Topics In This Issue

• SEC Proposes Revisions to Disclosure Rules Regarding Executive Compensation and Corporate Governance
• SEC Votes to Approve a New York Stock Exchange Proposed Rule Concerning Discretionary Proxy Voting by Broker-Dealers
• SEC Files Complaint Against Individuals Accused of Orchestrating $485 Million Fraud and Ponzi Scheme
• Six Individuals Accused of Defrauding Investors of $140 Million through "Boiler Room Tactics"
• Hedge Fund Standards Board Proposes New Oversight and Disclosure Standards

SEC Proposes Revisions to Disclosure Rules Regarding Executive Compensation and Corporate Governance
On July 1, 2009, the SEC released two proposals regarding companies’ disclosures about compensation and corporate governance. The first comprises a set of rule revisions intended to increase the disclosures provided to shareholders of public companies regarding compensation and corporate governance matters in proxy and information statements. The proposal includes additional disclosures about the following topics:

• The relationship of a company’s overall compensation policies to various risks and the company’s risk-management policies;
• The professional and other qualifications of directors, executive officers and director nominees;
• The company leadership structure; and
• Potential conflicts of interests of compensation consultants hired by the company.

The proposed rule revisions also would require heightened reporting of annual stock and option awards to company executives and directors as well as more timely reporting of director election results. The SEC also proposed amendments to the proxy rules that are intended to clarify how those rules operate regarding proxy statements and in the larger universe of public disclosure. Responding to concerns that proxy statements already are too long and complex, SEC staff members said the benefits of increased transparency outweigh the costs of slightly longer filings.

The second proposal relates exclusively to the disclosure and shareholder approval of executive compensation for public companies receiving government assistance under the Troubled Asset Relief Program (“TARP”) administered by the U.S. Department of the Treasury under the authority of the Emergency Economic Stabilization Act of 2008 (the “Act”). The Act requires shareholder approval of executive compensation during the period in which a company has any outstanding obligations arising from financial assistance provided under TARP, which have been referred to as the “say-on-pay” requirement. Congress mandated these “say-on-pay” rules for participants in TARP after large bonuses at companies that had received taxpayer money provoked public outrage. The SEC is seeking public comment on proposed changes to SEC rules that would provide for the shareholder votes on executive compensation required by the Act. Among other things, the proposed rules would require the following:

• Public companies receiving TARP assistance would be required to provide a separate shareholder vote regarding executive compensation in proxy solicitations during the period in which the company has any outstanding obligations arising from financial assistance provided under TARP.
• This separate shareholder vote would be required only on a proxy solicited for an annual meeting (or a special meeting held in lieu of an annual meeting) of shareholders for which proxies will be solicited for the election of directors.
• Companies would be required to disclose in their proxy statements that they are providing a separate shareholder vote on executive compensation and to explain the general effect of the vote, including whether the vote is non-binding.
• Clarify that smaller reporting companies would not be required to include a compensation discussion and analysis section in their proxy statements.

Some banks, including Bank of America, already have allowed shareholder votes on their compensation policies at recent annual meetings. However, many in the financial industry oppose the rules, arguing they infringe on the rights of directors to set executive compensation levels and will lead to lower compensation, and thus less-qualified executives, at these already troubled companies. The SEC will take comments from all interested parties for a period of 60 days following the publication of the proposed rules in the Federal Register. For more information, click here for the SEC’s press release and related Proposed Rule Release No. 34-60218. top

SEC Votes to Approve a New York Stock Exchange Proposed Rule Concerning Discretionary Proxy Voting by Broker-Dealers

On July 1, 2009, the SEC voted to approve a proposal by the New York Stock Exchange (“NYSE”) made in February 2009 that would eliminate broker discretionary voting for all elections of directors, whether contested or not. In its current form, NYSE Rule 452 and corresponding Listed Company Manual Section 401.08 permit brokers to vote on behalf of the beneficial owners of securities in “routine” matters if their customers have not returned voting instructions to the brokers, which include uncontested elections of directors. Although the NYSE filed this proposed rule change with the SEC several years ago, the SEC did not publish it for public comment until March 6, 2009. The SEC received 153 comment letters from issuers, transfer agents, institutional investors, proxy advisory firms and others regarding the rule.

The NYSE proposal is intended to enhance corporate governance and accountability by helping to ensure that only those investors with an economic interest in the company vote on the election of directors. It also would address concerns that broker discretionary voting for directors has unfairly impacted election results. Specifically, the NYSE proposal would add “election of directors” to the list of enumerated items for which a member generally may not give a proxy to vote without instructions from the beneficial owner. However, the proposal contains a specific exception for companies registered under the Investment Company Act of 1940. In addition, the NYSE proposal seeks to codify two interpretations, which were previously published by the NYSE and prohibit broker discretionary voting for material amendments to investment advisory contracts with an investment company.

