July 24, 2014
Heightened Activist Attacks on Boards of Directors
by David A. Katz
Editor's Note: David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. The following post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal; the full article, including footnotes, is available here.
This has been called "the heyday of hedge fund activism," and it is certainly true that today boards of directors must constantly be vigilant to the many and varied ways in which activist investors can approach a target. Commencing a proxy fight long has been an activist tactic, but it is now being used in a different way. Some hedge funds are engaging in proxy fights in order to exercise direct influence or control over the board's decision-making as opposed to clearing the way for a takeover of the target company or seeking a stock buyback. In some cases, multiple hedge funds acting in parallel purchase enough target shares to hold a voting bloc adequate to elect their director nominees to the board. A recent Delaware case addressed a situation in which a board resisted a threat from hedge funds acting together in this manner. The court determined that a shareholder rights plan, or poison pill, could, in certain circumstances, be an appropriate response. As a general matter, boards of directors facing activist share accumulations and threats of board takeovers can take comfort in this latest affirmation of the respect accorded to an independent board's informed business judgment.
Similarly, hostile takeovers are not new, but the tactics being used by today's activist investors in their approaches to corporate targets are unprecedented. Boards are facing carefully crafted attacks that exploit (or seek to exploit) legal loopholes and take advantage of the climate of corporate governance that has led to the dismantling of many takeover defenses. Boards should be forewarned and forearmed as they pursue their plans for long-term value creation in the current, precarious environment that clearly favors the activist investor.
Third Point v. Ruprecht
In Third Point v. Ruprecht, the Delaware Court of Chancery recently upheld the actions of the Sotheby's board of directors and refused to enjoin the company's annual meeting based on claims by hedge funds that the board had breached its fiduciary duties. By way of background: In May 2013, Third Point, along with two other hedge funds, announced in SEC filings that they had purchased Sotheby's stock. A few months later, Third Point amended its filing to disclose that it had increased its holdings to 9.4 percent and attached a letter as part of the filing. The letter, from Daniel Loeb, the CEO of Third Point, outlined the fund's intentions to push for changes to the company's management, strategic direction, and board of directors. The letter emphasized Loeb's view of the need to replace Sotheby's CEO and to put Loeb and others identified by him onto the board. At that point, the group of three hedge funds had accumulated approximately 19 percent of Sotheby's outstanding shares. At its October meeting, the board decided to adopt a rights plan that, it stated in its press release, was "intended to protect Sotheby's and its shareholders from efforts to obtain control that are inconsistent with the best interests of the Company and its shareholders."
The rights plan adopted by Sotheby's had several interesting features. The rights plan had a one-year term, unless the rights plan was approved by a stockholder vote. It contained a "qualifying offer" exception, which permitted a cash tender offer for all of the shares of the company. Most important from the activists' perspective, it had a two-tier triggering structure. The threshold for triggering the rights plan was 10 percent for all stockholders other than passive investors, or Schedule 13G filers, who were permitted to acquire up to 20 percent of Sotheby's stock. As discussions proceeded between Third Point and Sotheby's, Third Point continued to increase its stake closer to the 10 percent limit and commenced a short-slate proxy contest for three board seats. Third Point then requested that the board waive the 10 percent limit so that it could acquire up to 20 percent of the company's stock. The board rejected this request, believing that with Third Point's and the other funds' current stock ownership levels, it was basically in a dead heat in the short-slate proxy contest. Thus, permitting Third Point to acquire additional shares by waiving the 10 percent limit would have given Third Point a greater likelihood of prevailing in the proxy contest. Days later, Third Point sued for a preliminary injunction to delay the annual meeting.
Third Point's claim was that the Sotheby's board had breached its fiduciary duties by adopting and refusing to waive the rights plan. They argued that the board had adopted the plan for the "primary purpose" of preventing Third Point from prevailing in the proxy contest, without any "compelling justification" to support their actions. Third Point also argued that the board had acted in a manner that was both "disproportionate" - because in their view there was minimal, if any, threat to the company - and "discriminatory" - because the rights plan was allegedly designed to favor the incumbent board.
In its opinion, the court affirmed that the standard for analyzing rights plans, even outside the takeover context, remains Unocal Corp. v. Mesa Petroleum Co., the seminal 1985 case holding that a board's response to a legitimate corporate threat had to be proportionate and reasonable in relation to the threat posed. In Third Point, the court found sufficient evidence that the threat of "creeping control" posed by the hedge fund group led by Third Point did indeed create a legitimate and objectively reasonable threat. The court further found evidence that the primary purpose of the Sotheby's board's actions was not to disenfranchise its shareholders but to address that threat. The court also noted that the Sotheby's board was not entrenched, pointing out the board's higher-than-average turnover rate, high proportion of outside directors, and lack of any financial conflicts of interest.
The court concluded that the Sotheby's rights plan was likely a proportionate response to the threat of collusive action by the hedge funds. The opinion noted that Third Point was the corporation's largest shareholder and that a trigger level much higher than 10 percent would make it easier for a small group of activist investors to obtain effective control of the company without paying a control premium. In finding that the Sotheby's rights plan met the proportionality test of Unocal, the court noted that the "discriminatory" element of the plan - its two-tiered structure - arguably made it a more tailored, proportionate response. Finally, the court concluded that the board's refusal to waive the rights plan in response to Third Point's request was reasonable and supported by evidence that Third Point still posed a threat - particularly, of "negative control" - i.e., permitting it to achieve 20 percent ownership would enable the activist fund to effectively control certain corporate actions despite having no actual or explicit power to do so. The court noted that it did not intend for the specter of negative control to be a license for the unreasonable deployment of defensive measures, but that due to Third Point's aggressive behavior and position as the largest single stockholder in the company, in this case it was a valid threat. The court also pointed out that nothing in the rights plan coerced shareholders to favor the incumbent slate over the dissident slate in the proxy contest.
Somewhat surprisingly, the discriminatory feature of the rights plan that permitted "passive" Schedule 13G filers to acquire up to 20 percent of Sotheby's stock did not appear to be very beneficial to Sotheby's. Third Point claimed that the discriminatory feature was an effort to give Schedule 13G filers who were more likely to vote in favor of management the ability to acquire additional shares. Noting that Third Point was Sotheby's largest shareholder, the court rejected this contention noting "there do not appear to be any restrictions whatsoever on a Schedule 13G filer who wishes to vote for a dissident slate in a proxy contest." Similarly, it does not appear that institutional holders appreciated the ability to acquire shares above the 10 percent triggering threshold so it is not clear that the distinction created by the discriminatory feature was helpful.
