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Reuters Denies Leaking Payrolls Report
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WASHINGTON (Reuters) - Reuters said it did not release U.S. payrolls data before the official embargo on Friday but that a technical glitch caused the wrong time stamp to appear on data received by some clients.
"We did not break the embargo," said Stephen Naru, Reuters global head of media relations in New York.
"We released the data when we were authorized by the Labor Department to do so. We are investigating the matter with Yahoo and any other organization that has issues with the time stamp," Naru said.
The Reuters story reporting a surprising gain in U.S. employment did not appear on its own screens, which are seen by clients in trading rooms around the world, until 8:30 a.m. (1330 GMT) -- in compliance with the official embargo.
An official at the Labor Department said investigations into the possible leak of the data show a Reuters article appeared to have been posted on the Internet two minutes early, but they did not believe the story was transmitted early.
"(Reuters' position) is our position too. There was nothing out of the ordinary in the lockup," spokesman Bob Zachariasiewicz told Reuters.
"We don't believe there was a leak."
A Reuters official in London familiar the technology issues behind Friday's events elaborated on the time-stamp problem.
"The story issued with an incorrect time stamp to U.S. Online Reports customers was processed by a U.K.-based server whose clock was off by about two minutes," said Jim Craddock, Technology Owner, Media.
"The server is not automatically synchronized with an official clock source -- hence the incorrect timestamp. It is not clear how often this server is manually corrected.
"There is a new system in place at the Reuters technical center in Docklands which is synchronized, but editorial text feeds have not been migrated to this system yet."
Dollar Rises on Strong U.S. Jobs Report
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By Kazunori Takada
TOKYO (Reuters) - The dollar traded higher against its major rivals on Monday, after a bullish U.S. jobs report raised expectations that the Federal Reserve would move sooner to lift rates from a 46-year low.
Although the U.S. currency initially struggled against the yen on selling by Japanese exporters and as steep gains in Tokyo share prices fueled demand for the yen from foreign investors, it was fetching 104.64/72 yen as of 0552 GMT.
That compares with 104.46/54 in late U.S. trade on Friday.
"Now that (dollar) selling has receded, it's coming back up on short-covering as the market was short (on dollars) going into the jobs data on Friday," said a spot trader at a U.S. bank.
Data on Friday showed that U.S. non-farm payrolls climbed 308,000 in March, the biggest gain in four years and more than twice what the market was expecting.
An improvement in jobs data is seen key to the Fed raising its funds rate from a 1958 low of one percent, which would increase the allure of dollar-denominated assets for foreign investors.
The euro rowed back to $1.2097/02 from $1.2132/38, edging closer to a four-month low of 1.2045 hit late last month.
Sterling slipped to $1.8272/76 compared with 1.8302/07.
"The euro is reacting to (strong U.S.) fundamentals. I think there is a chance that we could see the euro fall under 1.2," said Mitsuo Imaizumi, deputy general manager of the international bond and forex department at Daiwa Securities SMBC.
UPBEAT JAPAN
Against the yen, the single currency was trading a tad lower at 126.53/64 yen compared with 126.60/74 in late U.S. trade.
"What we may see is that the yen will continue to outperform the euro, because there has been a fairly large euro rally to date and we haven't seen that in the yen due to intervention," said Naomi Fink, senior currency strategist at BNP Paribas.
"And secondly because we see some pretty strong economic figures and improvements in sentiment in Japan, whereas we don't really in the euro area."
Hans-Werner Sinn, head of Germany's Ifo Institute, said on Sunday that the euro zone's biggest economy was mired in an economic crisis, with high wages, foreign competition and a political logjam making him doubtful of near-term improvements.
Meanwhile, Japan's closely watched Tankan survey of business sentiment, released last week, showed that Japanese companies felt business was better in March than at any time in almost seven years.
Analysts say that given improving economic fundamentals, large foreign buying of Japanese stocks, and the Japanese authorities apparent scaling back of currency intervention, the yen is likely to make further gains.
A Japanese government source, who has regular contact with the Finance Ministry, which runs Tokyo's intervention policy, told Reuters his impression was that many in the government recognized that a stronger yen helped companies deal with high oil and raw material prices.
He said that as a result, the government would likely halt its campaign of massive intervention to weaken the yen.
The dollar was still not far from the four-year low of 103.40 yen hit on Wednesday.
The Nikkei average ended the day up 1.20 percent at 11,958.32, after briefly leaping above the key 12,000 mark to a high of 12,003.92.
But some traders said the yen's upside versus the dollar may be limited.
"Yen-buying was limited despite the Nikkei's move today and the dollar was also little moved on the Reuters report on intervention. All this may be a sign that the yen may be capped around here for the time being," said the U.S. bank dealer.
Feds Examine Release of Employment Data
WASHINGTON (AP) - Three government agencies said Friday they were examining whether Labor Department employment figures for March were improperly released, triggering unusual bond market activity a few minutes before the official release time.
The data, showing a large gain of 308,000 new jobs in March, was embargoed for release at 8:30 a.m. EST. Bond markets moved minutes before, raising questions about whether the information had been accidentally or illegally leaked.
Labor Department spokesman Bob Zachariasiewicz said officials talked with staff members who distributed the information to reporters in a locked room Friday morning, and with some reporters there who transmitted the information, and "there is no indication that there was anything out of the ordinary."
Spokesmen for the Securities and Exchange Commission and the Commodity Futures Trading Commission said the agencies were examining the matter, but declined to say an investigation was under way.
Treasury Secretary John Snow, who said Thursday night that "I think we'll see that we are beginning to create a lot of new jobs," told CNBC Friday that he had not seen the report when he made the remark.
"I just reiterated my standard line that I'm confident that we'll see good jobs in the future," he said.
February 9, 2004 - Reshipper Scam Transforms
To alert citizens regarding the inappropriate use of IP-Relay to facilitate criminal activity.
January 26, 2004 - X_BOX Giveaway Scam
To alert citizens regarding spam emails pertaining to the notification of winning a Microsoft X-Box.
November 20, 2003 - Operation Cyber Sweep (.pdf 18K)
The Internet Fraud Complaint Center (IFCC), a partnership between NW3C
and the FBI, in coordination with state and local law enforcement
agencies, the U.S. Postal Inspection Service, the U.S. Secret Service,
the Federal Trade Commission, and the U.S. Dept. of Justice offer
details on a national take down effort highlighting recent Internet
crime investigations stemming from IFCC referrals.
November 4, 2003 - Employment Scams (.pdf 6K)
To alert citizens regarding scams that target those who use the Internet to find employment.
November 4, 2003 - Romanian Warning (.pdf 7K)
The number of reported Internet auction frauds is increasing and hundreds of new complaints are received daily. Many of these frauds originate in Eastern Europe in former communist countries. Consumers are strongly cautioned against entering into Internet transactions with subjects exhibiting this behavior.
November 4, 2003 - Nigerian Warning (.pdf 6K)
The Internet Fraud Complaint Center (IFCC) is aware of a large-scale fraud scheme involving the use of counterfeit cashier's checks. The scheme targets individuals that use Internet classified ads to sell merchandise.
June 30, 2003 - "Spoofed" E-mails & Web Sites (.pdf 16K)
A Gateway to Identity Theft and Credit Card Fraud.
May 16, 2003 - Operation E-Con (.pdf 307K)
The Internet Fraud Complaint Center (IFCC), a partnership between NW3C and the FBI, in coordination with state and local law enforcement agencies, the U.S. Postal Inspection Service, the U.S. Secret Service, the Federal Trade Commission, and the U.S. Dept. of Justice offer details on a national take down effort highlighting recent Internet crime investigations stemming from IFCC referrals.
April 2003 - Internet Fraud Complaint Center (IFCC) Referred More Than 48,000 Fraud Complaints to Law Enforcement in 2002
The Internet Fraud Complaint Center (IFCC) released its annual Internet Fraud Report today showing that, on behalf of victims, IFCC referred 48,252 fraud complaints to federal, state and/or local law enforcement authorities last year. This referral rate is triple the number of referrals (16,775) in 2001. The report also states that the total dollar loss from all referred fraud cases was $54 million, up from $17 million in 2001.
February 2002 - Internet Fraud Complaint Center (IFCC) Wins Excellence .Gov Award
May 23, 2001 U.S. Department of Justice Federal Bureau of Investigation Press Release
Criminal charges brought nationwide against dozens of Internet fraud subjects.
October 2, 2000 Internet Fraud Concerning Beanie Babies and Computers
Two people pled guilty on October 2, 2000 to conspiracy to commit wire fraud in Louisiana. Gregory L. Campbell, age 50, and Lucille M. Liscomb, age 35, face up to five years in prison and a $250,000 fine or both.
September 29, 2000 Federal Grand Jury Indicts Pair On Internet Auction Fraud Scheme
Shreveport, Louisiana . . . United States Attorney Bill Flanagan announced today that a federal grand jury in Shreveport has returned a 32 count indictment charging GREGORY L. CAMPBELL, age 50, and LUCILLE M. LISCOMB, age 35, both originally from Goodyear, Arizona, with using an internet auction site at auction.yahoo.com to defraud people bidding to purchase Beanie Babies or computer merchandise.
May 8, 2000 U.S. Department of Justice Federal Bureau of Investigation Press Release
The Federal Bureau of Investigation, jointly with the Department of Justice and National White Collar Crime Center (NW3C) today announced the creation of the Internet Fraud Complaint Center (IFCC). The IFCC was established to combat the growing problem of fraud occurring over the Internet by providing a vehicle for victims around the country to report incidents of fraud online.
http://www.ifccfbi.gov/strategy/pressroom.asp
Strategic Insight
Neoliberalism and Iraqi Economic Reconstruction
by Robert Looney
Strategic Insights are published monthly by the Center for Contemporary Conflict (CCC). The CCC is the research arm of the National Security Affairs Department at the Naval Postgraduate School in Monterey, California. The views expressed here are those of the author and do not necessarily represent the views of the Naval Postgraduate School, the Department of Defense, or the U.S. Government.
http://www.ccc.nps.navy.mil/rsepResources/si/aug03/middleEast.asp
Why a depression could happen
by Thomas I. Palley
ECONOMISTS are hardly renowned for their ability to predict the economic future. In 1929 Irving Fisher, perhaps the greatest of all American economists, confidently predicted that the stock market would go on to new highs and that the expansion of economic prosperity would continue, with no end in sight. Less than two months later came the crash; the economy had already entered what was to become the Great Depression. Published in 1987, Ravi Batra's best-selling The Great Depression of 1990 predicted just what the title says. So much for predictive accuracy.
http://www.theatlantic.com/issues/96jul/depress/depress.htm
I'm going to smash Clarke's testimony once and for all
Prediction; Condi will strike out, perjure herself and bring down the President worse than Nixon...911Gate is in full Swing!
High court agrees to hear Cheney energy dispute
By The Associated Press
12.15.03
WASHINGTON — The Supreme Court said today it would settle a fight stemming from Vice President Dick Cheney’s contacts with the energy industry as the Bush administration was drafting its energy policy.
The Court agreed to hear an appeal from the administration, which is fighting a lawsuit over the relationships between industry and the panel Cheney assembled.
The watchdog group Judicial Watch and an environmental organization, the Sierra Club, had won permission from a lower court to gather records related to the energy task force.
The interest groups claim the task force’s dealings should be open to the public.
The task force met for several months in 2001, and issued a report that favored opening more public lands to oil and gas drilling and proposes a wide range of other steps supported by industry.
The interest groups allege the industry representatives functioned as members of the government panel, which included Cabinet secretaries and lower-level government employees.
Judicial Watch sued the task force in July 2001, asking for names of task force participants, details of the group’s workings and information about Cheney’s involvement. The mainly conservative Judicial Watch made its name suing the Clinton administration but has applied the same tactics to the Republican Bush administration.
The Sierra Club sued later, seeking similar information, and the two lawsuits were joined.
The groups say the government is stonewalling, but the Bush administration claims its top leaders must be able to get candid information in private. Moreover, the administration claims that turning over the documents would mark a dangerous erosion of presidential power.
The high court will hear the case sometime in the spring, with a ruling expected by July.
The administration lost two rounds in federal court before appealing to the Supreme Court.
Demands for disclosure present serious constitutional issues about the separation of powers among the branches of government, Solicitor General Theodore Olson told the justices in the administration’s appeal. A federal judge who ordered some records released engaged in a “wholesale expansion” of federal law, he wrote.
“Legislative power and judicial power cannot extend to compelling the vice president to disclose ... the details of the process by which a president obtains information and advice from the vice president,” the government’s filing argued.
The Justice Department also said a federal appeals court erred when it rejected the government’s arguments that the lawsuit would be an unconstitutional intrusion into White House business.
Claims of a constitutional conflict are overblown, and the government is merely delaying, lawyers for Judicial Watch told the high court.
The administration has “not been ordered to disclose any privileged or other information,” and the government’s objections are premature, the group’s lawyers wrote.
Federal agencies have disclosed 39,000 pages of internal documents related to the work of Cheney’s energy task force. The task force itself has turned over no materials.
Among the proposals in the Cheney energy plan: drilling in the Arctic wildlife refuge and possibly reviving nuclear fuel reprocessing, which was abandoned in the 1970s as a nuclear proliferation threat.
The case is Cheney v. United States District Court.
http://www.firstamendmentcenter.org/news.aspx?id=12349
Cheney v. United States District Court
Certiorari Granted 12/15/2005
Argument Date 04/27/2004
Issue Whether the Federal Advisory Committee Act can be construed consistent with the Constitution, principles of separation of powers, and this Court’s decisions governing judicial review of Executive Branch actions, to authorize broad discovery of the process by which the Vice President and other senior advisors gathered information to advise the President on important national policy matters, based on an unsupported allegation in a complaint that the advisory group was not constituted as the President expressly directed and the advisory group itself reported. The watchdog group Judicial Watch and an environmental organization, the Sierra Club, had won permission from a lower court to gather records related to the energy task force.
Case Summary & Additional Resources
Lawyers For Petitioner
Theodore Olson, Solicitor General
For Respondent
Alan B. Morrison, Public Citizen Litigation Group (for Sierra Club)
Briefs For Petitioner
Petitioner's Certiorari Petition
For Respondent
Brief in Opposition to granting cert. (for Sierra Club)
News Stories & Commentary AP, " High court agrees to hear Cheney energy dispute"
AP, "High court asked to keep Cheney records secret"
Charles Lane, "High Court Will Review Ruling On Cheney Task Force Records," Washington Post, December 16, 2003, sect. A, p. 3
Saphire, William, "Behind Closed Doors," New York Times, December 17, 2003, sect. A, p. 35
Opinion - Lower Court In re Richard B. Cheney (D.C. Cir., 2003)
Other Free Expression Policy Project Overview
Judicial Watch, "Judicial Watch Will Argue Before the High Court For 'Open Government'"
Lower Court DC Circuit
Lower Court Ruling Federal District Court ordered release of documents from vice president's energy task force.
http://www.firstamendmentcenter.org/faclibrary/case.aspx?case=Cheney_v_US_District_Court
High court asked to keep Cheney records secret
By The Associated Press
10.01.03
WASHINGTON — Records of Vice President Dick Cheney’s energy task force should remain confidential, the Bush administration told the Supreme Court yesterday, arguing that demands for disclosure present serious constitutional issues.
In a 25-page filing, the Justice Department’s solicitor general urged the Supreme Court to consider “fundamental separation-of-powers questions” raised by a federal judge who says the Cheney panel should produce information about its operations.
The conservative Judicial Watch and an environmental organization, the Sierra Club, have filed suit, alleging that corporate executives and company lobbyists in effect became members of the Cheney panel that formulated the Bush administration’s energy policy in 2001.
The administration says the “unsupported allegation” in the lawsuit is contradicted by the president’s order creating the task force composed of members of his Cabinet.
U.S. District Judge Emmet Sullivan has ordered the administration to produce some documents in order to assess the accusations in the lawsuits.
The Justice Department papers said that the judge has engaged in a “wholesale expansion” of federal law.
“Legislative power and judicial power cannot extend to compelling the vice president to disclose ... the details of the process by which a president obtains information and advice from the vice president,” Solicitor General Theodore Olson argued.
The Justice Department also said a federal appeals court erred in its handling of the Bush administration’s arguments. The appeals court concluded that bringing the case to a higher court was premature.
But the Justice Department argued otherwise, saying that the demands for documents impose the same result as if the case had already been concluded with a final ruling against the Bush administration.
The lower court judge is imposing “problematic disclosure requirements” based “upon mere allegations,” said the solicitor general.
“Far from rendering separation-of-powers problems premature,” the demand for documents “only exacerbates them,” said the court papers.
The administration has lost two rounds in the U.S. Circuit Court of Appeals for the District of Columbia, where a three-judge panel ruled 2-1 against Cheney, followed by the refusal of the full appeals court to consider the issue.
Drafted in 2001, the administration’s energy plan favors opening more public lands to oil and gas drilling and proposes a wide range of other steps supported by industry.
http://www.firstamendmentcenter.org/news.aspx?id=12007
Court barreling through First Amendment cases
01.13.04
WASHINGTON — The U.S. Supreme Court, well into its current term, has already ruled on campaign finance, public funding of theological degrees and access to autopsy photos, and has heard arguments in a number of other important First Amendment-related cases.
Of the 80 or so cases it agrees to hear each term, the Court usually has seven to 10 First Amendment cases on its docket. In the last term, the Court departed from its usual pattern of granting First Amendment claims — by denying those claims in virtually every case it decided.
The nonprofit, nonpartisan First Amendment Center offers a variety of resources on the Supreme Court and its decisions, including:
This Web site, First Amendment Center Online, one of the foremost sites about First Amendment issues and the Supreme Court, containing breaking news, essays by noted scholars and experts, and commentary on a wide range of free speech, free press and religion topics.
A 2003-04 docket sheet, with complete case listings and information. The docket sheet is within The First Amendment Library on First Amendment Center Online. The library is the most comprehensive collection of information on Supreme Court First Amendment jurisprudence, including rulings, arguments, briefs, historical material, commentary and press coverage.
White papers and research packages on many of the issues and cases the Supreme Court will consider. This term there is a special research package on Locke v. Davey, a type of school-vouchers case decided by the Court.
In addition, the First Amendment Center offers several experts for interviews and assistance in covering First Amendment court cases:
Ken Paulson, executive director.
Ronald K.L. Collins, constitutional scholar and attorney.
Charles Haynes, senior scholar.
Paul McMasters, First Amendment ombudsman.
To arrange interviews with experts from the First Amendment Center, please contact Gene Policinski: 615/727-1303 or gpolicinski@fac.org.
The Court began its term with a special session to take up a case left over from the previous term, McConnell v. Federal Election Commission, a challenge to the McCain-Feingold campaign-finance law. Because of the complexity of the case and the lower court ruling, the justices held a special session Sept. 8 to hear arguments. The Court ruled in the case on Dec. 10.
The high court already had put on its docket Locke v. Davey, which concerns the state of Washington’s refusal to grant college scholarships to otherwise eligible students who pursue a degree in theology. The justices heard arguments on Dec. 2 and ruled on Feb. 25.
A Freedom of Information Act case decided this term is National Archives and Records Administration v. Favish (formerly Office of Independent Counsel v. Favish). A California lawyer, Allan J. Favish, had requested access to autopsy photos of Vincent Foster, a former Clinton administration official who committed suicide. The Court heard the case on Dec. 3 and ruled on March 30.
Summary of First Amendment cases that have been decided, accepted or denied Supreme Court review:
Decided
McConnell v. Federal Election Commission
Issue: Whether the new campaign-finance law violates the free-speech rights of contributors to candidates and parties.
Argument date: Sept. 8, 2003.
Decided: Dec. 10, 2003. Decision analysis
Doe v. Chao
Issue: Whether a person should be required to prove actual damages to obtain relief under the Privacy Act. More specifically, whether civil-damages relief under the Act should be narrowly confined so as to maximize public and press access to government information.
Argument date: Dec. 3, 2003. Argument analysis
Decided: Feb. 22, 2004. Decision analysis / Quick look
Locke v. Davey
Issue: Whether public funding of theological degrees is prohibited by constitutional concerns about separation of church and state.
Argument date: Dec. 2, 2003. Argument analysis / Argument excerpts
Decided: Feb. 25, 2004. Decision analysis / Quick look
National Archives and Records Administration v. Favish (formerly Office of Independent Counsel v. Favish)
Issue: Whether the government is obligated under the Freedom of Information Act to release post-mortem pictures of Vincent Foster or whether the privacy interests of Foster's family outweigh any such rights under federal law.
Argument date: Dec. 3, 2003. Argument analysis
Decided: March 30, 2004. Decision analysis / Quick look
Accepted for review
Ashcroft v. ACLU II
Argument date: March 2, 2004. Argument analysis
Issue: Whether the Child Online Protection Act violates the First Amendment rights of adults. The act bars Web-page operators from posting information inappropriate for minors unless the site is limited to adults by various screening devices, including a credit-card number requirement.
Summary: This case concerns a provision of the Child Online Protection Act (COPA) that requires that operators of commercial Internet sites use credit cards or some form of adults-only screening system to ensure children cannot see material deemed harmful to them. Operators could face fines and jail time for not complying.
Lower court ruling: The 3rd U.S. Circuit Court of Appeals has twice ruled that certain provisions of COPA violate the First Amendment. The 3rd Circuit’s latest ruling came in March 2003; the federal government has appealed that ruling. In its brief to the Supreme Court, the federal government contends that the filter technology alone is not enough. Children are “unprotected from the harmful effects of the enormous amount of pornography on the World Wide Web,” Solicitor General Theodore Olson wrote.
Earlier Supreme Court rulings concerning the Internet include United States v. American Library Association (2003), in which the Court upheld a federal law requiring require public libraries that receive federal funding to equip computers with anti-pornography filters. And in Ashcroft v. ACLU (2002), a divided Supreme Court sent the COPA case back to the 3rd Circuit for more consideration of certain First Amendment issues. Since the 3rd Circuit has affirmed the First Amendment challenges, the matter is again before the Court in the Ashcroft case.
U.S. v. Newdow, Elk Grove Unified School District v. Newdow, & Newdow v. U.S.
Argument date: March 24, 2004. Argument analysis / Argument excerpts
Issue: Whether a requirement to recite the Pledge of Allegiance in public schools is an unconstitutional endorsement of religion in violation of the First Amendment.
Summary: This action began when Michael Newdow, a Sacramento lawyer, sued the Elk Grove School District, alleging that his 8-year-old daughter should not be subjected to collective recitations of the Pledge of Allegiance with its “In God We Trust” passage. He challenged the constitutionality of a California law that required the recitation of the pledge, a school policy to the same effect, and also a 1954 federal statute that added the words “under God” to the Pledge of Allegiance.
Lower court rulings: A federal district court upheld the state and federal laws. On June 26, 2002, a three-judge panel of the 9th U.S. Circuit Court of Appeals held that the pledge requirement violated the First Amendment. The court struck down that portion of a 1954 federal law that added the words “under God” to the pledge and the local school policy of requiring recitation of the pledge. Sitting en banc, the full 9th Circuit declined to reverse the ruling of the three-judge panel. The 9th Circuit, however, stayed enforcement of its ruling pending review in the U.S. Supreme Court. The Bush administration has petitioned the Supreme Court for review. On March 20, 2003, the U.S. House of Representatives issued a non-binding resolution to condemn the 9th Circuit ruling. The vote was 400-7 with 15 members voting “present.”
In a similar challenge in 1992, the 7th U.S. Circuit Court of Appeals held that reciting the pledge in public schools was not an unconstitutional endorsement of religion. On Feb. 21, 2003, a federal district court in Alexandria, Va., upheld a Virginia law that required daily recitation of the Pledge of Allegiance and the posting of the motto “In God We Trust” in state schools.
City of Littleton v. Z.J. Gifts
Argument date: March 24, 2004. Argument analysis
Issue: To what extent, consistent with the First Amendment, must prompt judicial review be assured in adult-business licensing cases?
Review denied
Consumers Union v. Suzuki
Certiorari denied: Nov. 3, 2003. News story / Commentary
Issue: Whether a consumer magazine’s negative review of a motor vehicle is protected speech.
Summary: This case involves a defamation action brought by Suzuki Motor Corp. against Consumers Union of United States Inc. The action stems from a 1988 Consumer Reports article that stated that Suzuki Samurai sport-utility vehicles “roll over too easily.” The National Highway Traffic Safety Agency declined a petition to declare the Suzuki Samurai sport-utility vehicle defective; the agency also contested the accuracy of the magazine’s testing procedures. The issue in the case is whether there is sufficient evidence to proceed to a jury trial in the case.
