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The
Corporate Reform Weekly
Vol
V. #30 August 28, 2006
In
This Issue...
Corporate
Scandal
1.
Justice Department drops prosecution of Fannie Mae
2.
Banker Quattrone cleared of all charges
Hedge
Funds
3.
Sen. Grassley complains that SEC is stalling Congressional hedge fund
investigation
4.
Treasury official leading hedge fund industry may have conflict of interest
Securities
and Exchange Commission
5.
SEC enforcement is falling behind
Executive
Pay
6.
Senate Finance Committee to hold hearing on executive pay
This
Week’s Action Item
Tell your
Representatives: The SEC needs more resources to keep up enforcement
Corporate
Scandal
1.
Justice Department drops prosecution of Fannie Mae
The Justice
Department announced last week that it would not file any criminal charges
against Fannie Mae in connection with a $10.6 billion accounting fraud at the
mortgage giant, letting the company off the hook after a two-year probe.
According to a
report produced by the Office of Federal Housing Enterprise Oversight (OFHEO),
the accounting fraud, which took place over a six-year period, was designed to
allow top executives to collect $25 million in bonuses by meeting earnings
targets.
The OFHEO
report described a board of directors that was asleep at the wheel while CEO
Franklin Raines and CFO J. Timothy Howard manipulated earnings so that they
could get the maximum payouts. Raines earned $90 million in compensation
between 1998 and 2003. The report said he created an “unethical and arrogant
culture” at the top of company.
Following the
report’s release, Fannie Mae agreed to pay $400 million in penalties to OFHEO
and the Securities and Exchange Commission, but did not admit or deny guilt.
Though Fannie
Mae did avoid criminal prosecution, the company still faces shareholder
lawsuits related to the accounting fraud. Top executives also are still under
investigation, and the SEC said it may consider filing civil charges against
individual executives involved in the fraud. Additionally, the OFHEO said it
was considering forcing administrative changes at the company and forcing some
insiders to pay back ill-gotten gains.
For more, see:
“Fannie Mae Avoids Criminal Charges Over Accounting,”
By David S.
Hilzenrath and Carrie Johnson of the Washington Post:
http://www.washingtonpost.com/wp-dyn/content/article/2006/08/24/AR2006082400639_pf.html
August 23,
2006
2.
Banker Quattrone cleared of all charges
Federal
prosecutors decided last week to drop obstruction of justice charges against
former Credit Suisse First Boston banker Frank Quattrone, rather than pursue a
third trial after an appeals court overturned Quattrone’s May 2004 conviction
earlier this year. (The first trial ended in a mistrial). As part of a
deferred-prosecution agreement, Quattrone agreed not to violate any laws for
one year.
Quattrone had
been convicted in connection to a December 2000 e-mail he sent to company staff
that urged them to “clean up those files” just two days after he learned about
a grand jury investigation into the company’s handling of IPOs. The appeals
court ruled that “jury instructions were erroneous” and contained “a glaring
deficiency.” The alleged problem was that the U.S. District Judge Richard Owen
did not tell the jury that in order to find Quattrone guilty, they had to find
that Quattrone knew the government wanted the documents. The judge, however,
did not do this.
The appeals
wrote: “Ultimately we believe that the interest and appearance of justice are
better served by reassignment'' to a new judge. Quattrone’s lawyers had argued
that Judge Owen was biased against Quattrone.”
Government
prosecutors spent thousands of hours and millions of dollars pursuing
Quattrone’s conviction. However, the prosecutors who brought the original case
have since gone into private practice, which may have contributed to the
government’s decision to offer a deferred prosecution agreement.
Even better
for Quattrone, he’ll get $100 million in back pay and restricted stock from his
old company, Credit Suisse First Boston, which already helped to foot
Quattrone’s legal bills in his first two trials.
For more, see:
“Star Banker,
With Future, Emerges Free,” By ANDREW ROSS
SORKIN of the New York Times: http://www.nytimes.com/2006/08/23/business/23star.html
“Quattrone
Avoids Prosecution: Judge's Approval of Deal for Banker Averts Third Trial
By Brooke A.
