Thursday, December 28, 2006

And What a Year It Was!

Posted by Broc Romanek, Editor of

December 28, 2006
And What a Year It Was!

With Sarbanes-Oxley in the rear-view mirror for 4 years now, one would think that this would have been a quiet year for corporate governance developments. To the contrary, it was arguably the most dramatic year of change in recent history. Here is a snapshot of some of the more significant developments:
- The majority-vote movement matured at an incredible pace. Within the span of a single year, over half of the Fortune 500 adopted some form of policy or standard to move away from pure plurality voting for director elections. This trend is likely to continue as it’s the governance change that investors seek the most.
- An area not touched by Sarbanes-Oxley - executive compensation - continued to be inspected under a microscope by both investors and regulators. The SEC adopted sweeping changes to its compensation disclosure rules and investors became more willing to challenge companies that continue outlandish compensation policies. And House Democrats intend to consider executive compensation legislation early in 2007. [Today's WSJ and Washington Post contain articles in which Rep. Barney Frank expresses displeasure over the SEC's recent change in its exec comp rules - and we have announced a January 11th webcast just on these new changes. More on all this next week.]
- More and more hedge funds and private equity funds found “value” in using governance as an entree into forcing management to alter strategic course or to put a company into "play." The recent hiring of Ken Bertsch, a former TIAA-CREF governance analyst who had been working for Moody’s, by Morgan Stanley is an indicator that using governance as a “big stick” is likely to continue.
- The recent sale of the two primary proxy advisory services - ISS and Glass Lewis - at handsome premiums is a pretty good indicator that governance as a skill set can be quite profitable.
- The re-opening of the SEC’s “shareholder access” proposal - spurred by a recent 2nd Circuit decision - was unthinkable a year ago. But it’s now reality.
- The proposed elimination of broker votes in 2008 - via a rulemaking from the NYSE - means that the 2008 proxy season promises to be the wildest yet. But 2007 surely will be wild enough.
One thing we know for sure - we can’t predict what the New Year will bring! Happy Holidays!
Some Thoughts from Professor John Coffee
In an interview with the Corporate Crime Reporter, Professor John Coffee waxes on problems with the McNulty Memo and the Paulson Committee Report.
A Conservative Year for Holiday Cheer
Fried Frank took it easy in this year's annual festive message. Each year, the firm issues an alert at the end of the year which focuses on a true - and zany - government prosecutorial act. No food fraud to report on this year...

UnitedHealth Says It Has Received Formal Order from S.E.C.

UnitedHealth Group, the health-insurance giant, said Tuesday that it has received a formal order of investigation by the Securities and Exchange Commission related to stock-options backdating. The order was issued Dec. 19, after regulators first notified the company in April of an informal inquiry. UnitedHealth said in its filing that it is cooperating with the investigation. In October, the company fired its longtime chief executive, Dr. William W. McGuire, as well as its general counsel and a raft of other top executives in connection with the timing of options doled out to employees.
Go to United Health Filing with the Securities and Exchange Commission »Go to Previous Item on DealBook »

Wednesday, December 27, 2006

SEC amends compensation rules

The Securities and Exchange Commission is changing newly adopted rules governing the disclosure of executive and director compensation.
In a statement released Dec. 22, the agency said it is altering the requirements for disclosing the value of stock option awards and giving firms more flexibility in how they report those expenses.
The SEC said the new rules should more closely conform with the reporting of stock option awards under standards in the Financial Accounting Standards Board's rule FAS 123. That rule requires recognition of the costs of stock option awards over the period in which an employee is required to provide service in exchange for the award.
Using this same approach when disclosing executive compensation will give investors a better idea of the compensation earned by an executive or director during a particular reporting period, the SEC explained in its announcement.

Tuesday, December 26, 2006

Report: Falsification of Docs Core Question in Apple Backdating Case

Federal prosecutors are looking closely at whether Apple’s stock-option paperwork was falsified by Apple executives to maximize the profitability of option grants, reports the Recorder’s Justin Scheck, citing people with knowledge of the company’s situation. The anonymous sources told Scheck that the apparently faked documents were revealed in the three-month internal probe conducted by Quinn Emanuel.
The falsification of documents is a key issue for the feds in trying to determine which of the scores of backdating investigations they will ultimately pursue as criminal matters. Said Keith Krakaur of Skadden Arps to the Recorder, speaking generally about the investigations: “When there are falsified documents, the government views them as an intent to defraud, because people generally don’t falsify documents unless they’re trying to make things different from reality.” He added: “They view that as intent.”
Apple released a statement in October that “the investigation raised serious concerns regarding the actions of two former officers in connection with the accounting, recording and reporting of stock option grants.” Scheck cites “individuals with knowledge of the case” who say the two officers are former GC Nancy Heinen and ex-CFO Fred Anderson. Heinen left the company in the spring.