Though Sotheby's prevailed in the Delaware litigation, shortly after the opinion was issued, but prior to the annual meeting, the company entered into a settlement with Third Point under which the Sotheby's board was expanded to give Third Point nominees three new seats, the company's rights plan was terminated at the annual meeting, and Third Point entered into a voting and standstill agreement under which Third Point was permitted to acquire up to 15 percent of Sotheby's stock.
Collusive activist attacks on companies such as the one at issue in Third Point are a relatively new phenomenon, but already they have fallen into a familiar pattern. First, activists build up a stake in a target, individually or by teaming up with other institutional or activist stockholders to form a 'wolf pack.' Next, they apply pressure on the target, including by threatening to oppose a board's preferred strategic alternatives. Finally, they take action against the board by threatening "withhold the vote" campaigns, demanding board seats, launching a short-slate proxy contest, seeking control of the board, or making aggressive use of derivatives.
As Sotheby's found, activist funds can achieve their objectives, in whole or in part, even when the target "wins" in a court of law or public opinion. Activists' willingness to use aggressive, high-profile tactics is a powerful weapon that is difficult for target companies to deflect.
Activists and Hostile Takeover Bids
Activists are beginning to take their attacks a step further, using collusive tactics to create an advantage in a hostile takeover situation. They are profiting from what they perceive as loopholes in the federal securities laws to quietly buy large stakes in companies and combine with allies to put a target into play. A recent situation involving this type of attack is the ongoing and highly public hostile takeover bid for Allergan by Pershing Square Capital Management, a well-known activist fund headed by William Ackman, and Valeant Pharmaceuticals International. The partnership of a hedge fund and a strategic buyer is unprecedented, and it has been described as "a harbinger of a much wider range of kinds of deals." The hedge fund, with its aggressive tactics and ready cash, makes the strategic bidder a more formidable acquiror.
Pershing Square and Valeant have sought to carefully engineer their approach in an attempt to avoid restrictions in the securities laws designed to prevent secret accumulations of stock, insider trading and unfair collusion. For example, the pair formed a purchasing vehicle (funded primarily by Pershing Square) to purchase a large stake in Allergan using stock options rather than the underlying shares. They used the ten-calendar-day window between the acquisition and the required public disclosure of a 5 percent stake in a company to quickly go from just under 5 percent to nearly 10 percent ownership of Allergan. In their Schedule 13D filing at the end of that period, having amassed a very significant position without attracting any publicity, Valeant then disclosed its intention to make an offer for the target company. They also have attempted to avoid antitrust, fair disclosure, and insider-trading restrictions through a series of legalistic maneuvers. While it has yet to be seen if their tactics will be successful or if they have indeed complied with the federal securities laws, their novel and unprecedented approach has prompted renewed calls for a long-overdue updating and tightening of the securities laws to prevent use of the exploited loopholes.
Managing the Activist Threat
It remains to be seen how the Valeant-Pershing Square bid for Allergan will play out and whether these novel tactics will be adopted by other would-be acquirors in potentially hostile situations. In the meantime, boards should be aware that the activist threat is always looming and may become real at any time. As one recent article put it, "Other companies are wondering whether they too will wake up one morning to find a raider-activist team wielding a stealth block of their stock."
We are also seeing a new paradigm where activist investors actually seek to acquire control of companies without paying any control premium by pursuing all or a majority of the seats on a board of directors through a proxy contest. According to a recent Wall Street Journal Article, "Fights for at least a majority of the seats, including full control, increased to about 42% of all proxy fights announced in 2013 and 2012, exceeding the prior four years, according to FactSet data. This year  has started off with 35% of campaigns going for control, the data provider said." To the extent that shareholders allow activists to acquire control of a board, the activist will be able to pursue their own agenda, whether or not it will ultimately benefit all shareholders. Moreover, shareholders will have turned over control of the corporation to the activist without receiving any control premium.
Takeover defenses such as staggered boards and shareholder rights plans have for many years been under fire from shareholder activists and proxy advisory firms. As a result, public companies seeking to avoid controversy and show goodwill toward activist investors have willingly dismantled many of their structural defenses. Unfortunately, doing so leaves companies open to attack. Allergan, for example, declassified its board only a few years ago - as many companies have done in recent years - in response to a gadfly activist's pressure to do so. One commentator observed that "As a result of a small shareholder's activism... Allergan shareholders have put their directors at a major disadvantage in negotiating with Valeant." As hedge fund activism becomes more creative, more predatory, and more mainstream, companies may find it advantageous to reassess the advantages and disadvantages of structural takeover defenses and take steps to maintain or strengthen their positions with the legal tools that are available and appropriate to their situation.
As boards anticipate or respond to activist attacks, there is no substitute for preparation, communication, and vigilance. Every situation is different, and each board must consider, and regularly revise, its plans and strategies as needed. The board should be updated periodically on steps that the company is taking to maintain a state of preparedness for an activist approach. Board consensus in the event of an attack is extremely important, and solid preparation - including a thorough understanding of the options and alternatives that have been analyzed by management and the company's outside advisors - will be invaluable in achieving and presenting a united front. Activists will constantly seek to drive a wedge between the board and the management team. By keeping the board fully apprised of the evolving situation and alternatives and avoiding surprises, management can prevent the activist from achieving its objective to split the board and the management team. Board trust and confidentiality are crucial in high-pressure, public situations, as the psychological elements of proxy contests and takeover battles are, in many cases, as significant as the business, financial and legal elements.
As activists and their partners become ever more aggressive, legislation likely cannot keep pace with their efforts. Nonetheless, we hope that the Securities and Exchange Commission or Congress will heed the repeated calls for revision of the Section 13(d) reporting requirements, as the current regulations are repeatedly shown to be anachronistic. In the meantime, companies and boards need to be their own watchdogs and protectors, using careful preparation, expert advice, and sound business judgment to control their own destiny to the best of their ability.
July 24, 2014
Major Release on Knowledge Mosaic coming Monday July 28
by Chris Hitt
It's official: on Monday, you'll notice three exciting new things on the Knowledge Mosaic website:
- A new search page of Private Placement Memoranda, including 144A documents. Over 10,000 offering documents will be available when we release; we'll have double that amount by the end of the year.
