Securities Law Prof Blog

Brickey on Media & Corporate Governance Scandals

From Boardroom to Courtroom to Newsroom: The Media and the Corporate Governance Scandals, by KATHLEEN F. BRICKEY, Washington University School of Law, was recently posted on SSRN.  Here is the abstract:

Enron and its progeny spawned an unprecedented amount of press coverage. To its credit the press has, in the main, acquitted itself well. But media coverage of the ensuing investigations and trials also has raised a host of provocative questions about judgment, professionalism and restraint. Using five high-profile criminal trials arising out of recent corporate fraud scandals as a springboard, this article provides a critical analysis of how media coverage - and defendants' efforts to spin that coverage - can influence the course and outcome of a trial. Some, but not all of the mischief originates with the press. Ever conscious of the potential for media coverage to alter the outcome, defendants in high-profile fraud trials have increasingly orchestrated costly multi-media public relations campaigns that demonize prosecutors, witnesses, and the press to exonerate themselves. The five case studies in the article highlight growing points of tension between the media and the courts and provide a concrete context for exploring the extent to which we should be concerned about the potential for aggressive media coverage and media manipulation to undermine the legitimacy of the courts, to affect the outcome of lengthy criminal trials, to play on the passions of the community from which the jury will be drawn, to subvert journalistic credibility and independence, and to invite more restrictive court-imposed rules governing media coverage of high-profile trials. The article concludes that if the press is to effectively perform its watchdog role, it should be mindful of the need to watch itself. Three appendices at the end of the article provide a media-centric postscript on coverage of the corporate governance scandals.

Arlen & Talley on Shareholder Choice

Unregulable Defenses and the Perils of Shareholder Choice, by JENNIFER ARLEN, New York University School of Law and ERIC L. TALLEY, UC Berkeley (Boalt Hall) School of Law; RAND Corporation; University of Southern California - Law School, was recently posted on SSRN.  Here is the abstract:

A number of corporate law scholars have recently proposed granting shareholders an enhanced right to oversee the use of takeover defenses. While these "shareholder choice" proposals vary somewhat in their content, they generally agree that shareholder oversight is justified if and only if shareholders hold a bona fide advantage over managers in evaluating and responding to hostile bids. This article challenges that basic premise, arguing that even if shareholders enjoy a comparative advantage over management in reacting to hostile bids, it does not follow that a shareholder choice regime is value enhancing, because it would give managers an incentive to search for ways to thwart prospective oversight, perhaps even through value-destroying managerial choices that render the firm an unattractive takeover target. We demonstrate (a) that a number of such thwarting defenses exist, (b) that managerial threats to use them are credible, and (c) that their utilization would be difficult or impossible for courts to regulate. We also find empirical support for these hypotheses. Consequently, an immutable, one-size-fits-all shareholder choice rule is likely to be an imprudent policy choice for courts.

Jagolinzer et alia on General Counsel and Corporate Governance

The Impact of the General Counsel on Corporate Governance, by ALAN D. JAGOLINZER, Stanford Graduate School of Business, DAVID F. LARCKER, Stanford University, DANIEL TAYLOR, Stanford University, was recently posted on SSRN.  Here is the abstract:

Most corporate governance research has focused on the behavior of executive officers, board members, institutional shareholders, and other similar parties. However, little research has focused on the impact of executives whose primary responsibility is to enforce and shape corporate governance inside the firm. This study examines the role of the General Counsel in restricting insider trading by corporate officers during the blackout window specified by corporate insider trading policies. We find that abnormal returns to trades within mandatory blackout windows are statistically higher than abnormal returns to trades outside such windows, by 15.48% over a 180-day period. However, when General Counsel approval is required to execute a trade, abnormal returns to trades within these windows are statistically lower than abnormal returns to trades outside these windows by 5.26% over a 180-day period. Thus, when given the authority, it appears the General Counsel can effectively limit the extent to which officers use their private information to extract rents from shareholders.

