 |
|
||||||||||||||||||
|
July 14, 2003
In Short
In Business
Stock Options
1. Microsoft abandons stock options as options debate continues to rage
Scandal
2. Judge approves $750 million WorldCom settlement
3. Ernst& Young fined $15 million for tax shelter practices
4. Ford Foundation keeps former Xerox CEO as chairman despite $1 million SEC settlement for fraud allegations
5. Enron creditors come up short as company emerges from bankruptcy
In Washington
The campaign trail
6. Sen. Edwards announces corporate accountability plan
Congress
7. Subcommittee approves bill to limit state's ability to crack down on corporate fraud
Securities and Exchange Commission
8. SEC to recommend more power for shareholders in proxy elections
Bush Administration
9. Judge rules that Cheney can't keep meetings of energy task force secret
Fighting Back
10. Socially responsible funds criticize large companies on climate change
This Week's Action Item
Tell your Representative: Don't let the SEC preempt the ability of state AGs to protect investors
NEWS:
In Business
Stock Options
1. Microsoft abandons stock options as options debate continues to rage
In 2001, Microsoft gave out $3.4 billion worth of stock options as compensation to its employees, more than any other company. But last week, Microsoft announced it would stop granting options, sending a strong signal that stock options could be on their way out as a form of compensation. Microsoft's decision comes at a time when options have come under heavy fire from advocates of responsible accounting.
Stock options, the only form of compensation that does not have to be counted as an expense, have been cited as one of the key fuels of the recent corporate accounting scandals -- the fact that they are not counted as expenses encouraged companies to distribute them by boatloads (particularly to top executives), thus distorting the finances at some companies and encouraging many executives with lots of company stock to cook the books to get the stock price even higher. This happened at Enron, WorldCom, Global Crossing and others.
Though the Financial Accounting Standards Board (FASB) has proposed requiring options to be expensed, a small but vocal minority in Congress, backed by the technology industry, has fought to block FASB and keep options unexpensed.
Microsoft's decision to abandon options was widely seen as a serious blow to efforts to keep options unexpensed. As the Washington Post editorialized, "Microsoft's announcement was part of a bigger shift that could herald the end of what the Wall Street Journal called, "the golden age of stock options'" (See "Welcome Steps on Stock Options" http://www.washingtonpost.com/wp-dyn/articles/A35758-2003Jul9.html?nav=hptoc_eo)
But Microsoft's decision was not about integrity in accounting -- it was a simple realization that with the stock market not performing so well in recent years, employees no longer wanted stock options, which are only worth something in a rising market. Instead, they wanted good, old-fashioned stock, which is at least worth something in a bear market.
Meanwhile, another tech giant, Sun Microsystems, may also be reconsidering its approach to stock options.According to the Financial Times, the company might see a showdown on the issue at its July 23 meeting. The challenge to Sun's position comes from board member and former SEC chief accountant Lynn Turner, an outspoken critic of the accounting industry and a supporter of expensing options (For more on Sun, see "Sun faces stock option challenge" by Richard Waters and Adrian Michaels: http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1057562359288)
For more on Microsoft's decision see: "Microsoft to Award Stock, Not Options, To Employees" by john Markoff and David Leonhardt of the New York Times: http://www.nytimes.com/2003/07/09/technology/09SOFT.html
Also see: "Stock options on their way to passé?" by Gary Strauss and Michelle Kesller, USA Today: http://www.usatoday.com/money/industries/technology/2003-07-10-msoft_x.htm
"Tech Firms' Options Fight Loses Steam" by Jackie Spinner and Kristin Downey of the Washington Post: http://www.washingtonpost.com/wp-dyn/articles/A35514-2003Jul9.html?nav=hptoc_tn
Stock options are one of three ways that corporations have continued to inflate earnings, as Gretchen Morgenson notes in an excellent New York Times piece called "Earnings are Worse Without the Icing." (see http://www.nytimes.com/2003/07/13/business/yourmoney/13WATC.html). The article details two other ways that corporations continue to inflate earnings. "In other words," the article concludes, "the great stock market bubble lives on."
Scandal
2. Judge approves $750 million WorldCom settlement
WorldCom will pay $750 million to shareholders and creditors under an SEC settlement approved last week by U.S. District Court Judge Jed S. Rakoff. The money will include $500 million in cash and $250 million in MCI stock (after bankruptcy is completed, Worldcom will re-emerge as MCI).
