Moody's warns of dividend recaps

TheDeal.com, July10, 2007:
Are private equity firms guilty of playing bait-and-switch with credit rating agencies while drawing off a mother lode in dividends from the companies they own?
In a five-page report released Monday, July 9, Moody's Investors Service said that many of the dividend recapitalizations engineered by buyout houses since 2004 have taken it by surprise.
The comments on recaps were part of a wide-ranging, often caustic critique of the private equity industry's recent behavior, which the ratings agency accused of focusing too much on short-term returns to the detriment of long-term value creation.
Without accusing sponsors of duplicity, Moody's points up cases where it had assigned a target company a rating based on sponsors' assurances that they would use surplus cash flow to pay down debt.
Instead, the new owners turned around and paid themselves huge dividends, often within 12 months of the original LBO. Some dividends even surpassed the sponsors' equity investments.
Go to article: http://www.thedeal.com/servlet/ContentServer?cid=1183754874187&pagename=TheDeal%2FNWStArticle&c=TDDArticle

Ex-Partner at Milberg Pleads Guilty to Conspiracy

NY Times, July 10, 2007:
A seven-year federal investigation into accusations that a leading securities class-action law firm, Milberg Weiss, paid secret kickbacks to plaintiffs gained traction yesterday when David J. Bershad, a former partner with extensive knowledge of the firm’s finances, pleaded guilty to conspiracy and agreed to cooperate with prosecutors.
Mr. Bershad’s guilty plea is the latest blow to a powerhouse firm that once dominated the landscape for class-action securities lawsuits and spurred fear as well as contempt in corporate boardrooms. But over the last year, the firm has struggled to retain its major clients, its lawyers and its hold on numerous lawsuits even as the number of securities-related cases has declined, in part because of the strong performance of the stock market.
Yesterday’s guilty plea also put renewed pressure on William S. Lerach and Melvyn I. Weiss, two of the industry’s leading lawyers who founded the New York-based law firm and have long been the focus of the federal investigation. Mr. Lerach split from Milberg Weiss in 2004 to form a firm in San Diego, and last month, he announced that he was considering retirement. Neither Mr. Lerach nor Mr. Weiss has been indicted. Calls to their lawyers were not returned.

Kucinich to Hold Hearing on Blackstone IPO

Last month, Mr. Kucinich failed in his last-minute attempt to get the Securities and Exchange Commission to delay the Blackstone Group’s $4.7 billion I.P.O., which he said could pose new dangers for ordinary investors. But he is not giving up: On Wednesday, he plans to hold a congressional hearing on the implications of allowing small investors to buy shares in hedge funds and private equity funds.
In doing so, he continues Capitol Hill’s recent scrutiny of the private equity and hedge fund industries, which have raised their profile through a series of proposed public offerings and a run of big buyout deals.According to a news release, the hearing will examine “whether existing investor protections are sufficient to protect ordinary investors from new risks, and whether new regulation is necessary.” Mr. Kucinich points out that the recent public offerings will allow mom and pop investors — who would normally be barred from investing in buyout funds and hedge funds — to buy shares in the companies that run these funds.
And he is not alone: Many others in Washington have set their sights on private equity. On the same day as Mr. Kucinich’s hearing, the Senate Finance Committee will hold a hearing on a bill that would raise the tax rate on a major source of income for private equity fund managers.

No Let Up In Private-Equity Fund Raising

From WSJ Deal Journal:

If investors in private-equity funds are nervous about recent hiccups in the credit markets, they aren’t showing it.
According to this story today from our colleagues at LBO Wire, Carlyle Group, the leveraged-buyout titan, boosted the fund-raising target on its new fund to $17 billion from $15 billion. The new pool, which will be used mainly for buyouts of U.S. companies, probably will be more than double the size of Carlyle’s last U.S. buyout fund, a $7.85 billion pool. As a sign of how good times have gotten for private-equity firms, that fund, raised a mere two years ago, for a time held the distinction of being the biggest ever.
Now, even $17 billion won’t come close to breaking any records. That is because firms including Goldman Sachs Group, Blackstone Group and Kohlberg Kravis Roberts have broken — or are in the process of breaking — the $20 billion barrier. The new round of fund raising comes amid heightened worries by deal makers, investors and buyout executives themselves that the good times of ever larger buyouts and easy credit can’t last much longer. (See more on that in this Wall Street Journal article today about upcoming tests for the credit market.)
Given the bountiful times for fund raising, it is a wonder KKR says that one of the purposes of its recently unveiled IPO plan is to raise money for the firm to invest. (And lends credence to BreakingViews’ suspicion that the share sale may be more about the founders cashing out than KKR is letting on.) It’s also curious that one of the first members of the chorus of caution that has been building this year about the buyout boom is none other than Carlyle co-founder Bill Conway.
Of course all the recent fund raising could be part of a virtuous cycle for the buyout boom. With all that money in their coffers, private-equity firms should be able to keep plowing money into deals even if financing conditions continue to deteriorate.

Smaller Reporting Company Regulatory Relief and Simplification Proposal Published

At Securities Law Prof Blog:

The SEC published its proposed rules to extend the benefits of the current optional disclosure and reporting requirements for smaller companies to a much larger group of companies. The proposal would allow companies with a public float of less than $75 million to qualify for the smaller company requirements (up from the current $25 million for most companies). The SEC states that of the 11,898 companies that filed Annual Reports in 2006, 4,976 of them (or 42%) had a public float of less than $75 million. The proposed rules would also maintain the current scaled disclosure requirements in Regulation S-B, but integrate them into Regulation S-K and eliminate the Commission's "SB" forms. The SEC expects that these changes will simplify regulation for smaller businesses, reduce costs, and mitigate the reported lack of market acceptance associated with smaller filers. These proposals stem from the recommendations of the Advisory Committee on Smaller Public Companies.

PWC reaches $225 Million Settlement In Tyco Case

PricewaterhouseCoopers has agreed to pay $225 million to settle fraud claims relating to the Tyco International securities class-action suit, according to attorneys for the plaintiffs. Here are stories from Dow Jones Newswires and Reuters.
The suit, filed in New Hampshire federal court, alleged that as Tyco’s auditor PricewaterhouseCoopers failed in its auditing duties. The settlement with PricewaterhouseCoopers, combined with a recent settlement with Tyco, will bring the total class-action settlement to more than $3.2 billion by the time it is presented to the court for final distribution. By comparison, to date, payouts in the Enron and Worldcom suits have topped $7 billion and $6 billion, respectively.
Dennis Kozlowski, Tyco’s former chief executive, and Mark Swartz, Tyco’s former finance chief, were convicted in 2005 of looting Tyco and are serving prison sentences in New York. Tyco is pursuing its own claims and those of shareholders against the two men.

K.K.R. I.P.O., Hilton Buyout: The Deals Keep Coming

TOP STORY in today's NYT DealBook:

As many on Wall Street were making their pre-holiday getaways Tuesday afternoon, private equity giant Kohlberg Kravis Roberts was filing for a $1.25 billion public offering and Blackstone Group was announcing a $26 billion deal to buy Hilton Hotels.
Either development can be seen as a sign of gloom or good fortune for buyout firms. But something else may be happening: The private equity industry may simply be taking advantage of favorable market conditions while it can, before the market, Congress or both force Blackstone, Kohlberg Kravis and their brethren back down to earth.
"It feels like there's a window," Douglas A. Cifu, a partner at the law firm Paul Weiss Rifkind Wharton & Garrison, told The New York Times. "It feels like everyone wants to get in and get deals done because there's a lot of concern that the credit markets will tighten.
"Who is considering going public next? A better question is: Who isn't? Carlyle Group, Apollo Management and TPG are all believed to be exploring such a move, according to The Telegraph. Jeremy Warner, writing in a column for The Independent, says that while many will interpret KKR's public offering and the Hilton deal as signs that the private equity boom is peaking, "it doesn't feel like that to me."
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What President Bush's commutation of Libby says

From the Sentencing Law and Policy blog by Douglas A. Berman, William B. Saxbe Designated Professor of Law
Moritz College of Law at The Ohio State University:

July 2, 2007
What President Bush's commutation of Libby says: "I'm the sentencer ... for my pal"
Distilled to its essence, President Bush's decision to commute the imprisonment portion of Lewis Libby's sentence is a sentencing decision. The President has not formally excused Libby or changed his status as a convicted felon, and the President's statement indicates "respect" for a federal jury's determination that Libby committed numerous federal crimes. What the President apparently does not respect is the within-guideline prison term that Judge Reggie Walton concluded was "sufficient, but not greater than necessary" under federal law for Libby's numerous federal crimes.
As I noted here, many federal defendants and their attorneys have argued in many fora that guideline imprisonment levels should not be shown undue respect, but Bush's Justice Department has argued in many fora that the guidelines merit faithful allegience. It will be interesting to see if, after the President has made clear that he views the guidelines are "excessive" for one of his pals, others with sentencing power begin to give less respect to the guidelines when the fates of less connected defendants are in the balance.

