Bank One (One Group) Mutual Funds
Check Point Software Technologies Ltd.
Constar International Inc.
Emerson Radio Corp.
Nations Funds Inc.
Vertex Pharmaceuticals, Inc.
Enron Corp. $40,000,000
NorthPoint Communications Group Inc. $20,000,000
Rural/Metro Corp. $15,000,000
Green Tree Financial Corp. $12,450,000
Nuance Communications Inc. $11,000,000
Physicians Corp. of America $10,200,000
IBP Inc. $8,000,000
Roche Holdings Ltd. $6,350,000
Nesco Inc. $1,050,000
recent study based on SCAS data indicates that stock
prices are more sensitive to corrective disclosures
involving accounting allegations at the end of class
periods than for non-accounting allegations. Issuers'
stock prices dropped more than 24 percent at the end
of the class period when the company disclosed accounting
violations versus 8.9 percent for companies that disclosed
non-accounting violations. In the study, cumulative
excess return is defined as the excess of return over
the return on a market index.(See Feature Story)
Shows Investor Sensitivity to Class-Action Accounting Allegations
By Will Boye,
recent study of how stock prices move in response to various
events in the securities class-action litigation process reveals
that investors are more sensitive to allegations involving accounting
fraud, particularly for revenue items, than other allegations.
also points to an increased interest in securities class-action
suits in recent years, according to Paul Griffin, a professor
of management at the U.C. Davis Graduate School of Management
who authored the study with Joseph Grundfest, a professor at
Stanford Law School, and Michael Perino, a professor at St.
John's University School of Law.
study, which was based on filings over the past 12 years in
the Securities Class Action Services database,
found that issuers' stock prices dropped more than 24 percent
when the company disclosed accounting violations at the end
of the class period. For companies that disclosed non-accounting
violations at the end of the class period, the corresponding
drop in the stock price was 8.9 percent.
response to the accounting announcements tends to be larger,"
Griffin told SCAS Alert. "It's more clear
to an investor that something is actually taking place that
was wrong when there's disclosure of a restatement or
an accounting correction versus something else that may be more
difficult to prove, such as a violation of insider trading or
a violation of fiduciary duty."
from the study also shows that investors' negative response
to class-action filings, shown in the corresponding drop in
issuers' stock prices, has grown larger in recent years,
a trend that Griffin believes reflects a growing interest in
securities class-action cases themselves.
could be more or renewed interest now on following firms that
are subject to class-action filings," he said. "And
that makes sense because certainly there's a lot more
interest in securities litigation now than there used to be,
partly because of the Private Securities Litigation Reform Act
which improved upon a 2000 study that used a smaller sample
of filings, examined stock movements surrounding three dates
that define securities class-action litigation: the beginning
of the class period, the end of the class period (denoted by
a corrective disclosure of some kind), and the class-action
filing. Griffin found that investors responded to the three
events sequentially and not as unrelated events. For example,
when the price decline at the date of the corrective disclosure
was larger than average, then the decline at the date of the
filing tended to be smaller, indicating that the market was
less surprised by the news.
In a more
limited sample, Griffin found that firms' stock prices
increased by 3 percent in the days surrounding the announcement
of a class-action settlement. But the results are less conclusive
here, Griffin said, because it's more difficult to determine
precisely when the market learns about a settlement.
a little bit more difficult relative to something like a corrective
disclosure, where everybody learns about it pretty much on the
same day," he said. "I suspect a larger sample would
still show the same kind of response."
State-Federal Conflict and the WorldCom Quagmire
Bruce Carton, Executive Director
Attorney General Drew Edmonson filed criminal charges on Aug.
27 against WorldCom Inc. (renamed MCI) and
six of its former executives, including former CEO Bernie Ebbers.
Oklahoma alleged that WorldCom and the individual defendants'
conduct with respect to the company's now well-publicized
accounting irregularities constituted criminal violations of
the Oklahoma Securities Act.
of course, is the same that has been under investigation by
the U.S. Attorney's Office for the Southern District of
New York (SDNY) and the U.S. Securities and Exchange Commission
(SEC) since June 2002. Predictably, the SDNY and the SEC were
quick to express their displeasure. Both immediately issued
press releases making it clear that Oklahoma's action
had blindsided them and expressing hope that their ongoing cases
would not be jeopardized.
