July 15, 2006
KPMG Draws a Line in the Sand
Well-known white collar defense attorney Bob Bennett, lead counsel for KPMG, asserted in response to a request by sixteen of the defendants in the U.S. v. Stein prosecution who are former partners and employees of the firm that his client will not pay their attorney's fees, resisting the "suggestion" of U.S. District Judge Lewis Kaplan that the firm make the payments. The defendants filed a civil claim (see earlier post here) pursuant to Judge Kaplan's opinion finding that the government improperly pressured KPMG to not make the payments and authorizing the defendants to file their claim directly with the court as "ancillary" to the criminal case. At a hearing on July 13, Bennett stated, ""KPMG has no legal obligation to pay these fees . . . KPMG has no intention to pay these fees." (see AP story here). Bennett also indicated that the firm would seek to have the claims arbitrated rather than heard in the federal court, an issue that is likely to spark an immediate appeal if Judge Kaplan finds that any arbitration clause in employment or partnership agreements does not apply.
On another front, the judge also raised questions about government pressure on KPMG to force its partners to cooperate with the government's investigation by agreeing to interviews with prosecutors. Judge Kaplan will consider a motion to suppress statements made by three defendants that they assert were coerced by the firm, and indirectly the government, because of the Thompson Memo. A New York Times article (here) notes that Judge Kaplan referred again to the pressure created by the Thompson Memo on firms to cooperate, although unlike the attorney's fee issue, the DoJ document does not break much if any new ground related to cooperation in having employees speak with the government. It has long been a feature of the corporate landscape that, if an employee does not cooperate in an investigation, the person is liable to be fired, and at least for private firms they are largely free to decide whether to threaten an employee with termination for a lack of cooperation. The Thompson Memo makes explicit a common practice, and I suspect it will require quite a leap to find that government pressure on KPMG meets the standard for a coerced statement under the Due Process Clause.
Not that the judge can't reach that conclusion, and given his predilections about the Thompson Memo there is a reasonable chance he will suppress the statements. If he does exclude the statements on the ground that the Thompson Memo is unconstitutional or impermissibly pressured KPMG, then I think the government will quickly appeal. Who would have thought a tax prosecution could be this interesting -- not that these are tax issues, thankfully (and with apologies to Blog Emperor Caron!). (ph)
Bonds Is on Indictment Watch
The personal attorney for San Francisco Giants slugger Barry Bonds, Laura Enos, expects her client will be indicted in the next week on perjury and tax evasion charges. An AP story (here) quotes Enos as stating, "We are very prepared . . . We have excellent tax records and we are very comfortable that he has not shortchanged the government at all." The federal grand jury in San Francisco investigating Bonds is set to expire in the near future, perhaps as early as Thursday, July 20, so any indictment must be returned by then barring a six-month extension of its term. Bonds' former personal trainer, Greg Anderson, remains in jail for civil contempt for refusing to testify before the grand jury, and the Ninth Circuit denied his motion for bail while he appeals the contempt or, more likely, waits for the clock to wind down -- a witness is released from civil contempt once the grand jury's term expires. A lot of people will be watching for signs of an indictment on July 20, when the Giants will be home playing the division-leading San Diego Padres. (ph)
Hospice Care Provider Settles Medicare Fraud Case
Hospice care provider Odyssey HealthCare agreed to pay $12.9 million to settle civil fraud claims that it overbilled Medicare. The company was accused of billing for services for non-terminally ill patients who were not eligible for payments under Medicare rules. Odyssey agreed to enter into a Corporate Intergity Agreement with the Department of Health and Human Services. The case grew out of a qui tam action filed by JoAnne Russell, a former regional vice president, who will receive over $2.3 million from the settlement. A Department of Justice press release (here) discusses the civil settlement. (ph)
July 14, 2006
SEC Investigating Suspicious Trades in Western Gas and Kerr-McGee Call Options
The "free money" that can be made when trading in the options of a company about to be acquired is just too darn tough to resist, at least for some. On the heals of last month's SEC filing alleging insider trading by purchasers of call options in Maverick Tube right before it announced it would be taken over (see earlier post here), the Enforcement Division is now looking at trading in the two companies -- Western Gas Resources and Kerr-McGee -- that Anandarko Petroleum Corp. announced on June 23 it agreed to acquire. A Denver Post article (here) confirms that Anandarko Petroleum is cooperating with an informal SEC request for information related to the two acquisitions, and a study of the call options in both companies shows suspicious spikes in the volume right around the days when executives of each were working out the final details of the acquisitions. The story gives the example of the purchase of 322 July 50 Western Gas call options, which were slightly out of the money, the day after executives met to discuss the merger and the day before the board held a special meeting to consider the transaction; over the prior two weeks, the average daily volume for that series was 17. A similar pattern is shown in the Kerr-McGee call options, and each transaction involved a substantial premium that sent the shares of both well above the call option strike prices, meaning the purchasers realized substantial gains.