U.S. Deal-Making Topped $1 Trillion in First Half

The volume of mergers and acquisitions in the United States topped $1 trillion in the first half of 2007, a record for the first six months of any year, according to Dealogic. Deal activity was even stronger in Europe, where the combined value of mergers so far this year surpassed U.S totals for the first time in four years. Goldman Sachs continues to ride the deal wave. The investment bank was ranked the top M&A adviser across the world, in the U.S. and in Europe during the first six months of the year, Dealogic said. Goldman, which advised on 223 deals worth $788 billion, was followed by Morgan Stanley and Citigroup in the global M&A ranking.
Go to Item from DealBook»

Chairman Denies That S.E.C. Favors Business

By THE ASSOCIATED PRESS
Published: June 27, 2007
WASHINGTON, June 26 (AP) — The chairman of the Securities and Exchange Commission on Tuesday defended the agency’s record in pursuing corporate misconduct, rebuffing accusations that it may be tilting toward business interests.
At the same time, the chairman, Christopher Cox, showed some understanding for Republican lawmakers’ complaints that class-action lawsuits against corporations had grown out of control.
“Regulation has costs. So does litigation,” Mr. Cox said at a hearing of the House Financial Services Committee, where he appeared with the other four commissioners. He said regulators must be “particularly attentive” to potential conflicts of interest on the part of those who sue companies.
Mr. Cox also disclosed that the agency had started about a dozen investigations related to complex aggregations of debt known as collateralized debt obligations, in which hedge funds have increasingly invested. The situation took on urgency last week with the near-collapse of two funds managed by the Wall Street investment firm Bear Stearns.

Delay in Buyout Bond Sale

Two new signs emerged to suggest that investors are concerned that the buyout boom may be losing its momentum. US Foodservice, the American unit of the Dutch supermarket Royal Ahold, has postponed its sale of $650 million in bonds that were expected to finance the unit's equity buyout. Before the decision, US Foodservice had twice scaled back its debt offering to help finance its $7.1 billion buyout by Kohlberg Kravis Roberts and Clayton Dubilier & Rice.The decision to delay the sale, one anxiously watched by analysts as a weathervane for the newest crop of buyouts loaded with debt, came on the same day that shares of Blackstone Group, the giant private equity firm that went public last week, fell below their offer price of $31.
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AG's Hiring of Legal Counsel Opposed

Amanda Bronstad, The National Law Journal, June 26, 2007:

Two national tort reform groups have intervened in an Oklahoma case in an attempt to disqualify plaintiffs lawyers who were hired by the state's attorney general on a contingency-fee basis.
The U.S. Chamber of Commerce and the American Tort Reform Association (ATRA) recently filed an amicus brief in an environmental case brought by Oklahoma Attorney General W.A. Drew Edmondson against about a dozen poultry processing plants. State of Oklahoma v. Tyson Foods Inc., No. 4:05-cv-00329 (N.D. Okla.).
The Chamber and ATRA have been scrutinizing attorneys general for hiring outside counsel on a contingency-fee basis to bring big-ticket litigation against corporations.
In their brief, the chamber and ATRA claim that "permitting the state to 'contract out' its enforcement power to private attorneys can lead to prosecution of government lawsuits on the basis of profitability, not public interest."

Private Equity Investors Hint at Cool Down

By ANDREW ROSS SORKIN and MICHAEL J. de la MERCED
Published: June 26, 2007, The New York Times

The buyout boom may be about to hit a bump.
After years of supersize private equity deals, investors in the debt that supports these transactions — the lifeblood of the industry — have begun to not so quietly push back at several prominent transactions.
Rising interest rates and tougher terms from investors may signal that private equity players will soon be struggling to continue reaping the outsize returns that have made the buyout business so lucrative.
Already a raft of bond offerings for recently announced deals, including the $7.75 billion buyout of Thomson Learning and the $7.1 billion deal for U.S. Foodservice, have been scaled back after facing resistance from investors.
This week, two other buyouts, the $4.7 billion deal for ServiceMaster and the $6.9 billion sale of Dollar General, are expected to price their bonds, and they may serve as an important barometer for a series of even larger deals to sell bonds to investors this summer.
Stock in the Blackstone Group, the private equity firm that went public Friday, fell 7.5 percent yesterday, to $32.44, in another sign that investors may now be less optimistic about the buyout boom. Blackstone’s stock opened at $36.55 on Friday and closed that day at $35.06.

Does the Bell Toll for the Buyout Boom?

Posted by Dana Cimilluca, June 25, 2007, WSJ DealJournal:

The recent lull in merger activity could mean one of two things. Either the market is pausing before an assault on yet another peak, or the end of the great buyout boom is near.
Joseph Rice thinks it may be the latter. The chairman of buyout firm Clayton Dubilier & Rice told Bloomberg in an interview over the weekend from Singapore that “We are pretty close to the peak” of this private-equity cycle, which began after the last downturn in the industry in 2000-2001.
Signs that Rice might be right abound. Providers of the loans and bonds that have fueled the deal-making frenzy are starting to hold their wallets a bit more tightly. Last week, Royal Ahold’s U.S. Foodservice unit — in the midst of being bought by private-equity firms — was forced to trim down and delay the sale of debt to back its leveraged buyout, as The Wall Street Journal reported Saturday.
Then there was the initial public offering of Blackstone Group Friday. It doesn’t take a strong imagination to see the landmark sale, which the firm’s owners are using to partially cash out their stakes, as the climax of the boom.
Alas, many bankers and private-equity practitioners have been calling for a bursting of the M&A and lending bubble(?) for months, and so far it remains intact. All the worry could in fact could sustain the boom a while longer, as we discussed here.
After all, CD&R just signed up for one of the largest deals in its history, the $10 billion acquisition of Home Depot’s supply business. The string of quiet Mondays lately (normally the preferred day for merger announcements) also could signal little more than a typical summer slowdown, where even hyperactive bankers pause for a moment to smell their abundant roses. Certainly Deal Journal colleague Mahammad Hadi here sees the buyout speculators getting their flip-flops ready.
Time will tell whether it is Rice’s words or his actions that should be watched the closest.

Bausch & Lomb: A Sorry Tale

From Business Law Prof Blog, June 24, 2007:

Bausch & Lomb, a 154 year old company, is selling to a private equity firm, Warburg Pincus for $65 a share. The company is struggling and its stock price is well down from highs of $80 a share two years ago. The CEO responsible for the company's recent setbacks is Ronald L. Zarella. Zarella will receive a golden parachute payout of $40 million and have an equity stake in the privatized company. If the company turns around, he will rake it more millions. There are three things seriously wrong with this story: First, Zarella is profiting from his own weak managing record (there were accounting problems while he led the company). Second, Zarella is conflicted in the buyout both by the overly generous golden parachute and by his participation in the purchaser. And third, the purchaser will undoubtedly do the cookie cutter "Peltz thing" to print money -- sell under-producing assets, sell undervalued assets, leverage and distribute money to shareholders (an extraordinary dividend or buyback). This is not rocket science; it is pathetically simple. If this is a viable strategy for the private company it is surely a viable strategy for a public company; Zarella should have done the Peltz thing as CEO of the public company. The entire deal smells. At some point, we are going to have to come to grip with the fact them many of the private buyouts are a huge reward for those who should not be rewarded and this reward may itself be a primary reason for the buyout. Buyout groups look for companies with poor managers and fat golden parachute agreements; convince the manager to sell, cash the agreement, and come abroad the buyout team which can use his knowledge and contacts (and inside information) and tell him how to behave. We need a decent judicial opinion on one of these deals that lays out more protections for shareholders.

Vonage set to resume patent battle

by Stacey Higginbotham, TheDeal.com:
Vonage Holdings Corp. is scheduled Monday, June 25, to appear in the United States Court of Appeals in Washington to make what may be a final stand in fighting charges that its online telephony service infringes patents held by Verizon Communications Inc.
A verdict against Vonage, a pioneering developer of so-called voice-over-Internet-protocol technology, which enables conventional phone calls to pass over IP-based technology, could prove fatal for the Holmdel, N.J., company. Yet prospects for Vonage, whose shares have tanked over the past year amid uncertainty surrounding its legal status appear marginally brighter now than after its last court hearing two months ago.

