Think Enron. Global Crossing. WorldCom. Now think: Executive stock options. Re-pricing same at lower prices! Insider trading. Outlandish CEO pay. Unconscionable golden parachutes. Incestuous boards of directors. Accounting scams. And the list goes on ..........
Frustrated? Mad? Outraged? That's a formula for investor paralysis, if there ever was one. Given the modern market's volatility, paralysis is simply not conducive to favorable decision-making for either making gains or avoiding losses in any market environment, let alone this one.
So, what exactly is happening, in the Big Picture? The good news is ....... lots. For example:
Fines levied against Wall Street. The SEC has fined the top ten Wall Street firms a total of $1.4 billion and required them to adopt reforms to resolve allegations that they issued ratings on stocks to lure investment banking business. On balance, it can be legitimately asked, where's the restitution to damaged investors?..., but, hey, it's a start, and should carry some weight in subsequent civil litigation.
Fines against banks and other corporations. On July 28, Citigroup, Inc. and J.P. Morgan Chase & Co. agreed to pay a total of $305 million as restitution to settle government charges that they helped Enron Corp. and Dynegy Inc. defraud investors by manipulating financial statements through the use of fraudulent loans mischaracterized as revenue. Also, the Senate Judiciary Committee is looking into whether the $750 million that WorldCom paid to settle the SEC investigation into an alleged $11 billion accounting fraud was punishment enough.
Prosecution against individuals. The high profile case here is, unfortunately, Martha Stewart, who made $48,000 (allegedly) on an insider trade (and lost hundreds of millions on her own stock in the ensuing maelstrom). Important though, because Sam Waksal, founder of the involved company, ImClone, was sentenced to over seven years in prison and will have to pay over $4 million in fines and back taxes. Unfortunate though, because the perception is that the Kenneth Lays, the Andrew Fastows (both of Enron), the Bernie Ebbers (WorldCom) and the Dennis Kozlowskis (Tyco) of the world ....... all of whom allegedly ripped off their shareholders for humongous millions of dollars ...... are seemingly emerging unscathed ... but, hold onto your seats, their fates are not yet sealed.
And many more cases may yet unfold. The Justice Department's Corporate Fraud Task Force reported in mid-July that over 320 investigations were pending, involving over 500 individuals and companies. (In the last year they obtained over 250 corporate fraud convictions or guilty pleas, including those of at least 25 former CEO's, and had charged 354 defendants with some type of corporate fraud in connection with 169 cases.)
Legislation. The Sarbanes-Oxley Public Company Accounting and Investor Reform Act of 2002 requires publicly traded companies to document their internal accounting controls. Most U.S. publicly held companies must begin their new practices by June 15, 2004. Small U.S. firms and foreign firms will have to comply for their fiscal years ending on or after April 15, 2005. There are many complex and far-reaching provisions of Sarbanes-Oxley. In essence, the Bill requires boards of directors to establish oversight and accounting procedures unprecedented in American business history, including mandatory requirements for outside directors and extremely strict audit requirements. Perhaps the most important (and controversial) item in the sweeping 130-page bill is the requirement that CEOs certify, under extreme penalties for non-compliance, their companies' financial statements. The Law Offices of Marc J. Lane can provide assistance to companies requiring interpretation and implementation procedures under this very complex legislation and subsequent SEC rulings.
Accounting. The Financial Accounting Standards Board has proposed requiring executive stock options to be expensed. Currently, stock option grants are the only form of executive compensation which are not treated as an expense. This is an extremely controversial subject. Many corporations have utilized these, incurring substantial shareholder dilution, and especially incurring shareholder wrath when the options are "re-priced" as the stock price collapses. Arguably, young cash-poor companies may need this tool to attract and retain executive talent. Microsoft recently made major headlines by switching from stock options to grants of restricted stock. Stay tuned ..... the debate is loud. The accounting treatment is one thing, but most observers are now agreed: re-pricing of stock options, whereby the executive team gets a new low exercise price, while everyone else just observes and lives with their paper loss, will likely no longer be quietly tolerated. The expensing issue is expected to be resolved next year.
Collaboration Among Institutional Investors. Several of the world's largest retirement funds, including the New York State Common Retirement Fund, and "Calpers," the California Public Employees Retirement System, may team up (according to the Chicago Tribune, May 29, 2003) to advance their common agenda to actively push companies to adopt new corporate governance reforms. Those two entities combined have assets of more than $230 billion. As these, and similar organizations join together with their immense combined voting power, the pressure on corporations to actually implement, instead of just talking about, critical social and business reforms can only be expected to increase dramatically.
That's a brief summary of what is happening as Wall Street, Washington, and Corporate America seek to regain the confidence of investors, at least as far as the concepts of disclosure and fair play are concerned. So what does all of this mean to You, the Investor?
What we're doing
While we're encouraged by the governmental and FASB attempts to establish serious reform, in their sincere effort to re-establish confidence in the U.S. capital markets, we believe that ultimately the reforms that will matter will be pushed and driven by the private sector. After all, that's where the money is.
For serious investors, we at Marc J. Lane Investment Management, Inc. encourage the following:
Take proxy voting seriously. The combined efforts of individuals (and the growing numbers of motivated institutions) can not be under-estimated. We have developed an entire slate of suggested positions which we believe relevant to most shareholder proposals, and we would be happy to share them with you.
Remember, your vote will be combined with thousands of other individual investors, and the institutions are rapidly coming on board.
Demand to be heard. If you feel strongly about a corporate issue, write the CEO. They are "under the gun" to a degree which is unprecedented. Even if you're initially ignored, you will most likely go "on record."
Ask for our proxy recommendations. Chances are, if it's a public company, and there's an issue, we've analyzed it, and we have a corresponding recommendation, with solid reasoning.
If you are a mission-or value-based individual or organization: Consider seriously our Advocacy Investingsm program, which can build and manage a customized investment portfolio for you that not only passes our tough financial screens, but which is also custom-tailored to invest only in companies which actively reflect and promote your own unique core values and beliefs.
The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright, 2003 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.