Lower court ruling: By a 2-1 vote, the 9th U.S. Circuit Court of Appeals reversed a federal district court dismissal of the suit and ordered that the case proceed to a jury trial. Writing in dissent, Judge Warren J. Ferguson argued that the evidence in the case was inadequate and therefore the matter ought not to proceed to trial. Preventing a trial is “necessary to both avoid the inhibition of free speech by the media and to protect public safety and health,” wrote Ferguson. Last May, the 9th Circuit, sitting en banc, affirmed the three-judge panel's ruling by a 14-11 vote.
Moore v. Glassroth
Issue: Whether placing a granite Ten Commandments monument in the rotunda of the Alabama Judicial Building violates the establishment clause of the First Amendment.
Certiorari denied: Nov. 3, 2003. News story
Summary: On Aug. 1, 2001, Alabama Supreme Court Chief Justice Roy Moore unveiled a 5,280-pound granite monument containing the Ten Commandments in the rotunda of the Alabama State Judicial Building. Secular quotations about God are also on the sides of the monument. The American Civil Liberties Union of Alabama went to federal court to challenge the chief justice’s action. Stephen R. Glassroth was the lead plaintiff in that action. In different but related actions, the 7th U.S. Circuit Court of Appeals has ruled that such monuments violate the First Amendment, whereas the 10th Circuit and the Colorado Supreme Court have ruled otherwise. Thus far, the Supreme Court has declined to review such cases.
Lower court rulings: In 2002, U.S. District Judge Myron Thompson ruled the monument violates the establishment clause of the First Amendment. On July 1, 2003, that ruling was upheld by the 11th Circuit. Judge Thompson thereafter set an Aug. 20, 2003, deadline for its removal, threatening $5,000 daily fines against the state. The U.S. Supreme Court thereafter refused to stay Thompson's order. On Aug. 21, the associate justices of Alabama’s Supreme Court unanimously overruled their chief justice and ordered that the Ten Commandments monument be removed. Complying with Thompson's order, the monument was removed on Aug. 27.
http://www.firstamendmentcenter.org/news.aspx?id=11929
Justices broaden FOIA privacy exemption
By Tony Mauro
Special to the First Amendment Center Online
03.31.04
Requesting personal files from the federal government under the Freedom of Information Act just got a great deal more difficult as a result of a Supreme Court ruling yesterday.
Ruling in the case of a California lawyer’s quest for death-scene photographs of Clinton White House aide Vince Foster, the Supreme Court broadened the privacy exemption of the FOIA and placed new burdens on requesters to overcome privacy interests. The ruling is the latest in a series of decisions in which the Court has given greater weight to privacy concerns than the public’s right to know.
Even though five investigations have determined that Foster, then deputy White House counsel, died by suicide in 1993, lawyer Allan Favish, among others, remains unconvinced. He sought photographs from the scene at a park in Virginia where Foster’s body was found. The Office of Independent Counsel for the Whitewater and other Clinton-era investigations, which had the photos, denied the request, and Foster’s family also intervened in the litigation to stop their release. The independent counsel closed up shop earlier this month, and the photos are now in the possession of the National Archives, which is why the high court ruling is now called National Archives and Records Administration v. Favish.
Whereas traditionally, FOIA requesters do not need to explain why they are asking for certain documents, the Court’s ruling yesterday requires that when privacy interests are involved, “the requester must produce evidence that would warrant a belief by a reasonable person that the alleged Government impropriety might have occurred.”
That new standard brought swift objections from open-government advocates. “The new requirement that requesters must show evidence of government wrongdoing before such records will be released will almost surely prevent reporters and other interested citizens from investigating suspicious deaths,” said Lucy Dalglish, executive director of Reporters Committee for Freedom of the Press. “I don’t know how you can expect requesters to prove a negative before they are entitled to a record under the Freedom of Information Act.”
The FOIA, long a valued tool for the news media and the public, nonetheless allows government agencies to withhold documents for a variety of specific reasons. Under exemption 7(C) the government may refuse to disclose materials that could, if released, cause an “unwarranted invasion of personal privacy.” A recent study by the Reporters Committee for Freedom of the Press found that privacy is now the leading reason cited by government agencies in refusing FOIA requests. Both the 7(C) exemption at issue in the Favish case and another exemption protecting personnel and medical records invoke privacy concerns.
Favish, who argued his own cause before the Supreme Court last December, was joined by press organizations in arguing to the Court that the privacy exemption does not extend to family members or survivors of the person whose documents are being sought.
But the Court’s unanimous ruling, written by Justice Anthony Kennedy, rejects that view categorically. Reviewing the history of burial rites back to ancient Greece, Kennedy said Foster’s family had a long-recognized right not to have pictures of his body released. “They seek to be shielded by the exemption to secure their own refuge from a sensation-seeking culture for their own peace of mind and tranquility, not for the sake of the deceased.”
Kennedy continued, “We think it proper to conclude from Congress’ use of the term ‘personal privacy’ that it intended to permit family members to assert their own privacy rights against public intrusions long deemed impermissible under the common law and in our cultural traditions. This does not mean that the family is in the same position as the individual who is the subject of the disclosure. We have little difficulty, however, in finding in our case law and traditions the right of family members to direct and control disposition of the body of the deceased and to limit attempts to exploit pictures of the deceased family member’s remains for public purposes.”
Though much of the ruling appears confined to death-scene photographs, the rule or standard enunciated by Kennedy appears to cover any FOIA request in which privacy interests are involved — though it does not spell out how the presence or absence of those interests is supposed to be determined.
Kennedy wrote, “Where the privacy concerns addressed by Exemption 7(C) are present, the exemption requires the person requesting the information to establish a sufficient reason for the disclosure. First, the citizen must show that the public interest sought to be advanced is a significant one, an interest more specific than having the information for its own sake. Second, the citizen must show the information is likely to advance that interest. Otherwise, the invasion of privacy is unwarranted.”
Later in the opinion, Kennedy elaborates. “We hold that, where there is a privacy interest protected by Exemption 7(C) and the public interest being asserted is to show that responsible officials acted negligently or otherwise improperly in the performance of their duties, the requester must establish more than a bare suspicion in order to obtain disclosure. Rather, the requester must produce evidence that would warrant a belief by a reasonable person that the alleged Government impropriety might have occurred.”
Dalglish argues the standard will be very difficult to meet. “In essence, they are requiring requesters to demonstrate government misdeeds before they get the record. Usually, that’s why they’re asking for the record — to show government impropriety. It puts the requester in an impossible situation.”
Supreme Court places a premium on privacy
Inside the First Amendment
By Ken Paulson
First Amendment Center executive director
04.01.04
Privacy is growing more potent.
As courts grapple with complex issues involving the release of government information to the public and the press, they appear increasingly protective of Americans’ right to be left alone.
This trend was underscored by the unanimous decision by the U.S. Supreme Court on March 30 in National Archives and Records Administration v. Favish. The Court found that the photographs of former Clinton White House lawyer Vincent Foster taken at the site of his suicide would not have to be released under the Freedom of Information Act.
The Court concluded that the privacy rights of Foster’s immediate family trumped the arguments of a California attorney who said he needed access to the photos as part of his investigation into whether Foster was, in fact, murdered as part of a government conspiracy.
The First Amendment creates a presumption of access to some government information, but Congress has great latitude in deciding what information can be released and under what circumstances. In this case, the Supreme Court had to interpret a portion of the statute that bars the release of law enforcement records that may invade personal privacy.
In seeking the photographs, Allan Favish had argued that the reference to personal privacy in the statute only means the privacy of the individual and can’t be applied to spare the feelings of third parties, including family members.
The Court disagreed.
“Family members have a personal stake in honoring and mourning their dead and objecting to unwarranted public exploitation that, by intruding upon their own grief, tends to degrade the rights and respect they seek to accord to the deceased person who was once their own,” Justice Anthony Kennedy wrote in the decision.
The Supreme Court did acknowledge that this personal privacy exemption may be overcome if someone seeking the records could demonstrate that government officials acted negligently or improperly, but noted that there would have to be more than “a bare suspicion.”
Kennedy observed that five different investigations had concluded that Foster committed suicide, and that Favish hadn’t established government misdeeds.
On the face of it, this decision merely means that some fairly explicit photographs of Foster’s body won’t see the light of day. Most observers won’t see a problem with that.
But this decision could have a longer shadow:
By expanding the definition of personal privacy, the Supreme Court has given government officials much broader grounds on which to deny requests for law enforcement records. The decision tips the balance in favor of privacy and against the free flow of information.
The ruling also tips the scales against citizens seeking to challenge their government. The Foster case has been much discussed on talk radio over the past decade. Despite the five investigations, some people believe that Foster’s death was not a suicide. Of course, if you believe a government conspiracy was in place, you’re not exactly comforted by the fact that five government agencies declared there was no such conspiracy. With this ruling, the Supreme Court is in essence saying, “The documents you’re seeking to prove your case may not be released to you unless you do a better job of proving your case.” This stance has implications for matters well beyond the Foster probe.
The most telling element in the Supreme Court’s decision, though, was its assertion that the personal privacy rights of family members must be protected so they may seek “refuge from a sensation-seeking culture.”
This is a reminder that as public, press and media push the envelope with increasingly sensational content, courts are going to be inclined to push back.
To be fair, it’s not the mainstream media that judges truly worry about. It’s the uninhibited and unrestrained nature of the Internet that probably gives them pause.
Family members are haunted by the notion that they may one day see their loved ones’ autopsy photos posted on a Web site. It was precisely that fear that fueled Florida legislators’ passage of a law sealing autopsy photos of race car driver Dale Earnhardt.
Public revulsion at sensationalistic, intrusive and exploitative Web sites and publications is understandable, but the growing emphasis on privacy doesn’t bode well for responsible and legitimate gatherers of news and information.
The legislation spurred by the Earnhardt case and this decision sealing the Foster photos are among the first wave of developments signaling broader protection of privacy. They certainly won’t be the last.
Metric Companies Inc. Reportedly Files Cybersmear Case Against Ex-Employees
On February 10, the Associated Press reported that "late last year" Metric Companies Inc. filed two corporate cybersmear lawsuits against two former employees in a The company reportedly alleges that the defendants "posted defamatory and misleading messages about Metris and its recently ousted CEO, Ronald Zebeck". In an interesting twist, the complaint reportedly includes allegations that the postings violated securities laws. According to the report, the company "contends that as a result of the postings it has lost revenue, income, investors, customers and relations with business prospects. The lawsuits ask for a stop to the Internet postings and seek unspecified compensatory and punitive damages."
New SRO Shareholder Approval Requirements for Mergers and Acquisitions
By Debbie Kurtzberg
The days of seeking shareholder approval of equity compensation plans are back, though under a different regulatory scheme. Under the NYSE’s recently revised listing standards and substantially similar revisions to the Nasdaq rules—both of which became effective on June 30, 2003—listed companies must obtain shareholder approval of most newly adopted equity compensation plans and of material amendments to most existing equity compensation plans.
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The NYSE and Nasdaq rules each provide a few limited exceptions to the shareholder approval requirements, including three exceptions that come up in the context of mergers and acquisitions.
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The NYSE and Nasdaq rules each provide a few limited exceptions to the shareholder approval requirements, including three exceptions that come up in the context of mergers and acquisitions. This note briefly describes those three exceptions. Note that this article does not address any other statutory or regulatory requirements regarding shareholder approval, such as certain U.S tax code provisions.
Rollovers
The rollover of options, restricted shares and other equity awards held by employees of a target company does not require approval of the shareholders of the acquiring company. In many acquisition transactions, including both cash and share transactions, employee options, restricted shares and other outstanding equity awards covering target company shares are converted at the time of the closing of the transaction into equivalent options, restricted shares or other awards covering shares of the acquiring company, as adjusted to reflect the transaction. If the principal terms of the converted awards (such as the type and duration of the awards) are substantially the same as the corresponding target company awards, shareholder approval of the new or converted awards will not be required under the new listing standards and rules. Any additional shares reserved for issuance by the acquiring company to cover converted awards will, however, count in determining whether the transaction itself must be approved by shareholders under the NYSE or Nasdaq provisions that require a listed company to obtain shareholder approval of any transaction that involves a potential issuance of 20% or more of the listed company’s outstanding common shares.
Post-Transaction Grants Under Preexisting Plans
The new listing standards and rules do not require shareholders of an acquiring company to approve grants of options, restricted shares or other equitybased awards covering shares of the acquiring company to employees of the target company or its preacquisition subsidiaries from shares remaining available for grant under a preexisting equity compensation plan of the target company. Shareholder approval will not be required in this case only if (i) the pre-existing plan was itself approved by the shareholders of the target company, (ii) post-acquisition grants are made during the original term of the preexisting plan and (iii) the number of shares of the acquiring company available for post-acquisition grants is adjusted to reflect the transaction. (A plan that is adopted in contemplation of the acquisition would not qualify as a pre-existing plan for these purposes.)
Once again, however, any additional shares reserved for issuance by the acquiring company to cover post-acquisition grants will count towards determining whether the transaction must receive shareholder approval because it involves the potential issuance of 20% or more of the acquiring company’s outstanding shares. Thus, if the inclusion of all shares available for grant under a pre-existing plan would put the acquiring company over the 20% threshold, the acquiring company may want to reserve less than all of such shares available so that the limit is not exceeded.
Employment Inducement Awards
The grant of options, restricted shares or other equity based awards covering an acquiring company’s shares to employees of a target company under a retention program is exempt from the new NYSE and Nasdaq listing requirements so long as the retention program is a material incentive for the target company employees to remain with the resulting entity. Broad based grants and individual grants to executives or other target company employees as well as grants to new employees are eligible for the exemption so long as the grants constitute a material inducement to remain with the company. Note that a listed company is required to issue a press release anytime it uses this exemption, as described below.
Approval of Independent Board Members Required; Notice to the NYSE; Press Release for Employment Inducement Awards
One final note: the independent compensation committee of the acquiring company (or a majority of the independent members of its Board) must approve the rollover of target company awards, post-acquisition grants and retention or other employment inducement grants for such transactions to be exempt from the new shareholder approval requirements. In addition, companies listed on the NYSE must notify the NYSE in writing when it uses one of these exemptions. Notice, which may be filed in electronic form, must be filed with the NYSE representative for the listed company as promptly as practicable following the rollover, post-acquisition grant or retention grant. If not previously filed, such notice must be included in the listed issuer’s first supplemental listing application filed with respect to the shares issued under the exemption. The notice must include sufficient details for the NYSE to verify that the grant qualifies for the exemption.
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The grant of options, restricted shares or other equity based awards covering an acquiring company’s shares to employees of a target company under a retention program is exempt from the new NYSE and Nasdaq listing requirements[.]
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In addition to notice to the NYSE, both the NYSE and Nasdaq rules require a listed company to issue an immediate press release when a listed company makes equity grants in reliance on the exemption for retention grants to target company employees or other employment inducement grants to newly hired employees. In the case of grants to one or more individuals who will become executives of the listed issuer following the transaction, the press release must identify the individual (or individuals) receiving the equity grant and the number of shares covered by the grant. If, on the other hand, grants are made under a retention program covering a broad class of employees of the target company, the press release can disclose the grants on an aggregate basis, in one press release, provided the grants are not individually negotiated and the release specifies the maximum number of employees covered by the program and the maximum number of shares that will be granted, assuming all eligible target company employees accept the retention grant.
About the Author
Debbie Kurtzberg is Counsel at Cleary, Gottlieb, Steen and Hamilton in New York City.
http://www.realcorporatelawyer.com/m&a/m&a0204.html
SEC Issues Proposed Regulation NMS (National Market System) Seeking Public Comment
U.S. Securities and Exchange Commission, Proposed Rule: Regulation NMS, Release No. 34-49325 (Feb. 26, 2004) (Click Here For PDF Version).
U.S. Securities and Exchange Commission, SEC To Publish Regulation NMS for Public Comment, News Release 2004-22 (Feb. 24, 2004).
On February 24, the Securities and Exchange Commission voted to publish for public comment Regulation NMS (National Market System). The proposed rules address four "interrelated" areas that the Commission says are "designed to modernize the regulatory structure of the U.S. equity markets" by updating existing Exchange Act rules and consolidating them into a single regulation. The proposal addresses trade-throughs, intermarket access, sub-penny pricing and market data.
Trade-Throughs
The proposal would crate a "uniform trade-through rule for all market centers" based on the "fundamental principle of price priority". According to the SEC announcement of the proposal, it is intended to address "problems posted by the inherent difference in the nature of prices displayed by automated markets, which are immediately accessible, compared to prices displayed by manual markets, which are not."
The proposal would require SROs (as well as any market center that executes orders) to develop procedures "to prevent the execution of an order for national market system stocks at a price that is inferior to the best bid or offer displayed by another market center at the time of execution." Two exceptions would be: (1) an order that trades through a better-priced bid or offer on another market center if the person entering the order makes an informed decision affirmatively to opt out of the trade-through protections with "informed consent" required on an "order-by-order" basis; and (2) automated markets would be able to trade through a better displayed bid or offer on a non-automated market up to a de minimus amount of one to five cents, depending on the stock's price. The Commission warns that nothing about the proposal is intended to change a broker-dealer's existing duty to obtain best execution for customer orders.
Intermarket Access
The proposal is intended to ensure non-discriminatory access at the best prices displayed by market centers without requiring "inflexible, 'hard' linkages such as the Intermarket Trading System". According to the Commission, the proposal "would prohibit a market center from imposing unfairly discriminatory terms that prevent or inhibit any person from accessing its quotations indirectly through a member, customer, or subscriber."
In addition, to promote a common quoting convention, the proposed Regulation NMS would establish an access fee standard intended to "harmonize quotations and facilitate the ready comparison of quotes across the national market system." Specifically, according to the Commission, access fees would be capped at $0.001 per share and the aggregation of this fee would be limited to no more than $0.002 per share in any transaction.
The proposal also provides that each SRO must establish and enforce rules requiring its members to avoid -- and prohibiting them from engaging in a pattern or practice of -- locking or crossing the markets.
Sub-Penny Pricing
The proposal would ban sub-penny pricing in most stocks. According to the Commission, "it would prohibit market participants from accepting, ranking or displaying orders, quotes, or indications of interest in a pricing increment finer than a penny in national market system stocks, other than those with a share price below $1.00."
Market Data
The Commission says that proposed Regulation NMS seeks "to better reward SROs for their contributions to public price discovery, as well as implement most of the recommendations of the Commission's Advisory Committee on Market Information." The proposal sets forth a new formula intended to divide market data revenues equally between trading and quoting activity "in order to reward markets that publish the best accessible quotes." Additionally, there are a number of "improvements" based on recommendations by the Advisory Committee on Market Information including broadening participation in plan governance by creating advisory committees composed of non-SRO representatives representatives and authorizing market centers to distribute their own additional data, such as limit order books -- separately from other markets -- as well as establishing uniform standards for the terms of such distribution.
SEC II: SEC Proposes New Investment Company Act Rule 22c-2 Regarding Mandatory Redemption Fees for Mutual Fund Securities
U.S. Securities and Exchange Commission, SEC Proposes Mandatory Redemption Fees for Mutual Fund Securities, News Release 2004-23 (Feb. 25, 2004).
On February 25, the U.S. Securities and Exchange Commission voted to impose a two percent fee on the redemption proceeds of mutual fund securities redeemed within 5 days of their purchase. In any such case, the fund will retain the proceeds from the redemption fees. According to the Commission:
"The rule is designed to require short-term shareholders to reimburse the fund for the direct and indirect costs that the fund pays to redeem these investors' shares. In the past, these costs generally have been borne by the fund and its long-term shareholders. Thus the redemption fee would be a 'user fee' to reimburse the fund for the cost of accommodating frequent traders."
The proposed rule would require funds, in the case of shares held by financial intermediaries such as broker-dealers and retirement plans, to "obtain the information they need to assess the redemption fee, and to oversee the efforts of intermediaries to assess those fees and remit them to the fund."
The proposal apparently is more complex than might otherwise appear at first blush. First, it provides that funds must calculate the redemption fee on shares held the longest period of time first. Second, there is a de minimus exception providing that a fund may waive any redemption fee of $50 or less. Third, the proposal contains an emergency exception that allows a shareholder to avoid payment of a redemption fee in instances involving certain sorts of "unanticipated financial" emergencies.
The proposal does not apply to money market funds or exchange-traded funds. Nor would it apply "to mutual funds that encourage active trading and disclose to investors in the prospectus that such trading will likely impose costs on the fund."
SEC III: Commission Proposes Amendments to '40 Act Rule 12b-1 to Prohibit Directed Brokerage
U.S. Securities and Exchange Commission, Proposed Rule: Prohibition on the Use of Brokerage Commissions to Finance Distribution, Release No. IC-26356 (Feb. 24, 2004).
On February 24, the U.S. Securities and Exchange Commission proposed amendments to Rule 12b-1 under the '40 Act to prohibit funds from compensating a broker-dealer for promoting or selling fund shares by directing brokerage transactions to that broker. Additionally, the proposed amendments would prohibit step-out and similar arrangements designed to compensating selling brokers for selling fund shares.
Interestingly, the SEC seeks public comment on several specific questions on or before May 10. A few of these questions are:
Are its concerns about the practice of using brokerage commissions to pay brokers for selling fund shares justified?
Are there alternative measures it could take to address the use of brokerage commissions to finance distribution?
Would brokerage commissions be reduced by eliminating the use of commissions to pay for distribution? Would there be greater competition in commission rates?
If the SEC bans this practice, would the primary effect be to increase brokers' demands on advisers to make payments out of their assets -- i.e., revenue sharing? Is the SEC correct in its assumption that properly disclosed revenue sharing payments present more manageable conflicts for funds and broker-dealers?
If such an assumption is correct, should the Commission take additional steps to address revenue sharing concerns?
SEC IV: SEC's Corporation Finance Division Issues Advisory Letter to Companies and Says Entire Oil & Gas Industry Should Consider It
U.S. Securities and Exchange Commission Division of Corporation Finance, Sample Letter Sent to Oil and Gas Producers (Feb. 24, 2004).
On February 24 the Commission's Division of Corporation Finance announced that earlier that month it issued a guidance letter to registrants identified as being primarily engaged in the production of oil and gas. Significantly, however, the announcement further indicated that "All registrants with subsidiaries or operations engaged in the production of oil and gas should consider this letter in the preparation of their filings with the Commission."
The letter provides guidance regarding questions that have arisen concerning the required disclosures of FAS 69 with the more recent adoption of FASB Statement No. 143 (Accounting for Asset Retirement Obligations). According to the letter, the guidance is intended to clarify "how recognition of a liability for an asset retirement obligation and the related depreciation of the asset and accretion of the liability under FAS 143 impact the required disclosures under paragraphs 18 through 34 of FAS 69."
SEC V: SEC Extends Compliance Dates for Internal Control Over Financial Reporting Requirements
U.S. Securities and Exchange Commission, Extension of Compliance Dates Regarding Internal Control Over Financial Reporting Requirements, News Release 2004-21 (Feb. 24, 2004).
U.S. Securities and Exchange Commission, Final Rule: Management's Report on Internal Control over Financial Reporting and Certification of Disclosure in Exchange Act Reports (Extension of Compliance Dates), Release Nos. 33-8392, 34-49313, IC-26357 (Feb. 24, 2004).
On February 24, the Commission announced -- as widely expected -- that it has extended the compliance dates for the effectiveness of amendments to its rules under Section 404 of Sarbanes-Oxley. The amendments require a company to include in annual reports a report by management on the company's internal control over financial reporting and the accompanying auditor's report.
According to the SEC's announcement:
Under the new compliance schedule, a company that is an 'accelerated filer' as defined in Exchange Act Rule 12b-2 (generally, a U.S. company that has equity market capitalization over $75 million and has filed at least one annual report with the Commission), must begin to comply with these amendments for its first fiscal year ending on or after Nov. 15, 2004 (originally June 15, 2004). A non-accelerated filer must begin to comply with these requirements for its first fiscal year ending on or after July 15, 2005 (originally April 15, 2005). The Commission similarly has extended the compliance date for related requirements regarding evaluation of internal control over financial reporting and management certification requirements, including certification and related requirements applicable to registered investment companies. . . .
