Securities Law Prof Blog

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

Wednesday, May 23, 2007

SEC Approves Guidance on SOX 404

Today the SEC unanimously approved guidance for management to use in evaluating internal controls over financial reporting.  The guidance is intended to make it easier to comply with section 404 and reduce the costs of compliance.  One of the biggest cost reductions is expected to come from a rule that will require auditors to provide only one opinion on internal controls, instead of the currently required two -- one on the controls, one on management's process in assessing the controls.  Tomorrow PCAOB is expected to approve a comparable standard for auditors.  See WSJ, SEC Approves Guidance To Ease Sarbanes-Oxley Rules.

May 23, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Hewlett-Packard Settles Charges re. Director's Resignation

The Securities and Exchange Commission today filed settled administrative charges against Hewlett-Packard Company for failing to disclose the reasons for a director’s abrupt resignation in the midst of HP’s controversial investigation into boardroom leaks. The Commission found that several months before the public revelation of the company’s leak investigation, an HP director objected to the company’s handling of the matter and resigned from the Board, yet HP failed to disclose the reasons for his resignation as required by federal securities laws. The Commission’s Order charges HP with violating the public reporting requirements of the Securities Exchange Act of 1934. Without admitting or denying the Commission’s findings, HP consented to an order that it cease and desist from committing or causing violations of these provisions.

May 23, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Opening Remarks from SEC Open Meeting on Internal Controls

Excerpts from Statement by SEC Staff: SEC's Proposed Interpretive Guidance to Management for Section 404 of Sarbanes-Oxley Act, by Zoe-Vonna Palmrose, Deputy Chief Accountant, U.S. Securities and Exchange Commission, SEC Open Meeting, Washington, D.C., May 23, 2007:

The Commission's proposed interpretive guidance was centered around two broad principles. These principles have not changed in the guidance we are presenting today. The first principle is that management should evaluate whether it has implemented controls that adequately address the risk that a material misstatement in the financial statements would not be prevented or detected in a timely manner. The second principle is that management's evaluation of evidence about the operation of its controls should be based on its assessment of risk. Under the guidance, management can align the nature and extent of its evaluation procedures with those areas of financial reporting that pose the highest risks to reliable financial reporting (that is, whether the financial statements are materially accurate). As a result, management may be able to use more efficient approaches to gathering evidence, such as self-assessments, in low-risk areas and perform more extensive testing in high-risk areas. By following these two principles, we believe companies of all sizes and complexities will be able to implement our rules effectively and efficiently....

Nonetheless, based on the comments received, we did make modifications to the proposed interpretive guidance in a number of areas. For example, we made revisions to better align it with the PCAOB's proposed auditing standard, to provide clarification on the role of entity-level controls, as well as on the nature of on-going monitoring activities in relation to management's evaluation, and to enhance the guidance on fraud risk considerations.

May 23, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Recognizes Rating and Investment Information as NRSRO

In a May 21, 2007 no-action letter, the SEC's Division of Market Regulation recognizes Rating and Investment Information, Inc. as a nationally recognized statistical rating organization.  This allows broker-dealers to consider its credit ratings for purposes of the net capital rule.

May 23, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Announces Agendas and Panelists for Proxy Roundtables

The Securities and Exchange Commission today announced the agendas and participants for the final two roundtables in its series of roundtables on the proxy process. The Roundtable on Proxy Voting Mechanics, scheduled for May 24, 2007, from 9:00 a.m. to 12:30 p.m., will cover topics including: (1) share ownership and voting; (2) broker proxy voting; and (3) shareholder communications.
The Roundtable on Proposals of Shareholders, scheduled for May 25, 2007, from 9:00 a.m. to 12:30 p.m., will cover topics including: (1) state law rights of shareholders; (2) communication between shareholders and the company; and (3) the relationship between state law rights and the federal proxy rules.  See the press release for the complete list of panelists.