The NYSE’s proposal will apply to shareholder meetings held on or after January 1, 2010. To view the SEC’s approval order is published in the Federal Register and posted on the SEC Web site click here. top

SEC Files Complaint Against Individuals Accused of Orchestrating $485 Million Fraud and Ponzi Scheme

On July 2, 2009, the U.S. Securities and Exchange Commission (“SEC”) obtained a temporary restraining order and emergency asset freeze in a $485 million offering fraud and Ponzi scheme that the SEC alleges was run by three Dallas businessmen, primarily through Provident Royalties LLC (“Provident”), a company they purportedly controlled.

In a complaint filed in U.S. District Court in the Northern District of Texas, the SEC alleges that from approximately September 2006 to January 2009, Provident solicited investments and sold preferred stock through a series of fraudulent private placement offerings made through 21 entities affiliated with Provident. More specifically, the SEC alleges that Provident falsely represented that 86 percent of its investors’ funds would be placed in oil and gas investments, when in fact, less than 50 percent of investor funds were used for those purposes. In addition, the SEC alleges that investors were not told that their investments would be commingled with funds derived from other private placement offerings and that the proceeds from later private placements offerings would be used to pay promised returns to earlier investors.

The SEC’s complaint includes charges against three individuals who it alleges ran and owned Provident, its affiliated broker-dealer Provident Asset Management LLC and the 21 affiliated entities that sold the securities to the nearly 8,000 investors.

In addition to granting the asset freeze, the Northern District Court has appointed a receiver to preserve assets for the defrauded investors. top

Six Individuals Accused of Defrauding Investors of $140 Million through “Boiler Room Tactics”

The SEC and the U.S. Attorney for the Southern District of New York have filed charges against Ross Mandell, the founder and former CEO of Sky Capital LLC (“Sky Capital”) and five others for allegedly orchestrating a scheme to defraud investors of over $140 million. The SEC’s complaint charges the six individual defendants and Sky Capital with numerous violations of the Securities Act, while the U.S. Attorney’s indictment charges the defendants with securities fraud and conspiracy to commit securities, wire and mail fraud.

Both the SEC and the U.S. Attorney allege that Mandell and others used “boiler room techniques,” or a combination of high pressure sales tactics, misinformation and misrepresentations, to convince their customers to purchase private placements in Sky Capital Holdings Ltd. and Sky Capital Enterprises (collectively “Sky Entities”). They further allege that Mandell and others manipulated the market through, among other tactics, pressuring investors into holding onto their stock and directing Sky Capital brokers not to submit sell order tickets for the Sky Entity stocks unless they had lined up investors to purchase an equivalent amount of shares.

According to the SEC and U.S. Attorney’s Office, while investor funds were used to pay large, unreported “broker incentive commissions” and to enrich the six named defendants, investors were left holding stocks that had no value.

Should the defendants be convicted on security fraud charges, they face a maximum sentence of 20 years imprisonment and up to a $5 million fine. In addition, they face a maximum sentence of five years and a maximum fine of $250,000 on the conspiracy charges. top

Hedge Fund Standards Board Proposes New Oversight and Disclosure Standards
On July 1, 2009, the London-based Hedge Fund Standards Board (the “HFSB”), one of Europe’s most powerful hedge fund industry groups, proposed new standards for its membership designed to establish more independent fund oversight and increased disclosure rules. The proposals come as the European Union is also considering stricter measures to control hedge funds. The new HSFB standards are designed to prevent Madoff-like Ponzi schemes and other kinds of fraud.

Among the proposed changes are requirements that funds appoint third-party custodians who would be responsible for the safekeeping and custody of a hedge fund’s property. Such a rule would, according to the HFSB, ensure that each fund had an independent party to examine a fund’s book and records to help detect and prevent fraud. Antonio Borges, the HFSB’s chairman, commented on the proposed rules, “These new standards would help to safeguard investors’ assets and also lead to improvements in the redemption regime for hedge funds.” The HFSB also proposed tighter rules on disclosing redemption restrictions on investors’ cash, including informing investors of any fees or penalties imposed on withdrawals as well as the circumstances under which redemptions would be restricted.

Member of the HFSB have until August 21, 2009, to comment on the proposed changes. The HFSB’s rules are mandatory for its 56 members, which include about two-thirds of the European hedge fund industry. top

Contributors to this issue are Carter Dugan, Robin Preussel and Darryl Anderson.