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Wall Street’s “Moral Minority”

A New York Times article has revealed that long before Occupy Wall Street, the Sisters of St. Francis of Philadelphia were battling Wall Street over corporate responsibility. For the last thirty years, the Sisters have used the investments in their retirement fund to become Wall Street’s moral minority.

Using their status as shareholders, the nuns fought with Kroger over farm worker rights, with McDonald’s over childhood obesity, and with Wells Fargo over lending practices. They have met face-to-face with the heads of Lockheed Martin, BP, and General Electric. Most recently, they advised Goldman Sachs executives that the bank should protect consumers, rein in executive pay, increase its transparency, and remember the poor.

With their moral authority, the Sisters of St. Francis “can really bring attention to issues,” said Robert McCormick, chief policy officer of Glass, Lewis & Company, the proxy voting firm. “You haven’t seen shareholder activism until you see a nun battling it out with the CEOs. They can be devastating,” said Michael Passoff in a 2005 article on religious shareholder activists. Passoff works in the Corporate Social Responsibility Program for As You Sow, a leading organization in the strategizing and organizing of shareholder campaigns.

The nuns have been waging this war since 1980, when St. Francis Sister Nora Nash formed a committee with her community to combat troubling developments at the businesses in which they invested their retirement fund. The Roman Catholic order of over 500 nuns has teamed up with other orders and faith-based investing groups on shareholder resolutions. Much of Sister Nora’s activism takes place under the Interfaith Center on Corporate Responsibility, an umbrella group which includes Jews, Quakers and Presbyterians.

Sister Nora said that she and the order “want social returns, as well as financial ones.” She added, “when you look at the major financial institutions, you have to realize there is greed involved.”

The full New York Times article can be found here.

Say-on-Pay Update

As we have reported in earlier posts on “Say-on-Pay,” the Dodd-Frank Act provides for an advisory shareholder vote to approve executive and board compensation at most public companies.  While companies have overwhelmingly passed their Say-on-Pay votes this proxy season, 39 out of approximately 2000 companies have reported failures.  Twenty-five percent of these failures have occurred in the energy sector, and almost all failed votes have followed on the heels of a “no” recommendation by the institutional investor watchdog, Institutional Shareholder Services.

The Dodd-Frank Act also provides that shareholders decide how frequently Say-on-Pay votes are held -- the options ranging from every one to three years.  As expected, companies who failed this year’s Say-on-Pay vote also saw their shareholders demand such votes every year.

While these votes are advisory in nature, plaintiffs are using failures to bolster unjust enrichment and corporate waste claims in shareholder lawsuits.  The stronger cases have coupled these claims with federal claims under the proxy rules, often attacking a company’s “Pay-for-Performance” policies.  So far, two such shareholder lawsuits -- against KeyCorp and Occidental Petroleum -- have settled.  A significant part of the KeyCorp settlement included substantial compensation policy reforms.  The terms of the settlement in Occidental (whose CEO Ray Irani has been paid almost $300 million over the past decade) are largely confidential.  The remaining cases are pending.

We are encouraged that shareholders are standing up for the principle -- both at the corporate ballot box and in litigation when necessary -- that public companies should not increase executive compensation as shareholder returns decline.

From the Pages of The Pomerantz Monitor: Institutions Want a Say on Corporate Political Expenditures

As reported in the current issue of The Pomerantz Monitor, a few months ago, Home Depot applied to the SEC for permission to exclude from its proxy statement a resolution proposed by shareholder NorthStar Asset Management. The proposal would require that the company disclose its policies on political contributions, and report on its political spending for the previous year and its anticipated political spending for the next. In addition, NorthStar’s proposal would require that the proxy statement analyze whether the spending is consistent with the company’s values and whether it poses risks to the company’s brand, reputation, or shareholder value. These plans would be blocked unless 75% of the shareholders voted to approve them. Similar proposals are now scheduled for a vote at  Citigroup, I.B.M., Charles Schwab, Prudential, JPMorgan Chase and other corporations.
      