The penalty is for an estimated $11 billion in accounting fraud, which cost investors as much as $200 billion. Though the penalty is 75 times larger than any previous SEC settlement, it still pales in comparison to the approximately $175 billion that investors lost.
"This fine is not sufficient to act as a deterrent to future corporate corruption," said Tom Schatz, president of Citizens Against Government Waste. "It is disappointing that the company that commits the greatest fraud in American history.... receives only a slap on the wrist."
See "Judge Approves WorldCom Pact" by Barnaby J. Feder by the New York Times: http://www.nytimes.com/2003/07/08/business/08PHON.html
3. Ernst& Young fined $15 million for tax shelter practices
Accounting firm Ernst &Young will pay $15 million to settle IRS charges related to its marketing of tax shelters.
The settlement also calls for E&Y to work with the IRS "to ensure ongoing compliance" of tax-avoidance arrangements. E&Y came under fire earlier this year for deals that helped Sprint executives avoid tens of millions in taxes due on stock options - until the IRS found out about it. Now other big investors who received the same bad tax shelter advice are suing E&Y for bad advice.
According to Bloomberg News, E&Y collaborated with a Tennessee firm, Bolton Capital Planning LLC, to set up tax shelters for 80 investors, including 31 for executives at companies E&Y was auditing. Regulators are investigating the conflicts of interest that arise when a company's audit firm is setting up tax shelters for executives. Meanwhile, the IRS reports that it has opened more than 90 investigations of professional firms' tax shelter deals.
For more, see "Ernst & Young steered clients to tax shelter firm," by Miles Weiss and Bob Drummon of Bloomberg News: http://www.kansascity.com/mld/kansascity/business/6284730.htm
4. Ford Foundation keeps former Xerox CEO as chairman despite $1 million SEC settlement for fraud allegations
As CEO of Xerox, Paul Allaire oversaw $1.4 billion in alleged accounting fraud over four years. Recently, he paid $1 million to the SEC and agreed to forfeit $7.6 million in bonus pay and proceeds from Xerox stock sales to settle charges related to that fraud.
But despite all this, Allaire remains head of the Ford Foundation, one of the country's largest private charitable foundations, which recently agreed to keep him on as the chairman, raising a number of both internal and external questions.
Kathryn S. Fuller, a member of the Foundation's executive committee defended Allaire in a New York Times article: "We were committed to doing what we considered and consider to be the right thing, and that is what is best for the foundation, which is to stay with a man who has been an exemplary leader." Fuller is a former board member of Waste Management, which was itself embroiled in an accounting scandal in the mid 1990s.
For more, see "Foundation to Keep Leader Accused of Fraud at Xerox." by Stephanie Strom of the New York Times. http://www.nytimes.com/2003/07/08/national/08FORD.html
5. Enron creditors come up short as company emerges from bankruptcy
As Enron emerges from bankruptcy, it owes an estimated 20,000 creditors roughly $67 billion. But under the company's re-organization plan, those creditors will receive only 14.4 cents to 18.3 cents for every dollar lent.
Some of those creditors are big banks, like J.P. Morgan and Citigroup (who themselves had a key role in helping Enron commit fraud by setting up secretive partnerships and confusing deals).Others are small, unsecured bondholders. Either way, most of their money seems gone forever into the pockets of the many Enron executives who made off with millions as their company spiraled into bankruptcy.
For more see "Plan gives creditors of Enron little back," by Kristen Hays of the Associated Press: http://www.nwanews.com/adg/story_National.php?storyid=35670
In Washington
The campaign trail
6. Sen. Edwards announces corporate accountability plan
Presidential hopeful Sen. John Edwards (D-NC) last week introduced his corporate accountability plan, the Worker and Shareholder Bill of Rights, calling for honesty in the economy and in boardrooms.
"Our economy, our people, and our nation have been undermined by the crony capitalists who believe that success is all about working the angles, working the phones and rigging the game, instead of hard work, innovation and frugality," Edwards said.
Edwards drew the most attention for coming out in favor of expensing stock options, calling it "a fundamental tenet of economic reform." The other points of Edward's plan are:
- Curbing "Outrageous Executive Pay": Edwards wants companies to fully disclose CEO pay and perks to shareholders and require pay to be linked to performance.