SEC VI: SEC Issues Fee Rate Advisory #8 for Fiscal Year 2004
U.S. Securities and Exchange Commission, Fee Rate Advisory #8 for Fiscal Year 2004, News Release 2004-24 (Feb. 27, 2004).
The Commission issued Fee Rate Advisory #8 for Fiscal Year 2004 on February 27. The advisory provides that Effective April 1, 2004, the Section 31 transaction fee rate for fiscal 2004 will decrease from the current rate of $39.00 per million to a revised rate of $23.40 per million. This rate, the Commission noted, will not apply to the Section 31 assessment on security futures transactions, which will remain at the current rate of $0.009 per round turn transaction.
PCAOB I: On March 9 the PCAOB Will Consider Adopting Standard for Audits of Internal Control Over Financial Reporting
Public Company Accounting Oversight Board, Board to Consider Adopting Standard for Audits of Internal Control Over Financial Reporting (Feb. 24, 2004).
The Public Company Accounting Oversight Board has announced that on March 9 it will conduct an open meeting at which it will consider adopting an auditing standard for internal control over financial reporting. The auditing standard, "An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements" addresses the work that is required to audit internal control over financial reporting as well as the relationship of such an audit to the audit of the financial statements.
PRACTICAL GUIDANCE I: Correspondence with SEC is NOT "Confidential" - Keeping Communications With the SEC Confidential (Rule 83, SEC's Rules on Information and Requests)
Since enactment of the Freedom of Information Act, any form of communication with the U.S. Securities and Exchange Commission has been at risk of being disclosed by the Commission publicly. With the recent announcement by Global Securities Information, Inc. that it would begin offering as part of its LIVEDGAR service access to a massive collection of SEC comment letters and related response correspondence this issue has come into sharp focus for many companies and their counsel.
Whenever a response to an SEC comment (or any other communication with the Commission for that matter) needs to include sensitive or confidential information, the company and its counsel may wish to consider protection of such information in either of two ways.
Confidential Treatment Under Rule 83 of the SEC's Rules on Information and Requests
To make a confidential treatment request with respect to information included in a communication with, or supplemental information provided to, the SEC under Rule 83 of the SEC's Rules on Information and Requests, a company or its counsel must:
Electronically file the comment response letter or supplemental information with the confidential information redacted while marking each applicable page or portion of each page with the legend: "Confidential Treatment Requested by [Company Name]" and include an identifying number and / or code such as a so-called "Bates-stamped number".
Submit in a paper filing to the SEC a copy of the complete comment response letter or supplemental information without the confidential information redacted;
Submit to the Commission in a paper filing a letter requesting confidential treatment under Rule 83 and identifying the specific information for which confidential treatment is requested including a reference to the identifying number and code of the page(s).
Send a copy of the request for confidential treatment (but NOT the underlying documents for which confidential treatment is requested) by mail to the Office of Freedom of Information and Privacy Act Operations with the legend "FOIA Confidential Treatment Request" prominently displayed at the top of the first page of the written request. This must include the name, address and telephone number of the person requesting confidential treatment.
Significantly, the Director of the SEC's Division of Corporation Finance recently indicated that the SEC Staff will not honor so-called "blanket requests" for Rule 83 Confidential Treatment covering the contents of all correspondence between the SEC and the issuer.
Paper Filings of Supplemental Information
In the case of supplemental information submitted to the SEC, a company should consider the possibility of submitting the information to the SEC in a paper filing instead of an electronic filing and request that the SEC return such materials following its review. Under Exchange Act Rule 12b-4 and Securities Act Rule 418(b), the Commission should -- at the company's request -- return to the company any supplemental information provided by the company so long as the company's request is made when the information is furnished to the Staff, the return of the information is "consistent with the protection of investors" and "consistent with FOIA" and the information is not filed electronically.
PRACTICAL GUIDANCE II: Courtesy of RealCorporateLawyer.com
RealCorporateLawyer.com works hard to provide its readers with free access to a very large collection of law firm memoranda providing practical guidance on current hot topics. Readers are encouraged to visit the frequently-updated "Special Features" area of the home page for such current memoranda, as well as the SEC Reform Portal containing hundreds of other such memoranda. In the last 30 days, RealCorporateLawyer -- a free service -- has provided its readers with easy access to the following memoranda:
Sarbanes-Oxley, SEC and NYSE Corporate Governance rules and Proposals Summary from Bryan Cave LLP (02/27/04)
Urgent Notice for Non-EU Issuers of Securities from Elexica (Simmons & Simmons) (02/18/04)
Sarbanes-Oxley, SEC and Nasdaq Corporate Governance Rules and Proposals Summary from Bryan Cave LLP (02/27/04)
EU: Directive on Cross-Border Mergers from Elexica (Simmons & Simmons) (02/18/04)
Reports to Government Investigators of Audit Committee Findings May Be Discoverable by Plaintiffs in Shareholder Lawsuits from Wachtell, Lipton, Rosen, and Katz (02/27/04)
Consultation on Director and Auditor Liability from Elexica (Simmons & Simmons) (02/18/04)
SEC Delays Implementation Date of Internal Control Report Requirement for Many Public Companies from Morrison & Foerster (02/27/04) Market Abuse Directive: First Implementing Measures Adopted from Elexica (Simmons & Simmons) (02/18/04)
Alert for US Issuers: Last Minute Reminders for Preparing Your Annual Report on Form 10-K from White & Case LLP (02/26/04)
Another Call for Disclosure by Public Companies of Business in Terrorist-Supporting States from Covington and Burling (02/18/04)
SEC Extends the Compliance Dates for Internal Control Attestation Requirements Sarbanes-Oxley Section 404 from Arnall Golden & Gregory (02/26/04)
SEC Issues Interpretive Guidance on MD&A from Sullivan and Worcester (02/17/04)
M&A Notes from Kirkland & Ellis (Exculpatory Charter Provisions) (02/26/04)
What Public Companies Need to Know About This Year's Annual Reports and Proxy Statements from Sullivan and Worcester (02/17/04)
SEC Issues Additional Guidance Regarding MD&A from Kirkland & Ellis LLP (02/25/04)
Update for Form 20-F Filers from Paul, Weiss, Rifkind, Wharton & Garrison LLP (02/13/04)
ISS Study Finds Companies with Stronger Takeover Defenses Outperform Other Companies from Wachtell, Lipton, Rosen, and Katz (02/25/04)
The SEC's New MD&A Interpretive Release from Covington & Burling (02/13/04)
SEC and FDA Announce New Referral Program from Covington and Burling (02/24/04)
2004 Annual Update for Form 10-K and Proxy Statement Preparation from Mayer, Brown, Rowe & Maw LLP (02/09/04)
New Obligations - 2004 Proxy Season NYSE and Nasdaq Listed Companies from Vedder, Price, Kaufman & Kammholz P.C. (02/19/04)
SEC Issues Further Guidance on MD&A from Paul, Weiss, Rifkind, Wharton & Garrison (02/02/04)
In addition to all of this, the FAQs on Foreign Issuers & Compliance With Sarbanes-Oxley were updated during the month! Plus, the transcript to RR Donnelley’s February 19, Preparing the MD&A in a New Environment Teleconference is now available on RealCorporateLawyer.com.
COMINGS AND GOINGS: Who's Doing and Saying What and Where?
On February 26, Professor Joel Seligman (noted securities law scholar and author of the newly-revised The Transformation of Wall Street) gave an online "Fireside Chat" sponsored by the Securities and Exchange Commission Historical Society. An audio archive of the Fireside Chat is available online. Click here to access the archive.
On February 19, the Financial Accounting Foundation reappointed Edward W. Trott (FASB Board Member) and Paul R. Reilly (GASB Board Member) to their respective boards effective July 1, 2004. The reappointments were made by the Foundation's Board of Trustees, which has oversight responsibility for the Financial Accounting Standards Board and the Governmental Accounting Standards Board. See Financial Accounting Standards Board, Financial Accounting Foundation Reappoints Edward W. Trott, FASB Board Member, and Paul R. Reilly, GASB Board Member, News Release (Feb. 19, 2004).
On February 12, the American Stock Exchange named Fred Yager, formerly President and Founder of the World News & Information Network, as its Senior Vice President of Corporate Communications. Mr. Yager previously had held positions with Merrill Lynch, Fox Television, CBS News and Associated Press. See American Stock Exchange, American Stock Exchange Names Fred Yager Senior Vice President, Corporate Communications, News Release (Feb. 12, 2004).
On February 11, the Financial Accounting Foundation announced that Robert H. Attmore, a former Deputy State Comptroller in the New York State Comptroller's Office, has been elected Chairman of the Governmental Accounting Standards Board effective July 1, 2004. Mr. Attmore will succeed Tom L. Allen who has served as GASB Chairman commencing in 1995. See Financial Accounting Standards Board, Robert H. Attmore Elected Chairman of the Governmental Accounting Standards Board, News Release (Feb. 11, 2004).
On February 9 the New York Law Journal reported that Duke University School of Law professor Francis McGovern has been named fund administrator for the $1.4 billion settlement between the SEC and the country's largest brokerage firms regarding allegedly biased research. See Tom Perrotta, Law Professor Tapped as Administrator of SEC Settlement, N.Y. Lawyer (Feb. 9, 2004) (reprinted from New York Law Journal).
On February 6, the American Institute of Certified Public Accountants announced that the AICPA Board has voted to extend Barry Melancon's term as President and CEO of the AICPA for an additional five years. Prior to joining the AICPA, Melancon served as Executive Director of the Society of Louisiana CPAs and began his accounting career at the firm of Bergeron & Company in Louisiana. See American Institute of Certified Public Accountants, AICPA Board Approves Third Term for President and CEO Barry C. Melancon, News Release (Feb. 6, 2004).
What Are the Commissioners Saying? SEC Chairman William H. Donaldson delivered an Opening Statement at the February 25 open meeting on the topic of "Mandatory Redemption Fees". He also delivered a statement on the "Regulation NMS Proposal". SEC Commissioner Cynthia A. Glassman spoke at the 26th Annual Conference on Securities Regulation and Business Law Problems on February 20 regarding "Board Independence and the Evolving Role of Directors". Commissioner Glassman also delivered remarks at the Eighth Annual Conference on the Practical Implications of SEC Regulation Outside the United States regarding methods for instilling ethical procedures and preventing fraud through strong compliance. SEC Chairman William H. Donaldson delivered an "Introductory Statement at February 11, 2004, Open Meeting" regarding initiatives aimed at protecting mutual fund investors. Commissioner Cynthia A. Glassman spoke on February 3 at the Legal & Compliance Conference sponsored by the Bond Market Association regarding enforcement activities by the SEC staff and implementation of new rules under the Sarbanes-Oxley Act.
What Are the Commission Staffers Saying? On February 25, Paul F. Roye (Director of the Division of Investment Management) delivered an opening statement at the Commission's open meeting regarding "Mandatory Redemption Fees". Mr. Roye, on February 23, also delivered "Remarks Before the National Investment Company Service Association's 22nd Annual Conference & Expo" regarding the role of fund service providers and lessons for fund service providers. On February 19, Stephen M. Cutler (Director of the Division of Enforcement) delivered a "Statement Regarding SEC Action Against Ex-Enron Officer Jeffrey K. Skilling". On February 11, the SEC's Chief Accountant, Donald T. Nicolaisen, delivered "Remarks at the Tax Council Institute Conference on the Corporate Tax Practice: Responding to the New Challenges of a Changing Landscape". Also on February 11, Stephen M. Cutler delivered "Remarks Before the District of Columbia Bar Association" regarding inter-SEC "cross-pollination" to handle corporate fraud. On February 4, Mary Ann Gadziala (Associate Director, Office of Compliance Inspections and Examinations, N.Y.) spoke regarding "The Vital Role of Effective Comprehensive Compliance Controls at Broker-Dealers" at the Bond Market Association's Ninth Annual Legal and Compliance Conference. On February 2, Giovanni Prezioso (General Counsel, New York, NY) delivered "Remarks Before the Bond Market Association's Ninth Annual Legal and Compliance Conference".
January 27, Paul F. Roye (Director of the Division of Investment Management) delivered "Remarks Before the Understanding Securities Products of Insurance Companies - 2004 Conference" before a Practising Law Institute audience in New York City. On January 14, Linda C. Thomsen (Deputy Director of the Division of Enforcement) delivered a "Press Statement Regarding Settlement in SEC v. Andrew S. Fastow". On January 14, Paul F. Roye also delivered a "Statement at the SEC Open Meeting" regarding proposed rules regarding governance of mutual funds. At the same meeting, Annette Nazareth (Director of the Division of Market Regulation) delivered a "Statement at the SEC Open Meeting" regarding proposed rules concerning mutual funds. On January 8, Paul F. Roye spoke before the Mutual Fund Directors Forum in Washington, D.C. regarding "Enhancing the Fund Director's Tool Box".
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In This Issue:
SEC I: Mandatory EDGAR for Foreign Private Issuers Proposed
SEC II: Emergency and Exemptive Orders Re: Stock Repurchases, Section 16 and Rule 10b5-1 Plans
SEC III: Capital Raising and Other Relief for Airline and Insurance Industries
Stock Options: Spike in Popularity of "6 and 1" Repricing Plans
M&A: Fairness Reviews in Going Private Transactions with Controlling Shareholders
What's Up Online: 1st All-Electronic Annual Meeting Held
Comings and Goings: Who's Doing What and Where
Events Calendar
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SEC I: Mandatory EDGAR for Foreign Private Issuers Proposed
On September 25th, at an open meeting, the SEC approved the issuance of proposed rules mandating EDGAR for all foreign private and government issuers. There is a 60 day comment period.
The proposal allows for a four-month "transition period" scheduled to begin as soon as final rules are published - so that EDGAR would not be mandatory until sometime in mid-2002 (but Chairman Pitt was particularly interested in comments about whether the Form 20-Fs due at the end of June 2002 should be mandatory or not). Under the proposal, virtually all forms would be filed by EDGAR.
Although Section 16 reports were discussed at the meeting, they are not addressed in the release - the SEC is trying to reconcile any programming needs before doing any rulemaking.
The Chairman was quite interested in having "24/7" EDGAR and eliminating the current 24 hour delay in making filings available on SEC's Web site - and he asked the staff to prepare a cost-benefit analysis on these topics.
The proposed rules are at http://www.sec.gov/rules/proposed/33-8016.htm.
On an unrelated note, the SEC has delayed an adjustment of its filing fees for a few weeks - so filing fee rates remain at the levels they have been (i.e. $250 per $1 million registered). Typically, any adjustments take effect on October 1st, the first day of the SEC's fiscal year.
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SEC II: Emergency and Exemptive Orders Re: Stock Repurchases, Section 16 and Rule 10b5-1 Plans
In the wake of last month's tragic incidents, the SEC took unprecedented actions to facilitate the reopening of fair and orderly markets after the exchanges had been closed for nearly a week. This included the issuance of an emergency order (with an extension) that was effective for the 10 business days after the markets were reopened and a subsequent exemptive order that will last until October 12th.
The orders granted relief in a number of areas, including Rule 10b-18, Section 16 and Rule 10b5-1 - but some areas of relief in the emergency order (that ended Sept. 28th) were not continued in the exemptive order as noted below.
Among other matters, the orders:
Pooling-of-Interests Relief - The order's relief clarified that stock repurchases during these 10 day period would not impact the availability of pooling-of-interest accounting for past acquisitions (so far, it is reported that over 200 companies have conducted repurchases under the orders).
Suspended Time Restrictions - Repurchases were allowed throughout the day, including at the market open and within the last 1/2 hour of the trading day. This relief continues under the exemptive order but only for larger issuers and with certain limitations.
Increased Volume Limits - Up to 100% of average daily volume, an increase from 25%. Block transaction did not count against volume limits.
Relief from "Blackout" Periods - Repurchases occurring during companies' end of quarter or "blackout" periods were not by themselves considered as any indication of a violation of the securities laws.
No Section 16 Matching for Purchases - Section 16 insiders could purchase stock and those purchases were not matchable with any sales during the past six months. Note that sales were not exempted so that any purchases under the orders will be matchable. Purchases made in reliance on the emergency orders must be reported on Form 4 (with the transaction code of "J," and an explanatory footnote that the purchase was made in reliance on the orders).This relief was not extended by the exemptive order.
Termination of 10b5-1 Plans - Termination of plans established prior to September 11 will not, by itself, call into question whether the plan was "entered into in good faith and not as part of a plan or scheme to evade" if they were terminated between September 11 and September 28. This relief was not extended by the exemptive order.
A press release regarding the latest exemptive order is at http://www.sec.gov/news/headlines/newrepurchase.htm.
In addition, the Chief Accountant's office issued an interpretation that clarified that the auditor independence rules would not be implicated if accounting firms assisted clients that had offices around the World Trade Center as part of the recovery process.
The interpretation is available at http://www.sec.gov/rules/interp/33-8004.htm.
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SEC III: Capital Raising and Other Relief for Airline and Insurance Industries
The SEC has facilitated the ability of airline and insurance companies to raise capital on Form S-3. In addition to setting up phone and e-mail "hotlines" for these companies, the SEC is prepared to allow them to use Form S-3 even if they don't meet the form's eligibility requirements (e.gs. delinquent filings, inadequate float) and the SEC staff will review any filings by these companies within 5 business days of receipt.
In addition, these companies can seek relief for missing other SEC deadlines (e.g. filing for no-action relief under Rule 14a-8 regarding shareholder proposals). These special accommodations will continue through the end of the year.
The press release regarding this relief is available at http://www.sec.gov/news/headlines/airline-insurance.htm.
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Stock Options: Spike in Popularity of "6 and 1" Repricing Plans
As noted by Pat McGurn of Institutional Shareholder Services, over 100 companies have implemented "six months and one day" stock repricings so far in 2001. These option exchange plans allow companies to avoid the negative accounting effects of FASB's new Interpretation 44.
Under the accounting literature, stock options are treated as either "fixed" or "variable." If an option is treated as "variable," the company must recognize an ongoing earnings expense charge in connection with any rise in the value of the stock underlying the option. When an award is deemed "fixed," the company is required to measure a charge only at a single point in time-typically the grant date, when the "intrinsic value" is zero. Since Interpretation 44 allows companies to avoid variable accounting treatment by canceling underwater options in exchange for a promise of a new grant following a six-month "quarantine" period, this new type of "6 and 1" plan is attractive.
Despite widely publicized negative comment about Sprint's "6 and 1" plan as far back as November 2000, many companies have followed Sprint's lead. Pat includes a chart and list of companies that recently have adopted these plans in his article - and he predicts a backlash from institutional investors against companies that adopt such plans.
Source: Pat McGurn's observations are made in the September/October issue of the Corporate Governance Advisor published by Aspen. Aspen can be reached at http://www.aspenpublishers.com/Default.asp?cookie%5Ftest=1.
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M&A: Fairness Reviews in Going Private Transactions with Controlling Shareholders
Two recent Delaware cases illuminate how to avoid an "entire fairness" review in going private transactions conducted by a controlling stockholder. As noted by Steven Glover of Gibson Dunn, practitioners long assumed that a going private transaction in which a controlling stockholder acquires the balance of the stock from minority stockholders would be reviewed under the stringent entire fairness standard (often resulting in the use of special board committees formed on behalf of minority stockholders to show that an acquiror paid a fair price and engaged in fair dealing).
However, these recent decisions suggest that the ordinary business judgment rule will apply when the controlling stockholder makes a cash tender offer or stock exchange offer for the outstanding shares, and then conducts a short form merger to acquire any shares that were not tendered in response to the exchange offer or tender offer. This appears to work only if the controlling stockholder succeeds in acquiring 90% of the company's stock in the first step tender offer or exchange offer, so that the applicable short form merger statute is available.
These decisions are In re Siliconix Incorporated Shareholders Litigation, (Delaware Chancery Court June 19, 2001), and Glassman v. Unocal Exploration Corp., (Delaware Supreme Court July 25, 2001).
Source: The cases are available at http://caselaw.lp.findlaw.com/data2/delawarestatecases/390-2000.pdf (Unocal) and http://corporate-law.widener.edu/documents/opinions/18700-117.pdf (Siliconix). Steven Glover's article about these cases is in the September issue of the M&A Lawyer published by Glassers. Glassers can be reached at http://www.legalwks.com.
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What's Up Online: 1st All-Electronic Annual Meeting Held
In April, a small company incorporated in Delaware - Inforte - became the first company to take advantage of Delaware's year-old laws to conduct an electronic stockholders' meeting - with no physical counterpart! Now states other than Delaware, such as Massachusetts, are reported to be considering changing their laws to allow e-meetings.
Despite Delaware's modernized laws, many practitioners had predicted that no companies would attempt a pure e-meeting because of the concerns raised by many groups, including the Council of Institutional Investors and the AFL-CIO. These groups seek to preserve the ability to directly confront management as they feel that there is no comparable substitute for in-person contact. They don't take issue with supplemental Webcasts of annual meetings, and over 100 companies have done so this year.
Inforte found considerable cost and time savings in conducting an e-meeting (this was the company's first annual meeting since its IPO) - spending only $2k (for such things as the Webcast and an inspector of election), rather than the $20k budgeted. The time savings consisted of simpler planning and no traveling for management and the board. Inforte has approximately 5500 registered and beneficial holders.
Under new Section 211 of the Delaware General Corporation Law, the board can hold a meeting "by means of remote communication" and allow remote stockholders/proxy holders to be considered "present" for quorum and voting purposes, if the company has the ability to:
implement "reasonable measures" to verify that each person is a stockholder or a proxy holder.
Inforte was prepared to receive e-votes by fax (but none were faxed) and the inspector of elections would have verified the name and control number on any faxes against the transfer agent's and ADP's records.
implement "reasonable measures" to provide remote participants a "reasonable opportunity" to "participate" in the meeting.
Inforte allowed any investor (not just stockholders) to e-mail questions before - or during - the meeting (but none did).
allow to "attend" the meeting on a substantially concurrent basis, including an opportunity to read or hear the proceedings of the meeting.
Through PR Newswire, Inforte used a live audio Webcast and the meeting chair was prepared to read any e-mailed questions to the audience.
maintain a "record" of the votes or other action taken at the meeting by means of remote communication
Since Inforte collected e-votes by facsimile, this was fairly easy to do; next year, Inforte hopes to allow for online voting and recordkeeping should be even easier.
For FAQs about online stockholder meetings, see http://www.realcorporatelawyer.com/stockholdermeetings.html.
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Comings and Goings: Who's Doing What and Where
At the SEC, Harvey Pitt held his first open meeting as the new Chairman. Based on the tone and number/types of matters that were on the agenda, it appears that he is more likely to have the Commission consider more proposed rulemakings at open meetings - rather than in seriatim - and ask many more questions.
Robert K. Herdman was announced as the new Chief Accountant. Mr. Herdman was Vice-Chair of Ernst & Young, where he had been the senior partner responsible for the firm's relationships with the SEC, the Financial Accounting Standards Board, and the American Institute of Certified Public Accountants.
In the wake of last month's tragedies, tightened security is evident at the SEC. Staffers must display their badges at all times and visitors must check in and wear a badge to enter any of the buildings. The SEC's Northeast office was located in Building No. 7 of the World Trade Center and was destroyed but everyone is safe. The Northeast staff has been relocated to 233 Broadway on a permanent basis.
In Corp Fin, Christine Bianchine has left the Office of Rulemaking to concentrate her efforts on a new child. As typical at this time of year, many new junior staffers have begun their government careers in Operations, as other more seasoned staffers have transferred between Offices in an effort to vary their type of experience.
In private practice, it appears that all SEC alumni who worked in the World Trade Center are safe, including those at Brown & Wood, Thacher Profitt and Sandler O'Neil.
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Events Calendar
Although many events have been cancelled, the following upcoming events are still scheduled to be held:
RR Donnelley Financial Europe's "US GAAP Seminar," London, October 4
American Corporate Counsel Association's Annual Conference, San Diego, October 14-17
National Association of Stock Plan Professionals Annual Conference, New Orleans, October 17 - 20
RR Donnelley Financial Europe's "International Financial Reporting Issues - For Analysts, Bankers and Lawyers," Frankfurt, October 15-19
PLI's 33rd Annual Institute on Securities Regulation, New York City, November 8-11
If you would like to participate in either of these RR Donnelley Financial Europe conferences, please email martin.simmons@rrd.com for more information.
Florida Noncompete Agreements are Enforceable Post-merger
liz talk@flux.org
Tue, 29 Apr 2003 21:45:07 -0400 (EDT)
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On Tue, 29 Apr 2003, Haim Dimer wrote:
> I heard that because Florida is a right to work state, non-compete
> agreement don't stand in a state court of law. Is it true?
