Risk & Governance Weekly

SEC Spotlight

Bush Names Prof. Troy Paredes to Replace Atkins

President George W. Bush plans to nominate Washington University Law Professor Troy A. Paredes to replace outgoing Commissioner Paul Atkins, the White House announced May 6.   

Paredes is a co-author of a securities law treatise and has written on various topics, “including the importance of a balanced approach to securities regulation,” according to the Washington University Web site. He teaches courses in corporations, securities regulation, and corporate finance, as well as a seminar on corporate governance. Paredes received his bachelor’s degree from the University of California at Berkeley in 1992 and his law degree from Yale University in 1996. He also has worked as an attorney at the law firms of Steptoe & Johnson, O'Melveny & Myers, and Irell & Manella, the Dow Jones Newswires reported.

Atkins, one of three Republicans on the commission, plans to leave after his term expires on June 5 and a successor takes office. The SEC did not disclose his plans after leaving the agency. Atkins, a former partner with the accounting firm of PricewaterhouseCoopers, previously worked on the staffs of two former SEC chairmen.

“Over the course of two decades, Commissioner Atkins has worked energetically to ensure that the administration of the nation’s securities laws is fair, efficient, and transparent,” SEC Chairman Christopher Cox said in a May 5 press release. “And as a result of his exceptional devotion to ensuring that the costs of regulation are kept in line with its benefits, the implementation of Sarbanes-Oxley Section 404 has been rationalized with benefits for investors and companies alike.”

According to the press release, Atkins “has advocated greater transparency and cost-benefit analysis in the SEC rulemaking process.  He has championed rulemaking designed to make disclosure documents for mutual funds and corporations more straightforward and user-friendly, foreign investment more accessible to U.S. investors seeking to diversify their portfolios, and raising capital easier for small businesses.” 

While the SEC press release lauded Atkins as a “champion of protecting investors,” he has advocated views that differed from those of many activist shareholders. In 2007, he voted for a draft agency rule to allow companies to resume excluding proxy access proposals from shareholders. He has criticized large financial penalties against companies, arguing that those fines ultimately hurt investors. In 2006, he surprised some investors when he argued that the “spring-loading” of stock options (awarding them prior to the release of good corporate news) wasn’t fraud and helped shareholders by allowing companies to save on option expenses.

He also opposed a SEC rule to require mutual fund boards to have independent chairs and 75 percent independent directors; that rule ultimately was struck down by a federal appeals court. In addition, Atkins voted against a rule to require hedge fund advisers to register with the SEC; that measure also was invalidated by an appeals court.   
  
Atkins is the third commissioner to announce plans to leave the agency in the past year. The five-member commission also has two Democratic vacancies. President Bush has nominated Elisse Walter and Luis Aguilar to fill those seats; they are awaiting confirmation by the U.S. Senate, which will also vote on Paredes' nomination. --Ted Allen

Prof. Bebchuk Sues EA Over Proposal Exclusion

Harvard Law School Professor Lucian Bebchuk has sued Electronic Arts (EA) over the video-game maker’s exclusion of a novel proposal that asks the company to allow large shareholders to propose bylaw resolutions that otherwise could be excluded under the federal proxy rules.

Bebchuk, in a federal lawsuit filed April 18 in New York, requests a court order to compel the company to include his proposal on its proxy statement. Redwood City, Calif.-based EA traditionally holds its annual meeting in late July.

In his proposal, Bebchuk asks the board to support amending the company’s governing documents to limit its discretion to exclude bylaw proposals from shareholder groups that have held more than a 5 percent stake for at least one year. Under his proposal, those bylaw resolutions would have to be filed less than 120 days after the company’s preceding annual meeting, be “a proper action for shareholders under state law,” and not relate to the firm’s “ordinary business.”

In his supporting statement, Bebchuk notes that “it would be desirable to facilitate a vote” on shareholder-proposed bylaw amendments, even though “current and future SEC rules may in some cases allow companies--but do not require them" to omit those bylaw proposals.

The company obtained permission from the SEC staff to exclude the professor’s proposal. In a March 26 letter, EA’s lawyers argue that the proposal is “contrary to the federal proxy rules” and is “seeking to create an end run around [SEC] Rule 14a-8.” EA also asserts that the resolution relates to the company’s ordinary business and is “vague and misleading.”  

Bebchuk responds in his lawsuit by noting that Rule 14a-8 “establishes a mandatory federal minimum standard for shareholder proposals that companies are required to include in their proxy materials.” “Whereas Rule 14a-8(i) allows companies to exclude proposals” on 13 grounds, the rule “does not force companies to omit such proposals nor prohibit them from including such proposals,” his lawsuit explains. (For more on his suit, go to the Harvard Law School Corporate Governance Blog.) No hearing in the case has been scheduled yet, Bebchuk told R&GW.

Bebchuk’s approach to Rule 14a-8 contrasts with that of the Free Enterprise Fund, which is asking two companies to ban non-binding--or “precatory”--shareholder proposals. Steven Milloy, the fund’s managing partner, argues that those are “nuisance” proposals that clutter up corporate proxy ballots and are used by activists to harass companies. The fund’s binding proposals will be on the ballot at Charles Schwab on May 15 and ExxonMobil on May 28.
 
During the SEC’s proxy rule-making process last year, several corporate officials and law professors urged the agency to impose new limits on non-binding proposals or allow companies to adopt their own rules on those resolutions. Labor and social investors responded by filing thousands of comments in support of precatory proposals. So far, the commission has taken no action to further limit those proposals. --Ted Allen

Marvell Technology to Pay $10 Million to Resolve Backdating Claims

Marvell Technology Group has agreed to pay a $10 million fine to resolve SEC claims that the company backdated stock options.

The SEC alleged that Marvell “backdated the options to dates with lower stock prices, and falsely represented that the options had been granted ‘at-the-money’ (at market price) on earlier dates.” As a result of the backdating, the company “was able to overstate its income by $362 million from its fiscal years 2000 through 2006,” the SEC stated in a May 8 press release.

Weili Dai, a co-founder and a former chief operating officer, has agreed to pay a $500,000 fine. Neither Dai nor the Santa Clara, Calif.-based semiconductor company have admitted or denied the SEC’s allegations.

“Marvell’s long-running backdating scheme involved a senior executive who regularly signed minutes of meetings that never occurred,” Linda Chatman Thomsen, director of the SEC’s Enforcement Division, said in the press release. “Today’s action confirms that the commission continues to take allegations of misconduct by public company officers seriously.” --Ted Allen