SEC Posts Proposed Shareholder Access Rules

On July 27th, the SEC posted two Shareholder Access proposals. Commenters have 60 days to reply:

Shareholder Proposals Relating to the Election of Directors. No.: IC-27914. File No.: S7-17-07. Comments Due: Comments should be received 60 days after Federal Register publication.-->Submit comments on S7-17-07

Shareholder Proposals. Release No.: IC-27913. File No.: S7-16-07. Comments Due: Comments should be received 60 days after Federal Register publication.-->Submit comments on S7-16-07

Inspired

As we indicated they would, the SEC put forward a proposal that would eliminate or severely restrict shareholder access to the corporate proxy statement. The Agency also put forward a proposal to expand shareholder access to the proxy.

We believe trepidation about the leak of the restrictive proxy access proposal (SEC Proxy-Access Proposal Draws Fire from Investors. The Wall Street Journal. By JUDITH BURNS. July 11, 2007; Page D2) led to concerns about a possible due process lawsuit. In an inspired move, the Agency decided to simultaneously release a second, less restrictive proposal.

This action negates concerns about the early and selective distribution of proposed public policies only to moneyed interest groups and simultaneously provides a way to optimize shareholder access and proxy policy.

The SEC backs off

On July 20, 2007, "SEC Chairman Christopher Cox issued the following statement concerning disclosures filed with the Commission concerning public company activities in countries that the U.S. Secretary of State has determined to have repeatedly supported terrorism:

Since the SEC added to our Internet site a web tool that permits investors to obtain information directly from company disclosure documents about their business interests in countries the U.S. Secretary of State has designated 'State Sponsors of Terrorism,' the site has experienced exceptional traffic. Between June 25, when the web tool was unveiled, through July 16, visitors have 'hit' material posted on the site well over 150,000 times. Iran was the country most frequently clicked on, followed by Cuba, Sudan, North Korea, and Syria. Those who went to a country list most often clicked through to the text of companies' own disclosure (in the case of Iran, they did so overwhelmingly), indicating that the disclosures were allowed to speak for themselves."

The Chairman went on to add that, despite the unqualified success of the effort, the SEC is

"temporarily suspending the availability of the web tool while it undergoes reconstruction." Further SEC staff is "considering whether the use of interactive data tags applied by companies themselves could permit investors, analysts and others to easily discover this disclosure without need of an SEC-provided web tool at all. In the interim, the companies' disclosure regarding their business contacts in the five nations will continue to be available through the SEC's EDGAR database, and findable using our new full-text search capability."

We fully supported the SEC's efforts, have called for the use of interactive data tags in exactly this way (page 17), and are disappointed to see the site go down. As the Chairman noted,

"The exceptional public interest that has been demonstrated in reading company disclosures on this topic indicates that it is an important subject for investors. Federal law and SEC regulations will continue to require public companies to report on their activities, if material, in a country the Secretary of State has formally determined to be a State Sponsor of Terrorism. Our role is to make that information readily accessible to the investing public, and we will continue to work to find better ways to accomplish that objective."

The effort reinforces our view that by showing a willingness to address, in a timely and creative manner, critical issues affecting his Agency, Chairman Cox is the single most competent appointment made by the Bush Administration. The Terrorism disclosure effort was incredibly entrepreneurial and successful, both highly unusual for this Administration. We can only surmise that business interests on both sides of the issue (those doing business in States designated as sponsors of terrorism, and those selling information about those doing business in States designated as sponsors of terrorism) combined to get the pages taken down. This does not bode well for efforts to enhance shareholder democracy.

Lets hope this service comes back on-line soon.

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 25^th 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.

GS Sustain Focus List

On June 22, 2007, Goldman Sachs launched the GS Sustain Focus List, “companies from established industries, which have been selected by incorporating our proprietary Environmental, Social and Governance (ESG) framework into long-run industry drivers and returns-based analysis and valuation in order to pinpoint structural improvement and sustainable competitive positioning.” The list of stocks is "aimed at long term long only performance with low turnover.."

