In April 1998, Cendant announced a repeat of 1997 results, including a reduction in net income of $ 100 million because of several accounting irregularities. Then, July 14, 1998 Cendant announced a further adjustment of the financial results for 1995, 1996 and 1997, including all quarters following the recognition of revenue and mismanagement fictitious cookie cutter parts. At the end of August Cendant SEC filed a report showing a reduction in operating income of $ 500 million, areduction of net income before taxes of 297 million U.S. dollars and the impact on earnings per share. As a result, the market price of the share declined from a peak of $ 35. in April for $ 11. for action in August. Normally, a decline of 10% of the share price after a negative notice is enough to trigger a class action suit within 72 hours. Here, the decline was stronger: 69%.
Fifty complaints were filed in U.S. District Court, which were consolidated by the court with different levels of governmentinvestors as lead plaintiffs. Hundreds of thousands of documents produced by Cendant, Ernst & Young and several suspects. An investment bank and a team of lawyers have been retained as expert witnesses. Cendant settled for $ 2.8 billion. Ernst & Young settled for $ 335 million. This settlement was followed by even bigger ratings in the case of WorldCom ($ 6.2 billion) and Enron (7.1 billion U.S. dollars, pending final approval of the court).
Enron directors agreed to settleclass action against them for 168 million U.S. dollars as their share of the settlement. Make sure that a majority of the costs, but left their conditions which required the directors personally pay $ 13 million. WorldCom directors had a settlement that require their proportionate share, $ 54,000,000 of which she had to pay 18 million U.S. dollars on the basis of individual responsibility. The directors did not admit illegal in the liquidation.
Backdating stock options
The scandal of backdating Uscurrently reading The Wall Street Journal could, according to scientists from more than 3,000 listed companies. Lawyers, lawyers and actor began to mobilize. This potentially vast arena of litigation and expert testimony occurred due to the practice in the last ten years of listed companies granting stock options to key management personnel in-the-money, but not recorded as compensation costs, in violation thus accounting principles,false statements and tax obligations, and every quarter since the practice began. In other words, the data assigned to the options with the benefit of hindsight that a date prior to the effective date of the grant have been. The SEC has just begun a study of eighty companies, and the list is expanded daily. The DOJ and U.S. Attorney offices of logistical decisions about how to foretold the event of load distribution. Several cases were filed. At least, companiesinvolved will face civil charges by the SEC, a huge adjustment, and then virtually guaranteed class action and derivative suits. The clothes have a base that the companies concerned and their managers and administrators are guilty of breach of fiduciary duty, negligence, unjust enrichment and violations of the SEC Act of 1934. back-dated options have allowed the defendants to millions of dollars in illegal profits reap exceptional costssociety. A company only recently filed 34 suits derivatives. It 's the biggest area of civil litigation in history that begins to unfold before our eyes.
Shareholder Suits derivatives
shareholder derivative suits are still filed in connection with class action. A main concern is that directors and managers will find themselves without coverage for defense costs, premiums for legal fees and a monetary agreement actor. Director andOfficer may exclude insurance payments for non-civil disputes, as if some types of fraud involve SCIENTER exist. Even if he does, usually does not begin coverage until an indictment is brought. Another area that contains elements of risk that the payments are often made on a first come, first served basis. In other words, the claims of order. This can often lead to a shortfall in the event of a solution.
There is an increasing trendfiling of suits derivatives, which are recorded in the first place, before the national courts, as opposed to class action, filed in federal courts. State courts often as plaintiffs to recover non-unanimous decisions (mandatory in the federal system) and some state laws allow lower standards for the utility of the results. This stand-alone derivative suits are normally in the event of breach of fiduciary duty, violations of proxy, on compensation and breach of duty or obligationloyalty.
The Business Judgement Rule supports the decisions of the board on, but does not address these violations. For example, it is a violation of agency decisions include unintelligent, thoughtless actions, illegal or a violation of federal laws. The lack of representation of demand management is another example of this type of violation.
