First Whistleblower Action Over Executive Compensation Disclosures

Yesterday, the Chicago Tribune ran this article about a Chicago Securities lawsuit brought against McDonald’s by a former Senior Director of Compensation who balked against signing a subcertification related to the company’s disclosure of executive compensation. The company denies the allegations. I’m pretty sure this is the first whistleblower suit related to executive compensation disclosure.

The complaint was filed in US District Court for Northern Illinois

- Setting up a reimbursement/repayment scheme to avoid disclosing golf club memberships for the regional President stationed in Hong Kong;
- Mislabeling the outgoing CEO as a “transitional officer” so he could keep his health and other benefits, and so the millions paid to him after his last day of work for McDonald’s could be called salary and incentive pay, rather than severance; and
- Implementing a shareholder-mandated 2.99X cap on executive severance agreements with loopholes large enough to render the cap meaningless.

We’ll be closely following this development since the topic is “near and dear” to many of our members…

Are Credit Default Swaps Enforceable?

In a recent presentation, Brink Dickerson of Troutman Sanders questioned whether credit default swaps are enforceable, at least in certain circumstances. Hedge funds, large banks and other financial institutions routinely control, either as a result of holding the underlying security or under contractual arrangements, the voting rights with respect to bonds and other indebtedness. At the same time, however, these institutions have hedged their economic interest in the CDS market, in some cases so much so that they are “over-hedged” and would benefit more from the failure of the underlying business than they do from its survival.

This in turn can lead to their opposing - if not blocking - otherwise rational consent solicitations, exchange offers and other restructurings. Brink speculated that to the extent that an institution has an over hedged position that leads to an irrational action as a holder (or former holder) of indebtedness, the underlying CDS may be void (or, if misused, voidable) as a matter of public policy (see Restatement Second of Contracts § 178). He also speculated on whether the misuse of an over hedged position might lead to liability.

The law is not there yet on this issue, but the extremeness of the facts in some of the current restructurings - where in one case the CDS positions were a substantial multiple of the outstanding indebtedness - could lead to the courts striking out in a new direction. Professors Henry Hu and Bernard Black have written widely on this and related issues - which they call “debt decoupling” and “equity decoupling” - and this clearly is a topic that would get significant focus should a major company fail just because of irrational actions by a holder (or former holder).

Help Me! Researching Fake SEC Filings

On footnoted.org, Michelle Leder recently wrote about a fake Form 8-K purportedly filed by a penny stock company. That reminded me of a fake Form S-1 (or Form SB-2) filed a few years back that listed a bunch of celebrities as officers and it maybe even included the US President. I erroneously thought I blogged about it - but now I can’t find any mention of it on the Web.

Does anyone remember it too? And if so, do you recall the name? Please help me prove I’m not losing my marbles and jog my memory. It’s not this amended Form SB-2 filed by Toks. Although that filing included a ton of lies (and resulted in a rare stop order from the SEC), it lists the fraudster as the sole officer - so that’s not the one I’m thinking of…

Speaking of “fake” on April Fools’ Day, Michelle reminded me yesterday of the SEC’s own bogus press release from ‘07. Although that fake release was never posted on the SEC’s site (it was just sent to reporters), it was mentioned in our blog and captured verbatim by the Financial Times.

- Broc Romanek

Source

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SEC Whistleblower Policy

The SEC announced yesterday a new initiative to improve internal procedures for evaluating tips, complaints, and referrals. It is no coincidence that the announcement comes at a time when the SEC is facing stinging criticism as more facts surrounding the $50 billion Bernard Madoff fraud are showcased in the news. Namely, Harry Markopolos, a rival hedge fund investor, had been alerting the SEC of potential fraud committed by Madoff for years prior to Madoff’s confession.

The SEC says it receives hundreds of thousands of tips and complaints per year. It has a goal of improving its management of those communications, which come from a variety of different sources and are received by several different divisions of the commission.

FINRA has also recently developed a new “Office of the Whistleblower” to review tips, but the office will aid, rather than replace, the current process for reviewing tips and complaints.

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