Needless to say, the SEC doesn't view winners of the call option lottery in the weeks before the announcement of an extraordinary transaction to be just lucky, and we should expect to see an insider trading action filed in the none-too-distant future. As always, the key issue for the traders is whether the U.S. Attorney's Office is in the vicinity, and the safe bet is that federal prosecutors will be monitoring the SEC investigation. (ph)
More Swag Goes On the Block
An earlier post (here) discussed the July 15 auction of the property of former Patterson-UTI CFO Jody Nelson to recover some of the $77 million he embezzled from the company. Some of the property of Kirk Wright, founder and former CEO of hedge fund firm Investment Management Associates (IMA), will go on the block on July 28 as part of the firm's bankruptcy. Wright disappeared in early 2006 amid accusations from the firm's clients, which included a number of former NFL players, that their assets had disappeared from the firm's funds. Wright was found in a hotel in Miami in May, and remains in jail while the government appeals an order granting him bail. A grand jury issued a superseding indictment on June 28 charging Wright with 24 counts of mail and securities fraud, on top of a single mail fraud count charged in a May 25 indictment, related to the disappearance of virtually all the money invested in the firm, which the government alleges had effectively devolved into a ponzi scheme (see U.S. Attorney's Office press release here). Wright supplied investors with reports indicating the funds had over $180 million in assets, but when the government finally seized its accounts there was less than $500,000 there.
The upcoming auction (property description here) involves a 9600 square foot home in East Cobb, Georgia, a luxury loft near the Georgia Aquarium, all the equipment and furnishings from IMA's offices in East Cobb, and three cars from Wright's collection, described as follows: "The Aston Martin is a gray 12 cylinder 2003 Vanquish 2 door coupe with blue interior and only 4,266 miles. The Bentley is a blue 12 cylinder 2005 Continental 2 door coupe with tan interior and only 7,890 miles. The BMW is a classic silver 1967 2000CS in excellent condition, with 98,000 miles." Unfortunately for the victims of IMA's collapse, even if these items fetch top dollar -- which is unlikely in a fire-sale situation -- that will be a drop in the bucket compared to the losses the investors have suffered. The NFL players have sued the league and the players union for certifying IMA and Wright as part of its Financial Advisors Program, a seal of approval that does not appear to have included much protection; they are seekig to recover the $20 million they invested in the firm's hedge funds (see Atlanta Journal-Constitution story here). (ph)
Track Coach Convicted of Fraud for Misusing Student Aid Money
Lance Brauman, most recently an assistant track coach at the University of Arkansas, was convicted on five counts, including three counts of mail fraud, related to a scheme to give student-athletes college work-study and campus employment funds when they did no work. Brauman was the track coach at Barton County Community College in Kansas, and was one of seven coaches, along with the athletic director at the school, charged in the case, and is the first one to go to trial. Six coaches, including five from the basketball program, entered guilty pleas. Brauman's attorney stated after trial that his client was being held accountable for practices at the school that had been going on for years before he arrived. Brauman was acquitted of three mail fraud counts related to allegedly falsified transcripts for student-athletes sent to a four-year university, a charge that has been prosecuted successfully in other college athletics cases. An AP story (here) discusses the conviction. (ph)
Former Georgia School Superintendent Sentenced to Eight Years
Former Georgia School Superintendent Linda Schrenko received an eight-year prison term after her guilty plea to conspiracy, corruption, and money laundering charges related to diverting nearly $500,000 in education funds to help out her failed 2002 gubernatorial campaign. In addition, after losing the election, she used over $9,000 to pay for cosmetic surgery. According to a press release issued by the U.S. Attorney's Office for the Northern District of Georgia (here) describing the case:
In the summer of 2002, SCHRENKO, who at the time was the State School Superintendent of Georgia, and her former Deputy Superintendent, MERLE TEMPLE, conspired with STEPHAN BOTES, the owner of a computer consulting company, to fraudulently obtain over a half million dollars of federal funds administered by the Georgia Department of Education. The evidence showed SCHRENKO personally ordered the Georgia Department of Education to issue checks in amounts just under $50,000, totaling over $500,000, to various companies owned and controlled by BOTES, purportedly to provide computer licenses and services to the Atlanta Area School for the Deaf, the Georgia School for the Deaf, and the Governor's Honors Program.
