ExecuCite Blogger Archive

December 13, 2006

On January 20, 2003, the U.S. Department of Justice issued a memorandum entitled the “Principles of Federal Prosecution of Business Organizations” (http://www.execucite.com/member-site/Executive_Ethics/Principles-of-Federal-Prosecution-of-Business-Organizations). The memo was authored by the then Deputy Attorney General Hon. Larry Thompson. This memo has received a great deal of attention in the last three years and for good reason. The memo represented the Department’s view about how it handles criminal investigations for corporate wrongdoing. At the time, the Department had to react with a swift and heavy hand, as investors lost their fortunes due to accounting fraud and corporate corruption.
The memo created nine factors or principles for federal prosecutors to apply, the most controversial and the most compelling of which was number four:

“the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of corporate attorney-client and work product protection”

Apparently the government has been persuaded that the fraudulent times have past and corporations have learned their lessons. The 2003 Thompson Memo has been revised by the new Deputy Attorney General Paul McNulty. As reported in the NY Times today (December 13, 2006) “under the revisions, federal prosecutors will no longer have blanket authority to ask routinely that a company under investigation waive the confidentiality of its legal communications or risk being indicted. Instead they will need written approval for waivers from the deputy attorney general, and can make such requests only rarely.” These actions resonate a strong political force pressuring the Department to change a once “great” but short-lived rule. Big business has tired of the old rule and in keeping with the current trend of politics under the Bush Administration, big business wins. Even the Sarbanes-Oxley Act of 2002 is being scaled back as a result of increased lobbying by corporate interest groups.

Why does big business want to eliminate the aforementioned rule pertaining to the disclosure of confidential communications—there is more room to hide behind if you do not have to disclose your true intentions, i.e. a better defense.

Ever since the guidelines were issued in 2003, the Hon. Mr. Thompson has never spoken publicly about them. Until last week. In another NY Times article it was reported that:

“Speaking at a Washington conference at the Heritage Foundation, the conservative research group, Mr. Thompson, now general counsel of PepsiCo, said that requests by federal prosecutors that companies, executives and lawyers disclose legal communications among themselves and other parties should be ‘extremely limited.’”

Obviously, the Hon. Mr. Thompson has completely changed his opinion on the rule that has caused so much consternation and the one he created. But the nagging question remains- why did he change his opinion on this issue?

Mark P. Carey
CEO ExecuCite.com

Severance Defined:  a gift, something you have earned, you give up legal claims for it, you negotiated well to get it, it’s a bonus so go to the bank, a windfall because you got another job quickly!

Severance can be negotiated upfront before starting the new position or it can be negotiated on the backend.

Upfront Severance Negotiation:  You can negotiate severance before you start working for the new employer and this is typically associated with the negotiation of the employment contract. Employers will attach the severance agreement inside the employment contract or create a separate agreement.  You can determine whether a public company offers a severance package in their employment agreements by searching the company profiles in ExecuCite.com or at SEC.gov (public companies only).  You can also ask the company during the offer stage if they can negotiate severance upfront.  A company may even negotiate severance upfront to an at-will employee, but you would not know unless you posed the question- so don’t forget to ask or you will not receive!

Let’s assume you are at the negotiation table and the parties are discussing the terms of the new employment.  How do you set the right amount of severance to ask for?  There is no right or wrong answer to this question. Please note, severance is often referred to as 1x, 2x or 3x of your base salary. As a rule of thumb, individuals ask for one year typically- but don’t shoot me if the company was willing to give two years.  Seriously, a one year severance arrangement is the reality for most people. An executive or employee can “extract” a two or three year severance only in a narrow set of circumstances.  First, you must possess an incredible amount of negotiating leverage to extract a straight 2x or 3x severance. This means you are either a very popular and sought after executive/employee or huge revenues just follow you at every company.  Please note, anyone can negotiate a 2x or 3x severance, it just depends on how well you can sell the idea and what your worth is. Second, you can obtain a pre-offer 2x or 3x severance by way of a change-in-control agreement.  This is truly a narrow circumstance because all the variable conditions set forth in the change-in-control plan have to be satisfied. (See Change-In-Control discussed in ExecuCite.com)  The board of directors will dictate what those variables are, and the bar is often set pretty high.  During the pre-offer negotiations an executive can bargain for a change-in-control severance, but you better know what you are talking about before you make the proposal and have a good reason(s) for the board to grant you this type of severance.

Like any severance, in order to receive the severance monies you will of course need to sign your legal rights away.  The company is literally buying your known or unknown claims well in advance of your departure from the company.  Now, there is a rule about settling and waiving future claims- its against public policy and the courts do not enforce such future waivers.  What normally happens during pre-offer severance negotiations is the parties will negotiate a severance deal involving two components: (1) you agree to sign a mutually agreeable severance and general release of claims upon termination (usually termination for good reason, for no cause, or change-in-control); and (2) the parties will agree during the pre-offer stage on the amount of money, i.e. 1x, 2x or 3x.

How does “termination for cause”, “without cause” and “termination for good reason” affect a severance payout?  These terms I just mentioned can be placed in a severance and/or employment agreement.  If you are terminated for cause and you cannot defend or cure the “for cause” allegation- this means you really screwed up (or intentionally set up) and you will not be receiving severance!  If there is a “without cause” reason given by the employer, you will get severance. In this situation you may have been smart enough to craft language into the severance agreement that automatically grants you a severance for quitting for “no reason” given.  If you got this provision in your favor, you have negotiation power and guts.  Good work!  In a majority of cases, if you quit without cause or the company terminates without cause, you will not receive severance pay. The remaining way to get severance is to demonstrate a good reason for your sudden departure, such as office relocation, material change in job duties, demotion, change in compensation-downward etc.  Under this last method, you will need to have your material evidence ready to present directly to the company and their counsel.

It is a good idea to keep a confidential file or files at home, wherein you store emails, memos, and other supportive evidence. You can also store whistle blower evidence, but be careful whether you pull the trigger on this sort of thing because it can have professional repercussions if the word got out. However, a well played game of bluff on a whistle blower claim, especially in the Sarbanes-Sox era, does have tidy rewards.

Backend Termination Severance Negotiation:  This may well be the most common severance negotiation most people will encounter.  Obviously, you did not negotiate or could not negotiate a severance agreement at the start of employment.  I want to discuss how to maximize your return on investment of your time and money.  Think of this deal as an investment transaction.  You are going to put in time throughout your employment to collect favorable evidence (documents and statements), time with your attorney, and then spend money on legal fees.  The goal is to obtain a severance that easily pays off the legal fees and your time spent, but also returns a hefty windfall!

In order to conduct a productive severance negotiation, you need to collect documents, statements and other evidence throughout your employment. This may sound strange and evoke ideas of paranoia. But contemporaneous journal entries along with gathering evidence in your personal “home file,” will produce the types of negotiation fire-power you will need to obtain a substantial severance. Yes, I am pre-thinking the end result, but you have to.

I will explain it in a different way.  When you go to an employment attorney with the news you just received a severance agreement and you are still carrying your box of personal belongings, the attorney will want to know every factual detail of your career with the former company.  You will end up recreating a factual timeline from your memory, notes, emails, documents and conversations with co-workers.  You may not capture all the details, missing vital factual evidence.  An ongoing contemporaneous effort to collect data will save you a great deal of time and money!