Masters of the Washington Post: http://www.washingtonpost.com/wp-dyn/content/article/2006/08/22/AR2006082200555_pf.html
“The Glorious
Appeals System For the Rich,” by Lee Drutman for the Providence Journal
http://www.commondreams.org/views06/0407-27.htm
Hedge
Funds
3.
Sen. Grassley complains that SEC is stalling Congressional hedge fund
investigation
Sen. Charles
Grassley (R-Iowa), chairman of the Senate Finance Committee, last week
complained that the Securities and Exchange Commission is slowing a
congressional investigation into whether SEC officials cut short a hedge fund
investigation because it might implicate Morgan Stanley CEO John J. Mack.
“I have
serious concerns about indications that the SEC plans to impose unnecessary
delays on Congress’s ability to get to the bottom of this important matter,”
Grassley wrote to SEC chairman Christopher Cox. Grassley said that the agency
was being slow about allowing Senate investigators to examine documents of
interest.
The
controversy began in June, when Gary J. Aguire, a former Securities and
Exchange Commission enforcement agent, told a Senate Judiciary Committee panel
that he was forced out of a job last summer at the SEC after he tried to get
testimony from a powerful Wall Street executive. Aguire was seeking the
testimony as part of an investigation into allegedly illegal hedge fund
activity.
Aguire told
the Senate panel that he was investigating Pequot Capital, a $7 billion hedge
fund overseen by Arthur J. Samberg. Aguirre wanted to know whether Morgan
Stanley CEO John J. Mack was leaking nonpublic information to Pequot about a
pending merger.
Aguire, who
had just been given a two-step merit raise after a year at the SEC, was fired
within days of trying to get Mack’s testimony. In testimony before the Senate
panel, Aguire said that he was told by superiors at the SEC that the deposition
could not be taken because Mack had “very powerful political connections.”
For more, see:
“Senator Presses S.E.C. on a Hedge Fund Inquiry,”
By BLOOMBERG
NEWS: http://www.nytimes.com/2006/08/23/business/23sec.html
4.
Treasury official leading hedge fund industry may have conflict of interest
Before coming
to the U.S. Treasury, Emil Henry Jr. was a partner at Gleacher Partners LLC, an
asset management unit that specializes in hedge-fund investments. As part of
his severance package, he is entitled to 20 percent of the company’s 2006
profits.
Henry is now
the U.S. Treasury official in charge of a government inquiry into the $1.2
trillion hedge fund industry, in which he has a very big personal stake. Some
believe this is a conflict of interest.
“The clean
breach is the best breach,’’ James Cox, a securities professor at Duke University
Law School told Bloomberg News. “Anything else, you're walking a pretty fine
line subject to speculation and condemnation.''
According to
Bloomberg, Henry has been cleared by ethics specialists at the Treasury
Department. He has agreed to recuse himself on all matters involving
Gleacher for one year.
The Treasury
Department is currently in the midst of a “comprehensive review” to determine
the “appropriate policy response,” to the growth of the hedge fund industry,
according to recent Senate testimony by Randal Quarles, the undersecretary for
domestic finance at Treasury and Henry’s boss.
“At the moment
it is too soon to say what initiatives will result from this focus, but this is
the lens through which we will filter the various ideas and efforts with which
we will all be grappling over the next few years,'' Quarles told the Senate
Banking Committee on June 25.
See:
“Treasury
Official Henry Due 20 Percent of Gleacher Fund Profits”
By Robert
Schmidt of Bloomberg News: http://www.bloomberg.com/apps/news?pid=20601087&sid=aVlFdsqrJcgs&refer=home
Securities
and Exchange Commission
5.
SEC enforcement is falling behind
Enforcement at
the Securities and Exchange Commission is falling behind, according to a
comprehensive review by USA
Today.
