Federally supported financial firms have begun filing their preliminary proxy materials that include an advisory vote on executive pay, as required by the U.S. economic stimulus legislation.

It appears that many financial companies, especially those with April meeting dates, had to work quickly to revise their proxy materials to comply with this new mandate. The "say on pay" requirement was added to the American Recovery and Reinvestment Act of 2009 late in the legislative process, and many investors and corporate advisers originally assumed the first votes would be in 2010, after the Securities and Exchange Commission prepared a rule on the topic. However, the SEC, after prodding from U.S. Sen. Christopher Dodd of Connecticut, confirmed Feb. 26 that Troubled Asset Relief Program (TARP) participants must hold pay votes in 2009 if they file their final proxy statements after Feb. 17. Governance observers expect that at least 280 firms will hold advisory votes this year, up from the six issuers that voluntarily did so in 2008.

So far, the SEC has not issued specific guidance on the language that TARP firms should include in their management proposals. In recognition of the tight deadlines faced by issuers with April meetings, the agency said companies may ask the SEC to expedite the 10-day review period (normally required after a preliminary proxy filing) before definitive proxy materials may be filed, so annual meetings won't have to be postponed.

Based on early proxy filings, it appears that most TARP companies are preparing agenda items that refer to the stimulus bill and closely track the legislation's requirements. In most cases, the firms are asking investors to approve the compensation paid to the named executive officers, as described in the "Compensation Discussion and Analysis" (CD&A) section of the proxy statement and the accompanying tabular disclosures.

Given the time constraints, most of the early filers have not included a detailed justification for their compensation practices. Many of the agenda items are rather brief; examples include United Bancorp (203 words), M&T Bank (223 words), and Citizens & Northern (285 words). In its agenda item, Olympia, Wash.-based Heritage Financial provides a general defense of its pay policies: "We believe that our compensation policies and procedures are reasonable in comparison both to our Peer Group and to our relatively strong performance of the Company during 2008. We also believe that our compensation program is effective and appropriate."

Bank of America is one of the few firms so far to highlight specific compensation practices. In its 474-word ballot item, the Charlotte-based bank points to its bonus recoupment policy, its "stringent" stock ownership restrictions, and the fact that no executive officers received any year-end cash or equity bonuses.

Marshall & Ilsley discusses in its 760-word agenda item how it seeks "to establish a direct correlation between the annual incentives awarded to [top executives] and the financial performance of the company. The Wisconsin-based firm explains that it made no incentive payments in 2008 to the named executive officers and that their total annual cash compensation decreased by 26 percent from 2007.

Mark Borges, a compensation consultant with Compensia who has reviewed several dozen early filings, noted that 26 firms closely followed the provisions in the stimulus bill, while 10 phrased their agenda items more broadly and included language like that used by Aflac, which held the first U.S. advisory vote in May 2008. During a March 4 panel hosted by TheCorporateCounsel.net, Borges said he expects to see more "sophisticated" proposals in the future that point to certain parts of the CD&A. Some of those agenda items may resemble the management proposals from Verizon Communications, Motorola, and other non-TARP firms that are voluntarily holding their first advisory votes this season, he said.

So far, all of the early filers note that the compensation vote is non-binding. Most proxy statements (21) say the compensation committee will consider the results of the shareholder vote, nine say the committee may do so, and five are silent on that issue, Borges said.

Some preliminary proxy statements at TARP firms include both a management proposal and a shareholder resolution on the issue. On Feb. 27, Bank of America asked the SEC for permission to exclude a shareholder proposal from retail investor Kenneth Steiner, although the bank had missed the regular deadline for filing no-action requests. Tim Smith of Walden Asset Management, a leading pay-vote advocate, said the company should have asked Steiner to withdraw his proposal before wasting shareholder money to submit a no-action request. Most pay-vote proponents are withdrawing their proposals at TARP firms to avoid any confusion. So far, investors have negotiated withdrawal agreements with nine of the 14 TARP where advisory vote resolutions were filed, Smith said.

Back in March of 2005, the prior author of this blog put the "over/under on the filing date of the first securities class action to include allegations from a corporate executive's blog" at December 31, 2005.

Unless a hyper-alert reader can point to a complaint that I missed, I believe that this particular event has not yet come to pass.

