Look Who's Left Standing

Four years after regulators launched a task force to stamp out business corruption, numerous chief executives are on their way to prison, two of the nation's biggest accounting firms are defunct or on probation, and investment banks have shelled out billions of dollars in settlements.
But lawyers serving fraud-ridden companies have emerged relatively unscathed.

The LBO Gang Storms the Valley

High-powered private-equity players are talking frustrated techies into the idea of going private—and making billions. Business Week OnLine

Graceful exits

The market for initial public offerings has virtually ground to a halt for venture-backed companies this summer, but it's still been a pretty good month for venture capital firms cashing out of portfolio companies, thanks to robust M&A activity.

Home Depot Alters Voting, but Critics Seek More Change

Home Depot, the largest United States home-improvement retailer, took another step yesterday to repair its image with investors after an acrimonious annual meeting in May, announcing that it had revised company bylaws to require that each director be elected by majority vote. But shareholders and corporate governance experts seem reluctant to stop pressing the company for further changes, including revisions in executive pay policies and director oversight.

Schering-Plough to Pay $435 Million, Plead Guilty to Settle Probe

Schering-Plough has agreed to pay $435 million and will plead guilty to conspiracy to settle a federal investigation into its drug sales and marketing practices and its clinical trial programs. The Kenilworth, N.J.-based company will pay $255 million to resolve civil aspects of the previously disclosed investigation. A subsidiary, Schering Sales, will pay a criminal fine of $180 million and plead guilty to one count of conspiracy under the agreement, which is subject to court approval.

London Regulator Widens Scrutiny of Hedge Fund Managers

London’s financial watchdog is increasing the number of hedge fund managers under supervision to monitor the growing influence of activist funds.
The Financial Services Authority said it was widening the number of hedge fund managers under supervision after reviewing the risk posed by activist funds to the markets.

Next for Nest Eggs: Hedge Fund Strategies?

Hedge-fund-like investments may soon be available to ordinary folks through — of all things — their retirement plans. So reports Alternative Investment News via DailyII.com, which tells us that some individual retirement accounts already allow investing in mutual funds that act like hedge funds, which are loosely regulated investment pools known for high returns, high risks and high fees. Some 401(k) plans may soon do the same.

Forbes: The Asbestos Game Goes On

Even as states crack down on frivolous lawsuits by people with no asbestos symptoms, asbestos trusts established by bankrupt manufacturers are still paying tens of thousands of claims each year based on exaggerated or false stories of how people were exposed to their products. Here’s the story from Forbes’s Dan Fisher.
But the trusts are overseen by plaintiffs’ lawyers, like Dallas firm Baron & Budd and New York firm Weitz & Luxenberg. So can’t they be counted on to weed out false claims?

M&A Remains The Most Popular Private Equity Exit

Mergers and acquisitions were the most popular way to get some money back for private equity firms in the U.S. in 2005, followed by dividend recapitalizations, according to a study by SCM Strategic Capital Management, a Swiss PE advisory firm.

Nonprosecution Agreement Doesn't Guarantee a Dodged Bullet

Most companies assume that they've successfully dodged a bullet when they sign a nonprosecution agreement with the government. That's certainly what shipping giant Stolt-Nielsen S.A. thought when its subsidiary struck a deal three years ago to avoid federal criminal charges for antitrust violations.
But shortly after the deal was concluded, the government said it would indict Stolt-Nielsen anyway because the company had broken the pact. Stolt-Nielsen maintains that the government is the one who isn't living up to the deal, and in July asked the U.S. Supreme Court to block the indictment.

Mass Torts & Class Actions: Going the Way of the Dodo?

Mass torts and class action lawsuits are on the wane, reported the Wall Street Journal’s Paul Davies in the Weekend Edition. “The future of mass torts and class actions is very much in question,” said NYU law professor Geoffrey Miller. Some reasons why:

The Milberg Weiss Effect: This year, new securities-fraud class-action lawsuits are down 45%, to 61 through June from 111 in the first half of 2005, according to a new study. (One reason: The indicted Milberg Weiss has filed just 17 lawsuits in the first six months of 2006, versus 55 in 2005’s first half — and hasn’t filed a class-action case since its indictment.)

