Corporations

From the Bench: Wells Fargo’s Contribution to Mortgage Settlement Does Not Bar Some Future Claims

By Mark Rutter, J.D. Candidate 2015 | Posted on

Wells Fargo’s bid to block the government’s most recent charges against it stemming from the mortgage crisis—primarily alleged violations of the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”)—took a blow earlier this month when a court ruled that its $5 billion contribution to the multi-bank, $25 billion settlement in April over foreclosure practices did not preclude the new charges.  Previous coverage of Wells Fargo’s attempt to preclude the litigation is here.  U.S. District Judge Rosemary Collyer ruled that the settlement did not bar all civil or administrative claims against Wells Fargo, including those under the False Claims Act, paving the way for prosecutors in the United States Attorney’s Office for the Southern District of New York to move forward with the suit.

Collyer’s decision left the bank’s lawyers, led by teams from Fried Frank and K&L Gates, vehemently protesting the court’s interpretation of contested language in the settlement.  According to Collyer, that language indicated the government retained the right to sue Wells Fargo for material violations of Housing and Urban Development/ Fair Housing Administration (“HUD-FHA”) requirements, only barring claims based on false annual certifications regarding the bank’s compliance with those requirements.  Collyer stated that the current charges do not fall under the precluded claims, finding Wells Fargo ignored the plain language of the settlement in coming to a mistaken interpretation.   As a result, the government can bring allegations under the False Claims Act in the current suit.

Collyer, however, did not address the pending case directly.  The court for the Southern District of New York will still have to make a final determination as to whether the prosecution has pled barred claims as the case moves forward.

The defense team has strongly attacked the government’s charges in its court filings, framing the current charges as part of a broader effort to avoid honoring FHA and HUD commitments to insure thousands of defaulting mortgages as it attempts to wrongly implicate the financial industry for the defaults.

The prosecution has not yet filed its response to Wells Fargo’s motion to dismiss the current suit.

Former Senior Executives Receive Lucrative Consulting Arrangements

By Bali Kumar, J.D. Candidate 2013 | Posted on

For some senior executives at major companies, retirement does not lead to the cessation of income.  Aside from pension and/or severance benefits, some retired executives are retained as consultants.  The Wall Street Journal illustrates the variety of purposes former executives can serve as consultants, including relationship management, closing deals, and facilitating new executive transitions.

For example, Phillip E. Powell of First Cash Financial Services, Inc. is former executive who received a lucrative consulting arrangement after retirement. According to First Cash Financial Services Inc.’s most recent proxy statement, Powell performs “such services as may be requested by the Board of Directors.”  This consulting arrangement began in 2005, and the term of this arrangement extends through the end of 2016.  For his services, Powell receives $700,000 per year for an unspecified number of hours of work.  If the company terminated his contract in 2011, he would have been paid out the remaining $3.5 million on his contract.

This is a highly rewarded consulting contract.  Based on 2011 salary alone, Powell earned one of the highest salaries of any First Cash Financial Services Inc. employee in that year.  In 2011, no employee other than the President and CEO earned a higher base salary than Powell.  In terms of 2011 total compensation, Powell would be within the top five most highly compensated employees, earning more than two Named Executive Officers: General Counsel Peter Watson and Vice President of Finance Jim Motley,.

The fact that Powell’s total package places him among the ranks of the most highly compensated employees of First Cash Financial Services Inc. is noteworthy, especially considering his salary is guaranteed—there is no performance-related element to his pay package.  This means that Powell is not held accountable for his performance in the same way that executive officers are.  This clearly demonstrates that the Board of Directors of First Cash Financial Services Inc. considers Powell’s consulting services to be extremely valuable.

Powell is one of many executives who benefit from consulting contracts after stepping down from their executive role.  According to Business Insider, “semi-retirement” can allow for either an effective transition from one executive to another or potentially be a new pool of funding for severance packages.  In either case, the pay packages are lucrative.

A New Method of Disclosing Executive Compensation

By Bali Kumar, J.D. Candidate 2013 | Posted on

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) has changed the landscape of executive compensation in the United States in favor of greater disclosure.  Dodd-Frank requires publicly traded companies to disclose “information that shows the relationship between executive compensation actually paid and the financial performance of the [company].”  15 U.S.C. § 78n(i).  Investors can discern what was actually paid to executives and the financial performance of the company in the proxy statement by looking to their company’s “Compensation Discussion and Analysis” and “Summary Compensation Table.”

