Materiality: No, the SEC did not write SAB No. 99

Corporate Counsel serves up a mostly excellent article, Securities Law Disclosure Checklist for Alleged (or Confirmed) Misconduct. It outlines disclosures that public companies should consider regarding alleged misconduct by employees, directors, or officers (e.g., “accounting improprieties, disclosure failures, criminal or civil actions involving the company and/or management, scandalous personal indiscretions, threatened disciplinary actions, fraud, false statements, or omissions, bribery or forgery”).

I say “mostly excellent” because, while the checklist is comprehensive and helpful to both companies and prospective whistleblowers, it unfortunately perpetuates the oddly popular myth that SEC Staff Accounting Bulletins (a.k.a. “SABs”), like SAB No. 99 dealing with materiality, are promulgated by the SEC and, therefore, are binding legal rules:

“In Staff Accounting Bulletin 99, the SEC also noted. . .” blah, blah, blah.

The SEC noted no such thing. As each and every SAB bears explicit witness, SABs are not binding partly because the SEC specifically disavows each of them with this preface:

The statements in the staff accounting bulletins are not rules or interpretations of the Commission, nor are they published as bearing the Commission’s official approval. They represent interpretations and practices followed by the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the Federal securities laws.*

Under the Fifth Amendment and the Administrative Procedure Act, so-called legislative regulations can only come into being through due process development that includes public notice and opportunity to comment. If the SEC were to so decide, it might be able to sneak by with interpretative regulations, thanks in no small part to the Supreme Court’s 2015 decision in Perez v. Mortgage Bankers Assoc. So far, however, on a number of important disclosure topics, including materiality and revenue recognition, the SEC has studiously avoided promulgating any regulations at all.

Thus, left to their own devices, SEC staff have taken the easy way out, engaging in a form of extra-legal self-help by drafting SABs, which they cook up behind closed doors with zero input from financial market constituents (investors and registrants). This is why SABs are called “Staff Accounting Bulletins.”

The distinction between legitimate SEC rules and ersatz SABs is not trivial. Rules that emerge from the crucible of notice and comment would undoubtedly differ significantly from the contents of the SABs, Wanda Wallace observed in 2007.** Investors and SEC registrants need and deserve better, legitimate regulatory guidance than the SABs. Meanwhile, the SEC should get no credit for binding regulations it has not drafted.

* See, e.g., SAB No. 99, See also Kurt S. Schulzke, Wink, Wink, Nudge Judge: Persuading U.S. Courts to Take Accountants Seriously in Federal Securities Cases with Help from the U.K. Companies Act, 16 Tenn. J. Bus. L. 231, 267 (2015) ,  (noting the disturbing appearance of this SEC mythology during Jeff Skilling’s Enron trial and in other securities cases); Kurt S. Schulzke, Gerlinde Berger-Walliser & Pier Luigi Marchini, Lexis Nexus Complexus: Comparative Contract Law and International Accounting Collide in the IASB–FASB Revenue Recognition Exposure Draft, 46 Vand. J. Trans. L. 515, 524 (2013) (similar).

** Wanda A. Wallace, Commentary: With or without due process?, ACCT. TODAY, Nov. 26, 2007, n.p. (decrying multiple SABs for their negative impact on the quality of financial information).


About that new FASB revenue recognition standard . . .

This morning, I made a short presentation on the new FASB-IASB revenue recognition standard, Revenue From Contracts With Customers, now at FASB Codification Topic 606. The slides appear below this post.

At the moment, Topic 606 will be effective for public company year ends beginning on or after January 1, 2017. We’ll see whether this effective date holds. Either way, a deeper dive on the new standard is available from three sources:

(a) Lexus Nexis Complexus: Comparative Contract Law and International Accounting Collide in the IASB-FASB Revenue Recognition Exposure Draft, co-authored by Gerlinde Berger-Walliser, Pier Luigi Marchini, and yours truly, now available online at the Vanderbilt Journal of Transnational Law;

(b) BNA’s Special Report, Navigating the New Road to Revenue Recognition by Lisa Starczewski; and

(c) FASB’s own Topic 606. It’s definitely not user-friendly — except, perhaps, to creative plaintiff’s counsel — but it’s big and it’s threatening.


Brief Overview of the New FASB-IASB Revenue Recognition Standard


SEC settles Dell fraud case: Execs pay millions

Is the SEC on a roll or just looking over its shoulder at salivating securities whistleblowers? On the heels of settling with Goldman Sachs last week for $550 million, the SEC yesterday announced its $111+ million take from settling accounting fraud charges against Dell Computer and several current and former Dell executives including Michael Dell, Kevin Rollins and James Schneider.  The three will pay the SEC $4M, $4M and $3M, respectively, to settle.  Assuming the facts are as stated by the SEC, they’re fortunate. And wasn’t the Sarbanes-Oxley Act supposed to prevent this kind of thing? Continue reading

Dodd-Frank H.R. 4173 now before the Senate

The leviathan Dodd-Frank bill, newly renamed the “Restoring American Financial Stability Act of 2010,” has been taken up by the Senate.  On CSPAN-2, Hawaii Senator Daniel Akaka is now droning on about how “too many investors don’t know the difference between a broker and investment advisor.”  Note well:  Both “Wall Street Reform” and “Consumer Protection” have disappeared from the bill’s title.  My brief analysis of the securities whistleblower provisions, in Act Section 922, tells me that once the bill is signed by the President the SEC should brace for a deluge of securities fraud claims.  These claims will take years to process but the process holds out some hope that securities whistleblowers may receive some compensation for their efforts to bring fraud to light.

