On Shareholder Proposals

The SEC has announced it will soon issue revised rules governing the conditions under which shareholders have the right to file resolutions. This follows a recent set of discussions, including a Roundtable on Proposals of Shareholders held at SEC HQ on May 25th.

We believe the SEC will limit shareholder rights. We do not believe they will eliminate shareholder access to the proxy outright. Rather, we expect the Commission to impose a number of rules that virtually eliminate shareholders’ ability to file resolutions. These may include a 5% ownership rule or unreasonably restrictive time limits governing the filing of resolutions. We believe the SEC will offer shareholders improved communications and access to corporate management via on-line tools, like bulletin boards or “chat rooms.” Having done so, they will claim to have improved shareholder access. Unless , as we suggested earlier, these boards or chat rooms reside on SEC servers, they will be wrong.

We base our opinion on several factors:

  • Comments made by presenters and others at the May 25th SEC Shareholder Access Roundtable meeting;
  • Comments made by SEC Chairman Cox before the Financial Services Committee of the US House of Representatives at a Review of Investor Protection and Market Oversight on Tuesday, June 26, 2007, 2:00 p.m., in room 2128 of the Rayburn House Office Building. While we believe Chairman Cox is the single most competent appointment made by the Bush Administration, in an earlier forum he noted that his ability to act independently and in the public interest with respect to this matter is limited;
  • Recent Supreme Court decisions which have, according to one observer, “ transformed the branch of government singularly devoted to the protection of our rights and liberties into a facilitator of discrimination and a guardian of powerful political and moneyed interests;”
  • The draft proxy access proposal was leaked to the Wall Street Journal (SEC Proxy-Access Proposal Draws Fire from Investors. By JUDITH BURNS. July 11, 2007; Page D2). Given this leak, moneyed interests probably had early access to the proposal, a violation of due process and of certain sections of the U.S. Code. The early and selective distribution of proposed public policies only to moneyed interest groups with a clear and abiding pecuniary interest is inconsistent with policy optimization. These groups "short circuited" the full, free and fair consideration of optimal policy recommendations.
  • We believe these interests successfully lobbied the SEC for a regulatory approach that limits shareholder access to the proxy ballot by raising the specter of falling U.S. competitiveness and by citing "costs" associated with increased shareholder access. Both a re faulty arguments. New York market institutions and Wall Street in particular are perceived, globally, to be marginally riskier places to do business: the risk of catastrophic market institution (exchange) failure has increased. This increase in risk perception implies an increase in IPO issuance cost. Add this increase to the increased cost due to investment bank fraud and malfeasance and any decline in the volume of foreign company stock issuance in New York based markets is readily explained. Further, we note that this "competitive crisis" has not limited the size of bonus payments to senior executives, a clear sign that most market makers are not facing dire circumstances.
  • Those most directly impacted by the policy change are large in number but divided and unorganized. These include shareholder groups like the Interfaith Center on Corporate Responsibility, labor-related funds, faith-based pension funds, “socially responsible” mutual funds, and individual stockholders. We have offered to help, but these groups have been unable to mount the type of strategic, sustained effort, or bring forward the new ideas and analysis required to prevent the imposition of a more restrictive shareholder access policy. Bottom line: they simply do not have the money. Given this, their voice does not count as much as that of those lobbying for moneyed interests. Without the ability to file resolutions, the already limited voice of these groups will be stilled, ushering in new and frightening excesses in an already gilded age.

This comes at a time of unprecedented corporate and market institution fraud and malfeasance. The following are the simple facts:

On April 28, 2003, every major US investment bank, including Merrill Lynch, Goldman Sachs, Morgan Stanley, Citigroup, Credit Suisse First Boston, Lehman Brothers Holdings, J.P. Morgan Chase, UBS Warburg, and U.S. Bancorp Piper Jaffray, were found to have aided and abetted efforts to defraud investors. The firms were fined a total of $1.4 billion dollars by the U.S. Securities and Exchange Commission, triggering the creation of a Global Research Analyst Settlement Fund.

