Citizen Works Corporate Reform Weekly 9/29/03

The Corporate Reform Weekly
Vol II, #36 September 29, 2003

In Short
In Business
NYSE
1. NYSE mulls reforms as McCall quits and Reed promises big changes
Scandal
2. Former Ernst & Young partner arrested for altering documents
3. Enron sues six big banks for bringing about its downfall
4. Kozlowksi and Quattrone go on trial this week
5. Lawsuits hit the mutual fund industry
Accounting
6. FASB mulls crucial pension accounting rule
Executive Compensation
7. Bear Stearns CEO receives $117 million in deferred compensation
In the States
Connecticut
8. State senator seeks to prohibit state contracts for companies that commit fraud
Fighting Back
9. Group asks FCC to deny Clear Channel license for 63 stations
In Washington
Congress
10. CRS report says Cheney's deferred compensation and stock options are "retained ties"
SEC
11. SEC looks into executive pay at exchanges
12. Study finds that shareholders back proxy access
13. SEC fails to meet hiring goals
This Week's Action Item:
Tell the FCC to deny renewal of Clear Channel Communications broadcast licenses

------------------------------
In Business

NYSE

1. NYSE mulls reforms as lead director McCall quits and Reed launches a new review

As calls for reform continued at the New York Stock Exchange last week, lead director H. Carl McCall, who had strongly defended the $188 million pay package of former chairman Richard Grasso, announced his resignation , saying that he was clearing the way for new interim chairman John Reed to make reforms.

On the same day, Reed announced that he was scrapping a review of the board's practices that McCall had been leading and instead would be undertaking his own review. Reed has said that he wants to cut the number of directors from 27 to 10 or 12. He wants "fresh blood" on the board, and he wants to find a permanent leader in four months. "You can't run the NYSE like a club or you won't have the confidence of the public," Reed told Bloomberg News. Reed has a history of making big changes. At Citigroup, for example, Reed fired almost the entire top management team during this tenure.

The first board member to quit was DaimlerChrysler chief Jurgen Schrempp , who said he resigned to help the board reform itself. The board member under the most fire right now is Kenneth Langone, a long-time ally and continued defender of Grasso. The AFL-CIO last week publicly called on the exchange to remove Langone from the board. AFL-CIO treasurer Richard Trumka said that Langone, a director since 1998, "has been the most determined defender of a compensation agreement that cannot be defended and that has precipitated the current crisis at the NYSE."

Meanwhile, several state pension funds (including California, New York, and North Carolina) issued their own calls for reform. In particular, the funds (which represent about $600 billion in investments) want the exchange to separate its regulatory and business functions and to separate the chairman and CEO positions. "We're not talking about just rearranging chairs in the boardroom," said California Treasurer Phil Angelides. The funds also want Grasso to return some of his outrageous compensation, as Citizen Works called for earlier this month.

Some exchange directors, led by Goldman Sachs CEO Henry M. Paulson Jr., are pushing for all executives from firms that the exchange regulates to resign from the board. Other suggestions include prohibiting the chairman from picking board members and turning the NYSE public.

The question about whether the stock exchange can continue to police itself seems to have had the most resonance, as more and more respected people are questioning whether the exchange can indeed exist as a business and a regulatory agency.

Additionally, the House Financial Services Committee announced last week that it would hold hearings on market structures that will investigate whether exchanges should be allowed to regulate themselves.

And as for Grasso, reports indicated that because his departure was structured as a termination, he could be entitled to an additional $57.7 million in deferred pay and severance.

For more, see:

"Pension Fund Officials Seek NYSE Split" by Ben White of the Washington Post: http://www.washingtonpost.com/wp-dyn/articles/A60645-2003Sep24.html

"Big Board Interim Chairman Calling for Fewer Directors" by Bloomberg News: http://www.nytimes.com/2003/09/25/business/25NYSE.html

"Grasso Backer to Quit NYSE's Board," By Ben White of the Washington Post http://www.washingtonpost.com/wp-dyn/articles/A2189-2003Sep25.html

"Growing SEC Role in Big Board Reform" by Stephen Labaton of the New York Times: http://www.nytimes.com/2003/09/26/business/26SEC.html

"Bold and Brash, Reed Digs In" By Susan Harrington of New York Newsday: http://www.newsday.com/business/printedition/ny-bznyse3470889sep28,0,6352647.story?coll=ny-business-print

"Ever the Insider's Club" by Robert Kuttner of the Boston Globe: http://www.boston.com/news/globe/editorial_opinion/oped/articles/2003/09/24/ever_the_insiders_club/

Scandal

2. Former Ernst & Young partner arrested for altering documents

A former Ernst & Young partner who allegedly altered and destroyed documents relevant to a federal accounting fraud investigation was arrested and charged last week, becoming one of the first people to be charged with a new document destruction crime that was created as part of the Sarbanes-Oxley Act.