the SDNY nor SEC provided any real specifics on how Oklahoma's
case might negatively impact their own cases, leading some,
including members of Congress, to speculate that their protests
were largely "P.R.-related;" i.e., motivated by a concern that
Oklahoma was stealing their thunder. Indeed, when SEC Chairman
Donaldson recently told the House Committee on Financial Services
that Oklahoma's actions were "dangerous," he was confronted
by Rep. Barney Frank (D-Mass.). The ranking Democrat on the
committee challenged the SEC chairman to name instances where
state action had hurt federal action and asked Donaldson to
send him a list. Frank then commented, "I think the list is
going to be very short."
instance, however, Oklahoma's decision to proceed with
its own case does appear to be a poor one that may well do harm
to the existing federal cases. Oklahoma brings nothing unique
to the table here. It is bringing this case merely in its capacity
as one of the dozens of states with citizens affected by the
fraud at WorldCom. Asked why his office was bringing the case,
Edmonson reportedly cited a "lack of accountability,"
and stated that "the lack of any serious sanction against
WorldCom, either corporately or its individual officers is the
most compelling reason." Now, Edmonson predicted, "somebody's
going to go to prison."
also makes no apologies for his failure to coordinate with the
Feds, reportedly stating that he wrote to the SDNY prior to
taking action but never received a response. Edmonson is even
more abrupt with respect to the efforts of the SEC. The
New York Times quoted him as saying, "I haven't seen
much of that so I don't think there is much to interfere with."
Edmonson's cavalier attitude toward the existing federal
cases, Oklahoma's decision may have a significant impact
on the SDNY and SEC. Several prominent attorneys who spoke to
me about the case gave compelling examples of how that could
witnesses. From all reports, Oklahoma and the SDNY/SEC
are pursuing the same company and the same individuals for the
same conduct under the same theories. Thus, Oklahoma will soon
be bringing common witnesses to testify before its own grand
jury and at trial. Attorney Alex Bourelly noted that such testimony
will effectively "lock in" the testimony of these
witnesses, facilitating cross-examination by counsel for the
defendants in any later federal action. Bourelly is special
counsel with the law firm Baker Botts in Washington,
D.C., and is a former assistant U.S. attorney in the Fraud and
Public Corruption Section in the U.S. Attorney's Office for
the District of Columbia.
points out that because the Oklahoma prosecutors have not been
immersed in the case and the millions of documents produced
to the SDNY and SEC over the past 15 months, testimony may be
locked in that does not take full advantage of facts and theories
developed by the federal prosecutors. This possibility places
the Feds in the difficult position of deciding whether to devote
substantial resources to coordinating with and educating Oklahoma,
or to decline to do so and risk damage to their own cases.
Rulings. The "double jeopardy" doctrine
will not bar a subsequent prosecution by the federal government
following a possible acquittal in the Oklahoma case because
they are different "sovereigns." Nonetheless, David
B. Irwin, a former assistant U.S. attorney in Maryland, and
now a partner with Irwin, Green & Dexter
in Baltimore, points out that adverse evidentiary or other rulings
in the Oklahoma case could still harm the federal cases because
a federal trial court might well give weight to such rulings
in reaching its own decision on the issue.
Tangles. If Oklahoma gives immunity to witnesses asserting
the Fifth Amendment privilege, the existence of such immunity
may taint and hinder the Feds' ability to present related
evidence in a subsequent case. Irwin notes that similar immunity
issues arose in the federal case against Oliver North that followed
a congressional inquiry, and the state case against Linda Tripp
that followed the Whitewater grand jury investigation.
to Settlement. State enforcement actions like the one
brought by Oklahoma have the potential to significantly hinder
the SEC's ability to settle its cases. Michael J. Rivera, a
former attorney in the SEC's Enforcement Division, and now a
partner with the law firm Fried, Frank, Harris, Shriver
& Jacobson, believes that defendants facing an
SEC enforcement action may be inclined to litigate rather than
settle if they have a reasonable fear that any one of 50 states
may decide to file its own enforcement action based on the allegations
or findings contained in the defendant's settlement agreement
with the SEC. Defendants seeking to resolve an SEC investigation
crave comfort that an SEC settlement will resolve all potential
government actions against them, Rivera added.
are all in addition, of course, to the inefficiency of having
federal prosecutors and one or more states prosecuting the same
defendants for the same conduct.
furor over Oklahoma's actions has produced one positive
development. The SEC and the North American Securities
Administrators Association announced on Sept. 14 that
they will form a joint initiative to develop best practices
for the coordination of federal and state enforcement activities.
