Responding to the Yahoo Resume Debacle

As reported by Bloomberg this week, Scott Thompson, the CEO of Yahoo since January, was forced to resign after it was discovered that he did not in fact obtain one of the college degrees listed in Yahoo’s reports. To make matters worse, a discrepancy was also discovered in the reported educational background of Patti Hart, the Chair of Yahoo’s Governance Committee and the search committee that evaluated Thompson. She will not seek re-election at the Yahoo annual meeting this summer.

Not only has this episode caused huge embarrassment to Yahoo, but it may have tipped the balance in the Yahoo Board’s proxy fight with dissident shareholder Third Point LLC, the group that blew the whistle on the academic discrepancies involving Thompson and Hart. On Sunday, Yahoo’s Board announced that it was giving Third Point three Board seats as part of a settlement.

It sounds like it didn’t take much detective work for the hedge fund to uncover the Thompson discrepancy. Yahoo’s Form 10-K amendment, proxy statement and web site had disclosed that Thompson had a degree in accounting and computer science, when in fact he only had a degree in accounting. As Third Point described in a press release:

A rudimentary Google search reveals a Stonehill College alumni announcement stating that Mr. Thompson’s degree is in accounting only. That announcement is consistent with other documents (including filings with the SEC) that reflect Mr. Thompson received a degree in accounting, but not computer science. . . . [W]e were . . . informed by Stonehill College that Mr. Thompson did indeed graduate with a degree in accounting only. Furthermore, Stonehill College informed us that it did not begin awarding computer science degrees until 1983 — four years after Mr. Thompson graduated. We inquired whether Mr. Thompson had taken a large number of computer science courses, perhaps allowing him to justify to himself that he had “earned” such a degree. Instead, we learned that during Mr. Thompson’s tenure at Stonehill only one such course was even offered – Intro to Computer Science. Presumably, Mr. Thompson took that course.

Painful. [Of course, it may just as painful that Yahoo’s largest shareholder thought first to run a Google search. Why not a Yahoo search?]

Does this episode mean that all public companies have to check up on the resumes of all of their directors and officers? Unfortunately, it may not be a bad idea – an expert in this 2006 Forbes article reported discrepancies in around 40% of resumes, and there are many reports of similar numbers. Maureen Mackey of the Fiscal Times just published this list of high profile cases of resume fraud. Here are a few tips for companies:

  • At the very least, the Yahoo experience teaches that public companies should revisit their procedures for gathering and compiling information in director and officer questionnaires for the proxy statement and Form 10-K. If any questions arise, it’s very important to be able to demonstrate that the information was tracked carefully and consistently. See the letter from Third Point to the Yahoo Board last week, requesting detailed information on everything the company looked at in connection with hiring Thompson and drafting the disclosures.
  • Further, it’s a good idea to cross-check the proposed disclosures with disclosures about the same individual in the filings of different companies. In the quote above, Third Point stated that other companies’ SEC filings had reported only that Thompson had a degree in accounting, not computer science.
  • In hiring new executive officers, it’s a good idea to do a background check, and the cost can be modest compared to the risk. The background check should include verifying academic and professional credentials – including whether licenses are current (CPA, etc.).
  • In the event of a proxy fight or threat by a dissident shareholder, it’s important to be even more vigilant in determining that the disclosed information is accurate.

It’s unfortunate that we can’t all trust what we hear – but a little healthy skepticism could have saved the Yahoo folks a lot of anguish.

LegalCORPS Provides Unique and Valuable Services

In “Can’t afford a lawyer? Check out LegalCORPS,” Nancy Crotti of Finance and Commerce provided a great summary of the benefits provided by a great organization. LegalCORPS is a Minnesota nonprofit that provides pro bono business legal services to low-income businesses and nonprofits. I serve on LegalCORPS’ Board.