Judge Dismisses Enron Investors' Claims Against Alliance

A federal judge has dismissed claims by Enron investors against Alliance Capital Management that arose from the service of Alliance executive Frank Savage on the energy company's board.
The investors argued that Alliance should be held liable because Savage signed a registration statement for a $1 billion Enron bond offering that incorporated the company's false financial statements for 1998 to 2000. Alliance, a New York-based money manager, is now known as AllianceBernstein.
U.S. District Judge Melinda Harmon in Houston rejected that argument after concluding that there was "no evidence that Alliance had any authority to influence, supervise, or determine Savage's actions at Enron," The Wall Street Journal reported. She also said there was no evidence that Savage knew or should have known that he had signed a false registration statement.
Jim Hamilton, an analyst at Wolters Kluwer Law & Business, noted the significance of the ruling in a posting on his Web log. Had the judge held Alliance liable based on Savage's service on Enron's board, "the effect would be to chill the willingness of qualified individuals to serve on boards of public companies as independent directors," Hamilton wrote.

Thursday, December 21, 2006

U.S. Clears CVS to Acquire Caremark Rx

CVS has won antitrust approval to purchase Caremark Rx, the pharmacy benefit manager, removing potential regulatory opposition to the pending $21 billion acquisition. The approval by the Federal Trade Commission comes shortly after Express Scripts launched rival $26 billion bid for Caremark in hopes of wresting its rival away from CVS. Should either CVS or Caremark scuttle the deal because of a competing offer, it would pay the other a breakup fee of $675 million, CVS’s chief financial officer, David B. Rickard, said in an interview last month.
Go to Article from Bloomberg News via The New York Times »

Wednesday, December 20, 2006

Love and Marriage, Hedge-Fund Style

Ryan on the soap opera “All My Children” got it all wrong when he compared love with a hedge fund, according to Drinky McDiligence, writing on the Long or Short Capital blog. McDiligence noted a recent New York Times article about how references to hedge funds, those investment pools reserved for institutional investors and the wealthy, are creeping into the popular culture. That article discussed an overwrought bit of TV dialogue in which Ryan told Kendall, ‘’Love isn’t like a hedge fund, you know?”
“Obviously, the writers have no idea what a hedge fund is,” McDiligence sniffed in his blog post. “What they should say is that love isn’t like a non-diversified traditional long-only fund.”
He explains (sort of):
"In reality, love is exactly like a hedge fund. Love is a limited partnership structure — it takes a large initial investment, and is largely unregulated. Frequently, it uses an aggressive strategy, relying on large directional bets and substantial amounts of leverage. The plan is to generate significant alpha (using the Lipper Love Average as a benchmark) but it is not uncommon to see a hedge fund or a love relationship with an unsuitably low Sortino ratio, indicating that it has strayed from it’s raison d’etre."
McDiligence even includes a graph, whose shape would be familiar to any securities analyst, suggesting that a pre-nuptial agreement can work like a “put” option for the wary husband- or bride-to-be. “It floors your downside, and there is unlimited upside,” the post reads. “If the love falters or a better substitute arrives, you can walk away with no marginal pain.”
Go to Item from Long or Short Capital »Go to Previous Item from DealBook »

Board Proposes Lighter Auditing of Internal Controls

Responding to complaints that the costs of the Sarbanes-Oxley Act were too high, the Public Company Accounting Oversight Board proposed a standard Tuesday aimed at allowing auditors to do less work — and charge less money — when assessing internal controls over financial reporting.
The changes would “eliminate unnecessary requirements while preserving the principles of the standard,” the chairman of the oversight board, Mark W. Olson, said.
The new rule, which is expected to be adopted this spring after public comment, is much shorter than the old standard, coming in at 65 pages rather than 180. It encourages auditors to use their judgment in deciding which internal controls should be reviewed, focusing on controls where the risk of significant misstatements is the highest.
Go to Article from The New York Times »

Tuesday, December 19, 2006

Get Ready For A Red-Hot Proxy Season

If the 2006 proxy season felt dramatic, just wait until spring. The folks with their fingers on the pulse of big shareholder groups have already identified the top five areas of activity this year: majority voting, executive compensation, board declassification, poison pill elimination and activist hedge funds.
Many boards grappled with one or more of these issues last season, but that doesn't mean they've gone away. If anything, shareholders feel empowered by their progress.