But, let's add a new one to the mix to keep our eyes open for - the first securities class action to include allegations from a corporate sustainability report.

As frequently noted by Kevin LaCroix over at The D&O Diary, the dull roar that we hear in the background is people talking about climate change (née, global warming) and litigation risk.

Given the proliferation of corporate sustainability reports (examples include - Baxter International, Ford Motor Company, Procter & Gamble, and UPS), I'll put the over/under at June 30, 2008 for the first securities class action to include allegations from a corporate sustainability report.

So ever-vigilant readers, go forth and an find a securities class action to include allegations from a corporate executive's blog or from a corporate sustainability report. First correct answer wins a prize.

Posting will screech to a halt for the rest of this week as SLW heads across the pond for the 2006 ISS Corporate Governance Conference in London. Stuart Grant of the US law firm Grant & Eisenhofer and Hilton Mervis of the pan-European law firm SJ Berwin will join me for a panel on the role of European institutions in US securities class action litigation.

Let me leave you by emptying my "To Blog" folder with these quick hits:

1. How's That Safety Net?

The first checks to defrauded WorldCom investors should be going out shortly in the SEC's $750 million settlement with the company. The first wave of checks will total approximately $150 million, and will provide claimants with a recovery of 2% of their Eligible Loss Amount. Another wave of cash will go out later, and will apparently provide investors with an additional 3% of their Eligible Loss Amount.

The SEC says in its press release that this "shows that even when things go terribly wrong, there is a safety net for injured investors." By my math, this "safety net" would return $5,000 to an investor who had an Eligible Loss of $100,000 in this case.

2. Statute of Limitations Expires in AOL Case

Did you read the Alec Klein's "Stealing Time: Steve Case, Jerry Levin, and the Collapse of AOL Time Warner" yet, which I recommended way back when? If you did you'll be surprised to learn that, according to this article in the Washington Post, the 5 year statute of limitations in the case has now passed, and prosecutors were unable to make a case against any AOL execs other than two mid-level persons.

The article states that

Despite a lengthy investigation by the U.S. attorney's office for the Eastern District of Virginia, lawyers involved in the case now say the government will not be able to bring criminal charges against top AOL executives over transactions in which the Dulles Internet service provider and its business partners allegedly sought to artificially boost each other's revenue numbers as the dot-com bubble was bursting in 2000 and 2001.

3. Not Appearing in the SEC Litigation Releases

A Minnesota federal court let the SEC have it last week, ruling that the SEC must actually review documents requested to be released under FOIA before asserting that it cannot release the documents without harming ongoing law enforcement efforts. As discussed in this Dow Jones article, the Court wrote that it

adamantly disapproves of the manner in which the SEC has conducted itself as it relates to Gavin's requests. The SEC has shirked its responsibility by brazenly refusing to conduct a document-by-document review-despite a direct order from the Court.

The SEC told the Court that a review of the requested documents would have cost over $2 million. The Court ruled that the group requesting the documents would be required to pay any such costs.

SLW will resume blogging in earnest following Labor Day.  Apologies for the extended break!

SLW lives! I just forgot to post that we were headed out on (yet another) vacation last week.  Lots going on in the securities litigation world while we were gone, so look for some catch-up posts today and this week.

First it got its own worldwide society and then a World Championship tournament.  Now the game/sport/strategy tool of  "Rock, Paper, Scissors" has gone to the next level.  Yes, RPS has now received the judicial imprimatur of a federal court in Florida as a "new form of dispute resolution."

According to this order signed yesterday by the Hon. Gregory A. Presnell resolving a motion filed in a squabble between the parties over the location for a deposition,

Upon consideration of the Motion – the latest in a series of Gordian knots that the parties have been unable to untangle without enlisting the assistance of the federal courts – it is

ORDERED that said Motion is DENIED. Instead, the Court will fashion a new form of alternative dispute resolution, to wit: at 4:00 P.M. on Friday, June 30, 2006, counsel shall convene at a neutral site agreeable to both parties. If counsel cannot agree on a neutral site, they shall meet on the front steps of the Sam M. Gibbons U.S. Courthouse, 801 North Florida Ave., Tampa, Florida 33602. Each lawyer shall be entitled to be accompanied by one paralegal who shall act as an attendant and witness. At that time and location, counsel shall engage in one (1) game of "rock, paper, scissors." The winner of this engagement shall be entitled to select the location for the 30(b)(6) deposition to be held somewhere in Hillsborough County during the period July 11-12, 2006....