Congressional Scrutiny of Private Equity Continues

DealLawyers.com Blog, June 19, 2007:

As widely reported, Senators Baucus (D-MT) and Grassley (R-IA) introduced a bill last Thursday that would significantly change the taxation of publicly traded private equity firms structured as partnerships. This legislation, if passed, would cause publicly traded private equity firms to be taxed as corporations. As such, these firms generally would be subject to an entity-level corporate tax (with no preference for capital gains, including carried interest) and the owners of these firms would be subject to tax on distributions received from the firms. Here is a related NY Times article.
Rep. Charles Rangel, Chairman of the House Ways and Means Committee, praised the bill and said his committee would examine the legislation. If passed, the bill would be immediately effective for any firm that has not yet filed an IPO registration statement with the SEC. For firms that have done so, namely the Blackstone Group, the bill would not be effective until 2012.
Posted by broc at June 19, 2007 08:45 AM

Calpers Jumps on the Activism Bandwagon

NYT's DealBook, June 18, 2007, 3:56 pm:

As shareholder activists grab the spotlight more often — the most recent example being The Children’s Investment Fund’s pushing for a sale of ABN Amro — one of the largest institutional investors in the United States has decided to hitch itself to itself to their star.
The California Public Employees’ Retirement System, the largest state pension fund in the country, will invest $12 billion with activist investors, a Calpers official said at a conference Monday, Bloomberg News reported. That would more than double the $5 billion the fund currently invests in such funds.
“Global activism is on the rise,” Christy Wood, a senior investment officer for global equities, told the GAIM conference in Monaco via videoconference. “Shareholders are increasingly taking an interest in what is happening in the companies they own.
DealBook has noted on more than one occasion that shareholder activism of late has earned handsome returns for practitioners. Studies by Columbia Business School and the Wharton School point out that activist funds have produced returns of at least 7 percent over the short term, with the stocks of targeted companies often remaining up over the longer term.
Yet both studies point to a worrisome trend for Carl C. Icahn, Daniel S. Loeb and their acolytes: more activists are chasing fewer good targets. The Columbia study, for instance, noted that average stock returns for targeted companies have declined from 10.6 percent in 2001 to 4.8 percent in 2005.
Go to Article from Bloomberg News »

Justices Turn Back Antitrust Suits Against Wall St. Firms

New York Times, WASHINGTON, June 18 — The Supreme Court ruled in favor of more than a dozen Wall Street investment banks today as it found that they could not be sued under antitrust law over losses in the crash of technology stocks seven years ago.
By a 7-to-1 majority, the court held that securities law, not antitrust law, applies to the conduct that the dissatisfied stock buyers alleged in the case. They complained in part that the investment banks conspired to drive up prices on hundreds of new stocks.
Today’s ruling overturns a 2005 decision by the United States Court of Appeals for the Second Circuit, in Manhattan, which said it found “dangerous manipulation” by the banks and would have allowed the plaintiffs to proceed under antitrust law.
The case had been closely watched on Wall Street, in part because a successful suit under antitrust law could lead to triple damages, unlike penalties under securities laws.

Must-Read Decision: VC Strine Enjoins Merger Vote Topps Case

From DealLawyers.com Blog, June 18,2007:
On Thursday, Vice Chancellor Strine of the Delaware Chancery Court issued an opinion in which he enjoined The Topps Company from proceeding with a meeting of stockholders to vote on a merger with The Tornante Company (controlled by Michael Eisner). The injunction required (i) supplemental disclosure regarding Eisner's assurances that he would retain existing management and (ii) that Topps release Upper Deck, a second bidder, from a standstill agreement so that Upper Deck could communicate with Topps stockholders and launch a topping tender offer. The Vice Chancellor concluded that Topps improperly failed to waive the standstill, used Upper Deck's status as a competitor as a "pretext," and that the evidence "regrettably suggests that the Topps Incumbent Directors favored Eisner, who they perceived as a friendly suitor who had pledged to retain management...."
This decision is a must-read for M&A practitioners. Here are some highlights from the 67-page opinion:
1. The court validated Topps's decision to negotiate privately with Eisner and not to conduct an auction. VC Strine observed that (a) Topps conducted a failed auction in 2005 for its confectionary business and (b) the directors engaged in a "spirited debate" on the subject. He also noted that a recent proxy contest had put potential buyers on notice: "the pot was stirred and ravenous capitalists should have been able to smell the possibility of a deal."
2. The court recognized the value of obtaining a binding bid from Eisner (the "proverbial bird in hand") and found that the board left itself "reasonable room for an effective post-signing market check" through the use of a go-shop provision ("For 40 days, the Topps board could shop like Paris Hilton").
3. VC Strine validated the customary deal protection measures used by Topps - a termination fee and matching right. He observed that while matching rights are "a useful deal protection" for buyers, they have "frequently been overcome in other real-world situations." He considered the 4.3% post-go-shop termination fee "a bit high in percentage terms" but deemed it reasonable since it included Eisner's expenses and "can be explained by the relatively small size of the deal." "At 42 cents a share, the termination fee (including expenses)is not of the magnitude that I believe was likely to have deterred a bidder with an interest in materially outbidding Eisner."
4. VC Strine sharply criticized the Topps board for having little basis on which to terminate negotiations with Upper Deck when the go-shop expired (which was permitted if Upper Deck was deemed to be an "Excluded Party"): "Upper Deck was offering a substantially higher price.... [and] the Topps board chose to tie its hands by failing to declare Upper Deck an Excluded Party in a situation where it would have cost Topps nothing to do so."
5. Most importantly, VC Strine came down hard on Topps's refusal to waive a standstill agreement which prevented Upper Deck from making public statements or proceeding with a premium hostile tender offer: "That refusal not only keeps the stockholders from having the chance to accept a potentially more attractive higher priced deal, it keeps them in the dark about Upper Deck's version of important events, and it keeps Upper Deck from obtaining antitrust clearance, because it cannot begin the process without either a signed merger agreement or a formal tender offer."
6. The court ordered supplemental disclosures to make clear that, even though management had not negotiated retention agreements, Eisner had already made clear that he planned to retain "substantially all" of Topps's "senior management and key employees." The court also ordered supplemental disclosures of Upper Deck's "he-double-hockey-sticks or high water" offer to divest itself of assets to obtain antitrust approval, which the court deemed relevant since Topps cited antitrust concerns in its decision to terminate discussions. The court also chastised Topps's financial advisors for adjusting cost of capital assumptions and shortening management's projections from five to three years-apparently in an attempt to support Eisner's offer. The court ordered supplemental disclosures that reflected the original and full projections.
Practitioners should note that unlike other recent decisions, such as Caremark-Express and Netsmart, Topps is not solely a disclosure injunction. VC Strine granted substantive relief regarding the standstill. Practitioners also should note (not surprisingly) that the plaintiff who obtained that relief was the topping bidder, not a stockholder plaintiff. VC Strine expressly noted that the arguments made by the stockholder plaintiffs would not have supported a Revlon injunction. Topps thus does not increase deal risk absent the presence of a meaningful topping bid.
Topps' ruling on the standstill provision is frankly a welcome precedent. The questions created by aggressive standstill agreements and subsequent waivers have been part of the Delaware counseling mix for some time. Without any meaningful decisions on the issue, however, concerns regarding potential fiduciary duty issues were often given short-shrift. Topps confirms that the use of standstill agreements and reliance on them to foreclose subsequent bids are areas that must be approached with particular care.

Congress Puts a Chill in Blackstone’s IPO

WSJ Deal Journal, June 14, 2007, 4:52 pm

Congress has finally lowered the hammer on the private-equity industry. And it’s hitting Blackstone Group in the head.
Sens. Max Baucus and Charles Grassley, the ranking Democrat and Republican on the Finance Committee, introduced a bill today that would eliminate favorable tax treatment for the private-equity firm, which is planning to go public later this month.
In short, the bill says the fees Blackstone collects from its investors should be taxed like regular corporate income, and not at the more favorable “partnership” level that Blackstone had planned.
The bill, which could be passed as soon as a few weeks from now if it gets added on to the budget bills the Congress is currently working on, could put a big chill on Blackstone’s IPO and other such offerings waiting in the wings.
Deal Journal has also been told by people close to the issue that Baucus and Grassley will introduce a bill in July to make sure that carried interest profits pocketed by private equity firms are taxed as regular income, at as much as 35%, and not the reduced capital gains rate of 15%.
If the bill passes, Grassley and Baucus made sure it will become effective retroactively — back to today, the day it was introduced. This is very signfiicnat because it ensures that Blackstone will have to comply even if it goes public before the bill passes.

Concerns grow over risky equity bridge loans

NEW YORK, June 14 (Reuters) - The recent popularity of a risky private equity financing agreement, known as an equity bridge loan, is raising concerns among analysts, regulators and even the bankers who arrange them.
Equity bridge loans allow private equity firms to get investment banks to share in the cash payment on deals. Such loans are great for buyout firms wanting to pursue takeovers without joining forces with competitors, but carry huge risk and skimpy pay-offs for the investment banks.

Deliver and you get paid

The private equity industry's pay-for-success approach to executive compensation could be a model for public companies, The Deal's David Carey writes. The article looks at common features of executive pay packages at private-equity-backed firms.
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The Private Equity Effect

As buyout firms hunt for underperforming public companies, many are trying to boost their stocks with asset sales, spin-offs, and restructurings

As private equity firms continue to gobble up assets at unprecedented rate for unprecedented sums, their deal-frenzy is causing a chain reaction among firms who are eager to escape the clutches of these cash-rich hunters.

Go to Article from BusinessWeek>>

Hedge fund activism works – for now

William Wright and William Hutchings
04 Jun 2007

Hedge fund activism generates big returns for shareholders – but these returns are falling as more funds chase fewer attractive targets, according to the most comprehensive academic study yet produced.
Shares in companies targeted by activist hedge funds in the US outperformed the market by more than 7% in the short-term, and targeted companies posted significant improvements in operational performance and return on equity in the two years after hedge funds called for change, according to the study of nearly 900 interventions by more than 130 different hedge funds in the US between 2001 and 2005.
In a quarter of all cases the excess returns were higher than 17%. The study, published last week by the Wharton School at the University of Pennsylvania and written by four academics, also shows that hedge fund activists have a bigger impact on share price performance than traditional activism by pensions funds or mutual funds.