Monday, December 18, 2006

Hostility on the Rise in M&A

Takeovers are increasingly turning hostile — again, says BusinessWeek. In 2006, corporate and private equity buyers worldwide lobbed 110 uninvited bids worth $351 billion at acquisition targets — the highest number since 2000, when 129 offers worth $117 billion were launched. Some companies are enlisting the assistance of hedge funds and unions to pour on the pressure, while private equity groups are busting in on each others’ deals, and occasionally making hostile offers themselves.
And with companies and financial buyers awash in cash anxiously looking for ways to put their money to work while interest rates remain low and financing is plentiful and cheap, bankers do not expect the wave of hostility to crest any time soon.
Many executives are making unsolicited bids for companies, BusinessWeek says, because they believe they must buy their rivals or risk being bought out as their industries consolidate.
The magazine cites AirTran Airways’ recent unsolicited $288 million bid for Midwest Airlines as an example. AirTran decided to go hostile after Midwest refused to engage in private merger talks. “You can debate the merits of consolidation, but if it happens, no one wants to be left out” AirTran President Robert L. Fornaro told BusinessWeek.
Go to Article from BusinessWeek »

Express Scripts Tops CVS With $26 Billion Caremark Bid

In an audacious takeover bid that could lead to lower drug prices for consumers, Express Scripts, a company that manages employee drug benefits, has launched a $26 billion hostile bid for larger rival Caremark Rx. The proposal tops a competing offer by the CVS drugstore chain in a bold move that evokes memories of the big buyout deals of the 1980’s and could lead to a bidding war.
Express Scripts is offering $29.25 in cash and 0.426 of its own shares for each Caremark share, or $58.50 in total — a 15 percent premium on Caremark’s closing price on Dec. 15, Express Scripts said in a press release early Monday.
Pharmacy benefit managers act as the middleman between drug companies and employers that offer drug subsidies to their workers as part of health-care coverage. By acquiring Caremark Rx, which is double its size, Express Scripts would become the largest pharmacy benefits manager in the nation by far.
The takeover bid, which seeks to scuttle Caremark Rx’s agreement last month to merge with CVS, will pit Express Scripts, with a market value of $9.3 billion, against the much-larger CVS, worth some $25 billion.
The offer by Express Scripts is a throwback to the 1980’s in two ways: It is a rare hostile bid that could spark a fierce bidding war, and it relies heavily on debt, some $14 billion. Express Scripts’ $26 billion offer is a vivid illustration of the role that cheap credit is playing in fueling the explosion in takeovers, as historically low interest rates and a flood of available cash have enabled private equity firms to buy out bigger and bigger companies.
The offer comes as somewhat of a surprise, as Express Scripts had widely been considered a takeover target, not an acquirer, because of its small size. Indeed, its bid for Caremark could also put it into play.
The proposed merger between CVS and Caremark received a mixed reception by investors. When it was first announced, shares in both companies tumbled, but they have returned to close to where they started after the deal. In that deal, Caremark received no premium for its shares.
Go to Press Release from Express Scripts »Go to Article from The New York Times »Go to Article from Bloomberg News »Go to Previous Item on DealBook »

Friday, December 15, 2006

U.S. Regulators Move to Streamline Merger Reviews

Hoping to reduce the time and expense involved in the merger review process, the Justice Department’s antitrust division on Friday announced changes to its five-year-old guidelines for vetting corporate transactions. Many of the changes focus on the “second request,” in which regulators, after launching a preliminary investigation into a deal’s competitive effects, extend the waiting period and ask the parties for more information. Among the new provisions is an option that allows companies to limit the scope of the documents they must produce in a second request, the Justice Department said.
Second request have become less common in recent years, according to figures published in a document accompanying Friday’s announcement. In the fiscal years 2000 and 2001, before the antitrust division took up its 2001 Merger Review Process Initiative, about 40 percent of preliminary investigations led to second requests. In 2002 and 2003, that percentage fell below 29 percent. In 2004 and 2005, it stood at 24 percent.
Merger reviews have also gotten shorter. Since the 2001 initiative was announced, the average length of time from the opening of a preliminary investigation to the early termination or closing of the investigation has fallen from about 93 days to 57 days, the Justice Department said.
Go to Press Release from the Justice Department »

IPOs Are Looking Tasty Again

BusinessWeek/online, December 2006:

Financial sector offerings paid off big, tech stocks are back, and 2007 promises more of the same

The once-moribund market for initial public offerings heated up in 2006, giving savvy investors an opportunity to beat the market by a wide margin. IPOs gained 24% through Dec. 8, vs. a 13% gain for the Standard & Poor's 500-stock index, according to Renaissance Capital in Greenwich, Conn., as the amount of money raised jumped 19%, to $38 billion.
The market looks just as solid going into 2007. And as the economy slows, upstarts with strong growth potential will look more appealing, says David Antonelli, chief investment officer at MFS Investment Management in Boston.

Thursday, December 14, 2006

Deals Haven’t Peaked Yet, Report Says

The merger-and-acquisition boom is likely to be even bigger next year, according to a year-end outlook from PriceWaterhouseCoopers. The accounting firm’s Transaction Services group published its outlook for 2007, and it said that private equity funds will continue to fuel much of the activity “as long as the Goldilocks economy continues.” The consultancy said the health care, media, financial services and telecommunications industries are likely to see the most deals.

U.S. Commercial Real Estate Investment to Set Record

Dec. 14 (Bloomberg) -- U.S. commercial real estate investment is likely to set a record this year, driven by rising rents and occupancies in office and industrial buildings, the National Association of Realtors said.
More than $236 billion in commercial real estate transactions were recorded in the first 10 months of 2006, up from $231.9 billion a year earlier, the Washington-based association said in its Commercial Real Estate Outlook report, released today. Blackstone Group LP's agreement in November to acquire Equity Office Properties Trust, the biggest office landlord in the U.S., for $20 billion, isn't included in the data.