"Right to work" is a euphemism for "anti-union." It means that in
Florida, you cannot have a "closed shop" in which individuals may not work
unless they are members of the applicable labor union.
This does not mean that non-compete agreements are not enforced in
Florida. They are, with some exceptions (for example, overly broad and
unreasonable restrictions.) It has nothing to do with non-compete
agreements.
Florida is a very pro-management state. It is also called an "at-will"
work state, which means that in the absence of a contract otherwise, and
provided that there is no discrimination based on membership in protected
classes of persons, in general employees can be fired for no reason at any
time.
Delaware Supreme Court on Fiduciary Outs in Merger Agreements
[PDF/Adobe Acrobat]
... on “Fiduciary Outs” in Merger Agreements. The Delaware Supreme Court has issued its opinion explicating its summary ...
www.realcorporatelaw.com/pdfs/wlrk0403.pdf
http://www.realcorporatelaw.com/pdfs/wlrk0403.pdf
Excluding Third-Party Beneficiaries from Merger Agreements
by: James A. Smith
Synopsis
Often, in a merger-acquisition negotiated by two companies, the target company’s shareholders receive a premium price for their shares. In the ordinary sense, the target’s shareholders are "beneficiaries" of the merger agreement. If the agreement is clear on the point, however, the target company’s shareholders are not third party beneficiaries and cannot sue the buyer for breach. Let’s look at a case study.
The Merger Agreement
Acme and Beta executed a definitive merger agreement. All shares of Beta were to be redeemed for cash. The price was tied to the market price of Acme shares, and included a premium for Beta’s shareholders - at least 25% over the last market quote for Beta shares before the deal was announced.
The Acme-Beta Merger Agreement contained "General Provisions." These "boilerplate" clauses were in the first draft of the agreement and were never revised during negotiations. They included such prosaic matters as addresses for notices, choice of governing law and counterpart execution. The General Provisions also included this clause:
"Entire Agreement; No Third Party Beneficiaries. This Agreement is the entire agreement between the Parties concerning its subject matter, supersedes all prior agreements and understandings, whether or not written, and is not intended to confer upon any person other than the Parties any rights or remedies hereunder."
Termination
On the eve of the merger, Acme terminated, claiming a substantial change in Beta’s circumstances had occurred. The next day, Beta’s share price fell back to premerger levels and no other buyer was interested in matching Acme’s offer. Some angry Beta shareholders consulted a well-known class-action securities lawyer, Matthew Browning, hoping to sue Acme for the price premium they lost. They asked him to work on a contingency fee. Browning studied the merger agreement, especially the General Provisions, then shook his head.
"I tried to make a claim like this once," he told the shareholders, "but I won’t try again. You won’t get to trial, so you won’t have much leverage for a settlement."
Browning explained: "The problem is, this merger agreement is between Acme and Beta, and you shareholders are not parties to the agreement. Normally, only a party to a contract can sue. Sometimes, you can sue as a third party beneficiary, but this agreement specifies that there are no third party beneficiaries. I know it sounds funny, but you can’t sue for breach, even if there was a breach. I wouldn’t take this case on a contingency and I wouldn’t advise you to spend money suing Acme."
One of the disappointed shareholders was Harold Nelson, president of his own company. Nelson called his lawyer, Nancy Tatum, and asked her if Browning was right. Nancy asked for a copy of the Acme-Beta merger agreement and other papers and told Nelson she would review the cases and send him a memo.
"I can’t afford any memos," Nelson protested. "Just call me when you know whether we can sue." Nancy Tatum set to work in the library, and here is what she found.
Excluding Third Parties
Nancy noted first that the merger agreement was governed by the law of Delaware, Acme’s state of incorporation. Delaware’s common law of contracts holds that no one can be a third party beneficiary of a contract unless it is apparent on the face of the contract that the parties to the contract intended to confer that status on others. Insurance Company of North America v. Waterhouse, 424 A.2d 675, 678 (Del. Sup. 1980). Michigan follows the same rule, by statute. MCL 600.1405, MSA 27A.1405.
"The courts use an objective standard to determine whether a plaintiff is a third-party beneficiary under the statute. The contract itself reveals the parties’ intentions. The parties’ motives and subjective intentions are irrelevant in determining whether a plaintiff is a third-party beneficiary. * * * " Frick v. Patrick, 165 Mich. App. 689, 694, lv. den., 431 Mich 872 (1988).
See also, Rieth-Riley Construction Co. v. Dept. of Transportation, 136 Mich. App. 425 (1984), lv. den., 422 Mich. 911 (1985).
So, Nancy knew what it takes to convince a court that someone is a third party beneficiary. It must be objectively clear from the terms of the contract itself. What about a contract which says that nobody is a third party beneficiary, even when the whole point of the agreement was to benefit an obvious group?
Nancy found few cases, but they supported Browning's advice to the Beta shareholders. The Oklahoma Court of Appeals addressed this question in Cities Service Company v. Gulf Oil Corp., 797 P.2d 1009 (Okla. App. 1990), reh. den., 5/29/90; cert. den., 9/18/90 (Okla. S. Ct.). Gulf Oil had agreed to acquire Cities Service, but canceled the deal when the Federal Trade Commission obtained a temporary restraining order enjoining the merger. Cities Service sued Gulf for breach, joined by two shareholders, who contended that they were third party beneficiaries of the contract.
The Cities Service - Gulf merger agreement, §10.8, provided:
"Section 10.8 Miscellaneous. This agreement . . . (i) constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter here [sic]; (ii) is not intended to confer upon any other person any rights or remedies hereunder; . . ." 797 P.2d at 1011.
The trial court dismissed both Cities Service’s claim for the premium its shareholders would have received and the shareholders’ direct claims for the premium. The Oklahoma Appeals Court affirmed, ruling:
"* * * Because of Section 10.8 of the merger agreement, we hold that the parties to said agreement (Cities, Gulf and GOCA [a Gulf subsidiary]) did not intend to confer upon the shareholders a right to receive performance by the promisor, Gulf, and therefore the shareholders were not in the legal sense third-party beneficiaries of the merger agreement." 797 P. 2d at 1012.
The Cities Service shareholders argued that they were the ones who were to receive the premium price offered by Gulf, so the "no third parties" clause could not have been intended to apply to them. The Oklahoma court turned this intuition around: because the shareholders were the "only class of potential third-party beneficiaries evident on the face of the contract", ibid., and the corporate parties took pains to exclude third party beneficiaries, this clause must have been intended to exclude the shareholders.
Similar results have been reached in other courts. Disappointed Cities Service shareholders also filed class actions in New York. In re Gulf Oil/Cities Service Tender Offer Litigation, 725 F. Supp. 712 (SDNY 1989). Applying Delaware law, the District Court ruled that "any other person" was clear and unambiguous language which excluded the shareholders from any right to sue. In an unreported decision dealing with another failed merger, the Ohio Court of Appeals refused to allow shareholders to sue when a merger agreement excluded third party beneficiaries. Matheny v. Ohio Bancorp, 1994 Ohio App Lexis 6007.
Corbin on Contracts, §776, at 7 (Supp., 1971) expresses a similar view:
"f two contracting parties expressly provide that some third party who will be benefitted by performance shall have no legally enforceable right, the courts should effectuate the express intent by denying the third party any remedy."
The Restatement of Contracts 2d, §302, observes that persons, who otherwise might meet the tests for third party beneficiary status, will be denied the right to sue when it is "otherwise agreed between promisor and promisee."
Her research done, Nancy Tatum called Mr. Nelson and told him that Matthew Browning gave him good advice. "Browning wouldn't take the case on a contingency because he knew he'd never get a fee," she said. "You would be wasting your money if you paid a lawyer to sue, and Browning was right to say so."
"Why didn't the Board insist that shareholders like me be included in the agreement?" Nelson asked. "Isn't that their job?"
Nancy explained: "It's the directors’ job to get the best deal they can for the shareholders, but they can't do the impossible. I believe Acme never would have signed the agreement without that clause. I certainly wouldn't let you sign one."
"I bet the board had their own sweet deal to sell their shares," Nelson fumed.
"Yes, they did sign lockup agreements", Nancy replied, "but that won't give them the right to sue, either. Acme's lawyers did a good job on the lockups, too."
RELATED AGREEMENTS
"Lockup" agreements, made between the acquiring company and shareholders of the target, frequently accompany merger agreements. The target’s key shareholders agree to vote for the merger and to tender their shares. Usually, there is no separate agreement to purchase them; the lockup is executed to induce the acquiror to enter into the merger agreement. Another form of "extrinsic" agreement is the tender offer made to other target shareholders, under which the acquiror offers to purchase shares, subject to the conditions of the merger agreement.
If the merger agreement and all related agreements have their own integration and "no third party" clauses, the courts will not merge the agreements into a "super contract" under which the target shareholders could sue. Lockup agreements can define their parties to include only the acquiror and the signing shareholder, thus excluding the target company and its other shareholders as parties. They also can exclude third party beneficiaries. Both courts which decided the Gulf Oil/Cities Service disputes ruled that the existence of such other agreements did not make target shareholders parties to or third party beneficiaries of the merger agreement.
"Faced with § 10.8’s preclusive effect on their third-party beneficiary argument, plaintiffs argue that § 10.8 does not apply to shareholders because it includes ‘instruments . . . referred in the Agreement' and the Offer to Purchase was referred to in the Merger agreement. * * * Defendants correctly respond that the language ‘instruments . . . referred in the Agreement’ is limited to those agreements ‘among the parties’ and, since even the shareholders agree they were not ‘parties’ to the Merger Agreement, plaintiffs’ imaginative reading of § 10.8 fails." Gulf Oil/Cities Service, supra, 725 F. Supp. at 733-734.
See also Cities Service Co. v. Gulf Oil Co, supra, 797 P. 2d at 1012 (shareholders not parties to merger agreement by virtue of tender agreement).
All agreements used in connection with the merger must be reviewed carefully to determine whether they could be read together to confer rights on ancillary parties. If drawn carefully, they will not. An example of problems created by lack of "boilerplate" is found in the litigation over the failed acquisition of ICO, Inc. Bush et al. v. Brunswick Corp. et al., 783 S.W.2d 724 (Ct. App. Tex. 1989), reh. den. (2/13/90); Brunswick Corp. et al. v. Bush et al., 829 S.W.2d 352 (Tex. App. 1992).
Brunswick agreed to acquire ICO, Inc., through merger with a new Brunswick subsidiary, "ICO Transitory". Brunswick also made lockup agreements with seven ICO shareholders, who held 51% of ICO’s stock. The merger agreement provided that it was "not intended to confer upon any other person any rights or remedies". It also "superseded all other prior oral agreements and understandings between the parties", but did not provide that it was the "entire agreement" between the parties. The lockup agreements lacked "entire agreement" and "supersedes other agreements" clauses, and did not exclude third parties.
When trouble developed, ICO sued, alleging anticipatory breach by Brunswick. The seven shareholders who had made lockup agreements petitioned to intervene, claiming third party beneficiary status. The Texas Court of Appeals ruled that the seven insiders could intervene, because the merger agreement had no "entire agreement" clause. The Court read the lockup agreements together with the merger agreement, concluding that the shareholders were intended beneficiaries of the merger agreement and could sue for its breach. The court read "any other person" as meaning persons other than the necessary participants in the merger. The court observed that the parties could have used language such as "no person who is not a party to the Merger Agreement", if that was what they meant. 783 S.W.2d at 730.
In its second opinion, the Texas court held that the seven insiders could sue for themselves, but not for a class of all ICO shareholders, because the shareholders who had not signed lockups were not necessary parties to the merger. 829 S.W.2d 352. This anomalous result probably could have been avoided if both merger and lockup agreements had used all of the necessary "boilerplate".
Nancy Tatum explained to Nelson that Acme had been careful to include all the necessary clauses in both the merger and the lockup agreements. Nelson listened to this explanation quietly, then asked: "Do we have clauses like these in our contracts?"
"Yes, in the contracts I’ve prepared", Nancy replied. "The only time I don't use a standard "no third parties" clause is when you really mean to create a third party beneficiary. There were some third party beneficiaries in one deal, when you agreed to honor agreements with employees of the company you bought. But we made sure the employees were the only third party beneficiaries, and only as to those agreements."
"Thanks, Nancy. I guess I'm getting good advice."
Nelson was right. He was getting good advice, both on his own company's contracts and on the contract between Acme and Beta. Using a no third party beneficiary clause is easy, seldom controversial in negotiating a deal, and can be crucial to defending a claim of breach. Coupled with integration and supersession clauses, it will do the job intended by the parties.
======================
This article originally appeared in the June 1999 edition of the Michigan Bar Journal.
http://www.bodmanlongley.com/a-122099.htm
Our-Street’s ‘Nick Tracy,’ Hero Securities Cop On the Block or Fraudster Sued by the SEC? / ATTACHED REPORT Information
Our-Street.com has made a lot of noise as a self-appointed securities cop, even recently winning accolades from no less than the Dow Jones (NYSE: DJ) Newswire. The site’s purported proprietor, “Nick Tracy,” screams for more “transparency,” but like most would-be anonymous vigilantes, there is a dark side. A very, very dark side.
And not a lot of “transparency” for Our-Street and Tracy.
The site’s current target is Skyway Communications Holdings, Inc. (OTCBB: SWYC), and its recent targets have included H-Quotient (OTCBB: HQNT) and Circle Group Holdings (AMEX: CXN) when it was on the over-the-counter bulletin board. Short sellers love the site, and until recently Tracy had disclosed that he was among the short sellers trading the companies he posted.
Targeting H-Quotient turns out to have been Our-Street’s Achilles heel. H-Quotient has sued Our-Street and Nick Tracy, who claims to live and operate out of the countryside near London, Chancery Number 86916, Fairfax Circuit Court, Virginia.
Except the company didn’t sue Tracy, and it certainly didn’t sue him “just outside London,” where he has claimed residence. It sued Timothy J. Miles, of 918 Pacific Terrace, Klamath Falls, Oregon 97601, phone 541-273-0225, fax 541-273-0206, a character whose background is definitely interesting and eclectic. Miles, purportedly a.k.a. Nick Tracy sent his attorneys, Charles Hildebrandt and Michael York of the law firm of Wehner & York (http://www.lawyers.com/w&ylaw/) to answer the suit. The next hearing is scheduled May 27.
The website operator’s claim to be “outside London” appears to be true. Klamath Falls, Oregon, is definitely outside London.
Other companies that Our-Street has gone after include Silverado Gold Mines, Ltd. (OTCBB: SLGLF), Epixtar Corp. (OTCBB: EPXR), Aqua Vie Beverage Corporation (OTC: AQVB), ChampionLyte Holdings, Inc (OTCBB: CPLY), BEVsystems Interenational, Inc. (OTC: BEVI), DataMeg, Inc. (OTCBB: DTMG), Kingdom Ventures, Inc. (OTCBB: KDMV), Imaging Diagnostics, Inc. (OTCBB: IMDS), SHEP Technologies, Inc. (OTCBB: STLOF), EdgeTech Services, Inc (OTCBB: EDGH), Nutra Pharma Corp. (OTCBB: NPHC), Verdisys Inc. (OTC: VDYS), Calypte Biomedical Corporation (OTCBB: CYPT), Galaxy Energy Corp. (OTCBB: GAXI), PowerChannel, Inc. (OTCBB: PWRC), US Global Nanospace (OTCBB: USGA), and Universal Guardian Holdings (OTCBB: UGHO).
A handful have indeed become targets of the SEC, not always though for the “crimes” that Our-Street has accused them of. Many others, however, have actually prospered, and some, such as H-Quotient, reported strong earnings and revenues hard on the heels of Our-Street’s representations that its finances were a sham.
At first it was hard not to admire Our-Street’s premise, and even FinancialWire reported the site’s activities and Investrend Information even listed the site as a partner, for about a week, until certain representations became suspicious and requests for documentation as to Tracy’s existence and true whereabouts were brick-walled. The circumstances were outlined in a comment letter posted on the SEC web site at http://www.sec.gov/rules/proposed/s72303/investrend010404.htm, which claimed among other things that “Tracy’s” own comment letter supporting short selling may have been a violation if, as suspected, Tracy had not truly identified himself in an official letter to a government agency.
In response, “Nick Tracy” wrote to FinancialWire and claimed that the SEC “knows who I am.”
For Timothy J. Miles, nothing could be closer to the absolute truth.
“Securities and Exchange Commission v. C. Jones & Company, Carter Allen Jones, Timothy J. Miles, Gaylen P. Johnson, and Jonathan Curshen, Civil Action No. 03-WM-0636(PAC) (District of Colorado, filed April 11, 2003)” is proof of that. On March 1, 2004, the SEC was awarded a summary judgment against Miles in their case against him after Miles’ dismissal motion was denied.
The SEC charged Miles and his co-defendants, most of whom are believed to have dropped out of sight or left the country, with securities fraud for their participation in an alleged "pump and dump" scheme involving Freedom Golf Corporation’s common stock, where Miles was a “principal shareholder.”
The complaint alleges that in the fall of 1999, Miles provided a broker-dealer with false information to be filed with the National Association of Securities Dealers in order to initiate public trading of securities issued by Freedom Golf's predecessor company. The complaint also alleges that from late January through early March 2000, Miles paid two stock promoters, Jones and Curshen, to hype Freedom Golf via the Internet, telephone, and mail. Specifically, the complaint alleges that Jones arranged for the dissemination of between 25 and 35 million unsolicited "spam" e-mails touting Freedom Golf in February 2000. During the same period, the complaint continues, Johnson created baseless profit, revenue, and expense projections for Freedom Golf that Jones published on his company's Internet website, and that Curshen publicized on an Internet message board. In addition, the complaint alleges that Jones and Curshen failed to disclose the full amount that Miles was paying them to tout Freedom Golf, in violation of the federal securities laws.
The complaint further alleges that Freedom Golf's stock price and trading volume was pumped up to artificially inflated levels as a result of the false and misleading e-mails and baseless price projections.
According to the complaint, during the course of this manipulation, Jones, Miles, and Curshen all sold shares of Freedom Golf stock and reaped profits of more than $500,000.
And yes, indeed, the SEC does know Miles. The case is used as "class materials" in presentations on stock fraud by John Reed Stark, Chief of the Office of Internet Enforcement in the Division of Enforcement of the U.S. Securities and Exchange Commission, at http://www.johnreedstark.com/ClassMaterials/LitigationReleas....
As it turns out, the SEC’s recognition of Miles' activities were nothing new for him. From 1997 to 2001, operating from Hilton Head, SC, an EDGAR search reveals that Timothy Miles would indeed make a Nick Tracy a very knowledgeable resource for pumps, dumps and sham public companies.
Miles is listed in registration statements during that period for a wide range of public companies that were soon pumped and dumped out of business, including Ballyhoo Capital Ventures, Casinovations, Inc., Global Foods Online, Inc., ICV, Inc., Pratt Wylce & Lords Ltd., Sea Shell Galleries, and Wahoo Capital Ventures. Only one company in which he was involved, Bionet Technologies, Inc. (OTC: BNTK), survived as a public entity, and it is nothing more than a shell, with no trades at $0.0001.
Before leaving Hilton Head for Klamath Falls, however, Miles appears to have had an epiphany. As “Reverend” Timothy Miles, our self-described fighter against “corporate evil-doers” apparently discovered “the meaning of life,” and began sharing his revelations with the world at http://www.themeaningoflife.net. Recently, FinancialWire wrote to the email address on the website, addressing “Nick Tracy.” Miles/Tracy did not respond but the website was promptly taken down, perhaps to save the author from embarrassment. However, the website was downloaded and stored, and portions of it may be accessed at http://www.investrendinformation.com at http://www.investrend.com/Admin/Topics/Articles/Resources/92....
“In February 1991, a unique and mysterious crystal was discovered near what some authorities believe to be the site of the Garden of Eden. This crystal possessed remarkable powers. Anyone who held this magical crystal was healed emotionally, restored spiritually and enlightened. Everyone who held the crystal was changed in a positive and profound way,” stated Rev. Timothy Miles as part of a pitch to have individuals register at his website.
“In 1999 the crystal was discovered to also contain data. This data turned out to be a text file that revealed new insight into the meaning of life. Religious leaders and scientists gathered together and examined the crystal and the newly found text. What followed was a scientific evaluation of the crystal and the gathering of all available empirical evidence. The result; the only possible explanation for the powers of the crystal and the unusual and unexplainable characteristics of the file containing the message was that this was indeed a message from God.
“For reasons too numerous and complex to detail here, these religious leaders decided that the best thing to do with this message was to put it on the internet, accompanied by a complete story about the crystal's discovery and the events leading up to its being placed on the net to let God’s will determine if and how it would be disseminated.
Rev. Miles goes on to say that “the insight I have gained from the story and the message has changed my life in many ways, all for the better. I am a 54-year old ordained minister (30 years) and I can say without reservation, this story has strengthened my faith,” noting that “there is something remarkable about the actual file containing the message, something beyond scientific explanation that has convinced me beyond a shadow of a doubt that this is indeed a message from God. It blew me away.”
Blown away to Klamath Falls to become London’s “Hellboy” saving the world from corporate evildoers?
One would think that one public website besides Our-Street.com would have been enough for the versatile Rev. Miles, but drum roll, please, straight from Klamath Falls, Oregon, ladies and gentlemen, we bring you, wonder of wonders, OTCart.com, at http://www.otcart.com.
Here, he is a little bit more upfront about his interests, although “fine art” would not be among those most observers would have guessed. Mighty fine art, perhaps, but fine art?
Here is how the Reverend Stock Corruption Expert Pumper Dumper Corruption Fighter Art Connoisseur describes yet another enterprise: “OTCart.com was conceived and developed by Timothy J. Miles. Over 2 years in development, OTCart.com represents the logical and essential meeting of two of Mr. Miles’ great passions, the stock market and the world of fine art.
“Mr. Miles has been an avid collector of original and limited edition fine art for over 20 years. As a collector, Mr. Miles recognized the lack of a cohesive secondary market for limited edition art. He also recognized that this lack of a structured market, kept limited edition art from reaching its potential as an investment medium. After all, cars, commodities and even companies, through the public stock markets, had an organized and cohesive trading platform for their products.
“Having spent the past 14 years working as a stockbroker, consultant to and president of publicly traded companies, Mr. Miles has an intimate knowledge of the workings of the Over the Counter Stock Market and recognized the similarities between stock and limited edition art. He also realized that what the art world needed was a market similar to the Over the Counter Market as a venue to establish not only the value of a particular work of limited edition art, but the strength and depth of that market as well. In that way, the collector could make a more informed decision regarding a particular artist or work of limited edition art and a gallery owner could expand his market by participating in a global trading platform both as both a buyer and as a seller.
“OTCart.com is the perfect marriage between the stock market and the art world. Establishing a simple, effective and relevant real-time market for registered works of art, this platform creates the essential distinction between decorative and investment-grade limited edition art and facilitates the execution of that market,” concludes the quirky site.
Miles’ OTCart, Inc., in Klamath Falls, lists a phone and fax which executives at one public company say are the same where messages were left and documents were faxed from and to Nick Tracy. Our-Street publicly acknowledged receiving phone messages that were left exclusively at the phone number, 541-273-0225, and discussed documents faxed to 541-273-0206.
The site states that “effective May 1, 2003, employees and/or owners of Our-Street.com do not trade any stocks featured on this site. In fact employees and/or owners don't even short stocks period!” That policy was adopted as part of the set of principles that FinancialWire required after its initial article about Our-Street on March 17, 2003, and just prior to parent Investrend Information’s demand for more documentation as to the site’s agenda and ownership in May, 2003, when FinancialWire ceased coverage of the site’s complaints.
In late April, Our-Street, squeezed out of press release distribution by the major press wire services, frantically asked FinancialWire to publish findings that Aqua Vie Beverage (OTC: AQVB) had apparently produced its own “tout sheet,” without disclosing it was the publisher. Our-Street had filed the complaint on April 25, but it wasn’t getting the notice that “Nick Tracy” wanted.
As part of its requirements for publishing the story, FinancialWire asked Tracy to fax copies of the offense for purposes of documentation, and to assert that neither he nor others associated with Our-Street was trading in stocks of companies covered. Thus, Our-Street set its policy, but in doing so, inadvertently revealed that up until May 1, the site’s proprietors were in fact trading the stocks.