Home Depot told the SEC that NorthStar’s resolution would interfere with the company’s ordinary business operations and was therefore improper. The SEC ruled in favor of NorthStar, affirming that resolutions which present a “significant social policy issue” are not excludable even if they may otherwise intrude on ordinary business.

These events come in the wake of last year’s Supreme Court’s decision in Citizens United, which held that corporations have First Amendment rights to spend unlimited amounts of money on political advertisements and other independent political activities. In response to that ruling, Congress has tried, but so far failed, to pass legislation that would require that political ads disclose the identities of those who paid for them. The ruling threatens to give big money even greater influence on elections. That is why shareholders are increasingly pressing to assert some control over corporate political expenditures.

In an Op-Ed piece published in The New York Times, John Bogle, former Vanguard chief executive, applauded NorthStar’s resolution, concluding that “America’s institutional investors must stand up to the Supreme Court’s misguided decision and bring democracy to corporate governance . . . and take that first step along the road to reducing the dominant role that big money plays in our political system.”

Firm Value Improved by Shareholder Access to Proxy Vote

A recent working paper published by Harvard Business School researchers presents evidence supporting regulatory efforts to increase shareholder power by providing proxy access to board elections.  The results suggest that the financial market puts a positive value on the election of shareholder-sponsored board members. 

The researchers studied the share prices of companies after the Securities Exchange Commission suspended its recently-passed “shareholder proxy access rule,” which would have made it easier for investors to nominate directors. 

Specifically, they found that the greater the stake of activist investors in a company, the more negatively the share price was impacted by news of the rule suspension.  In other words, the companies that would have been the most affected by the new rule suffered the largest drop in value.

One researcher explained that “[t]he biggest conclusion we draw from this is that allowing owners to have more power and influence with corporate decision-making, on balance, seems to be valuable in the eyes of the stock market.”

New Proxy Rules Already Impacting Pending Litigation

The SEC’s new proxy access rules, enacted on August 25, 2010, have already found there way into court.  Based on the rule changes adopted by the SEC, the Second Circuit recently remanded Bebchuk v. Elec. Arts, Inc. to the Southern District of New York for reconsideration of its previous dismissal of the case.  We’ve previously commented on the new rules here and here.

The Electronic Arts matter arises from a proposal by Harvard law professor Lucian Bebchuk to amend the company bylaws and establish a procedure for the placement of shareholder proposals into company proxy materials.  Opponents of the proposal noted that it potentially ran afoul of the SEC proxy rules as they then existed:

Professor Bebchuk's proposal is significant, in part, because it would enable a company's shareholders to amend the bylaws to permit shareholders to submit director nominees for inclusion in the company's proxy statement, even though proposals relating to the election of directors are excludable under Rule 14a-8, the SEC's shareholder proposal rule.   Accordingly, the proposal represents an effort to gain "proxy access" – that is, access to a company's proxy statement for the purpose of nominating directors.

The District Court agreed with that reasoning and granted EA’s motion to dismiss; holding that Bebchuk’s proposal was excludable under Rule 14a-8(i)(3) as contrary to the SEC’s proxy rules.  See Bebchuk v. Elec. Arts, Inc., No. 08-5842-cv (2d Cir. Sept. 13, 2010).  Now, nearly two years after that District Court dismissal, the Second Circuit has ruled that the SEC’s changes to the its proxy rules “may bear on the issues presented in this appeal” and the case should be remanded for reconsideration.  Id.   

SEC Set to Approve Proxy Access, But for How Many?

The Securities and Exchange Commission is meeting Wednesday to consider proposed proxy access rules that will allow shareholder nominations of board candidates and will require companies to print the names of such candidates directly onto corporate ballots.  The rules are expected to pass through the Commission on a 3-2 vote, with the two sitting Republican commissioners voting no.  However, based on recently-leaked details (the SEC has not yet officially released any details of the proposed rules), there may be reason to question just how broad the scope of the eventual proxy rules will be.

