SEC May Dump Indemnity Policy

Watch your wallets. The Securities and Exchange Commission is weighing adding stronger terms to settlement agreements it strikes with companies, according to a Wall Street Journal article, citing SEC officials.

Reportedly, the SEC is debating whether defendants should have to admit guilt as part of an agreement. It is also considering forcing defendants to pay all financial penalties out of pocket instead of being able to use insurance to cover some fines. The paper notes that commissioners and staff want to ensure that settlements serve as a deterrent against future violations.

SEC Chairman William Donaldson, The Journal reports, called indemnification, which protects officers and directors against disgorgement and fines, “bad pubic policy.” According to people cited to be familiar with the situation, he and other commissioners are concerned that, under such a policy, wrongdoers escape financial penalties while passing the costs on to shareholders.

Reportedly, four of the 10 Wall Street securities firms that recently agreed to pay $1.4 billion to settle conflict-of-interest charges are planning to pursue insurance claims for a portion of the settlement. Likewise, Xerox Corp. said it would utilize its D&O insurance to cover $19 million of the $22 million that six of the company’s must pay to settle recent charges.

Since the Wall Street case, the SEC has included language in its settlements that prevent defendants from using insurance or indemnification for any civil fines. But the agency is now considering expanding that ban to include disgorgement, which orders defendants to give back ill-gotten gains such as salary or stock.

Commissioner Harvey Goldschmid also apparently raised the possibility of having defendants admit guilt — an admission not binding on private lawsuits — because he believes not admitting guilt may give the impression a defendant didn’t engage in wrongdoing. Most SEC settlements today don’t require a defendant to admit or deny charges so the indemnification policies usually kick in.

The Journal‘s unnamed sources also say harsher sanctions may result in more litigation and fewer agreements because defendants may balk at the stricter terms.

As CFO reported last month, a bill is being floated in Congress aimed at strengthening the SEC’s enforcement powers and increasing its ability to reimburse defrauded investors.

In other SEC news:

Using non-GAAP financial measures does not have to be as nebulous or daunting a prospect as before.

The Securities and Exchange Commission’s corporate finance division on Monday issued responses to 33 frequently asked questions on how public companies should account for non-GAAP measures, as directed under the SEC’s Reg-G, a new regulation developed after the Sarbanes-Oxley Act of 2002.

Regulation G, adopted on January 22, requires public companies that disclose or release such non-GAAP financial measures to include, in that disclosure or release, a presentation of the most directly comparable GAAP financial measure and a reconciliation of the two. The effective date was March 28.

The questions relate to implementation and interpretation of rules the SEC adopted in an earlier release. The answers, however, are not rules, regulations or statements of the SEC.

The following topics are addressed:

To read the full staff responses to the FAQ, click here.

Former Rite Aid CEO Next to Plea?

Former Rite Aid Chief Executive Martin Grass is scheduled to plead guilty on Tuesday, according to Reuters, citing a federal court official.

The plea hearing is set to take place on Tuesday morning in Harrisburg, Pennsylvania, before U.S. District Judge Sylvia Rambo, the newswire reports. U.S. Attorney Thomas Marino reportedly stated that a change of plea proceeding would take place before Rambo at 9:30 a.m.

Grass and Rite-Aid’s former vice chairman and chief counsel, Franklin Brown, are both charged with fraud, obstruction of justice and other criminal counts relating to a $1.6 billion overstatement of Rite Aid’s profits in the late 1990s. The two were due to go on trial June 23.

Former Rite Aid CFO Frank Bergonzi pleaded guilty to a charge of fraud conspiracy on June 5 and agreed to cooperate with the government’s probe into the company’s financial scandal.

PeopleSoft Ups Bid for Rival

On Monday, PeopleSoft Inc. sweetened its offer to buy J.D. Edwards — this time upping its previously all-stock offer to a half-cash, half-stock offer. The move, the company says, is being used in part as a deterrent to the hostile, all-cash bid for PeopleSoft launched by Oracle Corp.

The PeopleSoft acquisition of rival ERP player J.D. Edwards would be valued at approximately $1.75 billion, with $863 million in cash and 52.6 million newly issued PeopleSoft shares, according to the company’s statement. Each J.D. Edwards stockholder will have the right to elect either cash or PeopleSoft common stock, subject to proration. Such amendments to its original all-stock offer on June 2 (0.86 PeopleSoft shares for each J.D. Edwards share, or $1.78 billion), are aimed at making the deal more attractive to investors.

PeopleSoft management also said it expected to close the J.D. Edwards deal in the third quarter, after saying previously that the transaction would be completed by the fourth quarter, putting pressure on Oracle’s hostile bid. PeopleSoft’s board has already rejected Oracle’s all-cash bid of $16 per share, or $5.1 billion.

“This move does not deter Oracle and our offer remains before shareholders,” Jim Finn, Oracle’s spokesman said in a statement.

Competitive Technologies Gets Wells

The SEC intends to recommend civil action against a chief financial officer and director at Competitive Technologies, the company said, in connection with the agency’s previously announced investigation. Reportedly, the SEC sent “Wells Notices” to the company, its CFO Frank R. McPike, Jr., and Samuel M. Fodale, a director of the company. A Wells Notice allows companies and individuals to rebut SEC claims before the regulatory agency decides to lodge a suit against them.

Apparently, Competitive’s notice and those of its executives relate to a matter of trading in the stock of the company. Competitive Technologies management said in a statement that it believes the issue relates to the company’s repurchase program under which it intermittently repurchased shares of its stock during the period of October 28, 1998 to March 22, 2001. The company’s management also asserted that it will continue to cooperate with the commission staff in this matter.

In a separate story, The Wall Street Journal reported on Friday that the SEC may recommend civil action against two former executives of Lucent Technologies Inc. for their alleged roles in aggressive sales practices at the company in 2000.

SEC staff recently delivered Wells notices to Nina Aversano, the company’s former head of North American sales, and William Plunkett, a former senior vice president of sales at Lucent, people familiar with the matter told the paper.

In February, the agency closed a two-year investigation into Lucent’s sales recognition practices without assessing any fines or penalties. The company agreed, The Journal notes, not to violate fraud, financial reporting and internal-controls statutes in the future.

Lucent spokeswoman Kathleen Fitzgerald said she wouldn’t comment on individuals receiving Wells notices. She added, however, that no current or former chairman, chief executive or chief financial officer of the company has received a notice. An SEC spokesman also declined to comment.

Applix Revenue Accounting in Question

Applix, Inc., a maker of business intelligence software, announced that it is the subject of an SEC investigation.

The company believes the inquiry relates to its recent restatements for 2001 and 2002 to properly account for revenue under two separate customer agreements, as well as another for the same years to correct the accounting for contingent expenses associated with an acquisition. Applix management says it is cooperating fully with the SEC in this matter and is hopeful of bringing the investigation to an expeditious resolution.

Short Takes

David J. Anderson has signed on at Honeywell as the company’s new CFO. Anderson, whose position becomes effective on June 23, joins the diversified technology company from ITT Industries, where he also served as finance chief since December 1999. Previously, he was CFO of Newport News Shipbuilding. He succeeds Richard Wallman, who according to Honeywell’s CEO Dave Cote, has a “desire to spend more time with his family.”