Brocade Settles With SEC Over Backdating Charges

Posted by Peter Lattman, WSJ Law Blog:
How will the SEC handle the more than 100 backdating investigations on its plate? This morning we have a clue. Brocade Communications Systems has agreed to pay a $7 million penalty to settle allegations over improper stock-options grants, making it the first company to pay a fine in connection with the backdating scandal. Here’s the story from the WSJ.
The settlement with the SEC paves the way for similar cases to be resolved. Analog Devices and Mercury Interactive previously announced preliminary settlements that include penalties. According to the WSJ, Brocade struck its deal with the SEC more than a year ago, but as the backdating scandal mushroomed to more than 100 companies, things got held up. (Click here for the WSJ.com’s essential backdating scorecard.)
The backdating probes spurred a lengthy debate among the five SEC commissioners about whether or not backdating warranted a penalty. Among the questions raised: Were shareholders hurt by either the backdating of options or by the deception about how executives were compensated? Were they hurt by the revelation of potential wrongdoing?
In general, levying penalties against companies involved in a financial fraud is a hot-button issue at the SEC. Republican commissioners, in general, have opposed them as a double hit to shareholders, who already have been penalized once by being defrauded. Others, including some Democrats, have argued that penalties serve as deterrents. Whaddya think?

The Buyout Boom

From today's DealBook blog:

The explosive growth of private equity deals is a well-documented trend by now, but some new numbers from Thomson Financial underscore just how enormous the volume of buyouts has become. Consider this: So far this year, the volume of global announced deals involving private equity firms is $447 billion, more than double the volume from the same period in 2006 — a year that was no slouch was far as buyouts were concerned. In the United States, the rise has been even sharper. At $281 billion, U.S. private equity deals have more than tripled from a year ago, boosted by the recent buyouts of Alltel, First Data and others.
Other highlights from Thomson Financial’s latest mergers and acquisitions statistics:
* Private equity deals worldwide have made up more than a fifth of all M&A so far this year, a gain of about 4 percentage points over last year. In the United States, leveraged buyouts account for 35 percent of all activity, up from about 16 percent last year.
* Total merger-and-acquisition volume so far this year is $2.18 trillion, 77 percent above last year at this time. In the U.S., volume is at $802 billion, up 54 percent. In Europe, volume is up 129 percent, at $983.6 billion.
* Strategic deals are up 69 percent, at $1.7 billion worldwide.
* Just two sectors, retail and telecommunications, are lagging behind last year in M&A activity. The recent deal for Texas Pacific Group and a unit of Goldman Sachs to buy wireless provider Alltel may signal a change for that second sector. It was the biggest-ever leveraged buyout of a telecommunications provider and the fifth-biggest L.B.O. of all time.

Boards More Likely to Oust Underperforming Chief Executives, a Study Finds

A new study examining turnover among top executives has found that corporate boards were nearly three times as likely to pull the trigger on failing chief executives than they were a decade ago.
Nearly one of three chief executives who departed last year were either fired or forced out for performance-related reasons, according to the analysis by the global management consulting firm Booz Allen Hamilton. That compared with roughly one in seven departing executives ousted in 1996.
While the study concluded that the wave of executive turnovers appears to have leveled off from its high point last year, shareholders and boards were still keeping the boss on a short leash.
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Tyco to Pay $2.98 Billion to Settle Accounting Suits

By Jef Feeley and Rachel Layne
May 15 (Bloomberg) -- Tyco International Ltd. agreed to pay $2.98 billion to settle investor lawsuits accusing the company of artificially inflating revenue, a move that helps clear the way for the firm to split into three companies.
Tyco, the world's biggest maker of electronic connectors and security systems, agreed today to resolve securities-fraud suits alleging the company overstated its income by $5.8 billion during the tenure of former Chief Executive Officer L. Dennis Kozlowski, according to a filing with the U.S. Securities and Exchange Commission.
The accord, the fourth-largest securities-fraud settlement in U.S. history according to Bloomberg data, comes as Pembroke, Bermuda-based Tyco prepares to dismantle the company built through acquisition by the now-jailed Kozlowski. Shareholder attorney Jay Eisenhofer said the agreement, which still requires court approval, is the largest settlement by a single defendant accused of defrauding investors.
The shareholders are handing over to Tyco their claims against Kozlowski and Swartz in exchange for 50 percent of whatever the company manages to recover from the former executives.
In addition to the cash settlement, Tyco agreed to give investors its right to sue the company's former auditor, PricewaterhouseCoopers, for failing to uncover the fraud, according to a statement issued by Eisenhofer and Richard Schiffrin, who also served as one of the shareholders' lead lawyers.

First Majority for "Say on Pay"

Submitted by: L. Reed Walton, Staff Writer
In the first clear majority vote for the issue, a proposal seeking an annual advisory shareholder vote on executive pay received 57 percent support at Blockbuster, according to the proponent, the New York City Employees' Retirement System (NYCERS).
"We are encouraged by the high level of shareholder support and hope that Blockbuster's board of directors will act swiftly to implement the expressed will of its shareholders," New York City Comptroller William C. Thompson wrote in a press release.
The video-rental company declined to confirm the exact level of support, but company officials did indicate that the NYCERS resolution--along with another shareholder proposal asking the company to eliminate its dual-class share system--was approved at Blockbuster's May 9 annual meeting.
"[The proposals] are non-binding, so our board will take them under advisement," Angelika Torres, director of Blockbuster's investor relations division, told Governance Weekly.
The Blockbuster vote is the highest known support received by any advisory pay vote proposal. The "say on pay" initiative is relatively new, having debuted with seven proposals last year that averaged about 40 percent support. The showing at Blockbuster is noteworthy because the company has not been criticized by prominent investors over its pay practices or faced an investigation into past stock option grants.
In its supporting statement, NYCERS said it wanted an advisory vote to "provide Blockbuster with useful information about whether shareholders view the company’s senior executive compensation, as reported each year, to be in shareholders' best interests."
Management at the Dallas-based company opposed the measure, saying it already provides means by which investors can communicate with the board.
A similar resolution at Verizon Communications may have won more than 50 percent of votes cast at the company's May 3 meeting. Preliminary counts indicate the vote was too close to call at the end of the meeting, and the company said it plans to tabulate the votes and release final results in about two weeks.
At 14 companies this season, pay vote resolutions have averaged 42 percent support, two percentage points higher than in 2006. A proposal by the Needmor Fund, a religious group, won 48.4 percent at Occidental Petroleum on May 4, while a similar measure filed by the AFL-CIO got 49.2 percent support at Merck's meeting on April 24.
All other "say on pay" measures this season have received 47 percent support or lower, with the lowest support level, 30.4 percent, at Coca-Cola on April 18.
More advisory vote proposals are on corporate ballots next week, including JPMorgan Chase on May 15, Northrop Grumman and AMR on May 16, Yum! Brands on May 17, and Time Warner on May 18.

Hedge funds may pose huge market risk: Fed

Could be largest risk since Long-Term Capital Management crisis in 1998 says New York Federal Reserve
May 2 2007: 1:18 PM EDT
NEW YORK (Reuters) -- Hedge funds may now pose the biggest risk of a crisis since 1998, when the implosion of Long-Term Capital Management threatened the global financial system, the New York Federal Reserve said on Wednesday.
The statement represented the bank's sternest warning to date over the possible fate of the $1.4 trillion industry.
"Recent high correlations among hedge fund returns could suggest concentrations of risk comparable to those preceding the hedge fund crisis of 1998," according to a paper written by Tobias Adrian, capital markets economist at the central bank.
Hedge funds, investment pools that are aimed primarily at wealthy investors and institutions, have been very lightly regulated, facing only vague registration requirements.
Their sheer immensity has raised some red flags from policy-makers, with New York Fed President Timothy Geithner among those sounding repeated warnings about the need for cautious lending.
The Fed's latest worry arose from what it described as a rising correlation between the actual returns of hedge funds, which could point to similar trading strategies that excessively concentrate risk on too few market positions.
Still, many officials including Geithner have shied away from calling for explicit regulation, arguing instead that the large banks who lend to hedge funds should police themselves to make sure no one lender gets in too deep.
Hedge funds borrow large sums of money in order to take aggressive bets on financial markets. Many operate heavily in the derivatives market, estimated at around $17 trillion, raising fears about possible future shocks

Reverberations from Supreme Court patent ruling

From Corporate Dealmaker Forum, May, 1, 2007:
The value of patents has dropped again following a decision by the U.S. Supreme Court in KSR International Co. v Teleflex, Inc. The nation’s highest court evaluated the tenet of “obviousness,” and on Monday reversed a legal test that had been relied upon for 24 years to decide if a patent claim was obvious when considering prior art.
The effect is to broaden the standard for obviousness and make it easier to argue that a patent in invalid. This is the fifth patent case in two years where the Supreme Court has changed patent law with its rulings. While the U.S. Congress tries its hand at patent reform yet again, the court is adjusting the aging patent system through its caseload.
Rachel Krevans, an intellectual property litigation partner in the San Francisco office of Morrison & Foerster LLP, says the ruling should have a greater effect on the electronics industry and little affect on the biotechnology industry.
As the Supreme Court focuses on patents, investors and corporate dealmakers should take note. As more and more of a company’s value derives from intangibles, such as patents, such legislating from the bench could have a profound impact on a portfolio of intellectual property.— Stacey Higginbotham
Read a related article from Bloomberg.com