In the article, I am quoted as describing why I enjoy volunteering for LegalCORPS’ brief advice clinics, and the article does a good job of describing the benefits to small start-up businesses who would not be able to afford a business lawyer and would not know where to find a good one. Also, as Chair of Maslon’s Pro Bono Committee, I appreciate LegalCORPS’ role in helping to broaden business lawyers’ involvement in pro bono services.

In a companion article, “LegalCORPS patent program to serve as national model,” Crotti also describes a unique new LegalCORPS program providing pro bono patent law services to low-income inventors.

Tips From the 2010 Bowne Conference: How to Avoid Disclosure Problems

The 2010 Bowne SEC Accounting, Compliance & Legal Issues Conference held in Minneapolis last week was a major success. More than 250 public company representatives and advisors attended to hear a day-long program featuring up-to-date information on disclosure, corporate governance, executive compensation and accounting issues.

I moderated a panel discussion on public company disclosure issues that also featured my partner, Paul Chestovich. Paul provided an update on the SEC’s new positions on climate change disclosures and non-GAAP financial measures, also the subject of a very handy article Paul wrote for the Small Public Company Forum called “Generation Non-GAAP”. We also participated in a discussion of tips for public companies to avoid disclosure problems. The SEC has beefed up its enforcement staff and enforcement activity, making compliance especially important these days, to avoid being “busted” by the SEC. Some of our disclosure and compliance tips were as follows:

  • When making tough disclosure calls, remember the current public skepticism and SEC activism (business as usual may not be enough).
  • Revisit forward looking disclaimers, risk factors and MD&A in light of current conditions.
  • Before you have a problem, check your D&O policy – does it cover SEC investigation expenses? (Many do not.)
  • Focus on process, process, process - in light of SEC scrutiny, it’s important to have consistency and proper oversight, and to be able to demonstrate that with good documentation.
  • Make sure disclosure controls are formalized (written and compiled), and that the internal disclosure committee keeps proper records.
  • Re-examine whistleblower policies, especially in relation to reporting of financial fraud. Note that, under the new financial reform bills, whistleblowers may receive a “bounty” for reporting financial fraud, which will encourage further activity by whistleblowers.
  • Consider a formal Communications Policy to control the flow of information to analysts, media, etc. This will reduce the risk of inconsistent or misleading statements and help promote compliance with Regulation FD (prohibiting selective disclosures to analysts).
  • Review the corporate website and make sure disclosures are consistent with public reports.
  • Focus on your insider trading policy - make sure the policy is up to date and policed. Even the appearance of insider trading gives plaintiffs and SEC additional basis for actions, where a disclosure issue alone might not trigger a proceeding.

Our complete presentation is available here (PDF).

If you were not there, hope you can make it to the Conference next year!

Compensation Surveys Provide Insights Into Public Company Pay Practices

And the survey says . . . executives are still doing okay in this economy. Many media outlets have just released surveys of the 2009 compensation of public company executives. They generally reported higher cash compensation (especially bonuses) than for 2008, when many companies did not hit their earnings targets. Relative equity compensation value was harder to assess.

In “Median pay for Minnesota’s top CEOs dipped only slightly,” Christopher Snowbeck of the St. Paul Pioneer Press reported on these trends for Minnesota companies. He did a good job describing the bonus increase, which resulted from companies setting more realistic financial goals for 2009. He also spoke to me about the difficulty in assessing equity compensation levels from the Summary Compensation Table in proxy statements, and the need to look at the intrinsic value of the awards at the end of the fiscal year and over time. Check it out.

And you have to check out Chris’ Twitter feed. In his words, “Chris Snowbeck is so inspired by business news he writes haiku in response.” Seriously, haiku.