SCHRENKO personally ordered payments to BOTES’ companies at a time when no services had been performed and no contracts for services existed. SCHRENKO directed the Department to issue 11 checks on one day, July 24, 2002, in amounts just under $50,000, the maximum amount allowed by her signature alone. The monies ostensibly were to go for services to be provided to the Atlanta Area School For the Deaf, Georgia School For the Deaf, and the Governor’s Honors Program. However, products and services were not provided, and approximately half of the fraudulent proceeds were secretly funneled into SCHRENKO’S campaign and to third parties to pay expenses for the campaign.
Schrenko was once a rising star in the Georgia Republican Party, but her fall from grace will now include a substantial prison term. (ph)
July 13, 2006
KPMG Defendants File for Their Attorney's Fees
The unique mechanism set up by U.S. District Judge Lewis Kaplan when he found that the government's pressure on KPMG to refuse to pay attorney's fees for its former partners and employees was unconstitutional has now been put in motion. The sixteen KPMG defendants charged with conspiracy related to the sales of tax shelters have filed a civil suit (Stein v. KPMG available below) seeking payment of the fees, and the suit asserts that this claim is not meant to preclude a separate claim for "breach of contract or tortious conduct." Now that KPMG has been brought before the court, a host of interesting issues may arise. Because the firm is not a party to the criminal action, I don't think it can appeal the judge's order directly, but it may be able to raise the remedial portion of that opinion, at least once there is a judgment against it. The court's jurisdiction, as explained in Judge Kaplan's opinion, is that the attorney's fee claim is based on the court's ancillary jurisdiction over matters related to the criminal matter. That may be open to challenge, especially in light of the fact that the usual basis for a federal claim arising under state contract law and corporate law would be diversity jurisdiction, which may not be present here.
The defendants have different claims, some based on an implied contract with the firm, one with an employment agreement containing an express term on attorney's fees, and others with a statutory claim based on California law. Should they be considered together, or in separate actions? The sixteen defendants filed a single case, but the judge may have to sort them out separately. Moreover, the earlier opinion made brief reference to an arbitration clause governing employment-related matters, which may trigger a claim by KPMG to send the case to an arbitrator. The usual rule in this area is that the arbitrator decides most issues, including the issue of whether a claim is subject to arbitration.
Finally, and perhaps most ominously for KPMG, would be if the firm filed a motion asking Judge Kaplan to recuse himself because he has already decided the issues without KPMG being a party to the earlier decision. The opinion in U.S. v. Stein makes it rather clear that the judge believes KPMG is required to pay the fees, and even urges the firm to do so voluntarily. A recusal motion is in effect the "nuclear option" for KPMG, but then from reading the opinion I'm not sure things could go much worse for the firm. If required to pay the attorney's fees for sixteen defendants in a case that will involve a three-month trial (at a minimum), KPMG will be facing cost well over $100 million, and perhaps more than a quarter of a billion dollars if all the defendants go to trial and then appeal the verdict if found guilty. That is a substantial hit to a firm that has already paid $456 million in fines and penalties. (ph)
NatWest Three Alight in the U.S.