U.S. Senate Takes Up "Say on Pay" Bill

From Institutional Shareholder Services:
Submitted by: L. Reed Walton, Staff Writer
After the passage of the "Shareholder Vote on Executive Compensation Act" by the U.S. House of Representatives, Senate Democrats are making it known that they, too, want shareholders to have a vote on executive pay.
A bill seeking to amend the Securities and Exchange Act of 1934 to give shareholders at public companies an advisory vote on executive compensation--or "say on pay"--was introduced April 20 in the U.S. Senate as a companion to the House bill approved the same day. The House legislation passed by a vote of 269-134, indicating that it got some Republican support.
Senate Bill 1811, which was introduced by Sen. Barack Obama of Illinois, proposes an annual vote on the executive compensation disclosed in proxy statements under the new Securities and Exchange Commission's standards. Companies would be required to allow a non-binding vote on the compensation disclosure and analysis (CD&A), summary compensation tables, and related material, starting in 2009.
Like the House measure, the Senate bill would give shareholders the opportunity to vote on any severance agreements that are reached while a company is considering a takeover offer or merger.
S. 1811 has been referred to the Senate Committee on Banking, Housing, and Urban Affairs, and has attracted co-sponsorships from at least four of Obama's fellow Democrats, including Sen. Sherrod Brown of Ohio, Sen. Tom Harkin of Iowa, Sen. John Kerry of Massachusetts, and Sen. Richard Durbin, also of Illinois.
In his invitation to co-sponsors on April 24, Obama wrote, "It's time that we not only make executive compensation packages more transparent, but that we also allow shareholders to express and debate their views on those packages."
The Bush administration has expressed opposition to the House legislation, saying it "does not believe that Congress should mandate the process by which executive compensation is approved."

Enron, the Supreme Court and Shareholders on the Brink

By BEN STEIN, New York Times, Sunday, April 29, 2007:
LONG ago and far away, when I was a little tyke studying economics under the tutelage of C. Lowell Harriss at Columbia, and finance under Jan Ginter Deutsch and Henry Wallich at Yale, we were taught that the stockholder was the ultimate owner of a public company, the ultimate boss, the ultimate trustor to whom the highest standards of fiduciary duty were owed.
These included the duty to put the interests of the stockholder ahead of the interests of the managers and their agents in each and every situation, to avoid even the appearance of a conflict of interest, to disclose each and every material fact and to avoid any subterfuge that would operate to conceal a material fact.
These duties were common-law obligations, but some of them had also been codified in federal and state law. Federal law, in particular, enacted after the disclosure of huge securities fraud surrounding the 1929 stock market crash that started the Great Depression, prohibited the use of any artifice or device to conceal material facts or to keep them from being disclosed to the investing public.
Section 10(b) of the Securities Exchange Act of 1934 specifically barred the use of any manipulative device or contrivance that would defraud or mislead. A rule adopted by the Securities and Exchange Commission under that act, the famous Rule 10b-5 said that it would be unlawful for any person “directly or indirectly” to “engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”
That, you would think, would have special relevance to the huge scandal at Enron. In that sad story, managers of the company used various devices to conceal from the markets and the investing public that the company was essentially a huge fraud.
In that effort, the managers were helped considerably by a number of very large investment banks. These banks and brokerages used complex transactions that made it look as if Enron were making money when in fact it was insolvent. Andrew S. Fastow, the former finance boss at Enron, testified during legal proceedings about Enron that he saw the large banks as “problem solvers” who would come up with these schemes and thus help the company conceal the reality of its dire situation.
Now, you would think that if this were true, Merrill Lynch, Credit Suisse and Barclays — named in an investor lawsuit — might possibly be liable to the defrauded stockholders, whose losses were in the tens of billions of dollars, and might owe some little pittance to them. (Banks including Citigroup, JPMorgan Chase and CIBC have already paid more than $7.3 billion to settle with Enron shareholders.) You would think that there would at least be a trial about it.
Ah, but then you would be missing the point that the law is a wily, cunning beast of utter unpredictability. Some years ago, in 1994, after a series of disastrous missteps by accounting firms in connection with an earlier series of securities frauds, the Supreme Court brought out an opinion in the case called Central Bank of Denver v. First Interstate Bank of Denver.
In this long and incomprehensible case, the high court basically said that there would be no 10(b) liability for players who “merely” aided and betted securities fraud.
Just as an opinion, by little me, this was done to save the accounting firms from completely immolating themselves by their misconduct. However, the facts of that case were somewhat limited. The defendant, Central Bank, had been the trustee for $26 million in defaulted bonds issued by a local public building authority. But Central was not its investment bank and did not issue investment analysis and, moreover, the securities in question were not publicly traded.
The Enron fraud involved a public company and had a much wider scope. In a huge class-action case where millions of documents had been collected in a federal district court, and in which many witnesses had been deposed, a jury trial was headed to daylight. But suddenly last month, something happened. A three-judge panel of the Fifth Circuit United States Court of Appeals in New Orleans ruled that the class-action suit against investment banks over Enron could not proceed. (Individuals’ ability to pursue claims was not affected.)
The panel held that although its ruling might prevent justice from being done and satisfaction from being had, the acts of the investment bankers were at most aiding and abetting, not direct acts, and therefore not actionable under 10(b) as construed in the Central Bank case.
Ouch. Yes, the defendant banks are accused of concealing the true facts about Enron and likely led investors to buy when they should have sold. Yes (and this is a beauty), at the same time the investment banks were helping Enron with its questionable financials, their “analysts” were praising Enron. (As the petitioners’ brief notes in an appeal to the Supreme Court to overturn the Fifth Circuit decision, these were “full service” banks.)
But, according to the Fifth Circuit panel, this was not enough. This was not a scheme or contrivance to defraud, they said. Yes, the facts were completely different from those of the Central Bank case, but the banks were to be let off the hook. This was in the name of offering predictability in these cases (apparently the predictability that the stockholders would be mistreated).
But not all hope is lost. A tasty appeal has been filed, which is a little masterpiece of legal argumentation.
Now, the Supreme Court can have another look at this case. It can return some dignity and rights to Enron stockholders and send up a warning flare to investment banks to avoid helping out with financial fraud. It can let this case go forward to trial.
This is a potential golden moment for the stockholders — or another step down the dreary alley toward extinction of the rights of those poor whipped dogs: the actual owners of America’s public companies. It is up to the Supreme Court to right the ship.
Ben Stein is a lawyer, writer, actor and economist. E-mail: ebiz@nytimes.com.

The Other Shoe Drops on Wendy's

From Business Law Prof Blog:
Wendy's is looking for a buyer. The final act is about to open on the two year interest in Wendy's by several prominent hedge funds. In the opening acts the hedge funds bought Wendy's stagnant shares, demanded that the board spin off two profitable subsidiaries (which it did), eased out the CEO, and negotiated for three seats on the board of directors. In response, Wendy's management took advantage of a rising stock price to cash in some options and received a standstill agreement from the most prominent of the hedge fund operators (Peltz). The standstill is expiring. Peltz is still interested and the board is rumored to be considering putting the company up for sale. The entire drama unfolded in a company with a staggered board and the multiple anti-takeover protections in Ohio legislation. The lesson? The old anti-takeover protections no longer work against determined hedge funds. The threat to mount a proxy fight against for even one-third of the seats works if those seats include insider heavyweights up for re-election (the CEO or the CFO).

Breeden Gets Seats at Applebee’s Table

Richard Breeden, the former chairman of the Securities and Exchange Commission, recently called Applebee’s International a “study in stagnation.” But life at the restaurant chain is bound to get livelier now that Mr. Breeden, who is head of activist investment firm Breeden Capital Management, and one of his allies have been named to the Applebee’s board. The appointments, announced Thursday, settle a proxy fight that was brewing ahead of the company’s annual shareholder meeting on May 25.
The settlement marked a victory for Mr. Breeden, who calls himself a “active shareholder” or a “relational investor,” albeit not a complete one: He had previously been gunning for four seats on the board.
In sharp contrast to the combative tone Mr. Breeden has sometimes taken with Applebee’s — among other things, he has caustically criticized the company’s use of its corporate jet — Mr. Breeden said in a statement Thursday that he is “convinced that as a group we can provide the leadership to help make Applebee’s better, stronger and more valuable for the benefit of all.”
Applebee’s also said Thursday that it had gotten several “nonbinding, preliminary proposals” to buy the company and was proceeding to a second round of due-diligence discussions. Shares of Applebee’s rose 4 percent following Thursday’s announcements.
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Who Wants to Take Out Wendy’s?