Bowne Conference Will Be Educational and Entertaining

I am excited to be presenting at the 2010 Bowne SEC Accounting, Compliance & Legal Issues Conference, to be held on May 27 in Minneapolis. My presentation is the Disclosure Update, where my panel will be providing tips on:

  • Update on SEC Disclosure Requirements, including Climate Change Disclosure and Guidance on Non-GAAP Measures
  • Securities Litigation and Enforcement Update - Bank of America Settlement, Lehman Brothers report and other developments
  • Impact of heightened SEC enforcement
  • Disclosure advice – what public companies should do to protect against liability

I’ll share some of the materials and tips in this Blog after the Conference – as well as the video clips we'll be showing to the attendees.

Also, if you can show up in person, I strongly encourage you to do so. This is always the biggest gathering of public company personnel in the Twin Cities, and it’s a great networking event. Nice lunch, too!

Never Mind!

After all the speculation about effective dates of the new amendments to the proxy disclosure rules, the SEC on Tuesday published a set of Compliance & Disclosure Interpretations that clarifies the effective date of the new amendments. The C&DIs clarify that the effective dates are indeed in line with the statements made at the public hearing at which the amendments were adopted.

The most important clarification is that companies with a fiscal year ended before December 20, 2009 will not have to comply with the new rules this year. A company with a fiscal year ended on or after December 20, 2009 will be required to comply, unless the definitive proxy materials and the Form 10-K are filed before February 28, 2010. The C&DIs also clarify some of the transition rules in connection with IPOs and other special situations.

Of course, the section of the ON Securities Cheat Sheet discussing the amendments has been updated consistent with the C&DIs.

Next week, I will discuss some examples of risk-based compensation analysis. In the meantime, you might review this previous post that includes insights from a recent Deloitte program on compliance with the new rules.

Again, Happy Holidays! For those of you in the Upper Midwest, if you have to drive, drive carefully.

Busted Again: More SEC Enforcement Developments

BustedAs I reported previously, the SEC enforcement staff is "loaded for bear," stepping up its enforcement activities to go after violations of the securities laws. Some recent stories reinforce that it is more important than ever to guard against these violations: The Wall Street Journal reported on Wednesday that the SEC has greatly expanded its insider trading investigations of broker-dealers and hedge funds (subscription required to view complete article). According to the report, the staff has sent at least three dozen subpoenas in the past month, including investigating the role of Goldman Sachs bankers. The staff is using sophisticated technology to examine the webs of relationships among traders, investment bankers, attorneys and others.

    Comment: There is no reason to think that the current investigations are limited to broker-dealers and hedge funds, and the trail could easily lead the SEC staff to company personnel. It is more important than ever for companies to monitor and enforce their insider trading policies.

The SEC last month reported that it entered into a consent decree with former officers and accountants at SafeNet in the first enforcement action by the Commission under Regulation G. Reg G regulates the use (and abuse) of "non-GAAP financial measures" by reporting companies. The complaint accused the personnel of engaging in a scheme to meet or exceed quarterly EPS targets through improper accounting adjustments. The company represented that it was excluding "non-recurring" expenses from its results, when in fact it was excluding recurring operating expenses to make its earnings look better.

    Comment: SafeNet obviously was engaged in outright fraud, and Reg G gave the SEC staff another means to go after bad people. However, it's no coincidence that the first Reg G proceeding is in late 2009 - again, the enforcement staff is actively looking for perceived wrongdoing, in part to justify the agency's continued existence. Public companies should be more careful than ever in complying with Reg G - for example, be careful about characterizing any excluded expenses as "non-recurring," which is a real hot-button issue with the SEC staff.

Westlaw Business Currents reported last week that there has been a "noticeable uptick" in companies disclosing Wells Notices relating to enforcement proceedings.

    Comment: Be careful out there. And don't get caught cheating.

No News. I keep checking the SEC calendar to see whether the Commission has scheduled a meeting to consider adoption of the new proxy disclosure rules. Nothing posted yet. It's hard to predict whether anything will be adopted this year, or whether the new rules will be effective for the 2010 proxy season.

