Randomly Noted

Next time career day comes around to local grade schools, don’t be surprised if some ambitious third grader raises his hand and announces he wants to grow up to be a whistleblower.

College courses and a new major are sure to follow. Maybe whistleblowing can be housed under criminal justice study, or, perhaps, sociology.

Who could blame the apocryphal youngster cited above, especially after recent news that a former employee of GlaxoSmithKline PLC picked up a cool $96 million for information that helped lead to a $750 million settlement between the comany and the Department of Justice.

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It’s not an economic story, except in the broadest sense that sports and entertainment are big parts of the U.S. economy.

Stilll, the potential lesson in the case of Roger Clemens, the former top-notch major legue baseball pitcher, resonates throughout the business and financial worlds.

That lesson is (assuming the perjury charges filed against Clemens hold up) that the questionable act is usually not what gets people in the biggest trouble, it’s the attempt to cover up that act.

 Clemens was indicted today, charged with making false statements to Congress when he declared under oath he never used performance-enhancing drugs.

“Prosecutors and the FBI have been gathering evidence in the steroids probe since Mr. Clemens testified before a House committee in 2008,” The Wall Street Journal reported. The Journal also reported Clemens’s lawyer wasn’t immediately available to comment.

It wasn’ t a legal matter like this, but allegations of a certain type of cover up are what reportedly prompted the Hewlett-Packard board just recently to push out Chief Executive Mark Hurd. There was the Martha Stewart case, and on and on.

But no one seems to get the message.

The fraught and mixed nature of Americans’ feelings towards big pay days seemed on display today as the so-called pay czar, Kenneth Feinberg, criticized 17 U.S. firms for pay practices at the height of the credit crisis.

Despite the critique of the bankers for handing out some individual payouts above $10 million while taking help from the government, Feinberg didn’t even reach for his biggest weapon, such as it is, a censure that the firms broke with the public interest.

All of which leaves one thinking, why undertake this particular exercise? Why the preceding hoopla?

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The issue of what’s material has popped up a second time in the Goldman Sachs & Co. imbroglio, this time in the form of a shareholder lawsuit.

What’s material for a buyer to know is at the heart of the Securities and Exchange Commission’s civil fraud charges against Goldman and one employee. The SEC says buyers of a synthetic collateralized debt obligation should have been told that choosing the underlying mortgages was partly the handiwork of the hedge fund Paulson & Co., which was betting against the buyers.

Goldman has vehemently denied that it has done anything wrong.

Now a more standard case of disclosure emanates from the SEC investigation and the eventual charges. A shareholder suit, which seeks class-action status, was filed today against Goldman.

It argues Goldman shareholders should have been told the securities firm recieved a so-called Wells notice from the SEC, indicating civil charges were quite possibly coming.

It’s easy to say in layman’s terms that, sure, Goldman shareholders would have liked to have been told this. The Wells notice essentially gives a firm one last chance to make a convincing case that civil charges should not be brought.

In legal terms it will no doubt be tougher. Among the relevant questions: how important in tangible terms is this whole episode to the prosperous investment bank’s overall financial status?

The SEC’s past statements on the sometimes elusive nature of materiality include this: something is material if  “there’s a substantial likelihood that a reasonable shareholder would consider it important” in making investment decisions.

The Wall Street Journal quotes Darren Robbins, an attorney with Robbins Geller Rudman & Dowd LLP, who is representing the shareholder who filed the suit, this way: the Wells notice was “something shareholders would want to know.”

The same Journal article said a Goldman spokesman didn’t immediately return a message seeking comment.

Goldman’s far from the only firm to have received a Wells notice and then had subsequent SEC charges brought against it.

The SEC has always wanted to avoid so-called bright line definitions of what’s material. But it seems pretty simple, again, in layman’s terms, for the watchdog agency to tell public companies that if and when they get a Wells notice they ought to disclose it.

It would save everyone a lot of grief and litigation.

Colleague Joe Checkler has updated us on the Landry’s saga – this is the company that runs some restaurant chains and a casino – Rainforest Cafe and Las Vegas’s Golden Nugget casino, among others. I blogged about this some months ago – noting that the Landry’s Chairman, CEO and majority owner, Tilman J. Fertitta, seems more interested in the financial acrobatics of acquiring the firm than running it. The latest is the Landry’s share price has risen about 40% above Fertitta’s latest buyout bid, indicating that the hot money (including Bill Ackman’s Pershing Square) expects him to go higher if he wants to get a deal done. As the U.S. economy recovers, people will return to restaurants in the Landry’s category – mid-price joints with novelty concepts – and for the sake of Landry’s long-term shareholders (if there are any left) one hopes Fertitta knows enough to keep an eye on the food, the service and the ambiance. The legal wrangling pitting big shareholders against Fertitta is surely a distraction as he defends his efforts against allegations that the CEO and his board have violated their fiduciary duties in supporting the boss’s takeover efforts. Given this very tangled web, Joe writes, with understatement, that getting into Landry’s shares now “could be risky.”