The Controversial Silicosis Litigation: Federal Judge Janis Jack found last year that nearly 10,000 claims of lung damage from silica dust “were manufactured for money.” The case involved 200 companies that manufactured or used silica, which allegedly causes silicosis, an incurable lung disease. Judge Jack’s decision – detailed in this NPR feature – has also reportedly chilled asbestos litigation, which involves many of the same lawyers, doctors and plaintiffs.

Legislation: Congress passed a tort-reform bill earlier this year that makes it easier to move many class-actions from state to federal court, where judges are more likely to dismiss dubious claims. And several states – including Florida, Georgia and Texas – have passed “medical-criteria” bills, requiring physicians to certify a patient has been harmed by asbestos or silica, and not simply exposed, before a lawsuit can proceed.

Prudential’s Improper Fund Trading Called ‘Unprecedented’

Details of Prudential Financial’s $600 million settlement with regulators were released Monday afternoon, following several reports that a deal was in the works to resolve charges of improper trading in mutual funds.
Stephen Luparello, senior executive vice president at NASD, said, “The scale of the fraudulent market timing activity that was allowed to occur through this firm and that went unchecked by the firm’s supervisory systems is unprecedented.” The release stated that employees of Prudential’s former brokerage unit allowed improper trading in at least 1,600 customer accounts between 2001 and 2003.

Buyback Binge: Bane or Boon?

S&P 500 companies snapped up their own stock at record levels in the second quarter. For investors, the buyback boom means it's especially important to look beyond per-share earnings when evaluating a company's quarterly performance, analysts say. It might also be a reason to pay more attention to M&A prospects. However, buyback watchers don't expect companies to repeat the mistakes of the late-1990s rash of repurchases, which came back to haunt some stocks after the bull market went bust

U.S. Management-Led Buyouts On The Rise

An interesting piece by Caroline Humer ran on the Reuters wire a few days ago titled U.S. Management-Led Buyouts Soar. What's most astounding is her statistic on U.S. management buyouts.
"So far this year, $74.7 billion has been announced in U.S. management buyouts compared with $9.2 billion last year, accounting for more than 9 percent of U.S. merger and acquisition deals, up from 1.2 percent in the year earlier period. That growth also outpaces the growth in U.S. private equity and M&A overall, up151 percent and 25 percent respectively this year."

Prominent Corporate Lawyers Didn't Stop Shady Options Deals

A review by The Recorder of SEC filings for 17 companies that had prominent Silicon Valley lawyers serving as directors has uncovered questionable option grant dates for executives at five. While the grant patterns aren't necessarily evidence of wrongdoing, they do suggest that suspect pay practices at startups may be more commonplace than previously thought. They also raise new questions about what some name-brand lawyers knew, or should have known, in their roles as directors.

Who Signed Off on Those Options?

AS Silicon Valley companies competed for top talent during the heady days of the dot-com boom — luring stars with plump signing bonuses and the most highly prized manna of all, stock options — Mercury Interactive, a highflying software concern, joined the fray with gusto.

Whispers of Mergers Set Off Suspicious Trading

The boom in corporate mergers is creating concern that illicit trading ahead of deal announcements is becoming a systemic.
It is against the law to trade on inside information about an imminent merger, of course. roblem.
But an analysis of the nation’s biggest mergers over the last 12 months indicates that the securities of 41 percent of the companies receiving buyout bids exhibited abnormal and suspicious trading in the days and weeks before those deals became public. For those who bought shares during these periods of unusual trading, quick gains of as much as 40 percent were possible.

A Private Eye for Investors

As the number and size of hedge funds balloons, big investors -- funds of funds, pensions and family offices -- are increasingly turning to private investigators to test the waters before putting their money in.

New landscape may help Rite Aid

Rite Aid's announcement that it is paying $2.54 billion to buy nearly 2,000 drugstores carrying the Brooks and Eckerd names along the East Coast and Mid-Atlantic region is sure to get the attention of regulators at the Federal Trade Commission. While a review is likely, the deal is unlikely to suffer the same fate of a Rite Aid deal a decade ago, according to The Deal.

