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The
Corporate Reform Weekly
Vol.
V, #32 September 18, 2006
In
This Issue…
Corporate
Governance
1.
Shareholder democracy may get a boost in light of recent court ruling
Congressional
Corruption
2.
Rep. Ney pleads guilty to corruption charges
3.
Executive sentenced to seven years in prison for bribing congressman
Corporate
Crime Prosecution
4.
Deputy Attorney General defends corporate prosecution tactics
5.
Federal regulators say they are “more than likely” to sue top execs at Fannie
Mae
Corporate
Scandal
6.
Congressional panel wants HP directors to testify
Sarbanes-Oxley
7.
CEOs and business-friendly academics form committee to undermine Sarbanes-Oxley
This
Week’s Action Item:
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Corporate
Governance
1.
Shareholder democracy may get a boost in light of recent court ruling
Following on a
U.S. Court of Appeals ruling two weeks ago that said shareholders should be
able to nominate candidates for the board of directors, investor advocates are
growing increasingly optimistic that this may open the door for a sea change in
shareholder democracy.
"This is
the fundamental issue in all of corporate governance and the defining character
of the Exchange Act--what rights do shareholders have to nominate and elect
board members who reflect their interests?" Rich Ferlauto, director of pension
and benefit policy at AFSCME, told SocialFunds.com. "Do shareholders only
have a right to disclosure, or do they have the right, under the Exchange Act
and state laws, to actually engage in an election that's run fairly and on an
equal basis where shareholders really have an opportunity to communicate with
other owners on who the leadership of the company should be? In some ways, this
decision can help bring a democratization of elections that hasn't been there
up until this point, and make capitalism more consistent with democracy."
The Securities
and Exchange Commission has said that it will consider new rules regarding the
rights of shareholders to nominate candidates to the board of directors.
Allowing
minority shareholders to nominate directors is widely seen by investor
advocates as a reasonable solution to a number of corporate governance
problems. Under current rules, directors are nominated by management. Almost
all shareholder elections consist of one and only one slate of directors –
shareholders have, in effect, no choice. Since directors are nominated by
management, they are only accountable to management, which means they often go
lightly on their oversight functions. Many blame the rise of executive
compensation on the fact that directors – which approve pay packages – are not
held accountable to shareholders.
The SEC
originally proposed rules to give shareholders more rights in 2003, but those
rules stalled under opposition from powerful business lobbyists.
In a
commentary in the Wall Street Journal, prominent corporate lawyer Ira M.
Millstein and former SEC Commissioner Harvey J. Goldschmid urged the SEC
to expand the voice of shareholders in the corporate boardroom:
“The SEC should
strive for a solution that gives shareholders a voice in the director election
process. Its recommendation should include safeguards such as minimum holding
requirements that may be necessary to ensure that access opportunities are not
abused by shareholders with non-efficiency or obstructionist motivations. A
uniform approach to shareholder access is key to achieving a balanced result
and avoiding the confusion and delay that can reign when ad hoc development by
too many cooks is permitted to occur (as with majority voting reform, for
example).”
“We urge the
SEC to balance the system and give shareholders the tools to hold boards
accountable -- and, in the process, restore public confidence in the fairness
and economic rationality of the governance system.”
For more, see:
“The SEC-Saw,” By IRA M. MILLSTEIN and HARVEY J. GOLDSCHMID: http://online.wsj.com/article/SB115828645964263952.html
Kathleen Pender, San Francisco Chronicle: http://sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2006/09/10/BUGJ9L1IPA1.DTL
“Court
Affirms Shareowner Right to File Resolutions on Proxy Access for Nominating
Directors” by Bill Baue: http://www.socialfunds.com/news/article.cgi/article2109.html
Congressional
Corruption
2. Rep.
Ney pleads guilty to corruption charges
Rep.
Robert Ney (R-Ohio) has agreed to plead guilty to doing favors for lobbyists in
exchange for money, meals, travel, sports tickets and gambling chips. Last
week, he signed a plea deal, checked into an alcohol rehabilitation
clinic and apologized publicly, saying, "I have made serious mistakes and
am sorry for them. I am very sorry for the pain I have caused to my family, my
constituents in Ohio and my colleagues."