A solution to the appropriate D & O coverage is only one side policies that protect directors and officers against losses notnormally be reimbursed. These policies generally provide coverage, even in adverse conditions, including business failure, where the boundaries of traditional policies are exhausted and where the normal policy excludes payments. Some states do not protect the unsuccessful defense against corporate derivative suits in such cases is not increasing, and the policy of one side only provide coverage.
The Private Securities Litigation Reform Act of 1995, providedchanges and a haven for the company in a matter of clothes derivatives - in forward-looking statements. Tenuous conclusions are not allowed in the plaintiff advanced. Complaints must specify the reason for which the false or misleading statements of the company were. Under the safe harbor provisions of the Reform Act, a company is not responsible for inaccurate forecasts if such claims are properly identified and accompanied by a cautionary statementindicates that actual results may differ from expected results, and there is no liability if the plaintiff does not prove the forward-looking statement was made with knowledge that it was misleading. These statements are often made orally to the meeting analysts' , so this gives a degree of certainty in corporate public relations department. However, as the option backdating practices, lack of a safe harbor.
Trading Models
The economic baseof these settlements is a test area in an adversarial process. In a monograph in the early 1990s, several authors have criticized the use of business models to estimate aggregate damages in class action, claiming that the results were not reliable and often overestimated by as much damage as 74%. Daubert grounds have been contested in a variety of proposed models. In Daubert, the Supreme Court directed federal courts to consider four factors in evaluating the evidence of experts under Federal Rule of Evidence702: (1) the widespread adoption of the economic model, (2) potential rate of error in precision, (3) peer review or publication, (4) whether the theory is tested. To recognize that trade models proposed do not meet these standards, the Court is concerned if the model is tested if the model is accepted by professional economists.
The Journal of Legal Economics is a good starting point for obtaining a fixed assessment. This is a doublerefereed journal. Each manuscript is reviewed by at least three qualified persons, in addition to the editor. It was designed as a forum for authors to contribute, both lawyers by profession and professions quantitative accounting, economics and finance, in order to provide constructive ideas to colleagues. It is designed to be a useful tool for the application of research and theory.
In theory, the out-of-pocket loss is the amount of damage in the class of open marketfits. Therefore, a buyer defrauded the member of the class to recover damages, attorney's fees apply unless it can vary from 15-30%. However, since this is the actual trade data is buried in archives, the models were chosen to produce tangible results. The Private Securities Litigation Reform Act of 1995 leaves the door open for the court to the most reliable method of proof of damages available to choose. There are also two-trader model, which assumed, probably rightly, thatthere are passive investors and traders. Retailers, of course, have a greater chance of obtaining and selling shares, and then uses this model to estimate the parameters of the damage, with damage estimated by using certificates of registration data. A trader models often significantly overestimated damage 90-98%. Assumptions can lead to bias. models with three traders also active investors high current, low activity of investors and intraday traders (who do not use at night to engagepositions). Often these operators can amount to one third of all trading one.
Recommendations
A successful strategy sometimes is to create a special litigation committee (SLC) that the content and form of independence. The committee has the responsibility of preserving the forensic teams for thousands of pages of documents and interviewed hundreds of witnesses to be examined. A company has only 2 million documents review and expects to pay $ 70,000,000only a report of its findings. The purpose of this committee is for the Court to provide business-judgment rule "derived confidence to dismiss the appeal. However, this procedure is not as simple and easy as it sounds.
Delaware and other states allow the Council to respond to a suit for appointment of a SLC should be independent directors. While the SLC is in progress, the seed has been derived. However, in the adversarial process, which iscontinues to operate, the motions presented, which is often in question the true objectivity of the SLC. Delaware courts often slamming the door to the SLC, finding the case against them and let go. If the SLC members have significant social ties to suspects in terms of relations between past and future that is a disqualification. Another example is a public declaration by the head of an SLC at any time prior to the release of the report that shows bias. It 'hard to believe that this would happen, butin specific cases and that has destroyed the defense of society from the beginning.