The U.S. Supreme Court decision Thursday that did away with long-standing restrictions on corporate spending on political advertising likely will usher in a host of governance issues for boards of directors and public company shareholders.

The questions for boards, management and concerned shareholders raised by the decision, which would allow corporation-funded advertising for or against specific candidates, are manifold.

The key one is whose decision will it be to make such direct contributions through ad spending:  management or the board of directors? This is a different type of decision than current company sponsored political fund-raising through political action committees, which presumably call for voluntary contributions from employees, shareholders and affiliates.

Here are a few other questions. Who within a corporation will decide how much company money goes to such direct for or against advertising in political campaigns? Who decides which candidates to support? Should such spending be limited to candidates and issues that are directly tied to a company’s lines of business? Or should companies spend money to support candidates broadly seen as more pro-business than others?

What will shareholders think about all this? Will they want money that might otherwise hit the corporate bottom line or get paid out in dividends go instead to campaign ads? Will shareholders want a ‘say on politics’ in the same way the ‘say on pay’ campaign argues for some shareholder input into top executive compensation?

Will we see the formation of more politically oriented investment or mutual funds? Some now won’t invest in gun or cigarette companies. How about a fund that won’t invest in companies that spend their money supporting Republican candidates and others that won’t invest in companies that support Democratic political candidates?  

It seems boards should have some say about the level and direction of political ad spending. It is a strategic as well as tactical decision and as such shouldn’t be left just to management.

It seems boards already had some additional politics coming their way in 2010 if the Securities and Exchange Commission goes ahead and passes proxy access to allow big shareholders to nominate some directors whose candidacies would be carried on company distributed voting materials. That could lead to some directors joining boards with specific social and political agendas.

But the Supreme Court decision potentially greatly increases boards’ exposure to politics and politically fraught decision making.

Rio Tinto employees Stern Hu, an Australian citizen, and three Chinese citizens, remain in jail – yet their case supposedly moved forward Monday. What we actually know is scant, and it’s not from Chinese authorities, who have been happy to remain silent since imprisoning the four last July. What little information reporters have comes from the Australian government, which has tried to keep an eye on Hu’s case, and it’s this: Chinese police handed the Rio Tinto employees’ cases to prosecutors. Colleagues James T. Areddy and Alex Wilson write: “While Chinese officials issued no announcement of Monday’s move, Australia’s government said it was informed that evidence supporting accusations of criminal behavior … had been handed to prosecutors by the Shanghai Public Security Bureau.” And so the murky case “proceeds” either to a quick trial or further delays – we don’t know, because China’s legal system lacks transparency. As my colleagues write, “The case has fueled a political storm in Australia and debates in corporate boardrooms whether it is a normal criminal matter, as Beijing has contended, or a sign of how China may use economic might to challenge multinationals.” Here’s my previous blog on the matter.

In evaluating investments in any country, a key consideration is always whether that particular nation has a strong rule of law.

Companies and professional investors want to make sure commercial contracts are protected by precedent and by an independent judiciary from the circumstances-driven meddling of government. No matter which way public and political opinion blows, investors want to know a legally entered contract is sacrosanct.

So it is quite ironic that a historic beacon of the rule of law, the United Kingdom, is about to consider allowing government to violate what should be the inviolable.

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Jed S. Rakoff is the federal district judge who earlier this summer took it upon himself to hold hearings probing the Securities and Exchange Commission’s settlement with Bank of America Corp. Under that pact, BofA agreed to pay a $33 million fine to avoid what might have been a more severe SEC sanction. The securities regulator’s claim alleged BofA late last year lied to shareholders in proxy documents on the subject of bonuses for Merrill Lynch employees; BofA was in the process of acquiring the troubled investment bank at the time. Rakoff could have rubber-stamped the consent decree but instead posed this salient question: The settlement might be pleasing to the bank’s leadership and the SEC, but is it good for shareholders and U.S. taxpayers, who subsidized BofA’s Merrill Lynch acquisition? When my children ask me – as they do periodically – to remind them what shares are, I reply that they’re the pieces of companies that ordinary people can own. Judge Rakoff seems intent to make sure I’m not fibbing when I say this. Today, he questioned why the SEC is fining the bank (eg affecting shareholder-owners) but not its executives – those who crafted allegedly misleading proxy documents. Here’s how he put it, according to the WSJ’s Jess Bravin: SEC policy requires seeking penalties “from culpable individual offenders acting for the corporation.” In this case, “Bank of America, through its management, effectively lied to its own shareholders.” Yet the SEC is fining the bank – not its executives – because, the agency argued in court, BofA officials acted on the advice of lawyers, and that guidance is confidential. Rakoff counters that this stance effectively means executives can dodge regulatory sanctions by citing legal counsel. The common-sense judge has asked the SEC and the bank to respond on Sept. 9. I recognize that Rakoff is known for his maverick ways, and I also realize there’s a certain Schadenfreude involved in figuratively watching a judge point a finger at the executives atop a big bank as the country hears the one-year anniversary of an economic crisis largely caused by a finance industry gone awry. None of this detracts from the refreshing simplicity of Rakoff’s approach, and his questions.