Put it this way, you need to protect and save your own butt because there is no one at your company who will!  Don’t be suckered into the “firm mentality,” that the company would never harm you because you are so loyal and trusting of the company.

A successful severance negotiation involves “issue spotting.” But if you are not an attorney how do you know what to look for?  Use your instincts and the smell test. If occurrences at work “smell bad”, well they probably are.  There exists a phrase, “being thrown under the bus.”  This happens when everyone suddenly treats you differently and you do not know why. Well, you better find out why and start taking notes and names. But keep your activities to yourself and don’t disclose your intentions to anyone.  There is nothing worse than showing your hand before you completed your own investigation. Most often it will be a false alarm, but what if the inevitable termination process has begun.  You may have been run over by that yellow bus.

Start learning the basics about employment law.  Every employee falls into one or more protected classifications of age, gender, sex, disability, religious belief, national origin and race.  If an employer uses these classifications in order make employment decisions, you have a violation of state and federal laws.  You can quickly study up on discrimination and retaliation in those areas within ExecuCite.com and at the EEOC.gov. Of course, there are more complex issues to spot, such as whistle blowing state and federal law violations. Just starting researching and you will pick up the basic issue spotting techniques quickly.

Once you have discovered the possible reasons for your termination, create a factual chronology using names, dates and exact statements made during conversations you have had.  This chronology will turn into your sworn affidavit. From this sworn affidavit, a demand letter can be created. Your affidavit will form the factual background of the claims.  You or your attorney can fill in the legal claims asserted.  At the conclusion of your demand letter, you should spell out what you are demanding.  Most people demand the following items: (1) severance money; (2) mutual release of claims known or unknown; (3) mutual non-disparagement; (4) mutual confidentiality; (5) a positive letter of reference; (6) agreement not to contest unemployment; (7) agreement that you are not required to mitigate your severance damages by getting new employment; (8) payment made lump sum, in case the employer suddenly gets sold.  Obviously, there are more terms to add, but these are the general terms requested during severance.

After the demand letter containing your offer is received, the employer will send a letter back to you or your legal counsel rejecting everything you asserted in your demand.  The employer’s role is to deny everything, so do not feel shocked. The employer will then make a counter offer.  This first counter offer will set the range of offers between the parties.  Further negotiations will seek to find a mid point between the two offers.  Each counter offer made can be any round number the party wants to offer.  There are no rules that govern this process.  You do not have to match the offer made by the other party.  However, always remember that your offer amount sends a particular message.  If your offer is too high, you are indicating you have a really good case and do not want to settle.  Also true is the employer’s very low offer, indicating unwillingness to settle because the legal claims have no merit.  I will note that some employers never negotiate with anything more than nuisance value, or $5,000 to $10,000 maximum offer.  The presence of an employment attorney representing an employee will have an immediate positive impact on the negotiations.

The severance and general release agreement will often contain a non-compete and non-solicitation agreement.  These are called restrictive covenants and usually reflect the fact the employer never had you sign these promises while you were employed.  Employees should not agree to sign these covenants contained in severance agreements, because they impair you ability to earn a livelihood. Unless you want to be restricted from doing what you do best.  In a worst case situation, the employee should demand an additional premium for having to sit out the next several months of the non-compete period.

The severance negotiation is concluded when the parties sign the agreement. Execution of the agreement can occur through two separate documents, exchanged through mail or facsimile.  Just make sure there is a provision that allows for such an execution, otherwise there is no formal ratification. You should hold onto the agreement in your home file for quick reference.  Do not communicate with others about the details of your agreement because the employer may find out.  Once you breached your agreement by disclosing the settlement, the employer may be entitled to a return of the severance pay.

There are more issues to discuss about severance, but these are the basic concepts for you understand.  I will write new articles on this subject in the near future.  If you have any questions, please contact my office at (203) 255-4150 or mcarey@capclaw.com.

Mark P. Carey

In today's Wall Street Journal there was another story about why women are scarce at the top levels of corporations.  The main reason for the current failure to promote is based on male egos.

According to the article, just 16.4% of women held corporate officer positions (VP's and above) of all Fortune 500 corporate office jobs. We can all agree this percentage is absurd. The rest of women are sidelined in lower management positions or administrative staff roles. If the percentage were a mere 45%, would Corporate America be different, without question. But getting to that percentage is a difficult task indeed.

Based on my experience researching and representing women in employment cases, I honestly believe a social stigma still attaches to women who have two jobs to do.
Raising a family and raising a career are not easy, unless the husband stays at home.  But who is responsible for maintaining this social stigma, men of course. Although information and technology developments may have made it look like we are all equalized in society, the development of gender equality has lagged far behind.

It was not long ago (1970’s) that it was socially acceptable that men ran companies and women stayed at home raising children.  The gender transformation in the work place did not begin to evolve until the 1990’s.  During the 1990’s there were notable legal decisions that have cleared the air about which behavior is acceptable and which is not.  As a result, corporations were forced to examine liability problems and promote better work equality agendas.  Taken together, gender and sexual harassment discrimination cases really have transformed the office environment nationwide, but there still remains a problem.  A problem, I believe will resolve itself over the next decade.

As more and more women cross over into the upper echelons of the corporate office, they will have an immediate impact on the way the corporation handles the promotion of women. It’s not going to happen all at once. I believe the change will occur more subtly.  Women executives faced with eyeball to eyeball decision making with their male counterparts, will cause the male ego to understand, from a rationale perspective, that promoting the female executive over the male executive makes good business sense.  Whether or not she has a golf handicap, these tough minded and smart women executives are ready to seize the moment.

The male corporate ego is on the way out.  As more and more women reach the top, they are spreading their views around the office, and more important down the chain of command.  I believe there will be a decline in the number of sexual harassment and gender cases that are filed because of this transformation of the male mind.  These cases more often than not occur in mid level management and below.

If you are an employee of SBC Communications/SNET you may be in for a surprise when you file for disability benefits. The surprise- your claim will be denied even though you are totally disabled!

On May 31, 2006, a lawsuit was filed in the United States District Court for the District of Connecticut against the SBC Umbrella Benefit Plan No. 1, SBC Disability Income Plan, SNET Disability Benefits Plan, Plan Administrators and Unum Life Insurance Company (306:CV 835 SRU). The plaintiff Diana Jordan claims she was unlawfully denied short and long term disability benefits. Ms. Jordan is totally disabled from her Chronic Fatigue Syndrome, Fibromyalgia and Orthostatic Intolerance. Although she presented all of her medical evidence to the defendants, she was denied benefits.

According to the defendants disability benefit plans, bargained for employees can file for and receive 52 weeks of short term disability leave. Short term disability benefits are self insured by the company. At the conclusion of the 52 week period, employees can file for long term disability, partially self insured and partially supplemented by third party insurance carriers.

All disability claims are administered by Sedgwick Claims Management, which is under contract with SBC/SNET. Sedgwick also provides the same services to AT&T, the new parent company. According to the lawsuit, on April 19, 2006, SBC provided a redacted copy of the agreement with Sedgwick. The redacted portions covered all financial information, i.e. the amount Sedgwick is paid. SBC/SNET and Sedgwick have refused to disclose the unredacted copy of the agreement.