Prosecutors say that former E&Y partner Thomas C. Trauger, 40, tampered with data going back to early 2001, shortly after he completed reviewing NextCard's 2000 books. In 2001, The Office of the Comptroller of the Currency and the Securities and Exchange Commission opened an investigation into how a NextCard subsidiary handled bad loans. Eventually, NextCard changed its accounting treatment of credit card defaults and its stock price fell 80 percent.

In October 2001, prosecutors say, Trauger told his E&Y colleague, Oliver Flanagan, 34, that they needed to "beef up" their NextCard work papers to make it look like they had been "right on the mark" from the start. To accomplish this, prosecutors say, the two went into the computer and revised the work papers, deleting the originals from the system.

Trauger could face 20 years in prison and fines of more than $250,000 . Flanagan, who earlier pleaded guilty, could face up to five years, but will likely get less for cooperating with prosecutors.

For more, see: "Former Ernst Worker Arrested" by Carrie Johnson of the Washington Post: http://www.washingtonpost.com/wp-dyn/articles/A2072-2003Sep25.html

3. Enron sues six big banks for bringing about its downfall

The Enron blame game continued last week, as bankrupt Enron sued six banks, including two of its largest creditors, for conspiring to cover up deep troubles that led to the company's failure.

The six banks - J.P. Morgan Chase and Citigroups (both creditors), as well as Merrill Lynch, Canadian Imperial Bank of Commerce, Deutsche Bank AG and Barcaly's Bank - stand accused of assisting the structured finance schemes that allowed Enron to inflate earnings by disguising loans as revenue. The lawsuit, which seeks to recover $3 billion from the banks, claims that "while [Enron's] true financial condition was concealed by the acts and omissions of the insiders and bank defendants, the company's debt load increased substantially and its insolvency was aggravated and deepened."

The lawsuit also names Enron insiders, including former CFO Andrew Fastow and his lieutenant Michael Kopper, who has already pleaded guilty to money laundering and conspiracy.

The confusing part is that Enron is suing the very same creditors who are also trying to get $5 billion that they say Enron owes them. But the banks are clearly not uninvolved bystanders. Bankruptcy court examiner Neal Batson has identified the role of these banks in structuring many of the deals that put Enron in so much trouble in the first place. In fact, just a few weeks ago, three former Merrill Lynch employees were indicted on federal fraud charges for helping Enron manipulate earnings. Merrill Lynch also paid the SEC $80 million in February to end an investigation into its role in helping Enron.

For more, see: "Enron suit strikes back: Big creditors accused of conspiring in fraud" by Kristen Hays of the Associated Press: http://www.chron.com/cs/CDA/ssistory.mpl/metropolitan/2118807

4. Kozlowksi and Quattrone go on trial this week

Two of the biggest symbols of corporate greed, former Tyco CEO L. Dennis Kozlowski, 56, and former Credit Suisse First Boston investment banker Frank Quattrone, both go on trial this week.

Kozlowksi, who made headlines by spending company money on such extravagances as a $17,100 traveling toilet box and a $15,000 dog umbrella stand, will go on trial alongside his number two, Mark Swartz, 43. The pair are accused of stealing more than $600 million from Tyco by mischievously awarding themselves loans and stock bonuses without the consent of the board of director, as well as misusing an employee relocation program.

Quattrone, 47, stands accused of obstruction of justice because he advised colleagues to "clean up" e-mail files after he was told of an investigation into how CFSB was awarding IPO shares to insiders.

