Donaldson Puts Coveted Office on the High Shelf
SEC Chairman Donaldson is being credited with having the "wisdom of Solomon," for crafting an "elegant" and "practical" solution to an issue that had roiled the usually serene halls of the SEC: which commissioner other than himself will get the one office with a coveted view of the U.S. Capitol?
His solution? Bloomberg reports that no one will get the room with a view. It will instead be turned into a conference room.
As discussed here previously, Commissioners Roel Campos and Cynthia Glassman both had been jockeying for the office:
Commissioners Roel Campos and Cynthia Glassman have made it clear they want the only office besides Donaldson's that overlooks the Capitol, according to people familiar with the matter. Commissioner Paul Atkins has said it's unfair for any one official to get a better office, the people familiar said. Commissioner Harvey Goldschmid, who is recovering from surgery, has mostly stayed out of the squabble.
Of the four commissioners, the three who lose will get offices looking over train tracks at Washington's Union Station in the new headquarters.
So maybe that was the wisdom of Solomon under the circumstances. All I know is that I did the same thing with "the good basketball" that my 7 and 4 year olds were arguing over, putting it on the high shelf where no one could have it. It worked for me, too.
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February 25, 2005 |
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"Hit the Numbers," Part III
I haven't been watching in the courtroom and only know what I'm reading in the press about the Ebbers trial, but the snippets I'm seeing are looking pretty ominous for the prosecution. The New York Times reports that yesterday, Bert C. Roberts (a WorldCom board member through 2002)
said he had a meeting with Mr. Sullivan on June 20, 2002, the same day that WorldCom's board confronted Mr. Sullivan about questionable accounting changes that he approved.
"I asked Scott whether Bernie knew and his answer to me was that Bernie did not know of the journal entries," Mr. Roberts said. "I did not pursue the issue further."
* * *
However, during cross-examination, Mr. Roberts confirmed that Mr. Sullivan only said Mr. Ebbers did not know about "journal entries," not the entire fraud. By asking Mr. Roberts to confirm this detail, prosecutors tried to highlight that Mr. Ebbers may not have known about specific items on WorldCom's ledgers, but he still could have known about Mr. Sullivan's broader efforts to commit fraud.
Ebbers "could have known?" That's where things stand now for the prosecution? That seems miles away from "beyond a reasonable doubt," doesn't it?
So now it appears that the prosecution is relying on (1) the jury to conclude that "hit the numbers" meant "go commit fraud," and (2) the jury to conclude that Sullivan's response above to what appears to have been a pretty straightforward question from Roberts--did Ebbers know about the questionable accounting?--somehow meant "yes" (or at least didn't mean "no").
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February 24, 2005 |
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Counting Up the Securities Class Action Trials
As reported earlier this week, Big Four accounting firm Ernst & Young recently prevailed at a rare trial in a securities class action lawsuit. E&Y had been named as a defendant in connection with audit work it performed at Clarent Corp. According to this press release from plaintiffs' counsel, the case was just the third securities class action to go to trial in the last ten years.
I tried to flesh this out last year in my Question to All Securities Litigators, but let's try again to identify the post-Reform Act securities class action trials:
1. Equisure (reportedly a $45.3 million default judgment against Equisure. I'm not sure this should really count since the company apparently failed to show up for the trial!).
2. BDO Seidman, LLP (Defendant BDO reportedly received a defense verdict in a class action seeking $37 million for BDO's alleged participation in accounting fraud and failure to uncover accounting abuses).
3. In Re Real Estate Associates Limited Partnerships, (reportedly tried to a $184 million jury verdict in the U.S. District Court for the Central District of California in November 2002).
4. Last week's E&Y case.
Can anyone add to this list??
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February 18, 2005 |
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"Hit the Numbers," Part II
I've been thinking a lot about the following question and answer from Scott Sullivan's cross-examination in the Ebbers criminal trial discussed in the post below:
"You were a member of the board. You had been named CFO of the year. You had cashed in some $30 million in [stock] options, and you felt you had no choice but to interpret Mr. Ebbers's words 'we have to hit the numbers' as a command to go out and commit accounting fraud?" Weingarten asked.