Is Google a Mutual Fund?

Companies whose securities comprise more than 40 percent of their assets can fall under restrictions that govern the mutual fund industry.

So Google, which has increased its cash and securities to almost $10 billion since its 2004 initial public offering, asked the Securities and Exchange Commission late last month for an exemption.

Share Buybacks Hit Record Level

Hear that giant sucking sound? Those are shares of stock being siphoned out of the market by companies buying them back. Standard & Poor’s on Wednesday announced that buybacks among companies in its S&P 500 index hit a record in the latest quarter and are continuing to grow at an unprecedented pace.

S&P also found that companies are now spending as much on stock buybacks as they are on capital expenditures. Companies in the information-technology sector are leading the buyback pack.

Fannie Mae Says It Will Avoid Prosecution

Fannie Mae, the mortgage finance company, said today it has been informed by the Department of Justice that no charges will be filed in connection with billions of dollars in accounting irregularities.
The company “has been advised by the United State’s Attorney’s Office for the District of Columbia … that it is discontinuing its investigation and does not plan to file charges,” said a statement from Fannie Mae today.

Deferred Prosecution Agreements On Trial

In light of Frank Quattrone’s sweetheart deal with the feds, The WSJ’s Laurie Cohen asks, “Do these ‘deferred-prosecution’ pacts have any teeth?”

Some legal commentators say the pacts don’t sufficiently punish wrongdoers and are simply face-saving mechanisms for prosecutors.

So which is it: Do deferred prosecution agreements secure “cooperation and real reform” or are they a toothless face-saving tool for prosecutors?

Bombshell Tax Decision From D.C. Circuit

The D.C. Circuit ruled Tuesday that the IRS may not tax the money plaintiffs receive as compensation for emotional distress and other intangible injuries. In striking down as unconstitutional Section 104(a)(2) of the Internal Revenue Code — which says that only compensation for physical injuries is tax-exempt — the court said, “Albert Einstein may have been correct that ‘[t]he hardest thing in the world to understand is the income tax,’ but it is not hard to understand that not all receipts of money are income.”

If the Supreme Court affirms or the agency adopts the court’s finding, plaintiffs nationwide will avoid paying taxes on awards in a myriad of cases, from civil-rights to employment-discrimination.

Icahn Reaches an Agreement With ImClone

The billionaire investor Carl C. Icahn said yesterday that he had reached an agreement with the biotechnology firm ImClone Systems to avoid a possible proxy contest.

In a filing with the Securities and Exchange Commission, Mr. Icahn said ImClone’s board offered to put him and three of his recommended candidates on the management slate of director nominees for the 2006 annual stockholders’ meeting, which is scheduled for Sept. 20.

Ford Motor considers going private

Ford Motor is considering taking itself private, USA Today reported Thursday, citing a source with direct knowledge of the discussions. Such a move would give the ailing automaker time to restructure operations outside the glare of critics. Meanwhile, Ford is also evaluating the prospects for alliances with other automakers as it moves ahead with its own revamping efforts, according to The New York Times.

Gateway Receives Bid After Hedge Fund Shines Spotlight

In just two days’ time, a hedge fund has managed to do for Gateway what its own earnings reports, pledges of growth in new markets and new C.E.O. haven’t been able to do for months: get investors to once again take notice of the nation’s No. 3 personal-computer company.
On Tuesday, shares of Gateway shares climbed as much as 12 percent after the disclosure by hedge fund Harbert Management that it has acquired 10.2 percent of Gateway’s outstanding stock.
And late Tuesday, Gateway said it received an unsolicited inquiry to acquire its retail operations from Lap Shun (John) Hui, owner of Joui International and a former owner of e-Machines.

A Change in Control: What Happens to the Executives?

One critical issue for an acquiring company in any proposed merger or acquisition is how to retain executives and key employees of the target. The introduction of a third party -- an acquirer -- into an employer-employee relationship can stress its bonds to the snapping point and generate a variety of reasons for an executive to want to leave.