For more, see: "Stars of the ?'90s Go on Trial," by Brooke A. Masters of the Washington Post: http://www.washingtonpost.com/wp-dyn/articles/A2092-2003Sep25.html

5. Lawsuits hit the mutual fund industry

Following New York Attorney General Eliot Spitzer's allegations of late-trading and market-timing at big mutual fund companies, the first wave of big lawsuits is now hitting the mutual fund companies that have been accused of playing insider games with investors' money.

The suits name the same funds named by Spitzer - Bank One, Strong Capital Management, Bank of America, and Janus - and follow closely Spitzer's charge that these banks engaged in late-trading (allowing insiders to buy funds at the day's closing price after the market had closed - an illegal move that Spitzer called "betting today on yesterday's horse races") and market timing (the practice of exploiting small differences in the actual and listed value of the fund).

The New York Times reports that plaintiff lawyers are hoping that the funds will settle. None of the funds have denied their alleged behaviors publicly and have actually announced they are investigating these practices internally. Plaintiffs have an advantage because there are specific laws concerning the mutual fund industry. If they had to rely on the current securities laws, which were weakened by the 1995 Private Securities Litigation Reform Act, they would have a more difficult case.

For more, see: "First Wave of Suits Hits Mutual Fund Companies," by Jonathan Glater of the New York Times: http://www.nytimes.com/2003/09/24/business/24MUTU.html

Accounting

6. FASB mulls crucial pension accounting rule

The Financial Accounting Standards Board (FASB) is preparing to look at how corporations account for their cash-balance pensions. If FASB requires the companies to report a larger obligation than they currently do, the rule could have major effects on corporate accounting and corporate pensions.

Cash-balance pensions are controversial because companies who convert their traditional defined-benefit pension plans into cash-balance plans can save hundreds of millions of dollars, but that savings typically comes at the expense of older workers. Currently, the Treasury Department is considering a rule that would make it easier for companies to make these conversions. About a third of America's largest 100 corporations have cash-balance plans.

But if FASB changes the accounting standards to make the conversions less profitable, companies may have less incentive to make the conversions. The change could also harm corporate earnings.

For more, see: "Changes Discussed in Accounting for Pension Fund Obligations" by Mary Williams Walsh of the New York Times: http://www.nytimes.com/2003/09/25/business/25PENS.html

Executive Compensation

7. Bear Stearns CEO receives $117 million in deferred compensation

In the latest executive pay outrage, Bear Stearns chairman James E. Cayne will receive $117 million in company stock as a deferred payment. An additional $210 million in deferred stock compensation will go to three other executives - executive committee chairman Alan C. Greenberg and Warren J. Spector and Alan D. Schwartz, the firm's co-presidents.

The deferred compensation payment method, which allows executives to defer taxes on salary and bonus income until they actually withdraw the money, has become a popular executive perk. It was highlighted most recently in former NYSE director Richard Grasso's $140 million pay package.

For more, see: "Bear Stearns Officer Will get $117 Million in Deferred Pay" by Bloomberg News: http://www.nytimes.com/2003/09/27/business/27WALL.html

In the States

Connecticut

8. State senator seeks to prohibit state contracts for companies that commit fraud

Connecticut State Senator William A. Aniskovich has announced that he wants to prohibit state contracts for companies that have admitted or are being investigated for accounting fraud or securities violations. Aniskovich said that he would introduce the legislation in the next session.

"This is a straightforward initiative that protects the hard-earned money of the citizens of Connecticut," said Aniskovich in a press release. "Awarding a state contract to a company that has earned its reputation based on fraudulent activities is wrong and for the state to allow this practice to continue would only condone this type of corporate malfeasance. By enacting this legislation, we could prevent companies with poor business and ethical standards from being rewarded with Connecticut's trust and hard earned tax dollars."

Aniskovich's press release specifically mentioned MCI/WorldCom, which overstated profits by an estimated $11 billion. MCI/WorldCom has been temporarily banned from federal contracts, but not before it won a $45 million contract to build a cell phone network in Iraq and a $7 milion contract to provide satellite data communications for the National Oceanic and Atmosphere Administration earlier this year. In 1996, MCI/WorldCom signed a three-year multimillion deal with Connecticut to provide the state with voice and data communications.

Aniskovich's legislation would be similar to legislation introduced in New York by State Senator Charles Fuschillo, which would prohibit contracts where there has been a felony conviction involving the firm or any of its officers for securities violations in the last five years. Companies who file for bankruptcy protection because of accounting fraud would also be banned. On a similar note, Indiana suspended MCI from contracting with state agencies in August.

