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The European Union's top diplomat says the bloc remains a staunch supporter of the International Criminal Court despite U.S. condemnation of the tribunal.

EU foreign policy chief Federica Mogherini said Thursday that "we will continue to fully and strongly support the ICC and its work."

The Hague-based court was created in 2002 to prosecute war crimes, crimes against humanity and genocide in areas where perpetrators might not otherwise face justice.

Mogherini said the ICC "has strengthened universal justice beyond power politics and beyond geopolitical interests," and added that "accountability is essential to build the foundations for peace."

U.S. National security adviser John Bolton denounced the ICC earlier this week just as a judge weighs whether to investigate allegations of war crimes against U.S. and Afghan personnel in Afghanistan since 2003.

On September 15, 2011, the Indiana Supreme Court issued its decision in Lucas v. U.S. Bank, N.A., ___ N.E.2d ___ (Ind. 2011), Cause No. 28S01-1102-CV-78, an action that arises from an attempt by a bank to foreclose on a home. That case raised the issue of how to tell when defenses in a foreclosure action should be tried to a jury or to a court. In deciding this case, the Court issued an important decision refining the general test for deciding when a case is essentially equitable and, therefore, not triable to a jury.

The Lucases entered into a residential mortgage in 2005, but in 2009, the bank move to foreclose on the loan. The Lucases filed an answer asserting many affirmative defenses and counterclaims, asserting that the bank violated numerous statutes and the common law and that the Lucases were thus entitled to various forms of relief, including money damages. The Lucases requested a jury trial on their affirmative defenses and counterclaims, but the trial court denied that motion. On appeal, the Court of Appeals reversed, holding that the Lucases had the right to have a jury hear their legal claims. The bank then successfully sought transfer.

The Court relied heavily on its decision in Songer v. Civitas Bank, 771 N.E.2d 61 (Ind. 2002), which also addressed the test to be used when deciding whether to have a jury hear issues in a case involving both legal and equitable claims. That test was a fact-based, multi-pronged test.

Ultimately, we believe Songer reveals that a trial court must engage in a multi-pronged inquiry to determine whether a suit is essentially equitable. Drawing on the teachings of Songer, we formulate that inquiry as follows: If equitable and legal causes of action or defenses are present in the same lawsuit, the court must examine several factors of each joined claim—its substance and character, the rights and interests involved, and the relief requested. After that examination, the trial court must decide whether core questions presented in any of the joined legal claims significantly overlap with the subject matter that invokes the equitable jurisdiction of the court. If so, equity subsumes those particular legal claims to obtain more final and effectual relief for the parties despite the presence of peripheral questions of a legal nature. Conversely, the unrelated legal claims are entitled to a trial by jury.

Th Lucases' claims in this case were subsumed into equity because, although they were legal causes of action, when "looking at the cause as a whole, we conclude that the core questions underlying the Lucases' legal claims significantly overlap with the foreclosure action that invoked the equitable jurisdiction of the trial court." Because "the essential features of the suit" were equitable, the entire case must be tried to the bench, rather than to a jury.


If a case involves both legal and equitable claims, the legal claims will be subsumed into equity if the whole action is essentially equitable. This is a fact-based, multi-pronged test.

Brad A. Catlin
Price Waicukauski & Riley, LLC

SEC to "Discuss" Internal Control Proposals at Open Commission Meeting

The SEC has scheduled an open meeting for next Wednesday to "discuss" the PCAOB's internal controls auditing standard (AS #5) and the SEC's own management report proposal. Based on the wording of the SEC's announcement, it doesn't seem like they will adopt anything - rather, the Commissioners and Staff will discuss the comment letters received to date (including the oft-mentioned alignment of the PCAOB's and SEC's proposals) and approaches available to the SEC. The SEC seems "on plan" to adopt something by May.

Maybe my memory is foggy, but I don't recall an open Commission meeting being held during which rules were not being proposed or adopted. In the past, these were fairly scripted affairs (but not as much over the past several years) and a discussion like this one would be conducted behind closed doors. Maybe its driven by a desire to ensure the standards are harmonized without treading on some "government in sunshine" restrictions about the SEC's dealings with the PCAOB...

The FASB's Appointment Process

Yesterday's WSJ included this article on recent changes to the selection process used to select members of the board of trustees for the Financial Accounting Foundation (FAF) and the Financial Accounting Standards Board (FASB). The article recounts the back and forth between the SEC and the FAF over how much power the SEC should have regarding the selection process at the FASB.

