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February 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 Take-Two Interactive Software CEO
Brant neither admitted nor denied the allegations, but consented to the entry of an order permanently enjoining him from violating or aiding and abetting violations of the antifraud, reporting, record-keeping, internal controls, and securities ownership reporting provisions of the federal securities laws and permanently barring him from serving as an officer or director of a public company. Brant also consented to disgorge gains of $4,118,093 with $1,143,513 in prejudgment interest, and to pay a $1,000,000 civil penalty, for a total of $6,261,606. The settlement is subject to the approval of the United States District Court for the Southern District of New York. In a statement issued by the Commission, the Director of the SEC's Enforcement Division, Linda Chatman Thomsen, said: "As the Commission has alleged in its complaint filed today, the backdating scheme at Take-Two, which spanned seven years and was at Brant's direction, resulted not only in millions of dollars of ill gotten gains, but also caused Take-Two to materially misrepresent its financial condition to investors. The Commission's commitment to protecting the investor requires us to address vigorously undisclosed options backdating wherever and whenever it arises. Our action today sends the message that we take our duty very seriously." The Commission indicated in a statement that its investigation of the matter is continuing. 
SEC II: SEC Approves SRO Rule Changes in Connection with NYSE Group and Euronext Combination
According to the Commission, the rule changes will enable the businesses of NYSE Group and Euronext to be wholly-owned subsidiaries of a new publicly-traded holding company, NYSE Euronext. NYSE Group and Euronext would each be a separate subsidiary of NYSE Euronext, and their respective businesses and assets will continue to be held as they are currently held.
SEC III: SEC Files Supreme Court Amicus Brief Seeking To Curtail Shareholder Suits
The issue presented by the case involves the pleading standard for securities fraud under the Private Securities Litigation Reform Act of 1995. More particularly, at issue is what is meant by the requirement that plaintiffs must allege facts "giving rise to a strong inference that the defendant acted with the required state of mind.” The court below, the United States Court of Appeals for the Seventh Circuit, applied the "reasonable person" standard, holding that the allegations, if true, would lead a “reasonable person” to infer that the defendant(s) “acted with the required intent.” In its amicus brief, the SEC argues that the "reasonable person" standard applied by the Seventh Circuit sets too low a standard. Instead, according to the Commission, the Supreme Court should require that allegations of securities fraud show “a high likelihood” that the defendant(s) possessed the intent to violate the law to survive dismissal.
SEC IV: SEC Announces $700 Million Fee Cut to Benefit Investors
In addition, effective March 17, 2007, the Section 31 fee rate applicable to securities transactions on the exchanges and over-the-counter markets will decrease to $15.30 per million dollars. Further, pursuant to Section 31, the Commission will determine no later than March 1, 2007 whether a mid-year adjustment to the Section 31 fee rate will be necessary. The Section 31 assessment on security futures transactions also will decrease to $0.0042 per round turn transaction, effective March 17, 2007.
SEC V: SEC's Division of Corporation Finance Provides Interpretive Guidance on New Executive Compensation Rules
The categories of "Questions and Answers of General Applicability" include: Item 402 of Regulation S-K General Guidance; Item 402(b) - Compensation Discussion and Analysis; Item 402(c) - Summary Compensation Table; Item 402(d) - Grants of Plan Based Awards Table; Item 402(f) - Outstanding Equity Awards at Fiscal Year-End Table; Item 402(g) Option Exercises and Stock Vested Table; Item 402(h) - Pension Benefits; Item 402(i) - Non-Qualified Deferred Compensation Table; Item 402(j) - Potential Payments Upon Termination or Change in Control; and Item 402(k) - Director Compensation Table. The categories of "Interpretive Responses Regarding Particular Situations" include: Item 402 - General Guidance; Item 402(c) - Summary Compensation Table; Item 402(d) - Grants of Plan Based Awards Table; Item 402(h) - Pension Benefits; and Item 402(k) - Director Compensation Table. RealCorporateLawyer.com is pleased to offer additional guidance on these developments from among the hundreds of law firm memos available via the Web site. See :
IRS I: IRS Allows Employers to Satisfy Tax Obligations of "Rank-and-File Employees" with Backdated Stock Options
According to the IRS, if an employee exercised a "backdated" stock option in 2006, the employee may owe an additional 20-percent tax, plus an interest tax, under the Federal tax laws governing deferred compensation. If the option had been properly priced, the employee normally would only have owed income tax on the difference between the value at the date of grant and exercise. The Compliance Resolution Program, described in IRS Announcement 2007-18 , allows companies to pay the additional 20-percent tax and any interest tax that rank-and-file employees owe. RealCorporateLawyer.com is pleased to offer additional guidance on IRS Announcement 2007-18 from among the hundreds of law firm memos available via the Web site. See :
NYSE I: NYSE Proposes to Require Members to Notify Customers of All Fees in Writing and That Fees Be Reasonable and Not Discriminate Unfairly
"A significant number of operational complaints that were reported to the Exchange pursuant to NYSE Rule 351(d) concerned member organizations' insufficient notification of fees to their customers. Specifically, many of these complaints involved increases in account fees and service charges or other charges which customers felt were imposed on them without notification. In June of 2005, the Exchange published Information Memo 05-41 ('Customer Notification of Service Fees and Service Fee Changes,'), which provided guidance to firms regarding notification of fees. New Rule 405B is being proposed to codify such guidance so as to emphasize the importance of notification of fees to customers." The new proposed rule will require member organizations to provide customers with "written notification of relevant fees regarding their accounts, with an exception for de minimus operational and administrative fees." The proposal specifies when and how such written notifications are to be issued. Moreover, in an interesting twist, the proposed rule will allow customers affirmatively to opt out of receiving fee notifications in writing and, instead, receive them electronically. Additionally, the proposal bars firms from discriminating unfairly between customers with regard to fees. The proposal cautions that the NYSE "recognizes that fees charged to certain customers by member organizations may differ in some circumstances depending on various factors including, for example, the type of account, the amount invested, and the length and type of relationship." Thus, according to the NYSE, the proposal is not intended to prohibit or restrict firms' ability to structure their pricing schedules based upon the uniqueness of their various customer relationships.