In May, 2003, the U.S. Securities and Exchange Commission disclosed that several “brokerage firms paid rivals that agreed to publish positive reports on companies whose shares..they issued to the public. This practice made it appear that a throng of believers were recommending these companies' shares.” This was false. “From 1999 through 2001, for example, one firm paid about $2.7 million to approximately 25 other investment banks for these so-called research guarantees, regulators said. Nevertheless, the same firm boasted in its annual report to shareholders that it had come through investigations of analyst conflicts of interest with its ‘reputation for integrity’ maintained.”

On September 3, 2003, the New York State Attorney General announced he had “obtained evidence of widespread illegal trading schemes, ‘late trading’ and ‘market timing,’ that potentially cost mutual fund shareholders billions of dollars annually. This, according to the Attorney General, “is like allowing betting on a horse race after the horses have crossed the finish line.”

On September 4, 2003, a major investment bank, Goldman Sachs, admitted that it had violated anti-fraud laws. Specifically, the firm misused material, nonpublic information that the US Treasury would suspend issuance of the 30-year bond. The firm agreed to “pay over $9.3 million in penalties.” On April 28, 2003, the same firm was found to have “issued research reports that were not based on principles of fair dealing and good faith .. contained exaggerated or unwarranted claims.. and/or contained opinions for which there were no reasonable bases.” The firm was fined $110 million dollars, for a total of $119.3 million dollars in fines in six months.

On December 18, 2003, the U.S. Securities and Exchange Commission “announced an enforcement action against Alliance Capital Management L.P. (Alliance Capital) for defrauding mutual fund investors. The Commission ordered Alliance Capital to pay $250 million. The Commission also ordered Alliance Capital to undertake certain compliance and fund governance reforms designed to prevent a recurrence of the kind of conduct described in the Commission's Order. Finally, the Commission found that “Alliance Capital breached its fiduciary duty to (it’s) funds and misled those who invested in them.”

On October 8, 2004, the U.S. Securities and Exchange Commission “announced..enforcement actions against Invesco Funds Group, Inc. (IFG), AIM Advisors, Inc. (AIM Advisors), and AIM Distributors, Inc. (ADI). The Commission issued an order finding that IFG, AIM Advisors, and ADI violated the federal securities laws by facilitating widespread market timing trading in mutual funds with which each entity was affiliated. The settlements require IFG to pay $215 million in disgorgement and $110 million in civil penalties, and require AIM Advisors and ADI to pay, jointly and severally, $20 million in disgorgement and an aggregate $30 million in civil penalties.”

On November 4, 2004, the U.S. Securities and Exchange Commission “filed a settled civil action in the United States District Court for the District of Columbia against Wachovia Corporation (Wachovia) for violations of proxy disclosure and other reporting requirements in connection with the 2001 merger between First Union Corporation (First Union) and Old Wachovia Corporation (Old Wachovia). Under the settlement, Wachovia must pay a $37 million penalty and is to be enjoined from future violations of the federal securities laws.”

On November 17, 2004, the U.S. Securities and Exchange Commission announced “charges concerning undisclosed market timing against Harold J. Baxter and Gary L. Pilgrim in the Commissions’ pending action in federal district court in Philadelphia.” Based on these charges, Baxter and Pilgrim agreed to “pay $80 million – $60 million in disgorgement and $20 million in civil penalties.”

On November 30, 2004, the U.S. Securities and Exchange Commission announced “the filing..of charges against American International Group, Inc. (AIG) arising out of AIG’s offer and sale of an earnings management product.” The company “agreed to pay a total of $126 million, consisting of a penalty of $80 million, and disgorgement and prejudgment interest of $46 million.”

On December 22, 2004, “the U.S. Securities and Exchange Commission, NASD and the New York Stock Exchange announced..enforcement proceedings against Edward D. Jones & Co., L.P., a registered broker-dealer headquartered in St. Louis, Missouri.” According to the announcement, “Edward Jones failed to adequately disclose revenue sharing payments that it received from a select group of mutual fund families that Edward Jones recommended to its customers.” The company agreed to “pay $75 million in disgorgement and civil penalties. All of that money will be placed in a Fair Fund for distribution to Edward Jones customers.”