The stakes are high: preventing a repeat of the WorldCom quagmire.
a tentative settlement related to Enron Corp.
and its Raptor III partnership, NewPower Holdings—a
company created by Enron—has agreed to pay $26 million
to settle a class-action lawsuit that was filed in February
2002 in U.S. District Court for the Southern District of New
York and two jointly-administered bankruptcy cases currently
pending in U.S. Bankruptcy Court for the Northern District of
Georgia. Investors who purchased the common stock of NewPower
Holdings during the period from Oct. 5, 2000, through Dec. 5,
2001, are expected to be eligible to take part in the settlement.
complaint alleges that the Registration Statement and Prospectus
for NewPower's public offering on Oct. 5, 2000, was false and
misleading in several ways, including misrepresentations and
omissions concerning the adequacy of risk management systems
put in place in conjunction with NewPower affiliate, Enron Energy
Services Inc. (EES) and the true nature and purpose of certain
related party transactions. The transactions at issue included
those pursuant to which Enron allegedly attempted to hedge its
investment in NewPower through use of a partnership known as
"Raptor III," which was conceived and designed by Enron CFO
Andrew Fastow. Furthermore, NewPower Holdings and certain of
its officers and directors allegedly misrepresented or failed
to disclose: (i) that the company had not adopted effective
and appropriate hedging strategies against volatility of commodity
prices; (ii) that the company was on course to achieve its financial
goals and had sufficient liquidity to do so; and (iii) that
certain forward contracts with EES posed little risk of loss
when they were actually driving the company toward insolvency,
and were largely structured to protect and enrich Enron, NewPower's
NewPower is a retailer of gas and electricity, which maintains
its headquarters in Purchase, N.Y. The company was formed by
Enron in 1999 and began servicing retail customers in Pennsylvania
and New Jersey in August 2000.
class-action lawsuit that was filed against Foundry Networks
in January 2001 in U.S. District Court for the Northern District
of California has been dismissed. The lawsuit was filed on behalf
of purchasers of the common stock of Foundry Networks during
the period from Oct. 18, 2000, through Dec. 19, 2000.
The complaint alleged that Foundry concealed and misrepresented
certain problems it was experiencing that were impacting its
future revenue growth, including the fact that many of its customers
were having difficulty raising money. Foundry allegedly concealed
this information so that the individual defendants could sell
additional Foundry shares before the bottom fell out of its
According to the company, Foundry is a provider
of high-performance enterprise and service provider switching,
routing and Web traffic management services including Layer
2/3 LAN switches, Layer 3 Backbone switches, Layer 4 - 7 Web
switches and Metro Routers. Foundry's 6,000 customers include
the world's premier ISPs, Metro service providers, and enterprises
including e-commerce sites, universities, entertainment, health
and wellness, government, financial, and manufacturing companies.
class-action lawsuit that was filed against NVIDIA Corp. in
February 2002 in U.S. District Court for the Northern District
of California has been dismissed. The lawsuit sought to represent
investors who purchased the common stock of NVIDIA during the
period from Feb. 15, 2000, through Feb. 14, 2002.
complaint alleges the following: As part of their effort to
boost the price of NVIDIA stock, defendants misrepresented NVIDIA's
true prospects in an effort to conceal NVIDIA's improper acts
until they were able to sell at least $66 million worth of their
own NVIDIA stock. In order to overstate revenues and assets
from the fourth quarter of 2000 through the third quarter of
2001, NVIDIA violated generally accepted accounting principles
(GAAP) and SEC rules by engaging in an illegal accounting scheme.
This scheme had the effect of dramatically overstating revenues
and assets. Then, on Feb. 14, 2002, after the close of the market,
the company partially admitted in a press release that its past
accounting for its prior results may be inaccurate.
According to the company, NVIDIA is a visual
computing technology business, dedicated to creating products
that enhance the interactive experience on consumer and professional
computing platforms. NVIDIA is headquartered in Santa Clara,
Calif., and employs more than 1,600 people worldwide.
|Funds have been recently disbursed (or approved for disbursal)
in the following cases:
- Cadence Design Systems Inc.
Micro Focus Group PLC
- VisionAmerica Inc.
- Windmere-Durable Holdings Inc.
U.S. Public Pension Funds Press for NYSE Reforms
four largest public pension funds are playing a leading role
in forcing changes at the world's largest stock exchange.
