Wednesday, July 28, 2010

Financial Accounting Standards Board

The FASB recently issued an exposure draft on new accounting standards concerning litigation contingencies.

The gist of it is that companies who are the defendants in lawsuits will be required to disclose the contentions of the parties and tell the end-users of the financial statements how they can obtain further information on point.

The proposals would require disclosure of publicly available quantitative information, such as the claim amounts, other relevant non-privileged data, and in some cases filers would disclose how much they would be entitled to draw from insurance and other sources against a judgment.

This is hardly the board's first look at the issue. The FASB put out a draft in June 2008 (which only SEEMS like twenty years ago!). This draft attempts to address some of the criticisms that were levelled at that one.

Nonetheless, I'm sure this will be a bone of contention in the accounting/auditing world for a long time yet.

Tuesday, July 27, 2010

Three brief items

1. Auction for Genzyme?

Genzyme Corp., a biopharm company based in Cambridge, Mass., has rejected a takeover offer from Sanofi-Aventis, the largest drug manufacturer in France.

According to a Bloomberg story, the discussions thus far have been informal, but "Sanofi may send a formal letter to Genzyme detailing its interest in an acquisition as soon as this week."

Genzyme has had the pleasure of Carl Icahn's company for some time now. Icahn curently controls two seats on the board. Icahn will surely make his views on the subject known if this does play itself out over the weeks to come.

GlaxoSmithKline is also sometimes mentioned as an interested party, so a real auction for Genzyme is a possibility.

2. Higher cross-border bid.

Alimentation Couche-Tard, the Canadian convenience store concern that owns the Circle K brand, has increased its bid for Casey's General Stores. It was bidding $36 a share in April and has now raised that to $36.75.

This values Casey's at $1.9 million, including debt says DealBook.

The offer expires at 5 PM on August 6 -- which, it so happens, is my baby sister's birthday. (Hello, Beth!)

Oh, and perhaps I' naive, but this strikes me as odd.

3. GSI Group Emerges from Chapter 11.

GSI is a multi-national family of companies that supply parts ("precision technology") to the medical, electronics, and industrial markets. Parts that, so far as I can tell, involve lasers.

Three of the entities within this family filed for chapter 11 reorganization in November 2009, in Delaware: GSI Group Inc., the parent Canadian holding company; GSI Group Corp., of Massachusetts; and MES International, Inc., a non-operating subsidiary of GSI Group Corp.

But now they have returned from that legal world of the undead to that of the truly living.

The Boston Business Journal, in May, described the descent into bankruptcy as
"a slew of regulatory and accounting setbacks that stemmed from revenue-booking practices between 2004 and 2008."

That got me curious, so I went here. Seventeen months ago, and eight months before its bankruptcy filing, GSI announced the results of an internal accounting probe and admitted to material revenue-recognition errors.

Monday, July 26, 2010

Bankruptcy and Dodd-Frank

Does the new Dodd-Frank bill have anything to say about corporate bankruptcies?

Yes, and to say myself the trouble of paraphrasing, I'll simply link you to a fine listing of direct and indirect consequences.

None of it seems to address the core dysfunction of our corporate bankruptcy system, though.

Back in March 2008, Judge Posner, of the 7th circuit court of appeals, suggested the key dysfunction -- out-of-control bankruptcy trustees. Posner wrote, “While the management of a going concern has many other duties besides bringing lawsuits, the trustee of a defunct business has little to do besides filing claims that if resisted he may decide to sue to enforce.”

In particular, trustees had become very aggressive by that time (BEFORE the worst of the credit crunch that autumn) in pressing claims for fraudulent conveyance. The result was that counter-parties to any institution that might even have been close to bankruptcy, which may even be rumored to be close to bankruptcy, have got very jittery. Why set one’s self up to be the defendant in a lawsuit brought by the next aggressive trustee?

It was and still is a legal climate that encourages “runs on the bank,” and that is what we have gotten.

It is more than a pity that neither Dodd nor Frank nor any of the many cooks that shared the legislative kitchen creating this crazy soup saw fit to address that problem head on. It is more than a pity, it is a symptom.

Sunday, July 25, 2010

Proxy Contests and the Dodd-Frank bill

Back in the 1980s, hostile corporate takeovers received a lot of attention, and several states decided that they ought to protect their homegrown corporations' managers from outsider threats.