On Stock Options, Google Gets Creative

Under the program, Google will grant employees a new type of option called a transferable stock option. Under certain circumstances, outside investors will be allowed to bid for those options.
The ability to sell these options, which allow the holder to buy Google stock at a specified price, changes the game for Google employees. As The New York Times reported Wednesday, outside investors are likely to pay more for these options than the employee would earn by exercising it. Even “underwater” options — those with an exercise price above Google’s current stock price — could have some value to outside investors, who may expect Google’s shares to rise, putting the options in the money.
Analysts, experts and columnists described Google’s move in generally glowing terms, calling it “elegant” and suggesting it was a win for both employees and shareholders. But the reaction was not entirely positive. Several people raised the possibility that Google was making it too easy for employees to cash out their options early, undermining some of the usefulness as an incentive.
Go to Article from The New York Times »Go to Item from Tech Trader Daily via Barron’s »Go to Item from Internet Outsider »Go to Item from The Precursor Blog »

Wednesday, December 13, 2006

Insider Trading of Derivatives Won't Be `Tolerated'

Dec. 13 (Bloomberg) -- A group of 12 securities industry associations issued a joint statement today saying the use of material nonpublic information when trading credit derivatives won't be ``tolerated.''
The statement from the International Swaps and Derivatives Association, Securities Industry and Financial Market Association and the other groups follows what some investors and traders have called suspicious trading in credit derivatives before announcements of takeovers and other events that can change the perceptions of a borrower's ability to meet debt payments.
The groups said they have adequate procedures in place to guard against improper trading in the unregulated market for credit derivatives and other markets including loans that are privately negotiated between banks and investors and not traded over an exchange. They will ``educate'' and ``inform'' members about how to handle information that hasn't been publicly disclosed that could influence markets, they said.

SEC Proposes New Guidance on Internal Controls

The Securities and Exchange Commission today proposed guidance to make it easier and less costly for companies to comply with internal-controls rules set forth by the Sarbanes-Oxley Act. The Commission voted 5-0 to publish the proposal and circulate it for public comment.
According to MarketWatch, SEC Chairman Christopher Cox said the accounting rules have posed "the biggest challenge" under the law and "without question, it has imposed the greatest cost." The proposed SEC rules would offer management much more flexibility in carrying out audits.

U.S. Moves to Restrain Prosecutors

The Justice Department placed new restraints on federal prosecutors conducting corporate investigations yesterday, easing tactics adopted in the wake of the Enron collapse.
The changes were outlined in a memorandum written by Paul J. McNulty, the deputy attorney general. Under the revisions, federal prosecutors will no longer have blanket authority to ask routinely that a company under investigation waive the confidentiality of its legal communications or risk being indicted. Instead, they will need written approval for waivers from the deputy attorney general, and can make such requests only rarely.
Another substantial change introduced yesterday prohibits prosecutors from considering, when weighing whether to seek the indictment of a company, whether it is paying the legal fees of an employee caught up in the inquiry.
The revised guidelines follow criticism from legal and business associations and from federal judges, senators and former top Justice Department officials that the tactics used in recent years against companies like the drug maker Bristol-Myers Squibb and the accounting firm KPMG were coercive and unconstitutional.

Hedge funds could require $2.5M net worth

The SEC is expected to vote Wednesday on whether to raise hedge fund net worth minimum to $2.5 million from $1 million.

WASHINGTON (Reuters) -- The Securities and Exchange Commission said Tuesday it is moving to increase the minimum net worth required for an investor to be eligible to invest in hedge funds to $2.5 million from $1 million.
At an open meeting of the investor protection agency scheduled for Wednesday, the proposal is expected to be voted on and then undergo a public comment period, SEC Chairman Christopher Cox told reporters at a briefing.
Final action by the commission would come later.
"We are going to be lifting the accredited investor standard from where it has been since 1982 at $1 million of net worth to $2.5 million," Cox said.