The funds, which represent assets of roughly $400 billion, played
a pivotal role by calling for the ouster of New York
Stock Exchange CEO and chairman Richard Grasso following
the disclosure of a deferred-compensation- and pension-related
package totaling $187.5 million. California state treasurer
Phil Angelides, together with the heads of the California
Public Employees' Retirement System (CalPERS), the
California State Teachers' Retirement System,
and N.Y. State Comptroller Alan G. Hevesi, trustee of the Empire
State's pension fund, the nation's second largest after
CalPERS, demanded Grasso's ouster in a press conference
on Sept. 16. The NYSE board ousted Grasso the next day. But
the state officials and pension funds remain vocal in pressing
for more reform at the Big Board. The group met with 11 NYSE
directors on Sept. 24, urging the NYSE to separate its business
and regulatory functions, separate the roles of CEO and chairman,
and cut the size of its board.
York State Comptroller Alan Hevesi unveiled a new institutional
investor-based corporate governance group at the Council
of Institutional Investors (CII) annual fall meeting
in early September. He said the group, which he called the National
Coalition for Corporate Reform, could use lawsuits
as a tool for reforming companies and gaining restitution for
in a possible setback, CalPERS voted not to become a member
of the coalition immediately, citing the potential drain on
its own governance efforts and resources. Following a recommendation
by Ted White, CalPERS' director of corporate governance, the
investment committee voted to participate in the formative stages
of Hevesi's coalition but to consider joining as a full-fledged
member at a later date.
Neustadt, a spokesman for Hevesi, later told ISS's Friday
Report that, to his knowledge, CalPERS representatives
are planning on attending the first organizational meeting but
that no one has been invited to join the NCCR as of yet. "There
is no organization yet," Neustadt said in mid-September.
"I'm glad that they've had a discussion of the pros and
cons of joining something that hasn't been formed yet."
Weiss, the king of class-action lawyers and the scourge of underperforming
companies, has targeted Exegenics Inc., but
this time it's personal. Weiss and his family own 4 percent
of the stock, the Financial Times reported. Along with
suing the struggling biotechnology company for allegedly mistreating
its investors, Weiss is for the first time going after its directors.
Weiss has filed with the SEC in an effort to remove Exegenics'
board, a move that would require half of all shareholders'
tactics contrast with his usual approach in class-action suits,
which have frequently been attacked by his critics as "shake-downs"
because boards and managements often prefer to settle allegations
out of court to avoid publicity and expense, the Times
Chairman William H. Donaldson, testifying on Capitol Hill, laid
out an unfinished agenda of securities regulatory issues. Topics
included defining state-level action, requiring corporate attorneys
to "report out" to the SEC, and examining the self-governance
of the NYSE and other stock exchanges. Donaldson made the comments
Sept. 17 before the House Committee on Financial Services.
an exchange with House Capital Markets Subcommittee Chairman
Richard H. Baker (R-La.), Donaldson told the House Financial
Services committee that a new joint task force between the SEC
and the North American Securities Administrators Association
would focus on developing an assignment protocol of enforcement
efforts of state and local governments. The joint group—which
the SEC and NASAA announced days before—comes after SEC
and certain states' officials, such as in Oklahoma and New York,
have butted heads over enforcement actions. [See Point of View
Editorial for more.]
other issues, Donaldson said the commission still has not made
up its mind on what further to require from corporate attorneys.
While encouraged by the American Bar Association's
adoption of new ethics codes this summer that allow lawyers
to tell the SEC about misbehaving companies, the SEC chairman
declared that the proposition of "noisy withdrawal"
remains alive. "We have not written a rule on this yet;
we have it under consideration," he said.
outside director at Tyco International Ltd.
said the conglomerate should quickly resolve shareholder lawsuits
spurred by suspect accounting practices and fraud claims against
former executives, Reuters reported, attributing an in-house
have to get the shareholder suits behind us as soon as possible
so we can concentrate on what is the real business of Tyco,
which is manufacturing products for customers and making money
for shareholders," the newsletter quotes director George
Buckley as saying. He is chief executive of boatmaker Brunswick
Krol, Tyco's lead outside director and a former CEO of chemical
maker DuPont Co., said the resolution of pending
regulatory investigations and shareholder lawsuits are among
the company's toughest challenges, according to the newsletter.
fraud claims against Tyco have been consolidated in U.S. District
Court in New Hampshire, where Chief Judge Paul Barbadoro is
weighing the company's motion to dismiss the class-action complaint.
Lawyers involved in the lawsuits said there have been no settlement
talks, Reuters reported.
net result of providing restitution to investors from recent
corporate scandals is often likely to be pennies or dimes on
the dollar for injured investors, the Wall Street Journal
reported. According to late summer estimates by the SEC,
payouts to investors in WorldCom will run about 10 cents a share.