Naturally, these laws were themselves challenged on the ground that they impinged upon federal jurisdiction, either as actually expressed in federal statute or in more dormant form.

But the Supreme Court of the United States upheld one such law, and upheld the bunch of them by implication, in a case arising out of Indiana, CTS Corp. v. Dynamics Corp. (1987).

The Dodd-Frank bill, which contains several provisions that speak to proxy contests, represents the continuing federalization of the field. So, is CTS Corp. v. Dynamics still good law? Or is it ripe for a challenge?

Here is a related discussion by Professor Bainbridge, written just before Dodd-Frank became the law of the land.

Bainbridge quotes in that blog post an article he wrote in 2003, with the then-new Sarbanes-Oxley Act in mind. At that time, he said: "No one seriously doubts that Congress has the power under the Commerce Clause to create a federal law of corporations if it chooses. The question of who gets to regulate public corporations thus is not one of constitutional law but rather of prudence and federalism. In this essay, I advance both economic and non-economic arguments against federal preemption of state corporation law. Competitive federalism promotes liberty as well as shareholder wealth."

Possibly it does. But at some point the duplicative regulation by both feds and states becomes itself enough of a drag that the gains one might get from "competitive federalism" are lost. It is at this point that preemption is supposed to kick in.

After Sarbanes-Oxley, and now after Dodd-Frank: are we there yet?

Wednesday, July 21, 2010

On the Road

I'm traveling today. This entry is something I cooked up last weekend so it would appear on this date. I don't usually do that sort of thing, but such is life.

Tomorrow, July 22, will be the meeting of the shareholders of the DWS Enhanced Commodity Fund, a fund controlled by Deutsche Bank AG.

In recognition thereof, I'll simply provide you with a quote from a recent filing from Western Investment LLC on the subject of that meeting and how it came to be scheduled for that date.

"By now you probably received the latest "fight" letter, dated July
6, 2010, from the fund's chairman, telling you he adjourned the
June 28, 2010 annual meeting of shareholders to July 22, 2010, and
blaming Western. Don't be fooled by this dishonest letter.
This long-overdue GCS annual shareholders meeting (the last one
was held in 2008) was convened as scheduled on June 28, 2010. A
quorum was present, and all business on the agenda could have been
conducted, including voting on the resolutions to terminate
Deutsche Asset Manager as the fund's investment adviser and to
approve the merger of GCS into an open-end Deutsche fund. Vote
tabulations available to both sides in the proxy contest, as
reported by Broadridge Financial Solutions, Inc. showed that a
majority of the fund's shares outstanding had voted "FOR" approval
of the merger and that approximately 2/3 of the shares present at
the meeting had voted "FOR" termination of Deutsche.
But the board adjourned the meeting to July 22, 2010 without
allowing any of those votes to be counted officially."

Tuesday, July 20, 2010

Barnes & Noble trial

I'll just linkfarm today.

The trial in the Barnes & Noble poison pill case is underway.

Corporate managers aren't usually eager to pick fights with their second-largest shareholder. But of course nothing is business-as-usual that involves Ron Burkle, the adversary-shareholder in question.

Burkle, the "grocery billionaire" who shows up in stories about the Clinton family, had enough juice to get Jared Paul Stern fired from the Post back in 2006. But, it seems, not quite enough juice to have Stern to get him prosecuted.

That Jared is not to be confused with this guy.

Anyway, the present excitement concerns Barnes & Noble, in a trial before Chancery Court Judge Leo Strine.

Burkle claims that certain directors are engaged in a “self-dealing scheme designed to entrench the Riggio family.”

Go at it, Rock'em, Sock'em robots!

Monday, July 19, 2010

Greenlight: Shorting Moody's Was A Good Idea

I'd like to thank the good folks at Dealbreaker for bringing to my attention a "Dear Partner" letter from Greenlight Capital, reviewing the unlamented but departed second quarter of 2010.

Greenlight has made some gains for its investors, though they are as the letter acknowledges far from spectacular. There are three partnerships involved, and the year-to-date returns on the three are 1.6 %, 2.2%, and 0.8%.

Greenlight professes to have "no idea" what will happen in the economy in the second half, and to be maintaining "a conservative and defensive portfolio, with a small net long position throughout."