In order to prevent short-term or small-bore investors from sparking contested board elections, the proxy access rules are expected to require that investors own at least a 3% stake in a company for as long as three years before they can nominate candidates on the company’s ballot.  At first blush, that seems reasonable enough.  However, for the largest issuers, investors holding a 3% stake will amount to a very small pool indeed.  The SEC had initially proposed a “tiered” approach that would have set the minimum stake at 1% for large companies, 3% for midsized companies, and 5% for small companies.  That rule, however, has apparently been rejected in favor of a flat requirement.

Couple that with other details leaked today and the application of the rules get even narrower.  An anonymous source tells Reuters that the SEC will likely grant a three-year grace period for “small companies” to comply with the proxy access rules.  If that turns out to be the case, then, in the near term, the proxy rules will except the very companies most likely to have a significant pool of investors holding the minimum 3% stake to nominate board candidates.  In other words, many investors seeking to take advantage of the new proxy rules may find themselves stuck in the middle – owning too little of the big fish to qualify for proxy access but, at the same time, unable to access the proxies of smaller companies for which they do own enough.

The New Wall Street Reform and Consumer Protection Act: Proxy Access and the SEC

As we should all know by now, last week, on July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act.  For the complete text, click here or click here 

 

Strengthening Corporate Governance through Proxy Access is specifically addressed.  See Title IX – Investor Protections and Improvements to the Regulation of Securities, Subtitle G – Strengthening Corporate Governance, Sec. 971. Proxy Access.  Proxy access makes it easier for shareowners to nominate their own candidates for corporate board directors by letting them place their nominees for director on the company’s proxy card.  Currently, the only way that shareowners can present alternative director candidates at a U.S. public company is by waging a full-blown election contest. For most investors, that is onerous and prohibitively expensive.  For more about Proxy Access, from the Council of Institutional Investors, http://www.cii.org/resourcesKeyGovernanceIssuesProxyAccess. 

 

In particular, the Proxy Access provision, § 971, amends Section 14(a) of the Exchange Act by adding a new subsection (1) that explicitly gives the SEC the authority to issue rules permitting shareholder access to proxy materials in order to nominate candidates to the Board of Directors.  As previously addressed in a Pomtalk post on July 15, 2010, entitled, “SEC Seeks Comments on Proxy System,” the SEC is currently seeking public comments on the U.S. proxy system and asking whether rule revisions should be considered to promote greater efficiency and transparency.  

 

More specifically, Title IX – Investor Protections and Improvements to the Regulation of Securities, Subtitle G – Strengthening Corporate Governance, Sec. 971. Proxy Access, provides: 

(a) PROXY ACCESS … The rules and regulations prescribed by the [SEC] … may include –

(A) a requirement that a solicitation of proxy, consent, or authorization by (or on behalf of) an issuer include a nominee submitted by a shareholder to serve on the board of directors of the issuer; and

(B) a requirement that an issuer follow a certain procedure in relation to a solicitation described in subparagraph  (A).’’.

(b) REGULATIONS.—The Commission may issue rules permitting the use by a shareholder of proxy solicitation materials supplied by an issuer of securities for the purpose of nominating individuals to membership on the board of directors of the issuer, under such terms and conditions as the Commission determines are in the interests of shareholders and for the protection of investors.

(c) EXEMPTIONS.—The Commission may, by rule or order, exempt an issuer or class of issuers from the requirement made by this section or an amendment made by this section. In determining whether to make an exemption under this subsection, the Commission shall take into account, among other considerations, whether the requirement in the amendment made by subsection (a) disproportionately burdens small issuers.

 

See http://thomas.loc.gov/cgi-bin/query/F?c111:6:./temp/~c111Q9Hs5H:e1747149

The Wall Street Reform Act's "New and Improved" Whistleblower Provision

On July 15, the Senate voted to adopt the Dodd-Frank Wall Street Reform and Consumer Protection Act.  President Obama signed the Act into law a week later.  One provision of particular interest amends the Securities Exchange Act of 1934 to provide new financial rewards for whistleblowers.  By providing “original information” to the SEC that leads to a successful enforcement action which recovers at least $1 million, whistleblowers stand to earn upwards of 30% of the recovery.  And they are now guaranteed at least 10% – the old statutory maximum, which applied only in connection with limited types of actions.