Tuesday, December 12, 2006

Thompson Memo Out, McNulty Memo In

U.S. Deputy Attorney General Paul J. McNulty announced earlier today that the DOJ is revising its corporate charging guidelines for federal prosecutors throughout the country. The new memorandum, informally titled the “McNulty Memorandum,” will supplant the Thompson Memorandum, which was issued in January 2003 by then-Deputy Attorney General Larry Thompson, now the general counsel at PepsiCo.
Both memoranda were designed to serve the same basic function: to help federal prosecutors decide whether to charge a corporation, rather than or in addition to individuals within the corporation, with criminal offenses. Under the Thompson memo, in deciding whether a corporation was cooperating with an investigation, prosecutors were allowed to consider two controversial factors: 1) whether a company would agree to waive the attorney-client privilege in regard to conversations had by its employees, and 2) whether a company had declined to pay attorneys’ fees for its employees.
The McNulty Memo requires that when federal prosecutors seek privileged attorney-client communications or legal advice from a company, the U.S. Attorney must obtain written approval from the Deputy Attorney General.
The new memorandum also instructs prosecutors that they cannot consider a corporation’s advancement of attorneys’ fees to employees when making a charging decision. An exception is created for those extraordinary instances where the advancement of fees, combined with other significant facts, shows that it was intended to impede the government’s investigation.
The Thompson memo was pointedly criticized by business groups and civil liberties organizations, who claimed that it eviscerated individuals constitutional rights. In July, federal judge Lewis Kaplan slammed the Thompson Memo in a case involving allegedly illegal tax shelters created by former KPMG employees. For more background on the Thompson Memo, check out this exchange between a former U.S. Attorney and two white-collar defense lawyers.

Options Scandal is a Tax Scam

From Business Law Prof Blog:

The WSJ today has a front page story about "How Backdating Helped Executives Cut Their Taxes." A later section carried the story "Another Consequence of Backdated Options: Stiff Tax Bills." Finally. The essence of the options backdating scandal, backdating either exercise dates or option grant dates, is a tax scam. What is disappointing is the degree to which senior executives in major companies thought that cheating on taxes was legit. The second story, by Theo Francis, explains why so many companies are cleaning up their past back dated options -- a 60% tax penalty that can be avoided if unexcersied, back dated options are repriced before year end.

Private Equity: The Challenges Ahead

Pioneer Tom Hicks says competition and higher interest rates may drive down returns—and smaller deals may end up being the most lucrative, December 12, 2006, 12:00AM EST

The last year has been notable for a string of massive leveraged buyouts that have extended the limits of what private equity firms can do. Kohlberg Kravis Roberts bought hospital company HCA for $33 billion, beating the record that KKR established in 1988 with the RJR Nabisco deal (see, 11/10/06, "The Dark Side of the M&A Boom"). The record was broken again in November with The Blackstone Group's $36 billion acquisition of Sam Zell's Equity Office Properties Trust (see, 12/08/06, "Private Equity: What's the Limit?").
But in a year of record deal volume (see, 11/07/06, "The Money Behind the Private Equity Boom"), the vast majority of transactions are much smaller. Buyout pioneer Thomas Hicks specializes in those smaller deals, which he says can be at least as profitable as bigger LBOs that dominate the headlines. On Dec. 8, his Hicks Holdings teamed up with The Watermill Group, a private equity firm in Lexington, Mass., to acquire Latrobe Specialty Steel of Latrobe, Pa., for $215 million in cash and $35 million in assumed debt. The company sells steel to civilian and military aircraft makers.

Monday, December 11, 2006

Venture Bubble Redux?

The foreboding headline on a Financial Times story Monday is not sitting well with at least one venture investor. “VC rises to dotcom bubble levels,” the headline declares. The article goes onto explain that total venture-capital investment is estimated to reach $32 billion this year, which is the highest in the past four years and “closer to levels seen during the dot-com bubble.”
“It’s not even close,” writes Paul Kedrosky in his Infectious Greed blog:
Sure, it’s the highest it’s been in four years, but you might equally write that VC funding is still 36 percent off its dotcom peak, or that it is more or less flat year-over-year. Instead we have this irresponsible stuff.
Go to Article from The Financial Times via »Go to Item from Infectious Greed »

The Heisman Trophy, Archie Griffin & the Law

From today's WSJ Law Blog: The Law Blog just ran into Archie Griffin, the only two-time winner of the Heisman Trophy. The Ohio State legend walked by our desk after giving an interview to Dow Jones Video. We introduced ourselves, shook hands and asked, “Did you know John Heisman had a law degree?” “No,” he responded, bursting into a smile. “What do you think of that?” we asked. “I think that’s fantastic,” said Griffin. “Woody wanted me to be a lawyer. Actually, I think Woody really wanted to be a lawyer. He urged a bunch of us to become lawyers and his son became one.”
Woody, for all you non-athletic supporters, is Woody Hayes, the iconic coach for whom millions of Buckeye fans are grateful never became a lawyer. Woody’s son is Steven B. Hayes, a municipal judge in Columbus. Thanks for the tip, Archie!

Soros fund denies insider info

NEW YORK (Reuters) -- An investment fund controlled by billionaire investor George Soros said Friday it did not have any inside information when it sold $24 million worth of Auxilium Pharmaceuticals Inc. shares a day before the company announced problems with a key clinical trial.
"We were not in possession of any material, non-public information at the time of the trade," the Perseus-Soros Biopharmaceutical Fund said in a statement.