- A new Advanced Search page on No-Action Letters. Nearly 70,000 No-Action Letters going back over 40 years.
- A new navigation bar. Okay, maybe not quite so exciting. But we think you'll find the new navigation more user-friendly, with content easier to find and the bar itself easier to use.
If you'd like a detailed sneak preview of the new stuff, you can see a 12-minute tutorial video here.
July 25, 2014
A Mid-Year Report Card on the Commercial Real Estate Capital Markets
by Rick Jones
We at Crunched Credit have taken a bit of a pause of late. It is, of course, the dog days of summer. But it's time to get back into the fray. Let's start by noting the doldrums seem to have taken a pass. From where we sit, the markets seem to be in robust health. As we look over this complex web of transactions, deal structures, innovations, capital flows, business plans, business goals, failures and successes that is our market, things look pretty damn good.
Okay, all perspective is positional, and maybe there is something horrible out there that's about to ruin my happy place. Frankly, if you look back over the past several years, we've had a long list of nasty summer surprises.
And there are plenty of storm clouds for the glass half empty set. We all still have, for the moment, a deep and visceral appreciation of the reality of black swans and fat tales. Putting to the side geopolitical events entirely, there is plenty of range for more pain by self-inflicted wound. We all watch with some level of trepidation, and, perhaps, fatalism our elected representatives and our regulators do things that just don't make much sense. Our Olympian governing class seems bound together, regardless of party politics or position, by an unshakable conviction that markets are a great Newtonian machine amiable to the pulling of levers and the adjusting of dials. A Steampunk view of economic policy. Moreover, and to make matters worse, we have poked our monetary nose outside the tent flaps of the known financial universe and neither bankers, traders, or the intellectually glitterati of the economic profession can tell us with much certainty how markets perform following momentous central bank intervention, zero bound interest rates, and highly activist central bankers who continue to embrace monetary policy as a woefully inadequate palliative for fiscal inactions. What's that all amount to? A ship captained by a person regularly wrong but rarely in doubt, firmly gripping a tiller which may or may not actually affect the direction of the ship in unchartered waters. How comforting.
One of the highlight of this year's CREFC meeting (generally a pretty cheerful affair) was Kevin Worsh's comments at Tuesday's lunch. Mr. Worsh, a former member of the board of governors of the Federal Reserve during its most trying times had much to say that seemed wise (I freely admit my conformation bias). He worries about the disconnect between the bad news on the front page of the paper and the happy talk in the business section. He worries that one of those versions of reality is right and one is wrong and that discontinuities of this type can collapse rapidly - and usually, painfully. He worries that our economy is underperforming because of a variety of ill-advised fiscal policies including the continued unsettled regulatory environment. He notes that the tsunami of liquidity provided through monetary policy has essentially created a disequilibrium evidenced by a bullish stock market and insipid GDP growth. He notes that while central bankers have the tools to intervene in a true credit crisis, they do not have any tools to increase GDP growth from our current anemic 2% to the 3+% required for this economy really to succeed.
But we continue to rock and roll. So, we ok?
Some observations from where we sit now:
- Structural complexity is returning to the marketplace in the search for yield. Many will say that's bad. I think that's Luddite thinking.
- There continues an almost comical hand-wringing about loss of underwriting discipline as the cycle grinds along. As Captain Renault said in Casablanca, "I am shocked, shocked!" Isn't worry about the cycling about as dramatic (and productive) as worrying that winter is coming? Have we lost our collective minds and thrown caution to the winds? No, at least not yet. Has the market achieved an epiphany where, confounding the Problem of the Commons, individual behavior is mediated for the common good? Hardly. Let's face it, folks. We are in the middle of a regular cycle with a fair amount of headroom. Some appreciation that the amiable portions of all cycles end. Not news.
- The folks who regularly provide estimates on CMBS structures for 2014 were right. We will see something in the range of $80-90 billion, which seems like a comfortable place to be right now. Lifecos, GSEs, banks large and small and non-banks are lending at a pretty good clip.
- There is a very real and substantial over capacity of capital chasing transactions. That seems unsustainable.
- Spreads on traditional B piece continuing to drop into and through the 14% range. Man, that's an awful lot of work to put a modest amount of capital to work. And risk and reward will only grow more asymmetrical as the cycle deepens. The B buyer looks to me to be the canary in the mine. We need to watch this market closely. What happens if there is a B piece strike?
- The CRE securitization or CRE CLO market is growing. There is a need for durationally matched financing for portfolio accumulators of financial assets. This is that, and increasingly there seems investor appetite for the product. We anticipate a continued (slowish) penetration of ramps and reinvestment features into the market over the year. We are already seeing it in a smallball sort of way. When true reinvestment becomes doable (and we have lots of ideas about how that can happen), this market will expand rapidly to provide leverage for floaters, non-stabilized loans with future funding components and indeed fixed rate assets held as portfolio assets.
- The Volcker Rule is one of the more horrible destroyers of capital formation in our market. It was poorly thought through, it is rife with unintended consequences, it is reducing the liquidity in all fixed income marketplaces (because who in this regulatory gotcha environment can really tell the difference between prop trading and making a market?). That's bad.
- The Volcker Rule is good for CRE securitization because these deals are largely outside the ambit of the Volcker prohibitions. It will push investment dollars into the market sector. Go figure.
- We are witnessing a secular change or a secular rotation from the resurrected banking sector to the non-regulated banking market (I refuse to use the term "shadow market." See my prior blog on my concern that names matter in our polity and shadow banking is a bad name). This means more funds will flow into specialty finance companies who have significant advantages in nimbleness and the inapplicability of punishing, bewildering and capital-destroying regulation. These new lenders function at a disadvantage in terms of cost of funds and access to liquidity when compared to banks. Nonetheless, the non-bank market will continue to grow rapidly over the next several years.
- The underlying real estate markets are healthy. After years of suppressed growth, lots of green arrows now and for the foreseeable future.