On January 25, 2005, “the U.S. Securities and Exchange Commission announced the filing in federal district court of separate settled civil injunctive actions against Morgan Stanley & Co. Incorporated (Morgan Stanley) and Goldman, Sachs & Co. (Goldman Sachs) relating to the firms' allocations of stock to institutional customers in initial public offerings (IPOs) underwritten by the firms during 1999 and 2000.”

According to the Associated Press, on January 31, 2005, “the nation’s largest insurance brokerage company, Marsh & McLennan Companies Inc., based in New York, will pay $850 million to policyholders hurt by” corporate practices that included “bid rigging, price fixing and the use of hidden incentive fees.” The company will issue a public apology calling its conduct "unlawful" and "shameful," according to New York State Attorney General Elliott Spitzer. In addition, “the company will publicly promise to adopt reforms.”

On Feb. 9, 2005, the U.S. Securities and Exchange Commission “announced the settlement of an enforcement action against Columbia Management Advisors, Inc. (Columbia Advisors), Columbia Funds Distributor, Inc. (Columbia Distributor), and three former Columbia executives in connection with undisclosed market timing arrangements in the Columbia funds. In settling the matter, the Columbia entities will pay $140 million, all of which will be distributed to investors harmed by the conduct. The SEC also brought fraud charges against two additional former Columbia senior executives in federal court in Boston.”

On March 23, 2005, the U.S. Securities and Exchange Commission “announced that Putnam Investment Management, LLC (Putnam) will pay $40 million. The Commission issued an order that finds Putnam failed to adequately disclose to the Putnam Funds' Board of Trustees and the Putnam Funds' shareholders the conflicts of interest that arose from..arrangements for increased visibility within the broker-dealers' distribution systems.”

On March 23, 2005, the U.S. Securities and Exchange Commission (Commission) “announced that it instituted and simultaneously settled an enforcement action against Citigroup Global Markets, Inc. (CGMI) for failing to provide customers with important information relating to their purchases of mutual fund shares.”

On April 12, 2005, the U.S. Securities and Exchange Commission “instituted and simultaneously settled an enforcement action against the New York Stock Exchange, Inc., finding that the NYSE, over the course of nearly four years, failed to police specialists, who engaged in widespread and unlawful proprietary trading on the floor of the NYSE.” As part of the settlement, the “NYSE agreed to an undertaking of $20 million to fund regulatory audits of the NYSE's regulatory program every two years through the year 2011.” On that same date, the Commission “instituted administrative and cease-and-desist proceedings against 20 former New York Stock Exchange specialists for fraudulent and other improper trading practices.”

On April 19, 2005, the U.S. Securities and Exchange Commission announced “that KPMG LLP has agreed to settle the SEC's charges against it in connection with the audits of Xerox Corp. from 1997 through 2000. As part of the settlement, KPMG consented to the entry of a final judgment in the SEC's civil litigation against it pending in the U.S. District Court for the Southern District of New York. The final judgment..orders KPMG to pay disgorgement of $9,800,000 (representing its audit fees for the 1997-2000 Xerox audits), prejudgment interest thereon in the amount of $2,675,000, and a $10,000,000 civil penalty, for a total payment of $22.475 million.”

On April 28, 2005, the U.S. Securities and Exchange Commission announced “that it has instituted settled enforcement proceedings against Tyson Foods, Inc. and its former Chairman and CEO Donald ‘Don’ Tyson. The SEC charged that in proxy statements filed with the Commission from 1997 to 2003, Tyson Foods made misleading disclosures of perquisites and personal benefits provided to Don Tyson both prior to and after his retirement as senior chairman in October 2001.”

On May 31, 2005, the U.S. Securities and Exchange Commission “announced settled fraud charges against two subsidiaries of Citigroup, Inc. relating to the creation and operation of an affiliated transfer agent that has served the Smith Barney family of mutual funds since 1999. Under the settlement, the respondents are ordered to pay $208 million in disgorgement and penalties and to comply with substantial remedial measures, including an undertaking to put out for competitive bidding certain contracts for transfer agency services for the mutual funds.”

On June 2, 2005, the U.S. Securities and Exchange Commission “filed securities fraud charges against Amerindo Investment Advisors, Inc., Alberto William Vilar and Gary Alan Tanaka, Amerindo’s co-founders and principals, for misappropriating at least $5 million from an Amerindo client.”