Satisfied going forward, in the wee hours of May 2, FinancialWire broke the story, and the SEC halted trading in Aqua Vie’s stock before the market opened.
The site then turned to other means to try to make money from its venture. It began accepting gratuities and selling “alerts” and “pre-alerts” about stocks it was about to publish, in essence, offering a paid front-runner service.
FinancialWire has received an email collected by Asiavest Investigative Services (www.agents911.com) that indicates Our-Street “does release information privately and before posting to their web site.”
The agent goes on to state “we believe that the person that sent this to us was one of the principals of Our-Street or closely related to the principals. The person that sent it to us is a known shorter, he is tied to organized crime people, and he was involved with a shorting criminal enterprise.”
The July 14, 2003 email message about Imaging Diagnotic Systems, Inc. (OTCBB: IMDS) sent to the individual from Tracy/Miles stated “that isn't due to hit till wedns so keep a lid on it .. thanks.”
One observer notes that many of the “scams” targeted by Our-Street had “significant price moves” prior to his “coverage.” It isn’t a leap to recognize that if there were short sellers in those companies, a scathing attack on the company wouldn’t do a short seller looking to bail out of a losing position any harm if the result, a short-term stock price deflation, occurs.
The observer notes that just because the messenger is tainted doesn’t mean that all of those targeted by short sellers are on the “up and up.” But for those that were, the executives are left after the experience wondering “who was that masked man, and what was that all about?”
That masked man, it turns out, is no relation to Dick Tracy, and he doesn’t have Sam Ketchum as a sidekick. Unmasked, is he Timothy Miles the SEC-charged fraud, the Reverend who found the meaning of life, the art connoisseur, the former stock broker and public company executive, the pumper and dumper, former Hilton Head resident now in Klamath Falls, or is he a true, abused, well-meaning, honest-to-goodness fraud-fighter just outside London? You decide.
Meanwhile, if you happen to be someone who agrees with Tracy/Miles that “Wall Street has been taken over by gangsters and terrorists in three piece suits and the cops (the SEC with its staff of 3,100) can’t handle it themselves,” you can do your part.
At http://www.voy.com/22812/, another dubious website apparently frequented by “Tracy,” mostly devoted to get-rich pyramid schemes and European lassies looking for a good time in London, you can answer this ad: “Looking for a research assistant -- Nick Tracy, 18:06:47 11/04/03 Tue [1] Nick Tracy Enterprises, Ltd is looking to hire another research assistant. We are a public company watchdog and we investigate all kinds of stock fraud and manipulation. If you like research, you will absolutely love this job. London area. Contact Nick Tracy at 207-900-2080.”
Are judicial findings of quasi-governmental status for the SROs inconsistent and unfair?
By Bill Singer
Following on the heels of last year's high-tech/Internet stock collapse, public customers have been filing complaints in growing numbers against issuers, analysts, investment bankers, broker-dealers ("BDs"), and registered persons. A byproduct of this discontent is increased scrutiny of Wall Street by Congress and the various industry regulators. Accordingly, I find myself more involved with matters before the self-regulatory organizations ("SROs"), as BDs, their management, and their employees are receiving increasing numbers of demands to produce documents and give testimony. Although it may seem comforting to view SRO regulatory practice as an isolated, esoteric discipline without impact beyond the registered entities and individuals subject to the respective jurisdiction, such a perspective is myopic. The ramifications of such investigations reach far beyond the walls of any given member firm and frequently affect pending shareholder lawsuits, consumer-initiated and intra-industry arbitrations, grand jury investigations, and subsequent criminal proceedings.
Unfortunately, to the unfamiliar practitioner, SRO investigative practice may be more than arcane --- it may be troubling and, at times, infuriating. Significant procedural policies are rarely memorialized. Disputes concerning on-site examinations or On-the-Record interviews ("OTRs") are usually resolved by a Staff member's arbitrary determination. When one raises a legitimate protest and requests a citation to whatever rule or regulation supports the Staff's position, the reply is frequently, "It's not codified, we don't have to put it in writing, Staff controls the record, and you're interfering with the investigation."
In recent years we have seen such new phenomena as electronic communications networks ("ECNs"), direct-access trading platforms, and discount, online broker-dealers. Similarly, we have seen dramatic inroads into the securities industry by organized crime and have witnessed more sophisticated financial fraud. And while it is fair to say that the SROs continue to play an important role in investigating marketplace misconduct, it is equally true that in some sense that role has diminished --- to the extent that the ultimate forum for resolving serious fraud is more frequently at the Securities and Exchange Commission ("SEC") or within the criminal justice arena.
After nearly two decades on Wall Street, during which time I have served as a regulatory attorney with the American Stock Exchange and the NASD, as in-house counsel to the industry, and more recently as a private practitioner, I have had an opportunity to observe self-regulation from both sides of the table. Now, with a new Presidential Administration, with a new SEC Chairman, and with our stock markets roiling in the face or an uncertain economy, I believe we must reappraise the system of self-regulation by asking three questions:
I. Are judicial findings of a quasi-governmental for the SROs inconsistent and unfair?
II. Is the piecemeal incorporation of criminal procedure into the SROs' civil, regulatory process inappropriate in the absence of the higher criminal standard for the burden of proof and attendant constitutional safeguards?
III. Must self-regulation be dismantled or can it be preserved through the implementation and codification of due process guarantees during investigations and pre-hearing practices?
Solomon Splits the Baby
More than a quarter of a century ago in the United States v. Solomon1, the Second Circuit ruled that SROs are private investigative organizations and do not trigger the self-incrimination rights attributable to government entities. In Solomon, a NYSE member firm notified the NYSE in mid-April 1973 of potentially significant books and records problems. The NYSE promptly investigated the firm and advised the SEC of the probable violations. On May 15, 1973 the SEC entered an Order of Investigation. On May 16, 1973 the SEC served a subpoena on the NYSE for production of all Solomon investigatory material. On May 17, 1973 Alan C. Solomon, an officer and director of the member firm, was summoned to testify before the NYSE's Department of Member Firms.
Under the then existing NYSE's Constitution, a failure to testify could result in the non-cooperating party being "suspended or expelled." Solomon appeared at the interrogation, did not claim any privilege against self-incrimination, and answered the NYSE's questions. Subsequently, the member firm was placed in receivership and Solomon (as well as four other officers/directors) was indicted in July 1973. Solomon's NYSE testimony was introduced during his criminal trial and he was subsequently found guilty on one count of creating and maintaining false books and records. Solomon's sole point on appeal was the use before the grand jury and at trial of his NYSE transcript (he had previously sought to have the testimony suppressed). Essentially, Solomon argued "interrogation by NYSE must be deemed the equivalent of interrogation by the United States because the Exchange has become in effect the arm of the Government in administering portions of the Securities Exchange Act."
In denying his appeal, the Court declined to deem the NYSE an agent of the SEC and held that
Most of the provisions of the Fifth Amendment, in which the self-incrimination clause is embedded, are incapable of violation by anyone except government in the narrowest sense. No private body, however close its affiliations with the government, can hold a person 'to answer for a capital or otherwise infamous crime' without an indictment . . .2"
Non-governmental actors
As held in Solomon, SROs have historically been viewed as private, non-governmental organizations. As clearly expressed in Graman v. NASD 3, a 1998 decision of the United States District Court for the District of Columbia:
Every court that has considered the question has concluded that NASD is not a governmental actor. See First Jersey Secs., Inc. v. Bergen, 605 F.2d 690, 698, 699 n. 5 (3d Cir.1979); Shrader v. NASD, Inc., 855 F. Supp. 122, 124 (E.D.N.C.1994), aff'd, 54 F.3d 774 (4th Cir.1995); Cremin v. Merrill Lynch Pierce Fenner & Smith, Inc., 957 F.Supp. 1460, 1468 (N.D.Ill.1997); Datek Secs. Corp. v. NASD, Inc., 875 F.Supp. 230, 234 (S.D.N.Y.1995); First Heritage Corp. v. NASD, Inc., 795 F.Supp. 1250, 1251 (E.D.Mich.1992); Bahr v. NASD, Inc., 763 F.Supp. 584, 589 (S.D.Fla.1991); United States v. Bloom, 450 F.Supp. 323, 330 (E.D.Pa.1978).
[Ed: emphasis supplied]
In recent years entities and individuals are finding themselves increasingly under investigation by both an SRO and a criminal prosecutor; whereas previously, parallel investigations were more likely conducted by an SRO and the SEC. Older cases considered the issue of whether an SRO was acting as the agent of the SEC --- and then questioned whether the SEC's role as a government agency was sufficient to infect federal prosecutors under whose aegis federal criminal charges were brought. More recently we are finding SROs accused of directly acting in concert with or at the behest of state or federal prosecutors, with less emphasis on attempting to establish the SEC as a disqualifying intermediary. More dramatically, the SROs themselves are now being characterized as quasi-governmental in nature.
In Marchiano v. NASD4 , the United States District Court for the District of Columbia recently visited the issue of the NASD's role as a "private entity". In Marchiano an NASD member firm's former president sought to enjoin the SRO from pursuing a disciplinary proceeding against him. The Plaintiff alleged that the NASD acted in concert with state prosecutors (who had charged him in a pending 240 count indictment alleging stock manipulation and fraud) and that the SRO was impermissibly planning to provide its disciplinary proceeding materials to the state prosecutors. The NASD argued that it was a private entity, not a state actor. Marchiano countered that the NASD was a quasi-governmental agency acting in concert with the state prosecutors and seeking to coerce him into surrendering his privilege against self-incrimination by threatening him with permanent banishment from the securities industry for failure to testify during the SRO's investigation. In dismissing the complaint against the NASD, the Court cited to Graman as "rejecting the argument that NASD is a 'quasi governmental authority' because of its regulatory duties," and further noted, inter alia:
[T]he court is aware of no case --- and Marchiano has presented none --- in which NASD Defendants were found to be state actors either because of their regulatory responsibilities or because of any alleged collusion with criminal prosecutors.
Consequently, in 2001 a line of cases from Solomon forward has consistently deemed SROs to be private entities, even to the extent that they lack quasi-governmental standing. An interesting example of the lengths to which some courts are prepared to go to sustain a finding of non-governmental, private-entity status is demonstrated in D.L. Cromwell Investments, Inc. v. NASD5. In Cromwell the United States District Court for the Southern District of New York considered a motion for a preliminary injunction, which was brought by targets/subject of a federal grand jury investigation. Plaintiffs there alleged that the NASD was seeking to coerce them into testifying before the SRO and participating in its disciplinary proceedings after they asserted their Fifth Amendment privileges in the federal investigation. In essence, the Plaintiffs sought to depict the NASD as an agent of the federal prosecutors. The Court characterized the Plaintiffs' allegations as follows:
Plaintiffs nevertheless argue the Court should . . . infer that DOE [NASD Department of Enforcement] is acting as the cat's paw on the government from a series of circumstances:
Regulation issued Rule 8210 demands to two . . . plaintiffs for personal financial records shortly after [the plaintiffs received] Eastern District grand jury subpoenas.
[A]n unidentified FBI agent is said to have stated that "we are working with the NASD --- they know exactly what is going on."
[D]uring [NASD] investigational testimony [an employee] was questioned regarding two documents that plaintiffs "believe' were seized by the FBI and surmise were not produced by them to Regulation.
[A grand jury] subpoena gave the witness the opportunity to respond by delivering responsive documents to . . . the NASD Washington office.
Regulation has refused to adjourn the interview until the completion of the criminal investigation.
Additionally, the Court noted that NASD Regulation ("NASDR"), the NASD's regulatory arm had formed in 1998 a Criminal Assistance Prosecution Unit to assist and advise federal/state prosecutors and that the unit's sole attorney was designated as a Special Assistant United States Attorney in various districts from time to time. The Court further noted that the unit's staff is granted access to federal grand jury materials pursuant to court order. Ultimately, in dismissing Plaintiffs' motion, the Court once again held that the Fifth Amendment prohibits only governmental action and that NASD and NASDR are "private entities."6
And this line of cases has now filtered down into the very jurisprudence of the SROs themselves. On April 30, 2001, NASD Regulation, Inc. determined, in DOE v. Frank A. Persico7 that
[t]he Federal Courts have consistently held that the Fifth Amendment claim against self-incrimination cannot be properly asserted when appearing before a self-regulatory organization. As explained in the recent federal court decision in D.L. Cromwell Investments, Inc., et al., v. NASD Regulation, Inc., the Fifth Amendment privilege does not apply to the NASDR in performing its statutory mandate, since it is not a government actor. 2001 U.S. Dist. LEXIS 1912 (S. D. N. Y. February 26, 2001). In D.L. Cromwell, the court held that [t]he Fifth Amendment prohibits only governmental action. The NASD and [NASD] Regulation are private entities.... Hence, even if the individual plaintiffs are being compelled to give evidence against themselves by the threat of NASD sanctions, [NASD] Regulation's actions raise no Fifth Amendment issue unless it fairly may be said that its actions are fairly attributable to the government.
This private entity, non-governmental actor characterization has been adopted by other SROs8.
Wearing two hats: the quasi-governmental chapeau
At first blush it would appear that the issue has been resolved. The NASD, the NYSE --- SROs as a whole --- are not governmental actors but private entities. However, in 1998 in Sparta Surgical Corporation v. NASD9, the Ninth Circuit Court of Appeals considered what civil remedies were available against the NASD for wrongfully temporarily delisting and suspending trading in a stock on the opening day of a public offering. The Court found that the SRO was immune from such a lawsuit and affirmed the lower court's dismissal. The Court reasoned that
[e]xtending immunity when a self-regulatory organization is exercising quasi-governmental powers is consistent with the structure of the securities market as constructed by Congress. When Congress considered the burgeoning over-the-counter market in the 1930s, it was confronted with two alternatives: a "pronounced expansions" of the SEC, or a system of industry self-regulation with strong SEC oversight. S. Rep. No. 1455, 75th Cong., 3d. Sess. 3-4 (1938). Congress chose the latter approach and, with enactment of the Maloney Act, established a system of "cooperative regulation" . . .[citing 1 Loss & Seligman, 6 Securities Regulation 2787-90 (3d Ed. 1990).
In 1975, Congress amended the Exchange Act to vest more control in the SEC . . . [S]elf-regulatory organizations "are intended to be subject to the SEC's control and have no governmentally derived authority to act independently of SEC oversight." H.R. Rep NO. 123, 94th Cong., 1st Sess., 48-49 (1975).
[Ed: emphasis supplied]
Sparta appears to have made a bit of a right turn on the issue of an SRO's private entity status --- the Court allowed for the existence of so-called quasi-governmental powers. The Court's analysis is somewhat provocative in that it talks about quasi-governmental status and cooperative regulation between the SEC and SROs, and at the same time notes that since 1975 Congress has attempted to solidify the "control" of SROs by the SEC. So in one breath, the Court swept aside the concept of a completely non-governmental, private entity; in another breath the Court (perhaps unwittingly) strengthens the historic "agency" argument by characterizing the SEC as something akin to either a regulatory partner or a control-person of the SROs.
Not a private business!?
On the heels of Sparta, the Ninth Circuit considered Partnership Exchange Securities Company v. NASD10, a complaint for money damages against the NASD arising from alleged improprieties attendant to the initiation of disciplinary proceedings against a member firm. In Partnership Exchange the Court once again affirmed a lower court's dismissal on the basis of an SRO's absolute immunity. Following a review of its previous holding in Sparta, the Court reiterated that
[T]he NASD was not acting as a private business, so its actions are protected by absolute immunity from money damages. . . acts similar to a prosecutor's preparation "for the initiation of judicial proceedings or for trial" are entitled to absolute immunity from suits for money damages. Buckley v. Fitzsimmons, 509 U.S. 259, 273 (1993). The NASD's actions fit under that rubric . . .
[Ed: emphasis supplied]
Within the context of Fifth Amendment compelled-testimony cases, courts seem adamant that SROs are private businesses not amenable to government action --- not even as agents of prosecutors. Within the context of lawsuits for money damages against SROs, the courts seem equally as adamant that those entities are quasi-governmental. So which is it? Are SROs private entities capable of compelling witnesses to waive their Fifth Amendment rights, or are they quasi-governmental entities absolutely immune from lawsuit when acting in such capacity --- or are they both?
Simple Logic and Intense Practicality?
Now, consider the recent case of D'Alessio v. NYSE et al11, which combines several elements addressed separately in the case analyses above. A registered person sues an SRO (which he also alleges is acting in concert with both a federal prosecutor and the SEC) for money damages. In December 1999, John R. D'Alessio ("D'Alessio") sought compensatory and punitive damages against the NYSE and various officers arising from claims of injurious falsehood, fraudulent deceit and concealment, negligent misrepresentation, and breach of contract. D'Alessio alleged that the defendants concocted a phony interpretation of various '34 Act and NYSE regulations and knowingly disseminated that incorrect interpretation to the detriment of D'Alessio and other floor brokers. D'Alessio alleged that the NYSE, in an effort to keep its activities secret and curry favor with law enforcement authorities, assisted the United States Attorney's Office and the SEC in their investigation and prosecution of D'Alessio by knowingly providing them with false information about D'Alessio (and further failing to disclose to these authorities that it had approved and encouraged the practice of "flipping," the specific type of unlawful trading for which D'Alessio had been charged). D'Alessio attributed the NYSE's inaction to the substantial fees earned by the NYSE and its clearing members on the high volume of "flipped" trades and to its desire to increase its daily volume. D'Alessio contended that, as a result of the NYSE's alleged misconduct, he incurred legal difficulties and has been unable to work as a NYSE floor broker.
In considering a motion to dismiss, the United States District Court for the Southern District of New York framed the pending question as asking whether NYSE employees "who, pursuant to statutory delegation, perform regulatory functions that would otherwise be performed by the Securities and Exchange Commission are entitled to the same immunities from suit to which comparable Commission employees would be entitled." In deciding that issue, the Court explained that
nder the federal securities laws, the Exchange "performs a variety of regulatory functions that would, in other circumstances, be performed by a government agency," namely, the Commission. Barbara, 99 F.3d at 59. Mutatis mutandis, the Exchange and its employees, in performing these functions, should be accorded the same absolute immunity that would be afforded the Commission and its employees in parallel circumstances. See Austin Mun. Securities, Inc. v. National Ass'n of Sec. Dealers. 757 F. 2d 676, 688 (5th Cir. 1985) (extending absolute immunity to another national securities exchange and its employees). This is a matter not simply of logic but of intense practicality, since, in the absence of such immunity, the Exchange's exercise of its quasi-governmental functions would be unduly hampered by disruptive and recriminatory lawsuits. See Barbara, 99 F.3d at 59; Austin 757 F.2d at 688.
On appeal, the United States Court of Appeals for the Second Circuit affirmed the lower court's ruling and held:
After reviewing the complaint, we agree with the district court's determination that the NYSE's alleged misconduct falls within the scope of quasi-governmental powers delegated to the NYSE pursuant to the Exchange Act and, therefore, conclude that absolute immunity precludes D'Alessio from recovering money damages in connection with his claims.
In reaching its decision, the Circuit Court specifically cited approvingly the District Court's above-referenced mutatis mutandis explanation, and further explained that the
NYSE, as an SRO, stands in the shoes of the SEC in interpreting the securities laws . . . and in monitoring compliance with those laws. It follows that the NYSE should be entitled to the same immunity enjoyed by the SEC when it is performing functions delegated to it under the SEC's broad oversight authority.
Question: If the D'Alessio quasi-governmental/absolute immunity inference is compelled as a matter of logic and practicality, then does not the following syllogism have equally sound footing? To wit:
Under the federal securities laws, SROs perform a variety of regulatory functions that would, in other circumstances, be performed by the SEC. Mutatis mutandis, the SROs and their employees, in performing these functions, should be accorded the same absolute immunity that would be afforded the SEC and its employees in parallel circumstances. This is a matter not simply of logic but of intense practicality, since, in the absence of such immunity, the SRO's exercise of its quasi-governmental functions would be unduly hampered by disruptive and recriminatory lawsuits.
Accordingly, witnesses compelled to give testimony before SROs are appearing under circumstances similar to that presented before the SEC (or other governmental agency) and should be entitled to the same constitutional protections afforded such parallel parties. Similarly, this too is a matter not simply of logic but of intense practicality, since in the absence of such constitutional protections, the witness' testimony before a quasi-governmental entity would be unduly coerced and lacking appropriate due process protections.
So much for a foolish consistency being the hobgoblin of small minds. D'Alessio declares that an SRO is a quasi-governmental entity when engaged in its regulatory role --- it stands in the SEC's shoes! And this federal court's interpretation is used against a registered person seeking to sue an SRO and its officers. The reward of such quasi-governmental status is absolute immunity bestowed upon the SROs --- a veritable legal shield if ever there was one. However, when an SRO is pursuing a registered person and that target seeks to assert a Constitutional right against self-incrimination, the SRO amazingly transforms itself into a non-governmental, private party. Now the SRO is armed with a prodigious sword. And they say there's no magic left in the world.
More to follow in the next installment!
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ENDNOTES
United States of America v. Alan C. Solomon, 509 F.2d 863, Fed. Sec. L. Rep. ¶94, 948 (2nd Cir. Jan. 14, 1975, Friendly, J.)
An interesting bit of dicta in Solomon was the Court’s discussion as to whether Solomon was coerced into not asserting his Fifth Amendment privilege before the NYSE by a threat of mandatory “permanent loss of employment in the only business which he knew." See, Garrity v. New Jersey,385 U.S. 493, 87 S.Ct. 616, 17 L.Ed.2d 562 (1967). Solomon noted that in Garrity, the applicable state statute used the words “shall be subject to a proceeding to have you removed from the department” (Ed: a requirement that police officers under oath answer questions pertaining to their office), whereas the NYSE’s Constitution stated that one “may be suspended or expelled” for failure to testify. Additionally, Solomon notes that “there would be a complete breakdown in the regulation of many areas of business if employers did not carry most of the load of keeping their employees in line and have the sanction of discharge for refusal to answer what is essential to that end.”
Martin Graman, v. National Association Of Securities Dealers, Inc., et al., 1998 WL 294022, (No. Civ. A. 97-1556-JR., April 27, 1998, D.D.C.)
Anthony J. Marchiano v. National Association of Securities Dealers, Inc., 134 F. Supp.2d 90 (D.D.C., Feb. 16, 2001)
D.L. Cromwell Investments, Inc., et al. v. NASD Regulation, Inc., 132 F. Supp.2d 248 (S.D.N.Y., Feb. 26, 2001)
Notwithstanding its ruling, the Court urged the NASDR to “give careful attention to its arrangements concerning assistance to criminal investigations and to the relationships, both physical and administrative, between CPAG [NASD’s Criminal Assistance Prosecution Unit (sic)] and DOE [NASD’s Division of Enforcement]. The present arrangements left doubt sufficient to require a trial as to the independence of DOE’s 8210 requests . . .”
Department of Enforcement v. Frank A. Persico, http://www.nasdr.com/pdf-text/oho_dec01_16.txt (Disciplinary Proceeding No. C10000139, April 30, 2001)
See,Exchange Hearing Panel Decision 01-20 (John Henry Libaire, Jr), http://www.nyse.com, (February 8, 2001) (“[L]ibaire informed Enforcement, by his attorney, that he would assert a claim of privilege under the Fifth Amendment to the U.S. Constitution and would not be providing the explanation requested by Enforcement. Enforcement advised Libaire’s attorney in this conversation, in substance, that the Fifth Amendment only applies to governmental proceedings and thus is inapplicable to Exchange proceedings.”); Exchange Hearing Panel Decision 00-176 Michelle McDonough a/k/a Michelle Sarian,http://www.nyse.com, (October 10, 2000) ([E]xchange advised McDonough’s attorney that the Exchange is not a government agency and does not recognize the invocation of the Fifth Amendment . . .”)
Sparta Surgical Corporation v. National Association of Securities Dealers 159 F. 3d 1209, Fed. Sec. L. Rep. ¶ 90, 318 (9th Cir. November 6, 1998) (No. 97-15394)
Partnership Exchange Securities Company v. National Association of Securities Dealers, Inc. et al. 97-16497, CV-96-02792-DLJ (February 25, 1999)
John R. D’Alessio, D’Alessio Securities, Inc. v. New York Stock Exchange, Inc., Richard A. Grasso,Edward A. Kwalwasser, and Robert J. McSweeney, 125 F.Supp.2d 656, Fed. Sec. L. Rep. ¶ 91, 227 (S.D.N.Y. Sept. 29, 2000) affirmed2001 WL 815541, --- F.3d ---, (2nd Cir., July 19, 2001). (Note: current SEC Chairman Harvey L. Pitt appeared as counsel on behalf of Appellees.)
