Haunted House? Spook to Run Oversight Board

William Webster, former head of CIA and FBI, will oversee PCAOB; beat out Biggs in close SEC vote. Plus: Commission to unveil pro forma proposals, Aetna ditches poison pill, and is Ford headed for the junk heap?

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Apparently, the SEC believes the best way to crack down on accounting fraud is to get someone with no accounting background to ride shotgun over the industry.

On Friday, the regulatory agency elected William Webster to serve as chairman of the new five-member Public Company Accounting Oversight Board (PCAOB).

Webster, 78, is the former head of the FBI and CIA.

He narrowly beat out John Biggs in a 3-2 vote. One wire service described the open meeting of the Commission as “unusually rancorous.” Biggs, 66, is retiring as head of New York’s TIAA-CREF teachers pension fund.

The PCAOB was created by the Sarbanes-Oxley Act of 2002 and will oversee the audits of public companies through rigorous registration, standard setting, inspection and disciplinary programs. The act requires the Commission to select the members of the board, although it must consult with the Secretary of Treasury and the Chairman of the Federal Reserve Board during the selection process.

During the Friday session, the SEC also selected four other members for the board: pension fund lawyer Kayla Gillan; accountant and former SEC general counsel Daniel Goelzer; former congressman Willis Gradison; and SEC Enforcement Division Chief Accountant Charles Neimeier.

“The individuals selected to serve on the board clearly meet and exceed all the requirements in the act,” said SEC Chairman Harvey Pitt. “They are individuals of high integrity and reputation who have demonstrated a commitment to serving the interests of investors, and they understand the financial reporting process. They are each committed to meaningful reform. In addition, they bring to the Board a combination of investor advocacy, regulatory and legal experience.”

Well, not in Webster’s case. But Goelzer served as the general counsel of the SEC for more than seven years. “During his tenure, Goelzer represented the SEC and the interests of investors through the performance of duties in the areas of appellate litigation, rulemaking, and regulation of the securities markets,” the SEC noted. He is a CPA and is the author of several articles on matters related to corporate governance and the securities laws. Early in his career, Goelzer was a member of the audit staff of Touche Ross & Co. His term at the PCAOB expires in 2006.

Gillan recently became the vice president of independent fiduciary services at the California Public Employees’ Retirement System (CalPERS). She had previously served six years as the chief legal adviser to CalPERS and to the fund’s 13-member board of trustees. Gillian also drafted CalPERS’ U.S. corporate governance core policies and guidelines. Her term expires in 2005.

Gradison is a former nine-term Congressman from Ohio. While in Congress, he served as the ranking member of the House Budget Committee and as the ranking member on the Health Subcommittee of the House Ways and Means Committee. He currently is the senior public policy counselor at Patton Boggs. His term expires in 2004.

Niemeier is the chief accountant in the Commission’s Division of Enforcement and co-chairman of the Commission’s Financial Fraud Task Force. In these roles, he coordinates, monitors and advises the division staff as they conduct accounting and financial reporting investigations and initiate enforcement and disciplinary proceedings.

Under Niemeier’s aegis, the Commission last year brought a record 160 financial fraud, reporting, and accounting cases, including cases involving misleading earnings press releases and misleading disclosures in the management discussion and analysis (MD&A) sections of corporate reports. His term expires in 2003.

Report: SEC to Propose New “Pro forma” Rules

Now that PCAOB is staffed, this week the SEC is reportedly planning to unveil new proposals regarding the reporting of pro forma results.

According to Reuters, the SEC’s proposal will require that companies present conventional net profit figures at least as prominently as pro forma numbers when issuing earnings statements.

“The importance of this will be to give guidance to companies who have not been sure today how much pro forma information to use,” said Brian Lane, a former head of the SEC’s division of corporate finance and currently a partner at law firm Gibson, Dunn & Crutcher, in the Reuters article. “And how best to present it and to have some insight into what the SEC is thinking.”

Earlier this month, The National Investor Relations Institute (NIRI) adopted a tough set of guidelines for companies when they report earnings, including more forthcoming reporting of pro forma results. The guidelines arose from a 10-point program NIRI announced back in April as a way of helping to restore investor trust and confidence.

About 46 percent of companies responding to a NIRI poll back in August said they presented pro forma information in the second quarter this year, down from 52 percent in the fourth quarter last year.

Under the Sarbanes-Oxley bill, the SEC must establish a rule that requires companies to provide information reconciling pro forma earnings figures to generally accepted accounting principles (GAAP).

The SEC has scheduled an open meeting for Wednesday to consider proposing new rules on pro forma financials.

Stewart Retires, Cigna Warns

Is there any connection between Cigna Corp.’s announcement that the company’s CFO will retire and the insurer’s subsequent earnings warnings?

If nothing else, the timing of the three announcements was a bit peculiar. As CFO.com reported, last Wednesday the insurance giant announced that James G. Stewart is retiring as the company’s CFO. Stewart has spent the last 36 years with Cigna — nineteen as chief financial officer.