- Everything said about life in the U.S. is truer in Europe. European securitization has been moribund for many years, which I've always found curious. Since losses on European securitization were far lower than in the U.S., the market didn't dive head first into the bubbling vat of subprime mortgage securitization and their banking system has grown, if anything, less able to meet the needs of a growing economy than the U.S. Not to beat the dead horse, and we've written quite a lot on this in the past, I do not believe that many European banks are as well capitalized as the miscellany of government regulators say they are. I do not believe they have adequate liquidity. I think that their enormous appetite for sovereign debt, born of a devils' bargain between state and bank which miraculously allows banks to carry sovereign debt without capital charges means that the middle market (and for this purpose I will include all of commercial real estate in the middle market) will be starved for leverage from the banking marketplace. And that all seems to be broadly accepted in governmental circles across Europe. We've seen Mr. Draghi publicly announce that securitization isn't so bad after all. Just last week, Clara Furse, an external member of the Bank of England Financial Policy wrote an op-ed piece remonstrating with European authorities to take another look at securitization and endeavor to encourage it as opposed to crush it, because it simply is needed. As Ms. Furse points out in her piece, bank lending to businesses in the UK remains substantially lower than it was five years ago. Finally, the European Central Bank in conjunction with the Bank of England has issued a paper entitled the Impaired EU Securitization Market: Causes, Road Blocks and How to Deal with Them. While I'm not sure the paper hits the nail on the head, much like the blind cat and the dead mouse, eventually a solution that works will be found.
So net/net, we remain pretty bullish on the market for the near and middle term. Memories of the downturn remain vivid and searing but to paraphrase Saint Augustine, Dear Lord, makes me cautious and conservative, just not yet.
July 25, 2014
SEC Charges Self-Described Bankers, Dishonest Brokers, and Microcap Company Executive in Pump-And-Dump Scheme
by Alexa Astarita
The SEC charged individuals who pocketed millions of dollars running an elaborate pump-and-dump scheme involving shares of a medical education company in Pennsylvania and two other microcap stocks.
The SEC alleges that the stock market manipulation ring included two self-described bankers, a pair of dishonest brokers, and a corrupt company executive who issued misleading press releases. The SEC today suspended trading in one of the microcap companies before they could illegally profit further.
According to the SEC's complaint filed in U.S. District Court for the Eastern District of New York, the CEO and president of a purported merchant banking firm teamed up with brokers and the CEO of a medical education company to inflate the price of the company's stock and profit at the expense of the brokers' customers. They acquired 3 million restricted shares of the company's stock following its reverse merger into a public shell company in May 2013, and improperly flooded the market with the shares as though they were unrestricted. They then engaged in a promotional campaign to hype the stock issuing materially misleading press releases that were sometimes edited.
For more information visit:http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542323032#.U8_r8PldVQE
July 25, 2014
This Week In Securities Litigation (Week ending July 25, 2014)
by Tom Gorman
This Week In Securities Litigation (Week ending July 25, 2014)
The Commission issued its long discussed rules reforming money markets this week, requiring that institutional prime money market funds have a floating NAV. The vote was 3-2.
In the Court of Appeals the SEC lost its effort to compel SIPIC to cover certain losses related to the Stamford Ponzi scheme. SEC Enforcement filed six actions this week. Two were tied to a prior actions centered on the sale of unregistered securities; one is a market crisis action tied to the sale of RMBS; another centered on a microcap fraud; and one alleged insider trading charges by an IR adviser.
Rules: The Commission adopted money fund reform rules which require a floating net asset value for institutional prime money market funds. The agency also issued a related notice proposing exemptions from certain confirmation requirements for transactions effected in shares of floating NAV money market funds and proposed amendments to certain related rules regarding references to credit ratings (here).
SEC Enforcement - Filed and Settled Actions
Statistics: This week the Commission filed, or announced the filing of, 5 civil injunctive actions, DPAs, NPAs or reports and 1 administrative proceeding (excluding follow-on and Section 12(j) proceedings).
Unregistered securities: SEC v. DDBO Consulting, Inc., (S.D. Fla. Filed July 24, 2014) is an action against the company, DBBG Consulting, Inc., Dean Baker, the president of both entities, and Bret Grove, a vice president of DBBG. Defendants sold unregistered shares of Thought Development, Inc. to at least 100 investors from July 2011 through November 2012. Thought Development, a defendant in a previously filed enforcement action, supposedly developed a laser-line system that can be used in professional and collegiate sporting events as described more fully here. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and each subsection of 17(a) and Exchange Act Sections 10(b) and 15(a). The defendants have agreed to settle but the terms were not disclosed. This action is related to the next case. The U.S. Attorney for the Southern District of Florida also filed criminal charges against Messrs. Baker and Grove as well as two individuals named in the initial complaint against Thought Development.
Unregistered securities: SEC v. Calpacific Equity Group, LLC, Civil Action No. 2:14-cv-05754 (C.D. Cal. Filed July 24, 2014) is an action against the firm, Daniel Baker, its managing director, and Demosthenes Dritsas, a managing member of the firm. This action alleges that during about the same time period as the action against DDBO Consulting the defendants sold unregistered shares in Thought Development, Inc. to at least 34 investors. The complaint alleges violations of the same Sections as the DDBO complaint. The defendants have agreed to settle with the Commission. The terms were not disclosed. The U.S. Attorney for the Central District of California brought criminal charges against Messrs. Baker and Dritsas who have entered guilty pleas in the case.
Market crisis: In the Matter of Morgan Stanley & Co. LLC, Adm. Proc. File No. 3-15982 (July 24, 2014) is a proceeding naming the firm, a registered broker-dealer, as a Respondent along with two of its subsidiaries. The action centers on two subprime residential mortgage-backed securities transactions in 2007. The two transactions had an aggregate principal value balance of over $2.5 billion. At the time of the offerings the subprime residential real estate market was unraveling and delinquency rates were spiking upward. The firm had a practice of making RMBS offerings with delinquency rates of 1% or less. In the two offerings involved here the disclosure documents recited that the delinquency rates for 30 to 60 days were 1% or less as to each pool's aggregate principal balance as of the date on the documents. At the time Morgan Stanley had historical delinquency data for the one offering showing a 17% delinquency rate at some point since origination. For that same offering the bank used payment data that post-dated the closing date in the documents which also impacted the delinquency rate. As to the other offering, after the closing date in the documents Morgan Stanly learned that the rate was actually 4.5%. As a result the information given to investors was incorrect, according to the Order. The Order alleges violations of Securities Act Sections 17(a)(2) and (3). To resolve the proceeding, Respondents consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition they agreed, on a joint and several basis, to pay disgorgement of $160,627,852, prejudgment interest and a civil penalty of $96,376,711. The payments will be placed in a fair fund. Respondents agreed that in any private action they would not claim an offset based on the civil penalty paid in this proceeding.