Report Slams Options ‘Insta-Vesting’

Amid the recent scandal over the backdating of stock options, another options practice — a perfectly common and legal one — is also raising questions.
Jack Ciesielski, publisher of the Analyst’s Accounting Observer newsletter, has done an examination of accelerated options vesting, in which companies decide to make employee stock options instantly exercisable, scrapping the previously agreed-to waiting period. As reported Tuesday in The San Francisco Chronicle, he found 887 companies that accelerated vesting in the past two years.

Judge Approves Settlement for Former Banker Quattrone

The court on Tuesday signed off on a deal between prosecutors and Frank Quattrone that will allow the former investment banker to avoid a third trial on obstruction charges. Provided he does not break the law for a year, Mr. Quattrone, who was Credit Suisse’s star technology investment banker at the height of the Internet boom, will also be allowed to return to the financial sector. He admitted no wrongdoing under the deferred prosecution agreement.

HCA leveraged buyout gets US antitrust approval

U.S. antitrust authorities said on Monday they had approved one of the biggest buyouts in corporate history, giving the green light to a group of private equity firms to acquire No. 1 U.S. hospital operator HCA for about $21 billion in cash.

Harbinger seeks change in Gateway

Hedge fund Harbinger Capital Partners led a group that has bought a 10.2 percent stake in Gateway, saying it wants to install new management to revive the struggling PC maker.

Law Firms Brace For Bankruptcy Uptick

Will there be more bankruptcies next year? Many big law firms are betting on it, even though this year is expected to mark a 12-year low in corporate bankruptcy filings, the National Law Journal reports.
Despite the lull, some lawyers say they are seeing a rise in the number of corporate clients starting behind-the-scenes “restructuring preparation.” One lawyer told the magazine that his firm is “very bullish” on the prospect of more bankruptcies. Sectors seen as vulnerable include automotive, telecommunications, retail and health care.

Bashing the Management Buyout

Management-led buyouts may be hugely popular these days, but they continue to draw skepticism in certain quarters.
In his latest column, The New Yorker’s James Surowiecki offered up his distinctly negative take on the phenomenon, writing that such transactions “create huge conflicts of interest” and are “often simply an opportunity for insiders to pick up assets on the cheap and flip them a few years later for fantastic sums.”

Introducing the ISS 2006 Proxy Season Review

Most of the 2006 proxy season vote results are in. Highlights from ISS' 2006 Proxy Season Scorecard to-date include:
--Majority vote to elect director proposals received an average level of support of 47.8 percent, up from 43.7 percent in 2005.
--Use performance-based vesting proposals received an average level of support of 41.5 percent, jumping more than nine percentage points from 2005.
--Disclose political contribution proposals received an average level of support of 20.7 percent, which is more than double last year's average.

Spitzer Returns Campaign Checks to Avoid Conflicts

As Attorney General of New York state, Eliot Spitzer has cultivated a squeaky-clean image by rooting out corporate wrongdoing. As a candidate for New York governor, Mr. Spitzer has become heavily dependent on corporate donations, raising a hefty $11 million in the first half of this year — at least $1.2 million of it directly from companies.

Sometimes, those two roles come in conflict. So far, Mr. Spitzer has returned checks from 93 contributors who offered a total of $250,368 to his Democratic gubernatorial run. Many of the donations came from companies and individuals who have tangled with his office in the past, are under criminal investigation or are presumed to be connected to a continuing probe, state records show.

Most Proxy Fights End in Settlements

Most proxy fights aren’t clear-cut, zero-sum battles between companies and shareholders, like the one going at Heinz, according to the Corporate Governance Blog. In fact, the majority of them — 61 percent — end in a settlement.
In many settlements, management is able to “save face,” by not appearing as an outright loser in a shareholder vote. And shareholders are usually able to obtain concessions – for example, winning board seats. “The dissidents often are able to get everything they asked for and appear reasonable in the bargain, which can only enhance their options in future proxy fight negotiations,” the blog concluded.

US should emulate London's AIM for small public offerings

In his Business Law Prof Blog, Dale Oesterle states:

"The London Stock Exchange is successfully marketing a low cost public offering process to small companies, entitled the Alternative Investment Market (AIM). AIM caters to companies in the micro to small cap universe, offering access and liquidity comparable to NASDAQ at a lower total cost to the issuer. Small companies can raise capital on the AIM with fees and underwriting charges that are forty percent of those incurred in the United States markets. Under-pricing losses are less as well. The listing process takes only eight to twelve weeks, compared to the six to eight months required in the United States."