Drivers often share institutional and social relations on the basis of onboard service. This makes it particularly difficult to find an objective third party. Warren Buffett explained this way: "Why directors intelligent and dignified, not so unfortunately the answer lies in the inadequate legal - has always been clear that the directors are required to protect the interests of shareholders to be - but?I had a place for meeting atmosphere 'call. "Council of applications for membership will be rejected by a record number because of the perception of a risk manager in this environment. However, the provisions on corporate governance are much more serious and warrants Sarbanes-Oxley them, these recent revelations almost guarantee his place in history.
backdating of options: corporate restructuring
Since August 17 the Wall Street Journal has included a study of 87companies that have launched probes, announced changes to the dismissal of management or the Justice Department investigation had in their stock options practices. The SEC filed a civil complaint against employees of public companies, namely that they are working on a ten-year fraudulent grant exclusive, in-the-money options to themselves and others by backdating stock option grants to coincide with prices closing of their historically low inventories. Those complaintsthat the former directors collectively millions of dollars in ill-designed compensation received through the exercise of illegally backdated option grants and the subsequent sale of its common stock.
In a separate case, U.S. Attorney 's offices are sealed criminal complaint charging conspiracy to violate the leaders anti-fraud provisions of federal securities laws, wire fraud and mail fraud. It 'been argued that the retroactive option grants and secret funds blacks optionwere "the deception of the highest order" to shareholders. Managers, according to the SEC have repeatedly used to analyze below to select when the closing price of its common stock was equal to or near a quarterly or annual low. The complaints further allege that well-regulated accounting principles in effect at the time, companies that have granted in-the-money options are required to charge an expense to record and report these amounts in the documents with the Commission. L 'Managers are also responsible for violations of the provisions of Sarbanes-Oxley certification officer of the federal securities laws. Coercive measures, civil penalties, disgorgement with interest prejudice, and an officer and director bars against each of the suspects is requested.
HOW TO LIGHT The backdating
It is useful to examine how the practice originated in that the reorganization of its internal control policies can be effective. Executivesmanaged and controlled the process of option grant backdating and start schemes. Among other things, have chosen in particular the data retrospectively, by interfacing with the Remuneration Committee. forgivable loan documents with false dates, approved by the Compensation Committee. unscheduled grants were the modus operandi. A spreadsheet containing the lists of proposed purchaser. At one point, the leaders "collected" from the date of grant to look back to their historical stockprices and, with hindsight, the choice of the date of grant which amounted to a date when the shares were trading at a relatively low. The master list was then submitted to the Compensation Committee for approval.
unanimous written consent forms on grant proposals were sent to members of the Compensation Committee for the signature. He was known among those managers who were given the "low-ball" look-before dates you have chosen. Remuneration CommitteeMembers are generally unaware of the impending grant of a first to receive the master list. The committee members then signed, but not the date of their copies of the consensus and has given them. On the basis of their involvement in the process of option grant, each defendant knew or were reckless in not knowing that the unanimous written was false, because "as" data that have been introduced permits and is reflected in the books of business documents and not the truegrant dates.
The leaders knew that any corporate action to approve options grants actually happened in the "as of" date. They knew they were those who had given the award by the look-back tables, with the benefit of hindsight. He had studied the historical citations and chose a date with a low price. Options back data that the program of accelerated aging, as the company has used the retroactive dateFor the purposes of ripeness, not the date of actual damages for approval. Many of the subsidies are at or near the lowest price for the fiscal quarter or year. In an article published by The Wall Street Journal, the patterns of stock option grants have been analyzed and astronomical units, some approaches is six billion, have been determined by such aid would fall on the data network for the earnings net of a business warehouse for the event.