What were their two best plays during the second quarter? They own some gold, and it has appreciated nicely. That's first. The second, and only other "significant" winner, was a short position on Moody's Investors Service (MCO).

Moody's took a hit, the letter explains, because the "proposed financial reform bill raises the rating agency legal liability more than the bulls expected." Of course, the bill itself didn't pass in time for the effects of its passage to be felt in the second quarter numbers. So, filling in the blanks a bit ... we can infer that as the likelihood of passage of the Moody's-impairing provisions became obvious, the stock price fell in anticipation of the legislation, and Greenlight locked in its profit from this short position during the quarter.

I've included a one-year stock chart of Moody's. The stock's price has hit its recent peak near the end of the first quarter. It was $30.26 on March 22. It went on a long slide at that point, bottoming out at $18.89 on May 31. So, yes, shorting was a good idea.

As it happens, it is the courts that decide what does or doesn't violate the first amendment, not the Congress. So insofar as the amendment has provided Moodys with a defense in the past, it might continue to do so. In that case, we may someday judge that the market over-corrected.

"Buy on the rumor, sell on the fact" -- may in this case translate, "sell on the threatened legislation, buy on its passage."

Usual disclaimer: THIS IS NOT INVESTMENT ADVICE! Don't buy or sell any damned thing because any blogger says so. Emphatically including me.

Still, Moody's may have an intriguing future.

Sunday, July 18, 2010

The Second Circuit on "willfulness."

Mark P. Kaiser, once the marketing chief for U.S. Foodservice, received a seven year sentence in 2007 for his role in a securities fraud that, according to the prosecution, overstated earnings by $800 million between 2000 and 2003.

Here's an AP report on the sentence at the time.

Kaiser appealed his conviction on several grounds, one of which was that under 32(a) of the 1934 Exchange Act, contrary to the usual bromide, ignorance of the law is an excuse. Section 32(a) of the Act criminalizes only "willful" violations of most of that Act's provisions. See p. 264 of that PDF.

The good news for Kaiser is that he won his appeal and his conviction has been vacated.

But he did not win on the willfulness theory. He won because the trial judge failed to give a crucial instruction on another issue.

The court -- a panel of the 2d circuit Court of Appeals -- was unimpressed with the defendant's contentions on the statutory meaning of willfulness -- and indeed apparently unimpressed with its own precedents on this point. Solomon Wisenberg at the White Collar Crime blog explains it well, here.

Wednesday, July 14, 2010

Brown and Snowe on Board with Dodd-Frank

This huge Rube Goldbergian contraption seems finally on the verge of becoming a law.

Senators Scott Brown and Olympia Snowe, of Massachusetts and Maine respectively, say that they are now on-board, which should give the bill's proponents the votes they need to overcome any filibuster.

Byrd's replacement? That is still an unknown. Governor Manchin has the power to make the appointment, and he is taking his time. Some announcement is likely this weekend.

Still, the Dood-Frank bill should come to a vote tomorrow, Thursday, even with that seat still empty. The Democrats, it appears, don't need that vote. They have, with Brown and Snowe and one other, a total of three Republican votes, and if they stay together as a party that should do the job.

This blog has been following the developments regarding this legislation for months. There was, for example, this observation last month about the fiduciary-obligation issue, and this one about the Volcker rule.

Going back to January, I wrote about the ambivalence of the President on these matters.

But here we are. It will probably be a done deal tomorrow. A small part of it is the "Collins amendment," a provision that would, after a three-year phase-in beginning on January 1, 2013, eliminate Trust preferred securities as Tier 1 capital for bank holding companies that had $15 billion or more in assets as of December 31, 2009. Where do you think that third Republican vote comes from? In the name of this amendment lies a clue, grasshopper.

This could all result in certain bank holding companies having to raise significant amounts of new Tier 1 capital. And that, in turn, (as the Wachtell Lipton law firm asserted in a memo they sent out yesterday) could result in significant capital structure inefficiencies.

That is just one of many respects in which this bill just seems to be a flailing-of-the-arms by politicians who don't have a clue what to do, but who feel strongly that they ought to do "something". Beware always the siren call of doing "something"!!!