In a press
release, Alice S. Fisher, the assistant attorney general in charge of the Justice
Department's criminal division, said that: "Congressman Ney and his
co-conspirators engaged in a long-term pattern to deprive the public of his
honest, unbiased services as an elected official.”
Ney admitted
to inserting specific amendments into an election reform bill to benefit
clients of lobbyist Jack Abramoff. He also said he helped Abramoff
purchase a casino cruise line in Florida and helped another Abramoff client win
a multi-million-dollar wireless communications service federal contract.
Earlier this
year, Neil G. Volz, Ney’s former chief of staff turned lobbyist, pleaded guilty
to conspiracy and fraud in trying to bribe his former boss with meals,
entertainment and other gifts.
For more, see:
“Rep. Ney Agrees to Plead Guilty,” By James V. Grimaldi and Susan Schmidt,
Washington Post
3.
Executive sentenced to seven years in prison for bribing congressman
Businessman
Vernon L. Jackson will spend seven years and three months in federal prison
after being convicted of paying more than $400,000 in bribes to Rep. William J.
Jefferson (D-La.). In exchange, Jefferson, who is the co-chair of the
congressional Africa Trade and Investment Caucus, is alleged to have used his
influence to promote iGate's broadband Internet and cable television technology
in Nigeria, Ghana and Cameroon.
According to
prosecutors, Jackson used a “professional services” agreement to conceal “the
illegal nature of the payments.” This included $7,500 a month to the Jefferson
family business, 5 percent of all capital investments in iGate, and 5 percent
of any gross sales over $5 million. Jefferson’s family company allegedly sent
numerous fake invoices to Jackson. These invoices were signed by Jefferson’s
wife.
Earlier this
year, former Jefferson aide Brett M. Pfeffer was sentenced to eight years in
prison after pleading guilty to bribing the Congressman.
Jefferson so
far has not been charged and maintains his innocence. Jefferson’s attorney,
Robert Trout, issued the following statement following Jackson’s sentencing:
"Congressman Jefferson knows well the pressure that the Department of
Justice can apply once it targets someone for criminal prosecution. As
Jackson's plea bargain makes clear, the government has offered powerful
inducements to cause Jackson to plead guilty."
For more, see:
“Businessman Gets 7 Years for Bribing Legislator
By Allan
Lengel,” Washington Post Staff Writer: http://www.washingtonpost.com/wp-dyn/content/article/2006/09/08/AR2006090801324_pf.html
Corporate Crime Prosecution
4.
Deputy Attorney General defends corporate prosecution tactics
Recently,
several former U.S. attorney generals sent a letter to the Justice Department
asking that federal prosecutors go easier on corporations during criminal
investigations. Following complaints from the U.S. Chamber of Commerce and the
American Bar Association, the former attorney generals and other Justice department
officials want the Justice Department to stop forcing companies to waive legal
protections, including attorney-client privileges, during criminal
investigations.
Last week,
Paul J. McNulty, deputy attorney general, defended his department’s tactics
before the Senate Judiciary Committee, noting that they had helped to rein in
fraud at more than 1,000 companies.
The tactics
are based on a 2003 memo drafted by then Deputy Attorney General Larry
Thompson. The so-called Thompson Memorandum set up tough guidelines for
prosecutors going after corporations, many of whom had been uncooperative in
the past. The memo encouraged prosecutors to go after confidential material in
order to more effectively investigate corporations suspected of breaking the law
and are being otherwise uncooperative.
McNulty said
that the Thompson memorandum guidelines “are nothing more than a structured
recitation of what common sense would lead a prosecutor to consider…The irony
of the attacks on the Thompson memo is that the federal criminal justice system
would be a much harsher, less predictable and less transparent environment for
corporations and their counsel in the absence of this guidance.”
Still,
responding to the criticism, McNulty said that, “we are giving thoughtful
consideration to everything,” and that “we’ll have new guidance if, and that’s
the key here, if something should be identified that would improve the
process.” Changes on the table include making the guidelines nonbinding.
For more, see:
"Justice Department Is Reviewing Corporate Prosecution
Guidelines," By LYNNLEY
BROWNING
http://www.nytimes.com/2006/09/13/business/13legal.html
5.