Mockery of Justice: Why SCOTUS Should Let Jeff Skilling Out of Jail

When a prominent Houston attorney advocates exonerating a convicted Enron executive you have to believe — as I have long argued — that something is seriously wrong with the conviction.  In his excellent post, The Reeling Prosecution in the Skilling Case, Houston Attorney Tom Kirkendall explains why the U.S. Supreme Court should (and likely will) let Jeff Skilling out of jail when it hears his case.

For those with short attention spans, the bottom line is that Jeff Skilling was convicted and sent to jail for 24 years (a sentence recently set aside by the 5th Circuit Court of Appeals in a weirdly self-contradictory opinion) because a Houston jury, poisoned by months of anti-Skilling and anti-Enron propaganda, decided that Skilling exercised bad business judgment as Enron’s CEO during the company’s death spiral. The jury’s theory, doubtless buttressed by years of education and experience running companies in the complex energy derivatives markets, was apparently that any business executive dumb enough or nice enough to try to rescue the jobs and retirement plans of thousands of employees from a perfect market storm had damn-well better save the company or get ready for the guillotine.

Skilling’s conviction and sentence are shocking. Compelling evidence of Skilling’s innocence (and the prosecution’s guilt) is provided by his 209-page Petition for Writ of Certiorari.

One prong of Skilling’s defense is that “honest services wire fraud,” codified at 8 U.S.C. § 1346, is chaotic nonsense that fosters politically-motivated witch hunts any time a big company’s stock plunges in value for whatever reason.  Kirkendall notes: Continue reading

Honest Services Fraud & Texas Justice to Get Skilling Grilling: Supreme Court Grants Certiorari in Skilling v. United States

With Wall Street agog over the DOJ’s biggest insider-trading sting ever and fully seven years since the Enron scandal broke, Jeff Skilling is back in the news.  The U.S. Supreme Court has agreed to hear Skilling’s appeal of his convictions in the Enron case for so-called “honest services fraud” and insider trading.  Needless to say, justice in these United States can take an excruciatingly long time to develop.

The Supreme Court’s grant of certiorari in Skilling v. United States should be good news for Americans accused of white collar fraud in the current wave of anti-Wall Street hysteria.  It is a sign that justice may at long last get its day in court, even in politically-charged cases like Skilling’s which grew out of the collapse of Enron.  I have consistently argued — see Jeff Skilling Is Innocent — that Skilling’s convictions were themselves a fraud, riddled with prosecutorial misconduct and jury bias and founded on a specious legal theory, “honest services fraud,” that criminalizes optimism essential to economic growth.

Here, for the record, are the questions to be heard by the Supreme Court:

1. Whether the federal “honest services” fraud statute, 18 U.S.C. § 1346, requires the government to prove that the defendant’s conduct was intended to achieve “private gain” rather than to advance the employer’s interests, and, if not, whether § 1346 is unconstitutionally vague.

2. When a presumption of jury prejudice arises because of the widespread community impact of the defendant’s alleged conduct and massive, inflammatory pretrial publicity, whether the government may rebut the presumption of prejudice, and, if so, whether the government must prove beyond a reasonable doubt that no juror was actually prejudiced.

Not every economic catastrophe is caused by a crime.  Markets naturally move up and down in cycles. Prosecutors and politicians should have the courage to make this clear to investors who too often expect someone else to pay every time the market turns against them.

“Contrived Facade of Enforcement”: Judge Rips SEC Over BofA Settlement

Earlier this year, I shared misgivings of other commentators that Mary Schapiro’s tenure at FINRA rendered her too conflicted to Chair the SEC.  Judge Rakoff’s scathing September 14 order in SEC v. Bank of America adds weight to the argument.  Judge Rakoff rejected the SEC’s settlement, ordering the parties to prepare for trial on February 1. Continue reading

Geithner nomination reduces Obama’s trust account

Timothy Geithner’s tax pecadillos should disqualify him for the nation’s top tax post.  Secretary of the Treasury is too high an office for a brilliant lawyer who repeatedly and apparently knowingly underpaid his taxes by thousands of dollars.  But to be fair, neither should Barack Obama be sworn in as President of the United States next Tuesday unless he first produces a valid birth certificate proving that he meets the constitutional prereqs for the nation’s highest office.

The disparity in the level of scrutiny applied to Geithner and Obama is remarkable.  On balance, a President’s qualifications for office should be viewed as more essential than those of the Treasury Secretary.  Yet, in this case, Geithner’s integrity and transparency are being examined far more closely than Obama’s. Continue reading

Why is Judge Ramos pushing a Wachovia-Citigroup marriage?

Under ordinary circumstances, a fight between Citigroup and Wells Fargo over Wachovia would be a good thing, benefiting Wachovia’s shareholders by pitting two prospective buyers against each other in a bidding war. Hence this Sunday statement by Wachovia:

“Wachovia believes its agreement with Wells Fargo is proper, valid and is in the best interest of shareholders, employees and the American taxpayers [however]. . . Citigroup is always free to make a superior offer to Wachovia.” (Courtesy WSJ Law Blog)

But these are no ordinary circumstances. The nation’s banking system would benefit, it seems, from an early resolution of the battle. Against this backdrop . . . Continue reading

Wachovia-Citigroup letter: Non-binding agreement to agree

Citigroup’s “agreement” with Wachovia appears to be a bust. If the $2.1 billion deal is documented by nothing more than the letter posted at Clusterstock (key excerpt below), Citigroup shareholders should get set for disappointment: the “non-binding” term sheet apparently involved a $42 billion contribution by the federal government. Citi’s reported $60 billion lawsuit against Wells Fargo suggests Wachovia was worth far more than Citi was letting on.

Continue reading