A version of this article appeared in the eSecuritiesnewsletter in August 2001 (volume 3, No. 12): Reappraising Self Regulation: Examing Judicial Findings of Quasi-Governmental Status for SROs. Reprints of that article may be ordered from Law Journal Newsletters, 105 Madison Avenue, New York, NY 10016.
http://www.rrbdlaw.com/2001/Q3/010816sro1.htm
Cybercrimes' True Price: Crime May Not Pay, But Someone Has To Pick Up The Cost
By Martin P. Loeb, InformationWeek
March 29, 2004
URL: http://www.informationweek.com/story/showArticle.jhtml?articleID=18402607
All security breaches are arguably a bad thing for a company, but recent empirical evidence suggests that most breaches actually don't have a significant economic impact in terms of direct expenses imposed on the companies that suffer them. That's the good news. The bad news is that the indirect costs associated with cybersecurity breaches can lead to significant economic punishment.
The financial beating we're talking about here is over and above what people usually talk about when they discuss the costs of cybercrime. This is because the difficulties of measuring those costs tend to focus any discussion on the more measurable costs--those that are direct expenses.
But, of course, there are both direct and indirect costs associated with cybersecurity breaches. The direct costs to companies include the money spent on intrusion-detection systems, overtime for staff members fixing compromised systems, and the productivity lost during virus attacks. Although these costs add up fast, spikes in expenses aren't a story that's unknown in other aspects of the day-to-day operations of a business. These costs can be thought of as akin to other operating expenditures. They are the costs of doing business in an Internet world. These costs can be measured, albeit not perfectly. And in total, these costs don't significantly impinge on a company's revenue.
The real financial damage as a result of cybersecurity breaches comes from indirect costs. These can be damages caused by lost sales, weakened customer relations, and legal liabilities. It's hard to measure indirect costs, but it's worth worrying about them because, unlike direct costs, they can add up to a substantial figure.
To try to get a handle on the full cost of cybercrime, Professor Lawrence A. Gordon and I led a team of researchers at the University of Maryland's Smith School of Business in examining the impact of cybersecurity breaches on the stock-market value of companies. The premise of our study was that stock-market pricing reflects the consensus of all the best minds in the market (and even the worst ones, for that matter) about all the information in the market at any given moment.
Once news of a breach reaches the market, the collective wisdom of investors will quickly work to evaluate the present value of all future effects of a breach, and this estimate will inherently include both the direct and indirect costs to the company.
In our research, looking at the stocks of businesses that had suffered breaches showed that most cybercrimes didn't have a significant effect on the market value of those companies. Shareholders recognize that an incident that, say, shuts down a company's Web site (as for example when SCO Group was pummeled by a denial-of-service attack as part of the MyDoom virus) may cost the business something but only in a transitory way.
When a breach leaks confidential private information (such as credit-card and bank-account numbers or sensitive medical information), that's an entirely different matter. In these cases, the breach has a marked negative impact on the market value of the company.
If a bank gets a virus and its ATMs shut down for a few hours, it's annoying, but customers probably won't change banks over such an incident. But if a bank is hacked and customer data is circulated on the Internet, customers may well decide to take their business elsewhere. You'd expect the stock market to react noticeably only in the latter case, because of the real potential for lost future revenue as customers opt to change banks.
Cybercrimes where confidentiality is violated are crimes that cause measurable negative impact in the stock-market value of companies. In our study, we found that companies lost an average of slightly more than 5% of their market valuation. If there is a perception that a business can't safeguard its confidential data, it can send investors running for the exits.
The message is clear: No company can achieve 100% security from cybercrimes, and trade-offs will have to be made. The key to those trade-offs is for companies to make sure to concentrate more of their information-security dollars on safeguards that will prevent breaches in confidentiality.
http://www.informationweek.com/shared/printableArticle.jhtml?articleID=18402607
Personal data at risk, thousands are warned
By Karen Kucher
UNION-TRIBUNE STAFF WRITER
March 17, 2004
San Diego State University is warning more than 178,000 students, alumni and employees that hackers broke into a university computer server where names and Social Security numbers were stored.
The university began mailing out notification letters Monday, urging people whose personal information was on the server to get copies of their credit reports and review them for suspicious activity.
The SDSU case appears to be the largest such notification made under a state law that went into effect last July requiring companies and state agencies to contact people when their computerized personal data have been compromised.
For help
If you feel your personal information has been compromised, the state Office of Privacy Protection offers these recommendations:
Contact any of the three credit bureaus – Equifax at (800) 525-6285; Experian at (888) 397-3742; and Trans Union at (800) 680-7289 – and flag your file with a fraud alert.
Request and review your credit reports for any accounts or activity you don't recognize. Request reports every three months or so.
If you find items you don't understand on your report, call the credit bureaus to review the report. If the information cannot be explained, call the creditors involved and report the crime to police.
For more information, go to the state Office of Privacy Protection's Web site at http://www.privacy.ca.gov
University officials said the hackers infiltrated a server in the Office of Financial Aid and Scholarships in late December and used it to send spam e-mail messages and transfer files, including MP3 music files.
The problem was discovered in the last week of February and SDSU took the server off the network.
"We have moved as absolutely quickly as logistically possible" to notify individuals affected by the security breach, said Ellene Gibbs, director of business information management at SDSU.
The server contained financial aid reports about current, former and prospective students – as well as some SDSU employees – who sent in financial aid applications since 1998, but not the applications themselves or award information.
This is the second time that SDSU has suffered a security breach that put computerized personal data at risk. The university notified around 1,000 people in December when a server used by the library was hacked, Gibbs said.
Under the state law, businesses and state agencies are required to notify customers when personal data, such as Social Security numbers or financial account numbers, may have fallen into the wrong hands.
That warning is designed to give people the chance to quickly act to protect themselves against thieves who would use stolen personal information to open new credit accounts and make unauthorized purchases.
SDSU recommends that those affected by the security breach obtain a copy of their credit report. A spokeswoman with the Privacy Rights Clearinghouse suggests people go a step further and request that one of the three credit reporting agencies flag their file with a fraud alert.
With a fraud alert in place, credit reporting agencies will contact the person if someone tries to establish new credit in his or her name, and also will waive the fee for the credit report.
"We also suggest people monitor their credit reports on a quarterly basis at least for a year," said Jordana Beebe, communications director for the Privacy Rights Clearinghouse.
California, which has the third highest per-capita rate of identity theft in the nation, has not officially tracked the number of cases in which security breaches have occurred.
Before the SDSU case, however, the largest notification was thought to be the more than 90,000 household workers and employers who were mailed letters in February from the state Employment Development Department, said Joanne McNabb, chief of the state's Office of Privacy Protection.
"This law may get some practices changed because people don't like getting these notices," McNabb said.
SDSU said there is no indication that the intruders targeted confidential information in the system.
"We don't have any indication that the illegal server access was used for the purpose of identity theft, but we can't take that chance," said university spokesman Jason Foster. "We have to let people know what happened and let them take steps to protect themselves."
The case is being investigated by university police. The FBI also has been notified because there is evidence that the hackers broke into the server from another state, said SDSU police Capt. Steve Williams.
SDSU is in the process of implementing a new ID number system that will provide students and employees with a randomly generated nine-digit number – instead of their Social Security numbers – for many student transactions, including financial payments and library services.
Gibbs said the use of the new ID system – dubbed the "Red ID" program – should help combat unauthorized access to personal information.
SDSU has put information about the incident on its Web site at http://security.sdsu.edu/2004-02-01/info.html People with concerns or questions about the case also can call the university's Information Technology Security Office at (619) 594-5393.
http://www.signonsandiego.com/news/computing/20040317-9999-news_7m17hacker.html
Personal data at risk, thousands are warned
By Karen Kucher
UNION-TRIBUNE STAFF WRITER
March 17, 2004
San Diego State University is warning more than 178,000 students, alumni and employees that hackers broke into a university computer server where names and Social Security numbers were stored.
The university began mailing out notification letters Monday, urging people whose personal information was on the server to get copies of their credit reports and review them for suspicious activity.
The SDSU case appears to be the largest such notification made under a state law that went into effect last July requiring companies and state agencies to contact people when their computerized personal data have been compromised.
For help
If you feel your personal information has been compromised, the state Office of Privacy Protection offers these recommendations:
Contact any of the three credit bureaus – Equifax at (800) 525-6285; Experian at (888) 397-3742; and Trans Union at (800) 680-7289 – and flag your file with a fraud alert.
Request and review your credit reports for any accounts or activity you don't recognize. Request reports every three months or so.
If you find items you don't understand on your report, call the credit bureaus to review the report. If the information cannot be explained, call the creditors involved and report the crime to police.
For more information, go to the state Office of Privacy Protection's Web site at http://www.privacy.ca.gov
University officials said the hackers infiltrated a server in the Office of Financial Aid and Scholarships in late December and used it to send spam e-mail messages and transfer files, including MP3 music files.
The problem was discovered in the last week of February and SDSU took the server off the network.
"We have moved as absolutely quickly as logistically possible" to notify individuals affected by the security breach, said Ellene Gibbs, director of business information management at SDSU.
The server contained financial aid reports about current, former and prospective students – as well as some SDSU employees – who sent in financial aid applications since 1998, but not the applications themselves or award information.
This is the second time that SDSU has suffered a security breach that put computerized personal data at risk. The university notified around 1,000 people in December when a server used by the library was hacked, Gibbs said.
Under the state law, businesses and state agencies are required to notify customers when personal data, such as Social Security numbers or financial account numbers, may have fallen into the wrong hands.
That warning is designed to give people the chance to quickly act to protect themselves against thieves who would use stolen personal information to open new credit accounts and make unauthorized purchases.
SDSU recommends that those affected by the security breach obtain a copy of their credit report. A spokeswoman with the Privacy Rights Clearinghouse suggests people go a step further and request that one of the three credit reporting agencies flag their file with a fraud alert.
With a fraud alert in place, credit reporting agencies will contact the person if someone tries to establish new credit in his or her name, and also will waive the fee for the credit report.
"We also suggest people monitor their credit reports on a quarterly basis at least for a year," said Jordana Beebe, communications director for the Privacy Rights Clearinghouse.
California, which has the third highest per-capita rate of identity theft in the nation, has not officially tracked the number of cases in which security breaches have occurred.
Before the SDSU case, however, the largest notification was thought to be the more than 90,000 household workers and employers who were mailed letters in February from the state Employment Development Department, said Joanne McNabb, chief of the state's Office of Privacy Protection.
"This law may get some practices changed because people don't like getting these notices," McNabb said.
SDSU said there is no indication that the intruders targeted confidential information in the system.
"We don't have any indication that the illegal server access was used for the purpose of identity theft, but we can't take that chance," said university spokesman Jason Foster. "We have to let people know what happened and let them take steps to protect themselves."
The case is being investigated by university police. The FBI also has been notified because there is evidence that the hackers broke into the server from another state, said SDSU police Capt. Steve Williams.
SDSU is in the process of implementing a new ID number system that will provide students and employees with a randomly generated nine-digit number – instead of their Social Security numbers – for many student transactions, including financial payments and library services.
Gibbs said the use of the new ID system – dubbed the "Red ID" program – should help combat unauthorized access to personal information.
SDSU has put information about the incident on its Web site at http://security.sdsu.edu/2004-02-01/info.html People with concerns or questions about the case also can call the university's Information Technology Security Office at (619) 594-5393.
http://www.signonsandiego.com/news/computing/20040317-9999-news_7m17hacker.html
Credit agency reports security breach
News Story by Carly Suppa
MARCH 17, 2004 - TORONTO - More than 1,400 Canadians, primarily in the provinces of British Columbia and Alberta, have been notified of a major security breach at Equifax Canada Inc., a national consumer-credit reporting agency.
Equifax confirmed yesterday that it discovered the breach in late February and has notified affected consumers via registered mail asking that they contact the agency to review the contents of their respected credit files.
According to reports, access was gained to the personal, detailed credit files of more than 1,400 people. The files contained social insurance numbers, bank account numbers, credit histories, home addresses and job descriptions.
Equifax is working with the Royal Canadian Mounted Police to find the culprits of the unauthorized access. At press time, there was still no word on the success of the investigation.
Equifax spokespeople refused to comment, but the company issued a statement that outlined the steps it is taking to ensure consumer protection.
The company has activated alert messages reading "lost or stolen identification" on the credit file of each affected consumer, which Equifax said would "prompt potential creditors to carefully confirm the consumer's identity and will help protect the consumer from potential identity theft."
The agency also stated it is providing affected consumers with a one-year free subscription to Credit Alert, a service that monitors credit file activity and alerts the consumer immediately of any changes "that could signal potential identity theft."
This situation has the Canadian security community very concerned. According to Rosaleen Citron, CEO of Burlington, Ont.-based security software firm Whitehat Inc., the breach is more dangerous than any the community has seen before.
"The information that was compromised was localized to Alberta and British Columbia with a few out of Ontario," Citron said. "Equifax has a very large database. If someone has breached the system, they would have all the information -- not just 1,400 files. This is a situation where the people who perpetrated this [likely were] funded."
Citron offered this analogy: "If you were going out and wanted to rob a bank, you may want to go and buy a vehicle and paint it to look like an armored car and show up three minutes earlier. The point is that takes money, effort and time. Whoever did this, it took money, effort and time."
In terms of identity theft, while Canada lags significantly behind the U.S. in the number of ID thefts per year, the fact remains that Canadian numbers are increasing. According to numbers from Equifax and fellow credit reporting agency Trans Union of Canada, ID thefts increased from approximately 8,100 reported incidents in 2002 to more than 13,000 reported in 2003.
To combat these thefts, Citron said the industry is seeing more emphasis on database security.
"People were very concerned about the perimeter, but now they understand that it is the databases that carry the gold mines and criminals are mining for them," she said.
http://www.computerworld.com/printthis/2004/0,4814,91319,00.html
FBI analyst faces trial for surfing law enforcement systems
By Wilson P. Dizard III,
Staff Writer
A former FBI investigative analyst is set to go on trial early next month in Dallas on felony charges related to his alleged misuse of law enforcement databases.
Jeffrey D. Fudge of Lancaster, Texas, faces eight counts of exceeding authorized access to a government computer and two counts of making false statements. If he is convicted on all the charges, Fudge could be imprisoned for up to 50 years or fined up to $2.5 million.
Fudge, who has denied all the charges, could not be reached for comment. Attorney Kevin Lamar Kelley of the firm of Kelley and Witherspoon of Dallas represented Fudge after his Nov. 5, 2003 arrest and firing. “Once the truth has come out, Jeffrey’s name will be cleared,” Kelley said. Federal public defender Richard D. Goldman now represents Fudge.
According to the indictment in the case of USA v. Fudge, the former investigative analyst’s work in support of FBI agents involved using the bureau’s Automated Case Support system, the National Crime Information Center, the Texas Crime Information Center, the Texas Law Enforcement Telecommunications System and the FBI Net.
The government charged that Fudge, beginning at least as early as October 1997 and continuing through April 2003, accessed FBI files and computer programs and revealed information to his friends and family members. He also checked whether the bureau was investigating specific people, including prominent Dallas residents. “Likewise, the defendant accessed FBI files to satisfy his own curiosity about FBI investigations,” according to the indictment. Fudge had worked for the FBI since 1988.
The indictment cites Fudge’s allegedly unauthorized access of files concerning eight people known to the grand jury and referred to as persons A through G. The grand jury charged Fudge with disclosing the information he found, in some instances, to other unnamed persons.
The false-statement charges allege that Fudge failed to cooperate with Justice Department agents investigating the case and failed to fully disclose the names of people to whom he passed on FBI files and computer programs.
Steven P. Beauchamp, special agent in charge of the Justice Department’s Inspector General’s Office, said in a statement, “This indictment serves as a reminder that the department will not tolerate the misuse and unauthorized disclosure of sensitive law enforcement information. In today’s world, and with advancing technology, there is too much at stake.”
Fudge’s trial is set to begin April 5 in the U.S. District Court for the Northern District of Texas in Dallas.
http://www.gcn.com/cgi-bin/udt/im.display.printable?client.id=gcndaily2&story.id=25279
FBI analyst faces trial for surfing law enforcement systems
03/17/04
By Wilson P. Dizard III,
Staff Writer
A former FBI investigative analyst is set to go on trial early next month in Dallas on felony charges related to his alleged misuse of law enforcement databases.
Jeffrey D. Fudge of Lancaster, Texas, faces eight counts of exceeding authorized access to a government computer and two counts of making false statements. If he is convicted on all the charges, Fudge could be imprisoned for up to 50 years or fined up to $2.5 million.
Fudge, who has denied all the charges, could not be reached for comment. Attorney Kevin Lamar Kelley of the firm of Kelley and Witherspoon of Dallas represented Fudge after his Nov. 5, 2003 arrest and firing. “Once the truth has come out, Jeffrey’s name will be cleared,” Kelley said. Federal public defender Richard D. Goldman now represents Fudge.
According to the indictment in the case of USA v. Fudge, the former investigative analyst’s work in support of FBI agents involved using the bureau’s Automated Case Support system, the National Crime Information Center, the Texas Crime Information Center, the Texas Law Enforcement Telecommunications System and the FBI Net.
The government charged that Fudge, beginning at least as early as October 1997 and continuing through April 2003, accessed FBI files and computer programs and revealed information to his friends and family members. He also checked whether the bureau was investigating specific people, including prominent Dallas residents. “Likewise, the defendant accessed FBI files to satisfy his own curiosity about FBI investigations,” according to the indictment. Fudge had worked for the FBI since 1988.
The indictment cites Fudge’s allegedly unauthorized access of files concerning eight people known to the grand jury and referred to as persons A through G. The grand jury charged Fudge with disclosing the information he found, in some instances, to other unnamed persons.
The false-statement charges allege that Fudge failed to cooperate with Justice Department agents investigating the case and failed to fully disclose the names of people to whom he passed on FBI files and computer programs.
Steven P. Beauchamp, special agent in charge of the Justice Department’s Inspector General’s Office, said in a statement, “This indictment serves as a reminder that the department will not tolerate the misuse and unauthorized disclosure of sensitive law enforcement information. In today’s world, and with advancing technology, there is too much at stake.”
Fudge’s trial is set to begin April 5 in the U.S. District Court for the Northern District of Texas in Dallas.
http://www.gcn.com/cgi-bin/udt/im.display.printable?client.id=gcndaily2&story.id=25279
Monetary Policy Modeling: Where Are We and Where Should We Be Going?
Our honorees, Dale Henderson, Richard Porter, and Peter Tinsley, have already received much well-deserved praise. I will add only one brief observation. Although I am a relative newcomer to the Federal Reserve, I have already had numerous occasions to be impressed by the research staff here. The Board staff has what a management expert might call a terrific corporate culture. They understand that they make crucial contributions to the policymaking process, not only in the realm of monetary policy but in banking, payments, consumer affairs, and other areas, and they bring great pride and professionalism to their work. Moreover, they understand the value of sophisticated and subtle economic analysis, which they apply both to day-to-day questions of policy and to more fundamental research questions. A culture like that doesn't just happen; it requires senior people who lead by example. In their times at the Board, Dale Henderson, Dick Porter, and Peter Tinsley, each in his own way, have promoted a culture that combines the best in policy-oriented research with the intellectual rigor and curiosity needed to address questions that go beyond the immediate economic situation. That is an outstanding contribution, one that should be recognized in addition to the many intellectual contributions that each of these scholars has made to the economic literature.
The theme of the panel is "Monetary Policy Modeling: Where Are We and Where Should Be Going?" Forecasting the direction of successful research is inherently very difficult. There is a kind of efficient markets principle at work; if a promising direction for research were obvious, someone would have already pursued it. So I think the best I can do is highlight three general areas in which much good work has already been done, including research by Messrs. Henderson, Porter, and Tinsley, but in which further progress would be enormously helpful to monetary policymaking in practice.
The first area is the characterization of good monetary policy in increasingly realistic and complex model environments. Henderson, Porter, and Tinsley have all made significant contributions to macroeconomic modeling at the Board. For specificity, I will focus on a piece of recent research that I like very much and which has already received much attention at this conference: Dale Henderson's paper with Christopher Erceg and Andrew Levin (2003).
We have learned a great deal in recent years about the effects of monetary policy in dynamic, stochastic, sticky-price models, with Michael Woodford's recent book (Woodford, 2003) perhaps best representing the state of the art. This line of research is potentially of great importance to applied macro modelers, because it addresses areas in which some may feel that our current policy models need to be strengthened, notably the treatment of expectations, the specification of model dynamics, and the relationship of the economic structure to the form of the policy rule. However, naturally enough, the earliest models in this genre have tended to be highly simplified representations of the economy, only loosely matched to the data. Like the models themselves, the optimal policy rules derived in the models are often unrealistically simple. For example, in some of these models, strict inflation targeting--a policy of keeping inflation at zero at all times--is the optimal policy.
To make these models relevant for applied policy analysis, the natural next step is to add new frictions and more complex dynamics to the benchmark models. The Erceg-Henderson-Levin (EHL) paper explores the implications for monetary policy of a plausible complication, the inclusion in the model of nominal wage stickiness as well as price stickiness. As was discussed yesterday, this relatively simple addition makes an important qualitative difference in the policy results. Specifically, in the EHL model, monetary policy can no longer achieve a fully optimal outcome but instead faces tradeoffs among its objectives. Because the optimal rule in their model is relatively complex and depends on model parameters and shocks, EHL use model simulations to examine the performance of some simple policy rules. Interestingly, they find that relatively simple policy strategies can achieve results close to the optimum.
The contribution of the EHL paper goes beyond the specific findings; equally important is the direction that this work sets for the collective research program. Erceg, Henderson, and Levin have shown by example that incorporating additional, realistic frictions into the basic new-Keynesian model changes both the behavior of the model and the nature of the optimal policy rule in nontrivial ways. The papers at this conference by Canzoneri, Cumby, and Diba (2004) and by Benigno and Woodford (2004) both take up the EHL challenge. For example, Canzoneri, Cumby, and Diba consider further complications of the sticky-price, sticky-wage model, including capital investment and habit formation in consumption, while Benigno and Woodford explore the case in which the steady state of the model is not Pareto optimal, as assumed by EHL. This progressive analysis of the implications of alternative assumptions is part of what Thomas Kuhn called "normal science." The insights from these types of modeling efforts are already informing policy analysis at the Board, and their influence will only grow as they become more detailed and realistic.
A second important area, one that will always be central to monetary policy, is macro forecasting. Because monetary policy works with a lag, the ability of policymakers to stabilize the economy depends critically on our ability to peer into our cloudy crystal balls and see something resembling the future. One of the key variables to be forecast is inflation. A variety of approaches to forecasting inflation are used at the Board, of course. One of Dick Porter's many contributions was to develop a monetary approach to forecasting inflation at medium-term horizons.
Dick's so-called P-star approach, originally developed with Jeffrey Hallman and David Small (1991) and updated in a 2000 paper with Athanasios Orphanides, combines simplicity with insight. Porter's analysis begins with an equation so basic that, at one time at least, it appeared on the California license plate of Milton Friedman's personal automobile. That equation is of course the quantity equation, MV = PY, or money times velocity equals the price level times output. This equation can be used to define a link between money growth and inflation that depends on the evolution of the velocity of money. Hallman, Porter, and Small (1991) analyzed the predictive power of that relationship under the assumption that M2 velocity is a constant--an assumption that seemed reasonable at the time they wrote, but, as these things are wont to do, broke down soon after they did their initial work. Orphanides and Porter (2000) have developed a more sophisticated version of the P-star model, which employs information about the opportunity cost of holding M2 to track the evolution of equilibrium M2 velocity. This approach seems to work reasonably well at predicting inflation at medium-term horizons, and the forecasts of this model are reported routinely to the Board of Governors. Of course, something very similar to Porter's approach was used by the Bundesbank prior to the formation of the euro area and is used by the European Central Bank today.
My own view is that a reliable macroeconomic forecast requires looking at many different types of economic data and considering a variety of forecasting models; any single model or approach is likely to go off the rails at one time or another. For this reason, I am personally attracted to factor models, which summarize large amounts of data (as in Bernanke and Boivin, 2003), and to model averaging, along with more structured analyses. Interesting alternative models, like Porter's P-star model, are useful because they give yet another perspective on the likely evolution of a critical macroeconomic variable and thus provide a check on other forecasts that one might have in hand. Because good forecasts are so crucial to good monetary policy, I hope and expect to see a great deal more work exploring the robustness of alternative forecasting methods.