The so-called "NatWest Three" -- David Bermingham, Giles Darby and Gary Mulgrew -- will be arriving in the United States to face charges related to one of the many Enron deals in which the company's former CFO, Andrew Fastow, and other executives sought to enrich themselves through the various side-deals they set up ostensibly to help Enron's finances (see AP story here). The extradition has become a major political issue in Great Britain, with the House of Commons set to debate the issue of sending British citizens to face charges in the United States for conduct that occurred primarily in their home country but the government decided not to pursue an investigation of them, deferring to federal prosecutors in Houston. The extradition treaty that authorizes the transfer of the defendants from their home country was negotiated in the wake of the September 11 attacks as a means to facilitate quicker transfers, but like so much legislation adopted in response to one event it is now being applied in a far different context. While Parliament has ratified the treaty, the Senate has not yet voted on it, creating the odd situation that a similar request for extradition under the treaty from the U.K. would not have resulted in Americans being sent there to face charges.
The three defendants are scheduled to appear for a bail hearing on Friday, July 14. Prime Minister Tony Blair announced that the federal prosecutors will not oppose bail, likely a response to pressure from the British government that has been skewered over the issue (see Financial Times story here). A key issue the court will have to decide is whether to permit the defendants to return to England while awaiting their trial. Even if they are, the controversy over their extradition will continue. (ph)
July 12, 2006
Bookkeeper Adorns Herself With $1 Million
A trip to a day spa can be a very nice way to pamper yourself, and when you're the bookkeeper at such a business the temptation to treat yourself to its money can be overwhelming. Such appears to be the case for Ruth Fallis, the bookkeeper at the Perry Anthony Design Group in Pike Creek, Delaware, a suburb of Wilmington, who from 2001 to 2005 embezzled over $1 million from the salon/day spa. She was arrested and charged with interstate transportation of stolen property and wire fraud.
How do you steal that much money, including over $500,000 from the cash receipts, without anyone noticing? It appears that Ms. Fallis was the only one responsible for the money, and as happens quite frequently in smaller businesses -- and some not so small ones, like Patterson-UTI -- she was able to manipulate the books to keep her theft under wraps (so to speak). In this case, she stopped paying the taxes for the business and had the IRS deficiency notices diverted so that the owner never learned about the scheme until the business was $1.3 million in the hole. Where did all that money go? According to a press release issued by the U.S. Attorney's Office for the District of Delaware (here), she used a good chunk of the money to pay credit card bills:
A review of Fallis’ AmEx statements showed that she used her AmEx card to buy first class plane tickets for herself and her family, take trips to Europe, go skiing with her family out West, stay at expensive resorts and hotels, and go on shopping sprees in New York City. In addition, Fallis wrote eleven checks totaling $40,913.50 to herself. She also wrote one check in the amount of $5,716.41 to pay a Diner’s credit card bill, two checks totaling $9,180 to pay for landscaping work done at her home, and five checks totaling $43,692 to pay for contracting work done on her home.
As usual, the boodle is probably long gone and it's unlikely much money will ever be recovered. And, the IRS does not accept excuses like "the bookkeeper ate the tax payments,", so the spa owner will still be liable for the non-payment of taxes. (ph)
Will Prosecutors Pitch a Perjury Indictment at Bonds?
Media reports (see here) indicate that federal prosecutors may seek a grand jury indictment of San Francisco Giants slugger Barry Bonds, probably this month, on perjury and tax evasion charges. The perjury relates to his testimony before a grand jury in 2003 regarding his use of steroids received from Balco (Bay Area Laboratory Cooperative) in which he is reported to have denied knowing that two substances provided by his personal trainer, Greg Anderson, contained steroids. Anderson, Balco founder Victor Conte, and two others entered guilty pleas in 2005 to drug charges related to the creation and distribution of so-called designer steroids -- which had nicknames like "the clear" and "the cream" -- that were undetectable until the recent development of new drug tests.