Wendy's International, the No. 3 hamburger chain in the United States, said it formed a special committee of directors to review options that could include a possible sale of the company. Under pressure from activist investor Nelson Peltz, Wendy's recently spun off its Tim Hortons chain of coffee shops and agreed to sell its Baja Fresh restaurant business. Some industry analysts said Wendy's could be an ideal turnaround candidate for private equity firms, but others suggested that its relatively high stock price could deter potential buyers. The news pushed Wendy's stock up 12.6 percent to $36.80, above its 52-week high, in after-hours trading on Wednesday.
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ISS Publishes New Study - What International Market Say on Pay: An Investor Perspective

ISS Publishes New Study - What International Market Say on Pay: An Investor Perspective
Submitted by: Stephen Deane, Vice President, ISS' Center for Corporate Governance

A Say on Pay shareholder proposal reportedly scored the highest level of support yet yesterday: 49.2 percent of the votes cast at Merck's annual meeting. That's still just shy of a majority vote - or is it? It isn't clear whether "votes cast" includes abstentions. If so, then support could actually have reached a majority of yes-and-no votes excluding abstentions. The company has declined to comment. Either way, with scores of shareholder proposals appearing on ballots - plus a Congressional bill that the House of Representatives passed last week - Say on Pay has become one of the hottest topics of this proxy season.
Several overseas markets - including the U.K., the Netherlands and Australia -already have legislation requiring companies to put their compensation reports or policies to shareholder votes. What lessons can we learn from their experience?
Institutional investors in those markets report positive impacts. The shareholder votes have strengthened dialogue with companies, tightened pay-for-performance links and reduced the likelihood of severance rewards for failure. It's true that there are market differences with the U.S., and votes on pay are not a panacea. But the experience abroad suggests that the practice can and should be transplanted to American soil.
Today we publish our research findings in a new study titled "What International Markets Say on Pay: An Investor Perspective."

Big Union Takes Skeptical Look at Private Equity

The Service Employees International Union, which represents nearly two million workers including health care employees and janitors, on Tuesday released a report that takes a skeptical look at the private equity industry. While the report stops short of being openly hostile to buyout firms, it sets forth a series of “public policy concerns” related to the recent run of large buyout deals.
The union held a conference call Tuesday, in which officials said the main goal of their report was to start a conversation about private equity funds, which have gathered billions of dollars from investors (including, in some cases, corporate pension funds for workers in the S.E.I.U.). In the past year or so, private equity funds have used that cash to sweep dozens of large public companies, such as hospital chain HCA and office landlord Equity Office Properties, into private hands.
The union’s report took pains to quantify the riches that private equity firms have reaped by acquiring companies and then selling them again — sometimes after making drastic cuts in jobs or worker benefits.
The union also put a spotlight on certain tax breaks that accrue to private equity firms. One of these — the ability to pay a lower tax rate on certain kinds of private equity fees — seems to be of particular interest to the union — as well as some lawmakers in Washington.
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Vonage Can Sell Services During Appeal

By Alan Sipress, Washington Post, April 24, 2007; 3:40 PM
A federal appeals court ruled today that Vonage Holdings, the leading Internet telephone provider, can continue doing business as usual while it seeks to overturn a lower court ruling that it violated three patents belonging to Verizon.
Roger Warin, a lawyer for Vonage, told the appeals court during morning arguments that the company faced a "real risk of insolvency" if barred from selling its service to new customers as the trial court ordered earlier this month. He asked the three-judge panel to extend an emergency reprieve allowing the company to continue adding new customers.
Less than two hours later, the appeals court ruled in favor of Vonage and scheduled a June 25 hearing on the appeal itself.
The decision by the Court of Appeals for the Federal Circuit, a special court established to hear all patent case appeals in the country, marks the latest chapter in Vonage's struggle to survive after a U.S. district court in Alexandria ruled last month that the company could no longer use a crucial technology connecting its online network to the public telephone system. The district court judge had granted Vonage a partial reprieve, saying it could temporarily continue serving existing customers but could not sign up new ones.
While Warin told the appeals court that Vonage's viability was on the line, he added that Verizon could actually benefit if his company were allowed to continue signing up new customers. This because Vonage could have to pay Verizon royalties on the new business under the district court ruling.
In a filing to the Securities and Exchange Commission last week, Vonage said it could face bankruptcy and liquidation if its appeal fails.

SEC Won't Sue Apple Over Backdating of Stock Options

April 24 (Bloomberg) -- Apple Inc. won't be sanctioned by the U.S. Securities and Exchange Commission for backdating stock options, including some to Chief Executive Officer Steve Jobs, because it cooperated with regulatory probes.
The SEC credited Apple today for ``swift, extensive, and extraordinary cooperation,'' while announcing lawsuits against two former top executives. Sheila O'Callaghan, an SEC enforcement official overseeing the case, declined to comment on whether the regulator may later sue Jobs.
Apple, maker of the iPod music player, is the largest company to have current or former executives targeted in an SEC lawsuit alleging the manipulation of stock options to boost their value. The company said in December 6,428 option grants between 1997 and 2002 were backdated, including one to Jobs marked as approved at a board meeting that never occurred.
Former Apple General Counsel Nancy Heinen will fight the SEC's civil lawsuit filed against her today in San Francisco, her lawyers said. The SEC settled with former Chief Financial Officer Fred Anderson. He agreed to forfeit $3.5 million and pay a $150,000 fine to resolve claims he filed false financial reports and had inadequate accounting controls at the Cupertino, California-based company.

Big Numbers for VCs

From today's PE Week Wire:
Q1 venture capital data is out this morning, and it includes three significant developments. First, venture capital investing reached its highest level in six years, with over $7.05 billion disbursed. Second, biotech (including pharma) was the top sector for the second time in the past three quarters (even though IT still tops healthcare by a 52-37% split). Finally, Southern California-based companies raised more VC funding in Q1 than did New England-based companies, although the latter still had more companies funded.
All of this comes courtesy of the MoneyTree number-crunchers at PricewaterhouseCoopers, National Venture Capital Association and Thomson Financial. Click here for an abundance of downloadable data.

When Conflicts Arise, Lawyers May Be a Source

Lawyers face potential conflicts of interest when they advise public companies and also have buyout firms and investment banks as major clients, Andrew Ross Sorkin wrote in his DealBook column in The New York Times.
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House OKs Bill to Give Investors Say on Executive Pay

April 20 (Bloomberg) -- The U.S. House of Representatives approved a measure to give shareholders more say on how companies pay top executives, rejecting amendments by Republicans who said corporate boards already have enough power to set compensation.
The measure, approved 269-134, aims to rein in pay levels House Financial Services Committee Chairman Barney Frank and other top Democrats called excessive by giving public-company shareholders annual non-binding votes on executive salaries.
``There are unfortunately a lot of examples of excessive compensation for CEOs,'' Frank said today, speaking to reporters after the vote. ``It bites into other things that you would use the money for.''
Frank, a Massachusetts Democrat, has made tackling exorbitant executive compensation a top priority since taking over as chairman in January. He criticized the severance package awarded to former Home Depot Inc. Chief Executive Officer Robert Nardelli in January as a ``$210 million good-bye kiss.''

Vonage faces key legal hearing

The final resting place of Vonage Holdings Inc. could be determined in a courtroom next week.
The United States Court of Appeals in Washington on April 24 is expected to rule on whether the embattled Internet telephony provider may sign up new customers. Vonage in a regulatory filing on Tuesday, April 17, said it risks bankruptcy related to patent litigation with Verizon Communications Inc., and a legal ruling against the so-called voice-over-Internet-protocol company could do irreparable harm to its business.
At issue is whether Holmdel, N.J.-based Vonage infringed three patents held by Verizon, a New York telecommunications giant. In so ruling, Judge Claude Hilton of the U.S. District Court for the Eastern District of Virginia earlier this month barred Vonage from adding new customers. The court of appeals subsequently stayed that injunction. The federal appeals court will determine whether to stay the injunction permanently.

SEC Enforcement Shift May Lead to Lower Penalties

On Friday, this Washington Post article noted: "The SEC is changing how it negotiates settlements with companies in a way that could reduce the number and size of financial penalties that businesses pay, current and former officials said yesterday.
Under the change, which has not been made public, SEC enforcement lawyers must seek approval from the agency's five commissioners before they begin settlement talks that involve fining corporations, including seeking ranges for possible fines. Currently, staff members have the authority to negotiate with businesses and draft settlements in principle before they take the deals to the agency leaders for final approval.
The shift marks the latest development in a heated debate over whether companies or individual wrongdoers should bear the brunt of blame for legal violations. Penalties reached record proportions after destructive scandals at Enron, WorldCom and Adelphia Communications, creating concern among some commissioners that enforcement staff members are overreaching.
The initiative comes at the behest of SEC Chairman Christopher Cox, a former Republican lawmaker from California who is striving to avoid split votes at the agency. The pilot program will affect a relatively small percentage of cases and will result in more productive and fast-tracked negotiations between business and enforcers, according to spokesman John Nester. The plan, Nester said, "will increase investor protection because it will give our enforcement division a stronger hand in settlement negotiations."
The enforcement division was criticized by trade groups last month as "adversarial" and "overly punitive." Republican Commissioner Paul S. Atkins has argued that imposing fines against businesses in many circumstances unduly penalizes their stockholders. Rather, he and allies say, corporate executives who broke the law should pay the price.
Disagreement over the issue has slowed resolution of several cases, including some involving more than 160 companies that engaged in backdating of stock options for officials and employees. For example, staff members are continuing to deliberate whether Brocade Communications Systems, whose former chief executive was charged last year with criminal fraud, must shell out money for backdating offenses.
After months of behind-the scenes negotiations, Cox unveiled a policy statement in January 2006 laying out analytical steps the SEC would follow in deciding whether to levy penalties against businesses. Since then, the commission at times has sent the enforcement unit back to the drawing board in cases against Veritas Software and MBIA, among others, frustrating businesses and defense lawyers who seek quicker resolution of investigations.
The new policy on settlements is designed to prevent disconnects between SEC staff members and the commissioners. But the change is also contributing to lowered morale within the enforcement unit, which swelled in financial resources and prestige after widespread accounting frauds came to light five years ago.
Since that time, the enforcement budget has flattened and the U.S. Chamber of Commerce, the nation's largest business lobby, has called on SEC leaders to appoint an advisory panel to scrutinize the enforcement division's fairness.
Some staff members are balking at the change as a show of distrust in their judgment and another layer of red tape that could reduce the frequency and the size of financial penalties. But officials asserted yesterday that Cox and enforcement unit leaders are on the same page. Details of the plan continue to be worked out, agency officials said."