F.B.I. Casts Wide Net for Fugitive Ex-Chief of Comverse

The hunt for Jacob Alexander, known as Kobi, was stepped up yesterday after the Federal Bureau of Investigation declared him a fugitive and said agents were seeking his arrest.

Mr. Alexander, the former chief executive of the communications software company Comverse, was charged, along with two other former Comverse executives, last week in connection with their suspected involvement in a stock options scheme that, prosecutors said, used a “secret slush fund” to dole out options to favored employees.

Mr. Alexander, who never showed up at his arraignment, transferred $57 million to Israel, fueling speculation he may have fled there. The F.B.I. also said yesterday that a “red notice’’ was issued for Mr. Alexander with the international police organization Interpol. Such notices alert countries that an arrest warrant has been issued.

Tech Offerings Slammed in Rocky I.P.O. Market

With a batch of scuttled I.P.O.’s this summer adding to the void, the market for initial public offerings has slowed down this year in the face of rising interest rates, record oil prices and geopolitical jitters.

Once the darling of the I.P.O. market, the tech sector has been particularly hard-hit after the lackluster debut of Vonage. Most attempts by tech firms since Vonage have either been pulled or heavily discounted, such as last week’s I.P.O. from Qimonda.

Porsche battles government's grip

Porsche paid 3.3 billion euro ($4.22 billion) last year to become the biggest shareholder in Volkswagen, but the German government still has a bigger say over VW, the largest European automaker. Now Porsche is thinking of joining a battle at the European Union level to break the politicians' grip.

Senators Voice Concern on S.E.C. Hedge Fund Case

The chairmen of two Senate committees have written to the head of the Securities and Exchange Commission saying they are troubled by the agency’s handling of accusations that political considerations impeded the investigation of a prominent hedge fund, Pequot Capital Management.
They also told the S.E.C. chairman, Christopher Cox, that agency officials “were seemingly unaware” of important documents and meetings involving its investigation of Pequot.

Executives Warn of ‘Witch Hunt’ in Options Probe

Many tech executives are now beginning to use the phrase “witch hunt” to describe the growing scandal. While few doubt there were cases of outright fraud that should be punished, they fear that the widening probe has now reached a counterproductive level. Rather than just catching scofflaws, well-meaning companies and executives are being wrongly impugned by the scandal, in their view.

Quick Flippers? Not These Firms

It is not unusual, especially these days, for private equity investors to be slammed as short-term opportunists. These funds, so the thinking goes, use their massive investment pools to buy companies, load them with debt, pay themselves hefty dividends and then bail out — quickly. What’s left gets foisted onto public shareholders.
Dismissing these firms as mere flippers fails to show the full picture, however. As The New York Times’s Andrew Ross Sorkin argues in his latest column, private equity investors often stay invested in their portfolio companies for years as they try to cook up a profit.

The Economist: Alliance Against Google Looks Like 19th Century Europe

Google, according to The Economist, is much like Napoleonic France. Google’s rivals – Yahoo, eBay, and Microsoft – are much like France’s enemies, Russia, Prussia and Austria. They should ally against their enemy to create a “balance of power.”

Google’s recent agreements with Viacom and News Corporation are “hard blows” for Yahoo and Microsoft’s MSN, the magazine said.

While the three powers arrayed agains Google already cooperate in some ways, “The strongest alliance, of course, would be a merger or takeover,” according to The Economist.

Private Equity’s Boom May Have Lost Steam, Fortune Says

Add Fortune’s voice to the growing chorus proclaiming that the big private equity boom of recent years will soon come to an end.
The magazine’s Adam Lashinsky argues that Wilbur Ross’s $375 million sale of his investment firm, W.L. Ross, to Amvesco is only the latest sign that the market has topped. As the $33 billion HCA buyout and Blackstone’s $15.6 billion fund set new records, observers now say that the market increasingly resembles those in 1987 and 1998, when private equity began seeing diminishing returns on their investments.