The third and final research area that I would like to highlight is the analysis of how the public forms its expectations, and of the effects of various expectations formation mechanisms on macroeconomic dynamics. For example, a rich recent literature on learning and macroeconomics has emphasized that actual inflation and inflation expectations may to some degree evolve independently, and that effective monetary policy stabilizes inflation expectations as well as inflation itself (Orphanides and Williams, 2003). Peter Tinsley, in a series of papers with Sharon Kozicki, has explored this theme in great detail. For example, Kozicki and Tinsley (2001) show that it is far easier to make sense of the term structure of Treasury yields if one assumes that expectations about long-run inflation adjust in a reasonable adaptive manner. In a paper presented at a recent conference at the Federal Reserve Bank of San Francisco, Kozicki and Tinsley (2003) develop an empirical model of the economy under the assumptions that the Fed's implicit inflation target is subject to permanent shocks and that the public learns about the Fed's target over time. Although simple, their model allows for a much richer and realistic description of the evolution of monetary policy and the economy. For example, their approach gives empirical content to the idea of imperfect monetary policy credibility; in their model, monetary policy is credible when private expectations of long-run inflation tend to align closely with the central bank's true underlying inflation target. Their model also illustrates clearly the benefits of central bank credibility for macroeconomic stability. I think that further theoretical and empirical work on expectations formation mechanisms and their links to economic dynamics will prove highly fruitful.
I will conclude by thanking the organizers for their hard work in putting together this conference. A research conference of the quality of this one is exactly the right way to honor the scholarly contributions of Dale, Dick, and Peter.
--------------------------------------------------------------------------------
References
Benigno, Pierpaolo, and Michael Woodford (2004). "Optimal Stabilization Policy When Wages and Prices Are Sticky," (PDF) presented at a conference on Models and Monetary Policy, Board of Governors of the Federal Reserve System, March 26.
Bernanke, Ben, and Jean Boivin (2003). "Monetary Policy in a Data-Rich Environment," Journal of Monetary Economics, 50 (April), pp. 525-46.
Canzoneri, Matthew, Robert Cumby, and Behzad Diba (2004). "Price and Wage Inflation Targeting: Variations on a Theme by Erceg, Henderson, and Levin," (PDF) presented at a conference on Models and Monetary Policy, Board of Governors of the Federal Reserve System, March 26.
Erceg, Christopher, Dale Henderson, and Andrew Levin (2000). "Optimal Monetary Policy with Staggered Wage and Price Contracts," Journal of Monetary Economics, 46 (March), pp. 281-313.
Hallman, Jeffrey, Richard Porter, and David Small (1991). "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?" American Economic Review, 81 (September), pp. 841-58.
Kozicki, Sharon, and Peter Tinsley (2001). "Shifting Endpoints in the Term Structure of Interest Rates," Journal of Monetary Economics, 47 (June), pp. 613-652.
Kozicki, Sharon, and Peter Tinsley (2003). "Permanent and Transitory Policy Shocks in an Empirical Macro Model with Asymmetric Information," Federal Reserve Bank of Kansas City, RWP 03-09 (November).
Orphanides, Athanasios, and Richard Porter (2000). "P* Revisited: Money-Based Inflation Forecasts with a Changing Equilibrium Velocity," Journal of Economics and Business, 52 (January/April), pp. 87-100.
Orphanides, Athanasios, and John Williams (2003). "Imperfect Knowledge, Inflation Expectations, and Monetary Policy," National Bureau of Economic Research working paper no. 9884.
Woodford, Michael (2003). Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, N.J.: Princeton University Press.
http://www.federalreserve.gov/boarddocs/speeches/2004/20040327/default.htm
FDIC Issues Removal And Prohibition Order Against Former South Dakota Banker
FOR IMMEDIATE RELEASE
PR-31-2004 (3-30-2004) Media Contact:
Frank Gresock 202-898-6634
The Federal Deposit Insurance Corporation (FDIC) has issued a removal and prohibition order against Bryan M. Plack. Plack was a branch manager of Security Bank, Madison, SD.
Plack consented to the order without admitting or denying culpability. The FDIC's action is based on allegations that Plack made fictitious loans and falsified bank records.
Plack is prohibited from further participation in the banking industry without FDIC approval.
http://www.fdic.gov/bank/individual/enforcement/NewOrders/03-177e.html
http://www.fdic.gov/news/news/press/2004/pr3104.html
FDIC Issues Removal and Prohibition Order Against Former Georgia Banker
FOR IMMEDIATE RELEASE
PR-35-2004 (3-30-2004) Media Contact:
Frank Gresock 202-898-6634
The Federal Deposit Insurance Corporation (FDIC) has issued a removal and prohibition order against Stephanie E. Stewart.
Stewart was the internal auditor of South Georgia Bank, Glennville, GA.
Stewart consented to the order without admitting or denying culpability. The FDIC's action is based on allegations that Stewart misappropriated funds and falsified bank records.
Stewart is prohibited from further participation in the banking industry without FDIC approval.
The order is attached.
http://www.fdic.gov/bank/individual/enforcement/NewOrders/03-041e.html
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C.
In the Matter of
STEPHANIE E. STEWART,
individually, and as an
institution-affiliated party of
SOUTH GEORGIA BANK
GLENNVILLE, GEORGIA
(Insured State Nonmember Bank)
ORDER OF PROHIBITION
FROM FURTHER PARTICIPATION
FDIC- 03-041e
STEPHANIE E. STEWART("Respondent") has been advised of the right to receive a NOTICE OF INTENTION TO PROHIBIT FROM FURTHER PARTICIPATION ("NOTICE") issued by the Federal Deposit Insurance Corporation ("FDIC") detailing the unsafe or unsound banking practices, and/or breaches of fiduciary duty for which an ORDER OF PROHIBITION FROM FURTHER PARTICIPATION ("ORDER") may be issued, and has been further advised of the right to a hearing on the alleged charges under section 8(e) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(e), and the FDIC's Rules of Practice and Procedure, 12 C.F.R. Part 308. Having waived those rights, the Respondent entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER OF PROHIBITION FROM FURTHER PARTICIPATION ("CONSENT AGREEMENT") with a representative of the Legal Division of the FDIC, whereby solely for the purpose of this proceeding and without admitting or denying any unsafe or unsound banking practices and/or breaches of fiduciary duty, Respondent consented to the issuance of an ORDER by the FDIC.
The FDIC considered the matter and determined it had reason to believe that:
(a) The Respondent has engaged or participated in unsafe or unsound banking practices, and/or breaches of fiduciary duty as an institution-affiliated party of SOUTH GEORGIA BANK, GLENNVILLE, GEORGIA;
(b) By reason of such practices and/or breaches of fiduciary duty, the Bank has suffered or will probably suffer financial loss or other damage, the interests of the Bank’s depositors have been or could be prejudiced, and/or Respondent received financial gain or other benefit; and
(c) Such practices and/or breaches of fiduciary duty involve personal dishonesty on the part of the Respondent or demonstrate the Respondent’s willful and/or continuing disregard for the safety and soundness of the Bank.
The FDIC further determined that such practices and/or breaches of fiduciary duty demonstrate the Respondent's unfitness to serve as a director, officer, person participating in the conduct of the affairs or as an institution-affiliated party of the Bank, any other insured depository institution, or any other agency or organization enumerated in section 8(e)(7)(A) of the Act, 12 U.S.C. § 1818(e)(7)(A).
The FDIC, therefore, accepts the CONSENT AGREEMENT and issues the following:
ORDER OF PROHIBITION FROM FURTHER PARTICIPATION
1. STEPHANIE E. STEWART is hereby, without the prior written approval of the FDIC and the appropriate Federal financial institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the Act, 12 U.S.C. § 1818(e)(7)(D), prohibited from:
(a) participating in any manner in the conduct of the affairs of any financial institution or organization enumerated in section 8(e)(7)(A) of the Act, 12 U.S.C. § 1818(e)(7)(A);
(b) soliciting, procuring, transferring, attempting to transfer, voting, or attempting to vote any proxy, consent or authorization with respect to any voting rights in any financial institution enumerated in section 8(e)(7)(A) of the Act, 12 U.S.C. § 1818(e)(7)(A);
(c) violating any voting agreement previously approved by the appropriate Federal banking agency; or
(d) voting for a director, or serving or acting as an institution-affiliated party.
2. This ORDER will become effective upon its issuance by the FDIC. The provisions of this ORDER will remain effective and enforceable except to the extent that, and until such time as, any provision of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
Pursuant to delegated authority.
Dated this 27th day of February, 2004.
--------------------------------------------------------------------------------
Lisa K. Roy
Associate Director
Division of Supervision and Consumer Protection
http://www.fdic.gov/news/news/press/2004/pr3504.html
Alert 2004-10
OCC Alert
Subject: Unauthorized Banking
Description: Investment Bank of
Austria-Fictitious Internet Bank
Date: March 30, 2004
TO: Chief Executive Officers of All
National Banks; All State Banking Authorities;
Chairman, Board of Governors of the Federal
Reserve System; Chairman, Federal Deposit
Insurance Corporation; Conference of State
Bank Supervisors; Deputy Comptrollers (districts);
Assistant Deputy Comptrollers; District
Counsel and Examining Personnel
RE: Investment Bank of Austria, Levasseurgasse 5,
1230 Wien/Vienna, Austria
www.inv-banking.com
The Office of the Comptroller of the Currency (OCC)
has been advised by the Finanzmarktaufsicht-Financial
Market Authority of Austria (FMA) that the Investment
Bank of Austria has not been granted a banking license
by Austrian authorities, and the entity is not
authorized to conduct banking business in Austria.
The FMA also states that the company is not located
at the listed address or any other known location in
Austria. The contact information listed on the subject
entity's Web site contains a street address in St. Paul,
Minnesota, and lists nonworking telephone and facsimile
numbers.
Please be advised that neither the OCC nor the state of
Minnesota has authorized the subject entity to operate
as a bank or federal branch in the United States.
Any information that you may have concerning this matter
should be brought to the attention of the:
Mail: Finanzmarktaufsicht
Praterstrasse 23
A-1020 Vienna, Austria
Fax: (43) 1-24-959-4399
Internet: www.fma.gv.at
and
Mail: Office of the Comptroller of the Currency
Enforcement & Compliance Division, MS 8-10
250 E Street, SW, Washington, DC 20219
Fax: (202) 874-5301
Internet: http://www.occ.treas.gov
E-mail: occalertresponses@occ.treas.gov
FDIC Makes Public February Enforcement Actions; No Administrative Hearings Scheduled
FOR IMMEDIATE RELEASE
PR-36-2004 (3-31-2004) Media Contact:
Frank Gresock (202) 898-6634
The Federal Deposit Insurance Corporation (FDIC) today released a list of orders of administrative enforcement actions taken against banks and individuals in February. No administrative hearings are scheduled for April.
The FDIC processed a total of 19 orders in February. These included ten removal-and-prohibition orders, five civil money penalty orders, two terminations of cease-and-desist orders, one termination of insurance, and one adjudicated decision.
Copies of the orders referred to above can be obtained from or inspected at the FDIC's Public Information Center, 801 17th Street, N.W., Room 100, Washington, D.C. (telephone 202-416-6940 or 877-275-3342). The orders will also be made available online within a week of the issuance of this news release. To view the orders online, visit the FDIC's Web page at http://www.fdic.gov/bank/individual/enforcement/index.html. A list of orders made public today follows.
****
FINAL ORDERS ISSUED PURSUANT TO SECTION 8(e), 12 U.S.C. § 1818(e)
(Removal and Prohibition Orders)
First State Bank, Parkin, AR; FDIC-02-209e; against Linda G. Cameron; Issued 2/11/04
BestBank, Boulder, CO; FDIC-03-208e; against Douglas R. Baetz; Issued 2/11/04
BestBank, Boulder, CO; FDIC-03-208e; against Glenn M. Gallant; Issued 2/11/04
South Georgia Bank, Glennville, GA; FDIC-03-041e; against Stephanie E. Stewart; Issued 2/27/04
Minnwest Bank South, Tracy, MN; FDIC-03-175e; against Bradley J. Oeltjenbruns; Issued 2/11/04
Carolina First Bank, Greenville, SC; FDIC-03-185e; against Larry D. Bailey; Issued 2/27/04
Security Bank, Madison, SD; FDIC-03-177e; against Bryan M. Plack; Issued 2/27/04
Citizens Bank, Gainesboro, TN; FDIC-03-021e; against Jimmy Lee Birdwell; Issued 2/11/04
International Bank of Commerce, Laredo, TX; FDIC-02-196e; against Sandra Ruiz; Issued 2/27/04
Union State Bank, Carrizo Springs, TX; FDIC-03-165e; against Teresa Rodriguez; Issued 2/27/04
FINAL ORDERS ISSUED PURSUANT TO SECTION 8(i), 12 U.S.C. § 1818(i)
(Civil Money Penalties)
Stock Yards Bank & Trust Company, Louisville, KY; FDIC-03-205k; Order to Pay Civil Money Penalty in the amount of $8,000; Issued 2/12/04
Benjamin Franklin Savings Bank, Franklin, MA; FDIC-03-187k; Order to Pay Civil Money Penalty against Kenneth B. Osborn in the amount of $25,000; Issued 2/11/04
Midwest Bank, Detroit Lakes, MN; FDIC-04-002k; Order to Pay Civil Money Penalty in the amount of $2,000; Issued 2/25/04
Carolina First Bank, Greenville, SC; FDIC-03-186k; Order to Pay a Civil Money Penalty against Larry D. Bailey in the amount of $10,000; Issued 2/27/04
The Coulee State Bank, La Crosse, WI; FDIC-03-214k; Order to Pay Civil Money Penalty in the amount of $12,000; Issued 2/24/04
ORDERS TERMINATING ORDERS to CEASE and DESIST
Pacific Union Bank, Los Angeles, CA; FDIC-02-055b; Issued 2/25/04
United-American Savings Bank, Pittsburgh, PA; FDIC-03-001b; Issued 1/28/04
FINAL ORDER ISSUED PURSUANT TO SECTION 8(q), 12 U.S.C. § 1818(q)
(Termination of Insurance)
Central Sierra Bank, San Andreas, CA; FDIC-04-024q; Issued 2/25/04
ADJUDICATED DECISION
First International Bank, Chula Vista, CA; FDIC-97-031e; Decision and Order to Prohibit From Further Participation against Roque De La Fuente II; Issued 2/17/04
###
Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation's banking system. The FDIC insures deposits at the nation's 9,182 banks and savings associations and it promotes the safety and soundness of these institutions by identifying, monitoring and addressing risks to which they are exposed. The FDIC receives no federal tax dollars - insured financial institutions fund its operations.
FDIC press releases and other information are available on the Internet at www.fdic.gov and may also be obtained through the FDIC's Public Information Center (877-275-3342 or 202-416-6940).
Last Updated 03/31/2004 communications@fdic.gov
http://www.fdic.gov/news/news/press/2004/pr3604.html
Daily Update
The weekly release is posted on Monday. Daily updates of the weekly release are posted Tuesday through Friday on this site.
H.10 DAILY UPDATE: WEB RELEASE ONLY For immediate release
FOREIGN EXCHANGE RATES April 2, 2004
The Board of Governors of the Federal Reserve System is advised that the Federal Reserve
Bank of New York has certified for customs purposes the following noon buying rates in
New York City for cable transfers payable in foreign currencies:
(Rates in currency units per U.S. dollar except as noted)
MONETARY
COUNTRY UNIT Mar. 29 Mar. 30 Mar. 31 Apr. 1 Apr. 2
*AUSTRALIA DOLLAR 0.7484 0.7531 0.7620 0.7671 0.7584
BRAZIL REAL 2.9390 2.9190 2.9070 2.8925 2.8985
CANADA DOLLAR 1.3097 1.3080 1.3100 1.3101 1.3140
CHINA, P.R. YUAN 8.2771 8.2771 8.2770 8.2769 8.2769
DENMARK KRONE 6.1295 6.1000 6.0575 6.0255 6.1500
*EMU MEMBERS EURO 1.2141 1.2202 1.2292 1.2358 1.2109
HONG KONG DOLLAR 7.7975 7.7963 7.7930 7.7883 7.7870
INDIA RUPEE 44.00 44.07 43.40 43.40 43.75
JAPAN YEN 105.52 105.61 104.18 103.70 104.55
MALAYSIA RINGGIT 3.8000 3.8000 3.8000 3.8000 3.8000
MEXICO PESO 11.160 11.229 11.183 11.182 11.172
*NEW ZEALAND DOLLAR 0.6529 0.6568 0.6650 0.6678 0.6583
NORWAY KRONE 6.9440 6.9010 6.8600 6.8200 6.9310
SINGAPORE DOLLAR 1.6890 1.6836 1.6750 1.6720 1.6750
SOUTH AFRICA RAND 6.4000 6.3350 6.3235 6.3450 6.4120
SOUTH KOREA WON 1157.80 1154.00 1146.70 1141.40 1141.80
SRI LANKA RUPEE 97.750 97.490 97.850 98.000 97.850
SWEDEN KRONA 7.6305 7.5920 7.5500 7.4650 7.6160
SWITZERLAND FRANC 1.2872 1.2790 1.2677 1.2627 1.2932
TAIWAN DOLLAR 33.150 33.090 33.000 32.890 33.000
THAILAND BAHT 39.620 39.600 39.280 39.160 39.190
*UNITED KINGDOM POUND 1.8163 1.8283 1.8400 1.8564 1.8293
VENEZUELA BOLIVAR 1920.00 1920.00 1920.00 1920.00 1920.00
MEMO:
UNITED STATES DOLLAR
1)BROAD JAN97=100 114.04 113.89 113.35 113.04 113.81
2)MAJOR CURRENCY MAR73=100 86.00 85.75 85.24 84.89 85.92
3)OITP JAN97=100 143.51 143.60 143.15 142.99 143.03
For more information on exchange rate indexes for the U.S. dollar, see "New Summary Measures
of the Foreign Exchange Value of the Dollar," Federal Reserve Bulletin, vol. 84 (October 1998),
pp. 811-18 (http://www.federalreserve.gov/pubs/bulletin/). Weights for the broad index can be
found at http://www.federalreserve.gov/releases/H10/Weights; weights for the major currencies
index and the other important trading partners (OITP) index are derived from the broad index
weights. The most recent annual revision of the currency weights and dollar indexes took effect
with the December 16, 2003, release of this report.
The source for exchange rates not listed in the table above but used in the calculation of the
broad and OITP indexes is Reuters Limited.
* U.S. dollars per currency unit.
1) A weighted average of the foreign exchange value of the U.S. dollar against the currencies
of a broad group of major U.S. trading partners.
2) A weighted average of the foreign exchange value of the U.S. dollar against a subset of
the broad index currencies that circulate widely outside the country of issue.
3) A weighted average of the foreign exchange value of the U.S. dollar against a subset of
the broad index currencies that do not circulate widely outside the country of issue.
The euro is reported in place of the individual euro-area currencies. These currency rates can
be derived from the dollar/euro rate by using the fixed conversion rates (in currencies per euro)
given below:
1 EURO = 13.7603 AUSTRIAN SCHILLINGS
= 40.3399 BELGIAN FRANCS
= 5.94573 FINNISH MARKKAS
= 6.55957 FRENCH FRANCS
= 1.95583 GERMAN MARKS
= .787564 IRISH POUNDS
= 1936.27 ITALIAN LIRE
= 40.3399 LUXEMBOURG FRANCS
= 2.20371 NETHERLANDS GUILDERS
= 200.482 PORTUGUESE ESCUDOS
= 166.386 SPANISH PESETAS
= 340.750 GREEK DRACHMAS
http://www.federalreserve.gov/releases/e15/default.htm
http://www.federalreserve.gov/Releases/G5/Current/default.htm
http://www.occ.treas.gov/scripts/newsrelease.aspx?Doc=NFBQ8WDP.xml
Comptroller Hawke Tells House Panel National Banks Are in Sound Condition
WASHINGTON -- Comptroller of the Currency John D. Hawke, Jr. told a House panel today that the national banking system is in excellent health and that national banks are continuing to play their traditional role of providing investment capital to America’s businesses and communities.
“By historical standards, the system is exceedingly well capitalized,” he said in testimony before the House Financial Services Committee. “Today all national banks, with minor exceptions, have risk-based capital above 8 percent, and less than one percent of national banks have risk-based capital below ten percent. In 2003, the national banking system set new earnings records, as measured by return-on-equity and return-on-assets.”
The OCC is also in sound financial condition, he said. “We have focused on modernizing our financial operating systems and ensuring that we manage our financial resources wisely. The agency’s budget has been balanced every year during my tenure as Comptroller, and we have been building our strategic contingency reserve to ease the impact of unforeseen disruptions to our operations or unexpected demands on our resources.”
The OCC expects to reach its goal of building reserves equal to six months operating expenses by the middle of 2005, Mr. Hawke said.
The Comptroller also discussed two recent regulations that clarify the types of state laws that apply to national banks and the OCC’s exclusive authority to supervise national banks.
“Let me state emphatically that neither regulation involves any fundamental shift in regulatory roles or responsibilities; neither alters the OCC’s continuing commitment to consumer protection; and neither should impose new or unmanageable burdens on our enforcement and compliance resources,” Mr. Hawke said.
“Indeed, our new preemption rule materially strengthens our ability to fight predatory lending by prohibiting national banks from making any consumer loan based predominantly on the foreclosure or liquidation value of a borrower’s collateral, and disregarding the crucial question whether the borrower can afford the loan,” Mr. Hawke added.
The Comptroller said the OCC has a proud record of protecting consumers against abusive and unfair banking practices. The OCC has pioneered supervisory innovations that have been emulated by other agencies, including its use of Section 5 of the Federal Trade Commission Act as a basis to take administrative enforcement actions against banks that engage in unfair and deceptive practices. In addition, the OCC thwarted efforts of payday lenders to use national bank charters to evade state and local consumer protection laws and adopted special procedures to assure full and prompt consideration of customer complaints referred to the OCC by state officials.
Mr. Hawke said that compliance with consumer laws and regulations is a high priority for the OCC and is handled by examiners located throughout the country, supplemented by the OCC’s Customer Assistance Group (CAG), a sophisticated, state-of-the-art call center in Houston.
“Over 100 OCC examiners throughout the country are compliance specialists; they not only perform detailed compliance examinations, but also serve as expert advisors on consumer protection issues to other examiners,” he said. “And our 1700 person-strong field examination staff is backed by dozens of attorneys,” Mr. Hawke added.
“While some have mistakenly concluded that CAG is the means by which we carry out our enforcement and compliance responsibilities, that is not at all the case,” Mr. Hawke said. “Enforcement and compliance remains – first and foremost -- the responsibility of our large battery of examiners and attorneys. But CAG is a very important adjunct to that resource.”
The Comptroller also told the committee that work on the proposed Basel Capital accord is far from over. Before final implementing regulations can be adopted, he said, regulators must complete a number of tasks, including a quantitative impact study and an economic impact analysis.
“I am confident that as this process moves ahead we will uncover a great many more issues that will require us to go back to the Basel Committee for appropriate responses, and I also feel confident that the current implementation date of year-end 2006 will be difficult, if not impossible, to realize,” he said.
# # #
The OCC charters, regulates and examines approximately 2,000 national banks and 51 federal branches of foreign banks in the U.S., accounting for more than 56 percent of the nation’s banking assets. Its mission is to ensure a safe and sound and competitive national banking system that supports the citizens, communities and economy of the United States.
http://www.occ.treas.gov/scripts/newsrelease.aspx?Doc=NFBQ8WDP.xml
April 1, 2004 - Governor Donald L. Kohn Monetary Policy and Imbalances At the Banking and Finance Lecture Series, Widener University, Chester, Pennsylvania www.federalreserve.gov/boarddocs/speeches/2004/200404012/default.htm
April 1, 2004 - Comptroller Hawke Tells House Panel National Banks Are in Sound Condition - Comptroller of the Currency John D. Hawke, Jr. told a House panel today that the national banking system is in excellent health and that national banks are continuing to play their traditional role of providing investment capital to America's businesses and communities.