SEC Proposes Rule on Interactive Data to Improve Financial Reporting

The SEC has published for comment proposed rules requiring companies to provide financial statement information in a form that would improve its usefulness to investors. Under the proposed rules, financial statement information could be downloaded directly into spreadsheets, analyzed in a variety of ways using commercial off-the-shelf software, and used within investment models in other software formats. The rules would apply to domestic and foreign public companies that prepare their financial statements in accordance with generally accepted accounting principles as used in the United States (U.S. GAAP), and foreign private issuers that prepare their financial statements using International Financial Reporting Standards (IFRS) as promulgated by the International Accounting Standards Board (IASB). Companies would provide their financial statements to the Commission and on their corporate Web sites in interactive data format using the eXtensible Business Reporting Language (XBRL). The interactive data would be provided as an exhibit to periodic reports and registration statements, as well as to transition reports for a change in fiscal year. The proposed rules are intended not only to make financial information easier for investors to analyze, but also to assist in automating regulatory filings and business information processing. Interactive data has the potential to increase the speed, accuracy, and usability of financial disclosure, and eventually reduce costs.  Comments should be received on or before August 1, 2008.

Cox Addresses Int'l Organization of Securities Commissions on IFRS

Excerpt from SEC Chairman Cox's speech on "International Financial Reporting Standards: The Promise of Transparency and Comparability for the Benefit of Investors Around the Globe," the Annual Conference of the International Organization of Securities Commissions, Paris, France, May 28, 2008:

The first key success factor for IFRS is that the standards be crafted in the interest of investors. That has to be their overarching purpose.

The second is that the standard setting process be transparent. That is essential not only to maintain investor confidence, but to ensure the integrity and quality of the standards.

The third is that the standard setter must be independent. That means independent from special pleaders, from the political process, from favored industries or industry players, and from national or regional biases.

Fourth, the standard setter must be accountable. This means ensuring that IFRS actually meet the needs of investors and other stakeholders, and that they are updated in a timely way.

And fifth and finally, it is vitally important that all of the stakeholders themselves participate in the standard setting process in order to ensure the continued success of IFRS.

Former Centerpulse CFO Settles SEC Charges of Inflating Income

The SEC announced that Urs Kamber, the former Chief Financial Officer of Centerpulse Ltd., agreed to settle the Commission's charges against him arising from his alleged involvement in the fraudulent inflation of Centerpulse's income during the third and fourth quarters of 2002. Without admitting or denying the Commission's allegations against him, Kamber has consented to the entry of a final judgment. which orders Kamber to pay a $50,000 civil penalty, $65,013 in disgorgement, and $22,824 in prejudgment interest. The final judgment also bars Kamber for five years from acting as an officer or director of any public company that has securities registered with, or is required to file reports with, the Commission.

The SEC's complaint alleges that Kamber, along with two other former Centerpulse executives, (1) fraudulently inflated Centerpulse's third quarter 2002 income by improperly deferring recognition of a $25 million expense, refusing to write down $3.4 million in costs associated with an impaired asset, and approving $3.6 million in improper reserve adjustments; and (2) fraudulently inflated Centerpulse's fourth quarter and fiscal 2002 income by refusing to increase a reserve to cover at least $18 million in liabilities, improperly using anticipated refund credits to offset another $5 million in expenses, and again refusing to write down $3.4 million in costs associated with an impaired asset.

In related administrative proceedings, Dennis L. Hynson, CPA, Christopher W. Kelford and Paula J. Norbom, CPA, the former vice presidents of finance for Centerpulse's three U.S. divisions, have consented to the entry of cease-and-desist orders relating to improper accounting decisions they made during the third quarter of 2002.

SEC Charges Analog and CEO with Backdating Options

The SEC charged Massachusetts high tech company Analog Devices, Inc. and its CEO Jerald Fishman with reporting false compensation and related financial information to investors by backdating stock option grants to officers, directors and employees. Without admitting or denying the allegations in the SEC's complaint filed today in U.S. District Court for the District of Columbia, Analog and Fishman agreed to settle charges against them by consenting to the entry of final judgments against them that orders Analog to pay a $3 million civil penalty and orders Fishman to pay a $1 million civil penalty. Fishman also consented to pay disgorgement of $450,000, plus prejudgment interest of $42,110, which represents the in-the-money benefit that Fishman obtained from selling stock obtained from the exercise of the 1998 backdated option grant that he exercised.

According to the complaint, in 1998, 1999 and 2001, Fishman caused the company to backdate stock option grants to price them below the market price of the stock on the date they were actually approved by Analog's Compensation Committee and caused the company to grant options at lower exercise prices than were allowed by the company's option plan. The complaint alleges that these in-the-money option grants were made to Analog's officers and employees (and one grant to its directors in 2001) and resulted in $30.7 million in compensation costs ($21.8 million net of tax) that the company failed to properly expense in its financial statements.