The creation of the focus list and the required methodology suggest that Goldman, like other firms, has come to see the value of incorporating a “socially responsible” framework into traditional investment analysis. While we applaud Goldman's incorporation of the ten principles of the UN Global Compact into an investment analysis framework and the firms’ tacit recognition of “socially responsible” investing, we feel the firm is ethically and ethnically challenged, and that these factors may negatively influence both the methodology and the composition of the GS Focus list. We explain our reasoning below.

Ethical challenges

We question a central thesis of the report: that Goldman has developed a superior ESG evaluation tool that allows investors, thru the firm, to “pinpoint sustainability and emerging players.”

Major Wall Street investment banks have a history of manipulating financial data in order to support business activities and to maximize short term profits. Consider the following:

• 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 SEC, triggering the creation of a Global Research Analyst Settlement Fund.

• On September 4, 2003, 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, Goldman Sachs 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.

• On January 25, 2005, “the 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.”

In the report, Goldman notes that “Corporate governance is a key focus of investors, securities regulators and stock exchanges in recent years in the wake of corporate accounting scandals.” No mention is made of the behavior noted above.

The firm, fined $119.3 million by the SEC for various crimes (see: http://www.sec.gov/news/press/2002-179.htm and http://www.sec.gov/news/press/2003-107.htm) received a $75 million dollar New Markets Tax Credit (NMTC) award. In the NMTC Program application, firms must attest to the following:

"The Applicant and its officers, directors, owners, partners, and key employees or any other person that Controls the Applicant:

(a) have not within a three-year period preceding the date of this Allocation Application been indicted, charged with or convicted of, or had a civil judgment rendered against them for commission of fraud or a criminal offense;

(b) have not within a three-year period preceding the date of this Allocation Application been indicted, charged with or convicted of, or had a civil judgment rendered against them for violation of Federal or State antitrust statutes or commission of embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements, or receiving stolen property;

(c) are not presently indicted for or otherwise criminally or civilly charged by a governmental entity (Federal, State, or local) with commission of any of the offenses enumerated in paragraphs 10(a) and 10(b) of this certification;

(d) have not within the three-year period preceding the date of this Allocation Application been the subject of any formal investigation or disciplinary proceeding by a government agency, regulatory body, or professional association in connection with any matter; and

(e) have not within the three-year period preceding the date of this Allocation Application been found liable in any civil legal action involving creditor's claims of greater than $500,000."

We believe GS New Markets Fund - owned by Goldman Sachs Group, Inc., technically violated this certification, and was, therefore, ineligible for a NMTC award. Even if the firm was eligible to receive the award, the allocation of federal tax credits to a firm fined $119.8 million makes a mockery of penalties assessed under the SEC’s "settlement with Goldman Sachs to resolve issues of conflict of interest at brokerage firms."

From an ethical standpoint, the firm has repeatedly engaged in behavior that would cause a prudent person to question its objectivity and fairness. We note that a smaller firm engaging in similar conduct would have been severely sanctioned by the market. Goldman has escaped meaningful sanction, however.

Diversity challenged

The report states that “Employee indicators for pay, productivity and gender diversity are universal. We measure companies’ ability to attract, retain and motivate employees by assessing employee compensation and productivity, health and safety performance and gender diversity.” By measuring only gender diversity, Goldman’s ESG framework reflects a troubling racial bias and lack of true diversity. This, in turn, reflects practices at the firm: according to a study by Chicago United, Goldman has one of the least diverse Boards of any company in the Fortune 100. This lack of racial diversity, we feel, influences methodological matters governing the CS Sustain list. Given demographic trends, gender diversity is a necessary but insufficiently robust, just or fair sole criterion to use as “a proxy for companies’ ability to attach and retain highly skilled staff from all backgrounds.” This is a frankly bigoted approach to the issue that is consistent with the current global trend toward racial animus. The immigration “debate” in the U.S. and the active targeting of racial minorities for fraudulent loans are other indicators of this trend.

Origin of the approach

The report issued announcing the creation of the Focus list states that “..the poor performance of indexes such as Dow Jones Sustainability Index and FTSE4Good (both -10% since 2000) suggests that a simplified approach of picking stocks on an ESG basis alone will not lead to stock market outperformance.” We know of no major SRI/ESG mutual fund that selects stocks based on social, or ESG factors alone.