For more, see: "Sen. Aniskovich Seeks to Ban Fraudulent Companies From State Contracts," Sen. Aniskovich's press release:http://www.senatereps.state.ct.us/Pages/Press_Releases/Aniskovich_Press/091703.htm

Fighting Back

9. Group asks FCC to deny Clear Channel license for 63 stations

Citing the Clear Channel's poor character, DC-based public-interest group Essential Information last week urged the Federal Communications Commission to deny a license renewal to 63 Clear Channel stations.

"Clear Channel and its subsidiaries have violated the law on 36 separate occasions over the last three years, demonstrating its poor character," said Jim Donahue, Essential Information's project director. "Clear Channel is not qualified to hold a broadcast license under the FCC's own character rules.

"The FCC has held that licensees which exhibit a pattern of illegal conduct shall be denied the privilege of broadcasting the public's airwaves because such licensees cannot be considered truthful or reliable in complying with the Communications Act of 1934 or FCC regulations."

Among the many complaints against Clear Channel:

- "Misleading the public about the rules for radio contests, including its ?'So You Want to Win 10,000' contest which offered a prize of ?'10,000' to listeners who could accurately answer 10 questions - without informing the audience that the prize was for ?'10,000 Italian Lira' (53 dollars);

- Deceptive advertising;

- Broadcasting conversations without obtaining permission of the second party to the conversation; and

- Conviction for animal cruelty in violation of state law for the purpose of promoting an on-air personality

Since the 1996 Telecommunications Act deregulated radio by allowing massive consolidation, Clear Channel has bought up stations throughout the country. It now owns more than 1,200 stations. Even FCC Chairman Michael Powell has said that Clear Channel "may have concentrated too much" and that "there may be issues associated with that company" which the FCC should consider scrutinizing.

For more, see Essential Information's press release: http://www.essential.org/features/clearchannel.html

To read the complaint: http://www.essential.org/features/Clear_Channel_Objections.pdf

For a list of stations in the complaint: http://www.essential.org/features/Stations2.pdf

For more on media reform, see: http://www.mediareform.net

For more specific details on radio reform, see: http://www.prometheusradio.org/

In Washington

Congress

10. CRS report says Cheney's deferred compensation and stock options are "retained ties"

Vice President Dick Cheney's $162,392 worth of deferred compensation and 433,333 stock options from Halliburton (where he served as president from 1995-2000) constitute a "financial interest" under Federal ethics standards, according to a report by the Congressional Research Service released last week by Sen. Frank Lautenberg (D-NJ).

The report contradicts Cheney's recent claim on Meet the Press that "I have no financial interest in Halliburton of any kind and haven't had, now, for over three years."

The issue is pertinent because Halliburton has now earned $2.25 billion in contracts from this administration, including $1.25 billion from an exclusive no-bid contract to rebuild Iraq's oil contracts.

Lautenberg has called on the Government Affairs Committee to hold hearings on Halliburton's no-bid contract. "Congress has the responsibility to look into this immediately before more taxpayer money is placed in Halliburton's bank accounts," Lautenberg said.

For more, see: "Senator: Report undermines Cheney, Halliburton link", by the Associated Press
http://www.chron.com/cs/CDA/ssistory.mpl/business/2120240

Also see Senator Lautenberg's press release: http://lautenberg.senate.gov/~lautenberg/press/2003/01/2003925A22.html

Securities and Exchange Commission

11. SEC looks into executive pay at exchanges

Responding to the disclosure of Richard Grasso's $140 million pay package, the Securities and Exchange Commission wants to know what other exchanges are paying its executives. So SEC Chairman William Donaldson has sent a letter to the American, Pacific, Boston and other stock exchanges, as well at the Nasdaq stock market "in light of recent events and increasing public demand for greater transparency."

Meanwhile, private securities regulator NASD (formerly the National Association of Securities Dealers) announced the pay of its chairman and chief executive, Robert Glauber. Glauber was paid salary and bonus of $2.1 million in 2002, plus deferred compensation and other allowances totaling $375,669. Though it pales in comparison to Grasso's $140 million, $2.5 million is still more than 10 times the salary of the Chairman of the Federal Reserve ($171,900) or the chairman of the Securities and Exchange Commission ($142,500).