In related administrative proceedings, without admitting or denying the SEC's findings, Analog and Fishman consented to the entry of an administrative cease-and-desist order. The SEC's order finds that Analog violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The order also finds that Fishman violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, which does not require a showing of scienter. Analog and Fishman agreed to cease and desist from committing or causing the violations. Analog also agreed to re-price two of the three option grants awarded to Fishman that he has not yet exercised in order to eliminate the benefit of the lower exercise prices that resulted from backdating the options.

AALS Section on Securities Regulation Call for Papers

Call for Papers: AALS Section on Securities Regulation
New Challenges in Dynamic Markets
AALS Annual Meeting
January 6-10, 2009 in San Diego, California

The subprime crisis and the resulting fallout have placed new pressures on the financial markets, reflected perhaps most vividly in the collapse of Bear Stearns.  The sale of mortgage-backed securities has resulted in a flood of litigation, involving underwriters, issuers, and investors.  The resulting lawsuits will have to contend with the changing legal landscape created by recent Supreme Court decisions such as Dura Pharmaceuticals, Tellabs and Stoneridge.  At the same time, the global financial turmoil has led to a host of reform proposals, including changes to the regulation of private offerings, reform of the rating agencies, and a single financial regulator combining the SEC and CFTC.

We are seeking papers for the January 2009 meeting of the AALS Securities Regulation Section in San Diego discussing any aspect of these developments.  Our section meeting is scheduled for Friday January 9, 2009, from 10:30 am-12:15 pm.  A broad range of topics is possible, and we welcome submissions on any aspect of the recent market and regulatory developments.

Submissions will be reviewed by the Section on Securities Regulation Executive Committee.  Decisions will be communicated no later than September 15, 2008.

Please submit an abstract and a draft, if available to Professor Jill Fisch, Chair of the Section on Securities Regulation by July 30, 2008.  E-mail submissions are preferred and should be sent to jfisch@law.fordham.edu. You may also submit your proposal by mail to Jill Fisch, Fordham Law School, 140 West 62nd Street, New York, NY  10023.

Please feel free to forward this Call for Papers to anyone who might be interested.

AALS Section on Business Associations Call for Papers

                                                    AALS SECTION ON BUSINESS ASSOCIATIONS

Call for Papers

JANUARY 2009 ANNUAL MEETING

 

The AALS Section on Business Associations will meet during the AALS Annual Meeting in San Diego, from 9:00am-noon on Saturday, January 10, 2009.

The topic for this year's session is "What, If Anything, Can Finance Teach Law (and vice versa)."  During the first half of the session, there will be a roundtable discussion and debate by a group of distinguished commentators, including prominent law and business school faculty.  During the second half of the session, legal scholars will present papers related to the topic.

Papers will be selected based on submissions made in response to this Call for Papers.  Possible topics include corporate governance and the role of the board, executive compensation and decision making, financial innovation, legal issues related to behavioral economics and finance, shareholder and stakeholder rights, and the theory of the firm, as well as recent market dislocations and the contributions of finance to reform proposals.  The Executive Committee encourages submissions on a broad range of issues related to the topic, including empirical and theoretical perspectives.

If you are interested in presenting a paper, please submit a summary of no more than three double-spaced pages, preferably by e-mail, before Friday, August 15, 2008.  In addition to the summary, you also may submit a complete draft of your paper.  Direct your submission to: Professor Frank Partnoy
fpartnoy@sandiego.edu 
University of San Diego School of Law
5998 Alcala Park
San Diego, CA 92110

Papers will be selected after review by members of the Executive Committee of the Section on Business Associations, including:

Richard Booth (Villanova)   
Eric Chiappinelli (Creighton, Dean) 
Lisa Fairfax (Maryland, Chair-Elect)
Frank Gevurtz (McGeorge)   
Christine Hurt (Illinois)   
Therese Maynard (Loyola-Los Angeles)
Brett McDonnell (Minnesota)   
Frank Partnoy (San Diego, Chair)
Margaret Sachs (Georgia)
David Skeel (Penn)
Gordon Smith (BYU, Past Chair)
Guhan Subramanian (Harvard)
Cynthia Williams (Osgoode Hall)

Authors of accepted papers will be notified by Friday, September 19, 2008.  Please feel free to pass this Call for Papers along to any colleagues who may be interested.

A Profile of New York Fed's Timothy Geithner

Timothy Geithner, President of the New York Fed, has been praised and blamed for his role in orchestrating the rescue of Bear Stearns.  Did his actions avert a major financial disaster or create moral hazard that will lead Wall St. to expect a bailout whenever they're in trouble?  The Wall. St. Journal interviews Geithner and walks us through the critical events leading up to the Fed's decision.  WSJ, Fed's Fireman On Wall Street Feels Some Heat.