A U.S. District Court judge recently sent Anderson to jail for civil contempt because he refused to testify before the grand jury investigating Bonds. He has filed a motion with the Ninth Circuit for bail while he appeals the contempt citation, but the grand jury is ending soon, perhaps at the end of the month, and it's unlikely he will be released before it expires or Bonds is indicted (see AP story here). From earlier reports about the appearance of witnesses, it appears that this is a "Thursday Grand Jury" that meets once each week, so any indictment is likely to come on that day.
The perjury case against Bonds looks to be based on the testimony of a former business partner involved in selling memorabilia autographed by Bonds and a former girlfriend who claims, among other things, that Bonds gave her $80,000 in cash. The tax charges likely relate to memorabilia sales that may not have been reported as income. If there is an indictment, I suspect any tax count is part of a "Liar, Liar" approach in which the government will try to show that Bonds was deceptive in other areas of his life to bolster the theory that he was not truthful in the grand jury about his use of steroids. The amount of income involved is unlikely to be significant for someone with Bonds' salary and ability to generate additional income through appearances and autograph sessions, so any tax charge looks to me to be part of a broader strategy to call into question his truthfulness. Moreover, if there is a basis for tax evasion charges, that would make it more difficult for Bonds to take the witness stand to explain his earlier testimony. If that is the case, the defense will focus on trying to undermine the credibility of the government's witnesses.
Mark you calendars for Thursdays during July, because something more than hot pennant races may be of interest. (ph -- sorry for the headline, I couldn't resist)
July 11, 2006
7 Day Sentence Not Enough for Martin
The 11th Circuit Court of Appeals in the case of United States v. Martin (Michael Martin) here ruled that the sentence issued by the district court was insufficient, despite the defendant providing cooperation pursuant to a 5K1.1 motion. The court stated:
"In Martin's case, we now are squarely presented with the question of whether a 23-level departure under s 5K1.1 for his assistance and an ultimate sentence of 7 days' imprisonment for his multi billion-dollar securities fraud are reasonable. The answer is easy: they are not."
Martin, a former CFO of HealthSouth provided evidence against Richard Scrushy at his HealthSouth related trial, in which Scrushy was found not guilty. Despite this cooperation, the government argued that a 23 level departure was unreasonable. The appellate court stated:
"[T]he choice of a 23-level guidelines departure under 5K1.1 to a 0-6 months guideline range was unreasonable where Martin's crimes yielded an advisory guidelines range of 9-11 years' imprisonment and a potential sentence of 15 years. Martin's cooperation, while commendable and extremely valuable, is not a get-out-of-jail-free card."
The court found the sentence "shockingly short" and the fact that Richard Scrushy was found not guilty at this trial was not comparable. Martin did "forfeit $2.375 million" dollars.
Although this sentence was clearly short, the government appeal is somewhat surprising. Normally the risk of going to trial reaps greater rewards than not going to trial. Thus, when one accused receives a greater sentence than the individual who went to trial, the incentive of the plea is minimized. When you roll the dice at trial you risk a huge sentence if convicted. Likewise, if you roll the dice and take a plea, the chance may be that you will do more time than the person who you testified against.
A Soft Sentence for a White Collar Offender
The Chicago Tribune reports here that a "pal" of Govenor Ryan received a sentence of 2 years probation and 8 months home confinement. Interestingly, the reasoning of the court was premised on age and health.
Australian Role in US Inquiry
One finds an interesting piece in the Sydney Morning Herald (here) discussing the Austrialian government & AWB in their testimony before the US Senate in an investigation related to the United Nation's oil-for-food program. The title of this piece is "Government 'Lied to U.S. Senate.'"
AWB Limited, according to its website here "is
's leading agribusiness and one of the world's largest wheat marketing companies. It is also one of
's top 100 publicly listed companies." The Board at AWB has issued a statement here, that in part reads:
"Regretfully, AWB’s reputation has been significantly damaged as a result of the Company’s participation in the United Nations Oil For Food Program and subsequent media coverage.
It is understandable that farmers, shareholders and customers have concerns and questions for the Company and we will respond as and when we can, but the Commission of Inquiry has not yet run its course."