L 'Secret backdating schemes have been suspicions that the company a higher compensation to executives and employees against granting them in-the-money options, and to avoid the cost of in-the-money options as a compensation expense in order to mask and then prevent the reduction of the Company's net income and EPS. In addition, some large institutional investors have long been compared to stock option plans that grant options allowed under the fair market valueunderlying stock at the time of grant. This is the basis for tens of billions of dollars in derivative lawsuits in recent weeks against associates from law firms on behalf of large institutional investors.
California Public Employees' Retirement System (CalPERS) is the largest U.S. public pension fund with over $ 200 billion of total assets. Have recently in an open letter to the chairmen of the compensation committees of several portfolio companiesissues relating to employee stock option backdating practices. The letter contains allegations of implications, such as lack of oversight by the board of directors, weak internal controls, weak internal and external audit practices, poor accounting, significant fiscal impact on the people for the backdating of options, and problems with executive Compensation Plan Administrator.
Senator Chuck Grassley of Iowa, chairman of the Senate Finance Committee,publicly stated: "It 's a great thing for a manager to make a profit, as it has improved its business, but it is quite another thing to great profit, because he plays fast and loose with the dating of stock options outside the corporate suite, t American Gio 'get to choose to share their dream. The market determines the price. "
The CFA Institute recently published an open letter to the SEC stating "In the case of post-dating, senior executives (and perhapsdrivers) used for science or post-closing market prices to determine when a retroactive effective date of share-based awards for the return of these awards to improve. This practice seems to be involved false accounting, the financial reporting requirements in order to circumvent the "variable" subsidies may be in conflict with the governance requirements for the pricing of stock options, and ultimately can lead to penalties and companies engaged in taxthese activities, damaging shareholders, the value even more. "
RECLAMATION
In the real world, the best attitude is one of proactive remediation before they begin a review by a third. Materiality thresholds should be considered according to ESA Bulletin No. Thresholds 99 and Sarbanes-Oxley. If the threshold is not broken, there will be no adjustments made. If an adjustment, this almost guarantees an investigation by the SEC and the creation of a "materialWeakness "from one of the external auditors. Findings material weakness can lead to loss of important blocks of market capitalization after the announcement.
The problems are not restricted to IT companies. Their excess returns in the studies conducted by academics at the University of Iowa and others were what first caught the attention to the problem, but its scope of IT companies. It is estimated that nearly 3,000 companies involved. In many of these casesmanagement did not question his integrity, and the element of SCIENTER does not exist. The rest of the public companies need to review procedures and Sarbanes appropriate research to ensure that they are not interested in the future. Early studies of proxy statements for statistics on options for the implementation of Sarbanes Oxley reporting requirements changed in two trading days of August 2002 indicated the problem existed in 1996, with most companies.Grant patterns in excess returns following option pricing largely began in the mid-1990. One company alone has almost two million documents that must be examined for the extent of the retroactivity problems fixed. I understand the research, forensic and related professional fees, in this case and one purpose only budgeted for 70 million U.S. dollars. This does not include defense spending or regulations on class action and derivative lawsuits.
Without going into specific detailswhat is called the tone at the top should be fixed compensation committees around the world today. Administration and in particular the Audit Committee and Compensation Committee members should be re-educated to the needs of governance to meet both the spirit and letter of the law. compensation programs should not be driven by competition, but with superior performance over the long term. Full information is required for proxy statements. Independent Directorsare an important need. The experts should be added to the compensation committees. If not, then others should be hired consultants who are experts. Incentive Compensation issues, dilution, options and performance facilities, revision of prices, and a variety of fiscal and governance issues must be addressed. Steps should be taken to ensure that the evaluations of the Board of Directors and Committee of fair compensation and would be advised to abstain from using resources to meetlegal and fiscal requirements for managers involved in the violations. This can lead to a further suitable derivatives. Independent detailed case studies with a strong support structure of the director to be taken. The effects of the Sarbanes must be fully understood and addressed. Lying to the auditors is now a federal crime. Insider manipulation is not tolerated by the market nor the supervisory authority. Justice officials havemade it clear that managers can, possibly in jail for backdating stock options face. serious change and corporate governance should now follow.
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