Bear Shareholders Approve JPMorgan Chase Merger

Bear Stearns shareholders approved the merger of the company into JP Morgan Chase for $1.4 million in a brief shareholders meeting.  Bear CEO James Cayne apologized to the shareholders and said that Bear ran into "a hurricane."  WSJ, Bear's Final Moment: An Apology and No Lack of Ire.

SEC and Canadian Regulators Agree on Schedule for Mutual Recognition Agreement

The Chairmen of four Canadian securities regulators and the Chairman of the U.S. Securities and Exchange Commission (SEC), following a series of meetings coinciding with the annual conference of the International Organization of Securities Commissions (IOSCO), announced today a schedule for the completion of a process agreement that would open the way for discussions of a potential U.S.–Canada mutual recognition arrangement.  Canada has a system of securities regulation in which 13 separate provincial and territorial securities regulators administer and enforce highly harmonized laws and regulations. In order to facilitate discussions between Canada and the United States and more closely coordinate their systems of securities regulation, the SEC and the Canadian Securities Administrators (CSA) are working on an agreement setting forth the process to be followed in discussing mutual recognition arrangements.  Under the schedule announced today, the process agreement would be concluded in mid-June 2008.

The process agreement, once concluded, would open the way for substantive discussions between the CSA and the SEC on the subject of mutual recognition. Mutual recognition could provide Canadian securities exchanges and certain other Canadian financial service providers with greater freedom to operate in the United States under Canadian regulatory oversight, while U.S. securities markets and certain other U.S. financial service firms could gain greater freedom to operate in Canada under SEC oversight. In this manner, dual regulation, redundancy, and regulatory overlap could be eliminated.

In March 2008, the SEC announced that it would explore the possibility of a limited mutual recognition arrangement with one or more foreign regulatory counterparts, and that those arrangements could provide the basis for the development of a more general approach to mutual recognition through rulemaking. Since then, in addition to the work underway with Canada, the SEC has announced that it is in discussions concerning a possible mutual recognition arrangement with Australia, and that it is pursuing a process agreement, similar to the proposed agreement announced today with Canada, with the European Commission and the Committee of European Securities Regulators. Any eventual mutual recognition arrangement with any individual country would be based upon a comparability assessment by the SEC and by the foreign authority of each other's securities regulatory regime.

The SEC has a long-standing and close relationship with its Canadian counterparts in the areas of regulatory and enforcement cooperation. Since 1988, Canadian securities regulators and the SEC have had formal mechanisms in place to assist each other in enforcement investigations. Since 1990, the SEC and Canada's securities regulators have participated in the Multi-Jurisdictional Disclosure System that permits issuers in the United States and Canada to use the same disclosure forms when selling securities in each other's markets.

SEC Charges Ernst & Young Partner with Insider Trading

The SEC alleged in an insider trading case filed today that from at least the summer of 2006 through the fall of 2007, James E. Gansman ("Gansman"), a partner at a Big Four accounting firm, tipped his friend concerning the identities of at least seven different acquisition targets of clients who sought valuation services from the partner's firm in connection with those acquisitions. According to the complaint, knowing the confidential nature of this information, the friend used the information to trade in the securities of the target companies, and made recommendations to others who traded as well, resulting in total illegal trading profits of $596,000.

The complaint alleges that Gansman, a lawyer and a former partner in Ernst & Young LLP's ("E&Y's") Transaction Advisory Services ("TAS") department in New York, learned of each of the pending acquisitions, and the identity of the target companies, through his work at E&Y advising the acquirers. According to the complaint, on numerous occasions, Gansman misappropriated the information about pending acquisitions by tipping defendant Donna B. Murdoch ("Murdoch"), a registered securities professional and Managing Director of a Philadelphia-based broker-dealer and investment banking firm. According to the Complaint, Murdoch used the material, nonpublic information Gansman provided to her, by trading in the securities of at least seven companies that were acquisition targets of E&Y's clients, realizing illegal profits totaling at least $392,035; tipping her father concerning one of the pending acquisitions;and recommending trading in the securities of two of the target companies to other persons, who likewise traded.  In all, the alleged illegal profits flowing from Gansman's tipping of Murdoch totaled at least $596,195.