Is Dealmaking Getting Harder in China?

A new set of rules governing mergers and acquisitions in China could make it even more difficult for foreign companies to take stakes in the world’s fastest-growing, and toughest, market, The Financial Times’s Lex column argues. But that’s not to say there might not be some good as well.

Takeover deals in China keep hitting the brakes; aborted efforts include the Carlyle Group’s $375 million offer for Xugong Construction Machinery and various Goldman Sachs efforts. Now, new rules require more offers to go through the Ministry of Commerce. These include companies with prominent brands or those that may impact Chinese “economic security.”

Yet, the column notes, the new regulations also smooth out a previously woolly process that drew in many an uninformed ministry. And the rules now allow foreign all-stock mergers, which may prove to be the exception rather than the rule, but which also puts China ahead of Japan in terms of deal flexibility.

Brocade Officers Settle Suits Over Options

The same day a grand jury indicted two former executives of Brocade Communications Systems on fraud charges, officers and directors of the software maker agreed to strengthen corporate governance and pay $525,000 along with former executives to settle shareholder lawsuits over stock-option backdating.

Intel's worst nightmare

Dwindling market share isn't the No. 1 chipmaker's only problem, says Fortune's Roger Parloff. It needs to mount a fierce defense to AMD's epic antitrust lawsuit.

S.E.C. Backs Delay in Rule on Small-Company Audits

The Securities and Exchange Commission, bowing to complaints that the Sarbanes-Oxley Act puts too big a burden on small companies, said yesterday that the deadline for them to comply with new auditing rules should be put off until the end of next year.
The S.E.C. proposed delaying by six months the July 15, 2007, date for small companies to start reporting whether financial controls promote accurate reports and prevent fraud. The companies could also wait until the end of 2008 to have outside auditors test and certify their controls.

3 at Comverse Charged in Stock Options Case

Describing a brazen scheme to manipulate the granting of options, federal prosecutors in Brooklyn charged three former executives of Comverse Technology with mail, securities and wire fraud yesterday. The three executives, prosecutors said, used fictitious employees to create a secret slush fund of options to be distributed to favored employees.
“In what can only be called an abuse of corporate power, these executives, through fraud and deceit, rewarded themselves and their friends at the expense of the investing public,” said James W. Burrus Jr., the acting assistant director of the Federal Bureau of Investigation, at a news conference in Washington yesterday.
Mr. Burrus said that the F.B.I. was investigating 45 cases involving the backdating of options. More than 80 companies nationwide are now under investigation over their options practices by the S.E.C. or by federal prosecutors in San Francisco, Brooklyn and Manhattan.

ABA Takes Aim at Thompson Memorandum, Again

Continuing to criticize what it sees as federal prosecutors’ overzealous tactics in fighting corporate fraud, the American Bar Association issued a formal policy statement yesterday objecting to the Justice Department’s policy of urging companies under criminal investigation to cut off the payment of legal fees to its employees. This is the second time in a year the ABA has issued a policy statement taking direct aim at the DOJ’s Thompson Memorandum.
It’s a happy coincidence for the ABA that this latest policy recommendation comes on the heels of last month’s stinging ruling by Judge Lewis Kaplan that prosecutors can’t pressure companies to stop paying legal bills for indicted employees. U.S. District Court Judge Lewis Kaplan ruled in the KPMG accounting fraud case that the feds violated the constitutional due process rights of indicted employees by pressuring their employers to refuse to pay their legal costs.

Criminal Complaint Filed Against Former Comverse Execs

Here’s the 53-page criminal complaint filed this morning against three former Comverse Technology executives on backdating charges. General counsel William Sorin and CFO David Kreinberg surrendered to FBI agents this morning. They will be arraigned at 2:30 p.m. today in federal court in Brooklyn, before Magistrate Judge Viktor Pohorelsky. The SEC also filed a civil complaint against the three former executives today.
No word on the whereabouts of former CEO Kobi Alexander, who was also named in the complaint. But several law enforcement officials are voicing concern that Alexander has traveled overseas and are worried that he will not turn himself in this morning, reported WNBC reporter Jonathan Dienst on CNBC. Dienst says spokesman at the FBI, SEC, and DOJ are not commenting, and Alexander’s lawyers did not returning calls. No one yet is calling the CEO yet a fugitive, reports Dienst.

