Monthly Archives: April 2010

Harmonized European Short Selling Disclosure Regime Proposed

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, April 3, 2010
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This post comes to us from Barnabas W.B. Reynolds, partner and head of the Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP, and is based on a Shearman & Sterling client publication.

The Committee of European Securities Regulators (“CESR”) has presented its report to the European Commission proposing a permanent pan-European short selling disclosure regime. The CESR report (the “Report”) envisages a harmonised European approach to short selling. Since 2008, short selling has been subject to different actions taken by Member States in response to recent market turmoil. CESR’s report, and the proposals it contains, seeks to avoid ongoing divergence in Member State requirements.

Introduction

In July 2009 CESR launched a consultation on the need for a European disclosure regime for short selling to address the concern that, as a result of the patchwork of short selling regulations implemented in different states since 2008, market participants had become burdened with having to comply with divergent sets of national requirements. The Report, entitled “Model for a Pan-European Short Selling Disclosure Regime”, [1] is the result of that consultation and recommends new European legislation on short selling to be enacted as soon as possible.

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Oligopoly, Disclosure, and Earnings Management

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, April 2, 2010

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This post comes to us from Mark Bagnoli, Professor of Accounting at Purdue University, and Susan Watts, Professor of Accounting at Purdue University.

In our paper, Oligopoly, Disclosure, and Earnings Management, which is forthcoming in The Accounting Review, we theoretically examine whether firms bias their disclosures (manage earnings) to gain a competitive advantage in their product market. Our specific motivation comes from the claims of C. Michael Armstrong who was the CEO of AT&T from 1997 to 2002. In statements made by Armstrong, he argues that accounting fraud at Worldcom was the cause of AT&T’s perceived strategic failures, its inability to compete with Worldcom and, in the end, the decision to break up the company. He specifically suggests that Worldcom’s fraudulently reported revenues, margins and costs drove AT&T’s layoffs, cost cutting and a very unprofitable price war that left AT&T unable to service the debt he incurred to revive the company. This view is supported by William Esrey who was Sprint’s CEO during that time. We interpret Armstrong and Esrey’s argument as suggesting that a rival’s earnings management affected competition in the product market, led to a misevaluation of their relative performance and caused dramatic, potentially non-optimal changes in their business strategy.

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Court Rejects Insurers’ Attempt to Avoid D&O Coverage

Posted by Marc Wolinsky, Wachtell, Lipton, Rosen & Katz, on
Thursday, April 1, 2010
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Marc Wolinsky is a member of the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Wolinsky, Martin J.E. Arms and Olivia A. Maginley. The post relates to the opinion in the case of Pendergest-Holt v. Lloyd’s of London, et al., which is available here.

In a recent opinion, the Fifth Circuit upheld a decision that prohibited D&O insurers from refusing to pay for the defense of a number of executives charged with civil and criminal wrongdoing by the SEC and the Department of Justice. Pendergest-Holt v. Lloyd’s of London, et al., No. 10-20069, 2010 WL 909090 (5th Cir. Mar. 15, 2010). The ruling has implications for insurers and insureds alike, as it will affect the ability of insurers to stop advancement of defense costs and may result in insurers changing the language of their policies.

The case arises out of the widely-reported charges that have been leveled against several executives of Stanford Financial Group. In order to fund their defense, the executives sought coverage for defense costs under two D&O policies. Both policies had an exclusion where the claims arose “in connection with any act or acts (or alleged act or acts) of Money Laundering.” The policies provided, however, that the insurers would only pay defense costs “until such time that it [was] determined that the alleged act or alleged acts did in fact occur.”

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Whistle-Blowing: Target Firm Characteristics and Economic Consequences

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, April 1, 2010
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This post comes to us from Robert Bowen, Professor of Accounting at the University of Washington, Andrew Call, Assistant Professor of Accounting at the University of Georgia, and Shiva Rajgopal, Professor of Accounting at the University of Washington.

In our paper, Whistle-Blowing: Target Firm Characteristics and Economic Consequences, which is forthcoming in The Accounting Review, we document the first systematic evidence on the characteristics and economic consequences of firms subject to employee allegations of corporate financial misdeeds. Whistle-blowing has received considerable attention in recent years after (1) whistleblowers were responsible, in part, for revealing the accounting scandals at Enron and WorldCom, and (2) provisions in SOX were enacted to protect employee whistle-blowers. Still, little is known about the nature of firms that are subject to whistle-blowing and whether such allegations are economically significant events with meaningful consequences for the targeted firms. Unlike other research to date, our focus is on (1) characteristics of firms targeted by employee whistleblowers, (2) the economic consequences of such whistle-blowing revelations and (3) firm responses to such allegations via subsequent governance changes.

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