Deloitte and Banks to Pay $455 Million to Adelphia Investors

The auditor Deloitte & Touche, Bank of America and 38 other banks have agreed to pay a total of $455 million to settle a lawsuit with investors in Adelphia Communications, the bankrupt cable television company.
Deloitte & Touche will pay $210 million and the banks will pay $245 million under a settlement approved Nov. 10 by Judge Lawrence McKenna of Federal District Court in New York. The amount each bank owes is confidential. Adelphia filed for bankruptcy in 2002 after an accounting fraud that led to the criminal convictions of its founder, John J. Rigas, and his son Timothy.
Investors had claimed losses as high as $5.5 billion, saying that Deloitte & Touche and the banks contributed to the fraud. Adelphia sold its cable properties to Comcast and Time Warner for $16.7 billion in July.

Friday, December 08, 2006

Paulson: Hedge Funds 'Positive' But Need to Be Monitored

In an exclusive interview on, Treasury Secretary Henry Paulson said hedge funds have had a positive impact on capital markets but need to be more closely monitored in an effort to protect investors.
"This is something we are giving a lot of thought and attention to," Paulson told CNBC's Maria Bartiromo. "There have been major changes in the capital markets over the past five to ten years, including big increases in private pools of capital."
Paulson said they are examining hedge funds in three areas, including: investor protection; systemic risk, or ensuring that there is enough liquidity in the system; and transparency between the hedge funds and those lending them money.
The Securities and Exchange Commission adopted a rule in 2004 ordering most hedge fund advisers to register with the investor protection agency. But a federal court threw out the rule in June.
Since the SEC's registration rule was struck down, the agency has been developing scaled-back rule proposals, including one to raise the minimum net worth an investor must possess to be allowed to invest in hedge funds. That proposal is expected to come before the SEC for a vote next week.
The average annualized performance of hedge funds 14.03%, according to the HFRI Fund Weighted Composite Index. The typical hedge fund charges investors a 2% management fee, along with a 20% share of profits.

Study Finds Value in Latest Wave of Deals

Seeking to answer one of Wall Street’s most controversial questions, Towers Perrin, an M&A consultancy, has taken a look at whether shareholders were helped or hurt in the recent flurry of corporate transactions. Its study, conducted with the Cass Business School, concludes that mergers and acquisitions “are now delivering shareholder value,” although it also found that medium-size deals performed better than big ones. The study compared deals completed in 2004 and 2005 with prior “waves” of deals in 1998 and 1988.
Go to News Release from Towers Perrin »

Tech Bankers See More Deals in the Pipeline

Technology investment bankers, already enjoying a banner year for mergers and acquisitions, expect to be even busier in 2007, a recent survey suggests. Of the more than 100 senior-level tech bankers who responded to The 451 Group’s second annual Technology Banking Survey, more than one-third said the number of their formal deal mandates is running 25 percent to 50 percent higher than at the same time last year. A year ago, only 23 percent of survey respondents reported growth in that bracket.
Go to Report from The 451 Group’s TechDealmaker »

Antitrust Ambiguity to Be on Justices’ Docket

WASHINGTON, Dec. 7 — The Supreme Court added two important antitrust cases on Thursday to its calendar for the current term. Both cases, granted at the request of defendants in private antitrust suits, are likely to lead to clarification of areas of antitrust law that have increasingly become unsettled.
One case has been closely watched on Wall Street. It is a class-action lawsuit against more than a dozen leading investment banks and institutional investors that took part in syndicates to underwrite the initial public offerings of hundreds of technology companies in the 1990s.
The suit, brought by purchasers of the stocks, charges that the sharing of information among the underwriters and the way in which they allocated shares to their customers amounted to an antitrust conspiracy.
While the eventual outcome of the case is uncertain, there is little uncertainty about the second antitrust case the court accepted. The question in that case, Leegin Creative Leather Products v. PSKS, No. 06-480, is how antitrust law should treat the minimum prices that manufacturers require retailers to charge for their products.
In a 1911 case known as the Dr. Miles precedent, this practice of “resale price maintenance” was deemed always illegal under the Sherman Act. The case asks the justices to re-evaluate the precedent in light of modern economic theory, and instead to make these arrangements subject to case-by-case analysis under what is known as the rule of reason.
In other areas of antitrust law, the court has steadily backed away from a categorical view of antitrust liability and is highly likely to use this case as a vehicle for doing the same for resale price maintenance.