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 February 15, Guidance Software Inc. announced that former SEC Chief Accountant Lynn Turner has joined its Board of Directors as Chairman of the audit committee. See Guidance Software Inc., Former SEC Chief Accountant Joins Guidance Software Board of Directors (Feb. 15, 2007). Former SEC Commissioner Isaac C. Hunt, Jr. has been named to the advisory board of investment firm Global Crown Capital. See Global Crown Capital, Global Crown Capital Names Former SEC Commissioner Isaac C. Hunt, Jr. to Advisory Board (Feb. 14, 2007). William Donaldson, former SEC Chairman, is joining investment banking boutique Perella Weinberg Partners as chairman of its advisory council. See Elstein, Aaron, Former SEC Chairman to Advise Perella (Feb. 8, 2007). On February 12 the SEC announced that Joseph B. Ucuzoglu has been named to serve in the SEC Office of the Chief Accountant as a senior advisor. See U.S. Securities and Exchange Commission, Joseph Ucuzoglu Named as Senior Advisor to the Commission's Chief Accountant, News Release 2007-18 (Feb. 12, 2007). The Commission named James L. Kroeker as Deputy Chief Accountant for Accounting in its Office of the Chief Accountant on February 5. See U.S. Securities and Exchange Commission, James Kroeker Named Deputy Chief Accountant for Accounting in the Office of the Chief Accountant, News Release 2007-13 (Feb. 5, 2007). On January 31, NASD Chairman and CEO Mary Schapiro issued a statement regarding the death of Gordon S. Macklin, former NASD President and NASDAQ founder. See NASD, Statement of NASD Chairman and CEO Mary Schapiro Regarding the Passing of Gordon S. Macklin, Former NASD President and NASDAQ Founder (Jan. 31, 2007). On January 30, the Financial Accounting Foundation reappointed Timothy P. Flynn and James H. Quigley to its Board of Trustees and appointed three new trustees: Robert T. Blakely, Ellen L. Brown, and John J. Radford. See Financial Accounting Foundation, The Financial Accounting Foundation Reappoints Timothy P. Flynn and James H. Quigley to its Board of Trustees (Jan. 30, 2007). The Public Company Accounting Oversight Board announced on January 24 that J. Gordon Seymour will succeed Lewis H. Ferguson III as PCAOB General Counsel beginning this month. See Public Company Accounting Oversight Board, Gordon Seymour to Succeed Lewis Ferguson as PCAOB General Counsel (Jan. 24, 2007). On January 23, the Financial Accounting Foundation announced that Robert H. Herz has been reappointed to a second five-year term as Chairman of the Financial Accounting Standards Board commencing on July 1, 2007. See Financial Accounting Foundation, Financial Accounting Foundation Reappoints Robert H. Herz as Chairman of Financial Accounting Standards Board (Jan. 23, 2007). The SEC announced on January 17 that James A. Brigagliano has been named as Associate Director for Trading Practices and Processing in the Commission'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). What Are the Commissioners and Commission Staffers Saying? SEC Commissioner Kathleen L. Casey delivered "Remarks Before SEC Speaks" in Washington, D.C. on February 9. Others who delivered remarks at the same event, included Commissioner Annette L. Nazareth, Chairman Christopher Cox, and Commissioner Paul S. Atkins. On February 8, Commissioner Roel C. Campos delivered "Remarks Before the CNMV Corporate Governance and Securities Markets Conference".
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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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