Will Buyout Brouhaha Put Dow Chemical In Play?

The irony of Thursday’s spectacle at Dow Chemical, which fired two senior executives for allegedly engaging in rogue negotiations to sell the company, is that it may have whetted investors’ and suitors’ appetite for a Dow takeover. “I find it interesting how private equity had penetrated the highest levels of the company,” HSBC Securities analyst Hassan Ahmed told Bloomberg News. The announcement “is telling us that there are parties interested in making that bid.” Shares of Dow rose 2 percent Thursday as some suggested that, while these talks appear to have been bungled, Dow could still make an attractive takeover target for Middle East investors or private equity firms. Breakingviews said this may be an example of “the wrong people doing the right thing.”
The Financial Times’s Lex column said the imbroglio highlights the “ever-present conflicts involved in management buyouts.”
There is a dispute, however, over whether the unauthorized talks really happened. One of the fired executives has already denied Dow’s accusations, telling TheStreet.com on Thursday that there may be “some kind of scapegoat going on.”
Dow Chemical, meanwhile, continues to reject the notion that it may be sold, a rumor that has been reported several times in British newspapers this year. A Dow spokesman told the Detroit Free Press that it is considering about 60 deals, ranging from joint-venture acquisitions to divestitures, but none involves the entire company.
Dow has a lot of cash, and many consider its shares to be undervalued — two factors that make for an appealing buyout candidate. But analysts also see plenty of reasons why a buyout is unlikely, including Dow’s size (its market capitalization is about $44 billion), its highly cyclical earnings and the difficulty of breaking the company up.
Details of the executives’ undercover negotiations began to emerge yesterday after Dow Chemical fired the two executives — J. Pedro Reinhard, a director and senior adviser to management, and Romeo Kreinberg, an executive vice president — saying they were “engaged in business activity that was highly inappropriate” involving “unauthorized discussions with third parties about the potential acquisition of the company.”
The New York Times reports that that both men engaged in talks with J.P. Morgan Chase about the prospect of a buyout and encouraged the bank to seek possible bidders, although the report notes that it is unclear whether the two executives had hoped simply to put Dow Chemical in play or had sought to be part of the management of an acquired company.
In any case, J.P. Morgan worked on the project for at least a month, running numbers on the business based on public filings and eventually reaching out to several private equity firms including Kohlberg Kravis Roberts & Company and the Blackstone Group, according to the Times. The firms apparently held meetings and briefly crunched some numbers, but their interest soon cooled.
J.P. Morgan was never formally retained by Dow Chemical to pursue a sale, and it is unclear whether Mr. Reinhard and Mr. Kreinberg represented themselves to the bank as authorized to engage in such preliminary discussions.
Yet the private talks soon became public on Feb 25, when The Sunday Express reported that three private equity firms — Kohlberg Kravis Roberts, Blackstone Group and the Carlyle Group — were ready to bid $54 billion for Dow.
The original report set off a firestorm at Dow Chemical’s headquarters in Midland, Mich.
Dow Chemical’s chief executive, Andrew Liveris called J.P. Morgan’s chief executive, James Dimon, to find out what was happening, according to The Times. When Mr. Dimon learned that Mr. Liveris was not interested in a buyout, it apparently stopped work on the project.
Furthermore, an executive from Blackstone reportedly called Mr. Liveris to tell him that the firm was not involved with a buyout proposal.
On Sunday, however, The Sunday Express ran another report of a possible buyout, this one specifying that Dow Chemical was about to be bought for $50 billion, with much of the money coming from the Middle East, in particular Oman.
“The fact that conversations had been held with potentially realistic buyers of the company suggests that those buyers aren’t going to go away,” William Batcheller, who helps oversee $85 million, including Dow shares, as director of investment management at Butler Wick, told Bloomberg.
On Monday, Dow, which usually does not comment publicly on deal speculation, issued a statement denying that it was in play. And on Tuesday, the chief executive, Mr. Liveris, appeared on CNBC to reiterate the denial.
Dow also decided that it was time it found out exactly why the talk persisted.
Christopher R. Huntley, a Dow spokesman, told The Times that high-level executives and directors started calling their contacts in the financial world, trying to trace the rumor to its source. One of them struck gold: “Someone in a position to know pointed at Romeo and Pedro,” Mr. Huntley said.
But now that the company has managed to rout the alleged secret deal makers, will it find itself — albeit unwittingly — in play?
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Berkshire Agrees to Hold First U.S. Shareholder Vote on Sudan

From Institutional Shareholder Services Corporate Governance Blog, April 11, 2007:

Shareholders at Berkshire Hathaway will vote on a Sudan divestment proposal in May--the first time a socially responsible investing (SRI) proposal regarding the violence-beleaguered African country will be on the proxy at a U.S. company.
The proposal, submitted by stockholder Judith Porter, asks the company to consider divesting its shares in PetroChina, a Chinese oil subsidiary whose parent company has mining, refinery, and pipeline operations in Sudan.
Porter, who owns 10 class-B Berkshire shares, wants the company to stop investing in "any foreign corporation or subsidiary thereof that engages in activities that would be prohibited for U.S. companies by Executive Order of the President of the United States."
Since 1997, U.S. firms have been forbidden to operate in Sudan, but the law says nothing about investment in foreign companies that conduct business there.
Berkshire originally obtained permission from the Securities and Exchange Commission to exclude the proposal on the grounds that the wording was "vague and indefinite." However, Berkshire Chief Executive Warren E. Buffett, who has said that he opposes the proposal, decided to put it on the proxy at the company's May 5 annual meeting to assess investors' views on this issue.
Berkshire management said in a Feb. 21 statement that PetroChina does not do business in Sudan. However, Berkshire acknowledges that PetroChina's parent company, the China National Petroleum Company (CNPC), does.

Foreign IPOs Rise

Despite fears that burdensome regulations are scaring companies away from listing on U.S. exchanges, U.S. markets are getting more and more foreign listings, TheStreet.com reported. Go to Article from TheStreet.com>>

Private equity fund-raising momentum continues in first quarter

Private equity's record fund-raising in 2006 continued unabated in the first quarter, according to Dow Jones Private Equity Analyst.
U.S. private equity firms have raised $44.3 billion among 68 funds in the first quarter of 2007, according to the newsletter. That's up 67 percent from the 46 funds that raised $26.6 billion in the first quarter of last year.
Go to Article from the Silicon Valley/San Jose Business Journal>>

Richest hedge fund managers get richer

The wealthiest U.S. hedge fund managers and traders became a lot richer last year when five of them took home $1 billion or more each, according to a study compiled by magazine Trader Monthly and released Monday.
Go to Article from Reuters via CNN Money>>
Go to Article from The New York Post>>

Second Circuit Won’t Rehear IPO Securities Litigation

The Second Circuit ruled today that it won’t rehear the plaintiffs appeal in the IPO securities litigation, but said they can try again for class certification at the lower court. In December, Wall Street won a big victory when the appeals court said a lawsuit alleging fraud in the pricing of IPOs couldn’t move forward as a class action. The case alleged that more than 50 Wall Street firms committed fraud by artificially inflating stock prices in IPOs that the firms underwrote during the tech bubble.

Vonage Barred in Verizon Lawsuit From Signing Up New Customers

April 6 (Bloomberg) -- A federal judge barred Vonage Holdings Corp. from signing up new customers while it appeals a ruling that it infringed three Verizon Communications Inc. patents.
U.S. District Judge Claude Hilton in Virginia federal court today agreed to stay an order banning Vonage's use of Verizon technology that lets customers make Internet calls to standard phone lines. He put his order on hold while the Internet telephone service provider appeals the ban, known as an injunction.
The case is Verizon Services Corp. v. Vonage Holdings, 06- cv-682, U.S. District Court, Eastern District of Virginia.

Ohio Lawmakers Introduce Board Election Bill

From ISS Governance Weeky, April 6, 2007:

Ohio lawmakers have introduced legislation that would make it possible for Ohio-incorporated firms to adopt majority voting in director elections.
Ohio law now mandates that companies use plurality voting. The legislation (H.B. 134), introduced on March 27, would allow issuers to adopt alternative election standards in their articles of incorporation after Jan. 1, 2008.
The legislation was prompted by requests by trade union pension funds and several prominent Ohio companies to change the law to allow firms to change their board election standards. The United Brotherhood of Carpenters and Joiners and the Sheet Metal Workers have sought to build support for the legislation by filing proposals at 13 Ohio-incorporated firms this season that urge the companies to reincorporate in Delaware, which permits majority voting. The two union funds have withdrawn most of those proposals after the companies agreed to support legislation to change Ohio law.
A Carpenters proposal will appear on the ballot at Convergys, an Ohio-based consulting firm, on April 17. Convergys asked the Securities and Exchange Commission for permission to exclude this proposal, but the SEC staff rejected that request in late December. A similar reincorporation proposal is slated for a vote at DPL on April 27.
Convergys opposes the proposal, arguing in its proxy that the benefits of remaining in Ohio would outweigh any benefits from incorporating in Delaware. The company notes that reincorporation would have to be approved by investors and dissenting shareholders would be entitled to “appraisal rights,” which could require the company to repurchase their shares. The company also said it would have to obtain the consent of some lenders. Reincorporation may also subject the firm to Delaware's franchise tax and additional shareholder lawsuits, Convergys warned.
A growing number of large companies have adopted majority vote bylaws after significant shareholder support for the issue during the 2006 and 2005 proxy seasons. Overall, at least 28 percent of the S&P 500 firms have adopted such bylaws, according to the Chicago law firm of Neal, Gerber & Eisenberg. At least 60 majority-voting proposals are slated to appear on corporate ballots this season, according to ISS data.