Federal regulators say they are “more than likely” to sue top execs at Fannie
Mae
Office of
Federal Housing Enterprise Oversight (OFHEO) Director James Lockhart last week
announced that his office, which oversees Fannie Mae, would “more than likely”
sue former Fannie Mae CEO Franklin D. Raines and other top executives for their
role in a $10.6 billion accounting fraud.
Last month,
the Justice Department announced that it would not file any criminal charges
against Fannie Mae, the company, ending a two-year probe, but that
investigations into the culpability of individual executives was continuing.
According to a
report produced by the OFHEO, the six-year accounting fraud 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 in May to pay $400 million in penalties to
OFHEO and the Securities and Exchange Commission, but did not admit or deny
guilt.
Regulator Says
Civil Suit Likely For Raines, By Terence O'Hara, Washington Post:
http://www.washingtonpost.com/wp-dyn/content/article/2006/09/13/AR2006091301982_pf.html
Corporate
Scandal
6.
Congressional panel wants HP directors to testify
The House
Energy and Commerce Committee is requesting Hewlett-Packard Chairwoman Patricia
Dunn and General Counsel Ann Baskins testify at a September 28 hearing that the
Committee is holding to investigate allegations that HP authorized illegal
spying activities on its own board members.
The FBI, SEC,
and California Attorney General Bill Lockyer are also conducting
investigations, and last week, shareholders filed a lawsuit in state court that
accuses company leaders of failing in their duties.
What appears
to have happened at HP is that some corporate directors were leaking classified
board information to members of the media. In response, other board members
including chairwoman Patricia Dunn, authorized a private firm to investigate
the leaks. The hired investigators allegedly broke the law by gaining records
and information under false pretenses. In California, where HP is
headquartered, this practice is known as “pretexting” and it is against the
law.
Director
George Keyworth, who was accused of having leaked information to the press, has
resigned. Dunn, who has come under fire for approving the investigation, will
step down as chairwoman in January.
For more, see:
“HP execs asked to testify in Washington; shareholder files suit,” JORDAN
ROBERTSON, Associated Press: http://www.mercurynews.com/mld/mercurynews/news/local/states/california/northern_california/15528854.htm
“FBI,
congressional panel open their own HP probes Board meets again to discuss fate
of chairwoman” Benjamin Pimentel, SF Chronicle http://sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2006/09/12/MNG4QL3RPQ1.DTL
“HP board
shuffle raises oversight issues ,” Associated Press: http://www.businessweek.com/ap/financialnews/D8K5EA5O0.htm
Sarbanes-Oxley
7.
CEOs and business-friendly academics form committee to undermine Sarbanes-Oxley
In yet another
attempt by big business to undermine Sarbanes-Oxley, a group of CEOs and
business-friendly academics have formed new group called the “Committee on
Capital Markets Regulation” to recommend changes to the Sarbanes-Oxley Act.
The director
of the group will be Hal S. Scott, a Harvard law professor who said he founded
the group because he was concerned about the competitiveness of America’s
markets.
Also on the
committee: CEOs of DuPont,
Office Depot
and the CIT Group;
top officers of mutual fund companies, Lehman
Brothers and the New York
Stock Exchange; William G. Parrett, chief executive of Deloitte
Touche Tohmatsu; Samuel A. DiPiazza Jr., chief executive of the accounting firm
PricewaterhouseCoopers; Donald L.
Evans, the former commerce secretary who is now chief executive of
the Financial Services Forum, a lobbying group for major insurers, banks and
investment banks; Ira M. Millstein, a leading corporate lawyer.
“I
expect the committee members, themselves capitalists and participants in
capital markets, to recommend that the free market be applied to our own
regulatory system,” Mallory Factor, the chairman of the Free Enterprise Fund,
told the New York Times. “The only true solution to easing the excessive costs
of SOX on American businesses is to make this legislation optional.”
The group’s
creation was also praised by Treasury Secretary Henry M.
Paulson Jr., who said that American competitiveness “is important to
the future of the American economy and a priority for me.”
The group
expects to have proposals ready for a new Congress in January. Issues of focus
will include: easing internal controls, limiting liability for auditors,
directors, and bankers, and the role of state regulators (i.e. how to prevent
future Eliot Spitzers from holding companies accountable).
“Panel of
Executives and Academics to Consider Regulation and Competitiveness“ by Floyd
Norris of the New York Times
http://www.nytimes.com/2006/09/13/business/13sarbanes.html
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