May 23, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

BISYS Group Settles Financial Reporting, Internal Controls Charges

The Securities and Exchange Commission announced today the filing and settlement of charges that The BISYS Group, Inc., a leading provider of financial products and support services, violated the financial reporting, books-and-records, and internal control provisions of the Securities Exchange Act of 1934. BISYS has agreed to settle the case, without admitting or denying the Commission's allegations. The company will consent to the entry of a judgment upon charges of violating the reporting, books-and-records and internal controls provisions of the securities laws. It has agreed pay approximately $25 million in disgorgement and prejudgment interest.

Mark K. Schonfeld, Director of the Commission's New York Regional Office, said, "This is a case study in internal control failures under earnings pressure. The settlement delivers meaningful relief to investors harmed by BISYS's misconduct."

May 23, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

MGM Mirage Forms Independent Committee to Study Kerkorian's Bid

MGM Mirage announced that it has set up a committee of independent directors to study controlling shareholder Kirk Kerkorian's offer to buy two properties (including the Bellagio) and possibly a restructuring of the company.  There is speculation that Kerkorian's bid will lead to an auction for the whole company.  See WSJ, Kerkorian Sets Up Delicate Dance at MGM and NYTimes, MGM Mirage Forms Independent Board to Study Kerkorian Offer

May 23, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Hedge Fund Investors Charge UBS With Harm to Fund

Investors in failed hedge fund Wood River are suing prime broker UBS, saying it used confidential information about the fund's portfolio to make money for itself at the expense of the fund.  Wood River owned an undisclosed large block of stock in Endwave, which violated both section 13(d) and its own publicly-stated policy against concentrating more than 10% of its portfolio in one stock.  The complaint charges that UBS knew management was violating the rules, but instead of taking steps to cure the problem, it used the Endwave shares to assist short sellers in the stock and made $100 million in profits.  The founder of the hedge fund, John Whittier, is charged with criminal fraud for the fund's violations of its investment policies.  See WSJ, Lawsuit Against UBS Spotlights Prime Brokers.

May 23, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 22, 2007

Securities Fraud Judgment Against C.E.C. Industries Officers

On May 8, 2007, the Honorable Henry H. Kennedy, U.S. District Judge for the District of Columbia, entered judgment against defendants Gerald H. Levine and Marie A. Levine in the Commission's litigation against them for violations of the federal securities laws. In addition to finding both Levines liable for securities fraud and other federal securities law violations, the Court held the defendants jointly and severally liable for disgorgement of $217,368.59 plus prejudgment interest and ordered them to pay, jointly and severally, a civil penalty of $200,000. The Court also enjoined the Levines for a period of ten years from violating the anti-fraud provisions of the federal securities laws, and barred each of them for a period of ten years from serving as an officer or director of a public company.

The judgment followed a December 2006 hearing during which the Court heard evidence on what remedies should be imposed as a result of the October 2003 jury verdict that found that the defendants had fraudulently overstated the assets of C.E.C. Industries Corporation (CEC) and filed false annual and quarterly reports with the Commission. In his Findings of Fact and Conclusions of Law, Judge Kennedy stated, among other things, that "[t]he Levines undertook a complex scheme of stealth and concealment by which they defrauded investors and brought financial gain to themselves," and that they were the "undisputed kingpins" of the scheme. Judge Kennedy further stated the Levines "utterly failed to acknowledge their wrongdoing or show contrition."  For further information, see the SEC press release.

May 22, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Roundtable of former SEC Chairs

SEC Chairman Christopher Cox today announced that on May 23, 2007, from 5-6 p.m., five former chairmen of the U.S. Securities and Exchange Commission will join him for a roundtable discussion. In addition to Chairman Cox, roundtable participants will include: William H. Donaldson, 2003-05, Chairman, Donaldson Enterprises; Roderick M. Hills, 1975-77, Partner, Hills and Stern LLP; Arthur Levitt, 1993-2001, Senior Advisor, The Carlyle Group; Harvey L. Pitt, 2001-03, CEO and Founder of Kalorama Partners; and David S. Ruder, 1987-89, William W. Gurley Memorial Professor of Law at Northwestern School of Law.