SEC Votes to Ease Sarbanes-Oxley Rules

By Marcy Gordon, Associated Press, Thursday, April 5, 2007;

The Securities and Exchange Commission yesterday approved a framework for changes to rules under the Sarbanes-Oxley anti-fraud law that would ease requirements for companies and the auditors who pore over their books.
The vote by the five SEC commissioners was unanimous in support of building more leeway into the rules, especially those being written by the independent board that oversees the accounting industry. The commissioners debated the changes, proposed by the SEC staff, at a public meeting at which differences were aired over a crucial part of the Sarbanes-Oxley Act. The law, enacted in 2002 in response to a number of corporate and accounting scandals, requires companies to assess the strength of their internal checks and balances to guard against fraud. The proposed changes are intended "to eliminate waste and duplication," the SEC said. "These needed improvements in the Sarbanes-Oxley process are especially urgent for smaller companies," SEC Chairman Christopher Cox said.
The framework calls for greater use of an approach based on principles rather than ironclad rules, which is in line with a recommendation of a private-sector group that has been pushing for eased business regulations.
The SEC and the Public Company Accounting Oversight Board have worked for several months to resolve differences over the rules. Some experts and investor advocates complain that the SEC is strong-arming the board to weaken regulatory standards.
Officials of the SEC and the accounting board say they are striking a balance between protecting investors and reducing the financial record-keeping required of companies. The SEC and the oversight board want final rules in place by June so they would apply to audits of all 2007 statements.

Cemex Bid for Rinker Advances

Cemex, the third-largest cement producer in the world, received clearance from United States antitrust regulators for its $11.7 billion hostile offer for the Rinker Group of Australia. The Justice Department said Cemex, based in Monterrey, Mexico, had agreed to sell 39 operations in Florida and Arizona to preserve price competition for large transportation projects in the two states. Rinker, based in Sydney, a building materials maker, gets about 80 percent of its sales in the United States.

SEC Meets To Debate Accounting Provision

The Securities and Exchange Commission will meet today to consider easing the most contentious part of the Sarbanes-Oxley Act, which imposed new duties on corporate executives and accountants after a series of fraud-ridden business collapses in 2002.
For five years, industry groups have complained that the law is too complex and burdensome, homing in on a provision that requires companies to assess the strength of their financial controls designed to prevent fraud and mistakes. In recent months, President Bush, Treasury Secretary Henry M. Paulson Jr. and members of Congress have called for an overhaul that would make that provision, known as Section 404, less expensive for small and mid-size businesses.
But striking an appropriate balance between reducing the costs of regulation and preserving the safeguards for investors remains tricky. The SEC's five commissioners are wrestling with how far to scale back the financial-control rule at the same time consumer advocates and a few vocal former agency officials are complaining that regulators are favoring business at the expense of average investors.

Ohio Bureau of Workers’ Compensation leaving the private equity market

From today's PE Week Wire:
Ohio could certainly use some good news, after the locals got tossed again by Florida in a national championship game. So here it is:The Ohio Bureau of Workers’ Compensation is just weeks away from leaving the private equity market.
Ok, I know what some of you are thinking: “Isn’t this a bad thing, given how private equity typically outperforms public equity and bond indices?”Well,that would betrue in most cases — but OBWC is exceptionally inept. It favors short-term political expediency over long-term investment strategy (take a bow Coingate). It also seems unable to properly file away partnership subscription agreements. And then there was its willingness – no, make that its eagerness – to sell GPs down the river by disclosing portfolio company valuations. In short, OBWC is like that annoying guy at the poker table. He’s got enough money to keep anteing, but is unable to differentiate between a low pair and a straight flush. At least OBWC knows when to fold them…
Which brings us to the present. Both buy-side and sell-side sources tell me that final bids for the OBWC private equity portfolio were due last Thursday. An email goof by placement agent UBS revealed that at least 29 firms had expressed serious interest, although it’s unclear how many actual offers were made. What I do know is that UBS put the entire portfolio’s net asset valuation at $685 million, including around $271 million in unfunded commitments. In case you’re now scouring your FedEx pile for the offering book, look for something codenamed “Project Ottawa.”
The final sale will come at a premium, but it’s highly unlikely that any one secondary firm will walk away with the whole enchilada. In fact, such a bid probably does not exist. Instead, prospective buyers view the portfolio as three pieces: (1) The good stuff, which includes funds from firms like The Carlyle Group, Castle Harlan and Charter Life Sciences; (2) The bad stuff, which is a portfolio of Ohio-based firms that has an average net annualized IRR of -17.3% through the end of Q1 2005; and (3) The funds-of-funds, which include HarbourVest Partners, Lexington Partners and Fort Washington Capital Partners.
Top-end secondary firms will be interested in 1, but probably will be contractually precluded from owning stakes in 3. They won’t want 2, but might bid anyway just to ease the process. There will be some secondary salvage shops (read: masochists) that only will bid on 2, and then some secondary firms without fund-of-funds arms that will bid on part 3.
Winners and losers will be selected within the next two to three weeks, with UBS already having scheduled presentations to current OBWC staff (who are far more competent than their former bureaucratic overlords).

Panel urges repeal of '30s era antitrust law

WASHINGTON (Reuters) - A 1930s-era antitrust law designed to protect small retailers should be repealed, a government-appointed panel of U.S. antitrust experts recommended on Tuesday.
The commission, which has been meeting and deliberating for three years, said lawmakers should put an end to the Robinson-Patman Act, which bars suppliers from engaging in anticompetitive price discrimination.
"The act has really outlived its usefulness and is better put to rest," said Jonathan Jacobson, an antitrust lawyer with the firm Wilson Sonsini Goodrich & Rosati and a member of the commission.
Repeal of the Robinson-Patman Act was the biggest change recommended by the commission, which was tasked with a review of the Sherman Act and other U.S. antitrust laws to see if they were in line with the modern economy.
Overall, the commission concluded that the antitrust laws are fundamentally sound and flexible enough to deal with relatively new industries such as computer software.
The commission also recommended that the two agencies that share responsibility for reviewing mergers -- the Justice Department and Federal Trade Commission -- act more quickly to decide which agency will review each particular deal.
Further, the commission suggested that the two agencies study and report to Congress on the possibility of developing a centralized international pre-merger notification system.

FTC moves to block Giant-Western

Although Giant Industries Inc.'s shareholders approved their company's proposed purchase by Western Refining Inc. more than a month ago, members of the Federal Trade Commission are expected next week to vote for blocking the $1.13 billion deal.
According to a government lawyer, the oil refinery deal is scheduled for a Tuesday, April 10, vote by the five-member commission, and it's expected to be the second time this year the commission has formally initiated a legal fight to stop a deal under its review. In March, the FTC voted 4-1 to stop a merger between rival nonresidential natural gas suppliers in Pittsburgh. That deal, Equitable Resources Inc.'s purchase of Peoples Natural Gas Co., a subsidiary of Dominion Resources Inc., is still pending.
It's unclear what specific remedy would satisfy the commissioners and head off their rejection of the merger, although sources following the deal believe any divestiture would affect the merged companies' capacity in the Albuquerque, N.M., market.
all the positive noises the companies have been making about the merger's prospects, there have been procedural disputes with regulators.
The companies' initial Hart-Scott-Rodino premerger notifications were apparently incomplete and delayed progress on the antitrust review. Then the FTC issued a second request for more information on the deal Oct. 10, and the agency was initially at loggerheads with the companies over whether the information they provided was sufficient for that request, too. Giant said in late December that it had substantially complied with the FTC's second request. But in a Feb. 28 earnings call, they announced they were still trying to satisfy the agency.

Auto industry reacts to court decision

Automakers called for an economy-wide approach to global warming in reaction to a Supreme Court decision Monday that could give the government the authority to regulate the emissions of carbon dioxide and greenhouse gases from cars.
The Alliance of Automobile Manufacturers, an industry trade group representing General Motors Corp., Ford Motor Co., DaimlerChrysler AG, Toyota Motor Corp. and five others, said in a statement that "there needs to be a national, federal, economy-wide approach to addressing greenhouse gases."
The Supreme Court ordered the federal government on Monday to take a fresh look at regulating carbon dioxide emissions from cars, a rebuke to Bush administration policy on global warming. In a 5-4 decision, the court said the Clean Air Act gives the Environmental Protection Agency the authority to regulate the emissions of carbon dioxide and other greenhouse gases from cars.