Perfect Payday: Options Scorecard

Here's an updated look at 78 companies that have come under scrutiny in recent months for past stock-option grants. Note: This list contains companies that have disclosed government probes, misdated options, restatements and/or executive departures. Some companies that have undertaken or disclosed internal probes but no further news may not be included.

Private Equity Is Hot Now. But for How Much Longer?

As private-equity firms spend and spend and spend — one estimate values of the last three weeks’s buyouts at $61 billion — The Financial Times’s Lex column cautions that the current mania could rank as a colossal folly.

For one, there’s far too much incoming money in search of deals. If one assumes that 80 percent of a buyout deal is leveraged, The FT hazards a guess of an astonishing $1.485 trillion in capital available for private takeouts. But the quality of that debt could be endangered, as higher risk-free interest rates, inflation and lopsided profit-to-output ratios combine to post trouble for the kind of financing such deals depend on.

Furthermore, with all that money sloshing around, private-equity firms can’t afford to be choosy anymore — and investors must still pay the high charges that come with siding with the buyout firms. Given all that, the FT warns, it’s better to be the bought-out rather than the buyer.

Confidence Sags Slightly Among Silicon Valley Venture Capitalists

An ongoing survey of 37 venture capitalists in Silicon Valley, started more than two years ago, has reported the sharpest quarterly drop in confidence among VCs in the survey’s history.

Confidence – essentially, a measure of their interest in investing — fell to 3.89 on a scale of 5 in the second quarter. Last quarter, the level was 4.15.

Is this bad? Not too much, at least not yet. The drop signals “a shift from broad confidence to increasing caution” according to the University of San Francisco’s Entrepreneurship Program, which conducts the survey.

Martha Stewart and Peter Bacanovic Settle SEC's Insider Trading Charges

Washington, D.C., Aug. 7, 2006 - The Securities and Exchange Commission today announced that it has reached an agreement to settle insider trading charges against Martha Stewart and Peter Bacanovic relating to Stewart's sale of ImClone Systems stock in December 2001. Under the settlement, Stewart agrees to an injunction, disgorgement of losses she avoided, and the maximum penalty of three times the losses she avoided, for a total of about $195,000 in monetary relief. Stewart also agrees to a five year bar from serving as a director of a public company and a five year limitation on the scope of her service as an officer or employee of a public company. Bacanovic agrees to an injunction and to pay disgorgement of commissions and a penalty totaling approximately $75,000. In a separate order, the Commission previously barred Bacanovic from associating with a broker, dealer or investment adviser.

Acxiom Settles Proxy Fight with Activist Hedge Fund

Acxiom on Monday said it had resolved a looming proxy battle by agreeing to give a dissident shareholder two seats on its board and doing a $300 million share buyback.

This victory makes ValueAct only the latest in a string of victories for activist hedge funds: Barington Capital Group gained four seats on Pep Boys’s board last week, and Pembridge Capital Management and Crescendo Partners struck a deal with Topps to win three seats on the baseball card company’s board. A previous DealBook noted that ValueAct may have set its sights on tool maker Snap-On.

Securities Litigation Continues Downward Trend

This recent study on class action securities litigation - "2006 Mid-Year Securities Fraud Class Action Filings Report" - from Stanford Law/Cornerstone Research shows that securities litigation continues to trend downwards with a 45% decline in the number of securities class actions filed during the first half of 2006 compared to the same period of the prior year.

The Study posits some reasons for this trend, including the dissipation of the ill effects from the boom and bust period of the late '90s, the cleansing effects of Sarbanes Oxley, and the absence of stock market volatility.

Companies 'Go Dark' to Avoid SOX Compliance

The Sarbanes-Oxley Act, enacted in 2002 in the wake of corporate scandals that rattled America's capital markets, was supposed to give more protection to investors.

But the higher costs that accompany increased disclosure and stiffened internal controls appear to be driving a growing number of companies to simply withdraw from the major exchanges.