Investment fraud: SEC v. International Stock Transfer, Inc., Civil Action No. 14-cv-4435 (E.D.N.Y. Filed July 23, 2014) is an action against the firm, a transfer agent, and its owner, Cecil Franklin Speight. The defendants raised about $3.3 million from over 70 investors who were induced by boiler room tactics to purchase shares which were supposed to be safe and have a high rate of return. The appearance of safety was bolstered by having payments sent to attorneys. What investors received was fake stock certificates. The defendants misappropriated the investor funds. The complaint alleges violations of Securities Act Sections 17(a), Exchange Act Sections 10(b) and 17(a)(3). To partially resolve the action each defendant consented to the entry of judgments permanently enjoining them from future violations of the securities laws and requiring them to pay disgorgement, prejudgment interest and penalties in amounts to be determined by the Court. Defendant Speight also consented to the entry of an officer and director bar and a penny stock bar. In a parallel criminal case he also pleaded guilty to a criminal charge. See Lit. Rel. No. 23050 (July 24, 2014).
Insider trading: SEC v. McGrath, Civil Action No. 14 CV 5483 (S.D.N.Y. Filed July 22, 2014) is an action against Kevin McGrath, a partner at investor relations firm Cameron Associates. The complaint alleges that Mr. McGrath traded in the shares of two firm clients after working on their press releases but before those releases were issued. The clients are Misonix, Inc. and Clean Diesel Technologies, Inc. First, in April 2009 Mr. McGrath purchased 10,000 shares of Misonix stock. Later that same month he began communicating with the company on an Earnings Release which contained disappointing news. After learning when it would be issued he immediately sold his shares. When the share price dropped about 36% after the release was issued he avoided losses of $5,400.
Second, in May 2011 Mr. McGrath was involved in drafting a release for Clean Diesel. It announced a new contract. After learning its release date he immediately purchased 1,000 shares of Clean Diesel stock. After the issuance of the release the share price increased 95%, giving Mr. McGrath profits of $6,376. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Mr. McGrath resolved the matter, consenting to the entry of an injunction which prohibits future violations of the Sections cited in the complaint. It also contains provisions to implement the order. In addition, he agreed to pay disgorgement of $11,776, prejudgment interest and a penalty equal to the amount of the disgorgement. See Lit. Rel. No. 23049 (July 22, 2014).
Insider trading: SEC v. Canas, Civil Action No. 13-cv-5299 (S.D.N.Y.) is a previously filed action against Cedric Canas Maillard, an executive advisor to the CEO of Banco Santander, and his friend, Julio Marin Ugedo. It alleged that the two men traded on inside information about the acquisition of Potash Corporation by BHP Billiton in which the bank was involved. Both men traded in advance of the deal announcement. Mr. Canas had profit of $917,239 while his friend had $43,566. Mr. Canas settled, and the Court entered an order prohibiting future violations of Exchange Act Sections 10(b) and 14(e). Mr. Canas also agreed to pay disgorgement in the amount of the total profits of both defendants, and a civil penalty equal to that amount which is $960,806. See Lit. Rel. No. 23048 (July 22, 2014).
Microcap fraud: SEC v. Plummer, Civil Action No. 14 CV 5441 (S.D.N.Y. Filed July 18, 2014) is a microcap fraud action which names as defendants: Christopher Plummer, the CEO of Franklin Energy and Madison & Wall Investments, LLC, and a recidivist fraudster currently in prison; Lex Cowset, the CEO of CytoGenix, Inc., a microcap pharmaceutical company; and GyroGenix. The complaint centers on two schemes involving joint ventures with Franklin Energy. In the first, Company A, supposedly a successful securities company, claimed to be transforming into renewable energy through a joint venture with a Franklin subsidiary. Despite a series of web postings and releases touting the venture, neither company had the resources to implement it. Yet it had market impact. The second scheme was similar, but involved CytoGenix which had lost all of its intellectual property in the pharmaceutical area through litigation. Again a joint venture was touted with Franklin. Its purpose was to identify and develop biologically based technologies for energy production. About $330,000 was raised through an offering. Again, neither company had the resources to implement the venture. The investor funds were misappropriated. The complaint alleges violations of Exchange Act Sections 10(b) and 20(b) and Securities Act Section 17(a). The case is in litigation. See Lit. Rel. No. 23047 (July 18, 2014).
Insider trading: U.S. v. Wang, 3:13-cr-03487(C.D. Calif. Filed Sept. 20, 2013) is a case in which former Qualcomm Inc. executive Jing Wang pleaded guilty to insider trading and money laundering. In three instances beginning in 2010 he traded on inside information obtained from his employer. The trades resulted in over $250,000 in profits. His broker and longtime friend, Gary Yin, placed the trades and in two instances also traded for his own account. The money laundering charge was based on the efforts of Mr. Wang to transfer over $525,000 from an offshore account he controlled that included about $250,000 from the insider trading to another nominee brokerage account in the British Virgin Islands. As part of the plea agreement Mr. Wang also admitted to fabricating evidence and a false cover story in conjunction with his brother Bing Wang and Mr. Yin. Mr. Wang's sentencing has not been scheduled. See also SEC v. Wang, Civil Action No. 3:13-cv-02270(S.D. Cal. Filed Sept. 23, 2013).
Bernd Kowaleski, formerly the CEO of BizJet, a subsidiary of Lufthansa Technik, AG, pleaded guilty to one count of conspiracy and one substantive FCPA violation. Mr. Kowaleski is the third company executive to plead guilty. The underlying scheme involved the payment of bribes, in some instances through shell companies, to officials in Mexico and Panama to secure contracts for aircraft maintenance repair and overhaul contracts. Previously the company entered into a deferred prosecution agreement. U.S. v. Bizjet International Sales & Support Inc., Case No. 12-cr-61 (N.D. Okla. March 14, 2012).
MOU: The Board announced that it had entered into a cooperative agreement with the Danish Business Authority for the oversight of audit firms subject to the regulatory jurisdictions of both regulators. It takes effect immediately. The agreement provides a framework for inspections and provides for cooperation and the exchange of confidential information.
Court of Appeals
SIPIC coverage: SEC v. SIPC, No. 12-5286 (D.C. Cir. Decided July 18, 2014) is an action in which the SEC sought to compel SIPIC to provide coverage for those who purchased CDs from Stanford International Bank, LTD, an offshore bank that was part of the Stanford empire. Those who purchased CD's did so on the recommendation of the Stanford Group Company, a Huston-based broker-dealer registered with the SEC.