"Yes, that is my testimony," Sullivan said.
My thoughts:
1. That is a brilliant, possibly devastating question.
2. Really? That's it? Ebbers said "hit the numbers" so Sullivan started engaging in fraudulent accounting on a massive scale in order to let WorldCom do so? You'd think there would have to be more there. But you'd also think that if there were, it would have come out during Sullivan's direct examination.
3. The question highlights something important--Sullivan was not some line accountant living paycheck-to-paycheck who was allegedly ordered to do something he knew to be improper. He was a member of the WorldCom Board. He was a nationally renowned and honored CFO. He had tens of millions of dollars in the bank. If "hit the numbers," was an order to commit fraud, how hard would it have been for him to just say "no" under those circumstances?
4. Hindsight is 20-20, but under those circumstances, when one has been told to "hit the numbers" and has interpreted these words as a directive to commit massive accounting fraud, isn't some kind of follow-up question necessary?
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February 17, 2005 |
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"Hit the Numbers"
The Washington Post has this article describing some of the cross-examination of former WorldCom CFO Scott Sullivan in the Bernie Ebbers criminal trial. One key issue: what prompted Sullivan to begin making improper accounting entries to permit WorldCom to meet it's expected financial results? The article reports that according to Sullivan's testimony, the fraud was the result of Ebbers telling him repeatedly to "hit the numbers," which he took as an order to make accounting adjustments :
As the afternoon wore on, Sullivan began to look tired and blink far more frequently, and Weingarten pressed harder.
Sullivan has testified that he told Ebbers in each of seven quarters about "adjustments" he made to the company's books to bring the revenue and earnings in line with Wall Street's expectations. He also said Ebbers responded each time by saying the company had to "hit the numbers."
"You took his words [hit the numbers] as a command to go out and commit accounting fraud?" Weingarten asked.
"Yes, I took that as an order to make adjustments and hit the earnings per share number, yes. He said we had to hit the numbers," Sullivan responded.
"You were a member of the board. You had been named CFO of the year. You had cashed in some $30 million in [stock] options, and you felt you had no choice but to interpret Mr. Ebbers's words 'we have to hit the numbers' as a command to go out and commit accounting fraud?" Weingarten asked.
"Yes, that is my testimony," Sullivan said.
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February 14, 2005 |
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Ebbers Criminal Trial Heats Up
The next few days in the criminal trial of former WorldCom CEO Bernie Ebbers should be downright riveting , as Scott Sullivan--the company's former CFO and the prosecution's star witness implicating Ebbers in WorldCom's financial fraud--will be cross-examined by Ebbers' attorney Reid Weingarten. The confrontation should be fascinating given the people involved and the huge stakes--in the absence of any real "smoking gun" documents, most observers seem to agree that the prosecution's case will rise or fall on whether the jury believes Sullivan.
Sullivan is said to be a brilliant and unflappable. As described in this article in today's New York Times,
one lawyer who has dealt with Mr. Sullivan in legal proceedings has told colleagues he is "the best witness he has ever defended," calling him "a prosecutor's dream, unflappable and very smart" and someone who "reacts well to curveballs."
Financial analysts who met often with Mr. Sullivan when he was at WorldCom attest to his near-total recall of facts and an instant grasp of financial information, in detail.
He was also a hard worker, according to one former co-worker, who remembers him as one of the last people to leave the office and someone "with his shirt sleeves rolled up."
Unlike Mr. Ebbers, who had a reputation for being moody and irascible, Mr. Sullivan was considered calm and professional. "I never saw him fly off the handle," the former co-worker said. "He never lost his temper, and he treated everyone exactly the same."
Still, it is hugely important to Ebbers' defense that his attorneys effectively undercut Sullivan's testimony against him, a task that will be left to his lead attorney, Reid Weingarten. The Times article notes that Weingarten
has successfully defended other prominent executives including Mark A. Belnick, the former general counsel of Tyco International.