The lawsuit reveals that prior to filing suit, Ms. Jordan provided the defendants with some very interesting pieces evidence that reveal bad faith on the part of the defendants. Her effort was to force a reversal of the denial of her recent administrative appeal. The defendants again refused, stating a "final" decision had been made in February 2006.

On March 16, 2006, an attorney for SBC/SNET disability benefits plans made the following admission, in an email, regarding benefit determinations for over 5000 New England employees. According to the lawsuit, Robert McCorkl provided statistical information regarding the number of successful administrative appeals filed internally with the disability benefit plans: "[I]n 2004, there were 134 decisions, 88 upheld (upholding previous denial), 33 overturned and 13 partially overturned. In 2005, there were 108 appeal decisions, 81 upheld (upholding previous denial), 16 overturned and 11 partially overturned." According to the complaint, Sedgwick and SBC/SNET deny 80% of all administrative appeals filed by claimants. The statement speaks for itself.

On March 22, 2006, an employee named Pat Kalina of Sedgwick Claims Management Services (SMAART) wrote an email letter to Ms. Jordan's union local. According to the lawsuit, Ms. Kalina stated, "[A]s we are both aware, the medical information relayed to a lay person (w/o medical background), by an employee will always sound worse than it is because: 1. usually the employee is trying to continue out of work, 2. by pleading w/you and embellishing any symptoms they have, is their way of making you believe that they are on 'death's door', 3. you are the union benefit rep and it is your job to assist them. And of course, you want to have a positive experience w/your member and don't want to appear the 'bad guy' because if you can't turn the employee's request into a plus instead of remaining negative." The statement speaks for itself. According to an unnamed source, Pat Kalina is no longer employed by Sedgwick.

mcarey@execucite.com

On May 18, the Commission instituted and simultaneously settled administrative proceedings against William D. Baker, Netopia, Inc.'s former Chief Financial Officer under Commission Rule of Practice 102(e). Baker was formerly licensed as a CPA in the State of Indiana. Baker consented, without admitting or denying the Commission's findings, to a Commission order suspending him from appearing or practicing before the Commission as an accountant, with a right to reapply after five years. The administrative proceedings were based on a federal court injunction entered against him on May 2, 2006. The Commission's complaint in the injunctive action alleged that Baker authorized Netopia to recognize revenue on a transaction with a reseller where collectibility was not probable and where the reseller's inability to pay precluded recognition of the revenue. The complaint also alleged that Baker became aware of the payment contingency in connection with a transaction improperly recognized as revenue in an earlier fiscal period, and did not take steps to correct the company's financial statements to reflect the contingency. (Rel. 34-53830; AAE Rel. No. 2432; File No. 3-12298)

The Commission today announced that the Honorable Michael B. Mukasey of the U.S. District Court for the Southern District of New York has entered a final judgment against defendant Milton E. Stanson. During the relevant time, Stanson was a director, Vice President and Treasurer of Emex Corporation, which was a start-up energy technology and mineral exploration company. The judgment permanently enjoins Stanson from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and from aiding and abetting violations of Section 13(a) of the Exchange Act. In addition, Stanson was permanently barred from serving as an officer and director of any public company and ordered to pay disgorgement of $5,000, plus prejudgment interest, and a $95,000 civil penalty. The Commission's amended complaint alleges that Stanson and co- defendant Vincent P. Iannazzo violated various antifraud provisions of the federal securities laws. According to the amended complaint, the defendants devised and orchestrated a scheme to artificially inflate Emex's stock price by causing Emex to issue a series of false and misleading press releases and postings on Emex's website, as well as a false and misleading year 2000 Annual Report. Iannazzo and Stanson's illegal efforts were meant to deceive the investing public and others about the technology, financial prospects and value of Emex. Stanson consented to the final judgment without admitting or denying the allegations in the Commission's amended complaint. The litigation against Iannazzo is ongoing. On Nov. 19, 2004, in a separate administrative proceeding, the Commission revoked the registration of Emex's securities pursuant to Section 12(j) of the Exchange Act. [SEC v. Vincent P. Iannazzo and Milton E. Stanson, Civil Action No. 04 CIV 02989 (MBM) SDNY] (LR- 19703)

The Securities and Exchange Commission today announced a series of actions it intends to take to improve the implementation of the Section 404 internal control requirements of the Sarbanes-Oxley Act of 2002. The actions the Commission intends to take include issuing SEC guidance for companies and working with the Public Company Accounting Oversight Board (PCAOB) on revisions of its internal control auditing standard. These actions are based on extensive analysis and commentary in recent months from investors, companies, auditors, and others. The expected actions will also include SEC inspections of PCAOB efforts to improve Section 404 oversight and a brief further postponement of the Section 404 requirements for the smallest company filers, although ultimately all public companies will be required to comply with the internal control reporting requirements of Section 404. "The steps we are announcing today are designed to further improve the reliability of financial statements and to better protect investors while making the Section 404 process more efficient and cost effective," said SEC Chairman Christopher Cox. "As we go forward, we will consider the special concerns of all companies that fall under our jurisdiction -- large and small, foreign and domestic. By providing practical guidance to companies, by working with the Public Company Accounting Oversight Board on their forthcoming revised standard for auditors, and by examining how the PCAOB inspection process is succeeding in increasing the efficiency and cost- effectiveness of the audit process, we will take a giant step toward 'getting it right' when it comes to Section 404 compliance." In recent months, the Commission has obtained comment from a variety of sources concerning the operation and effects of Section 404, including: The May 10, 2006, SEC Roundtable on Second-Year Experiences with Internal Control Reporting and Auditing Provisions; Written comments received in connection with the Roundtable; The April 23, 2006, Report of the SEC Advisory Committee on Smaller Public Companies; The April 2006 Report from the U.S. Government Accountability Office entitled Sarbanes-Oxley Act, Consideration of Key Principles Needed in Addressing Implementation for Smaller Public Companies; and Feedback from issuers, auditors, investors, and others since the Sarbanes-Oxley internal control reporting requirements went into effect. "The actions the Commission is announcing today represent key steps toward addressing issues raised by participants involved in the critical process of reporting to investors on the effectiveness of companies' internal control over financial reporting," said John White, Director of the Commission's Division of Corporation Finance. "We will be working on our own, and with the PCAOB, to improve the implementation of Section 404 so that it will work efficiently and effectively for companies and auditors of all sizes and types while still maintaining the important investor protections it provides." The actions the Commission expects to take include: Guidance for Companies. The Commission has received many requests for additional guidance for management on how to complete its assessment of internal control over financial reporting, as required by Section 404(a) of the Sarbanes-Oxley Act. To prepare for the issuance of management guidance, the Commission intends to take the following steps: Concept Release and Opportunity for Public Comment. The Commission expects to issue a Concept Release covering a variety of issues that might be the subject of Commission guidance for management. With the Concept Release, the Commission will solicit views on the management assessment process to ensure that the guidance the Commission ultimately proposes addresses the needs and concerns of all public companies. We will also seek input on the appropriate role of outside auditors in connection with the management assessment required by Section 404(a) of Sarbanes-Oxley, and on the manner in which outside auditors provide the attestation required by Section 404(b), to assist in our consideration of possible alternatives to the current approach. Consideration of Additional Guidance from COSO. The Commission has long been supportive of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as it works to provide guidance on COSO's 1992 Internal Control - Integrated Framework to address the needs of smaller companies. The Commission anticipates that this forthcoming guidance will help organizations of all sizes to better understand and apply the control framework as it relates to internal control over financial reporting. As the SEC develops guidance for management on how to assess its internal control over financial reporting, we will consider the extent to which the additional guidance that COSO provides is useful to smaller public companies in completing their Section 404(a) assessments. Issuance of Guidance. Commentary submitted to the Commission has suggested that management assessments under Section 404 have not fully reflected the top-down, risk-based approach the Commission intended. Building from the information gathered in response to the Concept Release, and from the anticipated COSO guidance, the Commission currently anticipates that it will issue guidance to management to assist in its performance of a top-down, risk-based assessment of internal control over financial reporting. To ensure that this guidance is of help to non-accelerated filers and smaller public companies, the Commission intends that this future guidance will be scalable and responsive to their individual circumstances. The guidance will also be sensitive to the fact that many companies have already invested substantial resources to establish and document programs and procedures to perform their assessments over the last few years. The form of the guidance has yet to be determined. Revisions to Auditing Standard No. 2. The PCAOB announced today that it intends to propose revisions to its Auditing Standard No. 2, An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements. Any final revision of AS No. 2 would be subject to SEC approval. The proposed revisions would: Seek to ensure that auditors focus during integrated audits on areas that pose higher risk of fraud or material error; Incorporate key concepts contained in the guidance issued by the PCAOB on May 16, 2005; and Revisit and clarify what, if any, role the auditor should play in evaluating the company's process of assessing internal control effectiveness. The Commission will work closely with the PCAOB to ensure that the proposed revisions to AS No. 2 are in the public interest and consistent with the protection of investors. SEC Oversight of PCAOB Inspection Program. The PCAOB announced on May 1, 2006, that it would focus its 2006 inspections on whether auditors have achieved cost-saving efficiencies in the audits they have performed under AS No. 2, and on whether auditors have followed the guidance that the PCAOB issued in May and November 2005 urging them to do so. As part of the Commission's oversight of the PCAOB, the Commission staff inspects aspects of the PCAOB's operations, including its inspection program. Among other things, upon completion of the PCAOB's 2006 inspections, the staff will examine whether the PCAOB inspections of audit firms have been effective in encouraging implementation of the principles outlined in the PCAOB's May 1, 2006, statement. Extension of Compliance for Non-Accelerated Filers. In order to permit non-accelerated filers and their auditors to have the benefit of the management guidance that the SEC intends to issue, and to have the opportunity to evaluate and implement the revisions that the PCAOB plans to make to AS No. 2, the Commission expects to issue a short postponement of the effective date of the Commission's rules implementing Section 404 for non-accelerated filers. It is anticipated that any such postponement would nonetheless require all filers to comply with the management assessment required by Section 404(a) of Sarbanes-Oxley for fiscal years beginning on or after Dec. 16, 2006. The Commission is also taking this opportunity to express again its appreciation to its Advisory Committee on Smaller Public Companies for their significant efforts and valuable contributions to the Commission's work, both with regard to Section 404 and other issues affecting smaller companies. For additional information, please contact John Nester, SEC Office of Public Affairs, at (202) 551-4120. (Press Rel. 2006-75)