Specter Bill Seeks to Alter DOJ Corporate Fraud Investigations

In an attempt to pressure the Justice Department to alter the way it investigates corporate fraud, a key member of the Senate Judiciary Committee on Thursday formally introduced legislation aimed at preventing prosecutors from forcing companies to waive the attorney-client privilege in order to avoid indictment. Sen. Arlen Specter, R-Pa., the outgoing chairman of the committee, said on the Senate floor that the DOJ had not moved quickly enough to change policies that he said encroached on corporate defendants' constitutional right to counsel.
Specter was joined by former Attorney General Richard Thornburgh and lobbyists from a number of business and legal groups, who said that forcing a change in the DOJ's policy could lead the Securities and Exchange Commission, the Internal Revenue Service and other government agencies to review their policies on privilege waivers.
Specter's move comes as Deputy Attorney General Paul McNulty is leading an internal review of the government's corporate-fraud prosecution policies in the wake of a concerted lobbying effort by business groups and a court decision in New York that found one of the policies to be unconstitutional.
At issue is the way federal prosecutors have interpreted provisions of the so-called Thompson memo, issued in 2003 by then-Deputy Attorney General Larry Thompson. In the memo, Thompson lists a number of factors prosecutors should consider when deciding whether to indict a company for corporate fraud. Among them: whether the company has waived the attorney-client or work-product privilege and granted prosecutors access to internal investigations prepared by the company's lawyers. (Thompson is now general counsel of PepsiCo.) Given that companies under criminal indictment are often driven to bankruptcy -- most notably exemplified in the case of accounting firm Arthur Andersen -- the DOJ's critics say corporate defendants are left with little choice but to waive their privilege and turn over documents relating to internal investigations. Those documents often become public through court proceedings and provide fodder for shareholder class actions.

Thursday, December 07, 2006

South Korea Calls Deal With U.S. Buyout Firm Illegal

As private equity firms in the United States increasingly look overseas for takeover targets, they might want to consider the plight of Lone Star Funds. The Dallas-based firm, whose 2003 acquisition of Korea Exchange Bank has prompted an investigation by South Korea’s government, faced a new setback on Thursday when a senior prosecutor claimed to have discovered illegal aspects of the transaction. The finding could lead to the $1.3 billion sale being voided, Reuters said. The controversy comes amid concern that stepped-up investments from foreign firms could prompt a backlash, not just in South Korea but in other nations as well.
The months-long inquiry in South Korea has already led Lone Star to cancel a deal to sell its stake in Korea Exchange Bank to Kookmin Bank for $7.3 billion, which would have allowed the firm a highly profitable exit. In deciding to scrap the deal last month, Lone Star cited the uncertainty created by the open-ended investigations conducted by what it called “politically motivated'’ prosecutors.
Lone Star defended its acquisition of the Korean bank on Thursday, calling the prosecutors’ latest findings “the same old broad conspiracy theory that never made any sense and still is not supported by any hard evidence.” The notion that Korea Exchange Bank was sold for a bargain price is “absurd,” Lone Star said.
Go to Article from Reuters via The New York Times »Go to The Financial Times’s FT Video »Go to Press Release from Lone Star Funds via PRNewswire »

Whirlpool to Sell Hoover to Hong Kong Company

Appliance maker Whirlpool has found a buyer for Hoover, the vacuum-cleaner company it picked up through its acquisition of rival Maytag in March. Whirlpool said Thursday it would sell the Hoover unit for $107 million in cash to Techtronic Industries, a Hong Kong-based company whose brands include Ryobi power tools and the Dirt Devil vacuum cleaner. Whirpool acquired Maytag in March for $1.9 billion in cash, stock and acquisition-related expenses.
Go to Press Release from Whirlpool via PRNewswire »

Wednesday, December 06, 2006

Court Rejects I.P.O. Class Action Against Banks

That sound emanating from lower Manhattan on Tuesday was a communal sigh of relief from the major Wall Street banks. These firms scored a huge victory when a federal appeals court ruled that they will not have to face a huge securities class-action suit related to accusations that they manipulated the prices of initial public offerings of technology companies during the market boom of the late 1990s. If they had chosen to avoid a trial, the banks faced the prospect of paying billions of dollars to settle the suit, which involved 55 underwriters, including Merrill Lynch, Goldman Sachs, Morgan Stanley and Credit Suisse First Boston. A link to the full text of the ruling is below.
There was more good news for the banks in Tuesday’s ruling. The decision raises the prospects that earlier settlements in the case, in particular a $425 million agreement with J.P. Morgan Chase and a $1 billion guaranteed proposed deal with the issuers of the new shares that was still pending approval by the judge in the case, could be nullified.
Described by many as the largest consolidated securities class-action case ever, the I.P.O. lawsuit involved more than 300 individual investors and 309 issuers.
The ruling was a devastating blow to the embattled securities class-action powerhouse Milberg Weiss Bershad & Schulman, which is a co-leader for the plaintiffs. The firm has been operating under a cloud for months after it was indicted by a federal grand jury in Los Angeles in May. The firm and two of its named partners are accused of making $11.3 million in secret payments to entice people to serve as plaintiffs in more than 150 lawsuits.
Download the Appeals Court Ruling (PDF) »Go to Article from The New York Times »

S.E.C. Proposes Compliance Delay for Small Firms

The Securities and Exchange Commission will propose giving the smallest companies an additional one-year delay before having to comply completely with the audit provisions of the Sarbanes-Oxley law, Commissioner Roel Campos said Monday.
Go to Article from Bloomberg News via The Los Angeles Times »

The Real Stakes in the Hedge Fund Hearings

Limits on the amount of debt that companies such as private-equity firms use to finance acquisitions may be one of the fallouts from the increasing scrutiny of hedge fund practices, BusinessWeek says. • Go to Article from BusinessWeek