The requirement for disclosure of pay and performance, coupled with the new ability for shareholders to have a “say on pay” has resulted in increased scrutiny from shareholders.  The new “say on pay” regime has allowed shareholders to have a non-binding vote on executive compensation.  Even though this vote is non-binding, Boards of Directors are paying attention to potential negative feedback from shareholders.

Because of “say on pay” voting, proxy advisory firms such as Glass Lewis and Institutional Shareholder Services have become more relevant.  These firms advise investors whether to vote yes or no on a company’s executive compensation provisions.  Because of this new scrutiny, companies are more likely to take actions to ensure they receive a recommended vote of “yes” from these proxy advisory firms.  If executive compensation payments appear excessive, the likelihood of a shareholders being advised to vote against executive compensation plans increases.

Therefore, many companies have begun to precede the Summary Compensation table in the proxy report with a “Realized Pay” or “Realized Compensation” table.  This additional disclosure reveals the compensation actually realized in the years shown by the named executives according to their W-2 forms.  The rationale often given for the additional disclosure is that the numbers in the Summary Compensation table do not show exact figures, but instead show figures for the “fair value” of shares/options awarded.  These fair values are based on accounting principles and models that estimate the potential worth of awards, instead of exact earned amounts.  For example, the most recent proxy statement for Hewlett-Packard Company states that in 2011, Catherine Lesjak, R. Todd Bradley, and Vyomesh Joshi realized $2.8 million, $3.0 million, and $2.7 million, respectively.  The Summary Compensation table states their 2011 compensation as $11.0 million, $10.7 million, and $9.8 million.  These numbers are strikingly different.  The realized pay table and the summary compensation table present different data; they are not perfect substitutes for one another.  The Realized Pay table shows the money the executive took home in a given year.  The Summary Compensation Table shows the salary, bonus, and the equity awards the company granted in a given year (not the equity awards that vested or were cashed-in in a given year).

We are still waiting for guidance from the Securities Exchange Commission on the definition of executive compensation “actually paid.”  In the meantime, it is reasonable to expect companies to continue to move in the direction of disclosing realized pay.

Netflix, Good Governance and Poison Pills

By Amanda Berloni, LL.M. Candidate 2013 | Posted on

In response to Carl Icahn’s recent trading activities, the board of directors of Netflix, Inc. has approved a shareholder rights plan (the “Plan”), commonly referred to as a “poison pill.”  The Plan allows Netflix shareholders to buy newly issued shares at a discount, diluting the Company’s shares and making a potential takeover more expensive and less attractive for potential buyers.

The Board approved the Plan in response to a takeover threat by Carl Icahn, an activist shareholder who currently owns 9.98% of the Common Shares.  Icahn is not attempting to purchase the Company outright; rather, it appears he is attempting to attract other buyers who would buy Netflix at a premium.  Instituting a shareholder rights plan is a common defensive tactic taken by boards of directors to thwart corporate takeovers.

Pursuant to the terms of the Plan, the Company has declared a dividend distribution of one right (each a “Right”) for each issued and outstanding common share of the Company.  Each Right entitles the holder thereof to purchase one one-thousandth of a series A preferred share.  The Plan is “flip-in,” whereby Netflix shareholders can exercise the Rights following the public announcement that a shareholder has acquired beneficial ownership of 10% or more of the Company’s common shares.

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News from the Bench: Kertesz v. GVC (2nd Circuit)

By Will Schildknecht, J.D. Candidate 2015 | Posted on

On October 17, 2012 the Second Circuit Court of Appeals ruled that Emory Kertesz, who had previously defended himself against a lawsuit brought by General Video Corporation (“GVC”) can pursue both an indemnification claim against GVC and an alter-ego corporate veil-piercing claim against the only other shareholder of the now defunct company. (more…)

Second Circuit Set to Reign in Rakoff

By Peter Benesch, J.D. Class of 2013 | Posted on

On March 15, the Second Circuit stayed proceedings in the now notorious case of SEC v. Citigroup. The case hit headlines last November when District Court Judge Rakoff refused to accept a $280 million settlement agreement between the SEC and Citigroup. Judge Rakoff’s decision was outlined in great detail in a previous post on the Network.