May 23, 2006 SEC News Digest

The Commission filed a settled enforcement proceeding charging the
Federal National Mortgage Association (Fannie Mae), a shareholder-
owned government-sponsored enterprise, with fraudulent accounting in
violation of the anti-fraud, books and records, internal controls and
reporting provisions of the Securities Exchange Act of 1934 (the
Exchange Act) and the anti-fraud provisions of the Securities Act of
1933 (the Securities Act). In a related proceeding, the Office of
Federal Housing Enterprise Oversight (OFHEO) reached a settlement with
Fannie Mae. As a result of its settlement with both OFHEO and the
Commission, Fannie Mae will pay a total civil penalty of $400 million
to the U.S. government.

The Commission filed a lawsuit in the United States District Court for
the District of Columbia charging Fannie Mae with violations of
Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange
Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; and
violations of Sections 17(a)(2) and (3) of the Securities Act. Without
admitting or denying the Commission's allegations, Fannie Mae
consented to the entry of a final judgment in the Commission's federal
lawsuit enjoining Fannie Mae from further violations.

In its federal court Complaint, the Commission charged that, between
1998 and 2004, Fannie Mae engaged in a financial fraud involving
multiple violations of Generally Accepted Accounting Principles (GAAP)
in connection with the preparation of its annual and quarterly
financial statements. These violations had the effect, among other
things, of falsely portraying stable earnings growth and reduced
income statement volatility, and - for year-ended 1998 - of maximizing
bonuses and achieving forecasted earnings.

Specifically, in its Complaint the Commission alleged that Fannie Mae
failed to comply with the accounting requirements of Statement of
Accounting Standards (SFAS) 91, which requires companies to recognize
loan fees, premiums and discounts as an adjustment over the life of
the applicable loans. In the fourth quarter of 1998, by not recording
the full adjustment required by SFAS 91, Fannie Mae understated its
expenses and overstated its income by a pre-tax amount of $199
million. Management's decision to book an amount significantly less
than the adjustment amount required by SFAS 91 resulted in the company
not only exceeding Wall Street expectations, but also hitting the
earnings per share target necessary to trigger maximum bonuses. In the
periods that followed, Fannie Mae made other departures from SFAS 91,
including the implementation of a SFAS 91 Policy in 2000. Fannie Mae's
SFAS 91 Policy used a "precision threshold" to determine the SFAS 91
adjustment amount the company would record. There is no support for
the use of a threshold in SFAS 91. Implementation of the Policy led to
misstatements of SFAS 91 amortization in all periods from the fourth
quarter of 2000 through the second quarter of 2004. The Commission
alleges that, on at least one occasion, Fannie Mae booked income when
it was within its own Policy threshold, with the effect of meeting its
earnings targets.

The Commission's Complaint also alleges that Fannie Mae failed to
comply with the accounting requirements of SFAS 133, which governs the
accounting for derivative instruments and hedging activities. Fannie
Mae disregarded the requirements of SFAS 133 and qualified
transactions for certain hedge accounting treatment based on erroneous
interpretations and an unjustified reliance on materiality. By failing
to comply with the requirements of SFAS 133, the company failed to
qualify for hedge accounting. This failure led to the company issuing
materially false and misleading financial statements for the periods
covering the first quarter of 2001 through the second quarter of 2004.
The vast majority of the anticipated restatement of at least an $11
billion reduction of previously reported net income is a result of
Fannie Mae's improper hedge accounting.

In its Complaint, the Commission also alleged improper accounting
practices involving the estimation and maintenance of the Loan Loss
Reserve, the process of classifying the company's portfolio
securities, the amortization of debt issuance costs, the consolidation
of certain securitization transactions, the accounting for Dollar
Rolls, and the valuation of aircraft asset-backed securities, among
others. Several of the transactions, acts, practices, or courses of
business alleged in the Commission's Complaint were directed and/or
implemented with the knowledge or approval of Fannie Mae's senior
management acting within their scope of authority.