On June 9, 2005, the U.S. Securities and Exchange Commission announced that “Roys Poyiadjis, a former CEO of AremisSoft Corporation, which was a software company with offices in New Jersey, London, Cyprus, and India, agreed to final resolution of fraud charges brought against him by the Securities and Exchange Commission in October 2001. In documents filed with the federal district court in Manhattan, Poyiadjis consented to disgorge approximately $200 million of unlawful profit from his trading in AremisSoft stock -- among the largest recoveries the SEC has obtained from an individual.”

On July 20, 2005, the U.S. Securities and Exchange Commission “announced a settled administrative proceeding against Canadian Imperial Bank of Commerce's (CIBC) broker-dealer and financing subsidiaries for their role in facilitating deceptive market timing and late trading of mutual funds by certain customers. The Commission ordered the subsidiaries, CIBC World Markets Corp. (World Markets), a New York based broker-dealer, and Canadian Imperial Holdings Inc. (CIHI), to pay $125 million, consisting of $100 million in disgorgement and $25 million in penalties.”

On August 15, 2005, the U.S. Securities and Exchange Commission “charged four brokers and a day trader with cheating investors through a fraudulent scheme that used squawk boxes to eavesdrop on the confidential order flow of major brokerages so they could ‘trade ahead’ of large orders at better prices.”

On August 22, 2005, the U.S. Securities and Exchange Commission “filed civil fraud charges against two former officers of Bristol-Myers Squibb Company for orchestrating a fraudulent earnings management scheme that deceived investors about the true performance, profitability and growth trends of the company and its U.S. medicines business.”

On August 23, 2005, the U.S. Securities and Exchange Commission “filed charges against two former top Kmart executives for misleading investors about Kmart's financial condition in the months preceding the company's bankruptcy.”

On November 2, 2005, the U.S. Securities and Exchange Commission “filed enforcement actions against seven individuals alleging they aided and abetted a massive financial fraud by signing and returning materially false audit confirmations sent to them by the auditors of the U.S. Foodservice, Inc. subsidiary of Royal Ahold (Koninklijke Ahold N.V.).”

On November 28, 2005, the U.S. Securities and Exchange Commission announced “that three affiliates of one of the country’s largest mutual fund managers have agreed to pay $72 million to settle charges they harmed long-term mutual fund shareholders by allowing undisclosed market timing and late trading by favored clients and an employee.”

On December 1, 2005, the U.S. Securities and Exchange Commission “announced settled enforcement proceedings against American Express Financial Advisors Inc., now known as Ameriprise Financial Services, Inc. (AEFA), a registered broker-dealer headquartered in Minneapolis, Minn., related to allegations that AEFA failed to adequately disclose millions of dollars in revenue sharing payments that it received from a select group of mutual fund companies. As part of its settlement with the Commission, AEFA will pay $30 million in disgorgement and civil penalties, all of which will be placed in a Fair Fund for distribution to certain of AEFA's customers.”

On December 1, 2005, the U.S. Securities and Exchange Commission “announced a settled administrative proceeding against Millennium Partners, L.P., Millennium Management, L.L.C., Millennium International Management, L.L.C., Israel Englander, Terence Feeney, Fred Stone, and Kovan Pillai for their participation in a fraudulent scheme to market time mutual funds. The respondents will pay over $180 million in disgorgement and penalties and undertake various compliance reforms to prevent recurrence of similar conduct.”

On December 19, 2005, the U.S. Securities and Exchange Commission “announced that it filed and settled insider trading charges both against an accountant and a former executive of Sirius Satellite Radio, Inc. who illegally profited from advance knowledge of radio personality Howard Stern’s $500 million contract with Sirius.”

On December 21, 2005, the U.S. Securities and Exchange Commission “sued top executives of National Century Financial Enterprises, Inc. (NCFE), alleging that they participated in a scheme to defraud investors in securities issued by the subsidiaries of the failed Dublin, Ohio company. NCFE, a private corporation, suddenly collapsed along with its subsidiaries in October 2002 when investors discovered that the companies had hidden massive cash and collateral shortfalls from investors and auditors. The collapse caused investor losses exceeding $2.6 billion and approximately 275 health-care providers were forced to file for bankruptcy protection.”