What's Up?

question3Early November finds us in a kind of limbo - those of us who advise public companies on governance and compensation matters are waiting for something big to happen. But there's plenty of smaller stuff to report on - although most of these items present more questions than answers:

    Proxy Disclosure Rules. On November 4, SEC Chairman Schapiro gave a speech addressing current regulatory developments. She described the proxy disclosure rules but did not address when they would be adopted or considered. The Corporate Counsel Blog reports that the rules will not be adopted on November 9, as previously rumored. However, there is still a chance that the rules will apply for the 2010 proxy season. If so, there won't be much time to evaluate the rules, or to hold a compensation committee meeting to address the new disclosures. Stay tuned. . . .

    Proxy Access. Rep. Maxine Waters has proposed an amendment to the Investor Protection Act of 2009 (the current provisions of the Act are described in the ON Securities Cheat Sheet). The amendment would require the SEC to adopt rules permitting large shareholders to nominate directors in the company's proxy statement (proxy access). If added to the Act and ultimately adopted, this provision would enhance the SEC's position in adopting its proposed Rule 14a-11 granting proxy access.

    Say-On-Pay and Shareholder Surveys. Companies continue to conduct annual advisory votes on compensation on a voluntary basis. Meanwhile, as reported by the Corporate Counsel Blog, some companies, including Schering-Plough, have begun to survey their shareholders. This will provide more detailed data on shareholders' opinions about compensation practices and may emerge as an alternative or supplement to simple yes-or-no advisory votes.

    New York Power of Attorney Law. You may have read about the amendments to the New York power of attorney laws, effective September 1, 2009. See this Forbes article. The amendments impose strict requirements (font size, notarization, etc.) for powers of attorney, particularly those signed in New York by New York residents. The amendments have prompted a flood of articles and analyses, including speculation that the requirements could affect the validity of powers of attorney for SEC registration statements, Section 16 filings, etc. I agree with this analysis, indicating that, even though there is no definitive guidance, the validity of powers of attorney for SEC filings should be governed by SEC rules and not state law.

I should get updates on some of these items next week - I'll be attending the NASPP Annual Conference in San Francisco. Of course, I can't wait to share the information with the ON Securities readers. There may even be a tweet or two, if you can't wait for the Blog.

"Busted" - Don't Be Blindsided by the SEC's New Enforcement Posture

busted1I spoke this week at a Minnesota CLE Conference on the topic of how public companies can avoid liability for their disclosures. In preparing my remarks, it struck me that the SEC is "loaded for bear" in going after public companies and their officers with investigations and enforcement proceedings. The SEC has increased and reorganized its enforcement staff and is trying to raise its profile - really, an attempt to justify the agency's continued existence. Recent examples, just during July and August of 2009:

    A recent accounting fraud case against General Electric, where GE agreed to pay a $50 million fine.

    The SEC's $33 million settlement with Bank of America for failure to disclose the approval of Merrill Lynch bonus payments in the merger proxy statement. The District Court is considering rejecting the settlement as too lenient, which the SEC is disputing.

    The SEC's "clawback" action to recover $4 million in incentive compensation from the CEO of CSK Auto, reported here. It's not clear whether the SEC will be successful in this case. However, clearly, the SEC is trying to send a message to corporate officers that, if the officers are not vigilant to preventing accounting fraud and disclosure violations, their own compensation may be at risk.

This is all happening at a time when private lawsuits for securities fraud are getting more difficult for plaintiffs' attorneys to bring - a point of agreement for the plaintiffs' attorneys and defense attorneys on the panel. This does not mean company officials can relax, due to the increased scrutiny from the SEC and, probably, increased skepticism from judges and juries about public company practices. As I said in this prior post, this atmosphere should lead public companies to carefully consider their disclosure processes, including the disclosure controls and procedures required under SOX.

In other words, once again, "Don't Get Caught Cheating." Or, make sure you're not "BUSTED" by the SEC.

If you would like a copy of my PowerPoint presentation from this week, send me an e-mail. If you have any tips on disclosure procedures, or just want to weigh in on the SEC's newly found "mojo", post a comment below.