In determining to accept Fannie Mae's settlement offer, the Commission
considered the cooperation that Fannie Mae provided the Commission
staff during its investigation. The Commission acknowledges the
assistance of OFHEO in its investigation, which is continuing as to
others. [SEC v Federal National Mortgage Association, Case No. 06-
00959 (RBW) USDC, D.D.C.] (LR-19710; Press Rel. 2006-80)

On May 11, Commission sought leave to file a third amended complaint (Complaint) in its pending action in the United States District Court for the Southern District of New York, alleging new charges against members of an international insider trading ring that netted at least $6.7 million in illicit gains. The new charges add a fourteenth individual defendant, Jason Smith (Smith), age 29, a resident of Jersey City, New Jersey and a letter carrier with the U.S. Postal Service. The new charges allege that, while serving on a federal grand jury investigating Bristol-Myers Squibb Co. (Bristol-Myers), Smith leaked information about the proceedings to co-defendants Eugene Plotkin (Plotkin) and David Pajcin (Pajcin), who traded in Bristol- Myers securities based on the information. By leaking the information, Smith violated grand jury secrecy rules and his oath as a grand juror. As alleged in the Complaint, beginning in early 2005, Smith was serving on a federal grand jury in the District of New Jersey convened to investigate potential accounting fraud involving Bristol-Myers and certain officers of that company. Plotkin and Pajcin set up a scheme with Smith in which Smith leaked information about the grand jury proceedings to Pajcin and Plotkin in order to enable them to trade on this non-public information. Among other things, Smith communicated to Plotkin and Pajcin that it appeared as if a high-ranking Bristol-Myers officer would be indicted, and based on that information, Plotkin and Pajcin traded in an attempt to profit on the negative information, initially in an account in Pajcin's name and later, in a foreign account in the name of his aunt, defendant Sonja Anticevic (Anticevic). Plotkin and Pajcin also tipped Plotkin's father, defendant Mikhail Plotkin, and defendant Henry Siegel (Siegel), in return for a share of their trading profits. Later, a day before the announcement of a deferred prosecution agreement with Bristol-Myers that did not include an indictment of the high-ranking officer, Smith tipped Plotkin and Pajcin that the grand jury had decided not to return an indictment against the high-ranking officer. Based on this tip, Plotkin and Pajcin caused various accounts to liquidate or cover their positions in an attempt to avoid losses. This Complaint follows three prior complaints filed by the Commission which charged insider trading resulting in at least $6.7 million of illicit gains from two other schemes orchestrated by Plotkin and Pajcin. In the first scheme, Stanislav Shpigelman (Shpigelman), a mergers and acquisitions analyst at Merrill Lynch, provided Plotkin and Pajcin with information about pending mergers and acquisitions deals on which Merrill Lynch was working, prior to the time such information became public in exchange for a share of the profits made from trades based on this information. In the second scheme, Plotkin and Pajcin recruited two individuals, first Nickolaus Shuster, and later Juan C. Renteria, Jr., to obtain employment at a printing plant which prints BusinessWeek magazine for the sole purpose of stealing advance copies of the magazine before it was distributed to the public. Plotkin and Pajcin then traded on the basis of a market moving column in the magazine and tipped others to trade in exchange for a percentage of their trading profits. In total, Plotkin and Pajcin traded in at least 26 stocks within one year based on inside information obtained through these schemes. Today's Complaint alleges that Smith provided Pajcin with some funding for Pajcin's and Plotkin's other insider trading schemes, and Plotkin and Pajcin agreed to provide Smith with a percentage of Pajcin's trading profits based upon information derived from this scheme, as well as other insider trading schemes. To date, the Commission has charged 14 individuals located in the United States and Europe for their roles in the scheme. Today's filing adds Smith as a defendant. A description of the other defendants is available in the Commission's news digest dated April 11, 2006, http://www.sec.gov/news/digest/2006/dig041106.txt. The Commission alleges that, as a result of trading in various securities on the basis of material, non-public information obtained pursuant to the grand jury and other schemes, the defendants engaged in illegal insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and that defendants Smith, Pajcin, Plotkin, Anticevic, Siegel, and Mikhail Plotkin also violated Section 17(a) of the Securities Act of 1933 by virtue of their insider trading in Bristol-Myers. In addition, the Commission alleges that defendants Plotkin, Pajcin, and Shpigelman violated Section 14(e) of the Exchange Act and Rule 14e-3 thereunder by trading in the stock of a company while in possession of material, non-public information related to a cash tender offer for such company's stock. Among other things, the Complaint seeks permanent injunctive relief, the disgorgement of all illegal profits plus prejudgment interest, the imposition of civil monetary penalties, and orders requiring the defendants to repatriate to the United States proceeds of the fraud in accounts outside the United States. The Commission acknowledges the assistance of the United States Attorney's Office for the Southern District of New York, the United States Attorney's Office for the District of New Jersey, and the Federal Bureau of Investigation. The Commission also acknowledges the assistance of the Financial Supervisory Authority in Denmark, the Financial Market Authority in Austria, the Croatian Securities Commission, and the Financial Services Authority in the United Kingdom. [SEC v. Sonja Anticevic et al., 05 Civ. 6991 (KMW) SDNY] (LR- 19696)

The Commission today announced that Henry C. Yuen, the former chairman and chief executive officer of Gemstar-TV Guide International, Inc., has been ordered to pay over $22 million for his role in a scheme to defraud investors by inflating Gemstar's licensing and advertising revenues. In addition, Yuen will be permanently barred from serving as an officer or director of a public company. After a three week trial in December 2005, in the Central District of California, United States District Judge Mariana R. Pfaelzer found in favor of the Commission and against Yuen on all of the SEC's charges. The court found that Yuen had committed securities fraud by making misrepresentations and omissions of material fact about certain Gemstar revenues, that Yuen aided and abetted Gemstar's primary violations of the periodic reporting and record keeping control requirements, and that Yuen lied to Gemstar's auditors. On May 8, 2006, the court ordered Yuen to pay a total of $22,327,231 in disgorgement, penalties, and interest, and entered a permanent injunction against future securities law violations and a permanent bar from serving as an officer or director of a public company. The court found that Yuen received $10,577,692 in ill-gotten gains from his fraudulent conduct, consisting of (1) $3,022,452 in gross bonus compensation received by Yuen during the period of the fraud, and (2) $7,555,240 in excess trading profit he received by selling Gemstar stock during the period of the fraud. The court ordered Yuen to pay a civil money penalty equal to the amount of disgorgement. Gemstar is a Los Angeles-based media and technology company that publishes TV Guide magazine and an interactive program guide (IPG) for televisions that enables consumers to navigate through and select television programs. During the relevant period, Gemstar generated revenues from the IPG by licensing the technology to third parties and selling advertising on the IPG. In statements to securities analysts and the investing public, Gemstar repeatedly touted the IPG technology and IPG advertising revenues as the company's future and as the "value driver" of the company's stock, and downplayed expected declines in revenue from TV Guide magazine. When Gemstar announced for the first time that certain of its IPG licensing and advertising revenue may have been improperly recorded, its stock price declined by approximately 37%, causing a market loss in excess of $3 billion. The SEC's complaint, filed in June 2003, alleges that from June 1999 through September 2002, Gemstar overstated its total revenues by at least $248 million to meet its ambitious projections for revenue growth from IPG licensing and advertising. The complaint further alleges that Yuen directed and approved Gemstar's fraudulent recording of IPG licensing and advertising revenue and approved fraudulent disclosure documents. The complaint alleges that Yuen knew, but did not disclose, that Gemstar was improperly recognizing and reporting licensing and advertising revenue from seven companies and that he participated in fraudulently diverting revenue from one business sector to another to meet sector revenue projections. Additionally, the complaint alleges that Yuen signed false management representation letters to Gemstar's auditors regarding the structure of certain transactions. The complaint charges Yuen with securities fraud, falsifying Gemstar's books and records, aiding and abetting Gemstar's reporting and record- keeping violations, and making false statements to auditors, in violation of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13b2-1, and 13b2-2 thereunder. [SEC v. Henry C. Yuen, Civil Action No. CV 03-4376 MRP (PLAx) C.D. Cal.] (LR-19694; Press Rel. 2006-67)