(Which I suppose will ultimately lead to this attorney time sheet entry: "2.0 hours--Prepare for and engage in ADR proceedings at federal court").

SLW is going into "Operation Shutdown" until 2006.  I thank all of you for reading and contributing to SLW, and I wish you a prosperous New Year.

By the way, until reading the link above I had completely lost sight of the fact that the original Operation Shutdown by Derek Bell (the now immortal "ultimate Pirate") is now in its 45th month!

Investment News has this article offering analysis of the ILR study previously discussed at length here and elsewhere on SLW.  The article includes the following quotes from me:

Some involved in tracking securities litigation question the study's results. "It's a strange way to look at it," commented Bruce Carton, vice president of Securities Class Action Services, a service offered by Institutional Shareholder Services Inc. in Rockville, Md., that tracks securities litigation and files claims for about 100 institutions.

He cites as an example losses of billions of dollars by the New York State Common Retirement Fund in Albany as a result of fraud perpetrated by WorldCom Inc., now MCI Inc. of Ashburn, Va. "They lost that money," Mr. Carton said. "They bought WorldCom securities and took a huge hit. The premise of the study appears to be that somewhere else they were the beneficiaries of holding inflated stock that that they sold at a good time. Who's to say that that's true or not? In any individual case, you're never going to know."

Further, Mr. Carton argued, large institutional investors invest money for individuals. "A pension fund or a mutual fund ultimately is making money to distribute to you and I."

I'm still waiting for some explanation why the second point above--that institutions  such as pension funds and mutual funds are aggregations of individual investor interests--does not undercut the study's conclusion that individual investors get the "short end of the stick" because, unlike institutions, they are unlikely to be sufficiently diversified  to get enough of the "'winning' transactions (i.e., from selling a security at what is alleged to be an artificially inflated price)" to offset their losses from "losing" transactions caused by securities fraud. 

The article also notes that the ILR's goal is to advance legislation dealing with securities litigation, and is looking at areas such as "how damages are calculated in securities class actions; stopping discovery proceedings while defendants' motions to dismiss cases are pending; requiring lead plaintiff's attorneys to bid competitively to be named lead counsel in class actions; as well as ways to better distribute funds to individual investors." 

I think all of these areas are worthy of some real scrutiny (although discovery already is supposed to be stayed under the PSLRA while a motion to dismiss is pending).  I just don't find the ILR study (as I understand it) to be a real red flag indicating that securities litigation reform is necessary.  To me, it seems like another reminder to investors of the importance of diversification.

As the website says, these "make the perfect holiday gift"... perhaps for that lawyer you've been trying to push over the edge into insanity.

Thanks to Jim Calloway's Law Practice Tips Blog for the link.

Night Shift (1982)

Bill Blazejowski:  "Wait a minute! Why don't they just mix the mayonnaise with the tuna in the can... HOLD THE PHONE! Why don't they just FEED the tuna fish mayonnaise! Call Starkist!"

I'm going to retroactively declare that the Perp Mask was Brilliant Idea #1, and make the idea I'm about to unveil be Brilliant Idea #2.  This will be part of an ongoing series of Brilliant Ideas that will be published as they occur to me (in other words, really infrequently).

After reading this NYT article about the criminal insider trading prosecution now under way against a Massachusetts husband and wife who face up to 10 years in prison on charges that they traded on inside information that Citizens Financial Group would buy Charter One Financial, I had a moment of clarity:  Marital Prisons.

Under my plan, this young couple ( "Shengnan Wang, 29, a former Citizens Bank employee, and her husband, Hai Liu, 31") would not be sent off to random separate prisons if convicted but rather to "marital prison."  This would be a special prison dedicated to simultaneous husband and wife offenders, and they would, of course, share a cell.  I see many efficiencies here:

• save on cell space
• easier for relatives to visit both inmates
• could serve as a significant deterrent to husbands or wives who don't get along well but who are thinking of committing a crime together
• eliminates need for conjugal visits

I'm sure there are many other reasons that this qualifies as a Brilliant Idea--please share them with me if any occur to you.