The District Court concluded that SIPIC was correct in determining that the CD purchasers are not customers of the broker-dealer within the meaning of the Act, a prerequisite to coverage.
The Circuit Court affirmed. The critical question here, according to that Court, is whether those who purchased bank CD's at the suggestion of the broker-dealer are customers for purposes of the Securities Investor Protection Act. A customer is generally defined as a person who has deposited cash with the broker for the purpose of purchasing securities. A claimant must generally demonstrate that the broker received or held the claimant's property and that the transaction gave rise to the claim and contained the indicia of a fiduciary relationship between the customer and the broker.
In this case the purchasers of SIBL CDs are not customers within the meaning of the Act, the Court held. It is undisputed that the investors did not deposit cash with SGC. Since "SGC had no custody over the investors' cash or securities, the investors do not qualify as SGC 'customers' under the ordinary operation of the statutory definition" the Court concluded.
The SEC argued, however, that given the interrelation of the Stanford operations, funds deposited with SIBL should be viewed as effectively on deposit with SGC - the entities should be viewed as one. This theory is grounded on the bankruptcy doctrine of "substantive consolidation" which, under equitable principles, would view the entities as one. Even assuming this is correct, the Court held, it does not support the position of the SEC since the CDs are a contractual investment in the entity which added to the capital of SIBL. Such instruments are excluded from coverage under the Act. While the plight of these investors is unfortunate, the Court noted, they are not covered by the statute.
Unauthorized transactions: The Australian Securities & Investment Commission banned financial adviser Adam David Joyner from providing financial services. The regulator found that Mr. Joyner had used client funds for purposes other than as instructed, had failed to implement trades and tried to cover-up his conduct. He caused client losses of over $1 million.
Investment fund fraud: Criminal charges were initiated against Frederick L. Hansen, formerly a director of Global Rule Pty Ltd, following an investigation by the ASIC. The agency had a receiver appointed for the company and found that Global Rule had raised about $16.3 million from 170 investors with promises of returns at 21.6% from early 2009 to the fall of 2010. Mr. Hansen is facing criminal charges which carry a maximum of 12 years in prison.
Misappropriation: The Securities and Futures Commission revoked the licenses of Union Securities Limited and its two responsible officers, Ma Kin Chung and Cheng Tai Ha. The two individuals were also banned for life from the securities business. The action is based on the misappropriation of $400,000 from two clients who deposited funds with the firm for securities trading. Both individuals have fled Hong Kong.
Manipulation: The SFC secured the conviction of registered representative Wong Pok Wang on 13 counts of manipulating the indicative equilibrium price or IED for eight derivate warrants and callable bull/bear contracts during the pre-opening session. The conduct took place from October 2010 to February 2011.
Asset freeze: The SFC obtained an injunction and freeze order over 107,290,000 shares of Hisense Kelson Electrical Holdings Ltd., up to a sum of $1.2 billion. The shares were held by, or for the benefit of Gu Chujun, the former chairman and CEO of Greencool Technologies Holdings Ltd. Hisense was an exchange listed company. The action is based on market misconduct by Mr. Chujun.
Corruption: The Serious Frauds Office charged Alstom Network UK Ltd. with three offenses of corruption. The charges are based on actions which took place from June 2000 to November 2006. They concern large transport projects in India, Poland and Tunisia. The investigation began with a report from the Attorney General in Switzerland concerning the Alstom Group.
Corruption: The SFO announced that Bruce Hall, formerly the CEO of Aluminium Bahrain B.S.C. or Alba, was sentenced to serve 16 months in prison on a charge of conspiracy to corrupt. The charges stem from his receipt from 2002 to 2005 of about £2.9 million in corrupt payments in connection with allowing a corrupt arrangement to continue in which Sheikh Isa bin Ali Al Khalifa, a member of the royal family, had been involved. Mr. Hall also has to pay a related confiscation order of over £3 million within seven days or face serving an additional term of 10 years in prison. His sentence was reduced for cooperation. U.S. enforcement authorities brought a related FCPA actions which resulted in payments that put the case at number 5 in the top ten largest FCPA settlements. U.S. v. Alcoa World Alumina LLC (W.D. Pa. Jan. 9, 2014); In the Matter of Alcoa, Inc., Adm. Proc. File No. 3-15673 (January 9, 2014).
Supervision: The Financial Conduct Authority used its suspension power for the first time, banning two subsidiaries of the Financial Group Limited from recruiting new appointed representatives and individual advisers for a period of four and a half months. The FCA found that from August 2008 through April 2013 the firm had a systematic weakness in the design and execution of its systems and controls and risk management framework. These failings were directly attributable to the firm's cultural focus.
Investment fund scheme: The FCA commenced a criminal proceeding against Phillip Harold Boakes for 13 alleged offences related to an unauthorized forex investment scheme that took place between October 2004 and June 2013. The charges include fraud and theft.
July 25, 2014
Corp Fin Director Keith Higgins Testifies: State of the Division's Rulemaking
by Broc Romanek
Yesterday, Corp Fin Director Keith Higgins delivered this testimony before the House Financial Services Committee's Capital Markets Subcommittee - talking about the state of the Division, with an emphasis on the status of Dodd-Frank and JOBS Act rulemaking. No earth-shattering revelations - but here are notables:
1. Pay Ratio - "Division staff is carefully considering those comments and is preparing recommendations for the Commission for a final rule"
2. Three Other Horsemen - "Division continues to work to implement provisions of the Dodd-Frank Act relating to executive compensation matters"
3. Accredited Investor Definition - "Division and other Commission staff currently are conducting a review of the accredited investor definition"
4. Crowdfunding - "Commission has received over 300 comment letters and the Division is preparing recommendations for the Commission on final rules"
5. Regulation A+ - "Commission has received over 100 comment letters and the Division is preparing recommendations for the Commission on final rules"
There were other rulemakings addressed - but you get the idea: "We are working on it." There were also questions asked about the Ackman/Allergan situation.
Keith did talk about the disclosure effectiveness project, noting that the initial set of recommendations would hone in on the business and financial disclosures in the '34 Act area (with coordination with FASB). And noting that subsequent phases "will include compensation and governance information included in proxy statements."
