Federal Securities Law Source

Archives: Executive Officer Matters

Subscribe to Executive Officer Matters RSS Feed

Justice Department Announces Settlement With CSK Auto: $20.9 Million Fine and a Non-Prosecution Agreement In Earnings Manipulation Case

On Friday, September 9, the Department of Justice announced that it had entered into a Non-Prosecution Agreement with CSK Auto Corporation, a retailer of automotive parts and accessories which used to be publicly traded, to settle a criminal investigation into alleged securities law violations stemming from a corporate earnings manipulation and double-billing scheme. Under the terms of the agreement, CSK Auto will pay a $20.9 million penalty. The resolution of this matter is the latest in a series of matters being handled by both DOJ and the SEC regarding the events at CSK Auto.…

SEC Settles Clawback Case With the Former CFO of Beazer Homes USA

On August 30, 2011, the SEC announced it had settled a case with James O’Leary, the former CFO of Beazer Homes USA under Section 304 of the Sarbanes-Oxley Act. Section 304’s "clawback" provision requires the reimbursement of compensation from executives under certain circumstances when their companies were in material non-compliance of financial reporting requirements due to misconduct. In Mr. O’Leary’s case, although he was not charged with any misconduct, he has agreed to reimburse $1.4 million he received after fraudulent financial statements were filed.…

SEC Brings Fraud Case Against Biopharmaceutical Company, Three Other Companies and Four Executives For Misleading Investors About Sole Product and Insider Trading

On Monday, August 1, 2011, the SEC filed suit against eight defendants for making false statements in public filings regarding the status of the human clinical trials for the drug SF-1019 by Argyll Biotechnologies LLC. The statements did not disclose that the Food and Drug Administration had issued clinical holds on testing for the drug, which is derived from goat blood and was Argyll’s sole product. In addition, three executives were charged with insider trading for selling shares of Immunosyn Corporation (the company which made the false filings) for $20 million during the same period. SEC v. Ferrone, No. 11-cv-05223 (N.D. Ill. Filed Aug. 1, 2011).…

Negotiations in SEC Clawback Case Collapse When Commission Rejects Settlement Proposal From Its Own Staff

The SEC’s Commissioners have rejected a proposed settlement to "claw back" a portion of the bonuses and stock sale profits a former CEO received during a period of accounting fraud. The SEC had previously described the case as the first clawback case under the Sarbanes-Oxley Act against an individual who was not alleged to have otherwise violated the securities laws. The negotiations failed when, according to a report in the Washington Post (available here), the SEC rejected the settlement proposed by its own enforcement staff which would have recovered less than half of the amount sought in the Complaint.…

Former Chairman of Mortgage Lender Taylor, Bean & Whitaker Sentenced to 30 Years in Prison For His Role In Market Crisis Case

On June 30, 2011, Lee Farkas, the former Chairman of Taylor Bean & Whitaker ("TBW"), was sentenced to 30 years in prison for his role the failure of his company and of Colonial Bank. While the sentence fell short of the Government’s request for a sentence of 385 years, it is likely that the 58-year old Mr. Farkas will spend the rest of his life in jail. …

Former Chairman of mortgage lender Taylor, Bean & Whitaker convicted for scheme that contributed to his company’s collapse and the failure of Colonial Bank

On Tuesday, April 19, 2011, in one of the first criminal trials arising out of the market crisis, a federal jury in Alexandria, Virginia convicted Lee Farkas of: one count of conspiracy to commit bank, wire and securities fraud; six counts of bank fraud; four counts of wire fraud; and three counts of securities fraud. The charges arose from Mr. Farkas’ role in a $2.9 billion fraud scheme that led to the failure of Colonial Bank (which was one of the 25 largest banks in the United States in 2009), and Mr. Farkas’ company, Taylor Bean & Whitaker ("TBW"), one of the largest privately held mortgage lending companies in 2009.…

Grant Thornton Surveys CFOs

In a recent national survey of CFOs and senior comptrollers conducted by Grant Thornton, over 75% of respondents said the SEC should revise Form 8-K rules to require reasons for all company dismissals of auditors, for all auditor resignations, and for all instances in which the auditor chooses not to stand for reappointment. The results suggest that CFOs feel auditors resign or are terminated for reasons that investors should know about but for which no disclosure is required. The crux of the current 8-K rules if an auditor resigns or is dismissed require that all disagreements between the auditor and the company be disclosed.

The complete survey follows. Note the split response to the last question.

Do you believe the roles of CEO and chairman of the board should be independent of each other?

Yes 78.73 % No 20.81 %

Should the SEC revise 8-K rules to require reasons for all company dismissals of auditors, for all auditor resignations and for all instances in which the auditor chooses not to stand for reappointment?

Yes 75.57 % No 21.72 %

Do you believe shareholders in public companies should have greater access to the proxy?

Yes 66.06 % No 29.86 %

Do you believe that small cap companies who test internal controls (according to Sarbanes-Oxley) will be looked upon more favorably by investors than those who do not test internal controls?

Yes 68.78 % No 29.41 %

Do you consider the newly issued guidance (AS 5) from the SEC on internal …

10b5-1 Trading Plan Scrutiny

The SEC is investigating misuse of a 10b5-1 trading plan by Countrywide Financial Corp CEO, Angelo Mozilo, and securities experts continue to predict that such misuse will be the next big securities scandal.

10b5-1 trading plans allow executives to trade stock without worrying about trading on material, nonpublic information, also known as insider trading. The plans are filed with the SEC and specify in advance when stock in an executive’s company will be bought and sold and at what price. The plans cannot be entered at a time when an executive has material, nonpublic information, the idea being that executives should not be able to influence when plans make purchases or sales if the executive has inside information.

Much like option backdating was exposed by an academic study that found option grants tend to occur at optimum times (which suggests insider trading), misuse of 10b5-1 plans has been suggested by a Stanford study that found such plans beat other trades by as much as 6 percent.

Examples of plan manipulation include:

  • Starting a plan while aware of insider information;
  • Disclosing insider information before a planned trade to maximize profits; and
  • Rewriting a plan before upcoming changes in company performance.

These types of manipulation are already illegal, which could mean any impending scandal may need to be solved with better detection of wrongdoing, as opposed to new rules. …

Today’s Inclusive CEO

Yesterday, ISS blogged about Booz Allen Hamilton’s annual CEO succession study, which reported several interesting findings that I also think are worth sharing. The study, which is based on the world’s 2,500 largest public companies concludes that the imperial CEO has been replaced by the inclusive CEO, as reported in the press release on the study – “The Era of The Inclusive Leader.” 

As noted in the press release, the study shows that CEOs are becoming acutely aware that in order to succeed, they must listen to the concerns of their directors, shareholders and employees, and respond timely and appropriately. Thus, the days of CEOs answering only to themselves appear to be closer to a distant memory than today’s reality. 

The study shows that boards are becoming less tolerant of current poor performance and indications of future underperformance than in the past. It used to be that boards would primarily only remove CEOs for proven underperformance, however, boards are becoming more focused on future performance and more inclined to remove CEOs based on indications of future underperformance.

The study also indicates that splitting the roles of chairman and CEO can be very beneficial to companies. Notably, in 2006, all of the underperforming CEOs of North American companies were also chairmen of their companies, or served under chairmen who were the companies’ former CEOs. The conclusion that investors benefit more when the positions of chairman and CEO are held by different individuals is a consistent conclusion on a global scale.

The press release is …

LexBlog