To put that in perspective, WorldCom shares were trading for
83 cents the day before the fraud was disclosed, but had climbed
as high $64.50 at their peak in June 1999.
there is a lot of money—and more all the time—earmarked
for distribution to investors, the Journal reported.
Last year, in response to the Enron Corp. and
WorldCom scandals, Congress gave the SEC new
powers designed to get more money into investors' hands. Since
that law, known as the Sarbanes-Oxley Act, took effect in mid-2002,
the SEC has set up at least 29 distribution funds with roughly
$1.5 billion in assets. That includes $399 million for investors
hurt by analyst conflicts of interest; the fund was largely
collected from major investment banks that were issuing research
allegedly tainted by their investment-banking relationships.
Trend: Legal Woes Induce Corporate Giants
to Embrace Governance Reforms
companies under fire in courtrooms, often from institutional
investors, are agreeing to corporate governance reforms as part
of their legal resolutions. At least six major companies this
year, including MCI (formerly WorldCom Inc.,)
have announced significant changes including bolstering board
independence levels and better oversight of executive compensation.
which is in a record-making bankruptcy proceeding and under
separate court supervision for the largest corporate fraud case
ever, a court-appointed monitor issued a long-awaited report
in late August outlining 78 reforms. MCI's board unanimously
adopted the reforms, which include:
CEO pay to $15 million per year
directors' annual pay at $150,000, 25 percent of which must
go to buy MCI stock
directors to 10-year terms and mandating retirement at age
in 2005, selecting one director who should not be renominated
each year, to permit the election of a new director
new stock options in favor of restricted stock, and expensing
short-term earnings projections and emphasizing cash flow
over earnings before interest, taxes, depreciation, and amortization
25 percent of its earnings to shareholders through dividends.
Siebel Systems Inc. was facing an early November
trial date for a shareholder lawsuit led by the Teachers'
Retirement System of Louisiana, which charged the software
giant with allocating more stock options to executives than
had been approved by shareholders. To settle the case, the company
in late August agreed to:
- Add a
new member to its board to be nominated at the company's next
annual stockholders meeting
and disclose more specific criteria for the selection of future
directors, as well as the criteria used by the compensation
committee to set awards to executives, directors, and employees
the size of the compensation committee, which is to consist
solely of independent directors
the size of the nominating and corporate governance committees
the compensation of directors to a preset level that has been
disclosed to shareholders
annual disclosure of the value of options granted to directors
and the company's five highest paid employees.
not immediately provide details of its new criteria or other
plans to enact the reforms.
and Siebel were not alone in accepting governance reforms. Independent
directors of Computer Associates International
Inc. announced at the company's annual shareholder meeting that
they were considering adding one or more independent directors
to the board, Dow Jones Newswires reported. Federal authorities
are investigating the company's accounting, and in recent years
CA has been the focus of angry shareholders led by Sam Wyly.
The company paid him $10 million last year to drop his proxy
it has revamped its board, adding independent members and instituting
term limits, and it points out that it has begun expensing stock
options. The company also agreed to settle a collection of shareholder
lawsuits in late August by issuing 5.7 million shares to plaintiffs
who had alleged accounting misdeeds, Dow Jones said.
August, Homestore Inc. agreed to pay $63.6
million in stock and cash to settle a class-action lawsuit with
CalSTRS. Under the tentative settlement, the
online real estate technology company agreed to two-year board
terms, adding a new shareholder-appointed director and minimum
stock ownership requirements for directors, the Associated Press
reported. Homestore further agreed not to use stock options
for future director compensation.
Hanover Compressor Co. shareholders with more
than 1 percent of the company's common stock will be allowed
to nominate two independent directors to the company's board
under a lawsuit settlement with GKH investment
groups. Hanover is a provider of natural gas compression services.
It agreed in May to the settlement, which also provides investors
with more than $80 million in cash, stock, and debt instruments.
Hanover also agreed to rotate its independent auditor every
in late March, Sprint Corp. agreed to groundbreaking
changes as part of a settlement of shareholder lawsuits following
the failed merger with WorldCom. Sprint's board unanimously
approved a set of reforms involving independent director and
board standards, the end of staggered terms, limitations on
compensation and stock options, and other measures. In addition,
Sprint agreed to pay $50 million in cash to settle one of two
shareholder suits filed against the company and led by Amalgamated
Bank of New York. By the time of the settlement, Sprint
had already decided to expense stock options and form a nominating
and corporate governance committee.
article originally appeared in ISS's Friday Report
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