By granting a stay in the proceedings, the Second Circuit is allowing the SEC and Citigroup to avoid having to proceed with the trial litigation while appealing Judge Rakoff’s decision. The appeal is scheduled to be heard in September, though the dicta in the March 15 decision appears to support the position that the Second Circuit is prepared to overturn Judge Rakoff’s decision.

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Facebook IPO: An Investment In Facebook Is An Investment In Zuckerberg

By By Juan O. Perla, J.D. Class of 2012 | Posted on

For the all the hype about Facebook’s initial public offering (IPO), analysts are raising important questions that the social network will need to answer to court investors successfully.

On February 2, Facebook filed its Form S-1 with the Securities Exchange Commission (SEC) seeking to raise $5 billion from the sales of Class A common stock. Analysts quickly reported their expectations that the behemoth start-up could be valued somewhere between $75 and $100 billion and that it could likely raise up to $10 billion, setting it up to become one of the largest IPOs in American history.

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The Second Circuit Casts Doubt on 5% Materiality Guideline

By By Charles Rogerson, J.D. Class of 2013 | Posted on

In Litwin v. Blackstone Group, L.P. (2011) the U.S. Court of Appeals for the Second Circuit concluded that the District Court erred in dismissing Plaintiffs’ complaint because Plaintiffs plausibly alleged that omitted or misstated trends from Defendants’ initial public offering registration statement and prospectus were material under Item 303(a)(3)(ii). In so holding, the Second Circuit stressed the importance of both a quantitative and qualitative analysis of materiality, stating that “[e]ven where a misstatement or omission may be quantitatively small compared to a registrant’s firm-wide financial results, its significance to a particularly important segment of a registrant’s business tends to show its materiality.” The decision casts doubt on the widely held belief amongst practitioners that a misstatement or omission that affects less than 5% of a firm’s assets is immaterial.

The case concerned the 2007 initial public offering of Defendant Blackstone Group, L.P., an alternative asset management and financial services company holding approximately $88.4 billion in assets in 2007. Plaintiff alleged misstatements and omissions with regard to its holdings in FGIC Corp., Freescale Semiconductor, Inc, and general residential real estate holdings.

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On the Passing of 14(a)-11 and Shareholder Nominations in BOD Elections

By Peter Benesch, J.D. Class of 2013 | Posted on

On July 22, 2011 the D.C. Circuit struck down an SEC regulation (Rule 14(a)-11) that would have required publicly traded companies to allow qualified shareholders to propose nominations in Board of Directors (BOD) elections. The court held that the SEC failed to perform a required cost/benefit analysis of the new provision, as mandated under Section 3(f) of the Exchange Act and Section 2(c) of the Investment Company Act of 1940. Consequently, Rule 14(a)-11 was declared invalid and unenforceable.

Before the SEC proposed the final version of 14(a)-11, Delaware preemptively proposed and implemented its own law regarding shareholder nominations for BOD elections: DGCL 112. A critical difference between the Delaware law and the SEC proposal is that DGCL 112 does not require that Delaware corporations allow qualified shareholders to nominate candidates in BOD elections, but rather provides that qualified shareholders can be given the authority to nominate candidates if such a provision is adopted in the company’s bylaws. Additionally, Section 112 does not make shareholder nominations of BOD members the default rule, as the procedure must be proactively adopted in the bylaws. Rule 14(a)-11 would have made it mandatory for all publicly traded companies to allow qualified shareholders to nominate candidates in BOD elections (and would have superseded DGCL 112, but for being struck down).

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Op-Ed: Why Corporations Should Think Twice About Plans To Lower Taxes

By By Evan Roberts, J.D. Class of 2012 | Posted on

At first blush, advocating for lower corporate taxes like Republican candidates Herman Cain and Rick Perry looks like the kind of policy that corporations would salivate over. As conservative pundits like to point out, the United States already has the second-highest statutory corporate tax rate of all developed countries and that it stands alone in its attempt to impose taxes on the global income of its own corporations. The complexities of our tax code also encourage American multinational companies to shift more of their business abroad. And as businesses move away, American jobs move with them. Lowering corporate taxes would keep those jobs here at home and invigorate our economy. Everyone would win, right?

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