- Empowering shareholders: Edwards wants minority shareholders with substantial company holdings to be able to nominate board members (as the SEC is likely to propose this week).
- Pension parity: Edwards wants to make sure that ordinary workers enjoy the same pension protections as executives.
- Cracking down on tax shelters: Edwards wants to strengthen the IRS's ability to crack down on tax shelters by increasing penalties and expanding disclosure of tax shelters. Edwards also wants to require companies to explain the difference between profits reported to the IRS and shareholders. (This difference has grown substantially in recent years.)
For details, see John Edwards' Campaign Site: http://www.johnedwards2004.com/page.asp?id=139
Congress
7. Subcommittee approves bill to limit state's ability to crack down on corporate fraud
A House subcommittee last week approved a bill that would severely limit the ability of state attorneys general like Eliot Spitzer to take action on securities fraud.
The misnamed "Securities Fraud Deterrence and Investor Restitution Act of 2003" (H.R.2179), introduced by Rep. Richard Baker (R-La.), a long time friend of the financial services industry, would bar state regulators from creating their own rules for brokerage firms. It would have, for example, prevented Spitzer from pursuing the charges that resulted from his investigation into analyst conflicts at large Wall Street banks. State regulators would also be prevented from instituting conflict of interest requirements on brokerage firms.
Spitzer called the bill "a direct attack on state securities regulators, without whom there would have been no meaningful action against the investment banking firms that engaged in the largest financial fraud in American history."
"This is revenge by some of the people on Wall Street on Eliot Spitzer," said Rep. Barney Frank (D-Mass.), "This is an attempt to knock the states out of the business of regulating investment banks."
The bill does have some decent provisions to strengthen the ability of the SEC to increase fines and go after property of securities violators. But based on the provisions to weaken state regulation, the bill should be defeated. The bill now goes to the full Financial Services Committee, which is led by Rep. Michael Oxley (R-Ohio), another friend of the financial services industry.
For more, see: "House Panel Votes to Limit States' Policing of Wall Street" by Gretchen Morgenson of the New York Times: http://www.nytimes.com/2003/07/11/business/11WALL.html
Also see: "Statement by Attorney General Eliot Spitzer on the proposed preemption of states efforts to protect individual investors": http://www.oag.state.ny.us/press/2003/jul/jul10a_03.html
Securities and Exchange Commission
8. SEC to recommend more power for shareholders in proxy elections
The Securities and Exchange Commission is expected to recommend changing the corporate proxy access rules to allow minority shareholders more power to nominate directors, a move that would be a welcome step towards making corporations more accountable to broader shareholder interests.
Under current rules, management controls the proxy cards, so dissident shareholders do not have access and instead have to wage costly and difficult battles to nominate directors.
Last week, chief investment officers of seven states (California, New York, Connecticut, Kentucky, Oregon, Maine, and North Carolina) called for the SEC to change the proxy access rules. All are big institutional investors who might be interested in nominating directors.
"We are deeply concerned that unless we keep shining the light on these areas of shareholder concern, they will be put on the back burner," said California State Treasurer Phil Angelides, who is leading the effort.
So far unions and socially responsible mutual funds have been the most vocal supporters of changing the rules, which could give them much more say about how the corporations they own shares in are run. Business executives have largely opposed to the measure, expressing concerns that their companies will fall prey to the interests of minority shareholders. For more details, see "SEC supports rule change for proxy candidates" by Bloomberg News: http://seattlepi.nwsource.com/business/130646_proxies14.html
Bush Administration
9. Judge rules that Cheney can't keep meetings of energy task force secret
A federal appeals court last week said that Vice President Dick Cheney has no right to keep secret the details of his energy task force meetings, where he formulated a national energy policy based on the advice of countless industry representatives but shut out environmentalists. (The policy calls for more oil and gas drilling, a revival of nuclear power, but gives practically no support to renewable power.)
A two-judge majority on the D.C. Circuit of the U.S. Court of Appeals said that sufficient safeguards prevented the disclosure of privileged information and that there would be no irreparable harm to releasing the documents, as Cheney had claimed. Judge
David Tatel said that granting Cheney the ability to keep the meetings secret would have turned executive privilege into "virtual immunity from suit." The suit was brought by Judicial Watch, a conservative watchdog group whose primary mission is demonstrating that "nobody is above the law." The Sierra Club joined the suit.