Have a great Labor Day weekend!

Watch Out For Those Claws!

The SEC's recent clawback action against Maynard Jenkins, the former CEO of auto supplier CSK Auto Corporation, has gotten more commentary than just about any other recent enforcement proceeding I can think of. The SEC is seeking reimbursement of $4 million in Jenkins' bonuses and profits from his stock sales during years when CSK's financial results were inflated by accounting fraud. What's getting all the attention? The SEC has not charged Jenkins individually with any wrongdoing. claws2

The SEC is seeking the clawback under Section 304(a) of the Sarbanes-Oxley Act of 2002, which allows recovery of incentive compensation following a financial restatement "as a result of misconduct." Section 304 doesn't specify that the misconduct be tied directly to the individual from whom the recovery is sought. However, the SEC, in its press release announcing the action, reported:

It is the first action seeking reimbursement under the SOX 'clawback' provision . . . from an individual who is not alleged to have otherwise violated the securities laws. . . . . 'Jenkins was captain of the ship and profited during the time that CSK was misleading investors about the company's financial health,' said Rosalind R. Tyson, Director of the SEC's Los Angeles Regional Office. 'The law requires Jenkins to return those proceeds to CSK.'

Much of the negative commentary accuses the SEC of overreaching, in a situation where it could not state an accounting fraud case directly against Jenkins. However, this case is an extreme one - Jenkins collected $4 million in bonuses and stock profits at a time when the company was committing massive accounting fraud. The COO, CFO, controller and another responsible officer were all indicted, and the latter two individuals have already pled guilty. Even if the SEC couldn't make a direct case against Jenkins for the fraud, this is the perfect test case for the extension of a Section 304 clawback beyond the responsible individuals to the "captain of the ship".

Regardless of the result in the case, the SEC has sent another signal that it is "loaded for bear" - as we reported in this post, the agency has a beefed-up enforcement staff and new energy. Regardless of the result in the Jenkins "no fault clawback" case, the SEC will be putting more heat on executives in the coming months.

"Don't Get Caught Cheating"

I've been working on my outline for an upcoming continuing legal education program on how in-house practitioners can avoid or minimize securities fraud liability. I talked to Maslon's securities litigation partner extraordinaire, Rich Wilson, about the topic, and we came up with the following tips:

    justiceThe simple rule is to disclose material information in a way that's not misleading. However, Rich cautions that a higher standard of disclosure may be required now. As Rich puts it, "There is a growing public skepticism that will make its way into the jury pool and even into the judiciary. In a dispute, a tie may no longer go to the company." SEC enforcement also poses new dangers, because the agency has a beefed-up enforcement staff and new energy. In other words, business as usual may not be the best course in the current atmosphere.
    Also, in the current climate, process and consistency become increasingly important. Companies should take a fresh look at their disclosure controls and procedures. The CEO and CFO have to certify the adequacy of these procedures every quarter in the 10-K and 10-Qs, but now is the time to make sure the procedures still make sense and are being followed consistently. This increased emphasis on compliance has to be maintained, even at a time when a lot of companies are cutting back on their in-house legal and compliance staffs due to economic considerations.

    It is also important to minimize the possibility of inconsistent disclosures by multiple individuals, and leaks of material non-public information. The company should have a clear written communications policy to ensure that corporate disclosures are made consistently by authorized spokespersons, and to prevent leaks. Again, the company should monitor and enforce consistent compliance with the policy.

    It is also very important to consistently monitor and enforce compliance with the company's insider trading policy. If insiders appear to be trading in the company's stock before allegedly material information is disclosed, this will greatly increase the risk of a lawsuit or SEC enforcement proceeding, compared to a disclosure-based claim alone.

All good tips. Although, maybe not as good as the tip my law school buddy used to give me: "Don't get caught cheating". Yes, he was kidding. Or maybe not - he ended up getting elected to Congress.