On January 3, 2006, the U.S. Securities and Exchange Commission announced “that it filed charges against six former officers of Putnam Fiduciary Trust Company (PFTC), a Boston-based registered transfer agent, for engaging in a scheme beginning in January 2001 by which the defendants defrauded a defined contribution plan client and group of Putnam mutual funds of approximately $4 million.”

On January 4, 2006, the U.S. Securities and Exchange Commission “filed securities fraud charges against McAfee, Inc., formerly known as Network Associates, Inc., a Santa Clara, California-based manufacturer and supplier of computer security and antivirus tools. McAfee consented, without admitting or denying the allegations of the complaint, to the entry of a Court order enjoining it from violating the antifraud, books and records, internal controls, and periodic reporting provisions of the federal securities laws. The order also requires that McAfee pay a $50 million civil penalty, which the Commission will seek to distribute to harmed investors pursuant to the Fair Funds provision of the Sarbanes-Oxley Act of 2002.”

On January 9, 2006, the U.S. Securities and Exchange Commission “announced that Daniel Calugar and his former registered broker-dealer, Security Brokerage, Inc. (SBI), agreed to settle the SEC’s charges alleging that they defrauded mutual fund investors through improper late trading and market timing. As part of the settlement, Calugar will disgorge $103 million in ill-gotten gains and pay a civil penalty of $50 million.”

On February 2, 2006, the U.S. Securities and Exchange Commission “announced that it filed an enforcement action against five former senior executives of General Re Corporation (Gen Re) and American International Group, Inc. (AIG) for helping AIG mislead investors through the use of fraudulent reinsurance transactions.”

On February 9, 2006, the U.S. Securities and Exchange Commission announced “the filing and settlement of charges that American International Group, Inc. (AIG) committed securities fraud. The settlement is part of a global resolution of federal and state actions under which AIG will pay in excess of $1.6 billion to resolve claims related to improper accounting, bid rigging and practices involving workers’ compensation funds.”

On March 16, 2006, the U.S. Securities and Exchange Commission “announced a settled enforcement action against Bear, Stearns & Co., Inc. (BS&Co.) and Bear, Stearns Securities Corp. (BSSC) (collectively, Bear Stearns), charging Bear Stearns with securities fraud for facilitating unlawful late trading and deceptive market timing of mutual funds by its customers and customers of its introducing brokers. The Commission issued an Order finding that from 1999 through September 2003, Bear Stearns provided technology, advice and deceptive devices that enabled its market timing customers and introducing brokers to late trade and to evade detection by mutual funds. Pursuant to the Order, Bear Stearns will pay $250 million, consisting of $160 million in disgorgement and a $90 million penalty.”

On April 11, 2006, the U.S. Securities and Exchange Commission announced “charges against individuals involved in widespread and brazen international schemes of serial insider trading that yielded at least $6.7 million of illicit gains. The schemes were orchestrated by..a research analyst in the Fixed Income division of Goldman Sachs, and a former employee of Goldman Sachs.”

On April 17, 2006, the U.S. Securities and Exchange Commission announced “Settled Charges Against Tyco International Ltd. Alleging (a) Billion Dollar Accounting Fraud.”

On May 10, 2006, the U.S. Securities and Exchange Commission announced that the “Former Chairman and CEO of Gemstar-TV Guide International, Inc. was Ordered to Pay Over $22 Million For (his) Role in Accounting Fraud.”

On May 30, 2006, the U.S. Securities and Exchange Commission brought “Settled Charges Against Tribune Company for Reporting Inflated Circulation Figures and Misstating Circulation Revenues.”

On May 31, 2006, the U.S. Securities and Exchange Commission announced that “15 Broker-Dealer Firms Settle(d)..Charges Involving Violative Practices in the Auction Rate Securities Market.”

On June 7, 2006, the U.S. Securities and Exchange Commission filed “Fraud Charges Against Former Restaurant Executives for Undisclosed Compensation and Accounting Fraud; Former CEO Agree(d) to Pay $500,000 Civil Penalty.”

