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January 2007 Published by RR Donnelley Editorial Content by LegalWorks Blake A. Bell, Editor in Chief In This Issue:
SEC I: SEC Settles Options Backdating Case Against Former General Counsel of Comverse Technology
Without admitting or denying the SEC's allegations, Sorin consented to entry of a final judgment permanently enjoining him from violating and/or aiding and abetting violations of the antifraud, reporting, record-keeping, internal controls, false statements to auditors, and securities ownership-reporting provisions of the federal securities laws. He also consented to entry of an order permanently prohibiting him from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act. He further consented to pay $1,670,915.03 in disgorgement, of which $1,007,201.58 represents the “in-the-money” benefit from exercises of backdated option grants. In addition, Sorin agreed to pay $817,509.07 in prejudgment interest thereon, and a $600,000 civil penalty, for a total of $3,088,424.10. The settlement is subject to the approval of the United States District Court for the Eastern District of New York. As part of the settlement, and following the entry of the proposed final judgment, Sorin, without admitting or denying the Commission's findings, consented to the entry of an administrative order, pursuant to Rule 102(e)(3) of the Commission's Rules of Practice, suspending him from appearing or practicing before the Commission as an attorney. In addition, in a separate matter filed in the United States District Court for the Eastern District of New York on Nov. 2, 2006, Sorin pleaded guilty to one criminal count of conspiracy to commit securities fraud, mail fraud, and wire fraud. The plea was the result of an agreement between Sorin and the United States Attorney's Office for the Eastern District of New York. 
SEC II: SEC Amends Executive Compensation Disclosure "To More Closely Align With FAS 123R"
According to the Commission, the amendment basically addresses three issues, including:
SEC III: SEC Issues Guidance Regarding Filing Restated Financial Statements for Errors in Accounting for Stock Option Grants
The principal issue seems to be that companies involved in such restatements contend that necessary restatements would apply to so many years that it would be unduly burdensome to amend all previously-filed reports. On January 16, the SEC released what it described as a "sample" of such a letter. In it, the Commissioner staff stated, in part, the following: "The staff of the Division of Corporation Finance will not raise further comment regarding your company's need to amend prior Exchange Act filings to restate financial statements and related MD&A if your company amends its most recent Form 10-K and includes in that amendment the comprehensive disclosure outlined below. If your next Form 10-K is due to be filed within two weeks of the Form 10-K amendment that you would file in response to this guidance, we will not comment on your company's need to amend or file prior Exchange Act filings to restate financial statements and related MD&A if your company includes the comprehensive disclosure outlined below in that next Form 10-K, rather than including the comprehensive disclosure in an amendment to your most recent Form 10-K." The sample letter then outlines an extensive form of disclosure to appear in the company's Form 10-K amendment (or its next Form 10-K as appropriate). Among many other things, the letter notes that the disclosure requirements include those outlined in the September 19, 2006 letter issued by the Commission Staff to Mr. Lawrence Salva, Chairman of the Committee on Corporate Reporting and Mr. Sam Ranzilla, Chairman of the Center for Public Company Audit Firms.
SEC IV: SEC Issues "Guidance" Regarding Implementation of FASB Interpretation No. 48
In its letter, the ICI complained the general tax rules applicable to funds or their investments are at times unclear and that the guidance that exists cannot always be applied confidently to specific fact patterns. According to the ICI, there are limited rules and regulations addressing the specific requirements a fund must meet in order to maintain its tax free status. Thus, funds must rely upon "less formal" Internal Revenue Service (IRS) guidance and practices when determining the technical merits of their tax positions. The ICI indicated that the IRS is aware both that funds face these uncertainties and that fund shareholders ultimately bear the burden of any fund-level tax. Thus, according to the ICI, the IRS at times addresses fund industry issues by providing guidance that is prospective only such that no taxes are due for prior periods. In its letter, the ICI expressed concern that these types of informal guidance and practices of the taxing authority cannot be considered in applying FASB Interpretation 48 regarding "Accounting for Uncertainty in Income Taxes". In its response letter dated December 22, the Commission indicated that it does not believe that Interpretation 48 places any limits on the type of evidence that an enterprise can look to in making its determination of the technical merits of a tax position. According to the Commission, paragraph 7 of FASB Interpretation 48 lists certain forms of evidence that may be available when making such a determination, but the list should not be viewed as the totality of evidence that may be considered. Less formal forms of guidance from the taxing authority should be considered as well. According to the letter, a "fund's management should weigh all available forms of evidence based on their persuasiveness". The guidance further indicates: "Pursuant to paragraph 7(b) of Interpretation 48, we also believe that the administrative practices and precedents of the taxing authority should be considered in a fund's analysis. Specifically, you have asserted that, in the event that the IRS objects to a tax position taken by a fund, the IRS at times grants prospective transition to cure the underlying deficiency such that no additional taxes are due for prior periods. If this is in fact the case, we believe that funds can, and should, consider the taxing authority's practice of addressing fund industry issues on a prospective basis as part of the administrative practices and precedents of the taxing authority. We would expect a fund's management to analyze the technical merits of a particular tax position, any known views of the taxing authority with respect to the position, the history of the taxing authority with respect to resolving fund tax issues with similar levels of technical support, and any other relevant information. Of course, when performing this analysis, pursuant to paragraph 7(a) of Interpretation 48, a fund must presume that the tax position will be examined by a taxing authority that has knowledge of all relevant information."