The report goes onto state that “Analysis of the environmental, social and governance issues facing companies is not new; socially responsible investors (SRI) and NGO’s have assessed companies on ESG metrics alone for the better part of three decades since the early 1970s. However, the integration of ESG with industry analysis and financial returns is a relatively new conceptual approach. SRI indices were originally designed to separate socially responsible and sustainability-focused companies from laggards on the basis of social, environmental and/or ethical screens alone; ESG analysis was separate from industrial and financial analysis.” This is incorrect on two counts. Economic development projects started or managed by Dr. Martin Luther King, like the Montgomery Bus Boycott and the Operation Breadbasket Project in Chicago, established the model for future socially responsible investing efforts. In that project King combined ongoing dialog with boycotts and direct action targeting specific corporations. Thus, assessing companies based on ESG metrics goes back to December 1, 1955, when the modern age of socially responsible investing began.

The second error relates to the integration of financial and social data. We first outlined this approach in 1991, when we created the Fully Adjusted Return™ methodology. Further, in 2001 and 2002 we participated in the SPI-Finance Project, linked to the Global Reporting Initiative and “undertaken by a group of financial institutions from Australia, Germany, the Netherlands, South Africa, Switzerland and the UK. “ We discussed the integration of financial and social performance measures for the financial services industry, based on our work creating the Fully Adjusted Return methodology.

Goldman’s work fall into this approach, first developed to aid in the selection of women and minority-owned banks, and takes it to a broader stage, but the core technique remains the same. Our concern is this: given the ethical and ethnic issues raised above, and based on our fifteen years of experience in the creation and application of SRI/ESG tools and techniques, we feel the application of this technique requires a fully objective third party, with no actual or potential conflicts of interest.

National bias is racial bias

The report discovers “country bias with regards to environmental, social and corporate governance performance.” We believe this is due to Goldman’s narrow and limited perspective on SRI/ESG issues. Excluding South Africa, no African countries are on the list. Excluding Japan, no Asian markets are included. Excluding Brazil, no Latin markets are included. Thus, areas representing the majority of the world’s population are excluded. This makes the report a non-minority (non-people of color) company and country exercise. This is consistent with the flawed diversity framework noted above. Certainly, data and capitalization issues represent a challenge, but given the firm’s reach and resources, these geographic regions could be included. Doing so sets the stage for the future and allows for a more realistic and consistent set of long term (50 year) forecasts, since at some point these regions will join the capital markets of the world.

Constructing the list

The GS Sustain Focus list contains “only companies for which we have completed our ESG analysis and companies under coverage in emergent industries.” While we believe it is important to know which companies on the list Goldman has current investment banking relationships with, a more important metric concerns Goldman’s strategic plan for future relationships. Because many of the industrial sectors and companies featured in the report are new (solar power, biotechnology) the report may be used to curry favor with potential future industries and clients. We note that being on the GS Focus list will have added value as institutional investors come to see the list as valuable. If SRI/ESG and sustainability issues have grown in importance, they have done so because they are critically important to the future of democratic capitalism and despite active opposition by most Wall Street firms, who, ten years ago, considered this type of analysis superfluous.

Action Steps

We have found these behaviors often the prelude to the development of a set of fraudulent business practices. In this specific case, we feel this may include manipulating or misrepresenting data used in ESG/social investing processes.

Security Notice

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This Week's events and news

Social Investments Forum will be held in Vladivostok

According to the Vladivostok Times, "The goal of the Forum is to promote the idea of social investments through creation of partnerships among local/regional authorities, businesses and non-commercial organizations (NGOs) for successful Territory"s socio-economic development. The New Eurasia Foundation Russian Far East Affiliate Office, in partnership with the Primorsky Territory Administration will hold SOCIAL INVESTMENTS FORUM IN THE RUSSIAN FAR EAST on July 27, 2007 in the framework of the first Pacific Economic Congress "Russia and Asia-Pacific - from cooperation to integration."

St. John’s Endowment Investments Outperform Those of a Majority of Higher Education Institution

According to St. John's University, "A recently released NACUBO study indicates that St. John’s surpassed 90 percent of 700-plus colleges and universities in average annual rate of return on investments in the three-year period ending June 30, 2006. Most impressively, St. John’s outpaced many of the schools with endowments over $1 billion, with a return of 15.6 percent vs. their average return of 15.3 percent. The three-year average return for all schools reporting was 11.9 percent.

