirements of Form S-3 and Form F-3 to permit registration of primary offerings by companies with a public float of less than $75 million, subject to restrictions on the amount of securities sold in any one-year period;
to propose exemptions from the registration requirements of the Securities Exchange Act of 1934 for grants of compensatory employee stock options by non-reporting companies;
to propose a new Regulation D exemption for offers and sales of securities to a newly defined subset of "accredited investors," as well as to propose revisions to the Regulation D definition of "accredited investor," disqualification provisions, and integration safe harbor and to provide interpretive guidance regarding integration;
to propose revisions to Form D and mandate electronic filing of Form D; and
to propose amendments to Rule 144 to revise the holding period for the resale of restricted securities, simplify compliance for non-affiliates, revise the Form 144 filing thresholds, and codify certain staff interpretations, as well as to propose amendments to Rule 145.

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

Four Defendant Settle SEC Charges on Bank Conversion Fraud

This is the first I've heard of this brand of securities fraud:

The Securities and Exchange Commission today charged a former Wall Street executive and three other individuals with securities fraud for perpetrating a decade-long scheme to defraud savings banks and their depositors in connection with the banks' conversion from mutual to stock ownership.

The SEC's complaint alleges that Bert Fingerhut spearheaded a sophisticated scheme to circumvent federal and state banking regulations in order to make lucrative stock purchases in bank conversions. From January 1997 through January 2007, Bert Fingerhut's scheme generated a total of more than $12 million in fraudulent profits from secondary market sales of bank stock illegally obtained in 65 public offerings. The other three defendants were nominees for Bert Fingerhut who knowingly played active roles in implementing the scheme and profited from their efforts.  The complaint alleges that the defendants made numerous misrepresentations in stock subscription agreements and order forms to carry out their fraudulent scheme. All four of the defendants have agreed to settle the SEC charges.

Mark K. Schonfeld, Director of the Commission's New York Regional Office, said, "When banks convert from mutual ownership by their depositors to stock ownership by shareholders, the depositors are supposed to get first priority to purchase stock. Here, the defendants defrauded banks and depositors around the country and, in effect, jumped ahead of that line. As a result, they lined their pockets with money that should have gone to legitimate depositors. Spanning 10 years and 65 stock offerings, this is the most extensive bank conversion fraud we have ever seen."

David Rosenfeld, Associate Regional Director of the New York Regional Office, said, "The conduct in this case was particularly egregious. The defendants ran this scheme as a shrewdly calculated business enterprise, serially defrauding banks and reaping millions in illegal profits at the expense of innocent depositors."

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