The very next day, Cigna warned that earnings for the third quarter and all of 2002 will come in lower than previous company guidance.

Then, on Friday, Cigna dropped another bombshell. It warned that operating income for 2003 will be below forecasts.

As a result, on Friday the stock price of Cigna plunged more than $24 to $39.39 a share, a drop of more than 38 percent in one day.

According to Cigna, Stewart’s retirement was reportedly in the works for some time. It is somewhat curious, however, that the company dropped two earnings-related bombshells in the two days immediately following the announcement of Stewart’s retirement.

Not surprising, law firm Milberg Weiss Bershad Hynes & Lerach LLP immediately filed a class action suit against Cigna, Chairman H. Edward Hanway, Chief Accounting Officer James A. Sears, and Stewart. The suit alleges they Cigna officers issued “a series of materially false and misleading statements” May 2, 2001 and Oct. 24, 2002.

According to the complaint, Cigna issued numerous press releases, and filed financial reports with the SEC, regarding its performance which “were materially false and misleading because they failed to disclose that Cigna had been under-reserving for its reinsurance obligations, particularly for its reinsurance of guaranteed minimum death benefits by (at least) hundreds of millions of dollars.”

The complaint also alleges they issued materially false and misleading statements regarding its Employee Health Care, life and Disability segment.

The suit also charges that the defendants engaged in this conduct because the company was planning to issue $250 million of 6 3/8 percent notes on Oct. 16.

Aetna Scraps Poison Pill

Late last week, management at Aetna said it changed its corporate governance practices, including the scrapping of the company’s anti-takeover provision.

The ditching of the poison pill could set the stage for an acquisition of the insurance company.

“We believe that the changes properly align our corporate governance practices with shareholder interests at this time,” said Dr. John W. Rowe, chairman and chief executive officer.

Aetna’s board also voted to:

  • Reduce the vote required for shareholders to approve mergers, consolidations and similar transactions from two-thirds of outstanding shares to a simple majority of outstanding shares.
  • Grant shareholders the right to call a special meeting with the support of two-thirds of the outstanding shares.
  • Reduce the vote required for shareholders to amend certain portions of the company’s by-laws from 80 percent of outstanding shares to two-thirds of outstanding shares, making it consistent with the level of shareholder support necessary to call a special meeting.

Pension Worries Abound

The IUE-CWA/GE Conference Board unanimously voted to authorize a national strike if General Electric sticks to its plan to increase health care costs for workers and retirees. GE’s plan would become effective Jan. 1.

Meanwhile, Lockheed Martin Corp. Friday warned that 2003 earnings could come in below forecasts unless pension fund investments produce good returns. It said its 2003 earnings estimate of $2.75 to $2.85 a share assumes the company will achieve its long-term target of a 9.5 percent return on its pension fund investments. Lockheed has a ways to go to hit that target. Through the first nine months of 2002, the company actually lost money on its pension investments.

Also last week: industrial services company Harsco Corp. indicated its British pension plan was underfunded by about $98 million as of Sept. 30 because of the lousy U.K. stock market. The company added it expects a $135 million noncash adjustment for the British pension plan. The company also said its U.S. pension plans may be underfunded as of Oct. 31. It added its 2003 pretax pension expense will probably increase by about $20 million.

Financing News

  • After several false attempts earlier in the week, Wynn Resorts Friday finally priced its IPO, selling 34.6 million common shares at $13 apiece. The company’s management had originally expected to sell 20.5 million shares at $21 to $23 each.
  • Fannie Mae issued $5 billion of 3-year notes and $250 million in a reopening of its 30-year 6.625 percent bonds due Nov. 15, 2030. The three-year notes were priced to yield 2.906 percent, 74.5 basis points over comparable Treasurys. The 30-year bonds were priced to yield 5.912 percent, or 71 basis points over Treasurys.
  • U.S. junk bond mutual funds pulled in $425.2 million in net cash in the week ended Wednesday, the second straight week of inflows, according to AMG Data Services.
  • Standard & Poor’s on Friday cut its long-term debt rating for Ford Motor Co. and its finance arm to two notches above “junk” status. S&P said it’s worried about the possibility of an impending restructuring at the automaker. S&P’s outlook for Ford is “negative.”

“Ford has to improve its cost position and beef up its product offerings,” Scott Sprinzen, an S&P auto analyst, told Reuters. “The reality of the marketplace is that it has to stay competitive on pricing, which is a moving target.”

  • Moody’s downgraded Interpublic Group of Companies Inc.’s senior unsecured debt ratings to Baa3 from Baa1 and subordinated debt rating to Ba1 from Baa2. The company’s senior unsecured and subordinated shelf registration ratings were also downgraded accordingly. In addition, the company’s short-term rating was lowered to Prime-3 from Prime-2.

The rating agency said the action concludes the review for downgrade initiated on August 7. According to Moody’s, “the rating action resulted from revenue, EBITDA and gross free cashflow (defined as EBITDA less taxes, interest, capex, working capital, and cash earn-out payments) shortfalls that are significantly larger than Moody’s anticipated for 2002 and for 2003.”

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