The Commission announced the filing of a civil injunctive action against Morgan Stanley & Co. Incorporated (Morgan Stanley) for failing to produce tens of thousands of e-mails during the Commission's IPO and Research Analyst investigations from Dec. 1, 2000 through at least July 2005. The Commission alleges in its complaint that Morgan Stanley did not diligently search for back-up tapes containing responsive e- mails until 2005. Morgan Stanley also failed to produce responsive e- mails because it over-wrote back-up tapes. The complaint further alleges that Morgan Stanley made numerous misstatements regarding the status and completeness of its productions; the unavailability of certain documents; and its efforts to preserve requested e-mail. The Commission charged Morgan Stanley with violating the provisions of the federal securities laws requiring Morgan Stanley, a regulated broker- dealer, to timely produce its records and documents to the Commission. Morgan Stanley has agreed to settle this matter. Without admitting or denying the allegations of the complaint, Morgan Stanley has consented to a final judgment that permanently enjoins Morgan Stanley from violating Section 17(b) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 17a-4(j) and orders the firm to pay a $15 million civil penalty, $5 million of which will be paid to NASD and the New York Stock Exchange, Inc. in separate related proceedings. Morgan Stanley also has agreed to adopt and implement policies, procedures and training focused on the preservation and production of e-mail communications. It will also hire an independent consultant to review these reforms. The settlement terms are subject to court approval. [SEC v. Morgan Stanley & Co. Incorporated, Civil Action No. 06 CV 0882 (RCL) D.D.C.] (LR-19693; Press Rel. 2006-69)

The Commission announced that on April 5, 2006, the U.S. District Court for the Southern District of Florida entered a Final Consent Judgment of Permanent Injunction and Other Relief against Defendant Bio-Heal Laboratories, Inc. Bio-Heal, without admitting or denying the allegations in the complaint, consented to the entry of an injunction against future violations of Sections 5(a) and 5(c) of the Securities Act of 1933, Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13a-1 thereunder. In addition, the Final Judgment orders Bio-Heal to pay disgorgement of $600,000 and prejudgment interest of $18,135. On April 20, 2006, the Court also entered a Default Final Judgment against Relief Defendant ICOR, Inc., and Default Final Judgments of Disgorgement and Other Relief against Relief Defendants Bela Enterprises, LLC, and Gibson Island Enterprises, LLC, respectively. The Default Judgment against ICOR orders it to disgorge 4 million shares of Bio-Heal Stock directly to Bio-Heal, which Bio-Heal will cancel upon receipt as agreed in its signed Consent. The Default Judgments against Bela and Gibson order them to pay, in cash, disgorgement of $1,420,890.29 plus prejudgment interest of $85,940.50 and $9,382,923.32 plus prejudgment interest of $518,495.74, respectively. Bela and Gibson are also ordered to disgorge 3,682,382 and 2,759,697 shares of Bio-Heal Stock directly to Bio-Heal, respectively. Upon receipt of the shares of stock, Bio-Heal will immediately cancel the shares of stock as agreed in its signed Consent. Based on the Commission's motion, on April 3, 2006, the Court entered an Order of Dismissal without Prejudice as to Relief Defendants MRMG Holdings, Inc. and Kess Associates, Inc. The Commission commenced this action by filing its complaint on April 25, 2005, against Bio-Heal and the various Relief Defendants. The complaint alleged that Bio-Heal improperly issued 12 million unrestricted shares of its stock to Relief Defendants MRMG, Kess, and ICOR. Two of the Relief Defendants then allegedly transferred their Bio-Heal shares to the other Relief Defendants, Bela and Gibson. The complaint further alleged that Bela and Gibson generated millions in net profits by dumping Bio-Heal shares while the stock was being touted to investors through the internet. [SEC v. Bio-Heal Laboratories, Inc., Defendant, MRMG Holdings, Inc., Kess Associates, Inc. ICOR, Inc., Bela Enterprises, LLC, and Gibson Island Enterprises, LLC, Relief Defendants, No. 05-21116-CIV-Seitz (S.D. Fla.)] (LR-19688)

On May 2, the Commission filed a complaint in U.S. District Court for the Southern District of Ohio against Michael E. Peppel (Peppel), the former CEO of MCSi, Inc. (MCSi), Ira H. Stanley, Jr. (Stanley), its former CFO, and David J. White (White), a customer of MCSi, alleging violations of the antifraud, issuer reporting, and issuer books and records provisions of the federal securities laws. The Commission alleges in its complaint that, in order to meet analysts' expectations, Peppel and Stanley falsified the company's financial statements from the first quarter of 2001 through the third quarter of 2002. The complaint alleges they did so by materially overstating revenues and income, and by making fictitious journal entries in the company's books. It is further alleged that Stanley concealed this conduct from MCSi's auditors by removing evidence of the false journal entries from the company's books. Finally, the complaint alleges that at the time MCSi was making false reports regarding its financial condition, Peppel sold approximately $6.8 million of his common stock in a registered offering. The complaint alleges that Peppel and Stanley violated Section 17(a) of the Securities Act of 1933 (Securities Act) and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5, 13a-14, 13b2-1 and 13b2-2, and also aided and abetted MCSi's violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13. The complaint alleges that, in addition, Stanley violated Section 13(b)(5) of the Exchange Act. The Commission is seeking injunctions from future violations of these provisions, officer/director bars, disgorgement, prejudgment interest, and civil money penalties from both Peppel and Stanley. The Commission further alleges that David White, a British citizen and owner of a UK company, assisted Peppel and Stanley in carrying out MCSi's largest fraudulent transaction and that White signed a false audit confirmation regarding that transaction. The Commission alleges that, by this conduct, White violated Section 10(b) of the Exchange Act and Rule 10b-5, and aided and abetted MCSi's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13. White has agreed to settle the Commission's action against him, and has consented to entry of an injunction against the antifraud and issuer reporting provisions of the federal securities laws. He has also agreed to pay a penalty of $50,000. (SEC v. Michael E. Peppel, Ira H. Stanley, Jr. and David J. White, Civil Action No. 3:06-cv-00131 WHR, S.D. OH)] (LR-19685)

Networking- it's what we all do every day. You can land a huge job, a big deal, or obtain a great client. And sometimes, you can use networking to find the right executive comp/employment lawyer to get you out of that issue your employer forced on you.

I have been asked so many times for networking contacts that I have decided to make it easy for everyone. I have added a discussion thread on Execucite called "1A Networking Discussion". No 1A does not stand for the freshman classroom, it's just that numbers make it fit on the top of my discussion topic list.

We have also posted a notice on the front page of the website for Executive candidates and Recruiters. Execucite is now accepting resumes for posting on the website. This is simply a feature that our subscribers have asked for.