SEC Will Consider New Risk Ratings for Mortgage Securities

The SEC will consider proposals to reform credit  ratings agencies at its June 11 meeting, including a staff proposal to change the ratings for mortgage-related securities to include an S (for structured) or a V (for volatility) to rate the risk of default.  The proposal has not been well-received by industry groups.   WSJ, SEC Pushes for New Risk Scorecard.

In the final installment of its three-part series on the collapse of Bear Stearns, the Wall St. Journal focuses on the negotiations over the sale of Bear Stearns to J.P. Morgan Chase, including the mistake in the agreement that gave Bear the leverage to argue for an increase in the price from $2 to $10 per share.  WSJ, Bear Stearns Neared Collapse Twice in Frenzied Last Days.  Bear shareholders vote today on the merger.

SEC Obtains Asset Freeze Against Clearing Broker

The SEC obtained an asset freeze and other emergency relief to protect investors whose funds were at risk due to fraudulent misconduct at North American Clearing, Inc., a Florida based general securities and clearing brokerage firm that services approximately 40 correspondent brokers and clears transactions for over 10,000 customer accounts.  The SEC requested the relief when it filed a complaint on May 27, 2008 against North American Clearing, its founder and director Richard L. Goble, its president Bruce B. Blatman, and its former financial and operations principal Timothy J. Ward, charging them with fraud and other securities laws violations. The SEC's complaint alleges that the defendants engaged in illegal activities, including the misuse of customer funds, in order to hide North American Clearing's financial problems and to pay for its daily business operations.

According to the SEC's complaint, on several occasions in March and April 2008, North American Clearing improperly sold customer money market funds as a means of temporarily freeing up funds that it then used to pay for daily operating expenses. The SEC's complaint also alleges that on May 13, 2008, the defendants manipulated North American Clearing's processing system to overstate net customer money market purchases. This enabled North American Clearing to illegally withdraw more than $3 million from the reserves it was required to maintain for the benefit of customers.

The SEC's complaint, filed in the United States District Court for the Middle District of Florida in Orlando, seeks preliminary and permanent injunctions, disgorgement of ill-gotten gains against North American Clearing and Goble, and civil penalties against all defendants. On May 27, 2008, the court granted the SEC's ex parte motion for emergency relief.

Securities Lawyer Charged with Stealing Client's Funds

Martin E. Weisberg, a former partner at Baker & McKenzie, was charged in federal court in Brooklyn with stealing over $1 million from an unidentified corporate client's escrow account.  He pleaded not guilty.  Last year Weisberg was indicted, and pleaded no guilty, to charges involving kickbacks in PIPEs offerings.  WSJ, Lawyer Charged With Looting Client.

Whole Foods CEO Is Blogging Again

Whole Foods CEO John Mackey, whose blogging under an anonymous screen name got him into legal trouble with the SEC last summer and caused embarrassment for the company, is Back to Blogging again on the Whole Foods website under his own name.  Among other things, he explains why he blogs, says that he was wrongly accused of badmouthing Wild Oats to drive down its stock price, and that his mistakes were those of judgment, not ethics.

Moody's Employees Who Covered Up Errors May Get the Sack

As the SEC expands its investigation into credit ratings agencies, Moody's, which is conducting its own internal investigation, led by law firm Sullivan & Cromwell, into errors in calculating credit ratings for certain complex securities,said it may fire employees if it finds that they covered up mistakes.  The SEC has a report due on credit ratings to Congress by the end of June.  WSJ, Moody's Tone About Probe
Into Ratings Takes a Turn.

The Collapse of Bear Stearns: Part Two

The Wall St. Journal, in the second part of its series on the collapse of Bear Stearns, describes the events leading up to March 14, 2008 when the Fed agreed to provide financing for JP Morgan Chase's bailout of Bear Stearns.  This installment ends with Bear Stearns' believing that it had 28 days to solve its problems, which of course turned out not to be the case.  As the article details the "run on the bank" that caused trading partners to pull their money out of Bear, it describes a Bear CEO (Alan Schwartz) who is too slow to recognize the severity of the situation and to seek the Fed's help.  WSJ, Fear, Rumors Touched Off Fatal Run on Bear Stearns.

A related story focuses on the SEC's ongoing investigation into Bear's demise.  The SEC is expected to look into the records of the major investment firms who were parties with Bear in credit default swaps to see if the "run on the bank" could have constituted illegal market manipulation.  The article includes a good schematic of how credit default swaps work.  WSJ, SEC Will Scour Bear Trading Data.