Search of Rep. Jefferson's Office Ruled OK
The search of Rep. Jefferson's congressional office was ruled constitutional by a district court (see Washington Post here). The decision here (via Talk Left here and How Appealing here) clearly rules against the arguments presented by Rep. Jefferson on his Rule 41(g) motion.
In this decision, the court states that "the Speech or Debate Clause’s testimonial privilege was not triggered by the execution of the search warrant." The district court notes that:
"[t]he D.C. Circuit has held that the 'touchstone' of the Speech or Debate Clause privilege is 'interference with legislative activities.' . . . Thus the Court’s decision here depends upon whether the execution of the search warrant impermissibly interfered with Congressman Jefferson’s legislative work." (citation omitted)
The district court further states:
"The Speech or Debate Clause is not undermined by the mere incidental review of privileged legislative material, given that Congressman Jefferson may never be questioned regarding his legitimate legislative activities, is immune from civil or criminal liability for those activities, and no privileged material may ever be used against him in court."
The court also rejected a separation of powers argument.
According to the Washington Post here , counsel for Rep. Jefferson plans to appeal this decision. An interesting question will be whether this ruling is appealable. Can one appeal a Rule 41(g) motion for return of property?
There are cases to support both sides here. See, e.g., Sealed Appellant 1 v. Sealed Appellee, 199 F.3d 276 (5th Cir. 2000) (holding the denial of return of property is not appealable); but see First National Bank of Tulsa v. U.S. Department of Justice, 865 F.2d 217 (10th Cir. 1989)(holding that the court of appeals had jurisdiction to hear denial of motion for return of property).
This particular case presents the added factor that it pertains to the office of a congressman. As stated by the district court in its opinion here:
"While Congressman Jefferson overlooks the sure availability of a motion to suppress the evidence seized during the search should the Government’s investigation result in his indictment, the Court recognizes that '[t]he unprecedented search of Congressman Jefferson’s office has raised questions of serious constitutional magnitude that directly implicate the fundamental workings of the federal government.' Reply 19. The Court agrees that the interests of justice demand that these issues be addressed now." Id. 7-8.
July 10, 2006
Tax Shelters - Legal or Illegal
The case related to the prosecution of the KPMG defendants may rest to some extent on the legality of the tax shelters. According to the NYTimes here an investigation in Deutsch Bank's role in some tax shelters may also present this same problem. The added issue here is whether "advice of counsel" (claiming a legality of these shelters), renders a defense if they are proven to be improper. As this investigation unfolds - some thoughts:
- How does one assess the intent of individuals setting up tax shelters? Where is the line between criminal conduct and legal tax shelters?
- In assessing the intent, should the government factor in the harm to individuals who may have suffered the ramifications of some of these tax shelters?
- Are there some shelters that are just so blatantly fraudulent that they deserve prosecution?
- In assessing intent, how much weight should be given to extrinsic evidence such as emails, conversations, etc. that demonstrate a desire to avoid taxation?
- Will juries be able to understand tax shelter prosecutions, or will DOJ, to simplify cases, be focusing on extrinsic evidence that may present damaging evidence against a particular defendant?
One thing for sure - - if you are not an accountant or tax specialist, the acronyms here can be pretty confusing. We find CARDS (Customized Adjustable Rate Debt Facility), BLIPS (Bond Linked Issue Premium Structure), FLIPS (Foreign Leverages Investment Program), etc.