But you have to earn over $100,000, and we can reject your resume if you tell a white lie. Oh from a legal standpoint, resume fraud can get you fired once an employer finds out. Or worse, you don't get the job at all.

Mark P. Carey
mcarey@execucite.com
and
mcarey@capclaw.com

If you really need to speak with me, call me
at (203) 255-4150.

On January 6, 2006, the Securities & Exchange Commission announced that it will reexamine disclosure rules on executive pay. The first meeting is scheduled for January 17, 2006.

Under the control of Chairman Christopher Cox, who has made executive pay his priority agenda, the SEC may soon begin to require complete disclosure in proxy statements for total compensation of the top five highest paid executives. Locating total compensation has been an elusive effort for most shareholders. The information is typically buried in corporate filings. The SEC is believed to propose a new table in corporate proxy statements that will provide a breakdown of total compensation, including stock options and their value.

The proposed changes to be announced at the January 17, 2006 meeting will be the first changes since 1993 when Congress implemented the $1 million excise tax on executive pay. The SEC proposals may also require: 1) a lower reporting threshold of total aggregate perks to $10,000; 2) disclosure of specific change in control payments; 3) new compensation table that would also include retirement pay; and 4) a new compensation table for executives.

The SEC's goal is to create greater transparency of executive pay in corporate disclosures. Some believe that the SEC and Congress cannot control the limits of excessive executive pay, but creating greater transparency shareholders and the market will create the incentives to limit excessive pay.

Mark P. Carey

January 4, 2006

The U.S. Securities and Exchange Commission today issued the following
statement concerning financial penalties:

Today the Commission announced the filing of two settled actions
against corporate issuers, SEC v. McAfee, Inc. and In the Matter of
Applix, Inc. In one, the company will pay a civil money penalty; in
the other, a penalty is not part of the settlement. The question of
whether, and if so to what extent, to impose civil penalties against a
corporation raises significant questions for our mission of investor
protection. The authority to impose such penalties is relatively
recent in the Commission's history, and the use of very large
corporate penalties is more recent still. Recent cases have not
produced a clear public view of when and how the Commission will use
corporate penalties, and within the Commission itself a variety of
views have heretofore been expressed, but not reconciled.

The Commission believes it important to provide the maximum possible
degree of clarity, consistency, and predictability in explaining the
way that its corporate penalty authority will be exercised. To this
end, we are issuing this statement describing with particularity the
framework for our penalty determinations in these two cases. We have
issued these decisions, and this statement of principles, unanimously.

In determining whether or not to impose penalties against the
corporations in these cases, we carefully considered our statutory
authority, and the legislative history surrounding that statutory
authority.

In 1990, Congress passed the Securities Enforcement Remedies and Penny
Stock Reform Act (Remedies Act), which gave the Commission authority
generally to seek civil money penalties in enforcement cases. The
penalty provisions added by the Remedies Act expressly authorize the
Commission to obtain money penalties from entities, including
corporate issuers. These provisions also enhanced the Commission's
authority to fine individuals. Today, we limit our discussion to
penalties against corporations, although we view penalties against
individual offenders as a critical component in punishing and
deterring violative conduct.

The Remedies Act legislative history contains express references to
penalty assessments against corporate issuers of securities. In its
Report on the legislation, the Senate Committee on Banking, Housing,
and Urban Affairs expressly noted both that the civil money penalty
provisions would be applicable to corporate issuers, and that
shareholders ultimately may bear the cost of penalties imposed on
corporate issuers. According to the Report, such penalties should be
assessed when the securities law violation that is the basis of the
penalty has resulted in an improper benefit to the shareholders. It
also cautioned that the Commission and courts should, in considering
corporate issuer penalties, take into account whether the penalty
would be paid by shareholders who had been the principal victims of
the violation:

The Committee believes that the civil money penalty provisions should
be applicable to corporate issuers, and the legislation permits
penalties against issuers. However, because the costs of such
penalties may be passed on to shareholders, the Committee intends that
a penalty be sought when the violation results in an improper benefit
to shareholders. In cases in which shareholders are the principal
victims of the violations, the Committee expects that the SEC, when
appropriate, will seek penalties from the individual offenders acting
for a corporate issuer. Moreover, in deciding whether and to what
extent to assess a penalty against the issuer, the court may properly
take into account whether civil penalties assessed against corporate
issuers will ultimately be paid by shareholders who were themselves
victimized by the violations. The court also may consider the extent
to which the passage of time has resulted in shareholder turnover.

As this discussion indicates, a key question for the Commission is
whether the issuer's violation has provided an improper benefit to the
shareholders, or conversely whether the violation has resulted in harm
to the shareholders. Where shareholders have been victimized by the
violative conduct, or by the resulting negative effect on the entity
following its discovery, the Commission is expected to seek penalties
from culpable individual offenders acting for a corporation. This same
point was made in the SEC's memorandum in support of the Remedies Act,
which the then Chairman of the SEC, David Ruder, transmitted to the
Senate in a January 18, 1989 letter.

In addition to the benefit or harm to shareholders, the statute and
its legislative history suggest several other factors that may be
pertinent to the analysis of corporate issuer penalties. For example,
the need for effective deterrence is discussed throughout the
legislative history of the Remedies Act. The Senate Report also notes
the importance of good compliance programs and observes that the
availability of penalties may encourage development of such programs.
The Senate Report also observes that penalties may serve to decrease
the temptation to violate the law in areas where the perceived risk of
detection of wrongdoing is small. Other factors discussed in the
legislative history include whether there was fraudulent intent, harm
to innocent third parties, and the possibility of unjust enrichment to
the wrongdoer.

The Sarbanes-Oxley Act of 2002 changed the ultimate disposition of
penalties. Section 308 of Sarbanes-Oxley (the Fair Funds provision)
allows the Commission to take penalties paid by individuals and
entities in enforcement actions and add them to disgorgement funds for
the benefit of victims. Penalty moneys no longer always go to the
Treasury. Under Fair Funds, penalty moneys instead can be used to
compensate the victims for the losses they experienced from the
wrongdoing. If the victims are shareholders of the corporation being
penalized, they will still bear the cost of issuer penalty payments
(which is the case with any penalty against a corporate entity). When
penalty moneys are ultimately returned to all or some of the investors
who were victims of the violation, the amounts returned are less the
administrative costs of the distribution. While the legislative
history of the Fair Funds provision is scant, there are two general
points that can be discerned. First, the purpose of the provision is
to provide an additional source of compensation to victims of
securities law violations. Second, the provision applies to all
penalties and makes no distinction between penalties against
individuals or entities.

We have considered the legislative histories of both the Remedies Act
and the Fair Funds provisions of the Sarbanes-Oxley Act in reaching
the decisions we announce today.

We proceed from the fundamental principle that corporate penalties are
an essential part of an aggressive and comprehensive program to
enforce the federal securities laws, and that the availability of a
corporate penalty, as one of a range of remedies, contributes to the
Commission's ability to achieve an appropriate level of deterrence
through its decision in a particular case.

