by T. GormanPosted on Posted in SECActions

While the daily headlines are focused on the conduct that has resulted in the recent stock option scandal and the scandal’s effect on corporate leaders, CFOs, controllers, and others in the finance trenches must be concerned about how to properly report previously issued financials that contain accounting errors. The errors are bad enough, but now introduce the overwhelming task and expense of restating prior financials for what could be several years on end, and the possibility of getting the restatement accounting wrong, which may lead to multiple restatements.

To aid registrants in this dilemma, this week Carol A. Stacey, Chief Accountant Division of Corporation Finance, supplemented the staff’s prior guidance on the accounting for such errors issued September 19, 2006 and posted a sample letter to CFOs providing guidance to companies on disclosing and filing such errors. Available at http://www.sec.gov/info/accountants/staffletters/fei_aicpa091906.htm (9/19/06 guidance); http://www.sec.gov/divisions/corpfin/guidance/oilgasltr012007.htm (1/16/07 guidance, mislabeled by the Commission as a oil/gas letter).

The letter offers that the staff will not require amendment of prior filings if the “company amends its most recent Form 10-K and includes in that amendment [a] comprehensive disclosure” that follows 10 requirements and subparts, explicitly detailed in the letter. None of the requirements are surprising and they do more to provide acceptable uniformity. The requirements follow known rules of restatement and accounting, i.e., requiring compliance with Items 301, 302 and 303 of Regulation S-K; FASB Statement 123 (Accounting for Stock-Based Compensation); and APB Opinion 25, Accounting for Stock Issued to Employees.

Not surprisingly, the staff reserves the right to review and comment on all filings and, specifically, states that adhering to the guidance does not “foreclose any action recommended by the Division of Enforcement under Section 304 of the Sarbanes-Oxley Act, Forfeiture of Certain Bonuses and Profits, with respect to the periods that the company’s financial statements require restatement, irrespective of whether the company amended the filings to include the restated financial statements.”

by T. GormanPosted on Posted in SECActions

Yesterday the SEC settled with the former general counsel of Comverse Technology Inc., William Sorin.  Previously, on November 2, 2006 Mr. Sorin plead guilty to a one-count felony information charging conspiracy to commit securities fraud, mail fraud, and wire fraud.  At that hearing, Mr. Sorin admitted conspiring with “Kobi” Alexander, the former Chief Executive Officer, to conceal stock option backdating at Comverse and to approving false proxy statements and SEC filings.  Mr. Sorin told the Judge, “I deeply regret my conduct, I failed as a lawyer and disserved our shareholders.” He will be sentenced on February 23.  According to the U.S. Attorney’s office, the conspiracy charge carries a maximum sentence of five years’ imprisonment and a fine of up to $250,000, or twice the gain or loss from the offense and requires restitution in an amount to be determined by the Court at sentencing, currently estimated at up to $51 million.
 

According to the SEC release, Mr. Sorin agreed to pay $3 million in civil penalties, disgorgement, and prejudgment interest, and consented to the entry of a permanent injunction, an officer-and-director bar, and an order suspending him from appearing or practicing before the Commission as an attorney. http://www.sec.gov/news/press/2007/2007-4.htm 

The SEC’s complaint alleged that Mr. Sorin created false company records for Comverse and one of its public subsidiaries reflecting compensation committee approvals of stock options that never occurred.  Like the allegations in the Brocade case, here the stock option backdating allegations are coupled with overt acts of concealment. 


Director of the SEC’s Enforcement Division, Linda Chatman Thomsen, took the opportunity to remind the public and the bar that attorneys are not exempt from prosecution, stating, “Today’s settlement signals that the Commission will vigorously pursue those responsible for backdating schemes wherever the investigation may lead, even, as appropriate, into the offices of corporate counsel.” 


No doubt attorneys and others are not exempt nor should they be.  The key question, however, is not whether anyone is exempt but rather the direction the SEC and DOJ will take with the dozens of on-going option investigations.  While the exact number of companies under inquiry is unclear, there is little doubt that a large number of issuers being scrutinized.  To date the cases brought have been clear cut frauds according to the government, involving falsified documents and cover-ups.  The Comverse case and Mr. Sorin’s role in it, for example, are the extreme.  Like the Brocade case, this stock option backdating scheme is not about mere errors, negligence or similar conduct, rather it is about active fraud and concealment.  


Ms. Thomsen’s comments are intended to signal a hard stance on pursuing all of the SEC’s backdating investigations; yet, what does all of this signal for the dozens of other cases under inquiry.  In may of those cases there may be a range of conduct from simple errors to negligence.  What, for example, does this say about the case of Apple and its superstar CEO Steve Jobs?  The Washington Post today reports that although Apple claims that Mr. Jobs did not benefit from the options he helped backdate, in fact he received restricted stock valued at about $650 million.  Given the complexity of the issues in that case, as well as others, it is difficult to project from the sad case of Comverse and Mr. Sorin how the remaining SEC and DOJ inquiries will be resolved.   In the meantime there seems to be no end in sight for the continuing options scandal.