Former Investment Committee Chair Peter D’Angelo ‘78MBA, who remains a member of the Committee, points to the University’s Vincentian and Catholic values as drivers of many investment decisions. 'As a Catholic university, St. John’s has also adopted a social investing policy which is provided to the managers in our portfolio,' he says. 'It is our intention to promote the basic moral values of fairness, respect for human life, defense of human rights and social justice.'"

TIAA-CREF Adds 2% Target For Proactive Social Investments In CREF Social Choice Account

TIAA-CREF announced a "two percent target allocation to proactive social investments within the fixed income portion of its CREF Social Choice account (the Account). The two percent target will be based on the Account's total net assets."

Doing well by doing good

According to Philippine News.com, "Many investors have strong opinions that don’t involve their views on interest rates and stock prices. They want their holdings to reflect their values by avoiding companies that profit from activities they oppose, and supporting those that behave in ways they consider appropriate or responsible. At the same time, they still want to earn a reasonable return on their portfolios.

Socially responsible investing ('SRI') helps investors meet these goals by practicing an investment strategy designed to deliver an acceptable level of performance while excluding companies that don’t meet certain ethical standards."

SEC Enforcement Actions

On July 12, 2007, the Securities and Exchange Commission "filed a civil injunctive action against Michael F. Shanahan, Sr. (Shanahan), the former Chief Executive Officer and Chairman of the Board of Engineered Support Systems, Inc., and his son, Michael F. Shanahan, Jr. (Shanahan Jr.), a former member of Engineered Support's Compensation Committee of its Board of Directors, alleging that they participated in a fraudulent scheme in which they granted undisclosed, in-the-money stock options to themselves and to other Engineered Support officers, employees, and directors. According to the complaint, Engineered Support employees and directors received approximately $20 million in unauthorized and undisclosed compensation as a result of the backdating, $16 million of which was received by top executives and directors. Shanahan personally profited from the backdating scheme by more than $8.9 million."

The Diversity Portfolio

The Creative Investment Research, Inc. Diversity Portfolio contains equity investments in some of the largest U.S. companies. These companies have been selected for inclusion because they have outstanding financial and diversity performance. Diversity performance is calculated by reviewing several key measures: Human capital, CEO commitment, and supplier diversity. From 4/7/06 to 7/17/07, the model portfolio returned 23.93% versus a 22.45% return for the market, as measured by the S&P 500 Index, a major stock market index (without considering dividends. Returns calculated before fees deducted. Past performance is no guarantee of future returns.) See DiversityFund.net for more information...

Angels Descend on Minority Business Enterprises

Investors gather to consider investments in top minority-owned ventures.

Portsmouth, VA (PRWEB) July 17, 2007 -- Virginia Housing and Community Development Corporation (VHCDC) continues its pioneering initiatives to facilitate the flow of capital to Minority Business Enterprises (MBEs) with the announcement of the 2007 MBE Capital Call Conference, Exhibition, and Venture Forum -- September 20 & 21 in Hampton, Virginia. The MBE Capital Call presents entrepreneurs with innovative and marketable business ideas the opportunity to secure capital, and other essential resources, by "Pitching" their business plans to active, accredited investors. This event invites Entrepreneurs, aspiring entrepreneurs, Investors, aspiring investors, and College/University Students to Hampton, Virginia for a rewarding two day conference aimed at facilitating investment in minority- and women-owned businesses.

VHCDC created the MBE Capital Call to expose and connect MBEs, particularly African-American, Hispanic, and Native American entrepreneurs, to capital (funding) to start and grow or expand their business. This year, twenty-one (21) entrepreneurs will be selected to pitch their business plans to active, accredited investors. A team of active investors and business development professionals will select the presenters from among registrations received thru August 10, 2007. Presenters will be judged on several criteria and may pitch plans for virtually any industry/business sector.

Registration is easy, and there's no additional cost to enter the competition. Business owners, aspiring entrepreneurs, investors, lenders, and students may register by visiting the MBE Capital Call website: www.mbecapitalcall.com now for complete details, registration, and terms and conditions.