You might recall that Section 108 of Sarbanes-Oxley gave oversight power to the SEC over the FASB - and the SEC outlined its role in a 2003 policy statement. In that statement, the SEC said that, given its oversight responsibilities, the FASB should give the SEC "timely notice of, and discuss with the Commission" its intention to appoint new members. According to the article, "timely notice" became an issue for the SEC in recents months and an agreement reached this month defines "timely" as generally 45 days but not less than 30 days before the FAF nominates members to its board or FASB members.

Critics of the SEC's oversight power worry that the SEC could hold reappointment over the heads of FASB or FAF members while important votes are being considered. They also point to the fairly recent experience at the PCAOB, where some appointments by the SEC were not made very timely (and eventually made when votes on significant issues were on the table).

A Closer Look: SEC Chief Accountant Conrad Hewitt

Yesterday, the Washington Post ran this interesting article about relatively new SEC Chief Accountant Conrad Hewitt.

E&Y Censured Over Independence (Again)

On Monday, the SEC announced a $1.5 million settlement with Ernst & Young relating to alleged independence violations for its work at two clients, AIG and PNC Financial, in 2001. You might recall that E&Y had been censured just a few years ago for its PeopleSoft audit because E&Y's consulting arm profited from recommending PeopleSoft software to customers.

Here are some thoughts from Lynn Turner: "Some in the auditing profession argue investors should rely on an audit firm itself to assess its independence and put in place safeguards if it is questioned. The three cases cited in this WSJ article regarding E&Y in recent years strongly arues against any such approach. Interestingly enough, in April 2001, the partner then in charge of the E&Y national office declined a request to meet with the SEC staff to discuss progress that E&Y was making in instituting a system to ensure its independence on a global basis, citing he did not need anyone at the SEC telling him what the independence rules were. (The other 7 largest firms accepted such an invitation).

It is also interesting an E&Y partner is a leader of the current effort to obtain what is in essence, an indemnification of auditors by their clients. Certainly, these are matters of concern for investors and audit committees."

On Monday, the US Court of Appeals for the Fifth Circuit issued a decision in the Enron securities class-action litigation that generally affirms that bankers, accountants, and others who work with publicly traded securities are not subject to securities-fraud claims that arise due to fraud committed by the issuer. There is some useful analysis of the decision in "The 10b-5 Daily."

And here is some analysis of the decision from Gibson Dunn: In a decision having important implications both for the scope of liability under the securities laws and for class certification in general, on March 19, the Fifth Circuit ruled that a securities fraud action against certain financial institutions that participated in transactions with Enron Corporation could not proceed as a class action. The decision, Regents of the University of California v. Credit Suisse First Boston (USA), Inc., No. 06-20856, 2007 WL 816518 (5th Cir. March 19, 2007), adds to a growing body of federal caselaw that places limits on efforts by plaintiffs' lawyers to plead securities fraud claims against secondary actors such as investment banks and other professional advisors, who did not themselves make any misrepresentations or omissions. The Fifth Circuit joins the Eighth Circuit in narrowly construing the scope of liability under such theories, and helps solidify a circuit split with the Ninth Circuit, which recently adopted a more liberal standard.

The Fifth Circuit's decision denying class certification also represents another recent example of how federal courts are beginning to impose more rigorous standards for certification of investor classes in securities cases, and are permitting defendants to present more sophisticated "merits-based" arguments opposing class certification in appropriate cases. In December 2006, the Second Circuit reached a similar conclusion in the high-profile In re IPO Public Offerings Securities Litigation case, and denied class certification in that case as well.

Yesterday, the SEC adopted long-awaited rules that will make it easier for foreign private issuers to deregister and terminate their SEC reporting obligations. New Rule 12h-6 and related Form 15F will enable a foreign private issuer meeting specified conditions to terminate its '34 Act reporting obligations. The final rules are similar to those re-proposed with some technical adjustments. Here are opening remarks from Corp Fin - and here are comments from Commissioner Atkins, Nazareth and Campos.

The new rule will be effective 60 days after publication of the SEC adopting release in the Federal Register - it is expected that the adopting release will be published by mid-April so that the rules will be effective by the middle of June. If this happens, calendar year companies will be able to avoid filing a 2006 Form 20-F (for large accelerated filers, the first to require internal control reports under Section 404 of Sarbanes-Oxley).

Below is some analysis of the adopted rules from Cleary Gottlieb: Under the new deregistration rule, a company can deregister equity securities if its average U.S. trading volume over a 12-month period represents 5% or less of its worldwide trading volume, so long as it meets the other requirements described below. While the basic test is identical to the December 2006 proposal, the SEC has refined the test in three respects:

- The 5% threshold will be calculated by comparing a company's U.S. trading volume to its worldwide trading volume, rather than comparing it to trading volume in the company's one or two primary markets.