He also won acquittals for other high-profile defendants like Mike Espy, a secretary of agriculture during the Clinton administration.
His unassuming, down-to-earth style and knack for sniffing out weaknesses in witnesses has won him an impressive reputation in the legal community.
Ebbers reportedly has several avenues that he may take in an effort to undercut Sullivan's credibility. According to this article in the New York Post,
The cross-examination will surely center on:
* Sullivan's alleged extramarital affairs. The bed sheets — not spreadsheets — side of the case will be aimed at showing how easily and consistently Sullivan could lead a fraudulent life;
* Sullivan's alleged marijuana and cocaine use over the years and his admitted use of coke after working hours with fellow employees.
* The fact there is no written proof that Ebbers directed any part of the fraud. Sullivan has mostly testified about conversations he and Ebbers had about the fraud outside of anyone else's earshot.
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February 11, 2005 |
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Spitzer Not Winning Friends and Influencing People at the SEC
If Eliot Spitzer loses the NY Governor race by a few hundred votes it may be SEC employees who are the swing voters. According to an article in Ignites this morning,
Just when it looked as if the two regulators were getting along, Spitzer blasted the SEC at a recent industry conference, declaring that the SEC “hired gnomes rather than people who could think,” according to published reports. He also took shots at the federal regulator’s effectiveness, noting that his staff has only 15 people, while the SEC has thousands.
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February 9, 2005 |
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File Those Claims ... Or Else, Part II
Another consequence for those investors who fail to file claims in securities class action settlements is that, increasingly, they may miss out on additional millions made available through SEC settlements. Take the recent announcement by the SEC concerning it's $25 million settlement in May 2004 with Lucent, for example. The SEC stated in this Litigation Release on February 4 that it has filed a motion seeking to have this $25 million transferred to the account established by the claims administrator in the securities class action settlement involving Lucent (In Re Lucent Technologies Inc. Securities Litigation, Case No. 00CV-621(JAP)). The SEC has proposed that the claims administrator will then distribute the funds to the class members who have already filed claims in that settlement (the claims deadline in that case was March 2004).
The result appears to be that investors who failed to file claims in the Lucent securities class action settlement will suffer the additional consequence of missing out on their share of another $25 million made available by the SEC.
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February 8, 2005 |
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Without Wheels? Now That's Cold!
Business Week has this interesting interview with SEC Commissioner Paul Atkins, which has the added benefit of invoking one of my favorite SEC quotes, from former SEC Chairman Richard Breeden. Breeden once famously stated that he wanted to leave people who engaged in insider trading "naked, homeless and without wheels."
From the interview:
Q: Why have you opposed some fines for corporate wrongdoers?
A: [Former SEC Chairman] Richard Breeden used to say "I want to leave them naked, homeless, and without wheels," which I thought crystallizes very well the idea that we should show no quarter to people who intentionally, willfully lie, cheat, and steal. They should not be left with the fruit of their misdeeds.
But when we extract a penalty from a company for financial fraud, it affects shareholders and employees. If you're a shareholder who held shares through all that and are still holding the shares now, your shares are worth less, but now we're taking money from the company to give only pennies on the dollar back to you. That hurts the company's ability to grow and ultimately hurts shareholder value.
Are we just sort of headline-grabbing? Is that really the best way to deter bad conduct, by hurting the people that we're supposedly helping? No. The best solution is to hold individuals accountable because someone in the company cooked the books. We ought to hold individuals accountable, not shareholders
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February 7, 2005 |
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WorldCom Directors' Settlement Falls Apart, Part II
ISS' Ted Allen, Managing Editor of The Friday Report, has written this insightful article on the collapse of the WorldCom director settlement. The article states that
Professor Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, said he doesn't expect that the collapse of the WorldCom settlement will deter other investors from seeking personal payments from board members. "The theory of getting some sort of payment from directors seems to be well established," Elson told The Friday Report.
