Securities Law Prof Blog

Wendy's in Revlon Mode

In a sign that its turn-around plan is not working, Wendy's announced that a special committee of the board of directors will investigate options for the company, including a sale or a leveraged recapitalization.  Investor Nelson Peltz, who has three seats on the board, announced last week that he's looking for more restaurant companies.  His "stand-still" agreement with Wendy's expires in June.   See WSJ, Wendy's Considers Possible Sale.

Proxy Advisers' Different Views on Icahn's Motorola Proxy Contest

Carl Icahn, who has brought 2.9% of Motorola stock since January, is waging a proxy contest to elect one seat on the board at the May 13 shareholders meeting.  Yesterday proxy advisor ISS gave its support to Icahn, while rival Glass Lewis sided with management.  See NYTimes, Divided Opinions in Motorola Fight;   WSJ, Proxy Firm Backs Icahn To Join Motorola Board.

Business Doing Well at NYSE

NYSE Euronext announced first quarter net income of 43 cents per share, up from 24 cents from last year's first quarter.  Results do not include Euronext earnings, as the merger closed after the end of the quarter.  See WSJ, NYSE's Net More Than Doubles Boosted By Transaction Revenue.

SEC Settles Charges With Former Cendant Accounting Exec

The U.S. Securities and Exchange Commission (Commission) today announced that it had submitted to the U.S. District Court for the District of New Jersey for filing a proposed settled Final Judgment as to Defendant Anne M. Pember and Relief Defendant Carleton H. Pember IV, in the Commission's previously filed civil injunctive action against Anne M. Pember (Pember) and others, Securities and Exchange Commission v. Cosmo Corigliano, Anne M. Pember, Casper Sabatino, and Kevin T. Kearney, Defendants, and Agnes T. Corigliano, Carleton H. Pember IV, and Mary Louise Scully, Relief Defendants, Civil Action No. 00-2873 (D.N.J). The Commission filed its injunctive action on June 14, 2000. The Commission's complaint in that action alleged that for several years the management of CUC International Inc. (CUC) operated a fraudulent scheme that added hundreds of millions of dollars to the reported operating income of CUC and, subsequently, of its corporate successor, Cendant Corporation (Cendant). On July 25, 2000, the Commission amended its complaint and, among other things, named Pember's spouse, Carleton H. Pember IV, as a relief defendant.

Former Northwestern Corp. Officers Settle SEC Fraud Charges

The Securities and Exchange Commission today filed separate complaints against four former officers of NorthWestern Corporation ("NorthWestern"), a Midwestern utility company headquartered in South Dakota. The Commission's complaints, each filed in the United States District Court for the District of South Dakota, allege that Merle D. Lewis, NorthWestern's former chief executive officer; Richard R. Hylland, NorthWestern's former chief operating officer; Kipp D. Orme, NorthWestern's former chief financial officer; and Kurt D. Whitesel, NorthWestern's former controller; overstated the performance of NorthWestern and its key telecommunications subsidiary, Expanets, Inc. ("Expanets"), in 2002 during the same period that NorthWestern completed securities offerings totaling more than $800 million. The Commission's complaints further allege that, after restating its financial results for the first three quarters of 2002, and disclosing Expanets' true financial position and results of operations, NorthWestern declared bankruptcy in 2003.  Lewis, Hylland, Orme and Whitesel, without admitting or denying the allegations in the Commission's complaints, each consented to the entry of a final judgment permanently enjoining him from violating or aiding and abetting violations of the provisions he allegedly violated, and to a five-year officer and director bar. Lewis and Hylland each consented to pay $150,000 in civil penalties, Orme consented to pay a $100,000 civil penalty, and Whitesel consented to pay a $25,000 civil penalty.  See SEC Charges Four Former Officers of NorthWestern Corporation with Financial and Disclosure Fraud.

SEC and UK Sign Protocol to Implement IFRS

The Securities and Exchange Commission, the United Kingdom Financial Services Authority (FSA), and the United Kingdom Financial Reporting Council (FRC) signed a protocol today for implementing the Work Plan between the SEC and the Committee of European Securities Regulators to share information on application of International Financial Reporting Standards (IFRS) by issuers listed in the UK and the U.S.

NASD Vice Chair Shulman's Speech at SIFMA Meeting

NASD Vice Chairman Doug Shulman spoke at the SIFMA Independent Broker Dealers on April 25, 2007, on the regulatory consolidation, important trends in the industry and the role of the modern regulator.

SEC Will Seek Comments on Use of IFRS

The SEC announced a series of actions it intends to take relating to the acceptance of financial reporting in International Financial Reporting Standards (IFRS) as published by the International Accounting Standards Board (IASB).

The Commission anticipates issuing a Proposing Release this summer that will request comments on proposed changes to the Commission's rules which would allow the use of IFRS in financial reports filed by foreign private issuers that are registered with the Commission. The approach in the proposed rule would be to give foreign private issuers a choice between IFRS and U.S. GAAP. In addition, the Commission plans a Concept Release relating to issues surrounding the possibility of treating U.S. and foreign issuers similarly in this respect by also providing U.S. issuers the alternative to use IFRS. Comments on both would be due in the fall.

"The next steps that the Commission is announcing today will keep us on course with the Roadmap announced in 2005," said SEC Chairman Christopher Cox. Pending public comments on the proposal, "we remain on track to eliminate reconciliation by 2009," Cox added.

The Commission's rules currently require that foreign private issuers who report in IFRS, or any other non-U.S. GAAP, provide a reconciliation of those financial statements to U.S. GAAP. The Commission's planned proposal this summer would address eliminating that reconciliation requirement with respect to financial statements filed in IFRS beginning in 2009. This is consistent with the timetable set forth in the Roadmap in 2005.

Because the elimination of the reconciliation requirement will permit some, but not all, registrants to have a choice between IFRS and U.S. GAAP, it raises the question whether all registrants should be able to report under either IFRS or U.S. GAAP. The planned Concept Release will permit the Commission to gather more information on this subject. See SEC Announces Next Steps Relating to International Financial Reporting Standards.

SEC Is Investigating Stock Sales at Sallie Mae

In a SEC filing, Sallie Mae reported that the SEC is investigating trading in the stock by two directors and trading in its stock prior to the April 16 announcement of its sale to four private firms.  The Washington Post had previously reported that the SEC was investigating  Chairman Alfred L. Lord's stock sale shortly before the government announced proposed cuts to subsidies to student loan providers.  See WPost,  Sallie Mae Board Members Under SEC Trading Probe.

IBM Announces $15 Billion Buyback

IBM announced it will borrow money and buy back about $15 billion of its shares, resulting in a 10% of its outstanding shares.  According to its treasurer, IBM is "very underleveraged" for its size and cash flow.  At its annual meeting 52% of the shareholders voted for a nonbinding "majority vote" resolution for directors.  See WSJ, IBM to Spend $15 Billion In Expanded Stock Buyback.

New York Times Shareholders Withhold 42% of Vote for Directors

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.

Insider Trading Charges Against Spouse of Amgen VP

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.

SEC Announces Roundtables on Proxy Voting

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.

Fired Apple CFO Points Finger at Jobs

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.

SEC Charges Former Apple GC in BackDating Scandal

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 IPO Study Finds No Evidence of Naked Short-Selling

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.

SEC Charges Expected Against Two Former Apple Officers

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.

SEC Commissioner Atkins on Competitiveness of US Markets

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.

$125 Million Will Be Distributed to Pilgrim Baxter Mutual Fund Investors

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.

Scrushy Settles SEC Actions by Paying $81 Million

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.