 

The precise size of whistleblower awards is at the discretion of the SEC.  Factors the SEC will consider include:  (i) the degree of assistance provided; (ii) the significance of the information; (iii) the interest of the SEC in deterring the conduct at issue; and (iv) additional factors to be determined.  There are also numerous provisions designed to keep whistleblowers’ identities secret to the extent – and for as long as – possible.

 

Never before have individual and institutional investors had such incentive to police the markets.  By empowering whistleblowers in this way, the government has provided the public with a potent tool with which to fight securities fraud.

From the Pages of The Pomerantz Monitor: Senator Specter Introduces Two Bills That Could Prove Very Important to Plaintiffs

As Susan Weiswasser reports in the current issue of The Pomerantz Monitor, two pieces of legislation recently introduced in the United States Senate, both sponsored by Arlen Specter of Pennsylvania, could, if passed, prove very important to plaintiffs. Both would effectively overrule Supreme Court decisions that made surviving motions to dismiss or getting relief for the acts of secondary actors in securities cases more difficult.

The Anti-Twombly Act. The first bill deals with the way plaintiffs have to present claims in their complaints to survive a motion to dismiss. Rule 8 of the Federal Rules of Civil Procedure requires, among other things, that a plaintiff make “a short and plain statement of the claim showing that the pleader is entitled to relief.” The standard for deciding whether a complaint satisfied Rule 8 was established in the 1957 Supreme Court case Conley v. Gibson. The Court held that the Federal Rules “do not require a claimant to set out in detail the facts upon which he bases his claim.” It stands to reason that plaintiffs very often will not have detailed facts available until after they have filed suit and obtained discovery from the defendants. The language the Conley Court used to describe this standard — that dismissal is improper “unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief” — would be quoted by courts reviewing motions to dismiss for the next 50 years.

Then, in 2007, the Court decided Bell Atlantic v. Twombly, and created a new standard — often referred to as the “plausibility standard” — which requires that, to survive a motion to dismiss, a plaintiff must provide “enough facts to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, decided earlier this year, reinforced Twombly’s message noting that “[t]he plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Since Twombly was decided, it is reported that motions to dismiss have been filed with much greater frequency.

Senator Specter’s bill would restore the pleading standard set forth in Conley v. Gibson. In his comments introducing the bill, Specter, a lawyer, made the point that “[n]ot until a plaintiff has had access to relevant information in the defendant’s possession during the discovery process . . . can the plaintiff normally offer evidence to support the complaint’s allegations.” Since the Federal Rules do not allow federal courts to pass on the merits of a case until plaintiffs have submitted evidence, either on summary judgment or at trial, Specter expressed the inappropriateness of requiring plaintiffs to do more than provide defendants with notice.

The Anti-Stoneridge Act. Second on Specter’s agenda is a bill that will restore securities fraud liability for aiders and abettors. While Congress had not specifically created a private right to sue aiders and abettors under the securities laws, until 1994 courts had allowed suits against accountants, lawyers, business associates and the like who assist primary violators in carrying out schemes to defraud investors.

In Central Bank of Denver v. First Interstate Bank of Denver, the Supreme Court dealt a serious blow to investors,  holding that no private right of action for aiding and abetting could be had under the securities laws. Thus investors lost the ability to pursue wrongdoers who often played an indispensable role in perpetrating a fraud in spite of not being primary violators. Analyzing Congress’s intent as expressed in the text of the statute, the Court ruled that a cause of action against one who had not committed the manipulative or deceptive act could not be inferred. The majority discounted arguments that the availability of such a claim functioned as a deterrent to those who might provide behind-the-scenes assistance to actual violators of section 10(b).