- Off-market trading will be counted worldwide, and not only in the United States, so long as the information source is reliable and not duplicative of exchange-reported trading.

- Convertible and other equity-linked securities will no longer be counted in the threshold calculation.

Like the December 2006 proposal, the final rule provides that companies that terminate their listings or ADR programs will have to wait one year before deregistering. In contrast to the proposal, however, the waiting period will only apply to companies that are above the 5% threshold when they terminate their ADR programs (this was true for terminating listings, but not ADR programs, in the proposal). There will also be a transition rule for companies that terminated listings or ADR programs during the year preceding the adoption of the rule.

The final rule retains a number of other provisions from the December 2006 proposal, including a requirement that a deregistering company be listed in one or two foreign markets that together represent at least 55% of its worldwide trading for a year prior to deregistration, that it have at least a one-year SEC reporting history at the time of deregistration, and that it not have sold securities in an SEC-registered offering for a year prior to deregistration. Companies that deregister are automatically eligible for the registration exemption of Rule 12g3-2(b), meaning that their deregistration will be permanent so long as they publish English versions of their home country reports and financial statements on their web sites.

Under the December 2006 proposal, a company could also deregister debt or equity securities if the securities were held by no more than 300 U.S. residents (based on improved "look-through" counting rules) or 300 holders worldwide (without applying "look-through" rules). While a number of comment letters suggested raising the threshold for debt securities, the SEC did not refer to any modification of the threshold during the open meeting.

It remains to be seen whether a significant number of foreign private issuers will use the new rules. Many of the largest European issuers have informally indicated that they intend to stay registered, at least for the time being. Many of these issuers will wait to see whether the SEC eliminates the U.S. GAAP reconciliation of IFRS financial statements (currently targeted for 2009), a change that would substantially reduce the costs of a U.S. listing. Several of the Commissioners expressed support for this objective during the open meeting.

The most significant practical impact may come from a provision of the new rule that allows companies that use their shares to acquire foreign SEC registrants to avoid registering themselves as “successor issuers” (assuming this provision remains in the final rule in the form proposed in December). This provision could facilitate cross-border M&A transactions that previously would have been blocked by the successor registration requirement.

Latest Analysis of How Funds Vote

  Featured Bloggers  -   POSTED: 2007/03/21 07:52

With each proxy season wilder than the last, keeping track of how funds vote becomes more important. The Corporate Library has now published their analysis of how mutual funds voted last year. The report analyzes the 2006 voting records of 29 large mutual fund families, which includes the voting records of 702 funds, amounting to more than 1.2 million voting decisions.

Here are some of the study's findings:

- Funds supported 92% of management-sponsored proposals in 2006 on average, up from 89% in 2004. A small number of management resolutions propose reforms that shareholders have called for in the past, yet receive much higher support when proposed by management. For example: Dreyfus, which voted in favor of no shareholder resolutions to declassify the board in 2006, voted for 98% of management proposals to adopt the same reform.

- Putnam was the fund family least likely to support management-sponsored resolutions, with an average 79% support. American and Ameriprise had the highest levels of support for management resolutions, with average support of 97%.

- Funds voted in favor of 37% of shareholder-sponsored resolutions, on average. Governance-related resolutions, which comprised 76% of all shareholder-sponsored resolutions published in proxies in 2006, received 44% support from funds. This figure has increased over the three years spanned by this study for 14 of the largest fund families, from 37% in 2004.

- Among shareholder resolutions, those proposing board declassification received the highest level of fund support – 87.7%, on average – in the 2006 proxy season. The largest category of shareholder resolution, those urging majority affirmative support for uncontested director elections, achieved 60% support from funds, on average, up significantly over the past three years.

After SEC's Chief Accountant Conrad Hewitt blessed the ESOARs arrangement proposed by Zions Bancorp, the Council of Institutional Investors wrote a letter to the SEC expressing concerns as to whether market instruments can appropriately value options, particularly given that Zions is activately marketing its valuation approach to other companies. Conrad recently sent this letter to CII noting that the SEC will continue to analyze - and accept input - on this issue.

In ISS' "Corporate Governance Blog," ISS has provided some analysis about the challenges that companies and investors face when determining the fair value of options. In addition, ISS recently held a webcast to discuss the complexities of option expensing as well as has begun publishing a regular "Options Expensing Alert" to help evaluate the accuracy and reliability of specific expense calculations.