The next steps remain unclear, but it is likely that the Justice Department, which is representing Cheney, will drag this out as long as possible.
See "Cheney Task Force Loses Place to Hide" by Dan Ackman of Forbes: Cheney Task Force Loses Place to Hide: http://www.forbes.com/home_europe/2003/07/09/cx_da_0709topnews.html
Also see: "Cheney Loses Ruling on Energy Panel Records" by Henri E. Cauvin of the Washington Post http://www.washingtonpost.com/wp-dyn/articles/A29486-2003Jul8.html
Fighting Back
10. Socially responsible funds criticize large companies on climate change
America's largest carbon-dioxide emitting companies are inadequately preparing for climate change and global warming, according to a new report commissioned by socially responsible investor groups.
The survey, Corporate Governance and Climate Change: Making the Connection, analyzes carbon emitters in electric power, automobiles, and oil industries with a 14-point "Climate Governance Checklist" that analyzes companies responses to climate change in areas of board oversight, management accountability, executive compensation, emissions reporting, and material risk disclosure.
Among the findings:
- U.S. based oil companies are devoting all their efforts to fossil fuels, but European oil companies (BP and Royal Dutch/Shell) are moving toward renewable technologies.
- The electric power industry scored lowest.
- The auto industry is not measuring and disclosing the emissions of its products. The report was commissioned by CERES, a coalition of investor, environmental and public interest groups, and written by the Investor Responsibility Research Center (IRRC).
"This report uncovers that climate change is a new "off-balance sheet' risk that could affect shareholder value," said Mindy S. Lubber, the executive director of CERES. "We need leaders in the private and public sectors to support climate change policy solutions that achieve real emissions reductions. As responsible stewards we can and must rise to this governance challenge." To read the report, see: http://ceres.org/newsroom/press/ceresirrcrel.htm
This Week's Action Item
Tell your Representative: Don't let the SEC preempt the ability of state AGs to protect investors
As described above, HR 2179, the misnamed "Securities Fraud Deterrence and Investor Restitution Act of 2003," passed last week in a House Financial Services subcommittee and is expected to go to the full committee soon.
The bill would weaken the ability of state attorneys general like Eliot Spitzer to take action on securities fraud. It would have, for example, prevented Spitzer from pursuing the charges that resulted from his investigation into analyst conflicts at large Wall Street banks. State regulators would also be prevented from instituting conflict of interest requirements on brokerage firms.
Please tell your Representative that while you believe that the SEC should have greater power to impose fines and go after violators, you do not think the federal government should prevent state attorneys general from protecting investors in their home state. For these reasons, your Representative should not support the bill.
To see if your Representative is a member of the Financial Services committee: visit: http://financialservices.house.gov/members.asp
If your Representative is not on the committee, let him or her know your feelings anyway - the bill could likely pass the committee and head for a full floor vote.
To contact your representative - http://www.house.gov/writerep
US Capitol Switchboard - (202) 224-3121
For more background, see: "House Panel Votes to Limit States' Policing of Wall Street" by Gretchen Morgenson of the New York Times: http://www.nytimes.com/2003/07/11/business/11WALL.html
Also see: "Statement by Attorney General Eliot Spitzer on the proposed preemption of states efforts to protect individual investors": http://www.oag.state.ny.us/press/2003/jul/jul10a_03.html
MAKE YOUR VOICE HEARD
White House Comment Line
- (202) 456-1111
White House Fax Line - (202) 456-2461
US Capitol Switchboard - (202) 224-3121
President George W.
Bush's e-mail - president@whitehouse.gov
Vice President
Dick Cheney's e-mail - vice-president@whitehouse.gov
White House Address - 1600 Pennsylvania Ave, Washington, DC 20500
Contact your senators
Contact your representative
News summaries based on original reports in other publications are prepared by Citizen Works staff and are not created, sponsored, approved or endorsed by the publications to which the original reports are attributed.
About Citizen Works
| Contact Us
| Privacy Policy
| Jobs/Internships
ALL CONTENT © 2004 CITIZEN WORKS