Some are going private and others "going dark," that is, deregistering their stock with the Securities and Exchange Commission. Instead, their shares are listed on the "Pink Sheets," an electronic quotation medium for companies not listed on stock exchanges.

These companies don't have to meet listed companies' disclosure requirements. So instead of providing more information to investors, they provide none.

M&A Activity Strong for Small-Caps — Especially Tech, Healthcare, Finance

Mergers involving small-cap companies are accelerating and are likely to continue, with the technology, finance and healthcare industries seeing the most activity, according to Merrill Lynch’s SmallCap Strategy report.

The value of deals in the medical-device business is already twice that seen in all of 2005, with $6.4 billion in mergers and acquisitions, the report noted. For healthcare as a whole, “consolidation should remain strong as firms aggressively search for growth and have liquid balance sheets.”

The report concluded:

The accelerating M&A trend supports our contention that the equity base of the smaller cap market is likely to shrink and, as a result, stabilize multiples or force them higher. The 2006 full year estimate of 368 deals is higher than the 329 deals announced in 2005 and even higher than the 299 deals recorded in 2004. The backdrop for M&A remains favorable or the 3 C’s of consolidation are in place - capital access, cyclicality and corporate valuations.

Has the DOJ Gone Too Far?

Has the Justice Department gone too far in its pursuit of white-collar criminals? An FT piece today says the DOJ “is coming under intense pressure to soften some of the tactics it embraced” after the Bush Administration put white-collar crime at the top of its law enforcement agenda.

The department adopted a tough policy in 2003 that has been a sore point for legal experts and business lobbyists, who say it unlawfully forces individuals and companies to forgo their due process rights in order to avoid being indicted.

While the department has largely ignored such criticisms in the past, the climate may be shifting following a recent ruling by a judge overseeing the government’s case against former partners at auditing firm KPMG.

Cox on Sarbox — Mend it, Don’t End It

SEC head honcho Christopher Cox defended the Sarbanes-Oxley law, calling its most contentious provision “benign,” but saying its implementation must be improved.

His comments countered sentiments expressed by Treasury secretary Hank Paulson in a recent speech, who said “often the pendulum swings too far” when it comes to “corrective measures” to deal with corporate scandals.

Higher Rates May Dim the New Dawn of LBOs

For Kohlberg Kravis Roberts, Bain Capital and their partners, the cost of acquiring hospital operator HCA will be nearly $100 million higher for than it would have been just three months ago, according to Bloomberg News.

That’s because of higher interest rates, which, together with stricter terms from banks, are making life a little tougher for private equity firms and others who want to finance takeovers with debt.

The days of (almost) free money from banks to fund take-private transactions appear to be drawing to an end.

S.E.C. Chairman Sees First Year as One of Needle-Threading

For Securities and Exchange Chairman Christopher Cox, his first year as the nation’s top securities cop has been one of diplomacy, not brashness. It has been one of emphasis on gathering consensus on a variety of hot-button issues, he said in an interview with the Washington Post published Wednesday.

From pushing forward a compensation disclosure package without the ballyhooed “Katie Couric” rule to giving foreign firms more time to comply with Sarbanes Oxley financial controls (a decision that could be announecd this week), Mr. Cox mostly has sought to gently prod change.

KeyCorp Considers Selling Champion Mortgage

Cleveland-based KeyCorp became the latest lender to announce plans to scale back in subprime lending, which involves loans to less credit-worthy borrowers who cannot qualify for the best terms.

KeyCorp said on Tuesday it may sell its Champion Mortgage subprime lending unit to focus on consumer and business banking.

The New Corporate Raiders

Increasingly industry analysts and legal professionals are calling hedge funds — money management firms that cater to institutional investors or wealthy individuals — a serious force for corporate change.

Now comes a report from investment bank Morgan Joseph that attempts to track the recent wave of hedge fund activism. One of its most notable findings: When hedge funds decide to make demands of a company as part of an activist campaign, they are likely to get what they want.

Morgan Joseph writes: Regardless of the demand made, activists prevailed in enacting change in the majority of the campaigns we tracked. This leaves no doubt that activists are a credible threat that should be taken seriously by a company’s management and board of directors not just during a campaign—but before it has begun as well.