Press Release: www.occ.treas.gov/scripts/newsrelease.aspx?Doc=NFBQ8WDP.xml
Attachment: www.occ.treas.gov/ftp/release/2004-26a.pdf
Attachment: www.occ.treas.gov/ftp/release/2004-26b.pdf
April 1, 2004 - Statistical Release G.5 Foreign Exchange Rates (Monthly) THE Table Below Shows The Average Rates Of Exchange In March 2004 Together With Comparable Figures For Other Months. Averages Are Based On Daily Noon Buying Rates For Cable Transfers In New York City Certified For Customs Purposes By The Federal Reserve Bank Of New York. www.federalreserve.gov/Releases/G5/Current/default.htm
April 1, 2004 - Governor Ben S. Bernanke Financial education and Jump$tart survey At the Jump$tart Coalition for Personal Financial Literacy and Federal Reserve Board joint news conference, Washington, D.C. www.federalreserve.gov/boarddocs/speeches/2004/20040401/default.htm
March 31, 2004 - Statistical Release E.15 Agricultural Finance Databook - These data are derived from quarterly sample surveys conducted by the Federal Reserve System during the first full week of the second month of each quarter. www.federalreserve.gov/releases/e15/default.htm
March 31, 2004 - Governor Edward M. Gramlich - Budget and Trade Deficits: Linked, Both Worrisome in the Long Run, but not Twins At the Los Angeles Chapter of the National Association for Business Economics Luncheon, Los Angeles, California
www.federalreserve.gov/boarddocs/speeches/2004/20040225/default.htm
March 31, 2004 - NCUA - Statement of NCUA Chairman Dennis Dollar Announcing His Resignation Effective April 30, 2004 www.ncua.gov/news/press_releases/2004/NR04-0331.htm
March 31, 2004 - Retail Payment Systems Guidance Released by Federal Financial Institution Regulators - The Federal Financial Institutions Examination Council today issued revised guidance for examiners, financial institutions, and technology service providers on the risks associated with retail payment systems.
FFIEC: www.ffiec.gov/press/pr033104.htm
OTS: http://www.ots.treas.gov/docs/77407.html
OCC: www.occ.treas.gov/ftp/bulletin/2004-14.txt
NCUA: www.ncua.gov/news/press_releases/2004/FFIEC040331.pdf
March 31, 2004 -FDIC Makes Public February Enforcement Actions; No Administrative Hearings Scheduled - The Federal Deposit Insurance Corporation today released a list of orders of administrative enforcement actions taken against banks and individuals in February. No administrative hearings are scheduled for April. www.fdic.gov/news/news/press/2004/pr3604.html
March 30, 2004 - This issuance notifies national banks that the OCC has been advised by the Finanzmarktaufsicht--Financial Market Authority of Austria that the Investment Bank of Austria has not been granted a banking license by Austrian authorities, and the entity is not authorized to conduct banking business in Austria. The contact information on the subject entity's Web site contains a street address in St. Paul, Minnesota, and lists nonworking telephone and facsimile numbers. www.occ.treas.gov/ftp/alert/2004-10.txt
March 30, 2004 - St. Louis Fed's Poole Lauds U.S.' "Superb Entrepreneurial Environment." www.stlouisfed.org/news/releases/2004/03_30_04.htm
March 30, 2004 - 2003 FFIEC Annual Report - www.ffiec.gov/PDF/annrpt03.pdf
March 30, 2004 - FDIC Issues Removal and Prohibition Order Against Former Georgia Banker - The Federal Deposit Insurance Corporation has issued a removal and prohibition order against Stephanie E. Stewart. www.fdic.gov/news/news/press/2004/pr3504.html
March 30, 2004 - FDIC Issues Removal and Prohibition Order Against Former Texas Banker - The Federal Deposit Insurance Corporation has issued a removal and prohibition order against Teresa Rodriguez. www.fdic.gov/news/news/press/2004/pr3404.html
March 30, 2004 - FDIC Issues Removal and Prohibition Order Against Former Texas Banker - The Federal Deposit Insurance Corporation has issued a removal and prohibition order against Sandra Ruiz. www.fdic.gov/news/news/press/2004/pr3304.html
March 30, 2004 - FDIC Issues Removal and Prohibition Order and Civil Money Penalty Against Former South Carolina Banker - The Federal Deposit Insurance Corporation issued a removal and prohibition order and imposed a $10,000 civil money penalty against Larry D. Bailey. www.fdic.gov/news/news/press/2004/pr3204.html
March 30, 2004 - FDIC Issues Removal And Prohibition Order Against Former South Dakota Banker - The Federal Deposit Insurance Corporation has issued a removal and prohibition order against Bryan M. Plack. Plack was a branch manager of Security Bank, Madison, SD. www.fdic.gov/news/news/press/2004/pr3104.html
March 30, 2004 - Statistical Release G.20 Finance Companies www.federalreserve.gov/releases/g20/current/default.htm
March 30, 2004 - NCUA - Chairman Dollar Says NCUA Board Will Consider Proposal To Allow Low-Income Student-Run Credit Unions To Apply For TAG Grants And CDLRF Loans.
www.ncua.gov/news/press_releases/2004/NR04-0329-2.htm
March 30, 2004 - Governor Ben S. Bernanke Trade and Jobs At the Distinguished Speaker Series, Fuqua School of Business, Duke University, Durham, North Carolina. http://www.federalreserve.gov/boarddocs/speeches/2004/20040330/default.htm
March 29, 2004 - NCUA - PALS Workshop Teaches Credit Unions to Safely Make More Business Loans - More than 230 credit union leaders learned innovative ways to safely make member business loans at the National Credit Union Administration's latest Partnering and Leadership Successes workshop, March 25 in San Francisco. www.ncua.gov/news/press_releases/2004/NR04-0329.htm
March 27, 2004 - Governor Ben S. Bernanke - Monetary Policy Modeling: Where Are We and Where Should We Be Going? At the Federal Reserve Board Models and Monetary Policy Conference, Washington, D.C. www.federalreserve.gov/boarddocs/speeches/2004/20040327/default.htm
March 26, 2004 - Governor Donald L. Kohn - Research at the Federal Reserve Board: The Contributions of Henderson, Porter, and Tinsley At the Federal Reserve Board Models and Monetary Policy Conference, Washington, D.C. www.federalreserve.gov/boarddocs/speeches/2004/200403262/default.htm
Script for Sonus Networks Conference Call
March 29, 2004
Jocelyn Philbrook, director of investor relations:
Thank you. Good morning everyone. Thank you for joining us today as we discuss
the press release Sonus issued this morning. With me today are Sonus' President
and CEO, Hassan Ahmed and Chief Financial Officer, Steve Nill.
The press release was issued today at 7:30 am Eastern Time on Business Wire and
on First Call. The text of this release also appears on our Web site at
www.sonusnet.com.
Before Hassan offers his opening remarks, I would like to remind you that during
this call, we will make projections or forward-looking statements regarding
items such as future market opportunities and the company's financial
performance. These projections or statements are just predictions and involve
risks and uncertainties such that actual events or financial results may differ
materially from those we have forecasted. As a result, we can make no assurances
that any projections of future events or financial performance will be achieved.
For a discussion of important risk factors that could cause actual events or
financial results to vary from these forward-looking statements, please refer to
the "Cautionary Statements" section of our quarterly report on Form 10-Q dated
November 10th 2003.
Risk factors include, among others, uncertainties regarding the Company's
ability to complete its review and the related audit and file its Annual Report
on Form 10-K/A for 2003 and future periodic reports, risks as to the SEC's
investigation of these or other matters, unforeseen issues encountered in the
completion of the audit, uncertainties regarding the extent to which prior
period financial statements will be restated, the continued adverse effect of
developments in the telecommunications industry, Sonus' ability to grow its
customer base, dependence on new product offerings, market acceptance of its
products, competition from large incumbent vendors, rapid technological and
market change and manufacturing and sourcing risks. In addition, any
forward-looking statements represent Sonus' views only as of today and should
not be relied upon as representing Sonus' views as of any subsequent date. While
Sonus may elect to update forward-looking statements at some point, Sonus
specifically disclaims any obligation to do so.
In addition, because we were unable to give several days' advance notice of this
call, the statements we make on this call are not considered valid public
disclosure for purposes of Regulation FD. To address this, we have filed a Form
8-K with the SEC containing our script for this call. However, because it was
obviously impossible to include in that script the responses to questions asked
on this call, our responses to questions must be limited to information covered
in our prepared remarks. Please bear that in mind if we are unable to address
certain questions you may wish to ask on this call.
<PAGE>
I would now like to turn the call over to Hassan.
Hassan Ahmed, president and CEO:
Thanks Jocelyn. Good morning everyone and thank you for joining us today on such
short notice. Today I will provide some comments on the financial review process
that Sonus has undertaken. Then, since it has been a while since our last
conference call, I will provide you with some detail on the progress that we are
making in our business. Following that, Steve will then briefly discuss the
audit with you.
This morning Sonus announced that we have delayed filing our amended 10-K for
fiscal year ended 2003. As we had reported to you previously, Sonus is
conducting a detailed review of its financial statements for 2003 and prior
periods. We have made considerable progress toward completing the review of our
2003 and 2002 financial results and are now considering whether to expand the
review to prior periods.
Sonus strives to achieve the highest level of integrity and transparency, in
both our business operations and financial reporting. As we reported to you
previously, we are engaged in a detailed review of the timing of revenue
recognized from customer transactions and of other financial statement accounts.
All of the revenue that Sonus had previously reported to you was the result of
good business, meaning that the products had been shipped to our customers and
we have either received payment or are receiving payment for the products in the
ordinary course. We are deeply disappointed that during our year-end audit in
January, senior management and our auditors discovered that certain employees
had engaged in behavior that violated our code of conduct and potentially
compromised the integrity of our financial reporting. We therefore felt it was
necessary and appropriate to launch a comprehensive financial investigation.
We consider this a very serious matter and have responded with aggressive
measures to address the issue. Sonus expanded the year-end financial review to
cover not only 2003, but also prior periods. Sonus' audit committee launched an
independent investigation to determine the extent of the behavior. Finally,
Sonus proactively notified the Securities and Exchange Commission of the
investigation and we have been providing them with the results of our
investigation.
Since we last updated you, Sonus has been thoroughly reviewing the financial
results we reported during 2002 and 2003. We are now considering whether to
expand the review to include the results from additional prior periods. Ernst
and Young was not our auditor for periods prior to 2002, and therefore, if we
determine that it is appropriate to review prior periods, the review and
accompanying audit could take some time.
I want to be clear that the delay in filing our results does not detract from
the progress we have made in our business. Sonus has accomplished a lot over the
last year, and continues to do so in 2004. While it could be easy to let the
recent financial review overshadow our achievements, I want to remind you that
this has not impacted the fundamentals of our business. Sonus has a strong
competitive position in a market that is
<PAGE>
now beginning to reach mainstream adoption. We are pleased with the progress in
our business to date and our start to 2004. Now let's get into some details.
In the fourth quarter, Sonus made important progress with its customers. For
example, two of our largest customers, Verizon and Qwest, continued to roll out
their Sonus-based networks.
In July last year, we announced that Verizon had chosen Sonus to deploy a
long-distance packet voice network in select cities. I'm sure you saw their
announcement about accelerating the build out of their packet switched network.
Over the past several quarters, Sonus and Verizon have built a successful
long-distance network. Sonus expects to continue to support and expand those
deployments. Down the road, we anticipate there will be a number of voice over
IP opportunities at Verizon, which we'll be aggressively pursuing.
For Qwest, 2003 marks the third year of substantial expansion of their
next-generation network and Qwest has one of the larger installed bases of Sonus
equipment. We continue to work with Qwest as they grow their packet voice
network and expand these technologies into new applications.
In the fourth quarter, we announced that America Online is deploying a Sonus
solution to offer premium services to their customers. AOL has grown their
membership to over 35 million around the world and is known to many as a pioneer
in new feature development for their users. Today, AOL offers their customers
Internet call alert, email by phone and voicemail over their computers, all
enabled by a packet voice infrastructure from Sonus.
Carrier deployment of packet voice solutions is accelerating, and monthly
traffic volumes on Sonus-based networks have continued to ramp steadily from the
5 billion minutes per month we reported in Q3 to over 6.5 billion minutes per
month today. This is an important validation of the scalability, reliability and
quality of our solutions.
In Q4, Sonus delivered Release 5.1 of its industry-leading software, once again
furthering our technology leadership with major new features and functionality
that extend the applications of our solutions. Specifically, Sonus' new Network
Border Switching capabilities address carriers' growing requirements for
security, session control and address translation between IP networks, and
facilitate the development of the ubiquitous all-IP network. As packet voice
networks continue to proliferate, service providers are moving to connect to
each other using IP, rather than circuits. This trend is opening up new
opportunities for carriers in a number of key areas including packet peering,
enterprise access, end user access, and application service provider access.
Sonus' new network border switch enables carriers to address each of these
opportunities with an advanced carrier grade solution.
Looking back, 2003 was an important year for Sonus. We strengthened our company
in many of the dimensions we need to build a large business. We successfully
broadened our customer base, including announcing relationships with AT&T,
Verizon, America
<PAGE>
Online and IDT. We made important additions to our product line, introducing new
capabilities and features that widened our addressable market to include the
wireless operators and network border switching. Major software releases
introduced last year provided enhancements in a number of key areas, expanding
our voice VPN features, broadening our international capabilities with a new set
of international signaling variants, and delivering traffic control features
that enable network performance optimization.
Taking a wider view, 2003 will be remembered as the year that voice over IP
became a mainstream technology. It is hard to pick up a newspaper or industry
report without some mention of voice over IP. More importantly, some of the
largest carriers in the world have announced plans to offer VoIP services. At
Sonus, our mission from the start has been to develop carrier class VoIP
solutions. Driven in large part from the success of networks built on Sonus,
carriers recognize that voice over IP technologies can deliver the same quality
of service as their TDM networks, while harnessing the powerful service delivery
platform of a converged IP network. This, combined with continued changes in the
regulatory environment, is driving a lot of new competitive activity among the
carriers.
Unlike the last major shift in switching technologies from analog to digital in
the 1970s, voice over IP is much more than simply the next technology platform.
By separating services and applications from transport, VoIP enables carriers to
deliver broadband services to customers without having to own connectivity to
the customer. This has the potential to change the structure of the industry and
the players, redefining the winners and losers. So it is clear that packet voice
technologies will play an important role in helping to shape the industry.
Looking ahead, 2004 is stacking up to be an incredibly exciting year for our
industry and our company. Sonus' mission is clear: further expand our market
presence, keep building our technology lead, extend our international reach, and
accomplish all this within the context of a business that is financially strong.
We are making important progress towards these goals. Sonus recently announced
its first OEM relationship with a global leader in the wireless market,
Motorola. Motorola has integrated Sonus' industry-leading GSX9000 media gateway
with the Motorola SoftSwitch, a next-generation switching platform for wireless
carriers around the globe. Through this relationship with Motorola, Sonus is now
able to offer a proven solution for the access portion of wireless carriers'
networks, complementing Sonus' SMARRT Wireless solution for the core and
effectively doubling our addressable market.
Additionally, Sonus recently announced that one of Japan's largest broadband
communication carriers, Softbank Broadband, is deploying Sonus infrastructure as
part of a multi-million dollar contract to build out a new packet-based,
next-generation voice network. SBB was awarded approximately 6 million of 9
million new IP-based telephone numbers to be issued in Japan, and is expanding
its network to accommodate the continued growth in subscribers. SBB is deploying
Sonus' voice solutions to provide
<PAGE>
long distance voice services first for residential subscribers and then for
enterprise customers in later deployment phases.
By now it is obvious that carriers throughout the world will adopt voice over
packet technologies. Sonus has announced positions with 32 carriers and we are
just getting started. We are growing our sales force and investing in marketing
to drive our solutions into large networks around the globe. Our trial base
continues to be strong and is diverse across carrier type and application,
including long distance, local, wireline and wireless operators.
In summary, this is an exciting time for our business. We are at the beginning
of a long-term and fundamental opportunity for Sonus. The industry has moved to
the next phase of the market in which incumbent carriers are beginning to adopt
and deploy packet voice solutions. We entered 2004 with confidence. Sonus has
winning technologies and a talented team, combined with an unwavering focus on
building one of the premier suppliers in next-generation voice.
With that, I would now like to turn the call over to Steve.
Steve Nill, vice president of finance and administration and CFO:
Thanks Hassan. I'd like to briefly comment on our review of the financial
results. As the head of the finance organization, I am personally deeply
disappointed with our current situation, and the impact that it has had on our
company and our shareholders. For those of you who know Sonus, the integrity of
our financials is paramount. And at Sonus, we hold ourselves to the highest
standards of legal, ethical and honorable behavior. When we discovered the
issues we're currently dealing with, we immediately began taking the appropriate
and necessary steps to address them.
Over the last few months, we have put a great deal of effort into completing the
expanded review and accompanying audit. During this process we have been
thoroughly reviewing the 2002 and 2003 financial results previously reported to
you. It is unfortunate that we were unable to file our amended Annual Report for
2003 within the 15-day grace period; however, we have made considerable progress
towards completing the review of 2003 and 2002.
As part of completing our review, we are assessing the need to expand the
review to prior periods. Our independent auditor, Ernst and Young, was not our
auditor of record for periods prior to 2002. So, if it is determined that we
need to expand our review into periods prior to 2002, completing the review and
the accompanying audit could take some time.
Based on the information we have today, we expect to restate our historical
financial results for fiscal year 2002 and for the first three quarters of
fiscal year 2003. It is important to remember that all of the revenue we
previously reported is the result of products that have been delivered to our
customers and we have either received payment or are receiving payment for the
products in the ordinary course. So while revenue is expected to
<PAGE>
shift between periods or move between revenue and deferred revenue, the overall
strength of our business remains unchanged. We ended the fiscal year 2003 with
in excess of $300 million in cash, cash equivalents and marketable securities.
To begin to restore investor confidence, we need to get our results on
file. We are investing substantial time and resources to complete this financial
review as quickly as possible. However, we do expect to receive notification
from the Nasdaq that we are not in compliance with their filing requirements and
that we could be subject to delisting from Nasdaq. The Nasdaq could change our
trading symbol to "SONSE." We will have seven days to request a hearing with the
Nasdaq once we receive such notification. If the Nasdaq grants a hearing, it is
usually scheduled within 2 to 3 weeks. There is no assurance that the panel will
grant our request for continued listing.
One last subject I'd like to cover is the shareholder lawsuits that have been
filed against our company in recent weeks. We believe that the company has
substantial legal and factual defenses, which we intend to pursue vigorously.
As you can imagine, at this time we are not able to provide you with additional
details on the audit or our restatements beyond what we've already told you.
But, if you have questions related to other aspects of our business, we've made
time for a few of them.
I'll turn the call over to the operator for questions.
So much for having $300 million in cash:
http://finance.yahoo.com/q/bs?s=SONSE&annual
http://finance.yahoo.com/q/is?s=SONSE&annual
Sonus Networks Provides Update on Status of Its Financial Results
CHELMSFORD, Mass.--(BUSINESS WIRE)--March 29, 2004--Sonus Networks
(Nasdaq: SONS), a leading provider of voice over IP (VoIP)
infrastructure solutions, today announced that the filing of its
amended Annual Report on Form 10-K/A for the fiscal year ended
December 31, 2003 will be delayed. The Company, having made
substantial progress towards the completion of its review of 2003 and
2002 financial results, is now considering whether to expand the
review to include additional prior periods. Sonus Networks'
independent auditor, Ernst and Young LLP, was not the auditor of
record for periods prior to 2002. Therefore, in the event that the
Company determines its review should be expanded to include periods
prior to 2002, such review and accompanying audit could be lengthy.
Sonus Networks is performing a detailed review of the timing of
revenue recognized from customer transactions and of other financial
statement accounts. The revenue issues under examination relate to the
proper timing of revenue recognition and not whether the sales could
ultimately be recorded as revenue. For the customer transactions under
review, the products have been delivered and Sonus Networks has either
received payment or is receiving payment for the products in the
ordinary course.
At this time, the Company expects that its review will lead to a
restatement of historical financial statements for the fiscal year
ended December 31, 2002 and for the first three quarters of fiscal
year 2003. As a result, existing financial statements for those
periods should not be relied upon. Sonus Networks does not expect that
these restatements will impact its December 31, 2003 cash, cash
equivalents and marketable securities balance, which exceeded $300
million.
"While today's announcement is regrettable, we are committed to
accurate and transparent financial reporting and require additional
time to complete our comprehensive review," said Hassan Ahmed,
president and CEO, Sonus Networks. "Our business is strong and Sonus
continues to build on its leadership position in the rapidly expanding
VoIP market. We continue to add new customers, build important new
partnerships and enhance our industry-leading product portfolio. We
have a great deal of confidence in our business outlook for 2004."
As a result of the Company's delay in filing its Form 10-K for
2003, Sonus Networks expects to receive notification from Nasdaq that
it is not in compliance with the filing requirements for continued
listing on Nasdaq and that its securities could be subject to
delisting from the Nasdaq National Market. In addition, Sonus Networks
anticipates that Nasdaq may change the Company's trading symbol from
"SONS" to "SONSE." Sonus will make a timely request for a hearing
before a Nasdaq Listing Qualifications Panel to address the filing
deficiency, but there can be no assurance that the Panel will grant a
request for continued listing.
Company Conference Call, Webcast and Replay Information
The Company will host a conference call and simultaneous webcast
on Monday, March 29, 2004 at 8:30 am Eastern to discuss the contents
of this press release.
To listen via telephone:
Dial-in number: +1-888-326-7098 or +1-706-758-2365
To listen via the Internet:
Sonus will host a live webcast of the conference call. To access
the webcast, visit the Sonus Networks Investor Relations site at
http://www.sonusnet.com.
Replay:
A telephone playback of the call will be available following the
conference and can be accessed by calling +1-402-977-9140 or
+1-800-633-8284. The access code for the replay is 21190372. The
telephone playback will be available through April 12, 2004.
The webcast will be available on the Sonus Networks Investor
Relations site through March 29, 2005. To access the replay of the
webcast, visit the Investor Relations site at http://www.sonusnet.com.
About Sonus Networks
Sonus Networks, Inc. is a leading provider of voice over IP (VoIP)
infrastructure solutions for wireline and wireless service providers.
With its Open Services Architecture(TM) (OSA), Sonus delivers
end-to-end solutions addressing a full range of carrier applications,
including trunking and tandem switching, residential and business
access, network border switching and enhanced services. Sonus' voice
infrastructure solutions, including media gateways, softswitches and
network management systems, are deployed in service provider networks
worldwide. Sonus, founded in 1997, is headquartered in Chelmsford,
Massachusetts. Additional information on Sonus is available at
http://www.sonusnet.com.
This release may contain projections or other forward-looking
statements regarding future events or the future financial performance
of Sonus that involve risks and uncertainties. Readers are cautioned
that these forward-looking statements are only predictions and may
differ materially from actual future events or results. Readers are
referred to the "Cautionary Statements" section of Sonus' Quarterly
Report on Form 10-Q, dated November 10, 2003 and filed with the SEC,
which identifies important risk factors that could cause actual
results to differ from those contained in the forward-looking
statements. Risk factors include, among others, uncertainties
regarding the Company's ability to complete the audit and file its
Annual Report on Form 10-K/A for 2003 and future periodic reports,
risks as to the SEC's investigation of these or other matters,
unforeseen issues encountered in the completion of the audit,
uncertainties regarding the extent to which prior period financial
statements will be restated, the continued adverse effect of
developments in the telecommunications industry, Sonus' ability to
grow its customer base, dependence on new product offerings, market
acceptance of its products, competition from large incumbent vendors,
rapid technological and market change and manufacturing and sourcing
risks. In addition, any forward-looking statements represent Sonus'
views only as of today and should not be relied upon as representing
Sonus' views as of any subsequent date. While Sonus may elect to
update forward-looking statements at some point, Sonus specifically
disclaims any obligation to do so.
Sonus is a registered trademark of Sonus Networks. Open Services
Architecture, GSX9000 and Insignus are trademarks of Sonus Networks.
All other trademarks, service marks, registered trademarks, or
registered service marks are the property of their respective owners.
CONTACT: Sonus Networks, Inc.
Investor Relations:
Jocelyn Philbrook, 978-614-8672
jphilbrook@sonusnet.com
or
Media Relations:
Beth Morrissey, 978-614-8579
bmorrissey@sonusnet.com
http://www.sec.gov/Archives/edgar/data/1105472/000115752304002728/a4603697ex99.txt
With all that cash no wonder the lawyers have filed four different law suits.