Less than a year later, Congress introduced the Private Securities Litigation Reform Act (PSLRA). The SEC, which had filed a friend-of-the-court brief in Central Bank in support of maintaining the aiding and abetting cause of action, pressed Congress to overturn the Central Bank decision in the new law. Congress refused, delegating the right to bring an action for aiding and abetting to the SEC alone. The bill passed over President Clinton’s veto.

Recently, the Court had another look at who could be sued for securities fraud. In Stoneridge Investment Partners v. Scientific-Atlanta, where the Pomerantz firm represented plaintiffs, the Court considered whether the Central Bank decision barred a suit against a party who engaged in deceptive conduct but made no public statements about that conduct. The Court ruled that deceptive acts could create primary liability under the securities laws, as long as investors relied on those deceptive acts. Because the deceptions in Stoneridge were directed at the auditors, rather than the public, the Court held that investors could not have relied on them and thus could not prevail.

Senator Specter’s bill would recreate the private right of action for aiding and abetting, so that “any person that knowingly or recklessly provides substantial assistance” to a primary violator could be held liable for securities fraud. Specter is likely to have support for this bill beyond investors and the plaintiffs’ bar. As Specter pointed out in his introduction of the bill, Judge Gerald Lynch of the federal court in Manhattan recently wrote in an opinion that Congress’s choice to deny investors a private right of action against aiders and abettors:

“may be ripe for legislative reexamination. While the impulse to protect professionals and other marginal actors who may too easily be drawn into securities litigation may well be sound, a bright line between principals and accomplices may not be appropriate. There are accomplices and there are accomplices: after all, in the criminal context when the Godfather orders a hit, he is only an accomplice to murder – one who ‘counsels, commands, induces or procures’ but he is nonetheless liable as a principal for the commission of the crime. Likewise, some civil accomplices are deeply and indispensably implicated in wrongful conduct.”

From the Pages of The Pomerantz Monitor: Institutional Investors Have Greatly Strengthened Securities Litigation

As Adam Prussin reports in the July/August issue of The Pomerantz Monitor, Congress instituted the "lead plaintiff" provisions of securities law to encourage institutional investors to become more involved in securities class action lawsuits. Since investors with the largest losses are favored as lead plaintiffs, institutions, with greater assets, typically have a leg up on individual investors. Is that good or bad?

As reported in the D&O Diary, a blog that follows securities litigation developments, a recent academic study concludes that institutions have heeded the call and that, when they act as lead plaintiffs, they get better results than individual investors do. The D&O Diary quotes the authors:  

institutional investor involvement in securities litigation not only enhances investors’ success in seeking financial recovery, but also improves the quality of the companies’ corporate governance. [It] is an effective corporate monitoring tool for institutional investors.

The study, published earlier this year by professors at LSU, Prairie View A&M, Purdue and the University of Houston, examined all 1,811 securities lawsuits filed between January 1, 1996 and July 20, 2005 that had been resolved by June 1, 2006. Two hundred eighty-six of these had an institutional investor as lead plaintiff. Although this is about 16% of the total, that percentage had reached more than 30% for cases filed in 2004. Today, institutional investors, especially public and union pension plans, are lead plaintiffs in most of the really large class action securities cases filed. 

The authors found that cases with institutional lead plaintiffs are 38.2% less likely to be dismissed on motion than cases without them; and that all else being equal, cases with institutional lead plaintiffs produced total settlement amounts about 60% higher on average than cases without them. The authors also found that within three years of the lawsuit filing, defendant companies that faced institutional investor lead plaintiffs experienced greater improvement in board independence than those facing individual lead plaintiffs. The authors conclude that: 

institutional investors’ involvement in securities litigation enhances not only investors’ success in seeking financial recovery, but also the quality of the defendant firms’ corporate governance . . . institutional investors could use litigation as a mechanism to discipline management and to secure the long-term health of the firm.

The study confirms that institutions have much to contribute to the enforcement of federal securities laws, and that more and more of them are stepping up to the plate.