According to USA Today, the SEC is on pace to file 590 cases
for the current fiscal year, a slight drop from 630 last year and 679 in fiscal
2003. However, the report notes that the SEC is increasing its enforcement case
filings by deregistering companies.
USA
Today reports:
“Beginning in
fiscal 2005, the SEC became more aggressive about deregistering companies that
had become delinquent in making their required quarterly filings with the
regulatory agency. That year, the SEC filed 33 such actions, effectively
removing dormant or defunct businesses from the roster of publicly traded
companies.”
“Without those
33 filings, on an apples-to-apples comparison, the SEC's total enforcement
actions for 2005 would have been 597, a sharp drop from the 679 actions filed
in 2004, when delinquent filing sanctions by the SEC were negligible. So far
this year, the SEC says it has brought 53 actions against delinquent filers. So
traditional enforcement actions could end up being fewer for fiscal 2006 than
in any year since 2001.”
The article
places the blame on the agency’s inability to fill vacancies due to budget
cuts.
For more, see:
“SEC enforcement activity lags,” By Greg Farrell, USA TODAY
http://www.usatoday.com/money/companies/regulation/2006-08-20-cox-usat_x.htm
Executive
Pay
6.
Senate Finance Committee to hold hearing on executive pay
In the wake of
the stock options backdating scandal, the Senate Finance Committee is going to
hold a hearing on options backdating and executive pay on September 6, with an
eye toward developing legislation to curb excesses.
“It’s one
thing for an executive to make big profits because he’s improved his company,
but it’s a whole different thing to make big profits because he’s playing fast
and loose with the books,” said Committee Chairman Charles Grassley (R-Iowa) in
a press release. “Outside the corporate suite, Americans don’t get to pick and
choose how much of their employer provided income is taxed. Their employers
report their salaries to the IRS and that’s that. It’s frustrating to think
that after the corporate scandals of recent years, some executives are still
looking for ways to take unfair advantage for personal gain.”
“On top of
that, it looks as though boards of directors are approving bad deals without
shareholder approval. On the backdating of stock options, the federal
government needs to take a hard look at that problem. I continue to ask federal
officials to let me know whether the current tax laws are adequate to rein in
and prosecute stock options backdating. If the tax laws are inadequate on stock
options backdating, I want to beef them up.”
The hearing
will feature testimony from the deputy attorney general, the IRS Commissioner,
and other interested groups, including some academics.
“At the
September 6 hearing, I’m especially interesting in hearing the panelists’ views
on the adequacy and the appropriateness of the current tax treatment of
executive compensation, including perks and retirement benefits. I want to find
out more about the effectiveness of the tax code, as well as how improved
transparency for shareholders could address concerns about executive
compensation abuse.”
For more, see
Sen. Grassley’s memorandum:
http://finance.senate.gov/press/Gpress/2005/prg082506.pdf
This
Week’s Action Item
Tell
your Representatives: The SEC needs more resources to keep up enforcement
According to a
report in USA Today (see item #5), SEC enforcement is lagging. The reason for
this is that the SEC doesn’t have the resources to fill vacancies. Without
adequate resources, the SEC can’t devote adequate efforts to stopping
accounting fraud and other financial crimes.
As this week’s
action item, we encourage you to contact your elected officials in Washington
and make sure they saw the USA Today article. Let them know you are concerned
and you hope that they will support more funding for SEC enforcement.
*
Contact your senators: http://www.senate.gov/general/contact_information/senators_cfm.cfm
* Contact your congressional representative: http://www.house.gov/writerep/
MAKE YOUR
VOICE HEARD
* White House Comment Line: 202.456.1111
* White House Fax Line: 202.456.2461
* E-mail President George W. Bush
* E-mail Vice President Dick Cheney
* White House Address: 1600 Pennsylvania Ave, Washington, DC 20500
* US Capitol Switchboard: 202.224.3121
*
Contact your senators: http://www.senate.gov/general/contact_information/senators_cfm.cfm
· Contact your congressional
representative: http://www.house.gov/writerep/
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