Tuesday, December 05, 2006

S.E.C. and Critics to Square Off in Senate

The Securities and Exchange Commission may have ended its investigation of Pequot Capital Management last week, but the questions surrounding the inquiry keep coming. Today, Linda C. Thomsen, the S.E.C.’s director of enforcement, and eight others are scheduled to go before the Senate Judiciary Committee to testify about allegations by former S.E.C. lawyer Gary Aguirre that the agency prematurely halted its inquiry after it led them in the direction of John Mack, Morgan Stanley’s chief executive.
The New York Times reports that a second S.E.C. official, who is also on Tuesday’s witness list, asked to be removed from the Pequot inquiry because of his serious misgivings about decisions made on the case. The Wall Street Journal writes that Ms. Thomsen will tell the committee that Mr. Aguirre “resisted standard supervision, and ignored the S.E.C.’s chain of command.”
Like Mr. Aguirre, S.E.C. investigator Eric Ribelin believed that the inquiry “was not handled right,” Senator Arlen Specter, the chairman of the Judiciary Committee, told The Times. “Something smells rotten here,” Mr. Ribelin wrote in an e-mail message to an S.E.C. supervisor last year.
Mr. Aguirre, who led the hedge fund investigation until he was fired last year, has told members of Congress that senior S.E.C. officials blocked him from taking testimony from Mr. Mack. S.E.C. officials deny that their probe of Mr. Mack was blocked by politics. Ms. Thomsen said in testimony prepared for today’s hearing that the S.E.C. has sued “captains of industry, presidential cabinet members, members of Congress and celebrities. The enforcement division does not pull its punches.”
The S.E.C. is also under review by the Government Accountability Office, the investigative arm of Congress. Charles E. Grassley, the Iowa Republican who is chairman of the Senate Finance Committee, asked for the review in September because he was growing concerned, he said, about whether the S.E.C. was “faithfully adhering to its mission.”
Go to Agenda of Tuesday’s Hearing »Go to Article from The New York Times »Go to Article from The Wall Street Journal (Subscription Required) »Go to Article from Bloomberg News »

Market Regulators to Ramp Up Scrutiny of Hedge Funds

Hedge funds will face greater scrutiny as U.S. market regulators coordinate efforts to uncover illegal trading, the New York Stock Exchange’s head of market surveillance said. “Given the proliferation of hedge funds and the impact they can have on a marketplace, we’re looking at ways to build up our database on hedge funds,” Robert Marchman told Bloomberg News. “Our scope of review of relationships between hedge funds and other financial business-related entities will expand,” he said.
The N.Y.S.E. and the NASD, which are merging their regulatory arms, will work with the Securities and Exchange Commission and the Chicago Board Options Exchange as pressure mounts on regulators to better police hedge funds for crimes, including insider trading, which will be the focus of a Senate Judiciary Committee meeting later today.
Go to Article from Bloomberg News »

Monday, December 04, 2006

Nice Deal for Wall Street, Bummer on Main Street

Dec. 1 (Bloomberg) -- Opinion By Susan Antilla:

The Wall Street crowd is giddier than a 10-year-old with a PlayStation 3 over news that the NASD and the New York Stock Exchange will be merging their regulatory units.
It has set off industry-wide celebration. Brokerage officials are handing out happy quotes to reporters about the welcome change. Lawyers who represent crooked stock brokers are making statesmanlike predictions of regulatory synergies.
The last time I saw people in the brokerage industry this happy, the Republicans had just swept the Senate. As with all mergers, though, this one is bound to be bum news for someone. I hate to throw cold water on this party, but what does it all mean for the customers?

Commentary: Beat the Clock (and Get a Double Bonus)

While the flurry of year-end deal announcements may seem like someone’s hitting the egg nogg a little too often, it’s more likely that someone else wants to stuff a little more into their stockings. One reason for the late rush of multibillion-dollar buyouts and sales is that investment bankers are trying to wrangle a bigger year-end gift in what some call the “double-bonus game,” Andrew Ross Sorkin writes in his Sunday DealBook column. Read on to see how it works.

SEC Democrats balk at plan

The honeymoon for Christopher Cox may soon be over at the Securities and Exchange Commission.
A Democratic commissioner Friday, Dec. 1, said he expects that the agency will be divided over a vote later this month on investor rights. If so, this will be the first time the agency has been split on a critical vote since Cox took charge at the SEC almost two years ago.
At issue is a federal appeals court's Sept. 5 ruling that the SEC was wrong to let American International Group Inc. exclude from its proxy an investor proposal intended to make it easier for shareholders to nominate alternative director candidates on corporate ballots.
To resolve the difference between the SEC's interpretation of the rules and the court's, Cox's most viable options would force him to choose between one option sure to be opposed by the SEC's two Democrats and another that faces resistance from at least one of his GOP colleagues.