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February 4, 2005 |
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SCAS Data: Top 100 Securities Class Action Settlements By Year
The following chart, derived from the upcoming SCAS Top 100 Securities Class Action Settlements report, provides an interesting breakdown of the Top 100 settlements by year:
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February 3, 2005 |
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SCAS Webcast: The Fiduciary Duty To File Claims In Securities Class Action Settlements
On February 16, 2005, at 1:30 p.m. Eastern, ISS' Securities Class Action Services will hold a free webcast entitled, "The Fiduciary Duty To File Claims In Securities Class Action Settlements."
Professor Randall Thomas, Professor of Law and Business, Vanderbilt University Law School, will join me for a discussion of the dozens of recently-filed class action lawsuits against mutual funds for their alleged failure to file claims in securities class action settlements. The lawsuits allege that mutual funds cost their shareholders billions of dollars by failing to file such claims.
Professor Thomas will also discuss the results of his recent study and upcoming paper entitled, "Letting Billions Slip Through Your Fingers: Empirical Evidence and Legal Implications of the Failure of Financial Institutions to Participate in Securities Class Action Settlements."
A copy of the invitation is below. Any and all interested Securities Litigation Watch readers are invited to sign up for the webcast here.
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February 2, 2005 |
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WorldCom Directors' Settlement Falls Apart
The high-profile settlement in which many of the WorldCom directors agreed to pay a combined $18 million out of their own pockets has reportedly fallen apart, meaning that at least for now, these directors are again defendants in the trial scheduled for February 28. According to this article by the Associated Press, New York State Comptroller Alan Hevesi announced that the plaintiffs were pulling out of the deal after U.S. District Judge Denise Cote struck down a key component of the agreement. Hevesi said the settlement was scuttled because the judge ruled that any jury award resulting from a Feb. 28 trial against other defendants would be reduced as a result of the prior deal with the directors. The article also quoted Sean Coffey, a lawyer for the plaintiffs, as stating that "Regrettably, we have no choice but to terminate the settlement, as historic as it is, because we cannot take the risk that a jury verdict against the investment banks might be reduced by an amount substantially higher than the settling director's ability to pay. We look forward to trying the case against all the defendants starting at the end of this month."
"The settlement is being terminated solely because of the potential impact on the amount other defendants might pay if the suit is successful," Hevesi said.
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20 Years Later...
20 years (!) after the SEC filed a securities fraud case against First Jersey Securities and Robert Brennan, First Jersey shareholders can seek to recover from a $26 million disgorgement fund the SEC has collected. A distribution plan and settlement notice are available here.
The case seems to move in 10 year increments. The SEC filed it in 1985, and in July 1995, after a trial, the District Court found Brennan and First Jersey liable to pay $74,977,993 in disgorgement and prejudgment interest. 2005 has now brought the settlement claims process. Hopefully settlement proceeds will be distributed well before 2015!
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February 1, 2005 |
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Financial Times: "Gain an Edge in the Blog Zone"
Let's hear it for Financial Times writer James Altucher, who clearly knows a good blog when he sees one. Discussing his seven favorite blogs, Altucher writes:
Securities Litigation Watch (slw.issproxy.com)
Finding investment returns largely consists of two tasks, finding value and avoiding corruption. Both are extremely difficult. Securities Litigation Watch, run by Bruce Carton, executive director of ISS Securities Class Action Services and a former corporate lawyer, provides a constant update into the latest scandals and investigations. Another useful blog that he often links to is www.the10b-5daily.com run by Lyle Roberts, lawyer for Wilson Sonsini. And for those CEOs out there, see his latest entry: "Don't you hate it when your wife ignores your specific 'entreaties' that she not share inside information about your publicly traded company with her brother, and gets sued by the SEC?"
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Office Space
In case you thought the SEC's top men and women might be immune to the bickering, jockeying and politics that accompany the dreaded "office move," well, just read this. The issue? Who among the four SEC commissioners will get the one office with a view of the U.S. Capitol (as opposed to train tracks at D.C.'s Union Station) when the agency moves to its new headquarters in March.
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