As for operational stats, 4500 companies had their filings reviewed last year - with the Division on the same pace for '14. Over 400 no-action letter requests are processed annually - of which over 300 relate to shareholder proposals.
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- Broc Romanek
July 25, 2014
Records Requests and the Caremark Standard At Issue in Delaware
by Celia Taylor
Flying somewhat below the radar, the on-going case of Indiana Electrical Workers Pension Trust Fund IBEW v. Wal-Mart Stores Inc. may prove to be one worthy of closer consideration. The case stems from the alleged involvement of Wal-Mart in a Mexico bribery scheme which was the subject of an extensive expose in a New York Times article.
As distilled by Ben W. Heineman, Jr. a former GE senior vice president for law and public affairs and a senior fellow at Harvard University's schools of law and government, the essential allegations in the Times story are as follows:
- For a substantial period before 2005, the CEO of Wal-Mart in Mexico and his chief lieutenants, including the Mexican general counsel and chief auditor, knowingly orchestrated bribes of Mexican officials to obtain building permits, zoning variances and environmental clearances, and also falsified records to hide these payments. When the lawyer in Mexico directly responsible for bribery payments had a change of heart and reported the scheme to Wal-Mart lawyers in the United States, those lawyers hired an independent firm which, after an initial look, recommended a major inquiry.
This was rejected by senior Wal-Mart management, which instead told an internal Wal-Mart investigative unit to look into it. That unit, too, said, in early 2006, that a substantial inquiry was warranted. But top Wal-Mart leaders in the U.S., including the company's general counsel, referred the matter back to the Wal-Mart general counsel in Mexico - the very lawyer who was allegedly at the center of the bribery scheme. Unsurprisingly, the Mexican general counsel promptly closed the matter, finding no problems and suggesting no disciplinary measures for senior Wal-Mart leaders in Mexico. He remained in his position until relieved of his duties just before the Times story appeared.
After publication of the article, the Indiana Electrical Workers Pension Trust Fund IBEW, who had received copies of the same files leaked by a whistleblower to The New York Times filed suit in August of 2012 seeking information to enable it to proceed with a derivative action against Walmart alleging that Walmart's board had failed in its oversight responsibilities and engaged in a cover-up of the alleged scheme. The gist of the case involved a claim brought under Delaware General Corporation Law §220. In the initial action, then-Chancellor Strine, now chief justice of the Supreme Court, ordered Wal-Mart to hand over certain internal files (but not all the fund sought) concerning what its directors knew about certain bribery claims, including allegations that certain executives paid bribes to facilitate Mexican real estate deals, in violation of the Foreign Corrupt Practices Act. (Ind. Elec. Workers Pension Trust Fund IBEW v. Wal-Mart Stores, Inc., Del. Ch, No. 7779-CS, 5/20/2013).
Walmart appealed and the Indiana Electrical Workers Pension Trust fund cross-appealed the decision. Oral arguments on the appeal were heard on July 10th before the Delaware Supreme Court. The Court will decide, among other issues, if Wal-Mart should release the files of the senior executives who briefed the directors, the Board's Audit committee, and Maritza Munich, Walmart's in-house counsel who resigned after the investigation was closed.
While this may not seem worth of note - Section 220 cases are common and their impact is typically limited to the parties involved in the action there has been much speculation in certain circles that the Delaware Supreme Court could use it as an opportunity to revisit and clarify the Caremark standard.
Under Caremark, "a director's obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system, which the board concludes is adequate, exists, and that failure to do so under some circumstances may, in theory at least, render a director liable for losses caused by non-compliance with applicable legal standards." The case did not articulate any specific requirements as to the nature and quality of the oversight process. It simply required that one be in place.
According to some commentators, including Michael Volkov, CEO of The Volkov Law Group LLC and a regular speaker on compliance, internal investigations and enforcement matters, "[t]he Wal-Mart case presents a set of circumstances where the court could find that Wal-Mart failed to meet the threshold standard or, more importantly, failed to exercise proper oversight and monitoring of the compliance program in accordance with a more stringent standard reflecting an up-to-date recognition of the change in corporate governance requirements and expectations since the Caremark decision.
At oral argument, the Justices seemed unsure how far to extend the reach of a Section 220 books and records request and it is unclear whether the case will work any changes in the Caremark standards or not.
Justice Randy J. Holland asked Mr. Grant, counsel for the Indiana Electrical Workers about the about the purpose of its § 220 complaint. "You are trying to ascertain if there are red flags that they board should have known" or did know about "but did nothing about?" Holland said.
Grant agreed, adding that communications and documents relating to internal auditors, audit committee member, internal investigators and former Wal-Mart compliance officer Maritza Munich are also needed to make that determination.
Justice Carolyn Berger emphasized that IBEW should be only entitled to documents that meet the "necessary and essential" standard. Berger expressed concern that what the IBEW wanted goes too far for the § 220 stage. "The description of what you would get sounds a lot like what you would get in normal discovery," she said.
Stuart H. Deming, founder of Deming PLLC, suggests that the case could have sweeping ramifications for corporate compliance programs.
"A decision enforcing the rights of shareholders in this context should certainly heighten the sensitivity of boards of directors to their obligations under Caremark," Deming, who represents foreign and domestic companies in a range of compliance matters.
Even if the case does not fundamentally change the Caremark analysis, some believe it will have important implications for boards of directors.
According to Mr. Deming, "even if an opinion is issued that does not enforce the rights of shareholders in the context of the circumstance associated with Wal-Mart, the mere fact that the issue has been raised is likely, at least in the short run, to have an impact in heightening the sensitivity of boards of directors to compliance obligations."
It is beyond doubt that the Caremark decision could use amplification. As corporate compliance becomes the focus of increased attention, guidance as to what constitutes adequate oversight could help both boards and shareholders.
July 24, 2014
Implementing COSO: Evolutionary, Not Revolutionary
by Edith Orenstein
Three financial executives, speaking on a webcast sponsored by FEI and BlackLine Systems, described their companies' implementation efforts of the updated internal control framework released by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013.
Moving to adopt COSO 2013, which supersedes COSO's 1992 framework forming the basis of Sarbanes-Oxley assertions on internal control, is a process of "evolution, not revolution," emphasized Ray Purcell, director of financial control at Pfizer. Purcell chaired FEI's Working Group on COSO, and served alongside FEI President and CEO Marie Hollein, FEI's representative on the COSO board, as a member of the COSO Project Advisory Group.