Grumblings from investors about unfair option values seem to fall into a number of discrete categories, including questionable assumptions set forth by companies; auditors not challenging those assumptions; and wide lattitude from the SEC regarding what assumptions are acceptable.

Option Backdating Cases: Deadline Looming? Disclosure-Only Charges?

Like this recent Financial Times article notes, a number of commentators have been talking about whether SEC and other enforcement officials will beat applicable statute of limitations deadlines in the numerous option backdating investigations pending.

An Associate Director in the SEC's Enforcement Division caused a stir a month ago when she said that she “wouldn't be surprised” if the agency brings some backdating enforcement actions that do not involve fraud, but rather would allege misleading disclosures only. According to this related Reuters article, the SEC has established guidelines to determine which matters will be prosecuted. Those factors include the duration of the misconduct, the "quantitative materiality of the compensation charges," the quality of the evidence and whether the company is filing a restatement.

Option Lies May Be Costly for Directors

Here is an interesting backdating column by the NY Times' Floyd Norris from last month:

"For companies that played games with employee stock options, the possible penalties are growing. New rulings in Delaware indicate that directors will be personally liable if options were wrongly issued. And the Internal Revenue Service has decided that employees who innocently cashed in backdated options in 2006 face a soaring tax bill. The service has given companies two weeks to decide whether to pick up the tax for the workers. That means directors must decide whether to spend corporate assets on bailing out workers, possibly angering shareholders, or leave the workers to shoulder huge tax bills.

In two rulings issued this month, Chancellor William B. Chandler III of the Delaware Chancery Court made it clear that the backdating of options was illegal. That was no surprise, but he went on to say that the same applied to “spring loading,” the practice of issuing options just before the release of good news.

“It is difficult to conceive of an instance, consistent with the concept of loyalty and good faith, in which a fiduciary may declare that an option is granted at ‘market rate’ and simultaneously withhold that both the fiduciary and the recipient knew at the time that those options would quickly be worth much more,” Chancellor Chandler wrote.

That decision creates the possibility of significant liability for directors, particularly those on compensation committees. Issuing options is an area over which they had specific authority. And since the decisions came in suits filed by shareholders of Tyson Foods and Maxim Integrated Products, they open the way to similar suits by owners of other companies.

Chancellor Chandler’s opinions go well beyond anything that the Securities and Exchange Commission has said. The S.E.C. has denounced backdating, the practice of saying an option was issued earlier than it was, when the share price was lower. It has forced companies to restate financial results and pay penalties.

But on spring loading, the only official comments from the commission have come from its chief accountant, who said there was no need to revise accounting, and from one commissioner, Paul S. Atkins, who suggested that the practice was just fine with him. “Isn’t the grant a product of the exercise of business judgment by the board?” he asked in a speech last year. “For example, a board may approve an options grant for senior management ahead of what is expected to be a positive quarterly earnings report. In approving the grant, the directors may determine that they can grant fewer options to get the same economic effect because they anticipate that the share price will rise. Who are we to second-guess that decision? Why isn’t that decision in the best interests of the shareholders?”

Chancellor Chandler, without mentioning Mr. Atkins, had an answer for him. It is possible that a decision to issue spring-loaded options “would be within the rational exercise of business judgment,” he wrote. But, he added, that could be true only if the decision were “made honestly and disclosed in good faith.” No such disclosures were made by spring-loading companies.

Chancellor Chandler’s opinion counts because Delaware is where most major companies are incorporated. He cleared the way for a suit against Tyson directors who approved options that appear to have been spring loaded, although that has not been proved. He also ruled that companies could not use the statute of limitations to avoid such suits. Even if the options were issued years ago, the fact that the directors hid the practice means that they can be sued now, when the facts have come out.

The tax issue stems from a law that took effect in 2005 regarding deferred compensation. It was not aimed at backdated options, but the I.R.S. says it applies to them if they were vested — that is, if the employee got the right to exercise them — after the end of 2004. Options can vest up to five years after they are issued, so some old option grants are partly covered.

If a taxpayer exercised such an option in 2006, the effective tax rate rises from 35 percent of the profits to 55 percent, and interest penalties could make the figure even higher. The I.R.S. gave companies until Feb. 28 to notify it if the company would pay the excess taxes for employees who exercised such options last year, and said the employees must be notified by March 15.

Directors of companies that issued backdated or spring-loaded options may now try to shift the blame. One can imagine directors contending they were deceived by executives or by corporate counsel, and that they, not the directors, should pay. Personal liability, in other words, can concentrate a director’s mind.

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