FBI I: One-Eighth of the FBI's Entire Corporate Fraud Investigation Caseload Now Involves Options Backdating
The report is based on remarks made by James Burrus, an FBI Investigation Assistant Director who heads the agency's Criminal Investigative Division, before the Reuters Regulation Summit in Washington, D.C. These figures would suggest that about 30% of the 200 or so options backdating probes identified to date have been referred to the FBI for possible criminal investigation.
NASD I: NASD Issues Guidance on Reportable Options Positions, Options Position Limits and Exercise Limits
In addition to providing detail regarding the amendments to the rule regarding activities in standardized and conventional option contracts, the NASD's guidance clarifies and reminds members about their responsibilities under Rule 2860 to report certain options positions to NASD. Additionally, the Notice to Members provides guidance regarding when it is appropriate to aggregate certain positions as well as the process for seeking interpretations from the NASD staff.
NASD II: NASD Makes Free Online Database of Arbitration Awards Available to the Public
The new online database is actually a replacement for the "search tool" that NASD has made available via its Web site since 2001 through the auspices of an outside vendor. To search for an Arbitration Award using the new online database, visitors may enter a Case Number, Text, and/or a Date Range (i.e., the date the award was served) within a simple search dialogue form. Users may search by date range, case number or text, or a combination of date range and case number or text. Text may include words in the award such as the Case Number, Claimant Name, Respondent Name or Arbitrator Name. To search by exact phrase/words, users can include the text within quotations (e.g., "John Smith"). Search results are returned in "case number descending" order, although an option to change that sort is available on search results pages. Users may also sort results by "case number ascending", "date of award ascending" and "date of award descending". Results are returned in Adobe PDF format.
PRACTICAL GUIDANCE: Courtesy of RealCorporateLawyer.com RealCorporateLawyer.com provides 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 "Emerging Legal Issues" area of the home page for such current memoranda, as well as the Expert Analysis: SEC Reform Portal section containing hundreds of other such memoranda. Recent additions include:
COMINGS AND GOINGS: Who's Doing and Saying What and Where? On January 17 the SEC announced that James Brigagliano has been named Associate Director for Trading Practices and Processing in the SEC's Division of Market Regulation. See U.S. Securities and Exchange Commission, James Brigagliano Named Associate Director for Trading Practices and Processing in the SEC's Division of Market Regulation, News Release 2007-5 (Jan. 17, 2007). On January 8 the NASD announced its new "Government Affairs Team" consisting of Casey M. Carter (Vice President for Government Relations) and Scott Borchert (State Liaison). See NASD, NASD Names New Government Affairs Team (Jan. 8, 2007). The Commission announced on January 4 that Elaine Greenberg has been named Associate District Administrator for Enforcement in the SEC's Philadelphia District Office. See U.S. Securities and Exchange Commission, Elaine Greenberg Named Associate District Administrator for Enforcement in the SEC's Philadelphia District Office, News Release 2007-1 (Jan. 4, 2007). Also on January 4, the NYSE Group announced the retirement of its S.V.P. Competitive Position, Robert J. McSweeney , and its E.V.P., Market Operations, Anne E. Allen. Ms. Allen's retirement will be effective March 1. See NYSE Group, NYSE Group Announces Retirement of Robert J. McSweeney Senior Vice President, Competitive Position (Jan. 4, 2007); NYSE Group, NYSE Group Announces Retirement of Anne E. Allen, Executive Vice President, Market Operations, Effective March 1, 2007 (Jan. 4, 2007). The SEC announced on December 28 that Administrative Law Judge Lillian McEwen is retiring from the Commission. See U.S. Securities and Exchange Commission, Administrative Law Judge Lillian McEwen to Retire from SEC, News Release 2006-221 (Dec. 28, 2006). On December 21 the Commission announced that its CFO, Margaret J. Carpenter, is retiring. The same day the Commission announced that it has named Kristine M. Chadwick its CFO and Associate Executive Director (Finance). See U.S. Securities and Exchange Commission, Kristine Chadwick Named SEC's Chief Financial Officer, News Release 2006-216 (Dec. 21, 2006); U.S. Securities and Exchange Commission, SEC Chief Financial Officer Margaret Carpenter to Retire, News Release 2006-215 (Dec. 21, 2006). What Are the Commissioners and Commission Staffers Saying? The recent holiday season was a "quiet" one for the Commissioners and Commission Staffers. SEC Commissioner Annette L. Nazareth is the only one who has had remarks made available via the Commission Web site. She delivered "Remarks at the ALI-ABA Course of Study, Broker-Dealer Regulation" on January 11, 2007.
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©2008 RR Donnelley This free E.Zine is provided for informational purposes only and does not constitute legal advice. RR Donnelley & Sons Company is not engaged in rendering legal or other professional services. Publication on this E.Zine is not intended to create, and the information contained hereon does not constitute, an attorney-client relationship. Do not act or rely upon the information and advice given in this publication without seeking the services of competent professional counsel. The RR Donnelley Financial Services Group provides a range of solutions to address all of your business communications needs. We offer financial printing services to the capital and investments markets, as well as judgment-based outsourcing and real estate services. Through our integrated global network, we file more than 50,000 documents annually with the SEC and produce many of the critical documents for regulatory compliance and financial transactions. Our BPO services leverage an on-site/offshore delivery model, leading subject matter experts and state-of-the-art, global operations to assume functions of our clients' business. We add value through highly personalized and around-the-clock service, single-source solutions, Venue virtual data rooms, worldwide regulatory and industry expertise, and insight that comes from over 140 years of experience and achievement. For more information, visit us at www.financial.rrd.com or www.RealCorporateLawyer.com , a reference resource site for corporate and securities lawyers.
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