Tuesday, July 13, 2010

Reactions to Bilski

Although I discussed the Bilski decision, the latest effort by the Supreme Court of the United States to reconcile patent law with the digital world, in this blog two days after it was issued, I'd like to return to the subject now that the dust is beginning to settle, to look at what the rest of the blogosphere is saying.

Matt Lee, writing for the Free Software Foundation, is both ecstatic and wary.

On the one hand, the ruling "undoubtedly represents a breakthrough," and on the other "software patent attorneys are formulating new incantations...."

Yes, that is their job. Also, the ad hoc nature of the court's opinion rather encourages them to get to work on those new incantations.

Rob Tiller, writing at OpenSource, and with the same PoV as Lee, takes a different, more lawyer-like, tone. Tiller is content that the court "followed the traditional methodology, and addressed only" the fact pattern immediately before it, "the issue of business method patents." When it does get to software, he says, it will find that "the rationale for invalidating the Bilski patent is one that could easily be applied to void some software patents."

Erik Sherman at BNET reports that he recently spoke to one of those tricky patent attorneys Lee mentions. Sherman spoke to Scott Bain, litigation counsel of the Software and Information Industry Assn., who said: "Things are pretty similar if not the same as before Bilski. The Supreme Court decided this single case on these facts, but didn't give much guidance on how other cases will come out."

Meanwhile, the Patent Office is trying to explain the ruling to its own examiners. In essence, their instructions are to stick to the machine-or-transformation test "as a tool for determining whether the claimed invention is a process under section 101."

Steven Seidenberg, of Intellectual Property Watch, gives us a suitable final word.

"The ruling, it appears, will keep patent litigators in the United States very busy for quite some time."

Monday, July 12, 2010

SEC Notice to Amedisys

Amedisys (Nasdaq:AMED), a provider of home health care nursing services, said on June 30 that it has "received notice of a formal investigation from the Securities and Exchange Commission ... pertaining to the company, and received a subpoena for documents relating to the matters under review by the Senate Finance Committee."

Amedisys, which is run out of Baton Rouge, La., also said that it will cooperate with the investigation.

Back in April, the Wall Street Journal ran a story that strongly suggested abuse of the Medicare reimbursement system by Amedisys, the largest company in the sector.

Sam Antar makes the case that the WSJ report wasn't as hard-hitting as it could have been.

Going back a bit, I should note that in September 2009, the president and chief operating officer of Amedisys, Larry Graham, resigned those posts suddenly. So did Alice Ann Schwartz its Chief Information Officer.

The company didn't give any reason for these departures. Not even their desire to spend more time with their families. Just a bald, " pursue other interests." That sort of thing is always ominous.

The U.S. Senate Finance Committee investigation to which the company referred in its statement involved four companies in the field. In addition to Amedisys, the Senate was curious about Almost Family Inc., Gentiva Health Services Inc., and the LHC Group, and their "internal policies and guidelines regarding the number of visits provided to each patient...."

Sunday, July 11, 2010


More must be said about Air Products versus Airgas.

AP is now offering to buy its rival at $63.50 a share, but the market is valuing Airgas at a premium above that. You can see this for yourself in the chart nearby, reproducing the trading from Friday, July 9.

Both companies provide gas to industrial and commercial users. Among others, these users include refineries, which remove sulfur from crude oil, by saturating the fuel with hydrogen first, producing hydrogen sulfide, which can then be removed from the mix. ARG is also apparently involved in the liquefaction of natural gas.

Airgas, based in Radnor, Pennsylvania, has said this: "This Board has unanimously concluded that Air Products’ unsolicited tender offer and proxy solicitation for its hand-picked nominees are an opportunistic attempt to advance Air Products’ goal of transferring the value of Airgas to Air Products at a grossly inadequate price.

"The Board continues to recommend that stockholders reject the Air Products offer."

Here is what BusinessWeek has to say.

Wednesday, July 7, 2010

SAP versus Oracle

I'm going to channel my inner IT nerd today.

The German software giant SAP AG and the US/California based Oracle are competitors on a range of products, but none more intensely so that in ERP, (or, for the uninitiated, Enterprise Resource Planning). The Californians have a better name, in that it evokes the image I have displayed here. The word "sap" evokes an image in English too, but I don't think its something the Germans were going for.

Here's a link to a general commentary on the rivalry from back in 2006, and here is something more recent.