With this principle in mind, our view of the appropriateness of a
penalty on the corporation in a particular case, as distinct from the
individuals who commit a securities law violation, turns principally
on two considerations:

The presence or absence of a direct benefit to the corporation as a
result of the violation. The fact that a corporation itself has
received a direct and material benefit from the offense, for example
through reduced expenses or increased revenues, weighs in support of
the imposition of a corporate penalty. If the corporation is in any
other way unjustly enriched, this similarly weighs in support of the
imposition of a corporate penalty. Within this parameter, the
strongest case for the imposition of a corporate penalty is one in
which the shareholders of the corporation have received an improper
benefit as a result of the violation; the weakest case is one in which
the current shareholders of the corporation are the principal victims
of the securities law violation.

The degree to which the penalty will recompense or further harm the
injured shareholders. Because the protection of innocent investors is
a principal objective of the securities laws, the imposition of a
penalty on the corporation itself carries with it the risk that
shareholders who are innocent of the violation will nonetheless bear
the burden of the penalty. In some cases, however, the penalty itself
may be used as a source of funds to recompense the injury suffered by
victims of the securities law violations. The presence of an
opportunity to use the penalty as a meaningful source of compensation
to injured shareholders is a factor in support of its imposition. The
likelihood a corporate penalty will unfairly injure investors, the
corporation, or third parties weighs against its use as a sanction.

In addition to these two principal considerations, there are several
additional factors that are properly considered in determining whether
to impose a penalty on the corporation. These are:

The need to deter the particular type of offense. The likelihood that
a corporate penalty will serve as a strong deterrent to others
similarly situated weighs in favor of the imposition of a corporate
penalty. Conversely, the prevalence of unique circumstances that
render the particular offense unlikely to be repeated in other
contexts is a factor weighing against the need for a penalty on the
corporation rather than on the responsible individuals.

The extent of the injury to innocent parties. The egregiousness of the
harm done, the number of investors injured, and the extent of societal
harm if the corporation's infliction of such injury on innocent
parties goes unpunished, are significant determinants of the propriety
of a corporate penalty.

Whether complicity in the violation is widespread throughout the
corporation. The more pervasive the participation in the offense by
responsible persons within the corporation, the more appropriate is
the use of a corporate penalty. Conversely, within this parameter,
isolated conduct by only a few individuals would tend not to support
the imposition of a corporate penalty. Whether the corporation has
replaced those persons responsible for the violation will also be
considered in weighing this factor.

The level of intent on the part of the perpetrators. Within this
parameter, the imposition of a corporate penalty is most appropriate
in egregious circumstances, where the culpability and fraudulent
intent of the perpetrators are manifest. A corporate penalty is less
likely to be imposed if the violation is not the result of deliberate,
intentionally fraudulent conduct.

The degree of difficulty in detecting the particular type of offense.
Because offenses that are particularly difficult to detect call for an
especially high level of deterrence, this factor weighs in support of
the imposition of a corporate penalty.

Presence or lack of remedial steps by the corporation. Because the aim
of the securities laws is to protect investors, the prevention of
future harm, as well as the punishment of past offenses, is a high
priority. The Commission's decisions in particular cases are intended
to encourage the management of corporations accused of securities law
violations to do everything within their power to take remedial steps,
from the first moment that the violation is brought to their
attention. Exemplary conduct by management in this respect weighs
against the use of a corporate penalty; failure of management to take
remedial steps is a factor supporting the imposition of a corporate
penalty.

Extent of cooperation with Commission and other law enforcement.
Effective compliance with the securities laws depends upon vigilant
supervision, monitoring, and reporting of violations. When securities
law violations are discovered, it is incumbent upon management to
report them to the Commission and to other appropriate law enforcement
authorities. The degree to which a corporation has self reported an
offense, or otherwise cooperated with the investigation and
remediation of the offense, is a factor that the Commission will
consider in determining the propriety of a corporate penalty.

This framework for the consideration of the propriety of corporate
penalties is grounded in the Commission's statutory authority and
supported by the legislative history underlying that authority. It is
the Commission's intent that the elucidation of these principles will
provide a high degree of transparency to our decisions in these and
future cases, and will be of assistance to the Commission's
professional staff, to corporate issuers and their counsel, and to the
public. (Press Rel. 2006-4)

 

 

1.                 Kenneth Lay – The former Enron founder has been battling hard during 2005 to prove that he “knew nothing” about his companies woes.  This week he got another Christmas present when his CAO Richard Causey decided to plead guilty and cooperate with the investigation.  Not good news for Jeffrey Skilling, former CEO either.

 2.                 Richard Scrushy – the HealthSouth founder who was found innocent of criminal charges in June faces new legal battles.  His company has filed suit for $76 million in back salary, bonuses and stock awards.  And the SEC has filed civil charges with a court date set for April 2007.  Not surprising, he resigned from HealthSouth’s Board of Directors this month and has filed his own lawsuit claiming breach of contract. 

 3.                 Conrad Black – former chairman and CEO of Hollinger International faced an arrest warrant this year.  The member of the House of Lords is charged with helping to steal more $51 million from his company.  In the past year, he has mortgaged his Toronto estate, sold his London townhouse, and his private holding company Ravelston is in receivership.  He also is facing charges brought by the SEC.

 4.                 Phillip Bennett – former CEO of Refco plead innocent to conspiracy charges.  Refco went public in August and filed for bankruptcy protection in October after it disclosed a $430 million debt to the company from Mr. Bennett. 

 5.                 Joseph Nacchio – the former Qwest CEO was indicted on 42 counts of insider trading.  As the story goes, it seems that when Mr. Nacchio discovered that his company would not make its forecast, he sold lots of stock ($101 million). Mr. Nacchio has pleaded not guilty and remains free on bond. He also faces fraud charges filed by the Securities and Exchange Commission and a number of shareholder lawsuits

 6.                 The family Riggs – father John, sons Michael and Timothy – former executives of Adelphia Communications.  John and Timothy were convicted of conspiracy, bank and securities fraud and face prison terms.  They remain free pending appeal.  Son Michael pleaded guilty to a lesser charge in order not to face a retrial on securities and bank fraud charges. 

 7.                 Bernard Ebbers – the former CEO of WorldCom was sentenced in July to 25 years in prison for his role in the collapse of the company.  Mr. Ebbers remains free pending appeal.

 8.                 E. Kirk Shelton – former Cendant Corporation Vice Chairman who convicted of conspiracy and securities, wire and mail fraud and received a ten year jail sentence.  The court ordered Shelton to pay more than $3.27 billion to Cendant, including an initial payment of $15 million and monthly payments of $2,000 per month once he is out of prison.  Mr. Shelton is free pending his appeal.  He made news again this December when he asked for the court’s permission to visit friends recovering from injuries sustained in a plane crash.  The friends have been recovering for months and prosecutors queried whether the request was merely an excuse for a vacation.  Seems the friends are recuperating in Vail.

 9.                 Dennis Kozlowski – former Tyco CEO and Mark Swartz – former CFO escaped their first trial in 2004 after a mistrial was declared.  In June of this year, they were convicted on 22 counts each of grand larceny, conspiracy, securities fraud and falsifying business records.  Sentenced in September to 8 to 25 years, these two remain behind bars pending their appeals.

 10.             Martha Stewart – founder of Martha Stewart Living et. al. – convicted last year of conspiracy, obstruction of justice and lying to investigators was released from jail in March and from house arrest in August.  She rebounded to give us her version of the “Apprentice” on TV.  

 

HAPPY NEW YEAR!!

The Staff at ExecuCite.com wish you great fortune and success!