On June 27, 2006, the U.S. Securities and Exchange Commission charged “Morgan Stanley With Failure To Maintain And Enforce Policies To Prevent Misuse of Inside Information.”

On June 28, 2006, the SEC settled charges against “Raytheon Company, (its) Former CEO, and Subsidiary Controller for Improper Disclosure and Accounting Practices.”

On September 26, 2006, the U.S. Securities and Exchange Commission ordered “BISYS Fund Services to Pay $21 Million to Settle Fraud Charges in Connection with Improper Marketing Arrangements with 27 Mutual Fund Advisers.”

On September 27, 2006, the U.S. Securities and Exchange Commission charged the “Former CEO and Two Former Executives Affiliated with RenaissanceRe Holdings Ltd. with Securities Fraud.”

On October 24, 2006, the U.S. Securities and Exchange Commission announced that “David Kreinberg, Former CFO of Comverse Technology, Inc., Agree(d) to Settle SEC Charges in (an) Options Backdating Case.”

On October 30, 2006, the U.S. Securities and Exchange Commission charged “Delphi Corporation and Nine Individuals, Including the Former CEO, CFO, Treasurer and Controller, in Wide-Ranging Financial Fraud; Four Others (were) Charged With Aiding and Abetting Related Violations.”

On November 2, 2006, the U.S. Securities and Exchange Commission filed “Settled Charges Against Eight Former Officers and Directors of Spiegel, Inc.”

On November 8, 2006, the U.S. Securities and Exchange Commission ordered the “Hartford (Insurance) to Pay $55 Million to Settle Directed Brokerage Charges.”

On November 14, 2006, the U.S. Securities and Exchange Commission sanctioned “the City Of San Diego for Fraudulent Municipal Bond Offerings and Order(ed) the City to Retain an Independent Consultant.”

On December 4, 2006, broker-dealer “Jefferies settle(d) (U.S. Securities and Exchange Commission) Charges Involving Illegal Gifts and Entertainment.”

On December 20, 2006, the U.S. Securities and Exchange Commission filed a “Settled Enforcement Action Against Broker-Dealer Friedman, Billings, Ramsey & Co., Inc.”

On January 10, 2007, the U.S. Securities and Exchange Commission settled an “Options Backdating Case Against William Sorin, Former General Counsel of Comverse Technology, Inc.”

On January 18, 2007, the U.S. Securities and Exchange Commission announced that “Fred Alger Management and Fred Alger & Company (agreed) to Pay $40 Million to Settle Market Timing and Late Trading Violations.”

On January 29, 2007, the U.S. Securities and Exchange Commission announced that it had “settled securities fraud charges against MBIA Inc., one of the nation’s largest insurers of municipal bonds, arising out of a sham reinsurance transaction that was restated in 2005, which the company had previously entered into to avoid having to recognize a $170 million loss.”

On February 6, 2007, the U.S. Securities and Exchange Commission announced that “Reinsurer RenaissanceRe Settle(d) Securities Fraud Charges for (a) Sham Reinsurance Transaction.”

On February 6, 2007, the U.S. Securities and Exchange Commission filed “Actions Against Former CFO and Former Controller of Engineered Support Systems, Inc. Relating to Options Backdating Scheme.”

On February 7, 2007, the U.S. Securities and Exchange Commission filed “Settled Books and Records and Internal Controls Charges Against El Paso Corporation for Improper Payments to Iraq Under the U.N. Oil for Food Program.”

On February 14, 2007, the U.S. Securities and Exchange Commission announced a “$6.3 Million Settlement With Former Take-Two Interactive Software, Inc. CEO in Stock Option Backdating Scheme.”

On February 28, 2007, the U.S. Securities and Exchange Commission charged the “Former General Counsel of McAfee, Inc. for Fraudulently Re-Pricing Option Grants.”

On March 1, 2007, the U.S. Securities and Exchange Commission “charged 14 defendants in a brazen insider trading scheme that netted more than $15 million in illegal insider trading profits on thousands of trades, using information stolen from UBS Securities LLC and Morgan Stanley & Co., Inc.”

We continue to believe that without ongoing, meaningful reform, including broader shareholder proxy access, there is a significant and growing risk that our economic system will simply cease functioning.



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