SAP's original business plan was to conquer the then-new ERP market, whereas Oracle seems to have bumbled into the field half by accident, through a series of acquisitions. They are an aggressive second-place runner, like "Avis" back in the day when there were only two rental car companies that counted, and Avis used to advertise: "We're number two. We try harder."

Here's a link to an issue of InfoWorld from August 1998, those golden days of the dotcom madness. Look at the column on the left, "ERP & Services Briefs." SAP's ERP suite was dominant, and other software companies were working to integrate with it in offering related services. But (says the second graf of that column): "versions for other ERP suites, such as Baan and Oracle, are in the works."

Oracle, as I've noted, has since made a big splash in this pond. What happened to Baan? That is a fairly tangled story, worth a separate entry.

So: what's my point? Only the old one that competition is good, even if it is only a duopoly. Keep it up, guys!

Tuesday, July 6, 2010

Situation Awareness???

Right off of PRNewswire recently, I see a story about an agreement settling a proxy contest involving Ezenia! Inc. (OTC BB: EZEN).

What caught my attention is the release's description of the business that Ezenia-with-exclamation-point is in. It is a "leading market provider of situation awareness." Doesn't "situation awareness" sound a bit too much like a new age therapy?

Anyway, its a biz-software goal.

So, for the record, the annual meeting (which will now, given the agreement, be a love fest) is scheduled for July 26. The now-mollified dissenters were a stockholders' group led by North & Webster, a value fund,
and N&W has agreed to withdraw its shareholder nominations. It will "cease all efforts to nominate or elect its nominees to the Ezenia! Board of Directors in connection with the 2010 annual meeting."

What did N&W get in return for its amiability? It will "have the right to appoint Samuel A. Kidston or another nominee to the Board in January 2011 in the event that Ezenia! does not meet the revenue and operating income targets in its operating budget for fiscal year 2010."

Monday, July 5, 2010

Insider Trading Case: AKO Capital

A London, England court has sentenced a former trader at a hedge fund there, AKO Capital LLP, who has pleaded guilty on insider trading charges. The trade, Anjam Ahmad, must pay about 287,000 pounds ($421,000) in fines and restitution.

There are as many as twenty two different companies involved in the trades that are the subject of the prosecution.

Judge Geoffrey Rivlin suspended his sentence, so and Ahmad, who is 39 years old, will serve no jail time.

Judge Rivlin at the sentencing June 22 said: "You cooperated immediately with the authorities and were very frank about the part you played in all this.”

The Financial Servcies Authority (FSA) has gotten a good deal more aggressive in such matters recently. Regular readers of this blog will probably understand that I believe that is unfortunate not only for Ahmad but for the economy and general public of the British isles.

Regulators and prosecutors are interested in trophies they can put on their walls. They aren't interest in what is best for the people paying their salaries. It isn't in their job description to be interested in what is best.

Sunday, July 4, 2010

Upek Gives Up on Authen Tec

Happy independence day everybody.

It is appropriate to mention that Authen Tec seems to have won its own continued independence.

Authen Tec a company headquartered in Melbourne, Florida, though I understand it has a parent corporation in Shanghai, China. It creates "smart sensor" products. This appears to mean that it sells components to computer manufacturers that allow those products to use smooth touch pads, rather than such grosser doohickies as track balls, mouse buttons, or joysticks.

Upek, a privately held company headquartered in Emeryville, California, is one of its rivals, and has long sought a combination. Under the Upek plan proposed in Januray of this year, stockholders of each company would have ended up with 50% of the stock of the combined entity, and the new entity would have been listed on the Nasdaq Stock Market.

Upek had combined its merger proposal with a proxy solicitation campaign. But it has now given up on both.

The catalyst for this decision was the resignation of Robert E. Grady from the Authen Tec board. As near as I understand, Grady was their friend on the inside. Yet he is now gone.

"My decision results from my increasing discomfort with the Company's de facto embrace of the status quo, and tolerance of management leadership's actions to resist value-creating transactions," Grady said as he left.

Anyway, Upek, while applauding Grady, has given up its own efforts at soliciting proxies or otherwise inducing a merger.

Upek and Authen Tec have also engaged in patent litigation, which is virtually inevitable nowadays among two firms both working within such a highly technical field.