For additional information, see the SEC press release, but don't look for an agenda, because one was not included.      

May 22, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Ownership Questions at the Proxy Advisory Firms

Who owns the proxy advisory firms, and does it affect the quality of their services?  A Wall St. Journal article today explores these questions and looks at the two leaders, Glass Lewis & Co. and Institutional Shareholder Services.  Glass Lewis is wholly owned by Shanghahi's Xinhua Finance Ltd., rising concerns about the influence of the Chinese government.  Two employees -- Lynn Turner (former SEC chief accountant) and Jonathan Weil (former WSJ reporter)-- recently resigned, citing concerns with the parent company's conduct.  ISS, in turn, is owned by risk management firm RiskMetrics Group, that purportedly is considering an IPO.  The longstanding concern about ISS is the conflict of interest between its proxy advisory services, where it advises shareholders how to vote on corporate governance matters, and its consulting services, where it advises companies on how to improve their corporate governance policies.  The conflict could be exacerbated if ISS goes public.  See WSJ, Proxy-Advisory Firms Encounter Concerns on Owners' Influence.

May 22, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

"Big Boy" Letters under Legal Scrutiny

Jenny Anderson's column in today's New York Times explores the disclosure duties relating to the use of "big boy" letters -- a promise by the purchaser not to sue the seller frequently used in private sales of securities.  In a case scheduled to go to trial in New York next month, a hedge fund, R2, is suing Smith Barney, which sold $20 million of World Access bonds while in possession of confidential information about the company's distressed financial situation.  The initial purchaser, the Jefferies Group, resold the bonds to R2, without disclosing the existence of the "big boy" letter it agreed to sign.  Two days later the World Access bonds plummeted in value.  Lawyers interviewed by Ms. Anderson divided on whether Smith Barney and the Jefferies Group acted improperly.  See NYTimes, Side Deals in a Gray Area.   

May 22, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Monday, May 21, 2007

NYSE's Ketchum on NYSE-NASD Consolidation

Richard G. Ketchum, Chief Executive Officer, NYSE Regulation, Inc. On “Consolidation of NASD and the Regulatory Functions of the NYSE: Working Towards Improved Regulation,” May 17, 2007 Testimony Given before the Subcommittee on Securities, Insurance and Investment of the U.S. Senate Committee on Banking, Housing and Urban Affairs

May 21, 2007 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Historical Society Broadcast on Insider Trading

Online Broadcast Tomorrow at

Fireside Chat: Insider Trading - Tuesday, May 22nd - 3:00 pm ET.
Learn more about the persistence of insider trading fraud and why the SEC views it as the "capital crime" of securities regulation by joining Mark Radke of LeBoeuf Lamb Greene & MacRae LLP, a former Chief of Staff to SEC Chairman Harvey Pitt; and Donna Nagy of Indiana University School of Law in discussion with moderator Professor Theresa Gabaldon of The George Washington University School of Law. The Fireside Chat is available free of charge; no advance registration is required.

May 21, 2007 in Professional Announcements | Permalink | Comments (0) | TrackBack (0)

China Will Invest in Private Equity Firm

China is going to diversify its portfolio beyond U.S. Treasury bills and make a $3 billion investment in The Blackstone Group.  It will make the purchase of non-voting shares as part of The Blackstone Group's upcoming IPO.  The stake will be less than 10% of the firm, and China will agree to hold it for four years.  See NYTimes, China to Buy a Stake in Blackstone; WSJ, China Puts Cash To Work in Deal With Blackstone.

May 21, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Alltel Latest to Announce LBO

Alltel Corp., the wireless phone company known for its "My Circle" plan, is the latest public company to announce a LBO.  Two private equity firms have offered to pay $71.50 per share, for a total of $27.51 billion, the largest buyout in the wireless industry.  See NYTimes, Equity Firms to Buy Alltel in $27.5 Billion Deal; WSJ, TPG, Goldman Arm Land Alltel.