Documents Seized from Rep. Jefferson's Office Remain on Ice
The documents seized by the FBI from Louisiana Representative William Jefferson's office back in May remain unreviewed, even though the President's order (here) directing the Solicitor General to hold them undisturbed for 45 days expired on July 9. Chief U.S. District Judge Thomas Hogan, who approved the search warrant, held a hearing on June 16 (see earlier post here) in which Representative Jefferson moved to have the documents returned and the chief counsel of the House of Representatives argued that the search violated the Speech or Debate Clause protection in the Constitution. The judge has not issued a decision yet, and while the 45-day cooling-off period was designed to permit the Department of Justice and Congress work out some resolution related to reviewing the documents, it does not appear that the two sides have reached an agreement. It is likely that the DoJ will stay away from the documents for now, despite the expiration of the President's order, because the issue is before the court and any move to look at them would be a slap at Congress that the Administration does not need at this point. If the judge upholds the search and rejects the claimed constitutional protection for congressional documents, the issue will likely boil back to the surface with an appeal likely, perhaps just in time for the fall elections. An AP story (here) discusses the status of the case. (ph)
Can Granting Stock Options Be Insider Trading
SEC Commissioner Paul Atkins set off a bit of a controversy when he praised so-called "spingloaded" options granted to corporate executives in advance of the disclosure of good news and said that they cannot constitute insider trading. In his remarks to the International Corporate Governance Network (here), he stated:
A scenario that has drawn much attention is the colorfully named “springloading,” which has been defined as the practice by which a company purposefully schedules an option grant ahead of good news, or purposefully postpones an option grant until after bad news. I am not sure where the term springloading came from, but it certainly has an ominous ring to it.
Not only are there difficult factual issues that need to be proven, such as the nexus between the grant decision and the subsequent news event, but there are also substantive legal issues that need to be addressed. Specifically, we need to ask ourselves whether there has been a securities law violation even if a nexus can be identified between the grant and the news event. Isn’t the grant a product of the exercise of business judgment by the board? For example, a board may approve an options grant for senior management ahead of what is expected to be a positive quarterly earnings report. In approving the grant, the directors may determine that they can grant fewer options to get the same economic effect because they anticipate that the share price will rise. Who are we to second-guess that decision? Why isn’t that decision in the best interests of the shareholders? We also need to remember that predicting the stock price effect of an upcoming event is difficult, let alone predicting the trajectory of the stock price over the next twenty quarters until the options vest.
Also swirling about are accusations of insider trading by corporate boards in connection with options grants. Again, one has to ask whether there is a legitimate legal rationale for pursuing any theory of insider trading in connection with option grants. Boards, in the exercise of their business judgment, should use all the information that they have at hand to make option grant decisions. An insider trading theory falls flat in this context where there is no counterparty who could be harmed by an options grant. The counterparty here is the corporation — and thus the shareholders! They are intended to benefit from the decision.
The issue of options-timing has come into focus recently as companies have revealed that documents related to the awards may have been backdated to ensure that the options priced at the low point to enhance their value. Some companies, such as Microsoft, disclosed their practice was to date the option at a low point for the stock, but it stopped that in 1999. Backdating documents does not mean the option grant was itself improper.
It's an interesting question whether an executive who accepts stock options from a company that "knows" of undisclosed good news and times the issuance of the options to enhance their value can even be termed insider trading, as Commissioner Atkins notes. Aside from his argument that there is no counterparty defrauded by the transaction, there is a question whether the transaction is even a "purchase or sale," an element of any fraud claim under Section 10(b) and Rule 10b-5, the basic insider trading provisions. Similarly, if the option is not exercised immediately but instead only down the road, can it be said the executive traded while in possession of material nonpublic information when that information may have been disclosed months or even years earlier? An interesting article by Professor Iman Anabtawi, Secret Compensation, 82 North Carolina L. Rev. 835 (2004), thoroughly reviews many of the issues related to using options and timing their issuance as a means to compensate management.
Compensation of senior executives is certainly generous, especially when compared with lowly law professors, and there is an almost natural reaction to view any transaction in stock related to undisclosed corporate information as potentially insider trading. A Wall Street Journal article (here) on the issue quotes the reaction of one person to Commissioner Atkins' statement as "[t]his is just not fair." There is a visceral reaction when well-paid executives appear to game the system to reap even more benefits, but that does not necessarily mean the federal securities laws have been contravened. Pigs at the trough maybe, but securities violators is a much more difficult conclusion to reach. (ph)
How Safe is Your Computer?
So, according to the Washington Post here, the government hires a computer consultant.
And the computer consultant breaks into the government computer.
And data on the government computer is compromised. And this includes FBI data such at the classified documents and the password of the Director of the FBI.
And the program used to do this was on the Internet.
So, the question is - how safe is your computer if this can happen to the head of the FBI's computer?