Although the 17 principles of internal control "are probably the most remarkable aspect of the 2013 framework," he said they "probably are not all that new," since the beginnings of a principles-based listing started with COSO's Small Business Guidance Purcell also advised that for purposes of the Sarbanes-Oxley effectiveness test:
- You need to have all the principles covered. All the components have to operate together (in the aggregate) and
- Your evaluation of deficiencies is same as before. You only have a significant deficiency if you have a material weakness under SEC/PCAOB definitions.
Some additional points Purcell noted about the implementation of COSO 2013:
- You may not have as much documentation of the board's role as you did of senior management's role. Consider beefing up documentation here.
- There may be a need for additional documentation of the principle regarding management's commitment to attract, develop and hold individuals accountable.
- Fraud risk assessment by management (Principle 8) has been elevated to a principle. Management needs to be sure there is a rigorous risk assessment process for thinking about potential fraud scenarios.
- Under Principle 9, consider if you have documented consideration of changes impacting risk effectively
- Under Principle 12, controls must be documented through policies and procedures
Interplay Between PCAOB and COSO
The webinar speakers noted there appears to be interplay between PCAOB inspection reports, a report PCAOB issued last year on internal control issues, and recent PCAOB speeches - particularly one by PCAOB Board Member Jeanette Franzel - and opportunities to use the updated COSO framework to address some of the PCAOB's concerns.
"As to IT General Controls testing reports, that particular aspect of (COSO Principle 11) is certainly getting focus at Pfizer, and I assume [it's] similarly under scrutiny elsewhere," said Purcell.
"Maybe the most problematic of the five COSO components is Information and Communication - how it is affected through policies and to support other components. Do people have the info they need, and is it reliable? How does the company ensure that?"
Purcell continued, "To some extent, info and communication may be more readily evaluated by - do we have control failures in the system of internal controls? If we have a control failure, we are doing root cause analysis. Insights from COSO 2013 are going to put to good use going forward."
Points of Focus: What's the Point?
Purcell explained that each of the principles is accompanied by a group of attributes or characteristics, called "points of focus," designed to offer additional implementation or compliance guidance.
"The 87 points of focus are not always going to be relevant in all situations, but they are certainly going to be useful," Purcell said. "I think it is really useful in the mapping exercise to think about how your existing controls relate to the principles. I am not as sold in using them to assess the design or effectiveness of your controls."
He emphasized that "There is no requirement to use them to assess (principles, components, and the effectiveness of your controls), that is the key takeaway.
"In the mapping exercise, we have used the points of focus as a way to make a connection between our existing controls at a relatively high level."
Purcell added that Pfizer is preparing a "pro forma" report to be presented to management and its auditors for review as they move forward with the COSO 2013 implementation.
Project Planning, Rolling Out to Other Departments Key
Martha Magurno, Director, Internal Control Compliance, Dow Chemical said that at her company, the transition to COSO 2013 was led by the internal control compliance group, part of Corporate Controllers, due to the close relationship between COSO and the Sarbanes-Oxley 404 process.
She noted her group has formally engaged in COSO 2013 transition discussions with the I.T. groups as well as Human Resources, but further documentation may be needed to track to the specific principles in COSO 2013.
Additionally, Magurno noted that Principle 14 emphasizes communications, and that includes interacting with the audit committee in its oversight role.
"We have engaged in a COSO 2013 readiness assessment with our auditor, and are conducting a joint dry run of evaluation of [our] design and operating effectiveness," said Magurno.
After the webcast, Magurno explained the company is conducting an internal 'dry run' during the 3rd quarter to fine-tune its process.
Magurno added during the webcast that Dow was very willing to understand its auditors challenges, and to incorporate "hot topics" identified by auditors and the PCAOB.
Approaches Will Vary
The basic internal controls that formed an effective system of internal control prior to COSO publishing its 2013 framework were largely in place, as many COSO board members and regulators have said. The 'mapping' exercise that companies are undertaking is largely designed to document that their existing systems of internal control, which satisfied the five core components of internal control under COSO 1992, also can be shown to satisfy the 17 Principles in COSO 2013.
Steve Forrest, Assistant Controller at Raytheon, led into his remarks by saying, "Internal control is not new, the five core components of internal control are not new, nor is complying with Sarbanes-Oxley Section 404. And, using professional judgment is not new. When we started our mapping exercise, we didn't have an attitude the sky is falling, and run around and ring the fire alarm," he noted.
Forrest said the documentation is not a "check the box" exercise, but a thorough mapping that also provides an opportunity for companies to take a fresh look at their control environment.
How companies approach mapping will differ greatly, said Forrest, depending on a company's approach to COSO 92, and how frequently their controls were updated.
"Similar to what Martha mentioned," he added, "from the beginning, we knew what we wanted to focus on, specifically ICER. We knew that piece needed to be specifically reported on and concluded on by our CEO and CFO, and audited by our external auditor, so we didn't want to start too broad and then narrow in."
Forrest also said Raytheon found the points of focus to be helpful. "We started at a high level, we started to do internal reviews, at first, it was hard to see that linkage. Throughout the process, the COSO material was helpful, the templates, the compendium dealing specifically with Internal Control over Financial Reporting, as well as the illustrative tools."
The COSO framework, including the separate volumes referenced by Forrest, can be ordered from COSO's website at www.coso.org , from the Guidance tab. FEI members can obtain a discount in ordering COSO books by using discount code FEIIC. Companies in need of additional tools for documentation can contact the webcast sponsor, BlackLine Systems.
'Novel' Approach Not Recommended
Forrest suggested that finance executives don't plan on reading the COSO documentation from beginning to end, but to instead look for easy wins or changes to implement.
"As we got into it a bit, we laid out a clear timeline to internal audit and external audit. We told the audit committee when we thought we'd be done. It took basic project management, making sure we didn't catch internal or external audit off guard," said Forrest.
"We did see some areas where we did see the documentation needed to be enhanced, echoing what Ray said, a great phrase, COSO 2013 was an evolution change from the '92 framework, vs. a revolutionary change."
Keep up with COSO at www.financialexecutives.org/coso
The post Implementing COSO: Evolutionary, Not Revolutionary appeared first on Financial Executives International Daily.
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CorporateCounsel.net Blog: Corp Fin Director Keith Higgins Testifies: State of the Division's Rulemaking
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Financial Executives International Daily » Financial Reporting: Implementing COSO: Evolutionary, Not Revolutionary