For more, see: "NASD Discloses Pay and Bonus of Chief" by Joanthan Fuerbringer of the New York Times: http://www.nytimes.com/2003/09/25/business/25NASD.html

See also: "SEC Chief Queries Stock Exchanges on Exec Pay," by Reuters: http://www.forbes.com/markets/newswire/2003/09/24/rtr1090379.html

12. Study finds that shareholders back proxy access

As the SEC prepares to consider a new rule that would improve the ability of shareholders to nominate directors through the proxy access process, a new Harris poll found that shareholders overwhelmingly support the idea.

According to the poll of 1,000 shareholders, 84 percent said that companies should be required to include all qualified candidates for the board of directors on the proxy voting materials, while 80 percent said that there should be a process to include shareholder nominees. More than half of respondents agreed that corporate managers were not in the best position to decide who should be nominated to the board of directors. The survey also found that 80 percent of investors felt that more open director elections would increase investor confidence.

Business leaders are opposed to opening up the proxy statements and are urging the SEC to go slow as it begins to consider the new rules.

Under current rules, shareholders who want to nominate a director don't have access to the proxy statement, which means they must go through a costly and difficult process to nominate directors. This proposal is widely seen as a way to increase the representation of minority shareholders on the board and make boards more independent of management. This proposal has enjoyed particular support among many shareholder activists, especially unions, state pension funds, and socially responsible investors.

See "Most Shareholders back proxy access, study says" by Andrew Countryman of the Chicago Tribune: http://www.chicagotribune.com/business/chi-0309240351sep24,1,5993381.story

13. SEC fails to meet hiring goals

Despite an increased budget, the Securities and Exchange Commission has failed to hire as many accountants and lawyers as it planned as it works to strengthen its ability to police the markets. With the fiscal year coming to a close, the SEC still has to spend roughly 40% of a $258 million budget increase that was supposed to allow it to hire more staff.

The SEC, which currently has a staff of 3,300, is trying to hire 842 new employees, including 308 in the Office of Compliance Inspections and Examinations, 209 in the Enforcement Divison, and 176 in the Division of Corporation Finance.

SEC Chairman William Donaldson defended the delay, saying he didn't want to waste money on unqualified hires:
"We will bring on the people we need to help us fulfill our mission, and not simply to increase our head count." Critics have complained that the SEC is not being proactive enough in its hiring efforts.
For more, see: "SEC taking sweet time to hire new enforcers as critics watch" by Marcy Gordon of the Associated Press: http://www.chron.com/cs/CDA/ssistory.mpl/business/2123618

This Week's Action Item:

Tell the FCC to deny renewal of Clear Channel Communications broadcast licenses

Last week, a Washington DC-based public interest group urged the Federal Communications Commission to deny a license renewal to 63 Clear Channel stations, citing the poor character of a company that has allegedly broken the law on 36 separate occasions, misled listeners, and curtailed local coverage in favor of bland, homogenized, commercial-laden programming.

We urge you to join in and ask the FCC not to grant license renewals to these 63 stations. This denial would be in accordance with the FCC's own rules that licensees who exhibit a pattern of illegal conduct should be denied the privilege of broadcasting on the public's airwaves. Even FCC Chairman Michael Powell has said that Clear Channel "may have concentrated too much" and that "there may be issues associated with that company" which the FCC should consider scrutinizing.

As this week's action item, please remind chairman Powell of his concerns and ask him to uphold the FCC's own rules and accordingly deny Clear Channel a license renewal.

To e-mail the commissioners:

Chairman Michael K. Powell: [email protected]
Commissioner Kathleen Q. Abernathy: [email protected]
Commissioner Michael J. Copps: [email protected]
Commissioner Kevin J. Martin: [email protected]
Commissioner Jonathan S. Adelstein: [email protected]

To read the complaint: http://www.essential.org/features/Clear_Channel_Objections.pdf

For a list of stations in the complaint: http://www.essential.org/features/Stations2.pdf

To see Essential Information's press release on the request: http://www.essential.org/features/clearchannel.html

Additionally, if you know of any Clear Channel abuses is your area, e-mail [email protected]