May 21, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, May 20, 2007

Perspectives on the Past Week's News

The big news this week is Cerberus's winning bid to take Chrysler off the hands of Daimler Chrysler by purchasing a 80.1% interest.  Daimler Chrysler is so relieved to undo the 9-year merger that it is investing an additional $677 million in the company.  Other U.S. auto makers are hopeful that Chrysler can make a deal with the unions about pension and health care benefits that will be helpful to them all.  Other note-worthy events include two decisions to take no action.  The SEC, to the outrage of the brokerage industry, decided not to seek rehearing of the D.C. Circuit's decision in FPA v. SEC (invalidating the exemption from the Investment Advisers Act for brokerage fee-based accounts).  The Dow Jones board of directors decided not to take any action on Murdoch's bid so long as a majority of the voting control remains opposed to the bid.

May 20, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Rapp on SOX Whistleblowers

Recently posted on SSRN:   Beyond Protection: Invigorating Incentives for Sarbanes-Oxley Corporate and Securities Fraud Whistleblowers, by GEOFFREY CHRISTOPHER RAPP, University of Toledo - College of Law . 


Section 806 of the Sarbanes-Oxley Act of 2002 (“SOX”) recognized the importance of private actors in bringing to light information about corporate financial and accounting fraud. That section provides some protection for whistleblowers against retaliation for objecting to, and reporting, violations of the federal securities laws. While this limited protection is a step in the right direction, current law does not go far enough to encourage whistleblowers to risk incurring the adverse social, psychological, and economic consequences of exposing serious corporate and securities fraud. This Article develops the “bounty” model for rewarding SOX whistleblowers, and argues that sound public policy counsels its adoption and implementation. By giving whistleblowers a share of the recovery of those damaged by corporate and financial fraud (a “bounty”), the law could increase incentives for whistleblowing. The federal False Claims Act provides a sensible precedent.

May 20, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Bainbridge on Shareholder Voting Rights

Recently posted on SSRN: The Scope of the Sec's Authority Over Shareholder Voting Rights, by STEPHEN M. BAINBRIDGE, University of California, Los Angeles - School of Law.


At a May 2007 Roundtable on "The Federal Proxy Rules and State Corporation Law," the Securities and Exchange Commission posed the following question for discussion: "What should be the relationship of federal and state law with respect to shareholders' voting rights and ability to govern the corporation?" To answer that question, this essay reviews the legislative history of Section 14(a) and of the Securities Exchange Act generally, as well as the leading judicial precedents. It concludes that, as a general rule of thumb, federal law appropriately is concerned mainly with disclosure obligations, as well as procedural and antifraud rules designed to make disclosure more effective. In contrast, regulating the substance of corporate governance standards is a matter for state corporation law.

The author was an invited panelist at the May 7th Roundtable and submitted this essay as his written comments.

May 20, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Simkovic on Open Market Stock Repurchases

Recently posted on SSRN:  The Effect of Enhanced Disclosure on Open Market Stock Repurchases, by MICHAEL SIMKOVIC, John M. Olin Center for Law and Economics at Harvard Law School; McKinsey & Co. (starting September 2007) 


Publicly traded companies distribute cash to shareholders primarily in two ways - either through dividends or through anonymous repurchases of the companies' own stock on the open market. Companies must announce a repurchase authorization, but do not actually have to repurchase any stock, and until recently did not have to disclose whether or not they were in fact repurchasing any stock. Scholars and regulators noticed that companies frequently announced repurchases but then appeared not to complete them. Scholars and regulators became concerned that such announcements might be used by insiders to exploit public investors. To increase transparency and reduce opportunities for exploitive behavior, the SEC required that companies disclose their repurchase activity for the past quarter in their 10-Q and 10-K filings beginning in January 2004. This paper tracks the 365 repurchase programs announced in 2004 and finds that since the SEC disclosure requirement went into effect, companies are more likely to complete their announced repurchases and do so within a shorter time period after the repurchase announcement.

May 20, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)